-----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, OoJuLkZ1Qi3NeZebpzr80r2tAZfSaoO6dsRWfTbCyXaPY/B4mqVxfS2BYzHStaXJ bWDQFQ1ieISrFSn82AmdFA== 0000950153-96-000593.txt : 19960816 0000950153-96-000593.hdr.sgml : 19960816 ACCESSION NUMBER: 0000950153-96-000593 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960815 SROS: NASD 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18443 FILM NUMBER: 96616497 BUSINESS ADDRESS: STREET 1: 4343 EAST CAMELBACK RD 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-K 1 FORM 10-K FOR FISCAL YEAR ENDED JUNE 30, 1996 1 United States Securities and Exchange Commission Washington, D.C. 20549 . . . . . . . . . . . . . . . . . . . . FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1996. or [] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to _____. Commission file number 0-18443 MEDICIS PHARMACEUTICAL CORPORATION ---------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 52-1574808 - --------------------------------- ------------------------------------ (State of other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 4343 East Camelback Road, Suite 250, Phoenix, AZ 85018-2700 - ----------------------------------------------------------- ------------ (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (602) 808-8800 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $.014 par value Preference Share Purchase Rights (Title of each Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form or any amendment to this Form 10-K [ ]. The aggregate market value on August 5, 1996, of the voting stock held on August 5, 1996, by non-affiliates of the registrant was $225,476,449 (calculated by excluding all shares held by executive officers, directors and holders of five percent or more of the voting power of the registrant's Common Stock, without conceding that such persons are "affiliates" of the Registrant for purposes of the federal securities law). As of August 3, 1996 there were 6,832,633 shares of Class A Common Stock $0.014 par value, 125,322 shares of Class B Common Stock $0.014 par value, and 62,660 shares of Series B Preferred Stock, $0.01 par value outstanding. Documents incorporated by reference: Portions of the Proxy Statement for the Registrant's 1996 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Form 10-K to the extent stated herein. 2 PART I This Report contains forward-looking statements which involve risks and uncertainties. The actual results of Medicis Pharmaceutical Corporation (together with its wholly-owned subsidiaries, the "Company" or "Medicis") could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this Form 10-K and the Company's other Securities and Exchange Commission filings. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 1. BUSINESS THE COMPANY Medicis is the leading independent pharmaceutical company in the United States that offers prescription and non-prescription (over-the-counter) products exclusively to treat dermatological conditions. Emphasizing the clinical effectiveness, quality, affordability and cosmetic elegance of its products, the Company has achieved a leading position in the treatment of acne and acne-related conditions using prescription pharmaceuticals, while also offering the leading domestic over-the-counter ("OTC") fade cream product. The Company has built its business through the successful introduction of DYNACIN and TRIAZ products for the treatment of acne and the acquisition of the ESOTERICA fade cream product line. PRINCIPAL PRODUCTS AND PRODUCT LINES Medicis currently offers products in the following areas of dermatology: acne, hyperpigmentation, inflammatory skin diseases, dry skin and cosmetic dermatology. The Company addresses these areas with a range of prescription and OTC products. Prescription Pharmaceuticals Prescription pharmaceuticals accounted for 83.2% of the Company's net sales in the fiscal year ended June 30, 1996 ("fiscal 1996"). Medicis currently focuses its prescription pharmaceutical efforts primarily on treating acne and related conditions. The Company's principal branded pharmaceuticals are as follows: DYNACIN is an oral, systemic antibiotic prescribed for the treatment of moderate to severe acne vulgaris, the most common form of acne, a condition that resulted in over 10 million visits to dermatologists in 1995. The most commonly prescribed systemic acne treatments are tetracycline and its derivatives, doxycycline and minocycline. Minocycline, the active ingredient in DYNACIN products, is widely prescribed for the treatment of acne for several reasons. It has a more convenient schedule of one or two doses per day as compared to other forms of tetracycline, which can require up to four doses per day. Other forms of tetracycline require ingestion on an empty stomach and often increase patient sensitivity to sunlight, creating a greater risk of sunburn. Moreover, the other forms of tetracycline, including doxycycline, often cause gastric irritation. In addition, resistance to several commonly used antibiotics, including erythromycin, clindamycin, doxycycline and tetracycline, by the primary bacterial organism responsible for acne has been documented. Studies suggest that bacterial resistance to erythromycin exceeds 60%, and resistance to doxycycline and tetracycline exceeds 40%, while the bacteria showed virtually no resistance to minocycline. Thus, although more expensive than other forms of branded tetracycline and many times more expensive than generic tetracycline, minocycline is documented to have clinical performance that is superior to other forms of tetracycline, while avoiding many of its disadvantages. However, DYNACIN's retail price is approximately 30% lower than the average reported retail price of the other leading branded minocycline product, Minocin, while selling at approximately 25% to 30% higher than the average reported retail price of generic minocycline. DYNACIN is at least comparable in performance to Minocin and is believed by the Company to enjoy certain performance characteristics that favorably distinguish it from generic minocycline. DYNACIN was launched in the second quarter of the fiscal year ended June 30, 1993 ("fiscal 1993"). At June 30, 1996, DYNACIN products held approximately 51% of total branded minocycline market sales and was the leading brand of branded minocycline in the United States. There can be no assurance that DYNACIN will not lose significant market share in the future, that it will remain a competitive product, or that the Company will be able to compete successfully in the acne treatment 2 3 market through the sale of DYNACIN or any other product. The Company has entered into a manufacturing and supply agreement with Schein Pharmaceuticals, Inc. ("Schein") for the supply of DYNACIN products. See "-- Manufacturing." TRIAZ is a topical therapy prescribed for the treatment of all forms and varying degrees of acne, and is available as a gel available in two concentrations and as a cleanser. The combined domestic sales of topically applied prescription acne products were in excess of $400 million in 1995. The most frequently prescribed topical acne treatments include Cleocin-T, generic topical clindamycin, and Benzamycin. While these therapies are generally effective, TRIAZ offers advantages over each product, including improved stability, greater convenience of use, reduced cost and fewer side effects. Benzamycin requires refrigeration and mixing by a pharmacist and has a relatively short shelf life of three months. TRIAZ comes in a ready-mixed gel that does not require refrigeration and has a two-year shelf life. In addition, TRIAZ is aesthetically pleasing and minimizes the extreme drying and scaling of skin often caused by competing brands. The average reported retail price of TRIAZ is less than that of either Cleocin-T or Benzamycin. In addition, bacterial resistance has been demonstrated with both Cleocin-T and erythromycin, an active ingredient in Benzamycin. TRIAZ products are manufactured using the active ingredient benzoyl peroxide in a vehicle containing glycolic acid and zinc lactate. Benzoyl peroxide is the most efficacious agent available for clearing the bacteria that cause acne. Glycolic acid enhances the effectiveness of benzoyl peroxide by exfoliating the outer layer of the skin (thereby providing direct access to the bacteria), and zinc lactate acts to reduce the appearance of inflammation and irritation often associated with acne. TRIAZ was developed internally by the Company's formulation scientists and introduced in the second quarter of fiscal 1996. There can be no assurance that the Company will be able to successfully market the TRIAZ product line or that the TRIAZ product line will achieve or retain market acceptance. The Company has a patent application and has certain licensed patent rights covering varying aspects of TRIAZ. TRIAZ products are manufactured to the Company's specifications on a purchase order basis by Paco Laboratories, Inc. See "-- Manufacturing," "-- Trademarks" and "-- Patents and Proprietary Rights." THERAMYCIN Z is a topical therapy available as a lotion prescribed for the treatment of acne. THERAMYCIN Z is erythromycin in a solution containing zinc acetate, which acts to reduce the appearance of inflammation and irritation often associated with acne. THERAMYCIN Z competes with other topical acne treatments, including Cleocin-T, Erycette, ATS, Emgel and other topical antibiotics. The Company has an exclusive worldwide license to market this product from a subsidiary of IVAX Corporation ("IVAX"). The Company purchases THERAMYCIN Z from IVAX pursuant to a manufacturing and supply agreement. See "-- Manufacturing" and "-- Certain License and Royalty Agreements." BENZASHAVE products are shave creams marketed by the Company as topical therapies for the treatment of pseudofolliculitis barbae ("PFB") and acne associated with shaving. PFB, commonly called "razor bumps," is a painful irritation aggravated by shaving. This condition affects millions of men in the United States, particularly African Americans and others with relatively coarse facial hair. However, medical treatment is often not sought, as many men afflicted with PFB grow facial hair to avoid shaving, or use a variety of nonprescription shaving products which claim to alleviate the condition. The Company believes that BENZASHAVE products are the only prescription shaving products available for treatment of PFB and acne associated with shaving. There can be no assurance that the Company will be able to successfully market BENZASHAVE products or that BENZASHAVE will achieve or maintain market acceptance. The Company entered into an exclusive worldwide license to market BENZASHAVE with IVAX in the fiscal year ended June 30, 1991 ("fiscal 1991"), which includes a license of patent rights relating to the use of benzoyl peroxide in the treatment of PFB. The Company purchases BENZASHAVE pursuant to a manufacturing and supply agreement. See "-- Manufacturing," "-- Certain License and Royalty Agreements," "-- Trademarks" and "-- Patents and Proprietary Rights." Over-The-Counter Products OTC pharmaceutical products accounted for 16.8% of the Company's net sales dollars in fiscal 1996. Medicis markets a variety of OTC skin care products to treat pigmentation, dry skin and certain inflammatory skin conditions. The Company's principal OTC products are as follows: ESOTERICA is a line of topical creams used to treat minor skin discoloration problems such as age spots, uneven skin tones, dark patches, blotches and freckles. ESOTERICA is the leading line of fade creams in the United States. 3 4 ESOTERICA product line is in five formulations, consisting of four creams containing various concentrations of the active ingredient hydroquinone and a body lotion. Hydroquinone is the only agent proven to reduce hyperpigmentation and the only product legally sold in the United States for this purpose. Other OTC products used to treat minor skin discoloration include Porcelana and AMBI, which are sold in a variety of creams, gels and lotions. There can be no assurance that the Company will be able to successfully market the ESOTERICA product line or that the ESOTERICA product line will maintain market acceptance. The Company acquired the ESOTERICA product line from SmithKline Beecham Consumer Healthcare L.P. ("SmithKline") in fiscal 1991, and assumed the marketing of these products in the United States and Canada. The Company's manufacturing agreement with SmithKline for ESOTERICA expires in March 31, 1997. See "-- Manufacturing." THERAPLEX is a line of moisturizers that are used for the treatment of dry skin or certain inflammatory skin conditions, such as are present in psoriasis, eczema or ichthyosis. The THERAPLEX line consists of three products, THERAPLEX EMOLLIENT, THERAPLEX CLEARLOTION and THERAPLEX HYDROLOTION, that combine high molecular weight hydrocarbons, the active component of petrolatum, with certain silicones. THERAPLEX moisturizers do not contain the normally greasy, sticky and odoriferous petrolatum components found in competitive products. Skin care products containing the patented ingredient present in THERAPLEX moisturizers have been marketed by other companies under other tradenames for several years in certain European countries, and more recently in Canada. THERAPLEX moisturizers compete with a variety of other moisturizing products, including Eucerin, Lubriderm and Keri-Lotion, as well as other mass marketed moisturizers. The Company acquired a license to the patent underlying the THERAPLEX product line in 1990. There can be no assurance that the Company will be able to successfully market the THERAPLEX product line or that the THERAPLEX product line will achieve or retain market acceptance. The Company has various agreements for the manufacture of the THERAPLEX product line on a purchase order basis and is obligated to pay certain royalties on its product sales. See "-- Manufacturing" and "-- Certain License and Royalty Agreements." PRODUCTS IN DEVELOPMENT The Company has developed and obtained rights to certain dermatological agents in various stages of development, and with potential applications, ranging from line extensions to new products or reformulations of existing products. Medicis' strategy involves the rapid evaluation and formulation of new therapeutics by obtaining preclinical safety and efficacy data (when possible), followed by rapid safety and efficacy testing in humans. While development periods may vary, the Company generally selects products for development with the objective of proceeding from formulation to product launch within a two-year period. Medicis directs the efforts of contract laboratory research facilities to perform formulation and research work on active ingredients as well as direct the third-party conduct of preclinical studies and clinical trials. All products and technologies under development will require significant commitments of personnel and financial resources. Several products will require extensive clinical evaluation and premarketing clearance by the United States Food and Drug Administrative ("FDA") and comparable agencies in other countries prior to commercial sale. Certain of the products and technologies under development have been licensed from third parties. The failure of the Company to meet its obligations under one or more of these agreements could result in the termination of the Company's rights under such agreements. In addition, the Company regularly reevaluates its product development efforts. On the basis of these reevaluations, the Company has in the past, and may in the future, abandon development efforts for particular products. No assurance can be given that any product or technology under development will result in the successful introduction of any new product. Failure of the Company to introduce and market new products, whether internally developed or acquired from third parties, could have a material adverse effect on the Company's business, financial condition or results of operation. See "--Government Regulation." The Company's research and development costs for Company-sponsored and unreimbursed co-sponsored pharmaceutical projects for fiscal 1996, fiscal 1995 and fiscal 1994 were $952,000, $770,000 and $1,572,000, respectively. The fiscal 1994 amount includes approximately $727,000 of research and development costs relating to divested operations. The Company has in the past supplemented, and may in the future supplement, its research and development efforts by entering into additional research and development agreements with other pharmaceutical companies in order to defray the cost of product development. There can be no assurance that the Company will enter into research and development agreements acceptable to the Company, or at all. 4 5 MARKETING AND SALES Prescription Pharmaceuticals The Company believes its marketing and sales organization is one of the most productive in the dermatology sector. The marketing effort is focused on assessing and meeting the needs of dermatologists. The Company's marketing and sales team, consisting of 30 members at August 3, 1996, regularly calls on dermatologists. Those dermatologists who are responsible for a relatively higher volume of prescriptions are visited more frequently. The Company has created an incentive program based on aggressive goals in market share growth, and believes that its highest performing sales representatives are among the best compensated in the industry. The Company believes that its most effective promotion is achieved by cultivating a relationship of trust and confidence with dermatologists themselves. Medicis also uses a variety of marketing tactics to promote its products, including sampling, journal advertising, promotional material, specialty publications, rebate coupons, product guarantees, a leadership position in educational conferences and exposure of its products on the Internet. OTC Products The Company's OTC products are promoted to retailers and wholesalers by manufacturers' representatives who also support a substantial number of products of other manufacturers. The Company also markets its OTC products through trade promotions, radio advertising, couponing and consumer awareness programs. WAREHOUSING AND DISTRIBUTION The Company utilizes an independent national warehousing corporation to store and distribute its products from three central warehousing locations in California, Kansas and Maryland. Upon the receipt of a purchase order through electronic data input ("EDI"), phone mail or facsimile, the order is processed into the Company's inventory systems, at which time an inventory picking sheet is automatically placed via EDI to the most efficient warehouse location for shipment usually within 24 hours to the customer placing the order. Upon shipment, the warehouse sends back to the Company via EDI the necessary information to automatically process the invoice in a timely manner. CUSTOMERS Medicis' customers include the nation's leading wholesale pharmaceutical distributors, such as McKesson, Bergen Brunswig Drug Company ("Bergen Brunswig"), Cardinal Health Inc. ("Cardinal"), Foxmeyer Drug Company ("Foxmeyer"), Bindley Western Drug Company ("Bindley") and major drug chains. During fiscal 1996, McKesson Drug Company ("McKesson"), Bergen Brunswig and Cardinal, accounted for approximately 15.5%,12.2% and 11.8%, respectively, of the Company's sales. For fiscal 1995, McKesson and Bergen accounted for approximately 15.9% and 9.6%, respectively, of the Company's sales. For fiscal 1994, McKesson and Bergen Brunswig accounted for approximately 15.1% and 11.2%, respectively, of the Company's sales. The distribution network for pharmaceutical products has, in recent years, been subject to increasing consolidation. As a result, a few large wholesale distributors control a significant share of the market. In addition, the number of independent drug stores and small chains has decreased as retail consolidation has occurred. Further consolidation among wholesale distributors or retailers could result in the combination or elimination of warehouses which may stimulate products returns to the Company, cause a reduction in their inventory levels, or otherwise result in reductions in purchases of the Company's products, any of which could result in a material adverse impact upon the Company's business, financial condition or results of operations. MANUFACTURING The Company currently contracts for all of its manufacturing needs and is permitted to contract only with manufacturers that comply with FDA current Good Manufacturing Practices ("cGMP") regulations and other applicable laws and regulations. The Company typically does not enter into long-term manufacturing contracts with third-party manufacturers. Whether or not such contracts exist, there can be no assurance that the Company will be able to obtain adequate supplies of such products in a timely fashion, or at all. 5 6 The Company's DYNACIN products are manufactured by Schein in compliance with the Company's stringent, internally developed specifications and quality standards pursuant to a supply agreement that expires in December 1997. Under the agreement, Schein manufactures minocycline for sale in the branded market exclusively for the Company, but may manufacture and sell minocycline for itself or others as a generic product. Schein currently manufactures minocycline for the generic market under its own label. The Schein supply agreement is subject to automatic renewal for successive two-year periods if neither party gives timely notice of termination and may also be canceled without cause upon 12-months notice. Schein may also terminate the exclusivity portion of the agreement if its profit margin on sales of DYNACIN products fall below a specified level. Schein may terminate the agreement upon a material breach by the Company, in the event that the Company becomes insolvent, or if any lawsuit is commenced alleging a patent or a proprietary rights violation. The agreement also provides that the Company will purchase all of its requirements for minocycline from Schein but may purchase some of its requirements from another manufacturer if Schein fails to meet certain cost standards or fails to provide the Company with all of its requirements for two of four consecutive calendar quarters. In addition, the Company may use alternative sources if Schein terminates the Company's exclusive rights to purchase branded minocycline based upon the Company's failure to meet the specified profit margins, as defined. Either party may terminate the agreement in the event that one party cannot perform under the agreement for a period of three months or longer for certain reasons beyond its control, such as war, strike, fire, lockout or acts of God. The Company believes that it has alternative sources of supply and that it would be able to use these alternative sources to preserve an adequate supply of DYNACIN. However, the inability of Schein to fulfill the Company's supply requirements for DYNACIN, the Company's largest-selling product, could have a material adverse effect on the Company's business, financial condition or results of operations. The Company's ESOTERICA line of products are manufactured by SmithKline pursuant to a manufacturing and supply agreement which expires in March 1997. SmithKline may terminate its agreement in the event of a material breach by the Company upon 15-days written notice. The Company's Canadian distributor currently utilized Contract Manufacturing Associates to manufacture its requirements of ESOTERICA for the Canadian market. In the event the Company or SmithKline declines to renew such manufacturing and supply agreement, the Company may utilize Contract Manufacturing Associates for its domestic product requirements or such other manufacturer as it determines appropriate. The Company purchases THERAMYCIN Z and BENZASHAVE products exclusively from IVAX, pursuant to a manufacturing agreement expiring in July 2000. In the event that IVAX is prevented from completing performance of its obligations under the Agreement for specified reasons beyond its control, it is excused from such performance until such time as the event preventing its performance ceases. If IVAX is unable to supply the Company's requirements of either product, the Company is permitted to purchase the unsatisfied requirements from third parties. The remainder of the Company's products are produced on a purchase order basis only, including its THERAPLEX EMOLLIENT products, manufactured by ViFor, S.A., a Swiss manufacturing company ("ViFor"); THERAPLEX CLEARLOTION products, manufactured by Accupac, Inc.; THERAPLEX HYDROLOTION products, manufactured by Beauty Control Cosmetics, Inc.; TRIAZ products, manufactured by Paco Laboratories, Inc. and THERAMYCIN Z and BENZASHAVE products, which are manufactured by IVAX. There can be no assurance that the above manufacturers will continue to meet the FDA's regulations or the Company's product specifications and standards for the indicated products or that they can continue to meet product demand on a consistent and timely basis. Schein, IVAX and ViFor are currently the sole manufacturers of DYNACIN products, THERAMYCIN Z and BENZASHAVE products, and THERAPLEX EMOLLIENT products, respectively. The Company believes that alternative sources of manufacturing are available for all of its products. Because of the FDA requirement for cGMP validation of manufacturing facilities for particular products, validation of a new facility to serve as a replacement source of manufacturing requires a substantial period of time. Any loss of a manufacturer or other manufacturing difficulties could have a material adverse effect on the Company's business, financial condition or results of operations. The Company has obtained business interruption insurance to insure against the loss of income for up to 12 months due to the interruption of manufacturing of the Company's three principal products due to certain causes. While the Company believes that the policy provides substantial protection against the covered events, there can be no assurance that the policy will cover all manufacturing interruptions or that the amount of such insurance will be adequate to fully protect the Company for losses associated with such interruptions. The Company's third-party manufacturers rely on certain suppliers of key raw materials. Certain of those materials are purchased from single sources and others may be purchased from single sources in the future. Although the Company has no reason to believe that it will be unable to procure adequate supplies of such raw materials on a timely basis, 6 7 disruptions in supplies, including delays due to the inability of the Company or its manufacturers to procure raw materials, would have a material adverse effect on the Company's business, financial condition and results of operations. Any interruptions in the supply of any of the Company's products due to shortages in raw materials, changes in manufacturing sources, regulatory changes or other causes could delay or eliminate the Company's ability to supply such products. In addition, the Company faces the risk that, upon expiration of the term of any third-party manufacturing agreement, it may not be able to renew or extend the agreement with the third-party manufacturer, to obtain an alternative manufacturing source from other third parties or to develop internal manufacturing capabilities on commercially viable terms, if at all. To manage its resources effectively, the Company attempts to retain inventory levels that are no greater than necessary to meet the currently projected needs of its customers. Manufacture of the Company's THERAMYCIN Z and BENZASHAVE products was suspended in fiscal 1994 following the acquisition by IVAX of certain assets of Syosset, the original manufacturer of those products under the agreement, in Syosset's bankruptcy proceeding. Manufacture of the BENZASHAVE products was subsequently resumed, and the Company resumed shipping these products during fiscal year ended June 30, 1995 (fiscal 1995"). During the second quarter of fiscal 1996, manufacturing of the THERAMYCIN Z product also resumed. This suspension did not have a material adverse effect on the Company's results of operations. However, there can be no assurance that the Company will not suffer future supply insufficiencies or interruptions or that it will be able to obtain adequate supplies of its products in a timely fashion, or at all. While the Company believes that its inventory levels are generally adequate, the loss of a manufacturer, the failure to obtain a replacement manufacturer on a timely basis, other manufacturing problems or any interruption of supply could have a material adverse effect on the Company's business, financial condition or results of operations. CERTAIN LICENSE AND ROYALTY AGREEMENTS In July 1990, the Company entered into two separate license agreements with IVAX, as successor to Syosset Laboratories, Inc. ("Syosset"), under which the Company acquired a 10-year exclusive, worldwide license to market and sublicense the products Erythromycin 2%, which Medicis markets as THERAMYCIN Z, BENZASHAVE 5% and 10% and certain other products. IVAX also manufactures the licensed products for the Company pursuant to a manufacturing agreement. The licensing agreements are subject to termination by IVAX upon a material failure of the Company to perform its obligations under the agreements for 60 days, or upon the Company's failure to perform under the payment provisions of the agreements for 30 days, or upon the filing of a petition in bankruptcy by or against the Company. In April 1989, the Company sublicensed a United States patent relating to the THERAPLEX line of products pursuant to a modified license agreement among the Company, Dr. Hans Rudi Seuss and H.R. Seuss, A.G. (collectively, "Seuss") and Euromerican Trade Resources, Inc. ("Euromerican"). The Company was granted an exclusive sublicense to market all products manufactured pursuant to the patent in the United States, Mexico and Japan, until the patent expires in October 1999. The agreement further grants the Company the right to otherwise exploit the know-how embodied in the patent. The agreement requires that the Company make annual payments of specified minimum royalties. The agreement is subject to termination by Seuss upon Euromerican's failure to perform its obligations under the agreement for 45 days or by Seuss or Euromerican upon the Company's failure to perform its obligations under the agreement for 45 days or upon the occurrence of other standard events of default. The Company has also received a separate assignment from Dr. Gars and Dr. Suess of certain patent rights relating to the Company's THERAPLEX HYDROLOTION products. There can be no assurance that the Company will fulfill its obligations under any of the foregoing agreements. The failure to satisfy the requirements of any agreement could result in the loss of the Company's rights under the agreements and in other related agreements which could have a material adverse affect upon the Company's business, financial condition or results of operations. TRADEMARKS The Company believes that trademark protection is significant in establishing product recognition. The Company owns 15 federally registered trademarks. The Company has filed United States applications for registration of seven additional trademarks and servicemarks. United States federal registrations for trademarks remain in force for 10 years and may be renewed every 10 years after issuance provided the mark is still being used in commerce. There 7 8 can be no assurance that any such trademarks or servicemarks will afford the Company adequate protection, or that the Company will have the financial resources to enforce its rights under any such trademarks and servicemarks. The inability of the Company to protect its trademarks or servicemarks from infringement could result in injury to any goodwill which may be developed in such trademarks or servicemarks. Moreover, the Company's inability to use one or more of its trademarks or servicemarks because of successful third-party claims to such marks could have a material adverse effect on the Company's business, financial condition or results of operations. An opposition to registration of the mark "THERAMYCIN Z" has been filed and is currently pending in the United States Patent and Trademark Office. While there can be no assurance as to the outcome of this matter, the Company does not currently foresee any significant costs or loss of sales associated with the reintroduction of THERAMYCIN Z under a different trade name. From time to time, the Company receives communications from parties who allege that their trademark interests may be damaged either by the Company's use of a particular trademark or its registration of such trademark. In general, the Company seeks to resolve such conflicts before an actual opposition to registration or suit for infringement is filed. There can, however, be no assurance that such oppositions will not be filed or that, if filed, they will not have a material adverse effect upon the Company's business, financial condition or results of operations. PATENTS AND PROPRIETARY RIGHTS The Company has licensed rights to products covered by certain United States patents directed to aspects of the THERAPLEX and BENZASHAVE compounds/formulations, and the Company has obtained patents directed to aspects of several other compounds. The Company is also pursuing several United States patent applications. No assurance can be given that patents will be issued with respect to any of these applications. The Company has acquired rights under certain patents and patent applications from third-party licensors. The Company has also acquired from certain of its consultants and principals an assignment of their rights to certain United States patents or patent applications. Certain of such patents and patent applications may be subject to claims of rights by third parties by reason of existing relationships with the party who filed such patents or patent applications. No assurance can be given that the Company will be able to obtain any rights under such patents or patent applications, as a result of such conflicting claims, or that any rights which the Company may obtain will be sufficient for the Company to market products which may be the subject of such patents or patent applications. The Company may be required to obtain licenses and or pay royalties to obtain the rights it acquires under such patents or patent applications and no assurance can be given that the Company will be able to obtain rights under such patents or patent applications on terms acceptable to the Company, or at all. The Company believes that its success will depend in part on its ability to obtain and maintain patent protection for its own inventions, and to obtain and maintain licenses for the use of patents licensed or sublicensed by third parties. No assurance can be given that any patent issued to, or licensed by, the Company will provide protection that has commercial significance. In this regard, the patent position of pharmaceutical compounds is particularly uncertain. There can be no assurance that challenges will be not be instituted against the validity or enforceability of any patent owned by or licensed to the Company or, if instituted, that such challenges will not be successful. The Company only conducts complete searches to determine whether its products infringe upon any existing patents as it deems appropriate. The cost of litigation to uphold the validity and prevent infringement of patents can be substantial and require a significant commitment of management time. Furthermore, there can be no assurance that others will not independently develop similar technologies or duplicate the technology owned by or licensed to the Company or design around the patented aspects of such technology. There can be no assurance that the products and technologies the Company currently markets, or may seek to market in the future, will not infringe patents or other rights owned by others. In the event of an adverse outcome of any dispute with respect to patents or other rights, the Company may be required to license such disputed rights to or cease using such disputed rights. There can be no assurance that a license would be on terms acceptable to the Company, or at all. The Company believes that obtaining foreign patents may be more difficult than obtaining domestic patents because of differences in patent laws, and recognizes that its patent position therefore may be stronger in the United States than in Europe. In addition, the protection provided by foreign patents once they are obtained may be weaker than that provided by domestic patents. 8 9 The Company relies and expects to continue to rely upon unpatented proprietary know-how and continuing technological innovation in the development and manufacture of many of its principal products. The Company's policy is to require all its employees, consultants and advisors to enter into confidentiality agreements with the Company. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's trade secrets or proprietary know-how in the event of any unauthorized use or disclosure of such know-how. In addition, there can be no assurance that others will not obtain access to or independently develop these trade secrets or know-how. COMPETITION Competition is intense among manufacturers of prescription pharmaceuticals for the treatment of dermatological diseases, such as the DYNACIN, TRIAZ, THERAMYCIN Z, and BENZASHAVE products, and in the OTC market for dermatological products such as the ESOTERICA and THERAPLEX product lines, as well as other products which the Company may develop and market in the future. Most of the Company's competitors are large, well-established pharmaceutical, chemical, cosmetic or health care companies with considerably greater financial, marketing, sales and technical resources than available to the Company. Additionally, many of the Company's present and potential competitors have research and development capabilities that may allow such competitors to develop new or improved products that may compete with the Company's product lines. The pharmaceutical industry is characterized by intense competition and rapid product development and technological change. The Company's pharmaceuticals could be rendered obsolete or made uneconomical by the development of new pharmaceuticals to treat the conditions addressed by the Company's products, technological advances affecting the cost of production, or marketing or pricing actions by one or more of the Company's competitors. The Company's business, financial condition or results of operations could be materially adversely affected by any one or more of such developments. Each of the Company's products is in competition for a share of the existing market with numerous products which have become standard treatments recommended or prescribed by dermatologists. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competition will not have a material adverse effect on the Company's business, financial condition and results of operations. DYNACIN competes with Minocin, a branded minocycline product marketed by American Home Products Corporation ("AHP"), and generic minocycline products marketed by Schein, BioCraft Laboratories, Inc. ("BioCraft"), and Warner-Chilcott Laboratories, Inc. ("Warner-Chilcott"). Other oral antibiotics utilized for the treatment of acne include erythromycin, doxycycline and tetracycline marketed in branded and generic form by a variety of companies. The Company believes that TRIAZ competes with Cleocin-T and a generic topical clindamycin, manufactured by Pharmacia & Upjohn; Benzac, manufactured by Galderma, Inc.; and Benzamycin, manufactured by Rhone-Poulenc Rorer. ESOTERICA primarily competes with Porcelana, marketed by Dep Corp. and AMBI, marketed by Kiwi Brands, a division of Sara Lee Corporation ("Kiwi"). Several of the Company's products compete with generic (non-branded) pharmaceuticals which claim to offer equivalent therapeutic benefits at a lower cost. In some cases, insurers and other third-party payors seek to encourage the use of generic products by paying or reimbursing a user or supplier of a branded prescription product a lower portion of the purchase price then would be paid or reimbursed for a generic product, making branded products less attractive, from a cost perspective, to buyers. The aggressive pricing activities of the Company's generic competitors and the payment and reimbursement policies of third-party payors could have a material adverse impact on the Company's business, financial condition or results of operations. GOVERNMENT REGULATION Drug and Cosmetic Regulation The manufacture and sale of cosmetics and drugs are subject to regulation principally by the FDA and state and local authorities in the United States, and by comparable agencies in certain foreign countries. The Federal Trade Commission 9 10 ("FTC") and state and local authorities regulate the advertising of OTC drugs and cosmetics. The Federal Food, Drug and Cosmetic Act, the regulations promulgated thereunder, and other federal and state statutes and regulations, govern, among other things, the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. In general, products falling within the FDA's definition of "new drugs" require premarketing clearance by the FDA. Products falling within the FDA's definition of "cosmetics" or of "drugs" that are not "new drugs" and that are generally recognized as "safe and effective" do not require premarketing clearance. The steps required before a pharmaceutical compound may be marketed in the United States include (i) preclinical laboratory and animal testing, (ii) submission to the FDA of an Investigatory New Drug ("IND") application, which must become effective before clinical trials may commence, (iii) adequate and well-controlled clinical trials to establish the safety and efficacy of the drug, (iv) submission to the FDA of an NDA and (v) FDA approval of the NDA prior to any commercial sale or shipment of the drug. In addition to obtaining FDA approval for each product, each domestic drug manufacturing establishment must be registered with, and approved by, the FDA. Drug product manufacturing establishments located in California also must be licensed by the State of California in compliance with separate regulatory requirements. Preclinical testing is generally conducted in laboratory animals to evaluate the potential safety and the efficacy of a drug. The results of these studies are submitted to the FDA as a part of an IND, which must be approved before clinical trials in humans can begin. Typically, clinical evaluation involves a time consuming and costly three-phase process. In Phase I, clinical trials are conducted with a small number of subjects to determine the early safety profile, the pattern of drug distribution and metabolism. In Phase II, clinical trials are conducted with groups of patients afflicted with a specific disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase III, large-scale, multi- center, comparative trials are conducted with patients afflicted with a target disease in order to provide enough data to demonstrate the efficacy and safety required by the FDA. The FDA closely monitors the progress of each of the three phases of clinical trials and may, at its discretion, re-evaluate, alter, suspend or terminate the testing based upon the data which have been accumulated to that point and its assessment of the risk/benefit ratio to the patient. In general, FDA approval is required before a new drug product may be marketed in the United States. However, most OTC drugs are exempt from the FDA's premarketing approval requirements. In 1972, the FDA instituted the ongoing OTC Drug Review to evaluate the safety and effectiveness of OTC drugs then in the market. Through this process, the FDA issues monographs that set forth the specific active ingredients, dosages, indications and labeling statements for OTC drugs that the FDA will consider generally recognized as safe and effective and therefore not subject to premarket approval. OTC drug products are classified by the FDA in one or more categories: Category I products, which are deemed "safe and effective for OTC use," Category II products, which are deemed "not generally recognized as safe and effective for OTC use," and Category III products, which are deemed "possibly safe and effective with studies ongoing." For certain categories of OTC drugs not yet subject to a final monograph, the FDA usually will not take regulatory action against such a product unless failure to do so will pose a potential health hazard to customers. Drugs subject to final monographs, however, are subject to various FDA regulations concerning for example, cGMP, general and specific OTC labeling requirements (including warning statements), prohibitions against promotion for conditions other than those stated in the labeling, and requirement that OTC drugs contain only suitable inactive ingredients. OTC drug manufacturing facilities are subject to FDA inspection, and failure to comply with applicable regulatory requirements may lead to administrative or judicially imposed penalties. The active ingredient in DYNACIN products, minocycline, has been approved by the FDA. The active ingredient in TRIAZ and BENZASHAVE products has been classified as a Category III product under a tentative final FDA monograph for over-the-counter distribution for use in treatment of labeled conditions. The FDA has requested, and a task force of the Non-Prescription Drug Manufacturers Association has undertaken, further studies to confirm that benzoyl peroxide, an active ingredient in TRIAZ and BENZASHAVE products, is not a tumor promoter when tested in conjunction with UV light exposure. TRIAZ and BENZASHAVE products, which the Company also sells on a prescription basis, have the same ingredients at the same dosage levels as the over-the-counter products. In the Company's opinion, TRIAZ and BENZASHAVE products would also be considered to be generally recognized as safe and effective for their intended uses under the Food and Drug Act. There can be no assurance these tests will confirm the status of benzoyl peroxide as generally recognized as safe and effective or that adverse test results would not result 10 11 in withdrawal of TRIAZ and BENZASHAVE from marketing. An adverse decision by the FDA with respect to the safety of benzoyl peroxide could result in the assertion of product liability claims against the Company and could otherwise have a material adverse effect on the Company's business, financial condition or results of operation. Certain ESOTERICA products contain the active ingredient hydroquinone, currently a Category I product. Independent expert dermatologists have formally expressed the view that hydroquinone at a 2% concentration is generally recognized as safe and effective for its intended use. However, in 1992, with the concurrence of the FDA, the industry initiated dermatological metabolism and toxicity studies to fully support hydroquinone's continued Category I status. Notwithstanding the pendency or results of these tests, which may take up to three years to complete, the FDA may elect to classify hydroquinone as a Category III OTC drug. The Company, in conjunction with the Non-Prescription Drug Manufacturers Association and other manufacturers, is responsible for 50% of the costs associated with these studies. An adverse decision by the FDA on the safety of hydroquinone could result in the assertions of product liability claims against the Company. Moreover, if hydroquinone is not maintained as a Category I or Category III drug, the Company would be required to cease marketing ESOTERICA products containing hydroquinone, which would have a material adverse effect on the Company's business, financial condition and results of operations. The ESOTERICA, TRIAZ and BENZASHAVE products must meet the composition and labeling requirements established by the FDA for products containing their respective basic ingredients. The Company believes that compliance with those established standards avoids the requirement for premarketing clearance of these products. There can be no assurance that the FDA will not take a contrary position. The Company believes its three THERAPLEX moisturizers, as they are promoted and intended by the Company for use, fall within the FDA's definition of "cosmetics" and therefore do not require premarketing clearance. There can be no assurance that the FDA will not take a contrary position in the future or that an adverse determination by the FDA would not result in withdrawal of the THERAPLEX moisturizers from marketing. The Company believes that such products are subject to regulations governing product safety, use of ingredients, labeling and promotion and methods of manufacture. Certain Factors Affecting the Company's Products The Company believes that certain of its products as they are promoted and intended by the Company for use, are exempt from registration based on the date of introduction of their active ingredients and therefore do not require premarketing clearance. There can be no assurance that the FDA will not take a contrary position. The Company believes that such products are subject to regulations governing product safety, use of ingredients, advertising, labeling and promotion and methods of manufacture. Clinical trials and the marketing and manufacturing of pharmaceutical products are subject to the rigorous testing and approval processes of the FDA and foreign regulatory authorities. The process of obtaining FDA and other required regulatory approvals is lengthy and expensive. There can be no assurance that the Company will be able to obtain the necessary approvals to conduct clinical trials or for the manufacturing and marketing of products, that all necessary clearances will be granted to the Company or its licensors for future products on a timely basis or at all or that FDA review or other actions will not involve delays adversely affecting the marketing and sale of the Company's products. In addition, the testing and approval process with respect to certain new products which the Company may develop or seek to introduce is likely to take a substantial number of years and involve the expenditure of substantial resources. There can be no assurance that pharmaceutical products currently in development, or those products acquired or licensed by the Company, will be cleared for marketing by the FDA. Failure to obtain any necessary approvals or failure to comply with applicable regulatory requirements could have a material adverse effect on the Company's business, financial condition or results of operations. Further, future government regulation could prevent or delay regulatory approval of the Company's products. There can be no assurance that any approval will be granted on a timely basis, or at all, that the FDA will not require post-marketing testing and surveillance to monitor the record of the product and continued compliance with regulatory requirements; that the FDA will not require the submission of any lot of any product for inspection and will not restrict the release of any lot that does not comply with FDA standards; that the FDA will not otherwise order the suspension of manufacturing, recall or seizure of products; or that the FDA will not withdraw its marketing clearance of any product 11 12 if compliance with regulatory standards is not maintained or if problems concerning safety or efficacy of the product are discovered following approval. From time to time, the FDA has issued correspondence to pharmaceutical companies, including the Company, alleging that their advertising or promotional practices are false, misleading or deceptive. The Company has resolved all such complaints without any adverse findings by the FDA and without incurring substantial expense. However, there can be no assurance that the Company will not receive such correspondence from the FDA in the future, or that, if such notices are received, they will not result in substantial cost, disruption or expense (including fines and penalties), in material changes to the manner in which the Company promotes its products, or in loss of sales of the Company's products or other material adverse effects on the Company's business, financial condition or results of operations. For both currently marketed and future products, failure to comply with the applicable regulatory requirements could, among other things, result in fines, suspensions of regulatory approvals, product recalls, operating restrictions, criminal prosecution, relabeling costs, delays in product distribution, marketing and sales or seizure or cessation of manufacture of the products and the imposition of civil or criminal sanctions. There can be no assurance that the FDA will not change its position with regard to the safety or effectiveness of the Company's current or future products or that the FDA will agree with the Company's position regarding the regulatory status of its products. In the event that the FDA takes a contrary position regarding any of the Company's current or future products, the Company may be required to change its labeling or formulation or possibly cease manufacture and marketing of such products. In addition, even prior to any formal regulatory action, the Company could decide voluntarily to cease distribution and sale, or to recall, any of its products if concern about the safety or efficacy of any of its products were to develop. Any such action could have a material adverse effect on the Company's business, financial condition or results of operations. The Company also will be subject to foreign regulatory authorities governing clinical trials and pharmaceutical sales if it seeks to market its products outside the United States. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must be obtained prior to the commencement of marketing of the product in those countries. The approval process varies from country to country and the time required may be longer or shorter than that required for FDA approval. There can be no assurance that any foreign regulatory agency will approve any product submitted for review by the Company. THIRD-PARTY REIMBURSEMENT The operating results of the Company will depend in part on the availability of adequate reimbursement for the Company's products from third-party payors, such as government entities, private health insurers and managed care organizations. Third-party payors are increasingly seeking to negotiate the pricing of medical services and products and to promote the use of non-branded (generic) pharmaceuticals through payor-based reimbursement policies designed to encourage their use. In some cases, third-party payors will pay or reimburse a user or supplier of a prescription drug product only a portion of the purchase price of the product. In the case of the Company's prescription products, payment or reimbursement by third-party payors of only a portion of the cost of such products could make such products less attractive, from a cost perspective, to users, suppliers and prescribing physicians. There can be no assurance that reimbursement, if available, will be adequate. Moreover, certain of the Company's products are not of a type generally eligible for third-party reimbursement. If adequate reimbursement levels are not provided by government entities or other third-party payors for the Company's products, or if those reimbursement policies increasingly favor the use of generic products, the Company's business, financial condition and results of operations would be materially adversely affected. In addition, managed care initiatives to control costs have influenced primary care physicians to refer fewer patients to dermatologists, resulting in a declining target market for the Company. Further reductions in referrals to dermatologists could have a material adverse impact upon the Company's business, financial condition or results of operations. In addition, a number of legislative and regulatory proposals aimed at changing the nation's health care system have been proposed in recent years. While the Company cannot predict whether any such proposals will be adopted, or the effect that any such proposal may have on its business, such proposals, if enacted, could have a material adverse effect on the Company's business, financial condition or results of operations. PRODUCT LIABILITY INSURANCE 12 13 The Company faces an inherent risk of exposure to product liability claims in the event that the use of its products is alleged to have resulted in adverse effects. Such risk exists even with respect to those products that are manufactured in licensed and regulated facilities or that otherwise possess regulatory approval for commercial sale. There can be no assurance that the Company will avoid significant product liability exposure. The Company currently has product liability insurance in the amount of $5.0 million per claim and $5.0 million in the aggregate on a claims-made basis. Many of the Company's customers require the Company to maintain product liability insurance coverage as a condition to their conducting business with the Company. As the loss of such insurance coverage could result in a loss of such customers, the Company intends to take all reasonable steps necessary to maintain such insurance coverage, although there can be no assurance that adequate insurance coverage will be available in the future on commercially reasonable terms, or at all, or that such insurance will be adequate to cover potential product liability claims, or that the loss of insurance coverage or the assertion of a product liability claim or claims would not materially adversely affect the Company's business, financial condition and results of operations. EMPLOYEES As of August 3, 1996, the Company had 58 full-time employees. The Company believes its relationship with its employees is good. The Company intends to hire personnel as needed during the next 12 months. 13 14 ITEM 2: PROPERTIES The Company presently leases approximately 12,000 square feet of office space for its headquarters in Phoenix, Arizona, under a Lease Agreement which expires in May 2005. The Company believes that these facilities will be adequate to meet its needs for the foreseeable future. ITEM 3: LEGAL PROCEEDINGS The Company and certain of its subsidiaries are parties to certain actions and proceedings incident to their business. Liability in the event of final adverse determinations in any of these matters is either covered by insurance and/or established reserves, or, the Company believes, will not, in the aggregate, have a material adverse effect on the business, financial position or results of operations of the Company. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the security holders of the Company during the fourth quarter of fiscal 1995. 14 15 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS DIVIDEND POLICY The Company declared a 3-for-2 stock split in the form of a 50% stock dividend paid on August 2, 1996 to holders of record on July 22, 1996. The Company has never declared a cash dividend. The Company intends to retain any earnings to fund future growth and the operation of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded on the Nasdaq National Market under the symbol "MDRX." The following table sets forth for the fiscal periods indicated, the range of high and low sales prices for the Common Stock of the Company on the Nasdaq National Market, as adjusted to reflect the 1-for-14 reverse stock split of the Company's Common Stock effected on October 23, 1995, and as adjusted to the nearest 1/16 to reflect the 3-for-2 stock split in the form of a 50% stock dividend paid on August 2, 1996 to holders of record as of July 22, 1996.
HIGH LOW -------- -------- FISCAL YEAR ENDED JUNE 30, 1994 First Quarter................. $ 8-3/16 $4-11/16 Second Quarter................ 8-3/16 3-1/2 Third Quarter................. 7-1/2 3-1/2 Fourth Quarter................ 4-3/8 2-1/16 FISCAL YEAR ENDED JUNE 30, 1995 First Quarter................. 4-15/16 2-1/16 Second Quarter................ 5-1/4 2-15/16 Third Quarter................. 3-13/16 2-1/16 Fourth Quarter................ 3-13/16 1-3/4 FISCAL YEAR ENDED JUNE 30, 1996 First Quarter................. 5-1/4 2-5/16 Second Quarter................ 10-9/16 4-1/2 Third Quarter................. 21-1/16 9-1/16 Fourth Quarter................ 31-1/2 15-1/2
On August 14, 1996, the last reported sale price on the Nasdaq National Market for the Company's Common Stock was $42.75 per share. As of such date, there were approximately 750 holders of record of Common Stock. ITEM 6: SELECTED FINANCIAL DATA The following selected financial data have been derived from the consolidated financial statements of Medicis Pharmaceutical Corporation for the fiscal years 1996, 1995, 1994, 1993 and 1992 15 16
YEAR ENDED JUNE 30, ------------------------------------------------------ 1992 1993(1) 1994(1) 1995(2) 1996 -------- -------- -------- -------- -------- (in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Net sales $ 7,687 $ 11,088 $ 17,059 $ 19,132 $ 25,310 Gross profit 5,450 7,215 11,239 13,282 18,354 Operating expenses: Selling, general and administrative 9,033 14,237(3) 8,786 10,330 10,868 Research and development expenses 823 3,841(4) 1,572 770 952 Depreciation and amortization 1,231(5) 616 653 522 559 -------- -------- -------- -------- -------- Total operating expenses 11,087 18,694 11,011 11,622 12,379 -------- -------- -------- -------- -------- Operating income (loss) (5,637) (11,479) 228 1,660 5,975 Other: Minority share of losses of Dyad -- -- 677 -- -- Gains on disposition of Dyad -- -- -- 107 -- Net interest income (expense) (2,330) (175) (249) (94) 79 Extraordinary loss on extinguishment of debt (3,824) -- -- -- -- Income tax benefit (expense) -- -- -- (60) 1,826 Net income (loss) $(11,791) $(11,654) $ 656 $ 1,613 $ 7,880 Net income (loss) per share before extraordinary item $ (2.17) $ (2.12) $ 0.10 $ 0.24 $ 1.09 Extraordinary loss per share (1.04) -- -- -- -- Net income (loss) per share $ (3.21) $ (2.12) $ 0.10 $ 0.24 $ 1.09 ======== ======== ======== ======== ======== Shares used in computing per share amount 3,668 5,507 6,303 6,593 7,242
BALANCE SHEET DATA: JUNE 30, 1992 1993(1) 1994(1) 1995 1996 -------- -------- -------- -------- -------- (in thousands) Cash and cash equivalents $ 6,136 $ 233 $ 775 $ 953 $ 7,956 Working capital (deficiency) (3,528) (4,541) (1,978) 619 12,401 Total assets 17,709 11,993 12,726 13,850 26,313 Long-term debt 2,320 1,264 899 694 117 Stockholders' equity 10,325 2,937 5,263 7,387 19,460
- ----------- (1) Fiscal 1994 and fiscal 1993 include the operations of Dyad Pharmaceutical Corporation ("Dyad") which were divested in fiscal 1995. (2) Fiscal 1995 includes approximately $610,000 of charges associated with headquarters relocation; the Company had operating income of $2,270,000 before relocation charges in fiscal 1995. (3) The increase in selling, general and administrative, was primarily attributable to advertising costs, most of which were due to the launch of DYNACIN products in November 1992. 16 17 (4) The increase in research and development costs is primarily attributable to the inclusion of the allocation of the purchase price of Dyad to research and development and the addition of Dyad's research and development expenses in fiscal 1993. (5) Fiscal 1992 depreciation and amortization included the write-off of the remaining value of a license agreement previously capitalized. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following Management's Discussion and Analysis of Financial Condition and Results of Operation contains forward-looking statements which involve risk and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW Medicis was founded in 1987 to develop and market prescription and over-the-counter products to treat dermatological conditions. Innovative Therapeutics, Inc. (the predecessor in interest of the Company) was incorporated under the laws of the District of Columbia on July 1, 1987, subsequently changed its name to Medicis Corporation and was merged with and into Medicis Corporation (a corporation incorporated on July 29, 1988 under the laws of Delaware), pursuant to an Agreement of Merger dated July 29, 1988. Medicis Corporation subsequently changed its name to Medicis Pharmaceutical Corporation. The Company has acquired rights to manufacture and sell certain of its dermatological products pursuant to several license and asset purchase agreements. The Company sells these products for use in various segments of the dermatological market, including the acne segment, the therapeutic emollient and moisturizer segment and the fade cream segment. The Company has achieved increases in net sales and net income both through the acquisition of products sold by others and the launch of new products. The Company's primary prescription products, DYNACIN products and TRIAZ products, were launched in fiscal 1993 and fiscal 1996, respectively, and the Company's primary OTC products, the ESOTERICA products, were acquired in fiscal 1991. Prescription pharmaceuticals accounted for 83.2% of fiscal 1996 net sales and net sales of 70.6% and 70.7% in fiscal 1995 and fiscal 1994, respectively. DYNACIN products accounted for a majority of the Company's total sales in fiscal 1996 and 1995. The Company believes that sales of DYNACIN products will continue to constitute the majority of total net sales for the foreseeable future. Accordingly, any factor adversely affecting the sale of DYNACIN products would have a material adverse effect on the Company's business, financial condition and results of operations. DYNACIN products could be rendered obsolete or uneconomical by regulatory or competitive changes. The sale of DYNACIN products could also be affected adversely by other factors, including manufacturing or supply interruptions, the development of new competitive pharmaceuticals to treat the conditions addressed by DYNACIN products, technological advances, factors affecting the cost of production, marketing or pricing actions by one or more of the Company's competitors, changes in the prescription writing practices of dermatologists, changes in the reimbursement policies of third-party payors, product liability claims or other factors. See Item 1, "-- Products in Development," "-- Manufacturing," "-- Certain License and Royalty Agreements," "-- Competition" and "-- Government Regulation." The Company's results of operation may vary from period to period due to a variety of factors, including expenditures incurred to acquire, license and promote pharmaceuticals, changes in prescription writing practices of dermatologists, the Company's level of research and development, the introduction of new products by the Company or its competitors, supply interruptions, cost increases from third-party manufacturers, the availability and cost of raw materials, the mix of products sold by the Company, changes in marketing and sales expenditures, market acceptance of the Company's products, competitive pricing pressures, seasonal fluctuations and general economic and industry conditions that affect customer demand. In addition, the Company's business has historically been subject to seasonal fluctuations, with lower sales generally being experienced in the first quarter of each fiscal year. As a result of customer buying patterns, a substantial portion of revenues has been received in the last month of each quarter. The Company schedules its inventory purchases to meet anticipated customer demand. As a result, relatively small delays in the receipt of manufactured products could result in revenues being deferred or lost. The Company's operating expenses are based on anticipated sales levels, and a high percentage of the Company's expenses are relatively fixed in the short-term, variations in the timing of recognition of revenue could cause significant fluctuations from period to period and may result in unanticipated periodic earnings shortfalls or losses. There can be no assurance that the Company will maintain or increase revenues, maintain profitability or avoid losses in any future period. 17 18 The Company recognizes revenues from sales upon shipment to its customers. At the time of sale, the Company records reserves for returns based on estimates using historical experience. Sales are reported net of actual and estimated product returns and net of pricing adjustments. The Company applies royalty obligations to the cost of sales in the period the corresponding sales are recognized. Medicis' customers include the nation's leading wholesale pharmaceutical distributors, such as McKesson, Bergen Brunswig, Cardinal, Foxmeyer, Bindley and major drug chains. During fiscal 1996, McKesson, Bergen Brunswig and Cardinal, accounted for 15.5%, 12.2% and 11.8%, respectively, of the Company's sales. During fiscal 1995, McKesson and Bergen Brunswig accounted for 15.9% and 9.6%, respectively, of the Company's sales. During fiscal 1994, McKesson and Bergen Brunswig accounted for 15.1% and 11.2%, respectively, of the Company's sales. The loss of any of these customer accounts could have a material adverse effect upon the Company's business, financial condition or results of operations. See Item 1, "Business -- Customers." To enable Medicis to focus on its core marketing and sales activities, the Company selectively out-sources certain non-marketing functions, such as laboratory research, manufacturing and warehousing. As the Company expands its activities in these areas, additional financial resources are expected to be utilized in these areas. The Company typically does not enter into long-term manufacturing contracts with third-party manufacturers. Whether or not such contracts exist, there can be no assurance that the Company will be able to obtain adequate supplies of such products in a timely fashion, or at all. The Company plans to spend substantial amounts of capital to continue the research and development of its pharmaceutical products. Actual expenditures will depend on the Company's financial position, as well as the results of clinical testing, delays or changes in government-required testing and approval procedures, technological and competitive developments and strategic marketing decisions. The Company may increase total expenditures for research and development and expects that research and development expenditures as a percentage of net sales will fluctuate from period to period. The Company can give no assurance that the research and development projects will provide technologies or products that will be patentable, commercially feasible or acceptable to government agencies whose approval may be necessary. The Company intends to seek additional acquisitions of product lines of niche-market pharmaceuticals to leverage its existing distribution channels and marketing infrastructure and to market aggressively formulations of existing products. The success of the Company's efforts is subject to a number of risks and uncertainties including its dependence upon key pharmaceuticals and integration of new product acquisitions, its reliance upon third-party manufacturers to produce certain key products, its ability to effectively manage a changing business, uncertainties related to pharmaceutical pricing and reimbursement and on the uncertainty of competitive forces within the pharmaceutical industry which affect both the market for its products and the availability of suitable product lines for acquisition which meet the Company's acquisition criteria. The future results of operations, both annually and from quarter to quarter, are subject to a variety of factors applicable to the Company and to the industries and markets in which it operates. See Certain Factors Affecting Forward Looking Statements -- Safe-Harbor Statement. RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements contained elsewhere herein. The following table sets forth certain data as a percentage of net sales for the periods indicated. 18 19
PERCENTAGE OF SALES YEAR ENDED JUNE 30, ---------------------------------------------------------- 1994 1995 1996 -------- -------- -------- Net sales..................................... 100.0% 100.0% 100.0% Gross profit.................................. 65.9 69.4 72.5 Operating expenses............................ 64.6 60.8 48.9 Operating income.............................. 1.3 8.6 23.6 Net interest income (expense)................. (1.5) (0.5) 0.3 Minority share of losses of Dyad.............. 4.0 -- -- Gains on disposition of Dyad.................. -- 0.6 -- Income tax benefit (expense).................. -- (0.3) 7.2 -------- -------- -------- Net income.................................... 3.8% 8.4% 31.1% -------- -------- --------
FISCAL 1995 AND 1996 QUARTERLY ANALYSIS -------------------------------------------------------------------------------------------- 1995 1996 ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) SEPT. DEC. MAR. JUNE SEPT. DEC. MAR. JUNE Net sales $ 3,690 $ 4,725 $ 5,033 $ 5,684 $ 4,574 $ 6,449 $ 7,016 $ 7,271 Gross profit 2,519 3,024 3,659 4,080 3,257 4,667 5,040 5,390 Operating expenses 2,444 2,793 3,335 3,050 2,608 3,260 3,305 3,206 Operating income 75 231 324 1,030 649 1,407 1,735 2,184 Net income $ 26 $ 308 $ 312 $ 967 $ 646 $ 1,404 $ 1,759 $ 4,071 ========= ======== ======= ======= ======== ======== ======= ======== Net income per share $ -- $ 0.05 $ 0.05 $ 0.14 $ 0.10 $ 0.21 $ 0.24 $ 0.54 ========= ======== ======= ======= ======== ======== ======= ========
Years Ended June 30, 1996 and 1995 Net Sales Net sales for fiscal 1996 increased 32.3%, or $6.2 million, to $25.3 million from $19.1 million for fiscal 1995. The Company's net sales increased in fiscal 1996 primarily as a result of both unit and dollar sales growth associated with an increase in market share of the existing prescription products and the launch of a new prescription product. The Company's prescription products accounted for 83.2% of net sales in fiscal 1996 and 70.6% in fiscal 1995. Net sales of the Company's prescription products grew 56.0%, or $7.6 million, to $21.1 million in 1996 from $13.5 million in fiscal 1995, primarily due to the Company's launch of TRIAZ products in October 1995, coupled with an increase in market penetration of DYNACIN products. The increase in sales of prescription products in fiscal 1996 was partially offset by a decrease in unit sales of OTC products, primarily the ESOTERICA product line. The OTC products accounted for 16.8% of net sales in fiscal 1996 and 28.2% in fiscal 1995. The Company continues to invest a majority of its marketing funds in the Company's prescription products. Gross Profit Gross profit during fiscal 1996 increased 38.2%, or $5.1 million, to $18.4 million from $13.3 million in fiscal 1995. As a percentage of net sales, gross margin grew to 72.5% in fiscal 1996 from 69.4% in fiscal 1995 primarily as a result of manufacturing cost reductions for DYNACIN products and a change in sales mix toward the Company's prescription products, which have higher gross margins. Selling, General and Administrative Expenses 19 20 Selling, general and administrative expenses in fiscal 1996 increased 5.2%, or $0.5 million, to $10.9 million from $10.3 million in fiscal 1995, primarily due to a 22.2%, or $1.4 million, increase in selling expenses in fiscal 1996. This increase was primarily attributable to an increase in personnel costs commensurate with increased sales volume, yearly salary escalations and an increase in promotional costs attributable to the launch of TRIAZ products. Selling, general and administrative expenses in fiscal 1995 included $0.6 million in nonrecurring expenses associated with the Company's headquarters relocation to Phoenix, Arizona in fiscal 1995. Research and Development Expenses Research and development expenses in fiscal 1996 increased 23.7%, or $0.2 million, to $1.0 million from $0.8 million in fiscal 1995 primarily due to development efforts relating to the introduction in October 1995 of the Company's TRIAZ products. Depreciation and Amortization Expenses Depreciation and amortization expenses remained materially unchanged, at $0.6 million in fiscal 1996 and $0.5 million in fiscal 1995. Operating Income Operating income during fiscal 1996 increased 260.0%, or $4.3 million, to $6.0 million from $1.7 million in fiscal 1995 and increased as a percentage of net sales to 23.6% from 8.6% in fiscal 1995. This increase was primarily as a result of higher sales volume, coupled with an increase in the Company's gross profit margin and the absence of nonrecurring relocation expenses which were incurred in fiscal 1995. Gains on Disposition and Minority Share of Losses of Dyad The Company had no related gains or losses in fiscal 1996. During fiscal 1995, the Company completed the sale of all of its interest in Dyad to Corporate Trinity. The sale of the Company's interest in Dyad resulted in a gain of $107,000. The Company had previously consolidated Dyad's operations. As a result of the divestiture of Dyad, the Company's and Dyad's financial statements are no longer consolidated, subsequent to June 30, 1994. Minority share of losses of Dyad in fiscal 1994 is based on the losses of Dyad included in operating income. Net Interest Income (Expense) Interest income in fiscal 1996 increased 167.7%, or $96,000, to $154,000 from $58,000 in fiscal 1995, primarily due to higher cash and cash equivalent balances in fiscal 1996. Interest expense in fiscal 1996 decreased 49.9%, or $75,000, to $76,000, from $151,000 in fiscal 1995, primarily due to the repayment of a substantial portion of the Company's debt. Income Tax Benefit (Expense) Income tax benefit (expense) during fiscal 1996 increased $1.9 million to a benefit of $1.8 million from an expense of $0.1 million in fiscal 1995. During the fourth quarter of fiscal 1996, the Company reevaluated the estimated amount of valuation allowance required to reduce deferred tax assets in accordance with Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS No. 109") to an amount the Company believed appropriate. Accordingly, a credit to income tax benefit of $1.9 million was reflected in the consolidated income statement. The amount of net deferred tax assets estimated to be recoverable was based upon the Company's assessment of the likelihood of near term operating income coupled with uncertainties with respect to the impact of future competitive and market conditions. No such income tax benefit was recorded in fiscal 1995. Net Income Net income during fiscal 1996 increased approximately 388.5%, or $6.3 million, to $7.9 million from $1.6 million in fiscal 1995. The increase was primarily attributable to an increase in sales volume, an increase in gross margin as a percentage of net sales and the recording of the income tax benefit in fiscal 1996. Years Ended June 30, 1995 and 1994 20 21 Net Sales Net sales for fiscal 1995 increased 12.2%, or $2.0 million, to $19.1 million from $17.1 million for fiscal 1994. Net sales increased in fiscal 1995 primarily as a result of unit sales growth attributable to an increase in market share of existing prescription products. The Company's prescription products accounted for approximately 70.6% of net sales in fiscal 1995 and 70.7% in fiscal 1994. Net sales of prescription products grew 12.0%, or $1.4 million, to $13.5 million in fiscal 1995 from $12.1 million in fiscal 1994, primarily due to an increase in market penetration of DYNACIN products. Net sales of OTC products grew 12.6%, or $0.7 million, to $5.6 million in fiscal 1995 from $4.9 million in fiscal 1994, primarily due to the Company's increased distribution in the food and drug class of trade and an increased number of store openings by one of the Company's major customers. Gross Profit Gross profit during fiscal 1995 increased 18.2%, or $2.1 million, to $13.3 million from $11.2 million in fiscal 1994. As a percentage of net sales, margins grew to 69.4% in fiscal 1995 from 65.9% in fiscal 1994, primarily as a result of manufacturing and royalty cost reductions for DYNACIN products coupled with a mid-year price increase. Selling, General and Administrative Expenses Selling, general and administrative expenses in fiscal 1995 increased 17.6%, or $1.5 million, to $10.3 million from $8.8 million in fiscal 1994, primarily due to an increase in sales bonuses and other variable personnel costs of $0.6 million and $0.6 million of nonrecurring costs associated with the Company's relocation to Phoenix, Arizona. The Company's decision to relocate was made in anticipation of lower operational expenses relating especially to office lease space, personnel costs and other operating expenses. The Company also received incentives from the State of Arizona in the form of low-interest financing, employee training grants and travel vouchers. In addition, selling, general and administrative expenses increased in fiscal 1995, primarily due to the increased sampling of DYNACIN products. Research and Development Expenses Research and development expenses decreased 51.0%, or $0.8 million, to $0.8 million in fiscal 1995 from $1.6 million in fiscal 1994, primarily due to the exclusion of research and development expenses incurred by Dyad included in research and development expenses in fiscal 1994. The Company divested its entire interest in Dyad during the first quarter of fiscal 1995. Depreciation and Amortization Expenses Depreciation and amortization expenses in fiscal 1995 decreased 20.1%, or $0.1 million, to $0.5 million from $0.6 million in fiscal 1994, primarily as a result of the exclusion of depreciation and amortization expenses incurred by Dyad coupled with a decrease in the weighted average balance of property and equipment attributable to the write-off of fully-depreciated assets in fiscal 1995 as compared to fiscal 1994. Depreciation and amortization expenses incurred by Dyad in fiscal 1995 are not included in the Company's fiscal 1995 operating results. Operating Income Operating income during fiscal 1995 increased 627.7%, or $1.5 million, to $1.7 million from $0.2 million in fiscal 1994, and increased as a percentage of sales to 8.6% from 1.3% in fiscal 1994. This increase was primarily a result of higher sales volume, an increase in the Company's gross profit margin and the exclusion of research and development expenditures associated with Dyad in fiscal 1995. 21 22 Gains on Disposition and Minority Share of Losses of Dyad During fiscal 1995, the Company completed the sale of all of its interest in Dyad to Corporate Trinity, resulting in a gain of approximately $107,000. Minority share of losses of Dyad in fiscal 1994 is based on the losses of Dyad included in operating income. Net Interest Income (Expense) Interest income in fiscal 1995 increased 96.5%, or $28,000, to $58,000 from $30,000 in fiscal 1994 primarily due to higher cash and cash equivalent balances in 1995. Interest expense in fiscal 1995 decreased 45.8%, or $128,000, to $151,000, from $279,000 in fiscal 1994, primarily due to the repayment of a substantial portion of the Company's debt. Income Taxes Income taxes for fiscal 1995 were less than the federal statutory rate due to the utilization of net operating loss carryforwards. The Company did not incur income tax expenses for fiscal 1994. Net Income Net income during fiscal 1995 increased 146.0%, or $1.0 million, to $1.6 million from $0.6 million in fiscal 1994, primarily due to an increase in sales volume, coupled with an increase in the Company's gross margins. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1996 and June 30, 1995, the Company had cash and cash equivalents of approximately $8.0 million and $1.0 million, respectively. The Company's working capital was $12.4 million and $0.6 million at June 30, 1996 and June 30, 1995, respectively. In fiscal 1996, the Company financed its operations through $4.9 million cash provided by operations and $3.1 million generated from the exercise of stock options and warrants. In fiscal 1995, the Company financed operations through cash from operations. During fiscal 1996, the Company retired two notes with payments aggregating $750,000. During fiscal 1995, the Company made payments aggregating $2.0 million to reduce outstanding debt and to partially retire a note incurred in connection with a license agreement. During fiscal 1994, the Company completed a sale of shares of its Common Stock outside of the United States, resulting in net proceeds of approximately $1.6 million. In May 1996, the Company obtained a $5.0 million Credit Facility from Norwest that expires in May 1997. This Credit Facility replaced a $2.0 million credit facility obtained from Norwest Business Credit, Inc., an affiliate of Norwest, in August 1995. The Credit Facility is secured by substantially all of the assets of the Company. The Company is required to comply with certain covenants and restrictions, including covenants relating to the Company's financial condition and results of operations. If the Company is unable or fails to comply with the covenants and restrictions, the lender would have the right not to make loans under the Credit Facility and to require early repayment of any outstanding loans. The Credit Facility, as amended, is no longer subject to a 0.5% per annum fee on the unused portion of the Credit Facility. Although the Company has yet to draw down on the Credit Facility, the lack of availability of loans or the requirement to make early repayment of loans or the inability of the Company to renew the Credit Facility could have a material adverse effect on the Company, depending on its liquidity and working capital at such time. At June 30, 1996 and June 30, 1995, the Company had inventories of $2.1 million and $0.8 million, respectively. The increase in inventory related to increased sales levels and the introduction of the TRIAZ product line in October 1995. Inventories also include finished goods held at manufacturers. The Company's inventory balances are subject to the manufacturers' scheduling of production in order to meet future demand as conveyed to the manufacturer by the Company. Inventories at manufacturers recorded on the consolidated balance sheets of the Company have no effect on working capital. During the fourth quarter of 1996, the Company reevaluated the estimated amount of valuation allowance required to reduce deferred tax assets available in accordance with SFAS No. 109 to an amount the Company believed appropriate. Accordingly, a deferred tax asset of $3.0 million was reflected in the consolidated balance sheet with a corresponding credit to equity of $1.1 million for 1996 tax deductions related to stock option and warrant exercises and 22 23 a credit to deferred tax benefit of $1.9 million in the consolidated income statement. The Company has deferred tax assets available at June 30, 1996 of $11.6 million, which are comprised principally of the tax effect of the Company's $26.0 million net operating loss carryforward. Deferred tax assets available at June 30, 1996 were reduced by an $8.6 million valuation allowance. The amount of net deferred tax assets available that are estimated to be recoverable was based upon the Company's assessment of the likelihood of near-term operating income coupled with the uncertainties with respect to the impact of future competitive and market conditions. The amount of deferred tax asset available that ultimately will be realized will depend upon future events which are uncertain. In accordance with various manufacturing agreements, the Company is required to provide manufacturers with pro forma estimated production requirements by stock keeping units (skus) and in accordance with minimum production runs. From time to time, the Company may not take possession of all merchandise which has been produced by the manufacturer. The Company records its obligation to the manufacturer at the time production is completed. During a portion of fiscal 1995 and prior years, the Company's cash flow from operations was insufficient to cover its operating expenses, and the Company relied on external financings to meet its needs for operating cash flow. As a result of increased sales beginning in the latter half of 1995 associated with the introduction of DYNACIN, the Company experienced an increase in accounts receivable. The Company expects that its current cash and cash equivalents, together with additional cash from operations and cash available from its Credit Facility and the proceeds of this offering, will be sufficient to meet its current liquidity requirements at least through the fiscal year ending June 30, 1998. However, depending upon the Company's acquisition and licensing activity, and results of operations there can be no assurance that such resources will be sufficient. If they are not, the Company would need to obtain additional financing. There is no assurance that such financing would be on terms advantageous to the Company. Adequate additional funds, whether from the financial markets or from other sources, may not be available on a timely basis, on terms acceptable to the Company, or at all. Insufficient funds may cause the Company to delay, scale back, or abandon some or all of its product acquisition, licensing, marketing or research and development programs or opportunities. OTHER MATTERS Inflation did not have a significant impact upon the results of the Company during the fiscal 1996, 1995 or 1994. CERTAIN FACTORS AFFECTING FORWARD LOOKING STATEMENTS - SAFE HARBOR STATEMENT This report contains forward-looking statements that involve risks and uncertainties. the actual results of Medicis could differ materially from those anticipated in these forward-looking statements as a result of certain factors discussed elsewhere in this report, as well as the following: DEPENDENCE ON SALES OF DYNACIN PRODUCTS 23 24 The Company derives a majority of its revenue from sales of DYNACIN products. The Company believes that sales of DYNACIN products will continue to constitute the majority of net sales for the foreseeable future. Accordingly, any factor adversely affecting the sale of DYNACIN products would have a material adverse effect on the Company's business, financial condition and results of operations. DYNACIN products could be rendered obsolete or uneconomical by regulatory or competitive changes. The sale of DYNACIN products could also be affected adversely by other factors, including manufacturing or supply interruptions, the development of new competitive pharmaceuticals to treat the conditions addressed by DYNACIN products, technological advances, factors affecting the cost of production, marketing or pricing actions by one or more of the Company's competitors, changes in the prescription writing practices of dermatologists, changes in the reimbursement policies of third-party payors, product liability claims or other factors. See Item 1, "Business -- Products in Development," "-- Manufacturing," "-- Certain License and Royalty Agreements," "-- Competition" and "-- Government Regulation." UNCERTAINTY OF FUTURE FINANCIAL RESULTS; FLUCTUATIONS IN OPERATING RESULTS The Company's results of operations may vary from period to period due to a variety of factors, including expenditures incurred to acquire, license and promote pharmaceuticals, changes in prescription writing practices of dermatologists, the level of research and development, the introduction of new products by the Company or its competitors, cost increases from third-party manufacturers, supply interruptions, the availability and cost of raw materials, the mix of products sold by the Company, changes in marketing and sales expenditures, market acceptance of the Company's products, competitive pricing pressures, and general economic and industry conditions that affect customer demand. In addition, the Company's business has historically been subject to seasonal fluctuations, with lower sales generally being experienced in the first quarter of each fiscal year. As a result of customer buying patterns, a substantial portion of the Company's revenues have been in the last month of each quarter. The Company schedules its inventory purchases to meet anticipated customer demand. As a result, relatively small delays in the receipt of manufactured products could result in revenues being deferred or lost. The Company's operating expenses are based on anticipated sales levels, and a high percentage of the Company's expenses are relatively fixed in the short term. Consequently, variations in the timing of recognition of revenue could cause significant fluctuations in operating results from period to period and may result in unanticipated periodic earnings shortfalls or losses. There can be no assurance that the Company maintain or increase revenues profitability or avoid losses in any future period. INTENSE COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE The manufacture and sale of pharmaceuticals is highly competitive. Most of the Company's competitors are large, well-established pharmaceutical, chemical, cosmetic or health care companies with considerably greater financial, marketing, sales and technical resources than those available to the Company. Additionally, many of the Company's present and potential competitors have research and development capabilities that may allow such competitors to develop new or improved products that may compete with the Company's product lines. The pharmaceutical industry is characterized by intense competition and rapid product development and technological change. The Company's pharmaceuticals could be rendered obsolete or made uneconomical by the development of new pharmaceuticals to treat the conditions addressed by the Company's products, technological advances affecting the cost of production, or marketing or pricing actions by one or more of the Company's competitors. The Company's business, financial condition or results of operations could be materially adversely affected by any one or more of such developments. DYNACIN competes with Minocin, a branded minocycline product marketed by AHP, and generic minocycline products marketed by Schein, BioCraft and Warner-Chilcott. Other oral antibiotics utilized for the treatment of acne include erythromycin, doxycycline and tetracycline marketed in branded and generic form by a variety of companies. The Company believes that TRIAZ competes with Cleocin-T and a generic topical clindamycin, manufactured by Pharmacia & Upjohn; Benzac, manufactured by Galderma, Inc.; and Benzamycin, manufactured by Rhone-Poulenc Rorer. ESOTERICA primarily competes with Porcelana, marketed by Dep Corp. and AMBI, marketed by Kiwi. Several of the Company's products compete with generic (non-branded) pharmaceuticals which claim to offer equivalent therapeutic benefits at a lower cost. In some cases, insurers and other third-party payors seek to encourage the use of generic products by paying or reimbursing a user or supplier of a branded prescription product a lower portion of the purchase price than would be paid or reimbursed for a generic product, making branded products less attractive, from a cost perspective, to buyers. The aggressive pricing activities of the Company's generic competitors and the 24 25 payment and reimbursement policies of third-party payors could have a material adverse effect on the Company's business, financial condition or results of operations. See Item 1, "Business -- Competition." DEPENDENCE ON NEW PRODUCT INTRODUCTIONS AND ACQUISITION STRATEGY The Company's strategy for growth is substantially dependent upon its continued ability to acquire pharmaceuticals targeted at the dermatology market. The Company engages in limited proprietary research and development of new products and must rely upon the willingness of other companies to sell or license product lines. Other companies, including those with substantially greater financial, marketing and sales resources, compete with the Company to acquire such products. There can be no assurance that the Company will be able to acquire rights to additional products on acceptable terms, or at all. The failure of the Company to acquire additional products or successful products could have a material adverse effect on the Company's business prospects. Further, the market conditions, distribution channels and levels and bases of competition with respect to internally developed or acquired products may be different than those of the Company's current products, and there can be no assurance that the Company will be able to compete favorably and attain market acceptance in any newly acquired product category or successfully integrate any acquired products or business. Failure of the Company to successfully introduce and market new products whether internally developed or acquired from third parties, could have a material adverse effect on the Company's business prospects. MANAGING CHANGING BUSINESS The Company's business strategy includes potential acquisitions of products and businesses and introductions of new products. The Company anticipates that the integration of new businesses or potential products, if any, would require significant management time and attention. The Company's ability to manage change will require it to continue to implement and improve its operational, financial and management information systems and to motivate and effectively manage an increasing number of employees. Failure to manage such change effectively would materially adversely affect the Company's business, financial condition and results of operations. See Item 7 and Item 1, "-- Business Strategy" and "-- Products in Development." RISK OF PRODUCT RECALL; PRODUCT RETURNS Product recalls may be issued at the discretion of the Company, the FDA, or other government agencies having regulatory authority for product sales and may occur due to disputed labeling claims, manufacturing issues, quality defects or other reasons. No assurance can be given that product recalls will not occur in the future. Any product recall could materially adversely affect the Company's business, financial condition or results of operations. The Company's policy is to accept for return only damages or out of date products. There can be no assurance that the Company will not grant such exceptions in the future. The Company maintains financial reserves for the anticipated amount of product returns based upon historical experience. There can be no assurance that future recalls or returns would not have a material adverse affect upon the Company's business, financial condition and results of operations. DEPENDENCE ON KEY PERSONNEL The Company is dependent on certain management personnel for the operation and development of its business. The Company has entered into an Employment Agreement providing for full-time services with Mr. Jonah Shacknai, the founder, Chairman and Chief Executive Officer of the Company. The current term of the agreement of which expires on June 30, 2001, subject to automatic renewal for periods of five years unless either party gives timely notice of an intention not to renew the agreement. Mr. Shacknai may also terminate the agreement prior to the end of the term. Presently, the Company carries key man insurance on Mr. Shacknai's life in the amount of $1.0 million with the Company as named beneficiary. Subject to the control and oversight of the Company's Board of Directors, Mr. Shacknai exercises control over substantially all policy making functions of the Company. In addition, the Company is dependent upon its scientific consultants, particularly with respect to the commercial development of discoveries and technologies as to which they have special expertise. Certain of such consultants are employed on a full-time basis by employers other than the Company, and some have consulting 25 26 or other advisory arrangements with other entities which may conflict or compete with their obligations to the Company. The loss of any key person, or a reduction in the amount of time Mr. Shacknai devotes to the Company, could have an adverse effect on the Company's business, financial condition or results of operations. DEPENDENCE ON LICENSES FROM OTHERS The Company has acquired rights to manufacture, use or market certain of its products, as well as many of its other proposed products and technologies, pursuant to license agreements with third parties. Such agreements contain provisions requiring the Company to use its best efforts or otherwise exercise diligence in pursuing market development for the subject products in order to maintain the rights granted under the agreements and may be canceled upon the Company's failure to perform its payment obligations. There can be no assurance that the Company will fulfill its obligations under one or more of such agreements due to insufficient resources, lack of successful product development, lack of product acceptance or other reasons. The failure to satisfy the requirements of any such agreements may result in the loss of the Company's rights under that agreement or under related agreements and have a material adverse effect on the Company. In addition, the Company's licensing agreements with Seuss and Euromerican for the exclusive rights to market the THERAPLEX line of products will terminate in October 1999 with the expiration of the related patent. See Item 1, "Business -- Manufacturing," "-- Certain License and Royalty Agreements,""-- Trademarks" and "-- Patents and Proprietary Rights." RISK OF DEBT COVENANT DEFAULT The Company has a $5.0 million Credit Facility from Norwest that expires in May 1997. The Credit Facility is secured by substantially all of the assets of the Company. The Company is required to comply with certain covenants and restrictions, including covenants relating to the Company's financial condition or results of operations. If the Company is unable or fails to comply with the covenants and restrictions, the lender would have the right not to make loans under the Credit Facility and to require early repayment of any outstanding loans. The lack of availability of loans or the requirement to make early repayment of loans or the inability of the Company to renew the Credit Facility could have a material adverse effect on the Company's business, financial condition or results of operations. See Item 1, "Business -- Liquidity and Capital Resources." UNCERTAINTY OF ACCESS TO CAPITAL During a portion of fiscal 1995 and prior years, the Company's cash flow from operations was insufficient to cover its operating expenses, and the Company relied on external financings to meet its needs for operating cash flow. As a result of increased sales beginning in the latter half of 1995 associated with the introduction of DYNACIN, the Company experienced an increase in accounts receivable. The Company expects that its current cash and cash equivalents, together with additional cash from operations and cash available from its Credit Facility and the proceeds of this offering, will be sufficient to meet its current liquidity requirements at least through the fiscal year ending June 30, 1998. However, depending upon the Company's acquisition and licensing activity and results of operations, there can be no assurance that such resources will be sufficient. If they are not, the Company would need to obtain additional financing. There is no assurance that such financing would be on terms advantageous to the Company. Adequate additional funds, whether from the financial markets or from other sources, may not be available on a timely basis, on terms acceptable to the Company, or at all. Insufficient funds may cause the Company to delay, scale back, or abandon some or all of its product acquisition, licensing, marketing or research and development programs or opportunities. VOLATILITY OF COMMON STOCK PRICE The market price for the stocks of many publicly traded pharmaceutical companies and marketers of dermatological products, including the Company, is highly volatile. A variety of events, both concerning and unrelated to the Company and the markets in which it participates, may have a significant negative impact on the market price of the Common Stock. These factors include regulatory developments in the health care field generally, the performance of and product announcements by other pharmaceutical companies, manufacturing or supply disruptions, product recalls, the loss of key personnel, and other matters affecting the Company's products, acquisitions and financial performance. Although the Common Stock trades on the Nasdaq National Market, trading volume, size of institutional holdings and the number of marketmakers has fluctuated and at times has been quite low. Both the price and volume of trading has been sensitive to the number of analysts reporting on the Company and such analysts' comments concerning the Company and the industry in which it participates. The realization of any of the risks described in these "Certain Factors Affecting Forward Looking Statements" could have a material and adverse effect on the price of the Company's Common Stock. 26 27 CONTROL BY DIRECTORS AND OFFICERS As of August 3, 1996, the Company's directors and officers beneficially own 876,623 shares of Class A Common Stock, which have one vote per share, and 112,301 shares of Class B Common Stock, and 56,150 shares of Series B Preferred Stock, each of which have 10 votes per share, representing approximately 16.9% of the Company's outstanding capital stock and 32.5% of the total voting power. Accordingly, such individuals, if they vote together, are able to exercise substantial power in the election of directors and thereby influence the policies of the Company. Market Risk of Shares Eligible For Future Sales Subject to certain specified exceptions relating to charitable gifts, estate planning transfers and sales relating to the exercise of expiring options, directors, executive officers and senior staff officers of the Company, holding in the aggregate, as of August 5, 1996, 922,154 shares of Common Stock representing 17.5% of the shares to be outstanding upon completion of the offering, have agreed with the Underwriters not to sell or dispose of any shares of Common Stock for a period of 90 days following commencement of this offering without the written consent of Robertson, Stephens & Company LLC. Sales by such officers and directors are generally subject to the provisions of Rule 144 under the Securities Act. The sale of a significant number of restricted securities, the exercise of a significant number of options, or the offer or sale of a significant number of shares of Common Stock acquired upon exercise of options at any one time could materially adversely affect the market price of the Company's Common Stock. Anti-Takeover Effect of Charter Provisions, Rights Plan, Delaware Law The Company's Certificate of Incorporation and Bylaws authorized the Board of Directors to designate and issue, without stockholder approval, Preferred Stock with voting, conversion and other rights and preferences that could differentially and adversely affect the voting power or other rights of the holders of Common Stock. The issuance of Preferred Stock or of rights to purchase Preferred Stock could be used to discourage an unsolicited acquisition proposal. Moreover, the Company has granted a dividend of one Preference Stock Purchase Right ("Rights") on each outstanding share of Class A Common Stock, Class B Common Stock and Series B Preferred Stock. Under certain circumstances, after a person has acquired beneficial ownership of a certain percentage of the Common Stock, each Right will entitle the holder to purchase, at the Right's then-current exercise price, stock of the Company or its successor at a discount. In addition, certain provisions of Delaware law applicable to the Company and certain provisions of the Company's Certificate of Incorporation and Bylaws could also delay or make more difficult a merger, tender offer or proxy contest involving the Company, including Section 203 of the Delaware Business Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years unless certain conditions are met. All of the Company's stock option plans provide for the acceleration of vesting in the event of a change in control in the Company and Mr. Shacknai's Employment Agreement provides for certain payments upon a change in control, as well as an acceleration of vesting of options previously granted to him. The possible issuance of Preferred Stock, the rights granted to stockholders under the Rights Plan, Delaware law, provisions of the Certificate of Incorporation and Bylaws and the Company's stock option plans and Mr. Shacknai's Employment Agreement could each have the effect of delaying, deferring or preventing a change in control of the Company including, without limitation, discouraging a proxy contest, making more difficult the acquisition of a substantial block of the Company's Common Stock or limiting the price that investors might in the future be willing to pay for shares of the Common Stock. Under certain circumstances, Mr. Shacknai's Employment Agreement requires the Company to make payments that would constitute excess parachute payments under the Internal Revenue Code of 1986, as amended. In the event that the Company was required to make payments constituting excess parachute payments, payments to Mr. Shacknai would not be deductible by the Company, and Mr. Shacknai would be required to pay an excise tax. LACK OF CASH DIVIDENDS The Company has never paid any cash dividends on its capital stock and does not anticipate that any cash dividends will be declared or paid in the foreseeable future. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 27 28 The Company's financial statements and schedule at December 31, 1996 and 1995 and for each of the three years in the period ending June 30, 1996 and the Independent Auditors' Report thereon and contained on pages F-1 through F-16 and S-1 of this Form 10-K. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCING DISCLOSURE Not applicable. 28 29 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11: EXECUTIVE COMPENSATION ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by Items 10, 11, 12 and 13 are incorporated by reference to the Company's definitive proxy statement for the 1996 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A. 29 30 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page ---- (a) Documents filed as a part of this Report. (1) Financial Statements: Index to Consolidated Financial Statements.............................. F-1 Report of Ernst & Young LLP, Independent Auditor......................... F-2 Consolidated balance sheets at June 30, 1996 and 1995................... F-3 Consolidated statements of income for the years ended June 30, 1996, 1995 and 1994............................................ F-5 Consolidated statement of stockholders' equity for the years ended June 30, 1996, 1995 and 1994...................................... F-6 Consolidated statements of cash flows for the years ended June 30, 1996, 1995 and 1994........................................................... F-7 Notes to consolidated financial statements.............................. F-8 (2) Financial Statement Schedules: Schedule II - Valuation and Qualifying Account.......................... S-1 The financial statement schedule should be read in conjunction with the consolidated financial statements. Financial statement schedules not included in this Annual Report on Form 10-K have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits filed as part of this Report:
Exhibit No. Description ----------- ----------- 3.1 - Certificate of Incorporation of the Company, as amended.(11) 3.3 - By-Laws of the Company.(1) 4.1 - Rights Agreement, dated as of August 17, 1995, between the Company and American Stock Transfer & Trust Company, as Rights Agent.(11) 4.3 - Form of specimen certificate representing Class A Common Stock.(2)
30 31 10.1 - License Agreement among Euromerican Trade Resources, Inc., Dr. H.R. Suess and H.R. Suess A.G. dated as of September 24, 1987.(3) 10.2 - Modification to License Agreement among the Company, Euromerican Trade Resources, Inc., Dr. H.R. Suess and H.R. Suess A.G. dated as of April 6, 1989.(3) 10.3 - Letter Agreement between the Company and Euromerican Trade Resources, Inc. dated as of April 6, 1989, relating to Modification to License Agreement among the Company, Euromerican Trade Resources, Inc., Dr. H.R. Suess and H.R. Suess A.G. dated as of April 6, 1989.(3) 10.8 - Medicis Pharmaceutical Corporation 1995 Stock Option Plan (incorporated by references to Exhibit C to the definitive Proxy Statement for the 1995 Annual Meeting of Stockholders previously filed with the SEC, File No. 0-18443). 10.9 - Employment Agreement between the Company and Jonah Shacknai dated as of July 24, 1996.(15) 10.10 - Medicis Pharmaceutical Corporation 1988 Stock Option Plan, as amended.(4) 10.12 - License Agreement between the Company and Dr. H.R. Suess dated March 1, 1990.(3) 10.13 - License Agreement between Syosset Laboratories, Inc. and Medicis Dermatologics, Inc. dated as of July 25, 1990 and the Guaranty of the Company.(5) 10.14 - Non-Exclusive License Agreement between Syosset Laboratories, Inc. and Medicis Dermatologics, Inc. dated as of July 25, 1990 and the Guaranty of the Company.(5) 10.15 - Manufacturing Agreement between Syosset Laboratories, Inc. and Medicis Dermatologics, Inc. dated as of July 25, 1990 and the Guaranty of the Company.(5) 10.16 - Sales Agency Agreement between Syosset Laboratories, Inc. and Medicis Dermatologics, Inc. dated as of July 25, 1990 and the Guaranty of the Company.(5) 10.18 - Medicis Pharmaceutical Corporation 1990 Stock Option Plan, as amended.(4)
31 32 10.46 - Option to Purchase 2,678 Shares of Class A Common Stock of the Company, dated December 3, 1991.(6) 10.49 - Option to Purchase Class A Common Stock granted to Stephen B. Booke.(4) 10.50 - Option to Purchase Class A Common Stock granted to Gerald Amato.(4) 10.58 - Medicis Pharmaceutical Corporation 1992 Stock Option Plan.(8) 10.59 - Supply Agreement, dated as of October 21, 1992, between Schein and the Company.(7) 10.69 - Purchase Agreement, dated May 21, 1993, between the Company and Bindley Western Drug Company.(9) 10.70 - Amendment to Manufacturing and Supply Agreement, dated March 2, 1993, between Schein and the Company.(10) 10.71 - Manufacturing and Supply Agreement, dated as of March 15, 1995, between SmithKline Beecham Consumer Healthcare, L.P. and the Company.(11) 10.72(a) - Credit and Security Agreement, dated as of August 3, 1995, between the Company and Norwest Business Credit, Inc.(12) 10.72(b) - First Amendment to Credit and Security Agreement, dated as of May 29, 1996, between the Company and Norwest Bank Arizona, N.A.(15) 10.73(a) - Patent Collateral Assignment and Security Agreement, dated as of August 3, 1995, by the Company to Norwest Business Credit, Inc.(13) 10.73(b) - First Amendment to Patent Collateral Assignment and Security Agreement, dated as of May 29, 1996, by the Company to Norwest Bank Arizona, N.A.(15) 10.74(a) - Trademark Collateral Assignment and Security Agreement, dated as of August 3, 1995, by the Company to Norwest Business Credit, Inc.(14) 10.74(b) - First Amendment to Trademark Collateral Assignment and Security Agreement, dated as of May 29, 1996, by the Company to Norwest Bank Arizona, N.A.(15) 10.75 - Assignment and Assumption of Loan Documents, dated as of May 29, 1996, from Norwest Business Credit, Inc., to and by Norwest Bank Arizona, N.A.(15) 10.76 - Multiple Advance Note, dated May 29, 1996, from the Company to Norwest Bank Arizona, N.A.(15) 21.1 - Subsidiaries.(15) 23.1 - Consent of Ernst & Young LLP(15). 24.1 - Power of Attorney (See page 34). 27.1 - Financial Data Schedule(15).
- ------------ (1) Incorporated by reference to the exhibit with the same number in the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1992, File No. 0-18443, previously filed with the Securities and Exchange Commission (the "SEC"). (2) Incorporated by reference to the exhibit with the same number in the Registration Statement on Form S-1 of the Registrant, File No. 33-32918, filed with the SEC on January 16, 1990. (3) Incorporated by reference to the exhibit with the same number in Amendment No. 1 to the Registration Statement on Form S-1 of the Company, File No. 33-32918, filed with the SEC on March 6, 1990. (4) Incorporated by reference to the exhibit with the same number in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1992, as amended, File No. 0-18443 previously filed with the SEC. (5) Incorporated by reference to the exhibit with the same number in Amendment No. 2 to the Registration Statement on Form S-1 of the Company, File No. 33-34041, filed with the SEC on August 2, 1990. 32 33 (6) Incorporated by reference to the exhibit with the same number in Amendment No. 1 to the Registration Statement on Form S-1 of the Company, File No. 33-46913, filed with the SEC on April 29, 1992. (7) Incorporated by reference to the exhibit with the same number in Registration Statement on Form S-1 of the Company, File No. 33-54276, filed with the SEC on June 11, 1993. (8) Incorporated by reference to Exhibit B to the Company's definitive Proxy Statement for its 1992 Annual Meeting of Stockholders, previously filed with the SEC, File No. 0-18443. (9) Incorporated by reference to the exhibit with the same number in Amendment No. 1 to the Registration Statement on Form S-1 of the Company, File No. 33-54276, filed with the SEC on May 25, 1993. (10) Incorporated by reference to the exhibit with the same number in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1993, File No. 0-18443, filed with the SEC on October 13, 1993. (11) Incorporated by reference to the exhibit with the same number in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, File No. 0-18443, filed with the SEC on September 27, 1995 ("1995 Form 10-K"). (12) Incorporated by reference to exhibit number 4.2 in the 1995 Form 10-K. (13) Incorporated by reference to exhibit number 4.4 in the 1995 Form 10-K. (14) Incorporated by reference to exhibit number 4.5 in the 1995 Form 10-K. (15) Filed herewith. (b) A Report on Form 8-K was filed with the Securities and Exchange Commission on August 12, 1996 relating to the 3-for-2 stock split in the form of a 50% stock dividend paid on August 2, 1996 to holders of record on July 22, 1996. (c) The exhibits to this Form 10-K follow the Company's Financial Statement Schedule included in this Form 10-K. (d) The Financial Statement Schedule to this Form 10-K appears on page S-1 of this Form 10-K. 33 34 MEDICIS PHARMACEUTICAL CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----- Report of Ernst & Young LLP, Independent Auditors..................................... F-2 Consolidated Balance Sheets........................................................... F-3 Consolidated Statements of Income..................................................... F-5 Consolidated Statement of Stockholders' Equity........................................ F-6 Consolidated Statements of Cash Flows................................................. F-7 Notes to Consolidated Financial Statements............................................ F-8
F-1 35 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Medicis Pharmaceutical Corporation We have audited the accompanying consolidated balance sheets of Medicis Pharmaceutical Corporation as of June 30, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Medicis Pharmaceutical Corporation at June 30, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Phoenix, Arizona August 2, 1996 F-2 36 MEDICIS PHARMACEUTICAL CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS
JUNE 30, --------------------------- 1996 1995 ----------- ----------- ASSETS Current assets: Cash and cash equivalents.................................... $ 7,956,050 $ 953,438 Accounts receivable, less allowance: 1996: $680,000; 1995: $520,000............................. 5,210,704 4,214,424 Inventories.................................................. 2,080,014 798,956 Deferred tax assets.......................................... 3,000,000 -- Other current assets......................................... 738,911 251,086 ----------- ----------- Total current assets.................................... 18,985,679 6,217,904 Property and equipment, at cost: Furniture and equipment......................................... 336,544 201,009 Leasehold improvements.......................................... 170,000 170,000 ----------- ----------- 506,544 371,009 Less accumulated depreciation................................ 100,897 54,907 ----------- ----------- Net property and equipment.............................. 405,647 316,102 Intangible assets, at cost: Patents, trademarks and licenses................................ 203,326 131,554 Intangible assets related to ESOTERICA product acquisition...... 9,168,853 9,168,853 ----------- ----------- 9,372,179 9,300,407 Less accumulated amortization................................ 2,450,705 1,984,269 ----------- ----------- Net intangible assets................................... 6,921,474 7,316,138 ----------- ----------- $26,312,800 $13,850,144 =========== ===========
See accompanying notes. F-3 37 MEDICIS PHARMACEUTICAL CORPORATION CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, ----------------------------- 1996 1995 ------------ ------------ LIABILITIES Current liabilities: Accounts payable........................................... $ 3,371,184 $ 3,227,173 Accrued officer's salaries................................. 204,750 204,750 Accrued royalties.......................................... 552,952 468,182 Notes payable.............................................. 10,000 140,000 Accrued incentives......................................... 1,184,111 631,231 Other accrued liabilities.................................. 1,262,134 927,243 -------- -------- Total current liabilities............................. 6,585,131 5,598,579 ESOTERICA products acquisition payables, net of discount of: 1995: $13,100................................................. -- 586,900 Note payable.................................................... 116,580 107,437 Other non-current liabilities................................... 151,437 170,234 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred Stock, $0.01 par value, 4,937,340 shares authorized; no shares issued.............................................. -- -- Series B Automatically Convertible Preferred Stock, $0.01 par value, shares authorized, issued and outstanding: 62,660 at June 30, 1996 and 1995........................................ 627 627 Class A Common Stock, $0.014 par value, shares authorized: 10,000,000; issued and outstanding: 1996: 6,816,318 1995: 6,498,843..................................................... 95,429 90,984 Class B Common Stock, $0.014 par value, shares authorized, issued and outstanding: 1996 and 1995: 125,322................ 1,754 1,754 Additional paid-in capital...................................... 44,251,722 40,063,251 Accumulated deficit............................................. (24,889,880) (32,769,622) -------- -------- Total stockholders' equity............................ 19,459,652 7,386,994 -------- -------- $ 26,312,800 $ 13,850,144 ======== ========
See accompanying notes. F-4 38 MEDICIS PHARMACEUTICAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED JUNE 30, ------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Net sales........................................... $25,309,743 $19,131,665 $17,058,504 Operating costs and expenses: Cost of sales..................................... 6,955,685 5,849,886 5,819,275 Selling, general and administrative (includes relocation charges of $609,762 for the year ended June 30, 1995)........................... 10,867,979 10,330,162 8,786,192 Research and development.......................... 951,888 769,577 1,571,769 Depreciation and amortization..................... 558,802 522,221 653,192 ----------- ----------- ----------- Operating costs and expenses................... 19,334,354 17,471,846 16,830,428 ----------- ----------- ----------- Operating income.................................... 5,975,389 1,659,819 228,076 Minority share of losses of Dyad.................... -- -- 677,000 Gain on disposition of Dyad......................... -- 106,640 -- Interest income..................................... 154,023 57,543 29,287 Interest expense.................................... (75,670) (150,895) (278,652) ----------- ----------- ----------- Income before taxes................................. 6,053,742 1,673,107 655,711 Income tax benefit (expense)........................ 1,826,000 (60,000) -- ----------- ----------- ----------- Net income.......................................... $ 7,879,742 $ 1,613,107 $ 655,711 =========== =========== =========== Net income per common and common equivalent share... $ 1.09 $ 0.24 $ 0.10 =========== =========== =========== Shares used in computing net income per common and common equivalent share........................... 7,242,162 6,593,164 6,303,453 =========== =========== ===========
See accompanying notes. F-5 39 MEDICIS PHARMACEUTICAL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SERIES B AUTOMATICALLY CONVERTIBLE CLASS A CLASS B PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL --------------- ------------------- ---------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL ------ ------ --------- ------- ------- ------ ----------- ------------ ----------- Balance at June 30, 1993.... 62,660 $627 5,591,227 $78,277 125,322 $1,754 $37,894,565 $(35,038,440) $ 2,936,783 Shares issued in connection with Regulation S offering... 671,902 9,407 1,637,542 1,646,949 Options issued in lieu of payment for services rendered................ 24,000 24,000 Net income................ 655,711 655,711 ------ ---- --------- ------- ------- ------ ----------- ------------ ----------- Balance at June 30, 1994.... 62,660 627 6,263,129 87,684 125,322 1,754 39,556,107 (34,382,729 ) 5,263,443 Shares issued in connection with private offering................ 235,714 3,300 507,144 510,444 Net income................ 1,613,107 1,613,107 ------ ---- --------- ------- ------- ------ ----------- ------------ ----------- Balance at June 30, 1995.... 62,660 627 6,498,843 90,984 125,322 1,754 40,063,251 (32,769,622 ) 7,386,994 Exercise of stock options and warrants, net....... 317,475 4,445 3,101,471 3,105,916 Tax effect of stock options exercised....... 1,067,000 1,067,000 Options issued in lieu of payment for services rendered................ 20,000 20,000 Net income................ 7,879,742 7,879,742 ------ ---- --------- ------- ------- ------ ----------- ------------ ----------- Balance at June 30, 1996.... 62,660 $627 6,816,318 $95,429 125,322 $1,754 $44,251,722 $(24,889,880) $19,459,652 ====== ==== ========= ======= ======= ====== =========== ============ ===========
See accompanying notes. F-6 40 MEDICIS PHARMACEUTICAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, ------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- OPERATING ACTIVITIES: Net income........................................ $ 7,879,742 $ 1,613,107 $ 655,711 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.................. 558,802 522,221 653,192 Non-cash interest.............................. 13,100 49,602 45,410 Other non-cash expenses........................ 20,000 -- 24,000 Deferred income tax benefit.................... (1,933,000) -- -- Allowance for doubtful accounts and returns.... 160,000 120,000 160,000 Minority share of losses of Dyad............... -- -- (677,000) Changes in operating assets and liabilities: Accounts receivable.......................... (1,156,280) (1,154,922) (2,380,654) Inventories.................................. (1,281,058) (370,929) 1,457,239 Other current assets......................... (487,825) (48,013) (29,231) Accounts payable............................. 144,011 1,282,949 (1,284,786) Accrued officer's salaries................... -- -- (3,334) Accrued royalties............................ 84,770 70,601 257,639 Interest payable............................. -- (250,016) (60,743) Accrued incentives........................... 552,880 222,711 (107,774) Other accrued liabilities.................... 334,891 (307,792) (319,787) ----------- ----------- ----------- Net cash provided by (used in) operating activities.............................. 4,890,033 1,749,519 (1,610,118) INVESTING ACTIVITIES: Purchase of property and equipment................ (181,911) (140,754) (12,029) Payments of license agreement and ESOTERICA products acquisition........................... -- -- (8,838) Other, net........................................ (71,772) (7,885) (31,317) ----------- ----------- ----------- Net cash used in investing activities..... (253,683) (148,639) (52,184) FINANCING ACTIVITIES: Sales of common equity securities................. -- 510,444 1,646,949 Proceeds from issuance of note payable............ 9,143 107,437 -- Principal payments of debt........................ (748,797) (2,040,000) (120,000) Proceeds from sale of equity in Dyad.............. -- -- 677,000 Proceeds from the exercise of options/warrants.... 3,105,916 -- -- ----------- ----------- ----------- Net cash provided by (used in) financing activities.............................. 2,366,262 (1,422,119) 2,203,949 Net increase in cash and cash equivalents......... 7,002,612 178,761 541,647 Cash and cash equivalents at beginning of year.... 953,438 774,677 233,030 ----------- ----------- ----------- Cash and cash equivalents at end of year.......... $ 7,956,050 $ 953,438 $ 774,677 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest..................................... $ 243,570 $ 351,309 $ 301,044 Taxes........................................ 132,233 79,631 79,237
See accompanying notes. F-7 41 MEDICIS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE 1. FORMATION AND DEVELOPMENT OF THE COMPANY Medicis Pharmaceutical Corporation and its wholly owned subsidiaries ("Medicis" or the "Company") is an independent pharmaceutical company in the United States offering prescription and non-prescription (over-the-counter) products exclusively to treat dermatological conditions. The Company has acquired rights to manufacture and sell certain of its dermatological products pursuant to several license and asset purchase agreements. The Company sells these products for use in various segments of the dermatological market, including the acne segment, the therapeutic emollient and moisturizer segment and the fade cream segment. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Medicis and all wholly owned subsidiaries, and through June 30, 1994, the accounts of Dyad Pharmaceutical Corporation ("Dyad") (see Note 4). The Company has since sold its interest in Dyad and, accordingly, the accounts of Dyad have not been consolidated subsequent to June 30, 1994. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. RESEARCH AND DEVELOPMENT COSTS All research and development costs, including payments related to products under development and research consulting agreements, are expensed as incurred. INTANGIBLE ASSETS Legal fees and other direct costs incurred in obtaining and protecting patents and trademarks are capitalized as incurred. When patent applications are approved or trademarks are registered, these costs are amortized over the shorter of the useful life of the patent or trademark, or the related product on the straight-line basis. The costs are expensed if and when it is concluded that nonapproval is probable or, in the Company's opinion, the patent or trademark should be abandoned. Intangible assets resulting from the ESOTERICA line of skin care products (the "ESOTERICA products") acquisition principally consist of the excess of the acquisition cost over the fair value of the net assets acquired and are being amortized on a straight-line basis over twenty years. The Company assesses the recoverability of intangible assets resulting from the ESOTERICA products acquisition based on the gross profit of the related products over the remaining amortization period. CASH AND CASH EQUIVALENTS At June 30, 1996, cash equivalents include highly liquid investments of approximately $7,500,000 invested largely in money market accounts consisting of government securities and high-grade commercial paper. These investments are stated at cost which approximates fair value. The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. INVENTORIES The Company utilizes third parties to manufacture and package inventories held for sale, takes title to certain inventories once manufactured, and warehouses such goods until packaged for final F-8 42 MEDICIS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) distribution and sale. Inventories consist of salable dermatological products held at the Company's warehouses as well as at the manufacturers' facilities and are valued at the lower of cost or market as more determined by their net realizable value using the first-in, first-out method. Inventories are as follows:
JUNE 30, ----------------------- 1996 1995 ---------- -------- Raw materials................................................ $ 72,633 -- Work in progress............................................. 23,749 $ 37,971 Finished goods............................................... 1,983,632 760,985 ---------- -------- Total inventories.......................................... $2,080,014 $798,956 ========== ========
DEPRECIATION AND AMORTIZATION Property and equipment are stated at cost. Depreciation is calculated on the straight-line basis over the estimated useful lives of property and equipment (three to five years). Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining lease term. REVENUE RECOGNITION The Company recognizes product revenue upon shipment to its customers. The Company records reserves for returns based on estimates at the time of sale. ADVERTISING The Company expenses advertising as incurred. Advertising expenses for the fiscal years ended June 30, 1996 ("Fiscal 1996"), June 30, 1995 ("Fiscal 1995") and June 30, 1994 ("Fiscal 1994") were approximately $1,887,000, $1,525,000 and $1,408,000, respectively. STATEMENTS OF CASH FLOWS Non-cash investing and financing activities were as follows:
YEAR ENDED JUNE 30, ----------------------------------- 1996 1995 1994 ---------- -------- ------- Property and equipment acquired under capital lease obligations...................................... -- $170,234 -- Options/warrants issued in lieu of payment for services rendered................................ $ 20,000 -- $24,000 Tax benefit of stock options exercised............. 1,067,000 -- --
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per common and common equivalent share have been computed by using the weighted average number of shares outstanding and common equivalent shares. Net income per share has been adjusted to reflect the 3-for-2 stock split described in Note 7. INCOME TAXES Income taxes have been provided using the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes("SFAS No. 109"). F-9 43 MEDICIS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates based upon future events, which could include, among other risks, changes in the regulations governing the manner in which the Company sells its products, changes in health care environment and the reliance on contract manufacturing services. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and long-term debt reported in the consolidated balance sheets approximate their fair value. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In March, 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which requires the revaluation of long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying value. Statement No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company will adopt Statement 121 in the first quarter of the year ending June 30, 1997 ("Fiscal 1997") as required and, based on current circumstances, does not believe the effect, if any, of adoption will be material. In Fiscal 1997, the Company is also required to adopt Statement No. 123, Accounting for Stock Based Compensation ("SFAS No. 123"). As permitted by SFAS No. 123, the Company will continue to account for stock based compensation with its employees, directors, and consultants pursuant to Accounting Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company grants stock options for a fixed rate of shares with an exercise price equal to the fair value of the shares at the date of grant and accordingly recognizes no compensation expense for the stock option grants. SFAS No. 123 requires companies which do not choose to account for the effects of stock based compensation in the financial statements to disclose in the Company's Notes to the Consolidated Financial Statements the pro forma effects on earnings and earnings per share as if such accounting had occurred. The Company will adopt SFAS No. 123 in the first quarter of Fiscal 1997. NOTE 3. DEBT Upon the Company's relocation to Arizona, the Company entered into a note from the Commerce and Economic Development Commission in the amount of approximately $131,000 bearing interest at a rate of 6.5% due in installments through June 2, 2000. At June 30, 1996, $126,580 was outstanding on the note. On June 3, 1996, the Company obtained a revolving line of credit facility of up to $5 million from Norwest Bank Arizona, N.A ("Norwest"). The facility may be drawn upon by the Company at its discretion and is collateralized by substantially all of the assets of the Company. The outstanding balance of the credit facility bears interest at a floating rate of 1.25% above Norwest's prime rate per annum and expires in June 1997. The Agreement requires the Company to comply with certain covenants, including covenants relating to the Company's financial condition and results of operation. The Company has not drawn on this credit facility. F-10 44 MEDICIS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4. INVESTMENT The consolidated financial statements for Fiscal 1994 include the accounts and operations of Dyad, a then majority owned development stage enterprise. Accordingly, net losses from the operations of Dyad amounting to approximately $862,000 are included in net income in Fiscal 1994, partly offset by the minority share in the losses of Dyad of $677,000. The sale of the Company's interest in Dyad in Fiscal 1995 resulted in a gain of approximately $106,000. As a result of the disposition of the Dyad Shares, the Company's and Dyad's financial statements are not consolidated subsequent to June 30, 1994. The sale contained provisions for possible additional consideration to the Company; however, the amount to be received, if any, is uncertain. NOTE 5. COMMITMENTS AND CONTINGENCIES OCCUPANCY ARRANGEMENTS The Company presently occupies approximately 12,150 square feet of office space, at an average annual expense of $191,007 per annum, under a lease agreement which expires in May 2005. The lease contains certain rent escalation clauses and upon expiration can be renewed for a period of five years. Rent expense was approximately $207,000, $188,000 and $314,000 for Fiscal 1996, 1995 and 1994, respectively. RESEARCH AND DEVELOPMENT AND CONSULTING CONTRACTS The Company has in the past and may in the future enter into agreements with various research organizations and individuals under which the Company acquires certain patent and marketing rights for therapeutics developed under such agreements in exchange for providing funding for collaborative research. It is also anticipated that, before any commercial marketing can be commenced, the Company will be required to secure certain regulatory approvals on the technological processes involved. The Company has various consulting agreements with certain scientists in exchange for the assignment of certain rights and consulting services. In addition, the Company has granted options to purchase shares of Class A Common Stock which are included in the stock option plan described in Note 8. These options vest annually over the commitment periods. At June 30, 1996, the Company had approximately $870,000 (solely attributable to the Chairman of the Central Research Committee of the Company) of commitments payable over the remaining five years under an agreement, which is cancelable by either party under certain conditions. LICENSING, MARKETING AND MANUFACTURING AGREEMENTS The Company has entered into licensing and marketing agreements under which it has obtained rights to market certain existing and future pharmaceutical products. Generally, the terms of such agreements vary, but range from 10 to 20 years from the date of the first sale of the related product or until the expiration of the patent applicable to the product. The agreements provide for varying royalties with certain stated minimum annual amounts, which vary by agreement from $17,500 to, for one such agreement, $55,000. A commitment to pay a minimum annual royalty of $160,000 commences twelve months after the United States Food and Drug Administration grants approval to market the product governed by the agreement. Total minimum royalties required to be paid on products currently being sold approximate $72,500 per year. F-11 45 MEDICIS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OTHER The Company and certain of its subsidiaries are parties to other actions and proceedings incident to their business. Liability in the event of final adverse determinations in any of these matters is either covered by insurance and/or established reserves, or, in the opinion of management, after consultation with counsel, should not, in the aggregate, have a material adverse effect on the consolidated financial position or results of operations of the Company. NOTE 6. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax assets are as follows:
JUNE 30, --------------------------- 1996 1995 ----------- ----------- Deferred tax assets: Net operating loss carryforwards........................ $10,500,000 $13,000,000 Reserves................................................ 700,000 630,000 Research and experimentation credits.................... 450,000 450,000 Alternative Minimum Tax credits......................... 70,000 -- ----------- ----------- 11,720,000 14,080,000 Deferred tax liabilities: Tax over book amortization of intangible assets related to ESOTERICA products acquisition.................... (120,000) (120,000) ----------- ----------- Net deferred tax assets available......................... 11,600,000 13,960,000 Less valuation allowance.................................. 8,600,000 13,960,000 ----------- ----------- Deferred tax assets....................................... $ 3,000,000 $ -- =========== ===========
At June 30, 1996, a valuation allowance of $8,600,000 has been recorded. The valuation allowance decreased by $5,360,000 and $540,000 during Fiscal 1996 and 1995, respectively. Of the decrease in Fiscal 1996, $1,280,000 related to the utilization of net operating loss carryforwards due to Fiscal 1996 taxable income, $1,067,000 as a direct credit to equity for Fiscal 1996 tax deductions related to stock option exercises, $1,080,000 for lower estimated deferred tax rates based on the Company's relocation, and an additional $1,933,000 with respect to changes in estimate with respect to the deferred tax assets that are more likely than not expected to be recovered through future income. In Fiscal 1995, the decrease was as a result of decreases in net deferred tax assets due to the utilization of net operating loss carryforwards. During the fourth quarter of Fiscal 1996, the Company reevaluated the estimated amount of valuation allowance required to reduce deferred tax assets in accordance with SFAS No. 109 to an amount management believes appropriate. Accordingly, a credit to deferred tax benefit of $1,933,000 was reflected in the consolidated income statement. The amount of net deferred tax assets, estimated to be recoverable, was based upon management's assessment of the likelihood of near-term operating income coupled with the uncertainties with respect to the impact of future competitive and market conditions. The amount of deferred tax assets available that will be ultimately realized will depend upon future events which are uncertain. At June 30, 1996, the Company had net operating loss carryforwards for federal income tax purposes of approximately $26,000,000 and research and experimentation credits of approximately F-12 46 MEDICIS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $450,000, which begin expiring in varying amounts in the years 2005 through 2010 if not previously utilized. During Fiscal 1996, the Company incurred approximately $70,000 in Alternative Minimum Tax which is available as a future tax credit. The Alternative Minimum Tax credits do not expire for income tax purposes. Components of the provision for income taxes (benefit) are as follows:
YEAR ENDED JUNE 30, YEAR ENDED JUNE 30, 1996 1995 ------------------- ------------------- Current Federal....................................... $ 70,000 $35,000 State......................................... 37,000 25,000 ----------- ------- 107,000 60,000 Deferred Federal....................................... (1,500,000) -- State......................................... (433,000) -- ----------- ------- (1,933,000) -- ----------- ------- Total................................. $(1,826,000) $60,000 =========== =======
Income tax expense (benefit) for the three years ended June 30, 1996, 1995, and 1994 differs from the amount computed applying the federal statutory rates due to the following:
JUNE 30, ----------------------------- 1996 1995 1994 ----- ----- ----- Statutory federal income tax rate....................... 34.0% 34.0% 34.0% State tax rate.......................................... 6.0 10.0 10.0 Utilization of net operating loss carryforwards......... (38.0) (43.2) (65.6) Change in estimate valuation allowance.................. (32.0) -- -- Losses of Dyad not generating tax benefit............... -- -- 13.5 Other................................................... -- 2.8 8.1 ----- ----- ----- Expense (benefit)....................................... (30.0%) 3.6% -- ===== ===== =====
NOTE 7. STOCK TRANSACTIONS Class A Common Stock has one vote per share and Class B Common Stock has ten votes per share. Each share of Class B Common Stock may be converted into one share of Class A Common Stock at the option of the holder or, in some circumstances, may automatically be converted upon a vote of the board of directors and the majority of the Class B Common Stockholders. The Series B Automatically Convertible Preferred Stock ("Series B Preferred Stock") was issued as part of the 3-for-2 stock split described in this Note and has all the relative rights, preferences, privileges and limitations of the Company's Class B Common Stock and has no liquidation preferences or stated dividend rates. Each share of Series B Preferred Stock shall be automatically converted into one share of Class B Common Stock immediately upon approval of the Company's shareholders of an amendment to the Company's Certificate of Incorporation increasing the number of authorized shares of Class B Common Stock by a number equal to or greater than the number of outstanding and issued shares of Series B Preferred Stock. In addition, shares of Series B Preferred Stock are convertible into Class A Common Stock on the same terms and conditions applicable to the conversion of Class B Common Stock into Class A Common Stock. F-13 47 MEDICIS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pursuant to a Subscription Agreement, dated as of November 17, 1994, (the "Subscription Agreement") with Frost Nevada Limited Partnership, a Nevada limited partnership ("Frost Nevada"), the Company issued 235,714 shares of its Class A Common Stock, $0.014 par value to Frost Nevada for a purchase price of $600,600. The 235,714 shares of Class A Common Stock issued by the Company were sold to Frost Nevada as part of a two-part transaction in which Frost Nevada purchased an aggregate of 342,856 shares of Class A Common Stock. Pursuant to a Stock Purchase Agreement dated as of November 17, 1994, (the "Stock Purchase Agreement") between the Chairman of the Company and Frost Nevada, Frost Nevada purchased from the Chairman 107,142 shares of Class A Common Stock. On August 17, 1995, the Board of Directors adopted a Preferred Stock Purchase Rights plan and declared a dividend of one preference share purchase right for each outstanding share of Class A Common Stock and Class B Common Stock. Under certain circumstances, after a person has acquired beneficial ownership of 15% of the Class A Common Stock, each Preference Stock Purchase Right will entitle the holder to purchase, at the Right's then-current exercise price, stock of the Company or its successor at a discount. On August 29, 1995, the Executive Committee of the Board of Directors declared a one-for-fourteen reverse stock split which was approved by shareholders on October 23, 1995. As a result of the reverse stock split, the Company's outstanding shares decreased from approximately 61.0 million to approximately 4.3 million at that date. Per share amounts and the average number of shares outstanding at that date were retroactively revised for all periods presented. Subsequent to year end, on July 22, 1996, the Board of Directors declared a 3-for-2 stock split effected in the form of a 50% stock dividend payable August 2, 1996, to common shareholders of record at the close of business on July 22, 1996. As a result of the stock split, the Company's outstanding shares increased from approximately 4.5 million to 6.8 million. Per share amounts and the weighted average number of shares outstanding have been retroactively revised for all periods presented. NOTE 8. STOCK OPTION PLANS The Company has four Stock Option Plans ("the 1988, 1990, 1992 and 1995 Plans" or collectively, the "Plans") under which options may be granted for the benefit of certain key employees, non-employee directors, and consultants of the Company. The 1988, 1990, 1992 and 1995 Plans, as amended, provide originally for the granting of a maximum of 321,429, 428,571, 535,714, and 535,714 respectively, qualified incentive stock options and non-qualified stock options, to purchase Class A Common Stock of the Company. On July 22, 1996, the Board of Directors authorized the granting of 201,474 shares to employees and consultants at fair market value and has placed limitations on the number of shares available for grant under the plans in the future. The Plans allow the Company to designate options as qualified incentive or non-qualified on an as needed basis. Qualified and non-qualified stock options vest over a period determined at the time the options are granted ranging from one to five years, except for certain non-qualified stock options that vest immediately. In April 1996, the Plans were amended to provide for acceleration of vesting in the event of a change in control of the Company. The options are generally granted at the fair market value on the date of the grant and are exercisable at prices from $1.77 to $31.83, with a weighted average of $6.93 at June 30, 1996. In September 1995, the Company approved the repricing of certain options under the Plans to purchase 300,726 shares of Class A Common Stock previously exercisable at a weighted average option exercise price of $10.85 per share to an exercise price of $4.39 per share, which was the fair market value of the Class A Common Stock at the date of repricing. The Company F-14 48 MEDICIS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) has not previously repriced any of its stock options. Options for the year were exercised at prices from $1.77 to $20.44. Information as to the options for Fiscal 1994, 1995 and 1996 is as follows:
QUALIFIED NON-QUALIFIED TOTAL EXERCISABLE --------- ------------- -------- ----------- Balance at June 30, 1993............. 279,676 398,052 677,728 459,312 ======= Granted.............................. 85,019 87,054 172,073 Terminated/expired................... (39,983) (4,286) (44,269) -------- -------- -------- Balance at June 30, 1994............. 324,712 480,820 805,532 587,589 ======= Granted.............................. 188,695 326,213 514,908 Terminated/expired................... (240,381) (226,682) (467,063) -------- -------- -------- Balance at June 30, 1995............. 273,026 580,351 853,377 524,481 ======= Granted.............................. 211,311 298,709 510,020 Exercised............................ (25,672) (117,880) (143,552) Terminated/expired................... (131,973) (221,972) (353,945) -------- -------- -------- Balance at June 30, 1996............. 326,692 539,208 865,900 250,455 ======== ======== ======== =======
The table includes 90,716 shares of Common Stock that will be available to certain employees relating to the stock split described in Note 7 upon authorization of additional shares by the Company's shareholders. During Fiscal 1996, 128,568 of non-qualified stock options not subject to the stock option plans have been exercised by outside parties at $14.56. An additional 47,121 non-qualified stock options not subject to the plans are issued and outstanding to outside parties at June 30, 1996 with exercise price ranges of $14.56 to $28.00. During Fiscal 1996, 45,355 warrants were exercised at $4.67. At June 30, 1996, there were no outstanding warrants. NOTE 9. SIGNIFICANT CUSTOMERS For Fiscal 1996, three customers accounted for approximately 15.5%, 12.2%, and 11.8% of sales. For Fiscal 1995, two customers accounted for approximately 15.9% and 9.6% of sales. For Fiscal 1994, two customers accounted for approximately 15.1% and 11.2% of sales. NOTE 10. FINANCIAL INSTRUMENTS -- CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company maintains cash and cash equivalents primarily with two financial institutions that invest funds in short-term, interest bearing, investment grade, marketable securities. The Company performs periodic evaluations of the relative credit standing of these financial institutions. At June 30, 1996 and 1995, five and six customers, respectively, comprised approximately 55.2% and 48.8%, respectively, of accounts receivable. The Company does not require collateral from its customers but performs periodic credit evaluations of its customers' financial condition. Management does not believe significant credit risk exists at June 30, 1996. F-15 49 MEDICIS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11. DEFINED CONTRIBUTION PLAN The Company has a defined contribution plan (the "Plan") that is intended to qualify under Section 401(k) of the Internal Revenue Code. All employees, except those with less than three months of service and those who have not attained the age of 21, are eligible to participate in the Contribution Plan. Participants may contribute, through payroll deductions, up to 20% of their basic compensation, not to exceed Internal Revenue Code limitations. Although the Contribution Plan provides for profit sharing contributions by the Company, the Company has not made any such contributions since its inception. NOTE 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) In the table below is the quarterly financial information for Fiscal 1996 and 1995. (All figures are in thousands except per share data).
FISCAL YEAR ENDED JUNE 30, 1996 (FOR THE QUARTERS ENDED) ----------------------------------------------------------------------- SEPTEMBER 30, 1995 DECEMBER 31, 1995 MARCH 31, 1996 JUNE 30, 1996 ------------------ ----------------- -------------- ------------- Net sales.................. $4,574 $ 6,449 $7,016 $ 7,271 Gross profit............... 3,257 4,667 5,040 5,390 Net income................. 646 1,404 1,759 4,071 Net income per share....... 0.10 0.21 0.24 0.54
FISCAL YEAR ENDED JUNE 30, 1995 (FOR THE QUARTERS ENDED) ----------------------------------------------------------------------- SEPTEMBER 30, 1994 DECEMBER 31, 1994 MARCH 31, 1995 JUNE 30, 1995 ------------------ ----------------- -------------- ------------- Net sales.................. $3,690 $ 4,725 $5,033 $ 5,684 Gross profit............... 2,519 3,024 3,659 4,080 Net income................. 26 308 312 967 Net income per share....... -- 0.05 0.05 0.14
The quarterly net income per share data disclosed above does not agree with the amounts reported in the Company's Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission as the amounts have been revised to reflect the stock splits discussed in Note 7 and for certain reclassification made to conform with fourth quarter presentation. The net income for the quarter ended June 30, 1996 includes a fourth quarter adjustment to record deferred income tax benefits of $1,933,000 as described in Note 6. F-16 50 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to Balance at Description beginning of year costs and expenses other accounts Deductions end of year - --------------------------------- ----------------- ------------------ -------------- ---------- ----------- Year Ended June 30, 1996 Deducted from Asset Accounts: Accounts Receivable: Allowances $ 520,000 $ 50,000 $ 160,000 $ 680,000 Year Ended June 30, 1995 Deducted from Asset Accounts: Accounts Receivable: Allowances $ 400,000 $ 120,000 $ 520,000 Year Ended June 30, 1994 Deducted from Asset Accounts: Accounts Receivable: Allowances $ 240,000 $ 160,000 $ 400,000
Draft August 14, 1996 (10:53am) S-1 51 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jonah Shacknai and Mark A. Prygocki, Sr., or either of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and any documents related to this report and filed pursuant to the Securities and Exchange Act of 1934, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 15, 1996 MEDICIS PHARMACEUTICAL CORPORATION By: /s/ JONAH SHACKNAI ------------------------------------- Jonah Shacknai Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------- -------------------------------------- ---------------- /s/ JONAH SHACKNAI Chairman of the Board of Directors August 15, 1996 - ------------------------------------- and Chief Executive Officer Jonah Shacknai (Principal Executive Officer) /s/ MARK A. PRYGOCKI, SR. Chief Financial Officer August 15, 1996 - ------------------------------------- (Principal Financial and Accounting Mark A. Prygocki, Sr. Officer) /s/ JOSEPH SALVANI Director August 15, 1996 - ------------------------------------- Joseph Salvani /s/ RICHARD L. DOBSON, M.D. Director August , 1996 - ------------------------------------- Richard L. Dobson, M.D. /s/ MICHAEL A. PIETRANGELO Director August 15, 1996 - ------------------------------------- Michael A. Pietrangelo Director August 15, 1996 - ------------------------------------- Philip S. Schein, M.D. /s/ ARTHUR ALTSCHUL, JR. Director August 15, 1996 - ------------------------------------- Arthur Altschul, Jr. /s/ LOTTIE SHACKELFORD Director August 15, 1996 - ------------------------------------- Lottie Shackelford
34 52 EX-10.9 2 EMPLOYMENT AGREEMENT WITH JONAH SHACKNAI 1 EXHIBIT 10.9 EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of this 24th day of July 1996 between MEDICIS PHARMACEUTICAL CORP., a corporation organized under the laws of the State of Delaware (the "Company") with offices located at 4343 East Camelback Road, Phoenix, Arizona, and Jonah Shacknai (the "Executive"), residing at 5868 East Berneil Lane, Paradise Valley, Arizona: WITNESSETH: WHEREAS, the Company and the Executive desire to enter into the present Agreement whereby the Executive will continue to provide personal services to the Company as Chairman and Chief Executive officer; and WHEREAS, in its business, the Company has developed and uses valuable technical and nontechnical information including information relating to development, use, manufacture and marketing of certain biologically-active compounds, and it is necessary for the Company to protect certain of the information either by patents, copyrights, or by holding it secret or confidential; and WHEREAS, the aforesaid information is vital to the success of the Company's business, and the Executive through his activities 2 2 may become acquainted therewith, and may contribute thereto, either through research, inventions, discoveries or otherwise; and WHEREAS, in the course of his employment, the Executive has gained and will gain knowledge of the business affairs, finances, management, marketing programs and philosophy, customers and methods of operation of the Company; and WHEREAS, the Company would suffer irreparable harm if the Executive were to use such knowledge, information and business acumen in competition with the Company, NOW, THEREFORE, in consideration of the continued employment of Executive by the Company as Chairman and Chief Executive Officer, the above premises and the mutual agreements hereinafter set forth, the receipt, adequacy and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Definitions. (a) "Business of the Company" shall mean and include the business of developing, manufacturing, marketing, selling and using certain chemical compounds for use in the dermatologic industry or such other businesses as the Company derived substantial revenues from, which revenues exceed twenty (20%) percent of the Company's gross annual revenues in the Company's most recent fiscal year. (b) "Competing Business" shall mean any business which is the same or essentially the same as the Business of the Company. 3 3 (c) "Confidential Information" shall mean all non public customer lists, sales and marketing information, customer account records, training and operations material and memoranda, trade secrets, strategic planning materials and information product development plans, scientific and technical information, personnel records, pricing information, and financial information concerning or relating to the business, accounts, customers, employees and affairs of the Company, obtained by or furnished, disclosed or disseminated to the Executive, or obtained, assembled or compiled by the Executive or under his supervision during the course of his employment by the Company, and all physical embodiments of the foregoing, all of which are hereby agreed to be the property of and confidential to the Company, but Confidential Information shall not include any of the foregoing to the extent the same is or becomes publicly known through no fault or breach of this Agreement by the Executive. 2. Terms of Employment; Duties. (a) The Company employs the Executive as Chairman of the Board of Directors of the Company, and Chief Executive Officer of the Company, and the Executive accepts such employment with the Company in that capacity subject to the terms and conditions hereof. The Executive shall in such office have the responsibilities which include presiding over and participating in deliberations of the Board as its Chairman and as a member of the Board; 4 4 serving on the Executive Committee of the Board; exercising ultimate responsibility on a reporting basis for sales, marketing, research and development, operations, regulatory compliance, finance, personnel, corporate development, public and shareholder relations and governmental relations activities of the Company; exercising ultimate responsibility for strategic planning and evaluation, and serving as Company's official spokesman and representative in all matters. (b) Throughout his employment hereunder, the Executive shall devote substantially all of his time, energy and skill during regular business hours to the performance of the duties of his employment (reasonable vacations, reasonable absences due to illness, and reasonable time as may be necessary for the Executive to manage his personal investments, excepted), shall faithfully and industriously perform such duties, and shall diligently follow and implement all management policies and decisions of the Company. 3. Compensation and Related Matters (a) For his services hereunder, the Company shall pay to the Executive the compensation and provide the benefits set forth in Exhibit A attached hereto and incorporated herein as part of this Agreement and such benefits as are otherwise provided for herein. 5 5 (b) The Executive shall be eligible to fully participate in all present or future pension, retirement, medical, dental, disability, life insurance or any other employee benefit plans of the Company, and in addition, the Executive shall be eligible to fully participate in all present or future incentive compensation, bonus, profit sharing, stock option or stock purchase plans of the Company as and to the extent granted or approved and determined by the Board of Directors of the Company, subject to the provisions of Exhibit A hereof. 4. Term and Termination of This Agreement. (a) The Executive's employment under this Agreement shall be. for a period of five (5) years commencing on July 1, 1996 and expiring on June 30, 2001 ("the Initial Term"), which period shall automatically be extended beyond its current five-year term, without further action by the parties, as of June 30, 2001 and as of each succeeding five-year period thereafter, for another five (5) year period beginning on July 1, 2001 and each succeeding five (5) year period, unless either party shall have served written notice upon the other six (6) months prior to June 30, 2001, or prior to June 30th of the expiration date occurring on each succeeding five (5) year period thereafter, of its intention to terminate or modify this Agreement, subject however to the earlier termination thereof pursuant to the provisions of this Agreement. Should this Agreement be automatically renewed for any five (5) 6 6 year period, the terms of said Agreement shall remain the same, except for any increases in the salary, bonuses or benefits provided by the Company to the Executive. (b) The term of the Executive's employment hereunder may be terminated prior to the expiration of the Initial Term (or any extension or automatic renewal thereof) in the following events: (i) termination by mutual agreement of the parties; (ii) termination by the Company without cause upon sixty (60) days' written notice to the Executive, as provided for in Section 5(a)(iii); (iii) termination upon the Executive's death or disability as defined in and as provided for in Section 5(a)(v); (iv) termination of the Executive for cause, as provided for in Sections 5(a)(ii) and 7; (v) resignation by the Executive for good reason, as provided for in Sections 5(a)(iii) and 8; 7 7 (vi) termination of the Executive arising as a result of change in ownership or control, as provided for in Sections 5(a)(iii) and 9; or (vii) voluntary resignation by the Executive for reasons other than those falling within paragraph (i), (v) or (vi) herein. 5. Payments Upon Termination (a) In the event that the Executive's employment hereunder is terminated pursuant to Section 4(b) above, the Company shall pay to Executive the following amounts within thirty (30) days of such termination or as otherwise set forth below: (i) If the Executive's employment is terminated pursuant to subsection 4(b)(i), the Company shall pay to the Executive all amounts owing to the Executive as Annual Compensation through the Date of Termination (as defined herein), consisting of Base Salary through the end of the calendar month from the Date of Termination and a pro rata bonus based upon the Executive's prior year's bonus. 8 8 (ii) If the Executive's employment is terminated by the Company for Cause (as defined in Section 7 herein) pursuant to subsection 4(b)(iv), or if the Executive voluntarily resigns his employment pursuant to Section 4(b)(vii), the Company shall pay to the Executive all amounts owing to the Executive as Base Salary through the end of the calendar month of the Date of Termination. (iii) (a) If the Executive's employment is terminated by the Company without cause (Section 4(b)(ii)), or in the event of the termination of this Employment Agreement pursuant to Section 4(b)(v) and Section 8 herein (Resignation by Executive For Good Reason), or in the event the Company shall terminate this Employment Agreement for any reason other than pursuant to Section 4(a)(iv) (cause) or Section 4(a)(iii) (death or disability), or Section 4(b)(vi) and Section 9 (Termination of Employment as a Result of Change In Ownership or Control): 9 9 -- the Company shall pay the Executive his then current annual compensation, and a pro rata bonus based on the Executive's prior year's bonus, through the Date of Termination. -- in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as severance to the Executive on the fifth day following the Date of Termination, a lump sum payment equal to the number of months remaining from the date of termination until the expiration date of this Employment Agreement, or any renewal thereof, divided by twelve (12), times the sum of (a) the Executive's annual Base Salary at the highest rate in effect during the twelve (12) months immediately preceding the Date of Termination and (b) the average of the annual bonus payments, if any, paid to the Executive in the preceding three (3) years, however in 10 10 no event shall the amount of severance to be paid to the Executive be less than the amount of payment in the event of non renewal of the Employment Agreement, as provided for in paragraph 6 of this Agreement, i.e. a lump sum payment equal to (i) two (2) times the sum of (A) the Executive's annual Base Salary at the highest rate in effect during the twelve (12) months immediately preceding the Date of Termination and (B) the average of the Annual bonus payments, if any, paid to the Executive in the preceding three (3) years; and (ii) an additional amount equal to 1/24 of the lump sum payment provided in clause (i), above, multiplied by each full year of the Executive's service with the Company. -- the Company shall pay all other damages to which the Executive may be entitled as a result of the Company's termination of his 11 11 employment under this Agreement, except for Cause, including damages for any and all loss of benefits to the Executive under the employee benefit plans which he would have received had this Agreement not been terminated for reasons set forth in subsections 4(b)(ii) 4(b)(v) and 4(b)(vi), herein, and had the Executive's employment continued for the full Initial Term, or for the full period of any extension or automatic renewal, and including all legal fees and expenses incurred by the Executive in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Employment Agreement. (iii)(b) In the event of the termination of this Employment Agreement pursuant to Section 4(b)(vi) and Section 9 herein (Termination of Employment as a Result of Change In Ownership Or Control): 12 12 -- the Company shall pay the Executive his then current annual compensation, and a pro rata bonus based on the Executive's prior year's bonus, through the Date of Termination. -- in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as severance to the Executive on the fifth day following the Date of Termination, a lump sum payment equal to 4 times the sum of (a) the Executive's annual Base Salary at the highest rate in effect during the twelve (12) months immediately preceding the Date of Termination and (b) the average of the annual bonus payments, if any, paid to the Executive in the preceding three (3) years; and -- the Company shall pay all other damages to which the Executive may be entitled as a result of the 13 13 Company's termination of his employment under this Agreement, except for Cause, including damages for any and all loss of benefits to the Executive under the employee benefit plans which he would have received had this Agreement not been terminated for reasons set forth in subsections 4(b)(ii) 4(b)(v) and 4(b)(vi), herein, and had the Executive's employment continued for the full Initial Term, or for the full period of any extension or automatic renewal, and including all legal fees and expenses incurred by the Executive in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Employment Agreement. (iv) If Executive's employment is terminated pursuant to subsection 4(b)(iii) by reason of Executive's death, the Company agrees to pay to the legal representative of his estate, (i) for a period of twelve (12) months 14 14 (commencing with the Date of Termination) an amount equal to and payable at the same rate at his then current Base Salary, and (ii) any payment the Executive's spouse, beneficiaries, or estate may be entitled to receive pursuant to any pension or employee benefit plan or life insurance policy presently maintained by the Company. (v) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to his physical or mental or emotional illness, the Executive shall continue to receive his full Base Salary along with any bonus payments awarded by the Board of Directors until the Executive returns to his duties or until his employment is terminated for reason of disability pursuant to Section 4(b)(iii). "Disability" shall mean the inability of the Executive to perform the duties of Chairman and Chief Exchange Officer of the Company due to physical, mental or emotional incapacity or illness, where such inability is expected to result in death or to be of long-continued 15 15 and indefinite duration, but in no event shall such duration be less than One Hundred Eighty (180) consecutive days. The determination of "Disability" shall be made by the Board of Directors of the Company ("the Board") and the Executive, as determined by an independent physician selected by both the Board and the Executive. In the event of such Disability, the Company may, at its election and by providing written notice thereof to the Executive within sixty (60) days after such determination, terminate the Executive's employment hereunder effective on the date set forth in such notice. If the Board or the Company does not timely give notice to the Executive of its election to terminate the Executive for such Disability, then the Company shall be deemed to have waived its right to terminate the Executive based upon such Disability. After such termination because of the Executive's disability, the Executive shall be paid, in substantially equal monthly installments, 100% of his Base Salary (at the rate in effect at the time Notice of 16 16 Termination is given) for twelve (12) months, and thereafter an annual amount equal to 50% of such Base Salary for the balance of the Initial Term, but in no event for less than a second twelve (12) month period. (b) In no event shall any payment pursuant to this Section 5 be made to the extent that it would constitute an "excess parachute payment," as defined in Section 280G of the Internal Revenue Code of 1986. Should any such payment provided for in section 5 constitute an "excess parachute payment" as defined in Section 280G of the Internal Revenue Code of 1986, the Company and the Executive shall meet in good faith to negotiate a substitute payment to the Executive equal to that amount which constitutes the excess parachute payment, the payment of which amount is permissible under the Internal Revenue Code and regulations promulgated thereunder. (c) Unless the Executive is terminated for Cause pursuant to Section 4(a)(iii) or voluntarily resigns his employment pursuant to section 4(a)(vii), the Company shall maintain in full force and effect, for the continued benefit of the 17 17 Executive, for a period of four (4) years following the Date of Termination all employee benefit plans and programs in which Executive was entitled to participate immediately prior to the Date of Termination, provided that the Executive's continued participation in such employee benefit plans is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred at any time during this four (4) year period, the Company shall arrange to provide the Executive with benefits substantially similar to those which the Executive would otherwise have been entitled to receive under such plans and programs from which his continued participation is barred, or alternatively, to provide to the Executive the economic after-tax equivalent of the participation in all of said employee benefit plans in which the Executive's participation is barred. At the end of the period of coverage, the Executive shall have the option to have assigned to him at no cost and with no apportionment of prepaid premiums any assignable insurance policy owned by the Company which relate specifically to the Executive. 18 18 (d) (i) In addition to the foregoing, if the Executive's employment is terminated by the Company without cause pursuant to Section 4(b)(ii), upon the Executive's death or disability pursuant to Section 4(b)(iii), upon the Executive's resignation for good reason pursuant to Section 4(b)(v), as a result of a change in ownership or control pursuant to Section 4(b)(vi), or upon the nonrenewal of this Agreement on its expira- tion date, all stock options awarded to the Executive on or before the Date of Termination under the Company's outstanding Incentive Stock Option Plans; or issuable to Executive under any future stock option plans granted by the Company during the term of this Agreement ("the Options"), shall immedi- ately vest to the Executive's benefit or the benefit of the Executive's estate, in the event of his death. Further, the Executive shall retain the right to exercise his rights under the options for the full term(s) thereof, and the Company shall take all actions as are necessary to transfer the Options from the Company's qualified stock option plan(s) to the Company's nonqualified 19 19 stock option plan(s) or such other plans as may be applicable. The intent of this provision is to insure that in the event of termination of the Executive's employment for reasons referenced in this subsection, the Executive shall be fully vested in the Options and shall have the full term of each such option or options to exercise the same. (ii) In the event the Executive's employment is terminated in accordance with Section 4(a)(vi) and, as a consequence of such change in ownership or Control the Company's incen- tive Stock option plans in existence at the time of the Executive's termination of employment cease to exist at any time before the Executive's right to exercise the Options pursuant to Section 5(d)(i) above has expired, the Executive's right to the Options, or to the receipt of cash compensa- tion in lieu thereof, shall be governed by the provisions of section 9(b)(ii), below. (e) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise, and no 20 20 compensation earned by the Executive after his termination of employment with the Company shall be applied to offset any payment provided for in this Agreement. (f) Any termination of the Executive's employment by the Company or by the Executive (other than termination by reason of the Executive's death) shall be communicated by written Notice of Termination to the other party hereto in accordance with provisions set forth in this Agreement. (g) "Date of Termination" shall mean: (i) if the Executive's employment is terminated by his death, the date of his death, (ii) if the Executive's employment is terminated by reason of the Executive's disability, sixty (60) days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of his duties on a reasonable full-time basis during such sixty (60) day period), 21 21 (iii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination; provided that if within sixty (60) days after the Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which said dispute is finally determined, either by mutual written agree- ment of the parties, or by a final arbitra- tion award as provided for in Section 18 (the time for appeal therefrom having expired and no appeal having been perfected). 6. Payment in the Event of Non Renewal of Agreement (a) In the event this Agreement is not renewed by the Company for a minimum period of three years after its expiration date of June 30, 2001, the Company shall pay as severance to the Executive on the fifth day following the Date of Termination, a lump sum payment equal to (i) two (2) times the sum of (A) the Executive's annual Base Salary at the highest rate in effect during the twelve (12) months immediately preceding the Date of Termination and (B) the average of the annual bonus payments, if any, paid to the Executive in the preceding three (3) years; and 22 22 (ii) an additional amount equal to 1/24 of the lump sum payment provided in clause (i), above, multiplied by each full year of the Executive's service with the Company. (b) Upon the non renewal of this Agreement by the Company as provided in Section 6(a) above, the Company shall maintain in full force and effect for the continued benefit of the Executive for a period of two (2) years following the Date of Termination all employee benefit plans and programs in which the Executive was entitled to participate immediately prior to the Date of Termination, provided that the Executive's continued participation in such employee benefit plans is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred at any time during this two (2) year period, the Company shall arrange to provide the Executive with benefits substantially similar to those which the Executive would otherwise have been entitled to receive under such plans and programs from which his continued participation is barred, or alternatively, to provide to the Executive the economic after-tax equivalent of the participation in all of said employee benefit plans in which the Executive's participation is barred. At the end of the period of coverage, the Executive shall have the option to have assigned to him at no cost and with no apportionment of prepaid premiums any assignable insurance policy owned by the Company which relates specifically to him. 23 23 (c) In the event of the non-renewal of the Company of this Agreement as provided for in Section 6(a), above, all options awarded to the Executive on or before the Date of Termination under the Company's outstanding Incentive Stock option Plans, or issuable to Executive under any future stock option plans established by the Company during the term of this Agreement, shall immediately vest to the Executive's benefit and the Executive shall retain the right to exercise his rights under the Options for the full term(s) thereof, and the Company shall take all actions as are necessary to transfer the "Options" from the Company's qualified stock option plan(s) to the Company's nonqualified stock option plan(s) or such other plans as may be applicable. 7. Termination for Cause (a) If the Company reasonably shall determine that there are grounds for discharging the Executive for Cause (as hereinafter defined), the Company may, through the Board, at its election within thirty (30) days thereafter, give the Executive notice of its intention to terminate the Executive for cause, stating the grounds for termination and specifying a date, within thirty (30) days of such notice, on which the Executive shall be given an opportunity to discuss such grounds for termination at a meeting of the Board. 24 24 (b) If the grounds for termination are those specified in clause (ii), (iii) or (iv) of paragraph (d) hereof, at such Board meeting the Board and the Executive shall discuss in good faith and shall determine and set forth in writing what actions the Executive might take, and by what date, to cure the material adverse impact or default, as the case may be, to the reasonable satisfaction of the Board, but in no event earlier than sixty (60) days after said meeting. When the Board and the Executive have agreed in writing upon a cure and the date by which it shall be provided, the Board shall take no further action regarding termination for cause on such grounds until such date, and on such date it shall provide written notice to the Executive that either (i) the cure has been satisfactorily provided, and the Board shall continue to employ the Executive under this Agreement pursuant to the terms hereof, or (ii) the cure has not been satisfactorily provided and the Board is terminating the Executive's employment for cause effective immediately. (c) If the grounds for termination are those specified in clause (i) of paragraph (d) hereof, it is understood and agreed that no satisfactory cure is available. If following discussion with the Executive of the grounds for his termination (as specified in clause (i) of paragraph (d) hereof, at the Board meeting the Board shall continue intent on discharging the Executive for cause on such grounds, the Company shall provide written notice of termination to the Executive within thirty (30) days of the date of 25 25 such meeting, and such termination shall be effective upon the date set forth in such notice. (d) For purposes of this Agreement the term "cause" shall mean: (i) the conviction of the Executive for a felony involving fraud or moral turpitude; (ii) The Executive's engaging in activities prohibited by Section 10 hereof; (iii) the Executive's frequent willful gross neglect (other than as a result of physical, mental or emotional illness) of his duties and responsibilities under this Agreement that has a material adverse impact on the business or reputation of the Company; or (iv) the Executive's willful gross misconduct that has a material adverse impact on the business or reputation of the Company. (e) For each act or occurrence giving rise to a basis for termination for cause, failure by the Company to timely give. all written notices as set forth in this Section, from the date the 26 26 Board or any of its members were either (i) aware of such act or occurrence giving rise to a basis for termination for cause, or (ii) with reasonable due diligence should have known of such act or occurrence giving rise to a basis for termination for cause, shall constitute a waiver of the Company's right to terminate based upon such cause, but such waiver shall not prejudice the Company's right to terminate pursuant to this Section based upon another act or occurrence giving rise to a basis for termination for cause, whether of the same or a different type. 8. Resignation by Executive for Good Reason In the event that the Company shall during the term of this contract (i) fail to continue the appointment of the Executive as Chairman and Chief Executive Officer, (ii) reduce the Executive's annual salary below the minimum amount specified in Appendix A, (iii) materially diminish the duties or responsibilities of the Executive as Chairman and Chief Executive Officer, as the same are set forth hereinabove, (iv) assign to the Executive such duties and responsibilities inconsistent with his position as Chairman and Chief Executive Officer, or (v) after a change in ownership or control of the Company, relocate its headquarters to a location more than thirty (30) miles, by air, from its location immediately prior to such charge in ownership or control (each of the foregoing hereinafter referred to as a "Triggering Event"), then the Executive may give notice to the Company of his election to 27 27 terminate this Agreement pursuant to this Section, effective sixty (60) days from the date of such notice, unless the Company shall have cured the default giving rise to his Notice of Termination. Such notice from the Executive shall state the Triggering Event that provides the grounds for his termination, and such notice must be given, if at all, within one hundred and twenty (120) days of the occurrence of the Triggering Event referred to as providing such grounds for termination. Within the sixty (60) day period specified in the Executive's notice to the Company, the Executive and the Board shall discuss in good faith what actions the Board might take, and by what date, to cure the default involved in the Triggering Event specified by the Executive. If within that sixty (60) day period the Board and the Executive are unable to agree in writing upon a cure or the date by which such cure shall be provided, the Executive's termination shall be effective on the date specified in his original notice to the Company. If within such sixty (60) day period the Board and the Executive shall agree in writing upon a cure and the date by which it shall be provided, then on such date the Executive shall notify the Board either (i) that the cure has been satisfactorily provided, and the Executive is willing to continue his employment under this Agreement pursuant to the terms hereof (except as such terms may have been altered by the agreed-upon cure), or (ii) that the cure has not been satisfactorily provided and the Executive is terminating his employment hereunder effective immediately. 28 28 9. Termination of Employment as a Result of Change in Ownership or Control of the Company (a) In the event that the Company shall enter into an agreement to merge with, or to sell or otherwise dispose of all or substantially all of its assets or stock to, or is acquired by another corporation or other entity (hereinafter, a "Change in ownership or Control"), and the parties to such agreement do not appoint the Executive as Chairman and Chief Executive Officer (or to such other position of authority and responsibility as may be acceptable to the Executive in his sole discretion) of the newly created or merged entity or purchaser, then the Board shall notify the Executive in writing, specifying such other senior executive position with the new entity purchaser, or controlling entity, in which the Executive is to serve, the duties to be assigned to such position, and any other amendments to the terms and provisions of this Agreement that the above-mentioned parties propose. In no event, however, shall the remuneration, benefit coverage, stock option entitlements or severance payments be less than that provided for in this Agreement. At any time during the period following such notice and ending six (6) months from the effective date of the Change in Ownership or Control, the Executive may elect to give notice to the Company, to the purchaser, to the new entity, or to the controlling entity as the case may be, that he is terminating this Agreement pursuant to this Section, effective on the date specified in such notice. If the Agreement is terminated pursuant to this section the Company shall provide the Executive 29 29 all benefits and obligations as provided in Section 5 hereof; provided, however, that prior to the effective date of the Change in Ownership or Control, the Company shall make arrangements satisfactory to the Executive by providing adequate security that the new entity, purchaser or controlling entity following the Change in ownership or Control will have the financial resources to make the payments and provide for the payments and benefits (or the economic equivalent thereof) to the Executive on a timely basis in accordance with the terms of this Agreement. (b) In the event the Change in Ownership or Control results in the dissolution, elimination or modification of the Company's Incentive Stock Option Plans or any future stock option plan(s) established by the Company, and the Executive becomes employed by the successor entity in accordance with Section 9(a), above, the Executive may, at his sole discretion, elect to (i) accept participation in and the award of stock options in such stock option plans of the successor or controlling entity, as offered to him by such successor or controlling entity, or (ii) receive a payment in cash for such stock options of the Company as calculated in accordance with the following formula: (A) All stock options awarded to the Executive by the Company shall be deemed to have become fully vested as of the date on which the Company's Incentive Stock Option Plans or any future stock option plans established by the 30 30 Company have been dissolved, eliminated or modified ("the Old Vested Options"). The Executive shall retain the right to exercise all such Options for the full term(s) thereof, and the Company shall take all actions as are necessary to transfer the Options from the Company's qualified stock options plan(s) to the Company's non-qualified stock option plan(s) or such other plans as applicable. The cash equivalent of these Stock Options shall be the average of the then present value of all stock options granted to the Executive over the prior three (3) years, and shall be determined pursuant to the "Black-Scholes" options pricing model. The Executive will be provided with a lump-sum payment, within 30 days of the dissolution, elimination or modification of the Company's stock options plans, equal to the calculated cash equivalent of the Old Vested options, plus an additional cash amount (grossed up) to cover all taxes required to be paid by the Executive on this cash equivalent. (B) In addition, the Executive will be credited, for the purpose of this Section, with additional stock options equal to 0.5 percent (0.5%) of the fully diluted 31 31 capitalization of the Company calculated as of the day before the change in ownership or Control, multiplied by the number of years (including fraction thereof) from that date to the end of the term of this Agreement as set forth in Section 4(a) ("the Cash Equivalency Obligation of Successor"). The cash equivalency of stock options provided in this paragraph shall be determined pursuant to the "Black-Scholes" options pricing model. On the first anniversary date of this Agreement following the Change in ownership or Control, the successor entity shall provide the Executive with a cash payment to be calculated as follows: the Cash Equivalency obligation of Successor multiplied by a fraction the numerator of which is the number of months or fraction thereof from the effective date of the Change in ownership or Control to the anniversary date and the denominator of which is the total number of months or fraction thereof from the effective date of the Change in ownership or Control and the end of the term of this Agreement. On each succeeding anniversary date through the end of the term of this Agreement, the successor entity shall provide the Executive with a cash payment to be calculated as follows: the Cash Equivalency obligation of Successor multiplied by a fraction the numerator of which is 12 and the denominator of which is the total number of months 32 32 between the effective date of the Change in ownership or Control and the end of the term of this Agreement. (c) In the event the Change in Ownership or Control results in the Executive's participation in a medical insurance plan which provides a lesser amount of benefits or coverage than the Company's medical plan for the Executive and/or members of his immediate family, the successor or controlling entity shall provide the Executive with a cash payment sufficient to reimburse the Executive for all medical expenses incurred by the Executive for himself and for members of his immediate family, and the successor or controlling entity shall provide the Executive with an additional cash amount (gross up) to cover all taxes required to be paid by the Executive on such medical expense reimbursement. 10. Agreement Not to Compete. The Executive agrees that during his employment by the Company, and for a period of one (1) year following the termination of such employment, except if the Executive's termination arises as a result of a change in ownership or control as provided for in Section 5(a)(iii) and 9 herein, in which case the Executive shall not be bound by any post-termination agreement not to compete, he will not, without the prior written consent of the Company, either directly or indirectly, on his own behalf or in the service or on behalf of others as a shareholder (other than ownership of less 33 33 than five percent (5%) of the outstanding voting securities of an entity whose voting securities are traded on a national securities exchange), officer, trustee, consultant, or executive or managerial employee, engage in, consult with or be employed by any competing Business. 11. Agreement Not to Solicit Customers. The Executive agrees that during his employment by the Company and for a period of one (1) year following the termination of such employment, except if the Executive's termination is for cause under Section 7, or voluntary resignation under Section 4(a)(7), or non-renewal of this Agreement under Section 6, he will not without the prior written consent of the Company, either directly or indirectly, on his own behalf or in the service or on behalf of others, solicit, divert or appropriate, or attempt to solicit, divert or appropriate, to any Competing Business, any person or entity whose account with the Company was sold or serviced by or under the supervision of the Executive during the two (2) years preceding the termination of such employment. 12. Agreement Not to Solicit Employees. The Executive agrees that during his employment by the Company and for a period of one (1) year following the termination of such employment, except if the Executive's termination is for cause 34 34 under Section 7, or voluntary resignation under Section 4(a)(7), or non renewal or this Agreement under Section 6, he will not, either directly or indirectly, on his own behalf or in the service or on behalf of others, solicit, divert or hire away, or attempt to solicit, divert or hire away, to any Competing Business any person employed by the Company, whether or not such employee is a full-time employee or a temporary employee of the Company, whether or not such employment is pursuant to written agreement and whether or not such employment is for a determined period or is at will. 13. Ownership, Non-Disclosure and Non-Use of Confidential Information. (a) The Executive acknowledges and agrees that all Confidential Information as defined in Section 1(c), hereof, and all physical embodiments thereof, are confidential to and shall be and remain the sole and exclusive property of the Company. Upon request by the Company, and in any event upon termination of his employment with the Company for any reason, the Executive shall promptly deliver to the Company all property belonging to the Company, including without limitation, all Confidential Information (and all embodiments thereof), then in his custody, control or possession. (b) The Executive agrees that he will not, either during the term of his employment by the Company, or for a period of five (5) years after the termination of his employment, without the 35 35 prior written consent of the Company, disclose or make available any Confidential Information, as defined in Section 1(c) hereof, to any person or entity, nor shall he make or cause to be made, or permit or allow, either on his own behalf or on behalf of others, any use of such Confidential Information other than in the proper performance of his duties hereunder. 14. Ownership of Inventions. (a) The Executive shall promptly disclose to the Company all discoveries, inventions, and improvements, patentable or unpatentable, conceived or made by the Executive, individually or jointly with any other person or persons, during the period of his employment by the Company (whether or not during working hours) relating in any manner to the business or activities of the Company, whether such discovery, invention or improvement be a machine, apparatus, process, composition, article, or other subject. All such discoveries, inventions and improvements shall be the sole and exclusive property of the Company in respect to any and all countries, their territories and possessions. The Executive shall, during his employment within the Company and thereafter, perform at the request and expense of the Company all lawful acts and execute, acknowledge and deliver all such instruments deemed necessary by the Company to vest in the Company the entire right, title and interest in and to such discoveries, inventions and improvements, and to enable the Company to properly 36 36 prepare, file and prosecute applications for and obtain patents (including like kinds of industrial property) thereon in any and all countries selected by the Company as well as reissues, renewals and extensions thereof, and to obtain and record title to such applications and patents so that the Company shall be the sole and absolute owner thereof in any and all countries in which it may desire patent or like protection. (b) Any provision in this Agreement requiring the Executive to assign his rights in any invention does not apply to an invention for which no equipment, supplies, facility, or trade secret information of the Company was used and which was developed entirely on the Executive's own time, and: (a) which does not relate (i) to the Business of the Company or (ii) to the Company's actual or demonstrably anticipated research or development, or (b) which does not result from any work performed by the Executive for the Company. 15. Business and Travel Expense. The Executive shall be reimbursed for his out-of-pocket expenses incurred in carrying out the Company's business, including all travel and entertainment expenses reasonably required by the Executive in his position as Chairman and Chief Executive officer, in accordance with Company policy and upon proof of such expenditures. It is understood that the Executive's wife may accompany 37 37 him on business travel when the Executive determines that her presence will enable him to further the interests of the Company and in such circumstances the Executive shall be reimbursed for her reasonable out-of-pocket travel and entertainment expenses as well. 16. Financial Planning Expenses. The Company shall reimburse the Executive for reasonable costs and expenses incurred by the Executive for financial, estate and tax planning up to an aggregate of Ten Thousand Dollars ($10,000) annually. 17. Legal and Consulting Fees. The Company shall pay all reasonable legal fees and consulting expenses incurred by the Executive in connection with the negotiation and preparation of this Agreement. 18. Resolution of Disputes (a) Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in the City of Phoenix, in accordance with the rules of the American Arbitration Association (the "AAA"). The arbitration shall be before three (3) arbitrators, all of whom shall be attorneys. One arbitrator shall be appointed by the Executive; one 38 38 arbitrator shall be appointed by the Company, and the third Arbitrator shall be selected by the two appointed Arbitrators. In the event the two appointed Arbitrators are unable to agree upon the third Arbitrator, either party may petition the Superior Court of the State of Arizona, Maricopa County, for appointment of the third arbitrator. The arbitrators shall not have the authority to add to, subtract from or in any way modify the express written terms of the Agreement, and in rendering an award, the arbitrators shall be required to adhere to the express written provisions of this Agreement and the intention of the parties appearing therefrom. The decision of the arbitrators shall be final and binding on the parties hereto and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. (b) The costs for the arbitration shall be borne equally by both parties. (c) Pending the outcome or resolution of any arbitration, the Company shall continue payment of all amounts when and as due the Executive under this Agreement without regard to any dispute; provided, however, that if the arbitration shall be decided in favor of the Company, the, Executive shall promptly repay to the Company, with interest at the prime rate as published from time to time by Chemical Bank, all amounts he would not have been entitled to receive under this Agreement had the dispute not been taken to arbitration, and the arbitration award in favor of 39 39 the Company shall be deemed an award in the amount of the repayment due to the Company. 19. Compliance With Securities Laws. The Executive shall comply with all federal and state securities laws and Company policies and guidelines relating thereto concerning insider trading, reporting requirements, and confidentiality of undisclosed internal material information about the Company. 20. Severability, etc. (a) The Executive agrees that the covenants and agreements contained in sections 10, 11, 12 and 13 of this Agreement, and the subsections of those Sections, are of the essence of this Agreement; that each of such covenants is reasonable and necessary to protect and preserve the interests and properties of the Company and the Business of the Company; that the company is engaged in the Business of the company; that irreparable loss and damage will be suffered by the Company should the Executive breach any of such covenants and agreements; that each of such covenants and agreements is separate, distinct and severable not only from the other of such covenants and agreements but also from the other and remaining provisions of this Agreement; that the unenforceability of any such covenant or agreement shall not affect 40 40 the validity or enforceability of any other such covenant or agreements or any other provision or provisions of this Agreement; and that, in addition to other remedies available to it, the Company shall be entitled to seek both temporary and permanent injunctive relief to prevent a breach or contemplated breach by the Executive of any of such covenants or agreements. (b) In the event any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable because it is invalid or in conflict with any law of any relevant jurisdiction, the validity of the remaining provisions shall not be affected, and the rights and obligations of the parties shall be construed and enforced as if this Agreement did not contain such invalid or unenforceable provisions. 21. No Set-Off By the Company. The Company shall continue to provide to the Executive all compensation, benefits and prerequisites of the office of Chairman and Chief Executive Officer provided for in this Agreement notwithstanding the existence of any claim, dispute, action or cause of action by the Company against the Executive, whether based. upon this Agreement or otherwise. Such dispute, claim or cause of action by the Company against the Executive shall be resolved in accordance with Section 18 hereof, with the exception 41 41 of the Company's right to seek injunctive relief provided for in section 20 hereof. 22. Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 23. Notices. Any notice to either party hereunder shall be in writing, and shall be deemed to be sufficiently given to or served on such party, for all purposes, if the same shall be personally delivered to such party, or sent to such party by registered mail, postage prepaid, at the address of such party given above. Either party hereto may change the address to which notices are to be sent to such party hereunder by written notice of such new address given to the other party hereto. 24. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Arizona applicable to contracts to be performed therein, without regard to conflict of laws principles. 42 42 25. Assignment. This Agreement may not be assigned by the Company without the prior written consent of the Executive. The Executive shall have the right to designate a beneficiary, his executor, his administrator or his estate to receive any payments or benefits payable under this Agreement upon his death. 26. Waiver. Except as otherwise provided for in this Agreement, no term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 27. Amendment of Agreement. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. 43 43 28. Entire Agreement. This Agreement represents the entire understanding of the parties hereto and supersedes any prior understandings or agreements between the parties, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided and not expressly provided in this Agreement. IN WITNESS WHEREOF, the Executive has executed this Agreement and the Company has caused this Agreement to be executed by its representative thereunto duly authorized as of the date set forth above. MEDICIS PHARMACEUTICAL CORPORATION By: /s/ Michael A. Pietrangelo ----------------------------------------- Michael A. Pietrangelo Chairman of the Executive Committee of the Board of Directors By: /s/ Joseph Salvani ------------------------------------------ Joseph Salvani Chairman, Compensation Committee, Member of Board of Directors By: /s/ Jonah Shacknai ------------------------------------------ Jonah Shacknai 44 EXHIBIT A - STOCK OPTION AND COMPENSATION COMMITTEE The following sets forth the Executive's compensation in accordance with paragraph 3(a): 1. Annual base compensation* $400,000 per year ("Base Salary") 2. Health/Medical and other Actual cost employee benefits pro- vided to other employees of the Company. 3. Health Club Membership $100 per month 4. Automobile Allowance $900 per month 5. Incentive Stock Options Minimum annual award of .5 percent (.5%) of the fully diluted capitalization of the Company to be awarded no earlier than thirty (30) days before or no later than thirty (30) days after the anniversary date of this Agreement. In the event of a change in ownership or control of the Company, or if the Company's Incentive Stock Option Plans are dissolved, eliminated or modified, then the Executive shall receive in lieu of this minimum annual award, a minimum annual award equal to the "cash equivalent" as set forth and provided for in Section 9(b). 6. Annual Cash Bonus The Board agrees to determine, in good faith, the annual cash bonus to be provided to the Executive based upon the Executive's performance and the performance of the Company measured against the Company's fiscal plan for the prior fiscal year. *The Stock Option and Compensation Committee will review the base salary amount annually and provide an increase in the Executive's base annual compensation as appropriate and within its discretion. EX-10.72B 3 FIRST AMENDMENT TO CREDIT AND SECURITY AGREEMENT 1 EXHIBIT 10.72(b) FIRST AMENDMENT TO CREDIT AND SECURITY AGREEMENT THIS FIRST AMENDMENT TO CREDIT AND SECURITY AGREEMENT (the "Amendment") is made as of the 29th day of May, 1996 by and between MEDICIS PHARMACEUTICAL CORPORATION, a Delaware corporation ("Borrower"), and NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association, as successor-in-interest to NORWEST BUSINESS CREDIT, INC., a Minnesota corporation ("Lender"). R E C I T A L S: WHEREAS, Borrower and Norwest Business Credit, Inc. ("NBCI") are parties to that certain Credit and Security Agreement dated as of August 3, 1995, as modified by letter agreements dated March 6, 1996 and April 11, 1996 (collectively, the "Credit Agreement"), pursuant to which NBCI agreed to make available to Borrower, on a revolving basis, a sum not to exceed $2,000,000 (the "Revolving Loan"), which Revolving Loan is evidenced by that certain Promissory Note dated August 3, 1995 from Borrower to NBCI in an amount not to exceed $2,000,000 (the "Revolving Note"); WHEREAS, NBCI has assigned, and Lender has assumed, all of NBCI's right, title, interest, privileges, obligations and liabilities under the Credit Agreement, as amended, and any documents, agreements or instruments evidencing, securing or in any way related to Borrower's obligations under the Credit Agreement, as amended (the "Loan Documents"), subject to and on the terms and conditions contained herein; and WHEREAS, Borrower has requested that Lender commit to advance an additional $3,000,000 to finance capital expenditures, product development costs, brand purchase contracts, licensing agreements and other financial needs mutually agreed upon in writing by Borrower and Lender in their sole and absolute discretion, and Lender has agreed thereto on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender, intending to be legally bound, agree as follows: 1. INTERPRETATION. Except as otherwise defined herein, all capitalized terms used herein shall have the meanings ascribed thereto in the Credit Agreement. 2. RECITALS. The recitals set forth above are true and accurate in every respect. 3. OUTSTANDING INDEBTEDNESS. As of May 29, 1996: the outstanding principal balance of the Revolving Loan is $0.00; the accrued and unpaid interest on the Revolving Loan is $0.00; the prorated Minimum Interest Charge (including the unused -1- 2 fee described in Section 2.11(b) of the Credit Agreement) payable to NBCI is $24,843.36; and the collateral examination fee previously incurred by, and payable to, NBCI is $2,300. 4. NO OFFSETS. Borrower acknowledges with respect to the amounts owing to Lender that, as of the date of execution of this Amendment, Borrower has no offset, defense or counterclaim with respect thereto, no claim or defense in the abatement or reduction thereof, or any other claim against Lender or NBCI or with respect to any document forming part of the transaction in respect of which the Revolving Loan was made or forming part of any other transaction under which Borrower is indebted to Lender or NBCI. Borrower acknowledges that all interest imposed under the Revolving Note through the date of execution hereof, and all fees and other charges that have been collected from or known by Borrower to have been imposed upon Borrower with respect to the Revolving Loan evidenced by the Revolving Note were and are agreed to, and were properly computed and collected, and that NBCI has fully performed all obligations that it may have had or now has to Borrower, and neither NBCI nor Lender has any obligation to make any additional loan or extension of credit to or for the benefit of Borrower, except as provided in the Credit Agreement, as amended by this Amendment. 5. REPRESENTATIONS AND WARRANTIES OF BORROWER. To induce Lender to enter into this Amendment and the arrangement contemplated by this Amendment, Borrower represents and warrants to Lender as follows: (a) This Amendment and all other instruments executed and delivered to Lender concurrently herewith, were executed in accordance with the requirements of law and in accordance with any requirements of Borrower's certificate of incorporation and bylaws and any amendments thereto. (b) The execution and delivery of this Amendment and any other instruments executed and delivered to Lender concurrently herewith, and the full and complete performance of the provisions hereof will not result in any breach of, or constitute a default under, or result in the creation of any lien, charge or encumbrance upon any property or assets of Borrower under any indenture, mortgage, deed of trust, bank loan or credit agreement or other instrument to which Borrower is a party or by which Borrower is bound. (c) The Loan Documents executed by Borrower and this Amendment are the legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their terms. (d) There is no pending or overtly threatened litigation involving Borrower. -2- 3 (e) Borrower has not derived ten percent (10%) or more of Borrower's Net Sales in any Fiscal Year from any Applicable License as described in Section 6.14 of the Credit Agreement. (f) The patent applications described in Exhibit F to this First Amendment are the only patent applications Borrower has pending before the PTO Office and none of the pending patent applications has yet been approved by the PTO Office. (g) The Beecham Loan (as defined in the Credit Agreement) has been paid in full and any collateral securing the Beecham Loan has been duly released of record. (h) There are no oral agreements, understandings or course of conduct that would modify, amend, rearrange, vary, diminish or impair the Loan Documents or the obligation of Borrower to pay the indebtedness evidenced thereby or to perform fully the obligations of Borrower in strict accordance with the Loan Documents, or which would permit Borrower to void or avoid its obligations in whole or in part. (i) The indebtedness relating to the financing statement from Borrower, as debtor, to Victor T. Weber, as Collateral Agent, as secured party, filed on August 10, 1993 in File No. 32228383, Financing Records of the Maryland State Department of Assessments and Taxation, has been paid in full and the secured party has no further obligation to advance monies to Borrower. (j) All of the respective representations and warranties made by Borrower in the Loan Documents remain true, complete and correct as of the date hereof, including, without limitation, the representations and warranties in Section 5 of the Credit Agreement. No representation or warranty made by Borrower and contained herein or in the other Loan Documents, and no certificate, information or report furnished or to be furnished by Borrower in connection with any of the Loan Documents or any of the transactions contemplated hereby or thereby, contains or will contain a misstatement of material fact, or omits or will omit to state a material fact required to be stated in order to make the statements contained herein or therein not misleading in the light of the circumstances under which such statements were made. 6. CONTINUED ENFORCEABILITY OF LOAN DOCUMENTS. Except as modified herein, all of the terms and provisions of the Loan Documents remain in full force and effect. In the event of any conflict between the terms and provisions of this Amendment and the terms and provisions of the Loan Documents, the terms and provisions of this Amendment shall govern and prevail. Borrower acknowledges, confirms and ratifies the enforceability of the Credit Agreement, the Revolving Note and the Loan Documents, as modified pursuant to this Amendment, and the continuing validity, -3- 4 enforceability and priority of the liens and security interests granted in the Loan Documents. 7. RELEASE OF CLAIMS. (a) Borrower hereby releases Lender and NBCI, their officers, employees and agents from all claims and demands (known and unknown) it may have on the date hereof arising out of or in any way relating to the extension or denial of credit by NBCI or the Lender to Borrower or other matters relating to the indebtedness, any collateral securing payment and performance of such indebtedness, or any matter preliminary to the execution and delivery by Borrower and Lender of this Amendment. The release set forth above shall not extend to any claim arising after the date hereof to the extent based on acts or omissions of Lender occurring after such date, except that such release is specifically intended by the parties to include the transactions leading up to the execution of this Amendment. This Amendment and the release provisions contained in this Section 7 are contractual, and not a mere recital. (b) Borrower acknowledges and agrees that Lender is not, and shall not be, obligated in any way to continue or undertake any loan, financing or other credit arrangement with Borrower, including, without limitation, any renewal of the indebtedness evidenced by the Loan Documents, except on the terms and subject to the conditions set forth in the Loan Documents as hereby amended and modified. 8. CONDITIONS OF CLOSING. Lender's obligation to enter into this Amendment and the other documents and instruments required hereunder shall be subject to the satisfaction of all of the following conditions on or before May 29, 1996 (the "Closing" or the "Closing Date") in a manner, form and substance satisfactory to Lender, which conditions may be waived by Lender in its sole and absolute discretion: (a) On the Closing Date the representations and warranties of Borrower set forth in the Loan Documents shall be true and correct in all material respects when made and at and as of the time of the Closing. (b) The following shall have been delivered to Lender, each duly authorized, executed and acknowledged, where applicable: (i) An Assignment of the Loan Documents from NBCI to Lender. (ii) Assignments by NBCI to Lender of each of the UCC-1 Financing Statement from Borrower to NBCI. (iii) This Amendment. -4- 5 (iv) A Multiple Advance Note from Borrower payable to Lender in the original principal amount not to exceed $3,000,000. (v) A UCC-1 Financing Statement from Borrower in favor of Lender to be filed in the central filing agency of the State of Maryland. (vi) An Amendment to the Collateral Account Agreement. (vii) An Amendment to the Patent Collateral Assignment and Security Agreement. (viii) An Amendment to the Trademark, Tradename and Service Mark Collateral Assignment and Security Agreement. (ix) An Amendment to the Agreement as to Lockbox Services. (x) A Consent from CEDC in connection with the Intercreditor Agreement between CEDC and NBCI. (xi) A Consent from Londen Center L.L.C. in connection with the Landlord's Subordination, Disclaimer and Consent dated as of August 3, 1995 among NBCI, Borrower and Londen Center L.L.C. (xii) A Consent from USCO Distribution Services, Inc. ("USCO") in connection with the Tri-Party Agreement among NBCI, Borrower and USCO. (c) Borrower shall have performed and complied in all material respects with all agreements and conditions contained in the Loan Documents to be performed by or complied with by Borrower prior to or at the Closing, and no Event of Default or Default shall have occurred and be continuing or would occur by Borrower entering into this Amendment and each condition precedent to the effectiveness of each of the Loan Documents shall have been satisfied. (d) Lender shall have received such documents as Lender shall require to establish the proper organization and good standing of Borrower, the authority of Borrower to execute this Amendment and any other documents or instruments required hereunder, and evidence that all approvals and/or consents of, or other action by, any shareholder, governmental agency or other Person whose approval or consent is necessary or required to enable Borrower to (a) enter into and perform its obligations under the Loan Documents and (b) grant to Lender the Security Interests, have been obtained. (e) All filings of Uniform Commercial Code financing statements and other filings and actions necessary to perfect and maintain the Security Interests as -5- 6 first, valid and perfected security interest in the Collateral shall have been filed or taken (or such filings delivered for filing immediately following the Closing, to Lender or a third party acceptable to Lender) and confirmation thereof shall have been received by Lender. (f) Lender shall have determined to its satisfaction that, as of the Closing Date, there has been no material adverse change in the financial condition of Borrower from the financial statements dated as of March 31, 1996 and other documents submitted by Borrower to Lender prior to the Closing Date. (g) Borrower shall have paid to Lender an origination fee of $50,000, which shall be fully earned and non-refundable upon Lender's execution and delivery of this Amendment (Lender shall pay its attorneys' fees associated with negotiating and preparing this Amendment and the related documents). (h) Lender shall be satisfied that (a) Borrower has good and indefeasible title to all of the Collateral and (b) Borrower at all times shall be entitled to the use and quiet enjoyment of all assets necessary and desirable for the continued ownership and operation of Borrower's business, including, without limitation, the use of equipment, licenses, fixtures and warehouses. (i) Borrower shall have paid all of Lender's out-of-pocket costs and expenses incurred in connection with UCC lien, litigation and judgment searches and verifications and filing and recording fees. (j) Borrower shall have paid all of the fees and reimbursable costs and expenses due to NBCI pursuant to Section 3 hereof. 9. DEFINITIONS. (a) The definitions of "Beecham Loan" and "Minimum Interest Charge" in Section 1.1 of the Credit Agreement is hereby deleted in its entirety; (b) the definitions of "Base Rate", "Floating Rate", "Loan Documents" and "Termination Date" in Section 1.1 of the Credit Agreement are hereby deleted in their entirety and the following inserted therefor: "Base Rate" means the rate of interest publicly announced from time to time by Norwest Bank Arizona, National Association, as its "base rate" or, if such bank ceases to announce a rate so designated, any similar successor rate designated by the Lender. "Floating Rate" means an annual rate equal to the sum of the Base Rate plus 125 basis points, which Floating Rate shall change when and as the Base Rate changes. -6- 7 "Loan Documents" means this Agreement, the Notes, the Financing Statements Form UCC-1, the Security Documents and all other documents previously, concurrently or hereafter executed or delivered in connection with the Revolving Credit Facility or the Term Credit Facility. "Termination Date" means July 31, 1997. and (c) Section 1.1 of the Credit Agreement is hereby amended to add the following definitions in proper alphabetical order: "Borrowing Base Certificate" means a monthly statement, in form approved by Lender, showing Accounts, Eligible Accounts, Inventory and Eligible Inventory by location, and the outstanding principal balance on the Revolving Credit Facility at the last day of each month, certified as correct by Borrower's President or Chief Financial Officer. "Current Assets" means cash, cash equivalents, including Permitted Investments, trade receivables, tax refunds and inventory. "Current Ratio" means, as of any date of determination, on a consolidated basis, the ratio of Current Assets to current liabilities under GAAP. "Maturity Date" means July 31, 2001. "Maximum Amount" means $3,000,000. "Net Worth" means the gross value of the Borrower's Equity plus debt subordinated to the Lender in a manner acceptable to the Lender (using the Lender's standard form). "Equity" means Borrower's retained earnings plus the "book value" of all issued and outstanding stock in Borrower (including all common and preferred), plus paid-in capital less treasury stock. "Permitted Investments" means investments in direct obligations of the United States of America or any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America having a maturity of one year or less, commercial paper issued by U.S. corporations rated "A-1" or "A-2" by Standard -7- 8 & Poor's Corporation or "P-1" or "P-2" by Moody's Investors Service or certificates of deposit or bankers' acceptances having a maturity of one year or less issued by members of the Federal Reserve System having deposits in excess of $100,000,000 (which certificates of deposit or bankers' acceptances are fully insured by the Federal Deposit Insurance Corporation and "Money Market Funds" acquired through an FDIC insured bank and/or a division or subsidiary thereof. "Revolving Credit Facility" means the working capital credit facility not to exceed the Commitment being made available to Borrower by Lender pursuant to Article 2 hereof. "Tangible Net Worth" means, as of any date of determination, on a consolidated basis, Net Worth less the net book value (after deducting reserves applicable thereto) of all assets classified as intangible assets under GAAP, including, without limitation, goodwill, trademarks, trade names, service marks, copyrights, patents, licenses, permits, covenants not to compete, and rights related thereto, less any stock or other securities or evidences of indebtedness of any other Person, any loans or advances to any other Person, or any investment or interest whatsoever in any other Person, including specifically, but without limitation, any partnership or joint venture, except Permitted Investments. "Term Credit Facility" means term credit facility not to exceed the Maximum Amount being made available to Borrower by Lender pursuant to Article 2 hereof. "Term Note" means the multiple advance promissory note from Borrower payable to Lender in the principal amount not to exceed the Maximum Amount and any amendments, modifications, supplements, consolidations, replacements or consolidations thereto or thereof, including, without limitation, any replacement note issued pursuant to Section 2.13 hereof. "Treasury Bill Constant" means the sum of (x)(i) the yield to maturity reported, as of 10:00 a.m. (New York City time) on the third Business Day preceding the Termination Date, on the display designated as "Page 678" on the -8- 9 Telerate Service (or such other display as may replace Page 678 on the Telerate Service) for actively traded U.S. Treasury securities having a maturity of forty-eight (48) months from the Termination Date (as near as practicable) or (ii) if such yields shall not be reported as of such time or the yields reported as of such time shall not be ascertainable, the Treasury Constant Maturity Series yields reported, for the latest day for which such yields shall have been so reported on or prior to the third Business Day preceding the Termination Date, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity of forty-eight (48) months from the Termination Date (as near as practicable) plus (y) three hundred (300) basis points. 10. ADVANCES. (a) The preface to Section 2.1 of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: Section 2.1 Advances. The Lender agrees, on the terms and subject to the conditions herein set forth, to make Advances to the Borrower from time to time during the period from the date hereof to and including the Termination Date, or the earlier date of termination in whole of the Revolving Credit Facility and Term Credit Facility pursuant to Sections 2.4(a) or 8.2 hereof, in an aggregate amount at any time outstanding not to exceed the Borrowing Base, with respect to the Revolving Credit Facility, and the Maximum Amount, with respect to the Term Credit Facility, which Advances shall be secured by the Collateral as provided in Article 3 hereof. The Revolving Credit Facility shall be a revolving facility and it is contemplated that the Borrower will request Advances, make prepayments and request additional Advances thereunder and the Term Credit Facility shall be a term facility and it is contemplated that Borrower will request Advances for capital expenditures, product development costs, brand purchase contracts, licensing agreements and other purposes mutually agreed upon in writing by Borrower and Lender in their sole and absolute discretion, which Advances will be repaid in accordance with the terms of this Agreement. The Borrower agrees to comply with the following procedures in requesting Advances under this Section 2.1: -9- 10 and (b) Section 2.1(b) of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: (b) Each request for an Advance under this Section 2.1 shall be made to the Lender prior to 11:00 a.m. (Phoenix time) of the day of the requested Advance by the Borrower. Each request for an advance may be made in writing or by telephone, specifying the date of the requested Advance and the amount thereof, and (i) shall specify whether it is an Advance under the Revolving Credit Facility or the Term Credit Facility and the purpose of the Advance, and (ii) shall be made by (A) any officer of the Borrower; or (B) any person designated as the Borrower's agent by any officer of the Borrower in a writing delivered to the Lender; or (C) any person reasonably believed by the Lender to be an officer of the Borrower or such a designated agent. 11. NOTE. Section 2.2 of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: Section 2.2 Notes. All Advances made by the Lender under this Section 2.1 shall be evidenced by and repayable with interest in accordance with the Note and the Term Note. The principal of the Note shall be payable as provided herein and on the earlier of the Termination Date or acceleration by the Lender pursuant to Section 8.2 hereof, and shall bear interest as provided herein. The principal of the Term Note shall be payable as provided herein and shall bear interest as provided herein, and, absent acceleration by the Lender pursuant to Section 8.2 hereof, shall be amortized commencing on the Termination Date as provided herein. 12. INTEREST. Section 2.3(b) of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: (b) INTENTIONALLY DELETED 13. VOLUNTARY PREPAYMENT; TERMINATION OF AGREEMENT BY THE BORROWER; PERMANENT REDUCTION OF COMMITMENT. (a) Section 2.4(a) of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: (a) Borrower may, in its discretion, prepay the Advances in whole at any time or from time to time in part. The Borrower may terminate this Agreement at any time -10- 11 and, subject to payment and performance of all the Borrower's obligations to the Lender, the Lender shall promptly release the Security Interest and the Borrower may obtain any release or termination of the Security Interest to which the Borrower is otherwise entitled by law by giving at least 30 days' prior written notice to the Lender of the Borrower's intention to terminate this Agreement. and (b) Section 2.4(b) of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: (b) INTENTIONALLY DELETED 14. MANDATORY PREPAYMENT. Section 2.5 of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: Section 2.5 Mandatory Prepayment. Without notice or demand, if the sum of the outstanding principal balance of the Advances with respect to the Note shall at any time exceed the Borrowing Base, the Borrower shall within forty-eight (48) hours (excluding Saturdays, Sundays and Holidays) thereof prepay the Advances to the extent necessary to reduce the sum of the outstanding principal balance of the Advances with respect to the Note to the Borrowing Base. Any payment received by the Lender under this Section 2.5 or under Section 2.4 may be applied to the Advances under the Revolving Credit Facility, including interest thereon and any fees, commissions, costs and expenses due and unpaid hereunder and under the Security Documents, in such order and in such amounts as the Lender, in its discretion, may from time to time determine, and, if a Default or Event of Default has occurred and is continuing, to the Advances under the Term Credit Facility, including interest thereon. 15. USE OF PROCEEDS. Section 2.8 of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: Section 2.8 Use of Proceeds. The proceeds of Advances with respect to the Revolving Credit Facility shall be used by the Borrower for ordinary working capital purposes and the proceeds of Advances with respect to the Term Credit Facility shall be used by the Borrower for capital expenditures, product development costs, brand purchase contracts, licensing agreements and other purposes -11- 12 mutually agreed upon in writing by Borrower and Lender in their sole and absolute discretion. 16. FEES. (a) Section 2.11(a) of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: (a) The Borrower hereby agrees to pay Lender a fully earned and non-refundable origination fee of $50,000 upon the execution of the First Amendment to Credit and Security Agreement dated as of May 29, 1996 between Borrower and Lender (the "First Amendment"). (b) Section 2.11(b) of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: (b) INTENTIONALLY DELETED and (c) Section 2.11(c) of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: (c) Provided that no Default or Event of Default has occurred and is continuing, Lender shall not undertake more than two (2) collateral audits or inspections of the operations or business of the Borrower in any Fiscal Year and Borrower shall not be required to pay any audit fees or out-of-pocket costs and expenses incurred by Lender in connection with any such audits or inspections by the Lender of any collateral or the corresponding operations or business of the Borrower after May 29, 1996. Upon the occurrence of a Default or Event of Default and during the continuance thereof, Lender may undertake such collateral audits and inspections of the operations or business of the Borrower as Lender deems necessary in its sole and absolute discretion and the Borrower hereby agrees to pay the Lender, on demand, audit fees of $50 per hour (or the then applicable rate charged by Lender) per auditor in connection with any such audits or inspections by the Lender of any collateral or the corresponding operations or business of the Borrower, together with all actual out-of-pocket costs and expenses incurred in conducting any such audit or inspection. 17. AMORTIZATION OF TERM CREDIT FACILITY. Article 2 of the Credit Agreement is hereby amended to add the following: -12- 13 Section 2.13 Amortization of Term Credit Facility. Provided that no Default or Event of Default has occurred and is continuing, on the Termination Date, all of the accrued and unpaid interest and other fees and charges shall be due and payable and, at Borrower's election to be made in writing on or prior to the Termination Date, (a) the then outstanding principal balance of the Term Credit Facility shall be amortized over a forty-eight month period and paid in equal principal payments, plus interest at the Floating Rate, on the last day of each month, commencing August 31, 1997 and continuing on the last day of each month thereafter until the Maturity Date, at which time the entire outstanding principal balance of the Term Credit Facility, all accrued and unpaid interest and all other fees and charges shall be due and payable, or (b) the then outstanding principal balance of the Term Credit Facility shall be amortized over a forty-eight month period, with interest calculated at the Treasury Bill Constant, and paid in level principal and interest payments on the last day of each month, commencing August 31, 1997 and continuing on the last day of each month thereafter until the Maturity Date, at which time the entire outstanding principal balance of the Term Credit Facility, all accrued and unpaid interest and all other fees and charges shall be due and payable. At the request of Lender, Borrower shall execute and deliver a replacement promissory note for the Term Note. In the event that Borrower fails to make an election on or prior to the Termination Date, Borrower shall be deemed to have elected clause (a) above. 18. CONDITIONS PRECEDENT TO THE INITIAL ADVANCE. Section 4.1 of the Credit Agreement is hereby amended to add the following: (u) A certificate of the Secretary or an Assistant Secretary of the Borrower, certifying as to the resolutions of the directors and, if required, the shareholders of the Borrower, authorizing the execution, delivery and performance of the First Amendment, the Term Note and the other documents and all documents and instruments incident thereto and to the transactions contemplated thereby, satisfactory to Lender and its counsel. (v) An opinion of counsel to the Borrower, addressed to Lender, with respect to the transactions -13- 14 contemplated by the First Amendment, in form and substance satisfactory to Lender and its counsel. 19. FINANCIAL CONDITION; NO ADVERSE CHANGE. Section 5.5 of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: Section 5.5 Financial Condition; No Adverse Change. The Borrower has heretofore furnished to the Lender audited financial statements of the Borrower for its Fiscal Year ended June 30, 1995 and unaudited financial statements of the Borrower for the months ended through March 31, 1996, and those statements fairly present the financial condition of the Borrower on the dates thereof and the results of its operations and cash flows for the periods then ended and were prepared in accordance with generally accepted accounting principles. Since the date of the most recent financial statements of the Borrower, there has been no material adverse change in the business, properties or condition (financial or otherwise) of the Borrower. 20. REPORTING REQUIREMENTS. (a) Section 6.1(l) of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: (c) within 15 days after the end of each month, agings of the Borrower's accounts receivable and its accounts payable and a Borrowing Base Certificate as at the end of such month; Section 6.1(l) of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: (l) promptly after the sending or filing thereof, copies of all regular and periodic financial reports and special reports which the Borrower shall file with the Securities and Exchange Commission or any national securities exchange, including, without limitation, reports on Form 10-Q, Form 10-K and Form 8-K. 21. INCOME TAX RETURNS. Section 6.1 of the Credit Agreement is hereby amended to add the following: (o) as soon as available and in any event within thirty (30) days following the filing of Borrower's federal income tax return, a copy of such federal income tax return and, if such federal income tax return is not filed on or -14- 15 before October 15, then on or before November 15, a copy of the completed request for extension delivered to the Internal Revenue Service followed by the federal income tax return when filed. 22. LOCKBOX; COLLATERAL ACCOUNT. Section 6.10 of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: Section 6.10 Lockbox; Collateral Account. (a) The Borrower will irrevocably direct all present and future Account debtors and other Persons obligated to make payments constituting Collateral to make such payments directly to the Lockbox. All of the Borrower's invoices, account statements and other written or oral communications directing, instructing, demanding or requesting payment of any Account or any other amount constituting Collateral shall conspicuously direct that all payments be made to the Lockbox and shall include the Lockbox address. Upon confirmation of good, collected funds, all payments made to the Lockbox shall be processed to Borrower's operating account no. 6438801379 maintained with Lender. In Lender's sole and absolute discretion, all payments received in the Lockbox may be processed to the Collateral Account. (b) Upon the written request of Lender, the Borrower agrees to deposit in the Collateral Account or, at the Lender's option, to deliver to the Lender all collections on Accounts, contract rights, chattel paper and other rights to payment constituting Collateral, and all other cash proceeds of Collateral, which the Borrower may receive directly notwithstanding its direction to Account debtors and other obligors to make payments to the Lockbox, immediately upon receipt thereof, in the form received, except for the Borrower's endorsement when deemed necessary. Until delivered to the Lender or deposited in the Collateral Account, all proceeds or collections of Collateral shall be held in trust by the Borrower for and as the property of the Lender and shall not be commingled with any funds or property of the Borrower. Amounts deposited in the Collateral Account shall not bear interest and shall not be subject to withdrawal by the Borrower, except after full payment and discharge of all Obligations. All such collections shall constitute proceeds of Collateral and shall -15- 16 not constitute payment of any Obligation. Collected funds from the Collateral Account shall be transferred to the Lender's general account, and the Lender may deposit in its general account or in the Collateral Account any and all collections received by it directly from the Borrower. The Lender may commingle such funds with other property of the Lender or any other person. The Lender from time to time at its discretion shall, after allowing two (2) Banking Days after deposit in the Collateral Account, apply such funds to the payment of any or all Obligations, in any order or manner of application satisfactory to the Lender. All items delivered to the Lender or deposited in the Collateral Account shall be subject to final payment. If any such item is returned uncollected, the Borrower will immediately pay the Lender, the amount of that item, or Lender at its discretion may charge any uncollected item to the Borrower's operating account or other account. The Borrower shall be liable as an endorser on all items deposited in the Collateral Account, whether or not in fact endorsed by the Borrower. 23. MINIMUM NET INCOME. Section 6.12 of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: Section 6.12 Tangible Net Worth. Borrower shall maintain on a consolidated basis Tangible Net Worth in the following amounts as of the following dates:
=========================================================== FISCAL QUARTER END TANGIBLE NET WORTH ----------------------------------------------------------- June 30, 1996 $5,700,000 ----------------------------------------------------------- September 30, 1996 $7,000,000 ----------------------------------------------------------- December 31, 1996 $8,800,000 ----------------------------------------------------------- March 31, 1997 $10,500,000 ----------------------------------------------------------- June 30, 1997 and thereafter $12,500,000 during the term of this Agreement ===========================================================
24. NET WORTH INCREASE. Section 6.13 of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: -16- 17 Section 6.13 INTENTIONALLY DELETED 25. BEECHAM LOAN. Section 6.16 of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: Section 6.16 Total Liabilities to Tangible Net Worth. Borrower shall maintain on a consolidated basis, measured quarterly as of the last day of March, June, September and December, a ratio of total liabilities under GAAP to Tangible Net Worth of no more than 1.50:1 as of June 30, 1996, September 30, 1996 and December 31, 1996; a ratio of total liabilities under GAAP to Tangible Net Worth of no more than 1.25:1 as of March 31, 1997; and a ratio of total liabilities under GAAP to Tangible Net Worth of no more than 1:1 from and including June 30, 1997 through the remaining term of this Agreement. 26. CURRENT RATIO. Article 6 of the Credit Agreement is hereby amended to add the following: Section 6.18 Current Ratio. During the term of this Agreement, Borrower shall maintain on a consolidated basis, measured monthly as of the last day of each month commencing June 30, 1996, a Current Ratio of no less than 1.7:1. 27. INVESTMENTS AND SUBSIDIARIES. Section 7.4(a) of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: (a) The Borrower will not purchase or hold beneficially any stock or other securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person, including specifically, but without limitation, any partnership or joint venture, except for the following: (i) Permitted Investments; (ii) advances in the form of progress payments, prepaid rent or security deposits; (iii) loans to employees in an aggregate amount outstanding at any time not to exceed $25,000; and -17- 18 (iv) other uses mutually agreed upon in writing by Borrower and Lender in their sole and absolute discretion. 28. CAPITAL EXPENDITURES. Section 7.10 of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: Section 7.10 Capital Expenditures. The Borrower will not expend, or contract to expend, to purchase Capital Assets more than $100,000 in Fiscal Year 1996 (excluding Borrower's purchase of modular furniture having an approximate value of $60,000); more than $500,000 in Fiscal Year 1997; and, thereafter, during the term this Agreement, more than $200,000 in any Fiscal Year. 29. ADDRESS FOR NOTICES, ETC. (a) For purposes of Section 9.3 of the Credit Agreement, the address for notices, requests, demands or other communications provided for under the Loan Documents to Lender shall be as follows: Norwest Bank Arizona, National Association 64 East Broadway Tempe, Arizona 85282 Attn: Mr. Jeffrey R. Wentzel, Vice President Telecopier: (602) 644-8392 (b) Copies of all notices, requests, demands or other communications provided for under Section 9.3 of the Credit Agreement or other communications provided for under the Loan Documents to Borrower shall be delivered as follows: Brown & Bain, P.A. 2901 North Central Avenue P.O. Box 400 Phoenix, Arizona 85001-0400 Attn: Frank M. Placenti, Esq. Telecopier: (602) 351-8516 30. FINANCING STATEMENT. For purposes of Section 9.4 of the Credit Agreement, the name and address of the Secured Party shall be as follows: Norwest Bank Arizona, National Association 64 East Broadway Tempe, Arizona 85282 Attn: Mr. Jeffrey R. Wentzel, Vice President -18- 19 31. COSTS AND EXPENSES. Section 9.7 of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: Section 9.7 Costs and Expenses. Borrower agrees to pay to Lender on demand any and all costs, expenses and fees (including reasonable attorneys' fees) incurred in enforcing or attempting to recover payment of the amount due under this Agreement, including, without limitation, negotiating, documenting and otherwise pursuing or consummating any modifications, extensions, compositions, renewals or other similar transactions pertaining to this Agreement, irrespective of the existence of a default, and including costs, expenses and fees incurred before, after or irrespective of whether suit is commenced and including costs, expenses and fees incurred by Lender in any bankruptcy proceedings (including, without limitation, efforts to modify or vacate any automatic stay or injunction) or appellate proceeding, and in the event suit or arbitration is brought to enforce payment hereof, such costs, expenses and fees and all other issues in such suit shall be determined by a court sitting without a jury or by the arbitrator(s), as applicable. 32. GOVERNING LAW; JURISDICTION, VENUE; WAIVER OF JURY TRIAL. Section 9.12 of the Credit Agreement is hereby deleted in its entirety and the following inserted therefor: Section 9.12 Arbitration; Waiver of Jury Trial. EXCEPT FOR "CORE PROCEEDINGS" UNDER THE UNITED STATES BANKRUPTCY CODE, THE PARTIES AGREE TO SUBMIT TO BINDING ARBITRATION ALL CLAIMS, DISPUTES AND CONTROVERSIES BETWEEN THEM, WHETHER IN TORT, CONTRACT OR OTHERWISE (AND THEIR RESPECTIVE EMPLOYEES, OFFICERS, DIRECTORS, ATTORNEYS, AND OTHER AGENTS) ARISING OUT OF OR RELATING TO IN ANY WAY THIS CREDIT AGREEMENT. ANY ARBITRATION PROCEEDING WILL (A) PROCEED IN PHOENIX, ARIZONA; (B) BE GOVERNED BY THE FEDERAL ARBITRATION ACT (TITLE 9 OF THE UNITED STATES CODE); AND (C) BE CONDUCTED IN ACCORDANCE WITH THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION ("AAA"). THIS ARBITRATION REQUIREMENT DOES NOT LIMIT THE RIGHT OF ANY PARTY TO (I) FORECLOSE -19- 20 AGAINST REAL OR PERSONAL PROPERTY COLLATERAL OR SUE FOR AND OBTAIN A DEFICIENCY JUDGMENT AFTER FORECLOSURE; (II) EXERCISE SELF-HELP REMEDIES RELATING TO COLLATERAL OR PROCEEDS OF COLLATERAL SUCH AS SETOFF OR REPOSSESSION; OR (III) OBTAIN PROVISIONAL ANCILLARY REMEDIES SUCH AS REPLEVIN, INJUNCTIVE RELIEF, ATTACHMENT OR THE APPOINTMENT OF A RECEIVER, BEFORE, DURING OR AFTER THE PENDENCY OR ANY ARBITRATION PROCEEDING. THIS EXCLUSION DOES NOT CONSTITUTE A WAIVER OF THE RIGHT OR OBLIGATION OF ANY PARTY TO SUBMIT ANY DISPUTE TO ARBITRATION, INCLUDING THOSE DISPUTES ARISING FROM THE EXERCISE OF THE ACTIONS DETAILED IN CLAUSES (I), (II) AND (III) ABOVE. ANY ARBITRATION PROCEEDING WILL BE BEFORE A SINGLE ARBITRATOR. THE PARTIES SHALL USE REASONABLE EFFORTS TO AGREE UPON A SINGLE ARBITRATOR WITHIN TEN (10) DAYS AFTER WRITTEN NOTICE FROM ONE PARTY TO THE OTHER REQUESTING ARBITRATION. IF THE PARTIES ARE UNABLE TO AGREE UPON AN ARBITRATOR WITHIN SUCH TEN (10) DAY PERIOD, AT ANY TIME THEREAFTER EITHER PARTY MAY REQUIRE THAT THE ARBITRATOR BE SELECTED ACCORDING TO THE COMMERCIAL ARBITRATION RULES OF THE AAA. THE ARBITRATOR WILL BE A NEUTRAL ATTORNEY WHO PRACTICES IN THE AREA OF COMMERCIAL OR BUSINESS LAW. THE ARBITRATOR WILL DETERMINE WHETHER OR NOT AN ISSUE IS ARBITRABLE AND WILL GIVE EFFECT TO THE STATUTES OF LIMITATION IN DETERMINING ANY CLAIM. JUDGMENT UPON THE AWARD RENDERED BY THE ARBITRATOR MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. IN ANY ARBITRATION PROCEEDING, THE ARBITRATOR WILL DECIDE (BY DOCUMENTS ONLY OR WITH A HEARING AT THE ARBITRATOR'S DISCRETION) ANY PRE-HEARING MOTIONS WHICH ARE SIMILAR TO MOTIONS TO DISMISS FOR FAILURE TO STATE A CLAIM OR MOTIONS FOR SUMMARY ADJUDICATION. IN ANY ARBITRATION PROCEEDING, DISCOVERY WILL BE PERMITTED AND WILL BE GOVERNED BY THE ARIZONA RULES OF CIVIL PROCEDURE. ALL -20- 21 DISCOVERY MUST BE COMPLETED NO LATER THAN 20 DAYS BEFORE THE HEARING DATE AND WITHIN 180 DAYS OF THE COMMENCEMENT OF ARBITRATION PROCEEDINGS. ANY REQUESTS FOR AN EXTENSION OF THE DISCOVERY PERIODS, OR ANY DISCOVERY DISPUTES, WILL BE SUBJECT TO FINAL DETERMINATION BY THE ARBITRATOR UPON A SHOWING THAT THE REQUEST FOR DISCOVERY IS ESSENTIAL FOR THE PARTY'S PRESENTATION AND THAT NO ALTERNATIVE MEANS FOR OBTAINING INFORMATION IS AVAILABLE. THE ARBITRATOR SHALL AWARD COSTS AND EXPENSES OF THE ARBITRATION PROCEEDING IN ACCORDANCE WITH THE PROVISIONS OF THE CREDIT AGREEMENT. EXCEPT AS OTHERWISE PROVIDED HEREIN, THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ARIZONA, WITHOUT REGARD TO ITS CONFLICT OF LAWS RULES. IN THE EVENT THAT LENDER EXERCISES ITS RIGHTS TO FORECLOSE AGAINST REAL OR PERSONAL PROPERTY COLLATERAL OR OBTAIN PROVISIONAL ANCILLARY REMEDIES SUCH AS REPLEVIN, INJUNCTIVE RELIEF, ATTACHMENT OR THE APPOINTMENT OF A RECEIVER, THE PARTIES AGREE THAT ANY LAWSUIT ARISING OUT OF ANY SUCH CONTROVERSY SHALL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. ------------ ------------ Initial Initial 33. COMPLIANCE CERTIFICATE. Exhibit E to the Credit Agreement is hereby deleted in its entirety and replaced by Exhibit E attached to the First Amendment, which is incorporated in the Agreement by this reference. 34. PATENT APPLICATIONS. Exhibit F to the Credit Agreement is hereby deleted in its entirety and replaced by Exhibit F attached to the First Amendment, which is incorporated in the Agreement by this reference. 35. MISCELLANEOUS. (a) Arbitration Agreement; Waiver of Right to Jury Trial. The Agreement contains an arbitration provision and waiver of right to jury trial. In the -21- 22 event of any dispute arising out of or related to this Amendment, the provisions of Section 9.12 of the Agreement shall apply. (b) Voluntary Agreement. Borrower represents and warrants to Lender that (i) it is, or has had the opportunity to be, represented by legal counsel of its choice in regard to the transaction provided for by this Amendment and that such counsel (if engaged) has explained the significance of the terms, and the meaning and effect of this Amendment; (ii) it is fully aware and clearly understands all of the terms and provisions contained in this Amendment; (iii) it has voluntarily, with full knowledge and without coercion or duress of any kind, entered into this Amendment and the documents executed in connection with this Amendment; (iv) it is not relying on any representations, either written or oral, express or implied, made to it by Lender other than as set forth in this Amendment; and (v) the consideration received by Borrower to enter into this Amendment and the arrangement contemplated by this Amendment has been actual and adequate. (c) Entire Agreement. This Amendment and the Loan Documents constitute the entire agreement among the parties as to the agreements and understandings contemplated by this Amendment. All parties to this Amendment acknowledge that there are no agreements, understandings, warranties or representations among the parties except as set forth in the Loan Documents and this Amendment. (d) Counterpart Execution. This Amendment may be executed in counterparts, each of which shall be deemed an original document, and all of which combined shall constitute a single document. (e) Waiver. Neither this Amendment nor any of the provisions hereof may be changed, waived, discharged or terminated, except by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. (f) Headings. Paragraph or other headings contained in this Amendment are for reference purposes only and are not intended to affect in any way the meaning or interpretation of this Amendment. (g) Severability. If any clause or provision of this Amendment is determined to be illegal, invalid, or unenforceable under any present or future law by the final judgement of a court of competent jurisdiction, such clause or provision shall be ineffective, but the remainder of this Amendment will not be affected thereby. (h) Binding Effect. All of the provisions of this Amendment shall be binding upon and shall inure to the benefit of Borrower and Lender and their permitted successors and assigns, including, without limitation, any successor holder of any Note and any successor mortgagee/beneficiary under any security document. -22- 23 (i) Time of the Essence. Time is of the essence of each and every provision under this Amendment. (j) Amendment. Except as specifically set forth herein, the Agreement and the other Loan Documents shall remain in full force and effect. In the event of a conflict between the terms and provisions of this Amendment and the terms and provisions of the Agreement, the terms and provisions of this Amendment shall govern and control. This Amendment replaces and supersedes in its entirety those certain letter agreements dated March 6, 1996 and April 11, 1996 between NBCI and Borrower. Nothing contained in this Amendment is intended to or shall be construed as relieving any person or entity, whether a party to this Amendment or not, of any of such person's or entity's obligations to Lender. (k) Power of Attorney. For purposes of compliance with Arizona Revised Statutes Section 14-5503, Sections 3.2 and 6.11 of the Credit Agreement and any other provisions in the Credit Agreement or Loan Documents granting a power of attorney by Borrower to Lender are incorporated herein by this reference. -23- 24 IN WITNESS WHEREOF, this Amendment is executed to be effective as of the date first above written. BORROWER: MEDICIS PHARMACEUTICAL CORPORATION, a Delaware corporation - ---------------------------------- Witness By: ------------------------------------- Name: Jonah Shacknai ----------------------------------- Title: Chairman of the Board ---------------------------------- Execution Date: May 29, 1996 LENDER: NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association By: ------------------------------------- Name: Jeffrey R. Wentzel ----------------------------------- Title: Vice President ---------------------------------- Execution Date: May 29, 1996 -24- 25 STATE OF ARIZONA ) ) ss. County of Maricopa ) The foregoing instrument was acknowledged before me, the undersigned notary public, this 29th day of May, 1996, by Jonah Shacknai, the Chairman of the Board of MEDICIS PHARMACEUTICAL CORPORATION, a Delaware corporation, on behalf of the corporation. --------------------------------- Notary Public My Commission Expires: - ---------------------- STATE OF ARIZONA ) ) ss. County of Maricopa ) The foregoing instrument was acknowledged before me, the undersigned notary public, this 29th day of May, 1996, by Jeffrey R. Wentzel, the Vice President of NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association, on behalf of the banking association. --------------------------------- Notary Public My Commission Expires: - ---------------------- -25- 26 EXHIBIT E COMPLIANCE CERTIFICATE In accordance with our Credit and Security Agreement dated as of August 3, 1995, as amended (the "Credit Agreement"), attached are the financial statements of Medicis Pharmaceutical Corporation (the "Borrower") as of and for the month and year-to-date period ended ______________ __, 199_ (the "Current Financials") I certify that the Current Financials have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the financial statements referred to in Section 5.5 of the Credit Agreement, subject to year-end audit adjustments, if applicable. Defaults and Events of Default (check one) / / I have no knowledge of the occurrence of any Default or Event of Default under the Credit Agreement which has not previously been reported to you and remedied. / / Attached is a detailed description of all Defaults and Events of Default of which I have knowledge and which have not previously been reported to you and remedied. For the date and periods covered by the Current Financials, the Borrower is in compliance with the covenants set forth in Sections 6.12, 6.16, 6.18 and 7.10 of the Credit Agreement, except as indicated below. The calculations made to determine compliance are as follows:
Covenant Actual Requirement 6.12 Tangible Net Worth $__________ $________ 6.16 Total Liabilities to Tangible Net Worth ___________ _________ 6.18 Current Ratio ___________ _________ 7.10 Capital Expenditures $__________ Maximum $________
27 Date:____________________________, 199__ MEDICIS PHARMACEUTICAL CORPORATION, a Delaware corporation By:_____________________________________ Name:___________________________________ Title:__________________________________ EX-10.73B 4 FIRST AMENDMENT TO PATENT COLLATERAL ASSIGNMENT 1 EXHIBIT 10.73(b) FIRST AMENDMENT TO PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT THIS FIRST AMENDMENT TO PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT (the "Amendment") is made as of this 29th day of May, 1996 by and between MEDICIS PHARMACEUTICAL CORPORATION, a Delaware corporation ("Assignor"), and NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association, the successor-in-interest to Norwest Business Credit, Inc. ("Norwest Bank"). WHEREAS, Assignor and Norwest Business Credit, Inc. ("NBCI") are parties to that certain Patent Collateral Assignment and Security Agreement dated as of August 3, 1995, which was filed with the United States Department of Commerce Patent and Trademark Office on August 17, 1995 in Reel/Frame: 7596/0504 (the "Agreement"); WHEREAS, NBCI has assigned, and Norwest Bank has assumed, all of NBCI's right, title, interest, privileges, obligations and liabilities under the Agreement; WHEREAS, Assignor has filed additional patents with the United States Department of Commerce Patent and Trademark Office since August 17, 1995, which patents are intended to be collateral security for the obligations of Assignor to Assignee; and WHEREAS, Assignor and Norwest Bank desire to amend the Agreement as provided herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficient of which are hereby acknowledged, Assignor and Norwest Bank, intending to be legally bound, agree as follows: 1. Interpretation. Except as otherwise defined herein, all capitalized terms used herein shall have the meanings ascribed thereto in the Agreement. 2. Assignee. All references to "Assignee" in the Agreement shall hereafter refer to Norwest Bank Arizona, National Association, a national banking association. 3. Recitals. The Section of the Agreement entitled "RECITALS" is hereby amended to add the following: D. On or about May 29, 1996, Norwest Business Credit, Inc. assigned and transferred to Norwest Bank Arizona, National Association, all of its right, title, interest, privileges, obligations and liabilities under the Note and Loan Agreement and all of the other agreements and documents evidencing, securing or otherwise relating 2 thereto, including, without limitation, this Agreement. E. Assignor and Norwest Bank Arizona, National Association, have concurrently herewith executed and delivered that certain First Amendment to Loan and Security Agreement dated as of May 29, 1996 which provides, among others, for an additional $3,000,000 multiple advance loan from Norwest Bank Arizona, National Association, to Assignor, subject to and on the terms and conditions contained therein, which loan is evidenced by that certain Multiple Advance Note dated May 29, 1996 from Assignor to Norwest Bank Arizona, National Association, in the original principal amount of $3,000,000, as it may hereafter be amended, modified, restated, extended, renewed and/or consolidated from time to time (the "Term Note"). 4. Obligations Secured. Section 2(a) of the Agreement is hereby deleted and the following inserted therefor: (a) The payment of indebtedness in the total principal amount of up to $5,000,000, with interest thereon, evidenced by the Note and the Term Note. 5. Patent Schedule. Schedule A attached to the Agreement is hereby deleted in its entirety and replaced by Schedule A attached to the First Amendment to Patent Collateral Assignment and Security Agreement dated as of May 29, 1996 between Assignor and Assignee, which is incorporated in the Agreement by this reference. 6. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Arizona. 7. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original and all of which combined shall constitute one and the same instrument. 8. Successors and Assigns. This Amendment shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. 9. Amendment. Except as otherwise amended hereby, all of the terms and provisions of the Agreement shall remain in full force and effect. 10. Power of Attorney. For purposes of compliance with Arizona Revised Statutes Section 14-5503, Section 13 of the Agreement and any other provisions in the Agreement granting a power of attorney by Assignor to NBCI or Norwest Bank are incorporated herein by this reference. -2- 3 IN WITNESS WHEREOF, this Amendment is executed as of the date first above written. ASSIGNOR: MEDICIS PHARMACEUTICAL CORPORATION, a Delaware corporation __________________________________ Witness By: ------------------------------------- Name: Jonah Shacknai ----------------------------------- Title: Chairman of the Board ---------------------------------- NORWEST BANK: NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association By: ------------------------------------- Name: Jeffrey R. Wentzel ----------------------------------- Title: Vice President ---------------------------------- -3- 4 STATE OF ARIZONA ) ) ss. County of Maricopa ) The foregoing instrument was acknowledged before me, the undersigned notary public, this 29th day of May, 1996, by Jonah Shacknai, the Chairman of the Board of MEDICIS PHARMACEUTICAL CORPORATION, an Arizona corporation, on behalf of the corporation. --------------------------------- Notary Public My Commission Expires: - ---------------------- STATE OF ARIZONA ) ) ss. County of Maricopa ) The foregoing instrument was acknowledged before me, the undersigned notary public, this 29th day of May, 1996, by Jeffrey R. Wentzel, the Vice President of NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association, on behalf of the banking association. --------------------------------- Notary Public My Commission Expires: - ---------------------- -4- EX-10.74B 5 FIRST AMENDMENT TO TRADEMARK COLLATERAL ASSGNMNT 1 EXHIBIT 10.74(b) FIRST AMENDMENT TO TRADEMARK, TRADENAME AND SERVICE MARK COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT THIS FIRST AMENDMENT TO TRADENAME, TRADEMARK AND SERVICE MARK COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT (the "Amendment") is made as of this 29th day of May, 1996 by and between MEDICIS PHARMACEUTICAL CORPORATION, a Delaware corporation ("Assignor"), and NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association, the successor-in-interest to Norwest Business Credit, Inc. ("Norwest Bank"). WHEREAS, Assignor and Norwest Business Credit, Inc. ("NBCI") are parties to that certain Trademark, Tradename and Service Mark Collateral Assignment and Security Agreement dated as of August 3, 1995, which was filed with the United States Department of Commerce Patent and Trademark Office on August 17, 1995 in Reel/Frame: 1382/0782 (the "Agreement"); WHEREAS, NBCI has assigned, and Norwest Bank has assumed, all of NBCI's right, title, interest, privileges, obligations and liabilities under the Agreement; WHEREAS, Assignor has filed additional trademarks, tradenames and/or service marks with the United States Department of Commerce Patent and Trademark Office since August 17, 1995, which trademarks, tradenames and/or service marks are intended to be collateral security for the obligations of Assignor to Assignee; and WHEREAS, Assignor and Norwest Bank desire to amend the Agreement as provided herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficient of which are hereby acknowledged, Assignor and Norwest Bank, intending to be legally bound, agree as follows: 1. Interpretation. Except as otherwise defined herein, all capitalized terms used herein shall have the meanings ascribed thereto in the Agreement. 2. Lender. All references to "Lender" in the Agreement shall hereafter refer to Norwest Bank Arizona, National Association, a national banking association. 3. Recitals. The Section of the Agreement entitled "RECITALS" is hereby amended to add the following: D. On or about May 29, 1996, Norwest Business Credit, Inc. assigned and transferred to Norwest Bank Arizona, National Association, all of its right, title, interest, 2 privileges, obligations and liabilities under the Note and Loan Agreement and all of the other agreements and documents evidencing, securing or otherwise relating thereto, including, without limitation, this Agreement. E. Assignor and Norwest Bank Arizona, National Association, have concurrently herewith executed and delivered that certain First Amendment to Loan and Security Agreement dated as of May 29, 1996 which provides, among others, for an additional $3,000,000 multiple advance loan from Norwest Bank Arizona, National Association, to Assignor, subject to and on the terms and conditions contained therein, which loan is evidenced by that certain Multiple Advance Note dated May 29, 1996 from Assignor to Norwest Bank Arizona, National Association, in the original principal amount of $3,000,000, as it may hereafter be amended, modified, restated, extended, renewed and/or consolidated from time to time (the "Term Note"). 4. Obligations Secured. Section 2(a) of the Agreement is hereby deleted and the following inserted therefor: (a) The payment of indebtedness in the total principal amount of up to $5,000,000, with interest thereon, evidenced by the Note and the Term Note. 5. Tradename, Trademark and Service Mark Schedule. Schedule A attached to the Agreement is hereby deleted in its entirety and replaced by Schedule A attached to the First Amendment to Tradename, Trademark and Service Mark Collateral Assignment and Security Agreement dated as of May 29, 1996 between Assignor and Assignee, which is incorporated in the Agreement by this reference. 6. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Arizona. 7. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original and all of which combined shall constitute one and the same instrument. 8. Successors and Assigns. This Amendment shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. 9. Amendment. Except as otherwise amended hereby, all of the terms and provisions of the Agreement shall remain in full force and effect. -2- 3 10. Power of Attorney. For purposes of compliance with Arizona Revised Statutes Section 14-5503, Section 13 of the Agreement and any other provisions in the Agreement granting a power of attorney by Assignor to Lender are incorporated herein by this reference. IN WITNESS WHEREOF, this Amendment is executed as of the date first above written. ASSIGNOR: MEDICIS PHARMACEUTICAL CORPORATION, a Delaware corporation - ---------------------------------- Witness By: ------------------------------------- Name: Jonah Shacknai ----------------------------------- Title: Chairman of the Board ---------------------------------- NORWEST BANK: NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association By: ------------------------------------- Name: Jeffrey R. Wentzel ----------------------------------- Title: Vice President ---------------------------------- -3- 4 STATE OF ARIZONA ) ) ss. County of Maricopa ) The foregoing instrument was acknowledged before me, the undersigned notary public, this 29th day of May, 1996, by Jonah Shacknai, the Chairman of the Board of MEDICIS PHARMACEUTICAL CORPORATION, an Arizona corporation, on behalf of the corporation. --------------------------------- Notary Public My Commission Expires: - ---------------------- STATE OF ARIZONA ) ) ss. County of Maricopa ) The foregoing instrument was acknowledged before me, the undersigned notary public, this 29th day of May, 1996, by Jeffrey R. Wentzel, the Vice President of NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association, on behalf of the banking association. --------------------------------- Notary Public My Commission Expires: - ---------------------- -4- EX-10.75 6 ASSIGNMENT AND ASSUMPTION OF LOAN DOCUMENTS 1 EXHIBIT 10.75 ASSIGNMENT AND ASSUMPTION OF LOAN DOCUMENTS THIS ASSIGNMENT AND ASSUMPTION OF LOAN DOCUMENTS (the "Assignment") is dated as of the 29th day of May, 1996 by and between NORWEST BUSINESS CREDIT, INC., a Minnesota corporation ("Assignor"), and NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association ("Assignee"). WHEREAS, Assignor and Medicis Pharmaceutical Corporation ("Borrower") entered into that certain Credit and Security Agreement dated as of August 3, 1995, as modified by letter agreements dated March 6, 1996 and April 11, 1996 (collectively, the "Credit Agreement"), pursuant to which Assignor agreed to make available to Borrower, on a revolving basis, a sum not to exceed $2,000,000 (the "Revolving Loan"); WHEREAS, the following documents evidence, secure or relate to the Revolving Loan (the "Loan Documents"): (a) The Credit Agreement. (b) Promissory Note dated August 3, 1995 from Borrower to Assignor in an amount not to exceed $2,000,000 (the "Revolving Note"). (c) UCC-1 Financing Statement from Borrower in favor of Assignor filed on July 12, 1995 in File No. 9519960707, Records of California Secretary of State. (d) UCC-1 Financing Statement from Borrower in favor of Assignor filed on July 18, 1995 in File No. 2157162, Records of Kansas Secretary of State. (e) UCC-1 Financing Statement from Borrower in favor of Assignor filed on July 12, 1995 in File No. 140451, Records of New York Secretary of State. (f) UCC-1 Financing Statement from Borrower in favor of Assignor filed on July 5, 1995 in File No. 837751, Records of Arizona Secretary of State. (g) Collateral Account Agreement dated as of August 3, 1995 between Assignor and Borrower. (h) Patent Collateral Assignment and Security Agreement dated as of August 3, 1995 between Assignor and Borrower. (i) Trademark, Tradename and Service Mark Collateral Assignment and Security Agreement dated as of August 3, 1995 between Assignor and Borrower. (j) Agreement as to Lockbox Services dated as of August 3, 1995 between Assignor and Borrower. 2 (k) Intercreditor Agreement dated as of August 3, 1995 between Assignor and the Community Economic Development Corporation. (l) Landlord's Subordination, Disclaimer and Consent dated as of August 3, 1995 among Assignor, Borrower and Londen Center L.L.C. (m) Tri-Party Agreement among Assignor, Borrower and USCO Distribution Services, Inc. (n) Any and all collateral accounts, lock boxes and funds and documents contained therein. (o) All other instruments, agreements or documents of any kind affecting or relating to the Revolving Loan executed or delivered in connection with or as security for the Revolving Loan, including, without limitation, any and all title insurance policies, insurance policies and certificates, collateral reports, appraisals, UCC lien, litigation and judgment searches, financing statements and attorneys' opinion letters. (p) Assignor's credit file and transaction history, including, without limitation, all written correspondence to and from Borrower. WHEREAS, Assignor desires to assign, and Assignee desires to assume, all of Assignor's right, title, interest, privileges, obligations and liabilities under the Loan Documents, subject to and on the terms and conditions contained herein; NOW, THEREFORE, in consideration of TEN AND NO/100 DOLLARS ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Assignor and Assignee agrees as follows: 1. Assignment and Transfer of Loan. Assignor hereby grants, bargains, sells, transfers, assigns, releases and sets over unto Assignee, its successors and assigns, forever, the Assignor's interest in and to the Loan Document and Assignor shall deliver all of the original copies of the Loan Document in Assignor's possession or control. 2. Authorization to Perform. Assignor hereby directs and authorizes the parties to any of the Loan Documents to perform any obligations heretofore owned to Assignor thereunder for the benefit, and at the direction, of Assignee from and after the date hereof, and the delivery of a copy of this Assignment to such party may be relied upon by any such party in complying with this direction and authorization. 3. Assumption. Assignee hereby agrees to assume and perform all obligations and agreements of Assignor accruing under the Loan Documents from and after the date hereof. 4. Assignor's Representations and Warranties. Assignor represents, warrants and covenants with and to Assignee that as of the date of this Assignment: -2- 3 (a) Assignor is the legal and beneficial owner and holder of the Revolving Loan, and Assignor has not previously assigned, transferred, conveyed, hypothecated, encumbered or otherwise transferred its interest in the Revolving Loan or the Loan Documents. (b) Assignor has the right, power, legal capacity, and authority to execute and deliver this Assignment and to consummate the transactions contemplated by the Assignment. This Assignment has been duly and validly executed and delivered by Assignor, constitutes the valid, legal and binding agreement of Assignor, and is enforceable against Assignor in accordance with its terms. Except as set forth in the Loan Documents, no approval of any person or entity is required for the execution and delivery of this Assignment by Assignor or the consummation of any of the transactions contemplated by the Assignment. (c) Assignor has not received any notice, and has no actual knowledge, of the occurrence and continuation of any default or event of default (or other event which, with the passage of time, the giving of notice, or both, would constitute an event of default) by Borrower under any of the Loan Documents. (d) There is no contract, agreement, instrument, document, or written or oral understanding between Assignor and Borrower which amends, modifies, waives or rearranges any of the Loan Documents or which diminishes or impairs the obligation of the Borrower to pay the indebtedness evidenced by the Revolving Note or to perform fully the obligations of such Borrower in strict accordance with the Loan Documents, or which impairs, subordinates, or diminishes the liens created by the Loan Documents, or which would permit the Borrower to void or avoid its obligations in whole or in part. (e) Except for the Credit Agreement, Borrower is not indebted to Assignor and Assignor has no obligation or commitment to make any loans or advance any funds to or for the benefit of Borrower. Except for the prorated Minimum Interest Charge (including the unused fee described in Section 2.11(b) of the Credit Agreement) of $24,843.36; and the collateral examination fee of $2,300, there is no principal or interest, or fees, costs or charges, due Assignor by Borrower under the Credit Agreement. (f) To Assignor's actual knowledge, there is no action, suit or proceeding pending, or threatened or asserted, against Assignor affecting the Revolving Loan, at law or in equity or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. (g) Assignor has not received any notice that the Borrower has failed to file or has improperly filed any tax return or report required to be filed by the Borrower, or that the Borrower has failed to pay all taxes, charges and assessments due and payable. 5. Assignee's Representations and Warranties. Assignee represents, warrants and covenants with and to Assignor that: (a) Assignee has the right, power, legal capacity, and authority to execute and deliver this Assignment and to consummate the transactions contemplated by the Assignment. This Assignment has been duly and validly executed and delivered by Assignee, constitutes the -3- 4 valid, legal and binding agreement of Assignee, and is enforceable against Assignee in accordance with its terms. Except as set forth in the Loan Documents, no approval of any person or entity is required for the execution and delivery of this Assignment by Assignee or the consummation of any of the transactions contemplated by the Assignment. 6. Payment to Assignor. Assignor and Assignee agree that notwithstanding any terms of this Assignment to the contrary, the sums owing to Assignor set forth in paragraph 4(e) above shall be paid to Assignor by Borrower in good funds as a condition precedent to the effectiveness of this Assignment. 7. Severability of Provisions. Whenever possible, each provision of this Assignment shall be interpreted in such manner as to be valid under applicable law, but if any provision of this Assignment shall be invalid or prohibited hereunder, such provision shall be ineffective to the extent of such prohibition or invalidation, which shall not invalidate the remainder of such provisions or the remaining provisions of this Assignment. 8. Governing Law. This Assignment shall be governed by and construed in accordance with the laws of the State of Arizona, without giving effect to its conflict of laws rules. 9. Enforcement. In the event of litigation involving this Assignment, the unsuccessful party shall pay to the prevailing party all costs of suit, including reasonable attorneys' fees. 10. Continuation of Provisions. The representations and warranties contained herein shall be effective on the date hereof and shall survive the execution and delivery of this Assignment. 11. Entire Agreement. This Assignment contains the entire agreement of the parties hereto with respect to the matters covered hereby and supersedes all prior arrangements and understandings between the parties, and no other agreement, statement or promise made by either party hereto which is not contained herein shall be binding or valid. 12. Counterparts. This Assignment may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same instrument. 13. Binding Effect. This Assignment shall be binding upon and shall inure to the benefit Assignor, Assignee and their successors and assigns. 14. Further Assurances. Assignor agrees to execute such separate assignments of the Loan Documents or other documents as Assignee may reasonably require for the purpose of giving separate notice of the assignments herein at the sole expense of Assignee, and Assignee shall reimburse Assignor for fees and costs incurred by Assignor in the review and execution of such documents. -4- 5 IN WITNESS WHEREOF, the parties have executed this Assignment as of the day and year first above written. ASSIGNEE: NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, a national banking association By: /s/ Jeffrey R. Wentzel ----------------------------------- Name: Jeffrey R. Wentzel Title: Vice President ASSIGNOR: NORWEST BUSINESS CREDIT, INC., a Minnesota corporation By: /s/ Peter J. Lowney ----------------------------------- Name: Peter J. Lowney Title: Assistant Vice President ACKNOWLEDGEMENT OF MEDICIS: By: /s/ Jonah Shacknai ----------------------------------- Name: Jonah Shacknai Title: Chairman of the Board -5- EX-10.76 7 MULTIPLE ADVANCE NOTE 1 EXHIBIT 10.76 MULTIPLE ADVANCE NOTE $3,000,000 Phoenix, Arizona May 29, 1996 For value received, the undersigned, Medicis Pharmaceutical Corporation, a Delaware corporation (the "Borrower"), hereby promises to pay on or before July 31, 1997 to the order of Norwest Bank Arizona, National Association, a national banking association (the "Lender"), at its main office in Phoenix, Arizona, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of Three Million Dollars ($3,000,000) or, if less, the aggregate unpaid principal amount of all advances made by the Lender to the Borrower hereunder, together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Credit and Security Agreement dated as August 3, 1995 by and between Norwest Business Credit, Inc. and the Borrower, as amended (the "Credit Agreement"). Except as otherwise defined herein, all capitalized terms used herein shall have the meanings ascribed thereto in the Credit Agreement. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. Provided that no Default or Event of Default has occurred and is continuing on July 31, 1997, the then outstanding principal balance of this Note shall be payable in accordance with Section 2.13 of the Credit Agreement. At the request of Lender, Borrower shall execute and deliver a replacement promissory note on or before July 31, 1997 in accordance with Section 2.13 of the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is the Term Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents (as defined in the Credit Agreement), and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. The Borrower hereby agrees to pay all costs of collection, including attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. 2 The Borrower agrees that the interest rate contracted for includes the interest rate set forth in the Credit Agreement plus any other charges or fees set forth herein and costs and expenses incident to this transaction paid by the Borrower to the extent the same are deemed interest under applicable law. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. IN WITNESS WHEREOF, this Note is executed and delivered as of the date first above written. MEDICIS PHARMACEUTICAL CORPORATION, a Delaware corporation By: ------------------------------------- Name: Jonah Shacknai ----------------------------------- Title: Chairman of the Board ---------------------------------- EX-21.1 8 SUBSIDIARIES 1 Exhibit 21.1 SUBSIDIARIES OF MEDICIS PHARMACEUTICAL CORP.
NAME JURISDICTION OF INCORPORATION OWNERSHIP - ---- ----------------------------- --------- Medicis Dermatologics, Inc. Delaware 100%
EX-23.1 9 CONSENT OF ERNST & YOUNG 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG, LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-45573) pertaining to the 1988 and 1990 Stock Option Plans and the Registration Statement (Form S-8 No. 33-88590) pertaining to the 1992 Stock Option Plan of Medicis Pharmaceutical Corporation of our report dated August 2, 1996 with respect to the consolidated financial statements and schedule of Medicis Pharmaceutical Corporation included in the Annual Report (Form 10-K) for the year ended June 30, 1996. ERNST & YOUNG, LLP Phoenix, Arizona August 15, 1996 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 7,956,050 0 5,890,704 680,000 2,080,014 18,985,679 506,544 100,897 26,312,800 6,585,131 116,580 0 627 97,183 19,361,842 26,312,800 25,309,743 25,309,743 6,955,685 6,955,685 0 0 75,670 6,053,742 (1,826,000) 7,879,742 0 0 0 7,879,742 1.09 1.09
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