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UNITED STATESSECURITIES AND EXCHANGE COMMISSION  
 FORM 10-K [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  Or [  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 Commission file number 0-18443 MEDICIS PHARMACEUTICAL CORPORATION  Delaware
    
    52-1574808(State of other jurisdiction
    
    (I.R.S. Employer Identification No.)of incorporation or organization)8125 North Hayden Road, Scottsdale, Arizona
    
    85258-2463(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: Class A common stock, $0.014 par value New York Stock Exchange
    
    Preference Share Purchase RightsName of each exchange on which
    
    (Title of each Class)registered)
 Securities registered pursuant to Section 12(g) of the Act: NONE 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 [  ]. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [X] No [  ] The
aggregate market value of the voting stock held on December 31,
2003 by non-affiliates of the registrant was $1,469,091,795
(calculated by excluding all shares held by executive officers, directors and holders known to the
registrant 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 laws). As of September 8,
2004, there were 56,946,488 outstanding shares of Class A common stock and
758,032 outstanding shares of Class B common stock. Documents incorporated by reference: Portions of the Proxy Statement for the registrants 2004 Annual
Meeting of Shareholders are incorporated herein by reference in Part III of
this Form 10-K to the extent stated herein. 1




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TABLE OF CONTENTS  PART IITEM 1: BUSINESSITEM 2: PROPERTIESITEM 3: LEGAL PROCEEDINGSITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5: MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6: SELECTED FINANCIAL DATAITEM 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A: CONTROLS AND PROCEDURESITEM 9B: OTHER INFORMATIONPART IIIITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11: EXECUTIVE COMPENSATIONITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURESReport of Independent Registered Public Accounting FirmCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSEXHIBIT INDEXEX-3.1EX-4.1(d)EX-10.1EX-10.2EX-10.3EX-10.72(f)EX-10.102EX-10.103EX-12EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 PART I 
 ITEM 1: BUSINESS Medicis Pharmaceutical Corporation, together with its wholly
owned subsidiaries (Medicis, the Company, or as used in the context of
we, us or our) is a leading independent specialty pharmaceutical company
focusing primarily on helping patients attain a healthy and youthful appearance
and self-image through the development and marketing of products in the United
States for the treatment of dermatologic, aesthetic and podiatric conditions in
the United States and Canada. We believe that annual U.S. pharmaceutical sales
in the dermatological market exceeds $5 billion. According to the American
Society for Aesthetic Plastic Surgery, nearly 8.3 million surgical and
non-surgical cosmetic procedures were performed in the United States during
2003. From 2002 to 2003, there was a 20% increase in the number of cosmetic
procedures performed by physicians. We have built our business by executing a four-part growth strategy. This
strategy consists of promoting existing core brands, developing new products
and important product line extensions, entering into strategic collaborations,
and acquiring complementary products, technologies and businesses. We offer a broad range of products addressing various conditions including
acne, fungal infections, rosacea, hyperpigmentation, photoaging, psoriasis,
eczema, skin and skin-structure infections, seborrheic dermatitis and cosmesis
(improvement in the texture and appearance of skin). We currently offer 13
branded products. Our core brands are DYNACIN®(minocycline HCI), LOPROX®
(ciclopirox), OMNICEF® (cefdinir), PLEXION® (sodium sulfacetamide/sulfur),
RESTYLANE® (hyaluronic acid) and TRIAZ® (benzoyl peroxide). For the fiscal
year ended June 30, 2004, core brands, including ORAPRED®, accounted for
approximately 87% of our total net revenues. All of our core brands enjoy
branded market leadership in the segments in which they compete. Because of
the significance of these brands to our business, we concentrate our sales and
marketing efforts in promoting them to physicians in our target markets. We
also sell a number of other products, but which are considered less critical to
our business. In March 2003, we expanded into the dermal aesthetic market through our
acquisition of the exclusive U.S. and Canadian rights to market, distribute and
commercialize the dermal restorative products known as RESTYLANE®, PERLANE®
and RESTYLANE FINE LINES from Q-Med AB, a Swedish biotechnology/medical
device company and its affiliates, collectively Q-Med. RESTYLANE® has been
approved by the Food and Drug Administration (the FDA) for use in the United
States as a medical device. RESTYLANE®, PERLANE® and RESTYLANE FINE
LINES have been approved for use in Canada. Q-Med currently promotes these
market-leading, patented non-animal stabilized hyaluronic acid (NASHA)
brands in over 75 countries, where over 1.5 million procedures have been
performed. NASHA products are manufactured by Q-Med in Uppsala, Sweden. RESTYLANE® is marketed and sold in over 75 countries outside the United
States. Since 1996, dermatologists and plastic surgeons outside the U.S. have
used it to contour and restore volume to skin and temporarily eliminate
wrinkles and facial folds. Additionally, in certain countries other than the
U.S. (such as Canada), RESTYLANE® also is approved to enhance the appearance
and fullness of lips. 2




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OUR PRODUCTS We currently offer 13 branded products. Our sales and marketing efforts
are currently focused on our core brands, which, during fiscal 2004, accounted
for approximately 87% of our total net revenues. The following chart details
certain important features of our core brands: Brand
    
    Treatment
    
    U.S. Market ImpactDYNACIN®
    
    Oral adjunctive treatment for moderate
to severe acne
    
    The number one branded minocycline
product in the U.S. DYNACIN® tablets and
capsules are available in a range of strengths for
moderate to severe acneLOPROX®
    
    Topical treatment for certain fungal and
yeast infections
    
    A leading antifungal agent, including the only gel
and shampoo approved for seborrheic dermatitisOMNICEF®
    
    A patented oral cephalosporin for skin and
skin-structure infections
    
    Superior kill rate compared to most frequently
prescribed antibiotic for this indicationPLEXION®
    
    Topical treatments for rosacea and
acne-related conditions
    
    The leading branded prescription cleanser indicated
for the treatment of rosaceaRESTYLANE®
    
    Injectable gel for treatment of fine lines and wrinkles, shaping facial contours and
correcting deep facial folds
    
    Launched on January 6, 2004, following approval by FDATRIAZ®
    
    Topical patented gel, cleanser and pad
treatments for acne
    
    The leading branded prescription
benzoyl peroxide product
 PRESCRIPTION PHARMACEUTICALS Our principal branded pharmaceutical products are described below: DYNACIN® is an oral antibiotic, available in 50-mg., 75-mg. and 100-mg.
tablet and capsule dosage forms, and is prescribed as an adjunctive treatment
for moderate to severe acne. The most commonly prescribed systemic acne
treatments are tetracycline and its derivatives, minocycline and doxycycline.
Minocycline, the active ingredient in DYNACIN®, is widely prescribed for the
treatment of acne for several reasons. It has a more convenient dosing
schedule, 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,
including doxycycline, require ingestion on an empty stomach and have been
reported to often cause gastric irritation. Moreover, the other forms of
tetracycline may increase patient sensitivity to sunlight, creating a greater
risk of sunburn. 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, doxycycline and tetracycline
exceeds 50%, while the bacteria showed virtually no resistance to minocycline.
DYNACIN® capsules were launched in fiscal 1993 with 50-mg. and 100-mg. dosage
forms available. We launched DYNACIN® capsules in a 75-mg. dosage form in
fiscal 1999. During fiscal 2003, we launched DYNACIN® in tablet form in
75-mg. and 100-mg. dosages, and we launched the 50-mg. dosage in fiscal 2004.
On July 18, 2004, Glades Pharmaceuticals, LLC, a wholly owned subsidiary of
Stiefel Laboratories, Inc., announced the launch of myracT (minocycline
hydrochloride tablets, USP), as a branded pharmaceutical product. MyracT
tablets is a prescription product that competes directly with our DYNACIN®
tablet products. LOPROX® cream and topical suspension are both broad-spectrum
prescription antifungal agents indicated for the topical treatment of tinea
pedis, tinea corporis, tinea cruris, tinea versicolor and cutaneous
candidiasis. LOPROX® works with a unique mode of action that has been shown
to have fungistatic and fungicidal properties and enhanced penetration. We
believe this unique mode of action makes LOPROX® an appropriate choice for
topical treatment alone, or as concomitant treatment with an oral
antifungal. For these reasons, we believe LOPROX® is a highly effective
product to manage the often-complicated mix of organisms involved in tinea
infections. In clinical trials, LOPROX® was shown to produce clinical
improvement of 82% to 93% of subjects after a single week of treatment across
the range of cutaneous mycoses. The most frequently prescribed topical
antifungal products in addition to LOPROX® include Spectazole®, Nizoral®,
Oxistat® and Lotrisone® (steroid/antifungal combination). In 3




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addition to
the cream and topical suspension formulations of LOPROX®, we market LOPROX®
Gel for the treatment of seborrheic dermatitis and fungal infections.
Currently, LOPROX® Gel is the only gel approved in the United States for
seborrheic dermatitis. During fiscal 2003, we launched LOPROX® Shampoo,
which is the first and only prescription antifungal shampoo approved in the
United States for the treatment of seborrheic dermatitis of the scalp, a common
fungal infection. On August 6, 2004, the FDA approved an Abbreviated New Drug
Application (ANDA) submitted by Altana, Inc. for its ciclopirox topical
suspension, a generic version of our LOPROX® TS product. OMNICEF®is promoted to dermatologists and podiatrists pursuant to our
exclusive co-promotion agreement with Abbott Laboratories (Abbott).
OMNICEF® is indicated for the treatment of uncomplicated skin and
skin-structure infections. Studies show that OMNICEF® has superior pathogen
eradication rates versus Cephalexin, the most frequently prescribed antibiotic
for uncomplicated skin and skin-structure infections. Since May 2001, we have
promoted OMNICEF® capsules in the U.S. market to dermatologists and
podiatrists. In return, we receive commission revenue from Abbott based on
prescriptions generated in these categories. Our agreement with Abbott expires
in 2013. PLEXION® treats rosacea and acne-related conditions with internally
developed cleanser and topical therapies. Rosacea is a chronic skin condition
causing inflammation and redness of the face. PLEXION® is designed to be
used in conjunction with other prescription rosacea therapies. The active
ingredients in our PLEXION® products are sodium sulfacetamide and sulfur.
PLEXION®, the leading branded prescription cleanser indicated for the
treatment of rosacea, was launched in fiscal 2000. The topical acne rosacea
market is comprised of products such as MetroGel®, MetroCream® and
MetroLotion®. PLEXION TS®,a gentle topical suspension treatment for acne,
was launched in fiscal 2001. In addition, during fiscal 2002 we launched
PLEXION SCT®, a short contact therapy with a silica base that helps remove
impurities from the skin pores. TRIAZ®, a patented, internally developed topical therapy prescribed for
the treatment of numerous forms and varying degrees of acne, is available as a
gel, cleanser or pad in three concentrations. While other topical acne
treatments, including Cleocin-T®, Benzamycin® and BenzaClin®, are
generally effective, TRIAZ® offers advantages over each of these products,
including improved stability, greater convenience of use, reduced cost and
fewer side effects. TRIAZ® products are manufactured using the active
ingredient benzoyl peroxide in a patented vehicle containing glycolic acid and
zinc lactate. Studies conducted by third parties have shown that benzoyl
peroxide is the most efficacious agent available for eradicating the bacteria
that cause acne with no reported resistance. We believe glycolic acid enhances
the effectiveness of benzoyl peroxide by exfoliating the outer layer of the
skin and that zinc lactate reduces the appearance of inflammation and
irritation often associated with acne. We introduced the TRIAZ® brand in
fiscal 1996. During July 2003, we launched TRIAZ® Pads, the first and only
benzoyl peroxide pad available in the U.S. indicated for the topical treatment
of acne vulgaris. DERMAL RESTORATIVE PRODUCTS Our principal branded dermal restorative products are described below: RESTYLANE®, PERLANE®and RESTYLANE FINE LINESare injectable,
transparent, NASHA gels, which require no patient sensitivity tests in
advance of product administration. These tissue tailored, transparent,
injectable products have varying gel particle sizes which provide physicians
with flexibility in treating fine lines and wrinkles, shaping facial contours
and correcting deep facial folds. Pre-packaged, glass syringes provide
physicians with various options to treat nasolabial folds, glabellar lines,
periorbital lines, vermillion borders, chins, cheeks, smiles lines, worry lines
and oral commissures. In the United States, the FDA regulates these products
as medical devices. Medicis offers all three of these products in Canada, and
began offering RESTYLANE® in the United States on January 6, 2004.
PERLANE® and RESTYLANE FINE LINES  have
not yet been approved by the FDA for use in the United States. We acquired the
exclusive U.S. and Canadian rights to these dermal restorative products from
Q-Med through a license agreement. 4




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PRODUCTS IN DEVELOPMENT We have developed and obtained rights to pharmaceutical agents in various
stages of development. We have a variety of products under development, ranging
from new products to existing product line extensions and reformulations of
existing products. Our 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. Over the
next four years, our objective is to launch one new product annually through
our research and development efforts. As a result of our increasing financial
strength, we have begun adding long-term projects to our development pipeline
and may add longer-term projects with inherently greater risk in the future.
Historically, we have supplemented our research and development efforts by
entering into research and development agreements with other pharmaceutical and
biotechnology companies. Our research and development costs for sponsored and unreimbursed
co-sponsored pharmaceutical projects for fiscal 2004, 2003 and 2002 were $16.5
million, $29.6 million and $15.1 million, respectively. Research and
development costs for fiscal 2004 include $2.4 million paid to Dow
Pharmaceutical Services, Inc. (Dow) for the development and commercialization
of a patented dermatologic product, under an agreement that we entered into in
September 2002. Research and development costs for fiscal 2003 include $14.2
million paid to Dow under this agreement and $6.0 million paid to aaiPharma,
Inc. (aaiPharma) for a development milestone payment under an agreement that
we entered into in June 2002 for the development, commercialization and license
of a key dermatologic product. Research and development costs for fiscal 2002
include $7.7 million paid to aaiPharma under this agreement. In addition to
the payments made during fiscal 2004, 2003 and 2002, the Dow and aaiPharma
agreements include potential future payments due to Dow and aaiPharma upon the
successful completion of various development milestones. On July 15, 2004, we entered into an exclusive license agreement with
Q-Med to market, distribute, sell and commercialize in the United States and
Canada Q-Meds product currently known as SubQ. Q-Med will have the
exclusive right to manufacture SubQ for Medicis. SubQ is not approved
currently for use in the United States and Canada. Under the terms of the
agreement, Medicis Aesthetics Holdings Inc., a wholly owned subsidiary of
Medicis, will license SubQ for approximately $80 million, due as follows:
approximately $30 million upon closing of the transaction, which was recorded
as research and development expense during the first quarter of fiscal 2005;
approximately $10 million upon completion of certain clinical milestones;
approximately $20 million upon the satisfaction of certain defined regulatory
milestones; and approximately $20 million upon U.S. launch of SubQ. We
also will make additional milestone payments to Q-Med upon the achievement of
certain commercial milestones. SubQ is comprised of the same NASHA
substance as RESTYLANE®, PERLANE® and RESTYLANE FINE LINES with a
larger gel particle size and is understood to have patent protection until at
least 2015. SALES AND MARKETING Our combined dedicated sales force, consisting of 139 employees as of June
30, 2004, focuses on high prescribing dermatologists, plastic surgeons and
podiatrists. Since a relatively small number of physicians are responsible for
writing a majority of prescriptions and performing dermal aesthetic procedures,
we believe that the size of our sales force is appropriate to reach our target
physicians. Our dermatology and podiatric sales force consists of 102
employees who regularly call on approximately 5,000 dermatologists and 3,000
podiatrists. Our dermal aesthetic sales force consists of 37 employees who
regularly call on leading plastic surgeons and aesthetic dermatologists. We
also have four national account managers who regularly call on managed care
organizations, large retail chains, formularies and related organizations. We cultivate relationships of trust and confidence with the high
prescribing dermatologists and podiatrists and the leading plastic surgeons in
the U.S. We use a variety of marketing techniques to promote our products
including sampling, journal advertising, promotional materials, specialty
publications, coupons, money-back or product replacement guarantees,
educational conferences and informational websites. We believe we have created an attractive incentive program for our sales
force that is based upon goals in prescription growth and market share
achievement. 5




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WAREHOUSING AND DISTRIBUTION We utilize an independent national warehousing corporation to store and
distribute our products from primarily two regional warehouses in Nevada and
Georgia, as well as an additional warehouse in Maryland. Upon the receipt of a
purchase order through electronic data input (EDI), phone, mail or facsimile,
the order is processed into our inventory systems. The order is transmitted
electronically to the appropriate warehouse for picking and packing, with
shipment to the customer occurring within 24 hours. Upon shipment, the
warehouse sends back to us via EDI the necessary information to automatically
process the invoice in a timely manner. CUSTOMERS Our customers include certain of the nations leading wholesale
pharmaceutical distributors, such as AmerisourceBergen Corporation
(AmerisourceBergen), Cardinal Health, Inc. (Cardinal), McKesson Corporation
(McKesson), Quality King Distributors (Quality King) and other major drug
chains. During the last three fiscal years, these customers accounted for the
following portions of our net revenues: Fiscal 2004
    
    Fiscal 2003
    
    Fiscal 2002McKesson
    
    
    36.9
    %
    
    
    20.2
    %
    
    
    19.4
    %Cardinal
    
    
    23.8
    %
    
    
    25.4
    %
    
    
    22.4
    %Quality King
    
    
    *
    
    
    
    17.0
    %
    
    
    26.7
    %AmerisourceBergen
    
    
    *
    
    
    
    15.5
    %
    
    
    11.1
    %
 * less than 10% McKesson is our sole distributor of our RESTYLANE® product, which was
launched in January 2004. MANUFACTURING We currently outsource all of our manufacturing needs, and we are required
by the FDA to contract only with manufacturers that comply with current Good
Manufacturing Practices (cGMP) regulations and other applicable laws and
regulations. Typically our manufacturing contracts are short-term. We review
our manufacturing arrangements on a regular basis and assess the viability of
alternative manufacturers if our current manufacturers are unable to fulfill
our needs. Patheon, Inc. (Patheon) manufactures the capsule form of our DYNACIN®
branded products under a supply agreement that automatically renews on an
annual basis. Par Pharmaceutical, Inc. (Par) manufactures the tablet form of
our DYNACIN® branded products in accordance with a supply agreement that
expires in June 2012. Our PLEXION® and TRIAZ® branded products are manufactured by Contract
Pharmaceuticals Limited pursuant to a manufacturing agreement that
automatically renews on an annual basis. Our LOPROX® cream and gel branded products are manufactured by Aventis
S.A. in accordance with a supply agreement that renews automatically on an
annual basis. Our LOPROX® TS product is manufactured by DPT Lakewood on a
purchase order basis. Our LOPROX® shampoo branded product is manufactured by
Patheon under a supply agreement that automatically renews on an annual basis. Our OMNICEF® branded product, which we promote through a license
agreement with Abbott, is manufactured by Abbott. The license agreement
expires in 2013. Our RESTYLANE® branded product is manufactured by Q-Med pursuant to a
long-term supply agreement that expires after 2013, at the earliest. 6




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LICENSE AND ROYALTY AGREEMENTS Pursuant to license agreements with third parties, we have acquired rights
to manufacture, use or market certain of our existing products, as well as many
of our proposed products and technologies. Such agreements typically contain
provisions requiring us to use our best efforts or otherwise exercise diligence
in pursuing market development for such products in order to maintain the
rights granted under the agreements and may be canceled upon our failure to
perform our payment or other obligations. In addition, we have licensed certain
rights to manufacture, use and sell certain of our technologies outside the
United States and Canada to various licensees. TRADEMARKS, PATENTS, AND PROPRIETARY RIGHTS We believe that trademark protection is an important part of establishing
product and brand recognition. We own a number of registered trademarks and
trademark applications and have acquired the rights to several trademarks by
license. U.S. 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. We have obtained a number of patents covering key aspects of certain of
our products, including a U.S. patent expiring in October 2015 covering various
formulations of TRIAZ® and a U.S. patent expiring in 2015 covering
RESTYLANE®. We have two patent applications pending related to our LOPROX®
gel and shampoo formulations. We are also pursuing several other U.S. and
foreign patent applications. We rely and expect to continue to rely upon unpatented proprietary
know-how and technological innovation in the development and manufacture of
many of our principal products. Our policy is to require all our employees,
consultants and advisors to enter into confidentiality agreements with us. COMPETITION The pharmaceutical and dermal aesthetics industries are characterized by
intense competition, rapid product development and technological change.
Competition is intense among manufacturers of prescription pharmaceuticals and
dermal injection products, such as for our core brands. Many of our 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 us.
Additionally, many of our present and potential competitors have research and
development capabilities that may allow them to develop new or improved
products that may compete with our product lines. Our products could be
rendered obsolete or made uneconomical by the development of new products to
treat the conditions addressed by our products, technological advances
affecting the cost of production, or marketing or pricing actions by one or
more of our competitors. Each of our products competes for a share of the
existing market with numerous products that have become standard treatments
recommended or prescribed by dermatologists and podiatrists and administered by
plastic surgeons and aesthetic dermatologists. Several of our core prescription brands compete or may compete in the near
future 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, making
branded products less attractive, from a cost perspective, to buyers. GOVERNMENT REGULATION The manufacture and sale of cosmetics, drugs and medical devices are
subject to regulation principally by the FDA and state and local authorities in
the United States, and by comparable agencies in certain foreign countries.
The Federal Trade Commission (FTC) and state and local authorities regulate
the advertising of over-the-counter drugs and cosmetics. The Food and Drug Act
and the regulations promulgated thereunder, and other federal and state
statutes and regulations, govern, among other things, the testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, approval, advertising
and promotion of our products. 7




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RESTYLANE® is a medical device intended for human use and is subject to
regulation by the FDA in the United States. Unless an exemption applies, each
medical device we market in the U.S. must have a Premarket Approval Application
(PMA) in accordance with the Federal Food, Drug, and Cosmetic Act, as
amended, or a 510(k) clearance (a demonstration that the new device is
substantially equivalent to a device already on the market). FDA regulations
generally require reasonable assurance of safety and effectiveness prior to
marketing, including safety data obtained under approved clinical protocols and
require compliance with good manufacturing practices (GMPs), as verified by
detailed FDA inspections of manufacturing facilities. These regulations also
require reporting of alleged product defects to the FDA. FDA regulations
divide medical devices into three classes. Class I devices are subject to
general controls that require compliance with device establishment
registration, product listing, labeling, GMPs and other general requirements.
Class II devices are subject to special controls in addition to general
controls. Class III devices are subject to the most extensive regulation and
in most cases require submission to the FDA of a PMA application that includes
data supporting the safety and effectiveness of the device. Periodic reports
must be submitted to the FDA, including any descriptions of any adverse events
reported. RESTYLANE® is regulated as a Class III medical device.
RESTYLANE® has been approved by the FDA under a PMA. 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 new drug may be marketed in the
United States include (i) preclinical laboratory and animal testing, (ii)
submission to the FDA of an Investigational New Drug (or IND) application,
which must become effective before clinical trials may commence, (iii) adequate
and well-controlled clinical trials to establish the safety and efficacy of the
drug, (iv) submission to the FDA of a New Drug Application (or NDA) and (v)
FDA approval of the NDA prior to any commercial sale or shipment of the drug.
In addition to obtaining FDA approval for each product, each domestic
drug-manufacturing establishment must be registered with, and approved by, the
FDA. Preclinical testing is generally conducted on 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 application, 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 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
to provide sufficient 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 that 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 over-the-counter drugs are exempt
from the FDAs premarketing approval requirements. In 1972, the FDA instituted
the ongoing over-the-counter Drug Review to evaluate the safety and
effectiveness of over-the-counter drug ingredients then in the market. Through
this process, the FDA issues monographs that set forth the specific active
ingredients, dosages, indications and labeling statements for over-the-counter
drug ingredients that the FDA will consider generally recognized as safe and
effective and therefore not subject to premarket approval. Over-the-counter
drug ingredients are classified by the FDA in one of three categories: Category
I ingredients which are deemed safe and effective for over-the-counter use;
Category II ingredients which are deemed not generally recognized as safe and
effective for over-the-counter use; and Category III ingredients which are
deemed possibly safe and effective with studies ongoing. Based upon the
results of these ongoing studies, the FDA may reclassify all Category III
ingredients as Category I or Category II ingredients. For certain categories
of over-the-counter drugs not yet subject to a final monograph, the FDA usually
permits such drugs to continue to be marketed until a final monograph becomes
effective, unless the drug will pose a potential health hazard to consumers.
Drugs subject to final monographs, as well as drugs that are subject only to
proposed monographs, are subject to various FDA regulations concerning, for
example, cGMP, general and specific over-the-counter labeling requirements and
prohibitions against promotion for conditions other than those stated in the
labeling. Over-the-counter drug 8




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manufacturing facilities are subject to FDA inspection, and failure to comply
with applicable regulatory requirements may lead to administrative or
judicially imposed penalties. Each of the active ingredients in LOPROX® and OMNICEF® have been
approved by the FDA under an NDA. The active ingredient in DYNACIN® has been
approved by the FDA under an ANDA. The active ingredient in the TRIAZ®
products has been classified as a Category III ingredient under a tentative
final FDA monograph for over-the-counter use in treatment of labeled
conditions. The FDA has requested, and a task force of the Non-Prescription
Drug Manufacturers Association (or NDMA), a trade association of
over-the-counter drug manufacturers, has undertaken further studies to confirm
that benzoyl peroxide, an active ingredient in the TRIAZ® products, is not a
tumor promoter when tested in conjunction with UV light exposure. The TRIAZ®
products, which we sell on a prescription basis, have the same ingredients at
the same dosage levels as the over-the-counter products. When the FDA issues
the final monograph, we may be required by the FDA to sell TRIAZ® as an
over-the-counter drug unless we file an NDA covering such product. There can
be no assurance as to the results of these studies or any FDA action to
reclassify benzoyl peroxide. In addition, there can be no assurance that
adverse test results would not result in withdrawal of TRIAZ® 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 us and could
have a material adverse effect on our business, financial condition and results
of operations. Our TRIAZ® branded products must meet the composition and labeling
requirements established by the FDA for products containing their respective
basic ingredients. We believe 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. Our PLEXION®
branded products, which contain the active ingredients sodium sulfacetamide and
sulfur, are marketed under the FDA compliance policy entitled Marketed New
Drugs without Approved NDAs or ANDAs. We believe that certain of our products, as they are promoted and intended
by us for use, are exempt from being considered new drugs based upon the
introduction date 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. If the FDA were to do so, we may be required to seek FDA
approval for these products, market these products as over-the-counter products
or withdraw such products from the market. We believe that these products are
subject to regulations governing product safety, use of ingredients, labeling,
promotion and manufacturing methods. We also will be subject to foreign regulatory authorities governing
clinical trials and pharmaceutical sales for products we seek to market outside
the United States. Whether or not FDA approval has been obtained, approval of
a product by the comparable regulatory authorities of foreign countries must be
obtained prior to the commencement of marketing the product in those countries.
The approval process varies from country to country, the approval process time
required may be longer or shorter than that required for FDA approval, and any
foreign regulatory agency may refuse to approve any product we submit for
review. EMPLOYEES At June 30, 2004, we had 319 full-time employees. No employees are
subject to a collective bargaining agreement. We believe our relationship with
our employees is good. AVAILABLE INFORMATION We make available free of charge on or through our Internet website,
www.medicis.com, our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to those reports, if any,
filed or furnished pursuant to Section 13(a) of 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after they are
electronically filed with, or furnished to, the Securities and Exchange
Commission. We also make available free of charge on or through our website
our Business Code of Conduct and Ethics, Corporate Governance Guidelines,
Nominating and Corporate Governance Committee Charter, Compensation Committee
Charter and Audit Committee Charter. The information contained on our website
is not intended to be incorporated into this annual report on Form 10-K. 9




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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS Our discussion and analysis in this report, in other reports that we file
with the Securities and Exchange Commission, in our press releases and in
public statements of our officers and corporate spokespersons contain
forward-looking statements. Forward-looking statements give our current
expectations or forecasts of future events. You can identify these statements
by the fact that they do not relate strictly to historical or current events.
They use words such as anticipate, estimate, expect, intend, will,
plan, believe and other words of similar meaning in connection with
discussion of future operating or financial performance. These include
statements relating to future actions, prospective products or product
approvals, future performance or results of current and anticipated products,
sales efforts, expenses, the outcome of contingencies such as legal proceedings
and financial results. Forward-looking statements may turn out to be wrong. They can be affected
by inaccurate assumptions or by known or unknown risks and uncertainties. Many
factors mentioned in this report  for example, governmental regulation and
competition in our industry  will be important in determining future results.
No forward-looking statement can be guaranteed, and actual results may vary
materially from those anticipated in any forward-looking statement. Medicis undertakes no obligation to update any forward-looking statement.
We provide the following discussion of risks and uncertainties relevant to our
business. These are factors that we think could cause our actual results to
differ materially from expected and historical results. Our business,
financial condition or results of operation could also be adversely affected by
other factors besides those listed here. However, these are the risks our
management currently believes are material. RISKS RELATED TO OUR BUSINESS We Derive A Majority Of Our Prescription Volume From Our Core Prescription
Products, And Any Factor Adversely Affecting The Prescription Volume Related To
These Products Could Harm Our Business, Financial Condition And Results Of
Operations We believe that the prescription volume of our core prescription products
and sales of our dermal aesthetic product, RESTYLANE®, which we began selling
in the United States on January 6, 2004, will constitute the majority of our
sales for the foreseeable future. Accordingly, any factor adversely affecting
our sales related to these products, individually or collectively, could harm
our business, financial condition and results of operations. Many of our core
prescription products, including DYNACIN® and LOPROX®, are subject to
generic competition or may be in the near future. On July 18, 2004, Glades
Pharmaceuticals, LLC, a wholly owned subsidiary of Stiefel Laboratories, Inc.,
announced the launch of myracT (minocycline hydrochloride tablets, USP), as a
branded pharmaceutical product. MyracT tablets is a prescription product that
competes directly with our DYNACIN® tablet products. On August 6,
2004, the FDA approved an ANDA submitted by Altana, Inc. for its ciclopirox
topical suspension, a generic version of our LOPROX® TS product.
Each of our core products could be rendered obsolete or uneconomical by
regulatory or competitive changes. Sales related to our core prescription
products and RESTYLANE® could also be adversely affected by other factors,
including:  
    
    manufacturing or supply interruptions;  
    
    the development of new competitive pharmaceuticals and
technological advances to treat the conditions addressed by our core
products;  
    
    marketing or pricing actions by one or more of our competitors;  
    
    regulatory action by the FDA and other government regulatory agencies;  
    
    changes in the prescribing or procedural practices of
dermatologists, plastic surgeons and / or podiatrists;  
    
    changes in the reimbursement or substitution policies of third-party payors or retail pharmacies;  
    
    product liability claims;  
    
    the outcome of disputes relating to trademarks, patents,
license agreements and other rights; and  
    
    restrictions on travel affecting the ability of our sales
force to market to prescribing physicians and plastic surgeons in
person. 10




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We Cannot Assure You That Our Dermal Aesthetic Enhancement Products Will
Maintain Widespread Acceptance We cannot assure you that we will be able to maintain market acceptance of
our dermal aesthetic enhancement products. This market is very competitive and
some of our competitors have been competing in this market for a significant
period of time. Additionally, we expect that new competitors will be entering
this market. If we are unable to anticipate, identify or react to competitive
products or if changing consumer preferences in the dermal aesthetic
enhancement marketplace shift to other treatments for the treatment of fine
lines and wrinkles, shaping facial contours and correcting deep facial folds,
we may experience difficulties in maintaining market acceptance or may
experience a decline in demand for RESTYLANE®, PERLANE® and RESTYLANE FINE
LINES. In addition, the popular media may produce negative reports on the
efficacy, safety or side effects of these products, which could negatively
impact consumer perceptions of the product and negatively influence market
acceptance or cause a decline in demand. We cannot assure you that consumers
will prefer RESTYLANE®, PERLANE® and RESTYLANE FINE LINES over other
treatment options, or that we will be able to respond in a timely manner to
changes in consumer preferences. If Q-Med Is Unable To Protect Its Intellectual Property And Proprietary Rights
With Respect To Our Dermal Aesthetic Enhancement Products, Our Business Could
Suffer RESTYLANE®, PERLANE® and RESTYLANE FINE LINES currently have
patent protection in the U.S. until 2015, and the exclusivity period of the
license granted to us by Q-Med ends when the last patent covering the products
expires. If the validity or enforceability of these patents is successfully
challenged, the cost to our Company could be significant and our business may
be harmed. If any such challenge is successful, Q-Med may be unable to supply
products to us. We may be unable to market, distribute and commercialize the
products or it may no longer be profitable for us to do so. On June 21, 2004 the United States International Trade Commission (ITC)
instituted an investigation pursuant to Section 337 of the Tariff Act of 1930,
as amended, at the request of Inamed Corporation (Inamed). The investigation
identifies Medicis Aesthetics, Inc., a wholly owned subsidiary of Medicis, and
Q-Med as Respondents in the investigation regarding Inameds allegation of
infringement of its U.S. Patent No. 4,803,075, dated February 7, 1989, by the
dermal filler, RESTYLANE®. Inamed has filed a parallel infringement action
against Medicis and Q-Med in the U.S. District Court of the Southern District
of California regarding the same patent. This action has been stayed pending
the outcome of the ITC investigation. After a preliminary investigation
regarding the above complaints, it is our belief that we have meritorious
defenses as to the infringement claims and as to the validity of the Inamed
patent. Our Operating Results And Financial Condition May Fluctuate Our operating results and financial condition may fluctuate from quarter
to quarter and year to year, depending upon the relative timing of events or
uncertainties which may arise. The following events or occurrences, among
others, could cause fluctuations in our financial performance from period to
period:  
    
    changes in the amount we spend to develop, acquire or license
new products, technologies or businesses;  
    
    untimely contingent research and development payments under
our third-party product development agreements;  
    
    changes in the amount we spend to promote our products;  
    
    delays between our expenditures to acquire new products,
technologies or businesses and the generation of revenues from those
acquired products, technologies or businesses;  
    
    changes in treatment practices of physicians that currently
prescribe our products;  
    
    changes in reimbursement policies of health plans and other
similar health insurers, including changes that affect newly
developed or newly acquired products;  
    
    increases in the cost of raw materials used to manufacture
our products; 11




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
    
    manufacturing and supply interruptions, including failure to
comply with manufacturing specifications;  
    
    development of new competitive products by others;  
    
    the mix of products that we sell during any time period;  
    
    our responses to price competition;  
    
    expenditures as a result of legal actions;  
    
    market acceptance of our products;  
    
    the impairment and write-down of goodwill or other intangible assets;  
    
    implementation of new or revised accounting or tax rules or policies;  
    
    disposition of core products, technologies and other rights;  
    
    termination or expiration of, or the outcome of disputes
relating to, trademarks, patents, license agreements and other
rights;  
    
    increases in insurance rates for existing products and the
cost of insurance for new products;  
    
    general economic and industry conditions, including changes
in interest rates affecting returns on cash balances and investments
that affect customer demand;  
    
    seasonality of demand for our products;  
    
    our level of research and development activities;  
    
    new accounting standards and/or changes to existing
accounting standards that would have a material effect on our
consolidated financial position, results of operations or cash
flows;  
    
    costs and outcomes of any tax audits or any litigation
involving intellectual property, customers or other issues; and  
    
    timing of revenue recognition related to licensing agreements
and/or strategic collaborations. We May Not Be Able To Collect All Scheduled License Payments From BioMarin As part of our transaction with BioMarin Pharmaceutical Inc. (BioMarin)
discussed in Note 9 to our consolidated financial statements, BioMarin will
make license payments to us of approximately $12.5 million per quarter for four
quarters beginning in July 2004; approximately $2.5 million per quarter for the
subsequent four quarters beginning in July 2005; approximately $2 million per
quarter for the subsequent eight quarters beginning in July 2006; and
approximately $1.75 million per quarter for the last four quarters of the
five-year period beginning in July 2008. Pursuant to the terms of the
transaction, BioMarin is required to deposit $25 million of cash and $25
million of BioMarin common stock in escrow until the last of the four quarterly
$12.5 million payments beginning July 2004 have been made. While we did
receive the first quarterly $12.5 million license payment during August 2004,
we cannot give any assurances as to BioMarins ability to make payments to us
above and beyond the escrow amount, or the future value of the BioMarin common
stock held in escrow. We Depend Upon Our Key Personnel And Our Ability To Attract, Train, And Retain
Employees Our success depends significantly on the continued individual and
collective contributions of our senior management team. We have not entered
into employment agreements with any of our key managers, with the exception of
our Chairman and Chief Executive Officer. The loss of the services of any
member of our senior management or the inability to hire and retain experienced
management personnel could adversely affect our ability to execute our business
plan and harm our operating results. In addition, our future success depends
on our ability to hire, train and retain skilled employees. Competition for
these employees is intense. Our Continued Growth Depends Upon Our Ability To Develop New Products We have internally developed potential pharmaceutical compounds and
agents. We also have acquired the rights to certain potential compounds and
agents in various stages of development. We currently have a variety of new
products in various stages of research and development and are working on
possible improvements, extensions and reformulations of some existing products.
These research and development activities, as well as the clinical testing and
regulatory approval process, which must be completed before commercial
quantities of these developments can be sold, will require significant
commitments of personnel and financial resources. Due to the limited financial
resources available for research and development, we cannot assure you that we
will be able to develop a product or technology in a timely manner, or at all.
Delays in the research, development, testing or 12




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approval processes will cause a corresponding delay in revenue generation from
those products. Regardless of whether they are ever released to the market,
the expense of such processes will have already been incurred. We reevaluate our research and development efforts regularly to assess
whether our efforts to develop a particular product or technology are
progressing at a rate that justifies our continued expenditures. On the basis
of these reevaluations, we have abandoned in the past, and may abandon in the
future, our efforts on a particular product or technology. Products that we
research or develop may not be successfully commercialized. If we fail to take
a product or technology from the development stage to market on a timely basis,
we may incur significant expenses without a near-term financial return. We have in the past, and may in the future, supplement our internal
research and development by entering into research and development agreements
with other pharmaceutical companies. We may, upon entering into such
agreements, be required to make significant up-front payments to fund the
projects. We cannot be sure, however, that we will be able to locate adequate
research partners or that supplemental research will be available on terms
acceptable to us in the future. If we are unable to enter into additional
research partnership arrangements, we may incur additional costs to continue
research and development internally or abandon certain projects. Even if we
are able to enter into collaborations, we cannot assure you that these
arrangements will result in successful product development or
commercialization. In March 2003, we completed our acquisition of the rights to market,
distribute and commercialize the dermal filler product lines known as
RESTYLANE®, PERLANE® and RESTYLANE FINE LINES in the U.S. and Canada.
The products are approved for sale in Canada, and RESTYLANE® was approved for
use in the U.S. on December 12, 2003. We cannot assure you that the FDA will
approve PERLANE® and RESTYLANE FINE LINES in a timely fashion, or for the
same indications as approved in other countries, or at all. We May Not Be Able To Identify And Acquire Products, Technologies And
Businesses On Acceptable Terms, If At All, Which May Constrain Our Growth Our strategy for continued growth includes the acquisition of products,
technologies and businesses. These acquisitions could involve acquiring other
pharmaceutical companies assets, products or technologies. In addition, we
may seek to obtain licenses or other rights to develop, manufacture and
distribute products. We cannot be certain that we will be able to identify
suitable acquisition or licensing candidates or if any will be available on
acceptable terms. Other pharmaceutical companies, with greater financial,
marketing and sales resources than we have, have also tried to grow through
similar acquisition and licensing strategies. Because of their greater
resources, our competitors may be able to offer better terms for an acquisition
or license than we can offer, or they may be able to demonstrate a greater
ability to market licensed products. We Could Experience Difficulties In Obtaining Supplies of RESTYLANE®,
PERLANE® And RESTYLANE FINE LINES The manufacturing process to create bulk non-animal stabilized hyaluronic
acid necessary to produce RESTYLANE®, PERLANE® and RESTYLANE FINE LINES
is technically complex and requires significant lead-time. Any failure by us
to accurately forecast demand for finished product could result in an
interruption in the supply of RESTYLANE®, PERLANE® and RESTYLANE FINE
LINES and a resulting decrease in sales of the products. We depend exclusively on Q-Med for our supply of RESTYLANE®, PERLANE®
and RESTYLANE FINE LINES. There are currently no alternative suppliers of
these products. Q-Med has committed to supply RESTYLANE® to us under a
perpetual license that is subject to customary conditions and our delivery of
specified milestone payments. Q-Med manufactures RESTYLANE®, PERLANE® and
RESTYLANE FINE LINES at its facility in Uppsala, Sweden. We cannot be
certain that Q-Med will be able to meet our current or future supply
requirements. Any impairment of Q-Meds manufacturing capacities could
significantly affect our inventories and our supply of products available for
sale. 13




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We Depend On Licenses From Others, And Any Loss Of Such Licenses Could Harm Our
Business, Market Share And Profitability We have acquired the rights to manufacture, use and market certain
products, including certain of our core products. We also expect to continue
to obtain licenses for other products and technologies in the future. Our
license agreements generally require us to develop a market for the licensed
products. If we do not develop these markets within specified time frames, the
licensors may be entitled to terminate these license agreements. We may fail to fulfill our obligations under any particular license
agreement for various reasons, including insufficient resources to adequately
develop and market a product, and lack of market development despite our
diligence and lack of product acceptance. Our failure to fulfill our
obligations could result in the loss of our rights under a license agreement. Our inability to continue the distribution of any particular licensed
product could harm our business, market share and profitability. Also, certain
products we license are used in connection with other products we own or
license. A loss of a license in such circumstances could materially harm our
ability to market and distribute these other products. Our growth and acquisition strategy depends upon the successful
integration of licensed products with our existing products. Therefore, any
loss, limitation or flaw in a licensed product could impair our ability to
market and sell our products, delay new product development and introduction,
and harm our reputation. These problems, individually or together, could harm
our business and results of operation. We Depend On A Limited Number Of Customers, And If We Lose Any Of Them, Our
Business Could Be Harmed Our customers include some of the nations leading wholesale
pharmaceutical distributors, such as AmerisourceBergen, Cardinal, McKesson,
Quality King, and major drug chains. During fiscal 2004, McKesson and Cardinal
accounted for 36.9%, and 23.8%, respectively, of our net revenues. The loss of
any of these customers accounts or a material reduction in their purchases
could harm our business, financial condition or results of operations. In
addition, we may face pricing pressure from our customers. The distribution network for pharmaceutical products has, in recent years,
been subject to increasing consolidation. As a result, a few large wholesale
distributors control a significant share of the market. In addition, the
number of independent drug stores and small chains has decreased as retail
consolidation has occurred. Further consolidation among, or any financial
difficulties of, distributors or retailers could result in the combination or
elimination of warehouses which may result in product returns to our company,
cause a reduction in the inventory levels of distributors and retailers, or
otherwise result in reductions in purchases of our products, any of which could
harm our business, financial condition and results of operations. We Rely On Others To Manufacture Our Products Currently, we outsource our entire product manufacturing needs. Typically,
our manufacturing contracts are short-term. We are dependent upon renewing
agreements with our existing manufacturers or finding replacement manufacturers
to satisfy our requirements. As a result, we cannot be certain that
manufacturing sources will continue to be available or that we can continue to
outsource the manufacturing of our products on reasonable or acceptable terms. The underlying cost to us for manufacturing our products is established in
our agreements with these outside manufacturers. Because of the short-term
nature of these agreements, our expenses for manufacturing are not fixed and
could change from contract to contract. If the cost of production increases,
our gross margins could be negatively affected. In addition, we rely on outside manufacturers to provide us with an
adequate and reliable supply of our products on a timely basis. Loss of a
supplier or any difficulties that arise in the supply chain could significantly 14




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affect our inventories and supply of products available for sale. We do
not have alternative sources of supply for all of our products. If a primary
supplier of any of our core products is unable to fulfill our requirements for
any reason, it could reduce our sales, margins and market share, as well as
harm our overall business and financial results. If we are unable to supply
sufficient amounts of our products on a timely basis, our revenues and market
share could decrease and, correspondingly, our profitability could decrease. Under several exclusive supply agreements, with certain exceptions, we
must purchase most of our product supply from specific manufacturers. If any
of these exclusive manufacturer or supplier relationships were terminated, we
would be forced to find a replacement manufacturer or supplier. The FDA
requires that all manufacturers used by pharmaceutical companies comply with
the FDAs regulations, including the cGMP regulations applicable to
manufacturing processes. The cGMP validation of a new facility and the
approval of that manufacturer for a new drug product may take a year or more
before manufacture can begin at the facility. Delays in obtaining FDA
validation of a replacement manufacturing facility could cause an interruption
in the supply of our products. Although we have business interruption insurance
covering the loss of income for up to 12 months, which may mitigate the harm to
us from the interruption of the manufacturing of our largest selling products
caused by certain events, the loss of a manufacturer could still cause a
reduction in our sales, margins and market share, as well as harm our overall
business and financial results. Our Reliance On Third-Party Manufacturers And Suppliers Can Be Disruptive To
Our Inventory Supply We and the manufacturers of our products rely on suppliers of raw
materials used in the production of our products. Some of these materials are
available from only one source and others may become available from only one
source. Any disruption in the supply of raw materials or an increase in the
cost of raw materials to our manufacturers could have a significant effect on
their ability to supply us with our products. We try to maintain inventory levels that are no greater than necessary to
meet our current projections. Any interruption in the supply of finished
products could hinder our ability to timely distribute finished products. If
we are unable to obtain adequate product supplies to satisfy our customers
orders, we may lose those orders and our customers may cancel other orders and
stock and sell competing products. This, in turn, could cause a loss of our
market share and reduce our revenues. Supply Interruptions May Disrupt Our Inventory Levels And The Availability Of
Our Products Numerous factors could cause interruptions in the supply of our finished
products, including:  
    
    timing, scheduling and prioritization of production by our contract manufacturers;  
    
    labor interruptions;  
    
    changes in our sources for manufacturing;  
    
    the timing and delivery of domestic and international shipments;  
    
    our failure to locate and obtain replacement manufacturers as needed on a timely basis; and  
    
    conditions affecting the cost and availability of raw materials. We estimate customer demand for our prescription products primarily
through use of third party syndicated data sources which track prescriptions
written by health care providers and dispensed by licensed pharmacies. These
data are extrapolations from information provided only by certain pharmacies,
and are estimates of historical demand levels. We observe trends from these
data, and, coupled with certain proprietary information, prepare demand
forecasts that are the basis for purchase orders for finished and component
inventory from our third party manufacturers and suppliers. Our forecasts may
fail to accurately anticipate ultimate customer demand for products.
Overestimates of demand may result in excessive inventory production;
underestimates may result in inadequate supply of our products in channels of
distribution. We sell our products primarily to major wholesalers and retail pharmacy
chains. Consistent with pharmaceutical industry patterns, approximately 80% of
our revenues are derived from four major drug wholesale concerns. While we
attempt to estimate inventory levels of our products at our major wholesale
customers, using historical prescription information and historical purchase
patterns, this process is inherently imprecise. Rarely do 15




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wholesale customers provide us complete inventory levels at regional
distribution centers, or within their national distribution systems. We rely
wholly upon our wholesale and drug chain customers to effect the distribution
allocation of our products. There can be no assurance that these customers
will adequately manage their local and regional inventories to avoid spot
outages. Based upon historically consistent purchasing patterns of our major
wholesale customers, we believe our estimates of trade inventory levels of our
products are reasonable. We further believe that inventories of our products
among wholesale customers, taken as a whole, are similar to those of other
specialty pharmaceutical companies, and that our trade practices, which
periodically involve volume discounts and early payment discounts, are typical
of the industry. We periodically offer promotions to wholesale and chain drugstore
customers to encourage dispensing of our products, consistent with
prescriptions written by licensed health care providers. Because many of our
products compete in multi-source markets, it is important for us to ensure the
licensed health care providers dispensing instructions are fulfilled with our
branded products and are not substituted with a generic product or another
therapeutic alternative product which may be contrary to the licensed health
care providers recommended prescribed Medicis brand. We believe that a
critical component of our brand protection program is maintenance of full
product availability at drugstore and wholesale customers. We believe such
availability strongly reduces the probability of local and regional product
substitutions, shortages and backorders, which could result in lost sales. We
expect to continue providing favorable terms to wholesale and retail drug chain
customers as may be necessary to ensure the fullest possible distribution of
our branded products within the pharmaceutical chain of commerce. We cannot control or influence greatly the purchasing patterns of
wholesale and retail drug chain customers. These are highly sophisticated
customers that purchase our products in a manner consistent with their industry
practices and, presumably, based upon their projected demand levels. Purchases
by any given customer, during any given period, may be above or below actual
prescription volumes of any of our products during the same period, resulting
in fluctuations in product inventory in the distribution channel. Fluctuations In Demand For Our Products Create Inventory Maintenance
Uncertainties As a result of customer buying patterns, a substantial portion of our
revenues has been recognized in the last month of each quarter. We schedule
our inventory purchases to meet anticipated customer demand. As a result,
relatively small delays in the receipt of manufactured products by us could
result in revenues being deferred or lost. Our operating expenses are based
upon anticipated sales levels, and a high percentage of our operating expenses
are relatively fixed in the short term. Consequently, variations in the timing
of revenue recognition could cause significant fluctuations in operating
results from period to period and may result in unanticipated periodic earnings
shortfalls or losses. Our Success Depends On Our Ability To Manage Our Growth We recently experienced a period of rapid growth from both acquisitions
and internal expansion of our operations. This growth has placed significant
demands on our human and financial resources. We must continue to improve our
operational, financial and management information controls and systems and
effectively motivate, train and manage our employees to properly manage this
growth. Even if these steps are taken, we cannot be sure that our recent
acquisitions will be assimilated successfully into our business operations. If
we do not manage this growth effectively, maintain the quality of our products
despite the demands on our resources and retain key personnel, our business
could be harmed. If We Are Unable To Secure And Protect Our Intellectual Property and
Proprietary Rights, Our Business Could Suffer We believe that the protection of our trademarks and service marks is an
important factor in product recognition and in our ability to maintain or
increase market share. If we do not adequately protect our rights in our
various trademarks and service marks from infringement, their value to us could
be lost or diminished. If the marks we use are found to infringe upon the
trademark or service mark of another company, we could be forced to stop using
those marks and, as a result, we could lose the value of those marks and could
be liable for damages caused by an infringement. 16




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The patents and patent applications in which we have an interest may be
challenged as to their validity or enforceability. Challenges may result in
potentially significant harm to our business. The cost of responding to these
challenges and the inherent costs to defend the validity of our patents,
including the prosecution of infringements and the related litigation, could be
substantial. Such litigation also could require a substantial commitment of our
managements time. We are pursuing several U.S. patent applications, although we cannot be
sure that any of these patents will ever be issued. We also have acquired
rights under certain patents and patent applications in connection with our
licenses to distribute products and by assignment of rights to patents and
patent applications from certain of our consultants and officers. These patents
and patent applications may be subject to claims of rights by third parties.
If there are conflicting claims to the same patent or patent application, we
may not prevail and, even if we do have some rights in a patent or patent
application, those rights may not be sufficient for the marketing and
distribution of products covered by the patent or patent application. The ownership of a patent or an interest in a patent does not always
provide significant protection. Others may independently develop similar
technologies or design around the patented aspects of our technology. We only
conduct patent searches to determine whether our products infringe upon any
existing patents when we think such searches are appropriate. As a result, the
products and technologies we currently market, and those we may market in the
future, may infringe on patents and other rights owned by others. If we are
unsuccessful in any challenge to the marketing and sale of our products or
technologies, we may be required to license the disputed rights, if the holder
of those rights is willing, or to cease marketing the challenged products, or
to modify our products to avoid infringing upon those rights. A claim or
finding of infringement regarding one of our products could harm our business,
financial condition and results of operations. The costs of responding to
infringement claims could be substantial and could require a substantial
commitment of our managements time. The expiration of patents may expose our
products to additional competition. We also rely upon trade secrets, unpatented proprietary know-how and
continuing technological innovation in developing and manufacturing many of our
core products. It is our policy to require all of our employees, consultants
and advisors to enter into confidentiality agreements prohibiting them from
taking or disclosing our proprietary information and technology. Nevertheless,
these agreements may not provide meaningful protection for our trade secrets
and proprietary know-how if they are used or disclosed. Despite all of the
precautions we may take, people who are not parties to confidentiality
agreements may obtain access to our trade secrets or know-how. In addition,
others may independently develop similar or equivalent trade secrets or
know-how. If We Become Subject To Product Liability Claims, Our Earnings And Financial
Condition Could Suffer We are exposed to risks of product liability claims from allegations that
our products resulted in adverse effects to the patient or others. These risks
exist even with respect to those products that are approved for commercial sale
by the FDA and manufactured in facilities licensed and regulated by the FDA. In addition to our desire to reduce the scope of our potential exposure to
these types of claims, many of our customers require us to maintain product
liability insurance as a condition of conducting business with us. We currently
carry product liability insurance in the amount of $50.0 million per claim and
$50.0 million in the aggregate on a claims-made basis. Nevertheless, this
insurance may not be sufficient to cover all claims made against us. We also
cannot be certain that our current coverage will continue to be available in
the future on reasonable terms, if at all. If we are liable for any product
liability claims in excess of our coverage or outside of our coverage, the cost
and expense of such liability could cause our earnings and financial condition
to suffer. We Selectively Outsource Certain Non-Sales And Non-Marketing Services, And
Cannot Assure You That We Will Be Able To Obtain Adequate Supplies Of Such
Services On Acceptable Terms To enable us to focus on our core marketing and sales activities, we
selectively outsource certain non-sales and non-marketing functions, such as
laboratory research, manufacturing and warehousing. As we expand our
activities in these areas, additional financial resources are expected to be
utilized. We typically do not enter into 17




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long-term manufacturing contracts with third party manufacturers. Whether or
not such contracts exist, we cannot assure you that we will be able to obtain
adequate supplies of such services or products in a timely fashion, on
acceptable terms, or at all. Our Reported Earnings Per Share May Be More Volatile Because Of The Conversion
Contingency Provision In Our Old Notes And New Notes In June 2002, we sold Contingent Convertible Senior Notes, due in 2032
(the Old Notes), in the amount of $400.0 million. In August 2003, we
exchanged approximately $230.8 million in principal of these Old Notes for
approximately $283.9 million of our Contingent Convertible Senior Notes due in
2033 (the New Notes). Included in the terms of the Old Notes and the New
Notes is a provision that allows the holders of the Old Notes and New Notes to
convert the Old Notes and New Notes into our Class A common stock during any
quarter commencing after June 30, 2002, and September 30, 2003, respectively,
if the closing sale price of our Class A common stock reaches certain milestone
thresholds. Unless this contingency is met, the shares underlying the
remaining Old Notes and New Notes are not included in the calculation of fully
diluted earnings per share. Should this contingency be met, earnings per share
would be expected to decrease as a result of the inclusion of the underlying
shares in the earnings per share calculation. Volatility in our stock price
could cause this condition to be met in one quarter and not in a subsequent
quarter, increasing the volatility of fully diluted earnings per share. During the quarters ended June 30, 2004, March 31, 2004 and December 31,
2003, the Old Notes met the criteria for the right of conversion into shares of
the Companys Class A common stock. This right of conversion of the holders of
Old Notes was triggered by the stock closing above $31.96 on 20 of the last 30
trading days and the last trading day of the quarters ending June 30, 2004,
March 31, 2004 and December 31, 2003. During these periods, the underlying
shares related to the Old Notes were included in fully diluted earnings per
share. We May Not Be Able To Repurchase The Old Notes And New Notes When Required On June 4, 2007, 2012 and 2017 and upon the occurrence of a change in
control, holders of the remaining Old Notes may require us to offer to
repurchase their Old Notes for cash. On June 4, 2008, 2013 and 2018 and upon
the occurrence of a change in control, holders of the New Notes may require us
to offer to repurchase their New Notes for cash. We may not have sufficient
funds at the time of any such events to make the required repurchases. The source of funds for any repurchase required as a result of any such
events will be our available cash or cash generated from operating activities
or other sources, including borrowings, sales of assets, sales of equity or
funds provided by a new controlling entity. We cannot assure you, however,
that sufficient funds will be available at the time of any such events to make
any required repurchases of the Notes tendered. Furthermore, the use of
available cash to fund the repurchase of the Old Notes or New Notes may impair
our ability to obtain additional financing in the future. RISKS RELATED TO OUR INDUSTRY The Growth Of Managed Care Organizations, Other Third-Party Reimbursement
Policies, State Regulatory Agencies And Retailer Fulfillment Policies May Harm
Our Pricing, Which May Reduce Our Market Share And Margins Our operating results and business success depend in large part on the
availability of adequate third-party payor reimbursement to patients for our
prescription-brand products. These third-party payors include governmental
entities such as Medicaid, private health insurers and managed care
organizations. Because of the size of the patient population covered by
managed care organizations, marketing of prescription drugs to them and the
pharmacy benefit managers that serve many of these organizations has become
important to our business. Managed care organizations and other third party payors try to negotiate
the pricing of medical services and products to control their costs. Managed
care organizations and pharmacy benefit managers typically develop formularies
to reduce their cost for medications. Formularies can be based on the prices
and therapeutic benefits of the available products. Due to their lower costs,
generic products are often favored. The breadth of the products 18




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covered by formularies varies considerably from one managed care
organization to another, and many formularies include alternative and
competitive products for treatment of particular medical conditions. Exclusion
of a product from a formulary can lead to its sharply reduced usage in the
managed care organization patient population. Payment or reimbursement of only
a portion of the cost of our prescription products could make our products less
attractive, from a net-cost perspective, to patients, suppliers and prescribing
physicians. We cannot be certain that the reimbursement policies of these
entities will be adequate for our branded pharmaceutical products to compete on
a price basis. If our products are not included within an adequate number of
formularies or adequate reimbursement levels are not provided, or if those
policies increasingly favor generic products, our market share and gross
margins could be harmed, as could our overall business and financial condition. Some of our products are not of a type generally eligible for
reimbursement. It is possible that products manufactured by others could
address the same effects as our products and be subject to reimbursement. If
this were the case, some of our products may be unable to compete on a price
basis. In addition, decisions by state regulatory agencies, including state
pharmacy boards, and/or retail pharmacies may require substitution of generic
for branded products, may prefer competitors products over our own, and may
impair our pricing and thereby constrain our market share and growth. Managed care initiatives to control costs have influenced primary-care
physicians to refer fewer patients to dermatologists and other specialists.
Further reductions in these referrals could reduce the size of our potential
market, and harm our business, financial condition and results of operation. We Are Subject To Extensive Governmental Regulation Pharmaceutical companies are subject to significant regulation by a number
of national, state and local agencies. The FDA administers requirements
covering testing, manufacturing, safety, effectiveness, labeling, storage,
record keeping, approval, sampling, advertising and promotion of our products.
In addition, the FTC and state and local authorities regulate the advertising
of over-the-counter drugs and cosmetics. Failure to comply with applicable
regulatory requirements could, among other things, result in:  
    
    fines;  
    
    changes to advertising;  
    
    suspensions of regulatory approvals of products;  
    
    product recalls;  
    
    delays in product distribution, marketing and sale; and  
    
    civil or criminal sanctions. Our prescription and over-the-counter products receive FDA review
regarding their safety and effectiveness. However, the FDA is permitted to
revisit and change its prior determinations. We cannot be sure that the FDA
will not change its position with regard to the safety or effectiveness of our
products. If the FDAs position changes, we may be required to change our
labeling or formulations or cease to manufacture and market the challenged
products. Even prior to any formal regulatory action, we could voluntarily
decide to cease distribution and sale or recall any of our products if concerns
about the safety or effectiveness develop. Before marketing any drug that is considered a new drug by the FDA, the
FDA must provide its approval of the product. All products which are
considered drugs which are not new drugs and that generally are recognized by
the FDA as safe and effective for use do not require the FDAs approval. We
believe that some of our products, as they are promoted and intended for use,
are exempt from treatment as new drugs and are not subject to approval by the
FDA. The FDA, however, could take a contrary position, and we could be
required to seek FDA approval of those products and the marketing of those
products. We could also be required to withdraw those products from the market. Sales representative activities may also be subject to the Voluntary
Compliance Guidance issued for pharmaceutical manufacturers by the Office of
Inspector General (OIG) of the Department of Health and Human Services. We
have established compliance program policies and training programs for our
sales force which we 19




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believe are appropriate. The OIG, however, could take a contrary position, and
we could be required to modify our sales representative activities. Obtaining FDA And Other Regulatory Approvals Is Time Consuming And Expensive The process of obtaining FDA and other regulatory approvals is time
consuming and expensive. Clinical trials are required and the marketing and
manufacturing of pharmaceutical products are subject to rigorous testing
procedures. We may not be able to obtain FDA approval to conduct clinical
trials or to manufacture or market any of the products we develop, acquire or
license on a timely basis or at all. Moreover, the costs to obtain approvals
could be considerable, and the failure to obtain or delays in obtaining an
approval could significantly harm our business performance and financial
results. Even if pre-marketing approval from the FDA is received, the FDA is
authorized to impose post-marketing requirements such as:  
    
    testing and surveillance to monitor the product and its
continued compliance with regulatory requirements;  
    
    submitting products for inspection and, if any inspection
reveals that the product is not in compliance, prohibiting the sale
of all products from the same lot;  
    
    suspending manufacturing;  
    
    switching status from prescription to over-the-counter drug;  
    
    recalling products; and  
    
    withdrawing marketing clearance. In their regulation of advertising, the FDA and FTC from time to time
issue correspondence to pharmaceutical companies alleging that some advertising
or promotional practices are false, misleading or deceptive. The FDA has the
power to impose a wide array of sanctions on companies for such advertising
practices, and the receipt of correspondence from the FDA alleging these
practices could result in the following:  
    
    incurring substantial expenses, including fines, penalties,
legal fees and costs to comply with the FDAs requirements;  
    
    changes in the methods of marketing and selling products;  
    
    taking FDA-mandated corrective action, which may include
placing advertisements or sending letters to physicians rescinding
previous advertisements or promotion; and  
    
    disruption in the distribution of products and loss of sales

until compliance with the FDAs position is obtained. In recent years, various legislative proposals have been offered in
Congress and in some state legislatures that include major changes in the
health care system. These proposals have included price or patient
reimbursement constraints on medicines, restrictions on access to certain
products, reimportation of products from Canada or other sources and mandatory
substitution of generic for branded products. We cannot predict the outcome of
such initiatives, and it is difficult to predict the future impact of the broad
and expanding legislative and regulatory requirements affecting us. We Face Significant Competition Within Our Industry The pharmaceutical and dermal aesthetics industries are highly
competitive. Competition in our industry occurs on a variety of fronts,
including:  
    
    developing and bringing new products to market before others;  
    
    developing new technologies to improve existing products;  
    
    developing new products to provide the same benefits as existing products at less cost; and  
    
    developing new products to provide benefits superior to those of existing products. Many of our competitors are large, well-established companies in the
fields of pharmaceuticals, chemicals, cosmetics and health care. Our
competitors include Aventis, Bristol-Myers Squibb, Allergan, Elan, Galderma,
GlaxoSmithKline, ICN Pharmaceuticals, Inamed, Johnson & Johnson, Pfizer,
Schering-Plough, Wyeth and others. 20




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Many of these companies have greater resources than we do to devote to
marketing, sales, research and development and acquisitions. As a result, they
have a greater ability to undertake more extensive research and development,
marketing and pricing policy programs. It is possible that our competitors may
develop new or improved products to treat the same conditions as our products
or make technological advances reducing their cost of production so that they
may engage in price competition through aggressive pricing policies to secure a
greater market share to our detriment. These competitors also may develop
products that make our current or future products obsolete. Any of these events
could significantly harm our business and financial results, including reducing
our market share and gross margins. We sell and distribute both prescription brands and over-the-counter
products. Each of these products competes with products produced by others to
treat the same conditions. Several of our prescription products compete with
generic pharmaceuticals, which claim to offer equivalent benefit at a lower
cost. In some cases, insurers and other health care payment organizations try
to encourage the use of these less expensive generic brands through their
prescription benefits coverage and reimbursement policies. These organizations
may make the generic alternative more attractive to the patient by providing
different amounts of reimbursement so that the net cost of the generic product
to the patient is less than the net cost of our prescription brand product.
Aggressive pricing policies by our generic product competitors and the
prescription benefits policies of third party payors could cause us to lose
market share or force us to reduce our gross margins in response. 
 ITEM 2: PROPERTIES During May 2003, we expanded our office space in Scottsdale, Arizona, to
approximately 75,000 square feet under an amended lease agreement that expires
in December 2010. The average annual expense under the amended lease agreement
is approximately $2.1 million. The lease contains certain rent escalation
clauses and, upon expiration, can be renewed for two additional periods of five
years each. Medicis Canada, Inc., a wholly owned subsidiary, presently leases
approximately 7,500 square feet of office and warehouse space in St-Laurent,
Quebec, Canada, under a lease agreement that expires in April 2005. Rent expense was approximately $2.1 million, $1.5 million and $1.4 million
for fiscal 2004, 2003 and 2002, respectively. We believe these properties are
adequate for our current and foreseeable purposes and that additional space
will be available if needed. 
 ITEM 3: LEGAL PROCEEDINGS On November 9, 2001, prior to its merger with Medicis, Ascent received
notice that Triumph-Connecticut Limited Partnership and related parties
(Triumph) had brought a civil action against it in the Business Session of
the Superior Court of the Commonwealth of Massachusetts. In the action, the
Triumph group claimed that the execution by Ascent of the merger agreement and
the consummation of the merger without the consent of the Triumph group or the
payment to the Triumph group of a specified amount breaches the terms of a
January 1997 securities purchase agreement, the terms of warrants issued to the
Triumph group, an implied covenant of good faith and fair dealing, and certain
deceptive trade laws. The Triumph group sought damages in an amount not less
than $22.1 million, plus treble damages. A hearing on cross-motions for
summary judgment was held on October 16, 2003. On April 9, 2004, the court
ruled on the cross-motions in Ascents favor. Triumphs cross-motion for
summary judgment was denied and Ascents cross-motion for summary judgment was
granted on all claims. The court entered its order dismissing the lawsuit on
April 13, 2004. Triumph filed a notice of appeal on May 6, 2004. We continue
to believe that the claims of the Triumph group are without merit and will
vigorously contest the appeal. On October 15, 2003, Kiel Laboratories, Inc. (Kiel) filed suit against
us in the U.S. District Court for the Northern District of Georgia. In that
action, Kiel claims that as a result of our acquisition of certain assets from
WE Pharmaceuticals, Inc. (WE), the Company interfered with an alleged
contractual relationship between Kiel and WE, that the Company breached certain
alleged contractual obligations, and that the Company violated the federal RICO
laws. Kiel has not claimed a specific dollar amount in damages in the
pleadings or discovery. The Company 21




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has denied all of Kiels allegations and is vigorously defending the
litigation. The action currently is in the discovery phase. On June 21, 2004, the United States International Trade Commission (ITC)
instituted an investigation pursuant to Section 337 of the Tariff Act of 1930,
as amended, at the request of Inamed Corporation (Inamed). The investigation
identifies Medicis Aesthetics, Inc., a wholly owned subsidiary of Medicis, and
Q-Med as Respondents in the investigation regarding Inameds allegation of
infringement of its U.S. Patent No. 4,803,075, dated February 7, 1989, by the
dermal filler, RESTYLANE®. There is no provision for money damages in this
proceeding. However, if there is a finding by the ITC that we have engaged in
unfair trade practices, the ITC could order us to cease and desist from
distributing any RESTYLANE® that we may have in our possession in the United
States. Inamed has filed a parallel infringement action against Medicis and
Q-Med in the U.S. District Court of the Southern District of California
regarding the same patent. This action has been stayed pending the outcome of
the ITC investigation. After a preliminary investigation regarding the above
complaints, it is our belief that we have meritorious defenses as to the
infringement claims and as to the validity of the Inamed patent. We and certain of our subsidiaries are parties to other actions and
proceedings incident to our businesses, including litigation regarding our
intellectual property, challenges to the enforceability or validity of our
intellectual property and claims that our products infringe on the intellectual
property rights of others. Although the outcome of these actions is not
presently determinable, we believe, at the present time, that the ultimate
resolution of these matters will not have a material adverse affect on our
business. In our opinion, based upon consultation with legal counsel, as of
June 30, 2004, the ultimate outcome with respect to any of these matters, based
upon the information available to us, is either covered by insurance and/or
established reserves, or in some cases rights of offset and/or indemnification,
and/or in the aggregate will not have a material adverse effect on our
business, financial condition or results of operations. 
 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 22




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PART II 
  ITEM 5:
    MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Price Range of Common Stock and Dividends Declared Medicis Class A common stock trades on the New York Stock Exchange under
the symbol MRX. The following table sets forth the high and low sale prices
for our Class A common stock on the New York Stock Exchange for the fiscal
periods indicated. Prices have been restated to reflect the 2 for 1 stock
split effected in the form of a stock dividend that occurred on January 23,
2004: DIVIDENDSHIGH
    
    LOW
    
    DECLAREDFISCAL YEAR ENDED JUNE 30, 2004First Quarter
    
    $
    32.00
    
    
    $
    27.27
    
    
    $
    0.025Second Quarter
    
    
    36.01
    
    
    
    27.81
    
    
    
    0.025Third Quarter
    
    
    41.50
    
    
    
    33.86
    
    
    
    0.025Fourth Quarter
    
    
    45.26
    
    
    
    38.45
    
    
    
    0.025FISCAL YEAR ENDED JUNE 30, 2003First Quarter
    
    $
    23.70
    
    
    $
    16.93
    
    
    $
    Second Quarter
    
    
    25.07
    
    
    
    18.98
    
    
    
    Third Quarter
    
    
    28.30
    
    
    
    22.61
    
    
    
    Fourth Quarter
    
    
    30.94
    
    
    
    25.14
    
    
    
    0.025
 On September 8, 2004, the last reported sale price on the New York Stock
Exchange for Medicis Class A common stock was $37.62 per share. As of such
date, there were approximately 229 holders of record of Class A common stock
and one holder of record of Class B common stock. During September 2004, all outstanding shares of Medicis Class B common
stock were in the process of being converted into Class A common stock. Dividend Policy During fiscal 2004, we paid quarterly cash dividends aggregating $5.5
million on our common stock. In addition, on June 10, 2004, we declared a cash
dividend of $0.025 per issued and outstanding share of common stock payable on
July 30, 2004, to our stockholders of record at the close of business on July
1, 2004. Prior to these dividends, we had not paid a cash dividend on our
common stock, and we have not adopted a dividend policy. Any future
determinations to pay cash dividends will be at the discretion of our Board of
Directors and will be dependent upon our financial condition, operating
results, capital requirements and other factors that our Board of Directors
deems relevant. Our 1.5% Contingent Convertible Senior Notes due 2033 require an
adjustment to the conversion price if cash dividends of more than $0.025 per
share per quarter are paid by us on our outstanding common stock. Recent Sales of Unregistered Securities None. 23




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##### Table of Contents



Equity Compensation Plan Information Information required to be included about our equity compensation plan is
incorporated by reference to the material under the caption Equity
Compensation Plan Information in the proxy statement for our 2004 annual
meeting of stockholders. Repurchases of Common Stock In May 2003, our Board of Directors approved a new repurchase program that
authorized the repurchase of up to $75 million of our common stock. This
program provided for the repurchase of Class A common stock at such time as
management determined. As of June 30, 2004, we had not repurchased any shares
of our common stock under this program. In August 2004, our Board of Directors
approved a new program that replaces the May 2003 program and authorizes the
repurchase of up to $150 million of our common stock. The timing and amount of
any future repurchases will depend upon market conditions and corporate
considerations. 24




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##### Table of Contents



ITEM 6: SELECTED FINANCIAL DATA The following selected consolidated financial data for the five year
period ended June 30, 2004 is derived from our audited consolidated financial
statements and accompanying notes. The comparability of the years presented is
impacted by certain product rights and business acquisitions. All business
acquisitions were accounted for under the purchase method and accordingly, the
results of operations reflect the financial results of each business
acquisition from the date of the acquisition. Certain business acquisitions
resulted in the write-off of in-process research and development resulting from
an independent valuation. Gross profit does not include amortization of the
related intangibles. All share and per share data have been restated to
reflect the 2 for 1 stock split effected in the form of a stock dividend that
occurred on January 23, 2004. FISCAL YEAR ENDED JUNE 30,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands, except per share amounts)Statements of Operations Data:Net revenues
    
    $
    303,722
    
    
    $
    247,539
    
    
    $
    212,807
    
    
    $
    167,802
    
    
    $
    139,099Gross profit
    
    
    257,116
    
    
    
    209,279
    
    
    
    177,042
    
    
    
    137,105
    
    
    
    113,187Operating expenses:Selling, general and administrative
    
    
    118,252
    
    
    
    91,648
    
    
    
    77,314
    
    
    
    59,508
    
    
    
    45,404Research and development
    
    
    16,494
    (a)
    
    
    29,568
    (b)
    
    
    15,132
    (c)
    
    
    25,515
    (d)
    
    
    4,903In-process research and development
    
    
    
    
    
    
    
    
    
    
    6,217
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    16,794
    
    
    
    10,125
    
    
    
    7,928
    
    
    
    8,261
    
    
    
    7,374Total operating expenses
    
    
    151,540
    
    
    
    131,341
    
    
    
    106,591
    
    
    
    93,284
    
    
    
    57,681Operating income
    
    
    105,576
    
    
    
    77,938
    
    
    
    70,451
    
    
    
    43,821
    
    
    
    55,506Other:Net interest (expense) income
    
    
    (759
    )
    
    
    (278
    )
    
    
    8,533
    
    
    
    15,504
    
    
    
    11,876Income tax expense
    
    
    (15,317
    )
    
    
    (26,404
    )
    
    
    (28,960
    )
    
    
    (18,905
    )
    
    
    (24,388
    )Loss on early extinguishment of debt
    
    
    (58,660
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    30,840
    
    
    $
    51,256
    
    
    $
    50,024
    
    
    $
    40,420
    
    
    $
    42,994Basic net income per share
    
    $
    0.55
    
    
    $
    0.94
    
    
    $
    0.83
    
    
    $
    0.67
    
    
    $
    0.74Diluted net income per share
    
    $
    0.52
    
    
    $
    0.91
    
    
    $
    0.80
    
    
    $
    0.64
    
    
    $
    0.70Cash dividend declared per common share
    
    $
    0.10
    
    
    $
    0.025
    
    
    
    
    
    
    
    
    
    
    
    Basic common shares outstanding
    
    
    55,618
    
    
    
    54,376
    
    
    
    60,536
    
    
    
    60,268
    
    
    
    58,058Diluted common shares outstanding
    
    
    59,258
    
    
    
    56,422
    
    
    
    62,810
    
    
    
    63,388
    
    
    
    60,998
  (a)
    
    Includes $2.4 million paid to Dow Pharmaceutical Sciences, Inc. (Dow)
for a research and development collaboration(b)
    
    Includes $14.2 million paid to Dow for a research and development
collaboration and $6.0 million paid to aaiPharma, Inc. (aaiPharma) for a
research and development collaboration(c)
    
    Includes $7.7 million paid to aaiPharma for a research and development
collaboration(d)
    
    Includes $17.0 million paid to Corixa Corporation for a development,
commercialization and licensing agreement 25




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JUNE 30,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands)Balance Sheet Data:Cash, cash equivalents, restricted cash
and short-term investments
    
    $
    634,040
    
    
    $
    552,663
    
    
    $
    577,576
    
    
    $
    334,157
    
    
    $
    285,737Working capital
    
    
    666,743
    
    
    
    576,781
    
    
    
    611,259
    
    
    
    358,468
    
    
    
    312,302Total assets
    
    
    1,078,384
    
    
    
    932,841
    
    
    
    876,273
    
    
    
    550,007
    
    
    
    496,113Long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,914Long-term debt
    
    
    453,067
    
    
    
    400,000
    
    
    
    400,000
    
    
    
    
    
    
    
    Stockholders equity
    
    
    555,303
    
    
    
    461,121
    
    
    
    429,059
    
    
    
    503,453
    
    
    
    437,439
 FISCAL YEAR ENDED JUNE 30,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands)Cash Flow Data:Net cash provided by operating activities
    
    $
    127,964
    
    
    $
    84,667
    
    
    $
    73,542
    
    
    $
    71,120
    
    
    $
    41,238Net cash (used in) provided by investing
activities
    
    
    (166,341
    )
    
    
    (113,709
    )
    
    
    (341,660
    )
    
    
    (97,981
    )
    
    
    13,387Net cash provided by (used in) financing
activities
    
    
    40,621
    
    
    
    (23,343
    )
    
    
    254,938
    
    
    
    12,548
    
    
    
    9,944
 26




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##### Table of Contents



ITEM 7:
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Managements Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) summarizes the significant factors affecting
our results of operations, liquidity, capital resources and contractual
obligations, as well as discusses our critical accounting policies and
estimates. You should read the following discussion and analysis together with
our consolidated financial statements, including the related notes, which are
included in this report on Form 10-K. Certain information contained in the
discussion and analysis set forth below and elsewhere in this report, including
information with respect to our plans and strategy for our business and related
financing, includes forward-looking statements that involve risks and
uncertainties. See Risk Factors that May Affect Future Results in Item 1 in
this Form 10-K for a discussion of important factors that could cause actual
results to differ materially from the results described in or implied by the
forward-looking statements in this report. Our MD&A is composed of four major
sections; Executive Summary, Results of Operations, Liquidity and Capital
Resources and Critical Accounting Policies and Estimates. EXECUTIVE SUMMARY We are a leading specialty pharmaceutical company focusing primarily on
helping patients attain a healthy and youthful appearance and self-image
through the development and marketing of products in the United States for the
treatment of dermatological, aesthetic and podiatric conditions in the United
States and Canada. We offer a broad range of products addressing various
conditions, including acne, fungal infections, rosacea, hyperpigmentation,
photoaging, psoriasis, eczema, skin and skin-structure infections, seborrheic
dermatitis and cosmesis (improvement in the texture and appearance of skin). Our current product franchises are divided between the Dermatological and
Non-dermatological fields. The Dermatological field represents products for
the treatment of Acne and Acne-related dermatological conditions and Non-acne
dermatological conditions. The Non-dermatological field represents products
for the treatment of Asthma (until May 2004) and Urea Cycle Disorder. The Acne
and Acne-related dermatological product lines include core brands DYNACIN®,
PLEXION® and TRIAZ®. The Non-acne dermatological product lines include core
brands LOPROX®, OMNICEF® and RESTYLANE®. The Non-dermatological product lines
include BUPHENYL® and ORAPRED®, which was one of the Companys core brands
until it was licensed to BioMarin in May 2004. Key Aspects of Our Business We derive a majority of our prescription volume from our core prescription
products. We believe that the prescription volume of our core prescription
products and sales of our dermal aesthetic product, RESTYLANE®, which we began
selling in the United States on January 6, 2004, will constitute the majority
of our sales for the foreseeable future. We have built our business by executing a four-part growth strategy. This
strategy consists of promoting existing core brands, developing new products
and important product line extensions, entering into strategic collaborations,
and acquiring complementary products, technologies and businesses. As a result of customer buying patterns, a substantial portion of our
revenues has been recognized in the last month of each quarter. We schedule
our inventory purchases to meet anticipated customer demand. As a result,
relatively small delays in the receipt of manufactured products by us could
result in revenues being deferred or lost. Our operating expenses are based
upon anticipated sales levels, and a high percentage of our operating expenses
are relatively fixed in the short term. Consequently, variations in the timing
of revenue recognition could cause significant fluctuations in operating
results from period to period and may result in unanticipated periodic earnings
shortfalls or losses. We estimate customer demand for our prescription products primarily
through use of third party syndicated data sources which track prescriptions
written by health care providers and dispensed by licensed pharmacies. These
data are extrapolations from information provided only by certain pharmacies
and are estimates of historical demand levels. We observe trends from these
data, and, coupled with certain proprietary information, prepare demand 27




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forecasts that are the basis for purchase orders for finished and
component inventory from our third party manufacturers and suppliers. Our
forecasts may fail to accurately anticipate ultimate customer demand for
products. Overestimates of demand may result in excessive inventory production;
underestimates may result in inadequate supply of our products in channels of
distribution. We sell our products primarily to major wholesalers and retail pharmacy
chains. Consistent with pharmaceutical industry patterns, approximately 80% of
our revenues are derived from four major drug wholesale concerns. While we
attempt to estimate inventory levels of our products at our major wholesale
customers, using historical prescription information and historical purchase
patterns, this process is inherently imprecise. Rarely do wholesale customers
provide us complete inventory levels at regional distribution centers, or
within their national distribution systems. We rely wholly upon our wholesale
and drug chain customers to effect the distribution allocation of our products.
Based upon historically consistent purchasing patterns of our major wholesale
customers, we believe our estimates of trade inventory levels of our products
are reasonable. We further believe that inventories of our products among
wholesale customers, taken as a whole, are similar to those of other specialty
pharmaceutical companies, and that our trade practices, which periodically
involve volume discounts and early payment discounts, are typical of the
industry. We periodically offer promotions to wholesale and chain drugstore
customers to encourage dispensing of our products, consistent with
prescriptions written by licensed health care providers. Because many of our
products compete in multi-source markets, it is important for us to ensure the
licensed healthcare providers dispensing instructions are fulfilled with our
branded products and are not substituted with a generic product or another
therapeutic alternative product which may be contrary to the licensed health
care providers recommended and prescribed Medicis brand. We believe that a
critical component of our brand protection program is maintenance of full
product availability at drugstore and wholesale customers. We believe such
availability strongly reduces the probability of local and regional product
substitutions, shortages and backorders, which could result in lost sales. We
expect to continue providing favorable terms to wholesale and retail drug chain
customers as may be necessary to ensure the fullest possible distribution of
our branded products within the pharmaceutical chain of commerce. We cannot control or influence greatly the purchasing patterns of our
wholesale and retail drug chain customers. These are highly sophisticated
customers that purchase products in a manner consistent with their industry
practices and, presumably, based upon their projected demand levels. Purchases
by any given customer, during any given period, may be above or below actual
prescription volumes of any of our products during the same period, resulting
in fluctuations of product inventory in the distribution channel. The following significant events and transactions occurred during fiscal
2004 and affected our results of operations, our cash flows and our financial
condition:  -
    
    Launch of RESTYLANE® in the United States Following Approval by the FDA-
    
    Licensing of ORAPRED® to BioMarin-
    
    Sale of Products to Taro Pharmaceuticals U.S.A., Inc. (Taro)-
    
    Exchange of our Contingent Convertible Senior Notes Launch of RESTYLANE® in the United States Following Approval by the FDA In March 2003, we acquired from Q-Med the exclusive U.S. and Canadian
rights to market, distribute and commercialize the dermal restorative product
lines known as RESTYLANE®, PERLANE®
and RESTYLANE FINE LINES. We paid $58.2
million upon closing of the transaction, $53.3 million in December 2003 upon
FDA approval of RESTYLANE®, $19.4 million in May 2004 upon certain cumulative
commercial milestones being achieved and will pay approximately $29.1 million
upon FDA approval of PERLANE®.
RESTYLANE®, PERLANE® and RESTYLANE
FINE LINES
had previously been approved for use in Canada, and on December 12, 2003, the
FDA approved RESTYLANE® for use in the United States. On January 6, 2004, we
began commercial sales of RESTYLANE® in the United States. This was an
important event for us as it represented our entrance into the dermal
aesthetics market in the U.S., a market that we had invested a significant
amount of resources in preparation of entering. In addition to the license fee
and milestone payments paid to Q-Med for the exclusive rights to the products,
we invested incremental costs associated with the hiring of a dedicated
aesthetics 28




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sales force, additional headquarters personnel to support sales force efforts,
including product management, customer service and training personnel, expenses
associated with public relations, physician training and continuing medical
education, and other administrative expenses. We believe the dermal aesthetics
market will be an integral part of our business for the foreseeable future. On June 21, 2004, the ITC instituted an investigation pursuant to Section
337 of the Tariff Act of 1930, as amended, at the request of Inamed. The
investigation identifies Medicis Aesthetics Inc., a wholly owned subsidiary of
Medicis, and Q-Med as Respondents in the investigation regarding Inameds
allegation of infringement of its U.S. Patent No. 4,803,075, dated February 7,
1989, by the dermal filler, RESTYLANE®. Inamed has filed a parallel
infringement action against Medicis and Q-Med in the U.S. District Court of the
Southern District of California regarding the same patent. This action has
been stayed pending the outcome of the ITC investigation. After a preliminary
investigation regarding the above complaints, it is our belief that we have
meritorious defenses as to the infringement claims and as to the validity of
the Inamed patent. Licensing of ORAPRED®to BioMarin On May 18, 2004, we closed an asset purchase agreement and license
agreement and executed a securities purchase agreement with BioMarin. The
asset purchase agreement involves BioMarins purchase of assets related to
ORAPRED®, including assets concerning the Ascent field sales force. ORAPRED®
and related pediatric intellectual property is owned by Ascent, a wholly owned
subsidiary of Medicis. The license agreement grants BioMarin the exclusive
worldwide rights to ORAPRED®, including proprietary taste-masking technologies
and related development technologies. The securities purchase agreement grants
BioMarin the option to purchase all outstanding shares of common stock of
Ascent, based on certain conditions. As part of the transaction, the name
Ascent Pediatrics, Inc. was changed to Medicis Pediatrics, Inc. Under terms of the agreements, BioMarin will make license payments to
Ascent of approximately $93 million payable over a five-year period as follows:
approximately $10 million as of the date of the transaction; approximately
$12.5 million per quarter for four quarters beginning in July 2004;
approximately $2.5 million per quarter for the subsequent four quarters
beginning in July 2005; approximately $2 million per quarter for the subsequent
eight quarters beginning in July 2006; and approximately $1.75 million per
quarter for the last four quarters of the five-year period beginning in July
2008. BioMarin will also make payments of $2.5 million per quarter for six
quarters beginning in July 2004 for reimbursement of certain contingent
payments as discussed in Note 9 to our consolidated financial statements. The
license agreement will terminate in July 2009. At that time, based on certain
conditions, BioMarin will have the option to purchase all outstanding shares of
Ascent for approximately $82 million. The payment will consist of $62 million
in cash and $20 million in BioMarin common stock, based on the fair value of
the stock at that time. As of the closing date of the transaction, BioMarin is responsible for all
marketing and promotional efforts regarding the sale of ORAPRED®. As a result,
we no longer advertise or promote any oral liquid prednisolone sodium phosphate
solution product or any related line extension. We have the responsibility for
the manufacture and delivery of finished goods inventory to BioMarin, and
BioMarin will be responsible for paying us for future finished goods inventory
delivered by us through June 30, 2005. During the term of the license
agreement, we will maintain ownership of the intellectual property and,
consequently, will continue to amortize the related intangible assets.
Payments received from BioMarin under the license agreement are treated as
contract revenue, which is included in net revenues in our consolidated
statements of income. Sale of Products to Taro On January 14, 2003, Taro licensed with an option to purchase from us four
branded prescription product lines for sale in the U.S. and Puerto Rico. The
license agreement was effective on January 14, 2003 and extended through June
1, 2004, after which Taro had the option to purchase the product lines.
Medicis received quarterly license payments from Taro during the term of the
agreement. Under terms of the agreement, Taro licensed from us the following
four brands: TOPICORT® (desoximetasone), a topical corticosteroid used for
inflammatory skin diseases; A/T/S® (erythromycin), a topical antibiotic used in
the treatment of acne; OVIDE® (malathion), a pediculicide used in the treatment
of head lice; and PRIMSOL® (trimethoprim HCI), an antibiotic oral solution for
children with acute 29




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otitis media, or middle ear infections. Taro purchased the product lines
at the end of the term of the agreement for $12.1 million. The carrying value
of the intangible assets related to these products was written off as of the
sale date, and a loss of approximately $32,000 was recognized during fiscal
2004 and is included in selling, general and administrative expenses in the
accompanying consolidated statements of income. We incurred $350,000 of
professional fees related to the transaction. Exchange of Contingent Convertible Senior Notes On August 14, 2003, we exchanged approximately $230.8 million in principal
amount of our 2.5% Contingent Convertible Senior Notes Due 2032 (the Old
Notes) for approximately $283.9 million in principal amount of our 1.5%
Contingent Convertible Senior Notes Due 2033 (the New Notes). Holders of Old
Notes that accepted our exchange offer received $1,230 in principal amount of
New Notes for each $1,000 in principal amount of Old Notes. The terms of the
New Notes are similar to the terms of the Old Notes, but have a different
interest rate, conversion rate and maturity date. Holders of Old Notes that
chose not to exchange continue to be subject to the terms of the Old Notes. The New Notes bear interest at a rate of 1.5% per annum, which is payable
on June 4 and December 4 of each year, beginning December 4, 2003. We will
also pay contingent interest at a rate of 0.5% per annum during any six-month
period, with the initial six-month period commencing June 4, 2008, if the
average trading price of the New Notes reaches certain thresholds. The New
Notes mature on June 4, 2033. We may redeem some or all of the New Notes at any time on or after June
11, 2008, at a redemption price, payable in cash, of 100% of the principal
amount of the New Notes, plus accrued and unpaid interest. Holders of the New
Notes may require us to repurchase all or a portion of their New Notes on June
4, 2008, 2013 and 2018, and upon a change in control, as defined in the
indenture governing the New Notes, at 100% of the principal amount of the New
Notes, plus accrued and unpaid interest to the date of the repurchase, payable
in cash. The New Notes are convertible, at the holders option, prior to the
maturity date into shares of our Class A common stock in the following
circumstances:  
    
    during any quarter commencing after September 30, 2003,
if the closing price of our Class A common stock over a specified
number of trading days during the previous quarter, including the
last trading day of each quarter, is more than 120% of the
conversion price of the New Notes, or $46.51. The Notes are
initially convertible at a conversion price of $38.76 per share,
which is equal to a conversion rate of approximately 25.7998
shares per $1,000 principal amount of New Notes, subject to
adjustment;  
    
    if we have called the New Notes for redemption;  
    
    during the five trading day period immediately
following any nine consecutive day trading period in which the
trading price of the New Notes per $1,000 principal amount for
each day of such period was less than 95% of the product of the
closing sale price of our Class A common stock on that day
multiplied by the number of shares of our Class A common stock
issuable upon conversion of $1,000 principal amount of the New
Notes; or  
    
    upon the occurrence of specified corporate
transactions. The New Notes, which are unsecured, do not contain any restrictions on the
incurrence of additional indebtedness or the repurchase of our securities and
do not contain any financial covenants. The New Notes require an adjustment to
the conversion price if cash dividends of more than $0.025 per quarter (after
giving effect to the stock split described in Note 16 to our consolidated
financial statements) are paid by us on our outstanding common stock. As a result of the exchange, the outstanding principal amounts of the Old
Notes and the New Notes were $169.2 million and $283.9 million, respectively.
During the fiscal first quarter ended September 30, 2003, we recognized a loss
on early extinguishment of debt totaling $58.7 million, consisting of a $53.1
million premium and a $5.6 million write-off of corresponding Old Notes fees.
We incurred approximately $5.1 million of fees and other 30




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origination costs related to the issuance of the New Notes. We are
amortizing these costs over the five-year Put period, which runs through August
2008. Unless a conversion contingency is met, the shares underlying the
remaining Old Notes and New Notes are not included in the calculation of fully
diluted earnings per share. Should a contingency be met, earnings per share
would be expected to decrease as a result of the inclusion of the underlying
shares in the earnings per share calculation. Volatility in our stock price
could cause a contingency to be met in one quarter and not in a subsequent
quarter, increasing the volatility of fully diluted earnings per share. Subsequent Events In addition to the events and transactions described above, the following
events and transactions occurred subsequent to the date of our fiscal year end: License of SubQTM from Q-Med On July 15, 2004, we entered into an exclusive license agreement with
Q-Med to market, distribute, sell and commercialize in the United States and
Canada Q-Meds product currently known as SubQTM. Q-Med will have the
exclusive right to manufacture SubQTM for Medicis. SubQTM is not approved
currently for use in the United States and Canada. Under the terms of the agreement, Medicis Aesthetics Holdings Inc., a
wholly owned subsidiary of Medicis, will license SubQTM for approximately $80
million, due as follows: approximately $30 million upon closing of the
transaction, which was recorded as a charge to research and development expense
during the first quarter of fiscal 2005; approximately $10 million upon
completion of certain clinical milestones; approximately $20 million upon the
satisfaction of certain defined regulatory milestones; and approximately $20
million upon U.S. launch of SubQTM. We also will make additional milestone
payments to Q-Med upon the achievement of certain commercial milestones. SubQTM is comprised of the same NASHATM (non-animal stabilized hyaluronic
acid) substance as RESTYLANE®, PERLANE® and RESTYLANE FINE LINESTM with a
larger gel particle size and is understood to have patent protection until at
least 2015. License of Product Rights to Taro On July 27, 2004, we entered into an exclusive license and optional
purchase agreement with Taro pursuant to which Taro will market, distribute and
sell the LUSTRA® family of products and two development stage products in the
United States, Canada and Puerto Rico. The license agreement was effective
immediately and extends through July 1, 2007, after which Taro may purchase the
product lines. Repurchases of Common Stock In August 2004, our Board of Directors approved a new program that
authorizes the repurchase of up to $150 million of our common stock. The
timing and amount of any future repurchases will depend upon market conditions
and corporate considerations. Competitive Developments On July 18, 2004, Glades Pharmaceuticals, LLC, a wholly owned subsidiary
of Stiefel Laboratories, Inc., announced the launch of myracT (minocycline
hydrochloride tablets, USP), as a branded pharmaceutical product. MyracT
tablets is a prescription product that competes directly with our DYNACIN®
tablet products. On August 6, 2004, the FDA approved an ANDA submitted by Altana, Inc. for
its ciclopirox topical suspension, a generic version of our LOPROX®
TS product. 31




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##### Table of Contents



RESULTS OF OPERATIONS The following table sets forth certain data as a percentage of net
revenues for the periods indicated. Percentage of Net Revenues FISCAL YEAR ENDED JUNE 30,2004***
    
    2003**
    
    2002*Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Gross profit
    
    
    84.7
    
    
    
    84.5
    
    
    
    83.2Operating expenses
    
    
    49.9
    
    
    
    53.1
    
    
    
    50.1Operating income
    
    
    34.8
    
    
    
    31.5
    
    
    
    33.1Interest (expense) income, net
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    4.0Loss on early extinguishment of debt
    
    
    (19.3
    )
    
    
    
    
    
    
    Income tax expense
    
    
    (5.0
    )
    
    
    (10.7
    )
    
    
    (13.6
    )Net income
    
    
    10.2
    %
    
    
    20.7
    %
    
    
    23.5
    %
  *
    
    Included in operating expenses is a $6.2 million charge (2.9% of net
revenues) for in-process research and development related to
the merger with Ascent and a $7.7 million payment (3.6% of net revenues)
to aaiPharma for a research and development
collaboration.**
    
    Included in operating expenses is $14.2 million in payments (5.7% of net
revenues) to Dow for a research and development
collaboration and a $6.0 million payment (2.4% of net revenues) to
aaiPharma for a research and development collaboration.***
    
    Included in operating expenses is a $2.4 million payment (0.8% of net
revenues) to Dow for a research and development collaboration. Fiscal Year Ended June 30, 2004 Compared To Fiscal Year Ended June 30, 2003 Net Revenues The following table sets forth the net revenues for the fiscal years ended
June 30, 2004 (fiscal 2004) and June 30, 2003 (fiscal 2003), along with the
percentage of net revenues for each of our product categories (amounts in
millions): Fiscal 2004
    
    Fiscal 2003
    
    $ Change
    
    % ChangeNet revenues
    
    $
    303.7
    
    
    $
    247.5
    
    
    $
    56.2
    
    
    
    22.7
    %
 Fiscal 2004
    
    Fiscal 2003
    
    ChangeAcne and acne-related
dermatological products
    
    
    30.5
    %
    
    
    33.6
    %
    
    
    (3.1
    )%Non-acne dermatological
Products
    
    
    50.9
    %
    
    
    36.7
    %
    
    
    14.2
    %Non-dermatological products
    
    
    18.6
    %
    
    
    29.7
    %
    
    
    (11.1
    )%Total net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    
 Our total net revenues increased during fiscal 2004 primarily as a result
of growth in sales of the DYNACIN®, LOPROX®, RESTYLANE® and TRIAZ® products.
The Acne and acne-related dermatological product net revenues decreased as a
percentage of net revenues, but increased in net dollars by 11.5% primarily due
to the introduction of DYNACIN® in tablet form in May 2003 and the introduction
of TRIAZ® in pad form in July 2003. The Non-acne dermatological product net
revenues increased as a percentage of net revenues during fiscal 2004 primarily
due to the launch of RESTYLANE® in the United States in January 2004 and the
introduction of LOPROX® Shampoo in March 2003. The Non-dermatological product
net revenues decreased as a percentage of net revenues primarily due to the
increase in net revenues in the other products, and decreased net revenues of
ORAPRED®. The Non-dermatological product net revenues decreased 23.4% from
fiscal 2003 to fiscal 2004. ORAPRED® was licensed to BioMarin as of May 18,
2004, and the licensing revenue recognized during fiscal 2004 subsequent to
that date was less than the ORAPRED® product revenue for the comparable period
during fiscal 2003. 32




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Gross Profit Gross profit represents our net revenues less our cost of product revenue.
Our cost of product revenue includes our acquisition cost for the products we
purchase from our third party manufacturers and royalty payments made to third
parties. Amortization of intangible assets related to products sold is not
included in gross profit. Product mix plays a significant role in our
quarterly and annual gross profit as a percentage of net revenues. Different
products generate different gross profit margins, and the relative mix of
higher gross product profit products and lower gross profit products can affect
our total gross profit. The following table sets forth our gross profit for fiscal years 2004 and
2003, along with the percentage of net revenues represented by such gross
profit (amounts in millions): Fiscal 2004
    
    Fiscal 2003
    
    $ Change
    
    % ChangeGross profit
    
    $
    257.1
    
    
    $
    209.3
    
    
    $
    47.8
    
    
    
    22.9
    %% of net revenues
    
    
    84.7
    %
    
    
    84.5
    %
 The increase in gross profit during fiscal 2004 as compared to fiscal 2003
was due to the increase in our net revenues, while the increase in gross profit
as a percentage of net revenues was primarily due to the different mix of
products sold during fiscal 2004 as compared to during fiscal 2003. Selling, General and Administrative Expenses The following table sets forth our selling, general and administrative
expenses for fiscal years 2004 and 2003, along with the percentage of net
revenues represented by such selling, general and administrative expenses
(amounts in millions): Fiscal 2004
    
    Fiscal 2003
    
    $ Change
    
    % ChangeSelling, general and administrative
    
    $
    118.3
    
    
    $
    91.6
    
    
    $
    26.7
    
    
    
    29.0
    %% of net revenues
    
    
    38.9
    %
    
    
    37.0
    %
 The increase in selling, general and administrative expenses from fiscal
2003 to fiscal 2004 was primarily attributable to incremental costs associated
with the establishment of a sales and marketing program for RESTYLANE®. We
have incurred incremental costs associated with the hiring of a dedicated
aesthetics sales force, additional headquarters personnel to support sales
force efforts, including product management, customer service and training
personnel, expenses associated with public relations, physician training and
continuing medical education, and other administrative expenses. A pre-market
approval application for RESTYLANE® was approved by the FDA on December 12,
2003, followed by the product launch and first U.S. commercial sales of
RESTYLANE® on January 6, 2004. Research and Development Expenses The following table sets forth our research and development expenses for
fiscal years 2004 and 2003 (amounts in millions): Fiscal 2004
    
    Fiscal 2003
    
    $ Change
    
    % ChangeResearch and development
    
    $
    16.5
    
    
    $
    29.6
    
    
    $
    (13.1
    )
    
    
    (44.2
    )%Charges included in research
and development
    
    
    2.4
    
    
    
    20.2
    
    
    
    (17.8
    )
    
    
    (88.0
    )%
 Included in research and development expenses for fiscal 2004 was a
milestone payment of $2.4 million under a license and development agreement
with Dow for a patented dermatological product. Included in fiscal 2003
research and development expense was $14.2 million in milestone payments under
a license and development agreement with Dow for a patented dermatologic
product, and a $6.0 million milestone payment to aaiPharma under an agreement
for the development, commercialization and license of a key dermatologic
product. Absent these charges, research and development expenses increased
50.1%, or $4.7 million, to $14.1 million during fiscal 2004 from $9.4 million
during fiscal 2003. This increase is due to the timing of various research and
development 33




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##### Table of Contents



projects. We expect research and development expenses to fluctuate from
quarter to quarter based on the timing of the achievement of development
milestones under license and development agreements, as well as the timing of
other development projects and the funds available to support these projects. Depreciation and Amortization Expenses Depreciation and amortization expenses during fiscal 2004 increased 65.9%,
or $6.7 million, to $16.8 million from $10.1 million during fiscal 2003. This
increase was primarily due to the amortization of expenses associated with the
acquisition of the RESTYLANE® family of products, which began in March 2003,
and the amortization related to the $53.3 million and $19.4 million milestone
payments made to Q-Med in December 2003 and May 2004, respectively, which are
being amortized over 15 years. Loss on Early Extinguishment of Debt On August 14, 2003, we exchanged $230.8 million in principal amount of our
Old Notes for $283.9 million in principal amount of our New Notes. As a result
of the exchange, we recognized a loss on early extinguishment of debt totaling
$58.7 million, consisting of a $53.1 million premium and a $5.6 million
write-off of corresponding Old Notes fees. Interest Income Interest income during fiscal 2004 decreased 18.3%, or $2.2 million, to
$10.1 million from $12.3 million during fiscal 2003, primarily due to a
decrease in interest rate yields. Interest Expense Interest expense during fiscal 2004 decreased 14.1%, or $1.8 million, to
$10.8 million from $12.6 million during fiscal 2003. This decrease was due to
the August 2003 exchange of a portion of our Old Notes, which accrue interest
at 2.5% per annum, for our New Notes, which accrue interest at 1.5% per annum. Income Tax Expense The following table sets forth our income tax expense and the resulting
effective tax rate stated as a percentage of pre-tax income for fiscal years
2004 and 2003 (amounts in millions): Fiscal 2004
    
    Fiscal 2003
    
    $ Change
    
    % ChangeIncome tax expense
    
    $

    15.3
    
    
    $
    26.4
    
    
    $
    (11.1
    )
    
    
    (42.0
    )%Effective tax rate
    
    
    33.2
    %
    
    
    34.0
    %
 The decrease in income tax expense and the effective tax rate from fiscal
2003 to fiscal 2004 was primarily due to the decrease in pretax earnings as a
result of the loss on the early extinguishment of debt. Excluding the loss on
early extinguishment of debt, our adjusted effective tax rate for fiscal 2004
was 35%. The increase in the adjusted effective tax rate to 35% in fiscal 2004
compared to the effective tax rate of 34% in fiscal 2003 is primarily
attributable to a decrease in research and development credits associated with
the decrease in research and development expenditures. The effective rate is
lower than the expected combined federal and state income tax rates due to
approximately $5.3 million and $5.9 million of tax-exempt interest income in
fiscal 2004 and fiscal 2003, respectively, and contributions to charitable
programs that receive favorable tax treatment. Our full year effective tax
rate may increase in fiscal 2005 compared to our adjusted effective tax rate in
fiscal 2004 due to expected changes in the mix of earnings and the expiration
of the U.S. research and development tax credit. 34




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Fiscal Year Ended June 30, 2003 Compared To Fiscal Year Ended June 30, 2002 Net Revenues The following table sets forth the net revenues for fiscal 2003 and the
fiscal year ended June 30, 2002 (fiscal 2002), along with the percentage of
net revenues for each of our product categories (amounts in millions): Fiscal 2003
    
    Fiscal 2002
    
    $ Change
    
    % ChangeNet revenues
    
    $
    247.5
    
    
    $
    212.8
    
    
    $
    34.7
    
    
    
    16.3
    %
 Fiscal 2003
    
    Fiscal 2002
    
    ChangeAcne and acne-related
dermatological products
    
    
    33.6
    %
    
    
    43.4
    %
    
    
    (9.8
    )%Non-acne dermatological
products
    
    
    36.7
    %
    
    
    34.0
    %
    
    
    2.7
    %Non-dermatological products
    
    
    29.7
    %
    
    
    22.6
    %
    
    
    7.1
    %Total net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    
 Our net revenues increased during fiscal 2003 primarily as a result of
growth in sales of the LOPROX®, OMNICEF®, ORAPRED® and BUPHENYL® products. The
Acne and acne-related dermatological product net revenues decreased as a
percentage of total net revenues primarily due to a decrease in sales of the
PLEXION® product line. This decrease was primarily due to increased
competition as four products entered the market in fiscal 2003. The growth in
sales of the LOPROX® product line is the primary cause of the Non-acne
dermatological product net revenues growth as a percentage of total net
revenues from fiscal 2002 to fiscal 2003. The growth in sales of ORAPRED® and
BUPHENYL® products was the primary cause of the Non-dermatological product net
revenues growth as a percentage of total net revenues from fiscal 2002 to
fiscal 2003. Gross Profit Gross profit represents our net revenues less our cost of product revenue.
Our cost of product revenue includes our acquisition cost for the products we
purchase from our third party manufacturers and royalty payments made to third
parties. Amortization of intangible assets related to products sold is not
included in gross profit. Product mix plays a significant role in our
quarterly and annual gross profit as a percentage of net revenues. Different
products generate different gross profit margins, and the relative mix of
higher gross product profit products and lower gross profit products can affect
our total gross profit. The following table sets forth our gross profit for fiscal years 2003 and
2002, along with the percentage of net revenues represented by such gross
profit (amounts in millions): Fiscal 2003
    
    Fiscal 2002
    
    $ Change
    
    % ChangeGross profit
    
    $
    209.3
    
    
    $
    177.0
    
    
    $
    32.3
    
    
    
    18.2
    %% of net revenues
    
    
    84.5
    %
    
    
    83.2
    %
 The increase in gross profit during fiscal 2003 as compared to fiscal 2002
was due to the increase in our net revenues, while the increase in gross profit
as a percentage of net revenues was primarily due to a higher percentage of
total sales related to our LOPROX® and ORAPRED® products, which have higher
gross profit percentages than our other products. 35




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Selling, General and Administrative Expenses The following table sets forth our selling, general and administrative
expenses for fiscal years 2003 and 2002, along with the percentage of net
revenues represented by such selling, general and administrative expenses
(amounts in millions): Fiscal 2003
    
    Fiscal 2002
    
    $ Change
    
    % ChangeSelling, general and administrative
    
    $
    91.6
    
    
    $
    77.3
    
    
    $
    14.3
    
    
    
    18.5
    %% of net revenues
    
    
    37.0
    %
    
    
    36.3
    %
 The increase in selling, general and administrative expenses during fiscal
2003 from fiscal 2002 was primarily attributable to a full fiscal year of costs
associated with our Ascent (pediatrics) sales force, including salaries and
travel expenses, and increases in personnel costs related to the hiring of
additional full-time equivalent employees, yearly salary escalations for
existing employees, operational expenses related to the acquired RESTYLANE®
family of products and an increase in variable costs commensurate with
increased sales volume. Research and Development Expenses The following table sets forth our research and development expenses for
fiscal years 2003 and 2002 (amounts in millions): Fiscal 2003
    
    Fiscal 2002
    
    $ Change
    
    % ChangeResearch and development
    
    $
    29.6
    
    
    $
    15.1
    
    
    $
    14.5
    
    
    
    95.4
    %Charges included in research
and development
    
    
    20.2
    
    
    
    7.7
    
    
    
    12.5
    
    
    
    162.2
    %
 Included in fiscal 2003 research and development expense is $14.2 million
in milestone payments under a license and development agreement with Dow for a
patented dermatologic product, and a $6.0 million milestone payment to
aaiPharma under an agreement for the development, commercialization and license
of a key dermatologic product. Included in fiscal 2002 research and
development expense is a $7.7 million payment to aaiPharma under that
agreement. Absent these charges, research and development expense increased
$2.0 million, to $9.4 million in fiscal 2003 from $7.4 million in fiscal 2002.
As a percentage of net revenues, total research and development expenses
increased from 7.1% in fiscal 2002 to 12.0% in fiscal 2003. This increase is
primarily attributable to the increased milestone payments incurred during 2003
as compared to 2002. We expect research and development expenses to fluctuate
from quarter to quarter based on the timing of the achievement of development
milestones under license and development agreements, as well as the timing of
other development projects and the funds available to support these projects. In-Process Research and Development Expense We recorded a $6.2 million charge to operations for in-process research
and development during fiscal 2002 as part of the allocated purchase price
related to the merger with Ascent. There were no in-process research and
development charges during fiscal 2003. The amount allocated to in-process
research and development was based on an independent valuation of Ascents
completed and in-process technologies. During fiscal 2004 and 2003, we
incurred development costs of approximately $0.5 million and $0.6 million,
respectively, related to the acquired in-process research and development. We
licensed the research and development technologies to BioMarin on May 18, 2004
under the terms of a license agreement, as further described in the EXECUTIVE
SUMMARY section. Depreciation and Amortization Expenses Depreciation and amortization expenses during fiscal 2003 increased 27.7%,
or $2.2 million, to $10.1 million from $7.9 million in fiscal 2002. This
increase was primarily due to the amortization of expenses associated with the
acquisition of the RESTYLANE® family of products, which began in March 2003 and
is being amortized over 15 years. 36




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Interest Income Interest income during fiscal 2003 increased 24.1%, or $2.4 million, to
$12.3 million from $9.9 million during fiscal 2002, primarily due to an
increase in cash available for investment from the issuance of our Old Notes
during June 2002 and an increase in cash flows from operations. Interest Expense Interest expense during fiscal 2003 increased $11.2 million, to $12.6
million from $1.4 million during fiscal 2002, primarily due to the issuance of
our Old Notes during June 2002. Interest payable on these Old Notes accrues at
2.5% per annum. In addition, amortization of deferred financing costs related
to the Old Notes is recognized as interest expense over the Put period of the
Old Notes. Total interest expense recognized during fiscal 2003 related to
these Old Notes, including the amortization of deferred financing costs, was
approximately $12.5 million. Income Tax Expense The following table sets forth our income tax expense and the resulting
effective tax rate stated as a percentage of pre-tax income for fiscal years
2003 and 2002 (amounts in millions): Fiscal 2003
    
    Fiscal 2002
    
    $ Change
    
    % ChangeIncome tax expense
    
    $
    26.4
    
    
    $
    29.0
    
    
    $
    (2.6
    )
    
    
    (8.8
    )%Effective tax rate
    
    
    34.0
    %
    
    
    36.7
    %
 The decrease in the effective tax rate was primarily due to increased tax
credits generated by the $20.2 million in research and development milestone
payments made during fiscal 2003, and the $6.2 million charge that we recorded
in fiscal 2002 for in-process research and development related to the merger
with Ascent, which was non-deductible for tax purposes in fiscal 2002. In
addition, the effective rate is lower than expected federal and state income
tax rates due to approximately $5.9 million and $5.7 million of tax-exempt
interest income in fiscal 2003 and 2002, respectively, and contributions to
charitable programs that receive favorable tax treatment. LIQUIDITY AND CAPITAL RESOURCES Overview The following table highlights selected cash flow components for fiscal
2004 and fiscal 2003, and selected balance sheet components as of June 30, 2004
and June 30, 2003 (amounts in millions): Fiscal 2004
    
    Fiscal 2003
    
    $ Change
    
    % ChangeCash provided by (used in):Operating activities
    
    $
    128.0
    
    
    $
    84.7
    
    
    $
    43.3
    
    
    
    51.1
    %Investing activities
    
    
    (166.3
    )
    
    
    (113.7
    )
    
    
    (52.6
    )
    
    
    (46.3
    )%Financing activities
    
    
    40.6
    
    
    
    (23.3
    )
    
    
    (63.9
    )
    
    
    (274.1
    )%
 June 30, 2004
    
    June 30, 2003
    
    $ Change
    
    % ChangeCash, cash equivalents, restricted
cash and short-term investments
    
    $
    634.0
    
    
    $
    552.7
    
    
    $
    81.3
    
    
    
    14.7
    %Working capital
    
    
    666.7
    
    
    
    576.8
    
    
    
    89.9
    
    
    
    15.6
    %2.5% contingent convertible senior
notes due 2032
    
    
    169.2
    
    
    
    400.0
    
    
    
    (230.8
    )
    
    
    (57.7
    )%1.5% contingent convertible senior
notes due 2033
    
    
    283.9

    
    
    
    
    
    
    
    283.9
    
    
    
    100.0
    %
 37




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Working Capital Working capital as of June 30, 2004 and June 30, 2003 consisted of the
following (amounts in millions): June 30, 2004
    
    June 30, 2003
    
    $ Change
    
    % ChangeCash, cash equivalents, restricted
cash and short-term investments
    
    $
    634.0
    
    
    $
    552.7
    
    
    $
    81.3
    
    
    
    14.7
    %Accounts receivable, net
    
    
    47.9
    
    
    
    51.7
    
    
    
    (3.8
    )
    
    
    (7.4
    )%Inventories, net
    
    
    19.5
    
    
    
    14.0
    
    
    
    5.5
    
    
    
    39.5
    %Deferred tax assets, net
    
    
    14.1
    
    
    
    10.5
    
    
    
    3.6
    
    
    
    35.0
    %Other current assets
    
    
    18.3
    
    
    
    16.8
    
    
    
    1.5
    
    
    
    8.7
    %Total current assets
    
    
    733.8
    
    
    
    645.7
    
    
    
    88.1
    
    
    
    13.7
    %Accounts payable

    
    
    13.9
    
    
    
    18.6
    
    
    
    (4.7
    )
    
    
    (25.1
    )%Short-term contract obligation
    
    
    17.9
    
    
    
    18.3
    
    
    
    (0.4
    )
    
    
    (0.2
    )%Income taxes payable
    
    
    0.7
    
    
    
    0.5
    
    
    
    0.2
    
    
    
    48.0
    %Other current liabilities
    
    
    34.6
    
    
    
    31.5
    
    
    
    3.1
    
    
    
    9.9
    %Total current liabilities
    
    
    67.1
    
    
    
    68.9
    
    
    
    (1.8
    )
    
    
    (0.3
    )%Working capital
    
    $
    666.7
    
    
    $
    576.8
    
    
    $
    89.9
    
    
    
    15.6
    %
 We had cash, cash equivalents, restricted cash and short-term investments
of $634.0 million and working capital of $666.7 million at June 30, 2004, as
compared to $552.7 million and $576.8 million, respectively, at June 30, 2003.
As of June 30, 2004, we did not have any restricted cash or restricted
short-term investments, as the escrow account related to our acquisition of
product rights from Q-Med was liquidated and paid to Q-Med upon the FDAs
approval of RESTYLANE®. Working capital increased from June 30, 2003 to June 30, 2004 primarily
due the increase in cash, cash equivalents, restricted cash and short-term
investments, which was primarily due to our net earnings generated during
fiscal 2004, adjusted for the $58.7 million non-cash loss on the early
extinguishment of debt, depreciation and amortization, and $20.4 million of tax
benefits from stock option exercises during fiscal 2004. Management believes existing cash and short-term investments, together
with funds generated from operations, should be sufficient to meet operating
requirements for the foreseeable future. Our cash and short-term investments
are available for strategic investments, mergers and acquisitions, other
potential large-scale needs and to fund our share repurchase program. Operating Activities Net cash provided by operating activities during fiscal 2004 increased
51.1%, or $43.3 million, to $128.0 million from $84.7 million during fiscal
2003. Our operating cash flow for fiscal 2004 was generated principally by
our net earnings, adjusted for the $58.7 million non-cash loss on the early
extinguishment of debt and other non-cash charges including depreciation and
amortization, as well as $20.4 million of tax benefits from stock option
exercises. Investing Activities Net cash used in investing activities during fiscal 2004 increased $52.6
million, to $166.3 million from $113.7 million during fiscal 2003. Net cash
used in investing activities during fiscal 2004 included $84.1 million in
payments for the purchase of product rights, including $72.7 million in
milestone payments to Q-Med. On December 12, 2003, the FDA approved RESTYLANE® for use in the United
States, and a payment of $53.3 million was made to Q-Med upon the occurrence of
this milestone. In May 2004, we paid $19.4 million to Q-Med as a result of
certain cumulative commercial milestones being achieved. We will pay Q-Med
approximately $29.1 million upon FDA approval of PERLANE®. 38




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Financing Activities Net cash provided by financing activities during fiscal 2004 was $40.6
million compared to net cash used in financing activities of $23.3 million
during fiscal 2003. The change is primarily attributable to the purchase of
$36.0 million of treasury stock during fiscal 2003 while no cash was used to
purchase treasury stock during fiscal 2004, as well as $51.4 million of
proceeds from the exercise of stock options received during fiscal 2004, as
compared to $12.8 million received during fiscal 2003. Contingent Convertible Senior Notes and Other Long-Term Commitments On August 14, 2003, we exchanged $230.8 million in principal amount of our
Old Notes for $283.9 million in principal amount of our New Notes. Holders of
Old Notes that accepted the Companys exchange offer received $1,230 in
principal amount of New Notes for each $1,000 in principal amount of Old Notes.
The terms of the New Notes are similar to the terms of the Old Notes, but have
a different interest rate, conversion rate and maturity date. Holders of Old
Notes that chose to not exchange will continue to be subject to the terms of
the Old Notes. See Note 13 of Notes to Consolidated Financial Statements for
further discussion. The New Notes and the Old Notes are unsecured and do not contain any
restrictions on the incurrence of additional indebtedness or the repurchase of
our securities, and do not contain any financial covenants. The Old Notes do
not contain any restrictions on the payment of dividends. The New Notes
require an adjustment to the conversion price if cash dividends of more than
$0.025 per quarter (after giving effect to the 2 for 1 stock split in January
2004) are paid by the Company on its outstanding common stock. Except for the Old Notes, the New Notes and deferred tax liabilities, we
have no long-term liabilities and had only $67.1 million of current liabilities
at June 30, 2004. Our other commitments and planned expenditures consist
principally of payments we will make in connection with strategic
collaborations and research and development expenditures, and we will continue
to invest in sales and marketing infrastructure. Repurchases of Common Stock In May 2003, our Board of Directors approved a new repurchase program that
authorized the repurchase of up to $75 million of our common stock. This
program provided for the repurchase of Class A common stock at such times as
management determined. As of June 30, 2004, we had not repurchased any shares
of our common stock under this program. In August 2004, our Board of Directors
approved a new program that replaces the May 2003 program and authorizes the
repurchase of up to $150 million of our common stock. The timing and amount of
any future repurchases will depend upon market conditions and corporate
considerations. Dividends During fiscal 2004, we paid quarterly cash dividends aggregating $5.5
million on our common stock. In addition, on June 10, 2004, we declared a cash
dividend of $0.025 per issued and outstanding share of common stock payable on
July 30, 2004 to our stockholders of record at the close of business on July 1,
2004. Prior to these dividends, we had not paid a cash dividend on our common
stock, and we have not adopted a dividend policy. Any future determinations to
pay cash dividends will be at the discretion of our Board of Directors and will
be dependent upon our financial condition, operating results, capital
requirements and other factors that our Board of Directors deems relevant. Line of Credit We have a revolving line of credit facility of up to $25.0 million from
Wells Fargo Bank, N.A. The facility may be drawn upon by us, at our discretion,
and is collateralized by our principal assets. The outstanding balance of the
credit facility bears interest at a floating rate of 150 basis points in excess
of the 30-day London Interbank Offered Rate and expires in November 2004. The
agreement requires us to comply with certain covenants, including covenants
relating to our financial condition and results of operation. We have not
drawn on this credit facility. 39




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Off-Balance Sheet Arrangements We do not have any transactions, arrangements and other relationships with
unconsolidated entities that are reasonably likely to affect our liquidity or
capital resources. We have no special purpose or limited purpose entities that
provided off-balance sheet financing, liquidity or market or credit risk
support, engage in leasing, hedging, research and development services, or
other relationships that expose us to liability that is not reflected on the
face of the financial statements. See Note 14 of the financial statements
regarding our lease commitments and other commitments. Contractual Obligations The following table summarizes our significant contractual obligations at
June 30, 2004, and the effect such obligations are expected to have on our
liquidity and cash flows in future periods. This table excludes amounts
already recorded on our balance sheet as current liabilities at June 30, 2004
or certain other purchase obligations as discussed below (in thousands): Payments Due By PeriodLess Than
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 YearsLong-term debt
    
    $
    453,067
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    453,067Operating leases
    
    
    13,683
    
    
    
    2,050
    
    
    
    4,168
    
    
    
    6,399
    
    
    
    1,066Other purchase obligations
and commitments
    
    
    867
    
    
    
    173
    
    
    
    347
    
    
    
    347
    
    
    
    Total contractual obligations
    
    $
    467,617
    
    
    $
    2,223
    
    
    $
    4,515
    
    
    $
    6,746
    
    
    $
    454,133
 Other purchase obligations and commitments include payments due under
research and development and consulting contracts. Purchase orders for raw materials, finished goods and other goods and
services are not included in the above table. We are not able to determine the
aggregate amount of such purchase orders that represent contractual
obligations, as purchase orders may represent authorizations to purchase rather
than binding agreements. For the purpose of this table, contractual
obligations for purchase of goods or services are defined as agreements that
are enforceable and legally binding on us and that specify all significant
terms, including: fixed or minimum quantities to be purchased; fixed, minimum
or variable price provisions; and the approximate timing of the transaction.
Our purchase orders are based on our current manufacturing needs and are
fulfilled by our vendors with relatively short timetables. We do not have
significant agreements for the purchase of raw materials or finished goods
specifying minimum quantities or set prices that exceed our short-term expected
requirements. We also enter into contracts for outsourced services; however,
the obligations under these contracts were not significant and the contracts
generally contain clauses allowing for cancellation without significant
penalty. The expected timing of payment of the obligations discussed above is
estimated based on current information. Timing of payments and actual amounts
paid may be different depending on the time of receipt of goods or services or
changes to agreed-upon amounts for some obligations. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in conformity with accounting principles generally accepted in
the United States. The preparation of the consolidated financial statements
requires us to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. On an ongoing
basis, we evaluate our estimates related to sales allowances, chargebacks,
rebates, returns and other pricing adjustments, depreciation and amortization
and other contingencies and litigation. We base our estimates on 40




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historical experience and various other factors related to each circumstance.
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 we sell our products, changes in the health care
environment and managed care consumption patterns. Our significant accounting
policies are described in Note 1 to the consolidated financial statements
included in this report. We believe the following critical accounting policies
affect our most significant estimates and assumptions used in the preparation
of our consolidated financial statements and are important in understanding our
financial condition and results of operations. Revenue Recognition Revenue from product sales is recognized when the merchandise is shipped
to an unrelated third party pursuant to Staff Accounting Bulletin No. 104 (SAB
104), Revenue Recognition in Financial Statements. Accordingly, revenue is
recognized when all four of the following criteria are met: (i) persuasive
evidence that an arrangement exists; (ii) delivery of the products has
occurred; (iii) the selling price is both fixed and determinable; and (iv)
collectibility is reasonably assured. Our customers consist primarily of large
pharmaceutical wholesalers who sell directly into the retail channel.
Provisions for early payment discounts, and estimates for chargebacks, managed
care and Medicaid rebates, damaged product returns, exchanges for expired
product are established as a reduction of product sales revenues at the time
such revenues are recognized. These revenue reductions are established by us
as our best estimate at the time of sale based on historical experience
adjusted to reflect known changes in the factors that impact such reserves.
These revenue reductions are generally reflected either as a direct reduction
to accounts receivable through an allowance, or as an addition to accrued
expenses if the payment is due to a party other than the wholesale or retail
customer. We enter into licensing arrangements with other parties whereby we receive
contract revenue based on the terms of the agreement. The timing of revenue
recognition is dependent on the level of our continuing involvement in the

manufacture and delivery of licensed products. If we have continuing
involvement, the revenue is deferred and recognized on a straight-line basis
over the period of continuing involvement. In addition, if our licensing
arrangements require no continuing involvement and payments are merely based on
the passage of time, we will assess such payments for revenue recognition
under the collectibility criteria of SAB 104. We do not provide any forms of price protection to our wholesale customers
and permit product returns only if the product is damaged or if it is returned
within six to 12 months of expiration and the customer is committed to
accepting replacement product in exchange. Our customers consist principally
of financially viable wholesalers; so, revenue is recorded upon sale to the
wholesaler, net of estimated provisions. If the levels of chargebacks, managed care and Medicaid rebates, damaged
product returns and exchanges for expired products fluctuate significantly
and/or if our estimates do not adequately reserve for these reductions of net
product revenues, our reported net product revenues could be negatively
affected. Accounts receivable are presented net of allowances related to the above
provisions of approximately $13.1 million and $12.7 million at June 30, 2004
and June 30, 2003, respectively. Goodwill and Other Identifiable Intangible Assets We have in the past made acquisitions of products and businesses that
include goodwill, license agreements, product rights, and other identifiable
intangible assets. We assess the impairment of goodwill and other identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Some factors we consider important
which could trigger an impairment review include the following: (i) significant
underperformance relative to expected historical or projected future operating
results; (ii) significant changes in the manner of our use of the acquired
assets or the strategy for our overall business; and (iii) significant negative
industry or economic trends. When we determine that the carrying value of goodwill and other
identifiable intangibles may not be recoverable based upon the existence of one
or more of the above indicators of impairment, we first will perform an
assessment of the assets recoverability based on expected undiscounted future
net cash flow and, if the amount is 41




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less than the assets value, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by our management
to be commensurate with the risk inherent in our current business model. In
accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we do not
amortize goodwill. In lieu of amortization, we are required to perform an
impairment review of goodwill on an annual basis. If we determine through the
impairment process that goodwill has been impaired, we would record the
impairment charge in our statement of income. As a result of our acquisitions, we included approximately $55.4 million
and $55.3 million of goodwill on our consolidated balance sheets as of June 30,
2004 and June 30, 2003, respectively. As a result of our acquisitions of product rights and other identifiable
intangible assets, we have included approximately $275.7 million and $218.8
million as net intangible assets on our consolidated balance sheets as of June
30, 2004 and June 30, 2003, respectively. Estimated amortization expense for
intangible assets as of June 30, 2004 for each of the five succeeding fiscal
years is approximately $4.4 million. Income Taxes Income taxes are determined using an annual effective tax rate, which is
generally less than the U.S. Federal statutory rate, primarily because of
tax-exempt interest, charitable contribution deductions and research and
experimentation tax credits available in the United States. Our effective tax
rate may be subject to fluctuations during the fiscal year as new information
is obtained which may affect the assumptions we use to estimate our annual
effective tax rate, including factors such as our mix of pre-tax earnings in
the various tax jurisdictions in which we operate, valuation allowances against
deferred tax assets, reserves for tax audit issues and settlements, utilization
of research and experimentation tax credits and changes in tax laws in
jurisdictions where we conduct operations. We recognize deferred tax assets and
liabilities for temporary differences between the financial reporting basis and
the tax basis of our assets and liabilities. We record valuation allowances
against our deferred tax assets to reduce the net carrying value to an amount
that management believes is more likely than not to be realized. Deferred income taxes are presented net of a valuation allowance of
approximately $17.5 million as of June 30, 2004 and June 30, 2003. Managed Care and Medicaid Reserves We establish and maintain reserves for amounts payable by us to Managed
Care Organizations and state Medicaid programs for the reimbursement of
portions of the retail price of prescriptions filled that are covered by the
respective programs. The amounts estimated to be paid relating to products sold
are recognized as revenue reductions and as additions to accrued expenses at
the time of sale based on our best estimate of the expected prescription fill
rate to these managed care and state Medicaid patients, using historical
experience adjusted to reflect known changes in the factors that impact such
reserves. If the levels of managed care and Medicaid rebates fluctuate significantly
and/or if our estimates do not adequately reserve for these reductions of net
product revenues, our reported net product revenues could be negatively
affected. Accrued liabilities include reserves of approximately $11.7 million and
$11.1 million at June 30, 2004 and June 30, 2003, respectively, for estimated
managed care and Medicaid rebates. Research and Development Costs and Accounting for Strategic Collaborations All research and development costs, including payments related to products
under development and research consulting agreements, are expensed as incurred.
We may continue to make up-front, non-refundable payments to third parties for
new technologies and for research and development work that has been completed.
These up-front payments may be expensed at the time of payment depending on
the nature of the payment made. 42




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Our policy on accounting for costs of strategic collaborations determines
the timing of our recognition of certain development costs. In addition, this
policy determines whether the cost is classified as development expense or
capitalized as an asset. We are required to form judgments with respect to the
commercial status of such products in determining whether development costs
meet the criteria for immediate expense or capitalization. For example, when
we acquire certain products for which there is already an ANDA or NDA
available, and there is net realizable value based on projected sales for these
products, we capitalize the amount paid as an intangible asset. In addition,
if we acquire product rights that are in the development phase and as to which
we have no assurance that the third party is required to perform additional
research efforts, we expense such payments. During fiscal 2004 and fiscal 2003, we incurred and expensed approximately
$2.4 million and $20.2 million, respectively, of up-front or development
milestone payments related to research and development collaborations. EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,
which addresses consolidation by business enterprises of variable interest
entities (VIEs) either: (1) that do not have sufficient equity investment at
risk to permit the entity to finance its activities without additional
subordinated financial support, or (2) in which the equity investors lack an
essential characteristic of a controlling financial interest. In December
2003, the FASB completed deliberations of proposed modifications to FIN 46
(Revised Interpretations) resulting in multiple effective dates based on the
nature as well as the creation date of the VIE. VIEs created after January 31,
2003, but prior to January 1, 2004, may be accounted for either based on the
original interpretation or the Revised Interpretations. For VIEs created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be applied
for the first interim or annual period ending after December 15, 2003. Certain
disclosures are effective immediately. VIEs created after January 1, 2004 must
be accounted for under the Revised Interpretations. We currently have no
contractual relationship or other business relationship with a variable
interest entity, and, therefore, the adoption of FIN No. 46 did not have any
effect on our consolidated financial position, results of operations or cash
flows. In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, which is generally effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. SFAS No. 149 clarifies under what circumstances a contract with
an initial net investment meets the characteristic of a derivative as discussed
in SFAS No. 133, clarifies when a derivative contains a financing component,
amends the definition of an underlying to conform it to the language used in
FASB Interpretation No. 45, Guarantor Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others and
amends certain other existing pronouncements. We do not have any derivative
financial instruments. The adoption of SFAS No. 149 did not have any impact on
our consolidated balance sheets or statements of operations, shareholders
equity and cash flows. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
This Statement requires that certain instruments that were previously
classified as equity on a companys statement of financial position now be
classified as liabilities. The Statement is effective for financial instruments
entered into or modified after May 31, 2003, and to all other instruments that
exist as of the beginning of the first interim financial reporting period
beginning after June 15, 2003. We have no instruments impacted by the adoption
of this statement, and, therefore, the adoption of SFAS No. 150 did not have
any effect on our consolidated financial position, results of operations or
cash flows. In March 2004, the Emerging Issues Task Force (EITF) reached a consensus
on EITF 03-6, Participating Securities and the Two-Class Method under FASB
Statement No. 128, Earnings per Share. EITF 03-6 provides guidance about how
to determine whether a security should be considered a participating security
for purposes of computing earnings per share and how earnings or losses should
be allocated to a participating security when using the two-class method for
computing basic earnings per share. The provisions of EITF 03-6 are effective
for reporting periods beginning after March 31, 2004, and must be applied by
restating previously reported earnings per share amounts. We have no
securities considered to be participating securities and therefore the
adoption did not 43




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have any effect on our consolidated financial statements. At the July 2004 meeting, the EITF began discussing Issue 04-8,
Accounting Issues Related to Certain Features of Contingently Convertible Debt
and the Effect on Diluted Earnings per Share, and the accounting for
contingently convertible debt instruments, commonly referred to as CoCos. CoCos
combine the features of contingently issuable shares with a convertible debt
instrument. These instruments generally become convertible into common stock
only if one or more specified events occurs, such as the underlying common
stock achieving a specified price target. Under current interpretations of
FASB Statement No. 128, Earnings per Share,issuers of CoCos exclude the
potential common shares underlying the CoCo from the calculation of diluted
earnings per share until the market price or other contingency is met. When
the contingency is met, generally the if-converted method is used to
calculate the dilutive impact of the instrument. Under the if-converted
method, the instrument is considered converted, with the resulting number of
shares included in the denominator of the earnings per share calculation and
the interest expense (net of tax) added back to the numerator of the earnings
per share calculation. While a traditional convertible debt instrument may
dilute earnings per share right away (application of the if-converted method
is required even if the conversion option is out of the money), current
accounting practice for CoCos avoids this dilution until a specified
contingency is met (the disclosure requirements associated with these
instruments were recently clarified by the FASB in FSP 129-1, Disclosure
Requirements under FASB Statement No. 129, Disclosure of Information about
Capital Structure, Relating to Contingently Convertible Securities). This
aspect of the accounting for CoCos is a significant aspect of their
attractiveness to issuers. The EITF reached a tentative conclusion that the
contingently issuable shares guidance in Statement 128 does not apply to
convertible debt. As a result, the dilutive effect of contingently convertible
debt should be included in the calculation of diluted earnings per share
immediately upon issuance of the instrument (generally using the if-converted
method). This represents a significant change in practice and will affect
hundreds of issuers. The Task Force tentatively concluded that its conclusion
would be applied by retroactively restating earnings per share. The tentative
conclusion will be posted to the FASBs website for public comment. As the
accounting rules related to this issue have yet to be determined, the impact
has not been reflected in our consolidated financial statements. 
 ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We are exposed to interest rate fluctuations on our short-term investments
that are comprised of U.S. corporate securities and other debt securities that
we hold on an available-for-sale basis. Changes in interest rates do not affect
interest expense incurred on our Contingent Convertible Senior Notes as the
interest rate is fixed. We have not entered into derivative financial
instruments. 44




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The following table provides information about our financial instruments
that are sensitive to changes in interest rates. For our investment portfolio,
the table presents principal cash flows and related weighted-average yield
rates by expected maturity dates. Additionally, we have assumed our
available-for-sale securities are similar enough to aggregate for presentation
purposes. Interest Rate Sensitivity
Principal Amount by Expected Maturity as of June 30, 2004
(amounts in thousands) Financial instruments mature during fiscal year ended June 30,2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    ThereafterAvailable-for-sale securities
    
    $
    112,703
    
    
    $
    181,574
    
    
    $
    64,180
    
    
    $
    12,911
    
    
    $
    
    
    
    $
    216,051Weighted-average yield rate
    
    
    1.9
    %
    
    
    1.8
    %
    
    
    1.9
    %
    
    
    1.3
    %
    
    
    
    
    
    
    1.5
    %Contingent convertible
senior notes due 2032
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    169,163Interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.5
    %Contingent convertible
senior notes due 2033
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    283,910Interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.5
    %
 We have minimal operations outside of the United States and, accordingly,
we have not been susceptible to significant risk from changes in foreign
currencies. During the normal course of business we could be subjected to a variety of
market risks, examples of which include, but are not limited to, interest rate
movements and foreign currency fluctuations, as we discussed above, and
collectibility of accounts receivable. We continuously assess these risks and
have established policies and procedures to protect against the adverse effects
of these and other potential exposures. Although we do not anticipate any
material losses in these risk areas, no assurance can be made that material
losses will not be incurred in these areas in the future. 
 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our financial statements and related financial statement schedule at June
30, 2004 and June 30, 2003 and for each of the three years in the period ended
June 30, 2004 and the Independent Registered Public Accounting Firms Report
thereon are contained on pages F-1 through F-30 and S-1 of this report on Form
10-K. 
  ITEM 9:
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 ITEM 9A: CONTROLS AND PROCEDURES Medicis maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in reports filed by Medicis
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commissions rules and forms and that such information is accumulated
and communicated to Medicis management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow for timely decisions
regarding required disclosure. Our Chief Executive Officer and Chief Financial
Officer evaluated, with the participation of other members of management, the
effectiveness of Medicis disclosure controls and procedures (as defined in
Exchange Act Rule 15d-15(e)), as of the end of the period covered by this
Annual Report on Form 10-K. Based on this 45




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evaluation, Medicis management concluded that the Companys disclosure
controls and procedures were effective. There were no significant changes in
our internal controls over financial reporting identified in connection with
this evaluation that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, Medicis
internal controls over financial reporting. 
 ITEM 9B: OTHER INFORMATION None. 
 PART III 
 ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company has adopted a written code of ethics, Medicis Pharmaceutical
Corporation Code of Business Conduct and Ethics, which is applicable to all
directors, officers and employees of the Company, including the Companys
principal executive officer, principal financial officer, principal accounting
officer or controller and other executive officers identified pursuant to this
Item 10 who perform similar functions (collectively, the Selected Officers).
In accordance with the rules and regulations of the SEC, a copy of the code is
available on the Companys website. The Company will disclose any changes in
or waivers from its code of ethics applicable to any Selected Officer on its
website at http://www.medicis.com or by filing a Form 8-K. 
 ITEM 11: EXECUTIVE COMPENSATION 
 ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 
 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 
 ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES The information called for by each of Items 10, 11, 12, 13 and 14 is
incorporated by reference to Medicis definitive proxy statement for the 2004
Annual Meeting of Shareholders to be filed pursuant to Regulation 14A. 46




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PART IV 
 ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  (a)
    
    Documents filed as a part of this Report Page(1
    )
    
    Financial Statements:Index to consolidated financial statements
    
    
    F-1Report of Ernst & Young LLP, Independent Registered Public
Accounting Firm
    
    
    F-2Consolidated balance sheets at June 30, 2004 and 2003
    
    
    F-3Consolidated statements of income for the years ended
June 30, 2004, 2003 and 2002
    
    
    F-5Consolidated statements of stockholders equity for the years
ended June 30, 2004, 2003 and 2002
    
    
    F-6Consolidated statements of cash flows for the years ended June 30,
2004, 2003 and 2002
    
    
    F-8Notes to consolidated financial statements
    
    
    F-9(2
    )
    
    Financial Statement Schedule:Schedule II - Valuation and Qualifying Accounts
    
    
    S-1This 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.
    
    
    
    Description2.1
    
    -
    
    Agreement of Merger by and between Medicis Pharmaceutical Corporation, a Delaware
corporation, Medicis Acquisition Corporation, a Delaware corporation, and GenDerm
Corporation, a Delaware corporation, dated November 28, 1997(11)2.1 (a)
    
    -
    
    Agreement of Plan of Merger, dated as of October 1, 2001, by and among Medicis
Pharmaceutical Corporation, MPC Merger Corp. and Ascent Pediatrics, Inc.(17)3.1
    
    -
    
    Certificate of Incorporation of the Company, as amended (filed herewith)3.3 (a)
    
    -
    
    Amended and Restated By-Laws of the Company(13)4.1
    
    -
    
    Rights Agreement, dated August 17, 1995, between the Company and American
Stock Transfer & Trust Company, as Rights Agent(4)4.1 (b)
    
    -
    
    Amendment No. 2 to Rights Agreement, dated March 17, 1997, between the
Company and Norwest Bank Minnesota, N.A.(9)4.1 (c)
    
    -
    
    Amendment No. 3 to Rights Agreement, dated May 31, 2002, between the Company and Wells
Fargo Bank Minnesota, N.A., as successor-in-interest to American Stock Transfer & Trust
Company(18)4.1 (d)
    
    -
    
    Indenture, dated as of August 19, 2003, by and between Medicis Pharmaceutical
Corporation, as issuer, and Deutsche Bank Trust Company Americas, as trustee (filed
herewith)4.1 (e)
    
    -
    
    Indenture, dated as of June 4, 2002, by and between Medicis Pharmaceutical Corporation,
as issuer, and Deutsche Bank Trust Company Americas, as trustee.(19)4.2
    
    -
    
    Registration Rights Agreement, dated as of June 4, 2002, by and between Medicis
Pharmaceutical Corporation and Deutsche Bank Securities Inc.(19)4.3
    
    -
    
    Form of specimen certificate representing Class A common stock(1)10.1
    
    -
    
    Asset Purchase Agreement among Medicis Pharmaceutical Corporation, Ascent Pediatrics,
Inc., BioMarin Pharmaceutical Inc., and BioMarin Pediatrics Inc., dated April 20, 2004
(filed herewith)10.2
    
    -
    
    Securities Purchase Agreement among Medicis Pharmaceutical Corporation, Ascent
Pediatrics, Inc., BioMarin Pharmaceutical Inc., and BioMarin Pediatrics Inc., dated May
18, 2004 (filed herewith)10.3
    
    -
    
    License Agreement among Medicis Pharmaceutical Corporation, Ascent Pediatrics, Inc.,
 47




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##### Table of Contents



Exhibit No.
    
    
    
    Descriptionand BioMarin Pediatrics Inc., dated May 18, 2004 (filed herewith)10.8
    
    -
    
    Medicis Pharmaceutical Corporation 1995 Stock Option Plan (incorporated by
reference to Exhibit C to the definitive Proxy Statement for the 1995 Annual
Meeting of Shareholders previously filed with the SEC, File No. 0-18443)10.9
    
    -
    
    Employment Agreement between the Company and Jonah Shacknai, dated
July 24, 1996(8)10.9 (a)
    
    -
    
    Amendment to Employment Agreement by and between the Company and
Jonah Shacknai, dated April 1, 1999(15)10.9 (b)
    
    -
    
    Amendment to Employment Agreement by and between the Company and
Jonah Shacknai, dated February 21, 2001 (15)10.20
    
    -
    
    Medicis Pharmaceutical Corporation 2002 Stock Option Plan (20)10.59
    
    -
    
    Supply Agreement, dated October 21, 1992, between Schein and the Company(2)10.70
    
    -
    
    Amendment to Manufacturing and Supply Agreement, dated March 2, 1993, between
Schein and the Company(3)10.72(a)
    
    -
    
    Credit and Security Agreement, dated August 3, 1995, between the Company and
Norwest Business Credit, Inc. (5)10.72(b)
    
    -
    
    First Amendment to Credit and Security Agreement, dated May 29, 1996,
between the Company and Norwest Bank Arizona, N.A.(8)10.72(c)
    
    -
    
    Second Amendment to Credit and Security Agreement, dated November 22, 1996,
by and between the Company and Norwest Bank Arizona, N.A. as successor-in-interest
to Norwest Business Credit, Inc.(10)10.72(d)
    
    -
    
    Third Amendment to Credit and Security Agreement, dated November 22, 1998, by
and between the Company and Norwest Bank Arizona, N.A., as successor-in-interest
to Norwest Business Credit, Inc.(12)10.72(e)
    
    
    
    Fourth Amendment to Credit and Security Agreement, dated November 22, 2000,
by and between the Company and Wells Fargo Bank Arizona, N.A., formerly
known as Norwest Bank Arizona, N.A., as successor-in-interest to Norwest Business
Credit, Inc.(16)10.72(f)
    
    -
    
    Fifth Amendment to Credit and Security Agreement, dated November 22, 2002, by and
between the Company and Wells Fargo Bank Arizona, N.A., formerly known as Norwest Bank
Arizona, N.A., as successor-in-interest to Norwest Business Credit, Inc. (filed
herewith)10.73(a)
    
    -
    
    Patent Collateral Assignment and Security Agreement, dated August 3, 1995, by
the Company to Norwest Business Credit, Inc.(6)10.73(b)
    
    -
    
    First Amendment to Patent Collateral Assignment and Security Agreement, dated
May 29, 1996, by the Company to Norwest Bank Arizona, N.A.(8)10.73(c)
    
    -
    
    Amended and Restated Patent Collateral Assignment and Security Agreement, dated
November 22, 1998, by the Company to Norwest Bank Arizona, N.A.(12)10.74(a)
    
    -
    
    Trademark Collateral Assignment and Security Agreement, dated August 3, 1995,
by the Company to Norwest Business Credit, Inc.(7)10.74(b)
    
    -
    
    First Amendment to Trademark Collateral Assignment and Security Agreement, dated
May 29, 1996, by the Company to Norwest Bank Arizona, N.A.(8)10.74(c)
    
    -
    
    Amended and Restated Trademark, Tradename, and Service Mark Collateral
Assignment and Security Agreement, dated November 22, 1998, by the Company
to Norwest Bank Arizona, N.A. (12)10.75
    
    -
    
    Assignment and Assumption of Loan Documents, dated May 29, 1996, from
Norwest Business Credit, Inc., to and by Norwest Bank Arizona, N.A.(8)10.76
    
    -
    
    Multiple Advance Note, dated May 29, 1996, from the Company to Norwest Bank
Arizona, N.A.(8)10.89
    
    -
    
    Asset Purchase Agreement dated November 15, 1998, by and among the Company and
Hoechst Marion Roussel, Inc., Hoechst Marion Roussel Deutschland GMHB and
Hoechst Marion Roussel, S.A.(12)10.90
    
    -
    
    License and Option Agreement dated November 15, 1998, by and among the Company
and Hoechst Marion Roussel, Inc., Hoechst Marion Roussel Deutschland GMBH and
Hoechst Marion Roussel, S.A. (12)10.91
    
    -
    
    Loprox Lotion Supply Agreement dated November 15, 1998, by and between the
Company and Hoechst Marion Roussel, Inc. (12)10.92
    
    -
    
    Supply Agreement dated November 15, 1998, by and between the Company and
Hoechst Marion Roussel Deutschland GMBH (12)
 48




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##### Table of Contents



Exhibit No.
    
    
    
    Description10.93
    
    -
    
    Asset Purchase Agreement effective January 31, 1999, between the Company and
Bioglan Pharma Plc(14)10.94
    
    -
    
    Stock Purchase Agreement by and among the Company, Ucyclyd Pharma, Inc. and
Syed E. Abidi, William Brusilow, Susan E. Brusilow and Norbert L. Wiech, dated
April 19, 1999 (14)10.95
    
    -
    
    Asset Purchase Agreement by and between the Company and Bioglan Pharma Plc,
dated June 29, 1999 (14)10.96
    
    -
    
    Asset Purchase Agreement by and among The Exorex Company, LLC, Bioglan
Pharma Plc, the Company and IMX Pharmaceuticals, Inc., dated June 29, 1999(16)10.97
    
    -
    
    Medicis Pharmaceutical Corporation Executive Retention Plan (14)10.98
    
    
    
    Asset Purchase Agreement between Warner Chilcott, plc and the Company, dated
September 14, 1999(14)10.99
    
    -
    
    Share Purchase Agreement between Q-Med International B.V. and Startskottet 21914
AB (under proposed change of name to Medicis Sweden Holdings AB), dated
February 10, 2003(21)10.99(a)
    
    -
    
    Amendment No. 1 to Share Purchase Agreement between Q-Med International
B.V. and Startskottet 21914 AB (under proposed change of name to Medicis Sweden
Holdings AB), dated March 7, 2003(21)10.100
    
    -
    
    Supply Agreement between Q-Med AB and Medicis Pharmaceutical Corporation,
dated March 7, 2003(21)10.101
    
    -
    
    Amended and Restated Intellectual Property Agreement between Q-Med AB and HA
North American Sales AB, dated March 7, 2003(21)10.102
    
    -
    
    Supply Agreement between Medicis Aesthetics Holdings Inc., a wholly owned subsidiary of
Medicis Pharmaceutical Corporation, and Q-Med AB, dated July 15, 2004 (filed herewith)
Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a
request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934.10.103
    
    -
    
    Intellectual Property License Agreement between Q-Med AB and Medicis Aesthetics
Holdings Inc., dated July 15, 2004 (filed herewith) Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to a request for confidential
treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.12
    
    -
    
    Computation of Ratios of Earnings to Fixed Charges (filed herewith)21.1
    
    -
    
    Subsidiaries (filed herewith)23.1
    
    -
    
    Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (filed
herewith)24.1
    
    -
    
    Power of Attorney See signature page(s)31.1
    
    -
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act, as amended (filed herewith)31.2
    
    -
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act, as amended (filed herewith)32.1
    
    -
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)32.2
    
    -
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)99.1
    
    -
    
    Exclusive Remedy Agreement, dated as of October 1, 2001, by and among Medicis
Pharmaceutical Corporation, Ascent Pediatrics, Inc., FS Private Investments LLC, Furman
Selz Investors II L.P., FS Employee Investors LLC, FS Ascent Investments LLC and FS
Parallel Fund L.P., BancBoston Ventures Inc., Flynn Partners, Raymond F. Baddour,
Sc.D., Robert E. Baldini, Medical Science Partners L.P. and Emmett Clemente, Ph.D. (17)99.1 (a)
    
    -
    
    Charter of the Nominating and Governance Committee of the Board of Directors of Medicis
Pharmaceutical Corporation(22)99.2
    
    -
    
    Note Agreement, dated as of October 1, 2001, by and among Ascent Pediatrics, Inc.,
Medicis Pharmaceutical Corporation, Furman Selz Investors II L.P., FS Employee
Investors LLC, FS Ascent Investments LLC, FS Parallel Fund L.P., BancBoston Ventures
Inc. and Flynn Partners (17)99.2 (a)
    
    -
    
    Medicis Pharmaceutical Corporation Corporate Governance Guidelines(22)99.3
    
    -
    
    Voting Agreement, dated as of October 1, 2001, by and among Medicis Pharmaceutical
Corporation, MPC Merger Corp., FS Private Investments LLC, Furman Selz Investors II
 49




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##### Table of Contents



Exhibit No.
    
    
    
    DescriptionL.P., FS Employee Investors LLC, FS Ascent Investments LLC and FS Parallel Fund L.P.
(17)
  (1)
    
    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(2)
    
    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(3)
    
    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(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,
1995, File No. 0-18443, previously filed with the SEC (the 1994 Form
10-K)(5)
    
    Incorporated by reference to exhibit number 4.2 in the 1995 Form 10-K(6)
    
    Incorporated by reference to exhibit number 4.4 in the 1995 Form 10-K(7)
    
    Incorporated by reference to exhibit number 4.5 in the 1995 Form 10-K(8)
    
    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,
1996, File No. 0-18443, previously filed with the SEC(9)
    
    Incorporated by reference to the exhibit with the same number in the
Companys Quarterly Report on Form 10-Q for the quarter ended March 31,
1997, File No. 0-18443, previously filed with the SEC(10)
    
    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, 1996, File No. 0-18443, previously filed with the SEC(11)
    
    Incorporated by reference to the exhibit with the same number in the
Companys Current Report on Form 8-K filed with the SEC on December 15, 1997(12)
    
    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, 1998, File No. 0-18443, previously filed with the SEC(13)
    
    Incorporated by reference to the exhibit with the same number in the
Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 1999, File No. 0-18443, previously
filed with the SEC(14)
    
    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,
1999, File No. 0-18443, previously filed with the SEC(15)
    
    Incorporated by reference to the exhibit with the same number in the
Companys Quarterly Report on Form 10-Q for the quarter ended March 31,
2001, File No. 0-18443, previously filed with the SEC(16)
    
    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,
2001, File No. 0-18443, previously filed with the SEC(17)
    
    Incorporated by reference to the exhibit with the same number in the
Companys Current Report on Form 8-K filed with the SEC on October 2, 2001(18)
    
    Incorporated by reference to the exhibit with the same number in the
Companys registration statement on
Form 8-A12B/A filed with the SEC on June 4, 2002 50




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##### Table of Contents



(19)
    
    Incorporated by reference to the exhibit with the same number in the
Companys Current Report on Form 8-K filed with the SEC on June 6, 2002(20)
    
    Incorporated by reference to the exhibit with the same number in the
Companys Current Report on Form
10-K for the fiscal year ended June 30, 2002, File No. 0-18443,
previously filed with the SEC(21)
    
    Incorporated by reference to the exhibit with the same number in the
Companys Current Report on Form
8-K filed with the SEC on March 10, 2003(22)
    
    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, 2003, File No. 0-18443,
previously filed with the SEC  (b)
    
    The exhibits to this Form 10-K follow the Companys Financial Statement
Schedule included in this Form 10-K.(c)
    
    The Financial Statement Schedule to this Form 10-K appears on page S-1 of
this Form 10-K. 51




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##### Table of Contents



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: September 10, 2004 MEDICIS PHARMACEUTICAL CORPORATIONBy:
    /s/ JONAH SHACKNAIJonah ShacknaiChairman of the Board and Chief Executive Officer 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. 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
Jonah Shacknai
    
    Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
    
    September 10, 2004/s/ MARK A. PRYGOCKI, SR.

Mark A. Prygocki, Sr.
    
    Executive Vice President, Chief Financial
Officer,
Corporate Secretary and Treasurer
(Principal Financial and Accounting Officer)
    
    September 10, 2004/s/ ARTHUR G. ALTSCHUL, JR.

Arthur G. Altschul, Jr.
    
    Director
    
    September 10, 2004/s/ SPENCER DAVIDSON
Spencer Davidson
    
    Director
    
    September 10, 2004/s/ STUART DIAMOND
Stuart Diamond
    
    Director
    
    September 10, 2004/s/ PETER S. KNIGHT, ESQ.

Peter S. Knight, Esq.
    
    Director
    
    September 10, 2004/s/ MICHAEL A. PIETRANGELO

Michael A. Pietrangelo
    
    Director
    
    September 10, 2004/s/ PHILIP S. SCHEIN, M.D.

Philip S. Schein, M.D.
    
    Director
    
    September 10, 2004/s/ LOTTIE SHACKELFORD
Lottie Shackelford
    
    Director
    
    September 10, 2004
 52




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##### Table of Contents



MEDICIS PHARMACEUTICAL CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGEReport of Ernst & Young LLP, Independent Registered Public
Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of June 30, 2004 and 2003
    
    
    F-3Consolidated Statements of Income for the fiscal years
ended June 30, 2004, 2003 and 2002
    
    
    F-5Consolidated Statements of Stockholders Equity for the
fiscal years ended June 30, 2004, 2003 and 2002
    
    
    F-6Consolidated Statements of Cash Flows for the fiscal years
ended June 30, 2004, 2003 and 2002
    
    
    F-8Notes to Consolidated Financial Statements
    
    
    F-9Schedule II  Valuation and Qualifying Accounts
    
    
    S-1
 53




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##### Table of Contents



Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of Medicis Pharmaceutical Corporation We have audited the accompanying consolidated balance sheets of Medicis
Pharmaceutical Corporation and subsidiaries as of June 30, 2004 and 2003, and
the related consolidated statements of income, stockholders equity, and cash
flows for each of the three years in the period ended June 30, 2004. Our
audits also included the financial statement schedule listed in Item 15(a)(2).
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 upon our audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Medicis
Pharmaceutical Corporation and subsidiaries at June 30, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 2004, in conformity with U.S.
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, present fairly in all material respects
the information set forth therein. /s/ Ernst & Young LLP Phoenix, Arizona
August 13, 2004 54




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##### Table of Contents



MEDICIS PHARMACEUTICAL CORPORATION 
 CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) JUNE 30,2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    46,621
    
    
    $
    44,346Restricted cash and short-term investments
    
    
    
    
    
    
    53,837Short-term investments
    
    
    587,419
    
    
    
    454,480Accounts
receivable, less allowances: 2004: $13,066; 2003: $12,716
    
    
    47,858
    
    
    
    51,661Inventories, net
    
    
    19,540
    
    
    
    14,005Deferred tax assets, net
    
    
    14,104
    
    
    
    10,450Other current assets
    
    
    18,321
    
    
    
    16,849Total current assets
    
    
    733,863
    
    
    
    645,628Property and equipment, net
    
    
    5,842
    
    
    
    3,094Intangible assets:Intangible assets related to product line acquisitions and
business combinations
    
    
    312,416
    
    
    
    245,989Other intangible assets
    
    
    15,288
    
    
    
    13,099327,704
    
    
    
    259,088Less: accumulated amortization
    
    
    51,961
    
    
    
    40,254Net intangible assets
    
    
    275,743
    
    
    
    218,834Goodwill
    
    
    55,401
    
    
    
    55,286Deferred financing costs, net
    
    
    7,535
    
    
    
    9,991Other non-current assets
    
    
    
    
    
    
    8$
    1,078,384
    
    
    $
    932,841
 See accompanying notes to consolidated financial statements.` 55




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##### Table of Contents



MEDICIS PHARMACEUTICAL CORPORATION CONSOLIDATED BALANCE SHEETS, Continued (in thousands, except share amounts) JUNE 30,2004
    
    2003LiabilitiesCurrent liabilities:Accounts payable
    
    $
    13,912
    
    
    $
    18,568Short-term contract obligation
    
    
    17,891
    
    
    
    18,306Income taxes payable
    
    
    712
    
    
    
    481Other current liabilities
    
    
    34,605
    
    
    
    31,492Total current liabilities
    
    
    67,120
    
    
    
    68,847Long-term liabilities:Contingent convertible senior notes
    
    
    453,067
    
    
    
    400,000Deferred tax liability, net
    
    
    2,894
    
    
    
    2,873Commitments and ContingenciesStockholders EquityPreferred stock, $0.01 par value; shares authorized: 5,000,000;
no shares issued
    
    
    
    
    
    
    Class A common stock, $0.014 par value; shares authorized:150,000,000; issued and outstanding: 65,419,460 and 62,509,682 at
June 30, 2004 and 2003, respectively
    
    
    916
    
    
    
    876Class B common stock, $0.014 par value; shares authorized: 1,000,000;
issued and outstanding: 758,032 at June 30, 2004 and
2003
    
    
    10
    
    
    
    10Additional paid-in capital
    
    
    517,468
    
    
    
    445,653Accumulated other comprehensive income
    
    
    (1,020
    )
    
    
    2,400Deferred compensation
    
    
    (1,212
    )
    
    
    (1,727
    )Accumulated earnings
    
    
    230,049
    
    
    
    204,817Less: Treasury stock, 8,681,468 shares at cost at June 30, 2004
and 2003, respectively
    
    
    (190,908
    )
    
    
    (190,908
    )Total stockholders equity
    
    
    555,303
    
    
    
    461,121$
    1,078,384
    
    
    $
    932,841
 See accompanying notes to consolidated financial statements. F-4




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##### Table of Contents



MEDICIS PHARMACEUTICAL CORPORATION 
 CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) YEAR ENDED JUNE 30,2004
    
    2003
    
    2002Net revenues
    
    $
    303,722
    
    
    $
    247,539
    
    
    $
    212,807Operating costs and expenses:Cost of product revenue
    
    
    46,606
    
    
    
    38,260
    
    
    
    35,765Selling, general and administrative
    
    
    118,253
    
    
    
    91,648
    
    
    
    77,314Research and development
    
    
    16,494
    
    
    
    29,568
    
    
    
    15,132Depreciation and amortization
    
    
    16,794
    
    
    
    10,125
    
    
    
    7,928In-process research and development
    
    
    
    
    
    
    
    
    
    
    6,217Operating costs and expenses
    
    
    198,147
    
    
    
    169,601
    
    
    
    142,356Operating income
    
    
    105,575
    
    
    
    77,938
    
    
    
    70,451Interest income
    
    
    10,050
    
    
    
    12,302
    
    
    
    9,909Interest expense
    
    
    (10,808
    )
    
    
    (12,580
    )
    
    
    (1,376
    )Loss on early extinguishment of debt
    
    
    (58,660
    )
    
    
    
    
    
    
    Income before income tax expense
    
    
    46,157
    
    
    
    77,660
    
    
    
    78,984Income tax expense
    
    
    (15,317
    )
    
    
    (26,404
    )
    
    
    (28,960
    )Net income
    
    $
    30,840
    
    
    $
    51,256
    
    
    $
    50,024Basic net income per share
    
    $
    0.55
    
    
    $
    0.94
    
    
    $
    0.83Diluted net income per share
    
    $
    0.52
    
    
    $
    0.91
    
    
    $
    0.80Cash dividend declared per common share
    
    $
    0.10
    
    
    $
    0.025
    
    
    $
    Basic common shares outstanding
    
    
    55,618
    
    
    
    54,376
    
    
    
    60,536Diluted common shares outstanding
    
    
    59,258
    
    
    
    56,422
    
    
    
    62,810
 See accompanying notes to consolidated financial statements. F-5




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##### Table of Contents



MEDICIS PHARMACEUTICAL CORPORATION 
 CONSOLIDATED STATEMENTS
OF SHAREHOLDERS EQUITY (in thousands) Class A
    
    Class BCommon Stock

    
    Common StockShares
    
    Amount
    
    Shares
    
    AmountBalance at June 30, 2001
    
    
    60,240
    
    
    $
    844
    
    
    
    846
    
    
    $
    12Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net unrealized gains on available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net unrealized losses on foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive income:Conversion of Class B common stock to
Class A common stock
    
    
    88
    
    
    
    2
    
    
    
    (88
    )
    
    
    (2
    )Restricted shares issued for deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    1,224
    
    
    
    16
    
    
    
    
    
    
    
    Tax effect of stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at June 30, 2002
    
    
    61,552
    
    
    
    862
    
    
    
    758
    
    
    
    10Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net unrealized gains on available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net unrealized gains on foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive income:Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted shares issued for deferred compensation, net
of cancellations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation, net of award
reacquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    958
    
    
    
    14
    
    
    
    
    
    
    
    Tax effect of stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at June 30, 2003
    
    
    62,510
    
    
    
    876
    
    
    
    758
    
    
    
    10Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net unrealized losses on available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net unrealized gains on foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive income:Conversion of contingent convertible senior notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation, net of award
reacquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    2,909
    
    
    
    40
    
    
    
    
    
    
    
    Tax effect of stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at June 30, 2004
    
    
    65,419
    
    
    $
    916
    
    
    
    758
    
    
    $
    10
 See accompanying notes to consolidated financial statements. F-6




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##### Table of Contents



[Continued from above table, first column(s) repeated] AccumulatedAdditional
    
    Other
    
    
    
    
    
    
    
    
    
    TreasuryPaid-In
    
    Comprehensive
    
    Deferred
    
    Accumulated
    
    StockCapital
    
    Income (Loss)
    
    Compensation
    
    Earnings
    
    Shares
    
    Amount
    
    TotalBalance at June 30, 2001
    
    $
    407,014
    
    
    $
    611
    
    
    $
    
    
    
    $
    104,899
    
    
    
    (600
    )
    
    $
    (9,927
    )
    
    $
    503,453Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,024
    
    
    
    
    
    
    
    
    
    
    
    50,024Net unrealized gains on available-for-sale
securities
    
    
    
    
    
    
    354
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    354Net unrealized losses on foreign currency
translation
    
    
    
    
    
    
    (175
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (175
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,203Conversion of Class B common stock to
Class A common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted shares issued for deferred compensation
Amortization of deferred compensation
    
    
    756
    
    
    
    
    
    
    
    (2,578
    )
    
    
    
    
    
    
    110
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    484
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    484Tax effect of stock options exercised
    
    
    14,364
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,3807,381
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,381Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,334
    )
    
    
    (146,842
    )
    
    
    (146,842
    )Balance at June 30, 2002
    
    
    429,515
    
    
    
    790
    
    
    
    (2,094
    )
    
    
    154,923
    
    
    
    (6,824
    )
    
    
    (154,947
    )
    
    
    429,059Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,256
    
    
    
    
    
    
    
    
    
    
    
    51,256Net unrealized gains on available-for-sale
securities
    
    
    
    
    
    
    1,396
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,396Net unrealized gains on foreign currency
translation
    
    
    
    
    
    
    214
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    214Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,866Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,362
    )
    
    
    
    
    
    
    
    
    
    
    (1,362
    )Restricted shares issued for deferred compensation, net
of cancellations
    
    
    (2
    )
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred compensation, net of award
reacquisitions
    
    
    
    
    
    
    
    
    
    
    365
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    365Exercise of stock options
    
    
    12,746
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,760Tax effect of stock options exercised
    
    
    3,394
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,394Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,858
    )
    
    
    (35,961
    )
    
    
    (35,961
    )Balance at June 30, 2003
    
    
    445,653
    
    
    
    2,400
    
    
    
    (1,727
    )
    
    
    204,817
    
    
    
    (8,682
    )
    
    
    (190,908
    )
    
    
    461,121Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,840
    
    
    
    
    
    
    
    
    
    
    
    30,840Net unrealized losses on available-for-sale
securities
    
    
    
    
    
    
    (3,452
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,452
    )Net unrealized gains on foreign currency
translation
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,420Conversion of contingent convertible senior notes
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6Dividends declared
Amortization of deferred compensation, net of award
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,608
    )
    
    
    
    
    
    
    
    
    
    
    (5,608
    )reacquisitions
    
    
    
    
    
    
    
    
    
    
    515
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    515Exercise of stock options
    
    
    51,393
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,433Tax effect of stock options exercised
    
    
    20,416
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,416Balance at June 30, 2004
    
    $
    517,468
    
    
    $
    (1020
    )
    
    $
    (1,212
    )
    
    $
    230,049
    
    
    
    (8,682
    )
    
    $
    (190,908
    )
    
    $
    555,303
 F-7




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MEDICIS PHARMACEUTICAL CORPORATION 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) YEAR ENDED JUNE 30,2004
    
    2003
    
    2002Operating Activities:Net income
    
    $
    30,840
    
    
    $
    51,256
    
    
    $
    50,024Adjustments to reconcile net income to net cash
provided by operating activities:In-process research and development
    
    
    
    
    
    
    
    
    
    
    6,217Depreciation and amortization
    
    
    18,938
    
    
    
    12,766
    
    
    
    8,138Gain on sale of property and equipment
    
    
    (4
    )
    
    
    
    
    
    
    Loss on sale of product rights
    
    
    32
    
    
    
    
    
    
    
    Gain on sale of available-for-sale investments
    
    
    (599
    )
    
    
    (380
    )
    
    
    (1,141
    )Amortization of deferred compensation
    
    
    515
    
    
    
    365
    
    
    
    484Deferred income tax expense (benefit)
    
    
    (3,634
    )
    
    
    8,879
    
    
    
    679Tax benefit from exercise of stock options
    
    
    20,416
    
    
    
    3,394
    
    
    
    7,381Provision for doubtful accounts and returns
    
    
    1,050
    
    
    
    5,321
    
    
    
    2,345Accretion of premium on investments
    
    
    7,284
    
    
    
    3,657
    
    
    
    3,200Accretion of discount on contract obligation
    
    
    
    
    
    
    
    
    
    
    340Loss on early extinguishment of debt
    
    
    58,660
    
    
    
    
    
    
    
    Changes in operating assets and liabilities (net of
acquired amounts):Accounts receivable
    
    
    2,753
    
    
    
    (11,318
    )
    
    
    (6,604
    )Inventories
    
    
    (5,535
    )
    
    
    (2,050
    )
    
    
    (2,246
    )Other current assets
    
    
    (1,472
    )
    
    
    (378
    )
    
    
    (1,707
    )Accounts payable
    
    
    (4,655
    )
    
    
    4,553
    
    
    
    (256
    )Income taxes payable
    
    
    232
    
    
    
    (979
    )
    
    
    1,197Other current liabilities
    
    
    3,143
    
    
    
    9,581
    
    
    
    5,491Net cash provided by operating activities
    
    
    127,964
    
    
    
    84,667
    
    
    
    73,542Investing Activities:Purchase of property and equipment
    
    
    (4,594
    )
    
    
    (1,367
    )
    
    
    (1,299
    )Proceeds from sale of property and equipment
    
    
    131
    
    
    
    
    
    
    
    Ascent merger, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (62,437
    )Payment of direct merger costs
    
    
    (633
    )
    
    
    (1,511
    )
    
    
    (1,794
    )Payment for purchase of product rights
    
    
    (84,116
    )
    
    
    (81,727
    )
    
    
    (18,184
    )Proceeds from sale of product rights
    
    
    12,100
    
    
    
    
    
    
    
    Purchase of available-for-sale investments
    
    
    (888,152
    )
    
    
    (712,040
    )
    
    
    (663,489
    )Sale of available-for-sale investments
    
    
    622,006
    
    
    
    566,080
    
    
    
    289,388Maturity of available-for-sale investments
    
    
    123,072
    
    
    
    138,975
    
    
    
    116,122Decrease (increase) in restricted cash
    
    
    53,837
    
    
    
    (22,153
    )
    
    
    Change in other assets
    
    
    8
    
    
    
    34
    
    
    
    33Net cash used in investing activities Activities
    
    
    (166,341
    )
    
    
    (113,709
    )
    
    
    (341,660
    )Financing Activities:Proceeds from issuance of Contingent Convertible
Senior Notes
    
    
    
    
    
    
    
    
    
    
    400,000Payment of deferred financing costs
    
    
    (5,276
    )
    
    
    (142
    )
    
    
    (12,600
    )Payment of dividends
    
    
    (5,536
    )
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (35,961
    )
    
    
    (146,842
    )Proceeds from the exercise of stock options
    
    
    51,433
    
    
    
    12,760
    
    
    
    14,380Net cash provided by (used in) financing activities
    
    
    40,621
    
    
    
    (23,343
    )
    
    
    254,938Effect of exchange rate on cash and
cash equivalents
    
    
    31
    
    
    
    214
    
    
    
    (175
    )Net increase (decrease) in cash and cash equivalents
    
    
    2,275
    
    
    
    (52,171
    )
    
    
    (13,355
    )Cash and cash equivalents at beginning of year
    
    
    44,346
    
    
    
    96,517
    
    
    
    109,872Cash and cash equivalents at end of year
    
    $
    46,621
    
    
    $
    44,346
    
    
    $
    96,517
 See accompanying notes to consolidated financial statements. F-8




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MEDICIS PHARMACEUTICAL CORPORATION 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 NOTE 1. NATURE OF BUSINESS Medicis Pharmaceutical Corporation is a leading specialty pharmaceutical
company focusing primarily on helping patients attain a healthy and youthful
appearance and self-image through the development and marketing of products in
the United States for the treatment of dermatological, aesthetic and podiatric
conditions in the United States and Canada. The Company offers a broad range
of products addressing various conditions including acne, fungal infections,
rosacea, hyperpigmentation, photoaging, psoriasis, eczema, skin and
skin-structure infections, seborrheic dermatitis and cosmesis (improvement in
the texture and appearance of skin). In March 2003, Medicis expanded into the
dermal aesthetic market through its acquisition of the exclusive U.S. and
Canadian rights to market, distribute and commercialize the dermal restorative
product lines known as RESTYLANE®,
PERLANE® and RESTYLANE FINE LINES from
Q-Med AB, a Swedish biotechnology/medical device company and its affiliates,
collectively Q-Med. RESTYLANE® has been approved by the Food and Drug
Administration (the FDA) for use in the United States. RESTYLANE®, PERLANE®
and RESTYLANE FINE LINES have been approved for use in Canada. See Note 7
for further discussion. In addition to the companys expansion into the dermal
aesthetics market, Medicis had previously expanded into the pediatric market in
November 2001 through its merger with Ascent Pediatrics, Inc. (Ascent).
Ascent marketed products to U.S.-based pediatricians, including an oral
treatment for children with asthma and other inflammatory respiratory
conditions (ORAPRED®). On May 18, 2004, the Company closed an asset purchase
agreement and license agreement and executed a securities purchase agreement
with BioMarin Pharmaceutical Inc. (BioMarin). The asset purchase agreement
involves BioMarins purchase of assets related to ORAPRED®, including assets
concerning the Ascent field sales force. The license agreement granted
BioMarin the exclusive worldwide rights to ORAPRED®, including proprietary
taste-masking technologies and related development technologies. The
securities purchase agreement granted BioMarin the option to purchase all
outstanding shares of common stock of Ascent, based on certain conditions. As
a result, the Company no longer markets products to U.S.-based pediatricians.
See Note 6 for further discussion. The consolidated financial statements include the accounts of Medicis
Pharmaceutical Corporation and its wholly owned subsidiaries (Medicis or the
Company). The Company does not have any subsidiaries in which it does not
own 100% of the outstanding stock. All of the Companys subsidiaries are
included in the consolidated financial statements. All significant
intercompany accounts and transactions have been eliminated in consolidation. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents At June 30, 2004, cash and cash equivalents included highly liquid
investments invested 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. F-9




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Restricted Cash and Investments Cash and investments that are restricted for use, for legal or other
contractual reasons, are segregated and classified as restricted cash and
investments. Investments The Company accounts for investments under Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The Companys debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value
with the unrealized gains and losses reported in stockholders equity. The
amortized cost of debt securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization is
included in interest income. Realized gains and losses and interest and
dividends on securities are included in interest income. The cost of securities
sold is based upon the specific identification method. 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 distribution and sale.
Inventories consist of salable products held at the Companys warehouses, as
well as raw materials and components at the manufacturers facilities, and are
valued at the lower of cost or market using the first-in, first-out method.
The Company provides valuation reserves for estimated obsolescence or
unmarketable inventory in an amount equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future
demand and market conditions. Inventories are as follows (amounts in thousands): JUNE 30,2004
    
    2003Raw materials
    
    $
    8,785
    
    
    $
    5,976Finished goods
    
    
    11,105
    
    
    
    8,727Valuation reserve
    
    
    (350
    )
    
    
    (698
    )Total inventories
    
    $
    19,540
    
    
    $
    14,005
 Property and Equipment Property and equipment are stated at cost. Depreciation is calculated on
a 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. Property and
equipment consist of the following (amounts in thousands): JUNE 30,2004
    
    2003Furniture, fixtures and equipment
    
    $
    7,268
    
    
    $
    4,129Leasehold improvements
    
    
    2,018
    
    
    
    8129,286
    
    
    
    4,941Less: accumulated depreciation
    
    
    (3,444
    )
    
    
    (1,847
    )$
    5,842
    
    
    $
    3,094
 Goodwill and Other Identifiable Intangible Assets The Company has in the past made acquisitions of products and businesses
that include goodwill, license agreements, product rights, and other
identifiable intangible assets. The Company assesses the impairment of F-10




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goodwill and other identifiable intangibles whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Some
factors the Company considers important which could trigger an impairment
review include the following: (i) significant underperformance relative to
expected historical or projected future operating results; (ii) significant
changes in the manner of our use of the acquired assets or the strategy for our
overall business; and (iii) significant negative industry or economic trends. When the Company determines that the carrying value of goodwill and other
identifiable intangibles may not be recoverable based upon the existence of one
or more of the above indicators of impairment, the Company first will perform
an assessment of the assets recoverability based on expected undiscounted
future net cash flow, and if the amount is less than the assets value, the
Company will measure any impairment based on a projected discounted cash flow
method using a discount rate determined by our management to be commensurate
with the risk inherent in our current business model. In accordance with SFAS
No. 142, Goodwill and Other Intangible Assets, the Company does not amortize
goodwill. In lieu of amortization, the Company is required to perform an
impairment review of goodwill on an annual basis. If the Company determines
through the impairment process that goodwill has been impaired, the Company
will record the impairment charge in the statement of income. The Company amortizes acquired identifiable intangible assets over their
expected useful lives, which range between five and 40 years. Estimated
amortization expense for intangible assets as of June 30, 2004 for each of the
five succeeding fiscal years is approximately $4.4 million. Deferred Financing Costs Deferred financing costs represent fees and other costs incurred in
connection with the June 2002 issuance of the 2.5% Contingent Convertible
Senior Notes Due 2032 and the August 2003 issuance of the 1.5% Contingent
Convertible Senior Notes Due 2033. These costs are being amortized on a basis
that approximates the effective interest method over the five-year period that
ends on the initial Put date of the Notes. Accumulated amortization amounted
to approximately $3.1 million as of June 30, 2004. Managed Care and Medicaid Reserves The Company establishes and maintains reserves for amounts payable to
Managed Care Organizations and state Medicaid programs for the reimbursement of
a portion of the retail price of prescriptions filled that are covered by the
respective plans. The amounts estimated to be paid relating to products sold
are recognized as revenue reductions and as additions to accrued expenses at
the time of sale based on the Companys best estimate of the expected
prescription fill rate to these Managed Care and state Medicaid patients using
historical experience adjusted to reflect known changes in the factors that
impact such reserves. Other Current Liabilities Other current liabilities are as follows (amounts in thousands): JUNE 30,2004
    
    2003Accrued incentives
    
    $
    8,069
    
    
    $
    6,054Deferred revenue
    
    
    3,545
    
    
    
    Managed care and Medicaid
reserves
    
    
    11,671
    
    
    
    11,082Other accrued expenses
    
    
    11,320
    
    
    
    14,356$
    34,605
    
    
    $
    31,492
 Revenue Recognition Revenue from product sales is recognized when the merchandise is shipped
to an unrelated third party pursuant to Staff Accounting Bulletin No. 104 (SAB
104), Revenue Recognition in Financial Statements. Accordingly, revenue is
recognized when all four of the following criteria are met: (i) persuasive
evidence that an F-11




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##### Table of Contents



arrangement exists; (ii) delivery of the products has occurred; (iii) the
selling price is both fixed and determinable; and (iv) collectibility is
reasonably assured. The Companys customers consist primarily of large
pharmaceutical wholesalers who sell directly into the retail channel.
Provisions for sales discounts, and estimates for chargebacks, rebates, damaged
product returns, and exchanges for expired product are established as a
reduction of product sales revenues at the time such revenues are recognized.
These revenue reductions are established by the Companys management as its
best estimate at the time of sale based on historical experience adjusted to
reflect known changes in the factors that impact such reserves. These revenue
reductions are generally reflected either as a direct reduction to accounts
receivable through an allowance, or as an addition to accrued expenses if the
provision is due to a party other than the wholesale or retail customer. The Company enters into licensing arrangements with other parties whereby
the Company receives contract revenue based on the terms of the agreement. The
timing of revenue recognition is dependent on the level of the Companys
continuing involvement in the manufacture and delivery of licensed products.
If the Company has continuing involvement, the revenue is deferred and
recognized on a straight-line basis over the period of continuing involvement.
In addition, if the licensing arrangements require no continuing involvement
and payments are merely based on the passage of time, the Company will assess
such payments for revenue recognition under the collectibility criteria of SAB
104. The Company does not provide any forms of price protection to its
wholesale customers and permits product returns only if the product is damaged
or if it is returned with 6-12 months of expiration and the customer is
committed to accept replacement product in exchange. The Companys customers
consist principally of financially viable wholesalers so revenue is recorded
upon sale to the wholesaler, net of estimated provisions. Advertising The Company expenses advertising as incurred. Advertising expenses for the
fiscal years ended June 30, 2004 (fiscal 2004), June 30, 2003 (fiscal 2003)
and June 30, 2002 (fiscal 2002) were approximately $22.5 million, $20.1
million and $17.4 million, respectively. Advertising expenses include samples
of the Companys products given to physicians for marketing to their patients. Stock-Based Compensation As of June 30, 2004, the Company has five stock-based employee
compensation plans. The Company accounts for those plans under the recognition
and measurement principles of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. Other
than restricted stock, no stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant. F-12




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The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), to stock-based employee
compensation (amounts in thousands, except per share amounts): 2004
    
    2003
    
    2002Net income, as reported
    
    $
    30,840
    
    
    $
    51,256
    
    
    $
    50,024Deduct: Total
stock-based
employee
compensation
expense determined
under fair value
methods of all
awards, net of
related tax effects
    
    
    17,034
    
    
    
    13,020
    
    
    
    14,259Pro forma net income
    
    $
    13,806
    
    
    $
    38,236
    
    
    $
    35,765Earnings per share:Basic, as reported
    
    $
    0.55
    
    
    $
    0.94
    
    
    $
    0.83Basic, pro forma
    
    $
    0.25
    
    
    $
    0.70
    
    
    $
    0.59Diluted, as reported
    
    $
    0.52
    
    
    $
    0.91
    
    
    $
    0.80Diluted, pro forma
    
    $
    0.23
    
    
    $
    0.68
    
    
    $
    0.57
 For purposes of pro forma disclosures, the estimated fair value of
stock-based compensation plans and other options is amortized to expense
primarily over the vesting period. See Note 19 for further discussion of the
Companys stock-based employee compensation. Shipping and Handling Costs Substantially all costs of shipping and handling of products to customers
are included in selling, general and administrative expense. Shipping and
handling costs for fiscal 2004, 2003 and 2002 were approximately $3.1 million,
$3.5 million and $3.7 million, respectively. Research and Development Costs and Accounting for Strategic Collaborations All research and development costs, including payments related to products
under development, and research consulting agreements, are expensed as
incurred. The Company makes up-front, non-refundable payments to third parties
for new technologies and for research and development work that has been
completed. These up-front payments may be expensed at the time of payment
depending on the nature of the payment made. The Companys policy on accounting for costs of strategic collaborations
determines the timing of the recognition of certain development costs. In
addition, this policy determines whether the cost is classified as development
expense or capitalized as an asset. Management is required to form judgments
with respect to the commercial status of such products in determining whether
development costs meet the criteria for immediate expense or capitalization. Income Taxes Income taxes are determined using an annual effective tax rate, which is
generally less than the U.S. Federal statutory rate, primarily because of
tax-exempt interest, charitable contribution deductions and research and
experimentation tax credits available in the United States. The Companys
effective tax rate may be subject to fluctuations during the fiscal year as new
information is obtained which may affect the assumptions it uses to estimate
its annual effective tax rate, including factors such as its mix of pre-tax
earnings in the various tax jurisdictions in which it operates, valuation
allowances against deferred tax assets, reserves for tax audit issues and
settlements, utilization of research and experimentation tax credits and
changes in tax laws in jurisdictions where the Company conducts operations.
The Company recognizes deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of its
assets and liabilities. The Company records valuation F-13




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allowances against its deferred tax assets to reduce the net carrying value to
an amount that management believes is more likely than not to be realized. Earnings Per Share Basic and diluted earnings per common share are calculated in accordance
with the requirements of Statement of Financial Accounting Standards No. 128,
Earnings Per Share. The contingently convertible debt has no impact on
diluted earnings per share until all conditions necessary for issuance have
been satisfied. During the quarters ended June 30, 2004, March 31, 2004 and December 31,
2003, the Old Notes met the criteria for the right of conversion into shares of
the Companys Class A common stock. This right of conversion of the Holders of
Old Notes was triggered by the stock closing above $31.96 on 20 of the last 30
trading days and the last trading day of the quarters ending June 30, 2004,
March 31, 2004 and December 31, 2003. During these periods, the underlying
shares related to the Old Notes were included in fully diluted earnings per
share if such inclusion was not anti-dilutive. Use of Estimates and Risks and Uncertainties The preparation of the consolidated financial statements in conformity
with U.S. 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 the health care environment and the reliance on
contract manufacturing services. The Company purchases its inventory from third party manufacturers, many
of whom are the sole source of products for the Company. The failure of such
manufacturers to provide an uninterrupted supply of products could adversely
impact the Companys ability to sell such products. Fair Value of Financial Instruments The carrying amount of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities reported in the
consolidated balance sheets approximates fair value because of the immediate or
short-term maturity of these financial instruments. The fair market value of
the Companys long-term debt is estimated based on market quotations at
year-end. The fair market value approximates $580.6 million at June 30, 2004. Reclassifications Certain prior year amounts have been reclassified to conform with the
current year presentation. Recently Issued Accounting Pronouncements In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,
which addresses consolidation by business enterprises of variable interest
entities (VIEs) either: (1) that do not have sufficient equity investment at
risk to permit the entity to finance its activities without additional
subordinated financial support, or (2) in which the equity investors lack an
essential characteristic of a controlling financial interest. In December
2003, the FASB completed deliberations of proposed modifications to FIN 46
(Revised Interpretations), resulting in multiple effective dates based on the
nature as well as the creation date of the VIE. VIEs created after January 31,
2003, but prior to January 1, 2004, may be accounted for either based on the
original interpretation or the Revised Interpretations. For VIEs created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be applied
for the first interim or annual period ending after December 15, 2003. Certain
disclosures are effective immediately. VIEs created after January 1, 2004 must
be accounted for under the Revised Interpretations. The Company currently has
no contractual relationship or other business relationship with a variable
interest entity, and, therefore, the adoption of FIN No. 46 did not have any F-14




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effect on the consolidated financial position, results of operations or
cash flows. In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, which is generally effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. SFAS No. 149 clarifies under what circumstances a contract with
an initial net investment meets the characteristic of a derivative as discussed
in SFAS No. 133, clarifies when a derivative contains a financing component,
amends the definition of an underlying to conform it to the language used in
FASB Interpretation No. 45, Guarantor Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others and
amends certain other existing pronouncements. The Company does not have any
derivative financial instruments. The adoption of SFAS No. 149 did not have
any impact on the Companys consolidated balance sheets or statements of
income, shareholders equity and cash flows. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
This Statement requires that certain instruments that were previously
classified as equity on a companys statement of financial position now be
classified as liabilities. The Statement is effective for financial
instruments entered into or modified after May 31, 2003, and to all other
instruments that exist as of the beginning of the first interim financial
reporting period beginning after June 15, 2003. The Company has no instruments
impacted by the adoption of this statement and, therefore, the adoption of SFAS
No. 150 did not have any effect on the consolidated financial position, results
of operations or cash flows. In March 2004, the Emerging Issues Task Force (EITF) reached a consensus
on EITF 03-6, Participating Securities and the Two-Class Method under FASB
Statement No. 128, Earnings per Share. EITF 03-6 provides guidance about how
to determine whether a security should be considered a participating security
for purposes of computing earnings per share and how earnings or losses should
be allocated to a participating security when using the two-class method for
computing basic earnings per share. The provisions of EITF 03-6 are effective
for reporting periods beginning after March 31, 2004, and must be applied by
restating previously reported earnings per share amounts. We have no
securities considered to be participating securities and, therefore, the
adoption did not have any effect on the consolidated financial statements. At the July 2004 meeting, the EITF began discussing Issue 04-8,
Accounting Issues Related to Certain Features of Contingently Convertible Debt
and the Effect on Diluted Earnings per Share, and the accounting for
contingently convertible debt instruments, commonly referred to as CoCos. CoCos
combine the features of contingently issuable shares with a convertible debt
instrument. These instruments generally become convertible into common stock
only if one or more specified events occurs, such as the underlying common
stock achieving a specified price target. Under current interpretations of
FASB Statement No. 128, Earnings per Share,issuers of CoCos exclude the
potential common shares underlying the CoCo from the calculation of diluted
earnings per share until the market price or other contingency is met. When
the contingency is met, generally the if-converted method is used to
calculate the dilutive impact of the instrument. Under the if-converted
method, the instrument is considered converted, with the resulting number of
shares included in the denominator of the earnings per share calculation and
the interest expense (net of tax) added back to the numerator of the earnings
per share calculation. While a traditional convertible debt instrument may
dilute earnings per share right away (application of the if-converted method
is required even if the conversion option is out of the money), current
accounting practice for CoCos avoids this dilution until a specified
contingency is met (the disclosure requirements associated with these
instruments were recently clarified by the FASB in FSP 129-1, Disclosure
Requirements under FASB Statement No. 129, Disclosure of Information about
Capital Structure, Relating to Contingently Convertible Securities). This
aspect of the accounting for CoCos is a significant aspect of their
attractiveness to issuers. The EITF reached a tentative conclusion that the
contingently issuable shares guidance in Statement 128 does not apply to
convertible debt. As a result, the dilutive effect of contingently convertible
debt should be included in the calculation of diluted earnings per share
immediately upon issuance of the instrument (generally using the if-converted
method). This represents a significant change in practice and will affect
hundreds of issuers. The Task Force tentatively concluded that its conclusion
would be applied by retroactively restating earnings per share. The tentative
conclusion will be posted to the FASB s website for public comment. As the
accounting rules related to this Issue has yet to be determined the impact has
not been reflected in the consolidated financial statements. F-15




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NOTE 3. CHANGE IN ESTIMATE In the first quarter of fiscal 2002, the Company changed the estimated
useful life for certain intangible assets from 20-25 years to 40 years. These
changes in estimate are based on managements determination that the products
related to these intangible assets appear to have longer useful lives than
originally estimated. There is no cumulative effect for this change. The
effect of this change on net income for fiscal 2002 was to increase net income
by approximately $958,000 or $0.02 per diluted common share. NOTE 4: SEGMENT AND PRODUCT INFORMATION The Company operates in one significant business segment:
Pharmaceuticals. The Companys current pharmaceutical franchises are divided
between the Dermatological and Non-Dermatological fields. The Dermatological
field represents products for the treatment of Acne and Acne-related
dermatological conditions and Non-acne dermatological conditions. The
Non-Dermatological field represents products for the treatment of Asthma (until
May 2004) and Urea Cycle Disorder. The Acne and Acne-related dermatological
product lines include core brands DYNACIN®, PLEXION® and TRIAZ®. The Non-acne
dermatological product lines include core brands LOPROX®, OMNICEF®, and
RESTYLANE®. The Non-Dermatological product lines include BUPHENYL® and
ORAPRED®, which was one of the Companys core brands until it was licensed to
BioMarin in May 2004. The Companys pharmaceutical products, with the exception of BUPHENYL®,
are promoted to dermatologists, podiatrists or plastic surgeons. Prior to the
Companys licensing of ORAPRED® to BioMarin in May 2004, the Company also
promoted to pediatricians. Such products are often prescribed by physicians
outside these specialties; including family practitioners, general
practitioners, primary-care physicians and OB/GYNs, as well as hospitals,
government agencies and others. All products, with the exception of BUPHENYL®,
are sold primarily to wholesalers and retail chain drug stores. BUPHENYL® is
primarily sold directly to hospitals and pharmacies. During the last three
fiscal years, four wholesalers accounted for the following portions of the
Companys net revenues: Fiscal 2004
    
    Fiscal 2003
    
    Fiscal 2002McKesson
    
    
    36.9
    %
    
    
    20.2
    %
    
    
    19.4
    %Cardinal
    
    
    23.8
    %
    
    
    25.4
    %
    
    
    22.4
    %Quality King
    
    
    *
    
    
    
    17.0
    %
    
    
    26.7
    %AmerisourceBergen
    
    
    *
    
    
    
    15.5
    %
    
    
    11.1
    %
 * less than 10% McKesson is the sole distributor for the Companys RESTYLANE® product,
which was launched in January 2004. The percentage of net revenues for each of the product categories is as
follows: FISCAL YEAR ENDED JUNE 30,2004
    
    2003
    
    2002Acne and acne-related dermatological products
    
    
    30
    %
    
    
    33
    %
    
    
    43
    %Non-acne dermatological products
    
    
    51
    
    
    
    37
    
    
    
    34Non-dermatological products
    
    
    19
    
    
    
    30
    
    
    
    23Total net revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 NOTE 5. STRATEGIC COLLABORATIONS On December 22, 2003, the Company announced that Corixa Corporation
(Corixa) and Medicis agreed to terminate further development of Corixas
immunotherapeutic product, PVAC treatment. Medicis and Corixa concluded that
data from the recently completed clinical trial of PVAC treatment in mild to
moderate psoriasis patients did not support further development of the product.
Medicis has no further financial obligation to Corixa. F-16




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On September 26, 2002, Medicis entered into an exclusive license and
development agreement with Dow Pharmaceutical Sciences, Inc. (Dow) for the
development and commercialization of a patented dermatologic product. Under
terms of the agreement, Medicis made an initial payment of $5.4 million and a
development milestone payment of $8.8 million to Dow during fiscal 2003, and a
development milestone payment of $2.4 million to Dow during fiscal 2004. In
accordance with the agreement between the parties, Medicis is required to make
potential additional payments upon the certification that certain development
milestones have occurred. The initial $5.4 million payment and the $8.8
million development milestone payment were recorded as charges to research and
development expense during fiscal 2003, and the $2.4 million development
milestone payment was recorded as a charge to research and development expense
during fiscal 2004. On September 4, 2002, the Company purchased the Abbreviated New Drug
Application (ANDA) for a pediatric prescription product from a third-party
pharmaceutical company for $9.0 million. Under terms of the agreement, the
Company may be required to make future contingent payments based on the
achievement of certain milestones. The contingent payments, if the milestones
are achieved, would be payable at the six (6)-, twelve (12)-, and eighteen
(18)-month anniversaries of the closing of the agreement. During fiscal 2003,
a milestone was achieved and a $4.0 million contingent payment was paid to the
third-party pharmaceutical company. During fiscal 2004, the second and third
milestones were achieved and $3.5 and $4.5 million, respectively, were paid to
the third-party pharmaceutical company. The Company accounted for the initial
payment and the subsequent contingent payments as an acquisition of an
intangible asset and commenced amortizing the asset over 15 years beginning in
the second quarter of fiscal 2003. This ANDA is included as part of the
BioMarin transaction discussed in Note 6. On June 26, 2002, Medicis entered into an exclusive strategic alliance
with aaiPharma, Inc. (aaiPharma) for the development, commercialization and
license of a key dermatologic product. Medicis made an initial payment of $7.7
million to aaiPharma during fiscal 2002, made a development milestone payment
of $6.0 million to aaiPharma during fiscal 2003, and has potential additional
payments to be made upon the successful completion of various development
milestones. The $7.7 million initial payment and the $6.0 million development
milestone payment were recorded as charges to research and development expense
during fiscal 2002 and fiscal 2003, respectively. NOTE 6. LICENSE OF ORAPRED® TO BIOMARIN On May 18, 2004, the Company closed an asset purchase agreement and
license agreement and executed a securities purchase agreement with BioMarin.
The asset purchase agreement involves BioMarins purchase of assets related to
ORAPRED®, including assets concerning the Ascent field sales force. ORAPRED®
and related pediatric intellectual property is owned by Ascent, a wholly owned
subsidiary of Medicis. The license agreement granted BioMarin the exclusive
worldwide rights to ORAPRED®, including proprietary taste-masking technologies
and related development technologies. The securities purchase agreement
granted BioMarin the option to purchase all outstanding shares of common stock
of Ascent, based on certain conditions. As part of the transaction, the name
of Ascent Pediatrics, Inc. was changed to Medicis Pediatrics, Inc. Under terms of the agreements, BioMarin will make license payments to
Ascent of approximately $93 million payable over a five-year period as follows:
approximately $10 million as of the date of the transaction; approximately
$12.5 million per quarter for four quarters beginning in July 2004;
approximately $2.5 million per quarter for the subsequent four quarters
beginning in July 2005; approximately $2 million per quarter for the subsequent
eight quarters beginning in July 2006; and approximately $1.75 million per
quarter for the last four quarters of the five-year period beginning in July
2008. BioMarin will also make payments of $2.5 million per quarter for six
quarters beginning in July 2004 for reimbursement of certain contingent
payments as discussed in Note 9. The license agreement will terminate in July
2009. At that time, based on certain conditions, BioMarin will have the option
to purchase all outstanding shares of Ascent for approximately $82 million.
The payment will consist of $62 million in cash and $20 million in BioMarin
common stock, based on the fair value of the stock at that time. The Company
is responsible for the manufacture and delivery of finished goods inventory to
BioMarin, and BioMarin will be responsible for paying the Company for future
finished goods inventory delivered through June 30, 2005. As a result, the
Company is required to recognize the first $60 million of license payments
ratably through June 30, 2005The Company has deferred approximately $3.5
million in revenue under the agreement as of June 30, F-17




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2004. The license payments received after June 30, 2005 will be
recognized as revenue when all four criteria of SAB 104 have been met. As of the closing date of the transaction, BioMarin is responsible for all
marketing and promotional efforts regarding the sale of ORAPRED®. As a result,
Medicis no longer advertises and promotes any oral liquid prednisolone sodium
phosphate solution product or any related line extension. Medicis has the
responsibility for the manufacture and delivery of finished goods inventory to
BioMarin, and BioMarin is responsible for paying Medicis for future finished
goods inventory delivered by Medicis through June 30, 2005. During the term of
the license agreement, Medicis will maintain ownership of the intellectual
property and, consequently, will continue to amortize the related intangible
assets. Payments received from BioMarin under the license agreement will be
treated as contract revenue, which is included in net revenues in the
consolidated statements of income. NOTE 7. ACQUISITION OF DERMAL AESTHETIC ENHANCEMENT PRODUCTS FROM THE Q-MED
GROUP On March 10, 2003, Medicis acquired all outstanding shares of HA North
American Sales AB from Q-Med, a Swedish biotechnology/medical device company.
HA North American Sales AB holds a license for the exclusive U.S. and Canadian
rights to market, distribute and commercialize the dermal restorative product
lines known as RESTYLANE®, PERLANE®
and RESTYLANE FINE LINES. RESTYLANE® has
been approved by the Food and Drug Administration (the FDA) for use in the
United States. RESTYLANE®, PERLANE®
and RESTYLANE FINE LINES have been
approved for use in Canada. Under terms of the agreements, a wholly owned
subsidiary of Medicis acquired all outstanding shares of HA North American
Sales AB for total consideration of approximately $160.0 million, payable upon
the successful completion of certain milestones or events. Medicis paid $58.2
million upon closing of the transaction, $53.3 million in December 2003 upon
FDA approval of RESTYLANE®, $19.4 million in May 2004 upon certain cumulative
commercial milestones being achieved and will pay approximately $29.1 million
upon FDA approval of PERLANE®. Payments and costs related to this acquisition
are capitalized as an intangible asset and are amortized over 15 years
beginning in March 2003. NOTE 8. LICENSE AND SALE OF PRODUCTS TO TARO PHARMACEUTICAL INDUSTRIES, LTD. On January 14, 2003, Taro Pharmaceutical Industries, Ltd. (Taro)
licensed with an option to purchase from Medicis four branded prescription
product lines for sale in the U.S. and Puerto Rico. The license agreement was
effective on January 14, 2003 and extended through June 1, 2004, after which
Taro had the option to purchase the product lines. Medicis received quarterly
license payments from Taro during the term of the agreement. Under terms of
the agreement, Taro licensed from Medicis the following four brands: TOPICORT®
(desoximetasone), a topical corticosteroid used for inflammatory skin diseases;
A/T/S® (erythromycin), a topical antibiotic used in the treatment of acne;
OVIDE® (malathion), a pediculicide used in the treatment of head lice; and
PRIMSOL® (trimethoprim HCI), an antibiotic oral solution for children with
acute otitis media, or middle ear infections. Taro purchased the product lines
at the end of the term of the agreement for $12.1 million. The carrying value
of the intangible assets related to these products was written off as of the
sale date, and a loss of approximately $32,000 was recognized during fiscal
2004 and is included in selling, general and administrative expenses in the
accompanying consolidated statements of income. The Company additionally
incurred $350,000 of professional fees related to the transaction. F-18




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NOTE 9. MERGER OF ASCENT PEDIATRICS, INC. On November 15, 2001, the Company completed its merger with Ascent,
purchasing all of the outstanding capital stock and retiring the indebtedness
of Ascent for consideration of approximately $60.0 million in cash plus up to
an additional $10.0 million per year for each of the first five years following
closing based upon reaching certain sales threshold milestones on the Ascent
products for each twelve month period ended November 15, 2006. The fixed
purchase price of $60.0 million was allocated as follows (amounts in
thousands): Intangible assets  core technology
    
    $
    2,049Intangible assets  trademarks
    
    
    2,868Intangible assets  customer list
    
    
    165Deferred tax assets
    
    
    29,701Goodwill
    
    
    24,952In-process research and development
    
    
    6,217Net assets acquired
    
    
    748
 Net assets acquired of $748,000 consist of current assets and net fixed
assets of $5.2 million and $148,000, respectively, offset by current
liabilities of $4.6 million. Current assets consisted primarily of cash,
accounts receivable, inventories and prepaid assets. Net fixed assets consisted
primarily of computers. Current liabilities consisted primarily of accounts
payable, accrued payroll and accrued commissions. The contingent portions of
the purchase price will be added to goodwill when and if threshold milestones
have been achieved or at such time that a payment is deemed to be probable.
The Company additionally incurred approximately $6.7 million of costs related
to the transaction, consisting of approximately $3.4 million of professional
services, including finder fees, $0.9 million of severance costs and $2.4
million of other costs. These costs were treated as additional direct costs of
acquisition and capitalized. The value assigned to in-process research and development was determined
by management based on an independent valuation analysis performed by a firm
other than our independent auditors. As of the valuation date, there were two
projects that were considered to be in-process. The values of the projects
were determined based on analyses of estimated cash flows to be generated by
the products that are expected to result from the in-process projects. These
cash flows were estimated by forecasting total revenues expected from these
products, then deducting appropriate operating expenses, cash flow adjustments
and contributory asset returns to establish a forecast of net return on the
in-process technology. These net returns were substantially reduced to take
into account the time value of money and the risks associated with the inherent
difficulties and uncertainties in the FDA approval process. The above analysis
resulted in $6.2 million of value assigned to acquired in-process research and
development, which was expensed on the acquisition date in accordance with U.S.
generally accepted accounting principles. Medicis management believes the
assumptions used in valuing in-process research and development are reasonable,
but are inherently uncertain, and no assurance can be given that the
assumptions made will occur. The contingent portions of the purchase price may be required to be paid
for each of the first five years following closing based upon reaching certain
sales threshold milestones on the Ascent products for each twelve-month period
ended November 15, 2006, subject to certain deductions and set-offs. From time
to time, the Company assesses the probability and likelihood of payment in the
coming respective November period based on current sales trends. There can be
no assurance that such payment will ultimately be made nor is the accrual of a
liability an indication of current sales levels. A total of approximately
$17.9 million is included in short-term contract obligation in the Companys
consolidated balance sheets as of June 30, 2004, representing the first two
years Contingent Payments. Pursuant to the merger agreement, payment of the
contingent portion of the purchase price will be withheld pending the final
outcome of the litigation discussed in Note 14. As part of the transaction
with BioMarin in May 2004, Medicis will remain responsible for the Contingent
Payments under the Ascent merger agreement. See Note 6 for further discussion. F-19




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NOTE 10. RESTRICTED CASH AND SHORT-TERM INVESTMENTS In connection with the acquisition of the products from Q-Med (see Note
7), the Company was required to establish an escrow account related to the
$53.3 million the Company would pay to Q-Med upon FDA approval of the
RESTYLANE® product. The Company initially funded the restricted cash account
through transfers of existing short-term investments into the escrow account.
In December 2003, the restriction on the account was released as the FDA
approved the RESTYLANE® product for use in the United States. The account was
liquidated and $53.3 million was paid to Q-Med. The Company did not have any
restricted cash or short-term investments as of June 30, 2004. NOTE 11. SHORT-TERM INVESTMENTS The Companys short-term investments are intended to establish a
high-quality portfolio that preserves principal, meets liquidity needs, avoids
inappropriate concentrations and delivers an appropriate yield in relationship
to the Companys investment guidelines and market conditions. The following is a summary of available-for-sale securities (amounts in
thousands): JUNE 30, 2004Gross
    
    Gross
    
    GrossUnrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueU.S. corporate securities
    
    $
    123,848
    
    
    $
    224
    
    
    $
    360
    
    
    $
    123,712Other debt securities
    
    
    465,070
    
    
    
    164
    
    
    
    1,527
    
    
    
    463,707Total securities
    
    $
    588,918
    
    
    $
    388
    
    
    $
    1,887
    
    
    $
    587,419
 JUNE 30, 2003Gross
    
    Gross
    
    GrossUnrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueU.S. corporate securities
    
    $
    118,001
    
    
    $
    1,227
    
    
    $
    11
    
    
    $
    119,217Other debt securities
    
    
    333,112
    
    
    
    2,203
    
    
    
    52
    
    
    
    335,263Total securities
    
    $
    451,113
    
    
    $
    3,430
    
    
    $
    63
    
    
    $
    454,480
 During the years ended June 30, 2004 and 2003, the gross realized gains on
sales of available-for-sale securities totaled $1,360,154 and $396,289,
respectively, and the gross realized losses totaled $236,427 and $2,645
respectively. Such amounts of gains and losses are determined based on the
specific identification method. The net adjustment to unrealized gains during
fiscal 2004 and fiscal 2003 on available-for-sale securities included in
stockholders equity totaled $(3,451,343) and $1,395,678, respectively. The
amortized cost and estimated fair value of the available-for-sale securities at
June 30, 2004, by maturity, are shown below (amounts in thousands). Expected
maturities will differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations without prepayment
penalties, and the Company views its available-for-sale securities as available
for current operations. JUNE 30, 2004EstimatedCost
    
    Fair ValueAvailable-for-saleDue in one year or less
    
    $
    112,650
    
    
    $
    112,703Due after one year through five years
    
    
    260,033
    
    
    
    258,665Due after five years through 10 years
    
    
    15,569
    
    
    
    15,562Due after 10 years
    
    
    200,666
    
    
    
    200,489$
    588,918
    
    
    $
    587,419
 F-20




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NOTE 12. DEBT The Company has a revolving line of credit facility of up to $25.0 million
from Wells Fargo Bank, N.A. The facility may be drawn upon by the Company, at
its discretion, and is collateralized by principal assets of the Company. The
outstanding balance of the credit facility bears interest at a floating rate of
150 basis points in excess of the 30-day London Interbank Offered Rate and
expires in November 2004. 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. NOTE 13. CONTINGENT CONVERTIBLE SENIOR NOTES On June 4, 2002 and June 10, 2002, the Company sold $400.0 million
aggregate principal amount of its 2.5% Contingent Convertible Senior Notes Due
2032 (the Old Notes) in private transactions. As discussed below,
approximately $230.8 million in principal amount of the Old Notes was exchanged
for New Notes on August 14, 2003. The Old Notes bear interest at a rate of
2.5% per annum, which is payable on June 4 and December 4 of each year,
beginning on December 4, 2002. The Company also will pay contingent interest
at a rate equal to 0.5% per annum during any six-month period, with the initial
six-month period commencing June 4, 2007, if the average trading price of the
Old Notes reaches certain thresholds. The Old Notes will mature on June 4,
2032. The Company may redeem some or all of the Old Notes at any time on or
after June 11, 2007, at a redemption price, payable in cash, of 100% of the
principal amount of the Old Notes, plus accrued and unpaid interest, including
contingent interest, if any. Holders of the Old Notes may require the Company
to repurchase all or a portion of their Old Notes on June 4, 2007, 2012 and
2017; and upon a change in control, as defined in the indenture governing the
Old Notes, at 100% of the principal amount of the Old Notes, plus accrued and
unpaid interest to the date of the repurchase, payable in cash. The Old Notes are convertible, at the holders option, prior to the
maturity date into shares of the Companys Class A common stock in the
following circumstances:  
    
    during any quarter commencing after June 30, 2002, if the
closing price of the Companys Class A common stock over a specified
number of trading days during the previous quarter, including the
last trading day of such quarter, is more than 110% of the
conversion price of the Old Notes, or $31.96. The Old Notes are
initially convertible at a conversion price of $29.05 per share,
which is equal to a conversion rate of approximately 34.4234 shares
per $1,000 principal amount of Old Notes, subject to adjustment;
    
    if the Company has called the Old Notes for redemption;
    
    during the five trading day period immediately following any
nine consecutive day trading period in which the trading price of
the Old Notes per $1,000 principal amount for each day of such
period was less than 95% of the product of the closing sale price of
the Companys Class A common stock on that day multiplied by the
number of shares of the Companys Class A common stock issuable upon
conversion of $1,000 principal amount of the Old Notes; or
    
    upon the occurrence of specified corporate transactions. The Old Notes, which are unsecured, do not contain any restrictions on the
payment of dividends, the incurrence of additional indebtedness or the
repurchase of the Companys securities and do not contain any financial
covenants. The Company incurred $12.6 million of fees and other origination costs
related to the issuance of the Old Notes. The Company is amortizing these
costs over the five-year Put period, which runs through May 2007. On August 14, 2003, the Company exchanged approximately $230.8 million in
principal amount of its Old Notes for approximately $283.9 million in principal
amount of its 1.5% Contingent Convertible Senior Notes Due 2033 (the New
Notes). Holders of Old Notes that accepted the Companys exchange offer
received $1,230 in principal amount of New Notes for each $1,000 in principal
amount of Old Notes. The terms of the New Notes are F-21




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similar to the terms of the Old Notes, but have a different interest rate,
conversion rate and maturity date. Holders of Old Notes that chose not to
exchange continue to be subject to the terms of the Old Notes. The New Notes bear interest at a rate of 1.5% per annum, which is payable
on June 4 and December 4 of each year, beginning December 4, 2003. The Company
will also pay contingent interest at a rate of 0.5% per annum during any
six-month period, with the initial six-month period commencing June 4, 2008, if
the average trading price of the New Notes reaches certain thresholds. The New
Notes mature on June 4, 2033. The Company may redeem some or all of the New Notes at any time on or
after June 11, 2008, at a redemption price, payable in cash, of 100% of the
principal amount of the New Notes, plus accrued and unpaid interest, including
contingent interest, if any. Holders of the New Notes may require the Company
to repurchase all or a portion of their New Notes on June 4, 2008, 2013 and
2018, and upon a change in control, as defined in the indenture governing the
New Notes, at 100% of the principal amount of the New Notes, plus accrued and
unpaid interest to the date of the repurchase, payable in cash. The New Notes are convertible, at the holders option, prior to the
maturity date into shares of the Companys Class A common stock in the
following circumstances:  
    
    during any quarter commencing after September 30, 2003, if
the closing price of the Companys Class A common stock over a
specified number of trading days during the previous quarter,
including the last trading day of such quarter, is more than 120% of
the conversion price of the New Notes, or $46.51. The Notes are
initially convertible at a conversion price of $38.76 per share,
which is equal to a conversion rate of approximately 25.7998 shares
per $1,000 principal amount of New Notes, subject to adjustment;
    
    if the Company has called the New Notes for redemption;
    
    during the five trading day period immediately following any
nine consecutive day trading period in which the trading price of
the New Notes per $1,000 principal amount for each day of such
period was less than 95% of the product of the closing sale price of
the Companys Class A common stock on that day multiplied by the
number of shares of the Companys Class A common stock issuable upon
conversion of $1,000 principal amount of the New Notes; or
    
    upon the occurrence of specified corporate transactions. The New Notes, which are unsecured, do not contain any restrictions on the
incurrence of additional indebtedness or the repurchase of the Companys
securities and do not contain any financial covenants. The New Notes require
an adjustment to the conversion price if cash dividends of more than $0.025 per
quarter (after giving effect to the stock split described in Note 1) are paid
by the Company on its outstanding common stock. As a result of the exchange, the outstanding principal amounts of the Old
Notes and the New Notes were $169.2 million and $283.9 million, respectively.
Both the New Notes and Old Notes are reported in aggregate on the Companys
consolidated balance sheets. During the fiscal first quarter ended September
30, 2003, the Company recognized a loss on early extinguishment of debt
totaling $58.7 million, consisting of a $53.1 million premium and a $5.6
million write-off of corresponding Old Notes fees. The Company incurred
approximately $5.1 million of fees and other origination costs related to the
issuance of the New Notes. The Company is amortizing these costs over the
five-year Put period, which runs through August 2008. During the quarters ended June 30, 2004, March 31, 2004 and December 31,
2003, the Old Notes met the criteria for the right of conversion into shares of
the Companys Class A common stock. This right of conversion of the Holders of
Old Notes was triggered by the stock closing above $31.96 on 20 of the last 30
trading days and the last trading day of the quarters ending June 30, 2004,
March 31, 2004 and December 31, 2003. The Holders of Old Notes have this
conversion right only until September 30, 2004. At such time and at the end of
all future quarters, the conversion rights will be reassessed in accordance
with the bond indenture agreement to determine if the conversion trigger rights
have been achieved. During the three months ended March 31, 2004, outstanding
principal amounts of $6,000 of Old Notes were converted into shares of the
Companys Class A common stock. As of September 10, 2004, no other Old Notes
had been converted. F-22




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##### Table of Contents



NOTE 14. COMMITMENTS AND CONTINGENCIES Occupancy Arrangements The Company presently occupies approximately 75,000 square feet of office
space, at an average annual expense of approximately $2.1 million, under an
amended lease agreement that expires in December 2010. The lease contains
certain rent escalation clauses and, upon expiration, can be renewed for two
additional periods of five years each. Rent expense was approximately $2.1
million, $1.5 million and $1.4 million in fiscal 2004, 2003 and 2002,
respectively. The Company relocated to its present office space in Scottsdale,
Arizona, in February 2000. Medicis Canada, Inc., a wholly owned subsidiary,
presently leases approximately 7,500 square feet of office and warehouse space
in St-Laurent, Quebec, Canada, under a lease agreement that expires in April
2005. At June 30, 2004, approximate future lease payments under the operating
lease are as follows (amounts in thousands): YEAR ENDING JUNE 30,2005
    
    $
    2,0502006
    
    
    2,1072007
    
    
    2,0612008
    
    
    2,1332009
    
    
    2,133Thereafter
    
    
    3,199$
    13,683
 Research and Development and Consulting Contracts The Company has various consulting agreements with certain scientists in
exchange for the assignment of certain rights and consulting services. At June
30, 2004, the Company had approximately $867,300 of commitments (solely
attributable to the Chairman of the Central Research Committee of the Company)
payable over the remaining five years under an agreement that is cancelable by
either party under certain conditions. Litigation The Company and certain of its subsidiaries are parties to other actions
and proceedings incident to their businesses, including litigation regarding
its intellectual property, challenges to the enforceability or validity of its
intellectual property and claims that its products infringe on the intellectual
property rights of others. Although the outcome of these actions is not
presently determinable, the Company believes, at the present time, that the
ultimate resolution of these matters will not have a material adverse effect on
its business. In the Companys opinion, based upon consultation with legal
counsel, as of June 30, 2004, the ultimate outcome with respect to any of these
matters, based on the information available to the Company, is either covered
by insurance and/or established reserves, or in some cases rights of offset
and/or indemnification, and/or in the aggregate will not have a material
adverse effect on the Companys business, financial condition or results of
operations. F-23




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##### Table of Contents



NOTE 15. INCOME TAXES The provision for income taxes consists of the following (in thousands): JUNE 30,2004
    
    2003
    
    2002CurrentFederal
    
    $
    15,831
    
    
    $
    17,123
    
    
    $
    25,966State
    
    
    861
    
    
    
    1,305
    
    
    
    1,693Foreign
    
    
    109
    
    
    
    14
    
    
    
    36816,801
    
    
    
    18,442
    
    
    
    28,027DeferredFederal
    
    
    (1,404
    )
    
    
    7,532
    
    
    
    893State
    
    
    (80
    )
    
    
    430
    
    
    
    40(1,484
    )
    
    
    7,962
    
    
    
    933Total
    
    $
    15,317
    
    
    $
    26,404
    
    
    $
    28,960
 Current income tax expense does not reflect benefit of $20.4 million, $3.4
million and $7.4 million for the fiscal years ended June 30, 2004, 2003, and
2002, respectively, related to the exercise of employee stock options recorded
directly to Additional paid-in-capital in the Companys consolidated
statements of stockholders equity. The reconciliations of the U.S. federal statutory rate to the combined
effective tax rate are as follows: JUNE 30,2004
    
    2003
    
    2002Statutory federal income tax rate
    
    
    35
    %
    
    
    35.0
    %
    
    
    35.0
    %State tax rate, net of federal benefit
    
    
    1.1
    
    
    
    1.5
    
    
    
    1.5Tax-exempt interest
    
    
    (4.2
    )
    
    
    (2.1
    )
    
    
    (2.7
    )Non-deductible in-process research and
development expense
    
    
    0.0
    
    
    
    0.0
    
    
    
    2.9Other
    
    
    1.3
    
    
    
    (0.4
    )
    
    
    0.033.2
    %
    
    
    34.0
    %
    
    
    36.7
    %
 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 deferred tax assets and liabilities are as follows (in
thousands): JUNE 30,2004
    
    2003Current
    
    Long-term
    
    Current
    
    Long-termDeferred tax assets:Net operating loss carryforwards
    
    $
    
    
    
    $
    25,691
    
    
    $
    
    
    
    $
    26,253Reserves and liabilities
    
    
    13,549
    
    
    
    
    
    
    
    11,742
    
    
    
    Unrealized losses on securities
    
    
    555
    
    
    
    
    
    
    
    
    
    
    
    Research and development credits
    
    

    
    
    
    1,920
    
    
    
    
    
    
    
    1,246Valuation allowance
    
    
    
    
    
    
    (17,492
    )
    
    
    
    
    
    
    (17,492
    )14,104
    
    
    
    10,119
    
    
    
    11,742
    
    
    
    10,007Deferred tax liabilities:Unrealized gains on securities
    
    
    
    
    
    
    
    
    
    
    (1,292
    )
    
    
    Bond interest
    
    
    
    
    
    
    (9,068
    )
    
    
    
    
    
    
    (11,266
    )Excess of net book value over tax basis
of intangible assets
    
    
    
    
    
    
    (3,945
    )
    
    
    
    
    
    
    (1,614
    )Net deferred tax assets (liabilities)
    
    $
    14,104
    
    
    $
    (2,894
    )
    
    $
    10,450
    
    
    $
    (2,873
    )
 F-24




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##### Table of Contents



At June 30, 2004, the Company has a federal net operating loss
carryforward of approximately $73.4 million that begins expiring in varying
amounts in the years 2008 through 2021 if not previously utilized. The net
operating loss carryforward was acquired in connection with the Companys
merger with Ascent during fiscal 2002. As a result of the merger and related
ownership change for Ascent, the annual utilization of the net operating loss
carryforward is limited under Internal Revenue Code Section 382. Based upon
this limitation, the Company estimates that approximately $27.0 million of the
$73.4 million net operating loss carryforward will be realized. Accordingly, a
valuation reserve has been recorded for the remaining net operating loss
carryforward that is not expected to be realized. At June 30, 2004, the Company has a research and experimentation credit
carryforward of approximately $1.9 million that begins expiring in varying
amounts in the years 2008 through 2024 if not previously utilized.
Approximately $1.3 million of the research and experimentation credit
carryforward was acquired in connection with the Companys merger with Ascent
during fiscal 2002 and is subject to the limitation under Internal Revenue Code
Section 383. As a result of this limitation, the Company does not expect to
realize any of the research and experimentation credits acquired from Ascent.
Accordingly, a valuation reserve of $1.3 million has been established for the
acquired research and experimentation credits. As a result of the limitations described above, the Company has recorded a
deferred tax asset valuation allowance of $17.5 million related to the net
operating loss and research and experimentation credit carryforwards acquired
in the merger with Ascent. Subsequent realization of loss and credit
carryforwards in excess of the amounts estimated to be realized as of June 30,
2004 will be applied to reduce the valuation allowance and goodwill recorded in
connection with the merger with Ascent. During fiscal 2004, The Internal Revenue Service issued Notice 2003-65,
providing taxpayers additional guidance regarding the computations under
Internal Revenue Code Section 382. The application of Notice 2003-65 to
Ascents net operating losses has resulted in an increase in the Companys
estimate of the amount of Ascents net operating losses it will utilize from
$16.7 million to $28.6 million. As a result, the Company reclassified
approximately $4.1 million from goodwill to deferred tax assets and the related
valuation allowance to reflect the increased estimate of the income tax benefit
it will realize from utilization of Ascents net operating loss carryforwards.
The June 30, 2003 goodwill, deferred tax asset and valuation allowance amounts
have also been reclassified to conform to the June 30, 2004 presentation. During fiscal 2004, the Company recorded a deferred tax asset of
approximately $555,000 relating to unrealized losses on available-for-sale
securities presented in other comprehensive income in stockholders equity.
During fiscal 2003, the Company recorded a deferred tax liability of
approximately $1.3 million relating to unrealized gains on available-for-sale
securities. During fiscal 2004, the Company received net refunds of $3.7 million.
During fiscal 2003 and 2002, the Company made tax payments of $16.7 million and
$20.2 million, respectively. The Company operates in multiple tax jurisdictions and could be subject to
audit in these jurisdictions. These audits can involve complex issues that may
require an extended period of time to resolve and may cover multiple years.
The Company believes an adequate provision for taxes has been made for all
years subject to audit. NOTE 16. STOCK TRANSACTIONS Class A common stock has one vote per share, and Class B common stock has
10 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 Class B common stock shareholders. On January 2, 2004, the Company announced a 2 for 1 stock split in the
form of a stock dividend payable on January 23, 2004 to stockholders of record
at the close of business on January 12, 2004. All share and per share data
have been restated to reflect the stock split effected in the form of a stock
dividend. F-25




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##### Table of Contents



During fiscal 2003, Medicis purchased 1,856,600 shares of its Class A
common stock in the open market at an average price of $19.37 per share. These
stock purchases were made in accordance with a stock repurchase program that
was approved by the Companys Board of Directors in May 1999. This program
provides for the repurchase of up to $75 million of Class A common stock at
such times as management may determine. During fiscal 2002, the Company
purchased 204,000 shares of Class A common stock at an average price of $21.29
in the open market under the stock repurchase program. The Company had
repurchased a total of approximately $50.2 million toward the $75 million as of
June 30, 2003. In May 2003, the Companys Board of Directors approved a new
program that authorizes the repurchase of up to $75 million of its common
stock, which replaces the May 1999 program. As of June 30, 2004, the Company
had not repurchased any shares of its common stock under this new program. In June 2002, the Company purchased approximately 6.4 million shares of
Class A common stock at an average price of $23.24. This purchase was made in
conjunction with the Companys sale of its $400.0 million Contingent
Convertible Senior Notes, where the Company agreed to purchase shares of its
Class A common stock sold short by purchasers of the Notes concurrently with
the sale of the Notes. This purchase was approved by the Companys Board of
Directors separately from the stock repurchase program as it occurred as part
of the funding of the Notes. The price per share of the purchase of Class A
common stock was equal to the closing sale price of the stock on the trading
day on which the Note offering was priced. In February 2002, the Company issued 87,892 shares of Class A common stock
upon the conversion of 87,892 shares of Class B common stock by a shareholder
who was not an officer, director or 5% or greater shareholder of Medicis. The
conversion was pursuant to the terms of the Class B common stock and did not
result in the receipt of additional cash consideration by Medicis. The shares
of Class B common stock converted in the transaction were originally issued to
the shareholder in October 1988. The original issuance and the conversion were
made in reliance upon exemptions from the registration requirements of the
Securities Act of 1933 afforded to transactions not involving a public
offering. As a consequence of this conversion, the number of outstanding
shares of Class B common stock decreased from 845,924 shares to 758,032 shares
at June 30, 2002. NOTE 17. DEFERRED COMPENSATION In July 2001, Medicis granted 110,000 restricted shares of Class A common
stock to certain employees. The Company recorded deferred compensation of
$2,577,850, representing the market price of the shares at the date of grant.
The amount of deferred compensation is presented as a reduction of
stockholders equity and is being amortized ratably over the service period of
the employees receiving the grants. The shares begin vesting two years after
the grant date, and become fully vested five years after the grant date. In
November 2002, 20,000 shares were reacquired by the Company due to an employee
departure, and the Company reversed approximately $111,000 of previously
amortized compensation expense due to the reacquisition. That employee
returned to the Company in March 2003, and Medicis granted that employee 20,000
new restricted shares of Class A common stock. The Company recorded deferred
compensation of $466,000, representing the market price of the shares at the
date of grant. Amortization of deferred compensation was approximately $515,000 and
$365,000 for fiscal year 2004 and 2003, respectively, and has been included in
selling, general and administrative expenses in the accompanying consolidated
statements of income. The Company expects to record compensation expense
related to deferred compensation of approximately $129,000 per quarter through
September 30, 2006, and approximately $23,000 per quarter thereafter through
March 31, 2008. Expense with respect to the grants could be reduced and/or
reversed to the extent employees receiving the grants leave the Company prior
to vesting in the award. NOTE 18. DIVIDENDS DECLARED ON COMMON STOCK During fiscal 2004, the Company paid quarterly cash dividends aggregating
$5.5 million on its common stock. In addition, on June 10, 2004, the Company
declared a cash dividend of $0.025 per issued and outstanding share of common
stock payable on July 30, 2004 to stockholders of record at the close of
business on July 1, 2004. The $1.4 million dividend was recorded as a
reduction of accumulated earnings and is included in other current F-26




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##### Table of Contents



liabilities in the accompanying consolidated balance sheets as of June 30,
2004. Prior to these dividends, the Company had not paid a cash dividend on
our common stock. The Company has not adopted a dividend policy. NOTE 19. STOCK OPTION PLANS As of June 30, 2004, the Company has five active Stock Option Plans (the
2002, 1998, 1996, 1995 and 1992 Plans or, collectively, the Plans). As of
June 30, 2004, the 2002, 1998, 1996, 1995 and 1992 Plans had the following
options outstanding: 4,422,225; 5,633,911; 666,272; 751,988; and 549,548,
respectively. Except for the 2002 Stock Option Plan, which only includes
non-qualified incentive options, 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, and generally
have a maximum term of ten years. Options are granted at the fair market value
on the grant date. Options outstanding at June 30, 2004, vary in price from
$6.06 to $36.06, with a weighted average exercise price of $23.82 as is set
forth in the following chart: Weighted
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    Average
    
    
    
    
    
    AverageRange of
    
    Number
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseExercise Prices
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price$6.06 - $13.69
    
    
    1,373,238
    
    
    
    4.76
    
    
    $
    11.07
    
    
    
    937,778
    
    
    $
    11.09$13.72 - $18.33
    
    
    2,590,882
    
    
    
    7.68
    
    
    $
    18.04
    
    
    
    401,324
    
    
    $
    16.59$18.57 - $24.99
    
    
    488,838
    
    
    
    7.71
    
    
    $
    22.68
    
    
    
    288,785
    
    
    $
    22.70$25.03 - $26.95
    
    
    2,119,550
    
    
    
    7.10
    
    
    $
    26.87
    
    
    
    427,694
    
    
    $
    26.86$26.98 - $27.63
    
    
    2,180,066
    
    
    
    6.10
    
    
    $
    27.63
    
    
    
    1,197,226
    
    
    $
    27.63$27.70 - $29.13
    
    
    199,460
    
    
    
    8.35
    
    
    $
    28.29
    
    
    
    36,230
    
    
    $
    28.13$29.20 - $29.20
    
    
    2,511,300
    
    
    
    9.08
    
    
    $
    29.20
    
    
    
    1,380
    
    
    $
    29.20$29.25 - $35.38
    
    
    549,210
    
    
    
    7.97
    
    
    $
    30.58
    
    
    
    201,630
    
    
    $
    30.90$35.88 - $35.88
    
    
    4,800
    
    
    
    9.50
    
    
    $
    35.88
    
    
    
    0
    
    
    $
    0.00$36.06 - $36.06
    
    
    6,000
    
    
    
    9.51
    
    
    $
    36.06
    
    
    
    0
    
    
    $
    0.00
 A summary of stock options granted within the Plans and related
information for the years ended June 30, 2004, 2003 and 2002 is as follows: WeightedAverageQualified
    
    Non-Qualified
    
    Total
    
    PriceBalance at June 30, 2001
    
    
    3,793,398
    
    
    
    5,941,852
    
    
    
    9,735,250
    
    
    $
    18.04Granted
    
    
    1,099,604
    
    
    
    2,029,368
    
    
    
    3,128,972
    
    
    $
    26.87Exercised
    
    
    (562,766
    )
    
    
    (659,244
    )
    
    
    (1,222,010
    )
    
    $
    11.77Terminated/expired
    
    
    (373,854
    )
    
    
    (132,752
    )
    
    
    (506,606
    )
    
    $
    20.85Balance at June 30, 2002
    
    
    3,956,382
    
    
    
    7,179,224
    
    
    
    11,135,606
    
    
    $
    21.08Granted
    
    
    12,340
    
    
    
    3,476,376
    
    
    
    3,488,716
    
    
    $
    19.11Exercised
    
    
    (451,596
    )
    
    
    (505,234
    )
    
    
    (956,830
    )
    
    $
    13.33Terminated/expired
    
    
    (310,664
    )
    
    
    (575,236
    )
    
    
    (885,900
    )
    
    $
    22.32Balance at June 30, 2003
    
    
    3,206,462
    
    
    
    9,575,130
    
    
    
    12,781,592
    
    
    $
    21.11Granted
    
    
    10,272
    
    
    
    3,403,248
    
    
    
    3,413,520
    
    
    $
    29.32Exercised
    
    
    (1,383,395
    )
    
    
    (1,526,179
    )
    
    
    (2,909,574
    )
    
    $
    17.68Terminated/expired
    
    
    (275,772
    )
    
    
    (985,822
    )
    
    
    (1,261,594
    )
    
    $
    25.41Balance at June 30, 2004
    
    
    1,557,567
    
    
    
    10,466,377
    
    
    
    12,023,944
    
    
    $
    23.82
 F-27




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##### Table of Contents



Options exercisable under the Plans at June 30, 2004 were 3,492,047 with
an average exercisable price of $21.61. Pro forma information regarding net income and net income per share, as
disclosed in Note 1, has been determined as if the Company had accounted for
its employee stock-based compensation plans and other stock options under the
fair method of SFAS No. 123. The fair value of these options was estimated at
the date of grant using a Black-Scholes option pricing model with the following
assumptions: 2004
    
    2003
    
    2002Expected dividend yield
    
    
    0.3
    %
    
    
    0.3
    %
    
    
    0.0
    %Expected stock price volatility
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.4Risk-free interest rate
    
    
    3.3
    %
    
    
    2.5
    %
    
    
    3.0
    %Expected life options
    
    5 Years
    
    5 Years
    
    5 Years
 The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options, which, unlike options granted by the Company,
have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions, including
the expected stock price volatility. Because the Companys stock options have
characteristics significantly different from options traded on an exchange, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options. The weighted average fair value of options granted during fiscal 2004,
2003 and 2002 was $10.17, $9.10 and $8.94 per share, respectively. NOTE 20. NET INCOME PER SHARE The following table sets forth the computation of basic and diluted net
income per share (in thousands, except per share amounts): JUNE 30,2004
    
    2003
    
    2002NumeratorNet income
    
    $
    30,840
    
    
    $
    51,256
    
    
    $
    50,024Weighted average common shares outstanding.
    
    
    55,618
    
    
    
    54,376
    
    
    
    60,536Effect of dilutive securities:Stock options and restricted stock
    
    
    3,640
    
    
    
    2,046
    
    
    
    2,274Weighted average common and common
equivalent shares outstanding
    
    
    59,258
    
    
    
    56,422
    
    
    
    62,810Basic net income per share
    
    $
    0.55
    
    
    $
    0.94
    
    
    $
    0.83Diluted net income per share
    
    $
    0.52
    
    
    $
    0.91
    
    
    $
    0.80
 Diluted net income per share must be calculated using the if-converted
method if the outstanding Old Notes and/or New Notes meet the criteria for
conversion. If the criteria for conversion is met, diluted net income per
share is calculated by adjusting net income for tax-effected net interest and
issue costs on the Old Notes and/or New Notes, divided by the weighted average
number of common shares outstanding assuming dilution. Diluted net income per
share for fiscal 2004 does not reflect the if-converted method, even though
the criteria for conversion for the Old Notes were met during fiscal 2004, as
such calculation would be anti-dilutive. Diluted net income per share for
fiscal 2003 does not reflect the if-converted method as the criteria for
conversion had not been met. The diluted net income per share computation for 2004 and 2003 excludes
5,393 and 3,098,163 shares of stock, respectively, which represented
outstanding stock options whose exercise prices were greater than the average
market price of the common shares during the respective fiscal years and were
anti-dilutive. Diluted net income per share as of June 30, 2004 also excludes
5,823,103 and 7,324,820 shares of common stock, respectively, issuable upon
conversion of the Old Notes and New Notes based upon those shares underlying
common stock price of F-28




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##### Table of Contents



$29.05 and $38.76, respectively. Diluted net income per
share as of June 30, 2003 also excludes 13,769,362 shares
of common stock issuable upon conversion of the contingent convertible
senior notes based upon those shares underlying common stock price of $29.05. NOTE 21. FINANCIAL INSTRUMENTS  CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments and accounts receivable. The Company maintains cash, cash equivalents and short-term investments
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, 2004 and 2003, three customers comprised approximately 88.8%
and 72.3%, 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 a significant
credit risk existed at June 30, 2004. NOTE 22. DEFINED CONTRIBUTION PLAN The Company has a defined contribution plan (the Contribution Plan) that
is intended to qualify under Section 401(k) of the Internal Revenue Code. All
employees, except 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 20.0% 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 had not made any such
contributions since its inception until April 2002. Beginning in April 2002,
the Company began matching employee contributions at 50% of the first 3% of
basic compensation contributed by the participants. During fiscal 2004, 2003
and 2002, the Company recognized expense related to matching contributions
under the Contribution Plan of $340,000, $307,000 and $70,000, respectively. NOTE 23. SUBSEQUENT EVENTS License of SubQ from Q-Med On July 15, 2004, we entered into an exclusive license agreement with
Q-Med to market, distribute, sell and commercialize in the United States and
Canada Q-Meds product currently known as SubQ. Q-Med will have the
exclusive right to manufacture SubQ for Medicis. SubQ is not approved
currently for use in the United States and Canada. Under the terms of the agreement, Medicis Aesthetics Holdings Inc., a
wholly owned subsidiary of Medicis, will license SubQ for approximately $80
million, due as follows: approximately $30 million upon closing of the
transaction, which was recorded as a charge to research and development expense
during the first quarter of fiscal 2005; approximately $10 million upon
completion of certain clinical milestones; approximately $20 million upon the
satisfaction of certain defined regulatory milestones; and approximately $20
million upon U.S. launch of SubQ. We also will make additional milestone
payments to Q-Med upon the achievement of certain commercial milestones. Like
RESTYLANE®, PERLANE® and RESTYLANE FINE LINES, SubQ is
comprised of the same NASHA (non-animal stabilized hyaluronic acid)
substance with a larger gel particle size and is understood to have patent
protection until at least 2015. License of Product Rights to Taro On July 27, 2004, the Company entered into an exclusive license and
optional purchase agreement with Taro pursuant to which Taro will market,
distribute and sell the LUSTRA® family of products and two development stage
products in the United States, Canada and Puerto Rico. The license agreement
was effective immediately and F-29




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##### Table of Contents



extends through July 1, 2007, after which Taro may purchase the product
lines. Repurchases of Common Stock In August 2004, the Companys Board of Directors approved a new program
that authorizes the repurchase of up to $150 million of its common stock, which
replaces the May 2003 program. Exchange of Class B Common Stock for Class A Common Stock During September 2004, all 758,032 shares of the Companys Class B common
stock were in the process of being exchanged for 758,032 shares of the
Companys Class A common stock. The Companys consolidated financial
statements as of June 30, 2004 do not reflect this change, as it would be
immaterial for the current year presentation. NOTE 24. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The table below lists the quarterly financial information for fiscal 2004
and 2003. All figures are in thousands, except per share amounts, and certain
amounts do not total the annual amounts due to rounding, or, in the case of
diluted net (loss) income per share, the application of the if converted
method for dilution in particular quarters. YEAR ENDED JUNE 30, 2004(FOR THE QUARTERS ENDED)SEPTEMBER 30, 2003
    
    DECEMBER 31, 2003
    
    MARCH 31, 2004
    
    JUNE 30, 2004Net revenues
    
    $
    63,295
    
    
    $
    70,633
    
    
    $
    81,839
    
    
    $
    87,954Gross profit
    
    
    53,114
    
    
    
    59,396
    
    
    
    68,721
    
    
    
    75,885Loss on early
extinguishment of debt
    
    
    (58,660
    )
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    
    (27,164
    )
    
    
    13,627
    
    
    
    20,671
    
    
    
    23,705Basic net (loss) income
per share
    
    $
    (0.50
    )
    
    $
    0.25
    
    
    $
    0.37
    
    
    $
    0.42Diluted net (loss) income
per share
    
    $
    (0.50
    )
    
    $
    0.23
    
    
    $
    0.33
    
    
    $
    0.37
 YEAR ENDED JUNE 30, 2003(FOR THE QUARTERS ENDED)SEPTEMBER 30, 2002
    
    DECEMBER 31, 2002
    
    MARCH 31, 2003
    
    JUNE 30, 2003Net revenues
    
    $
    58,745
    
    
    $
    59,514
    
    
    $
    62,575
    
    
    $
    66,705Gross profit
    
    
    49,587
    
    
    
    50,207
    
    
    
    53,461
    
    
    
    56,024Net income
    
    
    11,879
    
    
    
    15,301
    
    
    
    10,224
    
    
    
    13,851Basic net income
per share
    
    $
    0.22
    
    
    $
    0.28
    
    
    $
    0.19
    
    
    $
    0.25Diluted net income
per share
    
    $
    0.21
    
    
    $
    0.27
    
    
    $
    0.18
    
    
    $
    0.24
 Gross profit does not include amortization of the related intangibles. F-30




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##### Table of Contents



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS (in thousands) Balance at
    
    Charged tobeginning of
    
    costs and
    
    Charged to other
    
    
    
    
    
    Balance at end ofDescription
    
    year
    
    expenses
    
    accounts
    
    Deductions
    
    yearYear Ended June 30, 2004Deducted from Asset Accounts:Accounts Receivable:Allowances
    
    $
    12,716
    
    
    $
    83,834
    
    
    
    
    
    
    $
    (83,484
    )
    
    $
    13,066Year Ended June 30, 2003Deducted from Asset Accounts:Accounts Receivable:Allowances
    
    $
    7,395
    
    
    $
    61,034
    
    
    
    
    
    
    $
    (55,713
    )
    
    $
    12,716Year Ended June 30, 2002Deducted from Asset Accounts:Accounts Receivable:Allowances
    
    $
    5,050
    
    
    $
    36,644
    
    
    
    
    
    
    $
    (34,299
    )
    
    $
    7,395
 S-1




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##### Table of Contents



EXHIBIT INDEX Exhibit No.
    
    
    
    Description2.1
    
    -
    
    Agreement of Merger by and between Medicis Pharmaceutical Corporation, a Delaware
corporation, Medicis Acquisition Corporation, a Delaware corporation, and GenDerm
Corporation, a Delaware corporation, dated November 28, 1997 (11)2.1 (a)
    
    -
    
    Agreement of Plan of Merger, dated as of October 1, 2001, by and among Medicis
Pharmaceutical Corporation, MPC Merger Corp. and Ascent Pediatrics, Inc. (17)3.1
    
    -
    
    Certificate of Incorporation of the Company, as amended (filed herewith)3.3 (a)
    
    -
    
    Amended and Restated By-Laws of the Company (13)4.1
    
    -
    
    Rights Agreement, dated August 17, 1995, between the Company and American
Stock Transfer & Trust Company, as Rights Agent (4)4.1 (b)
    
    -
    
    Amendment No. 2 to Rights Agreement, dated March 17, 1997, between the
Company and Norwest Bank Minnesota, N.A. (9)4.1 (c)
    
    -
    
    Amendment No. 3 to Rights Agreement, dated May 31, 2002, between the Company and Wells
Fargo Bank Minnesota, N.A., as successor-in-interest to American Stock Transfer & Trust
Company (18)4.1 (d)
    
    -
    
    Indenture, dated as of August 19, 2003, by and between Medicis Pharmaceutical
Corporation, as issuer, and Deutsche Bank Trust Company Americas, as trustee (filed
herewith)4.1 (e)
    
    -
    
    Indenture, dated as of June 4, 2002, by and between Medicis Pharmaceutical Corporation,
as issuer, and Deutsche Bank Trust Company Americas, as trustee. (19)4.2
    
    -
    
    Registration Rights Agreement, dated as of June 4, 2002, by and between Medicis
Pharmaceutical Corporation and Deutsche Bank Securities Inc. (19)4.3
    
    -
    
    Form of specimen certificate representing Class A common stock (1)10.1
    
    -
    
    Asset Purchase Agreement among Medicis Pharmaceutical Corporation, Ascent Pediatrics,
Inc., BioMarin Pharmaceutical Inc., and BioMarin Pediatrics Inc., dated April 20, 2004
(filed herewith)10.2
    
    -
    
    Securities Purchase Agreement among Medicis Pharmaceutical Corporation, Ascent
Pediatrics, Inc., BioMarin Pharmaceutical Inc., and BioMarin Pediatrics Inc., dated May
18, 2004 (filed herewith)10.3
    
    -
    
    License Agreement among Medicis Pharmaceutical Corporation, Ascent Pediatrics, Inc.,




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##### Table of Contents



Exhibit No.
    
    
    
    Descriptionand BioMarin Pediatrics Inc., dated May 18, 2004 (filed herewith)10.8
    
    -
    
    Medicis Pharmaceutical Corporation 1995 Stock Option Plan (incorporated by
reference to Exhibit C to the definitive Proxy Statement for the 1995 Annual
Meeting of Shareholders previously filed with the SEC, File No. 0-18443)10.9
    
    -
    
    Employment Agreement between the Company and Jonah Shacknai, dated
July 24, 1996 (8)10.9 (a)
    
    -
    
    Amendment to Employment Agreement by and between the Company and
Jonah Shacknai, dated April 1, 1999 (15)10.9 (b)
    
    -
    
    Amendment to Employment Agreement by and between the Company and
Jonah Shacknai, dated February 21, 2001 (15)10.20
    
    -
    
    Medicis Pharmaceutical Corporation 2002 Stock Option Plan (20)10.59
    
    -
    
    Supply Agreement, dated October 21, 1992, between Schein and the Company (2)10.70
    
    -
    
    Amendment to Manufacturing and Supply Agreement, dated March 2, 1993, between
Schein and the Company (3)10.72(a)
    
    -
    
    Credit and Security Agreement, dated August 3, 1995, between the Company and
Norwest Business Credit, Inc. (5)10.72(b)
    
    -
    
    First Amendment to Credit and Security Agreement, dated May 29, 1996,
between the Company and Norwest Bank Arizona, N.A. (8)10.72(c)
    
    -
    
    Second Amendment to Credit and Security Agreement, dated November 22, 1996,
by and between the Company and Norwest Bank Arizona, N.A. as successor-in-interest
to Norwest Business Credit, Inc. (10)10.72(d)
    
    -
    
    Third Amendment to Credit and Security Agreement, dated November 22, 1998, by
and between the Company and Norwest Bank Arizona, N.A., as successor-in-interest
to Norwest Business Credit, Inc. (12)10.72(e)
    
    -
    
    Fourth Amendment to Credit and Security Agreement, dated November 22, 2000,
by and between the Company and Wells Fargo Bank Arizona, N.A., formerly
known as Norwest Bank Arizona, N.A., as successor-in-interest to Norwest Business
Credit, Inc. (16)10.72(f)
    
    -
    
    Fifth Amendment to Credit and Security Agreement, dated November 22, 2002, by and
between the Company and Wells Fargo Bank Arizona, N.A., formerly known as Norwest Bank
Arizona, N.A., as successor-in-interest to Norwest Business Credit, Inc. (filed
herewith)10.73(a)
    
    -
    
    Patent Collateral Assignment and Security Agreement, dated August 3, 1995, by
the Company to Norwest Business Credit, Inc. (6)10.73(b)
    
    -
    
    First Amendment to Patent Collateral Assignment and Security Agreement, dated
May 29, 1996, by the Company to Norwest Bank Arizona, N.A. (8)10.73(c)
    
    -
    
    Amended and Restated Patent Collateral Assignment and Security Agreement, dated
November 22, 1998, by the Company to Norwest Bank Arizona, N.A. (12)10.74(a)
    
    -
    
    Trademark Collateral Assignment and
Security Agreement, dated August 3, 1995, by the Company to Norwest Business Credit, Inc.(7)10.74(b)
    
    -
    
    First Amendment to Trademark Collateral Assignment and Security Agreement, dated
May 29, 1996, by the Company to Norwest Bank Arizona, N.A. (8)10.74(c)
    
    -
    
    Amended and Restated Trademark, Tradename, and Service Mark Collateral
Assignment and Security Agreement, dated November 22, 1998, by the Company
to Norwest Bank Arizona, N.A. (12)10.75
    
    -
    
    Assignment and Assumption of Loan Documents, dated May 29, 1996, from
Norwest Business Credit, Inc., to and by Norwest Bank Arizona, N.A. (8)10.76
    
    -
    
    Multiple Advance Note, dated May 29, 1996, from the Company to Norwest Bank
Arizona, N.A.(8)10.89
    
    -
    
    Asset Purchase Agreement dated November 15, 1998, by and among the Company and
Hoechst Marion Roussel, Inc., Hoechst Marion Roussel Deutschland GMHB and
Hoechst Marion Roussel, S.A. (12)10.90
    
    -
    
    License and Option Agreement dated November 15, 1998, by and among the Company
and Hoechst Marion Roussel, Inc., Hoechst Marion Roussel Deutschland GMBH and
Hoechst Marion Roussel, S.A. (12)10.91
    
    -
    
    Loprox Lotion Supply Agreement dated November 15, 1998, by and between the
Company and Hoechst Marion Roussel, Inc. (12)10.92
    
    -
    
    Supply Agreement dated November 15, 1998, by and between the Company and
Hoechst Marion Roussel Deutschland GMBH (12)




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##### Table of Contents



Exhibit No.
    
    
    
    Description10.93
    
    -
    
    Asset Purchase Agreement effective January 31, 1999, between the Company and
Bioglan Pharma Plc (14)10.94
    
    -
    
    Stock Purchase Agreement by and among the Company, Ucyclyd Pharma, Inc. and
Syed E. Abidi, William Brusilow, Susan E. Brusilow and Norbert L. Wiech, dated
April 19, 1999 (14)10.95
    
    -
    
    Asset Purchase Agreement by and between the Company and Bioglan Pharma Plc,
dated June 29, 1999 (14)10.96
    
    -
    
    Asset Purchase Agreement by and among The Exorex Company, LLC, Bioglan
Pharma Plc, the Company and IMX Pharmaceuticals, Inc., dated June 29, 1999 (16)10.97
    
    -
    
    Medicis Pharmaceutical Corporation Executive Retention Plan (14)10.98
    
    -
    
    Asset Purchase Agreement between Warner Chilcott, plc and the Company, dated
September 14, 1999(14)10.99
    
    -
    
    Share Purchase Agreement between Q-Med International B.V. and Startskottet 21914
AB (under proposed change of name to Medicis Sweden Holdings AB), dated
February 10, 2003(21)10.99(a)
    
    -
    
    Amendment No. 1 to Share Purchase Agreement between Q-Med International
B.V. and Startskottet 21914 AB (under proposed change of name to Medicis Sweden
Holdings AB), dated March 7, 2003(21)10.100
    
    -
    
    Supply Agreement between Q-Med AB and Medicis Pharmaceutical Corporation,
dated March 7, 2003(21)10.101
    
    -
    
    Amended and Restated Intellectual Property Agreement between Q-Med AB and HA
North American Sales AB, dated March 7, 2003(21)10.102
    
    -
    
    Supply Agreement between Medicis Aesthetics Holdings Inc., a wholly owned subsidiary of
Medicis Pharmaceutical Corporation, and Q-Med AB, dated July 15, 2004 (filed herewith)
Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a
request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934.10.103
    
    -
    
    Intellectual Property License Agreement between Q-Med AB and Medicis Aesthetics
Holdings Inc., dated July 15, 2004 (filed herewith) Portions of this exhibit
(indicated by asterisks) have been omitted pursuant to a request for confidential
treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.12
    
    -
    
    Computation of Ratios of Earnings to Fixed Charges (filed herewith)21.1
    
    -
    
    Subsidiaries (filed herewith)23.1
    
    -
    
    Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (filed
herewith)24.1
    
    -
    
    Power of Attorney See signature page(s)31.1
    
    -
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act, as amended (filed herewith)31.2
    
    -
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act, as amended (filed herewith)32.1
    
    -
    
    Certification of Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)32.2
    
    -
    
    Certification of Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)99.1
    
    -
    
    Exclusive Remedy Agreement, dated as of October 1, 2001, by and among Medicis
Pharmaceutical Corporation, Ascent Pediatrics, Inc., FS Private Investments LLC, Furman
Selz Investors II L.P., FS Employee Investors LLC, FS Ascent Investments LLC and FS
Parallel Fund L.P., BancBoston Ventures Inc., Flynn Partners, Raymond F. Baddour,
Sc.D., Robert E. Baldini, Medical Science Partners L.P. and Emmett Clemente, Ph.D. (17)99.1 (a)
    
    -
    
    Charter of the Nominating and Governance Committee of the Board of Directors of Medicis
Pharmaceutical Corporation(2)99.2
    
    -
    
    Note Agreement, dated as of October 1, 2001, by and among Ascent Pediatrics, Inc.,
Medicis Pharmaceutical Corporation, Furman Selz Investors II L.P., FS Employee
Investors LLC, FS Ascent Investments LLC, FS Parallel Fund L.P., BancBoston Ventures
Inc. and Flynn Partners (17)99.2 (a)
    
    -
    
    Medicis Pharmaceutical Corporation Corporate Governance Guidelines(22)99.3
    
    -
    
    Voting Agreement, dated as of October 1, 2001, by and among Medicis Pharmaceutical
Corporation, MPC Merger Corp., FS Private Investments LLC, Furman Selz Investors II




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##### Table of Contents



L.P., FS Employee Investors LLC, FS Ascent Investments LLC and FS Parallel Fund L.P.
(17) (1)
    
    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(2)
    
    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(3)
    
    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(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,
1995, File No. 0-18443, previously filed with the SEC (the 1994 Form
10-K)(5)
    
    Incorporated by reference to exhibit number 4.2 in the 1995 Form 10-K(6)
    
    Incorporated by reference to exhibit number 4.4 in the 1995 Form 10-K(7)
    
    Incorporated by reference to exhibit number 4.5 in the 1995 Form 10-K(8)
    
    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,
1996, File No. 0-18443, previously filed with the SEC(9)
    
    Incorporated by reference to the exhibit with the same number in the
Companys Quarterly Report on Form 10-Q for the quarter ended March 31,
1997, File No. 0-18443, previously filed with the SEC(10)
    
    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, 1996, File No. 0-18443, previously filed with the SEC(11)
    
    Incorporated by reference to the exhibit with the same number in the
Companys Current Report on Form 8-K filed with the SEC on December 15, 1997(12)
    
    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, 1998, File No. 0-18443, previously filed with the SEC(13)
    
    Incorporated by reference to the exhibit with the same number in the
Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 1999, File No. 0-18443, previously
filed with the SEC(14)
    
    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,
1999, File No. 0-18443, previously filed with the SEC(15)
    
    Incorporated by reference to the exhibit with the same number in the
Companys Quarterly Report on Form 10-Q for the quarter ended March 31,
2001, File No. 0-18443, previously filed with the SEC(16)
    
    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,
2001, File No. 0-18443, previously filed with the SEC(17)
    
    Incorporated by reference to the exhibit with the same number in the
Companys Current Report on Form 8-K filed with the SEC on October 2, 2001(18)
    
    Incorporated by reference to the exhibit with the same number in the
Companys registration statement on
Form 8-A12B/A filed with the SEC on June 4, 2002




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##### Table of Contents



(19)
    
    Incorporated by reference to the exhibit with the same number in the
Companys Current Report on Form 8-K filed with the SEC on June 6, 2002(20)
    
    Incorporated by reference to the exhibit with the same number in the
Companys Current Report on Form 10-K for the fiscal year ended June 30,
2002, File No. 0-18443,
previously filed with the SEC(21)
    
    Incorporated by reference to the exhibit with the same number in the Companys Current
Report on Form 8-K filed with the SEC on March 10, 2003(22)
    
    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, 2003, File No. 0-18443,previously filed with the SEC