<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1997
REGISTRATION NO. 333-23319
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ASCENT PEDIATRICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 2834 04-3047405
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
187 BALLARDVALE STREET, WILMINGTON, MASSACHUSETTS 01887 (508) 658-2500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ALAN R. FOX
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ASCENT PEDIATRICS, INC.
187 BALLARDVALE STREET
WILMINGTON, MASSACHUSETTS 01887
(508) 658-2500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
DAVID E. REDLICK, ESQ. DOUGLAS A. ZINGALE, ESQ.
HALE AND DORR LLP MINTZ, LEVIN, COHN, FERRIS,
60 STATE STREET GLOVSKY & POPEO, P.C.
BOSTON, MASSACHUSETTS 02109 ONE FINANCIAL CENTER
(617) 526-6000 BOSTON, MASSACHUSETTS 02111-2657
(617) 542-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
Dated May 28, 1997
2,000,000 SHARES
[ASCENT PEDIATRICS LOGO]
COMMON STOCK
------------------------
All of the shares of Common Stock, par value $.00004 per share (the "Common
Stock"), offered hereby are being sold by Ascent Pediatrics, Inc. ("Ascent" or
the "Company").
Prior to this offering there has been no public market for the Common Stock
of the Company. It is estimated that the initial public offering price of the
Common Stock will be between $11.00 and $13.00 per share. See "Underwriting" for
a discussion of the factors to be considered in determining the initial public
offering price. The Common Stock has been approved for quotation on the Nasdaq
National Market, upon notice of issuance, under the symbol "ASCT."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=========================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.......... $ $ $
Total(3)........... $ $ $
=========================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $800,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase an aggregate of up to 300,000
additional shares of Common Stock at the Price to Public, less Underwriting
Discounts and Commissions to cover over-allotments, if any. If all such
additional shares are purchased, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------------
The Common Stock is offered by the several Underwriters named herein when,
as and if received and accepted by them, and subject to their right to reject
orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates for the shares will be made at the
offices of Cowen & Company, New York, New York, on or about , 1997.
------------------------
COWEN & COMPANY
VOLPE BROWN WHELAN & COMPANY
ADAMS, HARKNESS & HILL, INC.
, 1997
<PAGE> 3
Finally, a pharmaceutical company dedicated to satisfying the "toughest
customers" in the world.
[Picture of a boy in overalls holding a baseball sitting on stairs next to
bulldog]
[LOGO]
ASCENT
PEDIATRICS, INC.
Developing Medicines Just For
Kids
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET AND MAY
IMPOSE PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus, including "Risk Factors" herein. Ascent is a development
stage company and, to date, has generated no revenues from product sales. See
"Risk Factors -- Early Stage of Development; History of Operating Losses and
Cumulative Deficit." Except as otherwise indicated, all information in this
Prospectus assumes no exercise of the Underwriters' over-allotment option and
reflects (i) the conversion of all outstanding shares of the Company's
Convertible Preferred Stock into an aggregate of 4,440,564 shares of Common
Stock upon the consummation of this offering (the "Preferred Stock Conversion")
and (ii) a 0.85-for-one reverse stock split of the Common Stock of the Company
effective May 27, 1997.
THE COMPANY
Ascent Pediatrics, Inc. ("Ascent" or the "Company"), is a drug development
and marketing company focused exclusively on the pediatric market. The Company's
strategy is to address unmet medical needs of children through the development
of differentiated, proprietary products based on approved compounds with well
known clinical profiles. Ascent is developing a range of pharmaceuticals
designed to improve upon currently available products for common pediatric
illnesses through the application of its drug delivery and reformulation
technologies. The Company is developing most of these products for sale on a
prescription basis. By developing products based on currently approved drugs,
rather than new chemical entities, Ascent believes that it can reduce regulatory
and development risks and shorten the product development cycle. In addition,
Ascent believes that market acceptance of its products will be enhanced by the
familiarity of pediatricians with the compounds that serve as the basis of these
products. The Company plans to introduce its first three products to the market
in the second half of 1997 and has seven other principal products in
development. The Company intends to market its products in the United States
through a direct sales force focused exclusively on the pediatric market.
The United States market for prescription pharmaceutical products for
children age 16 years and younger was estimated by Scott-Levin, a healthcare
consulting firm ("Scott-Levin"), to be approximately $3.5 billion in 1996,
representing a compound annual growth rate of approximately 9% over the 1992
level. Despite the size of the pediatric pharmaceutical market, the Company
believes that this market has been underserved by the large pharmaceutical
companies and will be receptive to a company whose sole mission is developing
and marketing drugs for children. Pharmaceutical companies historically have
concentrated their drug development efforts on the adult market or have pursued
pediatric presentations only as product line extensions. In addition, there are
a number of drug administration and patient compliance issues particular to the
pediatric market which result from the unpleasant taste and texture, frequent
dosing regimens, complex or difficult delivery methods or unfavorable side
effect profiles of certain drugs. The Company believes that the special needs of
this market and the relatively low number of drugs developed specifically for
pediatric use have resulted in an opportunity to address unmet medical needs of
children.
In January 1997, the Division of Anti-Infective Drugs of the United States
Food and Drug Administration (the "FDA") notified Ascent that it recommended
approval of the Company's New Drug Application ("NDA") for Primsol trimethoprim
solution, a prescription antibiotic for the treatment of ear infections in
patients age six months to twelve years, with a label reflecting that Primsol
solution would not be a product for first line therapy (i.e., the first course
of treatment selected in most instances by a physician) for this indication. The
FDA has not yet approved the Company's NDA for Primsol solution. Trimethoprim
for the treatment of ear infections in children is currently available only in
combination with a sulfa compound that is associated with allergic reactions.
Primsol solution contains trimethoprim only and in clinical trials demonstrated
a more favorable side effect profile than the combination therapy. Because of
this improved side effect profile, the Company believes that pediatricians will
be more likely to prescribe an antibiotic comprised only of trimethoprim for the
treatment of ear infections in children than they historically have been to
prescribe the combination therapy. In March 1997, the Company entered into an
agreement with Upsher-Smith Laboratories, Inc. ("Upsher-Smith"), to acquire the
currently marketed Feverall line of acetaminophen rectal suppository products.
The Company plans to introduce Primsol solution and Feverall suppositories to
the
3
<PAGE> 5
market in the second half of 1997, along with Pediamist, an over-the-counter
nasal saline spray developed by Ascent that uses a metering device to facilitate
pediatric use.
In addition to these three products, the Company has seven other products
in various stages of development. Prednisolone sodium phosphate syrup is a
steroid for the treatment of inflammation, including inflammation resulting from
respiratory conditions, for which the Company expects to file Abbreviated New
Drug Applications ("ANDAs") with the FDA in the second half of 1997. Pediatemp
acetaminophen controlled-release beads is an analgesic and antipyretic for the
treatment of pain and fever for which the Company recently completed Phase III
clinical trials and, subject to the results of these trials being satisfactory,
plans to file an NDA in the second half of 1997. Pediavent albuterol
controlled-release suspension is a bronchodilator for the treatment of asthma
which currently is in Phase I clinical trials. Cromolyn sodium cream is a
topical cream for the treatment of moderate to severe contact dermatitis which
currently is in Phase I clinical trials. Cromolyn sodium controlled-release
nasal spray is a drug for the treatment of nasal allergies that is undergoing
preclinical testing. The Company also is developing a line of over-the-counter
cough/cold products and an over-the-counter acetaminophen controlled-release
solution.
Ascent believes that an important part of fulfilling its mission of
becoming a leader in the development and marketing of pediatric pharmaceuticals
is the establishment of a corporate identity. Accordingly, even before the
launch of its first products, Ascent has initiated a program to familiarize
pediatricians with the Ascent name. Ascent is establishing a domestic sales
organization to promote the Company's products to high prescribing
pediatricians, influential pediatricians and pediatric nurses. Ascent plans to
supplement these activities with telemarketing, direct mail and advertisements
in speciality pediatric journals. Ascent also intends to promote its products
directly to managed care providers in order to obtain inclusion on these
providers' formularies and has retained a consulting firm to assist it in this
process.
Ascent seeks competitive protection for its products in a variety of ways,
including the creation of proprietary formulations using technologies, such as
taste masking and controlled-release systems, that are covered by patents or
patent applications owned by or licensed to the Company or its suppliers.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby................................. 2,000,000 shares
Common Stock to be outstanding after the offering........... 6,638,719 shares(1)
Use of proceeds............................................. To fund a portion of the
purchase price of the Feverall
product line and for product
development and sales and
marketing costs and general
corporate purposes.
Proposed Nasdaq National Market symbol...................... ASCT
</TABLE>
- ---------------
(1) Reflects the Preferred Stock Conversion. Excludes (i) 1,675,248 shares
reserved for issuance upon the exercise of options and warrants outstanding
as of March 31, 1997 at a weighted average exercise price of $6.28 per
share, (ii) up to an aggregate of 583,332 shares of Common Stock (assuming
an initial public offering price of $12.00 per share) issuable upon the
conversion of the Company's Convertible Subordinated Secured Notes (the
"Triumph Notes") in the aggregate original principal amount of $7,000,000
issued or issuable no later than the closing of this offering and (iii)
561,073 shares of Common Stock at an exercise price of $0.01 per share and
218,195 shares of Common Stock at an exercise price of $5.29 per share
reserved for issuance upon the exercise of warrants issued or issuable in
connection with the Triumph Notes (the "Triumph Warrants"). Warrants for
699,783 shares referred to in clause (i) of the preceding sentence contain a
cashless exercise feature which, if exercised in full prior to the closing
of this offering (and assuming an initial public offering price of $12.00
per share), would result in the issuance of 266,072 shares of Common Stock
with no additional proceeds to the Company. See "Dilution,"
"Capitalization," "Certain Transactions" and "Description of Capital Stock."
4
<PAGE> 6
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
COMBINED PRO ----------------------------- CUMULATIVE
FORMA 1997 FROM INCEPTION
YEAR ENDED DECEMBER 31, YEAR ENDED COMBINED (MARCH 16,
---------------------------------------------- DECEMBER 31, PRO 1989) TO
1992 1993 1994 1995 1996 1996(1) 1996 1997 FORMA(1) MARCH 31, 1997
------- ------- ------- ------- ---------- ------------ ----- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues............. $ -- $ -- $ -- $ 304 $ -- $ 3,877 $ -- $ -- $ 795 $ 304
Costs and expenses:
Cost of sales...... -- -- -- -- -- 1,434 -- -- 356 --
Research and
development...... 558 1,221 2,551 2,986 3,761 3,761 475 1,528 1,528 13,538
Selling, general
and
administrative... 706 723 1,141 1,532 2,805 5,142 428 973 1,606 9,176
------- ------- ------- ------- ---------- ---------- ----- ---------- ---------- --------
Loss from
operations......... (1,264) (1,944) (3,692) (4,214) (6,566) (6,460) (903) (2,501) (2,695) (22,410)
Interest income...... 47 123 147 113 79 79 25 73 73 826
Interest expense..... -- -- -- -- -- (468) -- (20) (147) (20)
Gain on sale of fixed
assets............. -- -- -- -- -- -- -- 9 9 9
------- ------- ------- ------- ---------- ---------- ----- ---------- ---------- --------
Net loss............. $(1,217) $(1,821) $(3,545) $(4,101) $ (6,487) $ (6,849) $(878) $ (2,439) $ (2,760) $(21,595)
======= ======= ======= ======= ========== ========== ===== ========== ========== ========
Pro forma and
combined pro forma
net loss per
share(2)........... $ (1.48) $ (1.56) $ (0.56) $ (0.63)
========== ========== ========== ==========
Pro forma weighted
average common and
common equivalent
shares(2).......... 4,384,197 4,384,197 4,384,197 4,384,197
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------------------------
COMBINED PRO FORMA
AS
ACTUAL COMBINED PRO FORMA(1) ADJUSTED(1)(3)
-------- --------------------- ------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities..................... $ 8,300 $ 7,154 $ 28,674
Working capital...................................................... 6,431 35 21,555
Total assets......................................................... 9,672 20,172 41,692
Long-term debt, net of current portion............................... 2,020 4,514 4,514
Redeemable preferred stock........................................... 25,010 -- --
Deficit accumulated during the development stage..................... (22,292) (22,292) (22,292)
Total stockholders' equity (deficit)................................. (19,437) 8,079 29,599
</TABLE>
- ---------------
(1) Presented on a combined pro forma basis to give effect to (i) the probable
acquisition of the Feverall product line from Upsher-Smith for $11,500,000
plus the cost of certain related inventory (assumed for this purpose to be
$235,696) as if such acquisition had occurred on January 1, 1996 with
respect to Statement of Operations Data and on March 31, 1997 with respect
to Balance Sheet Data, (ii) the issuance of $5,000,000 of Triumph Notes no
later than the closing of this offering presented as if this transaction
occurred on January 1, 1996 with respect to Statement of Operations Data and
on March 31, 1997 with respect to Balance Sheet Data with such Triumph Notes
recorded as a liability (after allocating $1,668,746 as value attributable
to warrants) of $3,331,254, which will be accreted up to the Triumph Notes'
face value of $5,000,000 over the term of the Triumph Notes and such
accretion in the amount of $1,668,746 will be recorded as interest expense
in addition to the stated interest rate, (iii) the Preferred Stock
Conversion and (iv) the reclassification of $2,505,740 of warrant
obligations to additional paid in capital as described in Note L to Notes to
Financial Statements. See "Capitalization," "Certain Transactions" and
"Unaudited Combined Pro Forma Financial Statements."
(2) See Note B to Notes to Financial Statements for information concerning the
computation of pro forma net loss per share and shares used in computing pro
forma net loss per share.
(3) Reflects the sale of the 2,000,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $12.00 per
share and the application of net proceeds therefrom, after deducting the
underwriting discounts and commissions and estimated offering expenses
payable by the Company. See "Capitalization," "Use of Proceeds" and "Certain
Transactions."
5
<PAGE> 7
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to the other information
contained in this Prospectus, should be carefully considered in evaluating the
Company and its business before purchasing the shares of Common Stock offered
hereby. This Prospectus contains forward-looking statements. For this purpose,
any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," "intends" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below and elsewhere in this
Prospectus.
EARLY STAGE OF DEVELOPMENT; HISTORY OF OPERATING LOSSES AND CUMULATIVE DEFICIT
Ascent is a development stage company. The Company has incurred net
operating losses since its inception. At March 31, 1997, the Company's
cumulative deficit was approximately $22,292,000. Such losses have resulted
primarily from costs incurred in the Company's product development programs and
from general and administrative costs associated with the Company's product
development. No revenues have been generated by the Company from product sales.
The Company expects to incur additional operating losses over at least the next
two years, as it continues its product development programs and establishes a
sales and marketing organization, and expects cumulative losses to increase. The
Company expects that losses will fluctuate from quarter to quarter and that such
fluctuations may be substantial. The Company's ability to achieve profitability
is dependent in part upon obtaining regulatory approval for new products,
commercial acceptance of products that are introduced to the market after
required approvals have been obtained and the successful development and
commercialization of its products. There can be no assurance that the Company
will obtain required regulatory approvals, successfully develop, commercialize,
manufacture and market its products or ever achieve sales or profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
UNCERTAINTY RELATED TO APPROVAL OF PRIMSOL TRIMETHOPRIM SOLUTION
In January 1997, the Division of Anti-Infective Drugs of the FDA notified
Ascent that it recommended approval of the Company's NDA for Primsol
trimethoprim solution for the treatment of acute otitis media ("AOM"), or middle
ear infection, for children age six months to twelve years, with a label
reflecting that Primsol solution would not be a product for first line therapy
for this indication. However, the FDA has not yet granted such marketing
approval, and there can be no assurance that such approval in fact will be
granted or as to the timing thereof. In October 1996, Ascent filed a second NDA
with the FDA covering a more concentrated formulation of Primsol solution.
Ascent plans to introduce this improved formulation as the Primsol solution
product that it brings to market. If the Company does not receive approval of
its NDA for this more concentrated formulation on a timely basis, the Company
would introduce the first formulation as the Primsol solution product that it
brings to market (provided it receives marketing approval for such formulation).
If the FDA were not to grant marketing approval of either formulation of Primsol
solution for this indication, or if there were significant delays in such
approval, the business, financial condition and operating results of the Company
would be adversely affected, possibly materially. In addition, in the event that
Primsol solution does not receive marketing approval for this indication prior
to the cold and flu season in the second half of 1997, the Company's
establishment of a dedicated marketing staff and sales force and the
introduction of any other products by the Company would be delayed, possibly
materially, which could have a material adverse effect on the Company's
business, financial condition and operating results. Ascent currently does not
plan to introduce any products to the market until it receives Primsol solution
marketing approval for this indication. See "Business -- Products and Products
Under Development -- Primsol Trimethoprim Solution."
PRODUCTS IN DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY
Ascent has not yet introduced any product into the market. Although the
Company has completed development of certain of its products, many of the
Company's product candidates are in development and
6
<PAGE> 8
require additional formulation, preclinical studies, clinical trials and
regulatory approval prior to any commercial sales. With respect to certain
product candidates, the Company must successfully address a number of
technological challenges to complete its development efforts. In addition, there
can be no assurance that the Company will be permitted to undertake and complete
human clinical trials of certain of the Company's potential products, either in
the United States or elsewhere, or, if permitted, that such products will be
demonstrated to be safe and efficacious. The administration of any product the
Company develops may produce undesirable side effects that could result in the
interruption, delay or suspension of clinical trials. In addition, there can be
no assurance that any of the Company's product candidates will obtain the
approval of the FDA or other regulatory approvals or that any approved product
will be capable of being produced in commercial quantities at reasonable cost
and successfully marketed.
LIMITED SALES AND MARKETING EXPERIENCE
The Company expects to market and sell its products in the United States
through its own dedicated marketing staff and sales force. The Company has
limited experience in marketing and sales and has only recently begun to recruit
a marketing staff and sales force. The Company believes that its success will
depend in significant part upon its ability to recruit, train and retain a
dedicated marketing staff and sales force capable of promoting its products.
Significant additional expenditures, management resources and time will be
required for the Company to assemble a marketing staff and sales force. There
can be no assurance that the Company will be able to attract and build a
satisfactory marketing staff and sales force, that the Company will be able to
assemble a marketing staff and sales force on a timely basis, that the cost of
establishing a marketing staff and sales force will be justifiable in light of
product revenues or that the Company's direct marketing and sales efforts will
be successful. Should the Company fail to recruit and train a marketing staff
and sales force on a timely basis, or otherwise fail in its marketing and sales
efforts, its business, financial condition and operating results would be
materially adversely affected. See "Business -- Sales and Marketing."
UNCERTAINTY OF MARKET ACCEPTANCE OF PRODUCTS
Although many of the Company's product candidates are reformulations of
compounds marketed by other manufacturers, there can be no assurance that these
products or other current or future products of the Company will achieve market
acceptance. The commercial success of the Company's products and products under
development, when and if any required approval for marketing by the FDA or any
other regulatory agency is obtained, will depend, in significant part, on such
products' efficacy, side effect profile, taste, dosing frequency, method of
administration, patent and other proprietary position, brand name recognition
and price. Another important factor will be the timing of market introduction of
the Company's or competitive products. Earlier entrants in the market often
obtain and maintain significant market share relative to later entrants.
The commercial success of the Company's products also will depend in
significant part upon their acceptance by pediatricians, pediatric nurses and
third party payors (particularly managed care providers). Acceptance of the
Company's products by pediatricians, pediatric nurses and third party payors
will in turn be dependent upon the success of the Company's marketing and sales
activities. There can be no assurance that pediatricians, pediatric nurses and
third party payors will accept the Company's products on a timely basis or at
all. In addition, in order to stimulate demand for its products, the Company may
be required to, among other things, offer substantial price discounts. Failure
to achieve market acceptance would have a material adverse effect on the
Company's business, financial condition and operating results.
COMPETITION
Competition in the pediatric pharmaceutical market is intense. Several
large pharmaceutical companies with significant research, development, marketing
and manufacturing operations market pediatric products in addition to products
for the adult market. These competitors include Glaxo Wellcome Inc., Eli Lilly
and Company, the Mead Johnson Division of Bristol-Myers Squibb, Inc., the
Ortho-McNeil Pharmaceutical Division of Johnson & Johnson Inc., Pfizer Inc., the
Ross Products Division of Abbott Laboratories Inc., Schering-Plough Corporation
and the Wyeth-Lederle Vaccines and Pediatrics Division of American Home
Products, Inc.
7
<PAGE> 9
Many of the companies against which Ascent will compete have substantially
greater name recognition and greater financial, technical and human resources
than Ascent. In addition, many of these competitors have significantly greater
experience than the Company in undertaking preclinical testing and human
clinical trials of pharmaceutical products and obtaining FDA and other
regulatory approvals of products for use in health care. Accordingly, the
Company's competitors may succeed in obtaining FDA or other regulatory approvals
for products more rapidly than the Company. Furthermore, subject to obtaining
required regulatory clearances, Ascent will compete against these larger
companies with respect to manufacturing efficiency and marketing capabilities,
areas in which Ascent has limited or no experience. These competitors may
introduce competitive pricing pressures that may adversely affect Ascent's sales
levels and margins. Moreover, many of these competitors offer well established,
broad product lines and services not offered by the Company. Many of the
products and services offered by these competitors have well known brand names
that have been promoted over many years.
The Company expects to market many of its product candidates as alternative
treatments for pediatric indications for which products with the same active
ingredient are well entrenched in the market. For example, the Company intends
to market Primsol, a trimethoprim antibiotic, for the treatment of AOM, an
indication for which pediatricians often prescribe the well-known combination
therapies Bactrim and Septra, which also contain trimethoprim. Similarly,
Pediatemp acetaminophen controlled-release beads will compete against Tylenol
liquid for children. The Company's product candidates also will face competition
from other products that do not contain the same active ingredient but are used
for the same indication and are well entrenched within the pediatric market. For
example, Primsol solution will compete against other antibiotics, including
amoxicillin. Moreover, many of the Company's potential products that are
reformulations of existing drugs of other manufacturers may have limited patent
or other competitive protection. There can be no assurance that pediatricians,
pediatric nurses and third party payors will prefer the Company's products to
existing products. See "Business -- Competition."
The Company plans to apply for three year protection for certain products
under the Drug Price Competition and Patent Term Restoration Act of 1984 (the
"Waxman-Hatch Act") from the approval of a potential competitor's ANDA which is
based on the Company's clinical trial results. There can be no assurance that
any of the Company's products will qualify for protection under the Waxman-Hatch
Act or, if any product does so qualify, that the statutory protection will
enhance the competitive position of such product. See "Business -- Government
Regulation."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company's future capital requirements will depend on many factors,
including continued progress in its product development programs, the magnitude
of these programs, the results of preclinical studies and clinical trials, the
time and costs involved in obtaining regulatory approvals, the costs involved in
filing, prosecuting, enforcing and defending patent claims, competing
technological and market developments, the ability of the Company to establish
and maintain a sales and marketing capability and product development,
manufacturing and marketing relationships, and the costs and success of
commercialization activities and arrangements. The Company's business strategy
requires a significant commitment of funds to conduct clinical testing of
potential products, to pursue regulatory approval of such products and to
establish sales and marketing capabilities and manufacturing relationships
necessary to bring such products to market.
Based on its current operating plan, the Company anticipates that its
existing capital resources, together with the proceeds of this offering and
interest earned thereon, the net proceeds from the issuance of an additional
$5,000,000 of Triumph Notes and internally generated funds, will be adequate to
satisfy its capital requirements for at least the next 24 months. The Company
anticipates that it may be required to raise substantial additional funds from a
number of potential sources, including through collaborative relationships and
public or private financings. No assurance can be given that additional
financing will be available, or, if available, that it will be available on
acceptable terms. If additional funds are raised by issuing equity securities,
further dilution to then existing stockholders will result. Additionally, the
terms of the financing may adversely affect the holdings or the rights of the
then existing stockholders. If adequate funds are not available, the Company may
be required to significantly curtail one or more of its product development
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programs or product commercialization efforts, or obtain funds through
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its technologies, product candidates or
products which the Company would otherwise pursue on its own. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
UNCERTAINTY OF IDENTIFICATION OR ACQUISITION OF NEW PRODUCT CANDIDATES AND NEW
TECHNOLOGIES
The success of the Company depends in part upon its ability to identify and
develop or obtain rights to pharmaceuticals suitable for pediatric use. There
can be no assurance that the Company will be successful in identifying and
developing pharmaceuticals suitable for pediatric use or in acquiring such
rights. The Company's success also depends upon its ability to apply its drug
delivery and reformulation technologies to produce proprietary products. There
can be no assurance that the Company will be able to develop additional
technologies or obtain rights from third parties to additional technologies on
reasonable terms, or at all.
UNPROVEN SAFETY AND EFFICACY OF PRODUCTS; UNCERTAINTIES RELATED TO CLINICAL
TRIALS
In order to obtain regulatory approval for the commercial sale of many of
its products, the Company is conducting or plans to conduct clinical trials to
demonstrate that such products are safe and effective. There can be no assurance
that any of these clinical trials will be successfully completed within any
specified time period, if at all. The results from early clinical trials may not
be predictive of results that will be obtained in large-scale clinical trials,
and there can be no assurance that the Company's clinical trials will
demonstrate the safety and effectiveness of any products or will result in
marketable products.
The rate of completion of the Company's clinical trials is dependent upon,
among other things, the rate of patient enrollment. Patient enrollment is a
function of many factors, including the size of the patient population, the
nature of the protocol, the proximity of patients to clinical sites and the
eligibility criteria for the study. Historically, recruiting children to
participate in clinical trials has been difficult, as parents are reluctant to
permit their children to take experimental medications. Delays in planned
patient enrollment may result in increased costs, program delays, or both, which
could have a material adverse effect on the Company.
The Company has contracted with clinical research organizations for the
conduct of all of its clinical trials and expects to continue to do so for the
foreseeable future. There can be no assurance that such entities will conduct
the clinical trials successfully. The Company relies on scientific, technical
and clinical data supplied by its academic and industry collaborators and
licensors in the design, development and evaluation of product candidates. There
can be no assurance that there are no errors or omissions in such data that
would materially adversely affect the development of these products.
NO ASSURANCE OF REGULATORY APPROVAL; EXTENSIVE GOVERNMENT REGULATION
The production and the marketing of the Company's products and the
Company's ongoing product development activities are and will be subject to
extensive regulation by numerous federal, state and local governmental
authorities in the United States and abroad. The Company has had only limited
experience in filing or pursuing applications necessary to gain regulatory
approvals. Preclinical testing of the Company's product candidates is subject to
Good Laboratory Practice ("GLP") requirements and the manufacture of products is
subject to Good Manufacturing Practice ("GMP") requirements prescribed by the
FDA.
Many of the products that the Company is developing will be subject to the
NDA regulatory process. This process generally includes preclinical studies,
clinical trials and ongoing post-approval testing of each compound to establish
or monitor its safety and effectiveness for the intended indications, typically
takes many years and requires the expenditure of substantial resources. The
Company has limited experience in filing or pursuing applications necessary to
gain regulatory approval. There can be no assurance that, even after the
performance of clinical studies and the expenditure of resources, regulatory
approval will be obtained for any products developed by the Company on a timely
basis, if at all. The Company's analysis of data obtained from preclinical and
clinical activities is subject to confirmation and interpretation by regulatory
authorities which could delay, limit or prevent FDA regulatory approval. The
Company or the FDA may suspend clinical trials
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at any time if the participants in such trials are being exposed to
unanticipated or unacceptable health risks. Moreover, if regulatory approval to
market a product is granted, such approval may entail limitations on the
indicated uses for which it may be marketed. See "Business -- Government
Regulation."
Failure to comply with applicable regulatory requirements can, among other
things, result in fines, suspension or withdrawal of regulatory approvals,
product recalls, seizure of products, operating restrictions and criminal
prosecutions. FDA policy may change and additional government regulations may be
established that could prevent or delay regulatory approval of the Company's
product candidates. In addition, a marketed product, its manufacturer and its
manufacturing facilities are subject to continual review and periodic
inspections, and subsequent discovery of previously unknown problems with a
product, manufacturer or facility may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market. There can be
no assurance that additional statutes or regulations applicable to the Company's
business will not be adopted, impose substantial additional costs upon or
otherwise adversely affect the Company's operations.
The Company is also subject to numerous and varying foreign regulatory
requirements governing the design and conduct of clinical trials and the
manufacturing and marketing of its products. The approval procedure varies among
countries and can involve additional testing, and the time required to obtain
approval may differ from that required to obtain FDA approval. The foreign
regulatory approval process may include all of the risks associated with
obtaining FDA approval set forth above. There can be no assurance that foreign
regulatory approvals will be obtained on a timely basis, if at all.
DEPENDENCE ON THIRD PARTY MANUFACTURING; RISKS RELATED TO SOLE SOURCE OF SUPPLY
The Company has no manufacturing facilities and has to date relied, and
plans in the future to rely, upon third parties to manufacture the Company's
products in accordance with GMP for preclinical testing, clinical trial and
commercial purposes. In addition, the Company has not arranged for the
production of certain of its product candidates in commercial quantities, and it
is possible that the Company will encounter difficulties in scaling up the
production of these product candidates. Although there are a number of
manufacturers that operate under GMP regulations capable of manufacturing
certain of the Company's products, in the event that the Company is unable to
obtain contract manufacturing, or obtain such manufacturing on commercially
reasonable terms, it may not be able to develop and commercialize its products
as planned. Where third-party arrangements are established, the Company will
depend upon such third parties to perform their obligations in a timely manner.
There can be no assurance that third parties depended upon by the Company will
perform and any failures by third parties may delay clinical trial development
or the submission of products for regulatory approval, impair the Company's
ability to commercialize its products as planned and deliver products on a
timely basis, or otherwise impair the Company's competitive position, which
could have a material adverse effect on the Company's business, financial
condition and operating results.
Certain of the Company's supply arrangements require that Ascent buy all of
the Company's requirements of a particular product exclusively from the other
party to the contract. Moreover, for many of its products, Ascent has qualified
only one supplier, even though the contractual arrangement with the supplier may
permit Ascent to qualify an alternative manufacturer. Any interruption in supply
from any of the Company's manufacturers or the inability of these manufacturers
to manufacture the Company's products in accordance with GMP could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Business -- Manufacturing and Distribution."
In the future, the Company may establish its own manufacturing facilities
if it becomes economically attractive to do so. In order for the Company to
establish a manufacturing facility, the Company would require substantial
additional funds and be required to hire and retain significant additional
personnel and comply with the extensive GMP regulations of the FDA.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in part on its ability to develop patentable
products and obtain patent or other proprietary rights protection for its
products, both in the United States and in other countries. The
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Company intends to file applications as appropriate for patents and other
protection covering both its products and processes. However, the patent
positions of pharmaceutical firms, including Ascent, are generally uncertain and
involve complex legal and factual questions. Moreover, because the Company's
product candidates are reformulations of existing off-patent drugs, any patent
protection afforded will be significantly narrower than a patent on the active
ingredient itself. In particular, the Company does not expect that
composition-of-matter patent protection will be available for the active
ingredients in its products. No assurance can be given that patents will issue
from any patent applications owned by or licensed to the Company or that, if
patents do issue, the claims allowed will be sufficiently broad to protect the
Company's products or technology. In addition, no assurance can be given that
any issued patents owned by or licensed to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company.
The commercial success of the Company will also depend in part on its
neither infringing patents or other proprietary rights granted to competitors or
others nor breaching the technology licenses upon which the Company's products
are based. The Company's licenses of third party patents and patent applications
impose various commercialization, sublicensing, royalty and other payment,
insurance and other obligations on the Company. Failure of the Company to comply
with these requirements could result in termination of the licenses. Competitors
of the Company and other third parties hold issued patents and pending patent
applications which may result in claims of infringement against the Company or
other patent-related litigation. There can be no assurance that the Company will
be able to successfully obtain a license to any technology that it may require
or that, if obtainable, such technology can be licensed at a reasonable cost or
on an exclusive basis. Failure by the Company to obtain a license to any
technology that it may require to commercialize its products could have a
material adverse effect on the Company. See "Business -- Patents, Trade Secrets
and Licenses."
The pharmaceutical industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Litigation, which
could result in substantial cost to the Company, may be necessary to enforce any
patents issued or licensed to the Company and/or to determine the scope and
validity of others' proprietary rights. Competitors of the Company and other
third parties hold issued patents and pending patent applications relating to
aspects of the Company's technology, and it is uncertain whether these patents
and patent applications will require the Company to alter its products or
processes, pay licensing fees or cease activities. In particular, the Company is
aware of one United States patent issued to a pharmaceutical company that may be
alleged to be infringed by the Company's prednisolone sodium phosphate syrup
that is being developed. Although Welsh & Katz, Ltd., patent counsel to the
Company, is of the opinion that the Company's prednisolone sodium phosphate
syrup that is being developed does not infringe such patent, an opinion of
counsel only represents such counsel's view of applicable law and is not binding
on any court or governmental agency. In addition, there can be no assurance that
the holder of such patent or its licensees will not sue the Company to enforce
such patent, and there can be no assurance as to the outcome of any such action.
In the event that the holder of such patent or its licensees, within 45 days
after receipt of the Company's notification of the filing of an ANDA relating to
prednisolone syrup files a patent infringement suit against the Company claiming
that the Company's prednisolone syrup infringes its patent, any FDA approval of
the ANDA can not become effective until the earlier of (i) a determination that
such patent has been found to be invalid, unenforceable or not infringed, (ii)
such litigation has been dismissed or (iii) 30 months after the ANDA filing. The
Company also may have to participate in interference proceedings declared by the
United States Patent and Trademark Office to determine the priority of
inventions, which could result in substantial cost to the Company. Furthermore,
the Company may have to participate at substantial cost in International Trade
Commission proceedings to abate importation of products which would compete
unfairly with products of the Company.
The Company relies on trade secret and proprietary know-how which it seeks
to protect, in part, by confidentiality agreements with its collaborators,
employees, advisors and consultants. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach or that the Company's trade secrets will not otherwise become
known or be independently
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developed by competitors. Failure to obtain or maintain patent and trade secret
protection, for any reason, could have a material adverse effect on the
Company's business, financial condition and operating results.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND ADEQUATE REIMBURSEMENT; NEED FOR
INCLUSION ON FORMULARIES
The Company's ability to commercialize its products successfully will
depend in part on the extent to which appropriate reimbursement levels for the
cost of such products are obtained from government authorities, private health
insurers and other organizations, such as health maintenance organizations
("HMOs"). Third-party payors are increasingly challenging the prices charged for
medical products and services. Also, the trend towards managed health care in
the United States and the concurrent growth of organizations such as HMOs, which
control or significantly influence the purchase of health care services and
products, as well as legislative proposals to reduce government insurance
programs, may all result in lower prices for the Company's products. The cost
containment measures that health care providers are instituting could affect the
Company's ability to sell its products and may have a material adverse effect on
the Company.
Thus, there can be no assurance that reimbursement in the United States or
foreign countries will be available for any of the Company's products, or if
available, will not be decreased in the future, or that reimbursement amounts
will not reduce the demand for, or the price of, the Company's products. The
unavailability or inadequacy of third-party reimbursement for the Company's
products would have a material adverse effect on the Company's business,
financial condition and operating results.
Managed care providers generally maintain formularies, or lists of
products, that such providers have approved for use and reimbursement. The
Company plans to seek to have its products included on such formularies. There
can be no assurance that the Company's products will be included on the
formularies of managed care providers on a timely basis, or at all. The
Company's success in obtaining inclusion of its products on managed care
formularies will materially affect the Company's business, financial condition
and operating results.
POTENTIAL PRODUCT LIABILITY EXPOSURE AND INSURANCE
The use of the Company's products in human clinical trials and the
commercial sale of such products may expose the Company to potential product
liability risks which are inherent in the testing, manufacturing, marketing and
sale of human therapeutic pharmaceuticals. Product liability claims might be
made directly by consumers, health care providers or by licensees, distributors
or others selling such products. There can be no assurance that product
liability claims, if made, would not result in a recall of the Company's
products or a change in the indications for which they may be used. Ascent has
limited product liability insurance coverage, and such coverage is subject to
various deductibles. Such coverage is expensive, and no assurance can be given
that the Company will be able to maintain or obtain such insurance at reasonable
cost or in sufficient amounts to protect the Company against losses due to
liability claims that could have a material adverse effect on the Company.
ATTRACTION AND RETENTION OF KEY EMPLOYEES
The Company is highly dependent on the principal members of its management
and scientific staff, particularly Dr. Clemente, the Company's Chairman, the
loss of whose services could have a material adverse effect on the Company.
Also, recruiting and retaining qualified scientific personnel to perform product
development work in the future will be critical to the Company's success. There
can be no assurance that the Company will be able to attract and retain such
highly skilled personnel on acceptable terms given the competition among
numerous pharmaceutical and health care companies, universities and non-profit
research institutions for experienced scientists. The Company does not carry
key-man insurance with respect to any of its executive officers other than Dr.
Clemente.
The Company's anticipated growth and expansion into areas and activities
requiring additional expertise, such as marketing and sales, are expected to
require the addition of new management personnel and the development of
additional expertise by existing management personnel. The failure to acquire
such services or
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to develop such expertise could have a material adverse effect on the Company's
business, financial condition and operating results.
RISKS RELATED TO POSSIBLE ACQUISITIONS
The Company may expand its operations or product offerings through the
acquisition of businesses, products or technologies. There can be no assurance
that the Company will be able to identify, acquire or profitably manage
additional businesses or successfully integrate any acquired businesses,
products or technologies into the Company without substantial expense, delays or
other operational or financial problems. Further, acquisitions may involve a
number of special risks, including diversion of management's attention, failure
to retain key acquired personnel, unanticipated events or circumstances and
legal liabilities, some or all of which could have a material adverse effect on
the Company's business, financial condition and operating results. In addition,
there can be no assurance that acquired businesses, products or technologies, if
any, will achieve anticipated revenues and earnings.
The Company is a party to an agreement with Upsher-Smith to purchase
Upsher-Smith's Feverall line of acetaminophen rectal suppositories. Although the
acquisition of this product line and related arrangements are the subject of
executed contracts, there are a number of conditions to closing and there can be
no assurance that these conditions will be satisfied and that Ascent will
acquire this product line or will do so on the terms specified in the existing
contracts. In the event that this acquisition does not close, management will
have broad discretion as to the use of the proceeds of this offering that
currently are expected to be used to finance a portion of the purchase price of
this acquisition. As of the date of this Prospectus, the Company has no other
agreements, understandings or commitments to effect any acquisition.
MANAGEMENT'S DISCRETION AS TO USE OF PROCEEDS
The Company currently intends to use approximately 28.1% ($6,050,000) of
the net proceeds of this offering to fund the portion of the purchase price of
Upsher-Smith's Feverall product line of acetaminophen rectal suppositories due
at the closing of the acquisition. The Company also currently intends to use the
balance of the net proceeds of this offering for other general corporate
purposes, which may include the payment of a portion of the $5,500,000 second
installment of the Feverall product line purchase price that is due in February
1998. There can be no assurance that the Feverall acquisition will close as
scheduled, if at all. In the event that the Feverall acquisition does not close,
management of the Company will have broad discretion as to the use of the
portion of the proceeds of this offering that currently is expected to be used
to finance such acquisition. See "Use of Proceeds," "Business -- Products and
Products Under Development -- Feverall Acetaminophen Suppositories."
DEPENDENCE ON COLLABORATORS
In addition to the manufacturing of product candidates and products, the
Company is dependent upon third parties with respect to significant other
aspects of its operations, including product design and formulation work,
conduct of clinical trials, marketing to managed care organizations and product
distribution. There can be no assurance that the Company will be able to enter
into future collaborative arrangements with respect to these matters or as to
whether any of the Company's existing or future relationships will be
successful. The success of any such arrangement is dependent on, among other
things, the skills, experience and efforts of the third party, the third party's
commitment to the arrangement and the financial condition of the third party,
all of which are beyond the control of the Company.
RELIANCE ON THIRD PARTIES FOR CERTAIN SALES AND MARKETING AND DISTRIBUTION
ACTIVITIES
The Company plans to sell its pediatric products in international markets
through distribution, licensing and similar arrangements and to sell its
products for adult indications in the United States and in international markets
through similar arrangements. To date, the Company has not entered into any
material arrangements of this nature. To the extent the Company enters into such
arrangements with third parties, any revenues the Company receives will depend
upon the efforts of such parties. There can be no assurance that any third party
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will market the Company's products successfully or that any arrangements with
third parties will be on terms favorable to the Company. If a third party does
not market the Company's products successfully, the Company's business,
financial condition and operating results would be adversely affected, possibly
materially. If Ascent's plan to rely on third parties for certain aspects of
marketing and selling the Company's products is unsuccessful for any reason,
Ascent may need to forgo international and adult market opportunities or recruit
and train a larger marketing staff and sales force and establish a larger
distribution capability than it currently anticipates doing, which would entail
the incurrence of significant additional costs.
Ascent initially plans to distribute its products through a third party
distribution warehouse. The Company has no experience with the distribution of
products and will rely on the third party distributor to perform various
functions on behalf of the Company, including order entry, customer service and
collection of accounts receivable. The success of this arrangement will be
dependent on, among other things, the skills, experience and efforts of the
third party distributor, all of which are beyond the control of the Company.
UNCERTAINTY OF HEALTH CARE REFORM MEASURES
Federal, state and local officials and legislators (and certain foreign
government officials and legislators) periodically propose or consider proposing
a variety of reforms to the health care systems in the United States and abroad.
The Company cannot predict what health care reform legislation, if any, will be
enacted in the United States or elsewhere or when such legislation will be
enacted. Significant changes in the health care system in the United States or
elsewhere are likely to have a substantial impact over time on the manner in
which the Company conducts its business and could have a material adverse effect
on the Company. The existence of pending health care reform proposals could have
a material adverse effect on the Company's ability to raise capital. Further, to
the extent that proposals have a material adverse effect on other pharmaceutical
companies that are prospective collaborators with the Company, the Company's
ability to establish collaborative commercial relationships may be adversely
affected.
NO PUBLIC MARKET; POSSIBLE VOLATILITY OF SHARE PRICE; DILUTION
Prior to this offering, there has been no public market for the Common
Stock of the Company, and there can be no assurance that an active trading
market will develop or be sustained after this offering. The initial public
offering price will be determined by negotiations among the Company and the
representatives of the Underwriters based upon several factors and may not be
indicative of future market prices. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
market price of the Company's Common Stock could be subject to wide fluctuations
in response to quarterly variations in the Company's operating results,
announcements of technological innovations, progress in the development of the
Company's product candidates or new products by the Company, its collaborative
partners or its competitors, governmental regulation, developments in patent or
other proprietary rights and public concern regarding the safety, effectiveness
or other implications of the products being developed by the Company. In
addition, the stock market has experienced extreme price and volume
fluctuations. This volatility has significantly affected the market prices of
securities of many pharmaceutical companies for reasons frequently unrelated to
or disproportionate to the operating performance of the specific companies.
These broad market fluctuations may adversely affect the market price of the
Company's Common Stock.
Purchasers of shares of Common Stock in this offering will experience an
immediate and substantial dilution of $9.33 per share in the net tangible book
value of the Common Stock from the initial public offering price (based on an
assumed initial public offering price of $12.00 per share). Additional dilution
is likely to occur upon exercise of outstanding warrants and stock options. See
"Dilution."
CONTROL BY DIRECTORS AND OFFICERS
Upon completion of this offering and based upon the ownership of the
Company's capital stock as of March 31, 1997, the Company's directors and
executive officers and their affiliates will beneficially own approximately
49.6% of the Company's outstanding Common Stock (approximately 47.9% if the
Underwriters exercise their over-allotment option in full). See "Principal
Stockholders." As a result, these stockholders, if
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acting together, will have the ability to control the outcome of most corporate
actions requiring stockholder approval, including actions concerning the
election of directors and the approval of certain mergers and other significant
corporate transactions, including a sale of substantially all of the Company's
assets, irrespective of how other stockholders of the Company may vote. This
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. See "Principal Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
A substantial number of outstanding shares of Common Stock and shares of
Common Stock issuable upon exercise of outstanding options, warrants and
convertible debt will become eligible for future sale in the public market at
prescribed times. Sales of substantial numbers of shares of Common Stock in the
public market following this offering could adversely affect prevailing market
prices. Holders of 6,843,676 shares of Common Stock (including 1,819,780 shares
of Common Stock that may be acquired upon the exercise of warrants and 583,332
shares of Common Stock that may be acquired upon conversion of the Triumph Notes
(assuming an initial public offering price of $12.00 per share)), are entitled
to certain rights with respect to registration of such shares of Common Stock
for offer or sale to the public. The Company plans to file a Form S-8
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), registering shares issuable pursuant to the Company's
employee stock plans. Any sales by existing stockholders or holders of options,
warrants or Triumph Notes may have an adverse effect on the Company's ability to
raise needed capital and may adversely affect the market price of the Common
Stock. See "Shares Eligible for Future Sale," "Description of Capital Stock" and
"Underwriting."
ANTI-TAKEOVER PROVISIONS
The Company's Second Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation"), as in effect upon the closing of this offering,
will require that any action required or permitted to be taken by stockholders
of the Company must be effected at a duly called annual or special meeting of
stockholders and may not be effected by any consent in writing, and will require
reasonable advance notice by a stockholder of a proposal or director nomination
which such stockholder desires to present at any annual or special meeting of
stockholders. Special meetings of stockholders may be called only by the
President of the Company or by the Board of Directors. The Certificate of
Incorporation provides for a classified Board of Directors, and members of the
Board of Directors may be removed only for cause upon the affirmative vote of
holders of at least two-thirds of the shares of capital stock of the Company
entitled to vote. In addition, the Board of Directors will have the authority,
without further action by the stockholders, to fix the rights and preferences
of, and issue shares of, Preferred Stock. These provisions, other provisions of
the Certificate of Incorporation and the beneficial ownership of a significant
portion of the Company's outstanding Common Stock by the Company's directors and
executive officers and their affiliates, may have the effect of deterring
hostile takeovers or delaying or preventing changes in control or management of
the Company, including transactions in which stockholders might otherwise
receive a premium for their shares over then current market prices. In addition,
these provisions may limit the ability of stockholders to approve transactions
that they may deem to be in their best interests.
NO DIVIDENDS ANTICIPATED IN FUTURE
The Company has not paid any dividends on the Common Stock since its
inception and does not anticipate paying any dividends in the future.
Declaration of dividends on the Common Stock will depend upon, among other
things, future earnings, if any, the operating and financial condition of the
Company, its capital requirements and general business conditions. The Company
is currently prohibited from paying dividends under an agreement relating to the
issuance of the Triumph Notes and the Triumph Warrants (the "Triumph
Agreement"). See "Dividend Policy."
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THE COMPANY
The Company was organized as a Delaware corporation in March 1989. On June
28, 1996, the Company changed its name to Ascent Pediatrics, Inc. from Ascent
Pharmaceuticals, Inc. The Company's principal office is located at 187
Ballardvale Street, Wilmington, Massachusetts 01887, and its telephone number is
(508) 658-2500.
The Company holds United States trademark registrations for "ASCENT,"
"PEDIAMIST" and "PRIMSOL" and has received notices of allowance from the United
States Patent and Trademark Office with respect to trademark registrations for
"PEDIATEMP" and "PEDIAVENT." All other brand names or trademarks appearing in
this Prospectus are the property of their respective owners.
All market data expressed in dollar amounts in this Prospectus reflect
estimates of pharmacy acquisition costs.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby are estimated to be $21,520,000 ($24,868,000 if the
Underwriters' exercise their over-allotment option in full), at an assumed
initial public offering price of $12.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company.
The Company currently intends to use approximately 28.1% ($6,050,000) of
the net proceeds of this offering to fund the portion of the purchase price of
Upsher-Smith's Feverall line of acetaminophen rectal suppositories (including
estimated inventory cost of $300,000) due at the closing of the acquisition. In
addition, the Company currently intends to use the balance of the net proceeds
of this offering in the following approximate amounts: (i) 23% for product
development activities, including costs of preclinical tests, clinical trials
and regulatory submissions; (ii) 39.5% for sales and marketing expenses,
including costs of assembling its marketing staff and sales force and
introducing the Company's initial three products to the market; and (iii) 9.4%
for general corporate purposes, which may include a portion of the $5,500,000
second installment of the Feverall product line purchase price that is due in
February 1998. The Company may also use a portion of the net proceeds to acquire
businesses, technologies or products complementary to the Company's business,
although the Company does not currently have any commitment or agreement for any
such acquisitions other than the Feverall acquisition. In the event that the
Feverall acquisition does not close, management will have broad discretion as to
the use of the portion of the proceeds of this offering that currently is
expected to be used to finance such acquisition. See "Risk Factors --
Management's Discretion as to Use of Proceeds" and "Business -- Products and
Products Under Development -- Feverall Acetaminophen Suppositories."
The amount and timing of actual expenditures by the Company will depend on
many factors, including the progress of its product development programs, the
magnitude of these programs, the results of preclinical studies and clinical
trials, the time and costs involved in obtaining regulatory approvals, the costs
involved in filing, prosecuting, enforcing and defending patent claims,
competing technological and market developments, the ability of the Company to
establish and maintain a sales and marketing capability and product development,
manufacturing and marketing relationships, and the costs and success of
commercialization activities and arrangements.
Based on its current operating plan, the Company anticipates that its
existing capital resources, together with the net proceeds of this offering and
interest earned thereon, the net proceeds from the issuance of an additional
$5,000,000 of Triumph Notes and internally generated funds, will be adequate to
satisfy its capital requirements for at least the next 24 months.
Pending application of the net proceeds of this offering as described
above, the Company intends to invest the net proceeds of this offering in
short-term, investment-grade, interest-bearing instruments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
16
<PAGE> 18
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, for use in its
business and therefore does not anticipate paying any cash dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company's Board of Directors after taking into account various
factors, including the Company's financial condition, operating results, capital
requirements, current and anticipated cash needs as well as other factors that
the Board of Directors may deem to be relevant. The Company is currently
prohibited from paying dividends under the Triumph Agreement. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
17
<PAGE> 19
CAPITALIZATION
The following table sets forth as of March 31, 1997: (i) the actual
capitalization of the Company; (ii) the combined pro forma capitalization of the
Company as described in Note (1) below; and (iii) the combined pro forma
capitalization of the Company as adjusted as described in Note (2) below. This
table should be read in conjunction with the Company's Financial Statements and
related Notes and Unaudited Combined Pro Forma Financial Statements included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------------------------
COMBINED
COMBINED PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(1)(2)
-------- ------------ -----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term debt, net of current portion............ $ 2,020 $ 4,514 $ 4,514
Redeemable Convertible Preferred Stock, $.00004
par value; 4,458,564 shares authorized;
4,008,658 shares issued and outstanding; no
shares authorized or outstanding, combined pro
forma and combined pro forma as adjusted........ 25,010 -- --
Stockholders' equity:
Convertible Preferred Stock, $.00004 par value;
1,199,999 shares authorized, issued and
outstanding; no shares issued and
outstanding, combined pro forma and combined
pro forma as adjusted........................ 2,855 -- --
Preferred Stock $.01 par value; 5,000,000
authorized and unissued combined pro forma as
adjusted..................................... -- -- --
Common Stock, $.00004 par value; 20,000,000
shares authorized and 198,155 shares issued
and outstanding; 20,000,000 shares authorized
and 4,638,719 shares issued and outstanding,
combined pro forma; 60,000,000 shares
authorized and 6,638,719 shares issued and
outstanding, combined pro forma as
adjusted(3).................................. -- -- --
Additional paid-in capital........................ -- 30,371 51,891
Deficit accumulated during the development
stage........................................... (22,292) (22,292) (22,292)
------ -------- --------
Total stockholders' equity (deficit).............. (19,437) 8,079 29,599
------ -------- --------
Total capitalization.............................. $ 7,593 $ 12,593 $ 34,113
====== ======== ========
</TABLE>
- ---------------
(1) Presented on a combined pro forma combined basis to give effect to (i) the
probable acquisition of the Feverall product line from Upsher-Smith for
$11,500,000 plus the cost of certain related inventory (assumed for this
purpose to be $235,696) as if such acquisition had occurred on March 31,
1997, (ii) the issuance of $5,000,000 of Triumph Notes no later than the
closing of this offering presented as if this transaction occurred on
January 1, 1996, with such Triumph Notes recorded as a liability (after
allocating $1,668,746 as value attributable to warrants) of $3,331,254,
which will be accreted up to the Triumph Notes' face value of $5,000,000
over the term of the Triumph Notes and such accretion in the amount of
$1,668,746 will be recorded as interest expense in addition to the stated
interest rate, (iii) the Preferred Stock Conversion and (iv) the
reclassification of $2,505,740 of warrant obligations to additional paid in
capital as described in Note L to Notes to Financial Statements. See
"Certain Transactions" and "Combined Pro Forma Financial Statements."
(2) Reflects the sale of the 2,000,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $12.00 per
share and the application of net proceeds therefrom, after deducting the
underwriting discounts and commissions and estimated offering expenses
payable by the Company. See "Use of Proceeds" and "Certain Transactions."
(3) Does not include 1,899,677 shares of Common Stock reserved for issuance upon
exercise of outstanding options and warrants as of March 31, 1997 at a
weighted average exercise price of $5.54 per share. See Note H of Notes to
Financial Statements. Also excludes (i) an aggregate of 583,332 shares of
Common Stock (assuming an initial public offering price of $12.00 per share)
issuable upon the conversion of the Triumph Notes and (ii) 336,644 shares of
Common Stock at an exercise price of $0.01 per share and 218,195 shares of
Common Stock at an exercise price of
18
<PAGE> 20
$5.29 per share reserved for issuance upon the exercise of the Triumph
Warrants. Of the number of shares of Common Stock issuable pursuant to
warrants outstanding as of March 31, 1997, 651,334 shares are issuable
pursuant to warrants issued in connection with the sale by the Company of
shares of Series F Convertible Preferred Stock (the "Series F Common
Warrants"). Upon the closing of this offering, assuming no prior exercise of
the Series F Common Warrants, the aggregate number of shares of Common Stock
issuable pursuant to the Series F Common Warrants will decrease from 651,334
to 415,031 shares (assuming an initial public offering price of $12.00 per
share) and the per share exercise price will increase from $7.65 to the
initial price per share to the public in this offering. In addition, the
Series F Common Warrants and warrants exercisable for 48,449 shares of
Common Stock issued to certain financial advisors to the Company contain a
cashless exercise feature which, if exercised in full prior to the
consummation of this offering (and assuming an initial public offering price
of $12.00 per share), would result in the issuance of 266,072 shares of
Common Stock with no additional proceeds to the Company. See "Certain
Transactions" and "Description of Capital Stock."
19
<PAGE> 21
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
dilution in the net tangible book value of their Common Stock from the assumed
initial public offering price. The Company's net tangible book value at March
31, 1997, on a combined pro forma basis to give effect to (i) the probable
acquisition of the Feverall product line from Upsher-Smith for $11,500,000 plus
the cost of certain related inventory (assumed for this purpose to be $235,696)
as if such acquisition had occurred on March 31, 1997, (ii) the issuance of
$5,000,000 of Triumph Notes no later than the closing of this offering presented
as if this transaction had occurred on March 31, 1997, (iii) the Preferred Stock
Conversion and (iv) the reclassification of $2,505,740 of warrant obligations to
additional paid in capital as described in Note L to Notes to Financial
Statements, was $(3,781,407) or approximately $(0.82) per share of Common Stock.
Combined pro forma net tangible book value per share represents the amount of
the Company's combined pro forma total tangible assets, reduced by the amount of
the Company's combined pro forma total liabilities, divided by the combined pro
forma number of shares of Common Stock outstanding. "Dilution per share"
represents the difference between the assumed initial public offering price per
share of the Common Stock and the combined pro forma net tangible book value per
share of the Company after giving effect to the Company's receipt of the net
proceeds from the sale of shares of Common Stock in this offering at an assumed
initial public offering price of $12.00 per share (after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company) and the initial application of the estimated net proceeds
therefrom. On such basis, the combined pro forma net tangible book value of the
Company as of March 31, 1997 would have been $17,738,593 or $2.67 per share.
This represents an immediate increase in the combined net tangible book value of
$3.49 per share to the existing stockholders and an immediate dilution in the
combined pro forma net tangible book value of $9.33 per share to new investors
purchasing Common Stock in this offering. The following table illustrates such
dilution per share to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share......... $12.00
Combined pro forma net tangible book value per share
as of March 31, 1997............................... $ (0.82)
Combined pro forma increase per share attributable to
new investors...................................... $ 3.49
-------
Combined pro forma net tangible book value per share
after this offering................................... $ 2.67
-------
Dilution per share to new investors..................... $ 9.33
=======
</TABLE>
The following table summarizes, on the combined pro forma basis described
above, as of March 31, 1997, the number of shares of Common Stock purchased from
the Company, the total consideration paid to the Company, and the average price
paid per share by the existing stockholders and by investors purchasing shares
of Common Stock offered hereby (at an assumed initial public offering price of
$12.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 4,638,719 69.9% $27,764,166 53.6% $ 5.99
New investors........................... 2,000,000 30.1 24,000,000 46.4 12.00
--------- ----- ----------- -----
Total......................... 6,638,719 100.0% $51,764,166 100.0%
========= ===== =========== =====
</TABLE>
The above computations assume no exercise of options and warrants since
March 31, 1997. As of March 31, 1997, there were options and warrants
outstanding to purchase 1,899,677 shares of Common Stock at a weighted average
exercise price of $5.54 per share. The above computations also exclude (i) an
aggregate of 583,332 shares of Common Stock (assuming an initial public offering
price of $12.00 per share) issuable upon the conversion of the Triumph Notes and
(ii) 336,644 shares of Common Stock at an exercise price of $0.01 per share and
218,195 shares of Common Stock at an exercise price of $5.29 per share reserved
for issuance upon the exercise of additional Triumph Warrants issuable no later
than the closing of this offering.
20
<PAGE> 22
Of the shares reserved for issuance upon the exercise of warrants outstanding as
of March 31, 1997, warrants for 699,783 shares contain a cashless exercise
feature which, if exercised in full prior to the closing of this offering (and
assuming an initial public offering price of $12.00 per share), would result in
the issuance of 266,072 shares of Common Stock with no additional proceeds to
the Company. See "Certain Transactions" and "Description of Capital Stock." The
exercise of outstanding options and warrants would result in further dilution to
new investors. In addition, effective upon the closing of this offering, there
will be 714,734, 300,000 and 500,000 shares of Common Stock reserved for future
issuance under the Company's Amended and Restated 1992 Equity Incentive Plan,
1997 Director Stock Option Plan and 1997 Employee Stock Purchase Plan,
respectively. See "Capitalization," "Management -- Employee Benefit Plans" and
"Description of Capital Stock."
21
<PAGE> 23
SELECTED FINANCIAL DATA
The selected financial data presented below as of December 31, 1995 and
1996, and for each of the three years in the period ended December 31, 1996, are
derived from the Company's Financial Statements, included elsewhere in this
Prospectus, which have been audited by Coopers & Lybrand L.L.P., independent
accountants. The selected financial data presented below as of December 31,
1992, 1993 and 1994 and for each of the two years in the period ended December
31, 1993 are derived from the Company's Financial Statements, not included in
this Prospectus, which have been audited by Coopers & Lybrand L.L.P.,
independent accountants. The selected financial data presented below as of March
31, 1997 and for the three months ended March 31, 1996 and 1997 are derived from
the Company's Financial Statements, included elsewhere in this Prospectus, which
have not been audited by Coopers & Lybrand L.L.P., independent accountants, have
been prepared on a basis consistent with the audited financial statements and,
in the opinion of management, include all adjustments necessary to present
fairly the financial condition and results of operations for the periods
presented. The Combined Pro Forma selected financial data as of and for the
three month period ended March 31, 1997 and for the year ended December 31, 1996
are derived from the Unaudited Combined Pro Forma Financial Statements contained
elsewhere in this Prospectus. The results for the three months ended March 31,
1997 are not necessarily indicative of the results expected for the full year.
The pro forma financial data are provided for comparative purposes only and may
not be indicative of the results that would have been achieved if the
transactions reflected therein had occurred at the beginning of the period for
which pro forma information is presented or of future results. This data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Financial Statements and the Notes and
the Unaudited Combined Pro Forma Financial Statements and Notes included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
COMBINED MARCH 31, CUMULATIVE FROM
PRO FORMA ---------------------------- INCEPTION
YEAR ENDED DECEMBER 31, YEAR ENDED 1997 (MARCH 16,
------------------------------------------- DECEMBER 31, COMBINED 1989) TO
1992 1993 1994 1995 1996 1996(1) 1996 1997 PRO FORMA(1) MARCH 31, 1997
------- ------- ------- ------- ------- ------------ ----- ------- ------------ ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues................ $ -- $ -- $ -- $ 304 $ -- $ 3,877 $ -- $ -- $ 795 $ 304
Costs and expenses:
Cost of sales......... -- -- -- -- -- 1,434 -- -- 356 --
Research and
development......... 558 1,221 2,551 2,986 3,761 3,761 475 1,528 1,528 13,538
Selling, general and
administrative...... 706 723 1,141 1,532 2,805 5,142 428 973 1,606 9,176
------- ------- ------- ------- ------- ------- ----- ------- ------- --------
Loss from operations.... (1,264) (1,944) (3,692) (4,214) (6,566) (6,460) (903) (2,501) (2,695) (22,410)
Interest income......... 47 123 147 113 79 79 25 73 73 826
Interest expense........ -- -- -- -- -- (468) -- (20) (147) (20)
Gain on sale of fixed
assets................ -- -- -- -- -- -- -- 9 9 9
------- ------- ------- ------- ------- ------- ----- ------- ------- --------
Net loss................ $(1,217) $(1,821) $(3,545) $(4,101) $(6,487) $ (6,849) $(878) $(2,439) $ (2,760) $ (21,595)
======= ======= ======= ======= ======= ======= ===== ======= ======= ========
Pro forma and combined
pro forma net loss per
share(2).............. $(1.48) $(1.56) $(0.56) $(0.63)
===== ======= ===== =======
Pro forma weighted
average common and
common equivalent
shares(2)............. 4,384,197 4,384,197 4,384,197 4,384,197
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
DECEMBER 31, 1997
------------------------------------------------- COMBINED
1992 1993 1994 1995 1996 1997 PRO FORMA(1)
------- ------- ------- -------- -------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.... $ 1,838 $ 5,691 $ 2,171 $ 2,538 $ 2,086 $ 8,300 $ 7,154
Working capital..................................... 1,713 5,557 1,966 2,231 525 6,431 35
Total assets........................................ 1,902 5,866 2,466 2,750 2,628 9,672 20,172
Long-term debt, net of current portion.............. -- -- -- -- -- 2,020 4,514
Redeemable preferred stock.......................... -- 8,157 8,157 12,557 17,832 25,010 --
Deficit accumulated during the development stage.... (3,202) (5,306) (8,851) (13,014) (19,633) (22,292) (22,292)
Total stockholders' equity (deficit) (3)............ 1,773 (2,451) (5,995) (10,158) (19,437) (19,437) 8,079
</TABLE>
- ---------------
(1) Presented on a combined pro forma basis to give effect to (i) the probable
acquisition of the Feverall product line from Upsher-Smith for $11,500,000
plus the cost of certain related inventory (assumed for this purpose to be
$235,696) as if such acquisition had occurred on January 1, 1996 with
respect to Statement of Operations Data and on March 31, 1997 with respect
to Balance Sheet Data, (ii) the issuance of $5,000,000 of Triumph Notes no
later than the closing of this offering presented as if this transaction
occurred on January 1, 1996 with respect to Statement of Operations Data and
on March 31, 1997 with respect to Balance Sheet Data, with such Triumph
Notes recorded as a liability (after allocating $1,668,746 as value
attributable to warrants) of $3,331,254, which will be accreted up to the
Triumph Notes' face value of $5,000,000 over the term of the Triumph Notes
and such accretion in the amount of $1,668,746 will be recorded as interest
expense in addition to the stated interest rate, (iii) the Preferred Stock
Conversion and (iv) the reclassification of $2,505,740 of warrant
obligations to additional paid in capital as described in Note L to Notes to
Financial Statements. See "Capitalization," "Certain Transactions" and
"Unaudited Combined Pro Forma Financial Statements."
(2) See Note B to Notes to Financial Statements for information concerning the
computation of pro forma net loss per share and shares used in computing pro
forma net loss per share.
(3) The Company has never declared or paid cash dividends on its capital stock.
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a drug development and marketing company focused exclusively
on the pediatric market. The Company commenced operations in March 1989 and
since that time has been engaged primarily in developing its products and
product candidates and in organizational efforts, including recruiting
scientific and management personnel and raising capital. To date, the Company
has not received any revenue from the sale of products. The Company expects to
introduce its first three products to the market in the second half of 1997. All
revenues received by the Company to date have consisted of payments in
connection with a licensing arrangement and interest on invested funds.
The Company has incurred net losses since its inception and expects to
incur additional operating losses over at least the next two years as it
continues its product development programs, establishes a sales and marketing
organization and introduces products to the market. The Company expects
cumulative losses to increase over this period. The Company has incurred a
deficit accumulated since inception through March 31, 1997 of $22,292,000.
The Company is a party to an agreement with Upsher-Smith to acquire the
Feverall acetaminophen rectal suppository product line. The Company expects to
close this acquisition in July 1997.
RESULTS OF OPERATIONS
Combined Pro Forma Three Months Ended March 31, 1997 Compared with Three
Months Ended March 31, 1997
Revenues and Cost of Sales. The combined pro forma statement for the three
months ended March 31, 1997 reflects solely the product sales of the Feverall
product line that the Company expects to acquire and the related cost of sales.
Net sales of the Feverall product line declined by 35.4% in the three months
ended March 31, 1997 compared to the three months ended March 31, 1996 as a
result of significantly lower unit sales volume.
Selling, General and Administrative Expenses. The increase in selling,
general and administrative expenses in the combined pro forma statement for the
three months ended March 31, 1997 compared to the three months ended March 31,
1997 reflects $626,000 of expenses associated with the Feverall product line,
consisting of $177,000 for advertising and promotion, $183,000 for allocated
selling costs and $122,000 of incremental expenses that Ascent estimates will be
incurred relating to this product line as well as $144,000 of goodwill
amortization related to this acquisition.
Combined Pro Forma Year Ended December 31, 1996 Compared with Year Ended
December 31, 1996
Revenues and Cost of Sales. The combined pro forma 1996 statement reflects
product sales of the Feverall product line that the Company expects to acquire
and the related cost of sales.
Selling, General and Administrative Expenses. The increase in selling,
general and administrative expenses in the combined pro forma 1996 statement
reflects $2,306,000 of expenses associated with the Feverall product line,
consisting of $669,000 for advertising and promotion, $572,000 for allocated
selling costs and $490,000 of incremental expenses that Ascent estimates will be
incurred relating to this product line as well as $575,000 of goodwill
amortization related to this acquisition.
Three Months Ended March 31, 1997 Compared With Three Months Ended March 31,
1996
Research and Development. The Company expended $1,528,000 and $475,000,
for research and development in the three months ended March 31, 1997 and March
31, 1996, respectively. The increase in 1997 over 1996 reflected increased costs
in connection with (i) Pediavent albuterol controlled-release suspension product
development and (ii) Pediatemp acetaminophen controlled-release beads clinical
trials.
23
<PAGE> 25
Selling, General and Administrative Expenses. The Company incurred
selling, general and administrative expenses of $973,000 and $428,000 in the
three months ended March 31, 1997 and March 31, 1996, respectively. The increase
in 1997 over 1996 was primarily attributable to increased personnel and
increased expenses associated with the development of the Company's marketing
program.
Interest. The Company incurred interest expense of $20,000 for the three
months ended March 31, 1997 related to the $2,000,000 of Triumph Notes issued on
January 31, 1997 and no interest expense for the three months ended March 31,
1996. The Company had interest income of $73,000 and $25,000 in the three months
ended March 31, 1997 and March 31, 1996, respectively. The increase in interest
income during the three months ended March 31, 1997 reflected the increase in
funds available for investment during such period.
Years Ended December 31, 1994, 1995 and 1996
Revenues. The Company had licensing revenues of $304,000 in 1995, which
were comprised of a $202,000 one-time technology transfer fee and $102,000 for
non-recurring product development activities pursuant to a license agreement.
Research and Development. The Company expended $2,551,000, $2,986,000 and
$3,761,000, for research and development in 1994, 1995 and 1996, respectively.
The increase in 1995 over 1994 reflected increased costs in connection with the
Phase I clinical trials of Pediatemp acetaminophen controlled-release beads and
Pediavent albuterol controlled-release suspension and costs in connection with
the commencement of preclinical tests of the Company's cromolyn sodium cream
product candidate. The increase in 1996 over 1995 reflected increased costs
associated with the Company's clinical trials of Pediatemp acetaminophen
controlled-release beads, costs of producing prednisolone sodium phosphate syrup
for stability testing and payments to the Company's supplier in connection with
the development of Pediavent albuterol controlled-release suspension.
Selling, General and Administrative Expenses. The Company incurred
selling, general and administrative expenses of $1,141,000, $1,532,000 and
$2,805,000 in 1994, 1995 and 1996, respectively. The increase in 1995 over 1994
was primarily attributable to increased expenditures to recruit and hire
personnel. The increase in 1996 over 1995 was primarily due to the initiation by
the Company of a program to familiarize pediatricians with the Ascent name,
development of a marketing program and increased expenditures to recruit and
hire personnel.
Interest. The Company had interest income of $147,000, $113,000 and
$79,000 in 1994, 1995 and 1996, respectively. The changes in these years were
primarily attributable to changes in the funds available for investment by the
Company.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily from
private sales of preferred stock. As of March 31, 1997, the Company had raised
approximately $27,159,000 (net of stock issuance costs) from the sale of
preferred stock, with net proceeds of $4,338,000 received in 1995, net proceeds
of $5,137,000 received in 1996 and net proceeds of $6,957,000 received in the
three months ended March 31, 1997.
In January 1997, the Company issued $2,000,000 of Triumph Notes, resulting
in net proceeds to the Company of $1,790,000, which was recorded as a liability
of $1,163,000 with $837,000 to be accreted as interest expense over the term of
the Triumph Notes. The Company will issue an additional $5,000,000 of Triumph
Notes, which will result in net proceeds to the Company of approximately
$4,840,000, no later than the closing of this offering, which will be recorded
as a liability of $3,331,000 with $1,669,000 to be accreted as interest expense
over the term of the Triumph Notes. Effective as of the closing of this
offering, the Triumph Notes amortize in eight equal quarterly principal
installments and require quarterly interest payments on the unpaid principal
balance, with the first quarterly payment of principal and interest due six
months after the closing of this offering. The Triumph Notes are collateralized
by a lien on all of the Company's assets, prohibit the payment of dividends by
the Company and, subject to certain exceptions (including for up to $6,000,000
of senior secured bank financing and $5,500,000 of secured purchase money
financing in connection with the planned acquisition of the Feverall product
line), prohibit the incurrence of additional indebtedness.
24
<PAGE> 26
Through March 31, 1997, the Company applied the proceeds from the sale of
preferred stock, Triumph Notes and its revenues to fund losses of $21,595,000
and the investment of $418,000 in property and equipment. As of March 31, 1997,
the Company had cash and cash equivalents of $8,300,000.
The Company currently expects to use approximately $6,050,000 of the net
proceeds of this offering to fund the portion of the purchase price of
Upsher-Smith's Feverall product line (including estimated inventory cost of
$300,000) due at the closing of the acquisition. This acquisition is scheduled
to close in July 1997. The Company previously paid Upsher-Smith $250,000 as a
non-refundable deposit in connection with this proposed acquisition, which will
be retained by Upsher-Smith as part of the purchase price. The Company will be
required to pay Upsher-Smith an additional $5,500,000 as the second installment
of the purchase price no later than 225 days following the closing of this
acquisition. This deferred payment will be evidenced by a note and secured by a
lien on the acquired assets.
The Company expended $94,000, $18,000, $60,000 and $175,000 to purchase
fixed assets, primarily equipment and furniture, in 1994, 1995, 1996 and the
three months ended March 31, 1997, respectively. The Company expects that its
capital expenditures for the year ending December 31, 1997 will be approximately
$225,000, primarily for computer equipment and leasehold improvements. In
addition, the Company has entered into several agreements with unaffiliated
entities for the performance of research and clinical trial studies. These
commitments are ongoing, and the Company expects to spend approximately $460,000
toward these commitments in 1997.
The Company's future capital requirements will depend on many factors,
including continued progress in its product development programs, the magnitude
of these programs, the results of preclinical studies and clinical trials, the
time and costs involved in obtaining regulatory approvals, the costs involved in
filing, prosecuting, enforcing and defending patent claims, competing
technological and market developments, the ability of the Company to establish
and maintain a sales and marketing capability and product development,
manufacturing and marketing relationships, and the costs and success of
commercialization activities and arrangements. The Company's business strategy
requires a significant commitment of funds to conduct clinical testing of
potential products, to pursue regulatory approval of such products and to
establish sales and marketing capabilities and manufacturing relationships
necessary to bring such products to market.
The Company has no committed external sources of capital. Based on its
current operating plan, the Company anticipates that its existing capital
resources, together with the proceeds of this offering and interest earned
thereon, the net proceeds from the issuance of an additional $5,000,000 of
Triumph Notes and internally generated funds, will be adequate to satisfy its
capital requirements for at least the next 24 months. However, there may be
circumstances, particularly a delay in the introduction of products or lower
than anticipated product sales, that might accelerate the Company's use of the
net proceeds of this offering and its other capital resources. The Company may
be required to raise substantial additional funds in the future, including
through collaborative relationships and public or private financings. No
assurance can be given that additional financing will be available, or, if
available, that it will be available on acceptable terms. See "Risk Factors --
Future Capital Needs; Uncertainty of Additional Funding."
RECENT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("FAS 128"). FAS
128 specifies the computation, presentation and disclosure requirements for
earnings per share. FAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods, and earlier
application is not permitted. FAS 128 requires restatement of all prior-period
earnings-per-share data presented after the effective date. The Company has not
yet determined FAS 128's effect on its financial statements.
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<PAGE> 27
BUSINESS
Ascent Pediatrics, Inc. ("Ascent" or the "Company"), is a drug development
and marketing company focused exclusively on the pediatric market. The Company's
strategy is to address unmet medical needs of children through the development
of differentiated, proprietary products based on approved compounds with well
known clinical profiles. Ascent is developing a range of pharmaceuticals
designed to improve upon currently available products for common pediatric
illnesses through the application of the Company's drug delivery and
reformulation technologies. The Company is developing most of these products for
sale on a prescription basis. By developing products based on currently approved
drugs, rather than new chemical entities, Ascent believes that it can reduce
regulatory and development risks and shorten the product development cycle. In
addition, Ascent believes that market acceptance of its products will be
enhanced by the familiarity of pediatricians with the compounds that serve as
the basis of these products. The Company plans to introduce its first three
products to the market in the second half of 1997 and has seven other principal
products in development. The Company intends to market its products in the
United States through a direct sales force focused exclusively on the pediatric
market.
In January 1997, the Division of Anti-Infective Drugs of the United States
Food and Drug Administration (the "FDA") notified Ascent that it recommended
approval of the Company's New Drug Application ("NDA") for Primsol trimethoprim
solution, a prescription antibiotic for the treatment of ear infections in
patients age six months to twelve years, with a label reflecting that Primsol
solution would not be a product for first line therapy (i.e., the first course
of treatment selected in most instances by a physician) for this indication. The
FDA has not yet approved the Company's NDA for Primsol solution. Trimethoprim
for the treatment of ear infections in children is currently available only in
combination with a sulfa compound that is associated with allergic reactions.
Primsol solution contains trimethoprim only and in clinical trials demonstrated
a more favorable side effect profile than the combination therapy. Because of
this improved side effect profile, the Company believes that pediatricians will
be more likely to prescribe an antibiotic comprised only of trimethoprim for the
treatment of ear infections in children than they historically have been to
prescribe the combination therapy. In March 1997, the Company entered into an
agreement with Upsher-Smith Laboratories, Inc. ("Upsher-Smith"), to acquire the
currently marketed Feverall line of acetaminophen rectal suppository products.
The Company plans to introduce Primsol solution and Feverall suppositories to
the market in the second half of 1997, along with Pediamist, an over-the-counter
nasal saline spray developed by Ascent that uses a metering device to facilitate
pediatric use.
In addition to these three products, the Company has seven other products
in various stages of development. Prednisolone sodium phosphate syrup is a
steroid for the treatment of inflammation, including inflammation resulting from
respiratory conditions, for which the Company expects to file Abbreviated New
Drug Applications ("ANDAs") with the FDA in the second half of 1997. Pediatemp
acetaminophen controlled-release beads are an analgesic and antipyretic for the
treatment of pain and fever for which the Company recently completed Phase III
clinical trials and, subject to the results of these trials being satisfactory,
plans to file an NDA in the second half of 1997. Pediavent albuterol
controlled-release suspension is a bronchodilator for the treatment of asthma
that currently is in Phase I clinical trials. Cromolyn sodium cream is a topical
cream for the treatment of moderate to severe contact dermatitis, which is the
subject of an effective Investigational New Drug ("IND") application and
currently is in Phase I clinical trials. Cromolyn sodium controlled-release
nasal spray is a drug for the treatment of nasal allergies that is undergoing
preclinical testing. The Company also is developing a line of over-the-counter
cough/cold products and an over-the-counter acetaminophen controlled-release
solution.
Ascent believes that an important part of fulfilling its mission of
becoming a leader in the development and marketing of pediatric pharmaceuticals
is the establishment of a corporate identity. Accordingly, even before the
launch of its first products, Ascent has initiated a program to familiarize
pediatricians with the Ascent name. Ascent is establishing a domestic sales
organization to promote the Company's products to high prescribing
pediatricians, influential pediatricians and pediatric nurses. Ascent plans to
supplement these activities with telemarketing, direct mail and advertisements
in speciality pediatric journals. Ascent also intends to promote its products
directly to managed care providers in order to obtain inclusion on these
providers' formularies and has retained a consulting firm to assist it in this
process.
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<PAGE> 28
Ascent seeks competitive protection for its products in a variety of ways,
including the creation of proprietary formulations using technologies, such as
taste masking and controlled-release systems, that are covered by patents or
patent applications owned by or licensed to the Company or its suppliers.
PEDIATRIC PHARMACEUTICAL INDUSTRY
The United States market for prescription pharmaceutical products for
children age 16 years and younger was estimated by Scott-Levin, a healthcare
consulting firm ("Scott-Levin"), to be approximately $3.5 billion in 1996. This
represents approximately a 9% compound annual growth rate over estimated 1992
sales of approximately $2.5 billion. According to Scott-Levin, in 1996,
prescriptions written by pediatricians accounted for approximately 60% of total
sales of pediatric prescription pharmaceuticals in the United States. The drugs
most frequently prescribed by pediatricians were antibiotics, which accounted
for approximately 35% of total 1996 United States prescription drug sales
attributable to pediatricians, and beta agonist bronchodilators, which accounted
for approximately 7% of such sales. Pediatricians also play a central role in
recommending over-the-counter medications for children. Pain/fever medications
are among the over-the-counter drugs most frequently recommended by
pediatricians for children. FIND/SVP, a market research and consulting firm,
estimates that sales of pediatric forms of pain/fever medications in the United
States approximate $300,000,000 per annum.
Despite the size and recent growth in the pediatric pharmaceutical market,
pharmaceutical companies historically have concentrated their drug development
efforts on the adult market or have pursued pediatric applications only as
product line extensions. The Company believes that this lack of emphasis on the
pediatric market has occurred for several reasons. First, because the pediatric
pharmaceutical market historically has comprised only a small percentage of the
total pharmaceutical market (approximately 5% of the total United States market
in 1996), pharmaceutical companies have been reluctant to expend the time and
resources required to develop products specifically targeted for children.
Moreover, as the pharmaceutical industry has consolidated, many pharmaceutical
companies have increasingly focused on the larger adult market. Secondly,
pharmaceutical companies have been concerned that, if clinical trial results for
a drug tested in children were to differ in an adverse manner from results in
adults, the usage of the drug by adults could be adversely affected and the
marketing approval of the drug might be jeopardized. Finally, without access to
specialized trial sites and a network of pediatricians, it is difficult to
recruit children to participate in clinical trials, as parents are reluctant to
permit their children to take experimental medications.
The Company believes that the relatively low number of drugs developed
specifically for pediatric use has resulted in an opportunity for a drug
development company dedicated exclusively to the pediatric market. Drug
administration and patient compliance with dosage regimens are greater issues in
treating pediatric patients than adult patients, particularly with respect to
medications that have not been formulated for children. Specifically, children
frequently dislike the taste and texture of liquids and chewable tablets, have
difficulty swallowing oral tablets and often do not use inhalers correctly. In
addition, children and their caregivers often find it difficult to comply with
dosing regimens that are complex or require frequent administration, which can
interrupt sleep, or special handling of the drug, such as refrigeration. All of
these problems can cause either missed doses or incorrectly administered doses,
which may decrease the therapeutic success of the treatment. The Company
believes that it can address many of these compliance and drug administration
problems through the application of its taste masking, controlled-release and
other drug delivery and formulation technologies to approved compounds in order
to design products specifically for children.
The limited number of pharmaceuticals approved for pediatric use has also
resulted in physicians prescribing certain drugs for children on an off label
basis, with the dosages for children extrapolated from clinical studies
performed in adults. Undesirable side effects and variations in therapeutic
efficacy may result when a drug formulated for an adult is administered to a
child. The Company believes that pediatricians will be more willing to prescribe
products that have been the subject of pediatric clinical trials because of the
availability of specific efficacy and safety information with respect to the
effect of the drug on pediatric patients.
The Company believes that the federal government, and in particular the
FDA, is increasingly focused on encouraging pharmaceutical companies to develop
drugs for the pediatric market and to conduct clinical trials in children. The
federal government enacted the Orphan Drug Act in 1983 to provide incentives to
27
<PAGE> 29
pharmaceutical manufacturers to develop products to treat diseases which affect
limited patient populations, including certain pediatric diseases. Moreover, in
1994, the FDA finalized the pediatric labeling rule, which mandates that, if an
approved drug is used on an off label basis in pediatric populations, then the
company marketing such drug must either apply to the FDA for proper labeling for
the pediatric indication (which could require clinical trials) or advise the FDA
as to why it would not seek such labeling. In 1994, the FDA also modified its
policy on new drug applications to require a company to indicate in its NDA
submission whether the drug has potential application to pediatric populations
and, if the company is not conducting clinical trials on children, its reasons
for not conducting such trials.
Pediatricians are the primary physician specialty treating children.
According to a survey of members of the American Academy of Pediatrics, in 1996
there were approximately 28,000 pediatricians in the United States with direct
patient care as their primary professional activity. The survey indicated that
most of these pediatricians practiced in or near urban or suburban centers and
that more than 80% of respondents were in group practices. The Company believes
that nurses in pediatricians' offices also play an important role in
recommending pharmaceuticals for children. The Company believes that
pediatricians and pediatric nurses are not targeted as frequently for
pharmaceutical detailing as specialists in other areas because the pediatric
pharmaceutical market has not been a primary focus for most major pharmaceutical
companies.
More than 60% of patients in the United States are covered by a managed
care program, such as a health maintenance organization, preferred provider
organization or state Medicaid program. However, the Company believes that
managed care has not played as great a role to date in pediatrics as it has in
other areas of medicine because pediatric medical problems generally do not
entail chronic or expensive treatments. The pharmaceuticals prescribed for
childhood diseases, such as antibiotics, generally are relatively inexpensive
and typically are used for only a short period of time. For manufacturers of
pediatric pharmaceuticals, the key concern with respect to managed care is
obtaining inclusion of their products on formularies, the lists of
pharmaceuticals that managed care providers maintain for products that have been
approved for use and reimbursement. In determining whether to include a product
on their formularies, managed care providers consider such factors as the
therapeutic characteristics, economic benefits and level of usage of the
product. Because Ascent is designing its products to improve patient compliance
or to substitute for products with less favorable side effect profiles, the
Company believes that its products will appeal to managed care providers by
producing fewer treatment failures than competitive products, thereby lowering
healthcare costs.
ASCENT'S STRATEGY
Ascent's objective is to be a leader in the development and marketing of
improved and differentiated pediatric pharmaceuticals. The Company is developing
a broad product line of proprietary products that are based on approved
compounds with well known clinical profiles. Ascent seeks to improve these
compounds by reducing their dosing frequency, increasing their palatability,
improving the method of administration or developing them as substitutes for
products with less favorable side effect profiles, all with the goal of
increasing patient compliance, improving therapeutic results or reducing side
effects. Key elements of Ascent's strategy include:
Focus Exclusively on Pediatric Market. Ascent's business is focused
exclusively on developing pharmaceuticals for children and marketing these
products to pediatricians, pediatric nurses and other pediatric caregivers. The
United States market for prescription pharmaceutical products for children age
16 years and under was estimated to be approximately $3.5 billion in 1996. The
Company believes that this market has been underserved in comparison with the
adult pharmaceutical market in terms of both development of specially designed
products and targeted promotion and represents an attractive market opportunity.
Select Products Based on Market Needs. Ascent actively evaluates the
pediatric pharmaceutical industry on an ongoing basis to assess product usage
and to identify unmet medical needs of children, particularly for prescription
drugs for the most common pediatric illnesses. Ascent's program to identify
pediatric product opportunities includes conducting focus groups with
pediatricians, pediatric nurses and parents, consulting with the Company's
scientific and medical advisors and evaluating drug delivery and other technical
developments for their applicability to the field of pediatric pharmaceuticals.
Ascent uses this
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information to select compounds as product development candidates that it
believes may be improved through the application of its technologies and
reformulation expertise and then successfully commercialized.
Develop Proprietary Formulations of Approved Compounds. Ascent selects as
product candidates approved compounds that have well known clinical profiles and
are not covered by third party patents. By developing products based on approved
compounds rather than new chemical entities, the Company believes that it can
reduce regulatory and development risks and shorten the product development
cycle. In addition, Ascent believes that market acceptance of its products will
be enhanced by the familiarity of pediatricians with the drugs that serve as the
basis of these products.
Establish a Corporate Identity for Ascent in the Pediatric Market. Ascent
believes that an important part of fulfilling its mission of becoming a leader
in the development and marketing of pediatric pharmaceuticals is the
establishment of a corporate identity. Accordingly, even before the launch of
its first products, Ascent has initiated a program to familiarize pediatricians
with the Ascent name. This program began at the fall 1996 annual meeting of the
American Academy of Pediatrics and includes a direct mail campaign and journal
advertising directed at private pediatricians. The Company believes that
establishing a corporate identity will distinguish it from its competitors and
accelerate market awareness and penetration of its products.
Create a Specialty Pediatric Sales Force. Ascent intends to market its
products in the United States through a direct sales force focused exclusively
on the pediatric pharmaceutical market. Ascent is establishing its domestic
sales organization in anticipation of the scheduled introduction in the second
half of 1997 of the Company's initial three products. Because pediatricians and
pediatric nurses are concentrated in group practices in urban and suburban
centers and advertising may be disseminated through a limited number of
specialty pediatric publications, Ascent believes that it can reach much of the
domestic pediatric market with a moderately sized sales force and carefully
controlled marketing expenditures.
Acquire or In-License Additional Pediatric Products. Ascent intends to
acquire or in-license from third parties pediatric pharmaceuticals that permit
it to extend its product lines and leverage its marketing and sales
capabilities. Ascent is particularly seeking prescription pharmaceuticals that
either already have features that increase patient compliance, improve
therapeutic efficacy or reduce side effects or that can be further developed by
Ascent to incorporate such features through the application of the Company's
technologies. Ascent believes that its exclusive focus on the pediatric market
may facilitate its efforts to acquire product rights from third parties. As an
example of this strategy, in March 1997, the Company entered into an agreement
to purchase the Feverall line of acetaminophen rectal suppository products from
Upsher-Smith.
Establish Collaborations for International and Adult Markets. Ascent plans
to enter into licensing and distribution arrangements for the marketing and sale
of its products in international markets to leverage the established
international marketing, sales and distribution capabilities of third party
collaborators. Ascent plans to enter into similar arrangements with respect to
any adult applications of its products.
Obtain Competitive Protections. Ascent seeks to protect many of its
products by applying for use or formulation patents or employing technologies
that are covered by patents or patent applications owned by or licensed to the
Company or its suppliers. In addition, some of Ascent's products will require
NDA approval. Competition for such products may be limited by clinical and
formulation development challenges and, in certain cases, three-year protection
against approval of a potential competitor's ANDA under the Drug Price
Competition and Patent Term Restoration Act of 1984 (the "Waxman-Hatch Act").
Ascent also seeks to keep confidential as a trade secret important know-how
involved in the formulation and production of certain of its products. Finally,
Ascent applies for trademark registrations to protect the brand recognition of
its products and, to date, has been issued six registered United States
trademarks.
ASCENT TECHNOLOGIES
Ascent is developing therapeutic pharmaceutical products that are designed
to be more appropriate for pediatric patients. Ascent has developed internally
or acquired rights through in-licensing or supply arrangements to a range of
technologies that it applies in its product development efforts. These
technologies include:
Taste masking. Ascent has developed technology to mask the objectionable
or unpleasant taste of various common ingredients used in pediatric
pharmaceuticals. The Company believes that a drug's taste is a
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critical factor in pediatric patient compliance, particularly when frequent
dosing is required. The Company is applying its taste masking technology to
liquid dosage forms of product candidates because of the widespread use of
liquids in the pediatric pharmaceutical market. The Company believes that this
technology also may be applicable to solid dosage forms. Ascent's taste masking
technology is based on a complex three-tiered system that entails dissolving the
drug through the addition of a polymer, adding carefully selected debittering
agents to neutralize the taste and then adding pleasant flavors which are
compatible with the physical characteristics of the formulation.
Controlled-release. Ascent has developed its own controlled-release
technology and has in-licensed controlled-release technology from a third party.
In general, these technologies involve coating the active drug with certain
approved substances in a manner that allows the substance to be released in the
patient at specific rates over time. The controlled-release manufacturing
procedures also provide certain taste masking characteristics to the product.
Ascent is applying these technologies to reduce the dosing frequency and, in
some cases, improve the taste of its products, in order to increase patient
compliance.
Transdermal delivery. Ascent has licensed rights to a transdermal enhancer
for certain topically applied drugs. The enhancer is designed to increase the
efficacy and onset of activity of these drugs, which are limited because of
their inability to be absorbed through the skin. The Company believes the active
compound in this enhancer will facilitate the transport of these drugs into the
skin by changing the structure of the lipid layer in the skin to permit
absorption.
Bioadhesion. Ascent is using commercially available bioadhesives to
deliver topical drugs in a manner that is designed to enhance the efficacy of
the active ingredient. Bioadhesives are substances, such as polymers, which are
mixed with drugs in order to anchor the drug to the mucous layer of tissue. When
a drug is so anchored, the body's normal clearance mechanism is slowed, thereby
permitting the drug to have a more rapid and prolonged effect, which may reduce
dosing frequency.
Intranasal delivery device. Ascent has developed a product using a
metering device supplied by a third party that facilitates intranasal use in
pediatric patients by delivering a small volume of fluid under low pressure.
Because the metering device delivers 20% of the amount of solution delivered by
most high volume metered systems, there is less drainage of excess solution from
the nose. The Company believes that this device will increase product acceptance
among children and assure delivery of a consistent volume of spray.
The following table lists the technologies described above, the principal
benefit being sought and the products or product candidates to which Ascent is
applying these technologies.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
TECHNOLOGY ANTICIPATED BENEFIT PRODUCT
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Taste masking Improved taste Primsol trimethoprim solution
Prednisolone sodium phosphate syrup
Cough/cold products
Controlled-release Reduced dosing frequency Pediatemp acetaminophen beads
Pediatemp acetaminophen liquid
Pediavent albuterol suspension
Transdermal delivery Improved efficacy Cromolyn sodium cream
Bioadhesion Improved efficacy Cromolyn sodium nasal spray
Intranasal delivery device Ease of administration Pediamist nasal saline spray
- --------------------------------------------------------------------------------------------------
</TABLE>
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PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The following table lists the principal products developed or currently
under development by the Company or that the Company has agreed to acquire. This
table is qualified in its entirety by reference to the more detailed
descriptions of these products elsewhere in this Prospectus.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
PRODUCT INDICATION DEVELOPMENT STATUS(1) KEY FEATURES
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Primsol Acute middle ear NDA recommended for Reduced toxicity
trimethoprim infections approval in January profile; pleasant
solution 1997(2) tasting liquid
Feverall Pain and fever Currently marketed Alternate form of
acetaminophen administration
rectal
suppositories(3)
Pediamist nasal Nasal dryness Developed; no FDA Low pressure and
saline spray approval required volume spray; reduced
stinging
Prednisolone sodium Inflammation, ANDA filings expected Significant taste
phosphate syrup including respiratory in second half of improvement
problems 1997(4)
Pediatemp Pain and fever Phase III clinical Reduced dosing
acetaminophen trials completed; NDA frequency; improved
controlled-release filing expected in taste
beads second half of 1997
Pediavent albuterol Asthma Phase I clinical Reduced dosing
controlled-release trials frequency; improved
suspension taste
Cromolyn sodium Moderate to severe Phase I clinical Alternative to
cream contact dermatitis trials steroids
Cromolyn sodium Nasal allergies Preclinical Alternative to
controlled-release steroids; reduced
nasal spray dosing frequency
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Preclinical. A compound is undergoing testing and being evaluated in
relevant assays and/or animal models to assess potential product
characteristics, safety and utility.
Phase I clinical trials. The product is administered to a limited number of
healthy human subjects or patients and tested for pharmacokinetics
(absorption, metabolism, distribution and excretion), pharmacologic action,
dose response, safety and, if possible, early evidence of effectiveness.
Phase II clinical trials. The product is administered to a limited patient
population to (i) evaluate the effectiveness for specific indications and
(ii) identify possible short-term adverse effects and safety risks.
Phase III clinical trials. The product is administered to an expanded
patient population to (i) further test the product for safety, (ii) further
evaluate clinical effectiveness and (iii) provide an adequate basis for
labeling.
ANDA. Abbreviated New Drug Application to the FDA for marketing approval
relating to a new drug that is the same as a drug for which the FDA has
already approved an NDA and whose patent and marketing exclusivity periods
have expired.
NDA. New Drug Application to the FDA for marketing approval for a new drug
for which an ANDA is not permitted.
(2) Ascent has filed a second NDA covering a more concentrated formulation of
Primsol solution. Ascent plans to introduce this more concentrated
formulation as the Primsol solution product that it brings to market. If
approval of the NDA for this more concentrated formulation is significantly
delayed, the Company intends to introduce the original formulation.
(3) This product line is the subject of an executed asset purchase agreement.
The closing is scheduled for July 1997.
(4) In April 1997, the Company submitted two ANDA applications covering
prednisolone syrup to the FDA. These applications will be deemed filed only
when accepted by the FDA.
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The Company has conducted a number of clinical trials of its product
candidates in children. The Company plans to continue to conduct such trials,
both in situations in which the trials are required by the FDA and in which the
Company believes that the clinical trial data will be of assistance in marketing
the product to pediatricians. The need to conduct clinical trials in children
under applicable FDA rules is determined on a product-by-product basis. In some
circumstances, the FDA may accept safety and efficacy data that are extrapolated
from adults in support of regulatory approval applications in children.
Because the Company's products are not based on new chemical entities,
Ascent believes that it can reduce regulatory and development risks and shorten
the product development cycle. As to certain product candidates, the Company
expects to be permitted to file an ANDA instead of an NDA. An ANDA is less
complex than an NDA, and, in some circumstances, only limited clinical trial
data or no clinical trial data are required for the application. For products
that contain active ingredients that have received FDA approval, after
expiration of any applicable patents and period of statutory protection under
the Waxman-Hatch Act, Ascent may use data from the NDA of the "pioneer" drug
concerning the safety and efficacy of the drug substance in support of its NDA
or ANDA. Finally, many nonprescription products do not require FDA pre-marketing
approval if the product is within an applicable FDA Over-the-Counter Drug
Monograph ("OTC Monograph"). See "Government Regulation."
Primsol Trimethoprim Solution
Ascent has developed Primsol trimethoprim solution, containing the
antibiotic trimethoprim, as a prescription drug for the treatment of acute
otitis media ("AOM"), or middle ear infection, in children age six months to
twelve years. Trimethoprim for the treatment of AOM in children is currently
only available in combination with the sulfa compound sulfamethoxazole. The
sulfa component of this combination therapy is associated with allergic
reactions that may be severe, or even fatal. In clinical trials conducted by the
Company, Primsol solution, which does not contain this sulfa component, was
shown to be as effective as the combination therapy for the treatment of AOM in
children, but with a more favorable side effect profile. Because of this
improved side effect profile, the Company believes that pediatricians will be
more likely to prescribe an antibiotic comprised only of trimethoprim for the
treatment of AOM in children than they historically have been to prescribe the
combination therapy. In January 1997, the Division of Anti-Infective Drugs of
the FDA notified Ascent that it recommended approval of the Company's NDA for
Primsol solution for the treatment of AOM in children age six months to twelve
years, with a label reflecting that Primsol solution would not be a product for
first line therapy for this indication. The FDA has not yet approved the
Company's NDA for Primsol solution. The Company may not market Primsol solution
until such NDA is approved. See "Risk Factors -- Uncertainty Related to Approval
of Primsol Trimethoprim Solution." Ascent plans to introduce Primsol solution in
the second half of 1997, along with Feverall acetaminophen rectal suppositories
and Pediamist saline nasal spray.
Acute infections are the most frequent illness treated by pediatricians.
AOM is the most common of these infections. By three years of age, approximately
80% of children in the United States have developed at least one ear infection.
In 1996, there were approximately 26,000,000 pediatric patient visits to doctors
in the United States for the treatment of AOM.
There are a number of currently available antibiotics for the treatment of
AOM in children. Most pediatricians initially prescribe amoxicillin, a form of
penicillin, unless the patient is allergic to the drug or the drug has
previously failed to provide a therapeutic effect in the patient. In such cases,
the pediatrician selects a second line antibiotic from a series of alternative
choices, including the trimethoprim/sulfa compound combination therapy (sold
under brand names such as Bactrim and Septra), cephalosporins (such as Ceclor),
a combination of amoxicillin and clavulanic acid (such as Augmentin) or newer
macrolides (such as Zithromax or Biaxin).
Scott-Levin estimates that the United States market for liquid antibiotics
for the treatment of AOM was approximately $371,000,000 in 1996. Of such amount,
approximately $54,500,000 was from the sale of amoxicillin (reflecting
approximately 11,200,000 prescriptions), approximately $11,900,000 was from the
sale of trimethoprim/sulfa compound combination products (reflecting
approximately 3,100,000 prescriptions) and approximately $304,600,000 was from
the sale of other liquid antibiotics (reflecting approximately
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<PAGE> 34
8,900,000 prescriptions), including cephalosporins and macrolides. The Company
believes that almost all liquid antibiotics are taken by children.
Ascent has developed Primsol solution as an antibiotic containing
trimethoprim only, thereby eliminating the potential for an allergic response to
the sulfa component of the combination product. Ascent has sought to facilitate
administration of this product by formulating it as an oral solution. Because
Primsol solution does not need to be shaken prior to administration, it does not
suffer from problems associated with suspensions, such as dose inconsistency.
The Company plans to market Primsol solution as a second line of therapy to
amoxicillin and as an alternative to trimethoprim combination products such as
Bactrim and Septra. Ascent believes that Primsol solution also may be an
attractive alternative to other antibiotics, such as cephalosporins and newer
macrolides, for pediatricians and managed care providers because the Company
plans to offer Primsol solution at a price that is significantly lower than the
current market prices of these other antibiotics.
In December 1995, Ascent completed multicenter Phase III clinical trials of
Primsol solution for the treatment of AOM and uncomplicated urinary tract
infection ("UTI") in children age six months to twelve years. These clinical
trials, which included over 500 children, compared Primsol solution with a
commercially available trimethoprim/sulfamethoxazole combination therapy.
Primsol solution proved to be as clinically effective as the combination therapy
in alleviating the signs and symptoms commonly associated with AOM or
uncomplicated UTI. No statistically significant differences were noted in
response rates of evaluable pediatric patients receiving either Primsol solution
or the combination therapy, and the bacteriologic cure rates were similar for
both types of therapies. However, there were statistically significantly fewer
treatment related side effects reported with Primsol solution than with the
combination therapy, particularly a lower incidence of skin rash.
Based on the January 1997 notice of recommended approval from the FDA and
subsequent discussions with the FDA, Ascent expects to receive marketing
approval from the FDA for Primsol solution for the treatment of AOM in children
age six months to twelve years in the first half of 1997. The Company is
currently in discussions with the FDA with respect to the appropriate labeling
for Primsol solution for this indication. However, the FDA has not yet granted
such marketing approval, and there can be no assurance that such approval in
fact will be granted or as to the timing thereof.
In October 1996, Ascent filed a second NDA with the FDA covering a more
concentrated formulation of Primsol solution. Ascent expects that the NDA with
respect to this second formulation will receive substantially the same approval
for the treatment of AOM in children age six months to twelve years as the first
formulation and that the FDA will grant such approval at approximately the same
time as it approves the first NDA. Accordingly, Ascent plans to introduce this
more concentrated formulation as the Primsol solution product that it brings to
market. If the Company does not receive approval of its NDA for this more
concentrated formulation on a timely basis, the Company would introduce the
first formulation as the Primsol solution product that it brings to market.
The FDA granted Ascent marketing approval for Primsol solution for the
treatment of uncomplicated UTI in patients twelve years and older in June 1995.
While AOM is the Company's primary target market for Primsol solution due to its
size, Ascent filed a supplemental NDA for the use of Primsol solution to treat
uncomplicated UTI in children age six months to twelve years. The FDA did not
approve Ascent's supplemental NDA for the treatment of this indication in this
pediatric patient population because it believed that the Company's clinical
trials did not involve a sufficient number of uncomplicated UTI subjects. The
Company is engaged in discussions with the FDA as to the approvability of its
Primsol solution supplemental NDA for the treatment of uncomplicated UTI in this
pediatric population.
Ascent has submitted a request to the FDA for three years of protection
under the Waxman-Hatch Act against the approval of a competitor's ANDA for the
treatment of AOM in children age six months to twelve years which is based on
the Company's clinical trial results.
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Feverall Acetaminophen Suppositories
Ascent has entered into an agreement with Upsher-Smith to purchase
Upsher-Smith's Feverall line of over-the-counter acetaminophen rectal
suppositories for the treatment of pain and fever. The closing of this
acquisition is scheduled for July 1997. The Company plans to begin marketing the
Feverall suppositories product line in the second half of 1997, along with
Primsol trimethoprim solution and Pediamist nasal saline spray. Acetaminophen
rectal suppositories are used in patients, primarily children or adolescents,
who cannot take acetaminophen orally as a result of regurgitation caused by
influenza or an inability to tolerate the taste of currently available liquid
forms of acetaminophen. The Feverall suppositories product line is covered by an
effective NDA and currently is being marketed by Upsher-Smith. Ascent will not
require any additional approval from the FDA in order to continue marketing the
Feverall suppositories product line.
IMS America, Ltd., a marketing research firm ("IMS"), estimates that the
1995 United States pediatric market for acetaminophen rectal suppositories was
approximately $5,800,000. Upsher-Smith introduced Feverall suppositories to the
market in 1989 and offers a product line of four strengths, 80 mg, 160 mg, 325
mg and 650 mg. Upsher-Smith's 1996 net sales of this product line were
$3,877,000. See "Financial Statements -- A Product Line of Upsher-Smith
Laboratories, Inc. -- Statement of Net Sales and Identified Costs and Expenses
of the Product Line to be Acquired by Ascent Pediatrics, Inc." Other
acetaminophen rectal suppositories currently on the market in the United States
include "Acephen," which is marketed by G&W Laboratories, and "Neopap," which is
marketed by PolyMedica Industries, Inc., as well as certain generic brands.
Ascent has contracted to acquire this product line because this dosage form
of acetaminophen permits administration to children who would otherwise be
unable to take the drug. In recent years, Upsher-Smith has promoted this product
line primarily through the use of advertising and two-month telemarketing
programs during the fall of each year. Ascent believes that it is possible to
increase market penetration for this product line through personal sales calls
to pediatricians and pediatric nurses, although there can be no assurance that
Ascent will be successful in doing so. In addition, under the acquisition
agreement, Ascent will be permitted to use the Feverall trademark in connection
with the other acetaminophen products that it is currently developing. Ascent
believes that the name recognition of this trademark will be useful in marketing
these other acetaminophen products and in enhancing the Company's profile in the
pediatric market generally.
The purchase price for this product line and certain related assets,
including the Feverall trademark, is $11,500,000 plus the cost of certain
related inventory (estimated to be approximately $300,000). The Company is
required to pay $6,000,000 plus the inventory cost at the closing of the
acquisition (of which $250,000 previously was paid as a nonrefundable deposit)
and to pay the balance no later than February 1998. Subject to the occurrence of
the closing, Upsher-Smith has agreed to supply the Company with its requirements
of Feverall acetaminophen rectal suppositories, and the Company has agreed to
purchase from Upsher-Smith all amounts of such product as it may require, for a
period of five years.
Although the acquisition of the Feverall suppositories product line and
related arrangements are the subject of executed contracts, there are a number
of conditions to closing, and there can be no assurance that these conditions
will be satisfied and that Ascent will acquire this product line or that the
terms of the acquisition will not change prior to closing.
Pediamist Nasal Saline Spray
Ascent has completed development of Pediamist nasal saline spray, an
over-the-counter product to relieve nasal dryness associated with low humidity.
This product is administered by a metering device that the Company believes is
particularly appropriate for use by children. The Company plans to introduce
Pediamist to the market in the second half of 1997, along with Primsol
trimethoprim solution and Feverall acetaminophen rectal suppositories. No FDA
pre-marketing approval is required for Ascent to market this product in the
United States.
Pediatricians frequently recommend nasal saline sprays instead of
decongestant sprays because decongestant sprays contain vasoconstrictors that
can cause "rebound," a phenomenon in which nasal congestion
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resulting from the use of the drug is more intense than the original symptoms.
Nasal saline sprays are often an effective alternative therapy for this
indication and are widely recognized as safe. IMS estimates that the 1993 United
States market for nasal saline sprays (both adult and pediatric) was
approximately $11,500,000.
There are a number of nasal saline spray products that are currently
available for nasal dryness associated with low humidity. All of these products
are designed primarily for use by adults and deliver a high volume of spray at
high pressure through a device sized for adult nasal openings. Moreover, certain
of these products are formulated with materials that are known to cause local
stinging.
Pediamist nasal spray is administered by a metering device specifically
designed to deliver saline solution in a low volume fine mist under low
pressure. This device includes a special actuator that determines the volume and
pressure of the saline to be delivered. Because the Pediamist nasal spray device
delivers approximately 20% of the amount of saline solution delivered by most
high volume metered systems, there is less drainage of excess saline from the
nose. The Company believes that this device will increase product acceptability
among children and assure delivery of a consistent volume of spray. Ascent has
formulated Pediamist nasal spray with glycerine to reduce stinging.
Prednisolone Sodium Phosphate Syrup
Ascent is developing a prednisolone sodium phosphate syrup as a
prescription steroid for the treatment of inflammation associated with a variety
of diseases, principally those of the respiratory system, such as asthma and
bronchitis. Currently available liquid steroid products for the treatment of
inflammation have a very unpleasant taste. As a result, compliance problems
frequently result, even though these products are used for the treatment of
serious and, in some cases, life threatening diseases. Ascent has applied its
taste masking technology to develop a prednisolone syrup product with a pleasant
taste. Ascent plans to file ANDAs with the FDA in the second half of 1997 for
two strengths of this product.
Scott-Levin estimates that in 1996 approximately 3,000,000 prescriptions
for liquid steroids were written in the United States, of which approximately
56% were written by pediatricians, and that the 1996 United States pediatric
market for liquid steroids was approximately $20,700,000. The Company believes
that almost all liquid steroids are taken by children.
A number of currently available steroids are widely used in pediatrics
because of the anti-inflammatory properties of these drugs. Physicians generally
prefer prednisolone and prednisone to other products due to the greater margin
of safety of these two drugs and generally prefer prednisolone to prednisone
because prednisolone is more reliable, particularly if the patient suffers from
certain liver disorders.
Certain currently available liquid steroid brands are available only in a
5mg/5ml strength, which Ascent believes limits their application. Ascent is
developing prednisolone syrup in both 5mg/5ml and 15mg/5ml strengths. Ascent has
conducted two pediatric studies for marketing purposes to compare the taste of
its product with that of a currently-marketed prednisolone sodium phosphate
liquid product. In the study testing the 15mg/5ml strength against an existing
product with the same strength, 23 of the 24 participating children preferred
the taste of the Ascent product; in the study testing the 5mg/5ml strength
against an existing product with the same strength, 16 of the 24 children
participating preferred the taste of the Ascent product, although the results of
this second study were not considered to be statistically significant due to the
number of participants. Ascent is not required to perform any clinical trials of
this product prior to filing an ANDA.
Pediatemp Acetaminophen Controlled-Release Beads
Ascent is developing Pediatemp acetaminophen controlled-release beads as an
over-the-counter product for the treatment of pain and fever in children. The
Company has designed this product to permit dosing every eight hours, rather
than the four hours required by currently available products. Ascent recently
completed Phase III clinical trials of this product and, subject to the results
of these clinical trials being satisfactory, plans to file an NDA in the second
half of 1997.
FIND/SVP estimates that sales of pediatric forms of pain/fever medications
in the United States approximate $300,000,000 per annum. There are a number of
currently available acetaminophen products for the treatment of pain and fever
in children. Most of these products are in the form of a liquid or chewable
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tablet. The product with the largest market share in the United States is
Tylenol liquid for children. None of the pediatric products currently on the
market is available in a controlled-release formulation. Accordingly, these
products are absorbed quickly from the gastrointestinal tract into the blood and
quickly cleared from the body, necessitating dosing every four hours. As a
result, if administered at bedtime, the patient needs an additional dose before
morning. If administered during the day, parents often must rely on school
nurses or day care providers to administer the medication. In addition, under
the applicable FDA OTC Monograph, only five doses of acetaminophen may be given
in each 24-hour period. Therefore, if the medication requires four hour dosing,
treatment may only be given for 20 hours in each 24-hour period.
Ascent is developing Pediatemp beads with a proprietary controlled-release
technology that releases the acetaminophen at specific rates over time in order
to provide a therapeutic effect (reduction in fever and pain) for eight hours.
Ascent believes that dosing every eight hours may significantly increase
compliance and permit therapeutic coverage for the full 24-hours of each day. To
facilitate administration, Ascent has formulated this product in the form of
small beads that either can be sprinkled on a food that is appealing to the
child, such as applesauce, or delivered in a liquid, such as water.
Ascent has completed three Phase I definitive pharmacokinetic trials
comparing Pediatemp beads to Tylenol extended relief caplets and immediate
release Tylenol tablets. These trials involved 63 healthy adults. In these
trials, Pediatemp beads exhibited equivalent bioavailability to the Tylenol
product to which they were compared.
In December 1996, Ascent completed a Phase III clinical trial that
evaluated Pediatemp beads for the reduction of dental pain. This study was
conducted in 125 adults and was double blinded, with the control group receiving
an equivalent amount of Tylenol extended relief caplets. A single dose was
administered to each patient over an eight-hour period. The data from this study
are currently being analyzed. A second Phase III clinical trial of this product
for the treatment of fever in children commenced in June 1996 and was completed
in February 1997. This study involved 100 febrile children between the ages of
two and eleven years old. In this second Phase III clinical trial, Pediatemp
beads were compared on a double blinded basis with an immediate release
presentation of acetaminophen for efficacy (reduction in fever) and safety. The
data from this study also are currently being analyzed. If the results of these
clinical trials are satisfactory, the Company plans to file an NDA for Pediatemp
beads in the second half of 1997.
An NDA will need to be approved by the FDA for Ascent to market this
product in the United States. Ascent expects to submit a request to the FDA for
three years of protection under the Waxman-Hatch Act against the approval of a
competitor's ANDA for the treatment of pain and fever in children under 12 years
of age which is based on the Company's clinical trial results.
Pediavent Albuterol Controlled-Release Suspension
Ascent is developing Pediavent albuterol controlled-release suspension as a
prescription product for the treatment of asthma. Ascent is formulating the
product in a controlled-release suspension to permit twice-a-day administration
and to mask the normal bitterness of albuterol. Ascent is conducting Phase I
clinical trials of this product.
Asthma is the leading cause of pediatric hospital admissions. It is a
debilitating disease that causes swollen and inflamed airways that are prone to
constrict suddenly and violently. Asthmatic attacks can be life-threatening and,
in some cases, fatal.
A common treatment for asthma is the administration of a beta agonist
bronchodilator, of which albuterol is the most widely prescribed. Scott-Levin
estimates that the 1996 United States pediatric market for all forms of beta
agonists was approximately $178,800,000, with liquid forms comprising
approximately 15% of this market ($26,500,000). Albuterol is available in
various dosage forms, including tablets and liquids, which are generally used
for chronic administration, and inhalers, which are generally used for acute
incidents. Tablet formulations are typically not used by young children, as they
are difficult to swallow and must be administered every four or eight hours. The
only currently available controlled-release tablet (Volmax) is not
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approved for use in patients under 12 years of age. Liquid albuterol
formulations have an unpleasant taste and must be dosed three to four times per
day.
Ascent is developing its albuterol product as a suspension in the form of
granules which contain the drug in a coating. The coating allows the albuterol
to be released at a specific controlled rate and masks the normal bitterness of
the drug. To enhance patient compliance, the Company is designing this product
for twice-a-day administration.
In 1995, Ascent conducted Phase I open-label, single dose pharmacokinetic
studies of this product in Europe comparing this product's bioavailability
profile with that of Volmax. These studies involved 12 healthy adult subjects at
one site. The results of this study indicated that the pharmacokinetics of two
of the formulations being developed by Ascent were indistinguishable from Volmax
in terms of bioavailability. Ascent initiated a Phase I clinical trial in the
United States involving 12 healthy adults in February 1997 to seek to confirm
the results of the European bioavailability study. If the results of the Phase I
clinical trial are satisfactory, the Company plans in the second half of 1997 to
initiate pivotal pharmacokinetic Phase I clinical trials involving 65 adults and
children as well as a pivotal Phase III clinical trial involving 50 children.
An NDA will need to be approved by the FDA for Ascent to market this
product in the United States. Ascent plans to submit a request to the FDA for
three years of protection under the Waxman-Hatch Act against the approval of a
competitor's ANDA for the treatment of asthma in children under 12 years of age
which is based on the Company's clinical trial results.
Cromolyn Sodium Cream
Ascent is developing cromolyn sodium cream as a prescription drug for
symptoms associated with moderate to severe contact dermatitis caused by
exposure to poison ivy or oak, insect bites and bee stings and other allergic
and non-allergic reactions. Ascent is designing this product as an alternative
to prescription topical steroids. The Company commenced Phase I clinical trials
of this product in February 1997.
Scott-Levin estimates that the 1996 United States market for pediatric
prescription topical steroids was approximately $42,000,000. Steroids are the
primary medication prescribed by physicians for the treatment of contact
dermatitis. Even when applied topically, steroids may be absorbed systemically
and have unfavorable side effects. Ascent believes that pediatricians prescribe
steroids for topical use by children because these drugs are effective and no
viable alternative exists. Such pediatric use is off label, because the
labelling of all of these drugs specifies that they are not for use in children.
Cromolyn sodium has wide use and acceptance for both children and adults in
other dosage forms for the treatment of conditions that have an allergic element
(e.g., asthma, allergic rhinitis, allergic conjunctivitis and intestinal
mastocytosis). Ascent is developing cromolyn sodium as a topical cream because
contact dermatitis has a similar allergic element as these other conditions. To
date, cromolyn sodium has not been used topically because it is not readily
absorbed through the skin. Ascent has formulated this product with a transdermal
enhancer to facilitate the transport of the cromolyn sodium into the skin.
Ascent believes that a medication for moderate to severe contact dermatitis that
does not use a steroid would be attractive to pediatricians.
Ascent is conducting two Phase I clinical trials of this product. Each of
these trials involves 12 healthy adult volunteers and compare Ascent's topical
cromolyn sodium cream with a placebo. These trials are being conducted at a
single site and are double blinded. One study involves the effect of cromolyn
sodium cream as a prophylactic, and the second is evaluating this product as a
treatment in a chemically-induced contact dermatitis.
An NDA will need to be approved by the FDA for Ascent to market this
product in the United States. Ascent plans to submit a request to the FDA for
three years of protection under the Waxman-Hatch Act against the approval of a
competitor's ANDA for the treatment of moderate to severe contact dermatitis in
children under 12 years of age which is based on the Company's clinical trial
results.
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Cromolyn Sodium Controlled-Release Nasal Spray
Ascent is developing a cromolyn sodium controlled-release nasal spray as a
prescription product for the prevention of allergic rhinitis associated with
conditions such as hay fever. Ascent's goal is to develop a product that will
require administration only once or twice per day and achieve a therapeutic
effect in a significantly shorter time than existing cromolyn sodium nasal
sprays. Ascent is conducting preclinical tests of this product.
There are a number of currently available therapies for the treatment of
allergic rhinitis in children, including topical steroids, which can be absorbed
systemically, leading to potentially serious side effects, and oral
antihistamines, which require systemic administration. Scott-Levin estimates
that the 1996 United States pediatric market for nasal steroids was
approximately $54,000,000. In addition, a cromolyn sodium nasal spray is
marketed for this indication under the name Nasalcrom. Nasalcrom requires a
frequent dosing regimen (four to six times per day) along with an extended time
(up to three weeks) to obtain a beneficial effect, which often leads patients to
become non-compliant or prematurely terminate their therapy. Scott-Levin
estimates that the 1996 United States pediatric market for Nasalcrom was
approximately $6,500,000.
Ascent is seeking to develop a cromolyn sodium nasal spray for this
indication because of the safe side effect profile of cromolyn sodium and to
avoid systemic administration. Ascent is formulating its product candidate with
a bioadhesive polymer which it believes will provide a longer nasal residence
time for the cromolyn sodium, thereby optimizing the drug action. An NDA will
need to be approved by the FDA for Ascent to market this product in the Untied
States.
Other Programs
In addition to the products and product development programs described
above, the Company also is engaged in the development of a number of other
pediatric pharmaceutical products. These programs include the following:
Cough/Cold and Other OTC Products. Ascent is developing a line of improved
flavor over-the-counter cough/cold products. Many of the over-the-counter
products for the treatment of coughs and congestion due to colds and influenza
contain the active ingredients guaifenisen, dextromethorphan or the decongestant
pseudoephedrine, which have a bitter taste.
Ascent is applying its taste masking technology to the development of a
line of cough/cold products containing guaifenisen, dextromethorphan and
pseudoephedrine. Ascent already has completed the development of a guaifenisen
cough syrup. In a taste study involving 81 children age three to six years
comparing Ascent's cough syrup containing guaifenisen to Robitussin, a leading
liquid guaifenisen product, the participants showed a statistically significant
preference for Ascent's product.
The Company believes that it is preferable to introduce its cough/cold
products to the market as an integrated product line. Accordingly, Ascent does
not plan to introduce its guaifenisen cough syrup until it has completed
development of additional products, which the Company estimates will occur no
sooner than late 1999. Because these products are being formulated within the
applicable FDA over-the-counter monographs, Ascent expects that they will not
require FDA approval prior to marketing.
In addition to these cough/cold products, Ascent also is developing other
products for the over-the-counter market using the Company's taste masking
technology. The Company does not believe that any of these products will require
FDA approval prior to marketing.
Pediatemp Acetaminophen Controlled-Release Liquid. Ascent is developing a
controlled-release liquid acetaminophen over-the-counter product for the
pediatric market. As with Pediatemp controlled-release beads, this product would
be used for the treatment of pain and fever. Ascent is developing a liquid
product because such a dosage form is preferable for young children. There
currently are no controlled-release acetaminophen liquid products on the market
for use by either children or adults. Ascent is currently undertaking stability
studies of this product candidate to optimize its formulation and taste
characteristics.
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Ascent is applying its taste masking technology in developing this product. An
NDA will need to be approved by the FDA for Ascent to market this product in the
United States.
PRODUCT DEVELOPMENT
Ascent actively evaluates the pediatric pharmaceutical industry on an
ongoing basis to assess product usage and to identify unmet medical needs of
children, particularly for prescription drugs for the most common pediatric
illnesses. Ascent's program to identify pediatric product opportunities includes
conducting focus groups with pediatricians, pediatric nurses and parents,
consulting with the Company's scientific and medical advisors and evaluating
drug delivery and other technical developments for their applicability to the
field of pediatric pharmaceuticals. Ascent uses this information to select
compounds as product development candidates that it believes may be improved
through the application of its technologies and reformulation expertise and then
successfully commercialized. Ascent reviews the anticipated development
difficulty, time frame and cost, required technologies, applicable regulatory
requirements, competitive environment and anticipated marketing and sales
approach in evaluating each development candidate.
Ascent selects as product candidates approved compounds that have well
known clinical profiles and are not covered by third party patents and that it
believes may be improved through the application of the Company's drug delivery
and reformulation technologies. Ascent then seeks to improve these products
through optimized formulations or new delivery technologies with the goal of
differentiating them from competitive products on the market. By developing
products based on approved compounds rather than new chemical entities, the
Company believes that it can reduce regulatory and development risks and shorten
the product development cycle.
Ascent identifies third party manufacturers or academic institutions that
have the required analytical expertise, technology, manufacturing capabilities
and personnel to perform much of the design and formulation work for the
Company's products. To expedite the regulatory process, Ascent seeks to enter
into arrangements with product manufacturers that extend from pilot production
for product stability testing through clinical trials and ultimately to
commercial production. Ascent works closely with these third parties in
connection with product design and formulation and monitors manufacturing
activities, including compliance with Good Manufacturing Practice ("GMP") and
Good Laboratory Practice ("GLP") rules of the FDA.
Ascent contracts with clinical research organizations for the conduct of
the Company's clinical trials. Ascent conducts clinical trials of many of its
products in children not only to comply with FDA requirements but also because
the Company believes that pediatricians will be more willing to prescribe
products for which specific efficacy and safety information is available with
respect to the effect of the drug on pediatric patients. To facilitate enrolling
children in the Company's clinical trials, Ascent has established a network of
relationships with influential pediatricians, industry associations and
pediatric research organizations specializing in conducting clinical trials in
children.
SALES AND MARKETING
Ascent believes that its exclusive focus on the development and marketing
of pediatric pharmaceutical products will meaningfully differentiate the Company
from other pharmaceutical companies in the pediatric medical community.
Accordingly, even before the launch of its first products, Ascent has initiated
a program to familiarize pediatricians with Ascent's corporate identity. This
program began at the fall 1996 annual meeting of the American Academy of
Pediatrics and includes a direct mail campaign and journal advertising directed
at private pediatricians. The Company expects that pediatricians and pediatric
nurses, who are responsible for most prescriptions written for children in the
United States and play a central role in recommending over-the-counter
medications for children, will be the primary focus of the Company's marketing
and sales efforts.
Ascent hired a Vice President of Marketing in 1996 and is recruiting a Vice
President of Sales to lead the Company's marketing and sales efforts. Ascent is
establishing its domestic sales organization in anticipation of the introduction
of its initial three products, Primsol trimethoprim solution, Feverall
acetaminophen rectal
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suppositories and Pediamist nasal saline spray, to the market during the second
half of 1997. Ascent is in the process of preparing marketing literature and
other marketing materials for the introduction of these initial three products.
Ascent's ability to achieve its product introduction schedule will depend on the
timing of final approval of the Primsol solution NDA and of the closing of the
Feverall product line acquisition. Ascent plans to introduce other products as
their development is completed and subject to obtaining requisite regulatory
approvals.
Ascent has chosen to establish its own domestic sales force instead of
using third party sales organizations. The Company believes that marketing and
sales initiatives can be more efficiently and effectively implemented through a
direct sales force that promotes only Ascent products. Because pediatricians and
pediatric nurses are concentrated in group practices in urban and suburban
centers and advertising may be disseminated through a limited number of
specialty pediatric publications, Ascent believes that it can reach much of the
domestic pediatric market with a moderately sized sales force and carefully
controlled marketing expenditures. Ascent expects to employ six regional sales
managers, six full-time sales representatives and approximately 30 flex-time (or
part-time) sales representatives by the end of 1997. Ascent plans to expand this
sales force in the future as it introduces additional products.
The Company plans to use its sales force to promote the Company's products
to high prescribing pediatricians, influential pediatricians and nurses in
pediatricians' offices. Ascent expects to accomplish this goal through personal
sales calls by its sales representatives and attendance by its sales
representatives at industry conferences, seminars and other meetings.
Particularly while building its sales force, Ascent plans to supplement these
activities with a telemarketing program designed to reach pediatricians and
pediatric nurses in geographic areas beyond the coverage of the Company's sales
force and pediatricians and pediatric nurses who are not targeted for one-on-one
visits. Ascent expects to advertise its products through direct mail and
advertisements in speciality pediatric journals.
Because more than 60% of patients are covered by a managed care program,
such as a health maintenance organization, preferred provider organization or
state Medicaid program, Ascent also plans to promote its products directly to
managed care providers with the goal of obtaining inclusion of these products on
the providers' formularies. The Company has retained a consulting firm to assist
it in gaining managed care formulary acceptance, but may perform this function
with its own personnel in the future.
Ascent plans to enter into licensing and distribution arrangements for the
marketing and sale of its products in international markets to leverage the
established international marketing, sales and distribution capabilities of
third party collaborators. Ascent plans to enter into similar arrangements with
respect to any adult applications of its products.
MANUFACTURING AND DISTRIBUTION
The Company plans to rely upon third parties to manufacture the Company's
products for preclinical tests, clinical trials and commercial purposes.
Accordingly, the Company does not have any manufacturing facilities and has not
sought to employ direct manufacturing personnel. The components of the Company's
products generally are available from a variety of commercial suppliers and are
inexpensive. The production of most of these products involves known
manufacturing techniques, although the Company has developed certain proprietary
manufacturing technologies that it seeks to protect as trade secrets.
Ascent believes that there are a number of third party manufacturers, both
in the United States and abroad, with the capability of manufacturing products
for the Company. The Company intends to establish supply agreements with
manufacturers that comply with the FDA's GMP requirements and other regulatory
standards. Certain of the Company's supply arrangements require that Ascent buy
all of the Company's requirements of a particular product exclusively from the
other party to the contract. Moreover, FDA regulations provide that a
manufacturer cannot supply a product to the Company and the Company cannot sell
the product unless the manufacturer is qualified (i.e., demonstrates to the FDA
that it can manufacture the product in accordance with applicable regulatory
standards). For many of its products, Ascent has qualified only one supplier,
even though the contractual arrangement with the supplier may permit Ascent to
qualify an alternative manufacturer. Any interruption in supply from any of its
manufacturers or the inability of these
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manufacturers to manufacture the Company's products in accordance with GMP could
have a material adverse effect on the Company's business, financial condition
and operating results.
To date, the Company has entered into several agreements with third parties
for the manufacture of the Company's products. In particular, the Company is a
party to a supply agreement with Lyne Laboratories, Inc. ("Lyne"), under which
Lyne has agreed to manufacture Primsol trimethoprim solution for the Company,
and the Company has agreed to purchase all amounts of such product as it may
require for sale in the United States from Lyne in accordance with an agreed
upon price schedule. The agreement may be terminated by either party on three
months' notice any time after October 17, 2004. See "Business -- License
Agreements" for a description of the Company's agreement with Recordati S.A.
Chemical and Pharmaceutical Company ("Recordati") relating to the manufacture of
Pediavent albuterol controlled-release granules for suspension and
"Business -- Products and Products under Development -- Feverall Acetaminophen
Suppositories" for a description of the Company's anticipated arrangements with
Upsher-Smith for the manufacture of Feverall acetaminophen rectal suppositories.
In the future, the Company may, if it becomes economically attractive to do
so, establish its own manufacturing facilities. In order for the Company to
establish a manufacturing facility, the Company would require substantial
additional funds and be required to hire and retain significant additional
personnel and comply with the extensive GMP regulations of the FDA.
Ascent initially plans to distribute its products through a third party
distribution warehouse. Under this arrangement, the manufacturers of the
Company's products will ship the products to the distributor. The distributor
will perform various functions on behalf of the Company, including order entry,
customer service and collection of accounts receivable. The Company may seek to
develop the capability to perform some or all of these functions through its own
personnel in the future.
COMPETITION
Competition in the pediatric pharmaceutical market is intense. Although the
Company believes that no competitor focuses its commercial activities and
research and development efforts exclusively on the pediatric pharmaceutical
market, several large pharmaceutical companies with significant research,
development, marketing and manufacturing operations market pediatric products.
These competitors include Glaxo Wellcome Inc., Eli Lilly and Company, the Mead
Johnson Division of Bristol-Myers Squibb, Inc., the Ortho-McNeil Pharmaceutical
Division of Johnson & Johnson Inc., Pfizer Inc., the Ross Laboratories Division
of Abbott Laboratories Inc., Schering-Plough Corporation and the Wyeth-Lederle
Vaccines and Pediatrics Division of American Home Products, Inc.
Key competitive factors affecting the success of the Company include the
efficacy, side effect profile, taste, dosing frequency, method of
administration, patent or other proprietary protection, brand name recognition
and price of its products. The timing of market introduction of the Company's or
competitive products is another important competitive factor. Earlier entrants
in the market often obtain and maintain significant market share relative to
later entrants. Accordingly, the relative speed with which Ascent can develop
products, complete the clinical trials and approval processes and supply
commercial quantities of the products to the market is expected to be an
important competitive factor. The Company's competitive position will also
depend on its ability to attract and retain qualified personnel, to obtain
patent protection or otherwise protect the competitive positions of its products
and to secure sufficient capital resources for its operations.
Many of Ascent's potential competitors have substantially greater name
recognition and greater financial, technical and human resources than Ascent. In
addition, many of these competitors have significantly greater experience than
the Company in undertaking preclinical testing and human clinical trials of
pharmaceutical products and obtaining FDA and other regulatory approvals of
products for use in health care. Accordingly, the Company's competitors may
succeed in obtaining FDA or other regulatory approvals for products more rapidly
than the Company. Furthermore, subject to obtaining required regulatory
clearances, Ascent will compete against these larger companies with respect to
manufacturing efficiency and marketing capabilities, areas in which Ascent has
limited or no experience. Ascent's competitors may introduce competitive pricing
pressures that may adversely affect Ascent's sales levels and margins. Moreover,
many of these competitors
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offer well established, broad product lines and services not offered by the
Company. Many of the products offered by these competitors have well known brand
names that have been promoted over many years.
The Company expects to market many of its product candidates as alternative
treatments for pediatric indications for which products with the same active
ingredient are well-entrenched in the market. For example, the Company intends
to market Primsol trimethoprim solution, a trimethoprim antibiotic, for the
treatment of AOM, for which pediatricians often prescribe the well-known
combination therapies Bactrim and Septra, which also contain trimethoprim.
Similarly, Pediatemp acetaminophen controlled-release beads would compete
against Tylenol liquid for children. The Company's product candidates also will
face competition from other products that do not contain the same active
ingredient but are used for the same indication and are well entrenched within
the pediatric market. For example, Primsol solution will compete against other
antibiotics, including amoxicillin. Moreover, many of the Company's potential
products that are reformulations of existing drugs of other manufacturers may
have significantly narrower patent or other competitive protection. There can be
no assurance that pediatricians, pediatric nurses and third party payors will
prefer the Company's products to existing products.
LICENSE AGREEMENTS
The Company is a party to certain license and other arrangements under
which it has obtained rights to manufacture and market certain of its products
or product candidates. Set forth below is a summary of those arrangements that
the Company believes are material to its business.
The Company is a party to a development and license agreement with
Recordati pursuant to which the Company holds a license under certain Recordati
patents and patent applications to clinically test, register, market, distribute
and sell a controlled-release suspension system formulation of albuterol in the
form of coated granules. The license is exclusive in all countries other than
Italy and Spain. The Company may sublicense its license rights under this
agreement, subject to certain restrictions in certain countries. Ascent and
Recordati have agreed to collaborate on the development, clinical testing and
regulatory approval of this albuterol product in the United States and in any
other country in which the Company elects to pursue the commercial development
of such product by providing Recordati notice of such intent within 24 months of
filing for regulatory approval in the United States. All license rights with
respect to (i) countries in which the Company does not so notify Recordati of
its intention to commercially develop such product and (ii) countries in which a
joint development committee comprised of two members from each of the Company
and Recordati determine that commercial development of the product is not
technically feasible, revert to Recordati. Recordati will own any intellectual
property resulting from the collaboration other than clinical research data,
product applications and regulatory approvals obtained by Ascent, which the
Company will own. This agreement has an initial term expiring 15 years from the
date of FDA approval of the product and may be extended at the Company's
election for an additional five year term. During the term of this agreement,
Recordati has agreed to supply such quantities of the product as the Company may
require. The Company is required to pay Recordati certain up-front license fees
and to purchase the product from Recordati at unit prices based upon net sales
in a given country. During the term of this agreement, the Company has agreed
not to develop, manufacture or sell other oral liquid controlled-release
suspension system formulations of a beta agonist.
The Company is a party to a license agreement with MacroChem Corporation
("MacroChem"), under which the Company holds the exclusive, worldwide license,
with the right to sublicense, in technology described in a certain MacroChem
patent to manufacture, use and sell products utilizing transdermal enhancers in
combination with catecholamine bronchodilators for the treatment of respiratory
disorders and products utilizing certain transdermal enhancers in combination
with cromolyn sodium for the treatment of allergic disorders. The license is
co-extensive with the duration of the licensed patent, which expires in 2006.
Pursuant to this agreement, the Company paid MacroChem certain up-front license
payments and is required to pay royalties based on net sales and sublicense fees
for the duration of the patent.
The licenses and other third party product arrangements to which the
Company is a party impose various commercialization, sublicensing, royalty and
other payment, insurance and other obligations on the Company.
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Failure of the Company to comply with these requirements could result in
termination of the applicable agreement, which could have a material adverse
effect on the Company.
PATENTS, TRADE SECRETS, LICENSES AND TRADEMARKS
The Company's success will depend in part on its ability to develop
patentable products and obtain patent or other proprietary rights protection for
its products, both in the United States and in other countries. The Company's
policy is to file patent applications to protect technology, inventions and
improvements that are considered novel and important to the development of its
business. The Company also relies upon trade secrets, know-how, continuing
technological innovation and licensing opportunities to develop and maintain its
competitive position. Ascent also plans to seek three year protection for
certain products under the Waxman-Hatch Act from the approval of a possible
competitor's ANDA which is based on the Company's clinical trial results as well
as trademark protection for its brand names. There can be no assurance, however,
that any steps taken by the Company to protect its proprietary position will be
effective.
The Company holds four issued United States patents, has filed ten
additional patent applications and has received notices of allowance of claims
in three such patent applications. Three of the issued patents relate to the
Company's cromolyn sodium cream product candidate. The claims in one of the
patent applications as to which the Company has receive a notice of allowance
relate to certain controlled-release technology of the Company. Three of the
other seven patent applications relate to the Company's cromolyn sodium cream
product candidate, three relate to taste-masking technologies and one relates to
the Company's formulation of Primsol trimethoprim solution. One of the issued
patents and two of the patent applications as to which the Company has received
notices of allowance of claims relate to product development candidates which
the Company currently is not planning to pursue. The Company has sought foreign
patent protection in other major industrial countries in respect of its most
commercially important technologies. All of the Company's issued United States
and foreign patents expire from 2012 to 2016, although certain United States
patents may be extended for specified periods, and the Company's United States
and foreign patents could lapse if certain applicable fees are not paid.
The patent positions of pharmaceutical firms, including Ascent, are
generally uncertain and involve complex legal and factual questions.
Consequently, even though Ascent currently is prosecuting its patent
applications with the United States Patent and Trademark Office and certain
foreign patent authorities, the Company does not know whether any of its
remaining applications will result in the issuance of any patents or, if any
patents are issued, whether they will provide significant proprietary protection
or will be circumvented or invalidated. Since the Company's products and product
candidates represent reformulations of off-patent drugs, any patents which cover
such products would be use or formulation patents, and the Company's products
would therefore be afforded a significantly narrower level of protection than a
patent on the active ingredient itself. Since patent applications in the United
States are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months or years, Ascent cannot be certain that it was the
first creator of inventions claimed by pending patent applications or that it
was the first to file patent applications for such inventions. Generally, in the
United States, the first to invent is entitled to the patent, whereas in the
European Economic Community, the first to file is entitled to the patent.
Competitors of the Company and other third parties hold issued patents and
pending patent applications relating to aspects of the Company's technology, and
it is uncertain whether these patents and patent applications will require the
Company to alter its products or processes, pay licensing fees or cease
activities. In particular, the Company is aware of one United States patent
issued to a pharmaceutical company that may be alleged to be infringed by the
Company's prednisolone sodium phosphate syrup that is being developed. Although
Welsh & Katz, Ltd., patent counsel to the Company, is of the opinion that the
Company's prednisolone sodium phosphate syrup that is being developed does not
infringe such patent, an opinion of counsel only represents such counsel's view
of applicable law and is not binding on any court or governmental agency. In
addition, there can be no assurance that the holder of such patent or its
licensees will not sue the Company to enforce such patent, and there can be no
assurance as to the outcome of any such action. See "Government Regulation --
FDA Approval."
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Ascent's practice is to require its employees, consultants, members of its
Scientific Advisory Board, Medical Advisory Board, outside scientific
collaborators and sponsored researchers and other advisors to execute
confidentiality and invention assignment agreements upon the commencement of
employment or consulting relationships with the Company. These agreements
provide that all confidential information developed pursuant to such
relationships or made known to the individual by Ascent during the course of the
individual's relationship with Ascent is to be kept confidential and not
disclosed to third parties, subject to a right to publish certain information in
the scientific literature in certain circumstances and subject to other specific
exceptions. In the case of employees, the agreements provide that all inventions
conceived by the individual relating to the business of the Company shall be the
exclusive property of the Company. There can be no assurance, however, that
these agreements will provide meaningful protection for the Company's trade
secrets or adequate remedies in the event of unauthorized use or disclosure of
such information.
Ascent engages in collaborations and sponsored research agreements and
enters into preclinical and clinical testing agreements with academic and
research institutions to take advantage of their technical expertise and staff
and to gain access to clinical evaluation models, patients, and related
technology. Ascent may be required to negotiate a license to any developments or
results arising out of such collaborations or agreements in order to
commercialize products incorporating them. There can be no assurance that the
Company will be able successfully to obtain any such license at a reasonable
cost or that such developments and results will not be made available to
competitors of the Company on an exclusive or nonexclusive basis. See "Risk
Factors -- Uncertainty Regarding Patents and Proprietary Rights."
Because it believes that promotion of pediatric pharmaceutical products
under a brand name can be an important competitive factor, Ascent plans to seek
trademark protection for its products, both in the United States and, to the
extent the Company deems appropriate, in major foreign countries. To date,
Ascent has obtained six trademark registrations from the United States Patent
and Trademark Office, including for the marks "ASCENT," "PEDIAMIST" and
"PRIMSOL," and has received notices of allowance from the United States Patent
and Trademark Office with respect to trademark registrations for the marks
"PEDIAVENT" and "PEDIATEMP." The "FEVERALL" trademark of Upsher-Smith is
included in the assets that Upsher-Smith has agreed to sell to the Company as
part of the Company's acquisition of Upsher-Smith's Feverall line of
acetaminophen rectal suppositories.
GOVERNMENT REGULATION
The testing, manufacture, labeling, distribution, sale, marketing,
promotion and advertising of the Company's products and its ongoing product
development activities are subject to extensive and rigorous regulation by
governmental authorities in the United States and other countries.
FDA Approval
In the United States, pharmaceutical products intended for therapeutic use
in humans are subject to rigorous and extensive FDA regulation before and after
approval. The process of completing preclinical studies and clinical trials and
obtaining FDA approvals for a new drug can take several years and requires the
expenditure of substantial resources. There can be no assurance that any product
will receive such approval on a timely basis, if at all. See "Risk Factors -- No
Assurance of Regulatory Approval; Extensive Government Regulation."
The steps required before a new drug for human use may be marketed in the
United States include (i) preclinical tests, (ii) submission to the FDA of an
IND, which must become effective before human clinical trials may commence,
(iii) adequate and well-controlled human clinical trials to establish the safety
and effectiveness of the product, (iv) submission of an NDA to the FDA, which
application is not automatically accepted for consideration by the FDA, and (v)
FDA approval of the NDA prior to any commercial sale or shipment of the product.
A new drug in generic form for use in humans may be marketed in the United
States following FDA approval of an ANDA if (i) such drug has the same active
ingredient, dosage form, route of administration, strength and conditions of use
as a "pioneer" drug that was previously approved by the FDA as safe and
effective, and (ii) any applicable patents and statutory period of protection
under the Waxman-Hatch Act have expired. Through a petition process, the FDA may
permit the filing of an ANDA for a generic version of an approved "pioneer" drug
with variations in active ingredient, dosage form,
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route of administration and strength (but not conditions of use), unless (i)
clinical investigations must be conducted to demonstrate the safety and
effectiveness of the drug or (ii) an ANDA would provide inadequate information
to permit the approval of the variation.
Preclinical tests include laboratory evaluation of product chemistry and
animal studies to gain preliminary information of a product's pharmacology and
toxicology and to identify any safety problems that would preclude testing in
humans. Preclinical safety tests must be conducted by laboratories that comply
with FDA regulations regarding GLP. The results of the preclinical tests are
submitted to the FDA as part of an IND application and are reviewed by the FDA
prior to the commencement of human clinical trials. Unless the FDA objects to,
or makes comments or raises questions concerning, an IND and places it on
clinical hold, the IND will become effective 30 days following its receipt by
the FDA and initial clinical studies may begin, although companies often receive
FDA comments before beginning such studies. There can be no assurance that
submission of an IND will result in FDA authorization to commence clinical
trials. See "Risk Factors -- Products in Development; Technological
Uncertainty."
Clinical trials involve the administration of the investigational new drug
to healthy volunteers and to patients under the supervision of a qualified
principal investigator. Clinical trials must be conducted in accordance with the
FDA's Good Clinical Practice requirements under protocols that detail, among
other things, the objectives of the study, the parameters to be used to monitor
safety, and the effectiveness criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. Further, each clinical study must be
conducted under the auspices of an Institutional Review Board ("IRB"). The IRB
will consider, among other things, ethical factors, the safety of human
subjects, the possible liability of the institution and the informed consent
disclosure which must be made to participants in the clinical trial.
Clinical trials are typically conducted in sequential phases, although the
phases may overlap. In Phase I, the investigational new drug usually is
administered to healthy human subjects (10 to 50 persons) and is tested for
safety (adverse effects), dosimetry, tolerance, metabolism, distribution,
excretion and pharmacokinetics (clinical pharmacology). Phase II involves
studies in a limited patient population (approximately 10 to 70 persons) to (i)
evaluate the effectiveness of the investigational new drug for specific
indications, (ii) determine dose response and optimal dosage and (iii) identify
possible adverse effects and safety risks. When an investigational new drug is
found to have an effect at an optimal dose and to have an acceptable safety
profile in Phase II evaluation, Phase III trials are undertaken to further test
for safety, further evaluate clinical effectiveness and to obtain additional
information for labeling within an expanded patient population at geographically
dispersed clinical study sites. There can be no assurance that Phase I, Phase II
or Phase III testing will be completed successfully within any specified time
period, if at all, with respect to any of the Company's products subject to such
testing. Furthermore, the FDA may at any time impose a clinical hold on ongoing
clinical trials, or the IRB or the Company may suspend clinical trials at any
time if it is felt that the participants are being exposed to an unanticipated
or unacceptable health risk. If the FDA imposes a clinical hold, clinical trials
may not recommence without prior FDA authorization and then only under the terms
authorized by the FDA.
The results of the pharmaceutical development, preclinical studies and
clinical studies, the chemistry and manufacturing data, and the proposed
labeling, among other things, are submitted to the FDA in the form of an NDA for
approval of the marketing and commercial shipment of the product. The FDA may
refuse to accept the NDA for filing if administrative and NDA content criteria
are not satisfied, and even after accepting the NDA for review, the FDA may
require additional testing or information before approving the NDA. The FDA must
deny an NDA if applicable regulatory requirements are not ultimately satisfied.
Moreover, if regulatory approval of a product is granted, such approval may
require post-marketing testing and surveillance to monitor the safety of the
product or may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained, new information raises safety or
effectiveness questions or if problems occur following initial marketing.
The Waxman-Hatch Act permits the use of an abbreviated FDA approval
procedure by authorizing the filing of an ANDA for any drug product that has the
same active ingredient as a drug that was approved by the FDA as safe and
effective, subject to certain exclusions (such as drugs that are still protected
by patent or
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market exclusivity). Approval of a pharmaceutical product through an ANDA does
not require the conduct of preclinical tests on pharmacology or toxicology or
Phase I, II or III clinical trials to prove the safety and effectiveness of such
product, but instead is based upon a showing of bioequivalence with the
"pioneer" drug and adequate manufacturing. Therefore, compared to an NDA, the
filing of an ANDA may result in reduced research and development costs
associated with bringing a product to market.
An ANDA can be filed in cases where there is an existing patent on an
approved "pioneer" drug. The applicant is obligated to notify the patent holder
of the filing of the ANDA, which then starts a 45-day period during which the
patent holder can file a patent infringement suit against the applicant if the
patent holder believes that its patent would be infringed by the applicant's
product. If patent litigation is brought against the applicant, the FDA will
still review the ANDA, however, any FDA approval of the ANDA can not become
effective until the earlier of (i) a determination that the existing patent is
invalid, unenforceable or not infringed, (ii) such litigation has been dismissed
or (iii) 30 months after the ANDA filing. The Company is in the process of
filing an ANDA for its prednisolone sodium phosphate syrup. The Company is aware
of one United States patent issued to a pharmaceutical company that may be
alleged to be infringed by this product candidate and has provided informal
notice to the holder and licensee of such patent that the Company believes that
its prednisolone syrup does not infringe such patent. See "Patents, Trade
Secrets, Licenses and Trademarks."
The Waxman-Hatch Act also provides for a period of statutory protection for
new drugs which receive NDA (but not ANDA) approval from the FDA. If a new drug
receives NDA approval, and the FDA has not previously approved any other new
drug containing the same active ingredient, then the Waxman-Hatch Act does not
permit an ANDA to be submitted by another company for a generic version of such
drug generally for a period of five years from the date of approval of the NDA.
Similarly, if NDA approval is received for a new drug containing an active
ingredient that was previously approved by the FDA, and if such NDA approval was
dependent upon the submission to the FDA of new clinical investigations (other
than bioavailability studies) by the applicant, then the Waxman-Hatch Act
prohibits the FDA from making effective the approval of an ANDA for a generic
version of such drug by another company for a period of three years from the
date of such NDA approval. The statutory protection provided pursuant to the
Waxman-Hatch Act will not prevent the filing or approval of an NDA (as opposed
to an ANDA) for any drug, including, for example, a drug with the same active
ingredient, dosage form, route of administration, strength and conditions of use
as a drug protected under the act. In order to obtain an NDA, a competitor would
be required to conduct its own clinical trials. As the Company's products and
product candidates are based upon approved compounds for which the FDA has
previously granted NDA approval, the Company expects that any of its products
which qualify for statutory protection under the Waxman-Hatch Act will be
afforded only a three year period of protection.
The Company has completed clinical trials and submitted an NDA with respect
to only one of its product candidates. No assurance can be given that the
Company's clinical trials with respect to any of its product candidates will be
completed on a timely basis, if at all, that the clinical trials will
demonstrate safety or effectiveness, that the clinical results will be accepted
for consideration by the FDA, that the FDA will find the data submitted adequate
or that an NDA or ANDA will be ultimately approved. See "Risk Factors --
Unproven Safety and Effectiveness of Potential Products; Uncertainties Related
to Clinical Trials."
As part of the drug approval process, the FDA must inspect and find that
the Company's or its supplier's drug manufacturing facilities comply with GMP
before an NDA or an ANDA can be approved by the FDA for marketing in the United
States. The FDA will review the manufacturing procedures and inspect the
manufacturer's facilities and equipment for compliance with GMP and other
requirements. After an NDA is approved, any material change in the manufacturing
process, equipment or location would necessitate additional data, then FDA
review and approval before marketing.
Certain of the Company's products, such as guaifenisen cough syrup, fall
within the FDA's OTC Monograph system, rather than the IND/NDA system, and may
be marketed without the Company first obtaining FDA approval of an NDA or ANDA,
provided such product complies with the specifications set forth in the OTC
Monograph for the applicable product category. OTC drugs must also be
manufactured in compliance with GMP, but premarket approval is not required.
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Foreign Regulatory Approval
Whether or not FDA approval has been obtained, approval of a pharmaceutical
product by comparable governmental regulatory authorities in foreign countries
must be obtained prior to the commencement of clinical trials and subsequent
marketing of such product in such countries. The approval procedure varies from
country to country, and the time required may be longer or shorter than that
required for FDA approval. Although there are some procedures for unified filing
for certain European countries, in general, each country has its own procedures
and requirements.
Under the recently-enacted FDA Export Reform and Enhancement Act of 1996,
pharmaceutical products generally may be freely exported from the United States
before the FDA has approved the product for marketing in the United States for
investigation in 24 listed countries and for marketing in any country after at
least one of the 24 listed countries has approved the product for marketing.
EMPLOYEES
As of March 31, 1997, Ascent had 24 full-time employees. Twelve of these
employees are engaged in product development and quality control, including
medical and regulatory affairs, three are employed in sales and marketing and
nine are employed in finance, business development and general and
administrative activities. Many of the Company's management and professional
employees have had prior experience with pharmaceutical, biotechnology or
medical products companies. None of the Company's employees is covered by a
collective bargaining agreement, and management considers relations with its
employees to be good.
FACILITIES
Ascent leases approximately 14,300 square feet of office space in
Wilmington, Massachusetts. The lease has an initial term expiring January 31,
2002. The Company has an option to renew the lease for an additional five-year
period.
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MANAGEMENT
EXECUTIVE OFFICERS, SIGNIFICANT EMPLOYEES AND DIRECTORS
The following table provides information concerning the executive officers,
significant employees and directors of the Company as of March 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- --------------------------------------------
<S> <C> <C>
Executive Officers
Emmett Clemente, Ph.D..................... 58 Chairman of the Board
Alan R. Fox............................... 52 President, Chief Executive Officer and
Director
John G. Bernardi.......................... 42 Vice President, Finance and Treasurer
Gregory A. Vannatter...................... 44 Vice President, Marketing
Significant Employees
Mumtaz Ahmed, M.D., Ph.D.................. 60 Vice President, Medical Affairs
Aloysius O. Anaebonam, Ph.D............... 41 Vice President, Product Development and
Quality Control
Albert R. Collinson, Ph.D................. 39 Vice President, Business Development
Robert W. Mendes, Ph.D.................... 58 Vice President, Regulatory Affairs
Ronald M. Scroggins....................... 54 Vice President, Sales and Marketing Planning
Diane Worrick............................. 44 Director of Human Resources
Other Members of the Board of Directors
Robert E. Baldini(1)...................... 66 Vice Chairman
Raymond F. Baddour, Ph.D.(1).............. 72 Director
Michael J.F. Du Cros(1)................... 59 Director
Thomas W. Janes(2)........................ 41 Director
Andre L. Lamotte, Sc.D.(2)................ 49 Director
Terrance McGuire(2)....................... 41 Director
Lee J. Schroeder(2)....................... 68 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Each officer serves at the discretion of the Board of Directors. There are
no family relationships among any executive officers, significant employees or
directors of the Company. A brief biography of each executive officer,
significant employee and director follows:
Emmett Clemente, Ph.D., founded the Company in 1989 and has served as a
director since 1989 and as Chairman of the Board since May 1996. From 1989 to
May 1996, Dr. Clemente also served as the Company's Chief Executive Officer. Dr.
Clemente served as the Director of Pharmaceutical Research for Fisons
Corporation, U.S., a pharmaceutical company ("Fisons"), from 1980 to 1989, and
as the Director of New Product Development and Acquisitions of Fisons from 1972
to 1980. From 1970 to 1972, Dr. Clemente served as Chief Scientist in the
Consumer Products Division of Warner-Lambert Company, a pharmaceutical company.
From 1967 to 1970, Dr. Clemente served as Senior Scientist of Richardson-Merrell
Company, a pharmaceutical company. Dr. Clemente received a B.S. in biology, an
M.S. in physiology and a Ph.D. in pharmacology from St. John's University.
Alan R. Fox, joined the Company as President, Chief Executive Officer and a
director in May 1996. Mr. Fox served as President of Mead Johnson Europe, an
infant formula and nutritional company, from 1991 to May 1996. From 1981 to
1991, Mr. Fox was President and General Manager of Mead Johnson Canada, an
infant formula and nutritional company. From 1968 to 1981, Mr. Fox served in
various positions, including as
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a Manager of Marketing and Sales for the Bristol Laboratories Division ("Bristol
Laboratories") of Bristol-Myers Squibb, Inc., ("Bristol-Myers Squibb") a
pharmaceutical company. Mr. Fox received a B.S. in economics and an M.B.A. from
the Wharton School, University of Pennsylvania.
John G. Bernardi, Vice President, Finance, joined the Company in June 1996.
Mr. Bernardi acted as an independent financial consultant from 1995 to June
1996. From 1990 to 1995, Mr. Bernardi served as the Vice President of
Administration and Finance for Vision-Science, Inc., a medical device company.
Mr. Bernardi received a B.S. in accounting from Bentley College and an M.B.A.
from New Hampshire College.
Gregory A. Vannatter, Vice President, Marketing, joined the Company in
October 1996. Mr. Vannatter served in various positions with Mead Johnson
Nutritionals Division of Bristol-Myers Squibb from 1988 to October 1996,
including most recently Director of Pediatric Global Marketing from 1995 to
September 1996 and Director of Infant Formula Marketing from 1991 to 1995. From
1986 to 1988, Mr. Vannatter served as Product Manager for Bristol Laboratories.
From 1975 to 1986, Mr. Vannatter served in various sales and marketing positions
with Pfizer Pharmaceuticals, a pharmaceutical company. Mr. Vannatter received a
B.S. in marketing from Ball State University and an M.B.A. from Indiana
University.
Mumtaz Ahmed, M.D., Ph.D., Vice President, Medical Affairs, joined the
Company in 1993. Dr. Ahmed served as Executive Director/Distinguished Research
and Development Physician at Ciba-Geigy Corporation, a pharmaceutical company
("Ciba-Geigy"), from 1982 to 1993. From 1979 to 1982, Dr. Ahmed served as a
Senior Investigator at Pfizer Inc., a pharmaceutical company. Dr. Ahmed received
a B.S. in biology and chemistry and an M.S. in Microbiology from University of
Karachi, Pakistan, an M.D. from UACJ School of Medicine, Juarez, Mexico, and a
Ph.D. in microbiology from Indiana University School of Medicine.
Aloysius O. Anaebonam, Ph.D., Vice President, Product Development and
Quality Control, joined the Company in 1991. Dr. Anaebonam served as a Section
Head in the Analytical/Stability Group for Fisons from 1986 to 1991. From 1981
to 1986, Dr. Anaebonam served as a Pharmaceutical Development Scientist for
Pfeiffer Pharmaceutical Sciences Laboratories at the Massachusetts College of
Pharmacy, which is engaged in pharmaceutical industry consulting. Dr. Anaebonam
received a B.Pharm. from the University of Nigeria and an M.S. and a Ph.D. in
industrial pharmacy from the Massachusetts College of Pharmacy.
Albert R. Collinson, Ph.D., Vice President, Business Development, joined
the Company in November 1996. Dr. Collinson served as Head of Scientific
Development, Office of Technology, of Berlex Laboratories, a pharmaceutical
company, from 1995 to November 1996. From 1993 to 1995, Dr. Collinson served as
Director of Business Development of Apoptosis Technology, Inc., biotechnology
company. From 1992 to 1995, Dr. Collinson served as Director, Business
Development and from 1988 to 1992 as Group Leader, Biochemistry, at ImmunoGen,
Inc., a biotechnology company. Dr. Collinson received a B.S. in biology and
chemistry from the University of Rhode Island and a Ph.D. in biochemistry from
Brandeis University.
Robert W. Mendes, Ph.D., Vice President, Regulatory Affairs, joined the
Company in 1992. Dr. Mendes served as a Professor of Industrial Pharmacy of the
Massachusetts College of Pharmacy from 1965 to 1992. From 1979 to 1992, Dr.
Mendes also served as Director of the Pfeiffer Pharmaceutical Sciences
Laboratories at the Massachusetts College of Pharmacy, an organization engaged
in pharmaceutical industry consulting. Dr. Mendes received a B.S. in pharmacy
from Northeastern University and an M.S. and a Ph.D. in pharmaceutics and
microbiology from the University of North Carolina.
Ronald M. Scroggins, Vice President, Sales and Marketing Planning, joined
the Company in 1990. Mr. Scroggins served as the Regional Sales Director of
Gynopharma, Inc., a gynecological and obstetrics company, from 1989 to 1990.
From 1986 to 1989, Mr. Scroggins served as Director, Product Management, at
Connaught Laboratories, Inc., a pediatric vaccine company. From 1984 to 1986,
Mr. Scroggins served as Group Product Manager for Key Pharmaceuticals, Inc., a
pharmaceutical company ("Key Pharmaceuticals"). From 1977 to 1984 and from 1965
to 1973, Mr. Scroggins held various sales and marketing positions at Sandoz,
Inc., a pharmaceutical company, and in the interim period from 1973 to 1977, he
served as Product Manager of Dorsey Laboratories, a pharmaceutical company. Mr.
Scroggins received a B.S. in biology from the University of Texas at El Paso.
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<PAGE> 51
Diane Worrick, Director of Human Resources, joined the Company in 1990. Ms.
Worrick served in various human resources positions at Fisons from 1976 to 1989,
last serving as Personnel Manager. Ms. Worrick received a B.B.A. from
Northeastern University.
Robert E. Baldini, Vice Chairman of the Board of Directors of the Company
since April 1996 and a director of the Company since 1993, has served as a
consultant to, and a director of, several private pharmaceutical and medical
device companies. Mr. Baldini served as Senior Vice President of Sales and
Marketing for Key Pharmaceuticals from 1982 to 1986. Following the acquisition
of Key Pharmaceuticals by Schering-Plough Corporation ("Schering-Plough") in
1986, he continued with Key Pharmaceuticals Division of Schering-Plough until
1995, last serving as its President. Mr. Baldini served as Executive Director of
Sales and Promotion of Ciba-Geigy from 1977 to 1982. Mr. Baldini also serves as
Vice Chairman of the Board of Directors of KOS Pharmaceuticals, Inc. Mr. Baldini
received a B.S. in marketing from Seton Hall University and an M.B.A. from New
York University.
Raymond F. Baddour, Ph.D., a director of the Company since 1989, has served
as the Lammot DuPont Professor of Chemical Engineering at the Massachusetts
Institute of Technology since 1973. Dr. Baddour is a co-founder and director of
Amgen Inc., a biotechnology company, Tekmat Corp., a specialty materials
company, Abcor, Inc., an ultra-filtration equipment company, and Amicon, Inc., a
specialty chemicals company. Dr. Baddour received a B.S. in chemical engineering
from the University of Notre Dame and an M.S. in chemical engineering practice
and an Sc.D. in chemical engineering from the Massachusetts Institute of
Technology.
Michael J.F. Du Cros, a director of the Company since 1993, has served as a
Partner of Atlas Venture, a venture capital firm, since 1993. Mr. Du Cros also
serves as a General Partner of Aspen Venture Partners, L.P., a limited
partnership formed to carry on the venture capital activities of 3i Ventures in
the United States, since 1991. From 1984 to 1988, Mr. Du Cros served as the
Chief Executive Officer of Protein Databases, Inc., a life science
instrumentation company. Mr. Du Cros received a B.Sc. in industrial chemistry
from the City University of London.
Thomas W. Janes, a director of the Company since January 1997, has served
as a Managing Director of Triumph Capital Group, Inc., a private equity money
management firm, since 1990 and as a General Partner of the Triumph-Connecticut
Limited Partnership, a private equity money management firm ("Triumph"), since
1993. Mr. Janes also serves as a director of Dairy Mart Convenience Stores, Inc.
and Alarmguard Holdings, Inc. Mr. Janes received a B.A. in history and
government from Harvard College and an M.B.A. from Harvard Business School.
Andre L. Lamotte, Sc.D., a director of the Company since 1989, has served
since 1989 as the Managing General Partner of Medical Science Ventures, L.P.,
the general partner of Medical Science Partners, L.P., the venture capital firm
founded by Harvard University. He served as General Manager of the Merieux
Institute, Inc., the U.S. affiliate of Institute Merieux and Pasteur Vaccines,
from 1983 to 1988. Dr. Lamotte has served as a director of OraVax, Inc., a
biotechnology company, since 1990. Dr. Lamotte received an M.S. in chemical
engineering and an Sc.D. in chemical engineering/chemistry from the
Massachusetts Institute of Technology and an M.B.A. from Harvard Business
School.
Terrance McGuire, a director of the Company since 1993, has served as a
founding General Partner of Polaris Venture Partners since 1996 and, as a
General Partner of Beta Partners Limited Partnership since 1989, both venture
capital firms. Since 1992, Mr. McGuire has also served as a General Partner of
Alta V Management Partners, L.P., which is the General Partner of Alta V Limited
Partnership ("Alta"), a venture capital fund associated with Burr, Egan, Deleage
& Co. He is a director of Integ, Incorporated, a diagnostic company, Cubist
Pharmaceuticals, Inc., a pharmaceutical company, and several private health care
companies. Mr. McGuire received a B.S. in physics and economics from Hobart
College, an M.S. in engineering from Dartmouth College and an M.B.A. from
Harvard Business School.
Lee J. Schroeder, a director of the Company since 1990, has served as the
President of Lee Schroeder and Associates, Inc., a company engaged in
pharmaceutical consulting, since 1985. From 1983 to 1985, Mr. Schroeder served
as the President of the Lincoln Wholesale Drug Company, a wholesale drug
company.
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<PAGE> 52
From 1981 to 1983 Mr. Schroeder was the Executive Vice President of Sandoz,
Inc., U.S., a pharmaceutical company. From 1974 to 1981, Mr. Schroeder served as
Vice President and General Manager of Dorsey Laboratories, a pharmaceutical
company. Mr. Schroeder serves as a director of Interneuron Pharmaceuticals,
Inc., a pharmaceutical company, MGI Pharmaceuticals, Inc., a pharmaceutical
company, and Celgene Corporation, a pharmaceutical company.
Following this offering, the Board of Directors will be divided into three
classes, each of whose members will serve for a staggered three-year term. The
Board will consist of three Class I Directors (Messrs. Baddour, Du Cros and
Schroeder), three Class II Directors (Messrs. Fox, Baldini and Janes) and three
Class III Directors (Messrs. Clemente, Lamotte and McGuire). At each annual
meeting of stockholders, a class of directors will be elected for a three-year
term to succeed the directors of the same class whose terms are then expiring.
The terms of the Class I Directors, Class II Directors and Class III Directors
will expire upon the election and qualification of successor directors at the
annual meeting of stockholders held during the calendar years 1998, 1999 and
2000, respectively.
Each director other than Thomas W. Janes has been nominated and elected to
the Board of Directors pursuant to a voting agreement among certain of the
Company's stockholders. This agreement will terminate upon the consummation of
this offering.
Thomas W. Janes has been nominated and elected to the Board of Directors
pursuant to the terms of a Securities Purchase Agreement dated January 31, 1997
(the "Triumph Agreement") between the Company, Triumph and certain of the
Company's warrantholders. This agreement will continue until the later of (i)
the payment of the convertible subordinated secured notes issued to Triumph and
certain other parties on January 31, 1997 and (ii) two and one-half years
following the date of the closing of this offering. See "Certain Transactions."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has a Compensation Committee, which makes
recommendations concerning salaries and incentive compensation for employees of
and consultants to the Company, establishes and approves salaries and incentive
compensation for executive officers and administers the Company's stock option
and other equity incentive plans (including granting stock options and awards to
executive officers and directors pursuant to such plans and making
recommendations to the full Board of Directors as to such grants and awards to
other employees of the Company), and an Audit Committee, which reviews the
results and scope of the audit and other services provided by the Company's
independent public accountants.
COMPENSATION OF DIRECTORS
Messrs. Baldini and Schroeder are paid $6,000 per annum as compensation for
serving on the Board of Directors. No other directors currently are compensated
for serving on the Board of Directors. All of the directors are reimbursed for
their expenses incurred in connection with their attendance at Board and
committee meetings.
In March 1997, the Company adopted the 1997 Director Stock Option Plan (the
"Director Plan"). Under the terms of the Director Plan, options to purchase
15,000 shares of Common Stock will be granted to non-employee directors upon the
date on which the initial public offering price is determined (the "Pricing
Date") at the initial public offering price. Thereafter, options to purchase
15,000 shares of Common Stock will be granted to each new director upon his or
her initial election to the Board of Directors. Annual options to purchase 5,000
shares of Common Stock will be granted to each non-employee director on May 1 of
each year commencing in 1998. All options will vest on the first anniversary of
the date of grant. However, the exercisability of these options will be
accelerated upon the occurrence of a change in control of the Company (as
defined in the Director Plan). A total of 300,000 shares of Common Stock may be
issued upon the exercise of stock options granted under the Director Plan. With
the exception of the options granted on the Pricing Date, the exercise price of
all options granted under the Director Plan will equal the closing price of the
Common Stock on the date of grant.
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The Company is a party to a consulting agreement with Mr. Robert E.
Baldini, the Company's Vice Chairman, dated April 1, 1996. Pursuant to this
agreement, Mr. Baldini provides certain consulting services as requested by the
Company in return for compensation of $1,500 per day. Upon execution of this
agreement, the Company granted Mr. Baldini an option under the Company's 1992
Equity Incentive Plan exercisable for 85,000 shares of Common Stock vesting in
four equal annual installments. Mr. Baldini was paid $7,500 in consulting fees
in 1996 pursuant to this agreement. This consulting agreement expires on April
1, 2000 unless extended by the parties.
SCIENTIFIC ADVISORS
The Company has a number of scientific advisors with recognized expertise
in medical areas relevant to pediatric patients and drug delivery technologies
who advise the Company on an as-needed basis. These scientific advisors are
employed by employers other than the Company, primarily academic institutions,
and may have commitments to or consulting or advisory agreements with other
entities that may limit their availability to the Company. These entities may
also be competitors of Ascent. The Company's scientific advisors are compensated
for their services pursuant to consulting agreements between the individuals and
the Company. A brief biography of each of the Company's scientific advisors, as
of March 31, 1997, follows:
Elazer Edelman, M.D., has served as a Visiting Scientist with the
Massachusetts Institute of Technology since 1985. In addition, since 1989, Dr.
Edelman has served as Instructor in the Department of Medicine at Brigham and
Women's Hospital, Boston, Massachusetts, and Harvard Medical School. Dr.
Edelman, whose specialty is transdermal delivery, received an M.D. from Harvard
Medical School.
Ho-Leung Fung, Ph.D., has served as Professor of Pharmaceutics with the
State University of New York, Buffalo, New York, since 1970. Dr. Fung, whose
specialty is controlled-release technologies, received a Ph.D. in Analytical
Pharmaceutical Chemistry from the University of Kansas.
Donald Goldmann, M.D., has served as Chief of Janeway Medical Service since
1995 and Medical Director, Quality Improvement since 1989 at the Children's
Hospital, Boston, Massachusetts. Dr. Goldmann, whose specialty is pediatrics,
has served as Professor in Pediatrics at Harvard Medical School since 1978. Dr.
Goldmann received an M.D. from Harvard Medical School.
David Grinder, R.Ph., M.S., has served as the Director of Pharmacy with All
Children's Hospital, St. Petersburg, Florida, since 1985. Mr. Grinder, whose
specialty is hospital pharmacy, received a B.S. in pharmacy from the University
of Montana and an M.S. in Management from the University of South Florida.
Amal Kurban, M.D., has served as Professor of Dermatology with the
Department of Dermatology of the Boston University School of Medicine since
1985. Dr. Kurban, whose specialty is pediatrics, received an M.D. from the
American University in Beirut.
Edward O'Rourke, M.D., has served as Associate in Medicine, Infectious
Disease, with the Children's Hospital, Boston, Massachusetts, since 1984. Dr.
O'Rourke, whose specialty is pediatrics, received an M.D. from Boston University
School of Medicine.
Ricky Richardson, M.D., has served as Executive Vice President with WCH
International, Inc. of the WellCare Group, a telemedicine company, since 1992.
Dr. Richardson, whose specialty is pediatrics, received an M.D. from London
University (Middlesex Hospital Medical School).
MEDICAL ADVISORY BOARD
The Company has a number of medical advisors with recognized expertise in
relevant medical specialities of importance to the Company who advise the
Company on an as-needed basis by suggesting and evaluating clinical study
protocols, marketing plans and sales force training programs. These medical
advisors are employed by employers other than the Company, primarily academic
institutions, and may have commitments to or consulting or advisory agreements
with other entities that may limit their availability to the Company. These
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entities may also be competitors of Ascent. A brief biography of each of the
Company's medical advisors, as of March 31, 1997, follows:
Charles J. Cote, M.D., has served as Vice Chairman, Director of Research,
department of Pediatric Anesthesia at the Children's Memorial Hospital, Chicago,
Illinois, since 1993. Dr. Cote has served as Professor of Clinical Anesthesia at
Northwestern University Medical School since 1993. Dr. Cote, whose specialty is
pediatric anesthesiology, received an M.D. from Albany Medical College.
Heinz F. Eichenwald, M.D., has served as the William Buchanon Professor of
Pediatrics with the University of Texas Southwestern Medical Center at Dallas
since 1982. Dr. Eichenwald, whose specialty is pediatric infectious disease,
received an M.D. from Cornell University Medical Center.
Richard J. Grand, M.D., has served as Professor of Pediatrics with the
Tufts University School of Medicine, Boston, Massachusetts, since 1983. Dr.
Grand, whose specialty is pediatric gastroenterology, received an M.D. from New
York University School of Medicine.
Ronald C. Hansen, M.D., has served as Professor of Internal Medicine and
Pediatrics with the University of Arizona, Tucson, Arizona, since 1991. Dr.
Hansen, whose specialty is pediatric dermatology, received an M.D. from
University of Iowa, Iowa College of Medicine.
Sheldon L. Kaplan, M.D., has served as Attending Pediatrician with the
Texas Children's Hospital, Houston, Texas, since 1987. Dr. Kaplan, whose
specialty is pediatric infectious disease, received an M.D. from the University
of Missouri.
Alan Nauss, M.D., has served as Pediatrician with the Lahey Clinic Medical
Center, Burlington, Massachusetts, since 1983. Dr. Nauss, whose specialty is
pediatrics, received an M.D. from the University of Pennsylvania.
David G. Tinkelman, M.D., has served as Vice President of Healthcare
Initiatives with the National Jewish Center for Immunology and Respiratory
Medicine, Denver, Colorado, since 1995. Dr. Tinkelman, whose specialty is
pediatric allergy, received an M.D. from Hahnemann Medical School.
Lonnie K. Zeltzer, M.D., has served as Professor of Pediatrics with the
UCLA School of Medicine, Los Angeles, CA, since 1988. Dr. Zeltzer, whose
specialty is pediatric pain, received an M.D. from the University of Cincinnati
College of Medicine.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to or earned by the
following individuals for services rendered to the Company in all capacities
during the year ended December 31, 1996: (i) the Chief Executive Officer (the
"CEO") of the Company as of December 31, 1996 and (ii) the former CEO (the CEO
and the former CEO are hereinafter referred to as the "Named Executive
Officers"). No other executive officer of the Company received salary and bonus
in fiscal 1996 in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------- ---------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION(1) SALARY BONUS COMPENSATION(2) OPTIONS
- --------------------------------------- -------- ------- --------------- ---------------
<S> <C> <C> <C> <C>
Emmett Clemente, Ph.D. ................ $190,500 $41,600 $14,119 --
Chairman of the Board(3)
Alan R. Fox............................ 135,000 -- -- 153,000
President and Chief Executive
Officer(4)
</TABLE>
- ---------------
(1) In accordance with the rules of the SEC, this table, the stock option grant
table and the stock option exercise table which follow present information
concerning the Company's former CEO and its current CEO for the year ended
December 31, 1996. John G. Bernardi, who joined the Company as Vice
President, Finance in June 1996, currently
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<PAGE> 55
receives an annual salary of $125,000. On August 28, 1996, pursuant to the
Company's 1992 Equity Incentive Plan (the "1992 Plan"), Mr. Bernardi was
granted incentive stock options exercisable for 29,750 shares of Common
Stock at an exercise price of $2.35 per share. Gregory A. Vannatter, who
joined the Company as Vice President, Marketing in October 1996, currently
receives an annual salary of $150,000. On October 15, 1996, pursuant to the
1992 Plan, Mr. Vannatter was granted incentive stock options exercisable for
29,750 shares of Common Stock at an exercise price of $2.35 per share. The
stock options granted to Messrs. Bernardi and Vannatter become exercisable
in four equal annual installments commencing on the first anniversary of the
date of commencement of such officer's employment with the Company.
(2) Reflects the dollar value of insurance premiums paid by the Company with
respect to life insurance for the benefit of the Named Executive Officers.
(3) Dr. Clemente served as the Chief Executive Officer of the Company from its
incorporation until May 1996, when he was succeeded by Mr. Fox.
(4) Mr. Fox joined the Company as Chief Executive Officer in May 1996, and the
amounts indicated in this table reflect his actual compensation for the year
ended December 31, 1996. Mr. Fox currently receives an annual salary of
$200,000.
The following table sets forth certain information concerning grants of
stock options made during fiscal 1996 to each of the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
------------------------------------------------ REALIZABLE
PERCENT VALUE AT
OF TOTAL ASSUMED ANNUAL
OPTIONS RATES OF STOCK
NUMBER OF GRANTED TO PRICE APPRECIATION
SECURITIES EMPLOYEES EXERCISE FOR OPTION TERM(2)
UNDERLYING IN FISCAL PRICE PER EXPIRATION -------------------
NAME OPTIONS YEAR SHARE DATE(1) 5% 10%
- ------------------------------------- ---------- ---------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Emmett Clemente, Ph.D................ -- -- -- -- -- --
Alan R. Fox.......................... 153,000(3) 40.1% $2.35 6/26/06 $226,440 $573,748
</TABLE>
- ---------------
(1) These options were granted to Mr. Fox on June 26, 1996. The expiration date
of an option is the tenth anniversary of the date on which the option was
originally granted.
(2) The amounts shown on this table represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. These gains are based on assumed rates of stock appreciation of 5% and
10%, compounded annually from the date the respective options were granted
to their expiration date. The gains shown are net of the option exercise
price, but do not include deductions for taxes or other expenses associated
with the exercise. Actual gains, if any, on stock option exercises will
depend on the future performance of the Common Stock, the option holder's
continued employment through the option period, and the date on which the
options are exercised.
(3) These options become exercisable in four equal annual installments
commencing on the first anniversary of the date of commencement of his
employment with the Company and are intended to qualify as incentive stock
options.
The following table sets forth certain information concerning the number
and value of unexercised options held by each of the Named Executive Officers on
December 31, 1996. No options were exercised by these individuals during fiscal
1996.
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Emmett Clemente, Ph.D...................... 141,100 3,400 $10,000 --
Alan R. Fox................................ -- 153,000 -- --
</TABLE>
- ---------------
(1) The value of the unexercised, in-the-money options on December 31, 1996 is
based on the difference between the fair market value of the shares as of
such date ($2.35), and the per share option exercise price, multiplied by
the number of shares of Common Stock underlying the options.
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<PAGE> 56
Employment Agreement
The Company is a party to an employment agreement with Dr. Emmett Clemente
for the period commencing March 16, 1994 and ending March 15, 1999, unless
extended by mutual agreement of the Company and Dr. Clemente. Under this
agreement, Dr. Clemente is entitled to receive an annual base salary of
$170,000, as it may be adjusted, and an annual bonus of up to 30% of his annual
base salary based upon the attainment of certain performance criteria set by the
Board of Directors annually (with the potential to exceed 30% of his annual base
salary, at the Board's discretion, in the event that the Company achieves
break-even cash flow). In addition, as part of Dr. Clemente's annual
compensation review, the Board of Directors is required to consider granting Dr.
Clemente a stock option to acquire additional shares of Common Stock. In the
event Dr. Clemente's employment is terminated by the Company without cause, Dr.
Clemente will continue to receive his annual base salary for the one-year period
commencing on the effective date of termination. In addition, if the Company
terminates the employment of Dr. Clemente without cause, the Company is required
to continue to provide Dr. Clemente with benefits for the 18 month period
following the effective date of termination. Any payments or benefits to be
provided by the Company in the event of its termination of Dr. Clemente's
employment without cause will be reduced dollar for dollar by any payments or
benefits received by Dr. Clemente from any other employer during the period in
which the Company is required to provide such payments or benefits. Following
the cessation or termination of his employment by the Company, Dr. Clemente has
agreed that, for a period of two years, he will not compete with the Company
with respect to any products developed, produced, marketed or sold by the
Company during his tenure with the Company.
EMPLOYEE BENEFIT PLANS
1992 Equity Incentive Plan
The Company's 1992 Plan, as amended, was adopted by the Company in
September 1992. The 1992 Plan provides for the grant of stock options and awards
to purchase shares of restricted stock to employees, officers and directors of,
and consultants and advisors to, the Company. Under the 1992 Plan, the Company
may grant incentive stock options and non-statutory stock options. Incentive
stock options may only be granted to employees of the Company. Effective upon
the closing of this offering, a total of 1,350,000 shares of Common Stock may be
issued upon the exercise of options or upon the grant of awards to purchase
restricted stock under the 1992 Plan. As of March 31, 1997, options to purchase
a total of 634,736 shares of Common Stock were outstanding under the 1992 Plan,
and options to purchase a total of 530 shares of Common Stock had been
exercised. As of March 31, 1997, no awards to purchase shares of restricted
stock had been granted under the 1992 Option Plan. In addition, the maximum
number of shares with respect to which options or awards may be granted to any
employee under the plan shall not exceed 500,000 shares of Common Stock in any
year.
The 1992 Plan is administered by the Compensation Committee of the Board of
Directors. Subject to the provisions of the 1992 Plan, the Compensation
Committee has the authority to select the participants to whom options or awards
to purchase shares of restricted stock are granted and determine the terms of
each option or award, including (i) the number of shares of Common Stock subject
to such option or award, (ii) when an option becomes exercisable, (iii) the
option exercise price or award purchase price, which, in the case of incentive
stock options, must be at least 100% (110% in the case of incentive stock
options granted to a stockholder owning in excess of 10% of the Company's Common
Stock) of the fair market value of the Common Stock as of the date of grant,
(iv) the duration of the option (which, in the case of incentive stock options,
may not exceed ten years), and (v) in the case of awards to purchase restricted
stock, the duration of certain restrictions on the transfer of such stock.
Payment of the option exercise price may be made in cash, shares of Common
Stock, a combination of cash or stock or by any other method (including the
delivery of a promissory note payable on terms specified by the Compensation
Committee) approved by the Compensation Committee. Except as may be approved by
the Board of Directors, stock options and awards to purchase shares of
restricted stock are not assignable or
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<PAGE> 57
transferrable except by will and the laws of descent and distribution and, in
the case of non-statutory options, pursuant to a qualified domestic relations
order.
As of March 31, 1997, the Company had 24 full-time employees, all of whom
were eligible to participate in the 1992 Plan. The number of individuals
receiving stock options or awards to purchase shares of restricted stock varies
from year to year depending on various factors, such as the number of promotions
and the Company's hiring needs during the year, and thus the Company cannot now
determine option or award recipients.
The Compensation Committee may, in its sole discretion, include additional
provisions in any option or award granted or made under the 1992 Plan, including
without limitation restrictions on transfer, repurchase rights, commitments to
pay cash bonuses, to make, arrange for or guaranty loans or to transfer other
property to optionees upon exercise of options, or such other provisions as
shall be determined by the Compensation Committee, so long as not inconsistent
with the 1992 Plan or with applicable law. The Compensation Committee may also,
in its sole discretion, accelerate or extend the date or dates on which all or
any particular option or options granted under the 1992 Plan may be exercised.
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Company in March 1997 and becomes effective upon the closing of
this offering. The Purchase Plan authorizes the issuance of up to a total of
500,000 shares of Common Stock to participating employees.
All employees of the Company, including directors of the Company who are
employees and all employees of any participating subsidiaries, whose customary
employment is more than 20 hours per week and for more than five months in any
calendar year are eligible to participate in the Purchase Plan. Employees who
would immediately after the grant own 5% or more of the total combined voting
power or value of the stock of the Company or any subsidiary are not eligible to
participate. Following this offering, all of the Company's full-time employees
as of March 31, 1997 would have been eligible to participate in the Purchase
Plan.
On the first day of a designated payroll deduction period (the "Offering
Period"), the Company will grant to each eligible employee who has elected to
participate in the Purchase Plan an option to purchase shares of Common Stock as
follows: the employee may authorize an amount (a whole percentage from 1% to 10%
of such employee's regular pay) to be deducted by the Company from such pay
during the Offering Period. On the last day of the Offering Period, the employee
is deemed to have exercised the option, at the option exercise price, to the
extent of accumulated payroll deductions. Under the terms of the Purchase Plan,
the option price is an amount equal to 85% (or such higher percentage as is
determined by the Board of Directors) of the fair market value per share of the
Common Stock on either the first day or the last day of the Offering Period,
whichever is lower. In no event may an employee purchase in any one Offering
Period a number of shares which is more than 15% of the employee's annualized
base pay divided by 85% (or such higher percentage as is determined by the Board
of Directors) of the market value of a share of Common Stock on the commencement
date of the Offering Period. The Compensation Committee may, at its discretion,
choose an Offering Period of 12 months or less for each of the Offerings and
choose a different Offering Period for each Offering.
If an employee is not a participant on the last day of the Offering Period,
such employee is not entitled to exercise any option, and the amount of such
employee's accumulated payroll deductions will be refunded. An employee's rights
under the Purchase Plan terminate upon voluntary withdrawal from the Purchase
Plan at any time, or when such employee ceases employment for any reason, except
that upon termination of employment because of death, the employee's beneficiary
has certain rights to elect to exercise the option to purchase the shares which
the accumulated payroll deductions in the participant's account would purchase
at the date of death.
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<PAGE> 58
401(k) Savings and Retirement Plan
On August 28, 1996 the Company adopted a 401(k) Savings and Retirement Plan
(the "401(k) Plan"), a tax-qualified plan covering all of its employees who are
at least 20.5 years of age and who have completed at least three months of
service to the Company. Each employee may elect to reduce his or her current
compensation by up to 15%, subject to the statutory limit (a maximum of $9,500
in 1997) and have the amount of the reduction contributed to the 401(k) Plan.
The 401(k) Plan provides that the Company may, as determined from time to time
by the Board of Directors, provide a matching cash contribution. In addition,
the Company may contribute an additional amount to the 401(k) Plan, as
determined by the Board of Directors, which will be allocated based on the
proportion of the employee's compensation for the plan year to the aggregate
compensation for the plan year for all eligible employees. Upon termination of
employment, a participant may elect a lump sum distribution or, if his or her
total amount in the 401(k) Plan is greater than $3,500, may elect to receive
benefits as retirement income.
Executive Bonus Plan
Effective January 1, 1997, the Company adopted an Executive Bonus Plan,
which provides for the payment of bonuses to those officers and key employees
reporting directly to the Chief Executive Officer or Chairman of the Company.
Pursuant to the Executive Bonus Plan, each eligible participant is entitled to a
bonus of between 1.5% and 18% of his or her annual salary based upon the
Company's achievement of 95% or greater of its financial target for the year. In
addition, upon achievement of 95% or greater of the financial target for the
year, each eligible participant may receive an additional discretionary
performance bonus of up to 5% of salary.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Company's Compensation Committee are Thomas W.
Janes, Andre L. Lamotte, Sc.D., Terrance McGuire and Lee J. Schroeder. Messrs.
Janes (through a profit-sharing plan) and Lamotte and entities affiliated with
Messrs. Janes, Lamotte and McGuire have made various equity and convertible debt
investments in the Company since January 1, 1994. See "Certain Transactions."
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<PAGE> 59
CERTAIN TRANSACTIONS
Since January 1, 1994, the Company has engaged in the following
transactions with the following directors, officers and stockholders who
beneficially own more than 5% of the outstanding Common Stock of the Company
("5% Stockholders"), and affiliates of such directors, officers and 5%
Stockholders (collectively, the "Affiliates").
On June 18, 1995, the Company issued warrants exercisable for an aggregate
of 21,647 shares of Series D Convertible Preferred Stock in replacement of
warrants exercisable for the same number of shares of Series D Convertible
Preferred Stock which expired on such date. These warrants have an exercise
price of $9.00 per share and expire on June 18, 1997. Medical Science Partners,
L.P., was issued warrants exercisable for 9,804 of such shares. Upon the closing
of this offering, these warrants will be exercisable for 8,333 shares of Common
Stock at an exercise price of $10.59 per share.
On July 13, 1995 and August 16, 1995, the Company issued and sold an
aggregate of 733,371 shares of its Series E Convertible Preferred Stock at a
purchase price of $6.00 per share and issued warrants exercisable for an
aggregate of 103,891 shares of Common Stock at an exercise price of $10.59 per
share (the "Series E Common Warrants"). On June 28, 1996, December 18, 1996,
February 3, 1997, February 19, 1997 and February 28, 1997, the Company issued
and sold an aggregate of 1,915,765 shares of its Series F Convertible Preferred
Stock at a purchase price of $6.50 per share and issued warrants exercisable for
an aggregate of 651,334 shares of Common Stock at a purchase price of $7.65 per
share (the "Series F Common Warrants"). In addition, on February 28, 1997, the
Company issued a warrant exercisable for 10,200 shares of Common Stock at an
exercise price of $8.24 per share to Banque Paribas as consideration for
placement agent services in connection with the sale of shares of Series F
Convertible Preferred Stock. The purchasers of the shares of Series E
Convertible Preferred Stock, the Series E Common Warrants, the Series F
Convertible Preferred Stock and the Series F Common Warrants included, among
others, the following directors, officers and Affiliates of the Company:
<TABLE>
<CAPTION>
SERIES E SERIES F
SHARES OF COMMON SHARES OF COMMON TOTAL
NAME SERIES E WARRANTS SERIES F WARRANTS CONSIDERATION
- -------------------------------------- --------- -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Alta V Limited Partnership............ 164,935 23,365 190,308 64,702 $ 2,226,612
Atlas Venture Fund II, L.P............ 125,000 17,708 76,923 26,153 1,250,000
Customs House Partners................ 1,733 245 2,000 680 23,398
Alan R. Fox........................... -- -- 11,538 3,921 74,997
Bonnie S. Fox......................... -- -- 1,538 522 9,997
Andre L. Lamotte, Sc.D. .............. -- -- 7,692 2,614 49,998
Medical Science Partners, L.P. ....... -- -- 76,923 26,153 500,000
Medical Science Partners II, L.P. .... 83,334 11,805 -- -- 500,004
MSP Heathcare Opportunities Investment
Pool................................ -- -- 153,847 52,305 1,000,006
New York Life Insurance Company....... 125,000 17,708 346,153 117,691 2,999,995
Paribas Principal, Inc................ -- -- 461,538 156,922 2,999,997
Gregory A. Vannatter.................. -- -- 7,692 2,614 49,998
</TABLE>
Upon the closing of this offering, each share of Series E and Series F
Convertible Preferred Stock will automatically convert into 0.85 shares of
Common Stock. The number of shares of Common Stock issuable upon exercise of the
Series F Common Warrants and the exercise price of such warrants will be
adjusted upon the consummation of this offering pursuant to the terms of the
Series F Common Warrants. In addition, the Series F Common Warrants and the
warrant issued to Banque Paribas contain a cashless exercise feature. See
"Description of Capital Stock."
On January 31, 1997, the Company entered into the Triumph Agreement with
Triumph and certain other purchasers identified therein (the "Triumph
Purchasers"), pursuant to which the Company agreed to issue convertible
subordinated secured notes (the "Triumph Notes") in an aggregate amount of
$7,000,000 and warrants exercisable for an aggregate of 561,073 and 218,195
shares of Common Stock at per share exercise prices of $0.01 and $5.29,
respectively, (the "Triumph Warrants"). Upon execution of the Triumph Agreement,
the Company issued Triumph Notes in aggregate principal amount of $2,000,000 and
warrants exercisable for an aggregate of 224,429 shares of Common Stock at a per
share exercise price of $0.01. The Triumph Agreement, as amended, provides that,
upon the earlier of (i) the Company's receipt of final FDA
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<PAGE> 60
NDA approval for Primsol trimethoprim solution and (ii) the closing of this
offering, the Company shall issue additional convertible subordinated secured
notes to the Triumph Purchasers in an aggregate amount of $5,000,000 and
warrants exercisable for an aggregate of 336,644 shares of Common Stock at a per
share exercise price of $0.01 and warrants exercisable for an aggregate of
218,195 shares of Common Stock at a per share exercise price of $5.29.
Through a profit-sharing plan, Thomas W. Janes purchased $21,148 of the
Triumph Notes currently outstanding and Triumph Warrants exercisable for 2,404
shares of Common Stock at an exercise price of $0.01 per share (for total
consideration of $21,148) and will be required to purchase $53,571 of the
additional $5,000,000 of Triumph Notes, and additional Triumph Warrants
exercisable for 3,606 shares of Common Stock at an exercise price of $0.01 per
share and 2,337 shares of Common Stock at an exercise price of $5.29 per share
to be issued by the Company (for total consideration of $53,571).
Except as described below, the Triumph Notes mature on January 31, 2002.
Except as described below the Triumph Notes bear no interest through January 31,
1999 and bear interest at a rate of 7%, 8% and 9% interest for each of the three
years thereafter, respectively. Ascent may redeem the Triumph Notes by paying
100% of the outstanding principal and accrued interest at any time. Upon a
change in control of the Company, as defined in the Triumph Agreement, the
holders of the Triumph Notes may elect to have the Triumph Notes purchased by
the Company at 100% of the outstanding principal plus accrued interest. The
Triumph Notes are secured by a lien on all of the Company's assets, prohibit the
payment of dividends by the Company and, subject to certain exceptions,
(including for up to $6,000,000 of senior secured bank financing and $5,500,000
of secured purchase money financing in connection with the planned acquisition
of the Feverall product line) prohibit the incurrence of additional
indebtedness. Upon completion of this offering, the Company may either redeem
all of the outstanding Triumph Notes for their stated principal amount or all of
such Triumph Notes will amortize in eight equal quarterly principal payments and
require quarterly interest payments on the unpaid principal balance, at a rate
equal to the lesser of ten percent or 3.5% over the prime rate, with the first
quarterly payment of principal and interest due six months after the closing of
this offering. In addition, for a period of two years following the closing of
this offering, the holders of the Triumph Notes will have the right to convert
the Triumph Notes into such number of shares of Common Stock as is equal to the
outstanding principal of such Triumph Notes divided by the per share Price to
Public in this offering (subject to certain requirements as to the minimum
amount to be so converted as provided in the Triumph Agreement). Assuming an
initial public offering price of $12.00 per share, the full $7,000,000 principal
amount of the Triumph Notes would be convertible into an aggregate of 583,332
shares of Common Stock.
The Triumph Agreement also provides that, until the later of (i) the
payment of all amounts outstanding on the Triumph Notes and (ii) two and
one-half years after the date of this offering, the Company shall use its best
efforts to cause the number of members of the Board of Directors to be fixed at
nine and to cause the nominee of the holders of a majority of the shares
issuable upon exercise of the Triumph Warrants to be nominated, elected and
maintained as a director of the Company.
Certain persons and entities, including the purchasers of the Company's
Series E and Series F Convertible Preferred Stock and related warrants and the
holders of the Triumph Warrants and Triumph Notes listed above are entitled to
certain rights with respect to the registration under the Securities Act of
certain shares of the Company's Common Stock, including shares of Common Stock
that may be acquired pursuant to the conversion of the Convertible Preferred
Stock or the Triumph Notes or the exercise of certain options or warrants under
the terms of agreements among the Company and such persons and entities. For a
description of such rights, see "Shares Eligible for Future Sale."
For a description of the employment agreement between the Company and its
Chairman, see "Management -- Executive Compensation." For a description of stock
options granted to certain directors of the Company, see
"Management -- Compensation of Directors." For a description of the relationship
between certain directors of the Company and certain of the Affiliates, see
"Management -- Executive Officers, Significant Employees and Directors," and for
a description of the consulting arrangement between the Company and its Vice
Chairman, see "Management -- Compensation of Directors."
The Company believes that the securities issued in the transactions
described above were sold at their then fair market value and that the terms of
the transactions described above were no less favorable than the Company could
have obtained from unaffiliated third parties.
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<PAGE> 61
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of March 31, 1997 (assuming the
Preferred Stock Conversion), and as adjusted to reflect the sale of the shares
of Common Stock offered hereby and the issuance of an additional $5,000,000 of
Triumph Notes no later than the closing of this offering, by (i) each person or
entity known to the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
NUMBER OF SHARES ----------------------------------
BENEFICIALLY BEFORE THE
OWNED(1) OFFERING AFTER THE OFFERING(2)
---------------- ---------- ---------------------
<S> <C> <C> <C>
5% STOCKHOLDERS
Medical Science Partners Group................... 1,110,024(3) 23.4% 16.1%
20 William Street, Suite 250
Wellesley, MA 02181
Funds affiliated with Burr, Egan, Deleage &
Co. ........................................... 724,674(4) 15.2 10.4
One Post Office Square
Boston, MA 02109
New York Life Insurance Company.................. 701,156(5) 14.6 9.7
51 Madison Avenue
New York, NY 10010
Paribas Group.................................... 559,429(6) 11.6 7.4
c/o White & Case
1155 Avenue of the Americas
New York, NY 10036
Atlas Venture Fund II, L.P. ..................... 463,411(7) 9.8 6.8
222 Berkeley Street
Boston, MA 02116
Triumph-Connecticut Limited Partnership.......... 329,639(8) 6.6 14.7(9)
60 State Street
Boston, MA 02109
EXECUTIVE OFFICERS AND DIRECTORS(10)
Raymond F. Baddour, Ph.D. ....................... 261,537(11) 5.6 3.8
Robert E. Baldini................................ 55,250(12) * *
Emmett Clemente, Ph.D............................ 312,800(13) 6.5 4.6
Michael J.F. Du Cros............................. 463,411(14) 9.8 6.8
Alan R. Fox...................................... 53,807(15) 1.1 *
Thomas W. Janes.................................. 333,829(16) 6.7 14.9(17)
Andre L. Lamotte, Sc.D........................... 1,119,176(18) 23.5 16.2
Terrance McGuire................................. 724,674(19) 15.2 10.4
Lee J. Schroeder................................. 8,500 * *
All directors and executive officers as a group
(11 persons)................................... 3,342,136(20) 60.0 49.6(21)
</TABLE>
- ---------------
* Represents less than 1% of the outstanding Common Stock.
(1) Each stockholder has sole voting and investment power with respect to the
shares listed, except as otherwise noted. Shares of Common Stock which an
individual or group has a right to acquire within the 60-day period
following March 31, 1997 pursuant to the exercise of options or warrants
are deemed to be outstanding for the purposes of computing the percentage
ownership of such individual or group, but are not deemed to be outstanding
for the purpose of computing the percentage ownership of any other person
shown in the table.
(2) Assumes no cashless exercise of outstanding warrants and an initial public
offering price of $12.00 per share in this offering. See "Description of
Capital Stock."
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<PAGE> 62
(3) Consists of 844,312 shares held by Medical Science Partners, L.P. ("MSP")
(including 48,652 shares issuable upon the exercise of warrants within 60
days of March 31, 1997), 82,638 shares held by Medical Science Partners II,
L.P. ("MSP II") (including 11,805 shares issuable upon the exercise of
warrants within 60 days of March 31, 1997) and 183,074 shares held by MSP
Healthcare Opportunities Investment Pool ("MSP HOIP") (including 52,305
shares issuable upon the exercise of warrants within 60 days of March 31,
1997). MSP, MSP II and MSP HOIP are affiliates.
(4) Includes 582,341 shares and 134,798 shares issuable upon the exercise of
warrants within 60 days of March 31, 1997, beneficially owned by Alta V
Limited Partnership. Also includes 6,119 shares and 1,416 shares issuable
upon the exercise of warrants within 60 days of March 31, 1997,
beneficially owned by Customs House Partners. The respective general
partners of each of these funds exercise sole voting and investment power
with respect to the shares held by the funds.
(5) Includes 159,010 shares issuable upon the exercise of warrants within 60
days of March 31, 1997.
(6) Consists of 549,229 shares held by Paribas Principal, Inc. (including
156,922 shares issuable upon the exercise of warrants within 60 days of
March 31, 1997) and 10,200 shares issuable upon the exercise of warrants
held by Banque Paribas within 60 days of March 31, 1997. Banque Paribas and
Paribas Principal, Inc. are affiliates.
(7) Includes 79,277 shares issuable upon the exercise of warrants within 60
days of March 31, 1997.
(8) Includes 140,476 shares of Common Stock issuable upon conversion of the
Triumph Notes outstanding at March 31, 1997 (assuming an initial public
offering price of $12.00 per share) held by Triumph and 189,163 shares of
Common Stock issuable upon the exercise of the Triumph Warrants held by
Triumph which are exercisable within 60 days of March 31, 1997.
(9) Includes the shares described in note (8). Also includes an additional
351,190 shares of Common Stock issuable upon conversion of additional
Triumph Notes (assuming an initial public offering price of $12.00 per
share) and an additional 467,653 shares of Common Stock issuable upon the
exercise of additional Triumph Warrants within 60 days of March 31, 1997 to
be held by Triumph upon the Company's issuance of an additional $5,000,000
of Triumph Notes no later than the closing of this offering.
(10) The address for each director and officer of the Company is c/o Ascent
Pediatrics, Inc., 187 Ballardvale Street, Suite B125, Wilmington, MA 01887.
(11) Includes 26,153 shares issuable upon the exercise of warrants within 60
days of March 31, 1997.
(12) Consists of 55,250 shares issuable upon the exercise of options within 60
days of March 31, 1997.
(13) Includes 142,800 shares issuable upon the exercise of options within 60
days of March 31, 1997.
(14) All of such shares are held by Atlas Venture Fund II, L.P. ("Atlas
Venture") (including 79,277 shares issuable upon the exercise of warrants).
Mr. Du Cros is a Partner of Atlas Venture and may be considered the
beneficial owner of the shares owned by Atlas Venture, although Mr. Du Cros
disclaims beneficial ownership, except as to his pecuniary interest
therein.
(15) Includes 3,921 shares issuable upon the exercise of warrants and 38,250
shares issuable upon the exercise of options within 60 days of March 31,
1997. Also includes 1,829 shares held by Mr. Fox's wife (including 522
shares issuable upon the exercise of warrants within 60 days of March 31,
1997).
(16) Includes the shares described in note (8). Also includes 1,786 shares of
Common Stock issuable upon conversion of the Triumph Notes outstanding at
March 31, 1997 (assuming an initial public offering price of $12.00 per
share) held by a profit sharing plan for the benefit of Mr. Janes (the
"Janes Plan") and 2,404 shares of Common Stock issuable upon the exercise
of Triumph Warrants held by the Janes Plan which are exercisable within 60
days of March 31, 1997. Mr. Janes is a General Partner of Triumph and may
be considered the beneficial owners of shares held by Triumph. Mr. Janes
disclaims such beneficial ownership, except as to his pecuniary interest
therein.
(17) Includes the shares described in notes (8), (9) and (16). Also includes
4,464 shares of Common Stock issuable upon conversion of additional Triumph
Notes (assuming an initial public offering price of $12.00 per share) and
an additional 5,943 shares of Common Stock issuable upon the exercise of
additional Triumph Warrants within 60 days of March 31, 1997 to be held by
the Janes Plan upon the Company's issuance of an additional $5,000,000 of
Triumph Notes no later than the closing of this offering. Mr Janes is a
General Partner of Triumph and may be considered the beneficial owner of
shares held by Triumph. Mr. Janes disclaims such beneficial ownership,
except as to his pecuniary interest therein.
(18) Includes 2,614 shares issuable upon the exercise of warrants within 60 days
of March 31, 1997. Also includes the shares described in note (3). Dr.
Lamotte is the Managing General Partner of the general partners of MSP, MSP
II and MSP HOIP and may be considered the beneficial owner of the shares
owned by such entities, although Dr. Lamotte disclaims beneficial
ownership, except as to his pecuniary interest therein.
(19) Includes 717,139 shares held by Alta V Limited Partnership (including the
134,798 warrant shares) and 7,535 shares held by Customs House Partners
(including the 1,416 warrant shares). Mr. McGuire is a general partner of
Alta V Management Partners, L.P. (which is the general partner of Alta V
Limited Partnership). Mr. McGuire disclaims beneficial ownership of the
shares held by Alta V Limited Partnership except to the extent of his
proportionate pecuniary interests therein. Mr. McGuire disclaims all
beneficial ownership to the shares held by Customs House Partners.
(20) See notes (11) through (16) and notes (18) through (19). Includes an
additional 9,152 shares of Common Stock (including 2,614 shares issuable
upon the exercise of options and warrants within 60 days of March 31,
1997).
(21) Consists of the shares referenced in note (20) plus additional shares
related to the issuance of $5,000,000 in Triumph Notes described in notes
(9) and (17).
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<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
Assuming conversion of all of the Company's Convertible Preferred Stock, as
of March 31, 1997, there were 4,638,719 shares of Common Stock outstanding, held
of record by 60 stockholders.
COMMON STOCK
Prior to the closing of this offering, the Company's Second Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation") will
authorize the issuance of up to 60,000,000 shares of Common Stock, $.00004 par
value per share. Holders of Common Stock are entitled to one vote for each share
held on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. Accordingly, holders of a majority of the shares of
Common Stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors out
of funds legally available therefor, subject to any preferential dividend rights
of outstanding Preferred Stock. Upon the liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to receive ratably the
net assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in this offering will be, when issued and paid for, fully
paid and nonassessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
CONVERTIBLE PREFERRED STOCK AND WARRANTS
As of March 31, 1997, 800,000 shares of Series A Convertible Preferred
Stock, 399,999 shares of Series B Convertible Preferred Stock, 1,359,522 shares
of Series D Convertible Preferred Stock, 733,371 shares of Series E Convertible
Preferred Stock and 1,915,765 shares of Series F Convertible Preferred Stock of
the Company were outstanding. Upon the closing of this offering, all of the
outstanding shares of Convertible Preferred Stock will be converted into
4,440,564 shares of Common Stock.
As of March 31, 1997, a total of 1,264,941 shares of Common Stock (after
giving effect to the conversion of all shares of Convertible Preferred Stock
into Common Stock prior to or upon the closing of this offering) were issuable
upon exercise of outstanding warrants at a weighted average exercise price of
$4.93 per share. Such warrants will remain outstanding after the closing of this
offering. Upon the closing of this offering, assuming no prior exercise of the
Series F Common Warrants, the aggregate number of shares of Common Stock
issuable pursuant to the Series F Common Warrants will decrease from 651,334 to
415,031 shares (assuming an initial public offering price of $12.00 per share)
and the per share exercise price will increase from $7.65 to the initial price
per share to the public in this offering. In addition, the Series F Common
Warrants and warrants exercisable for 48,449 shares of Common Stock issued to
certain financial advisors to the Company contain a cashless exercise feature
which, if exercised in full prior to the consummation of this offering (and
assuming an initial public offering price of $12.00 per share), would result in
the issuance of 266,072 shares of Common Stock with no additional proceeds to
the Company upon the surrender of the warrant certificates. These warrants will
retain this cashless exercise feature following the consummation of this
offering.
As of March 31, 1997, a total of 634,736 shares of Common Stock were
issuable upon the exercise of outstanding options at a weighted average exercise
price of $2.40 per share, of which options with respect to 246,678 shares were
exercisable.
TRIUMPH NOTES
As of March 31, 1997, the Company had issued Triumph Notes in an aggregate
principal amount of $2,000,000. Upon the earlier of (i) the Company's receipt of
final NDA approval for Primsol trimethoprim solution and (ii) the closing of
this offering, the Company will issue additional Triumph Notes in an aggregate
principal amount of $5,000,000. For a period of two years following the closing
of this offering the holders of
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<PAGE> 64
the Triumph Notes will have the right to convert the Triumph Notes into such
number of shares of Common Stock as is equal to the outstanding principal of
such Triumph Notes divided by the per share Price to Public in this offering
(subject to certain requirements as to the minimum amount to be so converted as
provided in the Triumph Agreement). Assuming an initial public offering price of
$12.00 per share, the full $7,000,000 principal amount of the Triumph Notes
would be convertible into an aggregate of 583,332 shares of Common Stock). See
"Certain Transactions."
PREFERRED STOCK
Upon the closing of this offering and following the filing of a Certificate
of Retirement, the Company's Certificate of Incorporation will authorize the
issuance of up to 5,000,000 shares of Preferred Stock, $0.01 par value per
share. Under the terms of the Certificate of Incorporation, the Board of
Directors is authorized, subject to any limitations prescribed by law, without
stockholder approval, to issue such shares of Preferred Stock in one or more
series. Each such series of Preferred Stock shall have such rights, preferences,
privileges and restrictions, including voting rights, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be determined by the Board of Directors.
The purpose of authorizing the Board of Directors to issue Preferred Stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting stock of the Company. The Company has no
present plans to issue any shares of Preferred Stock.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The Certificate of Incorporation provides for the division of the Board of
Directors into three classes as nearly equal in size as possible with staggered
three-year terms. See "Management." In addition, the Certificate of
Incorporation provides that directors may be removed only for cause by the
affirmative vote of the holders of two-thirds of the shares of capital stock of
the corporation entitled to vote. Under the Certificate of Incorporation, any
vacancy on the Board of Directors, however occurring, including a vacancy
resulting from an enlargement of the Board, may only be filled by vote of a
majority of the directors then in office. The classification of the Board of
Directors and the limitations on the removal of directors and filling of
vacancies could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, control of the
Company.
The Certificate of Incorporation also provides that after the closing of
this offering, any action required or permitted to be taken by the stockholders
of the Company at an annual meeting or special meeting of stockholders may only
be taken if it is properly brought before such meeting and may not be taken by
written action in lieu of a meeting. The Certificate of Incorporation further
provides that special meetings of the stockholders may only be called by the
President of the Company or by the Board of Directors. Under the Company's
Amended and Restated By-Laws (the "By-Laws"), in order for any matter to be
considered "properly brought" before a meeting, a stockholder must comply with
certain requirements regarding advance notice to the Company. The foregoing
provisions could have the effect of delaying until the next stockholders meeting
stockholder actions which are favored by the holders of a majority of the
outstanding voting securities of the Company. These provisions may also
discourage another person or entity from making a tender offer for
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<PAGE> 65
the Company's Common Stock, because such person or entity, even if it acquired a
majority of the outstanding voting securities of the Company, would be able to
take action as a stockholder (such as electing new directors or approving a
merger) only at a duly called stockholders meeting, and not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's Certificate of Incorporation or By-Laws,
unless a corporation's Certificate of Incorporation or By-Laws, as the case may
be, requires a greater percentage. The Certificate of Incorporation and the
By-Laws require the affirmative vote of the holders of at least 75% of the
shares of capital stock of the Company issued and outstanding and entitled to
vote to amend or repeal any of the provisions described in the prior two
paragraphs.
The Certificate of Incorporation contains certain provisions permitted
under the General Corporation Law of Delaware relating to the liability of
directors. The provisions eliminate a director's liability for monetary damages
for a breach of fiduciary duty, except in certain circumstances involving
wrongful acts, such as the breach of a director's duty of loyalty or acts or
omissions which involve intentional misconduct or a knowing violation of law.
Further, the Certificate of Incorporation contains provisions to indemnify the
Company's directors and officers to the fullest extent permitted by the General
Corporation Law of Delaware. The Company believes that these provisions will
assist the Company in attracting and retaining qualified individuals to serve as
directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Boston Equiserve
Limited Partnership.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, based upon the number of shares
outstanding at March 31, 1997, there will be 6,638,719 shares of Common Stock of
the Company outstanding (including the 4,440,564 shares of Common Stock to be
issued upon the Preferred Stock Conversion, but exclusive of 1,511,618 shares
covered by vested options and warrants outstanding at March 31, 1997, 583,332
shares of Common Stock issuable upon conversion of the Triumph Notes (assuming
an initial public offering price of $12.00 per share) and 554,839 shares
issuable upon the exercise of Triumph Warrants issuable no later than the
closing of this offering). Of these outstanding shares (and without taking into
account the lock-up agreements described below), approximately 2,663,792 shares,
including the 2,000,000 shares of Common Stock sold in this offering, will be
immediately eligible for resale in the public market without restriction under
the Securities Act, except that any shares purchased in this offering by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act ("Rule 144 Affiliates"), may generally only be resold in
compliance with applicable provisions of Rule 144. Beginning approximately 90
days after the date of this Prospectus (and without taking into account the
lock-up agreements described below), approximately 3,090,520 additional shares
of Common Stock (including approximately (i) 329,010 shares covered by options
and 61,898 shares covered by warrants (assuming a cashless exercise of such
warrants prior to the closing of this offering at an initial public offering
price of $12.00 per share), in each case exercisable within the 90-day period
following the date of this Prospectus) will become eligible for immediate resale
in the public market, subject to compliance as to certain of such shares with
applicable provisions of Rules 144 and 701.
The Company, and its directors, officers and certain of its security
holders, holding in the aggregate approximately 4,392,739 shares of Common Stock
outstanding prior to this offering, approximately 2,096,006 shares of Common
Stock subject to options and warrants exercisable within 180 days of the
effective date of the registration statement to which this Prospectus forms a
part and 583,332 shares of Common Stock issuable upon conversion of the Triumph
Notes, have entered into agreements providing that, for a period of 180 days
after the effective date of the registration statement to which this Prospectus
forms a part, they will not, without the prior written consent of Cowen &
Company, offer, sell, contract to sell or otherwise dispose of or reduce
beneficial ownership in or risk relating to any shares of Common Stock or any
rights to acquire shares of Common Stock (other than, in the case of the
Company, in certain limited circumstances), or grant any option to purchase or
right to acquire or acquire any option to dispose of any shares of Common Stock.
The shares subject to the lock-up agreements include 610,252 of the shares of
Common Stock that would otherwise have become immediately eligible for resale in
the public market upon completion of this offering and approximately 2,942,455
of the shares of Common Stock (including approximately 328,054 shares of Common
Stock covered by options exercisable within the 90-day period following the date
of this Prospectus) that would otherwise have become eligible for resale in the
public market beginning approximately 90 days after the date of this Prospectus,
subject to compliance as to certain of such shares with the applicable
provisions of Rules 144 and 701.
In general, under Rule 144 as currently in effect, beginning approximately
90 days after the effective date of the Registration Statement of which this
Prospectus is a part, a stockholder, including a Rule 144 Affiliate, who has
beneficially owned his or her restricted securities (as that term is defined in
Rule 144) for at least one year from the later of the date such securities were
acquired from the Company or (if applicable) the date they were acquired from a
Rule 144 Affiliate is entitled to sell, within any three-month period, a number
of such shares that does not exceed the greater of 1% of the then outstanding
shares of Common Stock (approximately 66,387 shares immediately after this
offering) or the average weekly trading volume in the Common Stock during the
four calendar weeks preceding the date on which notice of such sale was filed
under Rule 144, provided certain requirements concerning availability of public
information, manner of sale and notice of sale are satisfied. In addition, under
Rule 144(k), if a period of at least two years has elapsed between the later of
the date restricted securities were acquired from the Company or (if applicable)
the date they were acquired from a Rule 144 Affiliate of the Company, a
stockholder who is not a Rule 144 Affiliate of the Company at the time of sale
and has not been a Rule 144 Affiliate of the Company for at least three months
prior to the sale is entitled to sell the shares immediately without compliance
with the foregoing requirements under Rule 144.
65
<PAGE> 67
Securities issued in reliance on Rule 701 (such as shares of Common Stock
that may be acquired pursuant to the exercise of certain options granted under
the 1992 Option Plan) are also restricted securities and, beginning 90 days
after the effective date of the Registration Statement of which this Prospectus
is a part, may be sold by stockholders other than a Rule 144 Affiliate of the
Company subject only to the manner of sale provisions of Rule 144 and by a Rule
144 Affiliate under Rule 144 without compliance with its one-year holding period
requirement.
At the completion of this offering, certain persons and entities (the
"Rightholders"), will be entitled to certain rights with respect to the
registration under the Securities Act of a total of approximately 6,843,676
shares of Common Stock (the "Registrable Shares"), including 1,819,780 shares of
Common Stock that may be acquired pursuant to the exercise of outstanding
warrants (including Triumph Warrants to be outstanding upon the closing of this
offering) and 583,332 shares of Common Stock that may be issued upon conversion
of the Triumph Notes (assuming an initial public offering price of $12.00 per
share), under the terms of agreements among the Company and the Rightholders
(the "Registration Agreements"). The Registration Agreements generally provide
that in the event the Company proposes to register any of its securities under
the Securities Act at any time, with certain exceptions, the Rightholders shall
be entitled to include Registrable Shares in such registration, subject to the
right of the managing underwriter of any underwritten offering to exclude from
such registration for marketing reasons some or all of such Registrable Shares.
The Rightholders have the additional right under certain Registration Agreements
to require the Company to prepare and file registration statements under the
Securities Act with respect to all of the Registrable Shares, including shares
of Common Stock that may be acquired upon the exercise of outstanding warrants,
if such Rightholders holding specified percentages of such Registrable Shares so
request, and the Company is required to use its best efforts to effect such
registration, subject to certain conditions and limitations. Under the
Registration Agreements, the Company is not required to file a registration
statement within six months of the effective date of the Registration Statement
of which this Prospectus is a part. In addition to the registration rights
described above, with respect to the shares of Common Stock issuable upon
conversion of the Triumph Notes, the Company is required to file a "shelf"
registration statement covering all of the Registrable Shares once the Company
has become eligible to file a registration statement on Form S-3, which the
Company expects to occur twelve months following the closing of this offering.
The Company is generally required to bear the expense of all such registrations.
Prior to this offering, there has been no public market for the Common
Stock. No precise prediction can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price of the Common Stock prevailing from time to time. The Company is unable to
estimate the number of shares that may be sold in the public market pursuant to
Rule 144, since this will depend on the market price of the Common Stock, the
personal circumstances of the sellers and other factors. Nevertheless, sales of
significant amounts of the Common Stock of the Company in the public market
could adversely affect the market price of the Company's Common Stock and could
impair the Company's ability to raise capital through an offering of its equity
securities.
66
<PAGE> 68
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Cowen & Company, Volpe Brown Whelan & Company, LLC and Adams, Harkness & Hill,
Inc., have severally agreed to purchase from the Company the following
respective numbers of shares of Common Stock at the initial public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER OF COMMON STOCK
- ----------------------------------------------------------------------------- ----------------
<S> <C>
Cowen & Company..............................................................
Volpe Brown Whelan & Company, LLC ...........................................
Adams, Harkness & Hill, Inc. ................................................
---------
Total.............................................................. 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.
The Company has been advised by the Representatives of the Underwriters
that the Underwriters initially propose to offer the shares of Common Stock to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other
dealers. After the initial public offering, the offering price and other selling
terms may be changed by the Representatives of the underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the table above bears to 2,000,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 2,000,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Company, and its directors, officers and certain of its security
holders, holding in the aggregate approximately 4,392,739 shares of Common Stock
outstanding prior to this offering, approximately 2,096,006 shares of Common
Stock subject to options and warrants exercisable within 180 days of the
effective date of the registration statement to which this Prospectus forms a
part and 583,332 shares of Common Stock issuable upon conversion of the Triumph
Notes, have entered into agreements providing that, for a period of 180 days
after the effective date of the registration statement to which this Prospectus
forms a part, they will not, without the prior written consent of Cowen &
Company, offer, sell, contract to sell or otherwise dispose of or reduce
beneficial ownership in or risk relating to any shares of Common Stock or any
rights to acquire shares of Common Stock (other than, in the case of the
Company, in certain limited circumstances), or grant any
67
<PAGE> 69
option to purchase or right to acquire or acquire any option to dispose of any
shares of Common Stock. See "Shares Eligible for Future Sale."
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock will be determined by negotiations between the Company and the
Representatives of the Underwriters. Among the factors to be considered in such
negotiations will be prevailing market conditions, the results of operations of
the Company in recent periods, the market capitalizations and stages of
development of other companies which the Company and the Representatives of the
Underwriters believe to be comparable to the Company, estimates of the business
potential of the Company, the present state of the Company's development and
other factors deemed relevant.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may overallot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
the Common Stock in the open market. The Underwriters may also reclaim selling
concessions allowed to an underwriter or a dealer for distributing the Common
Stock in the offering, if the Underwriters repurchase previously distributed
Common Stock in transactions to cover their short positions, in stabilization
transactions or otherwise. Finally, the Underwriters may bid for, and purchase,
shares of the Common Stock in market making transactions and impose penalty
bids. These activities may stabilize or maintain the market price of the Common
Stock above market levels that may otherwise prevail. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
Certain Representatives have acquired shares of capital stock in the
Company in private placements on the same terms as other investors who
participated in such private placements. On December 18, 1996, certain
affiliates of Volpe Brown Whelan & Company, LLC acquired from the Company an
aggregate of 26,922 shares of Series F Convertible Preferred Stock and related
warrants exercisable for 9,148 shares of Common Stock at an exercise price of
$7.65 per share for an aggregate purchase price of $174,993. On June 28, 1996,
Adams, Harkness & Hill, Inc., purchased from the Company 153,846 shares of
Series F Convertible Preferred Stock and related warrants exercisable for 52,307
shares of Common Stock at an exercise price of $7.65 per share for an aggregate
purchase price of $1,000,000. The number of shares of Common Stock issuable upon
exercise of these warrants and the exercise price of such warrants will be
adjusted upon the closing of this offering. As with all Series F Common
Warrants, these warrants have a cashless exercise feature. See "Description of
Capital Stock."
68
<PAGE> 70
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Hale and Dorr LLP, Boston, Massachusetts. Certain legal
matters in connection with this offering will be passed upon for the
Underwriters by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston,
Massachusetts.
EXPERTS
The balance sheets of Ascent Pediatrics, Inc., as of December 31, 1995 and
1996, and the statements of operations, changes in stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1996, and the cumulative period from inception (March 16, 1989) to
December 31, 1996, included in this Prospectus have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
The Statement of Assets related to the Product Line to be Acquired by
Ascent Pediatrics, Inc. as of December 29, 1996 and the Statements of Net Sales
and Identified Costs and Expenses of the Product Line to by Acquired by Ascent
Pediatrics, Inc. for the years ended December 31, 1995 and December 29, 1996 of
the Feverall Product Line of Upsher-Smith Laboratories, Inc. (the "Product
Line") included in this Prospectus have been included herein in reliance upon
the report, which includes an explanatory paragraph, of KPMG Peat Marwick LLP,
independent certified public accountants, given upon the authority of said firm
as experts in auditing and accounting. The explanatory paragraph states that the
financial statements were prepared to present the assets to be sold to Ascent
and the net sales and the identified costs and expenses of the Product Line and
are not intended to be a complete presentation of the Product Line's financial
position, results of operations or cash flows. Accordingly, identified costs and
expenses include only those costs and expenses directly attributable to the
Product Line to be sold. They do not contain any other costs which are not
directly attributable to the Product Line to be sold. As a result, the
statements presented may not be indicative of the results of operations that
would have been achieved had the Product Line operated as a nonaffiliated
entity.
The statements in this Prospectus set forth under the captions "Risk
Factors -- Uncertainty Regarding Patents and Proprietary Rights" and "Business
- -- Patents, Trade Secrets, Licenses and Trademarks," except for statements
pertaining to Primsol trimethoprim solution or the Company's trademarks, have
been reviewed and approved by Welsh & Katz, Ltd., Chicago, Illinois, United
States patent counsel for the Company, as experts on such matters, and are
included herein in reliance upon such review and approval.
The statements in this Prospectus set forth under the captions "Risk
Factors -- Uncertainty Regarding Patents and Proprietary Rights" and "Business
- -- Patents, Trade Secrets, Licenses and Trademarks" pertaining to Primsol
trimethoprim solution and the Company's trademarks have been reviewed and
approved by Hale and Dorr LLP, counsel for the Company, as experts on such
matters, and are included herein in reliance upon such review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement (which term
shall include all amendments, exhibits and schedules thereto) on Form S-1 under
the Securities Act with respect to the shares of Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission, to which Registration Statement reference is hereby made.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement and the
exhibits thereto may be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The
Commission maintains a World Wide Web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
69
<PAGE> 71
ASCENT PEDIATRICS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ASCENT PEDIATRICS, INC.:
Report of Independent Accountants..................................................... F-2
Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 (unaudited) and
March 31, 1997 (unaudited) Pro Forma................................................ F-3
Statements of Operations for the years ended December 31, 1994, 1995 and 1996, and for
the three months ended March 31, 1996 (unaudited) and March 31, 1997 (unaudited),
cumulative from inception (March 16, 1989) to December 31, 1996 and cumulative from
inception (March 16, 1989) to March 31, 1997 (unaudited)............................ F-4
Statements of Changes in Stockholders' Equity (Deficit) from inception (March 16,
1989) to December 31, 1996 and for the three months ended March 31, 1997
(unaudited)......................................................................... F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996, and for
the three months ended March 31, 1996 (unaudited) and March 31, 1997 (unaudited),
cumulative from inception (March 16, 1989) to December 31, 1996 and cumulative from
inception (March 16, 1989) to March 31, 1997 (unaudited)............................ F-6
Notes to the Financial Statements..................................................... F-7
A PRODUCT LINE OF UPSHER-SMITH LABORATORIES, INC.:
Independent Auditors' Report.......................................................... F-19
Statement of Assets Related to the Product Line to be Acquired by Ascent Pediatrics,
Inc. as of December 29, 1996 and March 31, 1997 (unaudited)......................... F-20
Statements of Net Sales and Identified Costs and Expenses of the Product Line to be
Acquired by Ascent Pediatrics, Inc. Years ended December 31, 1995 and December 29,
1996 and three months ended March 31, 1996 (unaudited) and March 31, 1997
(unaudited)......................................................................... F-21
Notes to the Financial Statements..................................................... F-22
UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS:
Introduction to Unaudited Combined Pro Forma Financial Statements for the Year Ended
December 31, 1996 and As of and for the Three Months Ended March 31, 1997........... F-24
Unaudited Combined Pro Forma Balance Sheet as of March 31, 1997....................... F-26
Unaudited Combined Pro Forma Statement of Operations for the Year Ended December 31,
1996................................................................................ F-27
Unaudited Combined Pro Forma Statement of Operations for the Three Months Ended March
31, 1997............................................................................ F-28
Notes to Unaudited Combined Pro Forma Financial Statements for the Year Ended December
31, 1996 and As of and for the Three Months Ended March 31, 1997.................... F-29
</TABLE>
F-1
<PAGE> 72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ascent Pediatrics, Inc.:
We have audited the accompanying balance sheets of Ascent Pediatrics, Inc.,
formerly Ascent Pharmaceuticals, Inc. (a Development Stage Enterprise), as of
December 31, 1995 and 1996 and the related statements of operations, changes in
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1996 and cumulative from inception (March 16, 1989) to
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly
in all material respects, the financial position of Ascent Pediatrics, Inc. (a
Development Stage Enterprise), as of December 31, 1995 and 1996 and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996 and cumulative from inception (March 16, 1989) to
December 31, 1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
May 27, 1997
F-2
<PAGE> 73
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1997
DECEMBER 31, ------------------------------
--------------------------- PRO FORMA
1995 1996 ACTUAL (NOTES K AND L)
------------ ------------ ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 2,538,047 $ 2,085,743 $ 8,299,854 $ 8,299,854
Other current assets..................................... 43,672 12,312 209,954 209,954
------------- ------------ ------------ ------------
Total current assets............................... 2,581,719 2,098,055 8,509,808 8,509,808
------------- ------------ ------------ ------------
Fixed assets, net (Note C)................................. 155,030 163,142 294,316 294,316
Deposits related to acquisition (Note F)................... -- 250,000 250,000 250,000
Deferred charges and other deposits (Notes F and K)........ -- 104,553 403,007 403,007
Debt issue costs, net...................................... -- -- 203,294 203,294
Other assets, net (Note D)................................. 13,125 11,874 11,562 11,562
------------- ------------ ------------ ------------
Total assets....................................... $ 2,749,874 $ 2,627,624 $ 9,671,987 $ 9,671,987
============= ============ ============ ============
LIABILITIES
Accounts payable........................................... $ 112,343 $ 496,655 $ 770,803 $ 770,803
Accrued expenses (Note G).................................. 238,653 1,076,556 1,307,863 1,307,863
------------- ------------ ------------ ------------
Total current liabilities.......................... 350,996 1,573,211 2,078,666 2,078,666
Subordinated secured notes (Note K)........................ -- -- 1,182,922 1,182,922
Warrant obligation (Note K)................................ -- -- 836,994 --
------------- ------------ ------------ ------------
Total liabilities.................................. 350,996 1,573,211 4,098,582 3,261,588
Series D redeemable convertible preferred stock, $.00004
par value; 1,399,589 shares authorized; 1,359,522 shares
issued and outstanding at December 31, 1995 and 1996 and
March 31, 1997 actual and none outstanding on a pro forma
basis, respectively (liquidation preference of $6.00 per
share)................................................... 8,157,132 8,157,132 8,157,132 --
Series E redeemable convertible preferred stock, $.00004
par value; 1,166,667 shares authorized; 733,371 shares
issued and outstanding at December 31, 1995 and 1996 and
March 31, 1997 actual and none outstanding on a pro forma
basis, respectively (liquidation preference of $6.00 per
share)................................................... 4,400,226 4,400,226 4,400,226 --
Series F redeemable convertible preferred stock, $.00004
par value; 2,353,848 shares authorized; 811,536 shares
issued and outstanding at December 31, 1996 and 1,915,765
shares issued and outstanding at March 31, 1997 actual
and none outstanding on a pro forma basis, respectively
(liquidation preference $6.50 per share)................. -- 5,274,984 12,452,471 --
Commitments (Notes D and F)
STOCKHOLDERS' EQUITY (DEFICIT)
Stockholders' equity (deficit)(Notes H, I and J):
Series A convertible preferred stock, $.00004 par value;
800,000 shares authorized, 800,000 issued and
outstanding at December 31, 1995 and 1996 and March 31,
1997 actual and none outstanding on a pro forma basis,
respectively (liquidation preference of $0.38 per
share)................................................. 280,110 280,110 280,110 --
Series B convertible preferred stock, $.00004 par value;
399,999 shares authorized, 399,999 issued and
outstanding at December 31, 1995 and 1996 and March 31,
1997 actual and none outstanding on a pro forma basis,
respectively (liquidation preference of $6.50 per
share)................................................. 2,574,993 2,574,993 2,574,993 --
Common stock, $.00004 par value; 20,000,000 shares
authorized; 197,837 and 198,155 shares issued and
outstanding at December 31, 1995 and 1996 and 4,638,719
shares outstanding on March 31, 1997 actual and on a
pro forma basis, respectively.......................... 8 8 8 185
Additional paid-in capital............................... -- -- -- 28,701,749
Deficit accumulated during the development stage......... (13,013,591) (19,633,040) (22,291,535) (22,291,535)
------------- ------------ ------------ ------------
Total stockholders' equity (deficit)................. (10,158,480) (16,777,929) (19,436,424) 6,410,399
------------- ------------ ------------ ------------
Total liabilities and stockholders' equity
(deficit)........................................ $ 2,749,874 $ 2,627,624 $ 9,671,987 $ 9,671,987
============= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 74
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE FROM CUMULATIVE FROM
INCEPTION (MARCH THREE MONTHS ENDED INCEPTION (MARCH
YEARS ENDED DECEMBER 31, 16, 1989) TO MARCH 31, 16, 1989) TO
--------------------------------------- DECEMBER 31, ----------------------- MARCH 31,
1994 1995 1996 1996 1996 1997 1997
----------- ----------- ----------- ---------------- --------- ----------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Licensing revenue (Note
D)..................... $ -- $ 303,949 $ -- $ 303,949 $ -- $ -- $ 303,949
---------- ---------- ---------- ------------ --------- ----------- ------------
Costs and expenses:
Research and
development.......... 2,550,931 2,986,044 3,760,948 12,009,821 474,637 1,528,114 13,537,935
Selling, general and
administrative....... 1,140,667 1,531,924 2,805,352 8,203,559 427,954 972,826 9,176,385
---------- ---------- ---------- ------------ --------- ----------- ------------
Total expenses... 3,691,598 4,517,968 6,566,300 20,213,380 902,591 2,500,940 22,714,320
---------- ---------- ---------- ------------ --------- ----------- ------------
Loss from operations..... (3,691,598) (4,214,019) (6,566,300) (19,909,431) (902,591) (2,500,940) (22,410,371)
Interest income........ 147,498 113,124 79,084 753,543 25,025 72,745 826,288
Interest expense....... -- -- -- -- -- (19,916) (19,916)
Gain on sale of fixed
assets............... -- -- -- -- -- 9,242 9,242
---------- ---------- ---------- ------------ --------- ----------- ------------
Net loss................. $(3,544,100) $(4,100,895) $(6,487,216) $(19,155,888) $(877,566) $(2,438,869) $(21,594,757)
Accretion to redemption
value of preferred
stock.................. -- 62,604 137,783 486,002 -- 219,626 705,628
---------- ---------- ---------- ------------ --------- ----------- ------------
Net loss to common
stockholders........... $(3,544,100) $(4,163,499) $(6,624,999) $(19,641,890) $(877,566) $(2,658,495) $(22,300,385)
========== ========== ========== ============ ========= =========== ============
Net loss per common and
common equivalent
share, historical (Note
B)
Pro forma (unaudited):
Net loss per common and
common equivalent
share................ $ (1.48) $ (0.56)
Weighted average number
of common and common
equivalent shares
outstanding.......... 4,384,197 4,384,197
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 75
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FROM INCEPTION (MARCH 16, 1989)
TO DECEMBER 31, 1996 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------- PAR ADDITIONAL
PREFERRED COMMON PREFERRED PREFERRED PREFERRED VALUE PAID-IN
STOCK STOCK SERIES A SERIES B SERIES C COMMON CAPITAL
--------- ------- --------- ---------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock issued to officers $.000047 per
share............................................ 170,000 $ $ $ $7 $ 1
Series A convertible preferred stock, net of
issuance costs of approximately $20,000, issued
at $0.38 per share............................... 800,000 280,110
Loss for the period from inception (March 16,
1989) to December 31, 1989.......................
--------- ------- -------- --- -------
Balance, December 31, 1989........................ 800,000 170,000 280,110 7 1
Series B convertible preferred stock, net of
issuance costs of approximately $25,000, issued
at $6.50 per share............................... 399,999 2,574,993
Common stock issued to consultants and employees
at $0.01 per share............................... 19,125 1 224
Net loss..........................................
--------- ------- -------- ---------- --- -------
Balance, December 31, 1990........................ 1,199,999 189,125 280,110 2,574,993 8 225
Common stock issued to consultants and employees
at $0.01 per share............................... 6,375 -- 75
Net loss..........................................
--------- ------- -------- ---------- --- -------
Balance, December 31, 1991........................ 1,199,999 195,500 280,110 2,574,993 8 300
Series C convertible preferred stock, net of
issuance costs of approximately $40,000, issued
at $12.75 per share.............................. 169,188 2,117,147
Common stock issued to consultants and employees,
issued at $1.18 per share........................ 2,125 2,500
Net loss..........................................
--------- ------- -------- ---------- ----------- --- -------
Balance, December 31, 1992........................ 1,369,187 197,625 280,110 2,574,993 2,117,147 8 2,800
Series C convertible preferred stock converted to
Series D redeemable convertible preferred
stock............................................ (169,188) (2,117,147)
Issuance costs of Series D redeemable convertible
preferred stock.................................. -- (2,800)
Net loss..........................................
--------- ------- -------- ---------- ----------- --- -------
Balance, December 31, 1993........................ 1,199,999 197,625 280,110 2,574,993 -- 8 --
Common stock issued upon option exercise at $2.35
per share........................................ 212 -- 500
Net loss..........................................
--------- ------- -------- ---------- ----------- --- -------
Balance, December 31, 1994........................ 1,199,999 197,837 280,110 2,574,993 -- 8 500
Issuance costs of Series E redeemable convertible
preferred stock.................................. (500)
Net loss.......................................... --
--------- ------- -------- ---------- ----------- --- -------
Balance, December 31, 1995........................ 1,199,999 197,837 280,110 2,574,993 -- 8 --
Common stock issued upon option exercise at $2.35
per share........................................ 318 750
Warrant proceeds.................................. 4,800
Issuance costs of Series F redeemable convertible
preferred stock.................................. (5,550)
Net loss..........................................
--------- ------- -------- ---------- ----------- --- -------
Balance, December 31, 1996........................ 1,199,999 198,155 280,110 2,574,993 -- 8 --
Issuance cost of Series F redeemable convertible
preferred stock (unaudited)......................
Net loss (unaudited)..............................
--------- ------- -------- ---------- ----------- --- -------
Balance, March 31, 1997 (unaudited)............... 1,199,999 198,155 $280,110 $2,574,993 -- $8 --
========= ======= ======== ========== =========== === =======
<CAPTION>
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY (DEFICIT)
------------ ----------------
<S> <<C> <C>
Common stock issued to officers $.000047 per
share............................................ $ $ 8
Series A convertible preferred stock, net of
issuance costs of approximately $20,000, issued
at $0.38 per share............................... 280,110
Loss for the period from inception (March 16,
1989) to December 31, 1989....................... (293,846) (293,846)
------------ ------------
Balance, December 31, 1989........................ (293,846) (13,728)
Series B convertible preferred stock, net of
issuance costs of approximately $25,000, issued
at $6.50 per share............................... 2,574,993
Common stock issued to consultants and employees
at $0.01 per share............................... 225
Net loss.......................................... (479,182) (479,182)
------------ ------------
Balance, December 31, 1990........................ (773,028) 2,082,308
Common stock issued to consultants and employees
at $0.01 per share............................... 75
Net loss.......................................... (1,211,956) (1,211,956)
------------ ------------
Balance, December 31, 1991........................ (1,984,984) 870,427
Series C convertible preferred stock, net of
issuance costs of approximately $40,000, issued
at $12.75 per share.............................. 2,117,147
Common stock issued to consultants and employees,
issued at $1.18 per share........................ 2,500
Net loss.......................................... (1,216,723) (1,216,723)
------------ ------------
Balance, December 31, 1992........................ (3,201,707) 1,773,351
Series C convertible preferred stock converted to
Series D redeemable convertible preferred
stock............................................ (2,117,147)
Issuance costs of Series D redeemable convertible
preferred stock.................................. (282,815) (285,615)
Net loss.......................................... (1,821,970) (1,821,970)
------------ ------------
Balance, December 31, 1993........................ (5,306,492) (2,451,381)
Common stock issued upon option exercise at $2.35
per share........................................ 500
Net loss.......................................... (3,544,100) (3,544,100)
------------ ------------
Balance, December 31, 1994........................ (8,850,592) (5,994,981)
Issuance costs of Series E redeemable convertible
preferred stock.................................. (62,104) (62,604)
Net loss.......................................... (4,100,895) (4,100,895)
------------ ------------
Balance, December 31, 1995........................ (13,013,591) (10,158,480)
Common stock issued upon option exercise at $2.35
per share........................................ 750
Warrant proceeds.................................. 4,800
Issuance costs of Series F redeemable convertible
preferred stock.................................. (132,233) (137,783)
Net loss.......................................... (6,487,216) (6,487,216)
------------ ------------
Balance, December 31, 1996........................ (19,633,040) (16,777,929)
Issuance cost of Series F redeemable convertible
preferred stock (unaudited)...................... (219,626) (219,626)
Net loss (unaudited).............................. (2,438,869) (2,438,869)
------------ ------------
Balance, March 31, 1997 (unaudited)............... $(22,291,535) $(19,436,424)
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 76
ASCENT PEDIATRICS, INC
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE FROM CUMULATIVE FROM
INCEPTION (MARCH THREE MONTHS ENDED INCEPTION (MARCH
YEARS ENDED DECEMBER 31, 16, 1989) TO MARCH 31, 16, 1989) TO
--------------------------------------- DECEMBER 31, ------------------------ MARCH 31,
1994 1995 1996 1996 1996 1997 1997
----------- ----------- ----------- ---------------- ---------- ----------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows for
operating activities:
Net loss............. $(3,544,100) $(4,100,895) $(6,487,216) $(19,155,888) $ (877,566) $(2,438,869) $(21,594,757)
Adjustments to
reconcile net loss
to net cash used by
operating
activities:
Depreciation and
amortization... 41,031 45,349 52,833 206,625 11,918 42,014 248,639
Gain on sale of
fixed assets... -- -- -- -- -- (9,242) (9,242)
Changes in
operating assets
and liabilities:
Other assets..... (67,464) 55,943 31,360 (12,312) (4,195) (197,642) (209,954)
Deferred charges
and deposits... -- -- (104,553) (104,553) (25,000) (298,474) (403,027)
Accounts payable
and accrued
expenses....... 143,590 47,038 1,222,215 1,573,213 (85,441) 505,455 2,078,668
------------ ------------ ------------ ------------- ---------- ----------- -------------
Total
adjustments... 117,157 148,330 1,201,855 1,662,973 (102,718) 42,111 1,705,084
------------ ------------ ------------ ------------- ---------- ----------- -------------
Net cash used by
operating
activities........... (3,426,943) (3,952,565) (5,285,361) (17,492,915) (980,284) (2,396,758) (19,889,673)
------------ ------------ ------------ ------------- ---------- ----------- -------------
Cash flows for
investing activities:
Purchase of fixed
assets............. (94,179) (17,774) (59,694) (381,642) (4,288) (174,757) (556,399)
Proceeds from sale of
fixed assets....... -- -- -- -- -- 38,069 38,069
Payments related to
acquisition........ -- -- (250,000) (250,000) -- -- (250,000)
------------ ------------ ------------ ------------- ---------- ----------- -------------
Net cash used in
investing
activities........... (94,179) (17,774) (309,694) (631,642) (4,288) (136,688) (768,330)
------------ ------------ ------------ ------------- ---------- ----------- -------------
Cash flows from
financing activities:
Proceeds from sale of
common stock....... 500 -- 750 4,058 -- -- 4,058
Proceeds from sale of
preferred stock,
net of issuance
costs.............. -- 4,337,622 5,137,201 20,201,442 -- 6,957,861 27,159,303
Proceeds from
issuance of debt
and related
warrants........... -- -- -- 150,000 -- 2,000,000 2,150,000
Debt issue costs..... -- -- -- -- -- (210,304) (210,304)
Proceeds from
warrant............ -- -- 4,800 4,800 4,800 -- 4,800
Repayment of debt.... -- -- -- (150,000) -- -- (150,000)
------------ ------------ ------------ ------------- ---------- ----------- -------------
Net cash provided by
financing
activities........... 500 4,337,622 5,142,751 20,210,300 4,800 8,747,557 28,957,857
------------ ------------ ------------ ------------- ---------- ----------- -------------
Net (decrease) increase
in cash.............. (3,520,622) 367,283 (452,304) 2,085,743 (979,772) 6,214,111 8,299,854
Cash and cash
equivalents at the
beginning of the
period............... 5,691,386 2,170,764 2,538,047 -- 2,538,047 2,085,743 --
------------ ------------ ------------ ------------- ---------- ----------- -------------
Cash and cash
equivalents at the
end of the period.... $ 2,170,764 $ 2,538,047 $ 2,085,743 $ 2,085,743 $1,558,275 $ 8,299,854 $ 8,299,854
============ ============ ============ ============= ========== =========== =============
Non-cash activity:
Series C preferred
stock converted to
Series D preferred
stock.............. -- -- -- $ 2,117,147 -- -- $ 2,117,147
------------ ------------ ------------ ------------- ---------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 77
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997 IS UNAUDITED)
A. NATURE OF BUSINESS
Ascent Pediatrics, Inc. (the "Company"), formerly Ascent Pharmaceuticals,
Inc., incorporated in Delaware on March 16, 1989, is a drug development and
marketing Company focused exclusively on the pediatric market. Since its
formation, the Company has operated as a development stage enterprise, devoting
substantially all of its efforts to establishing a new business and to carrying
on development activities.
The Company has incurred net losses since its inception and expects to
incur additional operating losses in the future as the Company continues its
product development programs, expansion of sales and marketing organization and
introduces its products to the market. The Company is subject to a number of
risks similar to other companies in the industry, including rapid technological
change, uncertainty of market acceptance of products, uncertainty of regulatory
approval, competition from substitute products and larger companies, customers'
reliance on third-party reimbursement, the need to obtain additional financing,
compliance with government regulations, protection of proprietary technology,
dependence on third-party manufacturers, distributors and key suppliers, product
liability, and dependence on key individuals.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation
On or prior to the effectiveness of a registration statement relating to
the initial public offering of the Common Stock of the Company, such as the one
contemplated in the Registration Statement in which the accompanying financial
statements have been included (the "Offering"), the Company will effect a
0.85-for-one reverse stock split of its common stock and increase the number of
authorized shares of common stock to 60,000,000. Accordingly, all share and per
share amounts have been adjusted to reflect the reverse stock split as though it
had occurred at the beginning of the initial period presented.
Cash and Cash Equivalents
The Company considers all short-term investments purchased with an original
maturity of three months or less at the date of acquisition to be cash
equivalents.
Concentration of Credit Risk
Cash and cash equivalents are financial instruments which potentially
subject the Company to concentrations of credit risk. At December 31, 1996,
substantially all of the Company's cash was invested in two money market mutual
funds through two different high quality financial institutions. At March 31,
1997, substantially all of the Company's cash was invested in one money market
mutual fund.
Fixed Assets
Fixed assets are recorded at cost and depreciated on a straight-line basis
over the useful life of the asset, typically five or seven years.
Revenue Recognition
Revenue is recognized under a collaborative license agreement as earned
based upon the performance requirements of such agreement (Note D).
Research and Development Expenses
Research and development costs are expensed as incurred.
F-7
<PAGE> 78
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997 IS UNAUDITED)
Advertising Expenses
Costs for catalogs and other media are expensed as incurred. For the years
ended December 31, 1994, 1995 and 1996, costs were $0, $21,090 and $423,656,
respectively. For the three months ended March 31, 1996 and 1997, costs were $0
and $51,034.
Income Taxes
The Company accounts for income taxes under Financial Accounting Standards
No. 109, "Accounting for Income Taxes," which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from the estimates and assumptions used by
management.
Pro Forma Net Loss Per Share (Unaudited)
The pro forma net loss per common share is computed based upon the weighted
average number of common shares and common equivalent shares (using the treasury
stock method) outstanding after certain adjustments described below. Common
equivalent shares consist of common stock options and warrants where the effect
of their inclusion would be dilutive. In accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 83, all common and common equivalent
shares issued during the 12 month period prior to the initial filing date of the
initial public offering have been included in the calculation as if they were
outstanding for all periods, using the treasury stock method and the assumed
initial public offering price of $12.00 per share. In addition, all outstanding
shares of convertible preferred stock and redeemable convertible preferred
stock, which mandatorily convert to common stock upon the closing of an initial
public offering, are treated as if converted to common stock for all periods.
Accordingly, in the computation of net loss per common share, accretion of the
redeemable preferred stock to the mandatory redemption amount is not included as
an increase to net loss to common stockholders.
Historical Net Loss Per Common Share
Net loss per common share on a historical basis is computed in the same
manner as pro forma net loss per common share, except that preferred stock is
not assumed to be converted. Accretion of redeemable preferred stock is included
as an increase to net loss attributable to common stockholders. Net loss per
common share on a historical basis is as follows:
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------------------- ---------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net loss per common share................ $(2.24) $(2.63) $(4.18) $(.55) $(1.68)
Weighted average number of common and
common equivalent shares outstanding... 1,584,988 1,585,190 1,585,252 1,585,252 1,585,252
</TABLE>
Fully diluted net loss per common share is the same as primary net loss per
common share.
F-8
<PAGE> 79
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997 IS UNAUDITED)
Recent Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("FAS 128"). FAS
128 specifies the computation, presentation and disclosure requirements for
earnings per share. FAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods, and earlier
application is not permitted. FAS 128 requires restatement of all prior-period
earnings per share data presented after the effective date. The Company has not
yet determined FAS 128's effect on its financial statements.
C. FIXED ASSETS
Fixed assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------- ---------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Equipment................................... $ 178,430 $ 220,983 $ 251,504
Furniture and fixtures...................... 89,730 106,871 166,136
--------- --------- ---------
Total equipment............................. 268,160 327,854 417,640
Less:
Accumulated depreciation.................. (113,130) (164,712) (123,324)
--------- --------- ---------
Total....................................... $ 155,030 $ 163,142 $ 294,316
========= ========= =========
</TABLE>
Depreciation expense amounted to $36,402, $44,101, and $51,582 for the
years ended December 31, 1994, 1995 and 1996, respectively, and $11,607 and
$14,775 for the three months ended March 31, 1996 and 1997, respectively.
D. LICENSE AGREEMENTS
During the year ended December 31, 1990, the Company entered into an
agreement with an unaffiliated entity, pursuant to which the Company was granted
a worldwide, exclusive license pursuant to certain patent applications. The
license agreement calls for royalties to be paid based on a percentage of net
sales of licensed product using the technology covered by the patent, and
additional royalties to be paid upon any sublicensing income earned.
During 1995, the Company entered into a licensing agreement with an
unaffiliated entity, pursuant to which the Company granted such party an
exclusive license to make, use and sell the licensed product in Japan. The
Company received approximately $202,000 as a non-refundable technology transfer
fee under the license agreement and recognized it as revenue in 1995. In the
event the licensee commercializes a product utilizing the licensed technology,
the licensee will pay a royalty based on a percentage of net sales as described
in the agreement. The Company has performed all of its material obligations
under this agreement. For the year ended December 31, 1995, the Company recorded
revenue of approximately $102,000 related to research and development activities
performed on behalf of the licensee. The Company did not record any revenue for
1996 or for the three months ended March 31, 1997 in connection with this
license.
F-9
<PAGE> 80
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997 IS UNAUDITED)
E. INCOME TAXES
No income tax provision has been recorded from inception through the year
ended December 31, 1996. As of December 31, 1996, the Company had approximately
$4,800,000 of federal net operating loss carryforwards available to offset
future taxable income, which begin to expire in 2004.
As required by Financial Accounting Statement No. 109, management of the
Company has evaluated the positive and negative evidence bearing upon the
realizability of its deferred tax assets, which are comprised principally of net
operating loss and tax credit carryforwards. Under these accounting standards,
because of the Company's history of losses, management believes that it is more
likely than not that the Company will not generate future taxable income prior
to the expiration of these net operating losses. Accordingly, the deferred tax
assets have been fully reserved. Management re-evaluates the positive and
negative evidence on a quarterly basis.
The components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Net operating loss carryforwards.................... $ 1,732,000 $ 1,954,000
Research and development credits.................... 159,000 200,000
Capitalized expenses:
Research and development.......................... 1,147,000 1,936,000
Start-up.......................................... 615,000 2,127,000
----------- -----------
Total deferred tax assets........................... 3,653,000 6,217,000
Valuation allowance................................. (3,653,000) (6,217,000)
----------- -----------
Net deferred tax asset.............................. $ -- $ --
=========== ===========
</TABLE>
The Tax Reform Act of 1986 contains provisions which may limit the
utilization of net operating losses and research and development credit
carryforwards in any given year upon the occurrence of certain events, including
a significant change in ownership interests. The difference between the federal
net operating loss carryforwards and the amount of the accumulated deficit
results primarily from certain pre-operating costs and research and development
expenses, which have been capitalized for tax purposes.
F. COMMITMENTS
In June 1991, the Company entered into a lease for laboratory and office
space and equipment, which expired on March 31, 1996. In May 1994, the Company
leased additional space in the same building on a month-to-month basis. This
lease required monthly rental payments of $4,258 and monthly payments of certain
operating expenses and real estate taxes. Rent expense included in the Statement
of Operations was approximately $50,000, $52,000, and $55,878 for the years
ended December 31, 1994, 1995 and 1996, respectively, $308,878 for the period
from inception (March 16, 1989) to December 31, 1996, and $12,800 and $37,700
for the three months ended March 31, 1996 and 1997, respectively. In 1996, the
Company amended this lease to a tenant-at-will lease.
In November 1996, the Company entered into a lease for new office space
commencing from February 1997 for a term of five years. This lease requires
monthly payments of $19,093. During 1996, the Company paid the landlord a
deposit of $57,280 related to the lease, which is reflected in the balance sheet
under Deferred Charges and Other Deposits.
F-10
<PAGE> 81
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997 IS UNAUDITED)
Future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
-----------------------------------------------------------------
<S> <C>
1997...................................................... $ 232,781
1998...................................................... 246,040
1999...................................................... 246,040
2000...................................................... 246,040
2001...................................................... 241,483
----------
Total..................................................... $1,212,384
=========
</TABLE>
On November 13, 1996, the Company signed a non-binding letter of intent
with Upsher-Smith Laboratories, Inc. ("Upsher-Smith") to purchase the Feverall
acetaminophen suppository product line ("Product Line") for a purchase price
equal to $11,500,000 plus the cost of inventories and paid Upsher-Smith a
$250,000 non-refundable deposit. In March 1997, the Company entered into a
definitive agreement relating to this acquisition. Under the terms of the
agreement, the Company has agreed to purchase the Product Line, including
certain intellectual property, technical information, product formulations and
regulatory approvals and registrations. The Company will not purchase any
accounts receivable and will not assume any liabilities of Upsher-Smith.
Approximately $5,750,000 plus the cost of inventories will be paid in cash at
the closing of the acquisition together with a promissory note in the principal
amount of $5,500,000. This note will be payable 225 days following the closing
of the acquisition. In addition, the Company has also agreed to purchase its
requirements for products in the Product Line from Upsher-Smith for a period of
five years.
In addition, the Company has entered into several agreements with
unaffiliated entities for the performance of research and clinical trial
studies. These commitments are ongoing, and the Company expects to spend
approximately $460,000 toward these commitments in 1997. The Company has also
entered into a 36-month lease for office equipment. Total payments under this
lease will be $11,935 through July 1997. Deposits related to office equipment
lease is $7,033 and is reflected in the balance sheet under Deferred Charges and
Other Deposits.
G. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------- ----------
1995 1996 1997
-------- ---------- ----------
<S> <C> <C> <C>
Compensation expenses........................... $ 52,756 $ 109,268 $ 244,136
Clinical study expenses......................... 87,815 156,134 259,000
Advertising costs............................... -- 364,692 --
Other........................................... 98,082 446,462 804,727
-------- ---------- ----------
$238,653 $1,076,556 $1,307,863
======== ========== ==========
</TABLE>
H. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
On or prior to the time the Registration Statement (see Note L) is declared
effective, the Company will effect a 0.85-for-one reverse stock split of its
outstanding common stock. The authorized number of shares of common stock will
be increased to 60,000,000. Accordingly, all shares and per share data have been
restated to reflect the reverse stock split as though it had occurred at the
beginning of the initial period presented.
The Company has two classes of capital stock: common and preferred. The
preferred stock has 6,120,103 shares authorized: 800,000 are designated Series A
convertible preferred stock, 399,999 are designated
F-11
<PAGE> 82
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997 IS UNAUDITED)
Series B convertible preferred stock, 1,399,589 are designated Series D
redeemable convertible preferred stock, 1,166,667 are designated Series E
redeemable convertible preferred stock and 2,353,848 are designated Series F
redeemable convertible preferred stock (collectively, the "Preferred Stock").
In July 1990, the Company authorized 170,000 shares of common stock to be
used as incentives for employees and consultants. As of December 31, 1993, a
total of 25,500 shares had been issued under this authorization at $0.01 per
share and 2,125 shares, at $1.18 per share, both determined to be the fair value
at the date of issuance by the Company's Board of Directors.
In 1989, 800,000 shares of Series A convertible preferred stock were issued
at $0.38 per share. In 1990, 399,999 shares of Series B convertible preferred
stock were issued at $6.50 per share. In 1992, 169,188 shares of Series C
convertible preferred stock were issued at $12.75 per share. In 1993, the
169,188 shares of Series C convertible preferred stock were canceled and all
outstanding shares were converted to 359,523 shares of Series D redeemable
convertible preferred stock at $6.00 per share. In 1993, 999,999 shares of
Series D redeemable convertible preferred stock were sold for $6.00 per share.
In 1995, 733,371 shares of Series E redeemable convertible preferred stock were
sold for $6.00 per share. In 1996, 811,536 shares of Series F redeemable
convertible preferred stock were sold for $6.50 per share (see Note K).
Shares of each of the series of Preferred Stock are convertible into common
stock at the option of the holder under a conversion formula which, except with
respect to the Series B convertible preferred stock which would convert to an
aggregate 353,230 common shares, would currently result in an 0.85-for-one
exchange, subject to antidilution provisions. Mandatory conversion is required
under certain circumstances, such as an initial public offering in which the
gross proceeds are not less than $10,000,000 and the price per share to the
public is greater than or equal to Series E conversion price.
Except with respect to certain actions enumerated in the Company's
Certificate of Incorporation which require separate class votes, stockholders of
each series of Preferred Stock are entitled to one vote for each share of common
stock into which their shares can be converted and vote together with the common
stockholders.
In the event of a liquidation, dissolution, or winding up of the Company,
the stockholders of each of the Preferred Stock series are entitled to receive a
liquidation preference. The per share liquidation preference equals: $0.38 for
Series A, $6.50 for Series B, $6.00 for Series D, $6.00 for Series E and $6.50
for Series F, with the Series D shares senior to the Series A and B shares,
Series E shares senior to the Series A, B and D shares and Series F shares
senior to the Series A, B, D and E shares.
The holders of the Series D shares, at the option of the holders (if
exercised by holders of an aggregate of 75% or more of Series D shares), have
the right to require the Company to repurchase all of the Series D shares at
$6.00 per share beginning on June 30, 1998 and for a period of one year
thereafter. The Company shall pay for the shares in three equal annual
installments, commencing one year from the date of the closing of such
repurchase by the Company. Any such repurchase shall only be paid out of funds
legally available therefor. The repurchase option shall automatically terminate
upon the consummation of an underwritten public offering in which gross proceeds
to the Company are at least $10,000,000 and the per share price to the public is
at least $7.06.
The holders of the Series E redeemable convertible preferred stock, at the
option of the holders (if exercised by holders of an aggregate of 75% or more of
Series E shares), have the right to require the Company to repurchase all of the
Series E redeemable convertible preferred stock at $6.00 per share beginning on
June 30, 1998 and for a period of one year thereafter. The Company shall pay for
such shares in three equal annual installments, commencing one year from the
date of the first closing of such repurchase by
F-12
<PAGE> 83
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997 IS UNAUDITED)
the Company, and such repurchase shall only be paid out of funds legally
available therefor. The repurchase option shall automatically terminate upon the
consummation of an underwritten public offering in which gross proceeds to the
Company are at least $10,000,000 and the per share price to the public is at
least $7.06.
The holders of the Series F redeemable convertible preferred stock, at the
option of the holders (if exercised by holders of an aggregate of 75% or more of
Series F shares), have the right to require the Company to repurchase all of the
Series F redeemable convertible preferred stock at $6.50 per share beginning on
June 30, 1998 and for a period of one year thereafter. The Company shall pay for
such shares in three equal annual installments, commencing one year from the
date of the first closing of such repurchase by the Company, and such repurchase
shall only be paid out of funds legally available therefore. The repurchase
option shall automatically terminate upon the consummation of an underwritten
public offering in which gross proceeds to the Company are at least $10,000,000
and the per share price to the public is at least $7.06.
In the event any Series holders exercise the repurchase option, the Company
shall provide notice of such event to all Series repurchase option holders. The
rights of the Series D holders to receive repurchase option payments are
subordinated to such rights of Series E holders and Series F holders, and the
rights of Series E holders are subordinated to that of Series F holders. The
Company may assign its obligations to effect any such repurchase to an assignee
designated by the Company, which assignment shall be subject to the approval of
holders of at least 50% in interest of the affected Series of Preferred
Stockholders.
The Company has reserved 3,488,764 shares of its common stock for issuance
upon conversion of the preferred stock and 722,500 shares for the issuance
pursuant to the incentive plan (see Note J). The Company has reserved 202,781
shares, 103,891 shares and 289,182 shares of common stock for issuance pursuant
to warrants held by Series D, E and F convertible preferred stockholders,
respectively (see Note I).
I. STOCK PURCHASE WARRANTS
Pursuant to a Stock Purchase Agreement dated June 18, 1992 and amended
March 4, 1993, the Company granted an unaffiliated entity and an individual
stockholder warrants to purchase 17,420 and 1,000 shares, respectively, of
Series D preferred stock in exchange for services. The warrants were exercisable
at $15.44 per share on or before June 18, 1996 and are exercisable at $19.30 per
share on or before June 18, 1997.
On June 18, 1995, the Company issued warrants exercisable for an aggregate
of 21,647 shares of Series D Convertible Preferred Stock in replacement of
warrants exercisable for the same number of shares of Series D Convertible
Preferred Stock which expired on such date. These warrants have an exercise
price of $9.00 per share and expire on June 18, 1997. In June 1996, the Company
received $4,800 in connection with the issuance of 4,000 of these warrants.
Pursuant to a Stock Purchase Agreement dated March 4, 1993, as amended
September 9, 1993, the Company granted to several holders of Series D redeemable
convertible preferred stock, warrants to purchase an aggregate of 202,781 shares
of common stock. The warrants are exercisable at $10.59 per share for a period
of five years from the date of grant.
Pursuant to the Stock Purchase Agreement dated July 12, 1995, as amended on
August 16, 1995, the Company granted the purchasers of Series E redeemable
convertible preferred stock, warrants to purchase an aggregate of 103,891 shares
of common stock. These warrants are exercisable at $10.59 per share for a period
of five years from the date of the grant.
Pursuant to the Stock Purchase Agreement dated June 28, 1996, as amended on
December 18, 1996, the Company granted the purchasers of Series F redeemable
convertible preferred stock, warrants to purchase an
F-13
<PAGE> 84
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997 IS UNAUDITED)
aggregate of 289,182 shares of common stock. These warrants are exercisable at
$7.65 per share for a period of five years from the date of the grant. The
number of shares issuable upon exercise of these warrants and the exercise price
of such warrants will be adjusted upon the closing of this offering pursuant to
the terms of such warrants. In addition, these warrants contain a cashless
exercise feature (see Note K).
J. INCENTIVE PLANS
1992 Equity Incentive Plan
On September 15, 1992, the Board of Directors adopted the 1992 Equity
Incentive Plan (the "1992 Plan"). On March 4, 1993, the shareholders approved
the 1992 Plan (see Note K). Under the 1992 Plan, a Committee appointed by the
Board of Directors is permitted to award shares of restricted common stock or to
grant stock options for the purchase of common stock to employees, consultants,
advisors and members of the Board of Directors, up to a maximum of 722,500
shares as amended. The 1992 Plan is terminated on the earlier of (i) the day
after the 10th anniversary of its adoption, or (ii) upon issuance of all
available shares.
The 1992 Plan provides for the granting of incentive stock options (ISOs),
nonqualified stock options (NSOs) and awards. In the case of ISOs and NSOs, the
exercise price shall not be less than 100% (110% in certain cases for ISOs) of
the fair market value per share of the common stock, as determined by the Board
of Directors, on the date of grant. In the case of awards, the purchase price
will be determined by the Board of Directors.
Each option granted under the 1992 Plan shall be exercisable either in full
or in installments as set forth in the option agreement. Each option and all
rights shall expire on the date specified by the Committee, but not more than
ten years after the date on which the option is granted in the case of ISOs
(five years in certain cases). Options vest between zero and five years.
In the case of awards of restricted common stock, the committee determines
the duration of certain restrictions on transfer of such stock.
Supplemental Disclosures for Stock-Based Compensation
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for the 1992 Plan. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), issued in 1995,
defined a fair value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. The Company elected to
continue to apply the accounting provisions of APB Opinion No. 25 for stock
options. Accordingly, options issued to non-employees result in a charge to
earnings. During 1994, 1995 and 1996, amounts expensed due to issuance of
options to non-employees were immaterial. The required disclosures under SFAS
123 as if the Company had applied the new method of accounting are made below.
F-14
<PAGE> 85
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997 IS UNAUDITED)
A summary of the Company's stock option activity for the three years ended
December 31, 1996 and for the three months ended March 31, 1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1993.................... 103,275 $ 4.47
Granted, 1994..................................... 184,875 2.79
Exercised, 1994................................... (212) 2.35
------- ------
Outstanding at December 31, 1994.................... 287,938 $ 3.39
Terminated, 1995.................................. (17,000) 7.06
------- ------
Outstanding at December 31, 1995.................... 270,938 $ 3.16
Granted, 1996..................................... 381,648 2.35
Exercised, 1996................................... (318) 2.35
Terminated, 1996.................................. (18,594) 2.35
------- ------
Outstanding at December 31, 1996.................... 633,674 $ 2.40
Granted (unaudited)............................... 1,062 $ 2.35
------- ------
Outstanding at March 31, 1997 (unaudited)........... 634,736 $ 2.40
======= ======
</TABLE>
Summarized information about stock options outstanding at December 31, 1996
is as follows:
<TABLE>
<CAPTION>
EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE OPTIONS PRICE
- --------------- ----------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$1.18 - 1.76 46,750 6.2 $ 1.14 40,163 $ 1.12
2.35 569,924 9.0 2.35 187,180 2.35
7.05 17,000 7.3 7.05 17,000 7.05
</TABLE>
Options exercisable at December 31, 1994 and 1995 and March 31, 1997 were
129,800, 200,791 and 246,678, respectively.
The weighted average fair value at date of grant for options granted during
1996 was $2.35 per option. No options were granted in 1995. The fair value of
these options at date of grant was estimated using the minimum value method with
the following weighted average assumptions for 1995 and 1996, respectively of
risk-free interest rate of 6.5% and a weighted average expected life of the
options of five years.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date for awards in 1995 and 1996 consistent
with the provisions of SFAS No. 123, the Company's net loss to common
stockholders and net loss per share to common stockholders would have been
reduced to the SFAS No. 123 pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Net loss to common stockholders -- as reported.... $(4,163,499) $(6,624,999)
Net loss to common stockholders -- SFAS No. 123
pro forma....................................... (4,163,499) (6,653,966)
Net loss per share to common stockholders -- as
reported........................................ $ (2.63) $ (4.18)
Net loss per share to common stockholders -- SFAS
No. 123 pro forma............................... (2.63) (4.20)
</TABLE>
F-15
<PAGE> 86
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997 IS UNAUDITED)
The SFAS No. 123 pro forma effect on net loss to common stockholders for
1995 and 1996 is not representative of the SFAS No. 123 pro forma effect on net
income or loss to common stockholders in future years because it does not take
into consideration SFAS No. 123 pro forma compensation expense related to grants
made prior to 1995.
K. SUBSEQUENT EVENTS:
Preferred Stock
On February 3, 1997, February 19, 1997 and February 28, 1997, the Company
completed a third, fourth and fifth closing of its Series F redeemable
convertible preferred stock financing, respectively, resulting in the issuance
of 1,104,229 shares at $6.50 per share and net proceeds of $6,847,988.
Pursuant to the Series F redeemable convertible preferred stock financing,
the Company granted the purchasers of the third, fourth and fifth closing of
Series F redeemable convertible preferred stock financing, warrants to purchase
an aggregate of 362,152 shares of common stock. The warrants are exercisable at
$7.65 per share for a period of five years from the date of the grant. Upon the
closing of this offering, assuming no prior exercise of these warrants, the
aggregate number of shares of common stock issuable pursuant to these warrants
will decrease from 651,334 to 415,031 shares (assuming an initial public
offering price of $12.00 per share) and the per share exercise price will
increase from $7.65 to the initial price per share to the public in this
offering. In addition, these warrants contain a cashless exercise feature which,
if exercised in full prior to the closing of this offering (and assuming an
initial public offering price of $12.00 per share), would result in the issuance
of 236,231 shares of common stock with no additional proceeds to the Company.
These warrants will retain this cashless exercise feature following the closing
of this offering.
On February 28, 1997, the Company issued warrants exercisable for an
aggregate of 48,449 shares of common stock at a weighted average exercise price
of $4.61 per share to certain financial advisors. These warrants contain a
cashless exercise feature which, if exercised in full prior to the closing of
this offering (and assuming an initial public offering price of $12.00 per
share), would result in the issuance of 29,841 shares of common stock with no
additional proceeds to the Company. These warrants will retain this cashless
exercise feature following the closing of this offering.
Upon the closing of the initial public offering (see Note L) and following
the filing of a Certificate of Retirement, the Company will be authorized to
issue up to 5,000,000 shares of Preferred Stock, $0.01 par value per share, in
one or more series. Each such series of Preferred Stock shall have such rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences, as
shall be determined by the Board of Directors. The Company has no present plans
to issue any shares of such Preferred Stock.
Subordinated Notes
On January 31, 1997, the Company executed a securities purchase agreement
that provided for the issuance of Subordinated Secured Notes (the "Notes") in
the aggregate amount of $2,000,000 ("First Closing") maturing on January 31,
2002. Upon the earlier of (i) the Company's receipt of final FDA approval for
Primsol and (ii) the closing of this offering, the Company will issue additional
Notes in the aggregate principal amount of $5 million ("Second Closing"). The
Notes bear no interest through January 31, 1999 after which the interest rates
are 7% through January 31, 2000, 8% through January 31, 2001 and 9% through
January 31, 2002, payable every quarter commencing on March 31 1999. The Company
has received net proceeds of approximately $1,790,000 pursuant to the first
closing. At December 31, 1996, $34,865 of
F-16
<PAGE> 87
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997 IS UNAUDITED)
expenses had been incurred and have been included in deferred charges and other
deposits in the balance sheet. The Company may redeem the Notes by paying 100%
of the outstanding principal and accrued interest at any time. Upon a change in
control of the Company, as defined in the Agreement, the holders of the Notes
may elect to have the Notes purchased by the Company at 100% of the outstanding
principal plus accrued interest. The Notes are secured by a lien on all of the
Company's assets, prohibit the payment of dividends by the Company and, subject
to certain exceptions, (including for up to $6,000,000 of senior secured bank
financing and $5,500,000 of secured purchase money financing in connection with
the planned acquisition of the Product Line) prohibit the incurrence of
additional indebtedness. Upon completion of this offering, the Company may
either redeem all of the outstanding Notes for their stated principal amount or
all of such Notes will amortize in eight equal quarterly principal payments and
require quarterly interest payments on the unpaid principal balance, at a rate
equal to the lesser of 10% or 3.5% over the prime rate, with the first quarterly
payment of principal and interest due six months after the closing of this
offering. In addition, for a period of two years following the closing of this
offering, the holders of the Notes will have the right to convert the Notes into
such number of shares of common stock as is equal to the outstanding principal
of such Notes divided by the per share Price to Public in this offering (subject
to certain requirements as to the minimum amount to be so converted as provided
in the Agreement).
Under the terms of the securities purchase agreement for the Notes, based
on a certain formula outlined therein, at the First Closing, the Company has
issued Series A warrants, to purchase an aggregate of 224,429 shares of common
stock and at the Second Closing, will issue Series A warrants to purchase an
aggregate of 336,644 shares of common stock and Series B warrants to purchase an
aggregate of 218,195 shares of common stock, to the Note investors. The Series A
warrants are exercisable at $0.01 per share for a period of seven years from the
grant date and the Series B warrants are exercisable at $5.29 per share over the
same period. In the event the Company shall not have consummated a Qualified
Public Offering or a Qualified Merger (each as defined in the securities
purchase agreement) into a public company within five years of the closing of
this financing, the holders will thereafter have the right, prior to the
expiration date, to put the warrants to the Company and require the Company to
purchase such warrants at an amount equal to the fair market value of the
underlying common stock, net of the exercise price. The fair market value of the
warrants (as of January 31, 1997) issued at the First Closing was recorded as a
discount of $836,994 to the Notes issued at such closing. Consequently, such
Note was recorded at $1,163,006. Similarly, the fair market value of the
warrants (as of January 31, 1997) issued at the Second Closing was recorded as a
discount of $1,668,746 to the Notes issued at such closing and such Notes will
be recorded at $3,331,254. Accordingly, approximately $2,506,000 of accretion
will be charged to interest expense, in addition to the stated interest rates,
over the term of the Notes.
Amendment of 1992 Equity Incentive Plan
The Board of Directors voted to amend the 1992 Plan, effective upon the
closing of the offering, to increase the number of shares of common stock
issuable upon exercise of stock options granted to 1,350,000 and to provide that
the maximum number of shares with respect to which options may be granted to any
employee during any calendar year be 500,000 shares.
1997 Employee Stock Purchase Plan
In March 1997, the Board of Directors adopted the 1997 Employee Stock
Purchase Plan (the "Purchase Plan"), effective upon the closing of the offering,
pursuant to which employees of the Company, including directors of the Company
who are employees, may purchase shares of common stock in regularly designated
offerings pursuant to payroll deductions at a price equal to the lower of 85%
(or such other higher percentage
F-17
<PAGE> 88
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1997 IS UNAUDITED)
as the Board of Directors determine to be appropriate) of the fair market value
per share of the common stock on either the first day or the last day of the
designated payroll deduction period, whichever is lower.
1997 Director Stock Option Plan
In March 1997, the Board of Directors adopted the 1997 Director Stock
Option Plan (the "Director Plan"), effective upon the pricing date of the
offering. Under the Director Plan, non-employee directors would be entitled to
receive options to purchase shares of common stock upon the pricing date of the
Offering and on May 1 of each year commencing in 1998. In addition, each
eligible non-employee director would receive an option to purchase a specified
number of shares of common stock upon the initial election to the Board of
Directors. The exercise price of the options, which vest on the first
anniversary of the date of grant, will equal the fair market value on the date
of grant.
Executive Bonus Plan
Effective January 1, 1997, the Company adopted an Executive Bonus Plan,
which provides for the payment of bonuses to those officers and key employees
reporting directly to the Chief Executive Officer or Chairman of the Company.
Pursuant to the Executive Bonus Plan, each eligible participant is entitled to a
bonus of between 1.5% and 18% of the annual salary based upon the Company's
achievement of 95% or greater of its financial target for the year. In addition,
upon achievement of 95% or greater of the financial target for the year, each
eligible participant may receive an additional discretionary performance bonus
of up to 5% of salary.
L. PRO FORMA BALANCE SHEET (UNAUDITED)
Immediately prior to the effective date of the Registration Statement
relating to the public offering of the common stock of the Company, such as the
one contemplated in the Registration Statement in which the accompanying
financial statements have been included, all of the outstanding shares of
Preferred Stock will convert on a 0.85-for-one basis, except Series B
convertible preferred which will convert to an aggregate of 353,227 shares of
common stock. In addition, the warrant obligation would be reclassified to
additional paid in capital since the put feature of those warrants would cease
to exist in the event of a public offering (see Note K). The unaudited pro forma
presentation of the March 31, 1997 balance sheet has been presented assuming
such conversions and transfers.
F-18
<PAGE> 89
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
UPSHER-SMITH LABORATORIES, INC.:
We have audited the accompanying statement of assets related to the product
line to be acquired by Ascent Pediatrics, Inc. as of December 29, 1996 and the
related statements of net sales and identified costs and expenses for each of
the years in the two-year period then ended. These financial statements are the
responsibility of Upsher-Smith Laboratories, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The product line to be acquired by Ascent Pediatrics, Inc. has been
operated as an integral part of Upsher-Smith Laboratories, Inc. and has no
separate legal existence. The basis of preparation of these financial statements
is described in note 1 to the financial statements.
In our opinion, the aforementioned financial statements present fairly the
assets related to the product line of Upsher-Smith Laboratories, Inc. at
December 29, 1996 to be acquired by Ascent Pediatrics, Inc. and the net sales in
excess of identified costs and expenses for each of the years in the two-year
period then ended on the basis of accounting described in the preceding
paragraph and in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 21, 1997
F-19
<PAGE> 90
A PRODUCT LINE OF UPSHER-SMITH LABORATORIES, INC.
STATEMENT OF ASSETS RELATED TO THE PRODUCT LINE TO BE ACQUIRED BY
ASCENT PEDIATRICS, INC.
<TABLE>
<CAPTION>
MARCH 31,
1997
DECEMBER 29, ------------
1996
------------ (UNAUDITED)
<S> <C> <C>
Inventories, net.................................................... $122,235 $235,696
-------- --------
Assets of the product line to be acquired........................... $122,235 $253,696
======== ========
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE> 91
A PRODUCT LINE OF UPSHER-SMITH LABORATORIES, INC.
STATEMENTS OF NET SALES AND IDENTIFIED COSTS AND EXPENSES OF
THE PRODUCT LINE TO BE ACQUIRED BY ASCENT PEDIATRICS, INC.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------- ---------------------------
1995 1996 1996 1997
---------- ---------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales................................ $3,563,761 $3,877,199 $1,231,057 $795,222
Identified costs and expenses:
Cost of sales.......................... 1,229,848 1,303,336 350,226 323,665
Advertising and promotion expense...... 657,655 669,456 281,001 176,851
Allocated selling expense.............. 480,700 571,167 188,160 182,734
---------- ---------- ---------- --------
Total identified costs and
expenses..................... 2,368,203 2,543,959 819,387 683,250
---------- ---------- ---------- --------
Net sales in excess of
identified costs and
expenses..................... $1,195,558 $1,333,240 $ 411,670 $111,972
---------- ---------- ---------- --------
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE> 92
A PRODUCT LINE OF UPSHER-SMITH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS OF THE PRODUCT LINE TO BE ACQUIRED BY
ASCENT PEDIATRICS, INC.
DECEMBER 31, 1995 AND DECEMBER 29, 1996
(UNAUDITED AS TO MARCH 31, 1996 AND 1997 DATA)
(1) BASIS OF PRESENTATION
The accompanying financial statements present the assets related to the
Feverall product line of Upsher Smith Laboratories, Inc. (Upsher-Smith), and the
net sales and the identified costs and expenses of the Feverall product line to
be acquired by Ascent Pediatrics, Inc. (Ascent), as provided in a non-binding
letter of intent dated November 13, 1996. The Feverall product line to be
acquired by Ascent has been operated as an integral part of Upsher-Smith and has
no separate legal existence.
The assets related to the Feverall product line as presented in the
accompanying statement of assets to be acquired include the historical balances
at December 29, 1996, of work-in-process and finished goods inventory together
with related samples of the Feverall product line. This product line has never
been operated as a separate business entity but rather has been an integral part
of the drug manufacturing and distribution business of Upsher-Smith.
The statements of net sales and identified costs and expenses of the
Feverall product line includes the net sales, cost of sales, and advertising and
promotion expense, that substantially relate directly to the product line to be
acquired by Ascent. Selling expense items are allocated based on estimates and
assumptions and primarily reflect an estimate of activity attributable to
selling the Feverall product line relative to the total selling activity of
Upsher-Smith. Management of Upsher-Smith cannot estimate what selling expenses
would have been if the Feverall product line had been operated on a stand alone
basis.
The above allocations are believed by management to be reasonable
allocations under the circumstances. However, there can be no assurance that
such allocations will be indicative of future results of operations. In
addition, the carrying value of inventories, as reflected in the accompanying
statement of assets to be acquired, does not include any adjustments which may
result at the date of acquisition.
General and administrative expenses of Upsher-Smith were not dedicated
specifically to the product line to be acquired for the periods presented and
because Ascent is not acquiring any of the general and administrative cost
structure of Upsher-Smith, general and administrative expenses were excluded
from the accompanying financial statements. Research and development expenses of
Upsher-Smith did not specifically relate to the product line to be acquired for
the periods presented and as a result were excluded from the accompanying
financial statements.
Upsher-Smith is a pharmaceutical manufacturer and distributor that
concentrates on developing cardiovascular products. The company markets its
products to retail, chain, and hospital pharmacies primarily by means of
wholesale and drug chain distribution channels throughout the United States. The
accompanying financial statements are not intended to present all the assets or
operations of Upsher-Smith.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method. Samples and display inventory are charged to
advertising and promotion expense when used.
Revenue Recognition
Revenue is recognized upon shipment of the product. Allowances for sales
returns, discounts and rebates are provided for based on the volume of sales and
actual experience.
F-22
<PAGE> 93
A PRODUCT LINE OF UPSHER-SMITH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS OF THE PRODUCT LINE TO BE ACQUIRED BY
ASCENT PEDIATRICS, INC. -- (CONTINUED)
(3) INVENTORIES
The components of inventories were as follows:
<TABLE>
<CAPTION>
DECEMBER 29, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Work in process...................................... $ 10,864 $ --
Samples and displays................................. 42,486 44,613
Finished goods....................................... 68,885 191,083
-------- --------
$122,235 $ 235,696
======== ========
</TABLE>
(4) NET SALES
Net sales consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
--------------------------- -----------------------
DECEMBER 31, DECEMBER 29, MARCH 31, MARCH 31,
1995 1996 1996 1997
------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Gross sales............................ $4,677,134 $5,281,399 $1,598,375 $1,223,906
Less sales returns, discounts and
rebates.............................. 1,113,373 1,404,200 367,318 428,684
---------- ---------- ---------- ----------
Net sales......................... $3,563,761 $3,877,199 $1,231,057 $ 795,222
========== ========== ========== ==========
</TABLE>
For the year ended December 31, 1995, two customers accounted for 22% of
sales of the Feverall product line. For the year ended December 29, 1996 three
customers accounted for 33% of sales of the Feverall product line.
(5) INCOME TAXES
Upsher-Smith has elected to be treated as a small business corporation (S
corporation) under provisions of the Internal Revenue Code of 1986, whereby
profits and losses are passed directly to the stockholders for inclusion in
their personal tax returns. Accordingly, no liability or provision for federal
and state income taxes is included in the accompanying financial statements.
(6) SUBSEQUENT EVENT (UNAUDITED)
On March 25, 1997, Upsher-Smith entered into a definitive agreement
relating to the sale of the Feverall product line to Ascent. Under the terms of
this agreement, Upsher-Smith has agreed to sell the Feverall product line,
including certain intellectual property, technical information, product
formulations and regulatory approvals and registrations.
F-23
<PAGE> 94
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
INTRODUCTION TO UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997
In March 1997 Ascent Pediatrics, Inc. ("Ascent" or the "Company") signed an
asset purchase agreement to acquire a product line of Upsher-Smith. Accordingly,
these accompanying unaudited combined pro forma financial statements reflect the
following:
- The issuance of $5,000,000 of convertible subordinated secured notes (the
"Notes") no later than the closing of this offering presented as if this
transaction occurred on January 1, 1996 with respect to the Unaudited
Combined Pro Forma Statements of Operations and on March 31, 1997 with
respect to Unaudited Combined Pro Forma Balance Sheet.
- The conversion of Series A and B convertible preferred stock, and Series
D, E and F redeemable convertible preferred stock, as if the conversion
took place at March 31, 1997, which mandatorily convert upon closing of
an initial public offering.
- The warrant obligation pertaining to the warrants issued or issuable in
connection with the Notes would be transferred to additional paid in
capital since the put feature on those warrants would cease to exist in
the event of a public offering.
The Ascent Pro Forma Subtotal March 31, 1997 column represents Ascent's
March 31, 1997 historical financial statements adjusted for the issuance of an
additional $5,000,000 of Notes no later than the closing of this offering, the
Preferred Stock conversions and reclassification of the warrant obligation to
additional paid in capital as described above and prior to adjustments related
to the acquisition described below.
In addition, the accompanying unaudited combined pro forma financial
statements reflect the acquisition of the Feverall acetaminophen suppository
line ("Product Line") from Upsher-Smith for a purchase price equal to $11.5
million plus the cost of inventories. Under the terms of the agreement, Ascent
has agreed to purchase the Product Line, including certain intellectual
property, technical information, product formulations and regulatory approvals
and registrations. Ascent will not purchase any accounts receivable and will not
assume any liabilities of Upsher-Smith. For purposes of the combined pro forma
financial statements, this acquisition has been accounted for using the purchase
method of accounting.
Pursuant to this agreement, the Company paid a non-refundable deposit of
$250,000 in 1996. Upon the closing, the Company is required to make a cash
payment to Upsher-Smith of approximately $5.75 million plus the cost of the
inventory ($235,696 at March 31, 1997) and to sign a promissory note in the
amount of approximately $5.5 million. This note will be payable 225 days
following the closing. Ascent has also agreed to purchase from Upsher-Smith,
Ascent's requirements for products in the Product Line for a period of five
years.
The Unaudited Combined Pro Forma Financial Statements combine Ascent's Pro
forma Balance Sheet with the Statement of Assets Related to the Product Line to
be Acquired as if the transaction occurred on March 31, 1997 and Ascent's
Statements of Operations for the year ended December 31, 1996 and for the three
months ended March 31, 1997 with the related Statement of Net Sales and
Identified Costs and Expenses of the Product Line to be Acquired as if the
transaction had occurred on January 1, 1996. The Statements of Net Sales and
Identified Costs and Expenses includes advertising and promotion expense that
substantially relate directly to the Product Line to be acquired by Ascent.
Selling expense items are allocated based on estimates and assumptions and
primarily reflect an estimate of activity attributable to the Product Line
relative to the total selling activity of Upsher-Smith. General and
administrative and research and development expenses of Upsher-Smith were not
dedicated specifically to the Product Line to be acquired and, because Ascent
would not acquire any of such cost structure of Upsher-Smith, these costs were
excluded from the Statements of Net Sales and Identified Costs and Expenses. Pro
forma adjustments have been made to reflect Ascent's estimate of the incremental
expense that would have been incurred if the acquisition had occurred on January
1, 1996. The unaudited combined pro forma statements do not purport to be
indicative of
F-24
<PAGE> 95
the financial position or the results of operations had the probable acquisition
actually occurred at this time or what results in the future may be.
The Statement of Assets Related to the Product Lines to be Acquired and the
Statements of Net Sales and Identified Costs and Expenses of the Product Lines
to be Acquired have been derived from their respective historical financial
statements. The Unaudited Combined Pro Forma Financial Statements should be read
in conjunction with the accompanying notes thereto and with the historical
financial statements and related notes thereto of Ascent and the historical
financial statements and related notes thereto of the Upsher-Smith Product Line
to be Acquired.
F-25
<PAGE> 96
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED COMBINED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1997
<TABLE>
<CAPTION>
ASSUMED
CONVERSION
ASCENT ISSUANCE OF OF PREFERRED
HISTORICAL ADDITIONAL NOTE STOCK INTO NOTE
MARCH 31, 1997 NOTES REF. COMMON STOCK REF.
----------------- ----------- ---- ------------- ----
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 8,299,854 $ 4,840,000 A $
Other current assets.......................... 209,954
Inventories, net.............................. --
-----------
Total current assets.................... 8,509,808
Fixed assets, net............................. 294,316
Deposits related to acquisition............... 250,000
Deferred charges and other deposits........... 403,007
Debt issue costs, net......................... 203,294 160,000 A
Other assets, net............................. 11,562
-----------
Total assets............................ $ 9,671,987
===========
Liabilities and stockholders' equity:
Accounts payable.............................. $ 770,803
Accrued expenses.............................. 1,307,863
Note payable -- Feverall Acquisition.......... --
-----------
Total current liabilities............... 2,078,666
Convertible subordinated secured notes.......... 1,182,922 3,331,254 A
Warrant obligation.............................. 836,994 1,668,746 A (2,505,740) B
-----------
Total liabilities....................... 4,098,582
Series D redeemable convertible preferred stock. 8,157,132 (8,157,132) B
Series E redeemable convertible preferred
stock......................................... 4,400,226 (4,400,226) B
Series F redeemable convertible preferred
stock......................................... 12,452,471 (12,452,471) B
Stockholders' equity (deficit):
Series A convertible preferred................ 280,110 (280,110) B
Series B convertible preferred................ 2,574,993 (2,574,993) B
Common stock.................................. 8 177 B
Additional paid-in capital.................... -- 30,370,495 B
Deficit accumulated during the development
stage....................................... (22,291,535)
-----------
Total stockholders' equity (deficit).... (19,436,424)
-----------
Total liabilities and stockholders'
equity (deficit)...................... $ 9,671,987
===========
<CAPTION>
A PRODUCT LINE
ASCENT OF UPSHER-SMITH PURCHASE
PRO FORMA HISTORICAL NOTE PRICE NOTE
MARCH 31, 1997 MARCH 31, 1997 REF. ADJUSTMENTS REF.
----------------- ----------------- ---- ----------- ----
<S> <C<C>
Current assets:
Cash and cash equivalents..................... $ 13,139,854 $ $(5,985,696) D
Other current assets.......................... 209,954
Inventories, net.............................. -- 235,696 C 14,304 J
------------
Total current assets.................... 13,349,808
Fixed assets, net............................. 294,316
Deposits related to acquisition............... 250,000 (250,000) E
Deferred charges and other deposits........... 403,007
Debt issue costs, net......................... 363,294
Other assets, net............................. 11,562 11,485,696 F
------------
Total assets............................ $ 14,671,987
============
Liabilities and stockholders' equity:
Accounts payable.............................. $ 770,803
Accrued expenses.............................. 1,307,863
Note payable -- Feverall Acquisition.......... -- 5,500,000 G
------------
Total current liabilities............... 2,078,666
Convertible subordinated secured notes.......... 4,514,176
Warrant obligation.............................. --
------------
Total liabilities....................... 6,592,842
Series D redeemable convertible preferred stock. --
Series E redeemable convertible preferred
stock......................................... --
Series F redeemable convertible preferred
stock......................................... --
Stockholders' equity (deficit):
Series A convertible preferred................ --
Series B convertible preferred................ --
Common stock.................................. 185
Additional paid-in capital.................... 30,370,495
Deficit accumulated during the development
stage....................................... (22,291,535)
------------
Total stockholders' equity (deficit).... 8,079,145
------------
Total liabilities and stockholders'
equity (deficit)...................... $ 14,671,987
============
<CAPTION>
COMBINED PRO FORMA
MARCH 31, 1997
------------------
Current assets:
Cash and cash equivalents..................... $ 7,154,158
Other current assets.......................... 209,954
Inventories, net.............................. 250,000
---------
Total current assets.................... 7,614,112
Fixed assets, net............................. 294,316
Deposits related to acquisition............... --
Deferred charges and other deposits........... 403,007
Debt issue costs, net......................... 363,294
Other assets, net............................. 11,497,258
---------
Total assets............................ $ 20,171,987
=========
Liabilities and stockholders' equity:
Accounts payable.............................. $ 770,803
Accrued expenses.............................. 1,307,863
Note payable -- Feverall Acquisition.......... 5,500,000
---------
Total current liabilities............... 7,578,666
Convertible subordinated secured notes.......... 4,514,176
Warrant obligation.............................. --
---------
Total liabilities....................... 12,092,842
Series D redeemable convertible preferred stock. --
Series E redeemable convertible preferred
stock......................................... --
Series F redeemable convertible preferred
stock......................................... --
Stockholders' equity (deficit):
Series A convertible preferred................ --
Series B convertible preferred................ --
Common stock.................................. 185
Additional paid-in capital.................... 30,370,495
Deficit accumulated during the development
stage....................................... (22,291,535)
---------
Total stockholders' equity (deficit).... 8,079,145
---------
Total liabilities and stockholders'
equity (deficit)...................... $ 20,171,987
=========
</TABLE>
F-26
<PAGE> 97
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSUMED
CONVERSION ASCENT
ASCENT ISSUANCE OF OF PREFERRED PRO FORMA
HISTORICAL ADDITIONAL NOTE STOCK INTO NOTE SUBTOTAL
DECEMBER 31, 1996 NOTES REF. COMMON STOCK REF. DECEMBER 31, 1996
----------------- ----------- ---- ------------- ---- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................................... $ -- $ $ --
----------- ----------
Costs and expenses:
Cost of sales............................. -- --
Research and development.................. 3,760,948 3,760,948
Selling, general and administrative....... 2,805,352 32,000 M 2,837,352
Advertising and promotion................. -- --
Allocated selling......................... -- --
----------- ----------
Total expenses:....................... 6,566,300 6,598,300
Income (loss) from operations............... (6,566,300) (6,598,300)
Interest income............................. 79,084 79,084
Interest expense............................ -- (468,556) N (468,556)
----------- ----------
Net income (loss)........................... $(6,487,216) $ (6,987,572)
=========== ==========
Net income (loss) per share................. $ (1.48) $ (1.59)
=========== ==========
Weighted average number of common and common
stock equivalent shares outstanding....... 4,384,197 4,384,197
<CAPTION>
A PRODUCT
LINE OF
UPSHER-SMITH PURCHASE
HISTORICAL NOTE PRICE NOTE OTHER NOTE COMBINED PRO FORMA
DECEMBER 29, 1996 REF. ADJUSTMENTS REF. ADJUSTMENTS REF. DECEMBER 31, 1996
----------------- ---- ----------- ---- ----------- ---- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................................... $ 3,877,199 C $ $ $ 3,877,199
----------- ------------
Costs and expenses:
Cost of sales............................. 1,303,336 C 130,333 I 1,433,669
Research and development.................. -- 3,760,948
Selling, general and administrative....... -- 574,285 H 490,000 L 5,142,260
1,240,623 K
Advertising and promotion................. 669,456 C (669,456) K --
Allocated selling......................... 571,167 C (571,167) K --
----------- ------------
Total expenses:....................... 2,543,959 C 10,336,877
Income (loss) from operations............... (6,459,678)
Interest income............................. -- 79,084
Interest expense............................ -- (468,556)
----------- ------------
Net income (loss)........................... $ 1,333,240 C $ (6,849,150)
=========== ============
Net income (loss) per share................. $ (1.56)
============
Weighted average number of common and common
stock equivalent shares outstanding....... 4,384,197
</TABLE>
F-27
<PAGE> 98
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
ASSUMED
CONVERSION ASCENT
ASCENT ISSUANCE OF OF PREFERRED PRO FORMA
HISTORICAL ADDITIONAL NOTE STOCK INTO NOTE SUBTOTAL
MARCH 31, 1997 NOTES REF. COMMON STOCK REF. MARCH 31, 1997
----------------- ----------- ---- ------------- ---- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales........................ $ -- $ $ --
----------- ------------
Costs and expenses:
Cost of sales.................. -- --
Research and development....... 1,528,114 1,528,114
Selling, general and
administrative............... 972,826 8,000 M 980,826
Advertising and promotion...... -- --
Allocated selling.............. -- --
----------- ------------
Total expenses:............ 2,500,940 2,508,940
Income (loss) from operations.... (2,500,940) (2,508,940)
Interest income.................. 72,745 72,745
Interest expense................. (19,916) (127,095) N (147,011)
Gain on sale of fixed assets..... 9,242 9,242
----------- ------------
Net income (loss)................ $(2,438,869) $ (2,573,964)
=========== ============
Net income (loss) per share...... $ (0.56) $ (0.59)
=========== ============
Weighted average number of common
and common stock equivalent
shares outstanding............. 4,384,197 4,384,197
<CAPTION>
A PRODUCT
LINE OF
UPSHER-SMITH PURCHASE
HISTORICAL NOTE PRICE NOTE OTHER NOTE COMBINED PRO FORMA
MARCH 31, 1997 REF. ADJUSTMENTS REF. ADJUSTMENTS REF. MARCH 31, 1997
----------------- ---- ----------- ---- ----------- ---- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales........................ $ 795,222 C $ $ $ 795,222
----------- ------------
Costs and expenses:
Cost of sales.................. 323,665 C 32,367 I 356,032
Research and development....... -- 1,528,114
Selling, general and
administrative............... -- 143,571 H 122,500 L 1,606,482
359,585 K
Advertising and promotion...... 176,851 C (176,851) K --
Allocated selling.............. 182,734 C (182,734) K --
----------- ------------
Total expenses:............ 683,250 C 3,490,628
Income (loss) from operations.... (2,695,406)
Interest income.................. -- 72,745
Interest expense................. (147,011)
Gain on sale of fixed assets..... 9,242
----------- ------------
Net income (loss)................ $ 111,972 C $ (2,760,430)
=========== ============
Net income (loss) per share...... $ (0.63)
============
Weighted average number of common
and common stock equivalent
shares outstanding............. 4,384,197
</TABLE>
F-28
<PAGE> 99
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997
The accompanying unaudited combined pro forma financial statements reflect
the impact of the following adjustments:
A. ISSUANCE OF ADDITIONAL NOTES
Records the issuance of $5,000,000 of the Notes net of estimated issuance
costs of $160,000 with proceeds of $4,840,000 no later than the closing of this
offering presented as if the issuance occurred on March 31, 1997. The Notes have
been recorded at $3,331,254 net of $1,668,746, the fair market value of Series A
and Series B warrants to purchase 336,644 and 218,195 shares, respectively, of
Common Stock issued in connection with the Notes. Accordingly the liability of
$3,331,254 (after allocating $1,668,746 as value attributable to warrants) will
be accreted up to $5,000,000 over the term of the Notes and such accretion in
the amount of $1,668,746 will be recorded as interest expense in addition to the
stated interest rate. The Notes bear no interest through January 31, 1999 after
which the interest rates are 7% through January 31, 2000, 8% through January 31,
2001 and 9% through January 31, 2002, payable every quarter commencing on March
31, 1999. Upon completion of an initial public offering of shares of its Common
Stock, the Company may either redeem all of the outstanding Notes for their
stated principal amount or all of such Notes will amortize in eight equal
quarterly principal payments and require quarterly interest payments on the
unpaid principal balance, at a rate equal to the lesser of 10% or 3.5% over the
prime rate, with the first quarterly payment of principal and interest due six
months after the closing of such an offering. In addition, for a period of two
years following the closing of any such offering, the holders of the Notes will
have the right to convert the Notes into such number of shares of Common Stock
as is equal to the outstanding principal of such Notes divided by the per share
Price to Public in the offering (subject to certain requirements as to the
minimum amount to be so converted as provided in the Agreement).
B. CONVERSION OF PREFERRED STOCK AND WARRANT OBLIGATION
Records the following:
- The conversion of 800,000 shares of Series A convertible preferred stock,
$.00004 par value, into 680,000 shares of common stock, $.00004 par
value.
- The conversion of 399,999 shares of Series B convertible preferred stock,
$.00004 par value, into 353,227 shares of common stock, $.00004 par
value.
- The conversion of 1,359,522 shares of Series D redeemable convertible
preferred stock, $.00004 par value, into 1,155,589 shares of common
stock, $.00004 par value.
- The conversion of 733,371 shares of Series E redeemable convertible
preferred stock, $.00004 par value, into 623,358 shares of common stock,
$.00004 par value.
- The conversion of 1,915,765 shares of Series F redeemable convertible
preferred stock, $.00004 par value, into 1,628,390 shares of common
stock, $.00004 par value.
- The reclassification of warrant obligations of $2,505,740 to additional
paid in capital.
F-29
<PAGE> 100
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SERIES D SERIES E SERIES F
SERIES A SERIES B REDEEMABLE REDEEMABLE REDEEMABLE
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED WARRANT
STOCK STOCK STOCK STOCK STOCK OBLIGATION TOTALS
----------- ----------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Warrant obligation............ $ $ $ $ $ $(2,505,740) $ (2,505,740)
Series A convertible preferred
stock........................ (280,110) (280,110)
Series B convertible preferred
stock........................ (2,574,993) (2,574,993)
Series D redeemable
convertible preferred
stock........................ (8,157,132) (8,157,132)
Series E redeemable
convertible preferred
stock........................ (4,400,226) (4,400,226)
Series F redeemable
convertible preferred
stock........................ (12,452,471) (12,452,471)
Common stock.................. 27 14 46 24 66 177
Additional paid-in capital.... 280,083 2,574,979 8,157,086 4,400,202 12,452,405 2,505,740 30,370,495
--------- ----------- ----------- ----------- ------------ ----------- ------------
Totals................. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
========= =========== =========== =========== ============ =========== ============
</TABLE>
C. A PRODUCT LINE OF UPSHER-SMITH
The historical results of A Product Line of Upsher-Smith exclude allocated
general and administrative and research and development expenses which are not
directly attributable to the product lines to be sold.
D. CASH PAYMENT
Records the cash payment of $5,985,696 for the probable acquisition of the
Product Line which includes a $5,750,000 million required payment at closing and
$235,696 of inventory costs.
E. DEPOSIT
Records the application of the deposit of $250,000 related to the probable
acquisition of the Product Line to the purchase price.
F. INTANGIBLE ASSETS
Records intangible assets, net of amortization and deposits, resulting from
the probable acquisition of the Feverall product line as if the probable
acquisition had occurred on March 31, 1997:
<TABLE>
<S> <C>
Purchase price.................................. $11,735,696
Less inventory acquired at fair value........... 250,000
-----------
Intangible assets............................... $11,485,696
===========
</TABLE>
G. NOTE PAYABLE
Records note payable to Upsher-Smith related to the probable acquisition of
the Feverall product line. The note is payable 225 days from closing and does
not bear interest.
<TABLE>
<S> <C>
Purchase price.................................. $11,735,696
Less deposit.................................... 250,000
-----------
Subtotal........................................ 11,485,696
Less cash payment............................... 5,985,696
-----------
Note payable.................................... $ 5,500,000
===========
</TABLE>
F-30
<PAGE> 101
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
H. AMORTIZATION EXPENSE
Records amortization expense of $574,285 ($143,571 a quarter) related to
the intangible assets of $11,485,696 over the estimated life of 20 years. At the
time the acquisition is consummated, the amount of the purchase price that
exceeds the fair value of the tangible assets will be allocated to specific
intangible assets (expected to be primarily intellectual property, know-how,
customer lists, etc.) and any remainder will be classified as goodwill.
Accordingly, the amortization periods for the assets will correspond to their
useful lives. The 20 years is an estimate by management for pro forma purposes
and, in the opinion of management, will not materially differ from actual
results.
I. COST OF GOODS SOLD
Adjusts cost of goods sold for the manufacture of the products to be
acquired in excess of Upsher-Smith's fully allocated costs of manufacturing such
products as per the manufacturing agreement.
J. INVENTORY
Records adjustment to increase inventory to be purchased to fair market
value.
K. RECLASSIFICATION
Records reclassification of Upsher-Smith advertising and promotion expenses
of $669,456 and allocated selling expenses of $571,167 totalling $1,240,623 for
the year ended December 31, 1996 and advertising and promotion expenses of
$176,851 and allocated selling expenses of $182,734 totalling $359,585 for the
three months ended March 31, 1997 to conform with Ascent's financial statement
presentation.
L. INCREMENTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Records an estimate of the incremental selling, general and administrative
expenses, in addition to the Upsher-Smith product line's identified costs and
expenses, expected to be incurred by Ascent primarily for distribution costs
(including billing and collection efforts), advertising, promotion and sales
force of $490,000 for a year or $122,500 for a quarter. Selling, general and
administrative expenses are expected to increase as the product line revenue
increases.
M. AMORTIZATION OF DEBT ISSUE COSTS
Records amortization of issuance costs of $160,000 related to the
additional Notes. Amortization for one year is $32,000 or $8,000 per quarter.
N. INTEREST EXPENSES PERTAINING TO THE ADDITIONAL NOTES
Records accretion of notes to maturity amount and treated as interest
expense. Interest expenses for the year ended December 31, 1996 and for the
three months ended March 31, 1997 are $468,556 and $127,095, respectively.
F-31
<PAGE> 102
Objective: Improved Compliance
and Therapeutic Outcomes
<TABLE>
<S> <C> <C>
9 Products in
Development
Identify [Background art Drug Delivery and
Products Based depicting children] Reformulation
on Market Needs Technologies
[ASCENT LOGO]
Establish Dedicated Experienced
U.S. Sales Force Management Team
</TABLE>
Exclusive Focus on
Pediatric Market
<PAGE> 103
======================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 6
The Company.......................... 16
Use of Proceeds...................... 16
Dividend Policy...................... 17
Capitalization....................... 18
Dilution............................. 20
Selected Financial Data.............. 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 23
Business............................. 26
Management........................... 48
Certain Transactions................. 58
Principal Stockholders............... 60
Description of Capital Stock......... 62
Shares Eligible for Future Sale...... 65
Underwriting......................... 67
Legal Matters........................ 69
Experts.............................. 69
Additional Information............... 69
Index to Financial Statements........ F-1
</TABLE>
------------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
2,000,000 SHARES
[ASCENT PEDIATRICS LOGO]
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
COWEN & COMPANY
VOLPE BROWN WHELAN
& COMPANY
ADAMS, HARKNESS & HILL, INC.
, 1997
======================================================
<PAGE> 104
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates except
for the Securities and Exchange Commission ("SEC") registration fee and the
National Association of Securities Dealers, Inc. ("NASD") filing fee. All these
expenses will be payable by the Registrant.
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
SEC Registration Fee.............................................. $ 9,061
NASD Filing Fee................................................... 3,490
Nasdaq National Market Listing Fee................................ 50,000
Blue Sky Fees and Expenses (including legal fees)................. 3,000
Transfer Agent and Registrar Fees and Expenses.................... 5,000
Accounting Fees and Expenses...................................... 300,000
Legal Fees and Expenses........................................... 275,000
Printing, Engraving and Mailing Expenses.......................... 125,000
Miscellaneous..................................................... 29,449
---------
Total........................................................... $800,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article EIGHTH of the Registrant's Second Amended and Restated Certificate
of Incorporation (the "Certificate of Incorporation") provides that no director
of the Registrant shall be personally liable for any monetary damages for any
breach of fiduciary duty as a director, except to the extent that the Delaware
General Corporation law prohibits the elimination or limitation of liability of
directors for breach of fiduciary duty.
Article NINTH of the Registrant's Certificate of Incorporation provides
that a director or officer of the Registrant (a) shall be indemnified by the
Registrant against all expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement incurred in connection with any litigation or
other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a Director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.
Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination by the Registrant that
II-1
<PAGE> 105
the director or officer did not meet the applicable standard of conduct required
for indemnification, or if the Registrant fails to make an indemnification
payment within 60 days after such payment is claimed by such person, such person
is permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent to
the right of indemnification, the director or officer must give the Registrant
notice of the action for which indemnity is sought and the Registrant has the
right to participate in such action or assume the defense thereof.
Article NINTH of the Registrant's Certificate of Incorporation further
provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officers the Registrant
must indemnify those persons to the full extent permitted by such law as so
amended.
Article NINTH also permits the Company to purchase and maintain insurance,
at the Company's expense, to protect any director against any expense, liability
or loss incurred by such director in such capacity or arising out of his status
as such.
Section 145 of the Delaware General Corporation Law, as amended, provides
that a corporation has the power to indemnify a director, officer, employee or
agent of the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
Under Section 6 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of Underwriting Agreement filed as
Exhibit 1.1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) ISSUANCES OF CAPITAL STOCK, NOTES AND WARRANTS
Since January 1, 1994, the Registrant has sold the following securities
that were not registered under the Securities Act:
1. On June 18, 1995, the Registrant issued warrants exercisable for
21,647 shares of Series D Convertible Preferred Stock at an exercise price
of $9.00 per share to one individual and two entities, each of whom or
which was an accredited investor, in exchange for the cancellation of
warrants exercisable for an equal number of shares of Series D Convertible
Preferred Stock held by such entities. These issuances were conducted
pursuant to Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act").
2. On July 13, 1995 and August 16, 1995, the Registrant issued and
sold a total of 733,371 shares of Series E Convertible Preferred Stock to
three individuals and ten entities, each of whom or which was an accredited
investor, for an aggregate purchase price of $4,400,000. In connection with
the sale of such shares of Series E Convertible Preferred Stock, the
Registrant issued warrants to the purchasers of such shares exercisable for
an aggregate of 103,891 shares of Common Stock at an exercise price of
$10.59 per share. These issuances were conducted pursuant to Registration D
promulgated under the Securities Act ("Regulation D") and Section 4(2) of
the Securities Act. The Company paid $25,000 in commissions to a placement
agent in connection with the sale of shares of Series E Convertible
Preferred Stock.
3. On June 28, 1996, December 18, 1996, February 3, 1997, February 19,
1997 and February 28, 1997, the Registrant issued and sold a total of
1,915,765 shares of Series F Convertible Preferred Stock to
II-2
<PAGE> 106
15 individuals and 14 entities, each of whom or which was an accredited
investor, for an aggregate purchase price of $12.5 million. These issuances
were conducted pursuant to Regulation D and Section 4(2) of the Securities
Act. In connection with the sale of such shares of Series F Convertible
Preferred Stock, the Registrant issued warrants to the purchasers of such
shares exercisable for an aggregate of 651,334 shares of Common Stock at an
exercise price of $7.65 per share. Upon the closing of this offering,
assuming no prior exercise of these warrants, the number of shares of
Common Stock issuable upon exercise of these warrants will decrease to
415,031 shares of Common Stock (assuming an initial public offering price
of $12.00 per share) and the per share exercise price will increase to the
initial per share price to the public. On February 28, 1997, the Company
also issued warrants exercisable for 10,200 shares of Common Stock at an
exercise price of $8.24 per share to one placement agent and warrants
exercisable for an aggregate of 17,000 shares of Common Stock at an
exercise price of $8.18 per share to four individuals affiliated with and
designated by a second placement agent and paid such placement agents
commissions in the aggregate amount of $201,000 in connection with the sale
of shares of Series F Convertible Preferred Stock. These issuances were
conducted pursuant to Section 4(2) of the Securities Act.
4. On January 31, 1997, the Registrant issued convertible subordinated
secured notes to two entities and two individuals, each of whom or which
was an accredited investor, for an aggregate of $2,000,000 and issued
warrants exercisable for an aggregate of 224,429 shares of Common Stock at
an exercise price of $.01 per share to such individuals and entities. These
issuances were conducted pursuant to Regulation D and Section 4(2) of the
Securities Act. On February 28, 1997, the Company also issued warrants
exercisable for an aggregate of 21,249 shares of Common Stock at an
exercise price of $0.01 per share to four individuals affiliated with and
designated by a placement agent and paid a commission of $120,000 to such
placement agent in connection with the issuance of the convertible
subordinated secured notes. These issuances were conducted pursuant to
Section 4(2) of the Securities Act.
5. On February 12, 1997, the Registrant issued 19,550 shares of Series
F Convertible Preferred Stock and warrants exercisable for an aggregate of
7,820 shares of Common Stock at an exercise price of $7.65 per share to one
accredited investor in connection with the provision of certain consulting
services to the Registrant. This issuance was conducted pursuant to
Regulation D and Section 4(2) of the Securities Act.
(b) GRANTS AND EXERCISES OF STOCK OPTIONS
The Registrant's 1992 Equity Incentive Plan, as amended (the "1992 Plan"),
was adopted by the stockholders of the Registrant in September 1992. As of March
31, 1997, options to purchase 530 shares of Common Stock had been exercised by
an aggregate of two persons for an aggregate consideration of $1,250 and options
to purchase 634,736 shares of Common Stock at a weighted average exercise price
of $2.40 per share were outstanding under such plan. The options and shares of
capital stock issued pursuant to the 1992 Plan were offered and sold in reliance
upon the exemption from registration under Rule 701 promulgated under the
Securities Act.
The Registrant's 1997 Director Option Plan and 1997 Employee Stock Purchase
Plan were adopted by the Company in March 1997. These plans will become
effective upon the closing of this offering, and, as of March 31, 1997, no
shares have been issued under these plans.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
EXHIBIT NO.
- -----------
1.1* Form of Underwriting Agreement
2.1*+ Asset Purchase Agreement dated as of March 25, 1997 between the
Registrant and Upsher-Smith Laboratories, Inc.
3.1* Amended and Restated Certificate of Incorporation of the Registrant
3.2* Certificate of Correction of Certificate of Amendment of the
Registrant
II-3
<PAGE> 107
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
3.3* Certificate of Amendment of Amended and Restated Certificate of Incorporation of
the Registrant
3.4 Form of Certificate of Amendment to be filed prior to consummation of the public
offering
3.5* Form of Second Amended and Restated Certificate of Incorporation of the Registrant
to be filed upon the closing of the public offering
3.6* Amended and Restated By-Laws of the Registrant
4.1* Specimen Certificate for shares of Common Stock, $.00004 par value, of the
Registrant
4.2* Form of Subordinated Secured Note (included in Exhibit 10.11)
5.1* Opinion of Hale and Dorr LLP with respect to the validity of the securities being
offered
10.1* Amended and Restated 1992 Equity Incentive Plan
10.2* 1997 Director Stock Option Plan
10.3* 1997 Employee Stock Purchase Plan
10.4* Lease dated November 21, 1996 between the Registrant and New Boston Wilmar Limited
Partnership
10.5* Employment Agreement dated as of March 15, 1994 between the Registrant and Emmett
Clemente
10.6* Consulting Agreement dated as of April 1, 1996 between the Registrant and Robert
E. Baldini
10.7*+ Development and License Agreement dated as of October 8, 1996 by and between the
Registrant and Recordati S.A. Chemical and Pharmaceutical Company ("Recordati")
10.8*+ Manufacturing and Supply Agreement dated as of October 8, 1996 by and between the
Registrant and Recordati
10.9*+ License Agreement dated September 28, 1990 between MacroChem Corp. and the
Registrant
10.10*+ Supply Agreement dated as of October 12, 1994 by and between the Registrant and
Lyne Laboratories, Inc.
10.11* Securities Purchase Agreement dated as of January 31, 1997 among the Registrant,
Triumph-Connecticut Limited Partnership and the other purchasers identified
therein (the "Triumph Agreement")
10.12* Waiver and Amendment to the Triumph Agreement dated as of March 13, 1997
10.13* Series F Convertible Preferred Stock and Warrant Purchase Agreement dated as of
June 28, 1996 between the Registrant and certain purchasers identified therein as
amended by Amendment No. 1 dated as of June 28, 1996 and Amendment No. 2 dated
February 3, 1997
10.14* Form of Common Stock Purchase Warrant issued to Chestnut Partners, Inc. on
February 28, 1997
10.15* Common Stock Purchase Warrant issued to Banque Paribas on February 28, 1997
10.16* Form of Common Stock Purchase Warrant with an exercise price of $.01 per share
issued to designees of Bentley Securities on February 28, 1997
10.17* Form of Common Stock Purchase Warrant with an exercise price of $5.91 per share
issued to designees of Bentley Securities on February 28, 1997
10.18* Amendment No. 1 dated February 28, 1997 to the Development and License Agreement
dated as of October 8, 1996 by and between the Registrant and Recordati
11.1* Computation of historical and pro forma net loss per common share
23.1* Consent of Hale and Dorr LLP
23.2 Consent of Coopers & Lybrand L.L.P., independent accountants
23.3* Consent of KPMG Peat Marwick LLP, independent auditors
23.4* Consent of Welsh & Katz, Ltd.
24.1* Powers of Attorney
27.1* Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
II-4
<PAGE> 108
(b) FINANCIAL STATEMENT SCHEDULES
All other schedules have been omitted because they are not required or
because the required information is given in the Financial Statements or Notes
thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Certificate of
Incorporation and Amended and Restated By-Laws of the Registrant and the laws of
the State of Delaware, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and this offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 109
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 4 to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Town of Wilmington,
Commonwealth of Massachusetts, on this 28th day of May, 1997.
ASCENT PEDIATRICS, INC.
By: /s/ JOHN G. BERNARDI
--------------------------------------
John G. Bernardi
Vice President, Finance and Treasurer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to Registration Statement has been signed by the following
persons in the capacities indicated below.
SIGNATURE TITLE DATE
--------- ----- ----
* President, Chief Executive May 28, 1997
- -------------------------- Officer and Director
Alan R. Fox (Principal Executive Officer)
* Vice President, Finance May 28, 1997
- -------------------------- and Treasurer (Principal
John G. Bernardi Financial and
Accounting Officer)
* Chairman May 28, 1997
- --------------------------
Emmett Clemente, Ph.D.
* Vice Chairman May 28, 1997
- --------------------------
Robert E. Baldini
* Director May 28, 1997
- --------------------------
Raymond F. Baddour, Ph.D.
* Director May 28, 1997
- --------------------------
Michael J.F. Du Cros
* Director May 28, 1997
- --------------------------
Thomas W. Janes
* Director May 28, 1997
- --------------------------
Andre Lamotte, Sc.D.
* Director May 28, 1997
- --------------------------
Terrance McGuire
* Director May 28, 1997
- --------------------------
Lee J. Schroeder
*By: /s/ JOHN G. BERNARDI
- --------------------------
John G. Bernardi
Attorney-in-Fact
II-6
<PAGE> 110
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------------------------------------------------------------------- ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement
2.1*+ Asset Purchase Agreement dated as of March 25, 1997 between the
Registrant and Upsher-Smith Laboratories, Inc.
3.1* Amended and Restated Certificate of Incorporation of the Registrant.
3.2* Certificate of Correction of Certificate of Amendment of the
Registrant.
3.3* Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Registrant.
3.4 Form of Certificate of Amendment to be filed prior to consummation of
the public offering.
3.5* Form of Second Amended and Restated Certificate of Incorporation of the
Registrant to be filed upon the closing of the public offering
3.6* Amended and Restated By-Laws of the Registrant
4.1* Specimen Certificate for shares of Common Stock, $.00004 par value, of
the Registrant
4.2* Form of Subordinated Secured Note (included in Exhibit 10.11)
5.1* Opinion of Hale and Dorr LLP with respect to the validity of the
securities being offered
10.1* Amended and Restated 1992 Equity Incentive Plan
10.2* 1997 Director Stock Option Plan
10.3* 1997 Employee Stock Purchase Plan
10.4* Lease dated November 21, 1996 between the Registrant and New Boston
Wilmar Limited Partnership
10.5* Employment Agreement dated as of March 15, 1994 between the Registrant
and Emmett Clemente
10.6* Consulting Agreement dated as of April 1, 1996 between the Registrant
and Robert E. Baldini
10.7*+ Development and License Agreement dated as of October 8, 1996 by and
between the Registrant and Recordati S.A. Chemical and Pharmaceutical
Company ("Recordati")
10.8*+ Manufacturing and Supply Agreement dated as of October 8, 1996 by and
between the Registrant and Recordati
10.9*+ License Agreement dated September 28, 1990 between MacroChem Corp. and
the Registrant
10.10*+ Supply Agreement dated as of October 12, 1994 by and between the
Registrant and Lyne Laboratories, Inc.
10.11* Securities Purchase Agreement dated as of January 31, 1997 among the
Registrant, Triumph-Connecticut Limited Partnership and the other
purchasers identified therein (the "Triumph Agreement")
10.12* Waiver and Amendment to the Triumph Agreement dated as of March 13,
1997
10.13* Series F Convertible Preferred Stock and Warrant Purchase Agreement
dated as of June 28, 1996 between the Registrant and certain purchasers
identified therein as amended by Amendment No. 1 dated as of June 28,
1996 and Amendment No. 2 dated February 3, 1997
10.14* Form of Common Stock Purchase Warrant issued to Chestnut Partners, Inc.
on February 28, 1997.
10.15* Common Stock Purchase Warrant issued to Banque Paribas on February 28,
1997.
10.16* Form of Common Stock Purchase Warrant with an exercise price of $.01
per share issued to designees of Bentley Securities on February 28,
1997.
10.17* Form of Common Stock Purchase Warrant with an exercise price of $5.91
per share issued to designees of Bentley Securities on February 28,
1997
</TABLE>
<PAGE> 111
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------------------------------------------------------------------- ------------
<C> <S> <C>
10.18* Amendment No. 1 dated February 28, 1997 to the Development and License
Agreement dated as of October 8, 1996 by and between the Registrant and
Recordati
11.1* Computation of historical and pro forma net loss per common share
23.1* Consent of Hale and Dorr LLP
23.2 Consent of Coopers & Lybrand L.L.P., independent accountants
23.3* Consent of KPMG Peat Marwick LLP, independent auditors
23.4* Consent of Welsh & Katz, Ltd.
24.1* Powers of Attorney
27.1* Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE> 1
Exhibit 3.4
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ASCENT PEDIATRICS, INC.
Pursuant to Section 242 of the
General Corporation Law of the State of Delaware
------------------------------------------------
ASCENT PEDIATRICS, INC. (hereinafter called the "Corporation"), a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware, does hereby certify as follows:
At a meeting of the Board of Directors of the Corporation, a resolution was
duly adopted, pursuant to Section 242 of the General Corporation Law of the
State of Delaware, setting forth amendments to the Amended and Restated
Certificate of Incorporation of the Corporation and declaring said amendments to
be advisable. The stockholders of the Corporation duly approved said proposed
amendments by written consent in accordance with Sections 228 and 242 of the
General Corporation Law of the State of Delaware, and written notice of such
consent has been given to all stockholders who have not consented in writing to
said amendments. The resolution setting forth the amendments is as follows:
RESOLVED: That the first paragraph of Article FOURTH of the Amended and
- -------- Restated Certificate of Incorporation of the Corporation, as
amended, be and hereby is deleted in its entirety and the
following paragraphs are inserted in lieu thereof:
<PAGE> 2
"FOURTH. That upon the filing date of this Certificate of
Amendment of this Restated Certificate of Incorporation, filed
with the Secretary of State of Delaware on May 27, 1997 (the
"Effective Date"), a 0.85-for-1 reverse stock split of the
Corporation's Common Stock shall become effective, pursuant to
which each share of Common Stock outstanding and held of record
by each stockholder of the Corporation (including treasury
shares) immediately prior to the Effective Date shall represent
0.85 shares of Common Stock from and after the Effective Date.
The total number of shares of all classes of stock which the
Corporation shall have the authority to issue is (i) Sixty
Million (60,000,000) shares of Common Stock, $.00004 par value
per share ("Common Stock"), and (ii) Six Million One Hundred
Twenty Thousand One Hundred Three (6,120,103) shares of Preferred
Stock, $.00004 par value per share ("Preferred Stock"), of which
Eight Hundred Thousand (800,000) shares shall be designated the
"Series A Convertible Preferred Stock" (the "Series A Senior
Preferred Stock"), Three Hundred Ninety-Nine Thousand Nine
Hundred Ninety Nine (399,999) shares shall be designated "Series
B Convertible Preferred Stock" (the "Series B Preferred Stock"),
One Million Three Hundred Ninety-Nine Thousand Five Hundred
Eighty-Nine (1,399,589) shares shall be designated "Series D
Convertible Preferred Stock" (the "Series D Preferred Stock"),
One Million One Hundred Sixty-Six Thousand Six Hundred
Sixty-Seven (1,166,667) shares shall be designated "Series E
Convertible Preferred Stock" (the "Series E Preferred Stock"),
Two Million Three Hundred Fifty-Three Thousand Eight Hundred
Forty-Eight (2,353,848) shares shall be designated "Series F
Convertible Preferred Stock" (the "Series F Preferred Stock") and
the balance of which may be issued from time to time in one or
more series as set forth in Part B of this Article FOURTH."
<PAGE> 3
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Certificate of Amendment to be signed by its Vice
President, Finance and Treasurer this 27th day of May, 1997.
ASCENT PEDIATRICS, INC.
By:
-------------------------------------
Vice President, Finance and Treasurer
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion, in this Amendment No. 4 to the registration
statement on Form S-1 (File No. 333-23319) to issue shares of Common Stock, of
our report dated May 27, 1997, on our audits of the financial statements of
Ascent Pediatrics, Inc. We also consent to the references to our firm under the
captions "Selected Financial Data" and "Experts."
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
May 27, 1997
