<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 000-22347
ASCENT PEDIATRICS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3047405
------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
187 Ballardvale Street, Suite B125, Wilmington, MA 01887
- -------------------------------------------------- ----------
(Address of principle executive offices) (Zip Code)
Registrant's telephone number, including area code (978) 658-2500
None
-------------------------------------------------
(Former name, former address, and
former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate number of shares outstanding of the registrant's Common Stock:
As of November 9, 1999, there were 9,643,883 depositary shares outstanding, each
depositary share representing one share of common stock, $0.00004 par value per
share, and represented by a depositary receipt.
<PAGE> 2
ASCENT PEDIATRICS, INC.
TABLE OF CONTENTS
Page
----
Part I. Financial Information
Item 1 - Unaudited Condensed Financial Statements
Unaudited Condensed Balance Sheets ....................... 1
Unaudited Condensed Statements of Operations ............. 2
Unaudited Statements of Comprehensive Loss ............... 2
Unaudited Condensed Statements of Cash Flows ............. 3
Notes to Unaudited Condensed Financial Statements ........ 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 10
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk............................................... 18
Part II. Other Information
Item 2 - Changes in Securities and Use of Proceeds................. 18
Item 4 - Submission of Matters to a Vote of Security Holders....... 20
Item 5 - Other Information OTC Bulletin Board...................... 21
Item 6 - Exhibits and Reports on Form 8-K ......................... 21
Signature .................................................................. 22
Exhibit Index .............................................................. 23
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1 - UNAUDITED CONDENSED FINANCIAL STATEMENTS
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ..................................... $ 106,628 $ 2,171,777
Accounts receivable, net ...................................... 1,657,773 918,307
Inventory ..................................................... 761,329 919,785
Other current assets .......................................... 321,677 274,983
------------ ------------
Total current assets ....................................... 2,847,407 4,284,852
Fixed assets, net ................................................ 608,975 730,894
Debt issue costs, net ............................................ 1,381,128 606,092
Intangibles, net ................................................. 10,022,477 10,523,789
Deferred charges ................................................. -- 63,760
Other assets ..................................................... 50,236 91,543
------------ ------------
Total assets ............................................. $ 14,910,223 $ 16,300,930
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable .............................................. $ 2,039,964 $ 1,510,193
Accrued expenses .............................................. 2,287,178 2,206,025
Other current liabilities ..................................... 366,693 100,218
------------ ------------
Total current liabilities .................................. 4,693,835 3,816,436
Subordinated secured notes ....................................... 16,992,876 8,681,474
------------ ------------
Total liabilities ........................................ 21,686,711 12,497,910
Stockholders' equity (deficit)
Preferred stock, $.01 par value; 5,000,000 shares
authorized; 0 and 7,000 shares, designated as
Series G convertible exchangeable preferred stock,
issued and outstanding at September 30, 1999 and
December 31, 1998, respectively (liquidation
preference of $7,000,000 at December 31, 1998) ............. -- 6,461,251
Common stock, $.00004 par value; 60,000,000 shares
authorized; 9,637,915 and 6,975,921 shares issued
and outstanding at September 30, 1999 and
December 31, 1998, respectively ............................ 385 279
Additional paid-in capital .................................... 55,662,874 47,951,271
Accumulated deficit ........................................... (62,439,747) (50,609,781)
------------ ------------
Total stockholders' equity (deficit) ....................... (6,776,488) 3,803,020
------------ ------------
Total liabilities and stockholders' equity (deficit) ....... $ 14,910,223 $ 16,300,930
============ ============
</TABLE>
See accompanying notes to unaudited condensed financial statements
Page 1
<PAGE> 4
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- ------------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Product revenue, net ............................. $ 644,913 $ 979,211 $ 2,391,771 $ 3,133,431
Co-promotional revenue ........................... 1,235,000 22,283 3,085,000 22,283
----------- ----------- ------------ ------------
Total net revenue ................................ 1,879,913 1,001,494 5,476,771 3,155,714
Costs and expenses
Cost of product sales ....................... 404,434 525,206 1,305,861 1,636,549
Selling, general and administrative ......... 4,576,436 3,423,012 12,217,188 10,174,813
Research and development .................... 1,137,118 902,685 2,958,765 3,329,093
----------- ----------- ------------ ------------
Total costs and expenses .................... 6,117,988 4,850,903 16,481,814 15,140,455
Loss from operations ................... (4,238,075) (3,849,409) (11,005,043) (11,984,741)
Interest income .................................. 15,256 103,383 56,985 320,646
Interest expense ................................. (368,444) (192,411) (881,908) (1,019,760)
----------- ----------- ------------ ------------
Net loss before extraordinary items .... (4,591,263) (3,938,437) (11,829,966) (12,683,855)
Extraordinary items - loss on early
extinguishment of debt ........................ -- -- -- 1,166,463
----------- ----------- ------------ ------------
Net loss ............................... (4,591,263) (3,938,437) (11,829,966) (13,850,318)
Preferred stock dividend ......................... 52,888 192,501 444,791 256,668
----------- ----------- ------------ ------------
Net loss to common stockholders ........ $(4,644,151) $(4,130,938) $(12,274,757) $(14,106,986)
=========== =========== ============ ============
Results per common share:
Historical - basic and diluted:
Net loss before extraordinary items .... $ (0.51) $ (0.56) $ (1.54) $ (1.83)
=========== =========== ============ ============
Extraordinary items .................... $ -- $ -- $ -- $ (0.17)
=========== =========== ============ ============
Net loss ............................... $ (0.51) $ (0.56) $ (1.54) $ (2.00)
=========== =========== ============ ============
Preferred stock dividend ............... $ (0.01) $ (0.03) $ (0.06) $ (0.04)
=========== =========== ============ ============
Net loss to common stockholders ........ $ (0.52) $ (0.59) $ (1.60) $ (2.04)
=========== =========== ============ ============
Weighted average shares outstanding - basic
and diluted ................................... 9,008,592 6,952,377 7,689,268 6,928,141
=========== =========== ============ ============
UNAUDITED STATEMENTS OF COMPREHENSIVE LOSS
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- ------------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss ......................................... $(4,591,263) $(3,938,437) $(11,829,966) $(13,850,318)
Unrealized gain (loss) on securities ............. -- 4,282 -- (1,116)
----------- ----------- ------------ ------------
Comprehensive loss ............................... $(4,591,263) $(3,934,155) $(11,829,966) $(13,851,434)
=========== =========== ============ ============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
Page 2
<PAGE> 5
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................................. $(11,829,966) $(13,850,318)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ................................... 893,679 1,509,952
Non-cash interest expense ....................................... 54,451 547,884
Non-cash extraordinary items .................................... -- 1,166,463
Provision for bad debts ......................................... 11,397 143,689
Changes in operating assets and liabilities:
Accounts receivable ......................................... (750,864) (45,638)
Inventory ................................................... 158,456 (84,093)
Other assets ................................................ (5,387) (189,468)
Accounts payable ............................................ 529,771 (669,247)
Accrued expenses ............................................ (9,999) 520,762
Other current liabilities ................................... 266,475 (10,941)
------------ ------------
Net cash used in operating activities .................. (10,681,987) (10,960,955)
Cash flows from investing activities:
Purchase of property and equipment ................................... (171,139) (274,217)
Proceeds from sale of marketable securities .......................... -- 2,526,784
------------ ------------
Net cash (used in) provided by investing activities .... (171,139) 2,252,567
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs ........ 1,202,731 175,599
Proceeds from issuance of preferred stock, net of issuance costs ..... -- 6,461,251
Proceeds from issuance of debt ....................................... 8,804,495 8,652,515
Proceeds from issuance of debt related warrants ...................... 195,505 322,997
Cash paid for debt issue costs ....................................... (1,271,217) (1,257,232)
Payment of preferred stock dividends ................................. (143,537) --
Repayment of debt .................................................... -- (6,125,000)
Repayment of promissory note ......................................... -- (5,500,000)
------------ ------------
Net cash provided by financing activities ............. 8,787,977 2,730,130
Net decrease in cash and cash equivalents ................................. (2,065,149) (5,978,258)
Cash and cash equivalents, beginning of period ............................ 2,171,777 11,700,612
------------ ------------
Cash and cash equivalents, end of period .................................. $ 106,628 $ 5,722,354
============ ============
</TABLE>
See accompanying notes to unaudited condensed financial statements.
Page 3
<PAGE> 6
ASCENT PEDIATRICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Ascent Pediatrics, Inc. ("Ascent" or 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 inception, until July 9, 1997, the Company operated as a development
stage enterprise devoting substantially all of its efforts to establishing a new
business and to carrying on development activities. On July 10, 1997, the
Company completed the acquisition of the Feverall line of acetaminophen rectal
suppositories from Upsher-Smith Laboratories, Inc. and subsequently commenced
sales of the Feverall line of products. In October 1997, the Company also
commenced sales of Pediamist nasal saline spray. During March 1998, the Company
began marketing Duricef(R) (cefadroxil monohydrate) to pediatricians in the
United States pursuant to a co-promotion agreement with Bristol-Myers Squibb
U.S. Pharmaceuticals Group. The Company terminated this co-promotion agreement
effective December 31, 1998. During February 1999, the Company began marketing
Omnicef(R) (cefdinir) oral suspension and capsules to pediatricians in the
United States pursuant to a promotion agreement with Warner-Lambert Company.
During May 1999, the Company began marketing Pediotic(R) (a combination
corticosteroid/antibiotic) to pediatricians in the United States pursuant to a
co-promotion agreement with King Pharmaceuticals, Inc.
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, builds its 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 uncertainty of
regulatory approval, rapid technological change, uncertainty of market
acceptance of products, limited sales and marketing experience, 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, collaborators and limited suppliers,
product liability, and dependence on key individuals.
2. BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited and have
been prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The interim financial statements
include, in the opinion of management, all adjustments (consisting of normal and
recurring adjustments) that are necessary for a fair presentation of the results
for the interim periods ended September 30, 1999 and 1998. The results for the
interim periods presented are not necessarily indicative of results to be
Page 4
<PAGE> 7
expected in the full fiscal year. Certain prior period items have been
reclassified to conform with current period presentation.
On July 23, 1999, the Company consummated a merger with a wholly-owned
subsidiary pursuant to which each share of common stock of the Company was
converted into one depositary share (each, a "Depositary Share"), representing
one share of common stock, subject to a call option, and represented by a
depositary receipt. As used in these financial statements, the terms "Common
Stock" and "common shares" includes the Depositary Shares and the term "common
stockholders" includes the holders of Depositary Shares for all periods from and
after July 23, 1999.
These financial statements should be read in conjunction with the
audited financial statements and notes thereto for the year ended December 31,
1998 included in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Loss Per Common Share
Options, warrants, preferred stock and debt to purchase or convert to
946,607 and 2,039,656 shares of common stock outstanding as of September 30,
1999 and 1998, respectively, were not included in the computation of diluted net
loss per common share because the Company is in a loss position, and the
inclusion of such shares, therefore, would be antidilutive.
Similarly, options and warrants to purchase or convert to 4,631,947 and
1,822,974 shares of common stock outstanding as of September 30, 1999 and 1998,
respectively, were not included in the computation of diluted net loss per
common share because the options and warrants have exercise prices greater than
the average market price of the common shares and, therefore, would be
antidilutive under the treasury stock method.
4. INVENTORIES
Inventories are stated at the lower of cost or market using the first
in, first out (FIFO) method and consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
Raw materials ............................. $303,150 $248,434
Work in process ........................... 112,867 --
Finished goods ............................ 345,312 671,351
-------- --------
Total ............................ $761,329 $919,785
======== ========
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of goodwill, patents, trademarks and a
manufacturing agreement and are being amortized using the straight-line method
over useful lives of fifteen to twenty years. The Company periodically reviews
the propriety of carrying amounts of its intangible assets as well as the
amortization periods to determine whether current events and circumstances
warrant
Page 5
<PAGE> 8
adjustment to the carrying value or estimated useful lives. This evaluation
compares the expected future cash flows against the net book values of related
intangible assets. If the sum of the future cash flows (undiscounted and without
interest charges) is less than the carrying amount of the asset, the Company
will recognize an impairment loss as a charge to operations. If impaired, the
intangible asset would be written down to the present value of estimated
expected future cash flows using a discount rate commensurate with the risk
involved. Impairment of goodwill, if any, is measured periodically on the basis
of whether anticipated undiscounted operating cash flows generated by the
acquired businesses will recover the recorded net goodwill balances over the
remaining amortization period.
6. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Employee compensation expenses............. $ 583,468 $ 762,664
Advertising expenses....................... -- 183,509
Legal and accounting expenses.............. 75,150 114,441
Selling fees and chargebacks............... 111,491 254,632
Interest payable........................... 563,144 208,862
Preferred stock dividend................... 397,915 306,815
Research and development................... 246,824 25,000
Other...................................... 309,186 350,102
---------- ----------
Total............................. $2,287,178 $2,206,025
========== ==========
</TABLE>
7. ALPHARMA STRATEGIC ALLIANCE
On February 16, 1999, the Company entered into a series of agreements
with Alpharma, Inc. and its wholly-owned subsidiary, Alpharma USPD Inc.
("Alpharma"). This strategic alliance contemplates a number of transactions,
including a loan agreement under which Alpharma agreed to loan Ascent up to
$40.0 million from time to time, $12.0 million of which may be used for general
corporate purposes and $28.0 million of which may only be used for specified
projects and acquisitions intended to enhance the Company's growth.
On July 23, 1999, following the approval by the Company's stockholders
of certain resolutions relating to the strategic alliance with Alpharma, the
Company consummated its strategic alliance with Alpharma. In connection with
this closing, the Company obtained a call option to acquire all of its
outstanding common stock and assigned the option to Alpharma, thereby giving
Alpharma the option, exercisable in 2002 (extended, subject to stockholder
approval, to 2003 pursuant to the second supplemental agreement described
below), to purchase all of the Company's common stock then outstanding at a
purchase price to be determined by a formula based on the Company's 2001
earnings (extended, subject to stockholder approval, to the Company's 2002
earnings pursuant to the second supplemental agreement described below). In
connection with the closing of these transactions, the Company consummated a
merger with a wholly-owned subsidiary pursuant to which each share of common
stock of the Company was converted into one depositary share, representing one
share of common stock, subject to Alpharma's call option, and represented by a
depositary receipt.
On February 19, 1999, the Company borrowed $4.0 million from Alpharma
under the loan agreement and issued Alpharma a 7.5% convertible subordinated
note in the principal amount of
Page 6
<PAGE> 9
up to $40.0 million. On July 26, 1999, in connection with the closing of the
strategic alliance with Alpharma, the Company borrowed an additional $1.5
million from Alpharma under the loan agreement. In addition, on August 31, 1999,
the Company borrowed $1.5 million from Alpharma under the loan agreement and
increased the outstanding principal on the existing note to $7.0 million. The
principal terms of the Alpharma note are set forth below.
PAYMENT OF PRINCIPAL AND INTEREST. The Alpharma note bears interest at
a rate of 7.5% per annum. Interest is due and payable quarterly, in arrears on
the last day of each calendar quarter. If the call option terminates or expires,
the Company does not otherwise prepay the principal amount of the note
outstanding and Alpharma does not otherwise convert the note, the Company will
repay the outstanding principal amount under the note over a 15 month period
commencing March 30, 2004 and ending June 30, 2005.
PREPAYMENT. On or before June 30, 2001, the Company may repay all or a
portion of the outstanding principal amount due under the note. The Company may
re-borrow any repaid amounts on or before December 31, 2001. At any time after
the expiration or termination of the call option and on or before December 31,
2002 (extended, subject to stockholder approval, to December 31, 2003 pursuant
to the second supplemental agreement described below), the Company may prepay
all of the outstanding principal amount under the note, together with any
accrued and unpaid interest, if it also pays a conversion termination fee equal
to 25% of the principal amount of the note outstanding as of December 31, 2001.
The Company may not otherwise prepay the note. Following a change in control of
the Company, Alpharma may require the Company to repay all outstanding principal
and interest under the note.
CONVERSION. Alpharma may convert all or a portion of the then
outstanding principal amount of the note into common stock of the Company on one
occasion after a change in control of the Company and at any time after December
31, 2002 at a conversion price of $7.125 per share (subject to adjustment).
After January 1, 2003 and on or before February 28, 2003, Alpharma may cause the
Company to borrow all remaining amounts available under the loan agreement
(increasing the principal amount of the note to $40.0 million), but only if
Alpharma converts all of the principal amount of the note into common stock of
the Company within three business days after the increase. On October 15, 1999,
pursuant to the second supplemental agreement described below, the Company and
Alpharma agreed, subject to stockholder approval, to change the foregoing dates
to December 31, 2003, January 1, 2004 and February 28, 2004, respectively.
ALPHARMA FIRST SUPPLEMENTAL AGREEMENT. On July 1, 1999, the Company
entered into a supplemental agreement with Alpharma amending the terms of the
loan agreement and the other strategic alliance agreements between the Company
and Alpharma. Under the supplemental agreement, the Company agreed to certain
additional restrictions on its ability to borrow additional funds under the loan
agreement, including a prohibition, prior to the approval and commercial launch
of both the Company's Primsol and Orapred products, on the use of any funds for
any purpose other than normal operating expenses and expenses relating to such
products as set forth in the Company's internal operating plan, as updated from
time to time. In addition, the Company may only use the additional $8.0 million
allocated for general corporate purposes under the loan agreement for the
purposes set forth in the Company's internal operating
Page 7
<PAGE> 10
plan, as updated from time to time, and may only use the $28.0 million allocated
for acquisitions and research and development projects for those acquisitions
and projects that are approved by a newly-formed screening committee comprised
of two nominees of Ascent, one nominee of Alpharma and one nominee of ING Furman
Selz. This screening committee was established for the purpose of approving any
changes to the Company's internal operating plan involving materially increased
expenditures and reviewing and approving acquisitions of companies, products or
product lines or rights to sell a product or product line and research and
development projects. The Company's two representatives on the screening
committee together have one vote, and the representatives of Alpharma and ING
Furman Selz each have one vote. The screening committee must act by unanimous
approval prior to the approval and commercial launch of the Company's Primsol
and Orapred products and by majority approval following the approval and
commercial launch of these products.
ALPHARMA SECOND SUPPLEMENTAL AGREEMENT. On October 15, 1999, the
Company entered into a second supplemental agreement with Alpharma amending the
terms of the loan agreement and the other strategic alliance agreements between
the Company and Alpharma. Under the second supplemental agreement, the Company
agreed, among other things, to extend by 12 months the exercise period of
Alpharma's call option to the first half of year 2003, to change the fiscal year
upon which the exercise price of Alpharma's call option is based from 2001 to
2002 and to modify certain conditions on Ascent's access to funds under the loan
agreement relating to the granting of a security interest in any business or
product acquired by the Company using such funds and to the performance by the
Company and the funds affiliated with ING Furman Selz of their respective
obligations under the fourth amendment to the May 1998 securities purchase
agreement described below. In addition, the Company agreed that, to the extent
it borrowed funds from Alpharma under the loan agreement to finance the
acquisition of products or businesses, it would grant Alpharma a security
interest in such products or businesses. The modification of the terms of
Alpharma's call option is subject to the approval of Ascent's stockholders which
Ascent expects to seek at the next annual meeting of its stockholders.
SERIES G AMENDMENT. In connection with the Company's strategic alliance
with Alpharma, on February 16, 1999, the Company entered into a second amendment
to the May 1998 Series G Purchase Agreement, providing for, among other things,
(a) the Company's agreement to exercise its right to exchange all outstanding
shares of Series G preferred stock for convertible subordinated notes in
accordance with the terms of the Series G preferred stock, (b) subject to
stockholder approval, the reduction in the exercise price of warrants to
purchase 2,116,958 shares of common stock of the Company from $4.75 per share to
$3.00 per share and the agreement of the Series G purchasers to exercise these
warrants, (c) the issuance and sale to the Series G purchasers of an aggregate
of 300,000 shares of common stock of the Company at a price of $3.00 per share
and (d) the cancellation of approximately $7.25 million of principal under the
subordinated notes held by the Series G purchasers to pay the exercise price of
the warrants and the purchase price of the additional 300,000 shares of common
stock. In addition, the Company entered into an amendment to a financial
advisory services fee agreement with ING Furman Selz whereby the Company agreed
to issue 150,000 shares of common stock to ING Furman Selz in lieu of the
payment of certain financial advisory fees. On July 23, 1999, following the
approval by the Company's stockholders of the reduction in the exercise price of
the warrants and the issuance of the additional shares of common stock to the
Series G purchasers and ING Furman Selz, and in connection with the consummation
of the Company's strategic alliance with Alpharma, the Company and the Series G
purchasers consummated the transactions contemplated above.
Page 8
<PAGE> 11
DEBT ISSUE COSTS. In connection with the Company's strategic alliance
with Alpharma, the Company had incurred $1,335,000 in legal, accounting and
consulting fees as of September 30, 1999. These fees have been capitalized on
the balance sheet as debt issue costs and are being amortized over the life of
the debt.
8. ING FURMAN SELZ LOAN ARRANGEMENTS
$4.0 MILLION FACILITY. On June 30, 1999, the Company issued and sold
7.5% demand promissory notes in the principal amount of $2.0 million to funds
affiliated with ING Furman Selz. On July 1, 1999, the Company and the Series G
purchasers entered into a third amendment to the May 1998 securities purchase
agreement under which funds affiliated with ING Furman Selz agreed to loan the
Company up to $4.0 million. Upon executing the third amendment, the Company
issued 7.5% convertible subordinated notes in the aggregate principal amount of
up to $4.0 million and warrants to purchase 300,000 shares of Ascent common
stock at an exercise price of $3.00 per share to the funds affiliated with ING
Furman Selz and cancelled the $2.0 million of 7.5% demand promissory notes
issued on June 30, 1999. The obligation of the funds affiliated with ING Furman
Selz to loan the Company the remaining $2.0 million is subject to the
fulfillment to their reasonable satisfaction or the waiver by the funds of
conditions, including that Ascent has or expects to have a stockholders' deficit
reflected on the balance sheet (calculated in a manner that treats as equity any
amounts outstanding under the 8% subordinated notes and the 7.5% convertible
subordinated notes and any amounts outstanding under any debt securities
issued upon exchange of the Series G preferred stock) and either the requested
loan from the funds affiliated with ING Furman Selz will prevent or eliminate
such stockholders' deficit or Alpharma agrees in writing that it will not deny
Ascent's next borrowing request under the Alpharma loan agreement because of
such stockholders' deficit.
The Company has agreed that, if it borrows any portion of the
additional $2.0 million, it will issue additional warrants to purchase shares of
Ascent common stock to the funds affiliated with ING Furman Selz. The warrants
will be exercisable for a number of shares of Ascent common stock equal to 1.5
shares for each additional $10.00 borrowed. All of the warrants the Company will
issue under the third amendment will have an exercise price of $3.00 per share
and will expire on July 1, 2006.
$10.0 MILLION FACILITY. On October 15, 1999, the Company and the Series
G purchasers entered into a fourth amendment to the May 1998 securities purchase
agreement under which funds affiliated with ING Furman Selz agreed to loan the
Company up to an additional $10.0 million. Upon executing the fourth amendment,
the Company issued 7.5% convertible subordinated notes in the aggregate
principal amount of up to $10.0 million and warrants to purchase 1,000,000
Ascent depositary shares at an exercise price of $3.00 per share to the funds
affiliated with ING Furman Selz. The obligation of the funds affiliated with ING
Furman Selz to loan the Company the $10.0 million is subject to the fulfillment
to their reasonable satisfaction or the waiver by the funds of certain
conditions. The Company has agreed to issue warrants to purchase up to an
additional 4,000,000 Ascent depositary shares in connection with borrowings
under this credit facility. All of the warrants the Company will issue under the
fourth amendment will have an exercise price of $3.00 per share and will expire
on October 15, 2006. The Company has agreed that, to the extent it grants
Alpharma a security interest in products or
Page 9
<PAGE> 12
businesses acquired by the Company using funds borrowed under the Alpharma loan
agreement, the Company will grant a junior security interest in such assets to
the funds affiliated with ING Furman Selz to secure the Company's indebtedness
under the $10.0 million credit facility.
PAYMENT OF PRINCIPAL AND INTEREST; CONVERSION. The 7.5% convertible
subordinated notes issued pursuant to the third amendment and the fourth
amendment expire on July 1, 2004 and are convertible into shares of Ascent
common stock at a conversion price of $3.00 per share in accordance with the
terms of the May 1998 securities purchase agreement, as amended. Interest on
these notes is due and payable quarterly, in arrears, on the last day of each
calendar quarter, and the outstanding principal on the notes is payable in full
on July 1, 2004.
9. PEDIOTIC
In April 1999, the Company entered into a one-year co-promotion
agreement with King Pharmaceuticals, Inc., to begin marketing, in May 1999,
Pediotic(R) (a combination corticosteroid/antibiotic) to pediatricians in the
United States. As compensation for the Company's co-promotional efforts, King
Pharmaceuticals has agreed to pay the Company a base fee with incremental
revenue based on achieving certain goals above a specified amount. The Company
has recognized $312,000 and $625,000 as revenue earned from this agreement for
the three and nine months ended September 30, 1999.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Ascent is a drug development and marketing company focused exclusively
on the pediatric market. Ascent commenced operations in March 1989 and prior to
the quarter ended September 30, 1997 was engaged primarily in developing its
products and product candidates and in organizational efforts, including
recruiting scientific and management personnel and raising capital. Ascent
introduced its first product, Feverall acetaminophen suppositories, during the
quarter ended September 30, 1997 and its second product, Pediamist nasal saline
spray, during the quarter ended December 31, 1997. During the quarter ended
March 31, 1998, the Company began marketing Duricef(R) (cefadroxil monohydrate)
to pediatricians in the United States pursuant to a co-promotion agreement with
Bristol-Myers Squibb U.S. Pharmaceuticals Group. The Company terminated this
co-promotion agreement effective December 31, 1998. During the quarter ended
March 31, 1999, Ascent began marketing Omnicef(R) (cefdinir) oral suspension and
capsules to pediatricians in the United States pursuant to a promotion agreement
with Warner-Lambert Company. During the quarter ended June 30, 1999, the Company
began marketing Pediotic(R) (a combination corticosteroid/antibiotic) to
pediatricians in the United States pursuant to a co-promotion agreement with
King Pharmaceuticals, Inc.
Ascent has incurred net losses since its inception and expects to incur
additional operating losses at least through the year 2000 as it continues its
product development programs, maintains its sales and marketing organization and
introduces products to the market. Ascent expects
Page 10
<PAGE> 13
cumulative losses to increase over this period. Ascent has incurred a deficit
from inception through September 30, 1999 of $62,440,000.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1998
REVENUE: Ascent had total net revenue of $1,880,000 and $5,477,000 for
the three and nine months ended September 30, 1999, respectively, compared with
total net revenue of $1,001,000 and $3,156,000 for the three and nine months
ended September 30, 1998, respectively. The increase in revenue of $879,000 for
the three months ended September 30, 1999 was primarily attributable to an
increase in co-promotional revenue of $1,213,000 offset by a decrease of
$301,000 in Feverall(R) revenue due to lower sales volume. The increase in
revenue of $2,321,000 for the nine months ended September 30, 1999 was primarily
attributable to an increase in co-promotional revenue of $3,063,000 due to the
signing of two co-promotion agreements this year offset by a decrease of
$736,000 in Feverall(R) revenue due to lower sales volume.
COST OF PRODUCT SALES: Cost of product sales was $404,000 and
$1,306,000 for the three and nine months ended September 30, 1999, respectively,
compared with $525,000 and $1,637,000 for the three and nine months ended
September 30, 1998, respectively. The decrease in cost of product sales of
$121,000 for the three months ended September 30, 1999 was primarily the result
of (i) a decrease of $100,000 for the manufacturing cost associated with the
production of the Feverall(R) due to a decrease in sales volume, and (ii) a
decrease of approximately $27,000 in manufacturing personnel costs due to a
decrease in headcount. The decrease in cost of product sales of $331,000 for the
nine months ended September 30, 1999 was primarily the result of (i) a decrease
of $133,000 for the manufacturing cost associated with the production of the
Feverall(R) due to a decrease in sales volume, (ii) a decrease of approximately
$106,000 in manufacturing personnel costs due a reduction in headcount, and
(iii) a decrease of approximately $61,000 in inventory net realizable value
adjustments.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Ascent incurred selling,
general and administrative expenses of $4,576,000 and $12,217,000 for the three
and nine months ended September 30, 1999, respectively, compared with $3,423,000
and $10,175,000 for the three and nine months ended September 30, 1998,
respectively.
Selling and marketing expenses were $2,748,000 and $8,625,000 for the
three and nine months ended September 30, 1999, respectively, compared with
expenses of $2,300,000 and $7,326,000 for the three and nine months ended
September 30, 1998, respectively. The increase in selling and marketing expenses
of $448,000 for the three months ended September 30, 1999 was primarily the
result of increases of (i) $317,000 in personnel costs due to an increased
number of sales representatives, (ii) $81,000 in samples and selling materials,
and (iii) $49,000 in administrative expense for sample accountability tracking.
The increase in selling and marketing expenses of $1,299,000 for the nine months
ended September 30, 1999 was primarily the result of an increase of $1,250,000
in personnel costs due to an increased number of sales representatives.
Page 11
<PAGE> 14
General and administrative expenses were $1,828,000 and $3,592,000 for the three
and nine months ended September 30, 1999, respectively, compared with $1,123,000
and $2,849,000 for the three and nine months ended September 30, 1998,
respectively. The increase of $705,000 for the three months ended September 30,
1999 was primarily attributable to an increase of $981,000 for the termination
of an advisory services agreement offset by decreases of (i) $208,000 in
personnel expenses due to a decrease in headcount, and (ii) $29,000 for legal,
accounting and investor relations expenses. The increase of $743,000 for the
nine months ended September 30, 1999 was primarily attributable to an increase
of $1,044,000 due to an advisory services agreement that was terminated during
the three months ended September 30, 1999. This was offset by decreases of (i)
$128,000 in personnel expenses due to a decrease in headcount, (ii) $93,000 for
legal, accounting and investor relations expenses, and (iii) $43,000 for
amortization of debt issue costs due to the cancellation of debt as part of the
second amendment to the May 1998 Series G Purchase Agreement.
RESEARCH AND DEVELOPMENT: Ascent incurred research and development
expenses of $1,137,000 and $2,959,000 for the three and nine months ended
September 30, 1999, respectively, compared with $903,000 and $3,329,000 for the
three and nine months ended September 30, 1998, respectively. The increase of
$234,000 for the three months ended September 30, 1999 was primarily
attributable to (i) $70,000 in increased personnel costs due to an increase in
headcount, and (ii) $157,000 in increased spending on the Orapred and
Acetaminophen Extended Release products' R&D programs. The decrease of $370,000
for the nine months ended September 30, 1999 was primarily attributable to (i)
$484,000 in reduced spending on the Primsol and Pediavent products' R&D programs
due to the completion of clinical and biological studies of these products
during the first half of 1998, and (ii) $88,000 in reduced legal/patent expenses
and these decreases were offset by $207,000 in increased spending on the Orapred
and Acetaminophen Extended Release products' R&D programs.
INTEREST: Ascent had interest income of $15,000 and $57,000 for the
three and nine months ended September 30, 1999, respectively, compared with
interest income of $103,000 and $321,000 for the three and nine months ended
September 30, 1998, respectively. The decreases of $88,000 and $264,000 for the
three and nine months ended September 30, 1999, respectively, were primarily due
to a lower average cash investment balance. Ascent had interest expense of
$368,000 and $882,000 for the three and nine months ended September 30, 1999,
respectively, compared to $192,000 and $1,020,000 for the three and nine months
ended September 30, 1998, respectively. The increase of $176,000 for the three
months ended September 30, 1999 was primarily attributable to the additional
subordinated notes issued during the period. The decrease of $138,000 for the
nine months ended September 30, 1999 was the result of the issuance of
subordinated notes in connection with the sale of shares of Ascent Series G
preferred stock and the use of the proceeds of such issuance to repay the
Triumph subordinated secured notes on June 1, 1998. The subordinated notes
issued in connection with the shares of Ascent Series G preferred stock have a
lower effective interest rate than the Triumph subordinated secured notes.
Page 12
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Ascent has financed its operations primarily from
private sales of preferred stock, the private sale of subordinated secured notes
and related common stock purchase warrants and, in 1997, an initial public
offering of shares of common stock. As of September 30, 1999, Ascent had raised
approximately $33,560,000 (net of issuance costs) from the sales of preferred
stock, approximately $24,408,000 (net of issuance costs and deferred charges)
from the issuance of subordinated secured notes and related warrants and
approximately $17,529,000 (net of issuance costs) from the initial public
offering of 2,240,000 shares of common stock. In addition, in the second half of
1997, Ascent began shipping its first two products, Feverall(R) acetaminophen
suppositories and Pediamist(R) nasal saline spray, in February 1999 began
promoting Omnicef(R) pursuant to a promotion agreement with Warner-Lambert
Company, and in May 1999 began promoting Pediotic(R) pursuant to a co-promotion
agreement with King Pharmaceuticals, Inc.
ALPHARMA STRATEGIC ALLIANCE. On July 23, 1999, Ascent consummated its
strategic alliance with Alpharma. Under the strategic alliance, Ascent entered
into a series of agreements with Alpharma Inc. and its wholly-owned subsidiary,
Alpharma USPD Inc. ("Alpharma"), including a loan agreement under which Alpharma
agreed to loan Ascent up to $40.0 million from time to time, $12.0 million of
which may be used for general corporate purposes and $28.0 million of which may
only be used for specified projects and acquisitions intended to enhance
Ascent's growth. In addition, Ascent obtained a call option to acquire all of
its outstanding common stock and assigned the option to Alpharma, thereby giving
Alpharma the option, exercisable in 2002 (extended subject to stockholder
approval, to 2003 pursuant to the second supplemental agreement described
below), to purchase all of the Ascent common stock then outstanding at a
purchase price to be determined by a formula based on Ascent's 2001 earnings
(extended, subject to stockholder approval, to the Company's 2002 earnings
pursuant to the second supplemental agreement described below).
On February 19, 1999, Ascent borrowed $4.0 million from Alpharma under
the loan agreement and issued Alpharma a 7.5% convertible subordinated note in
the principal amount of up to $40.0 million. On July 26, 1999, Ascent borrowed
an additional $1.5 million from Alpharma under the loan agreement and increased
the outstanding principal on the existing note to $5.5 million. In addition, on
August 31, 1999, the Company borrowed $1.5 million from Alpharma under the loan
agreement and increased the outstanding principal on the existing note to $7.0
million.
On July 1, 1999, the Company entered into a supplemental agreement with
Alpharma amending the terms of the loan agreement and the other strategic
alliance agreements between the Company and Alpharma. Under the supplemental
agreement, the Company agreed to certain additional restrictions on its ability
to borrow additional funds under the loan agreement, including a prohibition,
prior to the approval and commercial launch of both the Company's Primsol and
Orapred products, on the use of any funds for any purpose other than normal
operating expenses and expenses relating to such products as set forth in the
Company's internal operating plan, as updated from time to time. In addition,
the Company may only use the additional $8.0 million allocated for general
corporate purposes under the loan agreement for the purposes set forth in the
Company's internal operating plan, as updated from time to time, and may only
use the $28.0 million allocated for acquisitions and research and development
projects for those acquisitions and projects that are approved by a newly-formed
screening committee
Page 13
<PAGE> 16
comprised of two nominees of Ascent, one nominee of Alpharma and one nominee of
ING Furman Selz. This screening committee was established for the purpose of
approving any changes to the Company's internal operating plan involving
materially increased expenditures and reviewing and approving acquisitions of
companies, products or product lines or rights to sell a product or product line
and research and development projects. The Company's two representatives on the
screening committee together have one vote, and the representatives of Alpharma
and ING Furman Selz each have one vote. The screening committee must act by
unanimous approval prior to the approval and commercial launch of the Company's
Primsol and Orapred products and by majority approval following the approval and
commercial launch of these products. In connection with the consummation of
Ascent's strategic alliance with Alpharma, on July 23, 1999, Ascent consummated
the transactions contemplated by the second amendment to the May 1998 securities
purchase agreement with ING Furman Selz, including: (a) the exchange all
outstanding shares of Series G preferred stock for convertible subordinated
notes in the original principal amount of $7.0 million in accordance with the
terms of the Series G preferred stock, (b) the reduction in the exercise price
of warrants to purchase 2,116,958 shares of Ascent common stock from $4.75 per
share to $3.00 per share and the exercise of these warrants, (c) the issuance
and sale to the Series G purchasers of an aggregate of 300,000 shares of Ascent
common stock at a price of $3.00 per share and (d) the cancellation of
approximately $7.25 million of principal under the subordinated notes held by
the Series G purchasers to pay the exercise price of the warrants and the
purchase price of the additional 300,000 shares. On July 23, 1999, in connection
with these transactions, Ascent issued 150,000 shares of Ascent common stock to
ING Furman Selz in lieu of the payment of certain financial advisory fees
pursuant to an amendment to a financial advisory services fee agreement with ING
Furman Selz.
On October 15, 1999, the Company entered into a second supplemental
agreement with Alpharma amending the terms of the loan agreement and the other
strategic alliance agreements between the Company and Alpharma. Under the second
supplemental agreement, the Company agreed, among other things, to extend by 12
months the exercise period of Alpharma's call option to the first half of year
2003, to change the fiscal year upon which the exercise price of Alpharma's call
option is based from 2001 to 2002 and to modify certain conditions on Ascent's
access to funds under the loan agreement relating to the granting of a security
interest in any business or product acquired by the Company using such funds and
to the performance by the Company and the funds affiliated with ING Furman Selz
of their respective obligations under the fourth amendment to the May 1998
securities purchase agreement described below. In addition, the Company agreed
that, to the extent it borrowed funds from Alpharma under the loan agreement to
finance the acquisition of products or businesses, it would grant Alpharma a
security interest in such products or businesses. The modification of the terms
of Alpharma's call option is subject to the approval of Ascent's stockholders
which Ascent expects to seek at the next annual meeting of its stockholders.
ING FURMAN SELZ LOAN ARRANGEMENTS.
$4.0 MILLION FACILITY. On June 30, 1999, the Company issued and sold 7.5%
demand promissory notes in the principal amount of $2.0 million to funds
affiliated with ING Furman Selz. On July 1, 1999, the Company and the Series G
purchasers entered into a third amendment to the May 1998 securities purchase
agreement under which funds affiliated with ING Furman Selz agreed to loan the
Company up to $4.0 million. Upon executing the third amendment, the Company
issued 7.5% convertible subordinated notes in the aggregate principal amount of
up to $4.0 million and warrants to purchase 300,000 shares of Ascent common
stock at an exercise price of $3.00 per share to the funds affiliated with ING
Furman Selz and cancelled the
Page 14
<PAGE> 17
$2.0 million of 7.5% demand promissory notes issued on June 30, 1999. The
obligation of the funds affiliated with ING Furman Selz to loan the Company the
remaining $2.0 million is subject to the fulfillment to their reasonable
satisfaction or the waiver by the funds of conditions, including that Ascent has
or expects to have a stockholders' deficit reflected on the balance sheet
(calculated in a manner that treats as equity any amounts outstanding under the
8% subordinated notes and the 7.5% convertible subordinated notes and any
amounts outstanding under any debt securities issued upon exchange of the Series
G preferred stock) and either the requested loan from the funds affiliated with
ING Furman Selz will prevent or eliminate such stockholders' deficit or Alpharma
agrees in writing that it will not deny Ascent's next borrowing request under
the Alpharma loan agreement because of such stockholders' deficit.
The Company has agreed that, if it borrows any portion of the
additional $2.0 million, it will issue additional warrants to purchase shares of
Ascent common stock to the funds affiliated with ING Furman Selz. The warrants
will be exercisable for a number of shares of Ascent common stock equal to 1.5
shares for each additional $10.00 borrowed. All of the warrants the Company will
issue under the third amendment will have an exercise price of $3.00 per share
and will expire on July 1, 2006.
$10.0 MILLION FACILITY. On October 15, 1999, the Company and the Series
G purchasers entered into a fourth amendment to the May 1998 securities purchase
agreement under which funds affiliated with ING Furman Selz agreed to loan the
Company up to an additional $10.0 million. Upon executing the fourth amendment,
the Company issued 7.5% convertible subordinated notes in the aggregate
principal amount of up to $10.0 million and warrants to purchase 1,000,000
Ascent depositary shares at an exercise price of $3.00 per share to the funds
affiliated with ING Furman Selz. The obligation of the funds affiliated with ING
Furman Selz to loan the Company the $10.0 million is subject to the fulfillment
to their reasonable satisfaction or the waiver by the funds of certain
conditions. The Company has agreed to issue warrants to purchase up to an
additional 4,000,000 Ascent depositary shares in connection with borrowings
under this credit facility. All of the warrants the Company will issue under the
fourth amendment will have an exercise price of $3.00 per share and will expire
on October 15, 2006. The Company has agreed that, to the extent it grants
Alpharma a security interest in products or businesses acquired by the Company
using funds borrowed under the Alpharma loan agreement, the Company will grant a
junior security interest in such assets to the funds affiliated with ING Furman
Selz to secure the Company's indebtedness under the $10.0 million credit
facility.
PAYMENT OF PRINCIPAL AND INTEREST; CONVERSION. The 7.5% convertible
subordinated notes expire on July 1, 2004 and are convertible into shares of
Ascent common stock at a conversion price of $3.00 per share in accordance with
the terms of the May 1998 securities purchase agreement, as amended. Interest on
these notes is due and payable quarterly, in arrears, on the last day of each
calendar quarter, and the outstanding principal on the notes is payable in full
on July 1, 2004.
FUTURE CAPITAL REQUIREMENTS. Ascent's business strategy requires a
significant commitment of funds to engage in product and business acquisitions,
to conduct clinical testing of potential products, to pursue regulatory approval
of such products and to maintain sales and marketing capabilities and
manufacturing relationships necessary to bring such products to market. Ascent
Page 15
<PAGE> 18
anticipates, based upon its current operating plan, that its existing capital
resources, internally generated funds and the funds available for general
corporate purposes from Alpharma under the loan agreement and from ING Furman
Selz under the third and fourth amendments to the May 1998 securities purchase
agreement, should satisfy its capital requirements for at least 12 months. If
Ascent's business does not progress in accordance with its current operating
plan, however, the Company may need to raise additional funds. Ascent's future
capital requirements will depend on many factors, including whether Ascent
receives marketing approval of its two lead products in development, Orapred
Syrup, a liquid steroid for the treatment of inflammation, and Primsol
Trimethoprim Solution, a prescription antibiotic for the treatment of ear
infections in children, on a timely basis or at all, the costs and margins on
sales of its products, the success of its commercialization activities and
arrangements, particularly the level of product sales, its ability to acquire
and successfully integrate businesses and products, continued progress in its
product development programs, the magnitude of these programs, the results of
pre-clinical studies and clinical trials, the time and cost involved in
obtaining regulatory approvals, the costs involved in filing, prosecuting,
enforcing and defending patent claims, competing technological and market
developments, the ability of Ascent to maintain and, in the future, expand its
sales and marketing capability and product development, manufacturing and
marketing relationships, and the ability of Ascent to enter into and maintain
its promotion agreements. In August 1999, the FDA issued a major deficiency
letter to Ascent with respect to its Abbreviated New Drug Applications, or
ANDAs, for Orapred. Based on discussions with the FDA regarding this letter, on
September 9, 1999, the FDA notified Ascent that it had reclassified this letter
as a minor deficiency letter. Even though the FDA has agreed to reclassify the
deficiency letter as a minor deficiency letter, Ascent expects that, based on
the matters raised in the letter, marketing approval of Orapred will be received
later than Ascent had previously expected, if at all. Additional financing may
not be available to Ascent if the Company needs to raise additional funds, or
may not be available on acceptable terms. If adequate funds are not available,
Ascent may be required to significantly curtail one or more of its product
development programs or product commercialization efforts, obtain funds through
arrangements with collaborative partners or others that may require Ascent to
relinquish rights to certain of its technologies, product candidates or products
which Ascent would otherwise pursue on its own or significantly scale back or
terminate operations.
IMPACT OF YEAR 2000 ISSUES
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Following
December 31, 1999, Ascent's computer equipment and software that is time
sensitive, including equipment with embedded technology such as telephone
systems and facsimile machines, may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to engage in normal business activities.
During the third quarter of fiscal 1998, Ascent established an internal
Year 2000 task force, comprised of employees and members of management, for the
purpose of evaluating the Year 2000 compliance of its existing computer systems,
software and operations infrastructure and any Year 2000 issues of third parties
of business importance to Ascent. The goal of Ascent's
Page 16
<PAGE> 19
Year 2000 task force is to minimize any disruptions to Ascent's business which
could result from the Year 2000 problem and to minimize liabilities which Ascent
might incur as a result of such disruptions. As of September 30, 1999, Ascent
had completed its internal Year 2000 assessment and its remediation and testing
efforts.
Ascent has also initiated communications with its significant
suppliers, including Upsher-Smith Laboratories, Inc. and Lyne Laboratories, and
service providers and certain strategic customers to determine the extent to
which such suppliers, providers or customers will be affected by any significant
Year 2000 issues. As of September 30, 1999, Ascent has been notified that
approximately sixty-five percent of its significant suppliers are Year 2000
compliant. Of the remaining significant suppliers, Ascent has been in regular
contact regarding the suppliers' progress to determine the extent to which it
may be affected by the failure of these third parties to address their own Year
2000 issues and may facilitate the coordination of Year 2000 solutions between
Ascent and these third parties. Third parties of business importance to Ascent
may not successfully and timely evaluate and address their own Year 2000 issues.
The failure of any of these third parties to achieve Year 2000 compliance in a
timely fashion could have a material adverse effect on Ascent's business,
financial position, results of operations or cash flows.
Ascent is funding the costs of its Year 2000 compliance efforts with
cash flows from operations. Ascent does not anticipate that the costs of
becoming Year 2000 compliant will have a material adverse effect upon Ascent's
business, financial position, results of operations or cash flows. Ascent does
not expect that the costs of replacing or modifying computer equipment and
software will be substantially different, in the aggregate, from the normal,
recurring costs incurred by Ascent for systems development, implementation and
maintenance in the ordinary course of business. In this regard, in the ordinary
course of replacing computer equipment and software, Ascent attempts to obtain
replacements that are Year 2000 compliant. As of September 30, 1999, in addition
to the costs that Ascent would have incurred in the ordinary course of replacing
computer equipment and software, Ascent has incurred less than $10,000 for the
replacement of computer equipment and software that was not Year 2000 compliant.
Ascent expects to incur total costs of less than $25,000 to become Year 2000
compliant.
Ascent does not presently believe that the Year 2000 issue will pose
significant operational problems for the Company. However, if Ascent does not
properly identify all Year 2000 issues, or the timeliness of assessment,
remediation and testing are affected with respect to Year 2000 problems that are
identified, there can be no assurance that the Year 2000 issue will not have a
material adverse effect on Ascent's business, financial position, results of
operations or cash flows or adversely affect Ascent's relationships with
customers, suppliers or others.
As of September 30, 1999, Ascent had completed its contingency plans
for dealing with the operational problems and costs (including loss of revenues)
that would be reasonably likely to result from failure by Ascent and certain
third parties to achieve Year 2000 compliance on a timely basis. Ascent plans to
spend approximately $62,000 to stockpile certain raw materials to prevent
disruptions to its production schedule.
Page 17
<PAGE> 20
The foregoing assessment of the impact of the Year 2000 problem on
Ascent is based on management's best estimates as of the date of this quarterly
report, which are based on numerous assumptions as to future events. There can
be no assurance that these estimates will prove accurate, and actual results
could differ materially from those estimated if these assumptions prove
inaccurate.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This quarterly report on Form 10-Q contains certain forward-looking
statements. For this purpose any statements 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 in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Factors That May Affect Future Results" of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998 as filed
with the Securities and Exchange Commission, which are expressly incorporated by
reference herein.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In January 1997, the Securities and Exchange Commission issued
Financial Reporting Release 48, also known as FRR 48, "Disclosure of Accounting
Policies for Derivative Financial Instruments and Derivative Commodity
Instruments, and Disclosure of Quantitative and Qualitative Information About
Market Risk Inherent in Derivative Financial Instruments, Other Financial
Instruments and Derivative Commodity Instruments". FRR 48 requires disclosure of
qualitative and quantitative information about market risk inherent in
derivative financial instruments, other financial instruments, and derivative
commodity instruments beyond those required under generally accepted accounting
principles.
In the ordinary course of business, Ascent is exposed to interest rate
risk for its subordinated notes. At September 30, 1999, the fair market value of
these notes was estimated to approximate carrying value. Market risk was
estimated as the potential increase in fair value resulting from a hypothetical
10% decrease in the Company's weighted average short-term borrowing rate at
September 30, 1999, which was not materially different from the quarter-end
carrying value.
PART II. OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 23, 1999, the Company consummated a merger with a wholly-owned
subsidiary pursuant to which each share of Common Stock of the Company was
converted into one depositary share, representing one share of common stock,
subject to a call option, and represented by a depositary receipt. The holders
of depositary shares on the record date for any vote of the holders of Ascent
common stock are entitled to instruct the depositary in writing as to
Page 18
<PAGE> 21
the exercise of the voting rights pertaining to this number of shares of Ascent
common stock represented by their respective depositary shares. Upon the
liquidation, dissolution or winding up of Ascent, the holders of depositary
shares will be entitled to receive ratably the net assets of Ascent available
after the payment of all debts and other liabilities and subject to the prior
rights of any outstanding preferred stock. Any dividends declared on the
depositary shares will be distributed to the record holders of depositary shares
in proportion to the number of depositary shares owned by the holders thereof.
On June 30, 1999, the Company issued and sold 7.5% demand promissory
notes in the principal amount of $2.0 million to funds affiliated with ING
Furman Selz. On July 1, 1999, the Company and the Series G purchasers entered
into a third amendment to the May 1998 securities purchase agreement under which
funds affiliated with ING Furman Selz agreed to loan the Company up to $4.0
million. Upon executing the third amendment, the Company issued 7.5% convertible
subordinated notes in the aggregate principal amount of up to $4.0 million and
warrants to purchase 300,000 shares of Ascent common stock at an exercise price
of $3.00 per share to the funds affiliated with ING Furman Selz and canceled the
$2.0 million of 7.5% demand promissory notes issued on June 30, 1999. The 7.5%
convertible subordinated notes expire on July 1, 2004 and are convertible into
shares of Ascent common stock at a conversion price of $3.00 per share. These
issuances were conducted pursuant to Section 4(2) of the Securities Act of 1933,
as amended.
On July 23, 1999, the Company consummated the transactions contemplated
by the second amendment to the May 1998 securities purchase agreement with ING
Furman Selz, including: (a) the exchange all outstanding shares of Series G
preferred stock for convertible subordinated notes in the original principal
amount of $7.0 million in accordance with the terms of the Series G preferred
stock, (b) the reduction in the exercise price of warrants to purchase 2,116,958
shares of Ascent common stock from $4.75 per share to $3.00 per share and the
exercise of these warrants, (c) the issuance and sale to the Series G purchasers
of an aggregate of 300,000 shares of Ascent common stock at a price of $3.00 per
share and (d) the cancellation of approximately $7.25 million of principal under
the subordinated notes held by the Series G purchasers to pay the exercise price
of the warrants and the purchase price of the additional 300,000 shares. On July
23, 1999, in connection with these transactions, Ascent issued 150,000 shares of
Ascent common stock to ING Furman Selz in lieu of the payment of certain
financial advisory fees pursuant to an amendment to a financial advisory
services fee agreement with ING Furman Selz. These issuances were conducted
pursuant to Section 4(2) of the Securities Act of 1933, as amended.
On October 15, 1999, the Company issued 7.5% convertible subordinated
notes in the aggregate principal amount of up to $10.0 million and warrants to
purchase 1,000,000 Ascent depositary shares at an exercise price of $3.00 per
share to the funds affiliated with ING Furman Selz. The 7.5% convertible
subordinated notes expire on July 1, 2004 and are convertible into shares of
Ascent common stock at a conversion price of $3.00 per share. These issuances
were conducted pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
Page 19
<PAGE> 22
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on July 23, 1999, the
following proposals were adopted by the vote specified below:
(a) Approval and adoption of an Agreement and Plan of Merger
(including the related agreements attached as exhibits) dated
as of February 16, 1999 by and between the Company and Bird
Merger Corporation, a wholly-owned subsidiary of the Company.
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
5,866,551 19,450 27,067 1,972,336
(b) Approval of the reduction in the exercise price from $4.75 per
share to $3.00 per share of warrants to purchase an aggregate
of 2,116,958 shares of Ascent common stock, the sale and
issuance to the holders of these warrants of an aggregate of
300,000 shares of Ascent common stock at a price of $3.00 per
share and the issuance to an affiliate of some of these
holders of 150,000 shares of Ascent common stock in lieu of
the payment of certain financial advisory fees.
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
5,840,410 60,741 1,917 1,972,336
(c) The election of the following Class II directors:
Withheld
For Authority
--- ---------
Alan R. Fox 7,872,953 12,451
Robert E. Baldini 7,871,844 13,560
James L. Luikart 7,871,844 13,560
In addition, the following directors' terms in office
continued after the Annual Meeting: Raymond F. Baddour, Sc.D.,
Emmett Clemente, Ph.D., Michael J.F. DuCros, Andre Lamotte,
Sc.D., and Lee J. Schroeder. On February 19, 1999, Terrance
McGuire resigned as a director, and on July 23, 1999, Michael
J.F. DuCros resigned as a director. On July 23, 1999, in
connection with the consummation of the strategic alliance
with Alpharma, Thomas L. Anderson, a representative of
Alpharma, and Nicholas Daraviras, a representative of Furman
Selz Investments, were appointed to the Board of Directors to
fill these vacancies.
(d) Adoption of the Company's 1999 Stock Incentive Plan
Page 20
<PAGE> 23
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
5,700,449 208,639 3,980 1,972,336
(e) Ratification of Selection of Independent Auditors
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
7,880,967 2,550 1,487 400
ITEM 5 - OTHER INFORMATION
Upon closing of the strategic alliance with Alpharma on July 23, 1999,
Ascent merged with one of its subsidiaries and each share of Ascent
common stock was converted into one depositary share, representing one
share of Ascent common stock subject to a call option held by Alpharma
and represented by a depositary receipt. The depositary shares are
quoted and traded on the OTC Bulletin Board under the symbol "ASCTP."
During a transitionary period from July 23, 1999 through August 9,
1999, the depositary shares were traded under a temporary symbol,
"ASCZV."
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See the Exhibit Index on Page 23 for a list of exhibits filed
as part of this Quarterly Report on Form 10-Q, which Exhibit
Index is incorporated herein by reference.
b) Reports on Form 8-K
1. On July 2, 1999, the Company filed a Current Report
on Form 8-K with the Securities and Exchange
Commission announcing that the Company had
rescheduled its annual stockholder meeting from July
7, 1999 to July 23, 1999.
2. On July 27, 1999, the Company filed a Current Report
on Form 8-K with the Securities and Exchange
Commission announcing that, on July 23, 1999, (i) the
Company had completed its strategic alliance with
Alpharma Inc., (ii) the Company had completed the
transactions contemplated by the third amendment to
the May 1998 securities purchase agreement and (iii)
the Company had consummated a merger with a
wholly-owned subsidiary pursuant to which each share
of common stock of the Company was converted into one
depositary share (each, a "Depositary Share"),
representing one share of common stock, subject to a
call option, and represented by a depositary receipt.
Page 21
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ASCENT PEDIATRICS, INC.
Date: November 15, 1999 BY: /s/ Eliot M. Lurier
----------------------------------------
Eliot M. Lurier, Chief Financial Officer
Page 22
<PAGE> 25
Exhibit Index
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule
99(1) Pages 37 through 47 of the Company's Annual Report on Form
10-K for the year ended December 31, 1998 as filed with the
SEC (which is not deemed filed except to the extent that
portions thereof are expressly incorporated by reference
therein)
(1) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 1999 filed with
the Securities and Exchange Commission on May 17, 1999.
Page 23
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 106,628
<SECURITIES> 0
<RECEIVABLES> 1,717,361
<ALLOWANCES> 59,588
<INVENTORY> 761,329
<CURRENT-ASSETS> 2,847,407
<PP&E> 1,557,930
<DEPRECIATION> 948,955
<TOTAL-ASSETS> 14,910,223
<CURRENT-LIABILITIES> 4,693,835
<BONDS> 16,992,876
0
0
<COMMON> 385
<OTHER-SE> 55,662,874
<TOTAL-LIABILITY-AND-EQUITY> 14,910,223
<SALES> 2,391,771
<TOTAL-REVENUES> 5,476,771
<CGS> 743,552
<TOTAL-COSTS> 1,305,861
<OTHER-EXPENSES> 15,175,953
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 881,908
<INCOME-PRETAX> (12,274,756)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,274,756)
<EPS-BASIC> (1.60)
<EPS-DILUTED> (1.60)
</TABLE>
