<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 27, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
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 (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
187 BALLARDVALE STREET, SUITE B125
WILMINGTON, MA 01887
(978) 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, SUITE B125
WILMINGTON, MA 01887
(978) 658-2500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPY TO:
DAVID E. REDLICK, ESQ.
PHILIP P. ROSSETTI, ESQ.
HALE AND DORR LLP
60 STATE STREET
BOSTON, MA 02109
(617) 526-6000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
promptly as practicable after this Registration Statement becomes effective and
certain other conditions under the merger agreement are met or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, 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(d)
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. [ ] ____________
(Continued on next page)
<PAGE> 2
(Continued from previous page)
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE PRICE(1) REGISTRATION FEE
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Depositary Shares, each representing one
share of Common Stock, par value $.00004 15,009,666
per share, subject to a call option and Depositary
evidenced by a depositary receipt....... Shares(2) $2.875 $43,152,790 $11,996.48(3)
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Common Stock, par value $0.0004 per
share................................... (4) Not Applicable Not Applicable (5)
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
required by Section 6(b) of the Securities Act of 1933, as amended, and
computed pursuant to Rules 457(f)(1) and 457(c) thereunder on the basis of
the market value of the common stock of Ascent Pediatrics, Inc. ("Ascent")
to be exchanged in the merger, as the product of (a) $2.875 (the average of
the high and low sale prices for shares of Ascent common stock on the Nasdaq
National Market on May 25, 1999) and (b) 15,009,666 shares of Ascent common
stock and common stock equivalents with respect to which depositary shares
may be issued as a result of the merger.
(2) Represents securities of Ascent subject to a call option and evidenced by a
depositary receipt and consists of the sum of (a) the number of depositary
shares to be issued in respect of the outstanding shares of Ascent common
stock pursuant to the merger of Bird Merger Corporation with and into Ascent
as described in this proxy statement/prospectus, (b) the number of
depositary shares issuable following the merger upon the exercise of options
issued under Ascent's 1992 Stock Incentive Plan, 1997 Director Stock Option
Plan or 1997 Employee Stock Purchase Plan, (c) the number of depositary
shares issuable following the merger upon the exercise of any warrants
issued under the Series E Convertible Preferred Stock and Warrant Purchase
Agreement dated as of July 13, 1995 between Ascent and the purchasers named
therein, as amended, or the Series F Convertible Preferred Stock and Warrant
Purchase Agreement dated as of June 28, 1996 between Ascent and the
purchasers named therein, as amended, (d) the number of depositary shares
issuable following the merger upon the exercise of any warrants issued under
the Securities Purchase Agreement dated as of January 31, 1997 among Ascent,
Triumph-Connecticut Limited Partnership and the other purchasers named
therein, as amended, (e) the number of depositary shares issuable following
the merger upon the exchange of shares of Series G preferred stock, the
conversion of 8% convertible notes or the exercise of warrants issued under
the Securities Purchase Agreement dated as of May 13, 1998 between Ascent
and the Series G purchasers named therein, as amended (the "May 1998
Securities Purchase Agreement"), (f) 300,000 depositary shares issuable
following the merger to the Series G purchasers under the Second Amendment
dated as of February 16, 1999 to the May 1998 Securities Purchase Agreement,
and (g) 150,000 depositary shares to be issued to FS Private Investments LLC
under the Amendment dated February 16, 1999 to the Letter Agreement dated as
of May 13, 1998 between Ascent, FS Private Investments LLC and BancBoston
Ventures, Inc.
(3) Pursuant to Rule 457(b) under the Securities Act, the registration fee has
been reduced by the $7,880.08 paid on April 1, 1999 in connection with the
filing under the Securities Exchange Act of 1934, as amended, of preliminary
copies of the proxy materials included herein. Therefore, the registration
fee payable upon the filing of this registration statement is $4,116.40.
(4) Such number of shares of Ascent common stock as are represented by the
depositary shares covered by this registration statement.
(5) Because the Ascent common stock is issued for no additional consideration,
no registration fee is required with respect to these shares.
------------------------
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(a), MAY DETERMINE.
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<PAGE> 3
PROXY STATEMENT/PROSPECTUS OF
LOGO
ANNUAL MEETING OF STOCKHOLDERS TO BE
HELD AT THE OFFICES OF HALE AND DORR LLP
60 STATE STREET, BOSTON, MASSACHUSETTS AT
10:00 A.M., LOCAL TIME, ON JUNE 29, 1999
Dear Ascent Stockholder:
You are invited to attend the annual meeting of our stockholders where you
will be asked to vote on proposals relating to the strategic alliance with
Alpharma Inc. and Alpharma USPD Inc. which we announced in February 1999.
As part of the strategic alliance, Alpharma has agreed to loan us up to
$40.0 million from time to time, and we have agreed to assign to Alpharma a call
option, exercisable in 2002, to purchase all of the Ascent common stock then
issued and outstanding at a price to be determined by a formula based on our
2001 earnings. In order to subject your stock to the call option, we have formed
a subsidiary and entered into a merger agreement with it which provides that the
subsidiary will merge with and into us and that each share of Ascent common
stock owned by you will be converted into a depositary share evidencing one
share of Ascent common stock subject to the call option and represented by a
depositary receipt.
In addition, as a condition to the strategic alliance, we entered into a
second amendment to the Securities Purchase Agreement dated as of May 13, 1998
between Ascent and the purchasers named in the agreement. Under the second
amendment, the purchasers to the May 1998 securities purchase agreement have
agreed to consents and waivers approving the strategic alliance, amendments to
covenants in the May 1998 securities purchase agreement to conform to the
covenants agreed to with Alpharma, subordination provisions which subordinate
our indebtedness to the purchasers to our proposed indebtedness to Alpharma and
other matters requested by us. In order to induce the purchasers to agree to the
second amendment, we agreed, subject to stockholder approval, to reduce the
exercise price of warrants to purchase an aggregate of 2,116,958 shares of
Ascent common stock issued under the May 1998 securities purchase agreement from
$4.75 per share to $3.00 per share, to sell and issue to the holders of these
warrants an aggregate of 300,000 shares of Ascent common stock at a price of
$3.00 per share and to sell and issue to an affiliate of some of these holders
150,000 shares of Ascent common stock in lieu of the payment of financial
advisory fees.
<PAGE> 4
Because the consummation of the strategic alliance is subject to
stockholder approval of the merger agreement (including the related agreements
attached as exhibits) and the transactions contemplated by these agreements and
to the effectiveness of the second amendment, we are seeking your approval at
the annual meeting of (a) the merger agreement (including the related agreements
attached as exhibits) and the transactions contemplated by these agreements and
(b) the reduction in the exercise price of the common stock warrants issued
under the May 1998 securities purchase agreement and the sale and issuance of
Ascent common stock to the holders of these warrants and one of their affiliates
(all of which is a condition to the effectiveness of the second amendment).
Your board of directors has unanimously approved the strategic alliance,
the merger agreement (including the related agreements attached as exhibits) and
the transactions contemplated by these agreements and the transactions
contemplated by the second amendment and has unanimously determined that they
are fair to you and in your best interests. After careful consideration, your
board of directors unanimously recommends that you vote "FOR" the merger
proposal and the other proposals submitted for your consideration at the annual
meeting. Directors, executive officers and certain of their affiliates holding
shares of Ascent Common Stock and Ascent Series G preferred stock representing
approximately 39% of the votes represented by the shares of Ascent Common Stock
and Ascent Series G preferred stock entitled to vote at the annual meeting, have
agreed to vote their shares in favor of the merger agreement (including the
related agreements attached as exhibits) and the transactions contemplated by
these agreements.
Ascent common stock is traded on the Nasdaq National Market under the
symbol "ASCT". We have applied to have the depositary shares to be issued to you
in the merger listed on the Nasdaq National Market. However, The Nasdaq Stock
Market, Inc. has advised us that the depositary shares do not satisfy the
listing requirements for either the Nasdaq National Market or the Nasdaq
SmallCap Market and that it will not list the depositary shares on the Nasdaq
National Market or the Nasdaq SmallCap Market. Although we intend to appeal The
Nasdaq Stock Market's determination not to list the depositary shares on the
Nasdaq National Market or the Nasdaq SmallCap Market, there can be no assurance
that our appeal will be successful and that The Nasdaq Stock Market, Inc. will
agree that the depositary shares may be listed on the Nasdaq National Market or
the Nasdaq SmallCap Market. If our appeal is not successful, the depositary
shares will trade on the OTC Bulletin Board.
This proxy statement/prospectus gives you detailed information about the
specific matters to be voted on at the annual meeting. You should read this
document carefully. Please also refer to the section which we have entitled:
"Where You Can Find More Information" on page 130 for additional information
about us on file with the Securities and Exchange Commission. BE SURE TO READ
THE "RISK FACTORS" BEGINNING ON PAGE 15.
Alan R. Fox, President
Ascent Pediatrics, Inc.
Neither the Securities and Exchange Commission nor any state securities
regulators have approved or disapproved the depositary shares to be issued in
the merger or the Ascent common stock to be evidenced by the depositary shares,
or determined if this proxy statement/prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
This proxy statement/prospectus is dated June 2, 1999, and was first mailed
to stockholders on or about June 4, 1999.
<PAGE> 5
ASCENT PEDIATRICS, INC.
187 BALLARDVALE STREET, SUITE B125
WILMINGTON, MASSACHUSETTS 01887
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 29, 1999
To the stockholders of Ascent Pediatrics, Inc.:
This is to notify you that the annual meeting of stockholders of Ascent
Pediatrics, Inc. will be held on Tuesday, June 29, 1999 at the offices of Hale
and Dorr LLP, 60 State Street, Boston, Massachusetts, commencing at 10:00 a.m.,
local time, for the purpose of considering and voting upon the following
matters:
1. To approve and adopt an Agreement and Plan of Merger (including the
related agreements attached as exhibits) dated as of February 16, 1999
by and between Ascent and Bird Merger Corporation, a wholly owned
subsidiary of Ascent, and the transactions contemplated by these
agreements. The merger agreement provides that Bird Merger Corporation
will merge with and into Ascent and that you will receive one
depositary share for each share of Ascent common stock that you own
representing one share of Ascent common stock subject to a call option
and evidenced by a depositary receipt.
2. To approve 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 issued under the Securities Purchase
Agreement dated as of May 13, 1998 by and among Ascent and the
purchasers named therein, 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, as contemplated by the
Second Amendment dated as of February 16, 1999 to the Securities
Purchase Agreement dated as of May 13, 1998 by and among Ascent and the
purchasers named in the agreement and a related amendment to a
Financial Services Fee Agreement dated as of May 13, 1998.
3. To elect three Class II directors for the ensuing three years.
4. To approve the adoption of our 1999 Stock Incentive Plan.
5. To ratify the selection of PricewaterhouseCoopers LLP as our
independent auditors for the current fiscal year.
6. To transact such other business as may properly be brought before the
annual meeting or any adjournments of the annual meeting.
We have no knowledge of any other business to be transacted at the annual
meeting.
We have fixed the close of business on Wednesday, June 2, 1999 as the
record date for the determination of stockholders who are entitled to notice of
and to vote at the annual meeting and any adjournments of the annual meeting.
By order of the Board of
Directors,
Alan R. Fox
President
June 4, 1999
<PAGE> 6
HOW YOU CAN OBTAIN MORE INFORMATION
This proxy statement/prospectus incorporates important business and
financial information that is not included in or delivered with this document.
You may request a copy of this information at no cost, by writing or telephoning
us at the following address:
Ascent Pediatrics, Inc.
187 Ballardvale Street, Suite B125
Wilmington, Massachusetts 01887
Attention: Secretary
Telephone: (978) 658-2500
To obtain timely delivery, you must make this request no later than five
business days before June 29, 1999, the date of the annual meeting.
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
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QUESTIONS AND ANSWERS ABOUT VOTING.......................... vi
SUMMARY..................................................... 1
General................................................... 1
The Annual Meeting of Stockholders........................ 1
When and Where the Annual Meeting Will Be Held......... 1
Purpose of the Annual Meeting.......................... 2
Recommendations of Our Board of Directors.............. 2
Record Date; Votes Required............................ 2
The Strategic Alliance.................................... 3
General................................................ 3
Reasons for the Strategic Alliance..................... 4
Opinion of Our Financial Advisor....................... 4
The Master Agreement................................... 4
The Merger Agreement................................... 6
The Depositary Agreement............................... 6
The Loan Agreement..................................... 7
Federal Income Tax Consequences of the Merger.......... 9
Federal Securities Laws Consequences................... 9
Appraisal Rights....................................... 10
Amendment to May 1998 Warrants and Sale and Issuance of
Shares of Ascent Common Stock........... 10
General................................................ 10
Warrants and Sale and Issuance of Ascent Common
Stock................................................. 11
Election of Directors..................................... 11
Adoption of 1999 Stock Incentive Plan..................... 11
Ratification of Selection of Independent Auditors......... 11
SUMMARY FINANCIAL INFORMATION............................... 12
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS................................................ 14
RISK FACTORS................................................ 15
Risks of the Strategic Alliance........................... 15
The Call Option Could Limit the Value of Our Stock..... 15
Alpharma May Not Exercise the Call Option or Close the
Exercise of the Call Option........................... 15
The Call Option May Deter Third Parties From Entering
Into Agreements With Us............................... 15
Ascent Depositary Shares May Be Traded on the OTC
Bulletin Board, Which Could Decrease Their
Liquidity............................................. 16
Risks of Our Business..................................... 16
The FDA May Not Approve the Marketing and Sale of
Orapred Syrup......................................... 16
The FDA May Not Approve the Marketing and Sale of
Primsol Trimethoprim Solution......................... 17
</TABLE>
i
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<TABLE>
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The FDA May Not Approve the Marketing and Sale of
Feverall Controlled Release Sprinkles................. 17
There is Uncertainty as to the Market Acceptance of Our
Technology and Products............................... 17
We Have Not Been Profitable............................ 17
We May Require Additional Funding and Our Loan
Agreement with Alpharma Restricts Our Ability To Do
So.................................................... 18
We Are At An Early Stage of Development................ 18
We Are Subject to Technological Uncertainty in Our
Development Efforts................................... 19
We Have Only Limited Sales and Marketing Experience.... 19
We Face Significant Competition in the Pediatric
Pharmaceutical Industry............................... 19
We May Be Unsuccessful with Our Clinical Trials........ 19
We May Not Obtain or Maintain Regulatory Approvals..... 20
We Are Dependent On Third Party Manufacturers.......... 20
We Are Dependent Upon Sole Source Suppliers for our
Products.............................................. 21
We Intend to Pursue Strategic Acquisitions Which May Be
Difficult to Integrate................................ 21
Our Success Depends on Obtaining Patents............... 22
We May Become Involved in Proceedings Relating to
Intellectual Property Rights.......................... 22
Our Patent Licenses are Subject to Termination......... 22
Our Business Could Be Adversely Affected If We Cannot
Adequately Protect Our Proprietary Know-How........... 23
The Pricing of Our Products is Subject to Downward
Pressures............................................. 23
We Are Exposed to Potential Product Liability Claims... 23
We Have Limited Product Liability Coverage and We May
Not Be Able to Obtain It in the Future................ 23
We Are Dependent on a Few Key Employees with Knowledge
of the Pediatric Pharmaceutical Industry.............. 23
We Need to Attract and Retain Highly Skilled Personnel
with Knowledge of Developing and Manufacturing
Pediatric Pharmaceuticals............................. 24
Our Promotion Arrangements Depend on the Support of Our
Collaborators......................................... 24
We Are Dependent Upon a Third Party Distributor........ 24
Uncertainty of Healthcare Reform Measures.............. 24
MARKET PRICE AND DIVIDEND INFORMATION....................... 25
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING............. 27
When and Where the Annual Meeting Will Be Held............ 27
Adjournment of the Annual Meeting......................... 27
Matters to Be Considered at the Annual Meeting............ 27
Recommendation of Our Board of Directors.................. 27
Quorum.................................................... 27
Stockholders Entitled to Vote; Votes Required............. 28
</TABLE>
ii
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<TABLE>
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Voting of Proxies......................................... 29
Revocation of Proxies..................................... 29
Solicitation of Proxies................................... 29
Stockholder Proposals for the 2000 Annual Meeting......... 30
PROPOSAL 1 -- THE MERGER.................................... 31
The Strategic Alliance.................................... 31
Background of the Strategic Alliance................... 31
Reasons for the Strategic Alliance..................... 33
Opinion of Our Financial Advisor....................... 34
Federal Income Tax Consequences of the Merger.......... 38
Federal Securities Laws Consequences................... 40
Description of Our Capital Stock....................... 41
Transfer Agent and Registrar........................... 43
Dissenting Stockholders' Appraisal Rights.............. 43
The Master Agreement...................................... 45
General................................................ 45
Closing................................................ 45
Representations and Warranties......................... 45
Covenants.............................................. 46
Conditions to the Strategic Alliance Transactions
(including the merger)................................ 47
Termination of the Master Agreement; Termination Fee... 49
The Merger Agreement...................................... 49
Structure of the Merger................................ 49
Merger Consideration................................... 49
Exchange of Stock Certificates; Issuance of Depositary
Receipts.............................................. 50
Treatment of Convertible Securities, Warrants and
Options............................................... 50
Certificate of Incorporation and By-Laws............... 51
The Depositary Agreement.................................. 51
General................................................ 51
Call Option............................................ 52
Rights of a Holder of Depository Shares................ 55
Amendment and Termination of the Depositary
Agreement............................................. 56
Other Provisions....................................... 56
The Loan Agreement........................................ 56
Loans.................................................. 56
Loan Mechanics......................................... 57
Payment of Interest and Principal...................... 57
Representations and Warranties......................... 58
Conditions to Loans.................................... 58
Our Board of Directors................................. 59
Affirmative Covenants.................................. 60
</TABLE>
iii
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<TABLE>
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Negative Covenants..................................... 60
Default................................................ 63
Conversion Rights...................................... 64
Subordination.......................................... 64
Registration Rights.................................... 65
Guaranty............................................... 65
THE COMPANIES............................................... 66
Ascent.................................................... 66
Strategy............................................... 66
Technologies........................................... 68
Products and Products Under Development................ 69
Product Development.................................... 76
Sales and Marketing.................................... 77
Manufacturing and Distribution......................... 78
Competition............................................ 79
License and Marketing Agreements....................... 80
Patents, Trade Secrets, Licenses and Trademarks........ 81
Government Regulation.................................. 82
Employees.............................................. 86
Facilities............................................. 86
Legal Proceedings...................................... 86
Selected Financial Data................................ 87
Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 89
Alpharma.................................................. 99
PROPOSAL 2 -- AMENDMENT TO MAY 1998 WARRANTS AND SALE AND
ISSUANCE OF SHARES OF ASCENT COMMON STOCK................. 100
General................................................... 100
Warrants.................................................. 101
Sale and Issuance of Ascent Common Stock.................. 101
Reasons for the Amendment to the Warrants and the Sale and
Issuance of Ascent Common Stock........................ 102
Closing................................................... 102
Interests of Certain Persons.............................. 102
PROPOSAL 3 -- ELECTION OF DIRECTORS......................... 104
General................................................... 104
Board of Directors and Committee Meetings................. 108
Compensation of Directors................................. 108
Compensation of Executive Officers........................ 110
General................................................ 110
Summary Compensation Table........................... 110
</TABLE>
iv
<PAGE> 11
<TABLE>
<S> <C>
Option Grants in Last Fiscal Year.................... 111
Fiscal Year-End Option Values........................ 113
Employment Agreement................................. 113
Compensation Committee Report on Executive
Compensation........................................ 113
Repricing of Options................................. 116
Compensation Committee Report on Repricing of
Options............................................. 116
Compensation Committee Interlocks and Insider
Participation....................................... 117
Certain Relationships and Related Transactions....... 117
Stock Performance Graph.............................. 120
Security Ownership of Certain Beneficial Owners and
Management............................................. 121
Section 16(a) Beneficial Ownership Reporting
Compliance............................................ 125
PROPOSAL 4 -- 1999 STOCK INCENTIVE PLAN..................... 126
General................................................... 126
Description of Awards..................................... 126
Eligibility to Receive Awards............................. 127
Administration............................................ 127
Amendment or Termination.................................. 127
Federal Income Tax Consequences........................... 128
PROPOSAL 5 -- SELECTION OF INDEPENDENT AUDITORS............. 130
WHERE YOU CAN FIND MORE INFORMATION......................... 130
LEGAL OPINIONS.............................................. 130
EXPERTS..................................................... 131
FINANCIAL STATEMENTS........................................ F-1
ANNEX A -- AGREEMENT AND PLAN OF MERGER..................... A-1
Exhibit A -- Master Agreement............................. A-10
Exhibit B -- Depositary Agreement......................... A-37
Exhibit C -- Certificate of Merger........................ A-74
ANNEX B -- LOAN AGREEMENT................................... B-1
ANNEX C -- FAIRNESS OPINION OF ADAMS, HARKNESS & HILL,
INC....................................................... C-1
ANNEX D -- 1999 STOCK INCENTIVE PLAN........................ D-1
ANNEX E -- DELAWARE DISSENTERS' STATUTE..................... E-1
</TABLE>
v
<PAGE> 12
QUESTIONS AND ANSWERS ABOUT VOTING
Q: WHAT DO I NEED TO DO NOW?
A: After you have carefully read this proxy statement/prospectus, please mail
your signed proxy card in the enclosed postage-prepaid return envelope as
soon as possible, so that your shares may be represented at the annual
meeting. In addition, you may attend the annual meeting in person and vote,
whether or not you have signed and mailed your proxy card.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: Just send in a later-dated, signed proxy card before the annual meeting or
attend the annual meeting in person and vote. You may revoke any proxy by
written notice to our Secretary prior to the annual meeting.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how to
vote. You should instruct your broker to vote your shares, following the
directions provided by your broker on how to vote. If you do not instruct
your broker to vote your shares, they will not be voted on the proposed
merger or the other proposals.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A: You should call our Vice President of Finance, John G. Bernardi, at (978)
658-2500.
vi
<PAGE> 13
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus. It does not contain all of the information that is
important to you in order to understand the strategic alliance. For a more
complete description of the merger, the amendment of certain warrants and the
issuance of Ascent common stock to the holders of such warrants and an affiliate
of certain of such holders and the other proposals to be voted on at the annual
meeting, you should read carefully this entire document and the documents to
which we have referred you, including the Annexes attached to this proxy
statement/ prospectus. See "Where You Can Find More Information" (page 130).
GENERAL
THE COMPANIES (PAGE 66)
Ascent Pediatrics, Inc.
187 Ballardvale Street, Suite B125
Wilmington, Massachusetts 01887
(978) 658-2500
We are engaged in the development and marketing of pharmaceuticals for use
in the treatment of common pediatric illnesses. Our strategy is to address unmet
medical needs of children through the development of products that are
specifically formulated for use by children and are based on commonly-prescribed
off-patent pharmaceuticals. We seek to improve upon these pharmaceuticals by
making them easier to administer to children and reformulating them to reduce
the risk of side effects.
Alpharma USPD Inc.
7205 Windsor Blvd.
Baltimore, Maryland 21244
(410) 298-1000
Alpharma Inc.
One Executive Drive
Fort Lee, New Jersey 07024
(201) 947-7774
Alpharma USPD Inc. is a subsidiary of Alpharma Inc., a multinational
pharmaceutical company that develops, manufactures and markets specialty human
pharmaceutical and animal health products. References in this document to
Alpharma mean Alpharma USPD Inc. Alpharma develops, manufactures and markets
specialty generic prescription and over-the-counter pharmaceutical for human
use. Alpharma manufactures and/or markets approximately 170 generic products,
primarily in liquid, cream, ointment and suppository dosage forms. These
products are sold in over 300 product presentations under the "Alpharma",
"Barre" or "NMC" labels and private labels.
THE ANNUAL MEETING OF STOCKHOLDERS
WHEN AND WHERE THE ANNUAL MEETING WILL BE HELD
Our annual meeting of stockholders will be held on Tuesday, June 29, 1999
at 10:00 a.m., local time, at the offices of Hale and Dorr LLP, 60 State Street,
Boston, Massachusetts 02109.
1
<PAGE> 14
PURPOSE OF THE ANNUAL MEETING
The annual meeting is being held to consider and vote upon the following
matters:
- a proposal to approve the merger agreement (including the related
agreements attached as exhibits) and the transactions contemplated by
these agreements;
- a proposal to approve the reduction in the exercise price of warrants to
purchase an aggregate of 2,116,958 shares of Ascent common stock from
$4.75 per share to $3.00 per share, the sale and issuance to the holders
of the warrants of an aggregate of 300,000 shares of Ascent common stock
at a price of $3.00 per share and the issuance of 150,000 shares of
Ascent common stock to an affiliate of some of these holders in lieu of
the payment of certain financial advisory fees, as contemplated by the
second amendment to the May 1998 securities purchase agreement and a
related amendment to a financial services fee agreement;
- a proposal to elect three Class II directors for the ensuing three years;
- a proposal to approve the adoption of our 1999 Stock Incentive Plan;
- a proposal to ratify the selection of PricewaterhouseCoopers LLP as our
independent auditors for the current fiscal year; and
- such other business as may properly be brought before the annual meeting
or any adjournment of the annual meeting.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
Our board of directors has unanimously approved the merger agreement
(including the related agreements attached as exhibits) and the transactions
contemplated by these agreements and each of the other proposals described in
this proxy statement/prospectus, and recommends that you vote "FOR" approval of
each proposal.
RECORD DATE; VOTES REQUIRED
Only holders of record of shares of Ascent common stock and Ascent Series G
preferred stock as of the close of business on June 2, 1999 are entitled to vote
at the annual meeting. On June 2, 1999, an aggregate of 7,026,445 shares of
Ascent common stock and 7,000 shares of Ascent Series G preferred stock (issued
under the May 1998 securities purchase agreement) were outstanding and entitled
to vote.
Holders of Ascent common stock are entitled to one vote per share. Holders
of Ascent Series G preferred stock are entitled to one vote for each share of
Ascent common stock issuable as of the date of the vote upon conversion of the
Ascent Series G preferred stock then outstanding (currently, 210.5 votes per
share of Series G Preferred Stock). On all matters submitted to the record
holders of shares of Ascent common stock, such holders and the record holders of
shares of Ascent Series G preferred stock will vote together as one class. In
addition, the record holders of shares of Ascent Series G preferred stock will
vote separately as a class on the merger proposal.
The following votes of shares entitled to vote at the annual meeting are
required to approve the respective proposal:
- MERGER AGREEMENT (INCLUDING THE RELATED AGREEMENTS ATTACHED AS
EXHIBITS) -- the affirmative vote of the holders of a majority of the
votes represented by the outstanding shares of Ascent common stock and
Ascent Series G preferred stock
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<PAGE> 15
voting together and the holders of at least 80% of the Ascent Series G
preferred stock entitled to vote at the annual meeting;
- REDUCTION IN WARRANT EXERCISE PRICE AND SALE AND ISSUANCE OF ADDITIONAL
SHARES OF ASCENT COMMON STOCK -- the affirmative vote of the holders of a
majority of the votes cast by the holders of the outstanding shares of
Ascent common stock and Ascent Series G preferred stock voting together;
- ELECTION OF CLASS II DIRECTORS -- the affirmative vote of the holders of
a plurality of the votes cast by the holders of the outstanding shares of
Ascent common stock and Ascent Series G preferred stock voting together;
- 1999 STOCK INCENTIVE PLAN -- the affirmative vote of the holders of a
majority of the votes represented by the shares of Ascent common stock
and Ascent Series G preferred stock present or represented by proxy and
voting on the matter voting together; and
- RATIFICATION OF INDEPENDENT AUDITORS -- the affirmative vote of the
holders of a majority of the votes represented by the shares of Ascent
common stock and Ascent Series G preferred stock present or represented
by proxy and voting on the matter voting together.
As of the record date, our directors, executive officers and certain of
their affiliates, owning shares of Ascent common stock and Ascent Series G
preferred stock representing approximately 39.1% of the votes represented by the
shares of Ascent common stock and Ascent Series G preferred stock outstanding
and entitled to vote at the annual meeting, have agreed to vote all of their
respective shares in favor of the approval of the merger agreement (including
the related agreements attached as exhibits) and the transactions contemplated
by these agreements.
THE STRATEGIC ALLIANCE
GENERAL
The strategic alliance with Alpharma contemplates a number of transactions
including:
- A MERGER WITH BIRD MERGER CORPORATION, A WHOLLY OWNED SUBSIDIARY OF
ASCENT. If the merger is consummated, you will receive one depositary
share for each share of Ascent common stock that you own. Each depositary
share will evidence one share of Ascent common stock following the
merger, will be represented by a depositary receipt and will be subject
to a call option in our favor to purchase the Ascent common stock
evidenced by the depositary share;
- A LOAN AGREEMENT WITH ALPHARMA. Under the loan agreement, Alpharma will
loan us 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 intended to enhance our growth; and
- THE ASSIGNMENT OF OUR CALL OPTION TO ALPHARMA. This assignment will
occur following the consummation of the merger and is a condition to the
closing of the transactions contemplated by the strategic alliance
agreements, including Alpharma's agreement to loan us up to $40.0
million.
The terms of the strategic alliance are set forth in the master agreement
between us and Alpharma, the merger agreement between us and Bird Merger
Corporation, the loan
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<PAGE> 16
agreement between us and Alpharma and the depositary agreement between us,
Alpharma and State Street Bank and Trust Company, as depositary.
REASONS FOR THE STRATEGIC ALLIANCE
We believe that the strategic alliance represents a very favorable
strategic opportunity for us, which may provide the following benefits:
- the infusion of immediate capital in the form of debt on favorable terms
under the loan agreement which we can use to fund expected operating
losses into 2000;
- the availability of additional capital in the form of debt on favorable
terms under the loan agreement which we can use to pursue opportunities
to enhance our growth through other strategic alliances, company
acquisitions, product acquisitions and additional research and
development projects;
- the continuation of the ability of our existing stockholders to
participate in our anticipated future growth because the exercise price
for the call option is determined by an earnings-based formula; and
- the access to Alpharma's significant product development and
manufacturing expertise in topical and liquid pharmaceuticals.
OPINION OF OUR FINANCIAL ADVISOR
On February 16, 1999, Adams, Harkness & Hill, Inc. delivered its written
opinion to our board of directors that, as of such date, based on and subject to
the matters stated in the opinion, the terms of the strategic alliance as a
whole are fair, from a financial point of view, to Ascent and the holders of
Ascent common stock. The full text of the fairness opinion is attached to this
proxy statement/prospectus as Annex C and is incorporated in this proxy
statement/prospectus by reference.
We urge you to read the full text of the fairness opinion. The fairness
opinion was provided for the information of our board of directors and is not an
opinion to you as to how you should vote on the merger agreement (including the
related agreements attached as exhibits) and the transactions contemplated by
these agreements.
THE MASTER AGREEMENT
GENERAL. The master agreement provides that following the approval by our
stockholders of the merger agreement (including the related agreements attached
as exhibits) and the transactions contemplated by these agreements and the
satisfaction or waiver of other conditions, Bird Merger Corporation will be
merged with and into us, we will transfer the call option to Alpharma and we and
Alpharma will take or become obligated to take the other actions contemplated by
the strategic alliance.
CONDITIONS. Our obligation to consummate the merger and assign the call
option to Alpharma and our and Alpharma's obligation to effect the other
transactions contemplated by the master agreement are subject to the
satisfaction or waiver of several conditions, including the following:
- our stockholders must approve the merger agreement (including the related
agreements attached as exhibits) and the transactions contemplated by
these agreements;
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<PAGE> 17
- the second amendment to the May 1998 securities purchase agreement must
be in full force and effect, and the reduction in warrant exercise price
and the sale and issuance of shares contemplated by the second amendment
must have been approved by our stockholders;
- we are not in default under any indebtedness in excess of $200,000 or
which results in indebtedness in excess of $200,000 becoming due and
payable prior to its due date;
- since September 30, 1998, no event will have occurred which has had a
material adverse effect with respect to our business, properties, assets,
net worth, financial condition, results of operations or future
prospects;
- the number of shares as to which appraisal rights have been asserted (if
available) will not exceed 5% of the number of shares of our voting
capital stock then outstanding;
- a designee of Alpharma will have been elected to our board of directors;
and
- other customary conditions, including obtaining all requisite consents or
waivers, accuracy of representations and warranties and no adverse legal
proceedings.
ALPHARMA STANDSTILL AGREEMENT; VOTING AGREEMENT. Alpharma and Alpharma
Inc. have agreed that they will not acquire, in the aggregate, voting capital
stock (or securities convertible into or exercisable for voting capital stock)
which represents more than 40% of the aggregate voting power of all classes of
our voting capital stock that are then outstanding or then issuable upon
conversion or exercise of our convertible securities, rights, options and
warrants then outstanding (which percentage will be calculated based on the
assumption that the note held by Alpharma has been converted into 5,614,035
shares of the Ascent common stock). Alpharma and Alpharma Inc. have also agreed
that they will not take certain other actions relating to control of Ascent such
as soliciting shareholder proxies in connection with director elections or
otherwise proposing any business combination with us.
Alpharma and Alpharma Inc. have also agreed that, in any election of
directors and in any other vote to be taken by our stockholders during the next
seven years (whether taken at an annual or special meeting of stockholders or by
written action), Alpharma Inc. and Alpharma will vote any depositary shares or
other Ascent voting capital stock which they hold, in the same manner and in the
same proportion as the votes cast by the other holders of depositary shares or
such other voting capital stock.
TERMINATION PRIOR TO CONSUMMATION OF THE MERGER; TERMINATION FEE. The
master agreement, and in effect the merger agreement and the strategic alliance,
will terminate if the merger is not consummated by September 30, 1999.
Alpharma may terminate the master agreement if our board of directors
withdraws its recommendation of the merger or our stockholders fail to approve
the merger agreement (including the related agreements attached as exhibits) and
the transactions contemplated by these agreements. We may terminate the master
agreement if our board of directors withdraws its recommendation of the merger
and the transactions contemplated thereby in accordance with the exercise of its
fiduciary duties. If the master agreement is terminated by either us or Alpharma
under these circumstances, we will be required to pay Alpharma a $1.2 million
cash termination fee within 10 business days after termination.
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<PAGE> 18
THE MERGER AGREEMENT
WHAT ASCENT STOCKHOLDERS WILL RECEIVE IN THE MERGER. As a result of the
merger, each holder of Ascent common stock, other than holders of Ascent common
stock who perfect their rights of appraisal under Section 262 of the Delaware
General Corporation Law statute (if such rights are available), will receive one
depositary share for each share of Ascent common stock they own. Each depositary
share will evidence one share of Ascent common stock, subject to a call option
in our favor to purchase all of the Ascent common stock evidenced by the
depositary shares and will be represented by a depositary receipt. We will
assign this call option to Alpharma immediately following the merger.
WHAT EACH HOLDER OF CONVERTIBLE SECURITIES, WARRANTS OR OPTIONS OF ASCENT
WILL RECEIVE IN THE MERGER. As a result of the merger, each convertible
security, warrant or option of Ascent, whether or not then vested, convertible
or exercisable will (when vested, convertible or exercisable) become convertible
into or exercisable for a number of depositary shares equal to the number of
shares of Ascent common stock issuable upon conversion or exercise of the
convertible security, warrant or option.
THE DEPOSITARY AGREEMENT
ASSIGNMENT. We have agreed to assign our call option to purchase all of
the Ascent common stock held by the depositary to Alpharma immediately following
the effective time of the merger. Consequently, Alpharma will have the right,
but not the obligation, to purchase all of the Ascent common stock held by the
depositary.
EXERCISE. Alpharma may exercise the call option at any time during the
20-day period following our delivery to Alpharma of our audited financial
statements for the 2001 fiscal year and a statement from us stating the call
option exercise price and the manner in which it was calculated. This 20-day
period may be extended to resolve any dispute relating to the calculation of the
call option exercise price.
EXERCISE PRICE. The call option exercise price, for each share of Ascent
common stock, is determined by dividing:
- the greater of:
- $140.0 million and
- the sum of (i) the product of (a) 12.2 and (b) Ascent's 2001 pre-tax
operating income adjusted to exclude any research and development
expenses in excess of $1.5 million, certain interest and dividends in
respect of the note issued to Alpharma under the loan agreement and
the securities issued under the May 1998 securities purchase agreement
and other specified items and (ii) the aggregate exercise price of all
options and warrants of Ascent issued by us after December 31, 1998
and either (x) exercised prior to the closing of the exercise of the
call option or (y) outstanding as of the date immediately preceding
the closing of the exercise of the call option, by
- the sum of (i) the number of shares of Ascent common stock outstanding as
of the date immediately preceding the closing of the exercise of the call
option, and (ii) the number of shares of Ascent common stock issuable
upon the exercise or conversion of any options, warrants, rights or
convertible securities of Ascent outstanding as of the date immediately
preceding the closing of the exercise of the call option (excluding the
shares issuable upon conversion of the note issued to Alpharma pursuant
to the loan agreement).
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<PAGE> 19
If the call option exercise price is determined to be less than $11.76 per
share (subject to adjustment), the call option exercise price for each share of
Ascent common stock held by our stockholders will be reduced so that certain of
our securityholders can receive either $11.76 per share or the original call
option exercise price per share as required by our agreements with these
securityholders.
CLOSING OF EXERCISE OF CALL OPTION. The closing of the exercise of the
call option will occur within 10 to 15 business days following exercise, subject
to there being no provision of law or governmental or court order which
prohibits the closing and all antitrust approvals being obtained, either of
which could delay the closing.
TERMINATION OF CALL OPTION. Alpharma's call option will terminate if
Alpharma (a) does not exercise the call option within the specified period, (b)
terminates the call option following exercise because a material adverse event
has occurred with respect to Ascent, (c) has exercised the call option, but due
to a failure to satisfy closing conditions, the closing is not held within up to
180 days after the date on which the closing was originally scheduled or (d)
refuses to make a loan to us under the loan agreement unless it refuses our
requested loan because the proposed use of proceeds of the loan did not meet the
requirements under the loan agreement.
DEPOSITARY SHARES. Each depositary share evidences an interest in one
share of Ascent common stock held by the depositary, subject to the call option.
Prior to the closing of the exercise of the call option or the termination or
expiration of the call option, each holder of a depositary share will generally
be entitled to all the rights it would have if it held directly the share of
Ascent common stock the depositary share evidences. If the call option is
exercised, upon the closing of the exercise of the call option, each holder of a
depositary share will be entitled to receive the applicable exercise price for
each share of Ascent common stock evidenced by the depositary share, without
interest. If the call option is terminated or expires, each holder of a
depositary share will be entitled to receive the share of Ascent common stock
evidenced by the depositary share, together with any declared and unpaid
dividends. The depositary shares will be represented by depositary receipts in
substantially the form of Exhibit A to the depositary agreement.
THE LOAN AGREEMENT
LOANS. Alpharma will make loans to us in an aggregate principal amount of
up to $40.0 million from time to time prior to December 31, 2001. On February
19, 1999, we borrowed $4.0 million from Alpharma. We may borrow up to an
additional $36.0 million on or after the closing of the merger as follows:
- up to an additional $8.0 million for general corporate purposes;
- up to an additional $8.0 million in order to (a) acquire all of the stock
or assets of a company, (b) acquire a product or product line or the
right to sell a product or product line or (c) support a research and
development project; and
- up to an additional $20.0 million in order to (a) acquire all of the
stock or assets of a company that meets specified criteria, (b) acquire a
product or product line or the right to sell a product or product line
that meets specified criteria or (c) support a research and development
project.
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<PAGE> 20
CONDITIONS TO LOANS. Alpharma will not be obligated to make any loan to us
(beyond the $4.0 million loaned on February 19, 1999) unless several conditions
are met, including:
- our not having a negative stockholders' equity (treating the debt
outstanding under securities issued under the May 1998 securities
purchase agreement as stockholders equity for this purpose);
- no occurrence of an event which would make it reasonably probable that
our adjusted operating income for the 2001 fiscal year will be less than
$10.0 million; and
- Alpharma being reasonably satisfied that the proceeds of the requested
loan will be used in the manner required under the loan agreement.
PAYMENT OF PRINCIPAL AND INTEREST. The note evidencing the amounts
borrowed by us 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, we do not otherwise prepay the principal
amount of the note outstanding and Alpharma does not otherwise convert the note,
we 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, we may repay all or a portion of
the outstanding principal amount under the note. We may reborrow 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, we may prepay
all of the outstanding principal amount under the note, together with any
accrued and unpaid interest, if we also pay a conversion termination fee equal
to 25% of the principal amount of the note outstanding as of December 31, 2001.
Following a change in control of Ascent, Alpharma may require Ascent to repay
all outstanding principal and interest under the note. We may not otherwise
prepay the note.
CONVERSION. Alpharma may convert all or a portion of the then outstanding
principal amount of the note into Ascent common stock on one occasion after a
change in control of Ascent 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 Ascent 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 Ascent common stock within three business days
after the increase.
COVENANTS. We have agreed that Alpharma will be entitled to designate one
nominee for election to our board of directors and that it will have information
and inspection rights. We have also agreed that we will not take certain actions
without the prior consent of Alpharma, including the following:
- incur research and development expenses of more than $7.5 million in the
2001 fiscal year;
- create, incur, permit to exist or become liable with respect to borrowed
money indebtedness with certain exceptions, including (a) our existing
indebtedness, (b) up to $50.0 million of borrowed money indebtedness for
the purpose of acquiring a company or product which acquisition meets
specified criteria or funding research and development and (c) certain
indebtedness that is convertible
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<PAGE> 21
into Ascent common stock for the purpose of acquiring of a company or
product which acquisition meets specified criteria or funding research
and development;
- sell, convey or lease all or a substantial portion of our assets;
- acquire all or a substantial portion of the assets or stock of any person
other than in a transaction that meets specified criteria; and
- issue or become obligated to issue shares of capital stock or securities
convertible into capital stock other than Ascent common stock or rights,
warrants or options to purchase Ascent common stock.
SUBORDINATION. The Series G purchasers, who purchased shares of Series G
preferred stock, warrants and notes under the May 1998 securities purchase
agreement, and Alpharma have agreed, among other things, that:
- the indebtedness evidenced by the note held by Alpharma and by the notes
held by the Series G purchasers, including the notes issuable upon
exchange of shares of Ascent Series G preferred stock, will be
subordinated in right of payment to the prior payment in full of senior
indebtedness (as defined below under "Proposal 1 -- The Loan
Agreement -- Subordination" on page 64); and
- the indebtedness evidenced by the notes held by the Series G purchasers,
including the notes issuable upon exchange of shares of Ascent Series G
preferred stock, will be subordinated in right of payment to the note
held by Alpharma to the extent that we have a stockholders' deficit as
reflected on our monthly balance sheet and will otherwise have rights to
payment equal to the note held by Alpharma.
REGISTRATION RIGHTS. On or after the first date on which Alpharma may
convert the note into Ascent common stock, Alpharma may (a) on one occasion,
demand that we register the shares issuable upon conversion of the note, to the
extent the shares have an aggregate value of at least $5.0 million, and (b)
include such shares in any registration statement we file with the Securities
and Exchange Commission, subject to some limitations including a customary
underwriter cutback.
ALPHARMA GUARANTY. Alpharma Inc., the parent of Alpharma, has irrevocably
and unconditionally guaranteed to us Alpharma's performance of and compliance
with all covenants, agreements, obligations, terms and conditions under the loan
agreement and the other agreements entered into with us in connection with the
strategic alliance.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
For federal income tax purposes, each share exchanged by you in the merger
should be considered to have been exchanged in a "recapitalization" of Ascent
within the meaning of Section 368(a)(1)(E) of the Internal Revenue Code of 1986,
as amended. You will not recognize any gain or loss with respect to the share
considered to have been exchanged in the recapitalization for a depositary
share.
FEDERAL SECURITIES LAWS CONSEQUENCES
The issuance of depositary shares in the merger has been registered under
the Securities Act. The depositary shares of Ascent issued in the merger may be
traded freely and without restriction by those Ascent stockholders not deemed to
be "affiliates" of Ascent as that term is defined under the Securities Act. Any
transfer of depositary shares by any affiliate of Ascent would be restricted.
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<PAGE> 22
APPRAISAL RIGHTS
You will have the right to obtain a cash payment for the "fair value" of
your shares (excluding any element of value arising from the accomplishment or
expectation of the merger), if:
- appraisal rights are available under Section 262 of the Delaware General
Corporation Law statute;
- you are a holder of record of Ascent common stock or Ascent Series G
preferred stock who does not vote in favor of the merger proposal; and
- you deliver a demand for appraisal prior to the vote at the annual
meeting on the merger.
In order to exercise these rights, you must comply with each of the procedural
requirements of Section 262, a description of which is provided in "Proposal
1 -- The Merger Agreement -- Dissenting Stockholders' Appraisal Rights" and the
full text of which is attached to this proxy statement/prospectus as Annex E.
You should read Section 262 in its entirety. The "fair value" of a share would
be determined in judicial proceedings, the results of which cannot be predicted.
The failure to take any of the steps required under Section 262 in a timely
manner will result in your loss of appraisal rights.
AMENDMENT TO MAY 1998 WARRANTS AND SALE AND ISSUANCE OF SHARES OF ASCENT COMMON
STOCK
GENERAL
As a condition to Alpharma's entering into the strategic alliance, on
February 16, 1999, we and the Series G purchasers entered into the second
amendment to the May 1998 securities purchase agreement, which provides for,
among other things, the following:
- consents and waivers from the Series G purchasers approving the strategic
alliance;
- amendments to covenants and the definition of a default event in the May
1998 securities purchase agreement to conform them to similar provisions
in the loan agreement;
- the agreement by the Series G purchasers to subordinate the indebtedness
owed to them, including the notes issuable upon exchange of shares of
Ascent Series G preferred stock, to the indebtedness owed to Alpharma to
the extent that we have negative stockholders' equity as reflected on our
monthly balance sheet;
- the right of the Series G purchasers to designate an additional nominee
to our board of directors; and
- our agreement to exercise our right to exchange all Ascent Series G
preferred stock for 8% convertible subordinated notes in accordance with
the existing terms of the Ascent Series G preferred stock.
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WARRANTS AND SALE AND ISSUANCE OF ASCENT COMMON STOCK
In order to induce the Series G purchasers to agree to the second
amendment, we agreed, subject to stockholder approval, to:
- amend the warrants to purchase 2,116,958 shares of Ascent common stock
issued to the Series G purchasers to reduce the exercise price of the
warrants from $4.75 per share to $3.00 per share; and
- sell and issue to the Series G purchasers an aggregate of 300,000 shares
of Ascent common stock at a price per share of $3.00.
The Series G purchasers have agreed to exercise these warrants immediately
following the amendment to the warrants and to pay the exercise price of the
warrants and the purchase price for the 300,000 shares of newly issued Ascent
common stock through the cancellation of an aggregate of $7,250,874 of principal
under the 8% subordinated notes issued to them under the May 1998 securities
purchase agreement. Following the exercise of the warrants and the purchase of
the 300,000 shares, approximately $1.75 million in principal will remain
outstanding under the 8% subordinated notes.
In addition to the second amendment to the May 1998 securities purchase
agreement, we have agreed to amend a financial advisory services fee agreement
with FS Private Investments LLC, referred to herein as ING Furman Selz. Under
the original agreement, we had agreed to pay ING Furman Selz $150,000 per year,
payable quarterly in arrears, for a five year period commencing June 1, 1998. As
of March 1, 1999, we have paid a total of $112,500 under this agreement. We have
now agreed with ING Furman Selz that in lieu of paying its fees for the
remainder of the term of the agreement, we will issue them 150,000 shares of
Ascent common stock and that upon the issuance of such shares the agreement will
terminate.
ELECTION OF DIRECTORS
Our three Class II directors are proposed for re-election to serve as
members of our board of directors until the annual meeting of stockholders in
2002, or until their successors are duly elected and qualified.
ADOPTION OF 1999 STOCK INCENTIVE PLAN
Our board of directors has adopted, subject to stockholder approval, the
1999 Stock Incentive Plan providing for the issuance to our employees, directors
and officers, consultants and advisors of up to 500,000 shares of Ascent common
stock upon the exercise of stock options granted under the plan, upon restricted
stock awards or otherwise. If the 1999 Stock Incentive Plan is approved,
following the consummation of the merger, any person to whom options are granted
will receive options to purchase depositary shares and all restricted stock
awards will be issued in the form of depositary shares.
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
We have selected PricewaterhouseCoopers LLP as our auditors for the year
ending December 31, 1999, subject to ratification by our stockholders at the
annual meeting.
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- --------------------------------------------------------------------------------
SUMMARY FINANCIAL DATA
The table below summarizes recent historical financial and pro forma
financial information for Ascent. For further information, refer to the
financial statements of Ascent included in this proxy statement/ prospectus.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA THREE MONTHS QUARTER
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED MARCH 31, ENDED
------------------------------------------------- DECEMBER 31, ----------------- MARCH 31,
1994 1995 1996 1997 1998 1998(1, 2) 1998 1999 1999(2)
------- ------- ------- -------- -------- ------------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Product revenue, net.... $ -- $ -- $ -- $ 2,073 $ 4,476 $ 4,476 $ 1,314 $ 1,241 $ 1,241
Licensing revenue....... -- 304 -- -- -- -- -- -- --
Co-promotional
revenue............... -- -- -- -- -- -- -- 615 615
Loss from operations.... (3,692) (4,214) (6,566) (11,854) (16,213) (17,244) (4,128) (3,472) (3,472)
Extraordinary item(3)... -- -- -- -- 1,166 1,166 -- -- --
Net loss................ (3,545) (4,101) (6,487) (12,498) (18,231) (19,445) (4,441) (3,677) (3,859)
Net loss to common
stockholders.......... (3,545) (4,163) (6,625) (12,745) (18,680) (19,445) (4,441) (3,869) (3,859)
Net loss per common
share basic and
diluted............... $(17.93) $(21.05) $(33.44) $ (3.08) $ (2.69) $ (2.05) $ (0.64) $ (0.55) $ (0.40)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------------------------------- MARCH 31, MARCH 31,
1994 1995 1996 1997 1998 1999 1999(2)
------- -------- -------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents and current
marketable securities.................... $ 2,171 $ 2,538 $ 2,086 $14,229 $ 2,172 $ 2,268 $ 2,268
Working capital............................ 1,966 2,231 525 4,242 468
Total assets(4)................... 2,466 2,750 2,628 28,433 16,301 17,263 16,777
Long term subordinated secured notes, net
of current portion....................... -- -- -- 1,252 8,681 12,694 11,904
Redeemable Convertible Preferred Stock,
Series D, Series E and Series F(5)....... 8,157 12,557 17,832 -- -- -- --
Convertible Exchangeable Preferred Stock,
Series G................................. -- -- -- -- 6,461 6,461 --
Total equity...................... (5,995) (10,158) (16,778) 15,515 3,803 11 489
</TABLE>
No common stock dividends have been declared or paid by Ascent for any period
presented above.
- -------------------------
(1) Presented on a pro forma basis to give effect to the borrowing, on February
19, 1999, of $4,000,000 under the Alpharma loan agreement.
(2) Presented on a pro forma basis to give effect to the consummation of the
following transactions contemplated by the second amendment to the May 1998
securities purchase agreement, which will be consummated, subject to
stockholder approval, concurrently with the closing of the transactions
contemplated by the master agreement, including the merger: (a) the exchange
of 7,000 shares of Series G convertible exchangeable preferred stock for
convertible subordinated notes in the aggregate principal amount of
$7,000,000, (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 sale and issuance of
300,000 shares of Ascent common stock at a purchase price of $3.00 per share
to the holders of these warrants, (d) the cancellation of $7,250,874 of
- --------------------------------------------------------------------------------
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subordinated notes as payment of the exercise price for the warrant shares
and the purchase price for the 300,000 shares and (e) the issuance of an
additional 150,000 shares of Ascent common stock in lieu of the payment of
cash under a financial advisory services agreement. The basis for the pro
forma presentation is discussed in more detail in the unaudited pro forma
financial statements included in this proxy statement/prospectus.
(3) The extraordinary item resulted from the early repayment of subordinated
secured notes on June 1, 1998. As a result, Ascent accelerated the accretion
of the discount of $842,000. In addition, $325,000 of unamortized debt issue
costs were written off.
(4) In July 1997, Ascent acquired the Feverall acetaminophen suppository product
line and certain related assets for a purchase price of $11.9 million. A
significant portion of the purchase price was allocated to the "Feverall"
trademark acquired in the transaction, the manufacturing agreement entered
into in connection with the transaction and goodwill.
(5) All then outstanding preferred stock was converted to common stock at the
initial public offering in May 1997.
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CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS
Certain statements in this proxy statement/prospectus constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are included in the Summary and
under "Risk Factors" and "Proposal 1 -- The Merger -- Opinion of our Financial
Advisor" (particularly the financial information contained therein).
We may be making forward-looking statements when we make statements that
include the words "believes," "expects," "anticipates" or similar expressions.
You should read these statements with caution, because our actual results or
experience could differ materially from the forward-looking statements. These
differences could result from many factors, including those set forth in "Risk
Factors" on pages 15 through 24 of this proxy statement/prospectus.
We make no commitment to disclose any revisions to forward-looking
statements, or any facts, events or circumstances that may occur after the date
of this proxy statement/prospectus that may have an impact on our
forward-looking statements.
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RISK FACTORS
You should carefully consider the following risk factors, in addition to
the other information contained in this proxy statement/prospectus, in
determining how to vote at the annual meeting.
RISKS OF THE STRATEGIC ALLIANCE
THE CALL OPTION COULD LIMIT THE VALUE OF OUR STOCK
Under the call option, Alpharma will have the right to buy the outstanding
Ascent common stock at a price determined by an earnings-based formula. The
trading price of Ascent depositary shares is unlikely to exceed the anticipated
call option exercise price, even if our business, future prospects and general
market conditions warrant a per share valuation of Ascent in excess of the call
option exercise price. In addition, because the call option exercise price will
not be known until 2002, uncertainty as to the call option exercise price may
affect the trading price of Ascent depositary shares.
ALPHARMA MAY NOT EXERCISE THE CALL OPTION OR CLOSE THE EXERCISE OF THE CALL
OPTION
Alpharma's exercise of the call option is entirely at its discretion. Even
if we successfully develop, obtain regulatory approval and market our products
in accordance with our business plan, Alpharma may elect not to exercise, or may
be incapable of exercising, the call option. A number of factors could prevent
Alpharma from exercising the call option or closing the exercise of the call
option, including:
- Alpharma's financial condition may prohibit it from exercising the call
option and paying the option exercise price;
- Alpharma may change its strategic direction and determine that the
acquisition of Ascent is not consistent with its new business plan;
- the call option may terminate prior to the option exercise period because
of Alpharma's refusal to make a loan to us under the loan agreement
unless it refuses our requested loan because our proposed use of proceeds
did not meet the requirements under the loan agreement; or
- governmental agencies may prohibit or curtail Alpharma's ability to
purchase the Ascent common stock held by the depositary under applicable
antitrust laws.
In the event that Alpharma does not exercise the call option or close on
the exercise of the call option, we will have up to two years to repay all
amounts borrowed from Alpharma under the loan agreement, which would place a
substantial burden upon our ability to fund our operations. In addition, the
failure of Alpharma to exercise the call option may result in adverse investor
perceptions as to the business, financial condition or prospects of Ascent.
THE CALL OPTION MAY DETER THIRD PARTIES FROM ENTERING INTO AGREEMENTS WITH US
The call option creates uncertainty as to whether Ascent will be acquired
by Alpharma in 2002 upon their exercise of the call option. This uncertainty may
deter third parties from entering into or renewing agreements with us, including
collaboration, license, manufacturing, distribution, marketing and promotion
agreements. Our ability to develop, obtain marketing approval, market and
distribute products could be severely impacted if third parties are disinclined
to enter into agreements with us due to the call option.
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ASCENT DEPOSITARY SHARES MAY BE TRADED ON THE OTC BULLETIN BOARD, WHICH COULD
DECREASE THEIR LIQUIDITY
We have applied to have the depositary shares to be issued to you in the
merger listed on the Nasdaq National Market. However, The Nasdaq Stock Market,
Inc. has advised us that the depositary shares to be issued in the merger do not
satisfy the listing requirements for either the Nasdaq National Market or the
Nasdaq SmallCap Market and that it will not list the depositary shares on the
Nasdaq National Market or the Nasdaq SmallCap Market. If the depositary shares
are not listed on the Nasdaq National Market or the Nasdaq SmallCap Market, the
depositary shares will trade on the OTC Bulletin Board.
Trading of the depositary shares on the OTC Bulletin Board could make it
more difficult for a stockholder to dispose of or obtain accurate quotations as
to the market value of the depositary shares. In addition, broker-dealers who
sell securities listed on the OTC Bulletin Board to persons other than
established customers and accredited investors are required to make a special
suitability determination for the purchaser and must have received the
purchaser's written consent to the transaction prior to sale. These requirements
may affect the ability of broker-dealers and stockholders to sell the depositary
shares.
In addition, as an OTC Bulletin Board security, if the trading price of the
depositary shares is below $5.00 per share, trading in the depositary shares
would also be subject to the requirements of the penny stock rules under the
Exchange Act, which, subject to certain exceptions for companies with sufficient
assets or revenues, require additional disclosure by broker-dealers in
connection with any trades involving any security which has a market price of
less than $5.00 per share and is not listed on a stock exchange, the Nasdaq
National Market or the Nasdaq SmallCap Market. The penny stock rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated with investing in
such stocks and impose various sales practice requirements on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors. For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in the depositary shares, which could
severely limit the market liquidity of the depositary shares and the ability of
Ascent stockholders to sell depositary shares in the secondary market.
RISKS OF OUR BUSINESS
THE FDA MAY NOT APPROVE THE MARKETING AND SALE OF ORAPRED SYRUP
In April 1997, we filed two Abbreviated New Drug Applications, or ANDAs,
with the FDA covering 5mg/5ml and 15mg/5ml formulations of Orapred syrup. In
October 1998, the FDA issued a deficiency letter on chemistry, manufacturing and
controls which cited certain deficiencies with both ANDAs. In January 1998, we
amended the ANDA for the stronger formulation of Orapred to address the issues
raised by the FDA. The FDA is currently reviewing this ANDA. The FDA may not
approve this ANDA on a timely basis or at all. The failure of the FDA to approve
one of these ANDAs or a significant delay in such approval would have a material
adverse effect on our business.
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THE FDA MAY NOT APPROVE THE MARKETING AND SALE OF PRIMSOL TRIMETHOPRIM SOLUTION
In 1996, we filed a New Drug Application, or NDA, with the FDA covering a
50mg formulation of Primsol trimethoprim solution, an antibiotic for the
treatment of middle ear infection. In February 1998, we received a letter from
the FDA citing deficiencies in this NDA, and, in August 1998, the FDA notified
us that we would be required to conduct additional clinical trials to evaluate
the safety of the 50mg formulation of Primsol solution, due to the inclusion in
this formulation of maltitol, an inactive ingredient. In September 1998, the FDA
indicated that we would not be required to conduct these clinical trials if we
removed maltitol from the formulation, and, in December 1998, we filed an
amendment to the NDA for the 50mg formulation of Primsol solution removing
maltitol. The FDA is currently reviewing this NDA. The FDA may not approve this
NDA on a timely basis or at all. The failure of the FDA to approve this NDA or a
significant delay in such approval would have a material adverse effect on our
business.
THE FDA MAY NOT APPROVE THE MARKETING AND SALE OF FEVERALL CONTROLLED RELEASE
SPRINKLES
In December 1997, we filed an NDA for Feverall controlled-release
sprinkles, an acetaminophen product for the treatment of pain and fever in
children. In December 1998, the FDA issued a not-approvable letter covering this
NDA which cited deficiencies relating to the manufacture and packaging of this
product. The letter also indicated that the clinical trials of Feverall
sprinkles did not demonstrate adequate duration of action and that the product
should only be used in patients older than two years of age. We are currently in
discussions with the FDA regarding these issues. The FDA may not approve this
NDA on a timely basis or at all. The failure of the FDA to approve this NDA or a
significant delay in such approval would have a material adverse effect on our
business.
THERE IS UNCERTAINTY AS TO THE MARKET ACCEPTANCE OF OUR TECHNOLOGY AND PRODUCTS
The commercial success of Orapred syrup, Primsol solution, Feverall
sprinkles, and Pediavent albuterol controlled-release suspension, a prescription
product for the treatment of asthma for which we expect to file an NDA in the
second quarter of 1999, will depend upon their acceptance by pediatricians,
pediatric nurses and third party payors as clinically useful, cost-effective and
safe. Factors that we believe will materially affect market acceptance of these
products include:
- the receipt and timing of FDA approval;
- the timing of market introduction of our products and competing products;
- the safety, efficacy, side effect profile, taste, dosing and ease of
administration of the product;
- the patent and other proprietary position of the product;
- brand name recognition; and
- price.
The failure of any of Orapred syrup, Primsol solution, Feverall sprinkles or
Pediavent to achieve market acceptance could have a material adverse effect on
our business.
WE HAVE NOT BEEN PROFITABLE
We have incurred net losses since our inception. At March 31, 1999, our
accumulated deficit was approximately $54.3 million. We received our first
revenues from product sales
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only in July 1997. We expect to incur additional significant operating losses
over the next 12 months and expect cumulative losses to increase as our research
and development, clinical trial and marketing efforts expand. We expect that our
losses will fluctuate from quarter to quarter based upon factors such as our
product acquisition and development efforts, sales and marketing initiatives,
competition and the extent and severity of illness during cold and flu seasons.
These quarterly fluctuations may be substantial.
WE MAY REQUIRE ADDITIONAL FUNDING AND OUR LOAN AGREEMENT WITH ALPHARMA RESTRICTS
OUR ABILITY TO DO SO
We anticipate, based upon our current operating plan, that (a) our existing
capital resources and internally generated funds should satisfy our capital
requirements into June 1999 and (b) we will require approximately $10.0 million
of additional funds beyond that to meet our capital requirements through the
first quarter of 2000. We are currently in discussions to obtain bridge
financing to fund our capital requirements until the annual meeting of
stockholders, at which time we expect that, subject to stockholder approval of
the strategic alliance with Alpharma, we will be able to satisfy our capital
requirements with funds borrowed from Alpharma under the loan agreement,
including the remaining $8.0 million which we may borrow from Alpharma for
general corporate purposes under the loan agreement. If our stockholders do not
approve the merger with Alpharma or if we do not consummate the strategic
alliance with Alpharma, we must immediately repay the $4.0 million borrowed from
Alpharma on February 19, 1999 plus interest and will need to raise additional
funds, including through collaborative relationships and public or private
financings. In addition, if our business does not progress in accordance with
our current operating plan or Primsol or Orapred are not approved when expected,
we may need to raise additional funds. The additional financing may not be
available to us or may not be available on acceptable terms.
Although the loan agreement with Alpharma gives us access to $28.0 million
for acquisitions of companies and products that meet specified criteria and for
funding research and development, it places numerous restrictions on our ability
to raise additional capital, including restrictions on the type and amount of
securities that we may issue and the use of proceeds of any debt or equity
financing. These restrictions apply particularly in the context of raising
capital for general corporate purposes, such as funding operating expenses.
If we are unable to obtain adequate funding on a timely basis, we may need
to significantly curtail one or more of our research or product development
programs or reduce our marketing and sales initiatives, or we may be unable to
effect strategic acquisitions. We may also need to seek funds through
arrangements with collaborative partners or others that may require us to
relinquish rights to technologies, product candidates or products which we would
otherwise pursue on our own. Any of such cases would have a material adverse
effect on our business.
WE ARE AT AN EARLY STAGE OF DEVELOPMENT
We were founded in March 1989 and only introduced our first products into
the market in the second half of 1997. All but two of our products are in
research or development. The products that we have not yet completed developing
may require, depending on the development status of the product, additional
research and development, extensive preclinical studies and clinical trials and
regulatory approval prior to any commercial sales.
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WE ARE SUBJECT TO TECHNOLOGICAL UNCERTAINTY IN OUR DEVELOPMENT EFFORTS
We have introduced only one internally-developed product, Pediamist nasal
saline spray, into the market. Although we have completed development of
products and have filed applications with the FDA for marketing approval, many
of our product candidates are in development and require additional formulation,
preclinical studies, clinical trials and regulatory approval prior to any
commercial sales. We must successfully address a number of technological
challenges to complete the development of our potential products. These products
may have undesirable or unintended side effects, toxicities or other
characteristics that may prevent or limit commercial use.
WE HAVE ONLY LIMITED SALES AND MARKETING EXPERIENCE
We market and sell our products in the United States through our own
dedicated marketing staff and sales force. We recruited this marketing staff and
sales force in the second half of 1997 and have only limited experience in
marketing and sales. We believe that our success depends in significant part
upon our ability to maintain a dedicated marketing staff and sales force capable
of promoting our products.
WE FACE SIGNIFICANT COMPETITION IN THE PEDIATRIC PHARMACEUTICAL INDUSTRY
The pediatric pharmaceutical industry is highly competitive and
characterized by rapid and substantial technological change. We may be unable to
successfully compete in this industry. Our competitors include several large
pharmaceutical companies that market pediatric products in addition to products
for the adult market, including Glaxo Wellcome Inc., Eli Lilly and Company, the
Ortho-McNeil Pharmaceutical Division of Johnson & Johnson, Inc. and the Ross
products Division of Abbot Laboratories Inc.
We expect to market many of our product candidates as alternative
treatments for pediatric indications for which products with the same active
ingredient are well-entrenched in the market. Our product candidates also will
compete with products that do not contain the same active ingredient but are
used for the same indication and are well entrenched within the pediatric
market. Moreover, many of our potential products that are reformulations of
existing drugs of other manufacturers may have significantly narrower patent or
other competitive protection.
Particular competitive factors that we believe may affect us include:
- many of our competitors have well known brand names that have been
promoted over many years;
- many of our competitors offer well established, broad product lines and
services which we do not offer; and
- many of our competitors have substantially greater financial, technical
and human resources than we have, including greater experience and
capabilities in undertaking preclinical studies and human clinical
trials, obtaining FDA and other regulatory approvals and marketing
pharmaceuticals.
WE MAY BE UNSUCCESSFUL WITH OUR CLINICAL TRIALS
In order to obtain regulatory approvals for the commercial sale of any of
our products under development, we will be required to demonstrate through
preclinical testing and clinical trials that the product is safe and
efficacious.
The results from preclinical testing and early clinical trials of a product
that is under development may not be predictive of results that will be obtained
in large-scale later clinical trials.
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The rate of completion of our clinical trials is dependent on the rate of
patient enrollment, which is beyond our control. We may not be able successfully
to complete any clinical trial of a potential product within a specified time
period, if at all, including because of a lack of patient enrollment. Moreover,
clinical trials may not show any potential product to be safe or efficacious.
Thus, the FDA and other regulatory authorities may not approve any of our
potential products for any indication.
If we are unable to complete a clinical trial of one of our potential
products, if the results of the trial are unfavorable or if the time or cost of
completing the trial exceeds our expectation, our business, financial condition
or results of operations could be materially adversely affected.
WE MAY NOT OBTAIN OR MAINTAIN REGULATORY APPROVALS
The production and the marketing of our products and our ongoing research
and development activities are subject to extensive regulation by federal, state
and local governmental authorities in the United States and other countries. If
we fail to comply with applicable regulatory requirements, we may be subject to
fines, suspension or withdrawal of regulatory approvals, product recalls,
seizure of products, operating restrictions and criminal prosecutions.
Clearing the regulatory process for the commercial marketing of a
pharmaceutical product takes many years and requires the expenditure of
substantial resources. We have had only limited experience in filing and
prosecuting applications necessary to gain regulatory approvals. Thus, we may
not be able to obtain regulatory approvals to conduct clinical trials of or
manufacture or market any of our potential products.
Factors that may affect the regulatory process for our product candidates
include:
- our analysis of data obtained from preclinical and clinical activities is
subject to confirmation and interpretation by regulatory authorities,
which could delay, limit or prevent regulatory approval;
- we or the FDA may suspend clinical trials at any time if the participants
are being exposed to unanticipated or unacceptable health risks; and
- any regulatory approval to market a product may be subject to limitations
on the indicated uses for which we may market the product. These
limitations may limit the size of the market for the product.
As to products for which we obtain marketing approval, we, the manufacturer
of the product, if other than us, and the manufacturing facilities will be
subject to continual review and periodic inspections by the FDA. The subsequent
discovery of previously unknown problems with the product, manufacturer or
facility may result in restrictions on the product or manufacturer, including
withdrawal of the product from the market.
We also are subject to numerous and varying foreign regulatory requirements
governing the design and conduct of clinical trials and the manufacturing and
marketing of our products. The approval procedure varies among countries. The
time required to obtain foreign approvals often differs from that required to
obtain FDA approval. Approval by the FDA does not ensure approval by regulatory
authorities in other countries.
WE ARE DEPENDENT ON THIRD PARTY MANUFACTURERS
We have no manufacturing facilities. Instead, we rely on third parties to
manufacture our products in accordance with current "good manufacturing
practice" requirements prescribed by the FDA. For example, we rely on
Upsher-Smith Laboratories, Inc. for the manufacture of Feverall acetaminophen
rectal suppositories. In addition, we rely on third
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parties for the manufacture of our product candidates for clinical trials and
for commercial sale following FDA approval of the product. For example, we rely
on Lyne Laboratories, Inc. for the manufacture of Primsol solution and upon
Recordati S.A. Chemical and Pharmaceutical Company for the manufacture of
Pediavent.
We expect to be dependent on third party manufacturers or collaborative
partners for the production of all of our products. There are a limited number
of manufacturers that operate under the FDA's good manufacturing practice
requirements and capable of manufacturing our products. In the event that we are
unable to obtain contract manufacturing, or obtain manufacturing on commercially
reasonable terms, we may not be able to commercialize our products as planned.
We have no experience in manufacturing on a commercial scale and no
facilities or equipment to do so. If we determine to develop our own
manufacturing capabilities, we will need to recruit qualified personnel and
build or lease the requisite facilities and equipment. We may not be able to
successfully develop our own manufacturing capabilities. Moreover, it may be
very costly and time consuming for us to develop the capabilities.
WE ARE DEPENDENT UPON SOLE SOURCE SUPPLIERS FOR OUR PRODUCTS
Some of our supply arrangements require that we buy all of our requirements
of a particular product exclusively from the other party to the contract.
Moreover, for many of our products, we have qualified only one supplier. Any
interruption in supply from any of our suppliers or their inability to
manufacture our products in accordance with the FDA's good manufacturing
requirements may adversely affect us in a number of ways, including:
- we may not be able to meet commercial demands for our products;
- we may not be able to initiate or continue clinical trials of products
that are under development; and
- we may be delayed in submitting applications for regulatory approvals of
our products.
WE INTEND TO PURSUE STRATEGIC ACQUISITIONS WHICH MAY BE DIFFICULT TO INTEGRATE
As part of our overall business strategy, we intend to pursue strategic
acquisitions that would provide additional product offerings. Any future
acquisition could result in the use of significant amounts of cash, potentially
dilutive issuances of equity securities, the incurrence of debt under the
Alpharma loan agreement or otherwise or amortization expenses related to the
goodwill and other intangible assets, any of which could have a material adverse
effect on our business. In addition, acquisitions involve numerous risks,
including:
- difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;
- the diversion of management's attention from other business concerns; and
- the potential loss of key employees of the acquired company.
From time to time, we have engaged in discussions with third parties concerning
potential acquisitions of product lines, technologies and businesses.
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OUR SUCCESS DEPENDS ON OBTAINING PATENTS
Our success depends upon us obtaining patents to protect our products. As a
pharmaceutical company, our patent position involves complex legal and factual
questions. As a result, patents may not issue from any patent applications that
we own or license and, if issued, may not be sufficiently broad to protect our
technology.
Because our product candidates are reformulations of existing off-patent
drugs, any patent protection afforded to the products will be significantly
narrower than a patent on the active ingredient itself. In particular, we do not
expect that the active ingredients of our products will qualify for
composition-of-matter patent protection.
We are aware of patents and patent applications belonging to competitors
and others that may require us to alter our products or processes, pay licensing
fees or cease certain activities. We may not be able to obtain a license to any
technology owned by a third party that we require to manufacture or market one
or more products. Even if we can obtain a license, the financial and other terms
may be disadvantageous.
WE MAY BECOME INVOLVED IN PROCEEDINGS RELATING TO INTELLECTUAL PROPERTY RIGHTS
Because our products are based on existing compounds rather than new
chemical entities, we may become parties to patent litigation and interference
proceedings. The types of situations in which we may become parties to
litigation or proceedings include:
- we may initiate litigation or other proceedings against third parties to
enforce our patent rights;
- we may initiate litigation or other proceedings against third parties to
seek to invalidate the patents held by them or to obtain a judgment that
our products or processes do not infringe their patents;
- if our competitors file patent applications that claim technology also
claimed by us, we may participate in interference or opposition
proceedings to determine the priority of invention; or
- if third parties initiate litigation claiming that our processes or
products infringe their patent or other intellectual property rights, we
will need to defend against such proceedings.
An adverse outcome in any litigation or interference proceeding could
subject us to significant liabilities to third parties and require us to cease
using the technology that is at issue or to license the technology from third
parties. We may not be able to obtain any required licenses on commercially
acceptable terms or at all. Thus, an unfavorable outcome in any patent
litigation or interference proceeding could have a material adverse effect on
our business, financial condition or results of operations.
The cost to us of any patent litigation or interference proceeding, even if
resolved in our favor, could be substantial. Uncertainties resulting from the
initiation and continuation of patent litigation or interference proceedings
could have a material adverse effect on our ability to compete in the
marketplace. Patent litigation and interference proceedings may also absorb
significant management time.
OUR PATENT LICENSES ARE SUBJECT TO TERMINATION
We are a party to a number of patent licenses that are important to our
business and expect to enter into additional patent licenses in the future.
These licenses impose various
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commercialization, sublicensing, royalty, insurance and other obligations on us.
If we fail to comply with these requirements, the licensor will have the right
to terminate the license.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE CANNOT ADEQUATELY PROTECT OUR
PROPRIETARY KNOW-HOW
We must maintain the confidentiality of our trade secrets and other
proprietary know-how. We seek to protect this information by entering into
confidentiality agreements with our employees, consultants, outside scientific
collaborators and sponsored researchers and other advisors. These agreements may
be breached by the other party. We may not be able to obtain an adequate, or
perhaps, any remedy to remedy the breach. In addition, our trade secrets may
otherwise become known or be independently developed by our competitors.
THE PRICING OF OUR PRODUCTS IS SUBJECT TO DOWNWARD PRESSURES
The availability of reimbursement by governmental and other third party
payors affects the market for our pharmaceutical products. These third party
payors continually attempt to contain or reduce healthcare costs by challenging
the prices charged for medical products and services. In some foreign countries,
particularly the countries of the European Union, the pricing of prescription
pharmaceuticals is subject to governmental control.
If we obtain marketing approvals for our products, we expect to experience
pricing pressure due to the trend toward managed healthcare, the increasing
influence of health maintenance organizations and additional legislative
proposals. We may not be able to sell our products profitably if reimbursement
is unavailable or limited in scope or amount.
WE ARE EXPOSED TO POTENTIAL PRODUCT LIABILITY CLAIMS
Our business exposes us to potential product liability risks which are
inherent in the testing, manufacturing, marketing and sale of pharmaceuticals.
Product liability claims might be made by consumers, health care providers or
pharmaceutical companies or others that sell our products. If product liability
claims are made with respect to our products, we may need to recall the products
or change the indications for which they may be used. A recall of a product
would have a material adverse effect on our business, financial condition and
results of operations.
WE HAVE LIMITED PRODUCT LIABILITY COVERAGE AND WE MAY NOT BE ABLE TO OBTAIN IT
IN THE FUTURE
Our product liability coverage is expensive and we have purchased only
limited coverage. This coverage is subject to various deductibles. In the
future, we may not be able to maintain or obtain the necessary product liability
insurance at a reasonable cost or in sufficient amounts to protect us against
losses. Accordingly, product liability claims could have a material adverse
effect on our business, financial condition and results of operations.
WE ARE DEPENDENT ON A FEW KEY EMPLOYEES WITH KNOWLEDGE OF THE PEDIATRIC
PHARMACEUTICAL INDUSTRY
We are highly dependent on the principal members of our management and
scientific staff, particularly Dr. Clemente, the chairman of our board of
directors. The loss of the services of any of these individuals could have a
material adverse effect on our business. We do not carry key-man insurance with
respect to any of our executive officers other than Dr. Clemente.
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WE NEED TO ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL WITH KNOWLEDGE OF
DEVELOPING AND MANUFACTURING PEDIATRIC PHARMACEUTICALS
Recruiting and retaining qualified scientific personnel to perform research
and development is critical to our success. Our anticipated growth and expansion
into areas and activities requiring additional expertise are expected to require
the addition of new management personnel and the development of additional
expertise by existing management personnel. We may not be able to attract and
retain highly skilled personnel on acceptable terms given the competition for
experienced scientists among pharmaceutical and health care companies,
universities and non-profit research institutions. In addition, the existence of
the call option and the resulting uncertainty as to whether we will be acquired
by Alpharma may dissuade highly skilled personnel from accepting employment with
or remaining employed by us.
OUR PROMOTION ARRANGEMENTS DEPEND ON THE SUPPORT OF OUR COLLABORATORS
We plan to enter into arrangements to promote some pharmaceutical products
of third parties to pediatricians in the United States. For example, in November
1998, we entered into a promotion agreement with Warner-Lambert Company to
market Omnicef(R) (cefdinir), a product licensed by Warner-Lambert from Fujisawa
Pharmaceutical Co., Ltd. The success of any arrangement is dependent on, among
other things, the third party's commitment to the arrangement, the financial
condition of the third party and market acceptance of the third party's
products.
WE ARE DEPENDENT UPON A THIRD PARTY DISTRIBUTOR
We distribute our products through a third party distribution warehouse. We
have no experience with the distribution of products and rely on the third party
distributor to perform order entry, customer service and collection of accounts
receivable on our behalf. The success of this arrangement is dependent on, among
other things, the skills, experience and efforts of the third party distributor.
UNCERTAINTY OF HEALTHCARE REFORM MEASURES
In both the United States and some foreign jurisdictions, there have been a
number of legislative and regulatory proposals to change the healthcare system.
Further proposals are likely. The potential for adoption of these proposals
affects and will affect our ability to raise capital, obtain additional
collaborative partners and market our products.
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MARKET PRICE AND DIVIDEND INFORMATION
Ascent common stock is traded on the Nasdaq National Market under the
symbol "ASCT". On May 24, 1999, we received a notice from The Nasdaq Stock
Market, Inc. indicating that, because Ascent was not in compliance with the
continued listing requirements of the Nasdaq National Market as of December 31,
1998, The Nasdaq Stock Market, Inc. has determined that the Ascent common stock
is no longer eligible for continued listing on the Nasdaq National Market. We
have appealed their decision to the appeal panel of The Nasdaq Stock Market,
Inc. The Ascent common stock will not be delisted until final resolution by the
appeal panel.
We have applied to have the depositary shares to be issued to you in the
merger listed on the Nasdaq National Market. However, in its letter of May 24,
1999, The Nasdaq Stock Market, Inc. also advised us that the depositary shares
do not satisfy the listing requirements for the Nasdaq National Market or the
Nasdaq SmallCap Market and that it will not list the depositary shares on the
Nasdaq National Market or the Nasdaq SmallCap Market. We have also appealed this
determination by The Nasdaq Stock Market, Inc. There can be no assurance that
our appeal will be successful and that The Nasdaq Stock Market, Inc. will agree
that the depositary shares may be listed on the Nasdaq National Market or the
Nasdaq SmallCap Market. If our appeal is not successful, the depositary shares
will trade on the OTC Bulletin Board.
Bird Merger Corporation common stock is not publicly traded.
MARKET PRICES
The table below sets forth, for the quarters indicated, the range of high
and low sale prices of Ascent common stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
Quarter ended June 30, 1997+................................ $10.250 $ 8.500
Quarter ended September 30, 1997............................ $10.250 $ 6.125
Quarter ended December 31, 1997............................. $ 9.875 $ 4.000
Quarter ended March 31, 1998................................ $ 6.875 $ 3.312
Quarter ended June 30, 1998................................. $ 4.875 $ 1.375
Quarter ended September 30, 1998............................ $ 3.687 $ 1.625
Quarter ended December 31, 1998............................. $ 5.250 $ 1.093
Quarter ended March 31, 1999................................ $ 6.75 $ 2.50
Quarter ended June 30, 1999*................................ $ 3.1562 $ 2.75
</TABLE>
- -------------------------
+ Ascent common stock was first publicly traded on May 30, 1997.
* Through May 25, 1999.
On February 15, 1999, the last full trading day prior to the execution and
delivery of the merger agreement and the public announcement of the merger
agreement and the strategic alliance, the last reported sale price of Ascent
common stock on the Nasdaq National Market was $5.6875 per share.
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On May 25, 1999, the most recent practicable date prior to the printing of
this proxy statement/prospectus, the last reported sale price of Ascent common
stock on the Nasdaq National Market was $2.8125 per share.
As of May 28, 1999, there were 7,026,445 shares of Ascent common stock
outstanding, which were held by approximately 158 holders of record, and 7,000
shares of Ascent Series G preferred stock outstanding, which were held by five
holders of record.
We urge you to obtain current market quotations for Ascent common stock
before deciding how to vote your shares.
DIVIDENDS
We have never paid cash dividends on Ascent common stock. The decision
whether to pay any dividends in the future on Ascent common stock will be made
by our board of directors from time to time in the exercise of their business
judgement. Our board of directors does not currently intend to pay any cash
dividends in the foreseeable future. We are currently prohibited from paying
cash dividends under the terms of the 8% subordinated notes issued on June 1,
1998 in connection with the sale and issuance of Series G preferred stock. In
addition, our loan agreement with Alpharma restricts our ability to pay
dividends on Ascent common stock. Bird Merger Corporation does not have any
properties or assets and has not paid any dividends on its common stock.
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<PAGE> 39
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING
WHEN AND WHERE THE ANNUAL MEETING WILL BE HELD
Our annual meeting will be held on Tuesday, June 29, 1999, commencing at
10:00 a.m., at the offices of Hale and Dorr LLP, 60 State Street, Boston, MA
02109.
ADJOURNMENT OF THE ANNUAL MEETING
We may adjourn the annual meeting one or more times and continue to solicit
proxies under some circumstances. These circumstances include the failure to
obtain sufficient affirmative votes to approve any of the proposals to be
considered and voted upon at the annual meeting.
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
At the annual meeting, you will consider and vote upon the following
matters:
- a proposal to approve the merger agreement (including the related
agreements attached as exhibits) and the transactions contemplated by
these agreements;
- a proposal to approve the reduction in the exercise price of warrants to
purchase an aggregate of 2,116,958 shares of Ascent common stock from
$4.75 per share to $3.00 per share, the sale and issuance to the holders
of the warrants of an aggregate of 300,000 shares of Ascent common stock
at a price of $3.00 per share and the issuance of 150,000 shares of
Ascent common stock to an affiliate of some of these holders in lieu on
the payment of certain financial advisory fees, as contemplated by the
second amendment to the May 1998 securities purchase agreement and a
related amendment to a financial services fee agreement;
- a proposal to elect three Class II directors for the ensuing three year;
- a proposal to approve the adoption of our 1999 Stock Incentive Plan;
- a proposal to ratify the selection of PricewaterhouseCoopers LLP as our
independent auditors for the current fiscal year; and
- such other business as may properly be brought before the annual meeting
or any adjournment of the annual meeting.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
Our board of directors has unanimously approved the merger agreement
(including the related agreements attached as exhibits) and the transactions
contemplated by these agreements and each of the other proposals described in
this proxy statement/prospectus, and recommends that you vote "FOR" approval of
each proposal.
QUORUM
The holders of a majority of the shares of Ascent capital stock issued and
outstanding and entitled to vote at the annual meeting will constitute a quorum
for the transaction of business at the annual meeting.
Shares of capital stock held of record by a broker which are present in
person or represented by proxy are counted for purposes of determining a quorum.
If, however, a broker does not have discretionary voting authority to vote the
shares on a proposal at the annual meeting, then the shares (although present
for quorum purposes) will not be
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<PAGE> 40
considered entitled to vote on the proposal (broker non-votes). Accordingly,
abstentions and "broker non-votes" will have no effect on the voting on a
proposal that requires the affirmative vote of a certain percentage of the votes
cast or shares voting on the proposal, but will be the equivalent of a "no" vote
on a matter which requires the affirmative vote of a certain percentage of
shares entitled to vote on a proposal.
STOCKHOLDERS ENTITLED TO VOTE; VOTES REQUIRED
Our board of directors has fixed June 2, 1999 as the record date for
determination of Ascent stockholders entitled to vote at the annual meeting.
Under Delaware law, only holders of record of Ascent voting stock at the close
of business on the record date will be entitled to notice of and to vote at the
annual meeting. As of the record date, there were 7,026,445 shares of Ascent
common stock and 7,000 shares of Ascent Series G preferred stock outstanding and
entitled to vote.
Holders of Ascent common stock are entitled to one vote per share. Holders
of Ascent Series G preferred stock are entitled to one vote for each share of
Ascent common stock issuable as of the date of the vote upon conversion of each
share of Ascent Series G preferred stock held (currently, 210.5 votes per share
of Series G Preferred Stock). On all matters submitted to the record holders of
shares of Ascent common stock, such holders and the record holders of shares of
Ascent Series G preferred stock will vote together as one class. In addition,
the record holders of shares of Ascent Series G preferred stock will vote
separately as a class on the merger proposal.
The following votes of shares entitled to vote at the annual meeting are
required to approve the respective proposal:
- MERGER AGREEMENT (INCLUDING THE RELATED AGREEMENTS ATTACHED AS
EXHIBITS) -- the affirmative vote of the holders of a majority of the
votes represented by the outstanding shares of Ascent common stock and
Ascent Series G preferred stock voting together and the holders of at
least 80% of the Ascent Series G preferred stock entitled to vote at the
annual meeting;
- REDUCTION IN WARRANT EXERCISE PRICE AND SALE AND ISSUANCE OF ASCENT
COMMON STOCK -- the affirmative vote of the holders of a majority of the
votes cast by the holders of the outstanding shares of Ascent common
stock and Ascent Series G preferred stock voting together;
- ELECTION OF CLASS II DIRECTORS -- the affirmative vote of the holders of
a plurality of the votes cast by the holders of outstanding shares of
Ascent common stock and Ascent Series G preferred stock voting together;
- 1999 STOCK INCENTIVE PLAN -- the affirmative vote of the holders of a
majority of the votes represented by the shares of Ascent common stock
and Ascent Series G preferred stock present or represented by proxy and
voting on the matter voting together; and
- RATIFICATION OF INDEPENDENT AUDITORS -- the affirmative vote of the
holders of a majority of the votes represented by the shares of Ascent
common stock and Ascent Series G preferred stock present or represented
by proxy and voting on the matter voting together.
As of the record date, our directors, executive officers and certain of
their affiliates beneficially owned 31.5% of the outstanding shares of Ascent
common stock and 75.0% of
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<PAGE> 41
the outstanding shares of Ascent Series G preferred stock, representing
approximately 39.1% of the votes represented by the shares of Ascent common
stock and Ascent Series G preferred stock outstanding and entitled to vote at
the annual meeting. These figures are calculated without counting shares which
could be acquired by exercising stock options and warrants because the shares
underlying those options and warrants cannot be voted at the annual meeting.
These directors, executive officers and certain of their affiliates have agreed
to vote all of their respective shares in favor of the approval of the merger
agreement (including the related agreements attached as exhibits) and the
transactions contemplated by these agreements.
VOTING OF PROXIES
All stockholders who are entitled to vote and who are represented at the
annual meeting by properly executed proxies received prior to or at the annual
meeting will be voted in accordance with the instructions indicated on the proxy
card, unless revoked prior to the vote. If no instructions are indicated, the
proxies will be voted "FOR" approval of each of the proposals described in the
notice of meeting to which this proxy statement/prospectus is attached.
REVOCATION OF PROXIES
If any other matters are properly presented at the annual meeting for
consideration, including a motion to adjourn the meeting to another time or
place for the purpose of soliciting additional proxies or otherwise, the proxies
will have discretion to vote on the matters in accordance with their best
judgment (unless you withhold your authorization to use such discretion). We are
not aware of any matters expected to be presented at the annual meeting other
than the approval of the proposals described in the notice of meeting.
You may revoke any proxy that you give at any time before it is used to
cast your vote. Your presence at the annual meeting will not automatically
revoke your proxy. To revoke a proxy, you must either:
- file with the secretary of Ascent, at or before the taking of the vote, a
written notice of revocation bearing a later date than the proxy;
- duly execute a later dated proxy relating to the same shares and deliver
it to the secretary of Ascent before the taking of the vote; or
- attend the annual meeting and vote in person.
Any written notice of revocation or subsequent proxy must be sent to:
Ascent Pediatrics, Inc.
187 Ballardvale Street, Suite B125
Wilmington, Massachusetts 01887
Attn: Secretary
SOLICITATION OF PROXIES
The enclosed proxy is solicited by our management, on behalf of our board
of directors, to be voted at the annual meeting. We may solicit proxies by mail,
telephone, facsimile or overnight delivery. In addition, officers and employees
of Ascent may solicit proxies in advertisements and in person. We are
responsible for payment of all expenses of the solicitation, including the cost
of preparing and mailing this proxy statement/
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prospectus and the reimbursement of brokerage firms and other nominees for their
reasonable expenses in forwarding proxy material to beneficial owners of our
capital stock.
STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING
Any proposal that a stockholder intends to present at the 2000 annual
meeting of stockholders must be submitted to our secretary at our offices, 187
Ballardvale Street, Suite B125, Wilmington, Massachusetts 01887, no later than
February 5, 2000 in order to be considered for inclusion in the proxy statement
relating to the annual meeting of stockholders in 2000.
If a stockholder wishes to present a proposal before the annual meeting in
2000 but has not complied with the requirements for inclusion of the proposal in
our proxy materials pursuant to Rule 14a-8 under the Exchange Act, the
stockholder must give notice of the proposal to our secretary at our principal
offices. The required notice must be made in writing and delivered or mailed by
first class United States mail, postage prepaid, to our secretary at our
principal offices, and received not less than 60 days nor more than 90 days
prior to the annual meeting in 2000.
Notwithstanding the foregoing, if we provide stockholders with less than 70
days notice or public disclosure of the date of the meeting, then our secretary
must receive proposals from stockholders no later than the close of business 10
days after the date on which the notice of the meeting was mailed or the public
disclosure was made, whichever occurs first.
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PROPOSAL 1 -- THE MERGER
The following is a summary of significant provisions of the master
agreement, the merger agreement, the depositary agreement and the loan
agreement. The master agreement is attached as EXHIBIT A to the merger
agreement, which is attached to this document as ANNEX A. The depositary
agreement is attached as EXHIBIT B to the merger agreement. The loan agreement
is attached to this document as ANNEX B. Each of these important documents are
incorporated into this proxy statement/prospectus by reference. You should read
these documents carefully in their entirety for a complete understanding of
their terms.
THE STRATEGIC ALLIANCE
BACKGROUND OF THE STRATEGIC ALLIANCE
In February of 1998, as part of our overall strategy to be a leader in the
development and marketing of pharmaceuticals specifically formulated for use by
children, we actively sought a partner to promote pharmaceutical products and
services. In our review of potential partners, we determined that Alpharma had
extensive experience in the development, marketing and manufacturing of liquid
pharmaceutical products. After preliminary telephone conversations, we arranged
for members of our management and Alpharma's management to meet.
On February 18, 1998, Dr. Emmett Clemente, chairman of the board of
directors, Alan R. Fox, president and chief executive officer, and certain other
members of our senior management team met with Thomas L. Anderson, Alpharma's
president, and other members of Alpharma's senior management team, at Alpharma's
offices in Baltimore to discuss potential product and marketing collaborations
between Ascent and Alpharma. Each management team presented an overview of their
business.
On June 10, 1998, Mr. Fox met with Mr. Anderson in Boston to discuss
potential product and marketing collaborations between Ascent and Alpharma. They
explored ways the two companies could work together. Mr. Anderson inquired as to
whether Ascent would be interested in discussing a long-term relationship with
Alpharma, and Mr. Fox indicated we would.
On August 7, 1998, Dr. Clemente, Mr. Fox and other members of our senior
management team met with Mr. Anderson and Jeffrey Smith, the vice president,
finance of Alpharma Inc., at Alpharma's offices to further discuss a possible
strategic alliance between the companies. Our management team provided Alpharma
with a review of our business and the two parties further explored the
possibility of a long-term collaboration.
On August 18, 1998, Dr. Clemente, Mr. Fox and other members of our senior
management team met at our offices with Messrs. Anderson and Smith and other
members of Alpharma's senior management team to discuss the structure of a
strategic alliance. Alpharma raised the possibility of investing a substantial
amount of capital in Ascent over a period of several years in the form of
convertible debt in order to fund operations, research and development and
potential acquisitions and our granting Alpharma a call option to acquire all of
the outstanding shares of Ascent common stock.
After the August 18, 1998 meeting, members of our senior management team
continued to discuss by telephone the conceptual framework of a strategic
alliance with members of Alpharma's senior management team. Brian Friedman, a
Managing Member of ING Furman Selz, assisted our senior management team in these
discussions. The senior management teams of both companies continued their
discussions in person at
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meetings on September 18, September 29, October 19 and November 17, 1998. The
only structure which Alpharma was willing to consider was one that would involve
a large infusion of capital into Ascent over a period of several years and
provide Alpharma with a call option to acquire all of the outstanding shares of
Ascent common stock at the end of the period. The members of senior management
discussed generally the amount of funds that Alpharma would be willing to invest
in Ascent, the conversion and repayment terms of the debt and the terms of the
call option, including exercise price, exercise period and terms upon which the
call option would terminate.
As the discussions ensued, Mr. Fox from time to time advised members of our
board of directors at board meetings and by telephone as to the nature and
direction of the discussions, including the structure under consideration and
the level of interest expressed by Alpharma in continuing to negotiate a
possible transaction.
On November 24, 1998, Dr. Clemente, representatives of ING Furman Selz and
our legal counsel, Hale and Dorr LLP, met with Messrs. Anderson and Smith,
Robert F. Wrobel, Vice President and Chief Legal Officer of Alpharma Inc., and
Kent K. Matsumoto, Alpharma's in-house legal counsel, at Alpharma Inc.'s offices
to discuss the structure of the proposed investment. The parties discussed the
formula for determining the call option exercise price, the financial terms of
the loan, including the conversion of the note and our covenants under the loan
agreement, including our use of proceeds.
On December 10, 17 and 18, 1998, representatives of Ascent and Alpharma met
at our offices to conduct a due diligence review of our products, technology and
financial condition.
On December 22, 1998, Hale and Dorr LLP distributed initial drafts of the
master agreement, the merger agreement and the depositary agreement, and Mr.
Wrobel distributed an initial draft of the loan agreement.
On January 11 and 12, 1999, Dr. Clemente and Mr. Fox, together with other
members of our senior management team, our legal counsel and representatives of
ING Furman Selz met with Messrs. Anderson, Matsumoto, Smith and Wrobel in New
York at the offices of Kirkland & Ellis, Alpharma's outside legal counsel, to
negotiate the terms of the loan agreement, the depositary agreement and the
master agreement. Following the meetings, Ascent, Alpharma and representatives
of ING Furman Selz had numerous discussions by telephone to negotiate aspects of
the transactions.
On January 13, 1999, Brian Friedman and James Luikart, a Managing Member of
ING Furman Selz and a director of Ascent, met with Jeffrey Smith at Alpharma
Inc.'s offices to discuss the financial terms of the Loan Agreement and the
conditions relating to the exercise of the call option.
During the period from January 13, 1999 until February 16, 1999, our legal
counsel and Alpharma's legal counsel continued to exchange and negotiate revised
draft documents.
On January 27, 1999, Dr. Clemente and Messrs. Fox and Friedman met with
Messrs. Smith and Anderson at the offices of Kirkland & Ellis to discuss the
conversion of the note and restrictions on our use of proceeds of loans from
Alpharma.
On January 29, 1999, we engaged Adams, Harkness & Hill to assist us in
evaluating the fairness to our stockholders of the terms of any proposed
strategic alliance with Alpharma.
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On February 10, 1998, our board of directors met at our offices to consider
approval of the strategic alliance. Members of our management team and our legal
counsel also attended the meeting. At the meeting, our board of directors
reviewed the proposed terms of the strategic alliance, including, in particular,
the terms of the loan arrangement and the call option, the regulatory and other
approvals that would be required to consummate the transaction, the potential
effects of the strategic alliance, the potential effects of not proceeding with
the strategic alliance and the fiduciary duties of our board of directors. At
the board meeting, Adams, Harkness & Hill delivered its oral opinion to our
board of directors that, as of such date, and based upon and subject to the
assumptions made, matters considered and limitations on the review undertaken,
from a financial point of view, the terms of the strategic alliance as a whole
were fair to holders of Ascent common stock. At the meeting, our board of
directors unanimously approved the strategic alliance, the agreements setting
forth the terms of and providing for the mechanics of the strategic alliance,
including without limitation the merger agreement (including the related
agreements attached as exhibits) and the transactions contemplated by these
agreements.
On February 13, 1999, Dr. Clemente and Mr. Fox, together with
representatives of ING Furman Selz, met with Messrs. Anderson and Smith at the
offices of ING Furman Selz to finalize certain provisions of the strategic
alliance agreements.
On February 15, 1999, our board of directors held an informal meeting by
telephone conference during which Dr. Clemente and Mr. Fox advised our board of
directors of the status of negotiations of the strategic alliance and the
schedule of the announcement of the strategic alliance.
On February 16, 1999, Adams, Harkness & Hill delivered to us its written
opinion that, as of such date, and based upon and subject to the assumptions
made, matters considered and limitations on the review undertaken, from a
financial point of view, the terms of the strategic alliance as a whole are fair
to holders of Ascent common stock.
During the afternoon of February 16, 1999, Ascent, Alpharma Inc. and
Alpharma finalized, executed and delivered the strategic alliance agreements. A
joint public announcement of the strategic alliance was made by Ascent and
Alpharma Inc. following the close of the Nasdaq National Market on such date.
REASONS FOR THE STRATEGIC ALLIANCE
In reaching its decision to approve the strategic alliance, our board of
directors consulted with (a) our management, (b) Adams Harkness & Hill, our
financial advisors, regarding the financial aspects of the transaction and the
fairness of the strategic alliance as a whole to our stockholders from a
financial point of view and (c) our legal counsel regarding the legal terms of
the transaction and the obligations of our board of directors in its
consideration of the proposed transaction.
Our board of directors concluded that the strategic alliance represents a
highly favorable strategic opportunity for Ascent and is in the best interests
of Ascent and our stockholders. In reaching this conclusion, our board of
directors considered the following information and factors:
- the infusion of immediate capital in the form of debt on favorable terms
under the loan agreement which we can use to fund expected operating
losses into 2000;
- the availability of additional capital in the form of debt on favorable
terms under the loan agreement which we can use to pursue opportunities
to enhance our
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growth through other strategic alliances, company acquisitions, product
acquisitions and additional research and development projects;
- the continuation of the ability of our existing stockholders to
participate in our future growth because the exercise price for the call
option is determined by an earnings-based formula;
- access to Alpharma's significant product development and manufacturing
expertise in topical and liquid pharmaceuticals; and
- a presentation of Adams, Harkness & Hill, including their opinion that
the terms of the strategic alliance as a whole were fair from a financial
point of view to holders of Ascent common stock.
Our board of directors also considered potentially negative factors
relating to the strategic alliance, including (a) the risk that the benefits
sought in the strategic alliance would not be fully achieved, (b) the risk that
we would not be able to access all of the funds available under the loan
agreement, (c) the risk that we would not be able to obtain alternative
financing necessary for working capital purposes or for other projects that we
wish to pursue because of restrictions in the loan agreement, (d) the impact of
the call option on our sales and operating results, key customer relationships
and our ability to retain or attract key personnel due to uncertainties
associated with the exercise of the call option, (e) the impact of the call
option as a deterrent to takeovers and other changes in our control or
management, including transactions in which our stockholders might otherwise
receive a premium for their shares over the current market price, and (f) the
risk that the call option will not be exercised.
The foregoing discussion of the information and factors considered by our
board of directors is not intended to be exhaustive but is believed to include
all material factors considered by our board or directors. In view of the wide
variety of information and factors, both positive and negative, considered by
our board of directors, our board of directors did not find it practical to, and
did not, quantify or otherwise assign relative or specific weights to the
foregoing factors considered. After taking into consideration all of the factors
set forth above, our board of directors concluded that the strategic alliance
was in the best interests of Ascent and our stockholders. Accordingly, our board
of directors strongly recommends that we proceed with the strategic alliance.
OPINION OF OUR FINANCIAL ADVISOR
We retained Adams, Harkness & Hill, Inc. to evaluate the terms of the
strategic alliance and render an opinion as to its fairness. On February 10,
1999, Adams, Harkness & Hill rendered its oral opinion to our board of
directors, subsequently confirmed in writing as of February 16, 1999, to the
effect that, as of February 16, 1999, based on and subject to the matters stated
in the opinion, the terms of the strategic alliance as a whole are fair, from a
financial point of view, to Ascent and the holders of Ascent common stock.
The Adams, Harkness & Hill opinion, which sets forth the assumptions made,
matters considered and limitations upon the review undertaken, is attached as
ANNEX C to this proxy statement/prospectus and is incorporated herein by
reference. This summary is qualified in its entirety by reference to the full
text of the opinion. You should read the opinion carefully in its entirety. The
engagement of Adams, Harkness & Hill and its opinion are for the benefit of our
board of directors and the opinion was delivered to them in connection with its
consideration of the strategic alliance. The opinion addresses only the
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fairness of the strategic alliance from a financial point of view to Ascent, and
it does not address any other aspect of the strategic alliance, nor does it
constitute a recommendation to you as to how you should vote with respect to the
strategic alliance.
In connection with their opinion, Adams, Harkness & Hill, among other
things:
- reviewed the financial information contained in the prospectus, dated May
29, 1997, related to our initial public offering of common stock; our
annual report, Form 10-K, and related financial information for the
fiscal year ended December 31, 1997, and our Form 10-Q and the related
unaudited financial information contained therein for the nine month
period ended September 30, 1998;
- analyzed and discussed certain financial statements and other financial
and operating data concerning Ascent, including forecasts, prepared by
members of our senior management;
- conducted due diligence discussions with members of our senior
management;
- reviewed the historical market prices and trading activity for Ascent
common stock and compared them with those of other publicly traded
companies that Adams, Harkness & Hill deemed to be relevant and
comparable to Ascent;
- reviewed the historical market prices for Ascent common stock and
compared them with those of certain market indices Adams, Harkness & Hill
deemed to be relevant;
- compared the results of operations of Ascent with those of certain
companies Adams, Harkness & Hill deemed to be relevant and comparable to
Ascent;
- compared the financial terms of the strategic alliance with the financial
terms of certain other mergers and acquisitions to the extent Adams,
Harkness & Hill deemed them to be relevant and comparable to the
strategic alliance;
- participated in certain discussions among representatives of Ascent and
their financial and legal advisors;
- reviewed drafts of the loan agreement, master agreement, merger agreement
and depositary agreement; and
- reviewed such other financial studies and analyses, performed such other
investigations and took into account such other matters as Adams,
Harkness & Hill deemed necessary, including its assessment of general
economic, market and monetary conditions as of the date of the opinion.
In connection with its review and in arriving at its opinion, Adams,
Harkness & Hill did not independently verify any information received from us
and relied on and assumed that all such information was complete and accurate in
all material respects. With respect to any forecasts reviewed relating to the
prospects of Ascent, Adams, Harkness & Hill assumed that they were reasonably
prepared on bases reflecting the best currently available estimates and
judgements of our management as to the future financial performance of Ascent.
The Adams, Harkness & Hill opinion was rendered on the basis of securities
market conditions prevailing as of the date of its opinion and on the conditions
and prospects, financial and otherwise, of Ascent as known to Adams, Harkness &
Hill on such date. Adams, Harkness & Hill did not conduct, nor has it received
copies of, any independent valuation or appraisal of any of the assets of
Ascent. In addition, Adams, Harkness & Hill has assumed, with our consent, that
any material liabilities (contingent or
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otherwise, known or unknown) of Ascent are as set forth in its consolidated
financial statements.
In delivering the Adams, Harkness & Hill opinion to our board of directors,
Adams, Harkness & Hill prepared and delivered to our board of directors certain
written materials containing various analyses and other information material to
the Adams, Harkness & Hill opinion. The following is a summary of these
materials.
TRANSACTION REVIEW. The loan agreement allows Ascent to borrow from
Alpharma, from time to time through December 31, 2001, up to a maximum principal
amount of $40.0 million, subject to certain terms, conditions and other
limitations set forth therein. The outstanding principal will bear interest at
the rate of 7.5% per annum. The strategic alliance could result in one of three
alternative scenarios. Subsequent to year-end 2001, Alpharma may take any of the
following actions: (a) acquire each outstanding share of Ascent common stock for
the call option exercise price; (b) if we do not prepay the loan, convert the
outstanding principal balance of the loan into Ascent common stock at a
conversion price of $7.125 per share; or (c) seek repayment of the outstanding
principal plus accrued but unpaid interest thereon with a final payment due in
2005. Adams, Harkness & Hill assessed the fairness, from a financial point of
view, to the holders of Ascent common stock of the terms of the strategic
alliance, as a whole.
MARKET ANALYSIS. Adams, Harkness & Hill reviewed general background
information and selected market trading data for Ascent relative to a peer group
consisting of sixteen publicly traded companies engaged in the development and
manufacture of either generic pharmaceutical or specialty pharmaceutical
products.
Adams, Harkness & Hill reviewed the range of implied current market values
for Ascent's equity through the application of various financial ratios derived
through its review of companies in the Ascent peer group. Adams, Harkness & Hill
compared the current values of the peer group to the present value of the
financial results projected by our management to be realized for the fiscal year
ending December 31, 2001. Adams, Harkness & Hill established: (a) implied market
values for the peer group by multiplying the number of shares of common stock
outstanding on a fully diluted basis of the companies in the peer group by the
closing price of such common stock as of February 12, 1999 and (b) implied
enterprise values for the peer group by adding the amount of outstanding
non-trade debt to such product. Adams, Harkness & Hill then considered a variety
of financial ratios including:
- enterprise value divided by last twelve months revenue;
- enterprise value divided by last twelve months earnings before interest
and taxes; and
- market value divided by last twelve months net profit after taxes.
Our management provided Adams, Harkness & Hill with projected 2001 debt
figures, including $9.2 million of Furman Selz associated debt and $35.0 million
of Alpharma associated debt. For enterprise value calculations, Adams, Harkness
& Hill discounted the resulting $44.2 million debt figure to compare the value
of Ascent equity implied by the present value of enterprise value multiple
valuations minus the present value of projected net debt (which, by definition,
equals market value).
Present values for projected 2001 Ascent financial results were calculated
using discount rates which Adams, Harkness & Hill determined, based on its
experience, to be
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appropriate for companies in a stage of development and with growth prospects
similar to Ascent.
The adjusted multiples from the peer group for the ratio of enterprise
value to last twelve months revenue ranged between 2.3x and 7.6x, implying an
Ascent present equity value of between $44.1 million and $182.8 million. The
adjusted multiples from the peer group for the ratio of enterprise value to last
twelve months earnings before interest and taxes ranged between 15.9x and 39.2x,
implying an Ascent present equity value of between $116.1 million and $309.8
million. The adjusted multiples from the peer group for the ratio of market
value to last twelve months net profit after taxes ranged between 17.0x and
33.0x, implying an Ascent present market value of between $104.7 million and
$203.3 million. No one ratio was determinative, and each was considered in the
analysis. Financial projections used in the calculation of the present value of
Ascent reflect the expected-case financial results of our management for the
fiscal year ending December 31, 2001 discounted back at a rate of 40%.
IMPLIED ACQUISITION ECONOMICS. In the event that Alpharma elects to
acquire all of the Ascent common stock subsequent to December 31, 2001, the
price which Alpharma will pay in aggregate will be equal to the product of (i)
12.2 and (ii) our adjusted net income, as defined in the depositary agreement,
for the 2001 fiscal year, subject to certain increases and limitations. Adams,
Harkness & Hill estimated a range of implied valuations for the Ascent common
stock using this formula and a range of fiscal year 2001 adjusted net income
projections prepared by our management. The adjusted net income projections
provided to Adams, Harkness & Hill by our management ranged between $16.7
million and $28.4 million, which would result in an aggregate call option
exercise price of between $203.7 million and $346.5 million. The present value
for this range of implied valuations was calculated using a range of discount
rates from 35% to 45% and yielded present values between $66.9 million and
$140.7 million.
IMPLIED CONVERSION ECONOMICS. In the event Alpharma elects to convert the
outstanding principal of the loan into Ascent common stock subsequent to
December 31, 2001, the number of shares to be issued to Alpharma will be
calculated by dividing the outstanding principal of the loan by $7.125. Based
upon the timing of the drawdown of the loans, as projected by our management,
Adams, Harkness & Hill determined that upon conversion Alpharma would likely
receive approximately 26% of the total Ascent common stock (assuming a total
drawdown at the beginning of 2002 of $35.0 million; if the loan is at its
maximum of $40.0 million the percent of total Ascent common stock received by
Alpharma would be approximately 29%). Using discount rates ranging between 35%
and 45%, Adams, Harkness & Hill estimated the present value of funds made
available to Ascent through the loan to be between $17.4 million and $19.4
million, equal to between 39% and 43% of Ascent's total market capitalization as
of February 12, 1999.
In reaching its conclusions as to the fairness of the consideration to be
received in the strategic alliance and in its presentation to our board of
directors, Adams, Harkness & Hill did not rely on any single analysis or factor
described above, or assign relative weights to the analyses or factors
considered by it, or make any conclusions as to how the results of any given
analysis, taken alone, supported the Adams, Harkness & Hill opinion. The
preparation of a fairness opinion is a complete process and not necessarily
susceptible to partial analyses or summary description. Adams, Harkness & Hill
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all factors and analyses, would create a misleading view of the
processes underlying the Adams, Harkness & Hill opinion. The analyses of
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Adams, Harkness & Hill are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses. Analyses relating to the value of companies do not purport to be
appraisals or valuations or necessarily reflect the price at which companies may
actually be sold. No company or transaction used in any comparable analysis as a
comparison is identical to Ascent or the strategic alliance. Accordingly, an
analysis of the results is not mathematical; rather, it involves complex
considerations and judgements concerning differences in the various
characteristics of the comparable companies and other factors that could affect
the public trading value of the companies to which Ascent was compared.
Financial planning data and forecasts of Ascent were prepared based on
numerous variables and assumptions that are inherently uncertain, including,
without limitation, factors related to general economic and competitive
conditions. Actual results could vary significantly from those set forth in such
financial planning data.
Adams, Harkness & Hill, as part of its investment banking activities, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. Adams, Harkness & Hill has in the
past provided investment banking and financial advisory services to Ascent for
which it has received various fees. Adams, Harkness & Hill also serves as a
market maker for the Ascent common stock. In the ordinary course of its
business, Adams, Harkness & Hill and its affiliates may actively trade the
Ascent common stock for its own account and for the accounts of its customers.
Accordingly, Adams, Harkness & Hill may at any time hold a long or short
position in the Ascent common stock.
Our board of directors engaged Adams, Harkness & Hill to render a fairness
opinion in connection with the strategic alliance for which we will pay Adams,
Harkness & Hill a fee of $250,000. Whether or not the strategic alliance is
consummated, we have agreed to pay Adams, Harkness & Hill the $250,000 fee plus
reasonable out-of-pocket expenses. In addition, we have agreed to indemnify
Adams, Harkness & Hill against certain liabilities incurred (including
liabilities under the federal securities laws) in connection with our engagement
of Adams, Harkness & Hill.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion summarizes the material federal income tax
considerations relating to the merger, the creation of the call option and the
ownership of the depositary shares that are issuable to you based upon the
opinion of Ascent's legal counsel, Hale and Dorr LLP. Hale and Dorr LLP's
opinion is based on currently existing provisions of the Internal Revenue Code,
existing Treasury Regulations thereunder and current administrative rulings and
court decisions, all of which are subject to change. Any such change, which may
or may not be retroactive, could alter the tax consequences described below. In
addition, because the application of existing tax law to aspects of the
transactions described in this proxy statement/prospectus is unclear, the IRS
may disagree with the tax consequences described below, and a court may uphold
the IRS's position.
You should be aware that the opinion of Hale and Dorr LLP and this
discussion do not deal with all federal income tax considerations that may be
relevant to particular stockholders in light of their particular circumstances,
such as stockholders who are dealers in securities, who are foreigners or who do
not hold their stock as capital assets. In addition, the following discussion
does not address the tax consequences of the merger, the
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call option and the ownership of depositary shares under foreign, state or local
tax laws. Accordingly, you are urged to consult your own tax advisors as to the
specific tax consequences to you of the merger, the call option and the
ownership of the depositary shares, including applicable state, local and
foreign tax consequences.
TAX CONSEQUENCES OF THE MERGER. The merger should be treated as a tax-free
recapitalization so that you will not recognize any gain or loss upon the
exchange of your shares of Ascent common stock for depositary shares. In
addition, you should have a basis in the depositary shares that you receive in
the merger equal to the basis of the Ascent common stock that you exchange. The
holding period for your new depositary shares will include the period that you
held your Ascent shares, assuming that you held your Ascent shares as capital
assets.
Although Hale and Dorr LLP believes that the merger will have the tax
consequences discussed above, the IRS could attempt to attack the tax-free
nature of the merger on one or both of two separate grounds. First, the IRS
could contend that the merger did not qualify as a tax-free recapitalization
because the depositary shares received by each Ascent stockholder should not be
considered to be shares of stock of Ascent, but instead represent interests in a
separate trust or other entity established pursuant to the depositary agreement.
Hale and Dorr LLP does not believe that such a position by the IRS would be
sustained. Although under the depositary agreement you will not be able to
actually acquire possession of the Ascent shares held by the depositary prior to
the expiration of the call option, the depositary can only act at the direction
of the holders of depositary shares and should be treated as holding its shares
of Ascent common stock pursuant to a custodial arrangement. As such, the owners
of depositary shares should be treated as the direct owners of the shares of
Ascent common stock held by the depositary.
If the IRS were to prevail in a position that the depositary shares cannot
be treated as shares of Ascent, you would recognize taxable gain or loss on each
share of Ascent stock that you surrender in the merger equal to the difference
between your basis in such share and the fair market value of the depositary
share received in exchange. Such gain or loss would be capital gain or loss
assuming that you held your Ascent share as a capital asset and that you held 5%
or less of the total stock of Ascent (including attributed ownership from
related parties). In the case of any greater-than-5% stockholder, gain realized
on the taxable exchange of an Ascent share would be taxable as ordinary income
if Ascent is determined to be a "collapsible corporation" under Section 341 of
the Internal Revenue Code. Because determination of whether Ascent is a
collapsible corporation is dependent upon the amount of income it may realize
from its products in the future, Hale and Dorr LLP is unable to render an
opinion as to such classification.
Even if the depositary shares are treated as shares of Ascent stock, the
IRS might still take the position that as a result of the merger, you should be
treated as having transferred the call option with respect to your Ascent shares
directly to Alpharma in return for consideration (presumably in the form of
proceeds from the Alpharma loan) in an amount equal to the fair market value of
the call option. If such a characterization of the transaction were to prevail,
the amount of the consideration treated as having been received from Alpharma
for the call option would not be immediately subject to tax, but either would be
treated as additional purchase price upon an exercise of the call option or
would be taxable to you upon expiration of the call option. However, since such
a characterization is inconsistent with the structure of the merger and the
subsequent assignment of the call option by Ascent to Alpharma and would result
in the tax consequences to the parties being determined with reference to
transactions which never
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actually occurred, Hale and Dorr LLP does not believe the IRS is likely to be
sustained in any such position.
DEPOSITARY SHARES. As discussed above, the shares held in the depositary
will be treated as being held by the depositary as custodian for you and the
other Ascent stockholders, and you will be treated as owning your proportionate
portion of the Ascent shares held in the depositary for federal income tax
purposes. As such, distributions made with respect to your shares held in the
depositary will be taxed as dividends to you to the extent of Ascent's current
and accumulated earnings and profits for federal income tax purposes. To the
extent the distributions on the shares held in the depositary exceed such
earnings and profits, the amount distributed will be applied to reduce the tax
basis of your depositary shares and, to the extent that the amount distributed
exceeds such tax basis, will constitute gain from the deemed sale or exchange of
the depositary shares. Any such gain will be capital gain if the depositary
share is held as a capital asset, subject to the discussion of "collapsible
corporations" above. Any capital gain realized by any depositary share owner
will be long-term or short-term, depending on the holding period of the
depositary shares with respect to which the distribution was made.
If the shares of Ascent common stock held in the depositary are acquired by
Alpharma pursuant to an exercise of the call option, you will recognize gain or
loss measured by the difference between the basis of your depositary shares and
the amount of cash received. Such gain or loss will be capital gain or loss if
you hold your depositary shares as capital assets, subject to the discussion of
"collapsible corporations" above. Such gain will be long-term if, at the time of
the purchase you have a holding period for your depositary shares of more than
one year.
If the call option expires unexercised, upon distribution of the Ascent
shares by the depositary to the holders of depositary shares, no income, gain or
loss will be recognized for federal income tax purposes. See, however, the
discussion above regarding the possibility that a portion of any cash
consideration in the merger (presumably in the form of proceeds from the
Alpharma loan) would be treated as payable to the holders of shares of Ascent
common stock as consideration for the call option and would be treated as income
received by the depositary share holders upon expiration of the call option.
Because the holders of depositary shares will be treated as the owners of
the Ascent shares held in the depositary, upon expiration of the call option and
distribution of the Ascent shares from the depositary, you will have bases and
holding periods in the Ascent shares received by you equal to your bases and
holding periods in the depositary shares prior to the distribution.
FEDERAL SECURITIES LAWS CONSEQUENCES
The issuance of depositary shares in the merger has been registered under
the Securities Act. The depositary shares of Ascent issued in the merger may be
traded freely and without restriction by those Ascent stockholders not deemed to
be "affiliates" of Ascent as that term is defined under the Securities Act. An
affiliate of Ascent, as defined by the rules promulgated under the Securities
Act, is a person who directly, or indirectly through one or more intermediaries,
controls, is controlled by or is under common control with Ascent. Any
subsequent transfer of such shares by any person who is an affiliate of
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Ascent at the time the merger is submitted for a vote at the annual meeting
will, under existing law, require either:
- the further registration under the Securities Act of the depositary
shares of Ascent to be transferred;
- compliance with Rule 145 promulgated under the Securities Act (permitting
limited sales under certain circumstances); or
- the availability of another exemption from registration.
The foregoing restrictions are expected to apply to our directors and
executive officers and the holders of 10% or more of the outstanding shares of
Ascent common stock and to certain relatives or the spouses of these persons and
any trusts, estates, corporations or other entities in which any such person has
a 10% or greater beneficial or equity interest. Ascent will give stop transfer
instructions to the transfer agent with respect to the depositary shares to be
received by persons subject to the restrictions described above, and the
depositary receipts representing such depositary shares will be appropriately
legended.
DESCRIPTION OF OUR CAPITAL STOCK
The authorized capital stock of Ascent consists of 60,000,000 shares of
common stock, $.00004 par value per share, and 5,000,000 shares of preferred
stock, par value $.00004 per share, of which our board of directors has
designated 7,000 shares as Series G preferred stock. In connection with the
transactions contemplated by the strategic alliance agreements and the second
amendment to the May 1998 securities purchase agreement, we have agreed, upon
the closing of such transactions, to exercise our right to exchange all
outstanding shares of Ascent Series G preferred stock for 8% convertible
subordinated notes in accordance with the existing terms of the Ascent Series G
preferred stock. The following discussion of Ascent capital stock assumes that
such shares have been converted and are not outstanding.
Common Stock
VOTING RIGHTS. Holders of Ascent common stock are entitled to one vote per
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
Ascent common stock entitled to vote in any election of directors may elect all
of the directors standing for election.
DIVIDENDS. If dividends are declared by our board of directors, the
holders of Ascent common stock will receive them at the same rate, but only
after any dividends required to be paid on shares of Ascent preferred stock have
been paid.
LIQUIDATION. In the event of a liquidation of Ascent, after the payment of
its debts and other liabilities and after making provision for the holders of
Ascent preferred stock, if any, the remaining assets of Ascent will be
distributable ratably among the holders of Ascent common stock.
OTHER. The holders of Ascent common stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of Ascent
common stock are fully paid and nonassessable.
Preferred Stock
Our board of directors is authorized, without stockholder approval, to
issue up to 5,000,000 shares of preferred stock in one or more series. Our board
of directors will
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determine the number of shares and the rights, preferences, privileges and
restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, of each series of preferred
stock. The rights of the holders of Ascent common stock are subject to, and may
be adversely affected by, the rights of the holders of shares of any series of
preferred stock that may be issued. Preferred stock may, at the discretion of
our board of directors, be entitled, before the Ascent common stock, to the
payment of dividends and the distribution of assets in the event of the
liquidation, dissolution or winding up of Ascent. Additionally, the issuance of
shares of preferred stock could also decrease the amount of earnings and assets
available for distribution to the holders of the Ascent common stock.
The purpose of authorizing our 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 capital stock of Ascent. We have no present
plans to issue any shares of preferred stock.
Delaware Law and Charter and By-law Provisions
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, this statute 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. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or within the prior three
years did own) 15% or more of the corporation's voting stock.
Our charter provides for the division of the board of directors into three
classes as nearly equal in size as possible with staggered three-year terms. In
addition, our charter provides that directors may be removed only for cause by
the affirmative vote of the holders of two-thirds of the shares of Ascent
capital stock entitled to vote. Under our charter, any vacancy on the board of
directors 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 Ascent.
Our charter and by-laws also provide that any action required or permitted
to be taken by stockholders of Ascent may only be taken at a duly called annual
or special meeting of stockholders. These 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
Ascent, especially since special meetings of stockholders may only be called by
the board of directors or president of Ascent. The by-laws also establish
procedures, including advance notice procedures, with regard to the nomination,
other than by or at the direction of our board of directors, of candidates for
election as directors and other matters to be brought before stockholders
meetings.
These provisions, which may be amended only by a 75% vote of the
stockholders, could make it more difficult for a third party to effect a change
in the control of our board
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of directors. In addition, these provisions could make it more difficult for a
third party to acquire, or it could discourage a third party from attempting to
acquire, a majority of the outstanding voting stock of Ascent.
We have also included in our charter provisions to eliminate the personal
liability of our directors for monetary damages resulting from breaches of
fiduciary duty to the extent permitted by the Delaware General Corporation Law
and to indemnify our directors and officers to the fullest extent permitted by
Section 145 of the Delaware General Corporation Law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Ascent common stock is BankBoston,
N.A. Canton Massachusetts. Following the merger, BankBoston, N.A. will be the
transfer agent and registrar for the depositary shares.
DISSENTING STOCKHOLDERS' APPRAISAL RIGHTS
We are uncertain, and our counsel is unable to express a definite view, as
to whether appraisal rights are available to holders of Ascent common stock in
connection with the merger. Under Section 262(b)(2)(a) of the Delaware General
Delaware Law and Charter and By-law Provisions Corporation Law statute,
appraisal rights are not available for shares of capital stock of a corporation
if the holders of such shares are required by the terms of the merger agreement
to accept for such shares shares of stock of the corporation surviving or
resulting from the merger, or depository receipts in respect thereof. If the
depositary shares to be issued to Ascent stockholders under the merger agreement
are deemed to be stock of the surviving corporation, or depositary receipts in
respect thereof, then under Section 262(b) of the Delaware General Corporate Law
statute, the holders of Ascent common stock will not have appraisal rights.
However, if such depositary shares are not deemed stock of the surviving
corporation, or depositary receipts thereof, because of the existence of the
call option, then appraisal rights will be available to those stockholders of
Ascent who demand and perfect appraisal rights in accordance with the
requirements of Section 262 of the Delaware General Corporate Law statute.
Section 262 is attached as ANNEX E to this proxy statement/prospectus and
incorporated herein by reference. You should read ANNEX E carefully in its
entirety for a complete understanding of its terms. If you wish to exercise
statutory appraisal rights, if available, or wish to preserve the right to do
so, the failure to comply with the procedures set forth under Section 262 will
result in the loss of appraisal rights, if available.
If you are entitled to appraisal rights under Section 262 of the General
Corporation Law of the State of Delaware, you may, instead of accepting the
depositary shares representing shares of Ascent common stock to be issued in the
merger, demand the fair value of your shares as determined by a Delaware court.
However, to do so, you must comply with the conditions established by Section
262, which are complex.
Here are some of the conditions to preserving and exercising appraisal
rights:
- you must own the shares of Ascent common stock for which you demand
appraisal on the date you deliver the demand for appraisal described
below;
- you must continue to own those shares through the closing of the merger;
- before the vote is taken at the annual meeting, you must deliver a
properly executed written demand for appraisal of your shares to our
secretary. The demand
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will be sufficient if you sign it, and it reasonably informs us of your
identity and your intent to demand an appraisal of your shares. If you
are not the record owner of your shares of Ascent common stock, for
example, if your shares are owned of record in a fiduciary capacity by a
trustee, guardian or custodian, then the record owner of your shares must
execute the demand for appraisal rights. Any written demands should be
sent to:
Ascent Pediatrics, Inc.
187 Ballardvale Street, Suite B125
Wilmington, Massachusetts 01887
Attention: Secretary
- you must NOT have voted in favor of the proposed merger, either in
person, by proxy or by written consent. You can meet this requirement by
either not voting or by voting against the merger;
Important: You must separately comply with each of the last two
requirements listed above. Under Delaware law, to not vote in favor of the
proposed transaction, or to vote against it, is not considered a written
demand for appraisal of your shares.
- you, another Ascent stockholder or Ascent must file a petition for
appraisal of shares of Ascent common stock in the Delaware Court of
Chancery, as more fully described below, within 120 days after the
closing of the merger; and
- you must satisfy the other conditions described more fully below and in
ANNEX E.
AVAILABILITY OF INFORMATION ABOUT OTHER DISSENTING STOCKHOLDERS. Within 10
days after the closing of the proposed merger, we will notify each stockholder
who has complied with the procedures described above that the merger has become
effective. Within 120 days after the closing of the proposed merger, if you have
complied with the conditions for appraisal of your shares, you may request in
writing, and we will send you, a statement regarding the number of shares of
Ascent common stock not voted in favor of the transaction, the number of shares
for which we have received a written demand for appraisal and the number of
stockholders who own those shares. We are required to mail this statement to you
within 10 days after receiving your request. You should send any such request to
the same address to which your written demand is sent (see the third bullet
point above).
WHAT YOU WOULD RECEIVE BY EXERCISING APPRAISAL RIGHTS. If you intend to
demand an appraisal of your shares, keep in mind that the fair value of your
shares as determined under Delaware law could be more than, the same OR LESS
THAN the value of the depositary shares you would receive if you did not demand
an appraisal of your shares. Section 262 requires the fair value of the shares
to be determined exclusive of any element of value arising from the
accomplishment or expectation of the acquisition. A discussion of the other
factors considered by the Delaware Court of Chancery in appraising your shares
is beyond the scope of this summary.
EXPENSES OF THE APPRAISAL PROCEEDING. The cost of the appraisal proceeding
may be determined by the court and allocated among the parties to the proceeding
as the court deems equitable. Also, on application by a dissenting stockholder,
the court may order that all or a portion of the expenses incurred in the
appraisal proceeding by all dissenting stockholders be charged pro rata against
the value of all shares of stock entitled to appraisal.
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TERMINATION OF RIGHTS AS A STOCKHOLDER. If you properly demand appraisal
of your shares, you will lose your right to vote those shares on any matter or
to receive payment of dividends or other distributions on such shares. Keep in
mind, however, we have never paid, and we do not now anticipate paying, any
dividends on Ascent common stock.
WITHDRAWAL OF A DEMAND FOR APPRAISAL. You may withdraw a demand for
appraisal, and accept the consideration received by other stockholders of
Ascent, at any time within 60 days after the closing of the merger. After this
60-day period has passed, you may not withdraw your demand for appraisal unless
we consent to the withdrawal. If you take all the other actions required to
exercise your appraisal rights but fail to file a petition in the Delaware Court
of Chancery within 120 days after the transaction closes, you will lose your
appraisal rights. However, you will then be entitled to receive the
consideration the other stockholders of Ascent receive in the transaction.
The failure to take any step required to preserve or exercise appraisal
rights may result in the loss of those rights. In view of the complexity of
exercising appraisal rights under Delaware law, if you are considering
exercising these rights you should consult with your legal counsel.
THE MASTER AGREEMENT
GENERAL
The master agreement to which Ascent, Alpharma Inc. and Alpharma are
parties provides that, following the approval by our stockholders of the merger
agreement (including the related agreements attached as exhibits) and the
transactions contemplated by these agreements and the satisfaction or waiver of
other conditions, Bird Merger Corporation will be merged with and into Ascent,
Ascent will transfer the call option which it receives in the merger to Alpharma
and each of Ascent and Alpharma will take or become obligated to take the other
actions contemplated by the strategic alliance.
CLOSING
We expect that the closing of the transactions contemplated by the master
agreement, including the merger, will take place after all of the conditions to
closing have been satisfied or waived, which we expect to occur on or about June
29, 1999.
REPRESENTATIONS AND WARRANTIES
ASCENT. In the master agreement we made the same representations and
warranties that we made in the loan agreement, which are summarized in this
document under "Proposal 1 -- The Merger -- The Loan Agreement" beginning on
page 56 of this proxy statement/prospectus.
The representations and warranties relate to, among other things, our
organization and capital structure, the due authorization and enforceability of
the strategic alliance agreements, the absence of conflicts under our
certificate of incorporation, by-laws and material agreements, litigation,
financial statements, tax returns, securities law exemptions for the issuance
under the loan agreement of the note and the shares issuable upon conversion of
the note, governmental consents and filings, customers and key employees,
intellectual property, regulatory status of our products and outstanding
registration rights.
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ALPHARMA. Alpharma has made customary representations and warranties to us
in the master agreement relating to, among other things:
- Alpharma's organization, subsidiaries and other similar corporate
matters;
- Alpharma's capital structure;
- the authorization, execution, delivery, performance and enforceability of
the strategic alliance agreements;
- the absence of conflicts, violations or defaults under Alpharma's
certificate of incorporation or by-laws, Alpharma's material agreements
or any law or legal proceeding generally or as a result of the execution,
delivery and performance of the strategic alliance agreements;
- disclosure of litigation; and
- the acquisition of the note and the shares of Ascent common stock
issuable upon conversion of the note as is necessary to enable us to
issue such securities in a manner exempt from the registration
requirements of the Securities Act.
COVENANTS
In the master agreement we agreed to the same covenants that we made in the
loan agreement, which are summarized in this document under "Proposal 1 -- The
Merger -- The Loan Agreement" beginning on page 56 of this proxy
statement/prospectus.
We also made additional covenants relating to, among other things,
recommending the approval of the merger agreement and the second amendment to
the May 1998 securities purchase agreement, holding a meeting of stockholders
for the purpose of voting on the merger agreement and the second amendment to
the May 1998 securities purchase agreement, and using best efforts to obtain the
necessary approvals of our stockholders.
NASDAQ LISTING. We have agreed to file a listing application with the
Nasdaq National Market to list the depositary shares on the Nasdaq National
Market and to use reasonable efforts to cause the listing application to be
approved. See "Market Price and Dividend Information" on page 25 for a
discussion of the listing of Ascent common stock and the depositary shares.
STANDSTILL AGREEMENT. Each of Alpharma Inc. and Alpharma has agreed that,
for a period of up to seven years, unless it has obtained our prior written
consent by vote of the majority of our directors (other than the director
elected pursuant to Alpharma's director nominee rights), it will not and it will
cause its affiliates to not:
- acquire any Ascent voting capital stock, including securities convertible
or exercisable for voting capital stock, if, after the acquisition of
such securities, and after giving effect to the conversion or exercise of
such securities, if applicable, (including the conversion of the note
into an aggregate of 5,614,035 shares of Ascent common stock,
irrespective of whether the note or any principal under the note is then
outstanding), Alpharma Inc., Alpharma and their affiliates would together
own of record beneficially more than 40% of the aggregate voting power of
all classes of our voting capital stock that are then outstanding or that
are issuable upon conversion or exercise of Ascent securities that are
then outstanding;
- "solicit" proxies with respect to our voting securities under any
circumstances or become a "participant" in any "election contest"
relating to the election of our
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directors, as those terms are defined in Regulation 14A under the
Securities Exchange Act of 1934;
- deposit any of our voting securities in a voting trust or subject them to
a voting agreement or other agreement of similar effect;
- initiate, propose or otherwise solicit our stockholders for any approval
or induce any other person to initiate any stockholder proposal;
- present, or propose to present, to us, to our board of directors or our
stockholders any proposal or offer for a merger, tender or exchange offer
or other form of business combination involving us, or effect, propose to
effect or cause to occur any of the foregoing; or
- take any action individually or jointly or assist in taking any action it
could not take individually under the terms of the standstill agreement.
VOTING AGREEMENT. Alpharma Inc. and Alpharma have each agreed that, in any
election of directors and in any other vote to be taken by our stockholders
during the next seven years, Alpharma Inc. and Alpharma will, and will cause
their respective affiliates to, vote any depositary shares or other Ascent
voting capital stock which Alpharma Inc., Alpharma or their respective
affiliates hold, in the same manner and proportion as the votes cast by the
other holders of depositary shares or such other voting capital stock.
ALPHARMA DIRECTOR SEAT. We have agreed to appoint a nominee of Alpharma to
our board of directors immediately prior to the closing contemplated by the
master agreement. We expect that this designee will be Thomas Anderson,
president of Alpharma. Certain details of the arrangement concerning the
Alpharma director are set forth under "Proposal 1 -- The Merger -- The Loan
Agreement -- Our Board of Directors" on page 59 of this proxy
statement/prospectus.
Alpharma has agreed to cause its director designee to (a) resign from our
board of directors effective immediately upon the date on which the call option
terminates or expires and (b) abstain from voting on or recuse himself from any
matter to be discussed, considered or acted upon at any meeting of our board of
directors or of a committee of our board of directors with respect to which
Ascent and Alpharma have a potential conflict of interest, if our counsel
advises our board of directors or the committee that the abstention or recusal
is appropriate given the potential conflict of interest. Similarly, we may, by
vote of a majority of our directors other than Alpharma's designated director,
exclude Alpharma's designated director from access to any documents or other
materials provided to our board of directors which relate to any matter with
respect to which Ascent and Alpharma have a potential conflict of interest if
our counsel advises our board of directors that the abstention or recusal is
appropriate given the potential conflict of interest.
CALL OPTION TRANSFER. Immediately following the effective time of the
merger and as a condition to the closing of the transactions contemplated by the
master agreement, we will transfer the call option to Alpharma.
CERTAIN MUTUAL COVENANTS. The master agreement contains certain mutual
covenants of the parties, including covenants relating to public announcements
and obtaining consents and approvals.
CONDITIONS TO THE STRATEGIC ALLIANCE TRANSACTIONS (INCLUDING THE MERGER)
CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of
Ascent and Alpharma to consummate the transactions contemplated by the master
agreement and the
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other strategic alliance agreements, including the merger, are subject to the
satisfaction or waiver of conditions, including the following:
- our stockholders have approved the merger agreement (including the
related agreements attached as exhibits) and the transactions
contemplated by these agreements;
- the registration statement of which this proxy statement/prospectus forms
a part has been declared effective and is not subject to any stop order
or proceeding by the Securities and Exchange Commission;
- no legal proceeding is pending or threatened by or before any court or
any other agency or body which if determined adversely would prevent
consummation of the merger or any of the other transactions contemplated
by the master agreement, the merger agreement and the other strategic
alliance agreements, and no such judgment, order, decree, stipulation or
injunction is in effect; and
- the second amendment to the May 1998 securities purchase agreement is in
full force and effect, and the reduction in warrant exercise price and
the sale and issuance of shares contemplated by the second amendment has
been approved by our stockholders.
CONDITIONS TO OUR OBLIGATIONS. Our obligation to consummate the merger and
the other transactions contemplated by the master agreement, the merger
agreement and the other strategic alliance agreements is subject to the
satisfaction or waiver of conditions, including the following:
- the representations and warranties of Alpharma contained in the master
agreement are true and correct in all material respects;
- Alpharma has performed or complied with in all material respects all
obligations required to be performed or complied with by it;
- no statute, judgment, order or decree of any court or any other agency or
body is in effect which would impose any material limitation on our
ability to exercise our rights under the master agreement, the merger
agreement and the other strategic alliance agreements;
- we have obtained all consents or waivers necessary to execute and deliver
the master agreement, the merger agreement and the other strategic
alliance agreements, effect the merger, issue the note and carry out the
transactions contemplated by the agreements; and
- Alpharma has made all loans under the loan agreement properly requested
by us to be made on or prior to the date of the closing.
CONDITIONS TO ALPHARMA'S OBLIGATIONS. Alpharma's obligation to consummate
the transactions contemplated by the master agreement and the other strategic
alliance agreements is subject to the satisfaction or waiver of conditions,
including the following:
- our representations and warranties contained in the loan agreement are
true and correct in all material respects;
- we have performed or complied with in all material respects all
obligations required to be performed or complied with by us;
- no statute, judgment, order or decree of any court or any other agency or
body is in effect which would impose any material limitations on the
ability of Alpharma to
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exercise full rights of ownership of the note and the shares issuable
upon conversion of the note;
- we are not in default under any indebtedness in excess of $200,000 or
which results in indebtedness in excess of $200,000 becoming due and
payable prior to its due date;
- since September 30, 1998, no event has occurred which has had a material
adverse effect with respect to our business, properties, assets, net
worth, financial condition, results of operation or future prospects;
- we have obtained all consents or waivers necessary to execute and
delivery the master agreement, the merger agreement and the other
strategic alliance agreements, effect the merger, issue the note and
carry out the transactions contemplated by the agreements;
- the number of shares as to which appraisal rights have been asserted
shall not exceed 5% of the number of shares of our voting capital stock
then outstanding;
- a designee of Alpharma has been elected to our board of directors; and
- we have transferred the call option to Alpharma.
TERMINATION OF THE MASTER AGREEMENT; TERMINATION FEE
The master agreement will terminate upon the earliest of (a) September 30,
1999, if the closing contemplated by the master agreement has not occurred on or
before such date, (b) the date of the closing of the exercise of the call option
and (c) the date on which the call option expires or terminates.
Alpharma may terminate the master agreement prior to the closing
contemplated by the master agreement if (a) our board of directors withdraws its
recommendation of the merger or (b) our stockholders fail to approve the merger
agreement (including the related agreements attached as exhibits) and the
transactions contemplated by these agreements. We may terminate the master
agreement prior to closing if our board of directors withdraws its
recommendation of the merger.
If either we or Alpharma terminate the master agreement prior to closing
for any of these reasons, we will be required to pay to Alpharma a cash
termination fee of $1.2 million within ten business days after termination.
THE MERGER AGREEMENT
STRUCTURE OF THE MERGER
The merger agreement provides that, following the approval of the merger
agreement by our stockholders and concurrently with the closing contemplated by
the master agreement, Bird Merger Corporation will be merged with and into
Ascent. Bird Merger Corporation does not own any assets or properties. We will
be the surviving corporation.
MERGER CONSIDERATION
At the closing of the merger, by virtue of the merger and without any
action on the part of our stockholders, each share of Ascent common stock issued
and outstanding immediately prior to the closing (other than shares held in our
treasury and shares as to which appraisal rights have been duly demanded and
perfected, if available) will be converted into and represent the right to
receive one depositary share issued pursuant to
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the depositary agreement. Each depositary share will evidence one share of new
Ascent common stock, subject to the call option, and will be represented by a
depositary receipt.
EXCHANGE OF STOCK CERTIFICATES; ISSUANCE OF DEPOSITARY RECEIPTS
DELIVERY OF DEPOSITARY RECEIPTS. Prior to the closing of the merger, we
will deposit with the depositary a number of shares of Ascent common stock equal
to the number of shares of Ascent common stock outstanding immediately prior to
the closing of the merger. Upon receipt of these shares, the depositary will
deposit with the exchange agent for the merger depositary receipts representing
the number of depositary shares.
EXCHANGE. Promptly after the closing, the exchange agent will send to each
holder of record of Ascent common stock transmittal forms to be used in
exchanging Ascent common stock for depositary receipts representing depositary
shares.
You should not send in your certificates until you receive the transmittal
forms.
After the closing of the merger, each certificate representing shares of
Ascent common stock will represent for all purposes only the right to receive
depositary receipts representing depositary shares.
TREATMENT OF CONVERTIBLE SECURITIES, WARRANTS AND OPTIONS
Each convertible security, warrant or option of Ascent outstanding as of
the closing of the merger, whether or not then vested, convertible or
exercisable, will (when vested, convertible or exercisable in accordance with
the terms thereof) become convertible into or exercisable for a number of
depositary shares equal to the number of shares of Ascent common stock issuable
upon conversion or exercise of the convertible security, warrant or option in
accordance with the terms thereof.
After the closing of the merger and until the date on which the closing of
the exercise of the call option occurs or the call option expires or terminates,
upon the conversion or exercise of any convertible securities, warrants or
options, we will deposit with the depositary additional shares of Ascent common
stock corresponding to the number of depositary shares issued upon such
conversion or exercise. The holder of the convertible security, warrant or
option will receive depositary receipts representing the number of depositary
shares issued upon conversion or exercise of the convertible security, warrant
or option.
After the closing of the exercise of the call option, holders of any
outstanding convertible securities, warrants or options of Ascent will have the
right to receive from us upon conversion or exercise thereof (and the payment of
any exercise or purchase price provided for under the terms of the convertible
security, warrant or option) cash in an amount equal to the call option exercise
price for each depositary share for which the convertible security, warrant or
option is convertible or exercisable. After the expiration or termination of the
call option, holders will have the right to receive from us upon conversion or
exercise of the convertible securities, warrants or options shares of Ascent
common stock.
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CERTIFICATE OF INCORPORATION AND BY-LAWS
Our certificate of incorporation and by-laws will be the certificate of
incorporation and by-laws of the surviving corporation in the merger, except
that our certificate of incorporation will be amended to effect the following:
- to authorize our board of directors to discuss, consider and take any
actions relating to the matters set forth below, without the
participation or consent of director nominated by Alpharma, upon the
approval of a majority of the other directors, which action will be
regarded as the act of our board of directors:
- approve any amendment or waiver by us of the form of depositary
receipt or of any provision of the depositary agreement;
- consent to any waiver or exception of the obligations of Alpharma Inc.
and Alpharma under the standstill agreement set forth in the master
agreement;
- exclude the Alpharma director from access to any documents or other
materials provided to the other members of our board of directors
which relate to any matter with respect to which we and Alpharma have
a potential conflict of interest if our counsel advises the
non-Alpharma directors that the exclusion is appropriate given the
potential conflict of interest;
- approve any amendment or waiver by us of any provision of the master
agreement; and
- make any other determination under the terms of the depositary
agreement, the master agreement or the loan agreement or that
otherwise relates to any matter with respect to which we and Alpharma
have a potential conflict of interest if our counsel has advised us to
that effect; and
- to provide that our board of directors may not, without the consent of
the Alpharma director, authorize the issuance of (a) any securities that
are convertible into any Ascent equity security (including depositary
shares) or (b) any rights, options or warrants to acquire any Ascent
equity security (including depositary shares), which following the
closing of the exercise of the call option (whether or not then
convertible, vested, exercisable or exchangeable) are not convertible
into or exercisable or exchangeable solely for the cash that the holders
of such securities would have received had they converted, exercised or
exchanged the convertible securities, rights, options and warrants for
the Ascent equity security immediately prior to the closing of the
exercise of the call option.
THE DEPOSITARY AGREEMENT
GENERAL
Upon consummation of the merger, you will receive (unless you perfect your
rights of appraisal under Section 262 of the Delaware General Corporation Law
statute, if applicable) one depositary share for each share of Ascent common
stock you own, pursuant to the depositary agreement. Each depositary share will
evidence one share of Ascent common stock, subject to a call option which we
will assign to Alpharma to purchase the Ascent common stock evidenced by the
depositary shares, and will be represented by a depositary receipt. Each holder
of depositary shares will be deemed to be a party to the depositary agreement.
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If the call option is exercised, each holder of a depositary share will be
entitled to receive the applicable exercise price for each share of Ascent
common stock represented by the depositary share, without interest. If the call
option is terminated or expires, each holder of a depositary share will be
entitled to receive the share of Ascent common stock evidenced by the depositary
share, together with any declared and unpaid dividends.
CALL OPTION
ASSIGNMENT. We have agreed to assign our call option to purchase all of
the Ascent common stock deposited with the depositary to Alpharma immediately
following the effective time of the merger. Consequently, Alpharma will have the
right, but not the obligation, to purchase all of the Ascent common stock held
by the depositary.
EXERCISE. Alpharma may exercise the call option at any time during the
20-day period following our delivery to Alpharma of our audited financial
statements for the 2001 fiscal year and a statement calculating the call option
exercise price. If Alpharma disputes our calculation of the call option exercise
price by delivering notice to us, this 20-day period will be extended and a
neutral accountant's determination of the contested call option exercise price
will be binding. If the exercise of the call option constitutes a "going-
private" transaction under the Exchange Act that requires compliance with Rule
13e-3, prior to the exercise of the call option, Ascent and Alpharma will comply
with the requirements of Rule 13e-3 unless otherwise exempted by the Securities
and Exchange Commission.
EXERCISE PRICE. The call option exercise price for each share of Ascent
common stock is determined by dividing:
- the greater of:
- $140 million and
- the sum of (i) the product of (a) 12.2 and (b) Ascent's 2001 pre-tax
operating income adjusted to exclude any research and development
expenses in excess of $1.5 million, certain interest and dividends in
respect of the note issued to Alpharma under the loan agreement and
the securities issued or issuable under the May 1998 securities
purchase agreement and other specified items and (ii) the aggregate
exercise price of all options and warrants of Ascent issued by us
after December 31, 1998 and either (x) exercised prior to the closing
of the exercise of the call option or (y) outstanding as of the date
immediately preceding the closing of the exercise of the call option,
by
- the sum of (i) the number of shares of Ascent common stock outstanding as
of the date immediately preceding the closing of the exercise of the call
option, and (ii) the number of shares of Ascent common stock issuable
upon the exercise or conversion of any options, warrants, rights or
convertible securities of Ascent outstanding as of the date immediately
preceding the closing of the exercise of the call option (excluding the
shares issuable upon conversion of the note issued to Alpharma pursuant
to the loan agreement).
If the call option exercise price is determined to be less than $11.76 per
share (subject to adjustment), the call option exercise price will equal:
- $11.76 per share for each depositary share issuable upon the exercise of
then outstanding warrants to purchase an aggregate of 779,268 shares of
Ascent common stock (subject to adjustment) issued under a securities
purchase agreement with
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Triumph-Connecticut Limited Partnership and certain other purchasers and
then outstanding;
- the original call option exercise price determined pursuant to the
formula stated above with respect to the depositary shares issued or
issuable (a) upon the exercise of warrants to purchase an aggregate of
2,116,958 shares of Ascent common stock (subject to adjustment) and (b)
upon the conversion of the 8% convertible notes to be issued upon the
exchange of our Series G preferred stock (which notes would currently be
convertible into an aggregate of 1,473,684 shares of Ascent common stock
(subject to adjustment)) issued under the May 1998 securities purchase
agreement; and
- with respect to any other outstanding depositary shares or any other
depositary shares issuable upon conversion of any convertible securities
or upon exercise of rights, options or warrants to acquire depositary
shares (other than as set forth above), which shares are referred to
below as the stockholder shares, the difference between (a) the original
call option exercise price determined pursuant to the formula stated
above and (b) the price determined by dividing (i) the product of (A) the
shares issuable upon exercise of the Triumph warrants referred to above
and (B) the difference between $11.76 (subject to appropriate adjustment
in the event of any stock split, stock dividend or recapitalization) and
the original call option exercise price, by (ii) the number of
stockholder shares.
The formula for calculating the call option exercise price described above
is intended to reflect a valuation of Ascent in 2002 equal to 27.5 times
Ascent's 2001 earnings (on a post-tax basis). The 12.2 multiple used in the call
option exercise price formula reflects certain adjustments made to the 27.5
earnings multiple, including (a) a 40% reduction in the 27.5 earnings multiple
to reflect an assumed tax rate of 40% (because the formula provides for the
earnings multiple to be applied to our pre-tax operating income), and (b) a
further 26% reduction in the adjusted earnings multiple to reflect the
anticipated percentage ownership of Ascent capital stock (on a fully-diluted
basis) represented by the convertible note issued to Alpharma under the loan
agreement (because the shares issuable upon conversion of this note are not
included in the call option exercise price formula). In addition, the
adjustments to the definition of pre-tax operating income in the formula reflect
the agreement of both parties (x) to limit the adverse impact on our 2001
pre-tax operating income (as used in the formula) caused by the interest and
dividends due under the loan agreement and under securities issued under the May
1998 securities purchase agreement and (y) to ensure that our 2001 pre-tax
operating income is calculated in a manner consistent with the methodology used
by us in prior years.
The option exercise price is not a prediction of the future market value of
the depositary shares or the Ascent common stock issuable in respect to the
depositary shares if Alpharma does not exercise the call option.
CLOSING OF EXERCISE OF CALL OPTION. Alpharma may exercise the call option
by delivering a written notice to the depositary specifying a closing date
between 10 and 15 business days from the date of the notice. The closing will
occur on the date specified in the notice, subject to the satisfaction of the
following closing conditions:
- there is no provision of law or governmental or court order which
prohibits the closing; and
- all necessary governmental approvals under applicable antitrust laws have
been obtained.
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If either or both of these conditions are not satisfied prior to the date
specified in Alpharma's notice of exercise, the closing may be delayed as
follows:
- If Ascent and Alpharma are prohibited from closing due to any applicable
law or governmental or court order, the closing may be delayed for up to
90 days following the closing date specified in Alpharma's notice of
exercise; or
- If Ascent and Alpharma have not obtained all necessary governmental
approvals under applicable antitrust laws, the closing may be delayed for
up to 180 days following the closing date specified in Alpharma's notice
of exercise.
If the closing does not occur on the closing date or within the applicable
extension period set forth above, the call option will terminate.
At the closing, the depositary will deliver to Alpharma certificates
evidencing all of the shares of Ascent common stock held by the depositary. In
return, Alpharma will wire to the depositary the cash necessary for payment of
the option exercise price to holders of outstanding depositary shares.
Promptly following the closing, the depositary will mail notice of the
closing and a letter of transmittal to the record holders of depositary shares
stating the option exercise price and the place for surrender of depositary
receipts. Upon surrender of the depositary receipts and a duly executed letter
of transmittal, the holder of the depositary receipts will be entitled to
receive cash equal to the applicable aggregate option exercise price.
After the closing, all depositary shares will be deemed no longer to be
outstanding for any purpose and all rights with respect to the depositary shares
will terminate, except the right to receive the aggregate applicable option
exercise price to which each stockholder is entitled (together with any declared
and unpaid dividends), without interest. After the closing date, any depositary
receipts that are presented to the depositary will be cancelled and exchanged
for the applicable aggregate option exercise price (together with any declared
and unpaid dividends).
After the closing, all rights options and warrants to acquire depositary
shares which are not exercised prior to the closing will be exercisable only for
cash equal to the aggregate applicable option exercise price for the depositary
shares which would have been issued had the right, option or warrant been
exercised immediately prior to the closing.
Prior to the expiration of the call option, holders of depositary shares
will not have the right to require the depositary to deliver the shares of
Ascent common stock represented thereby. Absent an exercise by Alpharma of the
call option, holders of depositary shares will not have the right to require
payment of the call price.
TERMINATION OF CALL OPTION. Alpharma's call option will terminate on the
earliest of:
- the date 20 days after we deliver to Alpharma our audited financial
statements for the fiscal 2001 with a statement stating the call option
exercise price and the manner in which it was calculated, if Alpharma
fails to provide us with notice of exercise of the call option or to
dispute our determination of the option exercise price on or before such
date;
- the date 10 days after the resolution of a dispute concerning the
calculation of the option exercise price, if Alpharma fails to exercise
the call option on or before such date;
- the date on which Alpharma delivers to us written notice of its intention
not to exercise the call option;
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- the date, during the period from Alpharma's exercise of the call option
to the closing, on which Alpharma notifies us of its election not to
proceed with the closing due to the occurrence of an event during this
period that has a material adverse effect on Ascent's business,
properties, assets, net worth, financial condition or future prospects,
provided that Alpharma notifies us within 10 days of becoming aware of
such event;
- the latest of (a) the option closing date specified in Alpharma's option
exercise notice, (b) the date 90 days after the closing date specified in
Alpharma's option exercise notice if the option closing has not occurred
because of the failure to obtain any required antitrust approvals or
because any other laws or government or court ruling prohibits the option
closing, or (c) the date 180 days after the closing date specified in
Alpharma's option exercise notice if the option closing has not occurred
because of a failure to obtain any required antitrust approvals; and
- three business days following the date on which we notify Alpharma that
the call option will expire due to Alpharma's refusal to make a requested
loan under the loan agreement unless Alpharma has refused to make the
loan because it is not reasonably satisfied that the proceeds of the
requested loan will be used in the manner required under the loan
agreement.
Following the termination of the call option, the depositary will mail a
notice and a letter of transmittal to the holders of record of the depositary
shares stating the place where depositary receipts are to be surrendered for
certificates evidencing shares of Ascent common stock. Upon surrender to the
depositary of a depositary receipt and a duly executed letter of transmittal,
the holder of the depositary receipt will be entitled to receive a certificate
representing a number of shares of Ascent common stock equal to the number of
depositary shares represented by the depositary receipt (together with all
declared and unpaid dividends). After the termination of the call option, any
depositary receipts that are presented to the depositary after the closing will
be cancelled and exchanged for certificates representing a number of shares of
Ascent common stock equal to the number of depositary shares represented by such
depositary receipts.
RIGHTS OF A HOLDER OF DEPOSITARY SHARES
DIVIDENDS AND OTHER DISTRIBUTIONS. The depositary will distribute all
dividends received in respect of the depositary shares to the record holders of
depositary shares in proportion to the number of depositary shares owned by the
holders. The amount distributed in each case will be reduced by any amounts
required to be withheld by us or the depositary on account of taxes.
VOTING RIGHTS. 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 the exercise of the voting rights pertaining to this
number of shares of Ascent common stock represented by their respective
depositary shares.
LIQUIDATION. 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.
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AMENDMENT AND TERMINATION OF THE DEPOSITARY AGREEMENT
The depositary agreement may be amended at any time by agreement of Ascent,
Alpharma and the depositary. Any amendment which imposes or increases any fees
or charges upon holders of depositary shares (other than taxes and other
governmental charges) will take effect three months after notice of the
amendment has been given to the record holders of outstanding depositary shares.
Any other amendment that materially and adversely alters the rights of holders
of depositary shares will become effective after the holders of depositary
shares representing not less than a majority of the number of depositary shares
then outstanding have consented thereto.
The depositary agreement will terminate on and after the earliest of:
- September 30, 1999, if the merger has not occurred on or prior to such
date;
- the date on which no depositary receipts remain outstanding; and
- the later of (a) 24 months after the closing of the exercise of the call
option or the termination of the call option and (b) the date on which
securities of Ascent convertible into depositary shares and any rights,
options or warrants to acquire depositary shares which are outstanding on
the date specified in clause (a) cease to be convertible into or
exercisable or exchangeable for the depositary shares.
OTHER PROVISIONS
The depositary will keep a record book for the transfer of depositary
shares, which at all reasonable times will be open for inspection by Ascent, by
holders of depositary shares and, after the option closing, Alpharma to the same
extent as a record holder of shares of Ascent common stock may inspect the
transfer record books for shares of Ascent common stock.
The depositary and the depositary's agents may own and deal in any class of
securities of Ascent and in depositary shares. The depositary may also act as
transfer agent or registrar of any of the securities of Ascent, Alpharma and
their affiliates, may engage in any other business with or for Ascent, Alpharma
and their affiliates.
THE LOAN AGREEMENT
LOANS
Alpharma has agreed to make loans to us in an aggregate principal amount of
$40.0 million from time to time prior to December 31, 2001. The loans are
evidenced by a note bearing interest at a rate of 7.5% per annum.
On February 19, 1999, we borrowed $4.0 million from Alpharma under the loan
agreement. We may borrow the additional $36.0 million in the following manner on
or after the closing of the merger:
- up to an additional $8.0 million for general corporate purposes;
- up to an additional $8.0 million in order to (a) acquire all of the stock
or assets of a company, (b) acquire a product or product line or the
right to sell a product or product line or (c) support a research and
development project; and
- up to an additional $20.0 million in order to (a) acquire all of the
stock or assets of a company that meets specified criteria, (b) acquire a
product or product line or
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the right to sell a product or product line that meets specified criteria
or (c) support a research and development project.
LOAN MECHANICS
In order to borrow money under the loan agreement, we must provide Alpharma
with a notice of borrowing. The notice of borrowing must specify the amount of
the proposed loan and the date of the proposed loan (at least 10 business days
from the date of the notice), specify the proposed use of proceeds and provide
sufficient information to enable Alpharma to confirm the use of proceeds.
PAYMENT OF INTEREST AND PRINCIPAL
INTEREST PAYMENTS. Interest on the note is due and payable by us quarterly
in arrears, on the last day of each calendar quarter.
PRINCIPAL REPAYMENT. Our payment of the principal of the loan is as
follows:
- prior to June 30, 2001, we may repay all or a portion of the outstanding
principal amount of the loans. We may reborrow any principal amounts
repaid on or before December 31, 2001;
- following a change in control of Ascent, Alpharma may require Ascent to
repay all outstanding principal and interest under the note;
- if the call option terminates or expires, we may repay all of the
outstanding principal amount of the loans, together with any accrued and
unpaid interest, at any time after the date of termination or expiration
and on or before December 31, 2002 if we also pay a conversion
termination fee in cash equal to 25% of the principal amount of the note
outstanding as of December 31, 2001;
- if the call option terminates or expires, we do not otherwise prepay the
principal amount of the note outstanding and Alpharma does not otherwise
convert the note, we will repay the principal amount of the note
outstanding as follows:
<TABLE>
<CAPTION>
% OF PRINCIPAL AMOUNT OF
NOTE OUTSTANDING AS OF
DATE OF PAYMENT DECEMBER 31, 2001
- --------------- ------------------------------
<S> <C>
March 30, 2004..................... 5%
June 30, 2004...................... 5%
September 30, 2004................. 5%
December 31, 2004.................. 5%
March 30, 2005..................... 10%
June 30, 2005...................... 70%
</TABLE>
- if the closing contemplated by the master agreement, including the
consummation of the merger, has not occurred on or before September 30,
1999, we will immediately repay all unpaid principal and accrued interest
on the note.
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REPRESENTATIONS AND WARRANTIES
We have made customary representations and warranties in the loan
agreement, which we also made in the master agreement by reference to the loan
agreement, relating to, among other things:
- our organization, subsidiaries and other similar corporate matters;
- our capital structure;
- the authorization, execution, delivery, performance and enforceability of
the strategic alliance agreements and the Alpharma note;
- the absence of conflicts, violations or defaults under our certificate of
incorporation or by-laws, material agreements or any law or legal
proceeding as a result of the execution, delivery and performance of the
strategic alliance agreements;
- disclosure of litigation;
- financial statements;
- the filing of tax returns and the payment of taxes;
- the securities law exemptions for the issuance of the note and the shares
issuable upon conversion of the note;
- governmental consents and filings;
- our sole representatives, customers and key employees;
- our intellectual property;
- our Exchange Act filings;
- the regulatory status of our products in development;
- outstanding registration rights; and
- the absence of events which would reasonably be expected to have a
material adverse effect on our business, properties, assets, net worth,
financial condition or future prospects.
CONDITIONS TO LOANS
CONDITIONS TO ALPHARMA OBLIGATION TO LOAN UP TO $8.0 MILLION AT THE
CLOSING. The obligation of Alpharma to loan up to $8.0 million on or after the
date of the closing contemplated by the master agreement, including the
consummation of the merger, is subject to the fulfillment to its reasonable
satisfaction or the waiver by Alpharma of conditions, including the following:
- we have performed in all material respects all obligations, required to
be performed by us under the loan agreement;
- no statute, judgment, order or decree of any court or any other agency or
body is in effect which would impose any material limitations on the
ability of Alpharma to exercise full rights of ownership of the note and
the shares issuable upon conversion of the note;
- we are not in default under any indebtedness in excess of $200,000 or
which results in indebtedness in excess of $200,000 becoming due and
payable prior to its due date;
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- since September 30, 1998, no event has occurred that is materially
adverse to our business, properties, assets, net worth, financial
condition or future prospects;
- we have received all consents or waivers necessary under the strategic
alliance agreements to carry out the transactions contemplated by such
agreements;
- no event has occurred and be continuing, or shall result from the loan
being made, which would constitute a default under loan agreement; and
- Alpharma is reasonably satisfied that the proceeds of the loan being made
will be used in the manner required under the loan agreement.
CONDITIONS TO ALPHARMA'S OBLIGATION TO MAKE ANY ADDITIONAL LOANS. The
obligation of Alpharma to make any loan after the closing of the transactions
contemplated by the master agreement, including the merger, is subject to the
fulfillment to its reasonable satisfaction or the waiver by Alpharma on or prior
to the applicable loan date of conditions, including the following:
- no statute, judgment, order or decree of any court, agency or any other
body is in effect which would impose any material limitations on the
ability of Alpharma to exercise full rights of ownership of the note and
the shares issuable upon conversion of the note;
- we are not in default under any indebtedness in excess of $200,000 or
which results in indebtedness in excess of $200,000 becoming due and
payable prior to its due date;
- no event has occurred and is continuing, or shall result from the loan
being made, which would constitute a default under the loan agreement;
- our balance sheet as of the last day of the month prior to the loan date
does not reflect a stockholders's deficit (calculated in a manner that
treats any amounts outstanding under our 8% subordinated notes and any
amounts outstanding under any debt securities issued upon exchange of the
Series G preferred stock as equity);
- no event has occurred and is continuing since September 30, 1998 which
makes it reasonably probable that our operating income for the 2001
fiscal year will be less than $10.0 million;
- no bankruptcy event has occurred and is continuing; and
- Alpharma is reasonably satisfied that the proceeds of the loan being made
will be used in the manner required under the loan agreement.
OUR BOARD OF DIRECTORS
BOARD OF DIRECTORS SEAT. We have agreed that Alpharma will have the right
to designate one nominee for election to the our board of directors. We expect
that Thomas Anderson, Alpharma's President, will be appointed as a Class I
director immediately prior to the closing contemplated by the master agreement.
Certain details of the arrangement concerning the Alpharma director are set
forth under "Proposal 1 -- The Merger -- The Master Agreement -- Covenants" on
page 46 of this proxy statement/prospectus.
BOARD OF DIRECTORS RESTRICTIONS. We have agreed that our board of
directors will not consist of more than eleven or less than seven directors,
that our board of directors will hold meetings at least four times a year and
that we will not employ or otherwise
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compensate (other than normal director compensation) more than three members of
our board of directors.
COMMITTEE. We have agreed that the Alpharma director will be appointed to
the compensation committee and the audit committee of our board of directors and
will have the option to be appointed to any other committee designated by our
board of directors, other than with respect to which we and Alpharma have a
potential conflict of interest, including decisions to be made under the
strategic alliance agreements, if our counsel advises our board of directors
that the exclusion of the Alpharma director from the committee is appropriate
given the potential conflict of interest.
FEES. We have agreed to pay the Alpharma director fees in an amount that
is not less than the director fees paid to any other director of Ascent and to
reimburse the Alpharma director for his reasonable expenses incurred in
attending each board of directors or committee meeting or otherwise serving as a
director.
TERMINATION OF BOARD OF DIRECTORS RIGHTS. Alpharma's rights to a board
seat and related rights as described above terminate upon the date the call
option expires or terminates.
AFFIRMATIVE COVENANTS
We have agreed that, until no principal or interest on the note is
outstanding or payable (whether as a result of the payment of all outstanding
principal and accrued interest on the note or the conversion of the note), we
will undertake certain actions, including the following:
- deliver to Alpharma our monthly and annual financial statements, copies
of all communications we send to our stockholders, copies of all
registration statements and reports we file with the Securities and
Exchange Commission or Nasdaq and copies of our annual operating budget
and business plan;
- deliver to Alpharma notice of any condition or event which leads us to
believe we are not in compliance in all material respects with our
covenants in the loan agreement or any litigation or threatened
litigation which if decided adversely to us could have a material adverse
effect on our business, properties, assets, net worth, financial
condition, results of operations or future prospects;
- permit Alpharma and its designee to visit and inspect our offices and
properties, to review and make copies of our books, accounts and records
and to discuss our affairs, finances and accounts with our officers,
directors, auditors, consultants and attorneys;
- retain a public accounting firm reasonably acceptable to Alpharma or one
of the "Big Five" accounting firms to audit our financial statements at
the end of each fiscal year;
- refrain from incurring research and development expenses of, or making
commitments of research and development expenses with respect to, more
than an aggregate of $7.5 million in the 2001 fiscal year.
NEGATIVE COVENANTS
We have agreed that, until no principal or interest on the note is
outstanding or payable (whether as a result of the payment of all outstanding
principal and accrued interest on the note or the conversion of the note) and no
amounts may be borrowed
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pursuant to the loan agreement, we will not, without the consent of Alpharma,
undertake certain actions, including the following:
- create, incur, suffer or permit to exist, or assume or guarantee, or
become or remain liable with respect to any borrowed money indebtedness
(as defined), except the following:
- the note;
- borrowed money indebtedness existing as of February 16, 1999 and
disclosed in the financial statements, and all renewals, extensions
and replacements (but not increases) of any of the foregoing;
- principal of up to $50.0 million of borrowed money indebtedness
outstanding at any time which (a) on or before the expiration or
termination of the call option consists solely of indebtedness
incurred to fund a project which meets specified criteria and involves
the acquisition of the stock or assets of a company, a product or
product line, the right to sell a product or product line or a
research and development project and (b) after the expiration or
termination of the call option may include up to $10.0 million of
borrowed money indebtedness that is not incurred for such purposes,
plus any accrued interest thereon; provided, that all such
indebtedness outstanding on the date the call option is exercised must
be repayable at our option in full with aggregate penalties not in
excess of $1 million in connection with Alpharma's exercise of the
call option;
- purchase money indebtedness to the extent liens securing the same are
allowed by the other provisions of the loan agreement;
- capitalized lease obligations to the extent these leases are allowed
by the other provisions of the loan agreement;
- the convertible notes issuable under the May 1998 securities purchase
agreement;
- on or before the call option expiration date, any indebtedness
incurred for the purpose of funding a project which meets specified
criteria and involves the acquisition of the stock or assets of a
company, a product or product line, the right to sell a product or
product line or a research and development project and which
indebtedness is convertible directly or indirectly into Ascent common
stock, provided that (a) the aggregate annual interest expense
(including, without limitation the full effect of both cash and
non-cash accrued interest) with respect to such indebtedness may not
exceed $1.5 million; (b) the indebtedness by its terms will
automatically convert into common stock on or prior to the closing of
the exercise of the call option; and (c) the indebtedness may not be
repaid by us prior to the closing of the exercise of the call option;
and
- after the call option expiration date, any borrowed money indebtedness
that is convertible directly or indirectly into Ascent common stock;
- create or cause any lien upon any of our property or acquire any
property upon any conditional sale or other title retention device or
arrangement or any purchase money security agreement, other than
certain permitted liens;
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- guarantee the performance or payment, or assume or otherwise be liable in
respect of, any obligation or liability of any other person except for
certain liabilities, including the liabilities permitted to be incurred
under the loan agreement;
- liquidate or dissolve;
- be a party to any merger or consolidation unless we are the surviving
entity, we give Alpharma at least 20 days prior notice of the merger or
consolidation, if practicable, and we are not and the merger will not
cause us to be in default under the loan agreement;
- sell, convey or lease all or substantially all of our assets, except for
the sale of property in the ordinary course of business;
- acquire all or a substantial portion of the assets or stock of any person
other than in a transaction that meets the acquisition criteria specified
in the loan agreement;
- dispose of any equity interest in any of our subsidiaries, or permit any
of our subsidiaries to issue any additional equity interests except to us
or another subsidiary;
- redeem, retire or otherwise acquire, any equity interest in Ascent or any
of our subsidiaries (other than $250,000 in any fiscal year to be used
for repurchases of restricted stock issued to our employees, directors or
consultants) or make any distributions of any property or cash in respect
of any of our capital stock;
- change the nature of our business or enter into any business which is
substantially different from our current business;
- enter into any transaction or agreement with any officer, director, five
percent stockholder or subsidiary, unless the transaction is at
arms-length, except for compensation arrangements and transactions
exclusively between or among our subsidiaries, provided that we may not
pay management or consulting fees to the related parties in excess of an
aggregate of $50,000 per year;
- make any loan or investment in any person, except for permitted
investments under the loan agreement, normal advances to officers and
employees and capital contributions or investments used to fund projects
permitted under the loan agreement;
- amend our certificate of incorporation or by-laws if the action could
reasonably be expected to adversely affect the rights of Alpharma under
the loan agreement or the other strategic alliance agreement;
- permit our aggregate operating lease expenses, excluding lease payments
under capital leases, in any fiscal year to exceed $500,000, incur or
create aggregate new capital lease obligations or purchase money
indebtedness in any fiscal year in excess of $200,000 and permit our
aggregate capital lease obligations and purchase money indebtedness
outstanding at any one time to exceed $2.0 million;
- on or before the call option expiration date, issue or become obligated
to issue shares of capital stock or securities convertible into capital
stock, except for (a) shares of Ascent common stock, (b) rights, warrants
or options to purchase shares of Ascent common stock granted prior to
March 31, 2002 and rights, warrants or options to purchase up to 100,000
shares of Ascent common stock on or after March 31, 2002 (such number to
be adjusted for stock splits or reclassifications), and (c) certain
convertible securities;
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- on or prior to the call option expiration date, use the proceeds of any
issuances of securities, other than upon exercise of employee stock
options and loans under the loan agreement, to fund specified research
and development projects; or
- prior to the call option expiration date, establish a "Shareholders
Rights Plan" or "poison pill" or issue any securities in connection with
such a plan.
DEFAULT
Upon any event of default under the loan agreement and for so long as the
default is continuing, Alpharma, by notice to us, may declare the principal of
and any accrued interest on the note to be immediately due and payable. Events
of default under the loan agreement include the following:
- we default in the payment of interest on the note and the default
continues for a period of five business days;
- we default in the payment of the principal of the note at maturity, upon
acceleration or otherwise;
- we default in the performance of any negative covenants under the loan
agreement;
- we fail to comply with any other provisions of the loan agreement and the
failure continues for 20 business days after notice from Alpharma;
- we default in payment on any accelerated borrowed money indebtedness
(giving effect to any applicable grace periods and any extensions
thereof) of at least $700,000 principal amount;
- the final stated maturity of any borrowed money indebtedness is
accelerated (which acceleration is not cured, waived, rescinded or
annulled for 10 business days) if the aggregate principal amount of the
borrowed money indebtedness, together with the principal amount of any
other borrowed money indebtedness in default for failure to pay principal
at maturity or which has been accelerated, aggregates $700,000 or more at
any time;
- any of our representations or warranties under the loan agreement was
incorrect in any material respect when made;
- an unsatisfied final judgment is outstanding which, either alone or
together with other outstanding unsatisfied final judgments against us,
exceeds $200,000 (to the extent not covered by insurance) if the judgment
continues undischarged or unstayed for 20 business days;
- we, pursuant to or within the meaning of any bankruptcy law, commence a
voluntary case, consent to the entry of an order for relief against us in
an involuntary case, consent to the appointment of a custodian for us or
for all or substantially all of our property, or make a general
assignment for the benefit of our creditors; or
- a court of competent jurisdiction enters an order or decree under any
bankruptcy law that is for relief against us in an involuntary case,
appoints a custodian for us or for all or substantially all of our
property, or orders our liquidation, and the order or decree remains
unstayed and in effect for 90 consecutive days.
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CONVERSION RIGHTS
GENERAL. Alpharma may convert all or a portion of the then outstanding
principal of the note into Ascent common stock at a conversion price of $7.125
per share, (a) in the event of our change in control (as defined), on one
occasion within 15 days after we provide notice of the change in control or (b)
at any time after December 31, 2002. The conversion price is subject to
adjustment in the case of any reorganization, reclassification, subdivision,
combination or stock split affecting the Ascent common stock or any merger or
sale, lease or conveyance of all or substantially all of our assets.
TOP-OFF RIGHT. If the call option has expired or terminated (other than
because of a refusal to fund loans on the part of Alpharma) and the note
continues to be outstanding as of January 1, 2003, Alpharma will have the right,
at any time prior to February 28, 2003, to cause us to borrow the amount as
would result (after giving effect to the loan) in the aggregate principal amount
of the note outstanding equaling $40.0 million. If Alpharma exercises the right,
it will be required within three business days to convert the full $40.0 million
principal amount of the note into Ascent common stock.
ANTITRUST CONDITION. The note may not be converted into Ascent common
stock if the conversion would require governmental approval under applicable
antitrust laws, including without limitation the Hart-Scott-Rodino Act of 1976,
as amended, until the approval is obtained. We have agreed that, if such
approval is required and Alpharma wishes to convert all or a portion of the
note, we will cooperate with Alpharma to obtain this approval.
SUBORDINATION
In connection with the loan agreement, we entered into a subordination
agreement with Alpharma and the Series G purchasers pursuant to which Alpharma
and the Series G purchasers agreed to, among other things, the following:
- the indebtedness evidenced by the note held by Alpharma and by the notes
held by the Series G purchasers will be subordinated in right of payment
to the prior payment in full of senior indebtedness (as defined below);
and
- the indebtedness evidenced by the notes held by the Series G purchasers
will be subordinated in right of payment to the note held by Alpharma to
the extent that we have negative stockholders' equity as reflected on our
monthly balance sheet and will otherwise have rights of payment equal to
the note held by Alpharma.
For purposes of the subordination agreement, senior indebtedness means the
principal, premium, if any, and unpaid interest (including interest accruing on
or after the filing of any petition in bankruptcy or for reorganization relating
to Ascent whether or not a claim for post-filing interest is allowed in such
proceeding); fees, charges, expenses, reimbursement and indemnification
obligations, and all other amounts payable under or in respect of borrowed money
indebtedness in an aggregate principal amount not greater than $50.0 million
which (a) prior to or on the date the call option expires or terminates consists
solely of indebtedness incurred for the purpose of funding a project which meets
specified criteria and involves the acquisition of the stock or assets of a
company, a product or product line, the right to sell a product or product line
or a research and development project and (b) after date the call option expires
or terminates may include up to $10.0 million of borrowed money indebtedness
that is not incurred for such purposes, plus any accrued interest thereon, which
is designated by us as senior indebtedness.
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REGISTRATION RIGHTS
In connection with the loan agreement, we entered into a registration
rights agreement with Alpharma with respect to the Ascent common stock issuable
upon conversion of the note. Under the registration rights agreement, Alpharma
or certain transferees of the note or the Ascent common stock issuable upon
conversion of the note will be entitled to certain rights following the first
date on which the note may be converted into Ascent common stock, including the
following:
- holders of at least 35% of the Ascent common stock issued or issuable
upon conversion of the note may on one occasion only require us to effect
the registration under the Securities Act of Ascent common stock having
an aggregate value of at least $5.0 million (based on the then current
market price);
- in the event that we propose to register any of our securities under the
Securities Act, with limited exceptions, the holders of the Ascent common
stock issued or issuable upon conversion of the note will be entitled to
include such Ascent common stock in the registration, subject to the
right of the managing underwriting of any underwritten offering to
exclude some or all of their Ascent common stock from the registration
for marketing reasons;
- we will generally bear the expense of all registrations; and
- registration rights will not apply to any Ascent common stock issued or
issuable upon conversion of the note following (a) any sale of the Ascent
common stock pursuant to an effective registration statement or Rule 144
under the Securities Act, (b) any other sale or disposition of the Ascent
common stock to a person or entity other than a current holder of
registration rights under the agreement, an affiliate of the transferor
or a person or entity acquiring at least 1.0 million shares of the Ascent
common stock.
GUARANTY
Alpharma Inc. has irrevocably and unconditionally guaranteed to us and our
successors and assigns the due and punctual performance of and compliance with
all covenants, agreements, obligations, terms and conditions of each of the
strategic alliance agreements executed by Alpharma and required to be performed
or complied with by Alpharma.
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THE COMPANIES
ASCENT
We are engaged in the development and marketing of pharmaceuticals for use
in the treatment of common pediatric illnesses. We introduced our first two
products, Feverall acetaminophen suppositories and Pediamist nasal saline spray,
to the market in the second half of 1997. We have four principal products in
development:
- PRIMSOL TRIMETHOPRIM SOLUTION -- a prescription antibiotic for the
treatment of ear infections in children;
- ORAPRED SYRUP -- a liquid steroid for the treatment of inflammation,
including inflammation resulting from respiratory conditions;
- FEVERALL CONTROLLED-RELEASE SPRINKLES -- an acetaminophen-based analgesic
and antipyretic for the treatment of pain and fever in children; and
- PEDIAVENT ALBUTEROL CONTROLLED-RELEASE SUSPENSION -- a bronchodilator for
the treatment of asthma.
In addition, in February 1999, our sales force began to promote Omnicef(R)
(cefdinir), a broad based cephalosporin antibiotic marketed by Warner-Lambert
Company under a license from Fujisawa Pharmaceutical Co., Ltd., to pediatricians
in the United States. In May 1999, our sales force began to promote Pediotic(R),
a combination corticosteroid/ antibiotic, to pediatricians in the United States
under a co-promotion agreement with King Pharmaceuticals, Inc.
STRATEGY
Our objective is to be a leader in the development and marketing of
pharmaceuticals specifically formulated for use by children. We are developing a
broad line of products that are based on commonly-prescribed off-patent
pharmaceuticals which we seek to improve by reducing their dosing frequency,
improving their taste, making them easier to administer or developing them as
substitutes for products with considerable side effects. Our alliance with
Alpharma is intended to strengthen our financial position to allow us to fund
operations, research and development and potential acquisitions. We also expect
this alliance will provide us with opportunities for product and marketing
collaborations.
We intend to continue to focus on the key elements of our strategy as
previously announced, which are as follows:
- FOCUS EXCLUSIVELY ON PEDIATRIC MARKET. We are focused exclusively on
developing pharmaceuticals for children and promoting 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 $3.7
billion in 1997. We believe 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. We actively evaluate 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. As part of
this program, we conduct focus groups with
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pediatricians, pediatric nurses and parents, consult with scientific and
medical advisors and evaluate drug delivery and other technical
developments for their applicability to the field of pediatric
pharmaceuticals. Using this information, we select compounds as product
development candidates that we believe may be improved and successfully
commercialized through the application of our technologies and
reformulation expertise.
- DEVELOP PROPRIETARY FORMULATIONS OF APPROVED COMPOUNDS. We select as
product candidates commonly-prescribed off-patent pharmaceuticals. We
believe that developing products based on commonly prescribed
pharmaceuticals rather than new drugs reduces regulatory and development
risks and shortens the product development cycle. In addition, we believe
that the familiarity of pediatricians with the drugs that serve as the
basis of our products will enhance the market acceptance of these
products.
- LEVERAGE PEDIATRIC PRESENCE. We intend to leverage our corporate
identity in the pediatric pharmaceutical market as well as our specialty
pediatric sales force to increase acceptance of our products and attract
new opportunities for third-party collaborations.
- ACQUIRE OR IN-LICENSE ADDITIONAL PEDIATRIC PRODUCTS. We intend to extend
our product lines and leverage our marketing and sales capabilities by
acquiring or in-licensing additional products. In particular, we look for
prescription pharmaceuticals that are designed to increase patient
compliance, improve therapeutic efficacy or reduce side effects or that
we can modify to incorporate such features through the application of our
technologies. We believe that our exclusive focus on the pediatric market
may facilitate the acquisition of product rights from third parties. As
an example of this strategy, in July 1997, we purchased the Feverall line
of acetaminophen rectal suppository products from Upsher-Smith
Laboratories, Inc.
- ESTABLISH CO-PROMOTION OR OTHER MARKETING ARRANGEMENTS FOR THIRD PARTY
PRODUCTS. We intend to leverage our marketing and sales capabilities,
including our domestic sales force, by entering into arrangements to
promote third party pharmaceutical products to pediatricians. As an
example of this strategy, in November 1998, we entered into a promotion
agreement with Warner-Lambert Company under which we promote the
broad-spectrum cephalosporin antibiotic, Omnicef(R) (cefdinir), to
pediatricians in the United States.
- OBTAIN COMPETITIVE PROTECTIONS. We seek competitive protections for our
products by applying for use or formulation patents on our products and
employing patented technologies in the development of our products. In
addition, following FDA approval of any New Drug Application covering one
of our products, we intend to seek to take advantage of the three-year
statutory moratorium on the FDA's approval of an Abbreviated New Drug
Application covering a similar drug under the Drug Price Competition and
Patent Term Restoration Act of 1984, referred to as the Waxman-Hatch Act.
We also seek to keep important know-how involved in the formulation and
production of some of our products confidential as a trade secret.
Finally, we apply for trademark registrations to protect the brand
recognition of our products.
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TECHNOLOGIES
We have developed internally or acquired rights through in-licensing or
supply arrangements to a range of technologies which we use in our product
development efforts. These technologies include:
- TASTE MASKING. Taste masking involves the removal or masking of an
objectionable or unpleasant taste of various common ingredients used in
pediatric pharmaceuticals. We believe that a drug's taste is a critical
factor in pediatric patient compliance, particularly when frequent dosing
is required. We have developed and patented a taste masking technology
based on a complex three-tiered system that entails dissolving a 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. We are
applying this taste masking technology to liquid dosage forms of product
candidates because of the widespread use of liquids in the pediatric
pharmaceutical market. We believe that this technology also may be
applicable to solid dosage forms.
- CONTROLLED-RELEASE. This technology involves coating an active drug with
certain substances in a manner that allows the drug to be released in the
patient at specific rates over time. The controlled-release manufacturing
procedures may also hide the unpleasant taste of a drug. We have
developed our own controlled-release technology and have in-licensed
controlled-release technology from a third party. We are applying these
technologies to reduce the dosing frequency and, in some cases, improve
the taste of our products.
- BIOADHESION. Bioadhesives are chemicals which are mixed with a drug in
order to anchor the drug to a mucous layer of tissue. When a drug is so
anchored, it remains in the body for a longer period of time, which
permits the drug to have a more rapid and prolonged effect. This may
reduce dosing frequency. We are using commercially available bioadhesives
to deliver topical drugs in a manner that is designed to increase the
efficacy of the drug.
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PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The following table summarizes the principal products that we are
developing or marketing. These products are described in more detail following
the table.
<TABLE>
<CAPTION>
PRODUCT INDICATION STATUS(1) KEY FEATURES
- ------- ---------- --------- ------------
<S> <C> <C> <C>
Feverall Pain and fever Currently marketed Alternate form of
acetaminophen rectal administration
suppositories
Pediamist nasal Nasal dryness Currently marketed Low pressure and
saline spray volume spray; reduced
stinging
Omnicef(2) Infections Currently marketed Broad-spectrum
antibiotic; pleasant
tasting liquid
Pediotic(3) External ear Currently marketed Antibiotic/anti-
infections inflammatory; reduced
stinging
Primsol trimethoprim Acute middle ear NDA filed October Reduced toxicity
solution (50mg infections 1996 profile; pleasant
strength) tasting liquid
Orapred syrup Inflammation, ANDAs filed July 1997 Significant taste
including respiratory improvement
problems
Feverall controlled- Pain and fever NDA filed December Reduced dosing
release sprinkles 1997 frequency; improved
taste
Pediavent albuterol Asthma Phase 3 clinical Reduced dosing
controlled-release trials completed; NDA frequency; improved
suspension expected to be filed taste
second quarter of
1999
</TABLE>
- -------------------------
(1) PHASE 3 CLINICAL TRIALS. The product is administered to an expanded patient
population to (a) further test the product for safety, (b) further evaluate
clinical effectiveness and (c) obtain additional information 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) We are promoting this product to pediatricians in the United States under a
promotion agreement with Warner-Lambert Company.
(3) We are promoting this product to pediatricians in the United States under a
co-promotion agreement with King Pharmaceuticals, Inc.
We have conducted a number of clinical trials of our product candidates in
children and plan to continue to conduct such trials, both in situations in
which the FDA requires
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trials and in which we believe that the clinical trial data will assist us in
marketing a 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 our products are not based on new chemical entities, we believe
that we can reduce regulatory and development risks and shorten the product
development cycle. As to certain product candidates, we expect to file an
Abbreviated New Drug Application, or ANDA, with the FDA instead of a New Drug
Application, or NDA. An ANDA is less complex than an NDA. In some circumstances,
only limited clinical trial data or no clinical trial data are required for an
ANDA. For products that contain active ingredients that have received FDA
approval, after expiration of any applicable patents and any period of statutory
protection under the Waxman-Hatch Act, we may use data from the NDA of the
"pioneer" drug concerning the safety and efficacy of the drug in support of our
NDA or ANDA. Finally, many nonprescription products do not require FDA
pre-marketing approval if the product is manufactured and labeled in accordance
with applicable FDA guidelines known as an Over-the-Counter Drug Monograph, or
OTC Monograph.
Feverall Acetaminophen Rectal Suppositories
In July 1997, we began marketing the Feverall line of over-the-counter
acetaminophen rectal suppositories for the treatment of pain and fever. We
acquired this product line from Upsher-Smith Laboratories, Inc. in July 1997.
The Feverall product line, which Upsher-Smith originally introduced in 1989,
consists of four strengths, 80mg, 120mg, 325mg and 650mg. 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. We had net product revenues in 1998 from sales of the Feverall
product line of $4,095,000.
In addition, under the acquisition agreement, we acquired the Feverall
trademark to use in connection with other acetaminophen products. For example,
we are currently developing acetaminophen controlled-release sprinkles, which we
intend to market as Feverall controlled-release sprinkles.
The purchase price for this product line and related assets, including the
Feverall trademark and related inventory, was $11,905,000, including acquisition
costs. Upsher-Smith has agreed to supply us with our requirements of Feverall
acetaminophen rectal suppositories, and we have agreed to purchase from
Upsher-Smith all amounts of this product as we may require, for a period of five
years. We are entitled to extend this five-year period for two additional five
year terms.
Pediamist Nasal Saline Spray
Pediamist nasal saline spray is an over-the-counter product to relieve
nasal dryness associated with low humidity. This product is administered by a
metering device that we believe is particularly appropriate for use by children.
We began marketing Pediamist nasal spray in October 1997. We did not require FDA
approval to market this product in the United States. We had net product
revenues in 1998 from sales of Pediamist of $231,000.
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Omnicef(R) (Cefdinir) Oral Suspension and Capsules
In February 1999, we began detailing Omnicef(R) (cefdinir) to pediatricians
in the United States under a promotion agreement with Warner-Lambert Company,
which has a licensed this product from Fujisawa Pharmaceutical Co., Ltd.
Omnicef(R) (cefdinir) is a cephalosporin antibiotic for the treatment of mild to
moderate infections caused by susceptible strains of microorganisms in the
following conditions: acute otitis media (middle ear infections), pharyngitis,
tonsillitis, acute maxillary sinusitis and uncomplicated skin and skin structure
infections in children. Omnicef(R) (cefdinir) oral suspension has been studied
in clinical trials involving over 3,400 pediatric patients. It provides for
once-a-day dosing for a majority of its indications and is available in a
strawberry tasting suspension. Scott-Levin, a marketing research firm, estimates
that sales of cephalosporin oral suspension products in the United States were
approximately $372 million in 1998.
We agreed with Warner-Lambert Company to detail Omnicef(R) (cefdinir) oral
suspension as part of our strategy to leverage our marketing and sales
capabilities, including our domestic sales force.
Pediotic(R)
In May 1999, we began detailing Pediotic(R) to pediatricians in the United
States under a co-promotion agreement with King Pharmaceuticals, Inc.
Pediotic(R) is a combination corticosteroid/antibiotic prescription product for
the treatment of otitis externa, or external ear infection, which is formulated
to reduce stinging. Sales of Pediotic(R) by King Pharmaceuticals were
approximately $4.5 million in 1998, and pediatricians accounted for
approximately 62% of prescriptions written for this product in 1998.
We agreed with King Pharmaceuticals to detail Pediotic(R) as part of our
strategy to leverage our marketing and sales capabilities, including our
domestic sales force.
Primsol Trimethoprim Solution
We have developed Primsol trimethoprim solution, containing the antibiotic
trimethoprim, as a prescription drug for the treatment of middle ear infections
in children age six months to 12 years. Trimethoprim for the treatment of middle
ear infections in children is currently available only in combination with the
sulfa compound sulfamethoxazole, which is associated with allergic reactions
that may be severe or even fatal. In clinical trials, Primsol solution, which
does not contain this sulfa component, was shown to be as effective for the
treatment of middle ear infections in children as the combination therapy, but
with less side effects. Because of the reduced risk of side effects, we believe
that pediatricians will be more likely to prescribe Primsol for the treatment of
middle ear infections in children than other trimethoprim formulations which
contain sulfamethoxazole. The FDA is currently reviewing an NDA relating to
Primsol.
Acute infections are the most frequent illness treated by pediatricians,
and middle ear infections are 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 1998, there were approximately 25,000,000
pediatric patient visits to doctors in the United States for the treatment of
middle ear infections.
A number of antibiotics are currently available for the treatment of middle
ear infections 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
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antibiotic from a series of alternative choices, including a trimethoprim/sulfa
compound (sold under brand names such as Bactrim and Septra), cephalosporins
(such as Ceclor), a combination of amoxicillin and clavulanic acid (such as
Augmentin) or macrolides (such as Zithromax or Biaxin). We plan to market
Primsol solution as a second line of therapy to amoxicillin and as an
alternative to trimethoprim/sulfamethoxazole combination products such as
Bactrim and Septra.
Scott-Levin estimates that the United States market for liquid antibiotics
for the treatment of middle ear infections in 1998 was approximately
$469,200,000, which includes approximately $48,900,000 from the sale of
amoxicillin (reflecting approximately 9,800,000 prescriptions), approximately
$22,000,000 from the sale of trimethoprim/sulfa combination products (reflecting
approximately 2,072,000 prescriptions) and approximately $398,300,000 from the
sale of other liquid antibiotics (reflecting approximately 11,580,000
prescriptions), including cephalosporins and macrolides. We believe that almost
all liquid antibiotics are taken by children.
We have formulated Primsol as an oral solution to facilitate its
administration to children. 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.
In December 1995, we completed multicenter Phase 3 clinical trials of
Primsol solution for the treatment of middle ear infections and uncomplicated
urinary tract infections in children age six months to twelve years. These
clinical trials, which included over 500 children, compared a 25mg strength of
Primsol solution with a commercially available trimethoprim/sulfamethoxazole
combination therapy. In these trials, Primsol solution was as clinically
effective as the combination therapy in alleviating the signs and symptoms
commonly associated with these types of infections. No statistically significant
differences were noted in response rates of valuable pediatric patients
receiving either Primsol solution or the combination therapy, and both types of
therapies had similar bacteriologic cure rates. However, fewer treatment related
side effects were reported with Primsol solution than with the combination
therapy, particularly a lower incidence of skin rash.
We filed two NDA's with the FDA in 1995 and 1996 covering 25mg and 50mg
strengths of Primsol solution, respectively. In June 1997, the FDA approved the
NDA for the 25mg strength of Primsol solution, which we do not currently plan to
market. In February 1998, we received a letter from the FDA citing certain
deficiencies in the NDA for the 50mg formulation. In August 1998, the FDA
notified us that additional clinical trials were necessary to evaluate the
safety of the 50mg formulation of Primsol solution, due to the inclusion in this
formulation of maltitol, an inactive ingredient. In September 1998, the FDA
indicated that these clinical trials would not be necessary if we removed
maltitol from the formulation. In December 1998, we filed an amendment to the
NDA for the 50mg formulation of Primsol solution removing maltitol. The FDA is
currently reviewing the amended NDA.
Under the Waxman-Hatch Act, the FDA may not approve a competitor's ANDA for
a generic version of the 25mg strength of Primsol solution for the treatment of
middle ear infections in children age six months to twelve years, which ANDA is
based on our clinical trial results, for a three-year period ending in June
2000.
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Orapred Syrup
We are developing Orapred 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 these types of inflammation have a very
unpleasant taste. As a result of the unpleasant taste, children frequently do
not take these products as directed, even though they are prescribed for the
treatment of serious and, in some cases, life threatening diseases. We have
applied our taste masking technology to develop Orapred as a steroid product
with a pleasant taste.
IMS America, Ltd., a marketing research firm, estimates that in 1998
physicians in the United States wrote approximately 3,064,000 prescriptions for
liquid steroids, with pediatricians writing approximately 51% of these
prescriptions. IMS America also estimates that the 1998 United States market for
liquid steroids was approximately $44,000,000. We believe that almost all liquid
steroids are taken by children.
A number of currently available steroids, including prednisolone and
prednisone, 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.
Orapred syrup contains the active ingredient prednisolone sodium phosphate which
is therapeutically identical to prednisolone. Liquid steroid brands are
currently available in 5mg/5ml and 15mg/5ml strengths. We are developing Orapred
syrup in both of these strengths.
In April 1997, we filed two ANDAs with the FDA covering two strengths of
Orapred. Each of these formulations contained maltitol as an inactive
ingredient. In October 1998, the FDA issued a deficiency letter on chemistry,
manufacturing and controls which cited certain deficiencies with both ANDAs,
including the inclusion of maltitol. The other deficiencies cited in the FDA's
letter related to minor manufacturing and controls issues. In December 1998, the
FDA indicated that we would not be required to conduct additional clinical
trials of the product if we removed maltitol from these formulations. In January
1998, we amended the ANDA for the stronger formulation of Orapred to remove
maltitol as an ingredient and to address the manufacturing and controls issues
raised by the FDA.
Feverall(R) Controlled-Release Sprinkles
We are developing Feverall controlled-release sprinkles as an
over-the-counter acetaminophen product for the treatment of pain and fever in
children which can be administered by sprinkling on soft food. We have designed
this product to permit dosing every eight hours, rather than the four hours
required by currently available products.
A number of acetaminophen products are currently available for the
treatment of pain and fever in children. Most of these products are in the form
of a liquid or chewable tablet. FIND/SVP, a marketing research firm, estimates
that approximately $300,000,000 of pediatric forms of pain/fever medications are
sold in the United States annually. 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. These
products are absorbed quickly from the gastrointestinal tract into the blood and
quickly cleared from the body, which necessitates dosing every four hours. If
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these products are administered at bedtime, the patient needs an additional dose
before morning. If they are administered during the day, parents often must rely
on school nurses or day care providers to administer additional medication later
in the day. In addition, under the applicable FDA OTC Monograph, only five doses
of acetaminophen may be given in any 24-hour period. Therefore, if the
medication requires four hour dosing, treatment may only be given for 20 hours
in each 24-hour period.
We are developing Feverall sprinkles with a proprietary controlled-release
technology that releases the acetaminophen at specific rates over time in order
to reduce fever and pain for an eight hour period. We believe that dosing every
eight hours may significantly increase compliance and permit therapeutic
coverage for the full 24-hours of each day. To facilitate administration, we
have 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.
We have completed three Phase 1 definitive pharmacokinetic trials comparing
Feverall sprinkles to Tylenol extended relief caplets and immediate release
Tylenol tablets. These trials involved 63 healthy adults. In these trials,
Feverall sprinkles exhibited equivalent bioavailability to the Tylenol product
to which they were compared.
In December 1996, we completed a Phase 3 clinical trial that evaluated
Feverall sprinkles for the reduction of dental pain. This study involved 125
adults and adolescents and was double blinded, placebo and active controlled.
Each patient received a single dose over an eight-hour period. The data from
this study indicated that, for an eight hour period, Feverall sprinkles provided
pain relief superior to a placebo and comparable to Tylenol extended relief
caplets.
In February 1997, we completed a second Phase 3 clinical trial of this
product for the treatment of fever in children. This study involved 125 children
with a fever between the ages of two and 11 years old. In this second Phase 3
clinical trial, we compared Feverall sprinkles on a double blinded basis to an
immediate release presentation of acetaminophen for efficacy (reduction in
fever) and safety. The data from this study indicated that Feverall sprinkles
provided fever control over an eight hour period comparable to the fever control
provided by the immediate release presentation of acetaminophen and that, during
the fourth to sixth hours of treatment, the fever control provided by the
Feverall sprinkles was more effective than the fever control provided by the
immediate release acetaminophen.
We filed an NDA for Feverall sprinkles in December 1997. In December 1998,
the FDA issued a not-approvable letter covering this NDA which cited
deficiencies relating to the manufacture and packaging of this product. The
letter also indicated that the clinical trials of Feverall sprinkles did not
demonstrate adequate duration of action and that the product should only be used
in patients older than two years of age. We are currently in discussions with
the FDA regarding these issues.
The FDA must approve the NDA covering Feverall sprinkles for us to market
this product in the United States. We expect 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 a generic version of Feverall sprinkles for the treatment
of pain and fever in children under 12 years of age which ANDA is based on our
clinical trial results.
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Pediavent Albuterol Controlled-Release Suspension
We are developing Pediavent albuterol controlled-release suspension as a
prescription product for the treatment of asthma. We are developing this product
to mask the normal bitterness of albuterol and to permit twice-a-day
administration. 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 drugs which dilate
the bronchial tubes, known as bronchodilators, of which albuterol is the most
widely prescribed. IMS America estimates that the 1998 U.S. pediatric market for
all forms of beta agonists was approximately $159,700,000, with liquid forms
comprising approximately 10.6% of this market ($17,000,000). 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). Young children do not typically use tablet
formulations, 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 approved for use in patients under 6 years of age. Patients
under 6 years of age must therefore use either an inhaler or liquid albuterol,
which generally has an unpleasant taste and must be administered three to four
times per day.
We are developing Pediavent as a suspension in the form of granules which
contain albuterol 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, we are designing this product for twice-a-day
administration. Twice-a-day dosing also avoids waking a child at night to
administer medication.
In 1995, we conducted Phase 1 open-label, single dose studies of Pediavent
in Europe comparing its profile in humans with that of Volmax. These studies
involved 12 healthy adult subjects at one site. The results of this study
indicated that the two formulations of Pediavent were indistinguishable from
Volmax in terms of blood levels, which is an indicator of the effectiveness of
the drug. In February 1997, we conducted a Phase 1 clinical trial in the United
States involving 12 healthy adults which confirmed the results of the European
study.
In October, 1998, we completed Phase 3 clinical trials of Pediavent to
evaluate control of asthma symptoms, lung efficiency and safety in children with
asthma. The study was a multi-center, open label, comparative study performed in
63 children, ages two to six, with chronic asthma. For a one month period,
patients received either Pediavent suspension twice daily or an immediate
release form of albuterol, three times daily. The parents of each patient
monitored their status daily and a physician examined each patient weekly.
Parent and physician evaluation indicated that Pediavent suspension, taken twice
daily, is as safe and effective in controlling asthma in children as the
immediate release form of albuterol, taken three times daily.
We expect to file an NDA for the current formulation of Pediavent in the
second quarter of 1999. Late stage review of the current formulation of
Pediavent showed the inclusion of a grade of an inactive coating material, known
as glycerol monostearate, that may not be acceptable for internal use. Following
the filing of an NDA for the current formulation of Pediavent, we plan to
replace this ingredient with an acceptable grade of glycerol monostearate and
amend the NDA to account for this change.
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The FDA must approve an NDA covering Pediavent for us to market this
product in the United States. We expect 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 a generic version of Pediavent for the treatment of asthma
in children under 12 years of age which ANDA is based on our clinical trial
results.
Other Programs
In addition to the products and product development programs described
above, we also are developing a number of other pediatric pharmaceutical
products, including:
COUGH/COLD AND OTHER OTC PRODUCTS. We are 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 ingredient dextromethorphan (a cough suppressant) or the
decongestant pseudoephedrine, which both have a bitter taste. We are applying
our taste masking technology to the development of a line of cough/cold products
containing these active ingredients in formulations with improved taste.
We have already completed the development of a cough syrup containing
guaifenesen, a drug known to loosen phlegm. In a taste study involving 81
children age three to six years comparing our cough syrup to Robitussin, a
leading liquid guaifenesen product, the participants showed a statistically
significant preference for our product over Robitussin.
We believe that it is preferable to introduce our cough/cold products to
the market as an integrated product line. Accordingly, we do not plan to
introduce our guaifenesen cough syrup until we have completed development of
additional products, which we estimate will occur no sooner than late 2000.
Because these products are being formulated within the applicable FDA OTC
Monographs, we expect that they will not require FDA approval prior to
marketing.
CROMOLYN PRODUCTS. We are developing two cromolyn products for the
treatment of allergic reactions.
- A cromolyn sodium cream 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.
- A cromolyn sodium controlled-release nasal spray for the prevention of
allergic rhinitis associated with conditions such as hay fever.
Cromolyn is a drug that is believed to reduce selected allergic reactions. The
FDA must approve an NDA covering these products for us to market them in the
United States. We would sell both of these products on a prescription basis.
PRODUCT DEVELOPMENT
We actively evaluate 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.
We generally select as product candidates commonly-prescribed off-patent
pharmaceuticals that we believe we may improve and successfully commercialize
through the application of our technologies and reformulation expertise. By
developing products based on approved compounds rather than new chemical
entities, we believe that we can reduce regulatory and development risks and
shorten the product development cycle.
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We seek to identify 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 our
products. To expedite the regulatory process, we also seek to enter into
arrangements with product manufacturers commencing with pilot production for
product stability testing, through clinical trials and ultimately to commercial
production. We work closely with these third parties in connection with product
design and formulation and monitor manufacturing activities, including
compliance with the Good Manufacturing Practice and Good Laboratory Practice
rules of the FDA.
We typically hire clinical research organizations to conduct our clinical
trials. We conduct clinical trials of many of our products in children not only
to comply with FDA requirements but also because we believe that pediatricians
will be more willing to prescribe our products if they have been tested on
children. To facilitate enrolling children in our clinical trials, we have
established a network of relationships with influential pediatricians, industry
associations and pediatric research organizations specializing in conducting
clinical trials in children.
SALES AND MARKETING
We believe that our exclusive focus on the development and marketing of
pediatric pharmaceutical products meaningfully differentiates us from other
pharmaceutical companies in the pediatric medical community. We established our
domestic sales organization during the second half of 1997, coincident with the
market introduction of our initial two products, Feverall acetaminophen rectal
suppositories and Pediamist nasal saline spray. As of March 1, 1999, our sales
force consisted of six regional sales managers, 59 full-time sales
representatives and 24 flex-time (or part-time) sales representatives. The
primary focus of the our marketing and sales efforts are 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.
We chose to establish our own domestic sales force instead of using third
party sales organizations because we believe that we can more efficiently and
effectively implement marketing and sales initiatives through a direct sales
force. We believe that we can reach much of the domestic pediatric market with a
moderately sized sales force and carefully controlled marketing expenditures,
because pediatricians and pediatric nurses are generally concentrated in group
practices in urban and suburban centers. We plan to expand this sales force in
the future as we introduce additional products.
Our sales representatives conduct personal sales calls and attend industry
conferences, seminars and other meetings. We advertise our products through
direct mail and advertisements in speciality pediatric journals. We plan to
supplement these activities with a telemarketing program designed to reach
pediatricians and pediatric nurses in geographic areas beyond the coverage of
our sales force or who are not targeted for one-on-one visits.
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, we also promote our products directly to managed care
providers with the goal of obtaining inclusion of these products on the
providers' formularies.
We leverage our marketing and sales capabilities by entering into
arrangements to promote third party pharmaceutical products to pediatricians.
During the quarter ended March 31, 1998, we began marketing Duricef(R)
(cefadroxil monohydrate) oral suspension
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to pediatricians in the United States under a co-promotion agreement with
Bristol-Myers Squibb U.S. Pharmaceuticals Group. We terminated this agreement
effective December 31, 1998. In November 1998, we entered into a promotion
agreement with Warner-Lambert Company under which we promote the broad-spectrum
cephalosporin antibiotic, Omnicef(R) (cefdinir), which Warner-Lambert Company
licenses from Fujisawa Pharmaceutical Co., Ltd., to pediatricians in the United
States. In April 1999, we entered into a co-promotion agreement with King
Pharmaceuticals, Inc. to promote Pediotic(R), a combination
corticosteroid/antibiotic, to pediatricians in the United States. We plan to
continue to evaluate additional third-party products for promotion.
MANUFACTURING AND DISTRIBUTION
We rely on third parties to manufacture our products for preclinical tests,
clinical trials and commercial purposes. Accordingly, we do not have any
manufacturing facilities and have not sought to employ direct manufacturing
personnel. The components of our 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 we have developed
certain proprietary manufacturing technologies that we seek to protect as trade
secrets.
We believe that a number of third party manufacturers, both in the United
States and abroad, are capable of manufacturing our products. We intend to
establish supply agreements with manufacturers that comply with the FDA's Good
Manufacturing Practices and other regulatory standards. Certain of our supply
arrangements require us to buy all of our requirements of a particular product
exclusively from one supplier. Moreover, FDA regulations provide that a
manufacturer cannot supply a product to us, and we cannot sell the product,
unless the manufacturer is properly qualified (i.e., demonstrates to the FDA
that it can manufacture the product in accordance with applicable regulatory
standards). For many of our products, we have qualified only one supplier, even
though the contractual arrangement with the supplier may permit us to qualify an
alternative manufacturer.
To date, we have entered into several agreements with third parties for the
manufacture of our products. In particular, we are a party to a supply agreement
with Lyne Laboratories, Inc. which provides as follows:
- Lyne has agreed to manufacture Primsol solution;
- we have agreed to purchase all amounts of such product as we may require
for sale in the United States from Lyne in accordance with an agreed upon
price schedule; and
- the agreement may be terminated by either party on three months' notice
any time after October 17, 2004.
We have also entered into an agreement with Recordati S.A. Chemical and
Pharmaceutical Company relating to the manufacture of Pediavent albuterol
controlled-release suspension and an agreement with Upsher-Smith relating to the
manufacture of Feverall acetaminophen rectal suppositories.
In the future, we may establish our own manufacturing facilities if it
becomes economically attractive to do so. In order for us to establish a
manufacturing facility, we would require substantial additional funds and
significant additional personnel. In addition, we would need to comply with the
FDA's extensive manufacturing regulations.
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We distribute our products through a third party distribution warehouse.
Under this arrangement, the manufacturers of products ship the products to the
distribution warehouse, which performs various functions on our behalf,
including order entry, customer service and collection of accounts receivable.
We may seek to develop the capability to perform some or all of these functions
through our own personnel in the future.
COMPETITION
Competition in the pediatric pharmaceutical market is intense. Although we
believe 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;
- Bristol-Myers Squibb, Inc.;
- Ortho-McNeil Pharmaceutical Division of Johnson & Johnson Inc.;
- Pfizer Inc.;
- Ross Laboratories Division of Abbott Laboratories Inc.;
- Schering-Plough Corporation; and
- Wyeth-Lederle Vaccines and Pediatrics Division of American Home Products,
Inc.
We believe that key competitive factors affecting our success include:
- the efficacy, side effect profile, taste, dosing frequency, method of
administration;
- patent or other proprietary protection;
- brand name recognition;
- price;
- timing of market introduction of our or competitive products;
- the relative speed with which we can develop products, complete the
clinical trials and approval processes and supply commercial quantities
of the products; and
- ability to attract and retain qualified personnel.
Many of our potential competitors have substantially greater name
recognition and greater financial, technical and human resources. In addition,
many of these competitors have significantly greater experience than us 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, our competitors may more rapidly succeed in obtaining
FDA or other regulatory approvals for products. Furthermore, subject to
obtaining required regulatory clearances, we will compete against these larger
companies with respect to manufacturing efficiency and marketing capabilities,
areas in which we have limited or no experience. Our competitors may introduce
competitive pricing pressures that may adversely affect our sales levels and
margins. Moreover, many of these competitors offer well established, broad
product lines and services which we do not offer. Many of the products offered
by these competitors have well known brand names that have been promoted over
many years.
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We expect to market many of our product candidates as alternative
treatments for pediatric indications for which products with the same active
ingredient are well-entrenched in the market. For example, we intend to market
Primsol solution, a trimethoprim antibiotic, for the treatment of middle ear
infections, for which pediatricians often prescribe the well-known combination
therapies Bactrim and Septra, which also contain trimethoprim. Similarly,
Feverall controlled-release sprinkles would compete against Tylenol liquid for
children. Our product candidates also will compete with 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
also compete against other antibiotics, including amoxicillin. Moreover, many of
our potential products that are reformulations of existing drugs of other
manufacturers may have significantly narrower patent or other competitive
protection.
LICENSE AND MARKETING AGREEMENTS
We have obtained rights to manufacture and/or market certain products or
product candidates through licenses and other arrangements with third parties.
Set forth below is a summary of those arrangements that we believe are material
to our business.
RECORDATI LICENSE. We have obtained a license from Recordati S.A. Chemical
and Pharmaceutical Company under their 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, which
we are developing as Pediavent. The license is exclusive in all countries other
than Italy and Spain. Our license rights under this agreement will terminate
with respect to a particular country if (a) we do not notify Recordati within
two years of filing for FDA marketing approval of Pediavent of our intention to
pursue the commercial development of Pediavent in such country or (b) a joint
development committee determines that the commercial development of Pediavent in
such country is not technically feasible. We may also sublicense our license
rights under this agreement, subject to certain restrictions in certain
countries. We have agreed to collaborate with Recordati on the development,
clinical testing and regulatory approval of Pediavent in the United States and
in any other country in which we elect to pursue its commercial development.
Recordati will own any intellectual property resulting from the collaboration
other than our clinical research data, product applications and regulatory
approvals. This agreement expires 15 years from the date of FDA marketing
approval of Pediavent. We are entitled to extend the agreement, at our election,
for an additional five year term. During the term of this agreement, Recordati
has agreed to supply us with such quantities of the product as we may require.
In return, we have agreed 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, we have also agreed not to
develop, manufacture or sell competing products.
OMNICEF(R) (CEFDINIR) PROMOTION AGREEMENT. We have entered into a
promotion agreement with Warner-Lambert Company under which we have agreed to
promote Omnicef(R) (cefdinir) oral suspension to pediatricians in the United
States. Warner-Lambert Company licenses Omnicef(R) (cefdinir) from Fujisawa
Pharmaceutical Co., Ltd. As compensation for our promotional efforts,
Warner-Lambert Company has agreed to pay us compensation on an annual basis
which is subject to upward or downward adjustment based upon the achievement of
specified performance-based targets. The agreement also contains obligations
with respect to the number of sales representatives in our sales force. The term
of the agreement expires on January 31, 2001, unless terminated earlier under
specified circumstances.
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The licenses and other third party product arrangements to which we are a
party may impose various commercialization, sublicensing, royalty and other
payment, insurance and other obligations on us. Any failure by us to comply with
these requirements could result in termination of the applicable agreement,
which could adversely affect our business.
PATENTS, TRADE SECRETS, LICENSES AND TRADEMARKS
We believe that our success will depend in part on our ability to develop
patentable products and obtain patent or other proprietary rights protection for
our products, both in the United States and in other countries. Our policy is to
file patent applications to protect technology, inventions and improvements that
are considered novel and important to the development of our business. We also
rely on trade secrets, know-how, continuing technological innovation and
licensing opportunities to develop and maintain our competitive position. We
also plan to seek three year protection for certain products under the
Waxman-Hatch Act from the approval of a competitor's ANDA for a generic version
of one of our products which ANDA is based on our clinical trial results. We
also seek and intend to continue to seek trademark protection for our brand
names.
We hold 11 issued United States patents and have filed three additional
United States patent applications. These patents and patent applications
primarily relate to the following:
- Formulation of Primsol solution (1 patent);
- Cromolyn sodium cream product candidate (5 patents);
- Controlled-release technology (1 patent and 2 applications); and
- Task-masking technology (1 patent and 1 application).
Three of the issued patents relate to product candidates which we currently
are not planning to pursue. We have also sought foreign patent protection in
other major industrial countries for what we believe are our most commercially
important technologies. All of our issued United States and foreign patents
expire from 2002 to 2016, although we may extend certain United States patents
for specified periods. Any of our United States and foreign patents could lapse
if certain maintenance fees are not paid.
The patent positions of pharmaceutical firms are generally uncertain and
involve complex legal and factual questions. Consequently, even though we
currently are prosecuting our patent applications with the United States Patent
and Trademark Office and certain foreign patent authorities, we do not know
whether any of our 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 our
products and product candidates represent reformulations of off-patent drugs,
any patents which cover such products would be use or formulation patents, which
will provide us with 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, we cannot be certain that we were the
first creator of inventions claimed by pending patent applications or that we
were 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. Our
competitors and other third parties hold issued patents and pending patent
applications relating to aspects of our technology, and it is uncertain whether
these patents and patent applications will require us to alter our products or
processes, pay licensing fees or cease activities.
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We require our employees, consultants, outside scientific collaborators and
sponsored researchers and other advisors to execute confidentiality and
invention assignment agreements. These agreements require that all confidential
information developed pursuant to such relationships or made known to the
individual by us during the course of the individual's relationship with us 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 our business are our exclusive property. There can be no
assurance, however, that these agreements will provide meaningful protection for
our trade secrets or adequate remedies in the event of unauthorized use or
disclosure of such information.
We engage in collaborations and sponsored research agreements and enter
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. We
may need to negotiate a license to any developments or results arising out of
such collaborations or agreements in order to commercialize products
incorporating them.
Because we believe that promotion of pediatric pharmaceutical products
under a brand name is an important competitive factor, we plan to seek trademark
protection for our products, both in the United States and, to the extent we
deem appropriate, in major foreign countries. To date, we have obtained ten
trademark registrations from the United States Patent and Trademark Office,
including for the marks "ASCENT," "PEDIAMIST," "PEDIATEMP," "PEDIAVENT " and
"PRIMSOL." In addition, in July 1997, we acquired the "FEVERALL" trademark from
Upsher-Smith Laboratories, Inc. as part of our acquisition of the Feverall line
of acetaminophen rectal suppositories. Omnicef(R) is a registered trademark of
Fujisawa Pharmaceutical Co., Ltd., and Pediotic(R) is a registered trademark of
King Pharmaceuticals, Inc. All other trademarks appearing in this proxy
statement/prospectus are the property of their respective owners.
GOVERNMENT REGULATION
The testing, manufacture, labeling, distribution, sale, marketing,
promotion and advertising of our products and our ongoing product development
activities are subject to extensive and rigorous governmental regulation 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 a number of years and require
the expenditure of substantial resources.
The steps required before a new pharmaceutical product for human use may be
marketed in the United States include:
- preclinical tests;
- submission to the FDA of an Investigation New Drug, or IND, application,
which must become effective before human clinical trials may commence;
- adequate and well-controlled human clinical trials to establish the
safety and effectiveness of the product;
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- submission of a New Drug Application to the FDA, which application is not
automatically accepted for consideration by the FDA; and
- 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 Abbreviated New Drug Application. ANDA
approval requires that:
- the drug have 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;
- any applicable patents and statutory period of protection under the
Waxman-Hatch Act with respect to the "pioneer" drug 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, route of administration and strength (but not in
conditions of use). The FDA will not permit the filing of an ANDA, however, and
will instead require an applicant to file an NDA, if, among other reasons, (a)
clinical investigations must be conducted to demonstrate the safety and
effectiveness of the drug, (b) an ANDA would provide inadequate information to
permit the approval of the variation or (c) significant labelling changes would
be necessary to address new safety or effectiveness concerns raised by changes
in the product.
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 Good Laboratory Practice. The results of the
preclinical tests are submitted to the FDA as part of an IND application. The
FDA reviews these results prior to the commencement of human clinical trials.
Unless the FDA objects to, or makes comments or raises questions concerning, an
IND, the IND will become effective 30 days following its receipt by the FDA, at
which time initial clinical studies may begin. However, companies often obtain
affirmative FDA approval before beginning such studies.
Clinical trials involve the administration of the investigational new drug
to healthy volunteers and to patients under the supervision of a qualified
principal investigator. The sponsor must conduct the clinical trials in
accordance 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. The
sponsor must submit each protocol to the FDA as part of the IND. Further, the
sponsor must conduct each clinical study under the auspices of an Institutional
Review Board, or 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.
- PHASE 1. In Phase 1, the investigational new drug usually is
administered to between 10 and 50 healthy human subjects and is tested
for safety, dosimetry, tolerance, metabolism, distribution, excretion and
pharmacokinetics.
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- PHASE 2. Phase 2 involves studies in a limited patient population,
usually 10 to 70 persons, to evaluate the effectiveness of the
investigational new drug for specific indications, determine dose
response and optimal dosage and identify possible adverse effects and
safety risks.
- PHASE 3. When an investigational new drug is found to have an effect and
to have an acceptable safety profile in Phase 2 evaluation, Phase 3
trials are undertaken to further test for safety, further evaluate
clinical effectiveness and to obtain additional information for
labelling. Phase 3 trials involve an expanded patient population at
geographically dispersed clinical study sites.
The FDA may impose a clinical hold on an ongoing clinical trial at any time
if it believes that the clinical trial exposes the participants to an
unanticipated or unacceptable health risk. In addition, we may voluntarily
suspend clinical trials for the same reasons. If the FDA imposes a clinical
hold, clinical trials may not recommence without prior FDA authorization and
then only under terms authorized by the FDA.
In order to obtain marketing approval of a product in the United States, we
must submit an NDA to the FDA. The NDA includes the results of the
pharmaceutical development, preclinical studies, clinical studies, chemistry and
manufacturing data and the proposed labelling. The FDA may refuse to accept the
NDA for filing if certain administrative and NDA content criteria are not
satisfied. 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. If the
FDA grants regulatory approval of a product, it may require post-marketing
testing and surveillance to monitor the safety of the product or may impose
limitations on the indicated uses for which the product may be marketed.
Finally, the FDA may withdraw product approvals if compliance with regulatory
standards is not maintained or if problems occur following initial marketing.
A pharmaceutical product that has the same active ingredient as a drug that
the FDA has previously approved as safe and effective may be approved for
marketing in the United States following an abbreviated approval procedure
(subject to certain exclusions, such as drugs that are still protected by patent
or market exclusivity under the Waxman-Hatch Act). This procedure involves
filing an Abbreviated New Drug Application with the FDA. Approval of a
pharmaceutical product through an ANDA does not require preclinical tests on
pharmacology or toxicology or Phase 1, 2 or 3 clinical trials to prove the
safety and effectiveness of such product. Instead, an ANDA 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.
If an applicant files an ANDA for a pharmaceutical product where the
"pioneer" drug is protected by a patent, the applicant must notify the patent
holder of the filing of the ANDA. If the patent holder files a patent
infringement suit against the applicant within 45 days of this notice, 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 Waxman-Hatch Act provides 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 FDA may not accept an ANDA
by another company
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for a generic version of such drug for a period of five years from the date of
approval of the NDA (or four years if an ANDA applicant certifies invalidity or
non-infringement of the patent covering such drug). Similarly, if a new drug
containing an active ingredient that was previously approved by the FDA received
NDA approval which is based upon new clinical investigations (other than
bioavailability studies), then the FDA may accept the filing of an ANDA for a
generic version of such drug by another company but may not make the approval of
such ANDA effective for a period of three years from the date of the NDA
approval. The statutory protection provided by the Waxman-Hatch Act does not
prohibit 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. However, in order to obtain an NDA, a competitor would have had
to conduct its own clinical trials. As our products and product candidates are
based upon approved compounds for which the FDA has previously granted NDA
approval, we expect that any of our products which qualify for statutory
protection under the Waxman-Hatch Act will be afforded only a three year period
of protection.
Certain of our products, such as guaifenesen cough syrup, fall within the
FDA's OTC Monograph system. We may market these products without FDA approval of
an NDA or ANDA, provided they comply with the specifications set forth in the
OTC Monograph for the applicable product category. OTC drugs must also be
manufactured in compliance with Good Manufacturing Procedures, but premarket
approval is not required.
In addition to product approval, we must obtain a satisfactory inspection
by the FDA covering our manufacturing facilities or the facilities of our
suppliers before marketing a product in the United States. The FDA will review
the manufacturing procedures and inspect the manufacturer's facilities and
equipment for compliance with Good Manufacturing Practices and other
requirements. Any material change in the manufacturing process, equipment or
location necessitates additional preclinical and/or clinical data and additional
FDA review and approval before marketing. In addition, the FDA must
supplementally approve any changes in manufacturing that have substantial
potential to adversely affect the safety or effectiveness of the product, such
as changes in the formulation of a drug, as well as some changes in labeling or
promotion.
Even after approval, all marketed products and their manufacturers are
subject to continual government review. Subsequent discovery of previously
unrecognized problems or failure to comply with applicable regulatory
requirements could result in, among other things, restrictions on manufacturing
or marketing of the product, product recall or withdrawal, fines, seizure of
product, or civil or criminal prosecution, as well as withdrawal or suspension
of regulatory approvals.
Foreign Regulatory Approval
We must obtain the approval of governmental regulatory authorities
comparable to the FDA in foreign countries prior to the commencement of clinical
trials and subsequent marketing of a pharmaceutical product in such countries.
This requirement applies even if we have obtained FDA approval in the United
States. The approval procedure varies from country to country. The time required
may be longer or shorter than that required for FDA approval. A centralized
procedure is effective for the Member States of the European Union and certain
other countries who have agreed to be bound by the approval decisions of the
European Medical Evaluation Agency.
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A company generally may not freely export Pharmaceutical products from the
United States until the FDA has approved the product for marketing in the United
States. However, a company may apply to the FDA for permission to export
finished products to a limited number of countries prior to obtaining FDA
approval for marketing in the United States, if the products are covered by an
effective IND or a pending NDA and certain other requirements are met.
EMPLOYEES
As of March 1, 1999, we had 97 full-time employees. Eleven of these
employees are engaged in product development and quality control, including
medical and regulatory affairs, 73 are employed in sales and marketing and 13
are employed in finance, business development and general and administrative
activities. In addition, as of March 1, 1999, we had 24 flex-time employees, all
of whom are employed in sales and marketing. Many of our management and
professional employees have had prior experience with pharmaceutical,
biotechnology or medical products companies. None of our employees is covered by
a collective bargaining agreement, and management considers relations with our
employees to be good.
FACILITIES
We lease approximately 18,900 square feet of office space in Wilmington,
Massachusetts. The lease has an initial term expiring January 31, 2002. We have
an option to renew the lease for an additional five-year period.
LEGAL PROCEEDINGS
Not applicable.
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SELECTED FINANCIAL DATA
The table below summarizes recent historical financial and pro forma
financial information for Ascent. For further information, refer to the
financial statements of Ascent included in this proxy statement/prospectus.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
PRO FORMA ENDED PRO FORMA
YEAR ENDED DECEMBER 31, YEAR ENDED MARCH 31, QUARTER ENDED
------------------------------------------------- DECEMBER 31, ----------------- MARCH 31,
1994 1995 1996 1997 1998 1998(1,2) 1998 1999 1999(2)
------- ------- ------- -------- -------- ------------ ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Product revenue, net..... $ -- $ -- $ -- $ 2,073 $ 4,476 $ 4,476 $ 1,314 $ 1,241 $ 1,241
Licensing revenue........ -- 304 -- -- -- -- -- -- --
Co-promotional revenue... -- -- -- -- -- -- -- 615 615
Loss from operations..... (3,692) (4,214) (6,566) (11,854) (16,213) (17,244) (4,128) (3,472) (3,472)
Extraordinary item(3).... -- -- -- -- 1,166 1,166 -- -- --
Net loss................. (3,545) (4,101) (6,487) (12,498) (18,231) (19,445) (4,441) (3,677) (3,859)
Net loss to common
stockholders........... (3,545) (4,163) (6,625) (12,745) (18,680) (19,445) (4,441) (3,869) (3,859)
Net loss per common share
basic and diluted...... $(17.93) $(21.05) $(33.44) $ (3.08) $ (2.69) $ (2.05) $ (0.64) $ (0.55) $ (0.40)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------------------------------- MARCH 31, MARCH 31,
1994 1995 1996 1997 1998 1999 1999(2)
------- -------- -------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents and current marketable
securities.................................... $ 2,171 $ 2,538 $ 2,086 $14,229 $ 2,172 $ 2,268 $ 2,268
Working capital................................. 1,966 2,231 525 4,242 468
Total assets(4)................................. 2,466 2,750 2,628 28,433 16,301 17,263 16,777
Long term subordinated secured notes, net of
current portion............................... -- -- -- 1,252 8,681 12,694 11,904
Redeemable Convertible Preferred Stock, Series
D, Series E and Series F(5)................... 8,157 12,557 17,832 -- -- -- --
Convertible Exchangeable Preferred Stock, Series
G............................................. -- -- -- -- 6,461 6,461 --
Total equity.................................... (5,995) (10,158) (16,778) 15,515 3,803 11 489
</TABLE>
No common stock dividends have been declared or paid by Ascent for any period
presented above.
- -------------------------
(1) Presented on a pro forma basis to give effect to the borrowing, on February
19, 1999, of $4,000,000 under the Alpharma loan agreement.
(2) Presented on a pro forma basis to give effect to the consummation of the
following transactions contemplated by the second amendment to the May 1998
securities purchase agreement, which will be consummated, subject to
stockholder approval, concurrently with the closing of the transactions
contemplated by the master agreement, including the merger: (a) the exchange
of 7,000 shares of Series G convertible exchangeable preferred stock for
convertible subordinated notes in the aggregate principal amount of
$7,000,000, (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 sale and issuance of
300,000 shares of Ascent common stock at a purchase price of $3.00 per share
to the holders of these warrants, (d) the cancellation of $7,250,874 of
subordinated notes as payment of the exercise price for the warrant shares
and the purchase price for the 300,000 shares and (e) the issuance of an
additional 150,000 shares of Ascent common stock in lieu of the payment of
cash under a financial advisory services agreement. The basis for the pro
forma presentation is discussed in more detail in the unaudited pro forma
financial statements included in this proxy statement/prospectus.
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(3) The extraordinary item resulted from the early repayment of
subordinated secured notes on June 1, 1998. As a result, Ascent
accelerated the accretion of the discount of $842,000. In addition,
$325,000 of unamortized debt issue costs were written off.
(4) In July 1997, Ascent acquired the Feverall acetaminophen suppository
product line and certain related assets for a purchase price of $11.9
million. A significant portion of the purchase price was allocated to
the "Feverall" trademark acquired in the transaction, the manufacturing
agreement entered into in connection with the transaction and goodwill.
(5) All then outstanding preferred stock was converted to common stock at
the initial public offering in May 1997.
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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, Ascent began marketing Duricef(R) (cefadroxil monohydrate) oral
suspension to pediatricians in the United States under a co-promotion agreement
with Bristol-Myers Squibb U.S. Pharmaceuticals Group. Ascent terminated this
agreement effective as of 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 under a promotion agreement with
Warner-Lambert Company.
Ascent has incurred net losses since its inception and expects to incur
additional operating losses at least through 1999 as it continues its product
development programs, maintains its sales and marketing organization and
introduces products to the market. Ascent expects cumulative losses to increase
over this period. Ascent has incurred a deficit from inception through March 31,
1999 of $54,287,000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 VS. THREE MONTHS ENDED MARCH 31, 1998
REVENUE: Ascent had total net revenue of $1,856,000 for the three months
ended March 31, 1999 compared with revenue of $1,314,000 for the three months
ended March 31, 1998. This increase in revenue of $542,000 was primarily
attributable to an increase in co-promotional revenue of $615,000.
COST OF PRODUCT SALES: Cost of product sales was $635,000 for the three
months ended March 31, 1999 compared with $554,000 for the three months ended
March 31, 1998. This increase in cost of product sales of $81,000 was primarily
the result of (i) an increase of $56,000 for the manufacturing cost associated
with the production of the Feverall and Pediamist due to an increase in
shipments, and (ii) an increase of $24,000 in manufacturing support personnel
costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Ascent incurred selling,
general and administrative expenses of $4,115,000 for the three months ended
March 31, 1999 compared with $3,765,000 for the three months ended March 31,
1998, representing an increase of $350,000.
Selling and marketing expenses were $3,005,000 for the three months ended
March 31, 1999 compared with expenses of $2,662,000 for the three months ended
March 31, 1998. This increase in selling and marketing expenses of $343,000 was
primarily the result of an increase of $445,000 in personnel costs due to an
increased number of sales representatives. This was offset by a decrease in
consulting expenses of $105,000 associated with Ascent's election not to renew
consulting arrangements that were in effect during the first quarter of 1998.
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General and administrative expenses were $1,110,000 for the three months
ended March 31, 1999 which was consistent with the $1,103,000 expended for the
three months ended March 31, 1998.
RESEARCH AND DEVELOPMENT: Ascent incurred research and development
expenses of $578,000 for the three months ended March 31, 1999 compared with
$1,124,000 for the three months ended March 31, 1998. The decrease of $546,000
was primarily due to (i) $437,000 in reduced spending on the Primsol and
Pediavent products' research and development programs due to the completion of
clinical and biological studies of these products during the first quarter of
1998 and (ii) $56,000 in reduced personnel costs due to a reduction in the
number of research and development personnel.
INTEREST: Ascent had interest income of $26,000 for the three months ended
March 31, 1999 compared with interest income of $159,000 for the three months
ended March 31, 1998. This decrease of $133,000 was primarily due to a lower
average cash investment balance. Ascent had $231,000 in interest expense for the
three months ended March 31, 1999 compared to $471,000 for the three months
ended March 31, 1998, a decrease of $240,000. This decrease 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 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.
FISCAL YEAR 1998 VS. FISCAL YEAR 1997
REVENUE: Ascent had net revenue of $4,476,000 for the year ended December
31, 1998 compared with revenue of $2,073,000 for the year ended December 31,
1997. This increase in revenue of $2,403,000 was primarily attributable to (i)
increased sales of Feverall of $2,120,000 over the prior year due to twelve
months of sales being recognized in 1998 versus only six months of sales being
recognized in 1997, (ii) sales of Pediamist nasal saline spray, which was not
introduced until the fourth quarter of 1997, and (iii) revenues under the
Duricef co-promotion agreement which commenced on February 6, 1998.
COST OF SALES: Cost of sales was $2,307,000 for the year ended December 31,
1998 compared with $1,246,000 for the year ended December 31, 1997. This
increase in cost of sales of $1,061,000 was primarily a result of (i) $637,000
for the manufacturing cost associated with the production of the Feverall and
Pediamist products for a full year, (ii) an increase in net realizable value
adjustments of $95,000 to inventory, (iii) the amortization of an additional six
months in 1998 of $167,000 for the Feverall manufacturing agreement, and (iv)
increased operational support personnel costs of $134,000 in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Ascent incurred selling,
general and administrative expenses of $14,514,000 for the year ended December
31, 1998 compared with $8,305,000 for the year ended December 31, 1997,
representing an increase of $6,209,000.
Selling and marketing expenses were $9,558,000 for the year ended December
31, 1998 compared with expenses of $5,739,000 for the year ended December 31,
1997. This increase in selling and marketing expenses of $3,819,000 was
primarily the result of (i) increased personnel expenses of approximately
$4,024,000 associated with the hiring of Ascent's field sales organization, (ii)
increased marketing and distribution expenses of $491,000 associated with the
introduction of Ascent's first two product offerings, Feverall
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and Pediamist, and partly offset by (iii) decreased marketing expenses of
$696,000 due to a corporate marketing program that was run during 1997 and was
not repeated in 1998.
General and administrative expenses were $4,956,000 for the year ended
December 31, 1998 compared with expenses of $2,566,000 for the year ended
December 31, 1997. The increase in general and administrative expenses of
$2,390,000 was due primarily to (i) increased amortization expenses for a full
year in 1998 versus a half year in 1997 of intangible assets of $234,000 related
to the Feverall trademark and goodwill, (ii) increased support personnel cost of
$988,000 associated with the initial commercialization of Ascent's first two
products, (iii) increased legal, accounting and investor relations costs of
$375,000 associated with being a publicly-traded company for a full year, the
sale and issuance of shares of Ascent Series G preferred stock and the
negotiation of the strategic alliance with Alpharma, (iv) increased insurance
expenses of $191,000, and (v) $124,000 in increased rent and utility expense
related to the expansion of its facilities in 1998.
RESEARCH AND DEVELOPMENT: Ascent incurred research and development expense
of $3,868,000 for the year ended December 31, 1998 compared with $4,377,000 for
the year ended December 31, 1997. The decrease of $509,000 was primarily due to
(i) $248,000 in reduced spending in the Just for Kids Vitamins Drops and the
Feverall ER acetaminophen beaded product R&D programs and (ii) a decrease of
$274,000 in clinical trials for Ascent's Feverall ER acetaminophen beaded
product which were conducted during 1997.
INTEREST: Ascent had interest income of $369,000 for the year ended
December 31, 1998 compared with interest income of $693,000 for the year ended
December 31, 1997. The decrease of $324,000 was primarily due to a lower average
cash investment balance. Ascent had $1,221,000 in interest expense for the year
ended December 31, 1998 compared to $1,359,000 for the year ended December 31,
1997, a decrease of $138,000. The decrease was attributable to the repayment on
June 1, 1998 of the Triumph subordinated secured notes with the proceeds of the
subordinated notes issued in the Series G financing, which notes had a lower
effective interest rate.
FISCAL YEAR 1997 VS. FISCAL YEAR 1996
REVENUE: Ascent had net revenue of $2,073,000 for the year ended December
31, 1997 compared with no revenue for the year ended December 31, 1996. The
revenue was the result of the acquisition and subsequent marketing of Ascent's
first product, Feverall acetaminophen suppositories, and to a lesser extent the
introduction of Pediamist nasal saline spray to the market.
COST OF SALES: Cost of sales was $1,246,000 for the year ended December 31,
1997. The cost of sales was primarily attributable to (i) $874,000 for the
manufacturing cost associated with the production of the Feverall and Pediamist
products, (ii) the write-off of $205,000 of Just For Kids Vitamin Drops
inventory as a result of a change in the specific ingredients used in the final
product, and (iii) the amortization of $167,000 in 1997 for the Feverall
manufacturing agreement.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Ascent incurred selling,
general and administrative expenses for the year ended December 31, 1997 of
$8,305,000 compared with expenses of $2,805,000 for the year ended December 31,
1997, representing an increase of $5,500,000.
Selling and marketing expenses were $5,739,000 for the year ended December
31, 1997 compared with expenses of 1,065,000 for the year ended December 31,
1996. This increase of $4,674,000 was primarily the result of (i) increased
personnel expenses of
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$3,493,000 as Ascent assembled sales and marketing personnel for the anticipated
introduction of its products in the second half of 1997 and (ii) increases of
$1,181,000 in advertising and promotional activities in anticipation of such
product introductions.
General and administrative expenses were $2,566,000 for the year ended
December 31, 1997 compared with expenses of $1,739,000 for the year ended
December 31, 1996. This increase of $827,000 was primarily a result of
additional staffing expenses of $703,000 resulting from Ascent's increased
infrastructure relating to the anticipated product introductions and
amortization expenses of $124,000 for intangible assets related to the Feverall
trademark and goodwill.
RESEARCH AND DEVELOPMENT: Ascent incurred research and development expenses
for the year ended December 31, 1997 of $4,377,000 compared with expenses of
$3,761,000 for the year ended December 31, 1996. This increase of $616,000
primarily reflected increased third party pilot manufacturing and development
expenditures relating to Ascent's twice a day liquid controlled release
bronchodilator, Pediavent, and increased expenditures for the development of
Ascent's Just for Kids Vitamin Drops.
INTEREST: Ascent had interest income of $693,000 for the year ended
December 31, 1997 compared with interest income of 79,000 for the year ended
December 31, 1996. This increase of $614,000 was primarily attributable to
increases in funds available for investment by Ascent resulting from Ascent's
initial public offering of common stock, the sale of its Series F convertible
preferred stock and the issuance of subordinated secured notes. Ascent had
interest expense of $1,359,000 for the year ended December 31, 1997, which
reflected the accretion of $1,133,000 for the subordinated secured notes and
$226,000 for the related cash interest payments.
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 March 31, 1999, Ascent had raised
approximately $33,560,000 (net of issuance costs) from the sales of preferred
stock, approximately $18,027,000 (net of issuance costs) 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 acetaminophen suppositories and Pediamist nasal
saline spray, and in February 1999 began promoting Omnicef (R) pursuant to a
promotion agreement with Warner-Lambert Company.
TRIUMPH NOTES. In January and June 1997, Ascent issued an aggregate of
$7,000,000 of subordinated secured notes, resulting in net proceeds to Ascent of
$6,404,000, which was recorded as a liability of $4,949,000 with $2,506,000 to
be accreted as interest expense over the term of the notes. On June 1, 1998,
Ascent used a portion of the proceeds from the Series G financing to pay in full
the remaining principal and interest due of approximately $5,250,000 and
$130,000, respectively.
FEVERALL ACQUISITION. On July 10, 1997, Ascent closed the acquisition of
the Feverall line of acetaminophen rectal suppositories from Upsher-Smith. The
purchase price was $11,905,000. Ascent paid $6,405,000 in cash and issued a
promissory note for $5.5 million as payment of the purchase price, which
promissory note was paid on February 20, 1998.
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SERIES G FINANCING. On May 13, 1998, Ascent entered into a Securities
Purchase Agreement with funds affiliated with ING Furman Selz Investments LLC
and BancBoston Ventures, Inc. In accordance with this agreement, on June 1,
1998, Ascent issued and sold to these funds an aggregate of 7,000 shares of
Series G convertible exchangeable preferred stock, $9.0 million of 8% seven-year
subordinated notes and seven-year warrants to purchase 2,116,958 shares of
Ascent common stock at a per share exercise price of $4.75 per share, for an
aggregate purchase price of $16 million. Of the $9.0 million of subordinated
notes issued and sold by Ascent, $8,652,515 was allocated to the relative fair
value of the subordinated notes and $347,485 was allocated to the relative fair
value of the warrants. Accordingly, the 8% subordinated notes will be accreted
from $8,652,515 to the maturity amount of $9,000,000 as interest expense over
the term of the notes. The $347,485 allocated to the warrants was included in
additional paid in capital. Ascent used a portion of the net proceeds, after
fees and expense, of $14.7 million to repay the $5.3 million in Triumph
subordinated secured notes and intends to use the balance for working capital.
As a result of the early repayment of subordinated secured notes, Ascent
accelerated the unaccreted portion of the discount amounting to $842,000. In
addition, $325,000 of unamortized debt issue costs were written off. The primary
terms of the Series G preferred stock and the convertible and subordinates notes
are set forth below.
SERIES G PREFERRED STOCK. The Series G preferred stock is convertible
into Ascent common stock at a price of $4.75 per share at the option of the
holder (which conversion price was above the fair market value of Ascent's
common stock at June 1, 1998). The Series G preferred stock is entitled to
cumulative annual dividends equal to 8% (subject to adjustment) of the
liquidation preference of such stock ($1,000), payable semiannually in June
and December of each year, commencing December 1998. The Series G preferred
stock may be exchanged for 8% seven-year convertible subordinated notes
having an aggregate principal amount equal to the aggregate liquidation
preference of the Series G preferred stock solely at the option of Ascent
any time within seven years of issuance of the Series G preferred stock.
SUBORDINATED NOTES AND CONVERTIBLE NOTES. The subordinated notes and
convertible notes (when and if issued upon exchange of the Series G
preferred stock) bear interest at a rate of 8% per annum, payable
semiannually in June and December of each year, commencing December 1998.
Ascent may defer forty percent of the interest due on the subordinated
notes and fifty percent of the dividends due on the Series G preferred
stock (or the interest due on the convertible notes if issued upon exchange
of the Series G preferred stock) in each of December 1998, June 1999,
December 1999 and June 2000 for a period of three years.
Under an agreement with the holders of the Series G preferred stock and the
subordinated notes, subject to Alpharma's approval, Ascent's obligation to make
dividend and interest payments on June 1, 1999 will be deferred until July 1,
1999. During the period from June 1, 1999 through July 1, 1999, dividends and
interest will accrue at a rate of 9% per annum.
In the event of a change in control or unaffiliated merger of Ascent,
Ascent may, at its sole discretion, redeem the Series G preferred stock (or the
convertible notes issuable upon exchange of the Series G preferred stock) at a
price equal to the liquidation preference on such stock ($1,000) plus accrued
and unpaid dividends, although Ascent will be required to issue new common stock
purchase warrants in connection with such redemption. In the event of a change
of control or unaffiliated merger of Ascent, the holders of the convertible
notes and the subordinated notes may require Ascent to redeem
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these notes at a price equal to the unpaid principal plus accrued and unpaid
interest on such notes, but cannot require Ascent to redeem the Series G
preferred stock. In connection with the Series G financing, a representative of
ING Furman Selz Investments was added to Ascent's board of directors.
In connection with Ascent's strategic alliance with Alpharma, Ascent
entered into a second amendment to the May 1998 securities purchase agreement.
The second amendment provides for, among other things, (a) our agreement to
exercise our right to exchange of 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 Ascent common
stock 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 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. In addition, Ascent entered into an amendment to a financial
advisory services fee agreement with ING Furman Selz under which Ascent agreed
to issue 150,000 shares of Ascent common stock to ING Furman Selz in lieu of the
payment of certain financial advisory fees. The second amendment and the
financial advisory services fee amendment are discussed in more detail in
"Proposal 2 -- Amendment to May 1998 Warrants and Sale and Issuance of Shares of
Ascent Common Stock" beginning on page 100 of this proxy statement/prospectus.
ALPHARMA STRATEGIC ALLIANCE. On February 16, 1999, Ascent entered into a
series of agreements with Alpharma. This strategic alliance contemplates a
number of transactions, including a loan agreement under which Alpharma will
loan us 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, subject to stockholder approval, Ascent will obtain a call option to
acquire all of its outstanding common stock and assign the option to Alpharma,
thereby giving Alpharma the option, exercisable in 2002, 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. The terms of the strategic alliance
with Alphama are discussed in more detail in "Proposal 1 -- The Merger"
beginning on page 31 of this proxy statement/prospectus.
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. Alpharma's obligation to loan Ascent
the balance of the $40.0 million is subject to the approval of Ascent's
stockholders of a proposed merger between Ascent and Bird Merger Corporation,
which approval is a condition to the consummation of the strategic alliance. If
Ascent's stockholders do not approve the merger, Ascent must immediately repay
the outstanding principal and interest on the note.
FIXED ASSETS. Ascent expended $340,000, $805,000, and $60,000 to purchase
fixed assets, primarily equipment and furniture, in 1998, 1997, and 1996,
respectively. Ascent expects that its capital expenditures in 1999 will be
approximately $250,000, primarily for computer hardware and software.
FUTURE CAPITAL REQUIREMENTS. Ascent's future capital requirements will
depend on many factors, including the costs and margins on sales of its
products, success of its commercialization activities and arrangements,
particularly the level of product sales, its
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ability to acquire and successfully integrate business 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. 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 maintain sales and marketing capabilities and manufacturing
relationships necessary to bring such products to market.
Ascent anticipates, based upon its current operating plan, that (a) its
existing capital resources and internally generated funds should satisfy its
capital requirements into June 1999 and (b) it will require approximately $10.0
million of additional funds beyond that to meet its capital requirements through
the first quarter of 2000. Ascent is currently in discussions to obtain bridge
financing to fund its capital requirements until the annual meeting of
stockholders, at which time Ascent expects that, subject to stockholder approval
of the strategic alliance with Alpharma, it will be able to satisfy its capital
requirements with funds borrowed from Alpharma under the loan agreement,
including the remaining $8.0 million which Ascent may borrow from Alpharma for
general corporate purposes under the loan agreement. If Ascent's stockholders do
not approve the merger with Alpharma or if Ascent does not consummate the
strategic alliance with Alpharma, Ascent must immediately repay the $4.0 million
borrowed from Alpharma on February 19, 1999 plus interest and will need to raise
additional funds, including through collaborative relationships and public or
private financings. In addition, if Ascent's business does not progress in
accordance with its current operating plan or Primsol or Orapred are not
approved when expected, it may need to raise additional funds. The additional
financing may not be available to Ascent 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.
NASDAQ LISTING
On May 24, 1999, Ascent received a notice from The Nasdaq Stock Market,
Inc. indicating that, because Ascent was not in compliance with the continued
listing requirements of the Nasdaq National Market as of December 31, 1998, The
Nasdaq Stock Market, Inc. has determined that Ascent common stock is no longer
eligible for continued listing on the Nasdaq National Market. We have appealed
their decision to the appeal panel of The Nasdaq Stock Market, Inc. The Ascent
common stock will not be delisted until final resolution by the appeal panel.
There can be no assurance that our appeal will be successful or that Ascent's
common stock will continue to be listed on the Nasdaq National Market. See
"Market Price and Dividend Information" on page 25 for a discussion of the
listing of the depositary shares.
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
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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.
Ascent is in the process of assessing its computer systems, software and
operations infrastructure, including systems being developed to improve business
functionality, to identify computer hardware, software and process control
systems that are not Year 2000 compliant. To this end, 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 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. Ascent currently anticipates that its Year 2000 assessment efforts
will be completed by June 30, 1999.
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. Although, as of December 31, 1998, Ascent has not received a significant
number of responses to its inquiries, Ascent believes that these communications
will permit Ascent 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. Although Ascent has not completed the Year 2000
assessment of its computer systems and software, based upon its assessment
efforts to date, 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. For example, Ascent recently upgraded
its financial accounting software and received written representations that the
system was Year 2000 compliant. As of March 31, 1999, in addition to the costs
that Ascent would have incurred in the ordinary course of replacing computer
equipment and software, Ascent had incurred less than $5,000 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 it. However, if Ascent does not properly
identify all Year 2000 issues, or assessment, remediation and testing are timely
effected 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
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operations or cash flows or adversely affect Ascent's relationships with
customers, suppliers or others.
Ascent has not yet developed a contingency plan 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 currently plans to
complete its analysis of the problems and costs associated with the failure to
achieve Year 2000 compliance and to establish a contingency plan in the event of
such failure by June 30, 1999.
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 annual 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.
RECENT PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5
"Accounting for the Costs of Start-Up Activities", referred to as SOP 98-5. SOP
98-5 requires all costs of start-up activities (as defined by SOP 98-5) to be
expensed as incurred. This statement is effective for periods beginning after
December 15, 1998. Ascent does not believe SOP 98-5 will have a significant
impact on its financial statement disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, known as SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters beginning after
June 15, 1999. Ascent will adopt SFAS 133 by January 1, 2000. Ascent does not
believe that SFAS 133 will have a significant impact on its financial statement
disclosure.
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 December 31, 1998, the fair 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 December 31, 1998,
which was not materially different from the year-end carrying value.
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ALPHARMA
Alpharma is a subsidiary of Alpharma Inc., a multinational pharmaceutical
company that develops, manufactures and markets specialty human pharmaceutical
and animal health products. Alpharma develops, manufactures and markets
specialty generic prescription and over-the-counter pharmaceuticals for human
use. Alpharma manufactures and/or markets approximately 170 generic products,
primarily in liquid, cream, ointment and suppository dosage forms. Each product
represents a different chemical entity. These products are sold in over 300
product presentations under the "Alpharma", "Barre" or "NMC" labels and private
labels.
Alpharma's product lines consist primarily of the following:
- LIQUID PHARMACEUTICALS. Alpharma is a leading United States manufacturer
of generic pharmaceutical products in liquid form. Alpharma manufactures
approximately 110 different products in liquid form. Alpharma formulates
therapeutic equivalent drugs in liquid forms and refines product
characteristics such as taste, texture, appearance and fragrance. Cough
and cold remedies constitute a significant portion of Alpharma's liquid
pharmaceuticals business. This business is seasonal in nature. As a
result. sales volume is higher in the fall and winter months and is
affected, from year to year, by the incidence of colds, respiratory
diseases and influenza.
- CREAMS, LOTIONS AND OINTMENTS. Alpharma manufactures approximately 50
cream, lotion and ointment products for topical use. Most of these
creams, lotions and ointments are sold only by prescription.
- SUPPOSITORIES, AEROSOLS AND OTHER SPECIALTY GENERIC PRODUCTS. Alpharma
also manufactures five suppository products and markets certain other
specialty generic products, including two aerosols and two nebulizer
products.
Alpharma has historically sold its products to pharmaceutical wholesalers,
distributors, mass merchandising and retail chains, and to a lesser extent,
grocery stores, hospitals and managed care providers. In response to the general
trend of consolidation among pharmaceutical customers and increases in the
amount of products sold through wholesalers, Alpharma is placing an increased
emphasis on marketing its products directly to managed care organizations,
purchasing groups, mass merchandisers and chain drug stores.
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PROPOSAL 2 -- AMENDMENT TO MAY 1998 WARRANTS AND SALE AND
ISSUANCE OF SHARES OF ASCENT COMMON STOCK
GENERAL
As a condition to Alpharma's entering into the strategic alliance, on
February 16, 1999, we and the purchasers of our Series G preferred stock entered
into a second amendment to the May 1998 securities purchase agreement which
provides for, among other things, the following:
- consents and waivers from the Series G purchasers approving the strategic
alliance;
- amendments to covenants and the definition of a default event in the May
1998 securities purchase agreement to conform them to similar provisions
in the loan agreement;
- the agreement by the Series G purchasers to subordinate the indebtedness
owed to them, including the notes issuable upon exchange of shares of
Ascent Series G preferred stock, to the indebtedness owed to Alpharma to
the extent that we have negative stockholders' equity as reflected on our
monthly balance sheet;
- the right of the Series G purchasers to designate an additional nominee
to our board of directors; and
- our agreement to exercise our right to exchange all Ascent Series G
preferred stock for 8% convertible subordinated notes in accordance with
the existing terms of the Ascent Series G preferred stock.
In addition, in order to induce the Series G purchasers to agree to the
second amendment, we also agreed, subject to stockholder approval, to:
- amend the warrants to purchase 2,116,958 shares of Ascent common stock
issued to the Series G purchasers under the May 1998 securities purchase
agreement to reduce the exercise price from $4.75 per share to $3.00 per
share, and
- sell and issue to the Series G purchasers an aggregate of 300,000
additional shares of Ascent common stock at a price of $3.00 per share.
The Series G purchasers have agreed to exercise these warrants immediately
following the amendment to the warrants and to pay the exercise price of the
warrants and the purchase price for the 300,000 shares of newly issued Ascent
common stock through the cancellation of an aggregate of $7,250,874 of principal
under the 8% subordinated notes issued to them under the May 1998 securities
purchase agreement. Following the exercise of the warrants and the purchase of
the 300,000 shares, approximately $1.75 million in principal will remain
outstanding under the 8% subordinated notes.
We also agreed to amend a financial advisory services agreement with ING
Furman Selz, an affiliate of three of the Series G purchasers, to provide that
in lieu of paying ING Furman Selz cash fees, we would, subject to stockholder
approval, issue to ING Furman Selz 150,000 shares of Ascent common stock.
Under Rule 4460(i)(1)(D) of the Marketplace Rules of the Nasdaq Stock
Market, Inc., we are required to obtain the consent of our stockholders prior to
issuing shares of
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<PAGE> 112
Ascent common stock or securities convertible or exercisable for shares of
Ascent common stock if:
- the price for the shares is less than the market value of Ascent common
stock (on May 25, 1999, the closing price of the Ascent common stock on
the Nasdaq National Market was $2.8125 per share); and
- the shares represent more than 20% of the Ascent common stock outstanding
immediately prior to such issuance (on June 2, 1999, the number of shares
of Ascent common stock outstanding was 7,026,445).
Accordingly, we are seeking your consent to the proposed amendment to the
warrants held by the Series G purchasers and to the proposed sale and issuance
of Ascent common stock.
Our board of directors has unanimously approved the proposed amendment to
the warrants held by the Series G purchasers and the proposed issuance and sale
of Ascent common stock and recommends that you vote "FOR" the transactions.
WARRANTS
On June 1, 1998, we issued to the Series G purchasers warrants to purchase
an aggregate of 2,116,958 shares of Ascent common stock. The terms of the
warrants included, among other things, the following:
- an exercise price of $4.75 per share;
- a warrant expiration date of June 1, 2005;
- the right to pay the warrant exercise price by delivery to us of Ascent
Series G preferred stock, 8% convertible notes issuable upon conversion
of the Ascent Series G preferred stock, or 8% subordinated notes held by
the Series G purchasers or by cancellation of shares issuable upon
exercise of the warrants; and
- adjustments to the warrant exercise price in connection with issuances by
us of Ascent common stock for a consideration per share less than the
warrant exercise price then in effect.
The proposed amendment would reduce the exercise price of the warrants to
$3.00 per share. The Series G purchasers have agreed that, upon the
effectiveness of this amendment, they will exercise all warrants held by them
for the purchase of 2,116,958 shares of Ascent common stock. The Series G
purchasers will pay the exercise price for the warrants by delivery to us of 8%
subordinated notes in an aggregate principal amount equal to the aggregate
exercise price of the warrants ($6,350,874).
SALE AND ISSUANCE OF ASCENT COMMON STOCK
As part of the second amendment, we agreed to issue and sell to the Series
G purchasers 300,000 shares of Ascent common stock at a price of $3.00 per
share. The purchase price for these shares will be paid through the cancellation
of an additional $900,000 of principal under the 8% subordinated notes held by
the Series G purchasers.
We also agreed to amend a financial advisory services fee agreement with
ING Furman Selz. Under the original agreement, we had agreed to pay ING Furman
Selz $150,000 per year for financial advisory services, payable quarterly in
arrears, for a five year period commencing June 1, 1998. As of March 1, 1999, we
have paid a total of $112,500 under this agreement. We have now agreed with ING
Furman Selz that in lieu of paying its fees in cash for the remainder of the
term of the agreement, we will issue to
100
<PAGE> 113
them 150,000 shares of Ascent common stock and that upon the issuance of such
shares the agreement will terminate.
REASONS FOR THE AMENDMENT TO THE WARRANTS AND THE SALE AND ISSUANCE OF ASCENT
COMMON STOCK
Our board of directors believes that the amendment to the warrants and the
issuance of Ascent common stock is in the best interests of Ascent and our
stockholders for a number of reasons, including the following:
- STRATEGIC ALLIANCE. These transactions were necessary to induce the
Series G purchasers to agree to the second amendment, which is a
condition to the closing of the transactions contemplated by the master
agreement, including the merger.
- REDUCTION IN DIVIDEND AND INTEREST PAYMENTS. The exchange of the Ascent
Series G preferred stock for 8% convertible subordinated notes and the
cancellation of approximately $7.25 million of principal under the 8%
subordinated notes will result in a net decrease in Ascent's dividend and
interest payments to the holders of Ascent Series G preferred stock.
CLOSING
The closing of the transactions contemplated by the second amendment,
including the amendment to the warrants and the sale and issuance of Ascent
common stock, will occur concurrently with the closing of the transactions
contemplated by the master agreement, including the merger.
INTERESTS OF CERTAIN PERSONS
Furman Selz Investors II L.P., FS Employee Investors LLC and FS Parallel
Fund L.P., which hold the securities of Ascent set forth below are affiliates of
James Luikart, a director of Ascent. These entities are managed by ING Furman
Selz.
<TABLE>
<CAPTION>
SHARES OF
SERIES G PRINCIPAL
CONVERTIBLE AMOUNT OF
PREFERRED 8% SUBORDINATED
STOCK NOTES WARRANT SHARES
--------------- --------------- --------------
<S> <C> <C> <C>
Furman Selz Investors II
L.P................... 4,628 $5,950,667 1,399,662
FS Employee Investors
LLC................... 397 509,668 119,961
FS Parallel Fund L.P.... 225 289,665 68,095
</TABLE>
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<PAGE> 114
Following (a) the exercise of the warrants, (b) the sale and issuance of
shares of Ascent common stock contemplated by the second amendment and the
amendment to the financial services fee agreement and (c) the exchange of the
Series G preferred stock contemplated by the second amendment, Furman Selz
Investors II L.P., FS Employee Investors LLC, FS Parallel Fund L.P. and ING
Furman Selz will hold the securities of Ascent set forth below.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
SHARES OF AMOUNT OF AMOUNT OF
ASCENT 8% SUBORDINATED 8% CONVERTIBLE
COMMON STOCK NOTES SUBORDINATED NOTES(1)
------------ --------------------- ----------------------
<S> <C> <C> <C>
Furman Selz Investors
II L.P............. 1,598,012 $1,156,631 $4,628,000
FS Employee Investors
LLC................ 136,961 $ 98,785 $ 397,000
FS Parallel Fund
L.P................ 77,745 $ 56,430 $ 225,000
ING Furman Selz...... 150,000 $ 0 $ 0
</TABLE>
- -------------------------
(1) These 8% convertible subordinated notes are convertible into shares of
Ascent common stock at the election of the holder of such notes at a
conversion price of $4.75 per share, subject to adjustment.
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<PAGE> 115
PROPOSAL 3 -- ELECTION OF DIRECTORS
GENERAL
We have three classes of directors consisting of three Class I directors,
three Class II directors and two Class III directors. At each annual meeting,
directors are elected for a full term of three years to succeed those whose
terms are expiring. The terms of the three classes are staggered in a manner so
that only one class is elected by stockholders annually. The three Class II
directors are proposed for election this year to serve as members of our board
of directors until the 2002 annual meeting of stockholders, or until their
successors are elected and qualified. The term of the Class III directors will
expire at the 2000 annual meeting. The Class I directors were elected at the
annual meeting last year for a three year term expiring at the 2001 annual
meeting.
The persons named in the enclosed proxy will vote to elect, as Class II
directors, Alan R. Fox, Robert E. Baldini and James L. Luikart, the three
director nominees named below, unless the proxy is marked otherwise. Messrs.
Fox, Baldini and Luikart are currently directors of Ascent. Each Class II
director nominee has indicated his willingness to serve, if elected; however, if
any nominee should be unable to serve, the person acting under the proxy may
vote the proxy for a substitute nominee designated by our board of directors.
Our board of directors has no reason to believe that any of the nominees will be
unable to serve if elected.
The table below includes information for each director, including the Class
II director nominees, as of December 31, 1998 with respect to (a) his name and
age; (b) position and offices at Ascent; (c) principal occupation and business
experience during the past five years; (d) directorships, if any, of other
publicly held companies and (e) the year he became a director of Ascent.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION, OTHER BUSINESS
DIRECTOR EXPERIENCE DURING THE PAST FIVE YEARS
NAME AGE SINCE AND OTHER DIRECTORSHIPS
- ---- --- -------- -------------------------------------
<S> <C> <C> <C>
CLASS II DIRECTORS, NOMINEES TO BE ELECTED
AT THE ANNUAL MEETING (TERMS EXPIRING IN
2002)
Alan R. Fox 54 1996 President and chief executive officer
of Ascent since May 1996; president
of Mead Johnson Europe, an infant
formula and nutritional company, from
January 1992 to May 1996; president
and general manager of Mead Johnson
Canada, an infant formula and
nutritional company, from 1981 to
1991; various positions, including as
a manager of marketing and sales for
the Bristol Laboratories Division of
Bristol-Myers Squibb, Inc., a
pharmaceutical company, from 1968 to
1981.
</TABLE>
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<PAGE> 116
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION, OTHER BUSINESS
DIRECTOR EXPERIENCE DURING THE PAST FIVE YEARS
NAME AGE SINCE AND OTHER DIRECTORSHIPS
- ---- --- -------- -------------------------------------
<S> <C> <C> <C>
Robert E. Baldini 68 1993 Vice chairman of our board of
directors since April 1996;
consultant to, and a director of,
several private and public
pharmaceutical and medical device
companies; senior vice president of
sales and marketing for Key
Pharmaceuticals from 1982 to 1986 and
following the acquisition of Key
Pharmaceuticals by Schering-Plough
Corporation in 1986, various
positions with the Key
Pharmaceuticals Division of
Schering-Plough Corporation until
1995, last serving as its president;
executive director of sales and
promotion of Ciba-Geigy Corporation,
a pharmaceutical and chemical
company, from 1977 to 1982; vice
chairman of the board of directors of
KOS Pharmaceuticals, Inc., a
pharmaceutical company, and a
director of Clarion Pharmaceuticals,
Inc., a pharmaceutical company.
James L. Luikart 53 1998 Executive vice president of ING
Furman Selz Investments (an affiliate
of the manager and of the general
partner of Furman Selz Investors II
L.P., FS Employee Investors LLC and
FS Parallel Fund L.P.) since 1995;
vice president of Citicorp Venture
Capital Ltd., a subsidiary of
Citibank from 1988 to 1995.
</TABLE>
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<PAGE> 117
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION, OTHER BUSINESS
DIRECTOR EXPERIENCE DURING THE PAST FIVE YEARS
NAME AGE SINCE AND OTHER DIRECTORSHIPS
- ---- --- -------- -------------------------------------
<S> <C> <C> <C>
CLASS III DIRECTORS (TERMS EXPIRING IN
2000)
Emmett Clemente, Ph.D. 60 1989 Founder of Ascent in 1989 and
chairman of our board of directors
since May 1996; chief executive
officer of Ascent from 1989 to 1996;
director of pharmaceutical research
for Fisons Corporation, U.S., a
pharmaceutical company, from 1980 to
1989 and director of new product
development and acquisitions of
Fisons Corporation, U.S. from 1972 to
1980; chief scientist in the consumer
products division of Warner-Lambert
Company, a pharmaceutical company,
from 1970 to 1972; senior scientist
of Richardson-Merrell Company, a
pharmaceutical company, from 1967 to
1970.
Andre Lamotte, Sc.D 50 1989 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, since
1989; general manager of the Merieux
Institute, Inc., the U.S. affiliate
of Institute Merieux and Pasteur
Vaccines, from 1983 to 1988; director
of OraVax, Inc., a biotechnology
company.
CLASS I DIRECTORS (TERMS EXPIRING IN 2001)
Raymond F. Baddour, Sc.D. 73 1989 Lammot du Pont Professor Emeritus of
Chemical Engineering at the
Massachusetts Institute of Technology
since 1989; co-founder and director
of Amgen Inc., a biopharmaceutical
company, from 1980 to 1997, and
MatTek Corp., a specialty
biomaterials company; director of
Hyseq, Inc., a biotechnology company
and Scully Signal Co., a signal
device company.
</TABLE>
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<PAGE> 118
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION, OTHER BUSINESS
DIRECTOR EXPERIENCE DURING THE PAST FIVE YEARS
NAME AGE SINCE AND OTHER DIRECTORSHIPS
- ---- --- -------- -------------------------------------
<S> <C> <C> <C>
Michael J.F. Du Cros 61 1993 Partner of Atlas Venture, a venture
capital firm, since 1993; Limited
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; Chief
Executive Officer of Protein
Databases, Inc., a life science
instrumentation company, from 1984 to
1988; director of Cardima, Inc., a
medical device company.
Lee J. Schroeder 70 1990 President of Lee Schroeder and
Associates, Inc., a pharmaceutical
consulting company, since 1985;
president of the Lincoln Wholesale
Drug Company, a wholesale drug
company, from 1983 to 1985; executive
vice president of Sandoz, Inc., U.S.,
a pharmaceutical company, from 1981
to 1983; vice president and general
manager of Dorsey Laboratories, a
pharmaceutical company, from 1974 to
1981; director of Interneuron
Pharmaceuticals, Inc., MGI
Pharmaceuticals, Inc. and Celgene
Corporation, each a pharmaceutical
company.
</TABLE>
James L. Luikart was nominated and elected to our board of directors
pursuant to the terms of the May 1998 securities purchase agreement. For a
description of the May 1998 securities purchase agreement, see "Proposal 3 --
Certain Relationships and Related Transactions" on page 117 of this proxy
statement/prospectus.
We have agreed to appoint a nominee of Alpharma to our board of directors
as a Class I director immediately prior to the closing of the transactions
contemplated by the master agreement. We expect that this designee will be
Thomas Anderson, who has served as president of Alpharma since January 1997.
Prior to joining Alpharma, Mr. Anderson served as president and chief operating
officer of FoxMeyer Health Corporation from May 1993 to February 1996 and
executive vice president and chief operating officer of FoxMeyer Health
Corporation from July 1991 to April 1993.
We have also agreed to appoint an additional nominee of ING Furman Selz to
our board of directors as a Class III director immediately prior to the closing
of the transactions contemplated by the second amendment to the May 1998
securities purchase agreement. We expect that this designee will be Nicholas
Daraviras, who has served as an associate of ING Furman Selz since 1996. Prior
to joining ING Furman Selz,
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<PAGE> 119
Mr. Daraviras served as an equity research analyst at Oppenheimer & Co. and
Ladenburg Thalmann & Co. from 1994 to 1996.
Terrance McGuire, a former Class III director, resigned from our board of
directors effective February 19, 1999. Michael J.F. Du Cros, a Class I director,
has indicated that he would resign from the board of directors upon the closing
of the transactions contemplated by the master agreement, including the merger,
and the appointment of Messrs. Anderson and Daraviras to our board of directors.
BOARD OF DIRECTORS AND COMMITTEE MEETINGS
Our board of directors met 11 times (including by telephone conference)
during 1998. Messrs. Baddour, Lamotte, McGuire and Schroeder each attended less
than 75% of the meetings of our board of directors during 1998. All directors
attended at least 75% of the meetings of the committees on which they served.
Our board of directors has a compensation committee which held two formal
meetings and a number of informal meetings during 1998. The current members of
the compensation committee are Dr. Lamotte and Messrs. Luikart and Schroeder.
The compensation committee is responsible for:
- making recommendations concerning salaries and incentive compensation for
our employees and consultants;
- establishing and approving salaries and incentive compensation for
certain senior officers and employees; and
- administering, making recommendations concerning and granting stock
options pursuant to our stock option plans.
Commencing in 1999, the compensation committee has also established a
subcommittee to grant stock options to our executive officers in order to comply
with Section 162(m) of the Internal Revenue Code. The current members of this
subcommittee are Dr. Lamotte and Mr. Schroeder.
Our board of directors has an audit committee, which held two meetings
during 1998. The current members of the audit committee are Messrs. Baldini and
Dr. Baddour. The audit committee is responsible for reviewing the results and
scope of the audit and other services provided by our independent public
accountants.
We do not have a nominating committee or a committee serving a similar
function. Nominations are made by and through the full board of directors.
COMPENSATION OF DIRECTORS
Messrs. Baldini and Schroeder are paid $6,000 each year as compensation for
serving on our board of directors. No other directors currently are compensated
for serving on our board of directors. All of our directors are reimbursed for
their expenses incurred in connection with their attendance at board of
directors and committee meetings.
Under our 1997 Director Stock Option Plan, options to purchase 15,000
shares of Ascent common stock are granted to each new non-employee director upon
his or her initial election to our board of directors. On June 1, 1998, Mr.
James L. Luikart received an option for 15,000 shares of Ascent common stock.
Options to purchase 5,000 shares of Ascent common stock are granted to each
non-employee director on May 1 of each year. On May 1, 1998, Messrs. Baddour,
Baldini, Du Cros, McGuire and Schroeder each
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<PAGE> 120
received an option for 5,000 shares of Ascent common stock. All options vest on
the first anniversary of the date of grant. However, the exercisability of these
options accelerates upon the occurrence of a change in control of Ascent, as
provided for in the director plan. A total of 300,000 shares of Ascent 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 date of our
initial public offering, the exercise price of all options granted under the
director plan equals the closing price of Ascent common stock on the date of
grant. As of March 15, 1999, options to purchase an aggregate of 135,000 shares
of Ascent common stock were outstanding under the director plan.
We are party to a consulting agreement with Mr. Robert E. Baldini, vice
chairman of our board of directors, dated April 1, 1996. Pursuant to this
agreement, Mr. Baldini provides consulting services as requested by us in return
for compensation of $1,500 per day. Mr. Baldini did not receive any consulting
fees in 1998 pursuant to this agreement. Upon execution of this agreement, we
granted Mr. Baldini an option under our 1992 Equity Incentive Plan exercisable
for 85,000 shares of Ascent common stock vesting in four equal annual
installments. This consulting agreement expires on April 1, 2000, unless
extended by mutual agreement of the parties.
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<PAGE> 121
COMPENSATION OF EXECUTIVE OFFICERS
GENERAL
The following table sets forth the compensation for each of the fiscal
years ended December 31, 1998, 1997 and 1996 for our chief executive officer and
our four other most highly compensated executive officers, other than the chief
executive officer, whose total annual salary and bonus exceeded $100,000 in
fiscal 1998. The chief executive officer and the other executive officers are
referred to as the Named Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- --------------------------- ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Alan R. Fox............... 1998 $217,700 $43,540 -- --
President and chief 1997 $207,753 $36,500 -- --
executive officer(1) 1996 $135,000 -- 153,000 --
Emmett Clemente, Ph.D. ... 1998 $210,300 $42,060 -- $ 17,833(2)
Chairman of the board 1997 $201,083 $47,232 -- $ 7,705(2)
of directors 1996 $190,500 $41,600 -- $ 14,119(2)
Gregory A. Vannatter...... 1998 $167,500 $33,500 50,000(4) --
Vice president, 1997 $153,000 -- -- $ 32,436(5)
marketing(3) 1996 $ 31,511 -- 29,750 --
Timothy K. Moffitt........ 1998 $158,087 $30,880 100,000(7) --
Vice president, sales(6) 1997 $150,505 -- 40,000(8) --
1996 -- -- -- --
John G. Bernardi.......... 1998 $133,600 $26,720 17,500(10) --
Vice president, finance 1997 $128,092 -- -- --
and treasurer(9) 1996 $ 64,904 -- 29,750 --
</TABLE>
- -------------------------
(1) Mr. Fox joined Ascent as president in May 1996.
(2) Life insurance premiums paid by us for the benefit of Dr. Clemente.
(3) Mr. Vannatter joined Ascent as vice president, marketing in October 1996.
(4) Includes 18,000 options which were granted and repriced in 1998.
(5) Relocation costs, including related tax adjustments, paid by us for the
benefit of Mr. Vannatter.
(6) Mr. Moffitt joined Ascent as vice president, sales in May 1997.
(7) Includes 40,000 options which were granted in 1997 and repriced in 1998 and
20,000 options which were granted and repriced in 1998. See footnote (8)
(8) These options were repriced in 1998. See footnote (7).
(9) Mr. Bernardi joined Ascent as vice president, finance and treasurer in June
1996.
(10) Includes 16,000 options which were granted and repriced in 1998.
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<PAGE> 122
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES EXERCISE TERM(3)
OPTIONS IN FISCAL OR BASE EXPIRATION ------------------------
NAME GRANTED YEAR(1) PRICE(2) DATE 5% 10%
- ---- ---------- ------------ -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alan R. Fox.............. -- -- -- -- -- --
Emmett Clemente,
Ph.D. ................. -- -- -- -- -- --
Gregory A. Vannatter..... 10,000(4) 1.3% $3.75(7) 03/16/08 -- $ 11,062.50
8,000(5) 1.0% $3.75(7) 04/08/08 -- $ 8,850.00
32,000(6) 4.2% $3.75 04/08/08 $75,600.00 $190,800.00
Timothy K. Moffitt....... 40,000(8) 5.2% $3.75(9) 06/24/07 -- $ 44,250.00
10,000(10) 1.3% $3.75(7) 03/16/08 -- $ 11,062.50
10,000(11) 1.3% $3.75(7) 04/08/08 -- $ 11,062.50
40,000(12) 5.2% $3.75 04/08/08 $94,500.00 $238,500.00
John G. Bernardi......... 10,000(13) 1.3% $3.75(7) 03/16/08 $23,625.00 $ 59,625.00
6,000(14) 0.8% $3.75(7) 04/08/08 $14,175.00 $ 35,775.00
1,500(15) 0.2% $3.75 04/08/08 -- $ 1,659.38
</TABLE>
- -------------------------
(1) The number of options granted in 1998 includes 555,450 shares that were
repriced in September 1998.
(2) Options were granted by the compensation committee pursuant to the 1992
Equity Incentive Plan at "fair market value" determined on the date of the
grant, based upon the last reported sale price of Ascent common stock on
the Nasdaq National Market. Repriced options were granted at $3.75, above
fair market value on the date of grant.
(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compound rates of appreciation (5% and 10%) on
the market value of Ascent common stock on the date of option grant over
the term of the options. These numbers are calculated based on rules
promulgated by the Securities and Exchange Commission and do not reflect
our estimate of future stock price growth. Actual gains, if any, on stock
option exercise and Ascent common stock holdings are dependent on the
timing of the exercise and the future performance of Ascent common stock.
There can be no assurance that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected will be received by the
individuals.
(4) The option is exercisable in four equal annual installments beginning on
September 16, 1999.
(5) The option is exercisable in four equal annual installments beginning on
October 8, 1999.
(6) The option is exercisable in four equal annual installments beginning on
April 8, 1999.
(7) These options were repriced in September 1998.
(8) 10,000 of the shares subject to the option are immediately exercisable and
the remaining 30,000 shares are exercisable in three equal annual
installments beginning on November 12, 1999.
(9) These options were granted in 1997 and repriced in September 1998.
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<PAGE> 123
(10) The option is exercisable in four equal annual installments beginning on
September 16, 1999.
(11) The option is exercisable in four equal annual installments beginning on
October 8, 1999.
(12) The option is exercisable in four equal annual installments beginning on
April 8, 1999.
(13) The option is exercisable in four equal annual installments beginning on
September 16, 1999.
(14) The option is exercisable in four equal annual installments beginning on
October 8, 1999.
(15) The option is exercisable in four equal annual installments beginning on
April 8, 1999.
On February 10, 1999, Ascent's compensation committee granted each of Dr.
Clemente and Mr. Fox an incentive stock option for 125,000 shares of Ascent
common stock and granted each of Messrs. Bernardi, Moffitt and Vannatter an
incentive stock option for 25,000 shares of Ascent common stock. Each of these
options has an exercise price of $6.75 per share and vests in three equal annual
installments commencing on February 10, 2000.
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<PAGE> 124
YEAR-END OPTION TABLE
The following table sets forth information regarding the number and value
of exercisable and unexercised options held by each of the Named Executive
Officers on December 31, 1998. No stock options were exercised by any of the
Named Executive Officers in fiscal 1998.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Alan R. Fox...................... 76,500 76,500 $149,909 $149,909
Emmett Clemente, Ph.D............ 144,500 -- $293,162 --
Gregory A. Vannatter............. 14,875 64,875 $ 29,149 $ 57,274
Timothy K. Moffitt............... 10,000 90,000 $ 5,625 $ 50,625
John G. Bernardi................. 14,875 32,375 $ 29,149 $ 38,993
</TABLE>
- -------------------------
(1) The closing price for Ascent common stock as reported by the Nasdaq National
Market on December 31, 1998 was $4.3125. The value of these options is
calculated on the basis of the difference between the option exercise price
and $4.3125, multiplied by the number of shares of common stock underlying
the option.
EMPLOYMENT AGREEMENT
We are a party to an employment agreement with Dr. Emmett Clemente for the
period commencing March 16, 1994 and ending March 15, 2000, unless extended by
mutual agreement of the parties. Under this agreement, Dr. Clemente is entitled
to receive (a) an annual base salary of $210,300, as it may be adjusted, and (b)
an annual bonus of up to 30% of his annual base salary based upon the attainment
of performance criteria set by our board of directors annually (with the
potential to exceed 30% of his annual base salary, at the discretion of our
board of directors, in the event that we achieve break-even cash flow). In
addition, as part of Dr. Clemente's annual compensation review, our board of
directors is required to consider in its sole discretion granting Dr. Clemente a
stock option to acquire additional shares of Ascent common stock. In the event
Dr. Clemente's employment is terminated by us without cause, Dr. Clemente will
continue to receive (a) his annual base salary for the one-year period
commencing on the effective date of termination and (b) benefits for the
18-month period following the effective date of termination. However, any of the
above payments or benefits which we are required to provide will be reduced
dollar for dollar by any payments or benefits Dr. Clemente receives from any
other employer during the period we are required to provide these payments or
benefits. Following the cessation or termination of his employment by us, Dr.
Clemente has agreed not to compete with us for two years with respect to any
products developed, produced, marketed or sold by us during his tenure with us.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This report is submitted by the compensation committee of our board of
directors, which is responsible for establishing and administering our executive
compensation policies, including for the chief executive officer and the other
Named Executive Officers, and setting the compensation for these individuals.
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<PAGE> 125
GENERAL COMPENSATION POLICY
The compensation committee, including its stock plan subcommittee, seeks to
achieve the following three broad goals in connection with Ascent's executive
compensation programs and decisions regarding individual compensation:
- structure executive compensation programs in order to enable us to
attract and retain qualified executives;
- establish compensation programs that reward executives for the
achievement of our business objectives and/or in the individual
executive's particular area of responsibility, and thereby create a
performance-oriented environment; and
- provide executives with an equity interest in Ascent so as to link a
portion of the executive's compensation with the performance of Ascent
common stock.
PROCEDURES FOR ESTABLISHING COMPENSATION
Ascent performs periodic reviews of executive compensation to confirm the
competitiveness of the overall executive compensation package as compared with
industry peers who compete with Ascent for prospective employees who possess the
scientific and technical knowledge and skills required to develop, manufacture
and market pediatric drug products.
EXECUTIVE OFFICER COMPENSATION PROGRAM
The compensation programs for Ascent's executives consist principally of
three elements based upon the foregoing objectives: base salary, cash bonuses
and stock-based equity incentives in the form of participation in Ascent's stock
option plans.
BASE SALARY. In establishing base salaries for the executive officers,
including the chief executive officer, the compensation committee: (a) monitors
salaries at other companies, particularly those that are in the same industry as
Ascent or related industries and/or located in the same general geographic area
as Ascent; (b) considers historic salary levels of the individual and the nature
of the individual's responsibilities; (c) compares the individual's base salary
with those of other executives at Ascent; and (d) considers general economic
conditions, our financial performance and the individual's performance, to the
extent determined to be appropriate.
ANNUAL INCENTIVE COMPENSATION. The compensation committee considers the
payment of cash bonuses pursuant to the 1997 Executive Bonus Plan, as amended
and restated, as part of its compensation program. In this regard, the
compensation committee determined to pay cash bonuses to Dr. Clemente and
Messrs. Bernardi, Fox, Moffitt and Vannatter for 1998. In establishing the
amounts of the cash bonuses for 1998, the compensation committee considered
Ascent's achievements in 1998, including the closing of the Series G financing
and the execution of the promotion agreement with Warner-Lambert Company, and
the roles played by Dr. Clemente and Messrs. Bernardi, Fox, Moffitt and
Vannatter in accomplishing these achievements.
LONG-TERM INCENTIVE COMPENSATION. The compensation committee uses stock
options as a significant element of the compensation package of Ascent's
executive officers, including the chief executive officer, because they provide
an incentive to executives to maximize stockholder value and because they reward
the executives only to the extent that stockholders also benefit. The
compensation committee believes that it is to Ascent's advantage to increase the
interest of executives in Ascent's welfare, as such employees share the primary
responsibility for the management and growth of Ascent.
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<PAGE> 126
Our board of directors currently grants stock options based on the
recommendation of the compensation committee, or a subcommittee of the
compensation committee. It is not the policy of the compensation committee to
recommend the grant of stock options to executives annually, and the timing of
grants depends upon a number of factors, including (a) new hires of executives,
(b) the executives' current stock and option holdings, (c) vesting schedules of
outstanding options and (d) the current stock price, and such other factors as
the compensation committee deems relevant. In 1998, after reviewing Ascent's
executive officers' stock and option holdings, the compensation committee
determined to recommend the grant of stock options to Messrs. Bernardi, Moffitt
and Vannatter. When recommending the grant of stock options, it has generally
been the policy of the compensation committee to recommend that the exercise
price of the options be equal or greater than the fair market value of Ascent
common stock on the date of grant. For additional information concerning option
grants to Named Executive Officers, see the table under the heading "Option
Grants in Last Fiscal Year." Commencing in 1999, in order to comply with Section
162(m) of the Internal Revenue Code, a subcommittee of the compensation
committee has been delegated the authority to grant options to executive
officers.
Because of a decline in market value of Ascent common stock, some
outstanding options were exercisable at prices that exceeded the market value of
Ascent common stock. In view of this decline and in keeping with our philosophy
of using equity incentives to motivate and retain qualified executives, the
board of directors, including the compensation committee members, believed it
important to regain the incentive intended to be provided by options to purchase
shares of Ascent common stock. On September 4, 1998, our board of directors,
including the compensation committee members, unanimously approved a repricing
of some options granted to employees pursuant to Ascent's 1992 Equity Incentive
Plan. Only three executive officers, Mr. Gregory A. Vannatter, vice president,
marketing, Mr. John G. Bernardi, vice president, finance, and treasurer, and Mr.
Timothy K. Moffitt, vice president, sales, participated in the repricing.
Additional details regarding the repricing of their options can be found under
the heading "Repricing of Options" below.
TAX CONSIDERATIONS
Section 162(m) of the Internal Revenue Code, generally disallows a tax
deduction to public companies for compensation over $1.0 million paid to the
chief executive officer and four other most highly compensated executive
officers. Qualifying performance-based compensation will not be subject to the
deduction limit if certain requirements are met. In this regard, Ascent has
limited the number of shares subject to stock options which may be granted to
company employees in a manner that complies with the performance-based
requirements of Section 162(m). While the committee does not currently intend to
qualify its other compensatory awards as performance-based compensation, it will
continue to monitor the impact of Section 162(m) on us.
Compensation Committee
Andre L. Lamotte, Sc.D.
James L. Luikart
Lee J. Schroeder
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<PAGE> 127
REPRICING OF OPTIONS
The following table sets forth information with respect to the repricing of
options during fiscal 1998: (a) the name of the executive officer; (b) the date
of the repricing; (c) the number of securities underlying the repriced options;
(d) the per-share market price of the underlying security at the time of the
repricing; (e) the original exercise price of the canceled option; (f) the per
share exercise price of the replacement option; and (g) the amount of time
remaining before the canceled option would have expired. We have never repriced
options prior to fiscal 1998. In accordance with the rules of the Securities and
Exchange Commission, the following table includes information only with respect
to optionees who were executive officers of Ascent at the time of the repricing.
OPTION REPRICING
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF ORIGINAL OPTION
SECURITIES MARKET PRICE EXERCISE TERM
UNDERLYING OF STOCK AT PRICE REMAINING AT
OPTIONS TIME OF AT TIME OF NEW DATE OF
REPRICED OR REPRICING OR REPRICING OR EXERCISE REPRICING OR
NAME DATE AMENDED AMENDMENT AMENDMENT PRICE AMENDMENT(1)
- ---- -------- ----------- ------------ -------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Alan R. Fox................ -- -- -- -- -- --
Emmett Clemente, Ph.D...... -- -- -- -- -- --
Gregory A. Vannatter....... 09/04/98 10,000 $1.875 $ 4.50 $3.75 03/16/08
09/04/98 8,000 $1.875 $ 7.25 $3.75 04/08/08
Timothy K. Moffitt......... 09/04/98 40,000 $1.875 $9.125 $3.75 06/24/07
09/04/98 10,000 $1.875 $ 4.50 $3.75 03/16/08
09/04/98 10,000 $1.875 $ 7.25 $3.75 04/08/08
John G. Bernardi........... 09/04/98 10,000 $1.875 $ 4.50 $3.75 03/16/08
09/04/98 6,000 $1.875 $ 7.25 $3.75 04/08/08
</TABLE>
- -------------------------
(1) The length of the original option term was not changed.
COMPENSATION COMMITTEE REPORT ON REPRICING OF OPTIONS
On September 4, 1998, our board of directors and the compensation committee
of our board of directors approved a repricing of some options granted to
employees, including some of our executive officers, under our 1992 Equity
Incentive Plan. Because of a decline in market value of Ascent common stock,
some outstanding options were exercisable at prices that greatly exceeded the
market value of Ascent common stock. In view of this decline and in keeping with
Ascent's philosophy of using equity incentives to motivate and retain qualified
employees, the compensation committee believed it important to regain the
incentive intended to be provided by options to purchase shares of Ascent common
stock. The compensation committee believed the repricing was necessary as a
result of the intense competition in our industry for experienced managers,
skilled scientists, sales and marketing personnel, and other employees. Further,
equity-based compensation is of particular importance among drug development and
marketing companies, and the failure of Ascent to provide competitive
equity-based compensation could require us to pay significantly higher cash
salaries and bonuses in order to attract and retain qualified personnel. Because
increased cash compensation would negatively impact cash flow and would likely
result in an immediate drop in the value of stockholders' investments, the
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<PAGE> 128
compensation committee believed that repricing outstanding options and regaining
the incentive intended to be provided by the options would be in the best
interests of Ascent and our stockholders.
The exercise price of the repriced options was above the then-current fair
market value of the common stock, thus requiring the stock price to increase in
order for the optionees to realize any value. In addition, in exchange for the
repricing, the vesting schedule of any of then unvested portion of a repriced
option was delayed until six months after the date of grant specified in the
original option. Accordingly, optionees were prohibited from exercising the
repriced options for at least six months. Except as otherwise noted, vesting
schedules of the repriced options remained the same as those of the original
options.
Pursuant to the terms of the repricing, 88 option holders, holding options
to purchase an aggregate of 555,450 shares of Ascent common stock, that had
exercise prices ranging from $3.875 to $9.125, were issued new options to
purchase an aggregate of 555,450 shares of Ascent common stock having an
exercise price of $3.75 per share. This included three executive officers,
holding options to purchase an aggregate of 94,000 shares of Ascent common
stock, that had exercise prices ranging from $4.50 to $9.125, who were issued
new options to purchase an aggregate of 94,000 shares of Ascent common stock at
an exercise price of $3.75 per share.
Compensation Committee
Andre L. Lamotte, Sc.D.
James L. Luikart
Lee J. Schroeder
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of our company's compensation committee are Dr. Lamotte
and Messrs. Luikart and Schroeder. No executive officer of Ascent has served as
a director or member of the compensation committee (or other committee serving
an equivalent function) of any other entity, one of whose executive officers
served as a director of or member of our compensation committee.
Since January 1, 1998, we have engaged in the transactions described below
under "Certain Relationships and Related Transactions" with affiliates of Mr.
Luikart, a director of Ascent and a member of our compensation committee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1998, we entered into or engaged in the following
transactions with the following directors, executive officers and 5%
stockholders of Ascent, and their affiliates:
ING FURMAN SELZ. On June 1, 1998, we issued and sold to funds affiliated
with ING Furman Selz Investments LLC and BancBoston Ventures Inc. an aggregate
of 7,000 shares of Series G preferred stock exchangeable into $7.0 million
aggregate principal of 8% convertible subordinated notes of Ascent, $9.0 million
aggregate principal amount of 8% seven-year subordinated notes and seven-year
warrants to purchase 2,116,958 shares of Ascent common stock at a per share
exercise price of $4.75 for an aggregate purchase price of $16.0 million. The
Series G preferred stock will automatically convert into Ascent
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<PAGE> 129
common stock under specified circumstances based on the fair market value of
Ascent common stock. The Series G warrants expire on June 1, 2005. On February
16, 1999, in connection with and as a condition to the strategic alliance with
Alpharma, we entered into a second amendment to the May 1998 securities purchase
agreement. The details of the second amendment are set forth under "Proposal
2 -- Amendment to May 1998 Warrants and Sale and Issuance of Shares of Ascent
Common Stock" on page 100 of this proxy statement/prospectus. On May 25, 1999,
we entered into an additional agreement with the purchasers of Series G
preferred stock providing that, subject to Alpharma's approval, Ascent's
obligation under the terms of the Series G preferred stock and 8% subordinated
notes to make dividend and interest payments on June 1, 1999 will be deferred
until July 1, 1999 and that the dividends and interest would accrue at a rate of
9% per annum during the period from June 1, 1999 through July 1, 1999. Mr. James
L. Luikart, a director of Ascent and a member of our compensation committee, is
one of the managing members of FS Private Investments, which manages the
investments of Furman Selz Investors II L.P. and affiliated funds, a greater
than 5% stockholder of Ascent.
On June 1, 1998, in connection with the Series G preferred stock financing
described above, we entered into a financial advisory services fee agreement
with ING Furman Selz and BancBoston Ventures Inc. under which ING Furman Selz
agreed to provide ongoing customary financial advisory services to us at the
times and on the matters mutually agreed to by us and ING Furman Selz until June
1, 2003 for an advisory fee of $150,000 per year. On June 1, 1998, in connection
with the Series G preferred stock financing, we paid ING Furman Selz a closing
fee of $381,250 and BancBoston Ventures, Inc. a closing fee of $118,750. In
addition, in 1998, we paid ING Furman Selz financial advisory services fees of
$112,500 under this agreement. On February 16, 1999, we amended this agreement
in connection with the proposed loan by Alpharma to us to provide that in lieu
of making additional cash payments to them, we will issue to ING Furman Selz
150,000 shares of Ascent common stock and that upon the issuance of such shares
the agreement will terminate. The details of this amendment are set forth under
"Proposal 2 -- Amendment to May 1998 Warrants and Sale and Issuance of Shares of
Ascent Common Stock" on page 100 of this proxy statement/prospectus.
TRIUMPH-CONNECTICUT LIMITED PARTNERSHIP. On January 31, 1997, we entered
into a securities purchase agreement with Triumph-Connecticut Limited
Partnership, a 5% stockholder of Ascent, and certain other purchasers identified
in the agreement, pursuant to which we issued on January 31, 1997 and June 4,
1997 promissory notes to Triumph-Connecticut Limited Partnership and related
entities in an aggregate amount of $7,000,000 and warrants exercisable for an
aggregate of 561,073 and 218,195 shares of Ascent common stock at per share
exercise prices of $0.01 and $5.29, respectively. On March 3, 1998, we paid an
aggregate of $875,000 in principal and $153,125 in interest on these promissory
notes. On June 1, 1998, in connection with the Series G preferred stock
financing, we amended the securities purchase agreement and paid
Triumph-Connecticut Limited Partnership and related entities aggregate
consideration of $5,379,793, in full payment of their promissory notes.
REGISTRATION RIGHTS. Some persons and entities, including the purchasers
of Ascent Series G preferred stock and related warrants and Triumph-Connecticut
Limited Partnership, are entitled to registration of their shares of common
stock under the Securities Act, including shares of common stock that were
acquired upon conversion of convertible preferred stock or the exercise of
warrants, under the terms of registration agreements between us and such persons
and entities. The registration agreements generally provide that in the event we
propose to register any of our securities under the
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Securities Act, the holders of registration rights are entitled to include
shares in the registration, subject to the right of the managing underwriter of
any underwritten offering to exclude some or all of their shares from the
registration for marketing reasons. Some holders of registration rights also
have the right to require us to register their shares of common stock under the
Securities Act, including shares of common stock that may be acquired upon the
conversion of convertible preferred stock of the exercise of warrants, if the
holders of such common stock holding specified percentages of registrable shares
so request, and we are required to use our best efforts to effect the
registration, subject to some conditions and limitations. We are generally
required to bear the expense of all registrations. In June 1998, we filed a
registration statement with the Securities and Exchange Commission registering
the 779,268 shares of Ascent common stock issuable upon exercise of the warrants
held by Triumph-Connecticut Limited Partnership and related entities. As of
December 31, 1998, approximately 9,385,935 shares of common stock (including
shares issuable pursuant to the exercise of warrants and the conversion of
shares of Ascent Series G preferred stock) were subject to registration
agreements.
We believe 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 we could have obtained from
unaffiliated third parties.
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STOCK PERFORMANCE GRAPH
The stock performance graph below compares the percentage change in
cumulative stockholder return on Ascent common stock for the period from May 29,
1997 (the date Ascent common stock was first publicly traded) through December
31, 1998 with the cumulative total return on (a) the Nasdaq National Market
Index and (b) the Nasdaq Pharmaceuticals Index.
This graph assumes the investment of $100.00 in Ascent common stock (at the
initial public offering price), in the Nasdaq National Market Index and in the
Nasdaq Pharmaceuticals Index on May 29, 1997 and assumes dividends are
reinvested. Prior to May 29, 1997, Ascent common stock was not registered under
the Exchange Act.
<TABLE>
<CAPTION>
NASDAQ PHARMACEUTICALS
ASCENT PEDIATRICS INDEX NASDAQ US INDEX
----------------- ---------------------- ---------------
<S> <C> <C> <C>
May 1997 100.00 100.00 100.00
December 1997 65.28 100.44 113.03
December 1998 47.91 128.57 158.82
</TABLE>
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information, as of January 31, 1999,
regarding the beneficial ownership of Ascent common stock and Ascent Series G
preferred stock by (a) each person or entity known to us to beneficially own
more than five percent of Ascent common stock or Ascent Series G preferred
stock, (b) each director and Named Executive Officer of Ascent, (c) the chief
executive officer and the two other most highly compensated executive officers
of Ascent who were serving as such at December 31, 1998, and (d) all current
directors and executive officers of Ascent as a group.
The number of shares beneficially owned by each 5% stockholder, director
and executive officer is determined under rules promulgated by the Securities
and Exchange Commission, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under these rules, beneficial
ownership includes any shares as to which an individual or group has sole or
shared voting power or investment power and also any shares which an individual
or group has the right to acquire within 60 days of January 31, 1999 through the
conversion of any convertible note or the exercise of any stock option, warrant
or other right. The inclusion in this proxy statement/prospectus of these
shares, however, is not an admission that the named stockholder is a direct or
indirect beneficial owner of the shares. Unless otherwise indicated, each person
or group named in the table has sole voting and investment power (or shares the
power with his or her spouse) with respect to all shares of capital stock listed
as owned by the person or entity.
The "Total Percent of Common and Preferred Stock on an as-converted Basis"
column reflects each listed individual's or group's percent beneficial ownership
of Ascent voting stock on an as-converted basis. This column differs from the
column entitled "Percent of Class" with respect to Ascent common stock because
the percent calculation in this column is based on the assumption that all of
the shares of Ascent Series G preferred stock currently outstanding are
converted into 1,473,684 shares of Ascent common stock. The percent calculation
in the column entitled "Percent of Class" with respect to the Ascent common
stock includes shares of Ascent common stock issuable upon conversion of the
Ascent Series G preferred stock only to the extent that the listed individual or
group beneficially owns such shares of Ascent Series G preferred stock.
<TABLE>
<CAPTION>
SERIES G
COMMON STOCK PREFERRED STOCK
----------------------- ----------------------- TOTAL PERCENT
OF COMMON
NUMBER OF NUMBER OF AND PREFERRED
SHARES PERCENT SHARES PERCENT STOCK ON AN
BENEFICIALLY OF BENEFICIALLY OF AS-CONVERTED
OWNED CLASS OWNED CLASS BASIS
------------ ------- ------------ ------- --------------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
Funds affiliated with FS Private
Investments LLC....................... 2,692,981(1) 27.9% 5,250(2) 75.0% 26.8%
55 East 52nd Street
37th Floor
New York, NY 10055
BancBoston Ventures Inc. ............... 852,883(3) 10.9% 1,663 23.8% 9.5%
175 Federal Street
Boston, MA 02110
</TABLE>
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<TABLE>
<CAPTION>
SERIES G
COMMON STOCK PREFERRED STOCK
----------------------- ----------------------- TOTAL PERCENT
OF COMMON
NUMBER OF NUMBER OF AND PREFERRED
SHARES PERCENT SHARES PERCENT STOCK ON AN
BENEFICIALLY OF BENEFICIALLY OF AS-CONVERTED
OWNED CLASS OWNED CLASS BASIS
------------ ------- ------------ ------- --------------
<S> <C> <C> <C> <C> <C>
Medical Science Partners Group.......... 824,302(4) 11.8% -- -- 9.7%
161 Worcester Rd, Suite 301,
Framingham, MA 01701
Funds affiliated with Burr, Egan,
Deleage & Co. ........................ 667,514(5) 9.5% -- -- 7.8%
One Post Office Square
Boston, MA 02109
New York Life Insurance Company......... 659,851(6) 9.3% -- -- 7.7%
51 Madison Avenue
New York, NY 10010
Triumph-Connecticut Limited
Partnership........................... 654,591(7) 8.6% -- -- 7.2%
60 State Street
Boston, MA 02109
Paribas Group........................... 535,840(8) 7.5% -- -- 6.2%
c/o White & Case
1155 Avenue of the Americas
New York, NY 10036
Atlas Venture Fund II, L.P.............. 424,063(9) 6.0% -- -- 5.0%
222 Berkeley Street
Boston, MA 02109
DIRECTORS
Raymond F. Baddour, Sc.D. .............. 272,605(10) 3.9% -- -- 3.2%
Robert E. Baldini....................... 112,750(11) 1.6% -- -- 1.3%
Emmett Clemente, Ph.D. ................. 317,150(12) 4.5% -- -- 3.7%
Michael J. F. Du Cros................... 439,063(13) 6.2% 5.1%
Alan R. Fox............................. 112,528(14) 1.6% -- -- 1.3%
Andre L. Lamotte, Sc.D.................. 851,565(15) 12.2% -- -- 10.0%
James L. Luikart........................ 2,707,981(16) 28.0% 5,250(17) 75.0% %
Terrance McGuire........................ 682,514(18) 9.7% -- -- 8.0%
Lee J. Schroeder........................ 23,500(19) * -- -- *
OTHER NAMED EXECUTIVE OFFICERS
Gregory A. Vannatter.................... 21,805(20) * -- -- *
Timothy K. Moffitt...................... 11,500(21) * -- -- *
John G. Bernardi........................ 18,367(22) * -- -- *
All directors and executive officers as
a group (12 persons).................. 4,466,065(23) 48.6% 5,250(24) 75.0% 41.9%
</TABLE>
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- -------------------------
* Represents less than 1% of the outstanding shares of Ascent common stock.
(1) Consists of (a) 974,316 shares issuable upon the conversion of Series G
preferred stock held by Furman Selz Investors II L.P., (b) 1,399,662 shares
issuable upon the exercise of warrants held by Furman Selz Investors II
L.P. within 60 days of January 31, 1999, (c) 83,579 shares issuable upon
the conversion of Series G preferred stock held by FS Employee Investors
LLC, (d) 119,961 shares issuable upon the exercise of warrants held by FS
Employee Investors LLC within 60 days of January 31, 1999, (e) 47,368
shares issuable upon the conversion of Series G preferred stock held by FS
Parallel Fund L.P. and (f) 68,095 shares issuable upon the exercise of
warrants held by FS Parallel Fund L.P. within 60 days of January 31, 1999.
Furman Selz Investors II L.P., FS Employee Investors LLC and FS Parallel
Fund L.P. are affiliates under common control.
(2) Consists of (a) 4,628 shares of Series G preferred stock held by Furman
Selz Investors II L.P., (b) 397 shares of Series G preferred stock held by
FS Employee Investors LLC and (c) 225 shares of Series G preferred stock
held by FS Parallel Fund L.P. Furman Selz Investors II L.P., FS Employee
Investors LLC and FS Parallel Fund L.P. are affiliates under common
control.
(3) Consists of (a) 350,105 shares issuable upon the conversion of Series G
preferred stock and (b) 502,778 shares issuable upon the exercise of
warrants within 60 days of January 31, 1999.
(4) Consists of (a) 738,776 shares held by Medical Science Partners, L.P., (b)
2,888 shares issuable upon the exercise of warrants held by Medical Science
Partners, L.P. within 60 days of January 31, 1999, (c) 57,142 shares held
by Medical Science Partners II, L.P., (d) 11,805 shares issuable upon the
exercise of warrants Medical Science Partners II, L.P. within 60 days of
January 31, 1999 and (e) 13,691 shares held by Medical Science II
Co-Investment, L.P. Medical Science Partners, L.P., Medical Science
Partners II, L.P. and Medical Science II Co-Investment, L.P. are affiliates
under common control.
(5) Consists of (a) 582,341 shares held by Alta V Limited Partnership, (b)
78,319 shares issuable upon the exercise of warrants held by Alta V Limited
Partnership within 60 days of January 31, 1999, (c) 6,119 shares held by
Customs House Partners and (d) 735 shares issuable upon the exercise of
warrants held by Customs House Partners within 60 days of January 31, 1999.
The respective general partners of each of these funds exercise sole voting
and investment power with respect to the shares held by the funds.
(6) Includes 117,706 shares issuable upon the exercise of warrants within 60
days of January 31, 1999.
(7) Consists of 654,591 shares issuable upon the exercise of warrants.
(8) Consists of (a) 392,307 shares held by Paribas Principal, Inc., (b) 133,333
shares issuable upon the exercise of warrants held by Paribas Principal,
Inc. within 60 days of January 31, 1999 and (c) 10,200 shares issuable upon
the exercise of warrants held by Banque Paribas within 60 days of January
31, 1999. Paribas Principal, Inc. and Banque Paribas are affiliates under
common control.
(9) Includes 39,929 shares issuable upon the exercise of warrants within 60
days of January 31, 1999.
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<PAGE> 135
(10) Includes (a) 22,221 shares issuable upon the exercise of warrants within 60
days of January 31, 1999 and (b) 15,000 shares issuable upon the exercise
of options within 60 days of January 31, 1999.
(11) Consists of 112,750 shares issuable upon the exercise of options within 60
days of January 31, 1999.
(12) Includes 144,500 shares issuable upon the exercise of options within 60
days of January 31, 1999.
(13) Consists of (a) the shares described in note (9) and (b) 15,000 shares
issuable upon the exercise of options within 60 days of January 31, 1999.
(14) Consists of (a) 26,845 shares held by Mr. Fox, (b) 3,332 shares issuable
upon the exercise of warrants held by Mr. Fox within 60 days of January 31,
1999, (c) 76,500 shares issuable upon the exercise of options held by Mr.
Fox within 60 days of January 31, 1999, (d) 3,307 shares held by Mr. Fox's
spouse, (e) 444 shares issuable upon the exercise of warrants held by Mr.
Fox's spouse within 60 days of January 31, 1999 and (f) 2,100 shares held
by Mr. Fox's children.
(15) Consists of (a) the shares described in note (4), (b) 9,153 shares held by
Dr. Lamotte, (c) 3,110 shares issuable upon the exercise of warrants held
by Dr. Lamotte within 60 days of January 31, 1999 and (d) 15,000 shares
issuable upon the exercise of options held by Dr. Lamotte within 60 days of
January 31, 1999. Dr. Lamotte is the managing general partner of the
general partners of Medical Science Partners, L.P., Medical Science
Partners II, L.P. and Medical Science II Co-Investment, L.P. and may be
considered the beneficial owner of the shares held by such entities,
although Dr. Lamotte disclaims such beneficial ownership, except as to his
pecuniary interest therein.
(16) Consists of (a) the shares described in note (1) and (b) 15,000 shares
issuable upon the exercise of options within 60 days of January 31, 1999.
Mr. Luikart is an executive vice president of ING Furman Selz Investments,
an affiliate of FS Private Investments LLC.
(17) Consists of the shares described in note (2).
(18) Consists of (a) the shares described in note (5) and (b) 15,000 shares
issuable upon the exercise of options within 60 days of January 31, 1999.
Mr. McGuire is a general partner of Alta V Management Partners, L.P., which
is the general partner of Alta V Limited Partnership.
(19) Consists of 23,500 shares issuable upon the exercise of options within 60
days of January 31, 1999.
(20) Includes 14,875 shares issuable upon the exercise of options within 60 days
of January 31, 1999.
(21) Includes 10,000 shares issuable upon the exercise of options within 60 days
of January 31, 1999.
(22) Includes 14,875 shares issuable upon the exercise of options within 60 days
of January 31, 1999.
(23) See notes (10) through (16) and notes (18) through (22).
(24) Consists of the shares described in note (2).
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act of 1934, as amended, requires our
executive officers and directors, and persons who beneficially own more than 10%
of a registered class of Ascent equity securities, to file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership of our equity securities. To our knowledge, based solely on review of
the copies of the reports furnished to us and written representations that no
year-end reports on Form 5 were required, during the fiscal year ended December
31, 1998, all Section 16(a) filing requirements applicable to our executive
officers, directors and greater-than-10% stockholders were timely made other
than the filing of a Form 3 by Mr. James L. Luikart in connection with his
becoming a director of the company.
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PROPOSAL 4 -- 1999 STOCK INCENTIVE PLAN
GENERAL
On April 14, 1999, our board of directors adopted, subject to stockholder
approval, the 1999 Stock Incentive Plan. Up to 500,000 shares of Ascent common
stock, subject to adjustment in the event of stock splits and other similar
events, may be issued pursuant to options or restricted stock awards granted
under the plan.
The 1999 Stock Incentive Plan is intended to supplement our 1992 Equity
Incentive Plan, which expires in 2004 and under which only 12,113 shares
remained available for new option grants as of March 15, 1999.
Our board of directors believes that our future success depends, in large
part, upon our ability to maintain a competitive position in attracting,
retaining and motivating key personnel. Accordingly, our board of directors
believes adoption of the plan is in the best interests of Ascent and our
stockholders and recommends a vote "FOR" this proposal.
DESCRIPTION OF AWARDS
The plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code, nonstatutory stock
options, restricted stock awards and other stock-based awards, including the
grant of shares based upon certain conditions, the grant of securities
convertible into Ascent common stock and the grant of stock appreciation rights.
INCENTIVE STOCK OPTIONS AND NONSTATUTORY STOCK OPTIONS. Optionees receive
the right to purchase a specified number of shares of Ascent common stock at a
specified option price and subject to such other terms and conditions as are
specified in connection with the option grant. Options may be granted at an
exercise price which may be less than, equal to or greater than the fair market
value of Ascent common stock on the date of grant. Under present law, however,
incentive stock options and options intended to qualify as performance-based
compensation under Section 162(m) of the Internal Revenue Code may not be
granted at an exercise price less than the fair market value of Ascent common
stock on the date of grant (or less than 110% of the fair market value in the
case of incentive stock options granted to optionees holding more than 10% of
the voting power of Ascent). Options may not be granted for a term in excess of
ten years. The plan permits our board of directors to determine the manner of
payment of the exercise price of options, including through payment by cash,
check or in connection with a "cashless exercise" through a broker, by surrender
to us of shares of Ascent common stock, by delivery to us of a promissory note,
or by any other lawful means.
RESTRICTED STOCK AWARDS. Restricted stock awards entitle recipients to
acquire shares of Ascent common stock, subject to our right to repurchase all or
part of the shares from the recipient in the event that the conditions specified
in the applicable award are not satisfied prior to the end of the applicable
restriction period established for the award.
OTHER STOCK-BASED AWARDS. Under the plan, our board of directors has the
right to grant other awards based upon Ascent common stock having the terms and
conditions as our board of directors may determine, including the grant of
shares based upon certain conditions, the grant of securities convertible into
Ascent common stock and the grant of stock appreciation rights.
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<PAGE> 138
ELIGIBILITY TO RECEIVE AWARDS
Our officers, employees, directors, consultants and advisors (and those of
any future subsidiaries) are eligible to be granted awards under the 1999 Stock
Incentive Plan. Under present law, however, incentive stock options may only be
granted to employees. The maximum number of shares with respect to which an
award may be granted to any participant under the plan may not exceed 400,000
shares per calendar year.
On May 25, 1999, the last reported sale price of Ascent common stock on the
Nasdaq National Market was $2.8125.
ADMINISTRATION
The 1999 Stock Incentive Plan is administered by our board of directors.
Our board of directors has the authority to adopt, amend and repeal the
administrative rules, guidelines and practices relating to the plan and to
interpret the provisions of the plan. Pursuant to the terms of the plan, our
board of directors may delegate authority under the plan to one or more
committees of our board of directors, and subject to some limitations, to one or
more of our executive officers. Our board of directors has authorized a
subcommittee of the compensation committee to administer some aspects of the
plan, including the granting of options to executive officers. Subject to any
applicable limitations contained in the plan, our board of directors, the
compensation committee, or any other committee or subcommittee or executive
officer to whom our board of directors delegates authority, as the case may be,
selects the recipients of awards and determines:
- the number of shares of Ascent common stock covered by options and the
dates upon which the options become exercisable;
- the exercise price of options;
- the duration of options; and
- the number of shares of Ascent common stock subject to any restricted
stock or other stock-based awards and the terms and conditions of the
awards, including conditions for repurchase, issue price and repurchase
price.
Our board of directors is required to make appropriate adjustments in
connection with the plan and any outstanding awards to reflect stock dividends,
stock splits and certain other events. In the event of a merger, liquidation or
other acquisition event, as defined in the plan, our board of directors is
authorized to provide for (a) outstanding options or other stock-based awards to
be assumed or substituted for, (b) to accelerate the awards to make them fully
exercisable prior to consummation of the acquisition event, or (c) to provide
for a cash out of the value of any outstanding options. If any award expires or
is terminated, surrendered, canceled or forfeited, the unused shares of Ascent
common stock covered by the award will again be available for grant under the
plan.
AMENDMENT OR TERMINATION
No award may be made under the plan after April 14, 2009, but awards
previously granted may extend beyond that date but in no event later than 10
years from the date of grant. Our board of directors may at any time amend,
suspend or terminate the plan, except that after the date of the amendment no
award intended to comply with Section 162(m) of the Internal Revenue Code will
become exercisable, realizable or vested unless and until the amendment will
have been approved by our stockholders.
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FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the United States federal income tax
consequences that generally will arise with respect to awards granted under the
plan and with respect to the sale of Ascent common stock, which your depositary
shares represent, acquired under the plan.
INCENTIVE STOCK OPTIONS
In general, a participant will not recognize taxable income upon the grant
or exercise of an incentive stock option. Instead, a participant will recognize
taxable income with respect to an incentive stock option only upon the sale of
common stock acquired through the exercise of the option ("ISO stock"). The
exercise of an incentive stock option, however, may subject the participant to
the alternative minimum tax.
Generally, the tax consequences of selling ISO stock will vary with the
length of time that the participant has owned the ISO stock at the time it is
sold. If the participant sells ISO stock after having owned it for at least two
years from the date the option was granted and one year from the date the option
was exercised, then the participant will recognize long-term capital gain in an
amount equal to the excess of the sale price of the ISO stock over the exercise
price.
If the participant sells ISO stock for more than the exercise price prior
to having owned it for at least two years from the grant date and one year from
the exercise date (a "Disqualifying Disposition"), then all or a portion of the
gain recognized by the participant will be ordinary compensation income and the
remaining gain, if any, will be a capital gain. This capital gain will be a
long-term capital gain if the participant has held the ISO stock for more than
one year prior to the date of sale.
If a participant sells ISO stock for less than the exercise price, then the
participant will recognize capital loss equal to the excess of the exercise
price over the sale price of the ISO stock. This capital loss will be a
long-term capital loss if the participant has held the ISO stock for more than
one year prior to the date of sale.
NONSTATUTORY STOCK OPTIONS
As in the case of an incentive stock option, a participant will not
recognize taxable income upon the grant of a nonstatutory stock option. Unlike
the case of an incentive stock option, however, a participant who exercises a
nonstatutory stock option generally will recognize ordinary compensation income
in an amount equal to the excess of the fair market value of the common stock
acquired through the exercise of the option ("NSO stock") on the exercise date
over the exercise price.
With respect to any NSO stock, a participant will have a tax basis equal to
the exercise price plus any income recognized upon the exercise of the option.
Upon selling NSO stock, a participant generally will recognize capital gain or
loss in an amount equal to the excess of the sale price of the NSO stock over
the participant's tax basis in the NSO stock. This capital gain or loss will be
a long-term gain or loss if the participant has held the NSO stock for more than
one year prior to the date of the sale.
RESTRICTED STOCK AWARDS
A participant will not recognize taxable income upon the grant of a
restricted stock award, unless the participant makes an election under Section
83(b) of the Internal Revenue Code. If the participant makes a Section 83(b)
election within 30 days of the
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<PAGE> 140
date of the grant, then the participant will recognize ordinary income, for the
year in which the award is granted, in an amount equal to the difference between
the fair market value of the common stock at the time the award is granted and
the purchase price paid for the common stock. If a Section 83(b) election is not
made, the participant will recognize ordinary income, at the time that the
forfeiture provisions or restrictions on transfer lapse, in an amount equal to
the difference between the fair market value of the common stock at the time of
such lapse and the original purchase price paid for the common stock. The
participant will have a basis in the common stock acquired equal to the sum of
the price paid and the amount of ordinary compensation income recognized.
Upon the disposition of the common stock acquired pursuant to a restricted
stock award, the participant will recognize a capital gain or loss equal to the
difference between the sale price of the common stock and the participant's
basis in the common stock. The gain or loss will be a long-term gain or loss if
the shares are held for more than one year. For this purpose, the holding period
will begin just after the date on which the forfeiture provisions or
restrictions lapse if a Section 83(b) election is not made, or just after the
award is granted if a Section 83(b) election is made.
OTHER STOCK-BASED AWARDS
The tax consequences associated with any other stock-based award granted
under the plan will vary depending on the specific terms of such award. Among
the relevant factors are whether or not the award has a readily ascertainable
fair market value, whether or not the award is subject to forfeiture provisions
or restrictions on transfer, the nature of the property to be received by the
participant under the award and the participant's holding period and tax basis
for the award or underlying common stock.
TAX CONSEQUENCES TO US
The grant of an award under the plan will have no tax consequences to us.
Moreover, in general, neither the exercise of an incentive stock option nor the
sale of any common stock acquired under the plan will have any tax consequences
to us. We generally will be entitled to a business-expense deduction, however,
with respect to any ordinary compensation income recognized by a participant
under the plan, including as a result of the exercise of a nonstatutory stock
option, a Disqualifying Disposition or a Section 83(b) Election. Any such
deduction will be subject to the limitations of Section 162(m) of the Internal
Revenue Code.
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PROPOSAL 5 -- SELECTION OF INDEPENDENT AUDITORS
Our board of directors has selected PricewaterhouseCoopers LLP as our
auditors for the year ending December 31, 1999, subject to ratification by
stockholders at the annual meeting. If our stockholders do not ratify our
selection of PricewaterhouseCoopers LLP, our board of directors will reconsider
the matter. A representative of PricewaterhouseCoopers LLP, which served as
auditors for the year ended December 31, 1998, is expected to be present at the
annual meeting, to respond to appropriate questions, and to make a statement if
he or she so desires.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement (file no. 333- ) on Form S-4
with the Securities and Exchange Commission. This proxy statement/prospectus,
which is a part of the registration statement, does not contain all of the
information included in the registration statement. Certain information is
omitted and you should refer to the registration statement and its exhibits.
With respect to references made in this document to any contract, agreement or
other document of Ascent, the references are not necessarily complete and you
should refer to the exhibits attached to the registration statement for copies
of the actual contract, agreement or other document. You may review a copy of
the registration statement, including exhibits, at the Securities and Exchange
Commission's public reference room at:
- Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;
- Seven World Trade Center, 13th Floor, New York, New York 10048; or
- Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms.
We also file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statements or other information on file at the public
reference rooms. You can also request copies of these documents, for a copying
fee, by writing to the Securities and Exchange Commission.
Our Securities and Exchange Commission filings can also be reviewed by
accessing the Securities and Exchange Commission's Internet site at
http://www.sec.gov, which contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Securities and Exchange Commission.
LEGAL OPINIONS
Hale and Dorr LLP, Boston, Massachusetts, has rendered opinions concerning
certain tax matters described under "Proposal 1 -- The Merger -- United States
Federal Income Tax Consequences."
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EXPERTS
The financial statements as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998 included in this proxy
statement/prospectus have been included herein in reliance on the report, which
includes an explanatory paragraph regarding the entity's ability to continue as
a going concern, of PricewaterhouseCoopers LLP, independent accountants, given
on the authority of that firm as experts in auditing and accounting.
Representatives of PricewaterhouseCoopers LLP will attend the annual meeting and
will have an opportunity to make a statement and to respond to appropriate
questions that you pose.
The statement of assets related to the product line to be acquired by
Ascent as of December 29, 1996 and the statements of net sales and identified
costs and expenses of the product line to be acquired by Ascent for the years
ended December 31, 1995 and December 29, 1996 of the Feverall product line of
Upsher-Smith Laboratories, Inc. included in this proxy statement/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.
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ASCENT PEDIATRICS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ASCENT PEDIATRICS, INC.:
Audited Financial Statements -- December 31, 1997 and
1998......................................................
Report of Independent Accountants......................... F-2
Balance Sheets............................................ F-3
Statements of Operations.................................. F-4
Statements of Stockholders' Equity (Deficit).............. F-5
Statements of Cash Flows.................................. F-6
Notes to Financial Statements............................. F-7
Unaudited Condensed Financial Statements -- March 31, 1998
and 1999..................................................
Unaudited Condensed Balance Sheets........................ F-27
Unaudited Condensed Statements of Operations.............. F-28
Unaudited Statements of Comprehensive Loss................ F-28
Unaudited Condensed Statements of Cash Flows.............. F-29
Notes to Unaudited Condensed Financial Statements......... F-30
A PRODUCT LINE OF UPSHER-SMITH LABORATORIES, INC.:
Independent Auditors' Report................................ F-35
Statement of Assets Related to the Product Line Acquired by
Ascent Pediatrics, Inc. as of December 29, 1996 and July
9, 1997 (unaudited)....................................... F-36
Statements of Net Sales and Identified Costs and Expenses of
the Product Line Acquired by Ascent Pediatrics, Inc. Years
ended December 31, 1995 and December 29, 1996 and seven
months ended July 9, 1997 (unaudited)..................... F-37
Notes to the Financial Statements........................... F-38
ASCENT PEDIATRICS, INC.:
Introduction to Unaudited Pro Forma Financial Statements.... F-41
Unaudited Pro Forma Balance Sheet........................... F-43
Unaudited Pro Forma Statements of Operations................ F-44
Notes to Unaudited Pro Forma Financial Statements........... F-46
</TABLE>
F-1
<PAGE> 144
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ascent Pediatrics, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, comprehensive loss, stockholders' equity (deficit) and cash flows
present fairly, in all material respects, the financial position of Ascent
Pediatrics, Inc., at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform our
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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has suffered recurring losses from operations
and requires additional financing. These factors raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note A. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 24, 1999
F-2
<PAGE> 145
ASCENT PEDIATRICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................... $ 2,171,777 $11,700,612
Current marketable securities..................... -- 2,527,900
Accounts receivable, less allowance for doubtful
accounts of $48,000 and $50,000 at December 31,
1998 and 1997, respectively.................... 918,307 765,609
Inventory......................................... 919,785 789,498
Other current assets.............................. 274,983 124,874
----------- -----------
Total current assets........................... 4,284,852 15,908,493
Fixed assets, net................................... 730,894 759,563
Debt issue costs, net............................... 606,092 436,515
Intangibles, net.................................... 10,523,789 11,215,506
Other assets........................................ 155,303 113,386
----------- -----------
Total assets................................... $16,300,930 $28,433,463
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.................................. $ 1,510,193 $ 1,509,258
Accrued expenses.................................. 2,306,243 1,157,379
Promissory note................................... -- 5,500,000
Subordinated secured notes, current portion....... -- 3,500,000
----------- -----------
Total current liabilities...................... 3,816,436 11,666,637
Subordinated secured notes.......................... 8,681,474 1,252,068
----------- -----------
Total liabilities.............................. 12,497,910 12,918,705
Commitments and contingencies (Note H)
Stockholders' equity
Preferred stock, $.01 par value; 5,000,000 shares
authorized; 7,000 shares, designated as Series
G convertible exchangeable preferred stock,
issued and outstanding at December 31, 1998
(liquidation preference of $7,000,000)......... 6,461,251 --
Common stock, $.00004 par value; 60,000,000 shares
authorized; 6,975,921 and 6,893,332 shares
issued and outstanding at December 31, 1998 and
1997, respectively............................. 279 276
Additional paid-in capital........................ 47,951,271 47,891,846
Accumulated deficit............................... (50,609,781) (32,378,480)
Unrealized gain on securities..................... -- 1,116
----------- -----------
Total stockholders' equity..................... 3,803,020 15,514,758
----------- -----------
Total liabilities and stockholders' equity..... $16,300,930 $28,433,463
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 146
ASCENT PEDIATRICS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Net revenue.................................. $ 4,475,718 $ 2,073,458 $ --
Costs of sales............................... 2,306,717 1,245,543 --
------------ ------------ -----------
Gross margin................................. 2,169,001 827,915 --
Costs and expenses
Selling, general and administrative........ 14,513,559 8,305,205 2,805,352
Research and development................... 3,868,185 4,376,700 3,760,948
------------ ------------ -----------
Total costs and expenses................... 18,381,744 12,681,905 6,566,300
Loss from operations.................... (16,212,743) (11,853,990) (6,566,300)
Interest income.............................. 368,570 693,019 79,084
Interest expense............................. (1,220,665) (1,358,850) --
Other income................................. -- 21,742 --
------------ ------------ -----------
Loss before extraordinary item.......... (17,064,838) (12,498,079) (6,487,216)
Extraordinary item loss on early
extinguishment of debt (Note N), net of
taxes of $0................................ 1,166,463 -- --
------------ ------------ -----------
Net loss................................ (18,231,301) (12,498,079) (6,487,216)
Accretion to redemption value of preferred
stock...................................... -- 247,361 137,783
Preferred stock dividend..................... 449,169 -- --
------------ ------------ -----------
Net loss to common stockholders......... $(18,680,470) $(12,745,440) $(6,624,999)
============ ============ ===========
Results per common share:
Historical -- basic and diluted:
Loss before extraordinary item.......... $ (2.46) $ (3.02) $ (32.75)
============ ============ ===========
Extraordinary item loss on early
extinguishment of debt................ $ (0.17) -- --
============ ============ ===========
Net loss................................ $ (2.63) $ (3.02) $ (32.75)
============ ============ ===========
Net loss to common stockholders......... $ (2.69) $ (3.08) $ (33.44)
============ ============ ===========
Weighted average shares outstanding.......... 6,939,348 4,134,068 198,091
============ ============ ===========
</TABLE>
STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Net loss............................ $(18,231,301) $(12,498,079) $(6,487,216)
Changes in unrealized gain (loss) on
securities........................ -- 1,116 --
------------ ------------ -----------
Comprehensive loss.................. $(18,231,301) $(12,496,963) $(6,487,216)
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 147
ASCENT PEDIATRICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------------- PAR ADDITIONAL
PREFERRED COMMON PREFERRED PREFERRED PREFERRED VALUE PAID-IN
STOCK STOCK SERIES A SERIES B SERIES G COMMON CAPITAL
--------- ------ --------- --------- --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Accretion to redemption value 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 --
Accretion to redemption value of Series F
Redeemable convertible preferred stock...
Issuance of common stock pursuant to an
initial public offering net of issuance
costs of $2,630,751...................... 2,240,000 90 17,529,249
Conversion of preferred stock.............. (1,199,999) 4,440,559 (280,110) (2,574,993) 178 27,853,861
Cashless exercise of warrants.............. 13,296 -- --
Warrants issued to Subordinated Secured
Noteholders.............................. 2,505,740
Common stock issued upon option exercise at
$2.35 per share.......................... 1,275 -- 2,996
Common stock issued for sales force........ 47 -- --
Change in unrealized gain on securities....
Net loss...................................
----------- --------- --------- ------------ ---------- ---- -----------
Balance, December 31, 1997............... 0 6,893,332 -- -- -- 276 47,891,846
Series G convertible exchangeable preferred
stock, net of issuance costs of
$538,749................................. 7,000 6,461,251
Warrants issued to Subordinated Secured
Noteholders, net of issuance costs of
$24,488.................................. 322,997
Common stock issued upon option exercise... 29,963 1 40,499
Employee stock purchase plan............... 52,626 2 117,798
Stock option compensation expense.......... 27,300
Dividend on Series G convertible
exchangeable preferred stock............. (449,169)
Change in unrealized gain (loss) on
securities...............................
Net loss...................................
----------- --------- --------- ------------ ---------- ---- -----------
Balance, December 31, 1998............... 7,000 6,975,921 $ -- $ -- $6,461,251 $279 $47,951,271
=========== ========= ========= ============ ========== ==== ===========
<CAPTION>
UNREALIZED STOCKHOLDERS'
ACCUMULATED GAIN ON EQUITY
DEFICIT SECURITIES (DEFICIT)
----------- ---------- -------------
<S> <C> <C> <C>
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
Accretion to redemption value 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)
Accretion to redemption value of Series F
Redeemable convertible preferred stock... (247,361) (247,361)
Issuance of common stock pursuant to an
initial public offering net of issuance
costs of $2,630,751...................... 17,529,339
Conversion of preferred stock.............. 24,998,936
Cashless exercise of warrants..............
Warrants issued to Subordinated Secured
Noteholders.............................. 2,505,740
Common stock issued upon option exercise at
$2.35 per share.......................... 2,996
Common stock issued for sales force........ --
Change in unrealized gain on securities.... 1,116 1,116
Net loss................................... (12,498,079) (12,498,079)
------------ ------ ------------
Balance, December 31, 1997............... (32,378,480) 1,116 15,514,758
Series G convertible exchangeable preferred
stock, net of issuance costs of
$538,749................................. 6,461,251
Warrants issued to Subordinated Secured
Noteholders, net of issuance costs of
$24,488.................................. 322,997
Common stock issued upon option exercise... 40,500
Employee stock purchase plan............... 117,800
Stock option compensation expense.......... 27,300
Dividend on Series G convertible
exchangeable preferred stock............. (449,169)
Change in unrealized gain (loss) on
securities............................... (1,116) (1,116)
Net loss................................... (18,231,301) (18,231,301)
------------ ------ ------------
Balance, December 31, 1998............... $(50,609,781) $ -- $ 3,803,020
============ ====== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 148
ASCENT PEDIATRICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows for operating activities:
Net loss...................................... $(18,231,301) $(12,498,079) $(6,487,216)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization............... 1,234,901 630,253 52,833
Non-cash interest expense................... 560,295 1,132,808 --
Non-cash extraordinary items................ 1,166,463
Provision for bad debts..................... -- 50,000 --
Gain/(loss) on sales of fixed assets........ 8,568 (9,242) --
Changes in operating assets and liabilities:
Accounts receivable...................... (152,698) (815,609) --
Inventory................................ (130,287) (379,046) --
Other assets............................. (192,026) (121,395) (73,193)
Accounts payable......................... 935 1,012,603 384,312
Accrued expenses......................... 842,049 80,823 837,903
------------ ------------ -----------
Net cash used for operating
activities........................... (14,893,101) (10,916,884) (5,285,361)
Cash flows used for investing activities:
Purchase of property and equipment............ (356,335) (804,896) (59,694)
Proceeds from sale of fixed assets............ -- 38,050 --
Payments related to acquisition............... (5,500,000) (6,155,145) (250,000)
Purchase of marketable securities............. -- (2,526,784) --
Sales of marketable securities................ 2,526,784 -- --
------------ ------------ -----------
Net cash used for investing
activities........................... (3,329,551) (9,448,775) (309,694)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs.............................. 185,600 17,529,339 750
Proceeds from issuance of preferred stock, net
of issuance costs........................... 6,461,251 6,922,229 5,137,201
Proceeds from issuance of debt and related
warrants.................................... 8,975,512 7,000,000 --
Repayment of debt............................. (6,125,000) (875,000) --
Payment of debt issue costs................... (661,192) (596,040) --
Payments of preferred stock dividends......... (142,354) -- --
Proceeds from exercise of warrants............ -- -- 4,800
------------ ------------ -----------
Net cash provided by financing
activities........................... 8,693,817 29,980,528 5,142,751
Net (decrease) increase in cash and cash
equivalents................................... (9,528,835) 9,614,869 (452,304)
Cash and cash equivalents, beginning of
period........................................ 11,700,612 2,085,743 2,538,047
------------ ------------ -----------
Cash and cash equivalents, end of period........ $ 2,171,777 $ 11,700,612 2,085,743
============ ============ ===========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest.................................... $ 502,550 $ 175,000 $ --
Noncash transactions:
Conversion of convertible and redeemable
convertible preferred stock to common stock... -- 27,854,039 --
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 149
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS
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
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 closed the acquisition of the Feverall line of acetaminophen rectal
suppositories from Upsher-Smith Laboratories, Inc. ("Upsher-Smith"), pursuant to
an Asset Purchase Agreement dated as of March 25, 1997 (the "Asset Purchase
Agreement") between the Company and Upsher-Smith and subsequently commenced
sales of the Feverall line of products. In 1997, the Company also commenced
sales of Pediamist nasal saline spray during the quarter ended December 31,
1997. During the quarter ended March 31, 1998, the Company began marketing
Duricef([) (cefadroxil monohydrate) oral suspension to pediatricians in the
United States pursuant to a co-promotion agreement with Bristol-Myers Squibb
U.S. Pharmaceuticals Group.
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, growth of 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 rapid technological
change, uncertainty of market acceptance of products, uncertainty of regulatory
approval, 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.
PLAN OF OPERATIONS
Ascent has incurred net operating losses since its inception. At December
31, 1998, the Company's cumulative deficit was approximately $51,059,000. Such
losses have resulted primarily from costs incurred in the Company's product
development programs, general and administrative costs associated with the
Company's product development and costs associated with raising capital and the
establishment of the Company's sales force. The Company expects to incur
additional operating losses as it continues its product development programs and
maintains its sales and marketing organization and introduces product to the
market and expects cumulative losses to increase.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plan to continue operations is
principally based on increased net sales combined with reduced expenditures and
consummating the strategic alliance with Alpharma, Inc., through its subsidiary
Alpharma USPD, Inc. ("Alpharma"). However, there can be no assurance that the
Company will consummate the strategic alliance with Alpharma described below or
increase net sales to fund operations. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts and the classification of liabilities that might be necessary
should the Company be unable to continue in existence.
F-7
<PAGE> 150
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company and Alpharma Inc., have entered into agreements creating a
strategic alliance. Under these agreements, Alpharma will provide up to $40
million in financing to the Company through 7.5% convertible subordinated notes
due in 2004 and 2005. The agreements are subject to approval of the Company's
shareholders at a meeting expected to be held in the second quarter of 1999. See
Note Q for a discussion of the strategic alliance with Alpharma.
The Company anticipates that, based upon its current operating plan and its
existing capital resources, it will require approximately $8.0 million of
additional funds to meet its capital requirements through the first quarter of
2000, when the Company currently expects to reach cash-break-even. This amount
does not take into account the $4.0 million borrowed from Alpharma on February
19, 1999 or the additional $8.0 million which the Company may borrow from
Alpharma, subject to stockholder approval of the strategic alliance, for general
corporate purposes under the Loan Agreement dated February 16, 1999 by and among
the Company, Alpharma and Alpharma, Inc. If the Company's stockholders approve
the strategic alliance with Alpharma, the Company expects to borrow this $8.0
million from Alpharma under the loan agreement.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 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.
Basis of Presentation
Certain prior year amounts may have been reclassified to conform to the
current year's presentation.
Cash, Cash Equivalents and Marketable Securities
Cash equivalents consist of money market mutual funds and other highly
liquid investments with original maturities of three months or less. Current
marketable securities include only investments with remaining maturities of
twelve months or less. The Company classifies all securities as
available-for-sale. These securities are reported at fair value as of the
balance sheet date. Net unrealized holding gains and losses of current
marketable securities are included in stockholders' equity. Gains and losses on
sales of securities are calculated using the specific identification method.
Financial Instruments
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
current marketable securities and accounts receivable.
F-8
<PAGE> 151
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Inventory
Inventories, consisting of raw materials, work-in-process and finished
goods, are stated at the lower of cost (determined on a first-in, first-out
basis) or market.
Fixed Assets
Fixed assets are recorded at cost. Equipment and furniture and fixtures are
depreciated on a straight-line basis over the useful life of the asset,
typically five or seven years. Leasehold improvements are depreciated on a
straight-line basis over the shorter of the life of the lease or the useful life
of the asset. The costs and accumulated depreciation of fixed assets sold are
removed from the accounts and the related gains or losses, if any, are reflected
in earnings or loss for the period.
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 adjustment to the carrying value of estimated useful lives. This
evaluation compares the expected future cash flows with the carrying values of
related intangible assets. If the evaluation indicates an impairment in value,
the unrealizable intangible asset values are charged to operations.
Revenue Recognition
Product revenue is recognized upon shipment of product provided that no
significant obligations remain outstanding and the resulting receivable is
deemed collectible by management. License revenue is recognized under a
collaborative license agreement as earned based upon the performance
requirements of such agreement.
Research and Development Expenses
Research and development costs are expensed as incurred.
Advertising Expenses
Costs for catalogs and other media are expensed as incurred. For the years
ended December 31, 1998, 1997 and 1996, costs were $1,278,002, $1,615,318 and
$423,656, respectively.
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.
F-9
<PAGE> 152
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Accounting for Stock-Based Compensation
The Company continues to apply the provisions of Accounting Principles
Board ("APB") Opinion No. 25 to account for its stock option grants and has
elected the disclosure-only alternative permitted under the Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation. The Company has disclosed the pro forma net loss and pro forma net
loss per share in the footnotes using the fair value based method in fiscal
years 1998, 1997 and 1996.
Net Loss Per Common Share
The Company follows Statement of Financial Accounting Standard ("SFAS") No.
128, "Earnings Per Share," which specifies the computation, presentation and
disclosure requirements for net income (loss) per common share. Basic net income
(loss) per common share is computed based on the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per
common share gives effect to all dilutive potential common shares outstanding
during the period. Under SFAS No. 128, the computation of diluted earnings per
share does not assume the issuance of common shares that have an antidilutive
effect on net income (loss) per common share.
Options, warrants, preferred stock and debt to purchase or convert to
1,890,487, 3,196,511 and 5,275,193 shares of common stock were outstanding as of
December 31, 1998, 1997 and 1996, but were not included in the computation of
diluted net loss per common share. These potentially dilutive securities have
not been 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.
Additionally, options and warrants to purchase 3,026,603, 965,726 and 0
shares of common stock were outstanding as of December 31, 1998, 1997 and 1996,
respectively, but 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.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components. Components of comprehensive income are
net income and all other non-owner changes in equity such as the change in the
unrealized gains and losses on certain marketable securities. SFAS 130 requires
that an enterprise: (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a balance sheet. SFAS 130 was effective for
financial statements issued for periods beginning after December 15, 1997, which
for the Company is the first quarter of 1998. Presentation of comprehensive
income for earlier periods provided for comparative purposes is required. The
Company has adopted SFAS 130 in the accompanying financial statements.
F-10
<PAGE> 153
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Segments of an Enterprise
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." This statement
includes requirements to report selected segment information quarterly and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. The
statement is effective for annual periods beginning after December 15, 1997.
Reclassification for earlier periods is required, unless impracticable, for
comparative purposes. The Company currently has only one segment, therefore,
SFAS No. 131 does not have a material impact on its presentation of financial
position or results of operations.
In July 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information",
superseding SFAS 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 established standards for the way public business
enterprises report information about operating segments in annual financial
statements and requires those enterprises to report selected information about
operating segments in financial statements. It also requires disclosures about
products and services, geographic areas and major customers. The Company is a
drug development and marketing company focused exclusively on the pediatric
market. The Company evaluated its business activities that are regularly
reviewed by the executive management team and the Board of Directors for which
discrete financial information is available. As a result of this evaluation, the
Company determined that it has one operating segment and, accordingly, one
reportable segment. The adoption of SFAS 131 did not effect the results of
operations, financial position, or require the disclosure of segment information
since the Company has one reportable segment.
Recent Pronouncements
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5
"Accounting for the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5
requires all costs of start-up activities (as defined by SOP 98-5) to be
expensed as incurred. This statement is effective for periods beginning after
December 15, 1998. The Company does not believe SOP 98-5 will have a significant
impact on its financial statement disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ('SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters beginning after
June 15, 1999. The Company will adopt SFAS 133 by January 1, 2000. The Company
does not believe that SFAS 133 will have a significant impact on its financial
statement disclosure.
F-11
<PAGE> 154
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
C. MARKETABLE SECURITIES
Investments in marketable securities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------- -----------------------
COST FAIR VALUE COST FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government & Agency
Obligations................... $ -- $ -- $2,526,784 $2,527,900
========== ========== ========== ==========
</TABLE>
The net unrealized gain at December 31, 1998 and 1997 was $0 and $1,116,
respectively.
D. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------
1998 1997
-------- --------
<S> <C> <C>
Raw materials............................................ $248,434 $455,663
Work in process.......................................... -- 35,110
Finished goods........................................... 671,351 298,725
-------- --------
Total.......................................... $919,785 $789,498
======== ========
</TABLE>
E. FIXED ASSETS
Fixed assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Equipment............................................. $1,050,278 $ 780,704
Furniture and fixtures................................ 239,245 212,557
Leasehold improvements................................ 98,213 54,517
---------- ----------
Total equipment....................................... $1,387,736 $1,047,778
Less:
Accumulated depreciation.............................. (656,842) (288,215)
---------- ----------
Total............................................... $ 730,894 $ 759,563
========== ==========
</TABLE>
Depreciation expense amounted to $376,437, $179,669 and $51,582 for the
years ended December 31, 1998, 1997 and 1996, respectively.
F. CO-PROMOTION AGREEMENTS
DURICEF
On February 6, 1998, the Company entered into an agreement with
Bristol-Myers Squibb U.S. Pharmaceutical Group to exclusively promote Duricef(R)
(cefadroxil monohydrate) oral suspension to pediatricians in the U.S. The
Company terminated the agreement effective December 31, 1998. As compensation
for the Company's co-promotional efforts,
F-12
<PAGE> 155
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Bristol-Myers Squibb had agreed to pay the Company a specified percentage of net
sales of the product attributed to pediatricians (as defined in the agreement)
on sales above a specified number of prescriptions for the product. In addition,
Bristol-Myers Squibb had agreed to reimburse the Company for a specified amount
of the Company's marketing costs during each year of the agreement. During
fiscal year ended December 31, 1998, the Company earned revenue of $123,000
under the terms of the agreement.
OMNICEF
In November 1998, the Company signed a promotion agreement with Warner-
Lambert Company to begin marketing, in February 1999, OMNICEF(R) (cefdinir) oral
suspension and capsules to pediatricians in the United States. The Company
agreed to copromote OMNICEF(R) (cefdinir) oral suspension and capsules as part
of its strategy to leverage its marketing and sales capabilities, including its
domestic sales force. The Company believes that it can increase the market
penetration of OMNICEF(R) (cefdinir) oral suspension and capsules in the
pediatric market through marketing activities directed exclusively at the
pediatric market. Moreover the Company believes that OMNICEF(R) (cefdinir) oral
suspension strengthens its product line and complements Primsol, which is being
developed for the treatment of acute otitis media ("AOM"), or middle ear
infection.
G. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax expenses/(benefits):
Federal................................. $(5,433,714) $(4,276,253) $(1,996,116)
State................................... (2,096,174) (345,344) (616,286)
Change in Valuation Allowance........... 7,529,888 4,621,597 2,612,402
----------- ----------- -----------
Total Provision...................... $ 0 $ 0 $ 0
=========== =========== ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As of December 31, the
components of deferred tax assets are as follows:
F-13
<PAGE> 156
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Net operating loss carryforwards.................. $ 12,596,997 $ 5,215,788
Credit carryforward............................... 436,917 489,623
Capitalized expenses:
Research and development........................ 4,708,695 3,712,694
G&A............................................. 2,362,573 3,046,812
Other........................................... 19,087 91,292
------------- -------------
Total deferred tax assets......................... 20,086,095 12,556,209
------------- -------------
Valuation allowance............................... (20,086,095) (12,556,209)
------------- -------------
Net deferred tax asset............................ $ -- $ --
============= =============
</TABLE>
The provision for income taxes differs from the Federal statutory rate due
to the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Tax at statutory rate.................................. (34.0)% (34.0)% (34.0)%
State taxes -- net of federal benefit.................. (8.0) (1.8) (6.3)
Other.................................................. 0.3 (1.2) 0.0
Change in valuation allowances......................... 41.7 37.0 40.3
----- ----- -----
Effective tax rate..................................... 0.0% 0.0% 0.0%
</TABLE>
At December 31, 1998 the Company had net operating loss carryforwards of
$31,900,000 and $29,500,00 for federal and state income tax purposes,
respectively. The federal net operating losses expire beginning December 31,
2004 through 2018. The state net operating losses expire beginning December 31,
1999 through 2003. The use of these losses may be limited due to ownership
change limitations under Section 382 of the Internal Revenue Code of 1986.
The research and experimental credit carry forward at December 31, 1998 was
$325,378 for federal income tax purposes.
Management of the Company has evaluated the positive and negative evidence
impacting the realizability of its deferred tax assets, which are comprised
principally of net operating loss carryforwards, tax credits and capitalized
expenses, as required by Statement of Financial Accounting Standards No. 109.
Management has considered the Company's history of annual and cumulative losses
and concluded, in accordance with the applicable accounting standards, that it
is more likely than not that it will not generate future taxable income prior to
the expiration of these items. Based on the weight of the available evidence, it
is more likely than not that all of the deferred tax assets will not be
realized, and accordingly, the deferred tax assets have been fully reserved.
H. COMMITMENTS
The Company leases office space and equipment under noncancelable operating
leases expiring through the year 2002. The Company has an option to renew the
building lease
F-14
<PAGE> 157
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
for an additional five-year period. Rent expense was $300,904, $233,043 and
$55,878 for fiscal years 1998, 1997 and 1996, respectively.
Future minimum lease commitments are as follows:
<TABLE>
<S> <C>
1999................................................. 316,749
2000................................................. 317,317
2001................................................. 313,596
2002................................................. 51,435
--------
Total................................................ $999,097
========
</TABLE>
The Company is a party to supply agreements with two third party
manufacturers under which the third party manufacturers have agreed to
manufacture Primsol trimethoprim solution and Feverall acetaminophen
suppositories for the Company, and the Company has agreed to purchase all
amounts of such products as it may require for the sale in the United States
from those third party manufacturers in accordance with agreed upon price
schedules. The agreement for Primsol trimethoprim solution may be terminated by
either party on three months notice any time after October 17, 2004. The Company
does not currently have any outstanding purchase agreements with this third
party manufacturer at this time. Under the Feverall acetaminophen suppositories
agreement, the Company may renew the agreement for two additional five-year
terms, the first of which the Company may effect by giving notice one year
before the expiration of the contract on July 10, 2002. The Company currently
intends to renew this agreement. The Company currently has outstanding purchase
agreements of $335,000 with this third party manufacturer.
I. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Employee compensation expenses.................. $ 762,664 $ 109,887
Advertising expenses............................ 183,509 198,599
Legal and accounting expenses................... 114,441 101,238
Selling fees and chargebacks.................... 254,632 336,969
Interest payable................................ 208,862 51,042
Preferred stock dividend........................ 306,815 0
Other........................................... 475,320 334,644
---------- ----------
$2,306,243 $1,157,379
========== ==========
</TABLE>
J. STOCKHOLDERS' EQUITY AND 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
F-15
<PAGE> 158
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
share and net proceeds of $6,922,229. 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 (See Note K).
On May 27, 1997, the Company effected a 0.85-for-one reverse stock split of
its outstanding common stock. The authorized number of shares of common stock
was 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.
In June 1997, the Company completed its initial public offering ("Public
Offering") of 2,240,000 shares of Common Stock, raising approximately $17.5
million of net proceeds after deducting offering costs. Concurrent with the
closing of the initial public offering, all 5,208,657 shares of Series A
convertible preferred stock, Series B convertible preferred stock, Series D
redeemable convertible preferred stock, Series E redeemable convertible
preferred stock and Series F redeemable convertible preferred stock were
converted into 4,440,559 shares of common stock.
After the closing of the initial public offering, the Company was
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.
On June 1, 1998, the Company issued and sold to funds affiliated with
Furman Selz Investments and BancBoston Ventures 7,000 shares of Series G
convertible exchangeable preferred stock for an aggregate purchase price of $7
million yielding net proceeds of $6,461,251. The Series G preferred stock is
convertible into common stock at a price of $4.75 per share (which was above the
fair market value of the Company's common stock on June 1, 1998) and is entitled
to cumulative annual dividends equal to 8% of the liquidation preference of such
stock ($1,000), payable semiannually in June and December of each year,
commencing December 1998. The Series G preferred stock may be exchanged for 8%
seven-year convertible subordinated notes having an aggregate principle amount
equal to the aggregate liquidation preference of the preferred stock solely at
the option of the Company any time within the seven years of issuance of the
preferred stock (see Note O).
K. STOCK PURCHASE 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, none of which were exercised, were exercisable at
$10.59 per share for a period of five years from the date of grant. These
warrants expired unexercised on March 4, 1998.
Pursuant to the Stock Purchase Agreement dated July 12, 1995, as amended
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.
F-16
<PAGE> 159
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
These warrants, none of which have been exercised, 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 June 28, 1996, as amended
December 18, 1996 and February 28, 1997, the Company granted the purchasers of
Series F redeemable convertible preferred stock warrants to purchase an
aggregate of 651,334 shares of common stock. These warrants are exercisable at
$7.65 per share for a period of five years from the date of grant. Prior to the
closing of the Public Offering, a cashless exercise of 102,387 warrants resulted
in the issuance of 13,296 shares of common stock. Upon the closing of the Public
Offering, the aggregate number of shares issuable upon exercise of these
warrants decreased from 548,947 to 466,604 and the per share exercise price
increased from $7.65 to $9.00, pursuant to the terms of such warrants. These
warrants, none of which were exercised in 1997 or 1998, retained the cashless
exercise feature after the closing of the Public 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, none of which
were exercised in 1997 or 1998, contain a cashless exercise feature. These
warrants expire on August 28, 2002.
In 1997, the Company also issued warrants to Subordinated Secured Note
holders. Warrants were issued to purchase (i) 561,073 shares of common stock at
an exercise price of $0.01 per share, and (ii) 218,195 shares of common stock at
an exercise price of $5.29 per share (see Note N). None of these warrants have
been exercised. The relative fair value was recorded as a contribution to
additional paid in capital.
On June 1, 1998 the Company issued warrants to the purchasers of shares of
Series G convertible exchangeable preferred stock to purchase 2,116,958 shares
of common stock at an exercise price of $4.75 per share (see Note O). The
relative fair value was recorded as a contribution to additional paid in capital
of $323,000.
L. INCENTIVE PLANS
1992 Equity Incentive Plan
On September 15, 1992, the Board of Directors adopted the 1992 Equity
Incentive Plan (the "1992 Plan") which was approved by the shareholders on March
4, 1993. Under the 1992 Plan, The Board of Directors or 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. The 1992 Plan terminates on the earlier of (i) the day after the
tenth anniversary of its adoption or (ii) upon issuance of all available shares.
In connection with the closing of the initial public offering, the 1992
Plan was amended to increase the number of shares of common stock issuable upon
the grant of awards or upon exercise of stock options granted under the 1992
Plan to 1,350,000 and to provide that the maximum number of shares with respect
to which awards and options may be granted to any employee during any calendar
year be 500,000 shares.
F-17
<PAGE> 160
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998, the 1992 Plan was amended to increase the number of shares of
common stock issuable upon the grant of awards or upon exercise of stock options
granted under the 1992 Plan to 1,850,000.
The 1992 Plan provides for the granting of incentive stock options (ISOs),
nonqualified stock options (NSOs) and stock awards. In the case of ISOs and
NSOs, the exercise price may not be less than 100% (110% in certain cases for
ISOs) of the fair market value per share of the common stock on the date of
grant. In the case of stock awards, the purchase price will be determined by the
Board of Directors.
Each option granted under the 1992 Plan may be exercisable either in full
or in installments as set forth in the option agreement. Each option and all
rights expire on the date specified by the Board of Directors or 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 from the date of grant. The fair value of options issued to non-employees
is recorded as a charge to earnings over the service period.
In the case of awards of restricted common stock, the Board of Directors or
the Committee determines the duration of certain restrictions on transfer of
such stock.
A summary of all of the Company's stock option activity for the three years
ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------------
<S> <C> <C>
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, 1997......................................... 463,512 8.34
Exercised, 1997....................................... (1,275) 2.35
Terminated, 1997...................................... (850) 2.35
--------- -----
Outstanding at December 31, 1997........................ 1,095,061 $4.92
Granted, 1998......................................... 996,450 3.85
Exercised, 1998....................................... (29,963) 1.35
Terminated, 1998...................................... (698,799) 6.50
--------- -----
Outstanding at December 31, 1998........................ 1,362,749 $3.69
========= =====
</TABLE>
F-18
<PAGE> 161
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Summarized information about stock options outstanding at December 31, 1998
is as follows:
<TABLE>
<CAPTION>
EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE OPTIONS PRICE
---------- ----------- ------------ --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
$1.18-1.88 23,750 7.0 $1.57 21,250 $1.53
2.16-2.75 512,549 7.5 2.35 362,517 2.35
3.50-3.88 689,450 9.0 3.75 39,924 3.75
7.06-9.13 137,000 7.4 8.79 114,500 8.72
--------- -------
1,362,749 538,191
</TABLE>
Options exercisable at December 31, 1998, 1997 and 1996 were 538,191,
356,633 and 244,343, respectively.
The weighted average fair value at date of grant for options granted during
1998, 1997 and 1996 were $1.42, $3.20 and $0.54, respectively, per option.
1997 Employee Stock Purchase Plan
In March 1997, the Company adopted the 1997 Employee Stock Purchase Plan
(the "Purchase Plan"), effective upon the closing of the initial public
offering, pursuant to which rights are granted to purchase shares of common
stock at 85% (or such other higher percentage as the Board of Directors
determines to be appropriate) of the lesser of the fair market value of such
shares at either the beginning or the end of each six month offering period. The
Purchase Plan permits employees to purchase common stock through payroll
deductions which may not exceed 10% of an employees compensation as defined in
the plan. Under the Purchase Plan, the Company has reserved 500,000 shares of
common stock for issuance to eligible employees. The Company issued 52,626
shares of common stock in 1998 for proceeds of $117,000 to employees pursuant to
the Purchase Plan.
1997 Director Stock Option Plan
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 were granted to each of the non-employee directors
upon the closing of the initial public offering at $9.00 per share. Options to
purchase 15,000 shares of common stock are 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 Public Offering, 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.
F-19
<PAGE> 162
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A total of 50,000 and 105,000 options were granted under the Director Plan
during the years ended December 31, 1998 and 1997, respectively.
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 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. Through
December 31, 1998, the Company has not matched any cash contributions made by
employees to the 401(k) plan.
Stock-Based Compensation Plans
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for the 1992 Plan, the Director Plan and the Purchase Plan and no
compensation expense has been recognized for options granted to employees at
fair market value and shares purchased under these plans. Had compensation
expense for the stock-based compensation plans been determined based on the fair
value at the grant dates for the options granted and shares purchased under the
plan consistent with the method of SFAS 123, Accounting for Stock-Based
Compensation, the net loss and net loss per share would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- --------------------------
BASIC AND BASIC AND BASIC AND
NET LOSS TO DILUTED NET LOSS TO DILUTED NET LOSS TO DILUTED
COMMON NET LOSS COMMON NET LOSS COMMON NET LOSS
STOCKHOLDERS PER SHARE STOCKHOLDERS PER SHARE STOCKHOLDERS PER SHARE
------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
As Reported.......... $(18,680,470) $(2.69) $(12,745,440) $(3.08) $(6,624,999) $(33.44)
Pro Forma............ (19,356,551) (2.79) (13,014,737) (3.15) (6,653,966) (33.59)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
likely to be representative of the effects on reported net loss to common
stockholders for future years. SFAS 123 does not apply to awards granted prior
to fiscal year 1995 and additional awards are anticipated in future years.
The fair value of options and other equity instruments at the date of grant
was estimated using the Black-Scholes option pricing model for 1998 and 1997 and
the
F-20
<PAGE> 163
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Minimum Value Method for 1996 (since the Company was private then), with the
following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------------ --------
<S> <C> <C> <C>
Expected life (years) - stock
options........................... 4 years 2.5 - 4.0 years 5 years
Expected life (years) - Purchase
Plan.............................. .5 .5 --
Risk-free interest rate............. 4.13 - 5.65% 5.55 - 6.22% 6.50%
Volatility.......................... 79% 47% 0
Dividend yield...................... 0 0 0
Expected forfeiture rate............ 10% 10% --
</TABLE>
The Black-Scholes option pricing model was developed for use in estimating
the fair value of options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the use of highly
subjective assumptions, including the expected stock price volatility and
expected forfeiture. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective assumptions can materially affect the fair
value estimates, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock-based
compensation.
M. STOCK OPTION REPRICING
On September 4, 1998, the Board of Directors of the Company and the
Compensation Committee of the Board of Directors, by joint written action,
authorized the Company to offer to grant each employee who held an outstanding
stock option granted under the Company's 1992 Plan, during the period commencing
on June 1, 1997 and ending on June 10, 1998 with an exercise price greater than
$3.75 per share (collectively, the "Old Options"), a new stock option
(collectively, the "New Options") under the 1992 Plan, in exchange for the
cancellation of each such Old Option. Each such New Option would (i) have an
exercise price of $3.75 per share, which was above fair market value, (ii) be
exercisable for the same number of shares of the Company's common stock covered
by the outstanding unexercised portion of the Old Option cancelled in exchange
therefor, and (iii) have a vesting schedule that is based on the vesting
schedule of the Old Option it replaces except that each installment covered by
the Old Option would vest on the date six months after the date specified in the
Old Option and that any part of the Old Option which is currently exercisable
would remain exercisable and not be subject to such six month adjustment. Based
on this offer, on September 4, 1998, the Company granted to employees New
Options to purchase an aggregate of 555,450 shares of Common Stock, at an
executable price of $3.75 per share in exchange for and upon cancellation of Old
Options to purchase an aggregate of 555,450 shares of Common Stock with a
weighted average exercise price of $6.97 per share.
N. SUBORDINATED SECURED NOTES AND RELATED WARRANTS
In January and June 1997, the Company issued an aggregate of $7.0 million
of subordinated secured notes, resulting in net proceeds to the Company of
$6,404,000. These subordinated secured notes were payable in eight equal
quarterly principal payments and required quarterly interest payments on the
unpaid principal balance, at a rate equal to the
F-21
<PAGE> 164
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
lesser of 10% or 3.5% over the prime rate, with the first quarterly payment due
in December 1997. Accordingly, in December 1997, the Company paid an aggregate
of $1,050,000 to the holders of these subordinated secured notes as the first
quarterly payment.
In connection with the issuance of the subordinated secured notes, on
January 31, 1997, the Company issued Series A warrants, to purchase an aggregate
of 224,429 shares of common stock, and on June 4, 1997, the Company issued
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 holders of the subordinated secured notes. 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. None of these warrants were exercised in 1997 or 1998. The relative fair
value of the warrants issued on January 31, 1997 was recorded as an allocation
of $836,994 from the subordinated secured notes issued on such date.
Consequently, such subordinated secured notes were recorded at $1,163,006.
Similarly, the relative fair value of the warrants (as of January 31, 1997)
issued on June 4, 1997 was recorded as an allocation of $1,668,746 from the
subordinated secured notes issued on such date. Consequently, such notes were
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 terms of these subordinated secured notes. For the years ended December 31,
1998 and 1997, the accretion charges were $531,192 and $1,132,808, respectively,
which were included in interest expense on the statements of operations. The
Company also capitalized $596,040 of issuance costs related to the subordinated
secured notes which will be amortized over the term of the notes. In June 1998,
the Company used $5.3 million from the net proceeds of the Series G financing
(see Note O) to repay the outstanding subordinated secured notes. As a result of
the early repayment of the subordinated secured notes, the Company accelerated
the $842,000 remaining unaccreted portion of the discount. In addition, $325,000
of unamortized debt issue costs were written off. These two items have been
recorded as extraordinary items for the loss on early extinguishment of debt in
accordance with SFAS 4, "Reporting Gains and Losses From Extinguishment of
Debt."
O. SERIES G PREFERRED STOCK, SUBORDINATED NOTES AND RELATED WARRANTS
On June 1, 1998, pursuant to a Series G Securities Purchase Agreement dated
as of May 13, 1998 between the Company and the purchasers names therein (the
"Series G Purchase Agreement"), the Company issued and sold to funds affiliated
with ING Furman Selz Investments and BancBoston Ventures an aggregate of 7,000
shares of Series G convertible exchangeable preferred stock (the "Preferred
Stock"), $9 million of 8% seven-year subordinated notes (the "Subordinated
Notes") and seven-year warrants to purchase 2,116,958 shares of common stock for
an aggregate purchase price of $16 million (the "1998 Financing"). Of the $9
million of Subordinated Notes issued and sold by the Company, $8,652,515 was
allocated to the relative fair value of the Subordinated Notes and $347,485 was
allocated to the relative fair value of the warrants. Accordingly, the
Subordinated Notes will be accreted from $8,652,515 to the maturity amount of
$9,000,000 as interest expense over the term of the Subordinated Notes.
F-22
<PAGE> 165
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Amounts allocated to the warrants was included in additional paid in
capital. The Preferred Stock is convertible into common stock at a price of
$4.75 per share, which was above the fair market value of the Company's common
stock at June 1, 1998. The warrants are exercisable at a price of $4.75 per
share. The Preferred Stock is entitled to cumulative annual dividends equal to
8% (subject to adjustment) of the liquidation preference of such stock ($1,000),
payable semiannually in June and December of each year, commencing December
1998, and may be exchanged for 8% seven-year convertible subordinated notes (the
"Convertible Notes") having an aggregate principal amount equal to the aggregate
liquidation preference of the Preferred Stock solely at the option of the
Company any time within seven years of issuance of the Preferred Stock. The
Subordinated Notes and Convertible Notes (when and if issued upon exchange of
the Preferred Stock) (collectively, the "1998 Notes") bear interest at a rate of
8% per annum, payable semiannually in June and December of each year, commencing
December 1998. Forty percent of the interest due on the Subordinated Notes and
fifty percent of the dividends due on the Preferred Stock (or the interest due
on the Convertible Notes if issued upon exchange of the Preferred Stock) in each
of December 1998, June 1999, December 1999 and June 2000 may be deferred by the
Company for a period of three years. In the event of a change in control or
unaffiliated merger of the Company, the Company at its sole discretion may also
redeem the Preferred Stock (or the Convertible Notes issuable upon exchange of
the Preferred Stock) at a price equal to the liquidation preference on such
stock ($1,000) plus accrued and unpaid dividends, although the Company will be
required to issue new Common Stock purchase warrants in connection with such
redemption. In the event of a change of control or unaffiliated merger of the
Company, the holders of the 1998 Notes may require the Company to redeem the
1998 Notes at a price equal to the unpaid principal plus accrued and unpaid
interest on such notes. In connection with the investment, a representative of
Furman Selz Investments was added to the Company's Board of Directors. The
Company used a portion of the net proceeds, after fees and expense, of $14.7
million to repay the $5.3 million in subordinated secured notes and used the
balance for working capital.
P. FEVERALL ACQUISITION
On July 10, 1997, the Company completed the acquisition of the Feverall
acetaminophen suppository product line and certain related assets, including the
Feverall trademark and the Feverall Sprinkle Caps powder and Acetaminophen
Uniserts suppository product lines (the "Product Lines") from Upsher-Smith
Laboratories, Inc. ("Upsher-Smith"). The purchase price of $11,905,145,
including related costs of $183,880, consisted of cash of $6,405,145 and a
promissory note issued to Upsher-Smith for $5,500,000 maturing on February 20,
1998 bearing no interest. The Company paid this note in February 1998.
F-23
<PAGE> 166
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price was allocated to the assets acquired based on their
estimated respective fair values on the date of acquisition as follows:
<TABLE>
<CAPTION>
AMOUNT USEFUL
(IN LIVES
MILLIONS) (IN YEARS)
----------- ----------
<S> <C> <C>
Inventory........................................... $ 0.4 --
Trademark........................................... 4.5 20
Manufacturing agreement............................. 5.0 15
Goodwill............................................ 2.0 20
-----
Total..................................... $11.9
=====
</TABLE>
Accumulated amortization of intangible assets as of December 31, 1998 was
$980,279.
The Feverall trademark was valued using the Relief from Royalty Method,
using a risk adjusted cash flow model under which future cash flows were
discounted, taking into account risks relating to existing and future markets
and assessments of the life expectancy of the Feverall products. The
manufacturing agreement with Upsher-Smith was valued using a risk adjusted cash
flow model under which future cash flows were discounted, taking into account
risks relating to existing and future markets and the expected economic life of
the agreement. Intangible assets are amortized over the useful lives on a
straight line basis.
Pursuant to the acquisition of the Product Lines, the Company entered into
a manufacturing agreement with Upsher-Smith. The initial term of the agreement
is five years with an option for two additional five-year terms. Optional term
potential price increases are capped at 5% per option. The Company pays
Upsher-Smith on the basis of the fully absorbed costs plus a fixed percent.
Q. SUBSEQUENT EVENT (UNAUDITED)
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 will loan us 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. In addition, subject to stockholder
approval, the Company will obtain a call option to acquire all of its
outstanding common stock and assign the option to Alpharma, thereby giving
Alpharma the option, exercisable in 2002, 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. The consummation of the strategic alliance
is subject to the approval of the Company's stockholders of a proposed merger
between the Company and Bird Merger Corporation, a wholly-owned subsidiary of
the Company, at a meeting expected to be held in the second quarter of 1999.
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 up to $40.0 million. Alpharma's obligation to loan the
Company the balance of the $40.0 million is subject to the approval of the
Company's stockholders of the strategic
F-24
<PAGE> 167
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
alliance. If the Company's stockholders do not approve the strategic alliance,
the Company must immediately repay the outstanding principal and interest on the
note. The other 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 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, 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.
In connection with the Company's strategic alliance with Alpharma, the
Company entered into a second amendment to the 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 original 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. The
reduction in the exercise price of the warrants and the issuance of the
additional 300,000 shares of common stock are also subject to stockholder
approval.
F-25
<PAGE> 168
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
These transactions will be consummated, subject to stockholder approval,
concurrently with the closing of the transactions contemplated by the Master
Agreement, dated as of February 16, 1999, by and among the Company, Alpharma and
Alpharma, Inc., including the merger of the Company with Bird Merger
Corporation, a wholly-owned subsidiary of the Company, in accordance with the
Agreement and Plan of Merger, dated as of February 16, 1999, by and between the
Company and Bird Merger Corporation.
F-26
<PAGE> 169
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................... $ 2,267,976 $ 2,171,777
Accounts receivable, net.......................... 1,490,892 918,307
Inventory, net.................................... 698,824 919,785
Other current assets.............................. 421,923 274,983
----------- -----------
Total current assets...................... 4,879,615 4,284,852
Fixed assets, net................................... 660,706 730,894
Debt issue costs, net............................... 582,478 606,092
Intangibles, net.................................... 10,358,959 10,523,789
Deferred charges (Note 7)........................... 716,231 63,760
Other assets........................................ 65,046 91,543
----------- -----------
Total assets.............................. $17,263,035 $16,300,930
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.................................. $ 2,403,282 $ 1,510,193
Accrued expenses (Note 6)......................... 2,155,241 2,306,243
----------- -----------
Total current liabilities................. 4,558,423 3,816,436
Subordinated secured notes.......................... 12,693,885 8,681,474
----------- -----------
Total liabilities......................... 17,252,408 12,497,910
Stockholders' equity
Preferred stock, $.01 par value; 5,000,000 shares
authorized; 7,000 shares, designated as Series
G convertible exchangeable preferred stock,
issued and outstanding at March 31, 1999 and
December 31, 1998 (liquidation preference of
$7,000,000).................................... 6,461,251 6,461,251
Common stock, $.00004 par value; 60,000,000 shares
authorized; 7,026,445 and 6,975,921 shares
issued and outstanding at March 31, 1999 and
December 31, 1998, respectively................ 280 279
Additional paid-in capital........................ 47,835,662 47,951,271
Accumulated deficit............................... (54,286,566) (50,609,781)
----------- -----------
Total stockholders' equity................ 10,627 3,803,020
----------- -----------
Total liabilities and stockholders'
equity................................. $17,263,035 $16,300,930
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-27
<PAGE> 170
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Product revenue, net................................ $ 1,241,399 $ 1,314,049
Co-promotional revenue.............................. 615,000 --
----------- -----------
Total net revenue.............................. 1,856,399 1,314,049
Costs and expenses
Cost of product sales............................. 634,594 553,680
Selling, general and administrative............... 4,115,095 3,764,832
Research and development.......................... 578,303 1,123,878
----------- -----------
Total costs and expenses.......................... 5,327,992 5,442,390
Loss from operations........................... (3,471,593) (4,128,341)
Interest income..................................... 25,897 158,822
Interest expense.................................... (231,089) (471,313)
----------- -----------
Net loss....................................... (3,676,785) (4,440,832)
Preferred stock dividend............................ 192,501 --
----------- -----------
Net loss to common stockholders................ $(3,869,286) $(4,440,832)
=========== ===========
Results per common share:
Historical -- basic and diluted:
Net loss....................................... $ (0.52) $ (0.64)
=========== ===========
Preferred stock dividend....................... $ (0.03) $ --
=========== ===========
Net loss to common stockholders................ $ (0.55) $ (0.64)
=========== ===========
Weighted average shares outstanding................. 7,010,821 6,910,414
=========== ===========
</TABLE>
UNAUDITED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net loss............................................ $(3,676,785) $(4,440,832)
Unrealized gain on securities....................... -- 1,762
----------- -----------
Comprehensive loss.................................. $(3,676,785) $(4,439,070)
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-28
<PAGE> 171
ASCENT PEDIATRICS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows for operating activities:
Net loss.......................................... $(3,676,785) $(4,440,832)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization.................. 272,294 293,365
Non-cash interest expense...................... 12,411 325,480
Provision for bad debts........................ 14,801 --
Changes in operating assets and liabilities:
Accounts receivable.......................... (587,387) (67,643)
Inventory.................................... 220,961 (302,665)
Other assets................................. (120,443) (341,785)
Accounts payable............................. 893,090 (36,893)
Accrued expenses............................. (343,503) (39,367)
----------- -----------
Net cash used for operating activities.... (3,314,561) (4,610,340)
Cash flows used for investing activities:
Purchase of property and equipment................ (13,662) (132,548)
Payment related to acquisition.................... -- (5,500,000)
----------- -----------
Net cash used for investing activities.... (13,662) (5,632,548)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs................................. 76,893 59,568
Proceeds from issuance of debt.................... 4,000,000 --
Cash paid for deferred charges.................... (652,471) --
Repayment of debt................................. -- (875,000)
----------- -----------
Net cash provided by financing
activities............................. 3,424,422 (815,432)
Net (decrease) increase in cash and cash
equivalents....................................... 96,199 (11,058,320)
Cash and cash equivalents, beginning of period...... 2,171,777 11,700,612
----------- -----------
Cash and cash equivalents, end of period............ $ 2,267,976 $ 642,292
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest....................................... $ -- $ 153,125
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-29
<PAGE> 172
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. ("Upsher-Smith"), pursuant to
an Asset Purchase Agreement dated as of March 25, 1997 (the "Asset Purchase
Agreement") between the Company and Upsher-Smith 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.
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, growth of 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 rapid technological
change, uncertainty of market acceptance of products, uncertainty of regulatory
approval, 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 March 31, 1999 and 1998. The results for the
interim periods presented are not necessarily indicative of results to be
expected in the full fiscal year. Certain prior period items have been
reclassified to conform with the current quarter presentation.
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
F-30
<PAGE> 173
ASCENT PEDIATRICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
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
2,040,219 and 1,679,164 shares of common stock outstanding as of March 31, 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 2,382,153 and
982,195 shares of common stock outstanding as of March 31, 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>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Raw materials.................................. $191,033 $248,434
Finished goods................................. 507,791 671,351
-------- --------
Total..................................... $698,824 $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 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 shall recognize an impairment loss as a charge to operations.
F-31
<PAGE> 174
ASCENT PEDIATRICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
Employee compensation expenses....................... $ 664,426 $ 762,664
Advertising expenses................................. 80,149 183,509
Legal and accounting expenses........................ 62,882 114,441
Selling fees and chargebacks......................... 190,841 254,632
Interest payable..................................... 394,270 208,862
Preferred stock dividend............................. 499,316 306,815
Other................................................ 263,357 475,320
---------- ----------
Total........................................... $2,155,241 $2,306,243
========== ==========
</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 will 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. In addition, the Company will obtain a
call option to acquire all of its outstanding common stock and assign the option
to Alpharma, thereby giving Alpharma the option, exercisable in 2002, 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. The
consummation of the strategic alliance is subject to the approval of the
Company's stockholders, at a meeting expected to be held on June 29, 1999, of a
proposed merger between the Company and Bird Merger Corporation, a wholly-owned
subsidiary of the Company, which merger will result in the creation of the call
option.
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 up to $40.0 million. Alpharma's obligation to loan the
Company the balance of the $40.0 million is subject to the approval of the
strategic alliance by the Company's stockholders. If the Company's stockholders
do not approve the strategic alliance, the Company must immediately repay the
outstanding principal and interest on the note. The other 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.
F-32
<PAGE> 175
ASCENT PEDIATRICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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.
In connection with the Company's strategic alliance with Alpharma, 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 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. 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
are also subject to stockholder approval.
DEFERRED CHARGES. Also in connection with the Company's strategic alliance
with Alpharma, the Company has incurred $716,000 in legal, accounting and
consulting fees. These fees have been capitalized on the balance sheet as
deferred charges and are being amortized over the life of the debt.
These transactions will be consummated, subject to stockholder approval,
concurrently with the closing of the transactions contemplated by the Master
Agreement, dated as of February 16, 1999, by and among the Company, Alpharma and
Alpharma, Inc., including the merger of the Company with Bird Merger
Corporation, a wholly-owned subsidiary of the Company, in accordance with the
Agreement and Plan of Merger, dated as of February 16, 1999, by and between the
Company and Bird Merger Corporation.
F-33
<PAGE> 176
ASCENT PEDIATRICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
8. SUBSEQUENT EVENTS
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.
F-34
<PAGE> 177
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-35
<PAGE> 178
A PRODUCT LINE OF UPSHER-SMITH LABORATORIES, INC.
STATEMENTS OF ASSETS RELATED TO THE PRODUCT LINE TO BE ACQUIRED BY
ASCENT PEDIATRICS, INC.
<TABLE>
<CAPTION>
DECEMBER 29,
1996 JULY 9, 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
Inventories, net.................................... $122,235 $221,265
-------- --------
Assets of the product line to be acquired........... $122,235 $221,265
======== ========
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE> 179
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>
FOR THE
YEARS ENDED DECEMBER 31, INTERIM PERIOD
------------------------- JANUARY 1, 1997
1995 1996 TO JULY 9, 1997
----------- ----------- -------------------
(UNAUDITED)
<S> <C> <C> <C>
Net sales.............................. $3,563,761 $3,877,199 $1,486,561
Identified costs and expenses:
Cost of sales........................ 1,229,848 1,303,336 599,211
Advertising and promotion expense.... 657,655 669,456 238,986
Allocated selling expense.............. 480,700 571,167 324,974
---------- ---------- ----------
Total identified costs and
expenses........................ 2,368,203 2,543,959 1,163,171
---------- ---------- ----------
Net sales in excess of identified
costs and expenses.............. $1,195,558 $1,333,240 $ 323,390
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE> 180
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
(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 as if the Feverall product line had been operated on a stand-alone
basis during the periods presented and primarily reflect an estimate of activity
attributable to selling the Feverall product line relative to the total selling
activity of Upsher-Smith.
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.
F-38
<PAGE> 181
A PRODUCT LINE OF UPSHER-SMITH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS OF THE PRODUCT LINE TO BE ACQUIRED BY
ASCENT PEDIATRICS, INC.
(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.
(3) INVENTORIES
The components of inventories were as follows:
<TABLE>
<CAPTION>
DECEMBER 29, JULY 9,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Work in process.................................... $ 10,864 $ 0
Samples and displays............................... 42,486 46,938
Finished goods..................................... 68,885 174,327
-------- --------
$122,235 $221,265
======== ========
</TABLE>
(4) NET SALES
Net sales consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------- INTERIM PERIOD
DECEMBER 31, DECEMBER 29, ENDED
1995 1996 JULY 9, 1997
------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
Gross sales........................... $4,677,134 $5,281,399 $2,205,787
Less sales returns, discounts and
rebates............................. 1,113,373 1,404,200 719,226
---------- ---------- ----------
Net sales........................... $3,563,761 $3,877,199 $1,486,561
========== ========== ==========
</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.
F-39
<PAGE> 182
A PRODUCT LINE OF UPSHER-SMITH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS OF THE PRODUCT LINE TO BE ACQUIRED BY
ASCENT PEDIATRICS, INC.
(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-40
<PAGE> 183
ASCENT PEDIATRICS, INC.
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
AS OF MARCH 31, 1999 AND FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE QUARTER
ENDED MARCH 31, 1999
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 will loan us 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. In addition, subject to stockholder
approval, the Company will obtain a call option to acquire all of its
outstanding common stock and assign the option to Alpharma, thereby giving
Alpharma the option, exercisable in 2002, 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 (with a minimum aggregate purchase price of
$140.0 million). The consummation of the strategic alliance is subject to the
approval of the Company's stockholders, at a meeting expected to be held on June
29, 1999, of a proposed merger between the Company and Bird Merger Corporation,
a wholly-owned subsidiary of the Company, which merger will result in the
creation of the call option.
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 up to $40.0 million. Alpharma's obligation to loan the
Company the balance of the $40.0 million is subject to the approval of the
strategic alliance by the Company's stockholders. If the Company's stockholders
do not approve the strategic alliance, the Company must immediately repay the
outstanding principal and interest on the note. The other 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, 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
F-41
<PAGE> 184
ASCENT PEDIATRICS, INC.
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
AS OF MARCH 31, 1999 AND FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE QUARTER
ENDED MARCH 31, 1999
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.
In connection with the Company's strategic alliance with Alpharma, 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, and the
parties agreed that, upon the issuance of these shares, the financial advisory
services fee agreement would terminate. The reduction in the exercise price of
the warrants and the issuance of the additional shares of common stock are also
subject to stockholder approval.
The unaudited pro forma balance sheet as of March 31, 1999 reflects the
Company's historical balance sheet adjusted for the second amendment to the
Series G Purchase Agreement (as described above) as if it had occurred on March
31, 1999.
The unaudited pro forma statements of operations for the year ended
December 31, 1998 and the quarter ended March 31, 1999 reflect the Company's
historical statement of operations adjusted as if the second amendment to the
Series G Purchase Agreement (as described above) had occurred on January 1,
1998.
These unaudited pro forma financial statements do not purport to be
indicative of the financial position or the results of operations had the
transactions actually occurred at this time or what results in the future may
be. Additionally, the second amendment to the Series G Purchase Agreement is
subject to stockholder approval, which may not occur.
F-42
<PAGE> 185
ASCENT PEDIATRICS, INC.
UNAUDITED PRO FORMA BALANCE SHEET
MARCH 31, 1999
<TABLE>
<CAPTION>
ADJUSTMENTS
-------------------------------------------------------------------------
TERMINATION RECOGNITION OF
HISTORICAL EXCHANGE OF SALE OF OF ADVISORY UNAMORTIZED
MARCH 31, PREFERRED STOCK EXERCISE OF COMMON SERVICES DEBT ISSUE
1999 FOR DEBT WARRANTS STOCK AGREEMENT COSTS
------------ --------------- ----------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........ $ 2,267,976
Accounts receivable, less
allowance for doubtful accounts
of $63,000 at March 31,
1999........................... 1,490,892
Inventory, net................... 698,824
Other current assets............. 421,923
------------
Total current assets........... 4,879,615
Fixed assets, net.................. 660,706
Debt issue costs, net.............. 582,478 (485,798)(e)
Intangibles, net................... 10,358,959
Deferred charges................... 716,231
Other assets....................... 65,046
------------
Total assets................... $ 17,263,035
============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities
Accounts payable................. $ 2,403,282
Accrued expenses................. 2,155,241
------------
Total current liabilities...... 4,558,423
Subordinated secured notes......... 12,693,885 6,461,251(a) (6,350,874)(b) (900,000)(c)
------------
Total liabilities.............. 17,252,408
Commitments and contingencies (Note
H)
Stockholders' equity
Preferred stock, $.01 par value;
5,000,000 shares authorized;
7,000 shares, designated as
Series G convertible
exchangeable preferred stock,
issued and outstanding at March
31, 1999 (liquidation
preference of $7,000,000)...... 6,461,251 (6,461,251)(a)
Common stock, $.00004 par value;
60,000,000 shares authorized;
7,026,445 shares issued and
outstanding at March 31, 1999.... 280 85(b) 12(c) 6(d)
Additional paid-in capital......... 47,835,662 6,350,789(b) 899,988(c) 1,031,244(d) (485,798)(e)
Accumulated deficit................ (54,286,566) (1,031,250)(d)
------------
Total stockholders' equity..... 10,627
------------
Total liabilities and
stockholders' equity......... $ 17,263,035
============
<CAPTION>
ADJUSTMENTS
------------
REDUCTION IN PRO-FORMA
ACCRUED MARCH 31,
DIVIDENDS 1999
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........ $ 2,267,976
Accounts receivable, less
allowance for doubtful accounts
of $63,000 at March 31,
1999........................... 1,490,892
Inventory, net................... 698,824
Other current assets............. 421,923
------------
Total current assets........... 4,879,615
Fixed assets, net.................. 660,706
Debt issue costs, net.............. 96,680
Intangibles, net................... 10,358,959
Deferred charges................... 716,231
Other assets....................... 65,046
------------
Total assets................... $ 16,777,237
============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities
Accounts payable................. $ 2,403,282
Accrued expenses................. (175,000)(f) 1,980,241
============
Total current liabilities...... 4,383,523
Subordinated secured notes......... 11,904,262
------------
Total liabilities.............. 16,287,785
Commitments and contingencies (Note
H)
Stockholders' equity
Preferred stock, $.01 par value;
5,000,000 shares authorized;
7,000 shares, designated as
Series G convertible
exchangeable preferred stock,
issued and outstanding at March
31, 1999 (liquidation
preference of $7,000,000)...... --
Common stock, $.00004 par value;
60,000,000 shares authorized;
7,026,445 shares issued and
outstanding at March 31, 1999.... 383
Additional paid-in capital......... 175,000(f) 55,806,885
Accumulated deficit................ (55,317,816)
------------
Total stockholders' equity..... 489,452
------------
Total liabilities and
stockholders' equity......... $ 16,777,237
============
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
F-43
<PAGE> 186
ASCENT PEDIATRICS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ADJUSTMENTS
------------------------------------------------------------------
TERMINATION
HISTORICAL OF ADVISORY EXCHANGE OF ALPHARMA DEBT ISSUED
DECEMBER 31, SERVICES PREFERRED STOCK DEBT INTEREST TO SETTLE
1998 AGREEMENT FOR DEBT EXPENSE TRIUMPH NOTE
------------ ----------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net revenue........................ $ 4,475,718
Costs of sales..................... 2,306,717
------------
Gross margin....................... 2,169,001
Costs and expenses
Selling, general and
administrative................. 14,513,559 1,031,250(d)
Research and development......... 3,868,185
------------
Total costs and expenses......... 18,381,744
Loss from operations........... (16,212,743)
Interest income.................... 368,570
Interest expense................... (1,220,665) (326,666)(g) (300,000)(h) 443,984(i)
Other income....................... --
------------
Loss before extraordinary
item......................... (17,064,838)
Extraordinary item loss on
extinguishment of debt (Note N),
net of taxes of $0............... 1,166,463
------------
Net loss....................... (18,231,301)
Accretion to redemption value of
preferred stock.................. --
Preferred stock dividend........... 449,169 (449,169)(g)
------------
Net loss to common
stockholders................. $(18,680,470)
============
Results per common share:
Historical -- basic and diluted:
Loss before extraordinary
item......................... $ (2.46)
============
Extraordinary item loss on early
extinguishment on debt......... $ (0.17)
============
Net loss......................... $ (2.63)
============
Preferred stock dividend......... $ (0.06)
============
Net loss to common
stockholders................... $ (2.69)
============
Weighted average shares
outstanding...................... 6,939,348
============
<CAPTION>
ADJUSTMENTS
------------
PRO-FORMA
ISSUANCE OF DECEMBER 31,
COMMON STOCK 1998
------------ ------------
<S> <C> <C>
Net revenue........................ $ 4,475,718
Costs of sales..................... 2,306,717
------------
Gross margin....................... 2,169,001
Costs and expenses
Selling, general and
administrative................. 15,544,809
Research and development......... 3,868,185
------------
Total costs and expenses......... 19,412,994
Loss from operations........... (17,243,993)
Interest income.................... 368,570
Interest expense................... (1,403,347)
Other income....................... --
------------
Loss before extraordinary
item......................... (18,278,770)
Extraordinary item loss on
extinguishment of debt (Note N),
net of taxes of $0............... 1,166,463
------------
Net loss....................... (19,445,233)
Accretion to redemption value of
preferred stock.................. --
Preferred stock dividend........... --
------------
Net loss to common
stockholders................. $(19,445,233)
============
Results per common share:
Historical -- basic and diluted:
Loss before extraordinary
item......................... $ (1.93)
============
Extraordinary item loss on early
extinguishment on debt......... $ (0.12)
============
Net loss......................... $ (2.05)
============
Preferred stock dividend......... $
============
Net loss to common
stockholders................... $ (2.05)
============
Weighted average shares
outstanding...................... 2,566,958(j) 9,506,306
============
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
F-44
<PAGE> 187
ASCENT PEDIATRICS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
ADJUSTMENTS
-------------------------------------------------
HISTORICAL EXCHANGE OF ALPHARMA ISSUANCE OF PRO-FORMA
MARCH 31, PREFERRED STOCK DEBT INTEREST COMMON MARCH 31,
1999 FOR DEBT EXPENSE STOCK 1999
----------- --------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Product revenue, net............................. $ 1,241,399 $ 1,241,399
Co-promotional revenue........................... 615,000 615,000
----------- -----------
Total net revenue................................ 1,856,399 1,856,399
Costs and expenses
Cost of product sales.......................... 634,594 634,594
Selling, general and administrative............ 4,115,095 4,115,095
Research and development....................... 578,303 578,303
----------- -----------
Total costs and expenses....................... 5,327,992 5,327,992
Loss from operations......................... (3,471,593) (3,471,593)
Interest income.................................. 25,897 25,897
Interest expense................................. (231,089) (140,000)(g) (41,729)(h) (421,818)
----------- -----------
Net loss..................................... (3,676,785) (3,858,514)
Preferred stock dividend......................... 192,501 (192,501)(g) --
----------- -----------
Net loss to common stockholders.............. $(3,869,286) $(3,858,514)
=========== ===========
Results per common share:
Historical -- basic and diluted:
Net loss..................................... $ (0.52) $ (0.40)
=========== ===========
Preferred stock dividend..................... $ (0.03) $ --
=========== ===========
Net loss to common stockholders.............. $ (0.55) $ (0.40)
=========== ===========
Weighted average shares outstanding.............. 7,010,821 2,566,958(k) 9,577,779
=========== ===========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
F-45
<PAGE> 188
ASCENT PEDIATRICS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma balance sheet as of March 31, 1999 reflects the
impact of the second amendment to the Series G purchase agreement as if it
occurred on March 31, 1999. The unaudited pro forma statement of operations for
the year ended December 31, 1998 and the quarter ended March 31, 1999 reflect
the impact of the second amendment to the Series G purchase agreement and the
February 19, 1999 proceeds of $4 million from the Alpharma loan as if the
transactions contemplated by these agreements occurred at the beginning of the
periods presented.
The pro forma adjustments are described below:
(a) EXCHANGE OF PREFERRED STOCK FOR DEBT. The exchange of 7,000 shares of
Series G convertible exchangeable preferred stock as a reduction to
equity of $6,461,251, an increase to debt of $6,461,251 for the 8%
convertible subordinated notes. The debt will be accreted to its face
value of $7,000,000 over its life.
(b) EXERCISE OF WARRANTS. 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, the exercise of these warrants and the
cancellation of $6,350,874 of 8% subordinated notes as payment of the
exercise price. The $6,350,874 is treated as an increase to equity.
(c) SALE OF COMMON STOCK. The sale and issuance of 300,000 shares of
Ascent common stock at a purchase price of $3.00 per share and the
cancellation of $900,000 of 8% subordinated notes as payment of the
purchase price, which $900,000 is treated as an increase to equity.
(d) TERMINATION OF ADVISORY SERVICES AGREEMENT. The issuance of 150,000
shares of Ascent common stock for advisory services, and the recording
of the fair value of these shares, assuming a value of $6.875 per share
of common stock which was the market price on the date the agreement
was signed, totaling $1,031,250, as compensation expense as a debit to
selling, general and administrative expenses with a corresponding
credit to common stock and additional paid in capital.
(e) RECOGNITION OF UNAMORTIZED DEBT ISSUE COSTS. The cancellation of the
8% subordinated notes (see b. and c. above) also results in the
recognition of unamortized debt issue costs associated with the 8%
subordinated notes of $485,798 with a corresponding debit to
additional paid in capital.
(f) REDUCTION IN ACCRUED DIVIDENDS. The dividends on the Series G
convertible exchangeable preferred stock were recognized on an imputed
basis of 11%, while under the 8% convertible subordinated notes issued
upon exchange of the Series G convertible exchangeable preferred stock
Ascent is only obligated to pay 8%. The difference of $175,000 is a
debit against accrued expenses with a credit to additional paid in
capital.
(g) EXCHANGE OF PREFERRED STOCK FOR DEBT. Assuming the exchange of the
Series G convertible exchangeable preferred stock for 8% convertible
subordinated notes had taken place on June 1, 1998, Ascent would have
recorded interest expense of $326,666 and $140,000 for the year ended
December 31, 1998 and the quarter ended March 31, 1999, respectively.
Additionally, Ascent would have reversed preferred stock dividends
associated with the Series G convertible exchangeable preferred stock
in the amounts of $449,169 and $192,501 for the year ended December 31,
1998 and the quarter ended March 31 ,1999, respectively.
F-46
<PAGE> 189
(h) ALPHARMA DEBT INTEREST EXPENSE. The $4,000,000 borrowed under the
Alpharma loan agreement on February 19, 1999 results in pro forma
interest expense of $300,000 for the year ended December 31, 1998 and
$41,729 for the quarter ended March 31, 1999.
(i) DEBT ISSUED TO SETTLE TRIUMPH NOTE. Assuming the 8% subordinated
notes had been outstanding for the whole year, Ascent would have
incurred additional interest expense and accretion associated with
these notes amounting to $300,000 and $20,685, respectively, for the
year ended December 31, 1998. However, in that case Ascent would not
have incurred interest expense and accretion for the Triumph notes
(which were extinguished with the proceeds of the Series G preferred
stock and debt offering) amounting to $233,333 and $531,336,
respectively.
(j) ISSUANCE OF COMMON STOCK. For the year ended December 31, 1998,
weighted average shares outstanding of 6,939,348 is increased by the
issuance of 2,116,958 shares as described in (b) above, 300,000 shares
as described in (c) above, and 150,000 shares as described in (d) above
for a total pro forma weighted average shares outstanding of 9,506,306
assuming these transactions occurred at January 1, 1998.
(k) ISSUANCE OF COMMON STOCK. For the quarter ended March 31, 1999,
weighted average shares outstanding of 7,010,821 is increased by the
issuance of 2,116,958 shares as described in (b) above, 300,000 shares
as described in (c) above, and 150,000 shares as described in (d)
above for a total pro forma weighted average shares outstanding of
9,577,779 assuming these transactions occurred at January 1, 1999.
These transactions will be consummated, subject to stockholder approval,
concurrently with the closing of the transactions contemplated by the Master
Agreement, dated as of February 16, 1999, by and among the Company, Alpharma and
Alpharma, Inc., including the merger of the Company with Bird Merger
Corporation, a wholly-owned subsidiary of the Company, in accordance with the
Agreement and Plan of Merger, dated as of February 16, 1999, by and between the
Company and Bird Merger Corporation. In connection with the transactions
contemplated by the Master Agreement, the Company entered into a second
amendment to the securities purchase agreement dated as of May 13, 1998 between
the Company and the purchasers named in the agreement. In order to induce the
purchasers to agree to the second amendment, the Company agreed, subject to
stockholder approval, among other things, to reduce the exercise price of
warrants to purchase 2,116,958 shares of Ascent common stock issued under the
May 1998 securities purchase agreement from $4.75 per share to $3.00 per share,
to sell and issue to the holders of these warrants an aggregate of 300,000
shares of Ascent common stock at a price of $3.00 per share and to exchange the
Series G convertible exchangeable preferred stock held by the purchasers for 8%
convertible subordinated notes. These transactions will result in a net gain on
redemption of approximately $1.2 million which will be included in additional
paid-in capital as of the end of the fiscal quarter in which these transactions
are consummated and will impact earnings per common share in such fiscal
quarter. The unaudited pro forma statements of operations for the year ended
December 31, 1998 and the quarter ended March 31, 1999 do not reflect this gain.
F-47
<PAGE> 190
ANNEX A
AGREEMENT AND PLAN OF MERGER
BETWEEN
ASCENT PEDIATRICS, INC.
AND
BIRD MERGER CORPORATION
FEBRUARY 16, 1999
A-1
<PAGE> 191
AGREEMENT AND PLAN OF MERGER
Agreement entered into as of February 16, 1999 by and between Ascent
Pediatrics, Inc., a Delaware corporation (the "Company"), and Bird Merger
Corporation, a Delaware corporation and a wholly-owned subsidiary of the Company
(the "Transitory Subsidiary"). The Company and the Transitory Subsidiary are
referred to collectively herein as the "Parties."
This Agreement has been entered into concurrently with and pursuant to a
Master Agreement, substantially in the form of Exhibit A attached hereto (the
"Master Agreement"), entered into between the Company, Alpharma, Inc., a
Delaware corporation ("Parent"), and Alpharma USPD Inc., a Maryland corporation
and wholly-owned subsidiary of Parent ("Alpharma").
This Agreement contemplates a tax-free merger of the Transitory Subsidiary
into the Company. In such merger, the stockholders of the Company will receive
the consideration set forth herein in exchange for their capital stock of the
Company.
NOW, THEREFORE, in consideration of the representations, warranties and
covenants herein contained, the Parties agree as follows.
ARTICLE I
THE MERGER
1.1 The Merger. Upon and subject to the terms and conditions of this
Agreement, the Transitory Subsidiary (which at all times shall have no assets or
business operations and shall exist solely for the purpose of effecting the
Merger) shall merge with and into the Company (with such merger referred to
herein as the "Merger") at the Effective Time (as defined below). From and after
the Effective Time, the separate corporate existence of the Transitory
Subsidiary shall cease and the Company shall continue as the surviving
corporation in the Merger (the "Surviving Corporation"). The "Effective Time"
shall be the time at which the Company and the Transitory Subsidiary file the
certificate of merger or other appropriate documents prepared and executed in
accordance with the relevant provisions of the Delaware General Corporation Law
with the Secretary of State of the State of Delaware (the "Certificate of
Merger").
1.2 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall occur concurrently with the Closing Date (as
defined in the Master Agreement) and shall take place at the offices of Hale and
Dorr LLP, 60 State Street, Boston, MA 02109, commencing at 9:00 a.m. local time
on such date as the Company, the Transitory Subsidiary and Alpharma shall agree
(or at such other place and/or time and/or on such other date as the Company,
the Transitory Subsidiary and Alpharma may agree).
1.3 Actions at the Closing. At the Closing, (a) the Company and the
Transitory Subsidiary shall file with the Secretary of State of the State of
Delaware the Certificate of Merger, and (b) the Depositary (as defined below)
shall deliver on the Company's behalf Depositary Receipts (as defined below) to
a bank or trust company or other entity appointed by the Company to act as the
exchange agent in accordance with Section 1.5.
A-2
<PAGE> 192
1.4 Conversion of Shares. At the Effective Time, by virtue of the Merger
and without any action on the part of any Party or the holder of any of the
following securities:
(a) Each share of common stock, $.00004 par value per share, of the
Company ("Old Common Stock") issued and outstanding immediately prior to
the Effective Time (other than shares of Old Common Stock held in the
Company's treasury and Dissenting Shares (if applicable and as defined in
Section 1.7)) shall be converted into and represent the right to receive
one depositary share (a "Depositary Share") issued pursuant to the
Depositary Agreement (the "Depositary Agreement") dated as of the date
hereof by and among the Company, Alpharma and State Street Bank and Trust
Company (the "Depositary"), substantially in the form of Exhibit B attached
hereto (such Depositary Shares being referred to herein as the "Merger
Consideration"). Each Depositary Share shall evidence one share of common
stock, $.00004 par value per share, of the Surviving Corporation ("New
Common Stock"), subject to the Call Option (as such term is defined in the
Depositary Agreement), and shall be represented by a depositary receipt (a
"Depositary Receipt").
(b) Each share of Old Common Stock held in the Company's treasury
immediately prior to the Effective Time shall be cancelled and retired
without payment of any consideration therefor.
(c) Each share of common stock, $.01 par value per share, of the
Transitory Subsidiary issued and outstanding immediately prior to the
Effective Time shall be converted into and thereafter evidence the right to
receive $.01 per share.
1.5 Exchange of Shares
(a) Prior to the Effective Time, the Company shall appoint State Street
Bank and Trust Company or another mutually acceptable bank or trust company as
agent (the "Exchange Agent") for the purpose of exchanging certificates
representing shares of Old Common Stock outstanding prior to the Effective Time
for the Merger Consideration. At or prior to the Effective Time, the Company
shall deposit with the Depositary a number of shares of New Common Stock equal
to the number of shares of Old Common Stock outstanding immediately prior to the
Effective Time, and the Depositary shall, in turn, deposit with the Exchange
Agent Depositary Receipts representing the number of Depositary Shares
corresponding to the number of shares of New Common Stock so deposited. Promptly
after the Effective Time, the Surviving Corporation shall cause the Exchange
Agent to send to each holder of shares of Old Common Stock at the Effective Time
a letter of transmittal in customary form for use in such exchange (which shall
specify that the delivery shall be effected, and risk of loss and title shall
pass, only upon proper delivery of the certificates representing shares of Old
Common Stock to the Exchange Agent).
(b) Each holder of shares of Old Common Stock that have been converted into
a right to receive the Merger Consideration, upon surrender to the Exchange
Agent of a certificate or certificates formerly representing such shares of Old
Common Stock together with a duly executed letter of transmittal covering such
shares of Old Common Stock, shall be entitled to receive the Merger
Consideration payable in respect of such shares of Old Common Stock. After the
Effective Time, each such certificate shall, until so surrendered, represent for
all purposes only the right to receive such Merger Consideration.
(c) If any portion of the Merger Consideration is to be issued to a person
other than the registered holder of the shares of Old Common Stock represented
by the certificate or certificates surrendered in exchange therefor, it shall be
a condition to such issuance that
A-3
<PAGE> 193
the certificate or certificates so surrendered shall be properly endorsed or
otherwise be in proper form for transfer and that the person requesting such
issuance shall pay the Exchange Agent any transfer or other taxes required as a
result of such issuance to a person other than the registered holder of such
shares of Old Common Stock or establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not payable.
(d) After the Effective Time, there shall be no further registration of
transfers of shares of Old Common Stock outstanding prior to the Effective Time.
If, after the Effective Time, certificates representing shares of Old Common
Stock outstanding prior to the Effective Time are presented to the Surviving
Corporation, they shall be cancelled and exchanged for the consideration
provided for, and in accordance with the procedures set forth, in this Article
I.
(e) Any portion of the Merger Consideration deposited with the Exchange
Agent in accordance with this Section 1.5 that remains unclaimed by the holders
of shares of Old Common Stock one year after the Effective Time shall be
returned upon demand to the Depositary, who shall return underlying shares of
New Common Stock to the Surviving Corporation in accordance with the Depositary
Agreement, and any such holder who has not exchanged his shares of Old Common
Stock for Depositary Shares in accordance with this Article I prior to that time
shall thereafter look only to the Surviving Corporation for payment of the
Merger Consideration in respect of his shares of Old Common Stock, but shall
have no greater rights against the Surviving Corporation than may be accorded to
its general creditors under applicable law. Notwithstanding the foregoing, the
Surviving Corporation shall not be liable to any holder of shares of Old Common
Stock for any shares of New Common Stock issued to a public official pursuant to
applicable abandoned property laws. Any portion of the Merger Consideration
remaining unclaimed by holders of shares of Old Common Stock as of a date which
is immediately prior to such time as such amounts would otherwise escheat to or
become property of any government entity shall, to the extent permitted by
applicable law, become property of the Surviving Corporation, free and clear of
any claims or interest of any person previously entitled thereto.
(f) No dividends, interest or other distributions with respect to the
Merger Consideration shall be paid to the holder of any unsurrendered
certificates representing shares of Old Common Stock outstanding prior to the
Effective Time until such certificates are surrendered as provided in this
Section. Upon such surrender, there shall be paid, without interest, to the
person in whose name the certificates representing the Merger Consideration into
which such shares of Old Common Stock were converted are registered, all
dividends, interest and other distributions payable in respect of such
securities on any date subsequent to, and in respect of a record date after, the
Effective Time.
(g) The Depositary Receipts and the share certificates evidencing the
shares of New Common Stock deposited with the Depositary shall bear the
following legend:
THE [SHARES OF COMMON STOCK EVIDENCED BY THE DEPOSITARY SHARES
REPRESENTED HEREBY/SHARES OF COMMON STOCK EVIDENCED HEREBY] ARE SUBJECT TO
A CALL OPTION PURSUANT TO A DEPOSITARY AGREEMENT DATED FEBRUARY 16, 1999
AMONG ASCENT, ALPHARMA USPD INC. AND STATE STREET BANK AND TRUST COMPANY. A
COPY OF THIS AGREEMENT MAY BE OBTAINED FROM THE SECRETARY OF ASCENT.
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1.6 Treatment of Convertible Securities, Warrants and Options.
(a) Effective as of the Effective Time, each convertible security, warrant
or option of the Company outstanding as of the Effective Time, whether or not
then vested, convertible or exercisable, shall (when vested, convertible or
exercisable in accordance with the terms thereof) be convertible into or
exercisable for a number of Depositary Shares or shares of New Common Stock, as
determined in accordance with Section 1.6(b), equal to the number of shares of
Old Common Stock issuable upon conversion or exercise of such convertible
security, warrant or option in accordance with the terms thereof.
(b) From and after the Effective Time until the Option Determination Date
(as defined in the Depositary Agreement), from time to time upon the conversion
or exercise of any convertible security, warrant or option of the Surviving
Corporation, the Surviving Corporation shall deposit with the Depositary a
number of shares of New Common Stock corresponding to the number of Depositary
Shares issuable upon conversion or exercise of such convertible security,
warrant or option, and the Surviving Corporation shall cause the Depositary to
issue to the holder of such convertible security, warrant or option upon such
conversion or exercise, Depositary Receipts representing the number of
Depositary Shares issuable upon conversion or exercise of such convertible
security, warrant or option. From and after the Option Closing Date (as defined
in the Depositary Agreement), holders of any outstanding convertible securities,
warrants or options of the Surviving Corporation shall have the right to receive
from the Surviving Corporation upon conversion or exercise thereof (and the
payment of any exercise or purchase price provided for under the terms of such
convertible security, warrant or option) cash in an amount equal to the Option
Exercise Price (as defined in the Depositary Agreement) for each Depositary
Share for which such convertible security, warrant or option is convertible or
exercisable. From and after the Option Expiration Date (as defined in the
Depositary Agreement), such holders shall have the right to receive from the
Surviving Corporation upon conversion or exercise of such convertible
securities, warrants or options shares of New Common Stock.
(c) Prior to the Effective Time, the Company shall make any amendments to
the respective terms of any convertible security, warrant or option of the
Company then outstanding or the Company's 1992 Stock Incentive Plan, 1997
Director Stock Option Plan or 1997 Employee Stock Purchase Plan that are
necessary or advisable to give effect to the transactions contemplated by this
Section 1.6, including without limitation providing that all references therein
to Old Common Stock be deemed to be references to Depositary Shares.
1.7 Dissenting Shares. If appraisal rights are available under Section
262 of the Delaware General Corporation Law, shares of Old Common Stock held as
of the Effective Time by a stockholder of the Company who has not voted such
shares of Old Common Stock in favor of the adoption of this Agreement and the
Merger and with respect to which appraisal shall have been duly demanded and
perfected in accordance with Section 262 of the Delaware General Corporation Law
and not effectively withdrawn or forfeited prior to the Effective Time
("Dissenting Shares") shall not be converted into or represent the right to
receive the Merger Consideration, unless such stockholder shall have forfeited
his right to appraisal under the Delaware General Corporation Law or withdrawn,
with the consent of the Surviving Corporation, his demand for appraisal. If such
stockholder has so forfeited or withdrawn his right to appraisal of Dissenting
Shares, then (a) as of the occurrence of such event, such stockholder's
Dissenting Shares shall cease to be Dissenting Shares and shall be converted
into and represent the right to receive the Merger Consideration issuable
pursuant to Section 1.4(a) in respect of such shares of Old
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Common Stock held by such stockholder, (b) promptly following the occurrence of
such event, the Surviving Corporation shall deposit with the Depositary a number
of shares of New Common Stock equal to the number of shares of Old Common Stock
held by such stockholder, and (c) the Depositary shall, in turn, deposit with
the Exchange Agent Depositary Receipts representing the number of Depositary
Shares corresponding to the number of shares of New Common Stock so deposited.
1.8 Call Option. The shares of New Common Stock shall be subject to a
Call Option exercisable upon the terms and conditions set forth in the
Depositary Agreement.
1.9 No Further Rights. From and after the Effective Time, no shares of
Old Common Stock shall be deemed to be outstanding, and holders of shares of Old
Common Stock shall cease to have any rights with respect thereto, except as
provided herein or by law.
ARTICLE II
SURVIVING CORPORATION
2.1 Certificate of Incorporation. The Certificate of Incorporation of the
Surviving Corporation shall be the same as the Certificate of Incorporation of
the Company, except that such Certificate of Incorporation shall be amended in
the Merger in the manner set forth in Exhibit C attached hereto.
2.2 By-laws. The By-laws of the Surviving Corporation shall be the same
as the By-laws of the Company.
2.3 Directors and Officers. The directors of the Company at the Effective
Time shall be the directors of the Surviving Corporation, until their successors
are duly elected or appointed and qualified in accordance with applicable law,
and the officers of the Company at the Effective Time shall be the officers of
the Surviving Corporation.
ARTICLE III
CONDITIONS TO CONSUMMATION OF MERGER
3.1 Conditions to Each Party's Obligations. The respective obligations of
each Party to consummate the Merger are subject to the satisfaction of the
following conditions:
(a) The Company's stockholders shall have approved and adopted this
Agreement (including the exhibits attached hereto) and the Merger; and
(b) A Registration Statement of the Company on Form S-4 (the
"Registration Statement") registering the Depositary Shares and the
underlying shares of New Common Stock shall have been filed with the
Securities and Exchange Commission (the "SEC") and become effective in
accordance with the provisions of the Securities Act of 1933, as amended,
and no stop order suspending the effectiveness of the Registration
Statement shall have been issued by the SEC and remain in effect.
ARTICLE IV
MISCELLANEOUS
4.1 Succession. At the Effective Time, the Surviving Corporation shall
succeed to all of the rights, privileges, debts, liabilities, powers and
property of the Company and the
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Transitory Subsidiary in the manner of and as more fully set forth in Section
259 of the Delaware General Corporation Law. Without limiting the foregoing, at
the Effective Time, all property, rights, privileges, franchises, patents,
trademarks, licenses, registrations and other assets of every kind and
description of the Company and the Transitory Subsidiary shall be transferred
to, vested in and devolved upon the Surviving Corporation without further act or
deed, and all property, rights and every other interest of the Company and the
Transitory Subsidiary shall be as effectively the property of the Surviving
Corporation as they were of the Company and the Transitory Subsidiary,
respectively. All rights of creditors of the Company and the Transitory
Subsidiary and all liens upon any property of the Company and the Transitory
Subsidiary shall be preserved unimpaired, and all debts, liabilities and duties
of the Company and the Transitory Subsidiary shall attach to the Surviving
Corporation and may be enforced against it to the same extent as if said debts,
liabilities and duties had been incurred or contracted by it.
4.2 Further Assurances. From time to time, as and when required by the
Surviving Corporation or by its successors and assigns, there shall be executed
and delivered on behalf of the Company or the Transitory Subsidiary such deeds
and other instruments, and there shall be taken or caused to be taken by it such
further and other action, as shall be appropriate or necessary in order to vest
or perfect in or to confirm of record or otherwise in the Surviving Corporation
the title to and possession of all the property, interests, assets, rights,
privileges, immunities, powers, franchises and authority of the Company and the
Transitory Subsidiary, and otherwise to carry out the purposes of this
Agreement, and the officers and directors of the Company and the Transitory
Subsidiary are fully authorized in the name and on behalf of the Company or the
Transitory Subsidiary, as the case may be, or otherwise to take any and all such
action and to execute and deliver any and all such deeds and other instruments.
4.3 Abandonment. At any time prior to the Effective Time, if the Master
Agreement has been terminated, this Agreement may be terminated and the Merger
may be abandoned by the Board of Directors of either the Company or the
Transitory Subsidiary or both, notwithstanding approval of this Agreement by the
stockholders of the Company or the Transitory Subsidiary.
4.4 Amendment. This Agreement may be amended by the Boards of Directors
of the Company and the Transitory Subsidiary at any time prior to the Effective
Time, provided that such amendment shall have been consented to by Alpharma; and
provided further that an amendment made subsequent to the approval of this
Agreement by the stockholders of either the Company or the Transitory Subsidiary
shall not (i) alter or change the amount or kind of shares, securities, cash,
property and/or rights to be received in exchange for or on conversion of all or
any of the shares of any class or series thereof of such corporation, (ii) alter
or change any term of the Certificate of Incorporation of the Surviving
Corporation to be effected by the Merger, or (iii) alter or change any of the
terms and conditions of this Agreement if such alteration or change would
adversely affect the holders of any class or series of the stock of such
corporation.
4.5 Governing Law. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of Delaware, without giving effect to the principles of conflicts of law
thereof.
4.6 Counterparts. In order to facilitate the filing and recording of this
Agreement, the same may be executed in any number of counterparts, each of which
shall be deemed to be an original.
[REMAINDER OF PAGE LEFT BLANK.]
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
and Plan of Merger to be executed and attested on its behalf of its officers
thereunto duly authorized, as of the date first above written.
ASCENT PEDIATRICS, INC.
By: /s/ EMMETT CLEMENTE
--------------------------------
Chairman
BIRD MERGER CORPORATION
By: /s/ ALAN R. FOX
--------------------------------
President
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I, , Secretary of Ascent Pediatrics, Inc., a corporation
organized and existing under the laws of the State of Delaware (the "Company"),
hereby certify that the Agreement and Plan of Merger to which this certificate
is attached, after having been duly signed on behalf of the Company and having
been signed on behalf of Bird Merger Corporation, a corporation organized and
existing under the laws of the State of Delaware, was duly submitted to the
stockholders of the Company at a meeting of said stockholders pursuant to
Section 251 of the General Corporation Law of Delaware; and that the Agreement
and Plan of Merger was approved at said meeting by the affirmative vote of
stockholders representing at least a majority of the outstanding stock of the
Company entitled to vote thereon.
WITNESS my hand on this day of , 1999.
----------------------------------
Secretary
I, John G. Bernardi, Secretary of Bird Merger Corporation, a corporation
organized and existing under the laws of the State of Delaware ("Transitory
Subsidiary"), hereby certify that the Agreement and Plan of Merger to which this
certificate is attached, after having been duly signed on behalf of Transitory
Subsidiary and having been signed on behalf of Ascent Pediatrics, Inc., a
corporation organized and existing under the laws of the State of Delaware, was
duly submitted to the sole stockholder of Transitory Subsidiary by written
action of said stockholder pursuant to Section 251 of the General Corporation
Law of Delaware and that by said written action the Agreement and Plan of Merger
was approved by the affirmative vote of the sole stockholder representing at
least a majority of the outstanding stock of Transitory Subsidiary entitled to
vote thereon.
WITNESS my hand on this day of , 1999.
----------------------------------
Secretary
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EXHIBIT A
MASTER AGREEMENT
BY AND AMONG
ASCENT PEDIATRICS, INC.,
ALPHARMA, INC.
AND
ALPHARMA USPD INC.
FEBRUARY 16, 1999
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MASTER AGREEMENT dated as of February 16, 1999 among Ascent Pediatrics,
Inc., a Delaware corporation (the "Company"), Alpharma, Inc., a Delaware
corporation ("Parent"), and Alpharma USPD Inc., a Maryland corporation and
wholly owned subsidiary of Parent ("Alpharma").
WHEREAS, the Company and Bird Merger Corporation, a Delaware corporation
and wholly owned subsidiary of the Company ("Transitory Subsidiary"), have
entered into an Agreement and Plan of Merger dated as of February 16, 1999 (the
"Merger Agreement"), pursuant to which, among other things:
(i) Transitory Subsidiary shall be merged (the "Merger") with and into
the Company;
(ii) each share of common stock, $.00004 par value per share, of the
Company issued and outstanding immediately prior to the Effective Time (as
defined in the Merger Agreement) (the "Old Common Stock") (other than
shares of Old Common Stock held in the Company's treasury and shares of Old
Common Stock as to which appraisal rights have been perfected by the
holders thereof (if such rights are available under Section 262 of the
Delaware General Corporation Law)) shall be converted in the Merger into
and represent the right to receive one depositary share (a "Depositary
Share") issued pursuant to the Depositary Agreement, each Depositary Share
evidencing one share of common stock, $.00004 par value per share, of the
Company following the Merger (the "New Common Stock"), represented by a
depositary receipt ("Depositary Receipt") and subject to the right and
option of the Company (the "Call Option"), upon the terms and conditions
set forth in the Depositary Agreement (as defined below), to purchase all
of the outstanding shares of New Common Stock of the Company deposited with
the Depositary (as defined below);
(iii) each share of common stock, $.01 par value per share, of
Transitory Subsidiary issued and outstanding immediately prior to the
Effective Time shall be converted in the Merger into and thereafter
evidence the right to receive $.01 per share; and
WHEREAS, Alpharma and the Company have entered into a Loan Agreement dated
as of February 16, 1999 (the "Loan Agreement") pursuant to which Alpharma has
agreed to loan to the Company an aggregate of up to $40 million from time to
time upon the terms and conditions set forth therein;
WHEREAS, as a condition to, and as additional consideration for, Alpharma
agreeing to make Loans (as defined below), the Company desires to assign the
Call Option to Alpharma; and
WHEREAS, the Company, Alpharma, and State Street Bank and Trust Company
(the "Depositary") have entered into a Depositary Agreement dated as of February
16, 1999 (the "Depositary Agreement") providing for (i) the terms and conditions
pursuant to which the Company may exercise the Call Option prior to the transfer
of the Call Option to Alpharma and (ii) the terms and conditions pursuant to
which Alpharma may exercise the Call Option from and after the transfer of the
Call Option to Alpharma;
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NOW, THEREFORE, in consideration of the premises, it is agreed by and among
the parties hereto as follows:
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
1.1 Definitions.
"Affiliate" shall have the meaning ascribed to it in Rule 405 promulgated
under the Securities Act.
"Alpharma Director" has the meaning set forth in Section 6.5(a) of the Loan
Agreement.
"Ancillary Agreements" shall mean the Depositary Agreement, the Loan
Agreement, the Registration Rights Agreement and the Subordination Agreement
dated as of February 16, 1999 by and among the Company, Alpharma and the
Purchasers (as defined in the May 1998 Securities Purchase Agreement).
"Board of Directors" means the Board of Directors of the Company or any
committee of the Board of Directors authorized to act for it hereunder.
"Business Day" means any day which is neither a Saturday nor a Sunday nor a
legal holiday on which banks are authorized or required to be closed in Boston,
Massachusetts, New York, New York or in any other city in which the Depositary's
Office (as defined in the Depositary Agreement) is located.
"Capital Stock" means any and all shares, interests, participations or
other equivalents of or interests in (however designated) equity of the Company,
including any preferred stock, but excluding any debt securities convertible
into such equity prior to such conversion.
"Change in Control" of the Company means:
(a) the acquisition by any Person or "group" within the meaning of
Section 13(d)(3) or 14(d)(2) of the Exchange Act (excluding, for this
purpose, the Company or its Subsidiaries, any employee benefit plan of the
Company or its Subsidiaries which acquires beneficial ownership of voting
securities of the Company, or Alpharma or its Affiliates) of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange
Act) of more than 50% of the aggregate voting power of all classes of
Voting Capital Stock that are then outstanding or that are issuable upon
the conversion or exercise of convertible securities, options, warrants or
rights of the Company that are then outstanding; provided that any voting
securities acquired directly from the Company by an underwriter of the
Company as part of an underwritten public offering of Capital Stock of the
Company shall not be deemed to be beneficially owned by such underwriter
for purposes of determining whether a Change in Control has occurred;
(b) Persons who, as of the Closing Date constitute all of the
Non-Alpharma Directors (the "Non-Alpharma Incumbent Directors") cease for
any reason to constitute at least a majority of the Non- Alpharma Directors
then in office, provided that any Person becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
stockholders, was approved by a vote of at least a majority of the
Non-Alpharma Incumbent Directors shall be considered as though such Person
were one of the Non-Alpharma Incumbent Directors as of the
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Closing Date; provided, however, that there shall be excluded from this
clause (b) any individual whose initial assumption of office occurred as a
result of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened solicitation
of proxies or consents, by or on behalf of a Person other than the Board of
Directors;
(c) the consummation of a reorganization, merger or consolidation
involving the Company, if the stockholders of the Company beneficially
owning 100% of the aggregate voting power of all classes of Voting Capital
Stock that are then outstanding or that are issuable upon conversion or
exercise of convertible securities, options, warrants or rights that are
then outstanding immediately prior to such reorganization, merger or
consolidation do not, immediately thereafter, beneficially own more than
50% of the aggregate voting power of all classes of Voting Capital Stock
that are then outstanding or issuable upon conversion or exchange of
convertible securities, options, warrants or rights that are then
outstanding; or
(d) a liquidation or dissolution of the Company (other than pursuant
to the United States Bankruptcy Code) or the conveyance, transfer or
leasing of all or substantially all of the assets of the Company to any
Person.
"Closing" has the meaning set forth in Section 2.1 of this Agreement.
"Closing Date" has the meaning set forth in Section 2.1 of this Agreement.
"Common Stock" means (i) prior to the Effective Time (as defined in the
Merger Agreement), the Old Common Stock, and (ii) at and after the Effective
Time, the New Common Stock.
"Company" means the party named as such above until a successor replaces it
pursuant to the applicable provision hereof and thereafter means the successor
to such party.
"Depositary Agreement" shall have the meaning ascribed to it in the
Preamble to this Master Agreement.
"Effective Time" shall have the meaning ascribed to it in the Merger
Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Financial Statements" has the meaning set forth in Section 3.7(a) of the
Loan Agreement.
"First Loan" has the meaning set forth in Section 2.3 of the Loan
Agreement.
"Forty Percent Limit" has the meaning set forth in Section 6.1 of this
Agreement.
"GAAP" means U.S. generally accepted accounting principles as in effect
from time to time.
"Guaranty Agreement" means the Guaranty Agreement dated as of February 16,
1999 between the Company and the Parent.
"Indebtedness" means and includes:
(a) all items which in accordance with GAAP would be included on the
liability side of a balance sheet on the date as of which Indebtedness is
to be determined (excluding capital stock, surplus reserves and deferred
credits);
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(b) all guaranties, letter of credit, contingent reimbursement
obligations and other contingent obligations in respect of, or any
obligations to purchase or otherwise acquire, indebtedness of others; and
(c) all indebtedness secured by any Lien existing on any interest of
the Person with respect to which indebtedness is being determined in
Property owned subject to such Lien whether or not the indebtedness secured
thereby shall been assumed.
"Intellectual Property" has the meaning set forth in Section 3.11(a) of the
Loan Agreement.
"Lien" means any mortgage, pledge, charge, encumbrance, security interest,
collateral assignment or other lien or restriction of any kind, whether based on
common law, constitutional provision, statute or contract, and shall include
reservations, exceptions, encroachments, easements, rights of way, covenants,
conditions, restrictions and other title exceptions.
"Loan" means any borrowing by the Company of up to a maximum principal
amount of $40,000,000 from Alpharma pursuant to Section 2.1 of the Loan
Agreement and the other terms and conditions of the Loan Agreement.
"Loan Agreement" shall have the meaning ascribed to it in the Preamble to
this Master Agreement.
"Material Adverse Effect" means any development, change or effect that is
materially adverse to the business, Properties (including, without limitation,
Intellectual Property), assets, net worth, financial condition, results of
operations or future prospects (including, without limitation, future equity
value) of the Company or Alpharma, as the case may be, and its Subsidiaries
taken as a whole.
"May 1998 Securities Purchase Agreement" means the Series G Securities
Purchase Agreement dated as of May 13, 1998 by and among the Company and the
Purchasers named in Schedule I thereto, as amended.
"Merger" has the meaning set forth in the Preamble to this Agreement.
"Merger Agreement" has the meaning set forth in the Preamble to this
Agreement.
"Merger Consideration" has the meaning set forth in Section 1.4(a) of the
Merger Agreement.
"New Common Stock" has the meaning set forth in the preamble to this
Agreement.
"Non-Alpharma Directors" has the meaning set forth in Section 6.3 of this
Agreement.
"Note" means the note to be issued by the Company to Alpharma pursuant to
Section 2.2(a) of the Loan Agreement, provided however, that in the event that
Alpharma exchanges all or a portion of the Note for one or more Notes in
accordance with Section 2.2(c) of the Loan Agreement or transfers all or a
portion of the Note in accordance with Article XII of the Loan Agreement, all
references to the Note in this Agreement shall be deemed to include the Notes
issued by the Company upon such exchange or transfer.
"Note Conversion Shares" has the meaning set forth in Section 3.4(b) of the
Loan Agreement.
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"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of the Company.
"Old Common Stock" has the meaning set forth in the preamble to this
Agreement.
"Option Determination Date" has the meaning set forth in the Depositary
Agreement.
"Option Expiration Date" has the meaning set forth in the Depositary
Agreement.
"Person" means any individual, corporation, association, company, business
trust, partnership, joint venture, joint-stock company, limited liability
company, trust, unincorporated organization or association or government or any
agency or political subdivision thereof.
"Property" means any interest in any kind of property or asset, whether
real, personal or mixed, tangible or intangible.
"Proxy Statement/Prospectus" has the meaning set forth in Section 4.1 of
this Agreement.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of February 16, 1999 between the Company and Alpharma.
"S-4 Registration Statement" has the meaning set forth in Section 4.2 of
this Agreement.
"SEC" means the United States Securities and Exchange Commission.
"Second Amendment" shall mean the Second Amendment dated as of February 16,
1999 to the May 1998 Securities Purchase Agreement.
"Securities" means the Note and the Note Conversion Shares.
"Securities Act" means the Securities Act of 1933, as amended.
"Standstill Period" has the meaning set forth in Section 6.1 of this
Agreement.
"Stockholder Meeting" has the meaning set forth in Section 4.1 of this
Agreement.
"Subsidiary" of a Person means any corporation, association, partnership,
joint venture or other business entity of which more than fifty percent (50%) of
the Voting Capital Stock or other equity interests (in the case of Persons other
than corporations), is owned or controlled directly or indirectly by the Person,
or one or more of the Subsidiaries of the Person, or a combination thereof.
"Voting Capital Stock" means the Capital Stock of the Company entitled to
vote generally in the election of directors.
The term "to the knowledge of" or derivatives thereof shall mean the actual
knowledge of the Chief Executive Officer or the Vice President, Finance of the
Company.
1.2 Rules of Construction
Unless the context otherwise requires:
a. a term has the meaning assigned to it;
b. an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
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c. "or" is not exclusive;
d. words in the singular include the plural and in the plural include
the singular;
e. provisions apply to successive events and transactions; and
f. "herein," "hereof" and other words of similar import refer to this
Agreement as a whole and not to any particular Article, Section or other
subdivision.
ARTICLE II
THE CLOSING
2.1 The Closing. The Closing of the transactions contemplated by this
Agreement (the "Closing") shall occur within five days after the satisfaction or
waiver of all of the conditions to the obligations of the parties hereunder,
including without limitation the conditions set forth in Article V hereof and in
Section 4.2 of the Loan Agreement (the date of such Closing being referred to as
the "Closing Date").
2.2 Actions at the Closing. At the Closing, (a) the Company shall deliver to
Alpharma the certificates, instruments and documents referred to in Section
5.2(j), (b) the Company shall file with the Secretary of State of the State of
Delaware the Certificate of Merger and (c) following the Effective Time of the
Merger, Alpharma and the Company shall take such other actions as are provided
in this Agreement, the Merger Agreement and the Ancillary Agreements.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Company Representations and Warranties. The Company has made certain
representations and warranties to Alpharma pursuant to Article III of the Loan
Agreement, which representations and warranties are incorporated herein by
reference. The Company hereby confirms that such representations and warranties
are true and correct in all respects as of the date hereof as if included
herein.
3.2 Alpharma Representations and Warranties. Alpharma represents and warrants
to the Company that:
(a) it is an "accredited investor" as that term is defined in Rule
501(a) promulgated under the Securities Act,
(b) it has the requisite knowledge and experience in financial and
business matters to be capable of evaluating the merits and risks of an
investment in the Company,
(c) it has had an opportunity to discuss the Company's business,
management and financial affairs with the Company's management,
(d) it is acquiring the Securities for investment for its own account
and not with a view to, or for resale in connection with, any distribution
thereof, nor with any present intention of distributing or selling the
same; and Alpharma has no present or contemplated agreement, undertaking,
arrangement, obligation, indebtedness or commitment providing for the
disposition thereof,
(e) it is not in material breach or violation of, or in default under,
any term or provision of (i) its Certificate of Incorporation or Bylaws,
(ii) any indenture,
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mortgage, deed of trust, voting trust agreement, stockholders agreement,
note agreement or other agreement or instrument to which it is a party or
by which it is bound or to which any of its Property is subject, the effect
of which breach, violation or default, individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect with respect
to Alpharma, or (iii) any statute, judgment, decree, order, rule or
regulation applicable to Alpharma or of any arbitrator, court, regulatory
body, administrative agency or any other governmental agency or body,
domestic or foreign, having jurisdiction over Alpharma or any of its
activities or properties and the effect of which breach, violation or
default, individually or in the aggregate, would reasonably be expected to
have a Material Adverse Effect with respect to Alpharma,
(f) it has not been organized, reorganized or recapitalized
specifically for the purpose of investing in the Company,
(g) it understands that the Securities have not been registered under
the Securities Act and it will not offer, sell, transfer, pledge,
hypothecate or otherwise dispose of any Securities except pursuant to an
exemption from, or otherwise in a transaction not subject to, the
registration requirements of the Securities Act or pursuant to an effective
registration statement under the Securities Act, and, in each case, in
accordance with any applicable state securities or "blue sky" laws,
(h) it has full power and authority to execute, deliver and perform
this Agreement and the Ancillary Agreements,
(i) the Person executing this Agreement and the Ancillary Agreements
on behalf of Alpharma has the appropriate authority to act on behalf of
Alpharma,
(j) it has full power and authority to execute and deliver this
Agreement, the Ancillary Agreements and such other documents furnished or
to be furnished by Alpharma hereunder, this Agreement and the Ancillary
Agreements have each been duly authorized, executed and delivered by
Alpharma and each constitutes a legal, valid and binding agreement of
Alpharma, enforceable against Alpharma in accordance with its terms,
subject to bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to general
principles of equity,
(k) the compliance by Alpharma with the provisions of this Agreement
and the Ancillary Agreements and the consummation of the other transactions
contemplated hereby or thereby will not result in the creation or
imposition of any lien, charge, security interest or encumbrance upon any
of the assets of Alpharma pursuant to the terms or provisions of, or result
in a breach or violation of or conflict with any of the terms or provisions
of, or constitute a default under, or give any other party a right to
terminate any of its obligations under, or result in the acceleration of
any obligation under, (i) the Certificate of Incorporation and Bylaws of
Alpharma, (ii) any contract or other agreement to which Alpharma is a party
or by which Alpharma or any of its respective properties is bound, or (iii)
any judgment, ruling, decree, order, statute, rule or regulation of any
court or other governmental agency or body, domestic or foreign, applicable
to the business or properties of Alpharma, except, with respect to clauses
(ii) and (iii), in circumstances that would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect with
respect to Alpharma,
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(l) it has not employed any broker or finder in connection with the
transactions contemplated by this Agreement or the Ancillary Agreements,
(m) it acknowledges receipt of, and the opportunity to review, the
information that it believes necessary to make an investment in the
Securities, including, without limitation, the Financial Statements and the
other documents referenced in the Loan Agreement as having been delivered
to Alpharma by the Company,
(n) there is no action, suit, proceeding or investigation pending, or,
to the knowledge of Alpharma, threatened, against Alpharma before or by any
court, regulatory body or administrative agency or any other governmental
agency or body, domestic or foreign, or any action, suit, proceeding or
investigation pending, or, to the knowledge of Alpharma, threatened, which
challenges the validity of any action taken or to be taken pursuant to or
in connection with this Agreement and the Ancillary Agreements or the
issuance of the Note or the Note Conversion Shares, which would not
reasonably be expected to have a Material Adverse Effect with respect to
Alpharma, and
(o) Alpharma (i) is duly incorporated, validly existing and in good
standing under the laws of the State of Maryland, and has all requisite
corporate power and authority to carry on its business as now conducted and
proposed to be conducted, and (ii) is duly qualified to do business as a
foreign corporation and is in good standing (or the equivalent thereof
under applicable law) in each jurisdiction in which the conduct of its
business requires such qualification by reason of the ownership or leasing
of property or otherwise (except for those jurisdictions in which the
failure so to qualify does not have a Material Adverse Effect with the
respect to Alpharma).
ARTICLE IV
STOCKHOLDER MEETING; PROXY MATERIAL;
REGISTRATION STATEMENT; STOCK LISTING; INDEMNIFICATION
4.1 Stockholder Meeting; Proxy Material. The Company shall cause a meeting of
its stockholders (the "Stockholder Meeting") to be duly called and held as soon
as reasonably practicable for the purpose of voting on the approval and adoption
of (i) the Merger Agreement (including the exhibits attached thereto) and the
transactions contemplated thereby, including the Merger, and (ii) the Second
Amendment and the transactions contemplated thereby. The Board of Directors of
the Company shall recommend approval and adoption of (i) the Merger Agreement
(including the exhibits attached thereto) and the transactions contemplated
thereby, including the Merger, and (ii) the Second Amendment and the
transactions contemplated thereby, by the Company's stockholders. In connection
with the Stockholder Meeting, the Company (a) will promptly prepare and file
with the SEC, will use its best efforts to have cleared by the SEC and will
thereafter mail to its stockholders as promptly as practicable a proxy
statement/prospectus and all other documents which may be required to be filed
or mailed in connection with the Stockholder Meeting (collectively, the "Proxy
Statement/Prospectus") and the consummation of the transactions contemplated by
(i) the Merger Agreement and (ii) the Second Amendment, (b) will use its best
efforts to obtain the necessary approvals by its stockholders of (i) the Merger
Agreement (including the exhibits attached thereto) and the transactions
contemplated thereby, including the Merger, and (ii) the Second Amendment and
the transactions contemplated thereby, and (c) will otherwise comply with all
legal requirements applicable to the Stockholder Meeting.
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4.2 S-4 Registration Statement. Promptly following the resolution to the
satisfaction of the SEC of all SEC comments on the Proxy Statement/Prospectus
(or the expiration of the ten-day period under Rule 14a-6(a) under the Exchange
Act if no SEC comments are received by such date), the Company shall promptly
prepare and file with the SEC, under the Securities Act, a registration
statement on Form S-4 with respect to the Depositary Shares and the underlying
shares of New Common Stock (the "S-4 Registration Statement") and shall use its
best efforts to cause the S-4 Registration Statement to be declared effective as
promptly as practicable. The Company shall take any action required to be taken
under foreign or state securities or Blue Sky laws in connection with the
issuance of the Merger Consideration.
4.3 Cooperation. Alpharma will provide all information relating to Alpharma
and its Affiliates for use in preparation of the Proxy Statement/Prospectus and
the S-4 Registration Statement. The Company shall give Alpharma and its counsel
reasonable opportunity to review and comment upon the Proxy Statement/Prospectus
and the S-4 Registration Statement and any amendments thereto prior to the
filing thereof with the SEC and prior to dissemination of the Proxy
Statement/Prospectus to the stockholders of the Company. The Company shall
provide Alpharma and its counsel with a copy of any written comments or
telephonic notification of any verbal comments the Company may receive from the
SEC or its staff with respect to the Proxy Statement/Prospectus and the S-4
Registration Statement promptly after the receipt thereof, shall permit Alpharma
and its counsel to participate in the preparation of any written responses or
any verbal responses of the Company or its counsel and shall provide Alpharma
and its counsel with a copy of any written responses and telephonic notification
of any verbal responses of the Company or its counsel. The Company agrees to use
its best efforts, after consultation with Alpharma, to respond promptly to all
such comments of or requests by the SEC and to cause the Proxy
Statement/Prospectus and all required amendments and supplements to be mailed to
the stockholders entitled to vote at the Stockholder Meeting at the earliest
practicable time. The Proxy Statement/Prospectus shall contain the
recommendations of the Board of Directors of the Company referred to in Section
4.1.
4.4 Indemnification.
(a) The Company will indemnify and hold harmless Alpharma, each of its
directors and officers and each person, if any, who controls Alpharma within the
meaning of the Securities Act and the Exchange Act against any losses, claims,
damages or liabilities, joint or several, to which Alpharma may become subject
under the Securities Act, the Exchange Act, state securities or Blue Sky laws or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the S-4 Registration
Statement as of its effective date or in the Proxy Statement/Prospectus as of
the date on which it is distributed to the Company's stockholders and as of the
date of the Stockholder Meeting, (ii) any omission or alleged omission to state
a material fact required to be stated in the S-4 Registration Statement or
necessary to make the statements therein not misleading as of its effective date
or (iii) any omission or alleged omission to state a material fact required to
be stated in the Proxy Statement/Prospectus or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading as of the date on which the Proxy Statement/Prospectus is distributed
to the Company's stockholders and as of the date of the Stockholder Meeting, and
the Company will reimburse Alpharma for any legal or any other expenses
reasonably incurred by Alpharma in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that the
Company will not be
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liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or omission made
in the S-4 Registration Statement or the Proxy Statement/Prospectus in reliance
upon and in conformity with information furnished to the Company, in writing, by
or on behalf of Alpharma specifically for use in the preparation thereof.
(b) Alpharma will indemnify and hold harmless the Company, each of its
directors and officers and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act against any losses,
claims, damages or liabilities, joint or several, to which the Company, such
directors and officers or controlling persons may become subject under the
Securities Act, Exchange Act, state securities or Blue Sky laws or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the S-4 Registration Statement
as of its effective date or in the Proxy Statement/Prospectus as of the date on
which it is distributed to the Company's stockholders and as of the date of the
Stockholder Meeting, (ii) any omission or alleged omission to state a material
fact required to be stated in the S-4 Registration Statement or necessary to
make the statements therein not misleading as of its effective date or (iii) any
omission or alleged omission to state a material fact required to be stated in
the Proxy Statement/Prospectus or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading as of the
date on which it is distributed to the Company's stockholders and as of the date
of the Stockholder Meeting if the statement or omission was made in reliance
upon and in conformity with information relating to Alpharma furnished in
writing to the Company by or on behalf of Alpharma specifically for use in
connection with the preparation of the S-4 Registration Statement or the Proxy
Statement/Prospectus.
(c) Each party entitled to indemnification under this Section (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided, that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld); and, provided, further, that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section except to the extent that the Indemnifying Party
is adversely affected by such failure. The Indemnified Party may participate in
such defense at such party's expense; provided, however, that the Indemnifying
Party shall pay such expense if representation of such Indemnified Party by the
counsel retained by the Indemnifying Party would be inappropriate due to actual
or potential conflicting interests between the Indemnified Party and any other
party represented by such counsel in such proceeding; provided further that in
no event shall the Indemnifying Party be required to pay the expenses of more
than one law firm per jurisdiction as counsel for the Indemnified Party. The
Indemnifying Party also shall be responsible for the expenses of such defense if
the Indemnifying Party does not elect to assume such defense. No Indemnifying
Party, in the defense of any such claim or litigation shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect of such claim or litigation, and no Indemnified Party
shall consent to entry of any judgment or settle such claim or
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litigation without the prior written consent of the Indemnifying Party, which
consent shall not be unreasonably withheld.
4.5 Stock Listing. The Company shall file a listing application with the
Nasdaq National Market to list the Depositary Shares to be issued in connection
with the Merger, and upon exercise or conversion of options, warrants and
convertible securities of the Company which are exercised or converted after the
Effective Time, on the Nasdaq National Market and shall use reasonable efforts
to cause such listing application to be approved.
4.6 Fiduciary Duties. Neither the Company nor its Board of Directors shall be
obligated to make either of the recommendations set forth in Section 4.1 to the
extent that the making of such recommendation would be inconsistent with the
fiduciary duties of the Board of Directors of the Company, as determined in good
faith by the Company's Board of Directors.
ARTICLE V
CONDITIONS TO OBLIGATIONS OF
ALPHARMA AND THE COMPANY
5.1 Conditions to Each Party's Obligations. The obligation of the Company to
consummate the Merger and the other transactions contemplated by the Merger
Agreement, and the respective obligations of Alpharma and the Company to
consummate the transactions contemplated by this Agreement and the Ancillary
Agreements (other than the obligation of Alpharma to make the First Loan, which
is subject to the fulfillment or waiver of the conditions set forth in Section
4.1 of the Loan Agreement, and the obligation of the Company to issue the Note,
which is subject to the fulfillment or waiver of the conditions set forth in
Section 5.1 of the Loan Agreement) are subject to the satisfaction of the
following conditions:
(a) Stockholder Approval. The Company's stockholders shall have approved
and adopted the Merger Agreement (including the exhibits attached thereto) and
transactions contemplated thereby, including the Merger.
(b) S-4 Registration Statement. The S-4 Registration Statement shall have
become effective in accordance with the provisions of the Securities Act, and no
stop order suspending the effectiveness of the S-4 Registration Statement shall
have been issued by the SEC and remain in effect.
(c) Litigation. No action, suit or proceeding shall be pending or
threatened by or before any court, regulatory body, administrative agency or any
other governmental agency or body wherein an unfavorable judgment, order,
decree, stipulation or injunction would (i) prevent consummation of the Merger
or any of the other transactions contemplated by the Merger Agreement, this
Agreement, the Guaranty Agreement and the Ancillary Agreements or (ii) cause the
Merger or any of the other transactions contemplated by the Merger Agreement,
this Agreement, the Guaranty Agreement and the Ancillary Agreements to be
rescinded following consummation, and no such judgment, order, decree,
stipulation or injunction shall be in effect.
(d) Second Amendment to May 1998 Securities Purchase Agreement Amendment.
The Second Amendment shall be in full force and effect. The Second Amendment
Closing Date (as defined in the Second Amendment) shall have occurred and all
the other
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transactions required by the Second Amendment to have occurred at or prior to
the Closing Date shall have occurred.
5.2 Conditions to Alpharma's Obligations. The obligation of Alpharma to
consummate the transactions contemplated by this Agreement and the Ancillary
Agreements (other than the obligation of Alpharma to make the First Loan, which
is subject to the fulfillment or waiver of the conditions set forth in Section
4.1 of the Loan Agreement) is subject to the fulfillment to its reasonable
satisfaction, or the waiver by Alpharma, on or prior to the Closing Date, of
each of the following conditions:
(a) Representations and Warranties Correct. The representations and
warranties of the Company which are set forth in the Loan Agreement and
incorporated herein pursuant to Section 3.1 hereof shall be (x) true and correct
on and as of the date hereof and (y) true and correct in all material respects
on and as of the Closing Date with the same force and effect as if they had been
made on and as of the Closing Date, except in the case of clause (y) for (i)
those representations and warranties which address matters only as of a
particular date (which shall be true and correct as of such date) and (ii)
circumstances in which the failure of such representations and warranties to be
true and correct would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect with respect to the Company.
(b) Performance. All covenants, agreements and conditions contained in
this Agreement to be performed or complied with on or prior to the Closing Date
by the Company shall have been performed or complied with by the Company in all
material respects on or prior to the Closing Date.
(c) No Impediments. No statute, judgment, order or decree of any court,
regulatory body, administrative agency or any other governmental agency or body
shall be in effect which would impose any material limitation on the ability of
Alpharma to exercise full rights of ownership of the Securities.
(d) No Defaults. The Company shall not be in default under an indenture,
mortgage, agreement, instrument or commitment evidencing or under which there is
at the time outstanding any Indebtedness of the Company or any Subsidiary in
excess of $200,000 or which results in such Indebtedness, in an aggregate amount
(with other defaulted Indebtedness) in excess of $200,000, becoming due and
payable prior to its due date.
(e) No Material Adverse Events. Except as set forth in the schedules
attached to the Loan Agreement pursuant to Article III thereof, as disclosed in
the 1934 Act Filings (as defined in the Loan Agreement) filed with the SEC prior
to the date hereof or as set forth in Schedule 4.1(e) to the Loan Agreement,
since September 30, 1998, there shall have been no Material Adverse Effect with
respect to the Company (other than the continued incurrence of losses in the
ordinary course of business).
(f) Compliance Certificate. The Company shall have delivered to Alpharma a
certificate of the Company's President, dated the Closing Date, certifying to
the fulfillment of the conditions specified in subsections (a), (b), (d) and (e)
of this Section 5.2.
(g) Proceedings and Other Documents. All corporate and other proceedings
in connection with the transactions contemplated by this Agreement, the Merger
Agreement and the Ancillary Agreements shall have been taken, and Alpharma shall
have received such other documents and instruments in form and substance
reasonably satisfactory to it and its counsel, as to such other matters incident
to the transaction contemplated hereby
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as it may reasonably request. The Merger Agreement and the Ancillary Agreements
shall be in full force and effect. The Merger shall have occurred and all the
other transactions required by the Merger Agreement and the Ancillary Agreements
to have occurred at or prior to the Effective Time shall have occurred.
(h) Opinion of Counsel. Alpharma shall have received the opinion of Hale
and Dorr LLP, counsel for the Company, dated the Closing Date, substantially
with respect to the matters set forth on Exhibit A attached hereto.
(i) Consents, Waivers, Etc. The Company shall have obtained all consents
or waivers necessary to execute and deliver this Agreement, the Merger Agreement
and the Ancillary Agreements, effect the Merger, issue the Securities and carry
out the transactions contemplated hereby and thereby, and all such consents and
waivers shall be in full force and effect.
(j) Delivery. The Company shall have delivered to Alpharma (i) the Note
(in accordance with Section 4.1(l) of the Loan Agreement) and (ii) the
following:
(A) A certified copy of the Company's certificate of incorporation and
all amendments thereto, appropriately authenticated;
(B) A copy of the Company's bylaws, as amended to date, certified as
being true by a principal Officer of the Company; and
(C) A certificate of good standing of the Company as a foreign
corporation certified as of a recent date by the Secretary of State of the
Commonwealth of Massachusetts, and from every jurisdiction in which the
Company is qualified to do business.
(k) Appraisal Rights. The number of shares as to which appraisal rights
have been asserted by stockholders of the Company in connection with the Merger
pursuant to Section 262 of the Delaware General Corporation Law shall not exceed
5% of the number of shares of Voting Capital Stock then outstanding.
(l) Board of Directors. The Board of Directors of the Company shall have
elected a nominee of Alpharma to serve as a Class I Director of the Company
immediately prior to, or concurrently with, the Effective Time.
(m) Ancillary Agreements. The Merger Agreement and each of the Ancillary
Agreements shall have been executed and delivered by the Company and the other
parties thereto.
(n) Call Option Transfer. Immediately following the Effective Time of the
Merger, the Company shall have transferred the Call Option to Alpharma by
executing the Call Option Assignment attached hereto as Exhibit C.
5.3 Conditions to the Company's Obligations. The Company's obligations to
consummate the Merger and the other transactions contemplated by this Agreement,
the Merger Agreement and the Ancillary Agreements (other than the obligation of
the Company to issue the Note, which is subject to the fulfillment or waiver of
the conditions set forth in Section 5.1 of the Loan Agreement) are subject to
the fulfillment to its reasonable satisfaction, or the waiver by the Company, on
or prior to the Closing Date, of each of the following conditions:
(a) Representations and Warranties Correct. The representations and
warranties of Alpharma in Section 3.2 hereof shall be (x) true and correct on
and as of the date hereof and (y) true and correct in all material respects on
and as of the Closing Date with the
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same force and effect as if they had been made on and as of the Closing Date,
except in the case of clause (y) for (i) those representations and warranties
which address matters only as of a particular date (which shall be true and
correct as of the such date) and (ii) circumstances in which the failure of such
representations and warranties to be true and correct would not, individually or
in the aggregate, reasonably be expected to have a Material Adverse Effect with
respect to Alpharma.
(b) Performance. All covenants, agreements and conditions contained in
this Agreement to be performed or complied with on or prior to the Closing Date
by Alpharma shall have been performed or complied with in all material respects
on or prior to the Closing Date.
(c) Compliance Certificate. Alpharma shall have delivered to the Company a
certificate of Alpharma's President, dated the Closing Date, certifying to the
fulfillment of the conditions specified in subsections (a) and (b) of this
Section 5.3.
(d) No Impediments. No statute, judgment, order or decree of any court,
regulatory body, administrative agency or any other governmental agency or body
shall be in effect which would impose any material limitation on the ability of
the Company to exercise its rights under this Agreement and the Ancillary
Agreements.
(e) Opinion of Counsel. The Company shall have received the opinion of
Kirkland & Ellis, counsel for Parent and Alpharma, dated the Closing Date,
substantially with respect to the matters set forth on Exhibit B attached
hereto.
(f) Consents, Waivers, Etc. On or prior to the Closing Date, the Company
shall have obtained all consents or waivers necessary to execute and deliver
this Agreement, the Merger Agreement and the Ancillary Agreements, effect the
Merger, issue the Securities and carry out the transactions contemplated hereby
and thereby, and all such consents and waivers shall be in full force and
effect.
(g) Ancillary Agreements. Each of the Ancillary Agreements shall have been
executed and delivered by Alpharma and the other parties thereto.
(h) Guaranty Agreement. The Guaranty Agreement shall have been executed
and delivered by Parent.
(i) Proceedings and Other Documents. All corporate and other proceedings
in connection with the transactions contemplated by this Agreement, the Merger
Agreement, the Guaranty Agreement and the Ancillary Agreements required to be
taken by Alpharma or Parent shall have been taken, and the Company shall have
received such other documents and instruments in form and substance reasonably
satisfactory to it and its counsel, as to such other matters incident to the
transaction contemplated hereby as it may reasonably request. The Guaranty
Agreement and the Ancillary Agreements shall be in full force and effect.
(j) First Loan. Alpharma shall have made the First Loan to the Company
under the Loan Agreement and any other Loan properly requested by the Company to
be made on or prior to the Closing Date.
5.4 Cooperation. The Company and Alpharma shall each take all reasonable steps
and use all reasonable efforts necessary or desirable, and shall cooperate with
the other party to enable it, to obtain, as promptly as practicable, all
approvals, authorizations, certificates, consents and clearances required to
consummate the transactions contemplated by this Agreement, the Merger Agreement
and the Ancillary Agreements and satisfy the conditions set forth in this
Article V. Each of the Company and Alpharma shall cooperate
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with the other party to agree, prior to the Effective Time, upon a reasonable
valuation of the Call Option.
ARTICLE VI
COVENANTS OF ALPHARMA AND PARENT
6.1 Standstill Agreement. Each of the Parent and Alpharma agrees that, during
the period beginning on the date hereof and ending on (a) the date this
Agreement terminates (if this Agreement terminates pursuant to Section 8.8(a)(i)
or (ii)) or (b) the seventh anniversary of the date this Agreement terminates
(if this Agreement terminates pursuant to Section 8.8(a)(iii)) (the "Standstill
Period"), unless it has obtained the prior written consent of the Company by
vote of the majority of the Non-Alpharma Directors of the Company then in
office, it will not, and it will cause its Affiliates to not:
(i) acquire, directly or indirectly, by purchase or otherwise, of record or
beneficially, any Voting Capital Stock (which for purposes of this Agreement
shall include without limitation New Common Stock, Depositary Shares and
Depositary Receipts), any securities of the Company convertible into Voting
Capital Stock (which for purposes of this Agreement shall include without
limitation any convertible notes of the Company issued pursuant to the Loan
Agreement), or any rights, options or warrants to acquire Voting Capital Stock
of the Company, if after such acquisition (and after giving effect to the
conversion of any such convertible securities and the exercise of any such
rights, options or warrants held by Parent, Alpharma and their respective
Affiliates (including an aggregate of 5,614,035 shares of Common Stock of the
Company issued or issuable upon conversion of the Note, irrespective of whether
the Note or any principal thereunder is outstanding at such time)), Parent,
Alpharma and their respective Affiliates would together own of record or
beneficially in the aggregate more than forty percent (40%) of the aggregate
voting power of all classes of Voting Capital Stock that are then outstanding or
that are issuable upon conversion or exercise of convertible securities,
options, warrants or rights of the Company that are then outstanding (the "Forty
Percent Limit"); provided that notwithstanding the provisions of this clause (i)
the foregoing restrictions shall not apply to voting securities acquired (or
deemed owned as provided above) in connection with the existence or exercise of
the Call Option. If the number of shares of Voting Capital Stock that are then
outstanding or that are issuable upon conversion or exercise of convertible
securities, options, warrants or rights of the Company that are then outstanding
is reduced or if the aggregate ownership of Parent, Alpharma and their
respective Affiliates in the Company is increased as a result of a
recapitalization of the Company or as a result of any other action taken by the
Company, Parent, Alpharma and their respective Affiliates will not be required
to dispose of (and may continue to vote in accordance with Section 6.4) any of
its or their holdings of Voting Capital Stock even though such action resulted
in Parent's, Alpharma's and their respective Affiliates' aggregate ownership
exceeding the Forty Percent Limit.
Except as otherwise explicitly provided above, if Parent, Alpharma and
their respective Affiliates shall at any time during the Standstill Period own
in the aggregate in excess of the Forty Percent Limit, then:
(X) Parent and Alpharma shall (or shall cause their respective
Affiliates to) sell as promptly as practicable under the circumstances
sufficient Voting Capital Stock so that after such sale Parent, Alpharma
and their respective Affiliates shall not own in the aggregate more than
the Forty Percent Limit, and
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(Y) notwithstanding Section 6.4 to the contrary, Parent and Alpharma
shall (and shall cause their respective Affiliates to) refrain from voting
on any matter as to which the holders of all classes of Voting Capital
Stock shall have the right to vote with respect to any such Voting Capital
Stock held by Parent, Alpharma and their respective Affiliates in excess of
the Forty Percent Limit (provided, however, that the foregoing paragraph
shall not be deemed to limit the Company's remedies in the event that the
excess Voting Capital Stock were acquired in violation of this Section);
(ii) "solicit" proxies with respect to voting securities of the Company
under any circumstances or become a "participant" in any "election contest"
relating to the election of directors of the Company, as such terms are defined
in Regulation 14A under the Exchange Act;
(iii) deposit any voting securities of the Company in a voting trust or
subject them to a voting agreement or other agreement of similar effect;
(iv) initiate, propose or otherwise solicit stockholders of the Company for
the approval of one or more stockholder proposals at any time, or induce or
attempt to induce any other person to initiate any stockholder proposal;
(v) present, or propose to present, publicly or otherwise, to the Company,
the Board of Directors of the Company or the stockholders of the Company any
proposal or offer for a merger, tender or exchange offer or other form of
business combination involving the Company, or effect, propose to effect or
cause to occur any of the foregoing; or
(vi) take any action individually or jointly with any partnership, limited
partnership, syndicate, or other group or assist any other person, corporation,
entity or group in taking any action it could not take individually under the
terms of this Agreement.
6.2 Resignation. Alpharma shall cause any director of the Company nominated by
Alpharma and appointed to the Board of Directors as contemplated by Section
5.2(l) of this Agreement and Section 6.5 of the Loan Agreement, and any
successor or replacement thereof then in office who was elected to the Board of
Directors upon the nomination of Alpharma (the "Alpharma Director"), to resign
from the Board of Directors effective upon the Option Expiration Date.
6.3 Recusal.
(a) Alpharma Director. Alpharma shall cause the Alpharma Director to
abstain from voting on and/or recuse himself from any matter to be discussed,
considered and/or acted upon at any meeting of the Board of Directors of the
Company or of a committee of the Board of Directors of the Company with respect
to which the Company and Alpharma have a potential conflict of interest, if
counsel to the Company advises the Board of Directors of the Company or such
committee of the Board of Directors of the Company that such abstention and/or
recusal is appropriate given such potential conflict of interest. The Company
shall have the right by vote of a majority of all directors of the Company then
in office other than the Alpharma Director (the "Non-Alpharma Directors") to
exclude the Alpharma Director from access to any documents or other materials
provided to the other members of the Board of Directors of the Company which
relate to any matter with respect to which the Company and Alpharma have a
potential conflict of interest if counsel to the Company advises the
Non-Alpharma Directors that such exclusion is appropriate given such potential
conflict of interest.
(b) Non-Alpharma Directors. The Company shall request that any
Non-Alpharma Director abstain from voting and/or recuse himself from any matter
to be discussed,
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considered and/or acted upon at any meeting of the Board of Directors of the
Company or of a Committee of the Board of Directors of the Company with respect
to which the Company and such Non-Alpharma Director (or an Affiliate of such
Non-Alpharma Director) have a potential conflict of interest, if counsel to the
Company advises the Board of Directors of the Company or such committee of the
Board of Directors of the Company that such abstention and/or recusal is
appropriate given such potential conflict of interest.
6.4 Voting of Capital Stock. During the Standstill Period, subject to clause
(Y) of clause (i) of Section 6.1, in any election of directors and in any other
vote to be taken by the stockholders of the Company as to any matter (whether
taken at an annual or special meeting of stockholders or by written action),
Parent and Alpharma shall, and shall cause their respective Affiliates to, vote
any Depositary Shares (or shares of New Common Stock following the Option
Expiration Date), or other Voting Capital Stock which Parent, Alpharma or their
respective Affiliates hold, in the same manner and in the same proportion as the
votes cast by the other holders of Depositary Shares (or shares of New Common
Stock following the Option Expiration Date) or such other Voting Capital Stock.
ARTICLE VII
COVENANTS OF THE COMPANY
The Company hereby covenants and agrees as follows:
7.1 General Company Covenants. The Company shall perform and comply with the
covenants of the Company set forth in Sections 6.1 through 6.8 and Sections 7.1
through 7.13 of the Loan Agreement (including the definitions set forth in
Section 1.1 of the Loan Agreement to the extent applicable to such sections),
which covenants are incorporated herein by reference, whether or not the Loan
Agreement is in effect or any amounts are outstanding thereunder, as if such
covenants (including the definitions set forth in Section 1.1 of the Loan
Agreement to the extent applicable to such sections) were included herein. Any
waiver by Alpharma or any holder of the Note of any of such covenants under the
terms of the Loan Agreement shall not constitute a waiver of any covenant of the
Company under this Agreement unless Alpharma waives such covenant in accordance
with Section 8.5(a).
7.2 Call Option Transfer. Immediately following the Effective Time of the
Merger, the Company shall transfer the Call Option to Alpharma by executing the
Call Option Assignment attached hereto as Exhibit C.
7.3 Future Option Grants. Any options to purchase shares of Common Stock
granted by the Company to officers, directors or employees of, or consultants or
advisors to, the Company from and after the date hereof through the Option
Expiration Date shall provide that such options may not be exercised on the
Option Closing Date (as defined in the Depositary Agreement).
7.4 Further Assurances. From time to time the Company shall execute and
deliver to Alpharma such other instruments, certificates, agreements and
documents and take such other action and do all other things as may be
reasonably requested by Alpharma in order to implement or effectuate the terms
and provisions of this Agreement.
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<PAGE> 217
ARTICLE VIII
MISCELLANEOUS
8.1 Notices. All notices, requests, demands, claims, and other communications
to any party hereunder or pursuant to the terms hereof shall be in writing. Any
such notice, request, demand, claim, or other communication to any party
hereunder shall be deemed duly delivered three Business Days after it is sent by
registered or certified mail, return receipt requested, postage prepaid, or one
Business Day after it is sent via a reputable nationwide overnight courier
service, in each case to the intended recipient as set forth below:
If to Alpharma, to:
Alpharma USPD Inc.
7205 Windsor Blvd.
Baltimore, MD 21244
Attention: President
with a copy to:
Alpharma USPD Inc.
7205 Windsor Blvd.
Baltimore, MD 21244
Attention: Chief Legal Officer
If to Parent, to:
Alpharma, Inc.
One Executive Drive
Fort Lee, New Jersey 07024
Attention: President
with a copy to:
Alpharma, Inc.
One Executive Drive
Fort Lee, New Jersey 07024
Attention: Chief Legal Officer
If to the Company, to:
Ascent Pediatrics, Inc.
187 Ballardvale Street, Suite B125
Wilmington, Massachusetts 01887
Attention: Alan R. Fox
with a copy to:
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attention: David E. Redlick, Esq.
Any party may give any such notice, request, demand, claim, or other
communication using any other means (including personal delivery, expedited
courier, messenger service, telecopy, telex, ordinary mail, or electronic mail),
but no such notice, request, demand,
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claim, or other communication shall be deemed to have been duly given unless and
until it actually is received by the party for whom it is intended. Any party
may change the address to which notices, requests, demands, claims, and other
communications hereunder are to be delivered by giving the other parties notice
in the manner herein set forth.
8.2 Duplicate Originals. The parties may sign any number of copies of this
Agreement. Each signed copy shall be an original, but all of them together
represent the same agreement.
8.3 Press Releases and Announcements. Neither Parent or Alpharma, on the one
hand, nor the Company, on the other hand, shall issue any press release or
public disclosure relating to the existence of, or the subject matter of this
Agreement, the Merger Agreement or any of the Ancillary Agreements without the
prior written approval of the other party; provided, however, that any party
hereto may make any public disclosure it believes in good faith is required by
law or regulation (in which case the disclosing party shall advise the other
party and provide it with a copy of the proposed disclosure prior to making the
disclosure).
8.4 Governing Law. The laws of the State of Delaware, without regard to
principles of conflicts of law, shall govern this Agreement.
8.5 Amendments; No Waivers.
(a) Any provision of this Agreement may be amended or waived if, and only
if, such amendment or waiver is in writing and signed, in case of an amendment,
by Alpharma and the Company, or in the case of a waiver, by the party against
whom the waiver is to be effective; provided that no such amendment or waiver on
behalf of the Company shall be effective without the approval of a majority of
the Non-Alpharma Directors.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
8.6 Successors and Assigns. The provisions of this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided that no party may assign, delegate or otherwise
transfer any of its rights or obligations under this Agreement without the
consent of the other party hereto. Notwithstanding the foregoing, Alpharma may
assign, delegate or otherwise transfer all of its rights and obligations under
this Agreement to a transferee that acquires all or substantially all of the
business, assets or capital stock of Alpharma; provided that (a) Alpharma also
assigns, delegates or otherwise transfers all of its rights and obligations
under the Depositary Agreement to such transferee and (b) such transferee agrees
in writing to be bound by and subject to the provisions of this Agreement and
the Depositary Agreement.
8.7 Specific Performance. The Company, Parent and Alpharma acknowledge and
agree that Alpharma's and the Company's respective remedies at law for a breach
or threatened breach of any of the provisions of this Agreement would be
inadequate and, in recognition of that fact, agree that, in the event of a
breach or threatened breach by Alpharma, Parent or the Company of any of the
provisions of this Agreement, in addition to any remedies at law or otherwise,
Alpharma and the Company, respectively, without posting any bond shall be
entitled to seek equitable relief in the form of specific performance, a
temporary
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restraining order, a temporary or permanent injunction or any other equitable
remedy which may then be available.
8.8 Termination.
(a) This Agreement shall terminate upon the earliest of (i) September 30,
1999 if the Closing has not occurred prior to or on such date, (ii) the Option
Closing Date and (iii) the Option Expiration Date; provided that,
notwithstanding the foregoing, (A) the terms of Sections 4.4 and 8.12 of this
Agreement and the obligations thereunder shall survive the termination
contemplated by this Section 8.8 in accordance with their respective terms, and
(B) the terms of Sections 6.1 and 6.4 of this Agreement and the obligations
thereunder shall survive the termination contemplated by this Section 8.8 in
accordance with their respective terms and shall terminate upon the expiration
of the Standstill Period.
(b) Notwithstanding the foregoing, (i) Alpharma may terminate this
Agreement upon written notice to the Company if (A) the Board of Directors of
the Company withdraws its recommendation of the Merger or (B) the stockholders
fail to approve the Merger Agreement (including the exhibits thereto) and the
transactions contemplated thereby, including the Merger, at the Stockholder
Meeting, and (ii) the Company may terminate this Agreement upon written notice
to Alpharma if the Board of Directors withdraws its recommendation of the Merger
in accordance with its fiduciary duties as provided in Section 4.6 of this
Agreement. In either of such events, the Company shall pay to Alpharma in cash a
termination fee in the amount of $1,200,000, such termination fee to be payable
within ten Business Days after such termination.
8.9 Entire Agreement. This Agreement (including the documents referred to
herein, including the Merger Agreement, the Ancillary Agreements and the
Guaranty Agreement) constitutes the entire agreement among the parties and
supersedes any prior understanding, agreements or representations as between the
parties, written or oral, with respect to the subject matter hereof.
8.10 Separability. In case any provision in this Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
8.11 Headings, Etc. The Headings of the Articles and Sections of this
Agreement have been inserted for convenience of reference only, are not to be
considered a part hereof and shall in no way modify or restrict any of the terms
or provisions hereof.
8.12 Confidentiality. Each of Parent and Alpharma agree that it will keep
confidential and will not disclose, divulge or use for any purpose other than to
monitor Alpharma's investment in the Company any confidential, proprietary or
secret information which Parent or Alpharma may obtain from the Company pursuant
to financial statements, reports and other materials submitted by the Company to
Parent or Alpharma pursuant to this Agreement, or pursuant to visitation or
inspection rights granted hereunder, unless such information is known, or until
such information becomes known, to the public (other than as a result of a
breach of this Section 8.12 by Parent or Alpharma); provided, however that
Parent or Alpharma, as the case may be, may disclose such information if
required by law, provided that Parent or Alpharma, as the case may be, provides
prior written notice to the Company of such proposed disclosure and takes
reasonable steps to avoid and/or minimize the extent of any such required
disclosure. Each of Parent and Alpharma further acknowledge and agree that
certain of the confidential, proprietary or secret information which it may
obtain hereunder may be material non-public information
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<PAGE> 220
and that neither it nor any of its Affiliates shall engage in any acquisition,
disposition or other similar transaction involving the Company's securities on
the basis of, or at such time as Parent or Alpharma possesses, such material
non-public information.
[REMAINDER OF PAGE LEFT BLANK]
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<PAGE> 221
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above set forth.
<TABLE>
<S> <C>
Attest: ASCENT PEDIATRICS, INC.
/s/ John G. Bernardi By: /s/ Alan R. Fox
- -------------------------------------- --------------------------------------------
Secretary Title: President
Attest: ALPHARMA USPD INC.
By: /s/ Thomas L. Anderson
- -------------------------------------- --------------------------------------------
Secretary Title: President
Attest: ALPHARMA, INC.
By: /s/ Jeffrey E. Smith
- ------------------------------------- --------------------------------------------
Secretary Title: Vice President Finance and
Chief Financial Officer
</TABLE>
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EXHIBIT A
OPINION OF HALE AND DORR LLP
1. Each of the Company and Merger Sub is a corporation existing and in good
standing under the General Corporation Law of the State of Delaware.
2. The Company has the requisite corporate power and authority to execute,
deliver and perform the Merger Agreement and the Transaction Agreements. The
Merger Sub has the requisite corporate power and authority to execute,
deliver and perform the Merger Agreement.
3. The Board of Directors of the Company has adopted by requisite vote the
resolutions necessary to authorize the execution, delivery and performance
by the Company of the Merger Agreement and the Transaction Agreements. The
Board of Directors of the Merger Sub has adopted by requisite vote the
resolutions necessary to authorize the execution, delivery and performance
by the Merger Sub of the Merger Agreement.
4. The Company has duly executed and delivered the Merger Agreement and the
Transaction Agreements. The Merger Sub has duly executed and delivered the
Merger Agreement.
5. Each of the Merger Agreement and the Transaction Agreements is a valid and
binding obligation of the Company and is enforceable against the Company in
accordance with its respective terms. The Merger Agreement is a valid and
binding obligation of the Merger Sub and is enforceable against the Merger
Sub in accordance with its terms.
6. The Note has been duly authorized, executed, issued and delivered by the
Company and constitutes a valid and binding obligation of the Company
enforceable against the Company in accordance with its terms.
7. The execution and delivery by the Company of the Merger Agreement and the
Transaction Agreements and the performance of its obligations thereunder
will not (a) constitute a violation of the certificate of incorporation or
bylaws of the Company, (b) constitute a material violation by the Company of
any statutory law or governmental regulation covered by this Opinion, or (c)
breach, or result in a default under any existing obligation of the Company
under any of its Other Specified Agreements. The execution and delivery by
the Merger Sub of the Merger Agreement and the performance of its
obligations thereunder will not (a) constitute a violation of the
certificate of incorporation or bylaws of the Merger Sub or (b) constitute a
material violation by the Merger Sub of any statutory law or governmental
regulation covered by this Opinion. The term Other Specified Agreements
means those agreements set forth on Schedule A attached hereto.
8. Except as provided on the schedule of Governmental Filings attached hereto
as Schedule B, to our knowledge and based in part upon the representations
of Alpharma in the Master Agreement, neither the Company nor Merger Sub was
required to obtain any consent, approval, authorization or order of, or make
any filings or registrations with, any United States federal court or
governmental agency in order to obtain the right to enter into or perform
under the Merger Agreement or, in the case of the Company, any of the
Transaction Agreements, or to take any of the actions taken by it on or
prior to this date to consummate the transactions contemplated thereby,
except for (i) such consents, authorizations, approvals, orders,
registrations or filings as have been obtained or made prior to the date
hereof, or as permitted to be
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made or obtained on or after the date hereof pursuant to the Merger
Agreement, the Transaction Agreements and the exhibits and schedules
thereto, respectively; and (ii) such consents, authorizations, approvals,
orders, registrations or filings as could not individually or in the
aggregate reasonably be expected to have a Material Adverse Effect.
9. Neither the Company nor Merger Sub is an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
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<PAGE> 224
EXHIBIT B
FORM OF KIRKLAND & ELLIS OPINION
1. Alpharma is a corporation existing and in good standing under the laws of
the State of Maryland. Parent is a corporation existing and in good standing
under the General Corporation Law of the State of Delaware.
2. Alpharma has the corporate power to enter into and perform its obligations
under the Transaction Agreements to which it is a party. Parent has the
corporate power to enter into and perform its obligations under the
Transaction Agreements to which it is a party.
3. The Board of Directors of Alpharma has adopted by requisite vote the
resolutions necessary to authorize the execution, delivery and performance
by Alpharma of the Transaction Agreements to which it is a party. The Board
of Directors of Parent has adopted by requisite vote the resolutions
necessary to authorize the execution, delivery and performance by Parent of
the Transaction Agreements to which it is a party.
4. Alpharma has duly executed and delivered the Transaction Agreements to which
it is a party. Parent has duly executed and delivered the Transaction
Agreements to which it is a party.
5. Each of the Transaction Agreements to which Alpharma or Parent is a party is
a valid and binding obligation of Alpharma or Parent, respectively, and is
enforceable against Alpharma or Parent, as applicable, in accordance with
its respective terms.
6. The execution and delivery by each of Alpharma and Parent of the Transaction
Agreements to which it is a party and performance of its obligations
thereunder will not (a) constitute a violation of the certificate of
incorporation or bylaws of Alpharma or Parent, respectively, (b) constitute
a material violation by Alpharma or Parent, respectively, of any applicable
provision of statutory law or governmental regulation covered by this
Opinion or (c) breach, or result in a default under any existing obligation
of Alpharma or Parent, respectively, under any of its Other Specified
Agreements. Our opinion in this paragraph does not address any impact the
actions of Alpharma or Parent may have under any financial covenants or
tests, any consequences a default by Alpharma or Parent under any of the
Transaction Agreements may have under any of the Other Specified Agreements
or any cross default provisions in the Other Specified Agreements. The term
Other Specified Agreements means those agreements set forth on Schedule I
attached hereto.
7. To our actual knowledge and based in part upon your representations in the
Master Agreement, neither Alpharma nor Parent was required to obtain any
consent, approval, authorization or order of, or make any filings or
registrations with, any United States federal court or governmental agency
in order to obtain the right to enter into or perform under any of the
Transaction Agreements, or to take any of the actions taken by it on or
prior to this date to consummate the transactions contemplated thereby,
except for (i) such consents, authorizations, approvals, orders,
registrations or filings as have been obtained or made prior to the date
hereof, or as permitted to be made or obtained on or after the date hereof
pursuant to the Transaction Agreements and the exhibits and schedules
thereto, respectively; and (ii) such consents, authorizations, approvals,
orders, registrations or filings as could not individually or in the
aggregate be expected to have a Material Adverse Effect.
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EXHIBIT C
CALL OPTION ASSIGNMENT
, 1999
Reference is hereby made to the Depositary Agreement (the "Depositary
Agreement") dated as of February 16, 1999 by and among Ascent Pediatrics, Inc.,
a Delaware corporation, Alpharma USPD Inc., a Maryland corporation, and State
Street Bank and Trust Company and to the Master Agreement (the "Master
Agreement") dated as of February 16, 1999 by and between the Company and
Alpharma.
In accordance with Sections 5.2(n) and 7.2 of the Master Agreement and
Section 10.09 of the Depositary Agreement, the Company hereby:
(i) assigns, transfers and otherwise delegates such of its rights and
obligations under the Call Option (as defined in the Depositary Agreement)
so that following such assignment, transfer and delegation, Alpharma shall
have the rights and obligations under the Call Option specified in the
Depositary Agreement;
(ii) agrees to undertake such other obligations and actions with
respect to Alpharma as are specified in the Depositary Agreement; and
(iii) relinquishes any and all rights to exercise the Call Option.
Executed as of the date set forth above.
ASCENT PEDIATRICS, INC.
By:
----------------------------------
Its:
--------------------------------
Accepted:
ALPHARMA USPD INC.
By:
- ----------------------------------------
Its:
--------------------------------------------
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EXHIBIT B
DEPOSITARY AGREEMENT
DATED AS OF FEBRUARY 16, 1999
AMONG
ALPHARMA USPD INC.,
ASCENT PEDIATRICS, INC.
AND
STATE STREET BANK AND TRUST COMPANY
AS DEPOSITARY
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<PAGE> 227
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
ARTICLE I -- DEFINITIONS............................................ A-41
ARTICLE II -- DEPOSIT OF NEW COMMON STOCK........................... A-48
SECTION 2.01 Deposit of New Common Stock; Depositary
Receipts..................................... A-48
ARTICLE III -- COMPANY CALL OPTION.................................. A-49
SECTION 3.01 Company Call Option.......................... A-49
SECTION 3.02 Effectiveness................................ A-50
ARTICLE IV -- ALPHARMA CALL OPTION.................................. A-50
SECTION 4.01 Alpharma Call Option......................... A-50
SECTION 4.02 Option Closing Date.......................... A-51
SECTION 4.03 Covenants of the Company and Alpharma........ A-52
SECTION 4.04 Effectiveness................................ A-53
ARTICLE V -- THE CALL OPTION CLOSING................................ A-53
SECTION 5.01 Closing Shares............................... A-53
SECTION 5.02 Notice of Option Exercise; Delivery of Option
Exercise Price............................... A-54
SECTION 5.03 Company Options, Etc. ....................... A-56
ARTICLE VI -- FORM OF DEPOSITARY RECEIPTS, DEPOSIT OF STOCK,
EXECUTION AND DELIVERY, TRANSFER, SURRENDER AND
REDEMPTION OF DEPOSITARY RECEIPTS...................... A-57
SECTION 6.01 Form and Transferability of Depositary
Receipts..................................... A-57
SECTION 6.02 Execution and Delivery of Depositary
Receipts..................................... A-58
SECTION 6.03 Transfer of Depositary Receipts.............. A-58
SECTION 6.04 Combinations and Split-ups of Depositary
Receipts..................................... A-58
SECTION 6.05 Limitations on Execution and Delivery,
Transfer, Split-up, Combination, Surrender
and Exchange of Depositary Receipts.......... A-58
SECTION 6.06 Lost Depositary Receipts, etc. .............. A-59
SECTION 6.07 Cancellation and Destruction of Surrendered
Depositary Receipts.......................... A-59
SECTION 6.08 Representations and Warranties as to Stock... A-59
ARTICLE VII -- THE DEPOSITED SECURITIES, NOTICES.................... A-59
SECTION 7.01 Cash Distributions........................... A-59
SECTION 7.02 Distributions Other Than Cash................ A-60
SECTION 7.03 Fixing of Record Date for Holders of
Depositary Receipts.......................... A-60
SECTION 7.04 Voting Rights................................ A-60
SECTION 7.05 Changes Affecting Deposited Securities and
Reclassifications, Recapitalizations, etc.... A-60
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
SECTION 7.06 Reports...................................... A-61
SECTION 7.07 Lists of Depositary Receipt Holders.......... A-61
ARTICLE VIII -- THE DEPOSITARY, ALPHARMA AND THE COMPANY............ A-61
SECTION 8.01 Maintenance of Offices, Agencies, Transfer
Books by the Depositary Registrar............ A-61
SECTION 8.02 Prevention or Delay in Performance by the
Depositary, the Depositary's Agents or the
Company...................................... A-62
SECTION 8.03 Obligations of the Depositary, the
Depositary's Agents and the Company.......... A-62
SECTION 8.04 Resignation and Removal of the Depositary,
Appointment of Successor Depositary.......... A-64
SECTION 8.05 Corporate Notices and Reports................ A-64
SECTION 8.06 Deposit of New Common Stock by the Company... A-65
SECTION 8.07 Indemnification.............................. A-65
SECTION 8.08 Charges and Expenses......................... A-65
SECTION 8.09 Consequential Damages........................ A-65
ARTICLE IX -- AMENDMENT AND TERMINATION............................. A-65
SECTION 9.01 Amendment.................................... A-65
SECTION 9.02 Termination.................................. A-66
ARTICLE X -- MISCELLANEOUS.......................................... A-66
SECTION 10.01 Counterparts................................. A-66
SECTION 10.02 Exclusive Benefits of Parties................ A-67
SECTION 10.03 Invalidity of Provisions..................... A-67
SECTION 10.04 Notices...................................... A-67
SECTION 10.05 Depositary's Agents.......................... A-68
SECTION 10.06 Holders of Depositary Receipts are Parties... A-68
SECTION 10.07 Governing Law................................ A-68
SECTION 10.08 Headings..................................... A-68
SECTION 10.09 Successors and Assigns....................... A-68
</TABLE>
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DEPOSITARY AGREEMENT, dated as of February 16, 1999, among ALPHARMA USPD
INC., a Maryland corporation ("Alpharma"), ASCENT PEDIATRICS, INC., a Delaware
corporation (the "Company"), and STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company, as depositary (the "Depositary").
W I T N E S S E T H:
WHEREAS, Alpharma and the Company have entered into a Loan Agreement dated
as of February 16, 1999 (the "Loan Agreement") pursuant to which Alpharma has
agreed to loan to the Company an aggregate of up to $40 million from time to
time upon the terms and conditions set forth therein;
WHEREAS, the Company and Bird Merger Corporation, a Delaware corporation
and wholly-owned subsidiary of the Company ("Transitory Subsidiary"), have
entered into an Agreement and Plan of Merger dated as of February 16, 1999 (the
"Merger Agreement"), pursuant to which, among other things:
(i) Transitory Subsidiary shall be merged (the "Merger") with and into
the Company on the date hereof;
(ii) each share of common stock, $.00004 par value per share, of the
Company issued and outstanding immediately prior to the Effective Time (as
defined below) (the "Old Common Stock") (other than shares of Old Common
Stock held in the Company's treasury and shares of Old Common Stock as to
which appraisal rights have been perfected by the holders thereof, (if such
rights are available under Section 262 of the Delaware General Corporation
Law)) shall be converted in the Merger into and represent the right to
receive one depositary share (a "Depositary Share") issued hereunder, each
Depositary Share evidencing one share of common stock, $.00004 par value
per share, of the Company (the "New Common Stock"), represented by a
depositary receipt (a "Depositary Receipt") and subject to the right and
option of the Company, upon the terms and conditions set forth in Article
III hereof, to purchase all outstanding shares of New Common Stock of the
Company deposited with the Depositary hereunder; and
(iii) each share of common stock, $.01 par value per share, of
Transitory Subsidiary issued and outstanding immediately prior to the
Effective Time shall be converted in the Merger into and thereafter
evidence the right to receive $.01 per share;
WHEREAS, it is desired to provide as hereinafter set forth in this
Depositary Agreement for the terms and conditions pursuant to which the Company
may exercise the Call Option (as defined below);
WHEREAS, as a condition to, and as additional consideration for, Alpharma
agreeing to make Loans (as defined below), Alpharma, the Company and Alpharma,
Inc., a Delaware corporation, have entered into a Master Agreement dated as of
February 16, 1999 (the "Master Agreement"), pursuant to which the Company has
agreed to assign to Alpharma the Call Option;
WHEREAS, it is desired to provide as hereinafter set forth in this
Depositary Agreement for the terms and conditions pursuant to which Alpharma may
exercise the Call Option following the assignment by the Company to Alpharma of
the Call Option;
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WHEREAS, it is desired to provide, as hereinafter set forth in this
Depositary Agreement, for the deposit on behalf of the holders of Old Common
Stock of the Depositary Shares with the Depositary for the purposes set forth in
this Depositary Agreement and for the issuance hereunder of Depositary Receipts
evidencing Depositary Shares or the proceeds received therefor upon exercise of
the Call Option described herein; and
WHEREAS, the Depositary Receipts are to be substantially in the form of
Exhibit A attached hereto, with appropriate insertions, modifications and
omissions, as hereinafter provided in this Depositary Agreement;
NOW, THEREFORE, in consideration of the premises, it is agreed by and among
the parties hereto as follows:
ARTICLE I
DEFINITIONS
The following definitions shall for all purposes, unless otherwise clearly
indicated, apply to the respective terms used in this Depositary Agreement and
the Depositary Receipts:
"2001 Audited Financial Statements" shall mean the audited balance sheet of
the Company as of December 31, 2001, and the related audited statements of
operations, changes in stockholders' equity and cash flows of the Company for
the fiscal year ended December 31, 2001, together with the notes thereto. These
financial statements shall be prepared in accordance with GAAP (as defined
below), shall be prepared on a consolidated basis (if the Company has any
subsidiaries) and shall be accompanied by a report on such statements by an
Approved Accounting Firm (as defined below) confirming that such statements were
prepared in all material respects in conformity with GAAP.
"90-Day Extension Date" shall have the meaning ascribed to it in Section
4.02(a) of this Depositary Agreement.
"180-Day Extension Date" shall have the meaning ascribed to it in Section
4.02(a) of this Depositary Agreement.
"Adjusted 2001 Operating Income" shall mean the sum of:
(i) the Company's net income for the fiscal year ended December 31,
2001 as reflected in the 2001 Audited Financial Statements,
(ii) the Excluded Interest Expense (as defined below),
(iii) the provision for income taxes for the fiscal year ended
December 31, 2001 as reflected in the 2001 Audited Financial Statements,
and
(iv) the amount by which the Company's research and development
expenses for the fiscal year ended December 31, 2001 as reflected in the
2001 Audited Financial Statements exceeds $1.5 million,
as adjusted to (A) exclude Extraordinary Items (as defined below), (B) reflect
GAAP Adjustments (as defined below), (C) exclude the amount, if any, by which
the Company's research and development expenses for the fiscal year ended
December 31, 2001 as reflected in the 2001 Audited Financial Statements is less
than $1.5 million and (D) exclude any interest income earned in the fiscal year
ended December 31, 2001 on any Permitted Investment of the principal amount of
any Loan (as defined below).
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"Affiliate" shall have the meaning ascribed to it in Rule 405 promulgated
under the 1933 Act.
"Alpharma" shall have the meaning ascribed to it in the Introductory
Paragraph to this Depositary Agreement.
"Antitrust Approval Condition" shall have the meaning ascribed to it in
Section 4.02(a) of this Depositary Agreement.
"Approved Accounting Firm" shall mean one of the public accounting firms
currently known as the "Big Five"; provided, that following the Call Option
Transfer, such term shall also include any other public accounting firm
reasonably acceptable to Alpharma.
"Business Day" shall mean any day which is neither a Saturday nor a Sunday
nor a legal holiday on which banks are authorized or required to be closed in
Boston, Massachusetts or in any other city in which the Depositary's Office is
located.
"Call Option" shall mean the right and option to purchase all but not less
than all of the outstanding shares of New Common Stock deposited with the
Depositary hereunder upon the terms and conditions set forth in this Depositary
Agreement.
"Call Option Exercise Notice" shall mean the written notice delivered to
the Depositary by the holder of the Call Option pursuant to Section 3.01(a) or
Section 4.01(a) (as applicable) indicating that the holder has elected to
exercise the Call Option.
"Call Option Rejection Notice" shall mean the written notice delivered to
the Depositary by the holder of the Call Option pursuant to Section 3.01(c) or
Section 4.01(d) (as applicable) indicating that the holder has elected not to
exercise the Call Option.
"Call Option Transfer" shall mean the transfer of the Call Option by the
Company to Alpharma in accordance with Sections 5.2(n) and 7.2 of the Master
Agreement and in accordance with Section 10.09 of this Depositary Agreement.
"Call Period" shall (i) prior to a Call Option Transfer, have the meaning
ascribed to it in Section 3.01(a) of this Depositary Agreement and (ii) from and
after a Call Option Transfer, have the meaning ascribed to it in Section 4.01(a)
of this Depositary Agreement.
"Certificate of Incorporation" shall mean the Amended and Restated
Certificate of Incorporation of the Company, as amended from time to time after
the date hereof.
"Company" shall have the meaning ascribed to it in the Introductory
Paragraph of this Depositary Agreement.
"Conflict of Law Condition" shall have the meaning ascribed to it in
Section 4.02(a) of this Depositary Agreement.
"Depositary" shall have the meaning ascribed to it in the Introductory
Paragraph of this Depositary Agreement and, as the context requires, any
successor appointed pursuant to the terms of this Depositary Agreement.
"Depositary's Agent" or "Depositary's Agents" shall mean an agent or
agents, as the case may be, appointed by the Depositary as provided, and for the
purposes specified, in Section 10.05 of this Depositary Agreement.
"Depositary Bank Account" shall have the meaning ascribed to it in Section
5.01(a) of this Depositary Agreement.
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"Depositary's Office" shall mean the shareholder services office of the
Depositary at which at any particular time its shareholder services business
shall be administered, which at the date of this Depositary Agreement is located
at 150 Royall Street, Canton, Massachusetts 02021.
"Depositary Receipt" shall mean one or more of the depositary receipts
issued hereunder, substantially in the form of Exhibit A attached hereto.
"Depositary Share" shall have the meaning ascribed to it in the Preamble to
this Depositary Agreement.
"Depositary Share Consideration" shall mean (a) following the Option
Closing, the right to receive the Option Exercise Price, without interest, or
(b) following the Option Expiration Date, the right to receive one share of New
Common Stock (subject to adjustment for any stock dividend, stock split, reverse
stock split or similar event affecting the New Common Stock after the date
hereof), together with all declared but unpaid dividends thereon.
"Determination Date Notice" shall have the meaning ascribed to it in
Section 5.03 of this Depositary Agreement.
"Dispute Notice" shall have the meaning set forth in Section 4.01(b)(i) of
this Depositary Agreement.
"Dissenting Shares" shall have the meaning ascribed to it in the Merger
Agreement.
"Effective Time" shall have the meaning ascribed to it in Article I of the
Merger Agreement.
"Excluded Interest Expense" shall mean the sum of the Company's interest
expense (including without limitation the full effect of both cash and non-cash
accrued and accreted interest) for the fiscal year ended December 31, 2001 as
reflected in the 2001 Audited Financial Statements, in respect of or associated
with:
(i) the First Loan and any Unrestricted Loans (each as defined in the
Loan Agreement),
(ii) an amount of Project Loans equal to the lesser of (a) $8.0
million and (b) the amount by which the sum of the Company's research and
development expenses for the three fiscal years ending December 31, 2001,
as reflected in the Company's audited financial statements, exceeds $4.5
million
(iii) any convertible subordinated notes of the Company issued or
issuable pursuant to the Series G Agreement,
(iv) any other loans to the Company that are convertible into equity
or other convertible securities of the Company, and
(v) any loans to the Company or debt securities of the Company
originally issued as a unit or together with warrants, or such warrants;
other than, in the case of items (iii), (iv) and (v), such loans or securities
which will not have been converted into Depositary Shares as of the Option
Closing Date and which are not required by their terms to be converted into
Depositary Shares on or prior to the Option Closing Date.
"Exercising Party" shall have the meaning ascribed to it in Section 5.01(a)
of this Depositary Agreement.
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"Extraordinary Items" shall mean any events or transactions that are
distinguished by their unusual nature and by the infrequency of their occurrence
(as defined by Accounting Principle Board No. 30) as reflected in the 2001
Audited Financial Statements.
"Final Closing Shares" shall have the meaning ascribed to it in Section
5.01(b) of this Depositary Agreement.
"Final Extension Date" shall mean the latest date on which the Option
Closing may be held pursuant to Section 4.02 of this Depositary Agreement.
"Follow-up Depositary Notice" shall have the meaning ascribed to it in
Section 5.01(b) of this Depositary Agreement.
"GAAP" shall mean U.S. generally accepted accounting principles as in
effect from time to time.
"GAAP Adjustments" shall mean all adjustments to the 2001 Audited Financial
Statements required in connection with the calculation of the Adjusted 2001
Operating Income in order (i) to reflect GAAP and the other accounting methods,
treatments, principles and procedures in a manner consistent with the
preparation of the Company's audited financial statements for the fiscal year
ended December 31, 1998 and (ii) to account for any of the following actions to
the extent that such actions are not consistent with the Company's ordinary
course of business and past practice and have the effect of increasing Adjusted
2001 Operating Income:
(a) deferring the fulfillment of orders placed in the calendar year
2000 until the calendar year 2001;
(b) announcing any price increase, effective January, 2002, which
price increase results in an unusually large number of orders being
received and shipped in December 2001;
(c) announcing and implementing any unusual promotion during the
fiscal year ending December 31, 2001, including, for example, changes in
payment terms and significant discounts;
(d) selling intangible or other operating assets during the fiscal
year ending December 31, 2001 (except to the extent that such sale
constitutes an Extraordinary Item);
(e) deferring the incurrence of necessary expenses for staff,
regulatory compliance, quality control or maintenance and repairs with the
effect that operations after December 31, 2001 are burdened with
disproportionately higher expenses;
(f) prepaying and recognizing expenses in the fiscal year ending
December 31, 2000 that would otherwise have been recognized in the fiscal
year ending December 31, 2001;
(g) classifying selling, general and administrative expenses as
research and development expenses (except to the extent consistent with the
accounting methods, treatments, principles and procedures used in the
preparation of the Company's audited financial statements for prior fiscal
years);
(h) implementing unusual employee, customer or vendor incentive
programs that are inconsistent with industry practice and that have the
effect of increasing the Company's net income for the fiscal year ending
December 31, 2001 at the expense of the Company's net income for the fiscal
year ending December 31, 2002; and
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(i) unreasonably allocating license fees, royalties or other
consideration to, or otherwise entering into agreements containing
front-loaded payment terms providing for payment in, the fiscal year ending
December 31, 2001, which fees, royalties, other consideration or payments
would otherwise be payable to the Company in another fiscal year;
provided however, that no adjustment to the 2001 Audited Financial Statements
shall be made hereunder with respect to such adjustments as shall have been
waived by Alpharma in writing.
"HSR Act" shall have the meaning ascribed to it in Section 4.03(c) of this
Depositary Agreement.
"Initial Depositary Notice" shall have the meaning ascribed to it in
Section 5.01(a) of this Depositary Agreement.
"Letter of Transmittal" shall have the meaning ascribed to it in Section
4.03(c) of this Depositary Agreement.
"Loan" shall have the meaning ascribed to it in the Loan Agreement.
"Loan Agreement" shall have the meaning ascribed to it in the Preamble to
this Depositary Agreement.
"Master Agreement" shall have the meaning ascribed to it in the Preamble to
this Depositary Agreement.
"Material Adverse Effect" shall have the meaning ascribed to it in the
Master Agreement.
"Merger" shall have the meaning ascribed to it in the Preamble to this
Depositary Agreement.
"Merger Agreement" shall have the meaning ascribed to it in the Preamble to
this Depositary Agreement.
"Nasdaq" shall mean the Nasdaq National Market.
"New Common Stock" shall mean the New Common Stock as defined in the
Preamble to this Depositary Agreement or any security into which the New Common
Stock may be converted.
"Neutral Accountants" shall have the meaning ascribed to it in Section
4.01(a)(ii)(B) of this Depositary Agreement.
"Non-Alpharma Directors" shall have the meaning ascribed to it in Section
6.3 of the Master Agreement.
"Old Common Stock" shall have the meaning ascribed to it in the Preamble to
this Depositary Agreement.
"Option Closing" shall mean the closing of the exercise of the Call Option.
"Option Closing Date" shall mean the date specified pursuant to Section
3.01(b) or Section 4.02(a) (as applicable) for the Option Closing.
"Option Determination Date" shall mean the first to occur of the Option
Closing Date and the Option Expiration Date.
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"Option Exercise Deliverables" shall mean the 2001 Audited Financial
Statements and the Option Exercise Price Statement.
"Option Exercise Price" shall mean, for each share of New Common Stock, the
price determined by dividing:
(A) the greater of:
(i) $140,000,000 and
(ii) the sum of (a) the product of (x) 12.2 and (y) the Adjusted
2001 Operating Income, and (b) the aggregate exercise price of all
options and warrants of the Company issued by the Company after December
31, 1998 and either (I) exercised prior to the Option Closing Date (to
the extent that the Company has cash and cash equivalents on the date
immediately preceding the Option Closing Date in an amount equal to or
greater than the aggregate exercise price of such options and warrants)
or (II) outstanding as of the date immediately preceding the Option
Closing Date, by
(B) the sum of (i) the number of shares of New Common Stock
outstanding as of the date immediately preceding the Option Closing Date,
and (ii) the number of shares of New Common Stock issuable upon the
exercise or conversion of any options, warrants, rights or convertible
securities of the Company outstanding as of the date immediately preceding
the Option Closing Date (excluding the shares of New Common Stock issuable
upon conversion of the convertible securities issued to Alpharma pursuant
to the Loan Agreement);
provided that, notwithstanding the foregoing, in the event that the Option
Exercise Price calculated in the manner set forth above (the "Original Option
Exercise Price") shall equal a price per share of New Common Stock that is less
than $11.76 per share (subject to appropriate adjustment in the event of any
stock split, stock dividend, reverse stock split or other similar
recapitalization affecting the New Common Stock) and warrants to purchase at
least 75,000 Depositary Shares (subject to appropriate adjustment in the event
of any stock split, stock dividend, reverse stock split or other similar
recapitalization affecting the New Common Stock) issued pursuant to the Triumph
Agreement (the "Triumph Warrants") remain outstanding as of the Option Closing
Date, the Option Exercise Price shall mean:
(X) with respect to each Depositary Share that is issuable upon
exercise of the Triumph Warrants which are outstanding as of the Option
Closing Date ("Triumph Warrant Shares"), $11.76 (subject to appropriate
adjustment in the event of a stock split, stock dividend, reverse stock
split or other similar recapitalization affecting the New Common Stock);
(Y) with respect to each Depositary Share (the "Series G Shares")
issued or issuable upon conversion of the Series G Preferred or any
convertible notes issuable upon exchange of the Series G Preferred
outstanding as of the Option Closing Date or issued or issuable upon
exercise of the warrants issued pursuant to the Series G Agreement (to the
extent any such shares continue to be held as of the Option Closing Date by
one of the purchasers set forth on Schedule 1 to the Series G Agreement or
an Affiliate of any of such purchasers), the Original Option Exercise
Price; and
(Z) with respect to any Depositary Shares outstanding as of the Option
Closing Date or issuable as of the Option Closing Date upon conversion of
securities of the
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Company convertible into Depositary Shares of the Company or upon exercise
of rights, options or warrants to acquire Depositary Shares (other than
Triumph Warrant Shares and the Series G Shares) (all of such Depositary
Shares being referred to as the "Stockholder Shares"), the difference
between (i) the Original Option Exercise Price and (ii) the price
determined by dividing (a) the product of (I) the Triumph Warrant Shares
and (II) the difference between $11.76 (subject to appropriate adjustment
in the event of a stock split, stock dividend, reverse stock split or other
similar recapitalization affecting the New Common Stock) and the Original
Option Exercise Price, by (b) the number of Stockholder Shares.
"Option Exercise Price Statement" shall mean a statement from the Company
(a) stating the Option Exercise Price as calculated by the Company and setting
forth in reasonable detail the manner in which such calculation was made (which
stated Option Exercise Price shall be calculated based upon the Company's
reasonable assumptions as to what the Option Exercise Price will be as of the
date immediately preceding the Option Closing Date), (b) stating the Adjusted
2001 Operating Income as calculated by the Company and setting forth the manner
in which such amount was calculated and (c) setting forth the GAAP Adjustments
used in the calculation of Adjusted 2001 Operating Income as calculated by the
Company.
"Option Expiration Date" shall mean December 31, 2002; provided, that from
and after a Call Option Transfer, the Option Expiration Date shall be the first
to occur of (i) the date on which the Call Option terminates in accordance with
Section 4.01(a) of this Depositary Agreement, (ii) the date on which the Call
Option terminates in accordance with Section 4.02(c) of this Depositary
Agreement and (iii) the Final Extension Date, if Alpharma exercises the Call
Option but the Option Closing has not occurred on or before the Final Extension
Date; provided further that, notwithstanding the foregoing, in the event of a
Call Option Transfer, the Option Expiration Date shall occur immediately at 5:00
p.m. (Boston, Massachusetts time) (the "Final Refusal Time") on the third
Business Day following the day on which the Company provides written notice to
Alpharma that Alpharma has refused or otherwise failed to make a Loan requested
by the Company pursuant to Section 2.3 of the Loan Agreement if prior to the
Final Refusal Time Alpharma has still not funded such Loan, unless Alpharma's
failure to fund such Loan is due to the Company's failure to satisfy the
condition set forth in Section 4.2(f) or Section 4.3(d) of the Loan Agreement.
"Original Option Exercise Price" shall have the meaning ascribed to it in
the definition of "Option Exercise Price.
"Permitted Investment" shall have the meaning ascribed to it in the Loan
Agreement.
"Person" means any corporation, association, company, business trust,
partnership, joint venture, joint-stock company, limited liability company,
trust, unincorporated organization or association or government or any agency or
political subdivision thereof.
"Preliminary Closing Shares" shall have the meaning ascribed to it in
Section 5.01(a) of this Depositary Agreement.
"Record Date" shall mean the date fixed pursuant to Section 7.03 of this
Depositary Agreement.
"Record Holder" with respect to a Depositary Receipt shall mean the person
in whose name a Depositary Receipt is registered on the books of the Depositary
maintained for such purpose as of a specified Record Date.
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"Registrar" shall mean any bank or trust company which shall be appointed
to register Depositary Receipts as herein provided.
"Registration Statement" shall mean the Registration Statement on Form S-4
of the Company relating to the offering of the New Common Stock and the
Depositary Shares in connection with the Merger.
"Required Antitrust Approvals" shall have the meaning ascribed to it in
Section 4.03(c) of this Depositary Agreement.
"Series G Agreement" shall mean the Series G Securities Purchase Agreement
dated May 13, 1998 between the Company and the Purchasers (as defined therein),
as amended.
"Series G Preferred" shall mean the shares of Series G Convertible
Exchangeable Preferred Stock of the Company, par value $.01 per share, issued
pursuant to the Series G Agreement.
"Series G Shares" shall have the meaning ascribed to it in the definition
of Option Exercise Price.
"Stockholder Shares" shall have the meaning ascribed to it in the
definition of Option Exercise Price.
"Transitory Subsidiary" shall have the meaning ascribed to it in the
Preamble to this Depositary Agreement.
"Triumph Agreement" shall mean the Securities Purchase Agreement dated as
of January 31, 1997 among the Company, Triumph-Connecticut Limited Partnership
and the other Purchasers named therein, as amended.
"Triumph Warrants" shall have the meaning ascribed to it in the definition
of Option Exercise Price.
"Triumph Warrant Shares" shall have the meaning ascribed to it in the
definition of Option Exercise Price.
"1933 Act" shall mean the Securities Act of 1933 and the rules and
regulations promulgated thereunder, as amended from time to time.
References to any party hereto shall include such party's respective
successors and assigns.
ARTICLE II
DEPOSIT OF NEW COMMON STOCK
SECTION 2.01 Deposit of New Common Stock; Depositary Receipts.
(a) At or prior to the Effective Time, the Company shall deposit with the
Depositary a number of shares of New Common Stock equal to the number of shares
of Old Common Stock outstanding immediately prior to the Effective Time
(excluding any Dissenting Shares and shares held in the Company's treasury). The
Company shall make such deposit by delivery of (i) a certificate or certificates
for the New Common Stock to be deposited, registered in the name of the
Depositary, (ii) all such certifications as may be required by the Depositary in
accordance with the provisions of this Depositary Agreement and (iii) a written
order directing the Depositary, in its capacity as Depositary hereunder, to
execute and deliver to or upon the written order of the person or persons
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stated in such order a Depositary Receipt or Depositary Receipts representing
the number of Depositary Shares set forth in such order.
(b) All shares of New Common Stock to be issued by the Company from and
after the date hereof through the Option Determination Date (other than the Note
Conversion Shares (as defined in the Loan Agreement)) shall be deposited
hereunder by the Company in the manner prescribed by paragraph (a) above. In the
case of any conversion or exercise of any convertible security, warrant or
option (other than the Note (as defined in the Loan Agreement)) from and after
the date hereof and through the Option Determination Date, the Company shall
deposit with the Depositary in the manner prescribed in paragraph (a) above a
number of shares of New Common Stock corresponding to the number of Depositary
Shares issuable upon conversion or exercise of such convertible security,
warrant or option; provided that, following the Option Determination Date, the
Company's obligation to deposit shares of New Common Stock hereunder shall be
governed by and subject to Sections 5.02 and 5.03.
(c) Promptly following any deposit by the Company of shares of New Common
Stock with the Depositary pursuant to this Section 2.01, the Depositary shall
issue Depositary Receipts in the manner directed by the Company, such Depositary
Receipts representing a number of Depositary Shares corresponding to the number
of shares of New Common Stock so deposited by the Company with the Depositary.
(d) Each Depositary Share shall, as provided herein, represent an interest
in one share of New Common Stock. Subject to the terms of this Depositary
Agreement, until the Option Determination Date, each share of New Common Stock
represented by a Depositary Share shall be held in custody by the Depositary and
each owner of a Depositary Share shall be entitled, proportionately, to all the
rights of the New Common Stock represented thereby, including the dividend,
voting and liquidation rights set forth in the Certificate of Incorporation.
Following the Option Determination Date, each owner of a Depositary Share shall
be entitled to receive the Depositary Share Consideration in respect of such
Depositary Share.
ARTICLE III
COMPANY CALL OPTION
SECTION 3.01 Company Call Option.
(a) Prior to a Call Option Transfer, the Company shall have the right, at
its sole option, to purchase all but not less than all of the outstanding shares
of New Common Stock deposited with the Depositary hereunder as of the Option
Closing Date at a price per share of New Common Stock equal to the Option
Exercise Price and on such other terms and conditions as are specified in this
Depositary Agreement. The Company may elect to exercise the Call Option by
delivery of the Call Option Exercise Notice to the Depositary at any time during
the period (the "Call Period") commencing February 1, 2002 and continuing until
December 31, 2002.
(b) The Call Option Exercise Notice shall specify a date for the Option
Closing (the "Option Closing Date"), which shall be a date not earlier than ten
Business Days after the date of the Call Option Exercise Notice nor later than
January 15, 2003; provided, that the Company, in its sole discretion, at any
time may postpone the Option Closing to a date no later than January 15, 2003.
The Option Closing shall take place at 10:00 a.m. (Boston time) on the Option
Closing Date at the offices of the Company's legal counsel in Boston,
Massachusetts.
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(c) If, in lieu of the Call Option Exercise Notice, the Company delivers to
the Depositary the Call Option Rejection Notice or if the Call Period expires
without the Call Option Exercise Notice being provided to the Depositary, then,
effective as of the date of the Call Option Rejection Notice or as of the
expiration of the Call Period, as the case may be, the Call Option shall
terminate and become null and void and of no further force or effect.
SECTION 3.02 Effectiveness. This Article III, including without
limitation the Company's right to exercise the Call Option, shall be of no force
or effect from and after a Call Option Transfer.
ARTICLE IV
ALPHARMA CALL OPTION
SECTION 4.01 Alpharma Call Option.
(a) The Company shall deliver the Option Exercise Deliverables to Alpharma
on or before March 30, 2002. Alpharma shall have the right, at its sole option,
to purchase all but not less than all of the outstanding shares of New Common
Stock deposited with the Depositary hereunder as of the Option Closing Date at a
price per share of New Common Stock equal to the Option Exercise Price and on
such other terms and conditions as are specified in this Depositary Agreement.
Alpharma may elect to exercise the Call Option by providing the Call Option
Exercise Notice to the Company and the Depositary at any time during the period
(the "Call Period") commencing upon the date the Company delivers to Alpharma
the Option Exercise Deliverables and continuing until the later of (A) the date
20 days after the date of such delivery and (B) if Alpharma in good faith
disputes the Option Exercise Price pursuant to clause (b) of this Section 4.01,
the date 10 days after the Option Exercise Price is determined pursuant to
clause (b) of this Section 4.01.
(b) (i) Following delivery of the Option Exercise Deliverables, if Alpharma
in good faith disputes the Option Exercise Price as shown on the Option Exercise
Price Statement prepared by the Company, Alpharma shall deliver to the Company
within 20 days after receiving the Option Exercise Deliverables a statement (the
"Dispute Notice") disputing the Company's calculation of and, insofar as
Alpharma is capable based upon the information available to it, setting forth
what Alpharma believes is the correct Option Exercise Price and describing the
basis for the determination of such different Option Exercise Price. Alpharma
and the Company shall use reasonable efforts to resolve such differences
regarding the determination of the Option Exercise Price for a period of 10 days
after Alpharma has given the Dispute Notice.
(ii) If Alpharma and the Company do not reach a final resolution within 10
days after Alpharma has given the Dispute Notice, unless Alpharma and the
Company mutually agree to continue their efforts to resolve such differences,
Alpharma and the Company shall agree within five Business Days thereafter upon
one of the public accounting firms currently known as the "Big Five" (other than
one which has a then existing relationship with either Alpharma or the Company)
(the "Neutral Accountants") to resolve such differences in the manner provided
below. Alpharma and the Company shall each be entitled to make a presentation to
the Neutral Accountants, pursuant to procedures to be determined by the Neutral
Accountants, advocating the merits of the Option Exercise Price espoused by such
party, which presentations shall be made within 10 Business Days after Alpharma
and the Company agree on the Neutral Accountants; and the Neutral Accountants
shall be required to resolve the differences between Alpharma and the
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Company and to determine the Option Exercise Price within 10 Business Days
thereafter. The Option Exercise Price determined by the Neutral Accountants
shall be deemed to be the Option Exercise Price. Such determination by the
Neutral Accountants shall be conclusive and binding upon Alpharma and the
Company, absent fraud or manifest error. Nothing herein shall be construed to
authorize or permit the Neutral Accountants (A) to determine any questions or
matters whatsoever under or in connection with this Depositary Agreement except
for the resolution of differences between Alpharma and the Company regarding the
Option Exercise Price and (B) to apply any accounting methods, treatments,
principles or procedures other than as set forth in the definitions of "2001
Audited Financial Statements," "Adjusted 2001 Operating Income," "Excluded
Interest Expense," "GAAP Adjustments" and "Option Exercise Price" in Article I
of this Depositary Agreement.
(iii) Alpharma, on the one hand, and the Company, on the other hand, shall
share equally the fees and expenses of the Neutral Accountants; provided that if
the Neutral Accountants determine that either Alpharma or the Company has
adopted a position or positions with respect to the Option Exercise Price that
is unreasonable, frivolous or clearly without merit, the Neutral Accountants
may, in their discretion, assign a greater portion of any such fees and expenses
to such party.
(iv) The failure of Alpharma to deliver a Dispute Notice within 20 days
after receiving the Option Exercise Deliverables shall constitute acceptance of
the Option Exercise Price set forth on the Option Exercise Price Statement,
whereupon such Option Exercise Price shall be deemed to be conclusive and the
final determination of the Option Exercise Price.
(v) During the period commencing January 1, 2002 and continuing until the
earliest of (A) the date 20 days after such delivery of the Option Exercise
Deliverables, (B) the delivery to the Company of the Call Option Exercise Notice
and (C) the delivery to the Company of the Dispute Notice, the Company will
afford Alpharma, during regular business hours of the Company, upon reasonable
notice and as often as Alpharma may reasonably request, access to the Company's
books, accounts, records and work papers and to the Company's employees and
independent public accountants solely for the purpose of evaluating the accuracy
of the Option Exercise Price Statement; provided that such access shall not
interfere with or disrupt the business or operations of the Company.
(c) The Call Option Exercise Notice shall specify a date not earlier than
ten Business Days nor later than 15 Business Days after the date of the Call
Option Exercise Notice for the closing of the exercise of the Call Option. The
closing of the exercise of the Call Option shall take place at 10:00 a.m.
(Boston time) on the date specified in the Call Option Exercise Notice (or such
other date as may be provided under Section 4.02) at the offices of the
Company's legal counsel in Boston, Massachusetts.
(d) If, in lieu of the Call Option Exercise Notice, Alpharma delivers the
Call Option Rejection Notice to the Company and the Depositary or if the Call
Period expires without the Call Option Exercise Notice being provided to the
Company or the Depositary, then, effective as of the date of the Call Option
Rejection Notice or as of the expiration of the Call Period, as the case may be,
the Call Option shall terminate and become null and void and of no further force
or effect.
SECTION 4.02 Option Closing Date.
(a) Subject to this Section 4.02(a) and Sections 4.02(b) and 4.02(c) below,
the Option Closing shall occur on the date specified in the Call Option Exercise
Notice (the
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"Option Closing Date"); provided that notwithstanding anything in this
Depositary Agreement to the contrary, the Option Closing shall not occur on the
scheduled Option Closing Date if either of the following conditions are in
existence as of the scheduled Option Closing Date:
(i) any provision of any applicable law or regulation or any judgment,
injunction, order or decree prohibits the Option Closing and the failure to
comply with such provision, judgment, injunction, order or decree would
have a material adverse effect on the Company or Alpharma (the "Conflict of
Law Condition"); or
(ii) any Required Antitrust Approval shall not have been obtained (the
"Antitrust Approval Condition").
If either of the closing conditions described above has not been satisfied
as of the scheduled Option Closing Date, then the Option Closing Date shall be
extended to the earlier of (x) the date which is five Business Days after the
date that both closing conditions have been satisfied and (y) the date which is
90 days after the date of the Call Option Exercise Notice (the "90-Day Extension
Date").
If the Antitrust Approval Condition has not been satisfied as of the 90-Day
Extension Date, the Option Closing Date shall be further extended to the earlier
of (I) the date which is five Business Days after the date that both closing
conditions have been satisfied and (II) the date which is 180 days after the
date of the Call Option Exercise Notice (the "180-Day Extension Date").
(b) If the Option Closing does not occur on or prior to the 90-Day
Extension Date or the 180-Day Extension Date, as applicable, because one or both
of the closing conditions set forth in Section 4.02(a) has not been satisfied,
then, effective as of such date, the Call Option shall terminate and become null
and void and of no further force or effect.
(c) Notwithstanding the foregoing, if any event shall occur during the
period commencing on the date on which Alpharma delivers the Call Option
Exercise Notice to the Company and ending on the Option Closing Date that has a
Material Adverse Effect with respect to the Company, Alpharma may, in its sole
discretion, elect not to proceed with the Option Closing and to terminate the
Call Option by providing written notice of such election and termination to the
Company and the Depositary within 10 days of becoming aware of such event (but
in no event after the Option Closing Date). Effective as of the date of such
notice, the Call Option shall terminate and become null and void and of no
further force or effect.
SECTION 4.03 Covenants of the Company and Alpharma.
(a) The Company and Alpharma shall (i) use all commercially reasonable
efforts to promptly take, or cause to be taken, all actions and do, or cause to
be done, all things necessary, proper or appropriate to satisfy the conditions
to the Option Closing set forth in Section 4.02(a) and to consummate and make
effective the transactions contemplated by this Depositary Agreement on the
terms and conditions set forth herein and (ii) not take any action which might
reasonably be expected to impair the ability of the parties to consummate the
transactions contemplated by this Depositary Agreement.
(b) In the event that any action, suit, proceeding or investigation
relating hereto or to the transactions contemplated by this Depositary Agreement
is commenced, whether before or after the exercise of the Call Option, each of
the Company and Alpharma agrees to fully cooperate and use their respective best
efforts to vigorously defend against and respond thereto (including, without
limitation and, to the extent applicable, seeking to
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remove promptly any injunction or other legal barrier that may prevent the
consummation of the transactions contemplated by this Depositary Agreement).
(c) The Company and Alpharma shall each:
(i) take all actions necessary to make the filings required of such
party under the Hart Scott Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), relating to the possible exercise of the Call
Option by September 30, 2001, which filings shall comply in all respects
with the requirements of the HSR Act;
(ii) comply at the earliest practicable date with any formal or
informal request for additional information received by such party from the
Federal Trade Commission or Antitrust Division of the Department of Justice
pursuant to the HSR Act;
(iii) consult and cooperate with the other party and consider in good
faith the views of the other party, in connection with any analyses,
appearances, presentations, memoranda, briefs, arguments, opinions and
proposals made or submitted by or on behalf of any party in connection with
proceedings under or relating to the Required Antitrust Approvals;
(iv) request early termination of the applicable waiting period under
the HSR Act; and
(v) take any and all such other commercially reasonable actions as are
required in order to obtain the approval of the governmental entity with
the jurisdiction of enforcing applicable antitrust laws (the "Required
Antitrust Approvals"), including without limitation complying with the HSR
Act and obtaining termination or expiration of the applicable waiting
period under the HSR Act.
At any time and from time to time following the date of this Depositary
Agreement and prior to receipt of the Required Antitrust Approvals, each party
shall provide 30 days' prior written notice to the other party of any
transactions or other business activities in which such party is engaged which
such party reasonably believes could have an adverse impact on either party's
ability to obtain the Required Antitrust Approvals.
SECTION 4.04 Effectiveness. This Article IV, including without limitation
Alpharma's right to exercise the Call Option, shall be of no force or effect
prior to a Call Option Transfer.
ARTICLE V
THE CALL OPTION CLOSING
SECTION 5.01 Closing Shares.
(a) On or before the date three Business Days prior to the Option Closing
Date, (i) the Depositary shall provide the Company and, following a Call Option
Transfer, Alpharma with a written notice (the "Initial Depositary Notice")
specifying the total number of shares of New Common Stock deposited hereunder as
of the date five Business Days prior to the Option Closing Date (the
"Preliminary Closing Shares"), and (ii) the Company shall deliver to the
Depositary and, following a Call Option Transfer, Alpharma a written notice
specifying as of the date five Business Days prior to the Option Closing Date
(I) the amounts specified in clauses (A)(ii)(b) and (B)(ii) of the definition of
Option Exercise Price and (II) the number of outstanding Triumph Warrant Shares
and Series G Shares, if applicable. Following receipt of the Initial Depositary
Notice and on or before the Option Closing Date, the Company, if it shall have
exercised the Call Option
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pursuant to Section 3.01 of this Depositary Agreement, or Alpharma, if it shall
have exercised the Call Option pursuant to Section 4.01 of this Depositary
Agreement (the party exercising the Call Option being referred to herein as the
"Exercising Party"), shall pay to the Depositary an amount equal to the product
of (A) the Option Exercise Price and (B) the number of Preliminary Closing
Shares (if applicable, taking into account the proviso to the definition of
Option Exercise Price), by wire transfer to a bank account of the Depositary
(the "Depositary Bank Account") designated by the Depositary in writing prior to
the Option Closing in a bank having combined capital, surplus and undivided
profits aggregating at least $500,000,000.
(b) On the Option Closing Date, (i) the Depositary shall provide the
Company and, following a Call Option Transfer, Alpharma with a written notice
(the "Follow-up Depositary Notice") specifying the total number of shares of New
Common Stock deposited hereunder as of the Option Closing Date (the "Final
Closing Shares"), and (ii) the Company shall deliver to the Depositary and,
following a Call Option Transfer, Alpharma a written notice specifying the
number of Triumph Warrant Shares and Series G Shares, if applicable, outstanding
as of the Option Closing Date. On or prior to the first Business Day following
receipt of the Follow-up Depositary Notice, the Exercising Party shall pay to
the Depositary an amount equal to the product of (A) the Option Exercise Price
and (B) the difference between the number of Preliminary Closing Shares and the
number of Final Closing Shares (taking into account the proviso to the
definition of Option Exercise Price, if applicable) by wire transfer to the
Depositary Bank Account.
(c) Any payments hereunder shall be made for payment to the holders of
Depositary Shares, and the Depositary shall disburse the funds so deposited to
the holders of Depositary Shares in accordance with Section 5.02. At the Option
Closing, the Depositary shall deliver to the Exercising Party a certificate or
certificates evidencing all of the New Common Stock held by the Depositary for
which payment has been made by the Exercising Party accompanied by a duly
endorsed stock power or stock powers with respect thereto. Any certificates not
delivered at the Option Closing shall be delivered promptly upon receipt of
payment therefor in accordance with subsection (b) of this Section 5.01.
SECTION 5.02 Notice of Option Exercise; Delivery of Option Exercise Price.
(a) Promptly following the Option Determination Date, the Depositary shall
mail notice thereof, postage prepaid, to the holders of record of the Depositary
Shares at their respective addresses then appearing on the books of the
Depositary, but neither failure to mail such notice nor any defect therein or in
the mailing thereof shall affect the validity of any exercise of the Call Option
or the rights of the holders of Depositary Shares to receive the Depositary
Share Consideration. The Company shall provide the Depositary with the form of
such notice and each such notice shall state the form and amount of the
Depositary Share Consideration. Such notice shall be accompanied by a letter of
transmittal (the "Letter of Transmittal"), which the Company shall supply, in
customary form for use in the exchange of Depositary Receipts representing
Depositary Shares for cash or certificates representing shares of New Common
Stock, as the case may be (which Letter of Transmittal shall specify (i) the
place or places designated by the Depositary where Depositary Receipts
representing Depositary Shares are to be surrendered for payment of the
Depositary Share Consideration and (ii) that delivery of Depositary Receipts
shall be effected, and risk of loss shall pass, only upon proper delivery to the
Depositary).
(b) Each holder of Depositary Shares following the Option Determination
Date shall, upon surrender to the Depositary of a Depositary Receipt or
Depositary Receipts and a
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duly executed Letter of Transmittal, be entitled to receive the Depositary Share
Consideration attributable to the Depositary Shares held of record by such
holder. Upon receipt of a duly completed Letter of Transmittal and a Depositary
Receipt or Depositary Receipts, without unreasonable delay, the Depositary shall
deliver to such holder, or to the person or persons designated by such holder as
hereinafter provided, the number of whole shares of New Common Stock or cash
represented by the Depositary Receipt or Depositary Receipts so surrendered. No
holder of a Depositary Receipt or Depositary Receipts shall be entitled to any
distribution of shares of New Common Stock held by the Depositary pursuant to
the terms of this Depositary Agreement except upon the occurrence of the Option
Expiration Date and pursuant to the provisions of this Article V. No holder of a
Depositary Receipt or Depositary Receipts shall be entitled to any distribution
of cash held by the Depositary pursuant to the terms of this Depositary
Agreement except upon the occurrence of the Option Closing and pursuant to the
provisions of this Article V. In no event will fractional shares of New Common
Stock be distributed by the Depositary. If fractional shares of New Common Stock
would otherwise be required to be issued to a holder of Depositary Shares, the
Depositary shall pay to such holder in cash an amount equal to such fraction
multiplied by the fair market value of one share of New Common Stock on the
Option Expiration Date, as determined by the Board of Directors of the Company
in good faith, which determination of fair market value shall promptly be
provided in writing by the Company to the Depositary. Delivery of the New Common
Stock or the cash being distributed by the Depositary hereunder shall be made by
the delivery of such certificates, documents of title and other instruments as
the Depositary may deem appropriate, which, if required by law, shall be
properly endorsed or accompanied by proper instruments of transfer.
Delivery of the New Common Stock or the cash to be distributed by the
Depositary hereunder shall be made by the Depositary by first class mail under
the provisions of the Depositary's first class mail bond protecting the
Depositary from loss or liability arising out of the non-receipt or non-delivery
of such New Common Stock or cash or arising out of the replacement thereof, for
any deliveries where market value does not exceed the amount of the Depositary's
first class mail bond. Any mail delivery exceeding such amount shall be
delivered by registered mail or overnight mail and shall be insured separately
for the replacement value of its contents at the time of mailing. Any Depositary
Share Consideration remaining unclaimed at the expiration of two years after the
date of mailing of the notice specified in Section 5.02(a) to holders of
Depositary Receipts shall be returned to the Exercising Party, if such notice
relates to an Option Closing, or to the Company, if such notice relates to an
Option Expiration Date, after which return such holders shall have no claim
against the Depositary but shall either have a claim as an unsecured creditor
against the Exercising Party for the Option Exercise Price, without interest, or
against the Company for shares of New Common Stock (together with accrued and
unpaid dividends from the Option Expiration Date), as the case may be, but shall
have no greater rights against the Company or, following a Call Option Transfer,
against Alpharma than may be accorded such party's respective general creditors
under applicable law. Notwithstanding the foregoing, none of Alpharma, the
Company and the Depositary shall be liable to any holder of Depositary Shares
for any amount paid to any public official pursuant to abandoned property laws.
After an Option Closing, any portion of the Depositary Share Consideration
remaining unclaimed by holders of Depositary Shares as of the date which is
immediately prior to such time as such amounts would otherwise escheat to or
become property of any government entity shall, to the extent permitted by
applicable law, become property of the Exercising Party, free and clear of any
claims or interest of any person previously entitled thereto. If the Call Option
terminates without
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being exercised, or if such option is exercised but the Option Closing does not
occur on or before January 15, 2003 or, following a Call Option Transfer, the
Final Extension Date, any portion of the New Common Stock remaining unclaimed by
holders of Depositary Shares as of the date which is immediately prior to such
time as such New Common Stock would otherwise escheat to or become property of
any government entity shall, to the extent permitted by applicable law, become
property of the Company, free and clear of any claims or interest of any person
previously entitled thereto.
(c) If the New Common Stock or the cash being distributed are to be
delivered to a person or persons other than the Record Holder of the Depositary
Receipt or Depositary Receipts being surrendered, such holder shall execute and
deliver to the Depositary a written order (accompanied by a signature guarantee
if required by the Depositary) so directing the Depositary and the Depositary
may require that the Depositary Receipt or Depositary Receipts surrendered by
such holder for withdrawal of such shares of New Common Stock be properly
endorsed in blank or accompanied by a properly executed instrument of transfer
in blank. It shall be a condition of such distribution that the person
requesting such distribution shall pay the Depositary any transfer or other
taxes required as a result of such payment to a person other than the registered
holder of such Depositary Shares or establish to the satisfaction of the
Exchange Agent (as defined in the Merger Agreement) that such tax has been paid
or is not payable.
(d) After the Option Determination Date, there shall be no further
registration of transfers of Depositary Shares outstanding prior to such date.
If, after such date, Depositary Receipts are presented to the Depositary they
shall be cancelled and exchanged for the Depositary Share Consideration.
(e) Any funds received by the Depositary pursuant to this Depositary
Agreement shall be held by the Depositary, in its capacity as Depositary, on
behalf of the holders of Depositary Receipts. No interest will accrue on such
funds.
SECTION 5.03 Company Options, Etc. The Company will make appropriate
provision to assure that any securities of the Company convertible into
Depositary Shares of the Company, or any rights, options or warrants to acquire
Depositary Shares outstanding on the Option Closing Date (whether or not
convertible, vested, exercisable or exchangeable on such date) are convertible
into or exercisable or exchangeable solely for the cash that the holders thereof
would have received had they converted, exercised or exchanged such convertible
securities, rights, options and warrants for Depositary Shares, immediately
prior to the Option Closing Date. Promptly after the Option Determination Date,
the Depositary shall give the holders of such convertible securities, rights,
options or warrants notice (a "Determination Date Notice") of the event giving
rise to the Option Determination Date (i.e., the Option Closing or Option
Expiration Date), which Determination Date Notice shall be in the form provided
by the Company to the Depositary. If the event giving rise to the Option
Determination Date was the Option Closing, then from and after the Option
Determination Date, holders of such convertible securities, rights, options or
warrants shall have the right to receive from the Exercising Party (and not the
Depositary or, if Alpharma is the Exercising Party, the Company) upon conversion
or exercise thereof (and the payment of any exercise or purchase price provided
for under the terms of such convertible security, right, warrant or option) cash
in an amount equal to the Option Exercise Price for each Depositary Share for
which such convertible security, right warrant or option is convertible or
exercisable. Upon any such conversion or exercise, the Exercising Party shall
promptly pay such holders the cash to which they would be entitled hereunder. If
the event giving rise to the Option
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Determination Date was the Option Expiration Date, then, from and after the
Option Determination Date, holders of such convertible securities, rights,
options or warrants shall have the right to receive from the Company (and not
Alpharma or the Depositary) upon conversion or exercise thereof (and the payment
of any exercise or purchase price provided for under the terms of such
convertible security, right, warrant or option) the number of shares of New
Common Stock for which such convertible security, right warrant or option is
convertible or exercisable. Nothing herein shall be deemed or construed as a
waiver of any other rights that a holder of any such securities may have.
ARTICLE VI
FORM OF DEPOSITARY RECEIPTS, DEPOSIT OF STOCK,
EXECUTION AND DELIVERY, TRANSFER, SURRENDER
AND REDEMPTION OF DEPOSITARY RECEIPTS
SECTION 6.01 Form and Transferability of Depositary Receipts.
(a) Depositary Receipts shall be engraved or printed or lithographed on
steel-engraved borders and shall be substantially in the form set forth in
Exhibit A annexed to this Depositary Agreement, with appropriate insertions,
modifications and omissions, as hereinafter provided. Depositary Receipts shall
be executed by the Depositary by the manual signature of a duly authorized
officer of the Depositary, provided that such signature may be a facsimile if a
Registrar for the Depositary Receipts (other than the Depositary) shall have
been appointed and such Depositary Receipts are countersigned by manual
signature of a duly authorized officer of the Registrar. No Depositary Receipt
shall be entitled to any benefits under this Depositary Agreement or be valid or
obligatory for any purpose, unless it shall have been executed manually by a
duly authorized officer of the Depositary or if a Registrar for the Depositary
Receipts (other than the Depositary) shall have been appointed, by facsimile
signature of a duly authorized officer of the Depositary and, if executed by
facsimile signature of the Depositary, shall have been countersigned manually by
a duly authorized officer of such Registrar. The Depositary shall record on its
books each Depositary Receipt so signed and delivered as hereinafter provided.
All Depositary Receipts shall be dated the date of their execution.
(b) Except as the Depositary may otherwise determine, Depositary Receipts
shall be in denominations of any number of whole Depositary Shares.
(c) Depositary Receipts may be endorsed with or have incorporated in the
text thereof such legends or recitals or changes not inconsistent with the
provisions of this Depositary Agreement as may be required by the Depositary or
required to comply with any applicable law or any regulation thereunder or with
the rules and regulations of any securities exchange upon which the Depositary
Shares or the Depositary Receipts, may be listed or to conform with any usage
with respect thereto, or to indicate any special limitations or restrictions to
which any particular Depositary Receipts are subject by reason of the date of
issuance of the Deposit Shares or otherwise.
(d) Title to a Depositary Receipt which is properly endorsed or accompanied
by a properly executed instrument of transfer and to Depositary Shares evidenced
thereby shall be transferable by delivery with the same effect as in the case of
a negotiable instrument; provided, however, that until a Depositary Receipt
shall be transferred on the books of the Depositary as provided in Section 4.03,
the Depositary, each Depositary's Agent and the Company may, notwithstanding any
notice to the contrary, treat the Record Holder thereof at such time as the
absolute owner thereof for the purpose of determining the person
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entitled to distribution of dividends or other distributions or to any notice
provided for in this Depositary Agreement and for all other purposes.
SECTION 6.02 Execution and Delivery of Depositary Receipts.
(a) Upon each delivery to the Depositary of a certificate or certificates
for New Common Stock to be deposited hereunder, registered in its name as
provided above, the Depositary shall hold such shares in an account to be
established by the Depositary, at the Depositary's Office, or at such other
place or places as the Depositary shall determine.
(b) Upon receipt by the Depositary of a certificate or certificates for New
Common Stock deposited in accordance with the provisions of this Section 4.02,
together with the other documents required as above specified, the Depositary,
subject to the terms and conditions of this Depositary Agreement, shall execute
and deliver a Depositary Receipt or Depositary Receipts evidencing beneficial
ownership of the number of Depositary Shares representing the New Common Stock
so deposited and registered in such name or names as may be requested by the
person or persons named in the written order delivered to the Depositary in
accordance with the first paragraph of this Section 6.02. The Depositary shall
execute and deliver such Depositary Receipt at the Depositary's Office and at
such other offices, if any, as it may designate. Delivery at other offices shall
be at the risk and expense of the Company. However, in each case, subsequent to
the initial deposit hereunder, such delivery shall be made only upon payment to
the Depositary of all taxes and governmental charges and fees payable in
connection with such deposit and the transfer of the deposited New Common Stock.
SECTION 6.03 Transfer of Depositary Receipts. Subject to the terms and
conditions of this Depositary Agreement, the Depositary shall make transfers on
its books from time to time of Depositary Receipts upon any surrender thereof by
the holder in person or by duly authorized attorney, properly endorsed or
accompanied by a properly executed instrument of transfer, and duly stamped as
may be required by law. Thereupon the Depositary shall execute a new Depositary
Receipt or Depositary Receipts and deliver the same to or upon the order of the
person entitled thereto evidencing beneficial ownership of the same aggregate
number of Depositary Shares as those evidenced by the Depositary Receipt or
Depositary Receipts surrendered.
SECTION 6.04 Combinations and Split-ups of Depositary Receipts. Upon
surrender of a Depositary Receipt or Depositary Receipts at the Depositary's
Office or at such other offices as it may designate for the purpose of effecting
a split-up or combination of such Depositary Receipt or Depositary Receipts, by
the holder or by duly authorized attorney, properly endorsed or accompanied by a
properly executed instrument of transfer, together with written instructions
specifying the number of Depositary Receipts to be received upon such split-up
or combination, and subject to the terms and conditions of this Depositary
Agreement, the Depositary shall execute and deliver a new Depositary Receipt or
Depositary Receipts in the authorized denominations requested, evidencing the
same aggregate number of Depositary Shares evidenced by the Depositary Receipt
or Depositary Receipts surrendered.
SECTION 6.05 Limitations on Execution and Delivery, Transfer, Split-up,
Combination, Surrender and Exchange of Depositary Receipts.
(a) As a condition precedent to the execution and delivery, transfer,
split-up, combination, surrender, or exchange of any Depositary Receipt, the
Depositary, or any of the Depositary's Agents, or the Company, may require
payment to it of a sum sufficient for the payment (or, in the event that the
Depositary or the Company shall have made
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such payment, the reimbursement to it) of any tax or other governmental charge
with respect thereto, may require the production of proof satisfactory to it as
to the identity and genuineness of any signature and may also require compliance
with such regulations, if any, as the Depositary or the Company may establish
consistent with the provisions of this Depositary Agreement.
(b) The transfer of Depositary Receipts may be refused, or the transfer,
split-up, combination, surrender or exchange of outstanding Depositary Receipts
may be suspended (i) during any period when the register of stockholders of the
Company is closed, or (ii) if any such action is deemed necessary or advisable
by the Depositary, any of the Depositary's Agents or the Company at any time or
from time to time because of any requirement of law or of any government or
governmental body or commission, or under any provision of this Depositary
Agreement.
SECTION 6.06 Lost Depositary Receipts, etc. In case any Depositary
Receipt shall be mutilated or destroyed or lost or stolen, the Depositary in its
discretion may execute and deliver a Depositary Receipt of like form and tenor
in exchange and substitution for such mutilated Depositary Receipt, or in lieu
of and in substitution for such destroyed, lost or stolen Depositary Receipt,
upon receipt by the Depositary of an appropriate affidavit of loss and a
corporate bond of indemnity which shall include indemnification of the Company
and the Depositary for the Depositary Shares evidenced by such Depositary
Receipt by a surety all in such form and substance as have been approved by the
Depositary.
SECTION 6.07 Cancellation and Destruction of Surrendered Depositary
Receipts. All Depositary Receipts surrendered to the Depositary or any
Depositary's Agent shall be cancelled by the Depositary. Except as prohibited by
applicable law or regulation, the Depositary is authorized to destroy such
Depositary Receipts so cancelled.
SECTION 6.08 Representations and Warranties as to Stock. The Company
hereby represents and warrants that the New Common Stock deposited hereunder
upon consummation of the Merger is, and will be deemed to have represented and
warranted that any additional shares of New Common Stock which it deposits
hereunder from time to time in accordance with Section 2.01 will be, when
issued, validly issued, fully paid and nonassessable. Such representation and
warranty shall survive any deposit of shares of New Common Stock and the
issuance of Depositary Receipts.
ARTICLE VII
THE DEPOSITED SECURITIES, NOTICES
SECTION 7.01 Cash Distributions. Whenever the Depositary shall receive
any cash dividend or other cash distribution on the New Common Stock, the
Depositary shall, subject to Section 6.02, promptly distribute to Record Holders
of Depositary Receipts on the Record Date fixed pursuant to Section 7.03 hereof
such amounts of such sum as are, as nearly as practicable, in proportion to the
respective numbers of Depositary Shares evidenced by the Depositary Receipts
held by such holders; provided, that in case the Company or the Depositary shall
be required to withhold and does withhold from any cash dividend or other cash
distribution received by the Depositary in respect of the Stock an amount on
account of taxes, the amount made available for distribution or distributed in
respect of Depositary Shares shall be reduced accordingly. The Depositary shall
distribute or make available for distribution, as the case may be, only such
amount, however, as can be distributed without attributing to any owner of
Depositary Shares a fraction of one cent
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and any balance, not so distributable shall be held by the Depositary (without
liability for interest thereon) and shall be added to and be treated as part of
the next sum received by the Depositary for distribution to Record Holders of
Depositary Receipts then outstanding.
SECTION 7.02 Distributions Other Than Cash. Whenever the Depositary shall
receive any distribution other than cash upon the New Common Stock, the
Depositary shall, subject to Section 6.02, promptly distribute to Record Holders
of Depositary Receipts on the Record Date fixed pursuant to Section 7.03 hereof
such amount of the securities or property received by it as are, as nearly as
practicable, in proportion to the respective numbers of Depositary Shares
evidenced by the Depositary Receipts held by such holders.
SECTION 7.03 Fixing of Record Date for Holders of Depositary Receipts.
Whenever any cash dividend or other cash distribution shall become payable or
any distribution other than cash shall be made, or if rights, preferences or
privileges shall at any time be offered, with respect to New Common Stock, or
whenever the Depositary shall receive notice of any meeting at which holders of
New Common Stock are entitled to vote or of which holders of New Common Stock
are entitled to notice, the Depositary shall in each such instance fix a Record
Date for the determination of the Record Holders of Depositary Receipts who
shall be entitled to receive such dividend, distribution, rights, preferences or
privileges, or to give instructions for the exercise of voting rights at any
such meeting, or who shall be entitled to notice of such meeting. The Record
Date established by the Depositary shall be the same as the Record Date set by
the Company for the holders of its New Common Stock with respect to the
corresponding right or privilege.
SECTION 7.04 Voting Rights.
(a) Upon receipt of notice of any meeting at which the holders of New
Common Stock are entitled to vote, the Depositary shall, as soon as practicable
thereafter, mail to the Record Holders of Depositary Receipts a notice which
shall be provided by the Company and which shall contain (i) such information as
is contained in such notice of meeting, and (ii) a statement that the Record
Holders of Depositary Receipts at the close of business on a specified Record
Date will be entitled, subject to any applicable provision of law and of the
Company's Certificate of Incorporation, to instruct the Depositary as to the
exercise of the voting rights pertaining to the number of shares of New Common
Stock represented by their respective Depositary Shares, and a brief statement
as to the manner in which such instructions may be given. Upon the written
request of a Record Holder of a Depositary Receipt on such Record Date, the
Depositary shall vote or cause to be voted the number of shares of New Common
Stock represented by the Depositary Shares evidenced by such Depositary Receipt
in accordance with the instructions set forth in such request. The Company
hereby agrees to take all reasonable action which may be deemed necessary by the
Depositary in order to enable the Depositary to vote such New Common Stock or
cause such New Common Stock to be voted. In the absence of specific instructions
from the holder of a Depositary Receipt, the Depositary will abstain from voting
to the extent of the New Common Stock represented by the Depositary Shares
evidenced by such Depositary Receipt.
(b) Record Holders of Depositary Shares shall also be entitled to vote on
certain amendments of this Depositary Agreement pursuant to Section 9.01.
SECTION 7.05 Changes Affecting Deposited Securities and Reclassifications,
Recapitalizations, etc. Upon any split-up, consolidation or any other
reclassification of New Common Stock, or upon any recapitalization,
reorganization, merger, amalgamation,
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consolidation or sale of all or substantially all of the Company's assets
affecting the Company or to which it is a party, the Depositary shall, upon the
instructions of the Company treat any shares of stock or other securities, cash
(including without limitation cash paid in lieu of fractional shares) or
property which shall be received by the Depositary in exchange for or upon
conversion of or in respect of the New Common Stock as new deposited property
under this Depositary Agreement, and Depositary Receipts then outstanding shall,
subject to Sections 3.01 and 4.01, thenceforth represent the new deposited
property so received in exchange for or upon conversion or in respect of such
New Common Stock. In any such case the Depositary may in its discretion, with
the approval of the Company, execute and deliver additional Depositary Receipts,
or may call for the surrender of all outstanding Depositary Receipts to be
exchanged for new Depositary Receipts specifically describing such new deposited
property.
SECTION 7.06 Reports. The Depositary shall make available for inspection
by holders of Depositary Receipts at the Depositary's Office, and at such other
places as it may from time to time deem advisable during normal business hours,
copies of this Depositary Agreement and any reports and communications received
from the Company which are both (a) received by the Depositary as the holder of
New Common Stock and (b) made generally available to the holders of New Common
Stock of the Company.
SECTION 7.07 Lists of Depositary Receipt Holders. Promptly upon request
from time to time of the Company or, from and after the Option Closing, Alpharma
(if Alpharma is the Exercising Party), the Depositary shall furnish to the
Company or Alpharma, as the case may be, a list, as of a recent date, of the
names, addresses and holdings of Depositary Shares by all persons in whose names
Depositary Receipts are registered on the books of the Depositary as Record
Holders.
ARTICLE VIII
THE DEPOSITARY, ALPHARMA AND THE COMPANY
SECTION 8.01 Maintenance of Offices, Agencies, Transfer Books by the
Depositary Registrar.
(a) Upon execution of this Depositary Agreement in accordance with its
terms, the Depositary shall maintain at the Depositary's Office facilities for
the execution and delivery, transfer, surrender and exchange of Depositary
Receipts, and at the offices of the Depositary's Agents, if any, facilities for
the delivery, transfer, surrender and exchange of Depositary Receipts, all in
accordance with the provisions of this Depositary Agreement.
(b) The Depositary shall maintain, or cause one of the Depositary's Agents
to maintain, appropriate records which shall reflect registrations,
registrations of transfers, exchanges, split-ups and combinations and
conversions of Depositary Shares. Such records shall be open for inspection by
the Company, the Record Holders of Depositary Receipts and, from and after the
Option Closing, Alpharma (if Alpharma is the Exercising Party), to the same
extent and for the same purposes as a Record Holder of New Common Stock may
inspect books for the transfer of New Common Stock as provided by applicable
law. The Depositary shall, if requested by the Company or, from and after the
Option Closing, Alpharma (if Alpharma is the Exercising Party), consult with
such party upon its receipt of any request by a Record Holder for inspection.
The Depositary may close such books, at any time or from time to time, when
deemed expedient by it in connection with the performance of its duties
hereunder.
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(c) If the Depositary Receipts or the Depositary Shares evidenced thereby
(or the New Common Stock represented by such Depositary Shares) are quoted with
NASDAQ, the Depositary may, with the approval of the Company, appoint a
Registrar for registry of such Depositary Receipts or Depositary Shares in
accordance with the requirements of NASDAQ. Such Registrar (which may be the
Depositary if so permitted by the requirements of NASDAQ) may be removed and a
substitute Registrar appointed by the Depositary upon the request or with the
approval of the Company. If the Depositary Receipts or the Depositary Shares are
(or the New Common Stock is) listed on one or more other stock exchanges or
quoted on a national trading market, the Depositary will, at the request of the
Company, arrange such facilities for the delivery, transfer, surrender and
exchange of such Depositary Receipts, Depositary Shares or New Common Stock as
may be required by law or applicable stock exchange or trading market
regulations.
SECTION 8.02 Prevention or Delay in Performance by the Depositary, the
Depositary's Agents or the Company. None of the Depositary, any Depositary's
Agent or the Company shall incur any liability to any holder of any Depositary
Receipt, if by reason of any provision of any present or future law, or
regulation promulgated thereunder, of the United States of America, or of any
other governmental authority or, in the case of the Depositary or the
Depositary's Agent, by reason of any provision, present or future, of the
Company's Certificate of Incorporation or in the case of the Depositary, the
Depositary's Agent or the Company by reason of any act of God or war or other
circumstance beyond the control of the relevant party, the Depositary, any
Depositary's Agent or the Company shall be prevented or forbidden from doing or
performing any act or thing which the terms of this Depositary Agreement provide
shall be done or performed; nor shall the Depositary, any Depositary's Agent or
the Company incur any liability to any holder of a Depositary Receipt by reason
of any non-performance or delay, caused as aforesaid, in the performance of any
act or thing which the terms of this Depositary Agreement provide shall or may
be done or performed, or by reason of any exercise of, or failure to exercise,
any discretion provided for in this Depositary Agreement except, in case of any
such exercise or failure to exercise discretion not caused as aforesaid, if
caused by the negligence or willful misconduct of the party charged with such
exercise or failure to exercise.
SECTION 8.03 Obligations of the Depositary, the Depositary's Agents and
the Company.
(a) None of the Depositary, any Depositary's Agent or the Company assumes
any obligation or shall be subject to any liability under this Depositary
Agreement to holders of Depositary Receipts except that nothing herein shall
relieve the Depositary, the Depositary's Agent or the Company for liability
arising out of negligence or bad faith on the part of such person or persons in
the performance of such duties as are specifically set forth in this Depositary
Agreement.
(b) The Depositary agrees to comply with all information reporting and
withholding requirements with respect to any applicable law.
(c) None of the Depositary, any Depositary's Agent or the Company shall be
under any obligation to appear in, prosecute or defend any action, suit or other
proceeding with respect to New Common Stock, Depositary Shares or Depositary
Receipts, which in its opinion may involve it in expense or liability, unless
indemnity satisfactory to it against all expense and liability be furnished as
often as may be required.
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(d) None of the Depositary, any Depositary's Agent or the Company shall be
liable for any action or any failure to act by it in reliance upon the advice of
or information from legal counsel, accountants, any person presenting New Common
Stock for deposit, any holder of a Depositary Receipt or any other person
believed by it in good faith to be competent to give such advice or information.
The Depositary, any Depositary's Agent and the Company may each rely and shall
each be protected in acting upon any written notice, request, direction or other
document believed by it to be genuine and to have been signed or presented by
the proper party or parties.
(e) The Depositary and the Depositary's Agents may own and deal in any
class of securities of the Company and its Affiliates and in Depositary Shares.
The Depositary may also act as transfer agent or registrar of any of the
securities of the Company and its Affiliates.
(f) Notwithstanding any other provision of this Depositary Agreement that
may be interpreted to the contrary, neither the Depositary nor any of the
Depositary's Agents is a trustee hereunder. It is intended that neither the
Depositary nor any Depositary's Agent shall be deemed to be an "issuer" of the
securities under the federal securities laws or applicable state securities
laws, it being expressly understood and agreed that the primary purpose of this
Depositary Agreement is to facilitate the implementation of the Call Option and
that the Depositary and the Depositary's Agents are acting only in a ministerial
custodial capacity as Depositary for the Depositary Shares and the Depositary
Share Consideration and have no obligation or right to exercise any discretion
regarding the preservation of any property held on behalf of the Record Holders
of outstanding Depositary Receipts.
(g) Neither the Depositary (or its officers, directors, employees or
agents) nor any Depositary's Agent makes any representation or has any
responsibility as to the validity of the Registration Statement filed by the
Company in connection with the Merger, the New Common Stock, the Depositary
Shares or any instruments referred to therein or herein, or as to the
correctness of any statement made therein or herein; provided, that the
Depositary is responsible for (i) its representations in this Depositary
Agreement and (ii) the validity of any action taken or required to be taken by
the Depositary in connection with this Depositary Agreement.
(h) The Depositary assumes no responsibility for the correctness of the
description of certain provisions of the Depositary Agreement which appears in
the Depositary Receipts. Notwithstanding any other provision herein or set forth
in the Depositary Receipts, the Depositary makes no warranties or
representations as to the validity, genuineness or sufficiency of any New Common
Stock at any time deposited with the Depositary hereunder or of the Depositary
Shares, as to the value of the Depositary Shares or as to any right, title or
interest of the Record Holders of the Depositary Receipts to the Depositary
Shares. The Depositary shall not be accountable for the use or application by
the Company of the Depositary Shares or Depositary Receipts or the proceeds of
either thereof.
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SECTION 8.04 Resignation and Removal of the Depositary, Appointment of
Successor Depositary.
(a) The Depositary may at any time resign as Depositary hereunder by
written notice of its election to do so delivered to the Company, such
resignation to take effect upon the appointment of a successor depositary and
its acceptance of such appointment as hereinafter provided.
(b) The Depositary may at any time be removed by the Company by written
notice of such removal delivered to the Depositary, such removal to take effect
upon the appointment of a successor depositary and its acceptance of such
appointment as hereinafter provided.
(c) In case at any time the Depositary acting hereunder shall resign or be
removed at any time prior to the termination of this Depositary Agreement, the
Company (with the prior written approval of Alpharma from and after a Call
Option Transfer, which shall not be unreasonably withheld or delayed) shall,
within 60 days after the delivery of the notice of resignation or removal, as
the case may be, appoint a successor depositary, which shall be a bank or trust
company having its principal office in the United States of America and having a
combined capital and surplus of at least $500,000,000. If a successor Depositary
shall not have been appointed in 90 days, the resigning Depositary may petition
a court of competent jurisdiction to appoint a successor depositary, and the
Company and Alpharma shall bear equally the expense of any such petition. Every
successor depositary shall execute and deliver to its predecessor and to
Alpharma and the Company an instrument in writing accepting its appointment
hereunder, and thereupon such successor depositary, without any further act or
deed, shall become fully vested with all the rights, powers, duties and
obligations of its predecessor and for all purposes shall be the Depositary
under this Depositary Agreement, and such predecessor, upon payment of all sums
due it and on the written request of the Company, shall promptly execute and
deliver an instrument transferring to such successor all rights and powers of
such predecessor hereunder, shall duly assign, transfer and deliver all rights,
title and interest in the New Common Stock and any moneys or property held
hereunder to such successor, and shall deliver to such successor a list of the
Record Holders of all outstanding Depositary Receipts. Any successor depositary
shall promptly mail notice of its appointment to the Record Holders of
Depositary Receipts.
(d) Any corporation into or with which the Depositary may be merged,
consolidated or converted or any corporation to which the Depositary may
transfer all or substantially all of its shareholder services business shall be
the successor of such Depositary without the execution or filing of any document
or any further act. Such successor depositary may authenticate the Depositary
Receipts either in the name of the predecessor depositary or in the name of the
successor depositary.
SECTION 8.05 Corporate Notices and Reports. The Company agrees that it
will deliver to the Depositary, and the Depositary will, promptly after receipt
thereof, transmit to the Record Holders of Depositary Receipts, in each case at
the address recorded in the Depositary's books, copies of all notices and
reports (including, without limitation, financial statements) required by law,
by the rules of NASDAQ or any national securities exchange upon which the New
Common Stock, the Depositary Shares or the Depositary Receipts are listed or by
the Company's Certificate of Incorporation to be furnished by the Company to
holders of New Common Stock. Such transmission will be at the Company's expense
and the Company will provide the Depositary with such number of copies of such
documents as the Depositary may reasonably request for such purpose. In
addition, the
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Depositary will transmit to the holders of Depositary Receipts (at the Company's
expense) such other documents as may be requested by the Company.
SECTION 8.06 Deposit of New Common Stock by the Company. The Company
shall instruct the Depositary upon the deposit of shares of New Common Stock
hereunder as to whether the shares of New Common Stock so deposited are
registered under the provisions of the 1933 Act, are covered by a then effective
registration statement under the 1933 Act or are restricted. The Depositary
agrees that, consistent with Section 6.01(c) of this Depositary Agreement, upon
the instruction of the Company, it shall incorporate into the Depositary
Receipts evidencing the Depositary Shares to be issued in respect of such New
Common Stock any legends or other stock transfer restrictions deemed appropriate
and requested by the Company.
SECTION 8.07 Indemnification. The Company agrees to indemnify the
Depositary, any Depositary's Agent and any Registrar against, and hold each of
them harmless from, any liability, costs and expenses (including reasonable
attorneys' fees) which may arise out of acts performed or omitted in accordance
with the provisions of this Depositary Agreement (as the same may be amended,
modified or supplemented from time to time) and the Depositary Receipts (i) by
the Depositary, any Registrar or any of their respective agents (including any
Depositary's Agent), except for any liability arising out of negligence or bad
faith on the part of any such person or persons, or (ii) by the Company or any
of its respective agents (other than the Depositary, the Depositary's Agents,
the Registrar, if any, or any of their agents).
SECTION 8.08 Charges and Expenses. No charges and expenses of the
Depositary or any Depositary's Agent hereunder, or those of any Registrar, shall
be payable by any person other than the Company, except for any taxes and other
governmental charges and except as provided in this Section 8.08. If the
Depositary incurs charges or expenses at the election of a holder for which it
is not otherwise liable hereunder, such holder will be liable for such charges
and expenses. All other charges and expenses of the Depositary and any
Depositary's Agent hereunder and of any Registrar (including, in each case, fees
and expenses of counsel) incident to the performance of their respective
obligations hereunder will be paid upon consultation and agreement between the
Depositary and the Company as to the amount and nature of such charges and
expenses. The Depositary shall present its statement for charges and expenses to
the Company once every three months or at such other intervals as the Company
and the Depositary may agree.
SECTION 8.09 Consequential Damages. No party to this Depositary Agreement
shall be liable to the other parties for consequential damages under any
provision of this Depositary Agreement or any consequential damages arising out
of any act or failure to act hereunder.
ARTICLE IX
AMENDMENT AND TERMINATION
SECTION 9.01 Amendment. The form of the Depositary Receipts and any
provision of this Depositary Agreement may at any time and from time to time be
amended by written agreement between Alpharma, the Company and the Depositary in
any respect which they may deem necessary or desirable; provided that prior to
the Option Determination Date, no such amendment or waiver by the Company shall
be effective without the approval of a majority of the Non-Alpharma Directors;
provided, further, that if a Call Option Transfer to Alpharma does not occur on
or before the ninetieth day
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following the Effective Time of the Merger, Alpharma shall reasonably cooperate
with the Company and the Depositary in adopting any amendment to this Agreement
that the Company and the Depositary may request. Any amendment which shall
impose any fees, taxes or charges (other than taxes and other governmental
charges, fees and telegram, telex or delivery expenses payable by owners of
Depositary Shares) shall not become effective as to outstanding Depositary
Receipts until the expiration of three months after notice of such amendment
shall have been given to the Record Holders of outstanding Depositary Receipts.
If any such amendment shall materially and adversely alter the rights of holders
of Depositary Receipts, it shall not become effective as to outstanding
Depositary Receipts until the Record Holders of Depositary Receipts representing
not less than a majority of the number of Depositary Shares then outstanding
shall have consented thereto in writing or by voting therefor in person or by
proxy at a meeting held on notice for such purpose or any adjournment or
adjournments thereof. Every holder of an outstanding Depositary Receipt at the
time any such amendment so becomes effective shall be deemed, by continuing to
hold such Depositary Receipt, to consent and agree to such amendment and to be
bound by this Depositary Agreement as amended thereby. In addition, in no event
shall any amendment obligate or empower the Depositary to act as a trustee with
respect to Depositary Shares or cash held by it on behalf of the Record Holders
of outstanding Depositary Receipts or otherwise result in the Depositary being
treated as other than the mere custodian of the New Common Stock on behalf of
such Record Holders.
SECTION 9.02 Termination. This Depositary Agreement shall be of no
further force and effect from and after the earliest of:
(i) September 30, 1999 if the Effective Time has not occurred prior to
or on such date;
(ii) the later of (A) 24 months after the Option Determination Date
and (B) the date on which all securities of the Company convertible into
Depositary Shares of the Company, and any rights, options or warrants to
acquire Depositary Shares outstanding on the Option Determination Date
cease to be convertible into or exercisable or exchangeable for the
Depositary Share Consideration; and
(iii) the date that no Depositary Receipts remain outstanding.
Upon the termination of this Depositary Agreement, the Company shall be
discharged from all obligations under this Depositary Agreement except for its
obligations to the Depositary, any Depositary's Agent and any Registrar under
Sections 8.07 and 8.08.
ARTICLE X
MISCELLANEOUS
SECTION 10.01 Counterparts. This Depositary Agreement may be executed in
any number of counterparts, and by each of the parties hereto on separate
counterparts, each of which counterparts, when so executed and delivered, shall
be deemed an original, but all such counterparts taken together shall constitute
one and the same instrument. Copies of this Depositary Agreement shall be filed
with the Depositary and the Depositary's Agents and shall be open to inspection
during business hours at the Depositary's Corporate Trust Office and the
respective offices of the Depositary's Agents, if any, by any holder of a
Depositary Receipt.
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SECTION 10.02 Exclusive Benefits of Parties. This Depositary Agreement is
for the exclusive benefit of the Depositary, Alpharma and the Company, and their
respective successors hereunder, and shall not be deemed to give any legal or
equitable right, remedy or claim to any other person whatsoever.
SECTION 10.03 Invalidity of Provisions. In case any one or more of the
provisions contained in this Depositary Agreement or in the Depositary Receipts
should be or become invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein or therein shall in no wise be affected, prejudiced or disturbed thereby.
SECTION 10.04 Notices.
(a) All notices, requests, demands, claims, and other communications to any
party hereunder or pursuant to the terms hereof shall be in writing. Any such
notice, request, demand, claim, or other communication to any party hereunder
shall be deemed duly delivered three Business Days after it is sent by
registered or certified mail, return receipt requested, postage prepaid, or one
Business Day after it is sent via a reputable nationwide overnight courier
service, in each case to the intended recipient as set forth below:
if to Alpharma, to:
Alpharma USPD Inc.
7205 Windsor Blvd.
Baltimore, MD 21244
Attention: President
with a copy to:
Alpharma USPD Inc.
One Executive Drive
Fort Lee, New Jersey 07024
Attention: Chief Legal Officer
If to the Company, to:
Ascent Pediatrics, Inc.
187 Ballardvale Street, Suite B125
Wilmington, Massachusetts 01887
Attention: Alan R. Fox
with a copy to:
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attention: David E. Redlick, Esq.
If to the Depositary, to:
State Street Bank and Trust Company
c/o EquiServe, L.P.
150 Royall Street
Canton, MA 02021
Any party may give any such notice, request, demand, claim, or other
communication using any other means (including personal delivery, expedited
courier, messenger service, telecopy, telex, ordinary mail, or electronic mail),
but no such notice, request, demand,
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claim, or other communication shall be deemed to have been duly given unless and
until it actually is received by the party for whom it is intended. Any party
may change the address to which notices, requests, demands, claims, and other
communications hereunder are to be delivered by giving the other parties notice
in the manner herein set forth.
(b) Any and all notices given to any Record Holder of a Depositary Receipt
hereunder or under the Depositary Receipts shall be in writing and shall be
deemed to have been duly given if personally delivered or sent by mail or by
telegram or telex confirmed by letter, addressed to such holder at the address
of such Record Holder as it appears on the books of the Registrar, or, if such
holder shall have filed with the Registrar a written request that notices
intended for such holder be mailed to some other address, at the address
designated in such request. Delivery of a notice sent by mail or by telegram or
telex shall be deemed to be effected at the time when a duly addressed letter
containing the same notice (or a confirmation thereof in the case of a telegram
or telex message) is deposited, postage prepaid, in a post-office letter box.
The Depositary or the Company may, however, act upon any telegram or telex
message received by it from any holder of a Depositary Receipt, notwithstanding
that such telegram or telex message shall not subsequently be confirmed by
letter as aforesaid.
SECTION 10.05 Depositary's Agents. The Depositary may from time to time
appoint Depositary's Agents (which may include the Company) for the purposes of
this Depositary Agreement and may at any time appoint additional Depositary's
Agents and vary or terminate the appointment of such Depositary's Agents;
provided that no such Depositary Agent may hold the New Common Stock at any
time, other than EquiServe Limited Partnership, a Delaware limited partnership,
which may hold the New Common Stock as service agent for the Depositary. The
Depositary will notify the Company of any such action.
SECTION 10.06 Holders of Depositary Receipts are Parties. The holders of
Depositary Receipts from time to time shall be parties to this Depositary
Agreement and shall be bound by all of the terms and conditions hereof and of
the Depositary Receipts by acceptance thereof.
SECTION 10.07 Governing Law. This Depositary Agreement and the Depositary
Receipts and all rights hereunder and thereunder and provisions hereof and
thereof shall be governed by and construed in accordance with the laws of the
State of Delaware, without giving effect to the principles of conflicts of law
thereof.
SECTION 10.08 Headings. The headings of articles and sections in this
Depositary Agreement and in the form of the Depositary Receipt set forth in
Exhibit A hereto have been inserted for convenience only and are not to be
regarded as a part of this Depositary Agreement or to have any bearing upon the
meaning or interpretation of any provision contained herein or in the Depositary
Receipts.
SECTION 10.09 Successors and Assigns. The provisions of this Depositary
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns; provided that no party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Depositary Agreement without the consent of the other party hereto.
Notwithstanding the foregoing, (i) the Company may transfer the Call Option to
and assign, delegate or otherwise transfer all of its rights and obligations as
the holder of the Call Option under this Depositary Agreement to Alpharma in
accordance with Sections 5.2(n) and 7.2 of the Master Agreement, and (ii)
Alpharma may assign, delegate or otherwise transfer all of its rights and
obligations under this
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Agreement to a transferee that acquires all or substantially all of the
business, assets or capital stock of Alpharma, provided that (a) Alpharma also
assigns, delegates or otherwise transfers all or its rights and obligations
under the Master Agreement to such transferee and (b) such transferee agrees in
writing to be bound by and subject to the provisions of this Depositary
Agreement and the Master Agreement.
[REMAINDER OF PAGE LEFT BLANK.]
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IN WITNESS WHEREOF, the parties hereto have duly executed this Depositary
Agreement as of the day and year first above set forth and all holders of
Depositary Receipts shall become parties hereto upon acceptance by them of
Depositary Receipts issued in accordance with the terms hereof.
<TABLE>
<S> <C>
Attest: ASCENT PEDIATRICS, INC.
/s/ JOHN G. BERNARDI By: /s/ ALAN R. FOX
- ------------------------------------------------ -------------------------------------------
Secretary Title: President
Attest: ALPHARMA USPD INC.
By: /s/ THOMAS L. ANDERSON
- ------------------------------------------------ -------------------------------------------
Secretary Title: President
Attest: STATE STREET BANK AND TRUST COMPANY
/s/ DAVID M. ELWOOD By: /s/ CHARLES V. ROSSI
- ------------------------------------------------ -------------------------------------------
Vice President Title: Vice President
</TABLE>
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EXHIBIT A
FORM OF DEPOSITARY RECEIPT
DEPOSITARY RECEIPT
NUMBER FOR NUMBER
DEPOSITARY SHARES,
EACH REPRESENTING ONE SHARE OF COMMON STOCK,
$.00004 PAR VALUE PER SHARE,
OF
ASCENT PEDIATRICS, INC.
SUBJECT TO THE CALL OPTION EXERCISABLE PURSUANT TO
THE DEPOSITARY AGREEMENT,
SEE BELOW AND REVERSE.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN BOSTON, NEW YORK,
CHICAGO OR LOS ANGELES
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP
State Street Bank and Trust Company, a Massachusetts trust company, as
Depositary (the "Depositary"), hereby certifies that
<TABLE>
<S> <C>
- ------------------------------------------------ ------------------------------------
is the registered owner of Depositary Shares
- ------------------------------------------------
By Depositary and Registrar
- ------------------------------------------------
Authorized Signature
</TABLE>
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Each Depositary Share ("Depositary Shares") represents one share (a
"Share") of Common Stock, $.00004 par value per share, (the "Common Stock") of
Ascent Pediatrics, Inc., a Delaware corporation (the "Company") (i) subject to
an option under the Depositary Agreement dated as of February 19, 1999 (the
"Depositary Agreement"), among the Company, Alpharma USPD, Inc., a Maryland
corporation ("Alpharma"), and the Depositary to purchase all shares of Common
Stock held by the Depositary at any time during the Call Period (as defined in
the Depositary Agreement) (the "Call Option") at the Option Exercise Price
determined in accordance with the Depository Agreement (the "Option Exercise
Price"), and (ii) deposited with the Depositary. Subject to the terms and
entitled to the benefits of the Depositary Agreement, each owner of a Depositary
Share is entitled proportionately to all the powers, preferences and rights and
the qualifications, limitations or restrictions of such preferences and/or
rights of the Common Stock represented thereby, including dividends and voting
rights as set forth in the Amended and Restated Certificate of Incorporation and
the By-Laws of the Company, as amended from time to time (copies of which are on
file with the Depositary). If the Call Option is exercised, the holders of
Depositary Shares will be entitled to receive the Option Exercise Price paid in
respect thereof. By accepting this Depositary Receipt, the holder hereof agrees
to be bound by all of the terms and conditions of the Depositary Agreement. This
Depositary Receipt shall not be valid or obligatory for any purpose or entitled
to any benefits under the Depositary Agreement unless it shall have been
executed by the Depositary by the manual signature of a duly authorized officer
or, if executed in facsimile by the Depositary, countersigned by a Registrar in
respect of the Depositary Receipts by the manual signature of a duly authorized
officer thereof.
The Company will furnish without charge to each holder of a Depositary
Receipt who so requests a copy of the Depositary Agreement, such request to be
addressed to the Depositary named on the face of this receipt.
The following receipt abbreviations, when used in the instructions on the
face of this receipt shall be construed as though they were written out in full
according to applicable laws or regulations
<TABLE>
<S> <C> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT ------ Custodian ------
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ------------------------
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell(s), assign(s) and transfer(s)
unto
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE. PLEASE
INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Depositary Shares represented by the within Depositary Receipt, and does (do)
hereby irrevocably constitute and appoint Attorney
------------------------------
- --------------------------------------------------------------------------------
A-72
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to transfer such Depositary Shares on the books of the within named
Depositary, with full power of substitution in the premises.
Dated
X
------------------------------------------NOTICE:
THE SIGNATURE APPEARING ABOVE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THIS DEPOSITARY RECEIPT IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
A-73
<PAGE> 263
EXHIBIT C
CERTIFICATE OF MERGER
OF
BIRD MERGER CORPORATION
(A DELAWARE CORPORATION)
INTO
ASCENT PEDIATRICS, INC.
(A DELAWARE CORPORATION)
Ascent Pediatrics, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, does hereby
certify:
FIRST: That the name and state of incorporation of each of the
constituent corporations of the merger is as follows:
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION
---- ----------------------
<S> <C>
Ascent Pediatrics, Inc. Delaware
Bird Merger Corporation Delaware
</TABLE>
SECOND: That an Agreement and Plan of Merger between the parties to
the merger has been approved, adopted, certified, executed and acknowledged
by each of the constituent corporations in accordance with the requirements
of Subsection (c) of Section 251 of the General Corporation Law of the
State of Delaware.
THIRD: That the name of the surviving corporation of the merger is
Ascent Pediatrics, Inc., a Delaware Corporation.
FOURTH: That the amendments or changes in the Restated Certificate of
Incorporation of Ascent Pediatrics, Inc., a Delaware corporation, which is
the surviving corporation, that are to be effected by the merger are as
follows:
That the following Article FOURTEENTH be and hereby is inserted immediately
following Article THIRTEENTH of the Restated Certificate of Incorporation of the
surviving corporation:
"FOURTEENTH. The Board of Directors of the Corporation may discuss,
consider and take any actions relating to any of the following matters,
without the participation or consent of any Alpharma Director (as defined
below), upon the approval of a majority of the Non-Alpharma Directors (as
defined below) of the Corporation then in office:
(a) approve any amendment or waiver by the Corporation of the form
of Depositary Receipt (as defined in the Depositary Agreement dated as
of February 16, 1999 (the "Depositary Agreement") by and among the
Corporation, Alpharma USPD, Inc., a Delaware corporation ("Alpharma"),
and State Street Bank and Trust Company) or any provision of the
Depositary Agreement pursuant to Section 9.01 of the Depositary
Agreement;
(b) consent to any waiver or exception to Section 6.1 of the Master
Agreement dated as of February 16, 1999 by and between the Corporation,
A-74
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Alpharma and Alpharma, Inc., a Delaware corporation ("Parent"), (the
"Master Agreement");
(c) exclude any Alpharma Director from access to any documents or
other materials provided to the other members of the Board of Directors
of the Corporation which relate to any matter with respect to which the
Corporation and Alpharma have a potential conflict of interest if
counsel to the Corporation advises the Non-Alpharma Directors that such
exclusion is appropriate given such potential conflict of interest;
(d) approve any amendment or waiver by the Corporation of any
provision of the Master Agreement pursuant to Section 8.5(a) thereof; or
(e) make any other determination under the terms of the Depositary
Agreement, the Master Agreement or the Loan Agreement dated as of
February 16, 1999 (the "Loan Agreement") by and among the Corporation,
Alpharma and Parent, or that otherwise relates to any matter with
respect to which the Corporation and Alpharma have a potential conflict
of interest if counsel to the Corporation has advised the Corporation to
such effect.
Any act or decision done or made by a majority of the Non-Alpharma
Directors pursuant to this Article FOURTEENTH shall be regarded as the act
of the Board of Directors of the Corporation. For purposes of this Article
FOURTEENTH, (i) the "Non-Alpharma Directors" shall mean all members of the
Board of Directors of the Corporation at any time in office, excluding any
Alpharma Director then in office, and (ii) the "Alpharma Director" shall
mean the member of the Board of Directors of the Corporation nominated by
Alpharma and appointed to the Board of Directors pursuant to Section 6.5 of
the Loan Agreement and any successor to or replacement of such director
then in office who was elected to the Board of Directors upon the
nomination of Alpharma. This Article FOURTEENTH shall terminate and be of
no further force or effect from and after the Option Expiration Date (as
defined in the Depositary Agreement).
FIFTEENTH. The Board of Directors of the Corporation may not, without
the consent of the Alpharma Director then in office, authorize the issuance
of any securities of the Company convertible into any equity security of
the Company (including Depositary Shares (as defined in the Depositary
Agreement)), or any rights, options or warrants to acquire any equity
security of the Company, which, following the Option Closing (as defined in
the Depositary Agreement) (whether or not convertible, vested, exercisable
or exchangeable on the Option Closing Date (as defined in the Depositary
Agreement)), are not convertible into or exercisable or exchangeable solely
for the cash that the holders thereof would have received had they
converted, exercised or exchanged such convertible securities, rights,
options and warrants for such equity security of the Company immediately
prior to the Option Closing Date. This Article FIFTEENTH shall terminate
and be of no further force or effect from and after the Option Expiration
Date."
FIFTH: That the executed Agreement and Plan of Merger is on file at
the principal place of business of the surviving corporation. The address
of said principal place of business is 187 Ballardvale Street, Suite B-125,
Wilmington, Massachusetts 01887.
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<PAGE> 265
SIXTH: That a copy of the Agreement and Plan of Merger will be
furnished by the surviving corporation upon request and without cost to any
stockholder of any constituent corporation.
SEVENTH: That this Certificate of Merger shall be effective upon
filing.
IN WITNESS WHEREOF, Ascent Pediatrics, Inc. has caused this Certificate to
be executed by its Chief Executive Officer this day of , 1999.
ASCENT PEDIATRICS, INC.
(a Delaware corporation)
By:
--------------------------------
Alan R. Fox
Chief Executive Officer
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<PAGE> 266
ANNEX B
ASCENT PEDIATRICS, INC.
MAXIMUM $40,000,000
7.5% CONVERTIBLE SUBORDINATED NOTES DUE 2005
LOAN AGREEMENT
DATE: FEBRUARY 16, 1999
B-1
<PAGE> 267
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE....... B-5
1.1 DEFINITIONS.......................................... B-5
1.2 RULES OF CONSTRUCTION................................ B-12
ARTICLE II AMOUNT AND TERMS OF SECURITIES.................. B-12
2.1 COMMITMENT TO LEND; LOANS............................ B-12
2.2 EVIDENCE OF DEBT..................................... B-13
2.3 MAKING OF LOANS...................................... B-13
2.4 INTEREST AND PRINCIPAL PAYMENTS...................... B-14
2.5 MANDATORY PREPAYMENT UPON CHANGE IN CONTROL.......... B-14
2.6 LENDER DISCRETIONARY BORROWING UNDER NOTE............ B-15
2.7 OPTIONAL PREPAYMENT.................................. B-15
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE
COMPANY................................................... B-15
3.1 ORGANIZATION AND EXISTENCE, ETC...................... B-15
3.2 SUBSIDIARIES......................................... B-15
3.3 CAPITALIZATION....................................... B-16
3.4 AUTHORIZATION; BINDING OBLIGATIONS................... B-16
3.5 COMPLIANCE WITH INSTRUMENTS, ETC..................... B-17
3.6 LITIGATION........................................... B-17
3.7 FINANCIAL STATEMENTS; TAXES.......................... B-17
3.8 OFFERING............................................. B-18
3.9 PERMITS; GOVERNMENTAL AND OTHER APPROVALS............ B-18
3.10 SALES REPRESENTATIVES, CUSTOMERS AND KEY EMPLOYEES... B-18
3.11 INTELLECTUAL PROPERTY................................ B-19
3.12 FORM 10-K AND 10-Q................................... B-20
3.13 REGULATORY STATUS.................................... B-20
3.14 REGISTRATION RIGHTS.................................. B-20
3.15 NO RELATIONSHIP BETWEEN PARTIES...................... B-20
3.16 ORDINARY COURSE...................................... B-20
3.17 NO FINDERS........................................... B-20
ARTICLE IV CONDITIONS OF OBLIGATIONS OF THE LENDER......... B-21
4.1 CONDITIONS TO LENDER'S OBLIGATIONS ON THE FIRST LOAN
DATE................................................. B-21
4.2 CONDITIONS TO LENDER'S OBLIGATIONS TO MAKE THE FIRST
UNRESTRICTED LOAN.................................... B-22
4.3 CONDITIONS PRECEDENT TO EACH LOAN.................... B-23
4.4 COOPERATION.......................................... B-23
ARTICLE V CONDITIONS OF OBLIGATIONS OF THE COMPANY......... B-23
5.1 COMPANY'S OBLIGATION................................. B-23
</TABLE>
B-2
<PAGE> 268
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
5.2 COOPERATION.......................................... B-24
ARTICLE VI AFFIRMATIVE COVENANTS OF THE COMPANY............ B-24
6.1 REPORTS.............................................. B-24
6.2 ACCOUNTS AND RECORDS................................. B-25
6.3 INSPECTION........................................... B-25
6.4 INDEPENDENT ACCOUNTANTS.............................. B-25
6.5 BOARD MEMBERS AND MEETINGS........................... B-25
6.6 USE OF PROCEEDS...................................... B-26
6.7 INSURANCE............................................ B-26
6.8 RESEARCH AND DEVELOPMENT............................. B-26
6.9 FURTHER ASSURANCES................................... B-26
6.10 TERMINATION.......................................... B-26
ARTICLE VII NEGATIVE COVENANTS............................. B-27
7.1 BORROWED MONEY INDEBTEDNESS.......................... B-27
7.2 LIENS................................................ B-27
7.3 CONTINGENT LIABILITIES............................... B-28
7.4 MERGERS, CONSOLIDATIONS AND DISPOSITIONS AND
ACQUISITIONS OF ASSETS............................... B-28
7.5 REDEMPTION, DIVIDENDS AND DISTRIBUTIONS.............. B-28
7.6 NATURE OF BUSINESS................................... B-28
7.7 TRANSACTIONS WITH RELATED PARTIES.................... B-28
7.8 LOANS AND INVESTMENTS................................ B-29
7.9 ORGANIZATIONAL DOCUMENTS............................. B-29
7.10 LEASE EXPENSES; PURCHASE MONEY INDEBTEDNESS.......... B-29
7.11 SALE/LEASEBACKS...................................... B-29
7.12 ISSUANCE OF STOCK.................................... B-29
7.13 SUBSIDIARIES......................................... B-29
7.14 TERMINATION.......................................... B-30
ARTICLE VIII DEFAULTS AND REMEDIES......................... B-30
8.1 EVENTS OF DEFAULT.................................... B-30
8.2 ACCELERATION......................................... B-31
8.3 OTHER REMEDIES....................................... B-31
8.4 WAIVER OF PAST DEFAULTS.............................. B-31
ARTICLE IX CONVERSION...................................... B-31
9.1 RIGHT OF CONVERSION.................................. B-31
9.2 CONVERSION PRICE..................................... B-31
9.3 EXERCISE OF CONVERSION RIGHT......................... B-32
9.4 PROVISIONS IN CASE OF MERGER, ETC.................... B-32
9.5 TAXES ON CONVERSION.................................. B-32
9.6 COMPANY TO PROVIDE STOCK............................. B-32
</TABLE>
B-3
<PAGE> 269
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
9.7 REQUIRED ANTITRUST APPROVAL.......................... B-33
ARTICLE X SUBORDINATION.................................... B-33
10.1 AGREEMENT TO SUBORDINATE............................. B-33
ARTICLE XI RESTRICTIONS ON TRANSFER........................ B-33
11.1 SECURITIES LAWS RESTRICTIONS ON TRANSFER............. B-33
11.2 RESTRICTIVE LEGEND................................... B-34
11.3 REGISTRATION RIGHTS AGREEMENT........................ B-34
11.4 ADDITIONAL RESTRICTIONS.............................. B-34
ARTICLE XII AMENDMENT, SUPPLEMENT AND WAIVER............... B-35
12.1 WITH CONSENT OF HOLDERS OF THE NOTE.................. B-35
ARTICLE XIII MISCELLANEOUS................................. B-35
13.1 NOTICES.............................................. B-35
13.2 DUPLICATE ORIGINALS.................................. B-35
13.3 GOVERNING LAW........................................ B-35
13.4 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS........ B-37
13.5 SUCCESSORS AND ASSIGNS............................... B-37
13.6 SEPARABILITY......................................... B-37
13.7 HEADINGS, ETC........................................ B-37
13.8 CONFIDENTIALITY...................................... B-37
13.9 PARENT GUARANTEE..................................... B-37
</TABLE>
B-4
<PAGE> 270
LOAN AGREEMENT (the "Agreement") dated as of February 16, 1999 among ASCENT
PEDIATRICS, Inc., a Delaware corporation (the "Company"), Alpharma USPD Inc., a
Maryland corporation (the "Lender"), and Alpharma Inc., a Delaware corporation
(the "Parent").
WHEREAS, the Lender has agreed to loan to the Company an aggregate of up to
$40 million from time to time upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises, it is agreed by and among
the parties hereto as follows:
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
1.1 Definitions.
"Affiliate" shall have the meaning ascribed to it in Rule 405 promulgated
under the Securities Act.
"Alpharma Director" has the meaning set forth in Section 6.5(a) of this
Agreement.
"Ancillary Agreements" shall mean the Depositary Agreement, the Master
Agreement, the Merger Agreement and the Registration Rights Agreement.
"Approved Accounting Firm" shall have the meaning set forth in Section
6.1(a) of this Agreement.
"Bankruptcy Law" means Title 11, U.S. Code or any similar Federal or State
law for the relief of debtors. The term "Custodian" means any receiver trustee,
assignee, liquidator or similar official under any Bankruptcy Law.
"Board of Directors" means the Board of Directors of the Company or any
committee of the Board authorized to act for it hereunder.
"Borrowed Money Indebtedness" means, with respect to any Person, without
duplication:
(a) all obligations of such Person for borrowed money;
(b) all obligations of such Person evidenced by bonds, debentures,
notes or similar instruments;
(c) all obligations of such Person under conditional sale or other
title retention agreements relating to Property purchased by such Person;
(d) all obligations of such Person issued or assumed as the deferred
purchase price of Property or services (excluding obligations of such
Person to creditors for raw materials, inventory, services and supplies and
deferred payment for services to employees and former employees incurred in
the ordinary course of such Person's business);
(e) all capital lease obligations;
(f) all obligations of others secured by any Lien on Property or
assets owned or acquired by such Person, whether or not the obligations
secured thereby have been assumed;
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<PAGE> 271
(g) all outstanding letters of credit, surety bonds and currency swap
or similar agreements issued for the account of such Person; and
(h) all guarantees of such Person for obligations of the type
described above.
"Business Day" means any day which is neither a Saturday nor a Sunday nor a
legal holiday on which banks are authorized or required to be closed in Boston,
Massachusetts, New York, New York or in any other city in which the Depositary's
Office (as defined in the Depositary Agreement) is located.
"Call Option" has the meaning set forth in the Depositary Agreement.
"Capital Stock" means any and all shares, interests, participations or
other equivalents of or interests in (however designated) equity of the Company,
including any preferred stock, but excluding any debt securities convertible
into such equity prior to such conversion.
"Change in Control" of the Company means:
(a) the acquisition by any Person or "group" within the meaning of
Section 13(d)(3) or 14(d)(2) of the Exchange Act (excluding, for this
purpose, the Company or its Subsidiaries, any employee benefit plan of the
Company or its Subsidiaries which acquires beneficial ownership of voting
securities of the Company, or the Lender or its Affiliates) of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange
Act) of more than 50% of the aggregate voting power of all classes of
outstanding Voting Capital Stock that are then outstanding or that are
issuable upon the conversion or exercise of convertible securities,
options, warrants or rights of the Company that are then outstanding;
provided that any voting securities acquired directly from the Company by
an underwriter of the Company as part of an underwritten public offering of
Capital Stock of the Company shall not be deemed to be beneficially owned
by such underwriter for purposes of determining whether a Change in Control
has occurred;
(b) Persons who, as of the Closing Date constitute all of the
Non-Alpharma Directors (the "Non-Alpharma Incumbent Directors") cease for
any reason to constitute at least a majority of the Non-Alpharma Directors
then in office, provided that any Person becoming a director subsequent to
the Closing Date whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least a majority of
the Non-Alpharma Incumbent Directors shall be considered as though such
Person were one of the Non-Alpharma Incumbent Directors as of the Closing
Date, provided, however, that there shall be excluded from this clause (b)
any individual whose initial assumption of office occurred as a result of
an actual or threatened election contest with respect to the election or
removal of directors or other actual or threatened election contest with
respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents, by or on behalf of a Person
other than the Board of Directors;
(c) the consummation of a reorganization, merger or consolidation
involving the Company, if the stockholders of the Company beneficially
owning 100% of the aggregate voting power of all classes of Voting Capital
Stock that are then outstanding or that are issuable upon conversion or
exercise of convertible securities, options, warrants or rights that are
then outstanding immediately prior to such reorganization, merger, or
consolidation do not, immediately thereafter, beneficially own more than
50% of the aggregate voting power of all classes of Voting Capital Stock
that are then
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<PAGE> 272
outstanding or issuable upon conversion or exercise of convertible
securities, options, warrants or rights that are then outstanding; or
(d) a liquidation or dissolution of the Company (other than pursuant
to the United States Bankruptcy Code) or the conveyance, transfer or
leasing of all or substantially all of the assets of the Company to any
Person.
"Closing Date" has the meaning set forth in the Master Agreement.
"Common Stock" means (i) prior to the Effective Time, the Old Common Stock,
and (ii) at and after the Effective Time, the New Common Stock.
"Company" means the party named as such above until a successor replaces it
pursuant to the applicable provision hereof and thereafter means the successor
to such party.
"Company Intellectual Property" has the meaning set forth in Section
3.11(a) of this Agreement.
"Conversion Date" has the meaning set forth in Section 9.3 of this
Agreement.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default (as defined in Article VIII of this
Agreement).
"Depositary Agreement" means the Depositary Agreement dated as of the date
hereof by and among the Company, the Lender and State Street Bank and Trust
Company, as Depositary.
"Depositary Share" has the meaning set forth in the Merger Agreement.
"Derivative Securities" has the meaning set forth in Section 3.3(a) of this
Agreement.
"Effective Time" has the meaning set forth in the Merger Agreement.
"Encumbrance" has the meaning set forth in Section 3.4(a) of this
Agreement.
"Event of Default" has the meaning set forth in Section 8.1 of this
Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FDA" means the United States Food and Drug Administration.
"Financial Statements" has the meaning set forth in Section 3.7(a) of this
Agreement.
"First Loan" has the meaning set forth in Section 2.3 of this Agreement.
"First Loan Date" has the meaning set forth in Section 2.3 of this
Agreement.
"GAAP" means U.S. generally accepted accounting principles as in effect
from time to time.
"Historical Financial Statements" has the meaning set forth in Section
3.7(a) of this Agreement.
"Holder" means the Lender and any other Person to whom all or a portion of
the Note is transferred in accordance with Article XI of this Agreement.
"HSR Act" means the Hart Scott Rodino Antitrust Improvements Act of 1976,
as amended.
B-7
<PAGE> 273
"Impairment Event" means (i) the existence of a Negative Equity Position,
provided, however, that notwithstanding the requirements of GAAP, any amounts
outstanding under the 8% Subordinated Notes and any amounts outstanding under
any debt securities issued upon conversion or exchange of the Series G Preferred
shall be considered to be equity for purposes of this clause only; (ii) the
occurrence of an event which would make it reasonably probable that the
Company's operating income as defined by GAAP for the 2001 fiscal year will be
less than the amount set forth on Schedule I hereto; or (iii) the occurrence of
an event described in Section 8.1(i) or (j) hereof.
"Indebtedness" means and includes:
(a) all items which in accordance with GAAP would be included on the
liability side of a balance sheet on the date as of which Indebtedness is
to be determined (excluding capital stock, surplus reserves and deferred
credits);
(b) all guaranties, letter of credit, contingent reimbursement
obligations and other contingent obligations in respect of, or any
obligations to purchase or otherwise acquire, indebtedness of others; and
(c) all indebtedness secured by any Lien existing on any interest of
the Person with respect to which indebtedness is being determined in
Property owned subject to such Lien whether or not the indebtedness secured
thereby shall been assumed.
"Intellectual Property" has the meaning set forth in Section 3.11(a) of
this Agreement.
"Investment" means the purchase or other acquisition of any Indebtedness
of, or the making of any loan, advance or capital contribution to, or the
incurring of any liability, contingent or otherwise, in respect of the
Indebtedness of, any Person.
"Lien" means any mortgage, pledge, charge, encumbrance, security interest,
collateral assignment or other lien or restriction of any kind, whether based on
common law, constitutional provision, statute or contract, and shall include
reservations, exceptions, encroachments, easements, rights of way, covenants,
conditions, restrictions and other title exceptions.
"Loan" means any borrowing by the Company from the Lender of up to a
maximum principal amount of $40,000,000 pursuant to Section 2.1 and the other
terms and conditions of this Agreement.
"Loan Date" has the meaning set forth in Section 2.3 of this Agreement.
"Master Agreement" means the Master Agreement dated as of the date hereof
by and between the Company and the Lender.
"Material Adverse Effect" means, when used in connection with the Company,
any development, change or effect that is materially adverse to the business,
Properties (including, without limitation, Intellectual Property), assets, net
worth, financial condition, results of operations or future prospects
(including, without limitation, future equity value) of the Company and its
Subsidiaries taken as a whole.
"May 1998 Securities Purchase Agreement" means the Series G Securities
Purchase Agreement dated as of May 13, 1998 by and among the Company and the
Purchasers named in Schedule I thereto.
"Merger" means the merger of Merger Sub with and into the Company pursuant
to the Merger Agreement.
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"Merger Agreement" means the Agreement and Plan of Merger dated as of the
date hereof by and between the Company and Bird Merger Corporation, a Delaware
corporation and wholly-owned subsidiary of the Company ("Merger Sub").
"Merger Sub" has the meaning set forth in the definition of Merger
Agreement.
"Negative Equity Position" means the existence of a stockholders' deficit
on the Company's balance sheet, determined in accordance with GAAP, as of the
last day of any monthly fiscal period.
"New Common Stock" has the meaning set forth in the Depositary Agreement.
"Non-Alpharma Directors" has the meaning set forth in the Depositary
Agreement.
"Note" means the note to be issued by the Company to the Lender pursuant to
Section 2.2(a) of this Agreement, substantially in the form attached hereto as
Exhibit A, evidencing the maximum principal amount of the Loans; provided
however, that in the event that the Lender exchanges all or a portion of the
Note for one or more Notes in accordance with Section 2.2(c) of this Agreement
or transfer all or a portion of the Note in accordance with Article XI, all
references to the Note in this Agreement shall be deemed to include the Notes
issued by the Company upon such exchange or transfer.
"Note Conversion Shares" has the meaning set forth in Section 3.4(b) of
this Agreement.
"Notice of Borrowing" has the meaning set forth in Section 2.3 of this
Agreement.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of the Company.
"Old Common Stock" has the meaning set forth in the Depositary Agreement.
"Option Determination Date" has the meaning set forth in the Depositary
Agreement.
"Option Expiration Date" has the meaning set forth in the Depositary
Agreement.
"Permitted Investments" means:
(a) readily marketable securities issued or fully guaranteed by the
United States of America with maturities of not more than one year;
(b) commercial paper rated "Prime 1" by Moody's Investors Services,
Inc. or "A-1" by Standard and Poor's Rating Services with maturities of not
more than 180 days;
(c) certificates of deposit or repurchase obligations issued by any
bank organized under the laws of the United States of America or any state
thereof having capital surplus of at least $100,000,000 or by any other
financial institution acceptable to the Requisite Holders, all of the
foregoing not having a maturity of more than one year from the date of
issuance thereof; and
(d) other Investments not exceeding, in the aggregate, $50,000 in any
fiscal year.
"Permitted Liens" means each of the following:
(a) artisans' or mechanics' Liens arising in the ordinary course of
business, and Liens for taxes, but only to the extent that payment thereof
shall not at the time be due or if due, the payment thereof is being
diligently contested in good faith and adequate reserves computed in
accordance with GAAP have been set aside therefor;
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(b) Liens in effect on the First Loan Date and disclosed to the Lender
in the Financial Statements, provided that neither the Borrowed Money
Indebtedness secured thereby nor the Property covered thereby shall
increase after the First Loan Date without the prior written consent of the
Requisite Holders, provided that, for purposes of this clause (b), the
accrual of interest on such Borrowed Money Indebtedness, so long as it is
not converted to principal, shall not be deemed to increase such Borrowed
Money Indebtedness;
(c) normal encumbrances and restrictions on title which do not secure
Borrowed Money Indebtedness and which do not have a material adverse affect
on the value or utility of the applicable Property;
(d) Liens incurred or deposits made in the ordinary course of business
(i) in connection with workmen's compensation, unemployment insurance,
social security and other like laws, or (ii) to secure insurance in the
ordinary course of business, the performance of bids, tenders, contracts,
leases, licenses, statutory obligations, surety, appeal and performance
bonds and other similar obligations incurred in the ordinary course of
business, but not, in any of the cases specified in this clause (ii),
incurred in connection with the borrowing of money, the obtaining of
advances or the payment of the deferred purchase of Property;
(e) Liens in connection with or to secure Borrowed Money Indebtedness
permitted under Section 7.1(c);
(f) attachments, judgments and other similar Liens arising in
connection with the court proceedings, provided that the execution and
enforcement of such Liens are effectively stayed and the claims secured
thereby are being actively contested in good faith with adequate reserve
made therefor in accordance with GAAP;
(g) Liens imposed by law, such as carriers', warehousemen's,
mechanics', materialmen's and vendors' liens incurred in good faith in the
ordinary course of business and securing obligations which are not yet due
or which are being contested in good faith by appropriate proceedings if
adequate reserves with respect thereto are maintained in accordance with
GAAP;
(h) zoning restrictions, easements, licenses, reservations,
provisions, covenants, conditions, waivers, and restrictions on the use of
Property, and which do not in any case singly or in the aggregate
materially impair the present use or value of Property subject to any such
restriction or materially interfere with the ordinary conduct of the
business of the Company and its Subsidiaries, if any;
(i) Liens securing purchase money Indebtedness permitted under Section
7.1 hereof and covering only the Property so purchased;
(j) capital leases and sale/leaseback transactions permitted under the
other provisions of this Agreement; and
(k) extensions, renewals and replacements of Liens referred to in
paragraphs (a) through (j) of this Section; provided that any such
extension, renewal or replacement Lien shall be limited to the Property or
assets (and, in the case of clause (e), categories of Property or assets)
covered by the Lien extended, renewed or replaced and that the Borrowed
Money Indebtedness secured by any such extension, renewal or replacement
Lien shall be in an amount not greater than the amount of the Indebtedness
secured by the Lien extended, renewed or replaced.
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"Person" means any individual, corporation, association, company, business
trust, partnership, joint venture, joint-stock company, limited liability
company, trust, unincorporated organization or association or government or any
agency or political subdivision thereof.
"Project" means (i) the acquisition of all or a substantial part of the
stock or assets of any Person engaged in the development, manufacture or sale of
pharmaceuticals or other health care products principally for the pediatric
market; (ii) the acquisition of a product or product line from, or the
acquisition of the right to manufacture, distribute or sell any product or
product line of any Person, in each case with applications in the pediatric
pharmaceutical or pediatric health care market; or (iii) R&D Project.
"Project Loans" has the meaning set forth in Section 2.1.
"Property" means any interest in any kind of property or asset, whether
real, personal or mixed, tangible or intangible.
"R&D Project" means any project for the research and development of
products or processes related to pediatric pharmaceuticals.
"Registration Rights Agreement" means the Registration Rights Agreement
between the Company and the Lender dated as of the date hereof.
"Requisite Holders" means Holders of more than 50% of the aggregate
principal amount of the Note outstanding at any time.
"Screened Project" means a Project that meets the criteria set forth on
Schedule II hereto.
"Screened Project Loans" has the meaning set forth in Section 2.1.
"Screened Project Indebtedness" means Borrowed Money Indebtedness (other
than Loans under this Agreement) incurred for the purpose of funding a Screened
Project.
"SEC" means the United States Securities and Exchange Commission.
"Second Amendment" means the Second Amendment to the May 1998 Securities
Purchase Agreement.
"Securities" means the Note and the Note Conversion Shares.
"Securities Act" means the Securities Act of 1933, as amended.
"Series G Preferred" means the Series G Convertible Exchangeable Preferred
Stock of the Company.
"Subordination Agreement" means the Subordination Agreement dated the date
hereof by and among the Company, the Lender and the Original Lenders (as defined
therein).
"Subsidiary" of a Person means any corporation, association, partnership,
joint venture or other business entity of which more than fifty percent (50%) of
the voting stock or other equity interests (in the case of Persons other than
corporations), is owned or controlled directly or indirectly by the Person, or
one or more of the Subsidiaries of the Person, or a combination thereof.
"Top-Off Notice" has the meaning set forth in Section 2.6 of this
Agreement.
The term "to the knowledge of" or derivatives thereof shall mean the actual
knowledge of the Chief Executive Officer or the Vice President, Finance of the
Company.
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"Type," when referring to a Loan, indicates whether such Loan is the First
Loan, an Unrestricted Loan, a Project Loan or a Screened Project Loan.
"Unrestricted Loans" means one or more Loans made on or after the Closing
Date in an aggregate principal amount not to exceed $8,000,000.
"Voting Capital Stock" means the Capital Stock entitled to vote generally
in the election of directors.
"1934 Act Filings" means the Annual Report on Form 10-K of the Company for
the fiscal year ended December 31, 1997, the Quarterly Reports of the Company on
Form 10-Q for each of the three months ended March 31, 1998, June 30, 1998 and
September 30, 1998 and any other reports or other documents filed by the Company
with the SEC since December 31, 1997 pursuant to the Exchange Act.
"1998 Financial Statements" has the meaning set forth in Section 3.7(a) of
this Agreement.
"1999 Financial Statements" has the meaning set forth in Section 3.7(a) of
this Agreement.
"8% Subordinated Notes" means the Company's 8% Subordinated Notes in the
aggregate principal amount of $9,000,000 issued pursuant to the May 1998
Securities Purchase Agreement.
1.2 Rules of Construction.
Unless the context otherwise requires:
a. a term has the meaning assigned to it;
b. an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
c. "or" is not exclusive;
d. words in the singular include the plural and in the plural include
the singular;
e. provisions apply to successive events and transactions; and
f. "herein", "hereof" and other words of similar import refer to this
Agreement as a whole and not to any particular Article, Section or other
subdivision.
ARTICLE II
AMOUNT AND TERMS OF SECURITIES
2.1 Commitment to Lend; Loans. On the terms and subject to the conditions
contained in this Agreement (including, without limitation, Section 2.3(b) of
this Agreement), the Lender agrees to make one or more Loans to the Company from
time to time on any Business Day on or prior to December 31, 2001. Such Loans
shall consist of (i) the First Loan, (ii) the Unrestricted Loans, (iii) Loans in
addition to those referred to in clauses (i) and (ii) in the maximum principal
amount of $8,000,000 ("Project Loans") and (iv) Loans in addition to those
referred to in clauses (i), (ii) and (iii) in the maximum principal amount of
$20,000,000 ("Screened Project Loans"). The maximum principal amount of Loans
outstanding at any time shall not exceed $4,000,000 prior to the Closing Date
and $40,000,000 at any time thereafter. On the terms and subject to the
conditions contained in this Agreement, on or prior to December 31, 2001 amounts
repaid pursuant to
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the first sentence of Section 2.4(b) may be reborrowed by the Company and, if
reborrowed, (A) shall be deemed to be a Loan of the same Type as the Loan that
was repaid, if the aggregate amount of Loans made pursuant to this Agreement at
the time of such reborrowing (whether or not repaid) is less than $20,000,000
and (B) shall be deemed to be a Screened Project Loan, in all other cases. The
Lender shall (i) have no obligation to make more than one Loan in any one
calendar month and (ii) have no obligation to make any Loans to the Company
after December 31, 2001.
2.2 Evidence of Debt.
(a) On the First Loan Date, Lender shall receive from the Company the Note
evidencing the maximum aggregate principal amount of the Loans.
(b) There shall be attached to the Note, and maintained by the Company, a
register in which the Company shall, from time to time, record (i) the date,
amount and Type of each Loan under the Note, (ii) the date and amount of any
interest payments due under the Note and (iii) the date and amount of any
principal and interest payments made by the Company under the Note. The entries
made in the register by the Company shall be conclusive and binding for all
purposes, absent manifest error.
(c) At any time after the Option Expiration Date, the Lender may, at its
option, exchange the Note for one or more Notes of like tenor, in such
denominations as the Lender may determine, payable to the order of the Lender
evidencing in the aggregate the principal amount of Loans outstanding on such
date; provided that the Lender may not transfer the Note or any portion of the
Note except in accordance with Article XI of this Agreement.
2.3 Making of Loans.
(a) The Lender agrees to make each Loan upon receipt of a notice of
borrowing in the form of Exhibit B (a "Notice of Borrowing") specifying the
amount of the proposed Loan given by the Company to the Lender not later than
10:00 am (New York time) on the tenth Business Day prior to the date of the
proposed Loan, except with respect to the first Loan hereunder which shall be in
the principal amount of $4,000,000 (the "First Loan") and which shall be made by
the Lender to the Company on the third Business Day after the date hereof (the
"First Loan Date") and shall be made without any requirement that the Company
deliver a Notice of Borrowing. Subject to the terms and conditions of this
Agreement, upon the date of a proposed Loan (a "Loan Date"), the Lender shall
make available for the account of the Company in accordance with the bank wire
instructions contained in such Notice of Borrowing, immediately available funds
in the amount of the Loan. Each Loan shall be in an aggregate amount of not less
than $1,000,000 or a multiple of $500,000 in excess thereof. Each Notice of
Borrowing shall be irrevocable and binding upon the Company. The Company shall
indemnify the Lender against any loss, cost or expense including, without
limitation, the cost of Lender funds on its credit facilities, incurred by the
Lender if a proposed Loan requested in a Notice of Borrowing (other than any
Notice of Borrowing delivered pursuant to Section 2.6) is not made by the Lender
because the conditions precedent to such Loan as set forth in Section 4.1, 4.2
or 4.3 of this Agreement were not satisfied or waived.
(b) Each Notice of Borrowing shall describe the proposed use of proceeds,
and shall provide sufficient information (including a description of any
Project, if applicable) to allow the Lender to reasonably determine that the
proceeds of the requested Loan will be used as required by Section 6.6. The
Lender shall have the reasonable opportunity to review information (including
without limitation the Company's financial projections)
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related to any Screened Project proposed in a Notice of Borrowing and to discuss
the proposed use of proceeds with the Company.
2.4 Interest and Principal Payments.
(a) The Company shall pay interest on the unpaid principal amount of each
Loan from the date of the making thereof until the principal amount thereof
shall be paid in full at a rate of 7.5% per annum. Interest shall be due and
payable by the Company with respect to each Loan quarterly, in arrears on the
last Business Day of each calendar quarter. All amounts paid shall first be
applied to any accrued but unpaid interest. All payments required to be made by
the Company under this Agreement shall be paid to the Lender to an account of
the Lender designated to the Company in writing.
(b) On or prior to June 30, 2001, the Company may repay all or a portion of
the outstanding principal amount of the Note in its sole discretion (by approval
of the Non-Alpharma Directors) on no more than one occasion in each calendar
quarter on the last Business Day of such calendar quarter. Subject to the terms
and conditions of this Agreement, amounts so repaid may be reborrowed pursuant
to Section 2.1 on or prior to December 31, 2001. The Company shall repay the
aggregate principal amount of the Note outstanding as of December 31, 2001 in
accordance with the following schedule:
<TABLE>
<CAPTION>
% OF PRINCIPAL AMOUNT
OF NOTE OUTSTANDING AS
DATE OF PAYMENT OF DECEMBER 31, 2001
- --------------- ----------------------
<S> <C>
March 30, 2004............................. 5%
June 30, 2004.............................. 5%
September 30, 2004......................... 5%
December 31, 2004.......................... 5%
March 30, 2005............................. 10%
June 30, 2005.............................. 70%
</TABLE>
provided that any then remaining principal and interest outstanding with respect
to the Note shall be paid in full on June 30, 2005. Notwithstanding the
foregoing, Loans made pursuant to Section 2.6 may not be repaid by the Company.
(c) Notwithstanding the foregoing, if the Closing Date has not occurred on
or prior to September 30, 1999 (i) the Lender shall have no further obligation
to make Loans and (ii) all unpaid principal and accrued interest on the Note
shall be and become immediately due and payable by the Company without any
declaration or other act on the part of any Holder.
(d) If any required payment of principal or interest is not paid when due,
whether at stated maturity, by acceleration or otherwise, the interest rate
applicable to the amount of any such payment shall be the 7.5% per annum
provided above plus an additional 2% per annum, all payable on demand.
2.5 Mandatory Prepayment Upon Change in Control. The Company shall give all
Holders notice of any Change in Control with respect to the Company within 10
days after the later of (i) the date of such Change in Control and (ii) the date
on which the Company becomes aware of such Change in Control. Upon any such
Change in Control, any Holder shall have the right at its option exercisable
upon written notice to the Company within 15 days after the Holder receives
notice of such Change in Control, (i) to convert all or a portion of the then
outstanding principal of the Note into Common
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Stock (or such other security as may be provided under Section 9.4) pursuant to
Article IX hereof, or (ii) to require the Company to repay all of the
outstanding amounts principal and accrued and unpaid interest under the Note
held by such Holder. Following a Change in Control with respect to the Company,
the Lender shall have no further obligations to make Loans.
2.6 Lender Discretionary Borrowing Under Note. So long as the Company has not
exercised its right under Section 2.7 hereof, at any time after the close of
business on December 31, 2002 and prior to the close of business on February 28,
2003, the Company shall, upon receipt of a written request from the Lender,
deliver to the Lender a Notice of Borrowing (a "Top-Off Notice") requesting a
Loan in an amount so that after giving effect to the Loan requested by such
Notice of Borrowing the maximum principal amount of $40,000,000 is outstanding
under the Note and the Lender shall make such Loan on the third Business Day
following receipt of such Top-Off Notice. The Loan made pursuant to this Section
is intended by the parties to provide for conversion of the maximum principal
amount of the Note into Common Stock and may not be repaid by the Company. If a
Loan is made pursuant to this Section, the Lender shall deliver a notice of
conversion pursuant to Section 9.3 with respect to the maximum principal amount
of $40,000,000 within three Business Days of making such Loan. Notwithstanding
Section 2.3(b) of this Agreement, any Top-Off Notice need not specify a Project
for which the Company proposes to use the proceeds of the Loan being requested.
Notwithstanding the foregoing, the Lender shall have no right to request a
Top-Off Notice and no obligation to make a Loan pursuant to this Section if the
Option Expiration Date has occurred due to the failure or refusal of Alpharma to
make Loans, as set forth in the proviso to the definition of the term "Option
Expiration Date" in the Depositary Agreement.
2.7 Optional Prepayment. At any time beginning at the close of business on the
Option Expiration Date and ending at the close of business on December 31, 2002,
the Company may, at its option, upon five Business Days prior written notice to
the Lender, prepay all, but not less than all, of the outstanding principal
amount of the Note, together with any accrued and unpaid interest to the date of
such prepayment. Concurrent with such prepayment, the Company shall pay to the
Lender in cash a conversion termination fee equal to 25% of the principal amount
of the Note outstanding as of the close of business on December 31, 2001.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Lender as follows:
3.1 Organization and Existence, Etc. The Company (a) is duly incorporated,
validly existing and in good standing under the laws of the State of Delaware,
and has all requisite corporate power and authority to carry on its business as
now conducted and as proposed to be conducted, and (b) is duly qualified to do
business as a foreign corporation and is in good standing (or the equivalent
thereof under applicable law) in each jurisdiction in which the conduct of its
business requires such qualification by reason of the ownership or leasing of
property or otherwise (except for those jurisdictions in which the failure so to
qualify does not have a Material Adverse Effect).
3.2 Subsidiaries. Other than Merger Sub, the Company has no Subsidiaries and
owns no securities of other corporations or entities other than Permitted
Investments.
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3.3 Capitalization.
(a) As of the date hereof, (i) the Company's authorized capital stock
consists of: 60,000,000 shares of Common Stock, of which 7,026,445 shares are
validly issued and outstanding, fully paid and non-assessable, and 5,000,000
shares of "blank check" preferred stock, $.01 par value per share, of which
7,000 shares have been designated Series G Convertible Exchangeable Preferred
Stock, all of which shares are validly issued and outstanding, fully paid and
non-assessable; and (ii) the Company has outstanding the securities set forth on
Schedule 3.3A which are convertible into or exercisable or exchangeable for
Common Stock (the "Derivative Securities").
(b) All the issued and outstanding shares of Capital Stock are free of
preemptive and similar rights and have been offered, issued, sold and delivered
by the Company in transactions in compliance with the applicable federal, state
and foreign securities laws. Other than as set forth in Schedule 3.3A, there are
no outstanding agreements or commitments requiring the Company to issue Capital
Stock or Derivative Securities.
3.4 Authorization; Binding Obligations.
(a) The Company has full power and authority to execute, deliver and
perform this Agreement, the Note, the Ancillary Agreements and such other
documents furnished or to be furnished by the Company hereunder, subject to the
approval by the stockholders of the Company of the Merger Agreement and the
transactions contemplated thereby. This Agreement, the Note and the Ancillary
Agreements have each been duly authorized, executed and delivered by the
Company, subject to the approval by the stockholders of the Company of the
Merger Agreement and the transactions contemplated thereby, and each constitutes
a legal, valid and binding agreement of the Company, enforceable against the
Company in accordance with its terms, subject to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or affecting
creditors' rights and to general principles of equity and subject to the
approval by the stockholders described above. Subject to the approval by the
stockholders of the Company of the Merger Agreement and the transactions
contemplated thereby, the issuance, offering and sale of the Securities pursuant
to this Agreement, the compliance by the Company with the provisions of this
Agreement, the Securities and the Ancillary Agreements, and the consummation of
the other transactions contemplated hereby or thereby will not result in the
creation or imposition of any lien, charge, security interest or encumbrance
(collectively "Encumbrance") upon any of the assets of the Company pursuant to
the terms or provisions of, or result in a breach or violation of or conflict
with any of the terms or provisions of, or constitute a default under, or give
any other party a right to terminate any of its obligations under, or result in
the acceleration of any obligation under, (i) the Certificate of Incorporation
and Bylaws of the Company, (ii) any contract or other agreement to which the
Company is a party or by which the Company or any of its respective properties
is bound, or (iii) any judgment, ruling, decree, order, statute, rule or
regulation of any court or other governmental agency or body, domestic or
foreign, applicable to the business or properties of the Company, except, with
respect to clauses (ii) and (iii), in circumstances that would not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(b) The Note has been duly authorized for issuance and, following the
issuance of the Note, the shares of Common Stock issuable upon conversion of the
Note (the "Note Conversion Shares") will have been duly authorized and reserved
for issuance. When the Note has been duly executed and delivered by the Company
in accordance with this Agreement, (i) the Note will constitute the valid and
legally binding obligation of the
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Company, enforceable against the Company in accordance with its terms, subject
to bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to general
principles of equity, (ii) the principal amount outstanding under the Note will
be convertible into Note Conversion Shares in accordance with the provisions of
this Agreement and the Note, and (iii) the Note Conversion Shares initially
issuable upon such conversion, when issued and delivered in accordance with the
provisions of this Agreement and the Note, will be validly issued, fully paid
and non-assessable.
3.5 Compliance with Instruments, Etc. Except as set forth on Schedule 3.5
hereto, the Company is not in breach or violation of, or in default under, any
term or provision of (i) its Certificate of Incorporation and Bylaws, (ii) any
indenture, mortgage, deed of trust, voting trust agreement, stockholders
agreement, note agreement, debt instrument or other agreement or instrument to
which it is a party or by which it is bound or to which any of its Property is
subject, the effect of which breach, violation or default, individually or in
the aggregate, would reasonably be expected to have a Material Adverse Effect,
or (iii) any statute, judgment, decree, order, rule or regulation applicable to
the Company or of any arbitrator, court, regulatory body, administrative agency
or any other governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any of its respective activities or properties
and the effect of which breach, violation or default, individually or in the
aggregate, would reasonably be expected to have a Material Adverse Effect.
3.6 Litigation. Except as set forth on Schedule 3.6 hereto, there are no
actions, suits, proceedings or investigations pending, or, to the knowledge of
the Company, threatened, against the Company before or by any court, regulatory
body or administrative agency or any other governmental agency or body, domestic
or foreign, which would, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect, or any actions, suits, proceedings
or investigations pending, or, to the knowledge of the Company, threatened,
which challenges the validity of any action taken or to be taken pursuant to or
in connection with this Agreement or the issuance of the Note or the Note
Conversion Shares, which would, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
3.7 Financial Statements; Taxes.
(a) The Company has previously delivered to the Lender, true, correct and
complete copies of its financial statements for the years ended December 31,
1995, 1996 and 1997 (the "Historical Financial Statements") and for the nine
months ended September 30, 1998 (the "1998 Financial Statements"). The Company
will deliver to the Lender true, correct and complete copies of all financial
statements filed with the SEC from January 1, 1999 to the Closing Date (the
"1999 Financial Statements" and together with the Historical Financial
Statements and the 1998 Financial Statements, the "Financial Statements"). The
Financial Statements have been (and in the case of 1999 Financial Statements
will be) prepared in accordance with GAAP (except for the absence of the
footnotes in any Financial Statements which do not cover a full fiscal year) and
fairly present (and in the case of the 1999 Financial Statements will present)
in all material respects, the financial position of the Company as of the
respective dates thereof and the results of operations and cash flows of the
Company for the periods then ended (subject to normal year-end adjustments in
the case of the 1998 Financial Statements and in any other Financial Statements
which do not cover a full fiscal year). The Historical Financial Statements have
been (and the Company's financial statements for the year ended
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December 31, 1998 will be) audited by PricewaterhouseCoopers LLP who are
independent public accountants within the meaning of the Securities Act and they
have expressed (or in the case of the Company's financial statements for the
year ended December 31, 1998 will express) an opinion thereon, which is
unqualified with respect to the Financial Statements for the years ended
December 31, 1995 and 1996. As of the respective dates of the Financial
Statements, the Company had (and in the case of 1999 Financial Statements will
have) no material liabilities or obligations of any nature (absolute, accrued,
contingent or otherwise) whether or not required by GAAP to be reflected on a
balance sheet or disclosed in the notes thereto except as were reflected on any
balance sheet or disclosed in any notes contained in the Financial Statements.
(b) Except as set forth on Schedule 3.7B hereto, the Company has filed or
obtained extensions for all necessary income, franchise and other material tax
returns, domestic and foreign, and has paid all taxes shown as due thereunder
(except in the case where the Company is contesting such matter in good faith
and except in such circumstances where such failure would not reasonably be
expected to have a Material Adverse Effect), and the Company has no knowledge of
any tax deficiency which might be assessed against the Company which would
reasonably be expected to have a Material Adverse Effect.
3.8 Offering. Subject to the Lender's representations and warranties in the
Ancillary Agreements, the offer, sale and issuance of the Securities to the
Lender as contemplated by this Agreement are not subject to the registration
requirements of the Securities Act and neither the Company, nor anyone acting on
its behalf, has taken or will take any action that would cause such registration
requirements to be applicable.
3.9 Permits; Governmental and Other Approvals. Except as set forth in Schedule
3.9 hereto, the Company has such licenses, permits, consents, orders, approvals
and other authorizations necessary for the conduct of its business as now being
conducted, except where the absence of such authorizations would not have a
Material Adverse Effect and except with respect to the Company's products in
development for which marketing and other approval from the FDA and similar
regulatory authorities have not been obtained. No approval, consent,
authorization or other order of, and no designation, filing, registration,
qualification or recording with, any governmental authority, domestic or
foreign, is required for the Company's performance of this Agreement or the
consummation of the transactions contemplated hereby except for applicable
filings with the Nasdaq Stock Market, the filing of Form D under the Securities
Act, the filing of one or more Reports on Form 8-K under the Exchange Act, the
filing of a Registration Statement on Form S-4 and a Registration Statement on
Form 8-A in connection with the Merger, any filings required under the HSR Act
and the filing of a Certificate of Merger and Certificate of Amendment to the
Company's Certificate of Incorporation in connection with the Merger.
3.10 Sales Representatives, Customers and Key Employees. Except as set forth
in Schedule 3.10A, to the knowledge of the Company, as of the date hereof, no
independent sales representative or key employee or group of employees of, or
party or Person providing services to, the Company has any intention to
terminate his, her or its relationship with the Company or, in the case of
employees, to leave the employ of the Company, which termination or departure
would have a Material Adverse Effect. Except as set forth in Schedule 3.10B
hereto, all personnel as of the date hereof are employed on an "at will" basis
and may be terminated upon notice of not more than (30) days.
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3.11 Intellectual Property.
(a) To the Company's knowledge, the Company has full and exclusive right,
title and interest in and to, or, to the extent set forth on Schedule 3.11(a),
license rights to, all (i) patents, patent applications, registered or
unregistered trademarks, service marks, tradenames, and applications therefor,
registered or unregistered copyrights and applications therefor, know-how,
proprietary rights and processes, trade secrets, customer lists, methodologies
(to the extent practicable), proprietary developments and marketing information,
(ii) know-how, inventions, inventors' notes (to the extent such notes exist),
drawings and designs associated with the foregoing and (iii) other confidential
information, (all of the foregoing collectively, "Intellectual Property") used
in or necessary for the ongoing conduct of its business and the development of
the Pipeline Products ("Company Intellectual Property"), free and clear of all
Encumbrances of any nature, except where the failure to have full and exclusive
right, title and interest in and to, or license rights to, Intellectual Property
would not reasonably be expected to have a Material Adverse Effect; and except
as set forth on Schedule 3.11(a), the Company has no material obligation to any
other Person or entity with respect to Company Intellectual Property or any
developed or under development product or process of the Company utilizing or
embodying any Company Intellectual Property. Schedule 3.11(a) is a complete and
accurate schedule of all patents, patent applications, registered trademarks,
service marks, tradenames and applications therefor, registered copyrights and
applications therefor, and license agreements used in or necessary for the
ongoing conduct of Company's business.
(b) There is (i) to the Company's knowledge, no infringement, misuse or
misappropriation of any Intellectual Property owned, licensed or controlled by
any third party arising out of any product or process (including without
limitation any Pipeline Product) now being used, manufactured, developed, under
development, or distributed, or ever having been used, manufactured, developed,
under development, or distributed at any time previously, by or on behalf of the
Company, except to the extent such infringement, misuse or misappropriation
would not reasonably be expected to have a Material Adverse Effect, (ii) no
pending or, to the knowledge of the Company, threatened claim or challenge of or
proceeding for infringement, misuse or misappropriation of or interference with
any Intellectual Property owned, licensed or controlled by any third party
arising out of any product or process now being used, manufactured, developed or
distributed, or ever having been used, manufactured, distributed or developed at
any time previously, by or on behalf of the Company, which would reasonably be
expected to have a Material Adverse Effect, (iii) except as set forth in
Schedule 3.11(b) hereto, no pending or, to the knowledge of the Company,
threatened claim, challenge or proceeding by the Company against any third party
for infringement, misuse or misappropriation of or interference with any
Intellectual Property owned, licensed or controlled by the Company or (iv) no
notice from any another party to the Company to the effect that, or, to the
knowledge of the Company, facts or information which, in the reasonable opinion
of the Company, would render any Company Intellectual Property owned, invalid or
unenforceable, nor, to the knowledge of the Company, is there any allegation
that any such Company Intellectual Property is invalid or unenforceable, except
to the extent that the invalidity or unenforceability of such Company
Intellectual Property would not reasonably be expected to have a Material
Adverse Effect.
(c) Except as set forth in Schedule 3.11(c), the Company has not disclosed
any material confidential information developed or utilized by the Company to
any third party except on a confidential basis and pursuant to a written
confidentiality agreement, nor, to the knowledge of the Company, has any third
party disclosed confidential information
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developed or utilized by the Company to any Person in material breach of such
confidentiality agreement.
3.12 Form 10-K and 10-Q. The Annual Report on Form 10-K of the Company for the
fiscal year ended December 31, 1997, the Quarterly Reports on Form 10-Q for each
of the three months ended March 31, 1998, June 30, 1998 and September 30, 1998,
and any reports filed with the SEC pursuant to the Exchange Act from the date
hereof to the First Loan Date when filed by the Company, complied or will comply
as to form in all material respects with the applicable requirements of the
Exchange Act and did not or will not, as of the date of such filing, contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading.
3.13 Regulatory Status. Schedule 3.13 sets forth a description of the
development status of each of the Company's principal products not currently on
the market as of the date hereof ("Pipeline Products"), including status with
the FDA. The Company has made available to the Lender for its review all of its
correspondence with the FDA related to the Pipeline Products and has had no oral
communications with the FDA that are contrary to any such correspondence dated
later than January 1, 1998. With respect to any Pipeline Products not in
commercial production, such description sets forth the remaining steps to be
taken prior to commercial production and an estimate of the time required to
reach commercial production. The Company makes no representation or warranty
with respect to the estimated time to achieve such steps.
3.14 Registration Rights. Except as provided for in this Agreement, the
Ancillary Agreements, or in Schedule 3.14, the Company is not under any
obligation to register under the Securities Act any of its currently outstanding
securities or any of its securities which may hereunder be issued.
3.15 No Relationship Between Parties. The Company is not an owner of any
shares of the stock or equity interest in the Lender. To the Company's
knowledge, as of the date hereof no officer, director, or owner of more than 5%
of the outstanding capital stock of the Company with which any officer or
director of the Company is affiliated owns any shares of the capital stock of or
equity interest in the Lender.
3.16 Ordinary Course. Since September 30, 1998, the Company, except as set
forth on Schedule 3.16 hereto, in the 1934 Act Filings or as explicitly
contemplated by this Agreement, has conducted its business in the ordinary
course, has not incurred any material obligation, absolute or contingent, or
entered into any material transactions not in the ordinary course of business
which, individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect, and has not declared or paid any dividends or
distributions on its Capital Stock or reacquired any shares of its Capital
Stock.
3.17 No Finders. The Company has not employed any broker or finder in
connection with the transactions contemplated by this Agreement or the Ancillary
Agreements.
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ARTICLE IV
CONDITIONS OF OBLIGATIONS OF THE LENDER
4.1 Conditions to Lender's Obligations on the First Loan Date. The obligation
of the Lender to make the First Loan is subject to the fulfillment to its
reasonable satisfaction, or the waiver by the Lender, on the First Loan Date of
each of the following conditions:
(a) Representations and Warranties Correct. The representations and
warranties of the Company in Article III hereof shall be (x) true and correct on
and as of the date hereof and (y) true and correct in all material respects on
and as of the First Loan Date with the same force and effect as if they had been
made on and as of the First Loan Date, except in the case of clause (y) for (i)
those representations and warranties which address matters only as of a
particular date (which shall be true and correct as of such date), (ii)
circumstances in which the failure of such representations and warranties to be
true and correct would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect and (iii) inaccuracies resulting from
the failure to obtain shareholder approval for the transactions contemplated by
the Ancillary Agreements.
(b) Compliance Certificate. The Company shall have delivered to the Lender
a certificate of the Company's President, dated the First Loan Date, certifying
to the fulfillment of the conditions specified in subsections (a) and (e) of
this Section 4.1.
(c) No Impediments. No statute, judgment, order or decree of any court,
regulatory body, administrative agency or any other governmental agency or body
shall be in effect which would impose any material limitation on the ability of
the Lender to exercise full rights of ownership of the Securities.
(d) No Defaults. The Company shall not be in default under any indenture,
mortgage, agreement, instrument or commitment evidencing or under which there is
at the time outstanding any Indebtedness of the Company or any Subsidiary, in
excess of $200,000, or which results in such Indebtedness, in an aggregate
amount (with other defaulted Indebtedness) in excess of $200,000 becoming due
and payable prior to its due date.
(e) No Material Adverse Events. Except as set forth in the schedules
attached hereto pursuant to Article III hereof, as disclosed in the 1934 Act
Filings filed with the SEC prior to the date hereof or as set forth in Schedule
4.1(e) hereto, since September 30, 1998, there shall have been no Material
Adverse Effect with respect to the Company (other than the continued incurrence
of losses in the ordinary course of business).
(f) Legal Investment. The purchase of the Note by the Lender hereunder
shall be legally permitted by all statutes, rules and regulations to which the
Lender and the Company are subject.
(g) Qualifications. All authorizations, approvals or permits, if any, of
any governmental authority or regulatory body that are now required in
connection with the lawful issuance and sale of the Note pursuant to this
Agreement shall have been duly obtained and shall be in full force and effect.
(h) Issuance Taxes. All taxes imposed by law in connection with the initial
issuance, sale and delivery of the Securities shall have been fully paid by the
Company, and all laws imposing such taxes shall have been fully complied with at
the time of such issuance.
(i) Proceedings and Other Documents. All corporate and other proceedings in
connection with the transactions contemplated by this Agreement and the
Ancillary
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Agreements (other than shareholder approval) shall have been taken, and the
Lender shall have received such other documents and instruments in form and
substance reasonably satisfactory to it and its counsel, as to such other
matters incident to the transaction contemplated hereby as it may reasonably
request. The Ancillary Agreements shall be in full force and effect.
(j) Opinion of Counsel. The Lender shall have received the opinion of Hale
and Dorr LLP, counsel for the Company, dated the First Loan Date, substantially
with respect to the matters set forth on Exhibit C attached hereto.
(k) Consents, Waivers, Etc. The Company shall have obtained all consents or
waivers necessary to execute and deliver this Agreement and the Ancillary
Agreements, issue the Securities and carry out the transactions contemplated
hereby and thereby, and all such consents and waivers shall be in full force and
effect except for shareholder approval.
(l) Delivery. The Company shall have delivered to the Lender (i) the Note
and (ii) the following:
(A) A certified copy of the Company's certificate of incorporation and
all amendments thereto, appropriately authenticated;
(B) A copy of the Company's bylaws, as amended to date, certified as
being true by a principal Officer of the Company; and
(C) A certificate of good standing of the Company as a foreign
corporation certified as of a recent date by the Secretary of State of the
Commonwealth of Massachusetts, and from every jurisdiction in which the
Company is qualified to do business.
4.2 Conditions to Lender's Obligations to Make the First Unrestricted
Loan. The obligation of the Lender to make the first Unrestricted Loan is
subject to the fulfillment to its reasonable satisfaction, or the waiver by the
Lender, on or prior to the Closing Date of each of the following conditions:
(a) Representations and Warranties Correct. The representations and
warranties of the Company in Article III hereof shall be (x) true and correct on
and as of the date hereof and (y) true and correct in all material respects on
and as of the Closing Date with the same force and effect as if they had been
made on and as of the Closing Date, except in the case of clause (y) for (i)
those representations and warranties which address matters only as of a
particular date (which shall be true and correct as of such date) and (ii)
circumstances in which the failure of such representations and warranties to be
true and correct would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
(b) Performance. All covenants, agreements and conditions contained in this
Agreement to be performed or complied with on or prior to the Closing Date by
the Company shall have been performed or complied with by the Company in all
material respects on or prior to the Closing Date.
(c) Conditions in Section 4.1. The conditions set forth in Section 4.1
remain fulfilled or waived by the Lender on or prior to the Closing Date,
provided that any exceptions therein for shareholder approval shall not be given
effect.
(d) Proceedings and Other Documents. All corporate and other proceedings in
connection with the transactions contemplated by this Agreement and the
Ancillary Agreements shall have been taken, and the Lender shall have received
such other
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documents and instruments in form and substance reasonably satisfactory to it
and its counsel, as to such other matters incident to the transaction
contemplated hereby as it may reasonably request. The Ancillary Agreements shall
be in full force and effect. The Merger shall have occurred as contemplated by
the Merger Agreement and the other transactions required by the Ancillary
Agreements (including the satisfaction or waiver of the conditions set forth in
Section 5.1, 5.2 and 5.3 of the Master Agreement) to have occurred at or prior
to the Effective Time shall have occurred. The Second Amendment shall be in full
force and effect. The Second Amendment Closing Date (as defined in the Second
Amendment) shall have occurred and all the other transactions required by the
Second Amendment to have occurred at or prior to the Second Amendment Closing
Date shall have occurred.
(e) No Defaults. No event has occurred and is continuing or would result
from the first Unrestricted Loan being made on such date, which constitutes a
Default or an Event of Default.
(f) Use of Proceeds. The Lender shall be reasonably satisfied that the
proceeds of the Loan being made will be used as set forth in Section 6.6.
4.3 Conditions Precedent to Each Loan. The obligation of the Lender to make
any Loan other than the First Loan or the first Unrestricted Loan is subject to
the fulfillment to its reasonable satisfaction, or the waiver by the Lender, on
or prior to the applicable Loan Date of each of the following conditions:
(a) The conditions set forth in subsections (c), (d), (f) and (g) of
Section 4.1 remain fulfilled or waived by Lender.
(b) No event has occurred and is continuing, or would result from the Loan
being made on such date, which constitutes a Default or an Event of Default.
(c) No Impairment Event has occurred and is continuing since September 30,
1998.
(d) The Lender shall be reasonably satisfied that the proceeds of the Loan
being made will be used as set forth in Section 6.6.
4.4 Cooperation. The Lender shall take all reasonable steps and use all
reasonable efforts necessary or desirable, and shall cooperate with the Company
to enable it, to obtain, as promptly as practicable, all approvals,
authorizations, certificates, consents and clearances required to consummate the
transactions contemplated hereby and satisfy the conditions set forth in
Sections 4.1, 4.2 and 4.3.
ARTICLE V
CONDITIONS OF OBLIGATIONS OF THE COMPANY
5.1 Company's Obligation. The Company's obligations under this Agreement are
subject to the fulfillment to its reasonable satisfaction, or the waiver by the
Company, on or prior to the First Loan Date of each of the following conditions:
(a) Performance. All covenants, agreements and conditions contained in
this Agreement to be performed or complied with on or prior to the First Loan
Date by the Lender shall have been performed or complied with in all respects on
or prior to the First Loan Date.
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(b) Compliance Certificate. The Lender shall have delivered to the Company
a certificate of an Officer of the Lender, dated the First Loan Date, certifying
to the fulfillment of the condition specified in subsection (a) of this Section
5.1.
5.2 Cooperation. The Company shall take all reasonable steps and use all
reasonable efforts necessary or desirable, and shall cooperate with the Lender
to enable it, to obtain, as promptly as practicable, all approvals,
authorizations, certificates, consents and clearances required to consummate the
transactions contemplated hereby and satisfy the conditions set forth in Section
5.1.
ARTICLE VI
AFFIRMATIVE COVENANTS OF THE COMPANY
Subject to Section 6.10 hereof, the Company hereby covenants and agrees:
6.1 Reports. The Company will deliver to each Holder the following:
(a) within thirty (30) days after the end of each of the twelve (12)
monthly accounting periods in each fiscal year (or when furnished to the Board
of Directors, if earlier), unaudited consolidated statements of income and
retained earnings and cash flows of the Company and its Subsidiaries, if any,
for each monthly period and for the period from the beginning of such fiscal
year to the end of such monthly period, together with consolidated balance
sheets of the Company and its Subsidiaries, if any, as at the end of each
monthly period, setting forth in each case comparisons to budget and to
corresponding periods in the preceding fiscal year which statements will be
prepared in accordance with GAAP, consistently applied subject to the absence of
footnotes and year-end adjustments;
(b) within ninety (90) days after the end of each fiscal year, consolidated
statements of income and retained earnings and cash flow of the Company and its
Subsidiaries, if any, for the period from the beginning of each fiscal year to
the end of such fiscal year, and consolidated balance sheets as at the end of
such fiscal year, setting forth in each case in comparative form corresponding
figures for the preceding fiscal year, which statements will be prepared in
accordance with GAAP, consistently applied (except as approved by the accounting
firm examining such statements and disclosed by the Company) and will be
accompanied by a report on the consolidated statements of a public accounting
firm reasonably acceptable to the Requisite Holders or one of the public
accounting firms currently known as the "Big Five" (either, an "Approved
Accounting Firm");
(c) within ten (10) days after transmission thereof, copies of all
financial statements, proxy statements, reports and other communications which
the Company sends to its stockholders, copies of all registration statements and
all regular, special or periodic reports which it files with the SEC or with any
securities exchange on which any of the securities of the Company are then
listed or proposed to be listed, and copies of all press releases made generally
available by the Company to the public concerning material developments in the
business of the Company and its Subsidiaries, if any; and
(d) promptly after the occurrence thereof (but in any event within seven
(7) days after such occurrence is known to the Company) notice of any condition
or event which constitutes, or the occurrence of (i) an event which would lead
the Company to believe that the Company is not in compliance in material
respects with the covenants in this Agreement or (ii) the institution or
threatened institution of an action, suit or proceeding against the Company or
any of its Subsidiaries by or before any court, regulatory authority,
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administrative agency or any other governmental agency or body, domestic or
foreign, which, if adversely decided, could have a Material Adverse Effect.
(e) at least thirty (30) days prior to the end of each fiscal year, a
detailed annual operating budget and business plan for the Company and its
subsidiaries, if any, for such fiscal year. Such budgets shall be prepared on a
monthly basis, displaying consolidated statements of anticipated income and
retained earnings, consolidated statements of anticipated cash flow and
projected consolidated balance sheets, setting forth in each case the assumption
(which assumptions and projections shall represent and be based upon the good
faith best judgment in respect thereof of the Chief Executive Officer of the
Company) behind the projections contained in such financial statements, and
which budgets shall have been approved by the Board of Directors of the Company
or prior to the beginning of each twelve-month period to which they pertain and,
promptly upon preparation thereof, any other budgets that the Company may
prepare and any revisions of such annual or other budgets.
6.2 Accounts and Records. The Company shall keep true records and books of
account in which entries will be made of all dealings or transactions in
relation to the business and affairs of the Company and its Subsidiaries, if
any, in accordance with GAAP, to the extent applicable, applied on a consistent
basis.
6.3 Inspection. For so long as the Lender has not transferred any portion of
the Note, the Company shall permit the Lender or any of its officers, employees,
representatives or such other Person as the Lender may designate, during regular
business hours of the Company, upon reasonable prior notice, to visit and
inspect the offices and properties of the Company and to (i) review and make
extracts or copies of the books, accounts and records of the Company, and (ii)
discuss the affairs, finances and accounts of the Company, with the Company's
Officers, members of the Board of Directors, Approved Accounting Firm,
consultants and attorneys.
6.4 Independent Accountants. The Company will retain an Approved Accounting
Firm to audit the Company's financial statements at the end of each fiscal year.
In the event the services of the Approved Accounting Firm shall be terminated,
the Company shall promptly thereafter seek to engage another Approved Accounting
Firm.
6.5 Board Members and Meetings. From and after the Closing Date and prior to
the Option Expiration Date,
(a) The Company's Board of Directors may not consist of more than eleven or
less than seven directors without the consent of the Requisite Holders. The
Company agrees to hold meetings of its Board of Directors at least four times a
year, at least once per calendar quarter. The Lender shall have the right to
have one (1) nominee included on the Board of Directors' slate of nominees to
stand for election to the Board of Directors. The director of the Company
designated by the Lender pursuant to this Section 6.5(a) shall be referred to
hereinafter as the "Alpharma Director".
(b) If at any time the Board of Directors designates a committee or
committees to act on behalf of the Board, (other than any special committee or
committees of Non-Alpharma Directors constituted for the purpose of making any
determination that is to be made by such committee under the terms of this
Agreement or any Ancillary Agreement or that otherwise relates to any matter
with respect to which the Company and the Lender have a potential conflict of
interest, if counsel to the Company advises the Board of Directors that the
exclusion of the Alpharma Director from such committee is appropriate given such
potential conflict of interest) the Alpharma Director shall be given an option
to
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be a member of such committee or committees. Prior to the Closing Date, the
Alpharma Director shall have been appointed to the Compensation Committee and
the Audit Committee of the Company's Board of Directors.
(c) No more than three (3) of the members of the Company's Board of
Directors shall be employed, or otherwise be compensated (other than normal
director's compensation (i.e., meeting fees, expense reimbursements and stock
options), by the Company.
(d) The Company shall pay fees to the Alpharma Director in an amount not
less than the fees paid to any other director of the Company who is not an
executive officer of the Company, and shall reimburse such Alpharma Director for
his or her reasonable expenses incurred in attending each Board or committee
meeting or otherwise serving as a director.
6.6 Use of Proceeds. The Company shall use all the proceeds received from the
First Loan and the Unrestricted Loans for (a) general corporate purposes,
including capital expenditures and working capital, (b) the payment of legal
fees and disbursements, accounting fees, investment banking fees, SEC filing
fees and other fees and expenses incurred in connection with the transactions
contemplated by this Agreement and the Ancillary Agreements, and (c) any
Projects. The Company shall use all of the proceeds of Project Loans (other than
Loans made pursuant to Section 2.6 hereof) only for Projects and the payment of
fees and expenses related thereto. The Company shall use all the proceeds
received from Screened Project Loans (other than any Loans made pursuant to
Section 2.6 hereof) for Screened Projects and the payment of fees and expenses
related thereto. Pending the Company's use of the proceeds as set forth herein,
the Company shall invest all Loan proceeds in Permitted Investments consisting
exclusively of such proceeds.
6.7 Insurance. The Company shall keep in force with responsible insurers,
policies of insurance providing coverage, limits and deductibles customary in
the Company's industry.
6.8 Research and Development. The Company shall not incur expenses of, or make
commitments with respect to, more than an aggregate of $7,500,000 in the 2001
fiscal year in R&D Projects.
6.9 Further Assurances. From time to time the Company shall execute and
deliver to Lender such other instruments, certificates, agreements and documents
and take such other action and do all other things as may be reasonably
requested by Lender in order to implement or effectuate the terms and provisions
of this Agreement.
6.10 Termination. The covenants and agreements of the Company set forth in
this Article VI (other than Section 6.9) shall terminate and be of no further
force or effect at such time as no principal or interest on the Note is
outstanding or payable (whether as a result of the payment of all outstanding
principal and accrued interest on the Note or the conversion of the Note) and no
amounts may be borrowed pursuant to this Agreement.
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ARTICLE VII
NEGATIVE COVENANTS
Subject to Section 7.14 hereof, the Company hereby covenants and agrees
that it will not, will not agree to and will not suffer or permit any Subsidiary
of the Company to, do any of the following without the consent of the Requisite
Holders:
7.1 Borrowed Money Indebtedness. Create, incur, suffer or permit to exist, or
assume or guarantee, or become or remain liable with respect to any Borrowed
Money Indebtedness, except the following:
(a) the Note;
(b) the Borrowed Money Indebtedness existing on the date of this Agreement
and disclosed in the Financial Statements, and all renewals, extensions and
replacements (but not increases) of any of the foregoing, provided that the
accrual of interest on such liabilities, so long as it is not converted to
principal, shall not be deemed to increase such liabilities;
(c) principal of up to $50,000,000 of Borrowed Money Indebtedness in the
aggregate outstanding at any time (which (i) prior to or on the Option
Expiration Date must consist solely of Screened Project Indebtedness and (ii)
thereafter, may include up to $10,000,000 of Borrowed Money Indebtedness that is
not Screened Project Indebtedness), plus any accrued interest thereon; provided,
that all such Screened Project Indebtedness outstanding on the Option Exercise
Date must be repayable at the option of the Company in full with aggregate
penalties not in excess of $1,000,000 in connection with the Lender's purchase
of the Common Stock pursuant to its exercise of the Call Option;
(d) purchase money Indebtedness permitted by Section 7.10 to the extent
liens securing the same are allowed by the other provisions of this Agreement;
(e) capitalized lease obligations to the extent leases with respect thereto
are allowed by the other provisions of this Agreement;
(f) the convertible notes issuable pursuant to the May 1998 Securities
Purchase Agreement;
(g) on or prior to the Option Expiration Date, any Screened Project
Indebtedness that is convertible directly or indirectly into Common Stock
provided that (i) the aggregate annual interest expense (including, without
limitation the full effect of both cash and non-cash accrued interest) with
respect to such Indebtedness shall not exceed $1,500,000; (ii) such Indebtedness
by its terms is automatically converted into Common Stock on or prior to the
Option Closing Date; and (iii) such Indebtedness may not be repaid by the
Company prior to the Option Closing Date; and
(h) after the Option Expiration Date, any Borrowed Money Indebtedness that
is convertible directly or indirectly into Common Stock.
7.2 Liens. Create or suffer to exist any Lien upon any of its Property now
owned or hereafter acquired, or acquire any Property upon any conditional sale
or other title retention device or arrangement or any purchase money security
agreement; provided, however, that the Company any Subsidiaries of the Company
may create or suffer to exist Permitted Liens.
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7.3 Contingent Liabilities. Directly or indirectly guarantee the performance
or payment or, or purchase or agree to purchase, or assume or contingently agree
to become or be secondarily liable in respect of, any obligation or liability of
any other Person except for:
(a) the endorsement of checks or other negotiable instruments in the
ordinary course of business;
(b) obligations disclosed to Lender in the Financial Statements (but not
increases of such obligations after the First Loan Date, provided that the
accrual of interest on such obligations, so long as it is not converted to
principal, shall not be deemed to increase such obligations);
(c) obligations in respect of employees which shall not exceed an aggregate
amount equal to $200,000 at any time outstanding; and
(d) those liabilities permitted under Section 7.1 hereof.
7.4 Mergers, Consolidations and Dispositions and Acquisitions of Assets. In
any single transaction or series of related transactions, directly or
indirectly:
(a) liquidate or dissolve;
(b) be a party to any merger or consolidation unless (i) no Default or
Event of Default has occurred that is then continuing; (ii) immediately
thereafter and giving effect thereto, no event will occur and be continuing
which constitutes a Default; (iii) the Company, or the Subsidiary, if any, is
the surviving Person; and (iv) the Holders are given at least twenty (20) days
prior notice of such merger or consolidation or such lesser number of days as is
practicable;
(c) sell, convey or lease all or substantially all of its assets, except
for the sale of property in the ordinary course of business;
(d) acquire all or a substantial portion of the assets or stock of any
person whether by merger or otherwise other than in a transaction or series of
transactions that constitute a Screened Project, provided that this subsection
shall not prevent any Project funded with the proceeds of the First Loan, any
Unrestricted Loan or Project Loans; or
(e) pledge, transfer or otherwise dispose of any equity interest in any of
its Subsidiaries, if any exist, or issue or permit any of its Subsidiaries, if
any exist, to issue any additional equity interests except to the Company or
another of its Subsidiaries. Nothing in this Agreement shall prohibit the
Company from selling obsolete equipment or from replacing used equipment in the
ordinary course of business.
7.5 Redemption, Dividends and Distributions. At any time, except as
contemplated by this Agreement and the terms of the Note, by the Ancillary
Agreements and by the Series G Preferred: (a) redeem, retire or otherwise
acquire, directly or indirectly, any equity interest of the Company or any of
its Subsidiaries (other than $250,000 in any fiscal year to be used to
effectuate the repurchase of restricted stock issued to employees, directors or
consultants of the Company pursuant to a restricted stock agreement) or (b) make
any distributions of any property or cash in respect of any of its Capital
Stock.
7.6 Nature of Business. Change the nature of its business or enter into any
business which is substantially different from the development, manufacture and
sale of pharmaceuticals principally for the pediatric market.
7.7 Transactions with Related Parties. Enter into any transaction or agreement
with any Officer, director or beneficial owner of five percent (5%) or more of
the outstanding
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Capital Stock in the Company or any of its Subsidiaries (or any Affiliate of any
such Person) unless the transaction is upon no less favorable terms than those
that are obtainable from wholly unrelated sources. The provisions of this
Section 7.7 shall not apply to (a) fees and compensation (including options and
equity compensation) paid to or indemnity provided on behalf of Officers,
directors, employees or consultants of the Company and any of its Subsidiaries,
as determined by the Board of Directors of the Company or any of such
Subsidiaries or the Chief Executive Officer thereof in good faith and (b)
transactions exclusively between or among the Company's Subsidiaries, provided
such transactions are not otherwise prohibited by this Agreement.
Notwithstanding the prior two sentences, the Company may not pay management or
consulting fees to such related parties in excess of an aggregate of $50,000 per
year.
7.8 Loans and Investments. Make any loan, advance, extension of credit or
capital contribution to, or make or have any Investment in, any Person, or make
any commitment to make any such extension of credit or investment, except (a)
Permitted Investments, (b) normal and reasonable advances in the ordinary course
of business to Officers and employees and (c) capital contributions or
Investments used to fund a Project permitted by Section 6.6, provided in the
case of clause (c) that the making of such capital contribution or Investment
does not cause a Default under any other provision hereof.
7.9 Organizational Documents. Amend, modify, restate or supplement its
Certificate of Incorporation or Bylaws if such action could reasonably be
expected to adversely affect the rights of the Lender under this Agreement or
any Ancillary Agreement.
7.10 Lease Expenses; Purchase Money Indebtedness. Permit aggregate operating
lease expenses (excluding lease payments under capital leases), for the Company
and its Subsidiaries in the aggregate in any fiscal year, to exceed $500,000.
Incur or create new capital lease obligations or purchase money Indebtedness in
any fiscal year in excess of $200,000 in the aggregate for the Company and its
Subsidiaries. Permit aggregate capital lease obligations and purchase money
Indebtedness outstanding at any one time to exceed $2,000,000 in the aggregate
for the Company and its Subsidiaries.
7.11 Sale/Leasebacks. Enter into any sale/leaseback transactions except as
permitted under the provisions of Section 7.10.
7.12 Issuance of Stock. On or prior to the Option Expiration Date, issue, or
become obligated to issue shares of Capital Stock or securities convertible into
Capital Stock, except for (i) shares of Common Stock, (ii) rights, warrants or
options to purchase shares of Common Stock granted prior to March 31, 2002 and
rights, warrants or options to purchase up to 100,000 shares of Common Stock on
or after March 31, 2002 (such number to be adjusted for stock splits or
reclassifications), (iii) securities evidencing Screened Project Indebtedness
permitted by Section 7.1(g). On or prior to the Option Expiration Date, use the
proceeds of any issuances of securities (other than pursuant to the exercise of
options granted to officers, directors, consultants, employees and advisors and
other than the First Loan, the Unrestricted Loans and the Project Loans) to fund
Screened Projects and the payment of fees and expenses related thereto. Prior to
the Option Expiration Date, establish a "Shareholders Rights Plan" or "Poison
Pill" or issue any securities in connection therewith.
7.13 Subsidiaries. Form, create or acquire any Subsidiary other than Merger
Sub or permit any Person other than the Company or a wholly owned Subsidiary to
hold an equity interest in any Subsidiary.
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7.14 Termination. The covenants and agreements of the Company set forth in
this Article VII shall terminate and be of no further force or effect at such
time as no principal or interest on the Note is outstanding or payable (whether
a result of the payment of all outstanding principal and accrued interest on the
Note or the conversion of the Note) and no amounts may be borrowed pursuant to
this Agreement.
ARTICLE VIII
DEFAULTS AND REMEDIES
8.1 Events of Default. An "Event of Default" occurs if:
(a) the Company defaults in the payment of interest on the Note when the
same becomes due and payable and such default continues for a period of 5
Business Days;
(b) the Company defaults in the payment of the principal of the Note when
the same becomes due and payable at maturity, upon acceleration or otherwise;
(c) the Company defaults in the performance of any covenants under Article
VII of this Agreement;
(d) the Company fails to comply with any of the provisions of this
Agreement (other than Article VII) and such failure continues for 20 Business
Days after notice from the Requisite Holders;
(e) the Company defaults in payment on Borrowed Money Indebtedness (giving
effect to any applicable grace periods and any extensions thereof) of at least
$700,000 principal amount;
(f) there has been an acceleration of the final stated maturity of any
Borrowed Money Indebtedness of the Company (which acceleration shall not have
been cured, waived, rescinded or annulled for 10 Business Days) if the aggregate
principal amount of such Borrowed Money Indebtedness, together with the
principal amount of any other such Borrowed Money Indebtedness in default for
failure to pay principal at maturity or which has been accelerated, aggregates
$700,000 or more at any time;
(g) any representation or warranty of the Company under this Agreement
shall prove to have been incorrect in any material respect when made;
(h) there exists an outstanding unsatisfied final judgment which, either
alone or together with other outstanding unsatisfied final judgments against the
Company, exceeds an aggregate of $200,000 (to the extent not covered by
insurance) and such judgment shall have continued undischarged or unstayed for
20 Business Days after entry thereof;
(i) the Company pursuant to or within the meaning of any Bankruptcy Law:
(i) commenced a voluntary case,
(ii) consents to the entry of an order for relief against it in an
involuntary case,
(iii) consents to the appointment of a custodian of it or for all or
substantially all of its property, or
(iv) makes a general assignment for the benefit of its creditors; or
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(j) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that:
(i) is for relief against the Company in an involuntary case,
(ii) appoints a custodian of the Company for all or substantially all
of its property, or
(iii) orders the liquidation of the Company, and the order or decree
remains unstayed and in effect for 90 consecutive days.
8.2 Acceleration. If an Event of Default occurs and is continuing, the
Requisite Holders by notice to the Company, may declare the principal of and any
accrued interest on the Note to be due and payable. Upon such declaration such
principal and interest shall be due and payable immediately. If an Event of
Default specified in Section 8.1(i) or (j) occurs, all unpaid principal and
accrued interest on the Note then outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
any Holder.
8.3 Other Remedies. Notwithstanding any other provision of this Agreement, if
an Event of Default occurs and is continuing, any Holder may pursue any
available remedy by proceeding at law or in equity to collect the principal of
or interest then due on the Note held by such Holder. Without limiting the
foregoing, the Company, the Parent and the Lender acknowledge and agree that the
respective remedies of the Company, the Parent, the Lender and any other Holder
at law for a breach or threatened breach of any of the provisions of this
Agreement or the Subordination Agreement would be inadequate and, in recognition
of that fact, agree that, in the event of a breach or threatened breach by the
Company, the Parent, the Lender or any Holder of any of the provisions of this
Agreement, or the Subordination Agreement, in addition to any remedies specified
herein, at law or otherwise, any party hereto and any Holder, without posting
any bond shall be entitled to seek equitable relief in the form of specific
performance, a temporary restraining order, a temporary or permanent injunction
or any other equitable remedy which may then be available, provided that no
Holder shall be entitled to specific performance of the provisions of Section
6.5 hereof.
A delay or omission by any Holder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All remedies are
cumulative.
8.4 Waiver of Past Defaults. Any past Default or Event of Default and its
consequences may be waived in accordance with Section 12.2. When a Default or an
Event of Default is waived, it is cured and ceases.
ARTICLE IX
CONVERSION
9.1 Right of Conversion. A Holder may convert all or a portion of the then
outstanding principal of the Note into Common Stock of the Company (i) on one
occasion on or after any Change in Control with respect to the Company in
accordance with Section 2.5 and (ii) at any time after the close of business on
December 31, 2002.
9.2 Conversion Price. The conversion price per share of Common Stock for the
Note shall be $7.125 per share. The number of shares of Common Stock issuable
upon conversion of the Note shall be determined by dividing the dollar amount of
the
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outstanding principal of the Note to be converted, by $7.125. Except as set
forth in Section 9.4, no payment or adjustment to the conversion price shall be
made with respect to dividends or other distributions declared on shares of
Common Stock prior to the Conversion Date. The Company will pay the Lender in
cash any accrued and unpaid interest with respect to the principal amount of the
Note being converted on the Conversion Date. No fractional shares of Common
Stock shall be issuable upon conversion of the Note, but a payment in cash will
be made in respect of any fraction of a share which would otherwise be issuable
upon such conversion. Such payment shall be based on the fair market value of
the Common Stock at the time of conversion of the Note, as determined in good
faith by the Board of Directors.
9.3 Exercise of Conversion Right. A Holder may exercise the conversion right
set forth in this Article IX by giving written notice to the Company at the time
or times specified in Section 9.1, which notice shall be accompanied by the Note
being surrendered for cancellation and shall state the portion of the principal
amount of the Note being converted. As promptly as practicable after receipt of
the Holder's notice of conversion and the Note being surrendered, the Company
shall deliver or cause to be delivered at its principal executive office to the
Holder a certificate or certificates for the number of full shares issuable upon
the conversion of the Note, or portion thereof, in accordance with the
provisions hereof. Such conversion shall be deemed to have been made at the time
the Note was surrendered for conversion and the notice specified above shall
have been received by the Company at its principal executive office (the
"Conversion Date"), and the Holder upon such conversion shall be deemed to have
become on the Conversion Date the holder of record of the shares represented
thereby. If less than the entire outstanding principal amount of the Note is
being converted, a new Note shall promptly be delivered to the Holder for the
unconverted principal balance and shall be of like tenor as to all terms as the
Note surrendered. Upon the Conversion Date, the Note or the portion of the Note
being converted shall be deemed to be retired and canceled.
9.4 Provisions in Case of Merger, Etc. In the case of any reorganization or
reclassification of the outstanding shares of Common Stock (other than a change
in par value, or from par value to no par value) or as a result of a
subdivision, combination or stock split or in the case of any consolidation of
the Company into, or the merger of the Company with another entity in which the
Company is not the surviving entity (or it is the surviving entity, but its
shares of Common Stock become shares of another entity), or in the case of a
sale, lease or conveyance of all or substantially all of the assets of the
Company as an entity, a Holder shall thereafter have the right to convert the
Note held by such Holder into the kind and amount of securities, cash or other
property that would have otherwise been receivable by such Holder upon such
reorganization, reclassification, consolidation, merger or disposition if such
Holder had converted the Note into shares of Common Stock immediately prior to
such reorganization, reclassification, consolidation, merger or disposition.
Notwithstanding the foregoing, nothing in this Section shall alter or affect any
covenant in this Agreement which would limit or prevent the Company from
entering into any transaction described in this Section.
9.5 Taxes on Conversion. If a Holder converts the Note, the Company shall pay
any documentary, stamp or similar issue or transfer tax due on the issue of
shares of Common Stock upon such conversion.
9.6 Company to Provide Stock. The Company shall reserve out of its authorized
but unissued Common Stock or its Common Stock held in treasury enough shares of
Common Stock to permit the conversion of the maximum principal amount of the
Note.
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All shares of Common Stock which may be issued upon conversion of the Note
in accordance with the terms hereof shall be validly issued, fully paid and
non-assessable.
The Company will endeavor to comply with all securities laws regulating the
offer and delivery of shares of Common Stock upon conversion of the Note and
will endeavor to list or qualify such shares for trading on each national
securities exchange or market on which the Common Stock is then listed or
traded.
9.7 Required Antitrust Approval. Notwithstanding anything in this Article IX
to the contrary, the Note may not be converted at any time if such conversion
and the issuance of shares of Common Stock upon such conversion require
governmental approval under applicable antitrust laws, including without
limitation the HSR Act, until such approval is obtained. If such approval is
required and a Holder wishes to convert all or a portion of the Note, the
Company shall at the request of such Holder:
(a) take all actions necessary to make the filings required of the Holder
or the Company under the HSR Act, relating to the possible conversion of the
Note, which filings shall comply in all respects with the requirements of the
HSR Act;
(b) comply at the earliest practicable date with any formal or informal
request for additional information received by the Holder or the Company from
the Federal Trade Commission or Antitrust Division of the Department of Justice
pursuant to the HSR Act;
(c) consult and cooperate with the Holder and consider in good faith the
views of the Holder, in connection with any analyses, appearances,
presentations, memoranda, briefs, arguments, opinions and proposals made or
submitted by or on behalf of any party in connection with proceedings under or
relating to the required approvals;
(d) request early termination of the applicable waiting period under the
HSR Act; and
(e) take any and all other commercially reasonable actions in order to
obtain the approval of the governmental entity with the jurisdiction of
enforcing applicable antitrust laws, including without limitation complying with
the HSR Act and obtaining termination or expiration of the applicable waiting
period under the HSR Act.
ARTICLE X
SUBORDINATION
10.1 Agreement to Subordinate. The Company shall perform and comply with the
covenants and other obligations for the benefit of the Lender set forth in the
Subordination Agreement, which covenants and other obligations are incorporated
by reference herein, as if such covenants and other obligations were included
herein.
ARTICLE XI
RESTRICTIONS ON TRANSFER
11.1 Securities Laws Restrictions on Transfer. Neither the Note or the Note
Conversion Shares shall be sold or transferred unless either (a) they first
shall have been registered under the Securities Act or (b) the Company shall
have been furnished with an opinion of legal counsel, reasonably satisfactory to
the Company, to the effect that such a transfer is exempt from the registration
requirements of the Securities Act.
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11.2 Restrictive Legend. Each Note or certificate representing Note Conversion
Shares and any other securities issued in respect of such securities shall be
stamped or otherwise imprinted with a legend in the following form (in addition
to any legend required under applicable state securities laws):
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND
MAY NOT BE TRANSFERRED, SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
The foregoing legend may be removed after the second anniversary of the
later of (a) the issue date of the Conversion Shares and (b) the last date upon
which the Company or any Affiliate of the Company was the owner of such Security
(or such shorter period of time as permitted by Rule 144(k) under the Securities
Act or any successor provision).
11.3 Registration Rights Agreement. The rights and obligations of the Company
and the Lender with respect to Securities Act registration are set forth in the
Registration Rights Agreement.
11.4 Additional Restrictions.
(a) Notwithstanding the foregoing, none of this Agreement, the Note or the
rights and obligations hereunder and thereunder may be transferred by the Lender
on or prior to the Option Expiration Date except in the event of a Change in
Control. Following the Option Expiration Date or such Change in Control, this
Agreement, the Note and the rights and obligations hereunder and thereunder may
be transferred or assigned by a Holder to an affiliate of such Holder, to
another Holder, if any, or to any Person acquiring a Note having a principal
amount equal to at least 25% of the aggregate principal amount of the Note or
Notes then outstanding; provided, however, that the transferee provides written
notice of such assignment to the Company stating its name and address and the
principal amount of the Note with respect to which such rights are being
assigned; and provided further, that the Company receives the written instrument
provided in subparagraph (b) below. Any transferee to whom a transfer is made in
accordance with the immediately preceding sentence shall be deemed a Holder for
purposes of this Agreement.
(b) Any transferee (other than a Holder) to whom rights hereunder are
transferred shall, as a condition to such transfer, deliver to the Company a
written instrument by which such transferee agrees to be bound by the
obligations imposed upon Holders under this Agreement to the same extent as if
such transferee were a party hereto, including without limitation the
obligations imposed upon Holders pursuant to Section 13.8.
(c) A transferee to whom such rights are transferred pursuant to this
Section 11.4 may not again transfer such rights to any other Person, other than
as provided in this Section 11.4.
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ARTICLE XII
AMENDMENT, SUPPLEMENT AND WAIVER
12.1 With Consent of Holders of the Note. Except as provided below in
this Section 12.1, no provision of this Agreement or the Note may be amended,
supplemented or waived without the consent of the Requisite Holders voting as a
single class (including consents obtained in connection with a tender offer or
exchange offer for, or purchase of, the Note) and the Company, and no existing
Default or Event of Default (other than a Default or Event of Default in the
payment of the principal of, premium, if any, or interest on the Note, other
than a payment default resulting from an acceleration that has been rescinded)
and no compliance with any provision of this Agreement or the Note may be waived
without the consent of the Requisite Holders voting as a single class (including
consents obtained in connection with a tender offer or exchange offer for, or
purchase, of the Note). Except as provided below in this Section 12.1, without
the consent of the Holders holding at least 75% in principal amount of the Note
then outstanding (including consents obtained in connection with a tender offer
or exchange offer for, or purchase of, such Note) and the Company, no provisions
of Article II hereof may be amended, supplemented or waived in a manner that
adversely affects the rights of any Holder.
It shall not be necessary for the consent of the Holders of the Note under
this Section 12.1 to approve the particular form of any proposed amendment,
supplement or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment, supplement or waiver under this Section becomes
effective, the Company shall mail to the Holders of the Note a notice briefly
describing the amendment, supplement or waiver. Any failure of the Company to
mail such notice, or any defect therein, shall not, however, in any way impair
or affect the validity of any such amendment, supplement or waiver.
Notwithstanding the foregoing, without the consent of each Holder affected, an
amendment, supplement or waiver under this Section 12.1 may not (with respect to
the Note held by a non-consenting Holder):
(a) reduce the principal amount of the Note;
(b) reduce the principal of or change the fixed maturity of the Note or
alter or waive any of the provisions with respect to the conversion of the Note;
(c) reduce the rate of or change the time for payment of interest,
including default interest, on the Note;
(d) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Note (except a rescission of acceleration of
the Note by the Requisite Holders and a waiver of the payment default that
resulted from such acceleration);
(e) make any Note payable in money other than that stated in the Note;
(f) make any change in the provisions of this Agreement relating to waivers
of past Defaults or the rights of the Holders of the Note to receive payments of
principal of or interest on the Note; or
(g) make any changes in the foregoing amendment and waiver provisions.
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ARTICLE XIII
MISCELLANEOUS
13.1 Notices. All notices, requests, demands, claims, and other communications
to any party hereunder or pursuant to the terms hereof shall be in writing. Any
such notice, request, demand, claim, or other communication to any party
hereunder shall be deemed duly delivered three Business Days after it is sent by
registered or certified mail, return receipt requested, postage prepaid, or one
Business Day after it is sent via a reputable nationwide overnight courier
service, in each case to the intended recipient as set forth below:
if to the Lender, to:
Alpharma, Inc.
One Executive Drive
Fort Lee, New Jersey 07024
Attention: President
with a copy to:
Alpharma, Inc.
One Executive Drive
Fort Lee, New Jersey 07024
Attention: Chief Legal Officer
If to the Company, to:
Ascent Pediatrics, Inc.
187 Ballardvale Street, Suite B125
Wilmington, Massachusetts 01887
Attention: Alan R. Fox
with a copy to:
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attention: David E. Redlick, Esq.
If to a Holder other than the Lender, to the address provided to the
Company pursuant to Section 11.4.
Any party may give any such notice, request, demand, claim, or other
communication using any other means (including personal delivery, expedited
courier, messenger service, telecopy, telex, ordinary mail, or electronic mail),
but no such notice, request, demand, claim, or other communication shall be
deemed to have been duly given unless and until it actually is received by the
party for whom it is intended. Any party may change the address to which
notices, requests, demands, claims, and other communications hereunder are to be
delivered by giving the other parties notice in the manner herein set forth.
13.2 Duplicate Originals. The parties may sign any number of copies of this
Agreement. Each signed copy shall be an original, but all of them together
represent the same agreement.
13.3 Governing Law. The laws of the State of New York, without regard to
principles of conflicts of law, shall govern this Agreement and the Securities.
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13.4 No Adverse Interpretation of Other Agreements. This Agreement may not be
used to interpret another indenture, loan or debt agreement of the Company or a
subsidiary. Any such indenture, loan or debt agreement may not be used to
interpret this Agreement.
13.5 Successors and Assigns. All agreements of the Company in this Agreement
and the Securities shall bind its successors and assigns. All agreements of the
Lender in this Agreement shall bind its successors and assigns.
13.6 Separability. In case any provision in this Agreement or in the
Securities shall be invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
13.7 Headings, Etc. The Headings of the Articles and Sections of this
Agreement have been inserted for convenience of reference only, are not to be
considered a part hereof and shall in no way modify or restrict any of the terms
or provisions hereof.
13.8 Confidentiality. The Lender and each other Holder agree that he, she or
it will keep confidential and will not disclose, divulge or use for any purpose
other than to monitor his, her or its investment in the Company any
confidential, proprietary or secret information which such Holder may obtain
from the Company pursuant to financial statements, reports and other materials
submitted by the Company to such Holder pursuant to this Agreement, or pursuant
to visitation or inspection rights granted hereunder, unless such information is
known, or until such information becomes known, to the public (other than as a
result of a breach of this Section 13.8 by such Holder); provided, however that
a Holder may disclose such information if required by law, provided that the
Holder provides prior written notice to the Company of such proposed disclosure
and takes reasonable steps to avoid and/or minimize the extent of any such
required disclosure. The Lender and each other Holder further acknowledge and
agree that certain of the confidential, proprietary or secret information which
it may obtain hereunder may be material non-public information and that neither
it nor any of its Affiliates shall engage in any acquisition, disposition or
other similar transaction involving the Company's securities on the basis of, or
at such time as such Holder possesses, such material non-public information.
13.9 Parent Guarantee. The Parent agrees to enter into a guaranty agreement
with the Company with respect to all obligations of the Lender, monetary or
otherwise, under this Agreement.
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above set forth.
ASCENT PEDIATRICS, INC.
By: /s/ EMMETT CLEMENTE
Name: Emmett Clemente
Title: Chairman
ALPHARMA USPD, INC.
By: /s/ THOMAS L. ANDERSON
Name: Thomas L. Anderson
Title: President
ALPHARMA INC.
By: /s/ JEFFREY E. SMITH
Name: Jeffrey E. Smith
Title: Vice President Finance
and Chief Financial Officer
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EXHIBIT A
NOTE
Wilmington, Massachusetts
February 19, 1999
up to $40,000,000
FOR VALUE RECEIVED, the undersigned, ASCENT PEDIATRICS, INC., a Delaware
corporation (the "Company"), HEREBY PROMISES TO PAY to the order of ALPHARMA
USPD INC., a Maryland corporation (the "Lender") in lawful money of the United
States of America in immediately available funds, the amount of $40,000,000 or,
if less, the aggregate unpaid amount of all Loans made to the undersigned under
the "Loan Agreement" (as hereinafter defined). Schedule A attached hereto and
incorporated herein by reference records (i) the date, amount and Type of each
Loan hereunder, (ii) the date and amount of any interest payments due hereunder
and (iii) the date and amount of any principal and interest payments made by the
Company hereunder; provided, however, that any failure to endorse such
information on such schedule or continuation thereof shall not in any manner
affect the obligation of the Company to make payments of principal and interest
in accordance with the terms of this Note. All capitalized terms used but not
otherwise defined herein have the meanings given to them in the Loan Agreement.
This Note is issued pursuant to that certain Loan Agreement dated as of
February 16, 1999 by and between the Company, the Lender and Alpharma Inc., a
Delaware corporation (including all annexes, exhibits and schedules thereto and
as amended, modified, restated or supplemented from time to time (the "Loan
Agreement")), and is entitled to the benefit and security of the Loan Agreement.
Reference is hereby made to the Loan Agreement for a statement of all of the
terms and conditions under which the Loans evidenced hereby are made and are to
be repaid.
1. Interest and Principal Payments. The principal amount of the
indebtedness evidenced hereby shall be payable in the amounts and on the
dates specified in the Loan Agreement, the terms of which are hereby
incorporated herein by reference. Interest thereon shall be paid until such
principal amount is paid in full at such interest rates and at such times,
and pursuant to such calculations, as are specified in the Loan Agreement.
2. Default and Remedies. Subject to the requirements of Section 8.2
of the Loan Agreement, upon and after the occurrence of any Event of
Default, this Note may, as provided in the Loan Agreement, be declared, and
immediately shall become, due and payable.
3. Conversion. A Holder has the right to convert this Note under the
circumstances and at a Conversion Price as provided in the Loan Agreement.
A Holder may exercise the conversion right by following the procedures set
forth in the Loan Agreement.
4. Subordination. This Note is subordinated in right of payment, in
the manner and to the extent set forth in the Subordination Agreement dated
as of February 16, 1999 among the Company, the Lender and the Original
Lenders named therein (the "Subordination Agreement"), to the prior payment
in full of the Senior Indebtedness in accordance with the terms set forth
in the Loan Agreement.
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5. Legends.
"THIS NOTE AND THE SECURITIES ISSUED UPON CONVERSION OF THIS NOTE
HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE
TRANSFERRED, SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS NOTE AND THE SECURITIES ISSUED UPON
CONVERSION OF THIS NOTE UNDER THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
The foregoing legend may be removed after the second anniversary of
the later of (a) the issue date of the Conversion Shares and (b) the last
date upon which the Company or any Affiliate of the Company was the owner
of such Security (or such shorter period of time as permitted by Rule
144(k) under the Securities Act or any successor provision).
"THIS INSTRUMENT IS SUBJECT TO THE TERMS OF A SUBORDINATION
AGREEMENT DATED AS OF FEBRUARY 16, 1999, AMONG ASCENT PEDIATRICS, INC.,
ALPHARMA USPD, INC. AND THE ORIGINAL LENDERS NAMED THEREIN, WHICH
AGREEMENT IS INCORPORATED HEREIN BY REFERENCE. NOTWITHSTANDING ANY
STATEMENT TO THE CONTRARY CONTAINED IN THIS INSTRUMENT, NO PAYMENT OF
ANY NATURE ON ACCOUNT OF THE OBLIGATIONS HEREUNDER, WHETHER PRINCIPAL OR
INTEREST, SHALL BE MADE, PAID, RECEIVED OR ACCEPTED EXCEPT IN ACCORDANCE
WITH THE EXPRESS TERMS OF SUCH AGREEMENT."
The foregoing legend may be removed upon termination of the
Subordination Agreement.
"THIS INSTRUMENT HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT, AS
SUCH TERM IS DEFINED IN SECTION 1271 ET SEQ. OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED. FROM AND AFTER THE CLOSING DATE (AS DEFINED IN
THE LOAN AGREEMENT DATED AS OF FEBRUARY 16, 1999 BY AND BETWEEN ASCENT
PEDIATRICS, INC., ALPHARMA USPD INC. AND ALPHARMA, INC.) UPON INQUIRY
MADE BY ANY HOLDER HEREOF, ADDRESSED TO ASCENT PEDIATRICS, INC. AT 187
BALLARDVALE STREET, SUITE B125, WILMINGTON, MASSACHUSETTS, ATTENTION:
ALAN R. FOX, ASCENT PEDIATRICS, INC. WILL PROVIDE A STATEMENT SETTING
FORTH THE ISSUE PRICE, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT, THE ISSUE
DATE AND THE YIELD TO MATURITY WITH RESPECT TO THE INSTRUMENT HELD BY
SUCH HOLDER."
6. Registration Rights. The rights and obligations of the Company
and the Lender with respect to Securities Act registration are set forth in
the Registration Rights Agreement.
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7. Additional Restrictions.
(a) None of this Note or the rights and obligations hereunder may be
transferred by the Lender on or prior to the Option Expiration Date except
in the event of a Change in Control. Following the Option Expiration Date
or such Change in Control, this Note and the rights and obligations
hereunder may be transferred or assigned by a Holder to an affiliate of
such Holder, to another Holder, if any, or to any Person acquiring a Note
having a principal amount equal to at least 25% of the aggregate principal
amount of the Note or Notes then outstanding; provided, however, that the
transferee provides written notice of such assignment to the Company
stating its name and address and the principal amount of the Note with
respect to which such rights are being assigned; and provided further, that
the Company receives the written instrument provided in subparagraph (b)
below. Any transferee to whom a transfer is made in accordance with the
immediately preceding sentence shall be deemed a Holder of the Loan
Agreement.
(b) Any transferee (other than a Holder) to whom rights hereunder are
transferred shall, as a condition to such transfer, deliver to the Company
a written instrument by which such transferee agrees to be bound by the
obligations imposed upon Holders under the Loan Agreement to the same
extent as if such transferee were a party hereto, including without
limitation the obligations imposed upon Holders pursuant to the Loan
Agreement.
(c) A transferee to whom such rights are transferred pursuant to the
Loan Agreement may not again transfer such rights to any other Person,
other than as provided in the Loan Agreement.
8. Governing Law. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS
MADE AND PERFORMED IN THAT STATE.
ASCENT PEDIATRICS, INC.
By:
--------------------------------
Title:
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SCHEDULE A TO THE NOTE OF
ASCENT PEDIATRICS, INC.
DATED FEBRUARY 19, 1999
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EXHIBIT B
FORM OF NOTICE OF BORROWING
Reference is made to that certain Loan Agreement dated as February 16, 1999
by and among Ascent Pediatrics, Inc. (the "Company"), Alpharma USPD Inc. (the
"Lender") and Alpharma Inc. (including all annexes, exhibits and schedules
thereto, and as from time to time amended, restated, supplemented or otherwise
modified, the "Loan Agreement"). Capitalized terms used herein without
definition are so used as defined in the Loan Agreement.
The Company hereby gives irrevocable notice, pursuant to Section 2.3(a) of
the Loan Agreement, that it requests a Loan under the Loan Agreement and in that
connection sets forth below the terms on which such Loan is requested to be
made:
<TABLE>
<S> <C>
(A) Date of Borrowing
(which is a Business Day) __________________________________
(B) Principal Amount of Loan(1) ________________________________
(C) Funds are requested to be disbursed
to the Company's account with ______________________________
Account No. _____________
(D) Project Information and Use of Proceeds:
</TABLE>
______________________
(1) Not less than $1,000,000 or a multiple of $500,000 in excess thereof.
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The Company shall indemnify the Lender against any loss, cost or expense
including, without limitation, the cost of Lender funds on its credit
facilities, incurred by the Lender as a result of the Loan requested in this
Notice of Borrowing (other than any Notice of Borrowing delivered pursuant to
Section 2.6 of the Loan Agreement) not being made if such Loan is not made by
the Lender because the conditions precedent to such Loan as set forth in Section
4.1, 4.2 or 4.3 of the Loan Agreement were not satisfied or waived.
IN WITNESS WHEREOF, the Company has caused this Notice of Borrowing to be
executed and delivered by its duly authorized officer as of the date first set
above.
ASCENT PEDIATRICS, INC.
By:
-----------------------------------
Title:
----------------------------------
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EXHIBIT C
OPINION OF HALE AND DORR LLP
1. Each of the Company and Merger Sub is a corporation existing and in good
standing under the General Corporation Law of the State of Delaware.
2. The Company has the requisite corporate power and authority to execute,
deliver and, subject to the approval of the stockholders of the Company of
the Merger Agreement (including the exhibits thereto) and the transactions
contemplated thereby, perform the Merger Agreement and the Transaction
Agreements. The Merger Sub has the requisite corporate power and authority to
execute, deliver and perform the Merger Agreement.
3. The Board of Directors of the Company has adopted by requisite vote the
resolutions necessary to authorize the execution, delivery and, subject to
the approval of the stockholders of the Company of the Merger Agreement
(including the exhibits thereto) and the transactions contemplated thereby,
performance by the Company of the Merger Agreement and the Transaction
Agreements. The Board of Directors of the Merger Sub has adopted by requisite
vote the resolutions necessary to authorize the execution, delivery and
performance by the Merger Sub of the Merger Agreement.
4. The Company has duly executed and delivered the Merger Agreement and the
Transaction Agreements. The Merger Sub has duly executed and delivered the
Merger Agreement.
5. Subject to the approval of the stockholders of the Company of the Merger
Agreement (including the exhibits thereto) and the transactions contemplated
thereby, each of the Merger Agreement and the Transaction Agreements is a
valid and binding obligation of the Company and is enforceable against the
Company in accordance with its respective terms. The Merger Agreement is a
valid and binding obligation of the Merger Sub and is enforceable against the
Merger Sub in accordance with its terms.
6. The Note has been duly authorized, executed, issued and delivered by the
Company and constitutes a valid and binding obligation of the Company
enforceable against the Company in accordance with its terms.
7. Subject to the approval of the stockholders of the Company of the Merger
Agreement (including the exhibits thereto) and the transactions contemplated
thereby, the execution and delivery by the Company of the Merger Agreement
and the Transaction Agreements and the performance of its obligations
thereunder will not (a) constitute a violation of the certificate of
incorporation or bylaws of the Company, (b) constitute a material violation
by the Company of any statutory law or governmental regulation covered by
this Opinion, or (c) breach, or result in a default under any existing
obligation of the Company under any of its Other Specified Agreements. The
execution and delivery by the Merger Sub of the Merger Agreement and the
performance of its obligations thereunder will not (a) constitute a violation
of the certificate of incorporation or bylaws of the Merger Sub or (b)
constitute a material violation by the Merger Sub of any statutory law or
governmental regulation covered by this Opinion. The term Other Specified
Agreements means those agreements set forth on Schedule A attached hereto.
8. Except as provided on the schedule of Governmental Filings attached hereto as
Schedule B, to our knowledge and based in part upon the representations of
Alpharma in the Master Agreement, neither the Company nor Merger Sub was
required to obtain
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any consent, approval, authorization or order of, or make any filings or
registrations with, any United States federal court or governmental agency in
order to obtain the right to enter into or perform under the Merger Agreement
or, in the case of the Company, any of the Transaction Agreements, or to take
any of the actions taken by it on or prior to this date to consummate the
transactions contemplated thereby, except for (i) such consents,
authorizations, approvals, orders, registrations or filings as have been
obtained or made prior to the date hereof, or as permitted to be made or
obtained on or after the date hereof pursuant to the Merger Agreement, the
Transaction Agreements and the exhibits and schedules thereto, respectively;
and (ii) such consents, authorizations, approvals, orders, registrations or
filings as could not individually or in the aggregate reasonably be expected
to have a Material Adverse Effect.
9. Neither the Company nor Merger Sub is an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
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ANNEX C
ADAMS, HARKNESS & HILL, INC.
INVESTMENT BANKING
February 16, 1999
Board of Directors
Ascent Pediatrics, Inc.
187 Ballardsvale Street, Suite B125
Wilmington, MA 01887
Attention: Emmett Clemente, Ph.D. -- Chairman of the Board
Members of the Board:
You have requested our opinion (the "Fairness Opinion") as to the fairness,
from a financial point of view, to the holders of common stock, $0.00004 par
value (the "Common Stock"), of Ascent Pediatrics, Inc., a Delaware corporation
(the "Company"), of certain transactions by and among the Company, Alpharma USPD
Inc., a Maryland corporation (the "Lender"), and Alpharma, Inc., a Delaware
corporation (the "Parent").
The Company proposes entering into a loan agreement (the "Loan Agreement")
dated February 16, 1999 with the Lender. Pursuant to the Loan Agreement, the
Company may borrow from time to time through December 31, 2001, up to a maximum
principal amount of $40,000,000, subject to certain terms, conditions and other
limitations. The outstanding principal and accrued but unpaid interest thereon
shall bear interest at the rate of 7.5% per annum. In conjunction with the Loan
Agreement, the Company proposes entering into a number of agreements
(collectively, the "Option Agreement") involving both the Lender and the Parent
dated February 16, 1999 pursuant to which the Company shall assign to the Lender
an option (the "Option"), pursuant to which the Lender, on or about March 31,
2002, may acquire all of the outstanding capital stock of the Company (the
"Acquisition") for an aggregate amount equal to 12.2 times the sum of the
Company's fiscal year 2001 net income (as determined using 1998 Generally
Accepted Accounting Principles), plus the provision for income taxes for fiscal
year 2001, plus fiscal year 2001 research and development expenses in excess of
$1.5 million, plus certain interest expenses. If the Lender does not exercise
the Option the Company may elect to pre-pay all of the outstanding principal and
accrued but unpaid interest thereon at 125% of outstanding principal as of
December 31, 2001 plus accrued but unpaid interest thereon. If the Lender does
not exercise the Option and the Company does not elect to pre-pay the
outstanding principal and accrued but unpaid interest thereon, the Lender may
convert up to $40,000,000 of outstanding principal plus accrued interest (the
"Conversion") into Common Stock of the Company at a conversion price of $7.125
per share. If none of the foregoing occurs, the Lender shall be entitled to
receive repayment of all outstanding principal and accrued but unpaid interest
thereon according to a repayment schedule with a final payment due on June 30,
2005. We refer to the Loan Agreement, Option Agreement and the transactions
contemplated thereby collectively as the "Strategic Alliance".
Adams, Harkness & Hill, Inc., as part of its investment banking activities,
is continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. We
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have been engaged to render a Fairness Opinion by the Board of Directors of the
Company in connection with the Strategic Alliance and will receive a fee payable
upon rendering this Fairness Opinion. We have in the past provided investment
banking and financial advisory services to the Company for which we have
received various fees. We also serve as a market maker for the Common Stock,
and, in the ordinary course of our business, may trade in the Common Stock for
our own account and for the accounts of our customers. Accordingly, we may at
any time hold a long or short position in the Common Stock.
We are expressing no opinion as to the value of the Common Stock either
now, upon consummation of the Acquisition, upon consummation of the Conversion,
or at any other time. Our Fairness Opinion as expressed herein is limited to the
fairness, from a financial point of view, of the terms of the Strategic Alliance
as a whole to holders of the Common Stock as of the day hereof and does not
address the Company's underlying business decision to engage in the Strategic
Alliance.
In developing our Fairness Opinion, we have, among other things: (i)
reviewed the financial information contained in the prospectus of the Company,
dated May 29, 1997, related to its public offering of common equity, the
Company's Annual Report, Form 10-K, and related financial information for the
fiscal year ended December 31, 1997, and the Company's Form 10-Q and the related
unaudited financial information for the nine month period ended September 30,
1998; (ii) analyzed and discussed certain financial statements and other
financial and operating data concerning the Company, including forecasts,
prepared by members of the senior management of the Company; (iii) conducted due
diligence discussions with members of senior management of the Company; (iv)
reviewed the historical market prices and trading activity for the Common Stock
and compared them with those of certain publicly traded companies we deem to be
relevant and comparable to the Company; (v) reviewed the historical market
prices for the Common Stock and compared them with those of certain market
indices we deem to be relevant; (vi) compared the results of operations of the
Company with those of certain companies we deem to be relevant and comparable to
the Company; (vii) compared the financial terms of the Strategic Alliance with
the financial terms of certain other mergers and acquisitions to the extent we
deemed them to be relevant and comparable to the Strategic Alliance; (viii)
participated in certain discussions among representatives of the Company and
their financial and legal advisors; (ix) reviewed a draft of the Loan Agreement
dated February 16, 1999, and a draft of the Option Agreement dated February 16,
1999; and (x) reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters as we deemed
necessary, including our assessment of general economic, market and monetary
conditions as of the date hereof.
In connection with our review and arriving at our Fairness Opinion, we have
not independently verified any information received from the Company, have
relied on such information, and have assumed that all such information is
complete and accurate in all material respects. With respect to any forecasts
reviewed relating to the prospects of the Company, we have assumed that they
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of Company management as to the future financial
performance of the Company. Our Fairness Opinion is rendered on the basis of
securities market conditions prevailing as of the date hereof and on the
conditions and prospects, financial and otherwise, of the Company as known to us
on the date hereof. We have not conducted, nor have we received copies of, any
independent valuation or appraisal of any of the assets of the Company. In
addition, we have assumed, with your
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consent, that any material liabilities (contingent or otherwise, known or
unknown) of the Company are as set forth in the consolidated financial
statements of the Company.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by the Company with the Securities and Exchange Commission
with respect to the Strategic Alliance contemplated by the Loan Agreement and
the Option Agreement.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, from a financial point of view, the terms of the Strategic Alliance
as a whole are fair to the holders of the Common Stock.
Sincerely,
ADAMS, HARKNESS & HILL, INC.
By: /s/ GREGORY B. BROWN
----------------------------------------
Gregory B. Brown
Managing Director
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ANNEX D
ASCENT PEDIATRICS, INC.
1999 STOCK INCENTIVE PLAN
1. PURPOSE
The purpose of this 1999 Stock Incentive Plan (the "Plan") of Ascent
Pediatrics, Inc., a Delaware corporation (the "Company"), is to advance the
interests of the Company's stockholders by enhancing the Company's ability to
attract, retain and motivate persons who make (or are expected to make)
important contributions to the Company by providing such persons with equity
ownership opportunities and performance-based incentives and thereby better
aligning the interests of such persons with those of the Company's stockholders.
Except where the context otherwise requires, the term "Company" shall include
any of the Company's present or future subsidiary corporations as defined in
Section 424(f) of the Internal Revenue Code of 1986, as amended, and any
regulations promulgated thereunder (the "Code") and any other business venture
(including, without limitation, joint venture or limited liability company) in
which the Company has a significant interest, as determined by the Board of
Directors of the Company (the "Board").
2. ELIGIBILITY
All of the Company's employees, officers, directors, consultants and
advisors (and any individuals who have accepted an offer for employment) are
eligible to be granted options, restricted stock awards, or other stock-based
awards (each, an "Award") under the Plan. Each person who has been granted an
Award under the Plan shall be deemed a "Participant".
3. ADMINISTRATION, DELEGATION
(a) Administration by Board of Directors. The Plan will be administered by
the Board. The Board shall have authority to grant Awards and to adopt, amend
and repeal such administrative rules, guidelines and practices relating to the
Plan as it shall deem advisable. The Board may correct any defect, supply any
omission or reconcile any inconsistency in the Plan or any Award in the manner
and to the extent it shall deem expedient to carry the Plan into effect and it
shall be the sole and final judge of such expediency. All decisions by the Board
shall be made in the Board's sole discretion and shall be final and binding on
all persons having or claiming any interest in the Plan or in any Award. No
director or person acting pursuant to the authority delegated by the Board shall
be liable for any action or determination relating to or under the Plan made in
good faith.
(b) Delegation to Executive Officers. To the extent permitted by
applicable law, the Board may delegate to one or more executive officers of the
Company the power to make Awards and exercise such other powers under the Plan
as the Board may determine, provided that the Board shall fix the maximum number
of shares subject to Awards and the maximum number of shares for any one
Participant to be made by such executive officers.
(c) Appointment of Committees. To the extent permitted by applicable law,
the Board may delegate any or all of its powers under the Plan to one or more
committees or
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subcommittees of the Board (a "Committee"). All references in the Plan to the
"Board" shall mean the Board or a Committee of the Board or the executive
officer referred to in Section 3(b) to the extent that the Board's powers or
authority under the Plan have been delegated to such Committee or executive
officer.
4. STOCK AVAILABLE FOR AWARDS
(a) Number of Shares. Subject to adjustment under Section 8, Awards may be
made under the Plan for up to 500,000 shares of common stock, $.00004 par value
per share, of the Company (the "Common Stock"). If any Award expires or is
terminated, surrendered or canceled without having been fully exercised or is
forfeited in whole or in part or results in any Common Stock not being issued,
the unused Common Stock covered by such Award shall again be available for the
grant of Awards under the Plan, subject, however, in the case of Incentive Stock
Options (as hereinafter defined), to any limitation required under the Code.
Shares issued under the Plan may consist in whole or in part of authorized but
unissued shares or treasury shares.
(b) Per-Participant Limit. Subject to adjustment under Section 8, the
maximum number of shares of Common Stock with respect to which an Award may be
granted to any Participant under the Plan shall be 400,000 per calendar year.
The per-Participant limit described in this Section 4(c) shall be construed and
applied consistently with Section 162(m) of the Code.
5. STOCK OPTIONS
(a) General. The Board may grant options to purchase Common Stock (each,
an "Option") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive Stock
Option (as hereinafter defined) shall be designated a "Nonstatutory Stock
Option".
(b) Incentive Stock Options. An Option that the Board intends to be an
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereof) which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
(c) Exercise Price. The Board shall establish the exercise price at the
time each Option is granted and specify it in the applicable option agreement;
provided, however, that the exercise price shall not be less than 100% of the
fair market value of the Common Stock, as determined by the Board, at the time
the Option is granted.
(d) Duration of Options. Each Option shall be exercisable at such times
and subject to such terms and conditions as the Board may specify in the
applicable option agreement; provided, however, that no Option will be granted
for a term in excess of 10 years and that no Option granted hereunder may be
exercised on the Option Closing Date (as defined in Section 8(d) below).
(e) Exercise of Option. Options may be exercised by delivery to the
Company of a written notice of exercise signed by the proper person or by any
other form of notice
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(including electronic notice) approved by the Board together with payment in
full as specified in Section 5(f) for the number of shares for which the Option
is exercised.
(f) Payment Upon Exercise. Common Stock purchased upon the exercise of an
Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may, in its sole discretion, otherwise provide
in an option agreement, by (i) delivery of an irrevocable and unconditional
undertaking by a creditworthy broker to deliver promptly to the Company
sufficient funds to pay the exercise price or (ii) delivery by the
Participant to the Company of a copy of irrevocable and unconditional
instructions to a creditworthy broker to deliver promptly to the Company
cash or a check sufficient to pay the exercise price;
(3) by delivery of shares of Common Stock owned by the Participant
valued at their fair market value as determined by (or in a manner approved
by) the Board in good faith ("Fair Market Value"), provided (i) such method
of payment is then permitted under applicable law and (ii) such Common
Stock as owned by the Participant at least six months prior to such
delivery;
(4) to the extent permitted by the Board, in its sole discretion by
(i) delivery of a promissory note of the Participant to the Company on
terms determined by the Board, or (ii) payment of such other lawful
consideration as the Board may determine; or
(5) by any combination of the above permitted forms of payment.
6. RESTRICTED STOCK
(a) Grants. The Board may grant Awards entitling recipients to acquire
shares of Common Stock, subject to the right of the Company to repurchase all or
part of such shares at their issue price or other stated or formula price (or to
require forfeiture of such shares if issued at no cost) from the recipient in
the event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable restriction period or periods
established by the Board for such Award (each, a "Restricted Stock Award").
(b) Terms and Conditions. The Board shall determine the terms and
conditions of any such Restricted Stock Award, including the conditions for
repurchase (or forfeiture) and the issue price, if any. Any stock certificates
issued in respect of a Restricted Stock Award shall be registered in the name of
the Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). At the expiration of the applicable restriction periods, the
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or if the Participant has died, to the
beneficiary designated, in a manner determined by the Board, by a Participant to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
7. OTHER STOCK-BASED AWARDS
The Board shall have the right to grant other Awards based upon the Common
Stock having such terms and conditions as the Board may determine, including the
grant of
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shares based upon certain conditions, the grant of securities convertible into
Common Stock and the grant of stock appreciation rights.
8. ADJUSTMENTS FOR CHANGES IN COMMON STOCK AND CERTAIN OTHER EVENTS
(a) Changes in Capitalization. In the event of any stock split, reverse
stock split, stock dividend, recapitalization, combination of shares,
reclassification of shares, spin-off or other similar change in capitalization
or event, or any distribution to holders of Common Stock other than a normal
cash dividend, (i) the number and class of securities available under this Plan,
(ii) the per-Participant limit set forth in Section 4(c), (iii) the number and
class of securities and exercise price per share subject to each outstanding
Option, (iv) the repurchase price per share subject to each outstanding
Restricted Stock Award, and (v) the terms of each other outstanding Award shall
be appropriately adjusted by the Company (or substituted Awards may be made, if
applicable) to the extent the Board shall determine, in good faith, that such an
adjustment (or substitution) is necessary and appropriate. If this Section 8(a)
applies and Section 8(c) also applies to any event, Section 8(c) shall be
applicable to such event, and this Section 8(a) shall not be applicable.
(b) Liquidation or Dissolution. In the event of a proposed liquidation or
dissolution of the Company, the Board shall upon written notice to the
Participants provide that all then unexercised Options will (i) become
exercisable in full as of a specified time at least 10 business days prior to
the effective date of such liquidation or dissolution and (ii) terminate
effective upon such liquidation or dissolution, except to the extent exercised
before such effective date. The Board may specify the effect of a liquidation or
dissolution on any Restricted Stock Award or other Award granted under the Plan
at the time of the grant of such Award.
(c) Acquisition Events
(1) Definition. An "Acquisition Event" shall mean: (a) any merger or
consolidation of the Company with or into another entity as a result of which
the Common Stock is converted into or exchanged for the right to receive cash,
securities or other property or (b) any exchange of shares of the Company for
cash, securities or other property pursuant to a statutory share exchange
transaction.
(2) Consequences of an Acquisition Event on Options. Upon the occurrence
of an Acquisition Event, or the execution by the Company of any agreement with
respect to an Acquisition Event, the Board shall provide that all outstanding
Options shall be assumed, or equivalent options shall be substituted, by the
acquiring or succeeding corporation (or an affiliate thereof). For purposes
hereof, an Option shall be considered to be assumed if, following consummation
of the Acquisition Event, the Option confers the right to purchase, for each
share of Common Stock subject to the Option immediately prior to the
consummation of the Acquisition Event, the consideration (whether cash,
securities or other property) received as a result of the Acquisition Event by
holders of Common Stock for each share of Common Stock held immediately prior to
the consummation of the Acquisition Event (and if holders were offered a choice
of consideration, the type of consideration chosen by the holders of a majority
of the outstanding shares of Common Stock); provided, however, that if the
consideration received as a result of the Acquisition Event is not solely common
stock of the acquiring or succeeding corporation (or an affiliate thereof), the
Company may, with the consent of the acquiring or succeeding corporation,
provide for the consideration to be received upon the exercise of Options to
consist solely of common stock of the acquiring or succeeding corporation (or an
affiliate
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thereof) equivalent in fair market value to the per share consideration received
by holders of outstanding shares of Common Stock as a result of the Acquisition
Event.
Notwithstanding the foregoing, if the acquiring or succeeding corporation
(or an affiliate thereof) does not agree to assume, or substitute for, such
Options, then the Board shall, upon written notice to the Participants, provide
that all then unexercised Options will become exercisable in full as of a
specified time prior to the Acquisition Event and will terminate immediately
prior to the consummation of such Acquisition Event, except to the extent
exercised by the Participants before the consummation of such Acquisition Event;
provided, however, that in the event of an Acquisition Event under the terms of
which holders of Common Stock will receive upon consummation thereof a cash
payment for each share of Common Stock surrendered pursuant to such Acquisition
Event (the "Acquisition Price"), then the Board may instead provide that all
outstanding Options shall terminate upon consummation of such Acquisition Event
and that each Participant shall receive, in exchange therefor, a cash payment
equal to the amount (if any) by which (A) the Acquisition Price multiplied by
the number of shares of Common Stock subject to such outstanding Options
(whether or not then exercisable), exceeds (B) the aggregate exercise price of
such Options.
(3) Consequences of an Acquisition Event on Restricted Stock Awards. Upon
the occurrence of an Acquisition Event, the repurchase and other rights of the
Company under each outstanding Restricted Stock Award shall inure to the benefit
of the Company's successor and shall apply to the cash, securities or other
property which the Common Stock was converted into or exchanged for pursuant to
such Acquisition Event in the same manner and to the same extent as they applied
to the Common Stock subject to such Restricted Stock Award.
(4) Consequences of an Acquisition Event on Other Awards. The Board shall
specify the effect of an Acquisition Event on any other Award granted under the
Plan at the time of the grant of such Award.
(d) Depositary Shares Merger.
(1) In accordance with this Section 8, effective as of the effective time
(the "Effective Time") of the merger (the "Merger") contemplated by the
Agreement and Plan of Merger dated as of February 16, 1999 by and between the
Company and Bird Merger Corporation, a wholly-owned subsidiary of the Company,
the class of securities available under this Plan shall mean the depositary
shares ("Depositary Shares") issued or issuable pursuant to the Depositary
Agreement dated as of February 16, 1999 by and among the Company, Alpharma USPD,
Inc. and State Street Bank and Trust Company (the "Depositary") until the Option
Expiration Date (as defined in the Depositary Agreement) and shall mean the
Common Stock of the Company from and after the Option Expiration Date.
(2) From and after the Effective Time until the Option Determination Date
(as defined in the Depositary Agreement), a Participant shall receive from the
Depositary, upon the exercise of an Option a depositary receipt ("Depositary
Receipt") representing the number of Depositary Shares issuable upon exercise of
such Option.
(3) From and after the Option Closing Date (as defined in the Depositary
Agreement), a Participant shall receive from the Company, upon exercise of an
Option, cash in an amount equal to the Option Exercise Price (as defined in the
Depositary Agreement) for each Depositary Share issuable upon conversion or
exercise of such Option.
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(4) From and after the Option Expiration Date, a Participant shall receive
from the Company, upon exercise of an Option, the number of shares of Common
Stock of the Company issuable upon conversion or exercise of such Option.
9. GENERAL PROVISIONS APPLICABLE TO AWARDS
(a) Transferability of Awards. Except as the Board may otherwise determine
or provide in an Award, Awards shall not be sold, assigned, transferred, pledged
or otherwise encumbered by the person to whom they are granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and, during the life of the Participant, shall be exercisable only
by the Participant. References to a Participant, to the extent relevant in the
context, shall include references to authorized transferees.
(b) Documentation. Each Award shall be evidenced by a written instrument
in such form as the Board shall determine. Each Award may contain terms and
conditions in addition to those set forth in the Plan.
(c) Board Discretion. Except as otherwise provided by the Plan, each Award
may be made alone or in addition or in relation to any other Award. The terms of
each Award need not be identical, and the Board need not treat Participants
uniformly.
(d) Termination of Status. The Board shall determine the effect on an
Award of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Award.
(e) Withholding. Each Participant shall pay to the Company, or make
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. Except as the Board may otherwise
provide in an Award, Participants may, to the extent then permitted under
applicable law, satisfy such tax obligations in whole or in part by delivery of
shares of Common Stock, including shares retained from the Award creating the
tax obligation, valued at their Fair Market Value. The Company may, to the
extent permitted by law, deduct any such tax obligations from any payment of any
kind otherwise due to a Participant.
(f) Amendment of Award. The Board may amend, modify or terminate any
outstanding Award, including but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
(g) Conditions on Delivery of Stock. The Company will not be obligated to
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
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(h) Acceleration. The Board may at any time provide that any Options shall
become immediately exercisable in full or in part, that any Restricted Stock
Awards shall be free of restrictions in full or in part or that any other Awards
may become exercisable in full or in part or free of some or all restrictions or
conditions, or otherwise realizable in full or in part, as the case may be.
10. MISCELLANEOUS
(a) No Right To Employment or Other Status. No person shall have any claim
or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.
(b) No Rights As Stockholder. Subject to the provisions of the applicable
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Award until becoming the record holder of such shares.
Notwithstanding the foregoing, in the event the Company effects a split of the
Common Stock by means of a stock dividend and the exercise price of and the
number of shares subject to such Option are adjusted as of the date of the
distribution of the dividend (rather than as of the record date for such
dividend), then an optionee who exercises an Option between the record date and
the distribution date for such stock dividend shall be entitled to receive, on
the distribution date, the stock dividend with respect to the shares of Common
Stock acquired upon such Option exercise, notwithstanding the fact that such
shares were not outstanding as of the close of business on the record date for
such stock dividend.
(c) Effective Date and Term of Plan. The Plan shall become effective on
the date on which it is adopted by the Board, but no Award granted to a
Participant designated by the Board as subject to Section 162(m) of the Code by
the Board shall become exercisable, vested or realizable, as applicable to such
Award, unless and until the Plan has been approved by the Company's stockholders
to the extent stockholder approval is required by Section 162(m) in the manner
required under Section 162(m) (including the vote required under Section
162(m)). No Awards shall be granted under the Plan after the completion of ten
years from the earlier of (i) the date on which the Plan was adopted by the
Board and (ii) the date the Plan was approved by the Company's stockholders, but
Awards previously granted may extend beyond that date.
(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan
or any portion thereof at any time, provided that to the extent required by
Section 162(m) of the Code, no Award granted to a Participant designated as
subject to Section 162(m) by the Board after the date of such amendment shall
become exercisable, realizable or vested, as applicable to such Award (to the
extent that such amendment to the Plan was required to grant such Award to a
particular Participant), unless and until such amendment shall have been
approved by the Company's stockholders as required by Section 162(m) (including
the vote required under Section 162(m)).
(e) Governing Law. The provisions of the Plan and all Awards made
hereunder shall be governed by and interpreted in accordance with the laws of
the State of Delaware, without regard to any applicable conflicts of law.
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ANNEX E
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
SEC.262 APPRAISAL RIGHTS. - (a) Any stockholder of a corporation of this
State who holds shares of stock on the date of the making of a demand pursuant
to subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec. 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of the stockholder's shares of stock under
the circumstances described in subsections (b) and (c) of this section. As used
in this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words 'depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to sec.
251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or sec.
264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to sec.sec. 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
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c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to sec. 228 or
sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights
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may, within 20 days after the date of mailing of such notice, demand in writing
from the surviving or resulting corporation the appraisal of such holder's
shares. Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either (i)
each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders of
any class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or (ii)
the surviving or resulting corporation shall send such a second notice to all
such holders on or within 10 days after such effective date; provided, however,
that if such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is required
to give either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than 10
days prior to the date the notice is given, provided, that if the notice is
given on or after the effective date of the merger or consolidation, the record
date shall be such effective date. If no record date is fixed and the notice is
given prior to the effective date, the record date shall be the close of
business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or
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certified mail to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall also be
given by 1 or more publications at least 1 week before the day of the hearing,
in a newspaper of general circulation published in the City of Wilmington,
Delaware or such publication as the Court deems advisable. The forms of the
notices by mail and by publication shall be approved by the Court, and the costs
thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the
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merger or consolidation); provided, however, that if no petition for an
appraisal shall be filed within the time provided in subsection (e) of this
section, or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of such stockholder's demand for an appraisal
and an acceptance of the merger or consolidation, either within 60 days after
the effective date of the merger or consolidation as provided in subsection (e)
of this section or thereafter with the written approval of the corporation, then
the right of such stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such approval may
be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article EIGHTH of the Registrant's Second Amended and Restated 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 Amended and Restated 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, has 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 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 Second Amended and Restated 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.
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Article NINTH also permits the Registrant to purchase and maintain
insurance, at the Registrant'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 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.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are exhibits to the registration statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
2.1(1) Agreement and Plan of Merger dated as of February 16, 1999
by and between the Registrant and Bird Merger Corporation.
3.1(2) Amended and Restated Certificate of Incorporation of the
Registrant.
3.2(3) Certificate of Designation, Voting Powers, Preferences and
Rights of Series G Convertible Exchangeable Preferred Stock
of the Registrant.
3.3(2) Amended and Restated By-Laws of the Registrant.
4.1(2) Specimen Certificate for shares of Common Stock, par value
$.00004 per share, of the Registrant.
4.2(1) Form of Depositary Receipt (included in Exhibit 10.1).
4.3(1) Form of 7.5% Convertible Subordinated Note of the Registrant
issued on February 19, 1999 under the Alpharma Loan
Agreement (as defined below) (included in Exhibit 10.3).
4.4(1) Form of 8% Subordinated Note of the Registrant issued on
June 1, 1998 under the May 1998 Securities Purchase
Agreement (as defined below) (included in Exhibit 10.7).
4.5(1) Form of 8% Convertible Subordinated Note of the Registrant
issuable under the May 1998 Securities Purchase Agreement
(included in Exhibit 10.7).
5.1 Opinion of Hale and Dorr LLP as to the legality of the
securities being offered.
8.1 Opinion of Hale and Dorr LLP as to the material United
States federal income tax consequences of the merger.
10.1(1) Depositary Agreement dated as of February 16, 1999 by and
among the Registrant, Alpharma USPD, Inc. ("Alpharma") and
State Street Bank and Trust Company (included in Exhibit
2.1).
10.2(1) Master Agreement dated as of February 16, 1999 by and among
the Registrant, Alpharma and Alpharma, Inc. (included in
Exhibit 2.1).
10.3(1) Loan Agreement (the "Alpharma Loan Agreement") dated as of
February 16, 1999 by and among the Registrant, Alpharma and
Alpharma, Inc.
10.4(1) Guaranty Agreement dated as of February 16, 1999 by and
between the Registrant and Alpharma, Inc.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
10.5(1) Subordination Agreement dated as of February 16, 1999 by and
among the Registrant, Alpharma and the Original Lenders (as
defined therein).
10.6(1) Registration Rights Agreement dated as of February 16, 1999
by and between the Registrant and Alpharma.
10.7(3) Securities Purchase Agreement (the "May 1998 Securities
Purchase Agreement") dated as of May 13, 1998, by and among
the Registrant, Furman Selz Investors II, L.P., FS Employee
Investors LLC, FS Parallel Fund L.P., BancBoston Ventures,
Inc. and Flynn Partners.
10.8(1) Second Amendment dated as of February 16, 1999 to the May
1998 Securities Purchase Agreement.
10.9(2)(4) Amended and Restated 1992 Equity Incentive Plan.
10.10(2)(4) 1997 Director Stock Option Plan.
10.11(2)(4) 1997 Employee Stock Purchase Plan.
10.12(2) Lease dated November 21, 1996 between the Registrant and New
Boston Wilmar Limited Partnership.
10.13(2)(4) Employment Agreement dated as of March 15, 1994 between the
Registrant and Emmett Clemente (the "Clemente Employment
Agreement").
10.14(2)(4) Consulting Agreement dated as of April 1, 1996 between the
Registrant and Robert E. Baldini.
10.15(2)+ Development and License Agreement dated as of October 8,
1996 by and between the Registrant and Recordati S.A.
Chemical and Pharmaceutical Company ("Recordati").
10.16(2) 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.
10.17(2)+ Manufacturing and Supply Agreement dated as of October 8,
1996 by and between the Registrant and Recordati.
10.18(2)+ Supply Agreement dated as of October 12, 1994 by and between
the Registrant and Lyne Laboratories, Inc.
10.19(2) Securities Purchase Agreement dated as of January 31, 1997
among the Registrant, Triumph-Connecticut Limited
Partnership and the purchasers identified therein (the
"Triumph Agreement").
10.20(2) Waiver and Amendment to the Triumph Agreement dated as of
March 13, 1997.
10.21(3) Second Waiver and Amendment to the Triumph Agreement dated
as of May 13, 1998.
10.22(2) 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.
10.23(2) Form of Common Stock Purchase Warrant issued to Chestnut
Partners, Inc. on February 28, 1997.
10.24(2) Common Stock Purchase Warrant issued to Banque Paribas on
February 28, 1997.
10.25(2) Form of Common Stock Purchase Warrant with an exercise price
of $.01 per share issued to designees of Bentley Securities
on February 28, 1997.
10.26(2) 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.
10.27(2)+ Asset Purchase Agreement dated as of March 25, 1997, between
the Registrant and Upsher-Smith (the 'Asset Purchase
Agreement'), which includes the form of Manufacturing
Agreement between the Registrant and Upsher-Smith as Exhibit
E thereto.
10.28(5)+ Addendum to Asset Purchase Agreement dated as of July 10,
1997, between the Registrant and Upsher-Smith.
</TABLE>
II-3
<PAGE> 330
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
\
10.29(6)+ Promotion Agreement dated as of November 25, 1998, between
the Registrant and Warner-Lambert Company.
10.30(7) 1999 Stock Incentive Plan.
10.31 Amendment No. 1 dated as of March 15, 1999 to Clemente
Employment Agreement.
10.32 Financial Advisory Services Fee Arrangement dated as of May
13, 1998 by and among Ascent Pediatrics, Inc., FS Private
Investments LLC and BancBoston Ventures Inc. as amended by
the Letter Agreement dated as of February 16, 1999.
10.33 Agreement among the Registrant and the Purchasers (as
defined in the May 1998 Securities Purchase Agreement) dated
as of May 26, 1999.
23.1 Consent of PricewaterhouseCoopers LLC, independent
accountants.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Adams, Harkness & Hill, Inc. (included in Annex
C-1 to the proxy statement/prospectus which is a part of
this Registration Statement).
23.4 Consent of Hale and Dorr LLP (included in Exhibits 5.1 and
8.1 of this registration statement).
24.1 Powers of Attorney (included in the signature page of this
Registration Statement).
99.1 Form of the proxy card for the annual meeting of the
Registrant.
</TABLE>
- ---------------
(1) Incorporated herein by reference to the Exhibits to the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission (the
"Commission") on February 22, 1999.
(2) Incorporated herein by reference to the Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 333-23319).
(3) Incorporated herein by reference to the Exhibits to the Registrant's Current
Report on Form 8-K filed with the Commission on June 2, 1998.
(4) Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Registration Statement.
(5) Incorporated herein by reference to Exhibits to the Registrant's Current
Report on Form 8-K filed with the Commission on July 25, 1997.
(6) Incorporated herein by reference to the Exhibits to the Registrant's Annual
Report on Form 10-K filed with the Commission on March 31, 1999.
(7) Incorporated herein by reference to the 1999 Stock Incentive Plan of the
Registrant included as Annex D to the proxy statement/prospectus which is a
part of this Registration Statement.
+ Confidential treatment granted as to certain portions, which portions were
omitted and filed separately with the Commission.
(b) Not applicable.
(c) The opinion of Adams, Harkness & Hill, Inc. is included as Annex C-1,
to the proxy statement/prospectus which is part of this registration
statement and is incorporated herein by reference.
II-4
<PAGE> 331
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar amount of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c)(1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment
II-5
<PAGE> 332
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(d) 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 foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the 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.
(e) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the proxy
statement/prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form S-4,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
<PAGE> 333
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Wilmington, Commonwealth
of Massachusetts on this 26th day of May, 1999.
ASCENT PEDIATRICS, INC.
By: /s/ ALAN R. FOX
-----------------------------------
Alan R. Fox
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Alan R. Fox, John G. Bernardi and David E.
Redlick, Esq., and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities (including his capacity as a
director and/or officer of Ascent Pediatrics, Inc.) to sign any or all
amendments (including pre-effective and post-effective amendments) to this
registration statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ ALAN R. FOX President, Chief Executive May 26, 1999
- --------------------------------------------- Officer and Director
Alan R. Fox (Principal Executive
Officer)
/s/ JOHN G. BERNARDI Vice President, Finance and May 26, 1999
- --------------------------------------------- Treasurer (Principal
John G. Bernardi Financial and Accounting
Officer)
/s/ EMMETT CLEMENTE Chairman May 26, 1999
- ---------------------------------------------
Emmett Clemente, Ph.D.
/s/ ROBERT E. BALDINI Vice Chairman May 26, 1999
- ---------------------------------------------
Robert E. Baldini
/s/ RAYMOND F. BADDOUR Director May 26, 1999
- ---------------------------------------------
Raymond F. Baddour, Ph.D.
</TABLE>
II-7
<PAGE> 334
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ MICHAEL J.F. DUCROS Director May 26, 1999
- ---------------------------------------------
Michael J.F. DuCros
/s/ ANDRE L. LAMOTTE Director May 26, 1999
- ---------------------------------------------
Andre L. Lamotte, Sc.D.
/s/ JAMES L. LUIKART Director May 26, 1999
- ---------------------------------------------
James L. Luikart
/s/ LEE J. SCHROEDER Director May 26, 1999
- ---------------------------------------------
Lee J. Schroeder
</TABLE>
II-8
<PAGE> 335
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
2.1(1) Agreement and Plan of Merger dated as of February 16, 1999
by and between the Registrant and Bird Merger Corporation.
3.1(2) Amended and Restated Certificate of Incorporation of the
Registrant.
3.2(3) Certificate of Designation, Voting Powers, Preferences and
Rights of Series G Convertible Exchangeable Preferred Stock
of the Registrant.
3.3(2) Amended and Restated By-Laws of the Registrant.
4.1(2) Specimen Certificate for shares of Common Stock, par value
$.00004 per share, of the Registrant.
4.2(1) Form of Depositary Receipt (included in Exhibit 10.1).
4.3(1) Form of 7.5% Convertible Subordinated Note of the Registrant
issued on February 19, 1999 under the Alpharma Loan
Agreement (as defined below) (included in Exhibit 10.3).
4.4(1) Form of 8% Subordinated Note of the Registrant issued on
June 1, 1998 under the May 1998 Securities Purchase
Agreement (as defined below) (included in Exhibit 10.7).
4.5(1) Form of 8% Convertible Subordinated Note of the Registrant
issuable under the May 1998 Securities Purchase Agreement
(included in Exhibit 10.7).
5.1 Opinion of Hale and Dorr LLP as to the legality of the
securities being offered.
8.1 Opinion of Hale and Dorr LLP as to the material United
States federal income tax consequences of the merger.
10.1(1) Depositary Agreement dated as of February 16, 1999 by and
among the Registrant, Alpharma USPD, Inc. ("Alpharma") and
State Street Bank and Trust Company (included in Exhibit
2.1).
10.2(1) Master Agreement dated as of February 16, 1999 by and among
the Registrant, Alpharma and Alpharma, Inc. (included in
Exhibit 2.1).
10.3(1) Loan Agreement (the "Alpharma Loan Agreement") dated as of
February 16, 1999 by and among the Registrant, Alpharma and
Alpharma, Inc.
10.4(1) Guaranty Agreement dated as of February 16, 1999 by and
between the Registrant and Alpharma, Inc.
10.5(1) Subordination Agreement dated as of February 16, 1999 by and
among the Registrant, Alpharma and the Original Lenders (as
defined therein).
10.6(1) Registration Rights Agreement dated as of February 16, 1999
by and between the Registrant and Alpharma.
10.7(3) Securities Purchase Agreement (the "May 1998 Securities
Purchase Agreement") dated as of May 13, 1998, by and among
the Registrant, Furman Selz Investors II, L.P., FS Employee
Investors LLC, FS Parallel Fund L.P., BancBoston Ventures,
Inc. and Flynn Partners.
10.8(1) Second Amendment dated as of February 16, 1999 to the May
1998 Securities Purchase Agreement.
10.9(2)(4) Amended and Restated 1992 Equity Incentive Plan.
10.10(2)(4) 1997 Director Stock Option Plan.
10.11(2)(4) 1997 Employee Stock Purchase Plan.
</TABLE>
<PAGE> 336
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.12(2) Lease dated November 21, 1996 between the Registrant and New
Boston Wilmar Limited Partnership.
10.13(2)(4) Employment Agreement dated as of March 15, 1994 between the
Registrant and Emmett Clemente (the "Clemente Employment
Agreement").
10.14(2)(4) Consulting Agreement dated as of April 1, 1996 between the
Registrant and Robert E. Baldini.
10.15(2)+ Development and License Agreement dated as of October 8,
1996 by and between the Registrant and Recordati S.A.
Chemical and Pharmaceutical Company ("Recordati").
10.16(2) 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.
10.17(2)+ Manufacturing and Supply Agreement dated as of October 8,
1996 by and between the Registrant and Recordati.
10.18(2)+ Supply Agreement dated as of October 12, 1994 by and between
the Registrant and Lyne Laboratories, Inc.
10.19(2) Securities Purchase Agreement dated as of January 31, 1997
among the Registrant, Triumph-Connecticut Limited
Partnership and the purchasers identified therein (the
"Triumph Agreement").
10.20(2) Waiver and Amendment to the Triumph Agreement dated as of
March 13, 1997.
10.21(3) Second Waiver and Amendment to the Triumph Agreement dated
as of May 13, 1998.
10.22(2) 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.
10.23(2) Form of Common Stock Purchase Warrant issued to Chestnut
Partners, Inc. on February 28, 1997.
10.24(2) Common Stock Purchase Warrant issued to Banque Paribas on
February 28, 1997.
10.25(2) Form of Common Stock Purchase Warrant with an exercise price
of $.01 per share issued to designees of Bentley Securities
on February 28, 1997.
10.26(2) 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.
10.27(2)+ Asset Purchase Agreement dated as of March 25, 1997, between
the Registrant and Upsher-Smith (the "Asset Purchase
Agreement"), which includes the form of Manufacturing
Agreement between the Registrant and Upsher-Smith as Exhibit
E thereto.
10.28(5)+ Addendum to Asset Purchase Agreement dated as of July 10,
1997, between the Registrant and Upsher-Smith.
10.29(6)+ Promotion Agreement dated as of November 25, 1998, between
the Registrant and Warner-Lambert Company.
10.30(7) 1999 Stock Incentive Plan.
10.31 Amendment No. 1 dated as of March 15, 1999 to Clemente
Employment Agreement.
</TABLE>
<PAGE> 337
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.32 Financial Advisory Services Fee Arrangement dated as of May
13, 1998 by and among Ascent Pediatrics, Inc., FS Private
Investments LLC and BancBoston Ventures Inc. as amended by
the Letter Agreement dated as of February 16, 1999.
10.33 Agreement among the Registrant and the Purchasers (as
defined in the May 1998 Securities Purchase Agreement) dated
as May 26, 1999.
23.1 Consent of PricewaterhouseCoopers LLC, independent
accountants.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Adams, Harkness & Hill, Inc. (included in Annex
C-1 to the proxy statement/prospectus which is a part of
this Registration Statement).
23.4 Consent of Hale and Dorr LLP (included in Exhibits 5.1 and
8.1 of this registration statement).
24.1 Powers of Attorney (included in the signature page of this
Registration Statement).
99.1 Form of the proxy card for the annual meeting of the
Registrant.
</TABLE>
- ---------------
(1) Incorporated herein by reference to the Exhibits to the Registrant's Current
Report on Form 8-K filed with the Securities and Exchange Commission (the
"Commission") on February 22, 1999.
(2) Incorporated herein by reference to the Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 333-23319).
(3) Incorporated herein by reference to the Exhibits to the Registrant's Current
Report on Form 8-K filed with the Commission on June 2, 1998.
(4) Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Registration Statement.
(5) Incorporated herein by reference to Exhibits to the Registrant's Current
Report on Form 8-K filed with the Commission on July 25, 1997.
(6) Incorporated herein by reference to the Exhibits to the Registrant's Annual
Report on Form 10-K filed with the Commission on March 31, 1999.
(7) Incorporated herein by reference to the 1999 Stock Incentive Plan of the
Registrant included as Annex D to the proxy statement/prospectus which part
of this Registration Statement.
+ Confidential treatment granted as to certain portions, which portions were
omitted and filed separately with the Commission.
<PAGE> 1
HALE AND DORR LLP
COUNSELLORS AT LAW
60 STATE STREET, BOSTON, MASSACHUSETTS 02109
617-526-6000 FAX 617-526-5000
EXHIBIT 5.1
May 26, 1999
Ascent Pediatrics, Inc.
187 Ballardvalle Street, Suite B125
Wilmington, MA 01887
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-4 (the "Registration Statement"), filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended, for the registration of (i) 15,009,666 depositary shares (the
"Depositary Shares"), each Depositary Share representing one share of Common
Stock, $.00004 par value per share (the "Common Stock"), of Ascent Pediatrics,
Inc. (the "Company") subject to a call option and (ii) such number of shares of
Common Stock as are represented by the Depositary Shares so registered.
We have acted as counsel for the Company in connection with the
issuance of the Depositary Shares and the Common Stock pursuant to an Agreement
and Plan of Merger (the "Merger Agreement"), dated as of February 16, 1999, by
and between the Company and Bird Merger Corporation and a Depositary Agreement
(the "Depositary Agreement"), entered into pursuant to the Merger Agreement, by
and among the Company, Alpharma USPD Inc. and State Street Bank and Trust
Company, as Depositary. We have examined signed copies of the Registration
Statement and all exhibits thereto (including, but not limited to, the Merger
Agreement and Depositary Agreement), all as filed with the Commission. We have
also examined and relied upon the original or copies of minutes of meetings of
the stockholders and Boards of Directors of the Company, stock record books of
the Company, copies of the by-laws of the Company and such other documents as we
have deemed material to the opinion set forth below.
Based upon the foregoing, we are of the opinion that, subject to
stockholder approval of the Merger Agreement and the agreements contemplated
thereby, the Depositary Shares and the shares of Common Stock to be issued
pursuant to the Merger Agreement and Depositary Agreement will be duly
authorized by the Company and, when issued in accordance with the terms of the
Merger Agreement and Depositary Agreement, will be validly issued, fully paid
and non-assessable.
WASHINGTON, DC BOSTON, MA LONDON, UK*
- --------------------------------------------------------------------------------
HALE AND DORR LLP INCLUDES PROFESSIONAL CORPORATIONS
*BROBECK HALE AND DORR INTERNATIONAL (AN INDEPENDENT JOINT VENTURE LAW FIRM)
<PAGE> 2
Ascent Pediatrics, Inc.
May 26, 1999
Page 2
We hereby consent to the filing of this opinion in connection with the
Registration Statement.
This opinion is to be used only in connection with the issuance of the
Depositary Shares and the Common Stock while the Registration Statement is in
effect.
Very truly yours,
/s/ Hale and Dorr LLP
----------------------
HALE AND DORR LLP
<PAGE> 1
HALE AND DORR LLP
COUNSELLORS AT LAW
60 STATE STREET, BOSTON, MASSACHUSETTS 02109
617-526-6000 FAX 617-526-5000
Exhibit 8.1
-----------
May 26, 1999
Ascent Pediatrics, Inc.
187 Ballardvale Street, Suite B125
Wilmington, MA 01887
Re: Merger Pursuant to Agreement and Plan of Merger By and
Between Ascent Pediatrics, Inc. and Bird Merger Corporation
-----------------------------------------------------------
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the filing of a
registration statement (the "Registration Statement") on Form S-4, which
includes the Proxy Statement and Prospectus relating to the Agreement and Plan
of Merger dated as of February 16, 1999 (the "Merger Agreement"), by and between
Ascent Pediatrics, Inc., a Delaware corporation ("Ascent"), and Bird Merger
Corporation, a Delaware corporation ("Transitory Subsidiary"). Pursuant to the
Merger Agreement, Transitory Subsidiary will merge with and into Ascent (the
"Merger"). Except as otherwise provided, capitalized terms not defined herein
have the meanings set forth in the Merger Agreement and the exhibits thereto.
All section references, unless otherwise indicated, are to the United States
Internal Revenue Code of 1986, as amended (the "Code").
In our capacity as counsel to Ascent in the Merger, and for purposes of
rendering this opinion, we have examined and relied upon (i) the Registration
Statement; (ii) the Merger Agreement; (iii) the Master Agreement by and among
Ascent, Alpharma, Inc. and Alpharma USPD Inc. ("Alpharma") dated as of February
16, 1999; (iv) the Depositary Agreement dated as of February 16, 1999 among
Alpharma, Ascent and State Street Bank and Trust Company; (v) the Loan Agreement
by and among Ascent, Alpharma, Inc. and Alpharma dated as of February 16, 1999
evidencing a loan from Alpharma of an aggregate amount up to $40 million; (vi)
the Guaranty Agreement dated as of February 16, 1999 by and between Ascent and
Alpharma, Inc.; (vii) all exhibits to each such agreement (collectively, items
(i) through (vii) being hereinafter referred to as the "Transaction Documents");
and such other documents as we considered relevant to our analysis. In our
examination of documents, we have assumed the authenticity of original
WASHINGTON, DC BOSTON, MA LONDON, UK*
- --------------------------------------------------------------------------------
HALE AND DORR LLP INCLUDES PROFESSIONAL CORPORATIONS
*BROBECK HALE AND DORR INTERNATIONAL (AN INDEPENDENT JOINT VENTURE LAW FIRM)
<PAGE> 2
Ascent Pediatrics, Inc.
May 26, 1999
Page 2
documents, the accuracy of copies, the genuineness of signatures, and the legal
capacity of signatories.
We have assumed that all parties to the Transaction Documents and to any
other documents examined by us have acted, and will act, in accordance with the
terms of such documents and that the Merger and other transactions contemplated
by the Transaction Documents will be consummated pursuant to the terms and
conditions set forth in the Transaction Documents without the waiver or
modification of any such terms and conditions. Furthermore, we have assumed that
all representations contained in the Transaction Documents are, and at the
Effective Time will be, true and complete in all material respects, and that any
representation made in any of the documents referred to herein "to the best of
the knowledge and belief" (or similar qualification) of any person or party is
correct without such qualification. We have also assumed that as to all matters
for which a person or entity has represented that such person or entity is not a
party to, does not have, or is not aware of, any plan, intention, understanding,
or agreement, there is no such plan, intention, understanding, or agreement. We
have not attempted to verify independently such representations, but in the
course of our representation, nothing has come to our attention that would cause
us to question the accuracy thereof. Our opinion further assumes that there are
no material agreements or understanding (whether written or oral) relating to
the transactions contemplated by the Transaction Documents other than the
Transaction Documents.
The conclusions expressed herein represent our judgment as to the proper
treatment of certain aspects of the transactions contemplated by the Transaction
Documents under the income tax laws of the United States based upon the Code,
Treasury Regulations, case law, and rulings and other pronouncements of the
Internal Revenue Service (the "IRS") as in effect on the date of this opinion.
No assurances can be given that such laws will not be amended or otherwise
changed prior to the Effective Time, or at any other time, or that such changes
will not affect the conclusions expressed herein. Nevertheless, we undertake no
responsibility to advise you of any developments after the Effective Time in the
application or interpretation of the income tax laws of the United States.
Our opinion represents our best judgment of how a court would decide if
presented with the issues addressed herein and is not binding upon either the
IRS or any court. Thus, no assurances can be given that a position taken in
reliance on our opinion will not be challenged by the IRS or rejected by a
court.
This opinion letter addresses only the specific United States federal
income tax matters set forth in the section of the Registration Statement
entitled "Proposal 1 -- The Merger; Federal Income Tax Consequences of the
Merger" subject to the qualifications set forth in such section, and does not
address any other federal, state, local, or foreign income, estate, gift,
transfer, sales, use, or other tax consequences
<PAGE> 3
Ascent Pediatrics, Inc.
May 26, 1999
Page 3
that may result from the Merger or any other transaction (including any
transaction undertaken in connection with the Merger). We express no opinion
regarding the tax consequences of the Merger to shareholders of Ascent that are
subject to special tax rules, and we express no opinion regarding the tax
consequences of the Merger arising in connection with the ownership of options
or warrants for Ascent stock.
On the basis of, and subject to, the foregoing, and in reliance upon the
representations and assumptions described above and in the Registration
Statement, we hereby confirm the opinions attributed to us in the section of the
Registration Statement entitled "Proposal 1 -- The Merger; Federal Income Tax
Consequences of the Merger," subject to all of the qualifications, limitations
and assumptions relating to such opinions set forth therein. In addition, we are
of the opinion that the section of the Registration Statement entitled "Proposal
1 -- The Merger; Federal Income Tax Consequences of the Merger" includes a
general summary of all material federal income tax consequences relevant to the
transactions described in the Registration Statement.
This opinion is intended solely for the purpose of inclusion as an exhibit
to the Registration Statement. It may not be relied upon for any other purpose
or by any other person or entity, and may not be made available to any other
person or entity without our prior written consent. We hereby consent to the
filing of this opinion as an exhibit to the Registration Statement and further
consent to the use of our name in the Registration Statement in connection with
references to this opinion and the tax consequences of the Merger. In giving
this consent, however, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended.
Very truly yours,
/s/ Hale and Dorr LLP
---------------------
HALE AND DORR LLP
<PAGE> 1
EXHIBIT 10.31
Amendment No. 1
To
Employment Agreement
The Employment Agreement dated as of March 15, 1994 (the "Agreement"),
by Ascent Pediatrics, Inc. and Emmett Clemente is hereby amended as follows as
of this 15th day of March, 1999. Capitalized terms not otherwise defined herein
shall have the meanings set forth in the Agreement.
1. The reference in Section 1 to "March 15, 1999" is hereby
deleted and "March 15, 2000" is hereby substituted in lieu thereof.
2. In all other respects, the Agreement shall remain in full
force and effect, and all references in the Agreement to "this Agreement" shall
mean the Agreement as amended hereby.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first set forth above.
ASCENT PEDIATRICS, INC.
By: /s/ Alan R. Fox
-------------------------------
Alan R. Fox, President
EMPLOYEE
By: /s/ Emmett Clemente
-------------------------------
Emmett Clemente
<PAGE> 1
EXHIBIT 10.32
[CONFORMED COPY]
Ascent Pediatrics, Inc.
187 Ballardvale Street, Suite B125
Wilmington, MA 01887
Ladies & Gentlemen:
The purpose of this letter is to confirm our agreement and
understanding with respect to certain arrangements among FS Private Investments
LLC ("Furman Selz"), BancBoston Ventures Inc. ("BancBoston") and Ascent
Pediatrics, Inc. (together with any successor thereto, the "Company"), in
connection with a $16,000,000 investment by certain investment partnerships
managed by Furman Selz, BancBoston and another investor in the Series G
Convertible Exchangeable Preferred Stock, Subordinated Notes and Warrants of
the Company (the "Financing").
Upon the closing of the Financing, the Company shall pay to (i) Furman
Selz a closing fee in the amount of $381,250 in cash and (ii) BancBoston a
closing fee in the amount of $118,750 in cash.
Furman Selz agrees to provide ongoing customary financial advisory
services consistent with the fee arrangements set forth herein, at such times
and on such matters as the Company and Furman Selz shall mutually agree, for a
period of five (5) years commencing with the closing date of the Financing (the
"Advisory Term"). The Company shall pay to Furman Selz an advisory fee equal to
$150,000 for each year of the Advisory Term, payable quarterly in arrears.
The Company has all requisite corporate power and authority to enter
into this Agreement. This Agreement has been duly and validly authorized by all
necessary corporate action on the part of the Company and has duly executed and
delivered by the Company and constitutes a legal, valid and binding agreement of
the Company, enforceable in accordance with its terms. The execution, delivery
and performance by the Company of this Agreement will not result in any
violation by the Company of any provision of law.
This agreement may not be amended or modified except in writing and
shall be governed by and construed in accordance with the internal laws of the
State of New York.
For the convenience of the parties, any number of counterparts of this
agreement may be executed by the parties hereto. Each such counterpart shall be,
<PAGE> 2
and shall be deemed to be, an original instrument, but all such counterparts
taken together shall constitute one and the same Agreement.
If the foregoing correctly sets forth our agreement and understanding,
we would appreciate your signing the enclosed copy of.
Very truly yours,
FS PRIVATE INVESTMENTS LLC
By: /s/ James L. Luikart
------------------------------
Name: James L. Luikart
Title: Managing Member
BANCBOSTON VENTURES INC.
By:/s/ Theresa Nibi
--------------------------------
Name: Theresa Nibi
Title: Vice President
AGREED AND ACCEPTED:
ASCENT PEDIATRICS, INC.
By: /s/ Alan R. Fox
-------------------------------
Name: Alan R. Fox
Title: President and CEO
-2-
<PAGE> 3
February 16, 1999
Ascent Pediatrics, Inc.
187 Ballardvale Street, Suite B125
Wilmington, MA 01887
Ladies and Gentlemen:
The purpose of this letter (this "Amendment") is to amend the financial
advisory services fee arrangements set forth in the letter (the "Initial
Letter") among FS Private Investments LLC ("Furman Selz"), BancBoston Ventures
Inc. ("BancBoston") and Ascent Pediatrics, Inc. (together with any successor
thereto, the "Company"), which confirmed such parties agreement and
understanding with respect to certain arrangements among such parties in
connection with the $16,000,000 investment by certain investment partnerships
managed by Furman Selz, BancBoston and another investor (collectively, the
"Purchasers") in the Series G Convertible Exchangeable Preferred Stock,
Subordinated Notes and Warrants of the Company (the "Financing").
This Amendment shall be effective on the Second Amendment Closing Date
(as such term is defined in the Second Amendment dated February 16, 1999 to the
Securities Purchase Agreement dated May 13, 1998 by and among Furman Selz
Investors II L.P., FS Employee Investors LLC, FS Parallel Fund L.P., BancBoston
Ventures Inc., Flynn Partners and Ascent Pediatrics, Inc., as amended (such
Securities Purchase Agreement as so and heretofore amended, the "Purchase
Agreement").
Pursuant to this Amendment, Furman Selz and the Company agree as
follows:
1. FEE ARRANGEMENTS. Prior to the Second Amendment
Closing Date, the financial advisory service fee arrangements shall be
as set forth in the Initial Letter. On the Second Amendment Closing
Date, in lieu of any additional cash fees required to be paid to Furman
Selz pursuant to the Initial Letter for such services, the Company
shall issue to Furman Selz 150,000 unregistered shares (the "Shares")
of the Company's common stock, par value $.00004 per share (the "Common
Stock"). The aggregate dollar value of the Shares is $525,000.
2. REGISTRATION RIGHTS. The Company hereby grants the
registration rights to Furman Selz which were granted pursuant to
Article X of the Purchase Agreement. Under such Article X, Furman Selz
shall be deemed to be a "Holder" (as defined therein) for all purposes
and the Shares shall be deemed to be Registrable Securities (as defined
therein) for all purposes. In addition, for purposes of Section 10.3
thereof, at the election of Furman Selz, the Shares shall also be
deemed to be either Registrable Conversion Shares or Registrable
Warrant Shares (both as defined therein). This paragraph 2 shall be an
amendment to Article X of the Purchase Agreement.
<PAGE> 4
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company hereby represents and warrants to Furman Selz as follows:
(i) The Company has full power and authority to execute
and deliver this Amendment and issue the Shares and
to execute and deliver such other documents furnished
or to be furnished by the Company hereunder, subject
to the approval of the stockholders of the Company of
this Amendment and the transactions contemplated
hereby. This Amendment, subject to the approval of
the stockholders of the Company of this Amendment and
the transactions contemplated hereby, has been duly
authorized, executed and delivered by the Company
and, subject to the approval of the stockholders of
the Company of this Amendment and the transactions
contemplated hereby, constitutes a legal, valid and
binding agreement of the Company, enforceable against
the Company in accordance with its terms, subject to
bankruptcy, insolvency, reorganization and other laws
of general applicability relating to or affecting
creditors' rights and to general principles of
equity. Subject to the approval of the stockholders
of the Company of this Amendment and the transactions
contemplated hereby, the issuance of the Shares
pursuant to this Amendment, the compliance by the
Company with the provisions of this Amendment, and
the consummation of the other transactions herein
contemplated will not result in the creation or
imposition of any lien, charge, security interest or
encumbrance upon any of the assets of the Company
pursuant to the terms or provisions of, or result in
a breach or violation of or conflict with any of the
terms or provisions of, or constitute a default
under, or give any other party a right to terminate
any of its obligations under, or result in the
acceleration of any obligation under, (i) the
Certificate of Incorporation and Bylaws of the
Company, or (ii) any contract or other agreement to
which the Company is a party or by which the Company
or any of its respective properties is bound, or
(iii) any judgment, ruling, decree, order, statute,
rule or regulation of any court or other governmental
agency or body, domestic or foreign, applicable to
the business or properties of the Company, except,
with respect to clauses (ii) and (iii), circumstances
that would not, individually or in the aggregate,
reasonably be expected to have a material adverse
effect on the Company.
(ii) Subject to the approval of the stockholders of the
Company of this Amendment and the transactions
contemplated hereby, the Shares have been duly
authorized for issuance hereby, and, when
-2-
<PAGE> 5
issued and delivered in accordance with the
provisions of this Amendment, will be validly issued,
fully paid and nonassessable.
4. REPRESENTATIONS AND WARRANTIES OF FURMAN SELZ. Furman Selz
hereby represents and warrants to the Company that (i) it is an "accredited
investor" as that term is defined in Rule 501(a) promulgated under the
Securities Act of 1933, as amended, (ii) it has the requisite knowledge and
experience in financial and business matters to be capable of evaluating the
merits and risks of an investment in the Company, (iii) it has had an
opportunity to discuss the Company's business, management and financial affairs
with the Company's management, (iv) it is acquiring the Shares for investment
for its own account and not with a view to, or for resale in connection with,
any distribution thereof; nor with any present intention of distributing or
selling the same; and Furman Selz has no present or contemplated agreement,
undertaking, arrangement, obligation, indebtedness or commitment providing for
the disposition thereof, (v) it is not in material breach or violation of, or in
default under, any term or provision of (A) its organizational and governing
documents, (B) any indenture, mortgage, deed of trust, voting trust agreement,
stockholders, partners or members agreement, note agreement or other agreement
or instrument to which it is a party or by which it is bound or to which any of
its property is subject, or (C) any statute, judgment, decree, order, rule or
regulation applicable to Furman Selz or of any arbitrator, court, regulatory
body, administrative agency or any other governmental agency or body, domestic
or foreign, having jurisdiction over Furman Selz or any of its activities or
properties, (vi) Furman Selz represents that it has not been organized,
reorganized or recapitalized specifically for the purpose of investing in the
Company, (vii) it understands that the Shares have not been registered under the
Securities Act and it will not offer, sell, transfer, pledge, hypothecate or
otherwise dispose of any Shares except pursuant to an exemption from, or
otherwise in a transaction not subject to, the registration requirements of the
Securities Act or pursuant to an effective registration statement under the
Securities Act, and, in each case, in accordance with any applicable state
securities or "blue sky" laws and (viii) it understands that any certificates
representing the Shares and any other securities issued in respect of such
securities upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event, shall be stamped or otherwise imprinted with a
legend in the following form (in addition to any legend required under other
applicable securities laws):
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE ACT), OR ANY STATE SECURITIES
LAWS AND MAY NOT BE TRANSFERRED, SOLD OR OFFERED FOR SALE EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES
UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED."
-3-
<PAGE> 6
Furman Selz further represents that (i) it has full power and authority to
execute, deliver and perform this Amendment, (ii) the person executing this
Amendment on behalf of Furman Selz has the appropriate authority to act on
behalf of Furman Selz, and (iii) this Amendment has been duly authorized,
executed and delivered by Furman Selz and constitutes a legal, valid and binding
agreement of Furman Selz, enforceable against Furman Selz in accordance with its
terms, subject to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to general
principles of equity, and (iv) it has not employed any broker or finder in
connection with the transactions contemplated by this Amendment. To the best of
its knowledge, Furman Selz acknowledges receipt of, and the opportunity to
review, the information that it believes necessary to make an investment in the
Shares."
Except as amended by this Amendment, the Initial Letter shall remain in
full force and effect in accordance with its terms. This Amendment shall be
deemed to be part of the Initial Letter.
This agreement may not be amended or modified except in writing and
shall be governed by and construed in accordance with the internal laws of the
State of New York.
For the convenience of the parties, any number of counterparts of this
agreement may be executed by the parties hereto. Each such counterpart shall be,
and shall be deemed to be, an original instrument, but all such counterparts
taken together shall constitute one and the same Amendment.
If the foregoing correctly sets forth our agreement and understanding,
we would appreciate your signing the enclosed copy of this Amendment and
returning the same to us.
Very truly yours,
FS PRIVATE INVESTMENTS LLC
By: /s/ James L. Luikart
------------------------------
Name: James L. Luikart
Title: Managing Member
AGREED AND ACCEPTED:
ASCENT PEDIATRICS, INC.
By: /s / Alan. R. Fox
---------------------------------
Name: Alan R. Fox
Title: President and CEO
-4-
<PAGE> 7
ASCENT PEDIATRICS, INC.
187 Ballardvale Street, Suite B125
Wilmington, Massachusetts 01887
May 25, 1999
Ladies and Gentleman:
The purpose of this letter is to confirm and clarify that the issuance
by Ascent Pediatrics, Inc. (the "Company") of 150,000 shares of the Company's
common stock, par value $.00004 per share, to FS Private Investments LLC
("Furman Selz") pursuant to the amendment dated as of February 16, 1999 to the
financial advisory services fee agreement dated as of May 13, 1998 (the
"Agreement") among Furman Selz, BancBoston Ventures Inc. and the Company will be
in complete satisfaction of all financial advisory services to be provided by
Furman Selz under the Agreement and that, following the issuance of such shares,
neither the Company nor Furman Selz will have any further obligations under the
Agreement.
If the foregoing correctly sets forth our agreement and understanding,
we would appreciate your signing the enclosed copy of this letter and returning
the same to us.
Very truly yours,
ASCENT PEDIATRICS, INC.
By: /s/ Alan R. Fox
------------------------------
Alan R. Fox, President
AGREED AND ACCEPTED:
FS PRIVATE INVESTMENTS LLC
By: /s/ James L. Luikart
-------------------------------
-5-
<PAGE> 1
Exhibit 10.33
-------------
AGREEMENT
This Agreement (this "Agreement") among Ascent Pediatrics, Inc., a Delaware
corporation (the "Company"), and the Purchasers (as defined in the Securities
Purchase Agreement dated May 13, 1998 among the Company and the Purchasers, as
amended (the "Securities Purchase Agreement")) is entered into as of the 26th
day of May, 1999.
WHEREAS, pursuant to the Securities Purchase Agreement the Company issued
and sold to the Purchasers, among other securities, 7,000 shares of Series G
Convertible Exchangeable Preferred Stock, par value $.01 per share ("Series G
Preferred Stock"), of the Company and 8% Subordinated Notes in the aggregate
original principal amount of $9,000,000 (the "Subordinated Notes");
WHEREAS, under the terms of the Series G Preferred Stock set forth in the
Certificate of Designation, Voting Powers, Preferences and Rights of Series G
Convertible Exchangeable Preferred Stock filed with the Secretary of State of
the State of Delaware on May 29, 1998 (the "Series G Certificate of
Designation"), the Company is required to pay a dividend of $142,400 to the
Purchasers on June 1, 1999 (the "Series G Dividend");
WHEREAS, under the terms of the Subordinated Notes as set forth therein,
the Company is required to pay accrued interest of $224,114 to the Purchasers on
June 1, 1999 (the "Subordinated Notes Interest Payment");
WHEREAS, the Company and the Purchasers expect that the closing of the
Company's strategic alliance with Alpharma, Inc. ("Alpharma") under which, among
other things, Alpharma, through its subsidiary Alpharma USPD Inc., will provide
up to $40 million in financing to the Company through a 7.5% convertible
subordinated note, will occur on or prior to July 1, 1999; and
WHEREAS, the Company and the Purchasers desire that the payment of the
Series G Dividend and the Subordinated Notes Interest Payment be deferred from
June 1, 1999 to July 1, 1999;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein set forth, the parties have agreed as follows:
1. SERIES G DIVIDEND. The parties acknowledge that, under Section 2.1(b)
of the Series G Certificate of Designation, if the Company does not make the
required Series G Dividend, the Dividend Rate (as defined therein) shall
increase from 8% to 9% as of June 1, 1999 and that, effective upon payment of
the required Series G
<PAGE> 2
Dividend, the Dividend Rate shall decrease as of the date of such payment to 8%.
In connection with this Agreement, the Company agrees that it shall pay the
Series G Dividend on July 1, 1999 and that at such time, it shall also pay to
the Purchasers dividends in an amount equal to the additional 1% dividend that
accrued during the period from June 1, 1999 through July 1, 1999.
2. SUBORDINATED NOTES INTEREST PAYMENT. The Purchasers agree that the
Subordinated Notes shall hereby be amended to provide that the accrued interest
due and payable on June 1, 1999 under the Subordinated Notes shall instead be
due and payable on July 1, 1999 and hereby waive any default arising under the
Series G Purchase Agreement from the Company's failure to make the required
interest payment on June 1, 1999. In connection with such amendment, the Company
hereby agrees that during the period from June 1, 1999 through July 1, 1999 the
interest rate on the Subordinated Notes shall be increased from 8% to 9% and
that, at such time as the Company pays the Subordinated Notes Interest Payment
otherwise due on June 1, 1999, the Company shall also pay the Purchasers an
amount equal to the additional 1% interest that accrued during such period.
3. Miscellaneous.
-------------
(a) In all respects other than as specifically provided in this
Agreement, the terms of the Series G Preferred Stock and the Subordinated Notes
are hereby ratified and affirmed.
(b) This Agreement constitutes the entire agreement between the
parties and supersedes all prior agreements and understandings, whether written
or oral, relating to the amendment of the Series G Certificate of Designation
and of the Subordinated Notes.
IN WITNESS WHEREOF, the parties have to have executed this Agreement as of
the day and year set forth above.
ASCENT PEDIATRICS, INC.
By: /s/ Alan R. Fox
--------------------------
Name: Alan R. Fox
Title: President and CEO
FURMAN SELZ INVESTORS II, L.P.
FS EMPLOYEE INVESTORS LLC
FS PARALLEL FUND L.P.
By: FS PRIVATE INVESTMENTS
LLC, MANAGER
By: /s/ James L. Luikart
---------------------------
Name: James L. Luikart
Title: Managing Member
BANCBOSTON VENTURES, INC.
By:/s/ Marcia T. Bates
---------------------------
Name: Marcia T. Bates
Title: Managing Director
/s/ James E. Flynn
------------------------------
James E. Flynn
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
Ascent Pediatrics, Inc. of our report dated February 24, 1999, which includes an
explanatory paragraph regarding the Company's ability to continue as a going
concern, relating to the financial statements of Ascent Pediatrics, Inc., which
appear in such Registration Statement. We also consent to the reference to us
under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Boston, Massachusetts
May 26, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Proxy Statement/Prospectus of Ascent
Pediatrics, Inc.
Our report dated February 21, 1997 contains an explanatory paragraph that states
that the financial statements were prepared to present the assets related to the
product line to be sold by Upsher-Smith Laboratories, Inc. and the net sales and
the identified costs and expenses and that they are not intended to be a
complete presentation of the product line's financial position, results of
operations or cash flows.
KPMG PEAT MARWICK LLP
Minneapolis, Minnesota
May 26, 1999
<PAGE> 1
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
- ---------------------------
ASCENT PEDIATRICS, INC.
- ---------------------------
Mark box at right if an address change or comment has been noted on
the reverse side of this card. [ ]
RECORD DATE SHARES:
--------------------------------
Please be sure to sign and date this Proxy. Date
- --------------------------------------------------------------------------------
- --------Stockholder sign here--------------------Co-owner sign here-------------
1. To approve and adopt an Agreement and Plan of Merger (including the related
agreements attached as exhibits) dated as of February 16, 1999 by and
between Ascent and Bird Merger Corporation, our wholly owned subsidiary,
and the transactions contemplated by these agreements. The merger agreement
provides that Bird Merger Corporation will merge into Ascent and that you
will receive one depositary share for each share of Ascent common stock
that you own, which represents one share of Ascent common stock subject to
a call option.
2. To approve 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 issued under the Securities Purchase Agreement dated as
of May 13, 1998 by and among Ascent and the purchasers named therein, 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, all pursuant to the Second Amendment dated as of February 16, 1999 to
the Securities Purchase Agreement and a related amendment to a Financial
Services Fee Agreement dated as of May 13, 1998.
3. To elect the following persons as Class II For All With- For All
Directors for the ensuing three years: Nominees hold Except
Robert E. Baldini [ ] [ ] [ ]
James L. Luikart
Alan R. Fox
NOTE: If you do not wish your shares voted "For" a particular nominee,
mark the "For All Except" box and strike a line through the name(s) of the
nominee(s). Your shares will be voted for the remaining nominees.
4. To approve the adoption of our 1999 For Against Abstain
Stock Incentive Plan.
[ ] [ ] [ ]
5. To ratify the selection of [ ] [ ] [ ]
PricewaterhouseCoopers LLP as our
independent auditors for the current
fiscal year.
In their discretion, the named Proxies are authorized to vote upon the other
matters that may properly come before the meeting, or any adjournment thereof.
The shares represented by this proxy will be voted as directed by the
undersigned. If no direction is given with respect to any election to office or
proposal specified above, this proxy will be voted FOR such election to office
or proposal.
DETACH CARD DETACH CARD
