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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ____ to ____
Commission File Number 000-22347
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ASCENT PEDIATRICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3047405
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
187 Ballardvale Street, Suite B125, Wilmington, MA 01887
(Address of principal executive offices, including zip code)
(978) 658-2500
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Depositary Shares, each representing one share of
Common Stock, par value $.00004 per share, subject to a
call option and represented by a depositary receipt.
Common Stock, $.00004 par value
(title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $26,584,685 based on the last reported sale price
of the Depositary Shares of the registrant on March 22, 2000. As of March 22,
2000, there were 9,667,158 Depositary Shares outstanding, each representing one
share of Common Stock, par value $.0004 per share, of the registrant and
represented by a depositary receipt.
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PART I
ITEM 1. BUSINESS
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 introduced Primsol trimethoprim
solution, a prescription antibiotic, to the market in February 2000. We are also
developing Orapred Syrup, a liquid steroid for the treatment of inflammation,
including inflammation resulting from respiratory conditions, which we expect to
introduce to the market in 2000, subject to FDA approval.
In 1999, our sales force promoted Omnicef(R) (cefdinir), a broad-spectrum
cephalosporin antibiotic marketed by Warner-Lambert Company under a license from
Fujisawa Pharmaceutical Co., Ltd., to pediatricians in the United States.
Following the sale by Warner-Lambert of its assets with respect to Omnicef(R) to
Abbott Laboratories in January 2000, we ceased promoting this product.
In May 1999, our sales force began to promote Pediotic(R), a combination
corticosteroid/antibiotic, to pediatricians in the United States pursuant to a
one-year 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 seek to develop
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.
On July 23, 1999, we consummated a strategic alliance with Alpharma, Inc. and
Alpharma USPD, Inc., referred to in this annual report as Alpharma. As part of
this strategic alliance, Alpharma agreed to loan us up to $40.0 million from
time to time for certain corporate purposes, and we assigned to Alpharma a call
option, exercisable in the first half of 2002, to purchase all of the Ascent
common stock then issued and outstanding at a price to be determined by an
earnings-based formula. We have agreed with Alpharma to delay the exercise
period of Alpharma's call option to the first half of 2003, subject to Ascent
stockholder approval at the 2000 annual meeting of stockholders. To date we have
borrowed an aggregate of $12.0 million under our loan agreement with Alpharma.
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.
Since the later half of 1999, we have devoted much of our resources to obtaining
regulatory approval of Primsol and Orapred and are preparing for the commercial
launch of these products. Key elements of our strategy as previously announced
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 $5.2
billion in 1999. 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
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focus groups with 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 May 1999, we entered into a one-year
co-promotion agreement with King Pharmaceuticals, Inc. under which we
promote the combination corticosteroid/antibiotic, Pediotic(R), 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. 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.
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
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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.
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The following table summarizes the principal products that we are currently
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>
Primsol trimethoprim Acute middle ear Currently marketed Reduced toxicity profile;
solution (50mg strength) infections pleasant tasting liquid
Feverall acetaminophen Pain and fever Currently marketed Alternate form of administration
rectal suppositories
Pediamist nasal saline spray Nasal dryness Currently marketed Low pressure and volume spray;
reduced stinging
Pediotic (2) Outer ear infections Currently marketed Combination
corticosteroid/antibiotic
Orapred syrup Inflammation, including Minor deficiency response Significant taste improvement
respiratory problems filed December 1999; under
review by FDA
Feverall controlled-release Fever FDA orally indicated Reduced dosing frequency;
sprinkles (3) product approvable; improved taste
additional development
required
Pediavent albuterol Asthma Phase 3 clinical trials Reduced dosing frequency;
controlled-release completed; additional improved taste
suspension (3) development required for
filing
</TABLE>
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(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.
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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
pursuant to a one-year co-promotion agreement with King
Pharmaceuticals, Inc.
(3) Ascent has suspended further development of these products until
such time as we determine that our financial condition has improved.
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 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.
Primsol Trimethoprim Solution
We 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. In January 2000, the FDA approved the
NDA for a 50mg strength of Primsol solution for the treatment of acute otitis
media in children age six months to twelve years. We commenced commercial
shipment of the 50mg strength of Primsol solution, which is available only by
prescription, in February 2000.
Prior to Primsol, trimethoprim for the treatment of middle ear infections in
children was only available in combination with the sulfa compound
sulfamethoxazole, which is associated with allergic reactions that may be severe
or even fatal. 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.
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 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 are marketing 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 1999 was approximately $511,000,000,
which includes approximately $58,200,000 from the sale of amoxicillin
(reflecting approximately 10,700,000 prescriptions), approximately $8,800,000
from the sale of trimethoprim/sulfa
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combination products (reflecting approximately 2,000,000 prescriptions) and
approximately $444,000,000 from the sale of other liquid antibiotics (reflecting
approximately 11,300,000 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. 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.
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 1999 from sales of the Feverall
product line of $2,891,000.
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 1999
from sales of Pediamist of $148,000.
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Pediotic(R)
In May 1999, we began detailing Pediotic(R) to pediatricians in the United
States under a one-year co-promotion agreement with King Pharmaceuticals, Inc.
Pediotic(R) is a combination corticosteroid/antibiotic prescription product
indicated for the treatment of otitis externa, or outer ear infection. We agreed
with King Pharmaceuticals, Inc. to detail Pediotic(R) as part of our strategy to
leverage our marketing and sales capabilities, including our domestic sales
force. Our co-promotion agreement with King Pharmaceuticals, Inc. expires in
April 2000.
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.
Scott-Levin estimates that in 1999 physicians in the United States wrote
approximately 3,971,000 prescriptions for liquid steroids, with pediatricians
writing approximately 59% of these prescriptions. Scott-Levin also estimates
that the 1999 United States market for liquid steroids was approximately
$53,500,000. 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
1999, 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. In August 1999 we received a major chemistry deficiency
notice which was subsequently reclassified to a minor after discussion with the
FDA. We responded to the minor deficiency comments in December 1999 and are
currently awaiting the results of the FDA's review.
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
acetaminophen products are absorbed quickly from the gastrointestinal tract into
the blood and quickly cleared from the body, which necessitates dosing every
four hours. If these products are administered at bedtime, the patient may need
an additional dose
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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. In discussions with the FDA, the FDA has indicated
to us that with changes and data required to address the manufacturing and
packaging deficiencies, the product may be approvable for the fever reduction
indication but that additional clinical data is required for approval of the
pain indication. In December 1999, we suspended development of this product. We
are planning to resume development at such time as we determine that our
financial condition has adequately improved.
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
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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 within 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.
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. This review has also uncovered issues related to the reproducibility of
the analytical test method and the reliability of the manufacturing process to
reproduce the product initially evaluated in the European Phase I trials. In
December 1999, we suspended development of this product. We are planning to
resume development at such time as we determine that our financial condition
has adequately improved.
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.
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Omnicef(R) (Cefdinir) Oral Suspension and Capsules
In addition to the preceding products and product candidates, 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 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.
Following the sale by Warner-Lambert of its assets with respect to Omnicef(R) to
Abbott Laboratories in January 2000, Warner-Lambert terminated this promotion
agreement.
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.
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.
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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, 2000, our sales
force consisted of six regional sales managers, 66 full-time sales
representatives and 28 flex-time (or part-time) sales representatives. The
primary focus of 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.
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. As an example
of this strategy, we have entered into a one-year co-promotion agreement with
King Pharmaceuticals, Inc. under which we promote the combination
corticosteroid/antibiotic, Pediotic(R), to pediatricians in the United States.
Our co-promotion agreement with King Pharmaceuticals, Inc. expires in April
2000. 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 two supply
agreements with Lyne Laboratories, Inc. which provides as follows:
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- Lyne has agreed to manufacture Primsol solution and Orapred syrup;
- 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 Primsol agreement may be terminated by either party on three
months' notice any time after October 17, 2004. The Orapred agreement
may be terminated by either party on twelve months notice after six
years from the date of the first product shipment.
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.
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;
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- 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.
We currently market one of our products, and 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 are marketing 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.
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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 (2 applications); and
- Task-masking technology (2 patents).
Four 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,
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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.
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. All other brand names or trademarks appearing
in this annual report 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 labeling 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.
- 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
labeling. Phase 3 trials involve an expanded patient population at
geographically dispersed clinical study sites.
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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 labeling. 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 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 product candidates may 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
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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.
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, 2000, we had 83 full-time employees. Seven of these employees are
engaged in product development and quality control, including medical and
regulatory affairs, 66 are employed in sales and marketing and 10 are employed
in finance, business development and general and administrative activities. In
addition, as of March 1, 2000, we had 28 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.
ITEM 2. PROPERTIES
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.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the fourth quarter of 1999.
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EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth certain information regarding the executive
officers and certain significant employees of Ascent as of March 1, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS
Emmett Clemente, Ph.D. 61 President and Chairman of the Board
Gregory A. Vannatter 47 Executive Vice President, Sales and
Marketing
Eliot M. Lurier, CPA 41 Chief Financial Officer, Treasurer and
Secretary
SIGNIFICANT EMPLOYEES
Mumtaz Ahmed, M.D., Ph.D. 63 Vice President, Medical Affairs
William E. Brochu, Ph.D. 54 Vice President, Regulatory and Quality
Affairs
Bobby R. Owen 51 Vice President, Operations
Diane Worrick 47 Vice President, Human Resources
</TABLE>
- ----------
Emmett Clement, Ph.D., President and Chairman of the Board of Directors, founded
Ascent in 1989. Dr. Clemente has served as a director since 1989, as Chairman of
the Board since May 1996 and as President since December 1999. From May 1989 to
May 1996, Dr. Clemente also serves as Ascent's Chief Executive Officer. Dr.
Clement served as the Director of Pharmaceutical Research for Fisons
Corporation, U.S., a pharmaceutical company ("Fisons"), from 1980 to 1989, and
as the Director of New Product Development and Acquisitions of Fisons from 1972
to 1980. From 1970 to 1972, Dr. Clemente served as Chief Scientist in the
Consumer Products Division of Warner-Lambert Company, a pharmaceutical company.
From 1968 to 1970, Dr. Clemente served as Senior Scientist, Richardson-Merrell
Company, a pharmaceutical company. Dr. Clemente received a B.S. in biology, an
M.S. in physiology and a Ph.D. in pharmacology from St. John's University.
Gregory A. Vannatter, Executive Vice President, Sales and Marketing, joined
Ascent in October 1996. Mr. Vannatter served in various positions with Mead
Johnson Nutritionals Division of Bristol-Myers Squibb from 1988 to October 1996,
including most recently Director of Pediatric Global Marketing from 1995 to
September 1996 and Director of Infant Formula Marketing from 1991 to 1995. From
1986 to 1988, Mr. Vannatter served as Product Manager for Bristol Laboratories.
From 1975 to 1986, Mr. Vannatter served in various sales and marketing positions
with Pfizer Pharmaceuticals, a pharmaceutical company. Mr. Vannatter received a
BS in marketing from Ball State University and an MBA from Indiana University.
Eliot M. Lurier, Chief Financial Officer, Treasurer, and Clerk, joined Ascent in
October 1999. Mr. Lurier was a consultant to the pharmaceutical and
biotechnology industries from August 1997 to October 1999 . From 1995 to August
1997 Mr. Lurier was Chief Financial Officer of Epco Packaging Products, Inc. a
manufacturer of paperboard packaging. From 1983 to 1995 Mr. Lurier held various
high level financial positions in a number of industries. Mr. Lurier was an
auditor at Coopers & Lybrand in Boston from 1981 to 1983. Mr. Lurier is a
Certified Public Accountant in the Commonwealth of Massachusetts. Mr. Lurier
received his BS in accounting from Syracuse University.
Mumtaz Ahmed, M.D., Ph.D., Vice President, Medical Affairs, joined Ascent in
1993. Dr. Ahmed served as Executive Director/Distinguished Research and
Development Physician at Ciba-Geigy Corporation, a pharmaceutical company
("Ciba-Geigy"), from 1982 to 1993. Dr. Ahmed received a BS in biology and
chemistry and an MS in Microbiology from University of Karachi, Pakistan, an
M.D. from UACJ School of Medicine, Juarez, Mexico, and a Ph.D. in microbiology
from Indiana University School of Medicine.
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William E. Brochu, Ph.D., Vice President, Regulatory and Quality Affairs, joined
Ascent in 1997. Dr. Brochu served as Director, Regulatory Affairs at Copley
Pharmaceutical, Inc., a pharmaceutical company, from 1995 to 1997. From 1985 to
1995 Dr. Brochu served in various regulatory and technical positions at Proctor
& Gamble Co., a personal and household products company, including Section Head,
Regulatory Affairs from 1991 to 1995. From 1978 to 1985 Dr. Brochu served as
Section Chief, New Product Development at Norwich-Eaton Pharmaceuticals which
was acquired by Proctor & Gamble in 1985. From 1974 to 1978 Dr. Brochu served as
Section Manager, Pharmaceutical Development at Travenol Laboratories, Inc., a
pharmaceutical company. Dr. Brochu received his BS and MS in pharmaceutical
sciences from the Massachusetts College of Pharmacy and his Ph.D. in industrial
and physical pharmacy from Purdue University.
Bobby R. Owen, Vice President, Operations, joined Ascent in 1997. Mr. Owen
served as Corporate Director of Manufacturing at AutoImmune, Inc., a
biotechnology company, from 1995 to 1997. From 1994 to 1995 Mr. Owen served as
Vice President of Technical Operations at Telor Ophthalmic Pharmaceuticals,
Inc., a pharmaceutical company. From 1989 to 1993 Mr. Owen served as Vice
President of Operations at PCM Corporation/Paco Pharmaceutical Services, Inc, a
pharmaceutical company. From 1971 to 1979 Mr. Owen served in various
manufacturing and developments positions with Baxter Health Care. Mr. Owen
received his BS in chemistry from the University of Alabama.
Diane Worrick, Vice President of Human Resources, joined Ascent in 1990. Ms.
Worrick served in various human resources positions at Fisons from 1976 to 1989,
last serving as Personnel Manager. Ms. Worrick received a B.B.A. from
Northeastern University.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market for the Registrant's Common Equity and Related Stockholder Matters
Since July 23, 1999, depositary shares representing Ascent's common stock have
traded on the OTC Bulletin Board under the symbol "ASCTP". Prior to this,
Ascent's common stock had been traded on the Nasdaq National Market under the
symbol "ASCT". The following table sets forth the high and low sales prices per
share of the Ascent common stock or depositary shares, as appropriate, for the
periods indicated below as reported on the Nasdaq National Market or the OTC
Bulletin Board, respectively. Information presented below with respect to the
OTC Bulletin Board reflects inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions in
Ascent depositary shares.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ---- ---
<S> <C> <C>
1998
----
First Quarter $ 6.875 $ 3.312
Second Quarter $ 4.875 $ 1.375
Third Quarter $ 3.687 $ 1.625
Fourth Quarter $ 5.250 $ 1.093
1999
----
First Quarter $ 6.875 $ 2.50
Second Quarter $ 3.1562 $ 1.6562
Third Quarter $ 3.00 $ 1.25
Fourth Quarter $ 2.125 $ 0.875
</TABLE>
The last reported sale price of the Ascent depositary shares on the OTC Bulletin
Board on March 22, 2000 was $2.75 per share. There were approximately 149
stockholders of record at March 21, 2000.
Ascent has never declared or paid cash dividends on its depositary shares or
common stock and does not expect to pay cash dividends on its depositary shares
or common stock in the foreseeable future. Ascent is currently prohibited from
paying cash dividends under the terms of its loan agreement with Alpharma USPD
Inc. and its financing arrangements with funds affiliated with ING Furman Selz
and BancBoston Ventures.
Except as set forth below, during the three-month period ended December 31,
1999, Ascent did not sell any securities that were not registered under the
Securities Act of 1933, as amended (the "Securities Act").
On October 15, 1999, Ascent issued 7.5% convertible subordinated notes in the
aggregate principal amount of up to $10.0 million and warrants to purchase
1,000,000 Ascent depositary shares at an exercise price of $3.00 per share to
funds affiliated with ING Furman Selz. The 7.5% convertible subordinated notes
expire on July 1, 2004 and are convertible into shares of Ascent common stock at
a conversion price of $3.00 per share. These issuances were conducted pursuant
to Section 4(2) of the Securities Act of 1933, as amended.
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<PAGE> 22
On December 30, 1999, in connection with the borrowing of $1,000,000 from funds
affiliated with ING Furman Selz pursuant to Ascent's financing arrangements with
ING Furman Selz, Ascent issued to such funds warrants to purchase 150,000 Ascent
depositary shares at an exercise price of $3.00 per share. These issuances were
conducted pursuant to Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
The table below summarizes recent historical financial information for Ascent.
For further information, refer to Part II, Item 8, Financial Statements and
Supplementary Data.
Selected Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Product revenue, net......................... $ 3,040 $ 4,353 $ 2,073 $ -- $ --
Co-promotional revenue....................... 4,008 123 -- -- --
Licensing Revenue............................ -- -- -- -- 304
Gross margin................................. 5,421 2,092 828 -- 304
Loss from operations......................... (14,221) (16,046) (11,694) (6,566) (4,214)
Extraordinary item(1) ....................... -- 1,166 -- -- --
Net loss..................................... (15,653) (18,231) (12,498) (6,487) (4,101)
Net loss available to common stockholders(2). (16,072) (18,680) (12,745) (6,625) (4,163)
Net loss available to common stockholders
per common share(3)
Basic and diluted.......................... $ (1.96) $ (2.69) $ (3.08) $(33.44) $(21.05)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and current
marketable securities...................... $ 1,067 $ 2,172 $ 14,229 $ 2,086 $ 2,538
Working capital (deficit).................... (798) 468 4,242 525 2,231
Total assets (4)............................. 15,273 16,301 28,433 2,628 2,750
Long term subordinated secured notes,
net of current portion..................... 21,461 8,681 1,252 -- --
Redeemable convertible preferred stock,
Series D, Series E and Series F (5)....... -- -- -- 17,832 12,557
Convertible exchangeable preferred stock,
Series G (6).............................. -- 6,461 -- -- --
Total stockholders' equity (deficit)......... (9,958) 3,803 15,515 (16,778) (10,158)
</TABLE>
No common stock or depositary share dividends have been declared or paid by
Ascent for any period presented above.
(1) 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.
(2) On July 23, 1999, in connection with the consummation of Ascent's strategic
alliance with Alpharma, Ascent effected a merger with a wholly-owned subsidiary
pursuant to which each outstanding share of Ascent common stock outstanding on
such date was converted into the right to receive one depositary share,
representing one share of Ascent common stock subject to a call option and
represented by a depositary receipt. As used herein, common shares refer to
shares of Ascent common stock on and before July 23, 1999 and to Ascent
depositary shares from and after July 23, 1999.
(3) On May 27, 1997, Ascent effected a 0.85-for-one reverse split of its common
stock and increased the number of authorized shares of common stock to
60,000,000. Accordingly, all share and per share amounts have been adjusted to
reflect the reverse stock split as though it had occurred at the beginning of
the initial period presented.
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<PAGE> 23
(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.
(6) On July 23, 1999, in connection with the Company's strategic alliance with
Alpharma, the Company exercised its right to exchange all outstanding shares of
Series G preferred stock for 8% convertible subordinated notes in accordance
with the terms of the Series G preferred stock.
ITEM 7. 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 pursuant to a co-promotion
agreement with Bristol-Myers Squibb U.S. Pharmaceuticals Group. Following the
sale by Warner-Lambert of its assets with respect to Omnicef(R) to Abbott
Laboratories in January 2000, Ascent ceased promoting this product. In May 1999,
Ascent began detailing Pediotic(R), a combination corticosteroid/antibiotic, to
pediatricians in the United States under a one-year co-promotion agreement with
King Pharmaceuticals, Inc. In February 2000, Ascent began marketing Primsol
solution, an internally-developed prescription antibiotic for the treatment of
middle ear infections.
Ascent has incurred net losses since its inception and expects to incur
additional operating losses at least through 2000 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 December
31, 1999 of $66,262,000.
In December, 1999 Ascent modified its short-term strategy until such time as
Ascent determines that its financial condition has adequately improved.
Specifically, Ascent is focused on introducing Primsol to the market, obtaining
FDA approval for Orapred and introducing it to the market and seeking
appropriate co-promotional opportunities. Ascent has suspended its other product
development activities until its financial condition has adequately improved.
RESULTS OF OPERATIONS
FISCAL YEAR 1999 VS. FISCAL YEAR 1998
REVENUE. Ascent had net revenue of $7,047,000 for the year ended December 31,
1999 compared with revenue of $4,476,000 for the year ended December 31, 1998.
This increase in revenue of $2,571,000 was primarily attributable to increased
revenues for Ascent's co-promotion arrangements, including revenues of
$3,383,000 under the Omnicef co-promotion agreement and $625,000 under the
Pediotic co-promotion agreement. The increase was offset by a decrease of
$1,241,000 in Feverall sales due to low sales volume and a decrease of $73,000
in Pediamist sales due to low sales volume.
COST OF PRODUCT SALES. Cost of sales was $1,626,000 for the year ended December
31, 1999 compared with $2,383,000 for the year ended December 31, 1998. This
decrease in cost of sales of $757,000 was primarily attributable to (i) a
decrease of $312,000 for the manufacturing cost associated with the production
of Feverall due to a decrease in sales volume, (ii) a decrease of $23,000 for
the manufacturing cost associated with the production of Pediamist due to a
decrease in sales volume, (iii) a decrease of $136,000 in operations personnel
costs due to a reduction in headcount, and (iv) a decrease of approximately
$245,000 in inventory net realizable value adjustments due to the write off of
expired Just For Kids Vitamin inventory and expired Primsol inventory.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Ascent incurred selling, general
and administrative expenses of $15,808,000 for the year ended December 31, 1999
compared with $13,616,000 for the year ended December 31, 1998, representing an
increase of 2,192,000.
Selling and marketing expenses were $11,613,000 for the year ended December 31,
1999 compared with
23
<PAGE> 24
$9,797,000 for the year ended December 31, 1998. This increase in selling and
marketing expenses of $1,816,000 was primarily the result of $1,949,000 in
increased personnel costs due to the increased number of our sales
representatives and $254,000 in increased samples and selling materials. This
increase was offset by a decrease of $224,000 in freight and distribution
expenses due to lower sales volumes and a decrease of $168,000 in consulting
charges due to the non-renewal of contracts that ended during 1998.
General and administrative expenses were $4,195,000 for the year ended December
31, 1999 compared with charges and expenses of $3,819,000 for the year ended
December 31, 1998. The increase in general and administrative expenses of
$376,000 was primarily attributable to increases of $1,003,000 for the
termination of an advisory services agreement. This increase was offset by
decreases of (i) $331,000 in personnel expenses due to a decrease in headcount,
(ii) $120,000 for legal, accounting and investor relations expenses, (iii)
$100,000 for consulting expenses due to scaling back of two existing agreements,
(iv) $57,000 for insurance expenses related to product liability, automobile and
directors' and officers' liability insurance, and (v) $25,000 in travel and
entertainment expenses.
RESEARCH AND DEVELOPMENT. Ascent incurred research and development expenses of
$3,833,000 for the year ended December 31, 1999 compared with $4,522,000 for the
year ended December 31, 1998. This decrease of $689,000 was primarily
attributable to (i) $962,000 in reduced spending on the Primsol, Pediavent and
Feverall Extended Release products' R&D programs due to the completion of
clinical and biological studies of these products during 1998 and (ii) $54,000
in reduced legal/patent expenses. These decreases were offset by increases of
$269,000 in personnel costs due to an increase in headcount and $104,000 in
increased spending on the Orapred product's R&D programs. In December, 1999,
Ascent suspended its research and development efforts for products other than
Primsol and Orapred until such time as Ascent determines that its financial
condition has adequately improved.
INTEREST. Ascent had interest income of $68,000 for the year ended December 31,
1999 compared with $369,000 for the year ended December 31, 1998. This decrease
of $301,000 was primarily due to a lower average cash investment balance. Ascent
had interest expense of $1,500,000 for the year ended December 31, 1999 compared
with $1,387,000 for the year ended December 31, 1998. This increase of $113,000
was primarily attributable to $56,000 for additional subordinated notes issued
during the year and $21,000 for the amortization of debt issue costs.
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.
COST OF SALES. Cost of sales was $2,383,000 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 $1,137,000 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) increased inventory reserves in 1998 of $131,000
as a result of increases in 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 $13,616,000 for the year ended December 31, 1998
compared with $7,717,000 for the year ended December 31, 1997, representing an
increase of $5,899,000.
Selling and marketing expenses were $9,797,000 for the year ended December 31,
1998 compared with expenses of $5,557,000 for the year ended December 31, 1997.
This increase in selling and marketing expenses of $4,240,000 was primarily the
result of (i) increased personnel expenses of approximately $4,651,000
associated with the hiring of Ascent's field sales organization, (ii) increased
marketing and distribution expenses of $482,000 associated with
24
<PAGE> 25
the introduction of Ascent's first two product offerings, Feverall and
Pediamist, and (iii) decreased marketing expenses of $820,000 due to corporate
marketing programs that were run during 1997 and not repeated in 1998.
General and administrative expenses were $3,819,000 for the year ended December
31, 1998 compared with expenses of $2,160,000 for the year ended December 31,
1997. The increase in general and administrative expenses of $1,659,000 was due
primarily to (i) increased amortization expenses for intangible assets of
$234,000 related to the Feverall trademark and goodwill, (ii) increased support
personnel cost of $647,000 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, 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 related to product liability, automobile and directors' and
officers' liability insurance, and (v) $124,000 in increased rent and utility
expense.
RESEARCH AND DEVELOPMENT. Ascent incurred research and development expense of
$4,522,000 for the year ended December 31, 1998 compared with $4,805,000 for the
year ended December 31, 1997. The decrease of $283,000 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.
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
balance. Ascent had $1,387,000 in interest expense for the year ended December
31, 1998 compared to $1,518,000 for the year ended December 31, 1997, a decrease
of $131,000. The decrease primarily reflects 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 than the Triumph subordinated secured notes.
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 and depositary shares purchase warrants, borrowings under
the Alpharma loan agreement and, in 1997, an initial public offering of shares
of common stock. As of December 31, 1999, Ascent had raised approximately
$33,560,000 (net of issuance costs) from the sales of preferred stock,
approximately $28,318,000 (net of issuance costs) from the issuance of
subordinated secured notes and related warrants, approximately $17,529,000 (net
of issuance costs) from the initial public offering of 2,240,000 shares of
common stock and had borrowed approximately $10.5 million under the Alpharma
loan agreement. In addition, in the second half of 1997, Ascent began shipping
its first two products, Feverall acetaminophen suppositories and Pediamist nasal
saline spray. In March 1998, Ascent began promoting Duricef(R) pursuant to a
co-promotion agreement with Bristol-Myers Squibb that terminated on December 31,
1998; in February 1999, Ascent began promoting Omnicef(R) pursuant to a
promotion agreement with Warner-Lambert Company that was subsequently terminated
in January 2000; in May 1999, Ascent began promoting Pediotic(R) pursuant to a
one-year co-promotion agreement with King Pharmaceuticals, Inc.; and in February
2000, Ascent began marketing Primsol solution.
As of March 30, 2000, Ascent had the following notes outstanding under its
financing arrangements with Alpharma, the former holders of Series G preferred
stock and funds affiliated with ING Furman Selz:
- -- 8% seven-year subordinated notes issued on June 1, 1998 to the holders of
Series G preferred stock pursuant to the May 1998 securities purchase
agreement, $1.7 million principal amount outstanding as of March 30, 2000.
- -- 8% seven-year convertible subordinated notes issued on July 23, 1999 to the
holders of Series G preferred stock pursuant to the May 1998 securities
purchase agreement upon the conversion of the Series G preferred stock,
$7.0 million principal amount outstanding as of March 30, 2000.
- -- 7.5% convertible subordinated notes in the principal amount of up to $40.0
million issued on February 19, 1999 to Alpharma pursuant to the Alpharma
loan agreement, $12.0 million principal amount outstanding as of March 30,
2000.
- -- 7.5% convertible subordinated notes in the principal amount of up to $4.0
million issued on July 1, 1999 to funds affiliated with ING Furman Selz
pursuant to the Third Amendment to the May 1998 securities purchase
agreement, $4.0 million principal amount outstanding as of March 30, 2000.
- -- 7.5% convertible subordinated notes in the principal amount of up to $10.0
million issued on October 15, 1999 to funds affiliated with ING Furman Selz
pursuant to the Fourth Amendment to the May 1998 securities purchase
agreement, $1.5 million principal amount outstanding as of March 30, 2000.
Ascent's financing arrangements, including the material terms of the foregoing
notes, are described in more detail below.
Series G Financing. On May 13, 1998, Ascent entered into a Series G Securities
Purchase Agreement with funds affiliated with ING Furman Selz Investments LLC
and BancBoston Ventures, Inc. In accordance with this
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<PAGE> 26
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 is using 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.
In connection with Ascent's strategic alliance with Alpharma, which is described
below, Ascent entered into a second amendment to the May 1998 securities
purchase agreement. The second amendment provided for, among other things, (a)
Ascent'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) 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. These
transactions were consummated on July 23, 1999 in connection with the
consummation of Ascent's strategic alliance with Alpharma.
The subordinated notes and convertible notes 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) in each of
December 1998, June 1999, December 1999 and June 2000 for a period of three
years.
In the event of a change in control or unaffiliated merger of Ascent, Ascent
could 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 would 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 could require Ascent to redeem these notes at a price equal
to the unpaid principal plus accrued and unpaid interest on such notes. In
connection with the Series G financing, a representative of ING Furman Selz
Investments was added to Ascent's board of directors.
Alpharma Strategic Alliance. On February 16, 1999, Ascent entered into a series
of agreements with Alpharma, Inc. and its wholly-owned subsidiary, Alpharma USPD
Inc. Alpharma USPD is referred to in this annual report as
26
<PAGE> 27
Alpharma. This strategic alliance contemplates a number of transactions,
including a loan agreement under which Alpharma agreed to 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,
Ascent has obtained a call option to acquire all of its outstanding common stock
and assigned the option to Alpharma, thereby giving Alpharma the option,
exercisable in 2002, 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.
On February 19, 1999, Ascent borrowed $4.0 million from Alpharma under the loan
agreement and issued Alpharma a 7.5% convertible subordinated note in the
principal amount of up to $40.0 million. On July 26, 1999, Ascent borrowed $1.5
million under the loan agreement. On August 31, 1999, Ascent borrowed $1.5
million under the loan agreement. In October 1999, Ascent borrowed $1.5 million
under the loan agreement. On November 29, 1999, Ascent borrowed $2.0 million
under the loan agreement. On January 24, 2000, Ascent borrowed $1.5 million
under the loan agreement. 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, Ascent does not otherwise prepay the principal amount of the note
outstanding and Alpharma does not otherwise convert the note, Ascent 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, Ascent may repay all or a portion
of the outstanding principal amount under the note. Ascent 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, Ascent 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. Ascent may not otherwise prepay the
note. Following a change in control of Ascent, Alpharma may require Ascent
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 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.
Alpharma First Supplemental Agreement. On July 1, 1999, Ascent entered into a
supplemental agreement with Alpharma amending the terms of the loan agreement
and the other strategic alliance agreements between Ascent and Alpharma. Under
the supplemental agreement, the Company agreed to certain additional
restrictions on its ability to borrow additional funds under the loan agreement,
including a prohibition, prior to the approval and commercial launch of both
Ascent's Primsol and Orapred products, on the use of any funds for any purpose
other than normal operating expenses and expenses relating to such products as
set forth in the Ascent's internal operating plan, as updated from time to time.
In addition, Ascent may only use the additional $8.0 million allocated for
general corporate purposes under the loan agreement for the purposes set forth
in its internal operating plan, as updated from time to time, and may only use
the $28.0 million allocated for acquisitions and research and development
projects for those acquisitions and projects that are approved by a screening
committee comprised of two nominees of Ascent, one nominee of Alpharma and one
nominee of ING Furman Selz. This screening committee was established for the
purpose of approving any changes to Ascent's internal operating plan involving
materially increased expenditures and reviewing and approving acquisitions of
companies, products or product lines or rights to sell a product or product line
and research and development projects. Ascent's two representatives on the
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screening committee together have one vote, and the representatives of Alpharma
and ING Furman Selz each have one vote. The screening committee must act by
unanimous approval prior to the approval and commercial launch of Ascent's
Primsol and Orapred products and by majority approval following the approval and
commercial launch of these products.
Alpharma Second Supplemental Agreement. On October 15, 1999, Ascent entered into
a second supplemental agreement with Alpharma amending the terms of the loan
agreement and the other strategic alliance agreements between Ascent and
Alpharma. Under the second supplemental agreement, Ascent agreed, among other
things, to delay by 12 months the exercise period of Alpharma's call option to
the first half of year 2003, to change the fiscal year upon which the exercise
price of Alpharma's call option is based from 2001 to 2002 and to modify certain
conditions on Ascent's access to funds under the loan agreement. In addition,
Ascent agreed that, to the extent it borrowed funds from Alpharma under the loan
agreement to finance the acquisition of products or businesses, it would grant
Alpharma a security interest in such products or businesses. The modification of
the terms of Alpharma's call option is subject to the approval of Ascent's
stockholders which Ascent expects to seek at the next annual meeting of its
stockholders.
ING Furman Selz Loan Arrangements
$4.0 Million Facility. On June 30, 1999, Ascent issued and sold 7.5% demand
promissory notes in the principal amount of $2.0 million to funds
affiliated with ING Furman Selz. On July 1, 1999, Ascent and the Series G
purchasers entered into a third amendment to the May 1998 securities
purchase agreement under which funds affiliated with ING Furman Selz agreed
to loan Ascent up to $4.0 million. Upon executing the third amendment,
Ascent issued 7.5% convertible subordinated notes in the aggregate
principal amount of up to $4.0 million and warrants to purchase 300,000
Ascent depositary shares at an exercise price of $3.00 per share to the
funds affiliated with ING Furman Selz and cancelled the $2.0 million of
7.5% demand promissory notes issued on June 30, 1999. The obligation of the
funds affiliated with ING Furman Selz to loan Ascent the remaining $2.0
million was subject to the fulfillment to their reasonable satisfaction or
the waiver by the funds of conditions, including that Ascent had or
expected to have a stockholders' deficit reflected on the balance sheet
(calculated in a manner that treats as equity any amounts outstanding under
the 8% subordinated notes and the 7.5% convertible subordinated notes and
any amounts outstanding under any debt securities issued upon exchange of
the Series G preferred stock) and either the requested loan from the funds
affiliated with ING Furman Selz would have prevented or eliminated such
stockholders' deficit or Alpharma agreed in writing that it would not deny
Ascent's next borrowing request under the Alpharma loan agreement because
of such stockholders' deficit. On December 30, 1999, Ascent borrowed an
additional $1.0 million under this loan arrangement and issued additional
warrants to purchase 150,000 Ascent depositary shares to the funds
affiliated with ING Furman Selz. On February 14, 2000, Ascent borrowed the
final $1.0 million under this loan arrangement and issued additional
warrants to purchase 150,000 Ascent depositary shares to the funds
affiliated with ING Furman Selz. All of the warrants Ascent has issued
under the third amendment have an exercise price of $3.00 per share and
will expire on July 1, 2006.
$10.0 Million Facility. On October 15, 1999, Ascent and the Series G
purchasers entered into a fourth amendment to the May 1998 securities
purchase agreement under which funds affiliated with ING Furman Selz agreed
to loan Ascent up to an additional $10.0 million. Upon executing the fourth
amendment, Ascent issued 7.5% convertible subordinated notes in the
aggregate principal amount of up to $10.0 million and warrants to purchase
1,000,000 Ascent depositary shares at an exercise price of $3.00 per share
to the funds affiliated with ING Furman Selz. On March 13, 2000, Ascent
borrowed $1.5 million under the fourth amendment. The obligation of the
funds affiliated with ING Furman Selz to loan Ascent the remaining $8.5
million is subject to the fulfillment to their reasonable satisfaction or
the waiver by the funds of certain conditions. Ascent has agreed to issue
warrants to purchase up to an additional 4,000,000 Ascent depositary shares
in connection with borrowings under this credit facility. Ascent has issued
warrants exercisable for an aggregate of 375,000 depositary shares in
connections with borrowings under
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the fourth amendment to date. All of the warrants Ascent has issued or
will issue under the fourth amendment have or will have an exercise price
of $3.00 per share and expire on October 15, 2006. Ascent has agreed that,
to the extent it grants Alpharma a security interest in products or
businesses acquired by Ascent using funds borrowed under the Alpharma loan
agreement, Ascent will grant a junior security interest in such assets to
the funds affiliated with ING Furman Selz to secure Ascent's indebtedness
under the $10.0 million credit facility.
Payment of Principal and Interest; Conversion. The 7.5% convertible
subordinated notes issued pursuant to the third amendment and the fourth
amendment expire on July 1, 2004 and are convertible into shares of Ascent
common stock at a conversion price of $3.00 per share in accordance with
the terms of the May 1998 securities purchase agreement, as amended.
Interest on these notes is due and payable quarterly, in arrears, on the
last day of each calendar quarter, and the outstanding principal on the
notes is payable in full on July 1, 2004.
Fixed Assets. Ascent expended $223,000, $356,000 and $805,000 to purchase fixed
assets, primarily equipment and furniture, in 1999, 1998 and 1997, respectively.
Ascent expects that its capital expenditures in 2000 will be approximately
$200,000, primarily for computer hardware and software.
Future Capital Requirements. Ascent's future capital requirements will depend on
many factors, including timing of FDA approval of Orapred, the costs and margins
on sales of its products, success of its commercialization activities and
arrangements, particularly the level of product sales, its 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 that, based upon its current operating plan and its existing
capital resources, it will have enough cash through December 31, 2000. We may
need to borrow up to an additional $4.0 million for fiscal year 2001. In order
to obtain these funds, we expect that we will borrow the remaining $8.5 million
available under Ascent's financing arrangements with ING Furman Selz. If
Ascent's business does not progress in accordance with its current operating
plan, such as if Orapred is not approved by the FDA or its approval is delayed,
Ascent may need to raise additional funds, including through collaborative
relationships and public or private financings. 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.
IMPACT OF YEAR 2000 ISSUES
In prior periods, Ascent discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, Ascent completed its assessment of its
computer systems, software and operations infrastructure to identify hardware,
software and process control systems that were not Year 2000 compliant. Ascent
also initiated communications with certain significant suppliers, service
providers and customers to determine the extent to which such suppliers,
providers or customers would be affected by any significant Year 2000 issues. As
a result of these planning and implementation efforts, Ascent experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully
responded to the Year 2000 date changes. Ascent spent less than $25,000 in 1999
in connection with remediating its systems to become Year 2000 compliant. Ascent
is not aware of any material problems resulting from Year 2000 issues, either
with its products, its internal systems or the products and services of third
parties. Ascent will continue to monitor its mission critical computer
applications and those of its suppliers and service providers through the Year
2000 to ensure that any latent Year 2000 matters that may arise are promptly
addressed.
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RECENT PRONOUNCEMENTS
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") requires that all
derivative investments be recorded in the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings or
comprehensive income depending on whether a derivative is designated as part of
a hedge transaction, and the type of hedge transaction. The Company does not
currently engage in derivative trading or hedging activity.
During 1999, Financial Accounting Standards Board Statement No. 137, "Accounting
for Derivative Instruments and Hedging Activities deferral of the Effective Date
of the Statement of Financial Accounting Standards No. 133" ("SFAS 137") was
issued. This statement amended SFAS 133 by deferring the effective date to
fiscal quarters beginning after June 15, 2001. The Company will adopt SFAS 133
in the fiscal quarter beginning after June 15, 2001, although no impact on
operating results or financial position is expected.
In November 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges" ("SAB
100"). SAB 100 expresses the views of the Staff regarding the accounting for the
disclosure of certain expenses commonly reported in connection with exit
activities and business combinations. The Company does not expect the provisions
of SAB 100 to have a material impact on its financial statements.
In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition issues in
financial statements. The application of the guidance in SAB 101 will be
required in the Company's second quarter of fiscal 2000. The Company does not
expect the provisions of SAB 101 to have a material impact on its financial
statements.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," "intends"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause THE COMPANY'S ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARDING-LOOKING
STATEMENTS. THESE FACTORS INCLUDE, WITHOUT LIMITATION, THOSE SET FORTH BELOW.
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. A minor chemistry deficiency was received in August 1999 and
a response was provided in December 1999. 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.
WE HAVE NOT BEEN PROFITABLE
We have incurred net losses since our inception. At December 31, 1999, our
accumulated deficit was approximately $66.3 million. We received our first
revenues from product sales 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
Based upon our current operating plan, we anticipate that our existing capital
resources, including the remaining $8.5 million which we may borrow from funds
affiliated with ING Furman Selz under the fourth amendment to the May 1998
securities purchase agreement will be adequate to satisfy our capital
requirements through the end of 2000. We currently believe that we will need to
raise additional funds to satisfy our capital requirements through 2001. If our
business does not progress in accordance with our current operating plan, we may
need to raise additional funds, including through collaborative relationships
and public or private financings. 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.
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. Discussions with the FDA have led to an
agreement that
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with changes and data required to address the manufacturing and packaging
deficiencies, the product may be approvable for the fever reduction indication
but that additional clinical data is required for approval of the pain
indication. We are planning on resuming the required manufacturing and packaging
work as our financial position improves. 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, 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 to achieve market acceptance of Primsol solution and Orapred
syrup could have a material adverse effect on our business.
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WE ARE SUBJECT TO TECHNOLOGICAL UNCERTAINTY IN OUR DEVELOPMENT EFFORTS
We have introduced only two internally-developed products, Pediamist nasal
saline spray and Primsol trimethoprim solution, 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 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 currently market one of our products and 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
products compete and 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, some of our
products and many of our potential products that are reformulations of existing
drugs of other manufacturers may have significantly narrower patent or other
competitive protection.
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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.
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
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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. We also rely on Lyne Laboratories, Inc. for the
manufacture of Primsol solution. In addition, we rely on third 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 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:
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- 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.
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 some of our products and 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.
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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 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 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 president and 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.
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
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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 April 1999,
we entered into a one-year co-promotion agreement with King Pharmaceuticals,
Inc. to market Pediotic, a combination corticosteroid/antibiotic. 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.
ITEM 7A. 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 and convertible subordinated notes and the promissory note
issued by Ascent to Alpharma under its loan agreement with Alpharma. At December
31, 1999, 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, 1999, which was not materially
different from the year-end carrying value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All financial statements required to be filed hereunder are filed as Appendix A
hereto, are listed under Item 14 (a) and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
37
<PAGE> 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part in Ascent's
Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
June 14, 2000 (the "Definitive Proxy Statement") under the caption "Proposal 1 -
Election of Directors," which section is incorporated herein by this reference.
The information required by this item is also contained in part under the
caption "Executive Officers and Significant Employees" in Part I of this Annual
Report on Form 10-K, following Item 4.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the Definitive Proxy
Statement under the caption "Proposal 1 - Election of Directors," which section
is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the Definitive Proxy
Statement under the caption "Stock Ownership of Certain Beneficial Owners and
Management," which section is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Definitive Proxy
Statement under the caption "Certain Relationships and Related Transactions,"
which section is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as Appendix A hereto and are
included as part of this Annual Report on Form 10-K:
Financial Statements of Ascent Pediatrics, Inc.:
Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity (Deficit)
Statements of Cash Flows
Notes to Financial Statements
Financial Statements of a Product Line of Upsher-Smith Laboratories,
Inc.:
Independent Auditors' Report
Statements of Assets Related to the Product Line
Statements of Net Sales and Identified Costs and Expenses of
the Product Line
Notes to Financial Statements
(b) The Company is not filing any financial statement schedules as part of
this Annual Report on Form 10-K because they are not required or
because the required information is provided in the financial
statements or notes thereto.
38
<PAGE> 39
(c) The list of Exhibits filed as a part of this Annual Report on Form
10-K are set forth on the Exhibit Index immediately preceding such
exhibits, and is incorporated herein by this reference.
(d) Reports on Form 8-K:
1. On October 10, 1999, Ascent filed a Current Report on Form 8-K
with the Securities and Exchange Commission announcing that the
U.S. Food and Drug Administration had agreed to reclassify a
deficiency letter relating to Ascent's Abbreviated New Drug
Application for its Orapred product candidate from a major
deficiency to a minor deficiency.
2. On November 4, 1999, Ascent filed a Current Report on Form 8-K
with the Securities and Exchange Commission announcing (i) that
Ascent had entered into an agreement with Alpharma Inc. modifying
the strategic alliance between the two companies to, among other
things, extend (subject to stockholder approval) the exercise
period of Alpharma's call option by 12 months to the first half
of 2003 and (ii) that ING Furman Selz had agreed to loan Ascent
up to $10.0 million in additional financing for general corporate
purposes.
3. On December 20, 1999, Ascent filed a Current Report on Form 8-K
with the Securities and Exchange Commission announcing (i) that
Dr. Emmett Clemente had been appointed to the office of President
of Ascent and (ii) that Warner-Lambert Company had notified
Ascent of its intention to terminate its promotion agreement with
Ascent relating to the Omnicef(R) (cefdinir) product immediately
after the consummation of the sale of Warner-Lambert's assets
with respect to such product to Abbott Laboratories.
39
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 30, 2000 ASCENT PEDIATRICS, INC.
(Registrant)
By: /s/ Emmett Clemente
-----------------------------
Emmett Clemente
President and Chairman of the
Board
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Emmett Clemente President and Chairman of the Board March 30, 2000
- ------------------- (Principal Executive Officer)
/s/ Eliot M. Lurier Chief Financial Officer, Treasurer and Clerk March 30, 2000
- ------------------- (Principal Financial and Accounting Officer)
/s/ Nicholas Daraviras Director March 30, 2000
- ------------------------
/s/ James L. Luikart Director March 30, 2000
- --------------------
/s/ Lee J. Schroeder Director March 30, 2000
- --------------------
</TABLE>
40
<PAGE> 41
APPENDIX A
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
ASCENT PEDIATRICS, INC.:
Report of Independent Accountants................................................. A-2
Balance Sheets.................................................................... A-3
Statements of Operations.......................................................... A-4
Statements of Stockholders' Equity (Deficit) ..................................... A-5
Statements of Cash Flows.......................................................... A-6
Notes to Financial Statements..................................................... A-7
A PRODUCT LINE OF UPSHER-SMITH LABORATORIES, INC.:
Independent Auditors' Report...................................................... A-23
Statement of Assets Related to the Product Line Acquired by Ascent
Pediatrics, Inc. as of December 29, 1996 and July 9, 1997 (unaudited).......... A-24
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).......... A-25
Notes to the Financial Statements................................................. A-26
</TABLE>
A-1
<PAGE> 42
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, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States. 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 auditing standards generally accepted in the
United States which 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, 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.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 17, 2000, except as to
the information in the fourth
paragraph of note T for which
the date is March 13, 2000.
A-2
<PAGE> 43
ASCENT PEDIATRICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents .......................................................... $ 1,067,049 $ 2,171,777
Accounts receivable, less allowance for doubtful accounts of $67,000
and $48,000 at December 31, 1999 and 1998, respectively .......................... 759,098 918,307
Inventory .......................................................................... 1,012,430 919,785
Other current assets ............................................................... 132,555 274,983
------------ ------------
Total current assets .......................................................... 2,971,132 4,284,852
Fixed assets, net ....................................................................... 516,165 730,894
Debt issue costs, net ................................................................... 1,882,365 669,852
Intangibles, net ........................................................................ 9,857,648 10,523,789
Other assets ............................................................................ 45,300 91,543
------------ ------------
Total assets .................................................................. $ 15,272,610 $ 16,300,930
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable ................................................................... $ 1,645,302 $ 1,510,193
Interest payable ................................................................... 523,023 208,862
Accrued expenses ................................................................... 1,600,855 2,097,381
------------ ------------
Total current liabilities ..................................................... 3,769,180 3,816,436
Subordinated secured notes .............................................................. 21,461,041 8,681,474
------------ ------------
Total liabilities ............................................................. 25,230,221 12,497,910
Commitments and contingencies (Note G)
Stockholders' equity (deficit)
Preferred stock, $.01 par value; 5,000,000 shares authorized; 0 and 7,000
shares, designated as Series G convertible exchangeable preferred stock,
issued and outstanding at December 31, 1999 and 1998, respectively ............ -- 6,461,251
Common stock, $.00004 par value; 60,000,000 shares authorized;
9,643,883 and 6,975,921 shares issued and outstanding at
December 31, 1999 and 1998, respectively ...................................... 385 279
Additional paid-in capital ......................................................... 56,304,465 47,951,271
Accumulated deficit ................................................................ (66,262,461) (50,609,781)
------------ ------------
Total stockholders' equity (deficit) .......................................... (9,957,611) 3,803,020
------------ ------------
Total liabilities and stockholders' equity (deficit) .......................... $ 15,272,610 $ 16,300,930
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-3
<PAGE> 44
ASCENT PEDIATRICS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Product revenue, net ............................... $ 3,039,678 $ 4,352,899 $ 2,073,458
Co-promotional revenue ............................. 4,007,500 122,819 --
------------ ------------ ------------
Total net revenue .................................. 7,047,178 4,475,718 2,073,458
Costs and expenses
Costs of product sales ........................ 1,626,339 2,383,431 1,245,543
Selling, general and administrative ........... 15,808,252 13,616,237 7,717,557
Research and development ...................... 3,833,310 4,522,046 4,804,823
------------ ------------ ------------
Total costs and expenses ...................... 21,267,901 20,521,714 13,767,923
Loss from operations ..................... (14,220,723) (16,045,996) (11,694,465)
Interest income .................................... 67,617 368,570 693,019
Interest expense ................................... (1,499,574) (1,387,412) (1,518,375)
Other income ....................................... -- -- 21,742
------------ ------------ ------------
Loss before extraordinary item ........... (15,652,680) (17,064,838) (12,498,079)
Extraordinary item- loss on early extinguishment of
debt, net of taxes of $0 (Note M) ............. -- 1,166,463 --
Net loss ................................. (15,652,680) (18,231,301) (12,498,079)
Accretion to redemption value of preferred stock ... -- -- 247,361
Preferred stock dividend ........................... 418,958 449,169 --
------------ ------------ ------------
Net loss to common stockholders .......... $(16,071,638) $(18,680,470) $(12,745,440)
============ ============ ============
Results per common share:
Historical - basic and diluted:
Loss before extraordinary item ........... $ (1.91) $ (2.46) $ (3.02)
Extraordinary item loss of early
extinguishment on debt ................... $ -- $ (0.17) $ --
Accretion to redemption value of preferred
stock .................................... $ -- $ -- $ (0.06)
Preferred stock dividend ................. $ (0.05) $ (0.06) $ --
------------ ------------ ------------
Net loss to common stockholders .......... $ (1.96) $ (2.69) $ (3.08)
============ ============ ============
Weighted average shares, basic and diluted ......... 8,182,085 6,939,348 4,134,068
============ ============ ============
</TABLE>
STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss ................................. $(15,652,680) $(18,231,301) $(12,498,079)
Unrealized gain on securities............. -- -- 1,116
------------ ------------ ------------
Comprehensive loss ....................... $(15,652,680) $(18,231,301) $(12,496,963)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-4
<PAGE> 45
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, 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
Amortization of unearned compensation ... 27,300
Dividend on Series G convertible
exchangeable preferred stock .......... (449,169)
Change in unrealized loss on securities .
Net loss ................................
--------- --------- --------- ----------- ----------- ----- ------------
Balance, December 31, 1998 ............. 7,000 6,975,921 $ -- $ -- $ 6,461,251 $ 279 $ 47,951,271
Issuance of common stock pursuant to
Furman Selz/Alpharma agreement......... 2,566,958 103 8,282,021
Conversion of preferred stock ......... (7,000) (6,461,251)
Acceleration of accretion of secured
debt ................................. (242,079)
Acceleration of debt issue costs ...... (460,632)
Preferred stock dividend variable rate
adjustment ........................... 210,153
Warrants and options issued to
subordinated secured noteholders ..... 811,263
Cashless exercise of warrants ........... 17,408
Employee stock purchase plan ............ 83,596 3 171,426
Dividend on Series G convertible
exchangeable preferred stock .......... (418,958)
Net loss ................................
--------- --------- --------- ----------- ----------- ----- ------------
Balance, December 31, 1999 .............. -- 9,643,883 $ -- $ -- $ -- $ 385 $ 56,304,465
========= ========= ========= =========== =========== ===== ============
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED ACCUMULATED
OTHER STOCKHOLDERS
ACCUMULATED COMPREHENSIVE EQUITY
DEFICIT INCOME (DEFICIT)
----------- ------------- ------------
<S> <C> <C> <C>
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
Amortization of unearned compensation ... 27,300
Dividend on Series G convertible
exchangeable preferred stock .......... (449,169)
Change in unrealized 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
Issuance of common stock pursuant to
Furman Selz/Alpharma agreement......... 8,282,124
Conversion of preferred stock ........... (6,461,251)
Acceleration of accretion of secured debt (242,079)
Acceleration of debt issue costs ........ (460,632)
Preferred stock dividend variable rate
adjustment ............................ 210,153
Warrants and options issued to
subordinated secured noteholders ........ 811,263
Cashless exercise of warrants ........... --
Employee stock purchase plan ............ 171,429
Dividend on Series G convertible
exchangeable preferred stock .......... (418,958)
Net loss ................................ (15,652,680) (15,652,680)
------------ ------------ ------------
Balance, December 31, 1999 .............. $(66,262,461) $ -- $ (9,957,611)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-5
<PAGE> 46
ASCENT PEDIATRICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows for operating activities:
Net loss ............................................... $(15,652,680) $(18,231,301) $(12,498,079)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization ..................... 1,074,852 472,113 437,417
Non-cash interest expense ......................... 554,439 1,323,083 1,325,644
Non-cash extraordinary items ...................... -- 1,166,463 --
Provision for bad debts ........................... 18,766 -- 50,000
Inventory write-off ............................... (539,825) -- --
Loss/(gain) on disposals of fixed assets .......... 28,834 8,568 (9,242)
Changes in operating assets and liabilities:
Accounts receivable ........................... 140,443 (152,698) (815,609)
Inventory ..................................... 447,179 (130,287) (379,046)
Other assets .................................. 188,671 (192,026) (121,395)
Accounts payable .............................. 135,109 935 1,012,603
Interest payable .............................. 314,161 208,862 --
Accrued expenses .............................. (512,794) 633,187 80,823
------------ ------------ ------------
Net cash used for operating activities ... (13,802,845) (14,893,101) (10,916,884)
Cash flows used for investing activities:
Purchases of property and equipment .................... (222,815) (356,335) (804,896)
Proceeds from sale of fixed assets ..................... -- -- 38,050
Payments related to acquisition ........................ -- (5,500,000) (6,155,145)
Purchase of marketable securities ...................... -- -- (2,526,784)
Sales of marketable securities ......................... -- 2,526,784 --
------------ ------------ ------------
Net cash used for investing activities ... (222,815) (3,329,551) (9,448,775)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs ....................................... 1,122,065 185,600 17,529,339
Proceeds from sale of preferred stock, net of
issuance costs ....................................... -- 6,461,251 6,922,229
Proceeds from issuance of debt ......................... 13,286,226 8,652,515 4,303,775
Proceeds from issuance of debt related warrants ........ 262,463 322,997 2,696,225
Repayment of debt ...................................... -- (6,125,000) (875,000)
Payment of debt issue costs ............................ (1,347,131) (661,192) (596,040)
Payments of preferred stock dividends .................. (402,691) (142,354) --
------------ ------------ ------------
Net cash provided by financing activities 12,920,932 8,693,817 29,980,528
Net (decrease) increase in cash and cash equivalents ........ (1,104,728) (9,528,835) 9,614,869
Cash and cash equivalents, beginning of year ................ 2,171,777 11,700,612 2,085,743
------------ ------------ ------------
Cash and cash equivalents, end of year ...................... $ 1,067,049 $ 2,171,777 $ 11,700,612
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest .......................................... $ 818,460 $ 502,550 $ 175,000
Income taxes ...................................... 29,348 65,387 8,049
Noncash transactions:
Conversion of convertible and redeemable
Convertible preferred stock to common stock ....... 6,461,251 -- 27,854,039
</TABLE>
The accompanying notes are an integral part of the financial statements.
A-6
<PAGE> 47
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS
A. 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 closed the acquisition of the Feverall line of acetaminophen rectal
suppositories from Upsher-Smith Laboratories, Inc. ("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
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, which agreement was subsequently
terminated in January 2000. During May 1999, the Company began marketing
Pediotic(R) (a combination corticosteroid/antibiotic) to pediatricians in the
United States pursuant to a co-promotion agreement with King Pharmaceuticals,
Inc.
The Company has incurred net losses since its inception and expects to incur
additional operating losses in the future as the Company continues its product
development programs, 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,
1999, the Company's cumulative deficit was approximately $66,262,000. 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 equity capital
and the establishment and maintenance 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.
Ascent anticipates that, based upon its current operating plan and its existing
capital resources, it will have enough cash through December 31, 2000. In order
to obtain these funds, we expect that we will borrow the remaining $8.5 million
available under Ascent's financing arrangements with ING Furman Selz.
On July 23, 1999, the Company consummated a merger with a wholly-owned
subsidiary pursuant to which each share of common stock of the Company was
converted into one depositary share (each, a "Depositary Share"), representing
one share of common stock, subject to a call option, and represented by a
depositary receipt. As used in these financial statements, the terms "Common
Stock" and "common shares" includes the Depositary Shares and the term "common
stockholders" includes the holders of Depositary Shares for all periods from and
after July 23, 1999.
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.
A-7
<PAGE> 48
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
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
and accounts receivable. Revenue from one customer was 50% of total net revenue
for the year ended December 31, 1999. Two customers comprised 71% of the
accounts receivable balance at December 31, 1999.
Inventory
Inventories, consisting of raw materials, work-in-process and finished goods,
are stated at the lower of costs (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 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. If impaired, the intangible asset
would be written down to the present value of estimated expected future cash
flows using a discount rate commensurate with the risks involved. Impairment of
goodwill, if any, is measured periodically on the basis of whether anticipated
undiscounted operating cash flows generated by the acquired businesses will
recover the recorded net goodwill balances over the remaining amortization
period.
Revenue Recognition
Product revenue is recognized upon shipment of the product when the terms
are F.O.B. shipping point or upon customer receipt of the product when the terms
are F.O.B. destination and provided that no significant obligations remain
outstanding and the resulting receivable is deemed collectible by management.
Co-promotion revenue is recognized as earned based upon the performance
requirements of the respective 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, 1999, 1998 and 1997, costs were $1,402,236, $1,278,002 and
$1,615,318, respectively.
A-8
<PAGE> 49
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
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.
Accounting for Stock-Based Compensation
The Company continues to apply the provisions of Accounting Principles Board
("APB") Opinion No. 25 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 1999, 1998 and 1997.
Net Loss Per Common Share
Basic net income (loss) per common share is computed based on the weighted
average number of common and common equivalent shares outstanding during the
period. Diluted net income (loss) per common share gives effect to all dilutive
potential common shares outstanding during the period. 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 5,655,517,
1,890,487, and 3,196,511 shares of common stock were outstanding as of December
31, 1999, 1998 and 1997, 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 6,068,792, 3,026,603, and 965,726
shares of common stock were outstanding as of December 31, 1999, 1998 and 1997,
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
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.
Debt Issue Costs
The costs incurred for the issuance of debt are initially captured in the
deferred charges account on the balance sheet until an agreement is
consummated. At such time the costs are capitalized as debt issue costs and are
amortized over the life of the debt with the amortization being charged to
interest expense on the statement of operations.
A-9
<PAGE> 50
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Recent Accounting Pronouncements
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") requires that all
derivative investments be recorded in the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings or
comprehensive income depending on whether a derivative is designated as part of
a hedge transaction, and the type of hedge transaction. The Company does not
currently engage in derivative trading or hedging activity.
During 1999, Financial Accounting Standards Board Statement No. 137, "Accounting
for Derivative Instruments and Hedging Activities deferral of the Effective Date
of the Statement of Financial Accounting Standards No. 133" ("SFAS 137") was
issued. This statement amended SFAS 133 by deferring the effective date to
fiscal quarters beginning after June 15, 2001. The Company will adopt SFAS 133
in the fiscal quarter beginning after June 15, 2001, although no impact on
operating results or financial position is expected.
In November 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges" ("SAB
100"). SAB 100 expresses the views of the Staff regarding the accounting for the
disclosure of certain expenses commonly reported in connection with exit
activities and business combinations. The Company does not expect the provisions
of SAB 100 to have a material impact on its financial statements.
In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition issues in
financial statements. The application of the guidance in SAB 101 will be
required in the Company's second quarter of fiscal 2000. The Company does not
expect the provisions of SAB 101 to have a material impact on its financial
statements.
C. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---------- ---------
<S> <C> <C>
Raw materials............................... $ 375,719 $ 248,434
Finished goods.............................. 636,711 671,351
---------- ---------
Total....................................... $1,012,430 $ 919,785
========== =========
</TABLE>
A-10
<PAGE> 51
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
D. FIXED ASSETS
Fixed assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Equipment......................... $ 1,121,708 $1,050,278
Furniture and fixtures............ 257,292 239,245
Leasehold improvements............ 98,213 98,213
----------- ----------
Total equipment................... $ 1,477,213 $1,387,736
Less:
Accumulated depreciation..... (961,048) (656,842)
----------- ----------
Total............................. $ 516,165 $ 730,894
=========== ==========
</TABLE>
Depreciation expense amounted to $408,711, $376,437, and $179,669 for the years
ended December 31, 1999, 1998 and 1997, respectively.
E. CO-PROMOTION AGREEMENTS
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 promote OMNICEF(R) (cefdinir) oral suspension and capsules as part of
its strategy to leverage its marketing and sales capabilities, including its
domestic sales force. On December 6, 1999, Warner-Lambert Company notified the
Company that it intended to terminate this promotion agreement immediately after
the consummation by Warner-Lambert Company of the sale of its assets with
respect to OMNICEF(R) (cefdinir) to Abbott Laboratories in January 2000.
PEDIOTIC
In April 1999, the Company entered into a one-year co-promotion agreement with
King Pharmaceuticals Inc. to begin marketing, in May 1999, Pediotic(R) (a
combination corticosteroid/antibiotic) to pediatricians in the United States. As
compensation for the Company's co-promotional efforts, King Pharmaceuticals has
agreed to pay the Company a base fee with incremental revenue based on achieving
certain goals above a specified amount. The Company recognized $625,000 as
revenue earned for this agreement for the year ended December 31, 1999.
F. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax expenses/(benefits):
Federal ..................... (5,206,072) (5,433,714) (4,276,253)
State ....................... (1,496,718) (2,096,174) (345,344)
Change in Valuation Allowance 6,702,790 7,529,888 4,621,597
Total Deferred ......... 0 0 0
----------- ----------- -----------
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, 1999
and 1998 the components of deferred tax assets (liabilities) are as follows:
A-11
<PAGE> 52
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net operating loss carryforwards............... 18,706,086 $ 12,596,997
Credit carryforward ........................... 909,546 436,917
Capitalized expenses:
Research and development ................. 5,567,393 4,708,695
G&A ...................................... 1,703,220 2,362,573
Other.......................................... (97,360) (19,087)
------------ ------------
Total deferred tax assets ..................... 26,788,885 20,086,095
Valuation allowance............................ (26,788,885) (20,086,095)
------------ ------------
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,
-----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate ........................ (34.00)% (34.0)% (34.0)%
State taxes - net of federal benefit.......... ( 6.31) ( 8.0) (1.8)
Other ........................................ ( 2.51) 0.3 (1.2)
Change in valuation allowance ................ 42.82 41.7 37.0
----- ---- ----
Effective tax rate ........................... 0.00% 0.0% 0.0%
</TABLE>
At December 31, 1999 the Company had net operating loss carryforwards of
$47,490,315 and $43,087,184 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,
2000 through 2004. 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, 1999 was
$633,690 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. 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.
G. 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 for an additional five-year period. Rent expense was $306,948,
$300,904, and $233,043 for fiscal years 1999, 1998 and 1997, respectively.
Future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000...................... $ 617,854
2001...................... 393,387
2002...................... 42,956
----------
Total..................... $1,054,197
==========
</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 respectively, 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. Under the
agreement for the Primsol trimethoprim solution, the agreement may be terminated
by either party on three months notice any time after October 17, 2004. The
Company currently has outstanding purchase agreements of $118,950 with this
third party manufacturer. Under the Feverall acetaminophen suppositories
agreement, the Company may renew the agreement by giving notice one year before
the expiration of the contract on July 10, 2002. There is an option for two
additional five-year terms which the Company intends to use. The Company
currently has outstanding purchase agreements of $71,500 with this third party
manufacturer.
A-12
<PAGE> 53
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
H. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Employee compensation expenses.......... $1,033,187 $ 762,664
Advertising expenses ................... -- 183,509
Legal and accounting expenses .......... 81,726 114,441
Selling fees and chargebacks ........... 78,071 254,632
Preferred stock dividend ............... 323,082 306,815
Other .................................. 84,789 475,320
---------- ----------
$1,600,855 $2,097,381
</TABLE>
I. 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 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 J).
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. The
Series G preferred stock was 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 was 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 could have been 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 N).
On February 16, 1999, the Company entered into a second amendment to the May
1998 Series G Purchase Agreement, providing for, among other things, (a) the
Company's agreement to exercise its right to exchange all outstanding shares of
Series G preferred stock for convertible subordinated notes in accordance with
the terms of the Series G preferred stock, (b) the reduction in the exercise
price of warrants to purchase 2,116,958 shares of common stock of the Company
from $4.75 per share to $3.00 per share and the agreement of the Series G
purchasers to exercise these warrants, (c) the issuance and sale to the Series G
purchasers of an aggregate of 300,000 shares of common stock of the Company at a
price of $3.00 per share and (d) the cancellation of approximately $7.25 million
of principal under the subordinated notes held by the Series G purchasers to pay
the exercise price of the warrants and the purchase price of the additional
300,000 shares of common stock. In addition, the Company entered into an
amendment to a financial advisory services fee agreement with ING Furman Selz
whereby the Company agreed to issue 150,000 shares of common stock to ING Furman
Selz in lieu of the payment of certain financial advisory fees. On July 23,
1999, following the approval by the Company's stockholders of the reduction in
the exercise price of the warrants and the issuance of the additional shares of
common stock to the Series G purchasers and ING Furman Selz, and in
A-13
<PAGE> 54
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
connection with the consummation of the Company's strategic alliance with
Alpharma, the Company and the Series G purchasers consummated the transactions
contemplated above.
On July 23, 1999, the Company consummated a merger with a wholly-owned
subsidiary pursuant to which each share of common stock of the Company was
converted into one depositary share (each, a "Depositary Share"), representing
one share of common stock, subject to a call option, and represented by a
depositary receipt. As used in these financial statements, the terms "Common
Stock" and common shares" includes the Depositary Shares and the term "common
stockholders" includes the holders of Depositary Shares for all periods from and
after July 23, 1999.
J. STOCK PURCHASE WARRANTS
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. 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, 1998 or 1999, 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 for services rendered for Series F
redeemable convertible preferred stock. These warrants, none of which were
exercised in 1997 or 1998, contain a cashless exercise feature and expire on
February 28, 2002. During 1999 a cashless exercise of 11,474 warrants resulted
in the issuance of 11,440 shares of common stock.
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 M). The relative fair value was
recorded as a contribution to additional paid in capital of $2,506,000. During
1999 a cashless exercise of 6,010 warrants, having an exercise price of $0.01
per share, resulted in the issuance of 5,968 shares of common stock.
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 N). The
relative fair value of these warrants was recorded as a contribution to
additional paid in capital of $323,000.
On June 30, 1999, the Company issued warrants to the funds affiliated with ING
Furman Selz to purchase 300,000 shares of Ascent common stock at an exercise
price of $3.00 per share (see Note P). The relative fair value of these warrants
was recorded as a contribution to additional paid in capital of $195,505.
On October 15, 1999, the Company issued warrants to the funds affiliated with
ING Furman Selz to purchase 1,000,000 shares of Ascent common stock at an
exercise price of $3.00 per share (see Note P). The fair value of these warrants
was recorded as a contribution to additional paid in capital of $513,500.
On December 30, 1999, the Company issued warrants to the funds affiliated with
ING Furman Selz to purchase 150,000 shares of Ascent common stock at an exercise
price of $3.00 per share (see Note P). The relative fair value of these warrants
was recorded as a contribution to additional paid in capital of $66,958.
In 1999, the Company issued stock options to non-employees in conjunction with
the issuance of certain subordinated secured notes. The fair value of the
options was recorded as debt issued costs and is being amortized as interest
expense. The total interest expense recorded in 1999, related to these options,
was $35,300.
A-14
<PAGE> 55
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
K. 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.
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. There have been no awards of restricted common stock made under this
plan.
1999 Stock Incentive Plan
On April 14,1999 the Board of Directors voted to adopt the 1999 Stock Incentive
Plan (the "1999 Plan") which was approved by the shareholders on July 23, 1999.
Under the 1999 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 500,000
shares. The 1999 Plan terminates on the earlier of (i) the day after the tenth
anniversary of its adoption or (ii) upon issuance of all available shares. There
were no awards of restricted common stock made during 1999.
A-15
<PAGE> 56
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
A summary of all the Company's stock option activity for the three years ended
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED TOTAL NUMBER OF
NUMBER OF AVERAGE NUMBER OF AVERAGE OPTIONS AND
OPTIONS EXERCISE PRICE WARRANTS EXERCISE PRICE WARRANTS
--------- -------------- --------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31, 1996....... 633,674 $ 2.40 103,891 $10.59 737,565
Granted, 1997..................... 463,512 8.34 1,945,655 5.43 2,409,167
Exercised, 1997................... (1,275) 2.35 (102,387) 7.65 (103,662)
Terminated, 1997.................. (850) 2.35 (548,947) 7.65 (549,797)
--------- ------ ---------- ------ ----------
Outstanding at December 31, 1997....... 1,095,061 $ 4.92 1,398,212 $ 4.78 2,493,273
Granted, 1998..................... 996,450 3.85 2,116,958 4.75 3,113,408
Exercised, 1998................... (29,963) 1.35 -- -- (29,963)
Terminated, 1998.................. (698,799) 6.50 -- -- (698,799)
--------- ------ ---------- ------ ----------
Outstanding at December 31, 1998....... 1,362,749 $ 3.69 3,515,170 $ 4.76 4,877,919
Granted, 1999..................... 781,275 5.46 1,450,000 3.00 2,231,275
Exercised, 1999................... -- -- (2,134,442) 4.74 (2,134,442)
Terminated, 1999.................. (120,388) 5.90 -- -- (120,388)
--------- ------ ---------- ------ ----------
Outstanding at December 31, 1999....... 2,023,636 $ 4.24 2,830,728 $ 3.87 4,854,364
========= ====== ========== ====== ==========
</TABLE>
Summarized information about employee, non-employee and Director stock options
outstanding at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE OPTIONS PRICE
--------------- ----------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$1.13-1.88 142,000 8.7 $ 1.21 21,875 $ 1.54
2.16-3.00 586,149 7.7 2.40 481,868 2.35
3.50-3.88 649,012 8.0 3.75 270,906 3.75
6.75 539,475 9.1 6.75 150,000 6.75
7.06-9.13 107,000 6.4 8.73 92,000 8.66
--------- ---------
2,023,636 1,016,649
</TABLE>
Options exercisable at December 31, 1999, 1998, and 1997 were 1,016,649, 538,191
and 356,633, respectively.
The weighted average fair value at the date of grant for options granted, all
with exercise prices equal to the fair market value of the Company's common
stock on the date of grant, during 1999, 1998, and 1997 were $2.96, $1.42, and
$3.20, 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 83,596 and 52,626 shares of
common stock in 1999 and 1998 for consideration of $171,429 and $117,800,
respectively, 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 non-employee
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
A-16
<PAGE> 57
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
under the Director Plan. With the exception of the options granted to all
non-employee directors on the day of 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. A total of 55,000, 50,000 and 105,000 options
were granted under the Director Plan during the years ended December 31, 1999,
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 $5,000, may elect to receive benefits as retirement income. Through
December 31, 1999, the Company had 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 1999 Plan and the Purchase Plan. 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 prescribed by SFAS 123, the net loss to common shareholders and net loss
to common shareholders per share would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- -------------------------- ---------------------------
BASIC AND BASIC AND BASIC AND
DILUTED DILUTED DILUTED
NET LOSS TO NET LOSS TO NET LOSS TO
NET LOSS TO COMMON NET LOSS TO COMMON NET LOSS TO COMMON
COMMON SHAREHOLDERS COMMON SHAREHOLDERS COMMON SHAREHOLDERS
STOCKHOLDERS PER SHARE STOCKHOLDERS PER SHARE STOCKHOLDERS PER SHARE
------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
As Reported $(16,071,638) $(1.96) $(18,680,470) $(2.69) $(12,745,440) $(3.08)
Pro Forma $(17,382,965) $(2.13) (19,356,551) (2.79) (13,014,737) (3.15)
</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 1999, 1998 and 1997
with the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ---------------
<S> <C> <C> <C>
Expected life (years) - stock options 4 years 4 years 2.5 - 4.0 years
Expected life (years) - Purchase Plan .5 .5 .5
Risk-free interest rate 4.91 - 6.15% 4.13 - 5.65% 5.55 - 6.22%
Volatility 92% 79% 47%
Dividend yield 0 0 0
Expected forfeiture rate 20% 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.
A-17
<PAGE> 58
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
L. 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.
M. 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 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 subordinates 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
approximately $450,000 from the subordinated secured notes issued on such date.
Consequently, such subordinated secured notes were recorded at approximately
$1,550,000. Similarly, the relative fair value of the warrants (as of June 4,
1997) issued on June 4, 1997 was recorded as an allocation of approximately
$2,050,000 from the subordinated secured notes issued on such date.
Consequently, such notes were recorded at approximately $2,950,000. Accordingly,
approximately $2,500,000 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 N) 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 from the loss on early extinguishment of debt in
accordance with SFAS 4, "Reporting Gains and Losses From Extinguishment of
Debt."
N. 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 and classified as
additional paid-in capital ("APIC"). 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. Amounts allocated to the
warrants were 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
A-18
<PAGE> 59
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
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.
In connection with the Company's strategic alliance with Alpharma (Note O), on
February 16, 1999, the Company entered into a second amendment to the May 1998
Series G Purchase Agreement, providing for, among other things, (a) the
Company's agreement to exercise its right to exchange all outstanding shares of
Series G preferred stock for convertible subordinated notes in accordance with
the terms of the Series G preferred stock, (b) the reduction in the exercise
price of warrants to purchase 2,116,958 shares of common stock of the Company
from $4.75 per share to $3.00 per share and the agreement of the Series G
purchasers to exercise these warrants, (c) the issuance and sale to the Series G
purchasers of an aggregate of 300,000 shares of common stock of the Company at a
price of $3.00 per share and (d) the cancellation of approximately $7.25 million
of principal under the subordinated notes held by the Series G purchasers to pay
the exercise price of the warrants and the purchase price of the additional
300,000 shares of common stock. In addition, the Company entered into an
amendment to a financial advisory services fee agreement with ING Furman Selz
whereby the Company agreed to issue 150,000 shares of common stock to ING Furman
Selz in lieu of the payment of certain financial advisory fees. On July 23,
1999, following the approval by the Company's stockholders of the reduction in
the exercise price of the warrants and the issuance of the additional shares of
common stock to the Series G purchasers and ING Furman Selz, and in connection
with the consummation of the Company's strategic alliance with Alpharma, the
Company and the Series G purchasers consummated the transactions contemplated
above.
O. ALPHARMA STRATEGIC ALLIANCE
On February 16, 1999, the Company entered into a series of agreements with
Alpharma, Inc. and its wholly-owned subsidiary, Alpharma USPD Inc. ("Alpharma").
This strategic alliance contemplates a number of transactions, including a loan
agreement under which Alpharma agreed to loan Ascent up to $40.0 million from
time to time, $12.0 million of which may be used for general corporate purposes
and $28.0 million of which may only be used for specified projects and
acquisitions intended to enhance the Company's growth.
On July 23, 1999, following the approval by the Company's stockholders of
certain resolutions relating to the strategic alliance with Alpharma, the
Company consummated its strategic alliance with Alpharma. In connection with
this closing, the Company obtained a call option to acquire all of its
outstanding common stock and assigned the option to Alpharma, thereby giving
Alpharma the option, exercisable in 2002 (extended, subject to stockholder
approval, to 2003 pursuant to the second supplemental agreement described
below), to purchase all of the Company's common stock then outstanding at a
purchase price to be determined by a formula based on the Company's 2001
earnings (extended, subject to stockholder approval, to the Company's 2002
earnings pursuant to the second supplemental agreement described below). In
connection with the closing of these transactions, the Company consummated a
merger with a wholly-owned subsidiary pursuant to which each share of common
stock of the Company was converted into one depositary share, representing one
share of common stock, subject to Alpharma's call option, and represented by a
depositary receipt.
On February 19, 1999, the Company borrowed $4.0 million from Alpharma under the
loan agreement and issued Alpharma a 7.5% convertible subordinated note in the
principal amount of up to $40.0 million. On July 26, 1999, in connection with
the closing of the strategic alliance with Alpharma, the Company borrowed an
additional $1.5 million from Alpharma under the loan agreement. In
A-19
<PAGE> 60
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
addition, on August 31, 1999, the Company borrowed $1.5 million from Alpharma
under the loan agreement and increased the outstanding principal on the existing
note to $7.0 million. As of December 31, 1999, Ascent has borrowed $10.5 million
under the loan agreement with Alpharma with a remaining balance of $1.5 million
available to borrow from the $12.0 million for general corporate purposes. The
principal terms of the Alpharma note are set forth below.
PAYMENT OF PRINCIPAL AND INTEREST. The Alpharma note bears interest at a rate of
7.5% per annum. Interest is due and payable quarterly, in arrears on the last
day of each calendar quarter. If the call option terminates or expires, the
Company does not otherwise prepay the principal amount of the note outstanding
and Alpharma does not otherwise convert the note, the Company will repay the
outstanding principal amount under the note over a 15 month period commencing
March 30, 2004 and ending June 30, 2005.
PREPAYMENT. On or before June 30, 2001, the Company may repay all or a portion
of the outstanding principal amount due under the note. The Company may
re-borrow any repaid amounts on or before December 31, 2001. At any time after
the expiration or termination of the call option and on or before December 31,
2002 (extended, subject to stockholder approval, to December 31, 2003 pursuant
to the second supplemental agreement described below), the Company may prepay
all of the outstanding principal amount under the note, together with any
accrued and unpaid interest, if it also pays a conversion termination fee equal
to 25% of the principal amount of the note outstanding as of December 31, 2001.
The Company may not otherwise prepay the note. Following a change in control of
the Company, Alpharma may require the Company to repay all outstanding principal
and interest under the note.
CONVERSION. Alpharma may convert all or a portion of the then outstanding
principal amount of the note into common stock of the Company on one occasion
after a change in control of the Company and at any time after December 31, 2002
at a conversion price of $7.125 per share (subject to adjustment). After January
1, 2003 and on or before February 28, 2003, Alpharma may cause the Company to
borrow all remaining amounts available under the loan agreement (increasing the
principal amount of the note to $40.0 million), but only if Alpharma converts
all of the principal amount of the note into common stock of the Company within
three business days after the increase. On October 15, 1999, pursuant to the
second supplemental agreement described below, the Company and Alpharma agreed,
subject to stockholder approval, to change the foregoing dates to December 31,
2003, January 1, 2004 and February 28, 2004, respectively.
ALPHARMA FIRST SUPPLEMENTAL AGREEMENT. On July 1, 1999, the Company entered into
a supplemental agreement with Alpharma amending the terms of the loan agreement
and the other strategic alliance agreements between the Company and Alpharma.
Under the supplemental agreement, the Company agreed to certain additional
restrictions on its ability to borrow additional funds under the loan agreement,
including a prohibition, prior to the approval and commercial launch of both the
Company's Primsol and Orapred products, on the use of any funds for any purpose
other than normal operating expenses and expenses relating to such products as
set forth in the Company's internal operating plan, as updated from time to
time. In addition, the Company may only use the additional $8.0 million
allocated for general corporate purposes under the loan agreement for the
purposes set forth in the Company's internal operating plan, as updated from
time to time, and may only use the $28.0 million allocated for acquisitions and
research and development projects for those acquisitions and projects that are
approved by a newly-formed screening committee comprised of two nominees of
Ascent, one nominee of Alpharma and one nominee of ING Furman Selz. This
screening committee was established for the purpose of approving any changes to
the Company's internal operating plan involving materially increased
expenditures and reviewing and approving acquisitions of companies, products or
product lines or rights to sell a product or product line and research and
development projects. The Company's two representatives on the screening
committee together have one vote, and the representatives of Alpharma and ING
Furman Selz each have one vote. The screening committee must act by unanimous
approval prior to the approval and commercial launch of the Company's Primsol
and Orapred products and by majority approval following the approval and
commercial launch of these products.
ALPHARMA SECOND SUPPLEMENTAL AGREEMENT. On October 15, 1999, the Company entered
into a second supplemental agreement with Alpharma amending the terms of the
loan agreement and the other strategic alliance agreements between the Company
and Alpharma. Under the second supplemental agreement, the Company agreed, among
other things, to extend by 12 months the exercise period of Alpharma's call
option to the first half of year 2003, to change the fiscal year upon which the
exercise price of Alpharma's call option is based from 2001 to 2002 and to
modify certain conditions on Ascent's access to funds under the loan agreement
relating to the granting of a security interest in any business or product
acquires by the Company using such funds and to the performance by the company
and the funds affiliated with ING Furman Selz of their respective obligations
under the fourth amendment to the May 1998 securities purchase agreement
described below. In addition, the Company agreed that, to the extent it borrowed
funds from Alpharma under the loan agreement to finance the acquisition of
products or businesses, it would grant Alpharma a security interest in such
products or businesses. The modification of the terms of Alpharma's call option
is subject to the approval of Ascent's stockholders which Ascent expects to seek
at the next annual meeting of its stockholders.
A-20
<PAGE> 61
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
DEBT ISSUE COSTS. In connection with the Company's strategic alliance with
Alpharma, the Company had incurred $1,348,000 in legal, accounting and
consulting fees as of December 31, 1999. These fees have been capitalized on the
balance sheet as debt issue costs and are being amortized over the life of the
debt.
P. ING FURMAN SELZ LOAN ARRANGEMENTS
$4.0 MILLION FACILITY. On June 30, 1999, the Company issued and sold 7.5% demand
promissory notes in the principal amount of $2.0 million to funds affiliated
with ING Furman Selz. On July 1, 1999, the Company and the Series G purchasers
entered into a third amendment to the Series G Purchase Agreement under which
funds affiliated with ING Furman Selz agreed to loan the Company up to $4.0
million. Upon executing the third amendment, the Company issued 7.5% convertible
subordinated notes in the aggregate principal amount of up to $4.0 million and
warrants to purchase 300,000 shares of Ascent common stock at an exercise price
of $3.00 per share to the funds affiliated with ING Furman Selz and cancelled
the $2.0 million of 7.5% demand promissory notes issued on June 30, 1999. Of the
$2.0 million of convertible subordinated notes issued and sold by Ascent,
$1,804,495 was allocated to the relative fair value of the convertible
subordinated notes classified as debt, and $195,505 was allocated to the
relative fair value of the warrants, classified as APIC. Accordingly, the 7.5%
convertible subordinated notes will be accreted from $1,804,495 to the maturity
amount of $2,000,000 as interest expense over the term of the convertible
subordinated notes. The obligation of the funds affiliated with ING Furman Selz
to loan the Company the remaining $2.0 million was subject to the fulfillment to
their reasonable satisfaction or the waiver by was the funds of conditions,
including that Ascent has or expects to have a stockholders' deficit reflected
on the balance sheet (calculated in a manner that treats as equity any amounts
outstanding under the 8% subordinated notes and the 7.5% convertible
subordinated notes and any amounts outstanding under any debt securities issued
upon exchange of the Series G preferred stock) and either the requested loan
from the funds affiliated with ING Furman Selz will prevent or eliminate such
stockholders' deficit or Alpharma agrees in writing that it will not deny
Ascent's next borrowing request under the Alpharma loan agreement because of
such stockholders' deficit.
On December 30, 1999, the Company borrowed an additional $1.0 million under this
loan arrangement and issued additional warrants to purchase 150,000 Ascent
depositary shares to the funds affiliated with ING Furman Selz. Of the $1.0
million of convertible subordinated notes issued and sold by Ascent, $871,500
was allocated to the relative fair value of the convertible subordinated notes
(classified as debt), and $128,500 was allocated to the relative fair value of
the warrants, (classified as APIC). Accordingly, the 7.5% convertible
subordinated notes will be accreted from $871,500 to the maturity amount of
$1,000,000 as interest expense over the term of the convertible subordinated
notes.
On February 14, 2000, the Company borrowed the final $1.0 million under this
loan arrangement and issued additional warrants to purchase 150,000 Ascent
depositary shares to the funds affiliated with ING Furman Selz. Of the $1.0
million of convertible subordinated notes issued and sold by Ascent, $767,000
was allocated to the relative fair value of the convertible subordinated notes
(classified as debt), and $233,000 was allocated to the relative fair value of
the warrants, (classified as APIC). Accordingly, the 7.5% convertible
subordinated notes will be accreted from $767,000 to the maturity amount of
$1,000,000 as interest expense over the term of the convertible subordinated
notes.
$10.0 MILLION FACILITY. On October 15, 1999, the Company and the Series G
purchasers entered into a fourth amendment to the Series G Purchase Agreement
under which funds affiliated with ING Furman Selz agreed to loan the Company up
to an additional $10.0 million. Upon executing the fourth amendment, the Company
issued 7.5% convertible subordinated notes in the aggregate principal amount of
up to $10.0 million and warrants to purchase 1,000,000 Ascent depositary shares
at an exercise price of $3.00 per share to the funds affiliated with ING Furman
Selz. The obligation of the funds affiliated with ING Furman Selz to loan the
Company the $10.0 million is subject to the fulfillment to their reasonable
satisfaction or the waiver by the funds of certain conditions. The Company has
agreed to issue warrants to purchase up to an additional 4,000,000 Ascent
depositary shares in connection with borrowings under this credit facility. All
of the warrants issued by the Company under the fourth amendment will have an
exercise price of $3.00 per share and will expire on October 15, 2006. The
Company has agreed that, to the extent it grants Alpharma a security interest in
products or businesses acquired by the Company using funds borrowed under the
Alpharma loan agreement, the Company will grant a junior security interest in
such assets to the funds affiliated with ING Furman Selz to secure the Company's
indebtedness under the $10.0 million credit facility.
A-21
<PAGE> 62
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
PAYMENT OF PRINCIPAL AND INTEREST; CONVERSION. The 7.5% convertible subordinated
notes issued pursuant to the third amendment and the fourth amendment expire on
July 1, 2004 and are convertible into shares of Ascent common stock at a
conversion price of $3.00 per share in accordance with the terms of the May 1998
securities purchase agreement, as amended. Interest on these notes is due and
payable quarterly, in arrears, on the last day of each calendar quarter, and the
outstanding principal on the notes is payable in full on July 1, 2004.
Q. INTANGIBLE ASSETS
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.
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>
USEFUL
AMOUNT LIVES
(IN 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, 1999 was
$1,657,045.
Amortization expense for intangible assets was $666,141, $691,717 and $299,187
for the years ended December 31, 1999, 1998 and 1997, respectively.
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.
R. PRINCIPAL DEBT COMMITMENTS
The commitment for debt payments over the next five years is as follows:
<TABLE>
<S> <C>
2000...................... $ --
2001...................... --
2002...................... --
2003...................... --
2004...................... 9,300,000
2005 and thereafter....... 12,949,126
-----------
Total..................... $22,249,126
===========
</TABLE>
S. COMPUTATION OF NET INCOME PER SHARE
The following illustrates the computation of basic and diluted net income per
share:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Shares, basic 8,182,085 6,939,348 4,134,068
Shares, diluted 8,182,085 6,939,348 4,134,068
============ ============ ============
Net loss, basic and diluted $(16,071,638) $(18,680,470) $(12,745,440)
============ ============ ============
Net loss per share - basic (1.96) (2.69) (3.08)
Net loss per share - diluted (1.96) (2.69) (3.08)
</TABLE>
T. SUBSEQUENT EVENTS
On January 24, 2000, Ascent borrowed an additional $1.5 million for general
corporate purposes under the loan agreement with Alpharma, bringing the
outstanding balance to $12.0 million.
On January 27, 2000, Ascent received FDA approval to market Primsol(R) Solution
(trimethoprim HCl oral solution), for the treatment of acute otitis media, or
middle ear infection, caused by susceptible organisms in children age six months
to twelve years. The Company began commercial shipment of Primsol, which is
available only by prescription, in February and physician detailing activity in
March.
On February 14, 2000, the Company borrowed the final $1.0 million under the
Third Amendment to the May 1998 Series G Purchase Agreement with funds
affiliated with ING Furman Selz and issued additional warrants to purchase
150,000 Ascent depositary shares. Of the $1.0 million of convertible
subordinated notes issued and sold by Ascent, $868,000 was allocated to the
relative fair value of the convertible subordinated notes (classified as debt)
and $132,000 was allocated to the relative fair value of the warrants
(classified as additional paid-in capital). Accordingly, the 7.5% convertible
subordinated notes will be accreted from $868,000 to the maturity amount of
$1,000,000 as interest expense over the term of the convertible subordinated
notes.
On March 13, 2000, the Company borrowed $1.5 million under the Fourth Amendment
to the May 1998 Series G Purchase Agreement with funds affiliated with ING
Furman Selz and issued additional warrants to purchase 375,000 Ascent depositary
shares. Of the $1.5 million of convertible subordinated notes issued and sold by
Ascent, $1,215,000 was allocated to the relative fair value of the convertible
subordinated notes (classified as debt) and $285,000 was allocated to the
relative fair value of the warrants (classified as additional paid-in capital).
Accordingly, the 7.5% convertible subordinated notes will be accreted from
$1,215,000 to the maturity amount of $1,500,000 as interest expense over the
term of the convertible subordinated notes.
A-22
<PAGE> 63
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 LLP
Minneapolis, Minnesota
February 21, 1997
A-23
<PAGE> 64
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, July 9,
1996 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.
A-24
<PAGE> 65
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
Interim Period
Years Ended December 31, January 1,
------------------------------ 1997 to
1995 1996 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.
A-25
<PAGE> 66
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 balance
sat 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.
(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.
A-26
<PAGE> 67
A PRODUCT LINE OF UPSHER-SMITH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS OF THE PRODUCT LINE TO BE ACQUIRED BY
ASCENT PEDIATRICS, INC. -- (CONTINUED)
(3) INVENTORIES
The components of inventories were as follows:
<TABLE>
<CAPTION>
December 29, July 9,
1996 1997
------------ -------
(Unaudited)
<S> <C> <C>
Work in process.................................. $ 10,864 $ 00,000
Samples and displays............................. 42,486 46,938
Finished goods................................... 68,885 174,327
----------- -----------
</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.
(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.
A-27
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
<S> <C>
3.1(1) Amended and Restated Certificate of Incorporation of the Company.
- ------------------------------------------------------------------------------------------------------------
3.2(1) Amended and Restated By-Laws of the Company.
- ------------------------------------------------------------------------------------------------------------
4.1(1) Specimen Certificate for shares of Common Stock, $.00004 par value, of the Company.
- ------------------------------------------------------------------------------------------------------------
4.2(2) Form of Depositary Receipt (included in Exhibit 10.1)
- ------------------------------------------------------------------------------------------------------------
4.3(2) Form of 7.5% Convertible Subordinated Note of the Company issued on February 19, 1999
under the Alpharma Loan Agreement (as defined below) (included in Exhibit 10.3).
- ------------------------------------------------------------------------------------------------------------
4.4(2) Form of 8% Subordinated Note of the Company issued on June 1, 1998 under the May 1998
Securities Purchase Agreement (as defined below) (included in Exhibit 10.9).
- ------------------------------------------------------------------------------------------------------------
4.5(2) Form of 8% Convertible Subordinated Note of the Company issued on July 23, 1998 under
the May 1998 Securities Purchase Agreement (included in Exhibit 10.9).
- ------------------------------------------------------------------------------------------------------------
4.6(3) Form of 7.5% Convertible Subordinated Note of the Company issued on July 1, 1999 under
the Third Amendment (as defined below) to the May 1998
Securities Purchase Agreement (included in Exhibit 10.11).
- ------------------------------------------------------------------------------------------------------------
4.7 Form of 7.5% Convertible Subordinated Note of the Company issued on October 15, 1999
under the Fourth Amendment (as defined below) to the May 1998
Securities Purchase Agreement.
- ------------------------------------------------------------------------------------------------------------
10.1(4) Depositary Agreement dated as of February 16, 1999 by and among the Company, Alpharma
USPD Inc. ("Alpharma") and State Street Bank and Trust Company.
- ------------------------------------------------------------------------------------------------------------
10.2(4) Master Agreement dated as of February 16, 1999 by and among the Company, Alpharma and
Alpharma Inc.
- ------------------------------------------------------------------------------------------------------------
10.3(2) Loan Agreement (the "Alpharma Loan Agreement") dated as of February 16, 1999 by and
among the Company, Alpharma and Alpharma Inc.
- ------------------------------------------------------------------------------------------------------------
10.4(2) Guaranty Agreement dated as of February 16, 1999 by and between the Company and Alpharma
Inc.
- ------------------------------------------------------------------------------------------------------------
10.5(2) Registration Rights Agreement dated as of February 16, 1999 by and between the Company
and Alpharma.
- ------------------------------------------------------------------------------------------------------------
10.6(5) Supplemental Agreement dated as of July 1, 1999 by and among the Company, Alpharma,
Alpharma Inc., State Street Bank and Trust Company and the
Original Lenders (as defined therein).
- ------------------------------------------------------------------------------------------------------------
10.7(6) Second Supplemental Agreement dated as of October 15, 1999 by and among the Company,
Alpharma, Alpharma Inc., State Street Bank and Trust Company
and the Original Lenders (as defined therein).
- ------------------------------------------------------------------------------------------------------------
10.8(6) Amended and Restated Subordinated Agreement dated as of
October 15, 1999 by and among the Company, Alpharma and the
Original Lenders (as defined therein).
- ------------------------------------------------------------------------------------------------------------
10.9(7) Securities Purchase Agreement (the "May 1998 Securities Purchase Agreement") dated as of
May 13, 1998, by and among the Company, Furman Selz Investors II, L.P., FS Employee
Investors LLC, FS Parallel Fund L.P., BancBoston Ventures, Inc. and Flynn Partners
- ------------------------------------------------------------------------------------------------------------
10.10(2) Second Amendment dated as of February 16, 1999 to the May 1998 Securities Purchase
Agreement.
- ------------------------------------------------------------------------------------------------------------
10.11(3) Third Amendment (the "Third Amendment") dated as of July 1, 1999 to the May 1998
Securities Purchase Agreement.
- ------------------------------------------------------------------------------------------------------------
10.12(6) Fourth Amendment (the "Fourth Amendment") dated as of October 15, 1999 to the May 1998
Securities Purchase Agreement.
- ------------------------------------------------------------------------------------------------------------
10.13(1)(8) Amended and Restated 1992 Equity Incentive Plan.
- ------------------------------------------------------------------------------------------------------------
10.14(1)(8) 1997 Director Stock Option Plan.
- ------------------------------------------------------------------------------------------------------------
10.15(1)(8) 1997 Employee Stock Purchase Plan.
- ------------------------------------------------------------------------------------------------------------
10.16(8)(9) 1999 Stock Incentive Plan.
- ------------------------------------------------------------------------------------------------------------
10.17(1) Lease dated November 21, 1996 between the Company and New Boston Wilmar Limited
Partnership.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 69
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
<S> <C>
10.18(1)(4) Employment Agreement dated as of March 15, 1994 between the Company and Emmett Clemente
(the "Clemente Employment Agreement").
- ------------------------------------------------------------------------------------------------------------
10.19(4)(10) Amendment No. 1 dated as of March 15, 1999 to the Clemente Employment Agreement.
- ------------------------------------------------------------------------------------------------------------
10.20 Amendment No. 2 dated as of March 15, 2000 to the Clemente Employment Agreement.
- ------------------------------------------------------------------------------------------------------------
10.21(1)(4) Consulting Agreement dated as of April 1, 1996 between the Company and Robert E. Baldini.
- ------------------------------------------------------------------------------------------------------------
10.22(1)+ Development and License Agreement dated as of October 8, 1996 by and between the Company
and Recordati S.A. Chemical and Pharmaceutical Company ("Recordati").
- ------------------------------------------------------------------------------------------------------------
10.23(1) Amendment No, 1 dated February 28, 1997 to the Development
and License Agreement dated as of October 8, 1996 by and
between the Company and Recordati.
- ------------------------------------------------------------------------------------------------------------
10.24(1)+ Manufacturing and Supply Agreement dated as of October 8, 1996 by and between the
Company and Recordati.
- ------------------------------------------------------------------------------------------------------------
10.25(1)+ Supply Agreement dated as of October 12, 1994 by and between the Company and Lyne
Laboratories.
- ------------------------------------------------------------------------------------------------------------
10.26(1) Securities Purchase Agreement dated as of January 31, 1997 among the Company,
Triumph-Connecticut Limited Partnership and the purchasers identified therein (the
"Triumph Agreement."
- ------------------------------------------------------------------------------------------------------------
10.27(1) Waiver and Amendment to the Triumph Agreement dated as of March 13, 1997.
- ------------------------------------------------------------------------------------------------------------
10.28(7) Second Waiver and Amendment to the Triumph Agreement dated as of May 13, 1998.
- ------------------------------------------------------------------------------------------------------------
10.29(1) Series F Convertible Preferred Stock and Warrant Purchase Agreement dated as of June 28,
1996 between the Company and certain purchasers identified therein, as amended by
Amendment No. 1 dated as of June 28, 1996 and Amendment No. 2 dated as of February 3,
1997
- ------------------------------------------------------------------------------------------------------------
10.30(1) Form of Common Stock Purchase Warrant issued to Chestnut Partners, Inc. on February 28,
1997.
- ------------------------------------------------------------------------------------------------------------
10.31(1) Form of Common Stock Purchase Warrant issued to Banque Paribas on February 28, 1997.
- ------------------------------------------------------------------------------------------------------------
10.32(1) Form of Common Stock Purchase Warrant with an exercise price of $.01 per share issued to
designees of Bentley Securities on February 28, 1997.
- ------------------------------------------------------------------------------------------------------------
10.33(1) 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.
- ------------------------------------------------------------------------------------------------------------
10.34(3) Form of Common Stock Purchase Warrant issued by the Company on February on July 1, 1999,
December 30, 1999 and February 14, 2000 under the Third Amendment to the May 1998
Securities Purchase Agreement (included in Exhibit 10.11).
- ------------------------------------------------------------------------------------------------------------
10.35 Form of Common Stock Purchase Warrant issued by the Company on October 15, 1999 and
December 30, 1999 under the Fourth Amendment to the May 1998
Securities Purchase Agreement.
- ------------------------------------------------------------------------------------------------------------
10.36(1)+ Asset Purchase Agreement dated as of March 25, 1997 (the "Asset Purchase Agreement")
between the Company and Upsher-Smith Laboratories, Inc. ("Upsher-Smith"), which includes
the form of Manufacturing Agreement between the Company and Upsher-Smith as Exhibit E
thereto.
- ------------------------------------------------------------------------------------------------------------
10.37(1)+ Addendum to Asset Purchase Agreement dated as of July 10, 1997 between the Company and
Upsher-Smith.
- ------------------------------------------------------------------------------------------------------------
10.38 First Amendment to Lease between New Boston Wilmar Limited Partnership and the Company
dated as of September 18, 1997.
- ------------------------------------------------------------------------------------------------------------
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
- ------------------------------------------------------------------------------------------------------------
23.2 Consent of KPMG LLP.
- ------------------------------------------------------------------------------------------------------------
27.1 Financial Data Schedule (year ended December 31, 1999).
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Incorporated herein by reference to the Exhibits to the Company's
Registration Statement on Form S-1 (File No. 333-23319).
(2) Incorporated herein by reference to the Exhibits to the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission (the
"Commission") on February 22, 1999.
<PAGE> 70
(3) Incorporated herein by reference to the Exhibits to Post-Effective
Amendment No. 1 to the Company's Registration Statement on Form S-4 (File
No. 333-79383) filed with the Commission on July 2, 1999.
(4) Incorporated herein by reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-4 (File No. 333-79383).
(5) Incorporated herein by reference to Annex A to Post-Effective Amendment No.
1 to the Company's Registration Statement on Form S-4 (File No. 333-79383)
filed with the Commission on July 2, 1999.
(6) Incorporated herein by reference to the Exhibits to the Company's Current
Report on Form 8-K filed with the Commission on November 4, 1999.
(7) Incorporated herein by reference to the Exhibits to the Company's Current
Report on Form 8-K filed with the Commission on June 2, 1998.
(8) Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Annual Report on Form 10-K.
(9) Incorporated herein by reference to Annex D to the Company's Registration
Statement on Form S-4 (File No. 333-79383).
(10) Incorporated herein by reference to the Company's Registration Statement on
Form S-4 (File No. 333-79383).
- ------------
+ Confidential treatment granted as to certain portions, which portions were
omitted and filed separately with the Commission.
<PAGE> 1
Exhibit 4.7
FORM OF 7.5% CONVERTIBLE SUBORDINATED NOTE DUE JULY 1, 2004
THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, 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 UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
$_________ OCTOBER 15, 1999
WILMINGTON, MASSACHUSETTS
FOR VALUE RECEIVED, ASCENT PEDIATRICS, INC., a Delaware corporation (the
"undersigned"), hereby promises to pay to the order of____________, or
registered assigns, the principal amount of _______________ Dollars
($__________), or if less, the aggregate unpaid amount of all Advances made to
the undersigned under the Fourth Amendment (as defined below), on July 1, 2004,
and to pay interest from the date hereof (computed on the basis of a 360-day
year of twelve 30-day months) on the unpaid principal amount outstanding hereof
at the rate of 7.5% per annum until the unpaid principal amount outstanding
hereunder shall become due and payable, and to pay, on demand, interest on any
overdue principal, including any overdue prepayment of principal and premium, if
any, at the rate of 12% per annum.
SCHEDULE A attached hereto and incorporated herein by reference records (i) the
date and amount of each Advance hereunder and (ii) 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.
Payments of principal, premium, if any, and interest shall be made to the
registered holder hereof in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts, at the office of the Company at 187 Ballardvale
Street, Suite B125, Wilmington, Massachusetts 01887, subject to the right of the
registered holder hereof under the Fourth Amendment to receive direct payment in
immediately available funds.
Accrued interest shall be paid by the undersigned quarterly on March 31, June
30, September 30 and December 31 of each year, commencing on December 31, 1999.
If any amounts under this Note become due and payable on a Saturday or Sunday or
a day on which banks in the State of New York or the Commonwealth of
Massachusetts are authorized by law to remain closed, such amounts shall be paid
on the next succeeding day that such banks shall be open for business.
This Note has been issued pursuant to, and is one of a series of notes (the
"Fourth Amendment Convertible Notes") issued pursuant to the Fourth Amendment
dated as of October 15, 1999 (the
<PAGE> 2
"Fourth Amendment") to the Securities Purchase Agreement dated as of May 13,
1998 between the undersigned and the Purchasers named therein, as amended
(such Securities Purchase Agreement, as amended on September 30, 1998, February
16, 1999 and July 1, 1999 and by the Fourth Amendment being referred to herein
as the "Purchase Agreement"). This Note is subject to and entitled to the
benefits of all of the provisions of the Purchase Agreement. Capitalized terms
herein are used as defined in the Purchase Agreement unless otherwise defined
herein.
This Note may be redeemed by either the undersigned or the holder as provided in
Article IX of the Purchase Agreement. This Note may, or in certain
circumstances, shall automatically, be converted into Depositary Shares or other
securities of the Company in accordance with Section 12.2 of the Purchase
Agreement.
This Note is a general unsecured obligation of the undersigned and is
subordinated to all Senior Indebtedness in accordance with Article XI of the
Purchase Agreement and, as provided under Article XI, in certain circumstances,
to Senior Indebtedness under the Subordination Agreement dated as of February
16, 1999 among the Company, Alpharma USPD Inc. and the Original Lenders named
therein, as amended. Upon the occurrence of any one or more Events of Default,
all amounts then remaining unpaid on this Note may be declared to be immediately
due and payable subject to and as provided in the Purchase Agreement.
This Note may be amended and the provisions hereof may be waived only in
accordance with Article XIV of the Purchase Agreement.
This Note shall be governed by and construed in accordance with the laws of the
State of New York.
-2-
<PAGE> 3
IN WITNESS WHEREOF, ASCENT PEDIATRICS, INC. has caused this Note
to be duly executed.
ASCENT PEDIATRICS, INC.
(CORPORATE SEAL)
ATTEST: By:
---------------------------------
Name:
Title:
- ---------------------------------
Name:
Title: Secretary
-3-
<PAGE> 1
Exhibit 10.20
Amendment No. 2
to Employment Agreement
The Employment Agreement dated as of March 15, 1994, as amended by
Amendment No. 1, dated as of March 15, 1999 (the "Agreement"), between Ascent
Pediatrics, Inc. and Emmett Clemente is hereby amended as follows as of the 15th
day of March, 2000. Capitalized terms used herein and not otherwise defined
herein shall have the meanings set forth in the Agreement.
1. The reference in Section 1 to "March 15, 2000" is hereby deleted and
"March 15, 2001" 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/ Eliot Lurier
--------------------------------------
Name: Eliot Lurier
Title: Chief Financial Officer
EMPLOYEE
By: /s/ Emmett Clemente
-----------------------------------
Emmett Clemente
<PAGE> 1
Exhibit 10.35
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, 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 WARRANT AND THE
SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
VOID AFTER 5:00 P.M., NEW YORK TIME, ON OCTOBER 15, 2006, OR IF NOT A BUSINESS
DAY, AS DEFINED HEREIN, AT 5:00 P.M., NEW YORK TIME, ON THE NEXT FOLLOWING
BUSINESS DAY.
WARRANT TO PURCHASE
_________ DEPOSITARY SHARES
WARRANT TO PURCHASE DEPOSITARY SHARES
OF
ASCENT PEDIATRICS, INC.
--------------------------
This certifies that, for value received, ____________ or
registered assigns ("Warrantholder"), is entitled to purchase from Ascent
Pediatrics, Inc., a Delaware corporation (the "Company"), subject to the terms
set forth below, at any time prior to the Expiration Date, after which time this
Warrant shall become void, _________ Warrant Shares at the Warrant Price. The
Warrant Price and the number of Warrant Shares purchasable hereunder are subject
to adjustment from time to time as provided herein.
This Warrant is one of a series of warrants (the "Warrants")
evidencing the right to purchase Depositary Shares of the Company issued
pursuant to a certain Fourth Amendment (the "Fourth Amendment"), dated as of
October 15, 1999, to the Series G Securities Purchase Agreement, dated as of May
13, 1998, by and between the Company and the persons named therein, as amended
(such Securities Purchase Agreement, as amended on September 30, 1998, February
16, 1999 and July 1, 1999 and by the Fourth Amendment being referred to herein
as the "Purchase Agreement"), copies of which Purchase Agreement are on file at
the principal office of the Company, and the holder of this Warrant shall be
entitled to all of the benefits of and be bound by all of the applicable
obligations of the Purchase Agreement, as provided therein.
<PAGE> 2
ARTICLE I
DEFINED TERMS
Section 1.1. DEFINITION OF TERMS. As used in this Warrant, the following
capitalized terms shall have the following respective meanings:
(a) "Business Day" shall mean a day other than a Saturday,
Sunday or other day on which banks in the State of New York or the Commonwealth
of Massachusetts are authorized by law to remain closed.
(b) "Convertible Notes" shall mean the 7.5% Convertible
Subordinated Notes due July 1, 2004 issued pursuant to the Third Amendment dated
as of July 1, 1999 to the Purchase Agreement, the 7.5% Convertible Subordinated
Notes due July 1, 2004 issuable pursuant to the Fourth Amendment and the 8.0%
Convertible Subordinated Notes issued on July 23, 1999 pursuant to the Purchase
Agreement.
(c) "Common Stock" shall mean the Common Stock, $.00004 par
value per share, of the Company.
(d) "Closing Price" shall mean, with respect to any day, the
last reported sales price of the Depositary Shares, regular way, or in case no
sale takes place on such day, the average of the reported closing bid and asked
prices of the Depositary Shares, regular way, in either case as reported on the
principal national securities exchange on which the Depositary Shares is listed
or admitted to trading or, if the Depositary Shares are not listed or admitted
to trading on any national securities exchange, but is traded in the
over-the-counter market, the closing sale price of the Depositary Shares or in
case no sale is publicly reported, the average of the representative closing bid
and asked quotations for the Depositary Shares on the Nasdaq National Market,
or, if bid and asked prices for such day shall not have been reported on The
Nasdaq Stock Market, the average of the bid and asked prices for the Depositary
Shares as furnished by any New York Stock Exchange, Inc. member firm regularly
making a market in the Depositary Shares and selected for such purpose by the
Board of Directors of the Company.
(e) "Depositary Shares" means the depositary shares of the
Company issued 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, as amended (the "Depositary Agreement"), each Depositary Share
representing one share of Common Stock of the Company subject to a call option
and represented by a depositary receipt.
(f) "Expiration Date" shall mean the earlier of (a)
October 15, 2006, or if such day is not a Business Day, the next succeeding day
which is a Business Day.
(g) "Fair Market Value" with respect to the date of any
exercise by the Warrantholder of all or a portion of this Warrant, shall mean
the average daily Closing Price of the Depositary Shares, as applicable, for
thirty (30) consecutive trading days commencing forty-five (45) days before the
date of such exercise by the Warrantholder of all or a portion of this Warrant,
PROVIDED, HOWEVER, that where no public market exists for the Depositary Shares
at the
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<PAGE> 3
time of the exercise of all or a portion of this Warrant, the fair market
value per share shall be determined by the Company's Board of Directors in good
faith.
(h) "Fourth Amendment" shall mean the Fourth Amendment, dated
as of October 15, 1999, to the Purchase Agreement.
(i) "Person" shall mean any individual, corporation,
association, company, business trust, partnership, limited liability company,
joint venture, joint-stock company, trust, unincorporated organization,
association or any other entity or government or any agency or political
subdivision thereof.
(j) "Purchase Agreement" shall mean that certain Securities
Purchase Agreement, dated as of May 13, 1998, among the Company and the persons
named therein, as amended.
(k) "Related Person" of any Person means any other Person
directly or indirectly owning (A) twenty percent (20%) or more of the
outstanding common stock of such Person (or, in the case of a Person that is not
a corporation, twenty percent (20%) or more of the equity interest in such
Person) or (B) twenty percent (20%) or more of the combined voting power of the
voting capital stock of such Person.
(l) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(m) "Subordinated Notes" shall mean the Company's 8%
Subordinated Notes due 2005 issued pursuant to the Purchase Agreement.
(n) "Third Amendment" shall mean the Third Amendment, dated as
of July 1, 1999, to the Purchase Agreement.
(o) "Warrant Price" shall mean Three Dollars ($3.00) per
Warrant Share, as such price may be adjusted from time to time pursuant to
Article III hereof.
(p) "Warrant Shares" shall mean the Depositary Shares
purchasable upon exercise of this Warrant.
ARTICLE II
DURATION AND EXERCISE OF WARRANT
Section 2.1. EXERCISE OF WARRANT. The Warrantholder may
exercise this Warrant, in whole or in part, by presentation and surrender of
this Warrant at the address of the Company set forth in Section 4.6 hereof or at
such other address as the Company may designate by notice in writing to the
Warrantholder with the Subscription Form annexed hereto duly executed,
accompanied by payment of the Warrant Price for each Warrant Share purchased.
Upon receipt thereof, the Company shall cause to be issued certificates for the
Warrant Shares so purchased in such denominations as are requested for delivery
to the Warrantholder. Such certificates shall be delivered as promptly as
practicable to the Warrantholder. Upon any partial exercise of this
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<PAGE> 4
Warrant, the Company shall execute and deliver a new Warrant of like tenor
and date for the balance of the Warrant Shares purchasable hereunder. Upon
exercise, the Warrantholder shall be deemed to be the holder of record of
Depositary Shares issuable upon such exercise, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such Depositary Shares shall not then be actually delivered to the
Warrantholder. If at the time this Warrant is exercised, a registration
statement is not in effect to register under the Securities Act the Warrant
Shares issuable upon exercise of this Warrant, the Company may require the
Warrantholder to make such representations, and may place such legends on
certificates representing the Warrant Shares, as may be reasonably required to
permit the Warrant Shares to be issued without such registration. The Company
shall pay any and all stock transfer and similar taxes which may be payable in
respect of the issue of the Warrant or in respect of the issue of any of the
Warrant Shares, except the Company shall not pay such transfer taxes if the
Warrant Shares are issued to a Person other than the Warrantholder.
Section 2.2. RESERVATION OF SHARES. The Company hereby agrees
that at all times there shall be reserved for issuance and delivery upon
exercise of this Warrant such number of Depositary Shares or other shares of
capital stock of the Company as may be from time to time issuable upon exercise
of this Warrant. All such shares shall be duly authorized, and when issued upon
such exercise, shall be validly issued, fully paid and nonassessable, free and
clear of all liens, security interests, charges and other encumbrances or
restrictions, other than those restrictions imposed by the Securities Act of
1933, and free and clear of all preemptive and similar rights.
Section 2.3. FRACTIONAL SHARES. The Company shall not be
required to issue any fraction of a Depositary Share in connection with the
exercise of this Warrant, and in any case where the Warrantholder would, except
for the provisions of this Section 2.3, be entitled under the terms of this
Warrant to receive a fraction of a share upon the exercise of this Warrant, the
Company shall, upon the exercise of this Warrant and receipt of the Warrant
Price (as adjusted to cover the balance of the share), issue the largest number
of whole shares purchasable upon exercise of this Warrant, but in no event shall
the Company issue more than such number of Depositary Shares as are issuable
pursuant to the exercise of this Warrant. The Company shall not be required to
make any cash or other adjustment in respect of such fraction of a share to
which the Warrantholder would otherwise be entitled.
Section 2.4. PAYMENT FOR WARRANT SHARES.
(a) Payment of the aggregate Warrant Price for Warrant Shares
to be purchased upon exercise of all or a portion of this Warrant shall be made
in full by delivery to the Company, at its address set forth in Section 4.6
hereof or at such other address as the Company may designate by notice in
writing to the Warrantholder, of a certified or bank cashier's check or by wire
transfer to an account in the United States designated by the Company.
(b) Payment of the aggregate Warrant Price may also be made in
full by (i) delivery to the Company of Convertible Notes plus accrued interest
thereon, in an aggregate principal amount equal to the aggregate Warrant Price,
(ii) delivery to the Company of Subordinated Notes plus accrued interest
thereon, in an aggregate principal amount equal to the
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<PAGE> 5
aggregate Warrant Price or (iii) a combination of cash (payable by wire
transfer or certified or bank check), Convertible Notes or Subordinated Notes
beneficially owned by such Warrantholder and such accumulated dividends or
accrued interest, as the case may be, in an aggregate principal amount equal to
the aggregate Warrant Price. Any Convertible Notes or Subordinated Notes
surrendered for exchange hereunder shall be, if so required by the Company,
accompanied by a written instrument or instruments of transfer in form
satisfactory to the Company duly delivered by the Warrantholder.
(c) Notwithstanding any provisions herein to the contrary, if
the Fair Market Value of one Depositary Share is greater than the Warrant Price
(at the date of calculation as set forth below), in lieu of exercising this
Warrant for cash, the Warrantholder may elect to receive shares equal to the
value (as determined below) of this Warrant (or the portion thereof, which
portion shall be canceled) by surrender of this Warrant at the principal office
of the Company together with the properly endorsed Subscription Form annexed
hereto and notice of such election in which event the Company shall issue to the
Warrantholder a number of Depositary Shares computed using the following
formula:
X = Y(A-B)
-----
A
Where X = the number of Depositary Shares to be issued
to the Warrantholder
Y = the number of Depositary Shares
purchasable under the Warrant or, if
only a portion of the Warrant is
being exercised, the portion of the
Warrant being canceled (at the date
of such calculation)
A = the Fair Market Value of one Depositary
Share (at the date of such calculation)
B = Warrant Price (as adjusted to the date of
such calculation)
ARTICLE III
ADJUSTMENT OF WARRANT PRICE OR WARRANT SHARES
Section 3.1. ADJUSTMENT OF WARRANT PRICE.
(a) Except as hereinafter provided, in case the Company shall
at any time after the date hereof issue or sell any obligations or Depositary
Shares, for a consideration per share less than the Warrant Price in effect
immediately prior to the issuance or sale of such shares, or without
consideration, then, and thereafter successively upon each issuance or sale, the
Warrant Price in effect immediately prior to each such issuance or sale shall
forthwith be reduced to a price determined by dividing (i) an amount equal to
(X) the total number of
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<PAGE> 6
Depositary Shares outstanding immediately prior to such issuance or sale
multiplied by the Warrant Price in effect immediately prior to such issuance or
sale, plus (Y) the consideration, if any, received by the Company upon such
issuance or sale, by (ii) the total number of Depositary Shares outstanding
immediately after such issuance or sale.
For the purposes of any computation to be made in
accordance with the provisions of this paragraph (a), the following shall be
applicable:
(i) In case of the issuance or sale
of Depositary Shares for a consideration part or all
of which shall be cash, the amount of the cash
consideration therefor shall be deemed to be the
amount of cash received by the Company for such
shares (or, if such Depositary Shares are offered by
the Company for subscription, the subscription price,
or, if Depositary Shares shall be sold to
underwriters or dealers for public offering without a
subscription offering, the public offering price)
before deducting therefrom any commissions or other
expenses paid or incurred by the Company for any
underwriting of, or otherwise in connection with the
issuance of such shares;
(ii) In case of the issuance or sale
of Depositary Shares for a consideration part or all
of which shall be other than cash (otherwise than as
a dividend or other distribution on any Depositary
Shares of the Company or on conversion, exercise or
exchange of other securities of the Company or upon
acquisition of the assets or securities of another
company or upon merger or consolidation with another
entity), the amount of consideration therefor other
than cash shall be the value of such consideration as
of the date of the issuance or sale of the Depositary
Shares, irrespective of accounting treatment, but as
determined by the Board of Directors of the Company
in good faith. The reclassification of securities
other than Depositary Shares into Depositary Shares
shall be deemed to involve the issuance for a
consideration other than cash of such Depositary
Shares immediately prior to the close of business on
the date fixed for the determination of security
holders entitled to receive such Depositary Shares;
(iii) In case of the issuance of
Depositary Shares upon conversion or exchange of any
obligations or of any securities of the Company that
shall be convertible into or exchangeable for
Depositary Shares or upon the exercise of rights or
options to subscribe for or to purchase Depositary
Shares (other than upon exercise of this Warrant),
the amount of consideration received by the Company
for such Depositary Shares shall be deemed to be the
sum of (A) the amount of the consideration received
by the Company upon the original issuance of such
obligations, shares, rights or options, as the case
may be, plus (B) the consideration, if any, other
than such obligations, shares, rights or options,
received by the Company upon such conversion,
exchange, or exercise
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<PAGE> 7
except in adjustment of interest and dividends. The
amount of the consideration received by the Company
upon the original issuance of the obligations,
shares, rights or options so converted, exchanged or
exercised and the amount of the consideration, if
any, other than such obligations, shares, rights or
options, received by the Company upon such
conversion, exchange or exercise shall be determined
in the same manner provided in subparagraphs (i) and
(ii) above with respect to the consideration received
by the Company in case of the issuance of Depositary
Shares; if such obligations, shares, rights or
options shall have been issued as a dividend upon any
securities of the Company, the amount of the
consideration received by the Company upon the
original issuance thereof shall be deemed to be zero.
In case of the issuance of Warrant Shares upon
exercise of this Warrant, the Company shall be deemed
to have received the Warrant Price then in effect as
the consideration for each Depositary Share so
issued;
(iv) Depositary Shares issuable by
way of dividend or other distribution on any
securities of the Company shall be deemed to have
been issued and to be outstanding at the close of
business on the record date fixed for the
determination of security holders entitled to receive
such dividend or other distribution and shall be
deemed to have been issued without consideration.
Depositary Shares issued otherwise than as a
dividend, shall be deemed to have been issued and to
be outstanding at the close of business on the date
of issue;
(v) The number of Depositary Shares
at any time outstanding shall not include any shares
then owned or held by or for the account of the
Company, but shall include the aggregate number of
shares deliverable in respect of options, rights and
exercisable, convertible and exchangeable securities
at all times while such options, rights or securities
remain outstanding and unexercised, unconverted or
unexchanged, as the case may be; and
(vi) No adjustment shall be made to
the Warrant Price in effect upon conversion or
exchange of (i) securities convertible or exercisable
or exchangeable for Depositary Shares or for other
securities that are subsequently exercisable for
Depositary Shares that are outstanding as of the date
of the Fourth Amendment, or (ii) any obligations or
any securities of the Company that shall be
convertible into or exercisable or exchangeable for
Depositary Shares or upon the exercise of rights or
options to subscribe for or to purchase Depositary
Shares for which an adjustment in the Warrant Price
has previously been made in accordance with paragraph
(b) of this Section 3.1.
(vii) In the event that any payment
is made to the holders of warrants issued pursuant to
the Securities Purchase Agreement dated as of January
31, 1997 among the Company, Triumph Connecticut
Limited
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<PAGE> 8
Partnership and the other purchasers named therein
pursuant to Section 8.3(b) (or successor provision)
of such Securities Purchase Agreement which does not
result in a modification pursuant to Section 3.4, the
Company shall be deemed to have issued without
consideration as of the date of the event giving rise
to such payment a number of Depositary Shares equal
to the amount of such payment divided by the Closing
Price on the date of such event.
(b) In case the Company shall at any time after the date
hereof issue options or rights to subscribe for Depositary Shares, or issue any
obligations or securities convertible into or exchangeable for Depositary
Shares, otherwise than as contemplated by Section 3.1(a)(vi) or pursuant to
Section 3.3 hereof, for a consideration per share less than the Warrant Price in
effect immediately prior to the issuance of such options or rights or
convertible or exchangeable securities, or without consideration, the Warrant
Price in effect immediately prior to the issuance of such options or rights or
securities shall be reduced to a price determined by making a computation in
accordance with the provisions of paragraph (a) of this Section 3.1, provided
that:
(i) the aggregate maximum number of Depositary Shares
deliverable under such options or rights shall be considered to have
been delivered at the time such options or rights were issued, and for a
consideration equal to the minimum purchase price per Depositary Share provided
for in such options or rights, plus the consideration (determined in the same
manner as consideration received on the issue or sale of Depositary Shares), if
any, received by the Company for such options or rights;
(ii) the aggregate maximum number of Depositary
Shares deliverable upon conversion of or exchange for any such obligations or
securities shall be considered to have been delivered at the time of issuance of
such securities, and for a consideration equal to the consideration (determined
in the same manner as consideration received on the issue or sale of Depositary
Shares) received by the Company for such securities, plus the consideration, if
any, to be received by the Company upon the exchange or conversion thereof; and
(iii) on the expiration of such options or rights, or
an increase in the minimum exercise price thereof, or a decrease in the
maximum number of Depositary Shares deliverable upon exercise or conversion of
such options, rights or convertible or exchangeable securities pursuant to the
terms thereof (and not as a result of exercise or conversion), or the
termination of such right to convert or exchange, the Warrant Price in effect
shall forthwith be readjusted to such Warrant Price as would have obtained (A)
in the case of the expiration or termination of options or rights or the
termination of the right to convert or exchange convertible or exchangeable
securities, had no adjustments been made upon the issuance of such options,
rights or convertible or exchangeable securities, or (B) in the case of an
increase in the minimum exercise price thereof, or a decrease in the maximum
number of shares deliverable thereunder, had the adjustments made upon the
issuance of such options, rights or convertible or exchangeable securities been
made upon the basis of the delivery of only the number of Depositary Shares (A)
actually deliverable upon the exercise of such options or rights or upon
conversion or exchange of such securities, or (B) deliverable by reason of such
increase in price or decrease in number of shares.
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<PAGE> 9
(c) No adjustment to the Warrant Price shall be made in
connection with the issuance of:
(i) the Convertible Notes, the
Warrants issued pursuant to the Third Amendment, the
Warrants issued pursuant to the Fourth Amendment, the
Warrants issued pursuant to the Purchase Agreement
and the New Warrants, as such term is defined in the
Purchase Agreement (together, the "Convertible
Securities"), and the securities issued or issuable
upon conversion or exercise of the Convertible
Securities, or other currently outstanding securities
that are convertible, exercisable or exchangeable for
Depositary Shares; and
(ii) Depositary Shares or rights,
options or warrants to acquire Depositary Shares
issued to directors, employees or consultants of the
Company pursuant to a stock option plan or agreement
(and, in the case of rights, options, or warrants,
the Depositary Shares issued or issuable upon
exercise thereof) and approved by the Board of
Directors;
(d) In case the Company shall at any time after the date
hereof subdivide or combine the outstanding Depositary Shares, the Warrant Price
in effect shall forthwith be proportionately decreased in the case of the
subdivision or proportionately increased in the case of combination to the
nearest one cent. Any such adjustment shall become effective at the close of
business on the date that such subdivision or combination shall become
effective.
(e) No adjustment to the Warrant Price shall be made in
connection with the conversion of all outstanding Depositary Shares into shares
of Common Stock on the Option Expiration Date (as defined in the Depositary
Agreement) pursuant to the terms of the Depositary Agreement.
Section 3.2. ADJUSTMENT OF WARRANT SHARES. In the event of an
adjustment of the Warrant Price, the number of Depositary Shares (or
reclassified or recapitalized stock) issuable upon exercise of this Warrant
after such adjustment shall be equal to the number determined by multiplying the
number of Depositary Shares issuable upon exercise of this Warrant immediately
prior to such adjustment by a fraction, of which the numerator is the Warrant
Price in effect immediately prior to such adjustments, and the denominator is
the Warrant Price in effect immediately after such adjustment.
Section 3.3. DIVIDENDS AND DISTRIBUTIONS. In the event that
the Company shall at any time after the date hereof pay any dividend (other than
in Depositary Shares) on, or make any distribution of its assets upon or with
respect to, the Depositary Shares, or in the event that the Company shall offer
options or rights to subscribe for Depositary Shares, or issue any securities
convertible into or exchangeable for Depositary Shares, to all of its holders of
Depositary Shares, then on the record date for such payment, distribution or
offer or, in the absence of a record date, on the date of such payment,
distribution or offer, the Warrantholder shall receive what the Warrantholder
would have received had it exercised this Warrant in full
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<PAGE> 10
immediately prior to the record date of such payment, distribution or offer or,
in the absence of a record date, immediately prior to the date of such payment,
distribution or offer.
Section 3.4. MERGERS, CONSOLIDATIONS, RECLASSIFICATIONS. In
the case of any reorganization or reclassification of the outstanding Depositary
Shares (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination)
or in the case of any consolidation of the Company into, or merger of the
Company with another corporation in which it is not the surviving entity (or it
is the surviving entity, but its Depositary Shares become shares of another
corporation), or in the case of any sale, lease or conveyance of all, or
substantially all, of the property, assets, business and goodwill of the Company
as an entirety, the Warrantholder shall thereafter have the right upon exercise
of this Warrant to receive the kind and amount of shares of stock and other
securities, cash and property receivable upon such reorganization,
reclassification, consolidation, merger or disposition by a holder of the number
of Depositary Shares which the Warrantholder would have received had it
exercised this Warrant immediately prior to such reorganization,
reclassification, consolidation, merger or disposition, at a price equal to the
aggregate Warrant Price then in effect for exercising this Warrant in full (the
kind, amount and price of such stock and other securities to be subject to
adjustment as herein provided); provided, however, that the kind and amount of
such shares of stock and other securities, cash and other property shall be
determined as if any payment made to the holders of warrants issued pursuant to
the Securities Purchase Agreement dated as of January 31, 1997 among the
Company, Triumph Connecticut Limited Partnership and the other purchasers named
therein upon such reorganization, reclassification, consolidation, merger or
disposition in excess of the amount such holders would otherwise have been
entitled to receive under the terms of such warrants without regard to Section
8.3(b) (or successor provision) of such Securities Purchase Agreement had not
been made. The foregoing provisions of this Section 3.4 shall similarly apply to
successive reorganizations, reclassifications, consolidations, mergers and
dispositions.
Section 3.5. NOTICE OF ADJUSTMENT. Whenever the Warrant Price
or the number of Warrant Shares shall be adjusted pursuant to the provisions of
Article III, the Company shall prepare and deliver forthwith to the
Warrantholder a certificate signed by the President of the Company and by its
Chief Financial Officer, setting forth the adjusted number of Warrant Shares
purchasable upon the exercise of this Warrant and the Warrant Price calculated
to the nearest cent and setting forth in reasonable detail the method of
calculation and the facts requiring such adjustment and upon which such
calculation is based.
Section 3.6. NOTICE OF CERTAIN CORPORATE ACTION. In case at
any time:
(A) the Company shall declare any
dividend (or any other
distributions) on Depositary
Shares; or
(B) the Company shall authorize the
granting to all holders of its
Depositary Shares of rights to
subscribe for or purchase any shares
of stock of any class or of any
other rights; or
(C) there shall be any reclassification
of the Depositary Shares or capital
stock of the Company; or
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<PAGE> 11
(D) there shall be any capital
reorganization by the Company; or
(E) there shall be any (i) consolidation
or merger involving the Company,
other than the merger contemplated
by the Merger Agreement, or (ii)
sale, transfer or other disposition
of all or substantially all of the
Company's property, assets or
business (except a merger or other
reorganization in which the Company
shall be the surviving corporation
and its shares of capital stock
shall continue to be outstanding and
unchanged and except a
consolidation, merger, sale,
transfer or other disposition
involving a wholly-owned
subsidiary); or
(F) there shall be a voluntary or
involuntary dissolution, liquidation
or winding-up of the Company or any
partial liquidation of the Company
or distribution to holders of
Depositary Shares;
then, in each of such cases, the Company shall give written notice to the
Warrantholder of the date on which (i) the books of the Company shall close or a
record date shall be fixed for such dividend, distribution or subscription
rights or (ii) such reorganization, reclassification, consolidation, merger,
disposition, dissolution, liquidation or winding-up, as the case may be, shall
take place. Such notice also shall specify the date as of which the holders of
Depositary Shares of record shall participate in such dividend, distribution or
subscription rights, or shall be entitled to exchange their depositary receipts
for Depositary Shares for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding-up, as the case may be. Such notice shall be
given at least twenty (20) days prior to the action in question and not less
than twenty (20) days prior to the record date or the date on which the
Company's transfer books are closed in respect thereto.
Section 3.7. ADJUSTMENT FOR EXPIRATION OF CALL OPTION. From
and after the Option Expiration Date, this Warrant shall be exercisable into a
number of shares of Common Stock of the Company equal to the number of shares of
Common Stock that the Warrantholder would have received upon the exchange of the
Depositary Shares that the Warrantholder would have received had it exercised
this Warrant in full immediately prior to the Option Expiration Date. From and
after the Option Expiration Date, all references herein to Depositary Shares
shall be deemed to include the Common Stock of the Company.
Section 3.8. FORM OF WARRANT AFTER ADJUSTMENTS. The form of
this Warrant need not be changed because of any adjustments in the Warrant Price
or the number or kind of the Warrant Shares.
ARTICLE IV
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MISCELLANEOUS
Section 4.1. SUCCESSORS AND ASSIGNS; TRANSFERS.
(a) The terms of this Warrant shall be binding upon, inure to
the benefit of and be enforceable by and against any successors or assigns of
the Company and of the Warrantholder; PROVIDED, HOWEVER, that the Company may
not assign its rights or obligations hereunder.
(b) Subject to the provisions of paragraph (f) below and
Section 17.3 of the Purchase Agreement, this Warrant and all rights hereunder
are transferable by the Warrantholder, in whole or in party, upon surrender of
this Warrant with a properly executed assignment at the principal office of the
Company.
(c) Any transferee 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 the Warrantholder under this Warrant to the same extent as if such
transferee was the Warrantholder.
(d) The Company will maintain a register containing the names
and addresses of the Warrantholders of the Warrants. Any Warrantholder may
change its or his address as shown on the warrant register by written notice to
the Company requesting such change.
(e) Until any transfer of this Warrant is made in the warrant
register, the Company may treat the Warrantholder as the absolute owner hereof
for all purposes; provided, however, that if and when this Warrant is properly
assigned in blank, the Company may (but shall not be obligated to) treat the
bearer hereof as the absolute owner hereof for all purposes, notwithstanding any
notice to the contrary.
(f) This Warrant and the Warrant Shares shall not be sold or
transferred unless either (i) they first shall have been registered under the
Securities Act or (ii) the Company first shall have been furnished with an
opinion of legal counsel, reasonably satisfactory to the Company, to the effect
that such sale or transfer is exempt from the registration requirements of the
Securities Act.
(g) Each certificate representing Warrant Shares shall bear a
legend substantially in the following form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
may not be offered, sold or otherwise transferred, pledged or
hypothecated unless and until such securities are registered
under such Act or an opinion of counsel reasonably
satisfactory to the Company is obtained to the effect that
such registration is not required."
-12-
<PAGE> 13
The foregoing legend shall be removed from the certificates
representing any Warrant Shares, at the request of the holder thereof, at such
time as they become eligible for resale pursuant to Rule 144(k) under the
Securities Act.
Section 4.2. RIGHTS AS STOCKHOLDER. Except as provided herein,
the Warrantholder, as such, shall not be entitled to vote or be deemed to be a
stockholder of the Company for any purpose, nor shall anything contained in this
Warrant be construed to confer upon the Warrantholder, as such, any rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action or receive notice of meetings.
Section 4.3. ACCEPTANCE BY WARRANTHOLDER. Receipt of this
Warrant by the Warrantholder shall constitute acceptance of an agreement to the
foregoing terms and conditions.
Section 4.4. GOVERNING LAW. This Warrant and the rights of the
parties hereunder shall be governed in all respects by the laws of the State of
New York, without giving effect to the provisions thereof relating to conflicts
of law.
Section 4.5. SEVERABILITY. In case any provision of this
Warrant 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.
Section 4.6. NOTICES. Any notices or certificates by the
Company to the Warrantholder and by the Warrantholder to the Company shall be
deemed delivered if in writing and delivered in person or by registered mail
(return receipt requested) to the Warrantholder, at its address in the registry
of Warrantholders maintained by the Company, and if to the Company, at 187
Ballardvale Street, Suite B125, Wilmington, MA 01887, Attention: Principal
Financial Officer. The Company may change its address by written notice to the
Warrantholder.
Section 4.7. AMENDMENT. This Warrant may be amended or
modified (or any provision hereof waived) only if Warrantholders holding at
least eighty percent (80%) of the Warrant Shares (assuming exercise of all the
Warrants) shall approve such amendment, modification or waiver in writing;
PROVIDED, HOWEVER, that no amendment that adversely affects the rights of any
Warrantholder in a manner different from the rights of the other Warrantholders
shall be effective against such Warrantholder unless approved in writing by such
Warrantholder. After an amendment, modification or waiver of a provision the
Warrants becomes effective, the Company shall mail to the Warrantholders a
notice briefly describing the amendment, modification or waiver.
IN WITNESS WHEREOF, this Warrant has been duly executed by the
Company under its corporate seal as of the 15th day of October, 1999.
ASCENT PEDIATRICS, INC.
By:_________________________________
Name:
Its:
-13-
<PAGE> 1
Exhibit 10.38
FIRST AMENDMENT TO LEASE
WHEREAS, NEW BOSTON WILMAR LIMITED PARTNERSHIP (hereinafter referred to
as "Landlord") and ASCENT PEDIATRICS, INC. (hereinafter referred to as "Tenant")
entered into a certain lease of premises located at the building known and
numbered as 187 Ballardvale Street, Wilmington, Massachusetts, and dated
November 21, 1996 (hereinafter referred to as "Lease"); and
WHEREAS, Landlord and Tenant now desire to amend the Lease.
NOW THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration the receipt and sufficiency
of which are hereby acknowledged by both parties, it is agreed as follows:
1. Section I of the Lease is amended by inserting the following
language at the end of the second paragraph thereof:
"Effective September 15, 1997, the premises shall also include
approximately 4,542 square feet of net rentable area on the Second
Floor of the Building, as more particularly shown as the cross-hatched
area on Exhibit A-1 attached hereto and incorporated herein by
reference (hereinafter referred to as the "Additional Space")."
2. Section IV of the Lease is amended by inserting the following
language at the end of the first paragraph thereof:
"Effective September 15, 1997, Tenant shall pay rent with
respect to the Additional Space at the annual rental rates set forth
below:
<PAGE> 2
<TABLE>
<CAPTION>
PER SQUARE FOOT RENTAL RATE
---------------------------
<S> <C>
September 15, 1997 - September 30, 1998 $16.50
October 1, 1998 - September 30, 2000 $17.00
October 1, 2000 - February 28, 2002 $17.50"
</TABLE>
3. Section V(a) of the Lease is amended by inserting the following
language at the end thereof:
"Landlord shall do no work in or to the Additional Space to
prepare the same for occupancy by Tenant, it being understood and
agreed that Tenant accepts the same in their "as-is" condition. The
taking of possession of the Additional Space by Tenant shall be
conclusive evidence of the acceptance of the Additional Space by Tenant
and the Additional Space is in good and satisfactory condition, in
accordance with Landlord's obligations hereunder."
4. Section XI(c) of the Lease is amended by inserting the following
language at the end thereof:
"Effective September 15, 1997, "Tenant's Proportionate Share"
for taxes shall be eighteen and 20/100 percent (18.2%)."
5. Section XI(i) of the Lease is amended by inserting the following
language after the first sentence thereof:
"Effective September 15, 1997, "Tenant's Proportionate Share
for Operating Cost Escalation" shall be eighteen and 20/100 percent
(18.2%)."
6. Section XLIII of the Lease is amended by inserting the following
language at the end thereof:
-2-
<PAGE> 3
"Neither Landlord nor Tenant has dealt with any broker in
connection with the transaction reflected in this Second Amendment to
Lease, and each agrees to indemnify and hold the other harmless on
account of any claims or demands for a brokerage commission as a result
hereof."
7. Section XLV of the Lease is amended by inserting the following
language at the end thereof:
"On or before September 15, 1997, Tenant shall increase the
security deposit hereunder by Six Thousand Two Hundred Forty-Five
Dollars ($6,245)."
8. The Lease shall be amended by inserting the following language after
Section XLVIII thereof:
"SECTION XLIX. RIGHT OF FIRST OFFER. Provided Tenant is not in
default of its obligations hereunder, Landlord shall provide Tenant
with written notice (the "Right of First Offer Notice") if during the
term of this lease that portion of the first floor of the Building and
containing approximately 4,629 square feet of rentable area, as more
particularly shown as the cross-hatched area on Exhibit O attached
hereto and incorporated herein by reference, is or will become
available for lease (the "First Offer Premises"). The Landlord's Right
of First Offer Notice to Tenant shall set forth the premises' square
footage, availability date, term, tenant improvement allowance, if any,
and rental rate, which rental rate shall reflect the fair market rental
value for such premises which Landlord would accept from a new tenant
to lease the Premises as of the stated availability date. Tenant shall
have five (5) business days following receipt of the Right of First
Offer Notice to exercise its Right of First Offer, which Right of First
Offer shall apply only with respect to the entire premises offered, and
if Tenant shall fail to
-3-
<PAGE> 4
exercise said Right of First Officer within said five (5) business
day period, Tenant shall have waived its right to space offered and
shall have no further right pursuant to this Section XLIX to said
space for the remainder of the term of this lease, as it may be
extended. In the event Tenant accepts the offer of any space pursuant
to this Section XLIX, Landlord and Tenant shall execute an amendment to
this lease, setting forth the terms and conditions for the lease by
Tenant of the space so acquired.
"Notwithstanding the provisions of this Section XLIX, Landlord
expressly reserves the right the right to renew, extend, amend or
modify the lease of the existing tenant with respect to the First Offer
Premises as it sees fit."
9. This First Amendment to Lease is contingent upon Landlord entering
into a Lease Termination Agreement with Netcore Systems, Inc., with respect to
the Additional Space, effective September 14, 1997.
10. Except as modified hereby the Lease is hereby ratified and
affirmed.
IN WITNESS WHEREOF, the parties have set their hands and seals this
18th day of September 1997.
LANDLORD:
NEW BOSTON WILMAR
LIMITED PARTNERSHIP
By: New Boston Fund, Inc.
Its General Partner
By: /s/ Jerome L. Rappaport, Jr.
--------------------------------
Jerome L. Rappaport, Jr.
Its President
-4-
<PAGE> 5
TENANT:
ASCENT PEDIATRICS, INC.
By: /s/ Alan R. Fox
--------------------------------
Its President
-5-
<PAGE> 6
Exhibit A-1
[Diagram of floor plan of Second Floor
of 187 Ballardvale Drive, Wilmington, Massachusetts]
-6-
<PAGE> 1
Ex. 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-56621) and on Form S-8 (No's 333-84729,
333-84731, 333-84733 and 333-84735) of Ascent Pediatrics, Inc. of our report
dated February 17, 2000, except as to the information in the fourth
paragraph of note T, for which the date is March 13, 2000, relating to the
financial statements, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 30, 2000
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report in the Form 10-K 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.
/s/ KPMG LLP
------------
KPMG LLP
Minneapolis, Minnesota
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,067,049
<SECURITIES> 0
<RECEIVABLES> 830,783
<ALLOWANCES> 66,956
<INVENTORY> 1,012,430
<CURRENT-ASSETS> 2,971,132
<PP&E> 1,477,213
<DEPRECIATION> 961,048
<TOTAL-ASSETS> 15,272,610
<CURRENT-LIABILITIES> 3,769,180
<BONDS> 21,461,041
0
0
<COMMON> 385
<OTHER-SE> 56,304,465
<TOTAL-LIABILITY-AND-EQUITY> 15,272,610
<SALES> 3,039,678
<TOTAL-REVENUES> 7,047,178
<CGS> 910,027
<TOTAL-COSTS> 1,626,339
<OTHER-EXPENSES> 19,641,562
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,499,574
<INCOME-PRETAX> (16,071,638)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,071,638)
<EPS-BASIC> (1.96)
<EPS-DILUTED> (1.96)
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