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Exhibit 99.1
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INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
UPSHER-SMITH LABORATORIES, INC.:
We have audited the accompanying statement of assets related to the product
line to be acquired by Ascent Pediatrics, Inc. as of December 29, 1996 and the
related statements of net sales and identified costs and expenses for each of
the years in the two-year period then ended. These financial statements are the
responsibility of Upsher-Smith Laboratories, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The product line to be acquired by Ascent Pediatrics, Inc. has been
operated as an integral part of Upsher-Smith Laboratories, Inc. and has no
separate legal existence. The basis of preparation of these financial statements
is described in note 1 to the financial statements.
In our opinion, the aforementioned financial statements present fairly the
assets related to the product line of Upsher-Smith Laboratories, Inc. at
December 29, 1996 to be acquired by Ascent Pediatrics, Inc. and the net sales in
excess of identified costs and expenses for each of the years in the two-year
period then ended on the basis of accounting described in the preceding
paragraph and in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 21, 1997
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A PRODUCT LINE OF UPSHER-SMITH LABORATORIES, INC.
STATEMENT OF ASSETS RELATED TO THE PRODUCT LINE TO BE ACQUIRED BY
ASCENT PEDIATRICS, INC.
DECEMBER 29, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
Inventories, net.................................................... $122,235 $235,696
-------- --------
Assets of the product line to be acquired........................... $122,235 $253,696
======== ========
See accompanying notes to financial statements.
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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.
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
------------------------- -------------------------
1995 1996 1996 1997
---------- ---------- ---------- --------
(UNAUDITED)
Net sales................................ $3,563,761 $3,877,199 $1,231,057 $795,222
Identified costs and expenses:
Cost of sales.......................... 1,229,848 1,303,336 350,226 323,665
Advertising and promotion expense...... 657,655 669,456 281,001 176,851
Allocated selling expense.............. 480,700 571,167 188,160 182,734
---------- ---------- ---------- --------
Total identified costs and
expenses..................... 2,368,203 2,543,959 819,387 683,250
---------- ---------- ---------- --------
Net sales in excess of
identified costs and
expenses..................... $1,195,558 $1,333,240 $ 411,670 $111,972
---------- ---------- ---------- --------
See accompanying notes to financial statements.
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A PRODUCT LINE OF UPSHER-SMITH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS OF THE PRODUCT LINE TO BE ACQUIRED BY
ASCENT PEDIATRICS, INC.
DECEMBER 31, 1995 AND DECEMBER 29, 1996
(UNAUDITED AS TO MARCH 31, 1996 AND 1997 DATA)
(1) BASIS OF PRESENTATION
The accompanying financial statements present the assets related to the
Feverall product line of Upsher-Smith Laboratories, Inc. (Upsher-Smith), and the
net sales and the identified costs and expenses of the Feverall product line to
be acquired by Ascent Pediatrics, Inc. (Ascent), as provided in a non-binding
letter of intent dated November 13, 1996. The Feverall product line to be
acquired by Ascent has been operated as an integral part of Upsher-Smith and has
no separate legal existence.
The assets related to the Feverall product line as presented in the
accompanying statement of assets to be acquired include the historical balances
at December 29, 1996, of work-in-process and finished goods inventory together
with related samples of the Feverall product line. This product line has never
been operated as a separate business entity but rather has been an integral part
of the drug manufacturing and distribution business of Upsher-Smith.
The statements of net sales and identified costs and expenses of the
Feverall product line includes the net sales, cost of sales, and advertising and
promotion expense, that substantially relate directly to the product line to be
acquired by Ascent. Selling expense items are allocated based on estimates and
assumptions and primarily reflect an estimate of activity attributable to
selling the Feverall product line relative to the total selling activity of
Upsher-Smith. Management of Upsher-Smith cannot estimate what selling expenses
would have been if the Feverall product line had been operated on a stand alone
basis.
The above allocations are believed by management to be reasonable
allocations under the circumstances. However, there can be no assurance that
such allocations will be indicative of future results of operations. In
addition, the carrying value of inventories, as reflected in the accompanying
statement of assets to be acquired, does not include any adjustments which may
result at the date of acquisition.
General and administrative expenses of Upsher-Smith were not dedicated
specifically to the product line to be acquired for the periods presented and
because Ascent is not acquiring any of the general and administrative cost
structure of Upsher-Smith, general and administrative expenses were excluded
from the accompanying financial statements. Research and development expenses of
Upsher-Smith did not specifically relate to the product line to be acquired for
the periods presented and as a result were excluded from the accompanying
financial statements.
Upsher-Smith is a pharmaceutical manufacturer and distributor that
concentrates on developing cardiovascular products. The company markets its
products to retail, chain, and hospital pharmacies primarily by means of
wholesale and drug chain distribution channels throughout the United States. The
accompanying financial statements are not intended to present all the assets or
operations of Upsher-Smith.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method. Samples and display inventory are charged to
advertising and promotion expense when used.
Revenue Recognition
Revenue is recognized upon shipment of the product. Allowances for sales
returns, discounts and rebates are provided for based on the volume of sales and
actual experience.
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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:
DECEMBER 29, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
Work in process...................................... $ 10,864 $ --
Samples and displays................................. 42,486 44,613
Finished goods....................................... 68,885 191,083
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$122,235 $ 235,696
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(4) NET SALES
Net sales consisted of the following:
YEARS ENDED THREE MONTHS ENDED
--------------------------- -----------------------
DECEMBER 31, DECEMBER 29, MARCH 31, MARCH 31,
1995 1996 1996 1997
------------ ------------ ---------- ----------
(UNAUDITED)
Gross sales............................ $4,677,134 $5,281,399 $1,598,375 $1,223,906
Less sales returns, discounts and
rebates.............................. 1,113,373 1,404,200 367,318 428,684
---------- ---------- ---------- ----------
Net sales......................... $3,563,761 $3,877,199 $1,231,057 $ 795,222
========== ========== ========== ==========
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.
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