1
Exhibit 99.2
------- ----
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
INTRODUCTION TO UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997
In March 1997 Ascent Pediatrics, Inc. ("Ascent" or the "Company") signed an
asset purchase agreement to acquire a product line of Upsher-Smith. Accordingly,
these accompanying unaudited combined pro forma financial statements reflect the
following:
- The issuance of $5,000,000 of convertible subordinated secured notes (the
"Notes") no later than the closing of this offering presented as if this
transaction occurred on January 1, 1996 with respect to the Unaudited
Combined Pro Forma Statements of Operations and on March 31, 1997 with
respect to Unaudited Combined Pro Forma Balance Sheet.
- The conversion of Series A and B convertible preferred stock, and Series
D, E and F redeemable convertible preferred stock, as if the conversion
took place at March 31, 1997, which mandatorily convert upon closing of
an initial public offering.
- The warrant obligation pertaining to the warrants issued or issuable in
connection with the Notes would be transferred to additional paid in
capital since the put feature on those warrants would cease to exist in
the event of a public offering.
The Ascent Pro Forma Subtotal March 31, 1997 column represents Ascent's
March 31, 1997 historical financial statements adjusted for the issuance of an
additional $5,000,000 of Notes no later than the closing of this offering, the
Preferred Stock conversions and reclassification of the warrant obligation to
additional paid in capital as described above and prior to adjustments related
to the acquisition described below.
In addition, the accompanying unaudited combined pro forma financial
statements reflect the acquisition of the Feverall acetaminophen suppository
line ("Product Line") from Upsher-Smith for a purchase price equal to $11.5
million plus the cost of inventories. Under the terms of the agreement, Ascent
has agreed to purchase the Product Line, including certain intellectual
property, technical information, product formulations and regulatory approvals
and registrations. Ascent will not purchase any accounts receivable and will not
assume any liabilities of Upsher-Smith. For purposes of the combined pro forma
financial statements, this acquisition has been accounted for using the purchase
method of accounting.
Pursuant to this agreement, the Company paid a non-refundable deposit of
$250,000 in 1996. Upon the closing, the Company is required to make a cash
payment to Upsher-Smith of approximately $5.75 million plus the cost of the
inventory ($235,696 at March 31, 1997) and to sign a promissory note in the
amount of approximately $5.5 million. This note will be payable 225 days
following the closing. Ascent has also agreed to purchase from Upsher-Smith,
Ascent's requirements for products in the Product Line for a period of five
years.
The Unaudited Combined Pro Forma Financial Statements combine Ascent's Pro
forma Balance Sheet with the Statement of Assets Related to the Product Line to
be Acquired as if the transaction occurred on March 31, 1997 and Ascent's
Statements of Operations for the year ended December 31, 1996 and for the three
months ended March 31, 1997 with the related Statement of Net Sales and
Identified Costs and Expenses of the Product Line to be Acquired as if the
transaction had occurred on January 1, 1996. The Statements of Net Sales and
Identified Costs and Expenses includes advertising and promotion expense that
substantially relate directly to the Product Line to be acquired by Ascent.
Selling expense items are allocated based on estimates and assumptions and
primarily reflect an estimate of activity attributable to the Product Line
relative to the total selling activity of Upsher-Smith. General and
administrative and research and development expenses of Upsher-Smith were not
dedicated specifically to the Product Line to be acquired and, because Ascent
would not acquire any of such cost structure of Upsher-Smith, these costs were
excluded from the Statements of Net Sales and Identified Costs and Expenses. Pro
forma adjustments have been made to reflect Ascent's estimate of the incremental
expense that would have been incurred if the acquisition had occurred on January
1, 1996. The unaudited combined pro forma statements do not purport to be
indicative of
F-24
2
the financial position or the results of operations had the probable acquisition
actually occurred at this time or what results in the future may be.
The Statement of Assets Related to the Product Lines to be Acquired and the
Statements of Net Sales and Identified Costs and Expenses of the Product Lines
to be Acquired have been derived from their respective historical financial
statements. The Unaudited Combined Pro Forma Financial Statements should be read
in conjunction with the accompanying notes thereto and with the historical
financial statements and related notes thereto of Ascent and the historical
financial statements and related notes thereto of the Upsher-Smith Product Line
to be Acquired.
F-25
3
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED COMBINED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1997
ASSUMED
CONVERSION
ASCENT ISSUANCE OF OF PREFERRED
HISTORICAL ADDITIONAL NOTE STOCK INTO NOTE
MARCH 31, 1997 NOTES REF. COMMON STOCK REF.
----------------- ----------- ---- ------------- ----
Current assets:
Cash and cash equivalents..................... $ 8,299,854 $ 4,840,000 A $
Other current assets.......................... 209,954
Inventories, net.............................. --
-----------
Total current assets.................... 8,509,808
Fixed assets, net............................. 294,316
Deposits related to acquisition............... 250,000
Deferred charges and other deposits........... 403,007
Debt issue costs, net......................... 203,294 160,000 A
Other assets, net............................. 11,562
-----------
Total assets............................ $ 9,671,987
===========
Liabilities and stockholders' equity:
Accounts payable.............................. $ 770,803
Accrued expenses.............................. 1,307,863
Note payable -- Feverall Acquisition.......... --
-----------
Total current liabilities............... 2,078,666
Convertible subordinated secured notes.......... 1,182,922 3,331,254 A
Warrant obligation.............................. 836,994 1,668,746 A (2,505,740) B
-----------
Total liabilities....................... 4,098,582
Series D redeemable convertible preferred stock... 8,157,132 (8,157,132) B
Series E redeemable convertible preferred
stock......................................... 4,400,226 (4,400,226) B
Series F redeemable convertible preferred
stock......................................... 12,452,471 (12,452,471) B
Stockholders' equity (deficit):
Series A convertible preferred................ 280,110 (280,110) B
Series B convertible preferred................ 2,574,993 (2,574,993) B
Common stock.................................. 8 177 B
Additional paid-in capital.................... -- 30,370,495 B
Deficit accumulated during the development
stage....................................... (22,291,535)
-----------
Total stockholders' equity (deficit).... (19,436,424)
-----------
Total liabilities and stockholders'
equity (deficit)...................... $ 9,671,987
===========
A PRODUCT LINE
ASCENT OF UPSHER-SMITH PURCHASE
PRO FORMA HISTORICAL NOTE PRICE NOTE
MARCH 31, 1997 MARCH 31, 1997 REF. ADJUSTMENTS REF.
----------------- ----------------- ---- ----------- ----
<C
Current assets:
Cash and cash equivalents..................... $ 13,139,854 $ $(5,985,696) D
Other current assets.......................... 209,954
Inventories, net.............................. -- 235,696 C 14,304 J
------------
Total current assets.................... 13,349,808
Fixed assets, net............................. 294,316
Deposits related to acquisition............... 250,000 (250,000) E
Deferred charges and other deposits........... 403,007
Debt issue costs, net......................... 363,294
Other assets, net............................. 11,562 11,485,696 F
------------
Total assets............................ $ 14,671,987
============
Liabilities and stockholders' equity:
Accounts payable.............................. $ 770,803
Accrued expenses.............................. 1,307,863
Note payable -- Feverall Acquisition.......... -- 5,500,000 G
------------
Total current liabilities............... 2,078,666
Convertible subordinated secured notes.......... 4,514,176
Warrant obligation.............................. --
------------
Total liabilities....................... 6,592,842
Series D redeemable convertible preferred stock. --
Series E redeemable convertible preferred
stock......................................... --
Series F redeemable convertible preferred
stock......................................... --
Stockholders' equity (deficit):
Series A convertible preferred................ --
Series B convertible preferred................ --
Common stock.................................. 185
Additional paid-in capital.................... 30,370,495
Deficit accumulated during the development
stage....................................... (22,291,535)
------------
Total stockholders' equity (deficit).... 8,079,145
------------
Total liabilities and stockholders'
equity (deficit)...................... $ 14,671,987
============
COMBINED PRO FORMA
MARCH 31, 1997
------------------
Current assets:
Cash and cash equivalents..................... $ 7,154,158
Other current assets.......................... 209,954
Inventories, net.............................. 250,000
---------
Total current assets.................... 7,614,112
Fixed assets, net............................. 294,316
Deposits related to acquisition............... --
Deferred charges and other deposits........... 403,007
Debt issue costs, net......................... 363,294
Other assets, net............................. 11,497,258
---------
Total assets............................ $ 20,171,987
=========
Liabilities and stockholders' equity:
Accounts payable.............................. $ 770,803
Accrued expenses.............................. 1,307,863
Note payable -- Feverall Acquisition.......... 5,500,000
---------
Total current liabilities............... 7,578,666
Convertible subordinated secured notes.......... 4,514,176
Warrant obligation.............................. --
---------
Total liabilities....................... 12,092,842
Series D redeemable convertible preferred stock. --
Series E redeemable convertible preferred
stock......................................... --
Series F redeemable convertible preferred
stock......................................... --
Stockholders' equity (deficit):
Series A convertible preferred................ --
Series B convertible preferred................ --
Common stock.................................. 185
Additional paid-in capital.................... 30,370,495
Deficit accumulated during the development
stage....................................... (22,291,535)
---------
Total stockholders' equity (deficit).... 8,079,145
---------
Total liabilities and stockholders'
equity (deficit)...................... $ 20,171,987
=========
F-26
4
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
ASSUMED
CONVERSION ASCENT
ASCENT ISSUANCE OF OF PREFERRED PRO FORMA
HISTORICAL ADDITIONAL NOTE STOCK INTO NOTE SUBTOTAL
DECEMBER 31, 1996 NOTES REF. COMMON STOCK REF. DECEMBER 31, 1996
----------------- ----------- ---- ------------- ---- -----------------
Net sales................................... $ -- $ $ --
----------- ----------
Costs and expenses:
Cost of sales............................. -- --
Research and development.................. 3,760,948 3,760,948
Selling, general and administrative....... 2,805,352 32,000 M 2,837,352
Advertising and promotion................. -- --
Allocated selling......................... -- --
----------- ----------
Total expenses:....................... 6,566,300 6,598,300
Income (loss) from operations............... (6,566,300) (6,598,300)
Interest income............................. 79,084 79,084
Interest expense............................ -- (468,556) N (468,556)
----------- ----------
Net income (loss)........................... $(6,487,216) $ (6,987,572)
=========== ==========
Net income (loss) per share................. $ (1.70) $ (1.84)
=========== ==========
Weighted average number of common and common
stock equivalent shares outstanding....... 3,806,011 3,806,011
A PRODUCT
LINE OF
UPSHER-SMITH PURCHASE
HISTORICAL NOTE PRICE NOTE OTHER NOTE COMBINED PRO FORMA
DECEMBER 29, 1996 REF. ADJUSTMENTS REF. ADJUSTMENTS REF. DECEMBER 31, 1996
----------------- ---- ----------- ---- ----------- ---- ------------------
Net sales................................... $ 3,877,199 C $ $ $ 3,877,199
----------- ------------
Costs and expenses:
Cost of sales............................. 1,303,336 C 130,333 I 1,433,669
Research and development.................. -- 3,760,948
Selling, general and administrative....... -- 574,285 H 490,000 L 5,142,260
1,240,623 K
Advertising and promotion................. 669,456 C (669,456) K --
Allocated selling......................... 571,167 C (571,167) K --
----------- ------------
Total expenses:....................... 2,543,959 C 10,336,877
Income (loss) from operations............... (6,459,678)
Interest income............................. -- 79,084
Interest expense............................ -- (468,556)
------------
Net income (loss)........................... $ 1,333,240 C $ (6,849,150)
=========== ============
Net income (loss) per share................. $ (1.80)
============
Weighted average number of common and common
stock equivalent shares outstanding....... 3,806,011
F-27
5
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
ASSUMED
CONVERSION ASCENT
ASCENT ISSUANCE OF OF PREFERRED PRO FORMA
HISTORICAL ADDITIONAL NOTE STOCK INTO NOTE SUBTOTAL
MARCH 31, 1997 NOTES REF. COMMON STOCK REF. MARCH 31, 1997
----------------- ----------- ---- ------------- ---- -----------------
Net sales........................ $ -- $ $ --
-
----------
Costs and expenses:
Cost of sales.................. -- --
Research and development....... 1,528,114 1,528,114
Selling, general and
administrative............... 972,826 8,000 M 980,826
Advertising and promotion...... -- --
Allocated selling.............. -- --
----------
Total expenses:............ 2,500,940 2,508,940
Income (loss) from operations.... (2,500,940) (2,508,940)
Interest income.................. 72,745 72,745
Interest expense................. (19,916) (127,095) N (147,011)
Gain on sale of fixed assets..... 9,242 9,242
-
----------
Net income (loss)................ $(2,438,869) $ (2,573,964)
========== =
Net income (loss) per share...... $ (0.64) $ (0.68)
========== =
Weighted average number of common
and common stock equivalent
shares outstanding............. 3,806,075 3,806,075
A PRODUCT
LINE OF
UPSHER-SMITH PURCHASE
HISTORICAL NOTE PRICE NOTE OTHER NOTE COMBINED PRO FORMA
MARCH 31, 1997 REF. ADJUSTMENTS REF. ADJUSTMENTS REF. MARCH 31, 1997
----------------- ---- ----------- ---- ----------- ---- ------------------
Net sales........................ $ 795,222 C $ $ $ 795,222
----------- ------------
Costs and expenses:
Cost of sales.................. 323,665 C 32,367 I 356,032
Research and development....... -- 1,528,114
Selling, general and
administrative............... -- 143,571 H 122,500 L 1,606,482
359,585 K
Advertising and promotion...... 176,851 C (176,851) K --
Allocated selling.............. 182,734 C (182,734) K --
----------- ------------
Total expenses:............ 683,250 C 3,490,628
Income (loss) from operations.... (2,695,406)
Interest income.................. -- 72,745
Interest expense................. (147,011)
Gain on sale of fixed assets..... 9,242
----------- ------------
Net income (loss)................ $ 111,972 C $ (2,760,430)
=========== ============
Net income (loss) per share...... $ (0.73)
============
Weighted average number of common
and common stock equivalent
shares outstanding............. 3,806,075
F-28
6
ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997
The accompanying unaudited combined pro forma financial statements reflect
the impact of the following adjustments:
A. ISSUANCE OF ADDITIONAL NOTES
Records the issuance of $5,000,000 of the Notes net of estimated issuance
costs of $160,000 with proceeds of $4,840,000 no later than the closing of this
offering presented as if the issuance occurred on March 31, 1997. The Notes have
been recorded at $3,331,254 net of $1,668,746, the fair market value of Series A
and Series B warrants to purchase 336,644 and 218,195 shares, respectively, of
Common Stock issued in connection with the Notes. Accordingly the liability of
$3,331,254 (after allocating $1,668,746 as value attributable to warrants) will
be accreted up to $5,000,000 over the term of the Notes and such accretion in
the amount of $1,668,746 will be recorded as interest expense in addition to the
stated interest rate. The Notes bear no interest through January 31, 1999 after
which the interest rates are 7% through January 31, 2000, 8% through January 31,
2001 and 9% through January 31, 2002, payable every quarter commencing on March
31, 1999. Upon completion of an initial public offering of shares of its Common
Stock, the Company may either redeem all of the outstanding Notes for their
stated principal amount or all of such Notes will amortize in eight equal
quarterly principal payments and require quarterly interest payments on the
unpaid principal balance, at a rate equal to the lesser of 10% or 3.5% over the
prime rate, with the first quarterly payment of principal and interest due six
months after the closing of such an offering. In addition, for a period of two
years following the closing of any such offering, the holders of the Notes will
have the right to convert the Notes into such number of shares of Common Stock
as is equal to the outstanding principal of such Notes divided by the per share
Price to Public in the offering (subject to certain requirements as to the
minimum amount to be so converted as provided in the Agreement).
B. CONVERSION OF PREFERRED STOCK AND WARRANT OBLIGATION
Records the following:
- The conversion of 800,000 shares of Series A convertible preferred stock,
$.00004 par value, into 680,000 shares of common stock, $.00004 par
value.
- The conversion of 399,999 shares of Series B convertible preferred stock,
$.00004 par value, into 353,227 shares of common stock, $.00004 par
value.
- The conversion of 1,359,522 shares of Series D redeemable convertible
preferred stock, $.00004 par value, into 1,155,589 shares of common
stock, $.00004 par value.
- The conversion of 733,371 shares of Series E redeemable convertible
preferred stock, $.00004 par value, into 623,358 shares of common stock,
$.00004 par value.
- The conversion of 1,915,765 shares of Series F redeemable convertible
preferred stock, $.00004 par value, into 1,628,390 shares of common
stock, $.00004 par value.
- The reclassification of warrant obligations of $2,505,740 to additional
paid in capital.
F-29
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ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
SERIES D SERIES E SERIES F
SERIES A SERIES B REDEEMABLE REDEEMABLE REDEEMABLE
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED WARRANT
STOCK STOCK STOCK STOCK STOCK OBLIGATION TOTALS
----------- ----------- ----------- ----------- ------------ ----------- ------------
Warrant obligation............ $ $ $ $ $ $(2,505,740) $ (2,505,740)
Series A convertible preferred
stock........................ (280,110) (280,110)
Series B convertible preferred
stock........................ (2,574,993) (2,574,993)
Series D redeemable
convertible preferred
stock........................ (8,157,132) (8,157,132)
Series E redeemable
convertible preferred
stock........................ (4,400,226) (4,400,226)
Series F redeemable
convertible preferred
stock........................ (12,452,471) (12,452,471)
Common stock.................. 27 14 46 24 66 177
Additional paid-in capital.... 280,083 2,574,979 8,157,086 4,400,202 12,452,405 2,505,740 30,370,495
--------- ----------- ----------- ----------- ------------ ------- ------------
Totals................. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
========= =========== =========== =========== ============ ======= ============
C. A PRODUCT LINE OF UPSHER-SMITH
The historical results of A Product Line of Upsher-Smith exclude allocated
general and administrative and research and development expenses which are not
directly attributable to the product lines to be sold.
D. CASH PAYMENT
Records the cash payment of $5,985,696 for the probable acquisition of the
Product Line which includes a $5,750,000 million required payment at closing and
$235,696 of inventory costs.
E. DEPOSIT
Records the application of the deposit of $250,000 related to the probable
acquisition of the Product Line to the purchase price.
F. INTANGIBLE ASSETS
Records intangible assets, net of amortization and deposits, resulting from
the probable acquisition of the Feverall product line as if the probable
acquisition had occurred on March 31, 1997:
Purchase price.................................. $11,735,696
Less inventory acquired at fair value........... 250,000
-----------
Intangible assets............................... $11,485,696
===========
G. NOTE PAYABLE
Records note payable to Upsher-Smith related to the probable acquisition of
the Feverall product line. The note is payable 225 days from closing and does
not bear interest.
Purchase price.................................. $11,735,696
Less deposit.................................... 250,000
-----------
Subtotal........................................ 11,485,696
Less cash payment............................... 5,985,696
-----------
Note payable.................................... $ 5,500,000
===========
F-30
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ASCENT PEDIATRICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
H. AMORTIZATION EXPENSE
Records amortization expense of $574,285 ($143,571 a quarter) related to
the intangible assets of $11,485,696 over the estimated life of 20 years. At the
time the acquisition is consummated, the amount of the purchase price that
exceeds the fair value of the tangible assets will be allocated to specific
intangible assets (expected to be primarily intellectual property, know-how,
customer lists, etc.) and any remainder will be classified as goodwill.
Accordingly, the amortization periods for the assets will correspond to their
useful lives. The 20 years is an estimate by management for pro forma purposes
and, in the opinion of management, will not materially differ from actual
results.
I. COST OF GOODS SOLD
Adjusts cost of goods sold for the manufacture of the products to be
acquired in excess of Upsher-Smith's fully allocated costs of manufacturing such
products as per the manufacturing agreement.
J. INVENTORY
Records adjustment to increase inventory to be purchased to fair market
value.
K. RECLASSIFICATION
Records reclassification of Upsher-Smith advertising and promotion expenses
of $669,456 and allocated selling expenses of $571,167 totalling $1,240,623 for
the year ended December 31, 1996 and advertising and promotion expenses of
$176,851 and allocated selling expenses of $182,734 totalling $359,585 for the
three months ended March 31, 1997 to conform with Ascent's financial statement
presentation.
L. INCREMENTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Records an estimate of the incremental selling, general and administrative
expenses, in addition to the Upsher-Smith product line's identified costs and
expenses, expected to be incurred by Ascent primarily for distribution costs
(including billing and collection efforts), advertising, promotion and sales
force of $490,000 for a year or $122,500 for a quarter. Selling, general and
administrative expenses are expected to increase as the product line revenue
increases.
M. AMORTIZATION OF DEBT ISSUE COSTS
Records amortization of issuance costs of $160,000 related to the
additional Notes. Amortization for one year is $32,000 or $8,000 per quarter.
N. INTEREST EXPENSES PERTAINING TO THE ADDITIONAL NOTES
Records accretion of notes to maturity amount and treated as interest
expense. Interest expenses for the year ended December 31, 1996 and for the
three months ended March 31, 1997 are $468,556 and $127,095, respectively.
F-31