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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, 1998
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:
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. [ ]
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The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $10,129,926 based on the closing price of the
Common Stock on the Nasdaq Stock Market on March 15, 1999. The number of shares
outstanding of the registrant's Common Stock as of March 15, 1999 was 7,026,445.
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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 have four principal products in
development:
* Primsol Trimethoprim Solution -- a prescription antibiotic for
the treatment of ear infections in children;
* Orapred Syrup -- a liquid steroid for the treatment of
inflammation, including inflammation resulting from respiratory
conditions;
* Feverall Controlled-release Sprinkles -- an acetaminophen-based
analgesic and antipyretic for the treatment of pain and fever in
children; and
* Pediavent Albuterol Controlled-release Suspension -- a
bronchodilator for the treatment of asthma.
In addition, in February 1999, our sales force began to promote Omnicef(R)
(cefdinir), a broad-spectrum cephalosporin antibiotic marketed by Warner-Lambert
Company under a license from Fujisawa Pharmaceutical Co., Ltd., to pediatricians
in the United States.
STRATEGY
Our objective is to be a leader in the development and marketing of
pharmaceuticals specifically formulated for use by children. We are developing a
broad line of products that are based on commonly-prescribed off-patent
pharmaceuticals which we seek to improve by reducing their dosing frequency,
improving their taste, making them easier to administer or developing them as
substitutes for products with considerable side effects.
On February 16, 1999, we entered into 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 has agreed to loan us up
to $40.0 million from time to time for certain corporate purposes, and we have
agreed to assign to Alpharma a call option, exercisable in 2002, to purchase all
of the Ascent common stock then issued and outstanding at a price to be
determined by an earnings-based formula. The consummation of the strategic
alliance is subject to a number of conditions, including stockholder approval.
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.
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We intend to continue to focus on the key elements of our strategy as
previously announced, which are as follows:
* Focus Exclusively on Pediatric Market. We are focused exclusively
on developing pharmaceuticals for children and promoting these
products to pediatricians, pediatric nurses and other pediatric
caregivers. The United States market for prescription
pharmaceutical products for children age 16 years and under was
estimated to be approximately $3.7 billion in 1997. We believe
that this market has been underserved in comparison with the
adult pharmaceutical market in terms of both development of
specially designed products and targeted promotion and represents
an attractive market opportunity.
* Select Products Based on Market Needs. We actively evaluate the
pediatric pharmaceutical industry on an ongoing basis to assess
product usage and to identify unmet medical needs of children,
particularly for prescription drugs for the most common pediatric
illnesses. As part of this program, we conduct focus groups with
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.
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* Establish Co-promotion or Other Marketing Arrangements for Third
Party Products. We intend to leverage our marketing and sales
capabilities, including our domestic sales force, by entering
into arrangements to promote third party pharmaceutical products
to pediatricians. As an example of this strategy, in November
1998, we entered into a promotion agreement with Warner-Lambert
Company under which we promote the broad-spectrum cephalosporin
antibiotic, Omnicef(R) (cefdinir), to pediatricians in the United
States.
* Obtain Competitive Protections. We seek competitive protections
for our products by applying for use or formulation patents on
our products and employing patented technologies in the
development of our products. In addition, following FDA approval
of any New Drug Application covering one of our products, we
intend to seek to take advantage of the three-year statutory
moratorium on the FDA's approval of an Abbreviated New Drug
Application covering a similar drug under the Drug Price
Competition and Patent Term Restoration Act of 1984, referred to
as the Waxman-Hatch Act. We also seek to keep important know-how
involved in the formulation and production of some of our
products confidential as a trade secret. Finally, we apply for
trademark registrations to protect the brand recognition of our
products.
TECHNOLOGIES
We have developed internally or acquired rights through in-licensing or
supply arrangements to a range of technologies which we use in our product
development efforts. These technologies include:
* Taste Masking. Taste masking involves the removal or masking of
an objectionable or unpleasant taste of various common
ingredients used in pediatric pharmaceuticals. We believe that a
drug's taste is a critical factor in pediatric patient
compliance, particularly when frequent dosing is required. We
have developed and patented a taste masking technology based on a
complex three-tiered system that entails dissolving a drug
through the addition of a polymer, adding carefully selected
debittering agents to neutralize the taste and then adding
pleasant flavors which are compatible with the physical
characteristics of the formulation. We are applying this taste
masking technology to liquid dosage forms of product candidates
because of the widespread use of liquids in the pediatric
pharmaceutical market. We believe that this technology also may
be applicable to solid dosage forms.
* Controlled-release. This technology involves coating an active
drug with certain substances in a manner that allows the drug to
be released in the patient at specific rates over time. The
controlled-release manufacturing procedures may also hide the
unpleasant taste of a drug. We have developed our own
controlled-release technology and have in-licensed
controlled-release technology from a third party. We are applying
these technologies to reduce the dosing frequency and, in some
cases, improve the taste of our products.
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* 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
developing or marketing. These products are described in more detail following
the table.
PRODUCT INDICATION STATUS(1) KEY FEATURES
Feverall acetaminophen Pain and fever Currently marketed Alternate form of administration
rectal suppositories
Pediamist nasal saline Nasal dryness Currently marketed Low pressure and volume
spray spray; reduced stinging
Omnicef (2) Infections Currently marketed Broad-spectrum antibiotic
pleasant tasting liquid
Primsol trimethoprim Acute middle ear NDA filed October 1996 Reduced toxicity profile;
solution (50mg strength) infections pleasant tasting liquid
Orapred syrup Inflammation, ANDAs filed July 1997 Significant taste improvement
including respiratory
problems
Feverall controlled-release Pain and fever NDA filed December 1997 Reduced dosing frequency;
sprinkles improved taste
Pediavent albuterol Asthma Phase 3 clinical trials Reduced dosing frequency;
controlled-release completed; NDA expected improved taste
suspension to be filed second quarter
of 1999
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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.
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 promotion agreement with Warner-Lambert Company.
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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.
Feverall Acetaminophen Rectal Suppositories
In July 1997, we began marketing the Feverall line of over-the-counter
acetaminophen rectal suppositories for the treatment of pain and fever. We
acquired this product line from Upsher-Smith Laboratories, Inc. in July 1997.
The Feverall product line, which Upsher-Smith originally introduced in 1989,
consists of four strengths, 80mg, 120mg, 325mg and 650mg. Acetaminophen rectal
suppositories are used in patients, primarily children or adolescents, who
cannot take acetaminophen orally as a result of regurgitation caused by
influenza or an inability to tolerate the taste of currently available liquid
forms of acetaminophen. The Feverall suppositories product line is covered by an
effective NDA. We had net product revenues in 1998 from sales of the Feverall
product line of $4,095,000.
In addition, under the acquisition agreement, we acquired the Feverall
trademark to use in connection with other acetaminophen products. For example,
we are currently developing acetaminophen controlled-release sprinkles, which we
intend to market as Feverall controlled-release sprinkles.
The purchase price for this product line and related assets, including
the Feverall trademark and related inventory, was $11,905,000, including
acquisition costs. Upsher-Smith has agreed to supply us with our requirements of
Feverall acetaminophen rectal suppositories, and we have agreed to purchase from
Upsher-Smith all amounts of this product as we may require, for a period of five
years. We are entitled to extend this five-year period for two additional five
year terms.
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Pediamist Nasal Saline Spray
Pediamist nasal saline spray is an over-the-counter product to relieve
nasal dryness associated with low humidity. This product is administered by a
metering device that we believe is particularly appropriate for use by children.
We began marketing Pediamist nasal spray in October 1997. We did not require FDA
approval to market this product in the United States. We had net product
revenues in 1998 from sales of Pediamist of $231,000.
Omnicef(R) (Cefdinir) Oral Suspension and Capsules
In February 1999, we began detailing Omnicef(R) (cefdinir) to
pediatricians in the United States under a promotion agreement with
Warner-Lambert Company, which has licensed this product from Fujisawa
Pharmaceutical Co., Ltd. Omnicef(R) (cefdinir) is a cephalosporin antibiotic for
the treatment of mild to moderate infections caused by susceptible strains of
microorganisms in the following conditions: acute otitis media (middle ear
infections), pharyngitis, tonsillitis, acute maxillary sinusitis and
uncomplicated skin and skin structure infections in children. Omnicef(R)
(cefdinir) oral suspension has been studied in clinical trials involving over
3,400 pediatric patients. It provides for once-a-day dosing for a majority of
its indications and is available in a strawberry flavored suspension.
Scott-Levin, a marketing research firm, estimates that sales of cephalosporin
oral suspension products in the United States were approximately $372 million in
1998.
We agreed with Warner-Lambert Company to detail Omnicef(R) (cefdinir)
oral suspension as part of our strategy to leverage our marketing and sales
capabilities, including our domestic sales force.
Primsol Trimethoprim Solution
We have developed Primsol trimethoprim solution, containing the
antibiotic trimethoprim, as a prescription drug for the treatment of middle ear
infections in children age six months to 12 years. Trimethoprim for the
treatment of middle ear infections in children is currently available only in
combination with the sulfa compound sulfamethoxazole, which is associated with
allergic reactions that may be severe or even fatal. In clinical trials, Primsol
solution, which does not contain this sulfa component, was shown to be as
effective for the treatment of middle ear infections in children as the
combination therapy, but with less side effects. Because of the reduced risk of
side effects, we believe that pediatricians will be more likely to prescribe
Primsol for the treatment of middle ear infections in children than other
trimethoprim formulations which contain sulfamethoxazole. The FDA is currently
reviewing an NDA relating to Primsol.
Acute infections are the most frequent illness treated by
pediatricians, and middle ear infections are the most common of these
infections. By three years of age, approximately 80% of children in the United
States have developed at least one ear infection. In 1998, there were
approximately 25,000,000 pediatric patient visits to doctors in the United
States for the treatment of middle ear infections.
A number of antibiotics are currently available for the treatment of
middle ear infections in children. Most pediatricians initially prescribe
amoxicillin, a form of penicillin, unless the patient is allergic to the drug or
the drug has previously failed to provide a
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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 plan to
market Primsol solution as a second line of therapy to amoxicillin and as an
alternative to trimethoprim/sulfamethoxazole combination products such as
Bactrim and Septra.
Scott-Levin estimates that the United States market for liquid
antibiotics for the treatment of middle ear infections in 1998 was approximately
$469,200,000, which includes approximately $48,900,000 from the sale of
amoxicillin (reflecting approximately 9,800,000 prescriptions), approximately
$22,000,000 from the sale of trimethoprim/sulfa combination products (reflecting
approximately 2,072,000 prescriptions) and approximately $398,300,000 from the
sale of other liquid antibiotics (reflecting approximately 11,580,000
prescriptions), including cephalosporins and macrolides. We believe that almost
all liquid antibiotics are taken by children.
We have formulated Primsol as an oral solution to facilitate its
administration to children. Because Primsol solution does not need to be shaken
prior to administration, it does not suffer from problems associated with
suspensions, such as dose inconsistency.
In December 1995, we completed multicenter Phase 3 clinical trials of
Primsol solution for the treatment of middle ear infections and uncomplicated
urinary tract infections in children age six months to twelve years. These
clinical trials, which included over 500 children, compared a 25mg strength of
Primsol solution with a commercially available trimethoprim/sulfamethoxazole
combination therapy. In these trials, Primsol solution was as clinically
effective as the combination therapy in alleviating the signs and symptoms
commonly associated with these types of infections. No statistically significant
differences were noted in response rates of valuable pediatric patients
receiving either Primsol solution or the combination therapy, and both types of
therapies had similar bacteriologic cure rates. However, fewer treatment related
side effects were reported with Primsol solution than with the combination
therapy, particularly a lower incidence of skin rash.
We filed two NDA's with the FDA in 1995 and 1996 covering 25mg and 50mg
strengths of Primsol solution, respectively. In June 1997, the FDA approved the
NDA for the 25mg strength of Primsol solution, which we do not currently plan to
market. In February 1998, we received a letter from the FDA citing certain
deficiencies in the NDA for the 50mg formulation. In August 1998, the FDA
notified us that additional clinical trials were necessary to evaluate the
safety of the 50mg formulation of Primsol solution, due to the inclusion in this
formulation of maltitol, an inactive ingredient. In September 1998, the FDA
indicated that these clinical trials would not be necessary if we removed
maltitol from the formulation. In December 1998, we filed an amendment to the
NDA for the 50mg formulation of Primsol solution removing maltitol. The FDA is
currently reviewing the amended NDA.
Under the Waxman-Hatch Act, the FDA may not approve a competitor's ANDA
for a generic version of the 25mg strength of Primsol solution for the treatment
of middle ear
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infections in children age six months to twelve years, which ANDA is based on
our clinical trial results, for a three-year period ending in June 2000.
Orapred Syrup
We are developing Orapred syrup as a prescription steroid for the
treatment of inflammation associated with a variety of diseases, principally
those of the respiratory system, such as asthma and bronchitis. Currently
available liquid steroid products for the treatment of these types of
inflammation have a very unpleasant taste. As a result of the unpleasant taste,
children frequently do not take these products as directed, even though they are
prescribed for the treatment of serious and, in some cases, life threatening
diseases. We have applied our taste masking technology to develop Orapred as a
steroid product with a pleasant taste.
IMS America, Ltd., a marketing research firm, estimates that in 1998
physicians in the United States wrote approximately 3,064,000 prescriptions for
liquid steroids, with pediatricians writing approximately 51% of these
prescriptions. IMS America also estimates that the 1998 United States market for
liquid steroids was approximately $44,000,000. We believe that almost all liquid
steroids are taken by children.
A number of currently available steroids, including prednisolone and
prednisone, are widely used in pediatrics because of the anti-inflammatory
properties of these drugs. Physicians generally prefer prednisolone and
prednisone to other products, due to the greater margin of safety of these two
drugs, and generally prefer prednisolone to prednisone because prednisolone is
more reliable, particularly if the patient suffers from certain liver disorders.
Orapred syrup contains the active ingredient prednisolone sodium phosphate which
is therapeutically identical to prednisolone. Liquid steroid brands are
currently available in 5mg/5ml and 15mg/5ml strengths. We are developing Orapred
syrup in both of these strengths.
In April 1997, we filed two ANDAs with the FDA covering two strengths
of Orapred. Each of these formulations contained maltitol as an inactive
ingredient. In October 1998, the FDA issued a deficiency letter on chemistry,
manufacturing and controls which cited certain deficiencies with both ANDAs,
including the inclusion of maltitol. The other deficiencies cited in the FDA's
letter related to minor manufacturing and controls issues. In December 1998, the
FDA indicated that we would not be required to conduct additional clinical
trials of the product if we removed maltitol from these formulations. In January
1998, we amended the ANDA for the stronger formulation of Orapred to remove
maltitol as an ingredient and to address the manufacturing and controls issues
raised by the FDA.
Feverall(R) Controlled-Release Sprinkles
We are developing Feverall controlled-release sprinkles as an
over-the-counter acetaminophen product for the treatment of pain and fever in
children which can be administered by sprinkling on soft food. We have designed
this product to permit dosing every eight hours, rather than the four hours
required by currently available products.
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A number of acetaminophen products are currently available for the
treatment of pain and fever in children. Most of these products are in the form
of a liquid or chewable tablet. FIND/SVP, a marketing research firm, estimates
that approximately $300,000,000 of pediatric forms of pain/fever medications are
sold in the United States annually. The product with the largest market share in
the United States is Tylenol liquid for children. None of the pediatric products
currently on the market is available in a controlled-release formulation. These
products are absorbed quickly from the gastrointestinal tract into the blood and
quickly cleared from the body, which necessitates dosing every four hours. If
these products are administered at bedtime, the patient needs an additional dose
before morning. If they are administered during the day, parents often must rely
on school nurses or day care providers to administer additional medication later
in the day. In addition, under the applicable FDA OTC Monograph, only five doses
of acetaminophen may be given in any 24-hour period. Therefore, if the
medication requires four hour dosing, treatment may only be given for 20 hours
in each 24-hour period.
We are developing Feverall sprinkles with a proprietary
controlled-release technology that releases the acetaminophen at specific rates
over time in order to reduce fever and pain for an eight hour period. We believe
that dosing every eight hours may significantly increase compliance and permit
therapeutic coverage for the full 24-hours of each day. To facilitate
administration, we have formulated this product in the form of small beads that
either can be sprinkled on a food that is appealing to the child, such as
applesauce, or delivered in a liquid, such as water.
We have completed three Phase 1 definitive pharmacokinetic trials
comparing Feverall sprinkles to Tylenol extended relief caplets and immediate
release Tylenol tablets. These trials involved 63 healthy adults. In these
trials, Feverall sprinkles exhibited equivalent bioavailability to the Tylenol
product to which they were compared.
In December 1996, we completed a Phase 3 clinical trial that evaluated
Feverall sprinkles for the reduction of dental pain. This study involved 125
adults and adolescents and was double blinded, placebo and active controlled.
Each patient received a single dose over an eight-hour period. The data from
this study indicated that, for an eight hour period, Feverall sprinkles provided
pain relief superior to a placebo and comparable to Tylenol extended relief
caplets.
In February 1997, we completed a second Phase 3 clinical trial of this
product for the treatment of fever in children. This study involved 125 children
with a fever between the ages of two and 11 years old. In this second Phase 3
clinical trial, we compared Feverall sprinkles on a double blinded basis to an
immediate release presentation of acetaminophen for efficacy (reduction in
fever) and safety. The data from this study indicated that Feverall sprinkles
provided fever control over an eight hour period comparable to the fever control
provided by the immediate release presentation of acetaminophen and that, during
the fourth to sixth hours of treatment, the fever control provided by the
Feverall sprinkles was more effective than the fever control provided by the
immediate release acetaminophen.
We filed an NDA for Feverall sprinkles in December 1997. In December
1998, the FDA issued a not-approvable letter covering this NDA which cited
deficiencies relating to
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the manufacture and packaging of this product. The letter also indicated that
the clinical trials of Feverall sprinkles did not demonstrate adequate duration
of action and that the product should only be used in patients older than two
years of age. We are currently in discussions with the FDA regarding these
issues.
The FDA must approve the NDA covering Feverall sprinkles for us to
market this product in the United States. We expect to submit a request to the
FDA for three years of protection under the Waxman-Hatch Act against the
approval of a competitor's ANDA for a generic version of Feverall sprinkles for
the treatment of pain and fever in children under 12 years of age which ANDA is
based on our clinical trial results.
Pediavent Albuterol Controlled-Release Suspension
We are developing Pediavent albuterol controlled-release suspension as
a prescription product for the treatment of asthma. We are developing this
product to mask the normal bitterness of albuterol and to permit twice-a-day
administration. Asthma is the leading cause of pediatric hospital admissions. It
is a debilitating disease that causes swollen and inflamed airways that are
prone to constrict suddenly and violently. Asthmatic attacks can be
life-threatening and, in some cases, fatal.
A common treatment for asthma is the administration of drugs which
dilate the bronchial tubes, known as bronchodilators, of which albuterol is the
most widely prescribed. IMS America estimates that the 1998 U.S. pediatric
market for all forms of beta agonists was approximately $159,700,000, with
liquid forms comprising approximately 10.6% of this market ($17,000,000).
Albuterol is available in various dosage forms, including tablets and liquids
(which are generally used for chronic administration) and inhalers (which are
generally used for acute incidents). Young children do not typically use tablet
formulations, as they are difficult to swallow and must be administered every
four or eight hours. The only currently available controlled-release tablet
(Volmax) is not approved for use in patients under 6 years of age. Patients
under 6 years of age must therefore use either an inhaler or liquid albuterol,
which generally has an unpleasant taste and must be administered three to four
times per day.
We are developing Pediavent as a suspension in the form of granules
which contain albuterol in a coating. The coating allows the albuterol to be
released at a specific controlled rate and masks the normal bitterness of the
drug. To enhance patient compliance, we are designing this product for
twice-a-day administration. Twice-a-day dosing also avoids waking a child at
night to administer medication.
In 1995, we conducted Phase 1 open-label, single dose studies of
Pediavent in Europe comparing its profile in humans with that of Volmax. These
studies involved 12 healthy adult subjects at one site. The results of this
study indicated that the two formulations of Pediavent were indistinguishable
from Volmax in terms of blood levels, which is an indicator of the effectiveness
of the drug. In February 1997, we conducted a Phase 1 clinical trial in the
United States involving 12 healthy adults which confirmed the results of the
European study.
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In October, 1998, we completed Phase 3 clinical trials of Pediavent to
evaluate control of asthma symptoms, lung efficiency and safety in children with
asthma. The study was a multi-center, open label, comparative study performed in
63 children, ages two to six, with chronic asthma. For a one month period,
patients received either Pediavent suspension twice daily or an immediate
release form of albuterol, three times daily. The parents of each patient
monitored their status daily and a physician examined each patient weekly.
Parent and physician evaluation indicated that Pediavent suspension, taken twice
daily, is as safe and effective in controlling asthma in children as the
immediate release form of albuterol, taken three times daily.
We expect to file an NDA for the current formulation of Pediavent in
the second quarter of 1999. Late stage review of the current formulation of
Pediavent showed the inclusion of a grade of an inactive coating material, known
as glycerol monostearate, that may not be acceptable for internal use. Following
the filing of an NDA for the current formulation of Pediavent, we plan to
replace this ingredient with an acceptable grade of glycerol monostearate and
amend the NDA to account for this change.
The FDA must approve an NDA covering Pediavent for us to market this
product in the United States. We expect to submit a request to the FDA for three
years of protection under the Waxman-Hatch Act against the approval of a
competitor's ANDA for a generic version of Pediavent for the treatment of asthma
in children under 12 years of age which ANDA is based on our clinical trial
results.
Other Programs
In addition to the products and product development programs described
above, we also are developing a number of other pediatric pharmaceutical
products, including:
Cough/Cold and Other OTC Products. We are developing a line of improved
flavor over-the-counter cough/cold products. Many of the over-the-counter
products for the treatment of coughs and congestion due to colds and influenza
contain the active ingredient dextromethorphan (a cough suppressant) or the
decongestant pseudoephedrine, which both have a bitter taste. We are applying
our taste masking technology to the development of a line of cough/cold products
containing these active ingredients in formulations with improved taste.
We have already completed the development of a cough syrup containing
guaifenesen, a drug known to loosen phlegm. In a taste study involving 81
children age three to six years comparing our cough syrup to Robitussin, a
leading liquid guaifenesen product, the participants showed a statistically
significant preference for our product over Robitussin.
We believe that it is preferable to introduce our cough/cold products
to the market as an integrated product line. Accordingly, we do not plan to
introduce our guaifenesen cough syrup until we have completed development of
additional products, which we estimate will occur no sooner than late 2000.
Because these products are being formulated
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within the applicable FDA OTC Monographs, we expect that they will not require
FDA approval prior to marketing.
Cromolyn Products. We are developing two cromolyn products for the
treatment of allergic reactions.
* A cromolyn sodium cream for symptoms associated with moderate to
severe contact dermatitis caused by exposure to poison ivy or
oak, insect bites and bee stings and other allergic and
non-allergic reactions.
* A cromolyn sodium controlled-release nasal spray for the
prevention of allergic rhinitis associated with conditions such
as hay fever.
Cromolyn is a drug that is believed to reduce selected allergic reactions. The
FDA must approve an NDA covering these products for us to market them in the
United States. We would sell both of these products on a prescription basis.
PRODUCT DEVELOPMENT
We actively evaluate the pediatric pharmaceutical industry on an
ongoing basis to assess product usage and to identify unmet medical needs of
children, particularly for prescription drugs for the most common pediatric
illnesses.
We generally select as product candidates commonly-prescribed
off-patent pharmaceuticals that we believe we may improve and successfully
commercialize through the application of our technologies and reformulation
expertise. By developing products based on approved compounds rather than new
chemical entities, we believe that we can reduce regulatory and development
risks and shorten the product development cycle.
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, 1999, our sales
force consisted of six regional sales managers, 59 full-time sales
representatives and 24 flex-time (or part-time) sales representatives. The
primary focus of the our marketing and sales efforts are pediatricians and
pediatric nurses who are responsible for most prescriptions written for children
in the United States and play a central role in recommending over-the-counter
medications for children.
We chose to establish our own domestic sales force instead of using
third party sales organizations because we believe that we can more efficiently
and effectively implement marketing and sales initiatives through a direct sales
force. We believe that we can reach much of the domestic pediatric market with a
moderately sized sales force and carefully controlled marketing expenditures,
because pediatricians and pediatric nurses are generally concentrated in group
practices in urban and suburban centers. We plan to expand this sales force in
the future as we introduce additional products.
Our sales representatives conduct personal sales calls and attend
industry conferences, seminars and other meetings. We advertise our products
through direct mail and advertisements in speciality pediatric journals. We plan
to supplement these activities with a telemarketing program designed to reach
pediatricians and pediatric nurses in geographic areas beyond the coverage of
our sales force or who are not targeted for one-on-one visits.
Because more than 60% of patients are covered by a managed care
program, such as a health maintenance organization, preferred provider
organization or state Medicaid program, we also promote our products directly to
managed care providers with the goal of obtaining inclusion of these products on
the providers' formularies.
We leverage our marketing and sales capabilities by entering into
arrangements to promote third party pharmaceutical products to pediatricians.
During the quarter ended March 31, 1998, we began marketing Duricef(R)
(cefadroxil monohydrate) oral suspension to pediatricians in the United States
under a co-promotion agreement with Bristol-Myers Squibb U.S. Pharmaceuticals
Group. We terminated this agreement effective December 31, 1998. In November
1998, we entered into a promotion agreement with Warner-Lambert Company under
which we promote the broad-spectrum cephalosporin antibiotic, Omnicef(R)
(cefdinir), which Warner-Lambert Company licenses from Fujisawa Pharmaceutical
Co., Ltd., to pediatricians in the United States. 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.
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The production of most of these products involves known manufacturing
techniques, although we have developed certain proprietary manufacturing
technologies that we seek to protect as trade secrets.
We believe that a number of third party manufacturers, both in the
United States and abroad, are capable of manufacturing our products. We intend
to establish supply agreements with manufacturers that comply with the FDA's
Good Manufacturing Practices and other regulatory standards. Certain of our
supply arrangements require us to buy all of our requirements of a particular
product exclusively from one supplier. Moreover, FDA regulations provide that a
manufacturer cannot supply a product to us, and we cannot sell the product,
unless the manufacturer is properly qualified (i.e., demonstrates to the FDA
that it can manufacture the product in accordance with applicable regulatory
standards). For many of our products, we have qualified only one supplier, even
though the contractual arrangement with the supplier may permit us to qualify an
alternative manufacturer.
To date, we have entered into several agreements with third parties for
the manufacture of our products. In particular, we are a party to a supply
agreement with Lyne Laboratories, Inc. which provides as follows:
* Lyne has agreed to manufacture Primsol solution;
* we have agreed to purchase all amounts of such product as we may
require for sale in the United States from Lyne in accordance
with an agreed upon price schedule; and
* the agreement may be terminated by either party on three months'
notice any time after October 17, 2004.
We have also entered into an agreement with Recordati S.A. Chemical and
Pharmaceutical Company relating to the manufacture of Pediavent albuterol
controlled-release suspension and an agreement with Upsher-Smith relating to the
manufacture of Feverall acetaminophen rectal suppositories.
In the future, we may establish our own manufacturing facilities if it
becomes economically attractive to do so. In order for us to establish a
manufacturing facility, we would require substantial additional funds and
significant additional personnel. In addition, we would need to comply with the
FDA's extensive manufacturing regulations.
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.
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COMPETITION
Competition in the pediatric pharmaceutical market is intense. Although
we believe that no competitor focuses its commercial activities and research and
development efforts exclusively on the pediatric pharmaceutical market, several
large pharmaceutical companies with significant research, development, marketing
and manufacturing operations market pediatric products. These competitors
include:
* Glaxo Wellcome Inc.;
* Eli Lilly and Company;
* Bristol-Myers Squibb, Inc.;
* Ortho-McNeil Pharmaceutical Division of Johnson & Johnson Inc.;
* Pfizer Inc.;
* Ross Laboratories Division of Abbott Laboratories Inc.;
* Schering-Plough Corporation; and
* Wyeth-Lederle Vaccines and Pediatrics Division of American Home
Products, Inc.
We believe that key competitive factors affecting our success include:
* the efficacy, side effect profile, taste, dosing frequency,
method of administration;
* patent or other proprietary protection;
* brand name recognition;
* price;
* timing of market introduction of our or competitive products;
* the relative speed with which we can develop products, complete
the clinical trials and approval processes and supply commercial
quantities of the products; and
* ability to attract and retain qualified personnel.
Many of our potential competitors have substantially greater name
recognition and greater financial, technical and human resources. In addition,
many of these competitors have significantly greater experience than us in
undertaking preclinical testing and human
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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 expect to market many of our product candidates as alternative
treatments for pediatric indications for which products with the same active
ingredient are well-entrenched in the market. For example, we intend to market
Primsol solution, a trimethoprim antibiotic, for the treatment of middle ear
infections, for which pediatricians often prescribe the well-known combination
therapies Bactrim and Septra, which also contain trimethoprim. Similarly,
Feverall controlled-release sprinkles would compete against Tylenol liquid for
children. Our product candidates also will compete with products that do not
contain the same active ingredient but are used for the same indication and are
well entrenched within the pediatric market. For example, Primsol solution will
also compete against other antibiotics, including amoxicillin. Moreover, many of
our potential products that are reformulations of existing drugs of other
manufacturers may have significantly narrower patent or other competitive
protection.
LICENSE AND MARKETING AGREEMENTS
We have obtained rights to manufacture and/or market certain products
or product candidates through licenses and other arrangements with third
parties. Set forth below is a summary of those arrangements that we believe are
material to our business.
Recordati License. We have obtained a license from Recordati S.A.
Chemical and Pharmaceutical Company under their patents and patent applications
to clinically test, register, market, distribute and sell a controlled-release
suspension system formulation of albuterol in the form of coated granules, which
we are developing as Pediavent. The license is exclusive in all countries other
than Italy and Spain. Our license rights under this agreement will terminate
with respect to a particular country if (a) we do not notify Recordati within
two years of filing for FDA marketing approval of Pediavent of our intention to
pursue the commercial development of Pediavent in such country or (b) a joint
development committee determines that the commercial development of Pediavent in
such country is not technically feasible. We may also sublicense our license
rights under this agreement, subject to certain restrictions in certain
countries. We have agreed to collaborate with Recordati on the development,
clinical testing and regulatory approval of Pediavent in the United States and
in any other country in which we elect to pursue its commercial development.
Recordati will own any intellectual property resulting from the collaboration
other than our clinical research data, product applications and regulatory
approvals. This agreement expires 15 years from the date of FDA marketing
approval of Pediavent. We are entitled to extend the agreement, at our election,
for an additional five year term. During
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the term of this agreement, Recordati has agreed to supply us with such
quantities of the product as we may require. In return, we have agreed to pay
Recordati certain up-front license fees and to purchase the product from
Recordati at unit prices based upon net sales in a given country. During the
term of this agreement, we have also agreed not to develop, manufacture or sell
competing products.
Omnicef(R) (Cefdinir) Promotion Agreement. We have entered into a
promotion agreement with Warner-Lambert Company under which we have agreed to
promote Omnicef(R) (cefdinir) oral suspension to pediatricians in the United
States. Omnicef(R) (cefdinir) is licensed by Warner-Lambert Company from
Fujisawa Pharmaceutical Co., Ltd. As compensation for our promotional efforts,
Warner-Lambert Company has agreed to pay us compensation on an annual basis
which is subject to upward or downward adjustment based upon the achievement of
specified performance-based targets. The agreement also contains obligations
with respect to the number of sales representatives in Ascent's sales force. The
term of the agreement expires on January 31, 2001, unless terminated earlier
under specified circumstances.
The licenses and other third party product arrangements to which we are
a party may impose various commercialization, sublicensing, royalty and other
payment, insurance and other obligations on us. Any failure by us to comply with
these requirements could result in termination of the applicable agreement,
which could adversely affect our business.
PATENTS, TRADE SECRETS, LICENSES AND TRADEMARKS
We believe that our success will depend in part on our ability to
develop patentable products and obtain patent or other proprietary rights
protection for our products, both in the United States and in other countries.
Our policy is to file patent applications to protect technology, inventions and
improvements that are considered novel and important to the development of our
business. We also rely on trade secrets, know-how, continuing technological
innovation and licensing opportunities to develop and maintain our competitive
position. We also plan to seek three year protection for certain products under
the Waxman-Hatch Act from the approval of a competitor's ANDA for a generic
version of one of our products which ANDA is based on our clinical trial
results. We also seek and intend to continue to seek trademark protection for
our brand names.
We hold 11 issued United States patents and have filed three additional
United States patent applications. These patents and patent applications
primarily relate to the following:
* Formulation of Primsol solution (1 patent);
* Cromolyn sodium cream product candidate (5 patents);
* Controlled-release technology (1 patent and 2 applications); and
* Task-masking technology (1 patent and 1 application).
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Three of the issued patents relate to product candidates which we
currently are not planning to pursue. We have also sought foreign patent
protection in other major industrial countries for what we believe are our most
commercially important technologies. All of our issued United States and foreign
patents expire from 2002 to 2016, although we may extend certain United States
patents for specified periods. Any of our United States and foreign patents
could lapse if certain maintenance fees are not paid.
The patent positions of pharmaceutical firms are generally uncertain
and involve complex legal and factual questions. Consequently, even though we
currently are prosecuting our patent applications with the United States Patent
and Trademark Office and certain foreign patent authorities, we do not know
whether any of our remaining applications will result in the issuance of any
patents or, if any patents are issued, whether they will provide significant
proprietary protection or will be circumvented or invalidated. Since our
products and product candidates represent reformulations of off-patent drugs,
any patents which cover such products would be use or formulation patents, which
will provide us with a significantly narrower level of protection than a patent
on the active ingredient itself. Since patent applications in the United States
are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months or years, we cannot be certain that we were the
first creator of inventions claimed by pending patent applications or that we
were the first to file patent applications for such inventions. Generally, in
the United States, the first to invent is entitled to the patent, whereas in the
European Economic Community, the first to file is entitled to the patent. Our
competitors and other third parties hold issued patents and pending patent
applications relating to aspects of our technology, and it is uncertain whether
these patents and patent applications will require us to alter our products or
processes, pay licensing fees or cease activities.
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.
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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;
* 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:
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* the drug have the same active ingredient, dosage form, route of
administration, strength and conditions of use as a "pioneer"
drug that was previously approved by the FDA as safe and
effective;
* any applicable patents and statutory period of protection under
the Waxman-Hatch Act with respect to the "pioneer" drug have
expired.
Through a petition process, the FDA may permit the filing of an ANDA
for a generic version of an approved "pioneer" drug with variations in active
ingredient, dosage form, route of administration and strength (but not in
conditions of use). The FDA will not permit the filing of an ANDA, however, and
will instead require an applicant to file an NDA, if, among other reasons, (a)
clinical investigations must be conducted to demonstrate the safety and
effectiveness of the drug, (b) an ANDA would provide inadequate information to
permit the approval of the variation or (c) significant labelling changes would
be necessary to address new safety or effectiveness concerns raised by changes
in the product.
Preclinical tests include laboratory evaluation of product chemistry
and animal studies to gain preliminary information of a product's pharmacology
and toxicology and to identify any safety problems that would preclude testing
in humans. Preclinical safety tests must be conducted by laboratories that
comply with FDA regulations regarding Good Laboratory Practice. The results of
the preclinical tests are submitted to the FDA as part of an IND application.
The FDA reviews these results prior to the commencement of human clinical
trials. Unless the FDA objects to, or makes comments or raises questions
concerning, an IND, the IND will become effective 30 days following its receipt
by the FDA, at which time initial clinical studies may begin.
However, companies often obtain affirmative FDA approval before beginning such
studies.
Clinical trials involve the administration of the investigational new
drug to healthy volunteers and to patients under the supervision of a qualified
principal investigator. The sponsor must conduct the clinical trials in
accordance the FDA's Good Clinical Practice requirements under protocols that
detail, among other things, the objectives of the study, the parameters to be
used to monitor safety and the effectiveness criteria to be evaluated. The
sponsor must submit each protocol to the FDA as part of the IND. Further, the
sponsor must conduct each clinical study under the auspices of an Institutional
Review Board, or IRB. The IRB will consider, among other things, ethical
factors, the safety of human subjects, the possible liability of the institution
and the informed consent disclosure which must be made to participants in the
clinical trial.
Clinical trials are typically conducted in sequential phases, although
the phases may overlap.
* Phase 1. In Phase 1, the investigational new drug usually is
administered to between 10 and 50 healthy human subjects and is
tested for safety, dosimetry, tolerance, metabolism,
distribution, excretion and pharmacokinetics.
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* Phase 2. Phase 2 involves studies in a limited patient
population, usually 10 to 70 persons, to evaluate the
effectiveness of the investigational new drug for specific
indications, determine dose response and optimal dosage and
identify possible adverse effects and safety risks.
* Phase 3. When an investigational new drug is found to have an
effect and to have an acceptable safety profile in Phase 2
evaluation, Phase 3 trials are undertaken to further test for
safety, further evaluate clinical effectiveness and to obtain
additional information for labelling. Phase 3 trials involve an
expanded patient population at geographically dispersed clinical
study sites.
The FDA may impose a clinical hold on an ongoing clinical trial at any
time if it believes that the clinical trial exposes the participants to an
unanticipated or unacceptable health risk. In addition, we may voluntarily
suspend clinical trials for the same reasons. If the FDA imposes a clinical
hold, clinical trials may not recommence without prior FDA authorization and
then only under terms authorized by the FDA.
In order to obtain marketing approval of a product in the United
States, we must submit an NDA to the FDA. The NDA includes the results of the
pharmaceutical development, preclinical studies, clinical studies, chemistry and
manufacturing data and the proposed labelling. The FDA may refuse to accept the
NDA for filing if certain administrative and NDA content criteria are not
satisfied. Even after accepting the NDA for review, the FDA may require
additional testing or information before approving the NDA. The FDA must deny an
NDA if applicable regulatory requirements are not ultimately satisfied. If the
FDA grants regulatory approval of a product, it may require post-marketing
testing and surveillance to monitor the safety of the product or may impose
limitations on the indicated uses for which the product may be marketed.
Finally, the FDA may withdraw product approvals if compliance with regulatory
standards is not maintained or if problems occur following initial marketing.
A pharmaceutical product that has the same active ingredient as a drug
that the FDA has previously approved as safe and effective may be approved for
marketing in the United States following an abbreviated approval procedure
(subject to certain exclusions, such as drugs that are still protected by patent
or market exclusivity under the Waxman-Hatch Act). This procedure involves
filing an Abbreviated New Drug Application with the FDA. Approval of a
pharmaceutical product through an ANDA does not require preclinical tests on
pharmacology or toxicology or Phase 1, 2 or 3 clinical trials to prove the
safety and effectiveness of such product. Instead, an ANDA is based upon a
showing of bioequivalence with the "pioneer" drug and adequate manufacturing.
Therefore, compared to an NDA, the filing of an ANDA may result in reduced
research and development costs associated with bringing a product to market.
If an applicant files an ANDA for a pharmaceutical product where the
"pioneer" drug is protected by a patent, the applicant must notify the patent
holder of the filing of the ANDA. If the patent holder files a patent
infringement suit against the applicant within 45 days of this notice, any FDA
approval of the ANDA can not become effective until the
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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 products, such as guaifenesen cough syrup, fall within
the FDA's OTC Monograph system. We may market these products without FDA
approval of an NDA or ANDA, provided they comply with the specifications set
forth in the OTC Monograph for the applicable product category. OTC drugs must
also be manufactured in compliance with Good Manufacturing Procedures, but
premarket approval is not required.
In addition to product approval, we must obtain a satisfactory
inspection by the FDA covering our manufacturing facilities or the facilities of
our suppliers before marketing a product in the United States. The FDA will
review the manufacturing procedures and inspect the manufacturer's facilities
and equipment for compliance with Good Manufacturing Practices and other
requirements. Any material change in the manufacturing process, equipment or
location necessitates additional preclinical and/or clinical data and additional
FDA review and approval before marketing. In addition, the FDA must
supplementally approve any changes in manufacturing that have substantial
potential to adversely affect the safety or effectiveness of the product, such
as changes in the formulation of a drug, as well as some changes in labeling or
promotion.
Even after approval, all marketed products and their manufacturers are
subject to continual government review. Subsequent discovery of previously
unrecognized problems or failure to comply with applicable regulatory
requirements could result in, among other things, restrictions on manufacturing
or marketing of the product, product recall or withdrawal, fines, seizure of
product, or civil or criminal prosecution, as well as withdrawal or suspension
of regulatory approvals.
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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, 1999, we had 97 full-time employees. Eleven of these
employees are engaged in product development and quality control, including
medical and regulatory affairs, 73 are employed in sales and marketing and 13
are employed in finance, business development and general and administrative
activities. In addition, as of March 1, 1999, we had 24 flex-time employees, all
of whom are employed in sales and marketing. Many of our management and
professional employees have had prior experience with pharmaceutical,
biotechnology or medical products companies. None of our employees is covered by
a collective bargaining agreement, and management considers relations with our
employees to be good.
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 1998.
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, 1999.
NAME AGE POSITION
---- --- --------
Executive Officers
Emmett Clemente, Ph.D. (1).................. 60 Chairman of the Board
Alan R. Fox (1)............................. 54 President, Chief Executive Officer and
Director
Gregory A. Vannatter........................ 46 Vice President, Marketing and Business
Development
Timothy K. Moffitt.......................... 34 Vice President, Sales
John G. Bernardi ........................... 44 Vice President, Finance and Treasurer
Significant Employees
Mumtaz Ahmed, M.D., Ph.D.................... 62 Vice President, Medical Affairs
William E. Brochu, Ph.D .................... 53 Vice President, Regulatory and Quality
Affairs
Bobby R. Owen............................... 50 Vice President, Operations
Diane Worrick............................... 46 Senior Director of Human Resources
- -------------------
(1) See "Item 10 -- Directors and Executive Officers of the Registrant --
Directors" for the principal occupation and business experience of Dr. Clemente
and Mr. Fox during the past five years.
Gregory A. Vannatter, Vice President, Marketing and Business Development,
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 B.S. in marketing from Ball State University and an M.B.A.
from Indiana University.
Timothy K. Moffitt, Vice President, Sales, joined Ascent in 1997. Mr.
Moffitt served in various sales positions with G.D. Searle & Co, a
pharmaceutical company, from 1987 to 1997, including most recently Director,
Strategic Operations from 1996 to 1997, National Sales Director, LTC/Hospital
Markets from 1994 to 1996, National Director, Managed Care from 1993 to 1994,
and Regional Manager from 1991 to 1993. Mr. Moffitt received a B.S. in
biology/chemistry from Bradley University.
John G. Bernardi, Vice President, Finance, joined Ascent in June 1996.
Mr. Bernardi acted as an independent financial consultant from 1995 to June
1996. From 1990 to 1995, Mr. Bernardi served as the Vice President of
Administration and Finance for Vision-Science, Inc., a medical device company.
Mr. Bernardi received a B.S. in accounting from Bentley College and an M.B.A.
from New Hampshire College.
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 B.S. in biology and
chemistry and an M.S. 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.
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
B.S. and M.S. 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 B.S. in chemistry from the University of Alabama.
Diane Worrick, Senior Director 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
Since May 30, 1997, Ascent's common stock has traded on the Nasdaq National
Market under the symbol "ASCT". Prior to May 30, 1997, there was no established
public trading market for Ascent's common stock. The following table sets forth
the high and low sales prices per share of the Ascent common stock for the
periods indicated below as reported on the Nasdaq National Market.
PERIOD HIGH LOW
1997
- ----
Second Quarter (from May 30, 1997) $10.250 $8.500
Third Quarter $10.250 $6.125
Fourth Quarter $ 9.875 $4.000
1998
- ----
First Quarter $ 6.875 $3.3125
Second Quarter $ 4.875 $1.375
Third Quarter $ 3.6875 $1.625
Fourth Quarter $ 5.25 $1.0938
The reported closing price of the Ascent common stock on the Nasdaq National
Market on March 23, 1999 was $2.813. There were approximately 162 stockholders
of record at March 23, 1999.
Ascent has never declared or paid cash dividends on its common stock and
does not expect to pay cash dividends on its common stock in the foreseeable
future. Ascent is currently prohibited from paying cash dividends under the
terms of the 8% subordinated notes (the "Furman Notes") issued in the original
aggregate principal amount of $9,000,000 on June 1, 1998 to funds affiliated
with ING Furman Selz Investments and BancBoston Ventures. See "Item 13 --
Certain Relationships and Related Transactions." Ascent is also currently
prohibited from paying cash dividends under the terms of the Alpharma loan
agreement which is described in "Item 7 -- Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
During the three-month period ended December 31, 1998, Ascent did not sell
any securities that were not registered under the Securities Act of 1933, as
amended (the "Securities Act").
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ITEM 6. SELECTED FINANCIAL DATA
The table below summarizes recent financial information for the Company.
For further information, refer to Part II, Item 8, Financial Statements and
Supplementary Data.
Selected Financial Data
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- --------
Product revenue, net........................ $ 4,476 $ 2,073 $ -- $ -- $ --
Licensing Revenue........................... -- -- -- 304 --
Gross margin................................ 2,169 828 -- 304 --
Loss from operations........................ (16,213) (11,854) (6,566) (4,214) (3,692)
Extraordinary item(1)....................... 1,166 -- -- -- --
Net loss.................................... (18,231) (12,498) (6,487) (4,101) (3,545)
Net loss to common stockholders............. (18,680) (12,745) (6,625) (4,163) (3,545)
Net loss per common share
Basic and diluted......................... $ (2.69) $ (3.08) $ (33.44) $ (21.05) $ (17.93)
DECEMBER 31,
------------------------------------------------
1998 1997 1996 1995 1994
------- ------- -------- -------- --------
Cash, cash equivalents and current
marketable securities .................... $ 2,172 $14,229 $ 2,086 $ 2,538 $ 2,171
Working capital ............................ 468 4,242 525 2,231 1,966
Total assets(2) ............................ 16,301 28,433 2,628 2,750 2,466
Long term subordinated secured notes,
net of current portion ................... 8,681 1,252 -- -- --
Redeemable Convertible Preferred Stock,
Series D, Series E and Series F(3) ....... -- -- 17,832 12,557 8,157
Convertible Exchangeable Preferred Stock,
Series G.................................. 6,461 -- -- -- --
Total equity ............................... 3,803 15,515 (16,778) (10,158) (5,995 )
No common stock 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, the Company accelerated the
accretion of the discount of $842,000. In addition, $325,000 of unamortized debt
issue costs were written off.
(2) 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 towards the "Feverall"
trademark acquired in the transaction, the manufacturing agreement entered into
in connection with the transaction and goodwill.
(3) All then outstanding preferred stock was converted to common stock at the
initial public offering in May 1997.
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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. Ascent
terminated this agreement effective as of December 31, 1998.
Ascent has incurred net losses since its inception and expects to incur
additional operating losses at least through 1999 as it continues its product
development programs, maintains its sales and marketing organization and
introduces products to the market. Ascent expects cumulative losses to increase
over this period. Ascent has incurred a deficit from inception through December
31, 1998 of $51,059,000.
RESULTS OF OPERATIONS
FISCAL YEAR 1998 VS. FISCAL YEAR 1997
Revenue: Ascent had net revenue of $4,476,000 for the year ended
December 31, 1998 compared with revenue of $2,073,000 for the year ended
December 31, 1997. This increase in revenue of $2,403,000 was primarily
attributable to (i) increased sales of Feverall of $2,120,000 over the prior
year due to twelve months of sales being recognized in 1998 versus only six
months of sales being recognized in 1997, (ii) sales of Pediamist nasal saline
spray, which was not introduced until the fourth quarter of 1997, and (iii)
revenues under the Duricef co-promotion agreement which commenced on February 6,
1998.
Cost of Sales: Cost of sales was $2,307,000 for the year ended December
31, 1998 compared with $1,246,000 for the year ended December 31, 1997. This
increase in cost of sales of $1,061,000 was primarily a result of (i) $637,000
for the manufacturing cost associated with the production of the Feverall and
Pediamist products for a full year, (ii) an increase in net realizable value
adjustments of $95,000 to inventory, (iii) the amortization of an additional six
months in 1998 of $167,000 for the Feverall manufacturing agreement, and (iv)
increased operational support personnel costs of $134,000 in 1998.
Selling, General and Administrative Expenses: Ascent incurred selling,
general and administrative expenses of $14,514,000 for the year ended December
31, 1998 compared
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with $8,305,000 for the year ended December 31, 1997, representing an increase
of $6,209,000.
Selling and marketing expenses were $9,558,000 for the year ended
December 31, 1998 compared with expenses of $5,739,000 for the year ended
December 31, 1997. This increase in selling and marketing expenses of $3,819,000
was primarily the result of (i) increased personnel expenses of approximately
$4,024,000 associated with the hiring of Ascent's field sales organization, (ii)
increased marketing and distribution expenses of $491,000 associated with the
introduction of Ascent's first two product offerings, Feverall and Pediamist,
and partly offset by (iii) decreased marketing expenses of $696,000 due to a
corporate marketing program that was run during 1997 and was not repeated in
1998.
General and administrative expenses were $4,956,000 for the year ended
December 31, 1998 compared with expenses of $2,566,000 for the year ended
December 31, 1997. The increase in general and administrative expenses of
$2,390,000 was due primarily to (i) increased amortization expenses for a full
year in 1998 versus a half year in 1997 of intangible assets of $234,000 related
to the Feverall trademark and goodwill, (ii) increased support personnel cost of
$988,000 associated with the initial commercialization of Ascent's first two
products, (iii) increased legal, accounting and investor relations costs of
$375,000 associated with being a publicly-traded company for a full year, (iv)
increased insurance expenses of $191,000, and (v) $124,000 in increased rent and
utility expense related to the expansion of its facilities in 1998.
Research and Development: Ascent incurred research and development
expense of $3,868,000 for the year ended December 31, 1998 compared with
$4,377,000 for the year ended December 31, 1997. The decrease of $509,000 was
primarily due to (i) $248,000 in reduced spending in the Just for Kids Vitamins
Drops and the Feverall ER acetaminophen beaded product R&D programs and (ii) a
decrease of $274,000 in clinical trials for Ascent's Feverall ER acetaminophen
beaded product which were conducted during 1997.
Interest: Ascent had interest income of $369,000 for the year ended
December 31, 1998 compared with interest income of $693,000 for the year ended
December 31, 1997. The decrease of $324,000 was primarily due to a lower average
cash investment balance. Ascent had $1,221,000 in interest expense for the year
ended December 31, 1998 compared to $1,359,000 for the year ended December 31,
1997, a decrease of $138,000. The decrease was attributable to the repayment on
June 1, 1998 of the Triumph subordinated secured notes with the proceeds of the
subordinated notes issued in the Series G financing, which notes had a lower
effective interest rate.
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FISCAL YEAR 1997 VS. FISCAL YEAR 1996
Revenue: Ascent had net revenue of $2,073,000 for the year ended
December 31, 1997 compared with no revenue for the year ended December 31, 1996.
The revenue was the result of the acquisition and subsequent marketing of
Ascent's first product, Feverall acetaminophen suppositories, and to a lesser
extent the introduction of Pediamist nasal saline spray to the market.
Cost of Sales: Cost of sales was $1,246,000 for the year ended December
31, 1997. The cost of sales was primarily attributable to (i) $874,000 for the
manufacturing cost associated with the production of the Feverall and Pediamist
products, (ii) the write-off of $205,000 of Just For Kids Vitamin Drops
inventory as a result of a change in the specific ingredients used in the final
product, and (iii) the amortization of $167,000 in 1997 for the Feverall
manufacturing agreement.
Selling, General and Administrative Expenses: Ascent incurred selling,
general and administrative expenses for the year ended December 31, 1997 of
$8,305,000 compared with expenses of $2,805,000 for the year ended December 31,
1997, representing an increase of $5,500,000.
Selling and marketing expenses were $5,739,000 for the year ended
December 31, 1997 compared with expenses of 1,065,000 for the year ended
December 31, 1996. This increase of $4,674,000 was primarily the result of (i)
increased personnel expenses of $3,493,000 as Ascent assembled sales and
marketing personnel for the anticipated introduction of its products in the
second half of 1997 and (ii) increases of $1,181,000 in advertising and
promotional activities in anticipation of such product introductions.
General and administrative expenses were $2,566,000 for the year ended
December 31, 1997 compared with expenses of $1,739,000 for the year ended
December 31, 1996. This increase of $827,000 was primarily a result of
additional staffing expenses of $703,000 resulting from Ascent's increased
infrastructure relating to the anticipated product introductions and
amortization expenses of $124,000 for intangible assets related to the Feverall
trademark and goodwill.
Research and Development: Ascent incurred research and development
expenses for the year ended December 31, 1997 of $4,377,000 compared with
expenses of $3,761,000 for the year ended December 31, 1996. This increase of
$616,000 primarily reflected increased third party pilot manufacturing and
development expenditures relating to Ascent's twice a day liquid controlled
release bronchodilator, Pediavent, and increased expenditures for the
development of Ascent's Just for Kids Vitamin Drops.
Interest: Ascent had interest income of $693,000 for the year ended
December 31, 1997 compared with interest income of 79,000 for the year ended
December 31, 1996. This increase of $614,000 was primarily attributable to
increases in funds available for investment by Ascent resulting from Ascent's
initial public offering of common stock,
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the sale of its Series F convertible preferred stock and the issuance of
subordinated secured notes. Ascent had interest expense of $1,359,000 for the
year ended December 31, 1997, which reflected the accretion of $1,133,000 for
the subordinated secured notes and $226,000 for the related cash interest
payments.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Ascent has financed its operations primarily from
private sales of preferred stock, the private sale of subordinated secured notes
and related common stock purchase warrants and, in 1997, an initial public
offering of shares of common stock. As of December 31, 1998, Ascent had raised
approximately $33,560,000 (net of issuance costs) from the sales of preferred
stock, approximately $14,743,000 (net of issuance costs) from the issuance of
subordinated secured notes and related warrants and approximately $17,529,000
(net of issuance costs) from the initial public offering of 2,240,000 shares of
common stock. In addition, in the second half of 1997, Ascent began shipping its
first two products, Feverall acetaminophen suppositories and Pediamist nasal
saline spray, and in March 1998 began promoting Duricef7 pursuant to a
co-promotion agreement with Bristol-Myers Squibb.
Triumph Notes. In January and June 1997, Ascent issued an aggregate of
$7,000,000 of subordinated secured notes, resulting in net proceeds to Ascent of
$6,404,000, which was recorded as a liability of $4,949,000 with $2,506,000 to
be accreted as interest expense over the term of the notes. On June 1, 1998,
Ascent used a portion of the proceeds from the Series G financing to pay in full
the remaining principal and interest due of approximately $5,250,000 and
$130,000, respectively.
Feverall Acquisition. On July 10, 1997, Ascent closed the acquisition
of the Feverall line of acetaminophen rectal suppositories from Upsher-Smith.
The purchase price was $11,905,000. Ascent paid $6,405,000 in cash and issued a
promissory note for $5.5 million as payment of the purchase price, which
promissory note was paid on February 20, 1998.
Series G Financing. On May 13, 1998, Ascent entered into a Securities
Purchase Agreement with funds affiliated with ING Furman Selz Investments LLC
and BancBoston Ventures, Inc. In accordance with this agreement, on June 1,
1998, Ascent issued and sold to these funds an aggregate of 7,000 shares of
Series G convertible exchangeable preferred stock, $9.0 million of 8% seven-year
subordinated notes and seven-year warrants to purchase 2,116,958 shares of
Ascent common stock at a per share exercise price of $4.75 per share, for an
aggregate purchase price of $16 million. Of the $9.0 million of subordinated
notes issued and sold by Ascent, $8,652,515 was allocated to the relative fair
value of the subordinated notes and $347,485 was allocated to the relative fair
value of the warrants. Accordingly, the 8% subordinated notes will be accreted
from $8,652,515 to the maturity amount of $9,000,000 as interest expense over
the term of the notes. The $347,485 allocated to the warrants was included in
additional paid in capital. Ascent used a portion of the net proceeds, after
fees and expense, of
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$14.7 million to repay the $5.3 million in Triumph subordinated secured notes
and intends to use the balance for working capital. As a result of the early
repayment of subordinated secured notes, Ascent accelerated the unaccreted
portion of the discount amounting to $842,000. In addition, $325,000 of
unamortized debt issue costs were written off. The primary terms of the Series G
preferred stock and the convertible and subordinates notes are set forth below.
Series G Preferred Stock. The Series G preferred stock is
convertible into Ascent common stock at a price of $4.75 per share at
the option of the holder (which conversion price was above the fair
market value of Ascent's common stock at June 1, 1998). The Series G
preferred stock is entitled to cumulative annual dividends equal to 8%
(subject to adjustment) of the liquidation preference of such stock
($1,000), payable semiannually in June and December of each year,
commencing December 1998. The Series G preferred stock may be exchanged
for 8% seven-year convertible subordinated notes having an aggregate
principal amount equal to the aggregate liquidation preference of the
Series G preferred stock solely at the option of Ascent any time within
seven years of issuance of the Series G preferred stock.
Subordinated Notes and Convertible Notes. The subordinated
notes and convertible notes (when and if issued upon exchange of the
Series G preferred stock) bear interest at a rate of 8% per annum,
payable semiannually in June and December of each year, commencing
December 1998. Ascent may defer forty percent of the interest due on
the subordinated notes and fifty percent of the dividends due on the
Series G preferred stock (or the interest due on the convertible notes
if issued upon exchange of the Series G preferred stock) in each of
December 1998, June 1999, December 1999 and June 2000 for a period of
three years.
In the event of a change in control or unaffiliated merger of Ascent,
Ascent may, at its sole discretion, redeem the Series G preferred stock (or the
convertible notes issuable upon exchange of the Series G preferred stock) at a
price equal to the liquidation preference on such stock ($1,000) plus accrued
and unpaid dividends, although Ascent will be required to issue new common stock
purchase warrants in connection with such redemption. In the event of a change
of control or unaffiliated merger of Ascent, the holders of the convertible
notes and the subordinated notes may require Ascent to redeem these notes at a
price equal to the unpaid principal plus accrued and unpaid interest on such
notes, but cannot require Ascent to redeem the Series G preferred stock. In
connection with the Series G financing, a representative of ING Furman Selz
Investments was added to Ascent's board of directors.
In connection with Ascent's strategic alliance with Alpharma, which is
described below, Ascent entered into a second amendment to the May 1998
securities purchase agreement. The second amendment provides for, among other
things, (a) our agreement to exercise our right to exchange of all outstanding
shares of Series G preferred stock for convertible subordinated notes in
accordance with the terms of the Series G preferred
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stock, (b) subject to stockholder approval, the reduction in the exercise price
of warrants to purchase 2,116,958 shares of Ascent common stock from $4.75 per
share to $3.00 per share and the agreement of the Series G purchasers to
exercise these warrants, (c) the issuance and sale to the Series G purchasers of
an aggregate of 300,000 shares of Ascent common stock at a price of $3.00 per
share and (d) the cancellation of approximately $7.25 million of principal under
the subordinated notes held by the Series G purchasers to pay the exercise price
of the warrants and the purchase price of the additional 300,000 shares. In
addition, Ascent entered into an amendment to a financial advisory services fee
agreement with ING Furman Selz under which Ascent agreed to issue 150,000 shares
of Ascent common stock to ING Furman Selz in lieu of the payment of certain
financial advisory fees.
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
Alpharma. This strategic alliance contemplates a number of transactions,
including a loan agreement under which Alpharma will loan us up to $40.0 million
from time to time, $12.0 million of which may be used for general corporate
purposes and $28.0 million of which may only be used for specified projects and
acquisitions intended to enhance Ascent's growth. In addition, subject to
stockholder approval, Ascent will obtain a call option to acquire all of its
outstanding common stock and assign the option to Alpharma, thereby giving
Alpharma the option, exercisable in 2002, to purchase all of the Ascent common
stock then outstanding at a purchase price to be determined by a formula based
on Ascent"s 2001 earnings. The consummation of the strategic alliance is subject
to the approval of Ascent's stockholders of a proposed merger between Ascent and
Bird Merger Corporation at a meeting expected to be held in the second quarter
of 1999.
On February 19, 1999, Ascent borrowed $4.0 million from Alpharma under
the loan agreement and issued Alpharma a 7.5% convertible subordinated note in
the principal amount of up to $40.0 million. Alpharma's obligation to loan
Ascent the balance of the $40.0 million is subject to the approval of Ascent's
stockholders of the merger with Bird Merger Corporation, which approval is a
condition to the consummation of the strategic alliance. If Ascent's
stockholders do not approve the merger, Ascent must immediately repay the
outstanding principal and interest on the note. 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
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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.
Fixed Assets. Ascent expended $340,000, $805,000, and $60,000 to
purchase fixed assets, primarily equipment and furniture, in 1998, 1997, and
1996, respectively. Ascent expects that its capital expenditures in 1999 will be
approximately $250,000, primarily for computer hardware and software.
Future Capital Requirements. Ascent's future capital requirements will
depend on many factors, including the costs and margins on sales of its
products, success of its commercialization activities and arrangements,
particularly the level of product sales, its 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
(including internally generated funds), and its existing capital resources, it
will require approximately $8.0 million of additional funds to meet its capital
requirements through the first quarter of 2000, at which point Ascent currently
believes that it will be able to rely on internally generated funds to fund
operating expenses. This amount does not take into account the $4.0 million
borrowed from Alpharma on February 19, 1999 or the additional $8.0 million which
Ascent may borrow from Alpharma, subject to stockholder approval of the merger,
for general corporate purposes under the Loan Agreement dated February 16, 1999
by and among Ascent, Alpharma and Alpharma, Inc. If Ascent's stockholders
approve the merger, Ascent expects to borrow this $8.0 million
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from Alpharma under the loan agreement (including the $4.0 million borrowed on
February 19, 1999). If Ascent's business does not progress in accordance with
its current operating plan, if Ascent's stockholders do not approve the merger
or if Ascent does not consummate the strategic alliance with Alpharma, 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
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Following
December 31, 1999, Ascent's computer equipment and software that is time
sensitive, including equipment with embedded technology such as telephone
systems and facsimile machines, may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to engage in normal business activities.
Ascent is in the process of assessing its computer systems, software
and operations infrastructure, including systems being developed to improve
business functionality, to identify computer hardware, software and process
control systems that are not Year 2000 compliant. To this end, during the third
quarter of fiscal 1998, Ascent established an internal Year 2000 task force,
comprised of employees and members of management, for the purpose of evaluating
the Year 2000 compliance of its existing computer systems, software and
operations infrastructure and any Year 2000 issues of third parties of business
importance to Ascent. The goal of Ascent's Year 2000 task force is to minimize
any disruptions to Ascent's business which could result from the Year 2000
problem and to minimize liabilities which Ascent might incur as a result of such
disruptions. Ascent currently anticipates that its Year 2000 assessment efforts
will be completed by June 30, 1999.
Ascent has also initiated communications with its significant
suppliers, including Upsher-Smith Laboratories, Inc. and Lyne Labortories, and
service providers and certain strategic customers to determine the extent to
which such suppliers, providers or customers will be affected by any significant
Year 2000 issues. Although, as of December 31, 1998, Ascent has not received a
significant number of
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responses to its inquiries, Ascent believes that these communications will
permit Ascent to determine the extent to which it may be affected by the failure
of these third parties to address their own Year 2000 issues and may facilitate
the coordination of Year 2000 solutions between Ascent and these third parties.
Third parties of business importance to Ascent may not successfully and timely
evaluate and address their own Year 2000 issues. The failure of any of these
third parties to achieve Year 2000 compliance in a timely fashion could have a
material adverse effect on Ascent's business, financial position, results of
operations or cash flows.
Ascent is funding the costs of its Year 2000 compliance efforts with
cash flows from operations. Although Ascent has not completed the Year 2000
assessment of its computer systems and software, based upon its assessment
efforts to date, Ascent does not anticipate that the costs of becoming Year 2000
compliant will have a material adverse effect upon Ascent's business, financial
position, results of operations or cash flows. Ascent does not expect that the
costs of replacing or modifying computer equipment and software will be
substantially different, in the aggregate, from the normal, recurring costs
incurred by Ascent for systems development, implementation and maintenance in
the ordinary course of business. In this regard, in the ordinary course of
replacing computer equipment and software, Ascent attempts to obtain
replacements that are Year 2000 compliant. For example, Ascent recently upgraded
its financial accounting software and received written representations that the
system was Year 2000 compliant. As of December 31, 1998, in addition to the
costs that Ascent would have incurred in the ordinary course of replacing
computer equipment and software, Ascent had incurred less than $5,000 for the
replacement of computer equipment and software that was not Year 2000 compliant.
Ascent expects to incur total costs of less than $25,000 to become Year 2000
compliant.
Ascent does not presently believe that the Year 2000 issue will pose
significant operational problems for it. However, if Ascent does not properly
identify all Year 2000 issues, or assessment, remediation and testing are timely
effected with respect to Year 2000 problems that are identified, there can be no
assurance that the Year 2000 issue will not have a material adverse effect on
Ascent's business, financial position, results of operations or cash flows or
adversely affect Ascent's relationships with customers, suppliers or others.
Ascent has not yet developed a contingency plan for dealing with the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from failure by Ascent and certain third parties to
achieve Year 2000 compliance on a timely basis. Ascent currently plans to
complete its analysis of the problems and costs associated with the failure to
achieve Year 2000 compliance and to establish a contingency plan in the event of
such failure by June 30, 1999.
The foregoing assessment of the impact of the Year 2000 problem on
Ascent is based on management's best estimates as of the date of this annual
report, which are based on numerous assumptions as to future events. There can
be no assurance that
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these estimates will prove accurate, and actual results could differ materially
from those estimated if these assumptions prove inaccurate.
RECENT PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-5 "Accounting for the Costs of Start-Up Activities", referred to as SOP 98-5.
SOP 98-5 requires all costs of start-up activities (as defined by SOP 98-5) to
be expensed as incurred. This statement is effective for periods beginning after
December 15, 1998. Ascent does not believe SOP 98-5 will have a significant
impact on its financial statement disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, known as SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters beginning after
June 15, 1999. Ascent will adopt SFAS 133 by January 1, 2000. Ascent does not
believe that SFAS 133 will have a significant impact on its financial statement
disclosure.
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 UNDER THE CAPTION "CERTAIN FACTORS THAT MAY AFFECT FUTURE
RESULTS."
THE FDA MAY NOT APPROVE THE MARKETING AND SALE OF ORAPRED SYRUP
In April 1997, we filed two Abbreviated New Drug Applications, or
ANDAs, with the FDA covering 5mg/5ml and 15mg/5ml formulations of Orapred syrup.
In October 1998, the FDA issued a deficiency letter on chemistry, manufacturing
and controls which cited certain deficiencies with both ANDAs. In January 1998,
we amended the ANDA for the stronger formulation of Orapred to address the
issues raised by the FDA. The FDA is currently reviewing this ANDA. The FDA may
not approve this ANDA on a
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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.
THE FDA MAY NOT APPROVE THE MARKETING AND SALE OF PRIMSOL TRIMETHOPRIM SOLUTION
In 1996, we filed a New Drug Application, or NDA, with the FDA covering
a 50mg formulation of Primsol trimethoprim solution, an antibiotic for the
treatment of middle ear infection. In February 1998, we received a letter from
the FDA citing deficiencies in this NDA, and, in August 1998, the FDA notified
us that we would be required to conduct additional clinical trials to evaluate
the safety of the 50mg formulation of Primsol solution, due to the inclusion in
this formulation of maltitol, an inactive ingredient. In September 1998, the FDA
indicated that we would not be required to conduct these clinical trials if we
removed maltitol from the formulation, and, in December 1998, we filed an
amendment to the NDA for the 50mg formulation of Primsol solution removing
maltitol. The FDA is currently reviewing this NDA. The FDA may not approve this
NDA on a timely basis or at all. The failure of the FDA to approve this NDA or a
significant delay in such approval would have a material adverse effect on our
business.
THE FDA MAY NOT APPROVE THE MARKETING AND SALE OF FEVERALL CONTROLLED RELEASE
SPRINKLES
In December 1997, we filed an NDA for Feverall controlled-release
sprinkles, an acetaminophen product for the treatment of pain and fever in
children. In December 1998, the FDA issued a not-approvable letter covering this
NDA which cited deficiencies relating to the manufacture and packaging of this
product. The letter also indicated that the clinical trials of Feverall
sprinkles did not demonstrate adequate duration of action and that the product
should only be used in patients older than two years of age. We are currently in
discussions with the FDA regarding these issues. The FDA may not approve this
NDA on a timely basis or at all. The failure of the FDA to approve this NDA or a
significant delay in such approval would have a material adverse effect on our
business.
THERE IS UNCERTAINTY AS TO THE MARKET ACCEPTANCE OF OUR TECHNOLOGY AND PRODUCTS
The commercial success of Orapred syrup, Primsol solution, Feverall
sprinkles, and Pediavent albuterol controlled-release suspension, a prescription
product for the treatment of asthma for which we expect to file an NDA in the
second quarter of 1999, will depend upon their acceptance by pediatricians,
pediatric nurses and third party payors as clinically useful, cost-effective and
safe. Factors that we believe will materially affect market acceptance of these
products include:
* the receipt and timing of FDA approval;
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* the timing of market introduction of our products and competing
products;
* the safety, efficacy, side effect profile, taste, dosing and ease
of administration of the product;
* the patent and other proprietary position of the product;
* brand name recognition; and
* price.
The failure of any of Orapred syrup, Primsol solution, Feverall sprinkles or
Pediavent to achieve market acceptance could have a material adverse effect on
our business.
WE HAVE NOT BEEN PROFITABLE
We have incurred net losses since our inception. At December 31, 1998,
our accumulated deficit was approximately $51.1 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
We anticipate that, based upon our current operating plan (including
internally generated funds), and our existing capital resources, we will require
approximately $8.0 million of additional funds to meet our capital requirements
through the first quarter of 2000, at which point we currently believe that we
will be able to rely on internally generated funds to fund operating expenses.
This amount does not take into account the $4.0 million borrowed from Alpharma
on February 19, 1999 or the additional $8.0 million which we may borrow from
Alpharma, subject to stockholder approval of the merger, for general corporate
purposes under the Loan Agreement dated February 16, 1999 by and among Ascent,
Alpharma and Alpharma, Inc. If our stockholders approve the merger, we expect to
borrow this $8.0 million from Alpharma under the loan agreement (including the
$4.0 million borrowed on February 19, 1999). If our business does not progress
in accordance with our current operating plan, if our stockholders do not
approve the merger or if we do not consummate the strategic alliance with
Alpharma, 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
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apply particularly in the context of raising capital for general corporat e
purposes, such as funding operating expenses.
If we are unable to obtain adequate funding on a timely basis, we may
need to significantly curtail one or more of our research or product development
programs or reduce our marketing and sales initiatives, or we may be unable to
effect strategic acquisitions. We may also need to seek funds through
arrangements with collaborative partners or others that may require us to
relinquish rights to technologies, product candidates or products which we would
otherwise pursue on our own. Any of such cases would have a material adverse
effect on our business.
WE ARE AT AN EARLY STAGE OF DEVELOPMENT
We were founded in March 1989 and only introduced our first products
into the market in the second half of 1997. All but two of our products are in
research or development. The products that we have not yet completed developing
may require, depending on the development status of the product, additional
research and development, extensive preclinical studies and clinical trials and
regulatory approval prior to any commercial sales.
WE ARE SUBJECT TO TECHNOLOGICAL UNCERTAINTY IN OUR DEVELOPMENT EFFORTS
We have introduced only one internally-developed product, Pediamist
nasal saline spray, into the market. Although we have completed development of
products and have filed applications with the FDA for marketing approval, many
of our product candidates are in development and require additional formulation,
preclinical studies, clinical trials and regulatory approval prior to any
commercial sales. We must successfully address a number of technological
challenges to complete the development of our potential products. These products
may have undesirable or unintended side effects, toxicities or other
characteristics that may prevent or limit commercial use.
WE HAVE ONLY LIMITED SALES AND MARKETING EXPERIENCE
We market and sell our products in the United States through our own
dedicated marketing staff and sales force. We recruited this marketing staff and
sales force in the second half of 1997 and have only limited experience in
marketing and sales. We believe that our success depends in significant part
upon our ability to maintain a dedicated marketing staff and sales force capable
of promoting our products.
WE FACE SIGNIFICANT COMPETITION IN THE PEDIATRIC PHARMACEUTICAL INDUSTRY
The pediatric pharmaceutical industry is highly competitive and
characterized by rapid and substantial technological change. We may be unable to
successfully compete in this industry. Our competitors include several large
pharmaceutical companies that market pediatric products in addition to products
for the adult market, including Glaxo
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Wellcome Inc., Eli Lilly and Company, the Ortho-McNeil Pharmaceutical Division
of Johnson & Johnson, Inc. and the Ross products Division of Abbot Laboratories
Inc.
We expect to market many of our product candidates as alternative
treatments for pediatric indications for which products with the same active
ingredient are well-entrenched in the market. Our product candidates also will
compete with products that do not contain the same active ingredient but are
used for the same indication and are well entrenched within the pediatric
market. Moreover, many of our potential products that are reformulations of
existing drugs of other manufacturers may have significantly narrower patent or
other competitive protection.
Particular competitive factors that we believe may affect us include:
* many of our competitors have well known brand names that have
been promoted over many years;
* many of our competitors offer well established, broad product
lines and services which we do not offer; and
* many of our competitors have substantially greater financial,
technical and human resources than we have, including greater
experience and capabilities in undertaking preclinical studies
and human clinical trials, obtaining FDA and other regulatory
approvals and marketing pharmaceuticals.
WE MAY BE UNSUCCESSFUL WITH OUR CLINICAL TRIALS
In order to obtain regulatory approvals for the commercial sale of any
of our products under development, we will be required to demonstrate through
preclinical testing and clinical trials that the product is safe and
efficacious.
The results from preclinical testing and early clinical trials of a
product that is under development may not be predictive of results that will be
obtained in large-scale later clinical trials.
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
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our expectation, our business, financial condition or results of operations
could be materially adversely affected.
WE MAY NOT OBTAIN OR MAINTAIN REGULATORY APPROVALS
The production and the marketing of our products and our ongoing
research and development activities are subject to extensive regulation by
federal, state and local governmental authorities in the United States and other
countries. If we fail to comply with applicable regulatory requirements, we may
be subject to fines, suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions and criminal prosecutions.
Clearing the regulatory process for the commercial marketing of a
pharmaceutical product takes many years and requires the expenditure of
substantial resources. We have had only limited experience in filing and
prosecuting applications necessary to gain regulatory approvals. Thus, we may
not be able to obtain regulatory approvals to conduct clinical trials of or
manufacture or market any of our potential products.
Factors that may affect the regulatory process for our product
candidates include:
* our analysis of data obtained from preclinical and clinical
activities is subject to confirmation and interpretation by
regulatory authorities, which could delay, limit or prevent
regulatory approval;
* we or the FDA may suspend clinical trials at any time if the
participants are being exposed to unanticipated or unacceptable
health risks; and
* any regulatory approval to market a product may be subject to
limitations on the indicated uses for which we may market the
product. These limitations may limit the size of the market for
the product.
As to products for which we obtain marketing approval, we, the
manufacturer of the product, if other than us, and the manufacturing facilities
will be subject to continual review and periodic inspections by the FDA. The
subsequent discovery of previously unknown problems with the product,
manufacturer or facility may result in restrictions on the product or
manufacturer, including withdrawal of the product from the market.
We also are subject to numerous and varying foreign regulatory
requirements governing the design and conduct of clinical trials and the
manufacturing and marketing of our products. The approval procedure varies among
countries. The time required to obtain foreign approvals often differs from that
required to obtain FDA approval. Approval by the FDA does not ensure approval by
regulatory authorities in other countries.
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WE ARE DEPENDENT ON THIRD PARTY MANUFACTURERS
We have no manufacturing facilities. Instead, we rely on third parties
to manufacture our products in accordance with current "good manufacturing
practice" requirements prescribed by the FDA. For example, we rely on
Upsher-Smith Laboratories, Inc. for the manufacture of Feverall acetaminophen
rectal suppositories. In addition, we rely on third parties for the manufacture
of our product candidates for clinical trials and for commercial sale following
FDA approval of the product. For example, we rely on Lyne Laboratories, Inc. for
the manufacture of Primsol solution and upon Recordati S.A. Chemical and
Pharmaceutical Company for the manufacture of Pediavent.
We expect to be dependent on third party manufacturers or collaborative
partners for the production of all of our products. There are a limited number
of manufacturers that operate under the FDA's good manufacturing practice
requirements and capable of manufacturing our products. In the event that we are
unable to obtain contract manufacturing, or obtain manufacturing on commercially
reasonable terms, we may not be able to commercialize our products as planned.
We have no experience in manufacturing on a commercial scale and no
facilities or equipment to do so. If we determine to develop our own
manufacturing capabilities, we will need to recruit qualified personnel and
build or lease the requisite facilities and equipment. We may not be able to
successfully develop our own manufacturing capabilities. Moreover, it may be
very costly and time consuming for us to develop the capabilities.
WE ARE DEPENDENT UPON SOLE SOURCE SUPPLIERS FOR OUR PRODUCTS
Some of our supply arrangements require that we buy all of our
requirements of a particular product exclusively from the other party to the
contract. Moreover, for many of our products, we have qualified only one
supplier. Any interruption in supply from any of our suppliers or their
inability to manufacture our products in accordance with the FDA's good
manufacturing requirements may adversely affect us in a number of ways,
including:
* we may not be able to meet commercial demands for our products;
* we may not be able to initiate or continue clinical trials of
products that are under development; and
* we may be delayed in submitting applications for regulatory
approvals of our products.
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WE INTEND TO PURSUE STRATEGIC ACQUISITIONS WHICH MAY BE DIFFICULT TO INTEGRATE
As part of our overall business strategy, we intend to pursue strategic
acquisitions that would provide additional product offerings. Any future
acquisition could result in the use of significant amounts of cash, potentially
dilutive issuances of equity securities, the incurrence of debt under the
Alpharma loan agreement or otherwise or amortization expenses related to the
goodwill and other intangible assets, any of which could have a material adverse
effect on our business. In addition, acquisitions involve numerous risks,
including:
* difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;
* the diversion of management's attention from other business
concerns; and
* the potential loss of key employees of the acquired company.
From time to time, we have engaged in discussions with third parties concerning
potential acquisitions of product lines, technologies and businesses.
OUR SUCCESS DEPENDS ON OBTAINING PATENTS
Our success depends upon us obtaining patents to protect our products.
As a pharmaceutical company, our patent position involves complex legal and
factual questions. As a result, patents may not issue from any patent
applications that we own or license and, if issued, may not be sufficiently
broad to protect our technology.
Because our product candidates are reformulations of existing
off-patent drugs, any patent protection afforded to the products will be
significantly narrower than a patent on the active ingredient itself. In
particular, we do not expect that the active ingredients of our products will
qualify for composition-of-matter patent protection.
We are aware of patents and patent applications belonging to
competitors and others that may require us to alter our products or processes,
pay licensing fees or cease certain activities. We may not be able to obtain a
license to any technology owned by a third party that we require to manufacture
or market one or more products. Even if we can obtain a license, the financial
and other terms may be disadvantageous.
WE MAY BECOME INVOLVED IN PROCEEDINGS RELATING TO INTELLECTUAL PROPERTY RIGHTS
Because our products are based on existing compounds rather than new
chemical entities, we may become parties to patent litigation and interference
proceedings. The types of situations in which we may become parties to
litigation or proceedings include:
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* we may initiate litigation or other proceedings against third
parties to enforce our patent rights;
* we may initiate litigation or other proceedings against third
parties to seek to invalidate the patents held by them or to
obtain a judgment that our products or processes do not infringe
their patents;
* if our competitors file patent applications that claim technology
also claimed by us, we may participate in interference or
opposition proceedings to determine the priority of invention; or
* if third parties initiate litigation claiming that our processes
or products infringe their patent or other intellectual property
rights, we will need to defend against such proceedings.
An adverse outcome in any litigation or interference proceeding could
subject us to significant liabilities to third parties and require us to cease
using the technology that is at issue or to license the technology from third
parties. We may not be able to obtain any required licenses on commercially
acceptable terms or at all. Thus, an unfavorable outcome in any patent
litigation or interference proceeding could have a material adverse effect on
our business, financial condition or results of operations.
The cost to us of any patent litigation or interference proceeding,
even if resolved in our favor, could be substantial. Uncertainties resulting
from the initiation and continuation of patent litigation or interference
proceedings could have a material adverse effect on our ability to compete in
the marketplace. Patent litigation and interference proceedings may also absorb
significant management time.
OUR PATENT LICENSES ARE SUBJECT TO TERMINATION
We are a party to a number of patent licenses that are important to our
business and expect to enter into additional patent licenses in the future.
These licenses impose various 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
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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 chairman of our board of
directors. The loss of the services of any of these individuals could have a
material adverse effect on
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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
to require the addition of new management personnel and the development of
additional expertise by existing management personnel. We may not be able to
attract and retain highly skilled personnel on acceptable terms given the
competition for experienced scientists among pharmaceutical and health care
companies, universities and non-profit research institutions. In addition, the
existence of the call option and the resulting uncertainty as to whether we will
be acquired by Alpharma may dissuade highly skilled personnel from accepting
employment with or remaining employed by us.
OUR PROMOTION ARRANGEMENTS DEPEND ON THE SUPPORT OF OUR COLLABORATORS
We plan to enter into arrangements to promote some pharmaceutical
products of third parties to pediatricians in the United States. For example, in
November 1998, we entered into a promotion agreement with Warner-Lambert Company
to market Omnicef(R) (cefdinir), a product licensed by Warner-Lambert Company
from Fujisawa Pharmaceutical Co., Ltd. The success of any arrangement is
dependent on, among other things, the third party's commitment to the
arrangement, the financial condition of the third party and market acceptance of
the third party's products.
WE ARE DEPENDENT UPON A THIRD PARTY DISTRIBUTOR
We distribute our products through a third party distribution
warehouse. We have no experience with the distribution of products and rely on
the third party distributor to perform order entry, customer service and
collection of accounts receivable on our behalf. The success of this arrangement
is dependent on, among other things, the skills, experience and efforts of the
third party distributor.
UNCERTAINTY OF HEALTHCARE REFORM MEASURES
In both the United States and some foreign jurisdictions, there have
been a number of legislative and regulatory proposals to change the healthcare
system. Further proposals are likely. The potential for adoption of these
proposals affects and will affect our ability to raise capital, obtain
additional collaborative partners and market our products.
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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 notes. At December 31, 1998, the fair value of these notes was
estimated to approximate carrying value. Market risk was estimated as the
potential increase in fair value resulting from a hypothetical 10% decrease in
the Company's weighted average short-term borrowing rate at December 31, 1998,
which was not materially different from the year-end carrying value.
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.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
We have three classes of directors consisting of three Class I
directors, three Class II directors and two Class III directors. At each annual
meeting, directors are elected for a full term of three years to succeed those
whose terms are expiring. The terms of the three classes are staggered in a
manner so that only one class is elected by stockholders annually. The three
Class II directors are proposed for election this year to serve as members of
our board of directors until the 2002 annual meeting of stockholders, or until
their successors are elected and qualified. The term of the Class III directors
will expire at the 2000 annual meeting. The Class I directors were elected at
the annual meeting last year for a three year term expiring at the 2001 annual
meeting.
The table below includes information for each director, including the
Class II director nominees, as of December 31, 1998 with respect to (a) his name
and age; (b) position and offices at Ascent; (c) principal occupation and
business experience during the past five years; (d) directorships, if any, of
other publicly held companies and (e) the year he became a director of Ascent.
Principal Occupation, Other Business
Director Experience During the Past Five
Name Age Since Years and Other Directorships
---- --- -------- ------------------------------------
CLASS II DIRECTORS,
NOMINEES TO BE ELECTED
AT THE ANNUAL MEETING
(TERMS EXPIRING IN 2002)
Alan R. Fox 54 1996 President and chief executive officer of Ascent
since May 1996; president of Mead Johnson Europe,
an infant formula and nutritional company, from
January 1992 to May 1996; president and general
manager of Mead Johnson Canada, an infant formula
and nutritional company, from 1981 to 1991;
various positions, including as a manager of
marketing and sales for the Bristol Laboratories
Division of Bristol-Myers Squibb, Inc., a
pharmaceutical company, from 1968 to 1981.
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Principal Occupation, Other Business
Director Experience During the Past Five
Name Age Since Years and Other Directorships
---- --- -------- ------------------------------------
Robert E. Baldini 68 1993 Vice chairman of our board of directors since
April 1996; consultant to, and a director of,
several private and public pharmaceutical and
medical device companies; senior vice president of
sales and marketing for Key Pharmaceuticals from
1982 to 1986 and following the acquisition of Key
Pharmaceuticals by Schering-Plough Corporation in
1986, various positions with the Key
Pharmaceuticals Division of Schering-Plough
Corporation until 1995, last serving as its
president; executive director of sales and
promotion of Ciba-Geigy Corporation, a
pharmaceutical and chemical company, from 1977 to
1982; vice chairman of the board of
directors of KOS Pharmaceuticals, Inc., a
pharmaceutical company, and a director of Clarion
Pharmaceuticals, Inc., a pharmaceutical company.
James L. Luikart 53 1998 Executive vice president of ING Furman Selz
Investments (an affiliate of the manager and of
the general partner of Furman Selz Investors II
L.P., FS Employee Investors LLC and FS Parallel
Fund L.P.) since 1995; vice president of Citicorp
Venture Capital Ltd., a subsidiary of Citibank
from 1988 to 1995.
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Principal Occupation, Other Business
Director Experience During the Past Five
Name Age Since Years and Other Directorships
---- --- -------- ------------------------------------
CLASS III DIRECTORS
(TERMS EXPIRING IN 2000)
Emmett Clemente, Ph.D. 60 1989 Founder of Ascent in 1989 and chairman of our
board of directors since May 1996; chief executive
officer of Ascent from 1989 to 1996; director of
pharmaceutical research for Fisons Corporation,
U.S., a pharmaceutical company, from 1980 to 1989
and director of new product development and
acquisitions of Fisons Corporation, U.S. from 1972
to 1980; chief scientist in the consumer products
division of Warner-Lambert Company, a
pharmaceutical company, from 1970 to 1972; senior
scientist of Richardson-Merrell Company, a
pharmaceutical company, from 1967 to 1970.
Andre Lamotte, Sc.D. 50 1989 Managing general partner of Medical Science
Ventures, L.P., the general partner of Medical
Science Partners, L.P., the venture capital firm
founded by Harvard University, since 1989; general
manager of the Merieux Institute, Inc., the U.S.
affiliate of Institute Merieux and Pasteur
Vaccines, from 1983 to 1988; director of OraVax,
Inc., a biotechnology company.
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Principal Occupation, Other Business
Director Experience During the Past Five
Name Age Since Years and Other Directorships
---- --- -------- ------------------------------------
CLASS I DIRECTORS (TERMS
EXPIRING IN 2001)
Raymond F. Baddour, 73 1989 Lammot du Pont Professor Emeritus of Chemical
Sc.D. Engineering at the Massachusetts Institute of
Technology since 1989; co-founder and director of
Amgen Inc., a biopharmaceutical company, from 1980
to 1997, and MatTek Corp., a specialty
biomaterials company; director of Hyseq, Inc., a
biotechnology company and Scully Signal Co., a
signal device company.
Michael J.F. Du Cros 61 1993 Partner of Atlas Venture, a venture capital firm,
since 1993; Limited Partner of Aspen Venture
Partners, L.P., a limited partnership formed to
carry on the venture capital activities of 3i Ventures
in the United States, since 1991; Chief Executive Officer
of Protein Databases, Inc., a life science instrumentation
company, from 1984 to 1988; director of Cardima, Inc., a
medical device company.
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Principal Occupation, Other Business
Director Experience During the Past Five
Name Age Since Years and Other Directorships
---- --- -------- ------------------------------------
Lee J. Schroeder 70 1990 President of Lee Schroeder and Associates, Inc., a
pharmaceutical consulting company, since 1985;
president of the Lincoln Wholesale Drug Company, a
wholesale drug company, from 1983 to 1985;
executive vice president of Sandoz, Inc., U.S., a
pharmaceutical company, from 1981 to 1983; vice
president and general manager of Dorsey
Laboratories, a pharmaceutical company, from 1974
to 1981; director of Interneuron Pharmaceuticals,
Inc., MGI Pharmaceuticals, Inc. and Celgene
Corporation, each a pharmaceutical company.
James L. Luikart was nominated and elected to our board of directors
pursuant to the terms of the Securities Purchase Agreement dated as of May 13,
1998 by and among Ascent and the Series G purchasers identified in the
agreement. For a description of the May 1998 securities purchase agreement, see
"Item 13 - Certain Relationships and Related Transactions" on page 70 of this
annual report.
We have agreed to appoint a nominee of Alpharma to our board of
directors as a Class I director immediately prior to the closing of the
transactions contemplated by the master agreement with Alpharma. We expect that
this designee will be Thomas Anderson, who has served as president of Alpharma
since January 1997. Prior to joining Alpharma, Mr. Anderson served as president
and chief operating officer of FoxMeyer Health Corporation from May 1993 to
February 1996 and executive vice president and chief operating officer of
FoxMeyer Health Corporation from July 1991 to April 1993.
We have also agreed to appoint a nominee of ING Furman Selz Investments
LLC, referred to as ING Furman Selz in this annual report, to our board of
directors as a Class III director immediately prior to the closing of the
transactions contemplated by the
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Second Amendment dated as of February 16, 1999 to the May 1998 securities
purchase agreement. We expect that this designee will be Nicholas Daraviras, who
has served as an associate of ING Furman Selz since 1996. Prior to joining ING
Furman Selz, Mr. Daraviras served as an equity research analyst at Oppenheimer &
Co. and Ladenburg Thalmann & Co. from 1994 to 1996.
Terrance McGuire, a former Class III director, resigned from our board
of directors effective February 19, 1999. Michael J.F. Du Cros, a Class I
director, has indicated that he would resign from the board of directors upon
the closing of the transactions contemplated by the Master Agreement dated as of
February 16, 1999 between Ascent, Alpharma and Alpharma, Inc., including the
merger, and the appointment of Messrs. Anderson and Daraviras to our board of
directors.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act of 1934, as amended, requires our
executive officers and directors, and persons who beneficially own more than 10%
of a registered class of Ascent equity securities, to file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership of our equity securities. To our knowledge, based solely on review of
the copies of the reports furnished to us and written representations that no
year-end reports on Form 5 were required, during the fiscal year ended December
31, 1998, all Section 16(a) filing requirements applicable to our executive
officers, directors and greater-than-10% stockholders were timely made other
than the filing of a Form 3 by Mr. James L. Luikart in connection with his
becoming a director of Ascent.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Messrs. Baldini and Schroeder are paid $6,000 each year as compensation
for serving on our board of directors. No other directors currently are
compensated for serving on our board of directors. All of our directors are
reimbursed for their expenses incurred in connection with their attendance at
board of directors and committee meetings.
Under our 1997 Director Stock Option Plan, options to purchase 15,000
shares of Ascent common stock are granted to each new non-employee director upon
his or her initial election to our board of directors. On June 1, 1998, Mr.
James L. Luikart received an option for 15,000 shares of Ascent common stock.
Options to purchase 5,000 shares of Ascent common stock are granted to each
non-employee director on May 1 of each year. On May 1, 1998, Messrs. Baddour,
Baldini, Du Cros, McGuire and Schroeder each received an option for 5,000 shares
of Ascent common stock. All options vest on the first anniversary of the date of
grant. However, the exercisability of these options accelerates upon the
occurrence of a change in control of Ascent, as provided for in the director
plan. A total of 300,000 shares of Ascent common stock may be issued upon the
exercise of stock options granted under the director plan. With the exception of
the options granted on the date of our initial public offering, the exercise
price of all options granted under the director plan equals the closing price of
Ascent common stock on the date of grant. As of March 15, 1999, options to
purchase an aggregate of 135,000 shares of Ascent common stock were outstanding
under the director plan.
We are party to a consulting agreement with Mr. Robert E. Baldini, vice
chairman of our board of directors, dated April 1, 1996. Pursuant to this
agreement, Mr. Baldini provides consulting services as requested by us in return
for compensation of $1,500 per day. Mr. Baldini did not receive any consulting
fees in 1998 pursuant to this agreement. Upon execution of this agreement, we
granted Mr. Baldini an option under our 1992 Equity Incentive Plan exercisable
for 85,000 shares of Ascent common stock vesting in
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four equal annual installments. This consulting agreement expires on April 1,
2000, unless extended by mutual agreement of the parties.
COMPENSATION OF EXECUTIVE OFFICERS
GENERAL
The following table sets forth the compensation for each of the fiscal
years ended December 31, 1998, 1997 and 1996 for our chief executive officer and
our four other most highly compensated executive officers, other than the chief
executive officer, whose total annual salary and bonus exceeded $100,000 in
fiscal 1998. The chief executive officer and the other executive officers are
referred to as the Named Executive Officers.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
--------------------- ------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation
- ------------------------------- ---- -------- ------- ------------ ------------
Alan R. Fox 1998 $217,700 $43,540 -- --
President and chief executive 1997 $207,753 $36,500 -- --
officer(1) 1996 $135,000 -- 153,000 --
Emmett Clemente, Ph.D. 1998 $210,300 $42,060 -- $17,833(2)
Chairman of the board 1997 $201,083 $47,232 -- $ 7,705(2)
of directors 1996 $190,500 $41,600 -- $14,119(2)
Gregory A. Vannatter 1998 $167,500 $33,500 50,000(4) --
Vice president, marketing(3) 1997 $153,000 -- -- $32,436(5)
1996 $ 31,511 -- 29,750 --
Timothy K. Moffitt 1998 $158,087 $30,880 100,000(7) --
Vice president, sales(6) 1997 $150,505 -- 40,000(8) --
1996 -- -- -- --
John G. Bernardi 1998 $133,600 $26,720 17,500(10) --
Vice president, finance and 1997 $128,092 -- -- --
treasurer(9) 1996 $ 64,904 -- 29,750 --
- -------------------
(1) Mr. Fox joined Ascent as president in May 1996.
(2) Life insurance premiums paid by us for the benefit of Dr. Clemente.
(3) Mr. Vannatter joined Ascent as vice president, marketing in October
1996.
(4) Includes 18,000 options which were granted and repriced in 1998.
(5) Relocation costs, including related tax adjustments, paid by us for the
benefit of Mr. Vannatter.
(6) Mr. Moffitt joined Ascent as vice president, sales in May 1997.
(7) Includes 40,000 options which were granted in 1997 and repriced in 1998
and 20,000 options which were granted and repriced in 1998. See footnote
(8)
(8) These options were repriced in 1998. See footnote (7).
(9) Mr. Bernardi joined Ascent as vice president, finance and treasurer in
June 1996.
(10) Includes 16,000 options which were granted and repriced in 1998.
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OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
-------------------------------------------------
Percent Of
Total
Number Of Options Potential Realizable Value At
Securities Granted To Assumed Annual
Underlying Employees Exercise Rates Of Stock Price Appreciation
Options In Fiscal Of Base Expiration For Option Term(3)
Name Granted Year(1) Price(2) Date 5% 10%
- -------------------- ---------- ---------- -------- ---------- ------------- -------------
Alan R. Fox -- -- -- -- -- --
Emmett Clemente, -- -- -- -- -- --
Ph.D.
Gregory A. Vannatter 10,000(4) 1.3% $3.75(7) 03/16/08 -- $11,062.50
8,000(5) 1.0% $3.75(7) 04/08/08 -- $8,850.00
32,000(6) 4.2% $3.75 04/08/08 $75,600.00 $190,800.00
Timothy K. Moffitt 40,000(8) 5.2% $3.75(9) 06/24/07 -- $44,250.00
10,000(10) 1.3% $3.75(7) 03/16/08 -- $11,062.50
10,000(11) 1.3% $3.75(7) 04/08/08 -- $11,062.50
40,000(12) 5.2% $3.75 04/08/08 $94,500.00 $238,500.00
John G. Bernardi 10,000(13) 1.3% $3.75(7) 03/16/08 $23,625.00 $59,625.00
6,000(14) 0.8% $3.75(7) 04/08/08 $14,175.00 $35,775.00
1,500(15) 0.2% $3.75 04/08/08 -- $1,659.38
- -------------------
(1) The number of options granted in 1998 includes 555,450 shares that were
repriced in September 1998.
(2) Options were granted by the compensation committee pursuant to the 1992
Equity Incentive Plan at "fair market value" determined on the date of
the grant, based upon the last reported sale price of Ascent common stock
on the Nasdaq National Market. Repriced options were granted at $3.75,
above fair market value on the date of grant.
(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compound rates of appreciation (5% and 10%)
on the market value of Ascent common stock on the date of option grant
over the term of the options. These numbers are calculated based on rules
promulgated by the Securities and Exchange Commission and do not reflect
our estimate of future stock price growth. Actual gains, if any, on stock
option exercise and Ascent common stock holdings are dependent on the
timing of the exercise and the future performance of Ascent common stock.
There can be no assurance that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected will be received by
the individuals.
(4) The option is exercisable in four equal annual installments beginning on
September 16, 1999.
(5) The option is exercisable in four equal annual installments beginning on
October 8, 1999.
(6) The option is exercisable in four equal annual installments beginning on
April 8, 1999.
(7) These options were repriced in September 1998.
(8) 10,000 of the shares subject to the option are immediately exercisable
and the remaining 30,000 shares are exercisable in three equal annual
installments beginning on November 12, 1999.
(9) These options were granted in 1997 and repriced in September 1998.
(10) The option is exercisable in four equal annual installments beginning on
September 16, 1999.
(11) The option is exercisable in four equal annual installments beginning on
October 8, 1999.
(12) The option is exercisable in four equal annual installments beginning on
April 8, 1999.
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(13) The option is exercisable in four equal annual installments beginning on
September 16, 1999.
(14) The option is exercisable in four equal annual installments beginning on
October 8, 1999.
(15) The option is exercisable in four equal annual installments beginning on
April 8, 1999.
On February 10, 1999, Ascent's compensation committee granted each of
Dr. Clemente and Mr. Fox an incentive stock option for 125,000 shares of Ascent
common stock and granted each of Messrs. Bernardi, Moffitt and Vannatter an
incentive stock option for 25,000 shares of Ascent common stock. Each of these
options has an exercise price of $6.75 per share and vests in three equal annual
installments commencing on February 10, 2000.
Year-End Option Table
The following table sets forth information regarding the number and
value of exercisable and unexercised options held by each of the Named
Executive Officers on December 31, 1998. No stock options were exercised by
any of the Named Executive Officers in fiscal 1998.
FISCAL YEAR-END OPTION VALUES
Value of Unexercised in-the-
Number of Shares Underlying Money Options at Fiscal Year-
Options at Fiscal Year-End End(1)
------------------------------ ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- ----------- ------------- ----------- -------------
Alan R. Fox 76,500 76,500 $149,909 $149,909
Emmett Clemente, Ph.D. 144,500 -- $293,162 --
Gregory A. Vannatter 14,875 64,875 $ 29,149 $ 57,274
Timothy K. Moffitt 10,000 90,000 $ 5,625 $ 50,625
John G. Bernardi 14,875 32,375 $ 29,149 $ 38,993
- -------------------
(1) The closing price for Ascent common stock as reported by the Nasdaq
National Market on December 31, 1998 was $4.3125. The value of these
options is calculated on the basis of the difference between the option
exercise price and $4.3125, multiplied by the number of shares of
common stock underlying the option.
EMPLOYMENT AGREEMENT
We are a party to an employment agreement with Dr. Emmett Clemente for
the period commencing March 16, 1994 and ending March 15, 2000, unless extended
by mutual agreement of the parties. Under this agreement, Dr. Clemente is
entitled to receive (a) an annual base salary of $210,300, as it may be
adjusted, and (b) an annual bonus of up to 30% of his annual base salary based
upon the attainment of performance criteria set by our board of directors
annually (with the potential to exceed 30% of his annual base salary, at the
discretion of our board of directors, in the
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event that we achieve break-even cash flow). In addition, as part of Dr.
Clemente's annual compensation review, our board of directors is required to
consider in its sole discretion granting Dr. Clemente a stock option to acquire
additional shares of Ascent common stock. In the event Dr. Clemente's employment
is terminated by us without cause, Dr. Clemente will continue to receive (a) his
annual base salary for the one-year period commencing on the effective date of
termination and (b) benefits for the 18-month period following the effective
date of termination. However, any of the above payments or benefits which we are
required to provide will be reduced dollar for dollar by any payments or
benefits Dr. Clemente receives from any other employer during the period we are
required to provide these payments or benefits. Following the cessation or
termination of his employment by us, Dr. Clemente has agreed not to compete with
us for two years with respect to any products developed, produced, marketed or
sold by us during his tenure with us.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This report is submitted by the compensation committee of our board of
directors, which is responsible for establishing and administering our executive
compensation policies, including for the chief executive officer and the other
Named Executive Officers, and setting the compensation for these individuals.
GENERAL COMPENSATION POLICY
The compensation committee, including its stock plan subcommittee,
seeks to achieve the following three broad goals in connection with Ascent's
executive compensation programs and decisions regarding individual compensation:
* structure executive compensation programs in order to enable us
to attract and retain qualified executives;
* establish compensation programs that reward executives for the
achievement of our business objectives and/or in the individual
executive's particular area of responsibility, and thereby create
a performance-oriented environment; and
* provide executives with an equity interest in Ascent so as to
link a portion of the executive's compensation with the
performance of Ascent common stock.
PROCEDURES FOR ESTABLISHING COMPENSATION
Ascent performs periodic reviews of executive compensation to confirm
the competitiveness of the overall executive compensation package as compared
with industry peers who compete with Ascent for prospective employees who
possess the
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scientific and technical knowledge and skills required to develop, manufacture
and market pediatric drug products.
EXECUTIVE OFFICER COMPENSATION PROGRAM
The compensation programs for Ascent's executives consist principally
of three elements based upon the foregoing objectives: base salary, cash bonuses
and stock-based equity incentives in the form of participation in Ascent's stock
option plans.
Base Salary. In establishing base salaries for the executive officers,
including the chief executive officer, the compensation committee: (a) monitors
salaries at other companies, particularly those that are in the same industry as
Ascent or related industries and/or located in the same general geographic area
as Ascent; (b) considers historic salary levels of the individual and the nature
of the individual's responsibilities; (c) compares the individual's base salary
with those of other executives at Ascent; and (d) considers general economic
conditions, our financial performance and the individual's performance, to the
extent determined to be appropriate.
Annual Incentive Compensation. The compensation committee considers the
payment of cash bonuses pursuant to the 1997 Executive Bonus Plan, as amended
and restated, as part of its compensation program. In this regard, the
compensation committee determined to pay cash bonuses to Dr. Clemente and
Messrs. Bernardi, Fox, Moffitt and Vannatter for 1998. In establishing the
amounts of the cash bonuses for 1998, the compensation committee considered
Ascent's achievements in 1998, including the closing of the Series G financing
and the execution of the promotion agreement with Warner Lambert, and the roles
played by Dr. Clemente and Messrs. Bernardi, Fox, Moffitt and Vannatter in
accomplishing these achievements.
Long-Term Incentive Compensation. The compensation committee uses stock
options as a significant element of the compensation package of Ascent's
executive officers, including the chief executive officer, because they provide
an incentive to executives to maximize stockholder value and because they reward
the executives only to the extent that stockholders also benefit. The
compensation committee believes that it is to Ascent's advantage to increase the
interest of executives in Ascent's welfare, as such employees share the primary
responsibility for the management and growth of Ascent.
Our board of directors currently grants stock options based on the
recommendation of the compensation committee, or a subcommittee of the
compensation committee. It is not the policy of the compensation committee to
recommend the grant of stock options to executives annually, and the timing of
grants depends upon a number of factors, including (a) new hires of executives,
(b) the executives' current stock and option holdings, (c) vesting schedules of
outstanding options and (d) the current stock price, and such other factors as
the compensation
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committee deems relevant. In 1998, after reviewing Ascent's executive officers'
stock and option holdings, the compensation committee determined to recommend
the grant of stock options to Messrs. Bernardi, Moffitt and Vannatter. When
recommending the grant of stock options, it has generally been the policy of the
compensation committee to recommend that the exercise price of the options be
equal or greater than the fair market value of Ascent common stock on the date
of grant. For additional information concerning option grants to Named Executive
Officers, see the table under the heading "Option Grants in Last Fiscal Year."
Commencing in 1999, in order to comply with Section 162(m) of the Internal
Revenue Code, a subcommittee of the compensation committee has been delegated
the authority to grant options to executive officers.
Because of a decline in market value of Ascent common stock, some
outstanding options were exercisable at prices that exceeded the market value of
Ascent common stock. In view of this decline and in keeping with our philosophy
of using equity incentives to motivate and retain qualified executives, the
board of directors, including the compensation committee members, believed it
important to regain the incentive intended to be provided by options to purchase
shares of Ascent common stock. On September 4, 1998, our board of directors,
including the compensation committee members, unanimously approved a repricing
of some options granted to employees pursuant to Ascent's 1992 Equity Incentive
Plan. Only three executive officers, Mr. Gregory A. Vannatter, vice president,
marketing, Mr. John G. Bernardi, vice president, finance, and treasurer, and Mr.
Timothy K. Moffitt, vice president, sales, participated in the repricing.
Additional details regarding the repricing of their options can be found under
the heading "Repricing of Options" below.
TAX CONSIDERATIONS
Section 162(m) of the Internal Revenue Code, generally disallows a tax
deduction to public companies for compensation over $1.0 million paid to the
chief executive officer and four other most highly compensated executive
officers. Qualifying performance-based compensation will not be subject to the
deduction limit if certain requirements are met. In this regard, Ascent has
limited the number of shares subject to stock options which may be granted to
company employees in a manner that complies with the performance-based
requirements of Section 162(m). While the committee does not currently intend to
qualify its other compensatory awards as performance-based compensation, it will
continue to monitor the impact of Section 162(m) on us.
Compensation Committee
Andre L. Lamotte, Sc.D.
James L. Luikart
Lee J. Schroeder
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REPRICING OF OPTIONS
The following table sets forth information with respect to the
repricing of options during fiscal 1998: (a) the name of the executive officer;
(b) the date of the repricing; (c) the number of securities underlying the
repriced options; (d) the per-share market price of the underlying security at
the time of the repricing; (e) the original exercise price of the canceled
option; (f) the per share exercise price of the replacement option; and (g) the
amount of time remaining before the canceled option would have expired. We have
never repriced options prior to fiscal 1998. In accordance with the rules of the
Securities and Exchange Commission, the following table includes information
only with respect to optionees who were executive officers of Ascent at the time
of the repricing.
OPTION REPRICING
Length of
Number of Original Option
Securities Market Price Term
Underlying of Stock at Exercise Price Remaining at
Options Time of at Time of New Date of
Repriced or Repricing or Repricing or Exercise Repricing or
Name Date Amended Amendment Amendment Price Amendment(1)
- -------------------- -------- ----------- ------------ ------------- -------- ---------------
Alan R. Fox -- -- -- -- -- --
Emmett Clemente, -- -- -- -- -- --
Ph.D.
Gregory A. Vannatter 09/04/98 10,000 $1.875 $4.50 $3.75 03/16/08
09/04/98 8,000 $1.875 $7.25 $3.75 04/08/08
Timothy K. Moffitt 09/04/98 40,000 $1.875 $9.125 $3.75 06/24/07
09/04/98 10,000 $1.875 $4.50 $3.75 03/16/08
09/04/98 10,000 $1.875 $7.25 $3.75 04/08/08
John G. Bernardi 09/04/98 10,000 $1.875 $4.50 $3.75 03/16/08
09/04/98 6,000 $1.875 $7.25 $3.75 04/08/08
- -------------------
(1) The length of the original option term was not changed.
COMPENSATION COMMITTEE REPORT ON REPRICING OF OPTIONS
On September 4, 1998, our board of directors and the compensation
committee of our board of directors approved a repricing of some options granted
to employees, including some of Ascent's executive officers, pursuant to our
1992 Equity Incentive Plan. Because of a decline in market value of Ascent
common stock, some outstanding options were exercisable at prices that greatly
exceeded the market value of Ascent common stock. In view of this decline and in
keeping with Ascent's philosophy of using equity incentives to motivate and
retain qualified employees, the compensation committee believed it important to
regain the incentive intended to be provided by options to purchase shares of
Ascent common stock. The compensation committee
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believed the repricing was necessary as a result of the intense competition in
our industry for experienced managers, skilled scientists, sales and marketing
personnel, and other employees. Further, equity-based compensation is of
particular importance among drug development and marketing companies, and the
failure of Ascent to provide competitive equity-based compensation could require
us to pay significantly higher cash salaries and bonuses in order to attract and
retain qualified personnel. Because increased cash compensation would negatively
impact cash flow and would likely result in an immediate drop in the value of
stockholders' investments, the compensation committee believed that repricing
outstanding options and regaining the incentive intended to be provided by the
options would be in the best interests of Ascent and our stockholders.
The exercise price of the repriced options was above the then-current
fair market value of the common stock, thus requiring the stock price to
increase in order for the optionees to realize any value. In addition, in
exchange for the repricing, the vesting schedule of any of then unvested portion
of a repriced option was delayed until six months after the date of grant
specified in the original option. Accordingly, optionees were prohibited from
exercising the repriced options for at least six months. Except as otherwise
noted, vesting schedules of the repriced options remained the same as those of
the original options.
Pursuant to the terms of the repricing, 88 option holders, holding
options to purchase an aggregate of 555,450 shares of Ascent common stock, that
had exercise prices ranging from $3.875 to $9.125, were issued new options to
purchase an aggregate of 555,450 shares of Ascent common stock having an
exercise price of $3.75 per share. This included three executive officers,
holding options to purchase an aggregate of 94,000 shares of Ascent common
stock, that had exercise prices ranging from $4.50 to $9.125, who were issued
new options to purchase an aggregate of 94,000 shares of Ascent common stock at
an exercise price of $3.75 per share.
Compensation Committee
Andre L. Lamotte, Sc.D.
James L. Luikart
Lee J. Schroeder
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of our company's compensation committee are Dr.
Lamotte and Messrs. Luikart and Schroeder. No executive officer of Ascent has
served as a director or member of the compensation committee (or other committee
serving an equivalent function) of any other entity, one of whose executive
officers served as a director of or member of our compensation committee.
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Since January 1, 1998, we have engaged in the transactions described
below under "Certain Relationships and Related Transactions" with affiliates of
Mr. Luikart, a director of Ascent and a member of our compensation committee.
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STOCK PERFORMANCE GRAPH
The stock performance graph below compares the percentage change in
cumulative stockholder return on Ascent common stock for the period from May 29,
1997 (the date Ascent common stock was first publicly traded) through December
31, 1998 with the cumulative total return on (a) the Nasdaq National Market
Index and (b) the Nasdaq Pharmaceuticals Index.
[GRAPHIC OMITTED]
This graph assumes the investment of $100.00 in Ascent common stock (at
the initial public offering price), in the Nasdaq National Market Index and
in the Nasdaq Pharmaceuticals Index on May 29, 1997 and assumes dividends are
reinvested. Prior to May 29, 1997, Ascent common stock was not registered under
the Exchange Act.
MAY 29, 1997 DECEMBER 31, 1997 DECEMBER 31, 1998
------------ ----------------- -----------------
Ascent Pediatrics, Inc. $100.00 $ 65.28 $ 47.91
Nasdaq Pharmaceuticals Index $100.00 $100.44 $128.57
Nasdaq US Index $100.00 $113.03 $158.82
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of January 31, 1999,
regarding the beneficial ownership of Ascent common stock and Ascent Series G
preferred stock by (a) each person or entity known to us to beneficially own
more than five percent of Ascent common stock or Ascent Series G preferred
stock, (b) each director and Named Executive Officer of Ascent, (c) the chief
executive officer and the two other most highly compensated executive officers
of Ascent who were serving as such at December 31, 1998, and (d) all current
directors and executive officers of Ascent as a group.
The number of shares beneficially owned by each 5% stockholder,
director and executive officer is determined under rules promulgated by the
Securities and Exchange Commission, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under these rules,
beneficial ownership includes any shares as to which an individual or group has
sole or shared voting power or investment power and also any shares which an
individual or group has the right to acquire within 60 days of January 31, 1999
through the conversion of any convertible note or the exercise of any stock
option, warrant or other right. The inclusion in this annual report of these
shares, however, is not an admission that the named stockholder is a direct or
indirect beneficial owner of the shares. Unless otherwise indicated, each person
or group named in the table has sole voting and investment power (or shares the
power with his or her spouse) with respect to all shares of capital stock listed
as owned by the person or entity.
The "Total Percent of Common and Preferred Stock on an as-converted
Basis" column reflects each listed individual's or group's percent beneficial
ownership of Ascent voting stock on an as-converted basis. This column differs
from the column entitled "Percent of Class" with respect to Ascent common stock
because the percent calculation in this column is based on the assumption that
all of the shares of Ascent Series G preferred stock currently outstanding are
converted into 1,473,684 shares of Ascent common stock. The percent calculation
in the column entitled "Percent of Class" with respect to the Ascent common
stock includes shares of Ascent common stock issuable upon conversion of the
Ascent Series G preferred stock only to the extent that the listed individual or
group beneficially owns such shares of Ascent Series G preferred stock.
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Series G
Common Stock Preferred Stock
-------------------------- -------------------------
Total Percent
of Common
Number of Number of and Preferred
Shares Percent Shares Percent Stock on an
Beneficially of Beneficially of as-converted
Owned Class Owned Class Basis
------------ ------- ------------ ------- -------------
5% STOCKHOLDERS
---------------
Funds affiliated with FS Private 2,692,981 (1) 27.9% 5,250(2) 75.0% 26.8%
Investments LLC...................
55 East 52nd Street
37th Floor
New York, NY 10055
BancBoston Ventures Inc........... 852,883 (3) 10.9% 1,663 23.8% 9.5%
175 Federal Street
Boston, MA 02110
Medical Science Partners Group.... 824,302 (4) 11.8% -- -- 9.7%
161 Worcester Rd, Suite 301,
Framingham, MA 01701
Funds affiliated with Burr, Egan, 667,514 (5) 9.5% -- -- 7.8%
Deleage & Co......................
One Post Office Square
Boston, MA 02109
New York Life Insurance Company... 659,851 (6) 9.3% -- -- 7.7%
51 Madison Avenue
New York, NY 10010
Triumph-Connecticut Limited 654,591 (7) 8.6% -- -- 7.2%
Partnership.......................
60 State Street
Boston, MA 02109
Paribas Group..................... 535,840 (8) 7.5% -- -- 6.2%
c/o White & Case
1155 Avenue of the Americas
New York, NY 10036
Atlas Venture Fund II, L.P........ 424,063 (9) 6.0% -- -- 5.0%
222 Berkeley Street
Boston, MA 02109
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Series G
Common Stock Preferred Stock
-------------------------- -------------------------
Total Percent
of Common
Number of Number of and Preferred
Shares Percent Shares Percent Stock on an
Beneficially of Beneficially of as-converted
Owned Class Owned Class Basis
------------ ------- ------------ ------- -------------
DIRECTORS
---------
Raymond F. Baddour, Sc.D.......... 272,605 (10) 3.9% -- -- 3.2%
Robert E. Baldini................. 112,750 (11) 1.6% -- -- 1.3%
Emmett Clemente, Ph.D............. 317,150 (12) 4.5% -- -- 3.7%
Michael J. F. Du Cros............. 439,063 (13) 6.2% 5.1%
Alan R. Fox....................... 112,528 (14) 1.6% -- -- 1.3%
Andre L. Lamotte, Sc.D............ 851,565 (15) 12.2% -- -- 10.0%
James L. Luikart.................. 2,707,981 (16) 28.0% 5,250(17) 75.0% %
Terrance McGuire.................. 682,514 (18) 9.7% -- -- 8.0%
Lee J. Schroeder.................. 23,500 (19) * -- -- *
OTHER NAMED EXECUTIVE
OFFICERS
---------------------
Gregory A. Vannatter.............. 21,805 (20) * -- -- *
Timothy K. Moffitt................ 11,500 (21) * -- -- *
John G. Bernardi.................. 18,367 (22) * -- -- *
All directors and executive
officers as a group (12 persons) 4,466,065 (23) 48.6% 5,250(24) 75.0% 41.9%
- -------------------
*Represents less than 1% of the outstanding shares of Ascent common stock.
(1) Consists of (a) 974,316 shares issuable upon the conversion of Series
G preferred stock held by Furman Selz Investors II L.P., (b) 1,399,662
shares issuable upon the exercise of warrants held by Furman Selz
Investors II L.P. within 60 days of January 31, 1999, (c) 83,579
shares issuable upon the conversion of Series G preferred stock held
by FS Employee Investors LLC, (d) 119,961 shares issuable upon the
exercise of warrants held by FS Employee Investors LLC within 60 days
of January 31, 1999, (e) 47,368 shares issuable upon the conversion of
Series G preferred stock held by FS Parallel Fund L.P. and (f) 68,095
shares issuable upon the exercise of warrants held by FS Parallel Fund
L.P. within 60 days of January 31, 1999. Furman Selz Investors II
L.P., FS Employee Investors LLC and FS Parallel Fund L.P. are
affiliates under common control.
(2) Consists of (a) 4,628 shares of Series G preferred stock held by Furman
Selz Investors II L.P., (b) 397 shares of Series G preferred stock held
by FS Employee Investors LLC and (c) 225 shares of
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Series G preferred stock held by FS Parallel Fund L.P.. Furman Selz
Investors II L.P., FS Employee Investors LLC and FS Parallel Fund L.P.
are affiliates under common control.
(3) Consists of (a) 350,105 shares issuable upon the conversion of Series G
preferred stock and (b) 502,778 shares issuable upon the exercise of
warrants within 60 days of January 31, 1999.
(4) Consists of (a) 738,776 shares held by Medical Science Partners, L.P.,
(b) 2,888 shares issuable upon the exercise of warrants held by Medical
Science Partners, L.P. within 60 days of January 31, 1999, (c) 57,142
shares held by Medical Science Partners II, L.P., (d) 11,805 shares
issuable upon the exercise of warrants Medical Science Partners II,
L.P. within 60 days of January 31, 1999 and (e) 13,691 shares held by
Medical Science II Co-Investment, L.P. Medical Science Partners, L.P.,
Medical Science Partners II, L.P. and Medical Science II Co-Investment,
L.P. are affiliates under common control.
(5) Consists of (a) 582,341 shares held by Alta V Limited Partnership, (b)
78,319 shares issuable upon the exercise of warrants held by Alta V
Limited Partnership within 60 days of January 31, 1999, (c) 6,119
shares held by Customs House Partners and (d) 735 shares issuable upon
the exercise of warrants held by Customs House Partners within 60 days
of January 31, 1999. The respective general partners of each of these
funds exercise sole voting and investment power with respect to the
shares held by the funds.
(6) Includes 117,706 shares issuable upon the exercise of warrants within
60 days of January 31, 1999.
(7) Consists of 654,591 shares issuable upon the exercise of warrants.
(8) Consists of (a) 392,307 shares held by Paribas Principal, Inc., (b)
133,333 shares issuable upon the exercise of warrants held by Paribas
Principal, Inc. within 60 days of January 31, 1999 and (c) 10,200
shares issuable upon the exercise of warrants held by Banque Paribas
within 60 days of January 31, 1999. Paribas Principal, Inc. and Banque
Paribas are affiliates under common control.
(9) Includes 39,929 shares issuable upon the exercise of warrants within 60
days of January 31, 1999.
(10) Includes (a) 22,221 shares issuable upon the exercise of warrants
within 60 days of January 31, 1999 and (b) 15,000 shares issuable upon
the exercise of options within 60 days of January 31, 1999.
(11) Consists of 112,250 shares issuable upon the exercise of options within
60 days of January 31, 1999.
(12) Includes 144,500 shares issuable upon the exercise of options within 60
days of January 31, 1999.
(13) Consists of (a) the shares described in note (9) and (b) 15,000 shares
issuable upon the exercise of options within 60 days of January 31,
1999.
(14) Consists of (a) 26,845 shares held by Mr. Fox, (b) 3,332 shares
issuable upon the exercise of warrants held by Mr. Fox within 60 days
of January 31, 1999, (c) 76,500 shares issuable upon the exercise of
options held by Mr. Fox within 60 days of January 31, 1999, (d) 3,307
shares held by Mr. Fox's spouse, (e) 444 shares issuable upon the
exercise of warrants held by Mr. Fox's spouse within 60 days of January
31, 1999 and (f) 2,100 shares held by Mr. Fox's children.
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70
(15) Consists of (a) the shares described in note (4), (b) 9,153 shares held
by Dr. Lamotte, (c) 3,110 shares issuable upon the exercise of warrants
held by Dr. Lamotte within 60 days of January 31, 1999 and (d) 15,000
shares issuable upon the exercise of options held by Dr. Lamotte within
60 days of January 31, 1999. Dr. Lamotte is the managing general
partner of the general partners of Medical Science Partners, L.P.,
Medical Science Partners II, L.P. and Medical Science II Co-Investment,
L.P. and may be considered the beneficial owner of the shares held by
such entities, although Dr. Lamotte disclaims such beneficial
ownership, except as to his pecuniary interest therein.
(16) Consists of (a) the shares described in note (1) and (b) 15,000 shares
issuable upon the exercise of options within 60 days of January 31,
1999. Mr. Luikart is an executive vice president of ING Furman Selz
Investments, an affiliate of FS Private Investments LLC.
(17) Consists of the shares described in note (2).
(18) Consists of (a) the shares described in note (5) and (b) 15,000 shares
issuable upon the exercise of options within 60 days of January 31,
1999. Mr. McGuire is a general partner of Alta V Management Partners,
L.P., which is the general partner of Alta V Limited Partnership.
(19) Consists of 23,500 shares issuable upon the exercise of options within
60 days of January 31, 1999.
(20) Includes 14,875 shares issuable upon the exercise of options within 60
days of January 31, 1999.
(21) Includes 10,000 shares issuable upon the exercise of options within 60
days of January 31, 1999.
(22) Includes 14,875 shares issuable upon the exercise of options within 60
days of January 31, 1999.
(23) See notes (10) through (16) and notes (18) through (22).
(24) Consists of the shares described in note (2).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1998, we entered into or engaged in the following
transactions with the following directors, executive officers and 5%
stockholders of Ascent, and their affiliates:
ING Furman Selz. On May 13, 1998, we entered into the Series G
Securities Purchase Agreement with funds affiliated with ING Furman Selz
Investments LLC and BancBoston Ventures Inc. In accordance with this agreement,
on June 1, 1998, we issued and sold to these funds an aggregate of 7,000 shares
of Series G preferred stock exchangeable into $7.0 million aggregate principal
of 8% convertible subordinated notes of Ascent, $9.0 million aggregate principal
amount of 8% seven-year subordinated notes and seven-year warrants to purchase
2,116,958 shares of Ascent common stock at a per share exercise price of $4.75
for an aggregate purchase price of $16.0 million. The Series G preferred stock
will automatically convert into Ascent common stock under specified
circumstances based on the fair market value of Ascent common stock. On February
16, 1999, in connection with and as a condition to the
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strategic alliance with Alpharma, we entered into a second amendment to the May
1998 securities purchase agreement. The second amendment provides for, among
other things, (a) certain consents and waivers of the Series G purchasers in
connection with the strategic alliance, (b) amendments to covenants and the
definition of a default event in the May 1998 securities purchase agreement to
conform them to similar provisions of the Alpharma loan agreement, (c) the
agreement of the Series G purchasers to subordinate the indebtedness owed to
them to the indebtedness owed to Alpharma, (d) the right of the Series G
purchasers to designate an additional nominee to our board of directors, (e) our
agreement to exercise our right to exchange of all outstanding shares of Series
G preferred stock for 8% convertible subordinated notes in accordance with the
terms of the Series G preferred stock, (f) subject to stockholder approval, the
reduction in the exercise price of warrants to purchase 2,116,958 shares of
Ascent common stock from $4.75 per share to $3.00 per share and the agreement of
the Series G purchasers to exercise these warrants, (g) 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 (h) the cancellation of approximately $7.25
million of principal under the 8% 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. The Series G warrants expire on June 1, 2005. Mr.
James L. Luikart, a director of Ascent and a member of our compensation
committee, is one of the managing members of FS Private Investments, which
manages the investments of Furman Selz Investors II L.P. and affiliated funds, a
greater than 5% stockholder of Ascent.
On June 1, 1998, in connection with the Series G preferred stock
financing described above, we entered into a financial advisory services fee
agreement with ING Furman Selz and BancBoston Ventures Inc., under which ING
Furman Selz agreed to provide ongoing customary financial advisory services to
us at the times and on the matters mutually agreed to by us and ING Furman Selz
for an advisory fee of $150,000 per year. On June 1, 1998, in connection with
the closing of the Series G preferred stock financing, we paid ING Furman Selz a
closing fee of $381,250 and BancBoston Ventures, Inc. a closing fee of $118,750
under this agreement. In 1998, we paid ING Furman Selz a total of $112,500 in
financial advisory fees. On February 16, 1999, we amended this agreement in
connection with the proposed loan by Alpharma to provide that in lieu of making
additional cash payments to them, we will issue to ING Furman Selz 150,000
shares of Ascent common stock.
Triumph-Connecticut Limited Partnership. On January 31, 1997, we
entered into a securities purchase agreement with Triumph-Connecticut Limited
Partnership, a 5% stockholder of Ascent, and certain other purchasers identified
in the agreement, pursuant to which we issued on January 31, 1997 and June 4,
1997 promissory notes to Triumph-Connecticut Limited Partnership and related
entities in an aggregate amount of $7,000,000 and warrants exercisable for an
aggregate of 561,073 and 218,195 shares of Ascent common stock at per share
exercise prices of $0.01 and $5.29, respectively. On March 3, 1998, we paid an
aggregate of $875,000 in principal and $153,125 in interest on these promissory
notes. On June 1, 1998, in connection with the Series G preferred
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stock financing described above, we amended the securities purchase agreement
and paid Triumph-Connecticut Limited Partnership and related entities aggregate
consideration of $5,379,793 in full payment of their promissory notes.
Registration Rights. Some persons and entities, including the
purchasers of Ascent Series G preferred stock and related warrants and
Triumph-Connecticut Limited Partnership, are entitled to registration of their
shares of common stock under the Securities Act, including shares of common
stock that were acquired upon conversion of convertible preferred stock or the
exercise of warrants, under the terms of registration agreements between us and
such persons and entities. The registration agreements generally provide that in
the event we propose to register any of our securities under the Securities Act,
the holders of registration rights are entitled to include shares in the
registration, subject to the right of the managing underwriter of any
underwritten offering to exclude some or all of their shares from the
registration for marketing reasons. Some holders of registration rights also
have the right to require us to register their shares of common stock under the
Securities Act, including shares of common stock that may be acquired upon the
conversion of convertible preferred stock of the exercise of warrants, if the
holders of such common stock holding specified percentages of registrable shares
so request, and we are required to use our best efforts to effect the
registration, subject to some conditions and limitations. We are generally
required to bear the expense of all registrations. In June 1998, we filed a
registration statement with the Securities and Exchange Commission registering
the 779,268 shares of Ascent common stock issuable upon exercise of the warrants
held by Triumph-Connecticut Limited Partnership and related entities. As of
December 31, 1998, approximately 9,385,935 shares of common stock (including
shares issuable pursuant to the exercise of warrants and the conversion of
shares of Ascent Series G preferred stock) were subject to registration
agreements.
We believe that the securities issued in the transactions described
above were sold at their then fair market value and that the terms of the
transactions described above were no less favorable than we could have obtained
from unaffiliated third parties.
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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:
1. Financial Statements of Ascent Pediatrics, Inc.:
Report of Independent Accountants
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity (Deficit)
Statements of Cash Flows
Notes to Financial Statements
2. Financial Statements of a Product Line of Upsher-Smith
Laboratories, Inc.:
Independent Auditors' Report
Statements of Assets Related to the Product Line Acquired by
Ascent Pediatrics, Inc. as of December 29, 1996 and July
9, 1997 (unaudited)
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)
Notes to the Financial Statements
3. Financial Statement Schedule
Schedules not included herein are omitted because they are
not applicable or the required information appears in
the consolidated financial statements or notes thereto.
(b) 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.
(c) REPORTS ON FORM 8-K: No reports on Form 8-K were filed during
the last quarter of the Company's fiscal year ended December 31,
1998.
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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 29, 1999 ASCENT PEDIATRICS, INC.
(Registrant)
By: /s/ Alan R. Fox
-------------------------------------
Alan R. Fox
President and Chief Executive Officer
(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.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Alan R. Fox President, Chief Executive Officer and March 29, 1999
- --------------- Director (Principal Executive Officer)
Alan R. Fox
/s/ John G. Bernardi Vice President, Finance and Treasurer March 26, 1999
- -------------------- (Principal Financial and Accounting
John G. Bernardi Officer)
/s/ Emmett Clemente, Ph.D. Chairman March 26, 1999
- --------------------------
Emmett Clemente, Ph.D.
/s/ Robert E. Baldini Vice Chairman March 26, 1999
- ---------------------
Robert E. Baldini
/s/ Raymond F. Baddour, Ph.D. Director March 26, 1999
- -----------------------------
Raymond F. Baddour, Ph.D.
/s/ Michael J.F. Du Cros Director March 26, 1999
- ------------------------
Michael J.F. Du Cros
/s/ Andre Lamotte, Sc.D. Director March 30, 1999
- -------------------------
Andre Lamotte, Sc.D.
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75
/s/ James L. Luikart Director March 26, 1999
- --------------------
James L. Luikart
/s/ Lee J. Schroeder Director March 26, 1999
- --------------------
Lee J. Schroeder
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APPENDIX A
ASCENT PEDIATRICS, INC.
INDEX TO FINANCIAL STATEMENTS
ASCENT PEDIATRICS, INC.:
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (Deficit)................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
A PRODUCT LINE OF UPSHER-SMITH LABORATORIES, INC.:
Independent Auditors' Report................................ F-27
Statement of Assets Related to the Product Line Acquired by
Ascent Pediatrics, Inc. as of December 29, 1996 and July
9, 1997 (unaudited)....................................... F-28
Statements of Net Sales and Identified Costs and Expenses of
the Product Line Acquired by Ascent Pediatrics, Inc. Years
ended December 31, 1995 and December 29, 1996 and seven
months ended July 9, 1997 (unaudited)..................... F-29
Notes to the Financial Statements........................... F-30
F-1
77
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ascent Pediatrics, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, comprehensive loss, stockholders' equity (deficit) and cash flows
present fairly, in all material respects, the financial position of Ascent
Pediatrics, Inc., at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform our
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has suffered recurring losses from operations
and requires additional financing. These factors raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note A. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 24, 1999
F-2
78
ASCENT PEDIATRICS, INC.
BALANCE SHEETS
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents................ $ 2,171,777 $11,700,612
Current marketable securities............ -- 2,527,900
Accounts receivable, less allowance for
doubtful accounts of $48,000 and
$50,000 at December 31, 1998 and 1997,
respectively.......................... 918,307 765,609
Inventory................................ 919,785 789,498
Other current assets..................... 274,983 124,874
----------- -----------
Total current assets.................. 4,284,852 15,908,493
Fixed assets, net.......................... 730,894 759,563
Debt issue costs, net...................... 606,092 436,515
Intangibles, net........................... 10,523,789 11,215,506
Other assets............................... 155,303 113,386
----------- -----------
Total assets.......................... $16,300,930 $28,433,463
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable......................... $ 1,510,193 $ 1,509,258
Accrued expenses......................... 2,306,243 1,157,379
Promissory note.......................... -- 5,500,000
Subordinated secured notes, current
portion............................... -- 3,500,000
----------- -----------
Total current liabilities............. 3,816,436 11,666,637
Subordinated secured notes................. 8,681,474 1,252,068
----------- -----------
Total liabilities..................... 12,497,910 12,918,705
Commitments and contingencies (Note H)
Stockholders' equity
Preferred stock, $.01 par value;
5,000,000 shares authorized; 7,000
shares, designated as Series G
convertible exchangeable preferred
stock, issued and outstanding at
December 31, 1998 (liquidation
preference of $7,000,000)............. 6,461,251 --
Common stock, $.00004 par value;
60,000,000 shares authorized;
6,975,921 and 6,893,332 shares issued
and outstanding at December 31, 1998
and 1997, respectively................ 279 276
Additional paid-in capital............... 47,951,271 47,891,846
Accumulated deficit...................... (50,609,781) (32,378,480)
Unrealized gain on securities............ -- 1,116
----------- -----------
Total stockholders' equity............ 3,803,020 15,514,758
----------- -----------
Total liabilities and stockholders'
equity.............................. $16,300,930 $28,433,463
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-3
79
ASCENT PEDIATRICS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------ ------------ -----------
Net revenue..................... $ 4,475,718 $ 2,073,458 $ --
Costs of sales.................. 2,306,717 1,245,543 --
------------ ------------ -----------
Gross margin.................... 2,169,001 827,915 --
Costs and expenses
Selling, general and
administrative............. 14,513,559 8,305,205 2,805,352
Research and development...... 3,868,185 4,376,700 3,760,948
------------ ------------ -----------
Total costs and expenses...... 18,381,744 12,681,905 6,566,300
Loss from operations....... (16,212,743) (11,853,990) (6,566,300)
Interest income................. 368,570 693,019 79,084
Interest expense................ (1,220,665) (1,358,850) --
Other income.................... -- 21,742 --
------------ ------------ -----------
Loss before extraordinary
item..................... (17,064,838) (12,498,079) (6,487,216)
Extraordinary item loss on early
extinguishment of debt (Note
N), net of taxes of $0........ 1,166,463 -- --
------------ ------------ -----------
Net loss................... (18,231,301) (12,498,079) (6,487,216)
Accretion to redemption value of
preferred stock............... -- 247,361 137,783
Preferred stock dividend........ 449,169 -- --
------------ ------------ -----------
Net loss to common
stockholders............. $(18,680,470) $(12,745,440) $(6,624,999)
============ ============ ===========
Results per common share:
Historical -- basic and
diluted:
Loss before extraordinary
item..................... $ (2.46) $ (3.02) $ (32.75)
============ ============ ===========
Extraordinary item loss on
early extinguishment of
debt..................... $ (0.17) -- --
============ ============ ===========
Net loss................... $ (2.63) $ (3.02) $ (32.75)
============ ============ ===========
Net loss to common
stockholders............. $ (2.69) $ (3.08) $ (33.44)
============ ============ ===========
Weighted average shares
outstanding................... 6,939,348 4,134,068 198,091
============ ============ ===========
STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ -----------
Net loss............................ $(18,231,301) $(12,498,079) $(6,487,216)
Changes in unrealized gain (loss)
on securities..................... -- 1,116 --
------------ ------------ -----------
Comprehensive loss.................. $(18,231,301) $(12,496,963) $(6,487,216)
============ ============ ===========
The accompanying notes are an integral part of the financial statements.
F-4
80
ASCENT PEDIATRICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
NUMBER OF SHARES
----------------------- PAR ADDITIONAL
PREFERRED COMMON PREFERRED PREFERRED PREFERRED VALUE PAID-IN
STOCK STOCK SERIES A SERIES B SERIES G COMMON CAPITAL
--------- ------ --------- --------- --------- ------ ----------
Balance, December 31, 1995................. 1,199,999 197,837 $ 280,110 $ 2,574,993 -- $ 8 --
Common stock issued upon option exercise at
$2.35 per share.......................... 318 750
Warrant proceeds........................... 4,800
Accretion to redemption value of Series F
Redeemable convertible preferred stock... (5,550)
Net loss...................................
----------- --------- --------- ------------ ---------- ---- -----------
Balance, December 31, 1996................. 1,199,999 198,155 280,110 2,574,993 -- 8 --
Accretion to redemption value of Series F
Redeemable convertible preferred stock...
Issuance of common stock pursuant to an
initial public offering net of issuance
costs of $2,630,751...................... 2,240,000 90 17,529,249
Conversion of preferred stock.............. (1,199,999) 4,440,559 (280,110) (2,574,993) 178 27,853,861
Cashless exercise of warrants.............. 13,296 -- --
Warrants issued to Subordinated Secured
Noteholders.............................. 2,505,740
Common stock issued upon option exercise at
$2.35 per share.......................... 1,275 -- 2,996
Common stock issued for sales force........ 47 -- --
Change in unrealized gain on securities....
Net loss...................................
----------- --------- --------- ------------ ---------- ---- -----------
Balance, December 31, 1997............... 0 6,893,332 -- -- -- 276 47,891,846
Series G convertible exchangeable preferred
stock, net of issuance costs of
$538,749................................. 7,000 6,461,251
Warrants issued to Subordinated Secured
Noteholders, net of issuance costs of
$24,488.................................. 322,997
Common stock issued upon option exercise... 29,963 1 40,499
Employee stock purchase plan............... 52,626 2 117,798
Stock option compensation expense.......... 27,300
Dividend on Series G convertible
exchangeable preferred stock............. (449,169)
Change in unrealized gain (loss) on
securities...............................
Net loss...................................
----------- --------- --------- ------------ ---------- ---- -----------
Balance, December 31, 1998............... 7,000 6,975,921 $ -- $ -- $6,461,251 $279 $47,951,271
=========== ========= ========= ============ ========== ==== ===========
UNREALIZED STOCKHOLDERS'
ACCUMULATED GAIN ON EQUITY
DEFICIT SECURITIES (DEFICIT)
----------- ---------- -------------
Balance, December 31, 1995................. $(13,013,591) -- $(10,158,480)
Common stock issued upon option exercise at
$2.35 per share.......................... 750
Warrant proceeds........................... 4,800
Accretion to redemption value of Series F
Redeemable convertible preferred stock... (132,233) (137,783)
Net loss................................... (6,487,216) (6,487,216)
------------ ------ ------------
Balance, December 31, 1996................. (19,633,040) -- (16,777,929)
Accretion to redemption value of Series F
Redeemable convertible preferred stock... (247,361) (247,361)
Issuance of common stock pursuant to an
initial public offering net of issuance
costs of $2,630,751...................... 17,529,339
Conversion of preferred stock.............. 24,998,936
Cashless exercise of warrants..............
Warrants issued to Subordinated Secured
Noteholders.............................. 2,505,740
Common stock issued upon option exercise at
$2.35 per share.......................... 2,996
Common stock issued for sales force........ --
Change in unrealized gain on securities.... 1,116 1,116
Net loss................................... (12,498,079) (12,498,079)
------------ ------ ------------
Balance, December 31, 1997............... (32,378,480) 1,116 15,514,758
Series G convertible exchangeable preferred
stock, net of issuance costs of
$538,749................................. 6,461,251
Warrants issued to Subordinated Secured
Noteholders, net of issuance costs of
$24,488.................................. 322,997
Common stock issued upon option exercise... 40,500
Employee stock purchase plan............... 117,800
Amortization of unearned compensation...... 27,300
Dividend on Series G convertible
exchangeable preferred stock............. (449,169)
Change in unrealized gain (loss) on
securities............................... (1,116) (1,116)
Net loss................................... (18,231,301) (18,231,301)
------------ ------ ------------
Balance, December 31, 1998............... $(50,609,781) $ -- $ 3,803,020
============ ====== ============
The accompanying notes are an integral part of the financial statements.
F-5
81
ASCENT PEDIATRICS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------ ------------ -----------
Cash flows for operating activities:
Net loss...................................... $(18,231,301) $(12,498,079) $(6,487,216)
Adjustments to reconcile net loss to net cash
used For operating activities:
Depreciation and amortization............... 1,234,901 630,253 52,833
Non-cash interest expense................... 560,295 1,132,808 --
Non-cash extraordinary items................ 1,166,463
Provision for bad debts..................... -- 50,000 --
Gain/(loss) on sales of fixed assets........ 8,568 (9,242) --
Changes in operating assets and liabilities:
Accounts receivable...................... (152,698) (815,609) --
Inventory................................ (130,287) (379,046) --
Other assets............................. (192,026) (121,395) (73,193)
Accounts payable......................... 935 1,012,603 384,312
Accrued expenses......................... 842,049 80,823 837,903
------------ ------------ -----------
Net cash used for operating
activities........................... (14,893,101) (10,916,884) (5,285,361)
Cash flows used for investing activities:
Purchase of property and equipment............ (356,335) (804,896) (59,694)
Proceeds from sale of fixed assets............ -- 38,050 --
Payments related to acquisition............... (5,500,000) (6,155,145) (250,000)
Purchase of marketable securities............. -- (2,526,784) --
Sales of marketable securities................ 2,526,784 -- --
------------ ------------ -----------
Net cash used for investing
activities........................... (3,329,551) (9,448,775) (309,694)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs.............................. 185,600 17,529,339 750
Proceeds from issuance of preferred stock, net
of issuance costs........................... 6,461,251 6,922,229 5,137,201
Proceeds from issuance of debt and related
warrants.................................... 8,975,512 7,000,000 --
Repayment of debt............................. (6,125,000) (875,000) --
Payment of debt issue costs................... (661,192) (596,040) --
Payments of preferred stock dividends......... (142,354) -- --
Proceeds from exercise of warrants............ -- -- 4,800
------------ ------------ -----------
Net cash provided by financing
activities........................... 8,693,817 29,980,528 5,142,751
Net (decrease) increase in cash and cash
equivalents................................... (9,528,835) 9,614,869 (452,304)
Cash and cash equivalents, beginning of
period........................................ 11,700,612 2,085,743 2,538,047
------------ ------------ -----------
Cash and cash equivalents, end of period........ $ 2,171,777 $ 11,700,612 2,085,743
============ ============ ===========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest.................................... $ 502,550 $ 175,000 $ --
Noncash transactions:
Conversion of convertible and redeemable
convertible preferred stock to common stock... -- 27,854,039 --
The accompanying notes are an integral part of the financial statements.
F-6
82
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
Ascent Pediatrics, Inc. (the "Company"), formerly Ascent Pharmaceuticals,
Inc., incorporated in Delaware on March 16, 1989, is a drug development and
marketing company focused exclusively on the pediatric market. Since its
inception, until July 9, 1997, the Company operated as a development stage
enterprise devoting substantially all of its efforts to establishing a new
business and to carrying on development activities. On July 10, 1997, the
Company closed the acquisition of the Feverall line of acetaminophen rectal
suppositories from Upsher-Smith Laboratories, Inc. ("Upsher-Smith"), pursuant to
an Asset Purchase Agreement dated as of March 25, 1997 (the "Asset Purchase
Agreement") between the Company and Upsher-Smith and subsequently commenced
sales of the Feverall line of products. In 1997, the Company also commenced
sales of Pediamist nasal saline spray during the quarter ended December 31,
1997. During the quarter ended March 31, 1998, the Company began marketing
Duricef([) (cefadroxil monohydrate) oral suspension to pediatricians in the
United States pursuant to a co-promotion agreement with Bristol-Myers Squibb
U.S. Pharmaceuticals Group.
The Company has incurred net losses since its inception and expects to
incur additional operating losses in the future as the Company continues its
product development programs, growth of its sales and marketing organization and
introduces its products to the market. The Company is subject to a number of
risks similar to other companies in the industry, including rapid technological
change, uncertainty of market acceptance of products, uncertainty of regulatory
approval, limited sales and marketing experience, competition from substitute
products and larger companies, customers' reliance on third-party reimbursement,
the need to obtain additional financing, compliance with government regulations,
protection of proprietary technology, dependence on third-party manufacturers,
distributors, collaborators and limited suppliers, product liability, and
dependence on key individuals.
PLAN OF OPERATIONS
Ascent has incurred net operating losses since its inception. At December
31, 1998, the Company's cumulative deficit was approximately $51,059,000. Such
losses have resulted primarily from costs incurred in the Company's product
development programs, general and administrative costs associated with the
Company's product development and costs associated with raising capital and the
establishment of the Company's sales force. The Company expects to incur
additional operating losses as it continues its product development programs and
maintains its sales and marketing organization and introduces product to the
market and expects cumulative losses to increase.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plan to continue operations is
principally based on increased net sales combined with reduced expenditures and
consummating the strategic alliance with Alpharma, Inc., through its subsidiary
Alpharma USPD, Inc. ("Alpharma"). However, there can be no assurance that the
Company will consummate the strategic alliance with Alpharma described below or
increase net sales to fund operations. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts and the classification of liabilities that might be necessary
should the Company be unable to continue in existence.
F-7
83
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company and Alpharma Inc., have entered into agreements creating a
strategic alliance. Under these agreements, Alpharma will provide up to $40
million in financing to the Company through 7.5% convertible subordinated notes
due in 2004 and 2005. The agreements are subject to approval of the Company's
shareholders at a meeting expected to be held in the second quarter of 1999. See
Note Q for a discussion of the strategic alliance with Alpharma.
The Company anticipates that, based upon its current operating plan and its
existing capital resources, it will require approximately $8.0 million of
additional funds to meet its capital requirements through the first quarter of
2000, when the Company currently expects to reach cash-break-even. This amount
does not take into account the $4.0 million borrowed from Alpharma on February
19, 1999 or the additional $8.0 million which the Company may borrow from
Alpharma, subject to stockholder approval of the strategic alliance, for general
corporate purposes under the Loan Agreement dated February 16, 1999 by and among
the Company, Alpharma and Alpharma, Inc. If the Company's stockholders approve
the strategic alliance with Alpharma, the Company expects to borrow this $8.0
million from Alpharma under the loan agreement.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from the estimates and assumptions used by
management.
Basis of Presentation
Certain prior year amounts may have been reclassified to conform to the
current year's presentation.
Cash, Cash Equivalents and Marketable Securities
Cash equivalents consist of money market mutual funds and other highly
liquid investments with original maturities of three months or less. Current
marketable securities include only investments with remaining maturities of
twelve months or less. The Company classifies all securities as
available-for-sale. These securities are reported at fair value as of the
balance sheet date. Net unrealized holding gains and losses of current
marketable securities are included in stockholders' equity. Gains and losses on
sales of securities are calculated using the specific identification method.
Financial Instruments
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
current marketable securities and accounts receivable.
F-8
84
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Inventory
Inventories, consisting of raw materials, work-in-process and finished
goods, are stated at the lower of cost (determined on a first-in, first-out
basis) or market.
Fixed Assets
Fixed assets are recorded at cost. Equipment and furniture and fixtures are
depreciated on a straight-line basis over the useful life of the asset,
typically five or seven years. Leasehold improvements are depreciated on a
straight-line basis over the shorter of the life of the lease or the useful life
of the asset. The costs and accumulated depreciation of fixed assets sold are
removed from the accounts and the related gains or losses, if any, are reflected
in earnings or loss for the period.
Intangible Assets
Intangible assets consist of goodwill, patents, trademarks and a
manufacturing agreement and are being amortized using the straight-line method
over useful lives of fifteen to twenty years. The Company periodically reviews
the propriety of carrying amounts of its intangible asserts as well as the
amortization periods to determine whether current events and circumstances
warrant adjustment to the carrying value of estimated useful lives. This
evaluation compares the expected future cash flows with the carrying values of
related intangible assets. If the evaluation indicates an impairment in value,
the unrealizable intangible asset values are charged to operations.
Revenue Recognition
Product revenue is recognized upon shipment of product provided that no
significant obligations remain outstanding and the resulting receivable is
deemed collectible by management. License revenue is recognized under a
collaborative license agreement as earned based upon the performance
requirements of such agreement.
Research and Development Expenses
Research and development costs are expensed as incurred.
Advertising Expenses
Costs for catalogs and other media are expensed as incurred. For the years
ended December 31, 1998, 1997 and 1996, costs were $1,278,002, $1,615,318 and
$423,656, respectively.
Income Taxes
The Company accounts for income taxes under Financial Accounting Standards
No. 109, "Accounting for Income Taxes," which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns.
F-9
85
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Accounting for Stock-Based Compensation
The Company continues to apply the provisions of Accounting Principles
Board ("APB") Opinion No. 25 to account for its stock option grants and has
elected the disclosure-only alternative permitted under the Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation. The Company has disclosed the pro forma net loss and pro forma net
loss per share in the footnotes using the fair value based method in fiscal
years 1998, 1997 and 1996.
Net Loss Per Common Share
The Company follows Statement of Financial Accounting Standard ("SFAS")
No. 128, "Earnings Per Share," which specifies the computation, presentation and
disclosure requirements for net income (loss) per common share. Basic net income
(loss) per common share is computed based on the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per
common share gives effect to all dilutive potential common shares outstanding
during the period. Under SFAS No. 128, the computation of diluted earnings per
share does not assume the issuance of common shares that have an antidilutive
effect on net income (loss) per common share.
Options, warrants, preferred stock and debt to purchase or convert to
1,890,487, 3,196,511 and 5,275,193 shares of common stock were outstanding as of
December 31, 1998, 1997 and 1996, but were not included in the computation of
diluted net loss per common share. These potentially dilutive securities have
not been included in the computation of diluted net loss per common share
because the Company is in a loss position, and the inclusion of such shares,
therefore, would be antidilutive.
Additionally, options and warrants to purchase 3,026,603, 965,726 and 0
shares of common stock were outstanding as of December 31, 1998, 1997 and 1996,
respectively, but were not included in the computation of diluted net loss per
common share because the options and warrants have exercise prices greater than
the average market price of the common shares and, therefore, would be
antidilutive under the treasury stock method.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components. Components of comprehensive income are
net income and all other non-owner changes in equity such as the change in the
unrealized gains and losses on certain marketable securities. SFAS 130 requires
that an enterprise: (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a balance sheet. SFAS 130 was effective for
financial statements issued for periods beginning after December 15, 1997, which
for the Company is the first quarter of 1998. Presentation of comprehensive
income for earlier
F-10
86
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
periods provided for comparative purposes is required. The Company has adopted
SFAS 130 in the accompanying financial statements.
Segments of an Enterprise
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." This statement
includes requirements to report selected segment information quarterly and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. The
statement is effective for annual periods beginning after December 15, 1997.
Reclassification for earlier periods is required, unless impracticable, for
comparative purposes. The Company currently has only one segment, therefore,
SFAS No. 131 does not have a material impact on its presentation of financial
position or results of operations.
In July 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information",
superseding SFAS 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 established standards for the way public business
enterprises report information about operating segments in annual financial
statements and requires those enterprises to report selected information about
operating segments in financial statements. It also requires disclosures about
products and services, geographic areas and major customers. The Company is a
drug development and marketing company focused exclusively on the pediatric
market. The Company evaluated its business activities that are regularly
reviewed by the executive management team and the Board of Directors for which
discrete financial information is available. As a result of this evaluation, the
Company determined that it has one operating segment and, accordingly, one
reportable segment. The adoption of SFAS 131 did not effect the results of
operations, financial position, or require the disclosure of segment information
since the Company has one reportable segment.
Recent Pronouncements
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5
"Accounting for the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5
requires all costs of start-up activities (as defined by SOP 98-5) to be
expensed as incurred. This statement is effective for periods beginning after
December 15, 1998. The Company does not believe SOP 98-5 will have a significant
impact on its financial statement disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ('SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters beginning after
June 15, 1999. The Company
F-11
87
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
will adopt SFAS 133 by January 1, 2000. The Company does not believe that SFAS
133 will have a significant impact on its financial statement disclosure.
C. MARKETABLE SECURITIES
Investments in marketable securities consisted of the following:
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------- -----------------------
COST FAIR VALUE COST FAIR VALUE
---------- ---------- ---------- ----------
U.S. Government & Agency
Obligations................... $ -- $ -- $2,526,784 $2,527,900
========== ========== ========== ==========
The net unrealized gain at December 31, 1998 and 1997 was $0 and $1,116,
respectively.
D. INVENTORIES
Inventories consist of the following:
DECEMBER 31, 1998
--------------------
1998 1997
-------- --------
Raw materials............................................ $248,434 $455,663
Work in process.......................................... -- 35,110
Finished goods........................................... 671,351 298,725
-------- --------
Total.......................................... $919,785 $789,498
======== ========
E. FIXED ASSETS
Fixed assets consisted of the following:
DECEMBER 31,
------------------------
1998 1997
---------- ----------
Equipment............................................. $1,050,278 $ 780,704
Furniture and fixtures................................ 239,245 212,557
Leasehold improvements................................ 98,213 54,517
---------- ----------
Total equipment....................................... $1,387,736 $1,047,778
Less:
Accumulated depreciation.............................. (656,842) (288,215)
---------- ----------
Total............................................... $ 730,894 $ 759,563
========== ==========
Depreciation expense amounted to $376,437, $179,669 and $51,582 for the
years ended December 31, 1998, 1997 and 1996, respectively.
F-12
88
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
F. CO-PROMOTION AGREEMENTS
DURICEF
On February 6, 1998, the Company entered into an agreement with
Bristol-Myers Squibb U.S. Pharmaceutical Group to exclusively promote Duricef(R)
(cefadroxil monohydrate) oral suspension to pediatricians in the U.S. The
Company terminated the agreement effective December 31, 1998. As compensation
for the Company's co-promotional efforts, Bristol-Myers Squibb had agreed to pay
the Company a specified percentage of net sales of the product attributed to
pediatricians (as defined in the agreement) on sales above a specified number of
prescriptions for the product. In addition, Bristol-Myers Squibb had agreed to
reimburse the Company for a specified amount of the Company's marketing costs
during each year of the agreement. During fiscal year ended December 31, 1998,
the Company earned revenue of $123,000 under the terms of the agreement.
OMNICEF
In November 1998, the Company signed a promotion agreement with Warner-
Lambert Company to begin marketing, in February 1999, OMNICEF(R) (cefdinir) oral
suspension and capsules to pediatricians in the United States. The Company
agreed to copromote OMNICEF(R) (cefdinir) oral suspension and capsules as part
of its strategy to leverage its marketing and sales capabilities, including its
domestic sales force. The Company believes that it can increase the market
penetration of OMNICEF(R) (cefdinir) oral suspension and capsules in the
pediatric market through marketing activities directed exclusively at the
pediatric market. Moreover the Company believes that OMNICEF(R) (cefdinir) oral
suspension strengthens its product line and complements Primsol, which is being
developed for the treatment of acute otitis media ("AOM"), or middle ear
infection.
G. INCOME TAXES
The provision for income taxes consists of the following:
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Deferred tax expenses/(benefits):
Federal................................. $(5,433,714) $(4,276,253) $(1,996,116)
State................................... (2,096,174) (345,344) (616,286)
Change in Valuation Allowance........... 7,529,888 4,621,597 2,612,402
----------- ----------- -----------
Total Provision...................... $ 0 $ 0 $ 0
=========== =========== ===========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As of December 31, the
components of deferred tax assets are as follows:
F-13
89
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
Net operating loss carryforwards.................. $ 12,596,997 $ 5,215,788
Credit carryforward............................... 436,917 489,623
Capitalized expenses:
Research and development........................ 4,708,695 3,712,694
G&A............................................. 2,362,573 3,046,812
Other........................................... 19,087 91,292
------------- -------------
Total deferred tax assets......................... 20,086,095 12,556,209
------------- -------------
Valuation allowance............................... (20,086,095) (12,556,209)
------------- -------------
Net deferred tax asset............................ $ -- $ --
============= =============
The provision for income taxes differs from the Federal statutory rate due
to the following:
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
Tax at statutory rate.................................. (34.0)% (34.0)% (34.0)%
State taxes -- net of federal benefit.................. (8.0) (1.8) (6.3)
Other.................................................. 0.3 (1.2) 0.0
Change in valuation allowances......................... 41.7 37.0 40.3
----- ----- -----
Effective tax rate..................................... 0.0% 0.0% 0.0%
At December 31, 1998 the Company had net operating loss carryforwards of
$31,900,000 and $29,500,00 for federal and state income tax purposes,
respectively. The federal net operating losses expire beginning December 31,
2004 through 2018. The state net operating losses expire beginning December 31,
1999 through 2003. The use of these losses may be limited due to ownership
change limitations under Section 382 of the Internal Revenue Code of 1986.
The research and experimental credit carry forward at December 31, 1998 was
$325,378 for federal income tax purposes.
Management of the Company has evaluated the positive and negative evidence
impacting the realizability of its deferred tax assets, which are comprised
principally of net operating loss carryforwards, tax credits and capitalized
expenses, as required by Statement of Financial Accounting Standards No. 109.
Management has considered the Company's history of annual and cumulative losses
and concluded, in accordance with the applicable accounting standards, that it
is more likely than not that it will not generate future taxable income prior to
the expiration of these items. Based on the weight of the available evidence, it
is more likely than not that all of the deferred tax assets will not be
realized, and accordingly, the deferred tax assets have been fully reserved.
H. COMMITMENTS
The Company leases office space and equipment under noncancelable operating
leases expiring through the year 2002. The Company has an option to renew the
building lease
F-14
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ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
for an additional five-year period. Rent expense was $300,904, $233,043 and
$55,878 for fiscal years 1998, 1997 and 1996, respectively.
Future minimum lease commitments are as follows:
1999................................................. 316,749
2000................................................. 317,317
2001................................................. 313,596
2002................................................. 51,435
--------
Total................................................ $999,097
========
The Company is a party to supply agreements with two third party
manufacturers under which the third party manufacturers have agreed to
manufacture Primsol trimethoprim solution and Feverall acetaminophen
suppositories for the Company, and the Company has agreed to purchase all
amounts of such products as it may require for the sale in the United States
from those third party manufacturers in accordance with agreed upon price
schedules. The agreement for Primsol trimethoprim solution may be terminated by
either party on three months notice any time after October 17, 2004. The Company
does not currently have any outstanding purchase agreements with this third
party manufacturer at this time. Under the Feverall acetaminophen suppositories
agreement, the Company may renew the agreement for two additional five-year
terms, the first of which the Company may effect by giving notice one year
before the expiration of the contract on July 10, 2002. The Company currently
intends to renew this agreement. The Company currently has outstanding purchase
agreements of $335,000 with this third party manufacturer.
I. ACCRUED EXPENSES
Accrued expenses consisted of the following:
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
Employee compensation expenses.................. $ 762,664 $ 109,887
Advertising expenses............................ 183,509 198,599
Legal and accounting expenses................... 114,441 101,238
Selling fees and chargebacks.................... 254,632 336,969
Interest payable................................ 208,862 51,042
Preferred stock dividend........................ 306,815 0
Other........................................... 475,320 334,644
---------- ----------
$2,306,243 $1,157,379
========== ==========
J. STOCKHOLDERS' EQUITY AND PREFERRED STOCK
On February 3, 1997, February 19, 1997 and February 28, 1997, the Company
completed a third, fourth and fifth closing of its Series F redeemable
convertible preferred stock financing, respectively, resulting in the issuance
of 1,104,229 shares at $6.50 per
F-15
91
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
share and net proceeds of $6,922,229. Pursuant to the Series F redeemable
convertible preferred stock financing the Company granted the purchasers of the
third, fourth and fifth closing of Series F redeemable convertible preferred
stock financing, warrants to purchase an aggregate of 362,152 shares of common
stock (See Note K).
On May 27, 1997, the Company effected a 0.85-for-one reverse stock split of
its outstanding common stock. The authorized number of shares of common stock
was increased to 60,000,000. Accordingly, all shares and per share data have
been restated to reflect the reverse stock split as though it had occurred at
the beginning of the initial period presented.
In June 1997, the Company completed its initial public offering ("Public
Offering") of 2,240,000 shares of Common Stock, raising approximately $17.5
million of net proceeds after deducting offering costs. Concurrent with the
closing of the initial public offering, all 5,208,657 shares of Series A
convertible preferred stock, Series B convertible preferred stock, Series D
redeemable convertible preferred stock, Series E redeemable convertible
preferred stock and Series F redeemable convertible preferred stock were
converted into 4,440,559 shares of common stock.
After the closing of the initial public offering, the Company was
authorized to issue up to 5,000,000 shares of Preferred Stock, $0.01 par value
per share, in one or more series. Each such series of Preferred Stock shall have
such rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be determined by the Board of Directors.
On June 1, 1998, the Company issued and sold to funds affiliated with
Furman Selz Investments and BancBoston Ventures 7,000 shares of Series G
convertible exchangeable preferred stock for an aggregate purchase price of $7
million yielding net proceeds of $6,461,251. The Series G preferred stock is
convertible into common stock at a price of $4.75 per share (which was above the
fair market value of the Company's common stock on June 1, 1998) and is entitled
to cumulative annual dividends equal to 8% of the liquidation preference of such
stock ($1,000), payable semiannually in June and December of each year,
commencing December 1998. The Series G preferred stock may be exchanged for 8%
seven-year convertible subordinated notes having an aggregate principle amount
equal to the aggregate liquidation preference of the preferred stock solely at
the option of the Company any time within the seven years of issuance of the
preferred stock (see Note O).
K. STOCK PURCHASE WARRANTS
Pursuant to a Stock Purchase Agreement dated March 4, 1993, as amended
September 9, 1993, the Company granted to several holders of Series D redeemable
convertible preferred stock, warrants to purchase an aggregate of 202,781 shares
of common stock. The warrants, none of which were exercised, were exercisable at
$10.59 per share for a period of five years from the date of grant. These
warrants expired unexercised on March 4, 1998.
Pursuant to the Stock Purchase Agreement dated July 12, 1995, as amended
August 16, 1995, the Company granted the purchasers of Series E redeemable
convertible preferred stock, warrants to purchase an aggregate of 103,891 shares
of common stock.
F-16
92
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
These warrants, none of which have been exercised, are exercisable at $10.59 per
share for a period of five years from the date of grant.
Pursuant to the Stock Purchase Agreement dated June 28, 1996, as amended
December 18, 1996 and February 28, 1997, the Company granted the purchasers of
Series F redeemable convertible preferred stock warrants to purchase an
aggregate of 651,334 shares of common stock. These warrants are exercisable at
$7.65 per share for a period of five years from the date of grant. Prior to the
closing of the Public Offering, a cashless exercise of 102,387 warrants resulted
in the issuance of 13,296 shares of common stock. Upon the closing of the Public
Offering, the aggregate number of shares issuable upon exercise of these
warrants decreased from 548,947 to 466,604 and the per share exercise price
increased from $7.65 to $9.00, pursuant to the terms of such warrants. These
warrants, none of which were exercised in 1997 or 1998, retained the cashless
exercise feature after the closing of the Public Offering.
On February 28, 1997, the Company issued warrants exercisable for an
aggregate of 48,449 shares of common stock at a weighted average exercise price
of $4.61 per share to certain financial advisors. These warrants, none of which
were exercised in 1997 or 1998, contain a cashless exercise feature. These
warrants expire on August 28, 2002.
In 1997, the Company also issued warrants to Subordinated Secured Note
holders. Warrants were issued to purchase (i) 561,073 shares of common stock at
an exercise price of $0.01 per share, and (ii) 218,195 shares of common stock at
an exercise price of $5.29 per share (see Note N). None of these warrants have
been exercised. The relative fair value was recorded as a contribution to
additional paid in capital.
On June 1, 1998 the Company issued warrants to the purchasers of shares of
Series G convertible exchangeable preferred stock to purchase 2,116,958 shares
of common stock at an exercise price of $4.75 per share (see Note O). The
relative fair value was recorded as a contribution to additional paid in capital
of $323,000.
L. INCENTIVE PLANS
1992 Equity Incentive Plan
On September 15, 1992, the Board of Directors adopted the 1992 Equity
Incentive Plan (the "1992 Plan") which was approved by the shareholders on March
4, 1993. Under the 1992 Plan, The Board of Directors or a Committee appointed by
the Board of Directors is permitted to award shares of restricted common stock
or to grant stock options for the purchase of common stock to employees,
consultants, advisors and members of the Board of Directors, up to a maximum of
722,500 shares. The 1992 Plan terminates on the earlier of (i) the day after the
tenth anniversary of its adoption or (ii) upon issuance of all available shares.
In connection with the closing of the initial public offering, the 1992
Plan was amended to increase the number of shares of common stock issuable upon
the grant of awards or upon exercise of stock options granted under the 1992
Plan to 1,350,000 and to provide that the maximum number of shares with respect
to which awards and options may be granted to any employee during any calendar
year be 500,000 shares.
F-17
93
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998, the 1992 Plan was amended to increase the number of shares of
common stock issuable upon the grant of awards or upon exercise of stock options
granted under the 1992 Plan to 1,850,000.
The 1992 Plan provides for the granting of incentive stock options (ISOs),
nonqualified stock options (NSOs) and stock awards. In the case of ISOs and
NSOs, the exercise price may not be less than 100% (110% in certain cases for
ISOs) of the fair market value per share of the common stock on the date of
grant. In the case of stock awards, the purchase price will be determined by the
Board of Directors.
Each option granted under the 1992 Plan may be exercisable either in full
or in installments as set forth in the option agreement. Each option and all
rights expire on the date specified by the Board of Directors or the Committee,
but not more than ten years after the date on which the option is granted in the
case of ISOs (five years in certain cases). Options vest between zero and five
years from the date of grant. The fair value of options issued to non-employees
is recorded as a charge to earnings over the service period.
In the case of awards of restricted common stock, the Board of Directors or
the Committee determines the duration of certain restrictions on transfer of
such stock.
A summary of all of the Company's stock option activity for the three years
ended December 31, 1998 is as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------------
Outstanding at December 31, 1995........................ 270,938 $3.16
Granted, 1996......................................... 381,648 2.35
Exercised, 1996....................................... (318) 2.35
Terminated, 1996...................................... (18,594) 2.35
--------- -----
Outstanding at December 31, 1996........................ 633,674 $2.40
Granted, 1997......................................... 463,512 8.34
Exercised, 1997....................................... (1,275) 2.35
Terminated, 1997...................................... (850) 2.35
--------- -----
Outstanding at December 31, 1997........................ 1,095,061 $4.92
Granted, 1998......................................... 996,450 3.85
Exercised, 1998....................................... (29,963) 1.35
Terminated, 1998...................................... (698,799) 6.50
--------- -----
Outstanding at December 31, 1998........................ 1,362,749 $3.69
========= =====
F-18
94
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Summarized information about stock options outstanding at December 31, 1998
is as follows:
EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE OPTIONS PRICE
---------- ----------- ------------ --------- ---------- ---------
$1.18-1.88 23,750 7.0 $1.57 21,250 $1.53
2.16-2.75 512,549 7.5 2.35 362,517 2.35
3.50-3.88 689,450 9.0 3.75 39,924 3.75
7.06-9.13 137,000 7.4 8.79 114,500 8.72
--------- -------
1,362,749 538,191
Options exercisable at December 31, 1998, 1997 and 1996 were 538,191,
356,633 and 244,343, respectively.
The weighted average fair value at date of grant for options granted during
1998, 1997 and 1996 were $1.42, $3.20 and $0.54, respectively, per option.
1997 Employee Stock Purchase Plan
In March 1997, the Company adopted the 1997 Employee Stock Purchase Plan
(the "Purchase Plan"), effective upon the closing of the initial public
offering, pursuant to which rights are granted to purchase shares of common
stock at 85% (or such other higher percentage as the Board of Directors
determines to be appropriate) of the lesser of the fair market value of such
shares at either the beginning or the end of each six month offering period. The
Purchase Plan permits employees to purchase common stock through payroll
deductions which may not exceed 10% of an employees compensation as defined in
the plan. Under the Purchase Plan, the Company has reserved 500,000 shares of
common stock for issuance to eligible employees. The Company issued 52,626
shares of common stock in 1998 for proceeds of $117,000 to employees pursuant to
the Purchase Plan.
1997 Director Stock Option Plan
In March 1997, the Company adopted the 1997 Director Stock Option Plan (the
"Director Plan"). Under the terms of the Director Plan, options to purchase
15,000 shares of common stock were granted to each of the non-employee directors
upon the closing of the initial public offering at $9.00 per share. Options to
purchase 15,000 shares of common stock are granted to each new director upon his
or her initial election to the Board of Directors. Annual options to purchase
5,000 shares of common stock will be granted to each non-employee director on
May 1 of each year commencing in 1998. All options will vest on the first
anniversary of the date of grant. However, the exercisability of these options
will be accelerated upon the occurrence of a change in control of the Company
(as defined in the Director Plan). A total of 300,000 shares of common stock may
be issued upon the exercise of stock options granted under the Director Plan.
With the exception of the options granted on the Public Offering, the exercise
price of all options granted under the Director Plan will equal the closing
price of the common stock on the date of grant.
F-19
95
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A total of 50,000 and 105,000 options were granted under the Director Plan
during the years ended December 31, 1998 and 1997, respectively.
401(k) Savings and Retirement Plan
On August 28, 1996 the Company adopted a 401(k) Savings and Retirement Plan
(the "401(k) Plan"), a tax-qualified plan covering all of its employees who are
at least 20.5 years of age and who have completed at least three months of
service to the Company. Each employee may elect to reduce his or her current
compensation by up to 15%, subject to the statutory limit and have the amount of
the reduction contributed to the 401(k) Plan. The 401(k) Plan provides that the
Company may, as determined from time to time by the Board of Directors, provide
a matching cash contribution. In addition, the Company may contribute an
additional amount to the 401(k) Plan, as determined by the Board of Directors,
which will be allocated based on the proportion of the employee's compensation
for the plan year to the aggregate compensation for the plan year for all
eligible employees. Upon termination of employment, a participant may elect a
lump sum distribution or, if his or her total amount in the 401(k) Plan is
greater than $3,500, may elect to receive benefits as retirement income. Through
December 31, 1998, the Company has not matched any cash contributions made by
employees to the 401(k) plan.
Stock-Based Compensation Plans
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for the 1992 Plan, the Director Plan and the Purchase Plan and no
compensation expense has been recognized for options granted to employees at
fair market value and shares purchased under these plans. Had compensation
expense for the stock-based compensation plans been determined based on the fair
value at the grant dates for the options granted and shares purchased under the
plan consistent with the method of SFAS 123, Accounting for Stock-Based
Compensation, the net loss and net loss per share would have been as follows:
1998 1997 1996
-------------------------- -------------------------- --------------------------
BASIC AND BASIC AND BASIC AND
NET LOSS TO DILUTED NET LOSS TO DILUTED NET LOSS TO DILUTED
COMMON NET LOSS COMMON NET LOSS COMMON NET LOSS
STOCKHOLDERS PER SHARE STOCKHOLDERS PER SHARE STOCKHOLDERS PER SHARE
------------ ----------- ------------ ----------- ------------ -----------
As Reported.......... $(18,680,470) $(2.69) $(12,745,440) $(3.08) $(6,624,999) $(33.44)
Pro Forma............ (19,356,551) (2.79) (13,014,737) (3.15) (6,653,966) (33.59)
The effects of applying SFAS 123 in this pro forma disclosure are not
likely to be representative of the effects on reported net loss to common
stockholders for future years. SFAS 123 does not apply to awards granted prior
to fiscal year 1995 and additional awards are anticipated in future years.
The fair value of options and other equity instruments at the date of grant
was estimated using the Black-Scholes option pricing model for 1998 and 1997 and
the
F-20
96
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Minimum Value Method for 1996 (since the Company was private then), with the
following assumptions:
1998 1997 1996
------------ ------------------ --------
Expected life (years) - stock
options........................... 4 years 2.5 - 4.0 years 5 years
Expected life (years) - Purchase
Plan.............................. .5 .5 --
Risk-free interest rate............. 4.13 - 5.65% 5.55 - 6.22% 6.50%
Volatility.......................... 79% 47% 0
Dividend yield...................... 0 0 0
Expected forfeiture rate............ 10% 10% --
The Black-Scholes option pricing model was developed for use in estimating
the fair value of options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the use of highly
subjective assumptions, including the expected stock price volatility and
expected forfeiture. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective assumptions can materially affect the fair
value estimates, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock-based
compensation.
M. STOCK OPTION REPRICING
On September 4, 1998, the Board of Directors of the Company and the
Compensation Committee of the Board of Directors, by joint written action,
authorized the Company to offer to grant each employee who held an outstanding
stock option granted under the Company's 1992 Plan, during the period commencing
on June 1, 1997 and ending on June 10, 1998 with an exercise price greater than
$3.75 per share (collectively, the "Old Options"), a new stock option
(collectively, the "New Options") under the 1992 Plan, in exchange for the
cancellation of each such Old Option. Each such New Option would (i) have an
exercise price of $3.75 per share, which was above fair market value, (ii) be
exercisable for the same number of shares of the Company's common stock covered
by the outstanding unexercised portion of the Old Option cancelled in exchange
therefor, and (iii) have a vesting schedule that is based on the vesting
schedule of the Old Option it replaces except that each installment covered by
the Old Option would vest on the date six months after the date specified in the
Old Option and that any part of the Old Option which is currently exercisable
would remain exercisable and not be subject to such six month adjustment. Based
on this offer, on September 4, 1998, the Company granted to employees New
Options to purchase an aggregate of 555,450 shares of Common Stock, at an
executable price of $3.75 per share in exchange for and upon cancellation of Old
Options to purchase an aggregate of 555,450 shares of Common Stock with a
weighted average exercise price of $6.97 per share.
N. SUBORDINATED SECURED NOTES AND RELATED WARRANTS
In January and June 1997, the Company issued an aggregate of $7.0 million
of subordinated secured notes, resulting in net proceeds to the Company of
$6,404,000. These subordinated secured notes were payable in eight equal
quarterly principal payments and required quarterly interest payments on the
unpaid principal balance, at a rate equal to the
F-21
97
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
lesser of 10% or 3.5% over the prime rate, with the first quarterly payment due
in December 1997. Accordingly, in December 1997, the Company paid an aggregate
of $1,050,000 to the holders of these subordinated secured notes as the first
quarterly payment.
In connection with the issuance of the subordinated secured notes, on
January 31, 1997, the Company issued Series A warrants, to purchase an aggregate
of 224,429 shares of common stock, and on June 4, 1997, the Company issued
Series A warrants to purchase an aggregate of 336,644 shares of common stock and
Series B warrants to purchase an aggregate of 218,195 shares of common stock, to
the holders of the subordinated secured notes. The Series A warrants are
exercisable at $0.01 per share for a period of seven years from the grant date
and the Series B warrants are exercisable at $5.29 per share over the same
period. None of these warrants were exercised in 1997 or 1998. The relative fair
value of the warrants issued on January 31, 1997 was recorded as an allocation
of $836,994 from the subordinated secured notes issued on such date.
Consequently, such subordinated secured notes were recorded at $1,163,006.
Similarly, the relative fair value of the warrants (as of January 31, 1997)
issued on June 4, 1997 was recorded as an allocation of $1,668,746 from the
subordinated secured notes issued on such date. Consequently, such notes were
recorded at $3,331,254. Accordingly, approximately $2,506,000 of accretion will
be charged to interest expense, in addition to the stated interest rates, over
the terms of these subordinated secured notes. For the years ended December 31,
1998 and 1997, the accretion charges were $531,192 and $1,132,808, respectively,
which were included in interest expense on the statements of operations. The
Company also capitalized $596,040 of issuance costs related to the subordinated
secured notes which will be amortized over the term of the notes. In June 1998,
the Company used $5.3 million from the net proceeds of the Series G financing
(see Note O) to repay the outstanding subordinated secured notes. As a result of
the early repayment of the subordinated secured notes, the Company accelerated
the $842,000 remaining unaccreted portion of the discount. In addition, $325,000
of unamortized debt issue costs were written off. These two items have been
recorded as extraordinary items for the loss on early extinguishment of debt in
accordance with SFAS 4, "Reporting Gains and Losses From Extinguishment of
Debt."
O. SERIES G PREFERRED STOCK, SUBORDINATED NOTES AND RELATED WARRANTS
On June 1, 1998, pursuant to a Series G Securities Purchase Agreement dated
as of May 13, 1998 between the Company and the purchasers names therein (the
"Series G Purchase Agreement"), the Company issued and sold to funds affiliated
with ING Furman Selz Investments and BancBoston Ventures an aggregate of 7,000
shares of Series G convertible exchangeable preferred stock (the "Preferred
Stock"), $9 million of 8% seven-year subordinated notes (the "Subordinated
Notes") and seven-year warrants to purchase 2,116,958 shares of common stock for
an aggregate purchase price of $16 million (the "1998 Financing"). Of the $9
million of Subordinated Notes issued and sold by the Company, $8,652,515 was
allocated to the relative fair value of the Subordinated Notes and $347,485 was
allocated to the relative fair value of the warrants. Accordingly, the
Subordinated Notes will be accreted from $8,652,515 to the maturity amount of
$9,000,000 as interest expense over the term of the Subordinated Notes.
F-22
98
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Amounts allocated to the warrants was included in additional paid in
capital. The Preferred Stock is convertible into common stock at a price of
$4.75 per share, which was above the fair market value of the Company's common
stock at June 1, 1998. The warrants are exercisable at a price of $4.75 per
share. The Preferred Stock is entitled to cumulative annual dividends equal to
8% (subject to adjustment) of the liquidation preference of such stock ($1,000),
payable semiannually in June and December of each year, commencing December
1998, and may be exchanged for 8% seven-year convertible subordinated notes (the
"Convertible Notes") having an aggregate principal amount equal to the aggregate
liquidation preference of the Preferred Stock solely at the option of the
Company any time within seven years of issuance of the Preferred Stock. The
Subordinated Notes and Convertible Notes (when and if issued upon exchange of
the Preferred Stock) (collectively, the "1998 Notes") bear interest at a rate of
8% per annum, payable semiannually in June and December of each year, commencing
December 1998. Forty percent of the interest due on the Subordinated Notes and
fifty percent of the dividends due on the Preferred Stock (or the interest due
on the Convertible Notes if issued upon exchange of the Preferred Stock) in each
of December 1998, June 1999, December 1999 and June 2000 may be deferred by the
Company for a period of three years. In the event of a change in control or
unaffiliated merger of the Company, the Company at its sole discretion may also
redeem the Preferred Stock (or the Convertible Notes issuable upon exchange of
the Preferred Stock) at a price equal to the liquidation preference on such
stock ($1,000) plus accrued and unpaid dividends, although the Company will be
required to issue new Common Stock purchase warrants in connection with such
redemption. In the event of a change of control or unaffiliated merger of the
Company, the holders of the 1998 Notes may require the Company to redeem the
1998 Notes at a price equal to the unpaid principal plus accrued and unpaid
interest on such notes. In connection with the investment, a representative of
Furman Selz Investments was added to the Company's Board of Directors. The
Company used a portion of the net proceeds, after fees and expense, of $14.7
million to repay the $5.3 million in subordinated secured notes and used the
balance for working capital.
P. FEVERALL ACQUISITION
On July 10, 1997, the Company completed the acquisition of the Feverall
acetaminophen suppository product line and certain related assets, including the
Feverall trademark and the Feverall Sprinkle Caps powder and Acetaminophen
Uniserts suppository product lines (the "Product Lines") from Upsher-Smith
Laboratories, Inc. ("Upsher-Smith"). The purchase price of $11,905,145,
including related costs of $183,880, consisted of cash of $6,405,145 and a
promissory note issued to Upsher-Smith for $5,500,000 maturing on February 20,
1998 bearing no interest. The Company paid this note in February 1998.
F-23
99
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price was allocated to the assets acquired based on their
estimated respective fair values on the date of acquisition as follows:
AMOUNT USEFUL
(IN LIVES
MILLIONS) (IN YEARS)
----------- ----------
Inventory........................................... $ 0.4 --
Trademark........................................... 4.5 20
Manufacturing agreement............................. 5.0 15
Goodwill............................................ 2.0 20
-----
Total..................................... $11.9
=====
Accumulated amortization of intangible assets as of December 31, 1998 was
$980,279.
The Feverall trademark was valued using the Relief from Royalty Method,
using a risk adjusted cash flow model under which future cash flows were
discounted, taking into account risks relating to existing and future markets
and assessments of the life expectancy of the Feverall products. The
manufacturing agreement with Upsher-Smith was valued using a risk adjusted cash
flow model under which future cash flows were discounted, taking into account
risks relating to existing and future markets and the expected economic life of
the agreement. Intangible assets are amortized over the useful lives on a
straight line basis.
Pursuant to the acquisition of the Product Lines, the Company entered into
a manufacturing agreement with Upsher-Smith. The initial term of the agreement
is five years with an option for two additional five-year terms. Optional term
potential price increases are capped at 5% per option. The Company pays
Upsher-Smith on the basis of the fully absorbed costs plus a fixed percent.
Q. SUBSEQUENT EVENT (UNAUDITED)
On February 16, 1999, the Company entered into a series of agreements with
Alpharma, Inc. and its wholly-owned subsidiary, Alpharma USPD Inc. ("Alpharma").
This strategic alliance contemplates a number of transactions, including a loan
agreement under which Alpharma will loan us up to $40.0 million from time to
time, $12.0 million of which may be used for general corporate purposes and
$28.0 million of which may only be used for specified projects and acquisitions
intended to enhance the Company's growth. In addition, subject to stockholder
approval, the Company will obtain a call option to acquire all of its
outstanding common stock and assign the option to Alpharma, thereby giving
Alpharma the option, exercisable in 2002, to purchase all of the Company's
common stock then outstanding at a purchase price to be determined by a formula
based on the Company's 2001 earnings. The consummation of the strategic alliance
is subject to the approval of the Company's stockholders of a proposed merger
between the Company and Bird Merger Corporation, a wholly-owned subsidiary of
the Company, at a meeting expected to be held in the second quarter of 1999.
On February 19, 1999, the Company borrowed $4.0 million from Alpharma under
the loan agreement and issued Alpharma a 7.5% convertible subordinated note in
the principal amount of up to $40.0 million. Alpharma's obligation to loan the
Company the balance of the $40.0 million is subject to the approval of the
Company's stockholders of the strategic
F-24
100
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
alliance. If the Company's stockholders do not approve the strategic alliance,
the Company must immediately repay the outstanding principal and interest on the
note. The other principal terms of the Alpharma note are set forth below.
PAYMENT OF PRINCIPAL AND INTEREST. The Alpharma note bears interest at a
rate of 7.5% per annum. Interest is due and payable quarterly, in arrears on the
last day of each calendar quarter. If the call option terminates or expires, the
Company does not otherwise prepay the principal amount of the note outstanding
and Alpharma does not otherwise convert the note, the Company will repay the
outstanding principal amount under the note over a 15 month period commencing
March 30, 2004 and ending June 30, 2005.
PREPAYMENT. On or before June 30, 2001, the Company may repay all or a
portion of the outstanding principal amount under the note. the Company may
re-borrow any repaid amounts on or before December 31, 2001. At any time after
the expiration or termination of the call option and on or before December 31,
2002, the Company may prepay all of the outstanding principal amount under the
note, together with any accrued and unpaid interest, if it also pays a
conversion termination fee equal to 25% of the principal amount of the note
outstanding as of December 31, 2001. The Company may not otherwise prepay the
note. Following a change in control of the Company, Alpharma may require the
Company to repay all outstanding principal and interest under the note.
CONVERSION. Alpharma may convert all or a portion of the then outstanding
principal amount of the note into common stock of the Company on one occasion
after a change in control of the Company and at any time after December 31, 2002
at a conversion price of $7.125 per share (subject to adjustment). After January
1, 2003 and on or before February 28, 2003, Alpharma may cause the Company to
borrow all remaining amounts available under the loan agreement (increasing the
principal amount of the note to $40.0 million), but only if Alpharma converts
all of the principal amount of the note into common stock of the Company within
three business days after the increase.
In connection with the Company's strategic alliance with Alpharma, the
Company entered into a second amendment to the Series G Purchase Agreement
providing for, among other things, (a) the Company's agreement to exercise its
right to exchange all outstanding shares of Series G preferred stock for
convertible subordinated notes in accordance with the original terms of the
Series G preferred stock, (b) subject to stockholder approval, the reduction in
the exercise price of warrants to purchase 2,116,958 shares of common stock of
the Company from $4.75 per share to $3.00 per share and the agreement of the
Series G purchasers to exercise these warrants, (c) the issuance and sale to the
Series G purchasers of an aggregate of 300,000 shares of common stock of the
Company at a price of $3.00 per share and (d) the cancellation of approximately
$7.25 million of principal under the subordinated notes held by the Series G
purchasers to pay the exercise price of the warrants and the purchase price of
the additional 300,000 shares of common stock. In addition, the Company entered
into an amendment to a financial advisory services fee agreement with ING Furman
Selz whereby the Company agreed to issue 150,000 shares of common stock to ING
Furman Selz in lieu of the payment of certain financial advisory fees. The
reduction in the exercise price of the warrants and the issuance of the
additional 300,000 shares of common stock are also subject to stockholder
approval.
F-25
101
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
These transactions will be consummated, subject to stockholder approval,
concurrently with the closing of the transactions contemplated by the Master
Agreement, dated as of February 16, 1999, by and among the Company, Alpharma and
Alpharma, Inc., including the merger of the Company with Bird Merger
Corporation, a wholly-owned subsidiary of the Company, in accordance with the
Agreement and Plan of Merger, dated as of February 16, 1999, by and between the
Company and Bird Merger Corporation.
F-26
102
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Upsher-Smith Laboratories, Inc.:
We have audited the accompanying statement of assets related to the product
line to be acquired by Ascent Pediatrics, Inc. as of December 29, 1996 and the
related statements of net sales and identified costs and expenses for each of
the years in the two-year period then ended. These financial statements are the
responsibility of Upsher-Smith Laboratories, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The product line to be acquired by Ascent Pediatrics, Inc. has been
operated as an integral part of Upsher-Smith Laboratories, Inc. and has no
separate legal existence. The basis of preparation of these financial statements
is described in note 1 to the financial statements.
In our opinion, the aforementioned financial statements present fairly the
assets related to the product line of Upsher-Smith Laboratories, Inc. at
December 29, 1996 to be acquired by Ascent Pediatrics, Inc. and the net sales in
excess of identified costs and expenses for each of the years in the two-year
period then ended on the basis of accounting described in the preceding
paragraph and in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 21, 1997
F-27
103
A PRODUCT LINE OF UPSHER-SMITH LABORATORIES, INC.
STATEMENTS OF ASSETS RELATED TO THE PRODUCT LINE TO BE ACQUIRED BY
ASCENT PEDIATRICS, INC.
DECEMBER 29,
1996 JULY 9, 1997
------------- ------------
(UNAUDITED)
Inventories, net.................................... $122,235 $221,265
-------- --------
Assets of the product line to be acquired........... $122,235 $221,265
======== ========
See accompanying notes to financial statements.
F-28
104
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.
FOR THE
YEARS ENDED DECEMBER 31, INTERIM PERIOD
------------------------- JANUARY 1, 1997
1995 1996 TO JULY 9, 1997
----------- ----------- -------------------
(UNAUDITED)
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
========== ========== ==========
See accompanying notes to financial statements.
F-29
105
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.
F-30
106
A PRODUCT LINE OF UPSHER-SMITH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS OF THE PRODUCT LINE TO BE ACQUIRED BY
ASCENT PEDIATRICS, INC.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method. Samples and display inventory are charged to
advertising and promotion expense when used.
Revenue Recognition
Revenue is recognized upon shipment of the product. Allowances for sales
returns, discounts and rebates are provided for based on the volume of sales and
actual experience.
(3) INVENTORIES
The components of inventories were as follows:
DECEMBER 29, JULY 9,
1996 1997
------------ -----------
(UNAUDITED)
Work in process.................................... $ 10,864 $ 0
Samples and displays............................... 42,486 46,938
Finished goods..................................... 68,885 174,327
-------- --------
$122,235 $221,265
======== ========
(4) NET SALES
Net sales consisted of the following:
YEARS ENDED
---------------------------- INTERIM PERIOD
DECEMBER 31, DECEMBER 29, ENDED
1995 1996 JULY 9, 1997
------------ ------------ --------------
(UNAUDITED)
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
========== ========== ==========
For the year ended December 31, 1995, two customers accounted for 22% of sales
of the Feverall product line. For the year ended December 29, 1996 three
customers accounted for 33% of sales of the Feverall product line.
(5) INCOME TAXES
Upsher-Smith has elected to be treated as a small business corporation
(S corporation) under provisions of the Internal Revenue Code of 1986, whereby
profits and losses are passed directly to the stockholders for inclusion in
their personal tax returns. Accordingly, no liability or provision for federal
and state income taxes is included in the accompanying financial statements.
F-31
107
A PRODUCT LINE OF UPSHER-SMITH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS OF THE PRODUCT LINE TO BE ACQUIRED BY
ASCENT PEDIATRICS, INC.
(6) SUBSEQUENT EVENT (UNAUDITED)
On March 25, 1997, Upsher-Smith entered into a definitive agreement
relating to the sale of the Feverall product line to Ascent. Under the terms of
this agreement, Upsher-Smith has agreed to sell the Feverall product line,
including certain intellectual property, technical information, product
formulations and regulatory approvals and registrations.
F-32
108
EXHIBIT INDEX
- --------------------------------------------------------------------------------
Exhibit
Number Description
- ------- -----------
- --------------------------------------------------------------------------------
2.1 (1) Agreement and Plan of Merger dated as of February 16, 1999 by and
between the Registrant and Bird Merger Corporation.
- --------------------------------------------------------------------------------
3.1 (2) Amended and Restated Certificate of Incorporation of the
Registrant.
- --------------------------------------------------------------------------------
3.2 (3) Certificate of Designation, Voting Powers, Preferences and Rights
of Series G Convertible Exchangeable Preferred Stock of the
Registrant.
- --------------------------------------------------------------------------------
3.3 (2) Amended and Restated By-Laws of the Registrant.
- --------------------------------------------------------------------------------
4.1 (2) Specimen Certificate for shares of Common Stock, $.00004 par
value, of the Registrant.
- --------------------------------------------------------------------------------
4.2 (1) Form of Depositary Receipt (included in Exhibit 10.1)..
- --------------------------------------------------------------------------------
4.3 (1) Form of 7.5% Convertible Subordinated Note of the Registrant
issued on February 19, 1999 under the Alpharma Loan Agreement (as
defined below) (included in Exhibit 10.3).
- --------------------------------------------------------------------------------
4.4 (1) Form of 8% Subordinated Note of the Registrant issued on June 1,
1998 under the May 1998 Securities Purchase Agreement (as defined
below) (included in Exhibit 10.7).
- --------------------------------------------------------------------------------
4.5 (1) Form of 8% Convertible Subordinated Note of the Registrant
issuable under the May 1998 Securities Purchase Agreement
(included in Exhibit 10.7).
- --------------------------------------------------------------------------------
10.1 (1) Depositary Agreement dated as of February 16, 1999 by and among
the Registrant, Alpharma USPD, Inc. ("Alpharma") and State Street
Bank and Trust Company (included in Exhibit 2.1).
- --------------------------------------------------------------------------------
10.2 (1) Master Agreement dated as of February 16, 1999 by and among the
Registrant, Alpharma and Alpharma, inc. (included in Exhibit
2.1).
- --------------------------------------------------------------------------------
10.3 (1) Loan Agreement (the "Alpharma Loan Agreement") dated as of
February 16, 1999 by and among the Registrant, Alpharma and
Alpharma, inc.
- --------------------------------------------------------------------------------
10.4 (1) Guaranty Agreement dated as of February 16, 1999 by and between
the Registrant and Alpharma, Inc.
- --------------------------------------------------------------------------------
10.5 (1) Subordination Agreement dated as of February 16, 1999 by and
among the Registrant, Alpharma and the Original Lenders (as
defined therein).
- --------------------------------------------------------------------------------
10.6 (1) Registration Rights Agreement dated as of February 16, 1999 by
and between the Registrant and Alpharma.
- --------------------------------------------------------------------------------
10.7 (3) Securities Purchase Agreement (the "May 1998 Securities Purchase
Agreement") dated as of May 13, 1998, by and among the
Registrant, Furman Selz Investors II, L.P., FS Employee Investors
LLC, FS Parallel Fund L.P., BancBoston Ventures, Inc. and Flynn
Partners.
- --------------------------------------------------------------------------------
10.8 (1) Second Amendment dated as of February 16, 1999 to the May 1998
Securities Purchase Agreement.
- --------------------------------------------------------------------------------
10.9 (2)(4) Amended and Restated 1992 Equity Incentive Plan.
- --------------------------------------------------------------------------------
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109
- --------------------------------------------------------------------------------
10.10 (2)(4) 1997 Director Stock Option Plan.
- --------------------------------------------------------------------------------
10.11 (2)(4) 1997 Employee Stock Purchase Plan.
- --------------------------------------------------------------------------------
10.12 (2) Lease dated November 21, 1996 between the Registrant and New
Boston Wilmar Limited Partnership.
- --------------------------------------------------------------------------------
10.13 (2)(4) Employment Agreement dated as of March 15, 1994 between the
Registrant and Emmett Clemente (the "Clemente Employment
Agreement").
- --------------------------------------------------------------------------------
10.14 (2)(4) Consulting Agreement dated as of April 1, 1996 between the
Registrant and Robert E. Baldini.
- --------------------------------------------------------------------------------
10.15 (2)(5) Development and License Agreement dated as of October 8, 1996 by
and between the Registrant and Recordati S.A. Chemical and
Pharmaceutical Company ("Recordati").
- --------------------------------------------------------------------------------
10.16 (2) Amendment No. 1 dated February 28, 1997 to the Development and
License Agreement dated as of October 8, 1996 by and between the
Registrant and Recordati.
- --------------------------------------------------------------------------------
10.17 (2)(5) Manufacturing and Supply Agreement dated as of October 8, 1996 by
and between the Registrant and Recordati.
- --------------------------------------------------------------------------------
10.18 (2)(5) Supply Agreement dated as of October 12, 1994 by and between the
Registrant and Lyne Laboratories, Inc.
- --------------------------------------------------------------------------------
10.19 (2) Securities Purchase Agreement dated as of January 31, 1997 among
the Registrant, Triumph-Connecticut Limited Partnership and other
purchasers identified therein (the "Triumph Agreement").
- --------------------------------------------------------------------------------
10.20 (2) Waiver and Amendment to the Triumph Agreement dated as of March
13, 1997.
- --------------------------------------------------------------------------------
10.21 (3) Second Waiver and Amendment to the Triumph Agreement dated as of
May 13, 1998.
- --------------------------------------------------------------------------------
10.22 (2) Series F Convertible Preferred Stock and Warrant Purchase
Agreement dated as of June 28, 1996 between the Registrant and
certain purchasers identified therein as amended by Amendment No.
1 dated as of June 28, 1996 and Amendment No. 2 dated February 3,
1997.
- --------------------------------------------------------------------------------
10.23 (2) Form of Common Stock Purchase Warrant issued to Chestnut
Partners, Inc. on February 28, 1997.
- --------------------------------------------------------------------------------
10.24 (2) Common Stock Purchase Warrant issued to Banque Paribas on
February 28, 1997.
- --------------------------------------------------------------------------------
10.25 (2) Form of Common Stock Purchase Warrant with an exercise price of
$.01 per share issued to designees of Bentley Securities on
February 28, 1997.
- --------------------------------------------------------------------------------
10.26 (2) Form of Common Stock Purchase Warrant with an exercise price of
$5.91 per share issued to designees of Bentley Securities on
February 28, 1997.
- --------------------------------------------------------------------------------
10.27 (2)(5) Asset Purchase Agreement dated as of March 25, 1997, between the
Registrant and Upsher-Smith (the "Asset Purchase Agreement"),
which includes the form of Manufacturing Agreement between the
Registrant and Upsher-Smith as Exhibit E thereto.
- --------------------------------------------------------------------------------
10.28 (5)(6) Addendum to Asset Purchase Agreement dated as of July 10, 1997,
between the Registrant and Upsher-Smith.
- --------------------------------------------------------------------------------
-78-
110
- --------------------------------------------------------------------------------
10.29 (7) Promotion Agreement dated as of November 25, 1998, between the
Registrant and Warner-Lambert Company.
- --------------------------------------------------------------------------------
11.1 Computation of historical and pro forma net loss per common
share.
- --------------------------------------------------------------------------------
23.1 Consent of PricewaterhouseCoopers LLC, independent accountants
- --------------------------------------------------------------------------------
23.2 Consent of KPMG Peat Marwick LLP
- --------------------------------------------------------------------------------
27.1 Financial Data Schedule (Year Ended December 31, 1998)
- --------------------------------------------------------------------------------
(1) Incorporated herein by reference to the Exhibits to the
Registrant's Current Report on Form 8-K filed with the Securities
and Exchange Commission (the "Commission") on February 22, 1999.
(2) Incorporated herein by reference to Exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 333-23319).
(3) Incorporated herein by reference to the Exhibits to the
Registrant's Current Report on Form 8-K filed with the Commission
on June 2, 1998.
(4) Management contract or compensatory plan or arrangement required
to be filed as an Exhibit to this Annual Report on Form 10-K.
(5) Confidential treatment granted as to certain portions, which
portions were omitted and filed separately with the Commission.
(6) Incorporated herein by reference to Exhibits to the Registrant's
Current Report on Form 8-K filed with the Commission on July 25,
1997.
(7) Confidential treatment requested as to certain portions, which
portions are omitted and filed separately with the Commission.
-79-