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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, 2000
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
---------
ASCENT PEDIATRICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3047405
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
187 Ballardvale Street, Suite B125, Wilmington, MA 01887
(Address of principal executive offices, including zip code)
(978) 658-2500
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Depositary Shares, each representing one share of
Common Stock, par value $.00004 per share, which is represented by a depositary
receipt.
Common Stock, $.00004 par value
(title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $6,460,574 based on the last reported bid price of
the depositary shares of the registrant on March 27, 2001 on the
Over-The-Counter Bulletin Board. As of March 27, 2001, there were 17,009,722
depositary shares outstanding, each representing one share of common stock, par
value $.0004 per share, of the registrant and represented by a depositary
receipt.
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Documents Incorporated by Reference
Items 10, 11, 12 and 13 of Part III (except for information required with
respect to executive officers of Ascent, which is set forth under Part I -
Business - "Executive Officers of the Company") have been omitted from this
report, since Ascent will file with the Securities and Exchange Commission,
not later than 120 days after the close of its fiscal year, a definitive proxy
statement. The information required by Items 10, 11, 12 and 13 of Part III of
this report, which will appear in the definitive proxy statement, is
incorporated by reference into this report.
See exhibit index on page A-1.
PART I
ITEM 1. BUSINESS
Ascent Pediatrics, Inc. ("Ascent" or the "Company"), formerly Ascent
Pharmaceuticals, Inc., incorporated in Delaware on March 16, 1989, is currently
focused on marketing products exclusively to the pediatric market. Since its
inception, until July 9, 1997, Ascent has operated as a development stage
enterprise devoting substantially all of its efforts to establishing a new
business. We introduced our first two products, Feverall acetaminophen
suppositories and Pediamist nasal saline spray, to the market in the second half
of 1997. We introduced Primsol(R) trimethoprim solution, a prescription
antibiotic, to the market in February 2000 and Orapred(R) syrup, a liquid
steroid for the treatment of inflammation, including inflammation resulting from
respiratory conditions, to the market in January 2001. On December 29, 2000, we
sold the Feverall product line in an asset sale to Alpharma USPD Inc. ("Alpharma
USPD") in exchange for the cancellation by Alpharma USPD of $12.0 million of
indebtedness owed to Alpharma USPD by us, although we have maintained the right
to repurchase the product line through December 2001 at the same price.
STRATEGY
Our objective is to be a leader in the development and marketing of
pharmaceuticals specifically formulated for use by children. We have sought to
develop products that are based on commonly-prescribed off-patent
pharmaceuticals which we have sought to improve by reducing their dosing
frequency, improving their taste, making them easier to administer or developing
them as substitutes for products with considerable side effects.
On July 23, 1999, we consummated a strategic alliance with Alpharma, Inc. and
Alpharma USPD. As part of this strategic alliance, Alpharma USPD agreed to loan
us up to $40.0 million from time to time for certain corporate purposes, and we
assigned to Alpharma USPD a call option, exercisable in the first half of 2003,
to purchase all of the Ascent common stock then issued and outstanding at a
price to be determined by an earnings-based formula. As of December 29, 2000, we
had borrowed an aggregate of $12.0 million in principal under our loan agreement
with Alpharma USPD, dated as of February 16, 1999, as amended, by and among
Ascent, Alpharma USPD and Alpharma, Inc. On December 29, 2000, we entered into a
series of agreements with Alpharma USPD terminating the strategic alliance,
including the loan agreement. As part of these agreements, Alpharma USPD agreed
not to exercise its call option and purchased our Feverall product line in an
asset sale in exchange for the cancellation by Alpharma USPD of all of the
indebtedness owed to Alpharma USPD by us under the loan agreement.
Since the latter half of 1999, we have devoted much of our resources to
obtaining regulatory approval of Primsol and Orapred and commercially launching
these products. In December 1999, due to limitations on resources, we suspended
the development of any products in development until such time, if ever, as we
obtained the resources to continue product development efforts. Key elements of
our strategy are as follows:
- - - Continue to Promote and Expand Sales of Orapred and Primsol. We seek to
continue to broaden and expand sales of Orapred and Primsol. We expect to
continue to focus our resources on promoting these selected products. We will
continue to leverage the industry expertise of our senior management and sales
force in this effort.
- - - Maintain Sales Force. We intend to maintain and, in the future, seek to
expand our sales force, which focuses exclusively on the marketing of pediatric
pharmaceutical products. We believe that the exclusive focus by our direct sales
force on the marketing of pediatric pharmaceutical products meaningfully
differentiates us from other pharmaceutical companies in the pediatric medical
community. We seek to continue to have our sales representatives conduct
personal sales calls and attend industry conferences, seminars and other
meetings.
- - - 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.
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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 sales force, by seeking to enter into arrangements to promote third party
pharmaceutical products to pediatricians. For example, since we established our
sales force in July 1997, we have entered into co-promotion agreements under
which we promoted the combination corticosteroid/antibiotic, Pediotic , Omnicef
(cefdinir) oral suspension and capsules, and Duricef (cefadroxil mono hydrate)
oral suspension. All of these agreements have either expired or been terminated.
- - - Acquire or In-License Additional Pediatric Products. Subject to available
resources, we intend to continue to seek to leverage our marketing and sales
capabilities by acquiring or in-licensing additional products. In particular, we
intend to look for prescription pharmaceuticals that are designed to increase
patient compliance, improve therapeutic efficacy or reduce side effects or that
we can modify, if we resume product development, 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.
- - - Develop Proprietary Formulations of Approved Compounds. We intend to
select and seek to develop as product candidates, if our resources adequately
improve, 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.
- - - Continue To Focus Exclusively on Pediatric Market. We are focused
exclusively on pharmaceuticals for children and promoting these products to
pediatricians, pediatric nurses and other pediatric caregivers. The United
States market for prescription pharmaceutical products for children age 16 years
and under was estimated to be approximately $5.1 billion in 2000. 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.
TECHNOLOGIES
We have developed internally, or acquired rights through in-licensing or supply
arrangements, a range of technologies which we use in our products. 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 drug formulation. We have applied this taste masking
technology to liquid dosage forms of our products because of the widespread use
of liquids in the pediatric pharmaceutical market.
- - - Extended-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 extended-release manufacturing
procedures may also mask the unpleasant taste of a drug. We have developed our
own extended-release technology and have in-licensed extended-release technology
from a third party. We have applied these technologies to reduce the dosing
frequency and, in some cases, improve the taste of our products.
PRODUCTS
The following table summarizes the products that we are currently marketing.
These products are described in more detail following the table.
Product. . . . . . . . . . Indication Key Features
- - -------------------------- ------------------------ -------------------------
Orapred syrup Inflammation, including Significant taste
respiratory problems . . improvements
(e.g. asthma)
Primsol trimethoprim . . . Acute middle ear Reduced toxicity profile;
solution (50mg strength) . infections pleasant tasting liquid
Pediamist nasal saline . . Nasal dryness Low pressure and volume
spray. . . . . . . . . . . spray; reduced stinging
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Orapred Syrup
We developed Orapred (prednisolone sodium phosphate oral solution) syrup as a
prescription liquid steroid for the treatment of inflammation associated with a
variety of diseases, principally those of the respiratory system, such as asthma
and bronchitis. In December 2000, the Food and Drug Administration, or FDA,
approved the Abbreviated New Drug Application, or ANDA, for a 15mg/5mL strength
of Orapred Syrup for the treatment of inflammation in children. We commenced
commercial shipment of Orapred syrup in January 2001. In accordance with
industry practice, our customers generally have a right of return until they
fulfill prescriptions to the consumer.
Other available liquid steroid products for the treatment of inflammation have a
bitter and 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 applied our patented taste masking technology to develop Orapred as
a steroid product with a pleasant taste in a strength physicians prefer.
Scott-Levin, a market audit data service, estimated that in 2000 physicians in
the United States wrote approximately 4,172,000 prescriptions for liquid
steroids, with pediatricians writing approximately 57% of these prescriptions.
Scott-Levin also estimates that the 2000 United States market for liquid
steroids was approximately $56,296,000. 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. Orapred syrup
contains the active ingredient prednisolone sodium phosphate which is
therapeutically identical to prednisolone. We also have a 5/mg per 5mL strength
of Orapred in development.
Primsol (Trimethoprim Solution)
We developed Primsol (trimethoprim HCl oral solution), containing the antibiotic
trimethoprim, as a prescription drug for the treatment of middle ear infections
in children. In January 2000, the FDA approved the New Drug Application, or NDA,
for a 50mg strength of Primsol solution for the treatment of acute otitis media
in children age six months to twelve years. We commenced commercial shipment of
the 50mg strength of Primsol solution in February 2000. We had net product
revenues in 2000 from sales of Primsol of $530,000. In accordance with industry
practice, our customers generally have a right of return until they fulfill
prescriptions to the consumer.
Prior to Primsol, trimethoprim for the treatment of middle ear infections in
children was only available in combination with the sulfa compound
sulfamethoxazole, which is associated with allergic reactions that may be severe
or even fatal. Because of the reduced risk of side effects, we believe that
pediatricians will be more likely to prescribe Primsol for the treatment of
middle ear infections in children than other trimethoprim formulations which
contain sulfamethoxazole.
Acute infections are the most frequent illness treated by pediatricians, and
middle ear infections are the most common of these infections. By three years of
age, approximately 80% of children in the United States have developed at least
one ear infection. In 2000, there were approximately 25,189,000 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 had
previously failed to provide a therapeutic effect in the patient. In such cases,
the pediatrician selects a second line antibiotic from a series of alternative
choices, including a trimethoprim/sulfa compound (sold under brand names such as
Bactrim and Septra), cephalosporins (such as Ceclor), a combination of
amoxicillin and clavulanic acid (such as Augmentin) or macrolides (such as
Zithromax or Biaxin). We are marketing Primsol solution as a second line of
therapy to amoxicillin and as an alternative to trimethoprim/sulfamethoxazole
combination products such as Bactrim and Septra.
Scott-Levin estimates that the United States market for liquid antibiotics for
the treatment of middle ear infections in 2000 was approximately $483,599,000,
which consists of approximately $279,835,000 from the sale of amoxicillin
(reflecting approximately 14,533,000 prescriptions), approximately $9,266,000
from the sale of trimethoprim/sulfacombination products (reflecting
approximately 1,308,000 prescriptions) and approximately $194,498,000 from the
sale of other liquid antibiotics (reflecting approximately 6,595,000
prescriptions), including cephalosporins and macrolides. We believe that almost
all liquid antibiotics are taken by children.
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We 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.
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 2000
from sales of Pediamist of $99,000.
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. The
Feverall product line 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 2000 from sales of
the Feverall product line of $2,766,000.
On December 29, 2000, pursuant to the terms of a Product Purchase Agreement by
and between Ascent and Alpharma USPD, we sold the Feverall product line in an
asset sale to Alpharma USPD in exchange for the cancellation by Alpharma USPD of
$12 million of indebtedness owed by us under our loan agreement with Alpharma
USPD, although we have maintained the right to repurchase the product line
through December 2001 at the same price.
PRODUCT DEVELOPMENT
In December 1999, we suspended all product development efforts until such time,
if at all, as we determine that our financial condition has adequately improved.
If our financial condition improves sufficiently such that we begin product
development, we are most likely to begin our efforts with the product candidates
discussed below.
Product. . .. . . . Indication Status Key Features
- - - ----------------- ----------- ----------------- ------ ------------
FDA orally indicated product
Acetaminophen. . . ..Fever. . . approvable with certain Reduced dosing
extended-release . . . . . . . . modifications; additional frequency;
sprinkles. . . . . . . . . . . . development required improved taste
Phase 3 clinical trials
Pediavent albuterol. Asthma. . . completed; additional Reduced dosing
extended-release . . . . . . . . development required for frequency;
suspension . . . . . . . . . . . filing improved taste
Although we suspended all product development efforts in December 1999, we
incurred research and developments expenses in the year ended December 31, 2000
of $2.0 million, substantially all of which was in connection with the testing
of Orapred and Primsol. In the year ended December 31, 1999, research and
development expenses were $3.8 million and in the year ended December 31, 1998
were $4.5 million.
Acetaminophen Extended-Release Sprinkles
We were developing acetaminophen extended-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 designed this
product to permit dosing every eight hours, rather than the four hours required
by currently available products. In December 1999, we suspended development of
this product. We expect to seek to resume development of this product at such
time, if at all, as we determine that our financial condition has adequately
improved.
We were developing the acetaminophen sprinkles with a proprietary
controlled-release technology that releases the acetaminophen at an extended
rate 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 formulated this product in the form of small beads that
either can be sprinkled on a soft food that is appealing to the child, such as
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applesauce, or delivered in a liquid, such as water.
We completed three Phase 1 definitive pharmacokinetic trials comparing our
acetaminophen sprinkles to Tylenol extended relief caplets and immediate release
Tylenol tablets. These trials involved 63 healthy adults. In these trials, our
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 our
acetaminophen 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, our acetaminophen
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 our acetaminophen 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 our acetaminophen
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 our acetaminophen sprinkles was more effective than the fever
control provided by the immediate release acetaminophen.
We filed an NDA for the acetaminophen sprinkles in December 1997. In December
1998, the FDA issued a not-approvable letter covering this NDA which cited
deficiencies relating to the manufacture and packaging of this product. The
letter also indicated that the clinical trials of the acetaminophen sprinkles
did not demonstrate adequate duration of action for the treatment of pain and
that the product should only be used in patients older than two years of age. In
discussions with the FDA, the FDA indicated to us that with changes and data
required to address the manufacturing and packaging deficiencies, the product
may be approvable for the fever reduction indication but that additional
clinical data is required for approval of the pain indication.
Pediavent Albuterol Extended-Release Suspension
We were developing Pediavent albuterol extended-release suspension as a
prescription product for the treatment of asthma. We were developing this
product to mask the normal bitterness of albuterol and to permit twice-a-day
administration. In December 1999, we suspended development of this product. We
expect to seek to resume development of this product at such time, if at all, as
we determine that our financial condition has adequately improved.
We were developing Pediavent as a suspension in the form of granules which
contained albuterol within a coating. The coating allows the albuterol to be
released at an extended rate and masks the normal bitterness of the drug. To
enhance patient compliance, we were designing this product for twice-a-day
administration. Twice-a-day dosing also avoids waking a child at night to
administer medication.
In October 1998, we completed Phase 3 clinical trials of Pediavent to evaluate
control of asthma symptoms, lung efficiency and safety in children with asthma.
The study was a multi-center, open label, comparative study performed in 63
children, ages two to six, with chronic asthma. For a one month period, patients
received either Pediavent suspension twice daily or an immediate release form of
albuterol, three times daily. The parents of each patient monitored their status
daily and a physician examined each patient weekly. Parent and physician
evaluation indicated that Pediavent suspension, taken twice daily, is as safe
and effective in controlling asthma in children as the immediate release form of
albuterol, taken three times daily.
Late stage review of the current formulation of Pediavent showed the inclusion
of a grade of an inactive coating material, known as glycerol monostearate, that
may not be acceptable for internal use. We will need to replace this ingredient
with an acceptable grade of glycerol monostearate. The review also uncovered
issues related to the reproducibility of the analytical test method and the
reliability of the manufacturing process to reproduce the product initially
evaluated in the European Phase I trials.
The FDA must approve an NDA covering Pediavent in order for us to market this
product in the United States. We expect that if we were to resume product
development we would submit a request to the FDA for three years of protection
under the Waxman-Hatch Act against the approval of a competitor's ANDA for a
generic version of Pediavent for the treatment of asthma in children under 12
years of age, which ANDA is based on our clinical trial results.
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SALES AND MARKETING
We believe that our exclusive focus on the marketing of pediatric pharmaceutical
products meaningfully differentiates us from other pharmaceutical companies in
the pediatric medical community. We established our 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, 2001, our sales force consisted of five regional
sales managers, 40 full-time sales representatives and 15 flex-time (or
part-time) sales representatives. The primary focus of our marketing and sales
efforts are pediatricians and pediatric nurses who are responsible for most
prescriptions written for children in the United States and play a central role
in recommending over-the-counter medications for children.
We chose to establish our own sales force instead of using third party sales
organizations because we believed that we could more efficiently and effectively
implement marketing and sales initiatives through a direct sales force. We
believe that we can reach much of the United States pediatric market with a
moderately sized sales force and carefully controlled marketing expenditures,
because pediatricians and pediatric nurses are generally concentrated in group
practices in urban and suburban centers.
Our sales representatives conduct personal sales calls and attend industry
conferences, seminars and other meetings. We advertise our products through
direct mail and advertisements in speciality pediatric journals. Because more
than 71% 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.
Sales to Warner-Lambert Company accounted for 20% of our net revenues for the
year ended December 31, 2000 and 50% of our net revenues for the year ended
December 31, 1999. In addition, sales to McKesson HBOC accounted for 11% of our
net revenues for the year ended December 31, 2000. We do not have any long-term
contracts with any of our customers. We expect to continue to derive a majority
of our revenues from a limited number of customers in the near future.
We plan to continue to leverage our marketing and sales capabilities by seeking
to enter into arrangements to promote third party pharmaceutical products to
pediatricians. For example, since we established our sales force in July 1997,
we have entered into co-promotion agreements under which we promoted the
combination orticosteroid/antibiotic Pediotic(R), Omnicef(R) (cefdinir) oral
suspension and capsules, and Duricef(R) (cefadroxil mono hydrate) oral
suspension. We plan to continue to evaluate third-party products for promotion.
MANUFACTURING AND DISTRIBUTION
We rely on third parties to manufacture our products for commercial production.
Accordingly, we do not have any manufacturing facilities and have not sought to
employ direct manufacturing personnel. The components of our products generally
are available from a variety of commercial suppliers and are inexpensive. The
production of our 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 each of our products, we have qualified only one supplier, even
though the contractual arrangement with the supplier may permit us to qualify an
additional supplier.
To date, we have entered into several agreements with third parties for the
manufacture of our products. Currently, we are a party to two supply agreements
with Lyne Laboratories, Inc. for the manufacture of Primsol solution and Orapred
syrup, respectively. These agreements provide as follows:
- - - we have agreed to purchase all amounts of such products as we may require
for sale in the United States from Lyne in accordance with an agreed upon price
schedule; and
- - - the Primsol agreement may be terminated by either party on three months'
notice any time after October 17, 2004. The Orapred agreement may be terminated
by either party on twelve months notice after January 2, 2007.
In October 1996, we entered into an agreement with Recordati S.A. Chemical and
Pharmaceutical Company relating to the manufacture of Pediavent albuterol
controlled-release suspension. In the future, we may establish our own
manufacturing facilities if it becomes economically attractive to do so. In
PAGE 8
order for us to establish a manufacturing facility, we would require substantial
additional funds and significant additional personnel, neither of which may be
available to us. In addition, we would need to comply with the FDA's extensive
manufacturing regulations.
We distribute our products through Alpharma's distribution warehouse. Under this
arrangement, the manufacturers of products ship the products to the distribution
warehouse, which performs various functions on our behalf, including order
entry, customer service and collection of accounts receivable. We may seek to
develop the capability to perform some or all of these functions through our own
personnel in the future.
COMPETITION
Competition in the pediatric pharmaceutical market is intense. Although we
believe that no competitor focuses its commercial activities exclusively on the
pediatric pharmaceutical market, several large pharmaceutical companies with
significant research, development, marketing and manufacturing operations market
prescription pediatric products. These companies include:
- - - GlaxoSmithKline, which markets Ceftin(R) oral suspension;
- - - Eli Lilly and Company, which markets Ceclor(R) suspension;
- - - Bristol-Myers Squibb Company, which markets Cefzil(R) oral suspension;
- - - Ortho-McNeil Pharmaceutical Division of Johnson & Johnson Inc., which
markets Tylenol(R) suspension;
- - - Pfizer Inc., which markets Zithromax(R) oral suspension;
- - - Ross Products Division of Abbott Laboratories Inc., which markets
Omnicef(R) syrup;
- - - Schering-Plough Corporation, which markets Cedax(R) oral suspension,
Claritin(R) Reditabs, Proventil(R) syrup;
- - - Muro Pharmaceuticals, Inc., an ASTA Medica company, which markets
Prelone(R); and
- - - Celltech Group plc, which markets Pediapred(R).
We believe that key competitive factors affecting our success include:
- - - the efficacy, side effect profile, taste, dosing frequency and method of
administration of our products;
- - - patent or other proprietary protection;
- - - brand name recognition;
- - - price;
- - - timing of market introduction of competitors' products; and
- - - ability to attract and retain qualified personnel.
Many of our competitors have substantially greater name recognition and greater
financial, technical and human resources than us. Furthermore, we will compete
against these larger companies with respect to manufacturing efficiency and
marketing capabilities, areas in which we have limited or no experience. Our
competitors may introduce competitive pricing pressures that may adversely
affect our sales levels and margins. Moreover, many of these competitors offer
well established, broad product lines and services which we do not offer. Many
of the products offered by these competitors have well known brand names that
have been promoted over many years.
We currently market three products as alternative treatments for pediatric
indications for which products with the same active ingredient are
well-entrenched in the market. For example, we are marketing Primsol solution, a
trimethoprim antibiotic, for the treatment of middle ear infections for which
pediatricians often prescribe the well-known combination therapies Bactrim and
Septra, which also contain trimethoprim. Our products also 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 competes against other antibiotics, including amoxicillin.
LICENSE AND MARKETING AGREEMENTS
We have obtained rights to manufacture and/or market products through licenses
and other arrangements with third parties. Set forth below is a summary of our
license with Recordati with respect to our Pediavent product.
PAGE 9
Recordati License. We 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 an extended-release suspension
system formulation of albuterol in the form of coated granules, which we were
developing as Pediavent until December 1999 when we suspended all product
development. 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, although we have
suspended all such collaboration pending adequate improvement of our financial
condition. Recordati will own any intellectual property resulting from the
collaboration other than our clinical research data, product applications and
regulatory approvals. This agreement expires 15 years from the date of FDA
marketing approval of Pediavent. We are entitled to extend the agreement, at our
election, for an additional five year term. During the term of this agreement,
Recordati has agreed to supply us with such quantities of the product as we may
require. In return, we have agreed to pay Recordati certain up-front license
fees and to purchase the product from Recordati at unit prices based upon net
sales in a given country. During the term of this agreement, we have also agreed
not to develop, manufacture or sell competing products.
The licenses and other third party product arrangements to which we are or
become a party to 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 maintain
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
maintain our competitive position. If we resume product development, we also
plan to consider seeking three year protection for certain products, if
appropriate, under the Waxman-Hatch Act from the approval of a competitor's ANDA
for a generic version of one of our products that we suspended development on,
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 12 issued United States patents and have filed one additional United
States patent application. These patents and patent application primarily relate
to the following:
- - - Formulation of Primsol solution (1 patent);
- - - Cromolyn sodium cream product candidate (5 patents);
- - - Extended-release technology (1 patent and 1 application); and
- - - Task-masking technology (2 patents).
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 2014 to 2018, 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 application with the United States Patent and Trademark
Office and certain foreign patent authorities, we do not know whether our patent
application will result in the issuance of a patent or, if a patent is issued,
whether it will provide significant proprietary protection or will be
circumvented or invalidated. 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 our pending patent application or that we were the first
to file the patent application 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
PAGE 10
and patent applications will require us to alter our products or processes, pay
licensing fees or cease activities. In addition, since our products 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.
We require our employees, consultants, and any outside scientific collaborators,
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.
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. On December 29, 2000, in connection with
the sale of the Feverall product line, we transferred the entire right, title
and interest in the "FEVERALL" trademark to Alpharma USPD. All other brand names
or trademarks appearing in this annual report are the property of their
respective owners.
GOVERNMENT REGULATION
The manufacture, labeling, distribution, sale, marketing, promotion and
advertising of our products 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. In December 1999, due to limitations
on resources, we suspended the development of our products indefinitely.
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, among other things, that:
- - - the drug have the same active ingredient, dosage form, route of
administration, strength and conditions of use as a "pioneer" drug that was
previously approved by the FDA as safe and effective; and
- - - any applicable patents and statutory period of protection under the
Waxman-Hatch Act with respect to the "pioneer" drug have expired.
Through a petition process, the FDA may permit the filing of an ANDA for a
generic version of an approved "pioneer" drug with variations in active
ingredient, dosage form, route of administration and strength (but not in
conditions of use). The FDA will not permit the filing of an ANDA, however, and
will instead require an applicant to file an NDA, if, among other reasons, (a)
clinical investigations must be conducted to demonstrate the safety and
effectiveness of the drug, (b) an ANDA would provide inadequate information to
permit the approval of the variation or (c) significant labeling changes would
PAGE 11
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 with the FDA's Good Clinical Practice requirements under protocols
that detail, among other things, the objectives of the study, the parameters to
be used to monitor safety and the effectiveness criteria to be evaluated. The
sponsor must submit each protocol to the FDA as part of the IND. Further, the
sponsor must conduct each clinical study under the auspices of an Institutional
Review Board, or IRB. The IRB will consider, among other things, ethical
factors, the safety of human subjects, the possible liability of the institution
and the informed consent disclosure which must be made to participants in the
clinical trial.
Clinical trials are typically conducted in sequential phases, although the
phases may overlap.
- - - Phase 1. In Phase 1, the investigational new drug usually is administered
to between 10 and 50 healthy human subjects and is tested for safety, dosimetry,
tolerance, metabolism, distribution, excretion and pharmacokinetics.
- - - Phase 2. Phase 2 involves studies in a limited patient population, usually
10 to 70 persons, to evaluate the effectiveness of the investigational new drug
for specific indications, determine dose response and optimal dosage and
identify possible adverse effects and safety risks.
- - - Phase 3. When an investigational new drug is found to have an effect and
to have an acceptable safety profile in Phase 2 evaluation, Phase 3 trials are
undertaken to further test for safety, further evaluate clinical effectiveness
and to obtain additional information for labeling. Phase 3 trials involve an
expanded patient population at geographically dispersed clinical study sites.
The FDA may impose a clinical hold on an ongoing clinical trial at any time if
it believes that the clinical trial exposes the participants to an unanticipated
or unacceptable health risk. In addition, we may voluntarily suspend clinical
trials for the same reasons. If the FDA imposes a clinical hold, clinical trials
may not recommence without prior FDA authorization and then only under terms
authorized by the FDA.
In order to obtain marketing approval of a product in the United States, we must
submit an NDA to the FDA. The NDA includes the results of the pharmaceutical
development, preclinical studies, clinical studies, chemistry and manufacturing
data and the proposed labeling. The FDA may refuse to accept the NDA for filing
if certain administrative and NDA content criteria are not satisfied. Even after
accepting the NDA for review, the FDA may require additional testing or
information before approving the NDA. The FDA must deny an NDA if applicable
regulatory requirements are not ultimately satisfied. If the FDA grants
regulatory approval of a product, it may require post-marketing testing and
surveillance to monitor the safety of the product or may impose limitations on
the indicated uses for which the product may be marketed. Finally, the FDA may
withdraw product approvals if compliance with regulatory standards is not
maintained or if problems occur following initial marketing.
A pharmaceutical product that has the same active ingredient as a drug that the
FDA has previously approved as safe and effective may be approved for marketing
in the United States following an abbreviated approval procedure (subject to
certain exclusions, such as drugs that are still protected by patent or market
exclusivity under the Waxman-Hatch Act). This procedure involves filing an
Abbreviated New Drug Application with the FDA. Approval of a pharmaceutical
product through an ANDA does not require preclinical tests on pharmacology or
toxicology or Phase 1, 2 or 3 clinical trials to prove the safety and
effectiveness of such product. Instead, an ANDA is based upon a showing of
bioequivalence with the "pioneer" drug and adequate manufacturing. Therefore,
compared to an NDA, the filing of an ANDA may result in reduced research and
development costs associated with bringing a product to market.
If an applicant files an ANDA for a pharmaceutical product where the "pioneer"
drug is protected by a patent, the applicant must notify the patent holder of
the filing of the ANDA. If the patent holder files a patent infringement suit
against the applicant within 45 days of this notice, any FDA approval of the
ANDA can not become effective until the earlier of (i) a determination that the
PAGE 12
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
are based upon approved compounds for which the FDA has previously granted NDA
approval, we expect that any products which qualify for statutory protection
under the Waxman-Hatch Act will be afforded only a three year period of
protection.
In addition to product approval, satisfactory inspection by the FDA covering
manufacturing facilities or the facilities of a supplier is required before
marketing a product in the United States. The FDA will review the manufacturing
procedures and inspect the manufacturer's facilities and equipment for
compliance with Good Manufacturing Practices and other requirements. Any
material change in the manufacturing process, equipment or location necessitates
additional preclinical and/or clinical data and additional FDA review and
approval before marketing. In addition, the FDA must supplementally approve any
changes in manufacturing that have substantial potential to adversely affect the
safety or effectiveness of the product, such as changes in the formulation of a
drug, as well as some changes in labeling or promotion.
Even after approval, all marketed products and their manufacturers are subject
to continual government review. Subsequent discovery of previously unrecognized
problems or failure to comply with applicable regulatory requirements could
result in, among other things, restrictions on manufacturing or marketing of the
product, product recall or withdrawal, fines, seizure of product, or civil or
criminal prosecution, as well as withdrawal or suspension of regulatory
approvals.
FOREIGN REGULATORY APPROVAL
We would be required to 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, assuming we were to resume product development, which, in December
1999, we suspended indefinitely. 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 that 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, 2001, we had 63 full-time employees. Five of these employees are
engaged in quality control, including medical and regulatory affairs, 52 are
employed in sales and marketing and six are employed in finance, business
development and general and administrative activities. In addition, as of March
1, 2001, we had 15 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 two office spaces, totaling approximately 18,900 square feet, in the
same building in Wilmington, Massachusetts. The lease for the original space is
for approximately 14,200 square feet and has an initial term expiring January
31, 2002. We have an option to renew the lease for an additional five-year
period. The lease for the approximately 4,500 square feet of remaining office
PAGE 13
space has an initial term expiring February 28, 2002. On April 1, 2000, we
entered into an agreement with a third party to sublease all of the
approximately 4,500 square feet of office space to such third party. The
sublease agreement expires February 28, 2002.
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 2000.
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers and certain significant employees of Ascent as of March 1, 2001.
NAME . . . . . . . . . . AGE POSITION
- - ------------------------- --- ----------------------------------------------
Executive Officer
Emmett Clemente, Ph.D.. . 62 President, Chairman of the Board and Treasurer
Significant Employees
Mumtaz Ahmed, M.D., Ph.D. 64 Vice President, Medical Affairs
David J. Benn . . . . . . 34 Director of Marketing
Steven Evans. . . . . . . 46 National Sales Director
Jennifer A. Marchand. . . 30 Controller
Mark Murray . . . . . . . 37 Director of Regulatory Affairs
Bobby R. Owen . . . . . . 51 Vice President, Operations
Diane Worrick . . . . . . 47 Vice President, Human Resources
Emmett Clemente, Ph.D., President and Chairman of the Board of Directors,
founded Ascent in 1989. Dr. Clemente has served as a director since 1989, as
Chairman of the Board since May 1996 and as President since December 1999. From
May 1989 to May 1996, Dr. Clemente also served as Chief Executive Officer of
Ascent. Dr. Clemente served as the Director of Pharmaceutical Research for
Fisons Corporation, U.S., a pharmaceutical company ("Fisons"), from 1980 to
1989, and as the Director of New Product Development and Acquisitions of Fisons
from 1972 to 1980. From 1970 to 1972, Dr. Clemente served as Senior Scientist in
the Consumer Products Division of Warner-Lambert Company, a pharmaceutical
company. From 1968 to 1970, Dr. Clemente served as Senior Scientist at
Richardson-Merrell Company, a pharmaceutical company. Dr. Clemente received a
B.S. in biology, an M.S. in physiology and a Ph.D. in pharmacology from St.
John's University.
Mumtaz Ahmed, M.D., Ph.D., has served as Vice President, Medical Affairs of
Ascent since 1993. From 1982 to 1993, Dr. Ahmed served as Executive
Director/Distinguished Research and Development Physician at Ciba-Geigy
Corporation, a pharmaceutical company. 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.
David J. Benn has served as Director of Marketing of Ascent since April 2000.
From January 2000 to April 2000, Mr. Benn served as Marketing Director at Watson
Pharmaceuticals, Inc., a pharmaceutical company. From 1994 to January 2000, Mr.
Benn held various marketing positions, including Product Management and
Marketing Management, at Muro Pharmaceutical, Inc., a pharmaceutical company.
From 1987 to 1994 Mr. Benn held positions in Sales, Sales Operations, and
Marketing at Schering Plough Corp., a pharmaceutical company. Mr. Benn received
a B.S. in business economics from Cook College, Rutgers University and an M.B.A.
in Marketing from Farleigh Dickinson University.
Steve Evans has served as National Sales Director of Ascent since December 1999.
From July 1997 to December 1999, Mr. Evans served as Director of Sales of
Ascent. From 1982 to June 1997, Mr. Evans held various positions at Searle
Pharmaceuticals, a pharmaceutical company, including Manager of Sales
Operations, Manager of Sales Training and Director of Sales, and last serving as
Director in the National Customer Unit. Mr. Evans earned a B.S. in Psychology
from Oklahoma State University and a M.S.W. degree from Oklahoma University.
Jennifer A. Marchand has served as Controller of Ascent since January 2000. From
January 1997 to January 2000 Ms. Marchand served as a consultant, Accounting
Manager and Financial Systems Manager of Ascent. From 1993 to November 1996, Ms.
Marchand served in various accounting positions, including General Accounting
Supervisor, at Vision Sciences, Inc., a medical device manufacturer. Ms.
Marchand received a B.S. in business administration with a concentration in
PAGE 14
accounting from the University of Massachusetts, Lowell.
Mark Murray has served as Director of Regulatory Affairs of Ascent since 1994.
From 1992 to 1994, Mr. Murray served in various regulatory affairs positions,
including Senior Regulatory Affairs Specialist, last serving as Manager,
Regulatory Affairs, at Serono Laboratories, Inc., a pharmaceutical company. From
1986 to 1992 Mr. Murray served in various regulatory affairs and technical
positions at Marion Merrell Dow, Inc., a pharmaceutical company. Mr. Murray
received a B.S. in Biology from the University of Dayton.
Bobby R. Owen has served as Vice President, Operations of Ascent since September
1997. From 1995 to July 1997, Mr. Owen served as Corporate Director of
Manufacturing at AutoImmune, Inc., a biotechnology company. 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 has served as Vice President of Human Resources of Ascent since
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since July 23, 1999, depositary shares representing Ascent's common stock have
traded on the Over-The-Counter Bulletin Board under the symbol "ASCTP". Prior to
this, Ascent's common stock had been traded on the Nasdaq National Market under
the symbol "ASCT". The following table sets forth the high and low sales or bid
prices per share of Ascent common stock or depositary share, as appropriate,
for the periods indicated below as reported on the Nasdaq National Market or the
OTC Bulletin Board, respectively. Information presented below with respect to
the OTC Bulletin Board reflects inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions in
Ascent depositary shares.
PERIOD PERIOD. HIGH LOW
1999
-------
First Quarter. $ 6.875 $ 2.50
Second Quarter $3.1562 $1.6562
Third Quarter. $ 3.00 $ 1.25
Fourth Quarter $ 2.125 $ 0.875
2000
-------
First Quarter. $ 3.00 $ 1.25
Second Quarter $2.7812 $0.9375
Third Quarter. $1.9688 $0.8438
Fourth Quarter $1.7344 $0.5312
The last reported bid price of Ascent depositary shares on the Over-The-Counter
Bulletin Board on March 27, 2001 was $0.8125 per share. There were approximately
169 stockholders of record on March 27, 2001.
Ascent has never declared or paid cash dividends on its depositary shares or
common stock and does not expect to pay cash dividends on its depositary shares
or common stock in the foreseeable future. Ascent is currently prohibited from
paying cash dividends under the terms of its financing arrangements with funds
affiliated with ING Furman Selz LLC and BancBoston Ventures, Inc.
Except as set forth below or as previously reported in a quarterly report on
Form 10-Q, during the fiscal year ended December 31, 2000, Ascent did not sell
any securities that were not registered under the Securities Act of 1933, as
amended.
PAGE 15
On November 1, 2000, in connection with the borrowing of $1,000,000 from funds
affiliated with ING Furman Selz pursuant to Ascent's financing arrangements with
ING Furman Selz, Ascent issued to such funds immediately exercisable warrants to
purchase an aggregate of 500,000 Ascent depositary shares at an exercise price
of $3.00 per share. The exercise price of these warrants were subsequently
reduced to $0.05 per share in conjunction with the December 29, 2000 financing
with FS Ascent Investments. These warrants are exercisable on a cashless basis.
These issuances were conducted pursuant to Section 4(2) of the Securities Act of
1933.
On November 28, 2000, in connection with the borrowing of $1,000,000 from funds
affiliated with ING Furman Selz pursuant to Ascent's financing arrangements
with ING Furman Selz, Ascent issued to such funds immediately exercisable
warrants to purchase an aggregate of 1,000,000 Ascent depositary shares at an
exercise price of $3.00 per share. The exercise price of these warrants were
subsequently reduced to $0.05 per share in conjunction with the December 29,
2000 financing with FS Ascent Investments. These warrants are exercisable on a
cashless basis. These issuances were conducted pursuant to Section 4(2) of the
Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The table below summarizes recent historical financial information for Ascent.
For further information, refer to Part II, Item 8, Financial Statements and
Supplementary Data.
Selected Financial Data
(In thousands, except per share data)
Year Ended December 31,
--------------------------
2000 1999 1998 1997 1996
-------------------------- --------- --------- --------- ---------
Product revenue, net. . . . . . . . . . . $3,395 $ 3,040 $ 4,353 $ 2,073 $ -
Co-promotional revenue. . . . . . . . . . 1,069 4,008 123 - -
Gross margin. . . . . . . . . . . . . . . 3,062 5,421 2,092 828 -
Loss from operations. . . . . . . . . . . (11,413) (14,221) (16,046) (11,694) (6,566)
Extraordinary item (1). . . . . . . . . . - - 1,166 - -
Net loss. . . . . . . . . . . . . . . . . (14,339) (15,653) (18,231) (12,498) (6,487)
Net loss available to common
stockholders (2) (14,339) (16,072) (18,680) (12,745) (6,625)
Net loss available to common
stockholders per common share
basic and diluted . . . . . . . . . . . . . $(1.47) $ (1.96) $ (2.69) $ (3.08) $ (33.44)
December 31,
2000 1999 1998 1997 1996
------- --------- --------- --------- ---------
Cash, cash equivalents and current
marketable securities . . . . . . . . . . . $ 261 $ 1,067 $ 2,172 $ 14,229 $ 2,086
Working capital (deficit) . . . . . . . . . . (1,171) (798) 468 4,242 525
Total assets (3). . . . . . . . . . . . . . . 15,293 15,273 16,301 28,433 2,628
Long term subordinated secured notes,
net of current portion. . . . . . . . . . . 20,706 21,461 8,681 1,252 -
Redeemable convertible preferred stock,
Series D, Series E and Series F (4) . . . . - - - - 17,832
Convertible exchangeable preferred
stock, Series G (5) . . . . . . . . . . . . - - 6,461 - -
Total stockholders' equity (deficit). . . . . (21,707) (9,958) 3,803 15,515 (16,778)
No common stock or depositary share dividends have been declared or paid by
Ascent for any period presented above.
(1) The extraordinary item resulted from the early repayment of subordinated
secured notes on June 1, 1998. As a result, Ascent accelerated the accretion of
the discount of $842,000. In addition, $325,000 of unamortized debt issue costs
were written off.
(2) On July 23, 1999, in connection with the consummation of Ascent's strategic
alliance with Alpharma, Ascent effected a merger with a wholly-owned subsidiary
pursuant to which each outstanding share of Ascent common stock outstanding on
such date was converted into the right to receive one depositary share,
representing one share of Ascent common stock subject to a call option and
represented by a depositary receipt. As used herein, common shares refer to
shares of Ascent common stock on and before July 23, 1999 and to Ascent
PAGE 16
depositary shares from and after July 23, 1999. On December 29, 2000, Ascent
entered into a series of agreements with Alpharma terminating the strategic
alliance, including a loan agreement. As part of the agreements, Alpharma agreed
not to exercise its call option and Ascent sold its Feverall product line to
Alpharma USPD. See Footnote (3) below.
(3) In July 1997, Ascent acquired the Feverall acetaminophen suppository product
line and certain related assets for a purchase price of $11.9 million. A
significant portion of the purchase price was allocated to the "Feverall"
trademark acquired in the transaction, the manufacturing agreement entered into
in connection with the transaction and goodwill. On December 29, 2000, Ascent
sold the Feverall product line in an asset sale to Alpharma USPD, in exchange
for the cancellation by Alpharma USPD of $12.0 million of indebtedness owed to
Alpharma USPD by Ascent under a loan agreement.
(4) All then outstanding preferred stock was converted to common stock at the
initial public offering in May 1997.
(5) On July 23, 1999, in connection with Ascent's strategic alliance with
Alpharma USPD, which was subsequently terminated, Ascent exercised its right to
exchange all outstanding shares of Series G preferred stock for 8% convertible
subordinated notes in accordance with the terms of the Series G preferred stock.
See Footnote (2) above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
We are engaged in the marketing of pharmaceuticals for use in the treatment of
common pediatric illnesses. We introduced our first two products, Feverall
acetaminophen suppositories and Pediamist nasal saline spray, to the market in
the second half of 1997. We introduced Primsol trimethoprim solution, a
prescription antibiotic, to the market in February 2000 and Orapred syrup, a
liquid steroid for the treatment of inflammation, including inflammation
resulting from respiratory conditions, to the market in January 2001. On
December 29, 2000, we sold the Feverall product line in an asset sale to
Alpharma USPD in exchange for the cancellation by Alpharma USPD of $12.0 million
owed to Alpharma USPD by us under the loan agreement between the two parties,
although we have maintained the right to repurchase the product line through
December 2001 at the same price.
We leverage our marketing and sales capabilities, including our sales force, by
seeking to enter into arrangements to promote third party pharmaceutical
products to pediatricians. Since July 1997, when we established a sales force,
we have entered into co-promotion agreements under which we promoted the
combination corticosteroid/antibiotic, Pediotic(R), Omnicef(R) (cefdinir) oral
suspension and capsules, and Duricef(R) (cefadroxil mono hydrate) oral
suspension. All of these agreements have either expired or been terminated.
We have incurred net losses since our inception and expect to incur additional
operating losses at least through 2001 as we seek to maintain our sales and
marketing organization and promotion of Orapred and Primsol to the market. We
expect cumulative losses to increase over this period. We have incurred a
deficit from inception through December 31, 2000 of $80,602,000.
In December 1999, we modified our strategy until such time as we determine that
our financial condition has adequately improved. Specifically, we are focused on
introducing Orapred and Primsol to the market and seeking appropriate
co-promotional opportunities. We have suspended all product development
activities until such time, if ever, as our financial condition has adequately
improved.
RESULTS OF OPERATIONS
FISCAL YEAR 2000 VS. FISCAL YEAR 1999
REVENUE. Ascent had net revenue of $4,464,000 for the year ended December 31,
2000 compared with revenue of $7,047,000 for the year ended December 31, 1999.
This decrease in revenue of $2,583,000 was primarily attributable to a decrease
in revenues under co-promotion arrangements in 2000 from $4,008,000 to
$1,069,000 associated with the termination or expiration in early 2000 of the
Omnicef and Pediotic co-promotion agreements. The decrease also reflects a
decrease of $119,000 in Feverall sales and a decrease of $55,000 in Pediamist
sales. These decreases were offset by $530,000 in revenues from sales of
Primsol, which we began selling in February 2000. For the year ended December
31, 2000, sales to Warner Lambert Company accounted for 20% and sales to a
McKesson HBOC accounted for 11% of net revenues. We expect to continue to derive
a majority of our revenues from a limited number of customers in the near
future.
COST OF PRODUCT SALES. Cost of sales was $1,402,000 for the year ended December
31, 2000 compared with $1,626,000 for the year ended December 31, 1999. This
decrease in cost of sales of $224,000 was primarily attributable to (i) a
decrease of $166,000 for the manufacturing costs associated with the production
PAGE 17
of Feverall and Pediamist due to decreases in sales volume, (ii) a decrease of
$52,000 in operations personnel costs due to a reduction in headcount, and (iii)
a decrease of $95,000 in inventory net realizable value adjustments due to
higher prior year write-offs of expired Primsol inventory. The decrease was
offset by an increase of $44,000 for the manufacturing costs associated with the
production of Primsol and an increase of $97,000 for finished goods testing of
Primsol and Orapred.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Ascent incurred selling, general
and administrative expenses of $12,471,000 for the year ended December 31, 2000
compared with $15,808,000 for the year ended December 31, 1999, representing a
decrease of $3,337,000.
Selling and marketing expenses were $10,220,000 for the year ended December 31,
2000 compared with $11,613,000 for the year ended December 31, 1999. This
decrease in selling and marketing expenses of $1,393,000 was primarily the
result of (i) $1,294,000 in decreased personnel costs due to the decreased
number of our sales representatives in 2000, (ii) $430,000 in decreased
advertising and promotional expenses of Feverall, (iii) $314,000 in decreased
sales meeting costs,(iv) $331,000 in decreased samples, selling materials,
media and direct mailings costs associated with the Omnicef co-promotion
agreement, and (v) $200,000 in decreased travel, entertainment, and business
development expenditures. This decrease was offset by an increase of (i)$899,000
in the advertising and promotion of a new product offering, Primsol, (ii)
$156,000 in selling materials for Orapred in preparation for product
introduction,(iii) $92,000 for the purchase of sales information, and (iv)
$58,000 in freight and distribution expenses due to new product launching.
General and administrative expenses were $2,251,000 for the year ended December
31, 2000 compared with $4,195,000 for the year ended December 31, 1999. The
decrease in general and administrative expenses of $1,944,000 was primarily
attributable to decreases of (i) $1,094,000 due to the termination of an
advisory services agreement in the third quarter of 1999, (ii) $476,000 in
personnel expenses due to a decrease in headcount, (iii) $97,000 for investor
relations expenses, (iv) $116,000 in employee retention expenses, (v) $106,000
for consulting expenses due to the scaling back of an existing agreement in
November 1999, and (vi) $51,000 in recruiting expenses.
RESEARCH AND DEVELOPMENT. Ascent incurred research and development expenses of
$2,003,000 for the year ended December 31, 2000 compared with $3,833,000 for the
year ended December 31, 1999. This decrease of $1,830,000 was primarily
attributable to (i) $945,000 in reduced spending on the Pediavent and
Acetaminophen Extended Release products' research and development programs that
were suspended in December 1999, (ii) $370,000 in reduced spending on Orapred
development, (iii) $225,000 in reduced personnel expenses due to a decrease in
headcount,(iv) $143,000 in reduced consulting expenses, (v) $21,000 in reduced
legal/patent expenses, and (vi) $19,000 in reduced travel and entertainment
expenses. In December 1999, Ascent suspended its research and development
efforts for products other than Primsol and Orapred until such time as Ascent
determines that its financial condition has adequately improved.
INTEREST. Ascent had interest income of $59,000 for the year ended December 31,
2000 compared with $68,000 for the year ended December 31, 1999. This decrease
of $9,000 was due to a lower average cash investment balance. Ascent had
interest expense of $3,064,000 for the year ended December 31, 2000 compared
with $1,500,000 for the year ended December 31, 1999. This increase of
$1,564,000 was primarily attributable to $1,379,000 for additional subordinated
notes issued during the year and $185,000 for the amortization of debt issue
costs.
FISCAL YEAR 1999 VS. FISCAL YEAR 1998
REVENUE. Ascent had net revenue of $7,047,000 for the year ended December 31,
1999 compared with revenue of $4,476,000 for the year ended December 31, 1998.
This increase in revenue of $2,571,000 was primarily attributable to increased
revenues for Ascent's co-promotion arrangements, including revenues of
$3,383,000 under the Omnicef co-promotion agreement and $625,000 under the
Pediotic co-promotion agreement. The increase was offset by a decrease of
$1,241,000 in Feverall sales due to low sales volume and a decrease of $73,000
in Pediamist sales due to low sales volume. For the year ended December 31,
1999, sales to Warner Lambert Company accounted for 50% of net revenues.
COST OF PRODUCT SALES. Cost of sales was $1,626,000 for the year ended December
31, 1999 compared with $2,383,000 for the year ended December 31, 1998. This
decrease in cost of sales of $757,000 was primarily attributable to (i) a
decrease of $312,000 for the manufacturing cost associated with the production
of Feverall due to a decrease in sales volume, (ii) a decrease of $23,000 for
the manufacturing cost associated with the production of Pediamist due to a
decrease in sales volume, (iii) a decrease of $136,000 in operations personnel
costs due to a reduction in headcount, and (iv) a decrease of approximately
$245,000 in inventory net realizable value adjustments due to the write off of
expired Just For Kids Vitamin inventory and expired Primsol inventory.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Ascent incurred selling, general
and administrative expenses of $15,808,000 for the year ended December 31, 1999
compared with $13,616,000 for the year ended December 31, 1998, representing an
PAGE 18
increase of 2,192,000.
Selling and marketing expenses were $11,613,000 for the year ended December 31,
1999 compared with $9,797,000 for the year ended December 31, 1998. This
increase in selling and marketing expenses of $1,816,000 was primarily the
result of $1,949,000 in increased personnel costs due to the increased number of
our sales representatives and $254,000 in increased samples and selling
materials. This increase was offset by a decrease of $224,000 in freight and
distribution expenses due to lower sales volumes and a decrease of $168,000 in
consulting charges due to the non-renewal of contracts that ended during 1998.
General and administrative expenses were $4,195,000 for the year ended December
31, 1999 compared with charges and expenses of $3,819,000 for the year ended
December 31, 1998. The increase in general and administrative expenses of
$376,000 was primarily attributable to increases of $1,003,000 for the
termination of an advisory services agreement. This increase was offset by
decreases of (i) $331,000 in personnel expenses due to a decrease in headcount,
(ii) $120,000 for legal, accounting and investor relations expenses, (iii)
$100,000 for consulting expenses due to scaling back of two existing consulting
agreements, (iv) $57,000 for insurance expenses related to product liability,
automobile and directors' and officers' liability insurance, and (v) $25,000 in
travel and entertainment expenses.
RESEARCH AND DEVELOPMENT. Ascent incurred research and development expenses of
$3,833,000 for the year ended December 31, 1999 compared with $4,522,000 for the
year ended December 31, 1998. This decrease of $689,000 was primarily
attributable to (i) $962,000 in reduced spending on the Primsol, Pediavent and
Feverall Extended Release products' research and development programs due to the
completion of clinical and biological studies of these products during 1998 and
(ii) $54,000 in reduced legal/patent expenses. These decreases were offset by
increases of $269,000 in personnel costs due to an increase in headcount and
$104,000 in increased spending on the Orapred product's research and development
programs. In December, 1999, Ascent suspended its research and development
efforts for products other than Primsol and Orapred until such time as Ascent
determines that its financial condition has adequately improved.
INTEREST. Ascent had interest income of $68,000 for the year ended December 31,
1999 compared with $369,000 for the year ended December 31, 1998. This decrease
of $301,000 was primarily due to a lower average cash investment balance. Ascent
had interest expense of $1,500,000 for the year ended December 31, 1999 compared
with $1,387,000 for the year ended December 31, 1998. This increase of $113,000
was primarily attributable to $56,000 for additional subordinated notes issued
during the year and $21,000 for the amortization of debt issue costs.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Ascent has financed its operations primarily from private
sales of preferred stock, with net proceeds of $33.6 million, the private sale
of subordinated secured notes and related common stock and depositary share
purchase warrants, with net proceeds of $40.8 million, and, in 1997, an initial
public offering of shares of common stock, with net proceeds of $17.5 million.
As of December 31, 2000, Ascent had $261,000 in cash and cash equivalents, a
decrease of $806,000 from $1,067,000 as of December 31, 1999. Since January 1,
2001, Ascent has borrowed $5.0 million from FS Ascent Investments LLC under its
$10.25 million facility described below.
Ascent used $13.2 million of cash in operations for the year ended December 31,
2000 compared to $13.8 million for the year ended December 31, 1999. Net cash
used in operations for the year ended December 31, 2000 was primarily
attributable to a $14.3 million net loss generated during the period, a decrease
in inventory of $893,000, and a decrease in accrued expenses of $639,000. This
was offset in part by non-cash charges for depreciation and amortization expense
of $1,027,000 and non-cash interest expense of $767,000, and increases in
deferred revenue of $739,000. Ascent's investing activities resulted in net cash
used of $309,000 for the year ended December 31, 2000 compared to $223,000 for
the year ended December 31, 1999. Ascent's capital expenditures consist
primarily of purchases of property and equipment, including computer equipment
and software. Ascent expects that its capital expenditures will remain steady
in the future. Cash provided by financing activities was $12.7 million for the
year ended December 31, 2000 compared to $12.9 million for the year ended
December 31, 1999. The principal sources of financing for the year ended
December 31, 2000 were the Alpharma and ING Furman Selz credit facilities
discussed below, which yielded net proceeds of $1.5 million and $11.0 million,
respectively. The Alpharma credit facility was terminated as of December 29,
2000, by mutual agreement of the parties.
Outstanding Indebtedness to ING Furman Selz and Other Entities
As of December 31, 2000, Ascent had notes outstanding in the aggregate original
principal amount of $22.7 million under its financing arrangements with the
former holders of Series G preferred stock and funds affiliated with ING Furman
Selz. From December 31, 2000 to March 30, 2001, Ascent borrowed an additional
$5.0 million under the credit facility it entered into with ING Furman Selz on
December 29, 2000. The notes currently outstanding are as follows:
PAGE 19
- - - 8% seven-year subordinated notes issued on June 1, 1998 to the holders of
Series G preferred stock pursuant to the May 1998 securities purchase agreement,
$1.7 million principal amount outstanding as of December 31, 2000. The principal
is shown on the balance sheet net of the fair market value allocated to the
warrants associated with the notes. These notes mature in June 2005.
- - - 8% seven-year convertible subordinated notes issued on July 23, 1999 to
the holders of Series G preferred stock pursuant to the second amendment to the
May 1998 securities purchase agreement, as amended, upon the conversion of the
Series G preferred stock, $7.0 million principal amount outstanding as of
December 31, 2000. The principal is shown on the balance sheet net of the fair
market value allocated to the warrants associated with the notes. These notes
mature in June 2005.
- - - 7.5% convertible subordinated notes in the principal amount of up to $4.0
million issued on July 1, 1999 to funds affiliated with ING Furman Selz pursuant
to the third amendment to the May 1998 securities purchase agreement, as
amended, $4.0 million principal amount outstanding as of December 31, 2000. The
principal is shown on the balance sheet net of the fair market value allocated
to the warrants associated with the notes. These notes mature in July 2004.
- - - 7.5% convertible subordinated notes in the principal amount of up to $10.0
million issued on October 15, 1999 to funds affiliated with ING Furman Selz
pursuant to the fourth amendment to the May 1998 securities purchase agreement,
as amended, $10.0 million principal amount outstanding as of December 31, 2000.
The principal is shown on the balance sheet net of the fair market value
allocated to the warrants associated with the notes. These notes mature in July
2004.
- - - 7.5% convertible subordinated notes in the principal amount of up to $6.25
million issued on January 2, 2001 to funds affiliated with ING Furman Selz
pursuant to the fifth amendment to the May 1998 securities purchase agreement,
as amended, $5.0 million principal amount outstanding as of March 30, 2001.
These notes mature in June 2001.
Ascent's financing arrangements, including the material terms of the foregoing
notes, are described in more detail below.
Series G Financing. On May 13, 1998, Ascent entered into a Series G Securities
Purchase Agreement with funds affiliated with ING Furman Selz Investments LLC
and BancBoston Ventures, Inc. In accordance with this 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 an aggregate of 2,116,958
shares of Ascent common stock at a per share exercise price of $4.75 per share,
which, as discussed below, was subsequently decreased, for an aggregate purchase
price of $16.0 million. Of the $9.0 million of subordinated secured notes issued
and sold by Ascent, $8,652,515 was allocated to the relative fair value of the
subordinated notes and $347,485 was allocated to the relative fair value of the
warrants. Accordingly, the 8% subordinated notes will be accreted from
$8,652,515 to the maturity amount of $9,000,000 as interest expense over the
term of the notes. The $347,485 allocated to the warrants was included in
additional paid-in-capital. Ascent used a portion of the net proceeds, after
fees and expense, of $14.7 million to repay $5.3 million in existing
indebtedness and used the balance for working capital. As a result of the early
repayment of subordinated notes, Ascent accelerated the unaccreted portion of
the discount amounting to $842,000. In addition, $325,000 of unamortized debt
issue costs were written off.
In connection with Ascent's strategic alliance with Alpharma USPD and Alpharma,
Inc., which, as discussed below, was subsequently terminated, Ascent entered
into a second amendment to the May 1998 securities purchase agreement in July
1999. The second amendment provided for, among other things, (a) Ascent's
agreement to exercise its right to exchange all outstanding shares of Series G
preferred stock for convertible subordinated notes in accordance with the terms
of the Series G preferred stock, (b) the reduction in the exercise price of
warrants to purchase an aggregate of 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.
The subordinated notes and convertible notes bear interest at a rate of 8% per
annum, payable semiannually in June and December of each year, commencing
December 1998. Ascent deferred forty percent of the interest due on the
subordinated notes and fifty percent of the dividend interest due on the
convertible notes in each of December 1998, June 1999, December 1999 and June
2000 for a period of three years.
In the event of a change in control or unaffiliated merger of Ascent, Ascent
could redeem the convertible notes issued upon exchange of the Series G
preferred stock at a price equal to the liquidation preference plus accrued and
PAGE 20
unpaid dividends, although Ascent would be required to issue new common stock
purchase warrants in connection with such redemption. In the event of a change
of control or unaffiliated merger of Ascent, the holders of the convertible
notes and the subordinated notes could require Ascent to redeem these notes at a
price equal to the unpaid principal plus accrued and unpaid interest on such
notes. In connection with the Series G financing, a representative of ING Furman
Selz Investments was added to Ascent's board of directors.
$4.0 Million Credit Facility. On July 1, 1999, Ascent entered into an
arrangement with certain funds affiliated with ING Furman Selz Investments LLC
under which such funds agreed to loan Ascent up to $4.0 million. Pursuant to
this agreement, Ascent issued 7.5% convertible subordinated notes in the
aggregate principal amount of $4.0 million and warrants to purchase an aggregate
of 600,000 depositary shares at an exercise price of $3.00 per share, which, as
described below, was subsequently decreased to $0.05 per share, and which expire
on July 1, 2006, to the funds affiliated with ING Furman Selz. As of February
2000, Ascent had borrowed the entire $4.0 million under this credit facility. Of
the $4.0 million convertible subordinated notes issued and sold, $3,605,700 was
allocated to the relative fair value of the convertible subordinated notes
(classified as debt) and $394,300 was allocated to the relative fair value of
the warrants (classified as additional paid-in-capital). Accordingly, the 7.5%
convertible subordinated notes will be accreted from $3,605,700 to the maturity
amount of $4,000,000 as interest expense over the term of the convertible
subordinated notes. The notes mature on July 1, 2004 and are convertible into
depositary shares at a conversion price of $3.00 per share. Interest on these
notes is due and payable quarterly, in arrears, on the last day of each calendar
quarter, and the outstanding principal on the notes is payable in full on July
1, 2004. In connection with this arrangement, a second representative of ING
Furman Selz Investments was added to Ascent's board of directors.
$10.0 Million Credit Facility. On October 15, 1999, Ascent entered into an
arrangement with certain funds affiliated with ING Furman Selz under which such
funds agreed to loan Ascent up to an additional $10.0 million. Pursuant to this
agreement, Ascent issued to the funds affiliated with ING Furman Selz 7.5%
convertible subordinated notes in the aggregate principal amount of $10.0
million and warrants to purchase an aggregate of 5,000,000 depositary shares at
an original exercise price of $3.00 per share, which, as described below, was
subsequently decreased to $0.05 per share, and which expire on October 15, 2006.
As part of the right to draw down the $10.0 million, Ascent issued to the funds
affiliated with ING Furman Selz 1,000,000 warrants which were valued at $513,500
(classified as debt issue costs). As of December 31, 2000, Ascent had borrowed
an aggregate of $10.0 million under this credit facility. Of the $10.0 million
of convertible subordinated notes issued and sold, $8,540,187 was allocated to
the relative fair value of the convertible subordinated notes (classified as
debt), and $1,459,813 was allocated to the relative fair value of the warrants
(classified as additional paid-in-capital). Accordingly, the 7.5% convertible
subordinated notes will be accreted from $8,540,187 to the maturity amount of
$10.0 million as interest expense over the term of the convertible subordinated
notes. The notes mature on July 1, 2004 and are convertible into Ascent
depositary shares at a conversion price of $3.00 per share. Interest on these
notes is due and payable quarterly, in arrears, on the last day of each calendar
quarter, and the outstanding principal on the notes is payable in full on July
1, 2004.
$10.25 Million Credit Facility. On December 29, 2000, Ascent entered into a
loan agreement with FS Ascent Investments LLC, which is affiliated with ING
Furman Selz Investments ("FS Investments"), and a fifth amendment to the Series
G securities purchase agreement. Pursuant to the loan agreement and the fifth
amendment, Ascent will receive up to $10.25 million in financing from FS
Investments. The financing is comprised of $6.25 million of 7.5% secured notes
($5.0 million of which has already been advanced to Ascent in early 2001) and
$4.0 million of Series H preferred stock ($1,000 of which has been sold in
2001). Under the terms of the notes, Ascent will pay interest quarterly and
repay the outstanding principal of the notes on June 30, 2001, unless extended
to no later than June 30, 2002 at Ascent's election, or earlier upon a change in
control (as defined in the loan agreement) of Ascent or certain other
conditions. The notes are secured by Ascent's Primsol product line, including
intellectual property rights of Ascent pertaining to Primsol, pursuant to a
security agreement, dated as of December 29, 2000, by and between Ascent and FS
Investments. The $6.25 million to be advanced to Ascent under the loan agreement
will be obtained by FS Investments from Alpharma USPD under a loan agreement
between FS Investments and Alpharma USPD. Under the terms of the Series H
preferred stock, Ascent will be entitled to, and the holders of the Series H
preferred stock will be entitled to cause Ascent to redeem the Series H
preferred stock for a price equal to the liquidation amount of the Series H
preferred stock, plus $10.0 million. In connection with the financing, Ascent
agreed to issue warrants to FS Investments to purchase up to 10,950,000
depositary shares of Ascent at an exercise price of $.05 per share (of which
warrants to purchase 1,950,000 depositary shares were issued on January 2, 2001)
and reduced the exercise price of certain of the above described outstanding
warrants to purchase a total of 5,600,000 depositary shares issued under the
Series G securities purchase agreement from $3.00 to $0.05 per share. The
remaining warrants to purchase 9,000,000 depositary shares issuable under the
credit facility will be issued if the outstanding amounts are not repaid by June
30, 2001, and thereafter. On March 23, 2001, the funds affiliated with ING
PAGE 21
Furman Selz exercised all of their 7,550,000 outstanding warrants, on a cashless
basis, which resulted in the issuance of 7,211,528 depositary shares.
The Series H preferred stock is entitled to cumulative annual dividends payable
on December 31, 2001 at the rate of 7.5% of the liquidation preference (as
defined in the loan agreement dated as of December 29, 2000 between Ascent and
FS Investments LLC). The Series H preferred stock is redeemable at the
redemption price at any time after the demand date or the occurrence of a change
in control (each as defined in such loan agreement) of Ascent at the option of
the holders of the Series H preferred stock holding at least 80% of the shares
of such stock then outstanding. Ascent may redeem all of the Series H preferred
stock at the redemption price at any time. The holders of Series H preferred
stock generally do not have any voting rights.
Alpharma Strategic Alliance. On February 16, 1999, Ascent entered into a series
of agreements with Alpharma, Inc. and its wholly-owned subsidiary, Alpharma
USPD, which provided for a number of arrangements, including:
Call Option. In connection with the consummation of the strategic
alliance, Ascent obtained a call option to acquire all of its outstanding common
stock and assigned the call option to Alpharma USPD, thereby giving Alpharma
USPD the option, exercisable in 2003, to purchase all of Ascent's common stock
then outstanding at a purchase price to be determined by a formula based on
Ascent's 2002 earnings.
$40.0 Million Credit Facility. Alpharma agreed to loan Ascent up to $40.0
million from time to time, $12.0 million of which could 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.
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. Ascent borrowed the entire $12.0
million available for general corporate purposes by June 2000. The note bears
interest at a rate of 7.5% per annum, due and payable quarterly, in arrears on
the last day of each calendar quarter.
On December 29, 2000, Ascent entered into a Termination Agreement with Alpharma
USPD, Alpharma, the Original Lenders (as defined therein) and State Street Bank
and Trust Company terminating the strategic alliance. Pursuant to the terms of
the Termination Agreement, the parties terminated the (i) loan agreement, (ii)
Master Agreement, dated as of February 16, 1999, as amended, by and among
Ascent, Alpharma USPD and Alpharma, (iii) Guaranty Agreement, dated as of
February 16, 1999, as amended, by Alpharma for the benefit of Ascent, (iv)
Registration Rights Agreement, dated as of February 16, 1999, as amended, by and
between Ascent and Alpharma USPD, (v) Subordination Agreement, dated as of
February 16, 1999, as amended, by and among Ascent, Alpharma and the Original
Lenders (as defined therein), (vi) covenants and obligations of the parties
under the Supplemental Agreement, dated as of July 1, 1999, by and among Ascent,
Alpharma USPD, Alpharma, the Original Lenders (as defined therein) and State
Street and (vii) Second Supplemental Agreement, dated as of October 15, 1999, by
and among Ascent, Alpharma USPD, Alpharma, the Original Lenders (as defined
therein) and State Street (collectively, the "Ascent-Alpharma Agreements").
In addition, under the Termination Agreement, Alpharma USPD agreed that it would
not exercise its call option to acquire Ascent pursuant to the Depositary
Agreement, dated as of February 16, 1999, as amended, by and among Ascent,
Alpharma USPD and State Street, and that Mr. Anderson, president of Alpharma
USPD, would resign as a director of Ascent effective as of December 29, 2000.
Ascent agreed that upon the consummation of any change of control (as defined in
the Termination Agreement) of Ascent, Ascent would pay to Alpharma USPD a fee
equal to 2% of the aggregate consideration received by Ascent upon such event in
excess of $65.0 million.
On December 29, 2000, Ascent also entered into a Product Purchase Agreement with
Alpharma USPD. Pursuant to the terms of the Product Purchase Agreement, Ascent
sold its Feverall product line in an asset sale to Alpharma USPD in exchange for
the cancellation by Alpharma USPD of $12.0 million of indebtedness owed to
Alpharma USPD by Ascent under a 7.5% note issued to Alpharma USPD. Under the
terms of the Product Purchase Agreement, Ascent has the option to repurchase the
Feverall product line at anytime before December 29, 2001 for $12.0 million.
Accordingly, the gain on the sale of the assets is being deferred until the
option to repurchase the product line has expired and the net assets are
recorded on the balance sheet as "Assets contingently transferred to Alpharma
USPD" and the 7.5% note is recorded as a long-term liability called "Debt
contingently extinguished by Alpharma USPD".
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 maintain and, in the future, expand its sales and
marketing capability and resume product development, its ability to maintain its
manufacturing and marketing relationships, its ability to enter into and
maintain any promotion agreements, its ability to acquire and successfully
integrate businesses and products, the time and cost involved in maintaining
and, in the future, obtaining regulatory approvals, the costs involved in
PAGE 22
prosecuting, enforcing and defending patent claims and competing technological
and market developments. Ascent's business strategy requires a significant
commitment of funds to engage in product and business acquisitions and to
maintain sales and marketing capabilities and manufacturing relationships
necessary to promote Orapred and Primsol.
Ascent anticipates that, based upon its current operating plan, including
anticipated sales of Primsol and Orapred, its existing capital resources and
access to the remaining $5.25 million under its credit facility with FS
Investments, it will have enough cash to fund operations through December 31,
2001. However, Ascent will not have enough cash to pay the $875,000 in interest
and the $165,000 deferred Series G preferred stock dividends due during December
2001. Ascent will need additional funds beyond December 31, 2001 to repay this
debt and to operate the Company. If adequate funds are not available, Ascent may
be required to (i) obtain funds on unfavorable terms that may require Ascent to
relinquish rights to certain of its technologies or products or that would
significantly dilute Ascent's stockholders, (ii) significantly scale back or
terminate operations and/or (iii) seek relief under applicable bankruptcy laws.
Interest payments under the $4.0 and $10.0 million credit facilities with the
funds affiliated with ING Furman Selz are due and payable on the last day of
each calendar quarter. Interest payments under the 8% subordinated notes due
June 1, 2005 in the principal amount of $8.7 million are due and payable
semiannually in June and December of each year. During fiscal 2001, Ascent will
be required to pay an aggregate of $217,000 in interest under its credit
facility with certain holders of 8% subordinated notes due June 1, 2005. Under
an agreement with the funds affiliated with ING Furman Selz, during fiscal 2001,
Ascent will be required to pay an aggregate of $2,210,500 in interest under the
$4.0 and $10.0 million credit facilities with such funds and the 8% subordinated
notes due January 1, 2005 held by such funds. As of March 30, 2001, Ascent has
borrowed $5.0 million of the $10.25 million 7.5% credit facility with FS
Investments and during fiscal 2001 will be required to pay an aggregate of
$334,000 in interest.
RECENT PRONOUNCEMENTS
In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition issues in
financial statements. The application of the guidance in SAB 101 was effective
in the fourth quarter of fiscal 2000. Ascent adopted SAB 101 in the first
quarter of 2000 and the results of operations have been reflected accordingly.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 to certain issues including: the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a non-compensatory plan;
the accounting consequence of various modifications to the terms of previously
fixed stock options or awards; and the accounting for the exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1,
2000, but certain conclusions in FIN 44 are applicable retroactively to specific
events occurring after either December 15, 1998 or January 12, 2000. The
adoption of FIN 44 has not had a material impact on Ascent's financial position
or results of operations.
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") requires that all
derivative investments be recorded in the balance sheet at fair value. During
1999, Financial Accounting Standards Board Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities deferral of the Effective Date of
the Statement of Financial Accounting Standards No. 133" ("SFAS 137") was
issued. This statement amended SFAS 133 by deferring the effective date to
fiscal quarters beginning after June 15, 2001. The Company will adopt SFAS 133
in the fiscal quarter beginning after June 15, 2001, although the Company has
not historically entered into transactions involving derivative instruments, nor
has it hedged any of its business activities, so it does not believe that
adoption of SFAS 133 will have any effect on its financial statements.
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities--a replacement
of FASB Statement No. 125". SFAS No. 140 revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS No. 125's
provisions without reconsideration. This Statement is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. This Statement is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. We
do not expect the adoption of SFAS No. 140 to have a material impact on our
financial position or results of operations.
PAGE 23
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.
WE HAVE NOT BEEN PROFITABLE
We have incurred net losses since our inception. At December 31, 2000, our
accumulated deficit was approximately $80.6 million. We received our first
revenues from product sales in July 1997. We expect to incur additional
significant operating losses over the next 12 months and expect cumulative
losses to increase. We expect that our losses will fluctuate from quarter to
quarter based upon factors such as any product acquisitions of ours, sales and
marketing initiatives, competition and the extent and
severity of illness during cold and flu seasons. These quarterly fluctuations
may be substantial.
WE WILL REQUIRE ADDITIONAL FUNDING AND WE MAY NOT BE ABLE TO OBTAIN ANY
We anticipate that, based upon our current operating plan, including anticipated
sales of Primsol and Orapred, our existing capital resources and access to the
remaining $5.25 million under our credit facility with ING Furman Selz, we will
have enough cash to fund operations through December 31, 2001. However, we will
not have enough cash to pay the $875,000 in interest and the $165,000 in
deferred Series G preferred stock dividends due in December 2001. We will need
additional funds to repay this debt and to operate the Company beyond December
31, 2001. If adequate funds are not available, we may be required to (i) obtain
funds on unfavorable terms that may require us to relinquish rights to certain
of our technologies or products or that would significantly dilute our
stockholders, (ii) significantly scale back or terminate current operations
and/or (iii) seek relief under applicable bankruptcy laws. Any of such cases
would have a material adverse effect on our business.
WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUE FROM A SMALL NUMBER OF CUSTOMERS
AND OUR REVENUE WOULD DECLINE SIGNIFICANTLY IF WE LOSE A CUSTOMER OR IF A
CUSTOMER CANCELS OR DELAYS AN ORDER.
Because we depend on a small number of customers, our revenue would decline
significantly if we lose a customer, or if a customer cancels or delays an
order. Sales to Warner Lambert Company accounted for 20% of our net revenues
for the year ended December 31, 2000 and 50% of our net revenues for the year
ended December 31, 1999. In addition, sales to McKesson HBOC accounted for 11%
of our net revenues for the year ended December 31, 2000 and 5% of our net
revenues for the year ended December 31, 1999. We do not have any long-term
contracts with any of our customers. We expect to continue to derive a majority
of our revenues from a limited number of customers in the near future.
YOU WILL NOT BE ABLE TO CONTROL OUR CORPORATE EVENTS BECAUSE ING FURMAN SELZ
OWNS APPROXIMATELY 65% OF OUR SECURITIES
ING Furman Selz beneficially owns approximately 65% of our securities, including
depositary shares issuable upon conversion of outstanding convertible notes as
of March 30, 2001. Accordingly, ING Furman Selz, by virtue of its majority
ownership of our securities, has the power, acting alone, to elect a majority of
our board of directors over a three year period and has the ability to determine
the outcome of any corporate actions requiring stockholder approval, including
without limitation a sale of the Company, regardless of how our other
stockholders may vote. ING Furman Selz's interests could conflict with the
interests of our other stockholders. For instance, in the event of any sale of
the Company, the first $27.7 million in proceeds will be paid to ING Furman Selz
as repayment of debt, plus additional payments required under the terms of the
securities.
THERE IS UNCERTAINTY AS TO THE MARKET ACCEPTANCE OF OUR TECHNOLOGY AND PRODUCTS
The commercial success of Orapred syrup and Primsol solution 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 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.
PAGE 24
The failure to achieve market acceptance of Orapred syrup and Primsol solution
could have a material adverse effect on our business.
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 GlaxoSmithKline, which markets Ceftin oral suspension which
competes with our Primsol product; Eli Lilly and Company, which markets Ceclor
suspension which competes with our Primsol product; the Ortho-McNeil
Pharmaceutical Division of Johnson & Johnson, Inc., which markets Tylenol
suspension which would compete with our acetaminophen extended release product;
and Muro Pharmaceuticals, Inc., which markets Prelone which competes with our
Orapred product.
We currently market three products as alternative treatments for pediatric
indications for which products with the same active ingredient are
well-entrenched in the market. Our products 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, our products are
reformulations of existing drugs of other manufacturers and 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 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 Practices
requirements
prescribed by the FDA. In particular, we rely on Lyne Laboratories, Inc. for the
manufacture of Orapred syrup and Primsol solution.
We expect to be dependent on third party manufacturers for the production of all
of our products. There are a limited number of manufacturers that operate under
the FDA's Good Manufacturing Practices 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 one 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 Practices requirements
may adversely affect us in a number of ways, including our being unable to meet
commercial demand for our 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.
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
PAGE 25
pharmaceuticals is subject to governmental control.
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 MAY NOT BE ABLE TO MAINTAIN OR OBTAIN REGULATORY APPROVALS
The production and the marketing of our products 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.
Moreover, if our financial condition improves sufficiently such that we resume
product development, 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 future potential products.
Factors that may affect the regulatory process for any future product candidates
we may have 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 have or, with respect to future product candidates,
if any, 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.
ANY PROMOTION ARRANGEMENTS DEPEND ON THE SUPPORT OF OUR COLLABORATORS
We plan to continue to seek to enter into arrangements to promote some
pharmaceutical products of third parties to pediatricians in the United States.
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 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.
PAGE 26
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:
- - - 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;
- - - 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;
- - - we may initiate litigation or other proceedings against third parties to
enforce our patent rights; or
- - - 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.
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 seek 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, which could have a material
adverse effect on our business, financial condition or results of operations.
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, any outside scientific collaborators
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 address the breach.
In addition, our trade secrets may otherwise become known or be independently
developed by our competitors.
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 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.
WE ARE SUBJECT TO TECHNOLOGICAL UNCERTAINTY IN ANY DEVELOPMENT EFFORTS THAT WE
MAY RESUME
We have introduced only three internally-developed products, Pediamist nasal
saline spray, Primsol trimethoprim solution and Orapred syrup into the market.
Although we have completed development of products and have filed applications
with the FDA for marketing approval, any future product candidates we may have
would require additional formulation, preclinical studies, clinical trials and
PAGE 27
regulatory approval prior to any commercial sales. Moreover, in December 1999,
due to limitations on resources, we suspended the development of our products
indefinitely. If we resume product development, we will be required to
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 MAY BE UNSUCCESSFUL WITH ANY FUTURE CLINICAL TRIALS THAT WE MAY RESUME
In order to obtain regulatory approvals for the commercial sale of any future
products we may have under development, if any, 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. In December 1999,
due to limitations on resources, we suspended the development of our products
indefinitely.
The rate of completion of our clinical trials, if any, is dependent on the rate
of patient enrollment, which is beyond our control. We may not be able
successfully to complete any clinical trial of a potential product within a
specified time period, if at all, including because of a lack of patient
enrollment. Moreover, clinical trials may not show any potential product to be
safe or efficacious. Thus, the FDA and other regulatory authorities may not
approve any of our potential products for any indication.
If we are unable to complete a clinical trial of one of our potential products,
if the results of the trial are unfavorable or if the time or cost of completing
the trial exceeds our expectation, assuming we resume product development, our
business, financial condition or results of operations could be materially
adversely affected.
WE ARE DEPENDENT ON A FEW KEY EMPLOYEES WITH KNOWLEDGE OF THE PEDIATRIC
PHARMACEUTICAL INDUSTRY
We are highly dependent on the principal members of our management and
scientific staff, particularly Dr. Clemente, the president and chairman of our
board of directors. The loss of the services of Dr. Clemente could have a
material adverse effect on our business.
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.
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. Any growth and expansion into areas and
activities requiring additional expertise would 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release 48, also known as FRR 48, "Disclosure of Accounting Policies
for Derivative Financial Instruments and Derivative Commodity Instruments, and
Disclosure of Quantitative and Qualitative Information About Market Risk
Inherent in Derivative Financial Instruments, Other Financial Instruments and
Derivative Commodity Instruments". FRR 48 requires disclosure of qualitative and
quantitative information about market risk inherent in derivative financial
instruments, other financial instruments, and derivative commodity instruments
beyond those required under generally accepted accounting principles.
In the ordinary course of business, Ascent is exposed to interest rate risk for
its subordinated and convertible subordinated notes. At December 31, 2000, the
fair value of these outstanding 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 Ascent's weighted average
short-term borrowing rate at December 31, 2000, 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.
PAGE 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part in Ascent's
definitive proxy statement for the annual meeting of stockholders to be held on
June 13, 2001 (the "Definitive Proxy Statement") under the caption "Proposal 1 -
Election of Directors," which section is incorporated herein by this reference.
The information required by this item is also contained in part under the
caption "Executive Officers and Significant Employees of the Registrant" in Part
I of this Annual Report on Form 10-K, following Item 4.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the Definitive Proxy
Statement under the caption "Proposal 1 - Election of Directors," which section
is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the Definitive Proxy
Statement under the caption "Stock Ownership of Certain Beneficial Owners and
Management," which section is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Definitive Proxy
Statement under the caption "Certain Relationships and Related Transactions,"
which section is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as Appendix A hereto and are included
as part of this Annual Report on Form 10-K:
Financial Statements of Ascent Pediatrics, Inc.:
Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity (Deficit)
Statements of Cash Flows
Notes to Financial Statements
(b) Reports on Form 8-K: None.
(c) The list of Exhibits filed as a part of this Annual Report on Form 10-K
are set forth on the Exhibit Index immediately preceding such exhibits, and is
incorporated herein by this reference.
(d) The Company is not filing any financial statement schedules as part of
this Annual Report on Form 10-K because they are not required or because the
required information is provided in the financial statements or notes thereto.
PAGE 29
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: April 2, 2001 ASCENT PEDIATRICS, INC.
(Registrant)
By: /s/ Emmett Clemente
Emmett Clemente
President and Chairman of the Board
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- - --------- ----- ----
/s/ Emmett Clemente
- - ------------------------
Emmett Clemente President, Chairman of the Board April 2, 2001
and Treasurer (Principal
Executive and Financial Accounting
Officer)
/s/ Raymond F. Baddour
- - -------------------------
Raymond F. Baddour Director April 2, 2001
/s/ Robert Baldini
- - ------------------------
Robert Baldini Director April 2, 2001
/s/ Nicholas Daraviras
- - ------------------------
Nicholas Daraviras Director April 2, 2001
/s/ Joseph Ianelli
- - -------------------------
Joseph Ianelli Director April 2, 2001
- - -----------------------
Andre Lamotte Director
/s/ James l. Luikart
- - -------------------------
James L. Luikart Director April 2, 2001
PAGE 30
APPENDIX A
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
F-1
PAGE 31
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, of stockholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of Ascent Pediatrics, Inc. at
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
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,
has negative working capital, stockholders' deficit 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
March 23, 2001
F-2
PAGE 32
ASCENT PEDIATRICS, INC.
BALANCE SHEETS
December 31,
--------------
2000 1999
-------------- -------------
ASSETS
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . $ 260,882 $ 1,067,049
Accounts receivable, less allowance for doubtful
accounts of $137,000 and $67,000 at December 31,
2000 and 1999, respectively . . . . . . . . . . . . 812,373 759,098
Inventory . . . . . . . . . . . . . . . . . . . . . . 1,624,766 1,012,430
Other current assets. . . . . . . . . . . . . . . . . 410,129 132,555
-------------- -------------
Total current assets . . . . . . . . . . . . . . . 3,108,150 2,971,132
Fixed assets, net. . . . . . . . . . . . . . . . . . . . . 378,879 516,165
Debt issue costs, net. . . . . . . . . . . . . . . . . . . 1,267,433 1,882,365
Intangibles, net . . . . . . . . . . . . . . . . . . . . . - 9,857,648
Assets contingently transferred to Alpharma. . . . . . . . 10,493,146 -
Other assets . . . . . . . . . . . . . . . . . . . . . . . 45,300 45,300
-------------- -------------
Total assets . . . . . . . . . . . . . . . . . . . $ 15,292,908 $ 15,272,610
============== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable. . . . . . . . . . . . . . . . . . . $ 1,309,124 $ 1,645,302
Interest payable. . . . . . . . . . . . . . . . . . . 1,270,240 523,023
Accrued expenses. . . . . . . . . . . . . . . . . . . 961,421 1,600,855
Deferred revenue. . . . . . . . . . . . . . . . . . . 738,544 -
-------------- -------------
Total current liabilities. . . . . . . . . . . . . 4,279,329 3,769,180
Subordinated secured notes . . . . . . . . . . . . . . . . 20,706,113 21,461,041
Debt contingently extinguished by Alpharma . . . . . . . . 12,000,000 -
Other liabilities. . . . . . . . . . . . . . . . . . . . . 14,080 -
-------------- -------------
Total liabilities. . . . . . . . . . . . . . . . . 36,999,522 25,230,221
Commitments and contingencies (Note I)
Stockholders' deficit
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding at
December 31, 2000 and 1999, respectively . . . . . - -
Common stock, $.00004 par value; 60,000,000 shares
authorized; 9,781,814 and 9,643,883 shares issued
and outstanding at December 31, 2000 and 1999,
respectively . . . . . . . . . . . . . . . . . . . 390 385
Additional paid-in capital. . . . . . . . . . . . . . 58,894,821 56,304,465
Accumulated deficit . . . . . . . . . . . . . . . . . (80,601,825) (66,262,461)
-------------- -------------
Total stockholders' deficit. . . . . . . . . . . . (21,706,614) (9,957,611)
-------------- -------------
Total liabilities and stockholders' deficit. . . . $ 15,292,908 $ 15,272,610
============== =============
F-3
The accompanying notes are an integral part of the financial statements.
PAGE 33
ASCENT PEDIATRICS, INC.
STATEMENTS OF OPERATIONS
Year Ended December 31,
-------------------------
2000 1999 1998
------------------------- ------------- -------------
Product revenue, net . . . . . . . . . . . . $ 3,395,470 $ 3,039,678 $ 4,352,899
Co-promotional revenue . . . . . . . . . . . 1,068,562 4,007,500 122,819
------------------------- ------------- -------------
Total net revenue. . . . . . . . . . . . . . 4,464,032 7,047,178 4,475,718
Costs and expenses
Costs of product sales . . . . . . . . . . 1,401,696 1,626,339 2,383,431
Selling, general and administrative. . . . 12,471,356 15,808,252 13,616,237
Research and development . . . . . . . . . 2,003,489 3,833,310 4,522,046
------------------------- ------------- -------------
Total costs and expenses . . . . . . . . . 15,876,541 21,267,901 20,521,714
Loss from operations . . . . . . . . . (11,412,509) (14,220,723) (16,045,996)
Interest income. . . . . . . . . . . . . . . 58,779 67,617 368,570
Interest expense . . . . . . . . . . . . . . (3,063,583) (1,499,574) (1,387,412)
Other income . . . . . . . . . . . . . . . . 77,949 - -
------------------------- ------------- -------------
Loss before extraordinary item . . . . (14,339,364) (15,652,680) (17,064,838)
Extraordinary item- loss on early
extinguishment of debt, net of taxes
of $0 (Note M) . . . . . . . . . . . . . . - - 1,166,463
------------------------- ------------- -------------
Net loss . . . . . . . . . . . . . . . (14,339,364) (15,652,680) (18,231,301)
Preferred stock dividend . . . . . . . . . . - 418,958 449,169
------------------------- ------------- -------------
Net loss to common stockholders. . . . $ (14,339,364) $(16,071,638) $(18,680,470)
========================= ============= =============
Results per common share basic and diluted:
Loss before extraordinary item . . . . $ (1.47) $ (1.91) $ (2.46)
Extraordinary item loss of early
extinguishment on debt. . . . . . . $ - $ - $ (0.17)
Preferred stock dividend. . . . . . $ - $ (0.05) $ (0.06)
------------------------- ------------- -------------
Net loss to common stockholders . . $ (1.47) $ (1.96) $ (2.69)
========================= ============= =============
Weighted average shares, basic and diluted . 9,749,423 8,182,085 6,939,348
========================= ============= =============
The accompanying notes are an integral part of the financial statements.
F-4
PAGE 34
ASCENT PEDIATRICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Accumulated
Number of shares Par Additional Other Stockholders'
------------------
Preferred Common Preferred Value Paid-In Accumulated
Stock Stock Series G Common Capital Deficit
------------------ ------------ ------------ ---------- -------------- -------------
Balance, December 31, 1997 . . . . 0 6,893,332 - 276 47,891,846 (32,378,480)
Series G convertible exchangeable
preferred stock, net of issuance
costs of $538,749 . . . . . . . . 7,000 6,461,251 6,461,251
Warrants issued to subordinated
secured noteholders, net of
issuance costs of $24,488 . . . . 322,997 322,997
Common stock issued upon option
exercise. . . . . . . . . . . . . 29,963 1 40,499 40,500
Employee stock purchase plan. . . . 52,626 2 117,798 117,800
Amortization of unearned
Compensation. . . . . . . . . . . 27,300 27,300
Dividend on Series G convertible
Exchangeable preferred stock. . . (449,169) (449,169)
Change in unrealized loss on
Securities. . . . . . . . . . . . (1,116) (1,116)
Net loss. . . . . . . . . . . . . . (18,231,301) (18,231,301)
------------------ ------------
Balance, December 31, 1998 . . . . 7,000 6,975,921 $ 6,461,251 $ 279 $ 47,951,271 $(50,609,781)
Issuance of common stock pursuant
to Furman Selz/Alpharma agreement 2,566,958 103 8,282,021 8,282,124
Conversion of preferred stock . . (7,000) (6,461,251) (6,461,251)
Acceleration of accretion of
secured debt. . . . . . . . . . (242,079) (242,079)
Acceleration of debt issue costs. (460,632) (460,632)
Preferred stock dividend variable
rate adjustment . . . . . . . . 210,153 210,153
Warrants and options issued to
subordinated secured noteholders. 811,263 811,263
Cashless exercise of warrants . . . 17,408 -
Employee stock purchase plan. . . . 83,596 3 171,426 171,429
Dividend on Series G convertible
exchangeable preferred stock. . . (418,958) (418,958)
Net loss. . . . . . . . . . . . . . (15,652,680) (15,652,680)
------------------ ------------
Balance, December 31, 1999. . . . . - 9,643,883 $ - $ 385 $ 56,304,465 $(66,262,461)
Warrants issued to subordinated
secured noteholders and
beneficial conversion feature . . 2,285,710 2,285,710
Exercise of stock options . . . . . 97,000 4 228,232 228,236
Stock based compensation. . . . . . 4,445 4,445
Employee stock purchase plan. . . . 40,931 1 71,969 71,970
Net loss. . . . . . . . . . . . . . (14,339,364) (14,339,364)
------------------ ------------
Balance, December 31, 2000. . . . . - 9,781,814 $ - $ 390 $ 58,894,821 $(80,601,825)
================== ============ ============ ========== ============== =============
PAGE 35
Comprehensive Equity
Income (Deficit)
-------------- -------------
Balance, December 31, 1997 . . . . 1,116 15,514,758
Series G convertible exchangeable
preferred stock, net of issuance
costs of $538,749
Warrants issued to subordinated
secured noteholders, net of
issuance costs of $24,488
Common stock issued upon option
exercise
Employee stock purchase plan
Amortization of unearned
Compensation
Dividend on Series G convertible
Exchangeable preferred stock
Change in unrealized loss on
Securities
Net loss
Balance, December 31, 1998 . . . . $ - $ 3,803,020
Issuance of common stock pursuant
to Furman Selz/Alpharma agreement
Conversion of preferred stock
Acceleration of accretion of
secured debt
Acceleration of debt issue costs
Preferred stock dividend variable
rate adjustment
Warrants and options issued to
subordinated secured noteholders
Cashless exercise of warrants
Employee stock purchase plan
Dividend on Series G convertible
exchangeable preferred stock
Net loss
Balance, December 31, 1999. . . . . $ - $ (9,957,611)
Warrants issued to subordinated
secured noteholders and
beneficial conversion feature
Exercise of stock options
Stock based compensation
Employee stock purchase plan
Net loss
Balance, December 31, 2000. . . . . $ - $(21,706,614)
============== =============
The accompanying notes are an integral part of the financial statements.
F-5
PAGE 36
ASCENT PEDIATRICS, INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------
2000 1999 1998
------------------------- ------------- -------------
Cash flows for operating activities:
Net loss. . . . . . . . . . . . . . . . . . $ (14,339,364) $(15,652,680) $(18,231,301)
Adjustments to reconcile net loss to net
Cash used for operating activities:
Depreciation and amortization . . . . . 1,026,544 1,074,852 472,113
Non-cash interest expense . . . . . . . 767,030 554,439 1,323,083
Stock based compensation. . . . . . . . 4,445 - -
Non-cash extraordinary items. . . . . . - - 1,166,463
Provision for bad debts . . . . . . . . 70,208 18,766 -
Inventory write-off . . . . . . . . . . (62,481) (539,825) -
Loss on disposals of fixed assets . . . 86,200 28,834 8,568
Changes in operating assets and
liabilities:
Accounts receivable. . . . . . . . (123,483) 140,443 (152,698)
Inventory. . . . . . . . . . . . . (830,456) 447,179 (130,287)
Other assets . . . . . . . . . . . (277,574) 188,671 (192,026)
Accounts payable . . . . . . . . . (336,178) 135,109 935
Interest payable . . . . . . . . . 747,217 314,161 208,862
Accrued expenses . . . . . . . . . (639,434) (512,794) 633,187
Deferred revenue . . . . . . . . . 738,544 - -
Other liabilities. . . . . . . . . 14,080 - -
------------------------- ------------- -------------
Net cash used for operating
activities . . . . . . . . . . (13,154,702) (13,802,845) (14,893,101)
Cash flows used for investing activities:
Purchases of property and equipment . . . . (309,266) (222,815) (356,335)
Payments related to acquisition . . . . . . - - (5,500,000)
Sales of marketable securities. . . . . . . - - 2,526,784
------------------------- ------------- -------------
Net cash used for investing
activities . . . . . . . . . . (309,266) (222,815) (3,329,551)
Cash flows from financing activities:
Proceeds from issuance of common stock, net
of issuance costs . . . . . . . . . . . . 300,206 1,122,065 185,600
Proceeds from sale of preferred stock, net
of issuance costs . . . . . . . . . . . . - - 6,461,251
Proceeds from issuance of debt. . . . . . . 10,908,038 13,286,226 8,652,515
Proceeds from issuance of debt related
warrants. . . . . . . . . . . . . . . . . 1,591,649 262,463 322,997
Repayment of debt . . . . . . . . . . . . . - - (6,125,000)
Payment of debt issue costs . . . . . . . . (142,092) (1,347,131) (661,192)
Payments of preferred stock dividends . . . - (402,691) (142,354)
------------------------- ------------- -------------
Net cash provided by financing
activities . . . . . . . . . . 12,657,801 12,920,932 8,693,817
Net decrease in cash and cash equivalents. . . (806,167) (1,104,728) (9,528,835)
Cash and cash equivalents, beginning of year . 1,067,049 2,171,777 11,700,612
------------------------- ------------- -------------
Cash and cash equivalents, end of year . . . . $ 260,882 $ 1,067,049 $ 2,171,777
========================= ============= =============
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . $ 1,549,649 $ 818,460 $ 502,550
Non-cash transactions:
Conversion of convertible and redeemable
convertible preferred stock to common
stock. . . . . . . . . . . . . . . . . . . . - 6,461,251 -
Repricing of common stock warrants . . . . . . 650,937 - -
The accompanying notes are an integral part of the financial statements.
F-6
PAGE 37
ASCENT PEDIATRICS, INC.
NOTES TO FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
Ascent Pediatrics, Inc. ("Ascent" or the "Company"), formerly Ascent
Pharmaceuticals, Inc., incorporated in Delaware on March 16, 1989, is currently
focused on marketing products exclusively to the pediatric market. Since its
inception, until July 9, 1997, Ascent has operated as a development stage
enterprise devoting substantially all of its efforts to establishing a new
business. On July 10, 1997, the Company closed the acquisition of the Feverall
line of acetaminophen rectal suppositories from Upsher-Smith Laboratories, Inc.
("Upsher-Smith") and subsequently commenced sales of the Feverall line of
products. In October 1997, the Company also commenced sales of Pediamist nasal
saline spray. During February 1999, the Company began marketing Omnicef(R)
(cefdinir) oral suspension and capsules to pediatricians in the United States
pursuant to a promotion agreement with Warner-Lambert Company, which agreement
was subsequently terminated in January 2000. During May 1999, the Company began
marketing Pediotic(R) (a combination corticosteroid/antibiotic) to pediatricians
in the United States pursuant to a co-promotion agreement with King
Pharmaceuticals, Inc., which agreement expired in April 2000. During February
2000, the Company began marketing Primsol solution, an internally-developed
prescription antibiotic for the treatment of middle ear infections.
On December 29, 2000, Ascent sold its Feverall product line in an asset sale to
Alpharma USPD Inc. ("Alpharma USPD") in exchange for the cancellation by
Alpharma USPD of $12.0 million of indebtedness owed to Alpharma USPD by Ascent
under a 7.5% note issued to Alpharma USPD. Under the terms of the Product
Purchase Agreement, Ascent has the option to repurchase the Feverall product
line at anytime before December 29, 2001 for $12.0 million. As part of these
agreements, Alpharma USPD agreed not to exercise its call option and we sold our
Feverall product line in an asset sale to Alpharma USPD in exchange for the
cancellation by Alpharma USPD of all of the indebtedness owed to Alpharma USPD
by us under the loan agreement. During January 2001, the Company began marketing
Orapred syrup, an internally-developed prescription corticosteroid for the
treatment of inflammation.
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
At December 31, 2000, the Company's cumulative deficit was approximately
$80,602,000. Such losses have resulted primarily from costs incurred in the
Company's product development programs, costs associated with raising equity
capital and the establishment and maintenance of the Company's sales force. The
Company expects to incur additional operating losses as it continues its product
development programs and maintains its sales and marketing organization and
introduces product, and expects cumulative losses to increase. Ascent
anticipates that, based upon its current operating plan and its existing capital
resources, it will have enough cash through December 31, 2001 for operations but
not to pay debt due during December 31, 2001. The Company expects that it will
borrow the entire $10.25 million available under Ascent's financing arrangements
with FS Ascent Investments. As of March 30, 2001, Ascent has drawn down $5.0
million.
Ascent anticipates that, based upon its current operating plan, including
anticipated sales of Primsol and Orapred, its existing capital resources and
access to the funds under its credit facility with FS Investments, it will have
enough cash to fund operations through December 31, 2001, however, Ascent will
not have enough cash to pay the $875,000 in interest and the $165,000 in
deferred Series G preferred stock dividends due during December 2001. Ascent
will need additional funds beyond December 31, 2001 to repay this debt and to
operate the Company. If adequate funds are not available, Ascent may be required
to (i) obtain funds on unfavorable terms that may require Ascent to relinquish
rights to certain of its technologies or products or that would significantly
dilute Ascent's stockholders, (ii) significantly scale back or terminate
operations and/or (iii) seek relief under applicable bankruptcy laws.
If additional financing is not obtained, the Company may be unable to continue
as a going concern. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty. The accompanying
financial statements have been prepared assuming that the Company will continue
as a going concern.
F-7
PAGE 38
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 the financial
statements and the reported amounts of revenues and expenses during the reported
period. Significant estimates include the allowance for doubtful accounts and
accrued expenses. Actual results could differ from those estimates.
Reclassifications
Certain prior year financial statement items may have been reclassified to
conform to the current year's presentation.
Cash and cash equivalents
Cash and cash equivalents consists of highly liquid investments with original
maturities of three months or less.
Fair value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximate their fair values.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. Revenue from three customers was 35% of total net
revenue for the year ended December 31, 2000. Three customers comprised 44% of
the accounts receivable balance at December 31, 2000.
Inventory
Inventories, consisting of raw materials and finished goods, are stated at the
lower of costs (determined on a first-in, first-out basis) or market.
Fixed Assets
Fixed assets are recorded at cost. Equipment and furniture and fixtures are
depreciated on a straight-line basis over the useful life of the asset,
typically five or seven years. Leasehold improvements are depreciated on a
straight-line basis over the shorter of the life of the lease or the useful life
of the asset. When assets are sold or retired, the related cost and accumulated
depreciation are removed from the respective accounts and any resulting gain or
loss is included in the results of operations. Repairs and maintenance costs are
expensed as incurred.
Intangible Assets
Intangible assets consisted of goodwill, patents, trademarks and a manufacturing
agreement and were amortized using the straight-line method over useful lives of
fifteen to twenty years. The Company periodically reviews the propriety of
carrying amounts of its intangible assets as well as the amortization periods to
determine whether current events and circumstances warrant adjustment to the
carrying value or estimated useful lives. This evaluation compares the expected
future cash flows against the net book values of related intangible assets. If
the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, the Company would
recognize an impairment loss as a charge to operations. If impaired, the
intangible asset would be written down to the present value of estimated
expected future cash flows using a discount rate commensurate with the risks
involved. Impairment of goodwill, if any, is measured periodically on the basis
of whether anticipated undiscounted operating cash flows generated by the
acquired businesses will recover the recorded net goodwill balances over the
remaining amortization period. See footnote F for a discussion on the sale of
all the intangibles in December 2000 to Alpharma USPD.
Revenue Recognition
Product revenue is recognized upon evidence of an arrangement, when the related
fee is fixed or determinable and collection of the fee is reasonably assured.
Additionally, revenues for any product that is subject to a right of return is
deferred until such time that the right of return lapses, generally when the
Company's customers fulfill prescriptions to the consumer. Co-promotion revenue
is recognized as earned based upon the performance requirements of the
respective agreement.
Research and Development Expenses
Research and development costs are expensed as incurred.
F-8
PAGE 39
Advertising Expenses
Costs for catalogs and other media are expensed as incurred. For the years ended
December 31, 2000, 1999, and 1998, costs were $1,556,683, $1,402,236 and
$1,278,002, 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.
Accounting for Stock-Based Compensation
The Company continues to apply the provisions of Accounting Principles Board
("APB") Opinion No. 25 and has elected the disclosure-only alternative permitted
under the Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation. The Company has disclosed the pro forma
net loss and pro forma net loss per share in the footnotes using the fair value
based method in fiscal years 2000, 1999, and 1998.
Net Loss Per Common Share
Basic net income (loss) per common share is computed based on the weighted
average number of common and common equivalent shares outstanding during the
period. Diluted net income (loss) per common share gives effect to all dilutive
potential common shares outstanding during the period. The computation of
diluted earnings per share does not assume the issuance of common shares that
have an antidilutive effect on net income (loss) per common share.
Options, warrants, and preferred stock to purchase or convert to 7,880,174,
5,664,264 and 1,890,487 depositary shares or shares of common stock were
outstanding as of December 31, 2000, 1999, and 1998, 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, warrants and debt to purchase 8,435,243, 6,053,762 and
3,026,603 depositary shares or shares of common stock were outstanding as of
December 31, 2000, 1999, and 1998, respectively, but were not included in the
computation of diluted net loss per common share because the options and
warrants have exercise prices greater than the average market price of the
common shares and, therefore, would be antidilutive under the treasury stock
method.
Comprehensive Income
Components of comprehensive income are net income and all other non-owner
changes in equity such as the change in the unrealized gains and losses on
certain marketable securities. For the years ended December 31, 200, 1999 and
1998 comprehensive income was the same as net income.
Debt Issue Costs
The costs incurred for the issuance of debt are capitalized as debt issue costs
and are amortized over the life of the debt with the amortization being charged
to interest expense on the statement of operations.
Recent Accounting Pronouncements
In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition issues in
financial statements. The application of the guidance in SAB 101 was effective
in the fourth quarter of fiscal 2000. Ascent adopted SAB 101 in the first
quarter of 2000 and the results of operations have been reflected accordingly.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 to certain issues including: the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a non-compensatory plan;
the accounting consequence of various modifications to the terms of previously
fixed stock options or awards; and the accounting for the exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1,
2000, but certain conclusions in FIN 44 are applicable retroactively to specific
events occurring after either December 15, 1998 or January 12, 2000. The
adoption of FIN 44 has not had a material impact on the Company's financial
position or results of operations.
F-9
PAGE 40
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") requires that all
derivative investments be recorded in the balance sheet at fair value. During
1999, Financial Accounting Standards Board Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities deferral of the Effective Date of
the Statement of Financial Accounting Standards No. 133" ("SFAS 137") was
issued. This statement amended SFAS 133 by deferring the effective date to
fiscal quarters beginning after June 15, 2001. The Company will adopt SFAS 133
in the fiscal quarter beginning after June 15, 2001, although the Company has
not historically entered into transactions involving derivative instruments, nor
has it hedged any of its business activities, so it does not believe that
adoption of SFAS 133 will have any effect on its financial statements.
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities--a replacement
of FASB Statement No. 125". SFAS No. 140 revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS No. 125's
provisions without reconsideration. This Statement is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. This Statement is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. The
Company does not expect the adoption of SFAS No. 140 to have a material impact
on its financial position or results of operations.
C. ACCOUNTS RECEIVABLE
The allowance for doubtful accounts had the following activity:
Balance at beginning
Fiscal year end of year Additions Deductions Balance at end of year
- - --------------- --------------------- ---------- ----------- -----------------------
1998. . . . . . $ 50,000 $ - $ 1,810 $ 48,190
1999. . . . . . $ 48,190 $ 48,657 $ 29,891 $ 66,956
2000. . . . . . $ 66,956 $ 84,068 $ 13,860 $ 137,164
D. INVENTORIES
Inventories consist of the following:
December 31,
--------------
2000 1999
-------------- ----------
Raw materials. $ 965,538 $ 375,719
Finished goods 659,228 636,711
-------------- ----------
Total. . . . . $ 1,624,766 $1,012,430
============== ==========
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PAGE 41
E. FIXED ASSETS
Fixed assets consisted of the following:
December 31,
---------------
2000 1999
--------------- -----------
Equipment. . . . . . . . . $ 1,344,538 $1,121,708
Furniture and fixtures . . 257,528 257,292
Leasehold improvements . . 98,213 98,213
--------------- -----------
Total equipment. . . . . . $ 1,700,279 $1,477,213
Less:
Accumulated depreciation (1,321,400) (961,048)
--------------- -----------
Total. . . . . . . . . . . $ 378,879 $ 516,165
=============== ===========
Depreciation expense amounted to $360,352, $408,711 and $376,437 for the years
ended December 31, 2000, 1999, and 1998, respectively.
F. INTANGIBLE ASSETS
On July 10, 1997, the Company completed the acquisition of the Feverall
acetaminophen suppository product line and certain related assets, including the
Feverall trademark and the Feverall Sprinkle Caps powder and Acetaminophen
Uniserts suppository product lines (the "Product Lines") from Upsher-Smith
Laboratories, Inc. ("Upsher-Smith"). The purchase price of $11,905,145,
including related costs of $183,880, consisted of cash of $6,405,145 and a
promissory note issued to Upsher-Smith for $5,500,000, which was paid in
February 1998.
The purchase price was allocated to the assets acquired based on their estimated
respective fair values on the date of acquisition as follows:
USEFUL
AMOUNT LIVES
(IN MILLIONS) (IN YEARS)
------------- ----------
Inventory$ 0.4 --
Trademark 4.5 20
Manufacturing agreement 5.0 15
Goodwill 2.0 20
-------
Total$ 11.9
=======
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.
On December 29, 2000, Ascent entered into a series of agreements with Alpharma
USPD, a wholly-owned subsidiary of Alpharma, Inc. ("Alpharma"), including a
Product Purchase Agreement. Pursuant to the terms of the Product Purchase
Agreement, Ascent sold its Feverall product line in an asset sale to Alpharma
USPD in exchange for the cancellation by Alpharma USPD of $12.0 million of
indebtedness owed to Alpharma USPD by Ascent under a note issued pursuant to the
Loan Agreement, dated as of February 16, 1999, as amended, by and among Ascent,
Alpharma USPD and Alpharma (the "Loan Agreement"). The consideration paid under
the Product Purchase Agreement was determined based on the arms-length
negotiation between the parties. Under the terms of the Product Purchase
Agreement, Ascent has the option to repurchase the Feverall product line at
anytime within the next 12 months for $12.0 million (see Note O). In accordance
with the applicable accounting guidance, the gain of approximately $1.5 million
on the sale of the assets is being deferred until the option to repurchase the
product line has expired. The net assets are recorded on the balance sheet as
"Assets contingently transferred to Alpharma USPD" and the 7.5% note is recorded
as "Debt contingently extinguished by Alpharma USPD".
Accumulated amortization of intangible assets was $2,303,238 and $1,657,045 at
December 29, 2000 and December 31, 1999, respectively.
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PAGE 42
Amortization expense for intangible assets was $666,193, $666,141 and $691,717
for the years ended December 31, 2000, 1999 and 1998, respectively.
G. CO-PROMOTION AGREEMENTS
OMNICEF
In November 1998, the Company signed a promotion agreement with Warner-Lambert
Company to begin marketing, in February 1999, OMNICEF(R) (cefdinir) oral
suspension and capsules to pediatricians in the United States. The Company
agreed to promote OMNICEF(R) (cefdinir) oral suspension and capsules as part of
its strategy to leverage its marketing and sales capabilities, including its
domestic sales force. This agreement was terminated in January 2000 after the
consummation by Warner-Lambert Company of the sale of its assets with respect to
OMNICEF(R) (cefdinir) to Abbott Laboratories. The Company recognized $1,069,000
and $3,382,000 as revenue earned for this agreement for the years ended December
31, 2000 and 1999, respectively.
PEDIOTIC
In April 1999, the Company entered into a one-year co-promotion agreement with
King Pharmaceuticals Inc. to begin marketing, in May 1999, Pediotic(R) (a
combination corticosteroid/antibiotic) to pediatricians in the United States. As
compensation for the Company's co-promotional efforts, King Pharmaceuticals had
agreed to pay the Company a base fee with incremental revenue based on achieving
certain goals above a specified amount. The agreement expired in April 2000. The
Company recognized $0 and $625,000 as revenue earned for this agreement for the
years ended December 31, 2000 and 1999, respectively.
H. INCOME TAXES
The provision for income taxes consists of the following:
Years Ended December 31,
--------------------------
2000 1999 1998
------------------- ------------ ------------
Deferred tax expenses/(benefits):
Federal . . . . . . . . . . . (2,704,897) (5,206,072) (5,433,714)
State . . . . . . . . . . . . (3,392,439) (1,496,718) (2,096,174)
Change in Valuation Allowance 6,097,336 6,702,790 7,529,888
------------- ------------ ------------
Total Deferred . . . . . 0 0 0
------------- ------------ ------------
Total Provision. . . . . $ 0 $ 0 $ 0
============= ============ ============
Temporary differences that give rise to significant deferred tax assets as of
December 31, 2000 and 1999 are as follows:
2000 1999
------------- -------------
Net operating loss carryforwards $ 26,983,874 $ 18,706,086
Credit carryforward. . . . . . . 1,120,555 909,546
Amortization of intangibles. . . (1,606,696) -
Capitalized expenses:
Research and development. . 4,895,066 5,567,393
G&A . . . . . . . . . . . . 1,043,909 1,703,220
Other. . . . . . . . . . . . . . 109,674 (97,360)
------------- -------------
Total deferred tax assets. . . . 32,546,382 26,788,885
Valuation allowance. . . . . . . (32,546,382) (26,788,885)
------------- -------------
Net deferred tax asset . . . . . $ - $ -
============= =============
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PAGE 43
The provision for income taxes differs from the Federal statutory rate due to
the following:
Year Ended December 31,
------------------------
2000 1999 1998
------------------------ ------- -------
Tax at statutory rate. . . . . . . . (34.0)% (34.0)% (34.0)%
State taxes - net of federal benefit (5.9) (6.3) (8.0)
Other. . . . . . . . . . . . . . . . (2.6) (2.5) 0.3
Change in valuation allowance. . . . 42.5 42.8 41.7
------------------------ ------- -------
Effective tax rate . . . . . . . . . 0.0% 0.0% 0.0%
At December 31, 2000 Ascent had federal and state net operating loss
carryforwards ("NOL") of approximately $68,956,990 and $65,291,825,
respectively, which may be available to offset future federal and state income
tax liabilities and expire at various dates from 2006 through 2020.
Additionally, Ascent had federal and state credit carryforwards of approximately
$790,000 and $500,000, respectively. As required by Statement of Financial
Accounting Standards No. 109, management of Ascent has evaluated the positive
and negative evidence bearing upon the realizability of its deferred tax assets,
which are comprised principally of net operating losses and carryforwards.
Management has determined that it is more likely than not that Ascent will not
recognize the benefits of federal and state deferred tax assets and, as a
result, a valuation allowance of $32,546,382 has been established at December
31, 2000.
Ownership changes, as defined in the Internal Revenue Code, may have limited the
amount of net operating loss carryforwards that can be utilized annually to
offset future taxable income. Subsequent ownership changes could further affect
the limitation in future years.
I. COMMITMENTS
The Company leases office space and equipment under noncancelable operating
leases expiring through the year 2002. The Company has an option to renew the
building lease for an additional five-year period. Rent expense was $306,902,
$306,948, and $300,904 for fiscal years 2000, 1999 and 1998, respectively.
Future minimum lease and subleased commitments are as follows:
Leases Sublease Net
-------- --------- --------
2001. $583,442 $ 84,481 $498,961
2002. 237,556 14,080 223,476
2003. 161,161 - 161,161
2004. 16,792 - 16,792
2005. 868 - 868
-------- --------- --------
Total $999,819 $ 98,561 $901,258
======== ========= ========
The Company is a party to a supply agreement with a third party manufacturer
under which the third party manufacturer has agreed to manufacture Primsol
trimethoprim solution and Orapred Syrup 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 that third party manufacturer in accordance with
agreed upon price schedules. Under the agreement for the Primsol trimethoprim
solution, the agreement may be terminated by either party on three months notice
any time after October 17, 2004. Under the agreement for the Orapred syrup, the
agreement may be terminated by either party on twelve months notice after six
years from the date of the first product shipment. The Company currently has
outstanding purchase agreements of $68,115 with this third party manufacturer.
F-13
PAGE 44
J. ACCRUED EXPENSES
Accrued expenses consisted of the following:
December 31,
-------------
2000 1999
------------- ----------
Employee compensation expenses $ 342,296 $1,033,187
Legal and accounting expenses. 74,910 81,726
Selling fees and chargebacks . 171,743 78,071
Preferred stock dividend . . . 323,082 323,082
Other. . . . . . . . . . . . . 49,390 84,789
------------- ----------
$ 961,421 $1,600,855
============= ==========
K. STOCKHOLDERS' EQUITY AND PREFERRED STOCK
In June 1997, the Company completed its initial public offering ("Public
Offering") of 2,240,000 shares of Common Stock, raising approximately $17.5
million of net proceeds after deducting offering costs. Concurrent with the
closing of the initial public offering, all 5,208,657 shares of Series A
convertible preferred stock, Series B convertible preferred stock, Series D
redeemable convertible preferred stock, Series E redeemable convertible
preferred stock and Series F redeemable convertible preferred stock were
converted into 4,440,559 shares of common stock.
After the closing of the initial public offering, the Company was authorized to
issue up to 5,000,000 shares of Preferred Stock, $0.01 par value per share, in
one or more series. Each such series of Preferred Stock shall have such rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences, as
shall be determined by the Board of Directors.
On June 1, 1998, the Company issued and sold to funds affiliated with Furman
Selz Investments and BancBoston Ventures 7,000 shares of Series G convertible
exchangeable preferred stock for an aggregate purchase price of $7 million. The
Series G preferred stock was convertible into common stock at a price of $4.75
per share (which was above the fair market value of the Company's common stock
on June 1, 1998) and was entitled to cumulative annual dividends equal to 8% of
the liquidation preference of such stock ($1,000), payable semiannually in June
and December of each year, commencing December 1998. The Series G preferred
stock could have been exchanged for 8% seven-year convertible subordinated notes
having an aggregate principle amount equal to the aggregate liquidation
preference of the preferred stock solely at the option of the Company any time
within the seven years of issuance of the preferred stock (see Note O).
On February 16, 1999, the Company entered into a second amendment to the May
1998 Series G Purchase Agreement, providing for, among other things, (a) the
Company's agreement to exercise its right to exchange all outstanding shares of
Series G preferred stock for convertible subordinated notes in accordance with
the terms of the Series G preferred stock, (b) the reduction in the exercise
price of warrants to purchase 2,116,958 shares of common stock of the Company
from $4.75 per share to $3.00 per share and the agreement of the Series G
purchasers to exercise these warrants, (c) the issuance and sale to the Series G
purchasers of an aggregate of 300,000 shares of common stock of the Company at a
price of $3.00 per share and (d) the cancellation of approximately $7.25 million
of principal under the subordinated notes held by the Series G purchasers to pay
the exercise price of the warrants and the purchase price of the additional
300,000 shares of common stock. In addition, the Company entered into an
amendment to a financial advisory services fee agreement with ING Furman Selz
whereby the Company agreed to issue 150,000 shares of common stock to ING Furman
Selz in lieu of the payment of certain financial advisory fees. On July 23,
1999, following the approval by the Company's stockholders of the reduction in
the exercise price of the warrants and the issuance of the additional shares of
common stock to the Series G purchasers and ING Furman Selz, and in connection
with the consummation of the Company's strategic alliance with Alpharma, the
Company and the Series G purchasers consummated the transactions contemplated
above.
On July 23, 1999, the Company consummated a merger with a wholly-owned
subsidiary pursuant to which each share of common stock of the Company was
converted into one depositary share (each, a "Depositary Share"), representing
one share of common stock, subject to a call option, and represented by a
depositary receipt. As used in these financial statements, the terms "Common
F-14
PAGE 45
Stock" and "common shares" includes the Depositary Shares and the term "common
stockholders" includes the holders of Depositary Shares for all periods from and
after July 23, 1999.
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, as amended, 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
1,850,000 shares 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. 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.
The 1992 Plan provides for the granting of incentive stock options (ISOs),
nonqualified stock options (NSOs) and stock awards. In the case of ISOs and
NSOs, the exercise price may not be less than 100% (110% in certain cases for
ISOs) of the fair market value per share of the common stock on the date of
grant. In the case of stock awards, the purchase price will be determined by the
Board of Directors.
Each option granted under the 1992 Plan may be exercisable either in full or in
installments as set forth in the option agreement. Each option and all rights
expire on the date specified by the Board of Directors or the Committee, but not
more than ten years after the date on which the option is granted in the case of
ISOs (five years in certain cases). Options vest between zero and five years
from the date of grant. The fair value of options issued to non-employees is
recorded as a charge to earnings over the service period.
In the case of awards of restricted common stock, the Board of Directors or the
Committee determines the duration of certain restrictions on transfer of such
stock. There have been no awards of restricted common stock made under this
plan.
1999 Stock Incentive Plan
On April 14,1999 the Board of Directors voted to adopt the 1999 Stock Incentive
Plan (the "1999 Plan") which was approved by the shareholders on July 23, 1999.
Under the 1999 Plan, the Board of Directors or a Committee appointed by the
Board of Directors is permitted to award shares of restricted common stock or to
grant stock options for the purchase of common stock to employees, consultants,
advisors and members of the Board of Directors, up to a maximum of 500,000
shares. The 1999 Plan terminates on the earlier of (i) the day after the tenth
anniversary of its adoption or (ii) upon issuance of all available shares. There
have been no awards of restricted common stock made under this plan.
In June 2000, the 1999 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 1999 Plan to 1,250,000.
California Stock Option Plan
On December 13, 2000 the Board of Directors voted to adopt the California Stock
Option Plan (the "California Plan"). Under the California Plan, the Board of
Directors or a Committee appointed by the Board is permitted to award shares of
restricted stock or to grant stock options for the purchase of common stock to
employees, consultants, advisors and members of the Board of Directors who are
residents of the State of California on the date of grant of such award. Awards
may be made under the California Plan for up to 200,000 shares of common stock.
The California Plan terminates on the earlier of (i) the day after the tenth
anniversary of its adoption or (ii) upon issuance of all available shares. There
were no awards of restricted common stock made during 2000.
F-15
PAGE 46
A summary of all the Company's stock option activity for the three years ended
December 31, 2000 is as follows:
Weighted Total
Weighted Average Average Number
Number of Exercise Number of Exercise of Options
Options Price Warrants Price and Warrants
---------- ------------ ----------- -------- -------------
Outstanding at December 31, 1997 1,095,061 $ 4.92 1,398,212 $ 4.78 2,493,273
Granted, 1998 . . . . . . . 996,450 3.85 2,116,958 4.75 3,113,408
Exercised, 1998 . . . . . . (29,963) 1.35 - - (29,963)
Terminated, 1998. . . . . . (698,799) 6.50 - - (698,799)
---------- ---------- ----------- --------- ------------
Outstanding at December 31, 1998 1,362,749 $ 3.69 3,515,170 $ 4.76 4,877,919
Granted, 1999 . . . . . . . 781,275 5.46 1,450,000 3.00 2,231,275
Exercised, 1999 . . . . . . - - (2,134,442) 4.74 (2,134,442)
Terminated, 1999. . . . . . (120,388) 5.90 - - (120,388)
---------- ---------- ----------- --------- -----------
Outstanding at December 31, 1999 2,023,636 $ 4.24 2,830,728 $ 3.87 4,854,364
Granted, 2000 . . . . . . . 1,025,750 1.42 9,750,000 1.31 10,775,750
Exercised, 2000 . . . . . . (97,000) 2.35 - - (97,000)
Terminated, 2000. . . . . . (826,436) 3.76 (5,703,891) 3.14 (6,530,327)
---------- ---------- ----------- --------- -----------
Outstanding at December 31, 2000 2,125,950 $ 3.15 6,876,837 $ 3.25 9,002,787
========== ========== =========== ========= ===========
Summarized information about employee, non-employee and Director stock options
outstanding at December 31, 2000 is as follows:
Options Outstanding
--------------------
Weighted Options Exercisable
--------------------
Average Weighted Weighted
Range of. . Remaining Average Average
Exercise. . Number of Contractual Exercise Number of Exercise
Prices. . . Options Life (Years) Price Options Price
- - ----------- -------------------- -------------------- --------- --------- ---------
0.69-1.32. 509,000 9.5 $ 1.28 13,500 $ 1.16
1.38-1.88 . 392,600 9.0 1.42 152,807 1.41
2.35-3.00 . 407,775 7.1 2.45 337,398 2.42
3.50-3.88 . 407,500 6.6 3.75 223,500 3.74
6.75. . . . 302,075 7.6 6.75 20,577 6.75
7.06-9.13 . 107,000 5.9 8.73 99,500 8.70
-------------------- ---------
2,125,950. $ 3.15 847,282 $ 3.41
Options exercisable at December 31, 2000, 1999 and 1998 were 847,282, 1,016,649
and 538,191, respectively.
The weighted average fair value at the date of grant for options granted, all
with exercise prices equal to the fair market value of the Company's common
stock on the date of grant, during 2000, 1999 and 1998 were $0.98, $2.96, and
$1.42, respectively, per option.
In 1999, the Company issued stock options to non-employees in conjunction with
the issuance of certain subordinated secured notes. The fair value of the
options was recorded as debt issue costs and is being amortized as interest
expense. The total interest expense recorded in 1999, related to these options,
was $35,300. The total interest expense recorded in 2000, related to these
options, was $21,100. These options were fully vested as of May 1, 2000.
In 2000, the Company issued stock options to non-employees in conjunction with
consulting agreements. The options will vest over four years and the fair value
will be marked to market until fully vested. The total expense recorded in 2000,
related to these options, was $4,400.
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,
F-16
PAGE 47
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 40,931, 83,596 and 52,626
shares of common stock in 2000, 1999 and 1998 for consideration of $71,970,
$171,429 and $117,800, respectively, to employees pursuant to the Purchase Plan.
1997 Director Stock Option Plan
In March 1997, the Company adopted the 1997 Director Stock Option Plan (the
"Director Plan"). Under the terms of the Director Plan, options to purchase
15,000 shares of common stock were granted to each of the non-employee directors
upon the closing of the initial public offering at $9.00 per share. Options to
purchase 15,000 shares of common stock are granted to each new non-employee
director upon his or her initial election to the Board of Directors. Annual
options to purchase 5,000 shares of common stock will be granted to each
non-employee director on May 1 of each year commencing in 1998. All options will
vest on the first anniversary of the date of grant. However, the exercisability
of these options will be accelerated upon the occurrence of a change in control
of the Company (as defined in the Director Plan). A total of 300,000 shares of
common stock may be issued upon the exercise of stock options granted under the
Director Plan. With the exception of the options granted to all non-employee
directors on the day of the Public Offering, the exercise price of all options
granted under the Director Plan will equal the closing price of the common stock
on the date of grant. A total of 55,000, 55,000, and 50,000 options were granted
under the Director Plan during the years ended December 31, 2000, 1999, and
1998, respectively.
401(k) Savings and Retirement Plan
On August 28, 1996 the Company adopted a 401(k) Savings and Retirement Plan (the
"401(k) Plan"), a tax-qualified plan covering all of its employees who are at
least 20.5 years of age and who have completed at least three months of service
to the Company. Each employee may elect to reduce his or her current
compensation by up to 15%, subject to the statutory limit and have the amount of
the reduction contributed to the 401(k) Plan. The 401(k) Plan provides that the
Company may, as determined from time to time by the Board of Directors, provide
a matching cash contribution. In addition, the Company may contribute an
additional amount to the 401(k) Plan, as determined by the Board of Directors,
which will be allocated based on the proportion of the employee's compensation
for the plan year to the aggregate compensation for the plan year for all
eligible employees. Upon termination of employment, a participant may elect a
lump sum distribution or, if his or her total amount in the 401(k) Plan is
greater than $5,000, may elect to receive benefits as retirement income. Through
December 31, 2000, the Company had not matched any cash contributions made by
employees to the 401(k) plan.
Stock-Based Compensation Plans
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for the 1992 Plan, the 1999 Plan, the California Plan and the Purchase Plan. No
compensation expense has been recognized for options granted to employees at
fair market value and shares purchased under these plans. Had compensation
expense for the stock-based compensation plans been determined based on the fair
value at the grant dates for the options granted and shares purchased under the
plan consistent with the method prescribed by SFAS 123, the net loss to common
shareholders and net loss to common shareholders per share would have been as
follows:
2000 1999 1998
-------------------- ------------------- --------------------
Basic and Diluted Basic and Diluted Basic and Diluted
Net Loss to Net Loss to Common Net Loss to Net Loss to Common Net Loss to Net Loss to Common
Common Shareholders Common Shareholders Common Shareholders
Stockholders Per Share Stockholders Per Share Stockholders Per Share
- - ----------------- -------------------- ------------------- -------------------- -------------- --------------------
As Reported . . . $ (14,339,364) $ (1.47) $ (16,071,638) $ (1.96) $ (18,680,470) $(2.69)
Pro Forma . . . . (15,502,075) (1.59) (17,382,965) (2.13) (19,356,551) (2.79)
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.
F-17
PAGE 48
The fair value of options and other equity instruments at the date of grant was
estimated using the Black-Scholes option pricing model for 2000, 1999 and 1998
with the following assumptions:
2000 1999 1998
------------ ------------ ----
Expected life (years) - stock options 4 years 4 years 4 years
Expected life (years) - Purchase Plan .5_ .5 .5
Risk-free interest rate 5.00 - 6.00% 4.91 - 6.15% 4.13 - 5.65%
Volatility 138% 92% 79%
Dividend yield 0 0 0
Expected forfeiture rate 27% 20% 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 lesser of 10% or 3.5% over the
prime rate, with the first quarterly payment due in December 1997. Accordingly,
in December 1997, the Company paid an aggregate of $1,050,000 to the holders of
these subordinated secured notes as the first quarterly payment.
In connection with the issuance of the subordinated secured notes, on January
31, 1997, the Company issued Series A warrants, to purchase an aggregate of
224,429 shares of common stock, and on June 4, 1997, the Company issued Series A
warrants to purchase an aggregate of 336,644 shares of common stock and Series B
warrants to purchase an aggregate of 218,195 shares of common stock, to the
holders of the subordinates secured notes. The Series A warrants are exercisable
at $0.01 per share for a period of seven years from the grant date and the
Series B warrants are exercisable at $5.29 per share over the same period. None
of these warrants were exercised in 1997 or 1998. The relative fair value of the
warrants issued on January 31, 1997 was recorded as an allocation of
approximately $450,000 from the subordinated secured notes issued on such date.
Consequently, such subordinated secured notes were recorded at approximately
$1,550,000. Similarly, the relative fair value of the warrants (as of June 4,
1997) issued on June 4, 1997 was recorded as an allocation of approximately
$2,050,000 from the subordinated secured notes issued on such date.
Consequently, such notes were recorded at approximately $2,950,000. Accordingly,
approximately $2,500,000 of accretion will be charged to interest expense, in
addition to the stated interest rates, over the terms of these subordinated
secured notes. For the years ended December 31, 1998 and 1997, the accretion
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PAGE 49
charges were $531,192 and $1,132,808, respectively, which were included in
interest expense on the statements of operations. The Company also capitalized
$596,040 of issuance costs related to the subordinated secured notes which will
be amortized over the term of the notes. In June 1998, the Company used $5.3
million from the net proceeds of the Series G financing (see Note N) to repay
the outstanding subordinated secured notes. As a result of the early repayment
of the subordinated secured notes, the Company accelerated the $842,000
remaining unaccreted portion of the discount. In addition, $325,000 of
unamortized debt issue costs were written off. These two items have been
recorded as extraordinary items from the loss on early extinguishment of debt in
accordance with SFAS 4, "Reporting Gains and Losses From Extinguishment of
Debt."
O. SERIES G PREFERRED STOCK, SUBORDINATED NOTES AND RELATED WARRANTS
On May 13, 1998, Ascent entered into a Series G Securities Purchase Agreement
with funds affiliated with ING Furman Selz Investments LLC and BancBoston
Ventures, Inc. In accordance with this 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 an aggregate of 2,116,958 shares of Ascent
common stock at a per share exercise price of $4.75 per share, which, as
discussed below, was subsequently decreased, for an aggregate purchase price of
$16.0 million. Of the $9.0 million of subordinated secured 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 expenses, of $14.7 million to repay $5.3 million in existing
indebtedness and used the balance for working capital. As a result of the early
repayment of subordinated notes, Ascent accelerated the unaccreted portion of
the discount amounting to $842,000. In addition, $325,000 of unamortized debt
issue costs were written off.
In connection with Ascent's strategic alliance with Alpharma USPD and Alpharma,
Inc., which, as discussed below, was subsequently terminated, Ascent entered
into a second amendment to the May 1998 securities purchase agreement. The
second amendment provided for, among other things, (a) Ascent's agreement to
exercise its right to exchange all outstanding shares of Series G preferred
stock for convertible subordinated notes in accordance with the terms of the
Series G preferred stock, (b) the reduction in the exercise price of warrants to
purchase an aggregate of 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.
The subordinated notes and convertible notes bear interest at a rate of 8% per
annum, payable semiannually in June and December of each year, commencing
December 1998. Ascent deferred forty percent of the interest due on the
subordinated notes and fifty percent of the dividend interest due on the
convertible notes in each of December 1998, June 1999, December 1999 and June
2000 for a period of three years.
In the event of a change in control or unaffiliated merger of Ascent, Ascent
could redeem the convertible notes issued upon exchange of the Series G
preferred stock at a price equal to the liquidation preference plus accrued and
unpaid dividends, although Ascent would be required to issue new common stock
purchase warrants in connection with such redemption. In the event of a change
of control or unaffiliated merger of Ascent, the holders of the convertible
notes and the subordinated notes could require Ascent to redeem these notes at a
price equal to the unpaid principal plus accrued and unpaid interest on such
notes. In connection with the Series G financing, a representative of ING Furman
Selz Investments was added to Ascent's board of directors.
P. ING FURMAN SELZ LOAN ARRANGEMENTS
$4.0 Million Credit Facility. On July 1, 1999, Ascent entered into an
arrangement with certain funds affiliated with ING Furman Selz Investments LLC
under which such funds agreed to loan Ascent up to $4.0 million. Pursuant to
this agreement, Ascent issued to the funds affiliated with ING Furman Selz 7.5%
convertible subordinated notes in the aggregate principal amount of $4.0 million
and warrants to purchase an aggregate of 600,000 depositary shares at an
exercise price of $3.00 per share, which, as described below, was subsequently
decreased to $0.05 per share, and which expire on July 1, 2006. As of February
2000, Ascent had borrowed the entire $4.0 million under this credit facility. Of
the $4.0 million convertible subordinated notes issued and sold, $3,605,495 was
allocated to the relative fair value of the convertible subordinated notes
(classified as debt) and $394,505 was allocated to the relative fair value of
the warrants (classified as additional paid-in-capital). Accordingly, the 7.5%
convertible subordinated notes will be accreted from $3,605,495 to the maturity
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PAGE 50
amount of $4,000,000 as interest expense over the term of the convertible
subordinated notes. The notes mature on July 1, 2004 and are convertible into
depositary shares at a conversion price of $3.00 per share. Interest on these
notes is due and payable quarterly, in arrears, on the last day of each calendar
quarter, and the outstanding principal on the notes is payable in full on July
1, 2004. In connection with this arrangement, a second representative of ING
Furman Selz Investments was added to Ascent's board of directors.
$10.0 Million Credit Facility. On October 15, 1999, Ascent entered into an
arrangement with certain funds affiliated with ING Furman Selz under which such
funds agreed to loan Ascent up to an additional $10.0 million. Pursuant to this
agreement, Ascent issued to the funds affiliated with ING Furman Selz 7.5%
convertible subordinated notes in the aggregate principal amount of $10.0
million and warrants to purchase an aggregate of 5,000,000 depositary shares at
an original exercise price of $3.00 per share, which, as described below, was
subsequently decreased to $0.05 per share, and which expire on October 15, 2006.
As part of the right to draw down the $10.0 million, Ascent issued to the funds
affiliated with ING Furman Selz 1,000,000 warrants which were valued at $513,500
(classified as debt issue costs). As of December 31, 2000, Ascent had borrowed
an aggregate of $10.0 million under this credit facility. Of the $10.0 million
of convertible subordinated notes issued and sold, $8,540,187 was allocated to
the relative fair value of the convertible subordinated notes (classified as
debt), and $1,459,813 was allocated to the relative fair value of the warrants
(classified as additional paid-in-capital). Accordingly, the 7.5% convertible
subordinated notes will be accreted from $8,540,187 to the maturity amount of
$10.0 million as interest expense over the term of the convertible subordinated
notes. The notes mature on July 1, 2004 and are convertible into Ascent
depositary shares at a conversion price of $3.00 per share. Interest on these
notes is due and payable quarterly, in arrears, on the last day of each calendar
quarter, and the outstanding principal on the notes is payable in full on July
1, 2004.
$10.25 Million Credit Facility. On December 29, 2000, Ascent entered into a
loan agreement with FS Ascent Investments LLC, which is affiliated with ING
Furman Selz Investments ("FS Investments"), and a fifth amendment to the Series
G securities purchase agreement. Pursuant to the loan agreement and the fifth
amendment, Ascent will receive up to $10.25 million in financing from FS
Investments. The financing is comprised of $6.25 million of 7.5% secured notes
($5.0 million of which has been advanced to Ascent in 2001) and $4.0 million of
Series H preferred stock ($1,000 of which has been advanced in 2001). Under the
terms of the notes, Ascent will pay interest quarterly and repay the outstanding
principal of the notes on June 30, 2001, unless extended to no later than June
30, 2002 at Ascent's election, or earlier upon a change in control (as defined
in the loan agreement) of Ascent or certain other conditions. The notes will be
secured by Ascent's Primsol product line, including intellectual property rights
of Ascent pertaining to Primsol, pursuant to a security agreement, dated as of
December 29, 2000, by and between Ascent and FS Investments. The $6.25 million
to be advanced to Ascent under the loan agreement will be obtained by FS
Investments from Alpharma USPD under a loan agreement between FS Investments and
Alpharma USPD. Under the terms of the Series H preferred stock, Ascent will be
entitled to, and the holders of the Series H preferred stock will be entitled to
cause Ascent to redeem the Series H preferred stock for a price equal to the
liquidation amount of the Series H preferred stock, plus $10.0 million. In
connection with the financing, Ascent agreed to issue warrants to FS Investments
to purchase up to 10,950,000 depositary shares of Ascent at an exercise price of
$.05 per share (of which warrants to purchase 1,950,000 depositary shares were
issued on January 2, 2001) and reduced the exercise price of certain of the
above described outstanding warrants to purchase a total of 5,600,000 depositary
shares issued under the Series G securities purchase agreement from $3.00 to
$0.05 per share (See Note R). The additional 9,000,000 warrants will be issued
upon the extension of the due date of the principal of the note. The due date on
the note can be extended in monthly increments with the first three extensions
requiring the issuance of 1,000,000 warrants for each extension and the fourth,
fifth and sixth extensions requiring the issuance of 2,000,000 warrants for each
extension.
The Series H preferred stock is entitled to cumulative annual dividends payable
on December 31, 2001 at the rate of 7.5% of the liquidation preference (as
defined in the loan agreement dated as of December 29, 2000 between Ascent and
FS Investments LLC). The Series H preferred stock is redeemable at the
redemption price at any time after the demand date or the occurrence of a change
in control (each as defined in such loan agreement) of Ascent at the option of
the holders of the Series H preferred stock holding at least 80% of the shares
of such stock then outstanding. Ascent may redeem all of the Series H preferred
stock at the redemption price at any time. The holders of Series H preferred
stock generally do not have any voting rights.
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PAGE 51
As of December 31, 2000, the commitment for principal debt payments over the
next five years is as follows:
2001. . . . . . . . $ -
2002. . . . . . . . -
2003. . . . . . . . -
2004. . . . . . . . 14,000,000
2005 and thereafter 8,749,126
-----------
Total . . . . . . . $22,749,126
===========
Q. ALPHARMA STRATEGIC ALLIANCE
On February 16, 1999, Ascent entered into a series of agreements with Alpharma,
Inc. and its wholly-owned subsidiary, Alpharma USPD, which provided for a number
of arrangements, including:
Call Option. In connection with the consummation of the strategic
alliance, Ascent obtained a call option to acquire all of its outstanding common
stock and assigned the call option to Alpharma USPD, thereby giving Alpharma
USPD the option, exercisable in 2003, to purchase all of Ascent's common stock
then outstanding at a purchase price to be determined by a formula based on
Ascent's 2002 earnings.
$40.0 Million Credit Facility. Alpharma agreed to loan Ascent up to $40.0
million from time to time, $12.0 million of which could 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.
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. Ascent borrowed the entire $12.0
million available for general corporate purposes by June 2000. The note bears
interest at a rate of 7.5% per annum, due and payable quarterly, in arrears on
the last day of each calendar quarter.
On December 29, 2000, Ascent entered into a Termination Agreement with Alpharma
USPD, Alpharma, the Original Lenders (as defined therein) and State Street Bank
and Trust Company terminating the strategic alliance. Pursuant to the terms of
the Termination Agreement, the parties terminated the (i) loan agreement, (ii)
Master Agreement, dated as of February 16, 1999, as amended, by and among
Ascent, Alpharma USPD and Alpharma, (iii) Guaranty Agreement, dated as of
February 16, 1999, as amended, by Alpharma for the benefit of Ascent, (iv)
Registration Rights Agreement, dated as of February 16, 1999, as amended, by and
between Ascent and Alpharma USPD, (v) Subordination Agreement, dated as of
February 16, 1999, as amended, by and among Ascent, Alpharma and the Original
Lenders (as defined therein), (vi) covenants and obligations of the parties
under the Supplemental Agreement, dated as of July 1, 1999, by and among Ascent,
Alpharma USPD, Alpharma, the Original Lenders (as defined therein) and State
Street and (vii) Second Supplemental Agreement, dated as of October 15, 1999, by
and among Ascent, Alpharma USPD, Alpharma, the Original Lenders (as defined
therein) and State Street (collectively, the "Ascent-Alpharma Agreements").
In addition, under the Termination Agreement, Alpharma USPD agreed that it would
not exercise its call option to acquire Ascent pursuant to the Depositary
Agreement, dated as of February 16, 1999, as amended, by and among Ascent,
Alpharma USPD and State Street, and that Mr. Anderson, president of Alpharma
USPD, would resign as a director of Ascent effective as of December 29, 2000.
Ascent agreed that upon the consummation of any change of control (as defined in
the Termination Agreement) of Ascent, Ascent would pay to Alpharma USPD a fee
equal to 2% of the aggregate consideration received by Ascent upon such event in
excess of $65.0 million. This clause does not expire.
On December 29, 2000, Ascent also entered into a Product Purchase Agreement with
Alpharma USPD. Pursuant to the terms of the Product Purchase Agreement, Ascent
sold its Feverall product line in an asset sale to Alpharma USPD in exchange for
the cancellation by Alpharma USPD of $12.0 million of indebtedness owed to
Alpharma USPD by Ascent under a 7.5% note issued to Alpharma USPD. Under the
terms of the Product Purchase Agreement, Ascent has the option to repurchase the
Feverall product line at anytime before December 29, 2001 for $12.0 million. In
accordance with the applicalbe accounting guidance, the gain of approximately
$1.5 million on the sale of the assets is being deferred until the option to
repurchase the product line has expired and the net assets are recorded on the
balance sheet as "Assets contingently transferred to Alpharma USPD" and the 7.5%
note is recorded as "Debt contingently extinguished by Alpharma USPD".
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R. STOCK PURCHASE WARRANTS
Pursuant to the Stock Purchase Agreement dated July 12, 1995, as amended August
16, 1995, the Company granted the purchasers of Series E redeemable convertible
preferred stock, warrants to purchase an aggregate of 103,891 shares of common
stock. These warrants, none of which had been exercised, were exercisable at
$10.59 per share for a period of five years from the date of grant. These
warrants expired during 2000.
Pursuant to the Stock Purchase Agreement dated June 28, 1996, as amended
December 18, 1996 and February 28, 1997, the Company granted the purchasers of
Series F redeemable convertible preferred stock warrants to purchase an
aggregate of 651,334 shares of common stock. These warrants are exercisable at
$7.65 per share for a period of five years from the date of grant. Prior to the
closing of the Public Offering, a cashless exercise of 102,387 warrants resulted
in the issuance of 13,296 shares of common stock. Upon the closing of the Public
Offering, the aggregate number of shares issuable upon exercise of these
warrants decreased from 548,947 to 466,604 and the per share exercise price
increased from $7.65 to $9.00, pursuant to the terms of such warrants. These
warrants, none of which were exercised in 1997, 1998, 1999 or 2000, retained the
cashless exercise feature after the closing of the Public Offering.
On February 28, 1997, the Company issued warrants exercisable for an aggregate
of 48,449 shares of common stock at a weighted average exercise price of $4.61
per share to certain financial advisors for services rendered for Series F
redeemable convertible preferred stock. These warrants contain a cashless
exercise feature and expire on February 28, 2002. During 1999, a cashless
exercise of 11,474 warrants resulted in the issuance of 11,440 shares of common
stock. No warrants were exercised during fiscal year ended December 31, 2000.
These warrants expire on February 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). The relative fair value was
recorded as a contribution to additional paid in capital of $2,506,000. During
1999 a cashless exercise of 6,010 warrants, having an exercise price of $0.01
per share, resulted in the issuance of 5,968 shares of common stock. During
2000, none of these warrants were exercised. These warrants expire on January
31, 2004.
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) which
expire June 1, 2005. The relative fair value of these warrants was recorded as a
contribution to additional paid in capital of $323,000.
On June 30, 1999, in connection with a debt issuance, the Company issued
warrants to the funds affiliated with ING Furman Selz to purchase 300,000 shares
of Ascent common stock at an exercise price of $3.00 per share (see Note P)
which expire on July 1, 2006. The relative fair value of these warrants was
recorded as a contribution to additional paid in capital of $195,505.
On October 15, 1999, in connection with a debt issuance, the Company issued
warrants to the funds affiliated with ING Furman Selz to purchase 1,000,000
shares of Ascent common stock at an exercise price of $3.00 per share (see Note
P) which expire on October 15, 2006. The fair value of these warrants was
recorded as a contribution to additional paid in capital of $513,500.
On December 30, 1999, in connection with a debt issuance, the Company issued
warrants to the funds affiliated with ING Furman Selz to purchase 150,000 shares
of Ascent common stock at an exercise price of $3.00 per share (see Note P)
which expire on July 1, 2006. The relative fair value of these warrants was
recorded as a contribution to additional paid in capital of $66,958.
On February 14, 2000, in connection with a debt issuance, the Company issued
warrants to the funds affiliated with ING Furman Selz to purchase 150,000 shares
of Ascent common stock at an exercise price of $3.00 per share (see Note P)
which expire on July 1, 2006. The relative fair value of these warrants was
recorded as a contribution to additional paid in capital of $131,837.
On March 13, 2000, in connection with a debt issuance, the Company issued
warrants to the funds affiliated with ING Furman Selz to purchase 375,000 shares
of Ascent common stock at an exercise price of $3.00 per share (see Note P)
which expire on October 15, 2006. The relative fair value of these warrants was
recorded as a contribution to additional paid in capital of $285,463.
On May 8, 2000, in connection with a debt issuance, the Company issued warrants
to the funds affiliated with ING Furman Selz to purchase 312,500 shares of
Ascent common stock at an exercise price of $3.00 per share (see Note P) which
expire on October 15, 2006. The relative fair value of these warrants was
recorded as a contribution to additional paid in capital of $150,355.
On June 5, 2000, in connection with a debt issuance, the Company issued warrants
to the funds affiliated with ING Furman Selz to purchase 312,500 shares of
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PAGE 53
Ascent common stock at an exercise price of $3.00 per share (see Note P) which
expire on October 15. The relative fair value of these warrants was recorded as
a contribution to additional paid in capital of $82,549.
On July 7, 2000, in connection with a debt issuance, the Company issued warrants
to the funds affiliated with ING Furman Selz to purchase 500,000 shares of
Ascent common stock at an exercise price of $3.00 per share (see Note P) which
expire on October 15, 2006. The relative fair value of these warrants was
recorded as a contribution to additional paid in capital of $117,776.
On August 7, 2000, in connection with a debt issuance, the Company issued
warrants to the funds affiliated with ING Furman Selz to purchase 500,000 shares
of Ascent common stock at an exercise price of $3.00 per share (see Note P)
which expire on October 15, 2006. The relative fair value of these warrants was
recorded as a contribution to additional paid in capital of $217,634.
On September 25, 2000, in connection with a debt issuance, the Company issued
warrants to the funds affiliated with ING Furman Selz to purchase 500,000 shares
of Ascent common stock at an exercise price of $3.00 per share (see Note P)
which expire on October 15, 2006. The relative fair value of these warrants was
recorded as a contribution to additional paid in capital of $226,565.
On November 1, 2000, in connection with a debt issuance, the Company issued
warrants to the funds affiliated with ING Furman Selz to purchase 500,000 shares
of Ascent common stock at an exercise price of $3.00 per share (see Note P)
which expire on October 15, 2006. The relative fair value of these warrants was
recorded as a contribution to additional paid in capital of $219,510.
On November 28, 2000, in connection with a debt issuance, the Company issued
warrants to the funds affiliated with ING Furman Selz to purchase 1,000,000
shares of Ascent common stock at an exercise price of $3.00 per share (see Note
P) which expire on October 15, 2006. The relative fair value of these warrants
was recorded as a contribution to additional paid in capital of $159,961.
On December 29, 2000, the Company repriced the 5.6 million warrants issued to
the funds affiliated with ING Furman Selz from $3.00 per share to $0.05 per
share. The incremental value of these warrants was recorded as a contribution to
additional paid in capital of $651,000 and as debt issue costs as an asset on
the balance sheet to be amortized to interest expense over the six month term of
the new debt agreement (see Note P).
On December 29, 2000, in connection with the repricing of the 5.6 million
warrants, the Company was required, pursuant to the anti-dilution terms of
certain outstanding warrants, to adjust the exercise price and the number of
depositary shares for which the warrants were exercisable. The warrants were
adjusted to purchase (i) 935,354 depositary shares (up from 555,063 shares) at
an exercise price of $0.0059 per share (down from $0.01 per share), and (ii)
367,687 depositary shares (up from 218,195 shares) at an exercise price of
$3.1392 per share (down from $5.29 per share).
S. QUARTERLY RESULTS
The following tables set forth unaudited selected financial information for the
periods indicated, as well as certain information expressed as a percentage of
total revenues for the same periods. This information has been derived from
unaudited consolidated financial statements, which, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such information. This
information has not been audited or reviewed by the Company's independent
accountants in accordance with standards established for such reviews. The
results of operations for any quarter are not necessarily indicative of the
results to be expected for any future period.
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PAGE 54
Quarter Ended
---------------
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
1999 1999 1999 1999 2000 2000 2000 2000
--------------- -------- -------- -------- -------- -------- -------- --------
(In thousands except per share data)
(Unaudited)
Revenues . . . . . . . . . . . . . . 1,856 1,740 1,880 1,570 1,110 1,108 846 1,401
Cost of revenues . . . . . . . . . . 581 320 405 320 331 289 350 432
--------------- -------- -------- -------- -------- -------- -------- --------
Gross profit . . . . . . . . . . . . 1,275 1,420 1,475 1,250 779 819 496 969
Operating expenses:
Selling, general
And administrative . . . . . . . . 3,890 3,700 4,527 3,691 3,018 3,329 3,100 3,024
Research and
Development. . . . . . . . . . . . 833 989 1,137 874 745 538 659 62
--------------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses . . . . . . 4,723 4,689 5,664 4,565 3,763 3,867 3,759 3,086
--------------- -------- -------- -------- -------- -------- -------- --------
Operating loss . . . . . . . . . . . (3,448) (3,269) (4,189) (3,315) (2,984) (3,048) (3,263) (2,117)
Other income (loss). . . . . . . . . (229) (293) (402) (508) (614) (668) (761) (884)
--------------- -------- -------- -------- -------- -------- -------- --------
Net loss . . . . . . . . . . . . . . (3,677) (3,562) (4,591) (3,823) (3,598) (3,716) (4,024) (3,001)
Preferred stock dividend . . . . . . 192 199 53 (26) - - - -
--------------- -------- -------- -------- -------- -------- -------- --------
Net loss to common
Stockholders . . . . . . . . . . . (3,869) (3,761) (4,644) (3,797) (3,598) (3,716) (4,024) (3,001)
=============== ======== ======== ======== ======== ======== ======== ========
Earnings per share . . . . . . . . . $ (0.55) $ (0.54) $ (0.52) $ (0.39) $ (0.37) $ (0.38) $ (0.41) $ (0.31)
T. SUBSEQUENT EVENTS
On January 2, 2001, Ascent borrowed $2.0 million for general corporate purposes
under the loan agreement with FS Ascent Investments LLC. The $2.0 million was
recorded as debt. As part of the debt drawdown Ascent issued one share of Series
H preferred stock to FS Ascent Investments LLC under the fifth amendment to the
May 1998 Series G securities purchase agreement in return for $1,000. Under the
terms of the Series H preferred stock, Ascent will be entitled to, and the
holders of the Series H preferred stock will be entitled to cause Ascent to
redeem the Series H preferred stock for a price equal to the liquidation amount
of the Series H preferred stock, plus $10.0 million. Also, in connection with
the financing, Ascent issued warrants to FS Ascent Investments LLC to purchase
1,950,000 depositary shares of Ascent stock at an exercise price of $0.05 per
share (see Note P).
On February 21, 2001 and March 20, 2001, Ascent borrowed an additional $1.5
million and $1.5 million, respectively, under the loan agreement with FS Ascent
Investments LLC. Both borrowings were recorded as debt (see Note P).
On March 23, 2001, the funds affiliated with ING Furman Selz exercised all of
their 7,550,000 outstanding warrants, on a cashless basis, which resulted in the
issuance of 7,211,528 depositary shares (see Note P).
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EXHIBIT INDEX
2.1(1) Product Purchase Agreement, dated as of December 29, 2000, by and
between Ascent Pediatrics, Inc. (the "Company") and Alpharma USPD
Inc.
3.1(2) Amended and Restated Certificate of Incorporation of the Company.
3.2(2) Amended and Restated By-Laws of the Company.
Specimen Certificate for shares of Common Stock, $.00004 par
4.1(2) value, of the Company.
4.2(3) Form of Depositary Receipt (included in Exhibit 10.1).
4.3(3) Form of 7.5% Convertible Subordinated Note of the Company issued on
February 19, 1999 under the Alpharma Loan Agreement (as defined
below) (included in Exhibit 10.3).
4.4(4) Form of 8% Subordinated Note of the Company issued on June 1, 1998
under the May 1998 Securities Purchase Agreement (as defined
below).
4.5(3) Form of 8% Convertible Subordinated Note of the Company issued on
July 23, 1998 under the May 1998 Securities Purchase Agreement
(included in Exhibit 10.9).
4.6(5) Form of 7.5% Convertible Subordinated Note of the Company issued on
July 1, 1999 under the Third Amendment (as defined below) to the
May 1998 Securities Purchase Agreement (included in Exhibit 10.11).
4.7(6) Form of 7.5% Convertible Subordinated Note of the Company issued on
October 15, 1999 under the Fourth Amendment (as defined below) to
the May 1998 Securities Purchase Agreement.
4.8(1) Form of 7.5% Subordinated Note issued to FS Ascent Investments LLC
(included in Exhibit 10.15).
4.9(1) Form of Warrants to purchase Depositary Shares issuable to FS
Ascent Investments LLC under the Fifth Amendment to the Series G
Securities Purchase Agreement dated as of May 13, 1998, as
amended, by and between the Company and the Purchasers named
therein.
4.9(1) Certificate of Designation, Voting Powers, Preferences and Rights
of Series G Convertible Exchangeable Preferred Stock.
4.11(1) Certificate of Designation, Voting Powers, Preferences and Rights
of Series H Preferred Stock.
10.1(3) Depositary Agreement dated as of February 16, 1999 by and among
the Company, Alpharma USPD Inc. ("Alpharma") and State Street
Bank and Trust Company.
10.2(3) Master Agreement dated as of February 16, 1999 by and among the
Company, Alpharma and Alpharma Inc.
10.3(3) Loan Agreement (the "Alpharma Loan Agreement") dated as of
February 16, 1999 by and among the Company, Alpharma and Alpharma
Inc.
10.4(3) Guaranty Agreement dated as of February 16, 1999 by and between
the Company and Alpharma Inc.
10.5(3) Registration Rights Agreement dated as of February 16, 1999 by
and between the Company and Alpharma.
10.6(7) Supplemental Agreement dated as of July 1, 1999 by and among the
Company, Alpharma, Alpharma Inc., State Street Bank and Trust
Company and the Original Lenders (as defined therein).
10.7(8) Second Supplemental Agreement dated as of October 15, 1999 by
and among the Company, Alpharma, Alpharma Inc., State Street Bank
and Trust Company and the Original Lenders (as defined therein).
10.8(8) Amended and Restated Subordinated Agreement dated as of October
15, 1999 by and among the Company, Alpharma and the Original
Lenders (as defined therein).
10.9(4) Securities Purchase Agreement (the "May 1998 Securities Purchase
Agreement") dated as of May 13, 1998 by and among the Company,
Furman Selz Investors II, L.P., FS Employee Investors LLC, FS
Parallel Fund L.P., BancBoston Ventures, Inc. and Flynn Partners.
10.10(3) Second Amendment dated as of February 16, 1999 to the May 1998
Securities Purchase Agreement.
10.11(5) Third Amendment (the "Third Amendment") dated as of July 1, 1999
to the May 1998 Securities Purchase Agreement.
10.12(8) Fourth Amendment (the "Fourth Amendment") dated as of October 15,
1999 to the May 1998 Securities Purchase Agreement.
10.13(1) Fifth Amendment (the "Fifth Amendment") dated as of December 29,
2000 to the May 1998 Securities Purchase Agreement.
10.14(1) Termination Agreement dated as of December 29, 2000 by and among
the Company, Alpharma, Alpharma, Inc., State Street Bank and
Trust Company and the Original Lenders (as defined therein).
10.15(1) Loan Agreement dated as of December 29, 2000 by and between the
Company and FS Ascent Investments LLC.
10.16(1) Security Amendment dated as of December 29, 2000 by and between
the Company and FS Ascent Investments LLC.
10.17(2)(9) Amended and Restated 1992 Equity Incentive Plan.
10.18(2)(9) 1997 Director Stock Option Plan.
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10.19(2)(9) 1997 Employee Stock Purchase Plan.
10.20(4)(9)(10)1999 Stock Incentive Plan.
10.21(9) California Stock Option Plan.
10.22(2) Lease dated November 21, 1996 between the Company and New Boston
Wilmar Limited Partnership.
10.23(2)(9) Employment Agreement dated as of March 15, 1994 between the
Company and Emmett Clemente (the "Clemente Employment Agreement")
10.24(9)(11) Amendment No. 1 dated as of March 15, 1999 to the Clemente
Employment Agreement.
10.25(6)(9) Amendment No. 2 dated as of March 15, 2000 to the Clemente
Employment Agreement.
10.27(2)(9) Consulting Agreement dated as of April 1, 1996 between the
Company and Robert E. Baldini.
10.29(2)+ Development and License Agreement dated as of October 8, 1996
by and between the Company and Recordati S.A. Chemical and
Pharmaceutical Company ("Recordati").
10.30(2) Amendment No, 1 dated February 28, 1997 to the Development and
License Agreement dated as of October 8, 1996 by and between
the Company and Recordati.
10.31(2)+ Manufacturing and Supply Agreement dated as of October 8, 1996 by
and between the Company and Recordati.
10.32(2)+ Supply Agreement dated as of October 12, 1994 by and between the
Company and Lyne Laboratories.
10.33(2) Securities Purchase Agreement dated as of January 31, 1997 among
the Company, Triumph-Connecticut Limited Partnership and the
purchasers identified therein (the "Triumph Agreement").
10.34(2) Waiver and Amendment to the Triumph Agreement dated as of
March 13, 1997.
10.35(4) Second Waiver and Amendment to the Triumph Agreement dated as
of May 13, 1998.
10.36(2) Series F Convertible Preferred Stock and Warrant Purchase
Agreement dated as of June 28, 1996 between the Company and
certain purchasers identified therein, as amended by Amendment
No. 1 dated as of June 28, 1996 and Amendment No. 2 dated as
of February 3, 1997.
10.37(2) Form of Common Stock Purchase Warrant issued to Chestnut Partners
Inc. on February 28, 1997.
10.38(2) Form of Common Stock Purchase Warrant issued to Banque Paribas
on February 28, 1997.
10.39(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.
10.40(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.
10.41(5) Form of Common Stock Purchase Warrant issued by the Company on
July 1, 1999, December 30, 1999 and February 14, 2000 under the
Third Amendment to the May 1998 Securities Purchase Agreement
(included in Exhibit 10.11).
10.42(6) Form of Common Stock Purchase Warrant issued by the Company on
October 15, 1999 and December 30, 1999 under the Fourth Amendment
to the May 1998 Securities Purchase Agreement.
10.43(2)+ Asset Purchase Agreement dated as of March 25, 1997 (the "Asset
Purchase Agreement") between the Company and Upsher-Smith
Laboratories, Inc. ("Upsher-Smith"), which includes the form of
Manufacturing Agreement between the Company and Upsher-Smith as
Exhibit E thereto.
10.44(12)+ Addendum to Asset Purchase Agreement dated as of July 10, 1997
between the Company and Upsher-Smith.
10.45(6) First Amendment to Lease between New Boston Wilmar Limited
Partnership and the Company dated as of September 18, 1997.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
(1) Incorporated herein by reference to the Exhibits to the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission (the
"Commission") on January 16, 2001.
(2) Incorporated herein by reference to the Exhibits to the Company's Registration
Statement on Form S-1 (File No. 333-23319).
(3) Incorporated herein by reference to the Exhibits to the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on
February 22, 1999.
(4) Incorporated herein by reference to the Exhibits to the Company's Current
Report on Form 8-K filed with the Commission on June 2, 1998.
(5) Incorporated herein by reference to the Exhibits to Post-Effective Amendment
No. 1 to the Company's Registration Statement on Form S-4 (File No. 333-79383)
filed with the Commission on July 2, 1999.
(6) Incorporated herein by reference to the Exhibits to the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission (the
"Commission") on March 30, 2000.
(7) Incorporated herein by reference to Annex A to Post-Effective Amendment No. 1
to the Company's Registration Statement on Form S-4 (File No. 333-79383) filed
with the Commission on July 2, 1999.
(8) Incorporated herein by reference to the Exhibits to the Company's Current
Report on Form 8-K filed with the Commission on November 4, 1999.
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(9) Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Annual Report on Form 10-K.
(10) Incorporated herein by reference to Annex D to the Company's Registration
Statement on Form S-4 (File No. 333-79383).
(11) Incorporated herein by reference to the Company's Registration Statement on
Form S-4 (File No. 333-79383).
(12) Incorporated herein by reference to the Exhibits to the Company's Current
Report on Form 8-K filed with the Commission on July 25, 1997.
+ Confidential treatment granted as to certain portions, which portions were
omitted and filed separately with the Commission.
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