SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-18311
NEUROGEN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2845714
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 Northeast Industrial Road
Branford, Connecticut 06405
(Address of principal executive offices) (Zip Code)
(203) 488-8201
(Registrant's telephone number, including area code)
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
--- ---
As of August 14, 1998 the registrant had 14,427,279 shares of Common Stock
outstanding.
<PAGE>
NEUROGEN CORPORATION
INDEX
Page
Number
Part I - Financial Information
Item 1. Financial Statements............................................... 1
Balance Sheets at June 30, 1998 and
December 31, 1997................................................. 1,2
Statements of Operations for the three-month and six-month
periods ended June 30, 1998 and 1997 ............................. 3
Statements of Cash Flows for the six-month periods ended
June 30, 1998 and 1997 ........................................... 4
Notes to Financial Statements...................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 6-12
Part II - Other Information
Item 1. Legal Proceedings................................................. 13
Item 2. Changes in Securities............................................. 13
Item 3. Defaults upon Senior Securities................................... 13
Item 4. Submission of Matters to a Vote of Security Holders............... 13-14
Item 5. Other Information................................................. 14
Item 6. Exhibits and Reports on Form 8-K.................................. 14
Signature ................................... ........................... 16
Exhibit Index ........................................................... 17-19
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NEUROGEN CORPORATION
BALANCE SHEETS
(In thousands)
JUNE 30, 1998 DECEMBER 31, 1997
Assets (UNAUDITED) (AUDITED)
<S> <C> <C>
-------------- ---------------
Current assets:
Cash and cash equivalents $ 55,291 $ 66,924
Marketable securities 24,008 17,227
Receivables from corporate partners 322 1,192
Other current assets 940 1,122
------------- ---------------
Total current assets 80,561 86,465
Property, plant & equipment:
Land and land improvements 542 542
Building and building improvements 16,579 16,377
Leasehold improvements 4,026 4,026
Equipment 9,167 8,422
Furniture 518 484
--------------- ----------------
30,832 29,851
Less accumulated depreciation & amortization 6,086 4,950
--------------- ----------------
Net property, plant and equipment 24,746 24,901
Other assets, net 433 503
--------------- ----------------
$ 105,740 $ 111,869
=============== ================
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
NEUROGEN CORPORATION
BALANCE SHEETS
(In thousands, except per share data)
JUNE 30, 1998 DECEMBER 31, 1997
(UNAUDITED) (AUDITED)
----------------- -----------------
<S> <C> <C>
Liabilities & Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,662 $ 4,418
Unearned revenue from corporate partners 260 200
Current portion of mortgage payable 180 205
----------------- ------------------
Total current liabilities 2,102 4,823
Mortgage payable, excluding current portion - 74
Other compensation 54 54
----------------- ------------------
Total liabilities 2,156 4,951
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $.025 per share
Authorized 20,000 shares; none issued - -
Common stock, par value $.025 per share
Authorized 30,000 shares; issued and outstanding
14,422 shares at June 30, 1998 and 14,390 shares
at December 31, 1997 361 360
Additional paid-in capital 110,809 110,231
Accumulated deficit (6,486) (2,776)
Deferred compensation (1,097) (894)
Unrealized loss on marketable securities (3) (3)
----------------- ------------------
Total stockholders' equity 103,584 106,918
----------------- ------------------
$ 105,740 $ 111,869
================= ==================
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
NEUROGEN CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
---------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Operating revenues:
License fees $ - $ - $ - $ 3,000
Research and development 3,185 3,949 6,400 7,928
---------------- --------------- ------------- -------------
Total operating revenues 3,185 3,949 6,400 10,928
Operating expenses:
Research and development 5,196 4,505 10,200 8,874
General and administrative 1,093 965 2,091 1,920
---------------- ---------------- ------------- -------------
Total operating expenses 6,289 5,470 12,291 10,794
---------------- ---------------- ------------- -------------
Operating income (loss) (3,104) (1,521) (5,891) 134
Other income (expense):
Investment income 1,102 1,276 2,193 2,517
Interest expense (5) (10) (11) (21)
---------------- ---------------- ------------- -------------
Total other income, net 1,097 1,266 2,182 2,496
---------------- ---------------- ------------- -------------
Income (loss) before provision for income taxes (2,007) (255) (3,709) 2,630
Provision for income taxes - - - 35
---------------- ---------------- ------------- -------------
Net income (loss) $ (2,007) $ (255) $ (3,709) $ 2,595
================ ================ ============= =============
Earnings (loss) per share:
Basic $ (0.14) $ (0.02) $ (0.26) $ 0.18
================ ================ ============= =============
Diluted $ (0.14) $ (0.02) $ (0.26) $ 0.17
================ ================ ============= =============
Shares used in calculation of earnings (loss) per share:
Basic 14,411 14,339 14,399 14,313
================ ================ ============= =============
Diluted 14,411 14,339 14,399 15,345
================ ================ ============= =============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
NEUROGEN CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
(UNAUDITED) (UNAUDITED)
------------------ ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,709) $ 2,595
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization expense 1,386 802
Net gain on sale of assets - 3
Changes in operating assets and liabilities:
Increase (decrease) in accounts payable and accrued expenses (2,756) 747
Increase (decrease) in unearned revenue from corporate partners 60 (3,900)
Decrease in other current assets 181 45
(Increase) decrease in receivable from corporate partners 870 (251)
Decrease in other assets, net 59 32
----------------- ---------------
Net cash provided by (used in) operating activities (3,909) 73
Cash flows from investing activities:
Purchase of plant and equipment (981) (5,025)
Purchases of marketable securities (18,077) (24,383)
Maturities and sales of marketable securities 11,298 19,662
Proceeds from sale of asset - 25
----------------- ---------------
Net cash used in investing activities (7,760) (9,721)
Cash flows from financing activities:
Exercise of employee stock options 135 593
Principal payments under mortgage payable (99) (87)
----------------- ---------------
Net cash provided by financing activities 36 506
----------------- ---------------
Net decrease in cash and cash equivalents (11,633) (9,142)
Cash and cash equivalents at beginning of period 66,924 62,823
----------------- ---------------
Cash and cash equivalents at end of period $ 55,291 $ 53,681
================= ===============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Neurogen Corporation
Notes to Financial Statements
June 30, 1998
(Unaudited)
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial statements have been prepared from the books
and records of Neurogen Corporation (the "Company") in accordance with
generally accepted accounting principles for interim financial
information pursuant to Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair
presentation have been included. Interim results are not necessarily
indicative of the results that may be expected for the fiscal year.
(2) EARNINGS (LOSS) PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per
Share", which became effective in 1997, requires presentation of two
calculations of earnings per common share. "Basic" earnings per common
share equals net income divided by weighted average common shares
outstanding during the period. "Diluted" earnings per common share
equals net income divided by the sum of weighted average common shares
outstanding during the period plus common stock equivalents,
if dilutive. Common stock equivalents are shares assumed to be
issued if outstanding stock options were exercised. The difference
between the shares used for the basic and dilutive calculation for
the six months ended June 30, 1997 was the inclusion of 1,031,068
common equivalent shares.
(3) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no material impact on the
Company's net income or shareholders' equity. Statement 130 requires
unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in
shareholders' equity to be included in other comprehensive income.
For the three months ended June 30, 1998 and 1997, total comprehensive
loss was ($1,934,000) and ($101,000). For the six months ended June 30,
1998 and 1997, total comprehensive income (loss) was ($3,673,000) and
$2,700,000, respectively.
5
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Since its inception in September 1987, Neurogen has been engaged in
the discovery and development of drugs. The Company has not derived any
revenue from product sales and, excluding the effect of one-time
license fees received in 1996 from Schering-Plough Corporation
("Schering-Plough") and American Home Products Corporation ("American
Home Products") and from Schering-Plough and Pfizer Inc. ("Pfizer") in
1995, expects to incur significant losses in most years prior to
deriving any such product revenues. Revenues to date have come from
three collaborative research agreements entered into with Pfizer,
(the "Pfizer Agreements"), one collaboration with Schering-Plough,
one license agreement with American Home Products and from interest
income.
RESULTS OF OPERATIONS
Results of operations may vary from period to period depending on
numerous factors, including the timing of income earned under existing
or future strategic alliances, joint ventures or financings, if any,
the progress of the Company's research and development projects,
technological advances and determinations as to the commercial
potential of proposed products. Neurogen expects research and
development costs to increase significantly over the next several years
as its drug development programs progress. In addition, general and
administrative expenses necessary to support the expanded research and
development activities are expected to increase for the foreseeable
future.
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
The Company's operating revenues decreased to $3.2 million for
the three months ended June 30, 1998 as compared to $3.9 million for
the same period in 1997. Research and development revenues decreased in
1998 $0.7 million, to $3.2 million due primarily to a scheduled
reduction in funding under the 1994 Pfizer Agreement partially
offset by increased revenues recognized from the December 1996
extension of the 1992 and 1994 Pfizer Agreements as described below,
and, in the case of Neurogen's NPY obesity collaboration with Pfizer,
a reduction in reimbursement of costs under a cost sharing arrangement
for certain expenses associated with human clinical trials conducted
by Neurogen. The amount of such reimbursements may fluctuate
significantly depending on the level of clinical trials being
conducted. The amount of scheduled research funding may also fluctuate
significantly depending on the extent to which Pfizer elects to extend
the research programs.
6
<PAGE>
Research and development expenses increased 15 percent to $5.2
million for the three-month period ended June 30, 1998 as compared to
the same period in 1997. The increase is primarily due to increases in
research and development personnel as well as the Company's further
expansion of its AIDD (Accelerated Intelligent Drug Design Program) for
the discovery of new drug candidates. Research and development
expenses represented 83 percent of total operating expenses in 1998
and 82 percent in 1997.
General and administrative expenses increased 13 percent to
$1.1 million for the three-month period ended June 30, 1998 as
compared to $1.0 million for the same period in 1997. The increase
is due to an increased level of administrative expenses necessary
to support a growing research staff.
Other income, consisting primarily of interest income, and
gains and losses from invested cash and marketable securities,
decreased 13 percent for the second quarter of 1998 as compared to
the same period in 1997 due to a lower level of invested funds and
slightly lower interest rates.
The Company recognized a net loss of $2.0 million for the
three months ended June 30, 1998 as compared with a net loss of $.3
million for the same period in 1997. The decrease in earnings is
primarily due to a decrease in operating revenues, and an increase in
research and development expenses for the second quarter of 1998 due
to the factors described above.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
The Company's operating revenues decreased to $6.4 million
for the six months ended June 30, 1998 from $10.9 million for the same
period in 1997, which included the recognition of a nonrecurring
license fee of $3.0 million. License fees in 1997 represented the
recognition of a previously unearned $3.0 million fee from
Schering-Plough for access to a portion of Neurogen's combinatorial
chemistry libraries. The decrease in operating revenues was due to the
impact of this nonrecurring license fee, together with the reduction
of research and development revenues described below. Research and
development revenues decreased $1.5 million, or 19 percent, to
$6.4 million. This decrease is due primarily to a scheduled
reduction in funding under the 1994 Pfizer Agreement partially offset
by increased revenues recognized from the December 1996
extension of the 1992 and 1994 Pfizer Agreements as described below,
and, in the case of Neurogen's NPY obesity collaboration with
Pfizer, a reduction in reimbursement of costs under a cost sharing
arrangement for certain expenses associated with human clinical trials
conducted by Neurogen. The amount of such reimbursements may fluctuate
significantly depending on the level of clinical trials being
conducted. The amount of scheduled research funding may also fluctuate
significantly depending on the extent to which Pfizer or Schering-
Plough elect to extend the research programs under respective
collaborations.
7
<PAGE>
Research and development expenses increased 15 percent to
$10.2 million for the six months ended June 30, 1998 as compared to the
same period in 1997. This increase is primarily due to increases in
research and development personnel as well as the Company's further
expansion of its AIDD (Accelerated Intelligent Drug Design Program)
for the discovery of new drug candidates. Research and development
expenses represented 83 percent of total operating expenses for the
six-month period ended June 30, 1998 as compared to 82 percent for
the same period in 1997.
General and administrative expenses increased 9 percent to
$2.1 million for the six months ended June 30, 1998 as compared to the
same period in 1997. This increase is due to an increased level of
administrative expenses necessary to support a growing research staff.
Other income, consisting primarily of interest income, and
gains and losses from invested cash and marketable securities,
decreased to $2.2 million for the six months ended June 30, 1998 as
compared to $2.5 million for the same period in 1997, due to a lower
level of invested funds and slightly lower interest rates.
The Company recognized a net loss of $3.7 million for the six
months ended June 30, 1998 as compared with net income of $2.6
million for the same period in 1997. The change in earnings is
primarily due to the decrease in operating revenues, as explained
above, and an increase in research and development expenses for six
months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998 and December 31, 1997, cash, cash equivalents and
marketable securities were in the aggregate $79.3 million and $84.2
million respectively. While the Company's aggregate level of cash, cash
equivalents and marketable securities decreased slightly during the
second quarter of 1998, these levels have fluctuated significantly in
the past and are expected to do so in the future as a result of the
factors described below.
Neurogen's cash requirements to date have been met by the proceeds
of its financing activities, amounts received pursuant to collaborative
arrangements and interest earned on invested funds. The Company's
financing activities include three private placement offerings of its
common stock prior to its initial public offering, underwritten public
offerings of the Company's common stock in 1989, 1991 and 1995, and the
private sale of common stock to Pfizer in connection with entering into
the Pfizer Agreements and to American Home Products under the American
Home Products Agreement. Total funding received from these financing
activities was approximately $105.6 million. The Company's expenditures
have been primarily to fund research and development and general and
administrative expenses and to construct and equip its research and
development facilities.
8
<PAGE>
In the first quarter of 1992, the Company entered into a
collaborative agreement (the "1992 Pfizer Agreement") pursuant to which
Pfizer made a $13.8 million equity investment in the Company. Under
this agreement, the Company received $4.6 million in each of five
years from 1992 through 1996. The Company has received and is receiving
additional funding pursuant to the December 1996 extension, as
described below. Neurogen could also receive milestone payments
of up to $12.5 million if certain development and regulatory
objectives are achieved regarding its products subject to the
collaboration. In return, Pfizer received the exclusive rights to
manufacture and market collaboration anxiolytics and cognition
enhancers that act through the family of receptors which interact with
the neuro-transmitter gamma-aminobutyric acid, or GABA. Pfizer will
pay Neurogen royalties based upon net sales levels, if any, for such
products. As of June 30, 1998, Pfizer had provided $29.3 million of
research funding to the Company pursuant to the 1992 Pfizer Agreement,
as extended, (as described below) and $0.3 million due to the
completion of a clinical development milestone.
Neurogen and Pfizer entered into their second collaborative
agreement (the "1994 Pfizer Agreement") in July 1994, pursuant to which
Pfizer made an additional $9.9 million equity investment in the
Company. Under this agreement, the Company received approximately $7.4
million during the three-year period which commenced July 1, 1994, to
fund Neurogen's sleep disorder program. The Company is receiving
additional funding pursuant to the December 1996 extension, as
described below. Neurogen could also receive milestone payments of up
to $3.3 million if certain development and regulatory objectives are
achieved regarding its products subject to the collaboration. In
return, Pfizer received the exclusive rights to manufacture and market
GABA-based sleep disorder products for which it will pay Neurogen
royalties based upon net sales levels, if any. As of June 30, 1998,
Pfizer had provided $9.5 of research funding to the Company pursuant
to the 1994 Pfizer Agreement, as extended (as described below).
In 1996 and 1997, Neurogen and Pfizer extended the 1992 and
1994 agreements. Pursuant to the extension agreements, Neurogen
received $5.4 million in 1997 and expects to receive $6.1 million in
1998 for research and development funding of the Company's anxiolytic,
cognitive enhancer and sleep programs.
Under both the 1992 Pfizer Agreement and the 1994 Pfizer Agreement,
in addition to making the equity investments and the research and
milestone payments noted above, Pfizer is responsible for funding the
cost of all clinical development and the manufacturing and marketing,
if any, of drugs developed from the collaborations.
9
<PAGE>
Neurogen and Pfizer entered into their third collaborative
agreement (the "1995 Pfizer Agreement") in November 1995, pursuant to
which Pfizer made an additional $16.5 million equity investment in the
Company bringing Pfizer's ownership of the Company's common stock up to
approximately 21 percent and paid a $3.5 million license fee. The
Company is scheduled to receive approximately $2.4 million per year
during the three consecutive one-year periods which commenced November
1, 1995, to fund Neurogen's neuropeptide Y (NPY) eating disorders
program. Pfizer has recently elected to extend this research program
for an additional one-year period through October 1999 for which it
will pay Neurogen $2.4 million to fund such research, and to pay an
additional $1.0 million to expand the research program for the period
of June 1998 through October 1999. Neurogen may also receive up to
an additional $2.4 million for a fifth year should Pfizer exercise
its option to further extend the research program. Neurogen could
also receive milestone payments of up to approximately $28 million
if certain development and regulatory objectives are achieved regarding
its products subject to the collaboration. Pfizer received the
exclusive worldwide rights to manufacture and market NPY-based
collaboration compounds, subject to certain rights retained by
Neurogen. Pursuant to the 1995 Pfizer Agreement, Neurogen will fund
a minority share of early stage development costs, has retained the
right to manufacture any collaboration products in NAFTA countries, and
has retained a profit sharing option with respect to product sales in
NAFTA countries. If Neurogen exercises the profit sharing option, it
will fund a portion of the cost of late stage clinical trials and
marketing costs and in return receive a specified percentage of any
profit generated by sales of collaboration products in NAFTA countries.
If Neurogen chooses not to exercise its profit-sharing option, Pfizer
will pay Neurogen royalties on drugs marketed in NAFTA countries
and will fund a majority of early stage and all late stage development
and marketing expenses. In either case, Neurogen would be entitled
to royalties on drugs marketed in non-NAFTA countries. As of June 30,
1998, Pfizer had provided $6.7 million in research funding pursuant
to the 1995 Pfizer Agreement.
In June 1995, Neurogen and Schering-Plough entered into an
agreement (the "Schering-Plough Agreement") to collaborate in the
discovery and development of drugs for the treatment of schizophrenia
and other disorders which act through the dopamine family of receptors.
Pursuant to the Schering-Plough Agreement, the Company received
one-time license fees of $14.0 million for rights relating to
Neurogen's dopamine program and $3.0 million in each of 1995 and 1996
for the right to test certain of Neurogen's combinatorial chemistry
libraries in selected non-CNS assays. Neurogen received scheduled
funding aggregating approximately $9.8 million during the three-year
period from June 1995 through June 1998, for research and development
funding of the Company's dopamine program. In July 1998, Neurogen
announced that the Company and Schering-Plough had concluded the
research phase of the collaboration and that Schering-Plough plans to
continue the development of drug candidates identified during such
research. Accordingly, Neurogen has begun reassigning personnel
formerly conducting such research to other Neurogen projects and the
funding of $3.6 million per year formerly being received from Schering-
Plough has come to its scheduled conclusion as of July 1, 1998.
10
<PAGE>
Neurogen could also receive milestone payments of up to approximately
$32 million if certain development and regulatory objectives are
achieved regarding its products subject to the collaboration. In
return, Schering-Plough received the exclusive worldwide license
to market products subject to the collaboration. Neurogen
retained the rights to receive royalties based upon net sales levels,
if any, and an option to manufacture products for the United
States market. As of June 30, 1998, Schering-Plough had provided
$10.8 million in research funding pursuant to the Schering-Plough
Agreement. In addition to the payments described above, Schering-Plough
is responsible for funding the cost of all clinical development and
marketing, if any, of drugs subject to the collaboration.
In the fourth quarter of 1996, Neurogen entered into an agreement
with American Home Products acting through its Wyeth-Ayerst
Laboratories division. Under the terms of the agreement, Neurogen
received $0.8 million in license fees for ADCI, a small molecule
pharmaceutical that Neurogen has been developing for the treatment
of epilepsy and related disorders, and $0.8 million for 37,442 shares
of common stock. Neurogen may also receive up to $11.0 million in the
Company's license fees, equity investment and milestone payments on
worldwide sales of ADCI.
The Company plans to use its cash balance for its research and
development activities, working capital and general corporate purposes.
Neurogen anticipates that its current cash balance, as supplemented by
research funding pursuant to the Pfizer Agreements and the
Schering-Plough Agreement, will be sufficient to fund its current and
planned operations through 2000. However, Neurogen's funding
requirements may change and will depend upon numerous factors,
including, but not limited to, the progress of the Company's research
and development programs, the timing and results of preclinical testing
and clinical studies, the timing of regulatory approvals, technological
advances, determinations as to the commercial potential of its proposed
products, the status of competitive products and the ability of the
Company to establish and maintain collaborative arrangements with
others for the purpose of funding certain research and development
programs, conducting clinical studies, obtaining regulatory approvals
and, if such approvals are obtained, manufacturing and marketing
products. The Company anticipates that it may augment its cash balance
through financing transactions, including the issuance of debt or
equity securities, and further corporate alliances. No arrangements
have been entered into for any future financing, and no assurances
can be given that adequate levels of additional funding can be
obtained on favorable terms, if at all.
11
<PAGE>
As of December 31, 1997, the Company had approximately $13.5
million of net operating loss carryforwards available for federal
income tax purposes which expire from the years 2004 through 2012. The
Company had approximately $11.4 million of Connecticut state tax net
operating loss carryforwards as of December 31, 1997 which expire in
the years 1998 through 2002. Because of "change in ownership"
provisions of the Tax Reform Act of 1986, the Company's utilization of
its net operating loss and research and development credit
carryforwards may be subject to an annual limitation in future periods.
The Company has conducted a review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue
and is developing an implementation plan to resolve the issue. The
"Year 2000" problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of
the Company's programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations using existing
software and the need to convert to new software. While the Company
cannot accurately predict any impact the Year 2000 problem may have on
third parties with whom the Company conducts business, the Company
believes that the cost of making its information systems "2000-ready"
will not be material.
12
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
Not applicable for the second quarter ended June 30, 1998.
Item 2. Changes in Securities
Not applicable for the second quarter ended June 30, 1998.
Item 3. Defaults upon Senior Securities
Not applicable for the second quarter ended June 30, 1998.
Item 4. Submission of Matters to a Vote of Security Holders
On May 27, 1998, the Company held its annual meeting of stockholders (i) to
elect a board of eleven directors (Proposal 1); (ii) to ratify the appointment
by the Board of Directors of Ernst & Young, LLP as the independent auditors for
the Company for the fiscal year ending December 31, 1998 (Proposal 2); and (iii)
to adopt a proposed amendment to the Neurogen Corporation 1993 Omnibus
Incentive Plan (the "Plan") which as originally adopted provided for the
granting of awards aggregating up to 3,000,000 shares of Common Stock. As of
May 1998, approximately 400,000 shares remained available for future awards.
The proposed amendment would have replenished the plan by adding 4,000,000
shares.
Prior to the shareholder meeting and upon the recommendation of management,
the Company's Board of Directors voted to withdraw proposal number 3 from
consideration. At the shareholders meeting, management stated that it believed
that a smaller addition to the Plan than originally bought would provide for
more regular shareholder oversight and assessment of Company performance. The
Board of Directors indicated that it expects to make a new proposal to the
shareholders possibly later in 1998.
13
<PAGE>
The stockholders elected the persons named below, the Company's nominees
for directors, as directors of the Company, casting votes in favor of such
nominees or withholding votes as indicated:
Votes in Favor Votes Withheld
-------------- --------------
Barry M. Bloom, Ph.D. 13,170,046 45,330
Robert N. Butler 13,170,646 44,730
Frank C. Carlucci 13,170,646 44,730
Jeffrey J. Collinson 13,170,646 44,730
Robert M. Gardiner 13,170,646 44,730
Mark Novitch, M.D. 13,170,646 44,730
Harry H. Penner, Jr. 13,170,646 44,730
Robert H. Roth, Ph.D. 13,170,646 44,730
John Simon 13,170,646 44,730
John F. Tallman, Ph.D. 13,170,646 44,730
Suzanne H. Woolsey, Ph.D. 13,170,646 44,730
The stockholders approved Proposal 2, voting as follows:
Affirmative Votes Negative Votes Votes Abstained
----------------- -------------- ---------------
Proposal 2 12,493,493 718,753 3,130
Item 5. Other information
Not applicable for the second quarter June 30, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index on page 11.
(b) None
14
<PAGE>
SAFE HARBOR STATEMENT
Statements which are not historical facts, including statements about the
Company's confidence and strategies, the status of various product development
programs, the sufficiency of cash to fund planned operations and the Company's
expectations concerning its development compounds, drug discovery technologies
and opportunities in the pharmaceutical marketplace are "forward looking
statements" within the meaning of the Private Securities Litigations Reform Act
of 1995 that involve risks and uncertainties and are not guarantees of future
performance. These risks include, but are not limited to, difficulties or delays
in development, testing, regulatory approval, production and marketing of any of
the Company's drug candidates, the failure to attract or retain scientific
management personnel, any unexpected adverse side effects or inadequate
therapeutic efficacy of the Company's drug candidates which could slow or
prevent product development efforts, competition within the Company's
anticipated product markets, the Company's dependence on corporate partners with
respect to research and development funding, regulatory filings and
manufacturing and marketing expertise, the uncertainty of product development in
the pharmaceutical industry, inability to obtain sufficient funds through future
collaborative arrangements, equity or debt financings or other sources to
continue the operation of the Company's business, risk that patents and
confidentiality agreements will not adequately protect the Company's
intellectual property or trade secrets, dependence upon third parties for the
manufacture of potential products, inexperience in manufacturing and lack of
internal manufacturing capabilities, dependence on third parties to market
potential products, lack of sales and marketing capabilities, potential
unavailability or inadequacy of medical insurance or other third-party
reimbursement for the cost of purchases of the Company's products, and other
risks detailed in the Company's Securities and Exchange Commission filings,
including its Annual Report on Form 10-K for the year ended December 31, 1997,
each of which could adversely affect the Company's business and the accuracy of
the forward-looking statements contained herein.
15
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEUROGEN CORPORATION
By:/s/ STEPHEN R. DAVIS
------------------------
Stephen R. Davis
Vice President-Finance
and Chief Financial Officer
Date: August 14, 1998
16
<PAGE>
Exhibit Index
Exhibit
- -------
Number
- ------
10.1 - Neurogen Corporation Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-K for the fiscal
year ended December 31, 1991).
10.2 - Form of Stock Option Agreement currently used in connection with the
grant of options under Neurogen Corporation Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the Company's Form 10-K
for the fiscal year ended December 31, 1992).
10.3 - Neurogen Corporation 1993 Omnibus Incentive Plan, as amended
(incorporated by reference to Exhibit 10.3 to the Company's Form 10-K
for the fiscal year ended December 31, 1993).
10.4 - Form of Stock Option Agreement currently used in connection with the
grant of options under Neurogen Corporation 1993 Omnibus Incentive
Plan (incorporated by reference to Exhibit 10.4 to the Company's Form
10-K for the fiscal year ended December 31, 1993).
10.5 - Neurogen Corporation 1993 Non-Employee Directors Stock Option
Program (incorporated by reference to Exhibit 10.5 to the Company's
Form 10-K for the fiscal year ended December 31, 1993).
10.6 - Form of Stock Option Agreement currently used in connection with the
grant of options under Neurogen Corporation 1993 Non-Employee
Directors Stock Option Program (incorporated by reference to Exhibit
10.6 to the Company's Form 10-K for the fiscal year ended December 31,
1993).
10.7 - Employment Contract between the Company and Harry H. Penner, Jr.,
dated as of October 12, 1993 (incorporated by reference to Exhibit
10.7 to the Company's Form 10-K for the fiscal year ended December 31,
1993).
10.8 - Employment Contract between the Company and John F. Tallman, dated as
of December 1, 1993 (incorporated by reference to Exhibit 10.25 to the
Company's Form 10-Q for the quarterly period
ended September 30, 1994).
10.9 - Open-End Mortgage Deed and Security Agreement between the Company and
Orion Machinery & Engineering Corp., dated March 16, 1989
(incorporated by reference to Exhibit 10.15 to Registration Statement
No. 33-29709 on Form S-1).
10.10 - Form of Proprietary Information and Inventions Agreement
(incorporated by reference to Exhibit 10.31 to Registration
Statement No. 33-29709 on Form S-1).
10.11 - Warrant to Purchase 47,058 Shares of Common Stock to MMC/GATX
Partnership No. I, dated February 20, 1991 (incorporated by reference
to Exhibit 10.34 to the Company's Form 10-K for the fiscal year ended
December 31, 1990).
17
<PAGE>
10.12 - Collaborative Research Agreement and License and Royalty Agreement
between the Company and Pfizer Inc, dated as of January 1, 1992
(confidential treatment requested) (incorporated by reference to
Exhibit 10.35 to the Company's Form 10-K for the fiscal year ended
December 31, 1991).
10.13 - License Agreement between the Company and the National Technical
Information Service, dated as of January 1, 1992 (incorporated by
reference to Exhibit 10.36 to the Company's Form 10-K
for the fiscal year ended December 31, 1991).
10.14 - Cooperative Research and Development Agreement between the Company and
the National Institutes of Health, dated as of January 21, 1993
(incorporated by reference to Exhibit 10.37 to the Company's Form 10-K
for the fiscal year ended December 31, 1991).
10.15 - Letter Agreement between the Company and Barry M. Bloom, dated January
12, 1994 (incorporated by reference to Exhibit 10.25 to the Company's
Form 10-K for the fiscal year ended December 31, 1993).
10.16 - Letter Agreement between the Company and Robert H. Roth, dated April
14, 1994 (incorporated by reference to Exhibit 10.26 to the Company's
Form 10-K for the fiscal year ended December 31, 1994).
10.17 - Collaborative Research Agreement and License and Royalty Agreement
between the Company and Pfizer Inc, dated as of July 1, 1994
(confidential treatment requested) (incorporated by reference of
Exhibit 10.1 to the Company's Form 10-Q for the quarterly period ended
June 30, 1994).
10.18 - Stock Purchase Agreement between the Company and Pfizer dated as of
July 1, 1994 (incorporated by reference to Exhibit 10.2 to the
Company's Form 10-Q for the quarterly period ended June 30, 1994).
10.19 - Registration Rights and Standstill Agreement among the Company and the
Persons and Entities listed on Schedule I thereto, dated as of July
11, 1994 (incorporated by reference to Exhibit 10.29 to the Company's
Form 10-Q for the quarterly period ended September 30, 1994).
10.20 - Collaboration and License Agreement and Screening Agreement between
the Company and Schering-Plough Corporation (confidential treatment
requested) (incorporated by reference to Exhibit 10.1 to the Company's
Form 8-K dated July 28, 1995).
10.21 - Lease Agreement between the Company and Commercial Building Associates
dated as of August 30, 1995 (incorporated by reference to Exhibit
10.27 to the Company's Form 10-Q for the quarterly period ended
September 30, 1995).
10.22 - Collaborative Research Agreement between the Company and Pfizer dated
as of November 1, 1995 (confidential treatment requested)
(incorporated by reference to Exhibit 10.1 of the Company's Form 8-K
dated November 1, 1995).
18
<PAGE>
10.23 - Development and Commercialization Agreement between the Company and
Pfizer dated as of November 1, 1995 (confidential treatment requested)
(incorporated by reference to Exhibit 10.2 of the Company's Form 8-K
dated November 1, 1995).
10.24 - Stock Purchase Agreement between the Company and Pfizer dated as of
November 1, 1995 (incorporated by reference to Exhibit 10.3 of
the Company's Form 8-K dated November 1, 1995).
10.25 - Licensing Agreement dated as of November 25, 1996 between American
Home Products Corporation, acting through its Wyeth-Ayerst
Laboratories Division, and Neurogen Corporation (CONFIDENTIAL
TREATMENT REQUESTED) (incorporated by reference to Exhibit 10.1 of
the Company's Form 8-K dated March 31, 1997).
10.26 - Stock Purchase Agreement dated as of November 25, 1996 between
American Home Products Corporation, acting through its Wyeth-Ayerst
Laboratories Division, and Neurogen Corporation (CONFIDENTIAL
TREATMENT REQUESTED) (incorporated by reference to Exhibit 10.1 of
the Company's Form 8-K dated March 31, 1997).
27.1 - Financial Data Schedule
19
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