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 September 30, 1999
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 November 15, 1999 the registrant had 14,773,555 shares of Common
Stock outstanding.
<PAGE>
NEUROGEN CORPORATION
INDEX
Page
Number
Part I - Financial Information
Item 1. Financial Statements............................................... 1
Balance Sheets at September 30, 1999 and
December 31, 1998................................................. 1,2
Statements of Operations for the three-month and nine-month
periods ended September 30, 1999 and 1998 ........................ 3
Statements of Cash Flows for the nine-month periods ended
September 30, 1999 and 1998 ...................................... 4
Notes to Financial Statements...................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 6-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 13
Part II - Other Information
Item 1. Legal Proceedings................................................. 14
Item 2. Changes in Securities and Use of Proceeds......................... 14
Item 3. Defaults upon Senior Securities................................... 14
Item 4. Submission of Matters to a Vote of Security Holders............... 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)
SEPTEMBER 30, 1999 DECEMBER 31, 1998
Assets (UNAUDITED) (AUDITED)
<S> <C> <C>
-------------- ---------------
Current assets:
Cash and cash equivalents $ 51,510 $ 26,066
Marketable securities 18,011 48,944
Receivables from corporate partners 346 656
Other current assets 760 1,298
------------- ---------------
Total current assets 70,627 76,964
Property, plant & equipment:
Land and land improvements 542 542
Building and building improvements 16,826 16,704
Leasehold improvements 4,026 4,026
Equipment 10,785 9,949
Furniture 566 534
--------------- ----------------
32,745 31,755
Less accumulated depreciation & amortization 9,146 7,265
--------------- ----------------
Net property, plant and equipment 23,599 24,490
Other assets, net 512 356
--------------- ----------------
$ 94,738 $ 101,810
=============== ================
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
NEUROGEN CORPORATION
BALANCE SHEETS
(In thousands, except per share data)
SEPTEMBER 30, 1999 DECEMBER 31, 1998
(UNAUDITED) (AUDITED)
----------------- -----------------
<S> <C> <C>
Liabilities & Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,762 $ 2,861
Unearned revenue from corporate partner 4,570 260
Current portion of mortgage payable - 74
----------------- ------------------
Total current liabilities 6,332 3,195
Other compensation 48 48
----------------- ------------------
Total liabilities 6,380 3,243
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $.025 per share
Authorized 2,000 shares; none issued - -
Common stock, par value $.025 per share
Authorized 30,000 shares; issued and outstanding
14,767 shares at September 30, 1999 and 14,656 shares
at December 31, 1998 369 366
Additional paid-in capital 114,431 113,901
Accumulated deficit (23,021) (12,234)
Deferred compensation (3,264) (3,540)
Accumulated other comprehensive income (157) 74
----------------- ------------------
Total stockholders' equity 88,358 98,567
----------------- ------------------
$ 94,738 $ 101,810
================= ==================
</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 NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPT 30, 1999 SEPT 30, 1998 SEPT 30, 1999 SEPT 30, 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
---------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Operating revenues:
License fees $ 250 $ - $ 250 $ -
Research and development 2,380 2,340 7,359 8,740
---------------- --------------- ------------- -------------
Total operating revenues 2,630 2,340 7,609 8,740
Operating expenses:
Research and development 5,910 5,327 17,674 15,527
General and administrative 1,204 960 3,339 3,051
---------------- ---------------- ------------- -------------
Total operating expenses 7,114 6,287 21,013 18,578
---------------- ---------------- ------------- -------------
Operating loss (4,484) (3,947) (13,404) (9,838)
Other income (expense):
Investment income 819 1,118 2,620 3,311
Interest expense - (4) (2) (15)
---------------- ---------------- ------------- -------------
Total other income, net 819 1,114 2,618 3,296
---------------- ---------------- ------------- -------------
Loss before provision for income taxes (3,665) (2,833) (10,786) (6,542)
Provision for income taxes - - - -
---------------- ---------------- ------------- -------------
Net loss $ (3,665) $ (2,833) $ (10,786) $ (6,542)
================ ================ ============= =============
Net loss per share:
Basic (1) $ (0.25) $ (0.20) $ (0.74) $ (0.45)
================ ================ ============= =============
Diluted (1) $ (0.25) $ (0.20) $ (0.74) $ (0.45)
================ ================ ============= =============
Shares used in calculation of loss per share:
Basic (1) 14,588 14,424 14,558 14,404
================ ================ ============= =============
Diluted (1) 14,588 14,424 14,558 14,404
================ ================ ============= =============
</TABLE>
See accompanying notes to financial statements.
(1) The contingently issuable common stock securities have not been included,
in accordance with FAS 128.
3
<PAGE>
<TABLE>
<CAPTION>
NEUROGEN CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
(UNAUDITED) (UNAUDITED)
------------------ ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (10,786) $ (6,542)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense 1,912 2,078
Noncash compensation expense 354 -
Net loss on sale of assets 33 -
Changes in operating assets and liabilities:
Decrease in accounts payable and accrued expenses (1,098) (2,673)
Increase in unearned revenue from corporate partners 4,310 60
Decrease in other current assets 538 164
Decrease in receivable from corporate partners 309 1,008
(Increase) decrease in other assets, net (168) 94
----------------- ---------------
Net cash used in operating activities (4,596) (5,811)
Cash flows from investing activities:
Purchase of plant and equipment (1,042) (1,543)
Purchases of marketable securities (13,226) (27,575)
Maturities and sales of marketable securities 43,927 21,516
----------------- ---------------
Net cash provided by (used in) investing activities 29,659 (7,602)
Cash flows from financing activities:
Exercise of employee stock options 455 166
Principal payments under mortgage payable (74) (151)
----------------- ---------------
Net cash provided by financing activities 381 15
----------------- ---------------
Net increase (decrease) in cash and cash equivalents 25,444 (13,398)
Cash and cash equivalents at beginning of period 26,066 66,924
----------------- ---------------
Cash and cash equivalents at end of period $ 51,510 $ 53,526
================= ===============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Neurogen Corporation
Notes to Financial Statements
September 30, 1999
(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. These interim financial statements
should be read in conjunction with the audited financial statements
for the year ended December 31, 1998 included in the Company's Annual
Report on Form 10-K. Interim results are not necessarily indicative of
the results that may be expected for the fiscal year.
(2) BUSINESS
Neurogen Corporation ("Neurogen" or the "Company") is a
neuropharmaceuticals Company engaged in the discovery and development
of drugs. Neurogen's strategy is to discover and develop drugs which
modulate communications between cells in such a way as to avoid or
minimize the negative side effects typically associated with many
currently prescribed medications. The Company has not derived any
revenue from product sales to date.
(3) REVENUE RECOGNITION
Revenue under research and development arrangements is recognized
as earned under the terms of the respective agreements. License
payments under separate license agreements are recorded when received
and the license agreements are signed and there are no continuing
obligations on the part of the Company. When further efforts are
required, the license fees are recognized over the related term.
Product research funding is recorded as revenue, generally on a
quarterly basis, as research effort is incurred. Deferred revenue
arises from payments received which have not yet been earned under
research and development as well as in arrangements in contracts where
both research and development and licensing are included and Neurogen
has some level of continued involvement. The Company recognizes
milestone payments when the milestones are achieved.
(4) 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. Common
stock equivalents are shares assumed to be issued if outstanding stock
options were exercised.
(5) NEW FINANCING
Following the close of the third quarter, Neurogen entered into a
financing arrangement with Connecticut Innovations, Inc.(CII), whereby
CII will provide up to $5.0 million to Neurogen for the purchase and
development of a new building to create additional laboratory space.
On October 22, 1999, Neurogen utilized approximately $1.9 million for
the purchase of the facility. The remainder is available for
Neurogen's use in developing additional laboratory space within the
facility.
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 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 and one
technology transfer agreement entered into with Pfizer, 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, technology transfer agreements, joint
ventures or financings, if any, the progress of the Company's research
and development and technology transfer 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 SEPTEMBER 30, 1999 AND 1998
In June 1999 Neurogen entered into the Pfizer Technology Transfer
Agreement (described below). Upon commencement of this agreement,
Neurogen received a $3.0 million initial license fee, which will be
deferred and recognized in operating revenues over future periods as
Neurogen installs and further develops its Accelerated Intelligent
Drug Design (AIDD) system for discovering new drugs at Pfizer.
The Company's operating revenues increased to $2.6 million for
the three months ended September 30, 1999 as compared to $2.3 million
for the same period in 1998. This increase in operating revenues was
due primarily to the recognition of income related to the Pfizer AIDD
Technology Transfer Agreement.
Operating revenues in future periods may fluctuate significantly
depending on many factors including the following: the extent to which
Pfizer elects to extend the Company's ongoing research programs under
its existing collaborations; whether the Company is successful in
entering into new collaborations; the timing and completion of the
Company's transfer of technology and systems under the Pfizer
Technology Transfer Agreement and any other similar future agreements;
and the level of Neurogen's clinical cost reimbursements under a cost
sharing arrangement with Pfizer for Neurogen's NPY obesity
collaboration.
6
<PAGE>
Research and development costs increased 11 percent to $5.9
million for the three-month period ended September 30, 1999 as
compared to $5.3 million in the same period in 1998. The increase is
primarily due to increases in research and development personnel as
well as the Company's further expansion of its AIDD Program for the
discovery of new drug candidates. Research and development expenses
represented 83 percent and 85 percent of total expenses in the three
month periods ended September 30, 1999 and 1998, respectively.
General and administrative expenses increased 25 percent to $1.2
million for the three-month period ended September 30, 1999 as
compared to $1.0 million for the same period in 1998. This increase is
attributed to additional administrative and technical services to
support Neurogen's expanding research pipeline.
Other income, consisting primarily of interest income and gains
and losses from invested cash and marketable securities, decreased 26
percent for the third quarter of 1999 as compared to the same period
in 1998 due to a lower level of invested funds, and losses on disposal
of assets.
The Company recognized a net loss of $3.7 million for the three
months ended September 30, 1999 as compared with a net loss of $2.8
million for the same period in 1998. The increase in the net loss is
primarily due to an increase in research and development and general
and administrative expenses for the third quarter of 1999 due to the
factors described above.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
The Company's operating revenues decreased to $7.6 million for
the nine months ended September 30, 1999 from $8.7 million for the
same period in 1998. The decrease in operating revenues was due
primarily to an anticipated reduction in research and development
revenues associated with the conclusion of the research phase of
Neurogen's collaboration under the Schering-Plough Agreement.
Operating revenues in future periods may fluctuate significantly due
to many factors including those described above in the comparison of
the third quarter of 1999 to the third quarter of 1998.
Research and development expenses increased 14 percent to $17.7
million for the nine months ended September 30, 1999 as compared to
$15.5 million for the same period in 1998. This increase is primarily
due to increases in research and development personnel as well as the
Company's further expansion of its AIDD Program for the discovery of
new drug candidates. Research and development expenses represented 84
percent of total operating expenses for the nine-month period ended
September 30, 1999 and for the same period in 1998.
7
<PAGE>
General and administrative expenses increased 9 percent to $3.3
million for the nine months ended September 30, 1999 as compared to
$3.1 million for the same period in 1998.
Other income, consisting primarily of interest income, and gains
and losses from invested cash and marketable securities, decreased to
$2.6 million for the nine months ended September 30, 1999 as compared
to $3.3 million for the same period in 1998, due primarily to a lower
level of invested funds.
The Company recognized a net loss of $10.8 million for the nine
months ended September 30, 1999 as compared with a net loss of $6.5
million for the same period in 1998. The change in earnings is
primarily due to a decrease in research revenue, an increase in
research and development expenses, and a decrease in investment
income, as explained above, for the nine months ended September 30,
1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999 and December 31, 1998, cash, cash
equivalents and marketable securities were in the aggregate $69.5
million and $75.0 million respectively. While the Company's aggregate
level of cash, cash equivalents and marketable securities decreased
somewhat during the first nine months of 1999, 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 or technology transfer 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 in a licensing agreement. Total funding
received from these financing activities was approximately $105.6
million. The Company's expenditures to date 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 the 1992
Pfizer Agreement pursuant to which Pfizer made a $13.8 million equity
investment in the Company and agreed, among other things, to fund a
specified level of resources for up to five years (later extended as
described below) for Neurogen's research programs for the discovery of
GABA-based drugs for the treatment of anxiety and cognitive disorders.
As of September 30, 1999, Pfizer had provided $36.3 million of
research funding to the Company pursuant to the 1992 Pfizer Agreement,
as extended, and $0.3 million for the achievement of a clinical
development milestone. Neurogen is eligible to receive additional
milestone payments of up to $12.2 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 GABA. Pfizer will pay Neurogen royalties based
upon net sales levels, if any, for such products.
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 and agreed, among other things, to fund a specified level of
resources for up to four years (later extended as described below) for
Neurogen's research program for the development of GABA-based drugs
for the treatment of sleep disorders. As of September 30, 1999, Pfizer
had provided $11.8 million of research funding to the Company pursuant
to the 1994 Pfizer Agreement, as extended, and $0.3 million for the
achievement of a clinical development milestone. Neurogen could also
receive additional milestone payments of up to $3.0 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.
In December 1996 and again in December 1998, Neurogen and Pfizer
extended and combined Neurogen's research efforts under the 1992 and
1994 Agreements. Pursuant to the extension agreements, Neurogen has
received $6.2 million in the first nine months of 1999 (which amount
is included in the above-described cumulative totals received for the
1992 and 1994 agreements) and under the extension expects to receive
an additional $1.6 million during the remainder of 1999 for research
and development funding of the Company's GABA-based anxiolytic,
cognitive enhancer and sleep disorders projects.
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.
Pfizer also agreed, among other things, to fund a specified level of
resources for up to five years for Neurogen's research program for the
discovery of drugs which work through the neuropeptide Y (NPY)
mechanism for the treatment of obesity and other disorders. As of
September 30, 1999, Pfizer had provided $10.6 million in research
funding pursuant to the 1995 Pfizer Agreement. In 1998, Pfizer
exercised its option under the 1995 Pfizer Agreement to extend the NPY
research program and also agreed to fund increased Neurogen staffing
on the program and thereby pay Neurogen $3.1 million to fund a fourth
year of research, through October 1999. Recently, Pfizer elected to
further extend the research program through October 2000 and to fund
Neurogen's research for this fifth year at staffing levels to be
determined by Neurogen and Pfizer. Neurogen could also receive
milestone payments of up to approximately $28.0 million if certain
development and regulatory objectives are achieved regarding its
products subject to the collaboration. As part of this third
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 clinical
development costs and has retained the right to manufacture any
collaboration products in NAFTA countries. Neurogen has also 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
would 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.
In June of 1999, Neurogen and Pfizer entered into a technology
transfer agreement, (the "Pfizer Technology Transfer Agreement").
Under the terms of this agreement, Pfizer has agreed to pay Neurogen
up to a total of $27.0 million over a three year period for the
licensing and transfer to Pfizer of certain of Neurogen's AIDD
technologies for the discovery of new drugs, along with the
installation of up to four AIDD systems. Additional payments are also
possible upon Pfizer's successful utilization of this technology.
Pfizer has received a non-exclusive license to certain AIDD
intellectual property, and the right to employ this technology in its
own drug development programs. As of September 30, 1999, Pfizer had
provided $3.0 million in license fees pursuant to the Pfizer AIDD
agreement. Revenues associated with amounts received under the Pfizer
Technology Transfer Agreement will be recognized in future periods and
may fluctuate significantly depending on the timing and completion of
the Company's transfer of technology and systems pursuant to the
agreement.
In June 1995, Neurogen and Schering-Plough entered into 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 $10.8 million during the three-year period
from June 1995 through June 1998, for research and development funding
of the Company's dopamine program.
10
<PAGE>
In July 1998, Neurogen announced that the Company and
Schering-Plough had concluded the research phase of the collaboration.
Accordingly, the funding of $3.6 million per year formerly received
from Schering-Plough came to its scheduled conclusion on July 1, 1998.
Should Schering-Plough elect to continue the development of drug
candidates subject to the collaboration, Neurogen could also receive
milestone payments of up to approximately $32.0 million if certain
development and regulatory objectives are achieved. In return,
Schering-Plough received the exclusive worldwide license to market
dopamine-based products subject to the collaboration. Neurogen
retained the rights to receive royalties based on net sales levels, if
any, and an option to manufacture products for the United States
market. 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.
The Company plans to use its cash, cash equivalents and
marketable securities 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 fees it expects to receive under
the Pfizer Technology Transfer Agreement, will be sufficient to fund
its current and planned operations through 2002. 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, the ability of the Company to establish
additional technology transfer agreements, 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, 1998, the Company had approximately $24.3
million of net operating loss carryforwards available for federal
income tax purposes which expire from the years 2004 through 2013. The
Company had approximately $19.8 million of Connecticut state tax net
operating loss carryforwards as of December 31, 1998 which expire in
the years 1999 through 2003. 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.
Discussion of the Year 2000 issue
General. The Year 2000 issue is the result of computer programs
being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have
date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruption of operations including, among
other things, a temporary inability to access scientific data, process
transactions, or engage in similar normal business activities.
Program. The Company has a program to resolve the Year 2000
issue, consisting of four phases: assessment, remediation, testing and
contingency planning. The Company completed the assessment phase in
December 1998 and is currently in the remediation phase. During the
assessment phase, the Company assessed its products, key financial and
operating systems and other systems for Year 2000 compliance. The
assessment included identifying all critical information technology
systems and non-information technology critical systems on which the
Company relies, testing Year 2000 compliance of such systems, and
recommending steps for replacing or making corrective fixes to
non-compliant systems. Additionally, the Company obtained compliance
verification from key third party vendors supplying critical parts or
services to the Company in order to determine their plans to address
their own Year 2000 issues.
Upon completion of the detailed assessment, the Company concluded
that substantially all its key financial operating systems and all
other systems are Year 2000 compliant. However, certain software and
hardware components were identified as non-compliant. The Company has
established a plan to replace this non-compliant software and hardware
by October 1999. As of this writing, this remediation has been
completed, with the exception of two non-critical systems subsequently
identified as non-compliant. These systems are expected to be
corrected by the end of November 1999. Also, the Company believes that
its processes will be unaffected by the Year 2000 issue.
The testing phase of the program has been on-going, and will
continue to be conducted as non-compliant software and hardware are
replaced. The Company estimates that the testing phase is
approximately 98% completed as of September 30, 1999. The Company has
developed a contingency plan for all systems even though all systems
are expected to be Year 2000 compliant by December 31, 1999.
Because Neurogen's systems have been remediated and tested, most
of the contingency plans relate to the possibility of loss of services
from third party vendors. Prior to the end of the year, a power
interruption test will simulate the effect of a major disruption in
electrical service. Back-up and recovery of computers, computer
networks, and card-key access will also be tested. Key personnel will
be available for these tests and for the rollover period on December
31 - January 1. There is a plan in place for restarting any system
that may have a problem either operating through the rollover period
or restarting automatically in the new year.
12
<PAGE>
Costs. The Company has completed all phases of assessment and
substantially all phases of remediation and expects to finish the
remaining testing and contingency planning during November. All costs
associated with the Company's Year 2000 program are being expensed as
incurred. The estimated total cost of the Year 2000 program is
approximately $200,000, which primarily includes the cost of employee
time spent on the issue, and the cost of replacing or upgrading
non-compliant software and hardware devices identified during the
assessment phase. Costs incurred through September 30, 1999 have
totalled approximately $180,000.
Risks. The Company presently believes that with modifications to
existing software and conversions to new software, the Year 2000 issue
can be mitigated. However, the Company may not timely identify and
remediate all significant Year 2000 problems and remedial efforts may
involve greater time and expense than is currently anticipated. If
such modifications and conversions fail to be made, or are not timely
completed, the Year 2000 issue could have a material impact on the
results of operations, financial position or cash flows of the
Company. Furthermore, there can be no assurance that any Year 2000
compliance problems of the Company or its customers or suppliers will
not have a material adverse effect on the results of operations,
financial position or cash flows of the Company.
The Company believes that the most reasonably likely worst case
scenario is that a temporary disruption of operations would occur due
to any or all of the following: unavailability of services from
utility companies, delay in receipt of supplies from vendors, having
to access archived back-ups of databases of stored information, or
delays in accessing the Company's financial resources caused by
problems in the banking industry.
The estimates and conclusions herein contain forward-looking
statements and are based on management's best estimates of future
events. Risks to completing the program include the availability of
resources, the Company's ability to discover and correct Year 2000
problems which could have an impact on the Company's operations and
the ability of suppliers to bring their systems into Year 2000
compliance.
The information contained in this Year 2000 update is, to the
extent applicable, a "Year 2000 Readiness Disclosure" under the Year
2000 Information and Readiness Act of 1998.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk. The Company's investment portfolio includes
investment grade debt instruments. These securities are subject to
interest rate risk, and could decline in value if interest rates
fluctuate. Due to the short duration and conservative nature of these
instruments, the Company does not believe that it has a material
exposure to interest rate risk. Additionally, funds available from
investment activities are dependent upon available investment rates.
These funds may be higher or lower than anticipated due to interest
rate volatility.
Capital Market Risk. The Company currently has no product
revenues and is dependent on funds raised through other sources. One
source of funding is through further equity offerings. The ability of
the Company to raise funds in this manner is dependent upon capital
market forces affecting the stock price of the Company.
13
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
Not applicable for the third quarter ended September 30, 1999.
Item 2. Changes in Securities
Not applicable for the third quarter ended September 30, 1999.
Item 3. Defaults upon Senior Securities
Not applicable for the third quarter ended September 30, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable for the third quarter ended September 30, 1999.
Item 5. Other information
Not applicable for the third quarter ended September 30, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index on page 17.
(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
secure additional capital through licensing of the Company's AIDD
technologies, the failure to attract or retain scientific management
personnel, any adverse side effects or inadequate therapeutic efficacy
or pharmacokinetic properties 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, 1998, 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,
Chief Financial Officer
and General Counsel
Date: November 15, 1999
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).
10.27 - Technology agreement between the Company and Pfizer Inc, dated as of
June 15, 1999 (CONFIDENTIAL TREATMENT REQUESTED) (Incorporated by
reference to Exhibit 10.27 to the Company's Form 10-Q for the
quarterly period ended June 30, 1999).
27.1 - Financial Data Schedule
19
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