<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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: 1-11824
ZONAGEN, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 76-0233274
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization Identification No.)
2408 Timberloch Place, Suite B-4
The Woodlands, Texas 77380
(Address of principal executive office)
(281) 367-5892
(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 past 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 8, 1996 there were outstanding 5,151,730 shares of Common Stock,
par value $.001 per share, of the Registrant.
<PAGE>
ZONAGEN, INC.
(A development stage company)
For the Quarter Ended September 30, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
---------------------
<S> <C> <C>
Item 1 Financial Statements................................................................. 3
Consolidated Balance Sheets: September 30, 1996 (Unaudited)
and December 31, 1995................................................................ 4
Consolidated Statements of Operations: (Unaudited) For the three months
ended September 30, 1996 and 1995, nine months ended September 30, 1996
and 1995 and from Inception (August 20, 1987) through September 30, 1996............. 5
Consolidated Statements of Cash Flows: (Unaudited) For the three months
ended September 30, 1996 and 1995, nine months ended September 30, 1996
and 1995 and from Inception (August 20, 1987) through September 30, 1996............. 6
Notes to Consolidated Financial Statements........................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................ 12
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings.................................................................... 16
Item 6. Exhibits and Reports on Form 8-K..................................................... 16
SIGNATURES......................................................................................... 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10 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 necessary adjustments
(which include only normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the periods ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. For further information, refer to
the financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
3
<PAGE>
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 9,934,104 $ 4,189,858
Accounts receivable 420,439 327,975
Accrued interest receivable 1,980 20,185
Product inventory 170,500 230,380
Deposits and other current assets 645,337 49,047
------------- ------------
Total Current Assets 11,172,360 4,817,445
Lab equipment, furniture and leasehold
improvements, net of accumulated depreciation
and amortization of $676,256 and $601,792, respectively 313,642 233,315
Excess of cost over fair value of tangible assets acquired,
net of accumulated amortization of $393,704 and $240,845,
respectively 1,055,705 1,153,939
Other assets, net of accumulated amortization of
$102,668 and $67,532, respectively 563,858 446,856
------------- ------------
$ 13,105,565 $ 6,651,555
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,740,742 $ 660,673
Accrued expenses 386,749 499,631
Notes payable 14,604 -
------------- ------------
Total Current Liabilities 2,142,095 1,160,304
------------- ------------
Long term notes payable 86,106 66,125
------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Undesignated Preferred Stock, $.001 par value,
2,305,000 and 4,230,000 shares authorized respectively,
non issued and outstanding - -
Series A Convertible Preferred Stock, $.001 par value,
770,000 shares authorized, 227,034
and 504,850 shares issued and outstanding,
respectively 227 505
Series B Convertible Preferred Stock, $.001 par value,
1,925,000 and no shares authorized respectively,
1,137,750, and no shares issued and outstanding,
respectively 1,138 -
Common Stock, $.001 par value,
20,000,000 shares authorized, 5,130,446 and
4,098,124 shares issued and outstanding, respectively 5,130 4,098
Additional paid-in capital 33,382,844 22,473,074
Deferred compensation (128,793) (112,500)
Deficit accumulated during the development stage (22,383,182) (16,940,051)
------------- ------------
10,877,364 5,425,126
------------- ------------
$ 13,105,565 $ 6,651,555
============= ============
The accompanying notes ae an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE>
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FROM INCEPTION
(AUGUST 20, 1987)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, THROUGH
1996 1995 1996 1995 SEPTEMBER 30, 1996
------------- ------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
REVENUES
Product sales $ 686,045 $ 715,199 $ 2,065,565 $ 2,256,368 $ 5,704,844
Licensing fee - - - - 250,000
Interest income 18,810 4,929 106,155 46,154 727,948
------------- ------------- ------------- ------------- ------------------
Total Revenues 704,855 720,128 2,171,720 2,302,522 6,682,792
COST AND EXPENSES
Cost of products sold 463,706 514,073 1,419,821 1,693,389 4,151,990
Research and development 1,916,249 516,894 4,169,515 1,812,698 15,001,251
Sales, general and administrative 629,584 441,796 1,864,975 1,535,762 8,752,701
Interest expense, financing costs
and amortization of intangibles 52,375 49,068 160,540 164,404 796,649
------------- ------------- ------------- ------------- ------------------
Total Costs and Expenses 3,061,914 1,521,831 7,614,851 5,206,253 28,702,591
Loss from continuing operations (2,357,059) (801,703) (5,443,131) (2,903,731) (22,019,799)
Loss from discontinued operations - - - - (288,104)
Loss on disposal - - - - (75,279)
------------- ------------- ------------- ------------- ------------------
Net Loss $ (2,357,059) $ (801,703) $ (5,443,131) $ (2,903,731) $ (22,383,182)
------------- ------------- ------------- ------------- ------------------
Loss per common and common
equivalent share $ (0.47) $ (0.21) $ (1.14) $ (0.76)
============= ============= ============= =============
Weighted average common
and common equivalent shares 5,031,243 3,838,816 4,780,686 3,834,544
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
ZONAGEN, INC
(A development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FROM INCEPTION
(AUGUST 20, 1987)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, THROUGH
1996 1995 1996 1995 SEPTEMBER 30, 1996
------------ ------------- ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
Operating Activities
Net loss $ (2,357,059) $ (801,703) $ (5,443,131) $ (2,903,731) $ (22,383,182)
Loss on disposal of
discontinued operations - - - - 75,279
Adjustments to reconcile
net loss to net cash
used in
operating activities
Financing costs - - - - 315,984
Depreciation and
amortization 95,653 69,769 262,459 239,731 1,123,095
Noncash expenses related
to option transactions 20,192 9,375 284,805 104,109 359,825
Series B Preferred Stock
issued for consulting
services - - - - 17,999
Changes in operating
assets and liabilities
(net of effects of
purchase of businesses in
1988 and 1994):
(Increase) decrease in
receivables (94,761) (128,867) (74,259) 42,772 (108,328)
(Increase) decrease in
product inventory 73,830 57,861 59,880 (21,147) 111,028
(Increase) in deposits
and other
current assets (422,411) (101,788) (596,290) (119,262) (612,998)
Increase in accounts
payable and
accrued expenses 438,886 267,870 967,187 509,386 1,882,490
------------ ------------- ------------ ------------ ------------------
Net cash used in operating
activities (2,245,670) (627,483) (4,539,349) ( 2,148,142) (19,218,808)
Investing Activities
Capital expenditures (53,698) (24,709) (154,791) ( 15,041) (883,153)
Purchase of technology
rights and other
assets 154,455 - (206,760) (85,148) (674,131)
Cash acquired in purchase
of FTI - - - - 2,695
Proceeds from sales of
subsidiary, less $12,345
for operating losses during
1990 phase-out period - - - - 137,646
Increase in net assets
held for disposal - - - - (212,925)
------------ ------------- ------------ ------------ ------------------
Net cash provided by (used
in) investing
activities 100,757 (24,709) (361,551) (100,189) (1,629,868)
Financing Activities
Proceeds from issuance of
Common Stock 4,073 - 870,706 13,939 10,542,919
Proceeds from issuance of
Preferred Stock 9,740,060 - 9,739,855 - 19,060,817
Proceeds from issuance of
notes payable - - 39,625 - 2,878,306
Principal payments on
notes payable (4,616) - (5,040) (120,214) (1,699,262)
------------ ------------- ------------ ------------ ------------------
Net cash provided by (used
in) financing
activities 9,739,517 - 10,645,146 (106,275) 30,782,780
Net increase (decrease) in
cash and cash equivalents 7,594,604 (652,192) 5,744,246 (2,354,606) 9,934,104
Cash and cash equivalents
at beginning of
period 2,339,500 745,356 4,189,858 2,447,770 -
------------ ------------- ------------ ------------ ------------------
Cash and cash equivalents
at end of period $ 9,934,104 $ 93,164 $ 9,934,104 $ 93,164 $ 9,934,104
============ ============= ============ ============ ==================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
6
<PAGE>
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1 -- ORGANIZATION AND OPERATIONS
Zonagen, Inc. (the "Company") was organized on August 20, 1987 ("Inception") and
is engaged in the development of technologies targeting conditions or diseases
associated with the human reproductive system. These technologies include the
development of products for the oral treatment of male impotency
("Vasomax(TM)"), alleviation of urological diseases such as benign prosthetic
hyperplasia ("BPH") and prostate cancer, and the diagnosis and treatment of
female conditions such as endometriosis. The Company is also active in the
research of improved methodologies to enhance fertility as well as new
approaches to contraception and prophylaxis of sexually transmitted disease. The
Company currently has sales through its subsidiary, Fertility Technologies, Inc.
("FTI"), a marketing and distribution organization focused on
obstetrics/gynecology, fertility specialists and urologists. The Company's goal
is to become a leader in the area of human reproductive healthcare management by
providing a full array of innovative products and services that improve patient
outcomes and cost management. The Company's growth strategy is to develop
products based on its own research as well as in-licensing existing and late
stage development products and technologies focused in the area of human
reproductive healthcare. From Inception through September 30, 1996, the Company
has been primarily engaged in research and development and is still in the
development stage.
The Company requires substantial capital for research, product development and
market development activities. The ability of the Company to successfully
develop, manufacture and market its proprietary products is dependent upon many
factors. The Company's business is subject to significant risks consistent with
biotechnology companies that are developing products for human therapeutic use.
These risks include, but are not limited to, uncertainties regarding research
and development, access to capital, obtaining and enforcing patents, receiving
regulatory approval and competition with other biotechnology and pharmaceutical
companies. Other than through FTI, the Company has not generated revenues from
operations nor is there any assurance of significant revenues in the future.
In September 1996, the Company authorized and designated 1,925,000 shares of
Series B Convertible Preferred Stock ("Series B Preferred Stock"). On September
30, 1996, the Company completed an initial closing of a private placement of its
Series B Preferred Stock in which it sold 1,137,750 shares at a price of $10.00
per share. Net proceeds to the Company from the initial closing of the private
placement were approximately $9.7 million. On October 11, 1996, the Company
completed the final closing of its private placement of Series B Preferred
Stock, in which it sold an additional 554,750 shares of Series B Preferred Stock
at a price of $10.00 per share. Net proceeds from the final closing of the
private placement were approximately $4.8 million. The aggregate offering
consisted of 1,692,500 shares of Series B Preferred Stock with net proceeds of
approximately $14.5 million.
The Company has experienced negative cash flows from operations since its
inception and has funded its activities to date primarily from equity
financings. The Company has expended, and will continue to require, substantial
funds to continue research and development, including preclinical
7
<PAGE>
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
studies and clinical trials of its products, and to commence sales and marketing
efforts if FDA and other regulatory approvals are obtained. The Company expects
that its existing capital resources will be sufficient to fund its capital
requirements through 1997, based on its current clinical development plan for
Vasomax(TM), its oral treatment for male impotency. The Company will need to
raise substantial additional capital to fund its operations. The Company's
capital requirements will depend on many factors, including the problems,
delays, expenses and complications frequently encountered by development stage
companies; the progress of the Company's research, development and clinical
trial programs; the extent and terms of any future collaborative research,
manufacturing, marketing or other funding arrangements; the costs and timing of
seeking regulatory approvals of the Company's products; the Company's ability to
obtain regulatory approvals; the success of the Company's sales and marketing
programs; the cost of filing, prosecuting and defending and enforcing any patent
claims and other intellectual property rights; and changes in economic,
regulatory or competitive conditions or the Company's planned business.
Estimates about the adequacy of funding for the Company's activities are based
on certain assumptions, including the assumption that testing and regulatory
procedures relating to the Company's products can be conducted at projected
costs. There can be no assurance that changes in the Company's research and
development plans, acquisitions or other events will not result in accelerated
or unexpected expenditures. To satisfy its capital requirements, the Company may
seek to raise additional funds in the public or private capital markets. The
Company's ability to raise additional funds in the public or private markets
will be adversely affected if the results of its current or future clinical
trials are not favorable. The Company may seek additional funding through
corporate collaborations and other financing vehicles. There can be no assurance
that any such funding will be available to the Company on favorable terms or at
all. If adequate funds are not available, the Company may be required to certain
significantly one or more of its research or development programs, or it may be
required to obtain funds through arrangements with future collaborative partners
or others that may require the Company to relinquish rights to some or all of
its technologies or products. If the Company is successful in obtaining
additional financing, the terms of such financing may have the effect of
diluting or adversely affecting the holdings or the rights of the holders of the
Company's Common Stock.
NOTE 2 -- STOCKHOLDERS' EQUITY
Preferred Stock
Series A Convertible Preferred Stock
Through September 30, 1996, holders of Series A Convertible Preferred Stock
("Series A Preferred Stock") had converted 371,819 shares of Series A Preferred
Stock into 1,025,675 shares of Common Stock. As of September 30, 1996, there
were 227,034 shares of Series A Preferred Stock outstanding and convertible into
626,275 shares of Common Stock. On November 1, 1996, the Company
8
<PAGE>
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
exercised its right to cause the mandatory conversion of the Series A Preferred
Stock, with the result that all such shares not previously converted will be
converted into Common Stock effective November 25, 1996.
Series B Convertible Preferred Stock
In September 1996, the Company authorized and designated 1,925,000
shares of Series B Convertible Preferred Stock ("Series B Preferred Stock"). On
September 30, 1996, the Company completed an initial closing of a private
placement for its Series B Preferred Stock in which it sold 1,137,750 shares at
a price of $10.00 per share. Net proceeds to the Company from the initial
closing of the private placement were approximately $9.7 million. On October 11,
1996, the Company completed the final closing of its private placement of Series
B Preferred Stock, in which it sold an additional 554,750 shares of Series B
Preferred Stock at a price of $10.00 per share. Net proceeds from the final
closing of the private placement were approximately $4.8 million. The aggregate
offering consisted of 1,692,500 shares of Series B Preferred Stock with net
proceeds of approximately $14.5 million. In connection with the closing of the
private placement, the Company issued warrants for 169,250 shares of Series B
Preferred Stock to the placement agent for the private placement.
Each share of Series B Preferred Stock is convertible at the option of the
holder into shares of Common Stock at an initial conversion price of $6.625 per
share. The conversion price is subject to adjustment on October 11, 1997 (the
"Reset Date") if the average daily trading price of the Common Stock for 30 days
immediately preceding the Reset Date (the "Twelve Month Trading Price") is less
than 130% of the conversion price (a "Reset Event"). Upon a Reset Event, the
then applicable conversion price of the Series B Preferred Stock will be reduced
to equal the greater of (i) the Twelve Month Trading Price divided by 1.3 and
(ii) 50% of the then-applicable conversion price. The Company has the right at
any time after the Reset Date to cause the Series B Preferred Stock to be
converted into Common Stock if the closing price of the Common Stock exceeds
150% of the conversion price for at least 20 days on any 30 consecutive trading
day period. Holders of the Series B Preferred Stock are entitled to a
liquidation preference of $13.00 per share upon the liquidation of the Company,
the disposition of all or substantially all of its assets and certain mergers or
consolidations in which the Company is not the surviving entity. Holders of
Series B Preferred Stock are entitled to vote as if their shares had been
converted into Common Stock and are entitled to approve (i) additional
securities of the Company that are senior to or on parity with the Series B
Preferred Stock, (ii) changes to the rights and preferences of the Series B
Preferred Stock and (iii) declaration of dividends on junior stock or
repurchases of securities of the Company.
Through November 14, 1996, no shares of Series B Preferred Stock had been
converted into shares of Common Stock.
9
<PAGE>
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
Common Stock
During the third quarter of 1996, the Company issued an aggregate of 1,000
shares of Common Stock to former employees upon the exercise of stock options
for total proceeds of $4,000 at a price of $4.00 per share. During the first
quarter of 1996, the Company issued an aggregate 16,500 shares of Common Stock
to an employee, a consultant and a former board member upon the exercise of
stock options for total proceeds of $68,200 at prices ranging from $0.43 to
$5.88 per share.
On January 12, 1996 the Company issued 5,000 shares of Common Stock to a
consultant as compensation for services through June 1996. At that date, the
Company's stock was trading at $9.875 per share. As a result, the Company has
recorded this transaction as deferred compensation and will record an expense of
approximately $49,000 on a pro rata basis over the service period.
On April 13, 1996, the Company issued 19,512 shares of unregistered Common Stock
to Gamogen, Inc. ("Gamogen") for the second and final purchase payment relating
to the original Assignment Agreement entered into on April 13, 1994 in order to
retain the rights for the Company's treatment for male impotency, Vasomax(TM).
The Company recorded a research and development expense of approximately
$200,000 in the Company's financial statements in connection with the issuance
of such shares.
Warrants
During the first quarter of 1996, 219,776 warrants were exercised for total
proceeds of $798,000.
During the second quarter of 1996, 4,186 shares of Common Stock were issued in
exchange for the cashless exercise of a warrant originally issued with the
Company's private placement of Series A Preferred Stock closed in October 1995.
NOTE 3 _ AGREEMENTS
On June 7, 1996, Fertility Technologies, Inc. ("FTI"), the Company's wholly
owned subsidiary, purchased all of the assets of Zygotek Systems, Inc.
("Zygotek"), a Massachusetts-based company that manufactures and distributes
proprietary products and distributes products manufactured by others to diagnose
and facilitate the treatment of reproductive disorders. The aggregate purchase
price of such assets was approximately $55,000.
10
<PAGE>
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 4 -- SUBSEQUENT EVENT
The Company exercised its right to cause the mandatory conversion of the Series
A Preferred Stock on November 1, 1996, with the result that all such shares not
previously converted will be converted into Common Stock effective November 25,
1996. See Note 2.
The Company completed the final closing of its private placement of Series B
Preferred Stock on October 11, 1996. See Note 2.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here.
DESCRIPTION OF BUSINESS
Zonagen, Inc. (the "Company") was organized on August 20, 1987
("Inception") and is engaged in the development of technologies targeting
conditions or diseases associated with the human reproductive system. These
technologies include the development of products for the oral treatment of male
impotency ("Vasomax(TM)"), alleviation of urological diseases such as benign
prostatic hyperplasia and prostate cancer, and the treatment of female
conditions such as endometriosis. The Company is also active in the research of
improved methodologies to enhance fertility as well as new approaches to
contraception and prophylaxis of sexually transmitted disease. The Company
currently has sales through its subsidiary, Fertility Technologies, Inc.
("FTI"), a marketing and distribution organization focused on
obstetrics/gynecology and fertility specialists. The Company's goal is to become
a leader in the area of human reproductive healthcare management by providing a
full array of innovative products and services that improve patient outcome and
cost management. The Company's growth strategy is to develop products based on
its own research as well as in-licensing existing and late stage development
products and technologies focused in the area of human reproductive healthcare.
From Inception through September 30, 1996, the Company has been primarily
engaged in research and development and is still in a development stage.
The Company has implemented certain changes in the way that its
administrative function is handled by consolidating the administration
requirements of its subsidiary, FTI with its corporate headquarters. These
changes occurred primarily in the quarter ended June 30, 1996. Included in this
change was the reduction of rental space and approximate two year lease
extension of its East coast rental office and the elimination of a second rental
property on the West coast whose lease expired in the first quarter of 1996. In
addition, the Company expanded its existing corporate rental space to
accommodate the administrative consolidation and extended the lease on this
space for approximately three years.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 and 1995
Product sales were generated through the Company's wholly owned
subsidiary, FTI. Revenue from product sales for the quarter ended September 30,
1996 was $686,000, a 4% decrease from $715,000 for the same period in the
previous fiscal year. This decrease was primarily due to a change in the
relationship with a manufacturer from a distribution relationship whereby FTI
recognized 100% of revenue and related cost of goods sold to a sales agent
relationship whereby only commissions are recognized and an increase in
backorders expected to be shipped in the fourth quarter as compared to the
corresponding prior year period.
12
<PAGE>
Interest income was $18,800 for the quarter ended September 30, 1996, an
increase of $13,900 from $4,900 for the same period in the previous fiscal year.
This increase was due to the Company carrying higher average cash balances
resulting from the sale of Series A Preferred Stock in the fourth quarter of
1995 and exercise of stock warrants and stock options in the first quarter of
1996.
Cost of sales as a percentage of sales for the quarter ended September
30, 1996 was 68% as compared to 72% the corresponding prior year period. This
decrease is primarily due to the elimination of certain less profitable products
and the change in the relationship of a specific product line with a
manufacturer from a distribution relationship whereby FTI recognized 100% of
revenue and related cost of goods sold to a sales agent relationship whereby
only commissions are recognized.
Research and development expenses increased by $1,399,000 to $1,916,000
in the third quarter of 1996 compared with $517,000 for the same period in the
prior fiscal year. This increase is primarily due to expenses associated with
the clinical development of Vasomax(TM) and associated expenses for the
manufacturing development of phentolamine, the active ingredient in Vasomax(TM),
the Company's oral treatment for male impotency.
Sales, general and administrative expenses increased by $188,000, or
43%, in the third quarter of 1996 to $630,000 as compared to $442,000 in the
third quarter of 1995. This increase was primarily due to the increase in
public/investor relations activities, the hiring of a Vice President of
Corporate Development and additional sales support personnel and activities.
Interest expense, financing costs and amortization of intangibles
increased from $49,000 in the third quarter of 1995 to $52,000 in the third
quarter of 1996. Interest expense relates to the debt assumed through the
acquisition of FTI by Zonagen and the issuance of debt for the acquisition of
Zygotek Systems, Inc.
Nine Months Ended September 30, 1996 and 1995
Product sales for the nine months ended September 30, 1996 were
$2,066,000, an 8% decrease from $2,256,000 for the same period in the previous
fiscal year. This decrease was primarily due to a change in the relationship
with a manufacturer from a distribution relationship whereby FTI recognized 100%
of revenue and related cost of goods sold to a sales agent relationship whereby
only commissions are recognized and an increase in backorders expected to be
shipped in the fourth quarter as compared to the corresponding prior year
period.
Interest income was $106,000 for the nine months ended September 30,
1996, an increase of $60,000, or 130%, from $46,000 for the same period in the
previous fiscal year. This increase was due to the Company carrying higher
average cash balances resulting from the sale of Series A Preferred Stock in the
fourth quarter of 1995 and exercise of stock warrants and stock options in the
first quarter of 1996.
Cost of sales as a percentage of product sales for the nine months ended
September 30, 1996 was 69% as compared to 75% the corresponding prior year
period. This decrease is primarily due to the elimination of certain less
profitable products and the change in the relationship of a specific product
line with the manufacturer from a distribution relationship whereby FTI
recognized 100% of revenue and related cost of goods sold to a sales agent
relationship whereby only commissions are recognized.
13
<PAGE>
Research and development expenses increased by $2,357,000 to $4,170,000
for the nine months ended September 30, 1996 compared with $1,813,000 for the
same period in the prior fiscal year. This increase is primarily due to expenses
associated with the clinical development of Vasomax(TM) and associated expenses
for the manufacturing development of phentolamine, the active ingredient in
Vasomax(TM).
Sales, general and administrative expenses increased by $329,000, or
21%, from $1,536,000 in the nine months ended September 30, 1995 to $1,865,000
for the same period in 1996. This increase was primarily due to the increase in
public/investor relations activities and the hiring of a Vice President of
Corporate Development and additional sales support personnel and activities.
Interest expense, financing costs and amortization of intangibles
decreased from $164,000 in the nine months ended September 30, 1995 to $161,000
for the same period in 1996. Interest expense relates to the debt assumed
through the acquisition of FTI by Zonagen.
LIQUIDITY AND CAPITAL RESOURCES
The Company used net cash of $2,246,000 for operating activities in the
three months ended September 30, 1996 as compared to $627,000 for the three
months ended September 30, 1995, and net cash of $4,539,000 for operating
activities in the nine month period ended September 30, 1996 as compared to
$2,148,000 for the same period in the prior year. The Company had cash and cash
equivalents of $9,934,000 at September 30, 1996. The increased use of cash for
the nine months ended September 30, 1996 was primarily due to the increase in
expenses related to the clinical development of the Company's oral treatment for
male impotency and capital expenditures of approximately $101,000 for tenant
improvements to 3,600 square feet of additional space that the Company leased in
March 1996 and additional research and administrative equipment purchases.
The Company has experienced negative cash flows from operations since
its inception and has funded its activities to date primarily from equity
financings. The Company has expended, and will continue to require, substantial
funds to continue research and development, including preclinical studies and
clinical trials of its products, and to commence sales and marketing efforts if
FDA and other regulatory approvals are obtained. The Company expects that its
existing capital resources will be sufficient to fund its capital requirements
through 1997, based on its current development plan for Vasomax(TM). Thereafter,
the Company will need to raise substantial additional capital to fund its
operations. The Company's capital requirements will depend on many factors,
including the problems, delays, expenses and complications frequently
encountered by development stage companies; the progress of the Company's
research, development and clinical trial programs; the extent and terms of any
future collaborative research, manufacturing, marketing or other funding
arrangements; the costs and timing of seeking regulatory approvals of the
Company's products; the Company's ability to obtain regulatory approvals; the
success of the Company's sales and marketing programs; the cost of filing,
prosecuting and defending and enforcing any patent claims and other intellectual
property rights; and changes in economic, regulatory or competitive conditions
or the Company's planned business. Estimates about the adequacy of funding for
the Company's activities are based on certain assumptions, including the
assumption that testing and regulatory procedures relating to the Company's
products can be conducted at projected costs. There can be no assurance that
changes in the Company's research and development plans, acquisitions or other
events will not result in accelerated or unexpected expenditures. To satisfy its
capital requirements, the Company may seek to raise additional funds in
14
<PAGE>
the public or private capital markets. The Company's ability to raise additional
funds in the public or private markets will be adversely affected if the results
of its current or future clinical trials are not favorable. The Company may seek
additional funding through corporate collaborations and other financing
vehicles. There can be no assurance that any such funding will be available to
the Company on favorable terms or at all. If adequate funds are not available,
the Company may be required to curtain significantly one or more of its research
or development programs, or it may be required to obtain funds through
arrangements with future collaborative partners or others that may require the
Company to relinquish rights to some or all of its technologies or products. If
the Company is successful in obtaining additional financing, the terms of such
financing may have the effect of diluting or adversely affecting the holdings or
the rights of the holders of the Company's Common Stock.
During the first quarter of 1996 the Company received $798,000 from the
exercise of stock warrants for 219,776 shares of Common Stock. During the first
nine months of 1996, the Company received $72,200 from the exercise of stock
options for 17,500 shares of Common Stock.
In September 1996, the Company authorized and designated 1,925,000
shares of Series B Convertible Preferred Stock ("Series B Preferred Stock"). On
September 30, 1996, the Company completed an initial closing of a private
placement of its Series B Preferred Stock in which it sold 1,137,750 shares at a
price of $10.00 per share. Net proceeds to the Company from the initial closing
of the private placement were approximately $9.7 million. On October 11, 1996,
the Company completed the final closing of its private placement of Series B
Preferred Stock, in which it sold an additional 554,750 shares of Series B
Preferred Stock at a price of $10.00 per share. Net proceeds from the final
closing of the private placement were approximately $4.8 million. The aggregate
offering consisted of 1,692,500 shares of Series B Preferred Stock with net
proceeds of approximately $14.5 million.
Current liabilities were $2,142,000 at September 30, 1996 compared with
$1,160,000 at December 31, 1995. This increase of $982,000 is primarily due to
accrued expenses associated with the development of Vasomax(TM).
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The words
"anticipate," "believe," "expect," "estimate," "project" and similar expressions
are intended to identify forward-looking statements. Such statements are subject
to certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, believed,
expected, estimated or projected. For additional discussion of such risks,
uncertainties and assumptions, see "Item 1. Business - Patents and Proprietary
Information," "- Manufacturing Plans," "- Competition," "- Governmental
Regulations" and "Item 3. Legal Proceedings" included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995, as amended, and "-
Liquidity and Capital Resources" included elsewhere in this report.
15
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ZONAGEN, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Cause No. 94-021991; Bonita S. Dunbar v. Baylor College of Medicine, et al.; In
the 270th Judicial District Court of Harris County, Texas. Briefly, on May 16,
1994, Dr. Bonita Sue Dunbar ("Dunbar") filed suit in Harris County, Texas,
naming Baylor College of Medicine ("BCM"), BCM Technologies, Inc. ("BCMT"),
Fulbright and Jaworski, the Woodlands Venture Capital Company ("Woodlands"), and
Zonagen as defendants (collectively the "Defendants"). Dunbar is a cellular and
molecular biologist who has been employed by BCM as a teacher and research
scientist since 1981. During the course of her employment at BCM, Dunbar
developed technologies relating to the use of certain recombinant zona pellucida
peptides that were assigned to Zonagen. Dunbar claimed, among other things, that
her assignment of the patent rights was induced by statutory and constructive
fraud and a civil conspiracy on the part of the defendants, seeking damages and
rescission of the assignment. Dunbar also included a separate claim against
Zonagen alleging that Zonagen had converted certain of her endometriosis
research, seeking unspecified damages in connection with this conversion claim.
all of Dunbar's claims have been dismissed except for her conversion claim.
Dunbar has appealed such dismissals.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Identification of Exhibit
4.1 Certificate of Designation of the Series B
Convertible Preferred Stock.
4.2 Form of Subscription Agreement between the
Company and the purchasers of the Company's
Series B Convertible Preferred Stock.
4.3 Form of Warrant issued to the Placement Agent
for the Company's Series B Convertible
Preferred Stock.
11.1 Statement regarding computation of net loss
per share.
27.1 Financial data schedule
b. Reports on Form 8-K
None.
16
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ZONAGEN, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ZONAGEN, INC.
Date: November 14, 1996
By:/s/ Joseph S. Podolski
----------------------------
Joseph S. Podolski
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 1996
By /s/ Louis Ploth
---------------------
Louis Ploth
Vice President of Business Development and
Chief Financial Officer
(Principal Financial and Accounting Officer)
17
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ZONAGEN, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
- ------ -------------------------
4.1 Certificate of Designation of the Series B Convertible Preferred
Stock
4.2 Form of Subscription Agreement between the Company and the
Purchasers of the Company's Series B Convertible Preferred Stock
4.3 Form of Warrant issued to the Placement Agent for the Company's
Series B Convertible Preferred Stock
11.1 Statement regarding computation of net loss per share
27.1 Financial Data Schedule
18
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Exhibit 4.1
CERTIFICATE OF DESIGNATIONS
of
SERIES B CONVERTIBLE PREFERRED STOCK
of
ZONAGEN, INC.
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
ZONAGEN, INC., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), does hereby certify that, pursuant to the
authority conferred on the Board of Directors of the Corporation by the Amended
and Restated Certificate of Incorporation, as amended, of the Corporation and in
accordance with Section 151 of the General Corporation Law of the State of
Delaware, the Board of Directors of the Corporation adopted the following
resolution establishing a series of 1,925,000 shares of Preferred Stock of the
Corporation designated as "Series B Convertible Preferred Stock":
RESOLVED, that pursuant to the authority conferred on the Board of
Directors of this Corporation by the Amended and Restated Certificate of
Incorporation, as amended, a series of Preferred Stock, par value $.001 per
share, of the Corporation is hereby established and created, and that the
designation and number of shares thereof and the voting and other powers,
preferences and relative, participating, optional or other rights of the
shares of such series and the qualifications, limitations and restrictions
thereof are as follows:
Series B Convertible Preferred Stock
------------------------------------
1. Designation and Amount. There shall be a series of Preferred Stock
designated as "Series B Convertible Preferred Stock" and the number of shares
constituting such series shall be 1,925,000. Such series is referred to herein
as the "Series B Convertible Preferred Stock". Such number of shares may be
increased or decreased by resolution of the Board of Directors of the
Corporation; provided, however, that no decrease shall reduce the number of
shares of Series B Convertible Preferred Stock to less than the number of shares
then issued and outstanding. The Series B Preferred Stock shall be junior to
the Series A Preferred Stock.
2. Dividends. Subject to the prior and superior rights of the holders of
any shares of any series of Preferred Stock ranking prior and superior to the
shares of Series B Convertible Preferred Stock with respect to dividends and
distributions, the holders of shares of Series B Convertible Preferred Stock,
shall be entitled to receive dividends and distributions, when, as and if
declared by the Board of Directors out of funds legally available for such
purpose. If the Corporation declares a dividend or distribution on the common
stock, par value $.001 per share (the "Common Stock"), of the Corporation, the
holders of shares of Series B Convertible Preferred Stock shall be entitled to
receive for each share of Series B Convertible Preferred Stock a dividend or
distribution in the amount of the dividend or distribution that would be
received by a holder of the Common Stock into which such share of Series B
Convertible Preferred Stock is convertible on the record date for such dividend
or distribution. If the Corporation declares a dividend or distribution on any
other class or series of preferred stock, the holders of shares of Series B
Convertible
<PAGE>
Preferred Stock shall be entitled to receive a dividend or distribution in an
amount per share in proportion to the dividend or distribution declared on a
share of such other class or series based upon the liquidation preference of a
share of the Series B Convertible Preferred Stock relative to that of a share of
such other class or series, unless the holders of at least 66-2/3% of the
outstanding shares of Series B Convertible Preferred Stock consent otherwise. In
any such case, the Corporation shall declare a dividend or distribution on the
Series B Convertible Preferred Stock at the same time that it declares a
dividend or distribution on the Common Stock or such other class or series of
preferred stock and shall establish the same record date for the dividend or
distribution on the Series B Convertible Preferred Stock as is established for
such dividend or distribution on the Common Stock or such other class or series
of preferred stock. Each such dividend or distribution will be payable to
holders of record of the Series B Convertible Preferred Stock as they appeared
on the records of the Corporation at the close of business on the record date
declared for such dividend or distribution, as shall be fixed by the Board of
Directors. If the Corporation declares or pays a dividend or distribution on the
Series B Convertible Preferred Stock as a result of the declaration or payment
of a dividend or distribution on the Common Stock or any other class or series
of preferred stock as described above, the holders of the Series B Convertible
Preferred Stock shall not be entitled to any additional dividend or distribution
solely because such first dividend or distribution also required the declaration
or payment of a dividend or distribution on any other class or series of
preferred stock. Any reference to "distribution" contained in this Section 2
shall not be deemed to include any distribution made in connection with or in
lieu of any Liquidation Event (as defined below).
3. Liquidation Preference. In the event of a (i) liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, (ii) a sale
or other disposition of all or substantially all of the assets of the
Corporation or (iii) any consolidation, merger, combination, reorganization or
other transaction in which the Corporation is not the surviving entity or the
shares of Common Stock constituting in excess of 50% of the voting power of the
Corporation are exchanged for or changed into other stock or securities, cash
and/or any other property (a "Merger Transaction") (subparagraphs (i), (ii) and
(iii) being collectively referred to as a "Liquidation Event"), after payment or
provision for payment of debts and other liabilities of the Corporation, the
holders of the Series B Convertible Preferred Stock then outstanding shall be
entitled to be paid out of the assets of the Corporation available for
distribution to its shareholders, whether such assets are capital, surplus, or
earnings, before any payment or declaration and setting apart for payment of any
amount shall be made in respect of the stock junior to the Series B Convertible
Preferred Stock, an amount equal to $13.00 per share plus an amount equal to all
declared and unpaid dividends thereon; provided, however, in the case of Section
3(iii) above, such $13.00 per share may be paid in cash and/or securities
(valued at the closing price (as defined in Section 5) of such security) of the
entity surviving such Merger Transaction. If upon any Liquidation Event,
whether voluntary or involuntary, the assets to be distributed to the holders of
the Series B Convertible Preferred Stock shall be insufficient to permit the
payment to such shareholders of the full preferential amounts aforesaid, then
all of the assets of the Corporation to be distributed shall be so distributed
ratably to the holders of the Series B Convertible Preferred Stock on the basis
of the number of shares of Series B Convertible Preferred Stock held. A
consolidation or merger of the Corporation with or into another corporation,
other than in a transaction described in Section 3(iii) above, shall not be
considered a liquidation, dissolution or winding up of the Corporation or a sale
or other disposition of all or substantially all of the assets of the
Corporation and accordingly the Corporation shall make appropriate provision to
ensure that the terms of this Certificate of Designations survive any such
transaction. All shares of Series B Convertible Preferred Stock shall rank as
to payment upon the occurrence of any Liquidation Event senior to the Common
Stock as provided herein and, unless the terms of such series shall provide
otherwise, senior to all other series of the Corporation's preferred stock.
2
<PAGE>
4. Conversion.
(a) Right of Conversion. The shares of Series B Convertible Preferred Stock
shall be convertible, in whole or in part, at the option of the holder thereof
and upon notice to the Corporation as set forth in paragraph (b) below, into
fully paid and nonassessable shares of Common Stock and such other securities
and property as hereinafter provided. The shares of Series B Convertible
Preferred Stock shall be convertible initially at the rate of 1.51 shares of
Common Stock for each full share of Series B Convertible Preferred Stock and
shall be subject to adjustment as provided herein. The initial conversion price
per share of Common Stock is $6 5/8 and shall be subject to adjustment as
provided herein. For purposes of this resolution, the "conversion rate"
applicable to a share of Series B Convertible Preferred Stock shall be the
number of shares of Common Stock and number or amount of any other securities
and property as hereinafter provided into which a share of Series B Convertible
Preferred Stock is then convertible and shall be determined by dividing the then
existing conversion price into $10.00.
The conversion price (subject to adjustments pursuant to the provisions of
paragraph (c) below) in effect immediately prior to the date that is 12 months
after the Final Closing Date of the issuance and sale of the Series B
Convertible Preferred Stock (the "Reset Date") shall be adjusted and reset
effective as of the Reset Date if the average closing bid price of the Common
Stock for the 20 consecutive trading days immediately preceding the Reset Date
(the "12-Month Trading Price") is less than 130% of the then applicable
conversion price (a "Reset Event"). Upon the occurrence of a Reset Event, the
conversion price shall be reduced to be equal to the greater of (A) the 12-Month
Trading Price divided by 1.3, and (B) 50% of the then applicable conversion
price. If there is any change in the conversion price as a result of the
preceding sentence, then the conversion rate shall be changed accordingly, and
shall be determined by dividing the new conversion price into $10.00. The
Corporation shall prepare a certificate signed by the principal financial
officer of the Corporation setting forth the conversion rate as of the Reset
Date, showing in reasonable detail the facts upon which such conversion rate is
based, and such certificate shall forthwith be filed with the transfer agent of
the Series B Convertible Preferred Stock. Notwithstanding the provisions of
subparagraph (vi) of paragraph (c) below, a notice stating that the conversion
rate has been adjusted pursuant to this paragraph, or that no adjustment is
necessary, and setting forth the conversion rate in effect as of the Reset Date
shall be mailed as promptly as practicable after the Reset Date by the
Corporation to all record holders of the Series B Convertible Preferred Stock at
their last addresses as they shall appear in the stock transfer books of the
Corporation.
The "closing bid price" for each trading day shall be the reported closing
bid price on the Nasdaq Small-Cap Market or the Nasdaq National Market
(collectively referred to as, "NASDAQ") or, if the Common Stock is not quoted on
NASDAQ, on the principal national securities exchange on which the Common Stock
is listed or admitted to trading (based on the aggregate dollar value of all
securities listed or admitted to trading) or, if not listed or admitted to
trading on any national securities exchange or quoted on NASDAQ, the closing bid
price in the over-the-counter market as furnished by any NASD member firm
selected from time to time by the Corporation for that purpose, or, if such
prices are not available, the fair market value set by, or in a manner
established by, the Board of Directors of the Corporation in good faith.
"Trading day" shall mean a day on which the national securities exchange or
NASDAQ used to determine the closing bid price is open for the transaction of
business or the reporting of trades or, if the closing bid price is not so
determined, a day on which NASDAQ is open for the transaction of business.
(b) Conversion Procedures. Any holder of shares of Series B Convertible
Preferred Stock desiring to convert such shares into Common Stock shall
surrender the certificate or certificates
3
<PAGE>
evidencing such shares of Series B Convertible Preferred Stock at the office of
the transfer agent for the Series B Convertible Preferred Stock, which
certificate or certificates, if the Corporation shall so require, shall be duly
endorsed to the Corporation or in blank, or accompanied by proper instruments of
transfer to the Corporation or in blank, accompanied by irrevocable written
notice to the Corporation that the holder elects so to convert such shares of
Series B Convertible Preferred Stock and specifying the name or names (with
address) in which a certificate or certificates evidencing shares of Common
Stock are to be issued. The Corporation need not deem a notice of conversion to
be received unless the holder complies with all the provisions hereof. The
Corporation will instruct the transfer agent (which may be the Corporation) to
make a notation of the date that a notice of conversion is received, which date
shall be deemed to be the date of receipt for purposes hereof.
The Corporation shall, as soon as practicable after such deposit of
certificates evidencing shares of Series B Convertible Preferred Stock
accompanied by the written notice and compliance with any other conditions
herein contained, deliver at such office of such transfer agent to the person
for whose account such shares of Series B Convertible Preferred Stock were so
surrendered, or to the nominee or nominees of such person, certificates
evidencing the number of full shares of Common Stock to which such person shall
be entitled as aforesaid, together with a cash adjustment of any fraction of a
share as hereinafter provided. Subject to the following provisions of this
paragraph, such conversion shall be deemed to have been made as of the date of
such surrender of the shares of Series B Convertible Preferred Stock to be
converted, and the person or persons entitled to receive the Common Stock
deliverable upon conversion of such Series B Convertible Preferred Stock shall
be treated for all purposes as the record holder or holders of such Common Stock
on such date; provided, however, that the Corporation shall not be required to
convert any shares of Series B Convertible Preferred Stock while the stock
transfer books of the Corporation are closed for any purpose, but the surrender
of Series B Convertible Preferred Stock for conversion during any period while
such books are so closed shall become effective for conversion immediately upon
the reopening of such books as if the surrender had been made on the date of
such reopening, and the conversion shall be at the conversion rate in effect on
such date. No adjustments in respect of any dividends on shares surrendered for
conversion or any dividend on the Common Stock issued upon conversion shall be
made upon the conversion of any shares of Series B Convertible Preferred Stock.
All notices of conversion shall be irrevocable; provided, however, that if
the Corporation has sent notice of an event pursuant to Section 4(g) hereof, a
holder of Series B Convertible Preferred Stock may, at its election, provide in
its notice of conversion that the conversion of its shares of Series B
Convertible Preferred Stock shall be contingent upon the occurrence of the
record date or effectiveness of such event (as specified by such holder),
provided that such notice of conversion is received by the Corporation prior to
such record date or effective date, as the case may be.
(c) Certain Adjustments of Conversion Rate. In addition to adjustment
pursuant to paragraph (a) above, the conversion rate (and the corresponding
conversion price) shall be subject to adjustment from time to time as follows:
(i) In case the Corporation shall (A) pay a dividend in Common Stock or make
a distribution in Common Stock, (B) subdivide its outstanding Common Stock, (C)
combine its outstanding Common Stock into a smaller number of shares of Common
Stock or (D) issue by reclassification of its Common Stock other securities of
the Corporation, then in each such case the conversion rate in effect
immediately prior thereto shall be adjusted so that the holder of any shares of
Series B Convertible Preferred Stock thereafter surrendered for conversion shall
be entitled to
4
<PAGE>
receive the kind and number of shares of Common Stock or other securities of the
Corporation which such holder would have owned or would have been entitled to
receive immediately after the happening of any of the events described above had
such shares of Series B Convertible Preferred Stock been converted immediately
prior to the happening of such event or any record date with respect thereto.
Any adjustment made pursuant to this subparagraph (i) shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
(ii) In case the Corporation shall (i) sell or issue any shares of Common
Stock for a consideration per share less than the closing price on the date of
sale of issue or (ii) issue rights, options, warrants or convertible securities
to all or substantially all holders of its Common Stock, without any charge to
such holders, entitling them to subscribe for or purchase Common Stock at a
price per share which is lower at the record date mentioned below than both (A)
the then effective conversion price and (B) the closing bid price (as defined in
Section 4) for the trading day immediately prior to such record date (the
"Current Market Price"), then the conversion rate shall be determined by
multiplying the conversion rate theretofore in effect by a fraction, of which
the numerator shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such shares, rights, options, warrants or
convertible securities plus the number of additional shares of Common Stock
offered for subscription or purchase, and of which the denominator shall be the
number of shares of Common Stock outstanding immediately prior to the issuance
of such shares, rights, options, warrants or convertible securities plus the
number of shares which the aggregate offering price of the total number of
shares offered would purchase at such closing price or Current Market Price, as
the case may be. Such adjustment shall be made whenever such shares, rights,
options, warrants or convertible securities are issued, and shall become
effective immediately and retroactive to the record date for the determination
of stockholders entitled to receive such rights, options, warrants or
convertible securities. Notwithstanding any of the foregoing, no adjustment
shall be made pursuant to the provisions of this subsection (ii), if such
adjustment would result in a decrease of the conversion rate.
(iii) In case the Corporation shall distribute to all or substantially all
holders of its Common Stock evidences of its indebtedness or assets (excluding
cash dividends or distributions out of earnings) or rights, options, warrants or
convertible securities containing the right to subscribe for or purchase Common
Stock (excluding those referred to in subparagraph (ii) above), then in each
case the conversion rate shall be determined by multiplying the conversion rate
theretofore in effect by a fraction, of which the numerator shall be the then
fair value as determined in good faith by the Corporation's Board of Directors
on the date of such distribution, and of which the denominator shall be such
fair value on such date minus the then fair value (as so determined) of the
portion of the assets or evidences of indebtedness so distributed or of such
subscription rights, options, warrants or convertible securities applicable to
one share. Such adjustment shall be made whenever any such distribution is made
and shall become effective on the date of distribution retroactive to the record
date for the determination of stockholders entitled to receive such
distribution.
(iv) Upon the expiration of any rights, options, warrants or conversion
privileges, if such shall not have been exercised, the conversion rate shall,
upon such expiration, be readjusted and shall thereafter be such as it would
have been had it been originally adjusted (or had the original adjustment not
been required, as the case may be) on the basis of (A) the fact that Common
Stock, if any, actually issued or sold upon the exercise of such rights,
options, warrants or conversion
5
<PAGE>
privileges, and (B) the fact that such shares of Common Stock, if any, were
issued or sold for the consideration actually received by the Corporation upon
such exercise plus the consideration, if any, actually received by the
Corporation for the issuance, sale or grant of all such rights, options,
warrants or conversion privileges whether or not exercised.
(v) No adjustment in the conversion rate shall be required unless such
adjustment would require an increase or decrease of at least 1% in such rate;
provided, however, that the Corporation may make any such adjustment at its
election; and provided, further, that any adjustments which by reason of this
subparagraph (v) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section
4 shall be made to the nearest cent or to the nearest one-hundredth of a share,
as the case may be.
(vi) Whenever the conversion rate is adjusted as provided in any provision
of this Section 4:
(A) the Corporation shall compute (or may retain a firm of independent
public accountants of recognized national standing (which may be any such firm
regularly employed by the Corporation) to compute) the adjusted conversion rate
in accordance with this Section 4 and shall prepare a certificate signed by the
principal financial officer of the Corporation (or cause any such independent
public accountants to execute a certificate) setting forth the adjusted
conversion rate and showing in reasonable detail the facts upon which such
adjustment is based, and such certificate shall forthwith be filed with the
transfer agent of the Series B Convertible Preferred Stock; and
(B) a notice stating that the conversion rate has been adjusted and setting
forth the adjusted conversion rate shall forthwith be required, and as soon as
practicable after it is required, such notice shall be mailed by the Corporation
to all record holders of Series B Convertible Preferred Stock at their last
addresses as they shall appear in the stock transfer books of the Corporation.
(vii) In the event that at any time, as a result of any adjustment made
pursuant to this Section 4, the holder of any shares of Series B Convertible
Preferred Stock thereafter surrendered for conversion shall become entitled to
receive any shares of the Corporation other than shares of Common Stock or to
receive any other securities, the number of such other shares or securities so
receivable upon conversion of any share of Series B Convertible Preferred Stock
shall be subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions contained in this Section 4
with respect to the Common Stock.
(d) No Fractional Shares. No fractional shares or scrip representing
fractional shares of Common Stock shall be issued upon conversion of Series B
Convertible Preferred Stock. If more than one certificate evidencing shares of
Series B Convertible Preferred Stock shall be surrendered for conversion at one
time by the same holder, the number of full shares issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of
Series B Convertible Preferred Stock so surrendered. Instead of any fractional
share of Common Stock which would otherwise be issuable upon conversion of any
shares of Series B Convertible Preferred Stock, the Corporation shall pay a cash
adjustment in respect of such fractional interest in an amount equal to the same
fraction of the market price per share of Common
6
<PAGE>
Stock (which shall be the closing price as defined in Section 5) at the close of
business on the day of conversion.
(e) Reservation of Shares; Transfer Taxes; Etc. The Corporation shall at
all times reserve and keep available, out of its authorized and unissued stock,
solely for the purpose of effecting the conversion of the Series B Convertible
Preferred Stock, such number of shares of its Common Stock free of preemptive
rights as shall from time to time be sufficient to effect the conversion of all
shares of Series B Convertible Preferred Stock from time to time outstanding.
The Corporation shall use its best efforts from time to time, in accordance with
the laws of the State of Delaware, to increase the authorized number of shares
of Common Stock if at any time the number of shares of Common Stock not
outstanding shall not be sufficient to permit the conversion of all the then-
outstanding shares of Series B Convertible Preferred Stock.
The Corporation shall pay any and all issue or other taxes that may be
payable in respect of any issue or delivery of shares of Common Stock on
conversion of the Series B Convertible Preferred Stock. The Corporation shall
not, however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue or delivery of Common Stock (or other securities
or assets) in a name other than that in which the shares of Series B Convertible
Preferred Stock so converted were registered, and no such issue or delivery
shall be made unless and until the person requesting such issue has paid to the
Corporation the amount of such tax or has established, to the satisfaction of
the Corporation, that such tax has been paid.
Notwithstanding anything to the contrary herein, before taking any action
that would cause an adjustment increasing the conversion rate or before any such
adjustment is made as a result of a Reset Event, in either event, such that the
effective conversion price (for all purposes an amount equal to $10.00 divided
by the conversion rate as in effect at such time) would be below the then par
value of the Common Stock, the Corporation shall take any corporate action which
may, in the opinion of its counsel, be necessary in order that the Corporation
may validly and legally issue fully paid and nonassessable shares of Common
Stock at the conversion rate as so adjusted.
(f) Prior Notice of Certain Events. In case:
(i) the Corporation shall declare any dividend (or any other distribution)
on its Common Stock; or
(ii) the Corporation shall authorize the granting to the holders of Common
Stock of rights or warrants to subscribe for or purchase any shares of stock of
any class or of any other rights or warrants; or
(iii) of any reclassification of Common Stock (other than a subdivision or
combination of the outstanding Common Stock, or a change in par value, or from
par value to no par value, or from no par value to par value), or of any
consolidation or merger to which the Corporation is a party and for which
approval of any stockholders of the Corporation shall be required, or of the
sale or transfer of all or substantially all of the assets of the Corporation or
of any compulsory share exchange whereby the Common Stock is converted into
other securities, cash or other property; or
(iv) of the voluntary or involuntary dissolution, liquidation or winding up
of the Corporation;
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then the Corporation shall cause to be filed with the transfer agent for the
Series B Convertible Preferred Stock, and shall cause to be mailed to the
holders of record of the Series B Convertible Preferred Stock, at their last
addresses as they shall appear upon the stock transfer books of the Corporation,
at least 10 days prior to the applicable record date hereinafter specified, a
notice stating (x) the date on which a record (if any) is to be taken for the
purpose of such dividend, distribution or granting of rights or warrants or, if
a record is not to be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution, rights or warrants are to
be determined and a description of the cash, securities or other property to be
received by such holders upon such dividend, distribution or granting of rights
or warrants or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, share exchange, dissolution, liquidation or winding up
is expected to become effective, the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon such exchange,
dissolution, liquidation or winding up and the consideration, including
securities or other property, to be received by such holders upon such exchange;
provided, however, that no failure to mail such notice or any defect therein or
in the mailing thereof shall affect the validity of the corporate action
required to be specified in such notice.
(g) Other Changes in Conversion Rate. The Corporation from time to time may
increase the conversion rate by any amount for any period of time if the period
is at least 20 days and if the increase is irrevocable during the period.
Whenever the conversion rate is so increased, the Corporation shall mail to
holders of record of the Series B Convertible Preferred Stock a notice of the
increase at least 15 days before the date the increased conversion rate takes
effect, and such notice shall state the increased conversion rate and the period
it will be in effect.
The Corporation may make such increases in the conversion rate, in addition
to those required or allowed by this Section 4, as shall be determined by it, as
evidenced by a resolution of the Board of Directors, to be advisable in order to
avoid or diminish any income tax to holders of Common Stock resulting from any
dividend or distribution of stock or issuance of rights or warrants to purchase
or subscribe for stock or from any event treated as such for income tax
purposes.
(h) Ambiguities/Errors. The Board of Directors of the Corporation shall
have the power to resolve any ambiguity or correct any error in the provisions
relating to the convertibility of the Series B Convertible Preferred Stock, and
its actions in so doing shall be final and conclusive.
5. Mandatory Conversion. At any time on or after the Reset Date, the
Corporation, at its option, may cause the Series B Convertible Preferred Stock
to be converted in whole, or in part, on a pro rata basis, into fully paid and
nonassessable shares of Common Stock and such other securities and property as
herein provided if the closing price of the Common Stock shall have exceeded
150% of the then applicable conversion price for at least 20 trading days in any
30 consecutive trading day period. Any shares of Series B Convertible Preferred
Stock so converted shall be treated as having been surrendered by the holder
thereof for conversion pursuant to Section 4 on the date of such mandatory
conversion (unless previously converted at the option of the holder).
Not more than 60 nor less than 20 days prior to the date of any such
mandatory conversion, notice by first class mail, postage prepaid, shall be
given to the holders of record of the Series B Convertible Preferred Stock to be
converted, addressed to such holders at their last addresses as shown on the
stock transfer books of the Corporation. Each such notice shall specify the
date fixed for conversion, the place or
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<PAGE>
places for surrender of shares of Series B Convertible Preferred Stock, and the
then effective conversion rate pursuant to Section 4.
The "closing price" for each trading day shall be the reported last sales
price regular way or, in case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices regular way, in either case
on NASDAQ or, if the Common Stock is not quoted on NASDAQ, on the principal
national securities exchange on which the Common Stock is listed or admitted to
trading (based on the aggregate dollar value of all securities listed or
admitted to trading) or, if not listed or admitted to trading on any national
securities exchange or quoted on NASDAQ, the average of the closing bid and
asked prices in the over-the-counter market as furnished by any NASD member firm
selected from time to time by the Corporation for that purpose, or, if such
prices are not available, the fair market value set by, or in a manner
established by, the Board of Directors of the Corporation in good faith.
"Trading day" shall have the meaning given in Section 4 hereof.
Any notice which is mailed as herein provided shall be conclusively
presumed to have been duly given by the Corporation on the date deposited in the
mail, whether or not the holder of the Series B Convertible Preferred Stock
receives such notice; and failure properly to give such notice by mail, or any
defect in such notice, to the holders of the shares to be converted shall not
affect the validity of the proceedings for the conversion of any other shares of
Series B Convertible Preferred Stock. On or after the date fixed for conversion
as stated in such notice, each holder of shares called to be converted shall
surrender the certificate evidencing such shares to the Corporation at the place
designated in such notice for conversion. Notwithstanding that the certificates
evidencing any shares properly called for conversion shall not have been
surrendered, the shares shall no longer be deemed outstanding and all rights
whatsoever with respect to the shares so called for conversion (except the right
of the holders to convert such shares upon surrender of their certificates
therefor) shall terminate.
6. Voting Rights.
(a) General. Except as otherwise provided herein, in the Amended and
Restated Certificate of Incorporation or the By-laws, the holders of shares of
Series B Convertible Preferred Stock, the holders of shares of Common Stock and
the holders of any other class or series of shares entitled to vote with the
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation. In any such vote, each share of Series B
Convertible Preferred Stock shall entitle the holder thereof to cast the number
of votes equal to the number of votes which could be cast in such vote by a
holder of the Common Stock into which such share of Series B Convertible
Preferred Stock is convertible on the record date for such vote, or if no record
date has been established, on the date such vote is taken. Any shares of Series
B Convertible Preferred Stock held by the Corporation or any entity controlled
by the Corporation shall not have voting rights hereunder and shall not be
counted in determining the presence of a quorum.
(b) Class Voting Rights. In addition to any vote specified in paragraph (a)
of this Section 6, so long as 50% of the shares of Series B Convertible
Preferred Stock (including those shares of Series B Convertible Preferred Stock
issued or issuable upon the exercise of the warrants issued to Paramount
Capital, Inc., the placement agent in connection with the offer and sale of the
Series B Convertible Preferred Stock) shall be outstanding, the Corporation
shall not, without the affirmative vote or consent of the holders of at least
66-2/3% of all outstanding Series B Convertible Preferred Stock voting
separately as a class, (i) amend, alter or repeal any provision of the Amended
and Restated Certificate of
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Incorporation, as amended, or the Bylaws of the Corporation so as adversely to
affect the relative rights, preferences, qualifications, limitations or
restrictions of the Series B Convertible Preferred Stock, (ii) declare any
dividend or distribution on the Common Stock or any other class or series of
preferred stock or authorize the repurchase of any securities of the Corporation
or (iii) authorize or issue, or increase the authorized amount of, any
additional class or series of stock, or any security convertible into stock of
such class or series, (A) ranking prior to, or on a parity with, the Series B
Convertible Preferred Stock upon liquidation, dissolution or winding up of the
Corporation or a sale of all or substantially all of the assets of the
Corporation or (B) providing for the payment of any dividends or distributions.
A class vote on the part of the Series B Convertible Preferred Stock shall,
without limitation, specifically not be deemed to be required (except as
otherwise required by law or resolution of the Corporation's Board of Directors)
in connection with: (a) the authorization, issuance or increase in the
authorized amount of Common Stock or of any shares of any other class or series
of stock ranking junior to the Series B Convertible Preferred Stock in respect
of distributions upon liquidation, dissolution or winding up of the Corporation;
(b) the authorization, issuance or increase in the amount of the Series B
Convertible Preferred Stock or any bonds, mortgages, debentures or other
obligations of the Corporation (other than bonds, mortgages, debentures or other
obligations convertible into or exchangeable for or having option rights to
purchase any shares of stock of the Corporation the authorization issuance or
increase in amount of which would require the consent of the holders of the
Series B Preferred Stock); or (c) any consolidation or merger of the Corporation
with or into another corporation in which the Corporation is not the surviving
entity, a sale or transfer of all or part of the Corporation's assets for cash,
securities or other property, or a compulsory share exchange.
7. Outstanding Shares. For purposes of this Certificate of Designations,
all shares of Series B Convertible Preferred Stock shall be deemed outstanding
except (i) from the date, or the deemed date, of surrender of certificates
evidencing shares of Series B Convertible Preferred Stock, all shares of Series
B Convertible Preferred Stock converted into Common Stock, (ii) from the date of
registration of transfer, all shares of Series B Convertible Preferred Stock
held of record by the Corporation or any subsidiary of the Corporation and (iii)
any and all shares of Series B Convertible Preferred Stock held in escrow prior
to delivery of such stock by the Corporation to the initial beneficial owners
thereof.
8. Status of Acquired Shares. Shares of Series B Convertible Preferred
Stock received upon conversion pursuant to Section 4 or Section 5 or otherwise
acquired by the Corporation will be restored to the status of authorized but
unissued shares of Preferred Stock, without designation as to class, and may
thereafter be issued, but not as shares of Series B Convertible Preferred Stock.
9. Preemptive Rights. The Series B Convertible Preferred Stock is not
entitled to any preemptive or subscription rights in respect of any securities
of the Corporation.
10. Severability of Provisions. Whenever possible, each provision hereof
shall be interpreted in a manner as to be effective and valid under applicable
law, but if any provision hereof is held to be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating or otherwise adversely affecting
the remaining provisions hereof. If a court of competent jurisdiction should
determine that a provision hereof would be valid or enforceable if a period of
time were extended or shortened or a particular percentage were increased or
decreased, then such court may make such change as shall be necessary to render
the provision in question effective and valid under applicable law.
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Exhibit 4.2
SUBSCRIPTION AGREEMENT
SUBSCRIPTION AGREEMENT (this "Agreement") made as of the date set forth on the
signature page hereof between Zonagen, Inc., a Delaware corporation with its
principal offices at 2408 Timberloch Place, Suite B-4, The Woodlands, Texas
77380 (the "Company") and the undersigned (the "Subscriber").
W I T N E S S E T H:
WHEREAS, the Company desires to issue a minimum (the "Minimum Offering") of
thirty-five (35) units (the "Units") and a maximum (the "Maximum Offering") of
seventy-five (75) Units, with an option in favor of the Placement Agent to offer
up to an additional seventy (70) Units to cover over-allotments, in a private
placement offering (the "Offering"), each Unit consisting of 10,000 shares of
Series B Convertible Preferred Stock of the Company, stated value of $10.00 per
share, (the "Preferred Stock"), initially convertible into shares of common
stock of the Company, par value $.001 per share (the "Common Stock" and
collectively with the Preferred Stock, the "Shares"), and the Subscriber desires
to purchase that number of Units set forth on the signature page hereof on the
terms and conditions hereinafter set forth;
WHEREAS, the Company has engaged Paramount Capital, Inc. (the "Placement Agent")
as Placement Agent for the Offering on a "best-efforts" basis.
NOW, THEREFORE, in consideration of the premises and the mutual representations
and covenants hereinafter set forth, the parties hereto do hereby agree as
follows:
I SUBSCRIPTION FOR UNITS AND REPRESENTATIONS BY SUBSCRIBER
--------------------------------------------------------
1.1 Subject to the terms and conditions hereinafter set forth, the Subscriber
hereby subscribes for and agrees to purchase from the Company such number of
Units or fractions thereof and the Company agrees to sell such Units to the
Subscriber as is set forth upon the signature page hereof. The Units will be
offered at $100,000 per Unit (the "Initial Offering Price"). The purchase price
is payable by personal or business check, wire transfer of immediately available
funds or money order made payable to "Fleet Bank N.A., Escrow Agent, F/B/O
Zonagen, Inc." contemporaneously with the execution and delivery of this
Agreement. The Units will be delivered by the Company within ten (10) days
following the consummation of the Offering as set forth in Article III hereof.
<PAGE>
1.2 The Subscriber recognizes that the purchase of Units involves a high degree
of risk in that (i) the Company remains a development stage business with
limited operating history and requires substantial funds in addition to the
proceeds of the Offering; (ii) an investment in the Company is highly
speculative, and only investors who can afford the loss of their entire
investment should consider investing in the Company and the Units; (iii) the
Subscriber may not be able to liquidate his investment; (iv) transferability of
the Shares is extremely limited; and (v) in the event of a disposition, the
Subscriber could sustain the loss of his entire investment. Such risks are more
fully set forth in the Memorandum (as defined below) furnished by the Company to
the Subscriber.
1.3 The Subscriber represents that the Subscriber is an "accredited investor"
as such term is defined in Rule 501 of Regulation D promulgated under the
Securities Act of 1933, as amended (the "Act"), as indicated by his responses to
the questions contained in Article VIII hereof, and that the Subscriber is able
to bear the economic risk of an investment in the Units.
1.4 The Subscriber hereby acknowledges and represents that (i) the Subscriber
has prior investment experience, including investment in non-listed and
unregistered securities, or the Subscriber has employed the services of an
investment advisor, attorney and/or accountant to read all of the documents
furnished or made available by the Company both to the Subscriber and to all
other prospective investors in the Units and to evaluate the merits and risks of
such an investment on the Subscriber's behalf; (ii) the Subscriber recognizes
the highly speculative nature of this investment; and (iii) the Subscriber is
able to bear the economic risk which the Subscriber hereby assumes.
1.5 The Subscriber hereby acknowledges receipt and careful review of the
Confidential Private Placement Memorandum dated July 23, 1996, as supplemented
and amended (including Supplement and Amendment No. 1 to the Confidential
Offering Memorandum dated July 23, 1996, hereinafter referred to as the
"Supplement"), and the attachments and exhibits thereto (including the
Certificate of Designations of the Series B Convertible Preferred Stock, the
Company's Annual Report on Form 10-K for the year ended December 31, 1995,
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and
Definitive Proxy Statement for its June 19, 1996 Annual Meeting of Stockholders,
all of which constitute an integral part of the Memorandum) (the "Memorandum")
and hereby represents that the Subscriber has been furnished by the Company
during the course of this transaction with all information regarding the Company
which the Subscriber has requested or desired to know, has been afforded the
opportunity to ask questions of and receive answers from duly authorized
officers or other representatives of the Company concerning the terms and
conditions of the Offering and has received any additional information which the
Subscriber has requested.
1.6 (a) The Subscriber has relied solely upon the information provided by the
Company in the Memorandum in making the decision to invest in the Units. To the
extent necessary, the Subscriber has retained, at the expense of the Subscriber,
and relied upon
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<PAGE>
appropriate professional advice regarding the investment, tax and legal merits
and consequences of this Agreement and its purchase of the Units hereunder. The
Subscriber acknowledges and agrees that the Placement Agent has not supplied any
information for inclusion in the Memorandum other than information furnished in
writing to the Company by the Placement Agent specifically for inclusion in the
Memorandum relating to the Placement Agent, that the Placement Agent has no
responsibility for the accuracy or completeness of the Memorandum and that the
Subscriber has not relied upon the independent investigation or verification, if
any, which may have been undertaken by the Placement Agent.
(b) To the best of its knowledge, (i) the Subscriber was contacted regarding
the sale of the Units by the Placement Agent (or an authorized agent or
representative thereof), with whom the Subscriber had a prior substantial
pre-existing relationship and (ii) no Units were offered or sold to it by
means of any form of general solicitation or general advertising, and in
connection therewith the Subscriber: did not (A) receive or review any
advertisement, article, notice or other communication published in a
newspaper or magazine or similar media or broadcast over television or
radio whether closed circuit, or generally available; or (B) attend any
seminar meeting or industry investor conference whose attendees were
invited by any general solicitation or general advertising.
1.7 The Subscriber hereby represents that the Subscriber either by reason of
the Subscriber's business or financial experience or the business or financial
experience of the Subscriber's professional advisors (who are unaffiliated with
and who are not compensated by the Company or any affiliate or selling agent of
the Company, including the Placement Agent, directly or indirectly) has the
capacity to protect the Subscriber's own interests in connection with the
transaction contemplated hereby. The Subscriber hereby acknowledges that the
Offering has not been reviewed by the United States Securities and Exchange
Commission (the "SEC") because of the Company's representations that the
Offering is intended to be exempt from the registration requirements of Section
5 of the Act pursuant to Section 4(2) of the Act and Regulation D promulgated
thereunder. The Subscriber agrees that the Subscriber will not sell or
otherwise transfer the Shares unless they are registered under the Act or unless
an exemption from such registration is available.
1.8 The Subscriber understands that the Shares comprising the Units have not
been registered under the Act by reason of a claimed exemption under the
provisions of the Act which depends, in part, upon the Subscriber's investment
intention. In this connection, the Subscriber hereby represents that the
Subscriber is purchasing the Shares comprising the Units for the Subscriber's
own account for investment and not with a view toward the resale or distribution
of such shares to others. The Subscriber, if an entity, was not formed for the
purpose of purchasing the Shares.
1.9 The Subscriber understands that although there currently is a public market
for the Common Stock, Rule 144 promulgated under the Act requires, among other
conditions, a two-year holding period prior to the resale (in limited amounts)
of securities
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<PAGE>
acquired in a non-public offering without having to satisfy the registration
requirements under the Act. The Subscriber understands and hereby acknowledges
that the Company is under no obligation to register the Units or any of the
Shares comprising the Units under the Act or any state securities or "blue sky"
laws other than as set forth in Article V. The Subscriber consents that the
Company may, if it desires, permit the transfer of the Shares comprising the
Units out of the Subscriber's name only when the Subscriber's request for
transfer is accompanied by an opinion of counsel reasonably satisfactory to the
Company that neither the sale nor the proposed transfer results in a violation
of the Act or any applicable state "blue sky" laws (collectively, "Securities
Laws"). The Subscriber agrees to hold the Company and its directors, officers,
employees, controlling persons and agents (including the Placement Agent and its
officers, directors, employees, counsel, agents and controlling persons) and
controlling persons and their respective heirs, representatives, successors and
assigns harmless and to indemnify them against all liabilities, costs and
expenses incurred by them as a result of any misrepresentation made by the
Subscriber contained in this Agreement (including the Confidential Investor
Questionnaire contained in Article VIII herein) or any sale or distribution by
the Subscriber in violation of the Securities Laws.
1.10 The Subscriber consents to the placement of a legend on any certificate or
other document evidencing the Shares that such Shares have not been registered
under the Act or any state securities or "blue sky" laws and setting forth or
referring to the restrictions on transferability and sale thereof contained in
this Agreement. The Subscriber is aware that the Company will make a notation
in its appropriate records with respect to the restrictions on the
transferability of such Shares.
1.11 The Subscriber understands that the Company will review this Agreement and
is hereby given authority by the Subscriber to call Subscriber's bank or place
of employment or otherwise review the financial standing of the Subscriber; and
it is further agreed that the Company reserves the unrestricted right to reject
or limit any subscription, to accept subscriptions for fractional Units and to
close the Offering to the Subscriber at any time.
1.12 The Subscriber hereby represents that the address of the Subscriber
furnished by the Subscriber on the signature page hereof is the Subscriber's
principal residence if the Subscriber is an individual or its principal business
address if it is a corporation or other entity.
4
<PAGE>
1.13 The Subscriber represents that he or it has full power and authority
(corporate, statutory and otherwise) to execute and deliver this Agreement and
to purchase the Units. This Agreement constitutes the legal, valid and binding
obligation of the Subscriber, enforceable against the Subscriber in accordance
with its terms.
1.14 If the Subscriber is a corporation, company, trust, employee benefit plan,
individual retirement account, Keogh Plan, or other tax-exempt entity, it is
authorized and qualified to become an investor in the Company and the person
signing this Agreement on behalf of such entity has been duly authorized by such
entity to do so.
1.15 The Subscriber acknowledges that if he is a Registered Representative of
an NASD member firm, he must give such firm the notice required by the NASD's
Rules of Fair Practice, receipt of which must be acknowledged by such firm in
Section 8.4 below.
1.16 The Subscriber acknowledges that at such time, if ever, as the Shares are
registered, sales of the Shares will be subject to state securities laws,
including those of the State of New Jersey which requires any securities sold in
New Jersey to be sold through a registered broker-dealer or in reliance upon an
exemption from registration.
II REPRESENTATIONS BY AND COVENANTS OF THE COMPANY
-----------------------------------------------
Except as set forth on the Schedule of Exceptions attached hereto as Exhibit A,
the Company hereby represents and warrants to the Subscriber that:
2.1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has full corporate power and authority to conduct
its business as described in the Memorandum. The Company is duly qualified to
do business as a foreign corporation and is in good standing in the State of
Texas.
2.2 Capitalization and Voting Rights. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Memorandum under the heading
"Capitalization"; all issued and outstanding shares of the Company are validly
issued, fully paid and nonassessable. The Shares comprising the Units have been
duly and validly authorized and, when issued and paid for pursuant to this
Agreement, will be validly issued, fully paid and nonassessable. Except as set
forth in the Memorandum, there are no outstanding options, warrants, agreements,
convertible securities, preemptive rights or other rights to subscribe for or to
purchase any shares of capital stock of the Company. Except as set forth in the
Memorandum and in this Agreement and as otherwise required by law, there are no
restrictions upon the voting or transfer of the Shares pursuant to the Company's
Certificate of Incorporation, By-Laws or
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<PAGE>
other governing documents or any agreement or other instruments to which the
Company is a party or by which the Company is bound.
2.3 Authorization; Enforceability. This Agreement has been duly and validly
authorized by the Company and is enforceable against the Company in accordance
with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and by general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law). The Company has full power and lawful authority to authorize, issue and
sell the Units to be sold by it hereunder on the terms and conditions set forth
herein.
2.4 Certificate of Designations of Preferred Stock. The Preferred Stock has
the rights, preferences and privileges substantially as set forth in the Form of
Certificate of Designations attached as Exhibit A to the Memorandum with the
initial conversion price equal to the lesser of (i) $9.00 and (ii) 90% of the
average closing bid price of the Common Stock, on the Nasdaq Small-Cap Market
("Nasdaq") for the twenty consecutive trading days immediately preceding the (a)
the initial closing date (the "Initial Closing Date"), (b) any interim closing
date (each an "Interim Closing Date") or (c) the final closing date (the "Final
Closing Date") of this Offering, whichever is lowest. The initial conversion
rate shall be the number determined by dividing $10.00 by the initial conversion
rate.
2.5 No Conflict; Governmental Consents.
(i) The execution and delivery by the Company of this Agreement and the
consummation of the transactions contemplated hereby will not result in the
violation of any law, statute, rule, regulation, order, writ, injunction,
judgment or decree of any court or governmental authority to or by which
the Company is bound, or of any provision of the Certificate of
Incorporation or By-Laws of the Company, and will not conflict with, or
result in a breach or violation of, any of the terms or provisions of, or
constitute (with due notice or lapse of time or both) a default under, any
lease, loan agreement, mortgage, security agreement, trust indenture or
other agreement or instrument to which the Company is a party or by which
it is bound or to which any of its properties or assets is subject, nor
result in the creation or imposition of any lien upon any of the properties
or assets of the Company.
(ii) No consent, approval, authorization or other order of any governmental
authority is required to be obtained by the Company in connection with the
authorization, execution and delivery of this Agreement or with the
authorization, issue and sale of the Units or the Shares comprising the
Units, except such filings as may be required to be made with the SEC and
Nasdaq and with any state or foreign blue sky or securities regulatory
authority.
2.6 Licenses. Except as set forth in the Memorandum, the Company has
sufficient licenses, permits and other governmental authorizations currently
required for the
6
<PAGE>
conduct of its business or ownership of properties and is in all material
respects complying therewith.
2.7 Litigation. Except as set forth in the Memorandum, the Company knows of no
pending or threatened legal or governmental proceedings against the Company
which could materially adversely affect the business, property, financial
condition or operations of the Company.
2.8 Accuracy of Reports. All material reports required to be filed by the
Company within the two years prior to the date of this Agreement under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), have been duly
filed with the SEC, complied at the time of filing in all material respects with
the requirements of their respective forms and, except to the extent updated or
superseded by the Memorandum or any subsequently filed report, were complete and
correct in all material respects as of the dates at which the information was
furnished, and contained (as of such dates) no untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading.
2.9 Memorandum; Disclosure. No information set forth in the Memorandum
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained therein, in light of
the circumstances under which they were made, not misleading.
2.10 Investment Company
The Company is not an "investment company" within the meaning of such term
under the Investment Company Act of 1940 and the rules and regulations of the
SEC thereunder.
III TERMS OF SUBSCRIPTION
---------------------
3.1 The Company shall issue a minimum of thirty-five (35) Units and a maximum
of seventy-five (75) Units. The Placement Agent, at its sole option, may offer
and sell up to an additional seventy (70) Units to cover over-allotments. The
Offering Period shall begin on the date that the Company delivers the final
Memorandum to the Placement Agent. Upon receipt of the Minimum Offering amount,
the Placement Agent may conduct a closing (the "Initial Closing Date") and may
conduct subsequent closings on an interim basis (each a "Closing") until the
Maximum Offering amount (including any over-allotment amount) has been reached
(the "Final Closing Date"). The Offering Period is expected to terminate on
August 23, 1996, subject to an extension, at the sole option of the Placement
Agent, for an additional thirty (30) days. The Units will be offered on a "best
efforts" basis. The purchase price is payable by personal or business check,
wire transfer of immediately available funds or money order made payable to
"Fleet Bank, N.A., Escrow Agent, F/B/O Zonagen, Inc."
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3.2 Placement of the Units will be made by the Placement Agent, who will
receive certain compensation as described in the Term Sheet and the Supplement.
In addition, Cruttenden Roth Incorporated ("Cruttenden") has been named as a
Sub-Placement Agent for the Offering and will receive certain compensation as
described in the Term Sheet and Supplement.
3.3 Pending the sale of the Units, all funds paid hereunder shall be deposited
by the Company in escrow with the Fleet Bank, N.A., a national banking
association with a branch at 345 Park Avenue, New York, New York 10022. If the
Company shall not have obtained subscriptions (including this subscription) for
purchases of 35 Units on or before the Final Closing Date, then this
subscription shall be void and all funds paid hereunder by the Subscriber shall
be promptly returned to the Subscriber, without interest, subject to paragraph
3.5 hereof.
3.4 The Subscriber hereby authorizes and directs the Company to deliver the
Shares comprising the Units to be issued to the Subscriber pursuant to this
Agreement directly to the Subscriber's account maintained by the Placement
Agent, if any, or, if no such account exists to the residential or business
address indicated on the signature page hereto.
3.5 The Subscriber hereby authorizes and directs the Company to return any
funds for unaccepted subscriptions to the same account from which the funds were
drawn, including any customer account maintained with the Placement Agent.
IV Conditions to Obligations of the Subscribers
4.1 The Subscribers' obligation to purchase the Units at the Closing is subject
to the fulfillment on or prior to each Closing Date of the following conditions,
which conditions may be waived at the option of each Subscriber to the extent
permitted by law:
(a) Representations and Warranties Correct. The representations and warranties
made by the Company in Section 2 hereof shall be true and correct in all
material respects when made, and shall be true and correct in all material
respects on each Closing Date with the same force and effect as if they had
been made on and as of said date.
(b) Covenants. All covenants, agreements and conditions contained in this
Agreement to be performed by the Company on or prior to such purchase shall
have been performed or complied with in all material respects.
(c) Listing. The Company will promptly file an Application for Listing of
Additional Shares with the Nasdaq SmallCap Market in accordance with Rule
10b-7 under the Securities Exchange Act of 1934 and hereby represents and
warrants to the Placement Agent and to the Subscribers that it will take
all action reasonably necessary to list the Common Stock into which the
Preferred Stock is convertible and the Common Stock underlying the
Placement Warrants in accordance with the rules of the Nasdaq SmallCap
Market.
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(d) No Legal Order Pending. There shall not then be in effect any legal or
other order enjoining or restraining the transactions contemplated by this
Agreement.
(e) No Law Prohibiting or Restricting Such Sale. There shall not be in effect
any law, rule or regulation prohibiting or restricting such sale or
requiring any consent or approval of any person which shall not have been
obtained to issue the Shares (except as otherwise provided in this
Agreement).
(f) Minimum Subscriptions. The Company shall have received binding
subscriptions for at least 35 Units.
(g) Legal Opinion. On each Closing Date, Counsel to the Company shall have
delivered to the Placement Agent for the benefit of the Placement Agent and
the Subscribers, legal opinions (including legal opinions as to patent and
regulatory matters) to such effect with respect to legal matters relating
to this Agreement and the Memorandum as the Placement Agent may require.
(h) Comfort Letter. On each Closing Date, to the extent requested by the
Placement Agent, the Company's auditors shall have delivered to the
Placement Agent for the benefit of the Placement Agent and the Subscribers,
a comfort letter to such effect as the Placement Agent may require.
V Registration Rights
5.1 As used in this Agreement, the following terms shall have the following
meanings:
(a) "Affiliate" shall mean, with respect to any person, any other person
controlling, controlled by or under direct or indirect common control with
such person (for the purposes of this definition "control," when used with
respect to any specified person, shall mean the power to direct the
management and policies of such person, directly or indirectly, whether
through ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" shall have meanings correlative to the
foregoing).
(b) "Business Day" shall mean a day Monday through Friday on which banks are
generally open for business in New York.
(c) "Holders" shall mean the Subscribers and any person holding Registrable
Securities to whom the rights under Section 5 have been transferred in
accordance with Section 5.9 hereof.
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(d) "Person" shall mean any person, individual, corporation, partnership,
limited liability company, trust or other nongovernmental entity or any
governmental agency, court, authority or other body (whether foreign,
federal, state, local or otherwise).
(e) The terms "register," "registered" and "registration" refer to the
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
(f) "Registrable Securities" shall mean (A) the Shares of Common Stock issuable
upon the conversion of the Preferred Stock, (B) the shares of Common Stock
underlying the Placement Warrants and (C) any shares of Common Stock issued
as (or issuable upon the conversion of any warrant, right or other security
which is issued as) a dividend or other distribution with respect to or in
replacement of the Shares; provided, however, that securities shall only be
treated as Registrable Securities if and only for so long as they (I) have
not been disposed of pursuant to a registration statement declared
effective by the SEC, (II) have not been sold in a transaction exempt from
the registration and prospectus delivery requirements of the Securities Act
so that all transfer restrictions and restrictive legends with respect
thereto are removed upon the consummation of such sale or (III) are held by
a Holder or a permitted transferee pursuant to subsection 5.9.
(g) "Registration Expenses" shall mean all expenses incurred by the Company in
complying with Section 5.2 hereof, including, without limitation, all
registration, qualification and filing fees, printing expenses, escrow
fees, fees and expenses of counsel for the Company, blue sky fees and
expenses and the expense of any special audits incident to or required by
any such registration (but excluding the fees of legal counsel for any
Holder).
(h) "Registration Statement" shall have the meaning ascribed to such term in
Section 5.2.
(i) "Registration Period" shall have the meaning ascribed to such term in
Section 5.4.
(j) "Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities and all fees
and expenses of legal counsel for any Holder.
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5.2 As soon as practicable but not later than the earlier of (a) 60 days after
the Initial Closing Date and (b) 30 days after the Final Closing Date, (the
"Filing Date"), the Company will file a shelf registration statement (the
"Registration Statement") with the SEC and use its reasonable best efforts to
effect the registration, qualifications or compliances (including, without
limitation, the execution of any required undertaking to file post-effective
amendments, appropriate qualifications under applicable blue sky or other state
securities laws and appropriate compliance with applicable securities laws,
requirements or regulations) as may be so reasonably requested and as would
permit or facilitate the sale and distribution of all Registrable Securities.
5.3 All Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 5.2 shall be borne by the
Company. All Selling Expenses relating to the sale of securities registered by
or on behalf of Holders shall be borne by such Holders pro rata on the basis of
the number of securities so registered.
5.4 In the case of the registration, qualification or compliance effected by
the Company pursuant to this Agreement, the Company will, upon reasonable
request, inform each Holder as to the status of such registration, qualification
and compliance. At its expense the Company will:
(a) use its reasonable best efforts to keep such registration, and any
qualification or compliance under state securities laws which the Company
determines to obtain, continuously effective until at least the third
anniversary of the Closing Date or until the Holders have completed the
distribution described in the registration statement relating thereto,
whichever first occurs. The period of time during which the Company is
required hereunder to keep the Registration Statement effective is referred
to herein as "the Registration Period." Notwithstanding the foregoing at
the Company's election, the Company may cease to keep such registration,
qualification or compliance effective with respect to any Registrable
Securities, and the registration rights of a Holder shall expire, at such
time as the Holder may sell under Rule 144(k) under the Securities Act (or
other exemption from registration acceptable to the Company) all
Registrable Securities then held by such Holder; and
(b) advise the Holders:
(i) when the Registration Statement or any amendment thereto has been filed
with the SEC and when the registration statement or any post-effective
amendment thereto has become effective;
(ii) of any request by the SEC for amendments or supplements to the Registration
Statement or the prospectus included therein or for additional
information;
(iii) of the issuance by the SEC of any stop order suspending the effectiveness
of the Registration Statement or the initiation of any proceedings for
such purpose;
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(iv) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Shares included therein for sale in
any jurisdiction or the initiation or threatening of any proceeding for
such purpose; and
(v) of the happening of any event that requires the making of any changes in
the Registration Statement or the prospectus so that, as of such date, the
statements therein are not misleading and do not omit to state a material
fact required to be stated therein or necessary to make the statements
therein (in the case of the prospectus, in the light of the circumstances
under which they were made) not misleading;
(c) make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of any Registration Statement at the earliest
possible time;
(d) furnish to each Holder, without charge, at least one copy of such
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, and, if the Holder so requests in
writing, all exhibits (including those incorporated by reference) in the
form filed with the SEC;
(e) during the Registration Period, deliver to each Holder, without charge, as
many copies of the prospectus included in such Registration Statement and
any amendment or supplement thereto as such Holder may reasonably request;
and the Company consents to the use, consistent with the provisions hereof,
of the prospectus or any amendment or supplement thereto by each of the
selling Holders of Registrable Securities in connection with the offering
and sale of the Registrable Securities covered by the prospectus or any
amendment or supplement thereto. In addition, upon the reasonable request
of the Subscriber and subject in all cases to confidentiality protections
reasonably acceptable to the Company, the Company will meet with a
Subscriber or a representative thereof at the Company's headquarters to
discuss all information relevant for disclosure in the Registration
Statement covering the Registrable Securities, and will otherwise cooperate
with any Subscriber conducting an investigation for the purpose of reducing
or eliminating such Subscriber's exposure to liability under the Securities
Act, including the reasonable production of information at the Company's
headquarters;
(f) during the Registration Period, deliver to each Holder, without charge, (i)
as soon as practicable (but in the case of the annual report of the Company
to its stockholders, within 120 days after the end of each fiscal year of
the Company) one copy of: (A) its annual report to its stockholders (which
annual report shall contain financial statements audited in accordance with
generally accepted accounting principles in the United States of America by
a firm of certified public accountants of recognized standing); (B) if not
included in substance in its annual report to stockholders, its annual
report on Form 10-K (or similar form); (C) each of its quarterly reports to
its stockholders, and, if not included in substance in its quarterly
reports to stockholders, its quarterly report on Form 10-Q (or similar
form), and (D) a copy of the full Registration Statement (the foregoing, in
each case, excluding exhibits); and (ii)
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upon reasonable request, all exhibits excluded by the parenthetical to the
immediately preceding clause (D), and all other information that is
generally available to the public;
(g) prior to any public offering of Registrable Securities pursuant to any
Registration Statement, register or qualify for offer and sale under the
securities or blue sky laws of such jurisdictions as any such Holders
reasonably request in writing, provided that the Company shall not for any
such purpose be required to qualify generally to transact business as a
foreign corporation in any jurisdiction where it is not so qualified or to
consent to general service of process in any such jurisdiction, and do any
and all other acts or things necessary or advisable to enable the offer and
sale in such jurisdictions of the Registrable Securities covered by such
Registration Statement;
(h) cooperate with the Holders to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold
pursuant to any Registration Statement free of any restrictive legends to
the extent not required at such time and in such denominations and
registered in such names as Holders may request at least three business
days prior to sales of Registrable Securities pursuant to such Registration
Statement;
(i) upon the occurrence of any event contemplated by Section 5.4(b)(v) above,
the Company shall promptly prepare a post-effective amendment to the
Registration Statement or a supplement to the related prospectus, or file
any other required document so that, as thereafter delivered to purchasers
of the Registrable Securities included therein, the prospectus will not
include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and
(j) use its reasonable efforts to comply with all applicable rules and
regulations of the SEC, and will make generally available to the Holders
not later than 45 days (or 90 days if the fiscal quarter is the fourth
fiscal quarter) after the end of its fiscal quarter in which the first
anniversary date of the effective date of the Registration Statement
occurs, an earnings statement satisfying the provisions of Section 11(a) of
the Act.
(k) take all action reasonably necessary to cause the Common Stock into which
the Preferred Stock is convertible and the Common Stock underlying the
Placement Warrants to be listed on the Nasdaq SmallCap Market.
5.5 The Holders shall have no right to take any action to restrain, enjoin or
otherwise delay any registration pursuant to Section 5.2 hereof as a result of
any controversy that may arise with respect to the interpretation or
implementation of this Agreement.
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5.6 (a) To the extent permitted by law, the Company will indemnify each
Holder, each underwriter of the Shares and each person controlling such Holder
within the meaning of Section 15 of the Securities Act, with respect to which
any registration, qualification or compliance has been effected pursuant to this
Agreement, against all claims, losses, damages and liabilities (or action in
respect thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened (subject to Section 5.6(c) below), arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus or offering
circular, or any amendment or supplement thereof, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in light of the
circumstances in which they were made, and will reimburse each Holder, each
underwriter of the Shares and each person controlling such Holder, for
reasonable legal and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action as
incurred, provided that the Company will not be liable in any such case to the
extent that any untrue statement or omission or allegation thereof is made in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of such Holder and stated to be specifically for use in
preparation of such registration statement, prospectus or offering circular;
provided that the Company will not be liable in any such case where the claim,
loss, damage or liability arises out of or is related to the failure of the
Holder to comply with the covenants and agreements contained in this Agreement
respecting sales of Registrable Securities, and except that the foregoing
indemnity agreement is subject to the condition that, insofar as it relates to
any such untrue statement or alleged untrue statement or omission or alleged
omission made in the preliminary prospectus but eliminated or remedied in the
amended prospectus on file with the SEC at the time the registration statement
becomes effective or in the amended prospectus filed with the SEC pursuant to
Rule 424(b) of the Securities Act or in the prospectus subject to completion and
term sheet under Rule 434 of the Securities Act, which together meet the
requirements of Section 10(a) of the Securities Act (the "Final Prospectus"),
such indemnity agreement shall not inure to the benefit of any such Holder, any
such underwriter or any such controlling person, if a copy of the Final
Prospectus was not furnished to the person or entity asserting the loss,
liability, claim or damage at or prior to the time such furnishing is required
by the Securities Act.
(b) Each Holder will severally, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each underwriter of the Shares and each person who controls the
Company within the meaning of Section 15 of the Securities Act, against all
claims, losses, damages and liabilities (or actions in respect thereof),
including any of the foregoing incurred in settlement of any litigation,
commenced or threatened (subject to Section 5.6(c) below), arising out of or
based on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus or offering circular, or any
amendment or supplement thereof, incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a
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material fact required to be stated therein or necessary to make the statements
therein not misleading, in light of the circumstances in which they were made,
and will reimburse the Company, such directors and officers, each underwriter of
the Shares and each person controlling the Company for reasonable legal and any
other expenses reasonably incurred in connection with investigating or defending
any such claim, loss, damage, liability or action as incurred, in each case to
the extent, but only to the extent, that such untrue statement or omission or
allegation thereof is made in reliance upon and in conformity with written
information furnished to the Company by or on behalf of the Holder and stated to
be specifically for use in preparation of such registration statement,
prospectus or offering circular; provided that the indemnity shall not apply to
the extent that such claim, loss, damage or liability results from the fact that
a current copy of the prospectus that was made available to the Holder was not
sent or given to the person asserting any such claim, loss, damage or liability
at or prior to the written confirmation of the sale of the Registrable
Securities confirmed to such person if such current copy of the prospectus would
have cured the defect giving rise to such loss, claim, damage or liability.
Notwithstanding the foregoing, in no event shall a Holder be liable for any such
claims, losses, damages or liabilities in excess of the proceeds received by
such Holder in the offering, except in the event of fraud by such Holder.
(c) Each party entitled to indemnification under this Section 5.6 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
Indemnified Party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement, unless such failure
is prejudicial to the Indemnifying Party in defending such claim or litigation.
An Indemnifying Party shall not be liable for any settlement of an action or
claim effected without its written consent (which consent will not be
unreasonably withheld).
(d) If the indemnification provided for in this Section 5.6 is held by a court
of competent jurisdiction to be unavailable to an Indemnified Party with respect
to any loss, liability, claim, damage or expense referred to therein, then the
Indemnifying Party, in lieu of indemnifying such Indemnified Party thereunder,
shall contribute to the amount paid or payable by such Indemnified Party as a
result of such loss, liability, claim, damage or expense in such proportion as
is appropriate to reflect the relative fault of the Indemnifying Party on the
one hand and of the Indemnified Party on the other in connection with the
statements or omissions which resulted in such loss, liability, claim, damage or
expense as well as any other relevant equitable considerations. The relative
fault of the Indemnifying Party and of the Indemnified Party shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates to
information supplied
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by the Indemnifying Party or by the Indemnified Party and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
5.7 (a) Each Holder agrees that, upon receipt of any notice from the Company
of the happening of any event requiring the preparation of a supplement or
amendment to a prospectus relating to Registrable Securities so that, as
thereafter delivered to the Holders, such prospectus will not contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, each
Holder will forthwith discontinue disposition of Registrable Securities pursuant
to the registration statement contemplated by Section 5.2 until its receipt of
copies of the supplemented or amended prospectus from the Company and, if so
directed by the Company, each Holder shall deliver to the Company all copies,
other than permanent file copies then in such Holder's possession, of the
prospectus covering such Registrable Securities current at the time of receipt
of such notice.
(b) Each Holder agrees to suspend, upon request of the Company, any disposition
of Registrable Securities pursuant to the registration statement and prospectus
contemplated by Section 5.2 during (A) any period not to exceed two 40-day
periods within any one 12-month period the Company requires in connection with a
primary underwritten offering of equity securities and (B) any period, not to
exceed one 30-day period per circumstance or development, when the Company
determines in good faith that offers and sales pursuant thereto should not be
made by reason of the presence of material undisclosed circumstances or
developments with respect to which the disclosure that would be required in such
a prospectus is premature, would have an adverse effect on the Company or is
otherwise inadvisable.
(c) As a condition to the inclusion of its Registrable Securities, each Holder
shall furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the Company may request in writing or as
shall be required in connection with any registration, qualification or
compliance referred to in this Article V.
(d) Each Holder hereby covenants with the Company (1) not to make any sale of
the Registrable Securities without effectively causing the prospectus delivery
requirements under the Securities Act to be satisfied, and (2) if such
Registrable Securities are to be sold by any method or in any transaction other
than on Nasdaq (or other national securities exchange), in the over-the-counter
market, in privately negotiated transactions, or in a combination of such
methods, to notify the Company at least five business days prior to the date on
which the Holder first offers to sell any such Shares.
(e) Each Holder acknowledges and agrees that the Registrable Securities sold
pursuant to the registration statement described in this Section are not
transferable on the books of the Company unless the stock certificate submitted
to the transfer agent evidencing such Shares is accompanied by a certificate
reasonably satisfactory to the Company to
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the effect that (A) the Registrable Securities have been sold in accordance with
such registration statement and (B) the requirement of delivering a current
prospectus has been satisfied.
(f) Each Holder agrees not to take any action with respect to any distribution
deemed to be made pursuant to such registration statement, that constitutes a
violation of Rule 10(b)-6 under the Exchange Act or any other applicable rule,
regulation or law.
(g) At the end of the period during which the Company is obligated to keep the
registration statement current and effective as described above, the Holders of
Registrable Securities included in the registration statement shall discontinue
sales of shares pursuant to such registration statement upon receipt of notice
from the Company of its intention to remove from registration the shares covered
by such registration statement which remain unsold, and such Holders shall
notify the Company of the number of shares registered which remain unsold
immediately upon receipt of such notice from the Company.
5.8 With a view to making available to the Holders the benefits of certain
rules and regulations of the SEC which at any time permit the sale of the
Registrable Securities to the public without registration, the Company agrees to
use its reasonable best efforts to:
(a) make and keep public information available, as those terms are understood
and defined in Rule 144 under the Securities Act, at all times;
(b) file with the SEC in a timely manner all reports and other documents
required of the Company under the Exchange Act; and
(c) so long as a Holder owns any unregistered Registrable Securities, furnish to
such Holder upon any reasonable request a written statement by the Company as to
its compliance with Rule 144 under the Securities Act, and of the Exchange Act,
a copy of the most recent annual or quarterly report of the Company, and such
other reports and documents of the Company as such Holder may reasonably request
in availing itself of any rule or regulation of the SEC allowing a Holder to
sell any such securities without registration.
5.9 The rights to cause the Company to register Registrable Securities granted
to the Holders by the Company under Section 5.2 may be assigned in full by a
Holder, provided, that: (i) such transfer may otherwise be effected in
accordance with applicable securities laws; (ii) such transfer involves not less
than the lesser of all of such Holder's Shares or 100,000 Shares; (iii) such
Holder gives prior written notice to the Company; and (iv) such transferee
agrees to comply with the terms and provisions of this Agreement, and such
transfer is otherwise in compliance with this Agreement. Except as specifically
permitted by this Section 5.9, the rights of a Holder with respect to
Registrable Securities as set out herein shall not be transferable to any other
Person, and any attempted transfer shall cause all rights of such Holder therein
to be forfeited.
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5.10 With the written consent of the Company and the Holders holding at least a
majority of the Registrable Securities that are then outstanding, any provision
of this Article V may be waived (either generally or in a particular instance,
either retroactively or prospectively and either for a specified period of time
or indefinitely) or amended. Upon the effectuation of each such waiver or
amendment, the Company shall promptly give written notice thereof to the
Holders, if any, who have not previously received notice thereof or consented
thereto in writing.
VI MISCELLANEOUS
6.1 Any notice or other communication given hereunder shall be deemed
sufficient if in writing and sent by registered or certified mail, return
receipt requested, or delivered by hand against written receipt therefor,
addressed to Zonagen, Inc., 2408 Timberloch Place, Suite B-4, The Woodlands,
Texas 77380, Attn: President, and to the Subscriber at his address indicated on
the signature page of this Agreement. Notices shall be deemed to have been
given or delivered on the date of mailing, except notices of change of address,
which shall be deemed to have been given or delivered when received.
6.2 Except as provided for in Section 5.10, this Agreement shall not be
changed, modified or amended except by a writing signed by the parties to be
charged, and this Agreement may not be discharged except by performance in
accordance with its terms or by a writing signed by the party to be charged.
6.3 Subject to the provisions of Section 5.9, this Agreement shall be binding
upon and inure to the benefit of the parties hereto and to their respective
heirs, legal representatives, successors and assigns. This Agreement sets forth
the entire agreement and understanding between the parties as to the subject
matter hereof and merges and supersedes all prior discussions, agreements and
understandings of any and every nature among them.
6.4 Upon the execution and delivery of this Agreement by the Subscriber, this
Agreement shall become a binding obligation of the Subscriber with respect to
the purchase of Units as herein provided; subject, however, to the right hereby
reserved to the Company to enter into the same agreements with other subscribers
and to add and/or delete other persons as subscribers.
6.5 NOTWITHSTANDING THE PLACE WHERE THIS AGREEMENT MAY BE EXECUTED BY ANY OF
THE PARTIES HERETO, THE PARTIES EXPRESSLY AGREE THAT ALL THE TERMS AND
PROVISIONS HEREOF SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS
OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
6.6 In order to discourage frivolous claims the parties agree that unless a
claimant in any proceeding arising out of this Agreement succeeds in
establishing his claim and recovering a judgment against another party
(regardless of whether such claimant succeeds
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against one of the other parties to the action), then the other party shall be
entitled to recover from such claimant all of its/their reasonable legal costs
and expenses relating to such proceeding and/or incurred in preparation
therefor.
6.7 The holding of any provision of this Agreement to be invalid or
unenforceable by a court of competent jurisdiction shall not affect any other
provision of this Agreement, which shall remain in full force and effect. If
any provision of this Agreement shall be declared by a court of competent
jurisdiction to be invalid, illegal or incapable of being enforced in whole or
in part, such provision shall be interpreted so as to remain enforceable to the
maximum extent permissible consistent with applicable law and the remaining
conditions and provisions or portions thereof shall nevertheless remain in full
force and effect and enforceable to the extent they are valid, legal and
enforceable, and no provisions shall be deemed dependent upon any other covenant
or provision unless so expressed herein.
6.8 It is agreed that a waiver by either party of a breach of any provision of
this Agreement shall not operate, or be construed, as a waiver of any subsequent
breach by that same party.
6.9 The parties agree to execute and deliver all such further documents,
agreements and instruments and take such other and further action as may be
necessary or appropriate to carry out the purposes and intent of this Agreement.
6.10 This Agreement may be executed in two or more counterparts each of which
shall be deemed an original, but all of which shall together constitute one and
the same instrument.
6.11 (a) The Subscribers severally agree not to issue any public statement
with respect to the Subscribers' investment or proposed investment in the
Company or the terms of any agreement or covenant between them and the Company
without the Company's prior written consent, except such disclosures as may be
required under applicable law or under any applicable order, rule or regulation.
(b) The Company agrees not to disclose the names, addresses or any other
information about the Subscribers, except as required by law; provided, that the
Company may use the name (but not the address) of the Subscriber in the
Registration Statement.
6.12 (a) Each Subscriber severally represents and warrants that it has not
engaged, consented to or authorized any broker, finder or intermediary to act on
its behalf, directly or indirectly, as a broker, finder or intermediary in
connection with the transactions contemplated by this Agreement. Each
Subscriber hereby severally agrees to indemnify and hold harmless the Company
and the Placement Agent from and against all fees, commissions or other payments
owing to any such person or firm acting on behalf of such Subscriber hereunder.
19
<PAGE>
(b) The Company has engaged, consented to and authorized the Placement Agent in
connection with the transactions contemplated by this Agreement. The Company
hereby agrees to pay the Placement Agent a commission and to reimburse expenses
in accordance with the Placement Agency Agreement dated July 17, 1996 (the
"Placement Agency Agreement"), and the Company agrees to indemnify and hold
harmless the Subscribers from and against all fees, commissions or other
payments owing by the Company to any other person or firm acting on behalf of
the Company hereunder.
6.13 Nothing in this Agreement shall create or be deemed to create any rights
in any person or entity not a party to this Agreement, except (a) for the
holders of Registrable Securities and (b) for the Placement Agent pursuant to
Article I and 6.12 hereof.
VII NOTICE TO, AND REPRESENTATIONS AND COVENANTS OF, CERTAIN STATE RESIDENTS
7.1 Connecticut Residents: The undersigned acknowledges that the Securities
have not been registered under the Connecticut Uniform Securities Act, as
amended, and are subject to restrictions on transferability and sale of
securities as set forth herein. The undersigned hereby agrees that such
Securities will not be transferred or sold without registration under the
Connecticut Uniform Securities Act, as amended, or exemption therefrom.
7.2 Missouri Residents: The Subscriber acknowledges that the Securities have
not been registered under the Missouri Uniform Securities Act, as amended, and
are subject to restrictions on transferability and the sale of securities as
forth herein. The Subscriber hereby acknowledges that such Securities may be
disposed of only through a licensed broker-dealer. It is a felony to sell
securities in violation of the Missouri Uniform Securities Act.
7.3 Pennsylvania Residents: The Subscriber hereby acknowledges that the
Company is relying upon the exemption from registration of securities set forth
in Section 203(d) of the Pennsylvania Act of 1972, as amended (the "Pennsylvania
Act") in connection with the sale of the Securities to the Subscriber.
In accordance with the requirements of Section 203(d) of the Pennsylvania Act,
the Subscriber hereby agrees not to sell the securities within twelve months
from the date of purchase except pursuant to Section 204.01 of the Blue Sky
Regulations of the Pennsylvania Act. Additionally, the Subscriber is aware of
the right of withdrawal under Section 207(m) of the Pennsylvania Act described
in the cover pages of the Memorandum.
7.4 Texas Residents: The Subscriber hereby acknowledges that the Securities
cannot be sold unless they are subsequently registered under the Securities Act
of 1933, as amended, and the Texas Securities Act, or an exemption from
registration is available. The Subscriber further acknowledges that because the
Securities are not readily transferable, they must bear the entire risk of the
investment for an indefinite period of time.
20
<PAGE>
7.5 Alabama Residents: The undersigned represents that he or she, either alone
or with the undersigned's representative, has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of investment in the Units.
7.6 Massachusetts Residents: If the undersigned is a natural person, he or she
represents that his or her investment in these Units does not exceed 25% of his
or her net worth or joint net worth with spouse (excluding principal residence
and its furnishings).
7.7 Maryland Residents: The undersigned acknowledges and agrees that these
Units will not be sold without registration under the Maryland Securities Act or
exemption therefrom.
7.8 Wisconsin Residents: The undersigned represents that he or she, either
alone or with his or her representative, has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of investment in the Units.
7.9 California Residents: If the undersigned is a natural person, he or she
represents that his or her investment in these Units does not exceed 10% of his
or her net worth or joint net worth with spouse (excluding principal residence
and its furnishings).
7.10 Florida Residents: The undersigned acknowledges that the Units have not
been registered under the Florida Securities and Investor Protection Act (the
"Florida Act")in reliance upon exemption provisions contained therein. Section
517.061 (11)(a)(5) of the Florida Act provides that any Purchaser of securities
in Florida which are exempted from registration under Section 517.061(11) of the
Florida Act may withdraw his subscription agreement and receive a full refund of
all monies paid, within three business days after he tenders consideration for
such securities. Therefore, any Florida resident who purchases securities is
entitled to exercise the foregoing statutory rescission right within three
business days after tendering consideration for the investment packages by
telephone, telegram or letter notice to the Company. Any telegram or letter
should be sent or postmarked prior to the end of the third business day. A
letter should be mailed by certified mail, return receipt requested, to ensure
its receipt and to evidence the time of mailing. Any oral requests should be
confirmed in writing.
7.11 North Carolina Residents: The undersigned acknowledges that these Units
are subject to restriction on transferability and resale and may not be
transferred or resold except as permitted under the Securities and Exchange Act
of 1933, as amended, and the applicable state securities laws, pursuant to the
registration or exemption therefrom. Investors should be aware that that they
will be required to bear the financial risks of this investment for an
indefinite period of time.
21
<PAGE>
VIII CONFIDENTIAL INVESTOR QUESTIONNAIRE
8.1 The Subscriber represents and warrants that he, she or it comes within one
category marked below, and that for any category marked, he or she has
truthfully set forth, where applicable, the factual basis or reason the
Subscriber comes within that category. ALL INFORMATION IN RESPONSE TO THIS
SECTION WILL BE KEPT STRICTLY CONFIDENTIAL. The undersigned agrees to furnish
any additional information which the Company deems necessary in order to verify
the answers set forth below.
Category A The undersigned is an individual (not a partnership,
corporation, etc.) whose individual net worth, or joint net
worth with his or her spouse, presently exceeds $1,000,000.
Explanation. In calculating net worth you may include
equity in personal property and real estate, including your
principal residence, cash, short-term investments, stock and
securities. Equity in personal property and real estate
should be based on the fair market value of such property
less debt secured by such property.
Category B The undersigned is an individual (not a partnership,
corporation, etc.) who had an income in excess of $200,000
in each of the two most recent years, or joint income with
his or her spouse in excess of $300,000 in each of those
years (in each case including foreign income, tax exempt
income and full amount of capital gains and loses but
excluding any income of other family members and any
unrealized capital appreciation) and has a reasonable
expectation of reaching the same income level in the current
year.
Category C The undersigned is a director or executive officer of the
Company which is issuing and selling the Units.
Category D The undersigned is a bank; a savings and loan association;
insurance company; registered investment company; registered
business development company; licensed small business
investment company ("SBIC"); or employee benefit plan within
the meaning of Title 1 of ERISA and (a) the investment
decision is made by a plan fiduciary which is either a bank,
savings and loan association, insurance company or
registered investment advisor, or (b) the plan has total
assets in excess of $5,000,000 or is a self directed plan
with investment decisions made solely by persons that are
accredited investors.
22
<PAGE>
----------------------
----------------------
(describe entity)
Category E The undersigned is a private business development company
as defined in section 202(a)(22) of the Investment Advisors
Act of 1940.
----------------------
----------------------
(describe entity)
Category F The undersigned is either a corporation, partnership,
Massachusetts business trust, or non-profit organization
within the meaning of Section 501(c)(3) of the Internal
Revenue Code, in each case not formed for the specific
purpose of acquiring the Units and with total assets in
excess of $5,000,000.
----------------------
----------------------
(describe entity)
Category G The undersigned is a trust with total assets in excess of
$5,000,000, not formed for the specific purpose of acquiring
the Units, where the purchase is directed by a
"sophisticated person" as defined in Regulation
506(b)(2)(ii).
Category H The undersigned is an entity (other than a trust) all the
equity owners of which are "accredited investors" within one
or more of the above categories. If relying upon this
Category alone, each equity owner must complete a separate
copy of this Agreement.
----------------------
----------------------
(describe entity)
23
<PAGE>
Category I The undersigned is not within any of the categories above
and is therefore not an accredited investor.
The undersigned agrees that the undersigned will notify the Company at any time
on or prior to the Closing Date in the event that the representations and
warranties in this Agreement shall cease to be true, accurate and complete.
8.2 SUITABILITY (please answer each question)
(a) For an individual Subscriber, please describe your current employment,
including the company by which you are employed and its principal business:
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(b) For an individual Subscriber, please describe any college or graduate
degrees held by you:
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(c) For all Subscribers, please list types of prior investments:
______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(d) For all Subscribers, please state whether you have you participated in
other private placements before:
YES_______ NO_______
(e) For all Subscribers, please indicate frequency of such prior participation
in private placements of:
Public Private Public or Private
Companies Companies Biotechnology Companies
--------- ----------- -----------------------
Frequently
----------- ------------ ---------------
Occasionally
----------- ------------ ---------------
Never
----------- ------------ ---------------
24
<PAGE>
(f) For individual Subscribers, do you expect your current level of income to
significantly decrease in the foreseeable future?
YES_______ NO_______
(g) For trust, corporate, partnership and other institutional Subscribers, do
you expect your total assets to significantly decrease in the foreseeable
future?
YES_______ NO_______
(h) For all Subscribers, do you have any other investments or contingent
liabilities which you reasonably anticipate could cause you to need sudden cash
requirements in excess of cash readily available to you?
YES_______ NO_______
(i) For all Subscribers, are you familiar with the risk aspects and the non-
liquidity of investments such as the securities for which you seek to subscribe?
YES_______ NO_______
(j) For all Subscribers, do you understand that there is no guarantee of
financial return on this investment and that you run the risk of losing your
entire investment?
YES_______ NO_______
8.3 Manner In Which Title to be Held. (circle one)
----------------------------------------------
(a) Individual Ownership
(b) Community Property
(c) Joint Tenant with Right of
Survivorship (both parties
must sign)
(d) Partnership*
(e) Tenants in Common
(f) Company*
(g) Trust*
(h) Other
*If Units are being subscribed for by an entity, the attached
Certificate of Signatory must also be completed.
25
<PAGE>
8.4 NASD Affiliation.
Are you affiliated or associated with an NASD member firm (please
check one):
Yes _________ No __________
If Yes, please describe:
_________________________________________________________
_________________________________________________________
_________________________________________________________
*If Subscriber is a Registered Representative with an NASD member
firm, have the following acknowledgment signed by the appropriate party:
The undersigned NASD member firm acknowledges receipt of the notice
required by Article 3, Sections 28(a) and (b) of the Rules of Fair Practice.
_________________________________
Name of NASD Member Firm
By: ______________________________
Authorized Officer
Date: ____________________________
8.5 The undersigned is informed of the significance to the Company of
the foregoing representations and answers contained in the Confidential Investor
Questionnaire contained in this Section 8 and such answers have been provided
under the assumption that the Company will rely on them.
26
<PAGE>
[SIGNATURE PAGE]
NUMBER OF UNITS X $100,000 = (THE "PURCHASE PRICE")
__________________________ _____________________________________
Signature Signature (if purchasing jointly)
__________________________ _____________________________________
Name Typed or Printed Name Typed or Printed
__________________________ _____________________________________
Address Address
__________________________ _____________________________________
City, State and Zip Code City, State and Zip Code
__________________________ _____________________________________
Telephone-Business Telephone--Business
__________________________ _____________________________________
Telephone-Residence Telephone--Residence
__________________________ _____________________________________
Facsimile-Business Facsimile--Business
__________________________ _____________________________________
Facsimile-Residence Facsimile--Residence
__________________________ _____________________________________
Tax ID # or Social Security # Tax ID # or Social Security #
Name in which securities should be issued:
Dated: , 1996
This Subscription Agreement is agreed to and accepted as of
, 1996.
ZONAGEN, INC.
By: __________________________________________
Name: Joe Podolski
Title: Chief Executive Officer and President
27
<PAGE>
CERTIFICATE OF SIGNATORY
(To be completed if Units are
being subscribed for by an entity)
I, ________________________________, am the _____________________of
_____________________________________________ (the "Entity").
I certify that I am empowered and duly authorized by the Entity to
execute and carry out the terms of the Subscription Agreement and to purchase
and hold the Units, and certify further that the Subscription Agreement has been
duly and validly executed on behalf of the Entity and constitutes a legal and
binding obligation of the Entity.
IN WITNESS WHEREOF, I have set my hand this ____ day of ____ , 1996.
_________________________________
(Signature)
28
<PAGE>
EXHIBIT 4.3
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAW. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL
REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM
THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT.
ZONAGEN, INC.
WARRANT FOR THE PURCHASE OF SHARES OF
PREFERRED STOCK
No. 1 169,250 Shares
FOR VALUE RECEIVED, ZONAGEN, INC., a Delaware corporation (the
"COMPANY"), hereby certifies that Paramount Capital, Inc., its designee or its
permitted assigns is entitled to purchase from the Company, at any time or from
time to time commencing on APRIL 11, 1997 and prior to 5:00 P.M., New York City
time, on OCTOBER 11, 2001, ONE HUNDRED SIXTY NINE THOUSAND TWO HUNDRED AND FIFTY
(169,250) fully paid and non-assessable shares of the Series B Convertible
Preferred Stock, $.001 par value per share, of the Company for an aggregate
purchase price of $1,861,750 (computed on the basis of $11.00 per share).
(Hereinafter, (i) said Series B Convertible Preferred Stock, together with any
other equity securities which may be issued by the Company with respect thereto
(other than on conversion thereof) or in substitution therefor, is referred to
as the "PREFERRED STOCK", (ii) the Common Stock, $.001 par value, of the
Company, into which the Preferred Stock is convertible, is referred to as the
"COMMON STOCK", (iii) the shares of the Preferred Stock purchasable hereunder or
under any other Warrant (as hereinafter defined) are referred to as the "WARRANT
SHARES", (iv) the shares of Common Stock purchasable hereunder or under any
other Warrant (as hereinafter defined) following the conversion of all shares of
Preferred Stock into Common Stock and each share of Common Stock receivable upon
the conversion of the Warrant Shares receivable upon the exercise of this
Warrant are referred to as the "CONVERSION SHARES", (v) the aggregate purchase
price payable for the Warrant Shares or the Conversion Shares, as the case may
be, hereunder is referred to as the "AGGREGATE WARRANT PRICE", (vi) the price
payable (initially $11.00 per share, subject to adjustment) for each of the
Warrant Shares or the Conversion Shares, as the case may be, hereunder is
referred to as the "PER SHARE WARRANT PRICE", (vii) this Warrant, all similar
Warrants issued on the date hereof and all warrants hereafter issued in exchange
or substitution for this Warrant or such similar Warrants are referred to as the
"WARRANTS", (viii) the holder of this Warrant is referred to as the "HOLDER" and
the holder of this Warrant and all other Warrants, Warrant Shares and Conversion
Shares are referred to as the "HOLDERS" and Holders of more than 50% of the
outstanding Warrants, Warrant Shares and Conversion Shares are referred to as
the "MAJORITY OF THE HOLDERS") and (ix) the then Current Market
<PAGE>
Price per share (the "CURRENT MARKET PRICE") shall be deemed to be the last sale
price of the Common Stock on the trading day prior to such date or, in case no
such reported sales take place on such day, the average of the last reported bid
and asked prices of the Common Stock on such day, in either case on the
principal national securities exchange on which the Common Stock is admitted to
trading or listed, or if not listed or admitted to trading on any such exchange,
the representative closing bid price of the Common Stock as reported by the
National Association of Securities Dealers, Inc. Automated Quotations System
("NASDAQ"), or other similar organization if NASDAQ is no longer reporting such
information, or, if the Common Stock is not reported on NASDAQ, the high per
share bid price for the Common Stock in the over-the-counter market as reported
by the National Quotation Bureau or similar organization, or if not so
available, the fair market value of the Common Stock as determined in good faith
by the Board of Directors. The then current "MARKET PRICE PER SHARE OF PREFERRED
STOCK" shall equal the then Current Market Price multiplied by the then
effective "conversion rate" (as defined and used in the Certificate of
Designation for the Preferred Stock). The Aggregate Warrant Price is not subject
to adjustment. The Per Share Warrant Price is subject to adjustment as
hereinafter provided; in the event of any such adjustment, the number of Warrant
Shares or Conversion Shares, as the case may be, deliverable upon exercise of
this Warrant shall be adjusted by dividing the Aggregate Warrant Price by the
Per Share Warrant Price in effect immediately after such adjustment.
1. EXERCISE OF WARRANT.
(a) This Warrant may be exercised, in whole at any time or in part
from time to time, commencing on April 11, 1997 and prior to 5:00 P.M., New York
City time, on October 11, 2001 by the Holder:
(b) by the surrender of this Warrant (with the subscription form at the
end hereof duly executed) at the address set forth in Subsection 9(a) hereof,
together with proper payment of the Aggregate Warrant Price, or the
proportionate part thereof if this Warrant is exercised in part, with payment
for Warrant Shares or Conversion Shares, as the case may be, made by certified
or official bank check payable to the order of the Company; or
(ii) by the surrender of this Warrant (with the cashless exercise form
at the end hereof duly executed) (a "CASHLESS EXERCISE") at the address set
forth in Subsection 9(a) hereof. Such presentation and surrender shall be deemed
a waiver of the Holder's obligation to pay the Aggregate Warrant Price, or the
proportionate part thereof if this Warrant is exercised in part. In the event of
a Cashless Exercise, the Holder shall exchange its Warrant for that number of
Warrant Shares or Conversion Shares, as the case may be, subject to such
Cashless Exercise multiplied by a fraction, the numerator of which shall be the
difference between the then Current Market Price Per Share of Preferred Stock
(or the Common Stock into which the Preferred Stock is convertible) and the Per
Share Warrant Price, and the denominator of which shall be the then Current
Market Price Per Share of Preferred Stock (or the Common Stock into which the
Preferred Stock is convertible). For purposes of any computation under this
Section 1(a), the then
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<PAGE>
Current Market Price shall be based on the trading day prior to the
Cashless Exercise.
(b) If this Warrant is exercised in part, this Warrant must be
exercised for a number of whole shares of the Preferred Stock, (or the Common
Stock following conversion of all the Preferred Stock) and the Holder is
entitled to receive a new Warrant covering the Warrant Shares or Conversion
Shares, as the case may be, which have not been exercised and setting forth the
proportionate part of the Aggregate Warrant Price applicable to such Warrant
Shares or Conversion Shares, as the case may be. Upon surrender of this Warrant,
the Company will (i) issue a certificate or certificates in the name of the
Holder for the largest number of whole shares of the Preferred Stock (or the
Common Stock following conversion of all the Preferred Stock) to which the
Holder shall be entitled and, if this Warrant is exercised in whole, in lieu of
any fractional share of the Preferred Stock (or the Common Stock following
conversion of all the Preferred Stock) to which the Holder shall be entitled,
pay to the Holder cash in an amount equal to the fair value of such fractional
share (determined in such reasonable manner as the Board of Directors of the
Company shall determine), and (ii) deliver the other securities and properties
receivable upon the exercise of this Warrant, or the proportionate part thereof
if this Warrant is exercised in part, pursuant to the provisions of this
Warrant.
(c) If this Warrant is exercised on or after the date on which all
shares of Preferred Stock have been converted into shares of Common Stock (the
"Conversion Date"), then this Warrant shall be exercisable only for Conversion
Shares at the then applicable Per Share Warrant Price (including any adjustment
pursuant to Section 3(f) below).
2. RESERVATION OF WARRANT SHARES AND CONVERSION SHARES; LISTING. The
Company agrees that, prior to the expiration of this Warrant, the Company will
at all times (a) have authorized and in reserve, and will keep available, solely
for issuance and delivery upon the exercise of this Warrant, the shares of the
Preferred Stock and other securities and properties as from time to time shall
be receivable upon the exercise of this Warrant, free and clear of all
restrictions on sale or transfer, other than under Federal or state securities
laws, and free and clear of all preemptive rights and rights of first refusal
and (b) have authorized and in reserve, and will keep available, solely for
issuance or delivery upon conversion of the Warrant Shares or the exercise of
this Warrant following the conversion of all shares of Preferred Stock into
Common Stock, the shares of Common Stock and other securities and properties as
from time to time shall be receivable upon such conversion, free and clear of
all restrictions on sale or transfer, other than under Federal or state
securities laws, and free and clear of all preemptive rights and rights of first
refusal; and (c) if the Company hereafter lists its Common Stock on any national
securities exchange, use its best efforts to keep the Conversion Shares
authorized for listing on such exchange upon notice of issuance.
3. PROTECTION AGAINST DILUTION.
(a) If, at any time or from time to time after the date of this
Warrant, the Company shall issue or distribute to the holders of shares of
Preferred Stock evidence of its indebtedness, any other securities of the
Company or any cash, property or other assets (excluding a subdivision,
combination or reclassification, or dividend or distribution
-3-
<PAGE>
payable in shares of Preferred Stock, referred to in Subsection 3(b), and also
excluding cash dividends or cash distributions paid out of net profits legally
available therefor in the full amount thereof (any such non-excluded event being
herein called a "SPECIAL DIVIDEND")), the Per Share Warrant Price shall be
adjusted by multiplying the Per Share Warrant Price then in effect by a
fraction, the numerator of which shall be the then Current Market Price in
effect on the record date of such issuance or distribution less the fair market
value (as determined in good faith by the Company's Board of Directors) of the
evidence of indebtedness, cash, securities or property, or other assets issued
or distributed in such Special Dividend applicable to one share of Preferred
Stock and the denominator of which shall be the then Current Market Price in
effect on the record date of such issuance or distribution. An adjustment made
pursuant to this Subsection 3(a) shall become effective immediately after the
record date of any such Special Dividend.
(b) In case the Company shall hereafter (i) pay a dividend or make a
distribution on its capital stock in shares of Preferred Stock, (ii) subdivide
its outstanding shares of Preferred Stock into a greater number of shares, (iii)
combine its outstanding shares of Preferred Stock into a smaller number of
shares or (iv) issue by reclassification of its Preferred Stock any shares of
capital stock of the Company (other than the Conversion Shares), the Per Share
Warrant Price shall be adjusted to be equal to a fraction, the numerator of
which shall be the Aggregate Warrant Price and the denominator of which shall be
the number of shares of Preferred Stock or other capital stock of the Company
which he would have owned immediately following such action had such Warrant
been exercised immediately prior thereto. An adjustment made pursuant to this
Subsection 3(b) shall become effective immediately after the record date in the
case of a dividend or distribution and shall become effective immediately after
the effective date in the case of a subdivision, combination or
reclassification.
(c) Except as provided in Subsections 3(a) and 3(d), in case the
Company shall hereafter issue or sell any Preferred Stock, any securities
convertible into Preferred Stock, any rights, options or warrants to purchase
Preferred Stock or any securities convertible into Preferred Stock, in each case
for a price per share or entitling the holders thereof to purchase Preferred
Stock at a price per share (determined by dividing (i) the total amount, if any,
received or receivable by the Company in consideration of the issuance or sale
of such securities plus the total consideration, if any, payable to the Company
upon exercise or conversion thereof (the "TOTAL CONSIDERATION") by (ii) the
number of additional shares of Preferred Stock issuable upon exercise or
conversion of such securities) which is less than either the then Current Market
Price in effect on the date of such issuance or sale or the Per Share Warrant
Price, the Per Share Exercise Price shall be adjusted as of the date of such
issuance or sale by multiplying the Per Share Warrant Price then in effect by a
fraction, the numerator of which shall be (x) the sum of (A) the number of
shares of Preferred Stock outstanding on the record date of such issuance or
sale plus (B) the Total Consideration divided by the Current Market Price of the
Preferred Stock or the current Per Share Warrant Price, whichever is greater,
and the denominator of which shall be (y) the number of shares of Preferred
Stock outstanding on the record date of such issuance or sale plus the maximum
number of additional shares of Preferred Stock issued, sold or issuable upon
exercise or conversion of such securities.
(d) No adjustment in the Per Share Warrant Price shall be required in
the case of the issuance by the Company of Preferred Stock (i) pursuant to the
exercise of
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<PAGE>
any Warrant or (ii) pursuant to the exercise of any stock options or
warrants currently outstanding or securities issued after the date hereof
pursuant to any Company benefit plan.
(e) In case of any capital reorganization or reclassification, or any
consolidation or merger to which the Company is a party other than a merger or
consolidation in which the Company is the continuing corporation, or in case of
any sale or conveyance to another entity of the property of the Company as an
entirety or substantially as a entirety, or in the case of any statutory
exchange of securities with another corporation (including any exchange effected
in connection with a merger of a third corporation into the Company), the Holder
of this Warrant shall have the right thereafter to receive on the exercise of
this Warrant the kind and amount of securities, cash or other property which the
Holder would have owned or have been entitled to receive immediately after such
reorganization, reclassification, consolidation, merger, statutory exchange,
sale or conveyance had this Warrant been exercised immediately prior to the
effective date of such reorganization, reclassification, consolidation, merger,
statutory exchange, sale or conveyance and in any such case, if necessary,
appropriate adjustment shall be made in the application of the provisions set
forth in this Section 3 with respect to the rights and interests thereafter of
the Holder of this Warrant to the end that the provisions set forth in this
Section 3 shall thereafter correspondingly be made applicable, as nearly as may
reasonably be, in relation to any shares of stock or other securities or
property thereafter deliverable on the exercise of this Warrant. The above
provisions of this Subsection 3(e) shall similarly apply to successive
reorganizations, reclassifications, consolidations, mergers, statutory
exchanges, sales or conveyances. The Company shall require the issuer of any
shares of stock or other securities or property thereafter deliverable on the
exercise of this Warrant to be responsible for all of the agreements and
obligations of the Company hereunder. Notice of any such reorganization,
reclassification, consolidation, merger, statutory exchange, sale or conveyance
and of said provisions so proposed to be made, shall be mailed to the Holders of
the Warrants not less than 30 days prior to such event. A sale of all or
substantially all of the assets of the Company for a consideration consisting
primarily of securities shall be deemed a consolidation or merger for the
foregoing purposes.
(f) Upon the conversion of all the Preferred Stock into Common Stock
the Per Share Warrant Price shall be adjusted to be equal to a fraction, the
numerator of which shall be the Aggregate Warrant Price and the denominator of
which shall be the number of shares of Common Stock or other capital stock of
the Company which the Holder would have owned immediately following such
conversion had this Warrant been exercised (assuming a cash exercise)
immediately prior thereto.
(g) No adjustment in the Per Share Warrant Price shall be required
unless such adjustment would require an increase or decrease of at least $0.05
per share of Preferred Stock; provided, however, that any adjustments which by
reason of this Subsection 3(g) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment; provided, further,
however, that adjustments shall be required and made in accordance with the
provisions of this Section 3 (other than this Subsection 3(g)) not later than
such time as may be required in order to preserve the tax-free nature of a
distribution to the Holder of this Warrant or Preferred Stock issuable upon the
exercise hereof. All calculations under this Section 3 shall be made to the
nearest cent
-5-
<PAGE>
or to the nearest 1/100th of a share, as the case may be. Anything in this
Section 3 to the contrary notwithstanding, the Company shall be entitled to make
such reductions in the Per Share Warrant Price, in addition to those required by
this Section 3, as it in its discretion shall deem to be advisable in order that
any stock dividend, subdivision of shares or distribution of rights to purchase
stock or securities convertible or exchangeable for stock hereafter made by the
Company to its stockholders shall not be taxable.
(h) Whenever the Per Share Warrant Price is adjusted as provided in
this Section 3 and upon any modification of the rights of a Holder of Warrants
in accordance with this Section 3, the Company shall promptly prepare a brief
statement of the facts requiring such adjustment or modification and the manner
of computing the same and cause copies of such certificate to be mailed to the
Holders of the Warrants. The Company may, but shall not be obligated to unless
requested by a Holders of more than 50% of the outstanding Warrants, Warrant
Shares and Conversion Shares, obtain, at its expense, a certificate of a firm of
independent public accountants of recognized standing selected by the Board of
Directors (who may be the regular auditors of the Company) setting forth the Per
Share Warrant Price and the number of Warrant Shares or Conversion Shares, as
the case may be, after such adjustment or the effect of such modification, a
brief statement of the facts requiring such adjustment or modification and the
manner of computing the same and cause copies of such certificate to be mailed
to the Holders of the Warrants.
(i) If the Board of Directors of the Company shall declare any
dividend or other distribution with respect to the Preferred Stock or Common
Stock other than a cash distribution out of earned surplus, the Company shall
mail notice thereof to the Holders of the Warrants not less than 10 days prior
to the record date fixed for determining stockholders entitled to participate in
such dividend or other distribution.
(j) If, as a result of an adjustment made pursuant to this Section 3,
the Holder of any Warrant thereafter surrendered for exercise shall become
entitled to receive shares of two or more classes of capital stock or shares of
Preferred Stock and other capital stock of the Company, the Board of Directors
(whose determination shall be conclusive and shall be described in a written
notice to the Holder of any Warrant promptly after such adjustment) shall
determine the allocation of the adjusted Per Share Warrant Price between or
among shares or such classes of capital stock or shares of Preferred Stock and
other capital stock.
(k) For purposes of the anti-dilution protection contained in this
Section 3, at all times following the conversion of all shares of Preferred
Stock into shares of Common Stock, the term Preferred Stock shall be read to be
Common Stock, context permitting, so that the anti-dilution provisions will
continue to protect the purchase rights represented by this Warrant after the
conversion of all the Preferred Stock into the Common Stock in accordance with
the essential intent and principles of this Section 3 (it being understood that
prior to such conversion, the anti-dilution provisions of the Preferred Stock
shall protect the Holder from dilution of the Common Stock).
(l) Upon the expiration of any rights, options, warrants or
conversion privileges, if such shall not have been exercised, the number of
Warrant Shares purchasable upon exercise of this Warrant, to the extent this
Warrant has not then been
-6-
<PAGE>
exercised, shall, upon such expiration, be readjusted and shall thereafter be
such as they would have been had they been originally adjusted (or had the
original adjustment not been required, as the case may be) on the basis of (A)
the fact that Preferred Stock, if any, actually issued or sold upon the exercise
of such rights, options, warrants or conversion privileges, and (B) the fact
that such shares of Preferred Stock, if any, were issued or sold for the
consideration actually received by the Company upon such exercise plus the
consideration, if any, actually received by the Company for the issuance, sale
or grant of all such rights, options, warrants or conversion privileges whether
or not exercised; provided, however, that no such readjustment shall have the
effect of decreasing the number of Conversion Shares purchasable upon exercise
of this Warrant by an amount in excess of the amount of the adjustment initially
made in respect of the issuance, sale or grant of such rights, options, warrants
or conversion privileges.
4. FULLY PAID STOCK; TAXES. The Company agrees that the shares of
the Preferred Stock represented by each and every certificate for Warrant Shares
delivered on the exercise of this Warrant and the shares of Common Stock
delivered upon the conversion of the Warrant Shares or the exercise of this
Warrant following the conversion of all shares of Preferred Stock into Common
Stock, shall at the time of such delivery, be validly issued and outstanding,
fully paid and nonassessable, and not subject to preemptive rights or rights of
first refusal, and the Company will take all such actions as may be necessary to
assure that the par value or stated value, if any, per share of the Preferred
Stock and the Common Stock is at all times equal to or less than the then Per
Share Warrant Price. The Company further covenants and agrees that it will pay,
when due and payable, any and all Federal and state stamp, original issue or
similar taxes which may be payable in respect of the issue of any Warrant Share,
Conversion Share or any certificate thereof to the extent required because of
the issuance by the Company of such security.
5. REGISTRATION UNDER SECURITIES ACT OF 1933. (a) The Holder shall
with respect to the Conversion Shares only, have the right to participate in the
registration rights granted to purchasers of Preferred Stock pursuant to Section
5 of the subscription agreements (the "Subscription Agreements") between such
purchasers and the Company that were entered into at the time of the initial
sale of the Preferred Stock. By acceptance of this Warrant, the Holder agrees
to comply with the provisions in Section 5 of the Subscription Agreement to same
extent as if it were a party thereto.
(b) Until all Conversion Shares have been sold under a Registration
Statement or pursuant to Rule 144, the Company shall use its reasonable best
efforts to file with the Securities and Exchange Commission all current reports
and the information as may be necessary to enable the Holder to effect sales of
its shares in reliance upon Rule 144 promulgated under the Act.
6. INVESTMENT INTENT; LIMITED TRANSFERABILITY.
(a) The Holder represents, by accepting this Warrant, that he
understands that this Warrant and any securities obtainable upon exercise of
this Warrant have not been registered for sale under Federal or state securities
laws and are being offered and sold to the Holder pursuant to one or more
exemptions from the registration requirements of such
-7-
<PAGE>
securities laws. The Holder understands that he must bear the economic risk of
his investment in this Warrant and any securities obtainable upon exercise of
this Warrant for an indefinite period of time, as this Warrant and such
securities have not been registered under Federal or state securities laws and
therefore cannot be sold unless subsequently registered under such laws, unless
an exemption from such registration is available.
(b) The Holder, by his acceptance of this Warrant, represents to the
Company that he is acquiring this Warrant and will acquire any securities
obtainable upon exercise of this Warrant for his own account for investment and
not with a view to, or for sale in connection with, any distribution thereof in
violation of the Securities Act of 1933. The Holder agrees that this Warrant
and any such securities will not be sold or otherwise transferred unless (i) a
registration statement with respect to such transfer is effective under the Act
and any applicable state securities laws or (ii) the Holder delivers to the
Company an opinion of counsel reasonably satisfactory to the Company that such
registration statement is not required.
(c) In addition to the requirements set forth in Section 6(b) above,
this Warrant may not be sold, transferred, assigned or hypothecated for six
months from the date hereof except (i) to any firm or corporation that succeeds
to all or substantially all of the business of Paramount Capital, Inc., (ii) to
any of the officers, employees or affiliated companies of Paramount Capital,
Inc., or of any such successor firm, provided the Company shall have received
appropriate documentation for such assignee evidencing that such transfer does
not affect the issuance of the Units in the Offering of Preferred Stock pursuant
to Regulation D under the Act and that registration of such transfer is not
required, (iii) to any NASD member participating in the Offering or any officer
or employee of any such NASD member, provided such issuance may be made in
compliance with Regulation D or (iv) in the case of an individual, pursuant to
such individual's last will and testament or the laws of descent and
distribution, and is so transferable only upon the books of the Company which it
shall cause to be maintained for such purpose. The Company may treat the
registered Holder of this Warrant as he or it appears on the Company's books at
any time as the Holder for all purposes. The Company shall permit any Holder of
a Warrant or its duly authorized attorney, upon written request during ordinary
business hours, to inspect and copy or make extracts from its books showing the
registered holders of Warrants. All warrants issued upon the transfer or
assignment of this Warrant will be dated the same date as this Warrant, and all
rights of the holder thereof shall be identical to those of the Holder.
7. LOSS, ETC., OF WARRANT. Upon receipt of evidence satisfactory to
the Company of the loss, theft, destruction or mutilation of this Warrant, and
of indemnity reasonably satisfactory to the Company, if lost, stolen or
destroyed, and upon surrender and cancellation of this Warrant, if mutilated,
the Company shall execute and deliver to the Holder a new Warrant of like date,
tenor and denomination.
8. WARRANT HOLDER NOT STOCKHOLDER. This Warrant does not confer
upon the Holder any right to vote or to consent to or receive notice as a
stockholder of the Company, as such, in respect of any matters whatsoever, or
any other rights or liabilities as a stockholder, prior to the exercise hereof;
this Warrant does, however, require certain notices to Holders as set forth
herein.
-8-
<PAGE>
9. COMMUNICATION. No notice or other communication under this
Warrant shall be effective unless, but any notice or other communication shall
be effective and shall be deemed to have been given if, the same is in writing
and is mailed by first-class mail, postage prepaid, addressed to:
(a) the Company at Zonagen, Inc., 2408 Timberloch Place, B-4, The
Woodlands, Texas 77380, Attn: President or such other address as the
Company has designated in writing to the Holder, or
(b) the Holder at c/o Paramount Capital Incorporated, 787 Seventh
Avenue, New York, NY 10019 or other such address as the Holder has
designated in writing to the Company.
10. HEADINGS. The headings of this Warrant have been inserted as a
matter of convenience and shall not affect the construction hereof.
11. APPLICABLE LAW. This Warrant shall be governed by and construed
in accordance with the law of the State of New York without giving effect to the
principles of conflicts of law thereof.
12. AMENDMENT, WAIVER, ETC. Except as expressly provided herein,
neither this Warrant nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought;
provided, however, that any provisions hereof may be amended, waived, discharged
or terminated upon the written consent of the Company and the then current
Majority of the Holders of the Warrants only.
-9-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
by its President and its corporate seal to be hereunto affixed and attested by
its Secretary this 11TH day of OCTOBER, 1996.
ZONAGEN, INC.
By:___________________________________________
Name: Joseph Podolski
Title: President and Chief Executive Officer
ATTEST:
_____________________________
Secretary
[Corporate Seal]
-10-
<PAGE>
SUBSCRIPTION
The undersigned, ___________________, pursuant to the provisions of
the foregoing Warrant, hereby agrees to subscribe for and purchase
____________________ shares of the Preferred Stock, par value $.001 per share,
of Zonagen, Inc. covered by said Warrant, and makes payment therefor in full at
the price per share provided by said Warrant.
Dated:_______________ Signature:____________________
Address:______________________
CASHLESS EXERCISE
The undersigned ___________________, pursuant to the provisions of the
foregoing Warrant, hereby elects to exchange its Warrant for ___________________
shares of Preferred Stock, par value $.001 per share, of Zonagen, Inc. pursuant
to the Cashless Exercise provisions of the Warrant.
Dated:_______________ Signature:____________________
Address:______________________
ASSIGNMENT
FOR VALUE RECEIVED _______________ hereby sells, assigns and transfers
unto ____________________ the foregoing Warrant and all rights evidenced
thereby, and does irrevocably constitute and appoint _____________________,
attorney, to transfer said Warrant on the books of Zonagen, Inc.
Dated:_______________ Signature:____________________
Address:______________________
-11-
<PAGE>
PARTIAL ASSIGNMENT
------------------
FOR VALUE RECEIVED _______________ hereby assigns and transfers unto
____________________ the right to purchase _______ shares of the Preferred
Stock, par value $.001 per share, of Zonagen, Inc. covered by the foregoing
Warrant, and a proportionate part of said Warrant and the rights evidenced
thereby, and does irrevocably constitute and appoint ____________________,
attorney, to transfer that part of said Warrant on the books of Zonagen, Inc.
Dated:_______________ Signature:____________________
Address:______________________
-12-
<PAGE>
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
THREE MONTHS ENDED SEPTEMBER 30, 1996
- -------------------------------------
Net Loss Weighted Average Shares Outstanding Loss per Share
-------- ----------------------------------- --------------
$2,357,059 / 5,031,243 = $0.47
NINE MONTHS ENDED SEPTEMBER 30, 1996
- --------------------------------------
Net Loss Weighted Average Shares Outstanding Loss per Share
-------- ----------------------------------- --------------
$5,443,131 / 4,780,686 = $1.14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON
PAGES 4 AND 5 ON TH COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000897075
<NAME> ZONAGEN, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 9,934,104
<SECURITIES> 0
<RECEIVABLES> 422,419
<ALLOWANCES> 0
<INVENTORY> 170,500
<CURRENT-ASSETS> 11,172,360
<PP&E> 989,898
<DEPRECIATION> 676,256
<TOTAL-ASSETS> 13,105,565
<CURRENT-LIABILITIES> 2,142,095
<BONDS> 0
0
1,365
<COMMON> 5,130
<OTHER-SE> 10,870,869
<TOTAL-LIABILITY-AND-EQUITY> 13,105,565
<SALES> 2,065,565
<TOTAL-REVENUES> 2,171,720
<CGS> 1,419,821
<TOTAL-COSTS> 1,419,821
<OTHER-EXPENSES> 6,034,490
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 160,540
<INCOME-PRETAX> (5,443,131)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,443,131)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,443,131)
<EPS-PRIMARY> (1.14)
<EPS-DILUTED> 0
</TABLE>
