<PAGE>
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-K/A-1
-----------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934 [NO FEE REQUIRED]
Commission File Number: 1-11824
ZONAGEN, INC.
(Name of issuer in its charter)
DELAWARE 76-0233274
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2408 TIMBERLOCH PLACE, SUITE B-4, THE WOODLANDS, TEXAS 77380
(Address of principal executive offices, including zip code)
(713) 367-5892
(Issuer's telephone number, including area code)
-----------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED:
------------------- -----------------------------------------
COMMON STOCK, PAR VALUE $.001 PACIFIC STOCK EXCHANGE
PER SHARE NASDAQ SMALL CAP MARKET
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT
TITLE OF EACH CLASS
-------------------
NONE
Indicate by check mark the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of the
registrant was $31,322,988 at March 25, 1996. At that date, there were
4,751,563 shares of Common Stock outstanding.
THE REGISTRANT'S PROXY STATEMENT, TO BE FILED PURSUANT TO REGULATION 14A OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WITH RESPECT TO THE 1996 ANNUAL
MEETING OF STOCKHOLDERS, IS INCORPORATED BY REFERENCE INTO PART III OF THIS
REPORT.
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
FORM 10-K
PAGE
----
PART I
ITEM
----
1. Description of Business .................................... 3
2. Properties ................................................. 15
3. Legal Proceedings .......................................... 15
4. Submission of Matters To a Vote of Security Holders ........ 15
PART II
5. Market for Common Equity and Related Stockholder Matters ... 16
6. Selected Financial Data ................................... 17
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 18
8. Financial Statements ...................................... 20
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ....................... 20
PART III
10. Directors and Executive Officers of the Registrant ........ 21
11. Executive Compensation .................................... 21
12. Security Ownership of Certain Beneficial Owners
and Management ............................................ 21
13. Certain Relationships and Related Transactions ............ 21
PART IV
14. Exhibits and Reports on Form 8-K .......................... 22
Signatures ................................................. 38
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
Certain sections of the registrant's definitive proxy statement relating to
the registrant's 1996 annual meeting of stockholders, which proxy statement will
be filed under the Securities Exchange Act of 1934 within 120 days of the end of
the registrant's fiscal year ended December 31, 1995, are incorporated by
reference into Part III of this Form 10-K.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Company is engaged in the research and development of technologies
targeting conditions or diseases associated with the human reproductive system.
The Company's lead technology is the development of an "on demand" oral
treatment for male impotency. The Company is also active in the research and
development of adjuvants, new approaches to contraception and alleviation of
urological diseases such as benign prostatic hyperplasia ("BPH") and prostate
cancer. The Company currently has sales through its wholly-owned subsidiary,
Fertility Technologies, Inc. ("FTI"), a marketing and distribution organization
focused on obstetrics/gynecology, urologists 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. 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.
PRODUCT DEVELOPMENT
TREATMENT FOR MALE IMPOTENCY
In April 1994, the Company acquired the rights to a patent application for
the use of phentolamine mesylate ("Phentolamine") as an "on demand" oral
treatment for male impotency. The Company believes that its anticipated
impotency product, VASOMAX-TM-, if successfully developed, could become the
first line therapy for male impotence and increase the number of men who will
seek and receive medical treatment for male impotence. VASOMAX-TM- would offer
considerable advantages over existing treatments, most of which include surgery
or other inconvenient modes of administration. Moreover, the Company's
preliminary research indicates that VASOMAX-TM- may restore normal penile
function within approximately 15-30 minutes of each administration. VASOMAX-TM-
is expected to result in an erectile response only in the presence of
appropriate stimuli. Thus, because of the ease of oral administration, speed of
efficacy and normal stimuli-induced penile response, the Company believes that
VASOMAX-TM- has the potential to restore normal function to achieve the greatest
end use benefit for both partners.
VASOMAX-TM- uses Phentolamine as the active pharmacologic agent.
Phentolamine has been approved by the United States Food and Drug Administration
("FDA") for the diagnosis and treatment of certain tumors of the adrenal gland
and has been used by urologists both in combination with other drugs and alone
as a penile injection therapy for the treatment of impotent men. In pilot
studies conducted by urologists using Phentolamine formulated in a manner to
enhance its oral availability and data presented at the World Meeting on
Impotence in Singapore in 1993, Phentolamine yielded a positive response rate of
30-40% in patients with new cases of male impotence as compared to a 15-20%
response rate for a placebo. Since those studies, the Company believes it has
further improved the formulation.
3
<PAGE>
VASOMAX-TM- produces an alpha-adrenergic block of relatively short duration
and vasodilative effects on vascular smooth muscles, therefore, the Company
believes VASOMAX's-TM- mode of action will provide greatest benefit to men who
suffer from impotency due to vasculogenic reasons. These patients represent a
significant percentage of impotent men. The Company anticipates that when
administered orally in an appropriate formulation, the drug may be capable of
restoring normal sexual performance in a significant number of impotent men.
The Company has successfully completed a Phase I safety trial for
VASOMAX-TM- in Ireland with no significant adverse effects reported. The
Company engaged Pharmaco, LSR ("Pharmaco") to conduct a Phase II clinical
trial in Germany, which was completed in March, 1996. The Company
announced that preliminary results of a dose response Phase II trial with its
oral on-demand drug for impotence, VASOMAX-TM-, demonstrated an optimum dose
yielding improvement in erectile function with a minimum of side-effects in
impotent men, compared to patients who received placebo.
In the trial, conducted at 10 centers in Germany, a total of 177
patients who suffered from impotency three years or less and were diagnosed
as being impotent due primarily to vascular conditions, were randomized into
one of four parallel groups (placebo, 20 milligram, 40 milligram and 60
milligram doses). During the trial, patients attempted to achieve vaginal
penetration on three separate occasions.
Of the doses tested, the preliminary analysis of the data by the Company
indicates that a 40 milligram dose provides the best balance between efficacy
and safety. The data from the centers enrolling at least 24 patients
indicates that the 40 milligram dose provides approximately a 50 percent
improvement in efficacy over placebo with no side-effects. In this group 41
percent of the men using the 40 milligram dose reported successful
intercourse on at least one occasion versus 27 percent of the placebo group.
Furthermore, patients for whom the 40 milligram dose was successful,
indicated a higher level of satisfaction compared to those men who achieved
success on placebo. Additionally, no side effects were noted in the 40
milligram group (no priapism, no prolonged erections, no hypotension, and no
tachychardia). The 60 milligram dose provided no additional benefit.
However, four patients of the 41 randomized into the 60 milligram dose group
showed mild to moderate side effects predictable by the pharmacologic action
of the active ingredient in VASOMAX-TM- (Phentolamine). On the other hand,
although the 20 milligram dose group had no side effects, its overall
efficacy compared to placebo was marginal.
The Company has applied worldwide for patents for the use of
Phentolamine as a treatment for male impotency. The Company currently
intends to retain rights to VASOMAX-TM- in the United States and to seek one
or more corporate collaborators for the commercialization of VASOMAX-TM-
elsewhere.
FERTILITY RELATED PRODUCTS
Through FTI, the Company is currently distributing a variety of
non-proprietary fertility related products, including reproduction associated
diagnostic kits, fertility analysis instrumentation and disposable products
and media for laboratory use. These products are routinely used in the
diagnostic evaluation of infertile couples and for fertility procedures such
as artificial insemination and other assisted reproductive therapeutic
techniques. FTI provides the Company with a sales force directed at the
obstetrics/gynecology, urology and fertility specialist market segments and
provides a pathway for the Company to market its proposed in-house products.
4
<PAGE>
RESEARCH PROGRAMS
CONTRACEPTIVES
The Company is developing contraceptive products for women based on a
core technology which stems from its understanding of proprietary, patented
and patent pending technology relating to the zona pellucida. The zona
pellucida surrounds the mammalian egg and is analogous to an eggshell. It is
comprised primarily of unique proteins which the Company believes could cause
temporary infertility or sterility in female mammals when used as a vaccine.
The Company has identified and filed a patent application relating to two of
the human zona pellucida proteins that may be necessary to develop a human
immunocontraceptive vaccine.
The Company believes that its proposed human contraceptive products
could be attractive to women because such contraceptives will likely require
only a periodic administration, will not require the surgical implant of any
device inside the female body, and will operate by creating an immune
response rather than through the hormonal treatments used in currently
available long-lasting female contraceptives. Moreover, ease of
administration, long-term efficacy and potential low cost also could make the
Company's proposed human contraceptive products attractive for use in
population control in developing countries in which few long-lasting female
contraceptives are widely available. The Company does not anticipate it will
be able to market a zona pellucida-based human contraceptive in the United
States for at least ten years.
Because of the high costs associated with developing a human
contraceptive product, in December 1993 the Company entered into a License,
Research, Development, and Regulatory Filing Agreement (the "Schering
Agreement") with Schering AG, pursuant to which the Company and Schering
agreed to jointly research, develop and test zona pellucida-based human
contraceptive vaccines. The Schering Agreement applies only to products
related to zona pellucida-based human contraceptives.
The Company must bear all costs of the development of products under the
Schering Agreement until the Company has developed a "lead compound" that
meets certain specified standards for use in clinical trials of the
contraceptive vaccine being developed. Schering must bear all costs of the
development of the vaccine after formulation of the lead compound, including
all costs of pre-clinical and clinical trials, and costs associated with
obtaining regulatory approvals for sale of the vaccine in the licensed
territory. The Schering Agreement provides that upon the completion of
certain research and development milestones, Schering will make payments to
the Company aggregating up to $12.5 million. The first milestone payment of
$500,000 is for the development of a "preliminary lead compound," for a zona
pellucida-based human female contraceptive. The Company believes that it
could achieve this milestone in approximately 18 months.
ADJUVANTS
Through continued research and the need for an adjuvant that could be
used in conjunction with the Company's proposed immunocontraceptive vaccine,
the Company believes that it has discovered a new adjuvant, which has been
named "IMMUMAX-TM-," for the delivery of vaccines for both humans and
animals. An adjuvant is any substance used in conjunction with an antigen to
enhance an immune response. Antigens are substances that the body regards as
foreign or potentially dangerous, and against which it produces antibodies.
The Company's new adjuvant has produced elevated immune responses compared to
other known stimulants.
5
<PAGE>
The Company has developed and has applied for a patent for this unique
naturally occurring substance which enhances the immune response against
weakly immunogenic materials. The Company is testing a variety of currently
available commercially important vaccines against its own adjuvant
preparation, and in many cases has achieved promising results. Management
believes that the primary advantages of IMMUMAX-TM- are the rapid onset of
immunity and its natural origin, which limit side effects. The low cost per
dose of the adjuvant may result in its acceptance in both human as well as
animal vaccine applications. The Company intends to out-license this
technology on a product-by-product basis to companies that are focused in the
vaccine industry. In addition, the Company is seeking collaborative partners
to assist in the marketing of the product to researchers working on new
vaccine preparations. Although the Company believes that it will be able to
out-license its adjuvant technology, there can be no assurance that the
Company will be successful in this endeavor.
OTHER TECHNOLOGIES
The Company has conducted research through collaborations and its
internal capabilities in other areas of human reproductive healthcare,
including prophylactic approaches for the prevention of sexually transmitted
diseases as well as the detection and treatment of endometriosis and
therapies to treat prostate cancer and BPH.
Before acquiring rights to a treatment for male impotency, the Company's
primary focus was on the development of recombinant zona pellucida vaccines
for sterilizing certain animals. The most important animal vaccination
product would cause infertility while eliminating estrus (going into heat).
The Company now believes that it will not be able to develop an animal
vaccine that eliminates estrus using only zona pellucida technology. The
Company believes that its zona pellucida technology could be used to develop
a vaccine that would sterilize animals without eliminating estrus. Such a
product would be attractive to humane societies because their focus is in
ceasing fertility and the elimination of estrus is of only secondary
importance. The Company currently is seeking an animal health company that
would license this technology.
MARKETS
TREATMENT FOR MALE IMPOTENCY
According to published data, the Company believes that between 15 to 30
million men suffer from some degree of impotency in the United States and
that the total number of men affected is approximately double that figure
worldwide. The wide range of impotency reported in the U.S. is primarily
attributable to the lack of diagnosis of this condition in many men.
Impotency can affect men as young as 40 years of age and can be caused by
both physiological and psychological factors. The Company believes that if
successful, its oral treatment for this condition will provide advantages
over the current therapies available. In addition, based on this
technology's non-invasive nature, the Company may have the ability to expand
the current market that is presently based on products which include direct
penile injection, penile implants, vacuum constriction devices and other
various methods.
CONTRACEPTIVES
Annually, $1.8 billion is spent in the United States and Europe on birth
control pills. This represents only 18% of women of child bearing age. The
Company believes that its proposed human contraceptive products may be
attractive to women because such contraceptives will likely require only a
periodic administration, will not require the surgical implantation of any
device inside the female body and will operate by creating an immune response
rather than through the hormonal treatments used in currently available
long-lasting female contraceptives. In addition, the Company estimates that
on a worldwide basis there are approximately five million women annually who
undergo voluntary sterilization. The current procedures for female
sterilization all involve surgical procedures, some of which require
fully-equipped operating rooms and trained physician specialists. The
Company believes many women considering sterilization would view the
Company's proposed long-term contraceptive as an attractive alternative to a
surgical procedure due to decreased trauma and risk, lower cost and potential
reversal for those women who might choose to have children in the future.
6
<PAGE>
In developing countries in which extreme socio-economic pressures exist
to control population growth, current efforts at population control are less
effective than desired partly because of the difficulty in administering, on
a consistent basis, current contraceptive measures. The Company's proposed
human contraceptive vaccine would eliminate many of those administration
problems. Furthermore, because of the potential low cost of manufacture of
recombinant vaccines, a contraceptive vaccine could likely be delivered at an
attractive price to developing countries.
FERTILITY RELATED PRODUCTS
Published research industry studies estimated 1995 annual worldwide
market for human infertility products to be approximately $700 million.
Infertility in the United States is a physical condition affecting
approximately 20%, or 5-6 million couples of reproductive age and the number
of infertile couples is increasing. This increase is primarily due to
various extraneous factors such as the environment, delaying families because
of two career path family members, infections and a myriad of other
socio-economic causes. Worldwide, it is estimated that up to 60 million
people are experiencing problems associated with infertility.
RESEARCH AND DEVELOPMENT
GENERAL
The Company's research and development expenses for each of the fiscal
years ended 1995, 1994 and 1993 were $2.8 million, $2.7 million and $1.5
million, respectively. The Company acquired a technology to be utilized in
the development of an oral treatment for male impotency in April 1994. R&D
expenses relating to this technology, which included clinical trials and
scale-up, were approximately $710,000 and $322,000 for 1995 and 1994,
respectively.
The Company's initial research was directed to develop a vaccine to
replace surgical spaying of dogs and cats based on the Company's core
technology for the use of recombinant zona pellucida proteins as antigens to
produce an immune response resulting in infertility or sterility. The
Company subsequently determined that developing such a vaccine with this
technology would be impracticable, but that the development of human
contraceptives and other healthcare products using such technology might be
achievable. Since operations in the Company's laboratory began in 1990, the
Company has identified and sequenced 18 new zona proteins from seven
different species. The Company believes that the recent improvements to its
laboratory will enhance the development of the Company's products.
In January 1995, the Company entered into an agreement with a contract
research organization to conduct its Phase II clinical trials of its male
impotency product. Under the terms of the agreement, the Company is required
to pay an estimated total amount of $650,000, payable monthly based upon
actual time and expense charges incurred. This agreement expires in April
1996. If the agreement is terminated prior to its expiration date, the
Company is required to pay the balance of all costs and expenses incurred to
such date plus 25% of the total amount that otherwise would have been paid.
Through December 31, 1995, the Company has paid a total of $137,000 toward
the required total.
7
<PAGE>
COLLABORATION WITH CORPORATE PARTNERS
In December 1993, the Company entered into the Schering Agreement,
pursuant to which the Company and Schering agreed to jointly research,
develop and test zona pellucida-based human contraceptive vaccines. The
Company retained manufacturing rights to produce products developed under the
Schering Agreement. The Company granted to Schering an exclusive license in
all countries of the world except India and China to sell and distribute zona
pellucida-based human contraceptive vaccines developed under the Schering
Agreement. The Company retained certain co-promotion and sales rights in the
United States. Schering will pay the Company 30% of net sales of all
products sold by Schering, and the Company is obligated to pay Schering 30%
of the net sales attributable to products sold by the Company. The license
granted under the Schering Agreement shall terminate on a country-by-country
basis on the later of (i) ten years after the first commercial sale of each
product covered in each such country or (ii) the expiration of the last
patent relating to such product in each such country. The Schering Agreement
is terminable by Schering on 30 days written notice before the commencement
of Phase I clinical trials relating to any covered product and by either
party on the occurrence of a breach that is not cured within 60 days after
notice thereof has been given to the other party. If Schering terminates the
Schering Agreement without the occurrence of a breach and after commencement
of Phase I clinical trials, Schering must transfer to the Company ownership
of the investigational drug application, orphan drug designation and other
regulatory rights relating to any jointly-developed products.
COLLABORATIONS WITH UNIVERSITIES
In November 1995, the Company entered into a research agreement and a
license agreement with The Brigham and Women's Hospital, Inc. ("BWH"), a
not-for-profit corporation in Boston, Massachusetts. The Company agreed to
provide $35,000 for research in the field of clinical embryotoxic factor
assays which will be utilized to test woman that are candidates of
unexplained fetal loss during pregnancy and agreed to pay $15,000 for the
exclusive worldwide license to market BWH's technology and inventions, as
defined, pertaining to this field. The Company will also pay BWH a royalty
ranging from 3.3% to 15% of net sales of covered products. The research
agreement expires in November 1997. The license agreement can be terminated
by BWH after any calendar year in which license fees or royalties are not a
minimum of $5,000.
In January 1996, the Company entered into a sponsored research agreement
with the University of Texas Southwestern Medical Center at Dallas (the
"University"), a component institution of the University of Texas System.
The Company agreed to provide $26,200 for research in the field of aromatase
expression as a marker for the presence of pelvic endometriosis. The
agreement provides that the University grant to the Company an exclusive
option to negotiate an exclusive, worldwide, royalty-bearing license for any
invention or discovery resulting from this research. If the Company chooses
to exercise such option, the Company will be obligated to pay all patent
expenses relating to it. The sponsored research agreement expires in July
1996. It can be terminated by the written agreement of both parties.
PATENTS AND PROPRIETARY INFORMATION
The Company considers the proprietary nature of its technology to be
important to its business. The Company pursues a general policy of obtaining
patent protection in both the United States and abroad for patentable subject
matter, including, but not limited to, proprietary genes and gene families and
use of these genes in female contraception. The Company has rights to one
issued patent in the United States, India and Australia, and with respect to
which applications are pending in several foreign countries. The Company also
has two patent applications pending in the United States, and with respect to
which the Company has filed foreign patent applications in Canada, Australia,
Japan, South Korea, China, India and the countries party to the European Patent
Organization.
8
<PAGE>
In August 1994 the Company applied for foreign protection for its male
impotency technology. During September 1994 the Company submitted a U.S. patent
application for its new adjuvant ImmuMax. In 1995, the Company submitted a
patent application for a novel approach to the administration of Phentolamine
for the treatment of impotency.
The Company's existing patent is based on technology acquired from Baylor
College of Medicine ("BCM") which relates to the identification and production
of recombinant zona pellucida proteins and their use in immunocontraception (the
"BCM Patent"). The BCM Patent was permitted to issue claiming products and
methods using specific recombinant rabbit zona pellucida peptides. Patents also
were issued in India and Australia. The Company continues to prosecute the BCM
Patent, seeking broader claims for products and methods using other recombinant
zona pellucida peptides. The United States Patent and Trademark Office has
rejected these broader claims, and unless further arguments are successful in
securing withdrawal of the rejection, an appeal to the Patent Office Board of
Patent Appeals and Interferences would have to be successfully pursued to secure
issuance of such patent claims. Additional patent applications relating to this
patent are pending in Canada, the European Patent Office, Japan and Korea.
In November 1992, the Company submitted a United States patent application
claiming specific nucleic acid sequences encoding zona pellucida proteins it has
identified in dogs, cats, pigs, rabbits and cattle. In January 1993, the
Company submitted a continuation-in-part patent application, based on the
November 1992 application, claiming human zona pellucida nucleic acids. In
November 1993, the Company submitted another continuation-in-part application,
based on the November 1992 application, claiming specific nucleic acid sequences
encoding zona pellucida proteins that it has identified in cynomolgus monkeys.
In these patent applications, claims were made to the selective use of specific
zona pellucida proteins in causing either sterilization or reversible
infertility.
The extent of patent protection afforded by foreign patents may differ from
that of domestic patents. The Company can make no assurances that any issued
patent, whether domestic or foreign, will provide commercially significant
patent protection. Furthermore, patent positions of biotechnology companies are
highly uncertain and involve complex legal and factual questions. Therefore,
the Company cannot predict with any precision the scope or enforceability of
claims allowed in biotechnology patents. In addition, there can be no assurance
that the Company's patent applications will result in issued patents, that
issued patents will provide an adequate measure of protection against
competitive technology which could circumvent such patents or that issued
patents would withstand review and be held valid by a court of competent
jurisdiction. Furthermore, there can be no assurance that any issued patents
will not be infringed or otherwise circumvented by others or that competitors
would not obtain patent rights which would require the Company to seek a license
or a means of circumventing such patents. There can be no assurance that such
required licenses would be available on reasonable terms, if at all.
The Company may decide to retain certain knowledge that it considers
proprietary as trade secrets. In that event, or if patent protection is
unattainable, then the Company must rely upon trade secrets, know-how and
continuing technological innovation to maintain its competitive position.
The Company believes that its future success does not depend solely on
patents and trade secrets, but also depends, to a significant extent, on the
technical competence and technological skills of its personnel. Employees and
consultants of the Company who have access to proprietary information have
signed confidentiality agreements with the Company. The Company intends to
require any new employees and consultants to sign similar confidentiality
agreements. There can be no assurance that these agreements will provide
meaningful protection for the Company's trade secrets in the event of
unauthorized use or disclosure of such information.
9
<PAGE>
On May 16, 1994, Dr. Bonita Sue Dunbar ("Dunbar") filed suit in the 270th
District Court of Harris County, Texas, naming Baylor College of Medicine
("BCM"), BCM Technologies, Inc.,("BCMT"), Fulbright & Jaworski, a Texas limited
liability partnership, and the Company 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 the
Company and which are the subject of the Company's only existing patent. 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.
The Court recently granted partial summary judgment in favor of the
Company and the other defendants in connection with the action. As a result of
the rulings, Dunbar is unable to rescind the assignment of the patent rights and
is left only with ancillary claims. Such ancillary claims are subject to a
motion to sever and abate pending Dunbar's potential appeal of the Court's
orders granting the Company's motion for summary judgement.
MANUFACTURING PLANS
The Company does not have any manufacturing facilities and relies on third
party manufacturers to produce certain of its products, including Phentolamine.
On November 16, 1995, the Company entered into a development and manufacturing
services agreement with a contract manufacturing organization for the
manufacture and validation of bulk Phentolamine for use in clinical trials for
the purpose of supporting an IND application for the oral treatment of male
impotency. The contract manufacturing organization is also responsible for
filing a Drug Master File ("DMF") with the U.S. Food and Drug Administration
("FDA") in connection with the manufacturing of Phentolamine. The agreement
also provides for a possible future long term supply agreement regarding bulk
Phentolamine. The Company is required to pay the contract manufacturing
organization $447,000 payable in three installments ending during the first
quarter of 1996. Through December 31, 1995, the Company paid a total of
$134,100 toward the required total. Unless the Company is able to develop the
manufacturing capability to produce its own Phentolamine or is able to identify
and qualify alternative contract manufacturers, the Company may be entirely
dependent upon a small number of manufacturers for its supply of Phentolamine.
The Company presently produces all of the zona proteins necessary for use
in its research and development activities. The Schering Agreement requires that
at the time an Investigational New Drug ("IND") relating to a human
immunocontraceptive product is effective, the Company will have a facility with
the capacity to manufacture the product for worldwide sale. There can be no
assurance that the Company will be able to obtain the funding to construct such
a facility, or that the Company will be able to find alternative manufacturing
facilities if such plant is not completed.
COMPETITION
Competition in the biotechnology industry is intense. There are many
companies and academic institutions that are capable of developing products
similar to those being developed by the Company, and that have developed and are
capable of developing products based on other technologies that are or may be
competitive with the Company's proposed products. Many of those companies and
academic institutions are well-established, have substantially greater financial
and other resources than the Company, and have established success in the
development, sale and service of their products. These companies and academic
institutions may succeed in developing competing products that are more
effective than those proposed by the Company. The Company's ability to compete
will be dependent on its ability to obtain required approvals and licenses of
regulatory authorities, on the Company's ability to introduce its products in
the appropriate markets and upon the Company's ability to obtain the necessary
financing, none of which can be assured. See "-- Governmental Regulation."
10
<PAGE>
Currently, there are FDA approved products and other products under
development for the treatment of male impotence. Some of these products are
being marketed or developed by major pharmaceutical companies that possess
substantial resources compared to the Company. These products include:
NEEDLE INJECTION THERAPY. This form of treatment involves the needle
injection of pharmacologic agents directly into the penis. These agents
are generally combinations of vasoactive compounds such as alprostadil,
Phentolamine and papaverine. This form of treatment requires a
prescription from a physician and instruction on self-injection. Side
effects may include pain associated with injection and local pain and
aching. Complications may include hematomas, bleeding and nodule
formation. The FDA recently approved a prostaglandin-based needle
injection therapy, marketed by The Upjohn Company.
VACUUM CONSTRICTION DEVICES. This form of treatment involves the use of a
mechanical system that creates a vacuum around the penis, causing the
erectile bodies to fill with blood. Complications encountered by some
users of vacuum constriction devices include pain and difficulty
ejaculating.
PENILE IMPLANTS. This therapy involves the surgical implantation of a
semi-rigid, rigid or inflatable device into the penile structure to
mechanically simulate an erection.
ORAL MEDICATIONS. Yohimbine is the primary oral medication currently
prescribed in the United States for the treatment of male impotence. While
easily administered, Yohimbine must be taken multiple times daily and may
cause irritability, sweating, nausea and possibly hypertension. The
Company believes that for patients with physiologic male impotence the
efficacy of Yohimbine is not significantly greater than placebo.
URETHRAL CATHETER. Vivus, Inc. is developing a devise for the
transurethral administration of prostaglandin E, for the treatment of male
impotency. Prostaglandin E, is one of a family of naturally occurring
acidic lipids with various pharmacologic effects. Vasodilation, inhibition
of platelet aggregation, and stimulation of intestinal and uterine smooth
muscle are among the most notable of these effects. The transurethral
device has been reported to successfully treat impotency with some side
effects. The side effects noted were penile pain and some degree of
urethral burning after administration and during use. An erection is
caused with or without sexual stimulation within 15 minutes of
administration and lasts 30-60 minutes depending on dose effects.
ORAL THERAPIES UNDER DEVELOPMENT. Other pharmaceutical companies,
including Pfizer, Inc. and Syntex Corporation are developing orally
available therapies for the treatment of impotency.
The Company believes that direct competition with its patented zona
pellucida vaccines will be difficult because the Company has or expects to have
patent protection on most of the zona proteins necessary for the development of
the Company's proposed products. However, other products may be developed that
will be as or more effective than the Company's proposed zona pellucida-based
products. There can be no assurance that the Company will be able to compete
effectively with other commercially available products or that development of
other technologies will not detrimentally affect the Company's commercial
opportunities or competitive advantage. In addition, even if the Company
develops marketable contraceptive vaccines, such products will compete with
existing contraceptive products.
11
<PAGE>
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the United States and other
countries is a significant consideration in the clinical development, production
and marketing of the Company's products and in its research and development
activities. To test clinically, produce and sell products, the Company must
follow mandatory procedures and safety standards established by the FDA and
comparable agencies in foreign countries. The Company employs personnel and
regulatory consultants with experience and expertise in preparing and filing
regulatory documents required to begin clinical trials, recruiting and
monitoring clinical investigations, collecting and analyzing clinical trial data
and preparing and filing documents requesting approval to sell products.
The standard process required by the FDA before a pharmaceutical agent may
be marketed in the United States includes: (i) preclinical tests; (ii)
submission to the FDA of an Investigational New Drug ("IND") Application which
must become effective before human clinical trials may commence; (iii) adequate
and well-controlled human clinical trials to establish the safety and efficacy
of the drug in its intended application; (iv) submission to the FDA of a New
Drug Application ("NDA") with respect to drugs and a Product License Application
("PLA") with respect to biologicals; and (v) FDA approval of the NDA or PLA
before any commercial sale or shipment of the drug or biologic. In addition to
obtaining FDA approval for each product, each domestic drug manufacturing
establishment must be registered by the FDA. Domestic manufacturing
establishments are subject to inspections by the FDA and by other federal, state
and local agencies and must comply with established good manufacturing practices
as appropriate for production.
Human clinical trials are typically conducted in three sequential phases
which may overlap. In Phase I, the initial introduction of the drug to humans,
the drug is tested for safety dosage tolerance, absorption, distribution,
metabolism and excretion. Phase II involves studies in a limited patient
population to determine the efficacy of the drug for scientific targeted
indications, determine dosage tolerance and optimal dosage and identify possible
adverse effects and safety risks. When a product is found to be effective and
to have an acceptable safety profile in Phase II evaluation, Phase III trials
are undertaken to evaluate further clinical efficacy and to test further for
safety within an expanded patient population at geographically dispersed
clinical study sites.
Whether undertaken by the Company or a licensee of the Company, the
approval process for a new product is likely to take several years and will
involve the expenditure of substantial resources. There can be no assurance
that any such approvals will be granted on a timely basis, if at all. In
addition, the FDA may require post-marketing testing and surveillance programs
to monitor the drug's efficacy and side effects. Results of the post-marketing
programs may prevent or limit the further marketing of the affected products.
All of the Company's manufacturing facilities, if and when established,
will be subject to periodic inspections by the FDA and comparable agencies. If
violations of applicable regulations are noted during these inspections, the
Company may be restrained from continued marketing of the manufactured product.
The Company also is subject to regulation under federal and state law regarding,
among other things, occupational safety, laboratory practices, the use and
handling of radioisotopes and hazardous chemicals, prevention of illness and
injury, environmental protection and hazardous substance control.
12
<PAGE>
EMPLOYEES AND CONSULTANTS
EMPLOYEES
At January 31, 1996, the Company had 32 full-time employees and utilized a
variety of consultants. Of the Company's full-time employees, 16 were engaged
in research, development, clinical research and regulatory affairs, nine were
engaged in sales and sales support and seven were engaged in finance and
administration. One of these employees is experienced in FDA regulatory
matters. The Company relies on its employees to perform most research and
development activities, but also uses outside consultants as needed.
SCIENTIFIC ADVISORS AND CONSULTANTS
The Company benefits from consultation with prominent scientists active in
fields related to the Company's technology. For this purpose, the Company has
consulting relationships with several scientific advisors. At the Company's
request, these advisors review the feasibility of product development programs
under consideration, advise concerning advances in areas related to the
Company's technology and aid in recruiting personnel. These advisors are
compensated at negotiated rates for services actually performed. In addition,
certain advisors have been granted options to purchase shares of the Company's
Common Stock. All of the advisors are employed by academic institutions or
other entities and may have commitments to or advisory agreements with other
entities that may limit their availability to the Company. In addition, the
Company has funded, and plans to continue to fund, research using consultants.
Consultants provide services to the Company under written agreements and are
paid per diem fees for services actually performed. The Company's consultants
are used on an as needed basis, which allows the Company to perform certain
research activities without incurring the costs associated with full-time
employees. The Company's consultants are required to disclose and assign to the
Company any ideas, discoveries and inventions they develop in the course of
providing consulting services. The Company also uses consultants for various
administrative needs. None of the Company's consultants are otherwise
affiliated with the Company. The Company's scientific advisors and consultants
include the following persons:
ROBERT S. SCHENKEN, M.D. Dr. Schenken is Professor of Obstetrics and
Gynecology and Director of the Division of Reproductive Endocrinology and
Infertility at The University of Texas Health Science Center in San
Antonio. He serves as a staff member at Women's and Children's Hospital
and St. Luke's Baptist Hospital, both of which are located in San Antonio.
He has been a consultant for the Society of Reproductive Surgeons'
Collaborative Endometriosis Treatment Trial, and program chairman of the
Annual Meeting of the Society for Gynecologic Investigation and the
American Society for Reproductive Medicine. Dr. Schenken has received
numerous national awards for his research, including the National Institute
of Child Health and Human Development Clinical Investigator Award in
Reproductive Biology. Dr. Schenken has also served as principal
investigator on research projects funded by the National Institutes of
Health, World Health Organization and numerous pharmaceutical companies.
Dr. Schenken edited the publication "Endometriosis: Contemporary Concepts
in Clinical Management" and is the author of over 100 abstracts and
publications in the area of reproductive infertility and endometriosis.
Dr. Schenken is recognized as one of the world's leading authorities in the
field of endometriosis research. Dr. Schenken has a B.S. in Chemistry from
Stanford University and an M.D. from Baylor College of Medicine.
VERNON KNIGHT, M.D., D.SC. (HON.). Dr. Knight was, for over 20 years,
Professor and Chairman, Department of Microbiology and Immunology and
Professor, Infectious Disease Section, Department of Medicine, Baylor
College of Medicine, Director of the Center for Biotechnology (1989-1994).
Dr. Knight is currently Acting Chairman, Department of Molecular Physiology
and Biophysics. Before joining Baylor College of Medicine, Dr. Knight was
Clinical Director, National Institute of Allergy and Infectious Disease at
the National Institutes of Health, Bethesda, Maryland. Dr. Knight is
Chairman, Medical Advisory Committee, The Methodist Hospital Health Care
System.
13
<PAGE>
EDWARD C. YUREWICZ, PH.D. Dr. Yurewicz is Associate Professor, Department
of Obstetrics and Gynecology and Associate Member of the Graduate Faculty,
Department of Biochemistry and Molecular Biology, Wayne State University
School of Medicine. Dr. Yurewicz is a leading authority on zona pellucida
protein chemistry. He has a B.A. in biology from the University of
Delaware, a Ph.D. in physiological chemistry from Johns Hopkin University
School of Medicine and postdoctoral training in biochemistry and biophysics
at University of California, Davis.
ANTHONY SACCO, PH.D. Dr. Sacco is Professor, Department of Obstetrics and
Gynecology, Wayne State University School of Medicine and Director, Hutzel
Hospital-Wayne State University In Vitro Fertilization Laboratory. Dr.
Sacco is an authority on the application of zona pellucida antigens as
infertility agents. He has a B.A. in biology from the University of
Rochester and a Masters Degree and Ph.D. in zoology from the University of
Tennessee.
DAVID W. RUSSELL, PH.D. Dr. Russell is McDermott Distinguished Professor,
Department of Molecular Genetics, University of Texas Southwestern Medical
Center, in Dallas, Texas. Dr. Russell has a Ph.D. in chemistry from the
University of North Carolina at Chapel Hill. His main research interests
are cholesterol and steroid hormone metabolism, reproductive biology,
molecular genetics and gene regulation.
SERDAR E. BULUN, M.D. Dr. Bulun has been, for over 4 years, a faculty
member of Division of Reproductive Endocrinology, Department of
Obstetrics and Gynecology at the University of Texas Southwestern Medical
Center. He has a joint appointment at the Cecil H. and Ida Green Center
for Reproductive Biology Sciences of the same Institution. Dr. Bulun is
board-certified in Obstetrics and Gynecology and in Reproductive
Endocrinology. He conducts basic and clinical research involving
endometriosis and breast cancer. Dr. Bulun is an internationally
recognized expert in reproductive endocrinology. He serves in committees
of Society for Gynecologic Investigation and has been an invited speaker to
many international conferences.
DEBORAH J. ANDERSON, PH.D. Dr. Anderson is an Associate Professor of
Obstetrics, Gynecology and Reproductive Biology at Brigham and Women's
Hospital and Harvard Medical School. Dr. Anderson is also the Director of
the Fearing Research Laboratory.
JOSEPH A. HILL, M.D. Dr. Hill is the Director of the Reproductive Medicine
Division and of the Reproductive Endocrinology Fellowship Program and
Clinical Director of the Reproductive Immunology Division at Brigham and
Women's Hospital at Harvard Medical School. Dr. Hill is an Associate
Professor in the Department of Obstetrics, Gynecology and Reproductive
Biology at Brigham and Women's Hospital and Harvard Medical School.
M. FATHY EL ETREBY, D.V.M., B.SC. Dr. Etreby was for 25 years Director of
Research and Development at the Pharmaceutical Division of Schering AG in
Berlin/Germany and at Berlex Laboratories in Wayne, New Jersey. Currently,
Dr. Etreby is Director of Clinical and Basic Research at the Section of
Urology in the Department of Surgery, Medical College of Georgia. He hold
the title of Professor of Surgery, Medical College of Georgia. He holds
the title of Professor of Surgery and Professor of Physiology and
Endocrinology at the Medical College of Georgia, Dr. Etreby was a Senior
Scientific Advisor, Oncology & Endocrinology at Berlex Laboratories in
Wayne, New Jersey.
14
<PAGE>
RONALD W. LEWIS, M.D. Dr. Lewis is Professor and Chief of the Section of
Urology at the Medical College of Georgia in Augusta, Georgia. Prior to
assuming that position in December 1994, he was Professor of and
Consultant in Urology at the Mayo Clinic in Rochester, Minnesota for eight
years. He was Associate Professor of Urology at Tulane University and Head
of the Fertility and Sexual Dysfunction Clinics. He was also a research
scientist at the Delta Regional Primate Research Center while at Tulane
University. His major areas of research were Andrology (including
infertility), male impotence, and comparative studies of the non-human
primate prostate. He is a charter member of the International Society for
Impotence Research and is currently the Secretary/Treasurer. He is also the
Co-Editor-in Chief of the Journal of Andrology.
ITEM 2. PROPERTIES
The Company leases approximately 8,400 square feet of laboratory and office
space in The Woodlands, Texas from a related party. In January 1996, this lease
was amended to provide for approximately 12,000 feet of space beginning in March
1996. The amended lease expires in July 1999. The Company also leases
approximately 7,300 square feet in Natick, Massachusetts utilized by FTI. This
lease expires in July 1997. The Company believes that its facilities, its lease
arrangements and its equipment will be adequate for its operations in the near
future.
ITEM 3. LEGAL PROCEEDINGS
On May 16, 1994, Dr. Bonita Sue Dunbar ("Dunbar") filed suit in the 270th
District Court of Harris County, Texas, naming Baylor College of Medicine
("BCM"), BCM Technologies, Inc.,("BCMT"), Fulbright & Jaworski, a Texas limited
liability partnership, and the Company 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 the
Company and which are the subject of the Company's only existing patent. 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.
The Court recently granted partial summary judgement in favor of the
Company and the other defendants in connection with the action. As a result of
the rulings, Dunbar is unable to rescind the assignment of the patent rights and
is left only with ancillary claims. Such ancillary claims are subject to a
motion to sever and abate pending Dunbar's potential appeal of the Court's
orders granting the Company's motion for summary judgement. The Company believes
the ancillary claims are without merit and will not have any material adverse
effect on the Company's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders in
the fourth quarter of 1995.
15
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since March 25, 1993, the Company's Common Stock has been traded on the
Pacific Stock Exchange under the symbol "ZNG" and quoted on the Nasdaq Small Cap
Market under the symbol "ZONA." The following table shows the high and low bid
price for the Common Stock by quarter, as reported by the Nasdaq Small Cap
Market:
<TABLE>
<CAPTION>
Price Range
-------------------------------
1994 High Low
-------------- -------------- --------------
<S> <C> <C>
First Quarter $10.50 $ 8.25
Second Quarter 10.50 8.75
Third Quarter 9.50 6.88
Fourth Quarter 7.75 6.88
1995
--------------
First Quarter $ 7.25 $ 4.25
Second Quarter 5.00 3.38
Third Quarter 5.25 3.38
Fourth Quarter 10.88 4.88
1996
--------------
First Quarter
(through March 25, 1996) $18.25 $9.25
</TABLE>
All of the foregoing prices reflect interdealer quotations, without retail
mark-up, mark-downs or commissions and may not necessarily represent actual
transactions in the Common Stock.
On March 25, 1996, the last reported sales price of the Common Stock, as
quoted by the Nasdaq Small Cap Market, was $9.25 per share. On March 25, 1996,
there were approximately 800 holders of the Company's Common Stock.
The Company has never paid dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data presented below as of and for the
three years ended December 31, 1993, are derived from the Company's financial
statements, which have been audited by Ernst & Young LLP, independent public
accountants, and appear elsewhere herein. The selected historical financial
data as of and for the years ended December 31, 1994 and 1995 are derived from
the Company's audited financial statements, which have been audited by Arthur
Andersen LLP, independent public accountants, and appear elsewhere herein. The
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the notes thereto, included
elsewhere herein.
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------
1991 1992 1993 1994 1995
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales $ - $ - $ - $ 800,747 $ 2,838,532
Licensing fee - 250,000 - - -
Interest income 53,258 8,018 101,079 161,171 115,843
------------------------------------------------------------------
Total revenues 53,258 258,018 101,079 961,918 2,954,375
Expenses:
Cost of products sold - - - 569,723 2,162,446
Research and development 1,227,933 1,047,238 1,512,331 2,702,464 2,794,928
Sales, general and
administrative 644,153 753,599 841,382 1,603,479 2,068,115
Interest expense 792 39,989 279,249 56,649 216,203
------------------------------------------------------------------
Total expenses 1,872,878 1,840,826 2,632,962 4,932,315 7,241,692
Net loss $(1,819,620) $(1,582,808) $(2,531,883) $(3,970,397) $(4,287,317)
------------------------------------------------------------------
------------------------------------------------------------------
Net loss per common share $(1.10) $(0.83) $(0.83) $(1.07) $(1.11)
------------------------------------------------------------------
------------------------------------------------------------------
Weighted average shares
used in computing loss per
common share 1,649,917 1,904,432 3,066,060 3,711,559 3,857,746
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1991 1992 1993 1994 1995
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short term investments $ 484,860 $ 152,824 $ 6,056,588 $ 2,477,770 $ 4,189,858
Total assets 813,985 468,903 6,567,374 5,273,714 6,651,555
Long-term obligations 445,171 1,010,007 - 83,459 66,125
Redeemable preferred stock 4,782,006 5,021,638 - - -
Deficit accumulated during
the development stage (4,567,646) (6,150,454) (8,682,337) (12,652,734) (16,940,051)
Stockholders' equity
(deficit) $(4,563,776) $(5,780,592) $6,457,498 $4,248,015 $5,425,126
</TABLE>
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Zonagen, Inc. is a biopharmaceutical company in the development stage and
is engaged in the development of technologies targeting conditions or diseases
associated with the human reproductive system. The Company devotes a
substantial amount of its resources on the development of technologies which
include a product for the oral treatment of male impotency, research of
approaches to alleviate urological diseases such as benign prostate hyperplasia
("BPH") and prostate cancer 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 and fertility specialists. The Company's goal is to
become a leader in the area of human reproductive healthcare management by
providing an expansive array of products and services. 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.
The Company has incurred losses since its inception in 1987 and expects to
continue to incur losses for several years. The Company believes that its
current cash balance will be sufficient to satisfy its funding needs through
1996. The Company will be required to raise additional capital through the sale
of equity securities and out-licensing opportunities to continue to fund its
operations. As a result of the foregoing, the Company's independent public
accountants have included an explanatory paragraph in their report on the
Company's consolidated financial statements as of December 31, 1995 and 1994, to
the effect that the Company's ability to continued existence is dependent upon
its ability to obtain additional working capital to develop, manufacture and
market its products.
RESULTS OF OPERATIONS
Since its inception the Company has funded its operations through the sale
of equity securities and the formation of corporate partnerships. The Company
did not have product revenues until its acquisition of FTI in October 1994.
Revenues from FTI will not be adequate to fund the Company's operations.
YEARS ENDED DECEMBER 31, 1995 AND 1994
All of the Company's product sales, $2.8 million in 1995 and $.8 million in
1994, have occurred through FTI. The Company reported FTI's sales in its
consolidated financial statements for all of 1995 and for only the fourth
quarter of 1994. The gross margin on FTI's sales reported by the Company
declined to approximately 24% in 1995 compared to 29% in 1994. This was
primarily due to a change in product mix due to the elimination of a product
line and the costs associated with disposal of expired product.
Research and development ("R&D") expense was $2.8 million and $2.7 million
in 1995 and 1994, respectively. R&D expenses relating to the Company's oral
treatment for male impotency which included clinical trials and scale-up were
approximately $710,000 and $322,000 for 1995 and 1994, respectively. R&D
expenses excluding costs associated with the male impotence project were $2.1
million and $2.4 million for 1995 and 1994, respectively. In the second and
third quarters of 1995, the Company took various actions to reduce activities
due to its declining cash balances. Third quarter expenses were 31% lower in
1995 compared to 1994. In the fourth quarter of 1995, the Company had funds
available to accelerate its research and development activities. Fourth quarter
expenses were 20% higher in 1995 compared to 1994. Clinical trial expense and
manufacturing scale-up expenses associated with the Company's male impotence
product was $710,000 and $217,000 in 1995 and 1994, respectively. The increase
in clinical trials was due to Phase II clinical trials being conducted in Europe
in 1995 for the Company's oral treatment for male impotency. The Company
anticipates that it may incur even higher expenses relating to clinical trials
and manufacturing scale-up of its oral male impotency product in 1996.
18
<PAGE>
Sales, general and administrative expenses were $2.1 million and $1.6
million in 1995 and 1994, respectively. The increase in 1995 was primarily due
to a full year of expenses associated with the operations of FTI.
Interest expense and amortization of intangibles increased to $216,203 in
1995 as compared to $56,649 in 1994. This increase was due primarily to the
amortization of goodwill associated with the acquisition of FTI.
YEARS ENDED DECEMBER 31, 1994 AND 1993
The Company's product sales were $.8 million in 1994 and none in 1993.
Product sales occurred through FTI. The Company reported FTI's sales in its
consolidated financial statements for only the fourth quarter of 1994 and not at
all in 1993.
R&D expense was $2.7 million and $1.5 million in 1994 and 1993,
respectively. The increase of $1.2 million or 80% in 1994 was due primarily to
additional scientific staff that had been hired throughout 1993 to accelerate
the Company's scientific projects. The Company was able to hire additional
scientific and administrative staff due to the completion of its initial public
offering in March 1993. In 1994, the Company's activities also included human
clinical safety trials and other associated costs for its oral treatment for
male impotency which were performed in Europe which represented $322,000
additional 1994 expense.
Sales, general and administrative expenses were $1.6 million and $.8
million in 1994 and 1993, respectively. The increase in 1994 over 1993 is due
primarily to (i) certain costs associated with the acquisition of FTI and FTI's
expenses for the fourth quarter of 1994, (ii) the full-year effect of costs
associated with being a publicly-traded company, which included the hiring of a
chief financial officer and (iii) legal expenses related to the Dunbar
litigation.
Interest expense and amortization of intangibles decreased to $56,649 in
1994 as compared to $279,249 in 1993. Interest expense in 1993 includes a non-
cash charge of $240,000 associated with warrants to purchase shares of Common
Stock that were issued upon conversion of certain loans into Common Stock in
connection with the initial public offering. Cash interest expense has been
nominal since the conversion of debt into Common Stock in connection with the
initial public offering or the repayment of debt with the proceeds therefrom.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
the private and public sale of stock and through additional funds received from
out-licensing its proprietary technologies.
In April 1993, the Company received net proceeds of approximately
$7,039,000 from its initial public offering of 1,535,000 shares of Common
Stock. The Company used approximately $1,602,500 of the net proceeds from its
initial public offering to repay debt owed to certain of its affiliates and
others.
In December 1993, the Company entered into an agreement with Schering AG in
which the Company and Schering agreed to jointly research, develop and test zona
pellucida based human contraceptive vaccines. In December 1993, in accordance
with this agreement, Schering Berlin Venture Corporation purchased 239,933
shares of the Company's Common Stock for $2,500,000, or approximately $10.42 per
share.
In October 1995, the Company received net proceeds of $5.3 million from the
sale of 598,850 shares of Series A Preferred Stock. The offering price per
share for the Series A Preferred Stock was $10.00 per share and each share is
convertible into Common Stock based on a conversion price of $3.625 per share of
Common Stock.
19
<PAGE>
As of December 31, 1995, the Company had cash and cash equivalents on hand
of approximately $4.2 million. These funds along with additional funds of
$740,000 which were received from January 1, 1996 through February 28, 1996 from
the exercise of warrants, related to the IPO to purchase 204,776 shares of the
Company's Common Stock are expected to sustain operations at the present rate
throughout 1996.
At December 31, 1995, there were outstanding warrants to purchase Common
Stock, warrants to purchase Series A Preferred Stock and vested options to
purchase Common Stock that, if exercised, represent a source of capital to the
Company. If fully exercised, these securities would generate proceeds to the
Company of approximately $6.2 million. The exercising of any of these
securities is not within the control of the Company. Fluctuations in the market
value per share of the Company's Common Stock can significantly affect any
economic incentive for the holders of these securities to exercise them. There
is no assurance that the Company will realize any of these potential proceeds.
The Company will require substantial funds to continue to move its oral
treatment for male impotency through the required clinical trial programs
necessary to receive approval to market such products and to maintain its
research and development activities. The ability of the Company to raise
additional funds will depend on many factors, including the progress of the
Company's research and development activities and the establishment of
collaborative corporate partnerships. There can be no assurance that the
Company will be able to obtain financing on favorable terms in the public or
private capital markets in the foreseeable future. The Company currently is
attempting to negotiate additional corporate collaborations, but has not entered
into any letters of intent or agreements in principal with respect to any
research collaborations. There can be no assurance that the Company will be
able to consummate any corporate collaborations on terms favorable to the
Company or at all. The failure or inability of the Company to obtain additional
financing on acceptable terms would have a material adverse effect on the
Company.
The Company has incurred losses since its inception in 1987 and expects to
continue to incur losses for several years. The Company believes that its cash
balance will be sufficient to satisfy its funding needs through 1996. The
Company will be required to raise additional capital through the sale of equity
securities and out-licensing opportunities to continue to fund its operations.
ITEM 8. FINANCIAL STATEMENTS
The financial statements required by this item are presented following Item
14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Arthur Andersen LLP, an independent public accounting firm ("Arthur
Andersen"), began serving as the independent public accountants of the Company
on February 1, 1995. Before February 1, 1995, Ernst & Young LLP, an independent
auditing firm ("Ernst & Young"), had been the independent auditors for the
Company. During 1994, the Company's Board of Directors considered several
independent public accounting firms for possible selection as the Company's
auditors for fiscal year 1994, including Ernst & Young. After considerable
review, the Board unanimously voted to select Arthur Andersen as the Company's
independent public accountants for fiscal year 1994. Accordingly, Ernst & Young
was dismissed as the Company's auditors on February 1, 1995.
Management has had no disagreement with Ernst & Young on any material
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure. Ernst & Young's report on the financial statements
for the year ended December 31, 1993 did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item as to the directors and executive
officers of the Company is hereby incorporated by reference from the information
appearing under the caption "Election of Directors" in the Company's proxy
statement (the "Proxy Statement") for its annual meeting with stockholders.
Such Proxy Statement will be filed with the Securities and Exchange Commission
pursuant to the Securities and Exchange Act of 1934 within 120 days of the end
of the Company's fiscal year on December 31, 1995.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item as to the management of the Company
is hereby incorporated by reference from the information appearing under the
captions "Executive Compensation" and "Election of Directors - Director
Compensation" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item as to the ownership by management and
others of securities of the Company is hereby incorporated by reference from the
information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item as to certain business relationships
and transactions with management and other related parties of the Company is
hereby incorporated by reference from the information appearing under the
caption "Certain Transactions" in the Company's Proxy Statement.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT
1. FINANCIAL STATEMENTS
See Index to Financial Statements on page 23.
All schedules are omitted because they are not applicable, not required,
or because the required information is included in the financial
statements or the notes thereto.
2. EXHIBITS
Exhibits to the Form 10-K have been included only with the copies of the
Form 10-K filed with the Securities and Exchange Commission. Upon request
to the Company and payment of a reasonable fee, copies of the individual
exhibits will be furnished.
See Index to Exhibits on page 39.
(b) REPORTS ON FORM 8-K
The Company filed two Current Reports on Form 8-K dated October 4, 1995
and October 19, 1995 during the three months ended December 31, 1995.
22
<PAGE>
ZONAGEN, INC.
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants ............................. 24
Report of Independent Auditors ....................................... 25
Consolidated Balance Sheets as of December 31, 1995 and 1994 ......... 26
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994, 1993 and for the period from inception
(August 20, 1987) through December 31, 1995 ......................... 27
Consolidated Statement of Stockholders' Equity for the period from
inception (August 20, 1987) through December 31, 1995 ............... 28
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994, 1993 and for the period from inception
(August 20, 1987) through December 31, 1995 ......................... 29
Notes to Consolidated Financial Statements ........................... 30
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Zonagen, Inc.:
We have audited the accompanying consolidated balance sheets of Zonagen, Inc.
(a Delaware Corporation in the development stage) and subsidiary (the
"Company") as of December 31, 1995 and 1994 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, the Company has operated
as a development stage enterprise since its inception by devoting
substantially all of its efforts to raising capital and performing research
and development. In order to complete the research and development and other
activities necessary to commercialize its products, additional financing will
be required. Management's current projections indicate that the Company can
conserve its cash resources to maintain the Company's operations through
1996. Management's plans in regard to these matters are also described in
Note 1.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Zonagen, Inc. and subsidiary
as of December 31, 1995 and 1994 and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 26, 1996
24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Zonagen, Inc.
We have audited the accompanying statements of operations, stockholders'
equity and cash flows for the year ended December 31, 1993 of Zonagen, Inc.
(a development stage company) (the "Company"). The balance sheet at December
31, 1993 and the statements of operations and cash flows for the period from
August 20, 1987 (inception) to December 31, 1993, are not presented
separately herein. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of its operations and its cash flows for
the year ended December 31, 1993, and for the period from August 20, 1987
(inception) to December 31, 1993, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Houston, Texas
February 11, 1994
25
<PAGE>
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,189,858 $ 2,447,770
Accounts receivable 327,975 481,733
Accrued interest receivable 20,185 12,547
Product inventory 230,380 309,950
Deposits and other current assets 49,047 48,042
------------ ------------
Total Current Assets 4,817,445 3,300,042
Lab equipment, furniture and leasehold
improvements, net of accumulated
depreciation and amortization 233,315 286,482
Excess of cost over fair value of tangible
assets acquired, net of accumulated
amortization of $240,845 and $48,169,
respectively 1,153,939 1,346,615
Other assets, net of accumulated
amortization of $67,532 and $39,825,
respectively 446,856 340,575
------------ ------------
$ 6,651,555 $ 5,273,714
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 660,673 $ 482,381
Accrued liabilities 499,631 294,479
Notes payable -- 165,380
------------ ------------
Total Current Liabilities 1,160,304 942,240
------------ ------------
Long-term notes payable 66,125 83,459
------------ ------------
COMMITMENTS AND CONTINGENCIES -- NOTE 12
STOCKHOLDERS' EQUITY
Undesignated Preferred Stock, $.001 par
value, 4,300,000 and 5,000,000 shares
authorized, respectively, none issued
and outstanding -- --
Series A Preferred Stock, $.001 par value,
700,000 and 0 shares authorized,
respectively, 504,850 and 0 shares issued
and outstanding, respectively 505 --
Common Stock, $.001 par value, 20,000,000
shares authorized, 4,098,124 and
3,818,270 shares issued and outstanding,
respectively 4,098 3,819
Additional paid-in capital 22,473,074 17,046,930
Deferred compensation (112,500) (150,000)
Deficit accumulated during the development
stage (16,940,051) (12,652,734)
------------ ------------
5,425,126 4,248,015
------------ ------------
$ 6,651,555 $ 5,273,714
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
26
<PAGE>
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FROM INCEPTION
YEARS ENDED DECEMBER 31, (AUGUST 20, 1987)
---------------------------------------- THROUGH
1995 1994 1993 DECEMBER 31, 1995
------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
REVENUES
Product sales $ 2,838,532 $ 800,747 $ -- $ 3,639,279
Licensing fee -- -- -- 250,000
Interest income 115,843 161,171 101,079 621,793
------------ ------------ ------------ -----------------
Total Revenues 2,954,375 961,918 101,079 4,511,072
COSTS AND EXPENSES
Cost of products sold 2,162,446 569,723 -- 2,732,169
Research and development 2,794,928 2,702,464 1,512,331 10,831,736
Sales, general and
administrative 2,068,115 1,603,479 841,382 6,887,726
Interest expense and
amortization of intangibles 216,203 56,649 279,249 636,109
------------ ------------ ------------ -----------------
Total Costs & Expenses 7,241,692 4,932,315 2,632,962 21,087,740
Loss from continuing operations (4,287,317) (3,970,397) (2,531,883) (16,576,668)
Loss from discontinued operations -- -- -- (288,104)
Loss on disposal of discontinued
operations -- -- -- (75,279)
------------ ------------ ------------ -----------------
NET LOSS $(4,287,317) $(3,970,397) $(2,531,883) $(16,940,051)
------------ ------------ ------------ -----------------
LOSS PER COMMON SHARE
From continuing operations $ (1.11) $ (1.07) $ (0.83)
Discontinued operations -- -- --
------------ ------------ ------------
Loss per common share $ (1.11) $ (1.07) $ (0.83)
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares
used in computing loss per
common share 3,857,780 3,711,559 3,066,060
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
27
<PAGE>
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
SERIES A ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE TOTAL
--------------- ---------------- PAID-IN DEFERRED DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STAGE EQUITY
------- ------ --------- ------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exchange of Common Stock ($.004 per
share) for technology rights and
services from founding stockholders - $ - 245,367 $ 245 $ 805 $ - $ - $ 1,050
Net loss - - - - - - (27,613) (27,613)
------- ---- --------- ------ ----------- --------- ------------ -----------
Balance at December 31, 1987 - - 245,367 245 805 - (27,613) (26,563)
Net loss - - - - - - (327,412) (327,412)
------- ---- --------- ------ ----------- --------- ------------ -----------
Balance at December 31, 1988 - - 245,367 245 805 - (355,025) (353,975)
Proceeds from issuance of Common Stock - - 65,431 65 2,735 - - 2,800
Net loss - - - - - - (966,681) (966,681)
------- ---- --------- ------ ----------- --------- ------------ -----------
Balance at December 31, 1989 - - 310,798 310 3,540 - (1,321,706) (1,317,856)
Proceeds from issuance of Common Stock - - 467 1 19 - - 20
Net loss - - - - - (1,426,320) (1,426,320)
------- ---- --------- ------ ----------- --------- ------------ -----------
Balance at December 31, 1990 - - 311,265 311 3,559 - (2,748,026) (2,744,156)
Net loss - - - - - - (1,819,620) (1,819,620)
------- ---- --------- ------ ----------- --------- ------------ -----------
Balance at December 31, 1991 - - 311,265 311 3,559 - (4,567,646) (4,563,776)
Conversion of 391,305 shares of
Series C Preferred Stock into Common
Stock - - 91,442 92 359,908 - - 360,000
Purchase and retirement of Common
Stock - - (23,555) (24) (984) - - (1,008)
Proceeds from issuance of Common
Stock - - 16,946 17 6,983 - - 7,000
Net loss - - - - - - (1,582,808) (1,582,808)
------- ---- --------- ------ ----------- --------- ------------ -----------
Balance at December 31, 1992 - - 396,098 396 369,466 - (6,150,454) (5,780,592)
Issuance of Common Stock for cash,
April 1, 1993 and May 12, 1993
($5.50 per share), net of offering
costs of $1,403,400 - - 1,534,996 1,535 7,037,543 - - 7,039,078
Issuance of Common Stock for cash and
license agreement, December 9, 1993
($10.42 per share), net of offering
costs of $46,833 - - 239,933 240 2,453,017 - - 2,453,257
Conversion of Series A Preferred
Stock to Common Stock - - 179,936 180 600,420 - - 600,600
Conversion of Series B Preferred
Stock to Common Stock - - 96,013 96 377,903 - - 377,999
Conversion of Series C Preferred
Stock to Common Stock - - 876,312 877 3,442,530 - - 3,443,407
Conversion of Series D Preferred
Stock to Common Stock - - 280,248 280 599,352 - - 599,632
Conversion of bridge loan to Common
Stock - - 64,000 64 255,936 - - 256,000
Net loss - - - - - - (2,531,883) (2,531,883)
------- ---- --------- ------ ----------- --------- ------------ -----------
Balance at December 31, 1993 - - 3,667,536 3,668 15,136,167 - (8,682,337) 6,457,498
Deferred compensation resulting from
grant of options - - - - 187,500 (187,500) - -
Amortization of deferred compensation - - - - - 37,500 - 37,500
Exercise of warrants to purchase
Common Stock for cash, June 30, 1994
($3.94 per share) - - 39,623 40 156,079 - - 156,119
Issuance of Common Stock for purchase
of Fertility Technologies, Inc.
("FTI"), October 13, 1994 - - 111,111 111 1,567,184 - - 1,567,295
Net loss - - - - - - (3,970,397) (3,970,397)
------- ---- --------- ------ ----------- --------- ------------ -----------
Balance at December 31, 1994 - - 3,818,270 3,819 17,046,930 (150,000) (12,652,734) 4,248,015
Amortization of deferred compensation - - - - - 37,500 - 37,500
Exercise of options to purchase Common
Stock for cash January and April,
1995 ($.10 to $6.13 per share) - - 4,546 4 13,919 - - 13,923
Issuance of Common Stock for cash and
a financing charge, March 9, 1995
($.001 per share) - - 16,000 16 75,984 - - 76,000
Issuance of Series A Preferred Stock
for cash, October 4, 1995 and
October 19, 1995 ($10.00 per share),
net of offering costs of $651,495 598,850 599 - - 5,336,406 - - 5,337,005
Conversion of Series A Preferred Stock
into Common Stock, November and
December 1995 (94,000) (94) 259,308 259 (165) - - -
Net loss - - - - - - (4,287,317) (4,287,317)
------- ---- --------- ------ ----------- --------- ------------ -----------
Balance at December 31, 1995 504,850 $505 4,098,124 $4,098 $22,473,074 $(112,500) $(16,940,051) $ 5,425,126
------- ---- --------- ------ ----------- --------- ------------ -----------
------- ---- --------- ------ ----------- --------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
28
<PAGE>
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FROM INCEPTION
YEARS ENDED DECEMBER 31, (AUGUST 20, 1987)
----------------------------------------- THROUGH
1995 1994 1993 DECEMBER 31, 1995
----------- ------------ ----------- -----------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,287,317) $(3,970,397) $(2,531,883) $(16,940,051)
Loss on disposal of discontinued operations - - - 75,279
Adjustments to reconcile net loss to net cash
used in operating activities
Noncash financing costs 75,984 - 240,000 315,984
Depreciation and amortization 317,050 224,843 116,715 860,636
Noncash expenses related to option
transactions 37,500 37,500 - 75,020
Series B Preferred Stock issued for
consulting services - - - 17,999
Changes in operating assets and liabilities
(net of effects of purchase of business in
1988 and 1994)
(Increase) decrease in receivables 146,120 (168,370) (11,819) (34,069)
(Incrase) decrease in product inventory 79,570 (28,422) - 51,148
(Increase) decrease in deposits and other
current assets (1,005) (167) 9,425 (16,708)
(Decrease) increase in accounts payable
and accrued liabilities 383,444 421,983 (105,918) 915,303
------------ ------------ ----------- ------------
Net cash used in operating activities (3,248,654) (3,483,030) (2,283,480) (14,679,459)
INVESTING ACTIVITIES
Capital expenditures (43,500) (35,985) (241,027) (728,362)
Purchase of technology rights and other
assets (133,988) (189,002) (68,001) (467,371)
Cash acquired in purchase of FTI - 2,695 - 2,695
Proceeds from sale 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 used in investing activities (177,488) (222,292) (309,028) (1,268,317)
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock 13,939 156,119 9,492,335 9,672,213
Proceeds from issuance of Preferred Stock 5,337,005 - - 9,320,962
Proceeds from issuance of notes payable - - 450,000 2,838,681
Principal payments on notes payable (182,714) (59,615) (1,446,063) (1,694,222)
------------ ------------ ----------- ------------
Net cash provided by financing activities 5,168,230 96,504 8,496,272 20,137,634
Net increase (decrease) in cash and cash
equivalents 1,742,088 (3,608,818) 5,903,764 4,189,858
Cash and cash equivalents at beginning of
period 2,447,770 6,056,588 152,824 -
------------ ------------ ----------- -------------
$ 4,189,858 $ 2,447,770 $ 6,056,588 $ 4,189,858
------------ ------------ ----------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for interest $ - $ 5,660 $ 79,569 $ 129,243
Acquisition of FTI - 1,567,295 - 1,567,295
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
29
<PAGE>
ZONAGEN, INC.
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, alleviation of urological diseases such as benign prostatic
hyperplasia and prostrate 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. 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 December 31, 1995, the
Company has been primarily engaged in research and development and is still
in a development stage.
On April 1, 1993, the Company completed its initial public offering (the
"Offering").
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.
The Company believes that its current cash balance will be sufficient to
satisfy its funding needs through 1996. The Company's longer-term funding
requirements will depend on many factors, including the progress of the
Company's research and development and the establishment of other
collaborative relationships. At this time, the Company is pursuing corporate
partnering relationships with pharmaceutical companies in several countries
to advance the development of its proposed products. The Company is
contemplating obtaining additional equity financing during 1996. Should such
financing not be obtained, the Company will need to adjust its current plan
for conducting its operations during 1996.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of the Company and FTI, its wholly-owned subsidiary.
All significant intercompany balances and transactions have been eliminated.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
30
<PAGE>
CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements
of cash flows, the Company considers all cash accounts and highly liquid
investments having original maturities of three months or less to be cash and
cash equivalents.
PRODUCT INVENTORY: Product inventory consists of products manufactured
by others for resale to obstetrics/gynecologists, urologists and fertility
clinics. Inventory is stated at the lower of cost or market using the
first-in, first-out method.
LAB EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS: Lab equipment,
furniture and leasehold improvements are recorded at cost less accumulated
depreciation and amortization. Depreciation is computed on the straight-line
method over an estimated useful life of five years, or in the case of
leasehold improvements, amortized over the remaining term of the lease.
Depreciation and amortization for tax reporting purposes is computed using
the accelerated cost recovery system. Maintenance and repairs that do not
improve or extend the life of assets are expensed as incurred.
EXCESS OF COST OVER FAIR VALUE OF TANGIBLE ASSETS ACQUIRED: Excess of
cost over fair value of tangible assets acquired is amortized using the
straight line method over a 7 year period.
OTHER ASSETS: Other assets of $514,388 and $380,400 in 1995 and 1994,
respectively, consist primarily of patent costs, primarily legal fees. These
costs are being amortized over 17 years, or the lesser of the legal or the
estimated economic life of the patent.
REVENUE RECOGNITION: The Company recognizes revenues from product sales
upon shipment. Revenues from licensing activities are recognized upon
execution of the license agreement as these revenues have been earned.
RESEARCH AND DEVELOPMENT COSTS: The Company expenses research and
development costs in the period they are incurred.
LOSS PER COMMON SHARE: Loss per common share is computed by dividing
the net loss for the period by the weighted average number of shares of
Common Stock outstanding during each period, after giving effect for the
4.2793 reverse stock split and the conversion of the preferred stock to
common shares, both of which were effective at the time of the Offering. In
all applicable years, all Common Stock equivalents, including Series A
Preferred Stock were antidilutive and, accordingly, were not included in the
computation except, in accordance with Staff Accounting Bulletin Number 83 of
the Securities and Exchange Commission, issuance of the Company's Common
Stock, options, warrants and other potentially dilutive securities at prices
below the initial public offering price during the 12-month period preceding
the offering have been treated as Common Stock equivalents for the periods
prior to the initial public offering as if they had been issued at the
Company's inception even though their inclusion was antidilutive.
NOTE 3 -- ACQUISITION OF FTI
On October 13, 1994 (effective October 1, 1994), the Company purchased
all of the outstanding common stock of FTI, a Massachusetts-based company
that distributes products manufactured by others worldwide to diagnose and
facilitate the treatment of reproductive disorders. The purchase price
consisted of (i) an initial payment (the "Initial Payment") of 111,111 shares
of Common Stock, (ii) the assumption of $466,000 of debt FTI owed to its
former sole shareholder and (iii) the payment of a number of shares of Common
Stock (the "Final Payment") payable on January 31, 1997 to be determined
based upon (a) the market price per share of Common Stock at January 31, 1997
(the "Final Payment Date") and (b) whether FTI achieves certain earnings
milestones. The market value of the Common Stock issuable on the Final
Payment Date will not be less than $3 million nor more than $4.5 million,
depending upon whether such earnings milestones are met. As of December 31,
1995, none of FTI's earnings milestones have been met.
The Company accounted for the acquisition of FTI as a purchase and,
accordingly, allocated its purchase price to FTI's net assets based upon
their fair values. The purchase price allocation included the net present
value of the minimum requirement for the Final Payment. The excess of the
consideration paid over the estimated fair
31
<PAGE>
value of the tangible net assets acquired in the amount of $1,394,784 has
been recorded as "excess of cost over fair value of tangible assets
acquired." FTI's operations have been consolidated in the Company's
operations beginning October 1, 1994. The total purchase price of the assets
acquired and liabilities assumed was allocated as follows:
Cash ........................ $ 2,695
Accounts receivable .......... 314,091
Inventory .................... 281,528
Other current assets ......... 12,339
Fixed assets, net ............ 115,312
Excess of cost over fair
value of tangible assets
acquired .................... 1,394,784
Accounts payable and
accrued expenses ............ (245,000)
Short-term notes payable ..... (224,995)
Long-term notes payable ...... (83,459)
-------------
Total purchase price ......... $ 1,567,295
-------------
-------------
In connection with the FTI acquisition, the Company entered into an
employment agreement with the former sole shareholder of FTI. Such agreement
expires on December 31, 1996.
The following unaudited pro forma information shows the results of
operations for the years ended December 31, 1994 and 1993, as if the acquisition
had occurred on January 1, 1993, after giving effect to certain adjustments,
including amortization of excess of cost over fair value of tangible assets
acquired, interest expense related to the assumption of debt and intercompany
eliminations.
Proforma amounts
(unaudited)
-----------------------------
1994 1993
------------- -------------
Total revenues $ 2,785,165 $ 2,493,615
Net loss $ (4,119,886) $ (2,768,202)
Pro forma net loss per share $ (0.97) $ (0.77)
Shares used in computing loss
per common share 4,256,056 3,614,964
The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the purchase been made
at January 1993, or of the results which may occur in the future.
NOTE 4 -- LAB EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Lab equipment, furniture and leasehold improvements at December 31, 1995
and 1994, are classified as follows:
1995 1994
-------------- -------------
Laboratory equipment ....... $ 475,162 $ 445,861
Furniture and fixtures ..... 138,720 127,655
Office equipment ........... 76,043 50,730
Vehicles ................... - 24,923
Leasehold improvements ..... 145,182 142,438
--------- ---------
835,107 791,607
Less accumulated
depreciation and
amortization............... (601,792) (505,125)
--------- ---------
Total $ 233,315 $ 286,482
--------- ---------
--------- ---------
32
<PAGE>
NOTE 5 -- OPERATING LEASES
The Company leases laboratory and office space. Rental expense for the
years ended December 31, 1995, 1994 and 1993 was $179,640, $91,577 and $68,081,
respectively, and $501,135 for the period from inception through December 31,
1995. Future minimum lease payments under non-cancelable leases with original
terms in excess of one year as of December 31, 1995 are as follows:
1996 ................................... $197,747
1997 ................................... 156,572
1998 ................................... 117,624
1999 ................................... 63,574
NOTE 6 -- NOTES PAYABLE
In connection with the acquisition of FTI, the Company assumed two note
agreements from the former sole shareholder of FTI. One note agreement required
the payment of four equal quarterly installments of $62,500, beginning December
31, 1994 through September 30, 1995. The second note agreement requires the
payment of a number of shares of Common Stock payable on January 31, 1997 to be
determined based upon the market price of Common Stock at that date and the
achievement of certain earnings milestones. This note payable was recorded at
the present value of the estimated value of the Common Stock to be issued.
Interest was imputed on both notes payable at a rate of 11%.
NOTE 7 -- INCOME TAXES
Due to a net operating loss, the Company has no liability for federal
income taxes. As of December 31, 1995, the Company has generated net operating
loss (NOL) carryforwards of approximately $15 million and approximately $490,000
of research and development credits available to reduce future income taxes.
These carryforwards begin to expire in 2002.
The Tax Reform Act of 1986 provides for an annual limitation on the use of
NOL and credit carryforwards (following certain ownership changes) that could
significantly limit the Company's ability to utilize these carryforwards. The
Company has experienced such an ownership change since its inception.
Accordingly, the Company's ability to utilize the aforementioned carryforwards
to reduce future taxable income and tax liabilities may be limited.
Additionally, because United States tax laws limit the time during which these
carryforwards may be applied against future taxes, the Company may not be able
to take full advantage of these attributes for federal income tax purposes.
Beginning January 1, 1993, the Company adopted SFAS 109 which requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been recognized in the financial statements or
tax returns. Since the Company has had a net operating loss carryforward since
inception and there is no assurance of future taxable income, a valuation
allowance has been established to fully offset the Company's net deferred tax
assets.
NOTE 8 -- STOCKHOLDERS' EQUITY
PREFERRED STOCK
In October 1995, the Company authorized 770,000 shares and sold 598,850
shares of a new Series A Preferred Stock for $10.00 per share. Net proceeds to
the Company were approximately $5,337,000. Each share
33
<PAGE>
of Series A Preferred Stock is convertible at the option of the holder into
shares of Common Stock at an initial conversion price of $3.625 per share.
In October 1996, the conversion price is subject to adjustment if the Common
Stock is trading, as defined, for less than 130% of the conversion price.
Beginning in October 1996, the Company can cause the Series A Preferred Stock
to be converted into Common Stock if the Common Stock is trading, as defined,
for more than 150% of the conversion price. Holders of the Series A
Preferred Stock have certain liquidation preferences, 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, (ii) changes to the rights
and preferences of the Series A Preferred Stock and (iii) declaration of
dividends or repurchases of securities of the Company.
On October 4, 1995, The Woodlands Venture Fund, L.P., The Woodlands Venture
Capital Corporation and The Petrus Fund, L.P. purchased 25,000, 25,000 and
22,500 shares, respectively, of the Company's Series A Preferred Stock for cash
consideration of $250,000, $250,000 and $225,000, respectively.
Through December 31, 1995, 94,000 shares of Series A Preferred Stock had
been converted into 259,308 shares of Common Stock.
COMMON STOCK
In December 1993, the Company sold 239,933 shares of Common Stock to
Schering Berlin Venture Corporation ("SBVC") for $2.5 million, or $10.42 per
share. This transaction was part of a corporate collaboration agreement between
the Company and Schering AG. SBVC is a subsidiary of Schering AG.
On September 28, 1994, the Company filed a registration statement on Form
S-3 with the Securities and Exchange Commission for the registration of 199,000
shares of Common Stock. The registered shares consisted of 64,000 shares of
Common Stock then outstanding that were issued on conversion of certain notes
payable and 135,000 shares of Common Stock which represent shares issuable upon
exercise of certain Common Stock purchase warrants that were issued related to
the Offering. These warrants expire in March 1998.
On October 13, 1994, the Company filed Form 8-K with the Securities and
Exchange Commission for the registration of 111,111 shares of Common Stock
issued in conjunction with the acquisition of FTI.
In March 1995, the Company issued 16,000 shares of Common Stock to The
Woodlands Venture Fund, L.P. for a purchase price of $.001 per share. These
shares were issued in consideration for providing additional financing pending
the completion of the Offering. The Company recorded an expense of $75,984 for
the difference between the market value of these shares and the amount received.
WARRANTS
In connection with the cancellation of certain debt with the issuance of
Series C preferred stock in 1990, the Company issued stock purchase warrants to
the lenders which allowed the holders to purchase 39,623 shares of Common Stock
at a purchase price of $3.94 per share. All of these warrants were exercised in
1994.
In connection with the Offering, the Company sold to the underwriter, for
nominal consideration, warrants to purchase 135,000 shares of Common Stock at an
initial price per share equal to 120% of the initial public offering price per
share. These warrants contain certain provisions providing for adjustment of
the initial exercise price and the number and type of securities issuable upon
exercise of the warrants upon certain conditions. These warrants were recorded
at zero value in the accompanying financial statements because the value was
determined to be de minimus when issued. In 1995, as a result of the sale of
Series A Preferred Stock, these warrants were converted into warrants to
purchase 245,459 shares of Common Stock for $3.63 per share.
In connection with the October 1995 sale of Series A Preferred Stock, the
Company issued warrants to the placement agent for this offering to purchase
59,885 shares of Series A Preferred Stock at a price of $11.00 per share. These
warrants expire in 2000. These warrants were recorded at zero value in the
accompanying financial statements because the value was determined to be de
minimus when issued.
34
<PAGE>
NOTE 9 -- STOCK OPTIONS
The Company has two stock option plans for the granting of options to
purchase a minimum of 1,007,000 shares of Common Stock by its employees and
consultants. There are no significant differences between the provisions of
each plan. Options may not be granted with an exercise price per share less
than the fair market value per share of Common Stock on the grant date. Vesting
provisions for each grant are determined by the Board of Directors and has
generally been 20% vesting on each anniversary of the grant date. All options
expire no later than the tenth anniversary of the grant date. At December 31,
1995, 198,293 of these options were exercisable and 489,974 options are
available to be granted under these plans.
The Company also has a stock option plan for its non-employee directors
that may grant options to purchase up to 115,000 shares of Common Stock. The
plan provides that each director receive options to purchase 5,000 shares of
Common Stock upon initial election to the Board of Directors and shall receive
options to purchase 2,500 shares at each re-election. These options are fully
vested when granted and expire no later than the tenth anniversary of the grant
date. At December 31, 1995, 12,800 options were available to be granted under
this plan.
The following is a summary of employee, consultant and director stock
option activity:
COMMON
SHARES UNDER
OPTIONS PRICE RANGE
------------- ---------------
Outstanding at December 31, 1992..... 156,756 $ 0.04 - $ 4.00
Options granted................. 218,620 5.50 - 6.13
Options canceled................ (8,053) 0.04 - 0.43
-------
Outstanding at December 31, 1993..... 367,323 0.04 - 6.13
Options granted................. 115,000 5.50 - 9.32
Options canceled................ (3,001) 0.04 - 6.13
-------
Outstanding at December 31, 1994..... 479,322 0.04 - 9.32
Options granted................. 172,500 4.00 - 5.13
Options exercised............... (4,546) 0.10 - 6.13
Options canceled................ (49,421) 0.10 - 8.50
-------
Outstanding at December 31, 1995..... 597,855 $ 0.04 - $ 9.32
-------
-------
Effective January 1, 1994, the president of the Company was granted an
option to purchase 50,000 shares of Common Stock at an exercise price of $5.50
per share. This option was not granted under any of the currently adopted stock
option plans. This option vests at 20% per year. The difference between the
exercise price per common share and the market value at the date of grant of
$9.25 per common share was recorded as deferred compensation. Compensation
expense is recognized over the five year vesting period.
As part of the corporate collaboration agreement with Schering AG, the
Company issued an option to purchase up to $2.5 million of Common Stock at an
exercise price per share equal to 130% of the closing price per share on the
exercise date. This option must be exercised by SBVC if certain milestones
defined in the agreement are met. This option expires in December 1997.
NOTE 10 -- AGREEMENTS
On November 16, 1995, the Company entered into a development and
manufacturing services agreement with a contract manufacturing organization for
the manufacture and validation of phentolamine mesylate for use in clinical
trials for the purpose of supporting an IND application. (used in the Company's
product which is in development for the oral treatment of male impotence.) The
contract manufacturing organization is also
35
<PAGE>
responsible for filing a Drug Master File ("DMF") with the U.S. Food and Drug
Administration ("FDA") in connection with the manufacturing of phentolamine
mesylate. The Company will be responsible for manufacturing and packaging
products in finished pharmaceutical form. The agreement also provides for a
possible future long term supply agreement regarding bulk phentolamine
mesylate. The Company is required to pay the contract manufacturing
organization $447,000 payable in three installments ending during the first
quarter of 1996. Through December 31, 1995, the Company has paid a total of
$134,100 toward the required total.
In November 1995, the Company entered into a research agreement and a
license agreement with The Brigham and Women's Hospital, Inc. ("BWH"), a
not-for-profit corporation in Boston, Massachusetts. The Company agreed to
provide $35,000 for research in the field of clinical embryotoxic factor
assays for recurrent abortion and agreed to pay $15,000 for the exclusive
worldwide license to market BWH's technology and inventions, as defined,
pertaining to this field. The Company also pays BWH a royalty based on net
sales of covered products. The research agreement expires in November 1997.
The license agreement can be terminated by BWH after any calendar year in
which license fees or royalties are not a minimum of $5,000.
In November 1995, the Company entered into a one year agreement with a
physician in Mexico to conduct a study to determine the effectiveness and safety
of oral tablets of phentolamine mesylate for the treatment of impotence in
humans. Under this agreement, the Company pays an hourly rate for services plus
certain other costs.
Effective February 1995, the Company entered into an Assignment Agreement
with Reproductive Biotechnologies, Pvt. Ltd. ("RBPL"), an India-based technology
company, pursuant to which the Company purchased the rights to a technology for
the detection of estrogen-dependent breast cancer, including rights to a U.S.
patent application. In consideration for the assignment of the subject
technology, the Company paid RBPL $21,000 and will also make additional cash
payments through January 31, 1997. RBPL will also receive a predetermined
royalty, based on the aggregate net sales of any product developed from the
subject technology. This agreement was terminated in the first quarter of 1996.
In January 1995, the Company entered into an agreement with a contract
research organization to conduct its Phase II clinical trials of its male
impotency product. Under the terms of the agreement, the Company is required to
pay an estimated total amount of $650,000, payable monthly based upon actual
time and expense charges incurred. This agreement expires in April 1996. If
the agreement is terminated by the Company prior to its expiration date, the
Company is required to pay the balance of all costs and expenses incurred to
such date plus 25% of the total amount that otherwise would have been paid.
Through December 31, 1995, the Company has paid a total of $137,000 toward the
required total.
On April 13, 1994, the Company entered into an Assignment Agreement with
Gamogen, Inc. ("Gamogen") and Dr. Adrian Zorgniotti pursuant to which the
Company purchased the rights to a technology for the treatment of male
impotence, including rights to a U.S. patent application. In consideration
for the assignment of the subject technology, the Company provided Gamogen
with a cash payment of $100,000. As consideration for Gamogen's agreement
not to compete, the Company will deliver upon the achievement of a certain
milestone, $200,000 of the Company's Common Stock at the then current market
price. If the Company does not achieve this milestone by April 1996 then the
Company has the option to deliver $200,000 of the Company's Common Stock or
transfer the rights to the subject technology back to Gamogen no later than
May 1996. The Company anticipates delivering $200,000 of its Common Stock by
the May 1996 deadline. Gamogen will also receive a predetermined royalty,
based on the aggregate net sales of any product developed from the subject
technology. In addition, the Company is required to conduct $100,000 per
year of research for three years in the area of male impotency. The Company
has a right of first negotiation to purchase or exclusively license
improvements to any royalty-bearing product or competing product developed by
Gamogen.
On December 13, 1993, the Company entered into a corporate collaboration
agreement with Schering AG ("Schering"), a German company, to develop and
commercialize the human application of immunocontraceptive zona pellucida
technology. Under the agreement, the Company will continue to conduct
36
<PAGE>
research studies of its zona pellucida technology, with a focus on
identifying and selecting a lead immunocontraceptive product for humans.
Schering will then conduct the necessary preclinical and clinical development
studies of this and subsequent immunocontraceptive products, and will seek
the necessary regulatory approvals. The Company retains the manufacturing
rights to the products, as well as the responsibility to develop scaled-up
manufacturing processes and production capabilities. The Company also
retains certain marketing and manufacturing rights in India and China, and
the right to co-promote the product in the United States. Schering has
exclusive marketing rights in all other countries worldwide.
NOTE 11 -- RELATED PARTIES
The Company leases office space from an affiliate of a stockholder of the
Company. The Company recorded rent expense of approximately $75,000, $67,000
and $68,000 during 1995, 1994 and 1993, respectively, related to this lease. In
January 1996, this lease was extended through July 1999 and was also modified to
include additional space beginning March 1996. The modified lease commitments
are reflected in Note 5.
Embryotech Laboratories, Inc. ("ELI") is owned by the former sole
shareholder of FTI and current shareholder of the Company. ELI provides
products and services related to toxicity testing to customers of FTI. During
1995, FTI was the exclusive distributor of the products and services of ELI. At
December 31, 1995, revenues of $290,738 from the sale of these products and
services are recorded in the financial statements of FTI. At December 31, 1995,
FTI had a net payable balance to ELI of $8,888.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
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 & Jaworski, a Texas limited liability partnership, and
the Company 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 the Company and which are the subject
of the Company's only existing patent. 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.
The Court recently granted partial summary judgement in favor of the
Company and the other defendants in connection with the action. As a result of
the rulings, Dunbar is unable to rescind the assignment of the patent rights and
is left only with ancillary claims. Such ancillary claims are subject to a
motion to sever and abate pending Dunbar's potential appeal of the Court's
orders granting the Company's motion for summary judgement. The Company believes
the ancillary claims are without merit and will not have any material adverse
effect on the Company's financial condition and results of operations.
NOTE 13 -- SUBSEQUENT EVENTS
Through February 28, 1996, 200,000 shares of Series A Preferred Stock have
been submitted by their holders for conversion into 551,712 shares of Common
Stock.
From January 1, 1996 through February 28, 1996 the Company received
$743,337 from the exercise of 204,776 warrants which were issued in conjunction
with the Company's IPO.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ZONAGEN, INC.
Date: February 28, 1996 By: /s/ Joseph S. Podolski
----------------------------------------
Joseph S. Podolski,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ Martin P. Sutter /s/ Joseph S. Podolski
------------------------------------ -----------------------------------
Martin P. Sutter Joseph S. Podolski
Chairman of the Board of Directors President and Chief Executive
Director Officer;
(Principal Executive Officer)
/s/ David B. McWilliams /s/ Steven Blasnik
------------------------------------ -----------------------------------
David B. McWilliams Steven Blasnik
Director Director
/s/ David W. Ortlieb /s/ Allen D. Rudzik
------------------------------------ -----------------------------------
David W. Ortlieb Allen D. Rudzik, Ph. D.
Director Director
/s/ Louis Ploth
------------------------------------
Louis Ploth
Chief Financial Officer
(Principal Financial and Accounting Officer)
38
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY
NUMBERED
EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT PAGE
-------------- ------------------------- -------------
2.1 -- Stock Exchange Agreement dated October 13, --
1994, effective October 1, 1994, among
Zonagen, Inc., Fertility Technologies,
Inc. and J. Tyler Dean. Exhibit 2.1 to the
Company's Current Report on Form 8-K dated
October 13, 1994, is incorporated herein
by reference.
3.1 -- Restated Certificate of Incorporation. --
Exhibit 3.3 to the Company's Registration
Statement No. 33-57728-FW, as amended, is
incorporated herein by reference.
3.2 -- Restated Bylaws of the Company. Exhibit --
3.4 to the Company's Registration
Statement No. 33-57728-FW, as amended, is
incorporated herein by reference.
4.1 -- Specimen Certificate of Common Stock, $.01 --
par value, of the Company. Exhibit 4.1 to
the Company's Registration Statement No.
33-57728-FW, as amended, is incorporated
herein by reference.
4.2 -- Representative's Warrant Agreement dated --
March 25, 1993. Exhibit 4.3 to the
Company's Registration Statement No,
33-57728-FW, as amended, is incorporated
herein by this reference.
4.3 -- Certificate of Designation for the --
Company's Series A Convertible Preferred
Stock. Exhibit 4.1 to the Company's
Current Report on Form 8-K dated October 19,
1995 is incorporated herein by reference.
4.4 -- Form of Subscription Agreement between the --
Company and purchasers of the Company's
Series A Convertible Preferred Stock.
Exhibit 4.2 to the Company's Current
Report on Form 8-K dated October 19, 1995
is incorporated herein by reference.
4.5 -- Form of Warrants issued to the designees --
of the placement agent for the Company's
Series A Convertible Preferred Stock.
Exhibit 4.5 to the Company's Annual Report
on Form 10-K for the fiscal year ended
December 31, 1995 is incorporated herein
by reference.
10.1 -- Confidentiality Agreement dated July 19, --
1991, between the Company and the Regents
of the University of California. Exhibit
10.1 to the Company's Registration
Statement No. 33-5778-FW, as amended, is
incorporated herein by reference.
10.2 -- Agreement dated July 23, 1991, between the --
Company and Wayne State University.
Exhibit 10.2 to the Company's Registration
Statement No. 33-5778-FW, as amended, is
incorporated herein by reference.
10.3 -- Amended and Restated 1993 Employee and --
Consultant Stock Option Plan. Exhibit
10.3 to the Company's Registration
Statement No. 33-5778-FW, as amended, is
incorporated herein by reference.
10.4 -- Lease Agreement dated March 22, 1990, --
between the Company and The Woodlands
Equity Partnership-89. Exhibit 10.4 to
the Company's Registration Statement No.
33-5778-FW, as amended, is incorporated
herein by reference.
10.5 -- Employment Agreement between the Company --
and Joseph S. Podolski. Exhibit 10.5 to
the Company's Registration Statement No.
33-5778-FW, as amended, is incorporated
herein by reference.
39
<PAGE>
SEQUENTIALLY
NUMBERED
EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT PAGE
-------------- ------------------------- -------------
10.7 -- Exclusive License Agreement dated as of --
September 11, 1992, between the Company
and Dainippon Pharmaceuticals Co., Ltd.
Exhibit 10.7 to the Company's Registration
Statement No. 33-57728-FW, as amended, is
incorporated herein by reference.
10.8 -- Advisory Agreement dated March 25, 1993 --
between the Company and Reich & Co., Inc.
Exhibit 10.8 to the Company's Registration
Statement No. 33-57728-FW, as amended, is
incorporated herein by reference.
10.10 -- Extension, Modification and Ratification --
of Lease dated July 12, 1993 between the
Company and Woodlands Equity Partnership--89.
Exhibit 10.10 to the Company's Annual
Report on Form 10-KSB for the fiscal year
ended December 31, 1993, is incorporated
herein by reference..
10.11 -- The Company's 1993 Non-Employee Director --
Stock Option Plan. Exhibit 10.11 to the
Company's Annual Report of Form 10-KSB for
the fiscal year ended December 31, 1993,
is incorporated herein by reference
10.12 -- Employment Agreement between the Company --
and Louis Ploth. Exhibit 10.12 to the
Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1993,
is incorporated herein by reference.
10.13 -- Stock Purchase Agreement dated December 6, --
1993, between the Company and Schering
Berlin Venture Corporation. Exhibit 10.13
to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31,
1993, is incorporated herein by reference.
10.14 -- License, Research, Development and --
Regulatory Filing Agreement dated December
13, 1993, between the Company and Schering
AG. Exhibit 10.14 to the Company's
Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1993, is
incorporated herein by reference.
10.15 -- Agreement dated November 30, 1993, between --
the Company and the University of North
Carolina at Chapel Hill. Exhibit 10.15 to
the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31,
1993, is incorporated herein by reference.
10.16 -- Agreement between the Company and --
Reproductive Biotechnologies PVT., Ltd.
Exhibit 10.16 to the Company's Annual
Report on Form 10-KSB for the fiscal year
ended December 31, 1993, is incorporated
herein by reference
10.17 -- Assignment Agreement among Zonagen, Inc., --
Gamogen, Inc. and Dr. Adrian Zorgniotti
dated April 13, 1994. Exhibit 10.17 to
the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31,
1994, is incorporated herein by reference.
10.18 -- Registration Rights Agreement dated --
October 13, 1994, effective October 1,
1994, among Zonagen, Inc. and J. Tyler
Dean. Exhibit 10.1 to the Company's
Current Report on Form 8-K dated October
13, 1994, is incorporated herein by
reference.
10.19 -- Pledge and Security Agreement dated --
October 13, 1994 between Zonagen, Inc. and
J. Tyler Dean. Exhibit 10.2 to the
Company's Current Report on Form 8-K dated
October 13, 1994, is incorporated herein
by reference.
40
<PAGE>
SEQUENTIALLY
NUMBERED
EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT PAGE
-------------- ------------------------- -------------
10.22 -- Guaranty of Zonagen, Inc. dated October 13, --
1994. Exhibit 10.4 to the Company's
Current Report on Form 8-K dated October 13,
1994, is incorporated herein by reference.
10.23 -- Agreement between the Company and --
Pharmaco, LSR to conduct clinical trials
dated January 25, 1995. Exhibit 10.23 to
the Company's Annual Report on Form 10-K
for the fiscal year ended December 31,
1995 is incorporated herein by reference.
10.24 -- Research Agreement between the Company and --
The Brigham and Women's Hospital, Inc.
dated November 6, 1995. Exhibit 10.24 to
the Company's Annual Report on Form 10-K
for the fiscal year ended December 31,
1995 is incorporated herein by reference.
10.25 -- License Agreement between the Company and --
The Brigham and Women's Hospital, Inc.
dated November 6, 1995. Exhibit 10.25 to
the Company's Annual Report on Form 10-K
for the fiscal year ended December 31,
1995 is incorporated herein by reference.
11* -- Statement regarding computation of per 42
share earnings
24.1 -- Consent of Ernst & Young LLP. Exhibit 24.1 --
to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31,
1995 is incorporated herein by reference.
24.2* -- Consent of Arthur Andersen LLP. 43
-------------
*Filed Herewith
41
<PAGE>
Exhibit 11
ZONAGEN, INC.
Statement Regarding Computation of Per Share Earnings
As of December 31, 1995
<TABLE>
<CAPTION>
AVERAGE
SHARES
DATE SHARES DAYS OUTSTANDING
---- ----------- ---- -----------
<S> <C> <C> <C> <C>
1/1/95 3,818,270 X 11 42,000,970 115,071
1/12/95 3,822,350 X 56 214,051,600 586,443
3/9/95 3,838,350 X 39 149,695,650 410,125
4/17/95 3,838,816 X 204 783,118,464 2,145,530
11/7/95 3,845,712 X 23 88,451,376 242,333
11/30/95 4,052,608 X 6 24,315,648 66,618
12/6/95 4,093,987 X 23 94,161,701 257,977
12/29/95 4,098,124 X 3 12,294,372 33,683
--- ------------- -----------
365 1,408,089,781 3,857,780
--- ------------- -----------
--- ------------- -----------
Net Loss $(4,287,317)
-----------
LOSS PER SHARE $ (1.11)
-----------
-----------
</TABLE>
42
<PAGE>
EXHIBIT 24.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K/A, into the Company's previously filed
Form S-8 dated May 17, 1993, Form S-8 dated August 29, 1994 and Form S-3 dated
November 17, 1995.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
May 16, 1996
