<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SECOND AMENDMENT TO FORM 10-K ON
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-21198
ZONAGEN, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0233274
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ZONAGEN, INC.
2408 TIMBERLOCH PLACE, SUITE B-4
THE WOODLANDS, TEXAS 77380
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(281) 367-5892
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED:
------------------- ------------------------------------------
<S> <C>
Common Stock, par value $.001 per share Pacific Stock Exchange
Nasdaq Small Cap Market
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT: 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 the voting stock held by non-affiliates of
the registrant was approximately $108,263,000 as of March 11, 1997, based on the
closing sales price of the registrant's common stock on the Nasdaq National
Market on such date of $16.94 per share and assuming full conversion of the
registrant's Series B Convertible Preferred Stock. For purposes of the
preceding sentence only, all directors, executive officers and beneficial owners
of ten percent or more of the common stock are assumed to be affiliates. As of
March 11, 1997, 7,243,405 shares of common stock were outstanding and 995,738
shares of Series B Convertible Preferred Stock were outstanding.
Certain sections of the registrant's definitive proxy statement relating to
the registrant's 1997 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, 1996, are incorporated by
reference into Part III of this Form 10-K.
================================================================================
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
The financial statements required by this item are presented following
Item 14 of this report.
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 F-1.
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.
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
- ------- -------------------------
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, $.001 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.
4.6 --Certificate of Designation for the Company's Series B Convertible
Preferred Stock. Exhibit 4.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996 is incorporated
herein by reference.
2
<PAGE>
4.7 --Form of Subscription Agreement between the Company and purchasers
of the Company's Series B Convertible Preferred Stock . Exhibit
4.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996 is incorporated herein by reference.
4.8 --Form of Warrant issued to the Placement Agent for the Company's
Series B Convertible Preferred Stock. Exhibit 4.3 to the Company's
quarterly Report on Form 10-Q for the quarter ended September 30,
1996 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.
10.6 --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.
10.7 --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.
10.8 --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.
10.9+ --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
10.10+ --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.
10.11 --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.
10.12 --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.
10.13 --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.
10.14 --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
3
<PAGE>
10.15 --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.
10.16 --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.
10.17 --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.
10.18 --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.
10.19 --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.
10.20 --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.
10.21 --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.
11.1* --Statement regarding computation of per share earnings
21.1* --Subsidiary of the Registrant
23.1* --Consent of Arthur Andersen LLP.
27.1* --Financial Data Schedule.
- ---------------
*Filed herewith.
+Management contract or compensatory plan.
(b) Reports on Form 8-K
The Company filed one Current Report on Form 8-K, dated October 15, 1996,
during the three months ended December 31, 1996. The Current Report on Form 8-K
related to the closing of the private placement of shares of the Company's
Series B Convertible Preferred Stock.
4
<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: June 10, 1997 By: /s/ Joseph S. Podolski
---------------------------
Joseph S. Podolski
President and Chief Executive Officer
5
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995, and 1994,
and for the Period From Inception (August 20, 1987) Through December 31, 1996 F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995,
and 1994, and for the Period From Inception (August 20, 1987) Through December 31, 1996 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994,
and for the Period From Inception (August 20, 1987) Through December 31, 1996 F-8
Notes to Consolidated Financial Statements F-9
</TABLE>
<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 as of December
31, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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 audited 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 also 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 consolidated 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 1997.
Management's plans in regard to those matters are also described in Note 1.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Zonagen, Inc., and subsidiary as of December 31, 1996 and 1995, and
the results of their operations and cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 11, 1997
F-2
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 11,074,902 $ 4,189,858
Accounts receivable 420,149 327,975
Product inventory 174,073 230,380
Prepaids and other current assets 141,223 69,232
------------ ------------
Total current assets 11,810,347 4,817,445
LAB EQUIPMENT, FURNITURE AND LEASEHOLD
IMPROVEMENTS, net of accumulated
depreciation and amortization of
$706,351 and $601,792, respectively 311,093 233,315
EXCESS OF COST OVER FAIR VALUE OF
TANGIBLE ASSETS ACQUIRED, net of
accumulated amortization of $446,080
and $240,845, respectively 1,003,329 1,153,939
OTHER ASSETS, net of accumulated
amortization of $116,048 and $67,532,
respectively 586,991 446,856
------------ ------------
Total assets $ 13,711,760 $ 6,651,555
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,169,999 $ 660,673
Accrued liabilities 867,459 499,631
Current portion of notes payable 80,526
------------ ------------
Total current liabilities 2,117,984 1,160,304
------------ ------------
NOTES PAYABLE 16,799 66,125
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Undesignated preferred stock, $.001 par
value, 2,305,000 and 4,230,000 shares
authorized, respectively, none issued
and outstanding -- --
Series A preferred stock, $.001 par
value, 770,000 shares authorized, none
and 504,850 shares outstanding,
respectively -- 505
Series B preferred stock, $.001 par
value, 1,925,000 and none authorized,
respectively, 1,514,906 and none
outstanding, respectively 1,515 --
Common stock, $.001 par value,
20,000,000 shares authorized,
6,033,396 and 4,098,124 shares issued
and outstanding, respectively 6,033 4,098
Additional paid-in capital 38,124,532 22,473,074
Deferred compensation (144,718) (112,500)
Deficit accumulated during the
development stage (26,410,385) (16,940,051)
------------ ------------
Total stockholders' equity 11,576,977 5,425,126
------------ ------------
Total liabilities and
stockholders' equity $ 13,711,760 $ 6,651,555
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
From Inception
For the Year Ended December 31 (August 20, 1987)
------------------------------------------- Through
1996 1995 1994 December 31, 1996
------------- ------------- ------------- ------------------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Product sales $ 3,021,940 $ 2,838,532 $ 800,747 $ 6,661,219
Licensing fee -- -- -- 250,000
Interest income 270,906 115,843 161,171 892,699
----------- ----------- ----------- ------------
Total revenues 3,292,846 2,954,375 961,918 7,803,918
COSTS AND EXPENSES:
Cost of products sold 2,087,007 2,162,446 569,723 4,819,176
Research and development 7,936,188 2,794,928 2,702,464 18,767,924
Selling, general and administrative 2,515,509 2,068,115 1,603,479 9,403,235
Interest expense and amortization of
intangibles 224,476 216,203 56,649 860,585
----------- ----------- ----------- ------------
Total costs and expenses 12,763,180 7,241,692 4,932,315 33,850,920
----------- ----------- ----------- ------------
LOSS FROM CONTINUING OPERATIONS (9,470,334) (4,287,317) (3,970,397) (26,047,002)
LOSS FROM DISCONTINUED OPERATIONS -- -- -- (288,104)
LOSS ON DISPOSAL OF DISCONTINUED
OPERATIONS -- -- -- (75,279)
------------ ------------ ------------ ------------
Net loss $(9,470,334) $(4,287,317) $(3,970,397) $(26,410,385)
=========== =========== =========== ============
LOSS PER COMMON SHARE $(1.92) $(1.11) $(1.07)
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES USED IN
COMPUTING LOSS PER COMMON SHARE 4,924,623 3,857,780 3,711,559
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock Additional During the Total
----------------- ------------------- Paid-in Defered Development Stockholders'
Shares Amount Shares Amount Capital Compensation Stage Equity
------- ------- -------- --------- -------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exchange of common stock
($.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
(unaudited) -- -- 245,367 245 805 -- (27,613) (26,563)
Net loss -- -- -- -- -- -- (327,412) (327,412)
----- ------ --------- ------ ---------- ------- ----------- -----------
BALANCE AT DECEMBER 31, 1988
(unaudited) -- -- 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
(unaudited) -- -- 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
(unaudited) -- -- 311,265 311 3,559 -- (2,748,026) (2,744,156)
Net loss -- -- -- -- -- -- (1,819,620) (1,819,620)
----- ------ --------- ------ ---------- ------- ----------- -----------
BALANCE AT DECEMBER 31, 1991
(unaudited) -- -- 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 of 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
(unaudited) -- -- 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)
----- ------ --------- ------ ----------- ------- ----------- -----------
</TABLE>
F-5
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock Additional During the Total
----------------- ------------------- Paid-in Defered Development Stockholders'
Shares Amount Shares Amount Capital Compensation Stage Equity
------- ------- -------- --------- -------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993
(unaudited) -- $ -- 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
($3.94 per share) -- -- 39,623 40 156,079 -- -- 156,119
Issuance of common stock
for purchase of FTI,
October 13, 1994 -- -- 111,111 111 1,567,184 -- -- 1,567,295
Net loss -- -- -- -- -- -- (3,970,397) (3,970,397)
----- ------ --------- ------ ----------- -------- ----------- -----------
BALANCE AT DECEMBER 31, 1994 -- -- 3,818,270 3,819 17,046,930 (150,000) (12,652,734) 4,248,015
Amortization of deferred
compensation -- -- -- -- -- 37,500 -- 37,500
Exercise of options to
purchase common stock for
cash, January and April 1995
($.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 -- -- 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 warrants to
purchase common stock as
a result of offering under
antidilution clause,
October 19, 1995
($3.63 per share) -- -- -- -- -- -- -- --
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)
----- ------ --------- ------ ----------- -------- ----------- -----------
</TABLE>
F-6
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock Additional During the Total
---------------- ------------------- Paid-in Defered Development Stockholders'
Shares Amount Shares Amount Capital Compensation Stage Equity
------ ------ -------- -------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 504,850 $ 505 4,098,124 $4,098 $22,473,074 $(112,500) $(16,940,051) $ 5,425,126
Deferred compensation
resulting from grant of
options -- -- -- -- 86,250 (86,250) -- --
Amortization of deferred
compensation -- -- -- -- -- 54,032 -- 54,032
Exercise of warrants to
purchase common stock for
cash, January through
December 1996 ($3.63 per
share) -- -- 227,776 228 826,595 -- -- 826,823
Conversion of Series A
preferred stock into common
stock, January through
November 1996 (507,563) (508) 1,396,826 1,397 (889) -- -- --
Issuance of options for
services, January 12, 1996 -- -- -- -- 98,745 -- -- 98,745
Exercise of options to
purchase common stock for
cash, February through
November 1996 ($.001 to
$5.50 per share) -- -- 23,100 23 75,005 -- -- 75,028
Issuance of common stock for
agreement not to compete,
April 13, 1996 -- -- 19,512 19 199,978 -- -- 199,997
Exercise of warrant to purchase
Series A preferred stock under
cashless exercise provision,
June 5, 1996 2,713 3 -- -- (3) -- -- --
Issuance of Series B preferred
stock for cash, September 30,
1996, and October 11, 1996,
($10.00 per share), net of
offering costs of
$2,557,440 1,692,500 1,693 -- -- 14,365,867 -- -- 14,367,560
Conversion of Series B
preferred stock into common
stock, November through
December 1996 (177,594) (178) 268,058 268 (90) -- -- --
Net loss -- -- -- -- -- -- (9,470,334) (9,470,334)
--------- ------ --------- ------ ----------- --------- ------------ -----------
BALANCE AT DECEMBER 31, 1996 1,514,906 $1,515 6,033,396 $6,033 $38,124,532 $(144,718) $(26,410,385) $11,576,977
========= ====== ========= ====== =========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
From Inception
(August 20, 1987)
For the Year Ended December 31 Through
------------------------------------------- December 31,
1996 1995 1994 1996
------------- ------------- ------------- -----------------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(9,470,333) $(4,287,317) $(3,970,397) $(26,410,384)
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 -- 315,984
Depreciation and amortization 358,310 317,050 224,843 1,218,946
Noncash expenses related to
stock-based transactions 152,777 37,500 37,500 227,797
Common stock issued for agreement not
to compete 199,997 -- -- 199,997
Series B preferred stock issued for
consulting services -- -- -- 17,999
Changes in operating assets and
liabilities, net of effects of
purchase of businesses in 1988,
1994 and 1996
(Increase) decrease in receivables (119,893) 146,120 (168,370) (153,962)
(Increase) decrease in product
inventory 56,307 79,570 (28,422) 107,455
(Increase) decrease in prepaids and
other current assets (44,273) (1,005) (167) (60,981)
(Decrease) increase in accounts
payable and accrued liabilities 877,154 383,444 421,983 1,792,457
----------- ----------- ----------- ------------
Net cash used in operating
activities (7,989,954) (3,248,654) (3,483,030) (22,669,413)
----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (182,337) (43,500) (35,985) (910,699)
Purchase of technology rights and other
assets (203,651) (133,988) (189,002) (671,022)
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 (385,988) (177,488) (222,292) (1,654,305)
----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 901,851 13,939 156,119 10,574,064
Proceeds from issuance of preferred
stock 14,367,560 5,337,005 -- 23,688,522
Proceeds from issuance of notes payable -- -- -- 2,838,681
Principal payments on notes payable (8,425) (182,714) (59,615) (1,702,647)
----------- ----------- ----------- ------------
Net cash provided by financing
activities 15,260,986 5,168,230 96,504 35,398,620
----------- ----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 6,885,044 1,742,088 (3,608,818) 11,074,902
CASH AND CASH EQUIVALENTS, beginning of
period 4,189,858 2,447,770 6,056,588 --
----------- ----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of period $11,074,902 $ 4,189,858 $ 2,447,770 $ 11,074,902
=========== =========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for
interest $ -- $ -- $ 5,660 $ 129,243
Acquisition of FTI -- -- 1,567,295 1,567,295
Assumed debt in purchase of Zygotek
assets 39,625 -- -- 39,625
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
Zonagen, Inc., and subsidiary (the Company), a Delaware corporation, 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 prostate cancer, and the treatment of female
conditions such as endometriosis. The Company is also active in the research of
improved methodologies to enhance fertility as well as new approaches to
contraception and prophylaxis of sexually transmitted disease. The Company'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 health care. From Inception through
December 31, 1996, 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).
There can be no assurance that the Company will successfully complete the
transition from a development stage company to profitability. Such ability to
complete the transition is dependent upon, among other things, the Company's
ability to obtain additional working capital to develop, manufacture and market
its products and the success of future operations. 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
financing, obtaining and enforcing patents, receiving regulatory approval
product liability exposure, dependence on third parties for marketing and
manufacturing, and competition with other biotechnology and pharmaceutical
companies. Other than through Fertility Technologies, Inc. (FTI), the Company
has not generated revenues from operations nor is there any assurance of
significant revenues in the future.
The Company has incurred losses since its inception in 1987 and expects to incur
losses for the next several years. As of December 31, 1996, the Company had
accumulated losses of $26,410,385 and had cash reserves of $11,074,902. The
Company expects that it can conserve its capital resources sufficient to fund
its operations through the end of 1997. If the results of Phase III clinical
trials are favorable, the Company expects to require additional capital to fund
its "open label studies" in the third quarter of 1997. The Company believes that
it will receive funds sufficient to maintain its clinical program and other
operations at least through the end of 1997. If sufficient cash resources are
not available, management intends to reduce expenditures for its clinical
program and other operations. If the results of its Phase III clinical trial are
unfavorable, the Company intends to reduce its research and development
expenditures and focus on its remaining business, in which case the Company
expects that its existing capital resources will be sufficient to fund its
operations through the end of 1997.
On October 13, 1994, the Company purchased all of the outstanding common stock
of FTI (a Massachusetts corporation). The Company currently has sales through
this subsidiary, 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 health care management by providing a
full array of innovative products and services.
F-9
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following unaudited pro forma information shows the results of operations
for the year ended December 31, 1994, as if the acquisition had occurred on
January 1, 1994 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.
<TABLE>
<CAPTION>
Pro Forma Amounts
(Unaudited)
1994
------------------
<S> <C>
Total revenues $2,785,165
Net loss 4,119,886
Pro forma net loss per share 0.97
Shares used in computing loss per 4,256,056
common share
</TABLE>
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 1, 1994, or of the results which may occur in the future.
On June 7, 1996, FTI purchased substantially all of the assets of Zygotek, Inc.
(Zygotek) (a Massachusetts corporation), for cash of $15,000 and the assumption
of notes payable of $39,625. FTI also received the rights to a proprietary
product in connection with the purchase.
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.
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.
F-10
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Product Inventory
Product inventory consists primarily of products manufactured by others for
resale to obstetrics/gynecologists, urologists and fertility clinics. Inventory
at December 31, 1996, also includes finished goods manufactured by the Company
for sale to 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 was recorded in
conjunction with the purchase of FTI and the Zygotek assets and is amortized
using the straight-line method over a seven-year period and six-year period,
respectively.
Other Assets
Other assets 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 as these revenues are 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. In all applicable years, all common stock equivalents, including Series
A preferred stock and Series B preferred stock, were antidilutive and,
accordingly, were not included in the computation.
In March 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No.
128 establishes standards for computing and presenting earnings per share (EPS)
of common stock. This statement simplifies the standards for computing EPS,
previously found in Accounting Priciples Board Opinion (APB) No. 15, "Earnings
Per Share," and makes them comparable to international EPS standards. The
statement also retroactively revises the presentation of EPS in the financial
statements. The Company will adopt SFAS No. 128 for the year ended December 31,
1997, and has not currently quantified the effect of adoption.
F-11
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LAB EQUIPMENT, FURNITURE
AND LEASEHOLD IMPROVEMENTS:
Lab equipment, furniture and leasehold improvements at December 31, 1996 and
1995, are classified as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Laboratory equipment $ 592,479 $ 475,162
Furniture and fixtures 137,235 138,720
Office equipment 101,427 76,043
Leasehold improvements 186,303 145,182
---------- ---------
1,017,444 835,107
Less- Accumulated depreciation and
amortization (706,351) (601,792)
---------- ---------
Total $ 311,093 $ 233,315
========== =========
</TABLE>
Depreciation expense of $104,559, $96,667 and $209,259 was recorded in 1996,
1995 and 1994, respectively.
4. OPERATING LEASES:
The Company leases laboratory and office space. Rental expense for the years
ended December 31, 1996, 1995 and 1994, was $179,335, $179,640 and $91,577,
respectively. Future minimum lease payments under noncancelable leases with
original terms in excess of one year as of December 31, 1996, are as follows:
1997 $168,053
1998 169,979
1999 89,603
2000 1,763
2001 --
5. NOTES PAYABLE:
In connection with the acquisition of FTI, the Company assumed two note
agreements from the former sole stockholder 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
required the payment of a number of shares of common stock on January 31, 1997,
determined based upon the market price of common stock at that date. Interest
was imputed at a rate of 11 percent. On January 31, 1997, the Company issued
19,842 shares of common stock to satisfy the remaining note obligation.
In connection with the purchase of Zygotek in June 1996, FTI assumed two note
agreements totaling $39,625, one of which was to the former sole stockholder of
Zygotek. The notes bear interest at 8 percent and 11 percent and mature on May
1, 1999, and October 1, 1998, respectively. Principal and interest payments of
approximately $1,400 are due monthly. The notes are guaranteed by Zonagen, Inc.
F-12
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FEDERAL INCOME TAXES:
The Company had losses since inception and, therefore, has not been subject to
federal income taxes. The Company has accumulated approximately $520,000 of
research and development tax credits which will begin to expire in 2002. As of
December 31, 1996, the Company has net operating loss (NOL) carryforwards for
income tax purposes, subject to limitations described below, expiring as
follows:
Year expires-
2002 $ 27,613
2003 288,615
2004 614,044
2005 1,347,926
2006 1,839,889
2007 1,476,055
2008 2,360,658
2009 3,388,940
2010 3,889,500
2011 9,085,559
-----------
Total $24,318,799
===========
The Tax Reform Act of 1986 provided for a limitation on the use of NOL and tax
credit carryforwards following certain ownership changes that could limit the
Company's ability to utilize these NOLs and tax credits. Accordingly, the
Company's ability to utilize the above NOL and tax credit carryforwards to
reduce future taxable income and tax liabilities may be limited. Additionally,
because U.S. tax laws limit the time during which NOLs and tax credit
carryforwards may be applied against future taxable income and tax liabilities,
the Company may not be able to take full advantage of its NOLs and tax credit
carryforwards for federal income tax purposes.
The FASB has issued SFAS No. 109, "Accounting for Income Taxes." As the Company
has incurred losses since inception, and there is no certainty of future
revenues, a deferred tax asset has been recorded and reserved in full in the
accompanying financial statements for the Company's NOL carryforward.
F-13
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 1996 and 1995, are as
follows:
1996 1995
---- ----
Deferred tax assets and liabilities-
Net operating loss carryforwards $ 8,268,000 $ 5,179,000
Book/tax difference on basis of
assets and license agreements 133,000 57,000
Research and development tax credits 520,000 505,000
Accruals/expenses not currently
deductible 26,000 68,000
----------- -----------
Total deferred tax assets 8,947,000 5,809,000
Less- Valuation allowance (8,947,000) (5,809,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
7. STOCKHOLDERS' EQUITY:
Series A Preferred Stock
In October 1995, the Company authorized 770,000 shares and issued 598,850 shares
of Series A convertible preferred stock (Series A Preferred Stock) for $10.00
per share. Net proceeds to the Company were approximately $5,337,000. Each
share 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.
Holders of the Series A Preferred Stock are entitled to liquidation preference
of $13.00 per share upon the liquidation, sale or other disposition of all or
substantially all of the assets of the Company. Series A stockholders are
entitled to vote as if their shares had been converted into common stock and are
entitled to approve (a) additional securities of the Company, (b) changes to the
rights and preferences of the Series A Preferred Stock and (c) declaration of
dividends or repurchases of securities of the Company.
On November 1, 1996, the Company exercised its right to cause the mandatory
conversion of the Series A Preferred Stock, with the result that all such shares
not previously converted were converted into common stock effective November 25,
1996.
Series B Preferred Stock
In September 1996, the Company authorized 1,925,000 shares of Series B
convertible preferred stock (Series B Preferred Stock). On September 30, 1996,
the Company completed an initial closing of a private placement for its Series B
Preferred Stock in which it sold 1,137,750 shares at a price of $10.00 per
share. Net proceeds to the Company from the initial closing of the private
placement were approximately $9.7 million. On October 11, 1996, the Company
completed the final closing of its private placement of Series B Preferred
Stock, in which it sold an additional 554,750 shares of Series B Preferred Stock
at a price of $10.00 per share. Net proceeds from the final closing of the
private placement were approximately $4.7 million. The aggregate offering
consisted of 1,692,500 shares of Series B Preferred Stock with net proceeds of
approximately $14.4 million.
F-14
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Each share of Series B Preferred Stock is convertible at the option of the
holder into shares of common stock at an initial conversion price of $6.625 per
share. In October 1997, the conversion price is subject to adjustment if the
common stock is trading, as defined, less than 130 percent of the conversion
price. Beginning in October 1997, the Company can cause the Series B Preferred
Stock to be converted into common stock if the common stock is trading, as
defined, for more than 150 percent of the conversion price. Holders of the
Series B Preferred Stock are entitled to a liquidation preference of $13.00 per
share upon the liquidation of the Company. Holders of Series B Preferred Stock
are entitled to vote as if their shares had been converted into common stock and
are entitled to approve (a) additional securities of the Company that are senior
to or on parity with the Series B Preferred Stock, (b) changes to the rights and
preferences of the Series B Preferred Stock and (c) declaration of dividends on
junior stock or repurchases of securities of the Company.
Through December 31, 1996, 177,594 shares of Series B Preferred Stock had been
converted into 268,058 shares of common stock. From January 1, 1997, through
March 11, 1997, 519,168 shares of Series B Preferred Stock have been submitted
by their holders for conversion into 783,609 shares of common stock.
Common Stock
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 of Series A Preferred Stock. The Company recorded an
expense of $75,984 for the difference between the market value of these shares
and the amount received.
The acquisition of FTI required a final payment based upon the market price per
share of common stock at January 31, 1997, and whether FTI achieves certain
earnings milestones. On January 31, 1997, the Company issued 305,095 shares of
common stock as final payment.
Warrants
In connection with the Offering, the Company issued to the underwriter warrants
to purchase 135,000 shares of common stock at an initial price per share equal
to 120 percent of the initial public offering price per share. These warrants
contain certain antidilution 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 minimis 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 November 1996, as a result of the
sale of Series B Preferred Stock, the remaining warrants were converted into
warrants to purchase 37,898 shares of common stock for $2.46 per share. During
1996, warrants for 227,776 shares were exercised for total proceeds of $826,823.
From January 1, 1997, through March 11, 1997, warrants for 12,228 shares of
common stock were exercised by their holders.
In connection with the October 1995 sale of Series A Preferred Stock, the
Company issued warrants to the placement agent 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 minimis when
issued. During 1996, Series A warrants were exercised and converted into 4,168
shares of common stock under a cashless exercise provision. From January 1,
1997, through March 11, 1997, 33,521 Series A warrants were exercised and
converted into 70,112 shares of common stock under a cashless exercise
provision.
F-15
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the issuance of Series B Preferred Stock, the Company issued
warrants to the placement agent to purchase 169,250 shares of Series B Preferred
Stock at a price of $11.00 per share. These warrants expire in 2001. These
warrants were recorded at estimated fair value of $405,269. The fair value of
these warrants is estimated on the date of grant using the Black Sholes option
pricing model with the following weighted average assumptions; risk-free
interest rates of 5.67 percent; no expected dividend yield, expected life of one
year and expected volatility of 65 percent.
8. 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 are generally granted with an exercise price per share equal to 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 have generally been
20 percent on each anniversary of the grant date. All options expire no later
than the tenth anniversary of the grant date. At December 31, 1996, 275,866
options are available to be granted under these plans.
The Company also has a stock option plan for its nonemployee 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 receive options to
purchase 2,500 shares at each reelection. These options are fully vested when
granted and expire no later than the tenth anniversary of the grant date. At
December 31, 1996, 26,658 options were available to be granted under this plan.
The Company accounts for its stock option plans under APB No. 25 and the related
Interpretations. Accordingly, deferred compensation is recorded for stock
options based on the excess of the market value of the common stock on the
measurement date over the exercise price of the options. This deferred
compensation is amortized over the vesting period of each option.
In January 1994, the president of the Company was granted an option to purchase
50,000 shares of common stock. This option vests at 20 percent per year. The
difference between the market value of common stock at the date of grant and the
exercise price per common share was recorded as deferred compensation. Related
compensation expense is recognized over the five-year vesting period.
In January 1996, the Company granted a consultant stock options to purchase
10,000 shares of common stock as compensation for services rendered in 1996.
As a result of this option issuance, the Company recorded $98,745 of general and
administrative expense in 1996.
In December 1996, the executive committee of the board of directors approved the
adoption of a new nonemployee director stock option plan, subject to approval by
the full board of directors and the Company's stockholders. Upon execution of
this plan, stock options to purchase 175,000 shares of common stock will be
granted to the members of its board of directors.
F-16
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which, if fully adopted, requires the Company to record stock-
based compensation at fair value. The Company has adopted the disclosure
requirements of SFAS No. 123 for employee stock-based compensation and has
elected not to record related compensation expense in accordance with this
statement. Had compensation expense for its stock option plans been determined
consistent with SFAS No. 123, the Company's net loss and net loss per share
would have been increased to the following pro forma amounts:
For the Year Ended
December 31
------------------------
1996 1995
----------- -----------
Net loss-
As reported $9,470,334 $4,287,317
Pro forma 9,790,780 4,384,651
Loss per share-
As reported $ 1.92 $ 1.11
Pro forma 1.99 1.14
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The following is a summary of all stock option activity:
Common Weighted
Shares Average
Under Exercise
Options Price
-------- --------
Outstanding at December 31, 1993 367,323 $3.831
Options granted 165,000 7.039
Options canceled (3,001) 4.119
-------
Outstanding at December 31, 1994 529,322 4.771
Options granted 172,500 4.156
Options exercised (4,546) 3.063
Options canceled (49,421) 5.881
-------
Outstanding at December 31, 1995 647,855 4.518
Options granted 206,650 7.794
Options exercised (23,100) 3.248
Options canceled (56,400) 6.105
-------
Outstanding at December 31, 1996 775,005 6.405
=======
Exercisable at December 31, 1994 169,742 3.332
Exercisable at December 31, 1995 249,986 3.816
Exercisable at December 31, 1996 349,364 4.093
F-17
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The exercise price of options outstanding at December 31, 1996, range from $.001
to $9.00. The weighted average contractual life of options outstanding at
December 31, 1996, was eight years.
The weighted average fair value of options granted in 1996 and 1995 was $5.39
and $2.14, respectively. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1996 and 1995,
respectively, risk-free interest rates of 6.19 percent and 6.06 percent; no
expected dividend yields for both years, expected lives of 6 years and expected
volatility of 65 percent and 44 percent.
9. LICENSE, RESEARCH AND
DEVELOPMENT AGREEMENTS:
During 1996, the Company entered into agreements with two contract research
organizations, PPD Pharmaco and Affiliated Research Centers, Inc., for the U.S.
clinical development of Vasomax(TM), the Company's oral treatment for male
impotency. The Company may terminate these agreements upon written notification
and payment of expenses incurred prior to termination. During 1996, the Company
made cash payments aggregating $3,162,000 and recorded payables and accrued
expenses of $821,000 as of December 31, 1996. Upon continued success of the U.S.
Vasomax(TM) clinical program, it is anticipated that the Company could spend in
excess of $10,000,000 in 1997 to continue the U.S. clinical development program.
If sufficient cash resources are not available, management intends to reduce
expenditures under these agreements.
In April 1994, the Company entered into an assignment agreement with Gamogen,
Inc. (the Gamogen Agreement), 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, Inc.
(Gamogen), with a cash payment of $100,000 in 1994. As consideration for
Gamogen's agreement not to compete, the Company delivered $200,000 or 19,512
shares of the Company's common stock in April 1996. Pursuant to the Gamogen
Agreement, Gamogen is to 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 through 1997 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 January 24, 1997, the Company signed an amendment to the Gamogen Agreement.
This amendment expires in 2000 and provides the Company with an option to
purchase back the royalty stream. The Company made an initial payment of
$75,000 upon execution of the amendment and is required to make additional
payments of $150,000 each year through 1999 or until the final purchase is
completed. The Company can cancel the amendment at any time through nonpayment.
The final purchase price, inclusive of amended payments previously made, is
dependent upon the date the option is exercised and will range from $750,000 up
to $1,750,000.
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. That trial was completed in November 1996. Subsequently, the
Company has entered into an agreement
F-18
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to run an open label study with Vasomax(TM) in Mexico that is expected to last
through the first quarter of 1998 and cost approximately $436,000 during that
time period. Also, the Company anticipates conducting studies in Mexico in 1997
for other product development opportunities.
In November 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 Investigational New Drug (IND) application.
Phentolamine mesylate is used in the Company's product which is in development
for the oral treatment of male impotence. The contract manufacturing
organization is also responsible for filing and in 1996 did file 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 was required to pay the
contract manufacturing organization $447,000 payable in three installments
ending during the first quarter of 1996. Through December 31, 1996, the Company
has paid the total amount required under the contract.
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 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. Upon execution of this agreement, the Company sold 239,933
shares of common stock to Schering Berlin Venture Corporation (SBVC) for $2.5
million, or $10.42 per share. SBVC is a subsidiary of Schering AG.
10. RELATED PARTIES:
The Company leases office space from an affiliate of a stockholder of the
Company. The Company recorded rent expense of approximately $110,000, $67,000
and $68,000 during 1996, 1995 and 1994, respectively, related to this lease.
11. 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.
F-19
<PAGE>
ZONAGEN, INC., AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Court 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 appeal of the Court's orders granting the Company's
motion for summary judgment. The Company believes, based on discussions with
legal counsel, that the ancillary claims are without merit and will not have any
material adverse effect on the Company's financial condition and results of
operations.
F-20
<PAGE>
EXHIBIT 11.1
ZONAGEN, INC.
YEAR-TO-DATE WEIGHTED AVERAGE SHARES OUTSTANDING
AS OF DECEMBER 31, 1996
AVERAGE
SHARES
DATE SHARES DAYS OUTSTANDING
01/01/96 4,098,124 X 9= 36,883,116 101,050
01/10/96 4,102,251 X 7= 28,715,827 78,673
01/17/96 4,180,596 X 1= 4,180,596 11,454
01/18/96 4,188,871 X 6= 25,133,226 68,858
01/24/96 4,197,146 X 2= 8,394,292 22,998
01/26/96 4,207,146 X 4= 16,828,584 46,106
01/30/96 4,216,237 X 1= 4,216,237 11,551
01/31/96 4,224,512 X 1= 4,224,512 11,574
02/01/96 4,228,512 X 1= 4,228,512 11,585
02/02/96 4,248,198 X 3= 12,744,594 34,917
02/05/96 4,381,994 X 1= 4,381,994 12,005
02/06/96 4,400,176 X 3= 13,200,528 36,166
02/09/96 4,401,279 X 3= 13,203,837 36,175
02/12/96 4,456,451 X 1= 4,456,451 12,209
02/13/96 4,458,270 X 1= 4,458,270 12,214
02/14/96 4,468,270 X 1= 4,468,270 12,242
02/15/96 4,475,770 X 6= 26,854,620 73,574
02/21/96 4,558,528 X 7= 31,909,696 87,424
02/28/96 4,611,803 X 2= 9,223,606 25,270
03/01/96 4,625,596 X 6= 27,753,576 76,037
03/07/96 4,684,668 X 8= 37,477,344 102,678
03/15/96 4,698,461 X 3= 14,095,383 38,617
03/18/96 4,719,150 X 2= 9,438,300 25,858
03/20/96 4,724,150 X 5= 23,620,750 64,714
03/25/96 4,736,563 X 1= 4,736,563 12,977
03/26/96 4,751,563 X 2= 9,503,126 26,036
03/28/96 4,753,769 X 5= 23,768,845 65,120
04/02/96 4,828,526 X 2= 9,657,052 26,458
04/04/96 4,831,974 X 5= 28,991,844 79,430
04/10/96 4,846,320 X 3= 14,538,960 39,833
04/13/96 4,865,832 X 17= 82,719,144 226,628
04/30/96 4,872,728 X 23= 112,072,744 307,049
05/23/96 4,876,176 X 5= 24,380,880 66,797
05/28/96 4,880,178 X 8= 39,041,424 106,963
06/05/96 4,884,346 X 13= 63,496,498 173,963
06/18/96 4,925,725 X 20= 98,514,500 269,903
07/08/96 4,927,104 X 9= 44,343,936 121,490
07/17/96 4,927,504 X 7= 34,492,528 94,500
07/24/96 4,999,917 X 8= 39,999,336 109,587
08/01/96 5,006,813 X 6= 30,040,878 82,304
08/07/96 5,020,606 X 9= 45,185,454 123,796
08/16/96 5,021,206 X 4= 20,084,824 55,027
08/20/96 5,090,171 X 29= 147,614,959 404,425
09/18/96 5,117,757 X 5= 25,588,785 70,106
09/23/96 5,130,446 X 15= 76,956,690 210,840
10/08/96 5,137,337 X 2= 10,274,674 28,150
10/10/96 5,151,130 X 22= 113,324,860 310,479
11/01/96 5,151,730 X 13= 66,972,490 183,486
11/14/96 5,213,798 X 4= 20,855,192 57,138
11/18/96 5,227,591 X 2= 10,455,182 26,644
11/20/96 5,234,487 X 2= 10,468,974 28,682
11/22/96 5,241,383 X 3= 15,724,149 43,080
11/25/96 5,757,337 X 1= 5,757,337 15,774
11/28/96 5,764,884 X 15= 86,473,260 236,913
12/11/96 5,795,072 X 2= 11,590,144 31,754
12/13/96 5,803,072 X 3= 17,409,216 47,696
12/16/96 5,878,542 X 2= 11,757,084 32,211
12/18/96 5,904,956 X 1= 5,904,856 16,178
12/19/96 5,912,644 X 7= 41,388,508 113,393
12/26/96 5,927,738 X 1= 5,927,738 16,240
12/27/96 5,973,019 X 3= 17,919,057 49,093
12/30/96 6,033,395 X 1= 6,033,395 16,530
----- ------------- -----------
12/31/96 365 1,804,057,307 4,942,623
===== ============= ===========
Net Loss $(9,470,334)
-----------
Loss Per Share $ (1.92)
===========
<PAGE>
EXHIBIT 21.1
SUBSIDIARY OF THE REGISTRANT
----------------------------
Fertility Technologies, Inc., a Massachusetts corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, as amended, into the Company's previously
filed Form S-8 dated May 17, 1993, Form S-8 dated August 29, 1994, Form S-3
dated November 17, 1995 and Form S-3 dated December 9, 1996.
ARTHUR ANDERSEN LLP
Houston, Texas
June 10, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ZONAGEN, INC. SET FORTH IN THE COMPANY'S FORM 10-K FOR
THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,074,902
<SECURITIES> 0
<RECEIVABLES> 420,149
<ALLOWANCES> 0
<INVENTORY> 174,073
<CURRENT-ASSETS> 11,810,347
<PP&E> 1,017,444
<DEPRECIATION> 706,351
<TOTAL-ASSETS> 13,711,760
<CURRENT-LIABILITIES> 2,117,984
<BONDS> 0
0
1,515
<COMMON> 6,033
<OTHER-SE> 11,569,429
<TOTAL-LIABILITY-AND-EQUITY> 13,711,760
<SALES> 3,021,940
<TOTAL-REVENUES> 3,292,846
<CGS> 2,087,007
<TOTAL-COSTS> 12,763,180
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 224,476
<INCOME-PRETAX> (9,470,334)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,470,334)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,470,334)
<EPS-PRIMARY> (1.92)
<EPS-DILUTED> (1.92)
</TABLE>
