<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-21198
ZONAGEN, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 76-0233274
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2408 Timberloch Place, Suite B-4
The Woodlands, Texas 77380
(Address of principal executive offices)
(281) 367-5892
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
---- ----
As of August 1, 1997 there were outstanding 10,805,241 shares of Common Stock,
par value $.001 per share, and 421,708 shares of Series B Convertible Preferred
Stock, par value $.001 per share, of the Registrant.
<PAGE>
ZONAGEN, INC.
(A Development Stage Company)
For the Quarter Ended June 30, 1997
<TABLE>
<CAPTION>
INDEX
Page
----
<S> <C> <C>
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 4
Consolidated Balance Sheets: June 30, 1997 (Unaudited)
and December 31, 1996 5
Consolidated Statements of Operations: For the three months
ended June 30, 1997 and 1996, six months ended June 30, 1997 and 1996
and from Inception (August 20, 1987) through June 30, 1997 (Unaudited) 6
Consolidated Statements of Cash Flows: For the three months ended
June 30, 1997 and 1996, six months ended June 30, 1997 and 1996 and
from Inception (August 20, 1987) through June 30, 1997 (Unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
2
<PAGE>
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The words
"anticipate," "believe," "expect," "estimate," "project" and similar expressions
are intended to identify forward-looking statements. Such statements are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, believed,
expected, estimated or projected. These risks and uncertainties include risks
associated with the Company's early stage of development, uncertainties related
to clinical trail results, the Company's substantial dependence on one product
and early stage of development of other products, the Company's history of
operating losses, accumulated deficit and future capital needs, uncertainty of
additional funding, uncertainty of protection for patents and proprietary
technology, government regulations of and no assurance of regulatory approval
for the Company's products, the Company's limited sales and marketing experience
and dependence on future collaborators, manufacturing uncertainties and the
Company's reliance on third parties, competition and technological change,
product liability and availability of insurance, the Company's reliance on
contract research organizations and other risks and uncertainties described in
the Company's filings with the Securities and Exchange Commission. For
additional discussion of such risks, uncertainties and assumptions, see "Item 1.
Business - Patents and Proprietary Information," "- Manufacturing Plans," "-
Competition," "- Governmental Regulation" and "- Additional Business Risks", and
"Item 3. Legal Proceedings" included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, as amended, and "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" included elsewhere in this report.
3
<PAGE>
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to form 10-Q and Rule 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all necessary adjustments (which
include only normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the six month period
ended June 30, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997. For further information, refer
to the financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996, as amended.
4
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ -----------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,060,437 $11,074,902
Accounts receivable 367,325 420,149
Accrued interest receivable 12,574 47,904
Product inventory 160,962 174,073
Deposits and other current assets 337,930 93,319
------------ -----------
Total current assets 3,939,228 11,810,347
LAB EQUIPMENT, FURNITURE AND LEASEHOLD
IMPROVEMENTS, net of accumulated depreciation
and amortization of $764,276 and $706,351, respectively 303,502 311,093
EXCESS OF COST OVER FAIR VALUE OF TANGIBLE ASSETS ACQUIRED,
net of accumulated amortization of $550,831 and
$446,080, respectively 898,578 1,003,329
OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION OF
$142,183 and $116,048, respectively 677,575 586,991
------------ -----------
Total assets $ 5,818,883 $13,711,760
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,975,707 $ 1,169,999
Accrued expenses 1,162,417 867,459
Current portion of notes payable 15,125 80,526
------------ -----------
Total current liabilities 3,153,249 2,117,984
------------ -----------
LONG TERM NOTES PAYABLE 9,051 16,799
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Undesignated Preferred Stock, $.001 par value,
3,075,000 shares authorized, none issued and
outstanding - -
Series B Preferred Stock, $.001 par value,
1,925,000 shares authorized, 605,384 and
1,514,906 shares issued and outstanding, respectively 605 1,515
Common Stock, $.001 par value, 20,000,000 shares
authorized, 7,856,673 and 6,033,396 shares issued
and outstanding, respectively 7,857 6,033
Additional paid-in capital 40,785,644 38,124,532
Deferred compensation (2,529,503) (144,718)
Deficit accumulated during the development stage (35,608,020) (26,410,385)
------------ ------------
Total stockholders' equity 2,656,583 11,576,977
------------ -----------
Total liabilities and stockholders' equity $5,818,883 $13,711,760
============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FROM INCEPTION
THREE MONTHS ENDED SIX MONTHS ENDED (AUGUST 20, 1987)
------------------------------ ----------------------------- TO
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
REVENUES
Product sales $ 780,482 $ 640,437 $ 1,601,835 $ 1,379,777 $ 8,263,054
Licensing fee - - - - 250,000
Interest income 66,526 35,986 187,888 87,088 1,080,587
------------ ------------- ------------- ------------- -------------
Total revenues 847,008 676,423 1,789,723 1,466,865 9,593,641
COSTS AND EXPENSES
Cost of products sold 496,597 438,756 1,067,843 956,115 5,887,019
Research and development 4,483,328 1,090,000 8,495,417 2,253,263 27,263,341
Selling, general and administrative 717,635 628,057 1,315,509 1,235,391 10,718,744
Interest expense and amortization
of intangibles 54,647 54,581 108,589 108,165 969,174
------------- ------------- ------------- ------------- -------------
Total costs and expenses 5,752,207 2,211,394 10,987,358 4,552,934 44,838,278
Loss from continuing operations (4,905,199) (1,534,971) (9,197,635) (3,086,069) (35,244,637)
Loss from discontinued operations - - - - (288,104)
Loss on disposal - - - - (75,279)
------------- ------------- ------------- ------------- -------------
Net loss $ (4,905,199) $ (1,534,971) $(9,197,635) $(3,086,069) $ (35,608,020)
------------- ------------- ------------- ------------- -------------
Loss Per Common Share: $ (0.65) $ (0.32) $ (1.27) $ (0.66)
============= ============= ============= =============
Weighted Average Common Shares
used in computing loss per
Common Share 7,579,707 4,857,549 7,235,345 4,644,966
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
6
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FROM INCEPTION
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, (AUGUST 20, 1987
----------------------------- --------------------------- THROUGH
1997 1996 1997 1996 JUNE 30, 1997
--------------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,905,199) $ (1,534,971) $ (9,197,635) $ (3,086,069) $(35,608,020)
Loss on disposal of discontinued operations - - - - 75,279
Adjustments to reconcile net loss to net cash used in
operating activities
Financing costs - - - - 315,984
Depreciation and amortization 95,345 87,701 188,810 168,806 1,407,756
Options granted 29,653 238,804 43,345 264,638 271,142
Common stock issued for agreement not to compete - - - - 199,997
Series B Preferred Stock issued for consulting services - - - - 17,999
Changes in operating assets and liabilities
(net effects of purchase of businesses in 1988 and 1994):
(Increase) decrease in receivables 85,805 171,080 88,154 20,502 (65,808)
(Increase) decrease in inventory 2,270 426 13,111 (13,950) 120,566
(Increase) decrease in prepaid expenses and other
current assets (289,896) (122,432) (244,611) (173,879) (305,592)
(Decrease) increase in accounts payable and
accrued expenses 306,095 300,875 1,128,352 528,302 2,920,810
----------- ----------- ------------ ---------- -----------
Net cash used in operating activities (4,675,927) (858,517) (7,980,474) (2,291,650) (30,649,887)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (43,531) (31,088) (116,718) (101,093) (1,027,417)
Purchase of technology rights and other assets (31,620) (341,141) (50,334) (363,219) (721,356)
Cash acquired in purchase of FTI - - - - 2,695
Proceeds from sales of subsidiary, less $12,345 for
operating losses during 1990 phase-out period - - - - 137,646
Increase in net assets held for disposal - - - - (212,925)
----------- ----------- ------------ ---------- -----------
Net cash used in investing activities (75,151) (372,229) (167,052) (464,312) (1,821,357)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Common Stock 35,192 - 140,085 866,403 10,714,149
Proceeds from issuance of Preferred Stock - - - - 23,688,522
Proceeds from issuance of notes payable - 39,625 - 39,625 2,838,681
Principal payments on notes payable (3,555) (424) (7,024) (424) (1,709,671)
----------- ----------- ------------ ---------- -----------
Net cash provided by financing activities 31,637 39,201 133,061 905,604 35,531,681
Net increase (decrease) in cash and cash equivalents (4,719,441) (1,191,545) (8,014,465) (1,850,358) 3,060,437
Cash and cash equivalents at beginning of period 7,779,878 3,531,045 11,074,902 4,189,858 -
----------- ----------- ------------ ---------- -----------
Cash and cash equivalents at end of period $ 3,060,437 $ 2,339,500 $ 3,060,437 $ 2,339,500 $ 3,060,437
=========== =========== ============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Reduction of debt due to final payment, in stock,
of FTI Acquisition $ - $ - $ 93,812 $ -
Excess of FMV over Grant Price of Options
Granted to Directors $ 2,428,125 $ - $ 2,428,125 $ -
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
7
<PAGE>
ZONAGEN, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
NOTE 1 -- Organization and Operations
Zonagen, Inc., a Delaware corporation, (together with its subsidiary,
the "Company"), was organized on August 20, 1987 (Inception) and is a
biopharmaceutical company in the development stage engaged in the research,
development and marketing of products which address conditions and diseases
associated with the human reproductive system. The products under development
include Vasomax(TM), an oral treatment for male erectile dysfunction, and
products for the treatment of urological diseases such as benign prostatic
hyperplasia and prostate cancer. The Company is also engaged in the research and
development of a therapy for female sexual dysfunction, new approaches to
contraception, including zona pellucida-based vaccines in collaboration with
Schering AG and an adjuvant to enhance the effectiveness of vaccines. In
addition to its proprietary development activities, the Company markets and
distributes a variety of third-party fertility-related products to
obstetrics/gynecology, urology and fertility specialists through its wholly-
owned subsidiary, Fertility Technologies, Inc. ("FTI"). From Inception through
June 30, 1997, the Company has been primarily engaged in research and
development and is still in a development stage.
The Company is a development stage company. Problems, delays, expenses
and complications are typically encountered by companies in the development
stage, many of which may be beyond the Company's control. These include, but are
not limited to, unanticipated problems and costs relating to the development,
testing, production and marketing of its products, regulatory approvals and
compliance, availability of adequate financing and competition. There can be no
assurance that the Company will complete successfully the transition from a
development stage company to the successful introduction of commercially viable
products. The Company has generated only limited revenue from product sales
since inception.
On July 25, 1997, the Company completed a public offering of Common
Stock in which it sold 2,587,500 (consisting of 2,250,000 shares, plus 337,500
shares due to the exercise of the underwriter over allotment option) shares at a
price of $30.00 per share. Net proceeds were approximately $72.3 million.
The Company has experienced negative cash flows from operations since
its inception and has funded its activities to date primarily from equity
financings. The Company will continue to require substantial funds to continue
research and development, including preclinical studies and clinical trials of
its products, and to commence sales and marketing efforts if FDA and other
regulatory approvals are obtained. The Company believes that its existing
capital resources, including the proceeds of the public offering completed in
July 1997, will be sufficient to fund its operations through at least the next
twelve months. The Company's capital requirements will depend on many factors,
including the problems, delays, expenses and complications frequently
encountered by development stage companies; the progress of the Company's
preclinical and
8
<PAGE>
ZONAGEN, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
clinical activities; whether the Company is able to successfully
conclude a collaborative agreement for the marketing of Vasomax(TM); the
progress of the Company's future collaborative research, manufacturing,
marketing, or other funding arrangements; the costs and timing of seeking
regulatory approvals of the Company's products; the Company's ability to obtain
regulatory approvals; the success of the Company's sales and marketing programs;
the cost of filing, prosecuting and defending and enforcing any patent claims
and other intellectual property rights; and changes in economic, regulatory or
competitive conditions of the Company's planned business. Estimates about the
adequacy of funding for the Company's activities are based on certain
assumptions, including the assumption that the development and regulatory
approval of the Company's products can be completed at projected costs and that
product approvals and introductions will be timely and successful. There can be
no assurance that changes in the Company's research and development plans,
acquisitions or other events will not result in accelerated or unexpected
expenditures. To satisfy its capital requirements, the Company may seek to raise
additional funds in the public or private capital markets. The Company's ability
to raise additional funds in the public or private markets will be adversely
affected if the results of its current or future clinical trials are not
favorable. The Company is seeking a collaborative agreement with respect to
Vasomax(TM) and may seek additional funding through other corporate
collaborations and financing vehicles. There can be no assurance that the
Company will successfully enter into such an agreement with respect to
Vasomax(TM) or that any other such funding will be available to the Company on
favorable terms or at all. If adequate funds are not available, the Company may
be required to curtail significantly one or more of its research or development
programs, or it may be required to obtain funds through arrangements with future
collaborative partners or others that may require the Company to relinquish
rights to some or all of its technologies or products. If the Company is
successful in obtaining additional financing, the terms of such financing may
have the effect of diluting or adversely affecting the holdings or the rights of
the holders of the Company's Common Stock.
NOTE 2 -- STOCKHOLDERS' EQUITY
Series B Convertible Preferred Stock
On October 11, 1996, the Company completed the final closing of its
private placement of Series B Convertible Preferred Stock ("Series B Preferred
Stock"). The aggregate offering consisted of 1,692,500 shares of Series B
Preferred Stock at a price of $10.00 per share, with net proceeds of
approximately $14.4 million.
From January 1, 1997, through June 30, 1997, 909,522 shares of Series B
Preferred Stock have been converted into 1,372,783 shares of Common Stock.
Through June 30, 1997, 1,087,116 shares of Series B Preferred Stock had been
converted into 1,640,841 shares of Common Stock. Through August 1, 1997,
1,270,792 shares of Series B Preferred Stock had been converted into 1,918,114
shares of Common Stock.
9
<PAGE>
ZONAGEN, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
Effective July 25, 1997, the conversion rate of the Series B Preferred
Stock has been adjusted to 1.53 shares of Common Stock for each share of Series
B Preferred Stock from 1.5094 shares of Common Stock for each share of Series B
Preferred Stock. This adjustment was required because the price at which shares
of Common Stock were sold to the public in the recently completed Offering
($30.00 per share) was less than the closing bid price of Common Stock on the
date of the Offering ($31.50 per share).
Common Stock
The terms of the Company's acquisition of Fertility Technologies, Inc.
("FTI") required the Company to make a final purchase price payment dependent
upon the market price per share of Common Stock at January 31, 1997, and the
achievement of certain earnings milestones by FTI. On January 31, 1997, the
Company issued 305,095 shares of Common Stock in satisfaction of such final
payment obligations.
On July 25, 1997, the Company completed a public offering of Common
Stock in which it sold 2,587,500 (consisting of 2,250,000 shares, plus 337,500
shares due to the exercise of the underwriter over allotment option) shares at a
price of $30.00 per share. Net proceeds were approximately $72.3 million.
Warrants
During the first quarter of 1997, warrants to purchase an aggregate of
12,228 shares of Common Stock were exercised for total proceeds of $44,387 at a
price of $3.63 per share. Additionally, during the second quarter of 1997,
warrants to purchase an aggregate of 2,893 shares of Common Stock were exercised
for total proceeds of $18,392 at a price of $11.00 per share.
During the first quarter of 1997, the Company issued an aggregate of
70,112 shares of Common Stock upon the cashless exercise of Series A Preferred
Stock warrants to purchase an aggregate of 92,472 shares of Common Stock.
Additionally, during the second quarter of 1997, the Company issued an aggregate
of 8,672 shares of Common Stock upon the cashless exercise of Series A Preferred
Stock warrants to purchase an aggregate of 10,800 shares of Common Stock. Such
warrants were originally exercisable for shares of the Company's Series A
Convertible Preferred Stock ("Series A Preferred Stock") that were issued in
connection with the Company's private placement of Series A Preferred Stock in
October 1995. The warrants became exercisable for shares of Common Stock in lieu
of Series A Preferred Stock as a result of the mandatory conversion of the
Series A Preferred Stock effected in November 1996.
During the second quarter of 1997, the Company issued an aggregate of
4,380 shares of Common Stock upon the cashless exercise of Series B Preferred
Stock warrants and concurrent conversion of the Series B Preferred Stock
issuable upon exercise of such warrants. The warrants
10
<PAGE>
ZONAGEN, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
that were exercised entitled the holders to purchase an aggregate of 4,375
shares of Series B Preferred Stock, convertible into 6,603 shares of Common
Stock.
NOTE 3 -- STOCK OPTIONS
The Company records and amortizes over the related vesting periods
deferred compensation representing the difference between the exercise price of
options granted and the deemed fair market value of the Common Stock at the time
of grant. In December 1996, the Company established a new nonemployee director
stock option plan and a committee of the Board of Directors approved the grant
of options under the plan entitling the Company's nonemployee directors to
purchase and aggregate of 175,000 shares of Common Stock at an exercise price of
$8.38 per share which was the closing price on the date approved by the
committee. The grants were contingent upon stockholder approval of the new
nonemployee director option plan. For purposes of determining the amount of any
deferred compensation, such options were deemed granted upon stockholder
approval, which was received at the Company's Annual Meeting of Stockholders on
June 18, 1997. The Company recorded deferred compensation of $2.4 million in the
quarter ending June 30, 1997 based upon the difference between the fair market
value of the Common Stock of $22.25 per share (the last sale price of the Common
Stock as reported by The NASDAQ Small Cap Market) on the deemed grant date and
the exercise price of the options. The deferred compensation will be amortized
and recorded as compensation expense over the five year vesting period. In
addition, options to purchase an aggregate of 12,500 shares granted to an
employee and a consultant at a weighted average exercise price of $6.64 per
share vest based upon the achievement of certain performance criteria. The
Company will record compensation expense to the extent the fair market value of
such options at the time such performance criteria are met exceeds the exercise
price. Compensation expense related to the options for 10,000 shares granted to
the employee will be recorded at each reporting period prior to the achievement
of milestones based on the vesting period of the options and the amount by which
the fair market value exceeds the exercise price on the financial statement
date.
During the first quarter of 1997, the Company issued an aggregate 19,473
shares of Common Stock to current and former consultants and employees, upon the
exercise of stock options for total proceeds of $60,511 at prices ranging from
$0.04 to $7.25 per share. Additionally, during the second quarter of 1997, the
Company issued an aggregate 2,800 shares of Common Stock to current and former
consultants and employees, upon the exercise of stock options for total proceeds
of $16,800 at prices ranging from $5.50 to $7.25 per share.
On February 5, 1997 the Company issued 5,000 shares of Common Stock to a
consultant, upon the exercise of stock options granted during 1996.
11
<PAGE>
ZONAGEN, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
NOTE 4 -- AGREEMENTS
In April 1994, the Company entered into an assignment agreement (the
"Gamogen Agreement") with Gamogen, Inc. ("Gamogen") and Dr. Adrian Zorgniotti
pursuant to which the Company acquired the rights to a technology for the
treatment of male impotence, including the assignment of 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 in 1994. As
consideration for Gamogen's agreement not to compete, the Company delivered in
Common Stock $200,000 which equated to 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 provides the Company with an option, exercisable until
January 24, 2000, to purchase Gamogen's rights to receive royalties under the
Gamogen Agreement upon payment of a specified option price. The Company made an
initial payment of $75,000 upon execution of the amendment and is required to
make additional payments to maintain the option 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 option price, inclusive of
amended payments previously made, ranges from $750,000 up to $1,750,000
depending upon when the option is exercised.
During 1996, the Company entered into several agreements with contract
research organizations and other organizations that will provide the Company
with services relating to 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. Upon continued success of the U.S. Vasomax(TM) clinical program, it
is anticipated that the Company could spend in excess of $15.0 million in 1997
to continue the U.S. clinical development program.
12
<PAGE>
ZONAGEN, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
NOTE 5 -- Net Loss Per Share
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share". Zonagen will
adopt the provisions of the new statement, changing from its current method of
accounting for net loss per share as set forth in APB Opinion No. 15, for
interim and annual periods ending after December 15, 1997. Adoption of Statement
No. 128 will require retroactive revision of the presentation of net loss per
share in historical financial statements. The Company's net loss per share
presented in the accompanying financial statements as calculated under the
provisions of APB Opinion No. 15 are the same as those had basic net loss per
share under Statement No. 128 been presented. Additionally, net loss per share
as presented herein are also the same as those had diluted net loss per share
under the provisions of Statement No. 128 been presented, since the Company's
outstanding stock options would not have been included in the calculation
because their effect would have been anti-dilutive.
NOTE 6 -- SUBSEQUENT EVENT
The Company completed a public offering of Common Stock on July 25, 1997. See
Note 2. If the offering had been completed by June 30, 1997 the unaudited
balance sheet would look as follows:
<TABLE>
<CAPTION>
PROFORMA
June 30, 1997 JUNE 30, 1997
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash and Cash Equivalents $3,060,437 $75,360,437
Total Assets $5,818,883 $78,118,883
Total Liabilities $3,162,300 $ 3,162,300
Total Stockholders' Equity $2,656,583 $74,956,583
</TABLE>
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act. Such statements reflect the
Company's current views with respect to future events and financial performance
and are subject to certain risks, uncertainties and assumptions. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated in such forward-looking statements.
OVERVIEW
Zonagen, Inc. (the "Company") is a biopharmaceutical company in the
development stage engaged in the research, development and marketing of products
which address conditions and diseases associated with the human reproductive
system. In addition to its proprietary development activities, the Company
markets and distributes a variety of third-party fertility-related products to
obstetrics/gynecology, urology and fertility specialists through its wholly
owned subsidiary, Fertility Technologies, Inc. ("FTI"). The Company's objective
is to become a leading provider of innovative products and services for the
management of reproductive health.
The Company has recently completed two pivotal Phase 3 clinical trials
in the United States of its lead product candidate, Vasomax(TM), an oral
treatment for male erectile dysfunction. The Company has dedicated a substantial
portion of its resources over the last several years to the development of
Vasomax(TM). The Company's future prospects are substantially dependent on
approval by the FDA and the successful commercialization of Vasomax(TM).
Substantially all of the Company's revenues are derived from sales of
third-party fertility-related products by FTI. The Company acquired FTI in 1994
to enter the market for female reproductive healthcare products and services.
Revenues from FTI will not be sufficient to fund the Company's planned
operations.
The Company's general research and development expenses as well as its
selling, general and administrative expenses, have remained relatively constant
with the corresponding periods during the prior years. During the remainder of
1997, the Company anticipates hiring additional professionals to strengthen its
current management team, to assist in achieving the Company's goals.
As of June 30, 1997, the Company had an accumulated deficit of $35.6
million. There can be no assurance that the Company will be able to complete
successfully, the transition from a development stage company to the successful
introduction of commercially viable products. The Company's ability to achieve
profitability will depend, among other things, on successfully completing the
development of its products, obtaining regulatory approvals, establishing
marketing, sales and manufacturing capabilities or collaborative arrangements
with others which possess such capabilities, and raising sufficient funds to
finance its activities. There can be no assurance that the Company will be able
to achieve profitability or that profitability, if achieved, can be sustained.
14
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
Revenues. Total revenues increased 25% to $847,000 for the quarter ended
June 30, 1997 as compared to $676,000 for the same period in the prior year.
Product sales, substantially all of which were derived from FTI, increased 22%
to $780,000 in the quarter ended June 30, 1997 as compared to $640,000 for the
same period in the prior year. The increase was due primarily to the
introduction of a new product line and continued growth in other product lines.
Interest revenues increased 86% to $67,000 for the quarter ended June 30, 1997
as compared to $36,000 for the same period in the prior year. The increase was
due primarily to increased cash balances as a result of a private placement
completed in October 1996.
Cost of Products Sold. Cost of products sold increased 13% to $497,000
for the quarter ended June 30, 1997 as compared to $439,000 for the same period
in the prior year. Gross margin from product sales remained relatively constant
at approximately 30%.
Research and Development Expenses. Total research and development
("R&D") expenses increased 309% to $4.5 million for the quarter ended June 30,
1997 as compared to $1.1 million for the same period in the prior year. The
increase was due primarily to the additional costs associated with the
development of Vasomax(TM). Expenses associated with the development of
Vasomax(TM) increased 525% to approximately $3.9 million during the quarter
ended June 30, 1997 as compared to approximately $624,000 during the same period
in the prior year. General R&D expenses increased 20% to approximately $563,000
as compared to $466,000 during the same period in the prior year. This was
primarily due to an increase in new hires, salary adjustments and the addition
of clinical trials product liability coverage. The Company expects its research
and development expenses to increase during the remainder of 1997 and for at
least the next several years.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 14% to $718,000 during the quarter ended June
30, 1997 from $628,000 in the second quarter of 1996. The increase was primarily
due to payments made for financial advisory services.
Interest Expense and Amortization of Intangibles. Interest expense and
amortization of intangibles remained relatively constant in the second quarter
1997 as compared to 1996. The Company recorded $55,000 of amortization during
the second quarter of 1997 related to the excess of cost over fair value of
tangible assets associated with the acquisition of FTI.
15
<PAGE>
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Revenues. Total revenues increased 20% to $1.8 million for the six
months ended June 30, 1997 as compared to $1.5 million for the same period in
the prior year. Product sales, substantially all of which were derived from FTI,
increased 14% to $1.6 million in the six months ended June 30, 1997 as compared
to $1.4 million for the same period in the prior year. The increase was due
primarily to increased sales efforts of the Company's instruments product line
as well as the introduction of a new product line and continued growth in other
product lines. Interest revenues increased 116% to $188,000 for the six months
ended June 30, 1997 as compared to $87,000 for the same period in the prior
year. The increase was due primarily to additional cash on hand from the
Company's private placement completed in October 1996.
Cost of Products Sold. Cost of products sold increased 15% to $1.1
million for the quarter ended June 30, 1997 as compared to $956,000 for the same
period in the prior year. Gross margin from product sales remained relatively
constant at 30%.
Research and Development Expenses. Total research and development
("R&D") expenses increased 269% to $8.5 million for the six months ended June
30, 1997 as compared to $2.3 million for the same period in the prior year. The
increase was due primarily to the additional costs associated with the
development of Vasomax(TM). Expenses associated with the development of
Vasomax(TM) increased 500% to approximately $7.2 million during the six months
ended June 30, 1997 as compared to approximately $1.2 million during the same
period in the prior year. General R&D expenses remained relatively constant at
$1.1 million as compared to the same period in the prior year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 8% to $1.3 million for the six months ended
June 30, 1997 as compared to $1.2 million for the same period in the prior year.
Interest and Amortization of Intangibles. Interest expense and
amortization of intangibles remained relatively constant in the six months ended
June 30, 1997 as compared to the same period in 1996. The Company recorded
approximately $109,000 of amortization during the six months ended June 30, 1997
related to the excess of cost over fair value of tangible assets associated with
the acquisition of FTI.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operation primarily with
proceeds from the private placement and public offering of equity securities. In
April 1993, the Company received net proceeds of approximately $7.0 million from
its initial public offering. In December 1993, the Company received net proceeds
of $2.5 million from the sales of Common Stock to an affiliate of Schering AG in
connection with the Company's collaboration with Schering AG. In October 1995,
the Company received net proceeds of $5.3 million from the private placement of
Series A Preferred Stock. In September and October 1996, the Company received
aggregate net proceeds of $14.4 million from the private placement of Series B
Preferred Stock. In July 1997, the Company received net proceeds of
approximately $72.3 million from a public offering of Common Stock.
16
<PAGE>
The Company used net cash of $4.7 million for operating activities in
the three months ended June 30, 1997 as compared to $859,000 in the three months
ended June 30, 1996. The Company used net cash of $8.0 million for operating
activities for the six months ended June 30, 1997 as compared to $2.3 million
for the six months ended June 30, 1996. The Company had cash and cash
equivalents of $3.1 million at June 30, 1997, prior to its receipt of the $72.3
million net proceeds of the public offering completed July 1997 and
approximately $74.7 million as of July 31, 1997. The increased use of cash for
the three months and six months ended June 30, 1997 was primarily due to the
increase in expenses related to the clinical development of Vasomax(TM). The
Company currently anticipates spending in excess of $15.0 million in connection
with its U.S. clinical development program for Vasomax(TM) during 1997.
The Company has experienced negative cash flows from operations since
its inception and has funded its activities to date primarily from equity
financings. The Company will continue to require substantial funds to continue
research and development, including preclinical studies and clinical trials of
its products, and to commence sales and marketing efforts if FDA and other
regulatory approvals are obtained. The Company believes that its existing
capital resources, including the proceeds of the public offering completed in
July 1997, will be sufficient to fund its operations through at least the next
twelve months. The Company's capital requirements will depend on many factors,
including the problems, delays, expenses and complications frequently
encountered by development stage companies; the progress of the Company's
preclinical and clinical activities; whether the Company is able to successfully
conclude a collaborative agreement for the marketing of Vasomax(TM); the
progress of the Company's future collaborative research, manufacturing,
marketing, or other funding arrangements; the costs and timing of seeking
regulatory approvals of the Company's products; the Company's ability to obtain
regulatory approvals; the success of the Company's sales and marketing programs;
the cost of filing, prosecuting and defending and enforcing any patent claims
and other intellectual property rights; and changes in economic, regulatory or
competitive conditions of the Company's planned business. Estimates about the
adequacy of funding for the Company's activities are based on certain
assumptions, including the assumption that the development and regulatory
approval of the Company's products can be completed at projected costs and that
product approvals and introductions will be timely and successful. There can be
no assurance that changes in the Company's research and development plans,
acquisitions or other events will not result in accelerated or unexpected
expenditures. To satisfy its capital requirements, the Company may seek to raise
additional funds in the public or private capital markets. The Company's ability
to raise additional funds in the public or private markets will be adversely
affected if the results of its current or future clinical trials are not
favorable. The Company is seeking a collaborative agreement with respect to
Vasomax(TM) and may seek additional funding through other corporate
collaborations and financing vehicles. There can be no assurance that the
Company will successfully enter into such an agreement with respect to
Vasomax(TM) or that any other such funding will be available to the Company on
favorable terms or at all. If adequate funds are not available, the Company may
be required to curtail significantly one or more of its research or development
programs, or it may be required to obtain funds through arrangements with future
collaborative partners or others that may require the Company to relinquish
rights to some or all of its technologies or products. If the Company is
successful in obtaining additional financing, the terms of such financing may
have the effect of diluting or adversely affecting the holdings or the rights of
the holders of the Company's Common Stock.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. 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, L.L.P., 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 BCM
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 trial court granted partial summary judgment in favor of the Company
and the other defendants in connection with the action, and appeal by Dunbar is
presently pending. As a result of the rulings, in the trial court, Dunbar is
unable to rescind the assignment of the patent rights and is left only with
ancillary claims regarding the Company's alleged conversion of her ideas
relating to endometriosis and ovarian cancer. The Company believes the ancillary
claims are without merit, and that Dunbar's appeal of the summary judgment will
be unsuccessful.
The Company is involved in certain other litigation matters which it
believes will not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's Stockholders was held on June 18,
1997 to consider and vote upon the following proposals:
(i) Election of Directors. The following individuals were
nominated and elected as directors, with the following number of shares
voted for and withheld with respect to each director.
For Withheld
--------- --------
Martin P. Sutter 6,740,722 6,850
Joseph S. Podolski 6,740,722 6,850
Steven Blasnik 6,740,722 6,850
James L. Currie 6,740,722 6,850
Timothy McInerney 6,740,722 6,850
David B. McWilliams 6,740,722 6,850
David W. Ortlieb 6,740,722 6,850
Allan D. Rudzik 6,740,722 6,850
18
<PAGE>
(ii) Approval of the Company's 1996 Nonemployee Directors' Stock
Option Plan
For 3,862,025 Against 239,992 Abstain 174,329
--------- -------- -------
(iii) Approval of the Appointment of Arthur Andersen L.L.P. as
the Company's independent public accountants for 1997.
For 6,696,189 Against 37,222 Abstain 11,925
--------- ------ ------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
--------
Exhibit No. Identification of Exhibit
----------- -------------------------
10.1 1996 Nonemployee Director's Stock Option Plan
11.1 Statement regarding computation of net loss per
share
27.1 Financial Data Schedule
b. Reports on Form 8-K
-------------------
None.
19
<PAGE>
ZONAGEN, INC.
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ZONAGEN, INC.
Date: August 5, 1997
By: /s/ Joseph S. Podolski
----------------------------
Joseph S. Podolski
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 5, 1997
By /s/ Louis Ploth
---------------------
Louis Ploth
Vice President of Business Development and
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
<PAGE>
EXHIBIT 10.1
ZONAGEN, INC.
1996 NONEMPLOYEE DIRECTORS' STOCK OPTION PLAN
I. PURPOSE OF THE PLAN
The ZONAGEN, INC. 1996 NONEMPLOYEE DIRECTORS' STOCK OPTION PLAN (the
"Plan") is intended to promote the interests of ZONAGEN, INC., a Delaware
corporation (the "Company"), and its stockholders by helping to award and retain
highly-qualified independent directors and allowing them to develop a sense of
proprietorship and personal involvement in the development and financial success
of the Company. Accordingly, the Company shall grant to directors of the Company
who are not employees or consultants of the Company or any of its subsidiaries
("Nonemployee Directors") the option ("Option") to purchase shares of the common
stock of the Company ("Stock"), as hereinafter set forth. Options granted under
the Plan shall be options which do not constitute incentive stock options,
within the meaning of section 422(b) of the Internal Revenue Code of 1986, as
amended.
II. OPTION AGREEMENTS
Each Option shall be evidenced by a written agreement in the form attached
to the Plan.
III. ELIGIBILITY OF OPTIONEE
Options may be granted only to individuals who are Nonemployee Directors of
the Company. Each Nonemployee Director who is in office on the effective date
of this Plan shall receive, on such date, an Option exercisable for 25,000
shares of Stock. Each nonemployee Director who is elected to the Board of
Directors of the Company (the "Board") for the first time after the effective
date of the Plan shall receive, as of the date of his or her election and
without the exercise of the discretion of any person or persons, an Option
exercisable for 25,000 shares of Stock (subject to adjustment in the same manner
as provided in Paragraph VII hereof with respect to shares of Stock subject to
Options then outstanding). As of the date of the annual meeting of the
stockholders of the Company in each year that the Plan is in effect as provided
in Paragraph VI hereof, each Nonemployee Director then in office who is not then
entitled to receive an Option pursuant to the preceding sentence shall receive,
without the exercise of the discretion of any person or persons, an Option
exercisable for 2,500 shares of Stock (subject to adjustment in the same manner
as provided in Paragraph VII hereof with respect to shares of Stock subject to
Options then outstanding). If, as of any date that the Plan is in effect, there
are not sufficient shares of Stock available under the Plan to allow for the
grant to each Nonemployee Director of an Option for the number of shares
provided herein, each Nonemployee Director shall receive an Option for his or
her pro-rata share of the total number of shares of Stock then available under
the Plan. All Options granted under the Plan shall be at the Option price set
forth in Paragraph V hereof and shall be subject to adjustment as provided in
Paragraph VII hereof.
IV. SHARES SUBJECT TO THE PLAN
The aggregate number of shares which may be issued under Options granted
under the Plan shall not exceed 400,000 shares of Stock. Such shares may
consist of authorized but unissued shares of Stock or previously issued shares
of Stock acquired by the Company. Any of such shares which remain unissued and
which are not subject to outstanding Options at the termination of the Plan
shall cease to be subject to the Plan, but, until termination of the Plan, the
Company shall at all times make available a sufficient number of shares to meet
the
<PAGE>
requirements of the Plan. Should any Option hereunder expire or terminate
prior to its exercise in full, the shares theretofore subject to such Option
which may be issued under the Plan shall be subject to adjustment in the same
manner as provided in Paragraph VII hereof with respect to shares of Stock
subject to Options then outstanding. Exercise of an Option shall result in a
decrease in the number of shares of Stock which may thereafter be available,
both for purposes of the Plan and for sale to any one individual, by the number
of shares as to which the Option is exercised.
V. OPTION PRICE
The purchase price of Stock issued under each Option shall be the fair
market value of Stock subject to the Option as of the date the Option is
granted. For all purposes under the Plan, the fair market value of a share of
Stock on a particular date shall be equal to the last sales price of the Stock
(i) reported by the Nasdaq Stock Market on that date or (ii) if the Stock is
listed on a national stock exchange, reported on the stock exchange composite
tape on that date; or, in either case, if no prices are reported on that date,
on the last preceding date on which such prices of the Stock are so reported.
If the Stock is traded over the counter at the time a determination of its fair
market value is required to be made hereunder, its fair market value shall be
deemed to be equal to the average between the reported high and low or closing
bid and asked prices of Stock on the most recent date on which Stock was
publicly traded. In the event Stock is not publicly traded at the time a
determination of its value is required to be made hereunder, the determination
of its fair market value shall be made by the Board in such manner as it deems
appropriate.
VI. TERM OF PLAN
The Plan shall be effective on the date the Plan is approved the Board,
provided that the Plan shall be subject to approval by the stockholders of the
Company at the first annual meeting of the Company's stockholders following the
effective date of the Plan. Except with respect to Options then outstanding, if
not sooner terminated under the provisions of Paragraph VIII, the Plan shall
terminate upon and no further Options shall be granted after the expiration of
ten years from the date the Plan is approved by the Board.
VII. RECAPITALIZATION OR REORGANIZATION
A. The existence of the Plan and the Options granted hereunder shall not
affect in any way the right or power of the Board or the stockholders of the
Company to make or authorize any adjustment, recapitalization, reorganization,
or other change in the Company's capital structure or its business, any merger
or consolidation of the Company, any issue of debt or equity securities, the
dissolution or liquidation of the Company or any sale, lease, exchange or other
disposition of all or any part of its assets or business or any other corporate
act or proceeding.
B. The shares with respect to which Options may be granted are shares of
Stock as presently constituted, but if, and whenever, prior to the expiration of
an Option theretofore granted, the Company shall effect a subdivision or
consolidation of shares of Stock or the payment of a stock dividend on Stock
without receipt of consideration by the Company, the number of shares of Stock
with respect to which such Option may thereafter be exercised (i) in the event
of an increase in the number of outstanding shares shall be proportionately
increased, and the purchase price per share shall be proportionately reduced,
and (ii) in the event of a reduction in the number of outstanding shares shall
be proportionately reduced, and the purchase price per share shall be
proportionately increased.
-2-
<PAGE>
C. If the Company recapitalizes, reclassifies its capital stock, or
otherwise changes its capital structure (a "recapitalization"), the number and
class of shares of Stock covered by an Option theretofore granted shall be
adjusted so that such Option shall thereafter cover the number and class of
shares of stock and securities to which the optionee would have been entitled
pursuant to the terms of the recapitalization if, immediately prior to the
recapitalization, the optionee had been the holder of record of the number of
shares of Stock then covered by such Option.
D. Any adjustment provided for in Subparagraph (B) or (C) above shall be
subject to any required stockholder action.
E. Except as hereinbefore expressly provided, the issuance by the Company
of shares of stock of any class or securities convertible into shares of stock
of any class, for cash, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Stock subject to Options theretofore granted or the purchase price per
share.
VIII. AMENDMENT OR TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time with respect
to any shares for which Options have not theretofore been granted. The Board
shall have the right to alter or amend the Plan or any part thereof from time to
time; provided, that no change in any Option theretofore granted may be made
which would impair the rights of the optionee without the consent of such
optionee and provided, further, that the Board may not make any alteration or
amendment which would materially increase the benefits accruing to participants
under the Plan, increase the aggregate number of shares which may be issued
pursuant to the provisions of the Plan, change the class of individuals eligible
to receive Options under the Plan or extend the term of the Plan, without the
approval of the stockholders of the Company.
IX. SECURITIES LAWS
A. The Company shall not be obligated to issue any Stock pursuant to any
Options granted under the Plan at any time when the offering of the shares
covered by such Option have not been registered under the Securities Act of
1933, as amended, and such other state and federal laws, rules or regulations as
the Company deems applicable and, in the opinion of legal counsel for the
Company, there is no exemption from the registration requirements of such laws,
rules or regulations available for the offering and sale of such shares.
B. It is intended that the Plan and any grant of an Option made to a
person subject to Section 16 of the Securities Exchange Act of 1934, as amended
(the "1934 Act"), meet all of the requirements of Rule 16b-3, as currently in
effect or as hereinafter modified or amended ("Rule 16b-3"), promulgated under
the 1934 Act. If any provision of the Plan or any such Option would disqualify
the Plan or such Option under, or would otherwise not comply with, Rule 16b-3,
such provision or Option shall be construed or deemed amended to conform to Rule
16b-3.
-3-
<PAGE>
NONEMPLOYEE DIRECTOR'S STOCK OPTION AGREEMENT
(INITIAL GRANT)
AGREEMENT made as of the _____ day of __________, 19_____, between ZONAGEN,
INC., a Delaware corporation (the "Company"), and ____________________
("Director").
To carry out the purposes of the ZONAGEN, INC. 1996 NONEMPLOYEE DIRECTORS'
STOCK OPTION PLAN (the "Plan"), by affording Director the opportunity to
purchase shares of common stock of the Company ("Stock"), and in consideration
of the mutual agreements and other matters set forth herein and in the Plan, the
Company and Director hereby agree as follows:
1. GRANT OF OPTION. The Company hereby irrevocably grants the Director
the right and option ("Option") to purchase all or any part of an aggregate of
_______ shares of Stock, on the terms and conditions set forth herein and in the
Plan, which Plan is incorporated herein by reference as a part of this
Agreement. This Option shall not be treated as an incentive stock option within
the meaning of section 422(b) of the Internal Revenue Code of 1986, as amended
(the "Code").
2. PURCHASE PRICE. The purchase price of Stock purchased pursuant to the
exercise of this Option shall be $________ per share, which has been determined
to be not less than the fair market value of the Stock at the date of grant of
this Option. For all purposes of this Agreement, fair market value of Stock
shall be determined in accordance with the provisions of the Plan.
3. EXERCISE OF OPTION. Subject to the earlier expiration of this Option
as herein provided, this Option may be exercised, by written notice to the
Company at its principal executive offices addressed to the attention of Chief
Executive Officer, at any time and from time to time after the date of grant
hereof, but, except as otherwise provided below, this Option shall not be
exercisable for more than a percentage of the aggregate number of shares offered
by this Option determined by the number of full years from the first day of the
calendar month coincident with or next following the date of grant hereof to the
date of such exercise, in accordance with the following schedule:
Percentage of Shares
Number of Full Years That May Be Purchased
Less than 1 year.............................. 0.00%
1 year but less than 2 years.................. 20.00%
2 years but less than 3 years................. 40.00%
3 years but less than 4 years................. 60.00%
4 years but less than 5 years................. 80.00%
5 years or more............................... 100.00%
Notwithstanding the foregoing, if (i) the Company shall not be the
surviving entity in any merger, consolidation or other reorganization (or
survives only as a subsidiary of an entity other than a previously wholly-owned
subsidiary of the Company), (ii) the Company sells, leases or exchanges or
agrees to sell, lease or exchange all or substantially all of its assets to any
other person or entity (other than a wholly-owned subsidiary of the Company),
(iii) the Company is to be dissolved and liquidated, (iv) any person or entity,
including a "group" as contemplated by Section 13(d)(3) of the Securities
Exchange Act of 1934, acquires or gains ownership or control (including, without
limitation, power to vote) of more than 50% of the outstanding shares of the
Company's voting stock (based upon voting power), or (v) as a result of or in
connection with a contested election of directors, the persons who were
directors of the Company before such election shall cease to constitute a
majority of the Board of Directors of the Company (each such event is referred
to herein as a "Corporate Change"), then effective as of the earlier of (1) the
date of approval by the stockholders of the
<PAGE>
Company of such merger, consolidation, reorganization, sale, lease or exchange
of assets or dissolution or such election of directors or (2) the date of such
Corporate Change, this Option shall be exercisable in full.
This Option and all rights granted hereunder are not transferable by
Director other than by will or the laws of descent and distribution or pursuant
to a qualified domestic relations order as defined by the Code or Title 1 of the
Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder, and may be exercised during Director's lifetime only by Director or
Director's guardian or legal representative. This Option may be exercised only
while Director remains a member of the Board of Directors of the Company (the
"Board") and will terminate and cease to be exercisable upon Director's
termination of membership on the Board, except that:
(a) If Director's membership on the Board terminates by reason of
disability, this Option may be exercised in full by Director (or Director's
estate or the person who acquires this Option by will or the laws of
descent and distribution or otherwise by reason of the death of Director)
at any time during the period of one year following such termination.
(b) If Director dies while a member of the Board, Director's estate,
or the person who acquires this Option by will or the laws of descent and
distribution or otherwise by reason of the death of Director, may exercise
this Option in full at any time during the period of one year following the
date of Director's death.
(c) If Director's membership on the Board terminates for any reason
other than as described in (a) or (b) above, this Option may be exercised
by Director at any time during the period of three months following such
termination, or by Director's estate (or the person who acquires this
Option by will or the laws of descent and distribution or otherwise by
reason of the death of Director) during a period of one year following
Director's death if Director dies during such three month period, but in
each case only as to the number of shares Director was entitled to purchase
hereunder upon exercise of this Option as of the date Director's membership
on the Board so terminates.
This Option shall not be exercisable in any event after the expiration of
ten years from the date of grant hereof. The purchase price of shares as to
which this Option is exercised shall be paid in full at the time of exercise (A)
in cash (including check, bank draft or money order payable to the order of the
Company), (B) by delivering to the Company shares of Stock having a fair market
value equal to the purchase price, or (C) any combination of cash or Stock. No
fraction of a share of Stock shall be issued by the Company upon exercise of an
Option or accepted by the Company in payment of the purchase price thereof;
rather, Director shall provide a cash payment for such amount as is necessary to
effect the issuance and acceptance of only whole shares of Stock. Unless and
until a certificate or certificates representing such shares shall have been
issued by the Company to Director, Director (or the person permitted to exercise
this Option in the event of Director's death) shall not be or have any of the
rights or privileges of a stockholder of the Company with respect to shares
acquirable upon an exercise of this Option.
4. WITHHOLDING OF TAX. To the extent that the exercise of this Option or
the disposition of shares of Stock acquired by exercise of this Option results
in compensation income to Director for federal or state income tax purposes,
Director shall deliver to the Company at the time of such exercise or
disposition such amount of money or shares of Stock as the Company may require
to meet its obligation under applicable tax laws or regulations, and, if
Director fails to do so, the Company is authorized to withhold from any cash or
Stock renumeration then or thereafter payable to Director any tax required to be
withheld by reason of such resulting compensation income. Upon an exercise of
this Option, the Company is further authorized in its discretion to satisfy any
such withholding requirement out of any cash or shares of Stock distributable to
Director upon such exercise.
5. STATUS OF STOCK. The Company intends to register for issuance under
the Securities Act of 1933, as amended (the "Act"), the shares of Stock
acquirable upon exercise of this Option, and to keep such registration effective
throughout the period this Option is exercisable. In the absence of such
effective registration or an available exemption from registration under the
Act, issuance of shares of Stock acquirable upon exercise of this Option will be
delayed until registration of such shares is effective or an exemption from
registration under the Act is available. The Company
-2-
<PAGE>
intends to use its best efforts to ensure that no such delay will occur. In the
event exemption from registration under the Act is available upon an exercise of
this Option, Director (or the person permitted to exercise this Option in the
event of Director's death or incapacity), if requested by the Company to do so,
will execute and deliver to the Company in writing an agreement containing such
provisions as the Company may require to assure compliance with applicable
securities laws.
Director agrees that the shares of Stock which Director may acquire by
exercising this Option will not be sold or otherwise disposed of in any manner
which would constitute a violation of any applicable federal or state securities
laws. Director also agrees (i) that the certificates representing the shares of
Stock purchased under this Option may bear such legend or legends as the Company
deems appropriate in order to assure compliance with applicable securities laws,
(ii) that the Company may refuse to register the transfer of the shares of Stock
purchased under this Option on the stock transfer records of the Company if such
proposed transfer would in the opinion of counsel satisfactory to the Company
constitute a violation of any applicable securities law and (iii) that the
Company may give related instructions to its transfer agent, if any, to stop
registration of the transfer of the shares of Stock purchased under this Option.
6. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of any successors to the Company and all persons lawfully claiming under
Director.
7. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its officer thereunto duly authorized, and Director has executed
this Agreement, all as of the day and year first above written.
ZONAGEN, INC.
By:_______________________________________
DIRECTOR
__________________________________________
-3-
<PAGE>
NONEMPLOYEE DIRECTOR'S STOCK OPTION AGREEMENT
(ANNUAL GRANT)
AGREEMENT made as of the _____ day of __________, 19_____, between ZONAGEN,
INC., a Delaware corporation (the "Company"), and ____________________
("Director").
To carry out the purposes of the ZONAGEN, INC. 1996 NONEMPLOYEE DIRECTORS'
STOCK OPTION PLAN (the "Plan"), by affording Director the opportunity to
purchase shares of common stock of the Company ("Stock"), and in consideration
of the mutual agreements and other matters set forth herein and in the Plan, the
Company and Director hereby agree as follows:
1. GRANT OF OPTION. The Company hereby irrevocably grants the Director
the right and option ("Option") to purchase all or any part of an aggregate of
_______ shares of Stock, on the terms and conditions set forth herein and in the
Plan, which Plan is incorporated herein by reference as a part of this
Agreement. This Option shall not be treated as an incentive stock option within
the meaning of section 422(b) of the Internal Revenue Code of 1986, as amended
(the "Code").
2. PURCHASE PRICE. The purchase price of Stock purchased pursuant to the
exercise of this Option shall be $________ per share, which has been determined
to be not less than the fair market value of the Stock at the date of grant of
this Option. For all purposes of this Agreement, fair market value of Stock
shall be determined in accordance with the provisions of the Plan.
3. EXERCISE OF OPTION. Subject to the earlier expiration of this Option
as herein provided, this Option may be exercised, by written notice to the
Company at its principal executive offices addressed to the attention of Chief
Executive Officer, at any time and from time to time after the date of grant
hereof, but, except as otherwise provided below, this Option shall not be
exercisable for more than a percentage of the aggregate number of shares offered
by this Option determined by the number of full calendar months from the first
day of the calendar month coincident with or next following the date of grant
hereof to the date of such exercise, in accordance with the following schedule:
Percentage of Shares
Number of Full Calendar Months That May Be Purchased
Less than 1 month....................................... 0.00%
1 month but less than 2 months.......................... 8.33%
2 months but less than 3 months......................... 16.67%
3 months but less than 4 months......................... 25.00%
4 months but less than 5 months......................... 33.33%
5 months but less than 6 months......................... 41.67%
6 months but less than 7 months......................... 50.00%
7 months but less than 8 months......................... 58.33%
8 months but less than 9 months......................... 66.67%
9 months but less than 10 months........................ 75.00%
-4-
<PAGE>
10 months but less than 11 months....................... 83.33%
11 months but less than 12 months....................... 91.67%
12 months or more....................................... 100.00%
Notwithstanding the foregoing, if (i) the Company shall not be the
surviving entity in any merger, consolidation or other reorganization (or
survives only as a subsidiary of an entity other than a previously wholly-owned
subsidiary of the Company), (ii) the Company sells, leases or exchanges or
agrees to sell, lease or exchange all or substantially all of its assets to any
other person or entity (other than a wholly-owned subsidiary of the Company),
(iii) the Company is to be dissolved and liquidated, (iv) any person or entity,
including a "group" as contemplated by Section 13(d)(3) of the Securities
Exchange Act of 1934, acquires or gains ownership or control (including, without
limitation, power to vote) of more than 50% of the outstanding shares of the
Company's voting stock (based upon voting power), or (v) as a result of or in
connection with a contested election of directors, the persons who were
directors of the Company before such election shall cease to constitute a
majority of the Board of Directors of the Company (each such event is referred
to herein as a "Corporate Change"), then effective as of the earlier of (1) the
date of approval by the stockholders of the Company of such merger,
consolidation, reorganization, sale, lease or exchange of assets or dissolution
or such election of directors or (2) the date of such Corporate Change, this
Option shall be exercisable in full.
This Option and all rights granted hereunder are not transferable by
Director other than by will or the laws of descent and distribution or pursuant
to a qualified domestic relations order as defined by the Code or Title 1 of the
Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder, and may be exercised during Director's lifetime only by Director or
Director's guardian or legal representative. This Option may be exercised only
while Director remains a member of the Board of Directors of the Company (the
"Board") and will terminate and cease to be exercisable upon Director's
termination of membership on the Board, except that:
(a) If Director's membership on the Board terminates by reason of
disability, this Option may be exercised in full by Director (or Director's
estate or the person who acquires this Option by will or the laws of
descent and distribution or otherwise by reason of the death of Director)
at any time during the period of one year following such termination.
(b) If Director dies while a member of the Board, Director's estate,
or the person who acquires this Option by will or the laws of descent and
distribution or otherwise by reason of the death of Director, may exercise
this Option in full at any time during the period of one year following the
date of Director's death.
(c) If Director's membership on the Board terminates for any reason
other than as described in (a) or (b) above, this Option may be exercised
by Director at any time during the period of three months following such
termination, or by Director's estate (or the person who acquires this
Option by will or the laws of descent and distribution or otherwise by
reason of the death of Director) during a period of one year following
Director's death if Director dies during such three month period, but in
each case only as to the number of shares Director was entitled to purchase
hereunder upon exercise of this Option as of the date Director's membership
on the Board so terminates.
This Option shall not be exercisable in any event after the expiration of
ten years from the date of grant hereof. The purchase price of shares as to
which this Option is exercised shall be paid in full at the time of exercise (A)
in cash (including check, bank draft or money order payable to the order of the
Company), (B) by delivering to the Company shares of Stock having a fair market
value equal to the purchase price, or (C) any combination of cash or Stock. No
fraction of a share of Stock shall be issued by the Company upon exercise of an
Option or accepted by the Company in payment of the purchase price thereof;
rather, Director shall provide a cash payment for such amount as is necessary to
effect the issuance and acceptance of only whole shares of Stock. Unless and
until a certificate or certificates representing such shares shall have been
issued by the Company to Director, Director (or the person permitted to
-5-
<PAGE>
exercise this Option in the event of Director's death) shall not be or have any
of the rights or privileges of a stockholder of the Company with respect to
shares acquirable upon an exercise of this Option.
4. WITHHOLDING OF TAX. To the extent that the exercise of this Option or
the disposition of shares of Stock acquired by exercise of this Option results
in compensation income to Director for federal or state income tax purposes,
Director shall deliver to the Company at the time of such exercise or
disposition such amount of money or shares of Stock as the Company may require
to meet its obligation under applicable tax laws or regulations, and, if
Director fails to do so, the Company is authorized to withhold from any cash or
Stock renumeration then or thereafter payable to Director any tax required to be
withheld by reason of such resulting compensation income. Upon an exercise of
this Option, the Company is further authorized in its discretion to satisfy any
such withholding requirement out of any cash or shares of Stock distributable to
Director upon such exercise.
5. STATUS OF STOCK. The Company intends to register for issuance under
the Securities Act of 1933, as amended (the "Act"), the shares of Stock
acquirable upon exercise of this Option, and to keep such registration effective
throughout the period this Option is exercisable. In the absence of such
effective registration or an available exemption from registration under the
Act, issuance of shares of Stock acquirable upon exercise of this Option will be
delayed until registration of such shares is effective or an exemption from
registration under the Act is available. The Company intends to use its best
efforts to ensure that no such delay will occur. In the event exemption from
registration under the Act is available upon an exercise of this Option,
Director (or the person permitted to exercise this Option in the event of
Director's death or incapacity), if requested by the Company to do so, will
execute and deliver to the Company in writing an agreement containing such
provisions as the Company may require to assure compliance with applicable
securities laws.
Director agrees that the shares of Stock which Director may acquire by
exercising this Option will not be sold or otherwise disposed of in any manner
which would constitute a violation of any applicable federal or state securities
laws. Director also agrees (i) that the certificates representing the shares of
Stock purchased under this Option may bear such legend or legends as the Company
deems appropriate in order to assure compliance with applicable securities laws,
(ii) that the Company may refuse to register the transfer of the shares of Stock
purchased under this Option on the stock transfer records of the Company if such
proposed transfer would in the opinion of counsel satisfactory to the Company
constitute a violation of any applicable securities law and (iii) that the
Company may give related instructions to its transfer agent, if any, to stop
registration of the transfer of the shares of Stock purchased under this Option.
6. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of any successors to the Company and all persons lawfully claiming under
Director.
7. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its officer thereunto duly authorized, and Director has executed
this Agreement, all as of the day and year first above written.
ZONAGEN, INC.
By:_______________________________________
DIRECTOR
__________________________________________
-6-
<PAGE>
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
SIX MONTHS ENDED JUNE 30, 1997
- ------------------------------
Net Loss Weighted Average Shares Outstanding Loss per Share
-------- ----------------------------------- --------------
$9,197,635 divided by 7,235,345 = $1.27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 5 AND 6 OF THE COMPANY'S 10-Q FOR THE YEAR-TO DATE, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,060,437
<SECURITIES> 0
<RECEIVABLES> 379,899
<ALLOWANCES> 0
<INVENTORY> 160,962
<CURRENT-ASSETS> 3,939,228
<PP&E> 1,067,778
<DEPRECIATION> 764,276
<TOTAL-ASSETS> 5,818,883
<CURRENT-LIABILITIES> 3,153,249
<BONDS> 0
0
605
<COMMON> 7,857
<OTHER-SE> 2,648,121
<TOTAL-LIABILITY-AND-EQUITY> 5,818,883
<SALES> 1,601,835
<TOTAL-REVENUES> 1,789,723
<CGS> 1,067,843
<TOTAL-COSTS> 1,067,843
<OTHER-EXPENSES> 9,810,926
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108,589
<INCOME-PRETAX> (9,197,635)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,197,635)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,197,635)
<EPS-PRIMARY> (1.27)
<EPS-DILUTED> (1.27)
</TABLE>
