<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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 and
zip code)
(281) 367-5892
(Registrant's telephone number,
including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of November 12, 1999 there were outstanding 11,266,024 shares of
Common Stock, par value $.001 per share, of the Registrant.
<PAGE> 2
ZONAGEN, INC.
(A development stage company)
For the Quarter Ended September 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements
Consolidated Balance Sheets: September 30, 1999 (Unaudited)
and December 31, 1998 5
Consolidated Statements of Operations: For the three months ended
September 30, 1999 and 1998, nine months ended September 30, 1999 and 1998
and from Inception (August 20, 1987) through September 30, 1999 (Unaudited) 6
Consolidated Statements of Cash Flows: For the three months ended
September 30, 1999 and 1998, nine months ended September 30, 1999 and 1998
and from Inception (August 20, 1987) through September 30, 1999 (Unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
</TABLE>
2
<PAGE> 3
FACTORS AFFECTING 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 trial results and FDA approval, the Company's
substantial dependence on one product and early stage of development of other
products, the Company's history of operating losses and accumulated deficit, the
Company's future capital needs and uncertainty of additional funding,
uncertainty of protection for the Company's patents and proprietary technology,
the effects of government regulation of and lack of assurance of regulatory
approval for the Company's products, the Company's limited sales and marketing
experience and dependence on collaborators, manufacturing uncertainties and the
Company's reliance on third parties for manufacturing, 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. Description of Business - Business Risks" and "Item 3.
Legal Proceedings" included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 and "Part I. Financial Information - Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and "Part II. Other Information -
Item 1. Legal Proceedings" included elsewhere in this Quarterly Report on Form
10-Q.
3
<PAGE> 4
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 nine-month
period ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1999. 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, 1998.
4
<PAGE> 5
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,949 $ 51,640
Marketable securities - short term 19,737 --
Accounts receivable -- 318
Product inventory 2,502 3,139
Prepaid expenses and other current assets 1,047 1,032
-------------- --------------
Total current assets 26,235 56,129
LAB EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS, net 925 907
MARKETABLE SECURITIES - LONG TERM 18,272 --
GOODWILL, net -- 584
OTHER ASSETS, net 1,444 1,022
-------------- --------------
Total assets $ 46,876 $ 58,642
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,501 $ 3,317
Accrued expenses 1,427 1,935
Current portion of long-term notes payable -- 3
-------------- --------------
Total current liabilities 2,928 5,255
-------------- --------------
STOCKHOLDERS' EQUITY
Undesignated Preferred Stock, $.001 par value, 5,000,000
shares authorized, none issued and outstanding -- --
Common Stock, $.001 par value, 20,000,000 shares
authorized, 11,681,324 and 11,621,140 shares issued,
respectively; 11,266,024 and 11,205,840 shares
outstanding, respectively 12 12
Additional paid-in capital 113,564 113,717
Deferred compensation (548) (958)
Cost of treasury stock, 415,300 shares (7,484) (7,484)
Deficit accumulated during the development stage (61,596) (51,900)
-------------- --------------
Total stockholders' equity 43,948 53,387
-------------- --------------
Total liabilities and stockholders' equity $ 46,876 $ 58,642
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE> 6
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands except per share amounts)
<TABLE>
<CAPTION>
FROM INCEPTION
(AUGUST 20,
THREE MONTHS ENDED NINE MONTHS ENDED 1987)
SEPTEMBER 30, SEPTEMBER 30, THROUGH
-------------------------- -------------------------- SEPTEMBER 30,
1999 1998 1999 1998 1999
---------- ---------- ---------- ---------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES
Licensing fees $ -- $ 5,000 $ -- $ 10,000 $ 20,250
Product royalties 182 -- 204 167 367
Interest income 425 748 1,607 2,545 7,665
---------- ---------- ---------- ---------- ----------
Total revenues 607 5,748 1,811 12,712 28,282
COSTS AND EXPENSES
Research and development 2,094 4,646 10,007 16,838 73,512
General and administrative 692 736 2,565 2,190 15,089
Interest expense and amortization
of intangibles -- -- 8 3 388
---------- ---------- ---------- ---------- ----------
Total costs and expenses 2,786 5,382 12,580 19,031 88,989
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations (2,179) 366 (10,769) (6,319) (60,707)
Income (loss) from discontinued operations -- (37) 59 (8) (1,828)
Gain on disposal -- -- 1,014 -- 939
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (2,179) $ 329 $ (9,696) $ (6,327) $ (61,596)
========== ========== ========== ========== ==========
Income (loss) per share - basic and diluted:
Income (loss) from continuing operations $ (0.19) $ 0.03 $ (0.96) $ (0.56)
Income from discontinued operations -- -- 0.01 --
Gain on disposal -- -- 0.09 --
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (0.19) $ 0.03 $ (0.86) $ (0.56)
========== ========== ========== ==========
Shares used in income (loss) per share calculation:
Basic 11,264 11,263 11,236 11,298
Diluted 11,264 11,810 11,236 11,298
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE> 7
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
<TABLE>
<CAPTION>
FROM INCEPTION
(AUGUST 20,
THREE MONTHS ENDED NINE MONTHS ENDED 1987)
SEPTEMBER 30, SEPTEMBER 30, THROUGH
------------------------ ------------------------ SEPTEMBER 30,
1999 1998 1999 1998 1999
--------- --------- --------- --------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,179) $ 329 $ (9,696) $ (6,327) $ (61,596)
Gain on disposal of discontinued operations -- -- (1,014) -- (939)
Adjustments to reconcile net loss to net cash
used in operating activities:
Noncash financing costs -- -- -- -- 316
Depreciation and amortization 85 126 337 367 2,292
Noncash expenses related to stock-based
transactions 60 89 181 334 1,739
Common stock issued for agreement not to
compete -- -- -- -- 200
Series B Preferred Stock issued for consulting
services -- -- -- -- 18
Changes in operating assets and liabilities
(net effects of purchase of businesses in 1988 and 1994):
(Increase) decrease in receivables -- 335 (85) 133 (198)
(Increase) decrease in inventory 1 (763) 325 (1,062) (2,532)
(Increase) decrease in prepaid expenses and other
current assets 65 130 (42) (705) (933)
(Decrease) increase in accounts payable and
accrued expenses (69) (97) (2,230) (2,206) 2,805
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities (2,037) 149 (12,224) (9,466) (58,828)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities (38,009) -- (38,009) -- (38,009)
Capital expenditures (71) (111) (328) (325) (2,178)
Purchase of technology rights and other assets (42) (83) (455) (383) (1,534)
Cash acquired in purchase of FTI -- -- -- -- 3
Proceeds from sale of subsidiary, less
$12,345 for operating losses during
1990 phase-out period -- -- -- -- 138
Proceeds from sale of the assets of Fertility
Technologies, Inc., subsidiary -- -- 2,250 -- 2,250
Increase in net assets held for disposal -- -- -- -- (213)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing activities (38,122) (194) (36,542) (708) (39,543)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 3 4 76 383 84,009
Proceeds from issuance of preferred stock -- -- -- -- 23,688
Purchase of treasury stock -- (2,174) -- (6,197) (7,484)
Proceeds from issuance of notes payable -- -- -- -- 2,839
Principal payments on notes payable -- (4) (1) (12) (1,732)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities 3 (2,174) 75 (5,826) 101,320
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (40,156) (2,219) (48,691) (16,000) 2,949
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 43,105 59,981 51,640 73,762 --
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,949 $ 57,762 $ 2,949 $ 57,762 $ 2,949
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
7
<PAGE> 8
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
NOTE 1 -- ORGANIZATION AND OPERATIONS
Zonagen, Inc., a Delaware corporation, ("Zonagen" or the "Company"),
was organized on August 20, 1987 ("Inception"), and is a biopharmaceutical
company engaged in the development of pharmaceutical products for the
reproductive system, including sexual dysfunction, urology and contraception.
Until the sale of substantially all the assets of Fertility Technologies, Inc.
("FTI"), its wholly owned subsidiary, in March 1999, Zonagen also sold devices,
instruments and supplies to fertility specialists, obstetricians and
gynecologists. From inception through September 30, 1999, the Company has been
primarily engaged in pharmaceutical research and development and clinical
development and is still in a development stage.
In 1997, Zonagen entered into a worldwide sales and marketing agreement
with Schering-Plough Corporation for Vasomax(R), the Company's rapidly
disintegrating oral formulation of phentolamine mesylate for Male Erectile
Dysfunction ("MED"). In March 1998, Schering-Plough submitted a Product
Registration Application in Mexico for Vasomax(R) and subsequently began product
sales in May 1998, following approval by the Mexican regulatory authorities. On
July 14, 1998, Zonagen submitted its first New Drug Application ("NDA") to the
U.S. Food and Drug Administration ("FDA") for Vasomax(R) for the treatment of
MED. In August 1998, Schering-Plough submitted a Marketing Approval Application
for Vasomax(R) to the Medicines Control Agency in the United Kingdom. In
February 1999, Schering-Plough notified the Company that it had exercised its
right to begin manufacturing finished product for Vasomax(R). In May 1999,
Schering-Plough began sales of Vasomax(R) in Brazil.
Zonagen's lead product candidate is Vasomax(R), a proprietary oral
treatment for male erectile dysfunction. Zonagen completed two pivotal clinical
trials that demonstrated a therapeutic effect that is a statistically
significant improvement over placebo. These pivotal trials formed the basis of
the NDA for Vasomax(R) that was submitted to the FDA in July 1998.
On May 10, 1999, Zonagen, Inc. and Schering-Plough jointly announced
that the companies had decided to forego a June FDA Advisory Panel review of the
New Drug Application ("NDA") for Vasomax(R) until the results of an additional
12-week human clinical study being conducted by Schering-Plough could be
submitted to the Food and Drug Administration ("FDA"), as it was not possible to
delay the review by the Advisory Panel until a later date when the data from
that study would be available. As a result of this decision, Zonagen received a
non-approvable letter for the NDA from the FDA. Zonagen expects to submit the
new data from the ongoing human clinical study currently being conducted by
Schering-Plough to the FDA as an amendment to the NDA.
On August 10, 1999, Zonagen, Inc. announced that the FDA had advised
the Company that further U.S. clinical trials of Zonagen's phentolamine-based
drugs, Vasomax(R) and Vasofem(TM), had been placed on clinical hold until
certain issues surrounding the Company's two-
8
<PAGE> 9
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
year rat study were satisfactorily resolved. The FDA is however, allowing
Schering-Plough to complete the fully enrolled ongoing 12-week study in humans
of Vasomax(R) for erectile dysfunction.
The FDA's decision was based on preliminary findings from an ongoing
two-year, rat carcinogenicity study being conducted by Zonagen. The study, which
is scheduled to be completed in the fourth quarter of 1999, yielded preliminary
results that suggest that male rats receiving long term daily doses of
phentolamine mesylate develop a higher incidence of proliferation of brown fat
tissue than control rats. The implications of these findings need to be further
evaluated with regard to their potential for adverse effects on humans. To date,
such abnormalities have not been observed in female rats in the study.
Prior to these latest findings, Zonagen had completed and submitted to
the FDA a complete genotoxicity profile as well as results from a six month
mouse p53 assay and six month daily usage studies in dogs and rats. None of
these studies showed any abnormal effects, including brown fat tissue
proliferation.
There can be no assurance, that the FDA will consider such studies
satisfactory for approval of the NDA submission or whether additional studies
will be required; nor can there be any assurance that the FDA will ultimately
approve Vasomax(R). Certain risks and uncertainties associated with the filing
and the FDA review of the NDA are described or referenced in "Factors Affecting
Forward-Looking Statements" included elsewhere in this Quarterly Report on Form
10-Q.
On September 13, 1999, in response to the August 10, 1999 announcement
of the FDA clinical hold on Vasomax(R) and Vasofem(TM), the Company announced
that it had dismissed 15 of its employees, representing about one-third of its
work force. This action was taken to reduce cash expenditures and concentrate
the Company's talent and assets on programs that have the greatest potential to
impact shareholder value, including Vasomax(R), Vasofem(TM) and the Company's
adjuvant systems. In addition, work on several projects was slowed down. These
actions have the effect of substantially reducing Zonagen's projected cash
expenditures. The majority of the employees that were dismissed were involved in
the internal pre-clinical toxicology and analytical functions for the Company.
With the advent of the U.S. clinical hold on the Company's phentolamine-based
products, management felt that this reduction in staff would conserve cash and
have a minimal effect on the future development of the Company's technologies.
Management felt that it could outsource these requirements upon the lifting of
the Vasomax(R) and Vasofem(TM) U.S. clinical hold. The Company took a one-time
charge during the quarter ended September 30, 1999 of approximately $116,000
relating to the September 13, 1999 staff reduction. The Company will also focus
its efforts on out-licensing its existing technologies as a means of
9
<PAGE> 10
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
enhancing its cash reserves and reducing internal development costs by securing
external funding for certain research programs. Notwithstanding the cash
conservation plan, Zonagen will continue to seek opportunities to in-license
technologies that it believes will enhance future shareholder value.
The Company has experienced negative cash flows from operations since
its inception and has funded its activities to date primarily from equity
financings and corporate collaborations. The Company will continue to require
substantial funds to continue research and development, including pre-clinical
studies and clinical trials of its existing and future product candidates, and
to commence sales and marketing efforts, if the FDA or other regulatory
approvals are obtained.
Despite the delays regarding the Company's Vasomax(R) clinical
development program, the Company believes that its existing capital resources
will still be sufficient to fund its operations through at least mid-year 2001.
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
clinical and preclinical activities; the progress of the Company's collaborative
agreements with affiliates of Schering-Plough Corporation ("Schering-Plough")
and costs associated with any future collaborative research, manufacturing,
marketing or other funding arrangements; the costs and timing of seeking
regulatory approvals for Vasomax(R), the Company's oral treatment for male
erectile dysfunction; the costs and timing of seeking regulatory approvals for
Vasofem(TM), the Company's treatment for female sexual dysfunction, and the
Company's other future product candidates; the Company's ability to obtain
regulatory approvals; the success of the Company's potential 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 or
through additional corporate collaborations. The Company's ability to raise
additional funds will be adversely affected if Vasomax(R) is not successfully
commercialized, if necessary regulatory approvals are not obtained when expected
and if the results of current or future clinical trials are not favorable. The
Company may seek additional funding through corporate collaborations and other
financing vehicles. There can be no assurance that any such funding will be
available to the Company on
10
<PAGE> 11
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
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 -- MARKETABLE SECURITIES-SHORT AND -LONG TERM
Short term investments have a remaining maturity of less than twelve
months and long term investments have a remaining maturity of greater than
twelve months. All investments are stated at cost as it is the intent of the
Company to hold these securities until maturity. Marketable securities-short
term were $19.7 million and marketable securities-long term were $18.3 million
as of September 30, 1999 totaling $38.0 million. In the past, the Company
invested only in 30 day commercial paper. The Company now invests excess funds
in longer maturities to secure a higher yield. These investments include a range
of investments that have minimum credit ratings of A2/A and A1/P1 with
maturities of up to three years. The average life of the investment portfolio
may not exceed 24 months.
NOTE 3 -- SALE OF FERTILITY TECHNOLOGIES, INC.
On March 11, 1999, the Company sold substantially all of the assets
related to its wholly-owned subsidiary, FTI. These assets included the company
name, accounts receivable, inventory, property and equipment, and certain
Zonagen assets relating to the operation of FTI, for $2.25 million cash and the
assumption of certain specified liabilities. The sales agreement provided for a
purchase price adjustment relating to the fluctuation in working capital,
excluding cash, from December 31, 1998 as compared to February 28, 1999. During
the quarter ended March 31, 1999, the Company recorded a gain on the sale of FTI
of $1.0 million.
The results of FTI have been reported separately as discontinued
operations in the accompanying consolidated financial statements. Prior period
consolidated financial statements have been restated to present FTI as
discontinued. Revenues for FTI were approximately $558,000 for the two months
ended February 28, 1999 as compared to $929,000 for the three month period ended
March 31, 1998.
11
<PAGE> 12
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
The components of assets and liabilities of discontinued operations
included in the consolidated balance sheet for the year ended December 31, 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998
---------------
<S> <C>
Current assets :
Accounts receivable ........... $ 318
Inventory ..................... 350
Other current assets .......... 23
---------------
Total current assets .......... 691
Furniture and equipment, net .......... 70
Goodwill, net ......................... 584
---------------
Total Assets .......................... 1,345
---------------
Accounts payable and other ............ 275
---------------
Net assets ............................ $ 1,070
===============
</TABLE>
NOTE 4 -- PRODUCT INVENTORY
The Company maintains an inventory of bulk raw material phentolamine
which is the active ingredient in Vasomax(R), the Company's oral treatment for
male erectile dysfunction. Currently, Schering-Plough is manufacturing and
marketing this product primarily in Mexico and Brazil. Schering-Plough purchases
bulk raw material phentolamine from the Company. Prior to the sale of FTI, the
Company's inventory also consisted of products manufactured by others for resale
to obstetrics/gynecologists, urologists and fertility clinics. There was no
finished goods inventory at September 30, 1999.
As of September 30, 1999, the fair market value of the bulk raw
material phentolamine inventory was approximately $2.5 million. In addition, the
Company entered into a purchase order with the contract manufacturer of
phentolamine and has an obligation to purchase $1.5 million of bulk raw material
phentolamine during 1999. The Company has already paid a deposit of $375,000
against that purchase and expects to pay the remaining $1.125 million in the
quarter ending December 31, 1999. The Company expects to have approximately $4
million in bulk raw material phentolamine at year-end. Under the terms of the
agreement, the Company has already met minimum purchase requirements for the
year ended December 31, 1999. See "Part I. Financial Information - Item 1.
Financial Statements - Note 8 - Agreements of Notes to Consolidated Financial
Statements (Unaudited)" included elsewhere in this Quarterly Report on Form
10-Q.
12
<PAGE> 13
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
NOTE 5 -- PREPAID EXPENSES AND OTHER CURRENT ASSETS
During the three months ended September 30, 1999, prepaid expenses and
other current assets decreased to approximately $1.0 million. As of September
30, 1999, prepayments held by the phentolamine contract manufacturer were
$375,000. Other prepaid expenses and other current assets, substantially all of
which related to prepaid insurance, interest receivable and other expenses for
which the Company expects reimbursement totaled $625,000 as of September 30,
1999.
NOTE 6 -- STOCKHOLDERS' EQUITY
Preferred Stock Purchase Rights Agreement
On September 1, 1999, the Board of Directors of the Company adopted a
stockholder rights plan (the "Rights Plan") pursuant to which a dividend
consisting of one preferred stock purchase right (a "Right") was distributed
for each share of Common Stock held as of the close of business on September
13, 1999, and is to be distributed to each share of Common Stock issued
thereafter until the earlier of (i) the Distribution Date (as defined in the
Rights Plan), (ii) the Redemption Date (as defined in the Rights Plan), or
(iii) September 13, 2002. The Rights Plan is designed to deter coercive
takeover tactics and to prevent an acquirer from gaining control of the Company
without offering fair value to the Company's stockholders. The Rights will
expire on September 13, 2002, subject to the sooner redemption or exchange as
provided in the Rights Plan.
Each Right entitles the holder thereof to purchase from the Company
one one-hundredth of a share of a new series of Series One Junior Participating
Preferred Stock of the Company at a price of $20.00 per one one-hundredth of a
share, subject to adjustment. The Rights are generally exercisable only if a
person acquires beneficial ownership of 20% or more of the Company's
outstanding Common Stock.
Warrants
As of September 30, 1999, there were a total of 99,137 warrants
outstanding, convertible into 153,620 shares of common stock. All warrants
outstanding contain a cashless exercise provision. The Company would receive
cash proceeds up to approximately $969,000 if the cashless exercise provision
was not utilized.
During the six month period ended June 30, 1999, the Company issued an
aggregate of 27,782 shares of Common Stock upon the cashless exercise of 15,982
stock warrants. Additionally, warrants to purchase an aggregate 536 shares of
Common Stock were exercised for total proceeds of $3,850. There were no warrant
exercises during the quarter ended September 30, 1999.
Treasury Stock
On December 12, 1997, the Company announced a stock buyback of the
Company's Common Stock. The purchases were to be made from time to time in the
open market at prevailing market prices. As of December 31, 1998 the Company had
purchased an aggregate of 415,300 shares of Common Stock under the stock buyback
program at an aggregate purchase price of $7.5 million, representing an average
purchase price of $18.021 per share. The Company
13
<PAGE> 14
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
did not purchase any shares of Common Stock during the current fiscal year
through November 12, 1999.
NOTE 7 -- STOCK OPTIONS
The Company records and amortizes over the related vesting periods
deferred non-cash 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. The Company recorded compensation expense of approximately
$156,000 for the nine month period ended September 30, 1999 related to the
amortization of deferred compensation recorded in connection with options
granted under the 1996 Non-Employee Director Stock Option Plan (the "Director
Plan"). Amortization of deferred compensation recorded in connection with other
option grants totaled approximately $23,700 during the same period ended
September 30, 1999.
During the six month period ended June 30, 1999, the Company granted
options to directors, at the time of their re-election to the Board, of 12,500
shares of Common Stock at an exercise price of $13.44 which equaled the fair
market value on the date of grant. In addition, during the nine month period
ended September 30, 1999, the Company issued an aggregate of 31,866 shares of
Common Stock upon the exercise of stock options, at prices ranging from $.04 to
$8.375.
NOTE 8 -- AGREEMENTS
Schering-Plough Corporation
In November 1997, the Company entered into exclusive license agreements
with affiliates of Schering-Plough Corporation, a major U.S.-based
pharmaceutical company (including such affiliates, "Schering-Plough"), with
respect to the Company's Vasomax(R) product for the treatment of male erectile
dysfunction. Upon completion of the agreement, Schering-Plough paid Zonagen an
up-front payment of $10.0 million and agreed to make subsequent aggregate
milestone payments up to $47.5 million upon the successful achievement of
specified regulatory goals. The Schering-Plough agreements provide for Zonagen
to receive escalating royalty payments based on increasing product sales levels.
There can be no assurance that Vasomax(R) will be approved by the FDA or that
Schering-Plough will achieve sales levels that result in escalating royalty
payments.
As provided for in the Schering-Plough Agreements, royalty rates
payable are substantially reduced on Vasomax(R) sales in a territory where the
Company has not met a certain business criterion called for in the Agreements.
Currently, the Company has not met that business criterion in Mexico and Brazil,
the two jurisdictions where the product is currently being sold. Until this
business criterion is met in these countries, the Company will
14
<PAGE> 15
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
continue to receive royalties at the reduced rate. In addition, until this
business criterion is met, royalties may be reduced substantially further, if
during any Calendar Quarter, unit sales of orally administered
phentolamine-based products for male erectile dysfunction by competitors in this
territory exceed certain specified market shares.
On June 30, 1998, the Company received an accelerated milestone payment
of $5.0 million from Schering-Plough that was paid at the completion of the
clinical program that was used in support of the NDA for Vasomax(R). The payment
was due upon the submission of a NDA for Vasomax(R) with the FDA. The Company
submitted the NDA on July 14, 1998.
On September 30, 1998, the Company received an additional milestone
payment of $5.0 million from Schering-Plough that was paid upon FDA acceptance
of the NDA filing for Vasomax(R). Zonagen has received a total of $20.0 million
from Schering-Plough from inception of the collaboration through September 30,
1999. The balance of the $37.5 million in milestone payments is tied to the
receipt of regulatory approvals for Vasomax(R) in major developed country
jurisdictions.
In February 1999, Schering-Plough notified the Company that it had
exercised its right to begin manufacturing finished product for Vasomax(R).
Schering-Plough manufactures and markets the product in Mexico and Brazil.
Outside Contract Research Organizations
During 1996, the Company entered into agreements with two contract
research organizations for the clinical development of Vasomax(R). The Company
made cash payments aggregating approximately $424,000 and $1.7 million during
the quarters ended September 30, 1999 and 1998, respectively, and recorded
payables and accrued expenses of $354,000 as of September 30, 1999.
Outside Contract Manufacturer
On June 12, 1997, the Company entered into an exclusive supply
agreement with a contract manufacturer under which the Company has agreed to
purchase all of its bulk phentolamine requirements from the contract
manufacturer for a period of five years. The agreement will continue after the
initial five-year term for consecutive one-year periods until terminated by
either party. The agreement obligates the Company to purchase specified minimum
quantities of phentolamine and the manufacturer to manufacture phentolamine
exclusively for the Company, including a current unpaid purchase commitment of
$1.125 million, which is payable in the quarter ending December 31, 1999. The
Company has met the minimum purchase requirements through the year ending
December 31, 1999. The value of the specified
15
<PAGE> 16
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
minimum purchase commitments of phentolamine for the years ending December 31,
2000 and 2001 are $540,000 in each year.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
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 Technologies, Inc., Fulbright & Jaworski, L.L.P., The Woodlands Venture
Capital Company and the Company as defendants. The lawsuit was dismissed on June
11, 1999, without the right of Dunbar to re-file and with no monetary
consideration paid by the Company.
Certain purported class action complaints alleging violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder have been filed against the Company and certain of its officers and
directors. These complaints were filed in the United States District Court for
the Southern District of Texas in Houston, Texas and were consolidated on May
29, 1998. The plaintiffs purport to bring the suit on behalf of all purchasers
of Zonagen common stock between February 7, 1996 and January 9, 1998. The
plaintiffs assert that the defendants made materially false and misleading
statements and failed to disclose material facts about the patents and patent
applications of the Company relating to Vasomax(R) and ImmuMax, and about the
Company's clinical trials of Vasomax(R). The plaintiffs seek to have the action
declared to be a class action, and to have rescissionary or compensatory damages
in an unstated amount awarded, along with interest and attorney's fees. On March
30, 1999, the Court granted the defendants' motion to dismiss, and dismissed the
case with prejudice. The plaintiffs have filed an appeal. The Company and the
individual defendants believe that these actions are without merit and intend to
defend against them vigorously. No estimate of loss or range of estimate of
loss, if any, can be made at this time.
NOTE 10 -- SUBSEQUENT EVENTS
In August 1999, Zonagen reported preliminary findings from a required
two-year rat study that indicated that a limited number of male rats receiving
daily doses of phentolamine mesylate on a long-term basis developed brown fat
proliferations. In November 1999, Zonagen concluded the in-life portion of this
study. Gross necropsies have been performed on all the rats. Based on those
gross necropsies, a total of nine male rats, three in each dosage group, have
been found to have brown fat proliferations. None were found in female rats. A
histopathological review of over 25,000 tissue sample slides from these rats is
currently being performed. The Company expects to have this data, which was
requested by the FDA, ready for submission by mid-to-late second quarter 2000.
16
<PAGE> 17
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
Separately, Schering-Plough has completed the clinical study of
Vasomax(R) that the FDA allowed to continue to conclusion at the time that the
FDA informed Zonagen that further clinical studies for its phentolamine-based
drugs were being placed on clinical hold. Analysis of the Schering-Plough study
is underway. Once that analysis is fully complete, Zonagen expects to
incorporate that data into an Amendment to its New Drug Application for
Vasomax(R).
On October 18, 1999, the Company's Compensation Committee of the Board
of Directors approved and the Company granted stock options to all employees as
an incentive to remain with the Company, 285,500 shares of Common Stock at an
exercise price of $2.938 which equaled the fair market value on the date of
grant. Additionally, on the same date, stay bonuses aggregating $480,000 were
approved by the Compensation Committee and granted for all employees. These
bonuses will be payable on the first working day of January, 2001, for employees
who received the grants and who are still employed by the Company on December
31, 2000, subject to acceleration upon the occurrence of certain defined
circumstances.
17
<PAGE> 18
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 of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. 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. See "Factors Affecting
Forward-Looking Statements" included elsewhere in this Quarterly Report on Form
10-Q.
OVERVIEW
Zonagen, Inc., a Delaware corporation, ("Zonagen" or the "Company"),
was organized on August 20, 1987 ("Inception"), and is a biopharmaceutical
company engaged in the development of pharmaceutical products for the
reproductive system, including sexual dysfunction, urology and contraception.
Until the sale of substantially all the assets of Fertility Technologies, Inc.
("FTI"), its wholly owned subsidiary, in March 1999, Zonagen also sold devices,
instruments and supplies to fertility specialists, obstetricians and
gynecologists. From inception through September 30, 1999, the Company has been
primarily engaged in pharmaceutical research and development and clinical
development and is still in a development stage.
In 1997, Zonagen entered into a worldwide sales and marketing agreement
with Schering-Plough Corporation for Vasomax(R), the Company's rapidly
disintegrating oral formulation of phentolamine mesylate for Male Erectile
Dysfunction ("MED"). In March 1998, Schering-Plough submitted a Product
Registration Application in Mexico for Vasomax(R) and subsequently began product
sales in May 1998, following approval by the Mexican regulatory authorities. On
July 14, 1998, Zonagen submitted its first New Drug Application ("NDA") to the
U.S. Food and Drug Administration ("FDA") for Vasomax(R) for the treatment of
MED. In August 1998, Schering-Plough submitted a Marketing Approval Application
for Vasomax(R) to the Medicines Control Agency in the United Kingdom. In
February 1999, Schering-Plough notified the Company that it had exercised its
right to begin manufacturing finished product for Vasomax(R). In May 1999,
Schering-Plough began sales of Vasomax(R) in Brazil.
Zonagen's lead product candidate is Vasomax(R), a proprietary oral
treatment for male erectile dysfunction. Zonagen completed two pivotal clinical
trials that demonstrated a therapeutic effect that is a statistically
significant improvement over placebo. These pivotal trials formed the basis of
the NDA for Vasomax(R) that was submitted to the FDA in July 1998.
18
<PAGE> 19
On May 10, 1999, Zonagen, Inc. and Schering-Plough jointly announced
that the companies had decided to forego a June FDA Advisory Panel review of the
New Drug Application ("NDA") for Vasomax(R) until the results of an additional
12-week human clinical study being conducted by Schering-Plough could be
submitted to the Food and Drug Administration ("FDA"), as it was not possible to
extend the Advisory Panel review date. As a result of this decision, Zonagen
received a non-approvable letter for the NDA from the FDA. Zonagen expects to
submit the new data from the ongoing human clinical study currently being
conducted by Schering-Plough to the FDA as an amendment to the NDA.
On August 10, 1999, Zonagen, Inc. announced that the FDA had advised
the Company that further U.S. clinical trials of Zonagen's phentolamine-based
drugs, Vasomax(R) and Vasofem(TM), had been placed on clinical hold until
certain issues surrounding the Company's two-year rat study were satisfactorily
resolved. The FDA is however, allowing Schering-Plough to complete the fully
enrolled ongoing 12-week study in humans of Vasomax(R) for erectile dysfunction.
See "Part I. Financial Information - Item 1. Financial Statements - Note 1 -
Organization and Operations of Notes to Consolidated Financial Statements
(Unaudited)" included elsewhere in this Quarterly Report on Form 10-Q.
The FDA's decision was based on preliminary findings from an ongoing
two-year, rat carcinogenicity study being conducted by Zonagen. The study, which
is scheduled to be completed in the fourth quarter of 1999, yielded preliminary
results that suggest that male rats receiving long term daily doses of
phentolamine mesylate develop a higher incidence of proliferation of brown fat
tissue than control rats. The implications of these findings need to be further
evaluated with regard to their potential for adverse effects on humans. To date,
such abnormalities have not been observed in female rats in the study.
Prior to these latest findings, Zonagen had completed and submitted to
the FDA a complete genotoxicity profile as well as results from a six month
mouse p53 assay and six month daily usage studies in dogs and rats. None of
these studies showed any abnormal effects, including brown fat tissue
proliferation.
There can be no assurance, that the FDA will consider such studies
satisfactory for approval of the NDA submission or whether additional studies
will be required; nor can there be any assurance that the FDA will ultimately
approve Vasomax(R). Certain risks and uncertainties associated with the filing
and the FDA review of the NDA are described or referenced in "Factors Affecting
Forward-Looking Statements" included elsewhere in this Quarterly Report on Form
10-Q.
On September 13, 1999, in response to the August 10, 1999 announcement
of the FDA clinical hold on Vasomax(R) and Vasofem(TM), the Company announced
that it had dismissed 15 of its employees, representing about one-third of its
work force. This action was taken to reduce cash expenditures and concentrate
the Company's talent and assets on programs that have the greatest potential to
impact shareholder value, including Vasomax(R), Vasofem(TM) and the Company's
adjuvant systems. In addition, work on several projects was slowed down. These
actions have the effect of substantially reducing Zonagen's projected cash
expenditures. The majority of the
19
<PAGE> 20
employees that were dismissed were involved in the internal pre-clinical
toxicology and analytical functions for the Company. With the advent of the U.S.
clinical hold on the Company's phentolamine based products, management felt that
this reduction in staff would conserve cash and have a minimal affect on the
future development of the Company's technologies. Management felt that it could
outsource these requirements upon the lifting of the Vasomax(R) and Vasofem(TM)
U.S. clinical hold. The Company took a one-time charge during the quarter ended
September 30, 1999 of approximately $116,000 relating to the September 13, 1999
staff reduction. The Company will also focus its efforts on out-licensing its
existing technologies as a means of enhancing its cash reserves and reducing
internal development costs by securing external funding for certain research
programs. Notwithstanding the cash conservation plan, Zonagen will continue to
seek opportunities to in-license technologies that it believes will enhance
future shareholder value.
In addition to sexual dysfunction, the Company has ongoing research and
development programs for its proprietary vaccine adjuvant and other diseases and
disorders of the reproductive system, including several new approaches to
contraception and new treatments for urological diseases such as benign prostate
hyperplasia ("BPH") and prostate cancer. The Company has initiated a program to
out-license these technologies to secure external funds to support their ongoing
development.
On March 11, 1999, the Company sold for cash the assets of its wholly
owned subsidiary, Fertility Technologies, Inc. ("FTI") to SAGE BioPharma, Inc.,
a subsidiary of Counsel Corporation (Nasdaq: CXSN). The sale of FTI allows the
Company to focus all of its attention on its core business, the development of
pharmaceutical products for conditions associated with the reproductive system.
See "Part I. Financial Information - Item 1. Financial Statements - Note 3 -
Sale of Fertility Technologies, Inc. of Notes to Consolidated Financial
Statements (Unaudited)" included elsewhere in this Quarterly Report on Form
10-Q.
In June 1999, the U.S. Patent and Trademark Office issued Patent Number
5,912,000 directed to one of the Company's chitosan-based adjuvant systems and
immunogens, collectively know as the ImmuMax System.
As of September 30, 1999, the Company had an accumulated deficit of
approximately $61.6 million. There can be no assurance that the Company will be
able to successfully complete 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.
IMPACT OF YEAR 2000
Certain companies may face problems if the computer processors and
software upon which they directly or indirectly rely are unable to process date
values correctly upon the turn of the millennium ("Year 2000"). Such a system
failure and corruption of data of the Company or its customers or suppliers
could disrupt the Company's operations, including, among other things, a
temporary inability to process transactions or engage in other business
activities or to receive information or services from suppliers.
The Company has appointed a Year 2000 committee to address the issues
and assess the potential impact of the Year 2000 problem. The committee is
evaluating the Company's financial systems, computers, software and other
equipment and anticipates that the programs and
20
<PAGE> 21
systems should be Year 2000 compliant. The Company presently believes that its
computer systems, software and other equipment should be Year 2000 compliant by
December 1999. The Company estimates that it will spend approximately $100,000
to $150,000 in capital for replacement of computers, equipment and software
upgrades. The Company will incur another $50,000 to $100,000 for costs of
implementation.
The Company has surveyed its third party suppliers and has requested
that they represent that their products and services are to be Year 2000
compliant and that they have a program to test for compliance. The Company is
currently evaluating its third party suppliers' responses and is assessing those
vendors that are not Year 2000 compliant and will find alternative vendors that
are compliant.
Because the Company currently anticipates that it will achieve Year
2000 compliance, it has not formulated a contingency plan. However, should the
Company determine there is significant risk that it may be unable to adhere to
its compliance timetable, it will assess reasonably likely scenarios resulting
from noncompliance and establish a contingency plan to address such scenarios.
The Company's ability to achieve Year 2000 compliance is subject to
various uncertainties including the Company's ability to successfully identify
systems and programs not Year 2000 compliant, the nature and amount of
programming required to correct or replace affected programs, the availability
and magnitude of labor and consulting costs and the success of the Company's
business partners, vendors and clients in addressing the Year 2000 issue.
Therefore, while the financial impact of implementing Year 2000 compliance
remediation has not been and is not anticipated to be material to the Company's
business, financial position or results of operations, the Company can make no
assurances with respect to the costs of remediation efforts not yet incurred.
Additionally, the Company cannot be certain that it will achieve adequate Year
2000 compliance in a timely manner or that any impact of a failure to achieve
such compliance will not have a material adverse effect on the Company's
business, financial condition or results of operation.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues. Total revenues decreased 89% to $607,000 for the quarter
ended September 30, 1999 as compared to $5.7 million for the same period in the
prior year. The decrease is due primarily to no milestone payments being
received in the quarter ended September 30, 1999 as compared to a $5.0 million
payment received during the same period in the prior year. In addition,
royalties received from Schering-Plough for Vasomax(R) sales were $182,000 for
the quarter ended September 30, 1999 as compared to no royalties for the same
quarter in the prior year. Interest revenue decreased primarily due to decreased
cash balances as a result of the reduction in the Company's cash and investment
balances to fund ongoing operating activities.
Schering-Plough is manufacturing and marketing Zonagen's erectile
dysfunction product in Mexico and Brazil. Schering-Plough commenced sales of
Vasomax(R) in Mexico in May 1998 and in Brazil in May 1999. Under the terms
21
<PAGE> 22
of the license agreement, the Company receives quarterly royalty payments based
on net product sales by Schering-Plough. These quarterly payments lag current
quarter sales by up to sixty days. Until Vasomax(R) is approved and launched on
a broader basis, the Company expects royalty payments to reflect fluctuations
due to inventory stocking and promotional activities.
As provided for in the Schering-Plough Agreements, royalty rates
payable are substantially reduced on Vasomax(R) sales in a territory where the
Company has not met a certain business criterion called for in the Agreements.
Currently, the Company has not met that business criterion in Mexico and Brazil,
the two jurisdictions where the product is currently being sold. Until this
business criterion is met in these countries, the Company will continue to
receive royalties at the reduced rate. In addition, until this business
criterion is met, royalties may be reduced substantially further, if during any
Calendar Quarter, unit sales of orally administered phentolamine-based products
for male erectile dysfunction by competitors in this territory exceed certain
specified market shares.
Research and Development Expenses. Research and development ("R&D")
expenses include contracted research, regulatory affairs activities and general
research and development expenses. R&D expenses decreased 54% to $2.1 million
for the quarter ended September 30, 1999 as compared to $4.6 million for the
same period in the prior year. The decrease was due primarily to a decline in
contracted costs associated with the development of phentolamine-based products.
These contracted costs decreased 71% to approximately $1.0 million during the
quarter ended September 30, 1999 as compared to approximately $3.5 million
during the same period in the prior year. This reduction is primarily due to the
completion of Phase III and open label clinical trials for Vasomax(R), which
were used in the July 14, 1998 NDA submission to the FDA. The Company will
continue to incur costs in connection with the ongoing regulatory review of
Vasomax(R) until the regulatory process is complete. General research and
development expenses decreased 8% to approximately $1.1 million for the quarter
ended September 30, 1999 as compared to $1.2 million during the same period in
the prior year. This slight decrease was primarily due to a reduction in
pre-clinical studies and purchased research supplies. The Company expects that
R&D expenses will decrease during the remainder of 1999 and that they could
increase over the next several years as the Company progresses with clinical
trial programs for additional product candidates, including Vasofem(TM).
General and Administrative Expenses. General and administrative
expenses decreased 6% to $692,000 during the quarter ended September 30, 1999
from $736,000 in the third quarter of 1998. The decrease was primarily due to
lower legal expenses relating to the Company's shareholder lawsuit which was
partially offset by increased expenses associated with hiring and relocating
several new members of the management team.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues. Total revenues decreased 86% to $1.8 million for the nine
months ended September 30, 1999 as compared to approximately $12.7 million for
the same period in the prior year. The decrease is due primarily to no milestone
payments being received during the nine months ended September 30, 1999 as
compared to $10.0 million received during the same period in the prior year.
Product royalties for the nine months ended September 30, 1999, were $204,000
22
<PAGE> 23
as compared to $167,000 for the same period in the prior year. The decrease in
interest revenue is primarily due to decreased cash balances as a result of the
reduction in the Company's cash and investment balances to fund ongoing
operating activities and stock repurchases during the year ended December 31,
1998.
Schering-Plough is manufacturing and marketing Zonagen's erectile
dysfunction product in Mexico and Brazil. Schering-Plough commenced sales of
Vasomax(R) in Mexico in May 1998 and in Brazil in May 1999. Under the terms of
the license agreement, the Company receives quarterly royalty payments based on
net product sales by Schering-Plough. These quarterly payments lag current
quarter sales by up to sixty days. Until Vasomax(R) is approved and launched on
a broader basis, the Company expects royalty payments to reflect fluctuations
due to inventory stocking and promotional activities.
As provided for in the Schering-Plough Agreements, royalty rates
payable are substantially reduced on Vasomax(R) sales in a territory where the
Company has not met a certain business criterion called for in the Agreements.
Currently, the Company has not met that business criterion in Mexico and Brazil,
the two jurisdictions where the product is currently being sold. Until this
business criterion is met in these countries, the Company will continue to
receive royalties at the reduced rate. In addition, until this business
criterion is met, royalties may be reduced substantially further, if during any
Calendar Quarter, unit sales of orally administered phentolamine-based products
for male erectile dysfunction by competitors in this territory exceed certain
specified market shares.
Research and Development Expenses. R&D expenses include contracted
research, regulatory affairs activities and general research and development
expenses. R&D expenses decreased 40% to $10.0 million for the nine months ended
September 30, 1999 as compared to $16.8 million for the same period in the prior
year. The decrease was due primarily to a decline in contracted costs associated
with the development of various phentolamine based products. These contracted
costs decreased 51% to approximately $6.7 million during the period ended
September 30, 1999 as compared to approximately $13.8 million during the same
period in the prior year. This reduction is primarily due to the completion of
Phase III and open label clinical trials for Vasomax(R), which were used in the
July 14, 1998 NDA submission to the FDA. The Company will continue to incur
costs in connection with the further development of Vasomax(R) until the
regulatory process is complete. General research and development expenses
increased 10% to approximately $3.3 million for the nine months ended September
30, 1999 as compared to $3.0 million during the same period in the prior year.
This increase was primarily due to expenses associated with hiring additional
personnel and expanding the Company's research and drug screening capabilities.
The Company expects that R&D expenses will decrease during the remainder of 1999
and that they could increase over the next several years as the Company
progresses with clinical trial programs for additional product candidates,
including Vasofem(TM).
General and Administrative Expenses. General and administrative
expenses increased 18% to $2.6 million during the nine months ended September
30, 1999 from $2.2 million during the same period in the prior year. The
increase was primarily due to expenses associated with hiring and relocating
several new members of the management team.
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<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily with
proceeds from the private placement and public offering of equity securities and
with funds received under collaborative agreements. 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 sale 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 $72.2
million from a public offering of Common Stock. In December 1997, the Company
received a $10.0 million up-front license fee from Schering-Plough for the right
to market and sell Vasomax(R) for the treatment of male erectile dysfunction. On
June 30, 1998, the Company received an accelerated $5.0 million milestone
payment from Schering-Plough with respect to Vasomax(R). On September 30, 1998,
the Company received an additional $5.0 million milestone payment from
Schering-Plough upon the acceptance of the Vasomax(R) NDA by the FDA.
The Company used net cash of approximately $12.2 million for operating
activities in the nine months ended September 30, 1999 as compared to
approximately $9.5 million for the same period in the prior year. The increase
in net cash used for operating activities was due primarily to no milestone
payments being received in the nine months ended September 30, 1999, as compared
to $10.0 million in the prior year, offset by a decline in contracted costs
associated with the development of Vasomax(R). The reduction in contracted costs
associated with the development of Vasomax(R) is a result of the completion of
Phase III and open label clinical trials and a reduction in contracted research
and regulatory affairs activities following the July 14, 1998 NDA submission to
the FDA for Vasomax(R). The Company had cash and cash equivalents and marketable
securities-short term combined of $22.7 million and marketable securities-long
term were $18.3 million as of September 30, 1999 totaling $41.0 million.
The Company has experienced negative cash flows from operations since
its inception and has funded its activities to date primarily from equity
financings and corporate collaborative agreements. 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.
Despite the delays regarding the Company's Vasomax(R) clinical
development program, the Company believes that its existing capital resources
will still be sufficient to fund its operations through approximately mid-year
2001. This is due in large part to the way the Company has historically
forecasted its cash resources and the implementation of a cash conservation
plan. When forecasting its cash requirements, the Company only takes into
account actual cash payments received, not anticipated.
On September 13, 1999, in response to the August 10, 1999 announcement
of the FDA clinical hold on Vasomax(R) and Vasofem(TM), the Company announced
that it had dismissed 15 of its employees, representing about one-third of its
work force. In addition, work on several
24
<PAGE> 25
projects was slowed down. These actions had the effect on reducing Zonagen's
projected cash expenditures substantially. The main purpose of these steps was
to concentrate the Company's talents and assets on the programs that have the
greatest potential to impact shareholder value, including Vasomax(R),
Vasofem(TM) and the Company's adjuvant programs. The Company also announced it
will focus its efforts on out-licensing its existing technologies as a means of
enhancing its cash reserves and reducing internal development costs by securing
external funding for certain research programs. Notwithstanding the cash
conservation plan, the Company will continue to seek opportunities to in-license
technologies that it believes will enhance future shareholder value.
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
clinical and preclinical activities; the progress of the Company's collaborative
agreements with affiliates of Schering-Plough and costs associated with any
future collaborative research, manufacturing, marketing or other funding
arrangements; the costs and timing of seeking regulatory approvals for
Vasomax(R) and Vasofem(TM), and the Company's other future product candidates;
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 or through additional corporate collaborations. The
Company's ability to raise additional funds will be adversely affected if the
results of its current or future clinical trials, the regulatory approval
process, and the commercialization of Vasomax(R) are not favorable or timely.
The Company may seek additional funding through corporate collaborations and
other financing vehicles. There can be no assurance that any such funding will
be available to the Company on favorable terms, or at all. If adequate funds are
not available, the Company may be required to 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
25
<PAGE> 26
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 Technologies, Inc., Fulbright & Jaworski, L.L.P., The Woodlands Venture
Capital Company and the Company as defendants. The lawsuit was dismissed on June
11, 1999, without the right of Dunbar to re-file and with no monetary
consideration paid by the Company.
Certain purported class action complaints alleging violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder have been filed against the Company and certain of its officers and
directors. These complaints were filed in the United States District Court for
the Southern District of Texas in Houston, Texas and were consolidated on May
29, 1998. The plaintiffs purport to bring the suit on behalf of all purchasers
of Zonagen common stock between February 7, 1996 and January 9, 1998. The
plaintiffs assert that the defendants made materially false and misleading
statements and failed to disclose material facts about the patents and patent
applications of the Company relating to Vasomax(R) and ImmuMax, and about the
Company's clinical trials of Vasomax(R). The plaintiffs seek to have the action
declared to be a class action, and to have rescissionary or compensatory damages
in an unstated amount, along with interest and attorney's fees. On March 30,
1999, the Court granted the defendants' motion to dismiss, and dismissed the
case with prejudice. The plaintiffs have filed an appeal. The Company and the
individual defendants believe that these actions are without merit and intend to
defend against them vigorously. No estimate of loss or range of estimate of
loss, if any, can be made at this time.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 1, 1999, the Board of Directors of the Company adopted a
stockholder rights plan (the "Rights Plan") pursuant to which a dividend
consisting of one preferred stock purchase right (a "Right") was distributed
for each share of Common Stock held as of the close of business on September
13, 1999, and is to be distributed to each share of Common Stock issued
thereafter until the earlier of (i) the Distribution Date (as defined in the
Rights Plan), (ii) the Redemption Date (as defined in the Rights Plan), or
(iii) September 13, 2002. The Rights Plan is designed to deter coercive
takeover tactics and to prevent an acquirer from gaining control of the Company
without offering fair value to the Company's stockholders. The Rights will
expire on September 13, 2002, subject to the sooner redemption or exchange as
provided in the Rights Plan. Each Right entitles the holder thereof to purchase
from the Company one one-hundredth of a share of a new series of Series One
Junior Participating Preferred Stock of the Company at a price of $20.00 per
one one-hundredth of a share, subject to adjustment. The Rights are generally
exercisable only if a person acquires beneficial ownership of 20% or more of
the Company's outstanding Common Stock.
A complete description of the Rights, the Rights Agreement between the
Company and Harris Trust and Savings Bank, as rights agent, and the Series One
Junior Participating Preferred Stock is hereby incorporated by reference from
the information appearing under the captions "Rights Agreement" and "Description
of Preferred Stock" contained in the Current Report on Form 8-K of the Company
filed on September 3, 1999.
26
<PAGE> 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Identification of Exhibit
4.1 Rights Agreement dated as of
September 1, 1999 (incorporated by
reference to Form 8-A of the Company
filed on September 3, 1999).
10.1 Employment Agreement between the
Company and David B. Bowman
11.1 Statement Regarding Computation of Net
Loss Per Share
27.1 Financial Data Schedule
b. Reports on Form 8-K
(1) Current Report on Form 8-K dated
September 3, 1999 reporting under Item 5.
(2) Current Report on Form 8-K dated
September 14, 1999 reporting under Item 5.
27
<PAGE> 28
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ZONAGEN, INC.
Date: November 12, 1999
By: /s/ Joseph S. Podolski
-------------------------------
Joseph S. Podolski
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1999
By: /s/ F. Scott Reding
-------------------------------
F. Scott Reding
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
28
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Identification of Exhibit
----------- -------------------------
<S> <C>
4.1 Rights Agreement dated as of September 1, 1999
(incorporated by reference to Form 8-A of the Company filed
on September 3, 1999).
10.1 Employment Agreement between the Company and David B. Bowman
11.1 Statement Regarding Computation of Net Loss Per Share
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "AGREEMENT") is made and entered into
this 25th day of October, 1999, by and between ZONAGEN, INC., a Delaware
corporation (hereinafter referred to as the "COMPANY," which term shall for all
purposes be deemed to include its successors and assigns), and David B. Bowman
(the "EXECUTIVE").
WITNESSETH
WHEREAS, the Company desires to employ the Executive as its Vice
President of Operations on the terms and subject to the conditions set forth
herein, and the Executive desires to accept such employment.
NOW, THEREFORE, in consideration of the mutual covenants, promises and
agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. EMPLOYMENT.
(a) The Company hereby employs the Executive and the
Executive hereby accepts employment as Vice President
of Operations of the Company, subject to the
direction of the Board of Directors and the Company's
officers designated by the Board of Directors, and
shall perform and discharge well and faithfully the
duties and responsibilities that are assigned to him
by the Board of Directors. The Executive agrees to
devote such of his time, attention and energy to the
business of the Company, and any of its subsidiaries
or affiliates, as may be required to perform the
duties and responsibilities assigned to him by the
Board of Directors to the best of his ability and
with requisite diligence. If the Executive is
appointed a director or elected to another executive
officer position of the Company or any subsidiary
thereof during the term of this Agreement, the
Executive will serve in such capacity without further
compensation.
(b) The Executive agrees to comply in all material
respects, at all times during the Executive Period
(as defined in Section 2 hereof), with all applicable
policies, rules and regulations of the Company.
2. TERM. Subject to the terms hereof, this Agreement shall
commence on the date hereof (the "EXECUTION DATE") and shall
terminate on the second anniversary of the Execution Date;
provided, that this Agreement will automatically renew for
successive one-year periods unless written notice of
termination is given to the Executive by the Company not less
than sixty (60) days before the expiration of the term hereof
or any renewal period then in effect. The term of this
Agreement shall include any such renewal periods and shall be
referred to herein as the "EXECUTIVE PERIOD."
<PAGE> 2
EMPLOYMENT AGREEMENT
DAVID B. BOWMAN
PAGE 2 OF 6
3. COMPENSATION. For all services rendered under this Agreement,
the Company agrees to pay to Executive during the Executive
Period:
(i) A base monthly salary of 8,750.00, payable in equal
semi-monthly installments or on any other periodic
basis consistent with the Company's payroll procedures,
subject only to such payroll and withholding deductions
as are required by applicable federal and state laws.
4. FRINGE BENEFITS: EXPENSES.
(a) So long as the Executive is employed by the Company,
the Executive shall participate in all employee
benefit plans sponsored by the Company for its
executive employees, including, but not limited to,
vacation policy, health insurance, dental insurance
and pension or profit-sharing plans; provided,
however, that the nature, amount and limitations of
such plans shall be determined from time to time by
the Board of Directors of the Company.
(b) The Company agrees to reimburse the Executive for all
reasonable out-of-pocket expenses incurred by him in
the performance of his duties, subject to the
submission of appropriate documentation in accordance
with the Company's expense reimbursement policy as in
existence from time to time.
5. CONFIDENTIAL INFORMATION AND NON- COMPETITION. The Executive
shall execute and comply with the Proprietary Information and
Inventions and Non-Competition Agreement in the form attached
as Exhibit A hereto and incorporated herein by reference.
6. TERMINATION.
(a) At any time during the Executive Period, the Company
may, at its sole discretion, discharge the Executive,
with or without "cause". Such termination shall be
effective on delivery of written notice to the
Employee of the Company's election to terminate this
Agreement under this Section 6. For purposes of this
Agreement, the following events shall constitute
"CAUSE": (i) the conviction of the Executive by a
court of competent jurisdiction of a crime involving
moral turpitude; (ii) the commission, or attempted
commission, by the Executive of an act of fraud on
the Company; (iii) the misappropriation, or
attempted misappropriation, by the Executive of any
funds or property of the Company; (iv) the continued
and unreasonable failure by the Executive to
perform in any material respect his obligations under
the terms of this Agreement; (v) the knowing
engagement by the Executive, without
<PAGE> 3
EMPLOYMENT AGREEMENT
DAVID B. BOWMAN
PAGE 3 OF 6
the written approval of the Board of Directors, in
any direct, material conflict of interest with the
Company without compliance with the Company's
conflict of interest policy; (vi) the knowing
engagement by the Executive, without the written
approval of the Board of Directors, in any activity
which competes with the business of the Company or
which would result in a material injury to the
Company; or (vii) the knowing engagement by the
Executive in any activity that would constitute a
material violation of the provisions of the Company's
Insider Trading Policy or Business Ethics Policy, if
any, then in effect.
If the Company terminates the Executive's employment
under this Agreement for reasons other than Cause,
then the Company shall, subject to the terms of this
Section 6, pay to the Employee (or his estate or
representative, as appropriate) an amount equal to
six (6) months compensation at his then current
salary, payable bi-monthly or in accordance with the
Company's payroll procedures, and shall continue to
provide benefits in the kind and amounts provided up
to the date of termination for the 6-month period,
including, without limitation, continuation of any
Company-paid benefits as described in Section 5 of
this Agreement for the Executive and his family.
Under no circumstances shall the Executive be
entitled to any compensation or continuation of
benefits for any period of time following his
termination if his termination is for Cause. If the
Company terminates the Executive's employment under
this Agreement for reasons other than Cause, the
Executive agrees to accept, in full settlement of any
and all claims, losses, damages and other demands
that the Executive may have arising out of such
termination as liquidated damages and not as a
penalty, the six-month salary payments and
continuation of Company-paid benefits as set forth
above. The Executive hereby waives any and all rights
that he may have to bring any cause of action or
proceeding, as a result of such termination, except
to enforce the Company's obligation to pay amounts
owing pursuant to this Section 6.
(b) This Agreement will terminate automatically on the
earliest to occur of: (i) the death or disability of
the Executive; (ii) the voluntary retirement of the
Executive; or (iii) the expiration of the Executive
Period unless otherwise renewed.
(c) If at any time during the term of this Agreement, the
Executive is unable to perform effectively his duties
hereunder because of physical or mental disability,
the Company shall continue payment of compensation as
provided in Section 3 hereof during the first
<PAGE> 4
EMPLOYMENT AGREEMENT
DAVID B. BOWMAN
PAGE 4 OF 6
six-month period of such disability to the extent not
covered by the Company's disability insurance
policies. On the expiration of such six-month period,
the Company, at its sole discretion, may continue
payment of the Executive's salary for such additional
periods as the Company elects or may terminate this
Agreement without any further obligations thereunder.
If the Executive should die during the term of this
Agreement, the Executive's employment and the
Company's obligations hereunder shall terminate as of
the last day of the month in which the Executive's
death occurs.
(d) Notwithstanding the terms of Section 6(a) above, the
Executive shall be obligated to actively pursue
employment following termination of his employment to
be entitled to be paid the continuation of salary
provided in Section 6(a), and the Company's
obligation to pay any such continuation of salary
shall terminate at such time as the Executive
commences employment with another employer; provided,
however, that nothing herein shall obligate the
Executive to pursue or accept employment for a
position that is not commensurate with his current
position at the Company or otherwise acceptable to
him.
(e) At any time during the term of this Agreement, the
Executive may terminate this Agreement by giving at
least thirty days written notice to the Company of
his intent to terminate this Agreement, with the date
of termination to be specified in such notice.
(f) If this Agreement is terminated by the Executive
pursuant to Section 6(e) hereof, then the Company
will have no obligation to pay any amount to the
Executive other than amounts earned or accrued
pursuant to Section 3 hereof, but which have not yet
been paid, as of the date of termination.
7. ASSIGNMENT BY EXECUTIVE. Except as otherwise expressly
provided herein, the Executive agrees for himself, and on
behalf of his executors and administrators, heirs, legatees,
distributees and any other person or persons claiming any
benefits under him by virtue of this Agreement, that this
Agreement and the rights, interests and benefits hereunder
shall not be assigned, transferred, pledged or hypothecated
in any way by the Executive or any executor, administrator,
heir, legatee, distributee or person claiming under the
Executive by virtue of this Agreement and shall not be
subject to execution, attachment or similar process. Any
attempt at assignment, transfer, pledge or hypothecation or
other disposition of this Agreement or of such rights,
interests and benefits contrary to the foregoing provision,
or the levy of any attachment or similar process thereupon,
shall be null and void and without effect.
<PAGE> 5
EMPLOYMENT AGREEMENT
DAVID B. BOWMAN
PAGE 5 OF 6
8. SUCCESSORS OF THE COMPANY. This Agreement shall be binding
on and inure to the benefit of any Successor (as hereinafter
defined) of the Company and any such Successor shall be
deemed substituted for the Company under the terms of this
Agreement. As used in this Agreement, the term "SUCCESSOR"
shall include any person, firm, corporation or other
business entity which at any time, whether by merger,
purchase or otherwise, acquires all or substantially all of
the assets or businesses of the Company; but no such
substitution shall relieve such companies of their original
obligations hereunder. This Agreement may not otherwise be
assigned by the Company without the Executive's consent to
any person, firm, corporation, limited liability company,
trust or other entity.
9. NOTICES. All notices or other communications that are required
or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when delivered in
person, transmitted by telecopier or mailed by registered or
certified first class mail, postage prepaid, return receipt
requested, to the parties hereto at the address set forth
below (as the same may be changed from time to time by notice
similarly given) or the last known business or residence
address of such other person as may be designated by either
party hereto in writing.
If to the Company:
Zonagen, Inc.
2408 Timberloch Place, Suite B-4
The Woodlands, Texas 77380
Attn: Joseph S. Podolski
If to the Executive:
David B. Bowman
6 Heathstone Place
The Woodlands, TX 77381
10. WAIVER OF BREACH. A waiver by the Company or the Executive of
a breach of any provision of this Agreement by the other party
shall not operate or be construed as a waiver of any other
breach by the other party.
11. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
12. SEVERABILITY. If any provision of this Agreement shall, for
any reason, be held to violate any applicable law, and so much
of said Agreement is held to be unenforceable, then the
invalidity of such specific provision herein
<PAGE> 6
EMPLOYMENT AGREEMENT
DAVID B. BOWMAN
PAGE 6 OF 6
shall not be held to invalidate any other provision herein
which shall remain in full force and effect.
13. AMENDMENT. This Agreement constitutes and contains the entire
agreement of the parties and supersedes any and all prior
negotiations, correspondence, understandings and agreements
between the parties respecting the subject matter hereof. This
Agreement may be modified only by an agreement in writing
executed by all the parties hereto.
14. HEADINGS. The section and subsection headings contained in
this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this
Agreement.
15. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, and
all of which together shall constitute one instrument.
16. CUMULATIVE REMEDIES. All rights and remedies hereunder are
cumulative and are in addition to all other rights and
remedies provided by law, agreement or otherwise.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
COMPANY:
ZONAGEN, INC.
/s/ Joseph S. Podolski
--------------------------
Joseph S. Podolski
President and Chief
Executive Officer
EXECUTIVE:
/s/ David B. Bowman
--------------------------
David B. Bowman
<PAGE> 1
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
THREE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Net Loss Weighted Average Shares Outstanding Loss per Share
-------- ----------------------------------- --------------
<S> <C> <C> <C> <C> <C>
Basic $2,178,841 + 11,263,514 = $0.19
Diluted $2,178,841 + 11,263,514 = $0.19
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Net Loss Weighted Average Shares Outstanding Loss per Share
-------- ----------------------------------- --------------
<S> <C> <C> <C> <C> <C>
Basic $9,695,535 + 11,236,552 = $0.86
Diluted $9,695,535 + 11,236,552 = $0.86
</TABLE>
<TABLE> <S> <C>
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,949
<SECURITIES> 19,737
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 2,502
<CURRENT-ASSETS> 26,235
<PP&E> 2,109
<DEPRECIATION> (1,184)
<TOTAL-ASSETS> 46,876
<CURRENT-LIABILITIES> 2,928
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 43,936
<TOTAL-LIABILITY-AND-EQUITY> 46,876
<SALES> 0
<TOTAL-REVENUES> 1,811
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,572
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> (10,769)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,769)
<DISCONTINUED> 59
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,696)
<EPS-BASIC> (.86)
<EPS-DILUTED> (.86)
</TABLE>
