<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 March 31, 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 April 29, 1999 there were outstanding 11,244,966 shares of Common
Stock, par value $.001 per share, of the Registrant.
<PAGE>
ZONAGEN, INC.
(A development stage company)
For the Quarter Ended March 31, 1999
INDEX
PAGE
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements
Consolidated Balance Sheets: March 31, 1999 (Unaudited)
and December 31, 1998 5
Consolidated Statements of Operations: For the three months ended
March 31, 1999 and 1998 and from Inception (August 20, 1987)
through March 31, 1999 (Unaudited) 6
Consolidated Statements of Cash Flows: For the three months ended
March 31, 1999 and 1998, and from Inception (August 20, 1987)
through March 31, 1999 (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 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
<PAGE>
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>
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 three month
period ended March 31, 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>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------- --------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 48,150 $ 51,640
Accounts receivable - 318
Product inventory 2,642 3,139
Prepaid expenses and other current assets 972 1,032
-------- --------
Total current assets 51,764 56,129
LAB EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS, net 945 907
GOODWILL, net - 584
OTHER ASSETS, net 1,161 1,022
-------- --------
Total assets $ 53,870 $ 58,642
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,821 $ 3,317
Accrued expenses 2,120 1,935
Current portion of long-term notes payable - 3
-------- --------
Total current liabilities 3,941 5,255
-------- --------
LONG-TERM NOTES PAYABLE - -
-------- --------
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, 11,636,603 and 11,621,140 shares issued,
respectively; 11,221,303 and 11,205,840 shares
outstanding, respectively 12 12
Additional paid-in capital 113,763 113,717
Deferred compensation (870) (958)
Cost of treasury stock, 415,300 and 415,300 shares, respectively (7,484) (7,484)
Deficit accumulated during the development stage (55,492) (51,900)
-------- --------
Total stockholders' equity 49,929 53,387
-------- --------
Total liabilities and stockholders' equity $ 53,870 $ 58,642
======== ========
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 and in thousands except per share amounts)
<TABLE>
<CAPTION>
FROM INCEPTION
(AUGUST 20, 1987)
THREE MONTHS ENDED MARCH 31, THROUGH
--------------------------- MARCH 31,
1999 1998 1999
------------ ------------ --------
(unaudited)
<S> <C> <C> <C>
REVENUES
Licensing fees $ - $ - $ 20,250
Product royalties - - 163
Interest income 629 1,067 6,687
------------ ----------- --------
Total revenues 629 1,067 27,100
COSTS AND EXPENSES
Research and development 4,353 6,344 67,858
General and administrative 933 765 13,457
Interest expense and amortization
of intangibles 8 3 388
------------ ----------- --------
Total costs and expenses 5,294 7,112 81,703
------------ ----------- --------
Loss from continuing operations (4,665) (6,045) (54,603)
Income (loss) from discontinued operations 59 54 (1,828)
Gain on disposal 1,014 - 939
------------ ----------- --------
NET LOSS $ (3,592) $ (5,991) $ (55,492)
============ =========== =========
Loss per share - basic and diluted:
Loss from continuing operations $ (0.42) $ (0.53)
Income from discontinued operations 0.01 -
Gain on disposal 0.09 -
------------ -----------
NET LOSS $ (0.32) $ (0.53)
============ ===========
Shares used in income (loss) per share calculation:
Basic and diluted 11,214,502 11,322,142
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 and in thousands)
<TABLE>
<CAPTION>
FROM INCEPTION
(AUGUST 20, 1987)
THREE MONTHS ENDED MARCH 31, THROUGH
---------------------------- MARCH 31,
1999 1998 1999
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,592) $ (5,991) $ (55,492)
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 146 116 2,101
Noncash expenses related to stock-based
transactions 87 155 1,645
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 (85) (128) (198)
(Increase) decrease in inventory 184 4 (2,673)
(Increase) decrease in prepaid expenses and other
current assets 34 (309) (857)
(Decrease) increase in accounts payable and
accrued expenses (1,217) (1,428) 3,818
-------- -------- --------
Net cash used in operating activities (5,457) (7,581) (52,061)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (179) (31) (2,029)
Purchase of technology rights and other assets (150) (161) (1,229)
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 2,250 - 2,250
Technologies, Inc., subsidiary
Increase in net assets held for disposal - - (213)
-------- -------- --------
Net cash provided by (used in) investing activities 1,921 (192) (1,080)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 47 370 83,980
Proceeds from issuance of preferred stock - - 23,688
Purchase of treasury stock - (4,022) (7,484)
Proceeds from issuance of notes payable - - 2,839
Principal payments on notes payable (1) (4) (1,732)
-------- -------- --------
Net cash provided by (used in) financing activities 46 (3,656) 101,291
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,490) (11,429) 48,150
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 51,640 73,762 -
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 48,150 $ 62,333 $ 48,150
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
7
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
NOTE 1 -- Organization and Operations
Zonagen, Inc., a Delaware corporation, (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, contraception and infertility. 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 March 31, 1999, the Company has been primarily engaged in
research and development and clinical development and is still in a development
stage.
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 preclinical studies and
clinical trials of its existing and future product candidates, and to commence
sales and marketing efforts, if appropriate, if the U.S. Food and Drug
Administration ("FDA") or other regulatory approvals are obtained. The Company
believes that its existing capital resources will be sufficient to fund its
operations through at least the end of 2000. 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 of Vasomax(R), the
Company's oral treatment for male erectile 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. The Company's ability to raise additional
funds in the public or private markets 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
8
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
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 -- 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 period ended March 31, 1998.
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):
DECEMBER 31,
1998
-------
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
=======
9
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
NOTE 3 -- PRODUCT INVENTORY
The Company maintains an inventory of bulk 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 in Mexico
under the brand name Z-MAX and expects to launch the product in other Latin
American countries. Schering-Plough purchases bulk phentolamine from the
Company. As of March 31, 1999, the fair market value of this bulk raw material
inventory was approximately $2.6 million. 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 March 31, 1999.
The Company entered into a purchase order with the contract manufacturer of
phentolamine and has an obligation to purchase $1,500,000 of bulk phentolamine
during 1999, of which the Company has already paid a deposit of $375,000 against
that purchase. Under the terms of the agreement, the Company has already met
minimum purchase requirements for the year ended December 31, 1999. See "NOTE 7
- -- Agreements."
NOTE 4 -- PREPAID EXPENSES AND OTHER CURRENT ASSETS
During the three months ended March 31, 1999, prepaid expenses and other
current assets decreased to approximately $972,000. As of March 31, 1999,
prepayments held by the phentolamine contract manufacturer were $375,000. Other
prepaid expenses and other current assets, substantially all of which were
relating to phentolamine resale, other expenses for which the Company expects
reimbursement and interest receivable, totaled $597,000 as of March 31, 1999.
NOTE 5 -- STOCKHOLDERS' EQUITY
Common Stock
On July 25, 1997, the Company completed a public offering of Common Stock
in which it sold 2,587,500 shares of Common Stock (including the shares issued
pursuant to the exercise of the underwriters' over-allotment option) at a price
of $30.00 per share. The net proceeds of the public offering were approximately
$72.2 million.
Warrants
During the first quarter of 1999, the Company issued an aggregate 5,184
shares of Common Stock upon the cashless exercise of 5,850 stock warrants.
Additionally, warrants to purchase an aggregate 536 shares of Common Stock were
exercised for total proceeds of $3,850 at a price of $7.18 per common share. As
of March 31, 1999, there were a total of 109,269 warrants outstanding,
convertible into 181,031 shares of common stock. All warrants outstanding
contain a
10
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
cashless exercise provision. The Company would receive cash proceeds up to
approximately $1.1 million if the cashless exercise provision was not utilized.
Treasury Stock
On December 12, 1997 the Company announced a stock buyback of the Company's
Common Stock. The purchases are 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 did not purchase any shares of Common
Stock in the current fiscal year through May 12, 1999.
NOTE 6 -- 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 $69,500 in
the quarter ending March 31, 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 $18,000 in the quarter ending March 31, 1999.
During the three month period ended March 31, 1999, the Company granted
options, to directors, employees and consultants, of 86,500 shares of Common
Stock at exercise prices ranging from $19.75 to $29.00. During the three months
ended March 31, 1999, the Company issued an aggregate of 9,743 shares of Common
Stock upon the exercise of stock options, at prices ranging from $0.64 to $6.13.
NOTE 7 -- AGREEMENTS
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 exclusive license of the Company's Vasomax(R) product for the
treatment of male erectile dysfunction. Under 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. Zonagen will receive escalating royalties on all
product sales under the Schering-Plough agreements.
On June 30, 1998 the Company received an accelerated milestone payment of
$5.0 million from Schering-Plough that was
11
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
paid at the completion of the clinical program that was used in support of the
New Drug Application ("NDA") for Vasomax(R). The payment was due upon the
submission of a NDA for Vasomax(R) with the Food and Drug Administration
("FDA"). The Company submitted the NDA on July 14, 1998.
On September 30, 1998 the Company received a milestone payment of $5.0
million from Schering-Plough that was paid upon FDA acceptance for filing of the
NDA for Vasomax(R).
During 1996, the Company entered into agreements with two contract research
organizations to which the Company made cash payments aggregating to
approximately $1.8 million and $4.8 million during the quarters ended March 31,
1999 and 1998, respectively, and recorded payables and accrued expenses of $1.7
million as of March 31, 1999.
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 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.
The Company has already met minimum purchase requirements through the year ended
December 31, 1999. The value of the specified minimum quantities of phentolamine
for the years ended December 31, 2000 and 2001 are $540,000 and $540,000,
respectively.
In February 1999, Schering-Plough notified the Company that it has
exercised its right to begin manufacturing finished product for Vasomax(R).
NOTE 8 -- 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 has been
dismissed without the right of Dunbar to re-file and with no monetary
consideration paid by the Company.
12
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
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(TM), 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.
The Company is involved in certain other litigation matters which it
believes will not have a material adverse effect on the Company.
NOTE 9 - SUBSEQUENT EVENTS
On May 10, 1999, Zonagen, Inc. and Schering-Plough jointly announced that
the companies have decided to forego a June FDA Advisory Panel review of the New
Drug Application (NDA) for Vasomax(R) until the results of additional clinical
studies being conducted by Schering-Plough can be submitted to the FDA. As a
result of this decision, Zonagen expects that the FDA will issue a non-
approvable letter for the NDA. Vasomax(R) is Zonagen's oral treatment for
erectile dysfunction.
Zonagen completed two positive pivotal clinical trials that formed the
basis of the NDA for Vasomax(R). Zonagen and Schering-Plough believe that
inclusion of the new data from the ongoing studies should enhance the regulatory
filing and the commercial product profile for Vasomax(R). Both companies are
committed to obtaining approval of Vasomax(R) with the optimal safety and
efficacy product profile.
Zonagen expects to submit the data to the FDA as an amendment to the NDA.
It was not possible to extend the deadline for completion of the FDA review
therefore it was decided to accept a non-approvable letter.
Schering-Plough is continuing to seek regulatory approvals for Vasomax(R)
in countries outside the United States, having launched the product in Mexico in
June 1998 and Brazil in April 1999. A regulatory application was filed in the
United Kingdom in August 1998 as the first step in a mutual recognition
procedure for the European Union.
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 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. ("Zonagen" or the "Company") is a biopharmaceutical company
engaged in the development of pharmaceutical products for the reproductive
system, including sexual dysfunction, urology, contraception and infertility.
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 "Item 1. Financial Statements - Note 2 - Sale of Fertility Technologies,
Inc. of Notes to Consolidated Financial Statements (Unaudited)."
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.
Schering-Plough expects to launch the product in other Latin American countries.
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) with the Medicines Control Agency in the United
Kingdom. In February 1999, Schering-Plough notified the Company that it has
exercised its right to begin manufacturing finished product for Vasomax(R).
Schering-Plough intends to file Marketing Authorization Applications for
Vasomax(R) in all other countries in the European Union ("EU") using the EU
Mutual Recognition Procedure following approval in the U.K.
On May 10, 1999, Zonagen, Inc. and Schering-Plough jointly announced that
the companies have decided to forego a June FDA Advisory Panel review of the New
Drug Application (NDA) for Vasomax(R) until the results of additional clinical
studies being conducted by Schering-Plough can be submitted to the FDA. As a
result of this decision, Zonagen expects that the FDA will issue a non-
approvable letter for the NDA. Vasomax(R) is Zonagen's oral treatment for
erectile dysfunction.
Zonagen completed two positive pivotal clinical trials that formed the
basis of the NDA for Vasomax(R). Zonagen and Schering-Plough believe that
inclusion of the new data from the ongoing studies should enhance the regulatory
filing and the commercial product profile for Vasomax(R). Both companies are
committed to obtaining approval of Vasomax(R) with the optimal safety and
efficacy product profile.
Zonagen expects to submit the data to the FDA as an amendment to the NDA.
It was not possible to extend the deadline for completion of the FDA review
therefore it was decided to accept a non-approvable letter.
Schering-Plough is continuing to seek regulatory approvals for Vasomax(R)
in countries outside the United States, having launched the product in Mexico in
June 1998 and Brazil in April 1999. A regulatory application was filed in the
United Kingdom in August 1998 as the first step in a mutual recognition
procedure for the European Union.
There can be no assurance, however, 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.
14
<PAGE>
In December 1998, the Company initiated a U.S. Phase I clinical trial of
Vasofem, a vaginal form of phentolamine mesylate, for the treatment of Female
Sexual Dysfunction ("FSD").
The Company has several preclinical development programs for the treatment
of MED, including an oral combination treatment and a multi-component injection
for second-line therapy. In addition to sexual dysfunction, the Company has
ongoing research and development programs for 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.
As of March 31, 1999, the Company had an accumulated deficit of
approximately $55.5 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 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 is in the process of surveying its third party suppliers and is
requesting that they represent that their products and services are to be Year
2000 compliant and that they have a program to test for compliance.
Additionally, the Company will assess 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
15
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
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 MARCH 31, 1999 AND 1998
Revenues. Total revenues decreased 43% to $629,000 for the quarter ended
March 31, 1999 as compared to $1.1 million for the same period in the prior
year. The decrease is due primarily to decreased cash balances as a result of
the Company's net cash used in operating activities and stock repurchases during
the year ended December 31, 1998. Schering-Plough commenced sales of Vasomax(R)
in Mexico under the brand name of Z-MAX in May 1998. Under the terms of the
license agreement, the Company receives quarterly royalty payments based on net
product sales by Schering-Plough. These quarterly payments may lag current
quarter sales by up to sixty days. There were no product royalties received for
the quarter ended March 31, 1999. 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.
Research and Development Expenses. Research and development ("R&D")
expenses include internal and contracted research and regulatory affairs
activities. R&D expenses decreased 31% to $4.4 million for the quarter ended
March 31, 1999 as compared to $6.3 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 Vasomax(R). These contracted costs decreased 41% to
approximately $3.2 million during the quarter ended March 31, 1999 as compared
to approximately $5.4 million during the same period in the prior year. The
reduction in contracted costs associated with the development of Vasomax(R) is a
result of a reduction in contract research and regulatory activity following the
July 14, 1998 NDA submission to the FDA for Vasomax(R) and the completion of
Phase III and open label clinical trials. The Company will continue to incur
costs in connection with the further development of Vasomax(R) until the
regulatory process is complete. General R&D expenses increased 20% to
approximately $1.1 million for the quarter ended March 31, 1999 as compared to
$913,000 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
16
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage companyy)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
Company expects its research and development expenses to increase during the
remainder of 1999 and for at least the next several years as the Company
progresses with clinical trial programs for future product candidates.
General and Administrative Expenses. General and administrative expenses
increased 22% to $933,000 during the quarter ended March 31, 1999 from $765,000
in the first quarter of 1998. The increase was primarily due to expenses
associated with hiring and relocating several new members of the management
team.
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 with respect to Vasomax(R).
The Company used net cash of approximately $5.5 million for operating
activities in the three months ended March 31, 1999 as compared to approximately
$7.6 million for the same period in the prior year. The Company had cash and
cash equivalents of approximately $48.1 million at March 31, 1999. The decrease
for the three months ended March 31, 1999 was due primarily to 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 a
reduction in contract research and regulatory activity following the July 14,
1998 NDA submission to the FDA for Vasomax(R) and the completion of Phase III
and open label clinical trials.
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. The Company believes
that its existing capital resources will be sufficient to fund its operations
through at least the end of 2000. 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 of Vasomax(R) and the Company's other future
17
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage companyy)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
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. 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, 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.
18
<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
Technologies, Inc., Fulbright & Jaworski, L.L.P., The Woodlands Venture Capital
Company and the Company as defendants. The lawsuit has been dismissed 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(TM), 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.
The Company is involved in certain other litigation matters which it
believes will not have a material adverse effect on the Company.
19
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit No. Identification of Exhibit
----------- -------------------------
10.1 Asset Purchase Agreement between Zonagen, Inc.,
Fertility Technologies, Inc. and Sage BioPharma, Inc.
dated as of March 1, 1999
10.2 Employment Agreement between the Company and F. Scott
Reding
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 March 12, 1999
reporting under Item 5.
20
<PAGE>
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: May 12, 1999
By: /s/ Joseph S. Podolski
-------------------------------
Joseph S. Podolski
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 1999
By /s/ F. Scott Reding
-------------------------------
F. Scott Reding
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
21
<PAGE>
ASSET PURCHASE AGREEMENT
BETWEEN
ZONAGEN, INC.,
FERTILITY TECHNOLOGIES, INC.
AND
SAGE BIOPHARMA, INC.
Dated as of March 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
ARTICLE I
TRANSFER OF BUSINESS, PROPERTIES AND ASSETS...................................... 1
1.1 Sale and Transfer of Business, Properties and Assets............................. 1
1.2 Assumption of Liabilities........................................................ 1
1.3 Excluded Liabilities............................................................. 2
1.4 Purchase Price................................................................... 3
1.5 Payment of Estimated Purchase Price.............................................. 3
1.6 Adjustment to Purchase Price..................................................... 3
1.7 Allocation of Purchase Price..................................................... 4
ARTICLE II
CLOSING.......................................................................... 5
2.1 The Closing...................................................................... 5
2.2 Instruments of Conveyance, Transfer, Assumption, Etc............................. 5
2.3 Further Assurances............................................................... 5
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER AND ZONAGEN......................... 6
3.1 Organization and Good Standing................................................... 6
3.2 Authorization of Agreement....................................................... 6
3.3 Capitalization................................................................... 6
3.4 No Subsidiaries.................................................................. 7
3.5 Corporate Records................................................................ 7
3.6 Conflicts; Consents of Third Parties............................................. 7
3.7 Title to Assets.................................................................. 7
3.8 Financial Statements............................................................. 7
3.9 No Undisclosed Liabilities....................................................... 8
3.10 Absence of Certain Developments.................................................. 8
3.11 Taxes............................................................................ 9
3.12 Real Property.................................................................... 11
3.13 Tangible Personal Property....................................................... 12
3.14 Intangible Property.............................................................. 12
3.15 Material Contracts............................................................... 13
3.16 Employee Benefits................................................................ 13
3.17 Labor............................................................................ 14
3.18 Litigation....................................................................... 15
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
3.19 Compliance with Laws; Permits.................................................... 15
3.20 Environmental Matters............................................................ 15
3.21 Insurance........................................................................ 16
3.22 Inventories; Receivables; Payables............................................... 16
3.23 Related Party Transactions....................................................... 17
3.24 Relationships with Customers and Suppliers....................................... 17
3.25 Banks............................................................................ 18
3.26 No Misrepresentation............................................................. 18
3.27 Financial Advisors............................................................... 18
3.28 Shared Services.................................................................. 18
3.29 Asset Transfers.................................................................. 18
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER...................................... 18
4.1 Organization and Good Standing................................................... 18
4.2 Authorization of Agreement....................................................... 18
4.3 Conflicts; Consents of Third Parties............................................. 19
4.4 Litigation....................................................................... 19
4.5 Financial Advisors............................................................... 19
ARTICLE V
COVENANTS........................................................................ 19
5.1 General.......................................................................... 20
5.2 Transition....................................................................... 20
5.3 Confidentiality.................................................................. 20
5.4 Bulk Transfer Laws............................................................... 21
5.5 Publicity........................................................................ 21
5.6 Use of Name...................................................................... 21
5.7 Notification of Taxing Authorities............................................... 21
5.8 Mutual Release................................................................... 21
6.1 Conditions Precedent to Obligations of Purchaser................................. 22
6.2 Conditions Precedent to Obligations of Seller.................................... 22
ARTICLE VII
DOCUMENTS TO BE DELIVERED........................................................ 23
7.1 Documents to be Delivered by Seller and Zonagen.................................. 23
7.2 Documents to be Delivered by the Purchaser....................................... 24
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ARTICLE VIII
INDEMNIFICATION.................................................................. 24
8.1 Non-Tax Indemnification.......................................................... 24
8.2 Limitations on Indemnification for Breaches of Representations and Warranties.... 25
8.3 Non-Tax Indemnification Procedures............................................... 25
8.4 Tax Matters...................................................................... 26
8.5 Tax Treatment of Indemnity Payments.............................................. 29
8.6 Maximum Indemnity Amount......................................................... 29
ARTICLE IX
NONCOMPETITION................................................................... 29
9.1 Non-Solicitation and Non-Competition............................................. 29
ARTICLE X
MISCELLANEOUS.................................................................... 30
10.1 Certain Definitions.............................................................. 30
10.2 Payment of Sales, Use or Similar Taxes........................................... 36
10.3 Survival of Representations and Warranties....................................... 36
10.4 Expenses......................................................................... 37
10.5 Further Assurances............................................................... 37
10.6 Submission to Jurisdiction; Consent to Service of Process........................ 37
10.7 Entire Agreement; Amendments and Waivers......................................... 37
10.8 Governing Law.................................................................... 38
10.9 Table of Contents and Headings................................................... 38
10.10 Notices.......................................................................... 38
10.11 Severability..................................................................... 39
10.12 Binding Effect; Assignment....................................................... 39
</TABLE>
iii
<PAGE>
SCHEDULES AND EXHIBITS:
Exhibit A -Form of Transition Services Agreement
Exhibit B -Form of Bill of Sale
Exhibit C -Form of Opinion of Seller' Counsel
Schedule 1.1(a)-Scheduled Tangible Assets
Schedule 1.1(b)-Excluded Assets
Schedule 3.1 -List of jurisdictions where the Business is qualified to do
business
Schedule 3.10 -Absence of Certain Developments
Schedule 3.11 -Tax matters
Schedule 3.12 -List of Real Property
Schedule 3.13 -Tangible Personal Property
Schedule 3.14 -Intangible Property
Schedule 3.15 -Material Contracts
Schedule 3.16 -Employee Benefits
Schedule 3.17 -Labor
Schedule 3.18 -Litigation
Schedule 3.19 -Environment Matters
Schedule 3.20 -Insurance
Schedule 3.21 -Related Party Transactions
Schedule 3.22 -Customers and Suppliers
Schedule 3.23 -Banks
Schedule 3.24 -Brokers
Schedule 3.25 -Shares Services
iv
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is made as of March 1, 1999 (herein,
together with the Schedules and Exhibits attached hereto referred to as the
"Agreement") between ZONAGEN, INC., a Delaware corporation ("Zonagen"),
FERTILITY TECHNOLOGIES, INC., a Massachusetts corporation ("FTI" or "Seller"),
and SAGE BIOPHARMA, INC., a Delaware corporation (the "Purchaser").
WHEREAS, FTI is a wholly owned subsidiary of Zonagen engaged in the
business of distributing and selling products for infertility diagnostics and
assisted reproduction technique procedures (the "Business");
WHEREAS, Seller desires to sell and convey to Purchaser, and Purchaser
desires to purchase and assume from Seller, certain assets and certain
liabilities relating to the Business as described herein, upon the terms and
subject to the conditions of this Agreement; and
WHEREAS, Zonagen, as sole Stockholder of FTI, desires to facilitate the
sale by FTI of the Business and accordingly, is willing to enter into the
Transition Services Agreement, this Agreement, and take the other actions
contemplated by this Agreement, upon the terms and subject to the conditions of
this Agreement; and
WHEREAS, certain terms used in this Agreement are defined in
Section 10.1.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter contained, the parties hereby agree as
follows:
ARTICLE I
TRANSFER OF BUSINESS, PROPERTIES AND ASSETS
1.1 Sale and Transfer of Business, Properties and Assets. Subject to the
terms and conditions of this Agreement, at the Closing, Seller shall sell,
transfer, convey, assign and deliver to Purchaser and Purchaser shall purchase
from Seller, the Purchased Assets. It is understood and agreed that those assets
listed on Schedule 1.1(a) hereto shall be included, without limitation, in the
Purchased Assets (the "Scheduled Tangible Assets") and those assets listed on
Schedule 1.1(b) hereto shall be excluded, without limitation, from the Purchased
Assets (the "Excluded Assets"). In addition, Zonagen shall, at the Closing,
assign its obligations and rights under the License Agreements referenced in
Items 4, 5 and 6 to Schedule 3.14 to Purchaser.
1.2 Assumption of Liabilities. Upon the terms and subject to the
conditions contained herein, at the Closing, Purchaser shall assume only the
following Liabilities of the Business (the "Assumed Liabilities"):
1
<PAGE>
(a) all Liabilities accruing, arising out of, or relating to the
Contracts listed on Schedule 3.15 hereto or under the License Agreement
referenced in Items 4, 5 and 6 to Schedule 3.14 hereto, solely to the
extent such Liabilities either (i) are reflected on the Balance Sheet or
incurred after the Balance Sheet Date in the ordinary course of business
consistent with past practice, and constitute Current Liabilities, or (ii)
relate to periods from and after the Closing Date;
(b) all of the accounts payable and other accrued expenses (other than
those relating to Taxes not yet due and payable but which relate to periods
prior to the Determination Date) relating to the Business set forth in the
Balance Sheet or incurred after the Balance Sheet Date in the ordinary
course of business consistent with past practice, in each case, solely to
the extent constituting Current Liabilities; and
(c) all Taxes to the extent specifically provided in Section 8.4 of this
Agreement.
1.3 Excluded Liabilities. Notwithstanding any other provision of this
Agreement, except for the Assumed Liabilities specified in Section 1.2,
Purchaser shall not assume or be responsible for any other Liabilities of Seller
or Zonagen or any of their respective Affiliates ("Excluded Liabilities"),
including, without limitation, any and all Liabilities relating to or arising
out of any of the following:
(a) (i) the sponsorship, administration, contribution obligation of any
entity under any Employee Benefit Plan or Pension Plan or termination of
any Employee Benefit Plan or Pension Plan on or prior to the Closing Date,
(ii) the termination of employment of any employee of the Business,
including, without limitation, Pam Rogers, or (iii) except as expressly
assumed by Purchaser pursuant to Section 2.2(b) hereof, any Liability of
Seller to any employee, including, without limitation, Tom L. Lee, arising
on or prior to the Closing Date;
(b) any cause of action, whether or not pending or threatened on the
Closing Date, except to the extent arising from acts or omissions that
occurred during periods after the Closing Date;
(c) any failure or alleged failure to comply with, or any violation or
alleged violation of, (i) any Permit applicable to the Business or (ii) any
Contract or lease, in each case, which failure or violation occurred or was
alleged to have occurred prior to the Closing Date;
(d) any infringement or alleged infringement of the rights of any other
Person arising out of the use of any Intellectual Property in connection
with the Business prior to the Closing Date;
(e) any Liability for any Taxes (i) arising from the operation of the
Business or the ownership of the Purchased Assets on or before the Closing
Date (ii) arising
2
<PAGE>
pursuant to any Tax allocation or sharing agreement or (iii) to the extent
Seller or Zonagen has specifically agreed to be liable in Section 8.4 of
this Agreement;
(f) any Liabilities pursuant to Environmental Laws and costs and
expenses arising from, relating to, in respect of, or incurred in
connection with (i) any real property, business entities or assets, whether
domestic or foreign, formerly owned, occupied or operated by or in
connection with the Business, (ii) the transportation or disposal of any
Hazardous Substances to or at any offsite facility or location by or in
connection with the Business occurring prior to the Closing Date and (iii)
conditions existing or events occurring on or prior to the Closing Date on
any real property owned, occupied or operated by or in connection with the
Business as of the Closing Date;
(g) any Liabilities of Seller under all retention agreements, severance
agreements, change of control agreements and similar arrangements;
(h) all intercompany obligations and liabilities owed by the Business to
Seller or its Affiliates; or
(i) any indebtedness incurred prior to the Closing Date.
1.4 Purchase Price. Subject to the terms and conditions of this
Agreement, and in reliance on the representations, warranties, undertakings and
agreements of Seller and Zonagen made hereunder, and in consideration of such
sale, conveyance, transfer, assignment and delivery, Purchaser agrees to (i) pay
to Seller $2,250,000 (the "Purchase Price"), subject to adjustment as provided
in Section 1.6 below, and (ii) assume the Assumed Liabilities pursuant to this
Agreement.
1.5 Payment of Estimated Purchase Price. On the Closing Date, the
Purchaser shall pay to the Seller an aggregate of $2,250,000 (the "Estimated
Purchase Price"), which shall be paid by the delivery to Seller of a certified
or bank cashier's check in New York Clearing House Funds, payable to the order
of Seller or, at the Seller's option, by wire transfer of immediately available
funds into an account designated by the Seller.
1.6 Adjustment to Purchase Price.
(a) As soon as practicable following the Closing Date, Zonagen shall
deliver to Purchaser a balance sheet of the Business (the "Determination
Date Balance Sheet") as at the close of business on February 28, 1999 (the
"Determination Date"). The Determination Date Balance Sheet shall be based
upon the books and records of Seller, shall be prepared in accordance with
GAAP applied on a basis consistent with the Financial Statements referred
to in Section 3.8, and shall present fairly the financial position of the
Business as of the Determination Date. Concurrently with the delivery of
the Determination Date Balance Sheet, Zonagen shall deliver to Purchaser a
notice (the "Current Assets and Current Liabilities Notice") specifying (i)
the amount of current assets of the Business as of the Determination Date
included in the Purchased Assets, excluding cash and cash equivalents (the
"Determination Date Current Assets"), as determined by Zonagen in good
3
<PAGE>
faith based on the Determination Date Balance Sheet (the "Current Assets
Determination") and (ii) the amount of current liabilities of the Business
as of the Determination Date included in the Assumed Liabilities (the
"Determination Date Current Liabilities"), as determined by Zonagen in good
faith based on the Determination Date Balance Sheet (the "Current
Liabilities Determination"). The Current Assets Determination and the
Current Liabilities Determination shall become final (the "Final Current
Assets and Current Liabilities Determination") thirty (30) days after the
Current Assets and Current Liabilities Notice is so delivered by Zonagen
unless Purchaser sets forth any objection thereto in a written notice to
Zonagen, which notice shall include the basis for Purchaser's objection to
the Current Assets Determination or the Current Liabilities Determination,
as the case may be, and Purchaser's own determination of the Determination
Date Current Assets or the Determination Date Current Liabilities during
such thirty (30) day period, in which event the parties shall endeavor in
good faith to resolve such dispute within fifteen (15) days after such
notice and failing such resolution to mutually agree upon a partner of a
Big Five accounting firm to resolve such dispute promptly, and in no event
later than 30 days after the 15-day dispute resolution period, and whose
determination shall be final and conclusive. The fees and expenses of the
accounting firm selected to resolve any dispute with respect to either the
Determination Date Current Assets or the Determination Date Current
Liabilities, as the case may be, under this Section 1.6(a) shall be borne
equally by Purchaser and Zonagen.
(b) Within 5 days of the Final Current Assets and Current Liabilities
Determination, Zonagen shall pay to Purchaser, by the delivery to Purchaser
of a certified or bank cashier's check in New York Clearing House funds,
payable to the order of Purchaser or, at Purchaser's option, by wire
transfer of immediately available funds to an account designated by
Purchaser, the amount, if any, by which $416,191 shall exceed the
difference of the Determination Date Current Assets less the Determination
Date Current Liabilities as so determined (the "Determination Date Working
Capital"). If the amount of the Determination Date Working Capital shall
exceed $416,191, Purchaser shall pay to Zonagen, by the delivery to Zonagen
of a certified or bank cashier's check in New York Clearing House funds,
payable to the order of Zonagen or, at Zonagen's option, by wire transfer
of immediately available funds to an account designated by Zonagen, the
amount of such excess.
1.7 Allocation of Purchase Price. The Purchase Price (together with any
liabilities assumed hereunder and other relevant items) shall be allocated among
the Purchased Assets in accordance with the requirements of Section 1060 of the
Internal Revenue Code of 1986, as amended (the "Code"). Zonagen and Purchaser
shall use their reasonable best efforts to agree upon such allocation. Purchaser
shall provide to Zonagen a schedule and supporting material reflecting such
allocation for Zonagen's review and consent. Such consent shall not be
unreasonably withheld. Zonagen, Seller and Purchaser each agrees to report and
file all Tax Returns (including amended Tax Returns and claims for refund)
consistent with such allocation, and shall take no position contrary thereto or
inconsistent therewith (including, without limitation, in any audits or
examinations by any taxing authority or any other proceedings). Zonagen, Seller
and Purchaser shall cooperate in the filing of any forms (including Form 8594)
with respect to such allocation, including any amendments to such forms required
with respect to any adjustment to the Purchase Price
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pursuant to this Agreement. Notwithstanding any other provisions of this
Agreement, the foregoing agreement shall survive the Closing Date without
limitation.
ARTICLE II
CLOSING
2.1 The Closing. Subject to the conditions set forth in Sections 6.1 and
6.2 hereof (or the waiver thereof by the party entitled to waive that
condition), the closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Weil, Gotshal & Manges LLP, 767
Fifth Avenue, New York, New York 10153, on March 11, 1999, or such other place
or on such other date as Seller, Zonagen and Purchaser may mutually agree. The
date on which the Closing shall be held is referred to in this Agreement as the
"Closing Date".
2.2 Instruments of Conveyance, Transfer, Assumption, Etc.
(a) Seller shall execute and deliver to Purchaser at the Closing: (i)
one or more bills of sale, substantially in the form attached hereto as
Exhibit B, conveying the Purchased Assets to Purchaser and (ii) assignments
with respect to each of the contracts and other agreements and rights to be
assigned to Purchaser hereunder and, where required for such assignment,
the consent or waiver of any third party, in each case in form reasonably
satisfactory to Purchaser.
(b) In addition, at the Closing, Seller shall take all steps requisite
to put Purchaser in actual possession and operating control of the
Purchased Assets, including, without limitation, disclosure to such Persons
as the Purchaser may designate of Seller's trade secrets and other
proprietary information pertaining to the Business.
2.3 Further Assurances. At the Closing and from time to time after the
Closing but not in excess of six months following the Closing, (i) at the
request of Purchaser, Seller shall promptly execute and deliver to Purchaser
such certificates and other instruments of sale, conveyance, assignment and
transfer, and take such other action, as may reasonably be requested by
Purchaser more effectively to confirm any obligation assumed by Purchaser
pursuant to the Assumed Liabilities and to convey, assign and transfer to and
vest in Purchaser or to put Purchaser in possession of the Purchased Assets, and
(ii) at the request of Seller, Purchaser shall promptly execute and deliver to
Seller such certificates and other instruments of assumption, and take such
other action, to confirm and carry out the assumption by Purchaser of the
Assumed Liabilities. To the extent that any consents, waivers or approvals
necessary to convey items of Purchased Assets to Purchaser are not obtained
prior to the Closing, Seller and Zonagen shall use their reasonable best efforts
to: (i) provide to Purchaser, at the request of Purchaser, the benefits of any
such Purchased Asset, and hold the same in trust for Purchaser; (ii) cooperate
in any reasonable and lawful arrangement, approved by Purchaser, designed to
provide such benefits to Purchaser; and (iii) enforce and perform, at the
request of Purchaser, for the account of Purchaser, any rights or obligations of
Seller arising from any Purchased Asset against or in respect of any
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third person (including a government or Governmental Body) including the right
to elect to terminate any contract, arrangement or agreement in accordance with
the terms thereof upon the advice of Purchaser.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER AND ZONAGEN
Zonagen and FTI jointly and severally hereby represent and warrant to
the Purchaser that:
3.1 Organization and Good Standing.
Each of FTI and Zonagen is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation as set forth above and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as now conducted. FTI is duly qualified or authorized to do business as a
foreign corporation and is in good standing under the laws of each jurisdiction
in which it owns or leases real property and each other jurisdiction in which
the conduct of its business or the ownership of its properties requires such
qualification or authorization, except where the failure to be so qualified or
authorized would not have a Material Adverse Effect. Schedule 3.1 sets forth a
list of all states in which FTI is authorized or qualified to do business.
3.2 Authorization of Agreement. Each of FTI and Zonagen has all
requisite power, authority and legal capacity to execute and deliver this
Agreement, the Transition Services Agreement in the form of Exhibit A hereto
(the "Transition Services Agreement"), and each other agreement, document, or
instrument or certificate to be executed by either of them in connection with
the consummation of the transactions contemplated by this Agreement (together
with this Agreement and the Transition Services Agreement, the "Seller
Documents"), and to consummate the transactions contemplated hereby and thereby.
This Agreement has been, and each of the Seller Documents will be at or prior to
the Closing, duly and validly executed and delivered by FTI and Zonagen as the
case may be, and (assuming the due authorization, execution and delivery by the
other parties hereto and thereto) this Agreement constitutes, and each of the
Seller Documents when so executed and delivered will constitute, legal, valid
and binding obligations of FTI and/or Zonagen, as the case may be, enforceable
against such party in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity).
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3.3 Capitalization. The authorized capital stock of FTI consists of
15,000 shares of common Stock, no par value per share (the "Common Stock"). As
of the date hereof, there are 10,000 shares of Common Stock issued and
outstanding and no shares of Common Stock are held by FTI as treasury stock.
All of the issued and outstanding shares of Common Stock were duly authorized
for issuance and are validly issued, fully paid and non-assessable.
3.4 No Subsidiaries. The Purchased Assets do not include any stock or
other equity interest in any other Person.
3.5 Corporate Records. Seller has delivered to Purchaser true, correct
and complete copies of the certificate of incorporation (certified by the
Secretary of State or other appropriate official of the applicable jurisdiction
of organization) and by-laws (certified by the secretary, assistant secretary or
other appropriate officer) or comparable organizational documents of FTI.
3.6 Conflicts; Consents of Third Parties. (a) None of the execution and
delivery by Seller or Zonagen of this Agreement and the Seller Documents, the
consummation of the transactions contemplated hereby or thereby, or compliance
by the Seller or Zonagen with any of the provisions hereof or thereof will (i)
conflict with, or result in the breach of, any provision of the certificate of
incorporation or by-laws or comparable organizational documents of FTI; (ii)
conflict with, violate, result in the breach or termination of, or constitute a
default under any note, bond, mortgage, indenture, license, agreement or other
instrument or obligation to which Seller is a party or by which Seller or any of
its properties or assets are bound except as disclosed in Schedule 3.6 hereto;
(iii) violate any statute, rule, regulation, order or decree of any governmental
body or authority by which Seller is bound; or (iv) result in the creation of
any Lien upon the properties or assets of Seller.
(b) No consent, waiver, Order or Permit of, or declaration or filing
with, or notification to, any Person or Governmental Body is required on
the part of the Seller in connection with the execution and delivery of
this Agreement or the Seller Documents, or the compliance by the Seller,
with any of the provisions hereof or thereof, except as provided in
Schedule 3.6 hereto.
3.7 Title to Assets. Schedule 1.1(a) sets forth (i) the tangible assets
of the Business (including equipment, furniture, furnishings, leasehold
improvements, vehicles and fixtures), the location of such items and the
original book value and depreciated book value of such assets where available;
and (ii) all individual refundable deposits, prepaid expenses, deferred charges
and similar assets as of the Balance Sheet Date. FTI has good and marketable
title to, or a valid leasehold interest in, the properties and assets used in
the Business, located on the Business Premises, or shown on the Balance Sheet or
acquired after the date thereof, free and clear of all Liens, except for
Permitted Exceptions and properties and assets disposed of in the ordinary
course of business consistent with past practice since the date of the Balance
Sheet.
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3.8 Financial Statements. Seller has delivered to Purchaser copies of
the unaudited balance sheets of FTI as at December 31, 1996, 1997 and 1998 and
the related unaudited statements of income of FTI for the years then ended (such
unaudited statements are referred to herein as the "Financial Statements"). Each
of the Financial Statements is complete and correct in all material respects,
has been prepared in accordance with GAAP (subject to normal year-end
adjustments) and in conformity with the practices consistently applied by FTI
without modification of the accounting principles used in the preparation
thereof and presents fairly the financial position and results of operations of
FTI as at the dates and for the periods indicated. The schedule dated March 8,
1999 of international sales by vendor of FTI for the years 1996, 1997 and 1998
is complete and accurate in all material respects.
For the purposes hereof, the unaudited balance sheet of FTI as at
December 31, 1998 is referred to as the "Balance Sheet" and December 31, 1998,
is referred to as the "Balance Sheet Date."
3.9 No Undisclosed Liabilities. Seller has no indebtedness, obligations
or liabilities of any kind (whether accrued, absolute, contingent or otherwise,
and whether due or to become due) that would have been required to be reflected
in, reserved against or otherwise described on the Balance Sheet or in the notes
thereto in accordance with GAAP which was not fully reflected in, reserved
against or otherwise described in the Balance Sheet or the notes thereto or was
not incurred in the ordinary course of business consistent with past practice
since the Balance Sheet Date.
3.10 Absence of Certain Developments. Except as expressly contemplated
by this Agreement or as set forth in Schedule 3.10, since the Balance Sheet
Date:
(a) there has not been any Material Adverse Change nor has there
occurred any event which is reasonably likely to result in a Material
Adverse Change;
(b) there has not been any damage, destruction or loss, whether or not
covered by insurance, with respect to the property and assets of the
Business having a replacement cost of more than $10,000 for any single loss
or $25,000 for all such losses;
(c) there has not been any declaration, setting aside or payment of any
dividend or other distribution in respect of any shares of capital stock of
FTI or any repurchase, redemption or other acquisition by Seller or Zonagen
of any outstanding shares of capital stock or other securities of, or other
ownership interest in, FTI;
(d) Seller has not awarded or paid any bonuses to employees of FTI with
respect to the fiscal year ended December 31, 1998, except to the extent
accrued on the Balance Sheet or entered into any employment, deferred
compensation, severance or similar agreement (nor amended any such
agreement) or agreed to increase the compensation payable or to become
payable to any employees, agents or representatives of FTI or agreed to
increase the coverage or benefits available under any severance pay,
termination pay, vacation pay, company awards, salary continuation for
disability, sick leave, deferred
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compensation, bonus or other incentive compensation, insurance, pension or
other employee benefit plan, payment or arrangement made to, for or with
such directors, officers, employees, agents or representatives (other than
normal increases in the ordinary course of business consistent with past
practice and that in the aggregate have not resulted in a material increase
in the benefits or compensation expense of FTI);
(e) there has not been any change by FTI or Zonagen in accounting or Tax
reporting principles, methods or policies;
(f) Neither FTI nor Zonagen has not entered into any transaction or
Contract with respect to the Business or conducted the Business other than
in the ordinary course consistent with past practice;
(g) Seller has not failed to promptly pay and discharge current
liabilities with respect to the Business except where disputed in good
faith by appropriate proceedings;
(h) Neither FTI nor Zonagen has with respect to the Business made any
loans, advances or capital contributions to, or investments in, any Person
or paid any fees or expenses to Zonagen or any Affiliate of Zonagen;
(i) Neither FTI nor Zonagen has with respect to the Business mortgaged,
pledged or subjected to any Lien any of the Purchased Assets, or acquired
any assets or sold, assigned, transferred, conveyed, leased or otherwise
disposed of any assets of the Business, except for assets acquired or sold,
assigned, transferred, conveyed, leased or otherwise disposed of in the
ordinary course of business consistent with past practice;
(j) Neither FTI nor Zonagen has with respect to the Business discharged
or satisfied any Lien, or paid any obligation or liability (fixed or
contingent), except in the ordinary course of business consistent with past
practice and which, in the aggregate, would not be material to the
Business;
(k) Neither FTI nor Zonagen has with respect to the Business canceled or
compromised any debt or claim or amended, canceled, terminated,
relinquished, waived or released any Contract or right except in the
ordinary course of business consistent with past practice and which, in the
aggregate, would not be material to the Business;
(l) Neither FTI nor Zonagen has with respect to the Business made or
committed to make any capital expenditures or capital additions or
betterments in excess of $10,000 individually or $25,000 in the aggregate;
(m) Neither FTI nor Zonagen has instituted or settled any material Legal
Proceeding with respect to the Business except as contemplated in Section
6.1(g); and
(n) Neither FTI nor Zonagen has agreed to do anything set forth in this
Section 3.10.
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3.11 Taxes.
(a) Except as set forth in Schedule 3.11(a), (i) all material Tax
Returns required to be filed by, on behalf of, or with respect to the
Business have been filed on a timely basis with the appropriate Taxing
Authority in which such Tax Returns are required to be filed (after giving
effect to any valid extensions of time in which to make such filings); and
(ii) all material Taxes due and payable in respect of such Tax Returns with
respect to the Business (whether or not shown on such returns) have been
fully and timely paid or are adequately provided for in the Financial
Statements.
(b) With respect to the Business, Seller and its Affiliates do not have
any liability for Taxes of any other Person pursuant to Treas. Reg.
(S) 1.1502-6 (or any similar provision of state, local or foreign law);
(c) With respect to the Business, Seller and its Affiliates have duly
and timely withheld and paid over to the appropriate Taxing Authority all
Taxes and other amounts required to be so withheld and paid over for all
periods under all applicable laws in connection with amounts paid or owing
to any employee, independent contractor, subcontractor, lender, stockholder
or other third party or other personnel supplied by any third party.
(d) Except as set forth in Schedule 3.11(d), neither the Seller nor any
of its Affiliates (i) has received notice (written or oral) of any
assessment or intent to make any assessment by any Taxing Authority
regarding Taxes imposed on or with respect to the Business for any period
for which Tax Returns have been filed; (ii) has received any notice
(written or oral) of a claim made by any Taxing Authority in a jurisdiction
where such parties do not file Tax Returns with respect to the Business
that any of them is or may be subject to taxation by that jurisdiction or
is obliged to act as withholding agent under the laws of that jurisdiction
with respect to the Business; (iii) has any knowledge that there is a
dispute or claim concerning any Tax Liability of Seller or its Affiliates
with respect to the Business claimed or raised by any Taxing Authority
during any presently pending audit or proceeding; and (iv) has any waiver
or extension of any statute of limitations that is either in effect or has
been in connection with any Tax Returns with respect to the Business.
(e) There are no Liens on any of the assets of the Business that arose
in connection with any failure (or alleged failure) to pay any Taxes.
(f) Except as set forth in Schedule 3.11(f), the performance of the
transactions contemplated by this Agreement will not (either alone or upon
the occurrence of any additional or subsequent event) result in, nor do the
Assumed Liabilities otherwise provide for, any payment by Purchaser that
would constitute an "excess parachute payment" within the meaning of
Section 280G of the Code.
(g) Seller is not a foreign person within the meaning of Section 1445 of
the Code.
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(h) Except as set forth in Schedule 3.11(h), none of the assets of the
Business is (i) property required to be treated as being owned by another
Person pursuant to the provisions of Section 168(f)(8) of the Internal
Revenue Code of 1954, as amended and in effect immediately prior to the
enactment of the Tax Reform Act of 1986; (ii) "tax-exempt use property"
within the meaning of Section 168(h) of the Code; or (iii) tax exempt bond
financed property within the meaning of Section 168(g)(5) of the Code.
(i) Schedule 3.11(i) sets forth each and every Taxing Jurisdiction in
which the nature of the Business or the Purchased Assets either requires
Seller to (i) file income or franchise tax returns, (ii) collect sales or
use taxes, or (iii) pay ad valorem real or personal property taxes.
Schedule 3.11(i) also sets forth each and every Taxing Jurisdiction in
which (i) consummation of the transactions that are the subject of this
Agreement subjects the Purchaser to a liability for any Taxes of Seller or
its Affiliates; or (ii) the nature of Seller's business or assets requires
the Seller or Purchaser to notify a Taxing Authority of the transactions
that are the subject of this Agreement, if the failure to make such
notification would subject Purchaser to a liability for any Taxes of Seller
or its Affiliates.
3.12 Real Property.
(a) Schedule 3.12(a) sets forth a complete list of (i) all real property
and interests in real property owned in fee by FTI (individually, an "Owned
Property" and collectively, the "Owned Properties"), and (ii) all real
property and interests in real property leased by FTI (individually, a
"Real Property Lease" and the real properties specified in such leases,
together with the Owned Properties, being referred to herein individually
as a "Company Property" and collectively as the "Company Properties") as
lessee or lessor. The Company Property constitutes all interests in real
property currently used or currently held for use in connection with the
Business and which are necessary for the continued operation of the
Business as currently conducted. FTI has a valid and enforceable leasehold
interest under each of the Real Property Leases, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally and subject, as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity), and FTI has not
received any written notice of any default or event that with notice or
lapse of time, or both, would constitute a default by FTI under any of the
Real Property Leases. All of the Company Property, buildings, fixtures and
improvements thereon owned or leased by FTI are in good operating condition
and repair (subject to normal wear and tear). Seller has delivered or
otherwise made available to the Purchaser true, correct and complete copies
of (i) all deeds, title reports and surveys for the Owned Properties and
(ii) the Real Property Leases, together with all amendments, modifications
or supplements, if any, thereto.
(b) Seller has all material certificates of occupancy and Permits of any
Governmental Body necessary or useful for the current use and operation of
each Company Property, and Seller has fully complied with all material
conditions of the Permits applicable to the Business. No default or
violation, or event that with the lapse of time or giving of notice or both
would become a default or violation, has occurred in the due observance of
any Permit.
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(c) There does not exist any actual or, to the knowledge of Seller,
threatened or contemplated condemnation or eminent domain proceedings that
affect any Company Property or any part thereof, and Seller has not
received any notice, oral or written, of the intention of any Governmental
Body or other Person to take or use all or any part thereof.
(d) Seller has not received any written notice from any insurance
company that has issued a policy with respect to any Company Property
requiring performance of any structural or other repairs or alterations to
such Company Property.
(e) Seller does not hold, and is not obligated under or a party to, any
option, right of first refusal or other contractual right to purchase,
acquire, sell, assign or dispose of any real estate or any portion thereof
or interest therein.
3.13 Tangible Personal Property.
(a) Schedule 3.13(a) sets forth all leases of personal property
("Personal Property Leases") involving annual payments in excess of $10,000
relating to personal property used in the Business. Seller has delivered or
otherwise made available to Purchaser true, correct and complete copies of
the Personal Property Leases, together with all amendments, modifications
or supplements thereto.
(b) Seller has a valid leasehold interest under each of the Personal
Property Leases under which either Seller is a lessee, subject to
applicable bankruptcy, insolvency, reorganization, moratorium and similar
laws affecting creditors' rights and remedies generally and subject, as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity), and there is no
default under any Personal Property Lease by Seller or, to the knowledge of
Seller, by any other party thereto, and no event has occurred that with the
lapse of time or the giving of notice or both would constitute a default
thereunder.
(c) Seller has good and marketable title to all of the items of tangible
personal property reflected in the Balance Sheet (except as sold or
disposed of subsequent to the date thereof in the ordinary course of
business consistent with past practice), free and clear of any and all
Liens other than the Permitted Exceptions. All such items of tangible
personal property which, individually or in the aggregate, are material to
the operation of the Business are in good condition and in a state of good
maintenance and repair (ordinary wear and tear excepted) and are suitable
for the purposes used; provided, however, that no representation is made
with respect to compliance with year 2000 issues.
(d) All of the items of tangible personal property used by Seller under
the Personal Property Leases are in good condition and repair (ordinary
wear and tear excepted) and are suitable for the purposes used.
3.14 Intangible Property. Schedule 3.14 contains a complete and correct
list of each patent, trademark, trade name, service mark and copyright owned or
used by FTI or
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by Zonagen with respect to the Business as well as all registrations thereof and
pending applications therefor, and each license or other agreement relating
thereto. Except as set forth on Schedule 3.14, each of the foregoing is owned by
the party shown on such Schedule as owning the same, free and clear of all
mortgages, claims, liens, security interests, charges and encumbrances and is in
good standing and not the subject of any challenge. There have been no claims
made and neither Zonagen nor Seller has received any notice or otherwise knows
or has reason to believe that any of the foregoing is invalid or conflicts with
the asserted rights of others. Zonagen and Seller possess all patents, patent
licenses, trade names, trademarks, service marks, brand marks, brand names,
copyrights, know-how, formulate and other proprietary and trade rights necessary
for the conduct of the Business as now conducted, not subject to any
restrictions and without any known conflict with the rights of others and
neither Zonagen nor Seller has forfeited or otherwise relinquished any such
patent, patent license, trade name, trademark, service mark, brand mark, brand
name, copyright, know-how, formulate or other proprietary right necessary for
the conduct of the Business as conducted on the date hereof. Neither Zonagen nor
Seller is under any obligation to pay any royalties or similar payments in
connection with any license relating to the Business, except as to the License
Agreements described in Items 4, 5 and 6 to Schedule 3.14.
3.15 Material Contracts. Schedule 3.15 sets forth all of the following
Contracts to which Seller is a party or by which it is bound with respect to the
Business (collectively, the "Material Contracts"): (i) Contracts with any
officer, director or Affiliate of Seller; (ii) Contracts with any labor union or
association representing any employee of the Business; (iii) Contracts pursuant
to which any party is required to purchase or sell a stated portion of its
requirements or output from or to another party; (iv) Contracts for the sale of
any of the assets of the Business other than in the ordinary course of business
or for the grant to any person of any preferential rights to purchase any of its
assets; (v) joint venture agreements; (vi) material Contracts containing
covenants of Seller, or any employee of Seller with respect to the Business, not
to compete with any Person or with the Business; (vii) Contracts providing for
exclusive rights with respect to the purchase or sale of any goods or services
by or to Seller in respect of the Business; (viii) Contracts relating to the
borrowing of money; (ix) royalty arrangements or (x) any Contracts, with vendors
and all other Contracts, which involve the expenditure of more than $25,000 in
the aggregate or $10,000 annually or require performance by any party more than
one year from the date hereof. There have been made available to Purchaser, its
Affiliates and their representatives true and complete copies of all of the
Material Contracts. Except as set forth on Schedule 3.15, all of the Material
Contracts and other agreements are in full force and effect and are the legal,
valid and binding obligation of Seller, enforceable against such parties in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally and subject, as to enforceability, to general principles of
equity (regardless of whether enforcement is sought in a proceeding at law or in
equity). Except as set forth on Schedule 3.15, Seller is not in default in any
material respect under any Material Contracts, nor, to the knowledge of Seller,
is any other party to any Material Contract in default thereunder in any
material respect.
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3.16 Employee Benefits.
(a) Schedule 3.16(a) sets forth a complete and correct list of (i) all
"employee benefit plans", as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and any other
pension plans or employee benefit arrangements, programs or payroll
practices (including, without limitation, severance pay, vacation pay,
company awards, salary continuation for disability, sick leave, retirement,
deferred compensation, bonus or other incentive compensation, stock
purchase arrangements or policies, hospitalization, medical insurance, life
insurance and scholarship programs) maintained by Seller or Zonagen or to
which Seller or Zonagen contributes or is obligated to contribute
thereunder with respect to employees of the Business ("Employee Benefit
Plans") and (ii) all "employee pension plans", as defined in Section 3(2)
of ERISA, maintained by Seller or Zonagen or any trade or business (whether
or not incorporated) which are under control, or which are treated as a
single employer, with FTI under Section 414(b), (c), (m) or (o) of the
("ERISA Affiliate") or to which Seller or any ERISA Affiliate contributed
or is obligated to contribute thereunder ("Pension Plans"). Schedule
3.16(a) clearly identifies, in separate categories, Employee Benefit Plans
or Pension Plans that are (i) subject to Section 4063 and 4064 of ERISA
("Multiple Employer Plans"), (ii) multiemployer plans (as defined in
Section 4001(a)(3) of ERISA) ("Multiemployer Plans") or (iii) "benefit
plans", within the meaning of Section 5000(b)(1) of the Code providing
continuing benefits after the termination of employment (other than as
required by Section 4980B of the Code or Part 6 of Title I of ERISA and at
the former employee's or his beneficiary's sole expense).
(b) Seller does not have any withdrawal or other liability (contingent
or otherwise) under Title IV of ERISA with respect to any Multiple Employer
Plan or Multiemployer Plan, as a result of the transactions contemplated by
this Agreement.
(c) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment becoming due to any employee of the Business; (ii) increase any
benefits otherwise payable under any Employee Benefit Plan or Pension Plan;
or (iii) result in the acceleration of the time of payment or vesting of
any such benefits.
3.17 Labor.
(a) Except as set forth on Schedule 3.17(a), Seller is not a party to
any labor or collective bargaining agreement and there are no labor or
collective bargaining agreements which pertain to employees of the
Business. Seller has delivered or otherwise made available to Purchaser
true, correct and complete copies of the labor or collective bargaining
agreements listed on Schedule 3.17(a), together with all amendments,
modifications or supplements thereto.
(b) Except as set forth on Schedule 3.17(b), no employees of the
Business are represented by any labor organization. No labor organization
or group of employees of the Business has made a pending demand for
recognition, and there are no representation proceedings or petitions
seeking a representation proceeding presently pending or, to the
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knowledge of the Seller, threatened to be brought or filed, with the
National Labor Relations Board or other labor relations tribunal. There is
no organizing activity involving the Business pending or, to the knowledge
of Seller, threatened by any labor organization or group of employees of
the Business.
(c) There are no (i) strikes, work stoppages, slowdowns, lockouts or
arbitrations or (ii) material grievances or other labor disputes pending
or, to the knowledge of the Seller, threatened against or involving the
Business. There are no unfair labor practice charges, grievances or
complaints pending or, to the knowledge of Seller, threatened by or on
behalf of any employee or group of employees of the Business.
3.18 Litigation. Except as set forth in Schedule 3.18, there is no suit,
action, proceeding, investigation, claim or order pending or, to the knowledge
of Seller or Zonagen, overtly threatened against Seller relating to the Business
(or to the knowledge of Seller or Zonagen, pending or threatened, against any of
the officers, directors or key employees of FTI with respect to their business
activities on behalf of Seller), or to which Seller is otherwise a party, which,
if adversely determined, would have a Material Adverse Effect, before any court,
or before any governmental department, commission, board, agency, or
instrumentality; nor to the knowledge of Seller is there any reasonable basis
for any such action, proceeding, or investigation. Seller is not subject to any
judgment, order or decree of any court or governmental agency relating to the
Business except to the extent the same are not reasonably likely to have a
Material Adverse Effect and Seller is not engaged in any legal action to recover
monies due it or for damages sustained by it in relation to the Business.
3.19 Compliance with Laws; Permits. Seller is in compliance with all
Laws applicable to the Business or the Purchased Assets, except for such non-
compliances as would not, individually or in the aggregate, have a Material
Adverse Effect. Seller has all governmental permits and approvals from state,
federal or local authorities which are required to operate the Business, except
for those the absence of which would not, individually or in the aggregate, have
a Material Adverse Effect.
3.20 Environmental Matters. Except as set forth on Schedule 3.20 hereto:
(a) the operations of the Business are in compliance with all applicable
Environmental Laws and all permits issued pursuant to Environmental Laws or
otherwise;
(b) FTI has obtained all permits required under all applicable
Environmental Laws necessary to operate its business;
(c) Seller is not the subject of any outstanding written order or
Contract with any governmental authority or Person with respect to the
Business concerning (i) Environmental Laws, (ii) Remedial Action or (iii)
any Release or threatened Release of a Hazardous Material;
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(d) Seller has not received any written communication alleging both that
Seller with respect to the Business may be in violation of any
Environmental Law, or any permit issued pursuant to Environmental Law, or
may have any liability under any Environmental Law;
(e) Seller does not have, with respect to the Business, any current
contingent liability in connection with any Release of any Hazardous
Materials into the indoor or outdoor environment (whether on-site or off-
site);
(f) to Seller's knowledge, there are no investigations of the Business
or the Purchased Assets, pending or threatened which could lead to the
imposition of any liability pursuant to Environmental Law;
(g) there is not located at any of the properties of the Business any
(i) underground storage tank, (ii) asbestos-containing material or (iii)
equipment containing polychlorinated biphenyls; and,
(h) Seller has provided to Purchaser all environmentally related audits,
studies, reports, analyses, and results of investigations that have been
performed with respect to the currently or previously owned, leased or
operated properties of FTI or the Business.
3.21 Insurance. Schedule 3.21 sets forth a complete and accurate list of
all policies of insurance of any kind or nature currently covering the Business
or any employees, properties or assets of the Business, including, without
limitation, policies of life, disability, fire, theft, workers compensation,
employee fidelity, product liability and other casualty and liability insurance.
All such policies are in full force and effect, and, to the Seller's knowledge,
FTI is not in default of any provision thereof, except for such defaults as
would not, individually or in the aggregate, have a Material Adverse Effect.
3.22 Inventories; Receivables; Payables.
(a) The inventories of the Business are in good and marketable
condition, and are saleable in the ordinary course of business. Adequate
reserves have been reflected in the Balance Sheet for shorts, drops, off-
cuts, obsolete or otherwise unusable inventory, which reserves were
calculated in a manner consistent with past practice and in accordance with
GAAP consistently applied.
(b) All accounts receivable of the Business have arisen from bona fide
transactions in the ordinary course of business consistent with past
practice. Except as disclosed on Schedule 3.22, all accounts receivable of
the Business reflected on the Balance Sheet are good and collectible at the
aggregate recorded amounts thereof, net of any applicable reserve for
returns or doubtful accounts reflected thereon, which reserves are adequate
and were calculated in a manner consistent with past practice and in
accordance with GAAP consistently applied. All accounts receivable arising
after the Balance Sheet Date and prior to the Closing Date are good and
collectible at the aggregate recorded amounts thereof, net of any
applicable reserve for returns or doubtful accounts, which
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reserves are adequate and were calculated in a manner consistent with past
practice and in accordance with GAAP consistently applied.
(c) All accounts payable of the Business reflected in the Balance Sheet
or arising after the date thereof are the result of bona fide transactions
in the ordinary course of business and have been paid or are not yet due
and payable.
3.23 Related Party Transactions. Except as set forth on Schedule 3.23,
neither Seller nor any of its Affiliates has borrowed any moneys from or has
outstanding any indebtedness or other similar obligations to the Business.
Except as set forth in Schedule 3.23, neither Seller nor its Affiliates nor any
officer or employee of any of them (i) owns any direct or indirect interest of
any kind in, or controls or is a director, officer, employee or partner of, or
consultant to, or lender to or borrower from or has the right to participate in
the profits of, any Person which is (A) a competitor, supplier, customer,
landlord, tenant, creditor or debtor of FTI, (B) engaged in a business related
to the Business, or (C) a participant in any transaction to which FTI or Zonagen
with respect to the Business is a party or is a party to any Contract with FTI
or Zonagen with respect to the Business to any Contract with FTI.
3.24 Relationships with Customers and Suppliers. (a) Seller and Zonagen
believe that the relationships of Seller with the existing customers and
suppliers of the Business are sound, and, to the knowledge of the Seller, except
as disclosed in Schedule 3.24 there is no reasonable basis to believe that any
of the primary customers or suppliers of the Business will materially and
adversely change the manner in which they currently conduct business with FTI,
provided, however that nothing herein is intended to express any representation
or warranty on any impact that this Agreement and the transactions contemplated
herein may have on any such relationships.
(b) To the knowledge of Seller and Zonagen, there has been no written or
oral communication, fact, event or action which exists or has occurred
within 120 days prior to the date of this Agreement that would indicate
that any of the following shall terminate or materially reduce its business
with FTI:
(i) any current customer of the Business which accounted for over 5% of
total consolidated net sales of FTI for its most recently completed fiscal
year; or
(ii) any current supplier of items essential to the conduct of the
Business, which items cannot be replaced at comparable cost and the loss of
which would have a Material Adverse Effect.
(c) Since the Balance Sheet Date, (A) FTI has retained all sales
personnel employed in connection with the operation of the Business and (B)
no customer (or group of customers) purchasing in the aggregate of $25,000
in products and services of the Business on a yearly basis has terminated
its relationship with FTI.
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(d) The database to be furnished at Closing by Seller to Purchaser
contains the names and addresses of all customers of the Business during
fiscal year 1998. All contracts and agreements with such customers are
valid, effective and enforceable and Schedule 3.24 sets forth all customers
who have account balances that are in excess of 90 days past due and the
amount of any such delinquent account balances.
3.25 Banks. Schedule 3.25 contains a complete and correct list of the
names and locations of all banks in which FTI has accounts or safe deposit boxes
and the names of all persons authorized to draw thereon or to have access
thereto. Except as set forth on Schedule 3.25, no person holds a power of
attorney to act on behalf of FTI.
3.26 No Misrepresentation. No representation or warranty of Seller or
Zonagen contained in this Agreement or in any schedule hereto or in any
certificate or other instrument furnished by Seller or Zonagen to Purchaser
pursuant to the terms hereof, to the extent such representations and warranties
relate to Seller, Zonagen or the Business contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
contained herein or therein, in light of the circumstances under which they were
made, not misleading.
3.27 Financial Advisors. Except as set forth on Schedule 3.27, no Person
has acted, directly or indirectly, as a broker, finder or financial advisor for
the Seller or Zonagen in connection with the transactions contemplated by this
Agreement and no Person is entitled to any fee or commission or like payment in
respect thereof.
3.28 Shared Services. Except as described in Schedule 3.28 hereto, there
are no material assets or services of or provided to FTI that are allocated or
shared between FTI and any other operating unit, division or business of
Zonagen.
3.29 Asset Transfers. Prior to the execution and delivery of this
Agreement, Zonagen has conveyed to FTI those assets of Zonagen and its
Affiliates used in or relating to the Business as set forth on Schedule 3.29,
and FTI has conveyed to Zonagen all cash on hand and in all bank accounts on the
Determination Date and those assets of FTI, unrelated to the Business as set
forth on Schedule 3.29.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller and Zonagen that:
4.1 Organization and Good Standing. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
4.2 Authorization of Agreement. Purchaser has full corporate power and
authority to execute and deliver this Agreement, the Transition Services
Agreement and each other agreement, document, instrument or certificate
contemplated by this Agreement or to
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be executed by Purchaser in connection with the consummation of the transactions
contemplated hereby and thereby (together with the Transition Services
Agreement, the "Purchaser Documents"), and to consummate the transactions
contemplated hereby and thereby. The execution, delivery and performance by
Purchaser of this Agreement and each Purchaser Document have been duly
authorized by all necessary corporate action on behalf of the Purchaser. This
Agreement has been, and each Purchaser Document will be at or prior to the
Closing, duly executed and delivered by Purchaser and (assuming the due
authorization, execution and delivery by the other parties hereto and thereto)
this Agreement constitutes, and each Purchaser Document when so executed and
delivered will constitute, legal, valid and binding obligations of Purchaser,
enforceable against the Purchaser in accordance with their respective terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws affecting creditors' rights and remedies generally, and subject, as
to enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity).
4.3 Conflicts; Consents of Third Parties.
(a) Neither the execution and delivery by Purchaser of this Agreement
and of the Purchaser Documents, nor the compliance by Purchaser with any of
the provisions hereof or thereof will (i) conflict with, or result in the
breach of, any provision of the certificate of incorporation or by-laws of
Purchaser, (ii) conflict with, violate, result in the breach of, or
constitute a default under any note, bond, mortgage, indenture, license,
agreement or other obligation to which the Purchaser is a party or by which
Purchaser or its properties or assets are bound or (iii) violate any
statute, rule, regulation, order or decree of any Governmental Body or
authority by which Purchaser is bound, except, in the case of clauses (ii)
and (iii), for such violations, breaches or defaults as would not,
individually or in the aggregate, have a Material Adverse Effect on the
business, properties, results of operations, prospects, conditions
(financial or otherwise) of Purchaser and its subsidiaries, taken as a
whole.
(b) No consent, waiver, approval, Order, Permit or authorization of, or
declaration or filing with, or notification to, any Person or Governmental
Body is required on the part of Purchaser in connection with the execution
and delivery of this Agreement or the Purchaser Documents or the compliance
by Purchaser with any of the provisions hereof or thereof.
4.4 Litigation. There are no Legal Proceedings pending or, to the
knowledge of Purchaser, threatened that are reasonably likely to prohibit or
restrain the ability of Purchaser to enter into this Agreement or consummate the
transactions contemplated hereby.
4.5 Financial Advisors. No Person has acted, directly or indirectly, as
a broker, finder or financial advisor for the Purchaser in connection with the
transactions contemplated by this Agreement and no person is entitled to any fee
or commission or like payment in respect thereof.
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ARTICLE V
COVENANTS
The parties hereto agree as follows with respect to the period following
the Closing:
5.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the parties hereto will take such further action (including the
execution and delivery of such further instruments and documents) as any other
party reasonably may request, all at the sole cost and expense of the requesting
party (unless the requesting party is entitled to indemnification therefor under
Article VIII below). Seller acknowledges and agrees that from and after the
Closing, Purchaser will be entitled to possession of all documents, books,
records, agreements, and financial data of any sort relating to the Purchased
Assets or the Business, provided that Seller will be afforded access thereto
upon request for the purpose of preparing Tax Returns, complying with the terms
of Section 1.6 hereof, dealing with examinations or audits or performing their
indemnification obligations under Article VIII hereof.
5.2 Transition. Unless otherwise requested by Purchaser, Seller will
not, and will cause their Affiliates not to, take any action that is designed or
intended to have the effect of discouraging any lessor, licensor, customer,
supplier, or other business associate of FTI or Zonagen with respect to the
Business from maintaining the same business relationships with Purchaser after
the Closing as it maintained with respect to the Business prior to the Closing.
5.3 Confidentiality. Seller and Zonagen will treat and hold as such all
of the Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
Purchaser or destroy, at the request and option of Purchaser, all tangible
embodiments (and all copies) of the Confidential Information which are in their
possession. In the event that Seller or Zonagen is requested or required (by
oral question or request for information or documents in any legal proceeding,
interrogatory, subpoena, civil investigative demand, or similar process) to
disclose any Confidential Information, such party will notify Purchaser promptly
of the request or requirement so that Purchaser may seek an appropriate
protective order or waive compliance with the provisions of this Section 5.3.
If, in the absence of a protective order or the receipt of a waiver hereunder,
Seller or Zonagen is, on the advice of counsel, compelled to disclose any
Confidential Information to any tribunal or else stand liable for contempt, then
Seller or Zonagen may disclose the Confidential Information to such tribunal;
provided, however, that Seller or Zonagen shall use its reasonable efforts to
obtain, at the request of Purchaser, an order or other assurance that
confidential treatment will be accorded to such portion of the Confidential
Information required to be disclosed as Purchaser shall designate. The foregoing
provisions shall not apply to any Confidential Information which is generally
available to the public immediately prior to the time of disclosure, or was
disclosed to Seller or Zonagen by a third party not in violation of an existing
confidentiality agreement
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with or duty in favor of Purchaser; is independently developed by employees of
Seller or Zonagen not privy to such Confidential Information; or is necessary to
be disclosed in order for Seller or Zonagen to comply with the terms of this
Agreement. The obligations contained herein terminate on the third anniversary
of the Closing Date.
5.4 Bulk Transfer Laws. Notwithstanding anything to the contrary in this
Agreement, the parties hereby waive compliance with any bulk transfer or similar
laws of any jurisdiction in connection with the transactions contemplated by
this Agreement.
5.5 Publicity. Neither the Seller, Zonagen nor the Purchaser shall issue
any press release or public announcement concerning this Agreement or the
transactions contemplated hereby without obtaining the prior written approval of
the other party hereto, which approval will not be unreasonably withheld or
delayed, unless, in the sole judgment of the Purchaser or Zonagen, disclosure is
otherwise required by applicable Law or by the applicable rules of any stock
exchange on which Purchaser or Zonagen lists securities, provided that, to the
extent required by applicable law, the party intending to make such release
shall use its best efforts consistent with such applicable law to consult with
the other party with respect to the text thereof.
5.6 Use of Name. To the knowledge of Seller, upon the consummation of
the transaction contemplated hereby, Purchaser shall have the sole right to the
use of the name "Fertility Technologies, Inc." and the Seller shall not, and
shall not cause or permit any Affiliate to, use such name or any variation of
simulation thereof in any venture involving the Business or any related
business. Promptly following the Closing, FTI shall change its corporate name in
order to comply herewith.
5.7 Notification of Taxing Authorities. Except as otherwise provided in
Section 8.4, Seller shall notify any Taxing Authority of the transactions
contemplated by this Agreement in the form and in the manner required by
applicable Tax law and regulations in any Taxing Jurisdiction, if the failure to
make such notifications or receive any available tax clearances would subject
Purchaser to any Taxes of Seller or its Affiliates.
5.8 Mutual Release. The parties hereto, for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
forever release and discharge the other and their present and former parents,
subsidiaries and affiliates and each of their present and former officers,
employees, directors, agents, attorneys, successors and assigns from any and all
actions, causes of action, suits, debts sums of money, judgments, claims and any
liability whatsoever, known or unknown, matured or unmatured, which either party
had or hereafter has, can, shall or may have, from the beginning of the world to
the date hereof, pertaining to the litigations styled Sage BioPharma, Inc. et.
al. v. Vivan et al., No. 98 Civ. 8360 (S.D.N.Y.) and Sage BioPharma, Inc. et.
al. v. Berman et. al., No. 98 Civ. 1964 (W.D. Pa.). Nothing in this mutual
release shall be construed in any way to release the parties hereto from any
liability, if any should arise, relating to this Agreement or the Transition
Services Agreement or the documents entered into in connection herewith or
therewith or the transactions contemplated hereby or thereby.
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ARTICLE VI
CONDITIONS TO CLOSING
6.1 Conditions Precedent to Obligations of Purchaser. The obligation of
the Purchaser to consummate the transactions contemplated by this Agreement is
subject to the fulfillment, on or prior to the Closing Date, of each of the
following conditions (any or all of which may be waived by Purchaser in whole or
in part to the extent permitted by applicable law):
(a) all representations and warranties of Seller and Zonagen contained
herein qualified as to materiality shall be true and correct, and the
representations and warranties of the Seller and Zonagen contained herein
not qualified as to materiality shall be true and correct in all material
respects, at and as of the Closing Date, except to the extent expressly
made as of an earlier date;
(b) Seller and Zonagen shall have performed and complied in all material
respects with all obligations and covenants required by this Agreement to
be performed or complied with by Seller and Zonagen on or prior to the
Closing Date;
(c) there shall not have been or occurred any Material Adverse Change
since the Balance Sheet Date;
(d) Seller and/or Zonagen shall have obtained all consents and waivers
referred to in Section 3.6 hereof, in a form reasonably satisfactory to
Purchaser, which are necessary to consummate the transactions contemplated
by this Agreement and the Seller Documents;
(e) no Legal Proceedings shall have been instituted or threatened or
claim or demand made against Seller, Zonagen, or Purchaser seeking to
restrain or prohibit or to obtain damages which individually or in the
aggregate would reasonably be expected to have a Material Adverse Effect on
the Business, with respect to the consummation of the transactions
contemplated hereby, and there shall not be in effect any Order by a
Governmental Body of competent jurisdiction restraining, enjoining or
otherwise prohibiting the consummation of the transactions contemplated
hereby;
(f) Seller shall provide Purchaser with an affidavit of non-foreign
status that complies with Section 1445 of the Code (a "FIRPTA Affidavit");
(g) Purchaser and Seller shall have caused the dismissal of the
litigation between them or their Affiliates and employees pursuant to
mutually agreeable documentation; and
(h) Seller has obtained from all Taxing Authorities located in the
Taxing Jurisdictions listed in Schedule 3.11 any tax clearances available
under the laws of the applicable Taxing Jurisdiction relieving Purchaser of
any liabilities of Seller or its Affiliates, except as otherwise provided
in Section 8.4.
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6.2 Conditions Precedent to Obligations of Seller. The obligations of
Seller and Zonagen to consummate the transactions contemplated by this Agreement
are subject to the fulfillment, prior to or on the Closing Date, of each of the
following conditions (any or all of which may be waived by Seller or Zonagen in
whole or in part to the extent permitted by applicable law):
(a) all representations and warranties of Purchaser contained herein
qualified as to materiality shall be true and correct, and all
representations and warranties of Purchaser contained herein not qualified
as to materiality shall be true and correct in all material respects, at
and as of the Closing Date except to the extent expressly made as of an
earlier date;
(b) Purchaser shall have performed and complied in all material respects
with all obligations and covenants required by this Agreement to be
performed or complied with by Purchaser on or prior to the Closing Date;
(c) there shall not be in effect any Order by a Governmental Body of
competent jurisdiction restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated hereby; and
(d) Purchaser and Seller shall have caused the dismissal of the
litigation between them or their Affiliates and employees pursuant to
mutually agreeable documentation.
ARTICLE VII
DOCUMENTS TO BE DELIVERED
7.1 Documents to be Delivered by Seller and Zonagen. At the Closing,
Seller and Zonagen shall deliver, or cause to be delivered, to Purchaser the
following:
(a) certificates (dated the Closing Date and in form and substance
reasonably satisfactory to the Purchaser) executed on behalf of the Seller
and Zonagen certifying as to the fulfillment of the conditions specified in
Sections 6.1(a), 6.1(b), 6.1(c) and 6.1(e);
(b) the opinion of Andrews & Kurth LLP, counsel to the Seller and
Zonagen dated the Closing Date and in form and substance acceptable to
Purchaser;
(c) copies of all consents and waivers referred to in Section 6.1(d)
hereof;
(d) duly executed FIRPTA Affidavits for the Seller;
(e) the Transition Services Agreement, dated as of the Closing Date,
duly executed by Zonagen and FTI;
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(f) a receipt for the Estimated Purchase Price paid at Closing; and
(g) such other documents as Purchaser shall reasonably request.
7.2 Documents to be Delivered by the Purchaser. At the Closing,
Purchaser shall deliver to Seller and Zonagen the following:
(a) an instrument of assumption of the Assumed Liabilities, in form and
substance acceptable to Seller and Zonagen;
(b) the Estimated Purchase Price payable on the Closing;
(c) the Transition Services Agreement, dated as of the Closing Date,
duly executed by Purchaser; and
(d) such other documents as Seller shall reasonably request.
ARTICLE VIII
INDEMNIFICATION
8.1 Non-Tax Indemnification.
(a) Subject to Sections 8.2, 8.3, 8.6 and 10.3 hereof, Seller and
Zonagen jointly and severally hereby agree to indemnify and hold the
Purchaser and its directors, officers, employees, Affiliates, agents,
successors and assigns (collectively, the "Purchaser Indemnified Parties")
harmless from and against any and all losses, liabilities, obligations,
damages, costs and expenses based upon, attributable to or resulting from
(i) the failure of any representation or warranty of Seller and Zonagen set
forth in Article III hereof, or any representation or warranty contained in
any certificate delivered by or on behalf of Seller or Zonagen pursuant to
this Agreement, to be true and correct in all respects as of the date made;
(ii) the breach of any covenant or other agreement on the part of Seller or
Zonagen under this Agreement and (iii) any Excluded Liabilities and any
other liabilities relating to the Business resulting from the activities of
the Business prior to the Closing Date other than the Assumed Liabilities,
together with any and all notices, actions, suits, proceedings, claims,
demands, assessments, judgments, costs, penalties and expenses, including
attorneys' and other professionals' fees and disbursements (collectively,
"Expenses") incident to any and all losses, liabilities, obligations,
damages, costs and expenses with respect to which indemnification is
provided hereunder (collectively, "Losses").
(b) Subject to Section 8.2, Purchaser hereby agrees to indemnify and
hold Seller, Zonagen and their respective directors, officers, employees,
Affiliates, agents, successors and assigns (collectively, the "Seller
Indemnified Parties") harmless from and against, subject to Section 10.3,
any and all Losses based upon, attributable to or resulting from (i) the
failure of any representation or warranty of Purchaser set forth in Article
IV hereof, or any representation or warranty contained in any certificate
delivered by or on
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behalf of the Purchaser pursuant to this Agreement, to be true and correct
in all respects as of the date made, (ii) the breach of any covenant or
other agreement on the part of the Purchaser under this Agreement, and
(iii) any Assumed Liabilities and any other Liabilities relating to the
Business (other than the Excluded Liabilities) occurring from and after the
Closing Date, together with any and all Expenses incident to the foregoing.
8.2 Limitations on Indemnification for Breaches of Representations and
Warranties.
An indemnifying party shall not have any liability under Section
8.1(a)(i) or Section 8.1(b)(i) hereof unless the aggregate amount of Losses,
Expenses and Taxes to the indemnified parties finally determined to arise
thereunder, exceeds $25,000 (the "Basket") and, in such event, the indemnifying
party shall be required to pay the entire amount of such Losses and Expenses in
excess of $25,000 (the "Deductible"), subject to the terms of Sections 8.3, 8.6,
and 10.3 in all cases.
8.3 Non-Tax Indemnification Procedures.
(a) In the event that any Legal Proceedings shall be instituted or that
any claim or demand ("Claim") shall be asserted by any Person in respect of
which payment may be sought under Section 8.1 hereof (regardless of the
Basket or the Deductible referred to above), the indemnified party shall
reasonably and promptly cause written notice of the assertion of any Claim
of which it has knowledge which is covered by this indemnity to be
forwarded to the indemnifying party. The indemnifying party shall have the
right, at its sole option and expense, to be represented by counsel of its
choice, which must be reasonably satisfactory to the indemnified party, and
to defend against, negotiate, settle or otherwise deal with any Claim which
relates to any Losses indemnified against hereunder. If the indemnifying
party elects to defend against, negotiate, settle or otherwise deal with
any Claim which relates to any Losses indemnified against hereunder, it
shall within ten (10) days (or sooner, if the nature of the Claim so
requires) notify the indemnified party of its intent to do so and
acknowledge its responsibility for such claims hereunder, in which event
the indemnifying party shall be entitled to control the defense of the
claims in its sole discretion and to settle any such claim so long as the
indemnified parties shall be completely discharged and released therefrom.
If the indemnifying party elects not to defend against, negotiate, settle
or otherwise deal with any Claim which relates to any Losses indemnified
against hereunder, fails to notify the indemnified party of its election as
herein provided or contests its obligation to indemnify the indemnified
party for such Losses under this Agreement, the indemnified party may
defend against, negotiate, settle or otherwise deal with such Claim. If the
indemnifying party shall assume the defense of any Claim, the indemnified
party may participate, at his or its own expense, in the defense of such
Claim; provided, however, that such indemnified party shall be entitled to
participate in any such defense with separate counsel at the expense of the
indemnifying party if, (i) so requested by the indemnifying party to
participate or (ii) in the reasonable opinion of counsel to the indemnified
party and indemnifying party, a conflict or potential conflict exists
between the indemnified party and the indemnifying party that would make
such separate representation advisable; and provided, further, that the
indemnifying party shall not be required to pay for
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more than one such counsel for all indemnified parties in connection with
any Claim. The parties hereto agree to cooperate fully with each other in
connection with the defense, negotiation or settlement of any such Claim,
provided, however, that the indemnified party shall not settle any such
Claim without the prior written consent of the indemnifying party which
shall not be unreasonably withheld.
(b) After any final judgment or award shall have been rendered by a
court, arbitration board or administrative agency of competent jurisdiction
and the expiration of the time in which to appeal therefrom, or a
settlement shall have been consummated, or the indemnified party and the
indemnifying party shall have arrived at a mutually binding agreement with
respect to a Claim hereunder, the indemnified party shall forward to the
indemnifying party notice of any sums due and owing by the indemnifying
party pursuant to this Agreement with respect to such matter and the
indemnifying party shall be required to pay all of the sums so due and
owing to the indemnified party by wire transfer of immediately available
funds within 10 business days after the date of such notice.
(c) The failure of the indemnified party to give reasonably prompt
notice of any Claim shall not release, waive or otherwise affect the
indemnifying party's obligations with respect thereto except to the extent
that the indemnifying party can demonstrate actual loss and prejudice as a
result of such failure.
8.4 Tax Matters.
(a) Except as otherwise provided in this Section 8.4, all Taxes incurred
in connection with this Agreement and the transaction contemplated hereby
shall be borne by Seller, and Seller, at its own expense, will file, to the
extent required by applicable law, all necessary Tax Returns and other
documentation with respect to all such Taxes, and, if required by
applicable law, the Purchaser will join in the execution of any such Tax
Returns or other documentation.
(b) All personal property, real estate, occupancy, sewage and water
Taxes, assessments and other charges, if any, on or with respect to the
Business and operation of the Purchased Assets will be pro rated as of the
Determination Date, with Seller liable to the extent such items relate to
any time period through the Determination Date and Purchaser liable to the
extent such items relate to periods subsequent to the Determination Date.
Purchaser shall prepare and timely file all Tax Returns required to be
filed after the Determination Date with respect to the Purchased Assets, if
any, and shall duly and timely pay all such Taxes shown to be due on such
Tax Returns. Purchaser shall make such Tax Returns available for Seller's
review no later than fifteen (15) Business Days prior to the due date for
filing such Tax Returns. Within ten (10) Business Days after receipt of
such Tax Returns, Seller shall pay to Purchaser its proportionate share of
the amount shown as due on such Tax Returns determined in accordance with
this Section 8.4(b).
(c) Seller and Zonagen jointly and severally shall be liable for and
shall pay (and shall indemnify and hold harmless Purchaser against) one
half of all sales, use, stamp, documentary, filing, recording, transfer or
similar fees or taxes or governmental
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charges (including, without limitation, real property transfer gains taxes,
UCC-3 filing fees,m FAA, ICC, DOT, real estate or motor vehicle
registration, title recording or filing fees and other amounts payable in
respect of transfer filings) as levied by any Taxing Authority or
Governmental Body in connection with the transactions contemplated by this
Agreement (other than taxes measured by or with respect to income imposed
on Seller, Zonagen, or on Purchaser). Purchaser shall be liable for and
shall pay (and shall indemnify and hold harmless Seller against) one half
of all sales, use, stamp, documentary, filing, recording, transfer or
similar fees or taxes or governmental charges (including, without
limitation, real property transfer gains taxes, UCC-3 filing fees, FAA,
ICC, DOT, real estate and motor vehicle registration, title recording or
filing fees and other amounts payable in respect of transfer filings) as
levied by any Taxing Authority or Governmental Body in connection with the
transactions contemplated by this Agreement. Seller hereby agrees to file
all necessary documents (including, but not limited to, all Tax Returns)
with respect to all such amounts in a timely manner.
(d) Purchaser agrees to pay to Seller an amount by which (a) the excess
of (i) the amount of Massachusetts Corporate Excise Tax for the year
exceeds (ii) the amount of Massachusetts Corporate Excise Tax that would
have been imposed had the transactions contemplated by this Agreement not
occurred exceeds (b) the amount of tax payable in Massachusetts by the
stockholders of Seller had they sold the stock of Seller to Purchaser for
an amount equal to the Purchase Price; provided, however, that the
Purchaser shall not be required to pay, indemnify or hold harmless the
Seller or Zonagen for any Massachusetts Corporate Excise Tax incurred under
this Section 8.4(d) in an aggregate amount in excess of $50,000. Seller
hereby agrees to file all necessary documents (including, but not limited,
to Tax Returns) relating to the Massachusetts Corporate Excise Tax.
(e) Each of Purchaser and Seller shall provide the other with such
assistance as may reasonably be requested by the other party in connection
with the preparation of any Tax Returns, any audits or other examination by
any Taxing Authority, or any judicial or administrative proceedings
relating to liability for Taxes arising under Section 8.4(a), (b), (c) or
(d), and each will retain and provide the requesting party with any records
or information which may be relevant to such return, audit or examination,
proceedings or determination. Any information obtained pursuant to this
Section 8.4(e) or pursuant to any other section hereof providing for the
sharing of information or review of any Tax Returns or other schedules
relating to Taxes shall be kept confidential by the parties hereto.
(f) Tax Indemnification. (i) Without duplication, Seller and Zonagen
jointly and severally shall indemnify, defend and hold the Purchaser
Indemnified Parties harmless from and against any and all Taxes (including
interest and penalties) which may be suffered or incurred by them in
respect of the sale of Purchased Assets herein except to the extent that
Purchaser may be liable for Taxes under Section 8.4(b),(c) or (d); and (ii)
Purchaser shall indemnify, defend and hold Seller and Zonagen harmless with
respect to all Taxes (including interest and penalties) for which the
Purchaser is liable under Section 8.4(b), (c) or (d).
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(g) Further Indemnification. Without duplication, Seller shall also
indemnify, defend and hold harmless Purchaser from and against all losses,
liabilities, damages, deficiencies, costs of expenses (including, without
limitation, interest, penalties and reasonable attorneys' fees and
disbursements) in respect of any Taxes of the Seller, whether or not such
liability could have been avoided by timely invoking the procedure
available by law to notify any Taxing Authority of the transactions
contemplated by this Agreement.
(h) Tax Contest. (i) The Seller shall notify the Purchaser in writing
within thirty (30) days of receipt of written notice of any pending or
threatened tax examination, audit or other administrative or judicial
proceeding (a "Tax Contest") that could reasonably be expected to result in
an indemnification obligation under Section 8.4(f) or (g); (ii) If an issue
relates to any period ending on or prior to the Determination Date or to
any Taxes for which the Seller is liable in full hereunder, the Seller
shall, at its expense, control the defense and settlement of such Tax
Contest. If the Tax Contest relates to any period beginning after the
Determination Date or are to any Taxes for which the Purchaser is liable in
full hereunder, the Purchaser shall, at its own expense, control the
defense and settlement of such Tax Contest. The party not in control of the
defense shall have the right to observe the conduct of any Tax Contest at
its expense, including through its own counsel and other professional
experts; and (iii) If an issue raised in any Tax Contest controlled by one
party or jointly controlled could materially affect the liability for Taxes
of the other party, the controlling party shall not, and neither party in
the case of joint control shall, enter into a final settlement without the
written consent of the other party, which consent shall not be unreasonably
withheld. Where a party withholds its consent to any final settlement, that
party may continue or initiate further proceedings, at its own expense, and
the liability of the party that wished to settle (as between the consenting
and the non-consenting party) shall not exceed the liability that would
have resulted from the proposed final settlement (including interest,
additions to tax, and penalties that have accrued at that time), and the
non-consenting party shall indemnify the consenting party for such Taxes.
(i) Disputes. In the event that a dispute arises between the Seller and
the Purchaser as to the amount of Taxes, or indemnification, the parties
shall attempt in good faith to resolve such dispute, and any agreed upon
amount shall be paid to the appropriate party. If such dispute is not
resolved thirty (30) days thereafter, the parties shall submit the dispute
to a mutually agreed upon third party arbitrator for resolution, which
resolution shall be final, conclusive and binding on the parties.
Notwithstanding anything in this Agreement to the contrary, the fees and
expenses of the arbitrator in resolving the dispute shall be borne equally
by the Seller and the Purchaser. Any payment required to be made as a
result of the resolution of the dispute by such arbitrator shall be made
within ten (10) days after such resolution, together with any interest
determined by said arbitrator to be appropriate.
(j) Preparation of Form W-2s. Pursuant to Section 5 of Revenue Procedure
96-60, 1966-2 C.B. 399, provided that the Seller provides Purchaser with
all necessary payroll records for the calendar year which includes the
Closing Date, Purchaser shall furnish a Form W-2 to each employee employed
by Purchaser who had been employed by the Seller disclosing all wages and
other compensation paid for such calendar year, and taxes withheld
therefrom, and the Seller shall be relieved of the responsibility to do so.
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8.5 Tax Treatment of Indemnity Payments. Seller and Purchaser agree to
treat any indemnity payment made pursuant to this Article VIII as an adjustment
to the Purchase Price for federal, state, local and foreign income tax purposes.
8.6 Maximum Indemnity Amount. Under no circumstances shall Seller or
Zonagen be required to indemnify and hold harmless the Purchaser Indemnified
Parties under this Agreement with respect to Losses or Expenses incurred by the
Purchaser Indemnified Parties (other than in respect of Excluded Liabilities or
Taxes) in an aggregate amount in excess of $250,000 (the "Maximum Indemnity
Amount").
Notwithstanding anything herein to the contrary, (i) the amount of
Losses, Expenses and Taxes indemnifiable by Seller and Zonagen hereunder shall
be reduced by the amount of (a) insurance proceeds, or (b) amounts from third
parties, regardless of when received, and (ii) the Seller and Zonagen shall not
have liability for punitive or exemplary damages.
Except for (i) remedies that cannot be waived as a matter of law and
(ii) remedies set forth in any agreement, instrument or document being or to be
executed and delivered by Purchaser, Zonagen or Seller under this Agreement or
in connection herewith on the Closing Date, this Article VIII shall be the
exclusive remedy of Purchaser for any breach of any representation or warranty,
or any breach of any covenant or agreement contained herein or in any closing
document executed or delivered pursuant to the provisions hereof.
ARTICLE IX
NONCOMPETITION
9.1 Non-Solicitation and Non-Competition. Seller and Zonagen jointly and
severally agree as follows:
(a) For the period from and after the Closing Date until the third
anniversary of the Closing Date (the "Non-Competition Period"), neither
Seller nor Zonagen shall (the "Restricted Parties" and individually, a
"Restricted Party"), directly or indirectly, provide any of the specific
services or market any of the products currently provided or marketed by
the Business or products or services substantially similar thereto with
respect to any geographic area for which services are being provided by FTI
as of the Closing Date.
(b) During the Non-Competition Period each Restricted Party shall not,
for its own benefit or for the benefit of any Person other than the
Purchaser, (i) solicit, or assist any Person other than Purchaser to
solicit, any officer, director, executive or employee of the Business to
leave his employment, or (ii) hire or cause to be hired, or engage as a
partner, contractor, sub-contractor, employee or consultant, any present
officer, director, executive or employee of the Business.
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(c) During the Non-Competition Period, each Restricted Party shall not
solicit or encourage any customer, client, supplier or other person or
entity to terminate, curtail or otherwise limit its business relationship
with Purchaser, or otherwise direct or attempt to direct any client of the
Purchaser or interfere with any business relationships of the Purchaser.
(d) Each Restricted Party acknowledges that (i) the markets to be served
by the Business are national in scope and are not dependent on the
geographic location of the executive personnel or the businesses by which
they are employed; and (ii) the above covenants are manifestly reasonable
on their face, and the parties expressly agree that such restrictions have
been designed to be reasonable and no greater than is required for the
protection of the Purchaser and are a significant element of the
consideration hereunder.
(e) If the final judgment of a court of competent jurisdiction declares
that any term or provision of this Section 9.1 is invalid or unenforceable,
the parties agree that the court making the determination of invalidity or
unenforceability shall have the power to reduce the scope, duration, or
area of the term or provision, to delete specific words or phrases, or to
replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to
expressing the intention of the invalid or unenforceable term or provision,
and this Agreement shall be enforceable as so modified after the expiration
of the time within which the judgment may be appealed.
ARTICLE X
MISCELLANEOUS
10.1 Certain Definitions. For purposes of this Agreement, the following
terms shall have the meanings specified in this Section 10.1:
"Affiliates" means, with respect to any Person, any other Person
controlling, controlled by or under common control with such Person.
"Assumed Liabilities" has the meaning set forth in section 1.2.
"Books and Records" shall mean (a) all records and lists of Seller
pertaining to the Purchased Assets, (b) all records and lists of Seller
pertaining to the Business, customers, suppliers or personnel of the Business,
including, without limitation, a list of customers of the Business, (c) all
product, business and marketing plans of Seller relating to the Business, and
(d) all books, ledgers, files, reports, plans, drawings and operating records of
every kind maintained by Seller relating to the Business.
"Business" has the meaning set forth in the preamble hereto.
"Business Day" means any day of the year on which national banking
institutions in New York are open to the public for conducting business and are
not required or authorized to close.
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"Business Premises" shall mean all premises under the lease listed on
Schedule 3.12 attached hereto.
"Closing" has the meaning set forth in Section 3.1.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company Property" shall have the meaning ascribed to such term in
Section 3.12(a) hereof.
"Confidential Information" means any material information concerning the
Business that is not already generally available to the public and which Seller
in its normal course of business considers to be proprietary.
"Contract" means any Contract, agreement, indenture, note, bond, loan,
instrument, lease, commitment or other arrangement or agreement.
"Contract Rights" shall mean all of Seller's rights and obligations
under the Contracts listed in Schedule 3.15 attached hereto.
"Determination Date" has the meaning set forth in Section 1.6
"Determination Date Balance Sheet" has the meaning set forth in
Section 1.6.
"Determination Date Working Capital" has the meaning set forth in
Section 1.6.
"Environmental Law" means any foreign, federal, state or local statute,
regulation, ordinance, or rule of common law as now or hereafter in effect in
any way relating to the protection of human health and safety or the environment
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. (S) 9601 et seq.), the Hazardous
Materials Transportation Act (49 U.S.C. App. (S) 1801 et seq.), the Resource
Conservation and Recovery Act (42 U.S.C. (S) 6901 et seq.), the Clean Water Act
(33 U.S.C. (S) 1251 et seq.), the Clean Air Act (42 U.S.C. (S) 7401 et seq.) the
Toxic Substances Control Act (15 U.S.C. (S) 2601 et seq.), the Federal
Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. (S) 136 et seq.), and the
Occupational Safety and Health Act (29 U.S.C. (S) 651 et seq.), and the
regulations promulgated pursuant thereto.
"Estimated Purchase Price" shall have the meaning ascribed to such term
in Section 1.5 hereof.
"Excluded Assets" has the meaning set forth in Section 1.1.
"Excluded Liabilities" has the meaning set forth in Section 1.3.
"Financial Statements" has the meaning set forth in Section 3.8.
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"Fixtures and Equipment" shall mean all of the furniture, fixtures,
furnishings, machinery, vehicles, spare parts, supplies, equipment, and other
tangible personal property owned by Seller, and used primarily in connection
with the Business as described on Schedule 1.1(a).
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"Governmental Body" means any government or governmental or regulatory
body thereof, or political subdivision thereof, whether federal, state, local or
foreign, or any agency, instrumentality or authority thereof, or any court or
arbitrator (public or private).
"Hazardous Material" means any substance, material or waste which is
regulated by the United States the foreign jurisdictions in which the Company
conducts business, or any state or local governmental authority including,
without limitation, petroleum and its by-products, asbestos, and any material or
substance which is defined as a "hazardous waste," "hazardous substance,"
"hazardous material," "restricted hazardous waste," "industrial waste," "solid
waste," "contaminant," "pollutant," "toxic waste" or "toxic substance" under any
provision of Environmental Law.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions, and
reexaminations thereof, (b) all trademarks, service marks, trade dress, logos,
trade names, internet domain names and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations and renewals in connection therewith, (d)
all mask works and all applications, registrations and renewals in connection
therewith, (e) all trade secrets and Confidential Information (including ideas,
research and development, know-how, formulas, compositions, manufacturing and
production processes and techniques, technical data, designs, drawings,
specifications, customer and supplier lists, pricing, cost, profit and sales
information, business, marketing and research and development plans and
proposals and other information of a similar nature), (f) all computer software
and programs (including data and related documentation), and (g) all copies and
tangible embodiments thereof (in whatever form or medium).
"Inventory" shall mean all of the Business' inventory held for resale or
on order by the Business and all of Seller's sample inventory, raw materials,
work in process, finished products, wrapping, supply and packaging items and
similar items, if any, in each case, relating to the Business and owned by
Seller on the Determination Date, whether on hand, in transit or on order,
provided, however, that Inventory shall not include merchandise which has been
sold to customers.
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"Law" means any federal, state, local or foreign law (including common
law), statute, code, ordinance, rule, regulation or other requirement.
"Leasehold Estates" shall mean all of Seller's rights and obligations as
lessee under the leases listed on Schedule 3.12 attached hereto.
"Leasehold Improvements" shall mean all leasehold improvements situated
in or on any Real Property leased by Seller relating to the Business.
"Legal Proceeding" means any judicial, administrative or arbitral
actions, suits, proceedings (public or private), claims or governmental
proceedings.
"Liability" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for Taxes.
"Lien" means any lien, pledge, mortgage, deed of trust, security
interest, claim, lease, charge, option, right of first refusal, easement,
servitude, transfer restriction under any shareholder or similar agreement,
encumbrance or any other restriction or limitation whatsoever.
"Material Adverse Change" means any material adverse change in the
business, properties, results of operations, prospects, condition (financial or
otherwise) of FTI or Purchaser, as the case may be.
"Material Adverse Effect" means any effect which has resulted in, or is
reasonably likely to result in, a Material Adverse Change.
"Material Contracts" shall have the meaning ascribed to such terms in
Section 3.15.
"Order" means any order, injunction, judgment, decree, ruling, writ,
assessment or arbitration award.
"Owned Properties" shall have the meaning ascribed to such term in
Section 3.12.
"Permits" means any approvals, authorizations, consents, licenses,
permits or certificates.
"Permitted Exceptions" means (i) all defects, exceptions, restrictions,
easements, rights of way and encumbrances disclosed in policies of title
insurance which have been made available to Purchaser; (ii) statutory liens for
current taxes, assessments or other governmental charges not yet delinquent or
the amount or validity of which is being contested in good faith by appropriate
proceedings, provided an appropriate reserve is
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established therefor; (iii) mechanics', carriers', workers', repairers' and
similar Liens arising or incurred in the ordinary course of business that are
not material to the business, operations and financial condition of the property
so encumbered or the Company; (iv) zoning, entitlement and other land use and
environmental regulations by any Governmental Body, provided that such
regulations have not been violated; and (v) such other imperfections in title,
charges, easements, restrictions and encumbrances which do not materially
detract from the value of or materially interfere with the present use of any
Company Property subject thereto or affected thereby.
"Person" means any individual, corporation, partnership, firm, joint
venture, association, joint-stock company, trust, unincorporated organization,
Governmental Body or other entity.
"Personal Property Lease" shall have the meaning ascribed to such term
in Section 3.13.
"Purchase Price" has the meaning set forth in Section 1.4.
"Purchased Assets" shall mean all of the assets and all other
properties, and rights of every nature, kind and description, tangible and
intangible (including goodwill), whether real, personal or mixed, whether
accrued, contingent or otherwise and whether now existing or hereinafter
acquired, that relate to and are used in the Business as the same exists on the
Determination Date, including, without limitation:
(a) all Contract Rights;
(b) all Leasehold Estates;
(c) all Leasehold Improvements;
(d) all Fixtures and Equipment;
(e) all Inventory;
(f) all Books and Records;
(g) all notes, accounts receivable (excluding intercompany and
interdivisional accounts receivable) and all notes, bonds and other
evidences of indebtedness of and rights to receive payment from any person
or entity (in all cases, whether or not billed) and the benefit of security
therefore, in each case, relating to the Business, solely to the extent, in
the case of any Current Asset, that the Seller therein is a client with
respect to which the Business is continuing to provide services or that
Seller has a reasonable expectation of continuing to provide services as of
the Closing Date;
(h) all cash and other proceeds from the conduct of the Business,
including proceeds of accounts receivable, in whatever form received, to
the extent received by Seller
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in respect of the Business after February 28, 1999, other than any such
cash or other proceeds disposed of by Seller in the ordinary course of
business consistent with past practice and in accordance with the
representations and warranties set forth in this Agreement;
(i) all computer hardware and software used by Seller in the operation
of the Business as described on Schedule 1.1(a) hereto;
(j) all Permits relating to the Business (to the extent transferable);
(k) all owned Intellectual Property and licensed Intellectual Property,
including, without limitation, that listed on Schedule 3.14 attached
hereto;
(l) the name "Fertility Technologies, Inc.", FTI's logo and all goodwill
associated therewith or with the Business;
(m) all available supplies, sales literature, promotional literature,
customer, supplier and distributor lists, art work, samples display units
and purchasing records utilized in the Business;
(n) all telephone and fax numbers utilized in the Business;
(o) all rights under or pursuant to all warranties, representations,
indemnities and guaranties made by suppliers, contractors and manufacturers
in connection with the Purchased Assets or services furnished to the
Business or affecting the Purchased Assets, to the extent such warranties,
representations, indemnities and guaranties are assignable;
(p) all claims, causes of action, choses in action, rights of recovery
and rights of set-off of any kind against any Person arising out of or
relating to the Business, the Purchased Assets or the Assumed Liabilities;
(q) all prepaid expenses, deferred charges, advance payments, security
deposits and prepaid items of Seller relating to the Business; and
(r) all other assets reflected on the Balance Sheet other than those
assets disposed of in the ordinary course of business consistent with past
practice subsequent to the date of the Balance Sheet.
"Purchaser Documents" has the meaning set forth in Section 4.2.
"Purchaser Indemnity Claim" has the meaning set forth in Section 8.1.
"Real Property Lease" shall have the meaning ascribed to such term in
Section 3.12.
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"Release" means any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, or leaching into the indoor
or outdoor environment, or into or out of any property;
"Remedial Action" means all actions to (x) clean up, remove, treat or in
any other way address any Hazardous Material; (y) prevent the Release of any
Hazardous Material so it does not endanger or threaten to endanger public health
or welfare or the indoor or outdoor environment; or (z) perform pre-remedial
studies and investigations or post-remedial monitoring and care.
"Seller" has the meaning set forth in the preamble hereto.
"Seller Documents" has the meaning set forth in Section 3.2.
"Subsidiary" means any Person of which a majority of the outstanding
voting securities or other voting equity interests are owned, directly or
indirectly, by FTI.
"Taxes" means (i) all federal, state, local or foreign taxes, charges,
fees, imposts, levies or other assessments, including, without limitation, all
net income, gross receipts, capital, sales, use, ad valorem, value added,
transfer, franchise, profits, inventory, capital stock, license, withholding,
payroll, employment, social security, unemployment, excise, severance, stamp,
occupation, property and estimated taxes, customs duties, fees, assessments and
charges of any kind whatsoever, (ii) all interest, penalties, fines, additions
to tax or additional amounts imposed by any Taxing Authority in connection with
any item described in clause (i) and (iii) any transferee liability in respect
of any items described in clauses (i) and (ii).
"Tax Returns" means all returns, declarations, reports, estimates,
information returns and statements required to be filed in respect of any Taxes.
"Taxing Authority" means any department, bureau or agency of any Taxing
Jurisdiction having the legal authority to collect Taxes, or administer the Tax
laws of any Taxing Jurisdiction, or with whom or which Tax Returns are required
to be filed.
"Taxing Jurisdiction" shall mean the United States of America, any
foreign country, any state or local government, or any political subdivision of
any of the foregoing, that imposes or administers any Tax, or which requires, by
statute, regulation or otherwise, the filing of any Tax Return.
10.2 Payment of Sales, Use or Similar Taxes. All sales, use, transfer,
intangible, recordation, documentary stamp or similar Taxes or charges, of any
nature whatsoever, applicable to, or resulting from, the transactions
contemplated by this Agreement shall be borne equally by Seller and Purchaser,
except as otherwise provided in Section 8.4.
10.3 Survival of Representations and Warranties. The parties hereto
hereby agree that the representations and warranties contained in this Agreement
or in any
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certificate, document or instrument delivered in connection herewith, shall
survive the execution and delivery of this Agreement, and the Closing hereunder,
regardless of any investigation made by the parties hereto; provided, however,
that any claims or actions with respect thereto (other than claims for
indemnifications with respect to the representation and warranties contained in
Sections 3.7, 3.11, 3.16, 3.20, 3.27 and 4.5 which shall survive for periods
coterminous with any applicable statutes of limitation) shall terminate unless
within twelve (12) months after the Closing Date written notice of such claims
is given to Seller or Purchaser (as applicable) or such actions are commenced
and continuing.
10.4 Expenses. Except as otherwise provided in this Agreement, Seller
and Purchaser shall each bear their own expenses incurred in connection with the
negotiation and execution of this Agreement and each other agreement, document
and instrument contemplated by this Agreement and the consummation of the
transactions contemplated hereby and thereby.
10.5 Further Assurances. Seller, Zonagen and Purchaser each agrees to
execute and deliver such other documents or agreements and to take such other
action as may be reasonably necessary or desirable for the implementation of
this Agreement and the consummation of the transactions contemplated hereby.
10.6 Submission to Jurisdiction; Consent to Service of Process.
(a) The parties hereto hereby irrevocably submit to the non-exclusive
jurisdiction of any federal or state court located within the State of
Delaware over any dispute arising out of or relating to this Agreement or
any of the transactions contemplated hereby and each party hereby
irrevocably agrees that all claims in respect of such dispute or any suit,
action proceeding related thereto may be heard and determined in such
courts. The parties hereby irrevocably waive, to the fullest extent
permitted by applicable law, any objection which they may now or hereafter
have to the laying of venue of any such dispute brought in such court or
any defense of inconvenient forum for the maintenance of such dispute. Each
of the parties hereto agrees that a judgment in any such dispute may be
enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law.
(b) Each of the parties hereto hereby consents to process being served
by any party to this Agreement in any suit, action or proceeding by the
mailing of a copy thereof in accordance with the provisions of Section
10.10.
10.7 Entire Agreement; Amendments and Waivers. This Agreement (including
the schedules and exhibits hereto), represents the entire understanding and
agreement between the parties hereto with respect to the subject matter hereof
and can be amended, supplemented or changed, and any provision hereof can be
waived, only by written instrument making specific reference to this Agreement
signed by the party against whom enforcement of any such amendment, supplement,
modification or waiver is sought. No action taken pursuant to this Agreement,
including without limitation, any investigation by or on behalf of any party,
shall be deemed to constitute a waiver by the party taking such action
37
<PAGE>
of compliance with any representation, warranty, covenant or agreement contained
herein. The waiver by any party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a further or continuing waiver of
such breach or as a waiver of any other or subsequent breach. No failure on the
part of any party to exercise, and no delay in exercising, any right, power or
remedy hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of such right, power or remedy by such party preclude any other
or further exercise thereof or the exercise of any other right, power or remedy.
All remedies hereunder are cumulative and are not exclusive of any other
remedies provided by law.
10.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
10.9 Table of Contents and Headings. The table of contents and section
headings of this Agreement are for reference purposes only and are to be given
no effect in the construction or interpretation of this Agreement.
10.10 Notices. All notices and other communications under this Agreement
shall be in writing and shall be deemed given when delivered personally or
mailed by certified mail, return receipt requested, to the parties (and shall
also be transmitted by facsimile to the Persons receiving copies thereof) at the
following addresses (or to such other address as a party may have specified by
notice given to the other party pursuant to this provision):
If to the Seller or Zonagen, to:
c/o Zonagen, Inc.
2408 Timberloch Place, Suite B-4
The Woodlands, Texas 77380
Attention: Joseph Podolski
Facsimile: (281) 719-3664
With a copy to:
Andrews & Kurth LLP
2170 Buckthorne Place, Suite 150
The Woodlands, Texas 77380
Attention: Jeffrey Harder
Facsimile: (713) 238-7282
38
<PAGE>
If to Purchaser, to:
280 Park Avenue
West Building, 28th Floor
New York, New York 10017
Attention: Samuel Shimer
Facsimile: (212) 867-3226
With a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Norman D. Chirite
Facsimile: (212) 310-8007
10.11 Severability. If any provision of this Agreement is invalid or
unenforceable, the balance of this Agreement shall remain in effect.
10.12 Binding Effect; Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
permitted assigns. Nothing in this Agreement shall create or be deemed to create
any third party beneficiary rights in any person or entity not a party to this
Agreement except as provided below. No assignment of this Agreement or of any
rights or obligations hereunder may be made by either the Seller or the
Purchaser (by operation of law or otherwise) without the prior written consent
of the other parties hereto and any attempted assignment without the required
consents shall be void; provided, however, that Purchaser may assign this
Agreement and any or all rights or obligations hereunder (including, without
limitation, Purchaser's rights to purchase the Purchased Assets and Purchaser's
rights to seek indemnification hereunder) to any Affiliate of Purchaser. Upon
any such permitted assignment, the references in this Agreement to Purchaser
shall also apply to any such assignee unless the context otherwise requires.
39
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first written above.
ZONAGEN, INC.
By: /s/ Louis Ploth, Jr.
-------------------------------------
Name: Louis Ploth, Jr.
Title: Vice President & CFO
FERTILITY TECHNOLOGIES, INC.
By: /s/ Louis Ploth, Jr.
-------------------------------------
Name: Louis Ploth, Jr.
Title: General Manager
SAGE BIOPHARMA, INC.
By: /s/ James T. Posillico
-------------------------------------
Name: James T. Posillico
Title: President & CEO
40
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "AGREEMENT") is made and entered into this 22nd
day of February, 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 F. Scott Reding (the
"EXECUTIVE").
WITNESSETH
WHEREAS, the Company desires to employ the Executive as its Chief Financial
Officer 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 the Chief Financial Officer 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>
EMPLOYMENT AGREEMENT
F. SCOTT REDING
PAGE 2 OF 7
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 $14,584, 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 propose to the Compensation Committee of
the Board of Directors that the Executive be granted stock
options under the Company's Amended and Restated 1993 Employee
and Consultant Stock Option Plan (the "Plan") to purchase up to
40,000 shares of the Company's common stock, par value $.01 per
share (the "Common Stock"), at an exercise price equal to the
closing sale price of a share of Common Stock, as reported by the
NASDAQ Market, on the date of grant (which date shall be no later
that the date of this Agreement), with such option to (i) vest in
accordance with the Company's customary vesting schedule for
stock options and (ii) automatically vest in full on a Change in
Control (as defined in the Plan) of the Company.
(c) 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.
<PAGE>
EMPLOYMENT AGREEMENT
F. SCOTT REDING
PAGE 3 OF 7
(d) The Company will pay for all normal and customary expenses
associated with moving your household belongings from Darien,
Connecticut to Houston. In addition, the Company will reimburse
you for normal closing costs associated with the sale of your
home in Darien, Connecticut, grossed up to cover tax
consequences. If you voluntarily leave the Company before
completing 12 months of service, you will compensate the Company
for the costs defined in this paragraph. If you voluntarily leave
the Company during the 13th through 24th month of service, you
will compensate the Company for the costs defined in this
paragraph on a pro-rated basis for the remaining number of months
not worked on the date of termination.
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 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.
<PAGE>
EMPLOYMENT AGREEMENT
F. SCOTT REDING
PAGE 4 OF 7
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
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.
<PAGE>
EMPLOYMENT AGREEMENT
F. SCOTT REDING
PAGE 5 OF 7
(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.
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.
<PAGE>
EMPLOYMENT AGREEMENT
F. SCOTT REDING
PAGE 6 OF 7
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:
F. Scott Reding
18 Peterick Lane
Darien, CT 06820
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
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.
<PAGE>
EMPLOYMENT AGREEMENT
F. SCOTT REDING
PAGE 7 OF 7
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/ F. Scott Reding
-------------------------------------------
F. Scott Reding
<PAGE>
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
THREE MONTHS ENDED MARCH 31, 1999
- ---------------------------------
Net Loss Weighted Average Shares Outstanding Loss per Share
-------- ----------------------------------- --------------
Basic $3,592,125 (divided by) 11,214,502 = $0.32
Diluted $3,592,125 (divided by) 11,214,502 = $0.32
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 48,150
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 2,642
<CURRENT-ASSETS> 51,764
<PP&E> 1,961
<DEPRECIATION> 1,016
<TOTAL-ASSETS> 53,870
<CURRENT-LIABILITIES> 3,941
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 49,917
<TOTAL-LIABILITY-AND-EQUITY> 53,870
<SALES> 0
<TOTAL-REVENUES> 629
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,286
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> (4,665)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,665)
<DISCONTINUED> 59
<EXTRAORDINARY> 1,014
<CHANGES> 0
<NET-INCOME> (3,592)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
