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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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 No. 0-21198
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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 77380
THE WOODLANDS, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(281) 367-5892
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
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Common Stock, $.001 par value Pacific Exchange
Nasdaq National Market
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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 preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $310,086,607 as of March 11, 1999, based on the
closing sales price of the registrant's common stock on the Nasdaq National
Market on such date of $30.50 per share. For purposes of the preceding sentence
only, all directors, executive officers and beneficial owners of ten percent or
more of the shares of the registrant's common stock are assumed to be
affiliates. As of March 11, 1999, 11,220,894 shares of the registrant's common
stock were outstanding.
Certain sections of the registrant's definitive proxy statement relating to
the registrant's 1999 annual meeting of stockholders, which proxy statement will
be filed under the Securities Exchange Act of 1934 within 120 days of the end of
the registrant's fiscal year ended December 31, 1998, are incorporated by
reference into Part III of this Annual Report on Form 10-K.
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This Annual Report on Form 10-K 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. The words
"anticipate," "believe," "expect," "estimate," "project" and similar expressions
are intended to identify forward-looking statements. 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, including those
discussed in "Item 1. Description of Business -- Business Risks." 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, estimated or projected.
PART I
Item 1. DESCRIPTION OF BUSINESS
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.
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, following approval by the Mexican regulatory authorities. On July
14, 1998, Zonagen submitted its first New Drug Application ("NDA") to the U.S.
Food and Drug Administration ("FDA") for Vasomax(R) for the treatment of MED. In
August, Schering-Plough submitted a Marketing Approval Application for
Vasomax(R) with the Medicines Control Agency in the United Kingdom. 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. See " -- Collaborative and Licensing
Agreements."
Prior to the submission of the NDA for Vasomax(R), the Company conducted
two pivotal Phase III studies which demonstrated a statistically significant
improvement over placebo. There can be no assurance, however, that the FDA will
ultimately approve Vasomax(R). See " -- Male Erectile Dysfunction-- Vasomax(R)
Clinical Development" and " -- Business Risks -- Uncertainties Related to
Clinical Trial Results and FDA Approval."
In December, 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.
Recent Event
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. The sale of FTI positions 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 "Note 11 of Notes to Consolidated Financial Statements -- Subsequent Events
(Unaudited)."
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MALE ERECTILE DYSFUNCTION
Background
Male erectile dysfunction, or impotence, has historically been defined as
the persistent inability to attain and maintain an erection adequate to permit
satisfactory sexual performance. The Massachusetts Male Aging Study (the "MMA
Study"), published in the Journal of Urology in 1994, was the first large study
to demonstrate that sexual dysfunction is a major health concern. This study
determined that male erectile dysfunction is best defined using broader, more
flexible criteria, including an assessment of erectile difficulty during
intercourse, frequency of sexual activity and erection, and satisfaction with
the quality of the erection and the overall sexual experience.
The MMA Study found that 52% of the men studied between the ages of 40 and
70 suffered from erectile dysfunction, suggesting that approximately 18 million
American men in that age category suffered from erectile dysfunction in 1990.
More than 80% of those afflicted were characterized as having mild to moderate
dysfunction.
The health variable most strongly associated with erectile dysfunction is
age. According to the MMA Study, the overall prevalence of erectile dysfunction
increases from 40% at age 40 to 67% at age 70. Further, the MMA study found that
the probability of complete impotency triples, while the probability of moderate
erectile dysfunction doubles over that age range. In addition to age, factors
that may contribute to erectile dysfunction include heart disease, hypertension
and diabetes, certain therapeutic drugs and anger or depression. Current aging
trends suggest that the number and percentage of men in the U.S. suffering from
erectile dysfunction will increase.
Erectile dysfunction occurs when one or more of the underlying factors
results in (i) an inadequate supply of blood to the penis, (ii) a failure to
relax the smooth muscle tissue in the penis so that the penis can become
engorged with blood, (iii) a failure to retain blood in the penis or (iv) a
combination of these factors. Blood is carried to the penis by two large
arteries that terminate in a maze of blood vessels contained in three erectile
bodies of the penis: the corpus spongiosum, which surrounds the urethra, and two
corpora cavernosa. Smooth muscle tissue surrounds each individual blood vessel
in the erectile bodies. When the penis is flaccid, the smooth muscle tissue is
in a contracted state, which constricts the blood vessels and reduces blood
flow. During stimulation, signals are sent to the nerve endings in the penis
that cause the smooth muscle tissues in the penis to relax and the blood vessels
to expand. This expansion allows arterial blood to fill the erectile bodies and
causes the penis to become engorged with blood and erect. As the erectile bodies
expand, the venous outflow of blood is restricted so that the erection can be
maintained.
In men with normal erectile function, the penis is composed of
approximately forty-two to fifty-three percent smooth muscle. As men age, blood
flow to the genitalia may decline, causing the normal structure of the penis to
change; smooth muscle may be replaced by fibrous tissue that cannot expand
sufficiently to initiate and maintain an erection. Symptoms of erectile
dysfunction may begin when smooth muscle in the penis falls below forty-two
percent.
Vasomax(R)
Vasomax(R) is an oral treatment for male erectile dysfunction that delivers
phentolamine mesylate ("phentolamine") via a rapidly disintegrating tablet.
Vasomax(R) produces an alpha-adrenergic block of relatively short duration,
leading to increased blood flow to the genitalia and smooth muscle relaxation in
the penis. Phentolamine has been approved by the FDA for the treatment of
hypertensive crises associated with the surgical removal of certain tumors of
the adrenal gland, and has been used "off-label" by urologists, either alone or
in combination with other drugs, in penile needle injection therapies for the
treatment of male erectile dysfunction.
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Vasomax(R) Clinical Development
In May 1997, the Company completed two U.S. pivotal Phase III clinical
trials of Vasomax(R) that demonstrated statistically significant improvement
over placebo in men with erectile dysfunction. In the studies efficacy was
measured using the Erectile Function Domain of the International Index of
Erectile Function ("IIEF") as the primary endpoint. The IIEF is a statistical
instrument that was developed and validated by Raymond C. Rosen, Ph.D. to
measure erectile function and is based on the patient's answers to 15 questions.
The IIEF was used by Zonagen in its clinical trials of Vasomax(R) and by Pfizer
in its clinical trials of Viagra(R).
The IIEF questions include inquiries regarding: the frequency with which
the participant achieved (i) an erection, (ii) an erection with sufficient
firmness to achieve vaginal penetration, (iii) vaginal penetration, and (iv) an
erection that was maintained following penetration; the participant's difficulty
in maintaining an erection to completion of intercourse; and the participant's
confidence regarding his ability to achieve and maintain an erection. The
answers to these questions were used to classify a participant's degree of
erectile dysfunction as severe, moderate, mild to moderate, mild or not
impotent. Patients were deemed to be responding to therapy if the IIEF domain
score for erectile dysfunction improved at least one dysfunction class (mild,
mild-to-moderate, moderate, severe) and if the patient suffered from no greater
than mild-to-moderate erectile dysfunction at the end of the study.
In addition to the IIEF primary endpoint, the Company also measured other
endpoints in the Phase III trials that the FDA is expected to use in making its
determination regarding the efficacy of Vasomax(R). These secondary endpoints
included rates of successful intercourse (defined as intercourse involving the
achievement of an erection, vaginal penetration and the maintenance of the
erection through orgasm) and other measures of overall sexual experience. The
trials included men with a broad variety of medical conditions, including
cardiovascular conditions, diabetes and prostate conditions, and men who took
other medications during the study period. Because the Company believes that an
intact nervous system is necessary for Vasomax(R) to be effective, men with
erectile dysfunction caused by spinal cord injury or radical prostatectomy were
intentionally excluded from the trials.
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In addition to the two Phase III pivotal trials, the Company has also
completed (i) drug interaction studies in insulin and non-insulin dependent
diabetics and in cardiovascular patients being treated with ace inhibitors, beta
blockers, calcium channel blockers and alpha blockers and (ii) bioavailability
and food interaction studies with healthy individuals. The Company is also
currently finalizing three long-term open label safety studies, and additional
special population and drug interaction studies, from which it expects to submit
final data during the FDA's review of the NDA for Vasomax(R). The Company is
also currently conducting a two-year Phase IV rat carcinogenicity study from
which it expects to submit final data following approval of the Vasomax(R) NDA.
In March 1998, Schering-Plough, the worldwide licensee for Vasomax(R),
submitted a Product Registration Application in Mexico for Vasomax(R) and
subsequently began product sales, following approval in May, under the tradename
Z-MAX. The Company submitted an NDA for Vasomax(R) to the FDA on July 14, 1998.
Schering-Plough submitted a Marketing Authorization Application for Vasomax(R)
to the Medicines Control Agency in the United Kingdom in August 1998. There can
be no assurance, however, that the FDA will ultimately approve the NDA, or that
the regulatory authorities in non-U.S. countries will approve requests for
marketing approval submitted by Schering-Plough.
The foregoing expressions of the Company's expectations regarding the
completion of clinical trials and other studies, the approval of an NDA and
other matters relating to the clinical development of Vasomax(R) are forward-
looking statements which are subject to certain risks and uncertainties,
including those described under "-- Business Risks -- Uncertainties Related to
Clinical Trial Results and FDA Approval" and "-- Business Risks -- Government
Regulation; No Assurances of Regulatory Approval."
BUSINESS STRATEGY
The Company's business strategy is designed to provide a continuing
pipeline of proprietary new products by incorporating the following key
elements:
Develop Proprietary and Acquired Technologies. The Company's development
activities are focused on providing a broad portfolio of proprietary
pharmaceutical products for the reproductive system. New products may enter
development from the Company's own research programs as well as through an
active acquisition strategy. For example, while certain of the Company's
contraceptive and urology development programs were initiated in-house, the
Company acquired the rights, in 1994, to certain technology that formed the
basis for the development of Vasomax(R).
Establish Collaborations with Corporate Partners. When appropriate,
Zonagen seeks to collaborate with corporate partners for the development and
marketing of certain technologies and products. In November 1997, the Company
entered into exclusive license agreements with affiliates of Schering-Plough
with respect to the exclusive worldwide license to market and sell Vasomax(R)
for the treatment of male erectile dysfunction. In addition to providing an up-
front payment and milestone payments, these agreements provide for Schering-
Plough to pay royalties on net sales to the Company. See "-- Collaborative and
Licensing Agreements."
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Expand Intellectual Property Portfolio. The Company will continue to seek
patent protection for its technologies and formulations in the U.S. and key
international markets. Zonagen currently owns a total of 5 issued patents and
19 pending patent applications in the U.S., and 28 issued patents and 76 pending
patent applications outside the U.S. See "--Patents and Proprietary
Information."
PRODUCTS IN PRECLINICAL DEVELOPMENT
The Company has several product candidates in preclinical development in
the areas of sexual dysfunction, contraception, urological diseases and vaccine
adjuvants. The Company's preclinical product candidates are in early stages of
development and have not been demonstrated to be safe or effective. Even if the
Company is able to successfully complete its development efforts with respect to
a particular product, there can be no assurance that regulatory approvals will
be obtained or that any such product can be successfully manufactured and
commercialized. Any products that may be developed from such efforts are not
expected to be commercially available for at least the next several years, if at
all. See " -- Government Regulation," "-- Business Risks -- Uncertainties
Related to Clinical Trial Results and FDA Approval," and "-- Business Risks --
Substantial Dependence on One Product; Early Stage of Development of Other
Products."
SEXUAL DYSFUNCTION
Vasofem
A study published in The New England Journal of Medicine evaluating couples
with sexual dysfunction revealed that 40% of the men studied had erectile
dysfunction, while 63% of the women studied had arousal or orgasmic dysfunction.
Similar to male sexual dysfunction, the prevalence of Female Sexual Dysfunction
("FSD") has been shown to increase with age and to be associated with vascular
risk factors. Post-menopausal women and women with a history of vascular risk
factors have been shown to have significantly more complaints of self-reported
vaginal and clitoral dysfunction than pre-menopausal women or women without
vascular risks.
A study published in the International Journal of Impotence Research in
1997 suggests that the male and female reaction to sexual stimuli share similar
physiological characteristics. The study indicates that vasodilators, which are
effective in treating male erectile dysfunction, may also have application in
treating vasculogenic female sexual dysfunction.
During 1997, the Company completed a small pilot study under its
Investigational New Drug ("IND") application for Vasomax(R). The study was
conducted with six post-menopausal women as a preliminary evaluation of the
potential utility of phentolamine mesylate in treating FSD. Based on the
promising results from this study, the Company filed an IND with the FDA that
came into effect in October 1998. The purpose of this IND is to assess the
efficacy and safety of phentolamine mesylate in the treatment of female sexual
arousal disorder. A safety and pharmacokinetic study was initiated in the U.S.
under this IND to assess the safety of vaginally administered phentolamine
mesylate in sixty healthy women.
Combination Oral Therapy for MED
Combinations of drugs are often used on an off-label basis in penile needle
injection therapy to improve erectile response. These drugs are believed to
operate using different mechanisms of action, and are therefore administered in
combination with the objective of improving success rates over single-drug
treatments. Based on its evaluation of the mechanisms responsible for erectile
function, the Company believes that the use of Vasomax(R) in combination with
certain other drugs that possess different mechanisms of action may yield
improved erectile response in some men. The Company is currently conducting a
300 patient pilot study in Mexico to evaluate the safety and potential efficacy
of such an oral combination therapy for erectile dysfunction.
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Multi-component Injection Therapy for MED
In addition to an oral combination product for MED, the Company also
intends to conduct pilot studies with a multi-component injection as second-line
therapy. The Company believes that about 30% of patients with erectile
dysfunction may not respond satisfactorily to oral therapy and may require
penile injection therapy to achieve an erection sufficient for satisfactory
sexual performance.
CONTRACEPTION
Approximately 70 million women around the world use oral contraceptives on
a daily basis, and many other women employ alternative forms of contraception,
both reversible and irreversible. The Company believes that a variety of
factors, including the disadvantages of the hormones used in currently available
oral contraceptives and the rapidly growing populations of many developing
countries, present a significant opportunity for new contraceptive approaches.
Currently, the Company is conducting pilot studies of its vaginal spermacidal
gel in women in Mexico. The contraceptive vaccines are in preclinical
development.
UROLOGY
The National Institutes of Health (the "NIH") estimates that approximately
two million men in the U.S. suffer from diseases of the prostate, principally
benign prostate hyperplasia (BPH) and prostate cancer. Excluding skin cancer,
prostate cancer is the most commonly occurring cancer in American men.
According to the American Cancer Society, prostate cancer will afflict
approximately one out of every five American men. An estimated 179,300 new
cases of prostate cancer will be diagnosed in 1999, and approximately 37,000 men
will die of prostate cancer that year. Current treatments for prostate cancer
include surgery (usually either radical prostatectomy or transurethral resection
of the prostate), radiation therapy, hormone therapy and chemotherapy.
In November 1998, the Company initiated in Mexico the first human pilot
study of its therapeutic vaccine based on a recombinant prostate-specific
antigen, that appears to stimulate the human immune system to destroy prostate
cancer cells in non-hormone dependent tumors.
BPH is a condition involving the enlargement of the prostate as a result of
cellular proliferation, causing bladder and urinary tract problems. Although
the causes of BPH are not well understood, the prevalence of the condition is
strongly correlated with age. More than 50% of men over age 60, and between 80%
and 90% of men over age 80, are affected by BPH. Current treatments for BPH
include surgery, balloon urethroplasty, transurethral microwave therapy and two
approved drugs, one that inhibits production of a hormone involved in prostate
enlargement and the other which relaxes the smooth muscle of the prostate and
bladder neck to improve urinary flow and reduce bladder outlet obstruction.
The Company is conducting early-stage screening studies of small molecules
that may have the potential to treat BPH and prostate cancer. These agents have
been shown to reduce cellular proliferation and prostate size in animal studies
conducted by the Company. The Company has also identified a potential
immunological therapy based on a recombinant vaccine.
VACCINE ADJUVANTS
As a result of research conducted to develop an adjuvant that could be used
in conjunction with the Company's proposed zona pellucida-based contraceptive
vaccine, the Company believes that it has developed a new adjuvant system,
ImmuMax(TM) (formerly Zmax), which may enhance the effectiveness of vaccines.
The Company expects to complete toxicology studies for ImmuMax(TM) and
ImmuMax SR(TM) in 1999, and intends to seek opportunities for out-licensing its
adjuvant technology to corporate partners.
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RESEARCH AND DEVELOPMENT
The Company's research and development expenditures have been used
primarily for clinical trials of Vasomax(R) and the development of its
preclinical products. In 1996, 1997 and 1998, research and development expenses
were $7.9 million, $22.3 million and $22.4 million, respectively. The Company
expects these expenses to increase over the next several years as it advances
certain of the Company's preclinical product candidates into clinical trials.
COLLABORATIVE AND LICENSING AGREEMENTS
The Company seeks to collaborate with corporate partners for the
development and marketing of certain technologies and products and to in-license
existing and late-stage development products and technologies. In this regard,
the Company has entered into the collaborative and licensing agreements
described below:
Schering-Plough
In November 1997, the Company entered into exclusive license agreements
with Schering-Plough Corporation with respect to the exclusive worldwide license
to market and sell Vasomax(R) for the treatment of male erectile dysfunction. In
addition, the Company granted to Schering-Plough an option to acquire an
exclusive worldwide license to market and sell Vasomax(R), and certain other
products developed by the Company, for other indications. The Company will be
entitled to receive certain additional up-front payments, milestone payments and
royalties in the event that Schering-Plough exercises its options under the
agreements. Under the agreements, Schering-Plough paid Zonagen an aggregate up-
front payment of $10 million upon the signing of the agreement in 1997, and
additional milestones totaling $10 million in 1998 upon completion of certain
developmental milestones, and will make subsequent milestone payments as
specified regulatory goals are achieved. Schering-Plough will also pay to the
Company escalating royalties on all product sales.
Schering-Plough also has a right of first negotiation to enter into a
license agreement with Zonagen for the manufacture, marketing, distribution and
sale of certain additional products, which right of first negotiation is
exercisable only to the extent that Zonagen decides to enter into a
collaborative arrangement with a third party with respect to the manufacture,
marketing, distribution and sale of such additional products.
The Schering-Plough agreements obligate the Company to manufacture, or
subcontract the manufacturing to a third party at its expense, the licensed
products (and certain components thereof) for a period of three years after the
first commercial sale by Schering-Plough and the licensed compound for five
years. In turn, the agreements obligate Schering-Plough to purchase all of its
requirements of the licensed products from the Company or the Company's
designated third-party manufacturer during the same time period. The Company
has contracted with the Synkem Division of Plasto S.A. ("Synkem") for the
exclusive manufacture and supply of the Company's requirements of phentolamine
mesylate. Previously the Company relied upon FDA-approved contract
manufacturers to tablet and package Vasomax(R), however recently the Company was
notified by Schering-Plough that it has exercised its right to begin
manufacturing finished product. See "-- Manufacturing."
The licenses granted under the Schering-Plough agreements terminate on a
country-by-country basis on the expiration of the last patent relating to such
product in such country. The agreements are terminable by Schering-Plough in
the event certain regulatory milestone goals are not met, or other specified
events occur, and are terminable by either party on the occurrence of a breach
that is not cured by the breaching party within a certain time period after
notice has been given to such breaching party.
Schering AG
In December 1993, the Company entered into an agreement with Schering AG (a
pharmaceutical company based in Germany that is not affiliated with Schering-
Plough), pursuant to which the Company and Schering AG agreed to jointly
research, develop and test zona pellucida-based human contraceptive vaccines.
Schering AG was required to purchase $2.5 million of Common Stock on or before
June 9, 1998 to retain its rights under the
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agreement beyond such date. Schering AG did not purchase the shares of the
Company's Common Stock required to maintain its rights under the agreement;
accordingly, the agreement terminated on June 9, 1998. As a result of this
termination, Schering AG and the Company have no further obligations under the
agreements, and all product rights under the agreement have reverted to the
Company.
Contract Research Organizations
During 1996, the Company established arrangements with two contract
research organizations, PPD Pharmaco and Affiliated Research Centers, Inc.,
relating to the Company's U.S. clinical development of Vasomax(R). These
companies have collaborated with the Company in the design and conduct of the
Company's U.S. clinical trials, including the pivotal Phase III clinical trials
of Vasomax(R). In addition, these companies have been responsible for managing
the conduct of and analyzing data from such clinical trials on behalf of the
Company. Either party may terminate these arrangements at any time. If these
companies were unable or unwilling to devote adequate resources to the Company's
projects and to provide services on a timely basis and on acceptable terms, the
Company would be required to establish relationships with other contract
research organizations or to further develop the capacity to conduct clinical
trials within its own clinical affairs group. This could result in significant
additional expense and delays in the Company's clinical trials and could have a
material adverse effect on the Company. See " -- Business Risks -- Reliance on
Contract Research Organizations."
PATENTS AND PROPRIETARY INFORMATION
The Company's ability to compete effectively with other companies is
materially dependent on the proprietary nature of the Company's patents and
technologies. The Company actively seeks patent protection for its proprietary
technology in the United States and abroad. As of December 31, 1998, the
Company had rights to a total of five issued patents and 19 pending patent
applications in the United States and 28 issued patents and 76 pending patent
applications outside the United States. On March 24, 1998, the Company received
a second patent in the United States relating to its male erectile dysfunction
technology.
The Company has two issued patents and four pending patent application in
the United States, and 24 issued foreign patents, 55 pending foreign patent
applications, and a Patent Cooperation Treaty application relating to its male
erectile dysfunction technology. The Company has rights to three issued patents
in the United States, one issued patent in India, and two issued patents in
Australia with respect to products and methods using specific recombinant zona
pellucida peptides. The Company has a total of seven United States and 11
foreign patent applications pending that relate to zona pellucida proteins,
their preparation, and their use. The Company has four pending United States
patent applications and nine pending foreign patent applications for its ImmuMax
adjuvant system. The Company also has the following patent applications pending
in the United States: an application related to a vaginal contraceptive gel, an
application related to a recombinant human chorionic gonadotrophin vaccine and
uses thereof, and an application related to methods and materials for the
treatment of certain diseases of the prostate.
The Company's ability to commercialize any products will depend, in part,
on its or its licensors' ability to obtain patents, enforce those patents and
preserve trade secrets and on its own ability to operate without infringing on
the proprietary rights of third parties. The patent positions of biotechnology
and pharmaceutical companies are highly uncertain and involve complex legal and
factual questions. There can be no assurance that any patent applications owned
by or licensed to the Company will result in issued patents, that patent
protection will be secured for any particular technology, that any patents that
have been or may be issued to the Company or its licensors will be valid or
enforceable, that any patents will provide meaningful protection to the Company,
that others will not be able to design around the patents, or that the Company's
patents will provide a competitive advantage or have commercial application.
The failure to obtain adequate patent protection would have a material adverse
effect on the Company and may adversely affect the Company's ability to enter
into, or affect the terms of, any arrangement for the marketing of any product.
One of the Company's issued United States patents relating to Vasomax(R) is
a method-of-use patent rather than a composition-of-matter or formulations
patent. A method-of-use-patent encompasses the use of a composition to treat a
specified condition but does not encompass the composition or formulations,
themselves. A method-of-use
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patent may provide less protection than a composition-of-matter patent if other
companies market the composition for purposes other than that encompassed by the
method-of-use patent, because of the possibility of "off-label" use of the
composition. Phentolamine, the active ingredient in Vasomax(R), is currently
marketed in injectable form for the treatment of hypertension and for use in the
diagnosis of certain tumors of the adrenal gland, and has been used "off-label"
by urologists in penile injection therapies for the treatment of erectile
dysfunction. Although an oral formulation of phentolamine was formerly marketed
as a treatment for hypertension, it is no longer on the market. The Company
believes that the characteristics of this formerly available formulation, which
differs from the Vasomax(R) formulation used in clinical trials, would lack the
advantages of the Vasomax(R) formulation and have limited utility in treating
erectile dysfunction. The Company's second issued United States patent relating
to Vasomax(R), which issued on March 24, 1998, claims formulations as well as
the method of use of Vasomax(R).
There can be no assurance that patents owned by or licensed to the Company
will not be challenged by others. The Company could incur substantial costs in
proceedings, including interference proceedings before the United States Patent
and Trademark Office and comparable proceedings before similar agencies in other
countries. These proceedings could result in adverse decisions about the
patentability of the Company's inventions and products as well as about the
enforceability, validity or scope of protection afforded by the patents.
There can be no assurance that the manufacture, use or sale of the
Company's product candidates will not infringe patent rights of others. The
Company may be unable to avoid infringement of those patents and may be required
to seek a license, defend an infringement action, or challenge the validity of
the patents in court. There can be no assurance that a license will be
available to the Company on terms and conditions acceptable to the Company, if
at all, or that the Company will prevail in any patent litigation. Patent
litigation is costly and time-consuming, and there can be no assurance that the
Company will have sufficient resources to bring such litigation to a successful
conclusion. If the Company does not obtain a license under such patents, or is
found liable for infringement, or is not able to have such patents declared
invalid, the Company may be liable for significant money damages, may encounter
significant delays in bringing products to market, or may be precluded from
participating in the manufacture, use or sale of products or methods of
treatment requiring such licenses. The Company does not believe that the
commercialization of its products will infringe on the patent rights of others.
However, there can be no assurance that the Company has identified all United
States and foreign patents that pose a risk of infringement.
The Company also relies on trade secrets and other unpatented proprietary
information in its product development activities. To the extent the Company
relies on trade secrets and unpatented know-how to maintain its competitive
technological position, there can be no assurance that others may not
independently develop the same or similar technologies. The Company seeks to
protect trade secrets and proprietary knowledge, in part, through
confidentiality agreements with its employees, consultants, advisors,
collaborators and contractors. Nevertheless, these agreements may not
effectively prevent disclosure of the Company's confidential information and may
not provide the Company with an adequate remedy in the event of unauthorized
disclosure of such information. If the Company's employees, scientific
consultants or collaborators develop inventions or processes independently that
may be applicable to the Company's products, disputes may arise about ownership
of proprietary rights to those inventions and processes. Such inventions and
processes will not necessarily become the Company's property, but may remain the
property of those persons or their employers. Protracted and costly litigation
could be necessary to enforce and determine the scope of the Company's
proprietary rights. Failure to obtain or maintain patent and trade secret
protection, for any reason, would have a material adverse effect on the Company.
Several bills affecting patent rights have been introduced in the United
States Congress. These bills address various aspects of patent law, including
publication, patent term, re-examination, subject matter and enforceability. It
is not certain whether any of these bills will be enacted into law or what form
new laws may take. Accordingly, the effect of legislative change on the
Company's intellectual property is uncertain.
SALES AND MARKETING
The Company has limited experience in the sales, marketing and distribution
of pharmaceutical products. The Company has entered into sales and marketing
agreements with Schering-Plough for Vasomax(R) and may seek similar agreements
regarding its other proprietary product candidates with one or more
pharmaceutical companies
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that have established marketing and sales capabilities. If the Company fails to
reach, or elects not to enter into a similar arrangement with respect to any of
its other proprietary product candidates, in order to market such products
directly, the Company would need to develop a sales and marketing organization,
with supporting distribution capability. Significant additional expenditures
would be required for the Company to develop such a sales and marketing
organization.
Any revenues the Company receives from Vasomax(R) will depend on the
efforts of Schering-Plough. To the extent that the Company enters into marketing
or distribution arrangements with others, any revenues the Company receives will
depend on the efforts of third parties. There can be no assurance that Schering-
Plough, or any other third party, will devote significant resources to the
Company's products, or market the Company's products successfully, or that any
future third-party collaboration will be on terms favorable to the Company. If
Schering-Plough or any other marketing partner does not market a product
successfully, the Company would be materially adversely affected. There can be
no assurance that the Company will be able to establish sales, marketing and
distribution capabilities, or that it or its collaborators will be successful in
gaining market acceptance for any products that the Company may develop. The
Company's failure to establish marketing capabilities or to enter into marketing
arrangements with third parties would have a material adverse effect on the
Company.
MANUFACTURING
The Company does not have any manufacturing facilities to manufacture
products in the quantities necessary for clinical trials or commercial sales,
and does not expect to establish any significant manufacturing capacity in the
near future. On November 16, 1995, the Company entered into a development and
manufacturing services agreement with Synkem, a contract manufacturing
organization, for the manufacture and validation of bulk phentolamine for use in
clinical trials and for the purpose of supporting an IND application to permit
clinical testing of Vasomax(R). Synkem has filed a Drug Master File ("DMF") with
the FDA in connection with its manufacture of phentolamine, allowing the Company
to reference that information in its own regulatory submissions. On June 12,
1997, the Company and Synkem executed an exclusive supply agreement. This
initial supply agreement requires that the Company purchase all of its bulk
phentolamine from Synkem for a period of five years. The supply agreement
provides that it will automatically renew for consecutive one-year periods until
terminated by either party. The supply agreement requires the Company to
purchase specified minimum order quantities and that Synkem manufacture
phentolamine exclusively for the Company. Previously the Company relied upon
FDA-approved contract manufacturers to tablet and package Vasomax(R), however
recently the Company was notified by Schering-Plough that it has exercised its
right to begin manufacturing finished product. See " -- Collaborative and
Licensing Agreements -- Schering-Plough."
The Company presently produces all of the zona pellucida proteins necessary
for use in its research and development activities.
The Company intends to rely on third parties for the manufacture and supply
of commercial quantities of other products that it may develop. There can be no
assurance that the Company will be able to obtain supplies of its products from
third-party suppliers on terms or in quantities acceptable to the Company.
Also, the Company's dependence on third parties for the manufacture of its
products may adversely affect the Company's product margins and its ability to
develop and deliver products in a timely manner. Any such third-party suppliers
or any manufacturing facility the Company establishes will be required to meet
FDA manufacturing requirements. FDA certification of manufacturing facilities
for a drug, and compliance with current Good Manufacturing Practices
requirements, is a prerequisite to approval of an NDA for that drug. The
Company may encounter significant delays in obtaining supplies from third-party
manufacturers or experience interruptions in its supplies. The effects of any
such delays or interruptions will be more severe if the Company relies on a
single source of supply. If the Company were unable to obtain adequate supplies,
its business would be materially adversely affected.
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COMPETITION
The Company is engaged in pharmaceutical product development, an industry
that is characterized by extensive research efforts and rapid technological
progress. Many established biotechnology and pharmaceutical companies,
universities and other research institutions with resources significantly
greater than the Company's are marketing or may develop products that directly
compete with the Company's products. These entities may succeed in developing
products that are safer, more effective or less costly than the Company's
products. Even if the Company's products should prove to be more effective than
those developed by other companies, other companies may be more successful than
the Company because of greater financial resources, greater experience in
conducting preclinical studies and clinical trials and in obtaining regulatory
approval, stronger sales and marketing efforts, earlier receipt of approval for
competing products and other factors. If the Company commences significant
commercial sales of its products, the Company or its collaborators will compete
in areas in which the Company has little or no experience, such as manufacturing
and marketing. There can be no assurance that the Company's products, if
commercialized, will be accepted and prescribed by healthcare professionals.
Current Competitive Therapies
The following is a brief description of the major competitive therapies to
Vasomax(R) currently in existence:
Until March 1998, when the FDA approved Viagra(R), drug therapy for the
treatment of MED consisted of delivering vasoactive drugs directly to the penis
via needle injection, and recently, via the urethra. In addition to drug
therapy, other treatment options include vacuum constriction devices and penile
implants that are invasive, painful, and inconvenient, or result in an erection
the onset and duration of which is determined by the treatment rather than by
actual sexual stimulation. In addition, many currently available therapies
produce undesirable side effects and potential complications.
On March 27, 1998, the FDA approved Viagra(R)(sildenafil), the first oral
medication for erectile dysfunction. Viagra(R) is an oral product that
facilitates a normal response to sexual stimulation by inhibiting the enzyme
phosphodiesterase. The onset of action of Viagra(R) is approximately sixty
minutes after swallowing the tablet. The most common side effects include
headache, flushing and dyspepsia. Additionally Viagra(R) is contraindicated in
patients taking nitrate-containing medications and has, in rare incidences,
produced episodes of priapism (prolonged, painful erections.)
Prior to the approval of Viagra(R), the oral medication most frequently
used to treat erectile dysfunction was yohimbine, an extract from tree bark.
Yohimbine is available by prescription in a concentrated form or as a food
supplement at health food stores and other retailers. Yohimbine must be
chronically administered, may cause irritability, sweating, nausea and
hypertension, and has not demonstrated improvement that is statistically
different from placebo.
Vivus, Inc. commenced marketing MUSE(R) in the U.S. in January 1997.
MUSE(R) is a device that administers a small pellet of alprostadil directly into
the penis via a catheter that is inserted through the opening of the urethra.
The drug is absorbed through the urethra and produces an erection within a short
period of time, regardless of sexual stimulation. The erection is maintained for
a period of time that is determined by the dose of alprostadil rather than by
the normal conduct of sexual activity. This transurethral treatment may be used
to treat a significant number of impotent men, but may cause pain and some
degree of urethral burning during and after administration, as well as other
systemic side effects.
Needle injection therapy involves the direct injection into the penis of
vasoactive compounds such as alprostadil (prostaglandin E). Phentolamine
mesylate and papaverine are often combined with alprostadil on an off-label
basis. Pharmacia & Upjohn Inc. and Schwarz Pharma AG each market alprostadil
for penile injection, known as Caverject(R) and Edex(R), respectively. Needle
injection therapy has a relatively high degree of efficacy in producing an
erection of maximal rigidity within a short period of time after administration.
However, the erection is produced regardless of actual sexual stimulation and
maintained for a period of time determined by the dose rather than by the
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normal course of sexual activity. Needle injection therapy may also involve
significant undesirable effects, including the pain of the injection, local pain
or aching and complications such as hematomas, bleeding and nodule formation.
A vacuum constriction device is a mechanical system that creates a vacuum
around the penis, causing the erectile bodies to fill with blood. A
constriction band is then placed around the base of the penis to impede blood
drainage and maintain the erection until the band is removed. This device can
be inconvenient to use, may cause the penis to become cold and discolored due to
the constriction of blood flow, and may produce such complications as pain and
difficulty ejaculating. Prolonged periods of constricted blood flow may produce
permanent damage to tissue in the penis.
Penile implant therapy involves the surgical implantation of a semi-rigid,
rigid or inflatable device into the penile structure to mechanically simulate an
erection. In addition to the risks and scarring associated with the surgical
procedures, complications include infection and mechanical failure of the
device, which may necessitate a second surgical procedure. Penile implant
surgery is irreversible and involves substantial cost. Surgical implants
require the removal of tissue from the penis, effectively eliminating the
patient's ability to subsequently use other, less radical methods of treatment.
Competitive Products in Development
The following is a description of known competitive products to Vasomax(R)
in development:
Additional therapies for MED are under development by other companies that
may compete with Vasomax(R), including new oral, injection and topical
treatments. TAP Pharmaceuticals, Inc. ("TAP") and ICOS Corporation ("ICOS"), in
collaboration with Eli Lilly, are actively developing oral drug therapies to
treat MED that may eventually compete with Vasomax(R). The Company believes that
TAP could submit an NDA for this oral treatment to the FDA as early as 1999.
MacroChem Corp. is currently developing a topical treatment for male
erectile dysfunction that may compete with Vasomax(R). Harvard Scientific
Corporation, NexMed, Inc. and Senetek PLC are also developing products for
sexual dysfunction. Other companies and research groups, in addition to these
discussed above, may be developing oral, topical, and injectable drugs to treat
MED. The Company believes that Vasomax(R) will compete effectively with such
competitive products on the basis of one or more factors, including convenience
of administration, speed of efficacy, duplication of normal sexual function,
reduced side effects, price and the availability of third-party reimbursement.
Marketing of competitive products and other products that treat disease
indications targeted by the Company could adversely affect the market acceptance
of the Company's products as a result of the established market recognition and
physician familiarity with the competing product. The presence of directly
competitive products could also result in more intense price competition than
might otherwise exist, which could have a material adverse effect on the
Company. The Company believes that competition will be intense for all of its
products.
GOVERNMENTAL REGULATION
The Company's research and development activities, preclinical studies and
clinical trials, and ultimately the manufacturing, marketing and labeling of its
products, are subject to extensive regulation by the FDA and other regulatory
authorities in the U.S. and other countries. The U.S. federal Food, Drug and
Cosmetic Act (the "FDC Act") and the regulations promulgated thereunder and
other federal and state statutes and regulations govern, among other things, the
testing, manufacture, storage, record keeping, labeling, advertising, promotion,
marketing and distribution of the Company's products. Preclinical study and
clinical trial requirements and the regulatory approval process take years and
require the expenditure of substantial resources. Additional government
regulation may be established that could prevent or delay regulatory approval of
the Company's products. Delays or rejections in obtaining regulatory approvals
would adversely affect the Company's ability to commercialize any product the
Company develops and the Company's ability to receive product revenues or
royalties. If regulatory approval of
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a product is granted, the approval may include significant limitations on the
indicated uses for which the product may be marketed or may be conditioned on
the conduct of post-marketing surveillance studies.
The standard process required by the FDA before a pharmaceutical agent may
be marketed in the U.S. includes: (i) preclinical tests; (ii) submission to the
FDA of an investigational new drug application ("IND") which must become
effective before human clinical trials may commence; (iii) adequate and well-
controlled human clinical trials to establish the safety and efficacy of the
drug for its intended application; (iv) submission of an NDA to the FDA; and (v)
FDA approval of the NDA prior to any commercial sale or shipment of the drug.
Preclinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. Preclinical safety tests must be conducted
by laboratories that comply with FDA regulations regarding Good Laboratory
Practices. The results of the preclinical tests are submitted to the FDA as
part of an IND and are reviewed by the FDA before the commencement of human
clinical trials. Unless the FDA objects to an IND, an IND will become effective
30 days following its receipt by the FDA. There can be no assurance that
submission of an IND will result in FDA authorization to commence clinical
trials or that the lack of an objection to an IND means that the FDA will
ultimately approve an NDA.
Clinical trials involve the administration of the investigational new drug
to humans under the supervision of a qualified principal investigator. Clinical
trials must be conducted in accordance with Good Clinical Practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety, and efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. Also, each clinical trial must be
approved by and conducted under the auspices of an Institutional Review Board
("IRB"). The IRB will consider, among other things, ethical factors, the safety
of human subjects, and the possible liability of the institution conducting the
clinical trials.
Clinical trials are typically conducted in three sequential phases that may
overlap. In Phase I, the initial introduction of the drug to humans, the drug
is tested for safety (adverse effects), dosage tolerance, metabolism,
distribution, excretion and pharmacodynamics (clinical pharmacology). Phase II
involves studies of a limited patient population to gather evidence about the
efficacy of the drug for specific targeted indications, dosage tolerance and
optimal dosage, and to identify possible adverse effects and safety risks. When
a product has shown evidence of efficacy and has an acceptable safety profile in
a Phase II evaluation, Phase III clinical trials are undertaken to evaluate
clinical efficacy and to test for safety in an expanded patient population at
geographically dispersed clinical trial sites. There can be no assurance that
any of the Company's clinical trials will be completed successfully or within
any specified time period. The Company or the FDA may suspend clinical trials
at any time if, for example, safety issues arise or regulatory requirements are
not satisfied.
In addition, the FDA inspects and reviews clinical trial sites, informed
consent forms, data from the clinical trial sites, including case report forms
and record keeping procedures, and the performance of the protocols by clinical
trial personnel to determine compliance with Good Clinical Practices. The FDA
also evaluates whether there was any bias in the conduct of clinical trials.
The conduct of clinical trials in general and the performance of the pivotal
clinical trial protocols are complex and difficult. The Company designed the
protocols for its pivotal Phase III clinical trials of Vasomax(R) based on its
analysis of its research, including various parts of its German Phase II
clinical trial and its Mexican product registration trial. Although the data
from the pivotal Phase III trials has been presented at scientific meetings, and
submitted for publication to peer-reviewed medical journals, there can be no
assurance that the FDA will accept this data as being adequate proof of the
efficacy and safety of Vasomax(R). The Company completed a standard animal
carcinogenicity study in 1997 and is currently conducting a second animal
carcinogenicity study, which it expects to complete as a Phase IV commitment.
The results of preclinical studies and clinical trials, if successful, are
submitted in an NDA to seek FDA approval to market and commercialize the drug
product for a specified use. FDA approval of the NDA is required before
marketing may begin in the U.S. The NDA must include the results of extensive
clinical and other testing and the compilation of data relating to the product's
chemistry, pharmacology and manufacture. The total cost of the NDA is
substantial. After submitting an NDA, the FDA reviews it before it accepts it
for filing, and may request
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that additional information be provided prior to accepting an NDA for filing. In
such an event, the NDA must be resubmitted with the additional information and,
again, is subject to review before filing. Once the submission is accepted for
filing, the FDA begins an in-depth review of the NDA. The review process is
often significantly extended by FDA requests for additional information or
clarification regarding information already provided in the submission. The FDA
may refer the application to the appropriate advisory committee, typically a
panel of clinicians, for review, evaluation and a recommendation as to whether
the application should be approved. The FDA is not bound by the recommendation
of an advisory committee. If FDA evaluations of the NDA and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter, which usually contains a number of conditions that must be
met in order to secure final approval of the NDA. When and if those conditions
have been met to the FDA's satisfaction, the FDA will issue an approval letter,
authorizing commercial marketing of the drug for certain indications. As a
condition of NDA approval, the FDA may require postmarketing testing and
surveillance to monitor the drug's safety or efficacy. If the FDA's evaluation
of the NDA submission or manufacturing facilities is not favorable, the FDA may
refuse to approve the NDA or issue a not approvable letter, outlining the
deficiencies in the submission and often requiring additional testing or
information. Notwithstanding the submission of any requested additional data or
information in response to an approvable or not approvable letter, the FDA
ultimately may decide that the application does not satisfy the regulatory
criteria for approval. Once granted, product approvals may be withdrawn if
compliance with regulatory standards is not maintained or problems occur
following initial marketing.
Even if regulatory approvals for the Company's products are obtained, the
Company, its products, and the facilities manufacturing the Company's products
are subject to continual review and periodic inspection. The FDA will require
post-marketing reporting to monitor the safety of the Company's products. Each
U.S. drug-manufacturing establishment must be registered with the FDA. Domestic
manufacturing establishments are subject to biennial inspections by the FDA and
must comply with the FDA's requirements regarding Good Manufacturing Practices.
To supply drug products for use in the U.S., foreign manufacturing
establishments must comply with the FDA's Good Manufacturing Practices and are
subject to periodic inspection by the FDA or by regulatory authorities in those
countries under reciprocal agreements with the FDA. In complying with Good
Manufacturing Practices, manufacturers must expend funds, time and effort in the
area of production and quality control to ensure full technical compliance. The
Company does not have any drug manufacturing capability and must rely on outside
firms for this capability. See "-- Manufacturing." The FDA stringently applies
regulatory standards for manufacturing. Identification of previously unknown
problems with respect to a product, manufacturer or facility may result in
restrictions on the product, manufacturer or facility, including warning
letters, suspensions of regulatory approvals, operating restrictions, delays in
obtaining new product approvals, withdrawal of the product from the market,
product recalls, fines, injunctions and criminal prosecution.
Before the Company's products can be marketed outside of the U.S., they are
subject to regulatory approval similar to FDA requirements in the U.S., although
the requirements governing the conduct of clinical trials, product licensing,
pricing, and reimbursement vary widely from country to country. No action can
be taken to market any drug product in a country until the regulatory
authorities in that country have approved an appropriate application. FDA
approval does not assure approval by other regulatory authorities. The current
approval process varies from country to country, and the time spent in gaining
approval varies from that required for FDA approval. In some countries, the
sale price of a drug product must also be approved. The pricing review period
often begins after market approval is granted. Even if a foreign regulatory
authority approves any of the Company's products, no assurance can be given that
it will approve satisfactory prices for the products.
The Company's research and development involves the controlled use of
hazardous materials, chemicals, viruses, and various radioactive compounds.
Although the Company believes that its procedures for handling and disposing of
those materials comply with state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be eliminated.
If such an accident occurs, the Company could be held liable for resulting
damages, which could be material to the Company's financial condition and
business. The Company is also subject to numerous environmental, health and
workplace safety laws and regulations, including those governing laboratory
procedures, exposure to blood-borne pathogens, and the handling of biohazardous
materials. In addition, the Company's diagnostic laboratory operations are
required to be certified or licensed under the federal Clinical Laboratory
Improvement Act of 1967, as amended in 1988 ("CLIA"), the Medicare and Medicaid
programs and
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various state and local laws. Additional federal, state and local laws and
regulations affecting the Company may be adopted in the future. Any violation
of, and the cost of compliance with, these laws and regulations could materially
and adversely affect the Company. See "--Business Risks--Government Regulation;
No Assurances of Regulatory Approval."
EMPLOYEES AND CONSULTANTS
Employees
At December 31, 1998, the Company had 51 full-time employees and utilized a
variety of consultants. Of the Company's full-time employees, 33 were engaged
in research, development, clinical research and regulatory affairs, 11 were
engaged in finance and administration and 7 were engaged in FTI operations. The
Company relies on its employees to perform most research and development
activities, but also uses outside consultants as needed. The Company believes
its relationship with its employees is good.
Scientific Advisors and Consultants
The Company benefits from consultation with prominent scientists active in
fields related to the Company's technology. For this purpose, the Company has
consulting relationships with a number of scientific advisors. At the Company's
request, these advisors review the feasibility of product development programs
under consideration, advise concerning advances in areas related to the
Company's technology and aid in recruiting personnel. Certain of the
consultants receive cash or stock-based compensation for their services. All of
the advisors are employed by academic institutions or other entities and may
have commitments to or advisory agreements with other entities that may limit
their availability to the Company. The Company's consultants are required to
disclose and assign to the Company any ideas, discoveries and inventions they
develop in the course of providing consulting services. The Company also uses
consultants for various administrative needs. None of the Company's consultants
are otherwise affiliated with the Company. The Company's scientific advisors and
consultants include the following persons:
Deborah J. Anderson, Ph.D. Dr. Anderson is an Associate Professor of
Obstetrics, Gynecology and Reproductive Biology at Brigham and Women's Hospital
and Harvard Medical School. Dr. Anderson is also the Director of the Fearing
Research Laboratory.
M. Fathy El Etreby, D.V.M. Dr. Etreby was Director of Research and
Development at the Pharmaceutical Division of Schering in Berlin, Germany and at
Berlex Laboratories in Wayne, New Jersey for 25 years. Currently, Dr. Etreby is
Director of Clinical and Basic Research in the Section of Urology of the
Department of Surgery at the Medical College of Georgia.
David Ferguson, M.D., Ph.D. Dr. Ferguson has been involved in
pharmaceutical research and development since 1968. In 1993, he helped found
Affiliated Research Centers, Inc. ("ARC"), one of the first site management
organizations, and served as Senior Vice President for ARC until February 1997.
The Company engaged ARC to assist in the design and implementation of its U.S.
clinical trials. The Company engaged Dr. Ferguson as a consultant following his
departure from ARC. Dr. Ferguson also serves as a consultant to other
pharmaceutical companies and to the World Health Organization.
Irwin Goldstein, M.D. Dr. Goldstein has been co-director of the Urology
Research Laboratory at Boston University School of Medicine since 1980. Dr.
Goldstein serves as a consultant in the fields of male erectile dysfunction and
female sexual dysfunction.
Joseph A. Hill, M.D. Dr. Hill is the Director of the Reproductive Medicine
Division and of the Reproductive Endocrinology Fellowship Program and Clinical
Director of the Reproductive Immunology Division at Brigham and Women's Hospital
and Harvard Medical School. Dr. Hill is an Associate Professor in the
Department of Obstetrics, Gynecology and Reproductive Biology at Brigham and
Women's Hospital and Harvard Medical School.
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Vernon Knight, M.D. Dr. Knight was with the Baylor College of Medicine for
over 20 years as Professor and Chairman of the Department of Microbiology and
Immunology, Professor in the Infectious Disease Section of the Department of
Medicine and Director of Baylor's Center for Biotechnology. Dr. Knight is
currently Acting Chairman of the Department of Molecular Physiology and
Biophysics at Baylor College of Medicine.
Alfred Poindexter, M.D. Dr. Poindexter is Professor of Obstetrics and
Gynecology and Director of the Division of Contraceptive Development and
Research at Baylor College of Medicine. He is on the staff at St. Luke's
Episcopal Hospital and The Methodist Hospital in Houston, Texas. Dr. Poindexter
has conducted a clinical practice in reproductive endocrinology and research in
contraceptive technology for the past twenty years.
David W. Russell, Ph.D. Dr. Russell is the McDermott Distinguished
Professor in the Department of Molecular Genetics at the University of Texas
Southwestern Medical Center. His main research interests are cholesterol and
steroid hormone metabolism, reproductive biology, molecular genetics and gene
regulation.
Anthony Sacco, Ph.D. Dr. Sacco is a Professor in the Department of
Obstetrics and Gynecology at Wayne State University School of Medicine and
Director of the Hutzel Hospital, Wayne State University In Vitro Fertilization
Laboratory. Dr. Sacco is an authority on the application of zona pellucida
proteins as infertility agents.
Robert S. Schenken, M.D. Dr. Schenken is Professor of Obstetrics and
Gynecology and Director of the Division of Reproductive Endocrinology and
Infertility at The University of Texas Health Science Center in San Antonio. He
has been a consultant for the Society of Reproductive Surgeons' Collaborative
Endometriosis Treatment Trial, and program chairman of the Annual Meeting of the
Society for Gynecologic Investigation and the American Society for Reproductive
Medicine. Dr. Schenken has received numerous national awards for his research
and has also served as principal investigator on research projects funded by the
NIH, World Health Organization and numerous pharmaceutical companies.
Edward C. Yurewicz, Ph.D. Dr. Yurewicz is an Associate Professor in the
Department of Obstetrics and Gynecology and Associate Member of the Graduate
Faculty in the Department of Biochemistry and Molecular Biology at Wayne State
University School of Medicine. Dr. Yurewicz is a leading authority on zona
pellucida protein chemistry.
BUSINESS RISKS
Uncertainties Related to Early Stage of Development
The Company is a development stage company. Companies in the development
stage typically encounter problems, delays, expenses and complications, many of
which may be beyond the Company's control. These include, but are not limited
to, unanticipated problems and costs relating to the development, testing,
production and marketing of its products, regulatory approvals and compliance,
availability of adequate financing and competition. There can be no assurance
that the Company will be able to complete successfully the transition from a
development stage company to the successful introduction of commercially viable
products. The Company has generated only limited revenue from product sales
since its inception. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Note 1 of Notes to
Consolidated Financial Statements."
Uncertainties Related to Clinical Trial Results and FDA Approval
The FDA must approve the Company's NDA prior to commercializing Vasomax(R)
or any other pharmaceutical product in the U.S. Similar approvals will be
required from the regulatory authorities of other countries prior to
commercialization in such countries. The FDA and other regulatory authorities
generally require that the safety and efficacy of a drug be supported by results
from adequate and well-controlled Phase III clinical trials before approval for
commercial sale. The Company completed two U.S. pivotal Phase III clinical
trials of Vasomax(R) in May 1997, but even if the Company believes the Phase III
clinical trials demonstrate the safety and efficacy of Vasomax(R), or any other
product in the treatment of disease, the FDA and other regulatory authorities
may not accept the Company's assessment of the results. In either case, the
Company may be required to conduct
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additional clinical trials in an effort to demonstrate the safety and efficacy
of the product. In December 1998, the Company initiated a U.S. Phase I clinical
trial for Vasofem, for the treatment of female sexual dysfunction; none of the
Company's other products has entered into U.S. human clinical trials.
The Company must demonstrate through preclinical studies and clinical
trials that its products are safe and effective before the Company can obtain
regulatory approvals for the commercial sale of those products. These studies
and trials are very costly and time-consuming. The speed with which the Company
is able to enroll patients in clinical trials is an important factor in
determining how quickly clinical trials may be completed. Many factors affect
the rate of patient enrollment, including the size of the patient population,
the proximity of patients to clinical sites, and the eligibility criteria for
the study. Delays in patient enrollment in the trials may result in increased
costs, program delays, or both, which could have a material adverse effect on
the Company.
The administration of any product the Company develops may produce
undesirable side effects in humans. The occurrence of side effects could
interrupt or delay clinical trials of products and could result in the FDA or
other regulatory authorities denying approval of the Company's products for any
or all targeted indications. In addition, the Company, the FDA or other
regulatory authorities may suspend or terminate clinical trials at any time.
Even if the Company receives FDA and other regulatory approvals, the Company's
products may later exhibit adverse effects that limit or prevent their
widespread use or that necessitate their withdrawal from the market. There can
be no assurance that any of the Company's products will be safe for human use,
nor can there be any assurance that the Company will obtain regulatory approval
for the commercialization of Vasomax(R) or any other product on a timely basis,
or at all. Without regulatory approval, the Company will not be able to
commercialize its products, which would have a material adverse effect on the
Company. Furthermore, delays in the approval process could have a material
adverse effect on the Company, even if regulatory approval is ultimately
obtained. See "--Male Erectile Dysfunction--Vasomax(R)--" and "--Governmental
Regulation."
Substantial Dependence on One Product; Early Stage of Development of Other
Products
The Company has dedicated a substantial portion of its resources over the
last several years to the development of Vasomax(R), which is currently
undergoing regulatory review. Products, if any, resulting from the Company's
other research and development programs are not expected to be commercially
available for at least several years, if at all. As a result, the Company's
future prospects are substantially dependent on timely approval by the FDA and
the successful commercialization of Vasomax(R). Failure to obtain regulatory
approval and successfully commercialize Vasomax(R) would have a material adverse
effect on the Company. The development or acquisition of commercially viable
products will require significant further investment, research, development,
preclinical studies, and clinical testing and regulatory approvals, both foreign
and domestic. In addition, there can be no assurance that the Company will be
able to produce any product at reasonable cost or market such products
successfully. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "-- Products in Preclinical
Development--" and "-- Governmental Regulation."
History of Operating Losses; Accumulated Deficit
The Company has experienced significant operating losses in each fiscal
year since its inception. As of December 31, 1998, the Company had an
accumulated deficit of approximately $51.9 million. The Company may incur
substantial additional operating losses over the next several years in
connection with its research and development and preclinical and clinical
activities. 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. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Note 1 of Notes to Consolidated Financial Statements."
-17-
<PAGE>
Future Capital Needs; Uncertainty of Additional Funding
The Company has experienced negative cash flows from operations since its
inception and has funded its activities to date primarily from equity financings
and funds received through 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, together with the license
fee and milestone payments from Schering-Plough, 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 preclinical and clinical activities; the progress of
the Company's collaborative agreements with Schering-Plough and any future
collaborative research, manufacturing, marketing or other funding arrangements;
the costs and timing of seeking regulatory approvals of the Company's products;
the Company's ability to obtain regulatory approvals; the success of the
Company's sales and marketing programs; the cost of filing, prosecuting and
defending and enforcing any patent claims and other intellectual property
rights; and changes in economic, regulatory or competitive conditions or the
Company's planned business. Estimates about the adequacy of funding for the
Company's activities are based on certain assumptions, including the assumption
that the development and regulatory approval of the Company's products can be
completed at projected costs and that product approvals and introductions will
be timely and successful. There can be no assurance that changes in the
Company's research and development plans, acquisitions or other events will not
result in accelerated or unexpected expenditures. To satisfy its capital
requirements, the Company may seek to raise additional funds in the public or
private capital markets. The Company's ability to raise additional funds in the
public or private markets will be adversely affected if the results of its
current or future clinical trials are not favorable. 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. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Uncertainty of Protection for Patents and Proprietary Technology
The Company's ability to commercialize any products will depend, in part,
on its ability to obtain patents, enforce those patents and preserve trade
secrets and operate without infringing on the proprietary rights of third
parties. See "--Patents and Proprietary Information" for a discussion of the
uncertainty of protection for patents and proprietary technology.
Government Regulation; No Assurances of Regulatory Approval
The Company's research and development activities, preclinical studies,
clinical trials, and the manufacturing and marketing of its products are subject
to extensive regulation by the FDA and other regulatory authorities in the U.S.
These activities are also regulated in other countries where the Company intends
to test and market its products.
Any drug developed by the Company must undergo an extensive regulatory
approval process before it may be marketed and sold. The regulatory process,
which includes preclinical studies and clinical trials of each compound to
establish its safety and efficacy, takes many years and requires the expenditure
of substantial resources. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations that could delay, limit or
prevent FDA regulatory approval. Although the FDA may have been consulted in
developing protocols for clinical trials, that consultation provides no
assurance that the FDA will accept the clinical trials as adequate or well-
controlled or accept the results of those trials as establishing safety or
efficacy. In addition, delays or rejections may be encountered based on changes
in FDA policy for drug approval during the period of product development and FDA
regulatory review of each submitted NDA. Similar delays and rejections may also
be encountered in foreign countries. There can be no assurance that, even after
such time and expenditures, regulatory approval will be
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<PAGE>
obtained for any drugs developed by the Company. Moreover, if regulatory
approval of a drug is granted, such approval may entail limitations on the
indicated uses for which it may be marketed or may be conditioned on post-
marketing surveillance studies. Further, even if such regulatory approval is
obtained, a marketed drug, its manufacturer and its manufacturing facilities are
subject to continual review and periodic inspections, and later discovery of
previously unknown problems with a product, manufacturer or facility may result
in restrictions on the product or manufacturer, including a withdrawal of the
product from the market. Failure to comply with the applicable regulatory
requirements can, among other things, result in warning letters, fines,
suspensions or withdrawals of regulatory approvals, product recalls or seizures,
operating restrictions, injunctions, civil penalties and criminal prosecution.
Further, additional government regulation may be established that could prevent
or delay regulatory approval of the Company's products.
The Company's business is also subject to regulation under state and
federal laws regarding environmental protection, hazardous substances control,
and exposure to blood-borne pathogens. These laws include the federal
environmental laws, the Occupational Safety and Health Act, and the Toxic
Substance Control Act. In addition, the Company's diagnostic laboratory
operations must be certified or licensed under CLIA, the Medicare and Medicaid
programs and various state and local laws. Any violation of, and the cost of
compliance with, these laws and regulations could adversely affect the Company.
There can be no assurance that statutes or regulations applicable to the
Company's business will not be adopted that impose substantial additional costs
or otherwise materially adversely affect the Company's operations. See
"--Governmental Regulation."
Limited Sales and Marketing Experience; Dependence on Collaborators
The Company has limited experience in the sales, marketing and distribution
of pharmaceutical products, and its revenues from Vasomax(R) and other products
that may be marketed by others will depend on the efforts of Schering-Plough and
such other collaborators. See "--Sales and Marketing" for a discussion of the
risks associated with the Company's limited sales and marketing experience and
dependence on collaborators.
Manufacturing Uncertainties; Reliance on Third-Party Suppliers
The Company does not have any manufacturing facilities and does not expect
to establish any significant manufacturing capacity in the near future. See "--
Manufacturing" for a discussion of the risks associated with manufacturing and
the Company's reliance on third-party suppliers.
Competition and Technological Change
The Company is engaged in pharmaceutical product development, an industry
that is characterized by extensive research efforts and rapid technological
progress. See "--Competition" for a discussion of the risks associated with
competition and technological change.
Product Liability and Availability of Insurance
The Company's business exposes it to potential liability risks that are
inherent in the testing, manufacturing and marketing of medical products. The
use of the Company's product candidates in clinical trials may expose the
Company to product liability claims and possible adverse publicity. These risks
also exist with respect to the Company's product candidates, if any, that
receive regulatory approval for commercial sale. Clinical trials and commercial
sales, if any, of the Company's proposed female contraceptive products will
involve particularly significant product liability considerations, in light of
the substantial amount of current litigation involving female contraceptives and
other products affecting the female reproductive system. The Company currently
carries $10 million of product liability coverage for the clinical research use
of phentolamine and an additional $20 million of product liability specific to
Vasomax(R). Subsequent to the sale of FTI assets, the Company will maintain $2
million of product liability coverage for the former operations of FTI. There
can be no assurance that such coverage is adequate or that it will continue to
be available in sufficient amounts or at acceptable costs. The Company does not
have product liability insurance for the commercial sale of any of its other
product candidates. There can be no assurance that the Company will be able to
obtain additional insurance coverage at acceptable costs, or at
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<PAGE>
all, or that the Company will not experience losses due to product liability
claims in the future. A product liability claim, product recall or other claim,
or claims for uninsured liabilities or for amounts exceeding the limits of the
Company's insurance, could have a material adverse effect on the Company.
Reliance on Contract Research Organizations
During 1996, the Company established arrangements with two contract
research organizations, PPD Pharmaco and Affiliated Research Centers, Inc.,
relating to the Company's U.S. clinical trials of Vasomax(R). The companies have
collaborated with the Company in the design and conduct of the Company's U.S.
clinical trials, including the pivotal Phase III clinical trials of Vasomax(R).
In addition, these companies have been responsible for managing the conduct of
and analyzing data from such clinical trials on behalf of the Company. These
companies may terminate these arrangements at any time. If such companies were
to terminate these arrangements or were unable or unwilling to devote adequate
resources to the Company's projects or to provide services on acceptable terms,
the Company would be required to establish relationships with other contract
research organizations or to further develop the capacity to conduct clinical
trials within its own clinical affairs group. This could result in significant
additional expense and delays in the Company's clinical trials, and could have a
material adverse effect on the Company. See "--Collaborative and Licensing
Agreements--Contract Research Organizations."
No Assurance of Adequate Third-Party Reimbursement
The Company's ability to commercialize its products successfully will
depend in part on the extent to which appropriate reimbursement levels for the
cost of the products and related treatment are obtained from third-party payors,
including government authorities, private health insurers and other
organizations, such as health maintenance organizations ("HMOs"). Third-party
payors are increasingly challenging the prices charged for medical products and
services. Accordingly, if less costly treatments are available, third-party
payors may not authorize reimbursement for the Company's products even if they
offer advantages in safety or efficacy. Also, the trend toward managed
healthcare and government insurance programs significantly influences the
purchase of healthcare services and products, which could result in lower prices
and reduced demand for the Company's products. The cost containment measures
that healthcare providers are instituting and any healthcare reform could affect
the Company's ability to sell its products and may have a material adverse
effect on the Company. There can be no assurance that reimbursement in the U.S.
or foreign countries will be available for any of the Company's products, that
any reimbursement granted will be maintained, or that limits on reimbursement
available from third-party payers will not reduce the demand for, or negatively
affect the price of, the Company's products. The unavailability or inadequacy
of third-party reimbursement for the Company's products could have a material
adverse effect on the Company. The Company is unable to anticipate what
additional legislation or regulation relating to the healthcare industry or
third party coverage and reimbursement may be enacted in the future, or what
effect the legislation or regulation would have on the Company's business.
Dependence on Key Personnel
The success of the Company depends in large part on the Company's ability
to attract and retain highly qualified scientific and management personnel. The
Company faces competition for such personnel from other companies, research and
academic institutions, government entities and other organizations. There can
be no assurance that the Company will be successful in hiring or retaining key
employees in the future.
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<PAGE>
Year 2000 Issue
Many computer software applications and operating programs written in
the past may not properly recognize calendar dates beginning in the year 2000.
Such a recognition failure could cause computer systems to shut down or provide
incorrect information. The Company has plans to prepare its computer systems and
related software to accommodate sensitive information relating to the year 2000.
The Company expects that any additional costs related to ensuring such systems
and software to be ready for the year 2000 will not be material to the financial
condition or results of operations of the Company. There can be no assurance
that no year 2000 related computer operating problems or expenses will arise
with the computer systems and software of the Company or the Company's vendors
and customers. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Impact of Year 2000."
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<PAGE>
ITEM 2. PROPERTIES
The Company leases approximately 24,000 square feet of laboratory and
office space in The Woodlands, Texas under a lease that expires in May 2000. The
Company believes that it either possesses or can obtain the necessary space for
its operations for the near term.
ITEM 3. LEGAL PROCEEDINGS
Cause No. 94-021991; Bonita S. Dunbar v. Baylor College of Medicine, et
al.; In the 270th Judicial District Court of Harris County, Texas, Dr. Bonita
Sue Dunbar ("Dunbar") filed suit in Harris County, Texas, on May 16, 1994,
naming Baylor College of Medicine ("BCM"), BCM Technologies, Inc. ("BCMT"),
Fulbright & Jaworski, The Woodlands Venture Capital Company ("Woodlands"), and
the Company as defendants (collectively, the "Defendants"). Dunbar is a cellular
and molecular biologist who has been employed by BCM as a teacher and research
scientist since 1981. During the course of her employment at BCM, Dunbar
developed technologies relating to the use of certain recombinant zona pellucida
peptides that were assigned to the Company. Dunbar received stock in the Company
in exchange for the assignment. In her lawsuit, Dunbar claimed, among other
things, that her assignment of the patent right was induced by statutory and
constructive fraud and a civil conspiracy on the part of the Defendants, seeking
damages and rescission of the assignment. Defendants filed motions for summary
judgment on all of Dunbar's claims and received a favorable ruling from the
trial Court. Dunbar appealed, and the Court of Appeals reversed the trial
Court's grant of summary judgement. Defendants have filed motions for rehearing
in the Court of Appeals, which motions are currently pending. If the Court of
Appeals denies the motions for rehearing, a petition for review to the Texas
Supreme court will likely be pursued by the Company as well as the other
Defendants. The Company and the other Defendants believe that Dunbar's claims
are without merit and intend to vigorously defend against them. No estimate of
loss or range of estimate of loss, if any, can be made at this time.
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. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
in the fourth quarter of 1998.
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<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is quoted on The Nasdaq National Market under the
symbol "ZONA" and on the Pacific Exchange under the symbol "ZNG." The following
table shows the high and low sale prices per share of Common Stock, as reported
by The Nasdaq National Market, during the periods presented.
<TABLE>
<CAPTION>
PRICE RANGE
------------------------------------------
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter.................................... $ 18.25 $ 9.00
Second Quarter................................... 11.50 8.63
Third Quarter.................................... 9.13 6.38
Fourth Quarter................................... 11.50 7.75
1997
First Quarter.................................... $ 19.88 $ 9.13
Second Quarter................................... 24.75 14.81
Third Quarter.................................... 39.75 21.50
Fourth Quarter................................... 45.75 17.75
1998
First Quarter.................................... $ 25.50 $ 13.25
Second Quarter................................... 40.25 19.38
Third Quarter.................................... 26.75 12.25
Fourth Quarter................................... 22.00 12.00
1999
First Quarter (through March 11, 1999)........... $ 35.75 $ 19.00
</TABLE>
All of the foregoing prices reflect interdealer quotations, without
retail mark-up, mark-downs or commissions and may not necessarily represent
actual transactions in the Common Stock.
On March 11, 1999, the last sale price of the Common Stock, as reported
by the Nasdaq National Market, was $30.50 per share. On March 11, 1999, there
were approximately 271 holders of record and more than 8000 beneficial holders
of the Company's Common Stock.
The Company has never paid dividends on the Common Stock. The Company
currently intends to retain earnings, if any, to support the development of the
Company's business and does not anticipate paying dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion.
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<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data set forth below are
derived from the Company's audited consolidated financial statements as of and
for each of the years in the five-year period ended December 31, 1998. The
selected consolidated financial data set forth below should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Annual Report on Form
10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
------------- ------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Licensing fee.......................... $ -- $ -- $ -- $ 10,000 $ 10,000
Product royalties...................... -- -- -- -- 163
Interest income........................ 161 116 271 1,960 3,205
------------- ------------- ------------ ------------ ------------
Total revenues...................... 161 116 271 11,960 13,368
Expenses:
Research and development............... 2,702 2,795 7,936 22,299 22,438
General and administrative............. 1,357 846 1,163 2,730 3,211
Interest expense and
amortization of intangibles......... -- -- 4 10 3
------------- ------------- ------------ ------------ ------------
Total costs and expenses............ 4,059 3,641 9,103 25,039 25,652
------------- ------------- ------------ ------------ ------------
Loss from continuing operations......... (3,898) (3,525) (8,832) (13,079) (12,284)
Loss from discontinued operations....... (72) (762) (638) (94) (32)
------------- ------------- ------------ ------------ ------------
Net loss................................ $ (3,970) $ (4,287) $ (9,470) $ (13,173) $ (12,316)
============= ============= ============ ============ ============
Loss per share - basic and diluted:
Loss from continuing operations.......... $ (1.05) $ (0.91) $ (1.79) $ (1.45) $ (1.09)
Loss from discontinued operations........ (0.02) (0.20) (0.13) (0.01) --
------------- ------------- ------------ ------------ ------------
Net loss per share/1/.................... $ (1.07) $ (1.11) $ (1.92) $ (1.46) $ (1.09)
============= ============= ============ ============ ============
Shares used in loss per
share calculation................... 3,712 3,858 4,943 9,044 11,275
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
------------- ------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 2,478 $ 4,190 $ 11,075 $ 73,762 $ 51,640
Total assets............................. 5,274 6,652 13,712 76,941 58,642
Long-term obligations.................... 83 66 17 3 --
Deficit accumulated during the
development stage...................... (12,653) (16,940) (26,410) (39,584) (51,900)
Total stockholders' equity............... 4,248 5,425 11,577 70,976 53,387
</TABLE>
__________________
/1/ See Note 2 of Notes to Consolidated Financial Statements for a
description of the computation of loss per share.
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<PAGE>
ITEM 7. 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,
including those discussed in "Item 1. Description of Business -- Business
Risks." Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated in such forward-looking statements.
OVERVIEW
Zonagen, Inc. ("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. Until the sale of its wholly owned subsidiary, Fertility
Technologies, Inc., ("FTI") on March 11, 1999, Zonagen also sold devices,
instruments and supplies to fertility specialists, obstetricians and
gynecologists. The sale of FTI positions 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 "Note 11 of Notes to
Consolidated Financial Statements -- Subsequent Events (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, following approval by the Mexican regulatory authorities. On July
14, 1998, Zonagen submitted its first New Drug Application ("NDA") to the U.S.
Food and Drug Administration ("FDA") for Vasomax(R) for the treatment of MED. In
August, Schering-Plough submitted a Marketing Approval Application for
Vasomax(R) with the Medicines Control Agency in the United Kingdom.
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. See "Item 1.
Description of Business -- Collaborative and Licensing Agreements."
Prior to the submission of the NDA for Vasomax(R), the Company
conducted two pivotal Phase III studies which demonstrated a statistically
significant improvement over placebo. There can be no assurance, however, that
the FDA will ultimately approve Vasomax(R). See "Item 1. Description of
Business -- Government Regulation" and "-- Business Risks -- Uncertainties
Related to Clinical Trial Results and FDA Approval."
In December, 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 December 31, 1998, the Company had an accumulated deficit of
$51.9 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. See "Item 1. Description of Business -- Business Risks --
Uncertainties Related to Early Stage of Development," "-- Business
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<PAGE>
Risks -- History of Operating Losses; Accumulated Deficit" and "Note 1 of Notes
to Consolidated Financial Statements."
RESULTS OF OPERATIONS
Comparison of Years ended December 31, 1998 and 1997
Revenues. Total revenues increased 12% to $13.4 million in 1998, as
compared with $12.0 million in 1997. License revenue remained constant at $10.0
million, and consisted of two $5 million payments from Schering-Plough that were
paid upon the completion of certain developmental milestones relating to
Vasomax(R). The milestone payments were received in June 1998, when the Company
completed the clinical program used in support of the NDA, and in September
1998, upon FDA acceptance for filing of the NDA for Vasomax(R). Product
royalties from sales of Vasomax(R) in Mexico were approximately $163,000 in
1998, as compared to none in 1997. Schering-Plough commenced sales of Vasomax(R)
in Mexico, under the brand name 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. 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 activity.
Interest income increased 60% to $3.2 million in 1998, as compared with
$2.0 million in 1997. The increase was due to increased cash balances as a
result of the Company's public stock offering completed in July 1997, and
license and milestone payments received from Schering-Plough in 1997 and 1998.
Research and Development Expenses. Research and development ("R&D")
expenses include internal and contracted research and regulatory affairs. R&D
expenses remained constant at $22.4 million in 1998, as compared with $22.3
million in 1997. Expenses associated with the development of Vasomax(R)
decreased 7% to approximately $18.4 million in 1998, as compared with $19.8
million in 1997. The decrease was due primarily to a reduction in contracted
costs associated with the development of Vasomax(R) subsequent to the submission
of the NDA to the FDA in July 1998. During 1998, the Company established an
in-house clinical and regulatory affairs group. This group currently consists of
five individuals that manage the Company's regulatory issues and contract
research organizations ("CRO") that are utilized to conduct current and future
clinical development projects. General research and development expenses
increased 64% to $4.1 million in 1998, as compared with $2.5 million in 1997.
This increase was primarily due to expenses associated with hiring additional
personnel and expanding the Company's research and drug screening capabilities.
The Company expects its R&D expenses to increase for at least the next several
years.
General and Administrative Expenses. General and administrative
expenses increased 19% to $3.2 million in 1998 from $2.7 million in 1997. The
increase was primarily due to expenses associated with litigation filed in 1998,
increased expenses associated with operating a public company and the
establishment of an investor relations department along with the hiring of
additional professionals required to strengthen its current management team.
Discontinued Operations. On March 11, 1999, the Company sold
substantially all of the assets related to its wholly-owned subsidiary, FTI, and
certain Zonagen assets relating to the operation of FTI for $2.25 million in
cash and the assumption of certain specified liabilities. The recognition of the
sale of these assets will be reflected in the quarter ended March 31, 1999. The
loss from the discontinued operations relating to FTI was $32,000 for the year
ended 1998 as compared to $94,000 in the prior year.
Comparison of Years ended December 31, 1997 and 1996
Revenues. Total revenues increased $11.7 million to $12.0 million in
1997, as compared with $300,000 in 1996. License revenue increased to $10.0
million in 1997 from none in 1996. This increase was due to the Company's
receipt of payments under its agreements with Schering-Plough with respect to
Vasomax(R). Interest income increased 638% to $2.0 million in 1997, as compared
with $271,000 in 1996. The increase was due primarily to interest on proceeds
from the Company's follow-on public offering completed in July 1997.
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<PAGE>
Research and Development Expenses. Research and development expenses
increased 182% to $22.3 million in 1997, as compared with $7.9 million in 1996.
The increase was due primarily to the additional costs associated with the
development of Vasomax(R). Expenses associated with the development of
Vasomax(R) increased 230% to approximately $19.8 million in 1997, as compared
with $6.0 million in 1996. The increase was due primarily to costs incurred in
connection with Phase III clinical trials in 1997. General research and
development expenses were $2.5 million and $1.9 million in 1997 and 1996,
respectively.
General and Administrative Expenses. General and administrative
expenses increased 125% to $2.7 million in 1997 from $1.2 million in 1996. This
increase was primarily due to non-cash compensation expense related to stock
options, consulting fees and employee bonus awards.
Discontinued Operations. On March 11, 1999, the Company sold
substantially all of the assets related to its wholly-owned subsidiary, FTI, and
certain Zonagen assets relating to the operation of FTI. The loss from the
discontinued operations relating to FTI was $94,000 for the year ended 1997 as
compared to $638,000 in the prior year.
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 $15.7 million for operating
activities in the year ended December 31, 1998 as compared to approximately $8.3
million in the year ended December 31, 1997. The Company had cash and cash
equivalents of approximately $51.6 million at December 31, 1998. The increased
use of cash for the year ended December 31, 1998 was primarily due to the
increase in inventory levels and a decrease in accounts payable and accrued
expenses. The Company spent approximately $18.4 million in connection with its
clinical development program for Vasomax(R) during 1998. In addition to
operating activities in 1998, the Company purchased $6.2 million of its common
stock pursuant to the stock buyback announced by the Company on December 12,
1997.
The Company has experienced negative cash flows from operations since
its inception and has funded its activities to date primarily from equity
financing 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 appropriate, if the 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 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 products; the Company's ability to obtain regulatory approvals;
the success of the Company's sales and marketing programs; the cost of filing,
prosecuting and defending and enforcing any patent claims and other intellectual
property rights; and changes in economic, regulatory or competitive conditions
of the Company's planned business. Estimates about the adequacy of funding for
the Company's activities are based on certain assumptions, including the
assumption that the development and regulatory approval of the Company's
products can be completed at projected costs and that product approvals and
introductions will be timely and successful. There can be no assurance that
changes in the Company's research and development
-27-
<PAGE>
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 and the
commercialization of Vasomax(R) are not favorable. The Company may seek
additional funding through corporate collaborations and other financing
vehicles. There can be no assurance that any such funding will be available to
the Company on 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.
The Company's primary use of cash to date has been in operating
activities to fund research and development, including preclinical studies and
clinical trials, and general and administrative expenses. Cash of $15.7 million,
$8.3 million and $8.0 million was used in operating activities during 1998, 1997
and 1996, respectively.
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 will initiate communications with 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 is in the process of finding alternative vendors that are
compliant.
Because the Company currently anticipates that it will achieve Year
2000 compliance, it has not formulated a contingency plan. However, should the
Company determine there is significant risk that it may be unable to adhere to
its compliance timetable, it will assess reasonably likely scenarios resulting
from noncompliance and establish a contingency plan to address such scenarios.
The Company's ability to achieve Year 2000 compliance is subject to
various uncertainties including the Company's ability to successfully identify
systems and programs not Year 2000 compliant, the nature and amount of
programming required to correct or replace affected programs, the availability
and magnitude of labor and consulting costs and the success of the Company's
business partners, vendors and clients in addressing the Year 2000 issue.
Therefore, while the financial impact of implementing Year 2000 compliance
remediation has not been and is not anticipated to be material to the Company's
business, financial position or results of operations, the Company can make no
assurances with respect to the costs of remediation efforts not yet incurred.
Additionally, the Company cannot be certain that it will achieve adequate Year
2000 compliance in a timely manner or that any impact of a failure to achieve
such compliance will not have a material adverse effect on the Company's
business, financial condition or results of operation.
-28-
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS
The financial statements required by this item are presented following
Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-29-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item as to the directors and executive
officers of the Company is hereby incorporated by reference from the information
appearing under the caption "Election of Directors" in the Company's proxy
statement (the "Proxy Statement") for its annual meeting of stockholders. Such
Proxy Statement will be filed with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), within 120 days of the end of the Company's fiscal year ended December
31, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item as to the management of the
Company is hereby incorporated by reference from the information appearing under
the captions "Executive Compensation" and "Election of Directors--Director
Compensation" in the Company's Proxy Statement. Notwithstanding the foregoing,
in accordance with the instructions to Item 402 of Regulation S-K, the
information contained in the Company's proxy statement under the sub-heading
"Report of the Compensation Committee of the Board of Directors" and
"Performance Graph" shall not be deemed to be filed as part of or incorporated
by reference into this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item as to the ownership by management
and others of securities of the Company is hereby incorporated by reference from
the information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement. Such Proxy
Statement will be filed with the Securities and Exchange Commission pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), within 120
days of the end of the Company's fiscal year ended December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item as to certain business
relationships and transactions with management and other related parties of the
Company is hereby incorporated by reference from the information appearing under
the caption "Certain Transactions" in the Company's Proxy Statement. Such Proxy
Statement will be filed with the Securities and Exchange Commission pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), within 120
days of the end of the Company's fiscal year ended December 31, 1998.
-30-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as a Part of this Report
1. Financial Statements
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE
-------------------- ----
<S> <C>
Report of Independent Public Accountants.............................................F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997.........................F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 and (unaudited)
from Inception (August 20, 1987) through December 31, 1998.......................F-3
Consolidated Statement of Stockholders' Equity ......................................F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 and (unaudited) from Inception
(August 20, 1987) through December 31, 1998......................................F-8
Notes to Consolidated Financial Statements...........................................F-9
</TABLE>
All schedules are omitted because they are not
applicable, not required, or because the required information
is included in the financial statements or the notes thereto.
2. Exhibits
Exhibits to the Form 10-K have been included only
with the copies of the Annual Report on Form 10-K filed with
the Securities and Exchange Commission. Upon request to the
Company and payment of a reasonable fee, copies of the
individual exhibits will be furnished.
<TABLE>
<CAPTION>
EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT
- -------------- -------------------------
<S> <C>
3.1 -- Restated Certificate of Incorporation. Exhibit 3.3 to the Company's Registration Statement on Form SB-2
(No. 33-57728-FW), as amended (the "Registration Statement"), is incorporated herein by reference.
3.2 -- Restated Bylaws of the Company. Exhibit 3.4 to the Company's Registration Statement is incorporated herein by
reference.
4.1 -- Specimen Certificate of Common Stock, $.001 par value, of the Company. Exhibit 4.1 to the Company's
Registration Statement is incorporated herein by reference.
4.2 -- Representative's Warrant Agreement dated March 25, 1993. Exhibit 4.3 to the Company's Registration Statement is
incorporated herein by this reference.
4.3 -- Certificate of Designation for the Company's Series A Convertible Preferred Stock. Exhibit 4.1 to the Company's
Current Report on Form 8-K dated October 19, 1995 is incorporated herein by reference.
4.4 -- Form of Subscription Agreement between the Company and purchasers of the Company's Series A Convertible
Preferred Stock. Exhibit 4.2 to the Company's Current Report on Form 8-K dated October 19, 1995 is incorporated
herein by reference.
4.5 -- Form of Warrants issued to the designees of the placement agent for the Company's Series A
Convertible Preferred Stock. Exhibit 4.5 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 is incorporated herein by reference.
4.6 -- Certificate of Designation for the Company's Series B Convertible Preferred Stock. Exhibit 4.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (the
"September 1996 10-Q") is incorporated herein by reference.
4.7 -- Form of Subscription Agreement between the Company and purchases of the Company's
</TABLE>
-31-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT
- -------------- -------------------------
<S> <C>
Series B Convertible Preferred Stock. Exhibit 4.2 to the Company's September 1996 10-Q is incorporated herein
by reference.
4.8 -- Form of Warrant issued to the Placement Agent for the Company's Series B Convertible Preferred Stock. Exhibit
4.3 to the Company's September 1996 10-Q is incorporated herein by reference.
10.1 -- Confidentiality Agreement dated July 19, 1991, between the Company and the Regents of the University of
California. Exhibit 10.1 to the Company's Registration Statement is incorporated herein by reference.
10.2 -- Agreement dated July 23, 1991, between the Company and Wayne State University. Exhibit 10.2 to
the Company's Registration Statement is incorporated herein by reference.
10.3+ -- Amended and Restated 1993 Employee and Consultant Stock Option Plan. Exhibit 10.3 to the
Company's Registration Statement is incorporated herein by reference.
10.4 -- Lease Agreement dated March 22, 1990, between the Company and The Woodlands Equity
Partnership-89. Exhibit 10.4 to the Company's Registration Statement is incorporated herein by
reference.
10.5+ -- Employment Agreement between the Company and Joseph S. Podolski. Exhibit 10.5 to the Company's Registration
Statement is incorporated herein by reference.
10.6 -- Exclusive License Agreement dated as of September 11, 1992, between the Company and Dainippon Pharmaceuticals
Co., Ltd. Exhibit 10.7 to the Company's Registration Statement is incorporated herein by reference.
10.7 -- Advisory Agreement dated March 25, 1993 between the Company and Reich & Co., Inc. Exhibit 10.8
to the Company's Registration Statement is incorporated herein by reference.
10.8 -- Extension, Modification and Ratification of Lease dated July 12, 1993, between the Company and Woodlands Equity
Partnership- 89. Exhibit 10.10 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1993 (the "1993 Form 10-KSB") is incorporated herein by reference.
10.9+ -- The Company's 1993 Non-Employee Director Stock Option Plan. Exhibit 10.11 to the Company's 1993 Form 10-KSB is
incorporated herein by reference
10.10+ -- Employment Agreement between the Company and Louis Ploth. Exhibit 10.12 to the Company's 1993 Form 10-KSB is
incorporated herein by reference.
10.11 -- Stock Purchase Agreement dated December 6, 1993, between the Company and Schering Berlin
Venture Corporation. Exhibit 10.13 to the Company's 1993 Form 10-KSB is incorporated herein
by reference.
10.12 -- License, Research, Development and Regulatory Filing Agreement dated December 13, 1993, between the Company and
Schering AG. Exhibit 10.14 to the Company's 1993 Form 10-KSB is incorporated herein by reference.
10.13 -- Agreement dated November 30, 1993, between the Company and the University of North Carolina at Chapel Hill.
Exhibit 10.15 to the Company's 1993 Form 10-KSB is incorporated herein by reference.
10.14 -- Agreement between the Company and Reproductive Biotechnologies PVT., Ltd. Exhibit 10.16 to the Company's 1993
Form 10-KSB is incorporated herein by reference
10.15 -- Assignment Agreement dated April 13, 1994, among Zonagen, Inc., Gamogen, Inc. and Dr. Adrian Zorgniotti.
Exhibit 10.17 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994 is
incorporated herein by reference.
10.16 -- Stock Exchange Agreement dated October 13, 1994, effective October 1, 1994, among Zonagen, Inc.,
Fertility Technologies, Inc. and J. Tyler Dean. Exhibit 2.1 to the Company's Current Report on
Form 8-K dated October 13, 1994 is incorporated herein by reference.
10.17 -- Registration Rights Agreement dated October 13, 1994, effective October 1, 1994, among Zonagen, Inc. and J.
Tyler Dean. Exhibit 10.1 to the Company's Current Report on Form 8-K dated October 13, 1994 is incorporated
herein by reference.
10.18 -- Pledge and Security Agreement dated October 13, 1994, between Zonagen, Inc. and J. Tyler
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT
- -------------- -------------------------
<S> <C>
Dean. Exhibit 10.2 to the Company's Current Report on Form 8-K dated October 13, 1994 is incorporated herein by
reference.
10.19 -- Guaranty of Zonagen, Inc. dated October 13, 1994. Exhibit 10.4 to the Company's Current Report on Form 8-K
dated October 13, 1994 is incorporated herein by reference.
10.20 -- Agreement dated January 25, 1995, between the Company and Pharmaco, LSR to conduct clinical trials. Exhibit
10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 is incorporated herein
by reference.
10.21 -- Research Agreement dated November 6, 1995, between the Company and The Brigham and Women's Hospital, Inc.
Exhibit 10.24 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 is
incorporated herein by reference.
10.22 -- License Agreement dated November 6, 1995, between the Company and The Brigham and Women's Hospital, Inc.
Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 is
incorporated herein by reference.
10.23 -- Conditional Amendment No. 1 to Assignment Agreement dated January 24, 1997, between the Company and Gamogen,
Inc. Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997 is
incorporated herein by reference.
10.24 -- 1996 Nonemployee Directors' Stock Option Plan. Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1997 is incorporated herein by reference.
10.25 -- Amendment No. 2 to Assignment Agreement dated September 30, 1997, between the Company and Gamogen, Inc. Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997 is
incorporated herein by reference.
10.26 -- Supply Agreement dated June 12, 1997, between the Company and Plasto S.A. (Synkem Division). Exhibit 10.26 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1997 is incorporated herein by
reference.
10.27++ -- Exclusive License Agreement dated November 15, 1997, between the Company and Schering Corporation. Exhibit
10.27 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 is incorporated herein
by reference.
10.28++ -- Exclusive License Agreement dated November 15, 1997, between the Company and Schering-Plough Ltd. Exhibit 10.28
to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 is incorporated herein by
reference.
10.29*+ -- Employment Agreement between the Company and Paul Lammers, MD MSc.
10.30*+ -- Employment Agreement between the Company and Michael T. Redman.
11.1* -- Statement regarding computation of loss per share
23.1* -- Consent of Arthur Andersen LLP.
27.1* -- Financial Data Schedule
</TABLE>
* Filed herewith.
+ Management contract or compensatory plan.
++ Portions of this exhibit have been omitted based on a request for
confidential treatment pursuant to Rule 24b-2 of the Exchange Act. Such omitted
portions have been filed separately with the Commission.
(b) Reports on Form 8-K
None
-33-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ZONAGEN, INC.
By: /s/ Joseph S. Podolski
-------------------------------------
Joseph S. Podolski
President and Chief Executive Officer
Dated: March 22, 1999
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Joseph S. Podolski President, Chief Executive Officer March 22, 1999
- ----------------------------------------
Joseph S. Podolski and Director
(Principal Executive Officer)
/s/ Louis Ploth, Jr. Vice President March 22, 1999
- ----------------------------------------
Louis Ploth, Jr. of Finance and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Martin P. Sutter Chairman of the Board of Directors March 22, 1999
- ----------------------------------------
Martin P. Sutter
/s/ Steven Blasnik Director March 22, 1999
- ----------------------------------------
Steven Blasnik
/s/ Timothy McInerney Director March 22, 1999
- ------------------------------------
Timothy McInerney
/s/ David B. McWilliams Director March 22, 1999
- ----------------------------------------
David B. McWilliams
/s/ Jeffrey M. Jonas, M.D. Director March 22, 1999
- ----------------------------------------
Jeffrey M. Jonas, M.D.
/s/ Nelson L. Levy, Ph.D., M.D. Director March 22, 1999
- ----------------------------------------
Nelson L. Levy, Ph.D., M.D.
</TABLE>
-34-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Zonagen, Inc.:
We have audited the accompanying balance sheets of Zonagen, Inc. (a
Delaware corporation in the development stage), and subsidiary (collectively,
"the Company") as of December 31, 1998 and 1997, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Zonagen, Inc., and
subsidiary as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
January 26, 1999
F-1
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------------ ------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 51,640 $ 73,762
Accounts receivable 318 515
Product inventory 3,139 207
Prepaid expenses and other current assets 1,032 270
------------------ ------------------
Total current assets 56,129 74,754
LAB EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS, net 907 557
GOODWILL, net 584 794
OTHER ASSETS, net 1,022 836
------------------ ------------------
Total assets $ 58,642 $ 76,941
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,317 $ 3,285
Accrued expenses 1,935 2,663
Current portion of long-term notes payable 3 14
------------------ ------------------
Total current liabilities 5,255 5,962
------------------ ------------------
LONG-TERM NOTES PAYABLE - 3
------------------ ------------------
COMMITMENTS AND CONTINGENCIES - -
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, 11,621,140 and 11,541,923 shares issued,
respectively; 11,205,840 and 11,480,423 shares
outstanding, respectively 12 12
Additional paid-in capital 113,717 113,236
Deferred compensation (958) (1,401)
Cost of treasury stock, 415,300 and 61,500 shares, respectively (7,484) (1,287)
Deficit accumulated during the development stage (51,900) (39,584)
------------------ ------------------
Total stockholders' equity 53,387 70,976
------------------ ------------------
Total liabilities and stockholders' equity $ 58,642 $ 76,941
================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
FROM INCEPTION
(AUGUST 20, 1987)
THROUGH
FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1998
----------------- ------------------ ------------------- -------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Licensing fees $ 10,000 $ 10,000 $ - $ 20,250
Product royalties 163 - - 163
Interest income 3,205 1,960 271 6,058
----------------- ------------------ ------------------- -------------------
Total revenues 13,368 11,960 271 26,471
COSTS AND EXPENSES
Research and development 22,438 22,299 7,936 63,505
General and administrative 3,211 2,730 1,163 12,524
Interest expense and amortization
of intangibles 3 10 4 380
----------------- ------------------ ------------------- -------------------
Total costs and expenses 25,652 25,039 9,103 76,409
----------------- ------------------ ------------------- -------------------
Loss from continuing operations (12,284) (13,079) (8,832) (49,938)
Loss from discontinued operations (32) (94) (638) (1,887)
Loss on disposal - - - (75)
----------------- ------------------ ------------------- -------------------
NET LOSS $ (12,316) $ (13,173) $ (9,470) $ (51,900)
================= ================== =================== ===================
Loss per share - basic and diluted:
Loss from continuing operations $ (1.09) $ (1.45) $ (1.79)
Loss from discontinued operations - $ (0.01) $ (0.13)
----------------- ------------------ -------------------
NET LOSS $ (1.09) $ (1.46) $ (1.92)
================= ================== ===================
Shares used in loss per share calculation:
Basic and diluted 11,275 9,044 4,943
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands except share amounts)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in
---------------------------- ---------------------------
Shares Amount Shares Amount Capital
------------- ------------ ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Exchange of common stock ($.004 per share) for
technology rights and services from founding
stockholders - $ - 245,367 $ - $ 1
Net Loss - - - - -
------------- ------------ ------------- ------------ ----------
BALANCE AT DECEMBER 31, 1987 (unaudited) - - 245,367 - 1
Net Loss - - - - -
------------- ------------ ------------- ------------ ----------
BALANCE AT DECEMBER 31, 1988 (unaudited) - - 245,367 - 1
Proceeds from issuance of common stock - - 65,431 - 3
Net Loss - - - - -
------------- ------------ ------------- ------------ ----------
BALANCE AT DECEMBER 31, 1989 (unaudited) - - 310,798 - 4
Proceeds from issuance of common stock - - 467 - -
Net Loss - - - - -
------------- ------------ ------------- ------------ ----------
BALANCE AT DECEMBER 31, 1990 (unaudited) - - 311,265 - 4
Net Loss - - - - -
------------- ------------ ------------- ------------ ----------
BALANCE AT DECEMBER 31, 1991 (unaudited) - - 311,265 - 4
Conversion of 391,305 shares of Series C
preferred stock into common stock - - 91,442 - 360
Purchase of retirement of common stock - - (23,555) - (1)
Proceeds from issuance of common stock - - 16,946 - 7
Net Loss - - - - -
------------- ------------ ------------- ------------ ----------
BALANCE AT DECEMBER 31, 1992 (unaudited) - - 396,098 1 370
Issuance of common stock for cash, April 1, 1993,
and May 12, 1993 ($5.50 per share), net of
offering costs of $1,403,400 - - 1,534,996 2 7,037
Issuance of common stock for cash and license
agreement, December 9, 1993 ($10.42 per share),
net of offering costs of $46,833 - - 239,933 - 2,453
Conversion of Series A preferred stock to common stock - - 179,936 - 600
Conversion of Series B preferred stock to common stock - - 96,013 - 378
Conversion of Series C preferred stock to common stock - - 876,312 1 3,443
Conversion of Series D preferred stock to common stock - - 280,248 - 599
Conversion of bridge loan to common stock - - 64,000 - 256
Net Loss - - - - -
------------- ------------ ------------- ------------ ----------
BALANCE AT DECEMBER 31, 1993 (unaudited) - - 3,667,536 4 15,136
<CAPTION>
Deficit
Accumulated
During the Total
Deferred Treasury Stock Development Stockholders'
---------------------------
Compensation Shares Amount Stage Equity
------------ ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Exchange of common stock ($.004 per share) for
technology rights and services from founding
stockholders $ - $ - $ - $ - $ 1
Net Loss - - - (28) (28)
------------ ------------- ------------ ------------ -------------
BALANCE AT DECEMBER 31, 1987 (unaudited) - - - (28) (27)
Net Loss - - - (327) (327)
------------ ------------- ------------ ------------ -------------
BALANCE AT DECEMBER 31, 1988 (unaudited) - - - (355) (354)
Proceeds from issuance of common stock - - - - 3
Net Loss - - - (967) (967)
------------ ------------- ------------ ------------ -------------
BALANCE AT DECEMBER 31, 1989 (unaudited) - - - (1,322) (1,318)
Proceeds from issuance of common stock - - - - -
Net Loss - - - (1,426) (1,426)
------------ ------------- ------------ ------------ -------------
BALANCE AT DECEMBER 31, 1990 (unaudited) - - - (2,748) (2,744)
Net Loss - - - (1,820) (1,820)
------------ ------------- ------------ ------------ -------------
BALANCE AT DECEMBER 31, 1991 (unaudited) - - - (4,568) (4,564)
Conversion of 391,305 shares of Series C
preferred stock into common stock - - - - 360
Purchase of retirement of common stock - - - - (1)
Proceeds from issuance of common stock - - - - 7
Net Loss - - - (1,583) (1,583)
------------ ------------- ------------ ------------ -------------
BALANCE AT DECEMBER 31, 1992 (unaudited) - - - (6,151) (5,781)
Issuance of common stock for cash, April 1, 1993,
and May 12, 1993 ($5.50 per share), net of
offering costs of $1,403,400 - - - - 7,039
Issuance of common stock for cash and license
agreement, December 9, 1993 ($10.42 per share),
net of offering costs of $46,833 - - - - 2,453
Conversion of Series A preferred stock to common stock - - - - 600
Conversion of Series B preferred stock to common stock - - - - 378
Conversion of Series C preferred stock to common stock - - - - 3,444
Conversion of Series D preferred stock to common stock - - - - 600
Conversion of bridge loan to common stock - - - - 256
Net Loss - - - (2,532) (2,532)
----------- ------------- ------------ ------------ -------------
BALANCE AT DECEMBER 31, 1993 (unaudited) - - - (8,683) 6,457
</TABLE>
F-4
<PAGE>
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands except share amounts)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in
---------------------------- ---------------------------
Shares Amount Shares Amount Capital
------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Deferred compensation resulting from grant of options - - - - 188
Amortization of deferred compensation - - - - -
Exercise of warrants to purchase common stock
for cash, June 30, 1994 ($3.94 per share) - - 39,623 - 156
Issuance of common stock for purchase of FTI,
October 13, 1994 - - 111,111 - 1,567
Net loss - - - - -
------------ ------------ ------------- ------------ -----------
BALANCE AT DECEMBER 31, 1994 - - 3,818,270 4 17,047
Amortization of deferred compensation - - - - -
Exercise of options to purchase common stock for cash,
January and April 1995 ($.10 to $6.13 per share) - - 4,546 - 14
Issuance of common stock for cash and a financing
charge, March 9, 1995 - - 16,000 - 76
Issuance of Series A preferred stock for cash,
October 4, 1995, and October 19, 1995 ($10.00 per
share), net of offering costs of $651,495 598,850 1 - - 5,336
Conversion of warrants to purchase common
stock as a result of offering under antidilution
clause, October 19, 1995 ($3.63 per share) - - - - -
Conversion of Series A preferred stock into
common stock, November and December 1995 (94,000) - 259,308 - -
Net loss - - - - -
------------ ------------ ------------- ------------ -----------
BALANCE AT DECEMBER 31, 1995 504,850 1 4,098,124 4 22,473
Deferred compensation resulting from grant of options - - - - 86
Amortization of deferred compensation - - - - -
Exercise of warrants to purchase common stock for cash,
January through December 1996 ($3.63 per share) - - 227,776 - 827
Conversion of Series A preferred stock into
common stock, January through November 1996 (507,563) (1) 1,396,826 2 (1)
Issuance of options for services, January 12, 1996 - - - - 99
Exercise of options to purchase common stock for
cash, February through November 1996 ($.001 to
$5.50 per share) - - 23,100 - 75
Issuance of common stock for agreement not to
compete, April 13, 1996 - - 19,512 - 200
Exercise of warrants to purchase Series A preferred
stock under cashless exercise provision,
June 5, 1996 2,713 - - - -
Issuance of Series B preferred stock for cash,
September 30, 1996, and October 11, 1996 ($10.00
per share), net of offering costs of $2,557,440 1,692,500 2 - - 14,366
Conversion of Series B preferred stock into common
stock, November through December 1996 (177,594) - 268,058 - -
Net loss - - - - -
------------ ------------ ------------- ------------ -----------
BALANCE AT DECEMBER 31, 1996 1,514,906 2 6,033,396 6 38,125
<CAPTION>
Deficit
Accumulated
During the Total
Deferred Treasury Stock Development Stockholders'
---------------------------
Compensation Shares Amount Stage Equity
------------ ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Deferred compensation resulting from grant of options (188) - - - -
Amortization of deferred compensation 38 - - - 38
Exercise of warrants to purchase common stock
for cash, June 30, 1994 ($3.94 per share) - - - - 156
Issuance of common stock for purchase of FTI,
October 13, 1994 - - - - 1,567
Net loss - - - (3,970) (3,970)
------------ ------------- ------------ ------------ -------------
BALANCE AT DECEMBER 31, 1994 (150) - - (12,653) 4,248
Amortization of deferred compensation 37 - - - 37
Exercise of options to purchase common stock for cash,
January and April 1995 ($.10 to $6.13 per share) - - - - 14
Issuance of common stock for cash and a financing
charge, March 9, 1995 - - - - 76
Issuance of Series A preferred stock for cash,
October 4, 1995, and October 19, 1995 ($10.00 per
share), net of offering costs of $651,495 - - - - 5,337
Conversion of warrants to purchase common
stock as a result of offering under antidilution
clause, October 19, 1995 ($3.63 per share) - - - - -
Conversion of Series A preferred stock into
common stock, November and December 1995 - - - - -
Net loss - - - (4,287) (4,287)
------------ ------------- ------------ ------------ -------------
BALANCE AT DECEMBER 31, 1995 (113) - - (16,940) 5,425
Deferred compensation resulting from grant of options (86) - - - -
Amortization of deferred compensation 54 - - - 54
Exercise of warrants to purchase common stock for cash
January through December 1996 ($3.63 per share) - - - - 827
Conversion of Series A preferred stock into
common stock, January through November 1996 - - - - -
Issuance of options for services, January 12, 1996 - - - - 99
Exercise of options to purchase common stock for
cash, February through November 1996 ($.001 to
$5.50 per share) - - - - 75
Issuance of common stock for agreement not to
compete, April 13, 1996 - - - - 200
Exercise of warrants to purchase Series A preferred
stock under cashless exercise provision,
June 5, 1996 - - - - -
Issuance of Series B preferred stock for cash,
September 30, 1996, and October 11, 1996 ($10.00
per share), net of offering costs of $2,557,440 - - - - 14,368
Conversion of Series B preferred stock into common
stock, November through December 1996 - - - - -
Net loss - - - (9,470) (9,470)
------------ ------------- ------------ ------------ -------------
BALANCE AT DECEMBER 31, 1996 (145) - - (26,410) 11,578
</TABLE>
F-5
<PAGE>
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands except share amounts)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in
---------------------------- ---------------------------
Shares Amount Shares Amount Capital
------------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Deferred compensation resulting from grant of options - - - - 2,110
Amortization of deferred compensation - - - - -
Exercise of options to purchase common stock
for cash, January through December 1997 ($0.00 to
$22.25 per share) - - 90,955 - 522
Exercise of warrants to purchase common stock
for cash, January through December 1997 ($3.63 and
$3.07 per share) - - 22,368 - 75
Issuance of common stock for a cashless exercise of
Series A preferred stock warrants, February through
September 1997 - - 81,294 - -
Exercise of Series A preferred stock warrants to
purchase common stock for cash, April 1997 ($11.00
per share) - - 818 - 3
Issuance of common stock for a cashless exercise of
Series B preferred stock warrants, April through
November 1997 - - 88,223 - -
Exercise of Series B preferred stock warrants to
purchase common stock for cash, April through July
1997 ($11.00 per share) - - 17,169 - 125
Issuance of common stock as final purchase price
for acquisition of FTI, January 31, 1997 ($9.833 per
share) - - 305,095 1 -
Issuance of common stock as final debt payment
on FTI acquisition, January 31, 1997 ($9.833 per
share) - - 19,842 - 94
Conversion of Series B preferred stock into common
stock, January through October 1997 (1,514,906) (2) 2,295,263 2 (1)
Issuance of common stock for cash, July 25, 1997
($30.00 per share), net of offering costs
of $5,438,846 - - 2,587,500 3 72,183
Purchase of treasury stock, December 1997 - - - - -
Net loss - - - - -
------------- ------------ ------------- ------------ -----------
BALANCE AT DECEMBER 31, 1997 - - 11,541,923 12 113,236
<CAPTION>
Deficit
Accumulated
During the Total
Deferred Treasury Stock Development Stockholders'
---------------------------
Compensation Shares Amount Stage Equity
------------ ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Deferred compensation resulting from grant of options (2,110) - - - -
Amortization of deferred compensation 854 - - - 854
Exercise of options to purchase common stock
for cash, January through December 1997 ($0.00 to
$22.25 per share) - - - - 522
Exercise of warrants to purchase common stock
for cash, January through December 1997 ($3.63 and
$3.07 per share) - - - - 75
Issuance of common stock for a cashless exercise of
Series A preferred stock warrants, February through
September 1997 - - - - -
Exercise of Series A preferred stock warrants to
purchase common stock for cash, April 1997 ($11.00
per share) - - - - 3
Issuance of common stock for a cashless exercise of
Series B preferred stock warrants, April through
November 1997 - - - - -
Exercise of Series B preferred stock warrants to
purchase common stock for cash, April through July
1997 ($11.00 per share) - - - - 125
Issuance of common stock as final purchase price
for acquisition of FTI, January 31, 1997 ($9.833 per
share) - - - - 1
Issuance of common stock as final debt payment
on FTI acquisition, January 31, 1997 ($9.833 per
share) - - - - 94
Conversion of Series B preferred stock into common
stock, January through October 1997 - - - - (1)
Issuance of common stock for cash, July 25, 1997
($30.00 per share), net of offering costs
of $5,438,846 - - - - 72,186
Purchase of treasury stock, December 1997 -
Net loss - 61,500 (1,287) - (1,287)
BALANCE AT DECEMBER 31, 1997 - - - (13,174) (13,174)
------------ ------------- ------------ ----------- ------------
(1,401) 61,500 (1,287) (39,584) 70,976
</TABLE>
F-6
<PAGE>
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands except share amounts)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in
---------------------------- ---------------------------
Shares Amount Shares Amount Capital
------------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Deferred compensation resulting from grant of options - - - - 55
Amortization of deferred compensation - - - - -
Forefeiture of stock options, December 1998 - - - - (21)
Exercise of options to purchase common stock
for cash, January through October 1998 ($0.43 to
$22.25 per share) - - 63,022 - 344
Issuance of common stock for services, January - - 5,000 - 103
15, 1998
Issuance of common stock for a cashless exercise of
Series B preferred stock warrants, May through
July 1998 - - 11,195 - -
Purchase of treasury stock, January through
September 1998 ($13.00 to $20.65 per share) - - - - -
Net loss - - - - -
------------- ------------ ------------- ------------ -----------
BALANCE AT DECEMBER 31, 1998 - $ - 11,621,140 $ 12 $ 113,717
============= ============ ============= ============ ===========
<CAPTION>
Deficit
Accumulated
During the Total
Deferred Treasury Stock Development Stockholders'
---------------------------
Compensation Shares Amount Stage Equity
------------ ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Deferred compensation resulting from grant of options - - - - 55
Amortization of deferred compensation 422 - - - 422
Forefeiture of stock options, December 1998 21 - - - -
Exercise of options to purchase common stock
for cash, January through October 1998 ($0.43 to
$22.25 per share) - - - - 344
Issuance of common stock for services, January
15, 1998 - - - - 103
Issuance of common stock for a cashless exercise of
Series B preferred stock warrants, May through
July 1998 - - - - -
Purchase of treasury stock, January through
September 1998 ($13.00 to $20.65 per share)
Net loss - 353,800 (6,197) - (6,197)
BALANCE AT DECEMBER 31, 1998 - - - (12,316) (12,316)
----------- ------------- ------------ ----------- -------------
$ (958) 415,300 $ (7,484) $ (51,900) $ 53,387
=========== ============= ============ =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FROM INCEPTION
(AUGUST 20, 1987)
THROUGH
FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1998
---------------- ------------------ ----------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (12,316) $ (13,173) $ (9,470) $ (51,900)
Loss on disposal of discontinued operations - - - 75
Adjustments to reconcile net loss to net cash
used in operating activities:
Noncash financing costs - - - 316
Depreciation and amortization 353 383 358 1,955
Noncash expenses related to stock-based
transactions 477 853 153 1,558
Common stock issued for agreement not to
compete - - 200 200
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 197 (156) (120) (113)
(Increase) decrease in inventory (2,932) (33) 56 (2,857)
(Increase) decrease in prepaid expenses and other
current assets (762) (68) (44) (891)
(Decrease) increase in accounts payable and
accrued expenses (696) 3,938 877 5,035
--------------- ----------------- ---------------- --------------
Net cash used in operating activities (15,679) (8,256) (7,990) (46,604)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (572) (367) (182) (1,850)
Purchase of technology rights and other assets (107) (301) (204) (1,079)
Cash acquired in purchase of FTI - - - 3
Proceeds from sale of subsidiary, less
$12,345 for operating losses during
1990 phase-out period - - - 138
Increase in net assets held for disposal - - - (213)
--------------- ----------------- ---------------- --------------
Net cash used in investing activities (679) (668) (386) (3,001)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 447 72,912 902 83,933
Proceeds from issuance of preferred stock - - 14,368 23,688
Purchase of treasury stock (6,197) (1,287) - (7,484)
Proceeds from issuance of notes payable - - - 2,839
Principal payments on notes payable (14) (14) (9) (1,731)
--------------- ------------------ ---------------- --------------
Net cash provided by (used in) financing activities (5,764) 71,611 15,261 101,245
--------------- ------------------ ---------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (22,122) 62,687 6,885 51,640
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 73,762 11,075 4,190 -
--------------- ----------------- ---------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 51,640 $ 73,762 $ 11,075 $ 51,640
=============== ================= ================ ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Reduction of debt due to final payment, in stock,
of FTI Acquisition $ - $ 94 $ - $ 94
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
ZONAGEN, INC, AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
---------------------------
Zonagen, Inc., a Delaware corporation, (together with its subsidiary,
Fertility Technologies, Inc. ("FTI") 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 FTI, its wholly owned subsidiary, in March 1999,
Zonagen also sold devices, instruments and supplies to fertility specialists,
obstetricians and gynecologists. From Inception through December 31, 1998, 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 products, 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 products; the Company's ability to
obtain regulatory approvals; the success of the Company's sales and marketing
programs; the cost of filing, prosecuting and defending and enforcing any patent
claims and other intellectual property rights; and changes in economic,
regulatory or competitive conditions of the Company's planned business.
Estimates about the adequacy of funding for the Company's activities are based
on certain assumptions, including the assumption that the development and
regulatory approval of the Company's products can be completed at projected
costs and that product approvals and introductions will be timely and
successful. There can be no assurance that changes in the Company's research and
development plans, acquisitions or other events will not result in accelerated
or unexpected expenditures. To satisfy its capital requirements, the Company may
seek to raise additional funds in the public or private capital markets. The
Company's ability to raise additional funds in the public or private markets
will be adversely affected if Vasomax(R) is not successfully commercialized and
if the results of current or future clinical trials are not favorable. The
Company may seek additional funding through corporate collaborations and other
financing vehicles. There can be no assurance that any such funding will be
available to the Company on 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. See
"Item 1. Description of Business - Business Risks" elsewhere herein.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements include the accounts of the Company
and FTI, its wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated.
F-9
<PAGE>
ZONAGEN, INC, AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
- -------------------------
For purposes of the consolidated statements of cash flows, the Company
considers all cash accounts and highly liquid investments having original
maturities of three months or less to be cash and cash equivalents.
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. Schering-Plough purchases bulk phentolamine from the
Company. As of December 31, 1998, the fair market value of this bulk raw
material inventory was approximately $2.8 million. Additionally, the Company's
inventory consists of products manufactured by others for resale to
obstetrics/gynecologists, urologists and fertility clinics. Finished goods
inventory at December 31, 1998 was approximately $350,000. Inventory is stated
at the lower of cost or market using the first-in, first-out method.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
- -----------------------------------------
Prepaid expenses and other current assets consists partially of
prepayments on future phentolamine purchases from the contract manufacturer. As
of December 31, 1998, prepayments held by the contract manufacturer were
$375,000. Other deposits and other current assets, substantially all of which
were prepaid insurance and interest receivable, totaled $657,000 as of December
31, 1998.
LAB EQUIPMENT, FURNITURE
AND LEASEHOLD IMPROVEMENTS
- ---------------------------
Lab equipment, furniture and leasehold improvements are recorded at
cost, less accumulated depreciation and amortization. Depreciation is computed
on the straight-line method over an estimated useful life of five years or, in
the case of leasehold improvements, amortized over the remaining term of the
lease. Maintenance and repairs that do not improve or extend the life of assets
are expensed as incurred.
GOODWILL
- --------
Goodwill represents the excess of the purchase price of FTI over the
fair value of the assets acquired at the date of acquisition and is being
amortized using the straight-line method over 7 years, which represents
management's estimation of the related benefit to be derived from the acquired
business. Under Accounting Principles Board ("APB") Opinion No. 17 and Statement
of Financial Accounting Standards ("SFAS") No. 121, the Company periodically
evaluates whether events and circumstances after the acquisition date indicate
that the remaining balance of goodwill may not be recoverable. If factors
indicate that goodwill should be evaluated for possible impairment, the Company
would compare estimated undiscounted future cash flow from the related
operations to the carrying amount of goodwill. If the carrying amount of
goodwill were greater than the undiscounted future cash flow, an impairment loss
would be recognized. Any impairment loss would be computed as the excess of the
carrying amount
F-10
<PAGE>
ZONAGEN, INC, AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of goodwill over the estimated fair value of the goodwill (calculated based on
discounting estimated future cash flows).
Accumulated amortization of goodwill was approximately $865,000 and
$655,000 as of December 31, 1998 and 1997, respectively.
On March 11, 1999, the Company sold substantially all of the
assets related to its wholly-owned subsidiary, FTI. The recognition of the sale
of these assets will be reflected in the quarter ended March 31, 1999.
OTHER ASSETS
- ------------
Other assets consist primarily of patent costs which are being
amortized over 17 years, or the lesser of the legal or the estimated economic
life of the patent. Accumulated amortization of patent costs was $88,000 and
$168,000 at December 31, 1998 and 1997, respectively.
REVENUE RECOGNITION
- -------------------
Revenues from licensing and milestone activities are recognized as
these revenues are earned. Any revenue contingent upon future performance by the
Company is deferred and recognized as the performance is completed. Royalties
are reported in the period received.
RESEARCH AND DEVELOPMENT COSTS
- ------------------------------
The Company expenses research and development costs in the period they
are incurred. These costs consist of direct and indirect costs associated with
specific projects as well as fees paid to various entities that perform research
on behalf of the Company.
LOSS PER SHARE
- --------------
In February 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 revised the standards
for computing and presenting earnings per share (EPS) of common stock such that
the computations required for primary and fully diluted EPS were replaced with
basic and diluted EPS. Basic EPS is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted EPS is computed in the same manner as fully diluted EPS, except that,
among other changes, the average share price for the period is used in all cases
when applying the treasury stock method to potentially dilutive outstanding
options. All earnings per share amounts presented herein have been restated to
reflect the adoption of SFAS No. 128. In all applicable years, all common stock
equivalents, including Series A and Series B preferred stock, were antidilutive
and, accordingly, were not included in the computation for the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In July 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information". SFAS No. 131 requires
certain financial and supplementary information to be disclosed on an annual and
interim basis for each reportable segment of an enterprise. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. Due to the
disposition of its wholly-owned subsidiary subsequent to year end (see Note
11), the Company now operates in only one segment. Accordingly, the adoption of
SFAS 131 has not had a material impact on the disclosure requirements of the
Company.
F-11
<PAGE>
ZONAGEN, INC, AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LAB EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS:
---------------------------------------------------
Lab equipment, furniture and leasehold improvements are classified as
follows (in thousands):
DECEMBER 31,
1998 1997
------------ -------------
Laboratory equipment.............. $ 981 $ 672
Furniture and fixtures............ 226 181
Office equipment.................. 246 131
Leasehold improvements............ 505 401
------------- --------------
1,958 1,385
Less - Accumulated depreciation
and amortization............... (1,051) (828)
------------- --------------
Total............................. $ 907 $ 557
============= ==============
4. OPERATING LEASES:
----------------
The Company leases laboratory and office space pursuant to leases
accounted for as operating leases. Rental expense for the years ended December
31, 1998, 1997 and 1996, was approximately $273,000, $223,000 and $179,000,
respectively. Future minimum lease payments under noncancelable leases with
original terms in excess of one year as of December 31, 1998, are as follows (in
thousands):
1999.............. 244
2000.............. 96
------
Total.............. $ 340
======
5. ACCRUED EXPENSES:
----------------
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1998 1997
---------------- -------------
<S> <C> <C>
Research and development costs............................... $ 1,489 $ 1,447
Consulting fees.............................................. -- 178
Employee bonuses............................................. 137 175
Other........................................................ 309 863
-------------- -------------
Total........................................................ $ 1,935 $ 2,663
============== =============
</TABLE>
6. FEDERAL INCOME TAXES:
--------------------
The Company has had losses since inception and, therefore, has not been
subject to federal income taxes. The Company has accumulated approximately $2.2
million of research and development tax credits. As of December 31, 1998 and
1997, the Company had approximately $51.1 million and $38.2 million,
respectively, of net operating loss (NOL) carryforwards for federal income tax
purposes. Additionally, if not utilized, these NOLs and research and development
tax credits will begin to expire in the year 2002 and 2003, respectively.
F-12
<PAGE>
ZONAGEN, INC, AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Tax Reform Act of 1986 provided for a limitation on the use of NOL
and tax credit carryforwards following certain ownership changes that could
limit the Company's ability to utilize these NOLs and tax credits. The sale of
preferred stock in 1996, together with previous changes in stock ownership,
resulted in an ownership change in 1996 for federal income tax purposes. The
Company estimates that the amount of pre-1997 NOL carryforwards and the credits
available to offset taxable income is limited to approximately $5.4 million per
year on a cumulative basis. Accordingly, if the Company generates taxable income
in any year in excess of its then cumulative limitation, the Company may be
required to pay federal income taxes even though it has unexpired NOL
carryforwards. Additionally, because U.S. tax laws limit the time during which
NOLs and tax credit carryforwards may be applied against future taxable income
and tax liabilities, the Company may not be able to take full advantage of its
NOLs and tax credit carryforwards for federal income tax purposes.
Under SFAS No. 109, "Accounting for Income Taxes," an NOL requires the
recognition of a deferred tax asset. As the Company has incurred losses since
inception, and there is no certainty of future revenues, a deferred tax asset
has been recorded and reserved in full in the accompanying financial statements
for the Company's NOL carryforward.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets :
Net operating loss carryforwards................................. $ 17,370 $ 12,974
Book/tax difference on basis of assets and license agreements.... 36 32
Research and development tax credits............................. 2,200 1,315
Accruals/expenses not currently deductible....................... 54 53
------------ ------------
Total deferred tax assets........................................ 19,660 14,374
Less -- Valuation allowance....................................... (19,660) (14,374)
------------ ------------
Net deferred tax assets.......................................... $ -- $ --
============ ============
</TABLE>
7. STOCKHOLDERS' EQUITY:
-------------------
SERIES B PREFERRED STOCK
- ------------------------
In September 1996, the Company authorized 1,925,000 shares of Series B
convertible preferred stock (Series B Preferred Stock). The Company sold an
aggregate of 1,692,500 shares of Series B Preferred Stock in September and
October 1996 at a price of $10.00 per share, from which it received net proceeds
of approximately $14.4 million.
Effective July 25, 1997, the conversion rate of the Series B Preferred
Stock was adjusted to 1.53 shares of Common Stock from 1.5094 shares of Common
Stock for each share of Series B Preferred Stock that remained outstanding as of
such date. The adjustment was required under the terms of the Certificate of
Designation of the Preferred Stock because the price at which shares of Common
Stock were sold to the public in the July 25, 1997 Offering ($30.00 per share)
was less than the closing bid price of Common Stock on such date ($31.50 per
share).
On October 6, 1997, the Company exercised its right to cause the
mandatory conversion of the Series B Preferred Stock, with the result that all
such shares not previously converted were converted into Common Stock effective
October 31, 1997.
F-13
<PAGE>
ZONAGEN, INC, AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WARRANTS
- --------
At December 31, 1998 there were a total of 115,469 warrants
outstanding, convertible into 187,602 shares of common stock. All warrants
contain a cashless exercise provision. The Company could receive cash proceeds
up to approximately $1,108,000 if the cashless exercise provision was not
utilized.
In connection with the October 1995 sale of Series A Preferred Stock,
the Company issued warrants (Series A warrants) to the placement agent to
purchase 59,885 shares of Series A Preferred Stock at a price of $11.00 per
share. At December 31, 1998 there were 18,391 Series A warrants outstanding
convertible into 50,733 shares of common stock. These warrants expire in October
2000. The Series A warrants were recorded at zero value in the accompanying
consolidated financial statements because the value was determined to be de
minimis when issued.
In connection with the issuance of Series B Preferred Stock, the
Company issued warrants (Series B warrants) to the placement agent to purchase
169,250 shares of Series B Preferred Stock at a price of $11.00 per share. At
December 31, 1998 there were 75,078 Series B warrants outstanding convertible
into 114,869 shares of common stock. The Series B warrants expire in October
2001. The Series B warrants were recorded at estimated fair value of $405,269
and are included as a component of additional paid in capital in the
accompanying consolidated financial statements. The fair value of these warrants
was estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions: risk-free interest rates of
5.67 percent, no expected dividend yield, expected life of one year and expected
volatility of 65 percent.
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, 1997 the Company
purchased a total of 61,500 shares at an aggregate purchase price of $1.3
million for an average price of $20.92 per share. During 1998, the Company
purchased an additional 353,800 shares at an aggregate purchase price of $6.2
million for an average of $17.52 per share. Total purchases resulting from the
stock buyback program are 415,300 for an aggregate purchase price of $7.5
million for a weighted average purchase price of $18.02 per share.
8. STOCK OPTIONS:
-------------
The Company has two stock option plans for the granting of options to
purchase a maximum of 2,150,000 shares of common stock by its employees and
consultants over the life of the plans. Currently, the Company, may grant
options to purchase up to 1,269,711 shares of common stock under the plans.
There are no significant differences between the provisions of each plan.
Options are granted with an exercise price per share as determined by the board
of directors, generally equal to the fair market value per share of common stock
on the grant date. Vesting provisions for each grant are determined by the board
of directors and have generally been 20 percent on each anniversary of the grant
date. All options expire no later than the tenth anniversary of the grant date.
At December 31, 1998, 314,602 options were available to be granted under these
plans.
In December 1996, the board of directors approved the adoption of a new
non-employee director stock option plan which supersedes the prior non-employee
directors stock option plan and eliminated any remaining options available to be
granted under the preceding plan. Pursuant to the terms of this plan, the
Company may grant options to purchase up to 400,000 shares of common stock. The
plan provides that each director receive options to purchase 25,000 shares of
common stock upon initial election to the board of directors and receive options
to purchase 2,500 shares at each re-election. The vesting provisions for the
initial election grant of options is 20 percent
F-14
<PAGE>
ZONAGEN, INC, AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on each annual anniversary of the grant date. Vesting for the re-election grant
of options is 8.33 percent on each monthly anniversary of the grant date. All
options expire no later than the tenth anniversary of the grant date. In
December 1996, the Company granted options to purchase 175,000 shares of common
stock to members of the board of directors at the fair market value of the stock
on the date of grant. As the plan was not approved by the stockholders until
June 1997, the Company recorded approximately $2.4 million in deferred
compensation relating to these options for the excess over fair market value of
the stock between the grant date and the date shareholder approval was received.
The deferred compensation is being amortized over the vesting period of the
options. At December 31, 1998, 187,500 options were available to be granted
under this plan.
The Company accounts for its stock option plans under APB No. 25
"Accounting for Stock Issued to Employees." Accordingly, deferred compensation
is recorded for stock options based on the excess of the market value of the
common stock on the measurement date over the exercise price of the options.
This deferred compensation is amortized over the vesting period of each option.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which, if fully adopted, requires the Company to
record stock-based compensation at fair value. The Company has adopted the
disclosure requirements of SFAS No. 123 for employee stock-based compensation
and has elected not to record related compensation expense in accordance with
this statement. Had compensation expense for its stock option plans been
determined consistent with SFAS No. 123, the Company's net loss and loss per
share would have been increased to the following pro forma amounts (in
thousands, except for per share amounts):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997 1996
--------- ------------ -----------
<S> <C> <C> <C>
Net loss -
As reported.................. $ 12,316 $ 13,173 $ 9,470
Pro forma.................... 14,152 14,361 9,791
Loss per share -
As reported.................. $ 1.09 $ 1.46 $ 1.92
Pro forma.................... 1.26 1.59 1.99
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Under SFAS No. 123, the fair value of each option grant was estimated
on the date of grant using the Black-Scholes option pricing model. The following
weighted average assumptions were used for grants in 1998, 1997, and 1996,
respectively: risk-free interest rates of 5.2%, 6.3%, and 6.2%; dividend rates
of $0; expected lives of 6.0 years; expected volatility of 79%, 60%, and 65%.
The Black-Scholes option valuation model and other existing models were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of and are highly sensitive to subjective assumptions
including the expected stock price volatility. The Company's employee stock
options have characteristics significantly different from those of traded
options and changes in the subjective input assumptions can materially affect
the fair value estimate.
F-15
<PAGE>
ZONAGEN, INC, AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's option plans at December 31,
1998, 1997, and 1996 and changes during the years then ended is presented in the
tables below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.. 922,431 $ 9.44 775,005 $ 6.41 647,855 $ 4.52
Granted........................... 287,527 18.52 320,300 17.57 206,650 7.79
Exercised......................... (63,022) 5.45 (90,955) 5.74 (23,100) 3.25
Forfeited......................... (47,874) 18.48 (81,919) 6.96 (56,400) 6.10
---------- ---------- ----------
Outstanding at end of year........ 1,099,062 11.77 922,431 9.44 775,005 6.41
========== ========== ==========
Exercisable at end of year........ 524,795 6.92 435,837 5.12 349,364 4.09
Weighted average fair value of
options granted at market......... $ 15.65 $ 13.66 $ 5.39
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Number Remining Exercise Number Exercise
Range Of Exercise Prices Outstanding Life Price Exercisable Price
------------------------ ----------- -------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .00 to $ 5.00....... 192,883 4.3 $ 2.31 162,883 $ 1.99
5.01 to 10.00....... 521,377 6.3 7.40 320,487 6.94
10.01 to 15.00....... 25,000 9.8 14.13 -- --
15.01 to 20.00....... 104,625 9.6 17.45 3,625 18.19
20.01 to 25.00....... 155,277 9.2 21.28 17,500 21.58
25.01 to 30.00....... 52,000 8.8 29.87 10,400 29.87
30.01 to 35.00....... 47,900 8.8 33.25 9,900 33.25
--------- --------
1,099,062 524,795
========= ========
</TABLE>
9. LICENSE, RESEARCH AND DEVELOPMENT 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 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).
F-16
<PAGE>
ZONAGEN, INC, AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1996, the Company entered into agreements with two contract
research organizations to which the Company made cash payments aggregating to
approximately $13.5 million and $13.1 million during the years ended December
31, 1998 and 1997, respectively, and recorded payables and accrued expenses of
$1.4 million as of December 31, 1998.
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 December 1993, the Company entered into an agreement with Schering
AG (a pharmaceutical company based in Germany that is not affiliated with
Schering-Plough), pursuant to which the Company and Schering AG agreed to
jointly research, develop and test zona pellucida-based human contraceptive
vaccines. Under the agreement, the Company was required to bear all costs of the
development of all such products until the Company had developed a ?lead
compound? that met certain specified standards for use in clinical trials. The
agreement required Schering AG to make payments to the Company upon certain
research and development milestones, none of which had been achieved, and to
bear all costs of the development of the vaccine after formulation of a lead
compound. Schering AG was required to purchase $2.5 million of Common Stock on
or before June 9, 1998 to retain its rights under the agreement beyond such
date. Schering AG did not purchase the shares of the Company's Common Stock
required to maintain its rights under the agreement; accordingly, the agreement
terminated on June 9, 1998. As a result of this termination, Schering AG and the
Company have no further obligations under the agreement, and all product rights
under the agreement have reverted to the Company.
10. COMMITMENTS AND CONTINGENCIES:
------------------------------
Cause No. 94-021991; Bonita S. Dunbar v. Baylor College of Medicine, et
al.; In the 270th Judicial District Court of Harris County, Texas, Dr. Bonita
Sue Dunbar ("Dunbar") filed suit in Harris County, Texas, on May 16, 1994,
naming Baylor College of Medicine ("BCM"), BCM Technologies, Inc. ("BCMT"),
Fulbright & Jaworski, The Woodlands Venture Capital Company ("Woodlands"), and
the Company as defendants (collectively, the "Defendants"). Dunbar is a cellular
and molecular biologist who has been employed by BCM as a teacher and research
scientist since 1981. During the course of her employment at BCM, Dunbar
developed technologies relating to the use of certain recombinant zona pellucida
peptides that were assigned to the Company. Dunbar received stock in the Company
in exchange for the assignment. In her lawsuit, Dunbar claimed, among other
things, that her assignment of the patent right was induced by statutory and
constructive fraud and a civil conspiracy on the part of the Defendants, seeking
damages and rescission of the assignment. Defendants filed motions for summary
judgment on all of Dunbar's claims and received a favorable ruling from the
trial Court. Dunbar appealed, and the Court of Appeals reversed the trial
Court's grant of summary judgement. Defendants have filed motions for rehearing
in the Court of Appeals, which motions are currently pending. If the Court of
Appeals denies the motions for rehearing, a petition for review to the Texas
Supreme court will likely be pursued by the Company as well as the other
Defendants. The Company and the other Defendants believe that Dunbar's
claims are without merit and intend to vigorously defend against them. No
estimate of loss or range of estimate of loss, if any, can be made at this time.
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
F-17
<PAGE>
ZONAGEN, INC, AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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.
11. SUBSEQUENT EVENTS (UNAUDITED):
-----------------------------
On February 23, 1999, the Company announced that Schering-Plough
Corporation notified the Company that it has exercised its rights to begin
manufacturing finished product for Vasomax(R). Vasomax(R) is Zonagen's
rapidly disintegrating oral formulation of phentolamine mesylate for the
treatment of male erectile dysfunction that is currently under regulatory review
by the U.S. Food and Drug Administration and the Medicines Control Agency in the
U.K. See "Item 1. Description of Business -- Collaborative and Licensing
Agreements -- Schering-Plough" and "-- Manufacturing."
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. The
results of FTI have been reported separately as discontinued operations in the
accompanying consolidated financial statements. Prior year consolidated
financial statements have been restated to present FTI as discontinued. Revenues
for FTI were $3.3 million, $3.5 million and $3.0 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
The components of assets and liabilities of discontinued operations
included in the consolidated balance sheet are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---------- ----------
<S> <C> <C>
Current assets :
Accounts receivable...................................... $ 318 $ 515
Inventory................................................ 350 207
Other current assets..................................... 23 38
---------- ----------
Total current assets..................................... 691 760
Furniture and equipment, net................................. 70 72
Goodwill, net................................................ 584 794
---------- ----------
Total Assets................................................. 1,345 1,626
---------- ----------
Accounts payable and other................................... 275 342
---------- ----------
Net assets................................................... $ 1,070 $ 1,284
========== ==========
</TABLE>
F-18
<PAGE>
EXHIBIT 10.29
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "AGREEMENT") is made and entered into this
20/th/ day of April, 1998, 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 Paul Lammers, MD, MSc (the
"EXECUTIVE").
WITNESSETH
----------
WHEREAS, the Company desires to employ the Executive as its Senior V.P. of
Regulatory and Clinical Affairs 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 Senior V.P. of Regulatory and Clinical
Affairs 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
PAUL LAMMERS, MD, MSC
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
PAUL LAMMERS, MD, MSC
PAGE 3 OF 7
(d) The Company will pay for all normal and customary expenses
associated with moving your household belongings from New Jersey
to Houston. In addition, the Company will reimburse you for
normal closing costs associated with the sale of your home in New
Jersey 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 13/th/
through 24/th/ 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
PAUL LAMMERS, MD, MSC
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 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
PAUL LAMMERS, MD, MSC
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
PAUL LAMMERS, MD, MSC
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:
Paul Lammers, MD, MSc
123 Morris Turnpike
Randolph, NJ 07869
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
PAUL LAMMERS, MD, MSC
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/ Paul Lammers
---------------------------------
Paul Lammers, MD MSc
<PAGE>
EXHIBIT 10.30
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "AGREEMENT") is made and entered into this
9th day of November, 1998, 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 Michael T. Redman (the
"EXECUTIVE").
WITNESSETH
----------
WHEREAS, the Company desires to employ the Executive as its Vice President
of Business Development 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 Vice President of Business Development
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
MICHAEL T. REDMAN
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 $10,834, 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
35,000 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
MICHAEL T. REDMAN
PAGE 3 OF 7
(d) The Company will pay for all normal and customary expenses
associated with moving your household belongings from St. Louis
to Houston. In addition, the Company will reimburse you for
normal closing costs associated with the sale of your home in St.
Louis 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
MICHAEL T. REDMAN
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
MICHAEL T. REDMAN
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
MICHAEL T. REDMAN
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:
Michael T. Redman
6785 Ryan Crest Drive
Florissant, MO 63033
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
MICHAEL T. REDMAN
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/ Michael T. Redman
------------------------------------------
Michael T. Redman
<PAGE>
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands except per share amounts)
YEAR ENDED DECEMBER 31, 1998
- ----------------------------
<TABLE>
<CAPTION>
Weighted Average
Loss Shares Outstanding Loss per Share
---- ------------------ --------------
<S> <C> <C> <C>
LOSS PER SHARE - BASIC AND DILUTED:
Loss from continuing operations $ 12,284 divided by 11,275 = $ 1.09
Loss from discontinued operations $ 32 divided by 11,275 = --
-------- ---------
Net Loss $ 12,316 divided by 11,275 = $ 1.09
======== =========
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Form 10-K into the Company's previously
filed Form S-8 dated May 17, 1993, Form S-8 dated August 29, 1994, Form S-8
dated November 4, 1996, Form S-3 dated November 17, 1995 and Form S-3 dated
December 9, 1996.
ARTHUR ANDERSEN LLP
Houston, Texas
March 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ZONAGEN, INC. SET FORTH IN THE COMPANY'S FORM 10-K FOR
THE TWELVE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 51,640
<SECURITIES> 0
<RECEIVABLES> 318
<ALLOWANCES> 0
<INVENTORY> 3,139
<CURRENT-ASSETS> 56,129
<PP&E> 1,958
<DEPRECIATION> 1,051
<TOTAL-ASSETS> 58,642
<CURRENT-LIABILITIES> 5,255
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 53,375
<TOTAL-LIABILITY-AND-EQUITY> 58,642
<SALES> 0
<TOTAL-REVENUES> 13,368
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 25,649
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (12,284)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,284)
<DISCONTINUED> (32)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,316)
<EPS-PRIMARY> (1.09)
<EPS-DILUTED> (1.09)
</TABLE>
