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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-21198
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ZONAGEN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
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)
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(281) 367-5892
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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<S> <C>
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
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Common Stock, $.001 par value Pacific Exchange, Inc.
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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<S> <C>
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
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Common Stock, $.001 par value Nasdaq National Market
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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 $91,479,728 as of March 20, 2000, based on the
closing sales price of the registrant's common stock on the Nasdaq National
Market on such date of $8.875 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 20, 2000, 11,283,224 shares of the registrant's common
stock were outstanding.
Certain sections of the registrant's definitive proxy statement relating to
the registrant's 2000 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, 1999, 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 "may,"
"anticipate," "believe," "expect," "estimate," "project," "suggest," "intend"
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"), a Delaware corporation, was
organized on August 20, 1987 (Inception), and is a development stage company.
Zonagen is a biopharmaceutical company engaged in the development of products
for the human reproductive system, including sexual dysfunction, vaccine
adjuvants, products for fertility and female health as well as urological
applications, specifically prostate cancer.
Sexual dysfunction is a widespread condition impacting large numbers of
both men and women. Zonagen began developing its first product for sexual
dysfunction, VASOMAX(R) for male erectile dysfunction, in 1994. Since that time,
the Company has gained an in-depth understanding of the biological mechanisms of
sexual dysfunction in both men and women. Zonagen's products to treat sexual
dysfunction all incorporate phentolamine mesylate ("phentolamine"), an
alpha-adrenergic blocker, as the active agent.
Zonagen's lead product, VASOMAX(R), is a rapidly disintegrating oral
formulation of phentolamine for the treatment of male erectile dysfunction. See
"- Products in Development - Sexual Dysfunction - VASOMAX(R) - Male Erectile
Dysfunction." Vasofem(TM) is being developed by the Company to treat female
sexual dysfunction, an area of rapidly increasing interest and knowledge.
Bimexes(TM) is a second generation, multi-component oral therapy for male
erectile dysfunction that acts on multiple physiological pathways, each
impacting erectile function. Influencing multiple pathways simultaneously may
yield an improved erectile response in some men. Zonagen is also working on
ERxin(TM), a multi-component injectable product to treat severe male erectile
dysfunction.
In 1997, Zonagen entered into an exclusive worldwide sales and
marketing agreement with Schering-Plough Corporation ("Schering-Plough") for
VASOMAX(R). See "Collaborative and Licensing Agreements - Schering-Plough
Corporation."
Zonagen is collaborating with a number of vaccine companies that are
testing the Company's adjuvants, ImmuMax(TM) and ImmuMax-SR(TM), for use with
their vaccines. These adjuvants have been developed to amplify human immune
responses elicited by vaccines. Test results using these adjuvants indicate that
they may be superior to traditional, alum-based adjuvants.
Zonagen is developing a number of products to address fertility and
female health. The Company recently in-licensed a novel class of compounds with
highly selective anti-progestational activity. The initial focus for the
compounds will be endometriosis and uterine fibroids, both major causes of
infertility. The Company is developing two therapeutic vaccine products to
prevent contraception by stimulating an immune response. Also under development
is Contrel(TM), a chitosan-based product that is being evaluated for use as a
vaginal anti-infective.
In the urology area, Zonagen is testing two different vaccines for the
treatment of prostate cancer. One seeks to treat hormone-independent tumors; the
other targets hormone-dependent tumors.
See " -- Business Risks -- Uncertainties Related to Clinical Trial Results and
FDA Approval."
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SEXUAL DYSFUNCTION
Sexual dysfunction is a widespread health problem for both sexes.
Recent studies have reported that more than 50 percent of men over 40 years of
age suffer from male erectile dysfunction ("MED"). Approximately 45 percent of
all sexually active women suffer from female sexual dysfunction ("FSD"),
according to another recent study.
Male Erectile Dysfunction
In healthy men, an erection is a vascular response that is mediated by
a complex series of events triggered by sexual stimulation. In the flaccid
state, the muscles of the penis are contracted. When sexually simulated, the
brain sends signals carried by neurotransmitters, or chemical stimuli, that
cause the muscles in the penis to relax. The resulting bloodflow engorges the
penis, causing an erection.
MED, 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 ("MMA Study"), published in the
Journal of Urology in 1994, was the first large study to demonstrate that MED is
a major health concern. The MMA Study found that 52 percent of the men studied
between the ages of 40 and 70 suffered from MED, suggesting that over 22 million
American men in that age category currently suffer from MED. More than 50
percent of those afflicted were characterized as having mild to moderate
dysfunction.
The health variable most strongly associated with MED is age. In
addition to age, factors that may contribute to MED include heart disease,
hypertension and diabetes, certain therapeutic drugs and anger or depression.
Demographic trends suggest that the number and percentage of men suffering from
MED will continue to increase as the developed world's population ages.
This same study also determined that MED is best defined using broader,
more flexible criteria encompassed in the Erectile Function Domain of the
International Index of Erectile Function ("IIEF"). The IIEF is a statistical
instrument that was developed and validated by Raymond C. Rosen, Ph.D. to
determine the degree of erectile dysfunction by assessing erectile difficulty
during intercourse, frequency of sexual activity and erection, and level of
satisfaction with the quality of the erection and the overall sexual experience.
The primary variable as to the severity of the MED condition is the
percentage of smooth muscle remaining in the penis. As men age, bloodflow to the
penis typically declines causing the normal structure of the penis to change;
smooth muscle is replaced with fibrous tissue that cannot expand sufficiently to
initiate and to maintain an erection. In men, as smooth muscle is lost, MED
worsens. For approximately 50 percent of the afflicted population, sufficient
smooth muscle remains for oral therapies such as VASOMAX(R) or Viagra(R) to
provide clinical benefit. As the condition in men worsens and the percentage of
smooth muscle drops, direct administration of vaso-active drugs injected into
the penis is required to restore penile function. Roughly 30 percent of men with
MED require penile injections in order to achieve a rigid erection. In the most
severe cases, penile implants are required.
Oral vaso-active drugs can improve sexual function by improving the
blood flow to the genitalia via several different biologic pathways. Currently
there are existing drugs, as well as new products in development, that can take
advantage of a variety of pathways. Alpha-adrenergic blockers, such as
VASOMAX(R), may produce an effect in as little as 15 to 20 minutes. Drugs that
inhibit the enzyme phosphodiesterase, such as Viagra(R), act on the nitric oxide
pathway and generally require about one hour or more to take effect. In both
cases, sexual stimulation is necessary for a normal response.
Female Sexual Dysfunction
Female sexual disorders include five major categories: lack of desire,
arousal disorder (problems with lubrication and sensation), failure to achieve
orgasm, pelvic pain disorder and vaginismus (involuntary contraction
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of vaginal muscles). The causes of FSD are multi-faceted and complicated; both
physiological as well as psychological problems such as depression, stress and
fatigue are among the causes. Circulatory problems due to menopause, diabetes
and hysterectomies are also believed to contribute to the problem. Earlier
studies reported that, similar to male sexual dysfunction, the prevalence of FSD
increases with age and is associated with vascular risk factors. More recent
studies indicate that the prevalence of FSD is fairly evenly distributed among
women of all age groups from 18 to 59 years of age.
In February 1999, The Journal of the American Medical Association
published a report on a representative sample of approximately 1,500 women in
the United States. This study suggested that 43 percent of women suffer from
sexual dysfunction. Symptoms included diminished interest in sex, anxiety over
performance, difficulty lubricating, inability to achieve orgasm and pain during
sex, any of which cause sex to be unpleasurable. The preponderance of those
reporting such dysfunctions were not post-menopausal women, but rather such
experiences were fairly evenly distributed among women ranging from 18 to 59
years of age.
Despite its prevalence, the understanding of female sexual dysfunction
is not nearly as advanced as its male counterpart. Treatment for FSD has
traditionally involved psychological intervention or Hormone Replacement Therapy
("HRT"). A recent upsurge in interest has led to a better understanding of
female sexual anatomy. The success of vaso-active drug therapy for men has
accelerated the development of similar therapies that increase bloodflow to the
genitalia.
Vasodilators are expected to play a significant role in developing
therapies for Female Sexual Arousal Disorder ("FSAD"). As in men, sexual
response in women is bloodflow-mediated. Currently, vaso-active agents such as
alpha-blockers and phosphodiesterase inhibitors are in clinical development for
the treatment of FSAD. One of the challenges in the clinical development of
these products to treat FSAD is determining appropriate clinical end points to
be used in studies to test the efficacy and safety of these drugs. The
regulatory agencies have stressed the need for a psychometrically valid,
reliable and statistically validated instrument to evaluate the clinical
outcomes of these trials.
To promote the study and understanding of FSAD, Zonagen, in conjunction
with Bayer AG, has developed the Female Sexual Function Index ("FSFI"). The FSFI
is designed to assist in the evaluation and treatment of FSAD, one of the
specific categories of FSD that is difficult to clinically diagnose. The FSFI is
a brief questionnaire that evaluates sexual function in women, similar to the
manner in which the IIEF is used for the study of MED. This instrument was
developed for use in clinical trials to assess different aspects of female
sexual function, such as sexual arousal, orgasm, satisfaction and pain. The FSFI
was tested in two groups of women, one of which included subjects with FSAD as
determined by sexual history and the other included normal control subjects. The
test results validated the FSFI by demonstrating sufficient psychometric
properties. The FSFI sensitively and reliably differentiated between these two
groups of women on all aspects of sexual function.
Zonagen and Bayer AG recently announced that a paper titled "Female
Sexual Function Index (FSFI(C)): A Multidimensional Self-Report Instrument for
the Assessment of Female Sexual Function" has been accepted for publication in
The Journal of Sex and Marital Therapy.
PRODUCTS IN DEVELOPMENT
Sexual Dysfunction
Zonagen began developing its first product for sexual dysfunction,
VASOMAX(R) for MED, in 1994. Since that time, the Company has gained an in-depth
understanding of the biological mechanisms of sexual dysfunction in both men and
women. The Company's products to treat sexual dysfunction all incorporate
phentolamine as the active ingredient. Phentolamine is an alpha-adrenergic
blocker that has been shown to be useful in the treatment of MED function and is
being developed for FSD.
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The products being developed to treat sexual dysfunction are the
Company's most advanced in terms of clinical development. All of these products
have been tested in humans, though each is at a different stage of development.
VASOMAX(R) - Male Erectile Dysfunction
VASOMAX(R) is an oral therapy for MED that delivers the active
ingredient, phentolamine, via a rapidly disintegrating formulation. VASOMAX(R)
is a vasodilator that blocks the alpha-adrenergic receptors for a relatively
short duration, leading to increased blood flow to the genitalia and smooth
muscle relaxation in the penis, enhancing the ability to achieve an erection.
Phentolamine has been approved by the Food and Drug Administration ("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, most often in combination with other drugs, in penile needle
injection therapies for the treatment of severe MED.
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 MED. In the studies, efficacy was measured using the
Erectile Function Domain of the 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. The IIEF was used by Zonagen in its clinical
trials of VASOMAX(R) and by Pfizer in its clinical trials of Viagra(R).
In addition to the IIEF primary endpoints, the Company also measured
other endpoints in the Phase III trials that the FDA is expected to use in 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 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, unrelated medications during the study period. The Company believes that
an intact nervous system is necessary for VASOMAX(R) to be effective; therefore,
men with MED caused by spinal cord injury or radical prostatectomy were
intentionally excluded from the trials.
In November 1997, the Company entered into exclusive worldwide license
agreements ("Agreements") with Schering-Plough to market and sell VASOMAX(R) for
the treatment of MED.
In May 1998, Schering-Plough began product sales in Mexico under the
tradename Z-MAX(R). In May 1999, an affiliate of Schering-Plough commenced
VASOMAX(R) sales in Brazil.
The Company submitted a New Drug Application ("NDA") for VASOMAX(R) to
the U.S. FDA in July 1998. Schering-Plough submitted a Marketing Authorization
Application for VASOMAX(R) to the Medicines Control Agency in the United Kingdom
in August 1998.
In February 1999, Schering-Plough notified the Company that it had
exercised its right to begin manufacturing finished product for VASOMAX(R).
Schering-Plough manufactures the product in Mexico and Brazil.
In May 1999, Schering-Plough and Zonagen jointly declined to go to the
FDA advisory panel review meeting. At that time, Schering-Plough had a human
clinical study underway, the results of which were considered to be important
data to present to the FDA to maximize the probability of VASOMAX(R)'s long term
success in the market. Declining to attend the panel meeting resulted in a
non-approvable letter from the FDA.
In August 1999, the Company announced the preliminary finding of brown
fat proliferations in a small percentage of male rats in a two-year rat study.
Consequently, the FDA placed both VASOMAX(R) and Vasofem(TM) on clinical hold in
the U.S. until the final report on the data from the two-year study is
submitted, reviewed and assessed by the FDA. At the time the clinical holds were
imposed, the FDA did allow Schering-Plough to complete the ongoing human study
of VASOMAX(R) that was underway. Zonagen believes that having the U.S. clinical
hold
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lifted is the key to resuming the approval process for VASOMAX(R) not only in
the U.S., but also for the major European markets.
The in-life portion of the two-year rat study was completed in November
1999. The gross necropsies have been performed on all rats. The
histopathological review of approximately 28,000 tissue sample slides is
underway. The Company has since completed an additional study to elucidate the
true nature and etiology of these masses and is preparing to provide the FDA the
final report that has been requested to consider lifting the clinical hold. The
report is expected to be submitted to the FDA by mid-to-late second quarter
2000.
In December 1999, Zonagen announced that Schering-Plough had completed
the VASOMAX(R) clinical study that the FDA had allowed to continue to conclusion
when VASOMAX(R) and Vasofem(TM) were placed on clinical hold. In addition to the
two Phase III pivotal trials and the study that was completed recently by
Schering-Plough, the Company and Schering-Plough have 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 and Schering-Plough
have finalized their long term open label safety studies and additional special
population and drug interaction studies, which are expected to be submitted as
part of the FDA's review of the NDA for VASOMAX(R). Zonagen intends to use this
data to address the issues raised in the FDA's non-approvable letter.
The foregoing expressions of the Company's expectations regarding the
completion and submission of the final report on the two year rat study, the
submission of the additional human data, the approval of the NDA and other
matters relating to the clinical development of VASOMAX(R) are forward-looking
statements that 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." 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.
Vasofem(TM) - Female Sexual Arousal Disorder
During 1997, the Company completed a pilot study under its
Investigational New Drug ("IND") application for VASOMAX(R). Based on the
results of this study, the Company filed an IND for Vasofem(TM) with the FDA
that became effective in October 1998. The purpose of this IND is to assess the
efficacy and safety of phentolamine in the treatment of FSAD. After the
completion of a U.S. Phase I safety study, the FDA placed Vasofem(TM) on
clinical hold in the U.S. due to the findings of brown fat proliferations in the
two-year rat study for VASOMAX(R). Vasofem(TM) was placed on clinical hold
because the active ingredient for both products is phentolamine. See "- Products
in Development - VASOMAX(R) - Male Erectile Dysfunction."
Zonagen has completed an additional foreign Phase I study of
Vasofem(TM). Further, an offshore Phase II clinical trial was conducted in an
in-office setting. The results have encouraged the Company to proceed with the
clinical development of Vasofem(TM). Zonagen intends to begin another foreign
study later this year utilizing the FSFI questionnaire to determine if the
effects of Vasofem(TM) on sexual response observed in the doctors' offices can
be replicated in an at-home setting. If the clinical hold is lifted in the U.S.,
the Company expects to work with the FDA to develop Phase II clinical trial
protocols for U.S.-based trials, leveraging the experience gained from
previously conducted foreign studies.
Bimexes(TM) - Combination Oral Therapy
Combinations of drugs are often used on an off-label basis in penile
needle injection therapy to improve erectile response. These drugs operate on
different mechanisms of action and are therefore administered in combination
with the objective of improving on the success rates of single-drug treatments.
Based on its evaluation of the mechanisms responsible for erectile function, the
Company believes that the use of phentolamine in combination with certain other
drugs that possess different mechanisms of action may yield improved erectile
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response in some men. Bimexes(TM), which is under development, is designed to
both utilize an alpha-adrenergic receptor blockade and stimulate the nitric
oxide pathway. Zonagen completed a 300 patient dose-ranging study in Mexico to
evaluate the safety and pharmacodynamic potential of Bimexes(TM) as a
second-generation oral therapy for MED. A 40 patient Viagra(R) challenge
follow-up study is currently being conducted.
ERxin(TM) - Multi-component Injection Therapy
The Company believes that about 30 percent 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. Further, a significant percentage of men with severe
erectile dysfunction who attempted penile injection therapy do not respond
adequately to the leading injectable therapy, Caverject(R). The Company
completed pilot studies with a multi-component injection therapy, called
ERxin(TM), for men who suffer from severe erectile dysfunction. The first trial
studied men who did not respond to Viagra(R); the second studied men who did not
achieve an adequate response to Caverject(R). The Company is currently
evaluating the results. Initial trial results have shown ERxin(TM) to be
superior to Caverject(R) in terms of percentage of patience achieving erections
rated sufficient for vaginal penetration.
Vaccine Adjuvants
Vaccination is a cost-effective means of preventing disease. Today more
than 20 vaccines have been approved by the FDA, with many more in development.
The development of these new vaccines pose a major challenge. The new generation
of vaccines often consist of antigenic subunits, synthetic peptides and
recombinant proteins. One of the greatest limitations of the new generation of
vaccines is that the antigens in these vaccines elicit weak immunological
responses. Adjuvants are required to boost the immune response and improve the
vaccine's efficacy.
Zonagen has developed two different adjuvants: ImmuMax(TM) (formerly
Z-Max) and ImmuMax SR(TM). Both of these chitosan-based products elicit high
antibody titers. Both adjuvant systems have been well tolerated in a number of
species including mice, rabbits, guinea pigs, dogs, cattle and non-human
primates (baboons, rhesus monkeys, cynomolgus macaques).
ImmuMax SR(TM) has been used in conjunction with whole molecules
(purified proteins, native proteins, tissue extract, recombinant proteins and
synthetic peptides). ImmuMax(TM) has been used with histidine-tagged recombinant
proteins expressed in bacteria, baculovirus systems, yeast and Chinese hamster
ovary cells.
Test results using these adjuvants indicate that they may have the
immunological profile of Complete Freund's Adjuvant ("CFA"), the "gold standard"
of research adjuvants, stimulating both humoral and cell-mediated immune
responses without the toxicity profile associated with CFA. Zonagen is in
discussion with a number of vaccine manufacturers about licensing these adjuvant
systems for use with their vaccines.
Fertility and Female Health
Selective Progesterone Receptor Modulators
Infertility is a physical condition that annually affects approximately
4.5 million couples of reproductive age. Endometriosis and uterine fibroids are
conditions that significantly increase the risk of infertility. Endometriosis
and uterine fibroids afflict hundreds of millions of women worldwide, especially
in the developed world. These conditions are major contributors to female
fertility problems. In the U.S., fibroids are the largest single cause of
hysterectomies.
In 1999, Zonagen in-licensed a novel class of compounds with highly
selective anti-progestational activity from the National Institutes of Health
("NIH"). These compounds have a high degree of specificity for the progesterone
receptor and initially are being developed for the treatment of endometriosis
and uterine fibroids.
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Zonagen has selected a lead compound based on animal data, as well as
synthesis considerations. Once an appropriate commercial process is developed,
the Company will begin preparing to initiate human clinical trials.
Immunocontraceptives
One of the most pressing issues of the new millennium is
overpopulation. Though available for many years, birth control pills are only
used by 18 percent of women of childbearing age, and an even smaller percentage
in the developing world. Many other women employ alternate forms of
contraception, both reversible and non-reversible. The Company believes that a
variety of factors, including the disadvantage of hormones used in currently
available oral contraceptives and the rapidly growing populations of many
developing countries, present a significant opportunity for new contraceptive
approaches. The Company has directed its contraceptive research towards
developing products that are easy to use and that avoid the problems associated
with hormone therapies currently available today.
Zonagen has two therapeutic vaccine products in development that
prevent conception by stimulating an immune response. One product targets the
zona pellucida causing this outer protein layer of the human ova to become
impervious to sperm, and the other vaccine uses human chorionic gonadatropin, or
hCG. Both vaccine products are in pre-clinical development.
Contrel(TM)
Sexually transmitted diseases impose an enormous cost on society, both
in terms of the deleterious effects on the health of individuals, including
death, as well as consuming a large amount of the world's healthcare resources.
Contrel(TM) is a chitosan-based product candidate that is being evaluated for
its vaginal anti-infective properties. This product is in pre-clinical
development.
Urology
As part of its commitment to become a leading provider of products for
reproductive health, Zonagen also has a research program developing drugs that
treat prostate cancer.
After skin cancer, prostate cancer is the next most common form of
cancer among American men, and is now the second leading cause of cancer death.
The American Cancer Society estimates that in 2000 about 180,400 new cases of
prostate cancer will be diagnosed and 31,900 men will die of this disease. The
prevalence and incidence of this disease will continue to increase as the
world's population ages. Current treatments for prostate cancer include surgery
(usually either radical prostatectomy or transurethral resection of the
prostate), radiation therapy, hormone therapy and chemotherapy.
To treat prostate cancer, Zonagen has developed a therapeutic vaccine
designed to stimulate the human immune system to destroy prostate cancer cells
in hormone independent tumors. This product, known as Zproxal(TM), is undergoing
initial testing in prostate cancer patients in Mexico. In the case of
hormone-dependent tumors, Zonagen's product, Gonaxin(TM), seeks to elicit an
immune response that neutralizes the hormone signal required for continued tumor
growth. This product is in pre-clinical development.
RESEARCH AND DEVELOPMENT
The Company's research and development expenditures have been spent
primarily on clinical trials of VASOMAX(R), Vasofem(TM) and the development of
its preclinical products. In 1999, 1998 and 1997, research and development
expenses were $12.2 million, $22.4 million and $22.3 million, respectively.
The decline in research and development expenses over the past year was
due primarily to the completion of the Phase III and open label trials for
VASOMAX(R) and the consequent decrease in outside contracted costs. Upon FDA
removal of the clinical hold on the Company's phentolamine-based products, the
Company expects these
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expenses to increase in the next several years over their 1999 level, as it
advances Vasofem(TM) further into the clinical trial process and certain of the
Company's preclinical product candidates progress into clinical trials.
BUSINESS STRATEGY
The Company's business strategy is designed to provide a continuing
pipeline of proprietary new products. In addition to internal product
development, Zonagen seeks to in-license early stage novel technologies
consistent with its core sets of expertise. The Company then develops that
technology and subsequently out-licenses it to corporate partners that are
committed to commercializing that technology. Zonagen does not currently plan to
build a sales and marketing capability. The Company seeks to create value by
developing the technology and then realizing that value by securing licensing
fees, milestone payments and royalties through corporate collaborations, much as
it has done with VASOMAX(R). This strategy incorporates the following key
elements:
Develop Proprietary and Acquired Technologies. The Company's
development activities are focused on creating a broad portfolio of proprietary
pharmaceutical products relating to the human reproductive system. Zonagen
continuously reviews product in-licensing and acquisition opportunities. 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, during 1999, Zonagen in-licensed new technologies, such as the
anti-progesterone compounds from the NIH.
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 13 issued patents and
17 pending patent applications in the U.S. and 50 issued patents and 91 pending
patent applications outside the U.S. See "-- Patents and Proprietary
Information."
Establish Collaborations with Corporate Partners. 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 Corporation with respect
to marketing and selling VASOMAX(R) for the treatment of MED. In addition to
providing an up-front payment and milestone payments, these agreements provide
for Schering-Plough to pay royalties to the Company based on net sales. See " --
Collaborative and Licensing Agreements." Zonagen is actively pursuing a number
of out-licensing arrangements with corporate partners to commercialize Zonagen's
products, such as the vaccine adjuvants. However, there can be no assurance that
any transactions will be consummated.
COLLABORATIVE AND LICENSING AGREEMENTS
The Company seeks to collaborate with corporate partners for the
development and commercialization of certain technologies and products. In this
regard, the Company has entered into the collaborative and licensing agreement
described below:
Schering-Plough Corporation
In November 1997, the Company entered into exclusive worldwide license
agreements ("Agreements") with Schering-Plough Corporation to market and sell
VASOMA(R) for the treatment of MED. 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 including FSAD. The Company will be entitled to receive
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 Agreements 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. The Agreements provide for Zonagen to receive escalating
royalty payments based on increasing product sales levels. There can be no
assurance that VASOMAX(R)
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will be approved by the FDA or other international regulatory agencies, or that
Schering-Plough will achieve sales levels that result in escalating royalty
payments.
Schering-Plough also has certain rights to enter into a license
agreement with Zonagen for the manufacture, marketing, distribution and sale of
certain additional products, which include Vasofem(TM), the Company's
phentolamine-based product in clinical development for FSAD. Schering-Plough's
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 of 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.
In February 1999, the Company was notified by Schering-Plough that it
was exercising its right to begin manufacturing finished product. Due to the
current clinical hold on VASOMAX(R) and Vasofem(TM), the Company has not yet
transferred its contract rights with the bulk phentolamine manufacturer or its
current phentolamine supply to Schering-Plough. Thus, on an interim basis,
Schering-Plough is purchasing bulk phentolamine as needed from the Company's raw
material phentolamine inventory for its manufacture of VASOMAX(R) at
approximately the Company's cost. The Company anticipates that it will transfer
both its bulk phentolamine and rights to its supply agreement to Schering-Plough
upon the approval of VASOMAX(R). 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 may be terminated 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. See " -- Sales and Marketing" and
" -- Business Risks -- Limited Sales and Marketing Experience; Dependence on
Collaborators" for a discussion of the risks associated with the Company's
limited sales and marketing experience and dependence on collaborators.
MANUFACTURING
The Company does not have any 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 supply agreement required that the Company purchase all of its
bulk phentolamine from Synkem for a period of five years. However, due to
Synkem's production of phentolamine in excess of the Company's actual committed
orders, on January 27, 2000, the Company agreed to an early purchase of the
excess phentolamine production at a substantially discounted price. This
purchase satisfied the years 2000 and 2001 contractual purchase obligations,
relieving the Company of any future contractual purchase obligations. If
VASOMAX(R) is approved by the FDA and the Company purchases additional
phentolamine from the contract manufacturer, then the Company will be required
to pay the contract manufacturer a premium equal to the amount that the purchase
price of the excess production was discounted.
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In February 1999, the Company was notified by Schering-Plough that it
was exercising its right to begin manufacturing finished product. Due to the
current clinical hold on VASOMAX(R) and Vasofem(TM), the Company has not yet
transferred its contract rights with the bulk phentolamine manufacturer or its
current phentolamine supply to Schering-Plough. Thus, on an interim basis,
Schering-Plough is purchasing bulk phentolamine as needed from the Company's raw
material phentolamine inventory for its manufacture of VASOMAX(R) at
approximately the Company's cost. The Company anticipates the transfer of both
its bulk phentolamine and rights to its supply agreement upon the approval of
VASOMAX(R). See " -- Collaborative and Licensing Agreements -- Schering-Plough."
During 1999, the Company filed a DMF with the FDA for the chitosan raw
material to be used in the preparation of its adjuvants. The Company intends to
develop the capability to supply the raw materials required to support clinical
trials utilizing its adjuvants.
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 to 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.
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 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.
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, 1999, the Company
owned or had rights to a total of 13 issued patents and 17 pending patent
applications in the U.S., and 50 issued patents and 91 pending patent
applications outside the United States. Of these patents and patent
applications, three are issued
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patents and eight pending patent applications in the United States, and 43
issued foreign patents, 69 pending foreign patents applications, and three
Patent Cooperation Treaty applications relating to its MED technology. The
Company also has rights to seven issued patents in the United States and six
issued foreign patents with respect to products and methods using specific
recombinant zona pellucida peptides. The Company has a total of two United
States and nine foreign patent applications pending that relate to zona
pellucida proteins, their preparation, and their use. The Company has three
issued patents and two pending patent applications in the United States, and one
issued patent and eight pending foreign patent applications for its ImmuMax(TM)
adjuvant system. The Company also has the following patent applications pending:
one United States application and one Patent Cooperation Treaty application
related to a vaginal contraceptive gel, one United States application related to
a recombinant human chorionic gonadotropin vaccine and uses thereof, two United
States applications related to antiprogestational agents and one United States
application and one Patent Cooperation Treaty 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 U.S. 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 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 approved for use in the U.S. 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 MED. The Company's
second issued U.S. 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
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<PAGE> 13
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 U.S. 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.
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.
Therapies for sexual dysfunction represent a very large market
opportunity, especially as the overall population continues to age. As the size
of the market continues to grow, the competition will expand. Viagra(R) has
already been approved for the treatment of MED and a number of other products
are being developed to address both MED and FSD. The delay caused by the
non-approvable letter received from the FDA in May 1999 and the subsequent
clinical hold imposed by the FDA in August 1999 may allow other competitors to
enter the market before VASOMAX(R), adversely impacting Zonagen's product for
MED.
The approval and 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.
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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 ("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,
milestone payments or royalties. If regulatory approval of 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 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 a NDA.
If unexpected safety concerns arise, the FDA can put an IND on clinical hold,
which means that ongoing studies will have to be stopped and no new studies are
allowed to be initiated until the safety concerns have been addressed and
resolved to the FDA's satisfaction.
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
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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).
By the date of the NDA submission in July 1998, the Company had
completed and submitted a complete genotoxicity profile as well as the results
from a six-month p53 mouse assay and six-month daily usage studies in dogs and
rats. In 1997, Zonagen commenced a two-year rat carcinogenicity study.
In August 1999, the Company announced the preliminary finding of brown
fat proliferations in a small percentage of male rats in the required two-year
rat study. Consequently, the FDA placed both VASOMAX(R) and Vasofem(TM) on
clinical hold in the U.S. until the final report on the data from the two-year
study is submitted, reviewed and assessed by the FDA. Zonagen believes that
having the U.S. clinical hold lifted is the key to resuming the approval process
for VASOMAX(R) not only in the U.S., but also for the major European markets.
The in-life portion of the two-year rat study was completed in November 1999.
The gross necropsies have been performed on all rats. The histopathological
review of approximately 28,000 tissue sample slides is underway. The Company has
since completed an additional study to elucidate the true nature and etiology of
these masses and is preparing to provide the FDA the final report that has been
requested to consider lifting the clinical hold. The report is expected to be
submitted to the FDA by mid-to-late second quarter 2000. There can be no
assurance that the data will be sufficient to cause the FDA to release the
clinical hold.
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 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
post-marketing 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
non-approvable letter, outlining the deficiencies in the submission and often
requiring additional testing or information.
In May 1999, Schering-Plough and Zonagen jointly declined to go to the
FDA's previously scheduled advisory panel review meeting. At that time,
Schering-Plough had a human clinical study underway, the results of which were
considered to be important data to present to the FDA to maximize the
probability of VASOMAX(R)'s long term success in the market. Declining to attend
the panel meeting resulted in a non-approvable letter from the FDA.
In December 1999, Zonagen announced that Schering-Plough had completed
the VASOMAX(R) clinical study that the FDA had allowed to continue to conclusion
when VASOMAX(R) and Vasofem(TM) were placed on clinical hold. In addition to the
two Phase III pivotal trials and this study that was completed recently by
Schering-Plough,
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the Company and Schering-Plough have 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 and Schering-Plough have finalized their long
term open label safety studies, and additional special population and drug
interaction studies, which are expected to be submitted as part of the FDA's
review of the NDA for VASOMAX(R). Zonagen intends to use this data to address
the issues raised in the FDA's non-approvable letter.
Notwithstanding the submission of any requested additional data or
information in response to a non-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
capabilities 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. 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."
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EMPLOYEES AND CONSULTANTS
Employees
At December 31, 1999, the Company had 31 full-time employees and
utilized a variety of consultants. Of the Company's full-time employees, 23 were
engaged in research, development, clinical research and regulatory affairs and 8
were engaged in finance, business development and administration. The Company
relies on its employees to either perform internal research and development or
to manage contracted 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:
Rae Lyn Burke, Ph.D. - Dr. Burke, Principle, Biotechnology Solutions, a
consulting company, has an extensive background in the development, production
and preclinical and clinical testing of recombinant biological products,
especially in the field of vaccines. Her expertise is evidenced by authorship of
more than 75 publications, inventorship of more than 20 patents, and recently,
participation as a standing member of the NIH Special Study Section for
Vaccines. Dr. Burke received her Ph.D. at the Department of Microbiology, State
University of New York, Stony Brook. She did postdoctoral studies at the
Department of Biochemistry and Biophysics, University of California, San
Francisco. Her work experience includes employment at Chiron and in 1988 she
cofounded Biotechnology Solutions.
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.
Peter Barton Hutt - Mr. Hutt is a partner in the Washington, D.C. law
firm of Covington & Burling specializing in food and drug law. He graduated from
Yale College and Harvard Law School and obtained a Masters in Food and Drug Law
from NYU Law School. Mr. Hutt served as Chief Counsel for the Food and Drug
Administration from 1971 to 1975. He has been a member of the Institute of
Medicine since it was founded in 1970 and currently serves on the Institute of
Medicine Board on Health Care Services.
Vernon Knight, M.D. - Dr. Knight has served at Baylor College of
Medicine as Professor and Chairman of the Department of Microbiology and
Immunology, Professor in the Infectious Disease Section of the Department of
Medicine, Director of Baylor's Center for Biotechnology, and Acting Chairman,
Department of Molecular Physiology and Biophysics at Baylor College of Medicine.
Donald McDonnell, Ph.D. - Dr. McDonnell is Associate Professor of
Pharmacology and Cancer Biology at Duke University Medical Center. He earned his
Ph.D. in cell biology from Baylor College of Medicine. Between 1991 and 1994 he
served as Associate Director, then Director and Head of Molecular Biology at
Ligand Pharmaceuticals. His work has focused in recent years on the genetic and
pharmacological dissection of the steroid hormone receptor signal transduction
pathways. The insights from his work have led to the discovery and
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development of novel estrogen and progesterone modulators, which are being
evaluated clinically as treatments for cancer and osteoporosis.
Chuck Montgomery, DVM, ACVP, ACLAM - Dr. Montgomery is president of
Compath, a contract consulting firm providing services in toxicology,
toxicologic pathology and comparative medicine. Dr. Montgomery has 28 years
experience in toxicology and 34 years experience in veterinary pathology. He was
previously the Director of the Center for Comparative Medicine at Baylor College
of Medicine and is currently Professor of Pathology, Baylor College of Medicine;
Professor of Pathobiology, Oklahoma State University and Professor of Veterinary
Pathobiology at Texas A&M University. He was formerly the Head of Toxicologic
Pathology for the National Toxicology Program and Chairman of the Department of
Pathology at the Uniformed Services University of the Health Sciences, School 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.
Raymond C. Rosen, Ph.D. - Dr. Rosen is Professor of Psychiatry and
Medicine, and Co-Director of the Center for Sexual and Marital Health of
UMDNJ-Robert Wood Johnson Medical School. Dr. Rosen has authored seven books and
more than 100 book chapters and articles on aspects of sexuality and sexual
dysfunction. He is the Editor of the Annual Review of Sex Research and the Past
President of the International Academy of Sex Research.
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 several pharmaceutical companies 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 a Clinical Associate
Professor in the Department of Obstetrics and Gynecology 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.
Organization and Operations" of Notes to Consolidated Financial Statements.
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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 additional clinical trials in an effort to
demonstrate the safety and efficacy of the product. In January 1999, the Company
completed a U.S. Phase I clinical trial for Vasofem(TM) and in the same year
commenced an offshore Phase II trial for the treatment of FSAD. None of the
Company's other products have 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, that could have a material adverse effect on the
Company.
In May 1999, Schering-Plough and Zonagen jointly declined to go to the
FDA advisory panel review meeting. At that time, Schering-Plough had a human
clinical study underway, the results of which were considered to be important
data to present to the FDA to maximize the probability of VASOMAX(R)'s long term
success in the market. Declining to attend the panel meeting resulted in a
non-approvable letter from the FDA.
In August 1999, the Company announced the preliminary finding of brown
fat proliferations in a small percentage of male rats in the two-year rat study.
Consequently, the FDA placed both VASOMAX(R) and Vasofem(TM) on clinical hold in
the U.S. until the final report on the data from the two-year study is
submitted, reviewed and assessed by the FDA. At the time the clinical holds were
imposed, the FDA did allow Schering-Plough to complete the ongoing human study
of VASOMAX(R). Zonagen believes that having the U.S. clinical hold lifted is the
key to resuming the approval process for VASOMAX(R) not only in the U.S., but
also for the major European markets.
The in-life portion of the two-year rat study was completed in November
1999. The gross necropsies have been performed on all rats. The
histopathological review of approximately 28,000 tissue sample slides is
underway. The Company has since completed an additional study to elucidate the
true nature and etiology of these masses and is preparing to provide the FDA the
final report that has been requested to consider lifting the clinical hold. The
report is expected to be submitted to the FDA by mid-to-late second quarter
2000.
In December 1999, Zonagen announced that Schering-Plough had completed
the VASOMAX(R) clinical study that the FDA had allowed to continue to conclusion
when VASOMAX(R) and Vasofem(TM) were placed on clinical hold. In addition to the
two Phase III pivotal trials and this study that was completed recently by
Schering-Plough, the Company and Schering-Plough have 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 and Schering-Plough
have finalized their long term open label safety studies, and additional special
population and drug interaction studies, that are expected to be submitted as
part of the FDA's review of the NDA for VASOMAX(R). Zonagen intends to use this
data to address the issues raised in the FDA's non-approvable letter.
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
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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 " --
Products in Development -- VASOMAX(R) - Male Erectile Dysfunction", " --
Governmental Regulation" and " -- Limited Sales and Marketing Experience;
Dependence on Collaborators."
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), that 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 to 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, 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, 1999, the Company had an
accumulated deficit of approximately $63.9 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. Organization and Operations" of Notes to Consolidated Financial
Statements.
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 will be
sufficient to fund its operations through at least the end of 2001. The
Company's capital requirements will depend on many factors, including: the
problems, delays, expenses and complications frequently encountered by
development stage companies; the progress of the Company's 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 or its collaborators' sales and
marketing programs; the cost of filing, prosecuting, 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
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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 and clinical
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 or the regulatory approval process for VASOMAX(R) and Vasofem(TM) 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 "-- Description of Business -- 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.
In May 1999, Schering-Plough and Zonagen jointly declined to go to the
FDA advisory panel review meeting. Declining to attend the panel meeting
resulted in a non-approvable letter from the FDA.
In August 1999, the Company announced the preliminary finding of brown
fat proliferations in a small percentage of male rats in the two-year rat study.
Consequently, the FDA placed both VASOMAX(R) and Vasofem(TM) on clinical hold in
the U.S. until the final report on the data from the two-year study is
submitted, reviewed and assessed by the FDA. At the time the clinical holds were
imposed, the FDA did allow Schering-Plough to complete the ongoing human study
of VASOMAX(R). Zonagen believes that having the U.S. clinical hold lifted is the
key to resuming the approval process for VASOMAX(R) not only in the U.S., but
also for the major European markets.
The in-life portion of the two-year rat study was completed in November
1999. The gross necropsies have been performed on all rats. The
histopathological review of approximately 28,000 tissue sample slides is
underway. The Company has since completed an additional study to elucidate the
true nature and etiology of these masses and is preparing to provide the FDA the
final report that has been requested to consider lifting the clinical hold. The
report is expected to be submitted to the FDA by mid-to-late second quarter
2000.
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In December 1999, Zonagen announced that Schering-Plough had completed
the VASOMAX(R) clinical study that the FDA had allowed to continue to conclusion
when VASOMAX(R) and Vasofem(TM) were placed on clinical hold. In addition to the
two Phase III pivotal trials and this study that was completed recently by
Schering-Plough, the Company and Schering-Plough have 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 and Schering-Plough
have finalized their long term open label safety studies, and additional special
population and drug interaction studies, which are expected to be submitted as
part of the FDA's review of the NDA for VASOMAX(R). Zonagen intends to use this
data to address the issues raised in the FDA's non-approvable letter.
There can be no assurance that, even after submission of this
additional data, regulatory approval will be 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. 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. Under the terms of the
Schering-Plough Agreements, Schering-Plough has broad discretion as to whether
or not to continue the collaboration with Zonagen. A decision by Schering-Plough
to terminate the Agreements would have a material adverse effect on the Company.
See " -- Description of Business -- Collaborative and Licensing Agreements and
- -- 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.
Thus, the Company's ability to produce product to support product approvals, if
secured, or ongoing or future clinical trials is dependent upon third party
suppliers, that the Company does not control and that may or may not deliver the
manufactured product required. See "-- Description of Business -- Manufacturing"
for a discussion of the risks associated with manufacturing and the Company's
reliance on third-party suppliers.
Inventory Accumulation
As of December 31, 1999, the Company had approximately $4 million of
bulk phentolamine inventory reflected on its balance sheet and has made an
additional purchase subsequent to year-end. This inventory has a finite shelf
life. Although the Company believes that it will realize the full value of this
inventory upon approval of VASOMAX(R), any substantial delays in the approval of
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VASOMAX(R), or the failure to obtain approval, would force the Company to
attempt to liquidate a portion or all of its phentolamine inventory position. A
large sale of this bulk inventory could drive the market price down due to an
oversupply of phentolamine.
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 " -- Description of Business -- 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, none of which currently
involve the Company. 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 maintains $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 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
The Company utilizes contract research organizations ("CROs") to assist
with the design and conduct of the Company's clinical trials, including the
clinical trials of VASOMAX(R) and Vasofem(TM), and other of its
phentolamine-based products for sexual dysfunction, as well as animal studies
and other pre-clinical trials. In addition, these companies have been
responsible for managing the conduct of and analyzing data from such clinical
and preclinical 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 CROs or to further develop the
capacity to conduct clinical and preclinical trials within its own clinical
affairs and preclinical groups. This could result in significant additional
expense and delays in the Company's clinical and preclinical trials and could
have a material adverse effect on the Company.
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, that 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
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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 payors 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.
Year 2000 Issue
The Company experienced no significant problems regarding the turn of
the millennium ("Year 2000") through March 29, 2000. The Company budgeted
between $150,000 and $250,000 for new computers, equipment, software and
implementation. The Company estimates that it spent approximately $50,000 for
the replacement of or upgrades to its computers, equipment and software,
including the required Year 2000 remediation implementation.
The Company appointed a Year 2000 committee to address the issues and
to assess the potential impact of the Year 2000 problem. The committee evaluated
the Company's financial systems, computers, software and other equipment and
continues follow-up activities to insure that no material issues will occur.
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
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 were 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 purported to bring the suit on behalf of all purchasers
of Zonagen common stock between February 7, 1996 and January 9, 1998. The
plaintiffs asserted 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 sought to have the
action declared to be a class action, and to have rescissionary or compensatory
damages in an unstated amount, along with interest and attorney's fees. On March
30, 1999, the Court granted the defendants' motion to dismiss and dismissed the
case with prejudice. The plaintiffs filed an appeal. The Company and the
individual defendants believe that these actions are without merit and intend to
defend against them vigorously. No estimate of loss or range of estimate of
loss, if any, can be made at this time.
The Company is involved in certain other litigation matters which it
believes will not have a material adverse effect on the Company.
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 1999.
-24-
<PAGE> 25
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's 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>
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.................................... $ 35.75 $ 18.38
Second Quarter................................... 25.50 8.75
Third Quarter.................................... 10.22 2.81
Fourth Quarter................................... 7.78 2.31
2000
First Quarter (through March 20, 2000)........... $ 14.44 $ 4.38
</TABLE>
All of the foregoing prices reflect interdealer quotations, without
retail mark-up, markdowns or commissions and may not necessarily represent
actual transactions in the Common Stock.
On March 20, 2000, the last sale price of the Common Stock, as reported
by the Nasdaq National Market, was $8.875 per share. On March 20, 2000, there
were approximately 270 holders of record and approximately 9,000 beneficial
holders of the Company's Common Stock.
In December 1997, the Company announced a stock buyback of its common
stock. The Company did not buy back any of its common stock in 1999.
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.
On September 1, 1999, the Board of Directors of the Company adopted a
stockholder rights plan ("Rights Plan") pursuant to which a dividend
consisting of one preferred stock purchase right (a "Right") was distributed for
each share of Common Stock held as of the close of business on September 13,
1999, and is to be distributed to each share of Common Stock issued thereafter
until the earlier of (i) the Distribution Date (as defined in the Rights Plan),
(ii) the Redemption Date (as defined in the Rights Plan) or (iii) September 13,
2002. The Rights Plan is designed to deter coercive takeover tactics and to
prevent an acquirer from gaining control of the Company
-25-
<PAGE> 26
without offering fair value to the Company's stockholders. The Rights will
expire on September 13, 2002, subject to earlier redemption or exchange as
provided in the Rights Plan. Each Right entitles the holder thereof to purchase
from the Company one one-hundredth of a share of a new series of Series One
Junior Participating Preferred Stock of the Company at a price of $20.00 per one
one-hundredth of a share, subject to adjustment. The Rights are generally
exercisable only if a Person (as defined) acquires beneficial ownership of 20
percent or more of the Company's outstanding Common Stock.
A complete description of the Rights, the Rights Agreement between the
Company and Harris Trust and Savings Bank, as rights agent, and the Series One
Junior Participating Preferred Stock is hereby incorporated by reference from
the information appearing under the captions "Rights Agreement" and "Description
of Preferred Stock" contained in the Current Report on Form 8-K of the Company
filed on September 3, 1999.
-26-
<PAGE> 27
ITEM 6. 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, 1999. 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>
STATEMENTS OF OPERATIONS DATA YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Licensing fee .............................. $ -- $ -- $ 10,000 $ 10,000 $ --
Product royalties .......................... -- -- -- 163 242
Interest income ............................ 116 271 1,960 3,205 2,170
-------- -------- -------- -------- --------
Total revenues .......................... 116 271 11,960 13,368 2,412
Expenses:
Research and development ................... 2,795 7,936 22,299 22,438 12,180
General and administrative ................. 846 1,163 2,730 3,211 3,249
Interest expense and
amortization of intangibles ............. -- 4 10 3 8
-------- -------- -------- -------- --------
Total expenses
3,641 9,103 25,039 25,652 15,437
-------- -------- -------- -------- --------
Loss from continuing operations .............. (3,525) (8,832) (13,079) (12,284) (13,025)
Income (loss) from discontinued
operations ................................ (762) (638) (94) (32) 59
Gain on disposal ............................. -- -- -- -- 1,014
-------- -------- -------- -------- --------
Net loss ..................................... $ (4,287) $ (9,470) $(13,173) $(12,316) $(11,952)
======== ======== ======== ======== ========
Income (loss) per share - basic and
diluted:
Loss from continuing operations .............. $ (0.91) $ (1.79) $ (1.45) $ (1.09) $ (1.16)
Income (loss) from discontinued operations ... (0.20) (0.13) (0.01) -- 0.01
Gain on disposal ............................. -- -- -- -- 0.09
-------- -------- -------- -------- --------
Net loss per share(1) ........................ $ (1.11) $ (1.92) $ (1.46) $ (1.09) $ (1.06)
======== ======== ======== ======== ========
Shares used in income (loss) per
share calculation ....................... 3,858 4,943 9,044 11,275 11,244
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and marketable
securities .............................. $ 4,190 $ 11,075 $ 73,762 $ 51,640 $ 39,136
Total assets ............................ 6,652 13,712 76,941 58,642 46,287
Long-term obligations ................... 66 17 3 -- --
Deficit accumulated during the
development stage ..................... (16,940) (26,410) (39,584) (51,900) (63,852)
Total stockholders' equity .............. 5,425 11,577 70,976 53,387 41,750
</TABLE>
- ---------------------
(1) See Note 2 of Notes to Consolidated Financial Statements for a
description of the computation of loss per share.
-27-
<PAGE> 28
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." Those views are based on certain assumptions regarding the progress of
product development efforts under collaborative agreements, the execution of new
collaborative agreements, success at existing and future research and
development programs, the ultimate outcome of the regulatory approval process
for VASOMAX(R) in the U.S. and other foreign jurisdictions, as well as for
Vasofem(TM) and other product candidates, and other factors relating to the
Company's growth. Such expectations may not materialize if product
commercialization or development efforts are delayed or suspended, if
negotiations with potential collaborators are delayed or unsuccessful, if such
regulatory approvals are not forthcoming, or if other assumptions prove
incorrect. 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"), a Delaware Corporation was
organized on August 20, 1987 (Inception) and is a development stage company.
Zonagen is a biopharmaceutical company engaged in the development of products
for the reproductive system, including sexual dysfunction, vaccine adjuvants,
products for fertility and female health as well as urological applications,
specifically prostate cancer.
Zonagen's results of operations may vary significantly from year to
year and quarter to quarter, and depend, among other factors, on the regulatory
approval process in the United States and other foreign jurisdictions, the
signing of new licenses and product development agreements, the timing of
revenues recognized pursuant to license agreements, the achievement of
milestones by licensees or the Company, the progress of clinical trials
conducted by the licensees and the Company and the levels of research, marketing
and administrative expense. The timing of the Company's revenues may not match
the timing of the Company's associated product development expenses. To date,
research and development expenses have generally exceeded revenue in any
particular period and/or fiscal year.
As of December 31, 1999, the Company had an accumulated deficit of
$63.9 million. Losses have resulted principally from costs incurred conducting
clinical trials for VASOMAX(R) and Vasofem(TM), in research and development
activities related to efforts to develop the Company's products and from the
associated administrative costs required to support those efforts. 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 in a reasonable time frame and at a reasonable cost, obtaining
regulatory approvals, establishing marketing, sales and manufacturing
capabilities or collaborative arrangements with others that possess such
capabilities, the Company's and its partners' ability to realize value from the
Company's research and development programs through the commercialization of
those products 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 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, 1999 and 1998
Revenues. Total revenues decreased 82% to $2.4 million in 1999 as
compared with $13.4 million in 1998. The Company did not receive any milestone
payments from Schering-Plough in 1999 as compared to the $10 million received in
1998 relating to the completion of certain developmental milestones for
VASOMAX(R). Product royalties from sales of VASOMAX(R) in Latin America were
approximately $242,000 in 1999 as compared to $163,000 in 1998. Schering-Plough
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<PAGE> 29
commenced sales of VASOMAX(R) in Mexico, under the brand name Z-MAX(R), in May
1998 and in Brazil in May 1999. Under the terms of the Agreements, the Company
receives quarterly royalty payments based on net product sales by
Schering-Plough. These quarterly payments are expected to lag current quarter
sales by up to sixty days. Until the clinical hold on VASOMAX(R) is lifted in
the United States, the Company expects royalty payments from foreign sales to be
nominal.
Interest income decreased 31% to $2.2 million in 1999 as compared with
$3.2 million in 1998. The decrease was due to decreased cash balances as a
result of supporting the Company's continuing operations, that included expenses
associated with the clinical development of the Company's phentolamine-based
products and not receiving a milestone payment in 1999 as compared to $10
million in 1998.
Research and Development Expenses. Research and development ("R&D")
expenses include contracted research, regulatory affairs activities and general
research and development expenses. R&D expenses decreased 46% to $12.2 million
in 1999 as compared with $22.4 million in 1998. The decrease was due primarily
to expenses associated with the development of VASOMAX(R) and other
phentolamine-based products. These contracted research expenses decreased 56% to
approximately $8.1 million in 1999 as compared with $18.4 million in 1998. The
decrease was due primarily to a reduction in contracted costs associated with
the development of VASOMAX(R) subsequent to the completion of Phase III and open
label clinical trials that were used in the July 1998 NDA submission to the FDA.
The Company will continue to incur costs in connection with the ongoing
regulatory review of VASOMAX(R) until the regulatory process is complete,
although at a substantially reduced level. Further, the FDA placed a clinical
hold on the Company's phentolamine-based products in August 1999. This clinical
hold prevented the Company from continuing further clinical development in the
United States for all indications utilizing the active drug ingredient
phentolamine. During 1998, the Company established an in-house clinical and
regulatory affairs group. This group currently consists of six individuals that
manage the Company's regulatory issues and relationships with CROs that are and
will be utilized to conduct current and future clinical development projects.
General research and development expenses remained relatively constant at
approximately $4.1 million in both 1999 and 1998. The Company expects its R&D
expenses to increase in the future, specifically in the area of clinical
development, once the Company's phentolamine-based products are taken off
clinical hold by the FDA. There can be no assurance that the FDA will remove the
clinical hold on the Company's phentolamine-based products.
General and Administrative Expenses. General and administrative
expenses remained constant at approximately $3.2 million in both 1999 and 1998.
The Company does not anticipate a major increase in general and administrative
expenses until VASOMAX(R) is approved in a major market.
In September 1999, the Company announced that it had decreased its cash
expenditures by reducing staff by fifteen people and by slowing down spending on
certain of its research programs. By concentrating on its lead product
candidates (VASOMAX(R), Vasofem(TM) and vaccine adjuvants), the Company sought
to insure that it has sufficient funds to finance these programs. The staff
reductions affected all areas of the Company. The financial impact for the
remainder of 1999 was nominal; one time charges relating to the staff reductions
substantially offset the cost reductions realized for the balance of the year.
Discontinued Operations. On March 11, 1999, the Company sold
substantially all of the assets related to its wholly owned subsidiary,
Fertility Technologies, Inc. ("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 was reflected
in the quarter ended March 31, 1999. The results from discontinued operations
relating to FTI was income of $59,000 for the period ended February 28, 1999 and
a loss of $32,000 for the year ended December 31, 1998.
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 was the same for both years
at $10.0 million. 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
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<PAGE> 30
VASOMAX(R) in Mexico, under the brand name Z-MAX(R), 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 are
expected to lag current quarter sales by up to sixty days.
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 offering completed in July 1997 and license and
milestone payments received from Schering-Plough in 1998 and 1997.
Research and Development Expenses. Research and development ("R&D")
expenses include contracted research, regulatory affairs activities and general
research and development expenses. R&D expenses 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 manages the Company's regulatory issues and relationships with CROs that
are and will be 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.
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 number of shareholders and the related expenses as a result of the
public offering in July 1997 and the establishment of an investor relations
department along with the hiring of additional professionals required to
strengthen its management team.
LIQUIDITY AND CAPITAL RESOURCES
Since Inception, the Company has financed its operations primarily with
proceeds from the private placements and public offerings of equity securities
and with funds received under collaborative agreements. In 1997, Schering-Plough
Corporation paid the Company an up-front licensing fee of $10 million for the
exclusive worldwide rights to market and sell the Company's VASOMAX(R) product
for the treatment of MED. During 1998, the Company received $10.0 million in
milestone payments relating to the completion of certain developmental
milestones for VASOMAX(R). During 1998, Zonagen received nominal royalty
payments from Schering-Plough for the sale of VASOMAX(R). During 1999, the
Company received only royalty payments relating to the sale of VASOMAX(R).
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. Net cash of
approximately $14.0 million, $15.7 million and $8.3 million was used in
operating activities during 1999, 1998 and 1997, respectively. The Company had
cash, cash equivalents and marketable securities of approximately $39.1 million
at December 31, 1999. The decreased use of cash for the year ended December 31,
1999 was primarily due a reduction in contracted costs associated with the
development of VASOMAX(R) subsequent to the completion of Phase III and open
label clinical trials that were used in the July 1998 NDA submission to the FDA
and the U.S. clinical hold placed on its phentolamine-based product development
programs in 1999. The Company spent approximately $8.1 million in connection
with its clinical development programs during 1999 as compared to $18.4 million
in 1998. In addition to operating activities in 1999, the Company did not
purchase any shares of its common stock in 1999 pursuant to the stock buyback
announced by the Company in December 1997 as compared to a purchase of $6.2
million of its common stock during 1998.
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
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<PAGE> 31
products, and to commence sales and marketing efforts, 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 2001.
The Company's capital requirements will depend on many factors,
including the problems, delays, expenses and complications frequently
encountered by development stage companies; the progress of the Company's
clinical and preclinical activities; the progress of the Company's collaborative
agreements with affiliates of Schering-Plough 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 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.
IMPACT OF YEAR 2000
The Company experienced no significant problems regarding the turn of
the millennium ("Year 2000") through March 29, 2000. The Company budgeted
between $150,000 and $250,000 for new computers, equipment, software and
implementation. The Company estimates that it spent approximately $50,000 for
the replacement of or upgrades to its computers, equipment and software,
including the required Year 2000 remediation implementation.
The Company appointed a Year 2000 committee to address the issues and
to assess the potential impact of the Year 2000 problem. The committee evaluated
the Company's financial systems, computers, software and other equipment and
continues follow-up activities to insure that no material issues will occur.
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.
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<PAGE> 32
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 ("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 ("Exchange Act"), within 120
days of the end of the Company's fiscal year ended December 31, 1999.
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 ("Exchange Act"), within 120
days of the end of the Company's fiscal year ended December 31, 1999.
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 ("Exchange Act"), within 120
days of the end of the Company's fiscal year ended December 31, 1999.
-32-
<PAGE> 33
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, 1999 and 1998.........................F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 and (unaudited)
from Inception (August 20, 1987) through December 31, 1999.......................F-3
Consolidated Statement of Stockholders' Equity ......................................F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 and (unaudited) from Inception
(August 20, 1987) through December 31, 1999......................................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> <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 ("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.
10.1+ -- Amended and Restated 1993 Employee and Consultant Stock Option Plan. Exhibit 10.3 to the
Company's Registration Statement is incorporated herein by reference.
10.2 -- 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.
10.3+ -- Employment Agreement between the Company and Joseph S. Podolski. Exhibit 10.5 to the
Company's Registration Statement is incorporated herein by reference.
10.4 -- 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 ("1993 Form 10-KSB") is incorporated
herein by reference.
10.5*+ -- Employment Agreement between the Company and Louis Ploth.
</TABLE>
-33-
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT
-------------- -------------------------
<S> <C> <C>
10.6 -- 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.
10.7 -- 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.
10.8 -- 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.
10.9 -- 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.
10.10 -- 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.
10.11 -- 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.
10.12 -- 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.
10.13 -- 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.
10.14++ -- 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.
10.15++ -- 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.
10.16+ -- Employment Agreement between the Company and Paul Lammers, MD MSc. Exhibit 10.29 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 is incorporated
herein by reference.
10.17+ -- Employment Agreement between the Company and Michael T. Redman. Exhibit 10.30 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 is incorporated
herein by reference.
10.18 -- Asset Purchase Agreement between Zonagen, Inc., Fertility Technologies, Inc. and Sage
BioPharma dated as of March 1, 1999. Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1999 is incorporated herein by reference.
10.19+ -- Employment Agreement between the Company and F. Scott Reding. Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1999 is incorporated
herein by reference.
10.20 -- Rights Agreement dated as of September 1, 1999 (incorporated by reference to Form 8-A of the
Company filed on September 3, 1999). Exhibit 4.1 to the Company's Quarterly Report on Form
8-K dated September 3, 1999 is incorporated herein by reference.
10.21+ -- Employment Agreement between the Company and David B. Bowman. Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1999 is incorporated
herein by reference.
10.22* -- First Amendment to the Zonagen, Inc. Amended and Restated 1993 Stock Option Plan.
10.23*++ -- Amendment to the Supply Agreement dated June 12, 1997, between the Company and Plasto S.A.
(Synkem Division).
11.1* -- Statement regarding computation of loss per share
23.1* -- Consent of Arthur Andersen LLP
27.1* -- Financial Data Schedule
</TABLE>
-34-
<PAGE> 35
* 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
(1) The Company filed a Current Report on Form 8-K dated March
12, 1999, during the three months ended March 31, 1999. The Current Report on
Form 8-K related to the Company's sale of the assets of its wholly owned
subsidiary Fertility Technologies, Inc., a Massachusetts corporation, to Sage
BioPharma, Inc., a Delaware corporation.
(2) The Company filed a Current Report on Form 8-K dated
September 3, 1999, during the three months ended September 30, 1999. The Current
Report on Form 8-K related to the Company's adoption of a Rights Plan designed
to protect the Company's stockholders from coercive or unfair takeover
techniques.
(3) The Company filed a Current Report on Form 8-K dated
September 14, 1999, during the three months ended September 30, 1999. The
Current Report on Form 8-K related to the Company's dismissal of 15 employees,
representing a reduction of approximately one-third of the Company's work force.
-35-
<PAGE> 36
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 30, 2000
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Joseph S. Podolski President, Chief Executive Officer March 30, 2000
- ---------------------------------------- and Director
Joseph S. Podolski (Principal Executive Officer)
/s/ F. Scott Reding Senior Vice President, Chief Financial March 30, 2000
- ---------------------------------------- Officer and Secretary
F. Scott Reding (Principal Financial Officer and
Principal Accounting Officer)
/s/ Martin P. Sutter Chairman of the Board of Directors March 30, 2000
- ----------------------------------------
Martin P. Sutter
/s/ Steven Blasnik Director March 30, 2000
- ----------------------------------------
Steven Blasnik
/s/ Timothy McInerney Director March 30, 2000
- ----------------------------------------
Timothy McInerney
/s/ Jeffrey M. Jonas, M.D. Director March 30, 2000
- ----------------------------------------
Jeffrey M. Jonas, M.D.
/s/ Nelson L. Levy, Ph.D., M.D. Director March 30, 2000
- ----------------------------------------
Nelson L. Levy, Ph.D., M.D.
</TABLE>
-36-
<PAGE> 37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Zonagen, Inc.:
We have audited the accompanying consolidated balance sheets of
Zonagen, Inc. (a Delaware corporation in the development stage), and subsidiary
(collectively, "the Company") as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States.
ARTHUR ANDERSEN LLP
Houston, Texas
February 2, 2000
F - 1
<PAGE> 38
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 4,106 $ 51,640
Marketable securities - short term 31,146 --
Accounts receivable -- 318
Product inventory 4,003 3,139
Prepaid expenses and other current assets 800 1,032
------------ ------------
Total current assets 40,055 56,129
Lab equipment, furniture and leasehold improvements, net 852 907
Marketable securities - long term 3,884 --
Goodwill, net -- 584
Other assets, net 1,496 1,022
------------ ------------
Total assets $ 46,287 $ 58,642
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 3,561 $ 3,317
Accrued expenses 976 1,935
Notes payable -- 3
------------ ------------
Total current liabilities 4,537 5,255
------------ ------------
Stockholders' Equity
Undesignated Preferred Stock, $.001 par value, 5,000,000
shares authorized, none issued and outstanding -- --
Common Stock, $.001 par value, 20,000,000 shares authorized, 11,681,324 and
11,621,140 shares issued, respectively; 11,266,024 and 11,205,840
shares outstanding, respectively
Additional paid-in capital 12 12
Deferred compensation 113,564 113,717
Cost of treasury stock, 415,300 shares (490) (958)
Deficit accumulated during the development stage (7,484) (7,484)
(63,852) (51,900)
Total stockholders' equity ------------ ------------
41,750 53,387
Total liabilities and stockholders' equity ------------ ------------
$ 46,287 $ 58,642
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 2
<PAGE> 39
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)
For the Year Ended December 31, through
------------------------------------------------ December 31,
1999 1998 1997 1999
---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Revenues
Licensing fees $ -- $ 10,000 $ 10,000 $ 20,250
Product royalties 242 163 -- 405
Interest income 2,170 3,205 1,960 8,228
---------- ---------- ---------- ----------
Total revenues 2,412 13,368 11,960 28,883
Expenses
Research and development 12,180 22,438 22,299 75,685
General and administrative 3,249 3,211 2,730 15,773
Interest expense and amortization
of intangibles 8 3 10 388
---------- ---------- ---------- ----------
Total expenses 15,437 25,652 25,039 91,846
---------- ---------- ---------- ----------
Loss from continuing operations (13,025) (12,284) (13,079) (62,963)
Income (loss) from discontinued operations 59 (32) (94) (1,828)
Gain on disposal of discontinued operations 1,014 -- -- 939
---------- ---------- ---------- ----------
Net loss $ (11,952) $ (12,316) $ (13,173) $ (63,852)
========== ========== ========== ==========
Income (loss) per share - basic and diluted:
Loss from continuing operations $ (1.16) $ (1.09) $ (1.45)
Income (loss) from discontinued operations 0.01 -- (0.01)
Gain on disposal of discontinued operations 0.09 -- --
---------- ---------- ----------
Net loss $ (1.06) $ (1.09) $ (1.46)
========== ========== ==========
Shares used in income (loss) per share calculation:
Basic and diluted 11,244 11,275 9,044
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F - 3
<PAGE> 40
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands except share amounts)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------------- ------------------------- 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 $46,833 -- -- 239,933 -- 2,453
Conversion of Series A preferred stock to common stock -- -- 179,936 -- 600
Conversion of Series B preferred stock to common stock -- -- 96,013 -- 378
Conversion of Series C preferred stock to common stock -- -- 876,312 1 3,443
Conversion of Series D preferred stock to common stock -- -- 280,248 -- 599
Conversion of bridge loan to common stock -- -- 64,000 -- 256
Net Loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Treasury Stock During the Total
Deferred ---------------------- Development Stockholders'
Compensation Shares Amount Stage Equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Exchange of common stock ($.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)
----------- ----------- ----------- ----------- -----------
</TABLE>
F - 4
<PAGE> 41
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands except share amounts)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------------- ---------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 (unaudited) -- $ -- 3,667,536 $ 4
Deferred compensation resulting from grant of options -- -- -- --
Amortization of deferred compensation -- -- -- --
Exercise of warrants to purchase common stock
for cash, June 30, 1994 ($3.94 per share) -- -- 39,623 --
Issuance of common stock for purchase of FTI,
October 13, 1994 -- -- 111,111 --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1994 -- -- 3,818,270 4
Amortization of deferred compensation -- -- -- --
Exercise of options to purchase common stock for cash,
January and April 1995 ($.10 to $6.13 per share) -- -- 4,546 --
Issuance of common stock for cash and a financing
charge, March 9, 1995 -- -- 16,000 --
Issuance of Series A preferred stock for cash,
October 4, 1995, and October 19, 1995 ($10.00 per
share), net of offering costs of $651,495 598,850 1 -- --
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
Deferred compensation resulting from grant of option -- -- -- --
Amortization of deferred compensation -- -- -- --
Exercise of warrants to purchase common stock for cash,
January through December 1996 ($3.63 per share) -- -- 227,776 --
Conversion of Series A preferred stock into
common stock, January through November 1996 (507,563) (1) 1,396,826 2
Issuance of options for services, January 12, 1996 -- -- -- --
Exercise of options to purchase common stock for
cash, February through November 1996 ($.001 to
$5.50 per share) -- -- 23,100 --
Issuance of common stock for agreement not to
compete, April 13, 1996 -- -- 19,512 --
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 -- --
Conversion of Series B preferred stock into common
stock, November through December 1996 (177,594) -- 268,058 --
Net loss -- -- -- --
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Additional Treasury Stock
Paid-in Deferred -------------------------
Capital Compensation Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 (unaudited) $ 15,136 $ -- -- $ --
Deferred compensation resulting from grant of options 188 (188) -- --
Amortization of deferred compensation -- 38 -- --
Exercise of warrants to purchase common stock
for cash, June 30, 1994 ($3.94 per share) 156 -- -- --
Issuance of common stock for purchase of FTI,
October 13, 1994 1,567 -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1994 17,047 (150) -- --
Amortization of deferred compensation -- 37 -- --
Exercise of options to purchase common stock for cash,
January and April 1995 ($.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 5,336 -- -- --
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 -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1995 22,473 (113) -- --
Deferred compensation resulting from grant of option 86 (86) -- --
Amortization of deferred compensation -- 54 -- --
Exercise of warrants to purchase common stock for cash,
January through December 1996 ($3.63 per share) 827 -- -- --
Conversion of Series A preferred stock into
common stock, January through November 1996 (1) -- -- --
Issuance of options for services, January 12, 1996 99 -- -- --
Exercise of options to purchase common stock for
cash, February through November 1996 ($.001 to
$5.50 per share) 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 14,366 -- -- --
Conversion of Series B preferred stock into common
stock, November through December 1996 -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the Total
Development Stockholders'
Stage Equity
----------- -----------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1993 (unaudited) $ (8,683) $ 6,457
Deferred compensation resulting from grant of options -- --
Amortization of deferred compensation -- 38
Exercise of warrants to purchase common stock
for cash, June 30, 1994 ($3.94 per share) -- 156
Issuance of common stock for purchase of FTI,
October 13, 1994 -- 1,567
Net loss (3,970) (3,970)
----------- -----------
BALANCE AT DECEMBER 31, 1994 (12,653) 4,248
Amortization of deferred compensation -- 37
Exercise of options to purchase common stock for cash,
January and April 1995 ($.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 (16,940) 5,425
Deferred compensation resulting from grant of option -- --
Amortization of deferred compensation -- 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)
----------- -----------
</TABLE>
F - 5
<PAGE> 42
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands except share amounts)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------------- ---------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 1,514,906 $ 2 6,033,396 $ 6
Deferred compensation resulting from grant of options -- -- -- --
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 --
Exercise of warrants to purchase common stock
for cash, January through December 1997 ($3.63 and
$3.07 per share) -- -- 22,368 --
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 --
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 --
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 --
Conversion of Series B preferred stock into common
stock, January through October 1997 (1,514,906) (2) 2,295,263 2
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
Purchase of treasury stock, December 1997 -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Additional Treasury Stock
Paid-in Deferred ----------------------------
Capital Compensation Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 $ 38,125 $ (145) -- $ --
Deferred compensation resulting from grant of options 2,110 (2,110) -- --
Amortization of deferred compensation -- 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) -- -- -- --
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 72,183 -- -- --
Purchase of treasury stock, December 1997 -- -- 61,500 (1,287)
Net loss -- -- -- --
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the Total
Development Stockholders'
Stage Equity
----------- -----------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1996 $ (26,410) $ 11,578
Deferred compensation resulting from grant of options -- --
Amortization of deferred compensation -- 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 -- (1,287)
Net loss (13,174) (13,174)
----------- -----------
</TABLE>
F - 6
<PAGE> 43
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands except share amounts)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------------- --------------------------
Shares Amount Shares Amount
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 -- $ -- 11,541,923 $ 12
Deferred compensation resulting from grant of options -- -- -- --
Amortization of deferred compensation -- -- -- --
Forfeiture of stock options, December 1998 -- -- -- --
Exercise of options to purchase common stock
for cash, January through October 1998 ($0.43 to
$22.25 per share) -- -- 63,022 --
Issuance of common stock for services, January
15, 1998 -- -- 5,000 --
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
Deferred compensation resulting from grant of options -- -- -- --
Amortization of deferred compensation -- -- -- --
Exercise of options to purchase common stock
for cash, February through September 1999 ($0.04 to
$8.375 per share) -- -- 31,866 --
Issuance of common stock for a cashless exercise of
common stock warrants, February 1999 -- -- 4,775 --
Issuance of common stock for a cashless exercise of
Series A preferred stock warrants, April 1999 -- -- 22,131 --
Issuance of common stock for a cashless exercise of
Series B preferred stock warrants, March through
April 1999 -- -- 876 --
Exercise of Series B preferred stock warrants to
purchase common stock for cash, January 1999
($11.00 per share) -- -- 536 --
Net loss -- -- -- --
----------- ----------- ----------- ----------
BALANCE AT DECEMBER 31, 1999 -- $ -- 11,681,324 $ 12
=========== =========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Additional Treasury Stock
Paid-in Deferred ---------------------------
Capital Compensation Shares Amount
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 $ 113,236 $ (1,401) 61,500 $ (1,287)
Deferred compensation resulting from grant of options 55 -- -- --
Amortization of deferred compensation -- 422 -- --
Forfeiture of stock options, December 1998 (21) 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) -- -- 353,800 (6,197)
Net loss -- -- -- --
---------- ---------- ----------- ----------
BALANCE AT DECEMBER 31, 1998 113,717 (958) 415,300 (7,484)
Deferred compensation resulting from grant of options (229) 229 -- --
Amortization of deferred compensation -- 239 -- --
Exercise of options to purchase common stock
for cash, February through September 1999 ($0.04 to
$8.375 per share) 72 -- -- --
Issuance of common stock for a cashless exercise of
common stock warrants, February 1999 -- -- -- --
Issuance of common stock for a cashless exercise of
Series A preferred stock warrants, April 1999 -- -- -- --
Issuance of common stock for a cashless exercise of
Series B preferred stock warrants, March through
April 1999 -- -- -- --
Exercise of Series B preferred stock warrants to
purchase common stock for cash, January 1999
($11.00 per share) 4 -- -- --
Net loss -- -- -- --
---------- ---------- ----------- ----------
BALANCE AT DECEMBER 31, 1999 $ 113,564 $ (490) 415,300 $ (7,484)
========== ========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the Total
Development Stockholders'
Stage Equity
---------- ----------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1997 $ (39,584) $ 70,976
Deferred compensation resulting from grant of options -- 55
Amortization of deferred compensation 422
Forfeiture of stock options, December 1998 -- --
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) -- (6,197)
Net loss (12,316) (12,316)
---------- ----------
BALANCE AT DECEMBER 31, 1998 (51,900) 53,387
Deferred compensation resulting from grant of options -- --
Amortization of deferred compensation -- 239
Exercise of options to purchase common stock
for cash, February through September 1999 ($0.04 to
$8.375 per share) -- 72
Issuance of common stock for a cashless exercise of
common stock warrants, February 1999 -- --
Issuance of common stock for a cashless exercise of
Series A preferred stock warrants, April 1999 -- --
Issuance of common stock for a cashless exercise of
Series B preferred stock warrants, March through
April 1999 -- --
Exercise of Series B preferred stock warrants to
purchase common stock for cash, January 1999
($11.00 per share) -- 4
Net loss (11,952) (11,952)
---------- ----------
BALANCE AT DECEMBER 31, 1999 $ (63,852) $ 41,750
========== ==========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F - 7
<PAGE> 44
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
From Inception
(August 20, 1987)
For the Year Ended December 31, through
-------------------------------------------- December 31,
1999 1998 1997 1999
---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net loss $ (11,952) $ (12,316) $ (13,173) $ (63,852)
Gain on disposal of discontinued operations (1,014) -- -- (939)
Adjustments to reconcile net loss to net cash
used in operating activities:
Noncash financing costs -- -- -- 316
Depreciation and amortization 408 353 383 2,363
Noncash expenses related to stock-based
transactions 239 477 853 1,797
Common stock issued for agreement not to
compete -- -- -- 200
Series B Preferred Stock issued for consulting
services -- -- -- 18
Changes in operating assets and liabilities
(net effects of purchase of businesses in 1988 and 1994):
(Increase) decrease in receivables (86) 197 (156) (199)
(Increase) decrease in inventory (1,176) (2,932) (33) (4,033)
(Increase) decrease in prepaid expenses and other
current assets 206 (762) (68) (685)
(Decrease) increase in accounts payable and
accrued expenses (621) (696) 3,938 4,414
---------- ---------- ---------- ----------
Net cash used in operating activities (13,996) (15,679) (8,256) (60,600)
Cash Flows from Investing Activities
Purchase of marketable securities (35,030) -- -- (35,030)
Capital expenditures (311) (572) (367) (2,161)
Purchase of technology rights and other assets (521) (107) (301) (1,600)
Cash acquired in purchase of FTI -- -- -- 3
Proceeds from sale of subsidiary, less
$12,345 for operating losses during
1990 phase-out period -- -- -- 138
Proceeds from sale of the assets of Fertility
Technologies, Inc., subsidiary 2,250 -- -- 2,250
Increase in net assets held for disposal -- -- -- (213)
---------- ---------- ---------- ----------
Net cash used in investing activities (33,612) (679) (668) (36,613)
Cash Flows from Financing Activities
Proceeds from issuance of common stock 75 447 72,912 84,008
Proceeds from issuance of preferred stock -- -- -- 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 (1) (14) (14) (1,732)
---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities 74 (5,764) 71,611 101,319
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (47,534) (22,122) 62,687 4,106
Cash and cash equivalents at beginning of period 51,640 73,762 11,075 --
---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 4,106 $ 51,640 $ 73,762 $ 4,106
========== ========== ========== ==========
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> 45
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 wholly owned
subsidiary, Fertility Technologies, Inc. ("FTI"), the "Company" or "Zonagen"),
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, vaccine adjuvants, fertility and female
health as well as urological applications, specifically prostate cancer. Until
the sale of substantially all the assets of FTI in March 1999, Zonagen also sold
devices, instruments and supplies to fertility specialists, obstetricians and
gynecologists. From Inception through December 31, 1999, the Company has been
primarily engaged in research and development and clinical development and is
still in a development stage.
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
Company received a nominal payment under the terms of this agreement. During the
quarter ended March 31, 1999, the Company recorded a gain on the sale of FTI of
$1.0 million.
The results of FTI have been reported separately as discontinued
operations in the accompanying consolidated financial statements. Prior period
consolidated financial statements have been restated to present FTI as
discontinued. Revenues for FTI were approximately $558,000 for the two months
ended February 28, 1999 and $3.3 million and $3.5 million for the years ended
December 31, 1998 and 1997, 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
--------------
<S> <C>
Current assets :
Accounts receivable........................ $ 318
Inventory.................................. 350
Other current assets....................... 23
--------------
Total current assets....................... 691
Furniture and equipment, net....................... 70
Goodwill, net...................................... 584
--------------
Total Assets....................................... 1,345
--------------
Accounts payable and other......................... 275
--------------
Net assets......................................... $ 1,070
==============
</TABLE>
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 2001.
F - 9
<PAGE> 46
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 ("MED"), 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 results of FTI have been reported separately as discontinued
operations in the accompanying income statements. Prior period consolidated
income statements have been restated to present FTI as discontinued. The balance
sheet for the year ended 1998 reports consolidated balance sheet accounts. The
consolidated financial statements include the accounts of the Company and FTI.
All significant intercompany balances and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all cash accounts and highly liquid investments having original
maturities of three months or less to be cash and cash equivalents.
F - 10
<PAGE> 47
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRODUCT INVENTORY
The Company maintains an inventory of bulk phentolamine which is the
active ingredient in VASOMAX(R), the Company's oral treatment for MED. As of
December 31, 1999, the fair market value of this bulk raw material inventory on
hand was approximately $4.0 million as compared to approximately $2.8 million in
the prior year. Prior to the sale of FTI in March 1999, the Company's inventory
also consisted of products manufactured by others for resale to
obstetrics/gynecologists, urologists and fertility clinics. There was no
finished goods inventory at December 31, 1999. 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 for the year ended December
31, 1999, primarily consists of interest and other receivables of $599,000 from
the Company's marketable securities and bank accounts, prepaid insurance of
$118,000, prepaid operating expenses of $61,000 and other miscellaneous assets
of $22,000. As of December 31, 1998, prepaid expenses and other current assets
consisted of a $375,000 prepayment held by the bulk phentolamine manufacturer
and approximately $657,000 that substantially consisted of prepaid insurance
and interest receivable.
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. 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 of goodwill over the estimated fair value of
the goodwill (calculated based on discounting estimated future cash flows).
Accumulated amortization of goodwill was zero and approximately
$865,000 as of December 31, 1999 and 1998, 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 was reflected in the quarter ended March 31, 1999.
OTHER ASSETS
Other assets consist primarily of patent costs that 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 $136,000 and $88,000 at
December 31, 1999 and 1998, respectively.
F - 11
<PAGE> 48
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION
Revenues from licensing activities and milestone achievements 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, which may be up to
sixty days after the close of the quarter in which Schering-Plough Corporation
booked the related revenues. As the price is not determinable and collection is
not reasonably assured until that time.
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
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.
SEGMENT DISCLOSURE
Due to the disposition of its wholly owned subsidiary on March 11, 1999
(see Note 1), 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101") which provides guidance related to revenue recognition. SAB 101 is
effective the first fiscal quarter of fiscal years beginning after December 15,
1999 and requires companies to report any changes in revenue recognition as a
cumulative change in accounting principle at the time of implementation in
accordance with Accounting Principles Board No. 20, "Accounting Changes."
Zonagen is currently in the process of evaluating what impact, if any, SAB 101
will have on its financial position or its results of operations.
3. MARKETABLE SECURITIES -SHORT AND LONG TERM:
Short term marketable securities have a remaining maturity of less than
twelve months and long term marketable securities have a remaining maturity of
greater than twelve months. All investments are stated at amortized cost.
Marketable securities-short term were $31.1 million and marketable
securities-long term were $3.9 million as of December 31, 1999, totaling $35.0
million. In prior years, the Company invested only in 30-day commercial paper.
The Company now invests excess funds in longer maturities to secure a higher
yield. These investments include money market funds, corporate bonds and notes,
Euro-dollar bonds and taxable auction securities. The Company's policy is to
hold investments to maturity and to require minimum credit ratings of A2/A
F - 12
<PAGE> 49
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and A1/P1 with maturities of up to three years. The average life of the
investment portfolio may not exceed 24 months.
Marketable securities -short term and long term are classified as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------
SHORT TERM LONG TERM
---------- ---------
<S> <C> <C>
Corporate bonds $ 14,818 $ 2,222
Corporate notes 6,703 1,662
Euro-dollars 7,625 --
Taxable auction securities 2,000 --
---------- ---------
Total $ 31,146 $ 3,884
========== =========
</TABLE>
4. LAB EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS:
Lab equipment, furniture and leasehold improvements are classified as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Laboratory equipment ................... $ 1,084 $ 981
Furniture and fixtures ................. 167 226
Office equipment ....................... 367 246
Leasehold improvements ................. 475 505
---------- ----------
2,093 1,958
Less - Accumulated depreciation
and amortization ................... (1,241) (1,051)
---------- ----------
Total .................................. $ 852 $ 907
========== ==========
</TABLE>
5. 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, 1999, 1998 and 1997, was approximately $229,000, $273,000 and $223,000,
respectively. Future minimum lease payments under noncancelable leases with
original terms in excess of one year as of December 31, 1999, are as follows (in
thousands):
<TABLE>
<S> <C>
2000.............. $ 102
2001.............. 3
2002.............. 2
----------
Total............. $ 107
==========
</TABLE>
F - 13
<PAGE> 50
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. ACCRUED EXPENSES:
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998
-------------- ------------
<S> <C> <C>
Research and development costs............................... $ 467 $ 1,489
Employee bonuses............................................. 99 137
Other........................................................ 410 309
-------------- ------------
Total........................................................ $ 976 $ 1,935
============== ============
</TABLE>
On October 18, 1999, the Company's Compensation Committee of the Board
of Directors approved and granted stay bonuses aggregating $480,000 for all
existing employees. These bonuses will be payable on the first working day of
January 2001, for employees who received the grants and who are still employed
by the Company on December 31, 2000, subject to acceleration upon the occurrence
of certain defined circumstances. The Company is recognizing the expense of
these bonuses ratably over five quarters ending December 31, 2000, which is the
service period.
7. 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 $2.8
million of research and development tax credits. As of December 31, 1999 and
1998, the Company had approximately $61.2 million and $51.1 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.
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.
F - 14
<PAGE> 51
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
-----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ..................................... $ 20,802 $ 17,370
Book/tax difference on basis of assets and license agreements ........ 80 36
Research and development tax credits ................................. 2,787 2,200
Accruals/expenses not currently deductible............................ 119 54
---------- ----------
Total deferred tax assets ............................................ 23,788 19,660
Less-- Valuation allowance ........................................... (23,788) (19,660)
---------- ----------
Net deferred tax assets .............................................. $ -- $ --
========== ==========
</TABLE>
8. STOCKHOLDERS' EQUITY:
WARRANTS
During 1999, the Company issued an aggregate of 27,782 shares of Common
Stock upon the cashless exercise of stock warrants to purchase an aggregate of
33,448 shares of Common Stock. Also, during 1999, warrants to purchase an
aggregate of 536 shares of Common Stock were exercised for total proceeds of
$3,850 at a price of $7.18 per share.
At December 31, 1999 there were a total of 99,137 warrants outstanding,
convertible into 153,620 shares of common stock at exercise prices ranging from
$3.63 to $7.19. The Company could receive cash proceeds up to approximately
$969,000 if the cashless exercise provision was not utilized. All warrants
outstanding have a cashless exercise provision.
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 price of $17.52 per share. Total purchases resulting from
the stock buyback program are 415,300 shares for an aggregate purchase price of
$7.5 million for a weighted average purchase price of $18.02 per share. The
Company did not buy back any of its common stock in 1999.
9. 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. As a result of the amendment to the 1993
Amended and Restated Employee and Consultant Stock Option Plan, approved by the
shareholders at the 1999 annual meeting of shareholders, the Company may
currently grant options to purchase up to 2,000,000 shares of common stock under
the plan. 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% on each anniversary of the grant
date. All options expire no later
F - 15
<PAGE> 52
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
than the tenth anniversary of the grant date. At December 31, 1999, 905,938
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 that 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% on each annual anniversary of the grant
date. Vesting for the re-election grant of options is 8.33% 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, 1999, 205,000 options
were available to be granted under this plan.
On October 18, 1999, the Company's Compensation Committee of the Board
of Director's approved and granted stock options aggregating 285,500 options for
all existing employees. These options were granted at the fair market value on
the date of grant and will vest 20% on each anniversary of the grant date.
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.
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,
--------------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net loss -
As reported ......... $ 11,952 $ 12,316 $ 13,173
Pro forma ........... 14,423 14,152 14,361
Loss per share -
As reported ......... $ 1.06 $ 1.09 $ 1.46
Pro forma ........... 1.28 1.26 1.59
</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.
F - 16
<PAGE> 53
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1999, 1998, and 1997,
respectively: risk-free interest rates of 5.9%, 5.2%, and 6.3%; dividend rates
of $0; expected lives of 9.3, 6.0, and 6.0 years; expected volatility of 84%,
79%, and 60%. The weighted average fair value of options granted at market for
1999, 1998 and 1997 was $6.95, $15.65 and $13.66, respectively.
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.
A summary of the status of the Company's option plans at December 31,
1999, 1998, and 1997 and changes during the years then ended is presented in the
tables below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- --------------------------
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 ....... 1,099,062 $ 11.77 922,431 $ 9.44 775,005 $ 6.41
Granted ................................ 421,833 8.68 287,527 18.52 320,300 17.57
Exercised .............................. (31,866) 2.25 (63,022) 5.45 (90,955) 5.74
Forfeited .............................. (163,280) 18.66 (47,874) 18.48 (81,919) 6.96
---------- ---------- ----------
Outstanding at end of year ............. 1,325,749 10.16 1,099,062 11.77 922,431 9.44
========== ========== ==========
Exercisable at end of year ............. 620,892 8.28 524,795 6.92 435,837 5.12
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------------- ----------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
$ .00 to $ 5.00.......... 452,668 7.4 $ 2.77 155,668 $ 2.36
5.01 to 10.00.......... 500,871 5.3 7.44 368,471 7.08
10.01 to 15.00.......... 12,500 9.4 13.44 7,290 13.44
15.01 to 20.00.......... 82,350 8.7 17.32 17,425 17.36
20.01 to 25.00.......... 141,860 8.0 21.28 48,638 21.29
25.01 to 30.00.......... 120,000 8.7 28.05 16,000 30.00
30.01 to 35.00.......... 15,500 7.1 33.25 7,400 33.25
----------- ----------
1,325,749 620,892
=========== ==========
</TABLE>
10. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS:
SCHERING-PLOUGH CORPORATION
In November 1997, the Company entered into exclusive license agreements
with affiliates of Schering-Plough Corporation, a major U.S.-based
pharmaceutical company (including such affiliates, "Schering-Plough"), with
respect to the Company's VASOMAX(R) product for the treatment of MED. Upon
completion of the agreement,
F - 17
<PAGE> 54
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Schering-Plough paid Zonagen an up-front payment of $10.0 million and agreed to
make subsequent aggregate milestone payments up to $47.5 million upon the
successful achievement of specified regulatory goals. The Schering-Plough
agreements provide for Zonagen to receive escalating royalty payments based on
increasing product sales levels. There can be no assurance that VASOMAX(R) will
be approved by the FDA or that Schering-Plough will achieve sales levels that
result in escalating royalty payments.
As provided for in the Schering-Plough agreements, royalty rates
payable are substantially reduced on VASOMAX(R) sales in a territory where the
Company has not met a certain business criterion called for in the agreements.
Currently, the Company has not met that business criterion in Mexico and Brazil,
the two jurisdictions where the product is currently being sold. Until this
business criterion is met in these countries, the Company will continue to
receive royalties at the reduced rate. In addition, until this business
criterion is met, royalties may be reduced substantially further, if during any
calendar quarter, unit sales of orally administered phentolamine-based products
for MED by competitors in this territory exceed certain specified market shares.
On June 30, 1998, the Company received an accelerated milestone payment
of $5.0 million from Schering-Plough that was paid at the completion of the
clinical program that was used in support of the New Drug Application ("NDA")
for VASOMAX(R). The payment was due upon the submission of a NDA for VASOMAX(R)
with the FDA. The Company submitted the NDA on July 14, 1998.
On September 30, 1998, the Company received an additional milestone
payment of $5.0 million from Schering-Plough that was paid upon FDA acceptance
of the NDA filing for VASOMAX(R). Zonagen has received a total of $20.0 million
from Schering-Plough from inception of the collaboration through December 31,
1999. The balance of the $37.5 million in milestone payments is tied to the
receipt of regulatory approvals for VASOMAX(R) in major developed country
jurisdictions.
In February 1999, Schering-Plough notified the Company that it had
exercised its right to begin manufacturing finished product for VASOMAX(R).
Schering-Plough manufactures and markets the product in Mexico and Brazil.
On May 10, 1999, Zonagen and Schering-Plough jointly announced that the
companies had decided to forego a June FDA Advisory Panel review of the NDA for
VASOMAX(R) until the results of an additional 12-week human clinical study being
conducted by Schering-Plough could be submitted to the FDA, as it was not
possible to delay the review by the Advisory Panel until a later date when the
data from that study would be available. As a result of this decision, Zonagen
received a non-approvable letter for the NDA from the FDA.
On August 10, 1999, Zonagen, announced that the FDA had advised the
Company that further U.S. clinical trials of Zonagen's phentolamine-based drugs,
VASOMAX(R) and Vasofem(TM), had been placed on clinical hold until certain
issues surrounding the Company's two-year rat study were satisfactorily
resolved. The FDA however, allowed Schering-Plough to complete the fully
enrolled ongoing 12-week study in humans of VASOMAX(R) for erectile dysfunction.
Zonagen expects to submit the new data from the completed human clinical study
that was conducted by Schering-Plough to the FDA as an amendment to the NDA. See
"Part 1. Item 1. Description of Business - Business Risks - Uncertainties
Related to Clinical Trial Results and FDA Approval."
CONTRACT MANUFACTURER
On June 12, 1997, the Company entered into an exclusive supply
agreement with a contract manufacturer under which the Company has agreed to
purchase all of its bulk phentolamine from the contract manufacturer for
F - 18
<PAGE> 55
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 met minimum purchase requirements through the year
ended December 31, 1999. The value of the specified minimum quantities of
phentolamine for each of the years ended December 31, 2000 and 2001 is $540,000.
Due to the contract manufacturer producing phentolamine in excess of the
Company's actual committed orders, the Company agreed, on January 27, 2000, to
an early purchase of the excess phentolamine production at a substantially
discounted price. This purchase satisfied the years 2000 and 2001 contractual
purchase obligations, leaving the Company with no future contractual purchase
obligations. If VASOMAX(R) is approved by the FDA and the Company purchases
additional phentolamine from the contract manufacturer, then the Company will be
required, by the contract manufacturer, to pay a premium equal to the amount
previously discounted.
11. COMMITMENTS AND CONTINGENCIES:
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 were 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 purported to bring the suit on behalf of all purchasers
of Zonagen common stock between February 7, 1996 and January 9, 1998. The
plaintiffs asserted 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 sought to have the
action declared to be a class action, and to have rescissionary or compensatory
damages in an unstated amount, along with interest and attorney's fees. On March
30, 1999, the Court granted the defendants' motion to dismiss and dismissed the
case with prejudice. The plaintiffs filed an appeal. The Company and the
individual defendants believe that these actions are without merit and intend to
defend against them vigorously. No estimate of loss or range of estimate of
loss, if any, can be made at this time.
The Company is involved in certain other litigation matters which it
believes will not have a material adverse effect on the Company.
F - 19
<PAGE> 56
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT
-------------- -------------------------
<S> <C> <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 ("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.
10.1+ -- Amended and Restated 1993 Employee and Consultant Stock Option Plan. Exhibit 10.3 to the
Company's Registration Statement is incorporated herein by reference.
10.2 -- 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.
10.3+ -- Employment Agreement between the Company and Joseph S. Podolski. Exhibit 10.5 to the
Company's Registration Statement is incorporated herein by reference.
10.4 -- 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 ("1993 Form 10-KSB") is incorporated
herein by reference.
10.5*+ -- Employment Agreement between the Company and Louis Ploth.
</TABLE>
<PAGE> 57
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT
-------------- -------------------------
<S> <C> <C>
10.6 -- 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.
10.7 -- 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.
10.8 -- 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.
10.9 -- 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.
10.10 -- 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.
10.11 -- 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.
10.12 -- 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.
10.13 -- 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.
10.14++ -- 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.
10.15++ -- 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.
10.16+ -- Employment Agreement between the Company and Paul Lammers, MD MSc. Exhibit 10.29 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 is incorporated
herein by reference.
10.17+ -- Employment Agreement between the Company and Michael T. Redman. Exhibit 10.30 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 is incorporated
herein by reference.
10.18 -- Asset Purchase Agreement between Zonagen, Inc., Fertility Technologies, Inc. and Sage
BioPharma dated as of March 1, 1999. Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1999 is incorporated herein by reference.
10.19+ -- Employment Agreement between the Company and F. Scott Reding. Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1999 is incorporated
herein by reference.
10.20 -- Rights Agreement dated as of September 1, 1999 (incorporated by reference to Form 8-A of the
Company filed on September 3, 1999). Exhibit 4.1 to the Company's Quarterly Report on Form
8-K dated September 3, 1999 is incorporated herein by reference.
10.21+ -- Employment Agreement between the Company and David B. Bowman. Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1999 is incorporated
herein by reference.
10.22* -- First Amendment to the Zonagen, Inc. Amended and Restated 1993 Stock Option Plan.
10.23*++ -- Amendment to the Supply Agreement dated June 12, 1997, between the Company and Plasto S.A.
(Synkem Division).
11.1* -- Statement regarding computation of loss per share
23.1* -- Consent of Arthur Andersen LLP
</TABLE>
<PAGE> 58
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT
-------------- -------------------------
<S> <C> <C>
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.
<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "AGREEMENT") is made and entered into
this 16th day of October, 1993, 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 LOUIS PLOTH, JR.
(the "EXECUTIVE").
WITNESSETH
WHEREAS, the Company desires to employ the Executive as its Chief
Financial Officer on the terms and subject to the conditions set forth herein,
and the Executive desires to accept such employment.
NOW, THEREFORE, in consideration of the mutual covenants, promises and
agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. EMPLOYMENT.
(a) The Company hereby employs the Executive and the
Executive hereby accepts employment as the Chief
Financial Officer of the Company, subject to the
direction of the Board of Directors and the Company's
officers designated by the Board of Directors, and
shall perform and discharge well and faithfully the
duties and responsibilities that are assigned to him
by the Board of Directors. The Executive agrees to
devote such of his time, attention and energy to the
business of the Company, and any of its subsidiaries
or affiliates, as may be required to perform the
duties and responsibilities assigned to him by the
Board of Directors to the best of his ability and
with requisite diligence. If the Executive is
appointed a director or elected to another executive
officer position of the Company or any subsidiary
thereof during the term of this Agreement, the
Executive will serve in such capacity without further
compensation.
(b) The Executive agrees to comply in all material
respects, at all times during the Executive Period
(as defined in Section 2 hereof), with all applicable
policies, rules and regulations of the Company.
2. TERM. Subject to the terms hereof, this Agreement shall
commence on the date hereof (the "EXECUTION DATE") and shall
terminate on the second anniversary of the Execution Date;
provided, that this Agreement will automatically renew for
successive one-year periods unless written notice of
termination is given to the Executive by the Company not less
than sixty (60) days before the expiration of the term hereof
or any renewal period then in effect. The term of this
Agreement shall include any such renewal periods and shall be
referred to herein as the "EXECUTIVE PERIOD."
<PAGE> 2
EMPLOYMENT AGREEMENT
LOUIS PLOTH, JR.
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 $7,916.00, payable in equal
semi-monthly installments or on any other periodic
basis consistent with the Company's payroll procedures,
subject only to such payroll and withholding deductions
as are required by applicable federal and state laws.
4. FRINGE BENEFITS: EXPENSES.
(a) So long as the Executive is employed by the Company,
the Executive shall participate in all employee
benefit plans sponsored by the Company for its
executive employees, including, but not limited to,
vacation policy, health insurance, dental insurance
and pension or profit-sharing plans; provided,
however, that the nature, amount and limitations of
such plans shall be determined from time to time by
the Board of Directors of the Company.
(b) The Company agrees to 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 25,000 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 than 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.
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.
<PAGE> 3
EMPLOYMENT AGREEMENT
LOUIS PLOTH, JR.
PAGE 3 OF 7
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.
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
<PAGE> 4
EMPLOYMENT AGREEMENT
LOUIS PLOTH, JR.
PAGE 4 OF 7
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.
(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.
<PAGE> 5
EMPLOYMENT AGREEMENT
LOUIS PLOTH, JR.
PAGE 5 OF 7
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.
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.
<PAGE> 6
EMPLOYMENT AGREEMENT
LOUIS PLOTH, JR.
PAGE 6 OF 7
If to the Company:
Zonagen, Inc.
2408 Timberloch Place, Suite B-4
The Woodlands, Texas 77380
Attn: Joseph S. Podolski
If to the Executive:
Louis Ploth, Jr.
Route 25, Box 110
Ponderosa Pines
Conroe, Texas 77385
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.
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.
<PAGE> 7
EMPLOYMENT AGREEMENT
LOUIS PLOTH, JR.
PAGE 7 OF 7
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/ Louis Ploth, Jr.
------------------------------------------
Louis Ploth, Jr.
<PAGE> 1
EXHIBIT 10.22
FIRST AMENDMENT
TO THE
ZONAGEN, INC.
AMENDED AND RESTATED 1993 STOCK OPTION PLAN
This First Amendment (the "Amendment") to the Zonagen, Inc. (the "Company")
Amended and Restated 1993 Employee and Consultant Stock Option Plan (the "Plan")
is executed pursuant to Section 14 of the Plan. All capitalized and undefined
terms used herein shall have the meanings ascribed to such terms in the Plan.
WHEREAS, the Company's Board of Directors (the "Board") is authorized
by Section 14 of the Plan to amend the Plan from time to time, subject to any
required stockholder approval of any such amendments; and
WHEREAS, at a meeting on March 5, 1999 the Board approved (i) setting
the number of shares of the Company's common stock, par value $.001 per share
(the "Common Stock"), for which options may be granted under the Plan at
2,000,000 shares and (ii) extending the term of the Plan to May 13, 2003; and
WHEREAS, at a meeting held on May 13, 1999, the Company's stockholders
approved the Amendment.
NOW, THEREFORE, in order to amend Sections 3 and 19 of the Plan as
authorized by the Board and approved by the stockholders:
1. The second paragraph of Section 3 of the Plan is hereby
revised in its entirety to read as follows:
"The Committee may grant Options, shares of Restricted Stock
and Stock Bonuses under the Plan with respect to a number of
shares of Common Stock that in the aggregate does not exceed
2,000,000. The Company will, during the term of this Plan,
reserve and keep available for issuance a sufficient number of
shares of Common Stock to satisfy the requirements of the
Plan."
2. The last sentence of Section 19 of the Plan is hereby revised
in its entirety to read as follows:
"No Options, shares of Restricted Stock or Stock Bonuses may
be granted under the Plan after May 13, 2003."
3. Except as amended hereby, the terms and provisions of the Plan
shall remain in full force and effect, and the Plan and this
Amendment shall be read, taken and construed as one and the
same instrument.
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the
foregoing Amendment to the Plan by the Board of the Company and approval and
adoption thereof by the stockholders of the Company, the Company has caused this
Amendment to be duly executed in its name and behalf by its proper officers
thereunto duly authorized as of the 13th day of May, 1999.
ZONAGEN, INC.
By: /s/ F. Scott Reding
------------------------------
Name: F. Scott Reding
----------------------------
Title: CFO
---------------------------
<PAGE> 1
EXHIBIT 10.23
Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act
of 1934, as amended, and Rule 406 under the Securities Act of 1933, as amended.
These omitted portions have been marked with "*" and have been filed separately
with the Securities and Exchange Commission.
[ZONAGEN LETTERHEAD]
January 7, 2000
Synkem SA
47 rue de Longvic
21300 CHENOVE
France
Attn: Patrice Binay, Ph.D.
Re: June, 1997 Supply Agreement between Synkem SA and
Zonagen, Inc.
Dear Dr. Binay:
Pursuant to our recent discussions, this letter shall
evidence the terms of our agreement concerning the October, 1999
shipment of [**] kg of phentolamine mesylate by Synkem SA
("Synkem") to Zonagen, Inc. ("Zonagen") (the "Overage Shipment").
As we have discussed, the Overage Shipment was delivered by Synkem
prior to Zonagen's submission of an order for the Compound. While
the unexpected shipment has led to difficulties for both Synkem
and Zonagen, it is my understanding that we have reached an
agreement concerning payment for the Overage Shipment and have
further agreed to amend or waive certain provisions of the June,
1997 Supply Agreement by and between Zonagen and Synkem (the
"Agreement") relating to the Overage Shipment. Pursuant to Article
20 of the Agreement, the following will evidence the terms of our
understanding and the amendment of the Agreement. Unless otherwise
defined herein, capitalized terms shall have the same meanings
ascribed thereto in the Agreement.
1. Zonagen will purchase the Compound included in the
Overage Shipment at a price of [ ** ] per kilogram, which Synkem
represents to be its actual production cost for such Compound.
Attached hereto is a schedule setting forth the calculation of
Synkem's actual cost of production for the Compound included in
the Overage Shipment. The provisions of this Paragraph 1 shall
amend and supersede the provisions of Clause 3.1 of the Agreement
with respect to the purchase price otherwise payable by Zonagen
for the Compound included in the Overage Shipment.
<PAGE> 2
Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act
of 1934, as amended, and Rule 406 under the Securities Act of 1933, as amended.
These omitted portions have been marked with "*" and have been filed separately
with the Securities and Exchange Commission.
Dr. Patrice Binay
Synkem SA
January 7, 2000, page 2
2. Following the date upon which the U.S. Food and
Drug Administration issues its final approval of the New Drug
Application submitted by Zonagen for Vasomax(R) (the "Approval
Date"), Zonagen shall pay a premium price for subsequent
orders of the Compound as herein provided to compensate Synkem
for the difference between the price paid for the Overage
Shipment pursuant to Paragraph 1 above and the price otherwise
payable for the Overage Shipment pursuant to Clause 3.1 of the
Agreement (which the parties hereby stipulate to be [ ** ] per
kilogram). With respect to the initial [ ** ] kilograms of
Compound purchased by Zonagen following the Approval Date,
Zonagen shall pay, in addition to the purchase price payable
therefor under Clause 3.1 of the Agreement, an additional
[ ** ] per kilogram. Zonagen shall only be required to pay
such increased price with respect to orders for the Compound
submitted by Zonagen from time to time following the Approval
Date. If Zonagen does not purchase an additional [ ** ]
kilograms of Compound after the Approval Date or the Agreement
is otherwise terminated before such purchases are completed,
Zonagen shall not otherwise be required to compensate Synkem
for the difference between the purchase price payable for the
Overage Shipment pursuant to Paragraph 1 above and the
purchase price otherwise payable for the Overage Shipment
pursuant to Clause 3.1 of the Agreement. After Zonagen has
purchased an additional [ ** ] kg of Compound at the increased
price pursuant to this Paragraph 2, Zonagen shall no longer be
required to pay such increased price for subsequent orders of
the Compound and the purchase price payable for such orders
shall be determined in accordance with the provisions of the
Agreement.
3. Upon the complete execution of this letter
agreement by Zonagen and Synkem, Zonagen shall have a period
of thirty (30) days to complete its inspection of the Compound
included in the Overage Shipment pursuant to Clause 9.1(h) of
the Agreement. Within thirty (30) days of Zonagen's acceptance
of the Overage Shipment, Zonagen shall remit payment for the
Overage Shipment at the price set forth in Paragraph 1 above.
4. Synkem acknowledges and agrees that Zonagen's
purchase of the Overage Shipment pursuant to this letter
agreement shall satisfy, in full, Zonagen's minimum purchase
requirements for the years 2000 and 2001 as set forth in
Article 5 of the Agreement. The provisions of this Paragraph 4
shall supersede the provisions of Article 5 of the Agreement
with respect to the minimum purchase requirements for the
years 2000 and 2001.
5. Except as otherwise amended and superseded by the
terms of this letter agreement, the Agreement shall remain in
full force and effect as originally written.
<PAGE> 3
Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act
of 1934, as amended, and Rule 406 under the Securities Act of 1933, as amended.
These omitted portions have been marked with "*" and have been filed separately
with the Securities and Exchange Commission.
Dr. Patrice Binay
Synkem SA
January 7, 2000, page 3
6. This letter agreement may be executed in multiple
counterparts with the same effect as if all parties had signed
the same document. All counterparts shall be construed
together and shall constitute the same agreement.
If the foregoing accurately reflects your
understanding of our agreements, please so indicate by
returning to the undersigned a fully signed counterpart of
this letter agreement. The duplicate copy of this letter
agreement may be retained for your records.
Sincerely yours,
Zonagen, Inc.
By: /s/ David Bowman
-------------------------------
Name: David Bowman
----------------------------
Title: Vice President, Operations
---------------------------
Agreed to and Accepted
this 25th day of January, 2000
Synkem SA
By: /s/ Dr. Patrice Binay
---------------------------------------
Name: Dr. Patrice Binay
--------------------------------------
Title: Business Development Manager
-------------------------------------
<PAGE> 1
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands except per share amounts)
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Weighted Average Income/(Loss)
Income/(Loss) Shares Outstanding per Share
------------- ------------------ ---------
<S> <C> <C> <C>
INCOME (LOSS) PER SHARE - BASIC AND DILUTED:
(Loss) from continuing operations $ (13,025) / 11,244 = $ (1.16)
Income from discontinued operations 59 / 11,244 = 0.01
Gain from sale of discontinued operations 1,014 / 11,244 = 0.09
----------- -----------
Net (Loss) $ (11,952) / 11,244 = $ (1.06)
=========== ===========
</TABLE>
<PAGE> 1
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 30, 2000
<TABLE> <S> <C>
<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, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,106
<SECURITIES> 31,146
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 4,003
<CURRENT-ASSETS> 40,055
<PP&E> 2,093
<DEPRECIATION> 1,241
<TOTAL-ASSETS> 46,287
<CURRENT-LIABILITIES> 4,537
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 41,738
<TOTAL-LIABILITY-AND-EQUITY> 41,750
<SALES> 0
<TOTAL-REVENUES> 2,412
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,429
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> (13,025)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,025)
<DISCONTINUED> 1,073
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,952)
<EPS-BASIC> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
