UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-21198
ZONAGEN, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 76-0233274
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2408 Timberloch Place, Suite B-4
The Woodlands, Texas 77380
(Address of principal executive offices
and zip code)
(281) 367-5892
(Registrant's telephone number,
including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of August 11, 1999 there were outstanding 11,248,966 shares of Common
Stock, par value $.001 per share, of the Registrant.
ZONAGEN, INC.
(A development stage company)
For the Quarter Ended June 30, 1999
INDEX
Page
----
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements
Consolidated Balance Sheets: June 30, 1999 (Unaudited)
and December 31, 1998 5
Consolidated Statements of Operations: For the three months ended
June 30, 1999 and 1998, six months ended June 30, 1999 and 1998
and from Inception (August 20, 1987) through June 30, 1999 (Unaudited) 6
Consolidated Statements of Cash Flows: For the three months ended
June 30, 1999 and 1998, six months ended June 30, 1999 and 1998
and from Inception (August 20, 1987) through June 30, 1999 (Unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
2
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The words
"anticipate," "believe," "expect," "estimate," "project" and similar expressions
are intended to identify forward-looking statements. Such statements are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, believed,
expected, estimated or projected. These risks and uncertainties include risks
associated with the Company's early stage of development, uncertainties related
to clinical trial results and FDA approval, the Company's substantial dependence
on one product and early stage of development of other products, the Company's
history of operating losses and accumulated deficit, the Company's future
capital needs and uncertainty of additional funding, uncertainty of protection
for the Company's patents and proprietary technology, the effects of government
regulation of and lack of assurance of regulatory approval for the Company's
products, the Company's limited sales and marketing experience and dependence on
collaborators, manufacturing uncertainties and the Company's reliance on third
parties for manufacturing, competition and technological change, product
liability and availability of insurance, the Company's reliance on contract
research organizations, and other risks and uncertainties described in the
Company's filings with the Securities and Exchange Commission. For additional
discussion of such risks, uncertainties and assumptions, see "Item 1.
Description of Business - Business Risks" and "Item 3. Legal Proceedings"
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998 and "Part I. Financial Information - Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and "Part II. Other Information - Item 1. Legal Proceedings"
included elsewhere in this quarterly report on Form 10-Q.
3
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all necessary adjustments
(which include only normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the six month
period ended June 30, 1999 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999. For further information,
refer to the financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
4
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
June 30, December 31,
1999 1998
---------------- ----------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 43,105 $ 51,640
Accounts receivable - 318
Product inventory 2,503 3,139
Prepaid expenses and other current assets 1,112 1,032
---------------- ----------------
Total current assets 46,720 56,129
Lab equipment, furniture and leasehold improvements, net 930 907
Goodwill, net - 584
Other assets, net 1,411 1,022
---------------- ----------------
Total assets $ 49,061 $ 58,642
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,807 $ 3,317
Accrued expenses 1,190 1,935
Current portion of long-term notes payable - 3
---------------- ----------------
Total current liabilities 2,997 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,
11,664,266 and 11,621,140 shares issued, respectively;
11,248,966 and 11,205,840 shares outstanding, respectively 12 12
Additional paid-in capital 113,582 113,717
Deferred compensation (629) (958)
Cost of treasury stock, 415,300 and 415,300 shares, respectively (7,484) (7,484)
Deficit accumulated during the development stage (59,417) (51,900)
---------------- ----------------
Total stockholders' equity 46,064 53,387
---------------- ----------------
Total liabilities and stockholders' equity $ 49,061 $ 58,642
================ ================
The accompanying notes are an integral part of these consolidated
financial statements.
5
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands except per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- -------------------------
1999 1998 1999 1998
---------- ------------- ---------- -----------
Revenues
Licensing fees $ - $ 5,000 $ - $ 5,000
Product royalties 22 167 22 167
Interest income 554 729 1,182 1,797
---------- ------------- ---------- -----------
Total revenues 576 5,896 1,204 6,964
Costs and Expenses
Research and development 3,560 5,847 7,913 12,192
General and administrative 940 688 1,873 1,453
Interest expense and amortization
of intangibles - - 8 3
---------- ------------- ---------- -----------
Total costs and expenses 4,500 6,535 9,794 13,648
---------- ------------- ---------- -----------
Loss from continuing operations (3,924) (639) (8,590) (6,684)
Income (loss) from discontinued
operations - (25) 59 29
Gain on disposal - - 1,014 -
---------- ------------- ---------- -----------
Net loss $ (3,924) $ (664) $ (7,517) $ (6,655)
========== ============= ========== ===========
Loss per share - basic and diluted:
Loss from continuing operations $ (0.35) $ (0.06) $ (0.77) $ (0.59)
Income from discontinued operations - - 0.01 -
Gain on disposal - - 0.09 -
---------- ------------- ---------- -----------
Net loss $ (0.35) $ (0.06) $ (0.67) $ (0.59)
========== ============= ========== ===========
Shares used in income (loss) per
share calculation:
Basic and diluted 11,243 11,310 11,229 11,316
From Inception
(August 20, 1987)
through
June 30,
1999
----------------
(unaudited)
Revenues
Licensing fees $ 20,250
Product royalties 185
Interest income 7,240
-------------
Total revenues 27,675
Costs and Expenses
Research and development 71,418
General and administrative 14,397
Interest expense and amortization
of intangibles 388
-------------
Total costs and expenses 86,203
-------------
Loss from continuing operations (58,528)
Income (loss) from discontinued
operations (1,828)
Gain on disposal 939
-------------
Net loss $ (59,417)
=============
6
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- --------------- ---------------- ----------------
Cash Flows from Operating Activities
Net loss $ (3,924) $ (664) $ (7,517) $ (6,655)
Gain on disposal of discontinued operations - - (1,014) -
Adjustments to reconcile net loss to net cash used
in operating activities:
Noncash financing costs - - - -
Depreciation and amortization 106 124 252 241
Noncash expenses related to stock-based
transactions 33 89 121 244
Common stock issued for agreement not to
compete - - - -
Series B Preferred Stock issued for consulting
services - - - -
Changes in operating assets and liabilities
(net effects of purchase of businesses in 1988 and 1994):
(Increase) decrease in receivables - (74) (85) (202)
(Increase) decrease in inventory 140 (303) 324 (299)
(Increase) decrease in prepaid expenses
and other current assets (141) (526) (107) (835)
(Decrease) increase in accounts payable and
accrued expenses (944) (681) (2,161) (2,109)
--------------- --------------- ---------------- ----------------
Net cash used in operating activities (4,730) (2,035) (10,187) (9,615)
Cash Flows from Investing Activities
Capital expenditures (78) (182) (257) (214)
Purchase of technology rights and other assets (263) (139) (413) (300)
Cash acquired in purchase of FTI - - - -
Proceeds from sale of subsidiary, less
$12,345 for operating losses during
1990 phase-out period - - - -
Proceeds from sale of the assets of Fertility - - 2,250 -
Technologies, Inc., subsidiary
Increase in net assets held for disposal - - - -
--------------- --------------- ---------------- ----------------
Net cash provided by (used in) investing activities (341) (321) 1,580 (514)
Cash Flows from Financing Activities
Proceeds from issuance of common stock 26 8 73 378
Proceeds from issuance of preferred stock - - - -
Purchase of treasury stock - - - (4,022)
Proceeds from issuance of notes payable - - - -
Principal payments on notes payable - (4) (1) (8)
--------------- --------------- ---------------- ----------------
Net cash provided by (used in) financing activities 26 4 72 (3,652)
--------------- --------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents (5,045) (2,352) (8,535) (13,781)
Cash and cash equivalents at beginning of period 48,150 62,333 51,640 73,762
--------------- --------------- ---------------- ----------------
Cash and cash equivalents at end of period $ 43,105 $ 59,981 $ 43,105 $ 59,981
=============== =============== ================ ================
From Inception
(August 20, 1987)
through
June 30,
1999
---------------
(unaudited)
Cash Flows from Operating Activities
Net loss $ (59,417)
Gain on disposal of discontinued operations (939)
Adjustments to reconcile net loss to net cash used
in operating activities:
Noncash financing costs 316
Depreciation and amortization 2,207
Noncash expenses related to stock-based
transactions 1,679
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 (198)
(Increase) decrease in inventory (2,533)
(Increase) decrease in prepaid expenses
and other current assets (998)
(Decrease) increase in accounts payable
and accrued expenses 2,874
---------------
Net cash used in operating activities (56,791)
Cash Flows from Investing Activities
Capital expenditures (2,107)
Purchase of technology rights and
other assets (1,492)
Cash acquired in purchase of FTI 3
Proceeds from sale of subsidiary, less
$12,345 for operating losses during
1990 phase-out period 138
Proceeds from sale of the assets of Fertility 2,250
Technologies, Inc., subsidiary
Increase in net assets held for disposal (213)
---------------
Net cash provided by (used in) investing activities (1,421)
Cash Flows from Financing Activities
Proceeds from issuance of common stock 84,006
Proceeds from issuance of preferred stock 23,688
Purchase of treasury stock (7,484)
Proceeds from issuance of notes payable 2,839
Principal payments on notes payable (1,732)
---------------
Net cash provided by (used in) financing activities 101,317
---------------
Net increase (decrease) in cash and cash equivalents 43,105
Cash and cash equivalents at beginning of period -
---------------
Cash and cash equivalents at end of period $ 43,105
===============
The accompanying notes are an integral part of these consolidated
financial statements.
7
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
NOTE 1 -- Organization and Operations
Zonagen, Inc., a Delaware corporation, ("Zonagen" or the "Company"), was
organized on August 20, 1987 ("Inception"), and is a biopharmaceutical company
engaged in the development of pharmaceutical products for the reproductive
system, including sexual dysfunction, urology, contraception and infertility.
Until the sale of substantially all the assets of Fertility Technologies, Inc.
("FTI"), its wholly owned subsidiary, in March 1999, Zonagen also sold devices,
instruments and supplies to fertility specialists, obstetricians and
gynecologists. From inception through June 30, 1999, the Company has been
primarily engaged in research and development and clinical development and is
still in a development stage.
On May 10, 1999, Zonagen, Inc. and Schering-Plough jointly announced that the
companies had decided to forego a June FDA Advisory Panel review of the New Drug
Application ("NDA") for Vasomax(R) until the results of an additional clinical
study being conducted by Schering-Plough could be submitted to the Food and Drug
Administration ("FDA"). As a result of this decision, Zonagen received from the
FDA, a non-approvable letter for the NDA. Vasomax(R) is Zonagen's oral treatment
for erectile dysfunction.
Zonagen completed two positive pivotal clinical trials that formed the basis
of the NDA for Vasomax(R). Zonagen expects to submit the new data from the
ongoing study currently being conducted by Schering-Plough, to the FDA as an
amendment to the NDA. It was not possible to extend the deadline for completion
of the FDA review, to include this data; therefore, it was decided to accept a
non-approvable letter.
On August 10, 1999, Zonagen, Inc. announced that the FDA had advised the
Company that further U.S. clinical trials of Zonagen's phentolamine-based drugs,
Vasomax(R) and Vasofem, have been placed on clinical hold until certain issues
surrounding the Company's two-year rat study are satisfactorily resolved. FDA is
allowing Schering-Plough to complete the fully enrolled ongoing 12-week study in
humans of Vasomax(R) for erectile dysfunction.
FDA's decision was based on preliminary findings from an ongoing two-year,
rat carcinogenicity study being conducted by Zonagen. The study, which is
scheduled to be completed in the fourth quarter of this year, has yielded
preliminary results which suggest that male rats receiving long term daily doses
of phentolamine mesylate develop a higher incidence of proliferation of brown
fat tissue than control rats. The implications of these findings need to be
further evaluated with regard to their potential for adverse effects on humans.
To date, such abnormalities have not been observed in female rats in the study.
Prior to these latest findings, Zonagen had completed and submitted to the
FDA a complete genotoxicity profile as well as results from a six month mouse
p53 assay and six month
8
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
daily usage studies in dogs and rats. None of these studies showed any abnormal
effects, including brown fat tissue proliferation.
The Company has experienced negative cash flows from operations since its
inception and has funded its activities to date primarily from equity financings
and corporate collaborations. The Company will continue to require substantial
funds to continue research and development, including preclinical studies and
clinical trials of its existing and future product candidates, and to commence
sales and marketing efforts, if appropriate, if the U.S. Food and Drug
Administration ("FDA") or other regulatory approvals are obtained.
Despite the delays regarding the Company's Vasomax(R) clinical development
program, the Company believes that its existing capital resources will still be
sufficient to fund its operations through at least the end of 2000. This is due
primarily to the way the Company has historically forecasted its cash resources
and the implementation of a cash conservation plan. When forecasting its cash
requirements, the Company only takes into account actual cash payments received,
not anticipated. In addition, due to the May 10, 1999 announced delay in the
U.S. approval of Vasomax(R), the Company implemented a cash conservation plan
which focuses the current cash resources toward development of its existing
product candidates. The plan incorporates a hiring freeze, except for key
positions; postponement of salary increases until Vasomax(R) is approved in a
major market; and a reduction in Company headcount based on attrition. The
Company will also focus its efforts on out-licensing its existing technologies
as a means of enhancing its cash reserves and reducing future development costs.
Notwithstanding the cash conservation plan, the Company will continue to seek
opportunities to in-license technologies that it believes will enhance future
shareholder value.
The Company's capital requirements will depend on many factors, including
the problems, delays, expenses and complications frequently encountered by
development stage companies; the progress of the Company's clinical and
preclinical activities; the progress of the Company's collaborative agreements
with affiliates of Schering-Plough Corporation ("Schering-Plough") and costs
associated with any future collaborative research, manufacturing, marketing or
other funding arrangements; the costs and timing of seeking regulatory
approvals for Vasomax(R), the Company's oral treatment for male erectile
dysfunction; the costs and timing of seeking regulatory approvals for Vasofem,
the Company's treatment for female sexual dysfunction, and the Company's other
future product candidates; the Company's ability to obtain regulatory approvals;
the success of the Company's potential sales and marketing programs; the cost of
filing, prosecuting and defending and enforcing any patent claims and other
intellectual property rights; and changes in economic, regulatory or competitive
conditions of the Company's planned business. Estimates about the adequacy of
funding for the Company's activities are based on certain assumptions, including
the
9
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
assumption that the development and regulatory approval of the Company's
products can be completed at projected costs and that product approvals and
introductions will be timely and successful. There can be no assurance that
changes in the Company's research and development plans, acquisitions or other
events will not result in accelerated or unexpected expenditures. To satisfy its
capital requirements, the Company may seek to raise additional funds in the
public or private capital markets or through additional corporate
collaborations. The Company's ability to raise additional funds will be
adversely affected if Vasomax(R) is not successfully commercialized, if
necessary regulatory approvals are not obtained when expected and if the results
of current or future clinical trials are not favorable. The Company may seek
additional funding through corporate collaborations and other financing
vehicles. There can be no assurance that any such funding will be available to
the Company on favorable terms, or at all. If adequate funds are not available,
the Company may be required to curtail significantly one or more of its research
or development programs, or it may be required to obtain funds through
arrangements with future collaborative partners or others that may require the
Company to relinquish rights to some or all of its technologies or products. If
the Company is successful in obtaining additional financing, the terms of such
financing may have the effect of diluting or adversely affecting the holdings or
the rights of the holders of the Company's Common Stock.
NOTE 2 -- Sale of Fertility Technologies, Inc.
On March 11, 1999, the Company sold substantially all of the assets related to
its wholly-owned subsidiary, FTI. These assets included the company name,
accounts receivable, inventory, property and equipment, and certain Zonagen
assets relating to the operation of FTI, for $2.25 million cash and the
assumption of certain specified liabilities. The sales agreement provided for a
purchase price adjustment relating to the fluctuation in working capital,
excluding cash, from December 31, 1998 as compared to February 28, 1999.
During the quarter ended March 31, 1999, the Company recorded a gain on the sale
of FTI of $1.0 million.
The results of FTI have been reported separately as discontinued operations in
the accompanying consolidated financial statements. Prior period consolidated
financial statements have been restated to present FTI as discontinued.
Revenues for FTI were approximately $558,000 for the two months ended February
28, 1999 as compared to $929,000 for the three month period ended March 31,
1998.
10
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
The components of assets and liabilities of discontinued operations included
in the consolidated balance sheet for the year ended December 31, 1998 are as
follows (in thousands):
DECEMBER 31,
1998
------------------
Current assets:
Accounts receivable........................... $ 318
Inventory..................................... 350
Other current assets.......................... 23
------
Total current assets.......................... 691
Furniture and equipment, net.......................... 70
Goodwill, net......................................... 584
------
Total Assets.......................................... 1,345
------
Accounts payable and other............................ 275
------
Net assets............................................ $1,070
======
NOTE 3 -- PRODUCT INVENTORY
The Company maintains an inventory of bulk phentolamine which is the active
ingredient in Vasomax(R), the Company's oral treatment for male erectile
dysfunction. Currently, Schering-Plough is manufacturing and marketing in
Mexico and Brazil. Schering-Plough purchases bulk phentolamine from the
Company. As of June 30, 1999, the fair market value of this bulk raw material
inventory was approximately $2.5 million. Prior to the sale of FTI the
Company's inventory also consisted of products manufactured by others for resale
to obstetrics/gynecologists, urologists and fertility clinics. There was no
finished goods inventory at June 30, 1999.
The Company entered into a purchase order with the contract manufacturer of
phentolamine and has an obligation to purchase $1.5 million of bulk phentolamine
during 1999. The Company has already paid a deposit of $375,000 against that
purchase and expects to pay the remaining $1.125 million in the quarter ending
December 31, 1999. Under the terms of the agreement, the Company has already met
minimum purchase requirements for the year ended December 31, 1999. See
"NOTE 7 - Agreements."
NOTE 4 -- PREPAID EXPENSES AND OTHER CURRENT ASSETS
During the three months ended June 30, 1999, prepaid expenses and other
current assets increased to approximately $1.1 million. As of June 30, 1999,
prepayments held by the phentolamine contract manufacturer were $375,000. Other
prepaid expenses and other current assets, substantially all of which related
to prepaid insurance, other expenses for which the Company expects reimbursement
and interest receivable, totaled $725,000 as of June 30, 1999.
NOTE 5 -- STOCKHOLDERS' EQUITY
Warrants
During the first quarter of 1999, the Company issued an aggregate 5,184 shares
of Common Stock upon the cashless exercise of 5,850 stock warrants.
Additionally, warrants to
11
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
purchase an aggregate 536 shares of Common Stock were exercised for total
proceeds of $3,850. During the second quarter of 1999, the Company issued an
aggregate 22,598 shares of Common Stock upon the cashless exercise of 10,132
stock warrants.
As of June 30, 1999, there were a total of 99,137 warrants outstanding,
convertible into 153,620 shares of common stock. All warrants outstanding
contain a cashless exercise provision. The Company would receive cash proceeds
up to approximately $969,000 if the cashless exercise provision was not
utilized.
Treasury Stock
On December 12, 1997 the Company announced a stock buyback of the Company's
Common Stock. The purchases are to be made from time to time in the open market
at prevailing market prices. As of December 31, 1998 the Company had purchased
an aggregate of 415,300 shares of Common Stock under the stock buyback program
at an aggregate purchase price of $7.5 million, representing an average purchase
price of $18.021 per share. The Company did not purchase any shares of Common
Stock in the current fiscal year through August 11, 1999.
NOTE 6 -- STOCK OPTIONS
The Company records and amortizes over the related vesting periods deferred
non-cash compensation representing the difference between the exercise price of
options granted and the deemed fair market value of the Common Stock at the time
of grant. The Company recorded compensation expense of approximately $52,000 in
the quarter ending June 30, 1999 related to the amortization of deferred
compensation recorded in connection with options granted under the 1996 Non-
Employee Director Stock Option Plan (the "Director Plan"). Amortization of
deferred compensation recorded in connection with other option grants totaled
approximately $8,100 in the quarter ending June 30, 1999.
During the three month period ended June 30, 1999, the Company granted
options, to directors, at the time of their re-election to the Board, of 12,500
shares of Common Stock at an exercise price of $13.44 which equaled the fair
market value at the date of grant. During the three months ended June 30, 1999,
the Company issued an aggregate of 5,065 shares of Common Stock upon the
exercise of stock options, at prices ranging from $5.13 to $8.375.
NOTE 7 -- AGREEMENTS
In November 1997, the Company entered into exclusive license agreements with
affiliates of Schering-Plough Corporation, a major U.S.-based pharmaceutical
company (including such affiliates, "Schering-Plough"), with respect to the
exclusive license of the Company's Vasomax(R) product for the treatment of male
erectile dysfunction. Under the agreement, Schering-Plough paid Zonagen an up-
front payment of $10.0 million and agreed to make subsequent aggregate
12
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
milestone payments up to $47.5 million upon the successful achievement of
specified regulatory goals. Zonagen may receive escalating royalties on all
product sales under the Schering-Plough agreements.
On June 30, 1998 the Company received an accelerated milestone payment of $5.0
million from Schering-Plough that was paid at the completion of the clinical
program that was used in support of the New Drug Application ("NDA") for
Vasomax(R). The payment was due upon the submission of a NDA for Vasomax(R) with
the Food and Drug Administration ("FDA"). The Company submitted the NDA on
July 14, 1998.
On September 30, 1998 the Company received a milestone payment of $5.0 million
from Schering-Plough that was paid upon FDA acceptance for filing of the NDA for
Vasomax(R).
In February 1999, Schering-Plough notified the Company that it has exercised
its right to begin manufacturing finished product for Vasomax(R).
During 1996, the Company entered into agreements with two contract research
organizations to which the Company made cash payments aggregating to
approximately $2.2 million and $3.5 million during the quarters ended June 30,
1999 and 1998, respectively, and recorded payables and accrued expenses of
$624,000 as of June 30, 1999.
On June 12, 1997, the Company entered into an exclusive supply agreement with
a contract manufacturer under which the Company has agreed to purchase all of
its bulk phentolamine from the contract manufacturer for a period of five years.
The agreement will continue after the initial five-year term for consecutive
one-year periods until terminated by either party. The agreement obligates the
Company to purchase specified minimum quantities of phentolamine and the
manufacturer to manufacture phentolamine exclusively for the Company. Including
current unpaid purchase commitments of $1.125 million, which are payable in the
quarter ended December 31, 1999, the Company has met minimum purchase
requirements through the year ended December 31, 1999. The value of the
specified minimum purchase commitments of phentolamine for the years ended
December 31, 2000 and 2001 are $540,000 and $540,000, respectively.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
On May 16, 1994, Dr. Bonita Sue Dunbar ("Dunbar") filed suit in the 270th
District Court of Harris County, Texas naming Baylor College of Medicine, BCM
Technologies, Inc., Fulbright & Jaworski, L.L.P., The Woodlands Venture Capital
Company and the Company as defendants. The
13
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
lawsuit has been dismissed without the right of Dunbar to re-file and with no
monetary consideration paid by the Company.
Certain purported class action complaints alleging violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder
have been filed against the Company and certain of its officers and directors.
These complaints were filed in the United States District Court for the Southern
District of Texas in Houston, Texas and were consolidated on May 29, 1998. The
plaintiffs purport to bring the suit on behalf of all purchasers of Zonagen
common stock between February 7, 1996 and January 9, 1998. The plaintiffs assert
that the defendants made materially false and misleading statements and failed
to disclose material facts about the patents and patent applications of the
Company relating to Vasomax(R) and ImmuMax(TM), and about the Company's clinical
trials of Vasomax(R). The plaintiffs seek to have the action declared to be a
class action, and to have rescissionary or compensatory damages in an unstated
amount, along with interest and attorney's fees. On March 30, 1999, the Court
granted the defendants' motion to dismiss, and dismissed the case with
prejudice. The plaintiffs have filed an appeal. The Company and the individual
defendants believe that these actions are without merit and intend to defend
against them vigorously. No estimate of loss or range of estimate of loss, if
any, can be made at this time.
NOTE 9 -- SUBSEQUENT EVENTS
On August 10, 1999, Zonagen, Inc. announced that the Food and Drug
Administration (FDA) had advised the Company that further clinical trials of
Zonagen's phentolamine-based drugs have been placed on clinical hold until
certain issues surrounding the Company's two-year rat study are satisfactorily
resolved. FDA is allowing Schering-Plough to complete the fully enrolled ongoing
12-week study in humans of Vasomax(R) for erectile dysfunction.
FDA's decision was based on preliminary findings from an ongoing two-year,
rat carcinogenicity study being conducted by Zonagen. The study, which is
scheduled to be completed in the fourth quarter of this year, has yielded
preliminary results which suggest that male rats receiving long term daily doses
of phentolamine mesylate develop a higher incidence of proliferation of brown
fat tissue than control rats. The implications of these findings need to be
further evaluated with regard to their potential for adverse effects on humans.
To date, such abnormalities have not been observed in female rats in the study.
Prior to these latest findings, Zonagen had completed and submitted to the
FDA a complete genotoxicity profile as well as results from a six month mouse
p53 assay and six month daily usage studies in dogs and rats. None of these
studies showed any abnormal effects, including brown fat tissue proliferation.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements reflect
the Company's current views with respect to future events and financial
performance and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated in such forward-looking statements. See "Factors Affecting
Forward-Looking Statements" included elsewhere in this Quarterly Report on
Form 10-Q.
OVERVIEW
Zonagen, Inc. ("Zonagen" or the "Company") is a biopharmaceutical company
engaged in the development of pharmaceutical products for the reproductive
system, including sexual dysfunction, urology, contraception and infertility.
In 1997, Zonagen entered into a worldwide sales and marketing agreement with
Schering-Plough Corporation for Vasomax(R), the Company's rapidly disintegrating
oral formulation of phentolamine mesylate for Male Erectile Dysfunction ("MED").
In March 1998, Schering-Plough submitted a Product Registration Application in
Mexico for Vasomax(R) and subsequently began product sales in May 1998,
following approval by the Mexican regulatory authorities. On July 14, 1998,
Zonagen submitted its first New Drug Application ("NDA") to the U.S. Food and
Drug Administration ("FDA") for Vasomax(R) for the treatment of MED. In August
1998, Schering-Plough submitted a Marketing Approval Application for Vasomax(R)
to the Medicines Control Agency in the United Kingdom. In February 1999,
Schering-Plough notified the Company that it had exercised its right to begin
manufacturing finished product for Vasomax(R). In May 1999, Schering-Plough
began sales of Vasomax(R) in Brazil.
On May 10, 1999, Zonagen, Inc. and Schering-Plough jointly announced that the
companies had decided to forego a June U.S. FDA Advisory Panel review of the New
Drug Application ("NDA") for Vasomax(R) until the results of additional clinical
studies being conducted by Schering-Plough could be submitted to the FDA. As a
result of this decision, Zonagen received from the FDA, a non-approvable letter
for the NDA. Vasomax(R) is Zonagen's oral treatment for erectile dysfunction.
Zonagen completed two positive pivotal clinical trials that formed the basis
of the NDA for Vasomax(R). Zonagen expects to submit the new data from the
ongoing study currently being conducted by Schering-Plough, to the FDA as an
amendment to the NDA. It was not possible to extend the deadline for completion
of the FDA review, to include this data; therefore, it was decided to accept a
non-approvable letter.
On August 10, 1999, Zonagen, Inc. announced that the FDA had advised the
Company that further clinical trials of Zonagen's phentolamine-based drugs have
been placed on clinical hold until certain issues surrounding the Company's two-
year rat study are satisfactorily resolved. FDA is allowing Schering-Plough to
complete the fully enrolled ongoing 12-week study in humans of Vasomax(R) for
erectile dysfunction.
15
FDA's decision was based on preliminary findings from an ongoing two-year,
rat carcinogenicity study being conducted by Zonagen. The study, which is
scheduled to be completed in the fourth quarter of this year, has yielded
preliminary results which suggest that male rats receiving long term daily doses
of phentolamine mesylate develop a higher incidence of proliferation of brown
fat tissue than control rats. The implications of these findings need to be
further evaluated with regard to their potential for adverse effects on humans.
To date, such abnormalities have not been observed in female rats in the study.
Prior to these latest findings, Zonagen had completed and submitted to the
FDA a complete genotoxicity profile as well as results from a six month mouse
p53 assay and six month daily usage studies in dogs and rats. None of these
studies showed any abnormal effects, including brown fat tissue proliferation.
There can be no assurance, however, that the FDA will consider such studies
satisfactory for approval of the NDA submission or whether additional studies
will be required; nor can there be any assurance that the FDA will ultimately
approve Vasomax(R). Certain risks and uncertainties associated with the filing
and the FDA review of the NDA are described or referenced in "Factors Affecting
Forward-Looking Statements" included elsewhere in this Quarterly Report on
Form 10-Q.
Due to the May 10, 1999 announced delay in the U.S. approval of Vasomax(R),
the Company implemented a cash conservation plan. This plan will focus the
Company's current cash resources toward development of its existing product
candidates. The plan also incorporates a hiring freeze, except for key
positions; postponement of salary increases until Vasomax(R) is approved in a
major market; and a reduction in Company headcount based on attrition. The
Company will also focus its efforts on out-licensing its existing technologies
as a means of enhancing its cash reserves and reducing future development costs.
Notwithstanding the cash conservation plan, the Company will continue to seek
opportunities to in-license technologies that it believes will enhance future
shareholder value.
On March 11, 1999, the Company sold for cash the assets of its wholly owned
subsidiary, Fertility Technologies, Inc. ("FTI") to SAGE BioPharma, Inc., a
subsidiary of Counsel Corporation (Nasdaq: CXSN). The sale of FTI allows the
Company to focus all of its attention on its core business, the development of
pharmaceutical products for conditions associated with the reproductive system.
See "Item 1. Financial Statements - Note 2 - Sale of Fertility Technologies,
Inc. of Notes to Consolidated Financial Statements (Unaudited)."
In December 1998, the Company initiated a U.S. Phase I clinical trial of
Vasofem, a vaginal form of phentolamine mesylate, for the treatment of Female
Sexual Dysfunction ("FSD"). The FDA has notified the Company that all U.S.
clinical trials for Vasofem have been placed on clinical hold.
In addition to sexual dysfunction, the Company has ongoing research and
development programs for other diseases and disorders of the reproductive
system, including several new
16
approaches to contraception and new treatments for urological diseases such as
benign prostate hyperplasia ("BPH") and prostate cancer.
In June 1999 the U.S. Patent and Trademark Office issued Patent Number
5,912,000 directed to one of the Company's chitosan-based adjuvant systems and
immunogens, collectively know as the ImmuMax System.
As of June 30, 1999, the Company had an accumulated deficit of approximately
$59.4 million. There can be no assurance that the Company will be able to
successfully complete the transition from a development stage company to the
successful introduction of commercially viable products. The Company's ability
to achieve profitability will depend, among other things, on successfully
completing the development of its products, obtaining regulatory approvals,
establishing marketing, sales and manufacturing capabilities or collaborative
arrangements with others which possess such capabilities, and raising sufficient
funds to finance its activities. There can be no assurance that the Company will
be able to achieve profitability or that profitability, if achieved, can be
sustained.
IMPACT OF YEAR 2000
Certain companies may face problems if the computer processors and software
upon which they directly or indirectly rely are unable to process date values
correctly upon the turn of the millennium ("Year 2000"). Such a system failure
and corruption of data of the Company or its customers or suppliers could
disrupt the Company's operations, including, among other things a temporary
inability to process transactions or engage in other business activities or to
receive information or services from suppliers.
The Company has appointed a Year 2000 committee to address the issues and
assess the potential impact of the Year 2000 problem. The committee is
evaluating the Company's financial systems, computers, software and other
equipment and anticipates that the programs and systems should be Year 2000
compliant. The Company presently believes that its computer systems, software
and other equipment should be Year 2000 compliant by December 1999. The Company
estimates that it will spend approximately $100,000 to $150,000 in capital for
replacement of computers, equipment and software upgrades. The Company will
incur another $50,000 to $100,000 for costs of implementation.
The Company has surveyed its third party suppliers and has requested that they
represent that their products and services are to be Year 2000 compliant and
that they have a program to test for compliance. The Company is currently
evaluating its third party suppliers' responses and is assessing those vendors
that are not Year 2000 compliant and will find alternative vendors that are
compliant.
Because the Company currently anticipates that it will achieve Year 2000
compliance, it has not formulated a contingency plan. However, should the
Company determine there is significant risk that it may be unable to adhere to
its compliance timetable, it will assess reasonably likely scenarios resulting
from noncompliance and establish a contingency plan to address such scenarios.
17
The Company's ability to achieve Year 2000 compliance is subject to various
uncertainties including the Company's ability to successfully identify systems
and programs not Year 2000 compliant, the nature and amount of programming
required to correct or replace affected programs, the availability and magnitude
of labor and consulting costs and the success of the Company's business
partners, vendors and clients in addressing the Year 2000 issue. Therefore,
while the financial impact of implementing Year 2000 compliance remediation has
not been and is not anticipated to be material to the Company's business,
financial position or results of operations, the Company can make no assurances
with respect to the costs of remediation efforts not yet incurred.
Additionally, the Company cannot be certain that it will achieve adequate Year
2000 compliance in a timely manner or that any impact of a failure to achieve
such compliance will not have a material adverse effect on the Company's
business, financial condition or results of operation.
RESULTS OF OPERATIONS
Three months ended June 30, 1999 and 1998
Revenues. Total revenues decreased 90% to $576,000 for the quarter ended
June 30, 1999 as compared to $5.9 million for the same period in the prior year.
The decrease is due primarily to no milestone payments being received in the
quarter ended June 30, 1999 as compared to a $5.0 million payment received
during the same period in the prior year. In addition, royalties from Vasomax(R)
were $22,000 for the quarter ended June 30, 1999 as compared to $167,000 for the
same quarter in the prior year and interest revenue decreased primarily due to
decreased cash balances as a result of the Company's net cash used in operating
activities. Schering-Plough is manufacturing and marketing in Mexico and Brazil.
Schering-Plough commenced sales of Vasomax(R) in Mexico in May 1998 and in
Brazil in May 1999. Under the terms of the license agreement, the Company
receives quarterly royalty payments based on net product sales by Schering-
Plough. These quarterly payments may lag current quarter sales by up to sixty
days. Until Vasomax(R) is approved and launched on a broader basis, the Company
expects royalty payments to reflect fluctuations due to inventory stocking and
promotional activities.
Research and Development Expenses. Research and development ("R&D") expenses
include internal and contracted research and regulatory affairs activities. R&D
expenses decreased 38% to $3.6 million for the quarter ended June 30, 1999 as
compared to $5.8 million for the same period in the prior year. The decrease was
due primarily to a decline in contracted costs associated with the development
of Vasomax(R). These contracted costs decreased 49% to approximately $2.5
million during the quarter ended June 30, 1999 as compared to approximately $4.9
million during the same period in the prior year. The reduction in contracted
costs associated with the development of Vasomax(R) is a result of the
completion of Phase III and open label clinical trials and a reduction in
contract research and regulatory activity following the July 14, 1998 NDA
submission to the FDA for Vasomax(R). The Company will continue to incur costs
in connection with the further development of Vasomax(R) until the regulatory
process is complete. General R&D expenses increased 7% to approximately $1.0
million for the quarter ended June 30, 1999 as compared to $934,000 during the
same period in the prior year. This increase was primarily due to expenses
associated with hiring additional personnel and expanding the Company's research
and drug screening capabilities. The Company believes that research and
development expenses could increase over the next
18
several years as the Company progresses with clinical trial programs for future
product candidates.
General and Administrative Expenses. General and administrative expenses
increased 37% to $940,000 during the quarter ended June 30, 1999 from $688,000
in the second quarter of 1998. The increase was primarily due to expenses
associated with hiring and relocating several new members of the management
team.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues. Total revenues decreased 83% to $1.2 million for the six months
ended June 30, 1999 as compared to approximately $7.0 million for the same
period in the prior year. The decrease is due primarily to no milestone payments
being received during the six months ended June 30, 1999 as compared to a $5.0
million payment received during the same period in the prior year. The decrease
in interest revenue is primarily due to decreased cash balances as a result of
the Company's net cash used in operating activities and stock repurchases during
the year ended December 31, 1998. Schering-Plough is manufacturing and
marketing in Mexico and Brazil. Schering-Plough commenced sales of Vasomax(R) in
Mexico in May 1998 and in Brazil in May 1999. Under the terms of the license
agreement, the Company receives quarterly royalty payments based on net product
sales by Schering-Plough. These quarterly payments may lag current quarter
sales by up to sixty days. Product royalties for the six months ended June 30,
1999, were $22,000 as compared to $167,000 for the same period in the prior
year. Until Vasomax(R) is approved and launched on a broader basis, the Company
expects royalty payments to reflect fluctuations due to inventory stocking and
promotional activities.
Research and Development Expenses. Research and development ("R&D") expenses
include internal and contracted research and regulatory affairs activities. R&D
expenses decreased 35% to $7.9 million for the six months ended June 30, 1999 as
compared to $12.2 million for the same period in the prior year. The decrease
was due primarily to a decline in contracted costs associated with the
development of Vasomax(R). These contracted costs decreased 45% to approximately
$5.7 million during the period ended June 30, 1999 as compared to approximately
$10.3 million during the same period in the prior year. The reduction in
contracted costs associated with the development of Vasomax(R) is a result of
the completion of Phase III and open label clinical trials and a reduction in
contract research and regulatory activity following the July 14, 1998 NDA
submission to the FDA for Vasomax(R). The Company will continue to incur costs
in connection with the further development of Vasomax(R) until the regulatory
process is complete. General R&D expenses increased 16% to approximately $2.2
million for the six months ended June 30, 1999 as compared to $1.9 million
during the same period in the prior year. This increase was primarily due to
expenses associated with hiring additional personnel and expanding the Company's
research and drug screening capabilities. The Company believes that research and
development expenses could decrease during the remainder of 1999 and could
increase for at least the next several years as the Company progresses with
clinical trial programs for future product candidates.
19
General and Administrative Expenses. General and administrative expenses
increased 27% to $1.9 million during the six months ended June 30, 1999 from
$1.5 million during the same period in the prior year. The increase was
primarily due to expenses associated with hiring and relocating several new
members of the management team.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily with
proceeds from the private placement and public offering of equity securities and
with funds received under collaborative agreements. In April 1993, the Company
received net proceeds of approximately $7.0 million from its initial public
offering. In December 1993, the Company received net proceeds of $2.5 million
from the sale of Common Stock to an affiliate of Schering AG in connection with
the Company's collaboration with Schering AG. In October 1995, the Company
received net proceeds of $5.3 million from the private placement of Series A
Preferred Stock. In September and October 1996, the Company received aggregate
net proceeds of $14.4 million from the private placement of Series B Preferred
Stock. In July 1997, the Company received net proceeds of approximately $72.2
million from a public offering of Common Stock. In December 1997, the Company
received a $10.0 million up-front license fee from Schering-Plough for the right
to market and sell Vasomax(R) for the treatment of male erectile dysfunction. On
June 30, 1998, the Company received an accelerated $5.0 million milestone
payment from Schering-Plough with respect to Vasomax(R). On September 30, 1998,
the Company received an additional $5.0 million milestone payment from Schering-
Plough with respect to Vasomax(R).
The Company used net cash of approximately $4.7 million for operating
activities in the three months ended June 30, 1999 as compared to approximately
$2.0 million for the same period in the prior year. The increase in net cash
used for operating activities was due primarily to no milestone payments being
received in the three months ended June 30, 1999 offset by a decline in
contracted costs associated with the development of Vasomax(R). The reduction in
contracted costs associated with the development of Vasomax(R) is a result of
the completion of Phase III and open label clinical trials and a reduction in
contract research and regulatory activity following the July 14, 1998 NDA
submission to the FDA for Vasomax(R). The Company had cash and cash equivalents
of approximately $43.1 million at June 30, 1999.
The Company has experienced negative cash flows from operations since its
inception and has funded its activities to date primarily from equity financings
and corporate collaborative agreements. The Company will continue to require
substantial funds to continue research and development, including preclinical
studies and clinical trials of its products, and to commence sales and marketing
efforts if FDA and other regulatory approvals are obtained.
Despite the delays regarding the Company's Vasomax(R) clinical development
program, the Company believes that its existing capital resources will still be
sufficient to fund its operations through at least the end of 2000. This is due
primarily to the way the Company has historically forecasted its cash resources
and the implementation of a cash conservation plan. When forecasting its cash
requirements, the Company only takes into account actual cash payments received,
not anticipated. In addition, due to the May 10, 1999 announced delay in the
U.S. approval of Vasomax(R), the Company implemented a cash conservation plan
which
20
focuses the current cash resources toward development of its existing product
candidates. The plan incorporates a hiring freeze, except for key positions;
postponement of salary increases until Vasomax(R) is approved in a major market;
and a reduction in Company headcount based on attrition. The Company will also
focus its efforts on out-licensing its existing technologies as a means of
enhancing its cash reserves and reducing future development costs.
Notwithstanding the cash conservation plan, the Company will continue to seek
opportunities to in-license technologies that it believes will enhance future
shareholder value.
The Company's capital requirements will depend on many factors, including
the problems, delays, expenses and complications frequently encountered by
development stage companies; the progress of the Company's clinical and
preclinical activities; the progress of the Company's collaborative agreements
with affiliates of Schering-Plough and costs associated with any future
collaborative research, manufacturing, marketing or other funding arrangements;
the costs and timing of seeking regulatory approvals for Vasomax(R) and Vasofem,
and the Company's other future product candidates; the Company's ability to
obtain regulatory approvals; the success of the Company's sales and marketing
programs; the cost of filing, prosecuting and defending and enforcing any patent
claims and other intellectual property rights; and changes in economic,
regulatory or competitive conditions of the Company's planned business.
Estimates about the adequacy of funding for the Company's activities are based
on certain assumptions, including the assumption that the development and
regulatory approval of the Company's products can be completed at projected
costs and that product approvals and introductions will be timely and
successful. There can be no assurance that changes in the Company's research and
development plans, acquisitions or other events will not result in accelerated
or unexpected expenditures. To satisfy its capital requirements, the Company may
seek to raise additional funds in the public or private capital markets or
through additional corporate collaborations. The Company's ability to raise
additional funds will be adversely affected if the results of its current or
future clinical trials, the regulatory approval process, and the
commercialization of Vasomax(R) are not favorable or timely. The Company may
seek additional funding through corporate collaborations and other financing
vehicles. There can be no assurance that any such funding will be available to
the Company on favorable terms, or at all. If adequate funds are not available,
the Company may be required to curtail significantly one or more of its research
or development programs, or it may be required to obtain funds through
arrangements with future collaborative partners or others that may require the
Company to relinquish rights to some or all of its technologies or products. If
the Company is successful in obtaining additional financing, the terms of such
financing may have the effect of diluting or adversely affecting the holdings or
the rights of the holders of the Company's Common Stock.
21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 16, 1994, Dr. Bonita Sue Dunbar ("Dunbar") filed suit in the 270th
District Court of Harris County, Texas naming Baylor College of Medicine, BCM
Technologies, Inc., Fulbright & Jaworski, L.L.P., The Woodlands Venture Capital
Company and the Company as defendants. The lawsuit has been dismissed without
the right of Dunbar to re-file and with no monetary consideration paid by the
Company.
Certain purported class action complaints alleging violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder
have been filed against the Company and certain of its officers and directors.
These complaints were filed in the United States District Court for the Southern
District of Texas in Houston, Texas and were consolidated on May 29, 1998. The
plaintiffs purport to bring the suit on behalf of all purchasers of Zonagen
common stock between February 7, 1996 and January 9, 1998. The plaintiffs
assert that the defendants made materially false and misleading statements and
failed to disclose material facts about the patents and patent applications of
the Company relating to Vasomax(R) and ImmuMax(TM), and about the Company's
clinical trials of Vasomax(R). The plaintiffs seek to have the action declared
to be a class action, and to have rescissionary or compensatory damages in an
unstated amount, along with interest and attorney's fees. On March 30, 1999, the
Court granted the defendants' motion to dismiss, and dismissed the case with
prejudice. The plaintiffs have filed an appeal. The Company and the individual
defendants believe that these actions are without merit and intend to defend
against them vigorously. No estimate of loss or range of estimate of loss, if
any, can be made at this time.
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's Stockholders was held on May 13, 1999
to consider and vote upon the following proposals:
(i) Election of Directors. The following individuals were nominated
and elected as directors, with the following number of shares
voted for and withheld with respect to each director.
For Withheld
--- ---------
Martin P. Sutter 9,241,028 67,244
Joseph S. Podolski 9,233,828 74,444
Steven Blasnik 9,240,128 68,144
Jeffrey M. Jonas, M.D. 9,240,278 67,994
Nelson L. Levy, Ph.D. M.D. 9,238,278 69,994
Timothy McInerney 9,242,678 65,594
(ii) Approval of the amendment to the Company's 1993 Amended and
Restated Employee and Consultant Stock Option Plan.
For 4,686,551 Against 1,098,919 Abstain 28,846
(iii) Approval of the appointment of Arthur Andersen LLP as the
Company's independent public accountants for 1999.
For 9,282,637 Against 20,780 Abstain 4,855
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Identification of Exhibit
----------- -------------------------
11.1 Statement Regarding Computation of Net Loss Per Share
27.1 Financial Data Schedule
b. Reports on Form 8-K
None.
23
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ZONAGEN, INC.
Date: August 13, 1999
By: /s/ Joseph S. Podolski
----------------------------
Joseph S. Podolski
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1999
By: /s/ F. Scott Reding
----------------------------
F. Scott Reding
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
24