10-K 1 h03437e10vk.txt ZONAGEN, INC.- YEAR ENDED DECEMBER 31, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 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 ------------------ ZONAGEN, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 76-0233274 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2408 TIMBERLOCH PLACE, SUITE B-4 77380 THE WOODLANDS, TEXAS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (281) 367-5892 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ---------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED ------------------- ---------------------------- Common Stock, $.001 par value Pacific Exchange, Inc. Rights to purchase Series One Junior Pacific Exchange, Inc. Participating Preferred Stock SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NAME OF EACH TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED ------------------- ---------------------------- Common Stock, $.001 par value Nasdaq National Market Rights to purchase Series One Junior Nasdaq National Market Participating Preferred Stock 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 [ ] 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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule of the act). Yes [ ] No [X] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $15,420,000 as of June 28, 2002, the last business day of the registrants most recently completed second fiscal quarter, based on the closing sales price of the registrant's common stock on the Nasdaq National Market on such date of $1.50 per share. For purposes of the preceding sentence only, all directors, executive officers and beneficial owners of ten percent or more of the shares of the registrant's common stock are assumed to be affiliates. As of March 14, 2003, 11,504,984 shares of the registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain Part III information is incorporated by reference from the registrant's proxy statement for its 2003 annual meeting of stockholders anticipated to be filed with the Securities and Exchange Commission within 120 days of the end of the registrant's fiscal year. ZONAGEN, INC. 2001 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PAGE ----
PART I Item 1. Description of Business 3 Item 2. Properties 14 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 PART II Item 5. Market for Common Equity and Related Stockholder Matters 15 Item 6. Selected Consolidated Financial Data 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26 Item 8. Financial Statements 26 Item 9. Changes in and disagreements with Accountants on Accounting and Financial Disclosure 26 PART III Item 10. Directors and Executive Officers of the Registrant 28 Item 11. Executive Compensation 28 Item 12. Security Ownership of Certain Beneficial Owners and Management 28 Item 13. Certain Relationships and Related Transactions 28 Item 14. Controls and Procedures 28 PART IV Item 15. Exhibits, Financial Statement Schedules, Signatures, Certifications pursuant to the Sarbanes-Oxley Act of 2002 and Reports on Form 8-K 29
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, expected, estimated, projected, suggested or intended. -2- PART I ITEM 1. DESCRIPTION OF BUSINESS OVERVIEW Zonagen, Inc. ("Zonagen" or the "Company") was organized on August 20, 1987 and is a development stage company. The Company is engaged in the development of pharmaceutical products that address diseases and conditions associated with the human reproductive system. From our inception through December 31, 2002, we have been primarily engaged in research and development and clinical development. Due to the April 2002 withdrawal of the Marketing Authorization Application ("MAA") for our VASOMAX(R) product in the United Kingdom by Schering-Plough Corporation ("Schering-Plough"), the previous worldwide licensee of VASOMAX(R), the subsequent July 2002 mutual termination of the license agreements with Schering-Plough and the continued uncertainty relating to our phentolamine-based products, we resumed our search that was previously terminated in January 2002 for strategic alternatives for the redeployment of our assets in an attempt to maximize shareholder value. This search resulted in the signing of a merger agreement on October 30, 2002, with Lavipharm Corp. ("Lavipharm"). The merger agreement with Lavipharm was subsequently terminated on March 27, 2003 as a result of Nasdaq's determination that the proposed merger would be deemed by Nasdaq as a reverse merger along with other considerations. This has led to the Company's resumption of certain of its clinical development activities, which had been temporarily delayed pending possible completion of the merger. The Company also intends to resume its search for strategic alternatives. Following the April 2002 withdrawal of the MAA for VASOMAX(R) in the United Kingdom by Schering-Plough, the Company continued scaling back internal research and development spending activities to maintain Zonagen's cash reserves for future redeployment. During 2002 the Company continued to focus its research efforts on three Small Business Innovative Research ("SBIR") grants that the Company received during 2002 and continued limited development of the Company's research projects. The Company is currently performing research under a Phase II $836,441 SBIR grant which is being utilized to develop a new compound which is a selective progesterone receptor modulator ("SPRM's") as an oral treatment for endometriosis. This compound was licensed by Zonagen in 1999 from the National Institutes of Health ("NIH"). In addition, the Company is performing research in the area of breast cancer under a Phase I $108,351 grant. The funding under these two grants is anticipated to be depleted in mid 2003 while the third SBIR grant was depleted early in the first quarter of 2003. Zonagen has incurred several delays relating to the regulatory approval of its lead product, VASOMAX(R). In August 1999, the FDA placed our phentolamine-based products on clinical hold in the U.S. based on a finding of brown fat proliferations in a two-year rat study. In May 2000, the FDA upgraded the status of VASOMAX(R) to a partial clinical hold pending additional animal data and in October 2000, allowed Zonagen to conduct a mechanistic study to address the FDA's concerns. In July 2002, the Company submitted the final results from the one year mechanistic study to the FDA. In October 2002, our representatives, including outside consultants, met with the full Cancer Assessment Committee of the FDA. After this meeting, the FDA informed Zonagen that they would require the Company to conduct another two-year rat study before they would consider lifting the partial clinical hold. At this time the Company does not intend to conduct this additional study. There can be no assurance that even if the Company were to complete this additional study that the FDA would remove its partial clinical hold on phentolamine. Due to the future uncertainty surrounding the VASOMAX(R) product and the fact that the Company is not presently committing resources toward the approval of VASOMAX(R), Zonagen expensed both its bulk phentolamine inventory previously valued at $4.4 million and its VASOMAX(R) patent estate previously valued at approximately $1.0 million in the three-month period ended June 30, 2002. In addition, in the quarter ended September 30, 2002, the Company recognized the remaining $3.2 million of deferred revenue relating to the mutually terminated license agreements with Schering-Plough. As of June 30, 2002, the Company had a remaining obligation to Schering-Plough of approximately $1.3 million. Due to the mutual termination of the license agreements with Schering-Plough in July of 2002, the $1.3 million payable was forgiven and was reduced to zero on our balance sheet in the three-month period ended -3- September 30, 2002. Due to this reduction in accounts payable, research and development expenses were offset by the same amount. See Note 10 - License, Research and Development Agreements in the notes to the consolidated financial statements for the year ended December 31, 2002 in the financial pages of this Form 10-K for additional information regarding the termination of the license agreements with Schering-Plough. On November 8, 2002, the Company completed a $1.0 million bridge loan to Lavipharm that was repaid with interest on April 9, 2003. The Company has experienced negative cash flows from operations since inception and has funded its activities to date primarily from equity financings and corporate collaborations. If the Company were to continue its operations it would require substantial funds for research and development, including preclinical studies and clinical trials of our product candidates, and to commence sales and marketing efforts if appropriate, if the FDA or other regulatory approvals are obtained. The Company believes that its existing capital resources under its current operating plan will be sufficient to fund the Company's operations through at least the end of 2005. There can be no assurance that changes in our current strategic plans or other events will not result in accelerated or unexpected expenditures. Zonagen's results of operations may vary significantly from year to year and quarter to quarter, and depend, among other factors, on the Company's ability to find new strategic alternatives, the regulatory approval process in the United States and other foreign jurisdictions and the signing of new licenses and product development agreements. The timing of our revenues may not match the timing of our 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, 2002, the Company had an accumulated deficit of $79.7 million. Losses have resulted principally from costs incurred in conducting clinical trials for VASOMAX(R) and the related female sexual dysfunction product, in research and development activities related to efforts to develop our products and from the associated administrative costs required to support those efforts. RESEARCH AND DEVELOPMENT Following the April 2002 withdrawal of the MAA for VASOMAX(R) in the United Kingdom by Schering-Plough, the Company continued scaling back internal research and development spending activities to maintain its cash reserves for future redeployment. During 2002 the Company continued its research efforts on three SBIR grants that the Company received during 2002 and continued limited development of the Company's research projects which included an oral treatment for testosterone deficiency in men which the Company calls Androxal(TM). The Company utilizes consultants for the clinical development of its testosterone deficiency project. The Company currently has one full-time employee focused on research and development and that employee is primarily performing research under the Company's two active SBIR grants. Under a Phase II $836,441 SBIR grant the Company continues to develop a new compound which is a SPRM as an oral treatment for endometriosis. This compound was licensed by Zonagen in 1999 from the NIH. In addition, the Company is performing research in the area of breast cancer under a Phase I $108,351 grant. The funding under these two active grants is anticipated to be depleted in mid 2003 while the third SBIR grant was depleted early in the first quarter of 2003. The Company does not anticipate hiring additional research and development personnel during its search for strategic alternatives. The Company's research and development cash expenditures have continued to decline primarily due to the completion of the majority of the clinical development requirements for VASOMAX(R) which was completed prior to the year 2000 and the subsequent decrease in outside contracted costs, and the reduction in employee headcount and cash spending that was implemented in July 2000. In 2002, 2001 and 2000, research and development expenses were $6.4 million, $3.0 million and $4.5 million, respectively. The increase in expenses for the year 2002 included non-cash expenses recorded due to the write off of the Company's phentolamine inventory of $4.4 million and the write off of the Company's patent portfolio for VASOMAX(R) of $1.0 million which was offset by a reduction in expenses of $1.3 million due to the forgiveness of debt by Schering-Plough due to the mutual termination of the VASOMAX(R) licensing agreements. -4- Excluding these net non-cash charges, research and development expenses would have been $2.3 million for the year 2002. PRODUCT CANDIDATES During the early part of 2002, the Company's primary focus was the global approval of its lead product, VASOMAX(R). Following the April 2002 withdrawal of the MAA for VASOMAX(R) in the United Kingdom by Schering-Plough, the Company continued scaling back internal research and development spending activities to maintain its cash reserves for future redeployment. The Company currently has one full-time employee engaged in research and development. See "--Research and Development" for more information about the Company's current research and development activities. The Company's current product candidates include small molecule pharmaceuticals as well as vaccine related product candidates. The Company is primarily performing research and development regarding its two active SBIR grants which are expected to be depleted by mid 2003 and is currently committing limited resources toward its other product candidates. Except for the Company's VASOMAX(R) and the related female sexual dysfunction product candidates which are on partial clinical hold in the U.S., all of the Company's other product candidates are in the early stage of development. The Company currently either owns or has licensed the following product candidates. SMALL MOLECULE OPPORTUNITIES Sexual Dysfunction Although the products previously being developed to treat sexual dysfunction are the Company's most advanced in terms of clinical development, they all contain phentolamine which the FDA has on partial clinical hold. In October 2002, the FDA made a decision to require the Company to perform an additional two-year rat study in an attempt to lift the FDA's current partial clinical hold. At this time the Company does not intend to run this additional study. There can be no assurance that even if the Company were to complete this additional study that the FDA would remove its partial clinical hold on phentolamine. All of these products have been tested in humans, though each is at a different stage of development. Before the FDA will consider the approval to market any of the Company's phentolamine-based products the partial clinical hold must first be lifted. See "-- Regulatory Matters Regarding Phentolamine Based Products --" and " -- Business Risks -- Government Regulation; No Assurance of Regulatory Approval." The Company's phentolamine-based products include VASOMAX(R) - an oral therapy for Male Erectile Dysfunction ("MED"); an oral therapy for Female Sexual Arousal Disorder; Bimexes(TM) - an oral combination drug therapy for MED and ERxin(TM) - a multi-drug component injection therapy for MED. Due to the FDA imposed clinical hold on the Company's phentolamine-based products, the Company is not performing any additional clinical development activities regarding these product candidates. Female Health Selective Progesterone Receptor Modulators Endometriosis and uterine fibroids afflict 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 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. Zonagen has selected a lead compound based on animal data, as well as synthesis considerations. The Company was awarded a Phase I SBIR grant in the amount of $114,185 to research these compounds for the treatment of endometriosis and completed that research in early 2001. In 2002, the Company received an additional Phase II SBIR -5- grant in the amount of $836,441 to continue its research for a treatment of endometriosis. The funding from this Phase II grant is anticipated to be depleted in mid 2003. Male Health Androxal(TM) Oral Treatment for Testosterone Deficiency Another product candidate in the Company's portfolio is in the emergent field of treatment for a male condition which is associated with aging and the subsequent decline of the male hormone testosterone. Zonagen's lead drug candidate Androxal(TM), is an orally active agent developed out of the Company's internal research efforts. An Investigational New Drug application for a 50 patient Phase I/II efficacy and safety challenge study is on file at the FDA. Clinical drug supplies for this study have been produced and a Clinical Research Organization and clinical sites have been selected. The company intends to begin running this clinical study during 2003. VACCINE RELATED PRODUCT CANDIDATES The Company has identified, developed and/or licensed a number of early stage vaccine related product candidates. Due to the Company's plan to redeploy its assets, the Company is not performing any development activities and has discontinued its previous efforts to out-license these product candidates. The Company possesses the following early stage product candidates which include two different chitosan-based vaccine adjuvants; a zona pellucida and hCG immunocontraceptive vaccines; a therapy for the treatment of genital herpes; and two prostate therapeutic vaccines, one for hormone dependent and the other for hormone independent tumors. REGULATORY MATTERS REGARDING PHENTOLAMINE-BASED PRODUCTS Due to the April 2002 withdrawal of the MAA for our VASOMAX(R) product in the United Kingdom by Schering-Plough, the previous worldwide licensee of VASOMAX(R); the subsequent July 2002 mutual termination of the license agreements with Schering-Plough, the FDA's October 2002 decision to require the Company to perform an additional two-year rat safety study and the continued uncertainty relating to our phentolamine-based products, the Company is not currently committing any of its resources toward the clinical development of any of its phentolamine-based product candidates which include VASOMAX(R), an oral therapy for Female Sexual Arousal Disorder, Bimexes(TM) or ERxin(TM). In December 2001, the Company announced that a response to questions from the MAA for VASOMAX(R) was submitted by Schering-Plough to the MCA in the United Kingdom. The submission included responses to the questions and comments posed by the MCA in 1999 as part of their office action following the original submission. In addition to a response to the original MCA comments, the amendment included data from studies completed since the submission in 1998 as well as several expert reports including efficacy and cardiovascular safety evaluations. Following a review of the comments received from the Committee on Safety of Medicines regarding this VASOMAX(R) submission, Schering-Plough, the then world wide licensee, decided to withdraw its submission. Also in December 2001, the Company released the preliminary interim results from its then current mechanistic rat study regarding the safety of phentolamine. This study was initiated in November 2000 in an attempt to resolve the FDA's concerns regarding the appearance of brown fat proliferations in a prior two-year rat study, which those findings lead to the FDA placing VASOMAX(R) on clinical hold in the U.S. in August 1999 and which was subsequently upgraded in May 2000 to a partial clinical hold. The interim results of this mechanistic study showed that the gross necropsies of both old and young rats exposed to various doses of phentolamine suggested that phentolamine did not induce or promote brown fat proliferations in rats. No gross brown fat proliferations were observed during the entire one-year period that the animals were administered the drug. In October 2002 the FDA made a decision to require the Company to perform an additional two-year rat study; at this time the Company does not intend to conduct this additional study. There can be no assurances that the FDA will ever lift the partial clinical hold on the Company's phentolamine-based products or that if the partial clinical hold is lifted that the FDA will approve VASOMAX(R) or any of its other phentolamine-based product candidates for marketing in the U.S. or that VASOMAX(R) will be approved for marketing in -6- any major country. See "Business Risks -- Government Regulation; No Assurances of Regulatory Approval." COLLABORATIVE AND LICENSING AGREEMENTS Schering-Plough Corporation On July 15, 2002, the Company and Schering-Plough announced that they had mutually agreed to terminate the worldwide licensing agreements dated as of November 14, 1997 that covered Zonagen's phentolamine-based technologies for sexual dysfunction which include VASOMAX(R), as a result of the termination of the MAA. In exchange for the termination, the Company paid Schering-Plough a nominal cash fee upon execution of the termination agreement and agreed to make a milestone payment to Schering-Plough in the event that worldwide annual sales of VASOMAX(R) exceed a certain amount. In addition, the Company agreed to make royalty payments to Schering-Plough based on a percentage of future sales of VASOMAX(R) in Brazil and other countries in which there existed certain patent rights at the time of the termination. The Company's obligation to make royalty payments terminates after aggregate royalties paid under this termination agreement reach a certain maximum amount. Also, the Company agreed to make royalty payments to Schering-Plough based on future sales of certain combination products covered by combination patents controlled by Schering-Plough. These royalty payments are not subject to the cap on royalty payments for VASOMAX(R) sales described above. Included in the rights returned to Zonagen were all licenses, options and other rights with respect to Zonagen's phentolamine-based products, Zonagen's combination products, patent rights, know-how and trademarks for the treatment of sexual dysfunction for both men and women. Schering-Plough will transfer and assign to Zonagen rights, title and interest in and to any and all New Drug Applications or similar foreign submissions or approvals. Zonagen will thereafter be solely responsible for all obligations in the relevant countries with respect to such submissions and approvals. At this time the Company does not intend to commit any additional resources toward the clinical development of its phentolamine-based products. Included in the Company's balance sheet as of June 30, 2002 and December 31, 2001 under the caption "accounts payable" was an obligation to Schering-Plough of approximately $1.3 million and $1.6 million, respectively. This obligation was originally $2.4 million prior to any repayments made by the Company to Schering-Plough and represents costs relating to a portion of a shared clinical development program regarding the Company's VASOMAX(R) product. During April 2001, Schering-Plough agreed to accept payment of the Company's $2.4 million obligation to Schering-Plough via cash payments aggregating $1 million, a transfer of $933,000 in bulk phentolamine inventory and a $467,000 reduction in future royalties and milestone payments payable to the Company. In March 2002, the Company settled its $1 million cash obligation with its final cash payment of approximately $309,000. As of June 30, 2002, the Company had a remaining obligation to Schering-Plough of approximately $1.3 million which the Company and Schering-Plough had agreed would be satisfied through the transfer of bulk phentolamine and a reduction in future royalty and milestone payments as described above. Due to the mutual termination of the Schering-Plough Agreements in July of 2002, the $1.3 million payable was forgiven and reduced to zero on the Company's balance sheet and offset against research and development expenses in the three-month period ended September 30, 2002. National Institutes of Health (NIH) In 1999, Zonagen licensed worldwide rights to compounds known as Selective Progesterone Receptor Modulators ("SPRMs") that were developed by the National Institutes of Health (NIH). Under the terms of the agreement, the Company has paid an up-front fee and is obligated to pay additional milestones and royalties on potential new products. In addition, the Company is obligated to meet developmental milestones as outlined in a Commercial Development Plan. The NIH has the ability to terminate the agreement for lack of payment or if it feels that the licensee is not meeting milestones as outlined in the Commercial Development Plan and for other reasons as outlined in the agreement. Due to the difficulties of manufacturing the materials that are covered under the agreement, the Company has not been able to meet the original requirements stated in the Commercial Development Plan and in July 2002 the Company paid a fee to amend this agreement which included a revision of the original Commercial Development Plan. See " -- Product Candidates -- Small Molecule Opportunities -- Female Health -- Selective Progesterone Receptor Modulators" for a discussion of the development of this technology. -7- In August 2000, the Company received a Phase I, SBIR grant in the amount of $114,185 to study the activity of these new compounds for the treatment of endometriosis. In 2002, the Company received an additional Phase II SBIR grant in the amount of $836,441 to continue its research for a treatment of endometriosis. The funding from this Phase II grant is anticipated to be depleted in mid 2003. 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. 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 a New Drug Application ("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 no experience in the sales, marketing and distribution of pharmaceutical products. If in the future the Company fails to reach or elects not to enter into an arrangement with a collaborative partner with respect to the sales and marketing of any of its future potential 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. 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. Although the Company has previously written off capitalized patents relating to the zona pellucida immuno-contraceptive vaccine and its phentolamine-based products, the Company is still maintaining the most significant patents relating to these technologies and includes these costs in R&D expenses. As of December 31, 2002, the Company owned or had rights to a total of 21 issued patents and 11 pending patent applications in the U.S., 114 pending patent applications and 74 issued patents outside the United States, and one pending Patent Cooperation Treaty (PCT) application. Of these patents and patent applications, eight issued patents and seven pending patent applications in the United States, 64 issued foreign patents, and 72 pending foreign patent applications are related to its MED technology. The Company has nine issued patents in the United States, seven issued foreign patents, and five pending foreign patent applications that relate to zona pellucida proteins, their preparation, and their use. The Company has three issued patents in the United States, three issued foreign patents, and 24 pending foreign patent applications for its adjuvant system. The Company has one issued patent and one pending patent application in the United States and five pending foreign patent applications related to methods and materials for the treatment of certain diseases of the prostate. The Company has rights to two pending patent applications in the United States and five foreign pending patent applications related to anti-progestational agents. The Company also has the following patent applications pending: one United States patent application and three foreign patent applications related to recombinant human chorionic gonadotropin vaccines and uses thereof; and one Patent Cooperation Treaty application related to methods and materials for the treatment of testosterone deficiency in men. Of the Company's seven issued U.S. patents relating to VASOMAX(R), one patent encompasses only the formulations themselves, three patents encompass only methods of using VASOMAX(R), and three patents encompass -8- both the formulations and methods of using the formulations. 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 corresponding 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 not covered by the Company's patents 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. COMPETITION The Company is engaged in pharmaceutical product development, an industry that is characterized by extensive research efforts and rapid technological progress. Many established pharmaceutical and biotechnology 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 can develop products which 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 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. 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 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. 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 current Good Manufacturing Practices. To supply drug products for use in the U.S., foreign manufacturing establishments must comply with the FDA's Good -9- 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 current 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 Assurance of Regulatory Approval." EMPLOYEES AND CONSULTANTS Employees At December 31, 2002, the Company had 10 full-time employees but reduced its employee headcount during the first quarter of 2003 to four full time employees which is the minimum amount required to complete the redeployment of the Company's assets and continue to perform a limited amount of product development. The Company does not intend to increase its employee headcount and it 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. 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. -10- RISK FACTORS Uncertainties Related to Early Stage of Development The Company is a development stage company that currently has no approved products in a major country. There can be no assurance that the Company's products will be approved in the future. 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. History of Operating Losses; Accumulated Deficit The Company has experienced significant operating losses in each fiscal year since its inception. As of December 31, 2002, the Company had an accumulated deficit of approximately $79.7 million. The Company's ability to achieve profitability will depend, among other things, on successfully completing the development of its products, the FDA lifting its partial clinical hold on the Company's phentolamine-based products and 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 2005. The Company's capital requirements will depend on many factors, including but not limited to: the problems, delays, expenses and complications frequently encountered by development stage companies; the progress of the Company's preclinical and clinical activities; 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 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. 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." -11- 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. 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. There can be no assurance that patents owned by or licensed to the Company will not be challenged by others. The Company could incur substantial costs in proceedings, including interference proceedings before the United States Patent and Trademark Office and comparable proceedings before similar agencies in other countries. These proceedings could result in adverse decisions about the patentability of the Company's inventions and products, as well as about the enforceability, validity or scope of protection afforded by the patents. There can be no assurance that the manufacture, use or sale of the Company's product candidates will not infringe patent rights of others. The Company may be unable to avoid infringement of those patents and may be required to seek a license, defend an infringement action or challenge the validity of the patents in court. There can be no assurance that a license will be available to the Company on terms and conditions acceptable to the Company, if at all, or that the Company will prevail in any patent litigation. Patent litigation is costly and time-consuming, and there can be no assurance that the Company will have sufficient resources to bring such litigation to a successful conclusion. If the Company does not obtain a license under such patents, or is found liable for infringement, or is not able to have such patents declared invalid, the Company may be liable for significant money damages, may encounter significant delays in bringing products to market or may be precluded from participating in the manufacture, use or sale of products or methods of treatment requiring such licenses. The Company does not believe that the commercialization of its products will infringe on the patent rights of others. However, there can be no assurance that the Company has identified all 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, could have a material adverse effect on the Company. The effect of legislative change on the Company's intellectual property is uncertain. -12- Government Regulation; No Assurance of Regulatory Approval The Company's research and development activities, preclinical studies, clinical trials and the manufacturing and marketing of its products are subject to extensive regulation by the FDA and other regulatory authorities in the U.S. These activities are also regulated in other countries where the Company intends to test and market its products. Any drug developed by the Company must undergo an extensive regulatory approval process before it may be marketed and sold. The regulatory process, which includes preclinical studies and clinical trials of each compound to establish its safety and efficacy, takes many years and requires the expenditure of substantial resources. Data obtained from preclinical and clinical activities are susceptible to varying interpretations that could delay, limit or prevent FDA regulatory approval. Although the FDA may have been consulted in developing protocols for clinical trials, that consultation provides no assurance that the FDA will accept the clinical trials as adequate or well-controlled or accept the results of those trials as establishing safety or efficacy. In addition, delays or rejections may be encountered based on changes in FDA policy for drug approval during the period of product development and FDA regulatory review of each submitted NDA. Similar delays and rejections may also be encountered in foreign countries. There can be no assurance that regulatory approval will ever 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." 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 " -- Manufacturing" for a discussion of the risks associated with manufacturing and the Company's reliance on third-party suppliers. Competition and Technological Change The Company is engaged in pharmaceutical product development, an industry that is characterized by extensive research efforts and rapid technological progress. See " -- Competition" for a discussion of the risks associated with competition and technological change. Product Liability and Availability of Insurance The Company's business exposes it to potential liability risks that are inherent in the testing, manufacturing and marketing of medical products. The use of the Company's product candidates in clinical trials may expose the Company to product liability claims and possible adverse publicity. These risks also exist with respect to the Company's product candidates, if any, that receive regulatory approval for commercial sale. Clinical trials and commercial sales, if any, of -13- 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 a limited amount of products/clinical trial liability insurance, however, 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. 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. There May Be No Effective Remedy Against Arthur Andersen LLP in Connection With a Material Misstatement or Omission in Our 2001 Financial Statements. Arthur Andersen LLP, which audited our financial statements included in this annual report for the year ended December 31, 2001, was convicted on June 15, 2002 of federal obstruction of justice arising from the government's investigation of Enron Corp. There may be no effective remedy against Arthur Andersen LLP in connection with a material misstatement or omission in these financial statements, particularly in the event that Arthur Andersen LLP becomes insolvent as a result of the conviction or other proceedings against Arthur Andersen LLP. 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 2003. The Company believes that its facilities will be adequate for its operations through May 2003. The Company intends to extend its lease on a portion of its current existing space while it seeks strategic alternatives. 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, as amended, 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 Chito-ZN (formerly named 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 recessionary 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. On September 25, 2001, the United States Fifth Circuit Court of Appeals affirmed the dismissal of all claims except one; the court reversed the trial court's dismissal of a claim concerning the Company's disclosure about a patent relating to VASOMAX(R). Discovery is proceeding. The Company and the individual defendants believe that these actions are without merit and intend to defend against them vigorously. No estimate of loss or range of estimate of loss, if any, can be made at this time. ITEM 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 2002. -14- 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.
PRICE RANGE -------------------------- HIGH LOW -------- -------- 2001 First Quarter.................................... $ 3.63 $ 2.31 Second Quarter................................... 3.45 2.25 Third Quarter.................................... 4.30 2.65 Fourth Quarter................................... 8.74 3.14 2002 First Quarter.................................... $ 7.44 $ 4.12 Second Quarter................................... 4.68 0.90 Third Quarter.................................... 1.54 0.99 Fourth Quarter................................... 1.42 0.75 2003 First Quarter (through March 14, 2003)........... $ 1.19 $ 0.87
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 14, 2003, the last sale price of the Common Stock, as reported by the Nasdaq National Market, was $1.05 per share. On March 14, 2003, there were approximately 240 holders of record and approximately 7,500 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 2002. DIVIDENDS 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, which has been subsequently amended on September 6 and October 30, 2002 (as amended, the "Rights Plan") pursuant to which a dividend consisting of one preferred stock purchase right (a "Right") was distributed for each share of Common Stock held as of the close of business on September 13, 1999, and is to be distributed to each share of Common Stock issued thereafter until the earlier of (i) the Distribution Date (as defined in the Rights Plan), (ii) the Redemption Date (as defined in the Rights Plan) or (iii) September 13, 2005. The Rights Plan is designed to deter coercive takeover tactics and to prevent an acquirer from gaining control of the Company without offering fair value to the Company's stockholders. The Rights will expire on September 13, 2005, 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 -15- 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. Under the October 30, 2002 amendment to the Rights Plan, the execution of the merger agreement and the acquisition by Lavipharm's two largest stockholders of more than 20% of Zonagen's outstanding capital stock did not trigger exercisability of the Rights. A complete description of the Rights, the Rights Agreement between the Company and Computershare Investor Services, LLC, (as successor in interest to 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 caption "Item 1. Description of the Registrant's Securities to be Registered" contained in the Registration Statement on Form 8-A filed on September 3, 1999 and as amended by amendments to such Registration Statement on Form 8-A/A filed on September 11 and October 31, 2002. -16- ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The statement of operations data for the year ended December 31, 2002 and the balance sheet data as of December 31, 2002 have been derived from our audited financial statements included elsewhere in the annual report on Form 10-K that have been audited by PricewaterhouseCoopers LLP, independent public accountants. The statements of operations for each of the years ended December 31, 2001 and 2000, and the balance sheet data as of December 31, 2001, have been derived from our audited financial statements included elsewhere in this annual report on Form 10-K that have been audited by Arthur Andersen LLP, independent public accountants who have ceased operations. The statements of operations data for the years ended December 1999 and 1998, and the balance sheet data as of December 31, 2000, 1999, 1998 have been derived from our audited financial statements not included in this annual report on Form 10-K. Our historical results are not necessarily indicative of results to be expected for any future period. The data presented below have been derived from financial statements that have been prepared in accordance with accounting principles generally accepted in the United States and should be read with our financial statements, including notes, and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this annual report on Form 10-K. -17- STATEMENTS OF OPERATIONS DATA
YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 1998 1999 2000 2001 2002 -------- -------- -------- -------- -------- (in thousands except per share amounts) Revenues: .................................... Licensing fees ............................. $ 10,000 $ -- $ 2,115 $ 2,162 $ 4,228 Product royalties .......................... 163 242 164 58 -- Research and development grants ............ -- -- 72 115 315 Interest income ............................ 3,205 2,170 2,239 1,526 711 -------- -------- -------- -------- -------- Total revenues .......................... 13,368 2,412 4,590 3,861 5,254 Expenses: Research and development ................... 22,438 12,180 4,495 3,028 6,420 General and administrative ................. 3,211 3,249 2,796 1,672 2,716 Interest expense and amortization of intangibles .............. 3 8 -- -- -- -------- -------- -------- -------- -------- Total expenses ......................... 25,652 15,437 7,291 4,700 9,136 -------- -------- -------- -------- -------- Loss from continuing operations .............. (12,284) (13,025) (2,701) (839) (3,882) Income (loss) from discontinued operations ... (32) 59 -- -- -- Gain on disposal ............................. -- 1,014 -- -- -- -------- -------- -------- -------- -------- Net loss before cumulative effect of change in accounting principle ............. (12,316) (11,952) (2,701) (839) (3,882) Cumulative effect of change in accounting principle ....................... -- -- (8,454) -- -- -------- -------- -------- -------- -------- Net loss ..................................... $(12,316) $(11,952) $(11,155) $ (839) $ (3,882) ======== ======== ======== ======== ======== Income (loss) per share - basic and diluted: Loss from continuing operations ................................. $ (1.09) $ (1.16) $ (0.24) $ (0.07) $ (0.34) Income (loss) from discontinued operations ... -- 0.01 -- -- -- Gain on disposal ............................. -- 0.09 -- -- -- -------- -------- -------- -------- -------- Net loss before cumulative effect of change in accounting principle ............. (1.09) (1.06) (0.24) (0.07) (0.34) Cumulative effect of change in accounting principle ....................... -- -- (0.75) -- -- -------- -------- -------- -------- -------- Net loss per share(1) ........................ $ (1.09) $ (1.06) $ (0.99) $ (0.07) $ (0.34) ======== ======== ======== ======== ======== Shares used in income (loss) per ............. share calculation .......................... 11,275 11,244 11,303 11,333 11,412 Pro forma amounts assuming the accounting change is applied retroactively: Net loss................................. $(13,088) $ (9,838) ======== ======== Net loss per share(1).................... $(1.16) $ (0.87) ======== ========
-18-
YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 1998 1999 2000 2001 2002 -------- -------- -------- -------- -------- (in thousands) BALANCE SHEET DATA: Cash, cash equivalents and marketable securities.................................. $ 51,640 $ 39,136 $ 32,951 $ 30,056 $ 25,138 Total assets.................................. 58,642 46,287 40,374 36,914 27,370 Long-term debt................................ -- -- -- -- -- Deficit accumulated during the development stage........................... (51,900) (63,852) (75,007) (75,846) (79,728) Total stockholders' equity.................... 53,387 41,750 31,060 30,569 26,851
---------------------- (1) See "Note 2. Summary of Significant Accounting Policies" of Notes to Consolidated Financial Statements for a description of the computation of loss per share. -19- 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, the execution of collaborative agreements, success at existing and future research and development programs and the outcome of approval of the Company's 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. Critical Accounting Policies and the Use of Estimates The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates. The items in our financial statements requiring significant estimates and judgments are as follows: o The Company maintains an inventory of bulk phentolamine which is the active ingredient in VASOMAX(R), the Company's oral treatment for MED. Due to the termination of the Schering-Plough Agreements in July 2002, the future uncertainty surrounding the VASOMAX(R) product and the fact that the Company is not presently committing resources toward the approval of VASOMAX(R), the Company expensed both its bulk phentolamine inventory previously valued at $4.4 million and its patent estate valued at approximately $1.0 million in the quarter ended June 30, 2002. o Management determines the appropriate short and long-term classification of investments in debt and equity securities at the time of purchase and re-evaluates such designation as of each subsequent balance sheet date. Securities for which the Company has the ability and intent to hold to maturity are recorded at amortized cost in the Company's consolidated balance sheets, which approximates fair value. Securities classified as "trading securities" are recorded at fair value. Gains and losses on trading securities, realized and unrealized, are included in earnings and are calculated using the specific identification method. The Company holds no securities classified as "available for sale." 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. Marketable securities as of December 31, 2002 were all classified as trading securities and consist of only short term investments totaling $16.5 million. o We are currently involved in certain legal proceedings as discussed in the "Commitments and Contingencies" in the Notes to Consolidated Financial Statements. We do not believe these legal proceedings will have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, were an unfavorable ruling to occur in any quarterly period, there exists the possibility of a material impact on the operating results of that period. o During 2000, the Company adopted U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") which requires up-front, non-refundable license fees to be deferred and recognized over the performance period. In situations where the Company receives payment in advance of the performance of services, such amounts are deferred and recognized as revenue as the related services are performed. The Company recognizes revenue from non-refundable, up-front license and milestone payments, not specifically tied to a separate earnings process, ratably over the performance period of the agreement. When payments are specifically tied to a separate earnings process, -20- revenue is recognized when earned. Prior to January 1, 2000, the Company had recognized revenue from non-refundable fees when the Company had no obligations to refund the fees under any circumstances, and there were no additional contractual services to be provided or costs to be incurred by the Company in connection with the non-refundable fees. The cumulative effect of adopting SAB 101 at January 1, 2000 resulted in a one-time, non-cash charge of $8.5 million, with a corresponding increase to deferred revenue that will be recognized in future periods. The $8.5 million represents portions of 1997 and 1998 payments received from Schering-Plough in consideration for the exclusive license of the Company's VASOMAX(R) product for the treatment of MED. For the years ended December 31, 2002 and 2001, the Company recognized $4.2 million and $2.2 million, respectively, of licensing fees revenue that was included in the cumulative effect adjustment as of January 1, 2000. Due to the mutual termination of the Schering-Plough Agreements in July 2002, the Company recognized the remaining $3.2 million of deferred revenue in the quarter ended September 30, 2002. o Research and development ("R&D") 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. Expenses include salaries and related employee costs, insurance coverage for clinical trials and product sales, contracted research and consulting fees, facility costs and direct costs associated with specific projects. The Company expenses R&D costs in the period they are incurred. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and also specifies the criteria for the recognition of intangible assets separately from goodwill. Under the new rules, goodwill will no longer be amortized but will be subject to an impairment test at least annually. Separately identified and recognized intangible assets resulting from business combinations completed before July 1, 2001 that do not meet the new criteria for separate recognition of intangible assets will be subsumed in goodwill upon adoption. Other intangible assets that meet the new criteria will continue to be amortized over their useful lives. The Company adopted the new rules on accounting for goodwill and other intangible assets on January 1, 2002. The adoption of SFAS Nos. 141 and 142 had no impact on the Company's financial statements at transition. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The primary objectives of SFAS No. 144 are to develop one accounting model based on the framework established in SFAS No. 121 for long-lived assets to be disposed of by sale, and to address significant implementation issues. The Company's adoption of SFAS No. 144 on January 1, 2002 had no material impact on our financial position and results of operations. In November 2002, FASB issued Interpretation, or FIN, No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for the financial statements of interim or annual periods ending after December 15, 2002. Our adoption of FIN 45 will not have a material impact on our results of operations and financial position. In December 2002, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." This statement amends SFAS 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based accounting for employee compensation and the effect of the method used on reported results. The Company is currently evaluating whether to adopt the fair value based method. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 requires that unconsolidated variable interest entities be consolidated by their primary beneficiaries. A primary beneficiary is the party that absorbs a majority of the entity's expected losses or residual benefits. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003 and to existing variable interest entities in the periods beginning after June 15, 2003. Our adoption of FIN No. 46 will not have a material impact on our results of operations and financial position. OVERVIEW Zonagen, Inc. ("Zonagen" or the "Company") was organized on August 20, 1987 and is a development stage company. The Company is engaged in the development of pharmaceutical products that address diseases and conditions associated with the human reproductive system. From our inception through December 31, 2002, we have been primarily engaged in research and development and clinical development. -21- Due to the April 2002 withdrawal of the Marketing Authorization Application ("MAA") for our VASOMAX(R) product in the United Kingdom by Schering-Plough Corporation ("Schering-Plough"), the previous worldwide licensee of VASOMAX(R), the subsequent July 2002 mutual termination of the license agreements with Schering-Plough and the continued uncertainty relating to our phentolamine-based products, we resumed our search that was previously terminated in January 2002 for strategic alternatives for the redeployment of our assets in an attempt to maximize shareholder value. This search resulted in the signing of a merger agreement on October 30, 2002, with Lavipharm Corp. ("Lavipharm"). The merger agreement with Lavipharm was subsequently terminated on March 27, 2003 as a result of Nasdaq's determination that the proposed merger would be deemed by Nasdaq as a reverse merger along with other considerations. This has led to the Company's resumption of certain of its clinical development activities, which had been temporarily delayed pending possible completion of the merger. The Company also intends to resume its search for strategic alternatives. Following the April 2002 withdrawal of the MAA for VASOMAX(R) in the United Kingdom by Schering-Plough, the Company continued scaling back internal research and development spending activities to maintain Zonagen's cash reserves for future redeployment. During 2002 the Company continued to focus its research efforts on three Small Business Innovative Research ("SBIR") grants that the Company received during 2002 and continued limited development of the Company's research projects. The Company is currently performing research under a Phase II $836,441 SBIR grant which is being utilized to develop a new compound which is a selective progesterone receptor modulator ("SPRM's") as an oral treatment for endometriosis. This compound was licensed by Zonagen in 1999 from the National Institutes of Health ("NIH"). In addition, the Company is performing research in the area of breast cancer under a Phase I $108,351 grant. The funding under these two grants is anticipated to be depleted in mid 2003 while the third SBIR grant totaling $98,625, was depleted early in the first quarter of 2003. Zonagen has incurred several delays relating to the regulatory approval of its lead product, VASOMAX(R). In August 1999, the FDA placed our phentolamine-based products on clinical hold in the U.S. based on a finding of brown fat proliferations in a two-year rat study. In May 2000, the FDA upgraded the status of VASOMAX(R) to a partial clinical hold pending additional animal data and in October 2000, allowed Zonagen to conduct a mechanistic study to address the FDA's concerns. In July 2002, the Company submitted the final results from the one year mechanistic study to the FDA. In October 2002, our representatives, including outside consultants, met with the full Cancer Assessment Committee of the FDA. After this meeting, the FDA informed Zonagen that they would require the Company to conduct another two-year rat study before they would consider lifting the partial clinical hold. At this time the Company does not intend to run this additional study. There can be no assurance that even if the Company were to complete this additional study that the FDA would remove its partial clinical hold on phentolamine. Due to the future uncertainty surrounding the VASOMAX(R) product and the fact that the Company is not presently committing resources toward the approval of VASOMAX(R), Zonagen expensed both its bulk phentolamine inventory previously valued at $4.4 million and its VASOMAX(R) patent estate previously valued at approximately $1.0 million in the three-month period ended June 30, 2002. In addition, in the quarter ended September 30, 2002, the Company recognized the remaining $3.2 million of deferred revenue relating to the mutually terminated license agreements with Schering-Plough. As of June 30, 2002, the Company had a remaining obligation to Schering-Plough of approximately $1.3 million. Due to the termination of the license agreements with Schering-Plough in July of 2002, the $1.3 million payable was forgiven and was reduced to zero on our balance sheet in the three-month period ended September 30, 2002. Due to this reduction in accounts payable, research and development expenses were offset by the same amount. See Note 10 - License, Research and Development Agreements in the notes to the consolidated financial statements for the year ended December 31, 2002 in the financial pages of this Form 10-K for additional information regarding the termination of the license agreements with Schering-Plough. On November 8, 2002, the Company completed a $1.0 million bridge loan to Lavipharm that was repaid with interest on April 9, 2003. -22- The Company has experienced negative cash flows from operations since inception and has funded its activities to date primarily from equity financings and corporate collaborations. If the Company were to continue its operations it would require substantial funds for research and development, including preclinical studies and clinical trials of our product candidates, and to commence sales and marketing efforts if appropriate, if the FDA or other regulatory approvals are obtained. The Company believes that its existing capital resources under its current operating plan will be sufficient to fund the Company's operations through at least the end of 2005. There can be no assurance that changes in our current strategic plans or other events will not result in accelerated or unexpected expenditures. Zonagen's results of operations may vary significantly from year to year and quarter to quarter, and depend, among other factors, on the Company's ability to find new strategic alternatives, the regulatory approval process in the United States and other foreign jurisdictions and the signing of new licenses and product development agreements. The timing of our revenues may not match the timing of our associated product development expenses. To date, research and development expenses have generally exceeded revenue in any particular period and/or fiscal year. Due to the Company's decision to redeploy its assets, the Company currently has one full-time employee engaged in research and development. The Company is primarily performing research and development activities toward its two active SBIR grants which are expected to be depleted by mid 2003 and the Company is currently committing limited resources toward certain other product candidates. As of December 31, 2002, the Company had an accumulated deficit of $79.7 million. Losses have resulted principally from costs incurred conducting clinical trials for VASOMAX(R) and a female sexual dysfunction product, 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. Organization and Operations" of Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS During 2000, the Company adopted U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") which requires up-front, non-refundable license fees to be deferred and recognized over the performance period. In situations where the Company receives payment in advance of the performance of services, such amounts are deferred and recognized as revenue as the related services are performed. The Company recognizes revenue from non-refundable, up-front license and milestone payments, not specifically tied to a separate earnings process, ratably over the performance period of the agreement. When payments are specifically tied to a separate earnings process, revenue is recognized when earned. Prior to January 1, 2000, the Company had recognized revenue from non-refundable fees when the Company had no obligations to refund the fees under any circumstances, and there were no additional contractual services to be provided or costs to be incurred by the Company in connection with the non-refundable fees. The cumulative effect of adopting SAB 101 at January 1, 2000 resulted in a one-time, non-cash charge of $8.5 million, with a corresponding increase to deferred revenue that will be recognized in future periods. The $8.5 million represents portions of 1997 and 1998 payments received from Schering-Plough in consideration for the exclusive license of the Company's VASOMAX(R) product for the treatment of MED. For the years ended December 31, 2002 and 2001, the Company recognized $4.2 million and $2.2 million, respectively, in licensing fee revenue that was included in the cumulative effect adjustment as of January 1, 2000. Due to the termination of the Schering-Plough Agreements in July 2002, the Company recognized the remaining $3.2 million of deferred revenue in the quarter ended September 30, 2002. -23- Financial statements prior to the year ended December 31, 2000, have not been restated to apply SAB 101 retroactively; however, the pro forma amounts included in the consolidated statements of operations show the net loss and per share net loss assuming the Company had adopted SAB 101 in January 1999. Comparison of Years Ended December 31, 2002 and 2001 Revenues. Total revenues for the year ended 2002 were $5.3 million as compared to $3.9 million for the year ended 2001. Licensing fees for the year ended 2002 were $4.2 million as compared to $2.2 million in the prior year. Due to the termination of the Schering-Plough Agreements in July 2002, the Company recognized the remaining $3.2 million of deferred revenue in the quarter ended September 30, 2002. Research and development grants for the year 2002 were $315,000 as compared to $115,000 in 2001 relating to the Company's SBIR grants. The Company did not receive any milestone payments from Schering-Plough in either 2002 or 2001 for VASOMAX(R). Product royalties from sales of VASOMAX(R) in Latin America were zero in 2002 as compared to $58,000 in 2001. Due to the termination of the Schering-Plough Agreements the Company does not expect to receive any royalties in the near future. Interest income decreased 53% to $711,000 in 2002 as compared with $1.5 million in 2001 primarily due to a reduction in interest rates and lower cash balances. Research and Development Expenses. Research and development ("R&D") expenses include contracted research, regulatory affairs activities and general research and development expenses. Following the April 2002 withdrawal of the MAA for VASOMAX(R) in the United Kingdom by Schering-Plough, the Company continued scaling back R&D spending activities to maintain our cash reserves for future redeployment. R&D expenses increased 112% to $6.4 million in 2002, which included net non-cash expenses of $4.1 million related to the Company's VASOMAX(R) product, as compared with $3.0 million in 2001. Due to the termination of the Schering-Plough Agreements in July 2002, the future uncertainty surrounding the VASOMAX(R) product and the fact that the Company is not presently committing resources toward the approval of VASOMAX(R), the Company wrote-off of non-cash expenses for its bulk phentolamine inventory previously valued at $4.4 million and its VASOMAX(R) patent estate previously valued at approximately $1.0 million in the quarter ended June 30, 2002 and in July 2002 a liability due to Schering-Plough of $1.3 million relating to a prior joint clinical development program for VASOMAX(R) was forgiven and taken as a reduction to R&D expenses. In addition, R&D expenses in the quarter ended June 30, 2002 were reduced by $188,000 due to a reimbursement of prior clinical expenses for VASOMAX(R) that was received from a clinical research organization after a reconciliation was completed comparing actual expenses to payments made by the Company. R&D expenses excluding the four adjustments listed above would have been $2.5 million for the year ended December 31, 2002. General and Administrative Expenses. General and administrative ("G&A") expenses increased 62% to $2.7 million in 2002 as compared with $1.7 million in 2001. The increase in expenses is primarily due to the increase in costs associated with potential strategic alternative opportunities, increase in insurance rates and personnel expenses offset by a discontinuation of quarterly amortization expenses relating to a non-cash compensation charge for stock options previously issued in December 1996 that was fully amortized by December 31, 2001. Comparison of Years Ended December 31, 2001 and 2000 Revenues. Total revenues for the year ended 2001 were $3.9 million as compared to $4.6 million for the year ended 2000. Licensing fees for the year ended 2001 were $2.2 million of as compared to $2.1 million for the year ended 2000. Research and development grants for the year 2001 were $115,000 as compared to $72,000 in 2000 relating to the Company's SBIR grants. The Company did not receive any milestone payments from Schering-Plough in either 2001 or 2000 for VASOMAX(R). Product royalties from sales of VASOMAX(R) in Latin America were approximately $58,000 in 2001 as compared to $164,000 in 2000. Under the terms of the Schering Agreements, the Company received quarterly royalty payments based on net product sales by Schering-Plough. These quarterly payments have lagged current quarter sales by up to sixty days. Interest income decreased 32% to $1.5 million in 2001 as compared with $2.2 million in 2000 primarily due to a -24- reduction in interest rates and lower cash balances. 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 33% to $3.0 million in 2001 as compared with $4.5 million in 2000. This decrease was inclusive of a charge of $365,000 taken in the fourth quarter ended December 31, 2001 for previously capitalized patents relating to the Company's zona pellucida immuno-contraceptive vaccine technology. The Company had previously announced in September 2001, that it had suspended further research on the technology following inconsistent results from an ongoing baboon study. Due to these results, the option agreement with Wyeth-Ayerst Laboratories, a division of American Home Products, was terminated. During the fourth quarter of 2001, the Company attempted unsuccessfully to license the technology to a third party. The Company proceeded to determine if an impairment of the capitalized patents had occurred. The valuation technique used by Zonagen to determine fair value was the present value of estimated future cash flows using a discount rate commensurate with the risks involved. This resulted in an impairment of $365,000. The overall decrease in R&D expenses was due primarily to the July 2000 cost reduction program involving a significant R&D employee headcount reduction, which resulted in reduced R&D activities and other cost cutting measures. In addition, as a result of the partial clinical hold surrounding the Company's phentolamine-based products in the U.S., the Company had substantially reduced all clinical development of these products, until a satisfactory resolution could be reached with the FDA. During the fourth quarter of 2000 the Company initiated a mechanistic study to address the FDA's concerns. The Company incurred approximately $1.0 million of contracted research expenses in 2001 primarily for the VASOMAX(R) mechanistic study and other various clinical development programs as compared to approximately $1.6 million in 2000 which was primarily additional clinical development of VASOMAX(R) and a female sexual dysfunction product, as well as various other clinical development programs. General and Administrative Expenses. General and administrative ("G&A") expenses decreased 39% to $1.7 million in 2001 as compared with $2.8 million in 2000. This reduction in expenses was primarily due the July 2000 reduction in employee headcount and cost reduction program. In July 2000, due to previous delays regarding VASOMAX(R), the Company implemented a cost reduction program involving a significant R&D and G&A employee headcount reduction and other cost cutting measures. The Company released eighteen full-time employees, including some members of upper management, which resulted in additional expenses of approximately $500,000 in the third quarter ended September 30, 2000. These expenses include an early pay-out from a stay bonus program (implemented after the reduction in staff that occurred in September 1999), severance packages and other related expenses. The July 2000 employee reduction and cost reduction program had a greater impact during the year 2001 as compared to the year 2000. 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 million in additional payments relating to the completion of certain developmental milestones. 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. The Company had cash, cash equivalents and marketable securities of approximately $25.1 million at December 31, 2002 as compared to $30.1 million at December 31, 2001. Excluding maturities and purchases of marketable securities, net cash of approximately $3.6 million, $2.7 million, and $6.0 million was used in operating activities during 2002, 2001, and 2000, respectively. The increased use of cash for the year ended December 31, 2002 was primarily due to an increase in expenses associated with potential strategic alternative opportunities and an increase in insurance rates and personnel expenses. In addition, there continued to be a reduction in contracted clinical costs associated with the development of VASOMAX(R) and the Company's other phentolamine-based products due to the 1999 U.S. clinical hold placed on those products. The Company spent approximately $761,000 in connection with its clinical development programs during 2002 as compared to approximately $1.0 million in 2001 and $1.6 million in 2000. -25- The Company has had losses since inception and, therefore, has not been subject to federal income taxes. The Company has accumulated approximately $3.0 million of research and development tax credits. As of December 31, 2002 and 2001, the Company had approximately $78.9 million and $67.5 million, respectively, of net operating loss ("NOL") carry-forwards for federal income tax purposes. Additionally, if not utilized, approximately $289,000 of NOLs, and approximately $34,000 of research and development tax credits will begin to expire in the year 2003. The Company has experienced negative cash flows from operations since inception and has funded its activities to date primarily from equity financings and corporate collaborations. If the Company were to continue its operations it would require substantial funds for research and development, including preclinical studies and clinical trials of our product candidates, and to commence sales and marketing efforts if appropriate, if the FDA or other regulatory approvals are obtained. The Company believes that its existing capital resources under its current operating plan will be sufficient to fund the Company's operations through at least the end of 2005. There can be no assurance that changes in our current strategic plans or other events will not result in accelerated or unexpected expenditures. The Company's capital requirements will depend on many factors, including the costs and timing of seeking regulatory approvals of the Company's products; the problems, delays, expenses and complications frequently encountered by development stage companies; the progress of the Company's clinical and preclinical activities; the costs associated with any future collaborative research, manufacturing, marketing or other funding arrangements; the costs associated with removing the partial clinical hold of the Company's phentolamine based 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 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 the Company is successful in obtaining additional financing, the terms of such financing may have the effect of diluting or adversely affecting the holdings or the rights of the holders of the Company's common stock. ITEM 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 On June 18, 2002, the Company dismissed Arthur Andersen LLP ("Arthur Andersen") as its independent public accountants, and on July 10, 2002, the Company retained PricewaterhouseCoopers LLP as its independent accountants. Arthur Andersen's reports on Zonagen's financial statements for each of the years ended December 31, 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the fiscal year ended December 31, 2001 and through the interim period between December 31, 2001 and the date of Arthur Andersen's termination, there were no disagreements between the Company and Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure of auditing scope or procedure which, if not resolved to Arthur Andersen's satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their report for such years; and there were no reportable events as defined in Item -26- 304(a)(2) of Regulation S-K. During the fiscal year ended December 31, 2001 and through the date of the engagement of PricewaterhouseCoopers LLP, the Company did not consult PricewaterhouseCoopers LLP regarding any of the items described in Item 304(a)(2) of Regulation S-K. -27- 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, 2002. 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. 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, 2002. 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, 2002. 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, 2002. ITEM 14. CONTROLS AND PROCEDURES The Company's chief executive officer and chief financial officer have evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) and Rule 15d-14(c) under the Exchange Act) as of December 31, 2002 and concluded that those disclosure controls and procedures are effective. There have been no changes in the Company's internal controls or in other factors known to the Company that could significantly affect these controls subsequent to their evaluation, nor any corrective actions with regards to significant deficiencies and material weaknesses. While the Company believes that its existing disclosure controls and procedures have been effective to accomplish the objectives, the Company intends to continue to examine, refine and formalize its disclosures and procedures and to monitor ongoing developments in this area. -28- PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents Filed as a Part of this Report 1. Financial Statements
FINANCIAL STATEMENTS PAGE -------------------- ---- Report of Independent Accountants....................................................F-1 Report of Independent Public Accountants.............................................F-2 Consolidated Balance Sheets as of December 31, 2002 and 2001.........................F-3 Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000 and (unaudited) from Inception (August 20, 1987) through December 31, 2002.......................F-4 Consolidated Statement of Stockholders' Equity ......................................F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 and (unaudited) from Inception (August 20, 1987) through December 31, 2002.....................................F-10 Notes to Consolidated Financial Statements..........................................F-11
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.
EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT -------------- ------------------------- 3.1(a) -- 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. 3.1(b) -- Certificate of Designation of Series One Junior Participating Preferred Stock dated September 2, 1999. Exhibit A to Exhibit 4.1 to the Company's Registration Statement on Form 8-A as filed with the Commission on September 3, 1999 (the "Rights Plan Registration Statement"), is incorporated herein by reference. 3.2 -- Restated Bylaws of the Company. Exhibit 3.4 to the 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 Registration Statement is incorporated herein by reference. 4.2 -- Rights Agreement dated September 1, 1999 between the Company and Computershare Investor Services LLC (as successor in interest to Harris Trust & Savings Bank), as Rights Agent. Exhibit 4.1 to the Rights Plan Registration Statement is incorporated herein by reference. 4.3 -- First Amendment to Rights Agreement, dated as of September 6, 2002, between the Company, Harris Trust & Savings Bank and Computershare Investor Services LLC. Exhibit 4.3 to Amendment No. 1 to the Rights Plan Registration Statement on Form 8-A/A as filed with the Commission on September 11, 2002 is incorporated herein by reference. 4.4 -- Second Amendment to Rights Agreement, dated as of October 30, 2002, between the Company and Computershare Investor Services LLC. Exhibit 4.4 to Amendment No. 2 to the Rights Plan
-29-
EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT -------------- ------------------------- Registration Statement on Form 8-A/A as filed with the Commission on October 31, 2002 is incorporated herein by reference. 4.5 -- Form of Rights Certificate. Exhibit B to Exhibit 4.1 to the Rights Plan Registration Statement is incorporated herein by reference. 10.1+ -- Amended and Restated 1993 Employee and Consultant Stock Option Plan. Exhibit 10.3 to the Registration Statement is incorporated herein by reference. 10.2+ -- First Amendment to the Zonagen, Inc. Amended and Restated 1993 Stock Option Plan. Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999 Form 10-K") is incorporated herein by reference. 10.3+ -- 1996 Non-Employee 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. 10.4+ -- 2000 Non-Employee Directors' Stock Option Plan. Appendix B to the Company's Definitive Proxy Statement filed on April 26, 2000 is incorporated herein by reference. 10.5+ -- First Amendment to the Zonagen, Inc. 2000 Non-Employee Directors' Stock Option Plan. Exhibit 10.21 to the 2000 Form 10-K is incorporated herein by reference. 10.6* -- Second Amendment to 2000 Non-Employee Directors' Stock Option Plan. 10.7 -- Lease Agreement dated March 22, 1990, between the Company and The Woodlands Equity Partnership-89. Exhibit 10.4 to the Registration Statement is incorporated herein by reference. 10.8 -- Extension, Modification and Ratification of Lease dated May 31, 2000, between the Company and Woodlands Equity Partnership-89. Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (the "2000 Form 10-K") is incorporated herein by reference. 10.9+ -- Employment Agreement between the Company and Joseph S. Podolski. Exhibit 10.5 to the Registration Statement is incorporated herein by reference. 10.10+ -- First Amendment to Employment Agreement between the Company and Joseph S. Podolski. Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001 is incorporated herein by reference. 10.11+ -- Employment Agreement between the Company and Louis Ploth, Jr. Exhibit 10.5 to the 1999 Form 10-K is incorporated herein by reference.
30
10.12+ -- First Amendment to Employment Agreement between the Company and Louis Ploth, Jr. Exhibit 10.7 to the 2000 Form 10-K is incorporated herein by reference. 10.13 -- Assignment Agreement dated April 13, 1994, among Zonagen, Inc., Gamogen, Inc. and Dr. Adrian Zorgniotti. Exhibit 10.8 to the 2000 Form 10-K is incorporated herein by reference. 10.14 -- 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. 10.15 -- 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. 10.16++ -- Letter Agreement dated July 15, 2002 between the Company, Schering-Plough Ltd. and Schering-Plough Corporation. Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002 is incorporated herein by reference. 10.17+* -- Second Amendment to Employment Agreement between the Company and Joseph S. Podolski. 10.18+* -- Second Amendment to Employment Agreement between the Company and Louis Ploth, Jr. 23.1* -- Consent of PricewaterhouseCoopers LLP 23.2* -- Information Regarding Consent of Arthur Andersen LLP 99.1* -- Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer) 99.2* -- Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
----------------------- * 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 The Company filed a Current Report on Form 8-K dated October 31, 2002 reporting an event under Item 5. 31 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: April 10, 2003
SIGNATURE TITLE DATE /s/ Joseph S. Podolski President, Chief Executive Officer April 10, 2003 --------------------------------- and Director Joseph S. Podolski (Principal Executive Officer) /s/ Louis Ploth, Jr. Chief Financial Officer, VP Business April 10, 2003 --------------------------------- Development and Secretary Louis Ploth, Jr. (Principal Financial Officer and Principal Accounting Officer) /s/ Martin P. Sutter Chairman of the Board of Directors April 10, 2003 --------------------------------- Martin P. Sutter /s/ Steven Blasnik Director April 10, 2003 --------------------------------- Steven Blasnik /s/ Timothy McInerney Director April 10, 2003 --------------------------------- Timothy McInerney /s/ Lloyd M. Bentsen, III Director April 10, 2003 --------------------------------- Lloyd M. Bentsen, III
-32- CERTIFICATIONS I, Joseph S. Podolski, certify that: 1. I have reviewed this annual report on Form 10-K of Zonagen, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 10, 2003 By: /s/ Joseph S. Podolski ------------------------------------- Joseph S. Podolski President and Chief Executive Officer (Principal Executive Officer) -33- I, Louis Ploth, Jr., certify that: 1. I have reviewed this annual report on Form 10-K of Zonagen, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 10, 2003 By: /s/ Louis Ploth, Jr. -------------------------------------------- Louis Ploth, Jr. Vice President, Business Development and Chief Financial Officer (Principal Financial and Accounting Officer) -34- REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of Zonagen, Inc.: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, stockholders' equity, and cash flows present fairly, in all material respects, the financial position of Zonagen, Inc., and subsidiaries (a development stage company) at December 31, 2002 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. 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 audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The financial statements of Zonagen, Inc. as of December 31, 2001, and for each of the two years in the period ended December 31, 2001, were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements and included an explanatory paragraph that described the change in accounting described in Note 2 to the financial statements in their report dated February 6, 2002. PricewaterhouseCoopers LLP Houston, Texas April 9, 2003 F-1 THIS REPORT IS A COPY OF THE REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP, AND IT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. 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, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As explained in Note 2 to the consolidated financial statements, effective January 1, 2000, the Company changed its method of accounting for revenue recognition. ARTHUR ANDERSEN LLP Houston, Texas February 6, 2002 F-2 ZONAGEN, INC. AND SUBSIDIARY (A development stage company) CONSOLIDATED BALANCE SHEETS (in thousands except share amounts)
DECEMBER 31, DECEMBER 31, 2002 2001 ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 8,683 $ 1,521 Marketable securities 16,455 28,535 Note receivable 1,000 -- Product inventory -- 4,417 Prepaid expenses and other current assets 532 787 ------------ ------------ Total current assets 26,670 35,260 LAB EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS, net 191 340 OTHER ASSETS, net 509 1,314 ------------ ------------ Total assets $ 27,370 $ 36,914 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 86 $ 1,723 Accrued expenses 433 394 Deferred revenue - short term -- 2,114 ------------ ------------ Total current liabilities 519 4,231 ------------ ------------ DEFERRED REVENUE - LONG TERM -- 2,114 COMMITMENTS & CONTINGENCIES STOCKHOLDERS' EQUITY Undesignated Preferred Stock, $.001 par value, 5,000,000 shares authorized, none issued and outstanding -- -- Common Stock, $.001 par value, 20,000,000 shares authorized, 11,918,177 and 11,765,516 shares issued, respectively; 11,502,877 and 11,350,216 shares outstanding, respectively 12 12 Additional paid-in capital 114,051 113,898 Deferred compensation -- (11) Cost of treasury stock, 415,300 shares (7,484) (7,484) Deficit accumulated during the development stage (79,728) (75,846) ------------ ------------ Total stockholders' equity 26,851 30,569 ------------ ------------ Total liabilities and stockholders' equity $ 27,370 $ 36,914 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 ZONAGEN, INC. AND SUBSIDIARY (A development stage company) CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts)
FROM INCEPTION (AUGUST 20, 1987) FOR THE YEAR ENDED DECEMBER 31, THROUGH ------------------------------------------ DECEMBER 31, 2002 2001 2000 2002 ------------ ------------ ------------ ---------------- (unaudited) REVENUES AND OTHER INCOME Licensing fees $ 4,228 $ 2,162 $ 2,115 $ 28,755 Product royalties -- 58 164 627 Research and development grants 315 115 72 502 Interest income 711 1,526 2,239 12,704 ------------ ------------ ------------ ---------------- Total revenues and other income 5,254 3,861 4,590 42,588 ------------ ------------ ------------ ---------------- EXPENSES Research and development 6,420 3,028 4,495 89,628 General and administrative 2,716 1,672 2,796 22,957 Interest expense and amortization of intangibles -- -- -- 388 ------------ ------------ ------------ ---------------- Total expenses 9,136 4,700 7,291 112,973 ------------ ------------ ------------ ---------------- Loss from continuing operations (3,882) (839) (2,701) (70,385) Income (loss) from discontinued operations -- -- -- (1,828) Gain on disposal -- -- -- 939 ------------ ------------ ------------ ---------------- Net loss before cumulative effect of change in accounting principle (3,882) (839) (2,701) (71,274) Cumulative effect of change in accounting principle -- -- (8,454) (8,454) ------------ ------------ ------------ ---------------- NET LOSS $ (3,882) $ (839) $ (11,155) $ (79,728) ============ ============ ============ ================ INCOME (LOSS) PER SHARE - BASIC AND DILUTED: Loss from continuing operations $ (0.34) $ (0.07) $ (0.24) Income from discontinued operations -- -- -- Gain on disposal -- -- -- ------------ ------------ ------------ Net loss before cumulative effect of change in accounting principle (0.34) (0.07) (0.24) Cumulative effect of change in accounting principle -- -- (0.75) ------------ ------------ ------------ NET LOSS $ (0.34) $ (0.07) $ (0.99) ============ ============ ============ Shares used in income (loss) per share calculation: Basic 11,412 11,333 11,303 Diluted 11,412 11,333 11,303
The accompanying notes are an integral part of these consolidated financial statements. F-4 ZONAGEN, INC. AND SUBSIDIARY (A development stage company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands except share amounts)
PREFERRED STOCK COMMON STOCK ADDITIONAL --------------------------- ---------------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL ------------ ------------ ------------ ------------ ------------ 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 -- -- 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 $47 -- -- 239,933 -- 2,453 Conversion of Series A preferred stock to common stock -- -- 179,936 -- 600 Conversion of Series B preferred stock to common stock -- -- 96,013 -- 378 Conversion of Series C preferred stock to common stock -- -- 876,312 1 3,443 Conversion of Series D preferred stock to common stock -- -- 280,248 -- 599 Conversion of bridge loan to common stock -- -- 64,000 -- 256 Net Loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ DEFICIT ACCUMULATED TREASURY STOCK DURING THE TOTAL DEFERRED --------------------------- DEVELOPMENT STOCKHOLDERS' COMPENSATION SHARES AMOUNT STAGE EQUITY ------------ ------------ ------------ ------------ ------------ Exchange of common stock ($.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 -- -- -- -- 7,039 Issuance of common stock for cash and license agreement, December 9, 1993 ($10.42 per share), net of offering costs of $47 -- -- -- -- 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) ------------ ------------ ------------ ------------ ------------
(continued) F-5 ZONAGEN, INC. AND SUBSIDIARY (A development stage company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands except share amounts)
PREFERRED STOCK COMMON STOCK ADDITIONAL --------------------------- -------------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1993 (unaudited) -- $ -- 3,667,536 $ 4 $ 15,136 Deferred compensation resulting from grant of options -- -- -- -- 188 Amortization of deferred compensation -- -- -- -- -- Exercise of warrants to purchase common stock for cash, June 30, 1994 ($3.94 per share) -- -- 39,623 -- 156 Issuance of common stock for purchase of FTI, October 13, 1994 -- -- 111,111 -- 1,567 Net loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1994 -- -- 3,818,270 4 17,047 Amortization of deferred compensation -- -- -- -- -- Exercise of options to purchase common stock for cash, January and April 1995 ($.10 to $6.13 per share) -- -- 4,546 -- 14 Issuance of common stock for cash and a financing charge, March 9, 1995 -- -- 16,000 -- 76 Issuance of Series A preferred stock for cash, October 4, 1995, and October 19, 1995 ($10.00 per share), net of offering costs of $651 598,850 1 -- -- 5,336 Conversion of warrants to purchase common stock as a result of offering under antidilution clause, October 19, 1995 ($3.63 per share) -- -- -- -- -- Conversion of Series A preferred stock into common stock, November and December 1995 (94,000) -- 259,308 -- -- Net loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1995 504,850 1 4,098,124 4 22,473 Deferred compensation resulting from grant of options -- -- -- -- 86 Amortization of deferred compensation -- -- -- -- -- Exercise of warrants to purchase common stock for cash, January through December 1996 ($3.63 per share) -- -- 227,776 -- 827 Conversion of Series A preferred stock into common stock, January through November 1996 (507,563) (1) 1,396,826 2 (1) Issuance of options for services, January 12, 1996 -- -- -- -- 99 Exercise of options to purchase common stock for cash, February through November 1996 ($.001 to $5.50 per share) -- -- 23,100 -- 75 Issuance of common stock for agreement not to compete, April 13, 1996 -- -- 19,512 -- 200 Exercise of warrants to purchase Series A preferred stock under cashless exercise provision, June 5, 1996 2,713 -- -- -- -- Issuance of Series B preferred stock for cash, September 30, 1996, and October 11, 1996 ($10.00 per share), net of offering costs of $2,557 1,692,500 2 -- -- 14,366 Conversion of Series B preferred stock into common stock, November through December 1996 (177,594) -- 268,058 -- -- Net loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ DEFICIT ACCUMULATED TREASURY STOCK DURING THE TOTAL DEFERRED -------------------------- DEVELOPMENT STOCKHOLDERS' COMPENSATION SHARES AMOUNT STAGE EQUITY ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1993 (unaudited) $ -- -- $ -- $ (8,683) $ 6,457 Deferred compensation resulting from grant of options (188) -- -- -- -- Amortization of deferred compensation 38 -- -- -- 38 Exercise of warrants to purchase common stock for cash, June 30, 1994 ($3.94 per share) -- -- -- -- 156 Issuance of common stock for purchase of FTI, October 13, 1994 -- -- -- -- 1,567 Net loss -- -- -- (3,970) (3,970) ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1994 (150) -- -- (12,653) 4,248 Amortization of deferred compensation 37 -- -- -- 37 Exercise of options to purchase common stock for cash, January and April 1995 ($.10 to $6.13 per share) -- -- -- -- 14 Issuance of common stock for cash and a financing charge, March 9, 1995 -- -- -- -- 76 Issuance of Series A preferred stock for cash, October 4, 1995, and October 19, 1995 ($10.00 per share), net of offering costs of $651 -- -- -- -- 5,337 Conversion of warrants to purchase common stock as a result of offering under antidilution clause, October 19, 1995 ($3.63 per share) -- -- -- -- -- Conversion of Series A preferred stock into common stock, November and December 1995 -- -- -- -- -- Net loss -- -- -- (4,287) (4,287) ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1995 (113) -- -- (16,940) 5,425 Deferred compensation resulting from grant of options (86) -- -- -- -- Amortization of deferred compensation 54 -- -- -- 54 Exercise of warrants to purchase common stock for cash, January through December 1996 ($3.63 per share) -- -- -- -- 827 Conversion of Series A preferred stock into common stock, January through November 1996 -- -- -- -- -- Issuance of options for services, January 12, 1996 -- -- -- -- 99 Exercise of options to purchase common stock for cash, February through November 1996 ($.001 to $5.50 per share) -- -- -- -- 75 Issuance of common stock for agreement not to compete, April 13, 1996 -- -- -- -- 200 Exercise of warrants to purchase Series A preferred stock under cashless exercise provision, June 5, 1996 -- -- -- -- -- Issuance of Series B preferred stock for cash, September 30, 1996, and October 11, 1996 ($10.00 per share), net of offering costs of $2,557 -- -- -- -- 14,368 Conversion of Series B preferred stock into common stock, November through December 1996 -- -- -- -- -- Net loss -- -- -- (9,470) (9,470) ------------ ------------ ------------ ------------ ------------
(continued) F-6 ZONAGEN, INC. AND SUBSIDIARY (A development stage company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands except share amounts)
PREFERRED STOCK COMMON STOCK ADDITIONAL --------------------------- -------------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1996 1,514,906 $ 2 6,033,396 $ 6 $ 38,125 Deferred compensation resulting from grant of options -- -- -- -- 2,110 Amortization of deferred compensation -- -- -- -- -- Exercise of options to purchase common stock for cash, January through December 1997 ($0.00 to $22.25 per share) -- -- 90,955 -- 522 Exercise of warrants to purchase common stock for cash, January through December 1997 ($3.63 and $3.07 per share) -- -- 22,368 -- 75 Issuance of common stock for a cashless exercise of Series A preferred stock warrants, February through September 1997 -- -- 81,294 -- -- Exercise of Series A preferred stock warrants to purchase common stock for cash, April 1997 ($11.00 per share) -- -- 818 -- 3 Issuance of common stock for a cashless exercise of Series B preferred stock warrants, April through November 1997 -- -- 88,223 -- -- Exercise of Series B preferred stock warrants to purchase common stock for cash, April through July 1997 ($11.00 per share) -- -- 17,169 -- 125 Issuance of common stock as final purchase price for acquisition of FTI, January 31, 1997 ($9.833 per share) -- -- 305,095 1 -- Issuance of common stock as final debt payment on FTI acquisition, January 31, 1997 ($9.833 per share) -- -- 19,842 -- 94 Conversion of Series B preferred stock into common stock, January through October 1997 (1,514,906) (2) 2,295,263 2 (1) Issuance of common stock for cash, July 25, 1997 ($30.00 per share), net of offering costs of $5,439 -- -- 2,587,500 3 72,183 Purchase of treasury stock, December 1997 -- -- -- -- -- Net loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ DEFICIT ACCUMULATED TREASURY STOCK DURING THE TOTAL DEFERRED -------------------------- DEVELOPMENT STOCKHOLDERS' COMPENSATION SHARES AMOUNT STAGE EQUITY ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1996 $ (145) -- $ -- $ (26,410) $ 11,578 Deferred compensation resulting from grant of options (2,110) -- -- -- -- Amortization of deferred compensation 854 -- -- -- 854 Exercise of options to purchase common stock for cash, January through December 1997 ($0.00 to $22.25 per share) -- -- -- -- 522 Exercise of warrants to purchase common stock for cash, January through December 1997 ($3.63 and $3.07 per share) -- -- -- -- 75 Issuance of common stock for a cashless exercise of Series A preferred stock warrants, February through September 1997 -- -- -- -- -- Exercise of Series A preferred stock warrants to purchase common stock for cash, April 1997 ($11.00 per share) -- -- -- -- 3 Issuance of common stock for a cashless exercise of Series B preferred stock warrants, April through November 1997 -- -- -- -- -- Exercise of Series B preferred stock warrants to purchase common stock for cash, April through July 1997 ($11.00 per share) -- -- -- -- 125 Issuance of common stock as final purchase price for acquisition of FTI, January 31, 1997 ($9.833 per share) -- -- -- -- 1 Issuance of common stock as final debt payment on FTI acquisition, January 31, 1997 ($9.833 per share) -- -- -- -- 94 Conversion of Series B preferred stock into common stock, January through October 1997 -- -- -- -- (1) Issuance of common stock for cash, July 25, 1997 ($30.00 per share), net of offering costs of $5,439 -- -- -- -- 72,186 Purchase of treasury stock, December 1997 -- 61,500 (1,287) -- (1,287) Net loss -- -- -- (13,174) (13,174) ------------ ------------ ------------ ------------ ------------
(continued) F-7 ZONAGEN, INC. AND SUBSIDIARY (A development stage company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands except share amounts)
PREFERRED STOCK COMMON STOCK ADDITIONAL -------------------------- -------------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1997 -- $ -- 11,541,923 $ 12 $ 113,236 Deferred compensation resulting from grant of options -- -- -- -- 55 Amortization of deferred compensation -- -- -- -- -- Forfeiture of stock options, December 1998 -- -- -- -- (21) Exercise of options to purchase common stock for cash, January through October 1998 ($0.43 to $22.25 per share) -- -- 63,022 -- 344 Issuance of common stock for services, January 15, 1998 -- -- 5,000 -- 103 Issuance of common stock for a cashless exercise of Series B preferred stock warrants, May through July 1998 -- -- 11,195 -- -- Purchase of treasury stock, January through September 1998 ($13.00 to $20.65 per share) -- -- -- -- -- Net loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1998 -- -- 11,621,140 12 113,717 Deferred compensation resulting from grant of options -- -- -- -- (229) 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 -- 72 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 -- 4 Net loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1999 -- -- 11,681,324 12 113,564 Deferred compensation resulting from grant of options -- -- -- -- 77 Amortization of deferred compensation -- -- -- -- -- Exercise of options to purchase common stock for cash, March through September 2000 ($0.43 to $8.375 per share) -- -- 49,416 -- 112 Issuance of common stock through employee stock purchase plan for cash, December 2000 -- -- 9,379 -- 21 Issuance of common stock to Board of Director members for services, May through December 2000 -- -- 2,034 -- 6 Net loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ DEFICIT ACCUMULATED TREASURY STOCK DURING THE TOTAL DEFERRED -------------------------- DEVELOPMENT STOCKHOLDERS' COMPENSATION SHARES AMOUNT STAGE EQUITY ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1997 $ (1,401) 61,500 $ (1,287) $ (39,584) $ 70,976 Deferred compensation resulting from grant of options -- -- -- -- 55 Amortization of deferred compensation 422 -- -- -- 422 Forfeiture of stock options, December 1998 21 -- -- -- -- Exercise of options to purchase common stock for cash, January through October 1998 ($0.43 to $22.25 per share) -- -- -- -- 344 Issuance of common stock for services, January 15, 1998 -- -- -- -- 103 Issuance of common stock for a cashless exercise of Series B preferred stock warrants, May through July 1998 -- -- -- -- -- Purchase of treasury stock, January through September 1998 ($13.00 to $20.65 per share) -- 353,800 (6,197) -- (6,197) Net loss -- -- -- (12,316) (12,316) ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1998 (958) 415,300 (7,484) (51,900) 53,387 Deferred compensation resulting from grant of options 229 -- -- -- -- Amortization of deferred compensation 239 -- -- -- 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 (490) 415,300 (7,484) (63,852) 41,750 Deferred compensation resulting from grant of options (34) -- -- -- 43 Amortization of deferred compensation 283 -- -- -- 283 Exercise of options to purchase common stock for cash, March through September 2000 ($0.43 to $8.375 per share) -- -- -- -- 112 Issuance of common stock through employee stock purchase plan for cash, December 2000 -- -- -- -- 21 Issuance of common stock to Board of Director members for services, May through December 2000 -- -- -- -- 6 Net loss -- -- -- (11,155) (11,155) ------------ ------------ ------------ ------------ ------------
(continued) F-8 ZONAGEN, INC. AND SUBSIDIARY (A development stage company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands except share amounts)
PREFERRED STOCK COMMON STOCK ADDITIONAL --------------------------- -------------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 2000 -- $ -- 11,742,153 $ 12 $ 113,780 Compensation resulting from grant of options -- -- -- -- 36 Compensation resulting from extension of warrants -- -- -- -- 23 Amortization of deferred compensation -- -- -- -- -- Exercise of options to purchase common stock for cash, February through December 2001 ($0.64 to $4.00 per share) -- -- 12,242 -- 25 Issuance of common stock through employee stock purchase plan for cash, June and December 2001 -- -- 8,431 -- 25 Issuance of common stock to Board of Director members for services, February through December 2001 -- -- 2,690 -- 9 Net loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 2001 -- $ -- 11,765,516 $ 12 $ 113,898 Amortization of deferred compensation -- -- -- -- -- Exercise of options to purchase common stock for cash, January and February 2002 ($0.64 to $2.94 per share) -- -- 31,265 -- 21 Purchase common stock through employee stock purchase plan for cash, June 2002 -- -- 4,824 -- 6 Issuance of common stock to Employees -- -- 105,000 -- 111 Issuance of common stock to Board of Director members for services, March through December 2002 -- -- 11,572 -- 15 Net loss -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 2002 -- $ -- 11,918,177 $ 12 $ 114,051 ============ ============ ============ ============ ============ DEFICIT ACCUMULATED TREASURY STOCK DURING THE TOTAL DEFERRED -------------------------- DEVELOPMENT STOCKHOLDERS' COMPENSATION SHARES AMOUNT STAGE EQUITY ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 2000 $ (241) 415,300 $ (7,484) $ (75,007) $ 31,060 Compensation resulting from grant of options -- -- -- -- 36 Compensation resulting from extension of warrants -- -- -- -- 23 Amortization of deferred compensation 230 -- -- -- 230 Exercise of options to purchase common stock for cash, February through December 2001 ($0.64 to $4.00 per share) -- -- -- -- 25 Issuance of common stock through employee stock purchase plan for cash, June and December 2001 -- -- -- -- 25 Issuance of common stock to Board of Director members for services, February through December 2001 -- -- -- -- 9 Net loss -- -- -- (839) (839) ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 2001 $ (11) 415,300 $ (7,484) $ (75,846) $ 30,569 Amortization of deferred compensation 11 -- -- -- 11 Exercise of options to purchase common stock for cash, January and February 2002 ($0.64 to $2.94 per share) -- -- -- -- 21 Purchase common stock through employee stock purchase plan for cash, June 2002 -- -- -- -- 6 Issuance of common stock to Employees -- -- -- -- 111 Issuance of common stock to Board of Director members for services, March through December 2002 -- -- -- -- 15 Net loss -- -- -- (3,882) (3,882) ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 2002 $ -- 415,300 $ (7,484) $ (79,728) $ 26,851 ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-9 ZONAGEN, INC. AND SUBSIDIARY (A development stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
FROM INCEPTION (AUGUST 20, 1987) FOR THE YEAR ENDED DECEMBER 31, THROUGH -------------------------------------------- DECEMBER 31, 2002 2001 2000 2002 ------------ ------------ ------------ ---------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (3,882) $ (839) $ (11,155) $ (79,728) Gain on disposal of discontinued operations -- -- -- (939) Adjustments to reconcile net loss to net cash used in operating activities: Noncash financing costs -- -- -- 316 Noncash inventory impairment 4,417 -- -- 4,417 Noncash patent impairment 1,031 -- -- 1,031 Noncash decrease in accounts payable (1,308) -- -- (1,308) Depreciation and amortization 226 666 431 3,686 Noncash expenses related to stock-based transactions 137 298 326 2,558 Common stock issued for agreement not to compete -- -- -- 200 Series B Preferred Stock issued for consulting services -- -- -- 18 Maturities (purchase) of marketable securities 12,080 -- -- 12,080 Changes in operating assets and liabilities (net effects of purchase of businesses in 1988 and 1994): (Increase) decrease in receivables -- -- -- (199) Decrease (increase) in inventory -- 108 (522) (4,447) (Increase) decrease in prepaid expenses and other current assets 262 74 127 (222) (Decrease) increase in accounts payable and accrued expenses (290) (808) (1,612) 1,704 (Decrease) increase in deferred revenue (4,228) (2,161) 6,389 -- ------------ ------------ ------------ ---------------- Net cash provided by (used in) operating activities 8,445 (2,662) (6,016) (60,833) CASH FLOWS FROM INVESTING ACTIVITIES Maturities (purchase) of marketable securities -- 1,811 4,496 (28,723) Capital expenditures (49) (1) (57) (2,268) Purchase of technology rights and other assets (261) (188) (157) (2,206) (Increase) decrease in note receivable (1,000) -- -- (1,000) 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 FTI -- -- -- 2,250 Increase in net assets held for disposal -- -- -- (213) ------------ ------------ ------------ ---------------- Net cash provided by (used in) investing activities (1,310) 1,622 4,282 (32,019) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock 27 50 139 84,224 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 financing activities 27 50 139 101,535 ------------ ------------ ------------ ---------------- NET (DECREASE) IN CASH AND CASH EQUIVALENTS 7,162 (990) (1,595) 8,683 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,521 2,511 4,106 -- ------------ ------------ ------------ ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,683 $ 1,521 $ 2,511 $ 8,683 ============ ============ ============ ================
The accompanying notes are an integral part of these consolidated financial statements. F-10 1. ORGANIZATION AND OPERATIONS: Zonagen, Inc. ("Zonagen" or the "Company") was organized on August 20, 1987 and is a development stage company. The Company is engaged in the development of pharmaceutical products that address diseases and conditions associated with the human reproductive system. From our inception through December 31, 2002, we have been primarily engaged in research and development and clinical development. Due to the April 2002 withdrawal of the Marketing Authorization Application ("MAA") for our VASOMAX(R) product in the United Kingdom by Schering-Plough Corporation ("Schering-Plough"), the previous worldwide licensee of VASOMAX(R), the subsequent July 2002 mutual termination of the license agreements with Schering-Plough and the continued uncertainty relating to our phentolamine-based products, we resumed our search that was previously terminated in January 2002 for strategic alternatives for the redeployment of our assets in an attempt to maximize shareholder value. This search resulted in the signing of a merger agreement on October 30, 2002, with Lavipharm Corp. ("Lavipharm"). The merger agreement with Lavipharm was subsequently terminated on March 27, 2003 as a result of Nasdaq's determination that the proposed merger would be deemed by Nasdaq as a reverse merger along with other considerations. This has led to the Company's resumption of certain of its clinical development activities, which had been temporarily delayed pending possible completion of the merger. The Company also intends to resume its search for strategic alternatives. Following the April 2002 withdrawal of the MAA for VASOMAX(R) in the United Kingdom by Schering-Plough, the Company continued scaling back internal research and development spending activities to maintain Zonagen's cash reserves for future redeployment. During 2002 the Company continued to focus its research efforts on three Small Business Innovative Research ("SBIR") grants that the Company received during 2002 and continued limited development of the Company's research projects. The Company is currently performing research under a Phase II $836,441 SBIR grant which is being utilized to develop a new compound which is a selective progesterone receptor modulator ("SPRM's") as an oral treatment for endometriosis. This compound was licensed by Zonagen in 1999 from the National Institutes of Health ("NIH"). In addition, the Company is performing research in the area of breast cancer under a Phase I $108,351 grant. The funding under these two grants is anticipated to be depleted in mid 2003 while the third SBIR grant totaling $98,625, was depleted early in the first quarter of 2003. Zonagen has incurred several delays relating to the regulatory approval of its lead product, VASOMAX(R). In August 1999, the FDA placed our phentolamine-based products on clinical hold in the U.S. based on a finding of brown fat proliferations in a two-year rat study. In May 2000, the FDA upgraded the status of VASOMAX(R) to a partial clinical hold pending additional animal data and in October 2000, allowed Zonagen to conduct a mechanistic study to address the FDA's concerns. In July 2002, the Company submitted the final results from the one year mechanistic study to the FDA. In October 2002, our representatives, including outside consultants, met with the full Cancer Assessment Committee of the FDA. After this meeting, the FDA informed Zonagen that they would require the Company to conduct another two-year rat study before they would consider lifting the partial clinical hold. At this time the Company does not intend to run this additional study. There can be no assurance that even if the Company were to complete this additional study the FDA would remove its partial clinical hold on phentolamine. Due to the future uncertainty surrounding the VASOMAX(R) product and the fact that the Company is not presently committing resources toward the approval of VASOMAX(R), Zonagen expensed both its bulk phentolamine inventory previously valued at $4.4 million and its VASOMAX(R) patent estate previously valued at approximately $1.0 million in the three-month period ended June 30, 2002. In addition, in the quarter ended September 30, 2002, the Company recognized the remaining $3.2 million of deferred revenue relating to the mutually terminated license agreements with Schering-Plough. As of June 30, 2002, the Company had a remaining obligation to Schering-Plough of approximately $1.3 million. Due to the termination of the license agreements with Schering-Plough in July of 2002, the $1.3 million payable was forgiven and was reduced to zero on our balance sheet in the three-month period ended September 30, 2002. Due to this reduction in accounts payable, research and development expenses were offset by the same amount. See Note 10 - License, Research and Development Agreements in the notes to the consolidated financial statements for the year ended December 31, 2002 in the financial pages of this Form 10-K for additional information regarding the termination of the license agreements with Schering-Plough. F-11 On November 8, 2002, the Company completed a $1.0 million bridge loan to Lavipharm that was repaid with interest on April 9, 2003. As of December 31, 2002, the Company had an accumulated deficit of $79.7 million. Losses have resulted principally from costs incurred in conducting clinical trials for VASOMAX(R) and the related female sexual dysfunction product, in research and development activities related to efforts to develop our products and from the associated administrative costs required to support those efforts. The Company has experienced negative cash flows from operations since inception and has funded its activities to date primarily from equity financings and corporate collaborations. If the Company were to continue its operations it would require substantial funds for research and development, including preclinical studies and clinical trials of our product candidates, and to commence sales and marketing efforts if appropriate, if the FDA or other regulatory approvals are obtained. The Company believes that its existing capital resources under its current operating plan will be sufficient to fund the Company's operations through at least the end of 2005. There can be no assurance that changes in our current strategic plans 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 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 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. NOTE RECEIVABLE On November 8, 2002, the Company completed a $1.0 million bridge loan to Lavipharm that was repaid with interest on April 9, 2003. F-12 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 ("MED"). Due to the termination of the Schering-Plough Agreements in July 2002, the future uncertainty surrounding the VASOMAX(R) product and the fact that the Company is not presently committing resources toward the approval of VASOMAX(R), the Company wrote-off its bulk phentolamine inventory previously valued at $4.4 million in the quarter ended June 30, 2002. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets primarily consist of prepaid insurance, prepaid operating expenses and other miscellaneous assets, interest and other receivables. 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. When assets are sold or retired, the cost and accumulated depreciation are removed from the accounts and the resulting gain or loss is included in income during the period in which the transaction occurred. OTHER ASSETS Other assets consist of patent costs that are being amortized over 20 years, or the lesser of the legal or the estimated economic life of the patent. Amortization of patent costs was $35,000, $85,000 and $86,000 in 2002, 2001 and 2000, respectively. As of December 31, 2002, the Company had approximately $509,000 in capitalized patents reflected on its balance sheet. Of this amount $233,000 relate to patents for Zonagen's Selective Progesterone Receptor Modulators ("SPRM") which is being developed as an oral treatment for endometriosis through an SBIR grant; $170,000 relates to vaccine adjuvant technologies; $61,000 relates to prostate cancer vaccine technologies; and $45,000 relates to various other technologies. Due to the termination of the Schering-Plough Agreements in July 2002, the future uncertainty surrounding the VASOMAX(R) product and the fact that the Company is not presently committing resources toward the approval of VASOMAX(R), the Company wrote-off its VASOMAX(R) patent estate previously valued at approximately $1.0 million, which was net of $217,000 in accumulated amortization in the quarter ended June 30, 2002. REVENUE RECOGNITION Licensing Fees During 2000, the Company adopted U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") which requires up-front, non-refundable license fees to be deferred and recognized over the performance period. In situations where the Company receives payment in advance of the performance of services, such amounts are deferred and recognized as revenue as the related services are performed. The Company recognized revenue from non-refundable, up-front license and milestone payments, not specifically tied to a separate earnings process, ratably over the performance period of the agreement. When payments F-13 are specifically tied to a separate earnings process, revenue is recognized when earned. Prior to January 1, 2000, the Company had recognized revenue from non-refundable fees when the Company had no obligations to refund the fees under any circumstances, and there were no additional contractual services to be provided or costs to be incurred by the Company in connection with the non-refundable fees. The cumulative effect of adopting SAB 101 at January 1, 2000 resulted in a one-time, non-cash charge of $8.5 million, with a corresponding increase to deferred revenue that will be recognized in future periods. The $8.5 million represents portions of 1997 and 1998 payments received from Schering-Plough in consideration for the exclusive license of the Company's VASOMAX(R) product for the treatment of MED. For the years ended December 31, 2002 and 2001, the Company recognized $4.2 million and $2.2 million, respectively, of licensing fees revenue that was included in the cumulative effect adjustment as of January 1, 2000. Due to the termination of the Schering-Plough Agreements in July 2002, the Company recognized the remaining $3.2 million of deferred revenue in the quarter ended September 30, 2002. Product Royalties Under the terms of the Schering Agreements, the Company had received quarterly royalty payments based on net sales of VASOMAX(R) in Mexico and Brazil by Schering-Plough. The Company recognized royalty revenue when it was received. Due to the mutual termination of the Schering-Plough Agreements the Company does not expect to receive any royalties in the near future. Research and Development Grants The Company applies for research and development grants from the federal government usually in the form of Small Business Innovation Research ("SBIR") grants. When the Company is awarded one of these research and development grants it is obligated to spend grant dollars on research activities based on a budget that was submitted with the grant application. The Company typically bills the federal government on a monthly basis after it has expended its funds for the grant activities. At that time the Company recognizes research and development grant revenues. During 2002 the Company was awarded three SBIR grants totaling in excess of $1 million. RESEARCH AND DEVELOPMENT COSTS Research and development ("R&D") expenses include salaries and related employee expenses, contracted regulatory affairs activities, insurance coverage for clinical trials and product sales, contracted research and consulting fees, facility costs and internal research and development supplies. 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 loss 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. 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. STOCK-BASED COMPENSATION The Company has two stock-based compensation plans at December 31, 2002, which are described more fully in note 9. F-14 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 "Accounting for Stock-Based Compensation" 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):
DECEMBER 31, ------------------------------------ 2002 2001 2000 --------- --------- ---------- Net loss, as reported .................. $ (3,882) $ (839) $ (11,155) Add: Stock-based employee compensation expense included in reported net income, net of related tax effects ... 137 298 326 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects................... (2,175) (2,497) (2,821) Pro forma net loss ................... (5,920) (3,038) (13,650) Loss per share - Basic - as reported .................. $ (0.34) $ (0.07) $ (.99) Basic - pro forma .................... (0.52) (0.27) (1.21) Diluted - as reported ................ (0.34) (0.07) (.99) Diluted - pro forma .................. (0.52) (0.27) (1.21)
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1996, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Under SFAS No. 123, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for grants in 2002, 2001, and 2000, respectively: risk-free interest rates of 5.4%, 4.9%, and 6.2%; with no expected dividends; expected lives of 4.9, 4.7, and 6.1 years; expected volatility of 88%, 89%, and 91%. The weighted average fair value of options granted at market for 2002, 2001 and 2000 was $3.22, $2.39 and $2.85, 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and also specifies the criteria for the recognition of intangible assets separately from goodwill. Under the new rules, goodwill will no longer be amortized but will be subject to an impairment test at least annually. Separately identified and recognized intangible assets resulting from business combinations completed before July 1, 2001 that do not meet the new criteria for separate recognition of intangible assets will be subsumed in goodwill upon adoption. Other intangible assets that meet the new criteria will F-15 continue to be amortized over their useful lives. The Company adopted the new rules on accounting for goodwill and other intangible assets on January 1, 2002. The adoption of SFAS Nos. 141 and 142 had no impact on the Company's financial statements at transition. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The primary objectives of SFAS No. 144 are to develop one accounting model based on the framework established in SFAS No. 121 for long-lived assets to be disposed of by sale, and to address significant implementation issues. The Company's adoption of SFAS No. 144 on January 1, 2002 had no material impact on our financial position and results of operations. In November 2002, the FASB issued Interpretation, or FIN, No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for the financial statements of interim or annual periods ending after December 15, 2002. Our adoption of FIN 45 will not have a material impact on our results of operations and financial position. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure." This statement amends SFAS 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based accounting for employee compensation and the effect of the method used on reported results. The Company is currently evaluating whether to adopt the fair value based method. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 requires that unconsolidated variable interest entities be consolidated by their primary beneficiaries. A primary beneficiary is the party that absorbs a majority of the entity's expected losses or residual benefits. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003 and to existing variable interest entities in the periods beginning after June 15, 2003. Our adoption of FIN No. 46 will not have a material impact on our results of operations and financial position. 3. MARKETABLE SECURITIES Management determines the appropriate classification of investments in debt and equity securities at the time of purchase and re-evaluates such designation as of each subsequent balance sheet date. Securities for which the Company has the ability and intent to hold to maturity are classified as "held to maturity". Securities classified as "trading securities" are recorded at fair value. Gains and losses on trading securities, realized and unrealized, are included in earnings and are calculated using the specific identification method. Any other securities are classified as "available for sale." At December 31, 2002 all securities were classified as trading securities. The cost basis including purchased premium for these securities was $16.5 million and $28.5 million at December 31, 2002 and 2001, respectively. Marketable securities as of December 31, 2002 consist of only short term investments totaling $16.5 million. The Company's investments typically include corporate bonds and notes, Euro-dollar bonds, taxable auction securities and asset-backed securities. The Company's policy is to require minimum credit ratings of A2/A and A1/P1 with maturities of up to three years. The average life of the investment portfolio may not exceed 24 months. 4. LAB EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS: Lab equipment, furniture and leasehold improvements are classified as follows (in thousands):
DECEMBER 31, ----------------------- 2002 2001 ------- ------- Laboratory equipment ........................... $ 1,119 $ 1,089 Furniture and fixtures ......................... 154 172 Office equipment ............................... 371 384 Leasehold improvements ......................... 506 506 2,150 2,152 ------- ------- Less - Accumulated depreciation and amortization ............................ (1,959) (1,812) ------- ------- Total .......................................... $ 191 $ 340 ======= =======
5. OPERATING LEASES: The Company leases laboratory and office space, and equipment pursuant to leases accounted for as operating leases. The lease for the Company's laboratory and office space expires in May 2003. Rental expense for the years ended December 31, 2002, 2001 and 2000, was approximately $255,000, $248,000 and $238,000, respectively. Future F-16 minimum lease payments under noncancelable leases with original terms in excess of one year as of December 31, 2002, are as follows (in thousands): 2003 ....... $ 100 6. ACCRUED EXPENSES: Accrued expenses consist of the following (in thousands):
DECEMBER 31, ------------------- 2002 2001 ---- ---- Research and development costs ................... $ 55 $ 11 Legal ............................................ 141 95 Insurance ........................................ 73 81 Other ............................................ 164 207 ---- ---- Total ............................................ $433 $394 ==== ====
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 $3.0 million of research and development tax credits. As of December 31, 2002 and 2001, the Company had approximately $78.9 million and $67.5 million, respectively, of net operating loss ("NOL") carry-forwards for federal income tax purposes. Additionally, if not utilized, approximately $289,000 of NOLs, and approximately $34,000 of research and development tax credits will expire in the year 2003. 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, the Company's deferred tax assets have been reserved in full in the accompanying 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):
DECEMBER 31, ---------------------- 2002 2001 -------- -------- Deferred tax assets: Net operating loss carryforwards ................... $ 26,810 $ 22,962 Book/tax difference on basis of assets and license agreements ........................... 96 274 Research and development tax credits ............... 2,951 2,924 Accruals/expenses not currently deductible ......... 12 206 Deferred revenue ................................... -- 2,156 -------- -------- Total deferred tax assets .......................... 29,869 28,522 Less -- Valuation allowance ........................ (29,869) (28,522) -------- -------- Net deferred tax assets ............................ $ -- $ -- ======== ========
F-17 8. STOCKHOLDERS' EQUITY: WARRANTS There were no warrants issued or exercised during 2002. At December 31, 2002 there were a total of 33,460 warrants outstanding, convertible into 51,194 shares of common stock at an exercise price of $7.19. All warrants outstanding have a cashless exercise provision and expire in October 2003. 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 415,300 shares at an aggregate purchase price of $7.5 million for an average price of $18.02 per share. The Company did not buy back any of its common stock since that time. EARNINGS PER SHARE The following table presents information necessary to calculate earnings per share for the three years ended December 31, 2002, 2001 and 2000 (in thousands, except per share amounts):
2002 2001 2000 -------- -------- -------- Net loss $ (3,882) $ (839) $(11,155) Average common shares outstanding 11,412 11,333 11,303 -------- ------- -------- Basic earnings per share $ (0.34) $ (0.07) $ (0.24) ======== ======= ======== Average common and dilutive potential common shares outstanding: Average common shares outstanding 11,412 11,333 11,303 Assumed exercise of stock options -- -- -- -------- ------- -------- 11,412 11,333 11,303 -------- ------- -------- Diluted earnings per share $ (0.34) $ (0.07) $ (0.24) ======== ======= ========
9. STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN: 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. 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 than the tenth anniversary of the grant date. At December 31, 2002, there were 799,935 options available to be granted under these plans. 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 was being amortized over the vesting period of the options. At December 31, 2001, the Company had fully amortized these options. On May 23, 2000, the shareholders approved the Company's 2000 Non-Employee Directors' Stock Option Plan (the "2000 Director Plan") that supersedes the prior non-employee directors stock option plan and eliminated any remaining options available to be granted under the preceding plan. As of December 31, 2001, pursuant to the terms of this plan, the Company has reserved a total of 500,000 shares of common stock for issuance under the 2000 Director Plan. On the day after each annual meeting of the stockholders ("Annual Meeting"), for 9 years, starting in 2001, the total number of shares reserved for issuance under the 2000 Director Plan will be increased by a number of shares equal to the greater of: (i) 0.5% of the Company's outstanding common stock as of the end of the previous fiscal year or (ii) that number of shares that could be issued under options granted under the Director Plan during the prior 12 month period. The plan provides that each director receive options to purchase 40,000 shares of common stock upon initial election to the board of directors and receive options to purchase 5,000 shares at each re-election. The plan also provides that the chairman of the Board receive options to purchase an additional 10,000 shares of common stock upon initial election to the board of directors and receive options to purchase an additional 10,000 shares at each re-election. The vesting provisions for the initial grant of options shall provide for vesting of 20% of the shares subject to the option granted on each of the first five Annual Meeting dates after the date of the grant. Vesting provisions for the annual grant and chairman's grant shall provide for vesting of all shares subject to the option granted on the first Annual Meeting after the date of the grant. All options expire no later than the tenth anniversary of the grant date. With the adoption of the 2000 Director Plan, the Board terminated the 1996 Director Plan; however, any previously granted options under the F-18 terminated 1996 Director Plan shall continue in force unaffected by such action. At December 31, 2002, there were 243,369 options available to be granted under the 2000 Director Plan. During 2000, the Company amended the 2000 Director Plan to allow for issuance of stock awards and options in lieu of cash for fees owed to directors and consultants. In connection with this amendment, during 2002, the Company granted options to a director, totaling 23,360 shares of common stock at exercise prices ranging from $1.09 to $4.50. In addition, during 2002, the Company issued stock awards to directors, totaling 11,572 shares of common stock in connection with the same amendment at the closing price on the date of grant. A summary of the status of the Company's option plans at December 31, 2002, 2001, and 2000 and changes during the years then ended is presented in the tables below:
2002 2001 2000 -------------------------- -------------------------- --------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- --------- --------- --------- --------- --------- Outstanding at beginning of year ..... 1,295,429 $ 7.63 1,384,123 $ 8.59 1,325,749 $ 10.16 Granted .............................. 330,360 3.89 170,352 4.15 347,919 4.09 Exercised ............................ (31,265) .67 (12,242) 2.05 (49,416) 2.27 Forfeited ............................ (62,814) 12.67 (246,804) 10.90 (240,129) 12.07 --------- --------- --------- Outstanding at end of year ........... 1,531,710 6.76 1,295,429 7.63 1,384,123 8.59 ========= ========= ========= Exercisable at end of year ........... 981,710 8.32 964,329 8.70 733,623 9.41 ========= ========= =========
The following table summarizes information about stock options outstanding at December 31, 2002:
WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER REMAINING EXERCISE NUMBER EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE ------------------------ ----------- ---- ----- ----------- ----- $ .00 to $ 5.00......... 935,444 7.3 $ 3.48 395,644 $ 3.22 5.01 to 10.00......... 433,866 2.5 7.38 430,666 7.38 10.01 to 15.00.......... 7,500 6.4 13.44 7,500 13.44 15.01 to 20.00.......... 19,500 1.7 18.16 18,900 18.13 20.01 to 25.00.......... 73,400 2.4 21.45 71,000 21.49 25.01 to 30.00.......... 50,000 3.2 29.24 46,000 29.26 30.01 to 35.00.......... 12,000 5.9 33.25 12,000 33.25 --------- ------- 1,531,710 981,710 ========= =======
On May 23, 2000, the shareholders also approved the Company's 2000 Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan provides all eligible full-time employees with an opportunity to purchase common stock through accumulated payroll deductions. Purchases of common stock are made at the lower of 85% of the fair market value at the beginning or end of each six-month offering period. A total of 150,000 shares of common stock have been reserved for issuance under the Purchase Plan through December 2000. In addition, the Purchase Plan provides for annual increases in the number of shares available for issuance under the Purchase Plan on the first day of each year, beginning January 1, 2001, in an amount equal to 50,000 shares. In 2002, the Company issued an aggregate of 4,824 shares of common stock upon the exercise of options under the Purchase Plan at a weighted average price of $1.28 per common share. F-19 10. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS: SCHERING-PLOUGH CORPORATION On July 15, 2002, the Company and Schering-Plough announced that they had mutually agreed to terminate the worldwide licensing agreements dated as of November 14, 1997 that covered Zonagen's phentolamine-based technologies for sexual dysfunction which include VASOMAX(R). VASOMAX(R) is an oral therapy for the treatment of male erectile dysfunction ("MED"). The termination occurred following the April 29, 2002, announcement that Schering-Plough had withdrawn the Marketing Authorization Application ("MAA") for VASOMAX(R) which Schering-Plough had submitted to the United Kingdom Medicines Control Agency ("MCA") in December 2001. This decision was made following their review of the comments received from the Committee on Safety of Medicines regarding the VASOMAX(R) submission. In exchange for the termination, the Company paid to Schering-Plough a nominal cash fee upon execution of the termination agreement and agreed to make a milestone payment to Schering-Plough in the event that worldwide annual sales of VASOMAX(R) exceed a certain amount, which payment may be paid in several installments. In addition, the Company agreed to make royalty payments to Schering-Plough based on a percentage of future sales of VASOMAX(R) in Brazil and other countries in which there existed certain patent rights at the time of the termination. The Company's obligation to make royalty payments terminates after aggregate royalties paid under this termination agreement reach a certain maximum amount. Also, the Company agreed to make royalty payments to Schering-Plough based on future sales of certain combination products covered by combination patents controlled by Schering-Plough. These royalty payments are not subject to the cap on royalty payments for VASOMAX(R) sales described above. Included in the rights returned to Zonagen were all licenses, options and other rights with respect to Zonagen's phentolamine-based products, Zonagen's combination products, patent rights, know-how and trademarks for the treatment of sexual dysfunction for both men and women. Schering-Plough will transfer and assign to Zonagen rights, title and interest in and to any and all New Drug Applications or similar foreign submissions or approvals. Zonagen will thereafter be solely responsible for all obligations in the relevant countries with respect to such submissions and approvals. At this time the Company does not intend to commit any additional resources toward the clinical development of its phentolamine-based products. Included in the Company's balance sheet as of June 30, 2002 and December 31, 2001 under the caption "accounts payable" was an obligation to Schering-Plough of approximately $1.3 million and $1.6 million, respectively. This obligation was originally $2.4 million prior to any repayments made by the Company to Schering-Plough and represents costs relating to a portion of a shared clinical development program regarding the Company's VASOMAX(R) product. During April 2001, Schering-Plough agreed to accept payment of the Company's $2.4 million obligation to Schering-Plough via cash payments aggregating $1 million, a transfer of $933,000 in bulk phentolamine inventory and a $467,000 reduction in future royalties and milestone payments payable to the Company. In March 2002, the Company settled its $1 million cash obligation with its final cash payment of approximately $309,000. As of June 30, 2002, the Company had a remaining obligation to Schering-Plough of approximately $1.3 million which the Company and Schering-Plough had agreed would be satisfied through the transfer of bulk phentolamine and a reduction in future royalty and milestone payments as described above. Due to the termination of the Schering-Plough Agreements in July of 2002, the $1.3 million payable was forgiven and reduced to zero on the Company's balance sheet and offset against research and development expenses in the three-month period ended September 30, 2002. NATIONAL INSTITUTES OF HEALTH (NIH) In 1999, Zonagen licensed worldwide rights to compounds known as Selective Progesterone Receptor Modulators ("SPRMs") that were developed by the National Institutes of Health (NIH). Under the terms of the agreement, the Company has paid an up-front fee and is obligated to pay additional milestones and royalties on potential new products. In addition, the Company is obligated to meet developmental milestones as outlined in a Commercial Development Plan. The NIH has the ability to terminate the agreement for lack of payment or if it feels that the licensee is not meeting milestones as outlined in the Commercial Development Plan and for other reasons as outlined in the agreement. Due to the difficulties of manufacturing the materials that are covered under the agreement, the Company has not been able to meet the original requirements stated in the Commercial Development Plan and in July 2002 the Company paid a fee to amend this agreement which included a revision of the original Commercial Development Plan. F-20 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, as amended, 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 Chito-ZN (formerly named 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 recessionary 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. On September 25, 2001, the United States Fifth Circuit Court of Appeals affirmed the dismissal of all claims except one; the court reversed the trial court's dismissal of a claim concerning the Company's disclosure about a patent relating to VASOMAX(R). Discovery is proceeding. 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. 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
First Quarter Second Quarter Third Quarter Fourth Quarter Ended Ended Ended Ended March 31, 2002 June 30, 2002 September 30, 2002 December 31, 2002 -------------- ------------- ------------------ ----------------- (in thousands except per share amounts) Revenues: Licensing fees ............................. $ 529 $ 529 $ 3,170 $ -- Product royalties .......................... -- -- -- -- Research and development grants ............ -- -- 213 102 Interest income ............................ 233 182 153 143 -------- -------- -------- -------- Total revenues ....................... 762 711 3,536 245 Expenses: Research and development ................... 610 5,893 (651) 568 General and administrative ................. 443 433 802 1,038 -------- -------- -------- -------- Total expenses ....................... 1,053 6,326 151 1,606 -------- -------- -------- -------- Net loss before cumulative effect of change in accounting principle ............. (291) (5,615) 3,385 (1,361) Cumulative effect of change in accounting principle ....................... -- -- -- -- -------- -------- -------- -------- Net income (loss) ............................. $ (291) $ (5,615) $ 3,385 $ (1,361) ======== ======== ======== ======== Loss per share - basic and diluted: Net loss before cumulative effect of change in accounting principle ............. $ (0.03) $ (0.49) $ 0.30 $ (0.12) Cumulative effect of change in accounting principle ....................... -- -- -- -- -------- -------- -------- -------- Net loss per share(1) ......................... $ (0.03) $ (0.49) $ 0.30 $ (0.12) ======== ======== ======== ======== Shares used in loss per share calculation ................................ 11,358 11,382 11,402 11,500
In the second quarter ended June 30, 2002, following the April 2002 withdrawal of the MAA for VASOMAX(R) in the United Kingdom by Schering-Plough and the mutual termination of the Schering-Plough Agreements in July 2002, the Company expensed its bulk phentolamine inventory previously valued at $4.4 million and its patent estate previously valued at approximately $1.0 million which both related to its VASOMAX(R) product. The Company F-21 recognized this $5.4 million as an increase in research and development expenses. In the third quarter ended September 30, 2002, due to the mutual termination of the Schering-Plough Agreements in July 2002, Schering-Plough forgave a commitment of $1.3 million relating to a prior joint clinical development program for VASOMAX(R) which was owed to them by the Company. The Company took this $1.3 million as a reduction to research and development expenses. In addition, during the third quarter ended September 30, 2002, due to the mutual termination of the Schering-Plough Agreements, the Company recognized the remaining $3.2 million of deferred revenue as an increase to licensing fees.
First Quarter Second Quarter Third Quarter Fourth Quarter Ended Ended Ended Ended March 31, 2001 June 30, 2001 September 30, 2001 December 31, 2001 -------------- ------------- ------------------ ----------------- (in thousands except per share amounts) Revenues: Licensing fees ............................ $ 536 $ 537 $ 560 $ 529 Product royalties ......................... 49 10 -- -- Research and development grants ........... 99 17 -- -- Interest income ........................... 491 399 339 297 -------- -------- -------- -------- Total revenues ...................... 1,175 963 899 826 Expenses: Research and development .................. 742 657 738 891 General and administrative ................ 557 436 437 242 -------- -------- -------- -------- Total expenses ....................... 1,299 1,093 1,175 1,133 -------- -------- -------- -------- Net loss before cumulative effect of change in accounting principle ............ (124) (130) (276) (307) Cumulative effect of change in accounting principle ...................... -- -- -- -- -------- -------- -------- -------- Net loss ..................................... $ (124) $ (130) $ (276) $ (307) ======== ======== ======== ======== Loss per share - basic and diluted: Net loss before cumulative effect of change in accounting principle ............ $ (0.01) $ (0.01) $ (0.02) $ (0.03) Cumulative effect of change in accounting principle ...................... -- -- -- -- -------- -------- -------- -------- Net loss per share(1) ........................ $ (0.01) $ (0.01) $ (0.02) $ (0.03) ======== ======== ======== ======== Shares used in loss per share calculation ............................... 11,329 11,332 11,335 11,338
In the fourth quarter ended December 31, 2001, the Company took a charge of $365,000 for previously capitalized patents relating to the Company's zona pellucida immuno-contraceptive vaccine technology. The Company had previously announced that it had suspended further research on this technology following inconsistent results from a then ongoing baboon study. Due to these results, the option agreement with Wyeth-Ayerst Laboratories, a division of American Home Products, was terminated. The Company took this charge as an increase to research and development expenses. (1) See "Note 2. Summary of Significant Accounting Policies" of Notes to Consolidated Financial Statements for a description of the computation of loss per share. 13. SUBSEQUENT EVENTS: On April 2, 2003, the Company announced that its Board of Directors had authorized the Company to repurchase up to $2.5 million of the Company's common stock from time to time through privately negotiated third party transactions or in the open market. The Company has approximately 11.5 million shares of common stock currently outstanding. The Company also announced that it is seeking the engagement of an investment banking firm to review strategic alternatives for redeploying its assets. On November 8, 2002, the Company completed a $1.0 million bridge loan to Lavipharm that was repaid with interest on April 9, 2003. F-22 INDEX TO EXHIBIT
EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT -------------- ------------------------- 3.1(a) -- 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. 3.1(b) -- Certificate of Designation of Series One Junior Participating Preferred Stock dated September 2, 1999. Exhibit A to Exhibit 4.1 to the Company's Registration Statement on Form 8-A as filed with the Commission on September 3, 1999 (the "Rights Plan Registration Statement"), is incorporated herein by reference. 3.2 -- Restated Bylaws of the Company. Exhibit 3.4 to the 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 Registration Statement is incorporated herein by reference. 4.2 -- Rights Agreement dated September 1, 1999 between the Company and Computershare Investor Services LLC (as successor in interest to Harris Trust & Savings Bank), as Rights Agent. Exhibit 4.1 to the Rights Plan Registration Statement is incorporated herein by reference. 4.3 -- First Amendment to Rights Agreement, dated as of September 6, 2002, between the Company, Harris Trust & Savings Bank and Computershare Investor Services LLC. Exhibit 4.3 to Amendment No. 1 to the Rights Plan Registration Statement on Form 8-A/A as filed with the Commission on September 11, 2002 is incorporated herein by reference. 4.4 -- Second Amendment to Rights Agreement, dated as of October 30, 2002, between the Company and Computershare Investor Services LLC. Exhibit 4.4 to Amendment No. 2 to the Rights Plan
EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT -------------- ------------------------- Registration Statement on Form 8-A/A as filed with the Commission on October 31, 2002 is incorporated herein by reference. 4.5 -- Form of Rights Certificate. Exhibit B to Exhibit 4.1 to the Rights Plan Registration Statement is incorporated herein by reference. 10.1+ -- Amended and Restated 1993 Employee and Consultant Stock Option Plan. Exhibit 10.3 to the Registration Statement is incorporated herein by reference. 10.2+ -- First Amendment to the Zonagen, Inc. Amended and Restated 1993 Stock Option Plan. Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999 Form 10-K") is incorporated herein by reference. 10.3+ -- 1996 Non-Employee 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. 10.4+ -- 2000 Non-Employee Directors' Stock Option Plan. Appendix B to the Company's Definitive Proxy Statement filed on April 26, 2000 is incorporated herein by reference. 10.5+ -- First Amendment to the Zonagen, Inc. 2000 Non-Employee Directors' Stock Option Plan. Exhibit 10.21 to the 2000 Form 10-K is incorporated herein by reference. 10.6* -- Second Amendment to 2000 Non-Employee Directors' Stock Option Plan. 10.7 -- Lease Agreement dated March 22, 1990, between the Company and The Woodlands Equity Partnership-89. Exhibit 10.4 to the Registration Statement is incorporated herein by reference. 10.8 -- Extension, Modification and Ratification of Lease dated May 31, 2000, between the Company and Woodlands Equity Partnership-89. Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (the "2000 Form 10-K") is incorporated herein by reference. 10.9+ -- Employment Agreement between the Company and Joseph S. Podolski. Exhibit 10.5 to the Registration Statement is incorporated herein by reference. 10.10+ -- First Amendment to Employment Agreement between the Company and Joseph S. Podolski. Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001 is incorporated herein by reference. 10.11+ -- Employment Agreement between the Company and Louis Ploth, Jr. Exhibit 10.5 to the 1999 Form 10-K is incorporated herein by reference. 10.12+ -- First Amendment to Employment Agreement between the Company and Louis Ploth, Jr. Exhibit 10.7 to the 2000 Form 10-K is incorporated herein by reference. 10.13 -- Assignment Agreement dated April 13, 1994, among Zonagen, Inc., Gamogen, Inc. and Dr. Adrian Zorgniotti. Exhibit 10.8 to the 2000 Form 10-K is incorporated herein by reference. 10.14 -- 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. 10.15 -- 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. 10.16++ -- Letter Agreement dated July 15, 2002 between the Company, Schering-Plough Ltd. and Schering-Plough Corporation. Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002 is incorporated herein by reference. 10.17+* -- Second Amendment to Employment Agreement between the Company and Joseph S. Podolski. 10.18+* -- Second Amendment to Employment Agreement between the Company and Louis Ploth, Jr. 23.1* -- Consent of PricewaterhouseCoopers LLP 23.2* -- Information Regarding Consent of Arthur Andersen LLP 99.1* -- Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer) 99.2* -- Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
----------------------- * 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.