<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 18, 1996
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ERGO SCIENCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 2834 04-3271667
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
----------------
CHARLESTOWN NAVY YARD
100 FIRST AVENUE
CHARLESTOWN, MASSACHUSETTS 02129
(617) 241-6800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MANUEL CINCOTTA, JR.
CHAIRMAN OF THE BOARD
ERGO SCIENCE CORPORATION
CHARLESTOWN NAVY YARD
100 FIRST AVENUE
CHARLESTOWN, MASSACHUSETTS 02129
(617) 241-6800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
ROBERT L. KIMBALL DOUGLAS A. ZINGALE, ESQ.
VINSON & ELKINS L.L.P. MINTZ, LEVIN, COHN, FERRIS, GLOVSKY
3700 TRAMMELL CROW CENTER AND POPEO, P.C.
2001 ROSS AVENUE ONE FINANCIAL CENTER
DALLAS, TEXAS 75201 BOSTON, MASSACHUSETTS 02111
(214) 220-7700 (617) 542-6000
----------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
CALCULATION OF THE REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share........ 2,875,000 $16.375 $47,078,125 $16,234
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</TABLE>
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(1) Includes 375,000 shares that the underwriters have an option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) based on the average of the high and low prices
for the Common Stock as quoted on the Nasdaq National Market on July 16,
1996.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Dated July 18, 1996
2,500,000 SHARES
[THE COMPANY'S LOGO APPEARS HERE]
ERGO SCIENCE CORPORATION
Common Stock
-----------
All of the shares of Common Stock, par value $.01 per share (the "Common
Stock"), offered are being sold by Ergo Science Corporation ("Ergo" or the
"Company"). The Common Stock is quoted on the Nasdaq National Market under the
symbol "ERGO." On July 16, 1996, the last sale price of the Common Stock as
reported on the Nasdaq National Market was $16 3/4 per share. See "Price Range
of Common Stock."
-----------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 6 OF THIS PROSPECTUS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total(3)................................ $ $ $
</TABLE>
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting offering expenses payable by the Company estimated to be $
.
(3) The Company and the Selling Stockholders have granted the Underwriters an
option, exercisable within 30 days of the date hereof, to purchase an
aggregate of up to 375,000 additional shares at the Price to Public less
Underwriting Discounts and Commissions to cover over-allotments, if any. If
all such additional shares are purchased, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to Company will be $
, $ , and $ , respectively, and the Proceeds to Selling Stockholders
will be $ . See "Underwriting" and "Principal and Selling Stockholders."
-----------
The Common Stock is offered by the several Underwriters named herein when, as
and if received and accepted by them, subject to their right to reject orders
in whole or in part and subject to certain other conditions. It is expected
that delivery of the certificates for the shares will be made at the offices of
Cowen & Company, New York, New York, on or about , 1996.
-----------
COWEN & COMPANY
UBS SECURITIES
NEEDHAM & COMPANY, INC.
, 1996.
<PAGE>
[PICTURE OF ERGOSET TABLETS AND THE COMPANY'S LOGO]
The Company's lead drug candidate, ERGOSET(TM), is a low dose, fast
release, oral tablet formulation of a dopamine agonist. The Company
recently completed two Phase III clinical trials of ERGOSET as
adjunctive therapy with sulfonylurea agents for the treatment of Type
II diabetes. There can be no assurance that ERGOSET will receive FDA
approval for commercial marketing.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A
UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements appearing elsewhere in this
Prospectus. Except as otherwise noted, all information in this Prospectus
assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
Ergo Science Corporation is developing novel treatments for metabolic
disorders, including Type II diabetes and obesity, and for cancer. The
Company's technology uses orally administered neurotransmitter modulating drugs
to address abnormalities of the neuroendocrine system. The Company believes
that its approach may provide the platform for a new class of treatments for a
variety of glucose and lipid metabolic disorders and cancer. The Company's lead
drug candidate, ERGOSET(TM), is a low-dose, fast-release, oral tablet
formulation of bromocriptine, a dopamine agonist previously approved by the
U.S. Food and Drug Administration to treat Parkinson's disease and other
conditions. The Company recently completed two Phase III clinical trials of
ERGOSET as adjunctive therapy with sulfonylurea agents for the treatment of
Type II diabetes. A preliminary analysis of the two completed Phase III
clinical trials indicated that ERGOSET improved control of glucose,
triglycerides, free fatty acids, and cholesterol in Type II diabetics. The
Company anticipates completing a third Phase III clinical trial of ERGOSET as
monotherapy for Type II diabetes by the end of 1996. The Company plans to
submit a New Drug Application to FDA for ERGOSET to treat Type II diabetes in
1997. Ergo has also conducted clinical trials of ERGOSET for the treatment of
obesity and intends to conduct additional obesity clinical trials of ERGOSET by
itself and in combination with another product candidate. Ergo currently
retains all marketing rights to its drug candidates.
Ergo's technology is the result of over 30 years of research by the Company's
founding scientists into the regulation of glucose and lipid metabolism through
changes in daily patterns of neuroendocrine activity. Ergo's scientists have
shown that when vertebrate animals are in a fat, insulin resistant condition,
they exhibit a daily neuroendocrine pattern that is distinctly different from
their daily neuroendocrine pattern while in a lean, insulin sensitive
condition. Ergo's technology is based on observations that, just as animals
display changes in daily patterns of neuroendocrine activity to become
seasonally fat and insulin resistant to survive adverse environmental
conditions, humans display changes in daily neuroendocrine patterns as they
develop Type II diabetes. The aging process, as well as changes in the
environment of humans such as diet, sedentary lifestyles and artificial
lighting, may be causing changes in daily neuroendocrine patterns in humans.
Moreover, the Company has demonstrated that the timed administration of drugs
can alter daily neuroendocrine patterns and produce desired metabolic changes
in animals. The Company believes that its research and clinical trial data
indicate that the timed administration of neurotransmitter modulating drugs
alters these daily neuroendocrine patterns in humans, producing improvements in
glucose and lipid metabolism.
The markets for Type II diabetes and obesity are large and not adequately
addressed by current treatments. Approximately 15 million people will suffer
from Type II diabetes in the United States in 1996, and that number is expected
to increase to approximately 32 million by 2010. Obesity affects approximately
35 million Americans, or approximately 26% of the U.S. adult population.
Obesity is considered a risk factor for Type II diabetes, cardiovascular
disease and other conditions.
Ergo's preclinical studies suggest that temporal changes in neuroendocrine
activity may also play an important role in the body's regulation of immune
function and the body's ability to fight cancer. The Company is currently
enrolling patients in a small Phase II clinical trial of two neurotransmitter
modulating compounds for the treatment of metastatic breast cancer.
Approximately 184,000 women in the United States will be diagnosed with breast
cancer in 1996. The Company is also evaluating the use of phototherapeutic dyes
in photodynamic therapy to treat various tumors.
Ergo's commercialization strategy includes the formation of marketing
alliances with large pharmaceutical companies and the establishment of long-
term manufacturing agreements for its product supply. Geneva Pharmaceuticals,
Inc., a subsidiary of Ciba-Geigy Corporation, has agreed to supply the
Company's United States requirements for ERGOSET.
RECENT DEVELOPMENTS
Summary of Phase III Clinical Trial Results
Ergo recently announced the preliminary analysis of its two completed Phase
III clinical trials of ERGOSET as adjunctive therapy for Type II diabetes.
These double-blinded, placebo-controlled clinical trials investigated the
safety and efficacy of ERGOSET in the treatment of approximately 500 Type II
diabetics using sulfonylurea therapy at 17 trial sites
3
<PAGE>
across the United States. The primary endpoint of these Phase III clinical
trials was to achieve a clinically and statistically significant reduction in
blood levels of glycated hemoglobin A1c, which is considered a reliable
indicator of glycemic control in diabetics.
The preliminary analysis indicated that ERGOSET improved control of glucose,
triglycerides, free fatty acids, and cholesterol in Type II diabetics. This
preliminary analysis also showed that ERGOSET was generally well-tolerated. On
an intent-to-treat basis, the two completed trials indicated that ERGOSET
improved glycemic control as measured by a reduction in glycated hemoglobin Alc
compared with placebo of 0.5% (p less than 0.0001) in one study and 0.6% (p less
than 0.0007) in the other study. Serum glucose, triglycerides and free fatty
acids were measured throughout the day, and ERGOSET resulted in consistent
reductions compared with placebo in each parameter. Average reductions in serum
glucose compared with placebo were 21 mg/dl (p less than 0.005) and 23 mg/dl (p
less than 0.001) in the two studies. Average reductions in serum triglycerides
compared with placebo were 44 mg/dl (p less than 0.05) and 55 mg/dl (p less than
0.003) in the two studies. The average reduction in free fatty acids compared
with placebo was 149 u eq/L (p less than 0.03) in the one study for which this
parameter is available. In addition, fasting cholesterol levels compared with
placebo were reduced by 5.7 mg/dl (p less than 0.09) and 8.0 mg/dl (p less than
0.04).
A pre-established responder criterion was designed to identify clinically
significant responders to ERGOSET shortly after the initiation of treatment.
Responders were defined as those individuals on ERGOSET who had at least a 0.3%
decrease in glycated hemoglobin Alc from baseline after eight weeks of
treatment. In the responder group, which represented approximately 60% of the
subjects, ERGOSET resulted in decreases of glycated hemoglobin A1c of 1.0% (p
less than 0.0001) and 1.1% (p less than 0.0001) compared with placebo and
decreases in glycated hemoglobin Alc of 0.6% (p less than 0.0001) and 0.8% (p
less than 0.0001) compared with baseline. In the responder group, average
reductions in serum glucose levels were 39 mg/dl (p less than 0.0001) and 37
mg/dl (p less than 0.0001) compared with placebo, and average reductions were
24 mg/dl (p less than 0.06) and 25 mg/dl (p less than 0.01) compared with
baseline. See "Business--ERGOSET for Type II Diabetes--Phase III Clinical Trial
Results."
Obesity Data in the Leptin-Deficient Ob/Ob Mouse
Researchers at Ergo have also used neurotransmitter modulating drugs to
achieve significant reductions in body fat in the leptin-deficient ob/ob mouse,
a genetically insulin resistant and fat animal model. In a study presented at
the 1996 annual meeting of the American Diabetes Association, Ergo's scientists
reported that the administration of two neurotransmitter modulating drugs
produced a significant (approximately 30%) reduction in food intake and a
decrease in body fat gain of 22% to 32% with no significant decrease in lean
body (muscle) mass compared with control animals. The study also showed a 57%
reduction in blood glucose levels and a 50% reduction in blood insulin levels,
which reflect improved glycemic control. Ergo believes that the selective
reduction in body fat gain and preservation of lean body mass has significant
implications for the treatment of obesity because improvement in the lean-to-
fat ratio may reduce the cardiovascular risk associated with chronic obesity.
--------------
Ergo's principal executive offices are located at Charlestown Navy Yard, 100
First Avenue, Charlestown, Massachusetts 02129-2051. Its telephone number is
(617) 241-6800.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered here-
by........................ 2,500,000 shares
Common Stock to be out-
standing after the offer-
ing....................... 12,668,080 shares(1)
Use of proceeds............ For clinical trials, preclinical studies, research
and development, and general corporate purposes
Nasdaq National Market sym-
bol....................... ERGO
</TABLE>
- -------
(1) Excludes 1,178,575 shares of Common Stock issuable upon exercise of
outstanding options as of March 31, 1996, with a weighted average exercise
price of $4.57 per share. See "Capitalization," "Management--Employee
Benefit Plans," and Note 9 of Notes to Consolidated Financial Statements.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues............... $ 107,710 $ 214,916 $ 94,348 $ 17,267 $ 270,402
Operating expenses:
Research and develop-
ment................. 2,403,683 4,917,830 8,643,926 1,961,192 2,926,409
Purchase of in-process
research
and development...... -- -- 7,020,064 -- 168,750
General and adminis-
trative.............. 3,165,038 4,256,934 6,580,308 1,930,450 1,073,128
----------- ----------- ------------ ----------- -----------
Total operating
expenses........... 5,568,721 9,174,764 22,244,298 3,891,642 4,168,287
----------- ----------- ------------ ----------- -----------
Net loss............... $(5,461,011) $(8,959,848) $(22,149,950) $(3,874,375) $(3,897,885)
=========== =========== ============ =========== ===========
Net loss per common
share(1).............. $ (1.52) $ (2.56) $ (8.06) $ (1.07) $ (0.39)
Weighted average shares
used in computing net
loss per share(1)..... 3,857,915 3,857,940 3,966,266 3,887,838 10,146,899
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(2)
----------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 8,177,095 $
Working capital..................................... 15,951,169
Total assets........................................ 19,765,120
Series D Preferred Stock(3)......................... 4,413,170
Total stockholders' equity.......................... 18,123,047
</TABLE>
- -------
(1) See Note 1 of Notes to Consolidated Financial Statements.
(2) As adjusted to reflect the estimated net proceeds from the sale of
2,500,000 shares of Common Stock at an assumed public offering price of $16
3/4 per share. See "Use of Proceeds" and "Capitalization."
(3) Represents capital allocated to Series D Preferred Stock upon the issuance
of units of Preferred Stock and Common Stock in April 1995. The Company
currently intends to exercise its option to convert the Series D Preferred
Stock into Common Stock. The liquidation preference of the Series D
Preferred Stock is $6,903,000 plus accumulated and unpaid dividends. See
"Description of Capital Stock--Series D Preferred Stock" and Note 7 of
Notes to Consolidated Financial Statements.
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider the following factors in evaluating the Company and
its business before purchasing any of the Common Stock offered hereby.
UNCERTAINTIES RELATED TO PHASE III CLINICAL TRIAL RESULTS OF ERGOSET
The Company recently announced its statistical analyses of two Phase III
clinical trials of ERGOSET as adjunctive therapy in obese patients suffering
from Type II diabetes, and it expects to complete the statistical analysis of
a Phase III clinical trial of ERGOSET as monotherapy in obese Type II
diabetics by the end of 1996. The Company intends to file an NDA with FDA for
ERGOSET to treat Type II diabetes in 1997. In order for a drug such as ERGOSET
to be approved for commercial sale, FDA and other authorities require that the
safety and efficacy of the drug be established by at least two adequate and
well-controlled clinical trials. The Company has limited experience in filing
and pursuing applications necessary to gain regulatory approvals. Data
obtained from preclinical and clinical activities are susceptible to varying
interpretations that could delay, limit or prevent FDA regulatory approval.
There can be no assurance that FDA and other regulatory authorities will agree
with the Company's assessment of the results. If FDA or its advisory panel of
experts disagrees with the Company's analysis of the results of the Phase III
clinical trials or believes that the results do not establish that ERGOSET is
safe and effective in the treatment of Type II diabetes, the Company will not
receive the approval necessary to market ERGOSET, which would have a material
adverse effect on the Company. In that case, the Company may have to conduct
additional Phase III clinical trials in an effort to demonstrate the safety
and efficacy of ERGOSET, which also may not be acceptable to FDA. Without
acceptable results and regulatory approval, the Company would not be able to
commercialize ERGOSET, which would have a material adverse effect on the
Company. See "Business--ERGOSET for Type II Diabetes--Phase III Clinical Trial
Results."
If the results of the Phase III clinical trial of ERGOSET as monotherapy for
Type II diabetes are not satisfactory, the Company will not be able to submit
an NDA to FDA for ERGOSET as monotherapy. In that case, the Company may have
to conduct additional Phase III clinical trials in an effort to demonstrate
the safety and efficacy of ERGOSET as monotherapy or may have to submit an NDA
to FDA for ERGOSET as adjunctive therapy only. There can be no assurance that
the results of any of the Company's Phase III clinical trials will be
satisfactory, that ERGOSET will obtain regulatory approval for
commercialization, or that any regulatory approval obtained will not contain
material limitations on the indicated uses for which ERGOSET may be marketed.
See "Business--Government Regulation."
GOVERNMENT REGULATION; NO ASSURANCES OF REGULATORY APPROVAL
The Company's research and development activities, preclinical studies,
clinical trials, and the manufacturing and marketing of its products are
subject to extensive regulation by FDA and foreign regulatory authorities. To
market product candidates currently under development, the Company must
undergo an extensive regulatory approval process. The regulatory process takes
many years and requires the expenditure of substantial resources. Although
protocols for clinical trials are submitted to FDA prior to commencement of
the trials, there can be no assurance that FDA will accept the clinical trials
as adequate or well-controlled or accept the results of those trials.
Similarly, FDA may determine that product candidates are not eligible for or
will not receive expedited review, whether or not FDA has previously indicated
that such product candidates may be eligible for expedited review. In
addition, delays or rejections may result from changes in FDA policies about
drug approval during the period of product development, from FDA review of
NDAs, and from other causes. Similar delays may also be encountered in foreign
countries. There can be no assurance that regulatory review will be conducted
in a timely manner or that regulatory approval will be obtained for any drugs
developed by the Company, including ERGOSET. Moreover, if regulatory approval
of a drug is granted, the approval may entail limitations on the indicated
uses for which it may be marketed. Further, even if regulatory approval is
obtained, a company's marketed drug, its bulk chemical supplier, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections, and later discovery of previously unknown problems
with a product, supplier, manufacturer or facility may result in restrictions
on the product, including a withdrawal of the product from the market. Failure
to comply with the applicable regulatory requirements can, among other things,
result in fines, suspensions of regulatory approvals, product recalls,
operating restrictions and criminal prosecution. Additional government
regulation may be established that could prevent or delay regulatory approval
of the Company's product candidates.
6
<PAGE>
The Company's business is also subject to regulation under state and federal
laws regarding environmental protection and hazardous substances control,
including the Occupational Safety and Health Act, the Environmental Protection
Act, and the Toxic Substance Control Act. 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 "Business--Government
Regulation."
UNCERTAINTIES RELATED TO PRODUCT DEVELOPMENT AND MARKETABILITY
The Company has not yet completed the development of any products and,
accordingly, has not begun to market or generate revenues from the
commercialization of products. ERGOSET recently completed testing in two Phase
III clinical trials as adjunctive therapy in obese patients suffering from
Type II diabetes. ERGOSET as monotherapy for Type II diabetes, obesity or
other indications and the Company's other product candidates are at earlier
stages of development. There can be no assurance that the Company will
successfully develop and market its product candidates, which lack of success
would have a material adverse effect on the Company.
The results of preclinical studies and initial clinical trials of the
Company's product candidates are not necessarily predictive of the results
from large-scale clinical trials. The Company must demonstrate through
preclinical studies and clinical trials that its product candidates are safe
and effective for use in each target indication before the Company can obtain
regulatory approvals for the commercial sale of those products. These studies
and trials may be very costly and time-consuming. The speed with which the
Company is able to enroll patients in clinical trials is an important factor
in determining how quickly clinical trials may be completed. Many factors
affect patient enrollment, including the size of the patient population, the
proximity of patients to clinical sites, and the eligibility criteria for the
study. Delays in patient enrollment may result in increased costs, trial
delays, or both, which could have a material adverse effect on the Company.
Even if the Company establishes the safety and efficacy of its product
candidates and obtains FDA and other regulatory approvals for its product
candidates, physicians may not prescribe the approved product. Also, there can
be no assurance that the Company's product candidates will be accepted as
producing clinically significant benefits.
The administration of any product the Company develops may produce
undesirable side effects in humans. The occurrence of side effects could
interrupt or delay clinical trials of product candidates and could result in
FDA's or other regulatory authorities' denying approval of the Company's
product candidates for any or all targeted indications. The Company, FDA or
other regulatory authorities may suspend or terminate clinical trials at any
time. Even if the Company receives FDA and other regulatory approvals, the
Company's product candidates may later exhibit adverse effects that limit or
prevent their widespread use or that necessitate their withdrawal from the
market. There can be no assurance that any of the Company's product candidates
will be safe for human use.
MANUFACTURING UNCERTAINTIES; RELIANCE ON THIRD-PARTY SUPPLIERS
The Company does not operate and does not plan to operate manufacturing
facilities for the production of either bulk chemicals or the pharmaceutical
dosage forms for its product candidates. The Company has entered into a United
States supply agreement with Geneva Pharmaceuticals, Inc. ("Geneva") for the
finished dosage forms of ERGOSET. If Geneva does not perform its obligations
under this agreement or if the agreement is terminated, the Company may not be
able to obtain supplies of ERGOSET. Even if the Company is able to obtain
ERGOSET from other suppliers, it may not be on the terms or in the quantities
acceptable to the Company. Like Geneva, other suppliers would need to meet FDA
manufacturing requirements, and there can be no assurance that they would
receive FDA approval. The active ingredient in ERGOSET, bromocriptine, is
available from few suppliers in the world, and the manufacturing process for
the active ingredient is complex and lengthy. Accordingly, the Company will
encounter significant delays if it must obtain supplies from other sources or
otherwise experiences interruptions in its supplies. See "Business--
Commercialization Strategy--Manufacturing." If the Company is unable to obtain
adequate supplies, its business would be materially adversely affected. The
Company and Geneva have recently begun development of additional dosage-
strength tablets. This activity is subject to FDA requirements, including
demonstration of satisfactory in vitro dissolution, bioavailability,
bioequivalence, and manufacturability. There can be no assurance of the
outcome of these activities or the times in which they may be completed, if at
all.
7
<PAGE>
LIMITED SALES AND MARKETING EXPERIENCE; DEPENDENCE ON FUTURE COLLABORATORS
The Company has limited experience in sales, marketing and distribution. To
market any of its product candidates directly, the Company must develop a
sales and marketing force with supporting distribution capability; otherwise
the Company must enter into marketing and distribution arrangements with a
company that has an established capability. Significant additional
expenditures, management resources and time will be required for the Company
to develop a sales and marketing force and supporting distribution capability.
The Company plans to enter into a marketing agreement with one or more
pharmaceutical companies that have established marketing and sales
capabilities. To the extent that the Company enters into marketing or
distribution arrangements with others, any revenues the Company receives will
depend upon the efforts of third parties. While the Company believes that its
potential collaborators will have an economic incentive to succeed in
performing their obligations under such arrangements, the amount and timing of
funds and other resources to be devoted under such arrangements will be
controlled by the other parties and will be subject to financial and other
difficulties that may befall the other parties. There can be no assurance that
any third party will market the Company's products successfully or that any
third-party collaboration will be on terms favorable to the Company. If any
marketing partner does not market a product successfully, the Company's
business would be materially adversely affected. There can be no assurance
that the Company will be able to establish sales, marketing and distribution
capabilities, that it will be able to enter into a collaborative marketing
agreement, or that it or its collaborators will be successful in gaining
market acceptance for any products that the Company may develop. The Company's
failure to establish marketing capabilities or to enter into marketing
arrangements with third parties would have a material adverse effect on the
Company.
NO ASSURANCE OF ADEQUATE THIRD-PARTY REIMBURSEMENT
The Company's ability to commercialize its product candidates successfully,
if FDA approval is obtained, will depend in part on the extent to which
appropriate reimbursement levels for the cost of the products and related
treatment are obtained from government authorities, private health insurers
and other organizations, such as health maintenance organizations ("HMOs").
Third-party payors are increasingly challenging pricing of pharmaceutical
products. In addition, the trend toward managed healthcare in the United
States, the growth of organizations such as HMOs, and legislative proposals to
reform healthcare and government insurance programs could significantly
influence the purchase of pharmaceutical products, resulting in lower prices
and reducing demand for the Company's product candidates. Such cost
containment measures and healthcare reform could affect the Company's ability
to sell its product candidates and may have a material adverse effect on the
Company.
Significant uncertainty exists about the reimbursement status of newly
approved pharmaceutical products. There can be no assurance that reimbursement
in the United States or foreign countries will be available for any of the
Company's product candidates, that any reimbursement granted will be
maintained, or that limits on reimbursement available from third-party payors
will not reduce the demand for, or negatively affect the price of, the
Company's product candidates. The unavailability or inadequacy of third-party
reimbursement for the Company's product candidates would have a material
adverse effect on the Company. The Company is unable to forecast what
additional legislation or regulation relating to the healthcare industry or
third-party coverage and reimbursement may be enacted in the future, or what
effect the legislation or regulation would have on the Company's business.
EARLY STAGE OF DEVELOPMENT; HISTORY OF OPERATING LOSSES; ANTICIPATION OF
FUTURE LOSSES
The Company is in a development stage. It has generated no revenues from
product sales, and it does not expect to generate revenue from product sales
for several years, if at all. As of March 31, 1996, the Company's accumulated
deficit was $45,776,394. To date, the Company has dedicated most of its
financial resources to ERGOSET research and development, general and
administrative expenses, and the prosecution of patents and patent
applications. The Company expects to incur significant and increasing
operating losses for at least the next several years, primarily owing to the
expansion of its research and development programs, including
8
<PAGE>
preclinical studies and clinical trials. The Company's ability to achieve
profitability will depend, among other things, on its successfully completing
development of its product candidates, obtaining regulatory approvals,
establishing manufacturing, sales and marketing capabilities or collaborative
arrangements, 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 "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and "Business."
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 issuances of
equity securities. The Company has expended, and will continue to require,
substantial funds to continue research and development, including preclinical
studies and clinical trials of its product candidates, and to commence sales
and marketing efforts if regulatory approvals are obtained. The Company's
capital requirements will depend on many factors, including the problems,
delays, expenses and complications frequently encountered by development stage
companies; the progress of the Company's research, development and clinical
trial programs; the extent and terms of any collaborative research,
manufacturing, marketing or other funding arrangements; the costs and timing of
seeking regulatory approvals of the Company's product candidates; the Company's
ability to obtain regulatory approvals; the success of the Company's sales and
marketing programs; costs in 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 testing and regulatory
procedures relating to the Company's product candidates can be conducted at
projected costs. To satisfy its capital requirements, the Company may seek to
raise funds in the public or private capital markets. The Company's ability to
raise additional funds in the public or private markets will be adversely
affected if the results of ongoing or future clinical trials are not favorable
or if regulatory approval for any of the Company's product candidates is not
obtained. 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, or, if available, that it will
be available on acceptable terms. 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 product
candidates. If the Company is successful in obtaining additional financing, the
terms of the financing may have the effect of diluting or adversely affecting
the holdings or the rights of the holders of Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
UNCERTAINTY OF PROTECTION FOR PATENTS AND PROPRIETARY TECHNOLOGY
The Company's ability to commercialize any product candidates will depend, in
part, upon its or its licensors' ability to obtain patents, enforce those
patents, preserve trade secrets, and operate without infringing upon the
proprietary rights of third parties. In addition, the Company's patent
portfolio for its current product candidates is based on the timed
administration of neurotransmitter modulating drugs to address abnormalities of
the neuroendocrine system. If similar benefits could be achieved by using such
drugs without timed administration, the Company's patents and proprietary
technology would not prevent that use, and the use would likely have a material
adverse effect on the Company. There can be no assurance that the patent
applications licensed to or owned by 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, or that any patents will provide meaningful protection to
the Company.
In general, the United States patents and patent applications owned by or
licensed to the Company are method-of-use patents that cover the timed use of
certain compounds to treat specified conditions. The U.S. patents for
bromocriptine, the active ingredient in ERGOSET, have expired, and composition-
of-matter protection
9
<PAGE>
is not available for the active ingredient. Bromocriptine is currently sold in
the United States and other markets for several uses other than the treatment
of Type II diabetes or obesity. Even in jurisdictions where the use of
bromocriptine for Type II diabetes may be covered by the claims of a use
patent licensed to the Company, off-label sales might occur, especially if
another company markets bromocriptine at a price that is less than the price
of ERGOSET, thereby potentially reducing the sales of ERGOSET. See "Business--
Competition" and "Business--Government Regulation."
The patent positions of biotechnology and pharmaceutical companies are
highly uncertain and involve complex legal and factual questions. There can be
no assurance that patents will issue from the patent applications filed by the
Company or its licensors or that the scope of any claims granted in any patent
will provide proprietary protection or a competitive advantage to the Company.
There can be no assurance that the validity or enforceability of patents
issued or licensed to the Company will not be challenged by others or that, if
challenged, a court will find the patents to be valid and enforceable. In
addition, there can be no assurance that competitors will not be able to
circumvent any patents issued or licensed to the Company.
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 have 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, if at all, upon terms and conditions acceptable to the Company
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 pursue such litigation. If the Company does
not obtain a license under such patents, 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 recently began a small clinical study of two drugs for the treatment
of breast cancer. The Company is aware of an issued patent owned by a third
party which, if validly issued, likely covers one of the drugs being tested.
If the Company's product candidate infringes such issued patent, the Company
may have to seek a license to such patent. There can be no assurance that the
Company has identified United States and foreign patents that pose a risk of
infringement.
Ergo also relies on trade secrets and other unpatented proprietary
information in its product development activities. To the extent that 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 and
collaborators. 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 product candidates, disputes may arise about
ownership of proprietary rights to those inventions and processes. Such
inventions and processes will not necessarily become the Company's property,
but may remain the property of those persons or their employers. Protracted
and costly litigation could be necessary to enforce and determine the scope of
the Company's proprietary rights. Failure to obtain or maintain patent and
trade secret protection, for any reason, would have a material adverse effect
on the Company. See "Business--Patents, Proprietary Rights and Licenses."
The Company's rights to ERGOSET and its other technologies derive primarily
from a license from Louisiana State University ("LSU") for certain patents and
patent applications. The Company is a co-owner of certain of these patents and
patent applications. The Company has a right of first negotiation for new
technologies that LSU develops relating to the licensed technologies. There
can be no assurance that the Company will successfully obtain rights to any
such new technologies. If the license with LSU is terminated for any reason,
the Company would no longer possess the rights necessary to commercialize
ERGOSET and certain other technologies relating to the timed administration of
neurotransmitter modulating drugs. This would have a material adverse effect
on the Company. See "Business--LSU Agreement."
10
<PAGE>
The Company engages in collaborations, sponsored research agreements, and
other arrangements, such as the LSU Agreement, with academic researchers and
institutions that have received and may receive funding from United States
government agencies. As a result of these arrangements, the U.S. government or
certain third parties may have rights in certain inventions developed during
the course of the performance of such collaborations and agreements as required
by law or such agreements.
Several bills affecting patent rights have been introduced in the United
States Congress. These bills address various aspects of patent law, including
publication, patent term, re-examination, subject matter and enforceability. It
is not certain whether any of these bills will be enacted into law or what form
new laws may take. Accordingly, the effect of legislative change on the
Company's intellectual property estate is uncertain.
COMPETITION AND TECHNOLOGICAL CHANGE
The Company is engaged in pharmaceutical product development characterized by
extensive research efforts and rapid technological progress. Although the
Company is not aware of any other company attempting to treat Type II diabetes,
obesity or other metabolic diseases by altering daily neuroendocrine patterns,
many established biotechnology and pharmaceutical companies, universities, and
other research institutions with resources significantly greater than the
Company's are developing products that directly compete with the Company's
products. Those entities may succeed in developing products that are safer,
more effective or less costly than the Company's product candidates. Many drugs
are commercially available for the treatment of Type II diabetes, including two
drugs (Acarbose(R) and Glucophage(R)) that have recently been approved by FDA.
It appears that Glucophage is rapidly gaining market acceptance as a therapy
for Type II diabetes. There can be no assurance that ERGOSET will be able to
compete successfully with any of those products if regulatory approval is
received. In addition, ERGOSET promotional activities will be limited to the
claims on the product label approved by FDA. Other companies may be more
successful in marketing their products than the Company because of greater
financial resources, stronger sales and marketing efforts, and other factors.
If the Company commences significant commercial sales of its products, it or
its collaborators will compete in areas in which the Company has little or no
experience such as manufacturing and marketing. See "Business--Competition."
The active ingredient in ERGOSET is approved by FDA for indications other
than Type II diabetes. Physicians may choose to prescribe other drugs
containing this active ingredient for off-label use to try to achieve the same
effects as ERGOSET. Substitution of other forms of the active ingredient may
have a material adverse effect on the market for ERGOSET. This risk could be
increased if current regulations prohibiting off-label marketing are changed.
See "Business--Patents, Proprietary Rights and Licenses" and "Business--
Government Regulation." There can be no assurance that the Company's product
candidates, if commercialized, will be accepted and prescribed by healthcare
professionals. See "Business--Competition."
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of this offering, directors, executive officers and principal
stockholders of the Company, and certain of their affiliates, will beneficially
own approximately 50% of the outstanding Common Stock (approximately 49% if the
Underwriters exercise their over-allotment option in full). Accordingly, these
stockholders, individually and as a group, may be able to influence the outcome
of stockholder votes, including votes concerning the election of directors, the
adoption or amendment of provisions in the Company's Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation"), and the
approval of mergers and other significant corporate transactions. These levels
of concentrated ownership by a few persons, along with the factors described in
"Risk Factors--Anti-Takeover Provisions," may have the effect of delaying or
preventing a change in the management or voting control of the Company. See
"Principal and Selling Stockholders."
POTENTIAL PRODUCT LIABILITY; AVAILABILITY OF INSURANCE
The Company risks exposure to product liability claims if the use of its
products is alleged to have an adverse effect on subjects or patients. This
risk exists for product candidates tested in human clinical trials as well as
products that are sold commercially, if any. There can be no assurance that
product liability claims, if
11
<PAGE>
made, would not result in a recall of the Company's products or a change in
the indications for which they may be used. The Company maintains product
liability insurance coverage for claims arising from the use of its product
candidates in clinical trials. There can be no assurance that this coverage
will be adequate to cover claims. Product liability insurance is becoming
increasingly expensive, however, and no assurance can be given that the
Company will be able to maintain such insurance, obtain additional insurance,
or obtain insurance at a reasonable cost or in sufficient amounts to protect
the Company against losses that could have a material adverse effect on the
Company. Further, there can be no assurance that the Company will be able to
obtain product liability insurance for the administration of its product
candidates, including ERGOSET, in the future or that such insurance and the
resources of the Company would be sufficient to satisfy any liability
resulting from product liability claims. In addition, the loss of coverage for
the administration of the Company's product candidates would be a breach of
the terms of the Company's agreements with LSU and Geneva, which could lead to
termination of those agreements. Termination of either agreement would have a
material adverse effect on the Company. See "Business--Commercialization
Strategy--Manufacturing" and "Business--LSU Agreement."
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends in large part on the Company's ability to
attract and retain highly qualified scientific and management personnel. The
Company faces competition for such personnel from other companies, research
and academic institutions, government entities and other organizations. There
can be no assurance that the Company will be successful in hiring or retaining
key personnel. See "Business--Competition," "Business--Human Resources" and
"Management--Directors and Executive Officers."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public market
following this offering could adversely affect the market price for the Common
Stock. Approximately 5,957,178 shares of Common Stock will be eligible for
sale beginning April 27, 1997, subject to compliance with the manner-of-sale,
volume and other limitations of Rule 144. The SEC has proposed an amendment to
Rule 144 that, if adopted, would permit those shares to be sold earlier. See
"Shares Eligible for Future Sale." Some investors have the right to require
the Company to register the public resale of their shares before that time.
See "Description of Capital Stock--Registration Rights."
POSSIBLE STOCK PRICE VOLATILITY
The trading price of the Common Stock and the price at which the Company may
sell securities in the future could be subject to large fluctuations in
response to announcements of research activities, technological innovations or
new products by the Company or its competitors, changes in government
regulations, developments concerning proprietary rights, formation or
termination of corporate alliances, quarterly variations in operating results,
litigation, clinical trials of product candidates, approval or denial of NDAs,
other FDA action or inaction, general market and economic conditions, the
liquidity of the Company and its ability to raise additional funds, and other
events. The market prices for securities of emerging biotechnology companies
have experienced extreme fluctuations in recent years. These fluctuations have
sometimes been unrelated to the operating performance of the affected
companies. These market fluctuations as well as general fluctuations in the
stock markets may also affect the price of the Common Stock. See "Price Range
of Common Stock."
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation (i) provides for staggered terms
of office for directors; (ii) requires certain procedures to be followed and
time periods to be met for any stockholder to propose matters to be considered
at annual meetings of stockholders, including nominating directors for
election at those meetings; (iii) prohibits stockholders from calling special
meetings of stockholders; and (iv) authorizes the Board of Directors of the
Company to issue up to 10,000,000 shares of preferred stock without
stockholder approval and
12
<PAGE>
to set the rights, preferences, and other designations, including voting
rights, of those shares as the Board of Directors may determine. These
provisions, alone or in combination with each other and with the matters
described in "Risk Factors--Control by Existing Stockholders," may discourage
transactions involving actual or potential changes of control of the Company,
including transactions that otherwise could involve payment of a premium over
prevailing market prices to holders of Common Stock. The Company also is
subject to provisions of the Delaware General Corporation Law that may make
some business combinations more difficult. See "Description of Capital Stock--
Delaware Law and Certain Charter Provisions."
IMMEDIATE AND SUBSTANTIAL DILUTION; ABSENCE OF DIVIDENDS
Purchasers of the Common Stock in the offering will experience an immediate
and substantial dilution in net tangible book value per share. These investors
will also experience additional dilution upon the exercise of outstanding
options. See "Dilution." The Company intends to retain earnings, if any, for
use in its business and does not anticipate paying any cash dividends. In
addition, the terms of the Company's Series D Preferred Stock prohibit the
Company from paying cash dividends on the Common Stock. See "Dividend Policy"
and "Description of Capital Stock--Series D Preferred Stock."
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains forward-looking statements. The words "anticipate,"
"believe," "expect," "plan," "intend," "estimate," "project," "will," "could,"
"may," 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 involve risks and
uncertainties, including without limitation the risks described in "Risk
Factors." Should one or more of these risks or uncertainties occur, or should
underlying assumptions prove incorrect, actual results may vary materially and
adversely from those anticipated, believed, estimated or otherwise indicated.
13
<PAGE>
THE COMPANY
The Company's predecessor, Ergo, Inc., was incorporated in Rhode Island on
January 23, 1990, to develop novel treatments for metabolic disorders
including Type II diabetes and obesity. In 1992, Ergo Science Incorporated was
incorporated in Delaware and succeeded to the business of Ergo, Inc. Ergo
Science Corporation was incorporated in Delaware on December 7, 1994, as a
wholly owned subsidiary of Ergo Science Incorporated under the name Ergo
Science Holdings, Incorporated. In April 1995, the business was recapitalized
in a transaction in which the stock of Ergo Science Incorporated was exchanged
for stock of Ergo Science Holdings, Incorporated. After the recapitalization,
Ergo Science Holdings, Incorporated, changed its name to Ergo Science
Corporation. References in this Prospectus to Ergo or the Company include its
subsidiaries and predecessors. The Company's principal executive offices are
located at Charlestown Navy Yard, 100 First Avenue, Charlestown, Massachusetts
02129-2051. The Company's telephone number is (617) 241-6800.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby are estimated to be approximately $ after
deducting the estimated underwriting discounts and commissions and offering
expenses ($ if the Underwriters exercise their over-allotment option in
full).
The Company intends to use the net proceeds for clinical trials of ERGOSET
for Type II diabetes, obesity, and breast cancer, preclinical studies and
other clinical trials, research and development, and general corporate
purposes. Allocation of the proceeds for such purposes and the timing of the
expenditures will vary depending on numerous factors, including the hiring of
additional personnel, the progress of the Company's research and development
programs, the results of preclinical studies and clinical trials of its
product candidates, the cost, timing and nature of regulatory approvals, if
any, technological advances, the commercial potential of its products, the
terms of any collaborative arrangements that the Company establishes, and the
status of competitive products. See "Risk Factors" and "Business." Pending
such uses, the net proceeds will be invested in short-term, interest bearing,
investment grade securities. The Company intends to invest and use the net
proceeds so as not to be considered an investment company under the Investment
Company Act of 1940.
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market under the symbol
"ERGO." The following table shows the high and low sale prices per share of
Common Stock as reported on the Nasdaq National Market during the periods
indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
4th Quarter (beginning December 14, 1995).................... $ 15 $ 9 1/4
YEAR ENDING DECEMBER 31, 1996:
1st Quarter.................................................. $24 1/4 $12
2nd Quarter.................................................. $21 1/2 $17 1/2
3rd Quarter (through July 16, 1996).......................... $18 3/4 $15 7/8
</TABLE>
The last sale price of the Common Stock as reported on the Nasdaq National
Market on July 16, 1996, was $16 3/4 per share. At July 16, 1996, there were
approximately 250 holders of record of the Common Stock.
DIVIDEND POLICY
The Company intends to retain earnings, if any, for use in its business and
does not anticipate paying any cash dividends. In addition, the terms of the
Company's Series D Preferred Stock prohibit the Company from paying cash
dividends on the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Description of Capital Stock--Series D Preferred Stock," and Note
7 of Notes to Consolidated Financial Statements.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March 31,
1996, and as adjusted to reflect the receipt of the estimated net proceeds from
the Company's sale of 2,500,000 shares of Common Stock pursuant to this
offering. This table should be read in conjunction with "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related notes in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------
ACTUAL AS ADJUSTED
------------ -----------
<S> <C> <C>
Long-term portion of capital lease obligation........ $ 82,149 $
Stockholders' equity:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized; 6,903 shares of Series D Preferred
Stock issued and outstanding actual and as
adjusted(1)....................................... 4,413,170
Common Stock, $.01 par value, 50,000,000 shares
authorized; 10,168,080 shares issued and
outstanding actual and 12,668,080 shares issued
and outstanding as adjusted(2).................... 101,681
Additional paid-in capital......................... 63,438,262
Cumulative dividends on preferred stock............ (2,403,603)
Deferred compensation(3)........................... (1,650,069)
Deficit accumulated during development stage....... (45,776,394)
------------ -----
Total stockholders' equity........................... 18,123,047
------------ -----
Total capitalization............................. $ 18,205,196 $
============ =====
</TABLE>
- -------
(1) Represents capital allocated to Series D Preferred Stock upon the issuance
of units of Preferred Stock and Common Stock in April 1995. The liquidation
preference of the Series D Preferred Stock is $6,903,000 plus accumulated
and unpaid dividends. See "Description of Capital Stock--Series D Preferred
Stock" and Note 7 of Notes to Consolidated Financial Statements.
(2) Common Stock as adjusted excludes 1,178,575 shares of Common Stock issuable
upon exercise of outstanding options at March 31, 1996, with a weighted
average exercise price of $4.57 per share. See "Management--Employee
Benefit Plans" and Note 9 of Notes to Consolidated Financial Statements.
(3) See Note 9 of Notes to Consolidated Financial Statements.
DILUTION
The Company's net tangible book value at March 31, 1996, was $13,709,877, or
$1.35 per share of Common Stock. Net tangible book value per share is
determined by dividing the tangible net worth of the Company (tangible assets
less total liabilities and the carrying value of the Series D Preferred Stock)
by the total number of shares of Common Stock outstanding. After giving effect
to the Company's receipt of the estimated net proceeds from the sale of the
2,500,000 shares of Common Stock offered hereby at an assumed offering price of
$16 3/4, the Company's net tangible book value at March 31, 1996, would have
been $ , or $ per share of Common Stock. This represents an immediate
increase in the net tangible book value of $ per share to the Company's
existing holders of Common Stock and an immediate dilution of $ per share to
new investors purchasing shares in this offering. The following table
illustrates the per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed public offering price per share........................... $
Net tangible book value per share of Common Stock at March 31,
1996........................................................... $1.35
Increase per share of Common Stock attributable to new
investors......................................................
-----
Net tangible book value per share of Common Stock as adjusted for
this offering ...................................................
---
Dilution per share to new investors............................... $
===
</TABLE>
The preceding table assumes no exercises of any stock options to purchase
Common Stock outstanding at March 31, 1996. The table also reflects that the
Series D Preferred Stock will remain outstanding. See "Description of Capital
Stock--Series D Preferred Stock" and Note 7 of Notes to Consolidated Financial
Statements. At March 31, 1996, there were 1,178,575 shares of Common Stock
issuable upon exercise of outstanding options with a weighted average exercise
price of $4.57 per share. See "Management--Employee Benefit Plans" and Note 9
of Notes to Consolidated Financial Statements. To the extent outstanding
options are exercised, there will be further dilution in net tangible book
value per share of Common Stock to new investors.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and related notes included elsewhere in this Prospectus. The consolidated
statement of operations data for the years ended December 31, 1994 and 1995,
and the consolidated balance sheet data at December 31, 1994 and 1995, are
derived from, and are qualified by reference to, the consolidated financial
statements included elsewhere in this Prospectus that have been audited by
Coopers & Lybrand L.L.P. The consolidated statement of operations data for the
year ended December 31, 1993, are derived from the consolidated financial
statements included elsewhere in this Prospectus that have been audited by
Ernst & Young LLP. The consolidated statement of operations data for the years
ended December 31, 1991 and 1992, and the consolidated balance sheet data at
December 31, 1991, 1992, and 1993, are derived from consolidated financial
statements not included in this Prospectus that have been audited and reported
on by Ernst & Young LLP. The unaudited consolidated financial data as of March
31, 1996, and for the three months ended March 31, 1995 and 1996, have been
prepared on a basis consistent with the audited consolidated financial
statements and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial condition and results of operations for the periods presented.
The results for the three months ended March 31, 1996, are not necessarily
indicative of the results that may be expected for the year ending December
31, 1996.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------------------------ ------------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues................ $ 154,404 $ 340,579 $ 107,710 $ 214,916 $ 94,348 $ 17,267 $ 270,402
Operating Expenses:
Research and
development........... 1,044,224 2,297,754 2,403,683 4,917,830 8,643,926 1,961,192 2,926,409
Purchase of in-process
research and
development........... -- -- -- -- 7,020,064 -- 168,750
General and
administrative(1)..... 656,783 1,363,566 3,165,038 4,256,934 6,580,308 1,930,450 1,073,128
----------- ----------- ------------ ------------ ------------ ----------- -----------
Total operating
expenses.............. 1,701,007 3,661,320 5,568,721 9,174,764 22,244,298 3,891,642 4,168,287
----------- ----------- ------------ ------------ ------------ ----------- -----------
Net loss............... (1,546,603) (3,320,741) (5,461,011) (8,959,848) (22,149,950) (3,874,375) (3,897,885)
Accretion of dividends
on preferred stock..... -- -- (409,357) (933,216) (668,313) (268,281) (106,650)
Dividends on redeemable
preferred stock(2)..... -- -- -- -- (7,123,536) -- --
Dividends on preferred
stock.................. -- -- -- -- (2,018,763) -- --
----------- ----------- ------------ ------------ ------------ ----------- -----------
Net loss to common
stockholders.......... $(1,546,603) $(3,320,741) $ (5,870,368) $ (9,893,064) $(31,960,562) $(4,142,656) $(4,004,535)
=========== =========== ============ ============ ============ =========== ===========
Net loss per common
share(3)(4)............ $ (0.40) $ (0.86) $ (1.52) $ (2.56) $ (8.06) $ (1.07) $ (0.39)
=========== =========== ============ ============ ============ =========== ===========
Weighted average common
stock and common
equivalents(3)......... 3,857,915 3,857,915 3,857,915 3,857,940 3,966,266 3,887,838 10,146,899
=========== =========== ============ ============ ============ =========== ===========
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------ MARCH 31,
1991 1992 1993 1994 1995 1996
----------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents............ $ 1,167,452 $ 3,479,534 $ 8,135,484 $ 1,880,982 $ 15,896,373 $ 8,177,095
Working capital......... 34,093 2,660,555 6,925,243 679,177 19,609,791 15,951,169
Total assets............ 1,609,871 4,255,800 9,840,148 4,302,889 24,949,911 19,765,120
Deferred revenue(5)..... 2,106,791 4,494,329 5,744,329 5,744,329 -- --
Total stockholders'
equity (deficit)....... (1,760,566) (5,100,790) (11,104,844) (20,674,994) 21,803,851 18,123,047
</TABLE>
- -------
(1) Includes a non-cash charge in 1995 of $1,747,931, of which $1,089,356 was
recognized in the first quarter, for Common Stock issued in connection
with a renegotiated supply contract. See Note 7 of Notes to Consolidated
Financial Statements.
(2) See Note 6 of Notes to Consolidated Financial Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements. Does not include
1,178,575 shares of Common Stock reserved for issuance upon exercise of
outstanding options at March 31, 1996. See "Management--Employee Benefit
Plans" and Note 9 of Notes to Consolidated Financial Statements.
(4) The Company has never paid cash dividends on its Common Stock other than
distributions made to stockholders when the Company was owned only by
individuals and had elected to be an S corporation for U.S. federal income
tax purposes.
(5) See Note 7 of Notes to Consolidated Financial Statements.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since inception, the Company has been engaged in the discovery and
development of novel treatments for metabolic disorders and cancer. The
Company has dedicated most of its financial resources to ERGOSET research and
development, general and administrative expenses, and the prosecution of
patents and patent applications. To date, the Company has not received any
revenues from the sale of products and does not expect to generate revenues
for several years, if at all. The Company has been unprofitable since its
inception, and the Company's accumulated deficit was $45,776,394 as of March
31, 1996. Although the Company intends to enter into collaborative
relationships, it expects to incur substantial and increasing losses for at
least the next several years, due primarily to the expansion of its research
and development programs, including preclinical studies and clinical trials.
The Company expects that losses will fluctuate from quarter to quarter and
that the fluctuations may be substantial.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1995, and March 31, 1996
Total revenues increased from $17,267 for the three months ended March 31,
1995, to $270,402 for the same period in 1996. Revenues were derived primarily
from interest income earned on cash, cash equivalents and short-term
investments. The increase in interest income is attributable to an increase in
the average amounts of cash, cash equivalents and short-term investments
during the first quarter of 1996, compared to the first quarter of 1995. These
amounts increased as a result of proceeds received from the Company's initial
public offering in December 1995.
Research and development expenses increased from $1,961,192 for the three
months ended March 31, 1995, to $3,095,159 for the same period in 1996. The
increase was principally the result of greater expenses related to Phase III
clinical trials for ERGOSET, continued progress on several early stage
research and development programs including those in metastatic breast cancer
and photodynamic therapy, and the hiring of additional research personnel.
General and administrative expenses decreased from $1,930,450 for the three
months ended March 31, 1995, to $1,073,128 for the same period in 1996. The
decrease was principally due to a net charge of $1,089,356 recorded in the
first quarter of 1995 related to a renegotiated supply agreement. Excluding
this nonrecurring, non-cash charge, general and administrative expenses
increased $232,034 in the first quarter of 1996, compared to the first quarter
of 1995. The increase was mainly due to the hiring of additional
administrative personnel.
Net loss increased from $3,874,375 to $3,897,885 while net loss to common
stockholders decreased from $4,142,656 to $4,004,535 for the three months
ended March 31, 1995 and 1996, respectively. Although the change in net loss
to common stockholders was minor, the net loss per common share decreased from
$(1.07) for the three months ended March 31, 1995, to $(.39) for the same
period in 1996. The decrease was attributable to the change in weighted
average common shares outstanding resulting from the Company's initial public
offering in December 1995. For the three months ended March 31, 1995, the
weighted average common shares outstanding was 3,887,838, compared to
10,146,899 for the same period in 1996.
Years Ended December 31, 1994, and December 31, 1995
Total revenues declined from $214,916 in 1994 to $94,348 in 1995. Revenues
were derived primarily from interest income earned on cash and cash
equivalents. The decrease in interest income is attributable to a decrease in
the average amounts of cash and cash equivalents during 1995, compared to
1994, as cash was used to fund the Company's operations.
Research and development expenses increased from $4,917,830 in 1994 to
$15,663,990 in 1995. The increase was principally the result of greater
expenses related to clinical trials of ERGOSET, the purchase of in-process
research and development, a license payment to LSU, and preclinical studies.
General and administrative expenses increased from $4,256,934 in 1994 to
$6,580,308 in 1995. The increase was principally due to a net charge of
$1,747,931 related to a renegotiated supply agreement, nonrecurring
17
<PAGE>
charges in connection with the termination of a manufacturing agreement, the
settlement of litigation, and the hiring of additional administrative
personnel.
Net loss increased from $8,959,848 in 1994 to $22,149,950 in 1995. Net loss
to common stockholders increased from $9,893,064 to $31,960,562 while net loss
per common share increased from $2.56 in 1994 to $8.06 in 1995.
Years Ended December 31, 1993, and December 31, 1994
Total revenues increased from $107,710 in 1993 to $214,916 in 1994. Revenues
in 1993 and 1994 were derived primarily from interest income earned on cash
and cash equivalents. The increase in revenues from 1993 to 1994 is due
primarily to an increase in the average amounts of cash and cash equivalents
on hand during 1994 as the Company raised additional funds.
Research and development expenses increased from $2,403,683 in 1993 to
$4,917,830 in 1994. This increase was principally a result of greater
expenditures for clinical trials of ERGOSET and greater expenditures for
preclinical studies.
General and administrative expenses increased from $3,165,038 in 1993 to
$4,256,934 in 1994. This increase was primarily due to increased staffing
levels and legal costs associated with litigation which has since been
settled.
NET OPERATING LOSS CARRYFORWARD
As of December 31, 1995, the Company's reported federal net operating loss
carryforwards were approximately $30 million. If not used, the tax loss
carryforwards will begin to expire in 2007. The Company's ability to use these
carryforwards is subject to limitations resulting from an ownership change as
defined in Internal Revenue Code Sections 382 and 383. See Note 5 of Notes to
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's primary source of cash has been from
financing activities, which have consisted of private placements of equity
securities and its initial public offering. Private placements of equity
securities through March 31, 1996, provided the Company with aggregate
proceeds of $32,999,000. On December 19, 1995, the Company raised $23,030,476
from the sale of stock in an initial public offering, net of commissions and
offering costs. Cash and cash equivalents were $15,896,373 and $8,177,095,
while short-term investments were $6,325,502 and $8,860,301, at December 31,
1995, and March 31, 1996, respectively. The decrease in cash and cash
equivalents at March 31, 1996, was due primarily to a shift in the Company's
investment portfolio to include more short-term investments and the funding of
the Company's operations.
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. As of March 31, 1996, the
Company's net investment in equipment and leasehold improvements was
$2,210,396. The Company expects that additional equipment and facilities will
be needed to the extent it increases its research and development activities.
The Company believes that the net proceeds of this offering, together with
available cash, cash equivalents, short-term investments and expected interest
income, will be adequate to fund its current and anticipated levels of
operations through 1998. Before then, the Company will need to raise
additional capital through the sale of securities in the public or private
equity markets or by entering into a collaborative arrangement with another
company. See "Business--Commercialization Strategy." There can be no
assurance, however, that events in the Company's research and development
programs or other events affecting the Company's operations will not result in
accelerated or unexpected expenditures. The Company is pursuing additional
research and development of ERGOSET and other product candidates to treat
obesity, breast cancer and other diseases. The Company will require additional
financing to expand and complete that research and development. To the extent
the Company raises additional capital by issuing equity securities, ownership
dilution to existing stockholders will result and future investors may be
granted rights superior to those of existing stockholders. There can be no
assurance, however, that additional financing will be available from any
source or, if available, will be available on acceptable terms. See "Risk
Factors--Future Capital Needs; Uncertainty of Additional Funding."
The terms of the Series D Preferred Stock prohibit the Company from paying
dividends on the Common Stock. See "Dividend Policy" and "Description of
Capital Stock--Series D Preferred Stock."
18
<PAGE>
BUSINESS
OVERVIEW
Ergo Science Corporation is developing novel treatments for metabolic
disorders, including Type II diabetes and obesity, and for cancer. The
Company's technology uses orally administered neurotransmitter modulating
drugs to address abnormalities of the neuroendocrine system. The Company
believes that its approach may provide the platform for a new class of
treatments for a variety of glucose and lipid metabolic disorders and cancer.
The Company's lead drug candidate, ERGOSET(TM), is a low-dose, fast-release,
oral tablet formulation of bromocriptine, a dopamine agonist previously
approved by FDA to treat Parkinson's disease and other conditions. The Company
recently completed two Phase III clinical trials of ERGOSET as adjunctive
therapy with sulfonylurea agents for the treatment of Type II diabetes. A
preliminary analysis of the two completed Phase III clinical trials indicated
that ERGOSET improved control of glucose, triglycerides, free fatty acids, and
cholesterol in Type II diabetics. The Company anticipates completing a third
Phase III clinical trial of ERGOSET as monotherapy for Type II diabetes by the
end of 1996. The Company plans to submit an NDA to FDA for ERGOSET to treat
Type II diabetes in 1997. See "Risk Factors--Forward Looking Statements and
Associated Risks." Ergo has also conducted clinical trials of ERGOSET for the
treatment of obesity and intends to conduct additional obesity clinical trials
of ERGOSET by itself and in combination with another product candidate. Ergo
currently retains all marketing rights to its drug candidates.
Ergo's preclinical studies suggest that temporal changes in neuroendocrine
activity may also play an important role in the body's regulation of immune
function and the body's ability to fight cancer. The Company is currently
enrolling patients in a small Phase II clinical trial of two neurotransmitter
modulating compounds for the treatment of metastatic breast cancer. The
Company is also evaluating the use of phototherapeutic dyes in photodynamic
therapy ("PDT") to treat various tumors. See "Business--Immune Regulation and
PDT for Cancer."
The following table illustrates the general focus and status of the
Company's product development efforts.
<TABLE>
<CAPTION>
PRODUCT CANDIDATE DISEASE INDICATIONS STATUS
- --------------------------------------------------------------------------------
<S> <C> <C>
METABOLIC DISORDERS
ERGOSET as adjunctive Type II diabetes Two Phase III clinical
therapy with trials completed
sulfonylureas
ERGOSET as monotherapy Type II diabetes Phase III clinical trial
ongoing
ERGOSET as adjunctive Type II diabetes Preclinical research and
therapy with metformin clinical trials planned
and with insulin
ERGOSET Obesity Additional Phase II
clinical trial planned
D1/D2 combination (1) Type II diabetes Preclinical research
Obesity
Dopamine Type II diabetes Preclinical research
agonist/serotonin Obesity
agonist
CANCER
ERGOSET/serotonin Metastatic breast cancer Phase II clinical trial
agonist currently enrolling
patients
PDT and PDT/immune Cancer Selection of lead clinical
regulation candidate
</TABLE>
(1) Dopamine receptors.
19
<PAGE>
METABOLIC DISORDERS
The Company's primary focus is the treatment of Type II diabetes and
obesity. These disorders involve defects in the complex relationship between
glucose and fat metabolism. To sustain life, the human body must convert food
into glucose, a simple form of sugar, for use as a source of energy for the
body's cells. When glucose is abundant, it is converted into fat
(triglycerides) and stored in the adipose tissue for use when food is not
available. When glucose is not available from food, triglycerides in the
adipose tissue are broken down into free fatty acids that stimulate glucose
production by the liver. Insulin, which is secreted by the pancreas, plays an
important role in regulating the level of glucose in the blood stream by
stimulating the use of glucose as fuel and by inhibiting the production of
glucose in the liver. In a healthy metabolic state, a balance is maintained
between the sources and uses of glucose and the sources and uses of fat.
Diabetes
General. The term diabetes refers to a group of disorders that are
characterized by a single common feature: abnormally high levels of glucose in
the blood. Type I diabetes (juvenile-onset diabetes or insulin dependent
diabetes) is believed to result from the impaired function of the pancreas in
producing insulin. Type II diabetes (adult onset or noninsulin dependent
diabetes mellitus) is believed to involve a defect referred to as "insulin
resistance." Insulin resistance occurs when insulin-stimulated uptake of
glucose into peripheral cells is impaired and the inhibitory effect of insulin
on glucose production in the liver is reduced. This condition leads to
excessive blood levels of glucose (hyperglycemia). Hyperglycemia in most
diabetics is accompanied by increases in the blood levels of triglycerides,
free fatty acids, and other lipids. Type II diabetes is a chronic and
incurable disease that accounts for 90% to 95% of all diagnosed cases of
diabetes. It is a leading cause of death in the United States.
Many researchers believe that Type II diabetics develop insulin resistance
first, then impaired glucose tolerance, and finally diabetes. Due to a
combination of environmental and genetic factors, people develop insulin
resistance and compensate for modest insulin resistance by secreting more
insulin to maintain control of their blood glucose levels. Despite increased
insulin production, some people lose their ability to control blood glucose
over time as their insulin resistance increases. At this stage, the person
becomes impaired glucose tolerant, a condition characterized by normal blood
glucose levels before eating and hyperglycemia after eating. When a person
loses the ability to regulate blood glucose levels and exhibits persistent
hyperglycemia, the person is considered to be a Type II diabetic.
When blood glucose levels are not controlled within a narrow range, severe
complications can result. Hyperglycemia over an extended period of time is
believed to damage the walls of blood vessels, causing complications
characteristic of Type II diabetes including blindness from microvascular
deterioration in the retina, loss of circulation in the extremities leading to
amputation, coronary artery disease, and kidney failure. In addition, the high
blood levels of triglycerides, free fatty acids, and total cholesterol pose
serious health risks to the diabetic and are believed to lead to
cardiovascular disease including coronary heart disease. Approximately 70% to
80% of Type II diabetics are obese, and mortality in most Type II diabetics is
caused by cardiovascular disease and stroke, which are commonly associated
with hyperlipidemia and obesity.
Need for New Diabetes Treatments. There is no cure for diabetes. After
diagnosis, the first course of therapy for Type II diabetics is to try to
control hyperglycemia through diet and exercise. If this fails to achieve
glycemic control, the patients typically begin medication. The two leading
medications for Type II diabetes have traditionally been insulin and a class
of oral drugs called sulfonylureas. Each of these drugs reduces glucose levels
by increasing serum insulin levels. Most patients initially take
sulfonylureas, which work by stimulating the production of insulin in the
pancreas. Over time, many Type II diabetics taking sulfonylureas lose their
ability to control glucose levels, and others lose their ability to secrete
insulin. In either case, the Type II diabetic must then begin daily insulin
injections. The labeling of all sulfonylureas includes a special warning on
the possible increased risk of cardiovascular mortality from the use of the
drugs. Researchers suspect that the increased risk of cardiovascular disease
may be the result of above-normal levels of serum insulin, which may stimulate
the liver to increase lipid levels in the bloodstream, contributing to
atherosclerosis and obesity. Many patients who
20
<PAGE>
take sulfonylureas still experience elevated blood glucose and lipid levels.
For these reasons, there is a need for new diabetes therapies that improve
control of blood glucose and the co-morbid conditions associated with the
disease.
FDA recently approved two new drugs, Acarbose (precose) and Glucophage
(metformin), for treatment of Type II diabetes. Both drugs have methods of
action that are different from sulfonylureas. Acarbose is taken orally with
each meal and blocks the enzymes necessary for the body to digest and absorb
carbohydrates. Metformin is believed to work by reducing glucose output from
the liver. See "Business--Competition."
Demographics and Market Size. According to the American Medical Association
and the American Diabetes Association, approximately 15 million people will
suffer from Type II diabetes in the United States in 1996, seven million have
been diagnosed with the disease, and approximately 32 million will suffer from
the disease in 2010. According to IMS America Ltd., a pharmaceutical market
research firm, sulfonylureas are a leading pharmaceutical product with annual
sales of approximately $720 million in the United States. Insulin is also a
leading pharmaceutical product with annual sales of approximately $680 million
in the United States.
Obesity
General. The term obesity refers to a disorder in which a person's total
body weight is more than 30% over the weight that is normal for healthy
persons of the same age and height. Obesity is generally characterized by a
low lean-to-fat body mass ratio and is often accompanied by high blood lipid
levels. While the causes of obesity vary, many researchers believe that
insulin resistance contributes to the development of obesity.
Demographics and Market Size. Obesity is a significant health problem in the
United States. According to preliminary data from the 1994 National Health and
Nutrition Examination Survey, about 60 million Americans, or 45% of the adult
population, are overweight and about 35 million, or 26% of the adult
population, are obese. Obesity is considered a risk factor for Type II
diabetes. Approximately 30% of obese Americans are Type II diabetics, and many
of the others are considered to be in pre-diabetic states with varying levels
of insulin resistance or impaired glucose tolerance. Obesity is also
considered a risk factor for cardiovascular disease, gall bladder disease and
osteoarthritis. Recently, it was reported in the New England Journal of
Medicine that obesity itself can affect longevity. When statisticians ruled
out the effects of smoking, high-fat diets, lack of exercise and other
unhealthy living habits of 115,000 nurses tracked since 1976, they found that
25% of premature deaths in this study were associated with obesity.
THE COMPANY'S TECHNOLOGY
Ergo's founding scientists, Anthony H. Cincotta, Ph.D., formerly of
Massachusetts General Hospital and Harvard Medical School, and Albert H.
Meier, Ph.D., formerly of Louisiana State University, have conducted extensive
research into the way changes in the daily patterns of neuroendocrine activity
regulate changes in glucose and lipid metabolism observed in seasonal and non-
seasonal animals as well as in the ob/ob mouse, a genetically insulin
resistant and fat animal model. Ergo has elaborated on this research to focus
on how changes in daily patterns of neuroendocrine activities may improve
disease conditions in humans.
Overview of Temporal Neuroendocrine Regulation of Metabolism
Many animal species become insulin resistant and fat during one season of
the year and insulin sensitive and lean during other seasons of the year.
These seasonal increases in lipid production and storage provide an energy
source to the animal to endure times of low food availability, provide energy
for migration and hibernation, and provide insulation during the winter. Thus,
many species of animals have developed this ability to become seasonally
insulin resistant and fat in order to survive adverse environmental
conditions. Researchers have observed that animals in a seasonally insulin
resistant and fat condition display a metabolic profile that is similar to the
metabolic profile of insulin resistant and obese humans who have Type II
diabetes and its related metabolic disorders.
21
<PAGE>
Ergo's scientists have demonstrated that the seasonally insulin resistant and
fat condition in animals is associated with seasonal changes in the daily
pattern of neuroendocrine activity. The neuroendocrine system--a complex
physiological system that includes the brain, peripheral nervous system and
hormones--is one of the mechanisms that regulate and coordinate many functions
of the body. Neurotransmitters in the hypothalamus area of the brain such as
dopamine, serotonin and noradrenalin are involved in regulating the production
of hormones by the pituitary and other endocrine glands, which in turn help
regulate various cellular activities such as the liver's production of lipids.
Ergo's scientists have demonstrated that, when vertebrate animals are in a
seasonally insulin resistant, fat condition, they evidence a specific daily
pattern of neuroendocrine activity. This pattern is evidenced in part by
changes in the serum level of the hormone prolactin at specific times of day.
For example, in the Syrian hamster the concentration of the hormone prolactin
in the blood of the animal peaks at approximately four hours after sunrise each
day when the animal is in its insulin sensitive, lean summer condition. When
the animal is in its insulin resistant, fat winter condition, prolactin levels
peak at approximately 12 hours after sunrise each day. Further, Ergo's
scientists have observed that these changes in daily hormone patterns occur for
a number of different hormones and that a pattern exists in the levels of
certain hormones in the summer condition of animals that differs from the
pattern exhibited during the winter condition. The production of these hormones
is stimulated by dopamine and other neurotransmitters in the hypothalamus. The
following graphs illustrate the differences between the pattern of prolactin
levels in the Syrian hamster during its insulin sensitive, lean condition and
the pattern during its insulin resistant, fat condition.
[Under the heading "Seasonal Neuroendocrine Profile of Syrian Hamster," two line
graphs titled "Summer Condition, Insulin Sensitive, Lean" and "Winter Condition,
Insulin Resistant, Fat," respectively, with hourly increments of time on the
x-axis and plasma prolactin levels on the y-axis, showing prolactin levels in a
Syrian hamster peaking at four hours after light onset in an insulin sensitive,
lean Syrian hamster and 12 hours after light onset in an insulin resistant, fat
Syrian hamster, appear here.]
22
<PAGE>
Moreover, the Company's scientists have demonstrated that the timed
administration of certain pharmaceuticals in seasonal animals can alter
neurotransmitter activity, which affect daily hormone patterns to produce the
desired seasonal metabolic conditions out of season. When neurotransmitter
modulating drugs known to affect the neuroendocrine system are administered to
a seasonally insulin resistant, fat animal at specific times designed to shift
its neuroendrocine patterns to mimic those of a seasonally insulin sensitive,
lean animal, the animal's metabolism shifts to an insulin sensitive, lean state
regardless of the actual season of the year. In studies presented at the June
1996 annual meeting of the American Diabetes Association, Ergo's scientists
measured levels of neurotransmitter metabolites in the ventral medial
hypothalamus ("VMH") of insulin resistant, fat Syrian hamsters. The studies
indicated that insulin resistant, fat Syrian hamsters became insulin sensitive
and lean in two weeks through the administration of neurotransmitter modulating
drugs at a specific time of day. The studies also indicated that the altered
condition correlated with a change in the daily pattern of levels of
neurotransmitter metabolites in the VMH, which evidenced an alteration in the
daily neuroendocrine patterns in the animals.
Ergo's scientists have also demonstrated that the timed administration of
certain pharmaceuticals in non-seasonal animals with insulin resistance and
obesity can alter the animal's daily neuroendocrine pattern and produce a
leaner, more insulin sensitive animal. In preclinical studies with the leptin-
deficient ob/ob mouse, a genetically insulin resistant and fat animal model,
Ergo's scientists achieved significant reductions in the animal's body fat
through the timed administration of neurotransmitter modulating drugs. In one
study presented at the June 1996 ADA annual meeting, Ergo's scientists reported
that the use of two neurotransmitter modulating drugs produced a significant
(between 50% and 60%) reduction in food intake and a decrease in body fat gain
of 22% to 32% with no significant decrease in lean body (muscle) mass compared
with control animals. The treatment also improved glycemic control, reducing
glucose 57% and insulin 50%. The following graph illustrates that body fat
gain, serum insulin levels, and blood glucose levels were reduced in the
treated ob/ob mouse.
[Under the heading "Modifying Glucose and Lipid Metabolism in the Ob/Ob Mouse,"
three bar graphs with both a "control" and "drug" bar on the x-axis and with
"fat pad weight gain," "serum insulin" levels and "blood glucose" levels on the
y-axis, respectively, showing that body fat gain, serum insulin levels and
blood glucose levels were reduced in the animals on drug compared with the
control animals from approximately 3.8g to 1.7g, 9.5 ng/dl to 5.5 ng/dl and 260
mg/dl to 140 mg/dl, respectively, appear here.]
23
<PAGE>
In a second study also presented at the 1996 ADA annual meeting, Ergo's
scientists found that the administration of a dopamine agonist and a serotonin
agonist at specific times of day produced a significant (approximately 30%)
reduction in food intake compared with control animals and reduced body fat
gain 30% to 75% and body weight gain 40% to 60% in the ob/ob mouse. In that
study, lean body mass increased 5% to 17%, indicating that the two-drug
treatment reduced weight by selectively reducing body fat. The Company
believes the selective reduction in body fat gain and preservation of lean
body mass has significant implications for the treatment of obesity in humans
because improvement in the lean-to-fat body mass ratio may reduce
cardiovascular risk associated with chronic obesity.
Development of ERGOSET and Other Products for Metabolic Disorders
Ergo's scientists believe that their data suggest that defects in glucose
and lipid metabolism are associated with a neuroendocrine abnormality that,
during the daytime, involves reduced levels of dopaminergic activity and an
excess of serotonergic and noradranergic activity, and, during the nighttime,
involves an excess of dopaminergic activity and a reduced level of
serotonergic activity. Ergo's technology employs neurotransmitter modulating
compounds to alter the daily patterns of neurotransmitter activity. These
patterns function as biological clocks that the neuroendocrine system uses to
regulate metabolism and other physiological functions such as the immune
system. The aging process, as well as changes in the environment of humans
such as diet, sedentary lifestyles, and artificial lighting, may be changing
the timing and regularity of daily neuroendocrine patterns in humans.
Accordingly, the Company's therapeutic strategy to treat metabolic disorders
is to develop neurotransmitter modulating compounds for administration at a
particular time of day to alter specific neuroendocrine patterns that are
believed to influence the regulation of glucose and lipid metabolism.
The Company has developed ERGOSET, a low-dose, fast-release, oral tablet
formulation of a dopamine agonist. ERGOSET's active ingredient, bromocriptine,
has been approved by FDA to treat Parkinson's disease and other conditions.
Bromocriptine increases dopaminergic activity and decreases serotonergic
activity. ERGOSET tablets are formulated to permit titration of the drug at
low doses and to minimize gastrointestinal problems. In contrast to insulin,
which is injected, and sulfonylurea agents and metformin, which are taken
multiple times daily in varying doses, ERGOSET for Type II diabetes is a once-
daily oral therapy that may facilitate patient compliance.
The primary focus of the Company's clinical trials of ERGOSET to date has
been to study the effects of the drug on glucose and lipid metabolism, with
emphasis on Type II diabetes and obesity. The Company began clinical trials of
ERGOSET during 1992, completed two Phase III clinical trials of ERGOSET as
adjunctive therapy for Type II diabetes in the first half of 1996, and
anticipates completing the Phase III clinical trial of ERGOSET as monotherapy
for Type II diabetes by the end of 1996. Ergo plans to begin additional
studies in late 1996 and 1997 of ERGOSET for Type II diabetes using ERGOSET as
adjunctive therapy with insulin and in combination with Glucophage
(metformin).
Ergo has conducted Phase II clinical trials of the use of ERGOSET to reduce
body fat in obese subjects and plans to begin enrolling patients in a separate
Phase II clinical trial of ERGOSET to treat obese patients in the first half
of 1997.
The Company is in the process of selecting at least one lead candidate for
clinical development as a second generation treatment for Type II diabetes and
obesity. The possible candidates include a combination of a dopamine D2
agonist such as ERGOSET with a dopamine D1 agonist, and a therapy using a
dopamine agonist at one time of day in combination with a serotonin agonist at
another time of day. The Company is also studying additional delivery methods
to improve the therapeutic index of ERGOSET and other neurotransmitter
modulating drugs.
24
<PAGE>
ERGOSET CLINICAL TRIAL OVERVIEW
Ergo's three Phase III clinical trials of the timed daily administration of
ERGOSET tablets for the treatment of Type II diabetes involve over 600 obese
Type II diabetic subjects. Because the active ingredient in ERGOSET,
bromocriptine, has been approved for human use in other indications for more
than 15 years at dosage levels greater than those used in ERGOSET therapy, the
Company initiated Phase II clinical trials directly following preclinical
studies. The primary clinical endpoint of the Phase III clinical trials and
many of the Phase II clinical trials is to achieve a clinically and
statistically significant reduction in blood levels of glycated hemoglobin
A1c, an indicator of glycemic control in diabetics. The following table sets
forth general information about Ergo's Phase II and Phase III clinical trials
of ERGOSET for Type II diabetes and obesity.
<TABLE>
<CAPTION>
STUDY DESCRIPTION SUBJECTS STATUS ENDPOINT
- ----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
92-1 Phase II--Open Label 15 Complete Diurnal Hormone Profile Screening
92-2 Phase II--Open Label 25 Complete Diurnal Plasma Glucose and Insulin
Concentrations
93-1 Phase II--Open Label 10 Complete Glucose Uptake Measured by
Euglycemic Insulin Clamp Technique
93-2 Phase II--Double- 46 Complete Body Weight, Body Fat and Total
Blinded, Placebo- Glycated Hemoglobin
Controlled
93-3 Phase II--Double- 17 Complete Body Weight and Body Fat
Blinded, Placebo-
Controlled
94-1 Phase II--Single- 59 Complete Dose Response and Titration Study
Blinded, Placebo-
Controlled
94-2 Phase II--Double- 99 Complete Glycated Hemoglobin A1c and Body
Blinded, Placebo- Composition
Controlled
94-3 Phase II--Open Label 12 Complete Glucose Uptake Measured by Steady
State Plasma Glucose Technique
95-1 Phase III--Double- 247 Complete Glycated Hemoglobin A1c
Blinded, Placebo-
Controlled
95-2 Phase III--Double- 249 Complete Glycated Hemoglobin A1c
Blinded, Placebo-
Controlled
95-3 Phase III--Double- 130 Ongoing Glycated Hemoglobin A1c
Blinded, Placebo-
Controlled
</TABLE>
ERGOSET FOR TYPE II DIABETES
Phase II Clinical Trial Results
The Company has conducted eight Phase II clinical trials involving over 280
patients. In these studies, the Company evaluated the relationship of abnormal
neuroendocrine profiles to defects in glucose and lipid metabolism. The
Company evaluated ERGOSET's effect on hyperglycemia, hyperinsulinemia, excess
body fat, high triglycerides and high cholesterol, as well as ERGOSET's safety
profile. The protocols for Ergo's Phase III clinical trials were developed
based on the statistical analysis of data from various subgroups of subjects
of these Phase II clinical trials.
Two key Phase II clinical trials of ERGOSET for Type II diabetes were
Studies 93-2 and 94-2, which were double-blinded, placebo-controlled clinical
trials in obese, Type II diabetic subjects, most of whom were also using
sulfonylurea agents. The intent of these clinical trials was to evaluate the
timed administration of ERGOSET on glycemic control. In the first clinical
trial (Study 93-2), subjects on a weight-maintaining diet were administered
ERGOSET or placebo on a timed daily basis for 12 weeks. ERGOSET treatment
produced statistically significant reductions in total glycated hemoglobin and
fasting plasma glucose compared to placebo.
25
<PAGE>
The second clinical trial (Study 94-2), involved administering ERGOSET or
placebo for 24 weeks to subjects on either a weight-reducing or weight-
maintaining diet. The trial included 83 subjects on ERGOSET as adjunctive
therapy with sulfonylurea agents and 16 subjects on ERGOSET as monotherapy.
The subjects on ERGOSET as adjunctive therapy, regardless of diet, experienced
a statistically significant reduction in glycated hemoglobin A1c and systolic
blood pressure compared to placebo. The combined population of subjects on
either ERGOSET as monotherapy or ERGOSET as adjunctive therapy who were found
to be weight-maintained experienced a statistically significant reduction in
glycated hemoglobin A1c compared to placebo. The Company recently completed
Study 94-3, an open label study of the effect of ERGOSET treatment in 12
obese, hyperinsulinemic nondiabetic females. In that study, ERGOSET produced
statistically significant reductions in fasting triglycerides and cholesterol
and post-prandial triglyceride levels compared to subjects on placebo.
No clinically significant adverse safety trends arose during Phase II
clinical trials of ERGOSET. The higher dosages (10 mg to 50 mg daily) of
bromocriptine generally used to treat Parkinson's and other diseases have
revealed problems with patient tolerance, although the side effects are
generally mild. ERGOSET is a fast-release formulation of bromocriptine that
has been administered in doses from 1.6 mg to 4.8 mg daily.
Phase III Clinical Trial Results
During January 1995, Ergo initiated three double-blinded, placebo-controlled
Phase III clinical trials of ERGOSET treatment in obese, Type II diabetics.
The Company enrolled over 600 patients in the three clinical trials, which
include two trials of ERGOSET as adjunctive therapy that have been completed.
In the completed Phase III clinical trials, ERGOSET or placebo was given in a
single daily dose at 8:00 a.m. to approximately 500 Type II diabetics who were
on weight-maintaining diets and who were taking sulfonylurea agents. The
completed Phase III clinical trials were conducted at 17 sites across the
United States. In the ongoing monotheraphy Phase III clinical trial, ERGOSET
or placebo is being given to approximately 130 Type II diabetics who are on a
weight-maintaining diet but are not on any other diabetes medication. The
primary clinical endpoint of each of the Phase III clinical trials is to
achieve a clinically and statistically significant reduction in blood levels
of glycated hemoglobin A1c, which is considered a reliable indicator of
glycemic control in diabetics.
The Company recently announced that a preliminary analysis of the two
completed Phase III trials indicated that ERGOSET improved control of glucose,
triglycerides, free fatty acids, and cholesterol in Type II diabetics. This
preliminary analysis also showed that ERGOSET was generally well-tolerated.
All subjects were overt diabetics with average baseline fasting glucose and
glycated hemoglobin Alc levels of 218 mg/dl and 9.4%, respectively, in one
study and 223 mg/dl and 9.3%, respectively, in the other study. Baseline
fasting serum triglycerides and cholesterol were 237 mg/dl and 212 mg/dl,
respectively, in one study and 259 mg/dl and 213 mg/dl, respectively, in the
other study. Baseline fasting free fatty acids were 852 u eq/L in the only
study for which this parameter is available.
On an intent-to-treat basis, these trials indicated that ERGOSET improved
glycemic control as measured by a reduction in glycated hemoglobin Alc compared
with placebo of 0.5% (p less than 0.0001) in one study and 0.6% (p less than
0.0007) in the other study. Serum glucose, triglycerides, and free fatty acids
were measured nine times throughout the day (7 a.m. to 7 p.m., i.e. fasting,
postabsorptive and postprandial measurements), and ERGOSET resulted in
consistent reductions compared with placebo in each parameter. Average
reductions in serum glucose compared to placebo were 21 mg/dl (p less than
0.005) and 23 mg/dl (p less than 0.001). Average reductions in serum
triglycerides compared with placebo were 44 mg/dl (p less than 0.05) and 55
mg/dl (p less than 0.003) in the two studies. The average reduction in free
fatty acids compared with placebo was 149 u eq/L (p less than 0.03) in the one
study for which this parameter is available. ERGOSET treatment indicated a trend
toward a reduction in fasting cholesterol levels of 5.7 mg/dl (p less than 0.09)
compared with placebo in one study and a statistically significant reduction in
fasting cholesterol levels of 8.0 mg/dl (p less than 0.04) compared with placebo
in the other study.
A pre-established responder criterion was designed to identify clinically
significant responders to ERGOSET shortly after the initiation of treatment.
Responders were defined as those individuals on ERGOSET who had at least a 0.3%
decrease in glycated hemoglobin Alc from baseline after eight weeks of
treatment. According to this pre-established criterion, approximately 60% of all
subjects on ERGOSET were classified as responders. In the responder group,
ERGOSET resulted in decreases in glycated hemoglobin Alc of 1.0%
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<PAGE>
(p less than 0.0001) and 1.1% (p less than 0.0001) compared with placebo and
decreases of 0.6% (p less than 0.0001) and 0.8% (p less than 0.0001) compared
with baseline. Average reductions in serum glucose levels were 39 mg/dl (p less
than 0.0001) and 37 mg/dl (p less than 0.0001) compared with placebo and 24
mg/dl (p less than 0.06) and 25 mg/dl (p less than 0.01) compared with
baseline.
One study measured body density, or the ratio of lean mass to fat mass, using
a hydrodensitometry method. On an intent-to-treat basis, ERGOSET treatment
indicated a trend toward improved body density of 0.001 kg/L (p less than 0.11)
compared with placebo. On an intent-to-treat basis, body weight increased 2.0
lbs. (p less than 0.01) and 1.8 lbs. (p less than 0.003) compared to placebo in
both studies. The Company believes that the trend toward improved body density
and the reductions in triglycerides, free fatty acids and cholesterol in
subjects on a weight-maintaining diet provide evidence that a shift from fat
body mass to lean body mass may be involved in the weight gain.
The following table summarizes the preliminary analysis of the data from the
two completed Phase III clinical trials.
<TABLE>
<CAPTION>
ENDPOINT
GROUP/COMPARISON STUDY 95-1 STUDY 95-2
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Glycated hemoglobin Alc
intent-to-treat/placebo -0.5% (p less than 0.0001) -0.6% (p less than 0.0007)
Glycated hemoglobin Alc
responders/placebo -1.0% (p less than 0.0001) -1.1% (p less than 0.0001)
Glycated hemoglobin Alc
responders/baseline -0.6% (p less than 0.0001) -0.8% (p less than 0.0001)
Serum glucose (a)
intent-to-treat/placebo -21 mg/dl (p less than 0.005) -23 mg/dl (p less than 0.001)
Serum glucose (a)
responders/placebo -39 mg/dl (p less than 0.0001) -37 mg/dl (p less than 0.0001)
Serum glucose (a)
responders/baseline -24 mg/dl (p less than 0.06) (b) -25 mg/dl (p less than 0.01)
Serum triglycerides (a)
intent-to-treat/placebo -44 mg/dl (p less than 0.05) -55 mg/dl (p less than 0.003)
Free fatty acids (a)
intent-to-treat/placebo not available -149 u eq/L (p less than 0.03)
Fasting cholesterol
intent-to-treat/placebo -5.7 mg/dl (p less than 0.9) (b) -0.8 mg/dl (p less than 0.04)
Body density
intent-to-treat/placebo +0.001 kg/L (p less than 0.11) (b) not available
</TABLE>
(a) Average of nine measurements throughout the day.
(b) Not statistically significant (p less than 0.05).
or equal to
There was no statistically significant change in the levels of fasting
insulin in either study. On an intent-to-treat basis, diurnal insulin levels
for subjects on ERGOSET did not change significantly in one study and
increased 63 u U/ml (p less than 0.03) in the other study. Compared with
placebo, these changes in insulin levels were not clinically significant.
Both systolic and diastolic blood pressure tended to decrease among all
ERGOSET treatment groups, though those decreases were not statistically
significant on an intent-to-treat basis.
This preliminary analysis also showed that ERGOSET treatment was
generally well-tolerated. The most frequently reported side effects were
nausea, fatigue, and dizziness. The combined discontinuation rate in the two
trials due to side effects was approximately 12% for ERGOSET compared with
approximately 2% in the placebo group.
27
<PAGE>
FDA Approval Strategy
The primary clinical endpoint of the Company's Phase III clinical trials is
to achieve a reduction in blood plasma levels of glycated hemoglobin A1c. FDA
and the medical community have accepted glycated hemoglobin A1c as an
indication of efficacy for drugs for Type II diabetes. The Company intends to
file an NDA in 1997 for approval of ERGOSET to treat Type II diabetes and
intends to seek expedited review of the NDA. If the results of the Phase III
clinical trial of ERGOSET as monotherapy for Type II diabetes are not
satisfactory, the Company will not be able to submit an NDA to FDA for ERGOSET
as monotherapy. In that case, the Company may have to conduct additional Phase
III clinical trials in an effort to demonstrate the safety and efficacy of
ERGOSET as monotherapy or may have to submit an NDA to FDA for ERGOSET as
adjunctive therapy only. There can be no assurance that FDA will agree with
the Company's assessment of the results of the Phase III clinical trials, that
FDA will grant the Company expedited review for ERGOSET, or that ERGOSET will
receive FDA approval as either adjunctive therapy or monotherapy. See "Risk
Factors--Uncertainties Related to Phase III Clinical Trial Results of ERGOSET"
and "Risk Factors--Government Regulation; No Assurances of Regulatory
Approval."
Additional Studies and Second Generation Product Candidates
Ergo plans to begin additional studies of ERGOSET in late 1996 and 1997 by
conducting preclinical studies and clinical trials of ERGOSET as adjunctive
therapy with insulin in patients who require insulin injections to treat Type
II diabetes. The Company also plans to conduct preclinical studies and
clinical trials using ERGOSET as adjunctive therapy with Glucophage
(metformin). Insulin is a common treatment for advanced stages of Type II
diabetes, and Glucophage appears to be gaining market acceptance rapidly as a
new therapy. Additional clinical trials are expected to examine the effect of
ERGOSET therapy on co-morbid conditions of Type II diabetes such as
hyperlipidemia. The Company plans to expand its oral delivery system and offer
ERGOSET in several dosage strengths. The Company is currently conducting
extensions to the Phase III clinical trials (principally for safety) and
bioavailability studies of different dosage strengths of ERGOSET, which are
expected to be completed in the first half of 1997. The Company is also
studying additional delivery methods to improve the therapeutic index of
ERGOSET and other neurotransmitter modulating drugs. Such a delivery system,
if developed, should allow ERGOSET's active ingredient to be effective in
lower doses than currently required. The Company is also studying possible
second generation product candidates for the treatment of Type II diabetes and
obesity, including a combination of a dopamine D2 agonist such as ERGOSET with
a dopamine D1 agonist, and a therapy using a dopamine agonist at one time of
day in combination with a serotonin agonist at another time of day.
ERGOSET FOR OBESITY
Ergo's animal studies have demonstrated that neurotransmitter modulating
drugs that are effective in reducing insulin resistance in seasonal, non-
seasonal, and genetic animal models when administered at a specific time daily
are also effective in reducing total body weight and body fat and improving
the lean-to-fat mass ratio in those animal models. See "Business--The
Company's Technology."
In one of Ergo's completed Phase II clinical trials using ERGOSET therapy,
the primary endpoints were the reduction in body weight and body fat in obese
human subjects. In this double-blinded, placebo-controlled Phase II clinical
trial (Study 93-3), obese subjects were placed on a 25% calorie restriction
diet and treated with either ERGOSET or placebo for an 18-week period.
Although the trial population was small, ERGOSET treatment resulted in a
statistically significant reduction in percentage of body fat compared to
placebo. This trial suggests that ERGOSET treatment may selectively reduce
body fat in obese subjects.
The Company plans to begin enrolling patients in a Phase II clinical trial
of ERGOSET to treat obese patients in the first half of 1997 and plans to
pursue additional obesity clinical trials of ERGOSET by itself and in
combination with other neuromodulators to treat obesity.
28
<PAGE>
IMMUNE REGULATION AND PDT FOR CANCER
Breast cancer causes the second highest mortality rate from cancer among
women in the United States. In 1996, approximately 184,000 women in the United
States will be diagnosed with breast cancer. Breast cancer is now the leading
cause of death for American women aged 40 to 55. Although it was once believed
that tumors in the breast appear suddenly and spread slowly from the breast by
seeping through the lymphatic system, researchers now believe that breast
tumors take years to develop to detectable size and that they metastasize by
releasing cancerous cells into the bloodstream, from which the cells lodge and
multiply in other parts of the body.
The primary treatment for breast cancer is surgical removal of the
detectable tumor and, in most cases, removal of surrounding tissue and
lymphatic systems. Surgery is generally followed by radiation therapy or
chemotherapy. All of these treatments harm healthy tissue in addition to the
diseased tissue. Radiation therapy kills cells in its target area, inducing
breast inflammation and fibroblasts, and may create genetic damage that can
lead to other forms of cancer. In addition, radiation therapy has no effect on
metastases away from the targeted area. Chemotherapeutic compounds kill cells
throughout the body, but often cause fatigue, nausea, hair loss, mouth sores,
diarrhea and premature menopause. Chemotherapy is also not believed to destroy
all metastasized cancer cells. The surviving cancer cells continue to
multiply, which often results in a recurrence of cancer. Accordingly, new
therapeutic approaches are needed to eliminate cancer cells more effectively
and to reduce damage to healthy tissue.
Immune Regulation
Ergo is evaluating the application of its technology to treat breast cancer
and other cancers. Preclinical studies suggest that temporal neuroendocrine
regulation may play an important role in the body's regulation of immune
function and its ability to fight cancer. The Company also believes that the
presence of cancer tumors may suppress the body's immune response to the
tumor, in part by altering the patterns of neurotransmitter activity. In a
presentation at the Ninth International Congress of Immunology in 1995, Ergo's
scientists demonstrated that the alteration of daily neuroendocrine patterns
through the timed administration of neurotransmitter modulating drugs can
stimulate the immune system and limit the growth of tumors in mice. In
addition to treating cancer, Ergo believes this approach may be useful in
treating immune system disorders such as Lupus.
Ergo recently began a small, open-label Phase II clinical trial of ERGOSET
with another neurotransmitter in patients with metastatic breast cancer to
evaluate whether the treatment can increase the body's immune activity against
the cancer. Patients in this trial are dosed using ERGOSET and the
neurotransmitter alone or adjunctively with chemotherapy or radiation therapy.
Photodynamic Therapy
Ergo is studying the use of unique phototherapeutic dyes in PDT to fight
tumors. Preclinical studies suggest that these dyes, which are preferentially
sequestered within tumor cells, become toxic and result in site-specific,
localized destruction of tumor tissue only when irradiated with light supplied
by a laser in the proper wavelength. Many cancers that have a poor prognosis
and are difficult to treat may respond to this new approach. PDT may be useful
in treating cancers of the breast, bladder, brain, spine, pancreas and
prostate. Ergo believes its phototherapeutic dye may offer advantages over
other dyes being studied because preclinical studies indicate that Ergo's dye
is not immunosuppresive, sequesters preferentially in the tumor and not in
surrounding tissue or blood vessels, oxidizes with relatively low-intensity
photon bombardment, and exits the body relatively quickly. The Company intends
to integrate PDT with its understanding of temporal neuroendocrine regulation
to try to improve the anti-cancer effect of PDT. The Company is in the process
of identifying a lead photosensitizer for clinical study in its PDT program.
Ergo has licensed from The Rowland Institute for Science the rights to patents
covering these phototherapeutic dyes.
COMMERCIALIZATION STRATEGY
The Company's commercialization strategy includes the formation of marketing
alliances with major pharmaceutical companies to market the Company's
products. The Company also plans to establish long-term
29
<PAGE>
manufacturing agreements for its product supply. The Company currently retains
all marketing rights to its drug candidates.
Marketing
The Company intends to form strategic alliances with large pharmaceutical
companies to market the Company's product candidates internationally and to
the managed care and the primary care physician markets in the United States.
In addition, the Company also intends to build, over time, a direct sales
force to market to the managed care, endocrinologist and diabetologist markets
in the United States. To date, the Company has internally funded the clinical
development of ERGOSET for Type II diabetes into advanced clinical trials
before seeking collaborative marketing arrangements. The Company is currently
seeking a marketing partner for ERGOSET for Type II diabetes. The Company
intends to retain co-promotion and marketing rights to its product candidates
in the United States. See "Risk Factors--Limited Sales and Marketing
Experience; Dependence on Future Collaborators."
Manufacturing
Ergo does not operate and does not plan to operate manufacturing facilities
for the production of either bulk chemicals or the pharmaceutical dosage forms
for its product candidates. Instead, it plans to establish long-term supply
contracts for the supply of its pharmaceuticals. The Company has agreed to buy
from Geneva, and Geneva has agreed to supply, all of the Company's United
States requirements for the final dosage form of ERGOSET for the treatment of
Type II diabetes and obesity. The supply agreement between Geneva and the
Company (the "Geneva Agreement") will terminate December 31, 2009. Geneva has
paid the Company various amounts and agreed to pay the Company additional
amounts upon the achievement of certain milestones. The Company is required to
carry liability insurance in the amount of at least $1,000,000 per occurrence
and $3,000,000 in the aggregate for product liabilities. Geneva may terminate
the Geneva Agreement in various circumstances, including if FDA does not
accept the Company's first filing of an NDA within 18 months of its submission
or approve that NDA within three years of submission or if the Company's
requirements of ERGOSET do not exceed certain minimum levels during the two
years following FDA approval, if obtained. Geneva has a right of first option
to be the exclusive supplier of the Company's United States requirements for
new orally administered drug products on commercially competitive terms.
If Geneva does not perform its obligations under the Geneva Agreement, the
Company may not be able to obtain supplies of ERGOSET. Even if the Company is
able to obtain ERGOSET from other suppliers, it may not be on the terms or in
the quantities that would be acceptable to the Company. The active ingredient
in ERGOSET is available from few suppliers in the world, and the manufacturing
process for the active ingredient is complex and lengthy. Accordingly, the
Company will encounter significant delays if it must obtain supplies from
manufacturers other than Geneva or otherwise experiences interruptions in its
supplies. See "Risk Factors--Manufacturing Uncertainties; Reliance on Third-
Party Suppliers."
PATENTS, PROPRIETARY RIGHTS AND LICENSES
Ergo's ability to commercialize profitably any product candidates will
depend, in part, upon its or its licensors' ability to obtain patents, enforce
those patents, preserve trade secrets, and operate without infringing upon the
proprietary rights of third parties. The Company has rights to more than 40
issued or pending United States patents and patent applications and to
counterparts to many of those patents and patent applications in other
countries. In addition, the Company's patent portfolio for its current product
candidates is based on the timed administration of neurotransmitter modulating
drugs to address abnormalities of the neuroendocrine system. If similar
benefits could be achieved by using such drugs without timed administration,
the Company's patents and proprietary technology would not prevent that use,
and this would likely have a material adverse effect on the Company. The
Company has filed a patent application in the United States relating to a
fast-release formulation of ERGOSET. The Company is a co-owner of eight of
those U.S. patent applications and one U.S. patent. LSU has licensed its
interest in more than 35 of those patents and patent applications exclusively
to the Company. The Company's rights in certain patent applications, including
applications covering the treatment of
30
<PAGE>
immune dysfunction and cancer as well as certain enzyme inhibitors and certain
receptor antagonists, are not exclusive, but the Company is negotiating with
the co-owner of those rights for an exclusive license. There can be no
assurance that the patent applications licensed to or owned by the Company
will result in issued patents, that patent protection will be secured for any
particular technology the Company develops, that any patents that have been or
may be issued to the Company or its licensors will be valid or enforceable, or
that any patents will provide meaningful protection to the Company. See "Risk
Factors--Uncertainty of Protection for Patents and Proprietary Technology."
In general, the United States patents and patent applications licensed to or
owned by the Company are method-of-use patents (as opposed to composition-of-
matter patents) that cover the timed use of certain compounds to treat
specified conditions. The U.S. patents for bromocriptine, the active
ingredient in ERGOSET, have expired, and composition-of-matter protection is
not available for bromocriptine. Bromocriptine is currently sold in the United
States and other markets for several uses other than the treatment of Type II
diabetes. Even in jurisdictions where the use of bromocriptine for Type II
diabetes may be covered by the claims of a use patent licensed to the Company,
off-label sales might occur, especially if another company markets
bromocriptine at a price that is less than the price of ERGOSET, thereby
potentially reducing the sales of ERGOSET.
The patent positions of biotechnology and pharmaceutical companies,
including Ergo, are highly uncertain and involve complex legal and factual
questions. There can be no assurance that patents will issue from the patent
applications filed by the Company or its licensors or that the scope of any
claims granted in any patent will provide proprietary protection or a
competitive advantage to the Company. There can be no assurance that the
validity or enforceability of patents issued or licensed to the Company will
not be challenged by others or that, if challenged, a court will find the
patents to be valid and enforceable. In addition, there can be no assurance
that competitors will not be able to circumvent any patents issued or licensed
to the Company. In the United States, patent applications are maintained in
secrecy until patents issue, and publications in the scientific and patent
literature lag behind actual discoveries. As a result, the Company cannot be
certain that its scientists were the first to make inventions covered by its
patents and patent applications. If a third party has also filed a patent
application for the Company's inventions, the Company may have to participate
in interference proceedings declared by the United States Patent and Trademark
Office to determine priority of invention. Moreover, patent interference
proceedings would be lengthy and expensive, even if the outcome is favorable
to the Company. While no patent that could be potentially infringed by
manufacture, use or sale of the Company's product candidates in the fields of
Type II diabetes and obesity has come to the attention of the Company, the
Company's product candidates are still in the development stage, and neither
their formulations (other than the active ingredient) nor their method of
manufacture have been finalized.
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 have 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, if at all, upon terms and conditions acceptable to the Company
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 pursue such litigation. If the Company does
not obtain a license under such patents, is found liable for infringement, or
is not able to have them 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 covered by such patents. The
Company recently began a small clinical study of two drugs for the treatment
of breast cancer. The Company is aware of an issued patent owned by a third
party which, if validly issued, likely covers one of the drugs being tested.
If the Company's product candidate infringes such issued patent, the Company
may have to seek a license to such patent. There can be no assurance that the
Company has identified United States and foreign patents that pose a risk of
infringement.
Ergo 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 and
collaborators. Nevertheless,
31
<PAGE>
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
product candidates, disputes may arise about ownership of proprietary rights
to those inventions and processes. Such inventions and processes will not
necessarily become the Company's property, but may remain the property of
those persons or their employers. Protracted and costly litigation could be
necessary to enforce and determine the scope of the Company's proprietary
rights. Failure to obtain or maintain patent and trade secret protection, for
any reason, would have a material adverse effect on the Company. See "Risk
Factors--Uncertainty of Protection for Patents and Proprietary Technology."
The Company engages in collaborations, sponsored research agreements, and
other arrangements, such as the LSU Agreement, with academic researchers and
institutions that have received and may receive funding from United States
government agencies. As a result of these arrangements, the U.S. government or
certain third parties may have rights in certain inventions developed during
the course of the performance of such collaborations and agreements as
required by law or such agreements.
Several bills affecting patent rights have been introduced in the United
States Congress. These bills address various aspects of patent law, including
publication, patent term, re-examination, subject matter and enforceability.
It is not certain whether any of these bills will be enacted into law or what
form new laws may take. Accordingly, the effect of legislative change on the
Company's intellectual property estate is uncertain.
LSU AGREEMENT
The Company's rights to ERGOSET and its other technologies derive primarily
from a license from LSU for certain patents and patent applications. The
Company is a co-owner of certain of these patents and patent applications.
Under an agreement originally signed in 1990 (as amended, the "LSU
Agreement"), LSU granted to Ergo an exclusive license to its rights under
certain patents and patent applications. The LSU Agreement will terminate upon
expiration of all licensed patents thereunder unless terminated earlier by LSU
or the Company in accordance with terms of the LSU Agreement. In the LSU
Agreement, the Company agreed to commercialize ERGOSET in all countries where
commercialization is reasonably justified economically. The Company is
responsible for prosecuting and maintaining the patents and patent
applications licensed from LSU and for obtaining governmental approval of any
product, process, or method covered thereby in those countries (for example,
FDA approval in the United States). The Company's policy is to file foreign
counterparts to its licensed patents in countries with significant
pharmaceutical markets where such protection is obtainable. The Company has a
right of first negotiation for new technologies that LSU develops relating to
the licensed technologies. There can be no assurance that the Company will
successfully obtain rights to any such new technologies. The LSU Agreement
requires the Company to make specified fixed payments to LSU and pay LSU
royalties at varying rates on its product sales covered by the licensed
patents. In December 1996, the Company is obligated to issue 18,750 shares of
Common Stock to LSU pursuant to the LSU Agreement. The LSU Agreement also
requires the Company to maintain customary general liability insurance and
customary product liability insurance for all countries in which it sells
products licensed under the LSU Agreement. LSU may terminate the LSU Agreement
if Ergo breaches the LSU Agreement and fails to cure the breach within 45 days
(for breach of payment obligations) or 90 days (for other breaches) after
notice of the breach from LSU. If the LSU Agreement is terminated for any
reason, the Company would no longer possess the rights necessary to
commercialize ERGOSET and certain other technologies relating to the timed
administration of neurotransmitter modulating drugs. This would have a
material adverse effect on the Company. See "Risk Factors--Uncertainty of
Protection for Patents and Proprietary Technology."
COMPETITION
ERGOSET, if it is approved, will compete against existing therapies for Type
II diabetes such as insulin and oral hypoglycemic agents. FDA recently
approved two other drugs for treatment of Type II diabetes. Both of the drugs
have methods of action that are different from sulfonylureas and are intended
to address the hyperglycemia
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associated with diabetes. Bristol-Myers Squibb Co. recently obtained FDA
approval for and launched Glucophage (metformin) in the United States for the
treatment of Type II diabetes. Glucophage appears to be gaining market
acceptance rapidly as a new therapy. Metformin has been used as an adjunct to
oral hypoglycemic agents and in monotherapy to improve glycemic control in
diabetic patients without increasing serum insulin levels. Bayer
Pharmaceuticals recently obtained FDA approval in the United States for a drug
called Acarbose for the treatment of Type II diabetes. Acarbose is used to
reduce blood glucose by blocking the digestion of carbohydrates in the stomach
and intestine, thereby delaying or reducing the absorption of glucose into the
bloodstream.
The active ingredient in ERGOSET is approved by FDA for indications other
than Type II diabetes. Physicians may choose to prescribe other drugs
containing this active ingredient for off-label use to try to achieve the same
effects as ERGOSET. Substitution of other forms of the active ingredient may
have a material adverse effect on the market for ERGOSET. This risk could be
increased if current regulations prohibiting off-label marketing are changed.
See "Business--Patents, Proprietary Rights and Licenses" and "Business--
Government Regulation." There can be no assurance that the Company's product
candidates, if commercialized, will be accepted and prescribed by healthcare
professionals.
Ergo competes with biotechnology and established pharmaceutical companies in
all of its product development programs. Academic institutions, governmental
agencies, and other public and private research organizations also conduct
research, seek patent protection, and establish collaborative arrangements
with commercial entities for product development and marketing. Products
resulting from these activities may compete directly with any that the Company
develops. These companies and institutions also compete with the Company in
recruiting and retaining highly qualified scientific personnel. Many
competitors and potential competitors have substantially greater scientific
research and product development capabilities, as well as greater financial,
marketing and human resources, than the Company.
Many other entities, including large pharmaceutical companies and
institutions, are developing therapeutic products that may compete with Ergo's
product candidates in the treatment of Type II diabetes, obesity, immune-
related diseases and cancer. Several different approaches to treating Type II
diabetes are being tested in United States clinical trials, including new oral
hypoglycemic agents that stimulate insulin production and new medicines that
stimulate glucose uptake in peripheral tissue. Other drugs are being developed
that may limit or delay the damage that diabetes causes to organs such as the
eyes and kidneys. Some of these products may be at a more advanced stage of
development than the Company's products.
Competition for treatments for Type II diabetes is very intense. The Company
expects that competition among products approved for sale will be based on,
among other things, product safety, efficacy, ease of use, effect on co-morbid
conditions, availability, price, marketing and distribution. Even if ERGOSET
is approved by FDA for sale as a new treatment for Type II diabetes, there can
be no assurance that it will be able to compete successfully against other
products. See "Business--ERGOSET for Type II Diabetes--Phase II Clinical Trial
Results", "Business--ERGOSET for Type II Diabetes--Phase III Clinical Trial
Results," and "Risk Factors--Uncertainties Related to Phase III Clinical Trial
Results of ERGOSET."
GOVERNMENT REGULATION
Ergo'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 FDA and other regulatory
authorities in the United States. These activities are also regulated in other
countries where the Company intends to test and market its products. The
United States 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, safety, efficacy,
labeling, storage, record keeping, approval, advertising and promotion 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 product
candidates. Delays or rejections in obtaining regulatory approvals would
adversely affect the Company's ability
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to commercialize any product candidates the Company develops and the Company's
ability to receive product revenues or royalties. If regulatory approval of a
product candidate is granted, the approval may include significant limitations
on the indicated uses for which the product may be marketed.
FDA and other regulatory authorities require that the safety and efficacy of
the Company's therapeutic product candidates must be supported through at
least two adequate and well-controlled Phase III clinical trials. If the
results of Phase III clinical trials do not establish the safety and efficacy
of the Company's product candidates to the satisfaction of FDA and other
regulatory authorities, the Company will not receive the approvals necessary
to market its product candidates, which would have a material adverse effect
on the Company.
The steps required before a pharmaceutical agent may be marketed in the
United States include (a) preclinical laboratory, in vivo, and formulation
studies, (b) the submission to FDA of an Investigational New Drug application
("IND"), which must become effective before human clinical trials may
commence, (c) adequate and well-controlled human clinical trials to establish
the safety and efficacy of the drug, (d) the submission of an NDA to FDA, and
(e) FDA approval of the NDA, including approval of all product labeling and
advertising.
Preclinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. Preclinical safety tests must be
conducted by laboratories that comply with FDA regulations regarding Good
Laboratory Practices. The results of the preclinical tests are submitted to
FDA as part of an IND and are reviewed by FDA before the commencement of human
clinical trials. Unless FDA objects to an IND, the IND will become effective
30 days following its receipt by FDA. There can be no assurance that
submission of an IND will result in FDA authorization to commence clinical
trials or that the lack of an objection means that FDA will ultimately approve
an NDA.
Clinical trials involve the administration of the investigational new drug
to humans under the supervision of a qualified principal investigator.
Clinical trials must be conducted in accordance with Good Clinical Practices
under protocols that detail the objectives of the study, the parameters to be
used to monitor safety, and efficacy criteria to be evaluated. Each protocol
must be submitted to FDA as a part of the IND. Also, each clinical trial must
be approved and conducted under the auspices of an Institutional Review Board,
which will consider, among other things, ethical factors, the safety of human
subjects, and the possible liability of the institution conducting the
clinical trials.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap, as is the case with ERGOSET trials. Phase I clinical
trials involve the initial introduction of the drug into healthy human
subjects. In Phase I clinical trials, the drug is tested for safety (adverse
effects), dosage tolerance, metabolism, distribution, excretion, and
pharmacodynamics (clinical pharmacology). Phase II clinical trials are
conducted in a limited patient population to gather evidence about the
efficacy of the drug for specific, targeted indications; to determine dosage
tolerance and optimal dosage; and to identify possible adverse effects and
safety risks. When a compound has shown evidence of efficacy and an acceptable
safety profile in Phase II evaluations, Phase III clinical trials are
undertaken to evaluate clinical efficacy and to test for safety in an expanded
patient population at geographically dispersed clinical trial sites. There can
be no assurance that any of the Company's clinical trials will be completed
successfully or within any specified time period. The Company or FDA may
suspend clinical trials at any time.
The Company designed the protocols for its Phase III clinical trials based
on its analysis of its research, including various parts of its Phase II
clinical trials. Although copies of its Phase III clinical trial protocols
were submitted to FDA, there can be no assurance that FDA will not disagree
with the design of the Phase III clinical trial protocols. In addition, FDA
inspects and reviews clinical trial sites, informed consent forms, data from
the clinical trial sites including case report forms and record keeping
procedures, and the performance of the protocols by clinical trial personnel
to determine compliance with Good Clinical Practice. FDA also seeks to
determine whether there was bias in the conduct of clinical trials. The
conduct of clinical trials in general and
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the performance of the Phase III clinical trial protocols is complex and
difficult. There can be no assurance that the design or the performance of the
Phase III clinical trial protocols will be acceptable to FDA.
The results of preclinical studies and clinical trials, if successful, are
submitted in an NDA to seek FDA approval to market and commercialize the drug
product for a specified use. The testing and approval process require
substantial time and effort, and there can be no assurance that any approval
will be granted for any product or that approval will be granted according to
any schedule. FDA may deny an NDA if it believes that applicable regulatory
criteria are not satisfied. FDA may also require additional testing for safety
and efficacy of the drug. Moreover, if regulatory approval of a drug product
is granted, the approval will be limited to specific indications. There can be
no assurance that any of the Company's product candidates will receive
regulatory approvals for commercialization. See "Risk Factors--Government
Regulation; No Assurances of Regulatory Approval."
FDA has implemented an accelerated review process for pharmaceutical agents
that treat serious or life threatening diseases and conditions, including Type
II diabetes, subject to payment of user fees. When appropriate, the Company
intends to pursue opportunities for accelerated review of its products. The
Company cannot predict the ultimate effect of this review process on the
timing or likelihood of FDA review of any of its product candidates. FDA may
determine that product candidates are not eligible for or will not receive
expedited review, whether or not FDA has previously indicated that such
product candidates may be eligible for expedited review.
Even if regulatory approvals for the Company's product candidates are
obtained, the Company, its products, and the facilities manufacturing the
Company's products are subject to continual review and periodic inspection.
FDA will require post-marketing reporting to monitor the safety of the
Company's products. Each United States drug manufacturing establishment must
be registered with FDA. Domestic manufacturing establishments are subject to
biennial inspections by FDA and must comply with FDA's current Good
Manufacturing Practices. To supply drug products for use in the United States,
foreign manufacturing establishments must comply with FDA's Good Manufacturing
Practices and are subject to periodic inspection by FDA or by regulatory
authorities in those countries under reciprocal agreements with FDA. In
complying with Good Manufacturing Standards, manufacturers must expend funds,
time and effort in the area of production and quality control to ensure full
technical compliance. The Company does not have any drug manufacturing
capability and must rely on outside firms for this capability. See "Business--
Commercialization Strategy--Manufacturing." FDA stringently applies regulatory
standards for manufacturing. Discovery 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.
A bill proposing comprehensive reform of FDA regulations has been introduced
in the United States Senate. This bill addresses many facets of FDA
regulations, including requirements for NDA approval, requirements for
supplemental approval and export regulations. A counterpart bill has been
introduced into the United States House of Representatives that includes
provisions concerning off-label information dissemination. It is not certain
whether any such legislation will be enacted into law, what form any law will
take, or what effect any new law would have on the Company.
Before Ergo's drug products can be marketed outside of the United States,
they are subject to regulatory approval similar to FDA requirements in the
United States, 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 an appropriate application has been approved by the regulatory
authorities in that country. 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
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pricing review period often begins after market approval is granted. Even if a
foreign regulatory authority approves any of the Company's product candidates,
no assurance can be given that it will approve satisfactory prices for the
products.
The active ingredient in ERGOSET has been approved by FDA for use in humans
for more than 15 years for several indications, including treating Parkinson's
disease, acromegaly, and hyperprolactinemia. One company marketing
bromocriptine in the United States recently agreed voluntarily to remove the
indication of suppressing lactation in postpartum females after FDA initiated
action to withdraw the drug's approval for this indication. FDA had noted that
the benefit of using the drug for this indication was marginal and did not
outweigh the risks in this particular patient population including
hypertension, seizures, and cerebrovascular incidents. FDA has not taken
action with respect to the other approved indications, and bromocriptine
remains on the market for the treatment of Parkinson's disease, acromegaly,
and hyperprolactinemia. The Company's clinical trials exclude postpartum
females, and the data from the Company's completed Phase II and Phase III
clinical trials lead the Company to believe that ERGOSET does not present the
same health risks to its proposed patient population.
Ergo'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 will include an environmental assessment in the NDA in accordance with
FDA regulations. 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.
HUMAN RESOURCES
As of July 1, 1996, the Company had 65 full-time employees, including 11
persons with Ph.D. degrees. Forty-nine of Ergo's employees are engaged in
research and development activities. None of the Company's employees is
covered by a collective bargaining agreement, and the Company believes its
employee relations are good.
FACILITIES
Ergo leases approximately 36,000 square feet in three buildings in the
Charlestown Navy Yard, Charlestown, Massachusetts, of which approximately
26,000 square feet are used for research and development functions and
approximately 10,000 square feet are used for administrative functions. The
Company's principal offices are leased through 1997, with a renewal option for
one five-year term. Space in a nearby building is leased until August 1997,
and space in another building is leased through April 1998, with two five-year
renewal options. The Company believes that its facilities are adequate for its
current needs. The Company believes it can obtain additional space on
commercially reasonable terms.
LEGAL PROCEEDINGS AND INSURANCE
The Company is not a party to any material legal proceedings.
The Company maintains product liability coverage for claims arising from the
use of ERGOSET and its technologies in clinical trials. See "Risk Factors--
Potential Product Liability; Availability of Insurance."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information concerning directors and executive
officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Manuel Cincotta, Jr. (1)..... 49 Chairman of the Board of Directors,
Treasurer and Secretary
J. Warren Huff............... 42 President, Chief Executive Officer and
Director
Ronald H. Abrahams, Ph.D..... 53 Executive Vice President and Chief Operating
Officer
Anthony H. Cincotta, Ph.D.... 38 Senior Vice President, Chief Science Officer
and Director
Thomas N. Thurman............ 52 Senior Vice President, Marketing and
Business Development
Alan T. Barber............... 42 Vice President, Finance and Administration
and Chief Financial Officer
David R. Burt................ 32 Vice President, Corporate Development
Robert M. Powell............. 41 Vice President of Operations, Ergo Science
Development Corporation
Stephen A. Duzan (2)......... 55 Director
Ray L. Hunt (1)(2)........... 53 Director
Thomas F. McWilliams (1)(2).. 53 Director
Albert H. Meier, Ph.D........ 67 Director
</TABLE>
- --------
(1) Member of the Nominating Committee.
(2) Member of the Audit Committee and the Compensation Committee.
Executive officers are generally elected annually by the Board of Directors
to serve, subject to the discretion of the Board of Directors, until their
successors are appointed. Manuel Cincotta, Jr., and Dr. Anthony H. Cincotta
are brothers. A brief biography of each director and executive officer
follows.
Manuel Cincotta, Jr., has been Chairman of the Board, Treasurer and
Secretary of the Company since January 1990. From January 1990 until November
1995, Mr. Cincotta was Chief Executive Officer of the Company. For health
reasons, Mr. Cincotta retired as Chief Executive Officer in November 1995.
From 1969 until 1992, Mr. Cincotta was employed as a scientist by the
Department of the Navy's Research and Technology Branch of the Naval
Underwater Systems Center, most recently as a chief scientist and senior
project engineer. Mr. Cincotta received his B.S. and M.S. in chemical
engineering from the Lowell Technological Institute.
J. Warren Huff has been President and Chief Executive Officer of the Company
since November 1995. Mr. Huff joined the Company as its Executive Vice
President, Commercial Development and Finance, in February 1993. He became
President and Chief Operating Officer of the Company in January 1994, and he
has served as a director of the Company since January 1994. From 1979 until
1993, Mr. Huff was an attorney at Johnson & Gibbs, P.C., a law firm in Dallas,
Texas, where most recently he was chairman of the firm's corporate/securities
department. Mr. Huff represented companies in the medical science,
biotechnology, computer and telecommunications industries. Mr. Huff received a
B.B.A. in accounting from the University of Texas at Austin and a J.D. from
Southern Methodist University.
Ronald H. Abrahams, Ph.D., joined the Company as Senior Vice President,
Scientific Affairs, in April 1994 and was appointed Executive Vice President
and Chief Operating Officer in March 1996. From 1972 until joining the
Company, Dr. Abrahams held various scientific, quality assurance, and
regulatory affairs positions with Baxter International Incorporated, an
international healthcare company. From 1990 until 1994, Dr. Abrahams was a
corporate vice president and corporate officer with Baxter International,
responsible for quality and regulatory affairs. Dr. Abrahams currently serves
on the board of directors and is Chair-Elect of the Association for the
Advancement of Medical Instrumentation. Dr. Abrahams received a B.S. in
pharmacology from the University of Illinois and a Ph.D. in pharmacology and
experimental therapeutics from Loyola University in Chicago, Illinois.
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Anthony H. Cincotta, Ph.D., has been a director of the Company since January
1990 and Senior Vice President and Chief Science Officer since June 1996. From
January 1990 to June 1996, Dr. Cincotta was Director of Research of the
Company. From 1989 through July 1995 he was an instructor at the Harvard
Medical School, an Assistant Instructor in Biochemistry at Massachusetts
General Hospital, and an Adjunct Assistant Professor of Zoology and Physiology
at LSU. From 1987 to 1989, Dr. Cincotta was a Research Assistant Professor of
Zoology and Physiology at LSU and a research consultant at the Rowland
Institute of Science, Inc. Dr. Cincotta received his B.S. in biochemistry and
molecular biology from the University of California at Santa Barbara and his
M.S. and Ph.D. degrees in physiology from LSU. He is the author of
approximately 19 publications regarding temporal neuroendocrine organization.
Thomas N. Thurman joined the Company as Senior Vice President, Marketing and
Business Development, in June 1994. Before then, Mr. Thurman was a Vice
President and Member of the Executive Committee of Boots Pharmaceuticals,
Inc., a pharmaceutical company in Lincolnshire, Illinois. At Boots, he was
responsible for new products marketing, business development and public
affairs. In addition, Mr. Thurman has over 21 years of experience in domestic
and international pharmaceutical marketing, strategic planning and business
development with companies including The Upjohn Company, E.R. Squibb & Sons,
and Wyeth International. He has written extensively on pharmaceutical
marketing and management and served as an Adjunct Professor of Marketing and
Management at Western Michigan University. Mr. Thurman holds a B.A. from
Syracuse University, an M.B.A. from the University of Michigan, and an M.A.
from Western Michigan University.
Alan T. Barber joined the Company as Vice President, Finance and
Administration, in November of 1993 and became Chief Financial Officer in
October 1995. Before joining the Company, Mr. Barber was a partner with the
accounting firm Coopers & Lybrand L.L.P. in Dallas, Texas, and Tokyo, Japan,
where he specialized in global and domestic corporate finance and strategic
alliances. Mr. Barber received a B.S. in accounting from Florida State
University. Mr. Barber is a Certified Public Accountant.
David R. Burt joined the Company as Vice President, Corporate Development,
in March 1993. From 1990 until 1993, Mr. Burt practiced corporate and
securities law at Johnson & Gibbs, P.C., a law firm in Dallas, Texas. Mr.
Burt's practice involved representing issuers and underwriters in financing
transactions in a variety of high technology industries. Mr. Burt received a
B.A. in government from Dartmouth College and a J.D. from the University of
Maryland Law School. Before attending law school, Mr. Burt worked on the staff
of United States Senator Paul S. Sarbanes.
Robert M. Powell joined the Company as Vice President of Operations for Ergo
Science Development Corporation in March 1996. Mr. Powell has close to 20
years of experience in the field of pharmaceutical production and quality
control. Most recently, Mr. Powell served as Vice President, Quality
Assurance/Quality Control at Biogen, Inc. in Cambridge, Massachusetts. From
1978 to 1994, Mr. Powell served in positions of increasing management
responsibilities at Baxter Healthcare Corporation, located in Deerfield,
Illinois, including his tenure as Vice President, Manufacturing/Global
Sourcing for the V. Mueller Division, Deerfield, Illinois. In that capacity,
Mr. Powell had direct responsibility for all aspects of manufacturing
operations, facilities and human resources. Mr. Powell received a B.S. in
biology from Mississippi College.
Stephen A. Duzan became a director of the Company in October 1994. He is
currently Chairman, Chief Executive Officer and a director of Key Computer
Systems, Inc., a privately held company located in Seattle, Washington. Mr.
Duzan was a co-founder of Immunex Corporation, Seattle, Washington, and served
as its Chairman, Chief Executive Officer and director from its formation in
1981 until his retirement in September 1993. He also held the title of
President of Immunex from 1981 through 1990. Mr. Duzan serves on the Boards of
Directors of Targeted Genetics Corporation of Seattle, Washington, the
International Biotechnology Trust of London, England, and Numera Corporation
of Seattle, Washington.
Ray L. Hunt became a director of the Company in January 1994 in connection
with the purchase by Hunt Financial Corporation ("Hunt Financial") of
convertible securities of the Company. Mr. Hunt has been the Chairman of the
Board, President and Chief Executive Officer of Hunt Consolidated, Inc. and
the Chairman of
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the Board and Chief Executive Officer of Hunt Oil Company for over twenty
years. Mr. Hunt is a director of Dresser Industries, Inc., an international
oil field service company in Dallas, Texas, Pepsico, Inc., a multinational
food and beverage company in Purchase, New York, and Electronic Data Systems
Corporation, a global information technology company in Dallas, Texas. Mr.
Hunt received his B.B.A. in economics from Southern Methodist University.
Thomas F. McWilliams became a director of the Company during September 1992
in connection with the purchase of the Company's convertible securities by
Citicorp Venture Capital Ltd. ("CVC"). Mr. McWilliams is Managing Director of
CVC, a small business investment company, and has been affiliated with CVC
since 1983. Between 1978 and 1983, Mr. McWilliams held various positions,
including President, with Shelter Resources Corporation, a company with
interests in industries related to manufactured housing and consumer products.
From 1967 until 1978, Mr. McWilliams served in various corporate finance and
management positions at Citibank, N.A. He is a director of Chase Brass
Industries, Inc., a metals processing company. Mr. McWilliams received his
A.B. from Brown University and his M.B.A. from the Wharton School, University
of Pennsylvania.
Albert H. Meier, Ph.D., has been a director of the Company since January
1990 and a consultant to the Company since June 1992. Since June 1995, Dr.
Meier has served as Chief Scientist of the Company on a consultant basis. From
1972 until his retirement in the summer of 1995, Dr. Meier was a Professor of
Zoology and Physiology at LSU. Previously at LSU, Dr. Meier was an Associate
Professor (1967-1972) and an Assistant Professor (1964-1967). From 1962 to
1964, Dr. Meier was an NIH Postdoctoral Fellow at Washington State University;
and from 1961 to 1962 was a Postdoctoral Associate at Wabash College. Dr.
Meier received his B.A. in Zoology from Washington University, St. Louis,
Missouri, and his M.S and Ph.D. in Zoology from the University of Missouri. He
is the author of over 120 publications regarding temporal neuroendocrine
organization.
MEDICAL ADVISORS
The Company's medical advisors include individuals with recognized expertise
in human physiology, the medical complications of diabetes and obesity, and
biochemistry. Some of the Company's medical advisors are also principal
investigators in ERGOSET Phase III clinical trials. In addition to Drs.
Cincotta and Meier, who are described in "Management--Directors and Executive
Officers," the following persons are medical advisors to the Company:
Ralph A. DeFronzo, M.D., is Professor of Medicine, Chief of the Diabetes
Division, and Director of the Clinical Research Diabetes Unit, University of
Texas Health Science Center at San Antonio, Texas. He is the author of over
300 publications. Dr. DeFronzo received his B.S. from Yale University, his
B.M.S. from Dartmouth Medical School, his M.S. from Boston College Graduate
School of Biology, and his M.D. from Harvard Medical School. Dr. DeFronzo is
an Associate Editor of Diabetologia, Editor of Diabetes Reviews, and a past
member of the Board of Directors of the American Diabetes Association.
Burritt L. Haag, M.D., is Chief, Endocrine-Metabolic Division, Baystate
Medical Center, Springfield, Massachusetts. Dr. Haag received his B.S. from
Pennsylvania Sate University and his M.D. from Jefferson Medical College. He
is Associate Clinical Professor of Medicine at Tufts University School of
Medicine in Boston, Massachusetts.
Philip Raskin, M.D., is Professor of Medicine, Department of Internal
Medicine, University of Texas Southwestern Medical Center at Dallas, Texas,
and is Director of the Diabetes Clinic and the University Diabetes Treatment
Center at Parkland Memorial Hospital in Dallas. He is the author of over 130
publications. Dr. Raskin received his B.A. from Washington and Jefferson
College and his M.D. from the University of Pittsburgh School of Medicine.
Arthur H. Rubenstein, M.D., is Chairman, Department of Medicine, University
of Chicago. Dr. Rubenstein is a member of the editorial boards of Journal of
Diabetes and Its Complications and Annals of Internal Medicine. He is the
author of over 300 publications. Dr. Rubenstein received his M.B.B.Ch. from
the University
39
<PAGE>
of the Witwatersrand, Johannesburg, South Africa. Dr. Rubenstein is a Fellow
of the College of Medicine of South Africa; Fellow, Royal College of
Physicians of London; Fellow and Master of the American College of Physicians;
and Diplomat, American Board of Internal Medicine (Endocrinology-Metabolism
Subspecialty).
ELECTION AND COMMITTEES OF DIRECTORS
The Board of Directors is divided into three classes. The directors of each
class are elected for three-year terms, with the terms of the three classes
staggered so that directors from a single class are elected at each annual
meeting of stockholders. Stephen A. Duzan and J. Warren Huff are Class I
directors whose terms of office expire at the annual meeting of stockholders
in 1999; Ray L. Hunt and Thomas F. McWilliams are Class II directors whose
terms of office expire at the annual meeting of stockholders in 1997; and
Anthony H. Cincotta, Ph.D., Manuel Cincotta, Jr., and Albert H. Meier, Ph.D.,
are Class III directors whose terms of office expire at the annual meeting of
stockholders in 1998. The Company intends to add two additional independent
directors to its Board of Directors.
The Board of Directors has three standing committees: the Audit Committee,
the Compensation Committee, and the Nominating Committee. The Audit Committee
reviews the results and scope of the annual audit and other services provided
by the Company's independent public accountants. The Compensation Committee of
the Board of Directors determines salaries and incentive compensation for
officers of the Company. In addition, the Board of Directors has designated
the Compensation Committee as the administrator of the Company's Amended and
Restated 1995 Long-Term Incentive Plan (the "Incentive Plan"). See
"Management--Employee Benefit Plans--Incentive Plan." The Nominating Committee
identifies and recruits candidates to serve as directors of the Company for
recommendation to the full Board of Directors.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive cash compensation for their services
as directors. The Company reimburses them for the expenses incurred in
attending meetings of the Board of Directors and its committees. On November
15, 1994, the Company granted Mr. Duzan a nonqualified option to purchase
7,500 shares of Common Stock at an exercise price of $0.80 per share in
consideration for his service as a director. This option becomes exercisable
in three equal amounts on the date of grant and on each of the first two
anniversaries of the date of grant. The option expires in July 2004. On
October 6, 1995, the Company granted Mr. Duzan a nonqualified option to
purchase 17,500 shares of Common Stock at an exercise price of $6.71 per share
in consideration for his service as a director. This option becomes
exercisable in four equal amounts on each of the first four anniversaries of
the date of grant, or, if earlier, upon a change in control of the Company.
The option expires ten years from the date of grant.
In June 1996, Ergo's shareholders approved a Stock Option Plan for Non-
Employee Directors (the "Director Stock Plan"). The Director Stock Plan
provides for an initial grant of a stock option for 10,000 shares of Common
Stock to each non-employee director upon first being elected or appointed to
serve on the Board of Directors. Each non-employee director serving when the
Director Stock Plan was approved (other than Mr. Duzan) was granted a stock
option for 10,000 shares of Common Stock with a deemed grant date of May 15,
1996. On the second anniversary of the initial grant date, those non-employee
directors will be granted a second nonqualified stock option for 10,000 shares
of Common Stock if they are still directors on that date. On October 6, 1999,
which is the date Mr. Duzan's existing options are scheduled to become
exercisable, Mr. Duzan will be granted a stock option to purchase 10,000
shares of Common Stock if he is still a director. The total number of shares
of Common Stock authorized for issuance under the Director Stock Plan is
200,000. Each option under the Director Stock Plan has an exercise price equal
to the fair market value of the Common Stock on the grant date. These options
will become exercisable in equal increments on the first and second
anniversary of their date of grant and will expire ten years after the grant
date if not exercised. If a change in control of the Company occurs, all stock
options granted under the Director Stock Plan will become fully exercisable.
40
<PAGE>
In October 1995, the Company entered into a consulting agreement with Dr.
Albert Meier in which the Company agreed to pay Dr. Meier $100,000 per year
for at least 20 hours of consulting services per week through October 1998.
Dr. Meier agreed that all work product discovered, created or developed by
him, alone or with others, will belong to the Company. Dr. Meier also agreed
to maintain the confidentiality of the Company's proprietary information. In
addition, Dr. Meier agreed not to compete with the Company for two years
following the end of his consulting services; however, the Company is required
to pay Dr. Meier $50,000 within 10 days after the end of his consulting
services and $100,000 on the first anniversary of termination of his
consulting services to maintain the noncompetition obligation. The Company may
terminate the consulting arrangement at any time. However, if the termination
is without cause, the Company must pay Dr. Meier the lesser of $100,000 or the
amount of fees he would have received under the remaining term of the
agreement.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted under Delaware law, the Company's Certificate of Incorporation
provides that no director of the Company will be personally liable to the
Company or any of its stockholders for monetary damages arising from the
director's breach of fiduciary duty as a director. This limitation does not
apply with respect to any action in which the director would be liable under
the Delaware General Corporation Law for authorizing illegal dividends, stock
repurchases or redemptions. This limitation also does not apply with respect
to any liability in which the director (i) breached his duty of loyalty to the
Company; (ii) did not act in good faith or, in failing to act, did not act in
good faith; (iii) acted in a manner involving intentional misconduct or a
knowing violation of law or, in failing to act, acted in a manner involving
intentional misconduct or a knowing violation of law; or (iv) derived an
improper personal benefit.
The Company has entered into indemnification agreements with each of its
directors and executive officers, agreeing to indemnify the director or
officer to the fullest extent permitted by law, and to advance expenses, if
the director or officer becomes a party to or witness or other participant in
any threatened, pending or completed action, suit or proceeding (a "Claim") by
reason of any occurrence related to the fact that the person is or was a
director, officer, employee, agent or fiduciary of the Company or a subsidiary
of the Company or another entity at the Company's request (an "Indemnifiable
Event"), unless a reviewing party (either outside counsel or a committee
appointed by the Board of Directors) determines that the person would not be
entitled to indemnification under applicable law. In addition, if a change in
control or a potential change in control of the Company occurs and if the
person indemnified so requests, the Company will establish a trust for the
benefit of the indemnitee and fund the trust in an amount sufficient to
satisfy all expenses reasonably anticipated at the time of the request to be
incurred in connection with any Claim relating to an Indemnifiable Event. The
reviewing party will determine the amount deposited in the trust. An
indemnitee's rights under the indemnification agreement are not exclusive of
any other rights under the Company's Certificate of Incorporation or Bylaws or
applicable law.
The Company believes that these provisions and agreements will assist the
Company in attracting and retaining qualified individuals to serve as
directors and officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Stephen A. Duzan, Ray L. Hunt,
and Thomas F. McWilliams. None of them is or has been an employee of the
Company. No executive officer of the Company serves as a member of the board
of directors or compensation committee of any entity that has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee. Messrs. Hunt and McWilliams, or their affiliates, have
acquired capital stock of the Company and loaned funds to the Company. See
"Certain Transactions."
41
<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to or earned in 1995
and 1994 to the Company's Chief Executive Officer and the Company's four most
highly compensated executive officers other than the Chief Executive Officer
(the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
- --------------------------- ---- ---------- --------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
J. Warren Huff.......... 1995 $203,125 -- -- 125,000 --
President and Chief 1994 200,000 -- -- -- --
Executive Officer
Manuel Cincotta, Jr. ... 1995 225,000 -- -- -- $53,015(1)
Chairman of the Board, 1994 225,000 -- $26,705(2) -- 23,842(3)
Treasurer and Secretary
Ronald H. Abrahams...... 1995 200,000 -- -- 70,000 --
Executive Vice 1994 150,000 $75,000 -- 43,750 --
President and Chief
Operating Officer
Thomas N. Thurman....... 1995 175,000 -- -- 42,500 --
Senior Vice President, 1994 92,188 -- -- 31,250 --
Marketing and Business
Development
Alan T. Barber.......... 1995 138,333 -- -- 25,000 --
Vice President, Finance 1994 110,000 -- -- -- --
and Administration, and
Chief Financial Officer
</TABLE>
- --------
(1) Reflects the value of the use of the Company's automobile, term life and
disability insurance premiums and tax reimbursement for these items.
(2) Reflects the value of the use of the Company's automobile and tax
reimbursement for both this compensation and for the items in footnote 3.
(3) Consists of term life and disability insurance premiums.
42
<PAGE>
Option Grants in 1995
The following table sets forth information regarding the stock option grants
to Named Executive Officers in 1995.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS (1) FOR OPTION TERM(2)
----------------------------------------------------- ----------------------------
FAIR
NUMBER OF % OF TOTAL EXERCISE MARKET
SECURITIES OPTIONS OR VALUE ON
UNDERLYING GRANTED TO BASE GRANT
OPTIONS EMPLOYEES IN PRICE DATE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) ($/SH) DATE 0% ($) 5% ($) 10% ($)
---- ----------- ------------ -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J. Warren Huff.......... 125,000 20.11 $6.71 $9.00 10-06-2005 $286,250 $707,501 $1,792,958
Manuel Cincotta, Jr..... -- -- -- -- -- -- -- --
Ronald H. Abrahams...... 70,000 11.26 6.71 9.00 10-06-2005 160,300 396,201 1,004,056
Thomas N. Thurman....... 42,500 6.84 6.71 9.00 10-06-2005 97,325 240,550 609,606
Alan T. Barber.......... 25,000 4.02 6.71 9.00 10-06-2005 57,250 141,500 358,592
</TABLE>
- --------
(1) Options granted are nonqualified options under the Incentive Plan that
become exercisable in four equal amounts on each of the first four
anniversaries of the date of grant, subject to earlier termination in
accordance with the option agreements. Exercisability of options will
accelerate upon a change in control of the Company, termination of
employment by the Company without cause, or termination of employment by
the optionee with good reason. See "Management--Employee Benefit Plans--
Incentive Plan."
(2) Amounts represent hypothetical gains that could be achieved for the
options if they are exercised at the end of the option term. Those gains
are based on assumed rates of stock price appreciation of 0%, 5% and 10%
compounded annually from the date the option was granted through the
expiration date.
Option Exercises and Year-End Option Values
The following table provides information about the number of shares issued
upon option exercises by the Named Executive Officers during 1995, and the
value realized by the Named Executive Officers. The table also provides
information about the number and value of options held by the Named Executive
Officers at December 31, 1995.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FY-END (#) OPTIONS AT FY-END ($)(1)
ACQUIRED OR ------------------------- -------------------------
NAME EXERCISED (#) VALUE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------- ------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Warren Huff............. -- -- 144,700 125,000 $2,061,975 $1,781,250
Manuel Cincotta, Jr..... -- -- 100,000 -- 1,425,000 --
Ronald H. Abrahams...... -- -- 14,584 99,166 207,822 1,413,116
Thomas N. Thurman....... -- -- 10,417 63,333 148,442 902,495
Alan T. Barber.......... -- -- 12,500 31,250 178,125 445,313
</TABLE>
- --------
(1) Option values are based on the difference between the exercise price per
share of the option and $14.25 per share, which was the closing price of
the Common Stock on the Nasdaq National Market on December 29, 1995,
multiplied by the number of shares of Common Stock subject to the option.
43
<PAGE>
Employment Contracts
The Company has entered into employment agreements with J. Warren Huff,
Manuel Cincotta, Jr., Dr. Ronald H. Abrahams, Thomas N. Thurman, Alan T.
Barber, and Dr. Anthony H. Cincotta. The agreements provide for the payment of
base salary amounts of $225,000 for Mr. Huff, $225,000 for Manuel Cincotta,
Jr., $200,000 for Dr. Abrahams, $175,000 for Mr. Thurman, $135,000 for Mr.
Barber, and $200,000 for Dr. Cincotta. The Compensation Committee may increase
the base amounts at its discretion. The Company also agreed to provide Manuel
Cincotta, Jr., with use of a Company automobile and to pay premiums on term
life and disability insurance policies on Mr. Cincotta with a death benefit of
at least $2,500,000 for his beneficiary. The Company has also agreed to
reimburse Mr. Cincotta for taxes he incurs because of those benefits and this
reimbursement. The employment agreements expire in October 1998.
Either party may terminate employment with or without cause on five days
written notice. Under the employment agreements, an executive officer is
entitled to receive a lump sum payment equal to his base salary if his
employment is terminated (i) by the Company for any reason other than
disability or for cause, or (ii) by the executive officer for good reason.
However, if either termination described in the preceding sentence follows a
change in control of the Company, the executive officer is entitled to receive
a lump sum payment equal to two times the sum of his base salary and budgeted
bonus. After any such termination, or any termination resulting from the
executive officer's disability or death, the executive officer or his family
is entitled to continue participation in any benefit plan maintained by the
Company until the end of the employment term stated in the employment
agreement.
Each executive officer has agreed that all work product discovered, created
or developed by him, alone or with others, will belong to the Company. Each
executive officer has agreed to maintain the confidentiality of the Company's
proprietary information. In addition, Dr. Cincotta has agreed not to compete
with the Company for two years following the end of his employment, and each
other executive officer has agreed not to compete with the Company for three
years following the end of his employment; however, the Company is required to
pay to the executive officer an amount equal to 50% of his base salary within
10 days after termination and 100% of his base salary on the first and (other
than Dr. Cincotta) second anniversaries following termination of his
employment to maintain the non-competition obligation.
EMPLOYEE BENEFIT PLANS
Incentive Plan
The Company may grant officers, directors, employees and consultants awards
with respect to shares of Common Stock under the Company's Amended and
Restated 1995 Long-Term Incentive Plan (the "Incentive Plan"). The awards
under the Incentive Plan include both incentive and nonqualified stock
options, stock appreciation rights ("SARs") and restricted stock awards. The
number of shares of Common Stock that may be issued under the Incentive Plan
is 1,431,525 shares. As of March 31, 1996, the Company had granted options
under the Incentive Plan for 662,625 shares of Common Stock to officers,
directors, employees and consultants.
The Compensation Committee (the "Committee") administers the Incentive Plan,
selects participants, and determines the type and size of awards, when awards
will be granted, and the terms of each award including exercise price, if any.
An option is the right to purchase Common Stock at a specified exercise
price. The exercise price for incentive stock options must not be less than
the fair market value of the Common Stock on the date of grant. The Committee
determines at the time of grant when the option will become exercisable. At
the discretion of the Committee, holders may use shares of stock to pay the
exercise price, including shares issuable upon exercise of the option.
44
<PAGE>
An SAR may be awarded in connection with or separate from a stock option. An
SAR is the right to receive an amount in cash or stock equal to the excess of
the fair market value of a share of the Common Stock on the date of exercise
over the exercise price specified in the agreement governing the SAR (for SARs
not granted in connection with a stock option) or the exercise price of the
related stock option (for SARs granted in connection with a stock option). An
SAR granted in connection with a stock option will require the holder, upon
exercise, to surrender the related stock option or portion thereof relating to
the number of shares for which the SAR is exercised. The surrendered stock
option or portion will then cease to be exercisable. Such an SAR is
exercisable or transferable only to the extent that the related stock option
is exercisable or transferable. An SAR granted independently of a stock option
will be exercisable as the Committee determines. The Committee may limit the
amount payable upon exercise of any SAR.
A restricted stock award is a grant of shares of Common Stock that is
nontransferable or subject to risk of forfeiture until specific conditions are
met. The restrictions will lapse in accordance with a schedule or other
conditions as the Committee determines. During the restriction period, the
holder of a restricted stock award may, in the Committee's discretion, have
certain rights as a stockholder, including the right to vote the stock subject
to the award or receive dividends on that stock. Restricted stock may also be
issued upon exercise or settlement of options or SARs.
The Committee has discretion to determine whether an award under the
Incentive Plan should have change of control features. The Committee also has
discretion to vary the change of control features as it deems appropriate. The
following describes the change of control features that the Company generally
expects may apply to additional awards, if any such feature applies. An award
agreement under the Incentive Plan may provide that, upon a change of control
of the Company, (1) the holder of a stock option will be granted a
corresponding SAR, (2) all outstanding SARs and options will become
immediately and fully vested and exercisable in full, and (3) the restriction
period on any restricted stock award will be accelerated and the restrictions
will expire. Outstanding options under the Incentive Plan have the provision
described in the preceding clause (2). In general, a change in control of the
Company occurs in any of four situations: (1) a person other than the Company,
certain affiliated companies or benefit plans, or a company a majority of
which is owned directly or indirectly by the stockholders of the Company,
becomes the beneficial owner of 50% or more of the voting power of the
Company's outstanding voting securities; (2) a majority of the Board of
Directors is not comprised of the members of the Board of Directors at
September 15, 1995, and persons whose elections as directors were approved by
those directors or their approved successors; (3) the Company merges or
consolidates with another corporation or entity (whether the Company or the
other entity is the survivor), or the Company and the holders of the voting
securities of such other corporation or entity (or the stockholders of the
Company and such other corporation or entity) participate in a securities
exchange, other than a merger, consolidation or securities exchange in which
the Company's voting securities are converted into or continue to represent
securities having the majority of voting power in the surviving company; or
(4) the Company liquidates or sells all or substantially all of its assets,
except sales to any entity having substantially the same ownership as the
Company.
Other Stock Options
At various times since its formation, the Company granted options not under
the Incentive Plan for 100,000 shares to Manuel Cincotta, Jr., 75,000 shares
to Dr. Anthony H. Cincotta, 75,000 shares to Dr. Albert H. Meier, 144,725
shares to J. Warren Huff, 43,750 shares to Dr. Ronald H. Abrahams, 31,250
shares to Thomas N. Thurman, and 18,750 shares to Alan T. Barber, all at an
exercise price of $.80 per share. The options are fully exercisable other than
those granted to Dr. Abrahams, Mr. Thurman and Mr. Barber. The options for
Dr. Abrahams, Mr. Thurman and Mr. Barber were granted on March 31, 1994, June
21, 1994, and November 8, 1993, respectively, and become exercisable in equal
increments on each of the first three anniversaries of their dates of grant.
Each option expires at various times between December 31, 2002, and June 30,
2004. These options automatically become exercisable upon a change in control,
termination of the holder's employment with the Company by the Company without
cause, or termination of the holder's employment with the Company by the
holder for good reason.
45
<PAGE>
In connection with these options, the Company agreed to assist these
officers in paying all federal, state and local income tax liabilities with
respect to the Common Stock issued upon exercise of his options by
facilitating a sale of the Common Stock or arranging for the Company to
repurchase a portion of these shares issued.
CERTAIN TRANSACTIONS
On September 10, 1992, CVC, Citi Growth Fund, L.P. ("Citi Growth"), and CVC
employees including Mr. McWilliams purchased $3,500,000 principal amount of
subordinated notes of the Company (the "Series A Notes") at face value. The
Series A Notes were convertible into shares of Series A Convertible Preferred
Stock of the Company. On October 12, 1993, CVC, Citi Growth, CVC employees
including Mr. McWilliams, Hunt Financial, and another entity purchased 20,940
shares of the Company's Series B Preferred Stock for $10,041,986. Concurrently
with the purchase, the purchasers of the Series A Notes converted the Series A
Notes into 8,826 shares of the Company's Series A Preferred Stock.
On July 15, 1994, Hunt Financial purchased 6,255 shares of the Company's
Series C Preferred Stock for $2,999,647. Hunt Financial purchased an
additional 10,426 shares of Series C Preferred Stock on May 30, 1995, for
$4,999,892. With Hunt Financial's first purchase of the Series C Preferred
Stock, the Company issued to Hunt Financial for $.0004 per warrant, a warrant
to purchase 30,400 shares of the Company's Common Stock at $16.20 per share.
With Hunt Financial's second purchase, the Company issued to Hunt Financial
for $.0004 per warrant, warrants to purchase an additional 50,650 shares of
Common Stock at $16.20 per share. Before Hunt Financial's second purchase of
Series C Preferred Stock, Hunt Financial loaned the Company $1,000,000 on
February 3, 1995; $2,009,863 on March 10, 1995 ($1,009,863 of which the
Company used to repay the February 1995 loan); and $3,028,845 on April 13,
1995 ($2,028,845 of which the Company used to repay the March 1995 loan). The
Company used a portion of the proceeds of Hunt Financial's second purchase of
Series C Preferred Stock to repay the $3,067,846.57 principal and interest on
the April 1995 loan. The Company used the loans for working capital. The loans
bore interest at 1% over the prime rate and were unsecured.
On September 1, 1995, CVC, Citi Growth, CVC employees including Mr.
McWilliams, Hunt Financial, and Lafayette Investment Company ("Lafayette"), a
company controlled by Mr. Hunt, entered into a loan agreement (the "Loan
Agreement") in which they agreed to lend the Company up to $6,000,000 at an
interest rate of 10% per annum. The Company borrowed $4,000,000 under the Loan
Agreement. Upon the closing of the Company's initial public offering in
December 1995, the principal and interest on the loan were converted into
Common Stock at $9.00 per share, resulting in 451,767 shares of Common Stock
being issued.
In connection with this loan, the Company and the lenders agreed that the
shares of Series A, Series B and Series C Preferred Stock would convert to
Common Stock upon the closing of the initial public offering at a weighted
average conversion price of $6.41 per share of Common Stock. Before then, the
Series A, Series B and Series C Preferred Stock had conversion prices of
$16.90, $19.18, and $19.18 per share of Common Stock, respectively, but would
not have converted to Common Stock upon closing of the initial public
offering. Also, all warrants previously issued to Hunt Financial were
cancelled. In connection with the changes in conversion prices, the Company
recorded a preferred stock dividend in the amount of $7,123,536.
46
<PAGE>
The following table sets forth (i) the amount that each of CVC, Citi Growth,
Mr. McWilliams, Hunt Financial, and Lafayette had invested in Series A, Series
B and Series C Preferred Stock and loaned under the Loan Agreement, and (ii)
the number of shares of Common Stock into which the Preferred Stock or loan
were converted:
<TABLE>
<CAPTION>
AMOUNT INVESTED OR LOANED AND
NUMBER OF SHARES OF COMMON STOCK ISSUABLE
-----------------------------------------------------------
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK LOAN TOTAL AMOUNT TOTAL
--------------- --------------- --------------- ----------- INVESTED COMMON
NAME AMOUNT/NO. AMOUNT/NO. AMOUNT/NO. AMOUNT/NO. AND LOANED STOCK
---- --------------- --------------- --------------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
CVC..................... $2,350,000/ $6,038,139/ -- $1,578,844/ $9,966,984 1,519,985
395,051 949,507 175,427
Citi Growth............. $1,000,000/ $ 691,525/ -- $ 324,762/ 2,016,287 312,934
168,107 108,743 36,084
Mr. McWilliams.......... $ 100,000/ $ 194,221/ -- $ 55,546/ 349,768 53,522
16,810 30,541 6,171
Hunt Financial.......... -- $2,082,249/ $7,999,540/ $1,940,903/ 12,022,693 1,801,013
327,437 1,257,921 215,655
Lafayette............... -- $ 416,258/ -- $ 92,520/ 508,778 75,737
65,457 10,280
</TABLE>
In addition, Ergo granted demand and piggyback registration rights to the
purchasers of Preferred Stock and to these lenders with respect to the Common
Stock issued upon conversion of the Series A, Series B and Series C Preferred
Stock or issued in payment of the loan at the closing of the intial public
offering. See "Description of Capital Stock--Registration Rights."
In 1992, the Company agreed to purchase from Dr. Anthony Cincotta his
interest in patents and patent applications relating to the Company's
technology. Under the agreement, the Company was to pay Dr. Cincotta $200,000
each year for five years. The Company made one of those payments. In December
1995, the Company paid to Dr. Cincotta $800,000 in full satisfaction of those
obligations.
The Company licenses certain patents and patent obligations from LSU that
relate to inventions of Drs. Anthony Cincotta and Albert Meier. LSU's bylaws
give inventors of LSU's patents the right to share in any royalties LSU
receives from those patents. In April 1995, the Company issued to each of Drs.
Cincotta and Meier 60,000 shares of Common Stock to acquire their inventors'
share of royalties attributable to the Company's license payments to LSU under
the LSU Agreement. The number of shares of Common Stock issued was negotiated
between Drs. Cincotta and Meier and the Company's Board of Directors. See
"Business--LSU Agreement."
47
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the shares of the Company's Common Stock as of June 1, 1996, and
as adjusted to give effect to the sale of 2,500,000 shares of Common Stock in
this Offering and the sale of the shares offered hereby by the Selling
Stockholders (assuming exercise in full of the Underwriters' over-allotment
option), by (i) each person the Company knows to be the beneficial owner of 5%
or more of the outstanding shares of Common Stock, (ii) each Named Executive
Officer, (iii) each director of the Company, (iv) all executive officers and
directors of the Company as a group, and (v) each of the Selling Stockholders.
The Selling Stockholders are offering shares of Common Stock for sale only
through the over-allotment option, which may or may not be exercised in the
sole discretion of the Representatives. See "Underwriting." Except as
indicated in the footnotes to the table, the Company believes that the persons
named in the table have sole voting and investment power with respect to the
shares of Common Stock indicated.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE OFFERING(1) SHARES OFFERED AFTER OFFERING(1)
-------------------- IN OVER-ALLOTMENT -------------------------
BENEFICIAL OWNER SHARES PERCENTAGE OPTION SHARES PERCENTAGE
---------------- --------- ---------- ----------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Hunt Financial
Corporation............ 1,842,904 18.1%
1445 Ross at Field
Dallas, Texas 75202
Citicorp Venture Capital
Ltd.(2)................ 1,678,910 16.5%
399 Park Avenue
New York, New York
10043
Anthony H. Cincotta(3).. 868,578 8.5%
Charlestown Navy Yard
100 First Avenue
Charlestown,
Massachusetts 02129
Albert H. Meier(4)...... 702,524 6.9%
Charlestown Navy Yard
100 First Avenue
Charlestown,
Massachusetts 02129
Manuel Cincotta,
Jr.(5)................. 580,033 5.7%
Charlestown Navy Yard
100 First Avenue
Charlestown,
Massachusetts 02129
Citi Growth Fund,
L.P.(2)................ 343,357 3.4%
c/o Sycamore Management
989 Lenox Drive
Building 1, Suite 208
Lawrenceville, New
Jersey 08648
J. Warren Huff(6)....... 122,225 1.2%
Ronald H. Abrahams(7)... 29,167 *
Thomas N. Thurman(8).... 20,834 *
Alan T. Barber(9)....... 12,500 *
Stephen A. Duzan(10).... 5,000 *
Ray L. Hunt(11)......... 83,976 *
1445 Ross at Field
Dallas, Texas 75202
Thomas F.
McWilliams(12)......... 59,054 *
All executive officers
and directors as a
group (12 persons)..... 2,499,046 23.5%
</TABLE>
48
<PAGE>
- --------
* Represents less than 1% of outstanding Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
SEC and generally includes voting or disposition power with respect to
securities.
(2) Excludes shares of Common Stock beneficially owned by the employees of
CVC and Citi Growth Fund, L.P., including shares owned by Mr. McWilliams,
as to which CVC and Citi Growth Fund, L.P. disclaim beneficial ownership.
CVC and Citi Growth Fund, L.P. are affiliates, but each disclaims
beneficial ownership of the shares held by the other.
(3) Includes 75,000 shares of Common Stock subject to exercisable stock
options and 146,078 shares held in a trust for the benefit of the
children of Manuel Cincotta, Jr., for which Dr. Anthony Cincotta serves
as trustee.
(4) Includes 75,000 shares of Common Stock subject to exercisable stock
options.
(5) Includes 100,000 shares of Common Stock subject to exercisable stock
options.
(6) Includes 122,200 shares of Common Stock subject to exercisable stock
options.
(7) Includes 29,167 shares of Common Stock subject to exercisable stock
options.
(8) Includes 20,834 shares of Common Stock subject to exercisable stock
options.
(9) Includes 12,500 shares of Common Stock subject to exercisable stock
options.
(10) Includes 5,000 shares of Common Stock subject to exercisable stock
options.
(11) Consists entirely of shares owned by Lafayette Investment Company, a
limited partnership, the sole general partner of which is a corporation
owned entirely by Mr. Hunt. Excludes shares owned by Hunt Financial
Corporation, the capital stock of which is held, indirectly, through a
series of corporations, by certain trusts for the benefit of Mr. Hunt and
members of his family.
(12) Excludes shares owned by CVC, Citi Growth Fund, L.P., and other employees
of CVC, as to which Mr. McWilliams disclaims beneficial ownership.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock and 10,000,000 shares of preferred stock, par value $.01 per
share ("Preferred Stock").
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of common stockholders. Common Stock does not
have cumulative voting rights, which means that the holders of a majority of
the shares of Common Stock outstanding can elect all the directors and the
holders of the remaining shares will not be able to elect any directors. Each
share of Common Stock is entitled to participate equally in dividends, if, as
and when declared by the Company's Board of Directors, and in the distribution
of assets in the event of liquidation, subject in all cases to any prior
rights of outstanding shares of Preferred Stock. The Company has never paid
cash dividends on its Common Stock other than $166,910 of distributions made
in 1993 to stockholders when the Company was owned only by individuals and had
elected to be treated as an S corporation for federal income tax purposes. The
shares of Common Stock have no preemptive or conversion rights, redemption
rights, or sinking fund provisions. The outstanding shares of Common Stock
are, and the shares of Common Stock offered hereby upon issuance and sale will
be, duly authorized, validly issued, fully paid, and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of Preferred Stock. The
Company's Board of Directors may establish, without stockholder approval, one
or more classes or series of Preferred Stock having the number of shares,
designations, relative voting rights, dividend rates, liquidation and other
rights, preferences, and limitations that the Board of Directors may
designate. The Company believes that this power to issue Preferred Stock will
provide flexibility in connection with possible corporate transactions. The
issuance of Preferred Stock, however, could adversely affect the voting power
of holders of Common Stock and restrict their
49
<PAGE>
rights to receive payments upon liquidation of the Company. It could also have
the effect of delaying, deferring or preventing a change in control of the
Company. The Company does not currently plan to issue additional shares of
Preferred Stock. As of June 30, 1996, the Company's outstanding Preferred
Stock consisted of 6,903 shares of Series D Preferred Stock.
SERIES D PREFERRED STOCK
The Company issued the 6,903 shares of Series D Preferred Stock on April 27,
1995. These shares will remain outstanding following the offering until they
are converted into Common Stock at the Company's option as described in
"Description of Capital Stock--Series D Preferred Stock--Conversion at the
Company's Option," or until they are automatically exchanged into subordinated
notes as described in "Description of Capital Stock--Series D Preferred
Stock--Automatic Exchange," if the Company does not exercise its conversion
option after the option becomes exercisable. The following description is a
summary of the Certificate of Amendment to the Certificate of Designation for
the Series D Preferred Stock, and it is qualified in its entirety by reference
to that document.
Series D Preferred Stock ranks, with respect to dividend rights and
distribution of assets on liquidation, senior and prior to Common Stock and
junior to, or on parity with, as the case may be, any other stock of the
Company designated as senior to, or on parity with, as the case may be, Series
D Preferred Stock. Holders of Series D Preferred Stock will be entitled to
receive cumulative cash dividends at the rate of 6% per share per annum,
compounded annually, on the Stated Value thereof out of the funds legally
available therefor, if, as and when declared by the Company's Board of
Directors. The "Stated Value" per share of Series D Preferred Stock is $1,000
plus all accumulated and unpaid dividends thereon. Upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of Series D Preferred Stock then outstanding will be entitled to receive an
amount of cash equal to the Stated Value of Series D Preferred Stock after any
distribution is made on any senior securities and before any distribution is
made on any junior securities, including Common Stock. Except as required by
law, the holders of Series D Preferred Stock will have no voting rights. As
long as any shares of Series D Preferred Stock are outstanding, the Company
may not pay a dividend or other distribution on or repurchase Common Stock,
directly or indirectly, without first obtaining the affirmative vote or
written consent of the holders of a majority of the outstanding Series D
Preferred Stock, with certain exceptions. The terms of Series D Preferred
Stock may be amended with the consent of the holders of a majority of the
outstanding shares of Series D Preferred Stock.
Conversion at the Company's Option. At the Company's option exercised by
written notice to the holders of Series D Preferred Stock at any time during
the 90-day period following the Company's receipt of FDA approval to market
its first product (a "Trigger Event"), if that approval is received, each
share of Series D Preferred Stock will be converted into the number of shares
of Common Stock that is determined by dividing the Stated Value then in effect
for each share by 95% of the Average Trading Price in effect at the time for
the Common Stock. The "Average Trading Price" means as of any date the average
of the following for the 15 trading days immediately preceding that date: (a)
if Common Stock is then listed or admitted to trading on any securities
exchange registered under the Securities Exchange Act of 1934, the closing
price per share of the Common Stock, regular way, on such day, or if no sale
takes place on that day, the average of the closing bid and asked prices on
that day, (b) if the Common Stock is not then listed or admitted to trading on
any such securities exchange, the last reported sale price per share of the
Common Stock on that day, or if no sale takes place on that day, the average
of the high bid and low asked prices as reported by a reputable quotation
source designated by the Company, or (c) if the stock is not then listed or
admitted to trading on any such securities exchange and no such reported sale
price or bid and asked prices are available, the average of the reported high
bid and low asked prices per share of the Common Stock on that day, or if
there shall be no bid and asked prices on that day, the average of the high
bid and low asked prices, as so reported, on the most recent day for which
prices have been so reported. However, if the Common Stock is not then listed
or admitted to trading on any such securities exchange, and no such reported
sale price or bid and asked prices are available or reported, the Average
Trading Price will mean the fair market value per share of Common Stock as the
Company's Board of Directors determines in good faith. The Company currently
intends to exercise its option to convert the Series D Preferred Stock into
Common Stock if a Trigger Event occurs.
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<PAGE>
Automatic Exchange. Effective upon the expiration of the 90-day period
during which Ergo may convert Series D Preferred Stock as previously
described, or an earlier date following the Trigger Event on which Ergo elects
not to convert Series D Preferred Stock into Common Stock, all outstanding
shares of Series D Preferred Stock will be automatically exchanged for a
subordinated promissory note of the Company (the "Exchange Note") in the
principal amount equal to the Stated Value of Series D Preferred Stock at the
date of exchange. The Exchange Note will be unsecured, will be subordinated to
all senior indebtedness, will bear interest at a rate equal to 2% above the
prime rate of Citibank, N.A., and will provide for twelve consecutive
quarterly payments, commencing on the three-month anniversary of the issuance
thereof.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
the Company's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with the Company for three years
following the date that person becomes an interested stockholder unless (a)
before that person became an interested stockholder, the Company's Board of
Directors approved the transaction in which the interested stockholder became
an interested stockholder or approved the business combination; (b) upon
completion of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owns at least
85% of the voting stock outstanding at the time the transaction commenced
(excluding stock held by directors who are also officers of the Company and by
employee stock plans that do not provide employees with the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer); or (c) following the transaction in which that
person became an interested stockholder, the business combination is approved
by the Company's Board of Directors and authorized at a meeting of
stockholders by the affirmative vote of the holders of at least 66 2/3% of the
outstanding voting stock not owned by the interested stockholder. Because the
transactions in which Hunt Financial and CVC became interested stockholders
were approved in advance by the Company's Board of Directors, Hunt Financial,
CVC and their affiliates will be exempt from the limitations of Section 203
pursuant to the exclusion described in clause (a). The Company has no plans to
engage in any transactions with Hunt Financial, CVC or their affiliates that
otherwise would be subject to Section 203. Section 203 provides that these
restrictions also do not apply to certain business combinations proposed by an
interested stockholder following the announcement or notification of one of
certain extraordinary transactions involving the Company and a person who was
not an interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the Company's
directors, if that extraordinary transaction is approved or not opposed by a
majority of the directors who were directors before any person became an
interested stockholder in the previous three years or who were recommended for
election or elected to succeed such directors by a majority of such directors
then in office.
The Company's Board of Directors is divided into three classes. The
directors of each class are elected for three-year terms, with the terms of
the three classes staggered so that directors from a single class are elected
at each annual meeting of stockholders. Stockholders may remove a director
with or without cause upon the vote of holders of at least 66 2/3% of the
outstanding shares of Common Stock. In general, the Board of Directors, not
the stockholders, has the right to appoint persons to fill vacancies on the
Board of Directors.
The Certificate of Incorporation provides that holders of Common Stock may
act only at annual or special meetings of holders of Common Stock and not by
written consent. The Certificate of Incorporation also provides that special
meetings of holders of Common Stock may be called only by the Company's Board
of Directors and that only business proposed by the Board of Directors may be
considered at special meetings of holders of Common Stock.
The Certificate of Incorporation provides that the only business (including
election of directors) that may be considered at an annual meeting of holders
of Common Stock, in addition to business proposed (or persons nominated to be
directors) by the directors of the Company, is business proposed (or persons
nominated to be directors) by holders of Common Stock who comply with the
notice and disclosure requirements set forth in the
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<PAGE>
Certificate of Incorporation. In general, the Certificate of Incorporation
requires that a stockholder give the Company notice of proposed business or
nominations no later than 60 days before the annual meeting of holders of
Common Stock (meaning the date on which the meeting is first scheduled and not
postponements or adjournments thereof) or (if later) 10 days after the first
public notice of the annual meeting is sent to holders of Common Stock. In
general, the notice must also contain information about the stockholder
proposing the business or nomination, the stockholder's interest in the
business, and (with respect to nominations for director) information about the
nominee of the nature ordinarily required to be disclosed in public proxy
solicitation statements. The stockholder also must submit a notarized letter
from each of the stockholder's nominees stating the nominee's acceptance of
the nomination and indicating the nominee's intention to serve as director if
elected.
The Delaware General Corporation Law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or by-laws, unless the
corporation's certificate of incorporation or by-laws requires a greater
percentage. The Certificate of Incorporation provides that approval by the
holders of at least 66 2/3% of the outstanding voting stock of the Company is
required to amend the provisions of the Certificate of Incorporation
previously discussed and certain other provisions, except that approval of at
least 80% of the outstanding voting stock is required to amend the provisions
prohibiting holders of Common Stock from acting by written consent.
REGISTRATION RIGHTS
The Company granted demand and piggyback registration rights to the
purchasers of its Series A, B and C Preferred Stock with respect to the Common
Stock issued upon conversion of that Preferred Stock, to the lenders under the
Loan Agreement with respect to the Common Stock issued in payment of the loan
at the closing of the Company's initial public offering, and to such holders
of Preferred Stock and lenders with respect to all shares of Common Stock they
held as of April 19, 1995. Approximately 4,133,247 shares of Common Stock are
entitled to these registration rights. Pursuant to these rights, a holder or
holders of 20% or more of the securities covered by the registration rights
agreement may make up to two requests for the Company to register under the
Securities Act of 1933 (the "Securities Act") the sale of Common Stock covered
by the agreement, subject to certain conditions. In addition, if the Company
files a registration statement in connection with an offering of its Common
Stock by it or its securityholders, the holders of these shares may request
that the Company include in that registration all or any portion of these
shares.
The Company has also granted piggyback registration rights to Manuel
Cincotta, Jr., Dr. Anthony Cincotta, Dr. Albert Meier and other holders of
Common Stock pursuant to the Stockholder Rights Agreement, as amended, for
Ergo Science Incorporated effective August 5, 1992. Approximately 2,389,025
shares of Common Stock are entitled to these piggyback registration rights.
The Company also granted piggyback registration rights to persons who
received Common Stock in connection with the issuance of the Series D
Preferred Stock. Approximately 536,576 shares of Common Stock are entitled to
these piggyback registration rights.
Geneva obtained piggyback registration rights with respect to the 229,575
shares of Common Stock it received in connection with the signing of the
Geneva Agreement. See "Business--Commercialization Strategy--Manufacturing."
The Company also granted piggyback registration rights with respect to the
20,000 shares of Common Stock subject to an option that the Company granted
its financial advisor upon the closing of its initial public offering.
All of these registration rights are subject to cutback provisions. If the
underwriters of the offering advise the Company that inclusion of these
securities and any other securities held by other holders with piggyback
registration rights will have a material adverse effect on the amount, price
or distribution of the securities to be offered by the Company in the
offering, the aggregate number of shares to be included in the registration
will be allocated (i) 90% to the former holders of the Company's Series A,
Series B and Series C Preferred Stock and
52
<PAGE>
lenders and (ii) 10% to all other security holders (including, without
limitation, the Company's management). The Company has agreed to pay all
expenses incurred by the holders of these registration rights in connection
with a registration, including certain legal fees and expenses, but excluding
underwriting discounts and commissions. None of these registration rights has
been exercised in connection with this offering. See "Principal and Selling
Stockholders."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The First National
Bank of Boston.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 12,668,080 shares of
Common Stock outstanding. Of these shares, the 2,500,000 shares of Common
Stock sold in this offering will be, the 2,875,000 shares of Common Stock sold
in the Company's initial public offering are, and 22,500 shares of Common
Stock issued upon option exercises are, freely transferable without
restriction under the Securities Act unless they are held by the Company's
affiliates, as that term is used in Rule 144 under the Securities Act. The
Company issued the remaining 7,270,580 shares of Common Stock in reliance on
exemptions from the registration requirements of the Securities Act, and those
shares are restricted securities under Rule 144. Those shares may not be sold
publicly unless they are registered under the Securities Act, sold in
compliance with Rule 144, or sold in a transaction that is exempt from
registration. For purposes of Rule 144, the Company believes that none of the
Company's outstanding shares has a holding period that began before April 27,
1995, when the Company exchanged its capital stock for the capital stock of
Ergo Science Incorporated and interests in limited partnerships holding
licenses from the Company. Therefore, none of those shares will be eligible
for immediate sale in the public market without restriction under Rule 144(k),
and none of those shares will be eligible for immediate sale under the manner-
of-sale, volume and other limitations of Rule 144. Beginning April 27, 1997,
6,031,180 shares of Common Stock will become eligible for sale under Rule 144,
based on current SEC rules and subject to compliance with the manner-of-sale,
volume and other requirements of Rule 144, and the remaining outstanding
shares will become eligible for sale subject to those limitations at later
dates. Beginning April 27, 1998, those 6,031,180 shares of Common Stock will
become eligible for sale under Rule 144(k) if they are not held by affiliates
of the Company.
In general, under Rule 144 a person (or persons whose sales are aggregated),
including an affiliate, who has beneficially owned shares for at least two
years is entitled to sell in broker transactions, within any three-month
period commencing 90 days after this offering, a number of shares that does
not exceed the greater of (i) 1% of the then outstanding Common Stock
(approximately 126,681 shares immediately after this offering) or (ii) the
average weekly trading volume in the Common Stock during the four calendar
weeks preceding the sale, subject to the filing of a Form 144 with respect to
the sale and other limitations. In addition, a person who was not an affiliate
of the Company during the three months preceding a sale and who has
beneficially owned the shares proposed to be sold for at least three years is
entitled to sell the shares under Rule 144(k) without regard to the manner-of-
sale, volume and other limitations of Rule 144. The SEC has proposed to
shorten the holding periods under Rule 144 for restricted securities. The SEC
has indicated that, if adopted, the proposed amendment would apply to all
outstanding restricted securities. However, of those shares are subject
to lock-up agreements for 90 days after the date of this Prospectus. See
"Underwriting."
The holders of approximately 3,877,275 shares of Common Stock and their
permitted transferees are entitled to demand registration of those shares
under the Securities Act. See "Description of Capital Stock--Registration
Rights."
No prediction can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial numbers
of shares by existing stockholders or by stockholders purchasing in this
offering could have a negative effect on the market price of the Common Stock.
53
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Cowen & Company, UBS Securities LLC, and Needham & Company, Inc., have
severally agreed to purchase from the Company the following respective number
of shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Cowen & Company................................................
UBS Securities LLC ............................................
Needham & Company, Inc. .......................................
---------
Total........................................................ 2,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the Common Stock offered hereby if any of such shares are
purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public
initially at the price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the offering,
the offering price and other selling terms may be changed by the
Representatives of the Underwriters.
The Company and the Selling Stockholders have granted to the Underwriters an
option, exercisable not later than 30 days after the date of this Prospectus,
to purchase up to 375,000 additional shares of Common Stock at the public
offering price less the underwriting discounts and commissions set forth on
the cover page of this Prospectus. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of shares
of Common Stock to be purchased by it shown in the above table bears to
2,500,000 and the Company and the Selling Stockholders will be obligated,
pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 2,500,000 shares are being offered.
The Company and each Selling Stockholder that sells shares in the over-
allotment option have agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act.
The Company, its directors, officers, principal stockholders and Selling
Stockholders have entered into agreements providing that, for a period of 90
days after the date of this Prospectus, they will not, without the prior
written consent of Cowen & Company, offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into, or
exchangeable for, or warrants to purchase, any shares of Common Stock, or
grant any option to purchase or right to acquire or acquire any option to
dispose of any shares of Common Stock, except in certain limited
circumstances.
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<PAGE>
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In connection with this offering, certain Underwriters and selling group
members, if any, or their respective affiliates who are qualifying registered
market makers on the Nasdaq National Market may engage in passive market
making transactions in the Common Stock on the Nasdaq National Market in
accordance with Rule 10b-6A under the Securities Exchange Act of 1934 (the
"Exchange Act"), during the two business days before commencement of offers or
sales of the Common Stock. The passive market making transactions must comply
with applicable volume and price limits and be identified as such. In general,
a passive market maker may display its bid at a price not in excess of the
highest independent bid for the security; if all independent bids are lowered
below the passive market makers' bid, however, the bid must then be lowered
when certain purchase limits are exceeded.
Cowen & Company and Needham & Company, Inc. acted as co-managers of the
Company's initial public offering in December 1995, for which they received
customary commissions.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by Vinson & Elkins L.L.P., Dallas, Texas, and for the
Underwriters by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston,
Massachusetts. Two partners of Vinson & Elkins L.L.P. are partners of a
partnership that owns 47,857 shares of Common Stock, of which 14,725 shares
are attributable to the interests of those partners of Vinson & Elkins L.L.P.
However, those partners do not possess voting or disposition power with
respect to those shares.
EXPERTS
The consolidated balance sheets of the Company at December 31, 1994 and
1995, and the related consolidated statements of operations, cash flows and
stockholders' equity (deficit) for the years then ended, and for the portion
after December 31, 1993, of the period from inception (January 23, 1990) to
December 31, 1995, included in this Prospectus, have been included in reliance
on the report of Coopers & Lybrand L.L.P., independent accountants, given on
the authority of that firm as experts in accounting and auditing. The
consolidated financial statements of the Company for the year ended December
31, 1993, and the portion ending December 31, 1993, of the period from
inception (January 23, 1990) to December 31, 1993, have been included in
reliance on the report of Ernst & Young LLP, independent auditors, given on
authority of that firm as experts in accounting and auditing.
The statements in the Prospectus under the captions "Risk Factors--
Uncertainty of Protection for Patents and Proprietary Technology," "Business--
Patents, Proprietary Rights and Licenses" and "Business--LSU Agreement" have
been reviewed and approved by Darby & Darby, P.C., New York, New York, as
experts on such matters, and are included in this Prospectus in reliance on
that review and approval.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act. In accordance with the Exchange Act, the Company files reports, proxy
statements and other information with the Securities and Exchange Commission.
These reports, proxy statements and other information may be inspected and
copied at prescribed rates at the Public Reference Section of the SEC at
Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549, as well as at
the regional offices of the SEC at Seven World Trade Center, New York, New
York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. These reports, proxy statements and other information may
also be obtained from the Web site that the SEC maintains at
http:\\www.sec.gov.
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<PAGE>
The Company has filed with the SEC a registration statement on Form S-1
(together with all amendments and exhibits, the "Registration Statement")
under the Securities Act. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules to the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. For further information
with respect to the Company and the Common Stock offered hereby, reference is
made to the Registration Statement and to its exhibits and schedules.
Statements in this Prospectus about the contents of any contract or other
document are not necessarily complete; reference is made in each instance to
the copy of the contract or other document filed as an exhibit to the
Registration Statement. Each such statement is qualified in all respects by
this reference to the exhibit.
56
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.......................................... F-2
Report of Independent Auditors............................................. F-3
Consolidated Balance Sheets as of December 31, 1994 and 1995 and March 31,
1996 (unaudited).......................................................... F-4
Consolidated Statements of Operations and Deficit Accumulated During
Development Stage for the years ended December 31, 1993, 1994 and 1995,
for the period from inception (January 23, 1990) to December 31, 1995 and
for the unaudited three month periods ended March 31, 1995 and 1996....... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995, for the period from inception (January 23, 1990) to
December 31, 1995 and for the unaudited three month periods ended March
31, 1995 and 1996......................................................... F-6
Consolidated Statement of Stockholders' Equity (Deficit) for the period
from inception (January 23, 1990) to December 31, 1995 and for the
unaudited three month period ended March 31, 1996......................... F-7
Notes to Consolidated Financial Statements................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ergo Science Corporation
(A Development Stage Enterprise):
We have audited the accompanying consolidated balance sheets of Ergo Science
Corporation (the "Company") (a development stage enterprise) as of December
31, 1994 and 1995 and the related consolidated statements of operations and
deficit accumulated during the development stage, stockholders' equity
(deficit), and cash flows for the years then ended and the period cumulative
from inception (January 23, 1990) to December 31, 1995. 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 did not audit the financial statements of Ergo Science
Corporation for the period from inception to December 31, 1993. Such
statements are included in the cumulative totals from inception to December
31, 1995. The total net loss from inception to December 31, 1993 reflects 26%
of the cumulative total. Those statements were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to
amounts for the period from inception to December 31, 1993, included in the
cumulative totals, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Ergo Science Corporation as of
December 31, 1994 and 1995, and the results of its operations and its cash
flows for the years then ended and the period cumulative from inception
(January 23, 1990) to December 31, 1995, in conformity with generally accepted
accounting principles.
Coopers & Lybrand l.l.p.
Boston, Massachusetts
March 1, 1996
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Ergo Science Corporation
(A Development Stage Company):
We have audited the accompanying consolidated statements of operations and
deficit accumulated during the development stage, stockholders' deficit, and
cash flows of Ergo Science Corporation (a development stage company) for the
year ended December 31, 1993, and for the period from inception (January 23,
1990) to December 31, 1993 (not separately presented herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations and cash flows of Ergo Science Corporation for the year ended
December 31, 1993, and for the period from inception (January 23, 1990) to
December 31, 1993 (not separately presented herein) in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
April 26, 1994
F-3
<PAGE>
ERGO SCIENCE CORPORATION,
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 1,880,982 $ 15,896,373 $ 8,177,095
Short-term investments............. -- 6,325,502 8,860,301
Prepaid and other current assets... 58,527 440,376 473,697
------------ ------------ ------------
Total current assets............. 1,939,509 22,662,251 17,511,093
Equipment and leasehold improvements,
net................................. 2,335,913 2,268,234 2,210,396
Investments and other assets......... 27,467 19,426 43,631
------------ ------------ ------------
Total assets..................... $ 4,302,889 $ 24,949,911 $ 19,765,120
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued
expenses.......................... $ 566,874 $ 2,313,847 $ 1,235,540
Accrued legal costs................ 666,320 695,499 280,206
Current portion of capital lease
obligations....................... 27,138 43,114 44,178
------------ ------------ ------------
Total current liabilities........ 1,260,332 3,052,460 1,559,924
Long-term portion of capital lease
obligations......................... 89,013 93,600 82,149
Deferred revenue..................... 5,744,329 -- --
Commitments and contingencies........ -- -- --
Redeemable preferred stock........... 17,884,209 -- --
Stockholders' equity (deficit):
Preferred stock, $.01 par value,
10,000,000 shares authorized;
6,903 shares of Series D preferred
stock issued and outstanding at
December 31, 1995 and March 31,
1996.............................. -- 4,306,520 4,413,170
Common stock, $.01 par value,
authorized 6,250,000 shares at
December 31, 1994, and 50,000,000
at December 31, 1995 and March 31,
1996; issued and outstanding
2,500,025 shares at December 31,
1994, 10,145,580 shares at
December 31, 1995, and 10,168,080
shares at March 31, 1996.......... 25,000 101,456 101,681
Additional paid-in capital......... 1,289,446 63,420,487 63,438,262
Cumulative dividends on preferred
stock............................. (1,342,573) (2,296,953) (2,403,603)
Deferred compensation.............. (918,308) (1,849,150) (1,650,069)
Deficit accumulated during
development stage................. (19,728,559) (41,878,509) (45,776,394)
------------ ------------ ------------
Total stockholders' equity
(deficit)....................... (20,674,994) 21,803,851 18,123,047
------------ ------------ ------------
Total liabilities and
stockholders' equity (deficit).. $ 4,302,889 $ 24,949,911 $ 19,765,120
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-4
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT ACCUMULATED
DURING THE DEVELOPMENT STAGE
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JANUARY 23, 1990) THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, THROUGH MARCH 31,
-------------------------------------- DECEMBER 31, ------------------------
1993 1994 1995 1995 1995 1996
----------- ----------- ------------ ------------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Licensing and supplier
fees.................. $ 355,671
Interest............... $ 107,710 $ 214,916 $ 94,348 557,486 $ 17,267 $ 270,402
----------- ----------- ------------ ------------ ----------- -----------
107,710 214,916 94,348 913,157 17,267 270,402
Operating expenses:
Research and
development........... 2,403,683 4,917,830 8,643,926 19,445,268 1,961,192 2,926,409
Purchase of in-process
research and
development........... -- -- 7,020,064 7,020,064 -- 168,750
General and
administrative........ 3,165,038 4,256,934 6,580,308 16,139,941 1,930,450 1,073,128
----------- ----------- ------------ ------------ ----------- -----------
5,568,721 9,174,764 22,244,298 42,605,273 3,891,642 4,168,287
----------- ----------- ------------ ------------ ----------- -----------
Net loss............... (5,461,011) (8,959,848) (22,149,950) (41,692,116) (3,874,375) (3,897,885)
Accretion of dividends
on preferred stock.... (409,357) (933,216) (668,313) (2,010,886) (268,281) (106,650)
Dividends on redeemable
preferred stock....... -- -- (7,123,536) (7,123,536) -- --
Dividends on preferred
stock................. -- -- (2,018,763) (2,018,763) -- --
----------- ----------- ------------ ------------ ----------- -----------
Net loss to common
stockholders.......... $(5,870,368) $(9,893,064) $(31,960,562) $(52,845,301) $(4,142,656) $(4,004,535)
=========== =========== ============ ============ =========== ===========
Net loss per common
share.................. $ (1.52) $ (2.56) $ (8.06) $ (1.07) $ (.39)
=========== =========== ============ =========== ===========
Weighted average common
shares outstanding..... 3,857,915 3,857,940 3,966,266 3,887,838 10,146,899
=========== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-5
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS
YEARS ENDED DECEMBER 31, (JANUARY 23, 1990) ENDED MARCH 31,
----------------------------------------- THROUGH --------------------------
1993 1994 1995 DECEMBER 31, 1995 1995 1996
------------ ------------ ------------- ------------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $ (5,461,011) $ (8,959,848) $ (22,149,950) $ (41,692,116) $ (3,874,375) $ (3,897,885)
Adjustment to reconcile
net loss to cash used
by operating
activities:
Depreciation and
amortization.......... 205,193 787,651 1,339,867 2,449,369 299,245 436,139
Noncash purchase of in-
process research and
development........... -- -- 5,520,064 5,520,064 -- 168,750
Loss on sale of
equipment............. 28,331 -- -- 28,331 -- --
Noncash charge for
renegotiated supplier
agreement............. -- -- 1,747,931 1,747,931 1,089,356 --
Changes in operating
assets and
liabilities:
Accounts and notes
receivable........... 517,900 -- -- -- -- --
Prepaid and other
current assets....... (15,079) (19,448) (381,849) (440,376) 28,585 (33,321)
Investments and other
assets............... (18,532) (5,068) 8,975 (71,568) 3,863 (24,205)
Accounts payable and
accrued expenses..... 942,162 (14,744) 1,746,151 2,979,345 1,602,803 (1,662,351)
Deferred revenue...... 1,250,000 -- (184,615) 5,559,714 -- --
Deposit liability..... (1,050,000) -- -- -- -- --
Other noncash
charges.............. -- -- 86,347 86,347 -- --
------------ ------------ ------------- ------------- ------------ ------------
Net cash used for
operating activities... (3,601,036) (8,211,457) (12,267,079) (23,832,959) (850,523) (5,012,873)
------------ ------------ ------------- ------------- ------------ ------------
Cash flows from
investing activities:
Purchase of short-term
investments........... -- -- (6,325,502) (6,325,502) -- (4,015,550)
Proceeds from sale and
maturity of short-term
investments........... -- -- -- -- -- 1,480,750
Purchase of equipment
and leasehold
improvements.......... (1,677,935) (1,102,934) (737,335) (3,707,867) (143,052) (179,218)
Proceeds received on
sale of equipment..... 31,724 -- -- 31,724 -- --
------------ ------------ ------------- ------------- ------------ ------------
Net cash used in
investing activities... (1,646,211) (1,102,934) (7,062,837) (10,001,645) (143,052) (2,714,018)
------------ ------------ ------------- ------------- ------------ ------------
Cash flows from
financing activities:
Proceeds from issuance
of convertible debt,
net................... -- -- -- 3,409,552 -- --
Distributions paid to S
Corp. stockholder..... (166,910) -- -- (186,393) -- --
Principal payments
under capital lease
obligations........... (5,103) (8,733) (37,727) (59,048) (8,090) (10,387)
Proceeds from issuance
of promissory notes... -- -- 7,000,000 7,000,000 -- --
Repayment of promissory
notes................. -- -- (3,000,000) (3,000,000) -- --
Proceeds from issuance
of common stock and
Series D redeemable
stock................. -- 20 1,352,666 1,392,686 -- --
Proceeds received from
capital
contributions......... 33,224 68,952 -- 102,176 -- --
Proceeds from issuance
of Series B and C
redeemable convertible
preferred stock....... 10,041,986 2,999,650 4,999,892 18,041,528 -- --
Proceeds from issuance
of common stock, net
of issuance costs..... -- -- 23,030,476 23,030,476 -- --
Proceeds from stock
options exercised..... -- -- -- -- -- 18,000
------------ ------------ ------------- ------------- ------------ ------------
Net cash provided by
financing activities.. 9,903,197 3,059,889 33,345,307 49,730,977 (8,090) 7,613
------------ ------------ ------------- ------------- ------------ ------------
Net increase (decrease)
in cash and cash
equivalents........... 4,655,950 (6,254,502) 14,015,391 15,896,373 (1,001,665) (7,719,278)
Cash and cash
equivalents at
beginning of period... 3,479,534 8,135,484 1,880,982 -- 1,880,982 15,896,373
------------ ------------ ------------- ------------- ------------ ------------
Cash and cash
equivalents at end of
period................ $ 8,135,484 $ 1,880,982 $ 15,896,373 $ 15,896,373 $ 879,317 $ 8,177,095
============ ============ ============= ============= ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-6
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
CUMULATIVE ACCUMULATED
PREFERRED STOCK COMMON SHARES ADDITIONAL DIVIDENDS ON DURING
------------------ -------------------- PAID-IN REDEEMABLE DEFERRED DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL PREFERRED STOCK COMPENSATION STAGE
------ ----------- ---------- --------- ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock,
$.01 par value,
in connection
with
incorporation.. 2,500,000 $ 25,000 $ 15,000
Net loss for
period......... $ (253,963)
---------- --------- ------------ -------------
Balance at
December 31,
1990........... 2,500,000 25,000 15,000 (253,963)
Net loss for
period......... (1,546,603)
---------- --------- ------------ -------------
Balance at
December 31,
1991........... 2,500,000 25,000 15,000 (1,800,566)
Distributions
paid to S Corp.
stockholder.... (19,483)
Net loss for
period......... (3,320,741)
---------- --------- ------------ -------------
Balance at
December 31,
1992........... 2,500,000 25,000 15,000 (5,140,790)
Capital
contribution... 33,224
Distributions
paid to S Corp.
stockholder.... (166,910)
Accretion of
dividends on
redeemable
preferred
stock.......... $ (409,357)
Net loss for
period......... (5,461,011)
---------- --------- ------------ ------------ -------------
Balance at
December 31,
1993........... 2,500,000 25,000 48,224 (409,357) (10,768,711)
Capital
contribution... 68,952
Accretion of
dividends on
redeemable
preferred
stock.......... (933,216)
Exercise of
stock option... 25 20
Issuance of
compensatory
stock option
grants......... 1,172,250 $ (1,172,250)
Amortization of
deferred
compensation... 253,942
Net loss for
period......... (8,959,848)
---------- --------- ------------ ------------ ------------ -------------
Balance at
December 31,
1994........... 2,500,025 25,000 1,289,446 (1,342,573) (918,308) (19,728,559)
Accretion of
dividends on
preferred
stock.......... (1,233,366)
Forgiveness of
accretion of
dividends on
preferred
stock.......... 1,673,693
Dividend on
preferred
stock.......... 7,123,536 (7,123,536)
Purchase of in-
process
research and
development for
common stock... 403,875 4,039 6,429,661
Common stock
issuance
related to
supplier
agreements..... 229,575 2,296 3,158,679
Issuance of
common stock... 33,394 334 533,970
Issuance of
compensatory
stock option
grants......... 1,421,803 (1,421,803)
Dividend on
preferred
stock.......... 224,307 2,243 2,016,520 (2,018,763)
Conversion of
Series A, B,
and C preferred
stock into
common stock... 3,427,637 34,276 14,383,715 7,747,592
Conversion of
Bridge Loan and
interest to
common stock... 451,767 4,518 4,061,431
Conversion of
Series D
preferred
stock.......... 6,903 $ 4,306,520
Issuance of
common stock in
initial public
offering, net
of offering
costs of
$1,033,274..... 2,875,000 28,750 23,001,726
Amortization of
deferred
compensation... 490,961
Net loss for
period......... (22,149,950)
----- ----------- ---------- --------- ------------ ------------ ------------ -------------
Balance at
December 31,
1995........... 6,903 4,306,520 10,145,580 101,456 63,420,487 (2,296,953) (1,849,150) (41,878,509)
----- ----------- ---------- --------- ------------ ------------ ------------ -------------
Accretion of
dividends on
preferred
stock.......... 106,650 (106,650)
Exercise of
stock option... 22,500 225 17,775
Amortization of
deferred
compensation... 199,081
Net loss for the
three months
ended March 31,
1996........... (3,897,885)
----- ----------- ---------- --------- ------------ ------------ ------------ -------------
Balance at March
31, 1996
(unaudited).... 6,903 $ 4,413,170 10,168,080 $ 101,681 $ 63,438,262 $ (2,403,603) $ (1,650,069) $ (45,776,394)
===== =========== ========== ========= ============ ============ ============ =============
<CAPTION>
TOTAL
STOCKHOLDER'S
EQUITY (DEFICIT)
----------------
<S> <C>
Issuance of
common stock,
$.01 par value,
in connection
with
incorporation.. $ 40,000
Net loss for
period......... (253,963)
----------------
Balance at
December 31,
1990........... (213,963)
Net loss for
period......... (1,546,603)
----------------
Balance at
December 31,
1991........... (1,760,566)
Distributions
paid to S Corp.
stockholder.... (19,483)
Net loss for
period......... (3,320,741)
----------------
Balance at
December 31,
1992........... (5,100,790)
Capital
contribution... 33,224
Distributions
paid to S Corp.
stockholder.... (166,910)
Accretion of
dividends on
redeemable
preferred
stock.......... (409,357)
Net loss for
period......... (5,461,011)
----------------
Balance at
December 31,
1993........... (11,104,844)
Capital
contribution... 68,952
Accretion of
dividends on
redeemable
preferred
stock.......... (933,216)
Exercise of
stock option... 20
Issuance of
compensatory
stock option
grants.........
Amortization of
deferred
compensation... 253,942
Net loss for
period......... (8,959,848)
----------------
Balance at
December 31,
1994........... (20,674,994)
Accretion of
dividends on
preferred
stock.......... (1,233,366)
Forgiveness of
accretion of
dividends on
preferred
stock.......... 1,673,693
Dividend on
preferred
stock..........
Purchase of in-
process
research and
development for
common stock... 6,433,700
Common stock
issuance
related to
supplier
agreements..... 3,160,975
Issuance of
common stock... 534,304
Issuance of
compensatory
stock option
grants.........
Dividend on
preferred
stock..........
Conversion of
Series A, B,
and C preferred
stock into
common stock... 22,165,583
Conversion of
Bridge Loan and
interest to
common stock... 4,065,949
Conversion of
Series D
preferred
stock.......... 4,306,520
Issuance of
common stock in
initial public
offering, net
of offering
costs of
$1,033,274..... 23,030,476
Amortization of
deferred
compensation... 490,961
Net loss for
period......... (22,149,950)
----------------
Balance at
December 31,
1995........... 21,803,851
----------------
Accretion of
dividends on
preferred
stock..........
Exercise of
stock option... 18,000
Amortization of
deferred
compensation... 199,081
Net loss for the
three months
ended March 31,
1996........... (3,897,885)
----------------
Balance at March
31, 1996
(unaudited).... $ 18,123,047
================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Organization
Ergo Science Development Corporation ("Ergo") was incorporated on January
23, 1990. Ergo operated as an S Corporation from inception to September 10,
1992, when it converted to a C Corporation. In April 1995, Ergo went through a
recapitalization whereby all the stock of Ergo was exchanged on a one-for-one
basis for an equal amount of stock in Ergo Science Holdings, Incorporated,
previously a wholly-owned subsidiary of Ergo. Subsequent to the
recapitalization, Ergo Science Holdings, Incorporated changed its name to Ergo
Science Corporation (the "Company"). The consolidated financial statements
include the accounts of the Company and its subsidiaries, all of which are
wholly-owned. All intercompany accounts and transactions are eliminated upon
consolidation.
The Company is a development stage enterprise as defined in Statement of
Financial Accounting Standards No. 7, and is devoting all of its efforts to
conducting research and development and raising capital to fund operations.
The ultimate success of the Company is dependent upon the development and
marketing of its products and its ability to secure adequate financing until
the Company is operating profitably.
Research and Development Costs
Research and development costs are expensed as incurred.
Cash Equivalents and Investments
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
Debt securities are classified as held-to-maturity when the Company has
positive intent and ability to hold the securities to maturity. Held-to-
maturity securities are stated at amortized cost. Debt securities not
classified as held-to-maturity are classified as available for sale and stated
at fair value.
At December 31, 1994 and 1995 cash equivalents were composed primarily of
investments in money market funds and held-to-maturity securities with
original maturities of three months or less. Due to the nature of these
securities, there were no unrealized gains or losses at the balance sheet
dates. These investments consisted of United States Government obligations and
high grade commercial paper and asset backed securities that mature within 90
days of purchase. The held-to-maturity securities are recorded at their
amortized cost.
Concentration of Credit Risk
The Company has not realized any losses on its investments. The Company has
invested the net proceeds of its initial public offering in short-term,
interest-bearing, investment-grade securities, including U.S. Treasury and
agency securities and high-grade corporate notes.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
Uncertainties
The Company is subject to risks common to companies in the pharmaceutical
industry including, but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, and compliance with FDA governmental
regulations.
F-8
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
Net Loss Per Common Share
Net loss per common share is computed based upon the weighted average number
of common shares and common equivalent shares (using the treasury stock
method) outstanding after certain adjustments described below. Common
equivalent shares are not included in the per share calculations where the
effect of their inclusion would be anti-dilutive, except that, in accordance
with Securities and Exchange Commission Staff Accounting Bulletin No. 83, all
common and common equivalent shares issued during the twelve-month period
prior to the filing of the initial public offering, even when antidilutive,
have been included in the calculation as if they were outstanding for all
periods through September 30, 1995, using the treasury stock method. In the
computation of net loss per common share, accretion of preferred stock to the
mandatory redemption amount is included as an increase to net loss available
to common stockholders.
Fully diluted net loss per common share is the same as primary net loss per
common share.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation is
calculated using straight-line basis over a 2 to 7 year estimated useful life.
Leasehold improvements are amortized over the shorter of the life of the
leases or the estimated useful life of the related assets. Repairs and
maintenance costs are charged to expense as incurred. Upon retirement or sale,
the cost of the assets disposed of and the related accumulated depreciation
are removed from the accounts and any resulting gain or loss is included in
the determination of net income.
Capital Leases
Assets and liabilities relating to capital leases are recorded at the
present value of the future minimum rental payments using interest rates
appropriate at the inception of the lease. Capital lease amortization is
included with depreciation and amortization expense.
Organization Costs
Certain costs associated with organizing the Company have been capitalized
and are being amortized on a straight-line basis over a period of five years.
Income Taxes
The Company accounts for income taxes using the asset and liability method
of accounting for income taxes.
Stock-Based Compensation
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123") was issued and will
require the Company to elect either expense recognition under FAS 123 or its
disclosure-only alternative for stock-based employee compensation. The expense
recognition provision encouraged by FAS 123 would require fair-value based
financial accounting to recognize compensation expense for employee stock
compensation plans. FAS 123 must be adopted in the Company's fiscal 1996
financial statements with comparable disclosures for the prior years. The
Company has determined that it will elect the disclosure-only alternative. The
Company will be required to disclose the pro forma net income or loss and per
share amounts in the notes to the financial statements using the fair-value
based method beginning in fiscal 1996 with comparable disclosures for fiscal
1995. The Company has not determined the impact of these pro forma
adjustments.
F-9
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
2. SHORT-TERM INVESTMENTS
The following is a summary of held-to-maturity securities not classified as
cash and cash equivalents as of December 31:
<TABLE>
<CAPTION>
1994 1995
----- ----------
<S> <C> <C>
Commercial paper......................................... $ -- $2,388,948
Federal agency notes..................................... -- 3,936,554
----- ----------
Total short-term investments............................. $ -- $6,325,502
===== ==========
</TABLE>
Since held-to-maturity securities are short-term in nature, changes in
market interest rates would not have a significant impact on fair value of
these securities. These securities are carried at amortized cost which
approximate fair value. All short-term investments mature within 183 days of
December 31, 1995.
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following at December
31:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Furniture and equipment.............................. $ 588,425 $ 735,333
Lab equipment........................................ 1,026,260 1,475,123
Leasehold improvements............................... 1,389,752 1,551,408
---------- ----------
3,004,437 3,761,864
Accumulated depreciation and amortization............ (668,524) (1,493,630)
---------- ----------
Equipment and leasehold improvements, net............ $2,335,913 $2,268,234
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1993, 1994 and 1995
was $116,276, $522,920 and $802,275, respectively, and for the three month
periods ended March 31, 1995 and 1996, was $216,387 and $237,057,
respectively. Assets under capital leases, net of accumulated amortization at
December 31, 1994 and 1995 were $101,216 and $127,280, respectively.
4. LEASES
The Company leases office and research space under operating lease
arrangements which expire on various dates through 1999. Certain operating
lease arrangements include options to renew for additional periods or payment
terms that are subject to increases due to taxes and other operating costs of
the lessor. In addition, the Company leases certain equipment under lease
arrangements which have been accounted for as capital leases. Future minimum
commitments, by year and in the aggregate, under these long-term noncancelable
leases consist of the following at December 31, 1995:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
1996....................................... $ 54,685 $305,469
1997....................................... 54,685 252,325
1998....................................... 45,482 6,174
1999....................................... 2,979 3,087
-------- --------
157,831 $567,055
========
Less amounts representing interest......... 21,117
--------
Present value of minimum lease payments.... 136,714
Less current portion of capital lease obli-
gations................................... 43,114
--------
Long-term portion of capital lease obliga-
tions..................................... $ 93,600
========
</TABLE>
F-10
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
Rent expense for the years ended December 31, 1993, 1994 and 1995 and the
period from January 23, 1990 (date of inception) to December 31, 1995,
amounted to $108,217, $247,930, $251,637 and $697,337, respectively, and for
the three month periods ended March 31, 1995 and 1996, was $60,932 and
$92,407, respectively.
Cash paid for interest on capital leases for the years ended December 31,
1993, 1994 and 1995 was $547, $2,023, and $13,908, respectively, and for the
three month periods ended March 31, 1995 and 1996, was $2,602 and $2,612,
respectively.
5. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
as of December 31 are as follows:
<TABLE>
<CAPTION>
1994 1995
----------- ------------
<S> <C> <C>
Deferred tax assets:
Deferred revenue................................ $ 790,000 $ --
Equipment and leasehold improvements............ 17,000 166,000
Research and development credits................ 531,000 1,008,000
Deferred compensation........................... 367,000 740,000
In-process research and development............. -- 600,000
Net operating loss.............................. 6,525,000 11,798,000
Other--net...................................... 6,000 --
----------- ------------
Total deferred tax assets......................... 8,236,000 14,312,000
Valuation allowance for deferred tax assets....... (8,220,000) (14,312,000)
----------- ------------
16,000 --
Deferred tax liabilities:
Prepaid expenses and other current assets....... 16,000 --
----------- ------------
Total deferred tax liabilities.................... 16,000 --
----------- ------------
Net deferred tax assets........................... -- --
=========== ============
</TABLE>
The changes in the total valuation allowance for the years ended December
31, 1994 and 1995 were increases of $3,942,000 and $6,092,000 respectively.
During 1993, the Company converted from the cash basis to the accrual basis
for income tax purposes. As of December 31, 1995, the Company had net
operating loss carry forwards for income tax purposes of approximately $30
million which expire through 2009. The Company's ability to use the carry
forwards is subject to limitations resulting from an ownership change as
defined in Internal Revenue Code Sections 382 and 383.
6. CAPITAL STOCK
In October 1995, the Board of Directors increased the number of authorized
shares of common stock to 50,000,000 and the authorized number of shares of
preferred stock to 10,000,000. The Board of Directors may establish, without
stockholder approval, one or more classes or series of preferred stock having
the number of shares, designations, relative voting rights, dividend rates,
liquidation and other rights, preferences and limitations that the Board of
Directors may designate. Also in October 1995, the Company effected a 25-for-1
F-11
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
stock split and converted all shares of the Company's Class A Common Stock and
Class B Common Stock into one class of common stock. Accordingly, all share
and per share amounts have been adjusted to reflect the stock splits and the
Class A/Class B conversion as though they had occurred at the beginning of the
initial period presented.
On September 10, 1992, the Company issued $3,500,000 principal amount of
Series A 6% convertible notes for cash at face value. On October 12, 1993, the
Company converted the $3,500,000 of Series A 6% convertible notes into 8,826
shares of Voting Series A 6% Redeemable Convertible Preferred Stock, $.01 par
value, with a stated value of $3,730,750. In connection therewith, the Company
recognized a charge to expense of $48,458 representing the remaining
unamortized balance of the deferred issuance costs.
On October 12, 1993, the Company sold 20,940 shares of Voting Series B 6%
Redeemable Convertible Preferred Stock, $.01 par value, for an aggregate
amount of $10,041,986.
On July 15, 1994, the Company sold 6,255 shares of Voting Series C 6%
Redeemable Convertible Preferred Stock, $.01 par value, for an aggregate
amount of $2,999,605.
Each share of Series A, Series B, and Series C 6% Redeemable Convertible
Preferred Stock (the "Preferred Stock") was convertible, at the option of the
stockholder, into common stock by dividing the stated value for each share
adjusted for unpaid and undeclared dividends (in effect at the time) by the
conversion price (in effect at the time). The conversion price of the
Preferred Stock was subject to adjustment under certain conditions identified
in the agreement, and automatically converted upon the closing of the public
offering into shares of common stock of the Company, at the conversion price
in effect at the time.
The holders of Preferred Stock were also entitled to voting rights equal to
the number of common shares into which the preferred shares would have been
converted into at the time. The holders of Series A and Series C Preferred
Stock each had the right to elect one member to the Board of Directors. The
holders of Series B Preferred Stock had the right to elect two members to the
Board of Directors. Such voting power terminated upon the public offering.
The holders of Preferred Stock were entitled to receive quarterly cash
dividends at a rate of 6% per annum, compounded semi-annually, on the stated
value thereof, commencing November 1, 1993, for Series A and Series B
Preferred Stock and August 1, 1994 for Series C Preferred Stock. Accumulated
and unpaid dividends were accreted and charged to cumulative dividends on
redeemable preferred stock. Such dividends were cumulative, commencing on the
date of original issue, and payable to holders of record when and as declared
by the Board of Directors. The dividend value of the Preferred Stock was
$31.64, $35.83 and $13.22 per share for Series A, Series B and Series C
Preferred Stock, respectively, at December 31, 1994. Unpaid and undeclared
dividends to holders of Preferred Stock amounting to $509,525, $750,373 and
$82,675 for Series A, Series B and Series C, respectively, had been accreted
in cumulative dividends on redeemable preferred stock at December 31, 1994.
In the event of liquidation, the holders of Preferred Stock were entitled to
be paid a liquidation amount equal to the greater of the conversion amount per
share at the time or the stated value per share at the time. As of December
31, 1994, the aggregate liquidation values, of the Series A, Series B and
Series C Preferred Stock were $4,009,525, $10,792,359 and $3,082,325,
respectively.
On May 30, 1995, the Company sold 10,426 shares of Series C Preferred Stock,
par value $.01, for $4,999,892.
F-12
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
On September 1, 1995, the Series A, Series B and Series C Preferred Stock
designations were amended. The affect of this amendment was to cancel the
accretion of dividends on the Series A Preferred Stock since its conversion on
October 13, 1993, and the accretion on Series B and Series C Preferred Stocks
since their issuance and to reset the stated values at September 1, 1995 to
the original stated values of each series. The Company re-commenced accreting
dividends on September 1, 1995. In connection with these amendments, the
Company recorded a preferred stock dividend in the amount of $7,123,536 which
reflects the difference between the $9.00 per share fair market value of the
Company's common stock on the date of amendments and the $6.41 per share
amended weighted average conversion price of the Series A, B and C Preferred
Stock, multiplied by the number of additional shares of common stock those
preferred stockholders received upon conversion.
In September 1995, the Company obtained a loan commitment from the holders
of the Series A, B and C Preferred Stock for an amount up to $6,000,000. The
Company received an initial advance against this commitment of $1,000,000 and
had the option to draw further advances in installments of $1,000,000.
Outstanding amounts bore interest at 10% and would mature at the earlier of
the closing of a private placement, the closing of an initial public offering
("IPO"), or January 31, 1996. Upon the maturity of the outstanding amounts
which resulted from the closing of the IPO the Company issued the investors
451,767 shares of common stock of the Company equal to the outstanding amount,
$4,065,949 divided by $9.00 per share in full satisfaction of amounts under
the loan.
On December 19, 1995, the Company completed its IPO and sold an aggregate of
2,875,000 shares of common stock at $9.00 per share resulting in net proceeds,
after deducting underwriting discounts and offering costs, of approximately
$23,030,476. In addition, upon the closing of the IPO, the Series A, B and C
Preferred Stock including all applicable dividends accreted in cumulative
dividends on redeemable preferred stock since September 1, 1995, were
automatically converted into shares of common stock in accordance with the
underlying agreements.
On April 27, 1995, in connection with a revised license and royalty
agreement negotiated with Louisiana State University ("LSU"), the Company
issued 125,000 shares of common stock to certain inventors, including two
members of the Company's Board of Directors. The shares were issued in
exchange for the inventors' share of the royalty obligation the Company has
under the royalty agreement with LSU. Accordingly, the Company recorded a
$2,000,000 charge for the purchase of in-process research and development.
See Note 7 for a description of Series D Preferred Stock.
7. LICENSE AGREEMENTS AND SUPPLIER CONTRACTS
In the fall of 1991, the Company entered into an exclusive licensing
arrangement with an investment group organized in New England (the "New
England Group"). Under the terms of this arrangement, a partnership (the "New
England Venture") organized by the investment group acquired an exclusive
license arrangement to commercialize the Company's products and medical
protocols in the six New England States. In the spring of 1992, the Company,
the New England Group, and a group of investors in Florida organized a
partnership (the "Florida Venture") to commercialize the Company's products
and medical protocols in the state of Florida. The Company entered into a
license arrangement with the Florida Venture to commercialize the products and
medical protocols in Florida.
In the fall of 1992, the Company organized a partnership to commercialize
the Company's products and medical protocols in the state of Louisiana (the
"Louisiana Venture"). The Company entered into a license arrangement with the
Louisiana Venture to commercialize the products and medical protocols in
Louisiana.
F-13
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
During 1991 and 1993, the Company received fees from two suppliers for the
exclusive right to supply the Company with certain drug products. In exchange,
the Company agreed to purchase all of its drug requirements from the suppliers
at agreed upon prices.
$1,950,000 of the license fees and $1,750,000 of the supplier contracts fees
received by the Company were characterized as nonrefundable in the respective
agreements. Through December 31, 1992, such nonrefundable fees were recognized
as revenue over the period from receipt of funds to the estimated date of FDA
approval because of the Company's obligations to perform research and sponsor
clinical trials prior to that approval. However, during 1993, the Company
began discussions with the sublicensees about exchanging their sublicense
rights for the Company's common stock. The Company also began discussions with
suppliers to renegotiate the supply contracts to fit more closely the
redesigned plan for commercialization of its products. Therefore, no
additional deferred revenue from sublicensing fees and from supplier contracts
had been recognized in 1993 and 1994.
Effective January 1, 1995, the Company renegotiated the contract with one of
its drug suppliers. In recognition of the supplier's initial contribution of
its supply agreement fee to fund the Company's drug development efforts, the
Company issued 156,400 shares of common stock, par value $.01. The Company
assigned a value of $16.00 per share; the value assigned in excess of the
unamortized deferred revenue from the fees previously received resulted in a
net charge to operations of $1,089,356 in January 1995. The Company
subsequently issued an additional 73,175 shares of common stock to the
supplier under antidilution provisions of the renegotiated agreement, which
resulted in a net charge to operations of $658,575 in November 1995.
In September 1995, the Company terminated its manufacturing agreement with
the other drug supplier and recorded a charge of $215,385 for a cash payment
to that supplier.
In April 1995, the Company went through a recapitalization whereby all the
stock of the Company was exchanged on a one-for-one basis for an equal amount
of stock in Ergo Science Holdings, Incorporated, previously a wholly-owned
subsidiary of the Company. Subsequent to the recapitalization, Ergo Science
Holdings, Inc. changed its name to Ergo Science Corporation.
As a result of the redesigned plan for commercialization of the Company's
products, territorial sublicenses were no longer commercially feasible for the
partnerships. Accordingly, on April 27, 1995, the Company effectively canceled
the partnership sublicenses by acquiring all the partners' interests in the
New England Venture, the Florida Venture and the Louisiana Venture. Rather
than return the sublicense fees, including both the refundable and unamortized
nonrefundable portions originally contributed by the partnerships, the Company
issued 278,875 shares of common stock and 5,618 shares of Series D Preferred
Stock, par value $.01. The Company ascribed a value of $16.00 per share to the
common stock issued and $584.00 per share to the Series D Preferred Stock. The
excess of fair value of the stock issued over the related unamortized deferred
revenue resulted in a net charge to operations of $3,520,000 for the purchase
of in-process research and development.
The holders of Series D Preferred Stock are also entitled to receive
quarterly cash dividends at a rate of 6% per annum compounded semiannually on
the stated value. Such dividends shall be cumulative, commencing on the date
of original issue, and shall be payable to holders of record, when and as
declared, by the Board of Directors. The Company will have the option to
convert the Series D Preferred Stock into common stock during the 90 days
after the Company receives FDA approval to market its first product, if it
receives that approval. If the Company does not exercise its option to convert
the Series D Preferred Stock into common stock within the
F-14
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
90 days, the Series D Preferred Stock will automatically be exchanged for
subordinated debt securities at the end of the 90 days. The Company currently
intends to exercise its option to convert the Series D Preferred Stock to
common stock if a Trigger Event occurs, and, accordingly, the Series D
Preferred Stock was recharacterized as Preferred Stock upon closing of the
IPO. The terms of the Company's Series D Preferred Stock prohibit the Company
from paying dividends on the common stock.
On April 27, 1995, in conjunction with the recapitalization, the Company
also sold 1,285 shares of the Series D Preferred Stock, par value $.01 and
33,400 shares of common stock, par value $.01, for $1,285,000.
In November 1995, the Company declared a dividend of 224,307 shares of
common stock to the holders of Series D Preferred Stock and, accordingly,
recorded a charge in the fourth quarter of $2,018,763 to net loss to common
stockholders.
8. PREFERRED STOCK
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1994 1995 1996
----------- ---------- ----------
<S> <C> <C> <C>
Series A redeemable convertible preferred
stock, voting $.01 par value, authorized
8,840 shares, issued and outstanding 8,826
shares at December 31, 1994 and 0 shares
at December 31, 1995 and March 31, 1996
(at liquidation value).................... $ 4,009,525 $ -- $ --
Series B redeemable convertible preferred
stock, voting $.01 par value, authorized
21,000 shares, issued and outstanding
20,940 shares at December 31, 1994 and 0
shares at December 31, 1995 and March 31,
1996 (at liquidation value)............... 10,792,359 -- --
Series C redeemable convertible preferred
stock, voting, $.01 par value, authorized
16,681 shares, issued and outstanding
6,255 shares at December 31, 1994 and 0
shares at December 31, 1995 and March 31,
1996 (at liquidation value)............... 3,082,325 -- --
Series D preferred stock, $.01 par value,
authorized 8,000 shares, issued and
outstanding 6,903 shares at December 31,
1995 and March 31, 1996 (liquidation
preference $7,181,190 and $7,287,840,
respectively)............................. -- 4,306,520 4,413,170
----------- ---------- ----------
$17,884,209 $4,306,520 $4,413,170
=========== ========== ==========
</TABLE>
Upon completion of the IPO, the Series D Preferred Stock was no longer
redeemable at the holder's option. See Note 7.
9. STOCK OPTIONS AND INCENTIVE PLAN
The Company has granted options to purchase shares of common stock to key
employees and directors. The options vest over periods of up to four years and
expire at various dates through December 31, 2006.
In October 1995, the Company granted to various employees options to
purchase 621,625 shares of common stock at $6.71 per share. Deferred
compensation of $1,423,521 related to those option grants will be amortized to
operations over the four-year vesting period of the options.
F-15
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
In October 1995, the Company agreed that it would issue to its financial
advisor, at the closing of the IPO, an option exercisable for three years to
acquire 20,000 shares of common stock at an exercise price per share equal to
$9.00.
In December 1995, the Company granted one of its medical advisors an option
to purchase 10,000 shares of common stock at an exercise price equal to $9.00
per share. One quarter of these shares vested on the grant date and the
balance will vest over three years.
Information related to stock option activity for the period from inception
to December 31, 1995 is as follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
--------- ------------
<S> <C> <C>
Outstanding at December 31, 1991
Granted........................................... 394,725 $ 0.80
---------
Outstanding at December 31, 1992.................... 394,725
Granted........................................... 31,250 0.80
---------
Outstanding at December 31, 1993.................... 425,975
Granted........................................... 100,000 0.80
Exercised......................................... (25) 0.80
---------
Outstanding at December 31, 1994.................... 525,950
Granted........................................... 651,625 6.71-9.00
Canceled.......................................... (750) 6.71
---------
Outstanding at December 31, 1995.................... 1,176,825
Granted........................................... 25,000 22.00
Exercised......................................... (22,500) 18.75-20.75
Canceled.......................................... (750) 6.71
--------- ------------
Outstanding at March 31, 1996....................... 1,178,525 $ 0.80-22.00
========= ============
</TABLE>
At December 31, 1995 and March 31, 1996 there were 454,175 and 431,675
options exercisable, respectively. In connection with the issuance of stock
options at exercise prices below fair market value, as determined by the
Company's Board of Directors, the Company recorded compensation expense of
$253,942 and $490,961 for the years ended December 31, 1994 and 1995,
respectively, and $199,081 for the three months ended March 31, 1996. There
were no stock options issued at exercise prices below fair market value in the
three months ended March 31, 1996. The $1,650,069 remaining deferred
compensation at March 31, 1996 will be amortized over the vesting periods of
the underlying options.
Effective as of November 1, 1994, the Board of Directors adopted the Ergo
Science Development Corporation Long-Term Incentive Plan (the "Incentive
Plan") pursuant to which certain officers, directors, and key employees may be
granted awards with respect to shares of the Company's common stock. The
awards which may be granted under the Incentive Plan include incentive and
nonqualified stock options, stock appreciation rights ("SARs") and restricted
stock awards. At December 31, 1995 and March 31, 1996, the aggregate number of
shares of the Company's common stock which could be issued pursuant to
incentive awards under the Incentive Plan was 731,525 shares (for which common
shares have been reserved). Awards of options to provide 7,500, 631,625 and
25,000 shares at exercise prices of $0.80, $6.71-$9.00 and $22.00 per share,
respectively, were granted under the Incentive Plan during the years ended
December 31, 1994 and 1995 and during the three month period ended March 31,
1996, respectively. These amounts are included in the table above.
F-16
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS
UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES
The Company has a royalty agreement with LSU under which the Company pays
LSU a royalty based upon gross sales. The Company also has a commitment to
make payments of an agreed percentage of net cash flow to LSU once the Company
generates positive net cash flow, as defined in the agreement. LSU is
obligated to expend substantially all of such net cash flow payments from the
Company on research supervised by one of the Company's consultants (or the
Company's designee), and the Company has the option of licensing any patents
that arise from such research.
On May 1, 1995, Ergo Research Corporation, a wholly-owned subsidiary of the
Company, entered into a novative license and royalty agreement with LSU that
replaces the royalty agreement with LSU described in the prior paragraph. The
new agreement required an initial fee of $200,000 paid to LSU upon execution
and charged to operations as the purchase of in-process research and
development, $500,000 paid upon the IPO and the issuance of 18,750 common
shares one year after the IPO. The agreement requires additional fees of
$350,000 for the first and $500,000 for all subsequent administrative
approvals of licensed pharmaceutical products. The Company must pay LSU a
royalty based upon gross sales with minimum royalties due.
11. NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations are considered noncash items and, accordingly, are
not reflected in the consolidated statements of cash flows. Capital lease
obligations of $123,502 and $58,290 were incurred in 1994 and 1995,
respectively, when the Company entered into leases for lab and office
equipment.
F-17
<PAGE>
[Under the heading "Temporal Neuroendocrine Regulation," a picture of a human
body with inserts showing the neuroendocrine system, and the following text:
"Neurotransmitter modulating drugs administered at specific times of the day
bind to receptors in the brain." "Receptor binding activation in the brain's
hypothalamus triggers changes in the body's neuronendocrine system." "Changes in
the neuroendocrine system at specific times of day affect organs such as the
liver and pancreas and peripheral tissues..." "... thereby producing changes in
glucose and lipid metabolism."]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDER-
WRITERS OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES
OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
--------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Company.............................................................. 14
Use of Proceeds.......................................................... 14
Price Range of Common Stock.............................................. 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 15
Selected Consolidated Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 19
Management............................................................... 37
Certain Transactions..................................................... 46
Principal and Selling Stockholders....................................... 48
Description of Capital Stock............................................. 49
Shares Eligible for Future Sale.......................................... 53
Underwriting............................................................. 54
Legal Matters............................................................ 55
Experts.................................................................. 55
Available Information.................................................... 55
Index to Consolidated Financial
Statements.............................................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,500,000 SHARES
[THE COMPANY'S LOGO APPEARS HERE]
ERGO SCIENCE CORPORATION
COMMON STOCK
--------------------
PROSPECTUS
--------------------
COWEN & COMPANY
UBS SECURITIES
NEEDHAM & COMPANY, INC.
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by Ergo Science Corporation (the "Registrant"
or the "Company") in connection with the registration of the securities
offered hereby, other than underwriting discounts and commissions, are as
follows:
<TABLE>
<S> <C>
SEC filing fee...................................................... $16,234
NASD filing fee..................................................... 5,208
Nasdaq National Market additional listing fee....................... 17,500
Accounting fees and expenses........................................ *
Legal fees and expenses............................................. *
Blue Sky fees and expenses (including fees of counsel).............. *
Transfer agent and registrar fees................................... *
Printing and engraving expenses..................................... *
Miscellaneous....................................................... *
-------
Total........................................................... $ *
=======
</TABLE>
- --------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") provides that no director of the Registrant
will be personally liable to the Registrant or any of its stockholders for
monetary damages arising from the director's breach of fiduciary duty as a
director. However, this does not apply with respect to any action in which the
director would be liable under Section 174 of Title 8 of the General
Corporation Law of Delaware nor does it apply with respect to any liability in
which the director (i) breached his duty of loyalty to the Registrant; (ii)
did not act in good faith or, in failing to act, did not act in good faith;
(iii) acted in a manner involving intentional misconduct or a knowing
violation of law or, in failing to act, shall have acted in a manner involving
intentional misconduct or a knowing violation of law; or (iv) derived an
improper personal benefit.
The Certificate of Incorporation provides that the Registrant will indemnify
its officers and directors and former officers and directors against any
expenses, judgments or settlement payments sustained or paid by such persons
as a result of having acted as an officer or director of the Registrant, or,
at the request of the Registrant, as an officer, director, agent or employee
of another business entity. The Certificate of Incorporation further provides
that the Registrant may, by action of its Board of Directors, provide
indemnification to employees and agents of the Registrant, individually or as
a group, with the same scope and effect as the indemnification of directors
and officers.
The Registrant has entered into indemnification agreements with each of its
directors and executive officers providing for the indemnification of those
persons to the fullest extent permitted by law, together with the advancement
of expenses, in the event they become a party to or witness or other
participant in any threatened, pending or completed action, suit or proceeding
(a "Claim") by reason of any event or occurrence related to the fact that any
such person is or was a director, officer, employee, agent or fiduciary of the
Registrant or a subsidiary of the Registrant or another entity at the
Registrant's request (an "Indemnifiable Event"), unless a reviewing party
(either a committee appointed by the Board of Directors or outside counsel)
shall have determined that such person would not be entitled to
indemnification under applicable law. In addition, in the event of a Change in
Control or a Potential Change in Control of the Registrant (as defined in the
indemnification agreements), the Registrant will, upon the request of an
indemnitee, establish a trust for the benefit of the
II-1
<PAGE>
indemnitee and fund the trust in an amount sufficient to satisfy all expenses
reasonably anticipated at the time of the request to be incurred in connection
with any Claim relating to an Indemnifiable Event. The amount deposited in the
trust will be determined by the reviewing party. An indemnitee's rights under
the indemnification agreement are not exclusive of any other rights under the
Certificate of Incorporation, the Registrant's Third Amended and Restated By-
laws or applicable law.
Under Section 145 of the General Corporation Law of Delaware, every Delaware
corporation has the power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of the
corporation) by reason of the fact that the person is or was a director,
officer, employee or agent of the corporation or, at the corporation's
request, any other corporation, partnership, joint venture, trust or other
enterprise, against any and all expenses, judgments, fines and amounts paid in
settlement and reasonably incurred in connection with such action, suit or
proceeding. The power to indemnify applies only if the person acted in good
faith and in a manner the person reasonably believed to be in the best
interest, or not opposed to the best interest, of the corporation and with
respect to any criminal action or proceeding, had no reasonable cause to
believe the person's conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of the
corporation as well, but only to the extent of defense and settlement expenses
and not to any satisfaction of a judgment or settlement of the claim itself,
and with the further limitation that in such actions no indemnification may be
made in the event of any adjudication of negligence or misconduct unless the
court, in its discretion, believes that in light of all the circumstances
indemnification should apply.
To the extent any person referred to in the two immediately preceding
paragraphs is successful in the defense of the actions referred to therein,
that person is entitled to indemnification under Section 145 of the General
Corporation Law of Delaware as previously described.
The Registrant maintains insurance that insures the officers and directors
of the Registrant against certain losses and that insures the Registrant
against certain of its obligations to indemnify such officers and directors.
The form of underwriting agreement included as Exhibit 1 provides for
indemnification of the Registrant and certain controlling persons under
certain circumstances, including indemnification for liabilities under the
Securities Act of 1933 (the "Securities Act"). The Registrant is a party to
registration rights agreements that contain similar indemnification
provisions.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
References to the Company in this Item 15 for events before April 27, 1995,
include the Company's predecessor, Ergo Science Incorporated, which is now a
subsidiary of the Company.
On October 12, 1993, Citicorp Venture Capital Ltd. ("CVC"), Citi Growth
Fund, L.P. ("Citi Growth"), certain CVC employees (including Mr. McWilliams, a
director of the Company), Hunt Financial Corporation ("Hunt Financial"), and
another entity purchased 20,940 shares of the Company's Series B Preferred
Stock for $10,041,986. This transaction did not involve a public offering and
was done in reliance on Section 4(2) of the Securities Act and Rule 506 of
Regulation D. Concurrently with this purchase of Series B Preferred Stock,
purchasers of the Company's Series A Notes in September 1992 converted the
Series A Notes into 8,826 shares of the Company's Series A Preferred Stock.
The issuance of the Series A Preferred Stock upon conversion of the Series A
Notes was done in reliance on Section 3(a)(9) of the Securities Act.
On July 15, 1994, Hunt Financial purchased 6,255 shares of the Company's
Series C Preferred Stock for $2,999,647. With this purchase of Series C
Preferred Stock, the Company issued to Hunt Financial, for $.0004 per warrant,
warrants to purchase 30,400 shares of the Company's Common Stock at $16.20 per
share. Effective
II-2
<PAGE>
May 30, 1995, Hunt Financial purchased an additional 10,426 shares of the
Company's Series C Preferred Stock for $4,999,892. With this second purchase
of Series C Preferred Stock, the Company issued to Hunt Financial for $.0004
per warrant, warrants to purchase 50,650 shares of the Company's Common Stock
at $16.20 per share. These warrants were canceled in September 1995. Each of
these transactions did not involve a public offering and was done in reliance
on Section 4(2) of the Securities Act and Rule 506 of Regulation D.
On January 1, 1995, the Company entered into a renegotiated supply agreement
with Geneva Pharmaceuticals, Inc., a Colorado corporation ("Geneva"). In
connection with the renegotiation, the Company issued to Geneva 156,400 shares
(after adjustment to reflect the October 1995 25-for-1 stock split) of Common
Stock for $1,413,044 in fees previously received under the contract. The
Company subsequently issued an additional 73,175 shares of Common Stock to
Geneva under antidilution provisions of the renegotiated agreement. The
transaction did not involve a public offering and was done in reliance on
Section 4(2) of the Securities Act and Rule 506 of Regulation D.
In April 1995, the Company issued 60,000 shares of Common Stock to a
director, Dr. Anthony Cincotta; 60,000 shares to another director, Dr. Albert
Meier; and 5,000 shares to an employee. The issuance was consideration to
acquire from those individuals royalty rights which they had as inventors of
certain technology owned by Louisiana State University and Agricultural and
Mechanical College and licensed to the Company. This transaction did not
involve a public offering and was done in reliance on Section 4(2) of the
Securities Act and Rule 506 of Regulation D.
On April 27, 1995, the Company issued 6,971,875 shares of Common Stock
(after giving effect to the October 1995 25-for-1 split of the Common Stock)
and 5,618 shares of Series D Preferred Stock in exchange for partnership
interests in limited partnerships that previously had purchased cash licenses
from the Company for the use of certain of the Company's technologies. Also,
on April 27, 1995, the Company issued 835,000 shares of Common Stock (after
giving effect to the October 1995 25-for-1 split of the Common Stock) and
1,285 shares of Series D Preferred Stock for $1,285,000 in cash. Also on April
27 ,1995, the Company exchanged shares of its Common Stock and Series A,
Series B and Series C Preferred Stock for the corresponding classes of capital
stock of its parent company, Ergo Science Incorporated, which is now a
subsidiary of the Company. Each of these transactions did not involve a public
offering and was made in reliance on Section 4(2) of the Securities Act and
Rule 506 of Regulation D.
On September 1, 1995, CVC, Citi Growth, certain CVC employees including Mr.
McWilliams, Hunt Financial, and Lafayette Investment Company (a company
controlled by Ray L. Hunt, a director of the Company) entered into a loan
agreement pursuant to which they agreed to lend the Company up to $6,000,000.
This transaction did not involve a public offering and was done in reliance on
Section 4(2) of the Securities Act and Rule 506 of Regulation D.
Upon the closing of the Company's initial public offering in December 1995,
the principal of and accrued interest on this loan were converted into Common
Stock at a valuation of $9.00 per share. Also upon closing of the Company's
initial public offering, all outstanding shares of preferred stock (other than
the Series D Preferred Stock) were automatically converted into Common Stock
of the Company. These transactions were done in reliance on Section 3(a)(9) of
the Securities Act.
In October 1995, the Company declared a dividend of Common Stock to the
holders of Series D Preferred Stock. This transaction did not involve a sale.
During 1992, 1993, 1994 and 1995 the Company granted options to purchase an
aggregate of 1,147,600 shares of Common Stock (after giving effect to the
October 1995 25-for-1 split of the Common Stock) to directors, officers and
key employees. Certain of those options have been exercised. These
transactions did not involve a public offering and were done in reliance on
Section 4(2) of the Securities Act.
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<PAGE>
SECTION 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
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1* --Form of Underwriting Agreement.
3.1 --Amended and Restated Certificate of Incorporation of the Company
(Incorporated by reference to exhibit 3.1 to the Company's
registration statement on Form S-1, file number 33-98162).
3.2 --Certificate of Designations, Preferences and Rights of Series D
Preferred Stock, as amended and restated (Incorporated by reference to
exhibit 3.2 to the Company's registration statement on Form S-1, file
number 33-98162).
3.3 --Third Amended and Restated By-Laws of the Company (Incorporated by
reference to exhibit 3.3 to the Company's registration statement on
Form S-1, file number 33-98162).
4 --Form of Stock Certificate of Common Stock, par value $.01 per share,
of the Company (Incorporated by reference to exhibit 4 to the
Company's registration statement on Form S-1, file number 33-98162).
5* --Form of Opinion of Vinson & Elkins L.L.P.
10.1 --Loan Agreement dated September 1, 1995, by and among the Company,
together with the form of Promissory Note included as Exhibit A
thereto; and First Amendment to Loan Agreement dated October 6, 1995,
among the Company, Citicorp Venture Capital Ltd., Citi Growth Fund
L.P., Hunt Financial Corporation and Lafayette Investment Company
(Incorporated by reference to exhibit 10.1 the Company's registration
statement on Form S-1, file number 33-98162)
10.2 --Novated License and Royalty Agreement dated May 1, 1995, between the
Board of Supervisors of Louisiana State University and Agricultural
and Mechanical College, the Company, E. Science Incorporated, a
Delaware corporation formerly known as Ergo Science Incorporated that
is a subsidiary of the Company ("Ergo Science Incorporated"), and Ergo
Research Corporation, a Delaware corporation that is a subsidiary of
the Company (Incorporated by reference to exhibit 10.2 to the
Company's registration statement on Form S-1, file number 33-98162).
10.3 --Supply Agreement dated January 1, 1995, between Ergo Science
Incorporated and Geneva Pharmaceuticals, Inc. [Portions of this
exhibit have been omitted and filed separately with the SEC in
accordance with Rule 406 of the Securities Act and the Company's
request for confidential treatment.] (Incorporated by reference to
exhibit 10.3 to the Company's registration statement on Form S-1, file
number 33-98162).
10.4 --Registration Rights Agreement dated January 1, 1995, between Ergo
Science Incorporated and Geneva Pharmaceuticals, Inc.; and First
Amendment to Registration Rights Agreement dated September 1, 1995,
between Ergo Science Incorporated and Geneva Pharmaceuticals, Inc.
(Incorporated by reference to exhibit 10.4 to the Company's
registration statement on Form S-1, file number 33-98162).
10.5 --Stockholder Rights Agreement dated August 5, 1992, among Ergo Science
Incorporated and the stockholders of the Company that are signatories
thereto; First Amendment to Stockholder Rights Agreement dated
September 10, 1992, among Ergo Science Incorporated and the
stockholders of the Company that are signatories thereto; Second
Amendment to Stockholder Rights Agreement dated October 12, 1993,
among Ergo Science Incorporated and the stockholders of the Company
that are signatories thereto; Third Amendment to Stockholder Rights
Agreement and Consent dated October 12, 1993, among Ergo Science
Incorporated and the stockholders of the Company that are signatories
thereto; Fourth Amendment to Stockholder Rights Agreement dated July
15, 1994, among Ergo Science Incorporated and the stockholders of the
Company that are signatories thereto; Fifth Amendment to Stockholder
Rights Agreement dated April 27, 1995, among the Company, Ergo Science
Incorporated and the stockholders of the Company that are signatories
</TABLE>
II-4
<PAGE>
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thereto; Sixth Amendment to Stockholder Rights Agreement dated
September 1, 1995, among theCompany, Ergo Science Incorporated, and
the stockholders of the Company that are signatories thereto; and
Seventh Amendment to Stockholder Rights Agreement dated October 6,
1995, among the Company, Ergo Science Incorporated and the
stockholders of the Company that are signatories thereto
(Incorporated by reference to exhibit 10.5 to the Company's
registration statement on Form S-1, file number 33-98162).
10.6 --Third Amended and Restated Registration Rights Agreement dated
April 27, 1995, among the Company, Ergo Science Incorporated,
Citicorp Venture Capital Ltd. and Hunt Financial Corporation
(Incorporated by reference to exhibit 10.6 to the Company's
registration statement on Form S-1, file number 33-98162).
10.7 --Registration Rights Agreement dated April 27, 1995, among the
Company and the stockholders of the Company that are signatories
thereto; and First Amendment to Registration Rights Agreement dated
September 1, 1995, among the Company and the stockholders listed as
signatories thereto (Incorporated by reference to exhibit 10.7 to
the Company's registration statement on Form S-1, file number 33-
98162).
10.8 --Stockholders Agreement dated April 7, 1995, among the Company and
the stockholders of the Company that are signatories thereto
(Incorporated by reference to exhibit 10.8 to the Company's
registration statement on Form S-1, file number 33-98162).
10.9 --Transfer Agreement dated April 27, 1995, between the Company and
Anthony H. Cincotta, Ph.D (Incorporated by reference to exhibit
10.9 to the Company's registration statement on Form S-1, file
number 33-98162).
10.10 --Transfer Agreement dated April 27, 1995, between the Company and
Albert H. Meier, Ph.D. (Incorporated by reference to exhibit 10.10
to the Company's registration statement on Form S-1, file number
33-98162).
10.11 --Consulting Agreement dated October 6, 1995, between the Company
and Albert H. Meier, Ph.D. (Incorporated by reference to exhibit
10.11 to the Company's registration statement on Form S-1, file
number 33-98162).
10.12 --Amended and Restated Employment Agreement dated November 16, 1995,
between the Company and Manuel Cincotta, Jr. (Incorporated by
reference to exhibit 10.12 to the Company's registration statement
on Form S-1, file number 33-98162).
10.13 --Employment Agreement dated October 6, 1995, between the Company
and Anthony H. Cincotta, Ph.D. (Incorporated by reference to
exhibit 10.13 to the Company's registration statement on Form S-1,
file number 33-98162).
10.14 --Amended and Restated Employment Agreement dated November 16, 1995,
between the Company and J. Warren Huff (Incorporated by reference
to exhibit 10.14 to the Company's registration statement on Form S-
1, file number 33-98162).
10.15 --Employment Agreement dated October 6, 1995, between the Company
and Ronald H. Abrahams, Ph.D. (Incorporated by reference to exhibit
10.15 to the Company's registration statement on Form S-1, file
number 33-98162).
10.16 --Employment Agreement dated October 6, 1995, between the Company
and Thomas N. Thurman (Incorporated by reference to exhibit 10.16
to the Company's registration statement on Form S-1, file number
33-98162).
10.17 --Employment Agreement dated October 6, 1995, between the Company
and Alan T. Barber (Incorporated by reference to exhibit 10.17 to
the Company's registration statement on Form S-1, file number 33-
98162).
10.18 --Indemnification Agreement dated October 6, 1995, between the
Company and Manuel Cincotta, Jr., together with a schedule
identifying substantially identical documents and setting forth the
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material details in which those documents differ from the foregoing
document (Incorporated by reference to exhibit 10.18 to the
Company's registration statement on Form S-1, file number
33-98162).
10.19 --Ergo Science Corporation Amended and Restated 1995 Long-Term
Incentive Plan; and Nonstatutory Stock Option Agreement thereunder
dated as of October 6, 1995 between the Company and J. Warren Huff,
together with a schedule identifying substantially identical
documents and setting forth the material details in which those
documents differ from the foregoing document (Incorporated by
reference to exhibit 10.19 to the Company's registration statement
on Form S-1, file number 33-98162).
10.20 --Amended and Restated Option Agreement dated October 12, 1993,
between Ergo Science Incorporated and Manuel Cincotta, Jr.; First
Amendment to Amended and Restated Option Agreement dated April 27,
1995, among the Company, Ergo Science Incorporated and Manuel
Cincotta, Jr.; and Second Amendment to Amended and Restated Option
Agreement dated November 6, 1995, between the Company and Manuel
Cincotta, Jr. (Incorporated by reference to exhibit 10.20 to the
Company's registration statement on Form S-1, file number 33-
98162).
10.22 --Amended and Restated Option Agreement dated October 12, 1993,
between Ergo Science Incorporated and Albert H. Meier, Ph.D.; First
Amendment to Amended and Restated Option Agreement dated April 27,
1995, among the Company, Ergo Science Incorporated and Albert H.
Meier, Ph.D.; and Second Amendment to Amended and Restated Option
Agreement dated November 6, 1995, between the Company and Albert H.
Meier, Ph.D. (Incorporated by reference to exhibit 10.22 to the
Company's registration statement on Form S-1, file number
33-98162).
10.23 --Option and Proxy Statement dated November 1, 1993, between Ergo
Science Incorporated and J. Warren Huff; First Amendment to Option
and Proxy Agreement dated April 27, 1995, among the Company, Ergo
Science Incorporated and J. Warren Huff; Second Amendment to Option
and Proxy Agreement dated October 6, 1995, among the Company, Ergo
Science Incorporated and J. Warren Huff; and Third Amendment to
Option and Proxy Agreement dated November 6, 1995, between the
Company and J. Warren Huff (Incorporated by reference to exhibit
10.23 to the Company's registration statement on Form S-1, file
number 33-98162).
10.24 --Nonstatutory Stock Option Agreement dated November 15, 1994,
between Ergo Science Incorporated and Stephen A. Duzan; and First
Amendment to Option Agreement dated April 27, 1995, among the
Company, Ergo Science Incorporated and Stephen Duzan (Incorporated
by reference to exhibit 10.24 to the Company's registration
statement on Form S-1, file number 33-98162).
10.25 --Option Agreement dated as of March 31, 1994, between the Company
and Ronald H. Abrahams, Ph.D.; and First Amendment to Option
Agreement dated November 6, 1995, between the Company and Ronald H.
Abrahams, Ph.D. (Incorporated by reference to exhibit 10.25 to the
Company's registration statement on Form S-1, file number 33-
98162).
10.26 --Option Agreement dated as of June 21, 1994, between the Company
and Thomas N. Thurman; and First Amendment to Option Agreement
dated November 6, 1995, between the Company and Thomas N. Thurman
(Incorporated by reference to exhibit 10.26 to the Company's
registration statement on Form S-1, file number 33-98162).
10.27 --Option Agreement dated as of November 8, 1994, between the Company
and Alan T. Barber, and First Amendment to Option Agreement dated
November 6, 1995, between the Company and Alan T. Barber
(Incorporated by reference to exhibit 10.27 to the Company's
registration statement on Form S-1, file number 33-98162).
10.28 --Consulting Agreement dated August 24, 1995, between the Company
and DBM Corporate Consulting Group Ltd. (Incorporated by reference
to exhibit 10.28 to the Company's registration statement on Form S-
1, file number 33-98162).
</TABLE>
II-6
<PAGE>
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10.29 --Form of Option and Registration Rights Agreement between the
Company and DBM Corporate Consulting Group, Ltd. (Incorporated by
reference to exhibit 10.29 to the Company's registration
statement on Form S-1, file number 33-98162).
10.30 --Ergo Science Corporation Stock Option Plan for Non-Employee
Directors (Incorporated by reference to exhibit 10.1 to the
Company's Registration Statement on Form S-8, file number 333-
07159).
10.31 --First Amendment to Ergo Science Corporation Amended and Restated
1995 Long-Term Incentive Plan (Incorporated by reference to
exhibit 10.2 to the Company's Registration Statement on Form S-8,
file number 333-07013).
10.32* --Employment Agreement dated October 6, 1995, by and between the
Company and David R. Burt.
10.33* --Employment Agreement dated March 1, 1996, by and between the
Company and Robert M. Powell.
11* --Statement regarding computation of per share earnings.
21 --Subsidiaries (Incorporated by reference to exhibit 21 to the
Company's Registration Statement on Form S-1, File No. 33-98162).
23.1* --Consent of Vinson & Elkins L.L.P. (included in their opinion
filed as Exhibit 5 hereto).
23.2* --Consent of Ernst & Young LLP
23.3* --Consent of Coopers & Lybrand L.L.P.
23.4* --Consent of Darby & Darby, P.C.
24* --Powers of Attorney (included on Page II-8 of the Registration
Statement).
27* --Financial Data Schedule.
</TABLE>
- --------
*Filed herewith.
(b) Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the Registrant
of expenses incurred or paid by a director, officer or controlling person of
the Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHARLESTOWN, STATE OF
MASSACHUSETTS, ON JULY 17, 1996.
Ergo Science Corporation
By: /s/ J. Warren Huff
--------------------------------
J. WARREN HUFF
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED. EACH PERSON WHOSE SIGNATURE APPEARS
BELOW HEREBY AUTHORIZES AND APPOINTS MANUEL CINCOTTA, JR., AND J. WARREN HUFF,
OR EITHER OF THEM, AS HIS ATTORNEY-IN-FACT TO SIGN ON HIS BEHALF INDIVIDUALLY
AND IN THE CAPACITY STATED BELOW ALL AMENDMENTS AND POST-EFFECTIVE AMENDMENTS
TO THIS REGISTRATION STATEMENT (INCLUDING ANY ADDITIONAL REGISTRATION
STATEMENT FILED PURSUANT TO RULE 462 OF THE SECURITIES ACT OF 1933 WITH
RESPECT TO THIS REGISTRATION STATEMENT) AS THAT ATTORNEY-IN-FACT MAY DEEM
NECESSARY OR APPROPRIATE.
SIGNATURE TITLE DATE
/s/ J.Warren Huff President, Chief July 17, 1996
- ----------------------------------- Executive Officer
J. WARREN HUFF (Principal Executive
Officer), and Director
/s/ Alan T. Barber Vice President, Finance July 17, 1996
- ----------------------------------- and Administration and
ALAN T. BARBER Chief Financial Officer
(principal financial
and accounting officer)
/s/ Anthony H. Cincotta, Ph.D. Director July 17, 1996
- -----------------------------------
ANTHONY H. CINCOTTA, PH.D.
/s/ Manuel Cincotta, Jr. Director July 17, 1996
- -----------------------------------
MANUEL CINCOTTA, JR.
/s/ Stephen/A. Duzan Director July 17, 1996
- -----------------------------------
STEPHEN A. DUZAN
/s/ Ray L. Hunt Director July 11, 1996
- -----------------------------------
RAY L. HUNT
/s/ Thomas F. McWilliams Director July 17, 1996
- -----------------------------------
THOMAS F. MCWILLIAMS
/s/ Albert H. Meier, Ph.D. Director July 10, 1996
- -----------------------------------
ALBERT H. MEIER, PH.D.
II-8
<PAGE>
EXHIBIT INDEX
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PAGE
EXHIBIT DESCRIPTION NO.
------- ----------- ----
<C> <S> <C>
1* --Form of Underwriting Agreement.
3.1 --Amended and Restated Certificate of Incorporation of the
Company (Incorporated by reference to exhibit 3.1 to the
Company's registration statement on Form S-1, file number 33-
98162).
3.2 --Certificate of Designations, Preferences and Rights of Series
D Preferred Stock, as amended and restated (Incorporated by
reference to exhibit 3.2 to the Company's registration
statement on Form S-1, file number 33-98162).
3.3 --Third Amended and Restated By-Laws of the Company
(Incorporated by reference to exhibit 3.3 to the Company's
registration statement on Form S-1, file number 33-98162).
4 --Form of Stock Certificate of Common Stock, par value $.01 per
share, of the Company (Incorporated by reference to exhibit 4
to the Company's registration statement on Form S-1, file
number 33-98162).
5* --Form of Opinion of Vinson & Elkins L.L.P.
10.1 --Loan Agreement dated September 1, 1995, by and among the
Company, together with the form of Promissory Note included as
Exhibit A thereto; and First Amendment to Loan Agreement dated
October 6, 1995, among the Company, Citicorp Venture Capital
Ltd., Citi Growth Fund L.P., Hunt Financial Corporation and
Lafayette Investment Company (Incorporated by reference to
exhibit 10.1 the Company's registration statement on Form S-1,
file number 33-98162)
10.2 --Novated License and Royalty Agreement dated May 1, 1995,
between the Board of Supervisors of Louisiana State University
and Agricultural and Mechanical College, the Company, E.
Science Incorporated, a Delaware corporation formerly known as
Ergo Science Incorporated that is a subsidiary of the Company
("Ergo Science Incorporated"), and Ergo Research Corporation,
a Delaware corporation that is a subsidiary of the Company
(Incorporated by reference to exhibit 10.2 to the Company's
registration statement on Form S-1, file number 33-98162).
10.3 --Supply Agreement dated January 1, 1995, between Ergo Science
Incorporated and Geneva Pharmaceuticals, Inc. [Portions of
this exhibit have been omitted and filed separately with the
SEC in accordance with Rule 406 of the Securities Act and the
Company's request for confidential treatment.] (Incorporated
by reference to exhibit 10.3 to the Company's registration
statement on Form S-1, file number 33-98162).
10.4 --Registration Rights Agreement dated January 1, 1995, between
Ergo Science Incorporated and Geneva Pharmaceuticals, Inc.;
and First Amendment to Registration Rights Agreement dated
September 1, 1995, between Ergo Science Incorporated and
Geneva Pharmaceuticals, Inc. (Incorporated by reference to
exhibit 10.4 to the Company's registration statement on Form
S-1, file number 33-98162).
10.5 --Stockholder Rights Agreement dated August 5, 1992, among Ergo
Science Incorporated and the stockholders of the Company that
are signatories thereto; First Amendment to Stockholder Rights
Agreement dated September 10, 1992, among Ergo Science
Incorporated and the stockholders of the Company that are
signatories thereto; Second Amendment to Stockholder Rights
Agreement dated October 12, 1993, among Ergo Science
Incorporated and the stockholders of the Company that are
signatories thereto; Third Amendment to Stockholder Rights
Agreement and Consent dated October 12, 1993, among Ergo
Science Incorporated and the stockholders of the Company that
are signatories thereto; Fourth Amendment to Stockholder
Rights Agreement dated July 15, 1994, among Ergo Science
Incorporated and the stockholders of the Company that are
signatories thereto; Fifth Amendment to Stockholder
</TABLE>
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PAGE
EXHIBIT DESCRIPTION NO.
------- ----------- ----
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Rights Agreement dated April 27, 1995, among the Company,
Ergo Science Incorporated and the stockholders of the Company
that are signatories thereto; Sixth Amendment to Stockholder
Rights Agreement dated September 1, 1995, among theCompany,
Ergo Science Incorporated, and the stockholders of the
Company that are signatories thereto; and Seventh Amendment
to Stockholder Rights Agreement dated October 6, 1995, among
the Company, Ergo Science Incorporated and the stockholders
of the Company that are signatories thereto (Incorporated by
reference to exhibit 10.5 to the Company's registration
statement on Form S-1, file number 33-98162).
10.6 --Third Amended and Restated Registration Rights Agreement
dated April 27, 1995, among the Company, Ergo Science
Incorporated, Citicorp Venture Capital Ltd. and Hunt
Financial Corporation (Incorporated by reference to exhibit
10.6 to the Company's registration statement on Form S-1,
file number 33-98162).
10.7 --Registration Rights Agreement dated April 27, 1995, among
the Company and the stockholders of the Company that are
signatories thereto; and First Amendment to Registration
Rights Agreement dated September 1, 1995, among the Company
and the stockholders listed as signatories thereto
(Incorporated by reference to exhibit 10.7 to the Company's
registration statement on Form S-1, file number 33-98162).
10.8 --Stockholders Agreement dated April 7, 1995, among the
Company and the stockholders of the Company that are
signatories thereto (Incorporated by reference to exhibit
10.8 to the Company's registration statement on Form S-1,
file number 33-98162).
10.9 --Transfer Agreement dated April 27, 1995, between the Company
and Anthony H. Cincotta, Ph.D (Incorporated by reference to
exhibit 10.9 to the Company's registration statement on Form
S-1, file number 33-98162).
10.10 --Transfer Agreement dated April 27, 1995, between the Company
and Albert H. Meier, Ph.D. (Incorporated by reference to
exhibit 10.10 to the Company's registration statement on Form
S-1, file number 33-98162).
10.11 --Consulting Agreement dated October 6, 1995, between the
Company and Albert H. Meier, Ph.D. (Incorporated by reference
to exhibit 10.11 to the Company's registration statement on
Form S-1, file number 33-98162).
10.12 --Amended and Restated Employment Agreement dated November 16,
1995, between the Company and Manuel Cincotta, Jr.
(Incorporated by reference to exhibit 10.12 to the Company's
registration statement on Form S-1, file number 33-98162).
10.13 --Employment Agreement dated October 6, 1995, between the
Company and Anthony H. Cincotta, Ph.D. (Incorporated by
reference to exhibit 10.13 to the Company's registration
statement on Form S-1, file number 33-98162).
10.14 --Amended and Restated Employment Agreement dated November 16,
1995, between the Company and J. Warren Huff (Incorporated by
reference to exhibit 10.14 to the Company's registration
statement on Form S-1, file number 33-98162).
10.15 --Employment Agreement dated October 6, 1995, between the
Company and Ronald H. Abrahams, Ph.D. (Incorporated by
reference to exhibit 10.15 to the Company's registration
statement on Form S-1, file number 33-98162).
10.16 --Employment Agreement dated October 6, 1995, between the
Company and Thomas N. Thurman (Incorporated by reference to
exhibit 10.16 to the Company's registration statement on Form
S-1, file number 33-98162).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
EXHIBIT DESCRIPTION NO.
------- ----------- ----
<C> <S> <C>
10.17 --Employment Agreement dated October 6, 1995, between the
Company and Alan T. Barber (Incorporated by reference to
exhibit 10.17 to the Company's registration statement on Form
S-1, file number 33-98162).
10.18 --Indemnification Agreement dated October 6, 1995, between the
Company and Manuel Cincotta, Jr., together with a schedule
identifying substantially identical documents and setting
forth the material details in which those documents differ
from the foregoing document (Incorporated by reference to
exhibit 10.18 to the Company's registration statement on Form
S-1, file number 33-98162).
10.19 --Ergo Science Corporation Amended and Restated 1995 Long-Term
Incentive Plan; and Nonstatutory Stock Option Agreement
thereunder dated as of October 6, 1995 between the Company and
J. Warren Huff, together with a schedule identifying
substantially identical documents and setting forth the
material details in which those documents differ from the
foregoing document (Incorporated by reference to exhibit 10.19
to the Company's registration statement on Form S-1, file
number 33-98162).
10.20 --Amended and Restated Option Agreement dated October 12, 1993,
between Ergo Science Incorporated and Manuel Cincotta, Jr.;
First Amendment to Amended and Restated Option Agreement dated
April 27, 1995, among the Company, Ergo Science Incorporated
and Manuel Cincotta, Jr.; and Second Amendment to Amended and
Restated Option Agreement dated November 6, 1995, between the
Company and Manuel Cincotta, Jr. (Incorporated by reference to
exhibit 10.20 to the Company's registration statement on Form
S-1, file number 33-98162).
10.22 --Amended and Restated Option Agreement dated October 12, 1993,
between Ergo Science Incorporated and Albert H. Meier, Ph.D.;
First Amendment to Amended and Restated Option Agreement dated
April 27, 1995, among the Company, Ergo Science Incorporated
and Albert H. Meier, Ph.D.; and Second Amendment to Amended
and Restated Option Agreement dated November 6, 1995, between
the Company and Albert H. Meier, Ph.D. (Incorporated by
reference to exhibit 10.22 to the Company's registration
statement on Form S-1, file number 33-98162).
10.23 --Option and Proxy Statement dated November 1, 1993, between
Ergo Science Incorporated and J. Warren Huff; First Amendment
to Option and Proxy Agreement dated April 27, 1995, among the
Company, Ergo Science Incorporated and J. Warren Huff; Second
Amendment to Option and Proxy Agreement dated October 6, 1995,
among the Company, Ergo Science Incorporated and J. Warren
Huff; and Third Amendment to Option and Proxy Agreement dated
November 6, 1995, between the Company and J. Warren Huff
(Incorporated by reference to exhibit 10.23 to the Company's
registration statement on Form S-1, file number 33-98162).
10.24 --Nonstatutory Stock Option Agreement dated November 15, 1994,
between Ergo Science Incorporated and Stephen A. Duzan; and
First Amendment to Option Agreement dated April 27, 1995,
among the Company, Ergo Science Incorporated and Stephen Duzan
(Incorporated by reference to exhibit 10.24 to the Company's
registration statement on Form S-1, file number 33-98162).
10.25 --Option Agreement dated as of March 31, 1994, between the
Company and Ronald H. Abrahams, Ph.D.; and First Amendment to
Option Agreement dated November 6, 1995, between the Company
and Ronald H. Abrahams, Ph.D. (Incorporated by reference to
exhibit 10.25 to the Company's registration statement on Form
S-1, file number 33-98162).
10.26 --Option Agreement dated as of June 21, 1994, between the
Company and Thomas N. Thurman; and First Amendment to Option
Agreement dated November 6, 1995, between the Company and
Thomas N. Thurman (Incorporated by reference to exhibit 10.26
to the Company's registration statement on Form S-1, file
number 33-98162).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
EXHIBIT DESCRIPTION NO.
------- ----------- ----
<C> <S> <C>
10.27 --Option Agreement dated as of November 8, 1994, between the
Company and Alan T. Barber, and First Amendment to Option
Agreement dated November 6, 1995, between the Company and Alan
T. Barber (Incorporated by reference to exhibit 10.27 to the
Company's registration statement on Form S-1, file number 33-
98162).
10.28 --Consulting Agreement dated August 24, 1995, between the
Company and DBM Corporate Consulting Group Ltd. (Incorporated
by reference to exhibit 10.28 to the Company's registration
statement on Form S-1, file number 33-98162).
10.29 --Form of Option and Registration Rights Agreement between the
Company and DBM Corporate Consulting Group, Ltd. (Incorporated
by reference to exhibit 10.29 to the Company's registration
statement on Form S-1, file number 33-98162).
10.30 --Ergo Science Corporation Stock Option Plan for Non-Employee
Directors (Incorporated by reference to exhibit 10.1 to the
Company's Registration Statement on Form S-8, file number
333-07159).
10.31 --First Amendment to Ergo Science Corporation Amended and
Restated 1995 Long-Term Incentive Plan (Incorporated by
reference to exhibit 10.2 to the Company's Registration
Statement on Form S-8, file number 333-07013).
10.32* --Employment Agreement dated October 6, 1995, by and between
the Company and David R. Burt.
10.33* --Employment Agreement dated March 1, 1996, by and between the
Company and Robert M. Powell.
11* --Statement regarding computation of per share earnings.
21 --Subsidiaries (Incorporated by reference to exhibit 21 to the
Company's Registration Statement on Form S-1, File No. 33-
98162).
23.1* --Consent of Vinson & Elkins L.L.P. (included in their opinion
filed as Exhibit 5 hereto).
23.2* --Consent of Ernst & Young LLP
23.3* --Consent of Coopers & Lybrand L.L.P.
23.4* --Consent of Darby & Darby, P.C.
24* --Powers of Attorney (included on Page II-8 of the Registration
Statement)
27* --Financial Data Schedule.
</TABLE>
- --------
*Filed herewith.
<PAGE>
2,500,000 SHARES
ERGO SCIENCE CORPORATION
COMMON STOCK
($.01 PAR VALUE)
UNDERWRITING AGREEMENT
----------------------
August ___, 1996
Cowen & Company
UBS Securities LLC
Needham & Company, Inc.
As Representatives of the several Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Dear Sirs and Mesdames:
1. Introductory. Ergo Science Corporation, a Delaware corporation (the
------------
"Company"), proposes to sell, pursuant to the terms of this Agreement, to the
several underwriters named in Schedule A hereto (the "Underwriters," or, each,
----------
an "Underwriter"), an aggregate of 2,500,000 shares of Common Stock, $.01 par
value (the "Common Stock"), of the Company. The aggregate of 2,500,000 shares
so proposed to be sold is hereinafter referred to as the "Firm Stock." The
Company and certain shareholders of the Company named in Schedule B hereto (the
----------
"Selling Shareholders," or, each, a "Selling Shareholder"), also propose to sell
to the Underwriters, upon the terms and conditions set forth in Section 4
hereof, up to an additional 375,000 shares of Common Stock (the "Optional
Stock"). The Optional Stock to be sold by the Selling Shareholders shall be
referred to herein as the "Selling Shareholder Stock." The Firm Stock and the
Optional Stock are hereinafter collectively referred to as the "Stock." Cowen &
Company ("Cowen"), UBS Securities LLC ("UBS") and Needham & Company, Inc.
("Needham") are acting as representatives of the several Underwriters and in
such capacity are hereinafter referred to as the "Representatives."
2. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with, the several Underwriters and each Selling
Shareholder that:
(a) A registration statement on Form S-1 (File No. 333-__________) in the
form in which it became or becomes effective and also in such form as it
<PAGE>
may be when any post-effective amendment thereto shall become effective
with respect to the Stock, including any preeffective prospectuses included
as part of the registration statement as originally filed or as part of any
amendment or supplement thereto, or filed pursuant to Rule 424 under the
Securities Act of 1933, as amended (the "Securities Act"), and the rules
and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, copies of which have
heretofore been delivered to you, has been prepared by the Company in
conformity with the requirements of the Securities Act and has been filed
with the Commission under the Securities Act; one or more amendments to
such registration statement, including in each case an amended preeffective
prospectus, copies of which amendments have heretofore been delivered to
you, have been so prepared and filed. If it is contemplated, at the time
this Agreement is executed, that a post-effective amendment to the
registration statement will be filed and must be declared effective before
the offering of the Stock may commence, the term "Registration Statement"
as used in this Agreement means the registration statement as amended by
said post-effective amendment. The term "Registration Statement" as used
in this Agreement shall also include any registration statement relating to
the Stock that is filed and becomes effective pursuant to Rule 462(b) under
the Securities Act. The term "Prospectus" as used in this Agreement means
the prospectus in the form included in the Registration Statement, or, (A)
if the prospectus included in the Registration Statement omits information
in reliance on Rule 430A under the Securities Act and such information is
included in a prospectus filed with the Commission pursuant to Rule 424(b)
under the Securities Act, the term "Prospectus" as used in this Agreement
means the prospectus in the form included in the Registration Statement as
supplemented by the addition of the Rule 430A information contained in the
prospectus filed with the Commission pursuant to Rule 424(b) and (B) if
prospectuses that meet the requirements of Section 10(a) of the Securities
Act are delivered pursuant to Rule 434 under the Securities Act, then (i)
the term "Prospectus" as used in this Agreement means the "prospectus
subject to completion" (as such term is defined in Rule 434(g) under the
Securities Act) as supplemented by (a) the addition of Rule 430A
information or other information contained in the form of prospectus
delivered pursuant to Rule 434(b)(2) under the Securities Act or (b) the
information contained in the term sheets described in Rule 434(b)(3) under
the Securities Act, and (ii) the date of such prospectuses shall be deemed
to be the date of the term sheets. The term "Preeffective Prospectus" as
used in this Agreement means the prospectus subject to completion in the
form included in the Registration Statement at the time of the initial
filing of the Registration Statement with the Commission, and as such
prospectus shall have been amended from time to time prior to the date of
the Prospectus.
(b) The Commission has not issued or threatened to issue any order
preventing or suspending the use of any Preeffective Prospectus, and, at
2
<PAGE>
its date of issue, each Preeffective Prospectus conformed in all material
respects with the requirements of the Securities Act and did not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
and, when the Registration Statement became or becomes effective and at all
times subsequent thereto up to and including each of the Closing Dates (as
defined herein), the Registration Statement and the Prospectus and any
amendments or supplements thereto contained and will contain all material
statements and information required to be included therein by the
Securities Act and conformed and will conform in all material respects to
the requirements of the Securities Act, and neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto,
included or will include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the foregoing
representations, warranties and agreements shall not apply to information
contained in or omitted from any Preeffective Prospectus or the
Registration Statement or the Prospectus or any such amendment or
supplement thereto in reliance upon, and in conformity with: (i) written
information relating to any Underwriter furnished to the Company by or on
behalf of any Underwriter, directly or through you, specifically for use in
the preparation thereof, and (ii) written information relating to any
Selling Shareholder furnished to the Company by or on behalf of any Selling
Shareholder, specifically for use in the preparation thereof; there is no
franchise, lease, contract, agreement or document required to be described
in the Registration Statement or Prospectus or to be filed as an exhibit to
the Registration Statement which is not described or filed therein as
required; and all descriptions of any such franchises, leases, contracts,
agreements or documents contained in the Registration Statement are
accurate and complete descriptions of such documents in all material
respects.
(c) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus, and except as set forth or
contemplated in the Prospectus, (i) neither the Company nor any of its
subsidiaries has incurred any material liabilities or obligations, direct
or contingent, nor entered into any material transactions not in the
ordinary course of business, and (ii) there has not been any material
adverse change in the condition (financial or otherwise), properties,
business, management, prospects, net worth or results of operations of the
Company and its subsidiaries considered as a whole, or any change in the
capital stock, short-term or long-term debt of the Company and its
subsidiaries considered as a whole.
(d) The financial statements, together with the related notes set forth in
the Prospectus, fairly present, on the basis stated in the Registration
Statement, the financial position and the results of operations and changes
3
<PAGE>
in financial position of the Company and its consolidated subsidiaries at
the respective dates or for the respective periods therein specified. Such
statements and related notes have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
except as may be set forth in the Prospectus. The selected financial data
set forth in the Prospectus under the caption "Summary Consolidated
Financial Data" fairly present, on the basis stated in the Registration
Statement, the information set forth therein.
(e) Each of Coopers & Lybrand L.L.P. and Ernst & Young LLP, who have
expressed their opinions on the audited financial statements and related
schedules included in the Registration Statement and the Prospectus are
independent public accountants within the meaning of the Securities Act and
the Rules and Regulations.
(f) The Company and each of its subsidiaries have been duly organized and
are validly existing and in good standing as corporations under the laws of
their respective jurisdictions of organization, with power and authority
(corporate and other) to own or lease their properties and to conduct their
businesses as described in the Prospectus; the Company is, and each of its
subsidiaries are, in possession of and operating in compliance with all
franchises, grants, authorizations, licenses, permits, easements, consents,
certificates and orders required for the conduct of its business, all of
which are valid and in full force and effect, except where the failure to
be in possession of or operate in compliance with such franchises, grants,
authorizations, licenses, permits, easements, consents, certificates and
orders would not have a material adverse effect on the condition (financial
or otherwise), properties, business, management, prospects, net worth or
results of operations of the Company and its subsidiaries considered as a
whole; and the Company and each of such subsidiaries are duly qualified or
registered to do business and in good standing as foreign corporations in
all other jurisdictions where their ownership or leasing of properties or
the conduct of their businesses requires such qualification or
registration. The Company and each of its subsidiaries have all requisite
power and authority, and all necessary consents, approvals, authorizations,
orders, registrations, qualifications, licenses and permits of and from all
public regulatory or governmental agencies and bodies including, without
limitation, the United States Food and Drug Administration (the "FDA"), to
own, lease and operate their properties and conduct their businesses as now
being conducted and as described in the Registration Statement and the
Prospectus, and no such consent, approval, authorization, order,
registration, qualification, license or permit contains a materially
burdensome restriction not adequately disclosed in the Registration
Statement and the Prospectus. The Company and each of its subsidiaries
have made all necessary filings required under any federal, state or
foreign law, rule or regulation and have obtained all necessary consents,
approvals, authorizations, orders, registrations, qualifications, licenses
and permits from other persons which are necessary to own or lease their
4
<PAGE>
properties and assets and to conduct their businesses, except where the
failure to so file or obtain such consents, approvals, authorizations,
orders, registrations, qualifications, licenses and permits would not have
a material adverse effect on the condition (financial or otherwise),
properties, business, management, prospects, net worth or results of
operations of the Company and its subsidiaries considered as a whole.
Neither the Company nor any subsidiary has received any notice of
proceedings relating to the revocation, cancellation or modification of any
such consent, approval, authorization, order, registration, qualification,
license or permit which, singly or in the aggregate, if the subject of any
unfavorable decision, ruling, finding or cancellation, could have a
material adverse effect on the business or financial condition of the
Company and its subsidiaries, taken as a whole. The Company does not own
or control, directly or indirectly, any entity other than those listed on
the Schedule filed as Exhibit 21 to the Registration Statement.
(g) The Company's authorized and outstanding capital stock (including the
Selling Shareholder Stock) is at June 30, 1996, and will be on the Closing
Dates, as set forth under the heading "Capitalization" in the Prospectus;
the outstanding shares of Common Stock of the Company conform to the
description thereof in the Prospectus and have been duly authorized and
validly issued and are fully paid and nonassessable and have been issued in
compliance with all federal and state securities laws and were not issued
in violation of, and are not subject to, any preemptive rights or similar
rights to subscribe for or purchase securities. Except as disclosed in or
contemplated by the Prospectus or the financial statements of the Company
and related notes thereto included in the Prospectus, the Company does not
have outstanding any options or warrants to purchase, or, as of the Closing
Dates, any preemptive rights or other rights to subscribe for or to
purchase any securities, or obligations convertible into, or any contracts
or commitments to issue or sell, shares of its capital stock or any such
options, rights, convertible securities or obligations, except for options
granted subsequent to the date of information provided in the Prospectus
pursuant to the Company's employee and stock option plans disclosed in the
Prospectus. The description of the Company's stock option and other stock
plans or arrangements, and the options or other rights granted or exercised
thereunder, as set forth in the Prospectus, accurately and fairly presents
the information required to be shown with respect to such plans,
arrangements, options and rights. All outstanding shares of capital stock
of each subsidiary have been duly authorized and validly issued, and are
fully paid and nonassessable and (except for directors' qualifying shares)
are owned directly by the Company or by another wholly owned subsidiary of
the Company free and clear of any liens, encumbrances, equities or claims.
Under current law, no restricted securities (as that term is defined under
Rule 144 of the Securities Act) of the Company will be eligible for sale
under Rule 144 of the Securities Act prior to April 27, 1997.
5
<PAGE>
(h) The Stock to be issued and sold by the Company to the Underwriters
hereunder has been duly and validly authorized and, when issued and
delivered against payment therefor as provided herein, will be duly and
validly issued, fully paid and nonassessable and free of any preemptive or
similar rights and will conform to the description thereof in the
Prospectus.
(i) Except as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its
subsidiaries or affiliates is a party or of which any property of the
Company or any subsidiary or affiliate is subject, which, if determined
adversely to the Company or any such subsidiary or affiliate, might
individually or in the aggregate (i) prevent or adversely affect the
transactions contemplated by this Agreement, (ii) suspend the effectiveness
of the Registration Statement, (iii) prevent or suspend the use of the
Preeffective Prospectus in any jurisdiction or (iv) result in a material
adverse change in the condition (financial or otherwise), properties,
business, management, prospects, net worth or results of operations of the
Company and its subsidiaries considered as a whole; and to the best of the
Company's knowledge no such proceedings are threatened or contemplated
against the Company or any subsidiary or affiliate by governmental
authorities or others. The Company is not a party nor subject to the
provisions of any material injunction, judgment, decree or order of any
court, regulatory body or other governmental agency or body. The
description of the Company's litigation under the heading "Legal
Proceedings and Insurance" in the Prospectus is true and correct and
complies with the Rules and Regulations.
(j) The execution, delivery and performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a
breach or violation of any of the terms or provisions of or constitute a
default under any indenture, mortgage, deed of trust, note agreement or
other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of its properties is or may
be bound, the Certificate of Incorporation, By-laws or other organizational
documents of the Company or any of its subsidiaries, or any law, order,
rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
properties or will result in the creation of a lien.
(k) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Company
of the transactions contemplated by this Agreement, except such as may be
required by the National Association of Securities Dealers, Inc. (the
"NASD") or under the Securities Act or the securities or "Blue Sky" laws of
any jurisdiction in connection with the purchase and distribution of the
Stock by the Underwriters.
6
<PAGE>
(l) The Company has the full corporate power and authority to enter into
this Agreement and to perform its obligations hereunder (including to
issue, sell and deliver the Stock to be issued and sold by it), and this
Agreement has been duly and validly authorized, executed and delivered by
the Company and is a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except to the
extent that rights to indemnity and contribution hereunder may be limited
by federal or state securities laws or the public policy underlying such
laws and except for the effect of bankruptcy, insolvency, reorganization,
moratorium and other similar laws relating to or affecting the rights of
creditors generally.
(m) The Company and its subsidiaries are in all material respects in
compliance with, and conduct their businesses in conformity with, all
applicable federal, state, local and foreign laws, rules and regulations of
any court or governmental agency or body including, without limitation,
those of the FDA; to the knowledge of the Company, otherwise than as set
forth in the Registration Statement and the Prospectus, no prospective
change in any of such federal or state laws, rules or regulations has been
adopted which, when made effective, would have a material adverse effect on
the operations of the Company and its subsidiaries considered as a whole.
Except as disclosed in the Registration Statement, the Company and its
subsidiaries are in compliance with all applicable existing federal, state,
local and foreign laws and regulations relating to the protection of human
health or the environment or imposing liability or requiring standards of
conduct concerning any Hazardous Materials ("Environmental Laws"), except
where the failure to so comply would not have a material adverse effect on
the condition (financial or otherwise), properties, business, management,
prospects, net worth or results of operations of the Company and its
subsidiaries considered as a whole. The term "Hazardous Material" means
(i) any "hazardous substance" as defined by the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, (ii) any
"hazardous waste" as defined by the Resource Conservation and Recovery Act,
as amended, (iii) any petroleum or petroleum product, (iv) any
polychlorinated biphenyl and (v) any pollutant or contaminant or hazardous,
dangerous or toxic chemical, material, waste or substance regulated under
or within the meaning of any other Environmental Law.
(n) The Company and its subsidiaries have filed all necessary federal,
state, local and foreign income, payroll, franchise and other tax returns
and have paid all taxes shown as due thereon or with respect to any of
their properties, and there is no tax deficiency that has been, or to the
knowledge of the Company is likely to be, asserted against the Company or
any of its subsidiaries or any of their respective properties or assets
that would materially adversely affect the financial position, business or
operations of the Company and its subsidiaries.
7
<PAGE>
(o) No person or entity has the right to require registration of shares of
Common Stock or other securities of the Company because of the filing or
effectiveness of the Registration Statement, except for persons and
entities who have expressly waived such right or who have been given proper
notice and have failed to exercise such right within the time or times
required under the terms and conditions of such right.
(p) Neither the Company nor any of its officers, directors or affiliates
has taken or will take, directly or indirectly, any action designed or
intended to stabilize or manipulate the price of any security of the
Company, or which caused or resulted in, or which might in the future
reasonably be expected to cause or result in, stabilization or manipulation
of the price of any security of the Company.
(q) The Company has provided you with all financial statements since March
31, 1996 through the date hereof that are available to the officers of the
Company, including financial statements for the months of April 1996, May
1996, June 1995 and July 1996.
(r) The Company and its subsidiaries own or possess all patents,
trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, inventions, trade secrets
and rights described in the Prospectus as being owned by them or any of
them or necessary for the conduct of their respective businesses, as now
conducted or hereinafter proposed to be conducted as described in the
Prospectus, and the Company is not aware of any claim to the contrary or
any challenge by any other person to the rights of the Company and its
subsidiaries with respect to the foregoing. To the Company's knowledge,
its business as now conducted and as proposed to be conducted does not and
will not infringe or conflict with in any material respect patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses
or other intellectual property or franchise right of any person or entity.
Except as described in the Prospectus, no claim has been made against the
Company alleging the infringement by the Company of any patent, trademark,
service mark, trade name, copyright, trade secret, license in or other
intellectual property right or franchise right of any person or entity.
The Company has duly and properly filed or caused to be filed with the
United States Patent and Trademark Office all United States patent
applications described or referred to in the Prospectus. Except as
otherwise described in the Prospectus, to the knowledge of the Company, the
Company has clear title to its patents and patent applications referred to
in the Prospectus.
(s) The Company and its subsidiaries have performed all material
obligations required to be performed by them under all contracts required
by Item 601(b)(10) of Regulation S-K under the Securities Act to be filed
as exhibits to the Registration Statement, and neither the Company nor any
8
<PAGE>
of its subsidiaries nor any other party to such contract is in default
under or in breach of any such obligations, except where such default or
breach would not have a material adverse effect on the condition (financial
or otherwise), properties, business, management, prospects, net worth or
results of operations of the Company and its subsidiaries considered as a
whole. Neither the Company nor any of its subsidiaries has received any
notice of such default or breach.
(t) The Company is not involved in any labor dispute nor is any such
dispute threatened. The Company is not aware that (A) any executive, key
employee or significant group of employees of the Company or any subsidiary
plans to terminate employment with the Company or any such subsidiary or
(B) any such executive or key employee is subject to any noncompete,
nondisclosure, confidentiality, employment, consulting or similar agreement
that would be violated by the present or proposed business activities of
the Company and its subsidiaries. Neither the Company nor any subsidiary
has or expects to have any liability for any prohibited transaction or
funding deficiency or any complete or partial withdrawal liability with
respect to any pension, profit sharing or other plan which is subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
to which the Company or any subsidiary makes or ever has made a
contribution and in which any employee of the Company or any subsidiary is
or has ever been a participant. With respect to such plans, the Company
and each subsidiary are in compliance in all material respects with all
applicable provisions of ERISA.
(u) The Company has obtained the written agreement described in Section
9(k) of this Agreement from each of its officers, directors and holders of
Common Stock listed on Schedule C hereto.
----------
(v) The Company and its subsidiaries have, and the Company and its
subsidiaries as of the Closing Dates will have, good and indefeasible title
in fee simple to all real property and good and marketable title to all
personal property owned or proposed to be owned by them which is material
to the business of the Company or of its subsidiaries, in each case free
and clear of all liens, encumbrances and defects except such as are
described in the Prospectus or such as would not have a material adverse
effect on the Company and its subsidiaries considered as a whole; and any
real property and buildings held under lease by the Company and its
subsidiaries or proposed to be held after giving effect to the transactions
described in the Prospectus are, or will be as of the Closing Dates, held
by them under valid, subsisting and enforceable leases with such exceptions
as would not have a material adverse effect on the Company and its
subsidiaries considered as a whole, in each case except as described in or
contemplated by the Prospectus.
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(w) The Company and its subsidiaries are insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts
as are customary in the businesses in which they are engaged or propose to
engage after giving effect to the transactions described in the Prospectus;
and neither the Company nor any subsidiary of the Company has any reason to
believe that it will not be able to renew its existing insurance coverage
as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue their businesses at a cost
that would not materially and adversely affect the condition, financial or
otherwise, or the earnings, business or operations of the Company and its
subsidiaries considered as a whole.
(x) Except as set forth under the caption "Underwriting" in the
Prospectus, there is no broker, finder or other party that is entitled to
receive from the Company any brokerage or finder's fee or other fee or
commission as a result of any of the transactions contemplated by this
Agreement.
(y) The Company has complied with all provisions of Section 517.075
Florida Statutes (Chapter 92-198; Laws of Florida).
(z) The Company and each of its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(aa) To the Company's knowledge, neither the Company nor any of its
subsidiaries nor any employee or agent of the Company or any of its
subsidiaries has made any payment of funds of the Company or any of its
subsidiaries or received or retained any funds in violation of any law,
rule or regulation, which payment, receipt or retention of funds is of a
character required to be disclosed in the Prospectus.
(bb) Neither the Company nor any of its subsidiaries is an "investment
company" or an entity "controlled" by an "investment company" as such terms
are defined in the Investment Company Act of 1940, as amended.
(cc) Each certificate signed by any officer of the Company and delivered
to the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company as to the matters covered
thereby.
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3. Representations and Warranties of the Selling Shareholders. Each
----------------------------------------------------------
Selling Shareholder, severally and not jointly, represents and warrants to, and
agrees with, each Underwriter and the Company that:
(a) Such Selling Shareholder now has and on the Option Closing Date will
have valid title to such of the Selling Shareholder Stock as is then to be
sold by such Selling Shareholder, and on the date hereof has valid and
transferable title to such of the Selling Shareholder Stock as is to be
sold by such Selling Shareholder, in each case free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest
other than pursuant to this Agreement; such Selling Shareholder has full
right, power and authority to sell, assign, transfer and deliver the
Selling Shareholder Stock to be sold by such Selling Shareholder hereunder;
and upon delivery of such Selling Shareholder Stock hereunder and payment
of the purchase price as herein contemplated, each of the Underwriters will
obtain valid and transferable title to the Selling Shareholder Stock
purchased by it from such Selling Shareholder, free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest,
including any liability for estate or inheritance taxes, or any liability
to or claims of any creditor, devisee, legatee or beneficiary of such
Selling Shareholder.
(b) Such Selling Shareholder has duly authorized (if applicable), executed
and delivered, in the form heretofore furnished to the Representatives, a
Power of Attorney (the "Power of Attorney") appointing J. Warren Huff and
Alan T. Barber, or any of them as attorneys-in-fact (collectively, the
"Attorneys" and individually, an "Attorney") and a Letter of Transmittal
and Custody Agreement (the "Custody Agreement") with the Company as
custodian (the "Custodian"); each of the Power of Attorney and the Custody
Agreement constitutes a valid and binding agreement of such Selling
Shareholder, enforceable in accordance with its terms, except as the
enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; and each of
such Attorneys, acting alone, is authorized to execute and deliver this
Agreement and the certificate referred to in Section 9(l) hereof on behalf
of such Selling Shareholder, to determine the purchase price to be paid by
the several Underwriters to such Selling Shareholder as provided in Section
4 hereof, to authorize the delivery of the Selling Shareholder Stock under
this Agreement and to duly endorse (in blank or otherwise) the certificate
or certificates representing such Selling Shareholder Stock or a stock
power or powers with respect thereto, to accept payment therefor, and
otherwise to act on behalf of such Selling Shareholder in connection with
this Agreement. Certificates in negotiable form for all Selling
Shareholder Stock to be sold by such Selling Shareholder under this
Agreement together with a stock power or powers duly endorsed in blank by
such Selling Shareholder, have been placed in custody with the Custodian
for the purpose of effecting delivery hereunder.
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<PAGE>
(c) All authorizations, approvals, consents and orders necessary for the
execution and delivery by such Selling Shareholder of the Power of Attorney
and the Custody Agreement, the execution and delivery by or on behalf of
such Selling Shareholder of this Agreement and the sale and delivery of the
Selling Shareholder Stock under this Agreement (other than, at the time of
the execution hereof (if the Registration Statement has not yet been
declared effective by the Commission), the issuance of the order of the
Commission declaring the Registration Statement effective and such
authorizations, approvals or consents as may be necessary from the NASD or
under state or other securities or Blue Sky laws) have been obtained and
are in full force and effect; and such Selling Shareholder has full right,
power and authority to enter into and perform its obligations under this
Agreement and such Power of Attorney and Custody Agreement, and to sell,
assign, transfer and deliver the Selling Shareholder Stock to be sold by
such Selling Shareholder under this Agreement.
(d) This Agreement has been duly executed and delivered by or on behalf of
such Selling Shareholder and is a valid and binding agreement of such
Selling Shareholder, enforceable in accordance with its terms, except as
the indemnification and contribution provisions hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the creditors' rights generally or by general
equitable principles; and the performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a
breach of or default under any material bond, debenture, note or other
evidence of indebtedness, or any material contract, indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument to
which such Selling Shareholder is a party or by which such Selling
Shareholder or Selling Shareholder Stock hereunder may be bound or, to the
best of such Selling Shareholder's knowledge, result in any violation of
any law, order, rule, regulation, writ, injunction or decree of any court
or governmental agency or body.
(e) Such Selling Shareholder has not taken and will not take, directly or
indirectly, any action designed to, or which might reasonably be expected
to, cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Stock.
(f) Other than as permitted by the Securities Act, such Selling Shareholder
has not distributed and will not distribute any prospectus or other
offering material in connection with the offering and sale of the Stock.
12
<PAGE>
(g) All information furnished by or on behalf of such Selling Shareholder
relating to such Selling Shareholder and the Selling Shareholder Stock that
is contained in the representations and warranties of such Selling
Shareholder in such Selling Shareholder's Power of Attorney or set forth in
the Registration Statement and the Prospectus is, and on the Option Closing
Date will be, true, correct and complete in all material respects, and does
not, and on the Option Closing Date will not, contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make such statements not misleading, in light of
the circumstances under which they were made.
(h) Such Selling Shareholder will review the Prospectus and will comply
with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement on or prior to the Option
Closing Date, and will advise one of its Attorneys prior to the Option
Closing Date if any statement to be made on behalf of such Selling
Shareholder in the certificate contemplated by Section 9(l) hereof would be
inaccurate if made as of the Option Closing Date.
(i) Such Selling Shareholder does not have, or has waived prior to the date
hereof, any preemptive right, co-sale right or right of first refusal or
other similar right to purchase any of the Optional Stock that is to be
sold by the Company or any of the other Selling Shareholders to the
Underwriters pursuant to this Agreement; and such Selling Shareholder does
not own any warrants, options or similar rights to acquire, and does not
have any right or arrangement to acquire, any capital stock, rights,
warrants, options or other securities from the Company, other than those
described in the Registration Statement and the Prospectus.
(j) Such Selling Shareholder is not aware that any of the representations
and warranties of the Company set forth in Section 2 above is untrue or
inaccurate in any material respect.
4. Purchase by, and Sale and Delivery to, Underwriters--Closing Dates.
------------------------------------------------------------------
The Company agrees to sell to the Underwriters the Firm Stock, and on the basis
of the representations, warranties, covenants and agreements herein contained,
but subject to the terms and conditions herein set forth, the Underwriters
agree, severally and not jointly, to purchase the Firm Stock from the Company,
the number of shares of Firm Stock to be purchased by each Underwriter being set
opposite its name in Schedule A, subject to adjustment in accordance with
----------
Section 13 hereof.
The purchase price per share to be paid by the Underwriters to the Company
will be $_____ per share (the "Purchase Price").
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<PAGE>
The Company will deliver the Firm Stock to the Representatives for the
respective accounts of the several Underwriters (in the form of definitive
certificates, issued in such names and in such denominations as the
Representatives may direct by notice in writing to the Company given at or prior
to 12:00 Noon, Boston Time, on the second full business day preceding the First
Closing Date (as defined below) or, if no such direction is received, in the
names of the respective Underwriters or in such other names as Cowen may
designate (solely for the purpose of administrative convenience) and in such
denominations as Cowen may determine) against payment of the aggregate Purchase
Price therefor by certified or official bank check or checks in Clearing House
funds (next day funds), payable to the order of the Company, all at the offices
of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., One Financial Center,
Boston, MA 02111. The time and date of the delivery and closing shall be at
10:00 A.M., Boston Time, on August __, 1996, in accordance with Rule 15c6-1 of
the Exchange Act. The time and date of such payment and delivery are herein
referred to as the "First Closing Date." The First Closing Date and the
location of delivery of, and the form of payment for, the Firm Stock may be
varied by agreement between the Company and Cowen. The Closing Date may be
postponed pursuant to the provisions of Section 13 hereof.
The Company shall make the certificates for the Firm Stock available to the
Representatives for examination on behalf of the Underwriters not later than
10:00 A.M., Boston Time, on the business day preceding the First Closing Date at
the offices of Cowen & Company, Financial Square, New York, New York 10005.
It is understood that Cowen, UBS or Needham, individually and not as
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment to the Company on behalf of any Underwriter or Underwriters, for
the Stock to be purchased by such Underwriter or Underwriters. Any such payment
by Cowen, UBS or Needham shall not relieve such Underwriter or Underwriters from
any of its or their other obligations hereunder.
The several Underwriters agree to make a public offering of the Firm Stock
at the public offering price as soon after the effectiveness of the Registration
Statement as in their judgment is advisable. The Representatives shall promptly
advise the Company of the making of the public offering.
For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Stock as contemplated by the Prospectus, the
Company and the Selling Shareholders hereby grant to the Underwriters an option
to purchase, severally and not jointly, up to 375,000 additional shares of
Common Stock. The price per share to be paid for the Optional Stock shall be
the Purchase Price. The option granted hereby may be exercised as to all or any
part of the Optional Stock at any time, and from time to time not more than
thirty (30) days subsequent to the effective date of this Agreement. No
14
<PAGE>
Optional Stock shall be sold and delivered unless the Firm Stock previously has
been, or simultaneously is, sold and delivered. The right to purchase the
Optional Stock or any portion thereof may be surrendered and terminated at any
time upon notice by the Underwriters to the Company.
The option granted hereby may be exercised by the Underwriters by giving
written notice from Cowen to the Company and the Custodian setting forth the
number of shares of the Optional Stock to be purchased by them and the date and
time for delivery of and payment for the Optional Stock. Each date and time for
delivery of and payment for the Optional Stock (which may be the First Closing
Date, but not earlier) is herein called the "Option Closing Date" and shall in
no event be earlier than two (2) business days nor later than ten (10) business
days after written notice is given. (The Option Closing Date and the First
Closing Date are herein called the "Closing Dates".) All purchases of Optional
Stock from the Company and the Selling Shareholders shall be made on a pro rata
basis. The Optional Stock shall be purchased for the account of each
Underwriter in the same proportion as the number of shares of Firm Stock set
forth opposite such Underwriter's name in Schedule A hereto bears to the total
----------
number of shares of Firm Stock (subject to adjustment by the Underwriters to
eliminate odd lots). All sales of Optional Stock by the Company and the Selling
Shareholders shall be made on a pro rata basis. The Optional Stock shall be
sold by the Company and the Selling Shareholders in the same proportion as the
number of shares of Optional Stock set forth opposite their name in Schedule D
----------
hereto bears to the total number of shares of Optional Stock (subject to
adjustment to eliminate fractional shares). Upon exercise of the option by the
Underwriters, the Company and the Selling Shareholders agree to sell, severally
and not jointly, to the Underwriters the number of shares of Optional Stock
determined in the manner set forth in the immediately preceding sentence that,
in the aggregate, equal the number of shares of Optional Stock set forth in the
written notice of exercise and the Underwriters agree, severally and not jointly
and subject to the terms and conditions herein set forth, to purchase the number
of such shares determined as aforesaid.
The certificates in negotiable form for the Selling Shareholder Stock have
been placed in custody (for delivery under this Agreement) under the Custody
Agreement. Each Selling Shareholder agrees that the certificate representing
the Selling Shareholder Stock of such Selling Shareholder so held in custody is
subject to the interests of the Underwriters hereunder, that the arrangements
made by such Selling Shareholder for such custody, including the Power of
Attorney, is to that extent irrevocable and that the obligations of such Selling
Shareholder hereunder shall not be terminated by the act of such Selling
Shareholder or by operation of law, whether by the death or incapacity of such
Selling Shareholder or the occurrence of any other event, except as specifically
provided herein or in the Custody Agreement. If any Selling Shareholder should
die or be incapacitated, or if any other such event should occur, before the
delivery of the certificates for the Selling Shareholder Stock hereunder, the
Selling Shareholder Stock to be sold by such Selling Shareholder shall, except
as specifically provided herein or in the Custody Agreement, be delivered by the
15
<PAGE>
Custodian in accordance with the terms and conditions of this Agreement as if
such death, incapacity or other event had not occurred, regardless of whether
the Custodian shall have received notice of such death, incapacity or other
event.
The Company will deliver the Optional Stock to the Underwriters (in the
form of definitive certificates, issued in such names and in such denominations
as the Representatives may direct by notice in writing to the Company given at
or prior to 12:00 Noon, Boston Time, on the second full business day preceding
the Option Closing Date or, if no such direction is received, in the names of
the respective Underwriters or in such other names as Cowen may designate
(solely for the purpose of administrative convenience) and in such denominations
as Cowen may determine, against payment of the aggregate Purchase Price therefor
by certified or official bank check or checks in Clearing House funds (next day
funds), payable to the order of the Company with regard to the Optional Stock
being purchased from the Company, and to the order of the Custodian for the
respective accounts of the Selling Shareholders with regard to the Selling
Shareholder Shares being purchased from such Selling Shareholders, all at the
offices of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., One Financial
Center, Boston, Massachusetts 02111. The Company shall make the certificates
for the Optional Stock available to the Underwriters for examination not later
than 10:00 A.M., Boston Time, on the business day preceding the Option Closing
Date at the offices of Cowen & Company, Financial Square, New York, New York
10005. The Option Closing Date and the location of delivery of, and the form of
payment for, the Optional Stock may be varied by agreement between the Custodian
and Cowen. The Option Closing Date may be postponed pursuant to the provisions
of Section 13 hereof.
Upon exercise of any option provided for in Section 4 hereof, the
obligations of the Underwriters to purchase such Optional Stock will be subject
(as of the date hereof and as of the date of payment for such Optional Stock) to
the accuracy of any compliance with the representations and warranties of the
Company and the Selling Shareholders herein, to the accuracy of the statements
of the Company, the Selling Shareholders and officers of the Company made
pursuant to the provisions hereof, to the performance by the Company and the
Selling Shareholders of their respective obligations hereunder, and to the
condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Optional Stock shall be reasonably
satisfactory in form and substance to the Representatives, and the
Representatives shall have been furnished with all such documents, certificates
and opinions as the Representatives may reasonably request in order to evidence
the accuracy and completeness of any of the representations, warranties or
statements, the performance of any of the covenants of the Company and the
Selling Shareholders or the compliance with any of the conditions herein
contained.
5. Covenants and Agreements of the Company and the Selling Shareholders.
--------------------------------------------------------------------
(a) The Company covenants and agrees with the several Underwriters that:
16
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(i) The Company will (i) if the Company and the Representatives
have determined not to proceed pursuant to Rule 430A, use its best
efforts to cause the Registration Statement to become effective, (ii)
if the Company and the Representatives have determined to proceed
pursuant to Rule 430A, use its best efforts to comply with the
provisions of and make all requisite filings with the Commission
pursuant to Rule 430A and Rule 424 of the Rules and Regulations and
(iii) if the Company and the Representatives have determined to
deliver Prospectuses pursuant to Rule 434 of the Rules and
Regulations, to use its best efforts to comply with all the applicable
provisions thereof. The Company will advise the Representatives
promptly as to the time at which the Registration Statement becomes
effective, will advise the Representatives promptly of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the institution of any proceedings for
that purpose, and will use its best efforts to prevent the issuance of
any such stop order and to obtain as soon as possible the lifting
thereof, if issued. The Company will advise the Representatives
promptly of the receipt of any comments of the Commission or any
request by the Commission for any amendment of or supplement to the
Registration Statement or the Prospectus or for additional information
and will not at any time file any amendment to the Registration
Statement or supplement to the Prospectus which shall not previously
have been submitted to the Representatives a reasonable time prior to
the proposed filing thereof or to which the Representatives shall
reasonably object in writing or which is not in compliance with the
Securities Act and the Rules and Regulations.
(ii) The Company will prepare and file with the Commission,
promptly upon the request of the Representatives, any amendments or
supplements to the Registration Statement or the Prospectus which in
the opinion of the Representatives may be necessary to enable the
several Underwriters to continue the distribution of the Stock and
will use its best efforts to cause the same to become effective as
promptly as possible.
(iii) If at any time after the effective date of the Registration
Statement when a prospectus relating to the Stock is required to be
delivered under the Securities Act any event relating to or affecting
the Company or any of its subsidiaries occurs as a result of which the
Prospectus or any other prospectus as then in effect would include an
untrue statement of a material fact, or omit to state any material
fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the
Securities Act, the Company will promptly notify the Representatives
thereof and will prepare an amended or supplemented prospectus which
17
<PAGE>
will correct such statement or omission; and in case any Underwriter
is required to deliver a prospectus relating to the Stock nine (9)
months or more after the effective date of the Registration Statement,
the Company upon the request of the Representatives and at the expense
of such Underwriter will prepare promptly such prospectus or
prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Securities Act.
(iv) The Company will deliver to the Representatives, at or
before the Closing Dates, signed copies of the Registration Statement,
as originally filed with the Commission, and all amendments thereto
including all financial statements and exhibits thereto, and will
deliver to the Representatives such number of copies of the
Registration Statement, including such financial statements but
without exhibits, and all amendments thereto, as the Representatives
may reasonably request. The Company will deliver or mail to or upon
the order of the Representatives, from time to time until the
effective date of the Registration Statement, as many copies of the
Preeffective Prospectus as the Representatives may reasonably request.
The Company will deliver or mail to or upon the order of the
Representatives on the date of the public offering, and thereafter
from time to time during the period when delivery of a prospectus
relating to the Stock is required under the Securities Act, as many
copies of the Prospectus, in final form or as thereafter amended or
supplemented as the Representatives may reasonably request; provided,
however, that the expense of the preparation and delivery of any
prospectus required for use nine (9) months or more after the
effective date of the Registration Statement shall be borne by the
Underwriters required to deliver such prospectus.
(v) The Company will make generally available to its stockholders
as soon as practicable, but not later than fifteen (15) months after
the effective date of the Registration Statement, an earnings
statement which will be in reasonable detail (but which need not be
audited) and which will comply with Section 11(a) of the Securities
Act, covering a period of at least twelve (12) months beginning after
the "effective date" (as defined in Rule 158 under the Securities
Act).
(vi) The Company will cooperate with the Representatives to
enable the Stock to be registered or qualified for offering and sale
by the Underwriters and by dealers under the securities laws of such
jurisdictions as the Representatives may designate and at the request
of the Representatives will make such applications and furnish such
consents to service of process or other documents as may be required
of it as the issuer of the Stock for that purpose; provided, however,
that the Company shall not be required to qualify to do business or to
18
<PAGE>
file a general consent (other than that arising out of the offering or
sale of the Stock) to service of process in any such jurisdiction
where it is not now so subject. The Company will, from time to time,
prepare and file such statements and reports as are or may be required
of it as the issuer of the Stock to continue such qualifications in
effect for so long a period as the Representatives may reasonably
request for the distribution of the Stock. The Company will advise
the Representatives promptly after the Company becomes aware of the
suspension of the qualifications or registration of (or any such
exception relating to) the Common Stock of the Company for offering,
sale or trading in any jurisdiction or of any initiation or threat of
any proceeding for any such purpose, and in the event of the issuance
of any orders suspending such qualifications, registration or
exception, the Company will, with the cooperation of the
Representatives, use its best efforts to obtain the withdrawal
thereof.
(vii) The Company will furnish to its stockholders annual reports
containing financial statements certified by independent public
accountants and with quarterly summary financial information in
reasonable detail which may be unaudited. During the period of five
(5) years from the date hereof, the Company will deliver to the
Representatives and, upon request, to each of the other Underwriters,
as soon as they are available, copies of each annual report and any
proxy statement of the Company furnished by the Company to its
stockholders and will deliver to the Representatives, (i) as soon as
they are available, copies of any other reports (financial or other)
which the Company shall publish or otherwise make available to any of
its stockholders as such, (ii) as soon as they are available, copies
of any reports and financial statements of the Company furnished to or
filed with the Commission or the NASD or any securities exchange and
(iii) from time to time such other information concerning the Company
as you may request. So long as the Company has active subsidiaries,
such financial statements will be on a consolidated basis to the
extent the accounts of the Company and its subsidiaries are
consolidated in reports furnished to its stockholders generally.
Separate financial statements shall be furnished for all subsidiaries
whose accounts are not consolidated but which at the time are
significant subsidiaries as defined in the Rules and Regulations.
(viii) The Company will give notice of issuance to the Nasdaq
National Market of the Stock to be issued and sold by the Company.
(ix) The Company will maintain a transfer agent and registrar for
its Common Stock.
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<PAGE>
(x) For a period of 24 months after the date of this Agreement,
prior to filing its quarterly reports on Form 10-Q, the Company will
provide copies of such reports to its independent auditors and will
not file such reports until it has received comments thereon from its
independent auditors.
(xi) The Company will not offer, sell, assign, transfer, encumber,
contract to sell, grant an option to purchase or otherwise dispose of
any shares of Common Stock or securities convertible into or
exercisable or exchangeable for Common Stock during the ninety (90)
days following the effective date of the Registration Statement, other
than (i) the Company's sale of Common Stock hereunder, (ii) the
Company's issuance of Common Stock upon the exercise of warrants and
stock options which are or will be outstanding as of the Closing Dates
and described in the Prospectus, (iii) the Company's issuance of
awards under its Amended and Restated 1995 Long-Term Incentive Plan,
as amended, and (iv) the Company's issuance of options under its Stock
Option Plan for Non-Employee Directors.
(xii) The Company will apply the net proceeds from the sale of
the Stock as set forth in the description under "Use of Proceeds" in
the Prospectus, which description complies in all respects with the
requirements of Item 504 of Regulation S-K.
(xiii) The Company will supply you with copies of all
correspondence to and from, and all documents issued to and by, the
Commission in connection with the registration of the Stock under the
Securities Act, and by Nasdaq, in connection with the listing of the
Stock on the Nasdaq Stock Market, National Market System.
(xiv) Prior to the Closing Dates the Company will furnish to you,
as soon as they have been prepared, copies of any unaudited interim
consolidated financial statements of the Company and its subsidiaries
for any periods subsequent to the periods covered by the financial
statements appearing in the Registration Statement and the Prospectus.
(xv) Prior to the Closing Dates the Company will issue no press
release or other communications directly or indirectly and hold no
press conference with respect to the Company or any of its
subsidiaries, the financial condition, results of operation, business,
prospects, assets or liabilities of the Company or any of its
subsidiaries, or the offering of the Stock, without your prior written
consent.
20
<PAGE>
(b) Each of the Selling Shareholders covenants and agrees with the several
Underwriters that:
(i) It will not offer, sell, contract to sell, grant any option to
purchase or acquire any right to dispose or otherwise dispose for
value, any shares of Common Stock of the Company or any securities
convertible into, or exchangeable for, or warrants to purchase, any
shares of Company Common Stock (including, without limitation, Common
Stock which may be deemed to be beneficially owned by such Selling
Shareholder in accordance with the Rules and Regulations) or request
for the registration of the offer or sale of any of the foregoing for
a period of ninety (90) days after the date hereof otherwise than
hereunder or with the prior written consent of Cowen, other than
pursuant to bona fide gifts to persons who agree in writing to be
bound by the same restrictions and other than securities acquired by
such Selling Shareholder in the public markets.
(ii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 and the Interest and Dividend Tax
Compliance Act of 1983 with respect to the transactions herein
contemplated, each of the Selling Shareholders agrees to deliver to
the Representatives prior to or at the Option Closing Date a properly
completed and executed United States Treasury Department Form W-9 (or
other applicable form or statement specified by Treasury Department
regulations in lieu thereof).
(iii) Such Selling Shareholder will not take, directly or
indirectly, any action designed to cause or result in, or that has
constituted or might reasonably be expected to constitute, the
stabilization or manipulation of the price of any securities of the
Company.
6. Payment of Expenses. The Company will pay (directly or by
-------------------
reimbursement) all costs, fees and expenses incurred in connection with and
expenses incident to the performance of the obligations of the Company and the
Selling Shareholders under this Agreement and in connection with the
transactions contemplated hereby, including but not limited to (i) all expenses
and taxes incident to the issuance and delivery of the Stock to the
Representatives; (ii) all expenses incident to the registration of the Stock
under the Securities Act; (iii) the costs of preparing stock certificates
(including printing and engraving costs); (iv) all fees and expenses of the
registrar and transfer agent of the Stock; (v) all necessary issue, transfer and
other stamp taxes in connection with the issuance and sale of the Stock to the
Underwriters; (vi) fees and expenses of the Company's counsel and the Company's
independent accountants; (vii) all costs and expenses incurred in connection
with the preparation, printing, filing, shipping and distribution of the
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Registration Statement, each Preeffective Prospectus and the Prospectus
(including all exhibits and financial statements) and all amendments and
supplements provided for herein; (viii) all costs and expenses incurred in
connection with the copying, shipping and distribution of the "Agreement Among
Underwriters" between the Representatives and the Underwriters, the Master
Selected Dealers' Agreement, the Underwriters' Questionnaire, the Blue Sky
memoranda and this Agreement; (ix) all filing fees, attorneys' fees and expenses
incurred by the Company or the Underwriters in connection with exemptions from
the qualifying or registering (or obtaining qualification or registration of)
all or any part of the Stock for offer and sale and determination of its
eligibility for investment under the Blue Sky or other securities laws of such
jurisdictions as the Representatives may designate; (xi) all fees and expenses
paid or incurred in connection with filings made with the NASD; and (xii) all
other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section.
Except as provided in this Section 6, Section 7 and Section 12, the Underwriters
will pay all of their own costs and expenses, including the fees of their
counsel, stock transfer taxes on the resale of the Stock by them and advertising
expenses connected with any offers that they may make. To the extent, if at all,
that any of the Selling Shareholders engage special legal counsel to represent
them in connection with this offering, the fees and expenses of such counsel
shall be borne by such Selling Shareholder. Any transfer taxes imposed on the
sale of the Stock to the several Underwriters will be borne by the Company and
the Selling Shareholders pro rata. The provisions of this Section 6 are intended
to relieve the Underwriters from the payment of the expenses and costs which the
Selling Shareholders and the Company hereby agree to pay, but shall not affect
any agreement which the Selling Shareholders and the Company may make, or may
have made, for the sharing of any of such expenses and costs. Such agreements
shall not impair the obligations of the Company and the Selling Shareholders
hereunder to the several Underwriters.
7. Indemnification and Contribution. (a) The Company agrees to indemnify
--------------------------------
and hold harmless each Underwriter and each person, if any, who controls such
Underwriter within the meaning of the Securities Act and the respective
officers, directors, partners, employees, representatives and agents of each
such Underwriter (collectively, the "Underwriter Indemnified Parties" and, each,
an "Underwriter Indemnified Party"), against any losses, claims, damages,
liabilities or expenses (including the reasonable cost of investigating and
defending against any claims therefor and counsel fees incurred in connection
therewith), joint or several, which may be based upon the Securities Act, or any
other statute or at common law, on the ground or alleged ground that any
Preeffective Prospectus, the Registration Statement or the Prospectus (or any
Preeffective Prospectus, the Registration Statement or the Prospectus as from
time to time amended or supplemented) includes or allegedly includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, unless such
statement or omission was made in reliance upon, and in conformity with: (i)
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written information furnished to the Company by any Underwriter, directly or
through the Representatives, specifically for use in the preparation thereof or
(ii) written information related to any Selling Shareholder furnished to the
Company by or on behalf of such Selling Shareholder, specifically for use in the
preparation thereof. The Company will be entitled to participate at its own
expense in the defense or, if it so elects, to assume the defense of any suit
brought to enforce any such liability, but if the Company elects to assume the
defense, such defense shall be conducted by counsel chosen by it. In the event
the Company elects to assume the defense of any such suit and retain such
counsel, any of the Underwriter Indemnified Parties, defendant or defendants in
the suit, may retain additional counsel but shall bear the fees and expenses of
such counsel unless (i) the Company shall have specifically authorized the
retaining of such counsel or (ii) the parties to such suit include any such
Underwriter Indemnified Parties, and the Company and such Underwriter
Indemnified Parties at law or in equity have been advised by counsel to the
Underwriters that one or more legal defenses may be available to it or them
which may not be available to the Company, in which case the Company shall not
be entitled to assume the defense of such suit notwithstanding its obligation to
bear the fees and expenses of such counsel. It is agreed, however, that the
Company shall not, in connection with any suit or proceeding in the same
jurisdiction, be liable for the fees and expenses of more than one separate firm
(except for the fees and expenses of any firm with overall management
responsibility for such suit or proceeding). The Company shall not be liable
for the settlement of any proceeding effected without its written consent but if
settled with such consent or if there be a final judgement for the plaintiff,
the Company shall indemnify the Underwriter Indemnified Parties from and against
any loss or liability by reason of such settlement or judgement. This indemnity
agreement is not exclusive and will be in addition to any liability which the
Company might otherwise have and shall not limit any rights or remedies which
may otherwise be available at law or in equity to each Underwriter Indemnified
Party.
(b) Each Selling Shareholder, severally and not jointly, agrees to
indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed the Registration Statement, each person, if any, who
controls the Company within the meaning of the Securities Act and each Selling
Shareholder (collectively, the "Company Indemnified Parties") and each
Underwriter Indemnified Party against any losses, claims, damages, liabilities
or expenses (including the reasonable cost of investigating and defending
against any claims therefor and counsel fees incurred in connection therewith)
which may be based upon the Securities Act, or any other statute or at common
law, on the ground or alleged ground that any Preeffective Prospectus, the
Registration Statement or the Prospectus (or any Preeffective Prospectus, the
Registration Statement or the Prospectus as from time to time amended or
supplemented) includes or allegedly includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, but only to the extent such
statement or omission was made in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of such Selling
Shareholder, specifically for use in the preparation thereof. In no event,
however, shall the liability of any Selling Shareholder for indemnification
under this Section 7(b) exceed the proceeds received by such Selling Shareholder
23
<PAGE>
from the Underwriters in the offering. Any such Selling Shareholder will be
entitled to participate at its own expense in the defense. It is agreed,
however, that the Selling Shareholder shall not, in connection with any suit or
proceeding in the same jurisdiction, be liable for the fees and expenses of more
than one separate firm for the Company and the Underwriters (except for the fees
and expenses of any firm with overall management responsibility for such suit or
proceeding). Except as otherwise indicated herein, the Selling Shareholder shall
not be liable for the settlement of any proceeding effected without its written
consent but if settled with such consent or if there be a final judgement for
the plaintiff, the Selling Shareholder shall indemnify the Underwriter
Indemnified Parties from and against any loss or liability by reason of such
settlement or judgement. If at any time an Underwriter Indemnified Party or
Company Indemnified Party shall have requested a Selling Shareholder to
reimburse such Underwriter Indemnified Party or Company Indemnified Party for
fees and expenses of counsel, such Selling Shareholder agrees that it shall be
liable for any settlement of the nature contemplated by this Section 7 effected
without its written consent if: (i) such settlement is entered into more than
forty-five (45) days after receipt by such Selling Shareholder of the aforesaid
request, (ii) such Selling Shareholder shall have received notice of the terms
of such settlement at least thirty (30) days prior to such settlement being
entered into and (iii) such Selling Shareholder shall not have reimbursed such
Underwriter Indemnified Party or Company Indemnified Party in accordance with
such request prior to the date of such settlement. This indemnity agreement is
not exclusive and will be in addition to any liability which a Selling
Shareholder might otherwise have and shall not limit any rights or remedies
which may otherwise be available at law or in equity to each Underwriter
Indemnified Party.
(c) Each Underwriter severally agrees to indemnify and hold harmless the
Company Indemnifed Parties against any losses, claims, damages, liabilities
or expenses (including, unless the Underwriter or Underwriters elect to assume
the defense, the reasonable cost of investigating and defending against any
claims therefor and counsel fees incurred in connection therewith), joint or
several, which arise out of or are based in whole or in part upon the Securities
Act, the Exchange Act or any other federal, state, local or foreign statute or
regulation, or at common law, on the ground or alleged ground that any
Preeffective Prospectus, the Registration Statement or the Prospectus (or any
Preeffective Prospectus, the Registration Statement or the Prospectus, as from
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<PAGE>
time to time amended and supplemented) includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
in which they were made, not misleading, but only insofar as any such statement
or omission was made in reliance upon, and in conformity with, written
information relating to such Underwriter furnished to the Company or such
Selling Shareholder by such Underwriter, directly or through the
Representatives, specifically for use in the preparation thereof; provided,
however, that in no case is such Underwriter to be liable with respect to any
claims made against any Company Indemnified Party against whom the action is
brought unless such Company Indemnified Party shall have notified such
Underwriter in writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have been
served upon the Company Indemnified Party, but failure to notify such
Underwriter of such claim shall not relieve it from any liability which it may
have to any Company Indemnified Party otherwise than on account of its indemnity
agreement contained in this paragraph. Such Underwriter shall be entitled to
participate at its own expense in the defense, or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but, if such
Underwriter elects to assume the defense, such defense shall be conducted by
counsel chosen by it. In the event that any Underwriter elects to assume the
defense of any such suit and retain such counsel, the Company Indemnified
Parties and any other Underwriter or Underwriters or controlling person or
persons, defendant or defendants in the suit, shall bear the fees and expenses
of any additional counsel retained by them, respectively. The Underwriter
against whom indemnity may be sought shall not be liable to indemnify any person
for any settlement of any such claim effected without such Underwriter's
consent. This indemnity agreement is not exclusive and will be in addition to
any liability which such Underwriter might otherwise have and shall not limit
any rights or remedies which may otherwise be available at law or in equity to
any Company Indemnified Party.
(d) If the indemnification provided for in this Section 7 is unavailable or
insufficient to hold harmless an indemnified party under subsection (a), (b) or
(c) above in respect of any losses, claims, damages, liabilities or expenses (or
actions in respect thereof) referred to herein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Shareholders on the one hand
and the Underwriters on the other from the offering of the Stock. If, however,
the allocation provided by the immediately preceding sentence is not permitted
by applicable law, then each indemnifying party shall contribute to such amount
paid or payable by such indemnified party in such proportion as is appropriate
to reflect not only such relative benefits but also the relative fault of the
Company and the Selling Shareholders on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Shareholders on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company and the Selling Shareholders bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company, the
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<PAGE>
Selling Shareholders or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, the Selling Shareholders and the
Underwriters agree that it would not be just and equitable if contribution were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above. The amount paid
or payable by an indemnified party as a result of the losses, claims, damages,
liabilities or expenses (or actions in respect thereof) referred to above shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating, defending, settling or
compromising any such claim. Notwithstanding the provisions of this subsection
(c), no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the shares of the Stock underwritten by
it and distributed to the public were offered to the public exceeds the amount
of any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. The Underwriters' obligations to contribute are several in proportion
to their respective underwriting obligations and not joint. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
8. Survival of Indemnities, Representations, Warranties, etc. The
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respective indemnities, covenants, agreements, representations, warranties and
other statements of the Company, the Selling Shareholders and the several
Underwriters, as set forth in this Agreement or made by them respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless of
any investigation made by or on behalf of any Underwriter, any Selling
Shareholder, the Company or any of its officers or directors or any controlling
person, and shall survive delivery of and payment for the Stock.
9. Conditions of Underwriters' Obligations. The respective obligations of
---------------------------------------
the several Underwriters hereunder shall be subject to the accuracy, at and
(except as otherwise stated herein) as of the date hereof and at and as of the
Closing Dates, of the representations and warranties made herein by the Company
and the Selling Shareholders, to compliance at and as of the Closing Dates by
the Company and the Selling Shareholders with their covenants and agreements
herein contained and other provisions hereof to be satisfied at or prior to the
Closing Dates, and to the following additional conditions:
(a) The Registration Statement shall have become effective and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge
of the Company, the Selling Shareholders or the Representatives, shall be
threatened by the Commission, and any request for additional information on
the part of the Commission (to be included in the Registration Statement or
26
<PAGE>
the Prospectus or otherwise) shall have been complied with to the
reasonable satisfaction of the Representatives. Any filings of the
Prospectus, or any supplement thereto, required pursuant to Rule 424(b) or
Rule 434 of the Rules and Regulations, shall have been made in the manner
and within the time periods required by Rule 424 (b) and Rule 434 of the
Rules and Regulations, as the case may be.
(b) The Representatives shall have been satisfied that there shall not have
occurred any change, on a consolidated basis, prior to the Closing Dates in
the condition (financial or otherwise), properties, business, management,
prospects, net worth or results of operations of the Company and its
subsidiaries considered as a whole, or any change in the capital stock,
short-term or long-term debt of the Company and its subsidiaries considered
as a whole (other than changes contemplated by the Prospectus), such that
(i) the Registration Statement or the Prospectus, or any amendment or
supplement thereto, contains an untrue statement of fact which, in the
opinion of the Representatives, is material, or omits to state a fact
which, in the opinion of the Representatives, is required to be stated
therein or is necessary to make the statements therein not misleading, or
(ii) it is unpracticable in the reasonable judgment of the Representatives
to proceed with the public offering or purchase the Stock as contemplated
hereby.
(c) The Representatives shall be satisfied that no legal or governmental
action, suit or proceeding affecting the Company or any of its subsidiaries
which is material and adverse to the Company or which affects or may affect
the Company's ability to perform its obligations under this Agreement shall
have been instituted or threatened, and there shall have occurred no
material adverse development in any existing such action, suit or
proceeding.
(d) At the time of execution of this Agreement, the Representatives shall
have received from each of Coopers & Lybrand L.L.P and Ernst & Young LLP,
independent certified public accountants, a letter, dated the date hereof,
in form and substance satisfactory to the Underwriters.
(e) The Representatives shall have received from Coopers & Lybrand LLP,
letters, dated each of the Closing Dates, to the effect that such
accountants reaffirm, as of the Closing Dates, and as though made on the
Closing Dates, the statements made in the letter furnished by such
accountants pursuant to paragraph (d) of this Section 9.
(f) The Representatives shall have received from Vinson & Elkins L.L.P.,
counsel for the Company, opinions dated as of each of the Closing Dates, to
the effect set forth in Exhibit I hereto.
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(g) The Representatives shall have received from Darby & Darby, patent
counsel for the Company, opinions dated as of each of the Closing Dates, to
the effect set forth in Exhibit II hereto.
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(h) The Representatives shall have received from counsel for the Selling
Shareholders (which counsel shall be reasonably satisfactory to the
Representatives), opinions dated as of the Option Closing Date, to the
effect set forth in Exhibit III hereto.
-----------
(i) The Representatives shall have received from Mintz, Levin, Cohn,
Ferris, Glovsky and Popeo, P.C., counsel for the Underwriters, opinions
dated as of each of the Closing Dates, with respect to the incorporation of
the Company, the validity of the Stock, the Registration Statement and the
Prospectus and such other related matters as it may reasonably request, and
the Company shall have furnished to such counsel such documents as they may
request for the purpose of enabling them to pass upon such matters.
(j) The Representatives shall have received a certificate, dated each of
the Closing Dates, of the chairman of the board and the chief financial or
accounting officer of the Company, in their capacities as officers of the
Company and not in their individual capacities, to the effect that:
(i) No stop order suspending the effectiveness of the Registration
Statement has been issued, and, to the best of the knowledge of the
signers, no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act;
(ii) Neither any Preeffective Prospectus, as of its date, nor the
Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, as of the time when the Registration Statement
became effective and at all times subsequent thereto up to the
delivery of such certificate, included any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading;
(iii) The representations and warranties of the Company and the
Selling Shareholders in this Agreement are true and correct at and as
of the Closing Dates, and the Company and the Selling Shareholders
have complied with all the agreements and performed or satisfied all
the conditions on its part to be performed or satisfied at or prior to
such Closing Date; and
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(iv) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, and except as
disclosed in or contemplated by the Prospectus, (A) there has not been
any material adverse change or a development involving a material
adverse change in the condition (financial or otherwise), properties,
business, management, prospects, net worth or results of operations of
the Company and its subsidiaries considered as a whole; (B) the
business and operations conducted by the Company and its subsidiaries
have not sustained a loss by strike, fire, flood, accident or other
calamity (whether or not insured) of such a character as to interfere
materially with the conduct of the business and operations of the
Company and its subsidiaries considered as a whole; (C) no legal or
governmental action, suit or proceeding is pending or threatened
against the Company which is material to the Company, whether or not
arising from transactions in the ordinary course of business, or which
may materially and adversely affect the transactions contemplated by
this Agreement; (D) since such dates and except as so disclosed,
neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, direct, indirect or contingent,
entered into any material transaction not in the ordinary course, made
any change in its capital stock (except pursuant to its stock plans),
made any material change in its short-term or funded debt or
repurchased or otherwise acquired any of its capital stock; and (E)
the Company has not declared or paid any dividend, or made any other
distribution, upon its outstanding capital stock payable to
stockholders of record on a date prior to such Closing Date.
(k) The Company and the Selling Shareholders shall have furnished to the
Representatives such additional certificates as the Representatives may
have reasonably requested, including, without limitation, certificates as
to the accuracy, at and as of the Closing Dates, of the representations and
warranties made herein by them, severally and not jointly, and as to
compliance at and as of the Closing Dates by the Company and the Selling
Shareholders with their respective covenants and agreements herein
contained and other provisions hereof to be satisfied at or prior to the
Closing Dates, and as to satisfaction of the other conditions to the
obligations of the Underwriters hereunder.
(l) Cowen shall have received the written agreements of the officers,
directors and holders of Common Stock listed in Schedule C that each will
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not offer, sell, contract to sell, grant any option to purchase or acquire
any right to dispose or otherwise dispose for value, any shares of Common
Stock of the Company or any securities convertible into, or exchangeable
for, or warrants to purchase, any shares of Company Common Stock
(including, without limitation, Common Stock which may be deemed to be
beneficially owned by such holder in accordance with the Rules and
Regulations) or request for the registration of the offer or sale of any of
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the foregoing for a period of ninety (90) days after the date hereof
otherwise than hereunder or with the prior written consent of Cowen, other
than pursuant to bona fide gifts to persons who agree in writing to be
bound by the same restrictions and other than securities acquired by such
holder in the public markets.
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(m) The Representatives shall have received a certificate, dated the Option
Closing Date, from the Attorneys for each Selling Shareholder to the effect
that, as of the Option Closing Date, they have not been informed that:
(i) The representations and warranties made by such Selling
Shareholder herein are not true or correct in any material respect on
the Option Closing Date; or
(ii) Such Selling Shareholder has not complied with any obligation or
satisfied any condition which is required to be performed or satisfied
on his, her or its part at or prior to the Option Closing Date.
All opinions, certificates, letters and other documents will be in
compliance with the provisions hereunder only if they are satisfactory in
form and substance to the Representatives. The Company will furnish to the
Representatives conformed copies of such opinions, certificates, letters
and other documents as the Representatives shall reasonably request. If
any of the conditions hereinabove provided for in this Section shall not
have been satisfied when and as required by this Agreement, this Agreement
may be terminated by the Representatives by notifying the Company of such
termination in writing or by telegram at or prior to the Closing Dates, but
Cowen shall be entitled to waive any of such conditions.
10. Effective Date. This Agreement shall become effective immediately as
--------------
to Sections 6, 7, 8, 10, 11, 12, 14, 15, 16, 17 and 18 hereof and, as to all
other provisions, at 11:00 am. Boston Time on the first full business day
following the effectiveness of the Registration Statement or at such earlier
time after the Registration Statement becomes effective as the Representatives
may determine on and by notice to the Company or by release of any of the Stock
for sale to the public. For the purposes of this Section 10, the Stock shall be
deemed to have been so released upon the release for publication of any
newspaper advertisement relating to the Stock or upon the release by you of
telegrams (i) advising Underwriters that the shares of Stock are released for
public offering or (ii) offering the Stock for sale to securities dealers,
whichever may occur first.
11. Termination. This Agreement (except for the provisions of Section 6
-----------
hereof) may be terminated by the Company at any time before it becomes effective
in accordance with Section 10 hereof by notice to the Representatives and may be
terminated by the
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Representatives at any time before it becomes effective in accordance with
Section 10 hereof by notice to the Company. In the event of any termination of
this Agreement under this or any other provision of this Agreement, there shall
be no liability of any party to this Agreement to any other party, other than as
provided in Sections 6, 7 and 12 hereof and other than as provided in Section 13
hereof as to the liability of defaulting Underwriters.
This Agreement may be terminated after it becomes effective by the
Representatives by notice to the Company (i) if at or prior to the First Closing
Date or Option Closing Date trading in securities on Nasdaq National Market
System shall have been suspended or minimum or maximum prices shall have been
established on any such exchange or market, or a banking moratorium shall have
been declared by New York or United States authorities; (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market; (iii) if at or prior to the First Closing Date or
Option Closing Date there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power or of any other
insurrection or armed conflict involving the United States or (B) any change in
financial markets or any calamity or crisis which, in the judgment of the
Representatives, makes it impractical or inadvisable to offer or sell the Firm
Stock or Optional Stock, as applicable, on the terms contemplated by the
Prospectus; (iv) if there shall have been any development or prospective
development involving particularly the business or properties or securities of
the Company or any of its subsidiaries or the transactions contemplated by this
Agreement, which, in the judgment of the Representatives, makes it impracticable
or inadvisable to offer or deliver the Firm Stock or the Optional Stock, as
applicable, on the terms contemplated by the Prospectus; (v) if there shall be
any litigation or proceeding, pending or threatened, which, in the judgment of
the Representatives, makes it impracticable or inadvisable to offer or deliver
the Firm Stock or Optional Stock, as applicable, on the terms contemplated by
the Prospectus; or (vi) if there shall have occurred any of the events specified
in the immediately preceding clauses (i) - (v) together with any other such
event that makes it, in the judgment of the Representatives, impractical or
inadvisable to offer or deliver the Firm Stock or Optional Stock, as applicable,
on the terms contemplated by the Prospectus.
12. Reimbursement of Underwriters. Notwithstanding any other provisions
-----------------------------
hereof, if this Agreement shall not become effective by reason of any election
of the Company pursuant to the first paragraph of Section 11 hereof or shall be
terminated by the Representatives under Section 9 or the second paragraph of
Section 11 hereof, the Company will bear and pay the expenses specified in
Section 6 hereof and, in addition to its obligations pursuant to Section 7
hereof, the Company will reimburse the reasonable out-of-pocket expenses of the
several Underwriters (including reasonable fees and disbursements of counsel for
the Underwriters) incurred in connection with this Agreement and the proposed
purchase of the Stock, and promptly upon demand the Company will pay such
amounts to you as Representatives.
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13. Substitution of Underwriters. If any Underwriter or Underwriters
----------------------------
shall default in its or their obligations to purchase shares of Stock hereunder
and the aggregate number of shares which such defaulting Underwriter or
Underwriters agreed but failed to purchase does not exceed ten percent (10%) of
the total number of shares underwritten, the other Underwriters shall be
obligated severally, in proportion to their respective commitments hereunder, to
purchase the shares which such defaulting Underwriter or Underwriters agreed but
failed to purchase. If any Underwriter or Underwriters shall so default and the
aggregate number of shares with respect to which such default or defaults occur
is more than ten percent (10%) of the total number of shares underwritten and
arrangements satisfactory to the Representatives and the Company for the
purchase of such shares by other persons are not made within forty-eight (48)
hours after such default, this Agreement shall terminate.
If the remaining Underwriters or substituted Underwriters are required
hereby or agree to take up all or part of the shares of Stock of a defaulting
Underwriter or Underwriters as provided in this Section 13, (i) the Company
shall have the right to postpone the Closing Dates for a period of not more than
five (5) full business days in order that the Company may effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees
promptly to file any amendments to the Registration Statement or supplements to
the Prospectus which may thereby be made necessary, and (ii) the respective
numbers of shares to be purchased by the remaining Underwriters or substituted
Underwriters shall be taken as the basis of their underwriting obligation for
all purposes of this Agreement. Nothing herein contained shall relieve any
defaulting Underwriter of its liability to the Company or the other Underwriters
for damages occasioned by its default hereunder. Any termination of this
Agreement pursuant to this Section 13 shall be without liability on the part of
any non-defaulting Underwriter or the Company, except for expenses to be paid or
reimbursed pursuant to Section 6 hereof and except for the provisions of Section
7 hereof.
14. Notices. All communications hereunder shall be in writing and, if
-------
sent to the Underwriters shall be mailed, delivered, telecopied or telegraphed
and confirmed to you, as their Representatives c/o Cowen & Company at Financial
Square, New York, New York 10005 except that notices given to an Underwriter
pursuant to Section 7 hereof shall be sent to such Underwriter at the address
furnished by the Representatives or, if sent to the Company, shall be mailed,
delivered, telecopied or telegraphed and confirmed c/o Chief Executive Officer,
Ergo Science Corporation, Charlestown Navy Yard, Fourth Floor, 100 First Avenue,
Charlestown, Massachusetts 02129, or such other address of which the Company may
provide notice to the Underwriters in accordance with the terms hereof or, if
sent to one or more Selling Shareholders, such notice shall be mailed,
delivered, telecopied or telegraphed and confirmed to Ergo Science Corporation,
Charlestown Navy Yard, Fourth Floor, 100 First Avenue Charlestown, Massachusetts
02129, Attention: J. Warren Huff or Alan T. Barber, as Attorneys for the Selling
Shareholders.
33
<PAGE>
15. Successors. This Agreement shall inure to the benefit of and be
----------
binding upon the several Underwriters, the Company, each Selling Shareholder and
their respective successors and legal representatives. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any person
other than the persons mentioned in the preceding sentence any legal or
equitable right, remedy or claim under or in respect of this Agreement, or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of such
persons and for the benefit of no other person; except that the representations,
warranties, covenants, agreements and indemnities of the Company and the Selling
Shareholders contained in this Agreement shall also be for the benefit of the
person or persons, if any, who control any Underwriter or Underwriters within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act and the respective officers, directors, partners, employees, representatives
and agents of each such Underwriter, and the indemnities of the several
Underwriters shall also be for the benefit of each director of the Company, each
of its officers who has signed the Registration Statement, the person or
persons, if any, who control the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act and each Selling Shareholder.
16. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of New York.
17. Authority of the Representatives. In connection with this Agreement,
--------------------------------
you will act for and on behalf of the several Underwriters, and any action taken
under this Agreement by Cowen, as Representative, will be binding on all the
Underwriters.
18. Partial Unenforceability. The invalidity or unenforceability of any
------------------------
Section, paragraph or provision of this Agreement shall not affect the validity
or enforceability of any other Section, paragraph or provision hereof. If any
Section, paragraph or provision of this Agreement is for any reason determined
to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make it valid and
enforceable.
19. General. This Agreement constitutes the entire agreement of the
-------
parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company, the Attorneys and the Representatives.
34
<PAGE>
20. Counterparts. This Agreement may be signed in two (2) or more
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY BLANK]
35
<PAGE>
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter and your acceptance shall constitute a binding agreement between us.
Very truly yours,
ERGO SCIENCE CORPORATION
By: ____________________________________
Manuel Cincotta, Jr.
Chairman of the Board
SELLING SHAREHOLDERS
By: ___________________________________
Name:___________________________
Attorney-in-Fact for the
Selling Shareholders named in
Schedule B hereto
Accepted and delivered
as of the date first above written.
Cowen & Company
UBS Securities LLC
Needham & Company, Inc.
Acting on their own behalf
and as Representatives of the several
Underwriters referred to in the
foregoing Agreement.
By: Cowen & Company
By: Cowen Incorporated,
its general partner
By: ___________________________________
Name:_______________________________
Title:______________________________
36
<PAGE>
SCHEDULE A
LIST OF THE SEVERAL UNDERWRITERS
<TABLE>
<CAPTION>
Number of Number of
Shares of Shares of
Firm Stock Optional Stock
to be to be
Name Purchased Purchased
---- --------- ---------
<S> <C> <C>
Cowen & Company
UBS Securities LLC
Needham & Company, Inc.
Total
========= =========
</TABLE>
37
<PAGE>
SCHEDULE B
LIST OF SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
Selling Shareholder Number of Shares of
- ------------------- Selling Shareholder
Stock to be Sold
----------------
<S> <C>
__________
Total
==========
</TABLE>
38
<PAGE>
SCHEDULE C
LOCK-UP AGREEMENTS
Officers, Directors and securityholders of Ergo Science Corporation who
have signed Lock-up Agreements:
39
<PAGE>
SCHEDULE D
OPTIONAL STOCK
<TABLE>
<CAPTION>
Name Number of Shares of
- ---- Optional Stock
to be Sold
----------
<S> <C>
_________
Total
=========
</TABLE>
40
<PAGE>
EXHIBIT I
OPINION OF VINSON & ELKINS, L.L.P.
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware with
corporate power and authority to own or lease its properties and conduct its
business as described in the Prospectus; each of the Company's subsidiaries
(collectively, the "Subsidiaries") has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation, with corporate power and authority to own or lease its
properties and conduct its business as described in the Prospectus; the Company
and each of the Subsidiaries are duly qualified to transact business in all
jurisdictions in which the conduct of their business requires such
qualification, or in which the failure to qualify would have a materially
adverse effect upon the business of the Company and the Subsidiaries taken as a
whole; and the outstanding shares of capital stock of each of the Subsidiaries
have been duly authorized and validly issued and are fully paid and non-
assessable and are owned of record by the Company or a Subsidiary; and to such
counsel's knowledge, the outstanding shares of capital stock of each of the
Subsidiaries is owned free and clear of all liens, encumbrances and security
interests, and to such counsel's knowledge, no options, warrants or other rights
to purchase, agreements or other obligations to issue or other rights to convert
any obligations into any shares of capital stock or of ownership interests in
the Subsidiaries are outstanding.
(ii) The Company has authorized and outstanding capital stock as set forth
under the caption "Capitalization" in the Prospectus; the authorized shares of
its Common Stock have been duly authorized; the outstanding shares of its Common
Stock have been duly authorized and validly issued and are fully paid and non-
assessable; all of the Stock conforms in all material respects to the
description thereof contained in the Prospectus; the certificates for the Stock,
assuming they are in the form filed with the Commission, are in due and proper
form; the shares of Common Stock, including the Optional Stock, if any, to be
sold by the Company pursuant to the Underwriting Agreement have been duly
authorized and will be validly issued, fully paid and non-assessable when issued
and paid for as contemplated by the Underwriting Agreement; and to such
counsel's knowledge, no preemptive or similar rights of stockholders exist with
respect to any of the Stock or the issue or sale thereof.
(iii) Except as described in or contemplated by the Prospectus, to such
counsel's knowledge, there are no outstanding securities of the Company
convertible or exchangeable into or evidencing the right to purchase or
subscribe for any shares of capital stock of the Company, and there are no
outstanding or authorized options, warrants or rights of any character
obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in the
Prospectus, to such counsel's knowledge, there is no holder of any securities of
the Company or any other person who has the right,
41
<PAGE>
contractual or otherwise which has not been effectively waived, to cause the
Company to sell or otherwise issue to them, or to permit them to underwrite the
sale of, any of the Stock or the right to have any Common Stock or other
securities of the Company included in the Registration Statement or the right,
as a result of the filing of the Registration Statement, to require registration
under the Securities Act of any Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the Act and, to
such counsel's knowledge, no stop order proceedings with respect thereto have
been instituted or are pending or threatened under the Securities Act.
(v) The Registration Statement, the Prospectus and each amendment or
supplement thereto comply as to form in all material respects with the
requirements of the Securities Act and the Rules and Regulations (except that we
express no opinion as to the financial statements and notes thereto and other
financial information included therein).
(vi) The statements in the Prospectus set forth under the caption
"Description of Capital Stock", insofar as such statements constitute a summary
of documents referred to therein or matters of law, are accurate summaries and
fairly and correctly present the information called for with respect to such
documents and matters.
(vii) Based on current law, the holding periods of the holders of the
Company's unregistered securities are as reflected under the caption "Shares
Eligible for Future Sale" in the Prospectus.
(viii) Such counsel knows of no contracts or documents required to be
filed as exhibits to the Registration Statement or described in the Registration
Statement or the Prospectus which are not so filed or described as required.
(ix) Such counsel does not know of any legal or governmental proceedings
pending or threatened to which the Company or any of its Subsidiaries is a party
or to which any of the properties of the Company or any of its Subsidiaries is
subject that are required to be described in the Registration Statement or the
Prospectus and are not so described.
(x) The execution and delivery by the Company of the Underwriting
Agreement and the consummation of the transactions therein contemplated do not
and will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, (A) the Charter or By-laws of the
Company or any of its Subsidiaries or (B) any agreement or other instrument
known to such counsel to which the Company or any of its Subsidiaries is a party
or by which the Company of any of its Subsidiaries is bound, or (C) any
judgment, order or decree known to such counsel applicable to the Company of any
governmental body, agency or court having jurisdiction over the Company or any
of its Subsidiaries.
42
<PAGE>
(xi) No approval, consent, order, authorization, designation, declaration,
qualification or filing of, by or with any regulatory, administrative or other
governmental body or agency is required for the execution, delivery or
performance by the Company of its obligations under this Agreement and the
consummation of the transaction contemplated thereby, except such as may be
required by the Securities Act and the applicable rules and regulations of the
Commission thereunder (all of which have been obtained), and the Securities or
Blue Sky Laws of the various states in connection with the offer and sale of the
Stock by the underwriters.
(xii) The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
(xiii) The Stock issued and sold by the Company has been approved for
listing on The Nasdaq Stock Market, National Market System, upon official notice
of issuance.
(xiv) The Company is not, and will not become as a result of the
consummation of the transactions contemplated by this Agreement, required to
register as an investment company under the Investment Company Act of 1940.
(xv) Upon delivery of the Selling Shareholder Stock against payment
therefor as provided for in the Underwriting Agreement, each of the Underwriters
(assuming that they are bona fide purchasers within the meaning of the Uniform
Commercial Code) will have acquired good and marketable title on the Option
Closing Date to the Selling Shareholder Stock being sold by each Selling
Shareholder, free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest whatsoever.
In rendering such opinion Vinson & Elkins, L.L.P. may rely as to matters
governed by the laws of states other than Delaware or Federal laws on local
counsel in such jurisdictions, provided that in each case Vinson & Elkins,
L.L.P. shall state that they believe that they and the Underwriters are
justified in relying on such other counsel.
In addition to the matters set forth above, Vinson & Elkins L.L.P. shall
also provide a statement to the effect that nothing has come to the attention of
Vinson & Elkins, L.L.P. which has caused it to believe that (i) the Registration
Statement, or any amendment thereto, as of the time it became effective under
the Securities Act or as of the Closing Dates, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and (ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Dates, as the case
may be, contained, an untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements, in the light of the
circumstances under which they are made, not misleading (except that Vinson &
Elkins, L.L.P. need express no view as to financial statements and notes
43
<PAGE>
thereto and other financial information included therein). With respect to such
statement, Vinson & Elkins, L.L.P. may state that their belief is based upon the
procedures set forth therein, but is without independent check and verification.
44
<PAGE>
EXHIBIT II
OPINION OF DARBY & DARBY
(i) Insofar as the statements in the Registration Statement and the
Prospectus (A) under the caption "Risk Factors-Uncertainty of Protection for
Patents and Proprietary Rights" and (B) under the caption "Business - Patents,
Proprietary Rights, and Licenses," constitute summaries of matters of
intellectual property law, they are accurate statements or summaries of the
matters set forth therein.
(ii) Based on the information available to us as patent counsel for the
Company, but without our having conducted a formal investigation, no facts have
come to our attention that would form a basis for our believing that the above-
described portions of the Registration Statement and the Prospectus contain any
untrue statement of a material fact with respect to the patent position of the
Company or omit to state any material fact relating to the patent position of
the Company, which is necessary in order to make the statements contained
therein not misleading.
(iii) Based solely on: (1) the information available to us as patent
counsel for the Company; (2) the results of a title search that we conducted at
the United States Patent & Trademark Office (the "USPTO") (subject to the
limitations of such searches including the fact that the USPTO records are
incomplete); and (3) representations by the Company that no interests have been
conveyed by the Company to third parties which have not been recorded in the
USPTO, and except for (A) certain rights held by Massachusetts General Hospital
with respect to certain patent applications covering the treatment of immune
dysfunction, the treatment of cancer, and the use of M-1 muscarinic receptor
antagonists, (B) the fact that Geneva Pharmaceuticals, Inc. is a co-owner with
the Company of one of the Company's patent applications, (C) the possibility
that the United States government may have certain rights under 35 U.S.C. (S)
200-212 in and to the patents and patent applications in Schedule A, the Company
is either the co-owner of record or the beneficial co-owner of, or has license
rights from LSU or the Rowland Institute of Science under, the patents and
patent applications identified in Schedule A to this opinion. With respect to
item (C) of this section (iii), based on the information available to us as
patent counsel for the Company, and having conducted the investigation described
below in this section (iii), we have no reason to believe that the U.S.
government has rights in and to the patents and applications listed in Schedule
A except for those patents and applications listed in Schedule D, with respect
to all of which LSU has made an effective election to retain title. The
investigation referred to in the preceding sentence included (a) a review of the
pertinent grant documents and correspondence which LSU provided to us (stating
that their records were incomplete) or which were requested and obtained from
the U.S. government under the Freedom of Information Act (the U.S. government
also stated that its records were incomplete); (b) conferences with the
inventors of the applications and patents listed in Schedule A and with
45
<PAGE>
patent counsel for LSU as well as the Director of the LSU Office of Sponsored
Research; and (c) a review of the patents and patent applications listed in
Schedule A.
(iv) Based on the information available to us as patent counsel for the
Company but without having conducted a formal investigation, we have no
knowledge of any facts that would cause us to believe that the Company lacks
adequate intellectual property rights or licenses to conduct the business that
is proposed to be conducted in the United States by the Company as described in
the Prospectus and in the Registration Statement.
(v) Based on the information available to us as patent counsel for the
Company but without our having conducted a formal investigation, (A) no facts
have come to our attention that cause us to believe that any of the United
States patents owned by or licensed to the Company and identified in Schedule A
is unenforceable or invalid; and (B) we are not aware of any patents of others
which are or would be infringed by specific, current or proposed, products or
processes referred to in the Prospectus and in the Registration Statement in
such manner as to materially and adversely affect the Company.
(vi) Based on (1) the information available to us as patent counsel for
the Company, and (2) an investigation of the on-line databases identified in
Schedule C (subject to the limitations of such on-line investigations including
but not limited to the fact that they contain incomplete records), and having
obtained a confirming representation from the Company, we have no knowledge of
any pending or threatened action, suit, proceeding or claim by others that the
Company is infringing any patent which could result in any material adverse
effect on the Company.
(vii) To the best of our knowledge as patent counsel for the Company, and
based on (A) the investigation referred to in section (vi)(2) above, and (B) the
Company's representations but without having made another investigation, there
are no legal or governmental proceedings relating to United States or foreign
patent rights pending against the Company other than Official Actions by the
USPTO and foreign patent offices on pending United States and foreign patent
applications co-owned by or licensed to the Company, and to our knowledge no
such proceedings are threatened or contemplated by governmental authorities or
others.
(viii) Based on the information available to us as patent counsel for the
Company, as well as on the Company's representation, but having made no other
investigation, we do not know of any contracts or other documents, other than
those described in Schedule B, affecting the Company's rights in patents, patent
applications, trade secrets or other proprietary information.
46
<PAGE>
EXHIBIT III
OPINION OF COUNSEL TO SELLING SHAREHOLDERS
(i) The Underwriting Agreement has been duly authorized, executed and
delivered on behalf of the Selling Shareholders.
(ii) The Custody Agreement and the Power of Attorney executed and
delivered by each Selling Shareholder constitute the valid and binding
agreements of the Selling Shareholder, enforceable in accordance with their
terms, except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles.
(iii) Each Selling Shareholder has full legal right, power and authority,
and any approval required by law (other than as required by state securities and
Blue Sky laws as to which we express no opinion), to sell, assign, transfer and
deliver the portion of the Selling Shareholder Stock to be sold by such Selling
Shareholder.
47
<PAGE>
FORM OF LEGAL OPINION
[LETTERHEAD OF VINSON & ELKINS WILL APPEAR HERE]
WRITER'S TELEPHONE WRITER'S FAX NUMBER
(214) 220-7847 (214) 999-7847
, 1996
Ergo Science Corporation
33 Third Avenue
Charlestown, MA 02129
Ladies and Gentlemen:
We have acted as counsel for Ergo Science Corporation, a Delaware
corporation (the "Company"), in connection with the preparation of a
Registration Statement on Form S-1 (as may hereafter be amended, the
"Registration Statement"), which has been filed by the Company with the
Securities and Exchange Commission for the purpose of registering under the
Securities Act of 1933 (the "1933 Act") and the rules and regulations thereunder
the sale of up to 2,875,000 shares (the "Shares") of the Company's Common Stock,
$.01 par value per share ("Common Stock"). The Shares will be offered and sold
(the "Offering") pursuant to an underwriting agreement (the "Underwriting
Agreement") to be entered into between the Company and Cowen & Company, Needham
& Company, Inc. and UBS Securities Inc. as representatives of the underwriters
(the "Underwriters").
We are rendering this opinion as of the time the Registration Statement
becomes effective in accordance with Section 8(a) of the 1933 Act.
Before rendering the opinions hereinafter set forth, we examined, among
other things, the proposed form of Underwriting Agreement, the Registration
Statement, the Company's Amended and Restated Certificate of Incorporation and
Third Amended and Restated Bylaws, resolutions of the Company's Board of
Directors, and originals or photostatic or certified copies of all those
corporate records of the Company and of all those agreements, communications and
other instruments, certificates of public officials, certificates of corporate
officials and such other documents as we have deemed relevant and necessary as a
basis for the opinions hereinafter set forth. As to factual matters,
information with respect to which is in the possession of the Company relevant
to the opinions herein stated, we have relied without investigation, to the
extent we deem such reliance proper, upon certificates or representations made
by the Company's duly authorized representatives.
In rendering the opinions set forth below, we have assumed, with your
approval and without independent investigation, the genuineness of all
signatures, the authenticity of all documents
<PAGE>
Ergo Science Corporation
,1996
Page 2
submitted to us as originals and the conformity to original documents of all
documents submitted to us as certified or photostatic copies.
Based upon the foregoing assumptions, and subject to the qualifications set
forth hereinafter, we are of the opinion that, when (i) the Registration
Statement becomes effective under the 1933 Act, (ii) the final terms of the
Underwriting Agreement and the Offering have been approved by the Board of
Directors (or a duly constituted committee thereof), (iii) the Underwriting
Agreement has been duly executed and delivered by each of the parties thereto,
and (iv) the Shares have been issued and delivered in accordance with the terms
of the Underwriting Agreement (including the receipt by the Company of the
consideration for the Shares described therein), the Shares will be validly
issued, fully paid and non-assessable.
We are counsel admitted to practice law in the State of Texas and this
opinion is limited to the laws of the State of Texas, the General Corporation
Law of the State of Delaware and the federal law of the United States of
America.
We express no opinion as to any matter other than as expressly set forth
above, and no opinion is to or may be inferred or implied herefrom. This
opinion is given as of the date hereof, and we undertake no, and hereby disclaim
any, obligation to advise the Company or anyone else of any change in any matter
set forth herein.
We hereby consent to the filing of this opinion letter as an exhibit to the
Registration Statement and the references to us under the heading "Legal
Matters" in the prospectus that forms a part of the Registration Statement. We
also consent to the incorporation by reference of this consent into any
subsequent registration statement filed pursuant to Rule 462(b) under the 1933
Act in connection with the Offering. In giving this consent, we do not hereby
admit that we are within the category of persons whose consent is required under
Section 7 of the 1933 Act and the rules and regulations of the Securities and
Exchange Commission promulgated thereunder.
Very truly yours,
VINSON & ELKINS L.L.P.
<PAGE>
EMPLOYMENT AGREEMENT
by and between
ERGO SCIENCE CORPORATION
and
David R. Burt
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
the 6th day of October, 1995 by and between Ergo Science Corporation, a Delaware
corporation (together with its successors and assigns permitted hereunder, the
"Company"), and David R. Burt (the "Executive").
The Board of Directors of the Company (the "Board") has determined that it
is in the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication of the Executive. The Board believes
it is imperative to provide the Executive with compensation and benefits
arrangements which ensure that the compensation and benefits expectations of the
Executive will be satisfied and which are competitive with those of other
corporations. Therefore, in order to accomplish these objectives, the Board has
caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Employment Period. Subject to Section 4, the Company hereby agrees to
-----------------
continue the Executive in its employ, and the Executive hereby agrees to remain
in the employ the Company, in accordance with the terms and provisions of this
Agreement, for the period commencing on the date of this Agreement (the
"Effective Date") and ending on the third anniversary of such date (the
"Employment Period").
2. Terms of Employment.
-------------------
(a) Position and Duties.
-------------------
(i) During the term of the Executive's employment, the
Executive shall serve as Vice President, Corporate Development and, in so doing,
shall report to the Board, the Company's Chief Executive Officer or such
officers of the Company as is prescribed in the Company's by-laws, by
resolutions of the Board or by direction of the Chief Executive Officer. The
Executive shall have supervision and control over, and responsibility for, such
management and operational functions of the Company currently assigned to such
position, and shall have such other powers and duties (including holding officer
positions with one or more subsidiaries of the Company) as may from time to time
be prescribed by the Board or the Chief Executive Officer, so long as such
powers and duties are reasonable and customary for the a Vice President,
Corporate Development of an enterprise comparable to the Company.
(ii) During the term of the Executive's employment, and
excluding any periods of vacation and sick leave to which the Executive is
entitled, the Executive agrees to devote full business time to the business and
affairs of the Company and, to the extent necessary to discharge the
responsibilities assigned to the Executive hereunder, to use the Executive's
<PAGE>
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the term of the Executive's employment it shall not be
a violation of this Agreement for the Executive to (A) serve on corporate, civic
or charitable boards or committees, (B) deliver lectures, fulfill speaking
engagements or teach at educational institutions and (C) manage personal
investments, so long as such activities do not significantly interfere
with the performance of the Executive's responsibilities as an employee of the
Company in accordance with this Agreement.
(b) Compensation.
------------
(i) Base Salary. During the term of the Executive's employment,
-----------
the Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid in accordance with the customary payroll practices of the Company,
at least equal to $100,000. During the term of the Executive's employment, the
Annual Base Salary shall be reviewed at least annually by the Compensation
Committee of the Board (the "Compensation Committee") and shall be increased at
any time and from time to time as the Compensation Committee shall consider
appropriate in accordance with the compensation practices and guidelines of the
Company for its executive officers. Any increase in Annual Base Salary shall
not serve to limit or reduce any other obligation to the Executive under this
Agreement. The term Annual Base Salary as utilized in this Agreement shall refer
to Annual Base Salary as so increased.
(ii) Bonus. In addition to Annual Base Salary, the Executive
-----
shall be awarded during the term of the Executive's employment such bonuses (the
"Bonus"), if any, as shall be determined by the Compensation Committee
consistent with its practices for executive officers of the Company.
(iii) Incentive, Savings and Retirement Plans. During the term
---------------------------------------
of the Executive's employment, the Executive shall be entitled to participate
in all incentive, savings and retirement plans, practices, policies and programs
applicable generally to other executives of the Company ("Investment Plans").
(iv) Welfare Benefit Plans. During the term of the Executive's
---------------------
employment, the Executive and/or the Executive's family, as the case may be,
shall be eligible for participation in and shall receive all benefits under
welfare benefit plans, practices, policies and programs ("Welfare Plans")
provided by the Company (including, without limitation, medical, prescription,
dental, disability, salary continuance, employee life, group life, accidental
death and travel accident insurance plans and programs) to the extent applicable
generally to other executives of the Company.
(v) Expenses. During the term of the Executive's employment,
--------
the Executive shall be entitled to receive prompt reimbursement for all
reasonable employment expenses incurred by the Executive in accordance with the
policies, practices and procedures of the Company.
(vi) Vacation and Holidays. During the term of the Executive's
---------------------
employment, the Executive shall be entitled to paid vacation and paid holidays
in accordance with the plans, policies, programs and practices of the Company
for its executive officers.
2
<PAGE>
3. Change in Control. For purposes of this Agreement, a "Change in
-----------------
Control" shall have the meaning set forth in the Company's Amended and Restated
1995 Long Term Incentive Plan as of the date hereof.
4. Termination of Employment.
-------------------------
(a) Death or Disability. The Executive's employment shall terminate
-------------------
automatically upon the Executive's death during the Employment Period. If the
Disability of the Executive has occurred
during the Employment Period (pursuant to the definition of Disability set forth
below), the Company may give to the Executive written notice in accordance with
Section 13(b) of its intention to terminate the Executive's employment. In such
event, the Executive's employment with the Company shall terminate effective on
the 30th day after receipt of such notice by the Executive (the "Disability
Effective Date"), provided that, within the 30 days after such receipt, the
Executive shall not have returned to full-time performance of the Executive's
duties. For purposes of this Agreement, "Disability" shall mean the Executive's
incapacity due to mental or physical illness which is determined to be total and
permanent by a physician selected by the Company or its insurers and acceptable
to the Executive or the Executive's legal representative (such agreement as to
acceptability not to be withheld unreasonably).
(b) Cause. The Company may terminate the Executive's employment
-----
during the Employment Period for Cause or without Cause. For purposes of this
Agreement, "Cause" shall mean (i) a breach by the Executive of the Executive's
obligations under Section 2(a) (other than as a result of incapacity due to
physical or mental illness) which constitutes a continued failure by the
Executive to substantially perform his obligations and duties thereunder, as
determined by the Board, and which is not remedied in a reasonable period of
time after receipt of written notice from the Company specifying such breach,
(ii) commission by the Executive of an act of fraud upon, or willful misconduct
toward, the Company, as reasonably determined by the Board (other than the
Executive and members of his family) after a hearing by the Board following ten
days' notice to the Executive of such hearing, (iii) a breach by the Executive
of Section 8 or Section 11, (iv) the conviction of the Executive of any felony
(or a plea of nolo contendere thereto) or (v) the Executive's addiction to
---- ----------
alcohol, drugs or any other controlled substance.
(c) Good Reason. The Executive's employment may be terminated
-----------
during the Employment Period by the Executive for Good Reason or without Good
Reason. For purposes of this Agreement, "Good Reason" shall mean:
(i) the assignment to the Executive of any duties inconsistent
in any respect with the Executive's position (including status, offices, titles
and reporting requirements), authority, duties or responsibilities as
contemplated by Section 2(a) or any other action by the Company which results in
a diminution in such position, authority, duties or responsibilities, excluding
for this purpose an isolated, insubstantial and inadvertent action not taken in
bad faith and which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
3
<PAGE>
(ii) any termination or reduction of a material benefit under
any Investment Plan or Welfare Plan in which the Executive participates unless
(i) there is substituted a comparable benefit that is economically substantially
equivalent to the terminated or reduced benefit prior to such termination or
reduction or (ii) benefits under such Investment Plan or Welfare Plan are
terminated or reduced with respect to all employee's previously granted benefits
thereunder;
(iii) any failure by the Company to comply with any of the
provisions of Section 2(b), other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(iv) any failure by the Company to comply with and satisfy
Section 10(c), provided that such successor has received at least ten days prior
written notice from the Company or the Executive of the requirements of Section
10(c); or
(v) without limiting the generality of the foregoing, any
material breach of this Agreement by the Company or any successor thereto.
(d) Notice of Termination. Any termination by the Company for Cause
---------------------
or without Cause, or by the Executive for Good Reason or without Good Reason,
shall be communicated by Notice of Termination to the other party hereto given
in accordance with Section 13(b). For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific termination
provision in this Agreement relied upon, (ii) to the extent applicable, sets
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated and (iii) if the Date of Termination (as defined below) is other than
the date of receipt of such notice, specifies the termination date (which date
shall not be more than 15 days after the giving of such notice). The failure by
the Executive or the Company to set forth in the Notice of Termination any fact
or circumstance which contributes to a showing of Good Reason or Cause shall not
waive any right of the Executive or the Company hereunder or preclude the
Executive or the Company from asserting such fact or circumstances in enforcing
the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
-------------------
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason or without Good Reason, the date of receipt of the
Notice of Termination or any later date specified therein, as the case may be,
(ii) if the Executive's employment is terminated by the Company other than for
Cause, the date on which the Company notifies the Executive of such termination
and (iii) if the Executive's employment is terminated by reason of death or
Disability, the date of death of the Executive or the Disability Effective Date,
as the case may be.
5. Obligations of the Company upon Termination.
-------------------------------------------
(a) Good Reason; Other Than for Cause, Death or Disability. If,
------------------------------------------------------
during the Employment Period, the Company shall terminate the Executive's
employment other than for
4
<PAGE>
either Cause or Disability or the Executive shall
terminate his employment for Good Reason, and the termination of the Executive's
employment in any case is not due to his death:
(i) the Company shall pay to the Executive in a lump sum in
cash within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of the Executive's Annual Base Salary through
the Date of Termination to the extent not theretofore paid and any compensation
previously deferred by the Executive (together with any accrued interest or
earnings thereon) and any accrued vacation pay ("Accrued Obligations"); and
B. an amount (the "Severance Amount") equal to whichever
of the following is applicable: If such termination is prior to a Change in
Control, an amount equal to the Executive's Annual Base Salary; or if such
termination is following a Change in Control, an amount equal to two times the
sum of (x) the Executive's Annual Base Salary plus (y) the Executive's budgeted
Bonus for the year in which the termination occurs; and
C. any amount arising from Executive's participation in,
or benefits under, any Investment Plans ("Accrued Investments"), which amounts
shall be payable in accordance with the terms and conditions of such Investment
Plans.
(ii) for the remainder of the Employment Period, or such longer
period as any plan, program, practice or policy may provide, the Company shall
continue benefits provided under Welfare Plans to the Executive and/or the
Executive's family at least equal to those which would have been provided to
them if the Executive's employment had not been terminated; provided, however,
that if the Executive becomes reemployed with another employer and is eligible
to receive similar benefits under another employer provided plan, such benefits
described herein shall be secondary and not duplicate to those provided under
such other plan during such applicable period of eligibility (such continuation
of such benefits for the applicable period herein set forth shall be hereinafter
referred to as "Welfare Benefit Continuation"). For purposes of determining
eligibility of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to have
remained employed until the end of the Employment Period and to have retired on
the last day of such period; and
(iii) to the extent not theretofore paid or provided, the
Company shall timely pay or provide to the Executive and/or the Executive's
family any other amounts or benefits required to be paid or provided or which
the Executive and/or the Executive's family is eligible to receive pursuant to
this Agreement and under any plan, program, policy or practice or contract or
agreement of the Company ("Other Benefits").
(b) Death or Disability. If the Executive's employment is
-------------------
terminated by reason of the Executive's death or Disability during the
Employment Period, the Company shall have no further payment obligations to the
Executive or his legal representatives under this Agreement, other than for (i)
payment of Accrued Obligations, Accrued Investments and Other Benefits and (ii)
the timely provision of the Welfare Benefit Continuation; provided, however,
that if the Executive is covered by a Company-provided group disability
insurance policy at the date the
5
<PAGE>
Executive's employment is terminated by reason of the Executive's Disability and
benefits under such policy are not then payable to the Executive pursuant to the
terms of such policy, then the Company shall continue to pay the Executive his
Annual Base Salary in effect at the date of such termination (in accordance with
the customary payroll practices of the Company) until the first to occur of six
months after such termination date or benefits becoming payable to the Executive
under such policy.
(c) Cause; Other than for Good Reason. If the Executive's
---------------------------------
employment shall be terminated by the Company for Cause or by the Executive
without Good Reason during the Employment Period, the Company shall have no
further payment obligations to the Executive other than for payment of Accrued
Obligations, Accrued Investments and Other Benefits.
(d) Reduction to Avoid Excess Parachute Payment. Notwithstanding
-------------------------------------------
the other provisions of this Section 5, if any portion of the payments otherwise
to be made to the Executive pursuant to the provisions of this Section 5 would
be considered an "excess parachute payment" under the terms of Section 280G of
the Internal Revenue Code of 1986, as amended (the Code), the amount of cash
otherwise payable to the Executive pursuant to this Section 5 shall be reduced
to the extent (but only to the extent) necessary to cause no portion of the
payments made to the Executive pursuant to this Section 5 to be considered an
"excess parachute payment" under the terms of Section 280G of the Code.
6. Full Settlement. The Company's obligation to make the payments
---------------
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions
of this Agreement and, except as provided in Section 5(a)(ii), such amounts
shall not be reduced whether or not the Executive obtains other employment.
Neither the Executive nor the Company shall be liable to the other party for any
damages in addition to the amounts payable under Section 5 hereof arising out of
the termination of the Executive's employment prior to the end of the Employment
Period; provided, however, that the Company shall be entitled to seek damages
for any breach of Sections 7, 8 or 11.
7. Rights to Work Product.
----------------------
(a) Work Product. The Executive and the Company each acknowledge
------------
that during the term of the employment of the Executive by the Company or its
affiliates, whether prior to the date hereof or during the Employment Period,
the Executive may have discovered, created or developed improvements,
inventions, formulae, ideas, processes, techniques, know-how, methods, cures,
software designs, computer programs, computer models, data and original works of
authorship including, without limitation, inventions, processes, methods and
cures that relate to or arise from the scientific research in which the Company
and its affiliates were, are now, or may hereinafter become engaged, including
but not limited to research relating to circadian rhythms and temporal
neuroendocrine organization (collectively, the "Work Product"). The Executive
agrees that he will promptly and fully disclose to the Company any and all Work
Product generated, conceived, reduced to practice, or learned by the Executive,
either solely or
6
<PAGE>
jointly with others, that is developed prior to the termination of the
Executive's employment by the Company.
(b) Rights of Company to Intellectual Property. The Executive
------------------------------------------
agrees that whether or not the services performed by the Executive for the
Company or its affiliates are considered works made for hire or an employment to
invent, all Work Product discovered, created or developed by the Executive,
either solely or jointly with others, during the Executive's employment with the
Company or its affiliates, whether prior to the date hereof or during the
Employment Period, shall be and remain the sole property of the Company and its
assigns. Except as specifically set forth in writing and signed by both the
Company and the Executive, the Executive agrees that the Company shall have all
copyright and patent rights with respect to any Work Product discovered,
created, developed or reduced to practice by the Executive, either solely or
jointly with others, during the Executive's employment with the Company or its
affiliates prior to the date hereof or during the Employment Period.
(c) Transfer of Rights. If and to the extent that the Executive
------------------
may, under applicable law, be entitled to claim any ownership interest in any
Work Product that is developed by the Executive, either solely or jointly with
others, during the Executive's employment with the Company or its affiliates,
whether prior to the date hereof or during the Employment Period, the Executive
hereby transfers, grants, conveys, assigns and relinquishes exclusively to the
Company any and all right, title and interest he now owns or may hereafter
acquire in and to such Work Product under patent, copyright, trade secret,
trademark and other law in perpetuity or for the longest period otherwise
permitted by law. The Executive further agrees as to such Work Product to assist
the Company in every reasonable way to obtain and, from time to time, enforce
patents, copyrights, trade secrets and other rights and protection relating to
said Work Product, and to that end, the Executive will execute all documents for
use in applying for and obtaining such patents, copyrights, trade secrets and
other rights and protection with respect to such Work Product as the Company may
desire, together with any assignments thereof to the Company or persons
designated by it. The Executive's obligations to assist the Company in obtaining
and enforcing patents, copyrights, trade secrets and other rights and protection
relating to such Work Product shall continue beyond the termination of the term
of the Executive's employment.
8. Confidential Information.
------------------------
(a) The Executive acknowledges that the Company and its affiliates
have trade, business and financial secrets and other confidential and
proprietary information (collectively, the "Confidential Information") that
includes but is not limited to (i) the inventions, discoveries, methods, cures,
and patent applications owned by or licensed to the Company or its affiliates,
(ii) the materials and information related to the research, clinical studies,
products, services, contracts, customers, commercialization strategies,
development plans and other financial and business affairs of the Company and
its affiliates, and (iii) any and all Work Product which has or will come into
the Executive's possession or knowledge, disclosure of which to, or use by,
third parties would be damaging to the Company. As defined herein, Confidential
Information shall not include (i) information that is generally known to other
persons or entities who can obtain economic value from its disclosure or use and
(ii) information required to be disclosed by the Executive pursuant to a
subpoena or court order, or pursuant to a requirement of a
7
<PAGE>
governmental agency or law of the United States of America or a state thereof or
any governmental or politica l subdivision thereof; provided, however, that the
-----------------
Executive shall take all reasonable steps to prohibit disclosure pursuant to
subsection (ii) above.
(b) The Executive agrees (i) to hold such Confidential Information in
strictest confidence and (ii) not to release such information to any person
(other than Company employees and other persons to whom the Company has
authorized the Executive to disclose such information and then only to the
extent that such Company employees and other persons authorized by the Company
have a need for such knowledge).
(c) The Executive further agrees not to use any Confidential
Information for the benefit of any person or entity other than the Company.
9. Surrender of Materials Upon Termination. Upon any termination of the
---------------------------------------
Executive's employment, the Executive shall immediately return to the Company
all copies, in whatever form, of any and all Confidential Information and other
properties of the Company and its affiliates which are in the Executive's
possession, custody or control.
10. Successors.
----------
(a) This Agreement is personal to the Executive and without the
prior written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
8
<PAGE>
11. Non-Competition.
---------------
(a) The term of Non-Competition (herein so called) shall be for a
term beginning on the date hereof and continuing until the end of the 36-month
period following the later of (i) termination of the Executive's employment with
the Company, (ii) the date on which the Executive resumes compliance with the
terms of this Section 11 if at any time during the term of Non-Competition he
has failed to comply with this Section 11 and the Company has demanded that he
so comply, or (iii) the date of entry by a court of competent jurisdiction of a
final judgment enforcing the non-competition covenant against the Executive if
the Executive has failed to comply with this Section 11 (as reformed by the
court, if reformed).
(b) During the term of Non-Competition, the Executive will not
(other than for the benefit of the Company pursuant to this Agreement) directly
or indirectly, individually or as an officer, director, employee, shareholder,
consultant, contractor, partner, joint venturer, agent, equity owner or in any
capacity whatsoever, (i) engage in or promote the research, development,
testing, study or commercialization of methods of treating human and animal
diseases principally based on (A) the science of applying neurotransmitter
modulating drugs on a timed basis to correct abnormalities in the body's
neuroendocrine system or principally based on (B) any other specific research or
science undertaken by or licensed to the Company during the term of the
Executive's employment, for the benefit of the Executive or any other person or
entity located within the Geographic Area which herein shall mean the United
States, Canada, Europe or Israel, or within any other foreign geographic areas
in which the Company or its affiliates, or their partners, licensees, agents,
distributors or contractors, shall be actively marketing or distributing, or
shall be planning to market or distribute, directly or indirectly, any product
or services sold by the Company (a "Competing Business"), (ii) otherwise engage
in or promote any business within the Geographic Area that is principally
engaged in the research or treatment of type II diabetes, obesity, breast cancer
or any other indication with respect to which the Company conducted Phase I, II
or III human clinical trials during the term of the Executive's employment with
the Company (also a "Competing Business"), (iii) hire, attempt to hire, or
contact or solicit with respect to hiring any employee of the Company, or (iv)
call upon, solicit, divert or take away any customers or suppliers of the
Company. Notwithstanding the foregoing, the Company agrees that (A) the
Executive may own less than five percent of the outstanding voting securities of
any publicly traded company that is a Competing Business so long as the
Executive does not otherwise participate in such Competing Business in any way
prohibited by the preceding clause and (B) if the Executive's employment is
terminated by the Company without Cause or by the Executive for Good Reason,
then, after the first anniversary of such termination, nothing contained in this
Section 11(b) shall prevent the Executive from engaging in or promoting the
research, development, testing, study or commercialization of methods of
treating those human and animal diseases with respect to which the Company had
not discovered, created, developed or acquired research or clinical data prior
to such termination. As used in this Section 11(b), "Company" shall include the
Company and any of its affiliates.
(c) In consideration of this non-competition covenant, the Company
shall pay to the Executive, within ten days after the Date of Termination, an
amount equal to 50% of the Annual Base Salary, and on each of the first and
second anniversaries of the Date of Termination, an amount equal to the Annual
Base Salary. The Company may elect not to make any such payment, in which case
the term of Non-Competition shall lapse.
9
<PAGE>
(d) The Executive acknowledges that the geographic boundaries, scope
of prohibited activities, and time duration of the preceding paragraphs are
reasonable in nature and are no broader than are necessary to maintain the
confidentiality and the goodwill of the Company's proprietary technology, plans
and services and to protect the other legitimate business interests of the
Company.
12. Effect of Agreement on Other Benefits. The existence of this
-------------------------------------
Agreement shall not prohibit or restrict the Executive's entitlement to full
participation in the executive compensation, employee benefit and other plans or
programs in which executives of the Company are eligible to participate.
13. Miscellaneous.
-------------
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Massachusetts, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect. This Agreement may not be amended or
modified otherwise than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive: David R. Burt
-------------------
544 Franklin Street
Reading, MA 01867
If to the Company: Ergo Science Corporation
-----------------
Charlestown Navy Yard
100 First Avenue
Charlestown, MA 02129-2051
Attention: Chief Executive Officer
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) If any provision of this Agreement is held to be illegal, invalid
or unenforceable under present or future laws effective during the term of this
Agreement, such provision shall be fully severable; this Agreement shall be
construed and enforced as if such illegal, invalid or unenforceable provision
had never comprised a portion of this Agreement; and the remaining provisions of
this Agreement shall remain in full force and effect and shall not be affected
by the illegal, invalid or unenforceable provision or by its severance from this
Agreement. Furthermore, in lieu of such illegal, invalid or unenforceable
provision there shall be added automatically as part of this Agreement a
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.
10
<PAGE>
(d) The Company agrees to attempt to obtain and maintain a director's
and officer's liability insurance policy during the term of the Executive's
employment covering the Executive on commercially reasonable terms, and the
amount of coverage shall be reasonable in relation to the Executive's position
and responsibilities hereunder; provided, however, that such coverage may be
reduced or eliminated to the extent that the Company reduces or eliminates
coverage for its directors and executives generally.
(e) The Company may withhold from any amounts payable under this
Agreement such Federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(f) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason,
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
(g) The Executive acknowledges that money damages would be both
incalculable and an insufficient remedy for a breach of Section 7, 8 or 11 by
the Executive and that any such breach would cause the Company irreparable harm.
Accordingly, the Company, in addition to any other remedies at law or in equity
it may have, shall be entitled, without the requirement of posting of bond or
other security, to equitable relief, including injunctive relief and specific
performance, in connection with a breach of Section 7, 8 or 11 by the Executive.
(h) The provisions of this Agreement constitute the complete
understanding and agreement among the parties with respect to the subject matter
hereof and all of the terms and provisions of that certain Employment Agreement
between the Company and the Executive dated March 1, 1993, as amended, are
hereby terminated. Notwithstanding the preceding sentence, the terms and
provisions of that certain Option Agreement between the Company and the
Executive dated March 1, 1993, as amended, shall remain in full force and effect
in accordance with its terms.
(i) This Agreement may be executed in two or more counterparts.
11
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused this Agreement to be executed in its name on its behalf, all as of the
day and year first above written.
EXECUTIVE
/s/ DAVID R. BURT
-------------------------------------------
David R. Burt
ERGO SCIENCE CORPORATION
/s/ J. WARREN HUFF
-------------------------------------------
By: J. Warren Huff
President
12
<PAGE>
EMPLOYMENT AGREEMENT
by and between
ERGO SCIENCE CORPORATION
and
ROBERT POWELL
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
the 1st day of March, 1996, by and between Ergo Science Corporation, a Delaware
corporation (together with its successors and assigns permitted hereunder, the
"Company"), and Robert Powell (the "Executive").
The Board of Directors of the Company (the "Board") has determined that it
is in the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication of the Executive. The Board believes
it is imperative to provide the Executive with compensation and benefits
arrangements which ensure that the compensation and benefits expectations of the
Executive will be satisfied and which are competitive with those of other
corporations. Therefore, in order to accomplish these objectives, the Board has
caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Employment Period. Subject to Section 4, the Company hereby agrees to
-----------------
employ the Executive, and the Executive hereby agrees to be employed by the
Company, in accordance with the terms and provisions of this Agreement, for the
period commencing on the date of this Agreement (the "Effective Date") and
ending on the third anniversary of such date (the "Employment Period").
2. Terms of Employment.
-------------------
(a) Position and Duties.
-------------------
(i) During the term of the Executive's employment, the Executive
shall serve as Vice President of Operations and, in so doing, shall report to
the Board, the Company's Chief Executive Officer or such officers of the Company
as is prescribed by resolutions of the Board or by direction of the Chief
Executive Officer. The Executive shall have supervision and control over, and
responsibility for, such management and operational functions of the Company
currently assigned to such position, and shall have such other powers and duties
(including holding officer positions with one or more subsidiaries of the
Company) as may from time to time be prescribed by the Board or the Chief
Executive Officer, so long as such powers and duties are reasonable and
customary for the Vice President of Operations of an enterprise comparable to
the Company.
(ii) During the term of the Executive's employment, and excluding
any periods of vacation and sick leave to which the Executive is entitled, the
Executive agrees to devote full business time to the business and affairs of the
Company and, to the extent necessary to discharge the responsibilities assigned
to the Executive hereunder, to use the Executive's reasonable best efforts to
perform faithfully and efficiently such responsibilities. During the term of the
Executive's employment it shall not be a violation of this Agreement for the
Executive to (A) serve on corporate, civic or charitable boards or committees,
(B) deliver lectures, fulfill speaking engagements or teach at educational
institutions and (C) manage personal investments, so long as such activities do
not significantly interfere with the performance of the Executive's
responsibilities as an employee of the Company in accordance with this
Agreement.
<PAGE>
(b) Compensation.
------------
(i) Base Salary. During the term of the Executive's employment,
-----------
the Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid in accordance with the customary payroll practices of the Company,
at least equal to $140,000. During the term of the Executive's employment, the
Annual Base Salary shall be reviewed at least annually and shall be increased at
any time and from time to time in accordance with the compensation practices and
guidelines of the Company for its executive officers. Any increase in Annual
Base Salary shall not serve to limit or reduce any other obligation to the
Executive under this Agreement. The term Annual Base Salary as utilized in this
Agreement shall refer to Annual Base Salary as so increased.
(ii) Bonus. In addition to Annual Base Salary, the Executive shall
-----
be awarded during the term of the Executive's employment such bonuses (the
"Bonus"), if any, as shall be determined consistent with the practices for
executive officers of the Company.
(iii) Incentive, Savings and Retirement Plans. During the term of
---------------------------------------
the Executive's employment, the Executive shall be entitled to participate in
all incentive, savings and retirement plans, practices, policies and programs
applicable generally to other executives of the Company ("Investment Plans").
(iv) Welfare Benefit Plans. During the term of the Executive's
---------------------
employment, the Executive and/or the Executive's family, as the case may be,
shall be eligible for participation in and shall receive all benefits under
welfare benefit plans, practices, policies and programs ("Welfare Plans")
provided by the Company (including, without limitation, medical, prescription,
dental, disability, salary continuance, employee life, group life, accidental
death and travel accident insurance plans and programs) to the extent applicable
generally to other executives of the Company.
(v) Expenses. During the term of the Executive's employment, the
--------
Executive shall be entitled to receive prompt reimbursement for all reasonable
employment expenses incurred by the Executive in accordance with the policies,
practices and procedures of the Company.
(vi) Vacation and Holidays. During the term of the Executive's
---------------------
employment, the Executive shall be entitled to paid vacation and paid holidays
in accordance with the plans, policies, programs and practices of the Company
for its executive officers.
2
<PAGE>
3. Change in Control. For purposes of this Agreement, a "Change in
-----------------
Control" shall have the meaning set forth in the Company's Amended and Restated
1995 Long Term Incentive Plan as of the date hereof.
4. Termination of Employment.
-------------------------
(a) Death or Disability. The Executive's employment shall terminate
-------------------
automatically upon the Executive's death during the Employment Period. If the
Disability of the Executive has occurred during the Employment Period (pursuant
to the definition of Disability set forth below), the Company may give to the
Executive written notice in accordance with Section 13(b) of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to full-
time performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the Executive's incapacity due to mental or physical
illness which is determined to be total and permanent by a physician selected by
the Company or its insurers and acceptable to the Executive or the Executive's
legal representative (such agreement as to acceptability not to be withheld
unreasonably).
(b) Cause. The Company may terminate the Executive's employment during
-----
the Employment Period for Cause or without Cause. For purposes of this
Agreement, "Cause" shall mean (i) a breach by the Executive of the Executive's
obligations under Section 2(a) (other than as a result of incapacity due to
physical or mental illness) which constitutes a continued failure by the
Executive to substantially perform his obligations and duties thereunder, as
determined by the Board, and which is not remedied in a reasonable period of
time after receipt of written notice from the Company specifying such breach,
(ii) commission by the Executive of an act of fraud upon, or willful misconduct
toward, the Company, as reasonably determined by the Board (other than the
Executive and members of his family) after a hearing by the Board following ten
days' notice to the Executive of such hearing, (iii) a breach by the Executive
of Section 8 or Section 11, (iv) the conviction of the Executive of any felony
(or a plea of nolo contendere thereto) or (v) the Executive's addiction to
---- ----------
alcohol, drugs or any other controlled substance.
(c) Good Reason. The Executive's employment may be terminated during
-----------
the Employment Period by the Executive for Good Reason or without Good Reason.
For purposes of this Agreement, "Good Reason" shall mean:
(i) the assignment to the Executive of any duties inconsistent in
any respect with the Executive's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as contemplated
by Section 2(a) or any other action by the Company which results in a diminution
in such position, authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action not taken in bad faith
and which is remedied by the Company promptly after receipt of notice thereof
given by the Executive;
3
<PAGE>
(ii) any termination or reduction of a material benefit under any
Investment Plan or Welfare Plan in which the Executive participates unless (i)
there is substituted a comparable benefit that is economically substantially
equivalent to the terminated or reduced benefit prior to such termination or
reduction or (ii) benefits under such Investment Plan or Welfare Plan are
terminated or reduced with respect to all employee's previously granted benefits
thereunder;
(iii) any failure by the Company to comply with any of the
provisions of Section 2(b), other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(iv) any failure by the Company to comply with and satisfy Section
10(c), provided that such successor has received at least ten days prior written
notice from the Company or the Executive of the requirements of Section 10(c);
or
(v) without limiting the generality of the foregoing, any
material breach of this Agreement by the Company or any successor thereto.
(d) Notice of Termination. Any termination by the Company for Cause or
---------------------
without Cause, or by the Executive for Good Reason or without Good Reason, shall
be communicated by Notice of Termination to the other party hereto given in
accordance with Section 13(b). For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific termination
provision in this Agreement relied upon, (ii) to the extent applicable, sets
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated and (iii) if the Date of Termination (as defined below) is other than
the date of receipt of such notice, specifies the termination date (which date
shall not be more than 15 days after the giving of such notice). The failure by
the Executive or the Company to set forth in the Notice of Termination any fact
or circumstance which contributes to a showing of Good Reason or Cause shall not
waive any right of the Executive or the Company hereunder or preclude the
Executive or the Company from asserting such fact or circumstances in enforcing
the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
-------------------
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason or without Good Reason, the date of receipt of the
Notice of Termination or any later date specified therein, as the case may be,
(ii) if the Executive's employment is terminated by the Company other than for
Cause, the date on which the Company notifies the Executive of such termination
and (iii) if the Executive's employment is terminated by reason of death or
Disability, the date of death of the Executive or the Disability Effective Date,
as the case may be.
5. Obligations of the Company upon Termination.
-------------------------------------------
(a) Good Reason; Other Than for Cause, Death or Disability. If,
------------------------------------------------------
during the Employment Period, the Company shall terminate the Executive's
employment other than for
4
<PAGE>
either Cause or Disability or the Executive shall terminate his employment for
Good Reason, and the termination of the Executive's employment in any case is
not due to his death:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of the Executive's Annual Base Salary through the
Date of Termination to the extent not theretofore paid and any compensation
previously deferred by the Executive (together with any accrued interest or
earnings thereon) and any accrued vacation pay ("Accrued Obligations"); and
B. an amount (the "Severance Amount") equal to whichever of
the following is applicable: If such termination is prior to a Change in
Control, an amount equal to the Executive's Annual Base Salary; or if such
termination is following a Change in Control, an amount equal to two times the
sum of (x) the Executive's Annual Base Salary plus (y) the Executive's budgeted
Bonus for the year in which the termination occurs; and
C. any amount arising from Executive's participation in, or
benefits under, any Investment Plans ("Accrued Investments"), which amounts
shall be payable in accordance with the terms and conditions of such Investment
Plans.
(ii) for the remainder of the Employment Period, or such longer
period as any plan, program, practice or policy may provide, the Company shall
continue benefits provided under Welfare Plans to the Executive and/or the
Executive's family at least equal to those which would have been provided to
them if the Executive's employment had not been terminated; provided, however,
that if the Executive becomes reemployed with another employer and is eligible
to receive similar benefits under another employer provided plan, such benefits
described herein shall be secondary and not duplicate to those provided under
such other plan during such applicable period of eligibility (such continuation
of such benefits for the applicable period herein set forth shall be hereinafter
referred to as "Welfare Benefit Continuation"). For purposes of determining
eligibility of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to have
remained employed until the end of the Employment Period and to have retired on
the last day of such period; and
(iii) to the extent not theretofore paid or provided, the Company
shall timely pay or provide to the Executive and/or the Executive's family any
other amounts or benefits required to be paid or provided or which the Executive
and/or the Executive's family is eligible to receive pursuant to this Agreement
and under any plan, program, policy or practice or contract or agreement of the
Company ("Other Benefits").
(b) Death or Disability. If the Executive's employment is terminated
-------------------
by reason of the Executive's death or Disability during the Employment Period,
the Company shall have no further payment obligations to the Executive or his
legal representatives under this Agreement, other than for (i) payment of
Accrued Obligations, Accrued Investments and Other Benefits and (ii) the timely
provision of the Welfare Benefit Continuation; provided, however, that if the
Executive is covered by a Company-provided group disability insurance policy at
the date the
5
<PAGE>
Executive's employment is terminated by reason of the Executive's Disability and
benefits under such policy are not then payable to the Executive pursuant to the
terms of such policy, then the Company shall continue to pay the Executive his
Annual Base Salary in effect at the date of such termination (in accordance with
the customary payroll practices of the Company) until the first to occur of six
months after such termination date or benefits becoming payable to the Executive
under such policy.
(c) Cause; Other than for Good Reason. If the Executive's employment
---------------------------------
shall be terminated by the Company for Cause or by the Executive without Good
Reason during the Employment Period, the Company shall have no further payment
obligations to the Executive other than for payment of Accrued Obligations,
Accrued Investments and Other Benefits.
(d) Reduction to Avoid Excess Parachute Payment. Notwithstanding the
-------------------------------------------
other provisions of this Section 5, if any portion of the payments otherwise to
be made to the Executive pursuant to the provisions of this Section 5 would be
considered an "excess parachute payment" under the terms of Section 280G of the
Internal Revenue Code of 1986, as amended (the Code), the amount of cash
otherwise payable to the Executive pursuant to this Section 5 shall be reduced
to the extent (but only to the extent) necessary to cause no portion of the
payments made to the Executive pursuant to this Section 5 to be considered an
"excess parachute payment" under the terms of Section 280G of the Code.
6. Full Settlement. The Company's obligation to make the payments
---------------
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and, except as
provided in Section 5(a)(ii), such amounts shall not be reduced whether or not
the Executive obtains other employment. Neither the Executive nor the Company
shall be liable to the other party for any damages in addition to the amounts
payable under Section 5 hereof arising out of the termination of the Executive's
employment prior to the end of the Employment Period; provided, however, that
the Company shall be entitled to seek damages for any breach of Sections 7, 8 or
11.
7. Rights to Work Product.
----------------------
(a) Work Product. The Executive and the Company each acknowledge that
------------
during the term of the employment of the Executive by the Company or its
affiliates, whether prior to the date hereof or during the Employment Period,
the Executive may have discovered, created or developed improvements,
inventions, formulae, ideas, processes, techniques, know-how, methods, cures,
software designs, computer programs, computer models, data and original works of
authorship including, without limitation, inventions, processes, methods and
cures that relate to or arise from the scientific research in which the Company
and its affiliates were, are now, or may hereinafter become engaged, including
but not limited to research relating to circadian rhythms and temporal
neuroendocrine organization (collectively, the "Work Product"). The Executive
agrees that he will promptly and fully disclose to the Company any and all Work
Product generated, conceived, reduced to practice, or learned by the Executive,
either solely or
6
<PAGE>
jointly with others, that is developed prior to the termination of the
Executive's employment by the Company.
(b) Rights of Company to Intellectual Property. The Executive agrees
------------------------------------------
that whether or not the services performed by the Executive for the Company or
its affiliates are considered works made for hire or an employment to invent,
all Work Product discovered, created or developed by the Executive, either
solely or jointly with others, during the Executive's employment with the
Company or its affiliates, whether prior to the date hereof or during the
Employment Period, shall be and remain the sole property of the Company and its
assigns. Except as specifically set forth in writing and signed by both the
Company and the Executive, the Executive agrees that the Company shall have all
copyright and patent rights with respect to any Work Product discovered,
created, developed or reduced to practice by the Executive, either solely or
jointly with others, during the Executive's employment with the Company or its
affiliates prior to the date hereof or during the Employment Period.
(c) Transfer of Rights. If and to the extent that the Executive may,
------------------
under applicable law, be entitled to claim any ownership interest in any Work
Product that is developed by the Executive, either solely or jointly with
others, during the Executive's employment with the Company or its affiliates,
whether prior to the date hereof or during the Employment Period, the Executive
hereby transfers, grants, conveys, assigns and relinquishes exclusively to the
Company any and all right, title and interest he now owns or may hereafter
acquire in and to such Work Product under patent, copyright, trade secret,
trademark and other law in perpetuity or for the longest period otherwise
permitted by law. The Executive further agrees as to such Work Product to assist
the Company in every reasonable way to obtain and, from time to time, enforce
patents, copyrights, trade secrets and other rights and protection relating to
said Work Product, and to that end, the Executive will execute all documents for
use in applying for and obtaining such patents, copyrights, trade secrets and
other rights and protection with respect to such Work Product as the Company may
desire, together with any assignments thereof to the Company or persons
designated by it. The Executive's obligations to assist the Company in obtaining
and enforcing patents, copyrights, trade secrets and other rights and protection
relating to such Work Product shall continue beyond the termination of the term
of the Executive's employment.
8. Confidential Information.
------------------------
(a) The Executive acknowledges that the Company and its affiliates have
trade, business and financial secrets and other confidential and proprietary
information (collectively, the "Confidential Information") that includes but is
not limited to (i) the inventions, discoveries, methods, cures, and patent
applications owned by or licensed to the Company or its affiliates, (ii) the
materials and information related to the research, clinical studies, products,
services, contracts, customers, commercialization strategies, development plans
and other financial and business affairs of the Company and its affiliates, and
(iii) any and all Work Product which has or will come into the Executive's
possession or knowledge, disclosure of which to, or use by, third parties would
be damaging to the Company. As defined herein, Confidential Information shall
not include (i) information that is generally known to other persons or entities
who can obtain economic value from its disclosure or use and (ii) information
required to be disclosed by the Executive pursuant to a subpoena or court order,
or pursuant to a requirement of a
7
<PAGE>
governmental agency or law of the United States of America or a state thereof or
any governmental or political subdivision thereof; provided, however, that the
-----------------
Executive shall take all reasonable steps to prohibit disclosure pursuant to
subsection (ii) above.
(b) The Executive agrees (i) to hold such Confidential Information in
strictest confidence and (ii) not to release such information to any person
(other than Company employees and other persons to whom the Company has
authorized the Executive to disclose such information and then only to the
extent that such Company employees and other persons authorized by the Company
have a need for such knowledge).
(c) The Executive further agrees not to use any Confidential
Information for the benefit of any person or entity other than the Company.
9. Surrender of Materials Upon Termination. Upon any termination of the
---------------------------------------
Executive's employment, the Executive shall immediately return to the Company
all copies, in whatever form, of any and all Confidential Information and other
properties of the Company and its affiliates which are in the Executive's
possession, custody or control.
10. Successors.
----------
(a) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
8
<PAGE>
11. Non-Competition.
---------------
(a) The term of Non-Competition (herein so called) shall be for a term
beginning on the date hereof and continuing until the end of the 36-month period
following the later of (i) termination of the Executive's employment with the
Company, (ii) the date on which the Executive resumes compliance with the terms
of this Section 11 if at any time during the term of Non-Competition he has
failed to comply with this Section 11 and the Company has demanded that he so
comply, or (iii) the date of entry by a court of competent jurisdiction of a
final judgment enforcing the non-competition covenant against the Executive if
the Executive has failed to comply with this Section 11 (as reformed by the
court, if reformed).
(b) During the term of Non-Competition, the Executive will not (other
than for the benefit of the Company pursuant to this Agreement) directly or
indirectly, individually or as an officer, director, employee, shareholder,
consultant, contractor, partner, joint venturer, agent, equity owner or in any
capacity whatsoever, (i) engage in or promote the research, development,
testing, study or commercialization of methods of treating human and animal
diseases principally based on (A) the science of applying neurotransmitter
modulating drugs on a timed basis to correct abnormalities in the body's
neuroendocrine system or principally based on (B) any other specific research or
science undertaken by or licensed to the Company during the term of the
Executive's employment, for the benefit of the Executive or any other person or
entity located within the Geographic Area which herein shall mean the United
States, Canada, Europe or Israel, or within any other foreign geographic areas
in which the Company or its affiliates, or their partners, licensees, agents,
distributors or contractors, shall be actively marketing or distributing, or
shall be planning to market or distribute, directly or indirectly, any product
or services sold by the Company (a "Competing Business"), (ii) otherwise engage
in or promote any business within the Geographic Area that is principally
engaged in the research or treatment of type II diabetes, obesity, breast cancer
or any other indication with respect to which the Company conducted Phase I, II
or III human clinical trials during the term of the Executive's employment with
the Company (also a "Competing Business"), (iii) hire, attempt to hire, or
contact or solicit with respect to hiring any employee of the Company, or (iv)
call upon, solicit, divert or take away any customers or suppliers of the
Company. Notwithstanding the foregoing, the Company agrees that (A) the
Executive may own less than five percent of the outstanding voting securities of
any publicly traded company that is a Competing Business so long as the
Executive does not otherwise participate in such Competing Business in any way
prohibited by the preceding clause and (B) if the Executive's employment is
terminated by the Company without Cause or by the Executive for Good Reason,
then, after the first anniversary of such termination, nothing contained in this
Section 11(b) shall prevent the Executive from engaging in or promoting the
research, development, testing, study or commercialization of methods of
treating those human and animal diseases with respect to which the Company had
not discovered, created, developed or acquired research or clinical data prior
to such termination. As used in this Section 11(b), "Company" shall include the
Company and any of its affiliates.
(c) In consideration of this non-competition covenant, the Company
shall pay to the Executive, within ten days after the Date of Termination, an
amount equal to 50% of the Annual Base Salary, and on each of the first and
second anniversaries of the Date of Termination, an amount equal to the Annual
Base Salary. The Company may elect not to make any such payment, in which case
the term of Non-Competition shall lapse.
9
<PAGE>
(d) The Executive acknowledges that the geographic boundaries, scope
of prohibited activities, and time duration of the preceding paragraphs are
reasonable in nature and are no broader than are necessary to maintain the
confidentiality and the goodwill of the Company's proprietary technology, plans
and services and to protect the other legitimate business interests of the
Company.
12. Effect of Agreement on Other Benefits. The existence of this
-------------------------------------
Agreement shall not prohibit or restrict the Executive's entitlement to full
participation in the executive compensation, employee benefit and other plans or
programs in which executives of the Company are eligible to participate.
13. Miscellaneous.
-------------
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Massachusetts, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect. This Agreement may not be amended or
modified otherwise than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive: Robert Powell
------------------- 59 Rocky Brook Road
North Andover, MA 01845
If to the Company: Ergo Science Corporation
----------------- Charlestown Navy Yard
100 First Avenue
Charlestown, MA 02129-2051
Attention: Chief Executive Officer
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) If any provision of this Agreement is held to be illegal, invalid
or unenforceable under present or future laws effective during the term of this
Agreement, such provision shall be fully severable; this Agreement shall be
construed and enforced as if such illegal, invalid or unenforceable provision
had never comprised a portion of this Agreement; and the remaining provisions of
this Agreement shall remain in full force and effect and shall not be affected
by the illegal, invalid or unenforceable provision or by its severance from this
Agreement. Furthermore, in lieu of such illegal, invalid or unenforceable
provision there shall be added automatically as part of this Agreement a
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.
10
<PAGE>
(d) The Company agrees to attempt to obtain and maintain a director's
and officer's liability insurance policy during the term of the Executive's
employment covering the Executive on commercially reasonable terms, and the
amount of coverage shall be reasonable in relation to the Executive's position
and responsibilities hereunder; provided, however, that such coverage may be
reduced or eliminated to the extent that the Company reduces or eliminates
coverage for its directors and executives generally.
(e) The Company may withhold from any amounts payable under this
Agreement such Federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(f) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason,
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
(g) The Executive acknowledges that money damages would be both
incalculable and an insufficient remedy for a breach of Section 7, 8 or 11 by
the Executive and that any such breach would cause the Company irreparable harm.
Accordingly, the Company, in addition to any other remedies at law or in equity
it may have, shall be entitled, without the requirement of posting of bond or
other security, to equitable relief, including injunctive relief and specific
performance, in connection with a breach of Section 7, 8 or 11 by the Executive.
(h) The provisions of this Agreement constitute the complete
understanding and agreement among the parties with respect to the subject matter
hereof.
(i) This Agreement may be executed in two or more counterparts.
11
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused this Agreement to be executed in its name on its behalf, all as of the
day and year first above written.
EXECUTIVE
/s/ ROBERT POWELL
----------------------------------
Robert Powell
ERGO SCIENCE CORPORATION
/s/ J. WARREN HUFF
----------------------------------
By: J. Warren Huff
President
12
<PAGE>
EXHIBIT 11
ERGO SCIENCE CORPORATION
STATEMENT RE COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Common stock outstanding
beginning of the year..... 2,500,000 2,500,000 2,500,025 2,500,025 10,145,580
Issuance of cheap
stock(1).................. 1,357,915 1,357,915 743,559 1,231,413 --
Weighted average common
stock issued during
period.................... -- 25 457,192 156,400 1,319
Weighted average common
stock issued upon initial
public offering........... -- -- 102,397 -- --
Weighted average common
stock issued from
conversion of preferred
stock to common stock,
net....................... -- -- 122,080 -- --
Weighted average common
stock issued from
conversion of bridge loan
to common stock, net...... -- -- 16,090 -- --
Weighted average common
stock issued from common
stock dividend............ 24,923
--------- --------- --------- --------- ----------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING...... 3,857,915 3,857,940 3,966,266 3,887,838 10,146,899
========= ========= ========= ========= ==========
</TABLE>
- --------
(1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, stock options issued during the twelve month period prior to the
initial filing date of the Company's Registration Statement at exercise
prices below the assumed initial public offering price of $9.00 have been
included in the calculation of common equivalent shares using the treasury
stock method, as if they were outstanding for all periods presented.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Registration Statement on Form S-1 of Ergo
Science Corporation of our report, dated April 26, 1994, on our audit of the
consolidated statements of operations and deficit accumulated during the
development stage, stockholders' equity (deficit) and cash flows of Ergo
Science Corporation for the year ended December 31, 1993, and for the period
from inception (January 23, 1990) to December 31, 1993. We also consent to the
reference to our firm under the caption "Experts."
Ernst & Young LLP
Boston, Massachusetts
July 17, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 of
Ergo Science Corporation to register 2,500,000 shares of common stock of our
report, dated March 1, 1996, on our audits of the consolidated financial
statements of Ergo Science Corporation as of December 31, 1995 and 1994, and
for the two years then ended. We also consent to the reference to our firm
under the caption "Experts."
Coopers & Lybrand L.L.P.
Boston, Massachusetts July 17, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF DARBY & DARBY, P.C.
We consent to the reference to our firm under the heading "Experts" in the
prospectus that forms a part of the registration statement (the "Registration
Statement") to which this consent is filed as an exhibit. We also consent to
the incorporation by reference of this consent into any subsequent
registration statement filed pursuant to Rule 462(b) under the Securities Act
of 1933 in connection with the offering to which the Registration Statement
relates.
Darby & Darby, P.C.
/s/ S. Peter Ludwig
By: _________________________________
S. Peter Ludwig
New York, New York
July 11, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 15,896,373 8,177,095
<SECURITIES> 6,325,502 8,860,301
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 22,662,251 17,511,093
<PP&E> 3,761,864 3,941,083
<DEPRECIATION> 1,493,630 1,730,687
<TOTAL-ASSETS> 24,949,911 19,765,120
<CURRENT-LIABILITIES> 3,052,460 1,559,924
<BONDS> 0 0
0 0
4,306,520 4,413,170
<COMMON> 101,456 101,680
<OTHER-SE> 17,395,875 13,808,196
<TOTAL-LIABILITY-AND-EQUITY> 24,949,911 19,765,120
<SALES> 0 0
<TOTAL-REVENUES> 94,348 270,402
<CGS> 0 0
<TOTAL-COSTS> 22,244,298 4,168,287
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (22,149,950) (3,897,885)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (22,149,950) (3,897,885)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (22,149,950) (3,897,885)
<EPS-PRIMARY> (8.06) (.39)
<EPS-DILUTED> (8.06) (.39)
</TABLE>
