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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
-OR-
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from...to...
Commission File No. 0-24936
ERGO SCIENCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3271667
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Charlestown Navy Yard
100 First Avenue, Fourth Floor
Charlestown, Massachusetts 02129
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 241-6800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At November 1, 1996 there were 13,015,786 shares of common stock, par value
$.01 per share, of the registrant outstanding.
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ERGO SCIENCE CORPORATION
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995.................................. 3
Consolidated Statements of Operations and Deficit
Accumulated During the Development Stage
for the three months and nine months ended
September 30, 1996 and September 30, 1995 and
for the period from inception (January 23, 1990)
to September 30, 1996.................................. 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and September 30, 1995
and for the period from inception (January 23, 1990)
to September 30, 1996.................................. 5
Notes to Consolidated Financial Statements.................. 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 8
PART II. OTHER INFORMATION..................................................11
SIGNATURES..................................................................13
2
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ERGO SCIENCE CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 24,059,338 $ 15,896,373
Short-term investments...................................................... 18,278,382 6,325,502
Prepaid and other current assets............................................ 266,200 440,376
------------ ------------
Total current assets..................................................... 42,603,920 22,662,251
Equipment and leasehold improvements, net..................................... 2,536,095 2,268,234
Other assets.................................................................. 27,928 19,426
------------ ------------
Total assets.............................................................. $ 45,167,943 $ 24,949,911
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses....................................... $ 1,595,698 $ 2,313,847
Accrued legal costs......................................................... 112,321 695,499
Current portion of capital lease obligations................................ 179,261 43,114
------------ ------------
Total current liabilities................................................. 1,887,280 3,052,460
Long-term portion of capital lease obligations................................ 434,922 93,600
Commitments and contingencies................................................. -- --
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized;
6,903 shares of Series D preferred stock issued and outstanding
at September 30, 1996 and December 31, 1995................................ 4,631,805 4,306,520
Common stock, $.01 par value, authorized 50,000,000 at
September 30, 1996 and December 31, 1995; issued and
outstanding 13,015,786 shares at September 30, 1996 and
10,145,580 shares at December 31, 1995..................................... 130,158 101,456
Additional paid-in capital.................................................. 97,397,797 63,420,487
Cumulative dividends on preferred stock..................................... (2,622,238) (2,296,953)
Deferred compensation....................................................... (1,749,893) (1,849,150)
Deficit accumulated during the development stage............................ (54,941,888) (41,878,509)
------------ ------------
Total stockholders' equity................................................ 42,845,741 21,803,851
------------ ------------
Total liabilities and stockholders' equity............................. $ 45,167,943 $ 24,949,911
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
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ERGO SCIENCE CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT ACCUMULATED
DURING THE DEVELOPMENT STAGE
<TABLE>
<CAPTION>
Period From
Inception
Three Months Ended September 30, Nine Months Ended September 30, (January 23, 1990)
-------------------------------- ------------------------------- through
1996 1995 1996 1995 September 30, 1996
------------ ------------- ------------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Licensing and supplier fees.... -- -- -- -- $ 355,671
Interest....................... $ 373,710 $ 16,185 $ 840,025 $ 56,593 1,397,511
----------- ------------ ------------ ------------ ------------
373,710 16,185 840,025 56,593 1,753,182
Operating expenses:
Research and development....... 2,872,012 2,078,561 8,923,045 6,089,263 28,368,457
Purchase of in-process
research and development...... -- -- 168,750 5,520,064 7,188,814
General and administrative..... 2,570,177 1,903,474 4,811,609 4,804,647 20,951,406
----------- ------------ ------------ ------------ ------------
5,442,189 3,982,035 13,903,404 16,413,974 56,508,677
----------- ------------ ------------ ------------ ------------
Net loss..................... (5,068,479) (3,965,850) (13,063,379) (16,357,381) (54,755,495)
Accretion of dividends on
preferred stock................. (109,851) 354,816 (325,285) (278,255) (2,336,171)
Dividends on redeemable
preferred stock................. -- (7,123,536) -- (7,123,536) (7,123,536)
Dividends on preferred
stock........................... -- -- -- -- (2,018,763)
----------- ------------ ------------ ------------ ------------
Net loss to common
stockholders.................... $(5,178,330) $(10,734,570) $(13,388,664) $(23,759,172) $(66,233,965)
=========== ============ ============ ============ ============
Net loss per common share........ $(0.45) $(2.76) $(1.26) $(6.11)
=========== ============ ============ ============
Weighted average common
shares outstanding.............. 11,634,943 3,887,838 10,653,569 3,887,838
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
4
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ERGO SCIENCE CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From Inception
Nine Months Ended September 30, (January 23, 1990)
---------------------------------- through
1996 1995 September 30, 1996
------------- ------------ ---------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(13,063,379) $(16,357,381) $(54,755,494)
Adjustments to reconcile net loss to cash used
by operating activities:
Depreciation and amortization..................... 2,616,323 838,683 5,065,692
Noncash purchase of in-process
research and development........................ 168,750 5,520,064 5,688,814
Loss on sale of equipment......................... -- -- 28,331
Noncash charge for renegotiated supplier
agreement....................................... -- 1,089,356 1,747,931
Other noncash charges............................. -- -- 86,347
Changes in operating assets and liabilities:
Prepaid and other current assets................ 174,177 (51,584) (266,199)
Other assets.................................... (8,503) 12,658 (80,071)
Accounts payable and accrued expenses........... (1,470,077) 975,731 1,509,267
Deferred revenue................................ -- (184,615) 5,559,714
------------ ------------ ------------
Net cash used in operating activities............... (11,582,709) (8,157,088) (35,415,668)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of short-term investments................ (22,285,380) -- (28,610,882)
Proceeds from maturity of short-term
investments.................................... 10,332,501 -- 10,332,501
Purchase of equipment and leasehold
improvements................................... (1,050,734) (525,014) (4,758,601)
Proceeds received on sale of equipment............ -- -- 31,724
------------ ------------ ------------
Net cash used in investing activities............... (13,003,613) (525,014) (23,005,258)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of convertible debt, net... -- -- 3,409,552
Distribution paid to S Corp stockholder........... -- -- (186,393)
Principal payments under capital lease
obligations..................................... (72,248) (27,868) (131,296)
Proceeds from issuance of promissory notes........ -- 4,000,000 7,000,000
Repayment of promissory notes..................... -- (3,000,000) (3,000,000)
Proceeds from issuance of common stock and
Series D redeemable preferred stock............. -- 1,376,666 1,392,686
Proceeds received from capital contributions...... -- -- 102,176
Proceeds from issuance of Series B and C
redeemable convertible preferred stock.......... -- 4,999,892 18,041,528
Proceeds from issuance of common stock, net
of issuance costs............................... 32,249,817 -- 55,280,293
Proceeds from stock options exercised............. 22,000 -- 22,000
Proceeds from sale-leaseback agreement............ 549,718 -- 549,718
------------ ------------ ------------
Net cash provided by financing activities........... 32,749,287 7,348,690 82,480,264
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents........................................ 8,162,965 (1,333,412) 24,059,338
Cash and cash equivalents at beginning of
period............................................. 15,896,373 1,880,982 --
------------ ------------ ------------
Cash and cash equivalents at end of period.......... $ 24,059,338 $ 547,570 $ 24,059,338
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
5
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ERGO SCIENCE CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying financial statements are unaudited and have been
prepared by the Company in accordance with generally accepted accounting
principals.
Certain information and footnote disclosure normally included in the
Company's annual financial statements have been condensed or omitted. The
interim financial statements, in the opinion of management, reflect all
adjustments (including normal recurring accruals) necessary for a fair
statement of the results for the interim periods ended September 30, 1996 and
1995.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
These interim financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1995, which are
contained in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31, 1995.
2. Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with maturities of three months or less at the date
of purchase to be cash equivalents. Changes in cash and cash equivalents may
be affected by shifts in investment portfolio maturities as well as by actual
net cash receipts or disbursements.
At September 30, 1996 and December 31, 1995, cash equivalents were
composed primarily of investments in money market funds, United States
government obligations and high grade commercial paper that mature within 90
days of purchase.
3. Short-term Investments
The following is a summary of securities with maturities greater than
three months not classified as cash and cash equivalents. All short-term
investments are classified as held-to-maturity.
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Commercial paper....................... $ 7,905,502 $2,388,948
Federal agency notes................... 10,372,880 3,936,554
----------- ----------
Total short-term investments... $18,278,382 $6,325,502
=========== ==========
</TABLE>
The held-to-maturity securities are short-term in nature. Changes in
market interest rates would not have a significant effect on the fair value of
these securities. These securities are carried at amortized cost, which
approximates fair value.
6
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4. Capital Stock
On August 14, 1996, the Company completed a second public offering and
sold an aggregate of 2,842,706 shares of common stock at $12.25 per share
resulting in net proceeds, after deducting underwriting discounts and offering
costs, of $32,249,817.
5. Net Loss Per Common Share
Net loss per common share is computed based upon the weighted average
number of common shares outstanding. Common equivalent shares are not included
in the per share calculations where the effect of their inclusion would be
anti-dilutive. 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 to common stockholders.
Fully diluted net loss per common share is the same as primary net loss
per common share.
7
<PAGE>
ITEM 2. 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/TM/ 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 $54,941,888 as of
September 30, 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 and Nine Months Ended September 30, 1995 and 1996
Total revenues increased from $16,185 and $56,593 for the three month and
nine month periods ended September 30, 1995, respectively, to $373,710 and
$840,025 for the same periods in 1996. Revenues were derived primarily from
interest income earned on cash, cash equivalents and short-term investments.
The increases in interest income are attributable to an increase in the
average amounts of cash, cash equivalents and short-term investments during
the first three quarters of 1996, compared to the first three quarters of
1995. These amounts increased as a result of proceeds received from the
Company's initial public offering in December 1995 and second public offering
in August 1996.
Research and development expenses increased from $2,078,561 to $2,872,012
for the three month periods ended September 30, 1995 and 1996, respectively.
For the nine month periods ended September 30, 1995 and 1996, research and
development expenses decreased from $11,609,327 to $9,091,795, respectively.
The decrease was due to the reduction of in-process research and development
purchases which totaled $5,520,064 and $168,750 through September 30, 1995 and
1996, respectively. Excluding the purchases of in-process research and
development, expenses increased $2,833,782 for the nine month period ended
September 30, 1996, as compared to the same period in 1995. The increases were
principally the result of greater expenses related to Phase III clinical
trials for Ergoset, continued progress on several earlier stage research
programs including those in metastatic breast cancer and photodynamic therapy,
and the hiring of additional research personnel.
General and administrative expenses increased from $1,903,474 and
$4,804,647 for the three month and nine month periods ended September 30,
1995, to $2,570,177 and $4,811,609 for the same periods in 1996. The nine
month period ended September 30, 1995 included a net charge of $1,089,356
recorded in the first quarter of 1995 which related to a renegotiated supply
agreement. Excluding this nonrecurring, noncash charge, general and
administrative expenses increased a total of $1,096,318 for the first nine
months of 1996, compared to the same period in 1995. The 1996 increases were
8
<PAGE>
mainly due to a $1,277,980 charge in September 1996 related to the
resignation of a Company senior executive and the hiring of additional
administrative personnel, and were offset by a reduction in legal costs.
Net loss to common stockholders decreased from $10,734,570 and
$23,759,172 for the three month and nine month periods ended September 30,
1995, respectively, to $5,178,330 and $13,388,664 for the same periods in
1996. The decreases were primarily due to a $7,123,536 noncash charge in the
third quarter of 1995 related to a preferred stock dividend and costs
associated with the purchases of in-process research and development and the
renegotiated supply agreement that were recognized in the first half of 1995.
The net loss per common share decreased from $2.76 and $6.11 for the three
month and nine month periods ended September 30, 1995, respectively, to $0.45
and $1.26 for the same periods in 1996. The declines in net loss per common
share were attributable to the decreased loss to common stockholders and the
increase in weighted average common shares outstanding resulting from the
Company's public stock offerings in December 1995 and August 1996. For both
the three month and nine month periods ended September 30, 1995, the weighted
average common shares outstanding was 3,887,838, compared to 11,634,943 and
10,653,569 for the same periods in 1996.
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 two public offerings. Private placements of equity securities
through September 30, 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. Subsequently, on August 14, 1996, the Company raised an additional
$32,249,817, net of commissions and offering costs, from the sale of stock in
a second public offering. Cash and cash equivalents were $15,896,373 and
$24,059,338, while short term investments were $6,325,502 and $18,278,382, at
December 31, 1995 and September 30, 1996, respectively. The increase in cash,
cash equivalents and short-term investments at September 30, 1996, was due
primarily to the Company's second public offering.
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. Currently, the
Company is conducting clinical trials of its lead drug candidate, Ergoset, for
the treatment of Type II diabetes, and a two drug combination for the
treatment of breast cancer. On July 18, 1996, the Company announced the
results from two Phase III trials of Ergoset as adjunctive therapy with
sulfonylurea agents in the treatment of Type II diabetes. The preliminary
analysis of the results of these two Phase III trials indicated that Ergoset
improved control of glucose, triglycerides, cholesterol and free fatty acids.
Based on its analysis of the results from these two Phase III trials, the
Company intends to submit a New Drug Application (NDA) to the U.S. Food and
Drug Administration (FDA) for Ergoset to treat Type II diabetes. The Company
anticipates announcing by the end of calendar 1996 the results of a third
Phase III trial of Ergoset as monotherapy in the treatment of Type II
diabetes. The breast cancer clinical trial being conducted by the Company is
an open label Phase II study.
As of September 30, 1996, the Company's net investment in equipment and
leasehold improvements was $2,536,095. 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 its available cash, cash equivalents, short-
term investments and expected interest income, will be adequate to fund its
current and anticipated levels of operations through mid-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. 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. (See Part II Item 5 for a description of risk
factors). The Company is pursuing additional research and development of
Ergoset and other product candidates to treat obesity, breast
9
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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.
The terms of the Company's Series D Preferred Stock prohibit the Company
from paying dividends on the common stock.
This Form 10-Q contains forward-looking statements made by the Company
pursuant to the safe-harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements include, for example, statements
relating to the Company's intention to file an NDA, clinical development and
regulatory matters (including the completion and results of trials), and the
time at which the Company will be required to obtain additional funding.
Forward-looking statements reflect the Company's current views with respect to
such future events. Actual results may vary materially and adversely from those
anticipated, believed, estimated or otherwise indicated. Important factors that
could cause actual results to differ materially include, without limitation,
(1) there can be no assurance that the results from the third Phase III trial
of Ergoset will be satisfactory, (2) data obtained from clinical trials are
subject to varying interpretations and there can be no assurance that FDA (or
an FDA advisory panel of experts) will agree with the Company's assessment of
clinical trial results, (3) there can be no assurance of FDA approval to market
Ergoset for Type II diabetes or any other indication or that FDA will not
require additional clinical trials of Ergoset, (4) uncertainty related to the
scientific development of a new medical therapy, (5) competition in the
antidiabetic market is intense and two other products were recently approved by
FDA to treat Type II diabetes, (6) the need for additional funding, and (7)
the uncertainty relating to patent protection with respect to pharmaceutical
and biotechnology inventions. Further information and additional important
factors are set forth in (a) Part II Item 5 of this Form 10-Q, and (b) sections
entitled "Risk Factors" and "Business--Ergoset for Type II Diabetes Phase III
Clinical Trial Results" in a prospectus filed pursuant to Rule 424(b)(4). The
Company does not undertake to update any forward-looking statement that may be
made from time to time by or on behalf of the Company.
10
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PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company's business of discovering and developing novel treatments
for metabolic disorders and cancer involves significant scientific,
development, clinical trial and regulatory risks, and expense. There can be no
assurance that any of the Company's drug candidates will successfully meet
their development goals and receive market clearance from FDA. Important
milestones remain to be achieved before the Company can commercialize any of
its products, and failure to achieve these milestones would have a material
adverse effect on the business and financial condition of the Company and the
price of the Company's common stock.
In order for a drug as Ergoset to be approved for commercial sale, FDA
and other authorities require that the safety and efficiacy 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 of its clinical trials of Ergoset. If FDA or its advisory panel of
experts disagrees with the Company's analysis of its trial results 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.
The Company has completed two Phase III clinical trials of its lead drug
candidate, Ergoset, and expects to announce the results of a third Phase III
clinical trial of Ergoset as monotherapy prior to the end of calendar 1996.
There can be no assurance that the results of this third Phase III trial will
be satisfactory. If the results of the third Phase III trial are not
satisfactory, the Company will not be able to submit an NDA for Ergoset as
monotherapy based on such trial results and would be required to conduct
additional trials to apply to FDA for a monotherapy claim. Further testing of
Ergoset and the Company's other product candidates in research or development
may reveal undesirable and unintended side effects or other characteristics
that may prevent or limit their commercial use. The Company or FDA may
suspend clinical trials at any time if the subjects or patients participating
in such trials are being exposed to unacceptable health risks. There can be no
assurance that the Company will not encounter problems in clinical trials
which will cause the Company or FDA to delay or suspend clinical trials.
Products, if any, resulting from the Company's research and development
programs are not expected to be commercially available for a number of years.
In addition, the Company believes that patent and other proprietary
rights are important to its business, and in this regard intends to file
applications as appropriate for patents covering both its products and
processes. Litigation, which could result in substantial cost to the Company,
may also be necessary to enforce any patents issued to the Company or to
determine the scope and validity of third-party proprietary rights. It is
uncertain whether any third-party patents will require the Company to alter
its products or processes, obtain licenses, or cease certain activities. If
any licenses are required, there can be no assurance that the Company will be
able to obtain any such license on commercially favorable terms, if at all.
Failure by the Company to obtain a license to any technology that it may
require to commercialize its products may have a material adverse impact on
the Company.
11
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On July 18, 1996, the Company announced the results of two Phase III
trials of Ergoset as a treatment of Type II diabetes. The Company filed
information about those results with the Securities and Exchange Commission in
a prospectus filed pursuant to Rule 424(b)(4). The sections of that filing
entitled "Risk Factors" and "Business--Ergoset for Type II Diabetes Phase III
Clinical Trial Results" are hereby incorporated by reference in their
entirety.
On September 12, 1996, J. Warren Huff, then President and Chief
Executive Officer of the Company, resigned as an officer, director and
employee of the Company (and its subsidiaries). Ronald H. Abrahams was elected
a director of the Company and appointed President and Acting Chief Executive
Officer of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
---------
10.1 - Resignation Agreement by and between Ergo Science Corporation
and J. Warren Huff.
10.2 - First Amendment to Employment Agreement by and between Ergo
Science Corporation and Ronald H. Abrahams.
11 - Statement Re Computation of Loss Per Share.
27 - Financial Data Schedule.
Reports on Form 8-K:
--------------------
None.
12
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ERGO SCIENCE CORPORATION
By: /s/ Alan T. Barber
------------------------------------------
Alan T. Barber
Vice President, Finance and Administration and
Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer)
Date: November 14, 1996
-----------------
13
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EXHIBIT 10.1
RESIGNATION AGREEMENT
by and between
ERGO SCIENCE CORPORATION
and
J. WARREN HUFF
THIS RESIGNATION AGREEMENT (the "Agreement") is made and entered into as of
the 12th day of September 1996, by and between Ergo Science Corporation, a
Delaware corporation (together with its successors and assigns permitted
hereunder, the "Company"), and J. Warren Huff (the "Executive").
RECITALS
WHEREAS, the Executive has heretofore served as a Director and the
President and Chief Executive Officer of the Company and as a Director and
officer of affiliates of the Company; and
WHEREAS, effective as of the date hereof, the Executive has resigned from
all such director and officer positions with the Company and from all director
and officer positions with all affiliates of the Company, as set forth in that
certain letter of resignation dated of even date herewith submitted by the
Executive to the Board of Directors.
AGREEMENT
NOW, THEREFORE, in connection with such resignation, the Executive and the
Company hereby agree as follows:
1. Plan Stock Options. Pursuant to the Company's Amended and Restated
------------------
1995 Long Term Incentive Plan (the "Plan"), the Company has granted to the
Executive options (the "Plan Options") to purchase 220,000 shares of common
stock, par value $.01 per share, as evidenced by that certain Nonstatutory Stock
Option Agreement dated October 6, 1995, as amended, with respect to 125,000
shares, and by that certain Nonstatutory Stock Option Agreement dated of even
date herewith with respect to 95,000 shares. Without regard to any other
provision of this Agreement or the Plan except the immediately following
sentence, all of the Plan Options have become and will continue to be fully
vested and fully exercisable by the Executive in all respects. Unless a Change
in Control occurs, the Executive shall not exercise any of the Plan Options
before February 9, 1997. Change in Control shall have the meaning ascribed to
that term in the Plan.
2. Non-Plan Stock Options. In addition to the Options referenced in
----------------------
Section 1, the Company has granted to the Executive options (the "Non-Plan
Options") to purchase 144,725 shares of Common Stock (27,525 of which have been
purchased pursuant to exercises to date) under the terms of that certain Amended
Option and Proxy Agreement dated November 1, 1993,
<PAGE>
as amended (the "Non-Plan Option Agreement"). Without regard to any other
provision of this Agreement or the Non-Plan Option Agreement, all of the Non-
Plan Options have become and will continue to be fully vested and exercisable by
Executive in all respects.
3. Severance Payments.
------------------
(a) The Executive and the Company are parties to that certain Amended
and Restated Employment Agreement (the "Employment Agreement") dated November
16, 1995. Until the earlier of (i) the Executive obtaining full time employment
and (ii) March 31, 1998:
(i) the Executive shall be entitled to receive from the Company
his Annual Base Salary (as defined in the Employment Agreement and in the annual
amount of $225,000) payable $18,750 each month on the last business day of such
month; and
(ii) the Executive shall be entitled to participate in those
Investment Plans and Welfare Plans (each as defined in the Employment Agreement)
of the Company maintained by the Company as of the date hereof.
(b) The Company shall pay to the Executive an amount equal to the
product of (i) 75%, (ii) the average Annual Percentage Bonus of the President
and Vice President of the Company who were employed for the full calendar year
and receive an annual bonus for the fiscal year ended December 31, 1996, and
(iii) $225,000. Such amount shall be paid by the Company at the same time as
such fiscal 1996 bonuses are paid to the Company's officers. "Annual Percentage
Bonus" shall mean the quotient of (i) the amount of an officer's annual bonus
divided by (ii) the amount of that officer's Annual Base Salary (as defined in
that officer's employment agreement with the Company).
4. Termination of Employment Agreement. Except for the provisions
-----------------------------------
contained in Section 7 (Right to Work Product), Section 8 (Confidential
Information), Section 10 (Successors) and Section 13 (Miscellaneous) of the
Employment Agreement, the terms and provisions of the Employment Agreement shall
hereafter be null and void and the Executive and the Company hereby acknowledge
that neither party has any further obligations thereunder (including obligations
set forth in Section 5 thereof).
5. Publicity. The Executive shall not hereafter make any public
---------
statements (i) contrary to any public statements made by the Company or (ii)
derogatory about the Company or its business, prospects, past employees or
present employees. For purposes of this Agreement, public statements include
(i) statements made to the press, (ii) statements made in a public forum, and
(iii) statements intended or reasonably expected to be broadly disseminated. In
no event, however, shall statements concerning the Executive's termination of
employment with the Company made during private discussions either (i) with
parties having a historical relationship with the Company or (ii) in connection
with the Executive's search for employment be prohibited by this Agreement. The
Executive acknowledges that money damages would be both incalculable and an
insufficient remedy for a breach of Section 5 of this Agreement by the Executive
<PAGE>
and that any such breach would cause the Company irreparable harm. Accordingly,
the Executive, 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.
6. Computer. The Company hereby transfers all right, title and interest it
--------
has in that certain IBM 560 with software and accessories (the "Computer") to
the Executive. The Company shall provide the Executive with reasonable
technical support services to maintain the Computer during the period during
which the Executive receives payment pursuant to Section 3(a)(i). Under no
circumstances, however, shall the Executive be entitled to access to any
computerized information systems maintained by the Company or any electronic
data maintained therein. The Company will continue to provide Executive with a
voice mailbox during the period in which payments are continued under Section
3(a)(i) of this Agreement.
7. Counterparts. This Agreement may be executed in two or more
------------
counterparts.
8. Remedies. In addition to any other remedies at law or in equity that
--------
may be available to the Company, upon the Executive's failure to comply with any
provision of this Agreement or the Employment Agreement (as amended by Section 4
hereof) the Company shall have no obligations under Section 3 of this Agreement.
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/ J. Warren Huff
-------------------------------
J. Warren Huff
ERGO SCIENCE CORPORATION
/s/ Ronald H. Abrahams
-------------------------------
By: Ronald H. Abrahams, Ph.D.
President and Acting Chief
Executive Officer
<PAGE>
EXHIBIT 10.2
FIRST AMENDMENT
to
EMPLOYMENT AGREEMENT
by and between
ERGO SCIENCE CORPORATION
and
Ronald H. Abrahams, Ph.D.
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this "First Amendment"),
amending that certain Employment Agreement (the "Agreement") dated October 6,
1995, by and between Ergo Science Corporation, a Delaware corporation (together
with its successors and assigns permitted hereunder, the "Company"), and Ronald
H. Abrahams, Ph.D. (the "Executive"), is made and entered into as of the 12th
day of September, 1996 by and between the Company and the Executive.
Capitalized terms used and not otherwise defined herein shall have the meanings
ascribed to them in the Agreement.
1. Section 2(a)(i) of the Agreement is amended to read, in its entirety,
as follows:
"2. Terms of Employment.
-------------------
(a) Position and Duties.
-------------------
(i) During the term of the Executive's employment, the
Executive shall serve as President and, until the Board appoints a Chief
Executive Officer, shall act as Chief Executive Officer.
In acting as Chief Executive Officer, the Executive shall (x) be
responsible for preparing all Board agendas and, in consultation with the Board,
scheduling meetings of the Board, (y) have all executive authority and
responsibility associated with the activities of the Board other than presiding
at Board meetings, and (z) determine, in consultation with the Board, which
projects will be undertaken by Manuel Cincotta, Jr., as consultant to the
Company.
In serving as President, the Executive 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 President of an enterprise comparable to the Company."
<PAGE>
2. Section 2(b)(i) of the Agreement is amended to read, in its entirety,
as follows:
"(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 $250,000. 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."
3. A new Section 2(b)(vii) is added to read, in its entirety, as follows:
"(vii) Temporary Living Expenses. During the term of the
-------------------------
Executive's employment and until the earlier of (A) April 30, 1997 and (B) the
Executive's purchase of a residence in the Boston, Massachusetts area, the
Executive shall be entitled to receive prompt reimbursement for reasonable
temporary living expenses (including apartment rent, utilities and furniture
rental) incurred by the Executive to maintain a temporary residence in the
Boston, Massachusetts area. It is understood that such living expenses will
approximate $2,300 per month."
4. Section 4(c)(i) of the Agreement is amended to read, in its entirety,
as follows:
"(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 and
reporting requirements), authority, duties or responsibilities as President 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 (the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position, authority, duties or responsibilities as
acting Chief Executive Officer shall not constitute "Good Reason");"
5. A new paragraph, to be the last paragraph of Section 4(c) of the
Agreement, is
<PAGE>
added to read, in its entirety, as follows:
"In addition to the foregoing, if after three months following the
retention by the Company of a permanent Chief Executive Officer other than the
Executive, the Executive in good faith believes that he and the new Chief
Executive Officer cannot productively work together, the Executive may provide
notice thereof to the Board of Directors along with a detailed written
explanation of the nature of the unworkable relationship. If within 30 days
following receipt by the Board of Directors of such notice and written
explanation of the nature of the unworkable relationship has not been resolved
to the satisfaction of the Executive, the Executive may terminate his employment
with the Company and such termination shall be considered to be termination for
Good Reason."
6. Except as expressly set forth herein, the Agreement shall remain in
full force and effect in accordance with its terms.
7. This First Amendment may be executed in two or more counterparts.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board, the Company has caused this
First Amendment to be executed in its name on its behalf, all as of the day and
year first above written.
EXECUTIVE
/s/ Ronald H. Abrahams
-----------------------------
Ronald H. Abrahams, Ph.D.
ERGO SCIENCE CORPORATION
/s/ Alan T. Barber
----------------------------
By: Alan T. Barber
Chief Financial Officer
<PAGE>
Exhibit 11
ERGO SCIENCE CORPORATION
STATEMENT RE COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
Historical
Weighted
Average
Type of Security Shares
--------------------------- -----------
<S> <C>
Company, for the three months ended September 30, 1995:
Common stock outstanding beginning of the quarter.............. 2,656,425
Issuance of cheap stock(1)..................................... 1,231,413
----------
Weighted average common shares outstanding................... 3,887,838
==========
Company, for the nine months ended September 30, 1995:
Common stock outstanding beginning of the year................. 2,500,025
Issuance of cheap stock(1)..................................... 1,231,413
Weighted average common stock issued during period............. 156,400
----------
Weighted average common shares outstanding................... 3,887,838
==========
Company, for the three months ended September 30, 1996:
Common stock outstanding beginning of the quarter.............. 10,168,080
Weighted average common stock issued during period............. 1,466,863
----------
Weighted average common shares outstanding................... 11,634,943
==========
Company, for the nine months ended September 30, 1996:
Common stock outstanding beginning of the year................. 10,145,580
Weighted average common stock issued during period............. 507,989
----------
Weighted average common shares outstanding................... 10,653,569
==========
</TABLE>
- ---------------
(1) Pursuant to Securities and Exchange Commission Staff 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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 24059338
<SECURITIES> 18278382
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42603920
<PP&E> 4751479
<DEPRECIATION> 2215384
<TOTAL-ASSETS> 45167943
<CURRENT-LIABILITIES> 1887280
<BONDS> 0
0
4631805
<COMMON> 130158
<OTHER-SE> 38083778
<TOTAL-LIABILITY-AND-EQUITY> 45167943
<SALES> 0
<TOTAL-REVENUES> 840025
<CGS> 0
<TOTAL-COSTS> 13903404
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (13063379)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13063379)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13063379)
<EPS-PRIMARY> (1.26)
<EPS-DILUTED> (1.26)
</TABLE>
