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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
-OR-
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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
CHARLESTOWN, MASSACHUSETTS 02129
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 241-6800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 26, 1997, was approximatley $94,341,000. As of March 26,
1997, there were 13,174,475 outstanding shares of the registrant's common stock.
Portions of the registrant's Proxy Statement to be furnished to stockholders in
connection with its 1997 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K
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PART I
ITEM 1. BUSINESS
This Report 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 reflect the Company's current
views with respect to such events. Actual results may very materially and
adversely from those anticipated, believed, estimated or otherwise indicated.
Important factors that could cause actual results to differ materially, include,
without limitation, the factors set forth below in "Risk Factors."
OVERVIEW
Ergo Science Corporation ("Ergo" or the "Company") 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 ("FDA") to treat Parkinson's disease
and other conditions. The Company recently completed three Phase III clinical
trials of ERGOSET for the treatment of Type II diabetes. In two of the Phase
III trials, ERGOSET was used as an adjunct to sulfonylurea agents; and in the
third trial, ERGOSET was used as monotherapy. Analysis of the Phase III clinical
trials indicated that ERGOSET improved control of glycated hemoglobin A\\1c\\
(HbA\\1c\\), glucose, triglycerides, and free fatty acids in Type II diabetics
compared to placebo. The Company plans to submit a New Drug Application ("NDA")
to FDA for ERGOSET to treat Type II diabetes in mid-1997. Ergo currently
retains all marketing rights to its drug candidates.
One of the primary measures of blood glucose levels in diabetics is
HbA\\1c\\. In the three Phase III clinical trials of ERGOSET for the treatment
of Type II diabetes, known collectively as the TRIAD Study (Time-Regulated
Intervention in Adult Diabetes), treatment with ERGOSET reduced HbA\\1c\\
compared to placebo. Analysis of the two adjunctive trials indicates that
ERGOSET treatment resulted in an average decrease in HbA\\1c\\ of 1% compared
with placebo in the 60 percent of subjects who were classified as pre-defined
ERGOSET responders. Compared to baseline, the reduction for responders was 0.6%.
In the monotherapy trial, treatment with ERGOSET resulted in a similar decrease
of 1% HbA\\1c\\ in the ERGOSET responder group compared to placebo and 0.7%
compared to baseline.
Reduction in the level of blood glucose in Type II diabetics reduces
the severity and the risk of developing microvascular complications such as
kidney failure, blindness and peripheral neuropathy. Reduction in both blood
glucose levels and blood lipid levels is also believed to lower the incidence
and degree of cardiovascular complications which are the leading cause of death
in subjects with Type II diabetes. Treatment with ERGOSET in the Phase III
trials resulted in clinically meaningful reductions of triglycerides and free
fatty acids compared to placebo. Additionally, the TRIAD study indicated that
ERGOSET treatment was safe and generally well-tolerated. See "Business--
Development of ERGOSET and Other Products for Diabetes-- Clinical Trials of
ERGOSET for Type II Diabetes" and "Risk Factors-- Forward Looking Statements
and Associated Risks."
In 1997 Ergo plans to commence additional Phase II clinical trials of
ERGOSET for the treatment of obesity. See "Business-- Development of ERGOSET
and Other Products for the Treatment of Obesity." Currently, the Company is
continuing to enroll subjects in a small Phase II clinical trial of ERGOSET in
combination with another neurotransmitter modulating compound for the treatment
of metastatic breast cancer which was begun in late 1995. See "Business--
Development of ERGOSET for the Treatment of Cancer." The Company is also
screening for lead clinical candidates for use in photodynamic therapy ("PDT")
to treat various cancers and dopamine agonists for Type II diabetes and obesity.
See "Business--Development of Photodynamic Therapy (PDT) for the Treatment of
Cancer," and "Business--Development of ERGOSET and Other Products for
Diabetes--Additional ERGOSET Clinical Trials."
The Company's technology platform is based on over thirty years of
research by the Company's founding scientists into the regulation of glucose and
lipid metabolism by the neuroendocrine system. In many species, animals become
obese and insulin resistant as a means of surviving adverse environmental
conditions such as low food availability,
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migration or hibernation. These animals then revert to a lean, insulin sensitive
condition when environmental conditions become more favorable. Ergo's founding
scientists have demonstrated that the shift from the lean to the obese condition
in these animals is associated with a shift in the daily patterns of the
neuroendocrine system, i.e. a shift in the daily patterns of the levels of
neurotransmitters in the brain and hormones throughout the body. Ergo's
scientists have further demonstrated that an animal can be switched from an
obese state to a lean state by "resetting" the daily neuroendocrine patterns
from those associated with obesity to those associated with the lean animal. The
Company's research indicates that obese and diabetic humans have daily
neuroendocrine patterns that are different from healthy subjects. The Company's
strategy for treating Type II diabetes and obesity in humans is to administer
neurotransmitter modulating drugs such as ERGOSET on a timed basis to reset the
daily neuroendocrine patterns of obese and Type II diabetic patients to more
closely resemble the daily neuroendocrine patterns of lean, non-diabetic
subjects. See "Business -History and Science of the Company's Technology and
Preclinical Research."
The following table illustrates the status of the Company's current
product development efforts:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRODUCT CANDIDATE DISEASE INDICATIONS STATUS
- ----------------------------- ------------------------ ----------------------------------------------------
<S> <C> <C>
METABOLIC DISORDERS
ERGOSET as adjunctive Type II diabetes NDA preparation in progress; two Phase III
therapy with sulfonylureas clinical trials completed 1996
ERGOSET as monotherapy Type II diabetes NDA preparation in progress; Phase III clinical
trial completed 1996
ERGOSET as adjunctive Type II diabetes Phase II clinical trial planned for 1997
therapy with insulin
ERGOSET with hypocaloric Reduce Weight and Fat Phase II clinical trials planned for 1997
diet in Type II diabetics
ERGOSET with hypocaloric Obesity Phase II clinical trial planned for first half
diet of 1997
D1/D2 combination (1) Type II diabetes Preclinical research; selection of lead clinical
Obesity candidate planned for 1997
Dopamine agonist/serotonin Type II diabetes Preclinical research
agonist Obesity
IMMUNE DISORDERS/CANCER
ERGOSET/serotonin agonist Metastatic breast cancer Phase II clinical trial currently enrolling subjects
PDT and PDT/immune Cancer Preclinical research ongoing and selection of
regulation lead clinical candidate planned for 1997
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</TABLE>
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(1) Dopamine agonists
DEVELOPMENT OF ERGOSET AND OTHER PRODUCTS FOR DIABETES
Diabetes as a Metabolic Disorder. The Company's primary research
focus is the treatment of Type II diabetes and obesity. These metabolic
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
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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.
Characteristics of Diabetes. The term diabetes refers to a group of
disorders that show a single common feature: abnormally high levels of glucose
in the blood. Type I diabetes (juvenile-onset diabetes or insulin dependent
diabetes) results from a rapidly progressive dysfunction of the pancreas in
producing insulin. Type II diabetes (adult onset or noninsulin dependent
diabetes mellitus) is believed to involve a slow insidious process 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 both Type I
and Type II 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 develops
impaired glucose tolerance, 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 linings of blood vessels, causing the micro- and
macrovascular complications characteristic of Type II diabetes such as disorders
of the retinal and renal vasculature and loss of circulation in the extremities
which may lead to amputation, respectively. In addition, hyperglycemia and the
associated high blood levels of triglycerides, free fatty acids, and total
cholesterol are believed to lead to cardiovascular disease including coronary
artery 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 subjects 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. Many subjects initially take sulfonylureas,
which work by stimulating the production of insulin in the pancreas. The
labeling of 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 take sulfonylureas still experience elevated blood glucose and
lipid levels. Over time, many Type II diabetics taking sulfonylureas lose their
ability to control glucose levels, and may eventually lose their ability to
secrete insulin. In either case, the Type II diabetic must then begin daily
insulin injections. An estimated 40 percent of Type II diabetics are currently
taking insulin according to the American Diabetes Association. 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.
In recent years the FDA has approved three new drugs for the treatment
of Type II diabetes whose mechanisms of action are different than sulfonylureas.
Metformin (trade name Glucophage(R)), was approved for monotherapy and
adjunctive therapy for patients taking sulfonylureas in March 1995 and is sold
by Bristol-Myers Squibb Company. Glucophage is an oral medication that belongs
to a class of drugs called biguanides. It is believed to work, at least in part,
by reducing glucose output from the liver. Its use carries the risk of lactic
acidosis, a rare but possibly fatal side effect. Precose was approved for
monotherapy and adjunctive therapy in September 1995 and is sold in the United
States under the name Acarbose(R) by Bayer Corporation (previously sold in
Europe under the name Glucobay/TM/). Acarbose is an alpha-glucosidase inhibitor
which works in the intestine to block the enzymes necessary for the digestion
and
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absorption of carbohydrates in the intestines. Acarbose reduces blood glucose
levels primarily after meals by slowing down the digestion of carbohydrates and
lengthening the time it takes for carbohydrates to convert to glucose. It must
be taken orally at the start of each meal and causes mild to moderate
gastrointestinal side effects in most users. Troglitazone, sold by Warner
Lambert Company under the name Rezulin(R), was approved in January 1997. Rezulin
has been approved for use in treating diabetics who are taking insulin. It is
believed to work in part by increasing the body's sensitivity to insulin. See
"Business-- Competition."
Demographics and Market Size. The American Medical Association and
the American Diabetes Association ("ADA") estimate that approximately 15 million
people suffered from Type II diabetes in the United States in 1996, of whom
approximately seven and a half million have been diagnosed with the disease.
Another 20 million Americans are estimated to have impaired glucose tolerance.
Oral antidiabetic agents are a leading class of pharmaceutical products for the
treatment of diabetes with total sales of approximately $1 billion in the United
States during 1996. Insulin, used by an estimated 40% of Type II diabetics, is
also a leading pharmaceutical product with annual sales of approximately $1
billion in the United States during 1996.
ERGOSET in the treatment of Type II Diabetes. ERGOSET is a low-dose,
fast-release, once-daily oral tablet formulation of bromocriptine, a dopamine
agonist. ERGOSET tablets are formulated to permit titration of the drug at low
doses to minimizes gastrointestinal side effects. The active ingredient in
ERGOSET has been approved by FDA for approximately 20 years to treat Parkinson's
disease and other conditions. The Company selected bromocriptine for use in
treating Type II diabetes primarily because of its ability to increase
dopaminergic activity in the hypothalamus area of the brain. In the Phase III
clinical trials, ERGOSET was administered each day at approximately 8:00 a.m.
This treatment with ERGOSET is believed to help restore a more normal daily
pattern of dopaminergic activity in the brain, which is believed to be a central
regulator of lipid and glucose metabolism. The Company's research indicates
that healthy lean subjects evidence high levels of dopaminergic activity during
the daytime and that obese and Type II diabetic patients evidence low levels of
dopaminergic activity during that time period.
Clinical Trials of ERGOSET for Type II Diabetes
The primary focus of the Company's clinical trials to date has been to
study the effects of ERGOSET on glucose and lipid metabolism for the treatment
of Type II diabetes and obesity. The Company began clinical trials of ERGOSET
for the treatment of Type II diabetes in 1992 and in 1996 completed its three
Phase III clinical trials of ERGOSET as adjunctive and monotherapy for Type II
diabetes.
Ergo initiated its three double-blinded, placebo-controlled Phase III
clinical trials of ERGOSET treatment in obese, Type II diabetics in January
1995. The Company enrolled over 650 subjects in the three clinical trials, two
of which studied ERGOSET as adjunctive therapy and one of which studied ERGOSET
as monotherapy. The primary clinical endpoint of each of the Phase III clinical
trials was to achieve a clinically and statistically significant reduction in
blood levels of HbA\\1c\\, which is considered a reliable indicator of glycemic
control in diabetics, and is the primary measure of blood glucose control used
by the FDA to determine the efficacy of drug candidates in diabetics. In the
Phase III clinical trials of ERGOSET as adjunctive therapy, ERGOSET or placebo
was given daily at approximately 8:00 a.m. to nearly 500 Type II diabetics who
were on weight-maintaining diets and who were taking sulfonylurea agents. In
the monotherapy Phase III clinical trial, ERGOSET or placebo was given daily at
approximatley 8:00 a.m. to nearly 160 Type II diabetics who were on a weight-
maintaining diet but were not on any other diabetes medication.
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In 1996, the Company announced that analysis of the three completed
Phase III trials indicated that ERGOSET improved control of HbA\\1c\\, glucose,
triglycerides and free fatty acids in Type II diabetics on both a monotherapy
and adjunctive therapy basis. The analysis also showed that ERGOSET was
generally well-tolerated. The following table summarizes the changes in
HbA\\1c\\ levels in the Phase III clinical trials of subjects taking ERGOSET
versus subjects taking placebo, the results of which are discussed in further
detail below:
<TABLE>
<CAPTION>
CHANGE IN HbA\\1C\\ COMPARED TO PLACEBO
Intent-to-Treat Responders
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Endpoint* Week 24* Week 24
<S> <C> <C> <C>
Adjunctive Therapy -0.6 (p(less than)0.0001) -0.6 (p(less than)0.0001) -1.0 (p(less than)0.0001)
Monotherapy -0.4 (p=0.03) -0.6 (p(less than)0.02) -1.0 (p(less than)0.0001)
</TABLE>
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* Intent to treat endpoint analysis includes all subjects who received study
drug and had at least one subsequent visit and carries forward to the end
their last observation. Intent to treat Week 24 analysis includes values of
all subjects who actually completed the study.
The Adjunctive Therapy Trial Results. In the two studies of ERGOSET as
adjunctive therapy, all subjects were overt diabetics with average baseline
fasting glucose and HbA\\1c\\ levels of 223 mg/dL and 9.4%, respectively.
Baseline fasting serum triglycerides and total cholesterol were 248 mg/dL and
212 mg/dL, respectively. Baseline fasting free fatty acids were 847 u eq/L in
the one study for which this parameter is available.
On an intent-to-treat basis, the adjunctive therapy trials indicated
that ERGOSET improved glycemic control as measured by a reduction in HbA\\1c\\
compared with placebo of 0.6% (p(less than)0.0001). In the pre-defined responder
group, ERGOSET resulted in decreases in HbA\\1c\\ of 1% (p(less than)0.0001)
compared with placebo, and a decrease of 0.6% (p(less than)0.0001) compared with
baseline. The pre-defined responder criterion was designed to identify
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
HbA\\1c\\ 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 two adjunctive Phase III trials, treatment with ERGOSET
resulted in reductions in levels of fasting serum triglycerides and fasting free
fatty acids compared with placebo. On an intent-to-treat basis, ERGOSET
treatment reduced fasting serum triglycerides by 61 mg/dL (p=0.0058), a 24%
reduction compared to placebo. In the one study for which free fatty acids
results are available, ERGOSET treatment resulted in a reduction of fasting
serum free fatty acids of 150 u eq/L (p=.0424) compared to placebo on an
intent-to-treat basis.
This analysis also showed that ERGOSET treatment was generally well-
tolerated. The most frequently reported side effects were nausea, fatigue, and
dizziness which are known to be asociated with the use of bromocriptine. Most
side effects reported were mild to moderate in degree and transient in nature.
The combined discontinuation rate in the two trials due to side effects was
approximately 13% for ERGOSET compared with approximately 2% in the placebo
group.
The Monotherapy Trial Results. The Company's Phase III clinical study
of ERGOSET as monotherapy treatment for Type II diabetes demonstrated reductions
in HbA\\1c\\ consistent with the HbA\\1c\\ results in the Company's two earlier
adjunctive therapy trials. Of the 122 subjects who completed the 24 week trial,
60 received ERGOSET and showed a statistically significant 0.6% (p(less
than)0.02) reduction compared to placebo in HbA\\1c\\. Sixty-two percent of the
subjects receiving ERGOSET and completing the study met the responder group
criterion (at least a 0.3% reduction in HbA\\1c\\ from baseline after eight
weeks of therapy). This responder group showed a 1% (p(less than)0.0001)
reduction compared to
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placebo and a 0.7% (p(less than)0.0001) reduction compared to baseline in
HbA\\1c\\. Results from the monotherapy trial for ERGOSET also manifested trends
in improving lipid profiles. ERGOSET was generally well-tolerated in the
monotherapy trial with once a day administration at approximately 8:00 a.m for a
24-week period. The most frequently reported side effects in the monotherapy
trial were the nausea, fatigue, nasal congestion and dizziness known to be
associated with the use of bromocriptine. Most side effects reported were mild
to moderate in degree and transient in nature. The discontinuation rate due to
side effects was approximately 13% for ERGOSET versus 5% for placebo.
ERGOSET Clinical Trial Summary. The following table identifies the
Phase II and Phase III clinical trials conducted of ERGOSET for the treatment of
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-Blinded, 46 Complete Body Weight, Body Fat and Total Glycated
Placebo-Controlled Hemoglobin
93-3 Phase II - Double-Blinded, 17 Complete Body Weight and Body Fat
Placebo-Controlled
94-1 Phase II - Single-Blinded, 59 Complete Dose Response and Titration Study
Placebo-Controlled
94-2 Phase II - Double-Blinded, 99 Complete Glycated Hemoglobin A\\1c\\ and Body Composition
Placebo-Controlled
94-3 Phase II - Open Label 12 Complete Glucose Uptake Measured by Steady State
Plasma Glucose Technique
95-1 Phase III - Double-Blinded, 247 Complete Glycated Hemoglobin A\\1c\\
Placebo-Controlled
95-2 Phase III - Double-Blinded, 249 Complete Glycated Hemoglobin A\\1c\\
Placebo-Controlled
95-3 Phase III - Double-Blinded, 159 Complete Glycated Hemoglobin A\\1c\\
Placebo-Controlled
</TABLE>
FDA Approval Strategy
Based on the results in its three Phase III trials, the Company
intends to file an NDA in 1997 for approval of ERGOSET to treat Type II diabetes
as a monotherapy and as an adjunctive therapy. However, there can be no
assurance that FDA will agree with the Company's assessment of the results of
the Phase III clinical trials or that ERGOSET will receive FDA approval as
either adjunctive therapy or monotherapy. See "Risk Factors-- Uncertainties
Related to Regulatory Approval of ERGOSET for Type II Diabetes" and "Risk
Factors-- Government Regulation." The Company is currently conducting
extensions to the Phase III clinical trials (for safety) and bioavailability
studies of different dosage strengths of ERGOSET, which are expected to be
completed during 1997.
Additional ERGOSET Clinical Trials
Ergo is currently conducting preclinical studies in animals using
ERGOSET in combination with metformin prior to initiating this drug combination
for clinical trials. Ergo also plans to begin clinical trials of ERGOSET as
adjunctive therapy with insulin in subjects with Type II diabetes. Insulin is a
common treatment for advanced stages of
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Type II diabetes, and metformin appears to be gaining market acceptance rapidly
as a new therapy. The Company also plans to commence in 1997 another clinical
trial to examine the effect of ERGOSET therapy on hyperlipidemia, .i.e., high
triglycerides and free fatty acids. The Company is also studying possible second
generation product candidates for the treatment of Type II diabetes, including a
combination of a dopamine D2 agonist such as ERGOSET with a dopamine D1 agonist,
and a therapy involving administration of a dopamine agonist at one time of day
in combination with a serotonin agonist at another time of day.
DEVELOPMENT OF ERGOSET AND OTHER PRODUCTS FOR THE TREATMENT OF OBESITY
General. The term obesity is defined as 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. Many obese Americans are Type II diabetics, and 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, cancer, 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.
In 1996, the FDA approved the sale of REDUX(R) (dexfenfluramine) for
the treatment of obesity. Commercial sale of REDUX began in June of 1996. The
first six months of sales of REDUX were among the best initial sales for any
pharmaceutical product. Also in 1996, the FDA recommended approval of
MERIDIA(R) (sibutramine) for the treatment of obesity. Other drugs not
indicated for the treatment of obesity are often prescribed for this use
(referred to as off-label use).
ERGOSET for the Treatment of Obesity. Ergo's animal studies have
demonstrated that bromocriptine and other neurotransmitter modulating drugs are
effective in reducing body weight and body fat in seasonal, non-seasonal, and
genetic animal models when administered at a specific time daily. Studies
presented by Ergo scientists in 1996 indicated that the seasonally insulin
resistant, obese Syrian hamsters became insulin sensitive and lean in two weeks
through the administration of neurotransmitter modulating drugs at a specific
time of day. In other preclinical studies with the leptin-deficient ob/ob mouse,
a genetically obese and insulin resistant animal model, Ergo's scientists
achieved significant reductions in body fat compared with control animals
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 timed use of two neurotransmitter modulating drugs produced a
significant (between 50% and 60%) reduction in food intake and a decrease in
body fat of 22% to 32% with no significant decrease in lean body (muscle) mass
compared with control animals. See "Business--History and Science of the
Company's Technology and Pre-Clinical Research."
Clinical Trials of ERGOSET for the Treatment of Obesity. In one
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 in the morning 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 subjects in a new Phase II clinical trial of
ERGOSET to treat obese subjects in the first half of 1997 and plans to pursue
additional clinical trials of ERGOSET by itself and in combination with other
neurotransmitter modulating drugs to treat obesity.
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DEVELOPMENT OF ERGOSET FOR THE TREATMENT OF CANCER
Cancer. Ergo is researching the application of ERGOSET and its
neurotransmitter modulating technology to treat breast cancer and other cancers.
Preclinical studies conducted by Ergo 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 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.
Characteristics and Incidence of Breast Cancer. Breast cancer has the
second highest mortality rate from cancer among women in the United States. In
1996, approximately 184,000 women in the United States were 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.
Need for New Cancer Therapies. 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.
Clinical Trials of ERGOSET for the Treatment of Breast Cancer. In
late 1995, Ergo began a small, open-label Phase II clinical trial of ERGOSET
with another neurotransmitter modulating drug in subjects with metastatic breast
cancer to evaluate whether the treatment can increase the body's immune activity
against the cancer. The Company is continuing to enroll subjects in this study
at two sites. Subjects in this trial are dosed using ERGOSET and the other
neurotransmitter modulating drug alone or adjunctively with chemotherapy or
radiation therapy.
DEVELOPMENT OF PHOTODYNAMIC THERAPY (PDT) FOR THE TREATMENT OF CANCER
Ergo is studying the use of unique photosensitive dyes in PDT for
treating cancers. 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 at 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 has licensed from The Rowland Institute for Science rights to
patents covering the composition and methods of using certain unique
photosensitive dyes. Ergo believes its photosensitive dyes may offer advantages
over dyes being studied by other companies based on preclinical studies which
indicate that Ergo's dyes are not immunosuppressive, sequester preferentially in
the tumor and not in surrounding tissue or blood vessels, oxidize with
relatively low-intensity photon bombardment, and exit the body relatively
quickly. The Company intends to integrate PDT with its understanding of temporal
neuroendocrine regulation to try to improve the overall therapeutic effect of
PDT. The Company is in the process of identifying a lead photosensitizer for
clinical study in its PDT program.
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 manufacturing agreements
for its product supply. The Company currently retains all marketing rights to
its drug candidates.
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Marketing
The Company intends to form strategic alliances with large
pharmaceutical companies to market the Company's product candidates in the
United States and internationally. In addition, the Company may build, over
time, a direct sales force to market certain products to the managed care and
specialist markets in the United States. The Company 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 may 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 finished
pharmaceutical dosage forms for its product candidates. Instead, it plans to
establish contracts for the supply of its pharmaceuticals. In 1995 the Company
entered into an agreement to buy from Geneva Pharmaceuticals, Inc., and Geneva
has agreed to supply, all of the Company's United States requirements for the
final dosage form(s) of ERGOSET for the treatment of Type II diabetes and
obesity. Geneva has paid the Company various amounts and agreed to pay the
Company additional amounts upon the achievement of certain milestones. Geneva
may terminate the Geneva Agreement under 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 for ERGOSET do not exceed certain minimum levels during
the two years following FDA approval, if obtained. The Company also has certain
rights to terminate the Geneva Agreement. Geneva has a right of first option to
be the exclusive supplier of the Company's United States requirements for
certain 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 may encounter significant delays if it must obtain supplies of active
ingredient or finished tablets from suppliers other than its current suppliers.
See "Risk Factors --Manufacturing Uncertainties; Reliance on Third-Party
Suppliers."
HISTORY AND SCIENCE OF THE COMPANY'S TECHNOLOGY AND PRECLINICAL RESEARCH
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 obese
animal model. Ergo has expanded 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 obese during one
season of the year and insulin sensitive and lean during other seasons. 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 obese in order to survive adverse environmental conditions.
Researchers have observed that animals in a seasonally insulin resistant and
obese 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.
Ergo's scientists have demonstrated that the seasonally insulin
resistant and obese condition in animals is associated with seasonal changes in
the daily pattern of neuroendocrine activity. The neuroendocrine system--a
complex
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physiological system that includes the brain, peripheral nervous system and
hormones--is one of the mechanisms that regulates and coordinates many functions
of the body. Neurotransmitters in the hypothalamic 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, obese 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 lean insulin sensitive, summer condition. When the
animal is in its obese insulin resistant, 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 regulated by dopamine and other neurotransmitters in the hypothalamus. The
following graphs illustrate the differences between the daily pattern of
prolactin levels in the Syrian hamster during its lean insulin sensitive
condition and the daily pattern during its obese insulin resistant 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.]
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Moreover, the Company's scientists have demonstrated that the timed
administration of certain pharmaceuticals in seasonal animals can alter
neurotransmitter activity, which affects daily hormone patterns to produce the
desired seasonal metabolic conditions out of season. When neurotransmitter
modulating drugs are administered to a seasonally obese insulin resistant animal
at specific times designed to shift its neuroendocrine patterns to mimic those
of a seasonally lean insulin sensitive animal, the animal's metabolism shifts to
a lean insulin sensitive 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 obese insulin resistant Syrian
hamsters. The studies indicated that obese insulin resistant Syrian hamsters
became lean and insulin sensitive 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 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 obese and insulin resistant animal model,
Ergo's scientists achieved significant reductions in body fat compared with
control animals through the timed administration of neurotransmitter modulating
drugs without injecting leptin. 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 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, serum insulin levels, and blood glucose levels
were reduced in the treated ob/ob mouse compared with control animals.
[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," "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.]
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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 but different times of day produced a significant
(approximately 30%) reduction in food intake and reduced body fat 30% to 75% and
body weight gain 40% to 60% in the treated ob/ob mouse compared with control
animals. 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 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.
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. 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. The Company has filed a
patent application in the United States relating to a fast-release formulation
of ERGOSET. LSU has licensed its interest in more than 35 of those patents and
patent applications exclusively to the Company. See " Business-- LSU
Agreement." The Company is a co-owner of certain of those U.S. patent
applications and one U.S. patent. Recently, the Company entered into a license
agreement with Massachusetts General Hospital for its interest in certain patent
applications covering the treatment of immune dysfunctions and cancer. The
Company licenses its PDT technology from The Rowland Institute for Science. The
Company's rights in certain patent applications, primarily several of the
applications relating to PDT, are not exclusive, but the Company is negotiating
with the co-owner of those rights for an exclusive license. See "Risk Factors--
Uncertainty of Protection for Patents and Proprietary Technology."
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. 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."
MGH AGREEMENT
Recently the Company entered into an exclusive license agreement with
Massachusetts General Hospital (the "MGH Agreement") for its interest in
certain patent applications covering the treatment of immune dysfunctions and
cancer using the timed administration of certain neurotransmitter modulators.
The MGH Agreement requires the
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Company to pay Massachusetts General Hospital a royalty on product sales and to
make specified payments upon the completion of certain milestones. The agreement
also sets forth a development schedule for products covered by the licensed
patents which requires the Company to commence and complete certain clinical
trials within specified time periods. The MGH Agreement requires the Company to
maintain insurance and prosecute the licensed patents. Massachusetts General
Hospital may terminate the MGH Agreement if the Company breaches its terms and
fails to cure the breach within 60 days. If the MGH Agreement is terminated, the
Company's rights in many of its patent applications covering the treatment of
immune disorders and cancer would be non-exclusive.
COMPETITION
ERGOSET, if it is approved, will compete against existing therapies
for Type II diabetes such as insulin and oral antidiabetic agents. Over the past
two years, FDA has approved three drugs for the treatment of Type II diabetes
that have methods of action that are different from sulfonylureas and are
intended to address the hyperglycemia associated with diabetes.
Metformin, under the trade name Glucophage(R), was approved in March
1995 and is sold by Bristol-Myers Squibb Company. Metformin has been used as an
adjunct to oral hypoglycemic agents and in monotherapy to improve glycemic
control in diabetic subjects without increasing serum insulin levels. It is an
oral medication that belongs to a class of drugs called biguanides. It is
believed to work, at least in part, by reducing glucose output from the liver.
Its use carries the risk of lactic acidosis, a rare but possibly fatal side
effect. It appears that Metformin has rapidly gained market acceptance.
Precose, approved for monotherapy and adjunctive therapy by the FDA in
September 1995, is sold in the United States by Bayer Corporation under the
name Acarbose(R) and was previously sold in Europe under the name Glucobay/TM/.
Acarbose is an alpha-glucosidase inhibitor which works in the intestine to block
the enzymes necessary for the digestion and absorption of carbohydrates in the
intestines. Acarbose reduces blood glucose levels primarily after meals by
slowing down the digestion of carbohydrates and lengthening the time it takes
for carbohydrates to convert to glucose. It must be taken orally at the start of
each meal and causes mild to moderate gastrointestinal side effects.
In January 1997, the FDA approved Troglitazone, sold by Warner Lambert
Company under the name Rezulin(R), for use in treating diabetics who are taking
insulin. It is believed to work in part by increasing the body's sensitivity to
insulin.
The active ingredient in ERGOSET has been 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, 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
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tissues. Other drugs are being developed that may limit or delay the damage that
diabetes causes to organs such as the eyes and kidneys.
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 factors, 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 -- Development of ERGOSET and Other Products for
Type II Diabetes -- Clinical Trials of ERGOSET for Type II Diabetes," and
"Risk Factors -- Uncertainties Related to Regulatory Approval of ERGOSET for
Type II Diabetes."
GOVERNMENT REGULATION
Ergo's research and development activities, preclinical studies and
clinical trials, and ultimately the manufacturing, marketing and labeling of its
products, if approved, 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 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 established by
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.
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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
subject 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 subject 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
of ERGOSET for Type II diabetes 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 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 believed to
be 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 for
which FDA believes there is adequate supporting data. There can be no assurance
that any of the Company's product candidates will receive regulatory approvals
for commercialization. See "Risk Factors--Government Regulation."
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 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 Congress. This bill addresses many facets of FDA
regulations, including requirements for NDA approval, requirements for
supplemental approvals, and provisions liberalizing 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
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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 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 approximately 20 years for several indications, including treating
Parkinson's disease, acromegaly, and hyperprolactinemia. One company marketing
bromocriptine in the United States 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 subject 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
subject 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 March 28, 1997, the Company had 73 full-time employees,
including 14 persons with Ph.D. degrees. Fifty-six of Ergo's employees are
engaged in research and development activities. None of the Company's employees
is covered by a collective bargaining agreement.
RISK FACTORS
In addition to the other information in this Annual Report on Form 10-
K, prospective investors should consider the following factors in evaluating the
Company and its business before purchasing any of the Common Stock of the
Company.
UNCERTAINTIES RELATED TO REGULATORY APPROVAL OF ERGOSET FOR TYPE II DIABETES
In 1996 the Company announced the statistical analyses of its three
Phase III clinical trials of ERGOSET as adjunctive and monotherapy in obese
subjects suffering from Type II diabetes. 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
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ERGOSET, which also may not be acceptable to FDA. 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." Without regulatory approval, the Company
would not be able to commercialize ERGOSET, which would have a material adverse
effect on the Company. See "Business-- Development of ERGOSET and Other Products
for Diabetes-- Clinical Trials of ERGOSET for Type II Diabetes."
GOVERNMENT REGULATION
The Company's research and development activities, preclinical studies
and clinical trials, and ultimately the manufacturing, marketing and labeling of
its products, if approved, 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. 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 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 enacted or adopted
that could prevent or delay regulatory approval of the Company's product
candidates.
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 three Phase
III clinical trials as therapy in obese subjects suffering from Type II
diabetes. ERGOSET as treatment for 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 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 subjects in clinical trials is an important factor in determining how
quickly clinical trials may be completed. Many factors affect subject
enrollment, including the size of the subject population, the proximity of
subjects to clinical sites, and the eligibility criteria for the study. Delays
in subject 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
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no assurance that the Company's product candidates will be accepted by
physicians 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.
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. In 1995, the Company
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 of active ingredient or finished tablets from other sources or
otherwise experiences interruptions in its supplies. See "Business --
Commercialization Strategy-- Manufacturing." If the Company is unable to
obtain adequate supplies on favorable terms, 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.
LIMITED SALES AND MARKETING EXPERIENCE; DEPENDENCE ON FUTURE COLLABORATORS
The Company has limited experience in sales, marketing and
distribution. The market for products for Type II diabetes is large. To market a
new product for Type II diabetes to primary care and general practice physicians
requires significant resources. It is unlikely that the Company would develop
such capacity on its own. The Company plans to enter into a marketing agreement
with one or more pharmaceutical companies that have established marketing and
sales capabilities. There can be no assurance that the Company will enter into a
collaborative marketing agreement. 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 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
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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 at least the next couple of years, if at all. The Company has been
unprofitable since its inception, and as of December 31, 1996, the Company's
accumulated deficit was $59,061,288. 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 expenses for at least
the next several years, primarily owing to the expansion of its research and
development programs, including 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 or is limited. 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
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of diluting or adversely affecting the holdings or the rights of the holders of
its 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. If the Company
is unable to obtain and maintain a proprietary position with respect to its
clinical candidates it would have a material adverse effect on 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 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 timed 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. There can be
no assurance that the Company has identified United States and foreign patents
that pose a risk of infringement.
The Company recently began a small study of two drugs in the treatment
of breast cancer. The Company is aware of two issued patents, owned by a third
party, some of the claims of which relate to one of the drugs being tested in
the breast cancer study. The Company believes that the relevant claims are
either invalid or not infringed by the Company's product candidate and method of
treatment. If it is determined that any of such relevant claims are infringed by
the Company's product candidate and not invalid, the Company may have to seek a
license, defend an infringement action, or challenge the validity of such
patents in court. There can be no assurance that a license will be available to
the Company, that the terms and conditions of any such license would be
acceptable to the Company or that the Company
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will prevail in any patent litigation. If the Company does not obtain a license,
is found liable for infringement, or is not able to have the relevant claims
declared invalid, then the Company may be liable for significant money damages,
may encounter significant delays, or may be precluded from participating in the
manufacture, use or sale of products or methods of treatment covered by such
patents.
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 recently entered into a license
agreement with Massachusetts General Hospital for its interest in certain patent
applications covering the treatment of immune dysfunctions and cancer. 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. If the license
with Massachusetts General Hospital is terminated for any reason, the Company's
rights to certain product candidates and potential candidates would be non-
exclusive. See "Business--LSU Agreement" and "Business -- MGH Agreement."
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 on a timed basis, 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 four drugs (Acarbose/(R)/ ,
Glucophage/(R)/, Amaryl(R) and Rezulin/(R)/) that have recently been approved by
FDA. Glucophage has rapidly gained 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 these or other products if ERGOSET receives regulatory
approval. In addition, ERGOSET
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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
As of March 26, 1997, current directors, executive officers and
principal stockholders of the Company, and certain of their affiliates,
beneficially own approximately 54% of the outstanding Common Stock on a fully
diluted basis. 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.
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 patients or subjects. 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 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 its licensors, which could lead to termination of those
agreements. See "Business -- LSU Agreement." and "Business -- MGH
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" and
"Business -- Human Resources."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public
market 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 18, 1997, subject to compliance with the manner-of-sale, volume
and other limitations of Rule 144 (as amended in
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February 1997 ). Some investors have the right to require the Company to
register the public resale of their shares before that time.
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.
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 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.
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
This Annual Report on Form 10-K contains forward-looking statements.
The words "anticipate," "believe," "expect," "plan," "intend,"
"estimate," "project," "will," "could," "may," and other 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, should underlying assumptions prove incorrect, or should
other intervening events occur, actual results may vary materially and adversely
from those anticipated, believed, estimated or otherwise indicated. 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.
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ITEM 2. PROPERTIES
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 June 1999, 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.
ITEM 3. LEGAL PROCEEDINGS
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."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In 1996, Ergo Science Corporation submitted four matters to its
stockholders for approval at the 1996 Annual Meeting held on June 25. These
matters included (1) the re-election of J. Warren Huff and Stephen A. Duzan as
Class I directors of the Company, each to serve until the 2000 Annual Meeting of
Stockholders and until their successors are duly elected and qualified or their
earlier resignation or removal; (2) an amendment to the Ergo Science Corporation
Amended and Restated 1995 Long Term Incentive Plan that increased the number of
shares of the Company's common stock available to be issued thereunder from
731,525 shares to 1,431,525; (3) a Stock Option Plan for Non-employee Directors
of the Company; and (4) ratification of the Board of Directors' selection of
Coopers & Lybrand L.L.P. as independent accountants of the Company for fiscal
1996. Of those shares present at the meeting in person or by proxy, a plurality
voted to re-elect Messrs. Huff and Duzan as directors and a majority voted in
favor of each of the other three proposals. No other matters were submitted to
a vote of the stockholders of Ergo Science Corporation during 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the NASDAQ National Market
System under the symbol "ERGO". At March 25, 1997, the number of record holders
of the Company's common stock was approximately 298. The following table sets
forth the range of high and low bid quotations for the Company's common stock as
reported by the NASDAQ National Market System during the period from January 1,
1996 through December 31, 1996.
<TABLE>
<CAPTION>
HIGH LOW
---------------- -----------------
<S> <C>
$24 1/4 $10
</TABLE>
The Company has not paid cash dividends on its common stock and
intends to continue a policy of retaining any earnings for reinvestment in its
business.
24
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data for the Company
as of the dates and for the periods indicated. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and related notes
thereto included elsewhere in this Report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------------- --------------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues.......................... $ 1,397,521 $ 94,348 $ 214,916 $ 107,710 $ 340,579
Operating expenses:
Research and development 12,272,478 8,643,926 4,917,830 2,403,683 2,297,754
Purchase of in-process research
and development.................. 168,750 7,020,064 -- -- --
General and administrative (1)(2) 6,139,072 6,580,308 4,256,934 3,165,038 1,363,566
------------ ------------ ------------ ------------ -----------
Total operating expenses..... 18,580,300 22,244,298 9,174,764 5,568,721 3,661,320
------------ ------------ ------------ ------------ -----------
Net loss....................... (17,182,779) (22,149,950) (8,959,848) (5,461,011) (3,320,741)
Accretion of dividends on
preferred stock (437,332) (668,313) (933,216) (409,357) --
Dividends on redeemable
preferred stock.................. -- (7,123,536) -- -- --
Dividends on preferred stock -- (2,018,763) -- -- --
------------ ------------ ------------ ------------ -----------
Net loss to common stock-
holders.................... $(17,620,111) $(31,960,562) $ (9,893,064) $ (5,870,368) $(3,320,741)
============ ============ ============ ============ ===========
Net loss per common share (3)(4).. $(1.57) $(8.06) $(2.56) $(1.52) $(0.86)
============ ============ ============ ============ ===========
Weighted average common stock and
common equivalents (3).......... 11,248,315 3,966,266 3,857,940 3,857,915 3,857,915
============ ============ ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......... $ 18,066,884 $ 15,896,373 $ 1,880,982 $ 8,135,484 $ 3,479,534
Short-term investments............ 20,550,986 6,325,502 -- -- --
Working capital................... 36,917,629 19,609,791 679,177 6,925,243 2,660,555
Total assets...................... 41,385,280 24,949,911 4,302,889 9,840,148 4,255,800
Deferred revenue (5).............. -- -- 5,744,329 5,744,329 4,494,329
Total stockholders' equity
(deficit)........................ 39,065,225 21,803,851 (20,674,994) (11,104,844) (5,100,790)
</TABLE>
- ------------------------
(1) Includes a noncash charge in 1996 of $1,030,981 related to the
resignation of a Company senior executive. See Note 9 of Notes to
Consolidated Financial Statements.
(2) Includes a noncash charge in 1995 of $1,747,931 for common stock issued
in connection with a renegotiated supply contract. See Note 8 of Notes to
Consolidated Financial Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements. Does not
include 1,664,200 shares of common stock reserved for issuance upon exercise
of outstanding options at December 31, 1996 since their inclusion would be
antidilutive. See 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 8 of Notes to Consolidated Financial Statements.
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion 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 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) that data obtained from clinical
trials are subject to varying interpretations, and there can be no assurance
that the FDA (or an FDA panel of experts) will agree with the Company's
assessment of clinical trial results; (2) there can be no assurance of FDA
approval to market ERGOSET for Type II diabetes or any other indication or that
the FDA will not require additional clinical trials of ERGOSET; (3) uncertainty
related to the scientific development of a new medical therapy; (4) competition
in the anti-diabetic market is intense and other products have been recently
approved by the FDA to treat Type II diabetes; (5) the need for additional
funding; (6) the uncertainty relating to patent protection in the pharmaceutical
and biotechnology industries; and (7) there can be no assurance that the Company
will be able to establish corporate alliances to market ERGOSET and assist with
the development of product candidates. Further information and additional
important factors are set forth in the section entitled "Item 1. Business -
Risk Factors". 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.
ERGOSET has not been cleared for marketing by the FDA and is being investigated
for use in Type II diabetes pursuant to an Investigational New Drug exemption.
OVERVIEW
Since inception, the Company has been engaged in the discovery and
development of novel treatments for metabolic disorders, including Type II
diabetes and obesity, and various cancers. The Company's technology, based on
the principals of chronobiology, uses the timed administration of oral drugs to
modulate the body's neuroendocrine activity. 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 such revenues for at least a couple of years, if at
all. The Company has been unprofitable since its inception, and the Company's
accumulated deficit was $59,061,288 as of December 31, 1996. Although the
Company intends to enter into collaborative relationships, it expects to incur
substantial and increasing expenses 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
Years ended December 31, 1995 and 1996
Total revenues increased from $94,348 in 1995 to $1,397,521 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 1996, compared to 1995. The 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 decreased from $15,663,990 in 1995 to
$12,441,228 in 1996. The decrease was due to the reduction of in-process
research and development purchases which totaled $7,020,064 and $168,750 in 1995
and 1996, respectively. Excluding the purchases of in-process research and
development, expenses increased $3,628,552. 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 decreased from $6,580,308 in 1995 to
$6,139,072 in 1996. The decrease was principally due to a net charge of
$1,747,931 in 1995 related to a renegotiated supply agreement. Excluding this
nonrecurring, noncash charge, general and administrative expenses increased
$1,306,695. The increase in 1996 was due
26
<PAGE>
to a $1,277,980 charge related to the resignation of a Company senior executive,
and the hiring of additional administrative personnel. The increase was
partially offset by a reduction in legal costs.
Net loss decreased from $22,149,950 in 1995 to $17,182,779 in 1996. The
decrease was mainly due to costs associated with the purchase of in-process
research and development and the renegotiated supply agreement noted above. Net
loss to common stockholders decreased from $31,960,562 to $17,620,111. This
decrease was primarily due to a $7,123,536 noncash charge in 1995 related to a
preferred stock dividend, in addition to the reduction in costs associated with
the purchase of in-process research and development and the renegotiated supply
agreement. Net loss per common share decreased from $8.06 to $1.57 in 1995 and
1996, respectively. The decrease was due to the decreased net loss to common
stockholders and increased weighted average shares outstanding which totaled
3,966,266 in 1995 and 11,248,315 in 1996.
In the first quarter of 1997, the Company will record a charge of
approximately $925,000 for severance payments to be made to the former Chairman
of the Board of Directors, officer and employee of the Company. Of the total
estimated charge, $450,000 is noncash and the remainder will be paid over a 20
month period.
Years ended December 31, 1994 and 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, non-recurring 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 to $8.06 in 1994 and 1995,
respectively.
NET OPERATING LOSS CARRYFORWARD
At December 31, 1996, the Company's reported federal net operating loss
carryforwards were approximately $45 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 Code sections 382 and 383. See Note 6 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 two public offerings. Private placements of equity securities
through December 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.
Subsequently, on August 14, 1996, the Company raised an additional $32,218,487,
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 $18,066,884, while
short-term investments were $6,325,502 and $20,550,986, at December 31, 1995 and
1996, respectively. The increases in cash and cash equivalents and short-term
investments at December 31, 1996, were due primarily to the proceeds from the
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. During 1996, the Company
conducted clinical trials of its lead drug candidate, ERGOSET, for the treatment
of Type II diabetes, and a two drug
27
<PAGE>
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 analysis of
the results of these two Phase III trials indicated that ERGOSET improved
control of HbA\\1c\\, glucose, triglycerides and free fatty acids in Type II
diabetics. The analysis also showed that ERGOSET was generally well-tolerated.
On December 20, 1996, the Company announced statistically significant results in
its third Phase III trial of ERGOSET as monotherapy treatment of Type II
diabetes. This monotherapy study was the final in a group of three double-
blinded, placebo-controlled Phase III clinical trials. With the results from the
three Phase III clinical trials, the Company conducted a pre-NDA meeting with
the FDA on March 20, 1997, and plans to submit an NDA in mid-1997. During this
time period, the Company will be actively seeking corporate alliances to market
ERGOSET and assist with the development of product candidates. The breast cancer
clinical trial currently being conducted by the Company is an open label Phase
II study and results from this study are not expected to be released until 1998.
As of December 31, 1996, the Company's net investment in equipment and
leasehold improvements was $2,491,866. The Company expects that additional
equipment and facilities will be needed as 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. Prior to that time, 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. 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.
The terms of the Company's Series D Preferred Stock prohibit the Company
from paying dividends on the common stock.
28
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants....................................................................................... 30
Consolidated Balance Sheets as of December 31, 1996 and 1995............................................................ 31
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994
and for the period from inception (January 23, 1990) to December 31, 1996................................................ 32
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994
and for the period from inception (January 23, 1990) to December 31, 1996................................................ 33
Consolidated Statement of Stockholders' Equity (Deficit) for the period from inception
(January 23, 1990) to December 31, 1996................................................................................. 34
Notes to Consolidated Financial Statements............................................................................... 35
</TABLE>
29
<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, 1996 and 1995 and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 1996 and the period cumulative from
inception (January 23, 1990) to December 31, 1996. 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 financial position of Ergo
Science Corporation as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 and the period cumulative from inception (January 23, 1990) to
December 31, 1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 28, 1997
30
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 18,066,884 $ 15,896,373
Short-term investments.................................................... 20,550,986 6,325,502
Prepaid and other current assets.......................................... 234,558 440,376
------------ ------------
Total current assets............................................... 38,852,428 22,662,251
Equipment and leasehold improvements, net....................................... 2,491,866 2,268,234
Other assets.................................................................... 40,986 19,426
------------ ------------
Total assets....................................................... $ 41,385,280 $ 24,949,911
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................................... $ 1,747,961 $ 3,009,346
Current portion of capital lease obligations.............................. 186,838 43,114
----------- ------------
Total current liabilities.......................................... 1,934,799 3,052,460
Long-term portion of capital lease obligations.................................. 385,256 93,600
Commitments and contingencies................................................... -- --
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized;
6,903 shares of Series D exchangeable preferred stock
issued and outstanding at December 31, 1996 and 1995
(liquidation preferences were $7,618,522 and $7,181,190,
at December 31, 1996 and 1995, respectively)........................ 4,743,852 4,306,520
Common stock, $.01 par value, authorized 50,000,000 at
December 31, 1996 and 1995; issued and outstanding
13,048,036 at December 31, 1996 and 10,145,580 shares
at December 31, 1995................................................ 130,480 101,456
Additional paid-in capital............................................... 97,158,840 63,420,487
Cumulative dividends on preferred stock.................................. (2,734,285) (2,296,953)
Deferred compensation.................................................... (1,172,374) (1,849,150)
Deficit accumulated during the development stage......................... (59,061,288) (41,878,509)
------------ ------------
Total stockholders' equity........................................ 39,065,225 21,803,851
------------ ------------
Total liabilities and stockholders' equity.................... $ 41,385,280 $ 24,949,911
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
31
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From
Inception
Years Ended December 31, (January 23, 1990)
-------------------------------------------------------- through
1996 1995 1994 December 31, 1996
------------------------- -------------- ------------- -------------------
<S> <C> <C> <C> <C>
Revenues:
Licensing and supplier fees.......... $ 355,671
Interest............................. $ 1,397,521 $ 94,348 $ 214,916 1,955,007
------------ ------------ ----------- ------------
1,397,521 94,348 214,916 2,310,678
Operating expenses:
Research and development............. 12,272,478 8,643,926 4,917,830 31,717,746
Purchase of in-process research and
development........................ 168,750 7,020,064 -- 7,188,814
General and administrative........... 6,139,072 6,580,308 4,256,934 22,279,013
------------ ------------ ----------- ------------
18,580,300 22,244,298 9,174,764 61,185,573
------------ ------------ ----------- ------------
Net loss................... (17,182,779) (22,149,950) (8,959,848) (58,874,895)
Accretion of dividends on preferred stock... (437,332) (668,313) (933,216) (2,448,218)
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............. $(17,620,111) $(31,960,562) $(9,893,064) $(70,465,412)
============ ============ =========== ============
Net loss per common share................... $(1.57) $(8.06) $(2.56)
============ ============ ===========
Weighted average common shares outstanding.. 11,248,315 3,966,266 3,857,940
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
32
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from Inception
Years Ended December 31, (January 23, 1990)
------------------------------------------------------- through
1996 1995 1994 December 31, 1996
------------------------- -------------- ------------- ----------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $(17,182,779) $(22,149,950) $(8,959,848) $(58,874,895)
Adjustments to reconcile net loss to cash used
by operating activities:
Depreciation and amortization.............. 1,094,748 848,906 533,709 2,799,219
Noncash compensation....................... 2,015,251 490,961 253,942 2,760,148
Noncash purchase of in-process research and
development............................. 168,750 5,520,064 -- 5,688,814
Loss on disposal of equipment.............. -- -- -- 28,331
Noncash stock issuance for renegotiated
supplier agreement...................... -- 1,747,931 -- 1,747,931
Other noncash charges...................... -- 86,347 -- 86,347
Changes in operating assets and liabilities:
Prepaid and other current assets........ 205,818 (381,849) (19,448) (234,558)
Other assets............................ (21,560) 8,975 (5,068) (93,128)
Accounts payable and accrued expenses... (1,261,385) 1,746,151 (14,744) 1,717,961
Deferred revenue........................ -- (184,615) -- 5,559,714
------------ ------------ ----------- ------------
Net cash used for operating activities.......... (14,981,157) (12,267,079) (8,211,457) (38,814,116)
------------ ------------ ----------- ------------
Cash flows from investing activities:
Purchase of short-term investments............ (35,783,642) (6,325,502) -- (42,109,144)
Proceeds from maturity of short-term investments 21,558,158 -- -- 21,558,158
Purchase of equipment and leasehold
improvements............................ (1,318,380) (737,335) (1,102,934) (5,026,247)
Proceeds received on sale of equipment........ -- -- -- 31,724
------------ ------------ ----------- ------------
Net cash used in investing activities........... (15,543,864) (7,062,837) (1,102,934) (25,545,509)
------------ ------------ ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of convertible debt, net. -- -- -- 3,409,552
Distributions paid to S Corp. stockholder..... -- -- -- (186,393)
Principal payments under capital lease
obligations............................. (114,338) (37,727) (8,733) (173,386)
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............... -- 1,352,666 20 1,392,686
Proceeds received from capital
contributions........................... -- -- 68,952 102,176
Proceeds from issuance of Series B and C......
redeemable convertible preferred stock.. -- 4,999,892 2,999,650 18,041,528
Proceeds from issuance of common stock, net of
issuance costs ($515,273 in 1996 and
$1,033,274 in 1995)..................... 32,218,487 23,030,476 -- 55,248,963
Proceeds from stock option exercise........... 41,665 -- -- 41,665
Proceeds from sale-leaseback agreement........ 549,718 -- -- 549,718
------------ ------------ ----------- ------------
Net cash provided by financing activities..... 32,695,532 33,345,307 3,059,889 82,426,509
------------ ------------ ----------- ------------
Net increase (decrease) in cash and cash
equivalents............................. 2,170,511 14,015,391 (6,254,502) 18,066,884
Cash and cash equivalents at beginning of
period.................................. 15,896,373 1,880,982 8,135,484 --
------------ ------------ ----------- ------------
Cash and cash equivalents at end of
period.................................. $ 18,066,884 $ 15,896,373 $ 1,880,982 $ 18,066,884
============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
33
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional
Paid-In
Preferred Stock Common Stock Capital
-------------------------------------------- -------------------
Shares Amount Shares Amount
--------------------------------------------
<S> <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..........................
---------- --------- --------
Balance at December 31, 1990................. 2,500,000 25,000 15,000
Net loss for period..........................
---------- --------- --------
Balance at December 31, 1991................. 2,500,000 25,000 15,000
Distributions paid to S Corp. stockholder....
Net loss for period..........................
---------- --------- --------
Balance at December 31, 1992................. 2,500,000 25,000 15,000
Capital contribution......................... 33,224
Distributions paid to S Corp. stockholder....
Accretion of dividends on redeemable pref-
erred stock................................
Net loss for period..........................
---------- --------- ---------
Balance at December 31, 1993................. 2,500,000 25,000 48,224
Capital contribution......................... 68,952
Accretion of dividends on redeemable pref-
erred stock................................
Exercise of stock option..................... 25 20
Issuance of compensatory stock option
grants..................................... 1,172,250
Amortization of deferred compensation........
Net loss for period..........................
---------- --------- ---------
Balance at December 31, 1994................. 2,500,025 25,000 1,289,446
Accretion of dividends on preferred
stock......................................
Forgiveness of accretion of dividends on
preferred stock............................
Dividend on preferred stock.................. 7,123,536
Purchase of in-process research and deve-
lopment 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
Dividend on preferred stock.................. 224,307 2,243 2,016,520
Conversion of Series A, B, and C redeemable
preferred stock into common stock.......... 3,427,637 34,276 14,383,715
Conversion of Bridge Loan and interest to
common stock............................... 451,767 4,518 4,061,431
Issuance 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........
Net loss for period..........................
--------- --------- ---------- --------- -----------
Balance at December 31, 1995................. 6,903 4,306,520 10,145,580 101,456 63,420,487
Accretion of dividends on preferred stock.... 437,332
Exercise of stock options.................... 41,000 410 41,255
Cancellation of compensatory stock option
grants..................................... (651,003)
Issuance of compensatory stock option
grants..................................... 1,989,478
Issuance of common stock in public offer-
ing, net of offering costs of $515,273..... 2,842,706 28,427 32,190,060
Common stock issuance related to license and
royalty agreement.......................... 18,750 187 168,563
Amortization of deferred compensation........
Net loss for period..........................
-------- ------------ ---------- --------- -----------
Balance at December 31, 1996................. 6,903 $ 4,743,852 13,048,036 $ 130,480 $97,158,840
======== ============ ========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Cumulative During Stockholder's
Dividends on Deferred Development Equity
Preferred Stock Compensation Stage (Deficit)
---------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Issuance of common stock $.01 par value,
in connection with incorporation.......... $ 40,000
Net loss for period.......................... $ (253,963) (253,963)
--------------- ------------
Balance at December 31, 1990................. (253,963) (213,963)
Net loss for period.......................... (1,546,603) (1,546,603)
--------------- ------------
Balance at December 31, 1991................. (1,800,566) (1,760,566)
Distributions paid to S Corp. stockholder.... (19,483) (19,483)
Net loss for period.......................... (3,320,741) (3,320,741)
--------------- ------------
Balance at December 31, 1992................. (5,140,790) (5,100,790)
Capital contribution......................... 33,224
Distributions paid to S Corp. stockholder.... (166,910) (166,910)
Accretion of dividends on redeemable pref-
erred stock................................ $ (409,357) (409,357)
Net loss for period.......................... (5,461,011) (5,461,011)
------------ --------------- ------------
Balance at December 31, 1993................. (409,357) (10,768,711) (11,104,844)
Capital contribution......................... 68,952
Accretion of dividends on redeemable pref-
erred stock................................ (933,216) (933,216)
Exercise of stock option..................... 20
Issuance of compensatory stock option
grants..................................... $ (1,172,250)
Amortization of deferred compensation........ 253,942 253,942
Net loss for period.......................... (8,959,848) (8,959,848)
------------ ------------ --------------- ------------
Balance at December 31, 1994................. (1,342,573) (918,308) (19,728,559) (20,674,994)
Accretion of dividends on preferred
stock...................................... (1,233,366) (1,233,366)
Forgiveness of accretion of dividends on
preferred stock............................ 1,673,693 1,673,693
Dividend on preferred stock.................. (7,123,536)
Purchase of in-process research and deve-
lopment 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..................................... (1,421,803)
Dividend on preferred stock.................. (2,018,763)
Conversion of Series A, B, and C redeemable
preferred stock into common stock.......... 7,747,592 22,165,583
Conversion of Bridge Loan and interest to
common stock............................... 4,065,949
Issuance 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........ 490,961 490,961
Net loss for period.......................... (22,149,950) (22,149,950)
------------ ------------ --------------- ------------
Balance at December 31, 1995................. (2,296,953) (1,849,150) (41,878,509) 21,803,851
Accretion of dividends on preferred stock.... (437,332)
Exercise of stock options.................... 41,665
Cancellation of compensatory stock option
grants..................................... 651,003
Issuance of compensatory stock option
grants..................................... (958,497) 1,030,981
Issuance of common stock in public offer-
ing, net of offering costs of $515,273..... 32,218,487
Common stock issuance related to license
and royalty agreement...................... 168,750
Amortization of deferred compensation........ 984,270 984,270
Net loss for period.......................... (17,182,779) (17,182,779)
------------ ------------ --------------- ------------
Balance at December 31, 1996................. $ (2,734,285) $ (1,172,374) $ (59,061,288) $ 39,065,225
============ ============ =============== ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
34
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
30, 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 substantially 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
90 days 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.
At December 31, 1996 and 1995 cash equivalents were composed primarily
of investments in money market funds and held-to-maturity securities with
original maturities of 90 days 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.
Concentration of Credit Risk
The Company has not realized any losses on its investments. The
Company has invested the net proceeds of its public offerings 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.
35
<PAGE>
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.
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 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 had been
capitalized and were being amortized on a straight-line basis over a period of
five years. All capitalized organization costs were fully amortized as of
December 31, 1995.
Income Taxes
Deferred tax liabilities and assets are recognized based on temporary
differences between the financial statement basis and tax basis of assets and
liabilities using current statutory tax rates. A valuation allowance against
net deferred tax assets is established if, based on the available evidence, it
is more likely than not that some or all of the deferred tax assets will not be
realized. See Note 6.
36
<PAGE>
Recent Accounting Pronouncements
In 1997, the Financial Accounting Standards Board ("FASB") released
the Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share". SFAS 128 simplifies the standards for computing earnings per share
("EPS") and makes them comparable to international EPS standards. It replaces
the presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basis and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. SFAS 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. SFAS 128 requires restatement of all prior-
period EPS data presented. Management has not yet determined the impact of SFAS
128 on the Company's financial statements.
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>
1996 1995
------------ -----------
<S> <C> <C>
Commercial paper............. $ 8,844,868 $2,388,948
Federal agency notes......... 11,706,118 3,936,554
----------- ----------
Total short-term
investments................ $20,550,986 $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 approximates
fair value. All short-term investments mature within 83 days of December 31,
1996.
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following at
December 31:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Furniture and equipment................ $ 1,004,758 $ 735,333
Lab equipment.......................... 2,074,539 1,475,123
Leasehold improvements................. 1,939,831 1,551,408
----------- -----------
5,019,128 3,761,864
Accumulated depreciation and
amortization......................... (2,527,262) (1,493,630)
----------- -----------
Equipment and leasehold improve-
ments, net........................... $ 2,491,866 $ 2,268,234
=========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1995 and
1994 was $1,094,748, $802,275, and $522,920, respectively.
In July 1996, the Company entered into a sale lease-back agreement
which included $549,718 in furniture and office and lab equipment. Assets under
capital leases, net of accumulated amortization at December 31, 1996 and 1995
were $598,786 and $127,280, respectively.
37
<PAGE>
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at
December 31,
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Accounts payable............................... $ 322,614 $ 849,801
Accrued legal costs............................ 169,295 695,499
Accrued payroll and vacation................... 183,079 --
Accrued bonuses................................ 284,580 --
Accrued severance agreement.................... 185,248 --
Accrued other expenses......................... 603,145 1,464,046
---------- ----------
Total accounts payable
and accrued expenses......................... $1,747,961 $3,009,346
========== ==========
</TABLE>
5. LEASES
The Company leases office and research space and office equipment
under operating lease arrangements which expire on various dates through the
year 2000. 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,
1996:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
1997............................................ $273,169 $620,827
1998............................................ 263,966 110,747
1999............................................ 151,443 21,300
2000............................................ 41,512 14,200
2001 ........................................... -- --
Thereafter..................................... -- --
-------- --------
730,090 $767,074
========
Less amounts representing interest 157,996
--------
Present value of minimum lease payments 572,094
Less current portion of capital lease obligations 186,838
--------
Long-term portion of capital lease obligations $385,256
========
</TABLE>
Rent expense for the years December 31, 1996, 1995 and 1994 amounted to
$657,574, $251,637, and $247,930, respectively.
Cash paid for interest on capital leases was $51,206, $13,908, and $2,023
in 1996, 1995 and 1994, respectively.
38
<PAGE>
6. INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities as of December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Deferred tax assets:
Equipment and leasehold improvements.................................... $ 315,000 $ 166,000
Research and development credits........................................ 1,680,000 1,008,000
Deferred compensation................................................... 469,000 740,000
In-process research and development..................................... 560,000 600,000
Net operating loss...................................................... 17,835,000 11,798,000
------------ ------------
Total deferred tax assets................................................. 20,859,000 14,312,000
Valuation allowance for deferred tax assets............................... (20,859,000) (14,312,000)
------------ ------------
-- --
Deferred tax liabilities:
Total deferred tax liabilities............................................ -- --
------------ ------------
Net deferred tax assets................................................... -- --
============ ============
</TABLE>
The change in the total valuation allowance for the years ended December
31, 1996 and 1995 were increases of $6,547,000 and $6,092,000, respectively.
As of December 31, 1996, the Company had net operating loss carryforwards
for income tax purposes of approximately $45 million which expire through 2010.
The Company's ability to use the carryforwards is subject to limitations
resulting from an ownership change as defined in Internal Revenue Code Sections
382 and 383.
7. 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
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 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 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
39
<PAGE>
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 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.
On May 30, 1995, the Company sold 10,426 shares of Series C Redeemable
Convertible Preferred Stock, par value $.01, for $4,999,892.
On September 1, 1995, the Series A, Series B and Series C Redeemable
Convertible Preferred Stock designations were amended. The effect of this
amendment was to cancel the accretion of dividends on the Series A Preferred
Stock since its issuance on October 13, 1993, and the accretion on Series B and
Series C Preferred Stocks since their issuance and to reset the stated value at
September 1, 1995 to the original stated value 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 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 Redeemable Convertible 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
40
<PAGE>
$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 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
$32,218,487.
See Note 8 for a description of Series D Preferred Stock.
8. 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.
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 1994 and 1993.
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 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.
41
<PAGE>
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 Exchangeable Preferred Stock (the "Series D
Preferred Stock"), par value $.01. The Company ascribed a value of $16 per
share to the common stock issued and $584 per share of 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 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 it receives FDA approval, and,
accordingly, the Series D Preferred Stock was recharacterized as Preferred Stock
upon closing of the IPO. The Series D Preferred Stock is carried at face value
plus accrued unpaid dividends. 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 common shares
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.
On December 19, 1995, upon completion of the Company's IPO, the Series D
Preferred Stock was no longer redeemable at the holder's option.
On December 19, 1996, the one year anniversary of the IPO, the Company
issued 18,750 common shares to LSU in conjunction with a novative license and
royalty agreement and, accordingly, recorded a charge of $168,750. See Note 10
for a description of the novative license and royalty agreement.
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 27, 2006.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123") requires that companies either recognize
compensation expense for grants of stock, stock options, and other equity
instruments based on fair value, or provide pro forma disclosure of net income
or loss and earnings or loss per share in the notes to the financial statements.
The Company has adopted the disclosure provisions of SFAS 123 in 1996 and has
applied APB Opinion 25 and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its stock option
plans. The effects of applying SFAS 123 in this pro forma disclosure are not
likely to be representative of the effects on reported income or loss for future
years. SFAS 123 does not apply to awards prior
42
<PAGE>
to 1995 and additional awards in future years are anticipated. Had compensation
cost for the Company's stock-based compensation plans been determined based on
the fair value at the grant dates as calculated in accordance with SFAS
123, the Company's net loss and loss per share for the years ended December 31,
1996 and 1995 would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
Net Loss to Net Loss to
------------------ ------------------
Common Stockholder Loss Per Share Common Stockholder Loss Per Share
------------------ -------------- ------------------ --------------
<S> <C> <C> <C> <C>
As Reported... $17,620,111 $1.57 $31,960,562 $8.06
Pro Forma.... $18,334,693 $1.63 $32,072,056 $8.09
</TABLE>
The fair value of each stock option is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions: an
expected life of 5 years, expected volatility of 44%, a dividend yield of 0% and
a weighted average risk-free interest rate of 6.56% for 1996 and 5.85% for 1995.
The fair value of options granted in 1996 and 1995 was $3,695,732 and
$2,518,965, respectively.
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 is being amortized to
operations over the four-year vesting period of the options.
In December 1995, the Company issued to its financial advisor, at the
closing of the IPO, an option exercisable for three years to acquire 20,000
shares of common stock with an exercise price per share equal to the IPO price
per share.
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
the IPO price per share. One quarter of these shares vested on the grant date
and the balance will vest over three years.
During 1996, the Company granted to various employees options to
purchase 711,395 shares of common stock at exercise prices ranging from $6.71 to
$23.50 per share. Of the total number of options issued in 1996, 433,550 were
issued at prices equal to the market prices on the grant dates. The remaining
277,845 options were granted at prices below market. Of those options granted
at prices below market, 220,000 were issued in conjunction with the resignation
of a Company senior executive. In connection with the issuance of these
options, the Company recorded compensation expense of $1,030,981.
43
<PAGE>
Information related to stock option activity for the period from
inception to December 31, 1996 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 ................................ 711,395 6.71-23.50
Exercised ............................... (41,000) 0.80-6.71
Canceled ............................... (183,020) 6.71-11.00
--------- -----------
Outstanding at December 31, 1996 .......... 1,664,200 $0.80-23.50
--------- ===========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------ ----------- ---------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.80 486,450 6.9 years $ 0.80 442,701 $0.80
6.71 to 9.00 761,980 8.6 years $ 6.81 283,194 $6.92
11.00 to 23.50 415,770 9.7 years $12.63 -- --
--------- -------
$0.80 to 23.50 1,664,200 725,895
========= =======
</TABLE>
At December 31, 1996 there were 1,664,200 options at an average price
of $6.59 outstanding of which 725,895 options were exercisable. 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 $2,015,251, $490,961 and $253,492 in 1996, 1995 and
1994, respectively. In 1996, fair market value was based on market price. The
$1,172,374 remaining deferred compensation at December 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 stock options,
nonstatutory options, stock appreciation rights (SARs) and restricted stock
awards. At December 31, 1996 and 1995, the aggregate number of shares of the
Company's common stock which may be issued pursuant to incentive awards under
the Incentive Plan were 1,431,525 and 731,525 shares, respectively (for
44
<PAGE>
which common shares have been reserved). Awards of options to provide 661,395,
631,625 and 7,500 shares at exercise prices of $6.71-$23.50, $6.71-$9.00 and
$0.80 per share, respectively, were granted under the Incentive Plan in 1996,
1995 and 1994, respectively. These amounts are included in the tables above.
On May 15, 1996, the Board of Directors approved, subject to
stockholder approval, a proposal to adopt a Stock Option Plan for Non-Employee
Directors of the Company (the "Director Stock Plan"). The Director Stock Plan
provides for an initial grant of an option to purchase 10,000 shares of common
stock to each eligible non-employee director upon first being elected or
appointed to serve on the Board of Directors. Those eligible directors already
serving at the time the Director Stock Plan approved by the stockholders of the
Company were each granted a stock option to purchase 10,000 shares of common
stock with a deemed date of grant of May 15, 1996. If a director remains
eligible to receive stock options under the Director Stock Plan on the second
anniversary of the date that a director is first granted a stock option under
the Director Stock Plan, that director will be granted a second stock option to
purchase 10,000 shares of common stock. Stock options granted under the Director
Stock Plan will vest and become exercisable in equal increments on the first and
second anniversary of their date of grant, but no stock options may be exercised
more than ten years after the date of its grant. The Director Stock Plan was
approved by the stockholders at the Company's 1996 Annual Meeting which took
place on June 25, 1996. In conjunction with the approval of the Director Stock
Plan, options were granted to purchase 20,000 shares of common stock at an
exercise price of $21.13. In addition, options to purchase 10,000 shares were
issued to each of the three newly appointed Directors in the second half of
1996. Exercise prices range from $12.75 to $13.75 per share. These amounts are
included in the tables above.
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. 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.
In conjunction with the new agreement an initial fee of $200,000 was paid to LSU
upon execution, $500,000 was paid upon the initial public offering of the common
stock of the Company in December 1995 and 18,750 common shares with a fair
value of $168,750 were issued one year after that offering in December 1996.
These costs were charged to operations in the periods indicated as the purchase
of in-process research and development. The agreement also 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
Certain capital lease obligations are considered noncash items and,
accordingly, are not reflected in the consolidated statements of cash flows.
Noncash capital lease obligations of $58,290 and $123,502 were incurred in 1995
and 1994, respectively, when the Company entered into leases for lab and office
equipment. In 1996, the Company entered into a sale lease-back agreement which
resulted in the receipt of $549,718 in cash proceeds. See Note 3.
12. SUBSEQUENT EVENTS
Effective February 1, 1997, the Company implemented a deferred
compensation plan under Section 401(k) of the Internal Revenue Code (the "401k
Plan"). Under the 401k Plan, eligible employees are permitted to contribute,
subject to certain limitations, up to 20% of their gross salary. The Company
makes a matching contribution which currently totals 50% of the employee's
contribution, up to a maximum amount equal to the lesser of $2,500 or 6% of the
employees gross salary.
13. EVENTS SUBSEQUENT TO THE DATE OF THE ACCOUNTANT'S REPORT
(UNAUDITED)
In the first quarter of 1997, the Company will record a charge of
approximately $925,000 for severance payments to be made to the former Chairman
of the Board of Directors, officer and employee of the Company. Of the total
estimated charge, $450,000 is noncash and the remainder will be paid over a 20
month period.
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the heading "Directors and Executive
Officers" contained in the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A in connection with the Company's 1997 Annual Meeting
of Stockholders is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the heading "Management Compensation",
"Performance Graph" and "Compensation Committee Report on Executive
Compensation" contained in the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A in connection with the Company's 1997 Annual Meeting
of Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the heading "Security Ownership of
Certain Beneficial Owners and Management" contained in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A in connection with the
Company's 1997 Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the heading "Certain Relationships and
Related Transactions" contained in the Company's definitive Proxy Statement to
be filed pursuant to Regulation 14A in connection with the Company's 1997 Annual
Meeting of Stockholders is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
<TABLE>
<CAPTION>
<S> <C> <C>
(a)(1) -- The financial statements filed as part of this Report at Item 8 are listed in the Index
to Consolidated Financial Statements on page 29 of this Report.
(a)(2) -- None.
(a)(3) -- The following documents are filed or incorporated by reference as exhibits to this Report:
<CAPTION>
Exhibit Description
- ---------- --------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 -- Amended and Restated Certificate of Incorporation of the Company. Filed as exhibit 3.1 to
the Company's registration statement on Form S-1 (File No. 33-98162) filed with the
Commission on November 27, 1995, and incorporated by reference herein.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
3.2 -- Certificate of Designations, Preferences and Rights of Series D Exchangeable Preferred Stock,
as amended and restated. Filed as exhibit 3.2 to the Company's registration statement on Form
S-1 (File No. 33-98162) filed with the Commission on November 27, 1995, and incorporated
by reference herein.
3.3 -- Third Amended and Restated By-Laws of the Company. Filed as exhibit 3.3 to the Company's
registration statement on Form S-1 (File No. 33-98162) filed with the Commission on
November 27, 1995, and incorporated by reference herein.
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).
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. Filed as exhibit 10.1
to the Company's registration statement on Form S-1 (File No. 33-98162) filed with the
Commission on November 27, 1995, and incorporated by reference herein.
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. Filed as
exhibit 10.2 to the Company's registration statement on Form S-1 (File No. 33-98162) filed
with the Commission on November 27, 1995, and incorporated by reference herein.
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.] Filed as exhibit 10.3 to the Company's registration statement on Form
S-1 (File No. 33-98162) filed with the Commission on November 27, 1995, and incorporated
by reference herein.
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, Ergo Science Incorporated and Geneva Pharmaceuticals, Inc. Filed as
exhibit 10.4 to the Company's registration statement on Form S-1 (File No. 33-98162) filed
with the Commission on November 27, 1995, and incorporated by reference herein.
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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 thereto; Sixth Amendment to Stockholder
Rights Agreement dated September 1, 1995, among the Company, 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. Filed as exhibit
10.5 to the Company's registration statement on Form S-1 (File No. 33-98162) filed with the
Commission on November 27, 1995, and incorporated by reference herein.
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. Filed as exhibit 10.6 to the Company's registration statement on Form S-1 (File
No. 33-98162) filed with the Commission on November 27, 1995, and incorporated by
reference herein.
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. Filed as exhibit 10.7 to the Company's registration statement on Form
S-1 (File No. 33-98162) filed with the Commission on November 27, 1995, and incorporated
by reference herein.
10.8 -- Stockholders Agreement dated April 27, 1995, among the Company and the stockholders of
the Company that are signatories thereto. Filed as exhibit 10.8 to the Company's registration
statement on Form S-1 (File No. 33-98162) filed with the Commission on November 27, 1995,
and incorporated by reference herein.
10.9 -- Transfer Agreement dated April 27, 1995, between the Company and Anthony H. Cincotta,
Ph.D. Filed as exhibit 10.9 to the Company's registration statement on Form S-1 (File No. 33-
98162) filed with the Commission on November 27, 1995, and incorporated by reference
herein.
10.10 -- Transfer Agreement dated April 27, 1995, between the Company and Albert H. Meier, Ph.D.
Filed as exhibit 10.10 to the Company's registration statement on Form S-1 (File No. 33-
98162) filed with the Commission on November 27, 1995, and incorporated by reference
herein.
10.11 -- Consulting Agreement dated October 6, 1995, between the Company and Albert H. Meier,
Ph.D. Filed as exhibit 10.11 to the Company's registration statement on Form S-1 (File No.
33-98162) filed with the Commission on November 27, 1995, and incorporated by reference
herein.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.12 -- Amended and Restated Employment Agreement dated November 16, 1995, between the
Company and Manuel Cincotta, Jr. Filed as exhibit 10.12 to the Company's registration
statement on Form S-1 (File No. 33-98162) filed with the Commission on November 27, 1995,
and incorporated by reference herein.
10.13 -- Employment Agreement dated October 6, 1995, between the Company and Anthony H.
Cincotta, Ph.D. Filed as exhibit 10.13 to the Company's registration statement on Form S-1
(File No. 33-98162) filed with the Commission on November 27, 1995, and incorporated by
reference herein.
10.14 -- Amended and Restated Employment Agreement dated November 16, 1995, between the
Company and J. Warren Huff. Filed as exhibit 10.14 to the Company's registration statement
on Form S-1 (File No. 33-98162) filed with the Commission on November 27, 1995, and
incorporated by reference herein.
10.15 -- Employment Agreement dated October 6, 1995, between the Company and Ronald H.
Abrahams, Ph.D. Filed as exhibit 10.15 to the Company's registration statement on Form S-1
(File No. 33-98162) filed with the Commission on November 27, 1995, and incorporated by
reference herein.
10.16 -- Employment Agreement dated October 6, 1995, between the Company and Thomas N.
Thurman. Filed as exhibit 10.16 to the Company's registration statement on Form S-1 (File
No. 33-98162) filed with the Commission on November 27, 1995, and incorporated by
reference herein.
10.17 -- Employment Agreement dated October 6, 1995, between the Company and Alan T. Barber.
Filed as exhibit 10.17 to the Company's registration statement on Form S-1 (File No. 33-
98162) filed with the Commission on November 27, 1995, and incorporated by reference
herein.
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. Filed
as exhibit 10.18 to the Company's registration statement on Form S-1 (File No. 33-98162) filed
with the Commission on November 27, 1995, and incorporated by reference herein.
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. Filed as exhibit 10.19 to the Company's registration statement on Form
S-1 (File No. 33-98162) filed with the Commission on November 27, 1995, and incorporated
by reference herein.
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. Filed as exhibit 10.20 to
the Company's registration statement on Form S-1 (File No. 33-98162) filed with the
Commission on November 27, 1995, and incorporated by reference herein.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.21 -- Amended and Restated Option Agreement dated October 12, 1993, between Ergo Science
Incorporated and Anthony H. Cincotta, Ph.D.; First Amendment to Option Agreement dated
April 27, 1995, among the Company, Ergo Science Incorporated and Anthony H. Cincotta,
Ph.D.; and Second Amendment to Amended and Restated Option Agreement dated November
6, 1995, between the Company and Anthony H. Cincotta, Ph.D. Filed as exhibit 10.21 to the
Company's registration statement on Form S-1 (File No. 33-98162) filed with the Commission
on November 27, 1995, and incorporated by reference herein.
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. Filed as exhibit 10.22
to the Company's registration statement on Form S-1 (File No. 33-98162) filed with the
Commission on November 27, 1995, and incorporated by reference herein.
10.23 -- Option and Proxy Agreement 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. Filed as exhibit 10.23
to the Company's registration statement on Form S-1 (File No. 33-98162) filed with the
Commission on November 27, 1995, and incorporated by reference herein.
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. Filed as
exhibit 10.24 to the Company's registration statement on Form S-1 (File No. 33-98162) filed
with the Commission on November 27, 1995, and incorporated by reference herein.
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. Filed as exhibit 10.25 to the
Company's registration statement on Form S-1 (File No. 33-98162) filed with the Commission
on November 27, 1995, and incorporated by reference herein.
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. Filed as exhibit 10.26 to the Company's registration statement on
Form S-1 (File No. 33-98162) filed with the Commission on November 27, 1995, and
incorporated by reference herein.
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. Filed as exhibit 10.27 to the Company's registration statement on Form
S-1 (File No. 33-98162) filed with the Commission on November 27, 1995, and incorporated
by reference herein.
10.28 -- Consulting Agreement dated August 24, 1995, between the Company and DBM Corporate
Consulting Group, Ltd. Filed as exhibit 10.28 to the Company's registration statement on
Form S-1 (File No. 33-98162) filed with the Commission on November 27, 1995, and
incorporated by reference herein.
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.29 -- Form of Option and Registration Rights Agreement between the
Company and DBM Corporate Consulting Group, Ltd. Filed as
exhibit 10.29 to the Company's registration statement on Form
S-1 (File No. 33-98162) filed with the Commission on November
27, 1995, and incorporated by reference herein.
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. Filed as exhibit 10.32 to the
Company's registrtion statement on Form S-1 (File No. 333-
08327) filed with the Commission on August 9, 1996, and
incorporated by reference herein.
10.33 -- Employment agreement dated March 1, 1996, by and between the
Company and Robert M. Powell. Filed as exhibit 10.33 to the
Company's Registration Statement on Form S-1 (File No. 333-
08327) filed with the Commission on August 9, 1996, and
incorporated by reference herein.
10.34 -- Resignation Agreement dated September 12, 1996, between the
Company and J. Warren Huff. Filed as exhibit 10.1 to the
Company's quarterly filing on Form 10-Q (File No. 000-26988)
filed with the Commission and November 13, 1996 and
incorporated by reference herein.
10.35 -- First Amendment to Employment Agreement dated October 6, 1996,
between the Company and Ronald H. Abrahams, Ph.D. Filed as
exhibit 10.2 to the Company's quarterly filing on Form 10-Q
(File No.000-26988) filed with the Commission on November 13,
1996 and incorporated by reference herein.
10.36 -- Termination Agreement dated March 26, 1997, between the
Company and Manuel Cincotta, Jr. Filed herewith.
10.37 -- Option Agreement dated March 26, 1997, between the Company and
Manuel Cincotta, Jr. Filed herewith.
11 -- Statement re computation of loss per share.
21 -- Subsidiaries of registrant.
23.1 -- Consent of Coopers & Lybrand L.L.P.
27 -- Financial data schedule
(b) -- No reports on Form 8-K were filed by the Company during the
fourth quarter of 1996.
</TABLE>
51
<PAGE>
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, in the City of
Charlestown and State of Massachusetts on March 31, 1997.
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)
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Ronald H. Abrahams President, Chief Executive Officer and Director March 25, 1997
- ----------------------------------- (Principal Executive Officer)
(Ronald H. Abrahams, Ph.D.)
/s/ Alan T. Barber Vice President, Finance and Administration, and March 25, 1997
- ----------------------------------- Chief Financial Officer, (Principal Financial Officer
(Alan T. Barber) and Principal Accounting Officer)
/s/ Manuel Cincotta, Jr. Chairman of the Board and Director March 25, 1997
- -----------------------------------
(Manuel Cincotta, Jr.)
/s/ Anthony H. Cincotta Director March 25, 1997
- -----------------------------------
(Anthony H. Cincotta, Ph.D.)
/s/ Stephen A. Duzan Director March 25, 1997
- -----------------------------------
(Stephen A. Duzan)
/s/ Ray L. Hunt Director March 25, 1997
- -----------------------------------
(Ray L. Hunt)
/s/ Thomas F. McWilliams Director March 25, 1997
- -----------------------------------
(Thomas F. McWilliams)
/s/ Albert H. Meier Director March 25, 1997
- -----------------------------------
(Albert H. Meier, Ph.D.)
Director
- -----------------------------------
(Stephen P. Smiley)
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ David L. Castaldi Director March 25, 1997
- -----------------------------------
(David L. Castaldi)
Director
- -----------------------------------
(W. Leigh Thompson)
</TABLE>
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<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Document Description
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<C> <S> <C>
3.1 -- Amended and Restated Certificate of Incorporation of the Company.
Filed as exhibit 3.1 to the Company's registration statement on
Form S-1 (File No. 33-98162) filed with the Commission on
November 27, 1995, and incorporated by reference herein.
3.2 -- Certificate of Designations, Preferences and Rights of Series D
Exchangeable Preferred Stock, as amended and restated. Filed as
exhibit 3.2 to the Company's registration statement on Form S-1
(File No. 33-98162) filed with the Commission on November 27,
1995, and incorporated by reference herein.
3.3 -- Third Amended and Restated By-Laws of the Company. Filed as
exhibit 3.3 to the Company's registration statement on Form S-1
(File No. 33-98162) filed with the Commission on November 27,
1995, and incorporated by reference herein.
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).
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. Filed as exhibit 10.1 to the Company's
registration statement on Form S-1 (File No. 33-98162) filed with
the Commission on November 27, 1995, and incorporated by
reference herein.
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. Filed as exhibit
10.2 to the Company's registration statement on Form S-1 (File
No. 33-98162) filed with the Commission on November 27, 1995, and
incorporated by reference herein.
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.] Filed as exhibit 10.3 to the
Company's registration statement on Form S-1 (File No. 33-98162)
filed with the Commission on November 27, 1995, and incorporated
by reference herein.
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, Ergo Science Incorporated and Geneva Pharmaceuticals, Inc.
Filed as exhibit 10.4 to the Company's registration statement on
Form S-1 (File No. 33-98162) filed with the Commission on
November 27, 1995, and incorporated by reference herein.
</TABLE>
54
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<TABLE>
<CAPTION>
<C> <S> <C>
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 thereto; Sixth Amendment to Stockholder
Rights Agreement dated September 1, 1995, among the Company, 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. Filed as exhibit
10.5 to the Company's registration statement on Form S-1 (File No. 33-98162) filed with the
Commission on November 27, 1995, and incorporated by reference herein.
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. Filed as exhibit 10.6 to the Company's registration statement on Form S-1 (File
No. 33-98162) filed with the Commission on November 27, 1995, and incorporated by
reference herein.
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. Filed as exhibit 10.7 to the Company's registration statement on Form
S-1 (File No. 33-98162) filed with the Commission on November 27, 1995, and incorporated
by reference herein.
10.8 -- Stockholders Agreement dated April 27, 1995, among the Company and the stockholders of
the Company that are signatories thereto. Filed as exhibit 10.8 to the Company's registration
statement on Form S-1 (File No. 33-98162) filed with the Commission on November 27, 1995,
and incorporated by reference herein.
10.9 -- Transfer Agreement dated April 27, 1995, between the Company and Anthony H. Cincotta,
Ph.D. Filed as exhibit 10.9 to the Company's registration statement on Form S-1 (File No. 33-
98162) filed with the Commission on November 27, 1995, and incorporated by reference
herein.
10.10 -- Transfer Agreement dated April 27, 1995, between the Company and Albert H. Meier, Ph.D.
Filed as exhibit 10.10 to the Company's registration statement on Form S-1 (File No. 33-
98162) filed with the Commission on November 27, 1995, and incorporated by reference
herein.
10.11 -- Consulting Agreement dated October 6, 1995, between the Company and Albert H. Meier,
Ph.D. Filed as exhibit 10.11 to the Company's registration statement on Form S-1 (File No.
33-98162) filed with the Commission on November 27, 1995, and incorporated by reference
herein.
</TABLE>
55
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<TABLE>
<CAPTION>
<C> <S> <C>
10.12 -- Amended and Restated Employment Agreement dated November 16, 1995, between the
Company and Manuel Cincotta, Jr. Filed as exhibit 10.12 to the Company's registration
statement on Form S-1 (File No. 33-98162) filed with the Commission on November 27, 1995,
and incorporated by reference herein.
10.13 -- Employment Agreement dated October 6, 1995, between the Company and Anthony H.
Cincotta, Ph.D. Filed as exhibit 10.13 to the Company's registration statement on Form S-1
(File No. 33-98162) filed with the Commission on November 27, 1995, and incorporated by
reference herein.
10.14 -- Amended and Restated Employment Agreement dated November 16, 1995, between the
Company and J. Warren Huff. Filed as exhibit 10.14 to the Company's registration statement
on Form S-1 (File No. 33-98162) filed with the Commission on November 27, 1995, and
incorporated by reference herein.
10.15 -- Employment Agreement dated October 6, 1995, between the Company and Ronald H.
Abrahams, Ph.D. Filed as exhibit 10.15 to the Company's registration statement on Form S-1
(File No. 33-98162) filed with the Commission on November 27, 1995, and incorporated by
reference herein.
10.16 -- Employment Agreement dated October 6, 1995, between the Company and Thomas N.
Thurman. Filed as exhibit 10.16 to the Company's registration statement on Form S-1 (File
No. 33-98162) filed with the Commission on November 27, 1995, and incorporated by
reference herein.
10.17 -- Employment Agreement dated October 6, 1995, between the Company and Alan T. Barber.
Filed as exhibit 10.17 to the Company's registration statement on Form S-1 (File No. 33-
98162) filed with the Commission on November 27, 1995, and incorporated by reference
herein.
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. Filed
as exhibit 10.18 to the Company's registration statement on Form S-1 (File No. 33-98162) filed
with the Commission on November 27, 1995, and incorporated by reference herein.
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. Filed as exhibit 10.19 to the Company's registration statement on Form
S-1 (File No. 33-98162) filed with the Commission on November 27, 1995, and incorporated
by reference herein.
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. Filed as exhibit 10.20 to
the Company's registration statement on Form S-1 (File No. 33-98162) filed with the
Commission on November 27, 1995, and incorporated by reference herein.
</TABLE>
56
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<TABLE>
<CAPTION>
<C> <S> <C>
10.21 -- Amended and Restated Option Agreement dated October 12, 1993, between Ergo Science
Incorporated and Anthony H. Cincotta, Ph.D.; First Amendment to Option Agreement dated
April 27, 1995, among the Company, Ergo Science Incorporated and Anthony H. Cincotta,
Ph.D.; and Second Amendment to Amended and Restated Option Agreement dated November
6, 1995, between the Company and Anthony H. Cincotta, Ph.D. Filed as exhibit 10.21 to the
Company's registration statement on Form S-1 (File No. 33-98162) filed with the Commission
on November 27, 1995, and incorporated by reference herein.
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. Filed as exhibit 10.22
to the Company's registration statement on Form S-1 (File No. 33-98162) filed with the
Commission on November 27, 1995, and incorporated by reference herein.
10.23 -- Option and Proxy Agreement 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. Filed as exhibit 10.23
to the Company's registration statement on Form S-1 (File No. 33-98162) filed with the
Commission on November 27, 1995, and incorporated by reference herein.
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. Filed as
exhibit 10.24 to the Company's registration statement on Form S-1 (File No. 33-98162) filed
with the Commission on November 27, 1995, and incorporated by reference herein.
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. Filed as exhibit 10.25 to the
Company's registration statement on Form S-1 (File No. 33-98162) filed with the Commission
on November 27, 1995, and incorporated by reference herein.
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. Filed as exhibit 10.26 to the Company's registration statement on
Form S-1 (File No. 33-98162) filed with the Commission on November 27, 1995, and
incorporated by reference herein.
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. Filed as exhibit 10.27 to the Company's registration statement on Form
S-1 (File No. 33-98162) filed with the Commission on November 27, 1995, and incorporated
by reference herein.
10.28 -- Consulting Agreement dated August 24, 1995, between the Company and DBM Corporate
Consulting Group, Ltd. Filed as exhibit 10.28 to the Company's registration statement on
Form S-1 (File No. 33-98162) filed with the Commission on November 27, 1995, and
incorporated by reference herein.
</TABLE>
57
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<TABLE>
<CAPTION>
<C> <S> <C>
10.29 -- Form of Option and Registration Rights Agreement between the
Company and DBM Corporate Consulting Group, Ltd. Filed as
exhibit 10.29 to the Company's registration statement on Form
S-1 (File No. 33-98162) filed with the Commission on November
27, 1995, and incorporated by reference herein.
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. Filed as exhibit 10.32 to the
Company's registration statement on Form S-1 (File No. 333-
08327) filed with the Commission on August 9, 1996, and
incorporated by reference herein.
10.33 -- Employment Agreement dated March 1, 1996, by and between the
Company and Robert M. Powell. Filed as exhibit 10.33 to the
Company's registration statement on Form S-1 (File No. 333-
08327) filed with the Commission on August 9, 1996, and
incorporated by reference herein.
10.34 -- Resignation Agreement dated September 12, 1996, between the
Company and J. Warren Huff. Filed as exhibit 10.1 to the
Company's quarterly filing on Form 10-Q (File No. 000-26988)
filed with the Commission on November 13, 1996 and
incorporated by reference herein.
10.35 -- First Amendment to Employment Agreement dated October 6, 1996,
between the Company and Ronald H. Abrahams, Ph.D. Filed as
exhibit 10.2 to the Company's quarterly filing on Form 10-Q
(File No.000-26988) filed with the Commission on November 13,
1996 and incorporated by reference herein.
10.36 -- Termination Agreement dated March 26, 1997, between the
Company and Manuel Cincotta, Jr. Filed herewith.
10.37 -- Option Agreement dated March 26, 1997, between the Company and
Manuel Cincotta, Jr. Filed herewith.
11 -- Statement re computation of loss per share.
21 -- Subsidiaries of registrant.
23.1 -- Consent of Coopers & Lybrand L.L.P.
27 -- Financial data schedule
</TABLE>
58
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EXHIBIT 10.36
TERMINATION AGREEMENT
BY AND BETWEEN
ERGO SCIENCE CORPORATION
AND
MANUEL CINCOTTA, JR.
THIS TERMINATION AGREEMENT (this "Agreement") is made and entered into as
of March 26, 1997, by and between Ergo Science Corporation, a Delaware
corporation (the "Company"), and Manuel Cincotta, Jr. (the "Employee").
RECITALS
WHEREAS, the Company and the Employee are parties to that certain Amended
and Restated Employment Agreement (the "Employment Agreement") dated November
16, 1995; and
WHEREAS, the Employee has resigned from all officer, director and employee
positions with the Company and its subsidiaries, and the Company and the
Employee desire to terminate the Employment Agreement in connection therewith.
AGREEMENT
NOW, THEREFORE, for and in consideration of the promises and the mutual
covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and subject to the
terms and conditions hereinafter set forth, the Company and the Employee hereby
agree as follows:
1. Termination of the Employment Agreement. The Company and the Employee
---------------------------------------
agree that the Employment Agreement is hereby terminated.
2. Compensation.
------------
(a) Annual Payment.
--------------
(i) Beginning as of the date hereof and continuing until
terminated pursuant to Section 3 of this Agreement, the Employee shall be
entitled to receive $225,000 per year (the "Annual Payment"), payable in equal
installments corresponding in frequency and time with the customary payroll
procedures of the Company.
(ii) Beginning as of the date hereof and continuing until
terminated pursuant to Section 3 of this Agreement, the Employee shall be
entitled to receive $3,000 per month payable in equal installments corresponding
in frequency and time with the customary payroll procedures of the Company in
lieu of receipt of, or participation in, any and all benefits under
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<PAGE>
those welfare benefit plans, practices, policies and programs of the Company in
which the Employee participated as of September 11, 1996, and which the Company
continues to make available to executives of the Company in general (including,
without limitation, any and all life insurance policies on the life of the
Employee, health insurance policies, and short and long term disability
policies).
(iii) The Company shall pay to the Employee an amount equal to
75% of the average annual bonus paid by the Company to the officers of the
Company for the fiscal year ended December 31, 1996. Such amount shall be paid
by the Company within two weeks of the date of this Agreement.
(b) Automobile. The Company shall cause title to the automobile
----------
previously provided to the Employee under the terms of the Employment Agreement
to be transferred to the Employee.
(c) Tax Gross-Up. To the extent that the Employee is obligated to pay
------------
federal or state income taxes based upon his receipt of the benefit set forth in
Section 2 (b), the Company shall pay the Employee an amount necessary to provide
the Employee with the same after tax benefit as he would otherwise receive if
the transfer of the automobile were tax free to the Employee (including any tax
gross-up of such amount).
3. Term and Termination of Section 2 of This Agreement.
---------------------------------------------------
(a) Term and Termination Event. Sub-section 2 (a)(i) and (ii) of this
--------------------------
Agreement shall terminate on November 16, 1998, unless terminated earlier in
accordance with the following: the Company may elect to terminate Sub-section 2
(a)(i) and (ii) of this Agreement in the event that at any time Anthony H.
Cincotta, Ph.D., ceases to be a full-time employee of the Company.
(b) Effect of Termination. In the event that Section 2 of this
---------------------
Agreement is terminated pursuant to Section 3(a), the Company agrees to pay to
the Employee all amounts due thereunder through the date of termination (the
"Accrued Obligations") within 30 days after the date of termination.
4. Release
-------
(a) Prior Rights and Obligations. The Employee hereby extinguishes
----------------------------
all rights, if any, that Employee may have and obligations, if any, that the
Company may have, contractual or otherwise, relating to the Employee's
relationship with the Company, including without limitation as an officer,
director, employee, consultant, debtor, agent or creditor, and the termination
of any and all such relationships, unless otherwise provided in this Agreement.
(b) Employee's Obligations.
----------------------
(I) Employee hereby releases, acquits and forever discharges the
Company, along with the Company's predecessors, successors, assigns,
subsidiaries, affiliates, and past and present employees, officers, directors,
partners, shareholders, agents, attorneys,
2
<PAGE>
accountants, and advisors (and the agents, representatives, heirs, successors
and assigns of the foregoing), (all of the foregoing, the "Released Persons")
from any and all causes of action, complaints, charges, indebtedness, damages,
losses, claims, liabilities, actions or suits at law or in equity, and demands,
of whatsoever kind and character, whether matured or unmatured, liquidated or
unliquidated, choate or inchoate, known or unknown, vested or contingent,
("Liabilities") that Employee now has or ever has had, including but not limited
to all Liabilities in any manner whatsoever directly or indirectly related to,
attributed to or arising from (1) Employee's relationship with the Company, any
of its predecessors or subsidiaries as an officer, director, employee,
shareholder, consultant, debtor, agent or creditor, (2) Employee's termination
from any such relationship, and (3) any and all other acts or omissions related
to any matter up to and including the date of his execution of this Agreement.
This release includes, but is not limited to, any complaints or charges of
wrongful termination or discrimination (based on Employee's age or any other
factor) under the Age Discrimination in Employment Act, as amended, Title VII of
the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act,
as amended, and any other statute or law.
(ii) Employee agrees not to bring any lawsuit, charge or claim
against any or all of the Released Persons in or before any court, governmental
agency, mediator or arbitral body, arising from or attributed to Employee's
relationship with the Company (including its predecessors and subsidiaries), his
termination therefrom or any other matter covered by the release contained in
the preceding paragraph.
5. Rights to Work Product.
----------------------
(a) Work Product. The Employee and the Company each acknowledge that
------------
during the term of service of the Employee with the Company or its affiliates,
the Employee 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, or are now, engaged, including but not limited to
research relating to circadian rhythms and temporal neuroendocrine organization
(collectively, the "Work Product"). The Employee 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 Employee, either solely or jointly with
others, that was developed prior to the date hereof.
(b) Rights of Company to Intellectual Property. The Employee agrees
------------------------------------------
that whether or not the services performed by the Employee for the Company or
its affiliates were considered works made for hire or an employment to invent,
all Work Product discovered, created, invented or developed by the Employee,
either solely or jointly with others, during the term of the Employee's services
to the Company or its affiliates prior to the date hereof 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 Employee, the Employee
agrees that the Company shall have all copyright and patent rights with respect
to any Work Product discovered, created, invented, developed or reduced to
practice by the Employee, either solely or jointly with others, during the term
of the Employee's service to the Company or its affiliates prior to the date
hereof.
3
<PAGE>
(c) Transfer of Rights. The Employee hereby transfers, grants,
------------------
conveys, assigns, and relinquishes exclusively to the Company any and all right,
title and interest he now has or may hereafter acquire in and to any Work
Product under patent, copyright, trade secret and trademark law in perpetuity or
for the longest period otherwise permitted by law. The Employee 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
Employee 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 Employee'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 this Agreement. For purposes of Sections 5,
6, 8 and 10 of this Agreement, the Company shall include the Company's
predecessors and subsidiaries.
6. Non-Disclosure and Non-Use of Information.
-----------------------------------------
(a) The Employee 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 scientific, financial and business affairs of the Company and its
affiliates, and (iii) any and all Work Product which has come into the
Employee'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 Employee pursuant to a subpoena
or court order, or pursuant to a requirement of a 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 Employee shall take all
-----------------
reasonable steps to prohibit disclosure pursuant to subsection (ii) above.
(b) Employee agrees (i) to hold such Confidential Information in
strictest confidence and (ii) not to release such information to any person
(other than Company's employees and other persons to whom the Company has
authorized the Employee 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) Employee further agrees not to use any Confidential Information
for the benefit of any person or entity other than Company.
7. Surrender of Materials. The Employee 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
Employee's possession, custody or control. The Employee shall be able to retain
as his personal property the IBM ThinkPad notebook computer currently used by
the Employee together with all hardware peripherals and software installed
thereon;
4
<PAGE>
provided, however that the Employee shall immediately return to the Company
- -----------------
all Company files and data on such computer.
8. Non-Competition.
---------------
(a) The Term of Non-Competition (herein so called) shall be for a
term beginning on the date hereof and continuing through November 16, 1998.
(b) During the Term of Non-Competition, Employee will not, directly
or indirectly, individually or as an officer, director, employee, shareholder,
employee, contractor, partner, joint venturer, agent, equity owner, or in any
capacity whatsoever, (i) engage in or promote the commercialization of methods
of treating type II diabetes, obesity or breast cancer 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 prior to the date hereof for the benefit of the Employee or any other
entity or person, anywhere within the Geographic Area which herein shall mean
the United States, Canada, Europe, and Israel or 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 to its subsidiaries (a
"Competing Business"); (ii) hire, attempt to hire, or contact or solicit with
respect to hiring any employee of the Company; or (iii) call upon, solicit,
divert, or take away any customers or suppliers of the Company. Notwithstanding
the foregoing, the Company agrees that the Employee 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 Employee does not otherwise participate
in such Competing Business in any way prohibited by the preceding clause. As
used in this Section 8(b), "Company" shall include the Company and any of its
affiliates.
(c) Employee 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.
9. Premises. The Employee shall vacate the premises at or before 10:00
--------
p.m.on the date hereof.
10. Publicity. The Employee 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.
11. Survival. All of the provisions of this Agreement other than
--------
Section 2 shall survive the termination of Section 2 of this Agreement.
12. Governing Law. This Agreement shall be construed, interpreted, and
-------------
enforced in accordance with the laws of Massachusetts.
5
<PAGE>
13. Binding Agreement; Assignment. This Agreement and all provisions
-----------------------------
contained herein shall be binding upon and inure to the benefit of the parties
hereto and their respective representatives, successors, and assigns; provided,
however, that neither party may assign its rights or obligations hereunder
without the prior written consent of the other party. The Employee and the
Company agree that the provisions of Section 4 of this Agreement are intended
for the benefit of, and may be enforced by, the Released Persons, who are
express third party beneficiaries of the provisions of such Section 4.
14. Notices. Any notice required by this Agreement shall be in writing
-------
and shall be deemed to have been given when delivered personally or sent by
certified or registered mail, postage prepaid, return receipt requested, duly
addressed to the person concerned at the address indicated below or to such
changed address as such person may subsequently give such notice of:
If to the Company: Ergo Science Corporation
Charlestown Navy Yard
33 3rd Avenue
Charlestown, Massachusetts 02129
Attn: Chief Executive Officer
If to Employee: Manuel Cincotta, Jr.
158 Lake Road
Tiverton, Rhode Island 02878
A party may change its or his address by giving written notice to the other
party hereto, which notice shall be effective upon actual receipt.
15. Invalid Provisions. 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 part 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 each 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.
16. Equitable Relief. The Employee acknowledges that money damages would
----------------
be both incalculable and an insufficient remedy for a breach of Sections 4, 5,
6, 8 and 10 of this Agreement by the Employee 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.
17. Amendments. This Agreement may be amended at any time and from time
----------
to time in whole or in part only by an instrument in writing setting forth the
particulars of such amendment duly executed by both the Company and the
Employee.
6
<PAGE>
18. Entire Agreement. This Agreement and that certain Option Agreement
----------------
between the Company and Employee, dated as of March 26, 1997, constitute the
entire understanding between the parties hereto with respect to the subject
matter hereof and supersede all prior agreements or understandings, if any,
relating to the subject matter hereof. The terms and provisions of the
Employment Agreement, as noted above, are hereby terminated and the Company and
the Employee hereby acknowledge that neither party has any further rights or
obligations thereunder (including obligations set forth in Section 5 thereof).
19. Number and Gender. Whenever herein the singular number is used, the
-----------------
same shall include the plural where appropriate, and the words of any gender
shall include each other gender where appropriate.
20. Waiver. The waiver by any party hereto of a breach of any provision
------
of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by any party.
21. Counterparts. This Agreement may be executed in two or more identical
------------
counterparts, each of which for all purposes is to be deemed an original, and
all of which constitute, collectively, one agreement; but in making proof of
this Agreement, it shall not be necessary to produce or account for more than
one such counterpart.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
ERGO SCIENCE CORPORATION
By: /s/ David R.Burt
-----------------
David R. Burt
Vice President
/s/ Manuel Cincotta, Jr.
-------------------------
Manuel Cincotta, Jr.
8
<PAGE>
EXHIBIT 10.37
ERGO SCIENCE CORPORATION
AMENDED AND RESTATED 1995 LONG TERM INCENTIVE PLAN
NONSTATUTORY STOCK OPTION AGREEMENT
To: Manuel Cincotta, Jr. Date of Grant: March 26, 1997
Number of Shares:100,000 Exercise Price Per Share: $7.00
ERGO SCIENCE CORPORATION, a Delaware corporation (the "Corporation"), is
pleased to grant you a Nonstatutory Option (the "Option") to purchase shares of
the Corporation's common stock, par value $.01 per share ("Stock"). The number
of shares subject to this Option and the exercise price per share are stated
above. This Option is granted under the Ergo Science Corporation Amended and
Restated 1995 Long- Term Incentive Plan (the "Plan"), and is governed by the
terms of the Plan. All terms having their initial letters capitalized have the
meaning given them in the Plan unless otherwise defined in this Agreement or
unless the context requires otherwise.
THIS OPTION IS NOT BINDING ON THE CORPORATION UNTIL YOU SIGN THIS DOCUMENT
AND RETURN IT TO THE CORPORATION AT THE ADDRESS PROVIDED IN PARAGRAPH 7 AND
UNTIL YOU SIGN AND RETURN TO THE CORPORATION YOUR LETTER OF RESIGNATION DATED AS
OF MARCH 26, 1997 AND THAT CERTAIN TERMINATION AGREEMENT DATED AS OF MARCH 26,
1997 BETWEEN YOU AND THE COMPANY.
1. Vesting and Exercisability. You cannot exercise this Option and acquire
--------------------------
Stock until your right to exercise has vested. This Option will vest and will
be exercisable with respect to the number of shares of Stock indicated on and
after the following dates:
Number of shares of Stock as to
Vesting Date which the Option may be exercised
- --------------------------- ---------------------------------------
March 26, 1997 100,000 shares of Stock
In accordance with the preceding schedule, the Option may be exercised,
from time to time, in whole or in part.
2. Method of Exercise. The Option shall be exercisable only by written or
------------------
recorded electronic notice of exercise delivered to the Corporation at the
address provided in paragraph 8 or to the Corporation's designee, in accordance
with instructions generally applicable to all option holders, during the term of
the Option. The notice must (a) state the number of shares of Stock with
respect to which the Option is being exercised, (b) be signed or otherwise given
by you (or by your legal representative, legatee, or distributee in the case of
your death or by your guardian or legal representative in case of your
disability), (c) be accompanied by the Exercise Price for all shares of Stock
for which the Option is exercised, and (d) be accompanied by the amount that the
Corporation is required to withhold for federal income or other tax
1
<PAGE>
purposes. If you use a personal check to pay the Exercise Price, the Corporation
may wait until the check clears before accepting your notice to exercise. The
Option will not be deemed to have been exercised unless all of these
requirements are satisfied.
3. Duration. The Option will terminate at 5:00 p.m., eastern time, on
--------
March 26, 1999, not withstanding Section 10 of the Plan.
4. Transferability. This Option is not transferrable other than by will or
---------------
the laws of descent and distribution.
5. Rights as a Stockholder. You will have no right as a stockholder with
-----------------------
respect to any shares subject to this Option until a certificate representing
those shares is issued in your name. No adjustment will be made for dividends
(ordinary or extraordinary, whether in cash or other property) or distributions
or other rights for which the record date is before the date that certificate is
issued, except as contemplated by Paragraph 9.1 of the Plan.
6. Incorporation of Plan. This Option is subject to the Plan. In the
---------------------
event of a difference between a mandatory provision of the Plan and this Option,
the Plan's terms govern.
7. Notice. For purposes of notice hereunder, which shall be given in
------
accordance with Section 12.14 of the Plan, the Corporation, the Committee, and
you agree that any notices shall be given to the Corporation or you at the
following addresses:
Corporation or Committee: Ergo Science Corporation
Charlestown Navy Yard
33 3rd Avenue
Charlestown,
Massachusetts 02129-2051
Attention: Amended and Restated 1995
Long Term Incentive Plan
Administrator
You: Manuel Cincotta, Jr.
158 Lake Road
Tiverton, RI 02878
The Corporation or you may change the address previously specified for
receiving notices at any time and from time to time by written notice to the
other in accordance with Section 12.14 of the Plan.
2
<PAGE>
ERGO SCIENCE CORPORATION MANUEL CINCOTTA, JR.
By: /s/ David R. Burt /s/ Manuel Cincotta, Jr.
------------------ --------------------------
Name: David R. Burt Manuel Cincotta, Jr.
Title: Vice President
3
<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 YEAR ENDED DECEMBER 31, 1994:
Common stock outstanding beginning of the year................................... 2,500,000
Issuance of cheap stock(1) ...................................................... 1,357,915
Weighted average common stock issued during period............................... 25
---------
Weighted average common shares outstanding .................................... 3,857,940
=========
COMPANY, FOR THE YEAR ENDED DECEMBER 31, 1995:
Common stock outstanding beginning of the year .................................. 2,500,025
Issuance of cheap stock(1) ...................................................... 743,559
Weighted average common stock issued during period .............................. 457,192
Weighted average common stock issued upon 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 .................................... 3,966,266
==========
COMPANY, FOR THE YEAR ENDED DECEMBER 31, 1996:
Common stock outstanding beginning of the year .................................. 10,145,580
Weighted average common stock issued upon public
offering ...................................................................... 1,082,692
Weighted average common stock issued during period .............................. 20,043
----------
Weighted average common shares outstanding .................................... 11,248,315
==========
</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.
<PAGE>
EXHIBIT 21
ERGO SCIENCE CORPORATION
SUBSIDIARIES
<TABLE>
<CAPTION>
Subsidiary Jurisdiction of Incorporation
- -------------------------------------- --------------------------------------
<S> <C>
Ergo Science Development Corporation Delaware
Ergo Research Corporation Delaware
Ergo Texas Holdings, Incorporated Delaware
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Ergo Science Corporation on Form S-8 (File No. 333-02310) of our report,dated
February 28, 1997, on our audits of the consolidated financial statements of
Ergo Science Corporation as of December 31, 1996 and 1995, and for each of the
three years in the period ended December 31, 1996, which report is included in
this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 18,066,884
<SECURITIES> 20,550,986
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,852,428
<PP&E> 5,019,128
<DEPRECIATION> 2,527,262
<TOTAL-ASSETS> 41,385,280
<CURRENT-LIABILITIES> 1,934,799
<BONDS> 0
0
4,743,852
<COMMON> 130,480
<OTHER-SE> 34,190,893
<TOTAL-LIABILITY-AND-EQUITY> 41,385,280
<SALES> 0
<TOTAL-REVENUES> 1,397,521
<CGS> 0
<TOTAL-COSTS> 18,580,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (17,182,779)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,182,779)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,182,779)
<EPS-PRIMARY> (1.57)
<EPS-DILUTED> (1.57)
</TABLE>
