<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /x/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/x/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
Ergo Science Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/x/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
ERGO SCIENCE CORPORATION
CHARLESTOWN NAVY YARD
100 FIRST AVENUE
CHARLESTOWN, MA 02129
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD THURSDAY, JUNE 4, 1998
To our Stockholders:
You are cordially invited to attend the 1998 Annual Meeting of Stockholders
of Ergo Science Corporation (the "COMPANY") on Thursday, June 4, 1998 at 9:00
a.m., local time, at BankBoston Conference and Training Center, 100 Federal
Street, Boston, Massachusetts. The meeting will be held for the following
purposes:
(1) To elect two directors as Class III directors of the Company each to
serve for a three-year term ending at the Annual Meeting of Stockholders
in 2001 and until their successors are duly elected and qualified or
their earlier resignation or removal;
(2) To approve an amendment to the Ergo Science Corporation Amended and
Restated 1995 Long-Term Incentive Plan that will increase the number of
shares of the Company's common stock available to be issued thereunder by
250,000 shares from 1,866,750 shares to 2,116,750 shares; and
(3) To transact any other business that may properly come before the
meeting.
This notice is accompanied by a form of proxy, a Proxy Statement, and the
Company's 1997 Annual Report to stockholders. These items of business are more
fully described in the Proxy Statement.
The close of business on April 17, 1998, has been fixed as the record date
to determine stockholders entitled to receive notice of and to vote at the
Annual Meeting and any adjournments. A list of stockholders entitled to vote at
the Annual Meeting will be available for inspection by any stockholder for any
purpose germane to the meeting during ordinary business hours for ten days
before the meeting at the Company's offices at 33 Third Avenue, Charlestown, MA
and at the Annual Meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE SIGN, DATE AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ACCORDANCE WITH THE
INSTRUCTIONS ON THE PROXY CARD TO ENSURE YOUR REPRESENTATION AT THE MEETING. A
return envelope is enclosed for that purpose. You may revoke your proxy at any
time before the shares to which it relates are voted at the Annual Meeting, and
you may still vote in person if you attend the Annual Meeting. Please note,
however, that if your shares are held in the name of a broker, bank, or other
nominee and you wish to attend and vote at the Annual Meeting, you must obtain a
proxy issued in your name from that broker, bank or other nominee.
<TABLE>
<S> <C> <C>
By Order of the Board of Directors,
Ronald H. Abrahams, Ph.D.
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
OFFICER
</TABLE>
Charlestown, Massachusetts
April 30, 1998
<PAGE>
ERGO SCIENCE CORPORATION
CHARLESTOWN NAVY YARD
100 FIRST AVENUE
CHARLESTOWN, MA 02129
------------------------
PROXY STATEMENT
------------------------
ANNUAL MEETING OF STOCKHOLDERS
THE BOARD OF DIRECTORS OF ERGO SCIENCE CORPORATION (THE "COMPANY") REQUESTS
YOUR PROXY FOR USE AT THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON THURSDAY,
JUNE 4, 1998 AT 9:00 A.M., LOCAL TIME, AT BANKBOSTON CONFERENCE AND TRAINING
CENTER, 100 FEDERAL STREET, BOSTON, MASSACHUSETTS. BY SIGNING AND RETURNING THE
ENCLOSED PROXY, YOU AUTHORIZE THE PERSONS NAMED ON THE PROXY TO REPRESENT YOU
AND VOTE YOUR SHARES AT THE ANNUAL MEETING, INCLUDING ANY ADJOURNMENTS OF THE
MEETING. THIS PROXY STATEMENT AND PROXY WERE FIRST MAILED OR GIVEN TO
STOCKHOLDERS OF THE COMPANY ON OR ABOUT APRIL 30, 1998.
If you attend the Annual Meeting, you may vote in person. If you are not
present at the Annual Meeting, your shares can be voted only if you have
returned a properly signed Proxy or are represented by another proxy. You may
revoke the enclosed Proxy at any time before it is exercised at the Annual
Meeting by (a) signing and submitting a later-dated proxy to the Secretary of
the Company, (b) written notice of revocation to the Secretary of the Company,
or (c) voting in person at the Annual Meeting.
VOTING AND QUORUM
The only outstanding voting security of the Company is its common stock, par
value $.01 per share ("COMMON STOCK"). On April 17, 1998, the record date for
the Annual Meeting, there were 14,169,266 shares of Common Stock outstanding and
entitled to be voted at the Annual Meeting.
Each share of Common Stock outstanding on the record date is entitled to one
vote. The presence in person or by proxy of a majority of the shares of Common
Stock outstanding on the record date is required to constitute a quorum at the
Annual Meeting. If a quorum is not present, the stockholders entitled to vote
who are present in person or represented by proxy at the Annual Meeting have the
power to adjourn the Annual Meeting from time to time, without notice other than
an announcement at the Annual Meeting, until a quorum is present. At any
adjourned Annual Meeting at which a quorum is present, any business may be
transacted that might have been transacted at the Annual Meeting as originally
notified. Abstentions and broker non-votes will count in determining whether a
quorum is present at the Annual Meeting. A broker non-vote occurs if a broker or
other nominee does not have discretionary authority and has not received
instructions with respect to a particular item.
Proxies in the accompanying form that are properly signed and returned will
be voted at the Annual Meeting in accordance with the instructions on the Proxy.
Any properly executed Proxy on which no contrary instructions have been
indicated about a proposal will be voted as follows with respect to the
proposals: FOR the election of the two persons named in this Proxy Statement as
the Board of Directors' nominees for election to the Board of Directors; FOR
approval of the amendment to the Long-Term Incentive Plan; and in accordance to
the discretion of the holders of the Proxy with respect to any other business
that properly comes before the stockholders at the Annual Meeting. The Board of
Directors knows of no matters, other than those previously stated, to be
presented for consideration at the Annual Meeting. The persons named in the
accompanying Proxy may also, at their discretion, vote the Proxy to adjourn the
Annual Meeting from time to time.
<PAGE>
PROPOSAL ONE--ELECTION OF DIRECTORS
The members of the Company's Board of Directors are divided into three
classes serving staggered three-year terms. The terms of Class III directors
expire at this Annual Meeting. Two directors are to be elected as Class III
directors at this Annual Meeting.
The Board of Directors has designated Drs. Anthony H. Cincotta and W. Leigh
Thompson as nominees for re-election as Class III directors of the Company at
the Annual Meeting. If elected, each nominee for Class III director will serve
until the expiration of his term at the 2001 Annual Meeting of stockholders and
until his successor is elected and qualified. Each nominee is currently a
director of the Company. For information about each nominee, see "Directors and
Executive Officers."
The Board of Directors has no reason to believe that any of its nominees
will be unable or unwilling to serve if elected. If a nominee becomes unable or
unwilling to serve, your Proxy will be voted for the election of a substitute
nominee recommended by the current Board of Directors or the number of the
Company's directors will be reduced.
The election of directors requires the affirmative vote of a plurality of
the shares of Common Stock present or represented by proxy and entitled to vote
at the Annual Meeting. Accordingly, abstentions and broker non-votes will not
have any effect on the election of a particular director.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE ELECTION OF
EACH OF THESE NOMINEES.
PROPOSAL TWO--AMENDMENT TO THE COMPANY'S
AMENDED AND RESTATED 1995 LONG-TERM INCENTIVE PLAN
The Company has used stock options as a key element of its overall
compensation program for employees of the Company. The Board of Directors and
the Compensation Committee of the Board of Directors believe that it is
important to have equity-based incentives available to attract and retain
qualified employees. The Board of Directors has approved, subject to stockholder
approval, an amendment to the Company's Amended and Restated 1995 Long-Term
Incentive Plan (the "INCENTIVE PLAN") that would increase the number of shares
available to be awarded under the Incentive Plan. A description of the Incentive
Plan, including information regarding persons eligible for participation in the
plan and the tax effects of the plan, is set forth under "The Incentive Plan."
Currently, the maximum number of shares of Common Stock that may be issued
pursuant to awards granted under the Incentive Plan is 1,866,750 (subject to
adjustment in certain circumstances). Of that number, 197,954 shares remained
available for grant as of April 17, 1998. The proposed amendment will increase
the number of shares available under the Incentive Plan by 250,000.
Specifically, the proposed amendment would amend Section 2.1 of the Incentive
Plan by replacing the number "1,866,750" with the number "2,116,750."
Approval of this amendment to the Incentive Plan requires the affirmative
vote of a majority of the shares of Common Stock present or represented by proxy
and entitled to vote at the Annual Meeting. Abstention will have the effect of a
vote against this amendment and each broker non-vote will reduce the absolute
number, but not the percentage, of affirmative votes necessary for approval of
this amendment.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
AMENDMENT TO THE INCENTIVE PLAN.
2
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Ronald H. Abrahams, Ph.D............................. 55 President, Chief Executive Officer and Chairman of
the Board of Directors
Anthony H. Cincotta, Ph.D............................ 40 Executive Vice President, Chief Science Officer and
Director
David R. Burt........................................ 34 Vice President, Corporate Development and Secretary
Richard A. Paul, M.D................................. 50 Senior Vice President, Medical Affairs
David L. Castaldi.................................... 58 Director
Stephen A. Duzan(1).................................. 57 Director
Ray L. Hunt.......................................... 55 Director
Thomas F. McWilliams(1)(2)........................... 55 Director
Albert H. Meier, Ph.D................................ 68 Director
Stephen P. Smiley(1)(2).............................. 49 Director
W. Leigh Thompson, M.D., Ph.D........................ 59 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee and the Compensation Committee.
(2) Member of the Nominating Committee.
The Board of Directors is divided into three classes. Directors in each
class are elected for three-year terms, with the terms of the three classes
staggered so that directors from a single class are elected at each annual
meeting of stockholders. Ronald H. Abrahams, Ph.D., Stephen A. Duzan and Stephen
P. Smiley are Class I directors whose terms of office expire at the Annual
Meeting of Stockholders in 1999; Ray L. Hunt, Thomas F. McWilliams and David L.
Castaldi are Class II directors whose terms of office expire at the annual
meeting of stockholders in 2000; and Anthony H. Cincotta, Ph.D., Albert H.
Meier, Ph.D. and W. Leigh Thompson, M.D., Ph.D. are Class III directors whose
terms of office expire at the annual meeting of stockholders in 1998. The Board
of Directors decided not to nominate an additional Class III director to fill
the vacancy created when Albert H. Meier, Ph.D. chose not to seek re-election
during the Annual Meeting of stockholders in 1998, and the number of directors
will be so reduced.
Executive officers are generally elected annually by the Board of Directors
to serve at the discretion of the Board of Directors. A brief biography of each
director and executive officer follows.
RONALD H. ABRAHAMS, PH.D., was appointed to serve as Chief Executive Officer
of the Company and Chairman of the Board of Directors in March 1997, after
serving as Acting Chief Executive Officer since September 1996. He has been
President of the Company and a member of the Board of Directors since September
1996. Dr. Abrahams joined the Company as Senior Vice President, Scientific
Affairs, in April 1994 and was appointed Executive Vice President and Chief
Operating Officer in March 1996. From 1972 until joining the Company, Dr.
Abrahams held various scientific, quality assurance, and regulatory affairs
positions with Baxter International Incorporated, an international healthcare
company. From 1990 until 1994, Dr. Abrahams was a corporate vice president and
corporate officer with Baxter International, responsible for quality and
regulatory affairs. Dr. Abrahams currently serves on the board of directors and
3
<PAGE>
is Chairman of the Board of Directors of the Association for the Advancement of
Medical Instrumentation. Dr. Abrahams received a B.S. in Pharmacy from the
University of Illinois and a Ph.D. in Pharmacology and Experimental Therapeutics
from Loyola University in Chicago, Illinois.
ANTHONY H. CINCOTTA, PH.D., was appointed Executive Vice President of the
Company in March 1997 after serving as a Senior Vice President since June 1996.
Dr. Cincotta has been a director of the Company since January 1990 and its Chief
Science Officer since June 1996. From January 1990 to June 1996, Dr. Cincotta
was Director of Research of the Company. From 1989 through July 1995 he was an
instructor at the Harvard Medical School, an Assistant Instructor in
Biochemistry at Massachusetts General Hospital, and an Adjunct Assistant
Professor of Zoology and Physiology at Louisiana State University ("LSU"). From
1987 to 1989, Dr. Cincotta was a Research Assistant Professor of Zoology and
Physiology at LSU and a research consultant at the Rowland Institute of Science,
Inc. Dr. Cincotta received his B.S. in biochemistry and molecular biology from
the University of California at Santa Barbara and his M.S. and Ph.D. degrees in
physiology from LSU. He is the author of more than 20 publications regarding
temporal neuroendocrine organization.
DAVID R. BURT joined the Company as Vice President, Corporate Development,
in March 1993. He was appointed Secretary of the Company in March 1997. From
1990 until 1993, Mr. Burt practiced corporate and securities law at Johnson &
Gibbs, P.C., a law firm in Dallas, Texas. Mr. Burt's practice involved
representing issuers and underwriters in financing transactions in a variety of
high technology industries. Mr. Burt received a B.A. in government from
Dartmouth College and a J.D. from the University of Maryland Law School. Before
attending law school, Mr. Burt worked on the staff of United States Senator Paul
S. Sarbanes.
RICHARD A. PAUL, M.D. joined the Company as Senior Vice President, Medical
Affairs in January 1997. From 1994 through 1996, Dr. Paul was Vice President of
Clinical Research at Schering-Plough Healthcare Products, a multi-billion dollar
pharmaceutical company. Prior to this position, he held positions of increasing
responsibility with Sandoz Pharmaceuticals, Inc. as Executive Director of
Clinical Research, with Anaquest, Inc. as Senior Associate Director of Clinical
Research, and with Pfizer Central Research as Associate Director of Clinical
Research. Dr. Paul has experience as a diabetes research fellow at the Harvard
affiliated Beth Israel Deaconess Medical Center and Joslin Diabetes Center and
as a practicing clinician in the treatment of diabetes. He received a M.D. from
the University of Barcelona Faculty of Medicine. Dr. Paul has numerous
peer-reviewed publications and affiliations with medical associations, including
the American Diabetes Association, the International Diabetes Foundation, and
the Juvenile Diabetes Association.
DAVID L. CASTALDI became a director of the Company in September 1996. He was
the co-founder, President and CEO of BioSurface Technology, Inc., a company that
developed living tissue therapies, from 1987 until its acquisition by Genzyme in
1994. From 1977 to 1987, Mr. Castaldi was the President of the Hyland
Therapeutics Division of Baxter International, Inc., a worldwide manufacturer of
protein-based pharmaceuticals made from human blood plasma, prior to which he
served as Executive Vice President of Baxter's Artificial Organs Division. Since
1994, Mr. Castaldi has been a consultant to the Life Sciences Industry, which
has included serving as Chairman of the Board and CEO of Biolink Corporation, a
medical device company, since 1996. He is also a director of Nabi, a
publicly-held biopharmaceutical company. Mr. Castaldi received his M.B.A from
Harvard University and his B.B.A. from the University of Notre Dame. He also
served as an officer in the U.S. Army.
4
<PAGE>
STEPHEN A. DUZAN became a director of the Company in October 1994. He is
currently Chairman and a director of Key Computer Systems, Inc., a privately
held company located in Seattle, Washington. Mr. Duzan was a co-founder of
Immunex Corporation, Seattle, Washington, and served as its Chairman, Chief
Executive Officer and director from its formation in 1981 until his retirement
in September 1993. He also held the title of President of Immunex from 1981
through 1990. Mr. Duzan serves on the Boards of Directors of Targeted Genetics
Corporation of Seattle, Washington and the International Biotechnology Trust of
London, England.
RAY L. HUNT became a director of the Company in January 1994 in connection
with the purchase by Hunt Financial Corporation ("Hunt Financial") of
convertible securities of the Company. Mr. Hunt has been the Chairman of the
Board, President and Chief Executive Officer of Hunt Consolidated, Inc. and the
Chairman of the Board and Chief Executive Officer of Hunt Oil Company for over
twenty years. Mr. Hunt is a director of Dresser Industries, Inc., an
international oil field service company in Dallas, Texas, PepsiCo, Inc., a
multinational food and beverage company in Purchase, New York, Federal Reserve
Bank of Dallas in Dallas, Texas and Electronic Data Systems Corporation, a
global information technology company in Dallas, Texas. Mr. Hunt received his
B.B.A. in economics from Southern Methodist University.
THOMAS F. MCWILLIAMS became a director of the Company during September 1992
in connection with the purchase of the Company's convertible securities by
Citicorp Venture Capital Ltd. ("CVC"). Mr. McWilliams is Managing Director of
CVC, where he has been employed since 1983. He is a director of Chase Brass
Industries, Inc. and a number of privately owned companies. Mr. McWilliams
received his A.B. from Brown University and his M.B.A. from the Wharton School,
University of Pennsylvania.
ALBERT H. MEIER, PH.D., has been a director of the Company since January
1990. Dr. Meier was a consultant to the Company from June 1992 until April 1997,
and Dr. Meier served as Chief Scientist of the Company on a consultant basis
from June 1995 until April 1997. Dr. Meier was Professor of Zoology and
Physiology at Louisiana State University ("LSU") from 1972 until his retirement
in the summer of 1995. Dr. Meier was also an Associate Professor (1967-1972) and
an Assistant Professor (1964-1967) at LSU. From 1962 to 1964, Dr. Meier was a
NIH Postdoctoral Fellow at Washington State University and from 1961 to 1962 was
a Postdoctoral Associate at Wabash College. Dr. Meier received his B.A. in
Zoology from Washington University, St. Louis, Missouri, and his M.S. and Ph.D.
in Zoology from the University of Missouri. He is the author of over 120
publications regarding temporal neuroendocrine organization.
STEPHEN P. SMILEY became a director of the Company in October 1996. He is
President of Hunt Financial Corporation, a private investment company located in
Dallas, Texas. From 1991 until joining Hunt Financial in 1996, he was a
co-founder and President of Cypress Capital Corporation, a private investment
firm specializing in growth financings and buyouts. Prior to 1991, Mr. Smiley
was involved in venture capital and leveraged buyout activities of Citicorp in
New York and Dallas, Texas for 15 years. Mr. Smiley is a director of several
private companies and one public company, Dynamex, Inc. Mr. Smiley received a
B.A. from the University of Virginia and an M.B.A. in Finance from the College
of William and Mary.
W. LEIGH THOMPSON, M.D., PH.D., became a director of the Company in December
1996. Dr. Thompson retired as the Chief Scientific Officer of Eli Lilly and
Company ("Lilly") in 1994. Prior to becoming Chief Scientific Officer, Dr.
Thompson served in numerous positions at Lilly, including Executive Vice
President of Lilly Research Laboratories. Dr. Thompson is currently the
President and CEO of Profound Quality Resources Ltd., a firm providing
consulting services to pharmaceutical and biotechnology companies, academic
health centers, and managed care organizations. Dr. Thompson serves as a
5
<PAGE>
director of several public pharmaceutical-related corporations in addition to
Ergo: Chrysalis International Corporation (formerly DNX), Corvas International,
Inc., GeneMedicine, Inc., Guilford Pharmaceuticals, Inc., La Jolla
Pharmaceutical Company, Medarex, and Orphan Medical, Inc. He also serves on
several scientific and business advisory boards and on the board of directors of
several private organizations. Dr. Thompson received a Ph.D. in Pharmacology
from the Medical University of South Carolina and an M.D. from The Johns Hopkins
University where he trained on the Osler Medical Service and developed the first
ICU. He was Professor of Medicine at Case Western University where he headed
Clinical Pharmacology and Critical Care Medicine. He is the author of over 220
scientific publications, including nine books and 21 major monographs for Lilly.
MEETINGS AND COMMITTEES OF DIRECTORS
The Board of Directors held six meetings during 1997. Other than Mr. Hunt
and Mr. Castaldi, no director attended fewer than 75% of those meetings and of
meetings of the committees of the Board of Directors on which he served.
The Board of Directors has three standing committees: the Audit Committee,
the Compensation Committee, and the Nominating Committee.
The Audit Committee reviews the results and scope of the annual audit and
other services provided by the Company's independent public accountants. During
1997, the members of the Audit Committee were Stephen A. Duzan, Thomas F.
McWilliams, and Stephen P. Smiley. The Audit Committee met once during 1997.
The Compensation Committee determines salaries and incentive compensation
for officers of the Company. In addition, the Board of Directors has designated
the Compensation Committee as the administrator of the Company's Incentive Plan.
During 1997 the members of the Compensation Committee were Stephen A. Duzan,
Thomas F. McWilliams, and Stephen P. Smiley. The Compensation Committee met five
times during 1997.
The Nominating Committee identifies and recruits candidates to serve as
directors of the Company for recommendation to the full Board of Directors. In
recommending candidates to the Board of Directors, the Nominating Committee
seeks persons of proven judgment and experience. Stockholders who wish to
suggest qualified candidates may write to the Secretary of the Company at the
address on the first page of this Proxy Statement, stating in detail the
qualifications of the persons they recommend. The Nominating Committee was
established in February 1996. Its members during 1997 were Thomas F. McWilliams
and Stephen P. Smiley. The Nominating Committee met once in 1997.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
COMPENSATION OF DIRECTORS
Directors of the Company do not receive cash compensation for their services
as directors. The Company reimburses them for the expenses incurred in attending
meetings of the Board of Directors and its committees.
In June 1996, Ergo's shareholders approved a Stock Option Plan for
Non-Employee Directors (the "Director Stock Plan"). The Director Stock Plan
provides for an initial grant of a stock option for 10,000 shares of Common
Stock to each non-employee director upon first being elected or appointed to
serve on the Board of Directors. Messrs. Hunt and McWilliams who were serving as
non-employee directors when
6
<PAGE>
the Director Stock Plan was approved (but not Mr. Duzan who had previously been
granted stock options by the Company) were granted a stock option for 10,000
shares of Common Stock with a deemed grant date of May 15, 1996. In addition,
each non-employee director appointed by the Board of Directors after June 1996
was granted an initial stock option for 10,000 shares of Common Stock with a
grant date as of the date of such director's appointment to the board as
follows: David L. Castaldi, September 12, 1996; Stephen P. Smiley, October 25,
1996; and W. Leigh Thompson, December 27, 1996. On the second anniversary of
their initial grant date, each of these non-employee directors will be granted a
second nonqualified stock option for 10,000 shares of Common Stock if they are
still directors on that date. On November 15, 1994, the Company granted Mr.
Duzan a nonqualified option to purchase 7,500 shares of Common Stock at an
exercise price of $0.80 per share in consideration for his service as a
director. This option became exercisable in three equal amounts on the date of
grant and on each of the first two anniversaries of the date of grant. The
option expires in November 2004. On October 6, 1995, the Company granted Mr.
Duzan a nonqualified option to purchase 17,500 shares of Common Stock at an
exercise price of $6.71 per share in consideration for his service as a
director. This option becomes exercisable in four equal amounts on each of the
first four anniversaries of the date of grant, or, if earlier, upon a change in
control of the Company. The option expires ten years from the date of grant. On
October 6, 1999, which is the date Mr. Duzan's existing options are scheduled to
become fully exercisable, Mr. Duzan will be granted a stock option to purchase
10,000 shares of Common Stock under the Director Stock Plan if he is still a
director on that date.
The total number of shares of Common Stock authorized for issuance under the
Director Stock Plan is 200,000 of which 50,000 have been granted as of April 17,
1998. Each option under the Director Stock Plan has an exercise price equal to
the fair market value of the Common Stock on the grant date. These options will
become exercisable in equal increments on the first and second anniversary of
their date of grant and will expire ten years after the grant date if not
exercised. If a change in control of the Company occurs, all stock options
granted under the Director Stock Plan will become fully exercisable.
7
<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes the 1997, 1996 and 1995 compensation paid to
or earned by all persons serving in the capacity of the Company's Chief
Executive Officer during 1997 and the Company's five most highly compensated
executive officers other than the Chief Executive Officer during 1997 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION ALL OTHER
ANNUAL COMPENSATION AWARDS COMPENSATION ($)
---------------------------------------------------------- ------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING
POSITIONS IN 1997 YEAR SALARY ($) BONUS ($)(1) COMPENSATION ($) OPTIONS(#)
- ------------------------------------ --------- ----------- ------------- ------------------- -------------
Ronald H. Abrahams.................. 1997 250,000 93,750 -- 100,000 --
President and Chief Executive 1996 221,667 37,500 -- 100,000 --
Officer 1995 200,000 20,000 -- 70,000 --
Anthony H. Cincotta................. 1997 225,000 67,500 -- 150,000 3,047(2)
Senior Vice President and Chief 1996 210,000 31,500 -- -- 3,047(2)
Science Officer 1995 133,000 20,000 -- 194,725 3,047(2)
Richard A. Paul..................... 1997 210,176 64,500 -- 30,000 88,230(5)
Senior Vice President, Medical 1996 -- -- -- 60,000 --
Affairs 1995 -- -- -- -- --
Thomas N. Thurman(7)................ 1997 157,293(4) 20,000 31,822(9) -- 26,000(6)
Vice President Marketing and 1996 183,750 9,150 -- 35,000 --
Business Development 1995 175,000 17,500 -- 42,500 --
Alan T. Barber(8)................... 1997 128,938(3) -- -- -- --
Vice President, Finance and 1996 135,000 20,250 -- 35,000 --
Administration and Chief Financial 1995 138,333 13,500 -- 25,000 --
Officer
David R. Burt....................... 1997 110,000 33,000 -- 30,000 --
Vice President, Corporate 1996 100,000 10,000 -- 35,000 --
Development 1995 83,333 20,000 -- 27,500 --
</TABLE>
- ------------------------
(1) 1997 bonuses were expensed in 1997 and paid in 1998; 1996 bonuses were
expensed in 1996 and paid in 1997.
(2) Reflects the value of term life and disability insurance premiums and tax
reimbursement for these items.
(3) Reflects salary earned from January 1, 1997 until November 21, 1997, the
date of Mr. Barber's resignation from the Company.
(4) Reflects salary earned from January 1, 1997 until November 15, 1997, the
date of Mr. Thurman's resignation from the Company.
(5) Reflects relocation costs, taxes, and signing bonus received by Dr. Paul.
(6) Reflects disability income received by Mr. Thurman.
(7) Mr. Thurman resigned from the Company on November 15, 1997.
(8) Mr. Barber resigned from the Company on November 21, 1997.
(9) Reflects severance payment following Mr. Thurman's resignation from the
Company.
8
<PAGE>
OPTION GRANTS IN 1997
The following table sets forth information regarding the stock option grants
to Named Executive Officers in 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
----------------------------------------------------------------
NUMBER OF % OF TOTAL FAIR
SECURITIES OPTIONS EXERCISE MARKET
UNDERLYING GRANTED TO OR BASE VALUE ON
OPTIONS EMPLOYEES IN PRICE GRANT DATE EXPIRATION
NAME GRANTED(#) FISCAL YEAR(3) ($/SH) ($/SH) DATE
- ------------------------------ ---------- -------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Ronald H. Abrahams............ 100,000 17% $ 9.50 $12.38 4/29/2007
Alan T. Barber(4)............. -- -- -- -- --
David R. Burt................. 30,000 5% 17.00 17.00 12/8/2007
Anthony H. Cincotta........... 150,000 26% 9.50 9.50 4/29/2007
Richard A. Paul............... 30,000 5% 17.00 17.00 12/8/2007
Thomas N. Thurman(5).......... -- -- -- -- --
<CAPTION>
POTENTIAL REALIZED VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION
TERM(2)
--------------------------------
NAME 0% ($) 5% ($) 10% ($)
- ------------------------------ -------- ---------- ----------
<S> <C> <C> <C>
Ronald H. Abrahams............ $287,500 $1,065,751 $2,259,753
Alan T. Barber(4)............. -- -- --
David R. Burt................. -- 320,734 812,807
Anthony H. Cincotta........... -- 896,168 2,271,080
Richard A. Paul............... -- 320,734 812,807
Thomas N. Thurman(5).......... -- -- --
</TABLE>
- ------------------------
(1) The options granted terminate ten years from the date of grant and are
subject to earlier termination in accordance with the terms of the option
agreements and the Incentive Plan. Exercisability of options will accelerate
upon a change in control of the Company, termination of employment by the
Company without cause, or termination of employment by the optionee with
good reason.
(2) Amounts represent hypothetical gains that could be achieved for the options
if they are exercised at the end of the option term. Those gains are based
on assumed rates of stock price appreciation of 0%, 5%, and 10% compounded
annually from the date the option was granted through the expiration date.
(3) A total of 586,600 options were granted in 1997 to employees of the Company,
including officers.
(4) Mr. Barber resigned from the Company on November 21, 1997.
(5) Mr. Thurman resigned from the Company on November 15, 1997.
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table provides information about the number of shares issued
upon option exercises by the Named Executive Officers during 1997, and the value
realized by the Named Executive Officers. The table also provides information
about the number and value of options held by the Named Executive Officers at
December 31, 1997.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES VALUE OPTIONS AT FY-END (#) OPTIONS AT FY-END ($)(1)
ACQUIRED OR REALIZED -------------------------- --------------------------
NAME EXERCISED (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ronald H. Abrahams..................... 14,000 $ 186,543 76,417 223,333 $ 828,424 $ 1,199,364
Alan T. Barber(2)...................... -- -- 40,000 -- 414,875 --
David R. Burt.......................... 7,000 92,400 44,250 56,250 387,638 111,563
Anthony H. Cincotta.................... -- -- 172,363 247,362 1,915,230 1,693,971
Richard A. Paul........................ -- -- 15,000 75,000 48,750 146,250
Thomas N. Thurman(3)................... 10,000 132,000 63,750 -- 670,013 --
</TABLE>
- ------------------------
(1) Option values are based on the difference between the exercise price per
share of the option and $15.25 per share, which was the closing price of the
Common Stock on the NASDAQ National Market on December 31, 1997, multiplied
by the number of shares of Common Stock subject to the option.
(2) Mr. Barber resigned from the Company on November 21, 1997.
(3) Mr. Thurman resigned from the Company on November 15, 1997.
9
<PAGE>
EMPLOYMENT CONTRACTS
The Company entered into employment agreements with all its Named Executive
Officers. The agreements with Dr. Ronald H. Abrahams, David R. Burt, Dr. Anthony
H. Cincotta, and Dr. Richard A. Paul, as amended, currently provide for the
payment of base salary amounts of $262,500 to Dr. Abrahams, $150,000 to Mr.
Burt, $236,250 to Dr. Cincotta, and $225,750 to Dr. Paul. The Compensation
Committee may increase the base amounts at its discretion. These employment
agreements expire in October 1998 except for Dr. Paul's agreement, which expires
in January 2000. The Company's employment agreements with all the Named
Executive Officers provide that either party may terminate employment with or
without cause on five days written notice. Under the employment agreements, an
executive officer is entitled to receive a lump sum payment equal to his base
salary if his employment is terminated (i) by the Company for any reason other
than disability or for cause, or (ii) by the executive officer for good reason.
However, if either termination described in the preceding sentence follows a
change in control of the Company, the executive officer is entitled to receive a
lump sum payment equal to two times the sum of his base salary and budgeted
bonus. After any such termination, or any termination resulting from the
executive officer's disability or death, the executive officer or his family is
entitled to continue participation in any benefit plan maintained by the Company
until the end of the employment term stated in the employment agreement.
Under the terms of the Company's previous employment agreements with Mr.
Thurman and Mr. Barber, the Company was to pay a base salary of $188,750 to Mr.
Thurman and $140,175 to Mr. Barber. The Company's employment agreement with Mr.
Thurman terminated as of November 15, 1997 when he resigned from his position as
Senior Vice President, Marketing and Business Development, and the Company's
employment agreement with Mr. Barber terminated on November 21, 1997 when he
resigned his position of Vice President, Finance and Administration and Chief
Financial Officer. The Company entered into a separation agreement with Mr.
Thurman effective October 1, 1997, pursuant to which Mr. Thurman resigned from
his position with the Company. He received $51,822 in 1997 and $145,494 in 1998.
Mr. Thurman and his family are entitled to continue to participate in the
Company's customary health and benefit plans until April 1, 1999. Additionally,
the 42,500 options awarded to Mr. Thurman on October 6, 1995 were made fully
vested as of November 15, 1997.
Each executive officer has agreed that all work products discovered, created
or developed by him, alone or with others, will belong to the Company. Each
executive officer has agreed to maintain the confidentiality of the Company's
proprietary information. In addition, Dr. Cincotta has agreed not to compete
with the Company for two years following the end of his employment, and each
other executive officer has agreed not to compete with the Company for three
years following the end of his employment; however, the Company is required to
pay to the executive officer an amount equal to 50% of his base salary within 10
days after termination and 100% of his base salary on the first and (other than
Dr. Cincotta) second anniversaries following termination of his employment to
maintain the non-competition obligation.
DIRECTOR AND OFFICER INDEMNIFICATION
The Company has entered into indemnification agreements with each of its
directors and executive officers, agreeing to indemnify the director or officer
to the fullest extent permitted by law, and to advance expenses, if the director
or officer becomes a party to or witness or other participant in any threatened,
pending or completed action, suit or proceeding (a "Claim") by reason of any
occurrence related to the fact that the person is or was a director, officer,
employee, agent or fiduciary of the Company or a subsidiary of the Company or
another entity at the Company's request (an "Indemnifiable Event"), unless a
reviewing party (either outside counsel or a committee appointed by the Board of
Directors) determines that the person would not be entitled to indemnification
under applicable law. In addition, if a change in control or a potential change
in control of the Company occurs, and if the person indemnified so requests, the
Company will establish a trust for the benefit of the indemnitee and fund the
trust in an amount
10
<PAGE>
sufficient to satisfy all expenses reasonably anticipated at the time of the
request to be incurred in connection with any Claim relating to an Indemnifiable
Event. The reviewing party will determine the amount deposited in the trust. An
indemnitee's rights under the indemnification agreement are not exclusive of any
other rights under the Company's Certificate of Incorporation or Bylaws or
applicable law.
THE INCENTIVE PLAN
GENERAL. The Company may grant officers, directors, employees, and
consultants awards with respect to shares of Common Stock under the Company's
Amended and Restated 1995 Long-Term Incentive Plan. The awards under the
Incentive Plan include incentive and nonqualified stock options, stock
appreciation rights ("SARs") and restricted stock awards. The number of shares
of Common Stock that may be issued under the Incentive Plan is currently
1,866,750 shares. If the shareholders of the Company approve Proposal Two, the
shares that may be issued under the Incentive Plan will be increased to
2,116,750. As of April 17, 1998, the Company had granted options under the
Incentive Plan for 1,668,796 shares of Common Stock to officers, directors,
employees, and consultants (not including option shares forfeited upon
termination of employment). Accordingly, the number of shares currently
available for additional awards under the Incentive Plan is 197,954.
ADMINISTRATION. The Compensation Committee (the "Committee") administers
the Incentive Plan, selects participants, and determines the type and size of
awards, when awards will be granted, and the terms of each award including
exercise price, if any.
ELIGIBILITY. The Committee determines who will receive awards from among
the officers, directors, and employees of the Company and its subsidiaries. The
Committee may also grant awards to persons who provide consulting or advisory
services to the Company.
STOCK OPTIONS. An option is the right to purchase Common Stock at a
specified exercise price. The exercise price for incentive stock options must
not be less than the fair market value of the Common Stock on the date of grant.
The Committee determines at the time of grant when the option will become
exercisable. At the discretion of the Committee, holders may use shares of stock
to pay the exercise price, including shares issuable upon exercise of the
option.
STOCK APPRECIATION RIGHTS. An SAR may be awarded in connection with or
separate from a stock option. An SAR is the right to receive an amount in cash
or stock equal to the excess of the fair market value of a share of the Common
Stock on the date of exercise over the exercise price specified in the agreement
governing the SAR (for SARs not granted in connection with a stock option) or
the exercise price of the related stock option (for SARs granted in connection
with a stock option). The Committee may limit the amount payable upon exercise
of any SAR.
RESTRICTED STOCK AWARDS. A restricted stock award is a grant of shares of
Common Stock that is nontransferable or subject to risk of forfeiture until
specific conditions are met. The restrictions will lapse in accordance with a
schedule or other conditions as the Committee determines. During the restriction
period, the holder of a restricted stock award may, in the Committee's
discretion, have certain rights as a stockholder, including the right to vote
the stock subject to the award or receive dividends on that stock. Restricted
stock may also be issued upon exercise or settlement of options or SARs.
CHANGE IN CONTROL. The Committee has discretion to determine whether an
award under the Incentive Plan should have change of control features. The
Committee also has discretion to vary the change of control features as it deems
appropriate. The following describes the change of control features that the
Company generally expects may apply to additional awards, if any such feature
applies. An award agreement under the Incentive Plan may provide that, upon a
change of control of the Company, (1) the holder of a stock option will be
granted a corresponding SAR, (2) all outstanding SARs and options will become
immediately and fully vested and exercisable in full, and (3) the restriction
period on any restricted
11
<PAGE>
stock award will be accelerated and the restrictions will expire. Outstanding
options under the Incentive Plan have the provision described in the preceding
clause (2). In general, a change in control of the Company occurs in any of four
situations: (1) a person other than the Company, certain affiliated companies or
benefit plans, or a company a majority of which is owned directly or indirectly
by the stockholders of the Company, becomes the beneficial owner of 50% or more
of the voting power of the Company's outstanding voting securities; (2) a
majority of the Board of Directors is not comprised of the members of the Board
of Directors at September 15, 1995, and persons whose elections as directors
were approved by those directors or their approved successors; (3) the Company
merges or consolidates with another corporation or entity (whether the Company
or the other entity is the survivor), or the Company and the holders of the
voting securities of such other corporation or entity (or the stockholders of
the Company and such other corporation or entity) participate in a securities
exchange, other than a merger, consolidation or securities exchange in which the
Company's voting securities are converted into or continue to represent
securities having the majority of voting power in the surviving company; or (4)
the Company liquidates or sells all or substantially all of its assets, except
sales to any entity having substantially the same ownership as the Company.
RESTRUCTURINGS. Awards granted under the Incentive Plan may provide that,
if a restructure of the Company occurs that does not constitute a change in
control of the Company, the Committee may (but need not) cause the Company to
take any one or more of the following actions: (1) accelerate in whole or in
part the time of vesting and exercisability of any outstanding SARs and options
in order to permit those SARs and options to be exercisable before, upon, or
after the completion of the restructure; (2) grant each option holder
corresponding SARs; (3) accelerate, in whole or in part, the expiration of some
or all of the restrictions on any restricted stock award so that the Common
Stock subject to the awards will be owned without restriction or risk of
forfeiture; (4) if the restructure involves a transaction in which the Company
is not the surviving entity, cause the surviving entity to assume in whole or in
part any one or more of the outstanding awards upon such terms and provisions as
the Committee deems desirable; or (5) redeem in whole or in part any one or more
of the outstanding awards (whether or not then exercisable) in consideration of
a cash payment, adjusted for withholding obligations. A restructure, generally,
is any merger or consolidation of the Company, the consummation of a securities
exchange involving the stockholders of the Company, or the direct or indirect
transfer of all or substantially all of the Company's assets (whether by sale,
merger, consolidation, liquidation, or otherwise) in one transaction or a series
of transactions.
FEDERAL INCOME TAX CONSEQUENCES. Participants in the Incentive Plan who
receive an incentive option will not recognize income for federal income tax
purposes as a result of the receipt or exercise of the incentive option.
However, exercise of the incentive option will increase the optionee's
alternative minimum taxable income for purposes of the alternative minimum tax
in an amount equal to the excess of the fair market value of the Common Stock
received over the exercise price. The Company will not be entitled to a
deduction with respect to the grant or exercise of an incentive option.
Provided the shares are held as a capital asset, gain recognized on the
disposition of Common Stock acquired by exercise of an incentive option
("INCENTIVE STOCK") will be treated as long term capital gain if (a) the
incentive stock has been held by the optionee more than two years after the date
the incentive option was granted and more than one year after the date the
incentive option was exercised (the "STATUTORY HOLDING PERIOD") and (b) certain
other requirements of the Internal Revenue Code are satisfied by the holder of
the incentive stock. Gain recognized on disposition of incentive stock held by
the optionee for less than the Statutory Holding Period (a "DISQUALIFYING
DISPOSITION") generally will be compensation income to the optionee to the
extent of the excess of the fair market value of the incentive stock when
received (or, if less, the amount realized on disposition of the incentive
stock) over the applicable exercise price. However, if upon receipt the
incentive stock is subject to a substantial risk of forfeiture within the
meaning of Section 83(c) of the Internal Revenue Code, then special rules apply
concerning the date when the fair market value of the incentive stock is
determined. Any gain recognized in excess of the amount
12
<PAGE>
taxed as compensation generally will be characterized as capital gain. If an
optionee pays the exercise price of an incentive option solely with cash, the
optionee's initial tax basis of the incentive stock received is equal to the
amount of cash paid. An optionee who pays all or a portion of the exercise price
of an incentive option with shares of Common Stock will be subject to detailed
rules as provided in regulations concerning recognition of income or gain and
the determination of basis in the shares received. In the event of a
disqualifying disposition, the Company will be entitled to a corresponding
deduction for federal income tax purposes equal to the amount of compensation
income includible by the optionee (provided the optionee's total compensation
for that year is otherwise deductible and the applicable withholding
requirements are satisfied).
The grant of a nonstatutory option should neither result in recognition of
taxable income by the optionee nor give rise to a deduction by the Company.
However, an optionee who exercises a nonstatutory option must generally, as of
the exercise date, recognize compensation income equal to the excess (if any) of
the then fair market value of the Common Stock received over the exercise price
of the option. If the Common Stock received upon exercise of a nonstatutory
option is subject to a substantial risk of forfeiture within the meaning of
Section 83(c) of the Internal Revenue Code, then, unless the optionee makes an
election pursuant to Section 83(b) of the Internal Revenue Code to be taxed
currently on the excess of the fair market value of the shares over the price
paid, the excess would not be includible as compensation income unless and until
the substantial risk of forfeiture has lapsed. Any gain or loss on the
subsequent sale or exchange of Common Stock received on exercise of a
nonstatutory option will be treated as capital gain or loss, provided the stock
is held as a capital asset. If an optionee pays the exercise price of a
nonstatutory option solely with cash, the tax basis of the Common Stock received
will equal the sum of the cash paid plus the amount of compensation income
includible by the optionee resulting from the exercise. An optionee who pays all
or a portion of the exercise price of a nonstatutory option with shares of
Common Stock is subject to detailed rules as provided in regulations concerning
recognition of income or gain and the determination of basis in the shares
received. The amount of compensation income includible in gross income by an
optionee is deductible by the Company during its taxable year in which the
income is includible by the optionee (provided the optionee's total compensation
for that year is otherwise deductible and the applicable withholding
requirements are satisfied).
A participant generally will not recognize taxable income upon the grant
under the Incentive Plan of a SAR. Upon the exercise of a SAR, the participant
will recognize ordinary income in an amount equal to the cash and fair market
value of other property received, including Common Stock. The value of the
shares will be determined (1) on the date received, if the shares are
substantially vested as of that date or (2) the first date on which the shares
become substantially vested. Delivery of shares of Common Stock previously owned
by the participant to the Company to satisfy any tax withholding obligations of
the Company will be a taxable event to the participant with respect to the
surrendered shares. The Company will be entitled to a deduction in the amount
and at the time that the participant recognizes ordinary income in connection
with the exercise of an SAR, provided that the participant's compensation is
otherwise deductible and the Company withholds the applicable federal income
taxes (if required to do so). If the SAR is paid, in whole or in part, in shares
of Common Stock, the amount recognized by the participant as ordinary income
with respect to such shares becomes the participant's basis in the shares of
Common Stock for purposes of determining any gain or loss on the subsequent sale
of those shares.
A participant who receives a restricted stock award will recognize ordinary
income equal to the fair market value of the restricted Common Stock received at
the time the restrictions lapse, unless the participant makes an election under
Section 83(b) of the Internal Revenue Code to report the fair market value of
the restricted Common Stock as ordinary income at the time of receipt. At the
time the participant is required to include such ordinary income in gross
income, the Company may deduct a corresponding amount, provided the
participant's compensation is reasonable and the Company withholds the
applicable federal income taxes (if required to do so). During the period in
which a participant holds restricted Common Stock, before the lapse of the
restrictions, if dividends are declared but not distributed to the
13
<PAGE>
participant until the restrictions lapse, the dividends will be treated for tax
purposes by the participant and the Company in the following manner: (1) if the
participant makes an election under Section 83(b) of the Internal Revenue Code
to recognize income at the time of receipt of the restricted Common Stock, the
dividends will be taxed as dividend income to the participant when the
restrictions lapse and the Company will not be entitled to a deduction and will
not be required to withhold income tax; and (2) if no election is made under
Section 83(b) by the participant, the dividends will be taxed as compensation to
the participant at the time the restrictions lapse and will be deductible by the
Company and subject to any required income tax withholding at that time.
In each case, the Company's ability to deduct amounts with respect to any
awards for U.S. federal income tax purposes will be subject to compliance with
the conditions or limitations of Section 162(m) of the Internal Revenue Code.
PLAN BENEFITS TABLE. Future awards, if any, that will be made to eligible
participants in the Incentive Plan are subject to the discretion of the
Committee and, therefore, are not determinable at this time. The following table
sets forth, for certain executive officers and groups, the cumulative awards
that have been granted under the Incentive Plan through April 17, 1998. Each
award is a nonstatutory stock option that vests in equal increments on each of
the first four anniversaries of its grant date except the September 20, 1996
award to Dr. Abrahams that vests in its entirety on October 5, 1998, the October
6, 1995 award to Dr. Abrahams that was amended in September 1996 to vest in
equal increments on each of the three anniversaries of its grant date, and the
October 6, 1995 award to David Burt that was amended on September 20, 1996 to
vest in its entirety on March 31, 1997.
<TABLE>
<CAPTION>
TOTAL NUMBER OF
SHARES (#) GRANTED UNDER
NAMED EXECUTIVE OFFICERS AND OFFICERS, INCENTIVE PLAN AS OF APRIL 17,
DIRECTORS, AND EMPLOYEE GROUPS 1998
- --------------------------------------------------------------------------------- -------------------------------
<S> <C>
Ronald H. Abrahams............................................................... 270,000
David R. Burt.................................................................... 122,500
Alan T. Barber(1)................................................................ 21,250
Anthony H. Cincotta.............................................................. 344,725
Richard A. Paul.................................................................. 90,000
Thomas N. Thurman(1)............................................................. 42,500
Current Executive Officers as a Group............................................ 827,225
Current Non-Executive Directors as a Group....................................... 17,500
Current Non-Executive Employees as a Group....................................... 328,821
</TABLE>
- ------------------------
(1) This number excludes shares granted under the Incentive Plan that were
cancelled following the employee's resignation from the Company.
AMENDMENT AND TERMINATION. The Board of Directors may amend, modify,
suspend or terminate the Incentive Plan. The Incentive Plan may not be amended,
however, without the consent of the holders of a majority of the shares of
Common Stock present or represented and entitled to vote, or without the consent
of a majority of the shares then outstanding to (1) increase materially the
aggregate number of shares of Common Stock that may be issued under the
Incentive Plan (except for adjustments pursuant to the Incentive Plan), (2)
increase materially the benefits accruing to participants under the Incentive
Plan, or (3) modify materially the requirements about eligibility for
participation in the Incentive Plan.
14
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
THE EXECUTIVE COMPENSATION PROGRAM
The Company's executive compensation program is designed to help the Company
attract, motivate and retain the individuals that the Company needs to maximize
its return to stockholders. To meet this overall objective, the Company provides
competitive compensation opportunities and incentive award payments based on
Company and individual performance. The Company attempts to provide each of its
executives with a compensation package that, at expected levels of performance,
is competitive with those provided to executives who hold comparable positions
or have similar qualifications in other organizations of the Company's size and
in the Company's industry.
CASH COMPENSATION. Cash compensation for the executive officers named in
the Summary Compensation Table consists of a base salary and an annual bonus.
The base salaries are consistent with the biotechnology industry for companies
at a stage of development comparable to that of the Company and are fixed
pursuant to employment agreements entered into between the Company and each of
its executives. The Compensation Committee determines an executive's competitive
level of compensation based on information from a variety of sources, including
proxy statements of other companies and special surveys. The Compensation
Committee believes it is crucial to provide salaries within a competitive market
range to attract and retain highly talented executives. The specific competitive
markets considered depend on the nature and level of the executive position in
question and the labor markets from which qualified individuals would be
recruited. Annual salary increases for the Company's executive group may be
given based on general levels of market salary increase, individual performance
and the Company's overall financial results without any specific weighting among
these factors. Any base salary increases are expected to be consistent with the
Company's philosophy of pay-for-performance.
An executive of the Company may also be awarded a cash bonus as a percentage
of base pay within a pre-determined range established by the Board of Directors.
Within that range, an executive's cash bonus will be determined by the Board of
Directors in proportion to the extent to which the performance objectives
established by the Board of Directors for that executive are met or exceeded.
These objectives typically focus on results of the Company's operations,
scientific accomplishments and, as the Company remains in the developmental
stage, critical milestones in bringing the Company's science to the marketplace.
As shown in the Summary Compensation Table, the Company's executives received
bonuses for fiscal year 1997 in the range of 30 to 38 percent of base salary.
INCENTIVE PLAN. Equity based incentive compensation may be awarded under
the Company's Incentive Plan to the Company's executives. The Incentive Plan
allows grants of stock options, SARs and restricted stock awards. To date, only
stock options have been awarded under the Incentive Plan. The Compensation
Committee believes that providing equity based compensation to executives can be
critical in attracting and retaining qualified individuals and in bringing out
their superior performance.
CHIEF EXECUTIVE OFFICER COMPENSATION
As previously described, the Company structures the pay for all executives,
including the Chief Executive Officer, considering both a pay-for-performance
philosophy and market rates of compensation for the job. In September 1996,
Ronald H. Abrahams, Ph.D., formerly the Company's Executive Vice President and
Chief Operating Officer, was elected President and Acting Chief Executive
Officer. Dr. Abrahams was subsequently appointed as Chief Executive Officer by
the Board of Directors in March 1997. Specific actions taken by the Compensation
Committee regarding the compensation of Dr. Abrahams during 1997 are summarized
below.
BASE SALARY. Concurrent with Dr. Abrahams' duties of the Company's
President and Chief Executive Officer, Dr. Abrahams' annual base salary was
increased from $250,000 to $262,500 based upon the Compensation Committee's
evaluation of Dr. Abrahams' performance during 1997.
15
<PAGE>
BONUS. Dr. Abrahams received a cash bonus for fiscal year 1997 of $93,750
paid in March 1998. The criteria used in establishing the size of Dr. Abrahams'
bonus was based upon the satisfaction of a number of the Company's goals for the
year, as well as his efforts in the negotiation of the Joint Collaboration and
License Agreement with Johnson & Johnson, without any specific weighting among
these factors.
INCENTIVE STOCK PLAN. The Compensation Committee believes that equity based
compensation, in the form of stock options, is an important component of the
Chief Executive Officer's compensation. As previously discussed under Executive
Compensation, Dr. Abrahams was granted in 1997 options to purchase 100,000
shares of the Company's stock in conjunction with his position of President and
Chief Executive Officer based upon his increased duties and responsibilities and
his and the Company's performance. These options were granted below fair market
value and vest over the next four anniversaries of the date of grant.
COMPENSATION COMMITTEE
Stephen A. Duzan
Stephen P. Smiley
Thomas F. McWilliams, Chairman
16
<PAGE>
PERFORMANCE GRAPH
The Performance Graph compares the cumulative total return of the Company,
the NASDAQ Stock Market (U.S. Companies) and NASDAQ Pharmaceutical Stocks. The
graph assumes that $100 was invested in the stock or the index on December 14,
1995, the date of the Company's initial inclusion on the NASDAQ National Market
System, and also assumes reinvestment of dividends. Historical stock price
performance is not necessarily indicative of future stock price performance.
ERGO SCIENCE CORPORATION
COMPARATIVE TOTAL RETURNS
DECEMBER 14, 1995 THROUGH DECEMBER 31, 1997
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ERGO NASDAQ US NASDAQ PHARM
<S> <C> <C> <C>
12/14/95 $100 $100 $100
12/31/95 $143 $101 $115
3/31/96 $203 $106 $120
6/30/96 $186 $115 $117
9/30/96 $150 $119 $119
12/31/96 $131 $125 $115
3/31/97 $114 $118 $110
6/30/97 $110 $139 $119
9/30/97 $133 $163 $133
12/31/97 $153 $153 $119
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 14, 1995 DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Ergo Science Corporation(1)......... $ 100 $ 143 $ 131 $ 153
NASDAQ Stock Market................. $ 100 $ 101 $ 125 $ 153
NASDAQ Pharmaceutical............... $ 100 $ 115 $ 115 $ 119
</TABLE>
- ------------------------
(1) Based upon a stock price of $10.00 per share, the closing per share price of
the Common Stock on the day of the initial public offering.
As of April 17, 1998, the closing price of the Company's Common Stock on the
NASDAQ National Market System was 15.875 per share.
17
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the shares of the Company's Common Stock as of April 17, 1998, by
(i) each person the Company knows to be the beneficial owner of 5% or more of
the outstanding shares of Common Stock, (ii) each Named Executive Officer, (iii)
each director of the Company, and (iv) all executive officers and directors of
the Company as a group. Except as indicated in the footnotes to the table, the
Company believes that the persons named in the table have sole voting and
investment power with respect to the shares of Common Stock indicated.
<TABLE>
<CAPTION>
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
BENEFICIAL OWNER OWNED(1) OWNED(1)
- --------------------------------------------------------------------------------------- ------------ -------------
<S> <C> <C>
Hunt Financial......................................................................... $ 1,842,902 13.02%
1445 Ross at Field
Dallas, Texas 75202
Amerindo Investment Advisors Inc(2).................................................... 1,711,500 12.09%
One Embarcadero Center, Suite 2300
San Francisco, California
Citicorp Venture Capital Ltd.(3)....................................................... 1,678,910 11.86%
399 Park Avenue
New York, New York 10043
Anthony H. Cincotta(4)................................................................. 965,941 6.67%
Albert H. Meier(5)..................................................................... 668,474 4.70%
100 First Avenue
Charlestown, Massachusetts 02129
Citi Growth Fund, L.P(3)............................................................... 343,357 2.43%
c/o Sycamore Management
989 Lenox Drive, Building 1, Suite 208
Lawrenceville, New Jersey 08648
Ronald H. Abrahams(6).................................................................. 101,417 *
Alan T. Barber(7)...................................................................... 31,000 *
David R. Burt(8)....................................................................... 44,505 *
Richard A. Paul(9)..................................................................... 15,000 *
Thomas N. Thurman(10).................................................................. 22,500 *
David L. Castaldi(11).................................................................. 8,000 *
Stephen A. Duzan(12)................................................................... 16,250 *
Ray L. Hunt(13)........................................................................ 93,976 *
Thomas F. McWilliams(14)............................................................... 69,054 *
Stephen P. Smiley(15).................................................................. 5,100 *
W. Leigh Thompson(16).................................................................. 5,000 *
All executive officers and directors as a group (13 persons)........................... 2,046,217 13.71%
</TABLE>
- ------------------------
* Represents less than 1% of outstanding Common Stock or voting power.
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or disposition power with respect to
securities including stock options vesting by June 16, 1998.
(2) Consists of 1,453,000 shares owned by Amerindo Investment Advisors Inc.
("Amerindo") and 258,500 shares owned by Amerindo Investment Advisors, Inc.,
a Panama corporation ("Amerindo Panama"). Based on information contained in
the Schedule 13D/A of Amerindo, Amerindo Panama, Alberto W. Vilar and Gary
A. Tanaka dated January 30, 1998, Mr. Vilar and Mr. Tanaka are the sole
shareholders and directors of Amerindo and Amerindo Panama and may be deemed
to be beneficial owners of the 1,711,500 shares owned thereby.
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(3) Excludes shares of Common Stock beneficially owned by the employees of
Citicorp Venture Capital Ltd. ("CVC") and Citi Growth Fund, L.P., including
shares owned by Mr. McWilliams, as to which CVC and Citi Growth Fund, L.P.
disclaim beneficial ownership. CVC and Citi Growth Fund, L.P. are
affiliates, but each disclaims beneficial ownership of the shares held by
the other.
(4) Includes 172,363 shares of Common Stock subject to exercisable stock options
and 146,078 shares held in a trust for the benefit of the children of Manuel
Cincotta, Jr., for which Dr. Anthony Cincotta serves as co-trustee.
(5) Includes 75,000 shares of Common Stock subject to exercisable stock options.
(6) Includes 101,417 shares of Common Stock subject to exercisable stock
options.
(7) Includes 31,000 shares of Common Stock subject to exercisable stock options.
(8) Includes 44,250 shares of Common Stock subject to exercisable stock options
and 100 shares of Common Stock owned by daughter.
(9) Includes 15,000 shares of Common Stock subject to exercisable stock options.
(10) Includes 22,500 shares of Common Stock subject to exercisable stock
options.
(11) Includes 5,000 shares of Common Stock subject to exercisable stock options.
(12) Includes 16,250 shares of Common Stock subject to exercisable stock
options.
(13) Consists of 83,976 shares owned by Lafayette Investment Company, a limited
partnership, the sole general partner of which is a corporation owned
entirely by Mr. Hunt, and 10,000 shares of Common Stock subject to
exercisable stock options. Excludes shares owned by Hunt Financial
Corporation, the capital stock of which is held, indirectly, through a
series of corporations, by certain trusts for the benefit of Mr. Hunt and
members of his family.
(14) Consists of 22,993 shares owned by Alchemy L.P., a limited partnership, the
sole general partner of which is Mr. McWilliams. Excludes shares owned by
CVC, Citi Growth Fund, L.P., and other employees of CVC, as to which Mr.
McWilliams disclaims beneficial ownership.
(15) Includes 5,000 shares of Common Stock subject to exercisable stock options.
(16) Includes 5,000 shares of Common Stock subject to exercisable stock options.
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CERTAIN TRANSACTIONS
In addition, Ergo granted demand and piggyback registration rights with
respect to the Common Stock issued upon conversion of the Series A, Series B,
and Series C Preferred Stock or issued in payment of loans at the closing of the
initial public offering to purchasers of Preferred Stock and to the following
lenders: Citicorp Venture Capital, Ltd. ("CVC"); Citi Growth Fund L.P.; CVC
employees (including Mr. McWilliams); Hunt Financial Corporation; and Lafayette
Investment Company.
In October 1995, the Company entered into a consulting agreement with Dr.
Albert Meier in which the Company agreed to pay Dr. Meier $100,000 per year for
at least 20 hours of consulting services per week through October 1998. Dr.
Meier had the right to terminate the consulting contract without cause after
eighteen months from its effective date and elected to do so as of April 1997.
Dr. Meier agreed that all work product discovered, created or developed by him,
alone or with others, will belong to the Company. Dr. Meier also agreed to
maintain the confidentiality of the Company's proprietary information. In
addition, Dr. Meier agreed not to compete with the Company for two years
following the end of his consulting services. As required by the terms of the
contract, the Company paid Dr. Meier $50,000 following the termination of the
consulting contract as consideration for the first year of the noncompetition
period and paid an additional $100,000 on the first anniversary of the
termination to maintain the noncompetition obligation for the second year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Stephen A. Duzan, Stephen P.
Smiley, and Thomas F. McWilliams. None of these members is or has been an
employee of the Company. No executive officer of the Company serves as a member
of the board of directors or compensation committee of any entity that has one
or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee. Mr. McWilliams, or his affiliates, have
acquired capital stock of the Company and loaned funds to the Company. See
"Certain Transactions."
SECTION16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's executive officers, directors, and persons who beneficially own more
than 10% of a registered class of the Company's equity securities file with the
Securities and Exchange Commission initial reports of ownership and reports of
any changes in ownership of common stock and other equity securities of the
Company. Based on the Company's review of forms furnished to the Company and
written representations from reporting persons, the Company believes that all
filing requirements applicable to the Company's executive officers, directors,
and 10% beneficial owners were complied with during 1997.
ADDITIONAL INFORMATION
SOLICITATION
This solicitation of proxies is made by the Board of Directors and will be
conducted primarily by mail. Officers, directors and employees of the Company
may solicit proxies personally or by telephone, telegram or other forms of wire
or facsimile communication. The Company may also request banking institutions,
brokerage firms, custodians, nominees and fiduciaries to forward solicitation
material to the beneficial owners of Common Stock that those companies hold of
record. The costs of the solicitation, including reimbursement of such
forwarding expenses, will be paid by the Company.
STOCKHOLDER PROPOSALS
Stockholder proposals that are intended to be presented at the Company's
Annual Meeting of Stockholders to be held in 1999 must be received by the
Company at its executive offices, 100 First Avenue,
20
<PAGE>
Charlestown, Massachusetts 02129, Attn. Secretary, no later than January 1, 1999
in order that they may be included in the Proxy Statement and form of proxy for
that meeting.
CHANGE IN INDEPENDENT ACCOUNTANTS
The Board of Directors has selected Coopers & Lybrand L.L.P. as the
Company's independent accountants for 1998. Coopers & Lybrand L.L.P. has been
the Company's independent accountants since August 1995. The selection of
Coopers & Lybrand L.L.P. as the Company's independent accountants for 1997 was
approved by the Board of Directors. The Company expects that representatives of
Coopers & Lybrand will be present at the Annual Meeting to respond to
appropriate questions and will have an opportunity to make a statement if they
so desire to do so. The Board of Directors may terminate the appointment of
Coopers & Lybrand L.L.P. as independent accountants without the approval of the
Company's stockholders whenever the Board of Directors deems termination
necessary or appropriate.
In August 1995, the Company dismissed Ernst & Young LLP as its independent
auditors. The decision to dismiss Ernst & Young LLP was made by the Company's
management and was ratified by the Company's Board of Directors and Audit
Committee. During 1993, 1994, and 1995 there were no disagreements with Ernst &
Young LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Ernst & Young LLP, would have caused it to
make reference to the subject matter of the disagreements in its reports. During
1993 through the date of dismissal in 1995, Ernst & Young LLP did not advise the
Company that any of the following circumstances existed: (1) that the internal
controls necessary for the Company to develop reliable financial statements did
not exist; (2) that information had come to their attention that made them no
longer able to rely on management's representations, or that made them unwilling
to be associated with the financial statements prepared by management; (3) that
they needed to expand significantly the scope of their audit of the Company; or
(4) that information had come to their attention that materially affected, or if
investigated further may materially affect, the fairness or reliability of a
previously issued audit report or financial statements or the fairness of
financial statements issued or to be issued for fiscal periods following the
last audit report.
ANNUAL REPORT
The Company's annual report to stockholders for the year ended December 31,
1997, including financial statements, is being mailed herewith to all
stockholders entitled to vote at the Annual Meeting. The annual report does not
constitute a part of the proxy solicitation material. COPIES OF THE COMPANY'S
ANNUAL REPORT ON FORM 10-K ARE AVAILABLE WITHOUT CHARGE UPON REQUEST BY
CONTACTING THE COMPANY'S INVESTOR RELATIONS DEPARTMENT, ERGO SCIENCE
CORPORATION, 100 FIRST AVENUE, CHARLESTOWN, MA 02129, ATTN: LISA DESCENZA, OR BY
CALLING 617-241-6824.
<TABLE>
<S> <C> <C>
By Order of the Board of Directors,
Ronald H. Abrahams, Ph.D.
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
</TABLE>
Charlestown, Massachusetts
April 30, 1998
21
<PAGE>
PROXY
ERGO SCIENCE CORPORATION
Proxy Solicited on Behalf of the Board of Directors of
the Company for the Annual Meeting, June 4, 1998
The undersigned hereby constitutes and appoints each of Ronald H.
Abrahams, Ph.D., and David R. Burt, his or her true and lawful agents and
proxies with full power of substitution in each, to represent the undersigned,
with all the powers which the undersigned would possess if personally present,
and to vote the Common Stock of Ergo Science Corporation held of record by the
undersigned on the record date, at the Annual Meeting of Stockholders of Ergo
Science Corporation, to be held at the BankBoston Conference and Training
Center, 100 Federal Street, Boston, Massachusetts, on Thursday, June 4, 1998, at
9:00 am. local time, and at any adjournment thereof, on all matters coming
before said meeting.
You are encouraged to specify your vote by marking the appropriate box ON
THE REVERSE SIDE but you need not mark any box if you wish to vote in accordance
with the Board of Directors' recommendations which are FOR the election of the
named nominees as directors and FOR Proposal 2. The Proxies cannot vote your
shares unless you sign and return this card. This Proxy may be revoked in
writing at any time prior to the voting thereof.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
<PAGE>
ERGO SCIENCE CORPORATION
THIS IS YOUR PROXY
Dear Stockholder:
Your Proxy is being solicited by the Board of Directors of Ergo Science
Corporation for the Annual Meeting of Stockholders to be held at 9:00 a.m. local
time on June 4, 1998 at the BankBoston Conference and Training Center, 100
Federal Street, Boston, Massachusetts.
Enclosed with this Proxy is a Proxy Statement containing important information
about the two issues that you are being asked to approve.
Your vote is important to us. Whether or not you plan to attend the Annual
Meeting, you can be sure your shares are represented at the meeting by promptly
returning your completed Proxy card prior to the Annual Meeting.
Please mark the boxes on the Proxy card below to indicate how your shares are to
be voted, then sign the card, detach it and return your Proxy card in the
enclosed envelope.
Thank you in advance for your prompt consideration of these matters.
Please mark
[X] votes as in
this example.
This Proxy, when properly executed, will be voted in the manner directed herein
and authorize the Proxies to take action in their discretion upon other matters
that may properly come before the meeting. If no direction is made, this proxy
will be voted in accordance with the recommendations of the Board of Directors.
The Board of Directors recommends a vote FOR the election of all nominees for
director and FOR Proposal 2.
1. ELECTION OF DIRECTORS: To elect each of Anthony H. Cincotta, Ph.D. and W.
Leigh Thompson, M.D. as Class III directors for a three year term ending at
the Annual Meeting of Stockholders in 2001 and until their successors are
duly elected and qualified or their earlier resignation or removal.
[ ] FOR ALL NOMINEES [ ] WITHHELD FROM ALL NOMINEES
[ ]______________________________________
For all nominees except as noted above
2. To approve an amendment to the Ergo Science Corporation Amended and Restated
1995 Long Term Incentive Plan to increase the number of shares of the
Company's common stock available to be issued thereunder from 1,866,750
shares to 2,116,750 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
Please sign this Proxy exactly as your name appears on this card. Joint owners
should each sign personally. If you are signing as a representative of the named
stockholder (e.g. as a trustee, corporate officer or other agent on behalf of a
trust, corporation or other entity) you should indicate your title or the
capacity in which you sign.
Signature: _________________________ Date:_____________
Signature:__________________________ Date:_____________
