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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, 1997
-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 20, 1998, was approximately $98,600,000. As of March 20,
1998, there were 14,155,983 outstanding shares of the registrant's common stock.
Portions of the registrant's Proxy Statement to be furnished to stockholders in
connection with its 1998 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.
Forward-looking statements reflect the Company's current views with respect to
such 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,
the factors set forth below in "Risk Factors."
OVERVIEW
Ergo Science Corporation ("Ergo" or the "Company") develops novel
treatments for metabolic disorders, including Type 2 diabetes and obesity,
immune system disorders and various forms of cancer based on its core
technology, Neuroendocrine Resetting Therapy ("NRT"). NRT is based on the role
of neurotransmitters in regulating metabolism. The Company believes that its
approach may provide the foundation for a new class of treatments for a variety
of glucose and lipid disorders as well as immune diseases and cancer. The
Company's primary research focus is the treatment of Type 2 diabetes, obesity
and related metabolic disorders.
The Company filed a New Drug Application ("NDA") for its lead product
candidate, ERGOSET/(R)//1/ tablets, for the treatment of Type 2 diabetes, in
August 1997. This application was accepted for filing by the U.S. Food & Drug
Administration ("FDA") in October 1997. The FDA Advisory Panel for ERGOSET/(R)/
tablets is currently scheduled for May 14, 1998.
The Company announced in February 1998 that it had entered into a worldwide
joint collaboration with The R.W. Johnson Pharmaceutical Research Institute,
Ortho-McNeil Pharmaceutical, Inc. and Cilag AG International (collectively
referred to as "Johnson & Johnson") to develop and commercialize ERGOSET/(R)/
tablets, as well as other potential drug candidates acting through the NRT
mechanism, for the treatment of Type 2 diabetes and obesity. In the United
States, the parties share equally in the development and commercialization costs
and any resulting profits and losses with respect to ERGOSET/(R)/ tablets.
Outside the United States, Johnson & Johnson is responsible for development and
commercialization activities and costs, and Ergo will receive a royalty on any
net trade sales of ERGOSET/(R)/ tablets in such countries. In March 1998,
Johnson & Johnson made payments to Ergo totaling $20 million, including payment
of a $10 million license fee and the purchase of $10 million of Ergo common
stock. If the NDA for ERGOSET/(R)/ tablets is approved, Johnson & Johnson will
make an additional milestone payment of up to $20 million to the Company. See
"Business-- Commercialization, Marketing"
NRT is based on over thirty years of research by the Company's founding
scientists into the role of neurotransmitters in regulating glucose and lipid
metabolism. This research indicates that distinct, daily activity patterns of
certain neurotransmitters are required to maintain normal glucose and lipid
metabolism. Disorders in glucose and lipid metabolism can develop and progress
as a result of changes in these daily patterns of neurotransmitter activity.
With NRT, a neurotransmitter-modulating agent is administered at a specific time
of day to re-establish normal patterns of neurotransmitter activity and thereby
improve glucose and lipid metabolism. See "Business-- History and Science of the
Company's Technology and Preclinical Research."
The Company's research suggests that diabetic and obese humans have daily
neuroendocrine patterns that are different from healthy subjects. The Company's
strategy for treating Type 2 diabetes and obesity in humans is to administer a
neurotransmitter-modulating agent, such as ERGOSET/(R)/ tablets, on a timed
basis to reset the abnormal daily neuroendocrine patterns of the patients to
more closely resemble the daily neuroendocrine patterns of normal, lean, non-
diabetic subjects. See "Business-- Development of ERGOSET/(R)/ tablets and Other
Products for Diabetes" and "Business-- Development of ERGOSET/(R)/ tablets and
Other Products for the Treatment of Obesity."
- --------------------------
/1/ Johnson & Johnson, the Company's marketing partner, has indicated that if
the NDA for ERGOSET/R/ tablets is approved, it may change the trademark for
such product.
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ERGOSET/(R)/ tablets are a low-dose, fast-release, oral formulation of
bromocriptine mesylate, a dopamine agonist previously approved by the FDA to
treat Parkinson's disease, acromegaly and hyperprolactinemic conditions.
ERGOSET/(R)/ tablets are a potent dopamine-receptor agonist and operate through
a mechanism of action that is different from other anti-diabetic drugs. In 1996,
the Company completed three Phase III pivotal placebo-controlled trials in obese
Type 2 diabetic subjects. In two of the Phase III trials, ERGOSET/(R)/ tablets
were used as an adjunct to sulfonylurea agents; and in the third Phase III
trial, ERGOSET/(R) tablets were used as monotherapy. Data from these studies
indicated that ERGOSET/(R) tablets, compared to placebo, significantly decreased
glycated hemoglobin A\\1c\\ (HbA\\1c\\), the primary measure for assessing long-
term glucose control in diabetes. In addition, fasting and post-prandial
glucose, triglyceride and free fatty acid levels improved. Elevated levels of
triglycerides and free fatty acids are risk factors for cardiovascular disease,
the leading cause of death in Type 2 diabetics. See "Business-- Development of
ERGOSET/(R) tablets and Other Products for Diabetes."
Based upon findings from the widely accepted Diabetes Control and
Complications Trial (DCCT) in Type 1 diabetic patients, it is believed that
sustained reductions of blood glucose in Type 2 diabetic patients may also
reduce the risk of developing micro- and macrovascular complications such as
atherosclerosis, kidney failure, blindness and peripheral and autonomic
neuropathy.
In June 1997, Ergo commenced a Phase II dose selection clinical trial of
ERGOSET/(R) tablets for the treatment of obesity. This study is being conducted
at approximately 15 clinical sites across the United States with approximately
400 clinically obese subjects. This clinical trial is part of the collaboration
with Johnson & Johnson. See "Business-- Development of ERGOSET/(R) tablets and
Other Products for the Treatment of Obesity."
In addition, the Company has a research and development program in the area
of Photodynamic Therapy ("PDT") which includes the identification and subsequent
formulation of a lead photosensitizer dye, selection of a light source, and
identification of a suitable target site. See "Business-- Development of
Photodynamic Therapy (PDT) for the Treatment of Cancer."
Other areas of active research include: evaluating the applicability of NRT
technology using combinations of neurotransmitter-modulating compounds for the
palliative treatment of metastatic breast cancer; identifying and developing
second-generation dopamine agonists and combinations thereof, for the treatment
of Type 2 diabetes and obesity; examining the utility of specific dopamine
agonists on cardiovascular models; and exploring the role of NRT in various
immunological disease states. See "Business-- Development of ERGOSET/(R)/
tablets for the Treatment of Cancer" and "Business-- Development of ERGOSET/(R)/
tablets and Other Products for Diabetes-- Additional Clinical Trials."
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The following table illustrates the status of the Company's current product
development efforts:
<TABLE>
<CAPTION>
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PRODUCT CANDIDATE DISEASE INDICATIONS STATUS
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<S> <C> <C>
METABOLIC DISORDERS
ERGOSET/(R)/ tablets as Type 2 diabetes NDA accepted for filing with FDA; three Phase
monotherapy and adjunctive III clinical trials completed 1996
therapy with sulfonylureas
ERGOSET/(R)/ tablets as Type 2 diabetes Phase II clinical trial underway
adjunctive therapy with insulin
ERGOSET/(R)/ tablets with Reduce weight and fat Phase III clinical trial planned
hypocaloric diet in Type 2 diabetics
ERGOSET/(R)/ tablets with Treatment of clinical Phase II clinical trial initiated in June 1997
hypocaloric diet obesity
D1/D2 combination (1) Type 2 diabetes and Preclinical research; selection of lead
Obesity clinical candidate ongoing
Dopamine agonist/serotonin Type 2 diabetes and Preclinical research
agonist Obesity
IMMUNE DISORDERS/CANCER
ERGOSET/(R)/ tablets/serotonin Metastatic breast Phase II clinical trial completed; data being
agonist cancer analyzed
PDT and PDT/immune Cancer Preclinical research ongoing; selection of lead
regulation clinical candidate ongoing
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__________________
(1) Dopamine agonists for the D1 dopamine receptor and the D2 dopamine receptor,
respectively.
DEVELOPMENT OF ERGOSET/(R)/ TABLETS AND OTHER PRODUCTS FOR DIABETES
Diabetes as a Metabolic Disorder. The Company's primary research focus is
the treatment of Type 2 diabetes, obesity and related metabolic disorders. These
metabolic disorders involve defects in the neuroregulatory mechanisms which
control the integrated, complex relationship between glucose and fat metabolism.
To sustain life, the human body must breakdown food into glucose, fat and
protein. Glucose, a simple form of sugar, is used as a primary source of energy
for the body's cells. When the amount of glucose available becomes greater than
the body requires, it is converted into fat (triglycerides) and stored within
the adipose tissue for later use when food is unavailable. When glucose is not
available from food, triglycerides in the adipose tissue are broken down into
free fatty acids that stimulate glucose production by the liver. Insulin, which
is secreted by the pancreas, plays an important role in regulating the level of
glucose in the blood stream by stimulating the use of glucose as fuel primarily
in muscle tissue and by inhibiting the production of glucose in the liver. In a
healthy metabolic state, a balance is maintained between the production and
utilization of glucose and fat.
Characteristics of Diabetes. The term diabetes refers to a group of
metabolic disorders that show a single common feature, i.e., abnormally high
levels of glucose in the blood. Type I diabetes (juvenile-onset diabetes or
insulin dependent diabetes mellitus) results from a rapidly progressive,
immunologically driven dysfunction that leads to total failure of the insulin-
producing cells (beta-cells) in the pancreas. As the terminology implies, this
disease presents itself primarily within the first decade of life, producing an
extremely ill and potentially life threatening situation in the afflicted child.
It is clinically characterized by the sudden onset of lethargy, severe thirst,
urination and dehydration associated with deep labored breathing. This state of
labored breathing is characterized by a fruity smell resulting from the
production of toxic ketone bodies in the blood. The mainstay treatment for Type
1 diabetes is insulin and proper hydration. The incidence of this acute disease
is less than 10% of all patients diagnosed with diabetes.
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In contrast, Type 2 diabetes (adult onset or non-insulin dependent diabetes
mellitus) occurs generally in obese subjects around the fourth decade of life
and characteristically develops as a slow insidious process which may take
several years to become clinically evident. One of the primary components of
this disease is the body's inability to effectively utilize its available
insulin to control the entry of glucose into the cells. This dysfunction is due
to a condition known as insulin resistance. The abnormal state of insulin
resistance exists when the insulin-stimulated uptake of glucose into muscle
tissue and the brain becomes impaired resulting in a reduced inhibitory effect
of insulin on glucose production. This condition leads to excessive blood
levels of glucose (hyperglycemia) which is frequently accompanied by increases
in the blood levels of triglycerides, free fatty acids and other lipids. Type 2
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.
Due to a combination of environmental and genetic factors, people develop
insulin resistance and initially 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 fasting blood glucose levels and exhibits
persistent hyperglycemia, the person is considered to be a Type 2 diabetic.
When blood glucose levels are not controlled, potentially severe
complications can result. Hyperglycemia over an extended period of time is
believed to damage the linings of blood vessels. This damage initiates a
pathological process leading to the development of vascular complications
characteristic of both Type 1 and Type 2 diabetes. Examples of the complications
are severe destructive damage to the retinal and renal vasculature (micro) and
loss of circulation in the distal extremities (macro) which may lead to
amputation.
In addition to the hallmark of hyperglycemia evident in Type 2 diabetes,
the associated high blood levels of triglycerides, free fatty acids and total
cholesterol are believed to be potential risk factors for the premature
development of cardiovascular disease including coronary artery disease.
Need for New Diabetes Treatments. There is no cure for diabetes. After
diagnosis, the first course of therapy for Type 2 diabetics is to try to control
hyperglycemia through diet and exercise. If this fails to achieve glycemic
control, physicians will typically prescribe oral medication with one or more
of the available agents. Currently, there are five FDA approved classes of oral
medications for Type 2 diabetes.
The first class of oral agents approved for treating Type 2 diabetes was
sulfonylureas. Characteristically, each member of this drug class reduces blood
glucose levels by stimulating the pancreas to secrete more insulin. Researchers
suspect that the increased risk of cardiovascular disease in patients with Type
2 diabetes may be the result of above-normal levels of serum insulin, which may
stimulate the liver to increase lipid levels in the blood, contributing to
atherosclerosis and obesity. Thus, the labeling of sulfonylureas includes a
special warning on the possible increased risk of cardiovascular mortality from
the use of the drugs. Over time, many patients who are treated with
sulfonylureas begin to re-experience elevated blood glucose and lipid levels.
When this type of therapeutic failure occurs, a next step may be the addition
of, or substitution with, one or more of the newer types of oral therapies whose
mechanisms of action are different than sulfonylureas.
Metformin (tradename Glucophage/(R)/) was approved by the FDA for
monotherapy and adjunctive therapy for patients taking sulfonylureas in March
1995 and is sold by Bristol-Myers Squibb Company. Glucophage/(R)/ 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.
Troglitazone, a thiazolodinedione sold by Warner Lambert Company under the
tradename Rezulin/(R)/, was approved by the FDA in January 1997 for use in
diabetics taking insulin. In August 1997, the FDA approved Troglitazone for use
as monotherapy or combination therapy for Type 2 diabetes. It is believed to
work in part by increasing the body's sensitivity to insulin.
Precose was approved by the FDA for monotherapy and adjunctive therapy in
September 1995 and is sold in the United States under the tradename
Acarbose/(R)/ by Bayer Corporation (sold in Europe under the tradename
Glucobay/TM/). Precose 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. Precose 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. See "Business-- Competition."
Repaglinide (tradename Prandin/TM/) was approved by the FDA for monotherapy
and adjunctive therapy for patients taking sulfonylureas in December 1997 and
will be sold jointly by Novo Nordisk and Schering-Plough Corporation.
Repaglinide is an oral medication containing a benzoic acid derivative taken
with meals and is believed to act via calcium channels to stimulate insulin
secretion. The launch of Repaglinide in the U.S. is currently planned for 1998.
Therapeutic failure, which occurs after exhausting the aforementioned oral
drug treatments, may signal loss of the pancreatic beta-cell function and the
inability to secrete insulin. In this case, the Type 2 diabetic must then begin
daily insulin injections. An estimated 40% of Type 2 diabetics are currently
taking insulin according to the American Diabetes Association ("ADA").
Demographics and Market Size. The American Medical Association and the
ADA estimate that approximately 16 million people suffered from Type 2 diabetes
in the United States in 1997, of whom approximately 8 million have been
diagnosed with the disease. Another 16 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 $1.4 billion in the United States during 1997. Insulin, used by
an estimated 40% of Type 2 diabetics, is also a leading pharmaceutical product
with annual sales of approximately $1 billion in the United States during 1997.
ERGOSET/(R)/ Tablets in the Treatment of Type 2 Diabetes. ERGOSET/(R)/
tablets are a low-dose, fast-release, oral formulation of bromocriptine
mesylate, a dopamine agonist previously approved by the FDA to treat Parkinson's
disease, acromegaly and hyperprolactinemic conditions. ERGOSET/(R)/ tablets are
a potent dopamine-receptor agonist, which operates through a mechanism of action
that appears different from other anti-diabetic drugs. The Company selected
bromocriptine for use in treating Type 2 diabetes primarily because of its
ability to increase dopaminergic activity in the hypothalamic area of the brain.
Research by the Company and its founding scientists indicates that healthy, lean
subjects evidence high levels of dopaminergic activity during the daytime and
that obese and Type 2 diabetic subjects evidence low levels of dopaminergic
activity during the same time period. Specifically timed treatment with
ERGOSET/(R)/ tablets is believed to help restore a normal daily pattern of
dopaminergic activity in the brain. This "resetting" is believed to act as a
central regulator of metabolic function, i.e., lipid and glucose metabolism.
FDA Approval Strategy. Based on the results of its three Phase III trials,
the Company filed an NDA in August 1997 for approval of ERGOSET/(R)/ tablets to
treat Type 2 diabetes as a monotherapy and as adjunctive therapy with
sulfonylureas. In October 1997, the FDA accepted the NDA for filing. The FDA
Advisory Panel meeting is currently scheduled for May 14, 1998. However, there
can be no assurance that the FDA (or an expert advisory panel) will agree with
the Company's assessment of the results of the Phase III clinical trials or that
ERGOSET/(R)/ tablets will receive FDA approval as either adjunctive therapy or
monotherapy. See "Risk Factors--Uncertainties Related to Regulatory Approval of
ERGOSET/(R)/ tablets for Type 2 Diabetes", "Risk Factors-- Government
Regulation" and "Business-Commercialization, Marketing." In addition to the
above mentioned studies, the Company conducted extensions to the Phase III
clinical trials (for safety) and bioavailability studies of different dosage
strengths of ERGOSET/(R)/ tablets. The extension studies were completed in the
second half of 1997 and will be submitted to the FDA as part of the required six
month safety update.
Clinical Trials of ERGOSET/(R)/ Tablets for Type 2 Diabetes. The primary
goal of the Company's clinical trials to date has been to substantiate the
beneficial effect that ERGOSET/(R)/ tablets have on glucose and lipid metabolism
for the treatment of Type 2 diabetes and obesity seen in various animal models.
The Company began clinical trials of ERGOSET/(R)/ tablets for the treatment of
Type 2 diabetes in 1992 and completed its three Phase III clinical trials of
ERGOSET/(R)/ tablets as adjunctive and monotherapy for Type 2 diabetes in 1996.
Ergo initiated three double-blinded, placebo-controlled Phase III clinical
trials of ERGOSET/(R)/ tablets in obese, Type 2 diabetics in January 1995. Over
650 subjects were enrolled in the three clinical trials, two of which studied
ERGOSET/(R)/ tablets as adjunctive therapy with sulfonylurea agents and one of
which studied ERGOSET/(R)/ tablets 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 glycated hemoglobin
A\\1c\\ (HbA\\1c\\). HbA\\1c\\ is considered by the FDA
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to be a reliable indicator of glycemic control in diabetics. In the three
pivotal trials, ERGOSET/(R)/ tablets or placebo were given daily at
approximately 8:00 a.m. to Type 2 diabetics who were on weight-maintaining
diets.
In 1996, the Company announced that data from the three completed Phase III
trials indicated that ERGOSET/(R)/ tablets, compared to placebo, significantly
decreased HbA\\1c\\. In addition, fasting and post-prandial glucose,
triglyceride and free fatty acid levels improved. Elevated levels of
triglycerides and free fatty acids are risk factors for cardiovascular disease,
the leading cause of death in Type 2 diabetics. The data also showed that
ERGOSET/(R)/ tablets were generally well-tolerated.
The Adjunctive Therapy Trial Results. The two studies of ERGOSET/(R)/
tablets as adjunctive therapy were consistent with respect to baseline
population characteristics, i.e. all subjects were overtly diabetic 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 was available.
The intent-to-treat analysis indicated that ERGOSET/(R)/ tablets improved
glycemic control, as measured by a reduction in HbA\\1c \\ of 0.6% (p(less
than)0.0001), compared to placebo. In the pre-defined responder group,
ERGOSET/(R)/ tablets resulted in decreases in HbA\\1c\\ of 1% (p(less
than)0.0001) compared to placebo, and a decrease of 0.6% (p(less than)0.0001)
from baseline. The pre-defined responder criterion was designed to identify
responders to ERGOSET/(R)/ tablets shortly after the initiation of treatment.
Responders were defined as those individuals who had at least a decrease of 0.3%
in HbA\\1c\\ from baseline after eight weeks of treatment. According to this
pre-established criterion, approximately 60% of all subjects on ERGOSET/(R)/
tablets were classified as responders.
The intent-to-treat analysis also showed that ERGOSET/(R)/ tablets compared
to placebo reduced fasting serum triglycerides 61 mg/dL (p= 0.0058), a 24%
reduction. In the one study for which free fatty acids results were available,
ERGOSET/(R)/ tablets treatment resulted in a reduction of fasting serum free
fatty acids of 150 u eq/L (p=0.0424) compared to placebo on an intent-to-treat
basis.
Analysis of safety showed that ERGOSET/(R)/ tablets treatment was generally
well-tolerated. The most frequently reported side effects were nausea, fatigue
and dizziness, which are known potential side effects associated 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/(R)/ tablets compared with
approximately 2% in the placebo group.
The Monotherapy Trial Results. Monotherapy treatment for Type 2 diabetes
demonstrated reductions in HbA\\1c\\. Of the 122 subjects who completed the 24
week trial, 60 received ERGOSET/(R)/ tablets and showed a statistically
significant reduction of 0.6% (p(less than)0.02) compared to placebo in
HbA\\1c\\. Sixty-two percent of the ERGOSET/(R)/ tablet subjects completing the
study met the responder criterion. This responder group exhibited an HbA\\1c\\
reduction of 1% (p(less than)0.0001) compared to placebo and a reduction of 0.7%
(p(less than)0.0001) from baseline.
Results from the monotherapy trial also showed trends in improving lipid
profiles. ERGOSET/(R)/ tablets were generally well-tolerated. The most
frequently reported side effects in the monotherapy trial were nausea, fatigue,
nasal congestion and dizziness. 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/(R)/ tablets versus 5% for placebo.
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ERGOSET/(R)/ Tablets Clinical Trial Summary. The following table identifies
the completed Phase II and Phase III trials of ERGOSET/(R)/ tablets for the
treatment of Type 2 diabetes and obesity.
<TABLE>
<CAPTION>
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STUDY DESCRIPTION SUBJECTS PRIMARY ENDPOINT
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<C> <S> <C> <C>
92-1 Phase II - Open Label 15 Diurnal Hormone Profile Screening
92-2 Phase II - Open Label 25 Diurnal Plasma Glucose and Insulin Concentrations
93-1 Phase II - Open Label 10 Glucose Uptake Measured by Euglycemic Insulin
Clamp Technique
93-2 Phase II - Double-Blinded, Placebo-Controlled 46 Body Weight, Body Fat and Total Glycated
Hemoglobin
93-3 Phase II - Double-Blinded, Placebo-Controlled 17 Body Weight and Body Fat
94-1 Phase II - Single-Blinded, Placebo-Controlled 59 Dose Response and Titration Study
94-2 Phase II - Double-Blinded, Placebo-Controlled 99 Glycated Hemoglobin A\\1c\\ and Body Composition
94-3 Phase II - Open Label 12 Glucose Uptake Measured by Steady State Plasma
Glucose Technique
95-1 Phase III - Double-Blinded, Placebo-Controlled 247 Glycated Hemoglobin A\\1c\\
95-2 Phase III - Double-Blinded, Placebo-Controlled 249 Glycated Hemoglobin A\\1c\\
95-3 Phase III - Double-Blinded, Placebo-Controlled 159 Glycated Hemoglobin A\\1c\\
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</TABLE>
Additional Clinical Trials. Ergo has completed enrollment in a clinical
trial of ERGOSET/(R)/ tablets as adjunctive therapy with insulin in subjects
with Type 2 diabetes. The objective of this study is to show a reduced daily
insulin requirement in Type 2 diabetic patients currently being treated with
insulin and supplemented by ERGOSET/(R)/ tablets.
In addition, the Company also plans to commence several new clinical trials
in 1998. The Company plans to begin enrolling a Phase III trial in Type 2
diabetic patients who are to be placed on a 25% caloric reduction diet and given
either ERGOSET/(R)/ tablets or placebo for a period of one year. A second study
to examine the additive effects of ERGOSET/(R)/ tablets in combination with
Metformin in Type 2 diabetic patients is being considered. A third study to
assess the mechanism of action of ERGOSET/(R)/ tablets in the non-diabetic,
obese patient is expected to begin in 1998.
The Company is also studying possible second-generation product candidates
in animal models for the treatment of Type 2 diabetes and obesity, including a
combination of a dopamine D2 agonist such as ERGOSET/(R)/ tablets with a
dopamine D1 agonist.
DEVELOPMENT OF ERGOSET/(R)/ TABLETS 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 2 diabetes.
Many obese Americans are Type 2 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.
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ERGOSET/(R)/ Tablets for the Treatment of Obesity. Animal studies have
demonstrated that the active ingredient in ERGOSET/(R)/ tablets and other
neurotransmitter-modulating drugs are effective in reducing body weight and body
fat in seasonal, non-seasonal, and genetically bred animal models when
administered at a specific time of day. Various studies, which have been
recently presented by Ergo's researchers, 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, treatment with dopamine
agonists produced significant reductions in body fat compared with control
animals. In several studies presented at the 57th Scientific Sessions of the
American Diabetes Association and 16th Annual International Diabetes Federation
Congress, Ergo's scientists reported that the timed use of neurotransmitter-
modulating drugs produced significant reductions in food intake, body fat and
serum levels of glucose, lipids, free fatty acids and insulin in ob/ob mice. See
"Business-- History and Science of the Company's Technology and Preclinical
Research."
Clinical Trials of ERGOSET/(R)/ Tablets for the Treatment of Obesity. In
one double-blinded, placebo-controlled Phase II clinical trial (Study 93-3), 17
obese subjects were placed on a 25% caloric reduction diet and treated with
either ERGOSET/(R)/ tablets or placebo in the morning for an 18-week period.
Treatment with ERGOSET/(R)/ tablets resulted in a statistically significant
reduction in percentage of body fat compared to placebo. This trial suggests
that ERGOSET/(R)/ tablets treatment may selectively reduce body fat in obese
subjects. The Company began enrolling subjects in a new Phase II clinical trial
of ERGOSET/(R)/ tablets to treat obese subjects in June 1997. This study is
being conducted in approximately 15 clinical sites across the United States in
approximately 400 clinically obese subjects.
DEVELOPMENT OF ERGOSET/(R)/ TABLETS FOR THE TREATMENT OF CANCER
Cancer. Ergo is researching the application of ERGOSET/(R)/ tablets 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. 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 other immune system
disorders such as Lupus.
Clinical Trials of ERGOSET/(R)/ Tablets for the Treatment of Breast Cancer.
In late 1995, Ergo began a small, open-label Phase II clinical trial of
ERGOSET/(R)/ tablets with another neurotransmitter-modulating drug in
approximately 30 subjects with metastatic breast cancer. The study was conducted
to evaluate the long-term safety and efficacy of timed, orally administered
ERGOSET/(R)/ tablets and a serotonin agonist in improving the health status of
women diagnosed with metastatic breast cancer. The study has been completed and
the results are currently being analyzed.
DEVELOPMENT OF PHOTODYNAMIC THERAPY (PDT) FOR THE TREATMENT OF CANCER
Ergo is studying the use of unique photoactive dyes in PDT for 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 the proper
wavelength light supplied by a laser. Many cancers that have a poor prognosis
and are difficult to treat may respond to this new approach. PDT may be useful
in treating numerous solid cancers such as breast, bladder, brain, spine,
pancreas and prostate cancer.
Ergo has licensed from The Rowland Institute for Science rights to patents
covering the composition and methods of using certain unique photoactive dyes.
Ergo believes its photosensitive dyes may offer advantages over dyes being
studied by other companies. Ergo's position is 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, are
activated by relatively low-intensity light and exit the body relatively
quickly. The Company is in the process of identifying a lead photosensitizer dye
for clinical study in its PDT program and is currently performing preclinical
research to select a light source and identify a suitable target site.
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COMMERCIALIZATION
Marketing. On February 23, 1998, Ergo and Johnson & Johnson entered into a
worldwide Joint Collaboration and License Agreement (the "Joint Collaboration
Agreement") to develop and commercialize ERGOSET/(R)/ tablets as well as other
potential collaboration products for the treatment of Type 2 diabetes and
obesity. In March 1998, Johnson & Johnson made payments to Ergo totaling $20
million, including payment of a $10 million license fee and the purchase of $10
million of Ergo common stock.
Under the Joint Collaboration Agreement with Johnson & Johnson, Ergo is the
lead party in developing ERGOSET/(R)/ tablets for the treatment of Type 2
diabetes, in seeking U.S. marketing clearance for ERGOSET/(R)/ tablets for Type
2 diabetes and in developing ERGOSET/(R)/ tablets for the treatment of obesity
through Phase IIA clinical trials. The Robert Wood Johnson Pharmaceutical
Research Institute ("PRI"), a unit of Johnson & Johnson, will be the lead party
for seeking market clearance for ERGOSET/(R)/ tablets outside of the U.S. and
will be the lead party in developing ERGOSET/(R)/ tablets for the treatment of
obesity beyond Phase IIA clinical trials. Ortho-McNeil Pharmaceutical
Corporation, a unit of Johnson & Johnson, will be responsible for marketing
ERGOSET/(R)/ tablets, subject to regulatory clearance, in the United States.
Other Johnson & Johnson units will be responsible for marketing outside of the
United States, subject to regulatory clearances in such countries. In the United
States, the parties share equally in the development and commercialization costs
and any resulting profits and losses with respect to ERGOSET/(R)/ tablets.
Outside the United States, Johnson & Johnson is responsible for development and
commercialization activities and costs and Ergo will receive a royalty on net
trade sales of ERGOSET/(R)/ tablets in such countries. If the NDA for
ERGOSET/(R)/ tablets is approved by the FDA, Johnson & Johnson will make an
additional milestone payment to the Company of $20 million subject to offsets if
additional development activities are required by the FDA in order to obtain
such approval. In addition, Johnson & Johnson has committed to provide Ergo with
significant, additional financial support in the form of milestone payments upon
achievement of other specified development, regulatory and commercial objectives
subject to the terms of the Joint Collaboration Agreement.
In conjunction with the Collaboration Agreement, the Company also entered
into a Stock Purchase Agreement (the "Stock Purchase Agreement") with Johnson &
Johnson Development Coporation on February 23, 1998. In accordance with the
terms of the Stock Purchase Agreement, Johnson & Johnson Development Corporation
has purchased 602,155 shares of the Company's common stock. Johnson & Johnson
Development Coporation's estimated common stock ownership represents
approximately 4% of the Company's common shares outstanding at March 20, 1998.
During the term of the Joint Collaboration Agreement, Ergo may continue to
independently develop compounds, but may only commercialize compounds which act
through an NRT mechanism for the treatment of diabetes and obesity through the
joint collaboration. Ergo is also restricted from independently commercializing
compounds being developed within the collaboration for other indications outside
the collaboration, except that bromocriptine may be commercialized for other
indications by Ergo, alone or with a contract sales force, if Johnson & Johnson
elects not to participate in such commercialization through the collaboration.
During the course of development of compounds which act through an NRT mechanism
to treat diabetes or obesity or collaboration compounds for any indications,
Ergo is required to periodically present its current data to a joint project
team comprised of members of both Ergo and Johnson & Johnson. The joint project
team will then decide whether such compound shall be jointly developed and/or
commercialized for the suggested indication under the joint collaboration. Ergo
is entitled to develop and commercialize compounds which act through an NRT
mechanism alone or with a third party for indications other than diabetes and
obesity so long as such compounds are not collaboration compounds and are not
developed or commercialized for diabetes or obesity. Ergo also has some
restrictions on its ability to independently commercialize compounds which act
through an NRT mechanism for the treatment of lipid disorders.
Ergo is dependent on the future payments from Johnson & Johnson to continue
the development and commercialization of ERGOSET/(R)/ tablets. Johnson & Johnson
may terminate the Joint Collaboration Agreement at any time subject to payment
of penalties under certain conditions. Without Johnson & Johnson's continued
collaborative support, the Company might not be able to continue the
ERGOSET/(R)/ tablets development program, and the Company's financial condition
would be materially adversely affected.
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 a supply agreement ("Geneva
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Agreement") to buy ERGOSET/(R)/ tablets from Geneva Pharmaceuticals, Inc., and
Geneva agreed to supply all of the Company's requirements for the final dosage
form(s) of ERGOSET/(R)/ tablets for the treatment of Type 2 diabetes and
obesity. In October 1997, the Company and Geneva amended and restated the Geneva
Agreement. Under the amended Geneva Agreement, the Company agreed to purchase
its worldwide supply of ERGOSET/(R)/ tablets from Geneva on a "cost-plus" basis.
The Company also shortened the term of the agreement, agreed to issue Geneva
shares of Ergo common stock and agreed to make additional payments to Geneva
upon the occurrence of certain regulatory events and for performance of the
agreement for a specified period. In February 1998, the Company assigned its
rights and obligations, other than certain specified existing obligations, under
the Geneva Agreement to Johnson & Johnson under the terms of the Joint
Collaboration Agreement. See "Business--Commercialization, Marketing."
If Geneva does not perform its obligations under the Geneva Agreement or
Geneva is not approved by the FDA to manufacture ERGOSET/(R)/ tablets, the
Company or Johnson & Johnson may not be able to obtain supplies of ERGOSET/(R)/
tablets. Even if the Company or Johnson & Johnson is able to obtain ERGOSET/(R)/
tablets 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/(R)/
tablets is available from few suppliers in the world, and the manufacturing
process for the active ingredient is complex and lengthy. Accordingly, the
Company and Johnson & Johnson 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
over the last 30 years 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 2 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
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 noradrenaline, 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.
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 were 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
shifted to a lean, insulin sensitive state regardless of the actual season of
the year. In recent studies, Ergo's researchers measured levels of
neurotransmitter metabolites in the ventral medial hypothalamus ("VMH") of
obese, insulin resistant Syrian hamsters. The studies indicated that the
administration of neurotransmitter-modulating drugs at a specific time of day to
obese, insulin resistant Syrian hamsters caused the hamsters to become lean and
insulin sensitive in two weeks and also reduced the levels of neurotransmitter
metabolites in the VMH.
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
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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 over 20 studies presented at major scientific meetings in
1996 and 1997, Ergo scientists have demonstrated that central neuroendocrine-
modulating drugs from the class of dopamine agonists, when given to obese,
diabetic animals, produced a significant reduction in food intake and a decrease
in body fat with no significant decrease in lean body (muscle) mass compared
with control animals. The treatment also improved glycemic control, reducing
glucose and insulin and improving beta-cell function.
In another study, 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 50
issued or pending United States patents and patent applications and their
respective counterparts filed in other countries. LSU has licensed its interest
in more than 40 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 U.S. patents. 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 was also issued a patent in the United States relating to a
fast-release formulation of ERGOSET/(R)/ tablets. The Company has also entered
into a license agreement with Massachusetts General Hospital for its interest in
certain patent applications covering the treatment of immune dysfunctions and
cancer. See "Business-- MGH Agreement". The Company licenses its patent rights
in 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/(R)/ tablets 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 Company, in February 1998,
exclusively sublicensed some of its rights under the LSU Agreement to Johnson &
Johnson pursuant to the terms of the Joint Collaboration Agreement. See
"Business-- Commercialization, Marketing." 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/(R)/ tablets 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 application 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
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ERGOSET/(R)/ tablets and certain other technologies relating to the timed
administration of neurotransmitter-modulating drugs. This would have a material,
adverse effect on the Company, including the termination of the Johnson &
Johnson joint collaboration. See "Risk Factors-- Uncertainty of Protection for
Patents and Proprietary Technology."
MGH AGREEMENT
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 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 become non-exclusive.
COMPETITION
ERGOSET/(R)/ tablets, if approved, will compete against existing therapies
for Type 2 diabetes, such as insulin and oral anti-diabetic agents. In the
recent past, the FDA has approved four drugs for the treatment of Type 2
diabetes that have methods of action that are different from sulfonylureas and
are intended to address the hyperglycemia associated with diabetes.
Metformin, under the tradename 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. Metformin has rapidly gained market acceptance. The patent for this
product is expected to expire in 2001.
Precose, approved for monotherapy and adjunctive therapy by the FDA in
September 1995, is sold in the United States by Bayer Corporation under the
tradename Acarbose/(R)/ and sold in Europe under the tradename Glucobay/TM/.
Acarbose /(R)/ 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 /(R)/ 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 tradename Rezulin/(R)/, for use in treating diabetics who are
taking insulin. In August 1997, the FDA approved Troglitazone for use as
monotherapy or combination therapy for Type 2 diabetes. The product is believed
to work in part by increasing the body's sensitivity to insulin. In December
1997, Warner Lambert initiated a change in prescribing information for
Rezulin/(R)/. This came in response to reports of liver dysfunction potentially
associated with the drug.
Repaglinide (trade name Prandin/TM/) was approved by the FDA for
monotherapy and adjunctive therapy for patients taking sulfonylureas in December
1997 and will be sold jointly by Novo Nordisk and Schering-Plough Corporation.
Repaglinide is an oral medication containing a benzoic acid derivative taken
with meals and is believed to act via calcium channels to stimulate insulin
secretion. The launch of Repaglinide in the U.S. is currently planned for 1998.
The active ingredient in ERGOSET/(R)/ tablets has been approved by FDA for
indications other than Type 2 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/(R)/ tablets. Substitution of other forms of the active
ingredient may have a material adverse effect on the market for ERGOSET/(R)/
tablets. 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.
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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 2 diabetes, obesity and cancer.
Several different approaches to treating Type 2 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 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 2 diabetes is very intense. The Company
expects that competition among products approved for sale will be based on,
among other factors, product safety, efficacy, tolerability, ease of use, effect
on co-morbid conditions, availability, price, marketing and distribution. Even
if ERGOSET/(R)/ tablets are approved by FDA for sale as a new treatment for Type
2 diabetes, there can be no assurance that it will be able to compete
successfully against other products. See "Business-- Development of ERGOSET/(R)/
Tablets and Other Products for Diabetes-- Clinical Trials of ERGOSET/(R)/
Tablets for Type 2 Diabetes ", and "Risk Factors-- Uncertainties Related to
Regulatory Approval of ERGOSET/(R)/ tablets for Type 2 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.
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Clinical trials involve the administration of the investigational new drug
to humans under the supervision of a qualified principal investigator. Clinical
trials must be conducted in accordance with Good Clinical Practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and efficacy criteria to be evaluated. Each protocol must be
submitted to FDA as a part of the IND. Also, each clinical trial must be
approved and conducted under the auspices of an Institutional Review Board,
which will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution conducting the clinical
trials.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap, as is the case with ERGOSET/(R)/ tablets 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/(R)/ tablets for Type 2 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, 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.
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
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drug product in a country until an appropriate application has been approved by
the regulatory authorities in that country. FDA approval does not assure
approval by other regulatory authorities. The current approval process varies
from country to country, and the time spent in gaining approval varies from that
required for FDA approval. In some countries, the sale price of a drug product
must also be approved. The 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/(R)/ tablets has been approved by FDA for
use in humans for approximately 20 years for several indications, including
treating Parkinson's disease, acromegaly and hyperprolactinemic Conditions. 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
hyperprolactinemic Conditions. 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/(R)/ tablets 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 20, 1998, the Company had 66 full-time employees, including 13
persons with Ph.D. degrees. Forty seven 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/(R)/ TABLETS FOR TYPE 2
DIABETES
In 1996, the Company announced the statistical analyses of its three Phase
III clinical trials of ERGOSET/(R)/ tablets as adjunctive and monotherapy in
obese subjects suffering from Type 2 diabetes. The Company filed an NDA with FDA
for ERGOSET/(R)/ tablets to treat Type 2 diabetes in August 1997. The filing was
subsequently accepted by the FDA in October 1997. In order for a drug such as
ERGOSET/(R)/ tablets 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
subject 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. Such
approval may be influenced by the views of such regulatory authorities
regarding the magnitude of the reduction of HBA/IC/ and other risk factors for
cardiovascular disease by ERGOSE/R/ tablets and the design of the Company's
clinical trials.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/(R)/ tablets are safe and
effective in the treatment of Type 2 diabetes, the Company will not receive the
approval necessary to market ERGOSET/(R)/ tablets, which would have a material
adverse effect on the Company. In that case, the Company may have to conduct
additional Phase III
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clinical trials in an effort to demonstrate the safety and efficacy of
ERGOSET/(R)/ tablets, which also may not be acceptable to the FDA. There can be
no assurance that the results of any of the Company's Phase III clinical trials
will be satisfactory, that additional clinical trials would not be required as a
result of current or future FDA requirements, that ERGOSET/(R)/ tablets will
obtain regulatory approval for commercialization, or that any regulatory
approval obtained will not contain material limitations on the indicated uses
for which ERGOSET/(R)/ tablets may be marketed. See "Business-- Government
Regulation." Without regulatory approval, the Company would not be able to
commercialize ERGOSET/(R)/ tablets, which would have a material adverse effect
on the Company. See "Business--Development of ERGOSET/(R)/ Tablets and Other
Products for Diabetes-- Clinical Trials of ERGOSET/(R)/ Tablets for Type 2
Diabetes."
RELIANCE ON JOHNSON & JOHNSON
The Company is dependent on future payments from Johnson & Johnson to
continue the development and commercialization of ERGOSET/(R)/ tablets. Under
the Joint Collaboration Agreement between Johnson & Johnson and the Company,
Johnson & Johnson has primary responsibility for commercializing ERGOSET/(R)/
tablets. There can be no assurance that Johnson & Johnson will be able to
establish effective sales and distribution capabilities or be successful in
gaining market acceptance for ERGOSET/(R)/ tablets or that Johnson & Johnson
will devote sufficient resources to the commercialization of ERGOSET/(R)/
tablets. If Johnson & Johnson desires to discontinue the collaboration, it has
the right to terminate the collaboration at any time subject to the possibility
of paying penalties in certain circumstances. In addition, Johnson & Johnson has
the right to terminate the Joint Collaboration Agreement at any time based on
material safety or tolerability issues. Johnson & Johnson may also elect not to
jointly develop or commercialize other second-generation compounds for the
treatment of diabetes or obesity or existing collaboration compounds for
additional indications, in which case the Company would not be able to
independently commercialize such compound for those indications during the term
of the Joint Collaboration Agreement. If Johnson & Johnson were to discontinue
its financial support, the Company might not be able to continue the development
and commercialization of ERGOSET/(R)/ tablets, and the Company's financial
condition would be materially adversely affected. If adequate funds were not
available from other sources, the Company would be required to implement a
restructuring plan and to delay, scale-back or eliminate one or more of its
research or development programs. See "Business-- Commercialization, Marketing."
UNCERTAINTIES RELATED TO THE PAYMENT OF DEVELOPMENT, MARKETING AND
COMMERCIALIZATION COSTS UNDER THE JOINT COLLABORATION AGREEMENT WITH JOHNSON &
JOHNSON
Under the Joint Collaboration Agreement with Johnson & Johnson, the Company
is responsible for paying half of the development, marketing and
commercialization costs, including launch costs, for ERGOSET/(R)/ tablets as
well as any other collaboration compounds being developed and/or commercialized
under the Joint Collaboration Agreement. See "Business-- Commercialization,
Marketing" and "Risk Factors-- Future Capital Needs; Uncertainty of Additional
Funding." As many of these costs are speculative and will likely be substantial,
there can be no assurance that the Company will be able to pay its share of
these costs. Should the Company not be able to pay its share of these costs,
Johnson & Johnson would have the option to convert the profit/loss sharing
arrangement in the United States for the relevant product to a royalty
arrangement or maintain the profit/loss sharing arrangement and recover such
costs and specified interest-based penalties out of Ergo's share of future
operating profits or milestone payments for such product.
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 fund its 50% share
of commercialization and launch costs if regulatory clearance is obtained. See
"Risk Factors-- Uncertainties Related to the Payment of Development, Marketing
and Commercialization Costs under the Joint Collaboration Agreement with Johnson
& Johnson." 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 costs and timing of
seeking regulatory approvals of the Company's product candidates; the Company's
ability to obtain regulatory approvals; the success of Johnson & Johnson in its
sales and marketing efforts for ERGOSET/(R)/ tablets and/or other products
including Johnson & Johnson's ability to realize projected revenues and costs;
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 regulatory clearance for ERGOSET/(R)/
tablets can be obtained at projected costs. To satisfy its capital requirements,
the Company may seek to raise funds in the public or
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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
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."
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 October 1997, the Company amended
and restated its 1995 United States supply agreement with Geneva
Pharmaceuticals, Inc. ("Geneva") for the finished dosage forms of ERGOSET/(R)/
tablets. In February 1998, the Company assigned its rights and obligations under
the Geneva Agreement to Johnson & Johnson. If Geneva does not perform its
obligations under this agreement or if the agreement is terminated, the Company
and Johnson & Johnson may not be able to obtain supplies of ERGOSET/(R)/
tablets. Even if the Company or Johnson & Johnson are able to obtain
ERGOSET/(R)/ tablets 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/(R)/ tablets,
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, Manufacturing." If the Company is unable to obtain adequate
supplies on favorable terms, its business would be materially adversely
affected. 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 COLLABORATORS
The Company has limited experience in sales, marketing and distribution.
The market for products for Type 2 diabetes is large. To market a new product
for Type 2 diabetes to primary care and general practice physicians requires
significant resources. It is unlikely that the Company would develop such
capacity on its own. In February 1998, the Company entered into a Joint
Collaboration Agreement with Johnson & Johnson for the marketing and
distribution of ERGOSET/(R)/ tablets, as well as other potential collaboration
compounds, for the treatment of metabolic diseases, including Type 2 diabetes
and obesity. See "Business-- Commercialization, Marketing". While the Company
believes that its current and potential future 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 Johnson & Johnson, or any other third party, will
market the Company's products successfully. If Johnson & Johnson does not market
a product successfully or if Johnson & Johnson terminates the Joint
Collaboration Agreement, 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 and/or keep in effect 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
and/or keep in effect marketing arrangements with third parties would have a
material adverse effect on the Company.
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 2 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
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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 2 diabetes,
including five drugs (Acarbose/(R)/, Glucophage/(R)/, Amaryl/(R)/, Rezulin/(R)/
and Prandin/TM/), that have recently been approved by FDA. Glucophage/(R)/ and
Rezulin/(R)/ have rapidly gained market acceptance as therapies for Type 2
diabetes. There can be no assurance that ERGOSET/(R)/ tablets will be able to
compete successfully with any of these or other products if ERGOSET/(R)/ tablets
receive regulatory clearance. In addition, promotional activities for
ERGOSET/(R)/ tablets 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. See "Business-- Competition."
The active ingredient in ERGOSET/(R)/ tablets is approved by FDA for
indications other than Type 2 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/(R)/ tablets. Substitution of other forms of the active
ingredient may have a material adverse effect on the market for ERGOSET/(R)/
tablets. 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."
UNCERTAINTIES RELATED TO PRODUCT DEVELOPMENT AND MARKETABILITY
The Company has not yet completed the development of any products and,
accordingly, has not begun to generate revenues from the commercialization of
products. ERGOSET/(R)/ tablets were studied in three Phase III clinical trials
as therapy in obese, Type 2 diabetics. ERGOSET/(R)/ tablets 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 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.
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 its ability to receive any revenues from product sales is
dependent upon receiving market clearance from the FDA. The Company has been
unprofitable since its inception, and as of December 31, 1997, the Company's
accumulated deficit was $77,603,828. To date, the Company has dedicated most of
its financial resources to ERGOSET/(R)/ tablets research and development,
general and administrative expenses and the prosecution of patents and patent
applications. The Company expects to incur significant and increasing expenses
relating to the launch of ERGOSET/(R)/ tablets, if marketing clearance is
granted, and 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 regulatory clearance
for ERGOSET/(R)/ tablets and the successful launch and commercialization of
ERGOSET/(R)/ tablets by Johnson & Johnson. There can be
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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."
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/(R)/ tablets.
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."
NO ASSURANCE OF ADEQUATE THIRD-PARTY REIMBURSEMENT
The Company's or its marketing partner's ability to commercialize its
product candidates successfully, if FDA approval is obtained, will depend in
part on the extent to which appropriate reimbursement levels for the cost of the
products and related treatment are obtained from government authorities, private
health insurers and other organizations, such as health maintenance
organizations ("HMOs"). Third-party payors are increasingly challenging pricing
of pharmaceutical products. In addition, the trend toward managed healthcare in
the United States, the growth of organizations such as HMOs and legislative
proposals to reform healthcare and government insurance programs could
significantly influence the purchase of pharmaceutical products, resulting in
lower prices and reducing demand for the Company's product candidates. Such cost
containment measures and healthcare reform could affect the Company's or its
marketing partner'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.
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
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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 product
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/(R)/ tablets, 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 2 diabetes or obesity. Even in
jurisdictions where the timed use of bromocriptine for Type 2 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/(R)/ tablets, thereby potentially reducing the
sales of ERGOSET/(R)/ tablets. 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 conducted 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 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
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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/(R)/ tablets 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. 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/(R)/ tablets 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.
CONTROL BY EXISTING STOCKHOLDERS
As of March 20, 1998, current directors, executive officers and principal
stockholders of the Company and certain of their affiliates beneficially own
approximately 58% 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/(R)/ tablets, in the future or that such insurance and the
resources of the Company would be sufficient to satisfy any liability
21
<PAGE>
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 are 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 February 1997).
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 (or FDA expert panel) 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.
22
<PAGE>
ITEM 2. PROPERTIES
FACILITIES
Ergo leases approximately 30,000 square feet in two buildings in the
Charlestown Navy Yard, Charlestown, Massachusetts, of which approximately 10,000
square feet are used for research and development functions and approximately
20,000 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 through December 2003, with
one five-year renewal option. 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/(R)/ tablets 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 1997, Ergo submitted two matters to its stockholders for approval at
the 1997 Annual Meeting held on May 20. These matters included (1) the re-
election of Thomas F. McWilliams, David L. Castaldi and Ray L. Hunt as Class II
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; and (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 1,431,525 shares to 1,866,750. Of those shares present at the
meeting in person or by proxy, a plurality voted to re-elect Messrs. McWilliams,
Castaldi and Hunt as directors and a majority voted in favor of the other
proposal. No other matters were submitted to a vote of the stockholders of Ergo
during 1997.
23
<PAGE>
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 20, 1998, the number of record holders of the
Company's common stock was approximately 282. The following table sets forth,
for the periods indicted, the high and low sale price for the Company's common
stock as reported by the Nasdaq National Market System.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1997
First Quarter $17 1/4 $11 3/8
Second Quarter $16 $ 9
Third Quarter $14 1/2 $10
Fourth Quarter $20 1/8 $12 3/4
1996
First Quarter $24 1/4 $12
Second Quarter $21 1/2 $17 1/2
Third Quarter $18 3/4 $10
Fourth Quarter $15 1/2 $11
</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,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues........................................... $ 1,689,252 $ 1,397,521 $ 94,348 $ 214,916 $ 107,710
Operating expenses:
Research and development.......................... 13,258,016 12,272,478 8,643,926 4,917,830 2,403,683
Purchase of in-process research and
development....................................... -- 168,750 7,020,064 -- --
General and administrative (1)(2)(3).............. 6,973,776 6,139,072 6,580,308 4,256,934 3,165,038
------------ ------------ ------------ ------------ ------------
Total operating expenses.......................... 20,231,792 18,580,300 22,244,298 9,174,764 5,568,721
------------ ------------ ------------ ------------ ------------
Net loss..................................... (18,542,540) (17,182,779) (22,149,950) (8,959,848) (5,461,011)
Accretion of dividends on preferred stock.......... (463,968) (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 stockholders.............. $(19,006,508) $(17,620,111) $(31,960,562) $ (9,893,064) $ (5,870,368)
============ ============ ============ ============ ============
Net loss per common share
(basic and diluted) (4)(5).................... $(1.44) $(1.57) $(9.92) $(3.96) $(2.35)
============ ============ ============ ============ ============
Weighted average common stock and
common equivalents (basic and diluted)............ 13,212,042 11,248,315 3,222,707 2,500,025 2,500,000
============ ============ ============ ============ ============
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 13,923,115 $ 18,066,884 $ 15,896,373 $ 1,880,982 $ 8,135,484
Short-term investments............................ 9,536,995 20,550,986 6,325,502 -- --
Working capital................................... 20,943,195 36,917,629 19,609,791 679,177 6,925,243
Total assets...................................... 28,664,666 41,385,280 24,949,911 4,302,889 9,840,148
Deferred revenue (6).............................. -- -- -- 5,744,329 5,744,329
Long-term obligations............................. 327,442 385,256 93,600 89,013 --
Total stockholders' equity (deficit).............. 25,135,381 39,065,225 21,803,851 (20,674,994) (11,104,844)
</TABLE>
- ----------------------
(1) Includes noncash charges in 1997 totaling $647,413 related to the
resignation of two Company senior executives. See Note 10 of Notes to
Consolidated Financial Statements.
(2) Includes a noncash charge in 1996 of $1,030,981 related to the resignation
of a Company senior executive. See Note 10 of Notes to Consolidated
Financial Statements.
(3) Includes a noncash charge in 1995 of $1,747,931 for common stock issued in
connection with a renegotiated supply contract. 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) Loss per share for fiscal years 1995, 1994, and 1993 have been restated to
conform to the requirements of SFAS 128.
(6) See Note 9 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 future events. Actual results may vary materially and
adversely from those anticipated, believed, assumed, estimated or otherwise
indicated. Important factors that could cause actual results to differ
materially include, without limitation, (1) 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
the fast-release, oral formulation of bromocriptine for Type 2 diabetes or any
other indication or that the FDA will not require additional clinical trials of
the fast-release, oral formulation of bromocriptine (3) uncertainty related to
the scientific development of a new medical therapy, (4) competition in the
anti-diabetic and anti-obesity markets is intense; other products have been
recently approved for these indications and other companies are developing
competing products, (5) the need for additional funding, (6) there can be no
assurance that the fast-release, oral formulation of bromocriptine if approved
for commercial marketing, will be successful in the marketplace, or that Ergo
will receive any profits from its sale, (7) there can be no assurance that Ergo
will achieve any of the objectives required for payment of milestones by Johnson
& Johnson, (8) Johnson & Johnson has the right to terminate the collaboration at
any time subject to the possibility of paying penalties in certain
circumstances; and (9) the uncertainty relating to patent protection in the
pharmaceutical and biotechnology industries. 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.
OVERVIEW
Since inception, Ergo Science Corporation ("Ergo" or the "Company") has
developed novel treatments for metabolic disorders, including Type 2 diabetes
and obesity, immune system disorders and various forms of cancer based on its
core technology, Neuroendocrine Resetting Therapy ("NRT"). NRT is based on the
role of neurotransmitters in regulating metabolism. The Company has dedicated
most of its financial resources to research and development of ERGOSET/(R)/
tablets, the Company's lead product candidate, 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 its ability
to receive any revenues from product sales is dependent upon receiving market
clearance from the FDA. The Company has been unprofitable since its inception,
and its accumulated deficit was $77,603,828 as of December 31, 1997. On
February 23, 1998, Ergo and Johnson & Johnson entered into a worldwide Joint
Collaboration and License Agreement to develop and commercialize ERGOSET/(R)/
tablets as well as other potential collaboration products for the treatment of
Type 2 diabetes and obesity. The Company expects to incur significant and
increasing expenses relating to the launch of ERGOSET/(R)/ tablets, if marketing
clearance is granted, and 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, 1996 and 1997
Total revenues increased from $1,397,521 in 1996 to $1,689,252 in 1997.
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 1997, compared to 1996. The amounts increased as
a result of proceeds received from the Company's second public offering in
August 1996.
Research and development expenses increased from $12,441,228 in 1996 to
$13,258,016 in 1997. The increase was principally the result of expenses related
to the preparation and filing of the NDA for ERGOSET/(R)/ tablets and the Phase
II Obesity study initiated in 1997 which exceeded expenses related to the Phase
III clinical trials for ERGOSET/(R)/ tablets for Type 2 diabetes in 1996. All
other research and development expenses were relatively constant from 1996 to
1997.
26
<PAGE>
General and administrative expenses increased from $6,139,072 in 1996 to
$6,973,776 in 1997. The increase was principally due to increased corporate
communications and investor relations activities and costs associated with the
Company's efforts to establish corporate alliances to market ERGOSET/(R)/
tablets and assist with the development of other product candidates. In both
1996 and 1997 the Company recognized charges related to the resignation of
senior executives. These charges were approximately $1.3 million in both years.
Net loss increased from $17,182,779 to $18,542,540 and net loss to common
stockholders increased from $17,620,111 to $19,006,508 in 1996 and 1997,
respectively. The increases were mainly due to the increased costs noted above.
Net loss per common share decreased from $1.57 in 1996 to $1.44 in 1997. The
decrease was due to the increased weighted average shares outstanding which
totaled 11,248,315 in 1996 and 13,212,042 in 1997 offset by the increased net
loss.
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/(R)/
tablets, 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 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 $9.92 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
3,222,707 in 1995 and 11,248,315 in 1996.
In the first quarter of 1997, the Company recorded a charge of
approximately $925,000 for severance payments made to the former Chairman of the
Board of Directors, officer and employee of the Company. Of the total charge,
$450,000 is noncash and the remainder is being paid over a 20 month period.
NET OPERATING LOSS CARRYFORWARD
At December 31, 1997, the Company's reported federal net operating loss
carryforwards were approximately $66 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 7 of Notes to Consolidated
Financial Statements.
27
<PAGE>
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, 1997, 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 $18,066,884 and $13,923,115, while
short-term investments were $20,550,986 and $9,536,995, at December 31, 1996 and
1997, respectively. The decrease in cash and cash equivalents and short-term
investments at December 31, 1997 was due primarily to the use of cash in the
Company's operating activities.
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 1997, the Company conducted and continues to conduct preclinical
screens for lead candidates for use in photodynamic therapy to treat various
cancers. In addition, preclinical screens for lead candidates have been and
continue to be conducted for dopamine agonists to treat Type 2 diabetes and
obesity. Treatment with dopamine agonists is currently the Company's lead
preclinical approach for second-generation therapy for Type 2 diabetes and
obesity. The Company expects to incur increasing research and development costs
in connection with continued development in these areas.
Throughout 1997, the Company conducted and continues to conduct several
clinical trials for ERGOSET/(R)/ tablets in the areas of Type 2 diabetes,
obesity and breast cancer. The most significant of these trials is a Phase II
clinical study to evaluate the safety and efficacy of ERGOSET/(R)/ tablets to
treat clinical obesity. This study is being conducted at approximately 15
clinical sites across the United States in approximately 400 clinically obese
subjects. The Company is incurring and will continue to incur additional
research and development expenses associated with its various clinical trials.
In August 1997, the Company filed an NDA for ERGOSET/(R)/ tablets to treat
Type 2 diabetes with the FDA. The FDA subsequently accepted the NDA for filing
in October 1997. The Company is incurring and will continue to incur costs
associated with the NDA approval process.
As of December 31, 1997, the Company's net investment in equipment and
leasehold improvements was $1,970,328. The Company expects that additional
equipment and facilities will be needed to the extent it increases its research
and development activities.
In the event that ERGOSET/(R)/ tablets are cleared for marketing by the FDA
in 1998, the Company's available cash, cash equivalents, short-term investments
expected interest income and payments from the collaboration with Johnson &
Johnson (including the sale of common stock to Johnson & Johnson Development
Corporation, the license fee and payment on receipt of marketing clearance of
ERGOSET/(R)/ tablets) will be adequate to fund its current and anticipated
levels of operations through 1999. This is based on certain assumptions,
including assumptions as to the costs and expenses associated with launching and
marketing ERGOSET/(R)/ tablets and assumptions as to revenues from the sale of
ERGOSET/(R)/ tablets through 1999. In the event that ERGOSET/(R)/ tablets do
not receive marketing clearance, launch and marketing expenses are higher than
anticipated or revenues from the sale of ERGOSET/(R)/ tablets are lower than
anticipated, the Company will likely need additional capital. In addition, the
Company's research and development programs or other events affecting the
Company's operations may result in accelerated or unexpected expenditures for
which the Company will need additional capital resources. 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>
SUBSEQUENT EVENTS
On February 23, 1998, Ergo and Johnson & Johnson entered into a worldwide
Joint Collaboration and License Agreement (the "Joint Collaboration Agreement")
to develop and commercialize ERGOSET/(R)/ tablets as well as other potential
collaboration products for the treatment of Type 2 diabetes and obesity. In
March 1998, Johnson & Johnson made payments to Ergo totaling $20 million,
including payment of a $10 million license fee and the purchase of $10 million
of Ergo common stock. Under the Joint Collaboration Agreement with Johnson &
Johnson, the Company is responsible for paying half of the development,
marketing, and commercialization costs, including launch costs, for ERGOSET/(R)/
tablets as well as any other collaboration compounds being developed and/or
commercialized under the Joint Collaboration Agreement. In addition, the
Company assigned its rights and obligations, other than certain specified
existing obligations, under its amended and restated supply agreement for
ERGOSET/(R)/ tablets to Johnson & Johnson.
YEAR 2000
The Company has reviewed the data processing systems and computer applications
which are used in-house and has determined that the Company's data processing
will not be materially impacted by any date-sensitive calculations related to
the year 2000.
29
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants...................................................................... 31
Consolidated Balance Sheets as of December 31, 1997 and 1996........................................... 32
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995
and for the period from inception (January 23, 1990) to December 31, 1997.............................. 33
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995
and for the period from inception (January 23, 1990) to December 31, 1997.............................. 34
Consolidated Statement of Stockholders' Equity (Deficit) for the period from inception
(January 23, 1990) to December 31, 1997............................................................... 35
Notes to Consolidated Financial Statements............................................................. 37
</TABLE>
30
<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, 1997 and 1996 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, 1997 and the period cumulative from
inception (January 23, 1990) to December 31, 1997. 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, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997 and the period cumulative from inception (January 23, 1990) to December 31,
1997, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 28, 1998, except for
Note 14, as to which the date is
March 27, 1998.
31
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 13,923,115 $ 18,066,884
Short-term investments........................................................... 9,536,995 20,550,986
Inventory........................................................................ 424,320 --
Prepaid and other current assets................................................. 260,608 234,558
------------ ------------
Total current assets.......................................................... 24,145,038 38,852,428
Equipment and leasehold improvements, net............................................. 1,970,328 2,491,866
Deferred charges...................................................................... 2,499,000 --
Other assets.......................................................................... 50,300 40,986
------------ ------------
Total assets.................................................................. $ 28,664,666 $ 41,385,280
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............................................ $ 2,921,538 $ 1,747,961
Current portion of capital lease obligations..................................... 280,305 186,838
------------ ------------
Total current liabilities.................................................... 3,201,843 1,934,799
Long-term portion of capital lease obligations........................................ 327,442 385,256
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, 1997 and 1996
(liquidation preferences were $8,082,490 and $7,618,522,
at December 31, 1997 and 1996, respectively).................................. 5,207,820 4,743,852
Common stock, $.01 par value, authorized 50,000,000 at
December 31, 1997 and 1996; issued and outstanding
13,493,262 at December 31, 1997 and 13,048,036 shares
at December 31, 1996......................................................... 134,933 130,480
Additional paid-in capital...................................................... 101,469,182 97,158,840
Cumulative dividends on preferred stock......................................... (3,198,253) (2,734,285)
Deferred compensation........................................................... (874,473) (1,172,374)
Deficit accumulated during the development stage................................ (77,603,828) (59,061,288)
------------ ------------
Total stockholders' equity................................................... 25,135,381 39,065,225
------------ ------------
Total liabilities and stockholders' equity........................ $ 28,664,666 $ 41,385,280
============ ============
</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 OPERATIONS
<TABLE>
<CAPTION>
Period From
Inception
(January 23,
Years Ended December 31, 1990)
---------------------------------------------- through
1997 1996 1995 December 31, 1997
-------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C>
Revenues:
Licensing and supplier fees............ $ 355,671
Interest............................... $ 1,689,252 $ 1,397,521 $ 94,348 3,644,259
------------ ------------ ------------ ------------
1,689,252 1,397,521 94,348 3,999,930
Operating expenses:
Research and development............... 13,258,016 12,272,478 8,643,926 44,975,762
Purchase of in-process research and
development......................... -- 168,750 7,020,064 7,188,814
General and administrative............. 6,973,776 6,139,072 6,580,308 29,252,789
------------ ------------ ------------ ------------
20,231,792 18,580,300 22,244,298 81,417,365
------------ ------------ ------------ ------------
Net loss............................... (18,542,540) (17,182,779) (22,149,950) (77,417,435)
Accretion of dividends on preferred stock... (463,968) (437,332) (668,313) (2,912,186)
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............. $(19,006,508) $(17,620,111) $(31,960,562) $(89,471,920)
============ ============ ============ ============
Net loss per common share
(basic and diluted)...................... $(1.44) $(1.57) $(9.92)
============ ============ ============
Weighted average common shares outstanding
(basic and diluted)...................... 13,212,042 11,248,315 3,222,707
============ ============ ============
</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 CASH FLOWS
<TABLE>
<CAPTION>
Period from
Years Ended December 31, Inception (January
---------------------------------------------------- 23, 1990) through
1997 1996 1995 December 31, 1997
--------------- ---------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.......................... $(18,542,540) $(17,182,779) $(22,149,950) $(77,417,435)
Adjustments to reconcile net loss
to cash used by
operating activities:
Depreciation and amortization... 1,446,944 1,094,748 848,906 4,246,163
Noncash compensation............ 1,201,495 2,015,251 490,961 3,961,643
Noncash purchase of in-process
research and development....... -- 168,750 5,520,064 5,688,814
Noncash stock issuance for
renegotiated supplier
agreement...................... -- -- 1,747,931 1,747,931
Other noncash charges........... -- -- 86,347 114,678
Changes in operating assets and
liabilities:
Inventory..................... (424,320) (424,320)
Prepaid and other current
assets....................... (26,049) 205,818 (381,849) (260,607)
Other assets.................. (9,314) (21,560) 8,975 (102,442)
Accounts payable and accrued
expenses..................... 1,173,576 (1,261,385) 1,746,151 2,891,537
Deferred revenue.............. -- -- (184,615) 5,559,714
------------ ------------ ------------ ------------
Net cash used for operating
activities........................ (15,180,208) (14,981,157) (12,267,079) (53,994,324)
------------ ------------ ------------ ------------
Cash flows from investing
activities:
Purchase of short-term
investments...................... (41,330,582) (35,783,642) (6,325,502) (83,439,726)
Proceeds from maturity of
short-term investments............ 52,344,568 21,558,158 -- 73,902,725
Purchase of equipment and
leasehold improvements............ (659,202) (1,318,380) (737,335) (5,685,449)
Proceeds received on sale of
equipment........................ 6,000 -- -- 37,725
------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities.............. 10,360,784 (15,543,864) (7,062,837) (15,184,725)
------------ ------------ ------------ ------------
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................. (236,552) (114,338) (37,727) (409,938)
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 1,392,686
Proceeds received from capital
contributions.................... -- -- -- 102,176
Proceeds from issuance of Series B
and C redeemable convertible
preferred stock.................. -- -- 4,999,892 18,041,528
Proceeds from issuance of common
stock, net of issuance costs
($515,273 in 1996 and
$1,033,274 in 1995)............... 1,500 32,218,487 23,030,476 55,250,463
Proceeds from stock option
exercise......................... 910,707 41,665 -- 952,372
Proceeds from sale-leaseback
agreement......................... -- 549,718 -- 549,718
------------ ------------ ------------ ------------
Net cash provided by financing
activities........................ 675,655 32,695,532 33,345,307 83,102,164
------------ ------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents.............. (4,143,769) 2,170,511 14,015,391 13,923,115
Cash and cash equivalents at
beginning of period.............. 18,066,884 15,896,373 1,880,982 --
------------ ------------ ------------ ------------
Cash and cash equivalents at end
of period........................ $ 13,923,115 $ 18,066,884 $ 15,896,373 $ 13,923,115
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
34
<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 preferred 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 preferred stock...
Exercise of stock options.............................. 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 development for
common stock.......................................... 403,875 4,039 6,429,661
Common stock issuance related to supplier agreements... 229,575 2,296 3,158,679
Issuance of common stock............................... 33,394 334 533,970
Issuance of compensatory stock option grants........... 1,421,803
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
<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 preferred 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 preferred stock... (933,216) (933,216)
Exercise of stock options.............................. 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 development for
common stock.......................................... 6,433,700
Common stock issuance related to supplier agreements... 3,160,975
Issuance of common stock............................... 534,304
Issuance of compensatory stock option grants........... (1,421,803)
Dividends 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
</TABLE>
(Continued on page 36)
The accompanying notes are an integral part of the consolidated financial
statements
35
<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>
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 offering,
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
Accretion of dividends on preferred stock..... 463,968
Exercise of stock options..................... 295,226 2,953 907,754
Cancellation of compensatory stock option
grants....................................... (211,181)
Issuance of compensatory stock option grants.. 1,114,769
Common stock issuance related to renegotiated
supply agreement............................. 150,000 2,499,000
Amortization of deferred compensation........
Net loss for period........................... 1,500
------ ---------- ---------- ---------- ------------
Balance at December 31, 1997.................. 6,903 $5,207,820 13,493,262 $134,933 $101,469,182
====== ========== ========== ======== ============
<CAPTION>
Deficit
Accumulated Total
Cumulative During Stockholder's
Dividends on Deferred Development Equity
Preferred Stock Compensation Stage (Deficit)
--------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
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 offering,
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
Accretion of dividends on preferred stock..... (463,968)
Exercise of stock options..................... 910,707
Cancellation of compensatory stock option
grants....................................... 211,181
Issuance of compensatory stock option grants.. (664,768) 450,001
Common stock issuance related to renegotiated
supply agreement............................. 2,500,500
Amortization of deferred compensation........ 751,488 751,488
Net loss for period........................... (18,542,540) (18,542,540)
----------- ----------- ------------ ------------
Balance at December 31, 1997.................. $(3,198,253) $ (874,473) $(77,603,828) $ 25,135,381
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
36
<PAGE>
ERGO SCIENCE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Organization
Ergo Science Development Corporation ("ESDC") was incorporated on January
23, 1990. ESDC operated as an S Corporation from inception to September 10,
1992, when it converted to a C Corporation. In April 1995, ESDC went through a
recapitalization whereby all the stock of ESDC 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 ESDC. Subsequent to the
recapitalization, Ergo Science Holdings, Incorporated changed its name to Ergo
Science Corporation ("Ergo" or 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.
Recent Events
The Company announced in February 1998 that it had entered into a worldwide
joint collaboration with Johnson & Johnson to develop and commercialize
ERGOSET/(R)/ tablets, as well as other potential drug candidates acting through
the NRT mechanism, for the treatment of Type 2 diabetes and obesity. In the
United States, the parties will share equally in the development and
commercialization costs and any resulting profits and losses with respect to
ERGOSET/(R)/ tablets. Outside the United States, Johnson & Johnson is
responsible for development and commercialization activities and costs, and Ergo
will receive a royalty on any net trade sales of ERGOSET/(R)/ tablets in such
countries. See Note 14.
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, 1997 and 1996 cash equivalents were composed primarily of
investments in money market funds, United States government obligations and
commercial paper that mature within 90 days of purchase.
37
<PAGE>
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 commercial paper.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Uncertainties
The Company is subject to risks common to companies in the Pharmaceutical
Industry including, but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, and compliance with FDA governmental
regulations.
Net Loss Per Common Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS 128) "Earnings Per Share," which requires the
disclosure of Basic Earnings per Common Share and Diluted Earnings per Common
Share for all periods presented. At December 31, 1997, 1996 and 1995, the
Company had 1,828,894, 1,724,200 and 1,176,825 options outstanding,
respectively. Adoption of this statement has not affected the amounts presented
in any periods because the effect of including these equity instruments would be
anti-dilutive.
Prior to the adoption of this statement, all common and common equivalent
shares issued during the twelve-month period prior to the filing of the initial
public offering ("cheap stock") were included in the calculation of basic and
diluted loss per share as if they were outstanding for all periods presented.
Adoption of this statement, and the related guidance set out in Securities and
Exchange Commission Staff Bulletin No. 98, has eliminated the inclusion of cheap
stock from the calculation of basic and diluted loss per share prior to issuance
of the securities. Accordingly, basic and diluted loss per share in 1995 has
been restated from $8.06 to $9.92.
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.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
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.
38
<PAGE>
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.
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 7.
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>
1997 1996
----------- ------------
<S> <C> <C>
Commercial paper............... $6,461,033 $ 8,844,868
Federal agency notes........... 3,075,962 11,706,118
---------- -----------
Total short-term investments... $9,536,995 $20,550,986
========== ===========
</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 68 days of December 31,
1997.
3. INVENTORY
Pursuant to a supply agreement, the Company was responsible for the
purchase and supply of all active ingredient required for the manufacturing of
ERGOSET/(R)/ tablets. In the fourth quarter of 1997, the Company purchased
$424,320 of active ingredient to be used in the manufacturing of ERGOSET/(R)/
tablets, all of which was held as raw material at December 31, 1997. See Note 9
and Note 14.
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Furniture and equipment..................... $ 1,455,140 $ 1,004,758
Lab equipment............................... 2,442,471 2,074,539
Leasehold improvements...................... 2,031,594 1,939,831
----------- -----------
5,929,205 5,019,128
Accumulated depreciation and amortization... (3,958,877) (2,527,262)
----------- -----------
Equipment and leasehold improvements, net... $ 1,970,328 $ 2,491,866
=========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
was $1,446,944, $1,094,748 and $802,275, respectively.
Assets under capital leases, net of accumulated amortization at December
31, 1997 and 1996 were $616,264 and $598,786, respectively. See Note 12.
39
<PAGE>
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at
December 31,
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Accounts payable...................................... $ 424,488 $ 322,614
Accrued legal costs................................... 71,623 169,295
Accrued payroll and vacation.......................... 192,240 183,079
Accrued bonuses....................................... 389,744 284,580
Accrued severance agreement........................... 408,114 185,248
Accrued clinical development costs.................... 863,649 239,687
Accrued other expenses................................ 571,680 363,458
---------- ----------
Total accounts payable and accrued expenses...... $2,921,538 $1,747,961
========== ==========
</TABLE>
6. LEASES
The Company leases office and research space and office equipment under
operating lease arrangements which expire on various dates through the year
2003. 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,
1997:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
1998..................................... $363,432 $ 600,579
1999..................................... 250,910 514,360
2000..................................... 116,242 393,749
2001..................................... -- 377,663
2002..................................... -- 377,663
Thereafter............................... -- 377,663
-------- ----------
730,584 $2,641,677
==========
Less amounts representing interest....... 122,837
--------
Present value of minimum lease payments.. 607,747
Less current portion of capital lease
obligations............................ 280,305
--------
Long-term portion of capital lease
obligations............................ $327,442
========
</TABLE>
Rent expense for the years December 31, 1997, 1996 and 1995 amounted to
$668,594, $657,574, and $251,637, respectively.
Cash paid for interest on capital leases was $144,264, $51,206, and $13,908
in 1997, 1996 and 1995, respectively.
40
<PAGE>
7. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
as of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Equipment and leasehold improvements.......... $ 565,000 $ 315,000
Research and development credits.............. 857,000 1,680,000
Deferred compensation......................... 350,000 469,000
Intangible amortization....................... 272,000 560,000
Net operating loss............................ 26,239,000 17,835,000
------------ ------------
Total deferred tax assets........................ 28,283,000 20,859,000
Valuation allowance for deferred tax assets...... (28,283,000) (20,859,000)
------------ ------------
-- --
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, 1997 and 1996 were increases of $7,424,000 and $6,547,000, respectively.
As of December 31, 1997, the Company had net operating loss carryforwards
for income tax purposes of approximately $66 million which expire through 2017.
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.
8. 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.
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 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
41
<PAGE>
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.
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
$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.
42
<PAGE>
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 9 for a description of Series D Preferred Stock.
9. 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.
License fees of $1,950,000 and supplier contract fees of $1,750,000
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.
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
43
<PAGE>
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 11
for a description of the novative license and royalty agreement.
In October 1997, the Company amended and restated the agreement with its
drug supplier. Under the amended and restated agreement, the Company agreed to
purchase its worldwide supply of ERGOSET/(R)/ tablets from the supplier on a
"cost-plus" basis. This cost arrangement will result in a lower unit cost for
the product over the term of the contract. The Company also shortened the term
of the agreement, agreed to make additional payments to the supplier upon the
occurrence of certain regulatory events and for performance of the agreement for
a specified period and issued to the supplier shares of the Company's common
stock, with a fair value of $2,499,000. This deferred charge has been
capitalized and will be amortized on a straight line basis over a period of 42
months commencing on the first day after Ergo receives written communication
from the FDA approving the NDA of ERGOSET/(R)/ tablets for the treatment of Type
2 diabetes. In February 1998, the Company assigned its rights and obligations,
other than certain specified existing obligations, under the amended and
reststated agreement to Johnson & Johnson under the terms of a worldwide Joint
Collaboration and License Agreement. See Note 14.
10. 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
generally have a maximum term of ten years.
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 adopted the disclosure provisions of SFAS 123 and applies 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 to 1995 and additional awards in future years
are anticipated. Had compensation cost for the Company's stock-based
44
<PAGE>
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, 1997, 1996 and 1995 would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ----------------------- ----------------------
Net Loss to Loss Net Loss to Loss Net Loss to Loss
Common Per Common Per Common Per
Stockholder Share Stockholder Share Stockholder Share
----------- ------- ------------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
As Reported................ $19,006,508 $1.44 $17,620,111 $1.57 $31,960,562 $9.92
Pro Forma.................. $20,277,206 $1.53 $18,334,693 $1.63 $32,072,056 $9.95
</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:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Expected Life......................... 5 years 5 years 5 years
Expected Volatility................... 50% 44% 44%
Dividend Yield........................ 0% 0% 0%
Weighted Average Risk-free
Interest Rate........................ 5.44% 6.56% 5.85%
</TABLE>
The weighted average fair value of options granted in 1997, 1996 and 1995 was
$6.72, $6.61 and $3.87 per share, 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 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. Also 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 remaining balance is vesting over three years.
During 1996, the Company granted to various employees options to purchase
771,395 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, 493,550 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.
During 1997, the Company granted to various employees options to purchase
555,100 shares of common stock at exercise prices ranging from $7.00 to $17.00
per share. Of the total number of options issued in 1997, 355,100 were issued at
prices equal to the market prices on the grant dates. The remaining 200,000
options were granted at prices below market: 100,000 options were issued in
conjunction with the resignation of a Company senior executive and 100,000
options were issued to the newly appointed CEO. In connection with the issuance
of these options, the Company recorded compensation expense of $491,930 in 1997
and will record an additional $245,570 over the next 41 months.
45
<PAGE>
In addition, the vesting period of 21,250 shares of stock were accelerated in
conjunction with the resignation of a second Company senior executive which
resulted in a compensation charge of $197,413 in 1997.
In 1997, the Company also granted to each of its six medical advisors an
option to purchase 5,000 shares of common stock at an exercise price of $12.63
per share. These options were granted in connection with the medical advisors'
renegotiated consulting agreements. The option shares were issued at the
market price on the date of grant and vest over a four year period. The fair
value of these options total $175,388 and is being amortized on a straight line
basis over 22 months, the life of the consulting agreements. In 1997, the
Company recognized $23,917 in deferred compensation expense related to these
options.
Information related to stock option activity for the period from inception
to December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Weighted
--------
Average
-------
Shares Option Price
--------- -------------
<S> <C> <C>
Outstanding at December 31, 1991...
Granted ..................... 394,725 $0.80
---------
Outstanding at December 31, 1992... 394,725 0.80
Granted ..................... 31,250 0.80
---------
Outstanding at December 31, 1993... 425,975 0.80
Granted ..................... 100,000 0.80
Exercised ................... (25) 0.80
---------
Outstanding at December 31, 1994... 525,950 0.80
Granted ..................... 651,625 6.82
Canceled .................... (750) 6.71
---------
Outstanding at December 31, 1995... 1,176,825 4.13
Granted ..................... 771,395 10.68
Exercised ................... (41,000) 1.02
Canceled .................... (183,020) 7.36
---------
Outstanding at December 31, 1996... 1,724,200 6.70
Granted ..................... 586,600 11.41
Exercised ................... (295,226) 3.08
Canceled .................... (186,680) 10.49
---------
Outstanding at December 31, 1997... 1,828,894 $8.41
=========
</TABLE>
46
<PAGE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<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>
$0.80 300,450 6.0 years $ 0.80 300,450 $ 0.80
6.71 to 9.00 713,292 7.7 years $ 6.81 465,033 $ 6.85
9.50 to 15.00 603,282 9.1 years $10.82 87,438 $11.78
16.00 to 23.50 211,870 9.5 years $17.70 18,505 $20.62
--------- -------
$0.80 to 23.50 1,828,894 871,426
========= =======
</TABLE>
The following table summarizes information about stock options granted in
1997:
<TABLE>
<CAPTION>
Weighted Average Price Weighted Average Fair Value
Per Share Per Share
---------------------- ---------------------------
<S> <C> <C>
Shares Granted Above Market Price.... -- --
Shares Granted At Market Price....... $13.05 $6.47
Shares Granted Below Market Price.... $ 8.25 $7.20
</TABLE>
At December 31, 1997 there were 1,828,894 options outstanding at a weighted
average price of $8.41 of which 871,426 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 $1,201,495, $2,015,251 and $490,961 in 1997, 1996 and
1995, respectively. In 1997 and 1996, fair market value was based on market
price. The $874,473 remaining deferred compensation at December 31, 1997 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, 1997, 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 1,866,750, 1,431,525 and 731,525 shares,
respectively (for which common shares have been reserved). Awards of options to
provide 586,600, 661,395 and 631,625 shares at exercise prices of $7.00 -$17.00,
$6.71-$23.50, and $6.71-$9.00 per share, respectively, were granted under the
Incentive Plan in 1997, 1996 and 1995, 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
47
<PAGE>
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. There were no shares granted in 1997. These amounts are
included in the tables above.
11. COMMITMENTS AND CONTINGENCIES
The Company has a royalty agreement with LSU under which the Company pays
LSU a royalty based upon gross sales in the United States and a percentage of
revenues the Company receives outside of the United States. 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 in the United States with minimum royalties due.
12. 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 $272,205 and $58,290 were incurred in 1997
and 1995, 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 4.
13. EMPLOYEE BENEFIT PLANS
Effective February 1, 1997, the Company implemented a defined contribution
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
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<PAGE>
employee's gross salary. The employer matching contribution vests over a four
year period, 25% for each year of service. Years of service prior to the
implementation of the 401k Plan are excluded from the vesting period. In 1997,
the Company's contributions to the 401k Plan amounted to $74,014.
14. SUBSEQUENT EVENTS
On February 23, 1998, Ergo and Johnson & Johnson entered into a worldwide
Joint Collaboration and License Agreement (the "Joint Collaboration Agreement")
to develop and commercialize ERGOSET/(R)/ tablets as well as other potential
collaboration products for the treatment of Type 2 diabetes and obesity. In
March 1998, Johnson & Johnson made payments to Ergo totaling $20 million,
including payment of a $10 million license fee and the purchase of $10 million
of Ergo common stock. Under the Joint Collaboration Agreement with Johnson &
Johnson, the Company is responsible for paying half of the development,
marketing, and commercialization costs, including launch costs, for ERGOSET/(R)/
tablets as well as any other collaboration compounds being developed and/or
commercialized under the Joint Collaboration Agreement. In addition, the Company
assigned its rights and obligations, other than certain specified existing
obligations, under the amended and restated supply agreement for ERGOSET/(R)/
tablets to Johnson & Johnson. Under the amended agreement, the supplier is to
receive payments contingent upon the occurrence of specific events. The
obligation for these contingent payments will be that of Johnson & Johnson, and
the Company will subsequently reimburse Johnson & Johnson for its half of such
payments.
The Company is dependent on future payments from Johnson & Johnson to
continue the development and commercialization of ERGOSET/(R)/ tablets. Under
the Joint Collaboration Agreement, Johnson & Johnson has primary responsibility
for commercializing ERGOSET/(R)/ tablets. If Johnson & Johnson desires to
discontinue the collaboration, it can terminate the Joint Collaboration
Agreement with the Company at any time subject to the possibility of paying
penalties in certain circumstances. In addition, Johnson & Johnson has the right
to terminate the Joint Collaboration Agreement at any time based on material
safety or tolerability issues. Johnson & Johnson may also elect not to jointly
develop or commercialize other second-generation compounds for the treatment of
diabetes or obesity or existing collaboration compounds for additional
indications, in which case the Company would not be able to commercialize such
compound for those indications during the term of the Joint Collaboration
Agreement.
49
<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 1998 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 1998 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 1998 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 1998 Annual
Meeting of Stockholders is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(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 30 of this Report.
(a)(2) -- None.
(a)(3) -- The following documents are filed or incorporated by reference as
exhibits to this Report:
Exhibit
Number Document Description
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.
50
<PAGE>
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 Certificates 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.
51
<PAGE>
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.
52
<PAGE>
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.
53
<PAGE>
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.
54
<PAGE>
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 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 filed
with the Commission on November 13, 1996 and incorporated by
reference herein.
10.36 -- Resignation Agreement dated March 26, 1997, between the Company
and Manuel Cincotta, Jr. Filed as exhibit 10.36 to the Company's
annual filing on Form 10-K filed with the Commission on March 31,
1997 and incorporated by reference herein.
10.37 -- Option Agreement dated March 26, 1997, between the Company and
Manuel Cincotta, Jr. Filed as exhibit 10.37 to the Company's
annual filing on Form 10-K filed with the Commission on March 31,
1997 and incorporated by reference herein.
10.38 -- License Agreement effective as of February 1, 1997, between The
General Hospital Corporation and Ergo Science Corporation and
Ergo Research Corporation. Filed as Exhibit 10.1 to the Company's
quarterly filing on Form 10-Q filed with the Commission on May
15, 1997 and incorporated by reference herein. [Portions of this
exhibit have been omitted and filed separately with the
Commission in accordance with Rule 406 of the Securities Act and
the Company's request for confidential treatment.]
10.39 -- Amended and Restated Supply Agreement dated October 31, 1997, by
and among Ergo Science Corporation, Ergo Research Corporation and
Geneva Pharmaceuticals, Inc. Filed as exhibit 10.1 to the
Company's quarterly filing on Form 10-Q filed with the Commission
on November 14, 1997 and incorporated by reference
herein.[Portions of this exhibit have been omitted and filed
separately with the Commission in accordance with Rule 406 of the
Securities Act and the Company's request for confidential
treatment.]
55
<PAGE>
10.40 -- Second Amendment to Ergo Science Corporation Amended and Restated
1995 Long-Term Incentive Plan. Filed with the Commission on
December 9, 1997 (Incorporated by reference to exhibit 10.3 to
the Company's Registration Statement on Form S-8, file number
333-41791).
10.41 -- Joint Collaboration and License Agreement dated February 23,
1998, by and between Ergo Science Corporation, Ergo Research
Corporation , The R.W. Johnson Pharmaceutical Research Institute,
ORTHO-McNeil Pharmaceutical, Inc. and Cilag AG International.
Filed with the Commission on March 10, 1998 on Form 8-K, file
number 000-26988, and incorporated by reference herein.
10.42 -- Stock Purchase Agreement dated February 23, 1998, by and betweeen
Ergo Science Corporation and Johnson & Johnson Development
Corporation filed with the Commission on March 10, 1998 on
Form 8-K, file number 000-26988, and incorporated by reference
herein.
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 1997.
56
<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 30, 1998.
ERGO SCIENCE CORPORATION
By: /s/ Francis M. Ferrara, Jr.
------------------------------------------
(Francis M. Ferrara, Jr.)
Controller (principal financial and 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>
<S> <C> <C>
/s/ Ronald H. Abrahams, Ph.D. President, Chief Executive Officer and March 30, 1998
- ------------------------------ Chairman of the Board and Director
(Ronald H. Abrahams, Ph.D.) (Principal Executive Officer)
/s/ Francis M. Ferrara, Jr.
- ------------------------------ Controller (principal financial and March 30, 1998
(Francis M. Ferrara, Jr.) accounting officer)
/s/ Anthony H. Cincotta, Ph.D.
- ------------------------------ Director March 30, 1998
(Anthony H. Cincotta, Ph.D.)
/s/ Stephen A. Duzan
- ------------------------------ Director March 30, 1998
(Stephen A. Duzan)
/s/ Ray L. Hunt
- ------------------------------ Director March 30, 1998
(Ray L. Hunt)
/s/ Thomas F. McWilliams
- ------------------------------ Director March 30, 1998
(Thomas F. McWilliams)
/s/ Albert H. Meier, Ph.D.
- ------------------------------ Director March 30, 1998
(Albert H. Meier, Ph.D.)
/s/ Stephen P. Smiley
- ------------------------------ Director March 30, 1998
(Stephen P. Smiley)
/s/ David L. Castaldi
- ------------------------------ Director March 30, 1998
(David L. Castaldi)
/s/ W. Leigh Thompson
- ------------------------------ Director March 30, 1998
(W. Leigh Thompson)
</TABLE>
57
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Document Description
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 Certificates 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.
58
<PAGE>
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.
59
<PAGE>
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.
60
<PAGE>
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.
61
<PAGE>
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 -- Resignation Agreement dated March 26, 1997, between the Company
and Manuel Cincotta, Jr. Filed as exhibit 10.36 to the Company's
annual filing on Form 10-K filed with the Commission on March 31,
1997 and incorporated by reference herein.
10.37 -- Option Agreement dated March 26, 1997, between the Company and
Manuel Cincotta, Jr. Filed as exhibit 10.37 to the Company's
annual filing on Form 10-K filed with the Commission on March 31,
1997 and incorporated by reference herein.
10.38 -- License Agreement effective as of February 1, 1997, between The
General Hospital Corporation and Ergo Science Corporation and
Ergo Research Corporation. Filed as Exhibit 10.1 to the Company's
quarterly filing on Form 10-Q filed with the Commission on May
15, 1997 and incorporated by reference herein. [Portions of this
exhibit have been omitted and filed separately with the
Commission in accordance with Rule 406 of the Securities Act and
the Company's request for confidential treatment.]
10.39 -- Amended and Restated Supply Agreement dated October 31, 1997, by
and among Ergo Science Corporation, Ergo Research Corporation and
Geneva Pharmaceuticals, Inc. Filed as exhibit 10.1 to the
Company's quarterly filing on Form 10-Q filed with the Commission
on November 14, 1997 and incorporated by reference
herein.[Portions of this exhibit have been omitted and filed
separately with the Commission in accordance with Rule 406 of the
Securities Act and the Company's request for confidential
treatment.]
62
<PAGE>
10.40 -- Second Amendment to Ergo Science Corporation Amended and Restated
1995 Long-Term Incentive Plan. Filed with the Commission on
December 9, 1997 (Incorporated by reference to exhibit 10.3 to
the Company's Registration Statement on Form S-8, file number
333-41791).
10.41 -- Joint Collaboration and License Agreement dated February 23,
1998, by and between Ergo Science Corporation, Ergo Research
Corporation , The R.W. Johnson Pharmaceutical Research Institute,
ORTHO-McNeil Pharmaceutical, Inc. and Cilag AG International.
Filed with the Commission on March 10, 1998 on Form 8-K, file
number 000-26988, and incorporated by reference herein.
10.42 -- Stock Purchase Agreement dated February 23, 1998, by and betweeen
Ergo Science Corporation and Johnson & Johnson Development
Corporation filed with the Commission on March 10, 1998 on Form
8-K, file number 000-26988, and incorporated by reference herein.
21 -- Subsidiaries of registrant.
23.1 -- Consent of Coopers & Lybrand L.L.P.
27 -- Financial data schedule
63
<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. 333-41791) of our report,
dated February 28, 1998, except for Note 14, as to which the date is March 27,
1998, on our audits of the consolidated financial statements of Ergo Science
Corporation as of December 31, 1997 and 1996, and for each of the three years in
the period ended December 31, 1997, and the period cumulative from inception
(January 23, 1990) to December 31, 1997, which report is included in this Annual
Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 30, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,923,115
<SECURITIES> 9,536,995
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 424,320
<CURRENT-ASSETS> 24,145,038
<PP&E> 5,929,205
<DEPRECIATION> 3,958,877
<TOTAL-ASSETS> 28,664,666
<CURRENT-LIABILITIES> 3,201,843
<BONDS> 0
0
5,207,820
<COMMON> 134,933
<OTHER-SE> 19,792,628
<TOTAL-LIABILITY-AND-EQUITY> 28,664,666
<SALES> 0
<TOTAL-REVENUES> 1,689,252
<CGS> 0
<TOTAL-COSTS> 20,231,792
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<INCOME-PRETAX> (18,542,540)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,542,540)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (18,542,540)
<EPS-PRIMARY> (1.44)
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