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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
-OR-
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from...to...
Commission File No. 0-24936
ERGO SCIENCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3271667
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
790 TURNPIKE STREET
NORTH ANDOVER, MASSACHUSETTS 01845
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 974-9474
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At April 30, 2001 there were 14,299,217 shares of common stock, par value $.01
per share, of the registrant outstanding.
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ERGO SCIENCE CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2001 (Unaudited) and
December 31, 2000 3
Unaudited Consolidated Statements of Operations for the three
months ended March 31, 2001 and 2000 4
Unaudited Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 11
PART II. OTHER INFORMATION 12
SIGNATURES 13
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ERGO SCIENCE CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2001 2000
---------------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 8,504,931 $ 10,130,599
Short-term investments 18,221,988 16,958,488
Prepaid and other current assets 15,443 18,739
------------ ------------
Total current assets 26,742,362 27,107,826
Equipment and leasehold improvements, net 18,736 21,793
------------ ------------
Total assets $ 26,761,098 $ 27,129,619
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 730,304 $ 983,131
------------ ------------
Total current liabilities 730,304 983,131
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized; 6,903
shares of Series D preferred stock issued and outstanding at
March 31, 2001 and December 31, 2000 (liquidation preference
of $9,794,251 at March 31, 2001) 6,919,581 6,776,250
Common stock, $.01 par value, authorized 50,000,000 at March 31, 2001;
issued and outstanding 14,299,217 at March 31, 2001 and
December 31, 2000 142,993 142,993
Additional paid-in capital 111,808,824 111,808,824
Cumulative dividends on preferred stock (4,910,014) (4,766,683)
Accumulated deficit (87,930,590) (87,814,896)
------------ ------------
Total stockholders' equity 26,030,794 26,146,488
------------ ------------
Total liabilities and stockholders' equity $ 26,761,098 $ 27,129,619
============ ============
The accompanying notes are an integral part of the consolidated
financial statements
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ERGO SCIENCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
---- ----
Operating expenses:
Research and development $ 4,987 $ 45,229
General and administrative 509,342 334,140
----------- -----------
514,329 379,369
----------- -----------
Net operating loss (514,329) (379,369)
Other income:
Interest 398,635 431,902
----------- -----------
Net income (loss) (115,694) 52,533
Accretion of dividends on preferred stock (143,331) (135,102)
----------- -----------
Net loss to common stockholders $ (259,025) $ (82,569)
=========== ===========
Loss per common share:
Basic and Diluted $ (0.02) $ (0.01)
=========== ===========
Weighted average common shares outstanding:
Basic and Diluted 14,299,217 14,271,871
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements
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ERGO SCIENCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
----------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income (loss) $ (115,694) $ 52,533
Adjustments to reconcile net income (loss) to cash used in
operating activities:
Depreciation and amortization 3,057 7,534
Changes in operating assets and liabilities:
Prepaid and other current assets 3,296 7,584
Accounts payable and accrued expenses (252,827) (401,226)
----------- -----------
Net cash used in operating activities (362,168) (333,575)
----------- -----------
Cash flows from investing activities:
Purchase of short-term investments (9,626,272) (1,471,327)
Proceeds from maturity of short-term investments 8,362,772 1,369,128
Purchase of equipment and leasehold improvements -- (5,445)
----------- -----------
Net cash used in investing activities (1,263,500) (107,644)
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Cash flows from financing activities:
Proceeds from stock options exercised -- 23,800
----------- -----------
Net decrease in cash and cash equivalents (1,625,668) (417,419)
Cash and cash equivalents at beginning of period 10,130,599 4,292,631
----------- -----------
Cash and cash equivalents at end of period $ 8,504,931 $ 3,875,212
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements
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ERGO SCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements are unaudited and have been
prepared by Ergo Science Corporation ("Ergo" or the "Company") in accordance
with generally accepted accounting principles.
Certain information and footnote disclosure normally included in the
Company's annual financial statements have been condensed or omitted. The
interim financial statements, in the opinion of management, reflect all
adjustments (including normal recurring accruals) necessary for a fair statement
of the results for the interim periods ended March 31, 2001 and 2000.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
These interim financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 2000, which are
contained in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
2. CASH EQUIVALENTS
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 March 31, 2001 and December 31, 2000, cash equivalents were composed
primarily of investments in money market funds, United States government
obligations and high grade commercial paper that mature within 90 days of
purchase.
3. SHORT-TERM INVESTMENTS
The following is a summary of securities with maturities greater than
90 days not classified as cash and cash equivalents. All short-term investments
are classified as held-to-maturity.
MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
Commercial paper $11,772,542 $ 9,504,011
Federal agency notes 6,449,446 7,454,477
----------- -----------
Total short-term investments $18,221,988 $16,958,488
=========== ===========
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Since these held-to-maturity securities are short-term in nature,
changes in market interest rates would not have a significant effect on the
fair value of these securities. These securities are carried at amortized
cost, which approximates fair value.
4. NET LOSS PER COMMON SHARE
Basic net loss per share is computed using the weighted average
number of shares of common stock outstanding. Net loss used in the
calculation is increased by the accretion of dividends on the preferred
stock. Diluted net loss per share does not differ from basic net loss per
share since potential common shares from conversion of preferred stock and
exercise of stock options are anti-dilutive for all periods presented and are
therefore excluded from the calculation. During the periods ended March 31,
2001 and 2000, options to purchase 373,750 and 563,475 shares of common
stock, respectively, and preferred stock convertible into 12,047,049 and
5,574,893 shares of common stock, respectively, were not included in the
computation of diluted net loss per share since their inclusion would be
antidilutive.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING
STATEMENTS REFLECT ERGO'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,
o ERGO IS A COMPANY IN TRANSITION;
o ERGO'S COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL
MARKET SYSTEM AND MAY BECOME SUBJECT TO RULES RELATING TO
LOW-PRICED OR PENNY STOCK;
o THE COMPANY IS TAKING STEPS WHICH COULD LEAD TO THE SALE OR
LICENSE OF ITS INTERESTS (INCLUDING ITS INTELLECTUAL PROPERTY
RIGHTS) IN ERGOSET(R) AND ITS OTHER HUMAN DRUG RELATED ASSETS;
o THE COMPANY MAY ELECT TO USE ALL OF ITS CASH AND OTHER ASSETS,
AND MAY NEED SIGNIFICANT ADDITIONAL FUNDING TO ACQUIRE AND
OPERATE ONE OR MORE INCOME-PRODUCING BUSINESSES;
o THE COMPANY MAY RAISE CAPITAL BY SELLING COMMON STOCK AND
OTHER SECURITIES;
o AN APPROVABLE LETTER DOES NOT MEAN THAT A PRODUCT WILL BE
APPROVED, PARTICULARLY WHERE, AS HERE, IT IS NECESSARY TO
SATISFY FDA (PRIOR TO APPROVAL) THAT THERE IS NOT AN INCREASED
RISK OF A SERIOUS ADVERSE EVENT;
o COMPETITION IN THE ANTI-DIABETIC MARKET IS INTENSE; OTHER
PRODUCTS HAVE BEEN RECENTLY APPROVED FOR THIS INDICATION AND
OTHER COMPANIES ARE DEVELOPING COMPETING PRODUCTS; AND
o THE NEED FOR ADDITIONAL FUNDING TO SUPPORT IMPLEMENTATION OF
AN ALTERNATIVE STRATEGIC DIRECTION.
FURTHER INFORMATION AND ADDITIONAL IMPORTANT FACTORS ARE SET FORTH
IN REPORTS AND OTHER FILINGS OF THE COMPANY WITH THE SECURITIES AND EXCHANGE
COMMISSION, INCLUDING, WITHOUT LIMITATION, THE 2000 ANNUAL REPORT ON FORM 10-K,
GENERALLY UNDER THE SECTION ENTITLED "RISK FACTORS." ERGO 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
Ergo Science Corporation ("Ergo" or the "Company") is a company in
transition. Since 1990, the Company has been engaged in developing ERGOSET(R)
tablets for the treatment of type 2 diabetes and other metabolic disorders. Over
the last several years, however, the Company has been unable to persuade the
U.S. Food and Drug Administration (the "FDA") to approve ERGOSET(R) for
marketing. Although ERGOSET(R) is considered "approvable" by the FDA, the FDA
has required, prior to granting approval, an additional clinical trial to rule
out a possible increased risk of a serious adverse event with the use of
ERGOSET(R). After discussions with the FDA and its own consultants regarding the
scope and complexity of the additional clinical trial, the Board of Directors of
the Company believes that the next phase of the development of ERGOSET(R) will
be better undertaken by a company that has more experience with human drug
development and more resources for regulatory approval and marketing than Ergo.
Accordingly,
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the Company has begun the process of attempting to sell or license its interests
in ERGOSET(R) (including its intellectual property rights) and its other human
drug related assets (collectively, the "Science Assets").
The Company's Board of Directors is also taking additional steps to
try to enhance shareholder value. One alternative that the Company is
considering is the purchase of an income-producing business. In order to
purchase an income-producing business, the Company may need to raise
additional equity capital by selling Common Stock.
In addition to the capital it may raise from selling common stock and
other securities, in order to complete any such acquisition and to operate
thereafter, the Company may require additional debt and/or equity financing
which, if available on acceptable terms, may involve leveraging the Company's
assets and granting rights to lender(s) superior to those of existing
shareholders, issuing preferred stock or other securities with rights superior
to those of existing shareholders and/or issuing additional common stock that
would dilute existing shareholders. The Company is also evaluating the
implementation of restrictions on transfer of its Common Stock to help to
protect its NOLs. During this transition period, the Company intends to continue
to conserve its cash and other assets.
From inception through 2000, the Company has been unprofitable.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 2001
Research and development expenses decreased from $45,229 to $4,987 for
the three month period ended March 31, 2000 and 2001, respectively. This
decrease was mainly due to the reduction of the Company's workforce and the
discontinued funding of all its pre-clinical development programs.
General and administrative expenses increased from $334,140 to $509,342
for the three month period ended March 31, 2000 and 2001, respectively. The
increase was mostly attributable to legal costs incurred by the Company in
evaluating its strategic alternatives and the process of attempting to sell or
license its interest in ERGOSET(R) and its other human drug related assets.
Interest income decreased from $431,902 to $398,635 for the three month
period ended March 31, 2000 and 2001, respectively. The use of cash to fund the
Company's operations resulted in a decrease of cash available for investment.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's primary source of cash has been
financing activities, which have consisted of private placements of equity
securities, two public offerings, and the sale of common stock in conjunction
with the Joint Collaboration Agreement. Private placements of equity securities
provided the Company with aggregate proceeds of $42,999,000 through 1998. On
December 19, 1995, the Company raised $23,030,476 from the sale of stock in an
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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.
On February 23, 1998, Ergo and Johnson & Johnson entered into 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. In addition, Johnson & Johnson had 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 and reimbursement of certain development expenses
subject to the terms of the Joint Collaboration Agreement. The Joint
Collaboration Agreement was terminated on January 3, 1999; therefore there will
be no further financial support from this arrangement.
Cash, cash equivalents and short-term investments were $26,726,919 and
$27,089,087 at March 31, 2001 and December 31, 2000, respectively. The overall
decrease in cash, cash equivalents and short-term investments at March 31, 2001,
was due primarily to the funding of the operating activities of the Company.
The Company believes its current cash, cash equivalents and short-term
investments will fund its current operations at least through 2001. In the event
that the Company purchases an income-producing business, the Company will
require additional capital.
The terms of the Company's Series D Preferred Stock prohibit the
Company from paying dividends on the common stock.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The new standard establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. The Company adopted SFAS No. 133, effective January 1, 2001. SFAS
No. 133 did not effect Company's financial position or results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in the Company's exposure to market risk
from December 31, 2000.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K:
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ERGO SCIENCE CORPORATION
By: /s/ J. Richard Crowley
--------------------------------
J. Richard Crowley
Controller (principal accounting
officer)
Date: MAY 15, 2001
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