<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
-OR-
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from...to...
Commission File No. 0-24936
ERGO SCIENCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3271667
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
CHARLESTOWN NAVY YARD
100 FIRST AVENUE, FOURTH FLOOR
CHARLESTOWN, MASSACHUSETTS 02129
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 241-6800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At August 1, 1996 there were 10,168,080 shares of common stock, par value $.01
per share, of the registrant outstanding.
================================================================================
<PAGE>
ERGO SCIENCE CORPORATION
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995.................................... 3
Consolidated Statements of Operations and Deficit
Accumulated During the Development Stage
for the three months and six months ended
June 30, 1996 and June 30, 1995 and for the period
from inception (January 23, 1990) to June 30, 1996....... 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 1996 and June 30, 1995 and for
the period from inception (January 23, 1990)
to June 30, 1996......................................... 5
Notes to Consolidated Financial Statements...................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 8
PART II. OTHER INFORMATION................................................ 11
SIGNATURES................................................................. 12
</TABLE>
2
<PAGE>
ERGO SCIENCE CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 9,383,049 $ 15,896,373
Short-term investments.............. 3,735,886 6,325,502
Prepaid and other current assets.... 652,809 440,376
------------- -------------
Total current assets............... 13,771,744 22,662,251
Equipment and leasehold improvements,
net.................................... 2,192,452 2,268,234
Other assets 35,868 19,426
------------- -------------
Total assets....................... $ 16,000,064 $ 24,949,911
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses........................... $ 841,958 $ 2,313,847
Accrued legal costs................. 191,711 695,499
Current portion of capital lease
obligations........................ 210,002 43,114
------------- -------------
Total current liabilities.......... 1,243,671 3,052,460
Long-term portion of capital lease
obligations............................ 453,109 93,600
Commitments and contingencies........... _ _
Stockholders' equity:
Preferred stock, $.01 par value,
10,000,000 shares authorized;
6,903 shares of Series D preferred
stock issued and outstanding
at June 30, 1996 and December
31, 1995........................... 4,521,954 4,306,520
Common stock, $.01 par value,
authorized 50,000,000 at
June 30, 1996 and December 31,
1995; and outstanding 10,168,080
shares at June 30, 1996 and
10,145,580 shares at December
31, 1995........................... 101,681 101,456
Additional paid-in capital.......... 64,099,251 63,420,487
Cumulative dividends on preferred
stock.............................. (2,512,387) (2,296,953)
Deferred compensation............... (2,033,807) (1,849,150)
Deficit accumulated during the
development stage .................. (49,873,408) (41,878,509)
------------- -------------
Total stockholders' equity........ 14,303,284 21,803,851
------------- -------------
Total liabilities and
stockholders' equity........... $ 16,000,064 $ 24,949,911
============= =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
3
<PAGE>
ERGO SCIENCE CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT ACCUMULATED
DURING THE DEVELOPMENT STAGE
<TABLE>
<CAPTION>
Period From
Inception
Three Months Ended June 30, Six Months Ended June 30, (January 23, 1990)
-------------------------------- -------------------------- through
1996 1995 1996 1995 June 30, 1996
-------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Licensing and supplier fees.. 355,671
Interest..................... $ 195,914 $ 23,140 $ 466,316 $ 40,408 $ 1,023,802
----------- ----------- ------------ ------------ ------------
195,914 23,140 466,316 40,408 1,379,473
Operating expenses:
Research and development..... 3,124,768 2,049,573 6,051,177 4,010,766 25,496,445
Purchase of in-process
research and development..... _ 5,520,000 168,750 5,520,000 7,188,814
General and administrative... 1,168,160 970,724 2,241,288 2,901,173 18,381,229
----------- ------------ ------------ ------------ ------------
4,292,928 8,540,297 8,461,215 12,431,939 51,066,488
----------- ----------- ----------- ------------ ------------
Net loss.................. (4,097,014) (8,517,157) (7,994,899) (12,391,531) (49,687,015)
Accretion of dividends on
preferred stock................ (108,784) (364,790) (215,434) (633,071) (2,226,320)
Dividends on redeemable
preferred stock................ _ _ _ _ (7,123,536)
Dividends on preferred
stock.......................... _ _ _ _ (2,018,763)
---------- ---------- ---------- ---------- ----------
Net loss to common
stockholders.................. $(4,205,798) $(8,881,947) $(8,210,333) $(13,024,602) $(61,055,634)
=========== =========== =========== ============ ============
Net loss per common share...... $(.41) $(2.28) $(.81) $(3.35)
=========== =========== =========== ============
Weighted average common
shares outstanding ........... 10,168,080 3,887,838 10,157,489 3,887,838
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
4
<PAGE>
ERGO SCIENCE CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From Inception
Six Months Ended June 30, (January 23, 1990)
----------------------------------------- through
1996 1995 June 30, 1996
----------------------- ---------------- -------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................... $(7,994,899) $(12,391,531) $(49,687,015)
Adjustments to reconcile net loss to
cash used by operating
activities:
Depreciation and amortization........ 961,059 615,310 3,410,428
Noncash purchase of in-process
research and development........... 168,750 5,520,000 5,688,814
Loss on sale of equipment............ _ _ 28,331
Noncash charge for renegotiated
supplier agreement................. _ 1,089,356 1,747,931
Other noncash charges................ _ 18,018 86,347
Changes in operating assets and
liabilities:
Prepaid and other current assets.... (212,432) (6,373) (652,808)
Other assets........................ (16,446) 13,404 (88,014)
Accounts payable and accrued
expenses........................... (2,144,427) (256,129) 834,918
Deferred revenue.................... _ _ 5,559,714
------------ ------------ ------------
Net cash used in operating activities (9,238,395) (5,397,945) (33,071,354)
------------- ------------ ------------
Cash flows from investing activities:
Purchase of short-term investments... (3,992,884) _ (10,318,386)
Proceeds from sale and maturity of
short-term investments............. 6,582,501 _ 6,582,501
Purchase of equipment and leasehold
improvements....................... (408,943) (429,046) (4,116,810)
Proceeds received on sale of
equipment.......................... _ _ 31,724
------------ ------------ ------------
Net cash provided by (used in)
investing activities.................. 2,180,674 (429,046) (7,820,971)
------------- ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of
convertible debt, net............. _ _ 3,409,552
Distribution paid to S Corp
stockholder....................... _ _ (186,393)
Principal payments under capital
lease obligations................. (23,321) (17,763) (82,369)
Proceeds from issuance of promissory
notes............................. _ 3,000,000 7,000,000
Repayment of promissory notes....... _ (3,000,000) (3,000,000)
Proceeds from issuance of common
stock and Series D redeemable stock. _ 1,376,666 1,392,686
Proceeds received from capital
contributions..................... _ _ 102,176
Proceeds from issuance of Series B
and C redeemable convertible
preferred stock.................. _ 4,999,892 18,041,528
Proceeds from issuance of common
stock, net of issuance costs...... _ _ 23,030,476
Proceeds from stock options
exercised......................... 18,000 _ 18,000
Proceeds from sale-leaseback
agreement......................... 549,718 _ 549,718
------------ ------------ ------------
Net cash provided by financing
activities............................. 544,397 6,358,795 50,275,374
------------ ------------ -------------
Net increase (decrease) in cash and
cash equivalents....................... (6,513,324) 531,804 9,383,049
Cash and cash equivalents at beginning
of period.............................. 15,896,373 1,880,982 _
------------ ------------ -------------
Cash and cash equivalents at end of
period................................. $ 9,383,049 $ 2,412,786 $ 9,383,049
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
5
<PAGE>
ERGO SCIENCE CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements are unaudited and have been prepared
by the Company in accordance with generally accepted accounting principals.
Certain information and footnote disclosure normally included in the
Company's annual financial statements have been condensed or omitted. The
interim financial statements, in the opinion of management, reflect all
adjustments (including normal recurring accruals) necessary for a fair statement
of the results for the interim periods ended June 30, 1996 and 1995.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
These interim financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1995, which are
contained in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission for the year ended December 31, 1995.
2. CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with maturities of three months or less at the date of
purchase to be cash equivalents. Changes in cash and cash equivalents may be
affected by shifts in investment portfolio maturities as well as by actual net
cash receipts or disbursements.
At June 30, 1996 and December 31, 1995, cash equivalents were composed
primarily of investments in money market funds, United States government
obligations and high grade commercial paper that mature within 90 days of
purchase.
3. SHORT-TERM INVESTMENTS
The following is a summary of securities with maturities greater than
three months not classified as cash and cash equivalents. All short-term
investments are classified as held-to-maturity.
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
Commercial paper $1,250,000 $2,388,948
US treasury bills 2,485,886 _
Federal agency notes _ 3,936,554
---------- ----------
Total short-term investments $3,735,886 $6,325,502
========== ==========
</TABLE>
6
<PAGE>
The held-to-maturity securities are short-term in nature. Changes in market
interest rates would not have a significant effect on the fair value of these
securities. These securities are carried at amortized cost, which approximates
fair value.
4. NET LOSS PER COMMON SHARE
Net loss per common share is computed based upon the weighted average number
of common shares outstanding. Common equivalent shares are not included in the
per share calculations where the effect of their inclusion would be anti-
dilutive. In the computation of net loss per common share, accretion of
preferred stock to the mandatory redemption amount is included as an increase to
net loss to common stockholders.
Fully diluted net loss per common share is the same as primary net loss per
common share.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since inception, the Company has been engaged in the discovery and
development of novel treatments for metabolic disorders and cancer. The Company
has dedicated most of its financial resources to ERGOSET research and
development, general and administrative expenses, and the prosecution of patents
and patent applications. To date, the Company has not received any revenues from
the sale of products and does not expect to generate revenues for several years,
if at all. The Company has been unprofitable since its inception, and the
Company's accumulated deficit was $49,873,408 as of June 30, 1996. Although the
Company intends to enter into collaborative relationships, it expects to incur
substantial and increasing losses for at least the next several years, due
primarily to the expansion of its research and development programs, including
preclinical studies and clinical trials. The Company expects that losses will
fluctuate from quarter to quarter and that the fluctuations may be substantial.
RESULTS OF OPERATIONS
Three Months and Six Months Ended June 30, 1995 and 1996
Total revenues increased from $23,140 and $40,408 for the three month and six
month periods ended June 30, 1995, respectively, to $195,914 and $466,316 for
the same periods in 1996. Revenues were derived primarily from interest income
earned on cash, cash equivalents and short-term investments. The increases in
interest income are attributable to an increase in the average amounts of cash,
cash equivalents and short-term investments during the first and second quarters
of 1996, compared to the first and second quarters of 1995. These amounts
increased as a result of proceeds received from the Company's initial public
offering in December 1995.
Research and development expenses decreased from $7,569,573 and $9,530,766
for the three month and six month periods ended June 30, 1995, respectively, to
$3,124,768 and $6,219,927 for the same periods in 1996. The decreases were due
to the purchase of in-process research and development in the second quarter of
1995 which totaled $5,520,000. Excluding the purchase of in-process research and
development, expenses increased $1,075,195 and $2,040,411 for the three month
and six month periods ended June 30, 1996, respectively, as compared to the same
periods in 1995. The increases were principally the result of greater expenses
related to Phase III clinical trials for ERGOSET, continued progress on several
earlier stage research programs including those in metastatic breast cancer and
photodynamic therapy, and the hiring of additional research personnel.
General and administrative expenses increased from $970,724 for the three
months ended June 30 1995, to $1,168,160 for the same period in 1996, but
decreased from $2,901,173 for the six months ended June 30 1995, to $2,241,288
for the same period in 1996. The decrease in the six month period was
principally due to a net charge of $1,089,356 recorded in the first quarter of
1995 related to a renegotiated supply agreement. Excluding this nonrecurring,
noncash charge, general and administrative expenses increased $429,471 in the
first half of 1996, compared to the same period in 1995. The 1996 increases
were mainly due to the hiring of additional administrative personnel.
8
<PAGE>
As a result of the foregoing items, net loss to common stockholders decreased
from $8,881,947 and $13,024,602 for the three month and six month periods ended
June 30, 1995, respectively, to $4,205,798 and $8,210,333 for the same periods
in 1996. The decreases were primarily due to the costs associated with the
purchases of in-process research and development and the renegotiated supply
agreement that were recognized in the first half of 1995. The net loss per
common share decreased from $(2.28) and $(3.35) for the three month and six
month periods ended June 30, 1995, respectively, to $(.41) and $(.81) for the
same periods in 1996. The declines in net loss per common share were
attributable to the decreased loss to common stockholders and the increase in
weighted average common shares outstanding resulting from the Company's initial
public offering in December 1995. For both the three month and six month
periods ended June 30, 1995, the weighted average common shares outstanding was
3,887,838, compared to 10,168,080 and 10,157,489 for the same periods in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's primary source of cash has been from
financing activities, which have consisted of private placements of equity
securities and its initial public offering. Private placements of equity
securities through June 30, 1996, provided the Company with aggregate proceeds
of $32,999,000. On December 19, 1995, the Company raised $23,030,476 from the
sale of stock in an initial public offering, net of commissions and offering
costs. Cash and cash equivalents were $15,896,373 and $9,383,049, while short
term investments were $6,325,502 and $3,735,886, at December 31, 1995 and June
30, 1996, respectively. The decrease in cash, cash equivalents and short-term
investments at June 30, 1996, was due primarily to the funding of the Company's
operations.
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. As of June 30, 1996, the
Company's net investment in equipment and leasehold improvements was $2,192,452.
The Company expects that additional equipment and facilities will be needed to
the extent it increases its research and development activities.
The Company believes that its available cash, cash equivalents, short-term
investments and expected interest income, will be adequate to fund its current
and anticipated levels of operations through mid-1997. Before then, the
Company will need to raise additional capital through the sale of securities in
the public or private equity markets or by entering into a collaborative
arrangement with another company. There can be no assurance, however, that
events in the Company's research and development programs or other events
affecting the Company's operations will not result in accelerated or unexpected
expenditures. The Company is pursuing additional research and development of
ERGOSET and other product candidates to treat obesity, breast cancer and other
diseases. The Company will require additional financing to expand and complete
that research and development. To the extent the Company raises additional
capital by issuing equity securities, ownership dilution to existing
stockholders will result and future investors may be granted rights superior to
those of existing stockholders. There can be no assurance, however, that
additional financing will be available from any source or, if available, will be
available on acceptable terms.
The terms of the Company's Series D Preferred Stock prohibit the Company from
paying dividends on the common stock.
9
<PAGE>
RECENT DEVELOPMENTS
On July 18, 1996, the Company filed a registration statement on Form S-1 with
the Securities and Exchange Commission for the underwritten offering by the
Company of 2,500,000 shares of common stock. There can be no assurance,
however, that this offering will be completed or, if completed, as to the amount
of proceeds that will be raised by the Company therein.
This document contains statements which are forward looking statements. Such
statements reflect the Company's current views with respect to future events and
financial performance and involve risks and uncertainties. Should one or more of
these risks or uncertainties occur, or should underlying assumptions prove
incorrect, actual results may vary materially and adversely from those
anticipated, believed, estimated or otherwise indicated. See "Item 1. Business--
Risks Associated with Business Activities" in the Company's annual report on
Form 10-K filed with the Securities and Exchange Commission for the year ended
December 31, 1995, for a description of various factors that could materially
affect the ability of the Company to achieve the results described in the
forward looking statements.
10
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on June 25,
1996. At the meeting, the following actions were taken by
the Company's stockholders:
- The following individuals were elected to the Company's Board of
Directors:
J. Warren Huff
Stephen A. Duzan
- The Company's Amended and Restated 1995 Long Term Incentive Plan
was amended to increase the number of shares available for grant from
731,525 to 1,431,525, an increase of 700,000 shares.
- The Company's Stock Option Plan for Non-Employee Directors was
approved.
- The selection of Coopers & Lybrand L.L.P. as the Company's
independent accounts for fiscal 1996 was ratified.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
---------
11 - Statement re computation of loss per share.
Reports on Form 8-K:
--------------------
None.
11
<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.
ERGO SCIENCE CORPORATION
By: /s/ Alan T. Barber
------------------------
Alan T. Barber
Vice President, Finance and
Administration and Chief Financial
Officer (Principal Financial Officer
and Principal Accounting Officer)
Date: August 8, 1996
-----------------
12
<PAGE>
EXHIBIT 11
ERGO SCIENCE CORPORATION
STATEMENT RE COMPUTATION OF LOSS PER SHARE
HISTORICAL
WEIGHTED
AVERAGE
TYPE OF SECURITY SHARES
------------------ ---------
COMPANY, FOR THE THREE MONTHS ENDED JUNE 30, 1995:
Common stock outstanding beginning of the quarter................ 2,656,425
Issuance of cheap stock(1)....................................... 1,231,413
---------
Weighted average common shares outstanding..................... 3,887,838
=========
COMPANY, FOR THE SIX MONTHS ENDED JUNE 30, 1995:
Common stock outstanding beginning of the year................... 2,500,025
Issuance of cheap stock(1)....................................... 1,231,413
Weighted average common stock issued during period............... 156,400
---------
Weighted average common shares outstanding..................... 3,887,838
=========
COMPANY, FOR THE THREE MONTHS ENDED JUNE 30, 1996:
Common stock outstanding beginning of the quarter................ 10,168,080
----------
Weighted average common shares outstanding..................... 10,168,080
==========
COMPANY, FOR THE SIX MONTHS ENDED JUNE 30, 1996:
Common stock outstanding beginning of the year................... 10,145,580
Weighted average common stock issued during period............... 11,909
----------
Weighted average common shares outstanding..................... 10,157,489
==========
- ------------------
(1) Pursuant to Securities and Exchange Commission Staff Bulletin No. 83, stock
options issued during the twelve month period prior to the initial filing
date of the Company's Registration Statement at exercise prices below the
assumed initial public offering price of $9.00 have been included in the
calculation of common equivalent shares using the treasury stock method, as
if they were outstanding for all periods presented.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 9,383,049
<SECURITIES> 3,735,886
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,771,744
<PP&E> 4,159,118
<DEPRECIATION> 1,966,666
<TOTAL-ASSETS> 16,000,064
<CURRENT-LIABILITIES> 1,243,671
<BONDS> 0
0
4,521,954
<COMMON> 101,681
<OTHER-SE> 9,679,649
<TOTAL-LIABILITY-AND-EQUITY> 16,000,064
<SALES> 0
<TOTAL-REVENUES> 466,316
<CGS> 0
<TOTAL-COSTS> 8,461,215
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,994,899)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,994,899)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,994,899)
<EPS-PRIMARY> (.81)
<EPS-DILUTED> (.81)
</TABLE>
