<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 September 30, 1999
-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)
43 HIGH 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 October 26, 1999 there were 14,254,467 shares of common stock, par value $.01
per share, of the registrant outstanding.
===============================================================================
1
<PAGE>
ERGO SCIENCE CORPORATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998................................................... 3
Consolidated Statements of Operations for the three
months and nine months ended September 30, 1999
and September 30, 1998.............................................. 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and September 30, 1998..................... 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............................ 13
PART II. OTHER INFORMATION.............................................................................. 14
SIGNATURES.............................................................................................. 15
</TABLE>
2
<PAGE>
ERGO SCIENCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 22,611,306 $ 15,715,708
Short-term investments.................................................. 7,711,372 17,997,599
Prepaid and other current assets........................................ 58,339 593,125
---------------- ---------------
Total current assets........................................... 30,381,017 34,306,432
Equipment and leasehold improvements, net........................................ 47,449 367,123
Other assets..................................................................... 5,818 51,313
---------------- ---------------
Total assets................................................... $ 30,434,284 $ 34,724,868
---------------- ---------------
---------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................................... $ 4,414,366 $ 4,477,254
Current portion of capital lease obligations............................ -- 266,136
---------------- ---------------
Total current liabilities...................................... 4,414,366 4,743,390
Long-term portion of capital lease obligations................................... -- 155,596
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized; 6,903
shares of Series D preferred stock issued and outstanding at
September 30, 1999 and December 31, 1998 (liquidation
preferences were $8,963,129 and $8,574,718 at September 30,
1999 and December 31, 1998, respectively)..................... 6,088,459 5,700,048
Common stock, $.01 par value, authorized 50,000,000 at September 30,
1999 and December 31, 1998; issued and outstanding
14,254,467 shares at September 30, 1999 and December 31, 1998. 142,545 142,545
Additional paid-in capital.............................................. 111,773,472 111,977,063
Cumulative dividends on preferred stock................................. (4,078,892) (3,690,481)
Deferred compensation................................................... -- (390,568)
Accumulated deficit..................................................... (87,905,666) (83,912,725)
---------------- ---------------
Total stockholders' equity..................................... 26,019,918 29,825,882
---------------- ---------------
Total liabilities and stockholders' equity............. $ 30,434,284 $ 34,724,868
---------------- ---------------
---------------- ---------------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
3
<PAGE>
ERGO SCIENCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- -------------------------------
1999 1998 1999 1998
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenues:
Product revenue.................... -- -- -- $ 2,488,520
Sponsored research revenue......... -- $ 856,973 -- 5,585,438
License fees....................... -- -- -- 10,000,000
---------- --------- --------- ----------
-- 856,973 -- 18,073,958
Operating expenses:
Cost of product revenue............ -- -- -- 2,488,520
Research and development........... 292,737 2,710,304 2,207,105 10,072,189
Write-off related to renegotiated
supply agreement................. -- -- -- 2,499,000
General and administrative......... 901,591 1,371,373 2,954,599 5,183,401
---------- --------- --------- ----------
(1,194,328) 4,081,677 5,161,704 20,243,110
---------- --------- --------- ----------
Net operating loss........ (1,194,328) (3,224,704) (5,161,704) (2,169,152)
Other Income:
Interest........................... 389,891 519,740 1,168,763 1,382,056
---------- --------- --------- ----------
Net loss.................. (804,437) (2,704,964) (3,992,941) (787,096)
Accretion of dividends on preferred stock... (131,169) (123,639) (388,411) (366,117)
---------- --------- --------- ----------
Net loss to common stockholders............. $ (935,606) $ (2,828,603) $ (4,381,352) $ (1,153,213)
---------- --------- --------- ----------
---------- --------- --------- ----------
Earnings loss per common share:
Basic.............................. $ (0.07) $ (0.20) $ (0.31) $ (0.08)
---------- --------- --------- ----------
---------- --------- --------- ----------
Diluted............................ $ (0.07) $ (0.20) $ (0.31) $ (0.08)
---------- --------- --------- ----------
---------- --------- --------- ----------
Weighted average common shares outstanding:
Basic.............................. 14,254,467 14,253,267 14,254,467 14,032,080
---------- --------- --------- ----------
---------- --------- --------- ----------
Diluted............................ 14,254,467 14,253,267 14,254,467 14,032,080
---------- --------- --------- ----------
---------- --------- --------- ----------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
4
<PAGE>
ERGO SCIENCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................ $ (3,992,941) $ (787,096)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization....................... 20,246 677,745
Loss on disposal of equipment....................... 157,332 --
Noncash compensation................................ 186,977 331,612
Noncash charge for write-off related to
renegotiated supply agreement..................... -- 2,499,000
Changes in operating assets and liabilities:
Inventory...................................... -- 424,320
Prepaid and other current assets............... 534,786 18,595
Other assets................................... 45,495 (112,591)
Accounts payable and accrued expenses.......... (62,888) 177,228
Deferred revenue............................... -- 331,435
------------ ------------
Net cash (used in) provided by operating activities.............. (3,110,993) 3,560,248
------------ ------------
Cash flows from investing activities:
Purchase of short-term investments...................... (38,520,216) (47,351,893)
Proceeds from maturity of short-term investments........ 48,806,443 41,718,439
Proceeds on sale of equipment........................... 279,045 --
Purchase of equipment and leasehold improvements........ (136,949) (165,380)
------------ ------------
Net cash provided by (used in) investing activities.............. 10,428,323 (5,798,834)
------------ ------------
Cash flows from financing activities:
Principal payments under capital lease obligations...... (421,732) (271,762)
Proceeds from issuance of common stock.................. -- 10,000,000
Proceeds from stock options exercised................... -- 570,494
------------ ------------
Net cash (used in) provided by financing activities.............. (421,732) 10,298,732
------------ ------------
Net increase in cash and cash equivalents........................ 6,895,598 8,060,146
Cash and cash equivalents at beginning of period................. 15,715,708 13,923,115
------------ ------------
Cash and cash equivalents at end of period....................... $ 22,611,306 $ 21,983,261
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
5
<PAGE>
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 September 30, 1999 and 1998.
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, 1998, 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, 1998.
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. Cash equivalents
are stated at amortized cost.
At September 30, 1999 and December 31, 1998, 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.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Commercial paper $ 4,974,638 $ 4,371,496
Federal agency notes 2,736,734 13,626,103
------------------ -----------------
Total short-term investments $ 7,711,372 $17,997,599
------------------ -----------------
------------------ -----------------
</TABLE>
Since 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.
6
<PAGE>
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. At September 30, 1999 and 1998 the Company had 909,662 and
1,978,394 options outstanding, respectively. 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 to common stockholders.
5. CONTINGENCIES
On April 29, 1998, the Company and the Board of Supervisors of Louisiana
State University and Agriculture and Mechanical College ("LSU") entered into
dispute resolution under the provisions of the parties' Novated License and
Royalty Agreement dated May 1, 1995. The dispute relates to the amount of
payment owed to LSU arising from various payments received by the Company from
Johnson & Johnson. LSU is seeking payment of $4,138,000. The Company believes
that the payment owed to LSU is significantly less than this amount. The dispute
resolution provisions of the agreement provides for a period of good faith
negotiations between the parties, followed, if necessary, by mediation and
binding arbitration. The Company and LSU concluded mediation without resolution
and are currently in binding arbitration.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS MAY
VARY MATERIALLY AND ADVERSELY DEPENDING ON NUMEROUS FACTORS. IMPORTANT FACTORS
THAT COULD AFFECT OUR RESULTS INCLUDE, WITHOUT LIMITATION,
- - AN "APPROVABLE" LETTER DOES NOT MEAN THAT A PRODUCT WILL ULTIMATELY BE
APPROVED PARTICULARLY WHERE, AS HERE, IT IS NECESSARY TO SATISFY THE
U.S. FOOD & DRUG ADMINISTRATION (FDA) (PRIOR TO APPROVAL) THAT THERE IS
NOT AN INCREASED RISK OF A SPECIFIED SERIOUS ADVERSE EVENT
- - THE CLINICAL TRIAL TO ASSESS SAFETY RECOMMENDED BY FDA MAY INVOLVE A
RELATIVELY HIGH NUMBER OF PATIENTS AND MAY REQUIRE SUBSTANTIAL
RESOURCES AND TAKE YEARS TO COMPLETE
- - UNTIL THE SIZE AND SCOPE OF THE SAFETY TRIAL ARE DETERMINED BY FDA, AN
ASSESSMENT OF THE ADVISABILITY OF ANY SUCH TRIAL CANNOT BE MADE
- - ERGO SCIENCE MAY NOT HAVE SUFFICIENT RESOURCES FOR SUCH A SAFETY TRIAL
OR DECIDE THAT UNDERTAKING SUCH A TRIAL IS NOT COMMERCIALLY REASONABLE
- - ERGO SCIENCE MAY NOT BE ABLE TO ATTRACT A PARTNER TO ASSIST IN
UNDERTAKING SUCH A SAFETY TRIAL
- - 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 ERGO SCIENCE'S ASSESSMENT OF CURRENT
OR FUTURE CLINICAL TRIAL RESULTS OR OTHER DATA
- - UNCERTAINTY RELATED TO THE SCIENTIFIC DEVELOPMENT OF A NEW MEDICAL
THERAPY
- - COMPETITION IN THE ANTI-DIABETIC MARKET IS INTENSE; OTHER PRODUCTS HAVE
BEEN RECENTLY APPROVED FOR THESE INDICATIONS AND OTHER COMPANIES ARE
DEVELOPING COMPETING PRODUCTS
- - THE NEED FOR ADDITIONAL FUNDING
- - THERE CAN BE NO ASSURANCE THAT ERGO SCIENCE WILL BE ABLE TO ESTABLISH
CORPORATE ALLIANCES TO MARKET ERGOSET-REGISTERED TRADEMARK- TABLETS, IF
APPROVED FOR COMMERCIAL MARKETING, AND ASSIST WITH DEVELOPMENT OF
PROduct CANDIDATES,
- - THERE CAN BE TO ASSURANCE THAT ERGO SCIENCE'S FORMULATION OF
BROMOCRIPTINE MESYLATE, IF APPROVED FOR COMMERCIAL MARKETING, WILL BE
SUCCESSFUL IN THE MARKETPLACE, OR THAT ERGO SCIENCE WILL RECEIVE ANY
PROFITS FROM ITS SALE
- - THE UNCERTAINTY RELATING TO PATENT PROTECTION IN THE PHARMACEUTICAL AND
BIOTECHNOLOGY INDUSTRIES
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 1998 ANNUAL REPORT ON FORM 10-K,
GENERALLY UNDER THE SECTION ENTITLED "RISK FACTORS." ERGO SCIENCE DOES NOT
UNDERTAKE TO UPDATE ANY FORWARD-LOOKING STATEMENT THAT MAY BE MADE FROM TIME TO
TIME BY OR ON BEHALF OF THE COMPANY.
8
<PAGE>
OVERVIEW
Since inception, Ergo has sought to develop 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-REGISTERED TRADEMARK- ("NRT-REGISTERED
TRADEMARK-"). NRT-REGISTERED TRADEMARK- is based on the role of
neurotransmitters in regulating metabolism and other body systems. The Company
has dedicated most of its financial resources, since inception, to research and
development of ERGOSET-REGISTERED TRADEMARK- tablets, the Company's lead product
candidate, general and administrative expenses and the prosecution of patents
and patent applications. To date, the Company has been unprofitable and 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.
On May 14, 1998, the Endocrinologic and Metabolic Drugs Advisory
Committee of the FDA found that there was not sufficient evidence to recommend
for approval the Company's New Drug Application (NDA) for ERGOSET-REGISTERED
TRADEMARK- tablets for Type 2 diabetes. On November 20, 1998, the Company
received a letter from the Division of Metabolic and Endocrine Drug Products at
the FDA that its NDA for ERGOSET-REGISTERED TRADEMARK- tablets for the treatment
of Type 2 diabetes is not approvable, citing the overall benefit to risk ratio.
Subsequently in January 1999, Johnson & Johnson terminated the worldwide the
Joint Collaboration Agreement, which had been signed on February 23, 1998. As a
result of these events, the Company further reduced its work force by
approximately 50% and discontinued funding of all its pre-clinical development
programs. In February 1999, the Company decided to appeal the not-approvable
letter. On October 21, 1999, the Company announced receipt of a letter from the
Office of Drug Evaluation II, Center for Drug Evaluation and Research at the FDA
stating that its NDA for ERGOSET-REGISTERED TRADEMARK- tablets for the treatment
of Type 2 diabetes is approvable. However, before ERGOSET-REGISTERED TRADEMARK-
tablets can be approved by FDA for marketing, it will be necessary for Ergo
Science to address FDA concerns relating to the clinical safety of
ERGOSET-REGISTERED TRADEMARK- tablets and other issues, including
biopharmaceutics, pharmacology and toxicology.
In its letter, FDA stated that ERGOSET-REGISTERED TRADEMARK- tablets
are effective in the treatment of Type 2 diabetes as adjunctive therapy with
sulfonylureas. The letter also stated, however, that data submitted by the
Company, including epidemiology data recently developed by the Company, did not
adequately overcome FDA's concerns about the possible increased risk of a
serious adverse event with the use of ERGOSET-REGISTERED TRADEMARK- tablets in
Type 2 diabetes patients. To address this outstanding safety concern, the FDA
has recommended that a "large, simple" placebo-controlled study be undertaken to
evaluate whether treatment with ERGOSET-REGISTERED TRADEMARK- tablets is
associated with an increase in the specified serious adverse event. In the
letter, FDA does not provide specifics about the size and scope of such a
clinical trial. The resolution of this safety concern must be sufficient to
support approval in light of a treatment effect which FDA characterized as
small.
Ergo plans to meet with the Division of Metabolic and Endocrine Drug
Products to discuss the design of the safety study and other issues. The Company
will evaluate how to proceed with this product based on information from FDA
about the size and scope of the safety study, its costs, the competitive
landscape and commercial opportunity, as well as other factors. Based on such
information, the Company may decide that it is not commercially reasonable for
the Company to undertake such a study. The Company will also consider seeking a
corporate partner for the product but may not be able to attract a partner to
assist in undertaking such a study.
9
<PAGE>
RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
There were no product-related revenues for the three and nine-month
periods ended September 30, 1999. Total revenues were $856,973 and $18,073,958
for the three and nine- month periods ended September 30, 1998, respectively.
Total revenues for the first nine months of 1998 consisted of a $10 million
initial fee, approximately $4.7 million in sponsored research revenue and
approximately $2.5 million of revenue from raw material sold at cost, all
derived from the Joint Collaboration Agreement.
Research and development expenses decreased from $2,710,304 to $292,737
and from $10,072,189 to $2,207,105 for the three and nine month periods ended
September 30, 1998 and 1999, respectively. These decreases were mainly due to
the reduction of the Company's workforce and the discontinued funding of all its
pre-clinical development programs.
The write-off related to renegotiated supply agreement charge of
$2,499,000 in the second quarter of 1998 represents the write-off of the
capitalized value of stock issued in the fourth quarter of 1997 to the Company's
drug supplier.
General and administrative expenses decreased from $1,371,373 to $901,591
and from $5,183,401 to $2,954,599 for the three and nine month periods ended
September 30, 1998 and 1999, respectively. These decreases were mostly
attributable to the reduction of the Company's workforce.
Interest income decreased from $519,740 to $389,891 and from $1,382,056 to
$1,168,763 for the three and nine month periods ended September 30, 1998 and
1999, 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
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-REGISTERED
TRADEMARK- tablets as well as other potential collaboration products for the
treatment of type 2 diabetes and obesity. In March 1998, Johnson & Johnson paid
the Company a $10 million initial fee and purchased $10 million of Ergo common
stock at fair market value. 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
10
<PAGE>
development expenses subject to the terms of the Joint Collaboration Agreement.
The Joint Collaboration Agreement was terminated by Johnson & Johnson on January
3, 1999.
Cash, cash equivalents and short-term investments were $30,322,678 and
$33,713,307 at September 30, 1999 and December 31, 1998, respectively. The
overall decrease in cash, cash equivalents and short-term investments at
September 30, 1999, was due primarily to the funding of the operating activities
of the Company.
In 1997, the Company filed with the FDA an NDA for ERGOSET-REGISTERED
TRADEMARK- tablets to treat type 2 diabetes and the FDA accepted the NDA for
filing. On May 14, 1998, the Endocrinologic and Metabolic Drugs Advisory
Committee of the FDA found that there was not sufficient evidence to recommend
for approval the Company's NDA for ERGOSET-REGISTERED TRADEMARK- tablets for
type 2 diabetes. On November 20, 1998, the Company received a letter from the
FDA that its NDA for ERGOSET-REGISTERED TRADEMARK- tablets for the treatment of
type 2 diabetes was not approvable, citing the overall benefit to risk ratio.
The Company appealed the not-approvable letter for ERGOSET-REGISTERED TRADEMARK-
tablets sent to the Company by the Division of Metabolic and Endocrine Drug
Products of FDA. On October 21, 1999, the Company announced receipt of a letter
from the Office of Drug Evaluation II, Center for Drug Evaluation and Research
at the FDA stating that its New Drug Application for ERGOSET-REGISTERED
TRADEMARK- tablets to treat Type 2 diabetes is approvable. However, before
ERGOSET-REGISTERED TRADEMARK- tablets can be approved by FDA for marketing, it
will be necessary for Ergo Science to address FDA concerns relating to the
clinical safety of ERGOSET-REGISTERED TRADEMARK- tablets and other issues,
including biopharmaceutics, pharmacology and toxicology.
In its letter, FDA stated that ERGOSET-REGISTERED TRADEMARK- tablets are
effective in the treatment of Type 2 diabetes as adjunctive therapy with
sulfonylureas. The letter also stated, however, that data submitted by the
Company, including epidemiology data recently developed by the Company, did not
adequately overcome FDA's concerns about the possible increased risk of a
serious adverse event with the use of ERGOSET-REGISTERED TRADEMARK- tablets in
Type 2 diabetes patients. To address this outstanding safety concern, the FDA
has recommended that a "large, simple" placebo-controlled study be undertaken to
evaluate whether treatment with ERGOSET-REGISTERED TRADEMARK- tablets is
associated with an increase in the specified serious adverse event. In the
letter, FDA does not provide specifics about the size and scope of such a
clinical trial. The resolution of this safety concern must be sufficient to
support approval in light of a treatment effect which FDA characterized as
small.
Ergo plans to meet with the Division of Metabolic and Endocrine Drug
Products to discuss the design of the safety study and other issues. The Company
will evaluate how to proceed with this product based on information about the
size and scope of the safety study from FDA, its costs, the competitive
landscape and commercial opportunity, as well as other factors. Based on such
information, the Company may decide that it is not commercially reasonable for
the Company to undertake such a study. The Company will also consider seeking a
corporate partner for the product but may not be able to attract a partner to
assist in undertaking such a study.
The Company believes its current cash, cash equivalents and short-term
investments will fund its current operations at least through 2000.
As of September 30, 1999, the Company's net investment in equipment and
leasehold improvements was approximately $48,000.
11
<PAGE>
The terms of the Company's Series D Preferred Stock prohibit the
Company from paying dividends on the common stock.
YEAR 2000
The Company has developed a plan to address its computer systems'
compliance with the Year 2000 and all internal acceptance testing was completed
in June 1999. The Company is in the process of ascertaining the status of its
vendors' Year 2000 compliance efforts. The Company has verified that all major
vendors are currently Year 2000 compliant. The Company currently believes that
the cost of addressing the Year 2000 issue will not be material to the Company's
business, operations or financial condition.
While the Company believes its internal data processing and computer
applications will not be materially altered by any date sensitive calculations,
there can be no guarantee that the systems of other companies on which the
Company relies will be converted in a timely manner.
12
<PAGE>
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, 1998.
13
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the third quarter, the Company was sued by Incubator
Associates ("Incubator"), the previous landlord for the
Company's laboratory space. The dispute relates to the amount
of payment owed to Incubator under the lease, which expired at
the end of June 1999. Incubator is seeking payment of
approximately $200,000. The Company is contesting Incubator's
claim.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS:
--------
27 - Financial Data Schedule
REPORTS ON FORM 8-K:
-------------------
None.
14
<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/ J. RICHARD CROWLEY
------------------------------------
J. Richard Crowley
Acting Controller (principal accounting
officer)
Date: NOVEMBER 11, 1999
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 22611306
<SECURITIES> 7711372
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30381017
<PP&E> 67696
<DEPRECIATION> 20247
<TOTAL-ASSETS> 30434284
<CURRENT-LIABILITIES> 4414366
<BONDS> 0
0
6068459
<COMMON> 142545
<OTHER-SE> 19788914
<TOTAL-LIABILITY-AND-EQUITY> 30434284
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 5161704
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1168763)
<INCOME-PRETAX> (4381352)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4381352)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4381352)
<EPS-BASIC> (.31)
<EPS-DILUTED> (.31)
</TABLE>
