<PAGE>
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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, 2000
-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 ST., SUITE 205
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 November 6, 2000 there were 14,299,217 shares of common stock, par value $.01
per share, of the registrant outstanding.
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1
<PAGE>
ERGO SCIENCE CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Unaudited Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999.....................................................3
Unaudited Consolidated Statements of Operations for the three
months and nine months ended September 30, 2000
and September 30, 1999................................................4
Unaudited Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and September 30, 1999.......................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....................12
PART II. OTHER INFORMATION......................................................................13
SIGNATURES......................................................................................14
</TABLE>
2
<PAGE>
ERGO SCIENCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 11,502,238 $ 4,292,631
Short-term investments .................................................... 10,289,494 17,722,798
Prepaid and other current assets .......................................... 19,600 27,069
------------- -------------
Total current assets ............................................. 21,811,332 22,042,498
Long-term investments .............................................................. 8,376,291 8,324,326
Equipment and leasehold improvements, net .......................................... 25,256 39,759
Other assets ....................................................................... 4,828 3,318
------------- -------------
Total assets ..................................................... $ 30,217,707 $ 30,409,901
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ..................................... $ 3,835,996 $ 4,623,668
------------- -------------
Total current liabilities ........................................ 3,835,996 4,623,668
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
September 30, 2000 and December 31, 1999 (liquidation
preference of $9,508,981 at September 30, 2000) ...................... 6,634,311 6,222,250
Common stock, $.01 par value, authorized 50,000,000 at September 30,
2000 and December 31, 1999; issued and outstanding
14,299,217 and 14,269,467 shares at September 30, 2000 and
December 31, 1999, respectively ....................................... 142,993 142,695
Additional paid-in capital ................................................ 111,808,824 111,785,322
Cumulative dividends on preferred stock ................................... (4,624,744) (4,212,683)
Accumulated deficit ....................................................... (87,579,673) (88,151,351)
------------- -------------
Total stockholders' equity ....................................... 26,381,711 25,786,233
------------- -------------
Total liabilities and stockholders' equity ............... $ 30,217,707 $ 30,409,901
============= =============
</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 Nine Months Ended
September 30 September 30
------------------------------------------------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating expenses:
Research and development .................. $ (256,365) $ 292,737 $ (176,831) $ 2,207,105
General and administrative ................ 364,603 901,591 1,006,586 2,954,599
------------ ------------ ------------ ------------
108,238 1,194,328 829,755 5,161,704
------------ ------------ ------------ ------------
Net operating loss ............... (108,238) (1,194,328) (829,755) (5,161,704)
Other Income:
Interest .................................. 475,597 389,891 1,357,259 1,168,763
Other income -- -- 44,174 --
------------ ------------ ------------ ------------
Net income (loss) ................ 367,359 (804,437) 571,678 (3,992,941)
Accretion of dividends on preferred stock .......... (139,155) (131,169) (412,061) (388,411)
------------ ------------ ------------ ------------
Net income (loss) to common stockholders ........... $ 228,204 $ (935,606) $ 159,617 $ (4,381,352)
============ ============ ============ ============
Net income (loss) per common share:
Basic ......................................... $ 0.02 $ (0.07) $ 0.01 $ (0.31)
============ ============ ============ ============
Diluted ....................................... $ 0.02 $ (0.07) $ 0.01 $ (0.31)
============ ============ ============ ============
Weighted average common shares outstanding:
Basic ......................................... 14,299,217 14,254,467 14,290,135 14,254,467
============ ============ ============ ============
Diluted ....................................... 14,323,142 14,254,467 14,331,189 14,254,467
============ ============ ============ ============
</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,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................................. $ 571,678 $ (3,992,941)
Adjustments to reconcile net income (loss) to cash used in operating
activities:
Depreciation and amortization ................................................. 21,768 20,246
Loss on equipment disposal .................................................... -- 157,332
Noncash compensation .......................................................... -- 186,977
Accrued interest on long-term investments ..................................... (51,965) --
Changes in operating assets and liabilities:
Prepaid and other current assets ......................................... 7,469 534,786
Other assets ............................................................. (1,510) 45,495
Accounts payable and accrued expenses .................................... (787,672) (62,888)
------------ ------------
Net cash used in operating activities ...................................................... (240,232) (3,110,993)
------------ ------------
Cash flows from investing activities:
Purchase of short-term investments ................................................ (12,415,885) (38,520,216)
Proceeds from maturity of short-term investments .................................. 19,849,189 48,806,443
Proceeds on sale of equipment ..................................................... -- 279,045
Purchase of equipment and leasehold improvements .................................. (7,265) (136,949)
------------ ------------
Net cash provided by investing activities .................................................. 7,426,039 10,428,323
------------ ------------
Cash flows from financing activities:
Principal payments under capital lease obligations ................................ -- (421,732)
Proceeds from stock options exercised ............................................. 23,800 --
------------ ------------
Net cash provided by (used in) financing activities ........................................ 23,800 (421,732)
------------ ------------
Net increase in cash and cash equivalents .................................................. 7,209,607 6,895,598
Cash and cash equivalents at beginning of period ........................................... 4,292,631 15,715,708
------------ ------------
Cash and cash equivalents at end of period ................................................. $ 11,502,238 $ 22,611,306
============ ============
</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, 2000 and 1999.
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, 1999, 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 September 30, 2000 and December 31, 1999, 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, 2000 DECEMBER 31, 1999
<S> <C> <C>
Commercial paper ....................... $ 3,977,554 $12,330,312
Federal agency notes ................... 6,311,940 5,392,486
----------- -----------
Total short-term investments .. $10,289,494 $17,722,798
=========== ===========
</TABLE>
6
<PAGE>
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.
4. LONG-TERM INVESTMENTS
Long-term investments with maturity of more than twelve months when
purchased, consist of high-grade commercial paper ($6,607,035) and federal
agency notes ($1,769,256) at September 30, 2000. Long-term investments are
stated at amortized cost plus accrued interest, which approximates market value.
5. EARNINGS/LOSS PER COMMON SHARE
Basic earnings/loss per common share is computed by dividing net
income/loss by the weighted average number of common shares outstanding for the
period. Diluted earnings per common share is computed by dividing net income by
the sum of the weighted average number of common shares outstanding for the
period plus the assumed exercise of all dilutive securities, such as stock
options. For the three and nine month periods ending September 30, 2000, a total
of 23,925 and 41,946 stock option shares respectively, were included in the
weighted average number of common shares outstanding calculation.
The diluted loss per common share calculated for the three and nine
periods ending September 30, 1999 excludes the effects of 909,662 options
outstanding. These amounts are excluded, as their inclusion would be
anti-dilutive.
6. CONTINGENCIES
The Company settled its dispute with Lousiana State University ("LSU")
under the provisions of the parties' Novated License and Royalty Agreement
dated May 1, 1995. Under the terms of the Settlement Agreement, Ergo Science
paid LSU approximately $3 million of which $2 million was charged to research
and development expense in the third quarter of 2000. The dispute related to
the amount of royalty payments owed to LSU arising from various payments
received by the Company from Johnson & Johnson. In February 1998, the Company
entered into a Joint Collaboration and Licensing Agreement with Johnson &
Johnson to develop and commercialize ERGOSET(R) tablets for the treatment of
Type 2 diabetes and obesity. Under the agreement, payments to the company
included a $10 million license fee and a $10 million equity investment in
common stock. In December 1998, Johnson & Johnson notified Ergo Science of
its termination of the joint collaboration agreement effective January 3,
1999.
7
<PAGE>
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 POSSIBLE 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,
- 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;
- 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;
- ERGO MAY NOT HAVE SUFFICIENT RESOURCES FOR SUCH A SAFETY TRIAL OR
DECIDE, BASED ON ITS BUSINESS JUDGMENT, AGAINST INVESTING IN SUCH A
TRIAL;
- ERGO 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 FDA (OR AN FDA PANEL OF EXPERTS) MAY NOT AGREE
WITH ERGO'S ASSESSMENT OF ANY CURRENT OR FUTURE CLINICAL TRIAL RESULTS;
- 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 THIS INDICATION AND OTHER COMPANIES ARE
DEVELOPING COMPETING PRODUCTS;
- THE NEED FOR ADDITIONAL FUNDING;
- ERGO MAY NOT BE ABLE TO ESTABLISH CORPORATE ALLIANCES TO MARKET
ERGOSET(R) TABLETS, IF APPROVED For COMMERCIAL MARKETING;
- ERGOSET(R) TABLETS, IF APPROVED FOR COMMERCIAL MARKETING, MAY NOT BE
SUCCESSFUL IN THE MARKETPLACE, or ERGO MAY NOT RECEIVE ANY PROFITS FROM
ITS SALE;
- UNCERTAINTY RELATING TO PATENT PROTECTION IN THE PHARMACEUTICAL AND
BIOTECHNOLOGY INDUSTRIES; AND
- THE COMPANY IS CURRENTLY EVALUATING STRATEGIC ALTERNATIVES.
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 1999 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.
OVERVIEW
Since 1990, Ergo Science Corporation ("Ergo" or the "Company") has
been developing ERGOSET(R) tablets for the treatment of
metabolic disorders. In the fourth quarter of 1999, the U.S. Food & Drug
Administration ("FDA") issued a letter stating that the Company's New Drug
Application ("NDA") for ERGOSET(R) tablets for the treatment of type 2
diabetes was "approvable." However, before ERGOSET(R) tablets can be approved
by FDA for marketing, it will be necessary for Ergo to address FDA concerns
relating to the clinical safety of ERGOSET(R)
8
<PAGE>
tablets and other issues, including biopharmaceutics, pharmacology and
toxicology. In its letter, FDA stated that ERGOSET(R) 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(R) 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(R) 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.
From inception through 1999, the Company has been unprofitable.
In 1997, the Company filed with the FDA an NDA for ERGOSET(R) 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(R) 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 New Drug Application for ERGOSET(R) tablets for the treatment
of type 2 diabetes was 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. The Company has begun the appeal process within the FDA of the
not-approvable letter for ERGOSET(R) tablets sent to the Company by the Division
of Metabolic and Endocrine Drug Products of FDA. The Company is also considering
other strategic alternatives.
In the fourth quarter of 1999, the Company announced that it received a
letter from the Office of Drug Evaluation II, Center for Drug Evaluation and
Research at the FDA, stating that its NDA for ERGOSET(R) tablets to treat type 2
diabetes is approvable. However, before ERGOSET(R) 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(R) tablets and other issues,
including biopharmaceutics, pharmacology and toxicology. In its letter, FDA
stated that ERGOSET(R) 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(R) 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(R) 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.
The Company is evaluating how to proceed with its ERGOSET(R) program.
Some of the options at FDA include, without limitation, appealing the FDA letter
with respect to the request
9
<PAGE>
for an additional safety trial, requesting a rehearing before an advisory panel
on this issue of whether the additional safety trial is needed, or considering
moving ahead with the requested safety trial.
The Company is also evaluating its strategic options for its ERGOSET(R)
program. Some of the possible options include, without limitation: selling the
Company's rights to ERGOSET(R) tablets, licensing the rights to ERGOSET(R)
tablets to another pharmaceutical or biotechnology company, continuing
ERGOSET(R) development on its own, or halting development of ERGOSET(R) tablets.
In addition to ERGOSET(R) tablets, the Company is analyzing its other
strategic alternatives. The Company is reviewing various alternatives to
determine the best uses of its assets including its cash, its status as a public
company, its financial attributes (including tax attributes), and its
intellectual property assets other than ERGOSET(R) tablets. No decisions have
been made with respect to any of the possible alternatives.
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
Research and development expenses decreased from $292,737 to ($256,365)
and from $2,207,105 to ($176,831) for the three and nine month periods ended
September 30, 1999 and 2000, respectively. These decreases were due to the
discontinued funding of the Company's pre-clinical development programs, a $2
million charge as part of the settlement with LSU in the third quarter and a
change in estimates of amounts required to settle other ERGOSET(R) related
obligations.
General and administrative expenses decreased from $901,591 to $364,603
and from $2,954,599 to $1,006,586 for the three and nine month periods ended
September 30, 1999 and 2000, respectively. The decreases were primarily
attributable to the reduction of the Company's workforce.
Interest income increased from $389,891 to $475,597 and from $1,168,763 to
$1,357,259 for the three and nine month periods ended September 30, 1999 and
2000, respectively. These increases were due to allocating more cash to
long-term investments, which have higher yields.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's primary sources of cash have 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(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
10
<PAGE>
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.
The Company settled its dispute with Louisiana State University
("LSU") under the provisions of the parties' Novated License and Royalty
Agreement dated May 1, 1995. Under the terms of the Settlement Agreement,
Ergo Science paid LSU approximately $3 million of which $2 million was
charged to research and development expense in the third quarter of 2000. The
dispute related to the amount of royalty payments owed to LSU arising from
various payments received by the Company from Johnson & Johnson. In February
1998, the Company entered into a Joint Collaboration and Licensing Agreement
with Johnson & Johnson to develop and commercialize ERGOSET(R) tablets for
the treatment of Type 2 diabetes and obesity. Under the agreement, payments
to the company included a $10 million license fee and a $10 million equity
investment in common stock. In December 1998, Johnson & Johnson notified Ergo
Science of its termination of the joint collaboration agreement effective
January 3, 1999.
Cash, cash equivalents, short-term investments and long-term
investments were $30,168,023 and $30,339,755 at September 30, 2000 and
December 31, 1999, respectively. The overall decrease in cash, cash
equivalents, short-term investments and long-term investments at September
30, 2000, was due primarily to the funding of the operating activities of the
Company.
The Company believes its current cash, cash equivalents, short-term and
long-term investments will fund its operations at least through the end of 2001.
As of September 30, 2000, the Company's net investment in equipment and
leasehold improvements was approximately $25,000.
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 Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The Company has determined that the
adoption of SFAS 133, which is effective for all fiscal quarters for all fiscal
years beginning after June 15, 2000, will have no impact on its consolidated
financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements," as subsequently amended by
SAB 101A and SAB 101B, which is effective no later than the quarter ending
December 31, 2000. SAB 101 clarifies the SEC's views related to revenue
recognition and disclosure. Management does not believe the effect will be
material.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues
clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of previously fixed stock options or awards; and
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN
44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. The application of FIN 44 did not have a material impact on
the Company's financial position or results of operations.
11
<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, 1999.
12
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company settled its dispute with Lousiana State University
("LSU") under the provisions of the parties' Novated License
and Royalty Agreement dated May 1, 1995. Under the terms of
the Settlement Agreement, Ergo Science paid LSU approximately
$3 million of which $2 million was charged to research and
development expense in the third quarter of 2000. The dispute
related to the amount of royalty payments owed to LSU arising
from various payments received by the Company from Johnson &
Johnson. In February 1998, the Company entered into a Joint
Collaboration and Licensing Agreement with Johnson & Johnson
to develop and commercialize ERGOSET(R) tablets for the
treatment of Type 2 diabetes and obesity. Under the
agreement, payments to the company included a $10 million
license fee and a $10 million equity investment in common
stock. In December 1998, Johnson & Johnson notified Ergo
Science of its termination of the joint collaboration
agreement effective January 3, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS:
27 - Financial Data Schedule
REPORTS ON FORM 8-K:
None.
13
<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
Controller (principal accounting
officer)
Date: November 14, 2000
--------------------------------------
14
