<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, 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)
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 July 31, 2000 there were 14,299,217 shares of common stock, par value $.01
per share, of the registrant outstanding.
===============================================================================
<PAGE>
ERGO SCIENCE CORPORATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 ....................................................3
Consolidated Statements of Operations for the three
months and six months ended June 30, 2000
and June 30, 1999 ....................................................4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and June 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 ....................13
PART II. OTHER INFORMATION ......................................................................14
SIGNATURES ......................................................................................15
</TABLE>
2
<PAGE>
ERGO SCIENCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 9,770,760 $ 4,292,631
Short-term investments ............................................. 12,019,578 17,722,798
Prepaid and other current assets ................................... 18,910 27,069
------------- -------------
Total current assets ...................................... 21,809,248 22,042,498
Long-term investments ....................................................... 8,355,125 8,324,326
Equipment and leasehold improvements, net ................................... 31,402 39,759
Other assets ................................................................ 4,828 3,318
------------- -------------
Total assets .............................................. $ 30,200,603 $ 30,409,901
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .............................. $ 4,186,251 $ 4,623,668
Total current liabilities ................................. 4,186,251 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
June 30, 2000 and December 31, 1999 (liquidation preference
of $9,369,826 at June 30, 2000) ................................ 6,495,156 6,222,250
Common stock, $.01 par value, authorized 50,000,000 at June 30, 2000
and December 31, 1999; issued and outstanding
14,299,217 and 14,269,467 shares at June 30, 2000 and December
31, 1999, respectively ......................................... 142,993 142,695
Additional paid-in ................................................. 111,808,824 111,785,322
Cumulative dividends on preferred stock ............................ (4,485,589) (4,212,683)
Accumulated deficit ................................................ (87,947,032) (88,151,351)
------------- -------------
Total stockholders' equity ................................ 26,014,352 25,786,233
------------- -------------
Total liabilities and stockholders' equity ........ $ 30,200,603 $ 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 June 30 Six Months Ended June 30
--------------------------------------------------------------------
2000 1999 2000 1999
----- ---- ---- ----
<S> <C> <C> <C> <C>
Operating expenses:
Research and development ......... $ 34,305 $ 768,208 $ 79,534 $ 2,082,481
General and administrative ....... 307,843 703,439 641,983 1,884,895
------------ ------------ ------------ ------------
342,148 1,471,647 721,517 3,967,376
------------ ------------ ------------ ------------
Net operating loss ...... (342,148) (1,471,647) (721,517) (3,967,376)
Other Income:
Interest ......................... 449,760 358,831 881,662 778,872
Other income ..................... 44,174 -- 44,174 --
------------ ------------ ------------ ------------
Net income (loss) ....... 151,786 (1,112,816) 204,319 (3,188,504)
Accretion of dividends on preferred stock . (137,804) (129,895) (272,906) (257,242)
------------ ------------ ------------ ------------
Net income (loss) to common stockholders .. $ 13,982 $ (1,242,711) $ (68,587) $ (3,445,746)
============ ============ ============ ============
Net loss per common share:
Basic ..................................... $ 0.00 $ (0.09) $ 0.00 $ (0.24)
============ ============ ============ ============
Diluted ................................... $ 0.00 $ (0.09) $ 0.00 $ (0.24)
============ ============ ============ ============
Weighted average common shares outstanding:
Basic ..................................... 14,299,217 14,254,467 14,285,544 14,254,467
============ ============ ============ ============
Diluted ................................... 14,329,097 14,254,467 14,285,544 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>
Six Months Ended June 30,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................................. $ 204,319 $ (3,188,504)
Adjustments to reconcile net income (loss) to cash used in operating
activities:
Depreciation and amortization .................................. 15,622 12,684
Loss on equipment disposal ..................................... -- 157,332
Noncash compensation ........................................... -- 147,970
Accrued interest on long-term investments ...................... (30,799) --
Changes in operating assets and liabilities:
Prepaid and other current assets .......................... 8,159 467,903
Other assets .............................................. (1,510) 45,265
Accounts payable and accrued expenses ..................... (437,417) (571,386)
------------ ------------
Net cash used in operating activities ....................................... (241,626) (2,928,736)
------------ ------------
Cash flows from investing activities:
Purchase of short-term investments ................................. (6,220,108) (30,870,861)
Proceeds from maturity of short-term investments ................... 11,923,328 36,508,372
Proceeds on sale of equipment ...................................... -- 279,045
Purchase of equipment and leasehold improvements ................... (7,265) (131,446)
------------ ------------
Net cash provided by investing activities ................................... 5,695,955 5,785,110
------------ ------------
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 ................................... 5,478,129 2,434,642
Cash and cash equivalents at beginning of period ............................ 4,292,631 15,715,708
------------ ------------
Cash and cash equivalents at end of period .................................. $ 9,770,760 $ 18,150,350
============ ============
</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 June 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 June 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>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Commercial paper ........................................ $ 8,086,990 $12,330,312
Federal agency notes .................................... 3,932,588 5,392,486
----------- -----------
Total short-term investments ................... $12,019,578 $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 ($6,608,291) and federal
agency notes ($1,746,834) at June 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 month period ending June 30, 2000, a total of 33,815
stock option shares were included in the weighted average number of common
shares outstanding calculation.
The diluted loss per common share calculated for the three and six month
periods ended June 30, 1999 excludes the effects of 1,559,457 and 1,363,975
options outstanding respectively, and the diluted loss per common share
calculated for the six months ended June 30, 2000 excludes the effects of
293,750 options outstanding. These amounts are excluded, as their inclusion
would be anti-dilutive.
6. CONTINGENCIES
In 1998, the Company and LSU entered into dispute resolution under the
provisions of the LSU Agreement. The dispute related to the amount of payment
owed to LSU from various payments that the Company received from Johnson &
Johnson. LSU is seeking payment of $4,138,000. The Company believes that the
payment owed is significantly less than that 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. Since mediation was completed without a resolution, the Company and
LSU are currently in arbitration.
In February 2000, the Company announced that a preliminary ruling has
been made, which relates to a payment received in March 1998 from Johnson &
Johnson for $10 million of the Company's common stock. The Company took the
position that this $10 million is not subject to a royalty to LSU under the LSU
Agreement. LSU had argued to the arbitrator that the Company owes a royalty on
this stock purchase. In the preliminary ruling, the arbitrator has ruled,
contrary to the Company's position, that a royalty is due to LSU on the $10
million received from Johnson & Johnson for the purchase of common stock. The
exact amount of the royalty due to LSU on this $10 million will be dependent on
several factual issues which are in dispute and will be settled by the
arbitrator at a later date.
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 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;
- UNTIL THE SIZE AND SCOPE OF THE SAFETY TRIAL ARE DETERMINED WITH FDA, AN
ASSESSMENT OF THE ADVISABILITY OF ANY SUCH TRIAL CANNOT BE MADE;
- 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 -REGISTERED TRADEMARK- TABLETS, IF APPROVED FOR COMMERCIAL
MARKETING;
- ERGOSET -REGISTERED TRADEMARK- TABLETS, IF APPROVED FOR COMMERCIAL
MARKETING, MAY NOT BE SUCCESSFUL IN THE MARKETPLACE, OR ERGO MAY NOT
RECEIVE ANY PROFITS FROM ITS SALE; AND
- 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 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 -REGISTERED TRADEMARK- 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 -REGISTERED TRADEMARK- tablets for the
treatment of type 2 diabetes was "approvable." However, before ERGOSET
-REGISTERED TRADEMARK- tablets can be approved by FDA for marketing, it
8
<PAGE>
will be necessary for Ergo 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.
From inception through 1999, the Company has been unprofitable.
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 Division of Metabolic and Endocrine Drug Products at the FDA
that its New Drug Application 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. The Company has begun the appeal process
within the FDA of the not-approvable letter for ERGOSET -REGISTERED TRADEMARK-
tables 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
-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.
After the Company finalizes with FDA the requirements for the safety
study, the Company will determine how to proceed with its ERGOSET -REGISTERED
TRADEMARK- program. Some of the options at
9
<PAGE>
FDA include, without limitation, appealing the FDA letter with respect to the
request 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 has also been considering its strategic options for its
ERGOSET -REGISTERED TRADEMARK- program. Some of the possible options include,
without limitation: selling the Company's rights to EROGSET -REGISTERED
TRADEMARK- tablets, licensing the rights to ERGOSET -REGISTERED TRADEMARK-
tablets to another pharmaceutical or biotechnology company, continuing
ERGOSET -REGISTERED TRADEMARK- development on its own, or halting development
of EROGSET -REGISTERED TRADEMARK- tablets.
In addition to ERGOSET -REGISTERED TRADEMARK- 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 -REGISTERED TRADEMARK-
tablets. No decisions have been made with respect to any of the possible
alternatives.
RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND 2000
Research and development expenses decreased from $768,208 to $34,305 and
from $2,082,481 to $79,534 for the three and six month periods ended June 30,
1999 and 2000, respectively. These decreases were mainly due to the discontinued
funding of all its pre-clinical development programs.
General and administrative expenses decreased from $703,439 to $307,843
and from $1,884,895 to $641,983 for the three and six month periods ended June
30, 1999 and 2000, respectively. These decreases were mostly attributable to the
reduction of the Company's workforce.
Interest income increased from $358,831 to $449,760 and from $778,872 to $
881,662 for the three and six month periods ended June 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 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
10
<PAGE>
& 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, short-term investments and long-term
investments were $30,145,463 and $30,339,755 at June 30, 2000 and December 31,
1999, respectively. The overall decrease in cash, cash equivalents, short-term
investments and long-term investments at June 30, 2000, 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 is not approvable, citing the overall
benefit to risk ratio. The Company appealed this decision within the FDA. In
the fourth quarter of 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 is
approvable. However, before ERGOSET -REGISTERED TRADEMARK- 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 -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. 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 on HbA1c (blood sugar) which FDA characterized as
small.
The Company believes its current cash, cash equivalents, short-term and
long-term investments will fund its operations at least through mid-2001.
As of June 30, 2000, the Company's net investment in equipment and
leasehold improvements was approximately $31,000.
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
11
<PAGE>
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 Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
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, 1999.
13
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The information set forth in this Item 4 related to
matters submitted to a vote at the Annual Meeting of
Stockholders of Ergo Science Corporation On June 14, 2000.
(b) Not applicable
(c) A proposal to elect Thomas F. McWilliams and David L.
Castaldi as directors to serve for a three year term
ending in 2003 and until their successors are duly elected
and qualified was approved with the following vote:
<TABLE>
<CAPTION>
Nominee For Withheld
<S> <C> <C>
David L. Castaldi 9,832,594 326,032
Thomas F. McWilliams 9,832,904 325,722
</TABLE>
(d) Not applicable.
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
Controller (principal accounting
officer)
Date: August 14, 2000
--------------------------------
15
