UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-Q

 

 

ERGO SCIENCE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

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 ý No   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)

Yes o  No ý

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

At April 28, 2003 there were 7,149,578 shares of common stock, par value $.01 per share, of the registrant outstanding.

 

 

ERGO SCIENCE CORPORATION

 

TABLE OF CONTENTS

 

 

PART I.                        FINANCIAL INFORMATION
	ITEM 1.	Financial Statements
		Unaudited Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002
		Unaudited Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002
		Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002
		Notes to Consolidated Financial Statements
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk
	ITEM 4.	Controls and Procedures
PART II.                    OTHER INFORMATION
SIGNATURES
CERTIFICATION

 

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ERGO SCIENCE CORPORATION

 

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		March 31, 2003			December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents		$	24,725,382		$	24,938,233
Prepaid and other current assets		114,645			57,164
Total current assets		24,840,027			24,995,397
Equipment and leasehold improvements, net		1,385			2,278
Total assets		$	24,841,412		$	24,997,675
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	701,429		$	688,291
Total current liabilities		701,429			688,291
Stockholders’ equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized; 6,903 shares of Series D preferred stock issued and outstanding at March 31, 2003 and December 31, 2002 (liquidation preference of $11,023,511 at March 31, 2003)		4,306,520			4,306,520
Common stock, $.01 par value, 50,000,000 shares authorized; 7,149,578 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively		71,496			71,496
Additional paid-in capital		111,880,321			111,880,321
Cumulative dividends on preferred stock		(2,296,953		)	(2,296,953		)
Accumulated deficit		(89,821,401		)	(89,652,000		)
Total stockholders’ equity		24,139,983			24,309,384
Total liabilities and stockholders’ equity		$	24,841,412		$	24,997,675

 

The accompanying notes are an integral part of the consolidated financial statements

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ERGO SCIENCE CORPORATION

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended March 31,
		2003				2002
Operating expenses:
Research and development		$		9,800		$		9,300
General and administrative		235,483				217,824
		245,283				227,124
Net operating loss		(245,283			)	(227,124			)
Other income:
Interest income		75,882				110,973
Net income (loss)		$	(169,401		)	$	(116,151		)
Loss per common share:
Basic and diluted		$		(0.02	)	$		(0.02	)
Weighted average common shares outstanding:
Basic and diluted		7,149,578				7,149,578

 

The accompanying notes are an integral part of the consolidated financial statements

 

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ERGO SCIENCE CORPORATION

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Three Months Ended March 31,
		2003			2002
Cash flows from operating activities:
Net loss		$	(169,401	)	$	(116,151	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		893			1,517
Changes in operating assets and liabilities:
Prepaid and other current assets		(57,481		)	(64,150		)
Accounts payable and accrued expenses		13,138			(252,608		)
Net cash used in operating activities		(212,851		)	(431,392		)
Net decrease in cash and cash equivalents		(212,851		)	(431,392		)
Cash and cash equivalents at beginning of period		24,938,233			25,808,028
Cash and cash equivalents at end of period		$	24,725,382		$	25,376,636

 

The accompanying notes are an integral part of the consolidated financial statements

 

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ERGO SCIENCE CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.                                      Basis of Presentation

 

The accompanying financial statements are unaudited and have been prepared by Ergo Science Corporation (“Ergo” or the “Company”) in accordance with generally accepted accounting principles.

 

Certain information and footnote disclosure normally included in the Company’s annual financial statements have been condensed or omitted.  The interim financial statements, in the opinion of management, reflect all adjustments (including normal recurring accruals) necessary for a fair statement of the results for the interim periods ended March 31, 2003 and 2002.

 

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, 2002, which are contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

Stock Based Compensation

 

Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) requires that companies either recognize compensation expense for grants of stock, stock options, and other equity instruments based on fair value, or provide pro forma disclosure of net income or loss and earnings or loss per share in the notes to the financial statements. The Company follows the disclosure provisions of SFAS 123 and applies APB Opinion 25 and related interpretations in accounting for its employee plans. Accordingly, no compensation cost has been recognized for its stock option plans. The effects of applying SFAS 123 in this pro forma disclosure are not likely to be representative of the effects on reported income or loss for future years. Had compensation cost for the Company’s stock-based compensation plans been determined based on the fair value at the grant dates as calculated in accordance with SFAS 123, the Company’s net loss and loss per share for the three months ended March 31, would have been increased to the pro forma amounts indicated below:

 

 

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The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

 

2.                                      Cash Equivalents

 

The Company considers all highly liquid investments with a maturity of 90 days or less at the date of purchase to be cash equivalents.

 

Debt securities are classified as held-to-maturity when the Company has positive intent and ability to hold the securities to maturity.  Held-to-maturity securities are stated at amortized cost.

 

At March 31, 2003 and December 31, 2002, cash and cash equivalents were comprised primarily of investments in U.S. government obligations that mature within 90 days of purchase.

 

3.                                      Net 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 all potentially dilutive securities, such as stock options.

 

During the three month periods ended March 31, 2003 and 2002, options to purchase 213,625 shares of common stock, respectively, were not included in the computation of diluted net loss per share since their inclusion would be antidilutive.

 

4.                                      Guarantees

 

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of certain guarantees. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.

 

The Company has agreed to indemnify any person who is made a party to any action or threatened with any action as a result of such person’s serving or having served as an officer or director of the Company. The indemnification does not apply if the person is adjudicated not to have

 

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acted in good faith in the reasonable belief that his or her actions were in the best interests of the Company. The indemnification obligation survives termination of the indemnified party’s involvement with the Company but only as to those claims arising from such person’s role as an officer or director. The maximum potential amount of future payments that the Company could be required to make to indemnify an officer or director is unlimited; however, the Company has a Director and Officer insurance policy that, in most cases, would limit its exposure and enable it to recover a portion of any future amounts paid. The estimated fair value of these indemnification provisions is minimal. The indemnification provision for officers and directors was grandfathered under the provisions of FIN 45 as they were in effect prior to December 31, 2002. Accordingly, we have no liabilities recorded for these provisions as of March 31, 2003.

 

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ITEM 2.                       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This discussion contains forward-looking statements. Forward-looking statements reflect Ergo’s current views with respect to future events.  Actual results may vary materially and adversely from those anticipated, believed, assumed, estimated or otherwise indicated.  Important factors that could cause actual results to differ materially include, without limitation:

 

•                  we are a company in transition;

 

•                  our common stock is subject to rules relating to low-priced or penny stock, which may make it more difficult for our stockholders to buy or sell shares and for us to enter into future equity financings;

 

•                  the transfer restrictions implemented in the merger may delay or prevent takeover bids by third parties and may delay or frustrate any attempt by our stockholders to replace or remove the current management; and

 

•                  we believe that we have qualified for exclusions from the definition of “investment company”‘ under the Investment Company Act of 1940 at all relevant times since our incorporation; however, if the Securities and Exchange Commission takes a contrary position and prevails, we would be subject to significant restrictions on our business and on our ability to pursue other strategic alternatives.

 

Overview

 

Ergo Science is a company in transition.  From our incorporation through March 2001, we were engaged in the development of ERGOSET® tablets for the treatment of type 2 diabetes. We are now working to sell our drug assets and to pursue other strategic alternatives.

 

In March 2001, we decided that the next phase of the development of ERGOSET® would be better undertaken by a company that has more experience with human drug development and more resources for regulatory approval and marketing than we do. We are currently seeking to acquire one or more established businesses.  We have substantial unrecognized tax benefits and approximately $25 million in cash and cash equivalents.  We are currently evaluating strategic alternatives for these assets. We are also in the process of attempting to sell or license our interests in ERGOSET® including our intellectual property rights and other human drug related assets. If we enter into an agreement to dispose of any of our human drug-related assets, we will seek stockholder approval for that transaction only if it is required by Delaware or other applicable law or our board of directors determines it is advisable to seek such approval.

 

At our Annual Meeting of Stockholders held on October 15, 2001, stockholders approved the imposition of transfer restrictions on our common stock.  These transfer restrictions were implemented on October 19, 2001.

 

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During our transition period, we intend to continue to conserve our cash and other assets consistent with our attempts to sell our science assets and consider strategic alternatives.  The only securities we currently hold are U. S. government obligations with maturities of 90 days or less.  We expect to continue to hold similar securities exclusively until we acquire an operating business.

 

From inception through March 31, 2003, the Company as been unprofitable.

 

Results of Operations

 

Three Months Ended March 31, 2002 and 2003

 

Research and development expenses increased from $9,300 to $9,800 for the three month period ended March 31, 2002 and 2003, respectively.  The increase is due to a foreign exchange rate fluctuation on services incurred by the Company for the storage of ERGOSET®.

 

General and administrative expenses increased from $217,824 to $235,483 for the three month period ended March 31, 2002 and 2003, respectively. This increase was primarily attributable to increased costs incurred by the Company in evaluating its strategic alternatives and the process of attempting to sell or license its interest in ERGOSET® and its other human drug related assets.

 

Interest income decreased from $110,973 to $75,882 for the three month period ended March 31, 2002 and 2003, respectively. The decrease is due primarily to a general reduction in market interest rates and the use of cash to fund the Company’s operations resulting in less cash available for investment.

 

Liquidity and Capital Resources

 

Since our inception, our primary source of cash has been from 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 us with aggregate proceeds of $42,999,000 through 1998.

 

On May 23, 2001, we entered into a common stock purchase agreement with Court Square Capital Limited, the Company’s largest stockholder, to provide us with additional capital for general corporate purposes or to pursue other strategic alternatives. Subject to certain conditions, including stockholder approval, the agreement provides for us to issue and sell to Court Square 3,750,000 shares at a per share price of $2.30, subject to adjustment.  This agreement will expire on May 23, 2003.

 

Cash and cash equivalents were $24,938,233 and $24,725,382 at December 31, 2002 and March 31, 2003, respectively.  The overall decrease in cash and cash equivalents at March 31, 2003, was due primarily to the funding of the operating activities of the Company.

 

10

 

The Company believes its current cash and cash equivalents will fund its current operations for at least the next 12 months. In the event that the Company purchases an income-producing business, the Company may require additional capital.

 

The terms of the Company’s Series D Preferred Stock prohibit the Company from paying dividends on the common stock.

 

New Accounting Pronouncements

 

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.  FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved.  Variable interest entities that effectively disperse risk will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed.  FIN 46 also requires enhanced disclosure requirements related to variable interest entities.  FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date.  It applies in the first fiscal year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003.  The adoption of FIN 46 is not expected to have a material effect on our financial statements.

 

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ITEM 3.                       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There were no material changes in the Company’s exposure to market risk from December 31, 2002.

 

ITEM 4.                       CONTROLS AND PROCEDURES

 

(a)                                  Evaluation of disclosure controls and procedures.  Within 90 days prior to the filing date of this report, the Company’s principal executive officer and acting financial officer carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures.  Based on that evaluation, the Company’s principal executive officer and acting principal financial officer believe (i) that the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management as appropriate to allow timely decisions required disclosure, and (ii) that the Company’s disclosure controls and procedures are effective.

 

(b)                                 Changes in internal controls.  There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the evaluation referred to in Item 4. (a) above, nor have there been any corrective actions with regard to significant deficiencies or material weaknesses.

 

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PART II

 

OTHER INFORMATION

 

ITEM 6.                       EXHIBITS AND REPORTS ON FORM 8-K

 

(a)                                  Exhibits:

 

99.1                                 Certification of the Chief Executive Officer/Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.

 

(b)                                 Reports on Form 8-K:

 

None.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

	ERGO SCIENCE CORPORATION
	By:	/s/ David R. Burt
				David R. Burt
				Chief Executive Officer, Principal Financial and Accounting Officer and Director
	Date:		May 14, 2003

 

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CERTIFICATION

 

I, David R. Burt, certify that:

 

1.                                       I have reviewed this quarterly report on Form 10-Q of Ergo Science Corporation;

 

2.                                       Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.                                       Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.                                       I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have:

 

a.               designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b.              evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c.               presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a.               all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b.              any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.                                       I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

	/s/ David R. Burt
	David R. Burt
	Chief Executive Officer and acting Chief Financial Officer
	Date:	May 14, 2003

 

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INDEX TO EXHIBITS

 

ERGO SCIENCE CORPORATION

 

 

Exhibit No.		Exhibit
99.1		Certification of the Chief Executive Officer/Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act