UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

(Mark One)

ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
-OR-
o		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. 0-26988

 

 

ERGO SCIENCE CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware		04-3565746
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
790 Turnpike Street
North Andover, Massachusetts		01845
(Address of principal executive offices)		(Zip Code)
Registrant’s telephone number, including area code: (978) 688-8833
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 Par Value
(Title of Class)

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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

 

The aggregate market value of our common stock held by non-affiliates (without admitting that any person whose shares are not included in such calculation is an affiliate), based on closing sale price as reported on the NASD’s OTC Bulletin Board as of June 30, 2004 was $12,233,959.

 

As of March 3, 2005, there were 5,813,856 outstanding shares of the registrant’s common stock.

 

Documents incorporated by reference:  None.

 

 

FORWARD-LOOKING STATEMENTS

 

In this document the words “we,” “our,” “ours” and “us” refer only to Ergo Science Corporation and not to any other person.

 

This Annual Report on Form 10-K contains forward-looking statements with respect to our financial condition, results of operations and business.  You can find many of these statements by looking for such words as “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” “project,” “will,” “could,” “may” or similar expressions.  These statements reflect our current views with respect to future events and financial performance and involve numerous assumptions, risks and uncertainties, including without limitation, the risks described in “Item 1.  Business - Risk Factors.” Because these forward-looking statements are based upon assumptions and are subject to risks and uncertainties, actual results may vary materially and adversely from those anticipated, believed, estimated, assumed or otherwise indicated.  We do not undertake to update any forward-looking statement that may be made from time to time by or on behalf of us.

 

In connection with the implementation of transfer restrictions on our shares of common stock that became effective on October 19, 2001, the outstanding shares of our common stock were reverse split on a one-for-two basis. Unless otherwise indicated, all of the share and per share data in this report reflect the effect of this reverse stock split.

 

PART I

 

ITEM 1. BUSINESS

 

Overview

 

On February 9, 2005 the Company announced that on February 8, 2005 it had entered into a share purchase agreement to acquire the business to business publishing division (“Business”) of Highbury House Communications plc (“Highbury House”) for a purchase price of GBP 12.5 million (approximately $23.395 million).  The GBP 12.5 million purchase price is subject to a working capital adjustment that has been estimated by the parties to be GBP 1.041 million (approximately $1.948 million) at closing, and therefore, the Company expects to pay GBP 11.459 million (approximately $21.447 million) at closing.  The GBP 11.459 million payment is subject to a post-closing adjustment based on the actual working capital of the Business on the date of the closing.  The Business, comprising of eight wholly-owned subsidiaries of Highbury House, provides information across a diverse range of sectors including printed and web-based magazines, data services and directories, exhibitions, conferences and award ceremonies. According to its 2003 Annual Report, Highbury House “is a leading international print and online publisher of over 200 consumer, business to business and client magazines, as well as an organizer of events around the globe.” Highbury House Communications plc is listed on the FTSE Index. The business being acquired includes: 13 trade names (including: Checkout; Electrical Times; Independent Grocer; The Motor Ship; World Travel Guide; and Motor Trader); 150 domain names (including: columbusguides.com; groweroftheyear.com; harpers-wine.com; motorship.com; motortrader.com; travel-guide.com; and worldfish.com); approximately 45 magazine titles (including: Motor Trader; World Fishing Magazine; Export Times; Checkout; World Travel Guide; Television World; and Electronics World); and approximately 35 exhibitions (including: European Hotel Design Awards; The International Wine & Spirit Competition; The Retail Industry Awards; Quality Food and Drinks Awards; and Europe Power Conference and Exhibition).  The acquisition is expected to be completed in early April 2005 and is subject to approval by the shareholders of Highbury House, as required by the U.K. listing rules, as well as customary closing conditions. Ergo intends to fund the acquisition with cash and cash equivalents.

 

From November 2003 until February 2005 the Company has been reviewing and evaluating potential acquisitions.

 

On November 24, 2003 we sold all of our scientific and research assets and certain other intellectual property assets to Pliva d.d., a company organized under the laws of Croatia (“Pliva”). At the time of the sale, we received $5,498,000 in cash. Upon the occurrence of certain events outlined in the asset purchase agreement, we would have received an additional $500,000. In accordance with the asset

 

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purchase agreement, Pliva had one year from the closing date to obtain the right to certain patents from Massachusetts General Hospital (“MGH Patents”). Pliva was not able to obtain the right to the MGH Patents and therefore they shall retain the additional $500,000 and shall have no further obligation to pay that amount to us. In addition, Pliva has assumed our future obligations under the LSU Royalty agreement. Also as part of the agreement, Pliva has agreed to make payments to one of our wholly-owned subsidiaries, Ergo Texas Holdings, Inc. (“Ergo Texas”), to cover certain payments required to be made in the event that Ergoset® or another specified drug is approved by the Food and Drug Administration.

 

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.

 

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. From our incorporation through March 2001, we were engaged in the development of ERGOSET® tablets for the treatment of type 2 diabetes.

 

Human Resources

 

As of March 3, 2005, we had one full-time and two part-time employees.  None of our employees are covered by a collective bargaining agreement.

 

RISK FACTORS

 

In addition to the other information in this Annual Report on Form 10-K and all of our other SEC reports, you should consider the following factors in evaluating us, our business and the strategic direction we may head in the future.

 

We have relied on an exclusion from the definition of “investment company” that may not have been available to us.  We could therefore possibly be subject to enforcement action by the SEC and be required to register as an investment company with significant restrictions on our business.

 

The Investment Company Act of 1940 (the “‘40 Act”) requires registration as an investment company for companies that are engaged primarily in the business of investing, reinvesting, owning, holding or trading securities.  Unless an exclusion applies, a company is an investment company if it owns “investment securities” with a value exceeding 40% of the value of its total assets on an unconsolidated basis, excluding government securities and cash items.  We currently are not an investment company under this test because none of our assets consist of such investment securities.

 

However, from the time of our initial public offering through March 2001, we relied on an exclusion available to companies that are engaged primarily in a business other than investing.  The SEC has established specific criteria by which companies that are primarily engaged in research and development not investing, qualify for this exclusion.  When we sold our pre-clinical research assets in the second quarter of 1999 and moved to conserve our assets for the development of ERGOSET through the FDA process, it raised a regulatory issue as to whether we might need to register as an investment company.  There is a risk that the SEC could take the position that we did not meet the requirements for this exclusion from the second quarter of 1999 through March 2001.  The Investment Company Act also provides a one-year temporary exclusion for companies that are in transition and which have a bona fide intent to be engaged primarily in a business other than investing in securities as soon as possible, but in any event within one year.  We relied on this temporary exclusion since we decided to sell our human drug-related assets in March 2001 through the third quarter of 2001.  There is a risk that the SEC may take the position that we are not entitled to rely on this temporary exclusion.  In the event that we were not entitled to rely on the exclusion prior to March 2001 or we were not entitled to rely on the temporary exclusion beginning in March 2001, our failure to register as an investment company not only raises the possibility of an enforcement action by the SEC, but also threatens the validity of corporate actions and

 

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contracts entered into by us during the period of violations.  Since the third quarter of 2001, the only securities we have held are U.S. government obligations with maturities of 90 days or less, which provides a separate exemption under the ‘40 Act.

 

If we are or become an unregistered investment company, we may be limited in our ability to issue any securities, including securities pursuant to the 2001 Employee, Director and Consultant Stock Plan.

 

The transfer restrictions on our common stock may delay or prevent takeover bids by third parties and may delay or frustrate any attempt by stockholders to replace or remove the current management.

 

Our common stock is subject to transfer restrictions approved by our stockholders on October 15, 2001. These transfer restrictions require any person attempting to acquire a significant interest in the Company to negotiate with the Company’s board of directors. In addition, the transfer restrictions may make it more difficult for stockholders to replace current management because no single stockholder may cast votes for more than 5% of the Company’s outstanding shares of common stock, unless that stockholder held more than 5% of our common stock before the imposition of the transfer restrictions.

 

If the transfer restrictions on our common stock are not effective in preventing an ownership change from occurring, our ability to use the tax net operating loss (“NOL”) carryforwards will be severely limited.

 

Our assets include significant NOL carryforwards.  Under current tax rules, the potential value of our NOLs could be reduced to near zero if we experience an “ownership change” as defined in the Internal Revenue Code of 1986.  Although the transfer restrictions on our common stock are expressly permitted under Delaware law, we are not aware of any published court decisions enforcing similar transfer restrictions. Even if a court did enforce our transfer restrictions in the case of such a transfer, the Internal Revenue Service might not agree that the transfer restrictions provide a sufficient remedy with respect to any ownership change resulting from the prohibited transfer. In either of these cases, despite the implementation of the transfer restrictions, an ownership change could occur that would severely limit our ability to use the tax benefits associated with our NOL carryforwards.

 

We may not be able to realize the benefits of our NOL carryforwards.

 

Our ability to use our potential tax benefits in future years will depend upon the amount of our otherwise taxable income. If we do not have sufficient taxable income in future years to use the tax benefits before they expire, we will lose the benefit of those NOL carryforwards permanently.

 

In addition, the amount of NOL carryforwards that we have claimed has not been audited or otherwise validated by the U.S. Internal Revenue Service. The IRS could challenge our calculation of the amount of our NOLs or our determinations as to when a prior change in ownership occurred and other provisions of the Internal Revenue Code may limit our ability to carry forward our NOLs to offset taxable income in future years. If the IRS were successful with respect to any such challenge, the potential tax benefit of the NOL carryforwards to us could be substantially reduced.

 

Anti-takeover provisions could impair the market price of Ergo common stock.

 

We have adopted certain anti-takeover measures.  Our Certificate of Incorporation:

 

•                  provides for staggered terms of office for directors;

 

•                  requires certain procedures to be followed and time periods to be met for any stockholder to propose matters to be considered at annual meetings of stockholders, including nominating directors for election at those meetings;

 

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•                  prohibits stockholders from calling special meetings of stockholders; and

 

•                  authorizes our board of directors to issue up to 10,000,000 shares of preferred stock without stockholder approval and to set the rights, preferences, and other designations, including voting rights, of those shares as the board of directors may determine.

 

These provisions, alone or in combination with each other, may discourage transactions involving actual or potential changes of control. Such transactions may include those that otherwise could involve payment of a premium over prevailing market prices to holders of our common stock. We also are subject to provisions of the Delaware General Corporation Law that may make some business combinations more difficult.  We have taken steps to help preserve our net operating loss carryforwards and reduce, but not eliminate, the risk of the occurrence of an ownership change.  These steps may have the incidental effect of impeding the attempt of a person or entity from acquiring a significant or controlling interest in the Company render it difficult to effect a merger or similar transaction even if the transaction is favored by a majority of independent stockholders, and entrenching management.

 

As we acquire the assets of Highbury House’s business to business division, there can be no assurance of the Business’ future success.  Particular risk factors include, but are not limited to:

 

•             Ergo is relying on the existing key personnel of the acquired company to continue to run the business.

•             The existing management of Ergo has no expertise in the publishing industry.

•             The acquired company’s operating units are located outside of the United States.

•             Current financial results of the acquired company are not indicative of future results.

•             The market for the acquired company’s products and services can be competitive depending on the particular sector being serviced.

 

ITEM 2. PROPERTIES

 

Facilities

 

The Company currently leases approximately 250 square feet of shared office space as our principal office in Jefferson Office Park, North Andover, Massachusetts.  The space is leased on a month to month basis.

 

ITEM 3. LEGAL PROCEEDINGS

 

None.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Our 2004 Annual Meeting of Stockholders was held on December 1, 2004.  The following matters were voted upon at the annual meeting:

 

(1)   Nadim Nsouli was elected to serve as a Director to hold office for a term of three years until the 2007 annual meeting of stockholders and until his successor is chosen and qualified.  This matter was approved with 4,508,672 votes for the election of Mr. Nsouli, 215,508 votes were withheld and 0 broker non-votes.

 

(2)   Our stockholders also ratified the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2004. This proposal was approved with 4,683,171 votes for the proposal, 22,159 votes against the proposal, 18,850 abstentions and 0 broker non-votes.

 

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PART II

 

ITEM 5.                                                     MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Our common stock was quoted on the Nasdaq Stock Market through May 23, 2001 under the symbol “ERGO.”  Since that date, after a brief transition period during which our common stock was quoted on the NASD’s OTC Bulletin Board under the symbol “ERGG,” our common stock has been quoted on the NASD’s OTC Bulletin Board under the symbol “ERGO.”  At February 25, 2005, the number of record holders of our common stock was approximately 260.  The following table sets forth, for the periods indicated, the high and low sale price or bid information for our common stock as reported on the Nasdaq Stock Market or the NASD’s OTC Bulletin Board, as applicable. Please note that the bid information relating to over-the-counter market quotations of our common stock reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

Dividends

 

We have not paid dividends to our stockholders since our inception.  We are unable to pay dividends on our common stock without first obtaining the written consent of the holders of a majority of our outstanding series D exchangeable preferred stock.

 

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ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

 

The following table sets forth selected consolidated financial data for the Company as of the dates and for the periods indicated. The data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this report.

 

		Years Ended December 31,
		2004			2003			2002			2001			2000
Consolidated Statement of Operations Data:
Operating expenses:
Research and development (1)		$	—		$	(467,294	)	$	39,278		$	55,454		$	(163,834	)
General and administrative (2)		1,114,360			1,377,728			973,497			2,456,332			1,748,301
Total operating expenses		1,114,360			910,434			1,012,775			2,511,786			1,584,467
Other Income:
Interest income		326,904			263,607			426,493			1,260,964			1,920,922
Other income (3)		—			5,598,000			—			—			—
Total other income		326,904			5,861,607			426,493			1,260,964			1,920,922
Net income (loss) before income taxes		(787,456		)	4,951,173			(586,282		)	(1,250,822		)	336,445
Income tax expense (4)		—			94,000			—			—			—
Net income (loss)		$	(787,456	)	$	4,857,173		$	(586,282	)	$	(1,250,822	)	$	336,455
Net income (loss) income per share
basic		$	(0.14	)	$	0.74		$	(0.08	)	$	(0.18	)	$	0.05
assuming dilution		$	(0.14	)	$	0.74		$	(0.08	)	$	(0.18	)	$	0.05
Weighted average common shares outstanding
basic		5,813,856			6,589,673			7,149,578			7,149,578			7,146,209
assuming dilution		5,813,856			6,603,389			7,149,578			7,149,578			7,181,780

 

		December 31,
		2004			2003			2002			2001			2000
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	26,453,190		$	27,102,617		$	24,938,233		$	25,808,028		$	10,130,599
Investments		—			—			—			—			16,958,488
Working capital		25,961,444			26,748,428			24,307,106			24,888,851			26,124,695
Total assets		26,463,727			27,117,258			24,997,675			25,823,201			27,129,619
Total stockholders’ equity		$	25,961,444		$	26,748,900		$	24,309,384		$	24,895,666		$	26,146,488

 

(1)          2003: Includes a $500,000 credit to expense to reflect an adjustment to an ERGOSET® related obligation.
2000: Includes adjustments to estimates of amounts required to settle ERGOSET® related obligations, offset by a $2 million charge as part of the LSU settlement.

 

(2)          Includes a loss on the disposal of equipment in 2001 in the amount of $3,201.

 

(3)          Includes a gain in 2003 from the sale of the Company’s science assets in the amount of $5,498,000 and a gain from the sale of the domain name ergo.com in the amount of $100,000.

 

(4)          Represents an estimated amount owed for Federal income taxes due to limitations on alternative minimum tax net operating loss carryforwards in 2003.

 

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ITEM 7.                             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

On February 9, 2005 the Company announced that on February 8, 2005 it had entered into a share purchase agreement to acquire the business to business publishing division (“Business”) of Highbury House Communications plc (“Highbury House”) for a purchase price of GBP 12.5 million (approximately $23.395 million).  The GBP 12.5 million purchase price is subject to a working capital adjustment that has been estimated by the parties to be GBP 1.041 million (approximately $1.948 million) at closing, and therefore, the Company expects to pay GBP 11.459 million (approximately $21.447 million) at closing.  The GBP 11.459 million payment is subject to a post-closing adjustment based on the actual working capital of the Business on the date of the closing.  The Business, comprising of eight wholly-owned subsidiaries of Highbury House, provides information across a diverse range of sectors including printed and web-based magazines, data services and directories, exhibitions, conferences and award ceremonies. According to its 2003 annual report, Highbury House “is a leading international print and online publisher of over 200 consumer, business to business and client magazines, as well as an organizer of events around the globe.” Highbury House Communications plc is listed on the FTSE Index. The business being acquired includes: 13 trade names (including: Checkout; Electrical Times; Independent Grocer; The Motor Ship; World Travel Guide; and Motor Trader); 150 domain names (including: columbusguides.com; groweroftheyear.com; harpers-wine.com; motorship.com; motortrader.com; travel-guide.com; and worldfish.com); approximately 45 magazine titles (including: Motor Trader; World Fishing Magazine; Export Times; Checkout; World Travel Guide; Television World; and Electronics World); and approximately 35 exhibitions (including: European Hotel Design Awards; The International Wine & Spirit Competition; The Retail Industry Awards; Quality Food and Drinks Awards; and Europe Power Conference and Exhibition). The acquisition is expected to be completed in early April 2005 and is subject to approval by the shareholders of Highbury House, as required by the U.K. listing rules, as well as customary closing conditions. Ergo intends to fund the acquisition with cash and cash equivalents.

 

From November 2003 until February 2005 the Company has been reviewing and evaluating potential acquisitions.

 

On November 24, 2003 we sold all of our scientific and research assets and certain other intellectual property assets to Pliva d.d., a company organized under the laws of Croatia (“Pliva”). At the time of the sale, we received $5,498,000 in cash. Upon the occurrence of certain events outlined in the asset purchase agreement, we would have received an additional $500,000. In accordance with the asset purchase agreement, Pliva had one year from the closing date to obtain the right to certain patents from Massachusetts General Hospital (“MGH Patents”). Pliva was not able to obtain the right to the MGH Patents and therefore they shall retain the additional $500,000 and shall have no further obligation to pay that amount to us. In addition, Pliva has assumed our future obligations under the LSU Royalty agreement.  Also as part of the agreement, Pliva has agreed to make payments to one of our wholly-owned subsidiaries, Ergo Texas, to cover certain payments required to be made in the event that Ergoset® or another specified drug is approved by the Food and Drug Administration.

 

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.

 

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.  From our incorporation through March 2001, we were engaged in the development of ERGOSET® tablets for the treatment of type 2 diabetes.

 

From our inception through 2004, the Company has been unprofitable every year except 2003.  We were profitable in 2003 solely because of the sale of the Company’s science assets to Pliva.

 

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Critical Accounting Policies

 

Our significant accounting policies are discussed in Note 1 of our audited financial statements, which are included in this Form 10-K.  We believe that the most significant judgments involve the establishment of accruals at each balance sheet date.

 

Our former Chief Executive Officer (“CEO”) spent a portion of his time dealing with FDA related issues prior to the asset sale to Pliva in November 2003 and, therefore, we recorded a portion of the former CEO’s salary as a Research and Development expense in the statement of operations in the years up to and including 2003.

 

Results of Operations

 

Years ended December 31, 2003 and 2004

 

Research and Development Expenses. Research and development expenses consist primarily of salary expense of the former CEO who spent a portion of his time dealing with FDA related issues prior to the asset sale to Pliva in November 2003. We have expensed all of our research and development costs as they have been incurred.

 

Research and development expenses were $(467,294) in 2003 as compared to $0 in 2004. The Company incurred no research and development expenses in 2004. The 2003 amount of $(467,294) was primarily a result of a reversal of an ERGOSET® related obligation in the amount of $500,000 upon the signing of the sale of the Company’s science assets to Pliva. We no longer believed that it was probable that we would have to pay this obligation to a former vendor.

 

General and Administrative Expenses.  General and administrative expenses consist primarily of compensation for personnel, professional services, which include consultants, legal fees and accounting audit and tax fees, and administrative expenses associated with operating as a public company.

 

General and administrative expenses decreased from $1,377,728 in 2003 to $1,114,360 in 2004. The decrease of approximately $263,000 was principally due to decreases in legal costs of approximately $404,000, reductions in general operating costs of the company of approximately $28,000, offset by increases in payroll costs of approximately $107,000 and other professional fees of approximately $62,000.  General and administrative costs in 2004 included payroll expenses of approximately $270,000, legal fees of approximately $315,000, other professional fees of approximately $300,000 and Directors and Officers insurance of $85,000. The professional fees included accounting, audit and tax related fees, cash management fees and board of director fees.

 

Interest income increased from $263,607 in 2003 to $326,904 in 2004.  The increase in interest income is primarily due to a general increase of market interest rates and higher cash investment balances due to the $5,498,000 received from the Pliva transaction in November 2003.

 

Other income decreased from $5,598,000 in 2003 to $0 in 2004.  There was no other income in 2004. The other income in 2003 represented revenue from the sale of assets to Pliva in the amount of $5,498,000 and from the sale of the ergo.com domain name in the amount of $100,000.

 

Income tax expense decreased from $94,000 in 2003 to $0 in 2004. The income tax expense in 2003 represented an estimated amount owed for Federal income taxes in 2003 due to limitations on alternative minimum tax net operating loss carryforwards.

 

Net income (loss) decreased from a net income of $4,857,173 in 2003 to a net loss of $787,456 in 2004. The decrease in net income was primarily due to the sale of assets to Pliva in 2003.  Net income (loss) per common share decreased from $0.74 in 2003 to $(0.14) in 2004.

 

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Years ended December 31, 2002 and 2003

 

Research and development expenses decreased from $39,278 in 2002 to $(467,294) in 2003. The decrease was primarily a result of a reversal of an ERGOSET® related obligation in the amount of $500,000 upon the signing of the sale of the Company’s science assets to Pliva. We no longer believe it is probable that we will have to pay this obligation to a former vendor. We do not expect to incur any research and development expenses in 2004 now that we have sold the science assets.

 

General and administrative expenses increased from $973,497 in 2002 to $1,377,728 in 2003. The increase was principally due to increases in legal costs of approximately $350,000 and other professional fees of approximately $73,000, offset by reductions in general operating costs of the company of approximately $19,000. The legal costs and professional fees were incurred primarily in the sale of the assets to Pliva as well as maintaining our intellectual property prior to the sale.

 

Interest income decreased from $426,493 in 2002 to $263,607 in 2003.  The decrease in interest income is primarily due to a general reduction of market interest rates and a decrease of cash available for investment for the vast majority of the year.

 

Other income increased from $0 in 2002 to $5,598,000 in 2003.  The increase in other income represents revenue from the sale of assets to Pliva in the amount of $5,498,000 and from the sale of the ergo.com domain name in the amount of $100,000.

 

Income tax expense increased from $0 in 2002 to $94,000 in 2003. The increase in income tax expense represents an amount owed for Federal income taxes in 2003 due to limitations on alternative minimum tax net operating loss carryforwards.

 

Net income (loss) increased from a net loss of $(586,282) in 2002 to a net income of $4,857,173 in 2003. The increase in net income was primarily due to the sale of assets to Pliva.  Net income (loss) per common share increased from $(0.08) in 2002 to $0.74 in 2003.

 

Net Operating Loss Carryforwards

 

At December 31, 2004, we reported federal net operating loss and research and experimentation carryforwards of approximately $77 million. If not used, the tax loss carryforwards will begin to expire in 2008. Our ability to use these carryforwards is subject to limitations resulting from, among other things, an ownership change as defined in the Internal Revenue Code sections 382 and 383. See Note 5 of Notes to Consolidated Financial Statements.

 

Liquidity and Capital Resources

 

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, the sale of common stock in conjunction with the Joint Collaboration Agreement with Johnson & Johnson (the “Joint Collaboration Agreement”), and the sale of our science assets to Pliva. The Joint Collaboration Agreement was subsequently terminated by Johnson & Johnson effective on January 3, 1999. Private placements of equity securities provided us with aggregate proceeds of $42,999,000 through 1998.

 

Cash and cash equivalents were $27,102,617 and $26,453,190 at December 31, 2003 and 2004, respectively. The overall decrease in cash and cash equivalents at December 31, 2004 compared to one year prior was due primarily to general operating costs of approximately $1.1 million, offset by interest income of $327,000.

 

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Cash used in operating activities was $649,427 during the year ended December 31, 2004 compared to cash provided by operating activities of $4,582,041 during 2003 and a cash use of $869,795 during 2002. The decrease in cash provided by operations in 2004 is primarily due to net income in 2003 of $4,857,173 which was a direct result of the sale of the science assets to Pliva in the amount of $5,498,000. The cash use in 2004 and 2002 were primarily due to cash outflows for general and administrative activities.

 

Cash flow used in financing activities in 2003 of $2,417,657 was due to the treasury stock purchase of 1,335,722 shares by the Company of its own common stock from Court Square Capital Limited, its largest shareholder at the time.

 

Our primary source of cash in 2004 was interest income generated by our investment of cash and cash equivalents of $326,904. Our primary source of cash in 2003 was the sale of assets to Pliva in the amount of $5,498,000 as well as interest income of $263,607 generated by our investment of cash and cash equivalents. The Company will use most of its current cash to acquire the business publishing division of Highbury House Communications plc for a purchase price of GBP 11.459 million (approximately $21.447 million) (See Note 11).  The only securities we currently hold are U.S. government obligations with maturities of 90 days or less.

 

We have concentrated our efforts on conserving our cash in anticipation of an acquisition. However, our use of cash has fluctuated significantly from quarter to quarter and we anticipate that this pattern will continue.

 

Requirements

 

Our primary use of cash prior to March 2001 was in operating activities to fund research and development, including preclinical studies and clinical trials. Since then our primary use of cash has been in general and administrative expenses and in evaluating and implementing strategic alternatives. In addition, we purchased 1,335,722 shares of our common stock on August 1, 2003, from our then-largest stockholder, Court Square Capital Limited, for $2,417,657.

 

We expect that our available cash and expected interest income will fund our current operations for at least the next 12 months.

 

Depending on the decisions that are made, our capital requirements may exceed our current resources. In such event, we would have to seek additional debt or equity financing from private or public sources. To the extent we raise additional capital by issuing equity securities, ownership dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders. To the extent that we borrow funds, the lenders of such funds will have claims to our assets before there can be any distribution to our stockholders. There can be no assurance, however, that additional financing, either debt or equity, will be available from any source or, if available, will be available on terms acceptable to us.

 

We cannot pay dividends on our common stock without first obtaining the written consent of the holders of a majority of our outstanding series D exchangeable preferred stock.

 

The Company will use approximately $21.447 million of its own cash in its expected acquisition of Highbury House. The Company expects Highbury House to be cash flow positive for the foreseeable future.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

11

 

Contractual Obligations

 

We have no long term obligations, capital lease obligations, operating lease obligations, purchase obligations, or other long-term liabilities reflected on the Company’s balance sheet under Generally Accepted Accounting Principles “GAAP”.

 

The Company has entered into as Share Purchase Agreement with Highbury House Communications plc to purchase its business to business publishing division for approximately $21.447 million. The Company expects to complete this acquisition in April 2005.

 

New Accounting Pronouncements

 

In December 2004, the FASB revised SFAS No. 123 (“SFAS No. 123(R)”). SFAS No. 123(R), Share-Based Payment, requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Pro forma disclosure is no longer an alternative to financial statement recognition. SFAS No. 123(R) is effective for periods beginning after June 15, 2005. We are still evaluating the transition provisions allowed by SFAS No. 123 (R) and will adopt it in the third quarter of 2005. The financial statement impact is not expected to be materially different from that shown in the existing pro forma disclosure required under the original SFAS No. 123. The issuance of additional stock options in the future will cause SFAS 123(R) to have a greater impact on our financial statements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

We are not subject to market risk associated with risk sensitive institutions as we do not invest in instruments that are not United States government instruments and do not enter into hedging transactions.

 

12

 

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS

 

Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements

 

13

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of Ergo Science Corporation

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, cash flows and stockholders’ equity present fairly, in all material respects, the financial position of Ergo Science Corporation and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 25, 2005

 

14

 

ERGO SCIENCE CORPORATION

CONSOLIDATED BALANCE SHEETS

 

		December 31,
		2004			2003
ASSETS
Current assets:
Cash and cash equivalents		$	26,453,190		$	27,102,617
Prepaid and other current assets		10,537			14,169
Total current assets		26,463,727			27,116,786
Equipment, net		—			472
Total assets		$	26,463,727		$	27,117,258
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	408,283		$	274,358
Income taxes payable		94,000			94,000
Total current liabilities		502,283			368,358
Commitments and contingencies (Notes 8 and 11)		—			—
Stockholders’ equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized; 6,903 shares of series D exchangeable preferred stock issued and outstanding at December 31, 2004 and 2003 (liquidation preference of $12,225,487 at December 31, 2004)		4,306,520			4,306,520
Common stock, $.01 par value, 50,000,000 shares authorized at December 31, 2004 and 2003; 7,149,578 shares issued at December 31, 2004 and 2003		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		(85,582,283		)	(84,794,827		)
Treasury stock (at cost), 1,335,722 shares at December 31, 2004 and 2003		(2,417,657		)	(2,417,657		)
Total stockholders’ equity		25,961,444			26,748,900
Total liabilities and stockholders’ equity		$	26,463,727		$	27,117,258

 

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

 

15

 

ERGO SCIENCE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Years Ended December 31,
		2004			2003			2002
Operating expenses:
Research and development		$	—		$	(467,294	)	$	39,278
General and administrative		1,114,360			1,377,728			973,497
Total operating expenses		1,114,360			910,434			1,012,775
Other income:
Interest income		326,904			263,607			426,493
Other income		—			5,598,000			—
Total other income		326,904			5,861,607			426,493
Net income (loss) before income taxes		(787,456		)	4,951,173			(586,282		)
Income tax expense		—			94,000			—
Net income (loss)		$	(787,456	)	$	4,857,173		$	(586,282	)
Net income (loss) per common share:
Basic		$	(0.14	)	$	0.74		$	(0.08	)
Diluted		$	(0.14	)	$	0.74		$	(0.08	)
Weighted average common shares outstanding:
Basic		5,813,856			6,589,673			7,149,578
Diluted		5,813,856			6,603,389			7,149,578

 

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

 

16

 

ERGO SCIENCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Years Ended December 31,
		2004			2003			2002
Cash flows from operating activities:
Net (loss) income		$	(787,456	)	$	4,857,173		$	(586,282	)
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities:
Depreciation and amortization		472			1,806			4,537
Changes in operating assets and liabilities:
Prepaid and other current assets		3,632			42,995			(48,806		)
Accounts payable and accrued expenses		133,925			(413,933		)	(239,244		)
Income taxes payable		—			94,000			—
Net cash (used in) provided by operating activities		(649,427		)	4,582,041			(869,795		)
Cash flows from financing activities:
Payment for purchase of treasury stock		—			(2,417,657		)	—
Net cash used in financing activities		—			(2,417,657		)	—
Net (decrease) increase in cash and cash equivalents		(649,427		)	2,164,384			(869,795		)
Cash and cash equivalents at beginning of year		27,102,617			24,938,233			25,808,028
Cash and cash equivalents at end of year		$	26,453,190		$	27,102,617		$	24,938,233

 

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

 

17

 

ERGO SCIENCE CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

		Preferred Stock					Common Stock					Additional Paid-In			Cumulative Dividends on Preferred			Accumulated			Treasury Stock					Total Stockholder’s
		Shares		Amount			Shares		Amount			Capital			Stock			Deficit			Shares		Amount			Equity
Balance at December 31, 2001		6,903		$	4,306,520		7,149,578		$	71,496		$	111,880,321		$	(2,296,953	)	$	(89,065,718	)	—		—			$	24,895,666
Net loss																		(586,282		)						(586,282		)
Balance at December 31, 2002		6,903		4,306,520			7,149,578		71,496			111,880,321			(2,296,953		)	(89,652,000		)	—		—			24,309,384
Treasury stock purchase																					1,335,722		$	(2,417,657	)	(2,417,657		)
Net income																		4,857,173								4,857,173
Balance at December 31, 2003		6,903		4,306,520			7,149,578		71,496			111,880,321			(2,296,953		)	(84,794,827		)	1,335,722		(2,417,657		)	26,748,900
Net loss																		(787,456		)						(787,456		)
Balance at December 31, 2004		6,903		$	4,306,520		7,149,578		$	71,496		$	111,880,321		$	(2,296,953	)	$	(85,582,283	)	1,335,722		$	(2,417,657	)	$	25,961,444

 

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

 

18

 

ERGO SCIENCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.                                        Overview and Summary of Significant Accounting Principles

 

Background and Recent Events

 

On February 9, 2005 the Company announced that on February 8, 2005 it had entered into a share purchase agreement to acquire the business to business publishing division (“Business”) of Highbury House Communications plc (“Highbury House”) for a purchase price of GBP 12.5 million (approximately $23.395 million).  The GBP 12.5 million purchase price is subject to a working capital adjustment that has been estimated by the parties to be GBP 1.041 million (approximately $1.948 million) at closing, and therefore, the Company expects to pay GBP 11.459 million (approximately $21.447 million) at closing.  The GBP 11.459 million payment is subject to a post-closing adjustment based on the actual working capital of the Business on the date of the closing.  The Business, comprising of eight wholly-owned subsidiaries of Highbury House, provides information across a diverse range of sectors including printed and web-based magazines, data services and directories, exhibitions, conferences and award ceremonies. The acquisition is expected to be completed in early April 2005 and is subject to approval by the shareholders of Highbury House, as required by the U.K. listing rules, as well as customary closing conditions. Ergo intends to fund the acquisition with cash and cash equivalents.

 

From November 2003 until February 2005 the Company has been reviewing and evaluating potential acquisitions.

 

On November 24, 2003 the Company sold all of our scientific and research assets and certain other intellectual property assets to Pliva d.d., a company organized under the laws of Croatia (“Pliva”). At the time of the sale, we received $5,498,000 in cash. Upon the occurrence of certain events outlined in the sale agreement, we would have received an additional $500,000. In accordance with the asset purchase agreement, Pliva had one year from the closing date to obtain the right to certain patents from Massachusetts General Hospital (“MGH Patents”). Pliva was not able to obtain the right to the MGH Patents and therefore they shall retain the additional $500,000 and shall have no further obligation to pay that amount to the Company. In addition, Pliva has assumed our future obligations under the LSU Royalty agreement.  Also as part of the agreement, Pliva has agreed to make payments to one of our wholly-owned subsidiaries, Ergo Texas, to cover certain payments required to be made in the event that Ergoset® or another specified drug is approved by the Food and Drug Administration.

 

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.

 

In March 2001, the Company 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 the Company does.

 

From its incorporation through March 2001, the Company was engaged in the development of ERGOSET® tablets for the treatment of type 2 diabetes.

 

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Organization

 

Ergo Science Development Corporation (“ESDC”) was incorporated on January 23, 1990. ESDC operated as an S Corporation from inception to September 10, 1992, when it converted to a C Corporation. In April 1995, ESDC went through a recapitalization whereby all the stock of ESDC was exchanged on a one-for-one basis for an equal amount of stock in Ergo Science Holdings, Incorporated, which previously was a wholly owned subsidiary of ESDC. Subsequent to the recapitalization, Ergo Science Holdings, Incorporated changed its name to Ergo Science Corporation. The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions are eliminated upon consolidation.

 

Research and Development Costs

 

Research and development costs are expensed as incurred. The Company includes in research and development expense costs related to the handling of matters with the U.S. Food and Drug Administration.

 

Cash and Cash Equivalents

 

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

 

At December 31, 2004 and 2003, the Company’s cash equivalents consisted only of investments in bank cash accounts and U.S. government obligations that mature within 90 days of purchase.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

 

Net Income (Loss) Per Common Share

 

Basic earnings (loss) per common share are 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 using the treasury stock method, such as stock options.  For the year ended December 31, 2003, a total of 13,716 stock option shares were included in the weighted average number of common shares outstanding calculation because these shares had exercise prices less than the market value of the Company’s common stock as of December 31, 2003.

 

The diluted loss per common share calculated for the years ended December 31, 2004 and 2002, excludes the effects of 28,375 and 213,625 options outstanding, respectively. These amounts are excluded, as their inclusion would be anti-dilutive.

 

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 plans. Accordingly, no compensation cost has been recognized for its stock option plans since all options issued were for a fixed number of shares and had fixed exercise prices equal to the fair market value of the common stock

 

20

 

on the grant date. 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 years ended December 31, 2004, 2003 and 2002 would have been increased to the pro forma amounts indicated below:

 

 

No stock options were granted in 2004, 2003 or 2002.

 

Equipment

 

Equipment is stated at cost. Depreciation is calculated using straight-line basis over a 2 to 7 year estimated useful life. Repairs and maintenance costs are charged to expense as incurred. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the determination of net income.

 

Income Taxes

 

Deferred tax liabilities and assets are recognized based on temporary differences between the financial statement basis and tax basis of assets and liabilities using current statutory tax rates. A valuation allowance against net deferred tax assets is established if, based on the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. (See Note 5).

 

Comprehensive Income

 

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” establishes a standard for reporting and displaying comprehensive income and its components within the financial statements. Comprehensive income (loss) includes only net income (loss) at December 31, 2004, 2003 and 2002.

 

New Accounting Pronouncements

 

In December 2004, the FASB revised SFAS No. 123 (“SFAS No. 123(R)”). SFAS No. 123(R), Share-Based Payment, requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Pro forma disclosure is no longer an alternative to financial statement recognition. SFAS No. 123(R) is effective for periods beginning after June 15, 2005. We are still evaluating the transition provisions that are allowed by SFAS No. 123(R) and will adopt it in the third quarter of 2005. The financial statement impact is not expected to be materially different from that shown in the existing pro forma disclosure required under the original SFAS No. 123. The issuance of additional stock options in the future will cause SFAS 123(R) to have a greater impact on our financial statements.

 

21

 

2.                   Equipment

 

Equipment consists of the following at December 31:

 

 

Depreciation expense for the years ended December 31, 2004, 2003 and 2002 was $472, $1,806, and $4,537, respectively. The Company wrote off $15,672 of fully depreciated software in the third quarter of 2004 that was obsolete and no longer used by the Company.

 

3.                   Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consist of the following at December 31,

 

 

4.                   Leases

 

The Company leases office space under a lease arrangement, which originally expired in June 2002. The office space lease currently renews on a monthly basis. The lease for the Company’s office space includes payment terms that are subject to increases due to taxes and other operating costs of the lessor.  The minimum lease payment under this lease for 2005 is $1,030.

 

Rent expense for the years ending on December 31, 2004, 2003 and 2002 amounted to $29,789, $35,218, and $31,171, respectively.

 

5.                   Income Taxes

 

Significant components of the Company’s deferred tax assets and liabilities as of December 31 are as follows:

 

 

As of December 31, 2004, the Company had federal net operating losses (“NOL”) and research and experimentation credit carryforwards remaining of approximately $74,756,000 and $2,554,000, respectively, which may be available to offset future federal income tax liabilities and expire at various dates from 2008 through 2024. Approximately $29,000 of the gross deferred tax asset represents the benefit of deductions from the exercise of stock options, which have been fully reserved. The benefit from the $29,000 tax asset will be recorded as a credit to additional paid-in capital when realized. As required by Statement of Financial

 

22

 

Accounting Standards No. 109, management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss and research and experimentation credit carryforwards. Management has determined that, at this time, it is more likely than not that the Company will not realize the benefits of federal and state deferred tax assets and, as a result, a valuation allowance of $29,684,000 has been established at December 31, 2004.

 

The change in the valuation allowance was an increase of $79,000 for the year ended December 31, 2004 and a decrease of $2,493,000 for the year ended December 31, 2003.  For December 31, 2004, the increase in the valuation allowance is the result of the net operating loss for the year partially offset by expiring Massachusetts state net operating loss carryovers. For December 31, 2003, the decrease in the valuation allowance is the result of the Company utilizing approximately $4,700,000 of federal net operating loss carryovers, which were previously not benefited, to offset taxable income in connection with the gain on the sale of intellectual property on November 24, 2003, and the expiration of Massachusetts state net operating loss carryovers.

 

Ownership changes, as defined in the Internal Revenue Code, may have limited the amount of net operating loss carryforwards that can be utilized to offset future taxable income. Subsequent ownership changes could further affect the limitation in future years.

 

The reconciliation of the expected tax (benefit) expense (computed by applying the federal statutory tax rate to income before income taxes) to actual tax (benefit) expense was as follows:

 

		Years Ended December 31,
		2004			2003			2002
Expected federal income tax expense (benefit)		$	(276,000	)	$	1,733,000		$	(205,000	)
Effect of valuation allowance on current year losses		79,000			(2,493,000		)	(2,396,000		)
Expiration of state net operating loss carryforwards		243,000			885,000			2,630,000
Other		(46,000		)	(31,000		)	(29,000		)
Totals		$	—		$	94,000		$	—

 

6.                   Capital Stock

 

See Note 8 for a description of series D preferred stock.

 

On October 15, 2001, the stockholders of the Company voted to approve the merger of Ergo Science Corporation with and into its wholly-owned subsidiary, ESC Merger Sub, Inc. On October 19, 2001, the merger became effective and ESC Merger Sub. Inc. was renamed Ergo Science Corporation. Also at this time, each share of the pre-merger common stock was converted into the right to receive .5 shares of the post-merger common stock, plus cash in lieu of any fractional shares. The total paid by the Company for cash in lieu of fractional shares was approximately $30. Shares of the post-merger common stock are subject to certain transfer restrictions. These restrictions are intended to help preserve our substantial tax net operating loss carryforwards for use in offsetting future taxable income. In general, these restrictions will prohibit, without the prior approval of the board of directors, the direct or indirect disposition or acquisition of any of the Company’s stock by or to any holder who owns or would so own upon the acquisition (either directly or through the tax attribution rules) 5% or more of the Company’s stock.

 

Treasury stock

 

On August 1, 2003, the Company purchased 1,335,722 shares of its own common stock at a price of $1.81 per share, the current market price, for a total purchase price of $2,417,657 from Court Square Capital Limited, its largest shareholder at the time.

 

23

 

7.                   Sale of Intellectual Property

 

On November 24, 2003, the Company sold all of its scientific and research assets and certain other intellectual property to Pliva, a company organized under the laws of Croatia. The total selling price was $5,998,000, of which the Company received $5,498,000 at the time of the sale. The remaining $500,000 of the purchase price will be paid to the Company in cash, if at all, upon the occurrence of certain events following consummation of the sale. In accordance with the asset purchase agreement, Pliva has one year from the closing date to obtain the right to certain patents from Massachusetts General Hospital (“MGH Patents”). Pliva was not able to obtain the right to the MGH Patents and therefore they shall retain the additional $500,000 and shall have no further obligation to pay that amount to us. Also in accordance with the agreement, Pliva has assumed our future obligations under the LSU Royalty agreement. Also as part of the agreement, Pliva has agreed to make payments to one of our wholly-owned subsidiaries, Ergo Texas, to cover certain payments required to be made in the event that Ergoset® or another specified drug is approved by the Food and Drug Administration.

 

The Company has recorded the $5,498,000 as other income on the statement of operations for 2003; the intellectual property had a net recorded value of zero since the related cost was previously recognized as research and development expense.

 

On June 30, 2003, the Company signed an agreement to sell its entire right, title and interest in its domain registration name for ergo.com to ERGO Versicherungsgruppe AG, a company organized under the laws of Germany. In accordance with the terms of the agreement, the Company received $100,000 in exchange for the entire right, title and interest in ergo.com, which was completed on July 16, 2003 and recorded as other income on the statement of operations.

 

8.                   Commitments and Contingencies

 

License Agreements and Supplier Contracts

 

On April 27, 1995 in conjunction with a redesigned plan for commercialization of the Company’s products, the Company effectively canceled all of its existing partnership sublicenses by acquiring all the partners’ interests. The Company issued 278,875 shares of common stock and 5,618 shares of series D exchangeable preferred stock (the “series D preferred stock”), par value $0.01 per share. At the time, the Company ascribed a value of $16 per share to the common stock issued and $584 per share to the series D preferred stock.

 

The holders of series D preferred stock are entitled to receive quarterly dividends at a rate of 6% per annum, compounded semiannually, on the stated value. Such dividends shall be cumulative, commencing on the date of original issue, and shall only be payable to holders of record when and as declared by the board of directors. The Company will have the option to convert the series D preferred stock into common stock during the 90 days after the Company receives FDA approval to market its first product, if it receives that approval. If the Company does not exercise its option to convert the series D preferred stock into common stock within the 90 days after FDA approval the series D preferred stock will automatically be exchanged for subordinated debt securities at the end of the 90 days. The Company cannot pay dividends on its common stock without first obtaining the written consent of the holders of a majority of the outstanding series D preferred stock. Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of series D preferred stock then outstanding will be entitled to receive an amount of cash equal to the stated value of series D preferred stock (including any accrued by unpaid dividends) after any distribution is made on any senior securities and before any distribution is made on any junior securities, including common stock. The liquidation preference amount for the series D preferred stock as of December 31, 2004 was $12,225,487.

 

The Company is party to certain other license agreements, which require the Company to pay a royalty on product sales and to make specific payments on the completion of certain milestones. No amounts have been accrued related to these requirements as of December 31, 2004 or 2003.

 

24

 

9.                   Stock Options and Incentive Plan

 

The Company has granted options to purchase shares of common stock to key employees and directors. The options vest over periods of up to five years and generally have a maximum term of ten years.

 

No stock options were granted in 2004, 2003 or 2002.

 

Information related to stock option activity for the period from December 31, 2001 through December 31, 2004 is as follows:

 

 

The following table summarizes information about stock options outstanding at December 31, 2004:

 

Options Outstanding									Options Exercisable
Range of Exercise Prices		Number Outstanding		Weighted-Average Remaining Contractual Life		Weighted-Average Exercise Price			Number Exercisable		Weighted-Average Exercise Price
$ 0.00 to 1.562		27,500		6.2 years		$	1.56		20,500		$	1.56
$ 1.563 to 6.50		500		3.7 years		$	6.50		500		$	6.50
$ 6.51 to 13.42		375		0.8 years		$	13.42		375		$	13.42
$ 0.00 to 13.42		28,375				$	1.81		21,375		$	1.89

 

Effective as of November 1, 1994, the board of directors adopted the Ergo Science Development Corporation Long-Term Incentive Plan (the “Incentive Plan”) pursuant to which certain officers, directors, and key employees were granted awards with respect to shares of the Company’s common stock. The awards that could be granted under the Incentive Plan included incentive stock options, nonstatutory options, stock appreciation rights (SARs) and restricted stock awards. Awards of options to purchase 35,000 shares at an exercise price of $1.562 per share were granted to directors under the Incentive Plan in 2001. No awards were made in 2004, 2003 or 2002. These amounts are included in the tables above. At the time that the stockholders approved the 2001 Stock Plan, the Incentive Plan was closed and no new grants will be made under this Plan.

 

On May 15, 1996, the board of directors approved, subject to stockholder approval, a proposal to adopt a Stock Option Plan for Non-Employee Directors of the Company (the “Director Stock Plan”). The Director Stock Plan provided for an initial grant of an option to purchase 5,000 shares of common stock to each eligible non-employee director upon first being elected or appointed to serve on the board of directors. Awards of options to purchase 15,000 shares at exercise prices of $1.25-$1.562 per share were granted under the Director Stock Plan in 2001. There were no awards granted in 2004, 2003 or 2002. These amounts are included in the

 

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tables above.  At the time that the stockholders approved the 2001 Stock Plan, the Company’s Director Stock Plan was closed and no new grants will be made under this Plan.

 

On October 15, 2001, the stockholders of the Company approved the Ergo Science Corporation 2001 Employee, Director and Consultant Stock Plan (the “2001 Stock Plan”) pursuant to which certain officers, directors, key employees and consultants may be granted awards with respect to shares of the Company’s common stock. The awards that may be granted under the 2001 Stock Plan include incentive stock options under section 422 of the Internal Revenue Code, non-qualified stock options, stock appreciation rights (SARs) and restricted stock awards. A total of 1,600,000 shares of our common stock were reserved for issuance pursuant to options and other awards granted under this plan.  This plan provides for an initial grant of an option to purchase 5,000 shares of common stock to each eligible non-employee director upon first being elected or appointed to serve on the board of directors.  Stock options granted to directors under the 2001 Stock Plan vest and become exercisable in equal increments on the first five anniversaries of their date of grant, but no stock option may be exercised more than ten years after the date of its grant.  Awards of options to purchase 27,500 shares at an exercise price of $2.05 per share were granted under the 2001 Stock Plan in 2001 to the Company’s former CEO. These options were cancelled in March 2004 as a result of the resignation of the Company’s former CEO. There were no awards granted in 2004, 2003 or 2002. As of December 31, 2004, 1,600,000 shares were available to be granted under the 2001 Stock Plan.

 

At the time that the stockholders approved the 2001 Stock Plan, the Company’s Long-Term Incentive Stock and Director Stock Plan were closed and no new grants will be made under either the Long-Term Incentive Plan or the Director Plan.

 

10.            Quarterly Results (Unaudited)

 

The following table sets forth unaudited selected financial information for the periods indicated. This information has been derived from unaudited consolidated financial statements, which, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information. The results of operations for any quarter are not necessarily indicative of the results to be expected for any future period.

 

		First Quarter			Second Quarter			Third Quarter			Fourth Quarter
2004
Net loss		$	(292,031	)	$	(176,338	)	$	(125,196	)	$	(193,891	)
Net loss per share
Basic and diluted		$	(0.05	)	$	(0.03	)	$	(0.02	)	$	(0.04	)
2003
Net income (loss)		$	(169,401	)	$	(201,690	)	$	(210,209	)	$	5,438,473
Net income (loss) per share
Basic and diluted		$	(0.02	)	$	(0.03	)	$	(0.03	)	$	0.94

 

11.            Subsequent Events

 

Acquisition

 

On February 9, 2005 the Company announced that on February 8, 2005 it had entered into a share purchase agreement to acquire the business to business publishing division ("Business") of Highbury House Communications plc ("Highbury House") for a purchase price of GBP 12.5 million (approximately $23.395 million).  The GBP 12.5 million purchase price is subject to a working capital adjustment that has been estimated by the parties to be GBP 1.041 million (approximately $1.948 million) at closing, and therefore, the Company expects to pay GBP 11.459 million (approximately $21.447 million) at closing.  The GBP 11.459 million payment is subject to a post-closing adjustment based on the actual working capital of the Business on the date of the closing.  The Business, comprising of eight wholly-owned subsidiaries of Highbury House, provides information across a diverse range of sectors including printed and web-based magazines, data services and directories, exhibitions, conferences and award ceremonies.

 

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