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, 2003

 

-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)

 

 

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, 2003 was $9,885,386.

 

As of March 3, 2004, 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

 

We are 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.

 

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.

 

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.

 

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 may be able to receive an additional $500,000. 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”). If Pliva is not able to obtain such rights, then Pliva 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 by Ergo Texas in the event Ergoset® or another specified drug is approved by the Food and Drug Administration.

 

We are now currently seeking one or more established businesses to acquire.  Our assets currently consist of substantial unrecognized tax benefits and approximately $27 million in cash and cash equivalents.  We intend to continue to conserve our cash and other assets.

 

Human Resources

 

As of March 3, 2004, we had one full-time and two part-time employees.  None of our employees are covered by a collective bargaining agreement.

 

2

 

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 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.

 

We are a company in transition and may not be successful in acquiring an operating company.

 

We may not successfully make the transition from developing human drug products to pursuing an income producing business.  Over the past few years, we have terminated nearly all of our employees, including all of our key employees.  We may not have adequate capital, human or other resources to pursue an income producing business.  Capital, human and other resources may not be available from other sources and, even if available, may not be available on terms that are acceptable to us.

 

3

 

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;

 

•                  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.

 

4

 

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.

 

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 2003 Annual Meeting of Stockholders was held on December 9, 2003.  The following matters were voted upon at the annual meeting:

 

(1)               J. Warren Huff was elected to serve as a Director to hold office for a term of three years until the 2006 annual meeting of stockholders and until his successor is chosen and qualified.

 

(2)               Our stockholders also ratified the appointment of PricewaterhouseCoopers LLP as our independent public accountants for the fiscal year ending December 31, 2003. This proposal was approved with 4,045,439 votes for the proposal, 378,125 votes against the proposal, 20,856 abstentions and 0 broker non-votes.

 

5

 

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 27, 2004, the number of record holders of our common stock was approximately 259.  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,
		2003			2002			2001			2000			1999
Consolidated Statement of Operations Data:
Operating expenses:
Research and development (1)		$	(467,294	)	$	39,278		$	55,454		$	(163,834	)	$	2,269,450
General and administrative (2)		1,377,728			973,497			2,456,332			1,748,301			3,597,382
Total operating expenses		910,434			1,012,775			2,511,786			1,584,467			5,866,832
Other Income:
Interest income		263,607			426,493			1,260,964			1,920,922			1,628,206
Other income (3)		5,598,000			—			—			—			—
Total other income		5,861,607			426,493			1,260,964			1,920,922			1,628,206
Net income (loss) before income taxes		4,951,173			(586,282		)	(1,250,822		)	336,455			(4,238,626		)
Income tax expense (4)		94,000			—			—			—			—
Net income (loss)		$	4,857,173		$	(586,282	)	$	(1,250,822