**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

 

**(Mark One)**
| **ý** |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|--------|-------------------------------------------------------------------------------------------|

** **

**Forthe fiscal year ended December 31, 2003**

 

**-OR-**

 
| **o** |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------|-----------------------------------------------------------------------------------------------|

 

**Forthe transition periodfrom              to              **

 

**CommissionFile No. 0-26988**

 

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**ERGO SCIENCE CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **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 areacode: **(978) 688-8833**

 

SECURITIES REGISTERED PURSUANT TO SECTION12(b) OF THE ACT:

**None**

 

SECURITIES REGISTERED PURSUANT TO SECTION12(g) OF THE ACT:

**CommonStock, $.01 Par Value**

(Title of Class)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days. Yes ýNo o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of thisForm 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 suchcalculation is an affiliate), based on closing sale price as reported on theNASD’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 theregistrant’s common stock.

 

Documents incorporated by reference: None.

 

 

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**FORWARD-LOOKINGSTATEMENTS**

 

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

 

*This Annual Report on Form 10-K containsforward-looking statements with respect to our financial condition, results ofoperations and business.  You can findmany of these statements by looking for such words as “anticipate,” “believe,”“expect,” “plan,” “intend,” “estimate,” “project,” “will,” “could,” “may” orsimilar expressions.  These statementsreflect our current views with respect to future events and financial performanceand involve numerous assumptions, risks and uncertainties, including withoutlimitation, the risks described in “Item 1. Business - Risk Factors.” Because these forward-looking statements arebased upon assumptions and are subject to risks and uncertainties, actualresults 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 bemade from time to time by or on behalf of us.*

 

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

## ** **

## **PART I**

 

# **ITEM 1. BUSINESS**

## **Overview**

 

We are acompany in transition.  From ourincorporation through March 2001, we were engaged in the development ofERGOSET® tablets for the treatment of type 2 diabetes.

 

In March 2001,we decided that the next phase of the development of ERGOSET® would be betterundertaken by a company that has more experience with human drug developmentand more resources for regulatory approval and marketing than we do.

 

At our AnnualMeeting of Stockholders held on October 15, 2001, stockholders approved theimposition of transfer restrictions on our common stock.  These transfer restrictions were implementedon October 19, 2001.

 

On November24, 2003 we sold all of our scientific and research assets and certain otherintellectual property assets to Pliva d.d., a company organized under the lawsof 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 assetpurchase agreement, Pliva has one year from the closing date to obtain theright to certain patents from Massachusetts General Hospital (“MGH Patents”).If Pliva is not able to obtain such rights, then Pliva shall retain theadditional $500,000 and shall have no further obligation to pay that amount tous. In addition, Pliva has assumed our future obligations under the LSU Royaltyagreement.  Also as part of theagreement, Pliva has agreed to make payments to one of our wholly-ownedsubsidiaries, Ergo Texas Holdings, Inc. ("Ergo Texas"), to covercertain payments required to be made by Ergo Texas in the event Ergoset® oranother specified drug is approved by the Food and Drug Administration.

 

We are nowcurrently seeking one or more established businesses to acquire.  Our assets currently consist of substantialunrecognized tax benefits and approximately $27 million in cash and cash equivalents.  We intend to continue to conserve our cashand 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 acollective bargaining agreement.

 

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## **RISK FACTORS**

 

*In addition to the other information in thisAnnual Report on Form 10-K and all of our other SEC reports, you shouldconsider the following factors in evaluating us, our business and the strategicdirection we may head in the future.*

 

**We have relied on anexclusion from the definition of “investment company” that may not have beenavailable to us.  We could thereforepossibly be subject to enforcement action by the SEC and be required toregister as an investment company with significant restrictions on ourbusiness.**

 

The InvestmentCompany Act of 1940 (the “‘40 Act”) requires registration as an investmentcompany 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 companyif it owns “investment securities” with a value exceeding 40% of the value ofits total assets on an unconsolidated basis, excluding government securitiesand cash items.  We currently are not aninvestment company under this test because none of our assets consist of suchinvestment securities.

 

However, fromthe time of our initial public offering through March 2001, we relied on anexclusion available to companies that are engaged primarily in a business otherthan investing.  The SEC has establishedspecific criteria by which companies that are primarily engaged in research anddevelopment not investing, qualify for this exclusion.  When we sold our pre-clinical researchassets in the second quarter of 1999 and moved to conserve our assets for thedevelopment of ERGOSET through the FDA process, it raised a regulatory issue asto whether we might need to register as an investment company.  There is a risk that the SEC could take theposition that we did not meet the requirements for this exclusion from thesecond quarter of 1999 through March 2001. The Investment Company Act also provides a one-year temporary exclusion forcompanies that are in transition and which have a bona fide intent to beengaged primarily in a business other than investing in securities as soon aspossible, but in any event within one year. We relied on this temporary exclusion since we decided to sell our humandrug-related assets in March 2001 through the third quarter of 2001.  There is a risk that the SEC may take theposition that we are not entitled to rely on this temporary exclusion.  In the event that we were not entitled torely on the exclusion prior to March 2001 or we were not entitled to rely onthe temporary exclusion beginning in March 2001, our failure to register as aninvestment company not only raises the possibility of an enforcement action bythe SEC, but also threatens the validity of corporate actions and contractsentered into by us during the period of violations.  Since the third quarter of 2001, the only securities we have heldare U.S. government obligations with maturities of 90 days or less, whichprovides a separate exemption under the ‘40 Act.

 

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

 

**We are a company in transition and may not besuccessful in acquiring an operating company.**

 

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

 

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

 

Our commonstock is subject to transfer restrictions approved by our stockholders onOctober 15, 2001. These transfer restrictions require any person attempting toacquire a significant interest in the Company to negotiate with the Company’sboard of directors. In addition, the transfer restrictions may make it moredifficult for stockholders to replace current management because no singlestockholder may cast votes for more than 5% of the Company’s outstanding sharesof common stock, unless that stockholder held more than 5% of our common stockbefore the imposition of the transfer restrictions.

 

**If the transfer restrictions on our commonstock are not effective in preventing an ownership change from occurring, ourability to use the tax net operating loss (“NOL”) carryforwards will beseverely limited.**

 

Our assetsinclude significant NOL carryforwards. Under current tax rules, the potential value of our NOLs could bereduced to near zero if we experience an “ownership change” as defined in theInternal Revenue Code of 1986.  Althoughthe transfer restrictions on our common stock are expressly permitted underDelaware law, we are not aware of any published court decisions enforcingsimilar transfer restrictions. Even if a court did enforce our transfer restrictionsin the case of such a transfer, the Internal Revenue Service might not agreethat the transfer restrictions provide a sufficient remedy with respect to anyownership change resulting from the prohibited transfer. In either of thesecases, despite the implementation of the transfer restrictions, an ownershipchange could occur that would severely limit our ability to use the taxbenefits associated with our NOL carryforwards.

 

**We may not be able to realize the benefits ofour NOL carryforwards.**

 

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

 

In addition,the amount of NOL carryforwards that we have claimed has not been audited orotherwise validated by the U.S. Internal Revenue Service. The IRS couldchallenge our calculation of the amount of our NOLs or our determinations as towhen a prior change in ownership occurred and other provisions of the InternalRevenue Code may limit our ability to carry forward our NOLs to offset taxableincome 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 substantiallyreduced.

 

**Anti-takeoverprovisions could impair the market price of Ergo common stock.**

 

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

 

•                  provides forstaggered terms of office for directors;

 

•                  requires certainprocedures to be followed and time periods to be met for any stockholder topropose matters to be considered at annual meetings of stockholders, includingnominating directors for election at those meetings;

 

•                  prohibitsstockholders from calling special meetings of stockholders; and

 

•                  authorizes ourboard of directors to issue up to 10,000,000 shares of preferred stock withoutstockholder approval and to set the rights, preferences, and otherdesignations, including voting rights, of those shares as the board ofdirectors may determine.

 

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These provisions, alone or in combination with each other, maydiscourage transactions involving actual or potential changes of control. Suchtransactions may include those that otherwise could involve payment of apremium over prevailing market prices to holders of our common stock. We alsoare subject to provisions of the Delaware General Corporation Law that may makesome business combinations more difficult. We have taken steps to help preserve our net operating losscarryforwards and reduce, but not eliminate, the risk of the occurrence of anownership change.  These steps may havethe incidental effect of impeding the attempt of a person or entity fromacquiring a significant or controlling interest in the Company, render itdifficult to effect a merger or similar transaction even if the transaction isfavored by a majority of independent stockholders, and entrenching management.

 

**ITEM 2. PROPERTIES**

 

**Facilities**

 

The Companycurrently leases approximately 250 square feet of shared office space as ourprincipal office in Jefferson Office Park, North Andover, Massachusetts.  The space is leased on a month to monthbasis.

 

**ITEM 3. LEGALPROCEEDINGS**

 

None.

 

**ITEM 4. SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

 

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

 

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

 

(2)               Our stockholders also ratified theappointment of PricewaterhouseCoopers LLP as our independent public accountantsfor the fiscal year ending December 31, 2003. This proposal was approved with4,045,439 votes for the proposal, 378,125 votes against the proposal, 20,856abstentions and 0 broker non-votes.

 

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## **PART II**

 

**ITEM5.****                          MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

Our commonstock was quoted on the Nasdaq Stock Market through May 23, 2001 under thesymbol “ERGO.”  Since that date, after abrief transition period during which our common stock was quoted on the NASD’sOTC Bulletin Board under the symbol “ERGG,” our common stock has been quoted onthe NASD’s OTC Bulletin Board under the symbol “ERGO.”  At February 27, 2004, the number of recordholders of our common stock was approximately 259.  The following table sets forth, for the periods indicated, thehigh and low sale price or bid information for our common stock as reported onthe Nasdaq Stock Market or the NASD’s OTC Bulletin Board, as applicable. Pleasenote that the bid information relating to over-the-counter market quotations ofour common stock reflect inter-dealer prices, without retail mark-up, mark-downor commission and may not necessarily represent actual transactions.

 

|           |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
|           |   |     |   |    |   |
| 2003           |   |     |   |    |   |
| First Quarter  |   | $        | 1.85   |    | $      | 1.56 |   |
| Second Quarter |   | $        | 1.85   |    | $      | 1.64 |   |
| Third Quarter  |   | $        | 1.86   |    | $      | 1.50 |   |
| Fourth Quarter |   | $        | 2.25   |    | $      | 1.50 |   |
|           |   |     |   |    |   |
| 2002           |   |     |   |    |   |
| First Quarter  |   | $        | 2.15   |    | $      | 1.80 |   |
| Second Quarter |   | $        | 2.15   |    | $      | 1.81 |   |
| Third Quarter  |   | $        | 2.00   |    | $      | 1.50 |   |
| Fourth Quarter |   | $        | 1.93   |    | $      | 1.40 |   |

**Dividends**

 

We have notpaid dividends to our stockholders since our inception.  We are unable to pay dividends on our commonstock without first obtaining the written consent of the holders of a majorityof our outstanding series D exchangeable preferred stock.

 

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**ITEM 6. SELECTEDCONSOLIDATED FINANCIAL DATA**

 

The following table sets forth selected consolidated financial data forthe Company as of the dates and for the periods indicated. The data should beread in conjunction with “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and the consolidated financial statementsand 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 | ) | $ | 336,455 |   | $ | (4,238,626 | ) |
|                                       |   |                               |      |   |   |   |   |   |   |   |   |
| Net income (loss) income per share         |   |                               |      |   |   |   |   |   |   |   |   |
| basic                                      |   | $                                  | 0.74      |   | $ | (0.08 | ) | $ | (0.18 | ) | $ | 0.05 |   | $ | (0.59 | ) |
| assuming dilution                          |   | $                                  | 0.74      |   | $ | (0.08 | ) | $ | (0.18 | ) | $ | 0.05 |   | $ | (0.59 | ) |
|                                       |   |                               |      |   |   |   |   |   |   |   |   |
| Weighted average common shares outstanding |   |                               |      |   |   |   |   |   |   |   |   |
| basic                                      |   | 6,589,673                          |      | 7,149,578 |   | 7,149,578 |   | 7,146,209 |   | 7,127,912 |   |
| assuming dilution                          |   | 6,603,389                          |      | 7,149,578 |   | 7,149,578 |   | 7,181,780 |   | 7,127,912 |   |

 
|                             |   | **December 31,** | ** ** |
|----------------------------------|--------|------------------|------------|
|                             |   | **2003**         |       | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| Consolidated Balance Sheet Data: |   |             |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents        |   | $                | 27,102,617 |   | $ | 24,938,233 |   | $ | 25,808,028 |   | $ | 10,130,599 |   | $ | 4,292,631 |   |
| Investments                      |   | —           |       | — |   | — |   | 16,958,488 |   | 26,047,124 |   |
| Working capital                  |   | 26,748,428       |       | 24,307,106 |   | 24,888,851 |   | 26,124,695 |   | 18,431,622 |   |
| Total assets                     |   | 27,117,258       |       | 24,997,675 |   | 25,823,201 |   | 27,129,619 |   | 30,409,901 |   |
| Total stockholders’ equity  |   | $                | 26,748,900 |   | $ | 24,309,384 |   | $ | 24,895,666 |   | $ | 26,146,488 |   | $ | 25,786,233 |   |

 

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(1)               2003: Includes a $500,000 credit toexpense 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 LSUsettlement.

 

(2)               Includes a loss on the disposal of equipmentin 2001 and 1999 in the amount of $3,201 and $157,000, respectively.

 

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

 

(4)               Represents an amount owed for Federalincome taxes due to limitations on alternative minimum tax net operating losscarryforwards.

 

7

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**ITEM 7.****                             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Overview**

 

Ergo Science is a company in transition.  From our incorporation through March 2001, we were engaged in thedevelopment of ERGOSET® tablets for the treatment of type 2 diabetes.

 

In March 2001, we decided that the next phase of the development ofERGOSET® would be better undertaken by a company that has more experience withhuman drug development and more resources for regulatory approval and marketingthan we do.

 

At our Annual Meeting of Stockholders held on October 15, 2001,stockholders approved the imposition of transfer restrictions on our commonstock.  These transfer restrictions wereimplemented on October 19, 2001.

 

On November 24, 2003 we sold all of our scientific and research assetsand certain other intellectual property assets to Pliva d.d., a companyorganized under the laws of Croatia (“Pliva”). At the time of the sale, wereceived $5,498,000 in cash. Upon the occurrence of certain events outlined inthe 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 theclosing date to obtain the right to certain patents from Massachusetts GeneralHospital (“MGH Patents”). If Pliva is not able to obtain such rights, thenPliva shall retain the additional $500,000 and shall have no further obligationto pay that amount to us. In addition, Pliva has assumed our future obligationsunder the LSU Royalty agreement.  Alsoas part of the agreement, Pliva has agreed to make payments to one of ourwholly-owned subsidiaries, Ergo Texas, to cover certain payments required to bemade by Ergo Texas in the event Ergoset® or another specified drug is approvedby the Food and Drug Administration.

 

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

 

From our inception through 2002, the Company has beenunprofitable.  We were profitable in2003 solely because of the sale of the Company’s science assets to Pliva.

 

*Critical Accounting Policies*

 

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

 

Also, our former Chief Executive Officer (“CEO”) spent a portion of histime dealing with FDA related issues prior to the asset sale to Pliva inNovember 2003 and, therefore, we recorded a portion of the former CEO’s salaryas a Research and Development expense in the statement of operations.

 

# **Results of Operations**

 

*Years endedDecember 31, 2002 and 2003*

 

*Research and Development Expenses*. Research and development expenses consistprimarily of salary expense of the former CEO who spent a portion of his timedealing with FDA related issues prior to the asset sale to Pliva in November2003. We have expensed all of our research and development costs as they havebeen incurred.

 

Research and development expenses decreasedfrom $39,278 in 2002 to ($467,294) in 2003. The decrease was primarily a resultof a reversal of an ERGOSET® related obligation in the amount

 

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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 toa former vendor. We do not expect to incur any research and developmentexpenses in 2004 now that we have sold the science assets.

 

*General and Administrative Expenses*. General and Administrative Expenses consist primarily of compensationfor personnel, professional services, which include consultants, legal fees andaccounting audit and tax fees, and administrative expenses associated withoperating as a public company.

 

General and administrative expenses increasedfrom $973,497 in 2002 to $1,377,728 in 2003. The increase was principally dueto increases in legal costs of approximately $350,000 and other professionalfees of approximately $73,000, offset by reductions in general operating costsof the company of approximately $19,000. The legal costs and professional feeswere incurred primarily in the sale of the assets to Pliva as well asmaintaining our intellectual property prior to the sale. While costs associatedwith the Pliva transaction will not recur in 2004, the Company expects toincrease its spending related to the pursuit of an acquisition candidatetherefore general and administrative expenses may increase in 2004.

 

Interest income decreased from $426,493 in2002 to $263,607 in 2003.  The decreasein interest income is primarily due to a general reduction of market interestrates and a decrease of cash available for investment for the vast majority ofthe year.

 

Other income increased from $0 in 2002 to$5,598,000 in 2003.  The increase inother income represents revenue from the sale of assets to Pliva in the amountof $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. Theincrease in income tax expense represents an amount owed for Federal income taxes in 2003 due tolimitations on alternative minimum tax net operating loss carryforwards.

 

Net income (loss) increased from a net lossof ($586,282) in 2002 to a net income of $4,851,173 in 2003. The increase innet income was primarily due to the sale of assets to Pliva.  Net income (loss) per common share increasedfrom ($0.08) in 2002 to $0.74 in 2003.

 

*Years endedDecember 31, 2001 and 2002*

 

Research and development expenses decreasedfrom $55,454 in 2001 to $39,278 in 2002. The decrease in costs in 2002 was primarily a result of less FDA relatedconsulting services incurred by us in 2002.

 

General and administrative expenses decreasedfrom $2,456,332 in 2001 to $973,497 in 2002. The decrease was principally due to reduced legal costs of approximately$1,050,000 and reduced professional fees of approximately $460,000 from thoseexpenses incurred in 2001 in evaluating our strategic alternatives, inpreparing a proxy statement for our annual meeting of stockholders and inundertaking efforts to implement our strategic plan.  In particular, in 2001 we incurred legal costs and professionalfees related to our effort to remain listed on the Nasdaq Stock Market,adoption of a new stock option plan, negotiating a common stock purchaseagreement with Court Square Capital Limited, attempting to sell or license ourinterest in ERGOSET® and our other human drug related assets and implementingthe stock transfer restrictions.

 

Interest and other income decreased from$1,260,964 in 2001 to $426,493 in 2002. The decrease in interest income is primarily due to a general reductionof market interest rates and a decrease of cash available for investment.

 

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Netloss decreased from ($1,250,822) in 2001 to ($586,282) in 2002. The decrease innet loss was mainly due to decreased legal and other professional fees comparedto those fees incurred by us in 2001 in preparing our proxy statement for ourannual meeting of stockholders, in evaluating our strategic alternatives andthe process of attempting to sell or license our interest in ERGOSET® and ourother human drug related assets. Net loss per common share decreased from $0.18in 2001 to $0.08 in 2002.

 

# **Net Operating Loss Carryforwards**

 

At December 31, 2003, we reported federal net operating loss andresearch and experimentation carryforwards of approximately $76 million.If not used, the tax loss carryforwards will begin to expire in 2008. Ourability to use these carryforwards is subject to limitations resulting from,among other things, an ownership change as defined in the Internal Revenue Codesections 382 and 383. See Note 5 of Notes to Consolidated FinancialStatements.

 

**Liquidity and CapitalResources**

 

*Resources*

 

Since our inception, our primary source of cash has been from financingactivities, which have consisted of private placements of equity securities,two public offerings, the sale of common stock in conjunction with the JointCollaboration Agreement with Johnson & Johnson (the “JointCollaboration 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 securitiesprovided us with aggregate proceeds of $42,999,000 through 1998.

 

On May 23, 2001, we entered into a common stock purchase agreement withCourt Square Capital Limited, the Company’s largest stockholder at the time, toprovide us with additional capital for general corporate purposes or to pursueother strategic alternatives. Subject to certain conditions, includingstockholder approval, the agreement provided for us to issue and sell to CourtSquare 3,750,000 shares at a per share price of $2.30, subject to adjustment.No common stock was issued or sold pursuant to this agreement, which expired onMay 23, 2003.

 

Cash and cash equivalents were $24,938,233 and $27,102,617 atDecember 31, 2002 and 2003, respectively. The overall increase in cash andcash equivalents at December 31, 2003 compared to one year prior was dueprimarily to inflows of cash from the sale of assets to Pliva in the amount of$5,498,000 million and the sale of the ergo.com domain name in the amount of$100,000, offset by outflows for the purchase of our own common stock fromCourt Square Capital Limited in the amount of $2,417,657, and general operatingcosts of approximately $1 million.

 

Cash provided by operating activities was $4,582,041 during the yearended December 31, 2003 compared to a cash use of $869,795 during 2002 and acash use of $1,282,979 during 2001. The increase in cash provided by operationsin 2003 is primarily due to net income in 2003 of $4,857,173 which was a directresult of the sale of the science assets to Pliva in the amount of $5,498,000.The cash use in 2002 and 2003 were primarily due to cash outflows for generaland administrative activities.

 

Cash flows from investing activities in 2001 were related to thematurity of and the purchase of short-term investments that the Company held in2001.

 

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

 

Our primary source of cash in 2003 was the sale of assets to Pliva inthe amount of $5,498,000 as well as interest income of $263,607 generated byour investment of cash and cash equivalents. Barring

 

10

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unforeseen circumstances, weexpect interest income to continue to be our primary source of cash until weacquire an income producing business. The only securities we currently hold are U.S. government obligationswith maturities of 90 days or less.  Weexpect to continue to hold similar securities exclusively until we acquire anoperating business.

 

We have concentrated our efforts on conserving our cash while we havebeen considering our strategic alternatives. However, our use of cash hasfluctuated significantly from quarter to quarter and we anticipate that thispattern will continue.

 

*Requirements*

 

Our primary use of cash prior to March 2001 was in operating activitiesto fund research and development, including preclinical studies and clinicaltrials. Since then our primary use of cash has been in general andadministrative expenses and in evaluating and implementing strategicalternatives. In addition, we purchased 1,355,722 shares of our common stock onAugust 1, 2003, from our then-largest stockholder, Court Square CapitalLimited, for $2,417,657.

 

We expect that (in the absence of a strategic change) our availablecash and expected interest income will fund our current operations for at leastthe next 12 months and until we identify an acquisition candidate. In the eventthat the Company purchases a business, we may require additional capital tocomplete the acquisition.

 

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

 

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

 

**Off-Balance Sheet Arrangements**

 

We have no off-balance sheet arrangements.

 

**Long-Term Contractual Obligations**

 

We have no long-term contractual obligations.

 

**New AccountingPronouncements**

 

In January 2003, the FASB issued FASBInterpretation No. 46 (“FIN 46”), *Consolidationof Variable Interest Entities, an interpretation of ARB No. 51.* FIN 46 requires existing unconsolidated variable interest entities to beconsolidated by their primary beneficiaries if the entities do not effectivelydisperse risks among parties involved.  Variable interest entities thateffectively disperse risk will not be consolidated unless a single party holdsan interest or combination of interests that effectively recombines risks thatwere previously dispersed.  FIN 46 also requires enhanced disclosurerequirements related to variable interest entities.  FIN 46 appliesimmediately to variable interest entities created after January 31, 2003, andto variable interest entities in which an enterprise obtains an interest afterthat date. The FASB has extended the effective dates of FIN 46 so it will applyto us in the first interim period beginning after December 15, 2003 to variableinterest entities in which an enterprise holds a

 

11

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variable interestthat it acquired before February 1, 2003.    The adoption of FIN 46is not expected to have an effect on our financial statements.

 

InDecember 2003, the FASB issued FASB Interpretation No. 46-R (“FIN 46-R”) arevised interpretation of FASB Interpretation No 46 (“FIN 46”). FIN 46-Rrequires certain variable interest entities to be consolidated by the primarybeneficiary of the entity if the equity investors in the entity do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties. The provisions of FIN 46-Rare effective immediately for all arrangements entered into after January 31,2003. For all arrangements entered into after January 31, 2003, we are requiredto continue to apply FIN 46-R through the end of the first quarter of fiscal2004. We do not have any equity interests that would change its currentreporting or require additional disclosures outlined in FIN 46-R. Forarrangements entered into prior to February 1, 2003, we are required to adoptthe provisions of FIN 46-R in the first quarter of fiscal 2004. We do not haveany equity interests that would change its current reporting or requireadditional disclosures outlined in FIN 46-R.

 

**ITEM 7A. QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

We are not subject to market risk associated with risk sensitiveinstitutions as we do not invest in instruments that are not United Statesgovernment instruments and do not enter into hedging transactions.

 

12

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**ITEM 8. CONSOLIDATEDFINANCIAL STATEMENTS**

 
| **Index to  Consolidated Financial Statements**                                                                      |   |
|----------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                 |   |
| Report of Independent Auditors                                                                                       |   |
|                                                                                                                 |   |
| Consolidated Balance Sheets as of December 31, 2003 and 2002                                                    |   |
|                                                                                                                 |   |
| Consolidated Statements of Operations for  the years ended December 31, 2003, 2002 and 2001                |   |
|                                                                                                                 |   |
| Consolidated Statements of Cash Flows for  the years ended December 31, 2003, 2002 and 2001                |   |
|                                                                                                                 |   |
| Consolidated Statements of Stockholders’  Equity for the years ended December 31, 2003, 2002 and 2001 |   |
|                                                                                                                 |   |
| Notes to Consolidated Financial Statements                                                                           |   |

 

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**REPORT OFINDEPENDENT AUDITORS**

 

Tothe Board of Directors and Stockholders Ergo Science Corporation

 

Inour opinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of operations, cash flows and stockholders’ equitypresent fairly, in all material respects, the financial position of ErgoScience Corporation and its subsidiaries at December 31, 2003 and 2002,and the results of their operations and their cash flows for each of the threeyears in the period ended December 31, 2003 in conformity with accountingprinciples generally accepted in the United States of America. These financialstatements are the responsibility of the Company’s management; our responsibilityis to express an opinion on these financial statements based on our audits. Weconducted our audits of these statements in accordance with auditing standardsgenerally accepted in the United States of America, which require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 
| /s/  PRICEWATERHOUSECOOPERS LLP |   |
|---------------------------------|--------|
|                            |
| Boston, Massachusetts           |
| March 5, 2004                   |

 

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**ERGOSCIENCE CORPORATION**

**CONSOLIDATED BALANCESHEETS**

 
|                                                                                                                                                                                                                                     |   | **December  31,** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|
|                                                                                                                                                                                                                                     |   | **2003**          |       | **2002** |   |
|                                                                                                                                                                                                                                     |   |              |       |   |   |
| **ASSETS**                                                                                                                                                                                                                               |   |              |       |   |   |
| Current assets:                                                                                                                                                                                                                          |   |              |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                |   | $                 | 27,102,617 |   | $ | 24,938,233 |   |
| Prepaid and other current assets                                                                                                                                                                                                         |   | 14,169            |       | 57,164 |   |
| Total current assets                                                                                                                                                                                                                     |   | 27,116,786        |       | 24,995,397 |   |
| Equipment, net                                                                                                                                                                                                                           |   | 472               |       | 2,278 |   |
| Total assets                                                                                                                                                                                                                             |   | $                 | 27,117,258 |   | $ | 24,997,675 |   |
|                                                                                                                                                                                                                                     |   |              |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                            |   |              |       |   |   |
|                                                                                                                                                                                                                                     |   |              |       |   |   |
| Current liabilities:                                                                                                                                                                                                                     |   |              |       |   |   |
| Accounts payable and accrued expenses                                                                                                                                                                                                    |   | $                 | 274,358    |   | $ | 688,291 |   |
| Income taxes payable                                                                                                                                                                                                                     |   | 94,000            |       | — |   |
| Total current liabilities                                                                                                                                                                                                                |   | 368,358           |       | 688,291 |   |
|                                                                                                                                                                                                                                     |   |              |       |   |   |
| Commitments and contingencies (Note 8)                                                                                                                                                                                                   |   | —            |       | — |   |
|                                                                                                                                                                                                                                     |   |              |       |   |   |
| Stockholders’ equity:                                                                                                                                                                                                               |   |              |       |   |   |
| Preferred stock, $.01 par value, 10,000,000  shares authorized; 6,903 shares ofseries D exchangeable preferred stock  issued and outstanding at December 31, 2003 and 2002 (liquidation preference  of $11,523,696 at December 31, 2003) |   | 4,306,520         |       | 4,306,520 |   |
| Common stock, $.01 par value, 50,000,000  shares authorized at December 31, 2003 and 2002; 7,149,578 shares issued and  outstanding at December 31, 2003 and 2002                                                                        |   | 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                                                                                                                                                                                                                      |   | (84,794,827       | )          | (89,652,000 | ) |
| Treasury stock (at cost), 1,335,722 shares at December 31, 2003                                                                                                                                                                          |   | (2,417,657        | )          | — |   |
| Total stockholders’ equity                                                                                                                                                                                                          |   | 26,748,900        |       | 24,309,384 |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                          |   | $                 | 27,117,258 |   | $ | 24,997,675 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

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**ERGOSCIENCE CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
|                                        |   | **Years  Ended December 31,** |     |
|---------------------------------------------|--------|------------------------------------|----------|
|                                        |   | **2003**                           |     | **2002** |   | **2001** |   |
|                                        |   |                               |     |   |   |   |   |
| Operating expenses:                         |   |                               |     |   |   |   |   |
| Research and development                    |   | $                                  | (467,294 | ) | $ | 39,278 |   | $ | 55,454 |   |
| General and administrative                  |   | 1,377,728                          |     | 973,497 |   | 2,456,332 |   |
| Total operating expenses                    |   | 910,434                            |     | 1,012,775 |   | 2,511,786 |   |
|                                        |   |                               |     |   |   |   |   |
| Other income:                               |   |                               |     |   |   |   |   |
| Interest income                             |   | 263,607                            |     | 426,493 |   | 1,260,964 |   |
| Other income                                |   | 5,598,000                          |     | — |   | — |   |
| Total other income                          |   | 5,861,607                          |     | 426,493 |   | 1,260,964 |   |
|                                        |   |                               |     |   |   |   |   |
| Net income (loss) before income taxes       |   | 4,951,173                          |     | — |   | — |   |
|                                        |   |                               |     |   |   |   |   |
| Income tax expense                          |   | 94,000                             |     | — |   | — |   |
|                                        |   |                               |     |   |   |   |   |
|  Net income (loss)                     |   | 4,857,173                          |     | (586,282 | ) | (1,250,822 | ) |
|                                        |   |                               |     |   |   |   |   |
| Net income (loss) per common share:         |   |                               |     |   |   |   |   |
| Basic                                       |   | $                                  | 0.74     |   | $ | (0.08 | ) | $ | (0.18 | ) |
| Diluted                                     |   | $                                  | 0.74     |   | $ | (0.08 | ) | $ | (0.18 | ) |
|                                        |   |                               |     |   |   |   |   |
| Weighted average common shares outstanding: |   |                               |     |   |   |   |   |
| Basic                                       |   | 6,589,673                          |     | 7,149,578 |   | 7,149,578 |   |
| Diluted                                     |   | 6,603,389                          |     | 7,149,578 |   | 7,149,578 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

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**ERGOSCIENCE CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
|                                                                                            |   | **Years  Ended December 31,** |       |
|-------------------------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                                            |   | **2003**                      |       | **2002** |   | **2001** |   |
|                                                                                            |   |                          |       |   |   |   |   |
| Cash flows from operating activities:                                                           |   |                          |       |   |   |   |   |
| Net income (loss)                                                                               |   | $                             | 4,857,173  |   | $ | (586,282 | ) | $ | (1,250,822 | ) |
| Adjustments to reconcile net income (loss)  to cash provided by (used in) operating activities: |   |                          |       |   |   |   |   |
| Depreciation and amortization                                                                   |   | 1,806                         |       | 4,537 |   | 9,857 |   |
| Loss on disposal of equipment                                                                   |   | —                        |       | — |   | 3,201 |   |
| Changes in operating assets and  liabilities:                                                   |   |                          |       |   |   |   |   |
| Prepaid and other current assets                                                                |   | 42,995                        |       | (48,806 | ) | 10,381 |   |
| Accounts payable and accrued expenses                                                           |   | (413,933                      | )          | (239,244 | ) | (55,596 | ) |
| Income taxes payable                                                                            |   | 94,000                        |       | — |   | — |   |
|                                                                                            |   |                          |       |   |   |   |   |
| Net cash provided by (used in) operating  activities                                            |   | 4,582,041                     |       | (869,795 | ) | (1,282,979 | ) |
|                                                                                            |   |                          |       |   |   |   |   |
| Cash flows from investing activities:                                                           |   |                          |       |   |   |   |   |
| Purchase of short-term investments                                                              |   | —                        |       | — |   | (39,265,526 | ) |
| Proceeds from maturity of short-term  investments                                               |   | —                        |       | — |   | 56,224,014 |   |
| Net proceeds received on sale of equipment                                                      |   | —                        |       | — |   | 1,920 |   |
|                                                                                            |   |                          |       |   |   |   |   |
| Net cash provided by investing activities                                                       |   | —                        |       | — |   | 16,960,408 |   |
|                                                                                            |   |                          |       |   |   |   |   |
| Cash flows from financing activities:                                                           |   |                          |       |   |   |   |   |
| Payment for purchase of treasury stock                                                          |   | (2,417,657                    | )          | — |   | — |   |
|                                                                                            |   |                          |       |   |   |   |   |
| Net cash used in financing activities                                                           |   | (2,417,657                    | )          | — |   | — |   |
|                                                                                            |   |                          |       |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                                           |   | 2,164,384                     |       | (869,795 | ) | 15,677,429 |   |
| Cash and cash equivalents at beginning of  year                                                 |   | 24,938,233                    |       | 25,808,028 |   | 10,130,599 |   |
|                                                                                            |   |                          |       |   |   |   |   |
| Cash and cash equivalents at end of year                                                        |   | $                             | 27,102,617 |   | $ | 24,938,233 |   | $ | 25,808,028 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

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**ERGOSCIENCE CORPORATION**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

 
|                         |   |                 |   |              |      |                |      |       |   |       |   |       |       | **Additional  Paid-In  Capital** |       | **Cumulative  Dividends on  Preferred  Stock** |        | **Accumulated  Deficit** |   | **Total  Stockholder’s   Equity** |       |
|------------------------------|--------|----------------------|--------|-------------------|-----------|---------------------|-----------|------------|--------|------------|--------|------------|------------|----------------------------------|------------|------------------------------------------------|-------------|--------------------------|--------|----------------------------------------|------------|
|                         |   |                 |   |              |      |                |      |       |   |       |   |       |       |                             |       |                                           |        |
|                         |   | **Preferred  Stock** |   | **Common  Stock** |      | **Treasury  Stock** |      |       |   |       |   |
|                         |   | **Shares**           |   | **Amount**        |      | **Shares**          |      | **Amount** |   | **Shares** |   | **Amount** |       |                             |       |                                           |        |
|                         |   |                 |   |              |      |                |      |       |   |       |   |       |       |                             |       |                                           |        |                     |   |                                   |       |
| Balance at December 31, 2000 |   | 6,903                |   | $                 | 4,306,520 |                | 7,149,578 |       | $      | 71,496     |   | —     |       | —                           |       | $                                              | 111,880,321 |                     | $      | (2,296,953                             | )          | $ | (87,814,896 | ) | $ | 26,146,488 |   |
|                         |   |                 |   |              |      |                |      |       |   |       |   |       |       |                             |       |                                           |        |                     |   |                                   |       |
| Net loss                     |   |                 |   |              |      |                |      |       |   |       |   |       |       |                             |       |                                           |        | (1,250,822               | )      | (1,250,822                             | )          |
|                         |   |                 |   |              |      |                |      |       |   |       |   |       |       |                             |       |                                           |        |                     |   |                                   |       |
| 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     |   | 1,335,722  |       | $                                | (2,417,657 | )                                              | $           | 111,880,321              |   | $                                      | (2,296,953 | ) | $ | (84,794,827 | ) | $ | 26,748,900 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

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**ERGO SCIENCE CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****                                        Overviewand Summary of Significant Accounting Principles**

 

*Background and RecentEvents*

 

Ergo Science Corporation (the “Company”) is a company intransition.  From its incorporation throughMarch 2001, the Company was engaged in the development of ERGOSET® tablets forthe treatment of type 2 diabetes.

 

In March 2001, the Company decided that the next phase of thedevelopment of ERGOSET® would be better undertaken by a company that has moreexperience with human drug development and more resources for regulatoryapproval and marketing than the Company does.

 

At the Annual Meeting of Stockholders held on October 15, 2001, theCompany’s stockholders approved the imposition of transfer restrictions on theCompany’s common stock.  These transferrestrictions were implemented on October 19, 2001.  At that annual meeting, stockholders also approved an arrangementby which the Company could issue and sell up to 3,750,000 shares of its commonstock to Court Square Capital Limited, the Company’s largest stockholder at thetime, at a per share price of $2.30.  Noshares of common stock was issued or sold under this agreement, which expiredin May 2003.

 

On November 24, 2003 the Company sold all of our scientific andresearch assets and certain other intellectual property assets to Pliva d.d., acompany 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 inthe sale agreement, we may be able to receive an additional $500,000. Inaccordance with the asset purchase agreement, Pliva has one year from theclosing date to obtain the right to certain patents from Massachusetts GeneralHospital (“MGH Patents”). If Pliva is not able to obtain such rights, thenPliva shall retain the additional $500,000 and shall have no further obligationto pay that amount to the Company. In addition, Pliva has assumed our futureobligations under the LSU Royalty agreement. Also as part of the agreement,Pliva has agreed to make payments to one of our wholly-owned subsidiaries, ErgoTexas, to cover certain payments required to be made by Ergo Texas in the eventErgoset® or another specified drug is approved by the Food and Drug Administration.

 

The Company is now currently seeking to acquire one or more establishedbusinesses.  The Company has substantialunrecognized tax benefits and approximately $27 million in cash and cash equivalents.  The Company intends to continue to conserve its cash and other assets.

 

*Organization*

 

Ergo Science Development Corporation (“ESDC”) was incorporated onJanuary 23, 1990. ESDC operated as an S Corporation from inception toSeptember 10, 1992, when it converted to a C Corporation. InApril 1995, ESDC went through a recapitalization whereby all the stock ofESDC was exchanged on a one-for-one basis for an equal amount of stock in ErgoScience Holdings, Incorporated, previously a wholly owned subsidiary of ESDC.Subsequent to the recapitalization, Ergo Science Holdings, Incorporated changedits name to Ergo Science Corporation. The consolidated financial statementsinclude the accounts of the Company and its subsidiaries, all of which arewholly owned. All intercompany accounts and transactions are eliminated uponconsolidation.

 

*Research and Development Costs*

 

Research and development costs are expensed as incurred. The Companyincludes in research and development expense costs related to the handling ofmatters with the U.S. Food and Drug Administration.

 

19

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*Cash Equivalents and Investments*

 

The Company considers all highly liquid investments with maturity of90 days or less at the date of purchase to be cash equivalents.

 

All debt securities are classified as held-to-maturity as the Companyhas positive intent and ability to hold the securities to maturity.Held-to-maturity securities are stated at amortized cost.

 

At December 31, 2003 and 2002, the Company’s cash equivalents consistedonly of investments in bank cash accounts and U.S. government obligations thatmature within 90 days of purchase.

 

*Use of Estimates*

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make certain estimates and assumptions that effect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statement and the reported amounts ofrevenues and expenses during the reported period. Actual results could differfrom those estimates.

 

*Net Income (Loss) Per Common Share*

 

Basic earnings (loss) per common share iscomputed by dividing net income (loss) by the weighted average number of commonshares outstanding for the period. Diluted earnings per common share is computed by dividing net income bythe sum of the weighted average number of common shares outstanding for theperiod plus the assumed exercise of all dilutive securities, such as stockoptions.  For the year ended December31, 2003, a total of 13,716 stock option shares were included in the weightedaverage number of common shares outstanding calculation because these shareshad exercise prices less than the market value of the Company’s common stock asof December 31, 2003.

 

The diluted loss per common share calculated for the years endedDecember 31, 2003, 2002 and 2001, excludes the effects of 102,125, 213,625 and214,375 options outstanding, respectively. These amounts are excluded, as theirinclusion would be anti-dilutive.

 

*Stock Based Compensation*

 

Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”) requires that companies eitherrecognize compensation expense for grants of stock, stock options, and otherequity instruments based on fair value, or provide pro forma disclosure of netincome or loss and earnings or loss per share in the notes to the financialstatements. The Company follows the disclosure provisions of SFAS 123 andapplies APB Opinion 25 and related interpretations in accounting for its plans.Accordingly, no compensation cost has been recognized for its stock optionplans since all options issued were for a fixed number of shares and had fixedexercise prices equal to the fair market value of the common stock on the grantdate. The effects of applying SFAS 123 in this pro forma disclosure arenot likely to be representative of the effects on reported income or loss forfuture years. Had compensation cost for the Company’s stock-based compensationplans been determined based on the fair value at the grant dates as calculatedin accordance with SFAS 123, the Company’s net loss and loss per share forthe years ended December 31, 2003, 2002 and 2001 would have been increasedto the pro forma amounts indicated below:

 

20

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|                                          |   | **Years  ended December 31,** |      |
|-----------------------------------------------|--------|-------------------------------|-----------|
|                                          |   | **2003**                      |      | **2002** |   | **2001** |   |
| Net income (loss):                            |   |                          |      |   |   |   |   |
| As reported                                   |   | $                             | 4,857,173 |   | $ | (586,282 | ) | $ | (1,250,822 | ) |
| Deduct: Pro forma stock compensation  expense |   | 19,417                        |      | 136,787 |   | 187,185 |   |
| Pro forma                                     |   | $                             | 4,837,756 |   | $ | (723,069 | ) | $ | (1,438,007 | ) |
| Net income (loss) per share-basic             |   |                          |      |   |   |   |   |
| As reported                                   |   | $                             | 0.74      |   | $ | (0.08 | ) | $ | (0.18 | ) |
| Pro forma                                     |   | 0.74                          |      | (0.10 | ) | (0.20 | ) |
| Net income (loss) per share-diluted           |   |                          |      |   |   |   |   |
| As reported                                   |   | $                             | 0.74      |   | $ | (0.08 | ) | $ | (0.18 | ) |
| Pro forma                                     |   | 0.74                          |      | (0.10 | ) | (0.20 | ) |

 

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

 

|                                     |   | **2001** |   |
|------------------------------------------|--------|----------|--------|
| Expected Life                            |   | 5 years  |   |
| Expected Volatility                      |   | 50%      |   |
| Dividend Yield                           |   | 0%       |   |
| Weighted Average Risk-free Interest Rate |   | 4.77%    |   |

 

No stock options were granted in 2003 or 2002.

 

*Equipment*

 

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

 

*Income Taxes*

 

Deferred tax liabilities and assets are recognized based on temporarydifferences between the financial statement basis and tax basis of assets andliabilities using current statutory tax rates. A valuation allowance againstnet deferred tax assets is established if, based on the available evidence, itis more likely than not that some or all of the deferred tax assets will not berealized. (See Note 5).

 

*Comprehensive Income*

 

Statement of Financial Accounting Standards No. 130, “ReportingComprehensive Income,” establishes a standard for reporting and displayingcomprehensive income and its components within the financial statements.Comprehensive income (loss) includes only net income (loss) at December 31,2003, 2002 and 2001.

 

*Reclassifications*

 

Certain prior year amounts have been reclassified to conform to thecurrent year’s presentation. Such reclassifications had no effect on theCompany’s results of operations.

 

*New Accounting Pronouncements*

 

In January 2003, the FASB issued FASBInterpretation No. 46 (“FIN 46”), *Consolidationof Variable Interest Entities, an interpretation of ARB No. 51.* FIN 46 requires existing unconsolidated variable interest entities to beconsolidated by their primary beneficiaries if the entities do not effectively

 

21

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disperse risks among partiesinvolved.  Variable interest entities that effectively disperse risk willnot be consolidated unless a single party holds an interest or combination ofinterests that effectively recombines risks that were previously dispersed. FIN 46 also requires enhanced disclosure requirements related to variableinterest entities.  FIN 46 applies immediately to variable interestentities created after January 31, 2003, and to variable interest entities inwhich an enterprise obtains an interest after that date. The FASB has extendedthe effective dates of FIN 46 so it will apply to the Company in the firstinterim period beginning after December 15, 2003 to variable interest entitiesin which an enterprise holds a variable interest that it acquired beforeFebruary 1, 2003.    The adoption of FIN 46 is not expected to havean effect on the Company’s financial statements.

 

In December 2003, the FASBissued FASB Interpretation No. 46-R (“FIN 46-R”) a revised interpretation ofFASB Interpretation No 46 (“FIN 46”). FIN 46-R requires certain variableinterest entities to be consolidated by the primary beneficiary of the entity ifthe equity investors in the entity do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties. The provisions of FIN 46-R are effectiveimmediately for all arrangements entered into after January 31, 2003. For allarrangements entered into after January 31, 2003, we are required to continueto apply FIN 46-R through the end of the first quarter of fiscal 2004. We donot have any equity interests that would change its current reporting orrequire additional disclosures outlined in FIN 46-R. For arrangements enteredinto prior to February 1, 2003, we are required to adopt the provisions of FIN46-R in the first quarter of fiscal 2004. We do not have any equity intereststhat would change its current reporting or require additional disclosuresoutlined in FIN 46-R.

 

**2.****                   Equipment**

 

Equipment consists of the following at December 31: 

 
|                                      |   | **2003** |   | **2002** |   |
|-------------------------------------------|--------|----------|--------|----------|--------|
| Furniture and equipment                   |   | $        | 42,608 |     | $      | 42,608 |   |
| Accumulated depreciation and amortization |   | (42,136  | )      | (40,330  | )      |
| Equipment, net                            |   | $        | 472    |     | $      | 2,278 |   |

 

Depreciation expense for the years ended December 31, 2002, 2001and 2000 was $1,806, $4,537, and $9,857, respectively. The Company disposed offurniture and equipment in the third quarter of 2001, resulting in a loss of$3,201, which is included in general and administrative expense on thestatement of operations.

** **

**3.****                   AccountsPayable and Accrued Expenses**

 

Accounts payable and accrued expenses consist of the following atDecember 31,

 
|                                        |   | **2003** |    | **2002** |   |
|---------------------------------------------|--------|----------|---------|----------|--------|
| Accounts payable                            |   | $        | 18,852  |     | $      | 9,329 |   |
| Accrued legal costs                         |   | 151,007  |    | 52,940   |   |
| Accrued payroll, bonuses and vacation       |   | 28,456   |    | 29,289   |   |
| Accrued professional fees                   |   | 40,000   |    | 58,000   |   |
| Accrued drug development related expenses   |   | —   |    | 500,000  |   |
| Accrued other expenses                      |   | 36,043   |    | 38,733   |   |
| Total accounts payable and accrued expenses |   | $        | 274,358 |     | $      | 688,291 |   |

 

The accrued drug development related expenses represents an amount estimatedby management for costs incurred in prior years pertaining to drug developmentrelated expenses. This amount was reversed in 2003 upon the signing of theasset sale agreement with Pliva. It was determined at that time that is was notprobable that the Company would have to pay this obligation to a former vendor.

 

22

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**4.****                   Leases**

 

The Company leases office space under lease arrangements, whichoriginally expired in June 2002. The office space lease currently renewson a monthly basis. The lease for the Company’s office space includes paymentterms that are subject to increases due to taxes and other operating costs ofthe lessor.  Minimum lease paymentsunder this lease for 2004 is $1,930.

 

Rent expense for the years ending on December 31, 2003, 2002 and2001 amounted to $35,218, $31,171, and $36,616, respectively.

 

**5.****                   IncomeTaxes**

 

Theprovision for income taxes for 2003 was $94,000.

 

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

 

|                                        |   | **2003**    |      | **2002**    |   |
|---------------------------------------------|--------|-------------|-----------|-------------|--------|
| Deferred tax assets:                        |   |        |      |        |   |
| Research and development credits            |   | $           | 2,554,000 |        | $      | 2,554,000 |   |
| Deferred compensation                       |   | 79,000      |      | 79,000      |   |
| Intangible amortization                     |   | 620,000     |      | 727,000     |   |
| Net operating loss and AMT credits          |   | 26,352,000  |      | 28,738,000  |   |
| Total deferred tax assets                   |   | 29,605,000  |      | 32,098,000  |   |
| Valuation allowance for deferred tax assets |   | (29,605,000 | )         | (32,098,000 | )      |
| Net deferred tax assets                     |   | —      |      | —      |   |
|                                             |        |             |           |             |        |  |  |

 

For the year ending December 31, 2003, the Company will utilizeapproximately $4,700,000 of its federal net operating losses (“NOL”) to offsettaxable income. As of December 31, 2003, the Company had NOL, federalalternative minimum tax credits (AMT) and research and experimentation creditcarryforwards remaining of approximately $73,694,000, $94,000 and $2,554,000,respectively, which may be available to offset future federal income taxliabilities and expire at various dates from 2008 through 2022. Approximately$29,000 of the gross deferred tax asset represents the benefit of deductionsfrom the exercise of stock options, which have been fully reserved. The benefitfrom the $29,000 tax asset will be recorded as a credit to additional paid-incapital when realized. As required by Statement of Financial AccountingStandards No. 109, management of the Company has evaluated the positiveand negative evidence bearing upon the realizability of its deferred taxassets, which are comprised principally of net operating loss and research andexperimentation credit carryforwards. Management has determined that, at thistime, it is more likely than not that the Company will not realize the benefitsof federal and state deferred tax assets and, as a result, a valuationallowance of $29,605,000 has been established at December 31, 2003.

 

The change in the valuation allowance was a decrease of $2,493,000 forthe year ended December 31, 2003 and a decrease of $2,396,000 for the yearended December 31, 2002.  For December31, 2003, the decrease in the valuation allowance is the result of the Companyutilizing approximately $4,700,000 of federal net operating loss carryovers,which were previously not benefited, to offset taxable income in connectionwith the gain on the sale of intellectual property on November 24, 2003, and theexpiration of Massachusetts state net operating loss carryovers.  The decrease in the valuation allowance forDecember 31, 2002 is the result of expiring Massachusetts state net operatingloss carryovers.

 

Ownership changes, as defined in the Internal Revenue Code, may havelimited the amount of net operating loss carryforwards that can be utilizedannually to offset future taxable income. Subsequent ownership changes couldfurther affect the limitation in future years.

 

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

 

23

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|                                                  |   | **Years  Ended December 31,** |      |
|-------------------------------------------------------|--------|-------------------------------|-----------|
|                                                  |   | **2003**                      |      | **2002** |   | **2001** |   |
|                                                  |   |                          |      |   |   |   |   |
| Expected federal income tax expense  (benefit)        |   | $                             | 1,733,000 |   | $ | (205,000 | ) | $ | (85,000 | ) |
| Effect of valuation allowance on current  year losses |   | (2,493,000                    | )         | (2,396,000 | ) | 97,000 |   |
| Expiration of state net operating loss  carryforward  |   | 885,000                       |      | 2,630,000 |   | — |   |
| Other                                                 |   | (31,000                       | )         | (29,000 | ) | (12,000 | ) |
| Totals                                                |   | $                             | 94,000    |   | $ | — |   | $ | — |   |

 

**6.****                   CapitalStock**

 

On May 23, 2001, we entered into a common stock purchase agreement withCourt Square Capital Limited, our largest stockholder at the time, to provideus with additional capital for general corporate purposes or to pursue otherstrategic alternatives. Subject to certain conditions, including stockholderapproval, the agreement provided for us to issue and sell to Court Square andits affiliates up to 3,750,000 shares of our common stock at a per share priceof $2.30, subject to adjustment. No common stock was issued or sold under thisagreement, which expired on May 23, 2003.

 

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

 

On October 15, 2001, the stockholders of the Company voted to approvethe merger of Ergo Science Corporation with and into its wholly-ownedsubsidiary, ESC Merger Sub, Inc. On October 19, 2001, the merger becameeffective and ESC Merger Sub. Inc. was renamed Ergo Science Corporation. Alsoat this time, each share of the pre-merger common stock was converted into theright to receive .5 shares of the post-merger common stock, plus cash in lieuof any fractional shares. The total paid by the Company for cash in lieu offractional shares was approximately $30. Shares of the post-merger common stockare subject to certain transfer restrictions. These restrictions are intendedto help preserve our substantial tax net operating loss carryforwards for usein offsetting future taxable income. In general, these restrictions willprohibit, without the prior approval of the board of directors, the direct orindirect disposition or acquisition of any of the Company’s stock by or to anyholder who owns or would so own upon the acquisition (either directly orthrough the tax attribution rules) 5% or more of the Company’s stock.

 

*Treasurystock*

 

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

 

**7.****                Sale ofIntellectual Property**

 

On November 24, 2003, the Company sold all of its scientific andresearch assets and certain other intellectual property to Pliva, a companyorganized under the laws of Croatia. The total selling price was $5,998,000, ofwhich 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. Inaccordance with the asset purchase agreement, Pliva has one year from theclosing date to obtain the right to certain patents from Massachusetts GeneralHospital (“MGH Patents”). If Pliva is not able to obtain such rights, thenPliva shall retain the additional $500,000 and shall have no further obligationto pay that amount to us. Also in accordance with the agreement, Pliva hasassumed our future obligations under the LSU Royalty agreement.  Also as part of the agreement, Pliva hasagreed to make payments to one of our wholly-owned subsidiaries, Ergo Texas, tocover 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. TheCompany has recorded the $5,498,000 as other income on the statement ofoperations for 2003; the intellectual property had a net recorded value of zerosince the related cost was previously recognized as research and developmentexpense.

 

On June 30, 2003, the Company signed an agreement to sell its entireright, title and interest in its domain registration name for ergo.com to ERGOVersicherungsgruppe AG, a company organized under the laws of Germany. Inaccordance with the terms of the agreement, the Company received $100,000 in

 

24

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exchange for the entire right, title andinterest in ergo.com, which was completed on July 16, 2003 and recorded asother income on the statement of operations.

 

**8.****                   LicenseAgreements and Supplier Contracts**

 

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

 

The holders of series D preferred stock are entitled to receivequarterly dividends at a rate of 6% per annum, compounded semiannually, on thestated value. Such dividends shall be cumulative, commencing on the date oforiginal issue, and shall only be payable to holders of record when and asdeclared by the board of directors. The Company will have the option to convertthe series D preferred stock into common stock during the 90 daysafter the Company receives FDA approval to market its first product, if itreceives that approval. If the Company does not exercise its option to convertthe series D preferred stock into common stock within the 90 daysafter FDA approval the series D preferred stock will automatically beexchanged for subordinated debt securities at the end of the 90 days. TheCompany cannot pay dividends on its common stock without first obtaining thewritten consent of the holders of a majority of the outstanding series Dpreferred stock. Upon any voluntary or involuntary liquidation, dissolution orwinding up of the Company, the holders of series D preferred stock thenoutstanding will be entitled to receive an amount of cash equal to the statedvalue of series D preferred stock (including any accrued by unpaiddividends) after any distribution is made on any senior securities and beforeany distribution is made on any junior securities, including common stock. Theliquidation preference amount for the series D preferred stock as ofDecember 31, 2003 was $11,523,696.

 

The Company is party to certain other license agreements, which requirethe Company to pay a royalty on product sales and to make specific payments onthe completion of certain milestones. No amounts have been accrued related tothese requirements as of December 31, 2003 or 2002.

 

**9.****                   StockOptions and Incentive Plan**

 

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

 

The weighted average fair value of the options granted during 2001 was$1.72. No stock options were granted in 2003 or 2002.

 

During 2001, the Company granted to its directors options to purchase50,000 shares of common stock at exercise prices ranging from $1.25 to $1.56.Also during 2001, the Company granted an option to purchase 27,500 shares ofcommon stock to its Chief Executive Officer at an exercise price of $2.05. Alloptions issued in 2001 were issued at prices equal to the market price on thegrant dates.

 

Information related to stock option activity for the period fromDecember 31, 2000 through December 31, 2003 is as follows:

 

25

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|                             |   | **Shares** |   | **Weighted  Average  Option Price** |   |
|----------------------------------|--------|------------|--------|-------------------------------------|--------|
|                             |   |       |   |                                |   |
| Outstanding at December 31, 2000 |   | 136,875    |   | $                                   | 16.72  |   |
| Granted                          |   | 77,500     |   | 1.72                                |   |
| Exercised                        |   | —     |   | —                              |   |
| Canceled                         |   | —     |   | —                              |   |
| Outstanding at December 31, 2001 |   | 214,375    |   | 11.30                               |   |
| Granted                          |   | —     |   | —                              |   |
| Exercised                        |   | —     |   | —                              |   |
| Canceled                         |   | (750       | )      | 34.00                               |   |
| Outstanding at December 31, 2002 |   | 213,625    |   | 11.22                               |   |
| Granted                          |   | —     |   | —                              |   |
| Exercised                        |   | —     |   | —                              |   |
| Canceled                         |   | (84,000    | )      | 7.37                                |   |
| Outstanding at December 31, 2003 |   | 129,625    |   | $                                   | 13.72  |   |

 

The following table summarizes information about stock optionsoutstanding at December 31, 2003:

 
| **Options  Outstanding**      |   |                    |   |
|-------------------------------|--------|-------------------------|--------|
|                          |   |                    |   | **Weighted-Average  Remaining  Contractual Life** |   |   |   | **Options  Exercisable** |   |
| **Range of  Exercise Prices** |   | **Number  Outstanding** |   |   | **Weighted-Average  Exercise Price** |   | **Number  Exercisable** |   | **Weighted-Average  Exercise Price** |   |
| $                             | 0.00   | to                      | 1.562  |   | 27,500 |   | 7.2 years |   | $ | 1.56 |   | 17,000 |   | $ | 1.56 |   |
| $                             | 2.05   | to                      | 6.50   |   | 40,500 |   | 6.8 years |   | $ | 3.48 |   | 26,750 |   | $ | 4.21 |   |
| $                             | 13.42  | to                      | 22.00  |   | 31,625 |   | 2.3 years |   | $ | 18.17 |   | 31,625 |   | $ | 18.17 |   |
| $                             | 22.01  | to                      | 34.00  |   | 30,000 |   | 4.0 years |   | $ | 34.00 |   | 30,000 |   | $ | 34.00 |   |
| $                             | 0.00   | to                      | 34.00  |   | 129,625 |   |   |   | $ | 13.72 |   | 105,375 |   | $ | 16.45 |   |
|                               |        |                         |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Effective as of November 1, 1994, the board of directors adoptedthe Ergo Science Development Corporation Long-Term Incentive Plan (the“Incentive Plan”) pursuant to which certain officers, directors, and keyemployees were granted awards with respect to shares of the Company’s commonstock. The awards that could be granted under the Incentive Plan includedincentive stock options, nonstatutory options, stock appreciation rights (SARs)and restricted stock awards. Awards of options to purchase 35,000 shares at anexercise price of $1.562 per share, were granted to directors under theIncentive Plan in 2001. No awards were made in 2003 or 2002. These amounts areincluded in the tables above. At the time that the stockholders approved the2001 Stock Plan, the Incentive Plan was closed and no new grants will be madeunder this Plan.

 

On May 15, 1996, the board of directors approved, subject tostockholder approval, a proposal to adopt a Stock Option Plan for Non-EmployeeDirectors of the Company (the “Director Stock Plan”). The Director Stock Planprovided for an initial grant of an option to purchase 5,000 shares of commonstock to each eligible non-employee director upon first being elected orappointed to serve on the board of directors. Those eligible directors alreadyserving at the time the Director Stock Plan was approved by the stockholders ofthe Company were each granted a stock option to purchase 5,000 shares of commonstock with a deemed date of grant of May 15, 1996. Each director thatremained eligible to receive stock options under the Director Stock Plan on thesecond anniversary of the date that such director was first granted a stockoption under the Director Stock Plan was granted a second stock option topurchase 5,000 shares of common stock. Stock options granted under the DirectorStock Plan vest and become exercisable in equal increments on the first andsecond anniversary of their date of grant, but no stock option may be exercisedmore than ten years after the date of its grant. The Director Stock Plan wasapproved by the stockholders at the Company’s 1996 Annual Meeting ofStockholders that took place on June 25, 1996. Awards of options to purchase15,000 shares at exercise prices of $1.25-$1.562 per share were granted underthe Director Stock Plan in 2001. There were no awards granted in 2003 or 2002.

 

26

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These amounts are included inthe tables above.  At the time that thestockholders approved the 2001 Stock Plan, the Company’s Director Stock Planwas closed and no new grants will be made under this Plan.

 

On October 15, 2001, the stockholders of the Company approved the ErgoScience Corporation 2001 Employee, Director and Consultant Stock Plan (the“2001 Stock Plan”) pursuant to which certain officers, directors, key employeesand consultants may be granted awards with respect to shares of the Company’scommon stock. The awards that may be granted under the 2001 Stock Plan includeincentive stock options under section 422 of the Internal Revenue Code,non-qualified stock options, stock appreciation rights (SARs) and restrictedstock awards. A total of 1,600,000 shares of our common stock were reserved forissuance pursuant to options and other awards granted under this plan.  This plan provides for an initial grant ofan option to purchase 5,000 shares of common stock to each eligiblenon-employee director upon first being elected or appointed to serve on theboard of directors.  Stock optionsgranted to directors under the 2001 Stock Plan vest and become exercisable inequal increments on the first five anniversaries of their date of grant, but nostock option may be exercised more than ten years after the date of itsgrant.  Awards of options to purchase27,500 shares at an exercise price of $2.05 per share were granted under the2001 Stock Plan in 2001. There were no awards granted in 2003 or 2002. As ofDecember 31, 2003, 1,572,500 shares were available to be granted under the 2001Stock Plan.

 

At the timethat the stockholders approved the 2001 Stock Plan, the Company’s Long-TermIncentive Stock and Director Stock Plan were closed and no new grants will bemade under either the Long-Term Incentive Plan or the Director Plan.

 

**10.****            QuarterlyResults (Unaudited)**

 

The following table sets forth unaudited selected financial informationfor the periods indicated. This information has been derived from unauditedconsolidated financial statements, which, in the opinion of management, includeall adjustments (consisting only of normal recurring adjustments) necessary fora fair presentation of such information. The results of operations for anyquarter are not necessarily indicative of the results to be expected for anyfuture period.

 
|                                           |   | **First  Quarter** |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   |
|------------------------------------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|
| **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               |   |
|                                           |   |               |   |                |   |               |   |                |   |
| **2002**                                       |   |               |   |                |   |               |   |                |   |
| Net loss                                       |   | $(116,151          | )      | $(158,292           | )      | $(115,323          | )      | $(196,516           | )      |
| Net loss per share  Basic and diluted          |   | $(0.02             | )      | $(0.02              | )      | $(0.02             | )      | $(0.03              | )      |

 

**ITEM9.****                     CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING****AND FINANCIAL DISCLOSURES.**

 

None.

 

**ITEM 9A.****                                            CONTROLSAND PROCEDURES**

 

*Evaluation of disclosure controlsand procedures*

 

Based on anevaluation as of the end of the period covered by this annual report on Form10-K, our interim principal executive officer and acting principal financialofficer has concluded that our disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) of the Securities

 

27

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Exchange Act of 1934 (the“Exchange Act”)) are effective in timely providing management with materialinformation required to be disclosed by us in our filings under the ExchangeAct.

 

*Changes in internal controls*

 

There has beenno change in our internal controls over financial reporting (as defined in Rule13a-15(f) under the Exchange Act) that occurred during our last fiscal quarterthat has materially affected or is reasonably likely to materially affect ourinternal control over financing reporting.

 

28

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**PART III**

 

**ITEM 10. DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The following sets forth the ages, principal occupation and presentposition of each of our Directors and our executive officers.

 

CHARLES E. FINELLI, Age 40, Class I Director, joined our board ofdirectors in March 2001. Mr. Finelli became the interim Chief ExecutiveOfficer of the Company on December 1, 2003. Mr. Finelli has been in theprivate practice of law for seven years specializing in litigation. He is agraduate of the University of Arkansas School of Law.

 

WILLIAM T. COMFORT, III, Age 37, Class I Director, joined ourboard of directors in January 2001. Mr. Comfort was a private equityinvestor with CVC Capital Partners, a leading private equity firm based inLondon, England from 1995 to 2000. From February 2001 to February 2003 heserved as a consultant to Citicorp Venture Capital (“CVC”).  He is now principal of Conversion CapitalPartners Limited, an investment fund headquarter at 4th Floor,Liscartan House, 127 Sloane Street, London, England.  Mr. Comfort has served as the Chairman of the Board of J.L.Halsey Corporation since November 2002 and as a director since June 2002. Mr.Comfort is also a director of Stratos Lightwave Inc. with principal offices at7444 W. Wilson Avenue, Chicago, IL 60706-4549.** **Mr. Comfort received hisJ.D. and L.L.M. in tax from New York University School of Law.

 

J. WARREN HUFF, Age 50, Class II Director, joined our board ofdirectors in February 2001.  Mr.Huff is a Venture Partner with StarTech Medical Ventures and is the founder andChief Executive Officer of Reata Discovery, Inc., a biopharmaceutical companybased in Dallas, Texas.  From 1998 until2001, Mr. Huff was President and Chief Executive Officer of OpenPages, Inc. aprivately-held company in the content production software industry.  From 1997 to 1998, Mr. Huff was Presidentand Chief Executive Officer of InLight, Inc., a privately held medicaleducation software company that he founded. From 1992 until 1997, Mr. Huff wasour President. Mr. Huff received his J.D. from the Southern MethodistUniversity School of Law and graduated magna cum laude with a B.A. in businessadministration from University of Texas at Austin.

 

NADIMNSOULI, Age 34, Class III Director, joined our Board of Directors in December2003. From March 2000 to May 2003, Mr. Nsouli was founder and managing partnerof Lago Partners Limited, a $75 million venture capital fund. From 1999 — 2000,Mr. Nsouli was an investment banker in Media and Telecoms at Morgan StanleyDean Witter. From 1998 — 1999, Mr. Nsouli was an investment banker in M&Afor JP Morgan. Mr. Nsouli received his MBA with distinction from Insead, hisJuris Doctor from New York University School of Law and his B.S., magna cumlaude from Georgetown University.

 

LINGKWOK, age 33, has served as our Vice President, Corporate Development, sinceDecember 1, 2003.  From September 2002until joining us he was involved in international charitable work.  From February 2000 until September 2002 Mr.Kwok was an investment banker with Pacific Solutions Group.  He also was an investment banker with MorganStanley & Co. from May 1996 until February 2000.  Mr. Kwok received his B.A. degree, with honors, fromTrinity College in both economics and Asian Studies.

 

Our executive officers hold office at the pleasure of the board ofdirectors. The board of directors is divided into three classes. Directors ineach class are elected for three-year terms, with the terms of the threeclasses staggered so that directors from a single class are elected at eachannual meeting of stockholders. Nadim Nsouli is a Class III director whoseterm of office expires at the annual meeting of stockholders to be held in2004. William T. Comfort, III and Charles E. Finelli are Class I directorswhose terms of office expire at the annual meeting of stockholders to be heldin 2005. J. Warren Huff is a Class II director whose term of officeexpires at the annual meeting of stockholders to be held in 2006.

 

29

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**SECTION 16(a)BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**

 

Section 16(a) of the Securities Exchange Act of 1934 requires thatour executive officers, directors, and persons who beneficially own more than10% of a registered class of our equity securities file with the Securities andExchange Commission initial reports of ownership and reports of any changes inownership of our common stock and our other equity securities. Based on ourreview of forms furnished to us and written representations from reporting persons,we believe that all filing requirements applicable to our executive officers,directors, and 10% beneficial owners were complied with during 2003 except thatan initial report of ownership was filed late by Nadim Nsouli.

 

**Audit Committee Members and Financial Experts**

 

The audit committee of the board of directors iscomprised of J. Warren Huff and Nadim Nsouli. The board of directors hasdetermined that Mr. Huff meets the requirements of an audit committee financialexpert as defined in Item 401(h)(1) of Regulation S-K under the SecuritiesExchange Act of 1934 (the “Exchange Act”).

 

**Code of Ethics**

 

We have adopted a code of ethics that applies to ourprincipal executive officer, principal financial officer, principal accountingofficer or controller or person performing similar functions. The code ofethics is filed as an exhibit to this annual report on Form 10-K.

 

**ITEM 11. EXECUTIVECOMPENSATION**

 

The following table summarizes allcompensation awarded to, earned by, our former chief executive officer and ourcurrent interim chief executive officer and each of the other executiveofficers of the Company, for services rendered in all capacities during theyears ended December 31, 2003, 2002 and 2001.

 
|                                                                                         |   |     |    |       |    |      |   |                                 |   | **Long-Term  Compensation**   |   |
|----------------------------------------------------------------------------------------------|--------|----------|---------|------------|---------|-----------|--------|--------------------------------------|--------|-------------------------------|--------|
|                                                                                         |   |     |    |       |    |      |   |                                 |   | **Awards**                    |   | **Payouts** |   |   |   |
| **Name and Principal Position**                                                              |   | **Year** |    | **Salary** |    | **Bonus** |   | **Other  Annual  Compensation  (1)** |   | **Restricted  Stock  Awards** |   | **Securities  Underlying  Options/  SARs(#)** |   | **LTIP  Payouts** |   | **All Other  Compensation (2)** |   |
| Charles E. Finelli(3)  Chief Executive Officer, President and Secretary                      |   | 2003     |    | $          | 4,167   |      | $      | —                               |   | $                             | 25,000 |   | — |   | — |   | $ | — |   | $ | — |   |
|                                                                                         |   |     |    |       |    |      |   |                                 |   |                          |   |   |   |   |   |   |   |
| David R. Burt,Former Chairman of the Board, President, Chief ExecutiveOfficer and  Secretary |   | 2003     |    | $          | 137,500 |      | $      | —                               |   | $                             | — |   | — |   | — |   | $ | — |   | $ | — |   |
|                                                                                         | 2002   |     | 150,000 |       | —  |      | — |                                 | — |                          | — |   | — |   | 20,673 |   |
|                                                                                         | 2001   |     | 150,000 |       | —  |      | — |                                 | — |                          | 27,500 |   | — |   | 1,500 |   |
|                                                                                         |   |     |    |       |    |      |   |                                 |   |                          |   |   |   |   |   |   |   |
| Ling S. Kwok(4)  Vice President, Business Development                                        |   | 2003     |    | $          | 16,518  |      | $      | —                               |   | $                             | — |   | — |   | — |   | $ | — |   | $ | — |   |

 

----

(1)                                  Includes a payment to Mr. Finelli in 2003 inhis capacity as a member of the Company’s Board of Directors, prior to hisappointment as the Company’s Chief Executive Officer.

 

30

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(2)                                  All other compensation in 2001 consists ofmatching contributions made under the Company’s 401(k) plan.  The $20,673 in 2002 represents an amountreceived by Mr. Burt as a result of forfeitures due to the termination of theCompany’s 401(k) plan.

 

(3)                                  Mr. Finelli became employed by us on December1, 2003, and therefore no compensation for previous years is included.

 

(4)                                  Mr. Kwok became employed by us on December 1,2003, and therefore no compensation for previous years is included.

 

## **OPTION GRANTS IN 2001**

 

During 2001,we granted to directors options to purchase 100,000 shares of common stock atexercise prices ranging from $.625 to $.781, prior to the effect of the reversestock split approved by our stockholders on October 15, 2001. The effect of thereverse stock spit resulted in a reduction of the options to 50,000 shares atprices ranging from $1.25 to $1.562. Also during 2001, we granted options to purchase 27,500 shares of commonstock to our CEO at an exercise price of $2.05. All options issued in 2001 wereissued at prices equal to the market price on the grant dates. No options weregranted in 2003 or 2002.

 

The following table shows grants of stock options that we made during2001 to the current and former Chief Executive Officer.

 

|                  |   | **Individual  Grants**                                             |   |
|-----------------------|--------|--------------------------------------------------------------------|--------|
| **Name**              |   | **Number of  Securities  Underlying  Options/SARsGranted (#) (1)** |   | **% of Total  Options/SARs  Granted to  Employees inFiscal Year** |   | **Exercise  or Base  Price($/Share)** |   | **ExpirationDate** |   |
|                  |   |                                                               |   |   |   |   |   |   |   |
| Charles E. Finelli(1) |   | 5,000                                                              |   | 10 | % | $ | 1.562 |   | March 26, 2011 |   |
|                  |   |                                                               |   |   |   |   |   |   |   |
| David R. Burt(2)      |   | 27,500                                                             |   | 100 | % | $ | 2.05 |   | October 25, 2011 |   |

 

----

(1)          The options granted toMr. Finelli in 2001 were granted during Mr. Finelli’s capacity as a directorpursuant to our Director Stock Plan. Mr. Finelli has not been granted any options since he was named ourinterim Chief Executive Officer in December 2003. The options granted to Mr.Finelli are non-qualified stock options and vest annually in two equalinstallments commencing on March 1, 2001. The options are currently fullyvested.

 

(2)          The options were grantedpursuant to our 2001 Employee, Director and Consultant Stock Plan.  The options granted to Mr. Burt are non-qualified stock options and vestannually in four****equalinstallments commencing on March 1, 2002.

 

**OPTION EXERCISES ANDYEAR-END OPTION VALUES**

 

The following table provides information about the number of sharesissued upon option exercises by the current Chief Executive Officer and theformer Chief Executive Officer during 2001, and the value realized by eachChief Executive Officer. The table also provides information about the numberand value of options held by the current and former Chief Executive Officers atDecember 31, 2003.

 

31

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**AGGREGATEDOPTION EXERCISES IN LAST FISCAL YEAR AND**

**FISCALYEAR-END OPTION VALUES**

** **

|               |   |                               |                         |            |   | **Number of  Securities  Underlying  Unexercised Options  At Fiscal Year-End** |   | **Value of  the Unexercised  In-The-Money Options  at Fiscal Year-End (2)** |   |
|--------------------|--------|------------------------------------|------------------------------|-----------------|--------|--------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|
|               |   | **Shares  Acquired  on  Exercise** |                         |            |   |                                                                           |   |
|               |   |                               |                         |            |   |                                                                           |
|               |   |                               | **Value  Realized (1)** |            |   |                                                                           |
| **Name**           |   |                               |                         | **Exercisable** |   | **Unexercisable**                                                              |   | **Exercisable**                                                             |   | **Unexercisable** |   |
| Charles E. Finelli |   | —                             |                         | $               | — |                                                                           | 5,000  |                                                                        | — |   | $ | 1,940 |   | $ | — |   |
|               |   |                               |                         |            |   |                                                                           |   |                                                                        |   |   |   |   |   |
| David R. Burt      |   | —                             |                         | $               | — |                                                                           | 87,500 |                                                                        | 13,750 |   | $ | — |   | — |   |
|                    |        |                                    |                              |                 |        |                                                                                |        |                                                                             |        |  |  |  |  |  |  |  |

 

----

(1)                                  Amounts shown in thiscolumn do not necessarily represent actual value realized from the sale of theshares acquired upon exercise of the option because in many cases the sharesare not sold on exercise but have continued to be held by the executive officerexercising the option. The amounts shown represent the difference between theoption exercise price and the market price on the date of exercise, which isthe amount that would have been realized if the shares had been soldimmediately upon exercise.

 

(2)                                  The value ofunexercised in-the-money options at fiscal year end assumes a fair market valuefor our common stock of $1.95, the closing sale price per share of our commonstock as reported in the OTC Bulletin Board on Wednesday, December 31,2003.

 

**COMPENSATIONOF DIRECTORS**

 

In general, our policy is to pay no compensation to members of theboard of directors for attending meetings of the board of directors and itscommittees. However, we do reimburse directors for the expenses incurred inattending meetings of the board of directors and its committees. InJune 1996, our shareholders approved a Stock Option Plan for Non-EmployeeDirectors, which we refer to as the Director Stock Plan.  The Director Stock Plan provided for aninitial grant of a non-qualified stock option for 5,000 shares of common stockto each non-employee director upon first being elected or appointed to serve onthe board of directors. Messrs. Comfort, Finelli and Huff each received aninitial grant of a stock option for 5,000 shares of common stock upon firstbeing elected or appointed to serve on the board of directors during 2001.  Each option under the Director Stock Planhas an exercise price equal to the fair market value of the common stock on thegrant date. These options will become exercisable in equal increments on thefirst and second anniversary of their date of grant and will expire ten yearsafter the grant date if not exercised. If a change in control occurs, all stockoptions granted under the Director Stock Plan will become fullyexercisable.  The Director Stock Planwas terminated in 2001, which had no effect on options already outstanding.

 

In October 2001, our stockholders approved our 2001 Employee, Directorand Consultant Stock Plan, which we refer to as the 2001 Plan.  The 2001 Plan provides for an initial grantof a non-qualified stock option for 22,500 shares of common stock to eachfuture non-employee director upon first being elected or appointed to serve onthe board of directors.  Each suchoption will have an exercise price equal to the fair market value of the commonstock on the grant date. These options will become exercisable in equalincrements on the first five anniversaries of their date of grant and willexpire ten years after the grant date if not exercised.

 

In March 2001, Messrs. Comfort and Huff each received an additionalnon-qualified stock option for 17,500 shares of common stock under our 1995Long-term Incentive Plan.  Each of theseoptions has an exercise price equal to the fair market value of the commonstock on the grant date.  These optionswill become exercisable in equal increments on each of the first fiveanniversaries of their date of grant if the grantee participates in 75% or moreof the meetings of the board of directors held during the year ending

 

32

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on that anniversary and will expire ten years after the grant date ifnot exercised.  If a change in controloccurs, these stock options will become fully exercisable.

 

Mr. Comfort has never received any compensation for his services as adirector of the Company and he has returned all options to the Company.

 

In 2002, we made a cash payment in the amount of $15,000 to Mr. Finelliin consideration of his service on the board of directors.

 

In 2003, we made cash payments in the amount of $25,000 each to Mr. Finelliand Mr. Huff in consideration of their service on the special committee of theboard of directors.

 

**EMPLOYMENT CONTRACTS**

 

Charles E. Finelli, our interim Chief Executive Officer is anemployee-at-will. Mr. Finelli’s base annual salary is $50,000. The CompensationCommittee may increase the base amounts at its discretion.

 

Ling S. Kwok, the Company’s Vice President of Business Development isan employee-at-will. Mr. Kwok’s base annual salary is $150,000. TheCompensation Committee may increase the base amounts at its discretion.

 

**DIRECTOR AND OFFICERINDEMNIFICATION**

 

We have entered into indemnification agreements with each of ourdirectors and executive officers, agreeing to indemnify the director or officerto the fullest extent permitted by law, and to advance expenses, if thedirector or officer becomes a party to or witness or other participant in anythreatened, pending or completed action, suit or proceeding by reason of anyoccurrence related to the fact that the person is or was a director, officer,employee, agent or fiduciary of ours or a subsidiary of ours or another entityat our request, unless a reviewing party, either outside counsel or a committeeappointed by the board of directors, determines that the person would not beentitled to indemnification under applicable law. In addition, if achange-in-control or a potential change-in-control occurs, and if the personindemnified so requests, we will establish a trust for the benefit of theindemnitee and fund the trust in an amount sufficient to satisfy all expensesreasonably anticipated at the time of the request to be incurred in connectionwith any claim relating to such an event. The reviewing party will determinethe amount deposited in the trust. An indemnitee’s rights under the indemnificationagreement are not exclusive of any other rights under the restated certificateof incorporation or bylaws, as amended, or applicable law.

 

**COMPENSATION COMMITTEEINTERLOCKS AND INSIDER PARTICIPATION**

 

The members of the Compensation Committee are J. Warren Huff andWilliam T. Comfort III.  Mr. Comfort isnot now nor has he ever been employed by us. Mr. Huff was an officer asrecently as 1996. Mr. Comfort is also the Chairman of the CompensationCommittee for J. L. Halsey Corporation. None of our executive officers serve asa member of the board of directors or compensation committee of any entity thathas one or more executive officers serving as a member of our board ofdirectors or Compensation Committee.

 

**ITEM 12. SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The following table sets forth certain information regarding thebeneficial ownership of the shares of the our common stock as of March 3, 2004,by (i) each person we know to be the beneficial owner of 5% or more of theoutstanding shares of our common stock, (ii) the current and former ChiefExecutive Officer, (iii) each of our directors, and (iv) all of ourexecutive officers and directors as a group. Except as indicated in thefootnotes to the table, to our knowledge the persons named in the table havesole voting and investment power with respect to the shares of common stockindicated.

 

33

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|                                                                                   |   | **Shares  Beneficially  Owned (1)** |   |
|----------------------------------------------------------------------------------------|--------|------------------------------------------|--------|
| **Name and  Address****                                                                |   | **Number**                               |   | **Percent** |   |
| David R. Burt (2)                                                                      |   | 87,550                                   |   | 1.5 | % |
| William T. Comfort III  4th Floor, Liscartan House  127 Sloane Street, London SW1X 9AX |   | 352,267                                  |   | 6.1 | % |
| Charles E. Finelli (3)                                                                 |   | 5,000                                    |   | * |   |
| J. Warren Huff(4)                                                                      |   | 15,500                                   |   | * |   |
| All directors and the current executive  officer as a group (4 persons) (5)            |   | 460,317                                  |   | 7.9 | % |

 

----

*                                         Represents beneficial ownership of less than1% of the Company’s outstanding shares of Common Stock.

 

**                                  The address of each reporting person, unlessotherwise indicated, is 790 Turnpike Street, North Andover, Massachusetts01845.

 

(1)                                  The number of shares of common stock issuedand outstanding on March 3, 2004, was 5,813,856.  The calculation of percentage ownership for each listedbeneficial owner is based upon the number of shares of our common stock issuedand outstanding at March 3, 2004, plus shares of our common stock subject tooptions held by such person at March 3, 2004, and exercisable within60 days thereafter.  The personsand entities named in the table have sole voting and investment power withrespect to all shares shown as beneficially owned by them, except as notedbelow.

 

(2)                                  Includes 87,500 shares of common stocksubject to stock options held by Mr. Burt on March 3, 2004 and exercisablewithin 60 days thereafter, and 50 shares of our common stock owned byMr. Burt’s daughter.

 

(3)                                  Consists of shares of common stock subject tostock options held by Mr. Finelli on March 3, 2004 and exercisable within 60days thereafter.

 

(4)                                  Consists of shares of common stock subject tostock options held by Mr. Huff on March 3, 2004 and exercisable within 60 daysthereafter.

 

(5)                                  Includes 108,000 shares of common stocksubject to stock options held by the directors and executive officers on March3, 2004, and exercisable within 60 days thereafter.

 

34

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## **EQUITY COMPENSATIONPLAN INFORMATION**

 

Thefollowing table furnishes information with respect to compensation plans underwhich equity securities of the Company are authorized for issuance as ofDecember 31, 2003.

 
| **Plan category**                                       |   | **Number of  securities to be  issued upon  exercise of  outstanding  options, warrants  and rights** |   | **Weighted-  average exercise  price of  outstanding  options, warrants  and rights** |   | **Number of  securities  remaining available  for future issuance  under equity  compensation plans** |   |
|---------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|
|                                                    |   | **(a)**                                                                                               |   | **(b)**                                                                               |   | **(c)**                                                                                               |   |
| Equity compensation plans approved by  security holders |   | 1,600,000                                                                                             |   | $2.05                                                                                 |   | 1,572,500                                                                                             |   |
|                                                    |   |                                                                                                  |   |                                                                                  |   |                                                                                                  |   |
| Total                                                   |   | 1,600,000                                                                                             |   | $2.05                                                                                 |   | 1,572,500                                                                                             |   |

 

**ITEM 13. CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

None.

 

ITEM 14.                PRINCIPALACCOUNTANT FEES AND SERVICES

 

Thefollowing table setsforth the fees paid to PricewaterhouseCoopers LLP for services provided duringfiscal years 2003 and 2002:

 
|           |   | **2003** |   | **2002** |   |
|----------------|--------|----------|--------|----------|--------|
| Audit Fees (1) |   | $65,000  |   | $43,370  |   |
|           |   |     |   |     |   |
| Total          |   | $65,000  |   | $43,370  |   |

 

(1)          Represents fees for professional services rendered in connection withthe audit of our annual financial statements and review of our quarterlyfinancial statements.

 

Noother fees were paid to PricewaterhouseCoopers in 2003 or 2002.

 

OurAudit Committee has adopted a policy to pre-approve all audit, audit-related,tax and other services proposed to be provided by our independent auditor priorto engaging the auditor for that purpose. Consideration and approval of such services generally will occur at theAudit Committee’s regularly scheduled quarterly meetings.  In situations where it is impractical towait until the report regularly scheduled quarterly meeting, the AuditCommittee has delegated authority to approve the audit, audit-related, tax and otherservices to the Audit Committee Chairman up to a certain pre-determined levelas approved by the Audit Committee. Prior to the adoption of this policy, as in the case with the servicesprovided for fiscal 2003 and 2002, all of the services provided by ourindependent auditor were pre-approved by the entire Board of Directors.

 

35

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**PART IV**

 

**ITEM 15. EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

 
| (a)(1) | — | The financial statements filed as part of this Report at Item 8 are  listed in the Index to Consolidated Financial Statements on page 13 of this  Report. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| (a)(2) | — | All  schedules are not submitted because they are not applicable, not required or  the information is included in our Financial Statements.               |
| (a)(3) | — | The following documents are filed or incorporated by reference as  exhibits to this Report:                                                               |

 
| **Exhibit  Number** |   | **Document  Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|---------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.1                 | — | Amended and Restated Certificate of Incorporation of the Registrant.  Filed as exhibit 3.1 to the Registrant’s registration statement on Form S-4  (File No. 333-69172) filed with the Commission on September 7, 2001, and  incorporated by reference herein.                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2                 | — | By-Laws of the Registrant. Filed as exhibit 3.2 to the Registrant’s  registration statement on Form S-4 (File No. 33-98162) filed with the  Commission on September 7, 2001, and incorporated by reference herein.                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1                 | — | Form of Stock Certificate of the Registrant’s Common Stock, par value  $.01 per share. Filed as Exhibit 4.1 to the Registrant’s registration  statement on Form S-4 (File No. 333-69172) filed with the Commission on  September 7, 2001, and incorporated by reference herein.                                                                                                                                                                                                                                                                                                                                                                      |
| 10.1                | — | Novated License and Royalty Agreement dated May 1, 1995, between the  Board of Supervisors of Louisiana State University and Agricultural and  Mechanical College, the Registrant, E. Science Incorporated, a Delaware  corporation formerly known as Ergo Science Incorporated that is a subsidiary  of the Registrant (“Ergo Science Incorporated”), and Ergo Research Corporation,  a Delaware corporation that is a subsidiary of the Registrant. Filed as  exhibit 10.2 to the Registrant’s registration statement on Form S-1 (File No.  33-98162) filed with the Commission on November 27, 1995, and incorporated by  reference herein. |
| 10.2                | — | Indemnification Agreement dated October 6, 1995, between the  Registrant and Manuel Cincotta, Jr., together with a schedule identifying  substantially identical documents and setting forth the material details in  which those documents differ from the foregoing document. Filed as exhibit  10.18 to the Registrant’s registration statement on Form S-1 (File No.  33-98162) filed with the Commission on November 27, 1995, and incorporated by  reference herein.                                                                                                                                                                                |
| 10.3                | — | Form of Indemnification Agreement between the Registrant and each of  the Registrant’s officers and directors.   Filed as exhibit 10.1 to the Registrant’s registration statement on  Form S-4 (File No. 333-69172) filed with the Commission on September 7, 2001,  and incorporated by reference herein.                                                                                                                                                                                                                                                                                                                                      |
| 10.4                | — | Ergo Science Corporation 2001 Employee, Director and Consultant Stock  Plan.  Filed as Exhibit 10.3 to the  Registrant’s registration statement on Form S-4 (File No. 333-69172) filed  with the Commission on September 7, 2001, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                              |
| 10.5                | — | Ergo Science Corporation Stock Option Plan for Non-Employee  Directors.  Filed as Exhibit 99.2 to  the Registrant’s registration statement on Form S-8 (File No. 333-73222)  filed with the Commission on November 13, 2001, and incorporated herein by  reference.                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.6                | — | Ergo Science Corporation Amended and Restated 1995 Long-Term  Incentive Plan.  Filed as Exhibit 99.3  to the Registrant’s registration statement on Form S-8 (File No. 333-73222)  filed with the Commission on November 13, 2001, and incorporated herein by  reference.                                                                                                                                                                                                                                                                                                                                                                            |

 

36

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| 10.7   | — | Amended and Restated Option Agreement, dated October 12, 1993,  between Ergo Science Incorporated and Albert H. Meier, Ph.D.; First Amendment  to Amended and Restated Option Agreement, dated April 27, 1995, among the  Registrant, Ergo Science Incorporated and Albert H. Meier, Ph.D.; and Second  Amendment to Amended and Restated Option Agreement, dated November 6, 1995,  between the Registrant and Albert H. Meier, Ph.D.  Filed as Exhibit 99.4 to the Registrant’s registration  statement on Form S-8 (File No. 333-73222) filed with the Commission on  November 13, 2001, and incorporated herein by reference.           |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8   | — | Option Agreement, dated March 1, 1993, between Ergo Science Incorporated  and David R. Burt; First Amendment to Option Agreement, dated April 27, 1995,  among the Registrant, Ergo Science Incorporated and David R. Burt; Second  Amendment to Option Agreement, dated October 6, 1995, between the Registrant  and David R. Burt; and Third Amendment to Option Agreement, dated November 6,  1995, between the Registrant and David R. Burt.  Filed as Exhibit 99.5 to the Registrant’s registration  statement on Form S-8 (File No. 333-73222) filed with the Commission on  November 13, 2001, and incorporated herein by reference. |
| 10.9   | — | License Agreement effective as of February 1, 1997, between The  General Hospital Corporation and Ergo Science Corporation and Ergo Research  Corporation. Filed as Exhibit 10.1 to the Registrant’s quarterly filing on Form  10-Q filed with the Commission on May 15, 1997 and incorporated by reference  herein. [Portions of this exhibit have been omitted and filed separately with  the Commission in accordance with Rule 406 of the Securities Act and the  Registrant’s request for confidential treatment.]                                                                                                                     |
| 10.10  | — | Settlement Agreement dated as of October 6, 2000 between the  Registrant and Louisiana State University. Filed as Exhibit 10.17 to the  Registrant’s Annual Report on Form 10-K (File No. 000-26988) filed with the  Commission on April 2, 2001, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                     |
| 10.11  | — | Stock Purchase Agreement, dated as of August 1,  2003, by and between the Company and Court Square Capital Limited.  Filed as Exhibit 10.1 to the Registrant’s  Quarterly Report on Form 10-Q (File No. 000-26988) filed with the Commission  on August 14, 2003, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                     |
| 10.12  | — | Assignment Agreement, dated as of June 30, 2003,  by and between the Company and Ergo Verisherungsgruppe AG regarding the sale  of the ergo.com domain name.  Filed as  Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No.  000-26988) filed with the Commission on August 14, 2003, and incorporated  herein by reference.                                                                                                                                                                                                                                                                                           |
| 10.13  | — | Asset Purchase Agreement, dated as of November 24, 2003, by and  between the Company and PLIVA d.d regarding the sale of the Company’s  intellectual property. Filed as Exhibit 10.12 to the Registrant’s Current  Report on Form 8-K filed with the Commission on November 26, 2003 and  incorporated herein by reference.                                                                                                                                                                                                                                                                                                                 |
| 14     | — | Ergo Science Corporation Code of Business Conduct and Ethics.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 21.1   | — | Subsidiaries of registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.1   | — | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 32.1   | — | Section 1350 Certification.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (b)    | — | Reports filed on Form 8-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

37

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized, in theCity of North Andover and Commonwealth of Massachusetts on March 30, 2004.

 
|   | ERGO SCIENCE CORPORATION |
|--------|--------------------------|
|   |                     |
|   |                     |
|   | By:                      | /s/ CHARLES E. FINELLI |
|   |                     | Charles E. Finelli |
|   |                     | President and Chief Executive Officer |

 

Pursuant to the requirements of the Securities and Exchange Act of1934, this report has been signed below by the following persons on behalf ofthe Registrant in the capacities and on the dates indicated.

 
| /s/ CHARLES E. FINELLI      |   | President, Chief Executive Officer and Director |   | March 30, 2004 |
|-----------------------------|--------|-------------------------------------------------|--------|----------------|
| (Charles E. Finelli)        |   | (Principal Executive and Financial Officer)     |   |           |
|                        |   |                                            |   |           |
| /s/ WILLIAM T. COMFORT, III |   | Director                                        |   | March 30, 2004 |
| (William T. Comfort, III)   |   |                                            |   |           |
|                        |   |                                            |   |           |
| /s/ J. WARREN HUFF          |   | Director                                        |   | March 30, 2004 |
| (J. Warren Huff)            |   |                                            |   |           |
|                        |   |                                            |   |           |
| /s/ NADIM NSOULI            |   | Director                                        |   | March 30, 2004 |
| (Nadim Nsouli)              |   |                                            |   |           |

 

38

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