**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM10-K**

 

**(Mark One)**
| **ý**                                            | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|-------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| ** **                                            | ** ** | ** **                                                                                    |
| **For the  fiscal year ended December 31, 2004** |
| ** **                                            | ** ** | ** **                                                                                    |
| **-OR-**                                              |
| ** **                                            | ** ** | ** **                                                                                    |
| **o**                                                 | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from          to          **

 

**Commission File No. 0-26988**

 

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**ERGOSCIENCE CORPORATION**

(Exact name of registrantas specified in its charter)

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

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days. Yes ý  No o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act. Yes o  No ý

 

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

 

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

 

Documents incorporated by reference:  None.

 

 

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**FORWARD-LOOKING STATEMENTS**

 

*In thisdocument the words “we,” “our,” “ours” and “us” refer only to Ergo ScienceCorporation and not to any other person.*

 

*ThisAnnual Report on Form 10-K contains forward-looking statements withrespect to our financial condition, results of operations and business.  You can find many of these statements bylooking for such words as “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,”“project,” “will,” “could,” “may” or similar expressions.  These statements reflect our current viewswith respect to future events and financial performance and involve numerousassumptions, risks and uncertainties, including without limitation, the risksdescribed in “Item 1.  Business - RiskFactors.” Because these forward-looking statements are based upon assumptionsand are subject to risks and uncertainties, actual results may vary materiallyand adversely from those anticipated, believed, estimated, assumed or otherwiseindicated.  We do not undertake to updateany forward-looking statement that may be made from time to time by or onbehalf of us.*

 

*Inconnection with the implementation of transfer restrictions on our shares ofcommon stock that became effective on October 19, 2001, the outstanding sharesof our common stock were reverse split on a one-for-two basis. Unless otherwiseindicated, all of the share and per share data in this report reflect theeffect of this reverse stock split.*

 

**PART I**

 

**ITEM 1. BUSINESS**

 

**Overview**

 

On February 9, 2005 the Company announced that onFebruary 8, 2005 it had entered into a share purchase agreement to acquire thebusiness to business publishing division (“Business”) of Highbury HouseCommunications plc (“Highbury House”) for a purchase price of GBP 12.5 million(approximately $23.395 million).  The GBP12.5 million purchase price is subject to a working capital adjustment that hasbeen estimated by the parties to be GBP 1.041 million (approximately $1.948million) at closing, and therefore, the Company expects to pay GBP 11.459million (approximately $21.447 million) at closing.  The GBP 11.459 million payment is subject toa post-closing adjustment based on the actual working capital of the Businesson the date of the closing.  TheBusiness, comprising of eight wholly-owned subsidiaries of Highbury House,provides information across a diverse range of sectors including printed andweb-based magazines, data services and directories, exhibitions, conferencesand award ceremonies. According to its 2003 Annual Report, Highbury House “is aleading international print and online publisher of over 200 consumer, businessto business and client magazines, as well as an organizer of events around theglobe.” Highbury House Communications plc is listed on the FTSE Index. Thebusiness being acquired includes: 13 trade names (including: Checkout;Electrical Times; Independent Grocer; The Motor Ship; World Travel Guide; andMotor Trader); 150 domain names (including: columbusguides.com;groweroftheyear.com; harpers-wine.com; motorship.com; motortrader.com;travel-guide.com; and worldfish.com); approximately 45 magazine titles(including: Motor Trader; World Fishing Magazine; Export Times; Checkout; WorldTravel Guide; Television World; and Electronics World); and approximately 35exhibitions (including: European Hotel Design Awards; The International Wine& Spirit Competition; The Retail Industry Awards; Quality Food and DrinksAwards; and Europe Power Conference and Exhibition).  The acquisition is expected to be completedin early April 2005 and is subject to approval by the shareholders of HighburyHouse, as required by the U.K. listing rules, as well as customary closingconditions. Ergo intends to fund the acquisition with cash and cashequivalents.

 

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

 

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

 

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

 

At our Annual Meeting of Stockholders held on October15, 2001, stockholders approved the imposition of transfer restrictions on ourcommon stock.  These transferrestrictions were implemented on October 19, 2001.

 

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

 

**Human Resources**

 

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

 

**RISK FACTORS**

 

*Inaddition to the other information in this Annual Report on Form 10-K andall of our other SEC reports, you should consider the following factors inevaluating us, our business and the strategic direction we may head in thefuture.*

 

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

 

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

 

However, from the time of our initial public offeringthrough March 2001, we relied on an exclusion available to companies that areengaged primarily in a business other than investing.  The SEC has established specific criteria bywhich companies that are primarily engaged in research and development notinvesting, qualify for this exclusion. When we sold our pre-clinical research assets in the second quarter of1999 and moved to conserve our assets for the development of ERGOSET throughthe FDA process, it raised a regulatory issue as to whether we might need toregister as an investment company.  Thereis a risk that the SEC could take the position that we did not meet therequirements for this exclusion from the second quarter of 1999 through March2001.  The Investment Company Act alsoprovides a one-year temporary exclusion for companies that are in transitionand which have a bona fide intent to be engaged primarily in a business otherthan investing in securities as soon as possible, but in any event within oneyear.  We relied on this temporaryexclusion since we decided to sell our human drug-related assets in March 2001through the third quarter of 2001.  Thereis a risk that the SEC may take the position that we are not entitled to relyon this temporary exclusion.  In theevent that we were not entitled to rely on the exclusion prior to March 2001 orwe were not entitled to rely on the temporary exclusion beginning in March2001, our failure to register as an investment company not only raises thepossibility of an enforcement action by the SEC, but also threatens thevalidity of corporate actions and

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

**Anti-takeover provisions could impair the marketprice of Ergo common stock.**

 

We have adopted certainanti-takeover measures.  Our Certificateof 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;

 

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•                  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.

 

These provisions,alone or in combination with each other, may discourage transactions involvingactual or potential changes of control. Such transactions may include thosethat otherwise could involve payment of a premium over prevailing market pricesto holders of our common stock. We also are subject to provisions of the DelawareGeneral Corporation Law that may make some business combinations moredifficult.  We have taken steps to helppreserve our net operating loss carryforwards and reduce, but not eliminate,the risk of the occurrence of an ownership change.  These steps may have the incidental effect ofimpeding the attempt of a person or entity from acquiring a significant orcontrolling interest in the Company render it difficult to effect a merger orsimilar transaction even if the transaction is favored by a majority ofindependent stockholders, and entrenching management.

 

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

 

•             Ergois relying on the existing key personnel of the acquired company to continue torun the business.

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

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

•             Currentfinancial results of the acquired company are not indicative of future results.

•             Themarket for the acquired company’s products and services can be competitivedepending on the particular sector being serviced.

 

**ITEM 2. PROPERTIES**

 

**Facilities**

 

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

 

**ITEM 3. LEGAL PROCEEDINGS**

 

None.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

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

 

(1)   NadimNsouli was elected to serve as a Director to hold office for a term of threeyears until the 2007 annual meeting of stockholders and until his successor ischosen and qualified.  This matter wasapproved with 4,508,672 votes for the election of Mr. Nsouli, 215,508 voteswere withheld and 0 broker non-votes.

 

(2)   Our stockholders also ratified the appointment ofPricewaterhouseCoopers LLP as our independent registered public accounting firmfor the fiscal year ending December 31, 2004. This proposal was approved with4,683,171 votes for the proposal, 22,159 votes against the proposal, 18,850abstentions and 0 broker non-votes.

 

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## **PARTII**

## ** **

**ITEM 5.****                                                     MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

Our common stock wasquoted on the Nasdaq Stock Market through May 23, 2001 under the symbol “ERGO.”  Since that date, after a brief transitionperiod during which our common stock was quoted on the NASD’s OTC BulletinBoard under the symbol “ERGG,” our common stock has been quoted on the NASD’sOTC Bulletin Board under the symbol “ERGO.” At February 25, 2005, the number of record holders of our common stockwas approximately 260.  The followingtable sets forth, for the periods indicated, the high and low sale price or bidinformation for our common stock as reported on the Nasdaq Stock Market or theNASD’s OTC Bulletin Board, as applicable. Please note that the bid informationrelating to over-the-counter market quotations of our common stock reflectinter-dealer prices, without retail mark-up, mark-down or commission and maynot necessarily represent actual transactions.

 

| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
|           |       |     |       |    |       |
| 2004           |       |     |       |    |       |
| First Quarter  |       | $        | 2.65       |    | $          | 1.95 |   |
| Second Quarter |       | $        | 2.80       |    | $          | 2.10 |   |
| Third Quarter  |       | $        | 2.30       |    | $          | 1.95 |   |
| Fourth Quarter |       | $        | 2.47       |    | $          | 1.97 |   |
|           |       |     |       |    |       |
| 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 |   |

**Dividends**

 

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

 

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**ITEM 6.  SELECTEDCONSOLIDATED FINANCIAL DATA**

 

The following table setsforth selected consolidated financial data for the Company as of the dates andfor the periods indicated. The data should be read in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andthe consolidated financial statements and related notes thereto includedelsewhere in this report.

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

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

 

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(1)          2003: Includes a$500,000 credit to expense to reflect an adjustment to an ERGOSET® relatedobligation.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 thedisposal of equipment in 2001 in the amount of $3,201.

 

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

 

(4)          Represents an estimatedamount owed for Federal income taxes due to limitations on alternative minimumtax net operating loss carryforwards in 2003.

 

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

 

**Overview**

 

On February 9, 2005 the Company announced that onFebruary 8, 2005 it had entered into a share purchase agreement to acquire thebusiness to business publishing division (“Business”) of Highbury HouseCommunications plc (“Highbury House”) for a purchase price of GBP 12.5 million(approximately $23.395 million).  The GBP12.5 million purchase price is subject to a working capital adjustment that hasbeen estimated by the parties to be GBP 1.041 million (approximately $1.948million) at closing, and therefore, the Company expects to pay GBP 11.459million (approximately $21.447 million) at closing.  The GBP 11.459 million payment is subject toa post-closing adjustment based on the actual working capital of the Businesson the date of the closing.  TheBusiness, comprising of eight wholly-owned subsidiaries of Highbury House,provides information across a diverse range of sectors including printed andweb-based magazines, data services and directories, exhibitions, conferencesand award ceremonies. According to its 2003 annual report, Highbury House “is aleading international print and online publisher of over 200 consumer, businessto business and client magazines, as well as an organizer of events around theglobe.” Highbury House Communications plc is listed on the FTSE Index. Thebusiness being acquired includes: 13 trade names (including: Checkout;Electrical Times; Independent Grocer; The Motor Ship; World Travel Guide; andMotor Trader); 150 domain names (including: columbusguides.com;groweroftheyear.com; harpers-wine.com; motorship.com; motortrader.com;travel-guide.com; and worldfish.com); approximately 45 magazine titles(including: Motor Trader; World Fishing Magazine; Export Times; Checkout; WorldTravel Guide; Television World; and Electronics World); and approximately 35exhibitions (including: European Hotel Design Awards; The International Wine& Spirit Competition; The Retail Industry Awards; Quality Food and DrinksAwards; and Europe Power Conference and Exhibition). The acquisition isexpected to be completed in early April 2005 and is subject to approval by theshareholders of Highbury House, as required by the U.K. listing rules, as wellas customary closing conditions. Ergo intends to fund the acquisition with cashand cash equivalents.

 

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

 

On November 24, 2003 we 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 outlinedin the asset purchase agreement, we would have received an additional $500,000.In accordance with the asset purchase agreement, Pliva had one year from theclosing date to obtain the right to certain patents from Massachusetts GeneralHospital (“MGH Patents”). Pliva was not able to obtain the right to the MGHPatents and therefore they shall retain the additional $500,000 and shall haveno further obligation to pay that amount to us. In addition, Pliva has assumedour 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 in the event that Ergoset® oranother specified drug is approved by the Food and Drug Administration.

 

At our Annual Meeting of Stockholders held on October15, 2001, stockholders approved the imposition of transfer restrictions on ourcommon stock.  These transferrestrictions were implemented on October 19, 2001.

 

In March 2001, we 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 we do.  Fromour incorporation through March 2001, we were engaged in the development ofERGOSET® tablets for the treatment of type 2 diabetes.

 

From our inception through 2004, the Company has beenunprofitable every year except 2003.  Wewere profitable in 2003 solely because of the sale of the Company’s scienceassets to Pliva.

 

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*CriticalAccounting Policies*

 

Our significant accounting policies are discussed inNote 1 of our audited financial statements, which are included in this Form10-K.  We believe that the most significantjudgments involve the establishment of accruals at each balance sheet date.

 

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

 

**Results of Operations**

 

*Years ended December 31, 2003 and 2004*

 

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

 

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

 

*Generaland Administrative Expenses*.  General and administrativeexpenses consist primarily of compensation for personnel, professionalservices, which include consultants, legal fees and accounting audit and taxfees, and administrative expenses associated with operating as a publiccompany.

 

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

 

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

 

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

 

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

 

Net income (loss) decreasedfrom a net income of $4,857,173 in 2003 to a net loss of $787,456 in 2004. Thedecrease in net income was primarily due to the sale of assets to Pliva in2003.  Net income (loss) per common sharedecreased from $0.74 in 2003 to $(0.14) in 2004.

 

9

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*Years ended December 31, 2002 and 2003*

 

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

 

General and administrativeexpenses increased from $973,497in 2002 to $1,377,728 in 2003. The increase was principally due to increases inlegal costs of approximately $350,000 and other professional fees ofapproximately $73,000, offset by reductions in general operating costs of thecompany of approximately $19,000. The legal costs and professional fees wereincurred primarily in the sale of the assets to Pliva as well as maintainingour intellectual property prior to the sale.

 

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

 

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

 

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

 

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

 

**Net Operating Loss Carryforwards**

 

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

 

**Liquidity and Capital Resources**

 

*Resources*

 

Since our inception, ourprimary source of cash has been from financing activities, which have consistedof private placements of equity securities, two public offerings, the sale ofcommon stock in conjunction with the Joint Collaboration Agreement******with Johnson & Johnson**(the “JointCollaboration Agreement”), and the sale of our science assets to Pliva. The Joint Collaboration Agreement wassubsequently terminated by Johnson & Johnson effective on January 3, 1999.Private placements of equity securities provided us with aggregate proceeds of$42,999,000 through 1998.

 

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

 

10

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Cash used in operating activities was $649,427 duringthe year ended December 31, 2004 compared to cash provided by operatingactivities of $4,582,041 during 2003 and a cash use of $869,795 during 2002.The decrease in cash provided by operations in 2004 is primarily due to netincome in 2003 of $4,857,173 which was a direct result of the sale of thescience assets to Pliva in the amount of $5,498,000. The cash use in 2004 and2002 were primarily due to cash outflows for general and administrativeactivities.

 

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

 

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

 

We have concentrated our efforts on conserving ourcash in anticipation of an acquisition. However, our use of cash has fluctuatedsignificantly from quarter to quarter and we anticipate that this pattern willcontinue.

 

*Requirements*

 

Our primary use of cash prior to March 2001 was inoperating activities to fund research and development, including preclinicalstudies and clinical trials. Since then our primary use of cash has been ingeneral and administrative expenses and in evaluating and implementingstrategic alternatives. In addition, we purchased 1,335,722 shares of ourcommon stock on August 1, 2003, from our then-largest stockholder, Court SquareCapital Limited, for $2,417,657.

 

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

 

Depending on thedecisions that are made, our capital requirements may exceed our currentresources. In such event, we would have to seek additional debt or equityfinancing from private or public sources. To the extent we raise additionalcapital 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 withoutfirst obtaining the written consent of the holders of a majority of ouroutstanding series D exchangeable preferred stock.

 

**The Company will useapproximately $21.447 million of its own cash in its expected acquisition ofHighbury House. The Company expects Highbury House to be cash flow positive forthe foreseeable future.**

 

**Off-BalanceSheet Arrangements**

 

**We have no off-balance sheetarrangements*.***

 

11

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**ContractualObligations**

 

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

 

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

 

**New Accounting Pronouncements**

 

InDecember 2004, the FASB revised SFAS No. 123 (“SFAS No. 123(R)”).SFAS No. 123(R), *Share-Based Payment*,requires all share-based payments to employees, including grants of employeestock options, to be recognized in the financial statements based on their fairvalues. Pro forma disclosure is no longer an alternative to financial statementrecognition. SFAS No. 123(R) is effective for periods beginning afterJune 15, 2005. We are still evaluating the transition provisions allowedby SFAS No. 123 (R) and will adopt it in the third quarter of 2005. The financialstatement impact is not expected to be materially different from that shown inthe existing pro forma disclosure required under the original SFASNo. 123. The issuance of additional stock options in the future will causeSFAS 123(R) to have a greater impact on our financial statements.

 

**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSUREABOUT MARKET RISK**

 

We are not subject tomarket risk associated with risk sensitive institutions as we do not invest ininstruments that are not United States government instruments and do not enterinto hedging transactions.

 

12

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**ITEM 8. CONSOLIDATED FINANCIALSTATEMENTS**

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

 

13

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Stockholders of Ergo Science Corporation

 

In our opinion, the accompanying consolidatedbalance sheets and the related consolidated statements of operations, cashflows and stockholders’ equity present fairly, in all material respects, thefinancial position of Ergo Science Corporation and its subsidiaries at December31, 2004 and 2003, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2004 in conformitywith accounting principles generally accepted in the United States ofAmerica.  These financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.  Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

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

 

14

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**ERGO SCIENCE CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                                                                                                                | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                                                                                                                                                                                                                                      |       |             |       |   |   |
| **ASSETS**                                                                                                                                                                                                                                |       |             |       |   |   |
| Current assets:                                                                                                                                                                                                                           |       |             |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                |       | $                | 26,453,190 |   | $ | 27,102,617 |   |
| Prepaid and  other current assets                                                                                                                                                                                                         |       | 10,537           |       | 14,169 |   |
| Total current  assets                                                                                                                                                                                                                     |       | 26,463,727       |       | 27,116,786 |   |
| Equipment, net                                                                                                                                                                                                                            |       | —           |       | 472 |   |
| Total assets                                                                                                                                                                                                                              |       | $                | 26,463,727 |   | $ | 27,117,258 |   |
|                                                                                                                                                                                                                                      |       |             |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                             |       |             |       |   |   |
|                                                                                                                                                                                                                                      |       |             |       |   |   |
| Current  liabilities:                                                                                                                                                                                                                     |       |             |       |   |   |
| Accounts payable  and accrued expenses                                                                                                                                                                                                    |       | $                | 408,283    |   | $ | 274,358 |   |
| Income taxes  payable                                                                                                                                                                                                                     |       | 94,000           |       | 94,000 |   |
| Total current  liabilities                                                                                                                                                                                                                |       | 502,283          |       | 368,358 |   |
|                                                                                                                                                                                                                                      |       |             |       |   |   |
| Commitments and  contingencies (Notes 8 and 11)                                                                                                                                                                                           |       | —           |       | — |   |
|                                                                                                                                                                                                                                      |       |             |       |   |   |
| Stockholders’  equity:                                                                                                                                                                                                               |       |             |       |   |   |
| Preferred stock,  $.01 par value, 10,000,000 shares authorized; 6,903 shares of series D  exchangeable preferred stock issued and outstanding at December 31, 2004 and  2003 (liquidation preference of $12,225,487 at December 31, 2004) |       | 4,306,520        |       | 4,306,520 |   |
| Common stock,  $.01 par value, 50,000,000 shares authorized at December 31, 2004 and 2003; 7,149,578 shares issued at December  31, 2004 and 2003                                                                                         |       | 71,496           |       | 71,496 |   |
| Additional  paid-in capital                                                                                                                                                                                                               |       | 111,880,321      |       | 111,880,321 |   |
| Cumulative  dividends on preferred stock                                                                                                                                                                                                  |       | (2,296,953       | )          | (2,296,953 | ) |
| Accumulated  deficit                                                                                                                                                                                                                      |       | (85,582,283      | )          | (84,794,827 | ) |
| Treasury stock  (at cost), 1,335,722 shares at December 31, 2004 and 2003                                                                                                                                                                 |       | (2,417,657       | )          | (2,417,657 | ) |
| Total  stockholders’ equity                                                                                                                                                                                                          |       | 25,961,444       |       | 26,748,900 |   |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                          |       | $                | 26,463,727 |   | $ | 27,117,258 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

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**ERGO SCIENCE CORPORATION**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

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

 

The accompanying notesare an integral part of the consolidated financial statements.

 

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**ERGO SCIENCE CORPORATION**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

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

 

The accompanying notesare an integral part of the consolidated financial statements.

 

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**ERGO SCIENCE CORPORATION**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

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

 

The accompanying notesare an integral part of the consolidated financial statements.

 

18

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**ERGO SCIENCE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

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

 

*Background and Recent Events*

 

On February 9, 2005 the Company announced that onFebruary 8, 2005 it had entered into a share purchase agreement to acquire thebusiness to business publishing division (“Business”) of Highbury HouseCommunications plc (“Highbury House”) for a purchase price of GBP 12.5 million(approximately $23.395 million).  The GBP12.5 million purchase price is subject to a working capital adjustment that hasbeen estimated by the parties to be GBP 1.041 million (approximately $1.948million) at closing, and therefore, the Company expects to pay GBP 11.459million (approximately $21.447 million) at closing.  The GBP 11.459 million payment is subject toa post-closing adjustment based on the actual working capital of the Businesson the date of the closing.  TheBusiness, comprising of eight wholly-owned subsidiaries of Highbury House,provides information across a diverse range of sectors including printed andweb-based magazines, data services and directories, exhibitions, conferencesand award ceremonies. The acquisition is expected to be completed in earlyApril 2005 and is subject to approval by the shareholders of Highbury House, asrequired by the U.K. listing rules, as well as customary closing conditions.Ergo intends to fund the acquisition with cash and cash equivalents.

 

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

 

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

 

At our Annual Meeting of Stockholders held on October15, 2001, stockholders approved the imposition of transfer restrictions on ourcommon stock.  These transferrestrictions were implemented on October 19, 2001.

 

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

 

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

 

19

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*Organization*

 

Ergo Science DevelopmentCorporation (“ESDC”) was incorporated on January 23, 1990. ESDC operatedas an S Corporation from inception to September 10, 1992, when itconverted to a C Corporation. In April 1995, ESDC went through arecapitalization whereby all the stock of ESDC was exchanged on a one-for-onebasis for an equal amount of stock in Ergo Science Holdings, Incorporated,which previously was a wholly owned subsidiary of ESDC. Subsequent to therecapitalization, Ergo Science Holdings, Incorporated changed its name to ErgoScience Corporation. The consolidated financial statements include the accountsof the Company and its subsidiaries, all of which are wholly owned. Allintercompany accounts and transactions are eliminated upon consolidation.

 

*Research and Development Costs*

 

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

 

*Cash and Cash Equivalents*

 

The Company considers all highly liquid investmentswith maturity of 90 days or less at the date of purchase to be cashequivalents.

 

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

 

*Use of Estimates*

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make certain estimates and assumptions that effect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statement and the reported amountsof revenues and expenses during the reported period. Actual results coulddiffer from those estimates.

 

*Net Income (Loss) Per Common Share*

 

Basic earnings (loss) per common share are computed by dividing netincome (loss) by the weighted average number of common shares outstanding forthe period.  Diluted earnings per commonshare is computed by dividing net income by the sum of the weighted averagenumber of common shares outstanding for the period plus the assumed exercise ofall dilutive securities using the treasury stock method, such as stock options.  For the year ended December 31, 2003, atotal of 13,716 stock option shares were included in the weighted averagenumber of common shares outstanding calculation because these shares hadexercise prices less than the market value of the Company’s common stock as of December 31,2003.

 

The diluted loss per common share calculated for theyears ended December 31, 2004 and 2002, excludes the effects of 28,375 and213,625 options outstanding, respectively. These amounts are excluded, as theirinclusion would be anti-dilutive.

 

*Stock Based Compensation*

 

Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”)requires that companies either recognize compensation expense for grants ofstock, stock options, and other equity instruments based on fair value, orprovide pro forma disclosure of net income or loss and earnings or loss pershare in the notes to the financial statements. The Company follows thedisclosure provisions of SFAS 123 and applies APB Opinion 25 and relatedinterpretations in accounting for its plans. Accordingly, no compensation costhas been recognized for its stock option plans since all options issued werefor a fixed number of shares and had fixed exercise prices equal to the fairmarket value of the common stock

 

20

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on the grant date. Theeffects of applying SFAS 123 in this pro forma disclosure are not likelyto be representative of the effects on reported income or loss for future years.Had compensation cost for the Company’s stock-based compensation plans beendetermined based on the fair value at the grant dates as calculated inaccordance with SFAS 123, the Company’s net loss and loss per share forthe years ended December 31, 2004, 2003 and 2002 would have been increasedto the pro forma amounts indicated below:

 

| ** **                                    | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|
| ** **                                    | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income  (loss):                           |       |                              |       |   |   |   |   |
| As reported                                   |       | $                                 | (787,456   | ) | $ | 4,857,173 |   | $ | (586,282 | ) |
| Deduct: Pro  forma stock compensation expense |       | 6,323                             |       | 19,417 |   | 136,787 |   |
| Pro forma                                     |       | $                                 | (793,779   | ) | $ | 4,837,756 |   | $ | (723,069 | ) |
| Net income  (loss) per share—basic       |       |                              |       |   |   |   |   |
| As reported                                   |       | $                                 | (0.14      | ) | $ | 0.74 |   | $ | (0.08 | ) |
| Pro forma                                     |       | (0.14                             | )          | 0.74 |   | (0.10 | ) |
| Net income  (loss) per share—diluted     |       |                              |       |   |   |   |   |
| As reported                                   |       | $                                 | (0.14      | ) | $ | 0.74 |   | $ | (0.08 | ) |
| Pro forma                                     |       | (0.14                             | )          | 0.74 |   | (0.10 | ) |

 

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

 

*Equipment*

 

Equipment is stated at cost. Depreciation iscalculated using straight-line basis over a 2 to 7 year estimated usefullife. Repairs and maintenance costs are charged to expense as incurred. Uponretirement or sale, the cost of the assets disposed of and the relatedaccumulated depreciation are removed from the accounts and any resulting gainor loss is included in the determination of net income.

 

*Income Taxes*

 

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

 

*ComprehensiveIncome*

 

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

 

*New Accounting Pronouncements*

 

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

 

21

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**2.****                   Equipment**

 

Equipment consists of thefollowing at December 31:

 

| ** **                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Furniture and  equipment                   |       | $        | 26,936     |     | $          | 42,608 |   |
| Accumulated  depreciation and amortization |       | (26,936  | )          | (42,136  | )          |
| Equipment, net                             |       | $        | —     |     | $          | 472 |   |

 

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

 

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

 

Accounts payable and accrued expenses consist of thefollowing at December 31,

 

| ** **                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Accounts payable                             |       | $        | 31,514     |     | $          | 18,852 |   |
| Accrued legal  costs                         |       | 179,405  |       | 151,007  |       |
| Accrued payroll,  bonuses and vacation       |       | 37,054   |       | 28,456   |       |
| Accrued  professional fees                   |       | 142,336  |       | 40,000   |       |
| Accrued other  expenses                      |       | 17,974   |       | 36,043   |       |
| Total accounts  payable and accrued expenses |       | $        | 408,283    |     | $          | 274,358 |   |

 

**4.****                   Leases**

 

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

 

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

 

**5.****                   Income Taxes**

 

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

 

| ** **                                  | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|---------------------------------------------|------------|-------------|------------|-------------|------------|
| Deferred tax assets:                        |       |        |       |        |       |
| Research and development credits            |       | $           | 2,554,000  |        | $          | 2,554,000 |   |
| Deferred compensation                       |       | 79,000      |       | 79,000      |       |
| Intangible amortization                     |       | 512,000     |       | 620,000     |       |
| Net operating loss and AMT credits          |       | 26,539,000  |       | 26,352,000  |       |
| Total deferred tax assets                   |       | 29,684,000  |       | 29,605,000  |       |
| Valuation allowance for deferred tax assets |       | (29,684,000 | )          | (29,605,000 | )          |
| Net deferred tax assets                     |       | —      |       | —      |       |
|                                             |            |             |            |             |            |  |  |

 

As of December 31, 2004, the Company had federalnet operating losses (“NOL”) and research and experimentation creditcarryforwards remaining of approximately $74,756,000 and $2,554,000,respectively, which may be available to offset future federal income taxliabilities and expire at various dates from 2008 through 2024. 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

 

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Accounting Standards No. 109,management of the Company has evaluated the positive and negative evidencebearing upon the realizability of its deferred tax assets, which are comprisedprincipally of net operating loss and research and experimentation creditcarryforwards. Management has determined that, at this time, it is more likelythan not that the Company will not realize the benefits of federal and statedeferred tax assets and, as a result, a valuation allowance of $29,684,000 hasbeen established at December 31, 2004.

 

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

 

Ownership changes, asdefined in the Internal Revenue Code, may have limited the amount of netoperating loss carryforwards that can be utilized to offset future taxableincome. Subsequent ownership changes could further affect the limitation infuture years.

 

**Thereconciliation of the expected tax (benefit) expense (computed by applying thefederal statutory tax rate to income before income taxes) to actual tax(benefit) expense was as follows:**

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

 

**6.****                   Capital Stock**

 

See Note 8 for a description of series Dpreferred stock.

 

On October 15, 2001,the stockholders of the Company voted to approve the merger of Ergo ScienceCorporation with and into its wholly-owned subsidiary, ESC Merger Sub, Inc.On October 19, 2001, the merger became effective and ESC Merger Sub. Inc.was renamed Ergo Science Corporation. Also at this time, each share of thepre-merger common stock was converted into the right to receive .5 shares ofthe post-merger common stock, plus cash in lieu of any fractional shares. Thetotal paid by the Company for cash in lieu of fractional shares wasapproximately $30. Shares of the post-merger common stock are subject tocertain transfer restrictions. These restrictions are intended to help preserveour substantial tax net operating loss carryforwards for use in offsettingfuture taxable income. In general, these restrictions will prohibit, withoutthe prior approval of the board of directors, the direct or indirectdisposition or acquisition of any of the Company’s stock by or to any holderwho owns or would so own upon the acquisition (either directly or through thetax attribution rules) 5% or more of the Company’s stock.

 

*Treasury stock*

 

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

 

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

 

On November 24, 2003, the Company sold all of itsscientific and research assets and certain other intellectual property toPliva, a company organized under the laws of Croatia. The total selling pricewas $5,998,000, of which the Company received $5,498,000 at the time of thesale. The remaining $500,000 of the purchase price will be paid to the Companyin cash, if at all, upon the occurrence of certain events followingconsummation of the sale. In accordance with the asset purchase agreement,Pliva has one year from the closing date to obtain the right to certain patentsfrom Massachusetts General Hospital (“MGH Patents”). Pliva was not able toobtain the right to the MGH Patents and therefore they shall retain theadditional $500,000 and shall have no further obligation to pay that amount tous. Also in accordance with the agreement, 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 in the event that Ergoset®or another specified drug is approved by the Food and Drug Administration.

 

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

 

OnJune 30, 2003, the Company signed an agreement to sell its entire right,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 inexchange for the entire right, title and interest in ergo.com, which wascompleted on July 16, 2003 and recorded as other income on the statementof operations.

 

**8.****                   Commitments andContingencies**

 

*License Agreements and Supplier Contracts*

 

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

 

The holders of series D preferred stock areentitled to receive quarterly dividends at a rate of 6% per annum, compoundedsemiannually, on the stated value. Such dividends shall be cumulative,commencing on the date of original issue, and shall only be payable to holdersof record when and as declared by the board of directors. The Company will havethe option to convert the series D preferred stock into common stockduring the 90 days after the Company receives FDA approval to market itsfirst product, if it receives that approval. If the Company does not exerciseits option to convert the series D preferred stock into common stock withinthe 90 days after FDA approval the series D preferred stock willautomatically be exchanged for subordinated debt securities at the end of the90 days. The Company cannot pay dividends on its common stock withoutfirst obtaining the written consent of the holders of a majority of theoutstanding series D preferred stock. Upon any voluntary or involuntaryliquidation, dissolution or winding up of the Company, the holders ofseries D preferred stock then outstanding will be entitled to receive anamount of cash equal to the stated value of series D preferred stock(including any accrued by unpaid dividends) after any distribution is made onany senior securities and before any distribution is made on any juniorsecurities, including common stock. The liquidation preference amount for theseries D preferred stock as of December 31, 2004 was $12,225,487.

 

The Company is party to certain other licenseagreements, which require the Company to pay a royalty on product sales and tomake specific payments on the completion of certain milestones. No amounts havebeen accrued related to these requirements as of December 31, 2004 or2003.

 

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**9.****                   Stock Optionsand Incentive Plan**

 

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

 

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

 

Information related to stock option activity for theperiod from December 31, 2001 through December 31, 2004 is asfollows:

 

| ** **                            | ** ** | **Shares** | ** ** | **Weighted  Average  Option Price** | ** ** |
|---------------------------------------|------------|------------|------------|-------------------------------------|------------|
|                                  |       |       |       |                                |       |
| 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                               |       |
| Granted                               |       | —     |       | —                              |       |
| Exercised                             |       | —     |       | —                              |       |
| Canceled                              |       | (101,250   | )          | 17.06                               |       |
| Outstanding at December 31, 2004 |       | 28,375     |       | $                                   | 1.81       |   |
| Exercisable at December 31, 2002 |       | 157,500    |       | $                                   | 14.52      |   |
| Exercisable at December 31, 2003 |       | 105,375    |       | $                                   | 16.45      |   |
| Exercisable at December 31, 2004 |       | 21,375     |       | $                                   | 1.89       |   |

 

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

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

 

Effective as of November 1, 1994, the board ofdirectors adopted the Ergo Science Development Corporation Long-Term IncentivePlan (the “Incentive Plan”) pursuant to which certain officers, directors, andkey employees were granted awards with respect to shares of the Company’scommon stock. The awards that could be granted under the Incentive Planincluded incentive stock options, nonstatutory options, stock appreciationrights (SARs) and restricted stock awards. Awards of options to purchase 35,000shares at an exercise price of $1.562 per share were granted to directors underthe Incentive Plan in 2001. No awards were made in 2004, 2003 or 2002. Theseamounts are included in the tables above. At the time that the stockholdersapproved the 2001 Stock Plan, the Incentive Plan was closed and no new grantswill be made under this Plan.

 

On May 15, 1996, the board of directors approved,subject to stockholder approval, a proposal to adopt a Stock Option Plan forNon-Employee Directors of the Company (the “Director Stock Plan”). The DirectorStock Plan provided for an initial grant of an option to purchase 5,000 sharesof common stock to each eligible non-employee director upon first being electedor appointed to serve on the board of directors. 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 2004, 2003 or2002. These amounts are included in the

 

25

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

 

On October 15, 2001, the stockholders of theCompany approved the Ergo Science Corporation 2001 Employee, Director andConsultant Stock Plan (the “2001 Stock Plan”) pursuant to which certainofficers, directors, key employees and consultants may be granted awards withrespect to shares of the Company’s common stock. The awards that may be grantedunder the 2001 Stock Plan include incentive stock options under section 422of the Internal Revenue Code, non-qualified stock options, stock appreciationrights (SARs) and restricted stock awards. A total of 1,600,000 shares of ourcommon stock were reserved for issuance pursuant to options and other awardsgranted under this plan.  This planprovides 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. Stock options granted to directors under the 2001 Stock Plan vest andbecome exercisable in equal increments on the first five anniversaries of theirdate of grant, but no stock option may be exercised more than ten years afterthe date of its grant.  Awards of optionsto purchase 27,500 shares at an exercise price of $2.05 per share were grantedunder the 2001 Stock Plan in 2001 to the Company’s former CEO. These optionswere cancelled in March 2004 as a result of the resignation of the Company’sformer CEO. There were no awards granted in 2004, 2003 or 2002. As of December 31,2004, 1,600,000 shares were available to be granted under the 2001 Stock Plan.

 

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

 

**10.****            Quarterly Results(Unaudited)**

 

The following table setsforth unaudited selected financial information for the periods indicated. Thisinformation has been derived from unaudited consolidated financial statements,which, in the opinion of management, include all adjustments (consisting onlyof normal recurring adjustments) necessary for a fair presentation of suchinformation. The results of operations for any quarter are not necessarilyindicative of the results to be expected for any future period.

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

 

**11.****            Subsequent Events**

 

*Acquisition*

 

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

 

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The acquisition is expectedto be completed in early April 2005 and is subject to approval by theshareholders of Highbury House, as required by the U.K. listing rules, as wellas customary closing conditions. The Company intends to fund the acquisitionwith cash and cash equivalents.

 

27

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**ITEM 9.****               CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.**

 

None.

 

**ITEM 9A.**                    CONTROLSAND PROCEDURES

 

*Evaluation of disclosure controls and procedures*

 

As of the end of the annual period ended December 31,2004, Charles E. Finelli, our Chief Executive Officer and acting ChiefFinancial Officer, evaluated the effectiveness of our disclosure controls andprocedures.  Based on these evaluations,he believes that:

 

(a)          our disclosure controls and procedures were effective in ensuring thatinformation required to be disclosed by us in the reports we file or submitunder the Securities Exchange Act of 1934 was recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andforms; and

 

(b)         our disclosure controls and procedures were effective in ensuring thatmaterial information required to be disclosed by us in the reports we file orsubmit under the Securities Exchange Act of 1934 was accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

*Changes ininternal controls*

 

There have been no changes in our internal controlover financial reporting during the fourth quarter of 2004 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

It should be noted that any system of controls,however well designed and operated, can provide only reasonable, and notabsolute, assurance that the objectives of the system are met, such asprevention and detection of misstatements. In addition, the design of anycontrol system is based in part upon certain assumptions about the likelihoodof future events. Controls may become inadequate because of changes inconditions, or the degree of compliance with the policies or procedures maydeteriorate, for example. Because of these and other inherent limitations ofcontrol systems, there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions.

 

**ITEM 9B.**                    OTHERINFORMATION

 

None

 

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**PART III**

 

**ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

 

The following sets forth the ages, principaloccupation and present position of each of our Directors and our executiveofficers.

 

CHARLES E. FINELLI, Age 41, Class I Director,joined our board of directors in March 2001. Mr. Finelli became theinterim Chief Executive Officer of the Company, President, Secretary and ChiefFinancial Officer 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 38, Class IDirector, joined our board of directors in January 2001. Mr. Comfortwas a private equity investor with CVC Capital Partners, a leading privateequity firm based in London, England from 1995 to 2000. From February 2001to February 2003 he served 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 Chairmanof the Board of J.L. Halsey Corporation since November 2002 and as adirector since June 2002.** **Mr. Comfort receivedhis J.D. and L.L.M. in tax from New York University School of Law.

 

J. WARREN HUFF, Age 51, Class IIDirector, joined our board of directors in February 2001.  Mr. Huff is the Founding Chief ExecutiveOfficer of Reata Discovery, Inc., a biopharmaceutical company based inDallas, Texas.  From 1998 until 2001, Mr. Huffwas President and Chief Executive Officer of OpenPages, Inc. aprivately-held company in the content production software industry.  From 1997 to 1998, Mr. Huff wasPresident and Chief Executive Officer of InLight, Inc., a privately heldmedical education software company that he founded. From 1992 until 1997, Mr. Huffwas our 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.

 

NADIM NSOULI, Age 35, Class III Director, joined our Board of Directors in December 2003. Mr. Nsouli is the European Head of Gores Technology Group Limited, a private equity firm based in Los Angeles.  From 2000 to May 2003, Mr. Nsouli was founder and managing partner of Lago Partners Limited, a $75 million venture capital fund,   with principal offices at 3 Burlington Gardens, London, England.  From 1999 to 2000 Mr. Nsouli worked in Investment Banking, Media and Telecoms at Morgan Stanley Dean Witter with principal offices at Canary Wharf, London, England.  From 1998 to 1999 Mr. Nsouli worked in Investment Banking, M&A for JP Morgan with principal offices in London, England.   Prior to that, Mr. Nsouli was a corporate lawyer in New York at Jones, Day, Reavis & Pogue.  Mr. Nsouli received his MBA with distinction from Insead in France, his Juris Doctor from New York University School of Law and his B.S., Magna Cum Laude from Georgetown University in Washington, DC.

 

LING KWOK, age 34, has served as ourVice President, Corporate Development, since December 1, 2003.  From September 2002 until joining us hewas involved in international charitable work. From February 2000 until September 2002 Mr. Kwok was aninvestment banker with Pacific Solutions Group. He also was an investment banker with Morgan Stanley & Co. fromMay 1996 until February 2000.  Mr. Kwokreceived his B.A. degree, with honors,**from Trinity College in botheconomics and Asian Studies.**

 

Our executive officers hold office at the pleasure ofthe board of directors. The board of directors is divided into three classes.Directors in each class are elected for three-year terms, with the terms of thethree classes staggered so that directors from a single class are elected ateach annual meeting of stockholders. William T. Comfort, III and CharlesE. Finelli are Class I directors whose terms of office expire at theannual meeting of stockholders to be held in 2005. J. Warren Huff is a Class IIdirector

 

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whose term of officeexpires at the annual meeting of stockholders to be held in 2006. Nadim Nsouliis a Class III director whose term of office expires at the annual meetingof stockholders to be held in 2007.

 

**SECTION 16(a) BENEFICIAL OWNERSHIPREPORTING COMPLIANCE**

 

Section 16(a) ofthe Securities Exchange Act of 1934 requires that our executive officers,directors, and persons who beneficially own more than 10% of a registered classof our equity securities file with the Securities and Exchange Commissioninitial reports of ownership and reports of any changes in ownership of ourcommon stock and our other equity securities. Based on our review of formsfurnished to us and written representations from reporting persons, we believethat all filing requirements applicable to our executive officers, directors,and 10% beneficial owners were complied with during 2004.

 

**Audit Committee Members and Financial Experts**

 

The audit committee of theboard of directors is comprised of J. Warren Huff and Nadim Nsouli. The boardof directors has determined that Mr. Huff meets the requirements of anaudit committee financial expert as defined in Item 401(h)(1) ofRegulation S-K under the Securities Exchange Act of 1934 (the “ExchangeAct”).

 

**Code of Ethics**

 

We have adopted a code ofethics that applies to our principal executive officer, principal financialofficer, principal accounting officer or controller or person performingsimilar functions. The code of ethics is filed as an exhibit to this annualreport on Form 10-K.

 

**Shareholder Nomination**

** **

There have been nomaterial changes to the procedures by which shareholders may recommend nomineesto the Board, since the disclosure provided in the Company’s last proxystatement.

 

**ITEM 11. EXECUTIVE COMPENSATION**

 

The following tablesummarizes all compensation awarded to, earned by and our current interim chiefexecutive officer and each of the other executive officers of the Company, forservices rendered in all capacities during the years ended December 31,2004, 2003 and 2002.

 
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                         | ** ** | **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** | ** ** |
| Charles E. Finelli(2)                             |       | 2004       |       | $          | 50,000     |       | $          | —                             |       | $                             | 25,000     |   | — |   | — |   | $ | — |   | $ | — |   |
| Chief  Executive Officer, President and Secretary |       | 2003       |       | 4,167      |       | —     |       | 25,000                             |       | —                        |       | — |   | — |   | — |   |
|                                              |       |       |       |       |       |       |       |                               |       |                          |       |   |   |   |   |   |   |
| Ling S. Kwok(3)                                   |       | 2004       |       | 150,000    |       | —     |       | —                             |       | —                        |       | — |   | — |   | — |   |
| Vice President,  Business Development             |       | 2003       |       | 16,518     |       | —     |       | —                             |       | —                        |       | — |   | — |   | — |   |
|                                                   |            |            |            |            |            |            |            |                                    |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                                  Represents payment to Mr. Finelli in2004 and 2003 in his capacity as a member of the Company’s Board of Directors.

 

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(2)                                  Mr. Finellibecame employed by us on December 1, 2003, and therefore no compensationfor prior to 2003 is included.

 

(3)                                  Mr. Kwokbecame employed by us on December 1, 2003, and therefore no compensationfor prior to 2003 is included.

 

## **OPTIONGRANTS**

 

**During2001, we granted to directors options to purchase 100,000 shares of commonstock at exercise prices ranging from $.625 to $.781, prior to the effect ofthe reverse stock split approved by our stockholders on October 15, 2001.The effect of the reverse stock spit resulted in a reduction of the options to50,000 shares at prices ranging from $1.25 to $1.562.  One of our Board of Director’s cancelled hisoptions in 2003 which totaled 22,500 shares and returned all shares to theCompany. Also during 2001, we granted options to purchase 27,500 shares ofcommon stock to our former CEO at an exercise price of $2.05, which were notexercised and have subsequently been cancelled and returned to the Company inaccordance with the 2001 plan. All options issued in 2001 were issued at pricesequal to the market price on the grant dates. No options were granted in 2004,2003 or 2002.**

** **

**OPTION EXERCISES AND YEAR-END OPTION VALUES**

 

The following tableprovides information about the number of shares issued upon option exercises bythe Chief Executive Officer during 2001, and the value realized by the ChiefExecutive Officer. The table also provides information about the number andvalue of options held by the Chief Executive Officer at December 31, 2004.

 

**AGGREGATED OPTION EXERCISES INLAST FISCAL YEAR ANDFISCAL YEAR-END OPTION VALUES**

 

| ** **          | ** ** | **Shares  Acquired  on** | ** ** | **Value**             | ** ** | **Number of Securities  Underlying  Unexercised Options  At Fiscal Year-End** | ** ** | **Value of the Unexercised  In-The-Money Options  at Fiscal Year-End (2)** | ** ** |
|---------------------|------------|--------------------------|------------|-----------------------|------------|-------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **Name**            | ** ** | **Exercise**             | ** ** | **Realized (1)** | ** ** | **Exercisable**                                                               | ** ** | **Unexercisable**                                                          | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Charles E.  Finelli |       | —                   |       | $                     | —     |                                                                          | 5,000      |                                                                       | —     |   | $ | 4,390 |   | $ | — |   |
|                     |            |                          |            |                       |            |                                                                               |            |                                                                            |            |  |  |  |  |  |  |  |

 

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(1)                                  Amountsshown in this column do not necessarily represent actual value realized fromthe sale of the shares acquired upon exercise of the option because in many casesthe shares are not sold on exercise but have continued to be held by theexecutive officer exercising the option. The amounts shown represent thedifference between the option exercise price and the market price on the dateof exercise, which is the amount that would have been realized if the shareshad been sold immediately upon exercise.

 

(2)                                  Thevalue of unexercised in-the-money options at fiscal year end assumes a fairmarket value for our common stock of $2.44, the closing sale price per share ofour common stock as reported in the OTC Bulletin Board on Wednesday, December 31,2004. The $4,390 is calculated based on the difference between the market priceof our stock at December 31, 2004 and the exercise price to the officer of$1.562.

 

**COMPENSATION OF DIRECTORS**

 

In previous years ourpolicy was to pay no compensation to members of the board of directors forattending meetings of the board of directors and its committees. In 2004, theCompany began a new policy of paying each board member a compensation amount of$25,000 annually. We also reimburse directors for the expenses incurred inattending meetings of the board of directors and its committees. In

 

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June 1996, ourshareholders approved a Stock Option Plan for Non-Employee Directors, which werefer to as the Director Stock Plan.  TheDirector Stock Plan provided for an initial grant of a non-qualified stockoption for 5,000 shares of common stock to each non-employee director uponfirst being elected or appointed to serve on the board of directors. Messrs. Comfort,Finelli and Huff each received an initial grant of a stock option for 5,000shares of common stock upon first being elected or appointed to serve on theboard of directors during 2001.  Eachoption under the Director Stock Plan has an exercise price equal to the fairmarket value of the common stock on the grant date. These options will becomeexercisable in equal increments on the first and second anniversary of theirdate of grant and will expire ten years after the grant date if not exercised.If a change in control occurs, all stock options granted under the DirectorStock Plan will become fully exercisable. The Director Stock Plan was terminated in 2001, which had no effect onoptions already outstanding.

 

In October 2001, ourstockholders approved our 2001 Employee, Director and Consultant Stock Plan,which we refer to as the 2001 Plan.  The2001 Plan provides for an initial grant of a non-qualified stock option for22,500 shares of common stock to each future non-employee director upon firstbeing elected or appointed to serve on the board of directors.  Each such option will have an exercise priceequal to the fair market value of the common stock on the grant date. Theseoptions will become exercisable in equal increments on the first fiveanniversaries of their date of grant and will expire ten years after the grantdate if not exercised.

 

In March 2001, Messrs. Comfortand Huff each received an additional non-qualified stock option for 17,500shares of common stock under our 1995 Long-term Incentive Plan.  Each of these options has an exercise priceequal to the fair market value of the common stock on the grant date.  These options will become exercisable inequal increments on each of the first five anniversaries of their date of grantif the grantee participates in 75% or more of the meetings of the board ofdirectors held during the year ending on that anniversary and will expire tenyears after the grant date if not exercised.  If a change in control occurs, these stockoptions will become fully exercisable.

 

Mr. Comfort hasnever received any compensation for his services as a director of the Companyand he has returned all options to the Company.

 

In 2002, we made a cashpayment in the amount of $15,000 to Mr. Finelli in consideration of hisservice on the board of directors.

 

In 2003, we made cashpayments in the amount of $25,000 each to Mr. Finelli and Mr. Huff inconsideration of their service on the special committee of the board ofdirectors.

 

In 2004, we made cashpayments in the amount of $25,000 each to Mr. Finelli, Mr. Huff and Mr. Nsouliin consideration of their services on the board of directors.

 

**EMPLOYMENT CONTRACTS**

 

Charles E. Finelli, our interim Chief ExecutiveOfficer is an employee-at-will. Mr. Finelli’s base annual salary is$50,000. The Compensation Committee may increase the base amounts at itsdiscretion. Mr. Finelli also receives an additional $25,000 per year ascompensation for services as a member of our board of directors.

 

Ling S. Kwok, the Company’s Vice President of BusinessDevelopment is an employee-at-will. Mr. Kwok’s base annual salary is$150,000. The Compensation Committee may increase the base amounts at itsdiscretion.

 

32

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**DIRECTOR AND OFFICER INDEMNIFICATION**

 

We have entered into indemnification agreements witheach of our directors and executive officers, agreeing to indemnify thedirector or officer to the fullest extent permitted by law, and to advanceexpenses, if the director or officer becomes a party to or witness or otherparticipant in any threatened, pending or completed action, suit or proceedingby reason of any occurrence related to the fact that the person is or was adirector, officer, employee, agent or fiduciary of ours or a subsidiary of oursor another entity at our request, unless a reviewing party, either outsidecounsel or a committee appointed by the board of directors, determines that theperson would not be entitled to indemnification under applicable law. Inaddition, if a change-in-control or a potential change-in-control occurs, andif the person indemnified so requests, we will establish a trust for thebenefit of the indemnitee and fund the trust in an amount sufficient to satisfyall expenses reasonably anticipated at the time of the request to be incurredin connection with any claim relating to such an event. The reviewing partywill determine the amount deposited in the trust. An indemnitee’s rights underthe indemnification agreement are not exclusive of any other rights under therestated certificate of incorporation or bylaws, as amended, or applicable law.

 

**COMPENSATION COMMITTEE INTERLOCKS AND INSIDERPARTICIPATION**

 

The members of the Compensation Committee are J.Warren Huff and William T. Comfort III.  Mr. Comfortis not 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. SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT**

 

The following table setsforth certain information regarding the beneficial ownership of the shares ofthe our common stock as of March 4, 2005, by (i) each person we knowto be the beneficial owner of 5% or more of the outstanding shares of ourcommon stock, (ii) the Chief Executive Officer, (iii) each of ourdirectors, and (iv) all of our executive officers and directors as agroup. Except as indicated in the footnotes to the table, to our knowledge thepersons named in the table have sole voting and investment power with respectto the shares of common stock indicated.

 
| ** **                                                                  | ** ** | **Shares Beneficially  Owned (1)** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **Name and Address****                                                      | ** ** | **Number**                              | ** ** | **Percent** | ** ** |
| William T.  Comfort III                                                     |       | 352,267                                 |       | 6.1 | % |
| Charles E.  Finelli (2)                                                     |       | 5,000                                   |       | * |   |
| J. Warren  Huff(3)                                                          |       | 19,000                                  |       | * |   |
| Nadim Nsouli                                                                |       | —                                  |       |   |   |
| All directors  and the current executive officer as a group (4 persons) (4) |       | 376,267                                 |       | 6.5 | % |

 

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

 

**                                  The address of each reporting person is 790Turnpike Street, North Andover, Massachusetts 01845.

 

(1)                                  The number of shares of common stock issuedand outstanding on March 4, 2005, was 5,813,856.  The calculation of percentage ownership foreach listed beneficial owner is based upon the number of shares of our commonstock issued and outstanding at March 4, 2005, plus shares of our commonstock subject to options held by such person at March 4, 2005, andexercisable within 60 days thereafter. The persons and entities named in the table have sole

 

33

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voting and investment powerwith respect to all shares shown as beneficially owned by them, except as notedbelow.

 

(2)                                  Consists of shares of common stock subject tostock options held by Mr. Finelli on March 4, 2005 and exercisablewithin 60 days thereafter.

 

(3)                                  Consists of shares of common stock subject tostock options held by Mr. Huff on March 4, 2005 and exercisablewithin 60 days thereafter.

 

(4)                                  Includes 24,000 shares of common stocksubject to stock options held by the directors and executive officers on March 4,2005 and exercisable within 60 days thereafter.

 

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## **EQUITY COMPENSATION PLAN INFORMATION**

 

The following tablefurnishes information with respect to compensation plans under which equitysecurities of the Company are authorized for issuance as of December 31,2004.

 
| **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** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
|                                                    |       |                                                                                                  |       |                                                                                  |       |                                                                                                 |       |
| Equity  compensation plans approved by security holders |       | 28,375                                                                                                |       | $                                                                                     | 0          |                                                                                                 | 1,600,000  | ** ** |
|                                                    |       |                                                                                                  |       |                                                                                  |       |                                                                                                 |       |
| Total                                                   |       | 28,375                                                                                                |       | $                                                                                     | 0          |                                                                                                 | 1,600,000  | ** ** |

 

The Company’s 2001 Employee, Director and ConsultantStock Plan was approved by the stockholders of the Company on October 15,2001.  The plan reserves a total of1,600,000 shares of our common stock for issuance under this plan.  The purpose of the plan is to encourageownership of shares by key employees, directors and certain consultants to theCompany in order to attract such people, to induce them to work for the benefitof the Company or of an affiliate and to provide additional incentive for themto promote the success of the Company or of an affiliate. The awards that maybe granted under this plan include incentive stock options under section 422of the Internal Revenue Code or non-qualified stock options.  As of December 31, 2004, all 1,600,000shares were available to be granted under this plan.  At the time that the shareholders approvedthis plan, the Company’s Long-Term Incentive Stock and Directors Stock Plan wasclosed, and no new grants will be made to either plan.

 

**ITEM 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

None.

 

**ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

Thefollowing table sets forth the fees paid to PricewaterhouseCoopers LLP forservices provided during fiscal years 2004 and 2003:

 

| ** **     | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| Audit Fees (1) |       | $        | 70,500     |     | $          | 66,062 |   |
|           |       |     |       |     |       |
| Total          |       | $        | 70,500     |     | $          | 66,062 |   |

 

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(1)          Representsfees for professional services rendered in connection with the audit of ourannual financial statements and review of our quarterly financial statements.

 

Noother fees were paid to PricewaterhouseCoopers in 2004 or 2003.

 

Our Audit Committee hasadopted a policy to pre-approve all audit, audit-related, tax and otherservices proposed to be provided by our independent registered publicaccounting firm prior to engaging the auditor for that purpose.  Consideration and approval of such servicesgenerally will occur at the Audit Committee’s regularly scheduled quarterlymeetings.  In situations where it isimpractical to wait until the regularly scheduled quarterly meeting, the AuditCommittee has delegated authority to approve the audit, audit-related, tax andother services to the Audit Committee Chairman up to a certain pre-determined

 

35

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levelas approved by the Audit Committee. Prior to the adoption of this policy, as in the case with the servicesprovided for fiscal 2004 and 2003, all of the services provided by ourindependent registered public accounting firm were pre-approved by the entireBoard of Directors.

 

36

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**PART IV**

 

**ITEM 15. EXHIBITS AND FINANCIALSTATEMENT SCHEDULES**

 
| (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.                                                                                                                                                                                                                                                                                                                                                                                    |

 

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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.                                                                                                                                                                                                                                                                                                                                |
| 10.14 |   | — | ** ** | **Share Purchase Agreement, dated  as of February 8, 2005, by and between the Company and Highbury House  Communications plc regarding the purchase of the business publishing division  of Highbury House Communications plc, filed herewith.**                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 14    |   | — | ** ** | **Ergo Science Corporation Code  of Business Conduct and Ethics. Filed as Exhibit 14 to the Registrant’s  Annual Report on Form 10-K (File No. 000-26988) filed with the  Commission on March 30, 2004, and incorporated herein by reference.**                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 21.1  |   | — |       | Subsidiaries of registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 31.1  |   | — |       | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.1  |   | — |       | Section 1350 Certification.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized, in the City of North Andover andCommonwealth of Massachusetts on March 30, 2005.

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

 

Pursuant to therequirements of the Securities and Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant in thecapacities and on the dates indicated.

 

 
| /s/ CHARLES E. FINELLI            | President, Chief  Executive Officer and Director | March 30, 2005 |
|-----------------------------------|--------------------------------------------------|---------------------|
| (Charles E. Finelli)              | (Principal Executive  and Financial Officer)     |                |
|                              |                                             |                |
|                              |                                             |                |
| /s/ WILLIAM T.  COMFORT, III | Director                                         | March 30, 2005 |
| (William T.  Comfort, III)   |                                             |                |
|                              |                                             |                |
|                              |                                             |                |
| /s/ J. WARREN HUFF                | Director                                         | March 30, 2005 |
| (J. Warren Huff)                  |                                             |                |
|                              |                                             |                |
|                              |                                             |                |
| /s/ NADIM NSOULI                  | Director                                         | March 30, 2005 |
| (Nadim Nsouli)                    |                                             |                |

 

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