-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, El8ICsCIrEQEFzQvc8BCAljkBmdfI8Of7xjm1DiurFTAQuEueh2FkPOHfBIMSf9a YkTW9Wv8cMpm82vox80XeA== 0000912057-97-011421.txt : 19970430 0000912057-97-011421.hdr.sgml : 19970430 ACCESSION NUMBER: 0000912057-97-011421 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOSPHERICS INC CENTRAL INDEX KEY: 0000012239 STANDARD INDUSTRIAL CLASSIFICATION: 8700 IRS NUMBER: 520849320 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: 1934 Act SEC FILE NUMBER: 000-05576 FILM NUMBER: 97571321 BUSINESS ADDRESS: STREET 1: 12051 INDIAN CREEK CT CITY: BELTSVILLE STATE: MD ZIP: 20705 BUSINESS PHONE: 3014193900 MAIL ADDRESS: STREET 1: 12051 INDIAN CREEK COURT CITY: BELTSVILLE STATE: MD ZIP: 20705 FORMER COMPANY: FORMER CONFORMED NAME: BIOSPHERICS RESEARCH INC DATE OF NAME CHANGE: 19720404 10KSB40 1 FORM 10KSB40 - - ------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark one) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended December 31, 1996 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from to Commission file number 0-5576 BIOSPHERICS-Registered Trademark- INCORPORATED - - ------------------------------------------------------------------------------ (Name of small business issuer in its charter) Delaware 52-0849320 - - ------------------------------- -------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12051 Indian Creek Court, Beltsville, Maryland 20705 - - ---------------------------------------------- ------- (Address of executive offices) (Zip Code) Issuer's telephone number, including area code: 301-419-3900 Securities registered under Section 12(b) of the Exchange Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED None - - --------------------- ------------------------------------------- Securities registered under Section 12(g) of the Exchange Act: Common Stock ($.005 par value per share) - - ------------------------------------------------------------------ (Title of class) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- -- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The issuer's revenues for its most recent fiscal year: $13,800,385. The total market value of the voting stock was $51,646,478, of which $31,163,015 was held by nonaffiliates of the registrant, based upon the closing price of the Common Stock on March 17, 1997, as quoted by NASDAQ. The number of outstanding shares of the registrant's Common Stock on March 17, 1997, was 7,945,612. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement of Biospherics Incorporated to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934 on or prior to April 30, 1997, are incorporated herein by reference into Part III of this report. Transitional Small Business Disclosure Format (Check One): Yes No X -- -- Page 1 of 33 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- BIOSPHERICS INCORPORATED ------------------------ PART I Certain oral and written statements of management of the company included in the Form 10-KSB may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. (See Item 6 of Part II hereof). ITEM 1. DESCRIPTION OF BUSINESS GENERAL Biospherics Incorporated (the "Company"), a Delaware corporation, was founded in 1967. The Company has developed into a scientific and technological firm providing information services to private industry and to Federal, State, and local government agencies, biological and chemical contract research services, and is developing its own proprietary products. The Company consists of an Information Services Division ("ISD") and a BioTech Programs Unit. In February 1996, the Company sold its Beltsville branch of the Environmental and Laboratory Services Division ("ELSD"). Management believes that the sale will permit better focus on the major businesses of the Company, ISD and BioTech. In 1969, the Company completed a public offering. Its common stock trades on the NASDAQ National Market System under the symbol "BINC." INFORMATION SERVICES DIVISION On February 18, 1997, the Board of Directors approved a plan to convert ISD into a wholly-owned subsidiary. The plan will be proposed to Shareholders at the Company's May 15, 1997, Annual Meeting. The new company will continue all of the current ISD business and will feature an expansion of its healthcare business into demand management. The subsidiary will evaluate methods of increasing its capitalization, including a possible IPO in order to accelerate growth. Under the reorganization, ISD, which to date has funded all of the Company's nonfattening sugar (D-tagatose) development costs, will be free to concentrate on opportunities in its primary field, the healthcare market. With the recent worldwide licensing of D-tagatose to MD Foods Ingredients of Denmark, the Company has received funds that, together with anticipated continuing royalties, will allow it to continue to develop other proprietary products. ISD's information professionals provide computerized health, pharmaceutical and medical data collection and clinical trial management, report and publication writing and editing, development of programmatic concepts in public health information and education, database management, and computer-assisted health resource information. ISD collects and disseminates information by providing customized telesupport and database management systems that combine the human element of live operators with advanced communication technology. ISD answers millions of calls annually from professionals and the public nationwide and disseminates millions of publications. The core of its operation consists of three state-of-the-art call centers (Beltsville, Cumberland and Columbia, MD) that efficiently manage and track high volumes of calls. This technology is combined with computerized database management systems, which results in an efficient and effective system to collect and disseminate large amounts of information. ISD specializes in public health issues and provides information services on a wide range of diseases and disabilities, disease prevention, and education. Areas of expertise include Alzheimer's disease, AIDS, cancer, diabetes, heart disease, and stroke, in addition to the broad areas of smoking, aging, and environmental hazards such as mishandling of pesticides. Programs are staffed by health professionals and other information specialists who are given extensive training and strict quality control guidelines. ISD's clients had included over 20 of the Nation's top pharmaceutical companies, and government departments that deal with health or education. ISD holds contracts with such agencies as the Department of the Navy, the General Services Administration, the Department of Health and Human Services, and the Department 2 BIOSPHERICS INCORPORATED ------------------------ of Agriculture. Contracts with non-governmental parties are typically obtained following private negotiations and are most often for a term of 1 year, although many such contracts have continued to renew for several years. Contracts with governmental parties are obtained after a competitive bidding process and are most often for terms ranging from 2 to 3 years, with additional option years. Many have been re-won numerous times. During 1996, the Company recognized revenue from two of its customers, Parke-Davis and the Federal Information Center (FIC), representing 20% and 18%, respectively, of the total Company revenues. During 1995, the Company recognized 23% of its total revenues from Parke-Davis and 16% from FIC. ISD accounted for nearly 95% of the Company's total revenues from continuing operations in 1996. During 1996, government business accounted for approximately 57% of ISD's business, compared with 46% in 1995. This resulted primarily from completion of a major commercial contract in October 1995. The Company hopes to increase its share of commercial business, and expects to respond to a high level of public interest in health information. BIOTECH PROGRAMS UNIT The BioTech Programs Unit is the Company's research and development arm, dedicated to developing proprietary products and services with a view toward economic commercial applications. Over the last several years, it has invested more than $3 million in these developments, primarily in its nonfattening sugar. The Company has accumulated a number of patents on its products. Over past years, the Company has realized several million dollars in revenues from its products and processes. D-Tagatose as a Bulk Sweetener BioTech has patented the use of a naturally occurring sugar, D-tagatose, as a low-calorie and uniquely nonfattening sweetener. It is a true sugar that looks, feels, performs, and tastes like table sugar. Present in small amounts in many dairy products, it differs from all other nonfattening sweeteners in that it is the only one that has the full bulk of sugar with the same clean, sweet taste. Biospherics has been developing the substance since receiving a patent for its use as a food additive in 1988 and two patents for the economical production process (1990 and 1991). On September 27, 1996, the Company signed a license agreement with MD Foods Ingredients amba of Denmark for the exclusive worldwide rights to manufacture, market, and distribute D-tagatose as a food ingredient in return for a non-refundable up-front payment and a royalty schedule based upon net sales of the sugar. Under the agreement, MD Foods may sub-license the D-tagatose technology for use in foods and beverages. In return for the exclusive license, MD Foods will take responsibility for all future marketing and development expenses, including the cost of constructing and operating its own production plants. MD Foods manufactures a wide variety of foods and food ingredients made from milk. The Danish dairy company ranks as the eighth largest dairy products company in the world. It has the largest whey protein processing plant, the by-product of which is raw material for making D-tagatose. MD Foods is widely regarded as a manufacturer of high quality products and has the capability for worldwide distribution. The up-front payment has been made by MD Foods, part in September 1996 and part in January 1997. The payment totaled $2.5 million, $1 million of which is a non-refundable advance against future royalties. Biospherics will receive running royalties once commercial sales of D-tagatose begin, sometime in 1998 (Biospherics' estimate). The Company estimates further that if sales reach projected levels, the license could be worth in excess of $500 million in pre-tax profits to the Company over the next ten year period. To strengthen their cooperative efforts, the two companies established an advisory committee to plan and review progress in bringing D-tagatose to its various world market sectors. The committee consists of three MD Foods representatives and one Biospherics representative. The committee proposes strategies and actions for MD Foods management's consideration. MD Foods also funds Biospherics for technological support. 3 BIOSPHERICS INCORPORATED ------------------------ When the first commercial plant, now under design, becomes operational, MD Foods plans for sales to begin in Australia and the Pacific Rim, countries in which D-tagatose already has regulatory acceptance. Subsequently, it expects to compete for a share of the U.S. market for sweeteners, estimated to be worth $1 billion a year. A panel of experts has advised that D-tagatose may qualify for early entry into the U.S. market as a food ingredient that is Generally Recognized as Safe (GRAS). The Company believes that D-tagatose will fill a market not currently accessible to other sweetener products. That market initially includes chocolate confections, chewing gum, ice cream, and table top sugar. Later on, market applications will broaden to include baked goods, heat-processed foods, frozen desserts, other dairy products, cereals, and other products in which the full bulk of sugar is required. Biospherics believes that chocolate candies and chewing gum are excellent introductory uses for its nonfattening sugar because each constitutes a large market and each uses sugar as a major ingredient. Manufacturers have long sought a low-calorie substitute for table sugar in chocolate candy, which, partly because of its high sugar content, suffers from a high-calorie profile. While gum manufacturers have used alternative sweeteners to reduce caloric content, none has succeeded in emulating the flavor of table sugar. Also, unlike table sugar, D-tagatose has been shown to cause virtually no tooth decay. D-Tagatose as an Anti-hyperglycemic Agent The Company has received additional key patents for the use of D-tagatose as an anti-hyperglycemic agent (1994) and also as a treatment for diabetes (1995). D-Tagatose has been studied clinically as an anti-hyperglycemic agent by Dr. Thomas Donner, Assistant Professor, and Dr. John Wilber, Professor and Head of Endocrinology, at the University of Maryland School of Medicine. Phase One of this study was completed last year and results were reported for the first time at the national meeting of the American Diabetes Association in June 1996. The study demonstrated that: 1) acute administration of D-tagatose alone leads to no changes in serum insulin or plasma glucose in normal subjects or non-insulin-dependent-diabetic subjects (NIDDM or type II diabetics); 2) oral D-tagatose blunts the rise in plasma glucose and serum insulin seen after oral glucose in normals and NIDDM; 3) daily administration of D-tagatose for four weeks in NIDDM leads to a significant decline in glycohemoglobin, the most sensitive indicator of diabetes' disease consequences; and 4) no adverse metabolic effects were seen in normal subjects or NIDDM with chronic D-tagatose use. The investigators are presently preparing a manuscript for publication. Drs. Donner and Wilber are currently conducting the Second Phase of the clinical study to: 1) investigate whether D-tagatose can exert beneficial effects upon carbohydrate tolerance in type II diabetic subjects over a 12-month period with lower doses, and 2) determine the mechanism of action by which D-tagatose has beneficial effects in diabetic patients. The Company is discussing the possibility of licensing the use of D-tagatose as an anti-hyperglycemic agent with a number of pharmaceutical and nutritional products companies, while development efforts proceed. Safe-for-Humans Pesticides The increasing national and worldwide concern over pesticide hazards in foods and the general environment ensures a major market for an economical and effective product that poses no human threat. In November 1992, the Company received a U.S. patent for its safe-for-humans pesticide, including one of the products currently under development, which is called WingDinger-TM-. WingDinger-TM- has been tested under field conditions and in simulated field conditions in cooperation with the U.S. Department of Agriculture. Under conditions in which the insects' access to accidental water and food was controlled, housefly populations were controlled in a matter of several days. The U.S. Environmental Protection Agency (EPA) has reviewed the Company's application for approval of this novel pesticide and has found the safety data acceptable but requested a faster kill rate. The EPA feels that the kill rate for this obviously safe compound should be faster because the target insect, the common housefly, is a disease vector. Development efforts continue to design a product that will allow faster kill rates of common flies while examining non-disease vector pests for efficacy. 4 BIOSPHERICS INCORPORATED ------------------------ As a result of the research work with WingDinger-TM-, another group of compounds, derived from carbohydrates, has been identified as being both effective and economical pesticides. A U.S. patent for the use of this group of compounds as safe-for-humans pesticides is pending. The name chosen for the lead compound is FlyCracker-TM-. Under certain conditions, FlyCracker-TM- has been found to be effective in the control of common flies in agricultural environments. As with WingDinger-TM-, this compound is safe for humans. In fact, the EPA has recently deregulated its use under FIFRA, the law that regulates the use of pesticides in the U.S. More development work is required in order to make this component a commercial insecticide. Nutraceuticals Over the past decade, Biospherics has developed a considerable technology for the production and utilization of simple carbohydrates. BioTech is investigating ways in which the Company's technology can be applied to this new, rapidly growing market. These simple carbohydrates should have a number of applications in general because of their observed health benefits, apparently low levels of toxicity, reduced costs of production, and slower rates of metabolism versus the more common sugars like glucose and fructose. L-Sugars Earlier in its low-calorie sweetener research, the Company had obtained patents in the U.S. and abroad for the use of a broad group of L-hexose sugars for sweetening and bulking foods, beverages, and drugs. L-Sugars, by virtue of their molecular structures, contribute little or no caloric value to foods. Research also demonstrates that common bacteria cannot effectively utilize L-sugars, indicating reduced tooth decay. Additionally, foods substituted with L-sugars resist bacterial spoilage better and have longer shelf lives. To date, no economic means for production exists. The Company, however, plans to develop such for some of the L-sugars. For now, Biospherics' research efforts and investment are largely devoted to development of D-tagatose because of the near term favorable prospects for this product. ENVIRONMENTAL AND LABORATORY SERVICES DIVISION On January 5, 1996, the Board of Directors of the Company approved a formal plan to sell the net assets of ELSD because of a general decline in the environmental business and continuing lack of profitability. On February 29, 1996, the Company entered into an agreement to sell substantially all assets of ELSD except for certain receivables retained by the Company relating to completed contracts. The purchase price equaled the book value of substantially all ELSD Beltsville branch assets, less certain liabilities, plus $113,000 of goodwill. The aggregate net proceeds received for the sale and liquidation of remaining assets was $433,000. Management believes that the sale will permit better focus on the major businesses of the Company, ISD and BioTech. INDUSTRY SEGMENTS See Note 10 to Registrant's financial statements for information concerning the industry segments of Registrant, which information is incorporated herein by reference. COMPETITION The Company is in competition with other information firms across the Nation. Many of its competitors are substantially larger than the Company in assets, gross sales, working capital, operations facilities, and number of personnel. While acknowledging strong competition from other information firms, Biospherics has developed a specialized niche by concentrating on high quality, personalized service combined with state-of-the-art computerization for efficiency and cost-effectiveness. ISD has established a reputation for rapidly starting up projects to meet its clients' critical needs, while not compromising high quality and reasonable pricing. The Company continues to develop computer software products to maintain its competitive advantage in the future. Over the past several years, various sugar alcohols have been used in food products as bulk sweeteners. However, all are caloric, and none has the taste of table sugar. Three high-intensity, low- 5 BIOSPHERICS INCORPORATED ------------------------ calorie sweeteners are on the market in the United States. Aspartame was approved by FDA in 1981; saccharin was on the market before FDA approval was required, and despite FDA's warning that it is a health hazard, Congress has prevented FDA from banning it. Recently, Acesulfame-K was approved by FDA for some limited food uses, but its ability to achieve significant market penetration is not yet known. Other low-calorie sweeteners are awaiting FDA approval. These sweeteners, however, are either "high-intensity" and lack the important bulking properties of Sugaree (a proposed brand name for D-tagatose) and Lev-O-Cal or, having bulk, are caloric. The Company believes that no other products approach the table sugar taste or functional properties of Sugaree. SALES BACKLOG Sales backlog for continuing operations at December 31, 1996, and December 31, 1995, were as follows ($000s):
DECEMBER 31, 1996 DECEMBER 31, 1995 --------------------------------- --------------------------------- CURRENT LONG-TERM TOTAL CURRENT LONG-TERM TOTAL --------- ----------- --------- --------- ----------- --------- Information Services................................... $ 12,429 $ 16,504 $ 28,933 $ 10,693 $ 21,248 $ 31,941 BioTech Programs Unit.................................. 1,105 1,232 2,337 -- -- -- --------- ----------- --------- --------- ----------- --------- $ 13,534 $ 17,736 $ 31,270 $ 10,693 $ 21,248 $ 31,941 --------- ----------- --------- --------- ----------- --------- --------- ----------- --------- --------- ----------- ---------
PATENTS AND TRADEMARKS The Company has established a strong worldwide patent position for D-tagatose and an economical process for manufacture. The Company's 1988 U.S. patent for the use of D-tagatose as a low-calorie sweetener/bulking agent has subsequently been obtained or filed in many countries. In October 1994, the Company received a patent for the discovery that D-tagatose is effective in reducing hyperglycemia, one of the principal causes of physical and mental aging. In September 1995, it received a patent for the use of D-tagatose in treating diabetes. The Company developed a proprietary method for manufacture of D-tagatose that is protected by two U.S. patents issued in 1991 and 1992. In 1981, the Company obtained a patent for the use of certain L-sugars as low-calorie sweeteners/ bulking agents in foods, beverages, and drugs and later obtained patents on methods for the production of L-sugars although none was economical. During 1991, the Company reestablished the claims of its L-sugar patent by obtaining a reissue of the patent in the United States. In November 1992, a U.S. patent was awarded to the Company for its safe-for-humans pesticide. The Company has applied for foreign patents for the pesticide. With respect to all of its inventions, the Company has received a total of approximately 100 patents, including foreign issues. It has two patents pending and many additional invention disclosures. In addition to its strong patent position, the Company also relies on the common law protection of such information as trade secrets and on confidentiality agreements to protect the value of these assets. GOVERNMENTAL REGULATION The business activities of the Company are subject to a variety of Federal and state compliance, licensing, and certification requirements. Management believes that the Company is, and has been at all times, in full compliance with Federal and state environmental protection and worker safety laws. The Company has not incurred significant expense in complying with such laws and does not anticipate material expense, except for the FDA approval for commercialization of D-tagatose (which is to be borne by MD Foods) and L-sugars. Commercialization of D-tagatose and L-sugars in the United States for use as food additives will require FDA approval. As of this date, Biospherics believes the results of its test program warrant continuing the development efforts to provide a broad family of low-calorie sweeteners. 6 BIOSPHERICS INCORPORATED ------------------------ EMPLOYEES In 1996, the Company employed an average of 338 persons on a full- or part-time basis. The Company's employees are not currently unionized, and management believes that its relations with the Company's employees are harmonious. RESEARCH AND DEVELOPMENT BioTech expenditures were $611,000 and $539,000 in 1996 and 1995, respectively. These expenditures were incurred primarily in the ongoing efforts to commercialize D-tagatose with a minor portion to develop safe-for-humans pesticides. ITEM 2. DESCRIPTION OF PROPERTIES The Company leases a 95,000 square foot facility in Beltsville, Maryland, under the terms of a lease that expires on April 30, 1998. The Company currently occupies 43,000 square feet of this facility and has subleased the remaining space for the duration of the Company's lease. Current annual rent is approximately $1,139,000 and is subject to scheduled base rent increases during the lease term. The annual rent is offset by $518,000 from the sublet space. The Company currently leases space for its telesupport services in a 14,200 square foot facility in Cumberland, Maryland. The lease is scheduled to expire on December 31, 1998. In September 1996, the Company entered into a lease addendum to increase the total square footage from 12,900 square feet to 14,200 square feet. The annual rent increased from $58,000 to $63,700. ITEM 3. LEGAL PROCEEDINGS In December 1996, the Company instituted suit against Tetra Technologies, Inc. ("Tetra") in the Court of Common Pleas in Allegheny County, Pennsylvania. The suit alleged a breach by Tetra of its obligations to complete minimum royalty payments to the Company as required by a 1991 agreement pursuant to which the Company transferred certain technology rights to Tetra ("the 1991 Agreement"). The complaint demanded damages in the amount of one hundred thousand dollars ($100,000). Tetra has caused the action to be removed to the United States District Court for the Western District of Pennsylvania and has filed a counterclaim alleging various breaches of the 1991 agreement by the Company and demanding damages of approximately nine hundred thousand dollars ($900,000). The Company disputes the allegations contained in the counterclaim and intends to vigorously defend the counterclaim and prosecute its claims against Tetra. A claim raised by the IRS, reported in 1995 10-KSB, was settled in 1996. The settlement had an overall positive impact on cash flow of $12,220. In November, 1995, the Company received a notice of potential liability from the U.S. Environmental Protection Agency. See Item 6, Liquidity and Capital Resources. The Company does not believe it is exposed to any significant liability. The Company is also involved in litigation arising from the normal course of business. In the opinion of management, based on advice of legal counsel, this litigation will not have any material adverse effect on the financial statements of Biospherics. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 7 BIOSPHERICS INCORPORATED ------------------------ PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Biospherics' common stock is traded on the NASDAQ National Market System. No cash dividends were paid in 1996 or 1995. The Company's loan agreement with its bank does not expressly restrict the payment of dividends; however, no such payments are anticipated in the near future. As of March 17, 1997, the number of stockholders of record of Biospherics' common stock was approximately 4,387, based on the number of proxy requests of the Company's transfer agent. The per share market value at the close of each quarter for 1996 and 1995 is listed below. The per share market values for 1995 have been restated to reflect the two-for-one stock split of May 1996. HIGH LOW --------- --------- 1st Quarter 1996... 6 4 1/4 2nd Quarter 1996... 10 5 3rd Quarter 1996... 9 5 5/8 4th Quarter 1996... 9 6 1/8 1st Quarter 1995... 2 7/8 2 1/8 2nd Quarter 1995... 4 2 1/4 3rd Quarter 1995... 13 1/2 3 1/4 4th Quarter 1995... 6 7/8 3 15/16 Throughout 1996, the Company issued an aggregate of shares of its common stock as a result of exercised of stock options issued under the Company's non-qualified stock option plan. In 1996, the Company filed a Form S-8 Registration Statement to register the shares issued pursuant to this plan. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations 1996 Compared with 1995 The Company earned a net income of $69,000 for the year ended December 31, 1996, compared to $394,000 for 1995. The primary reasons for this decrease are the effect of plant, property and equipment retired in 1996, along with the Company's decision to write off expenses incurred during negotiations with MD Foods. BioTech operating income increased $758,000, resulting from the licensing agreement with MD Foods Ingredients amba of Denmark. On September 27, 1996, the Company signed an exclusive worldwide licensing agreement with MD Foods Ingredients amba of Denmark for the use, manufacture and sale of Biospherics' nonfattening sugar, D-tagatose, as a sweetener. The Company received a non-refundable $750,000 initial partial payment on signing. Net of costs incurred to secure the agreement, the impact of MD Foods on Research and Development operating income was $700,000 for the year 1996. The remaining $58,000 increase in operating income was primarily because of consulting revenue associated with efforts on commercialization of D-tagatose, plus lower level of direct labor and other direct costs associated with other research and development. 8 BIOSPHERICS INCORPORATED ------------------------ The Company also received an additional payment under the agreement of $1,750,000 on January 6, 1997. The $1,750,000 consists of a second $750,000 initial non-refundable payment and $1,000,000 non-refundable advance against future royalties, recoverable at 50% of such annual royalties. Full running royalties will be paid to the Company on net sales, which the Company believes will begin in 1998. The Company expects sales will escalate rapidly to become a major source of revenue. Under the terms of the agreement, MD Foods Ingredients has full responsibility for all development costs, including any regulatory requirements to sell in the U.S. and European countries, and costs of production and sales. In addition, MD Foods will support Biospherics' efforts in helping to commercialize D-tagatose to the extent of approximately $250,000 per year for 1996/1997 and 1997/1998. ISD operating income decreased by $802,000, or 80%, compared to twelve months ending 1995. The primary reasons for such decrease were the lower level of revenue generated, general and administrative costs reallocated, and $238,000 loss associated with the plant and equipment retired in 1996, as discussed below. ISD revenues were $12,980,000, which reflects a decrease of 5.3% or $735,000, compared with revenues of $13,715,000 in 1995. This decrease was primarily because of the expiration of a major commercial contract in October 1995. The loss from the commercial business was offset by increase of revenue generated from the government sector. The government segment expanded its level of revenue by 17% or by $1,020,000 in 1996, compared to 1995. Of the increase, $930,000 is related to a new contract. The remaining increase reflects expansion of existing government business. General and administrative expenses ("G&A") have been fully allocated to each segment's operating results. G&A expenses not eliminated after the sale of ELSD have been allocated to ISD and BioTech. As reflected in the accompanying Statements of Operations, G&A increased $116,000 from $2,350,000 in 1995 to $2,466,000 in 1996. This increased cost is primarily a result of the transfer of certain salary, fringe benefit, and other costs to G&A in connection with the sale of ELSD. As a result, G&A expenses of $76,000 and $3,000 in 1996 that would have been absorbed by ELSD, have been allocated to ISD and BioTech, respectively; and G&A expenses of $355,000 and $17,000 in 1995 previously absorbed by ELSD, have been allocated to ISD and BioTech, respectively. Other income and expenses decreased $417,000 from income of $330,000 in 1995 to expense of $87,000 in 1996. The decrease resulted from two major causes, one of which was the $335,000 settlement recorded in 1995 from the U.S. Department of Agriculture, Forest Service (the "Forest Service Contract"). On February 22, 1996, the Company settled the claim against the U.S. Department of Agriculture relating to the startup and early operation of the Forest Service Contract. Other factors for the decrease were the $238,000 loss associated with the plant and equipment retired in 1996, offset by the $100,000 royalty income relating to certain technology rights transferred to Tetra Technologies, Inc. Interest expense decreased $135,000 from $212,000 in 1995 to $77,000 in 1996. This decrease was primarily because of lower interest expense associated with the line of credit in 1996, compared to higher interest expense associated with the line of credit and the IRS settlement in 1995. The Company's backlog as of December 31, 1996, has remained steady at $31,270,000 compared to $31,941,000 in 1995. LIQUIDITY AND CAPITAL RESOURCES On January 5, 1996, the Board of Directors of the Company approved a formal plan to sell the net assets of ELSD because of a continuing lack of profitability and diminishing opportunity for profitable new sales. On February 27, 1996, the Company entered into an agreement to sell substantially all assets of ELSD except for certain receivables retained by the Company relating to completed contracts. The sale closed on February 29, 1996. The purchase price equaled the book value of substantially all ELSD assets, less certain liabilities, plus $113,000 goodwill. The aggregate cash received for the sale and liquidation of 9 BIOSPHERICS INCORPORATED ------------------------ remaining assets was approximately $433,000. Management believes that the sale will permit better focus on the major businesses of the Company, ISD and BioTech. On April 25, 1996, the Company entered into a $119,000 Promissory Note that will mature in three years. The Promissory Note will provide financing for start-up equipment costs related to new ISD contract wins. The Promissory Note is collateralized by new equipment purchased and will accrue interest at the rate of 8.81% per annum. The Company is required to make monthly payments of interest and principal. On May 31, 1996, the Company entered into a Loan Agreement (the "New Loan Agreement"), which replaced the Company's previous bank line of credit. The New Loan Agreement, which expires on May 31, 1997, provides for borrowings of up to $2 million, subject to an advance rate as defined in the agreement. Amounts outstanding under the New Loan Agreement accrue interest at the bank's prime rate plus .75% per annum and are collateralized by the Company's accounts receivable. The New Loan Agreement contains covenants that require the Company to meet certain tangible net worth and cash flow coverage ratios, and excludes a specific limitation on research and development expenditures. In November 1995, the Company received a notice of potential liability (the "Notice") from the U.S. EPA regarding a small quantity of hazardous materials shipped in 1988 and 1989 to a site owned and operated by a fully licensed company that was in the business of disposing of such materials. That company has since gone out of business. The EPA is conducting an investigation of the source, extent, and the nature of release or threatened release of hazardous substances at this site. The EPA has spent over $4.5 million in its investigation and restoration activities and that the Company has a potential proportionate liability under the Comprehensive Environmental Response, Compensation and Liability Act, as amended, for such costs. Based upon information in the Notice, the amount of hazardous material shipped to the site by the Company is less than .2% of all such materials found at the site. If the EPA allocates its costs based upon the amount of materials shipped by each company to the site in proportion to the total materials shipped to the site, the Company's share of the costs should be immaterial. Cash flow improved significantly as reflected in the accompanying Statements of Cash Flows. Net cash at end of the period was $796,000, a $766,000 improvement over 1995. The improvement was primarily due to the $750,000 received from MD Foods for the signing of the licensing agreement. Other major factors impacting cash flow were the $433,000 net proceeds received from the sale of ELSD, the $220,000 received from issuance of common stock, and $821,000 used for purchases of plant, property and equipment. The Company plans to invest in ISD through additional staffing and new equipment purchases in accordance with the decision to expand into the health care demand management market. Also, the Company intends to fund other BioTech development, including the use of D-tagatose as an adjunct for the treatment of diabetes, for which the Company still owns rights. No dividends were paid in 1996 and none is anticipated in 1997. While management believes that continuing operations of the business will generate positive cash flow, management is considering additional financing alternatives to support growth of its core businesses until significant royalties from D- tagatose materialize. Certain statements made above, which are summarized below, are forward looking statements that involve risks and uncertainties, and actual results may be materially different. Factors that could cause actual results to differ include those identified below: The Company estimates further that if sales reach projected levels, the license could be worth in excess of $500 million dollars in pre-tax profits to the Company over the next decade. The Company expects sales will escalate rapidly to become a major source of revenue. Performance by MD Foods under the relevant license agreement; success of MD Foods in its anticipated worldwide marketing and distribution efforts; satisfaction by MD Foods of all regulatory requirements, including but not limited to U.S. FDA approvals, necessary to engage in full scale marketing and distribution. 10 BIOSPHERICS INCORPORATED -------------- ITEM 7. FINANCIAL STATEMENTS Financial statements and supplementary data required by this Item 7 follow. INDEX TO FINANCIAL STATEMENTS Statements of Operations for each of the two years ended December 31, 1996............ 12 Balance Sheet as of December 31, 1996................................................. 13 Statements of Changes in Stockholders' Equity for each of the two years ended December 31, 1996................................................................... 14 Statements of Cash Flows for each of the two years ended December 31, 1996............ 15 Notes to Financial Statements......................................................... 17 Report of Independent Accountants..................................................... 27
-11- BIOSPHERICS INCORPORATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 ------------- ------------- Revenues Contract revenues.............................................................. $ 13,050,385 $ 13,739,514 Licensing fee revenue.......................................................... 750,000 -- ------------- ------------- Total revenues................................................................. 13,800,385 13,739,514 ------------- ------------- Operating expenses Direct contract costs and operating expenses................................... 9,605,805 10,005,559 General and administrative expenses............................................ 2,465,762 2,349,684 Research and development expenses.............................................. 611,139 538,714 Depreciation and amortization expenses......................................... 738,646 421,263 ------------- ------------- Total operating expenses....................................................... 13,421,352 13,315,220 ------------- ------------- Income from operations............................................................. 379,033 424,294 Other income (expense) Other income (expense)......................................................... (87,256) 329,631 Interest expense............................................................... (77,159) (211,979) ------------- ------------- Income from continuing operations before income taxes.............................. 214,618 541,946 Income tax expense................................................................. (88,052) (115,103) ------------- ------------- Income from continuing operations.................................................. 126,566 426,843 Discontinued operations Loss from discontinued operations, net of applicable income tax benefit of $36,227 and $19,949 in 1996 and 1995, respectively........................... (57,576) (32,549) ------------- ------------- Net income......................................................................... $ 68,990 $ 394,294 ------------- ------------- ------------- ------------- Net income (loss) per share data: Income per share from continuing operations.................................... $ 0.01 $ 0.05 Loss per share from discontinued operations.................................... -- (0.01) ------------- ------------- Net income per share........................................................... $ 0.01 $ 0.04 ------------- ------------- ------------- ------------- Weighted average common shares and common share equivalents outstanding........ 9,760,823 9,463,949 ------------- ------------- ------------- -------------
See notes to financial statements. -12- BIOSPHERICS INCORPORATED BALANCE SHEET DECEMBER 31, 1996 ASSETS Current assets Cash and cash equivalents................................................... $ 796,113 Trade accounts receivable, net.............................................. 2,016,124 Costs and estimated earnings in excess of billings on contracts............. 118,923 Other accounts receivable................................................... 194,290 Current deferred income taxes............................................... 83,247 Prepaid expenses and other assets........................................... 566,093 --------- Total current assets...................................................... 3,774,790 Property and equipment, net................................................. 1,649,865 Patents, net................................................................ 148,847 Restricted cash-security deposit............................................ 27,408 --------- Total assets.............................................................. $5,600,910 --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Bank line of credit......................................................... $ 235,000 Accounts payable and accrued expenses....................................... 1,079,023 Accrued salaries and benefits............................................... 416,759 Accrued vacation............................................................ 128,902 Income taxes payable........................................................ 102,778 Deferred rent............................................................... 128,755 Deferred revenue............................................................ 142,889 Note payable-current........................................................ 103,830 --------- Total current liabilities................................................. 2,337,936 Deferred compensation....................................................... 47,844 Deferred income taxes....................................................... 939 Deferred rent............................................................... 73,251 Note payable-long term...................................................... 110,716 --------- Total liabilities......................................................... 2,570,686 --------- Commitments and contingencies Redeemable common stock......................................................... 167,320 --------- Stockholders' equity Common stock, $.005 par value, 18,000,000 shares authorized; 7,957,468 and 7,914,462 shares, issued and outstanding, respectively, of which 3,219,506 shares are classified in redeemable common stock.......................... 23,690 Paid-in capital in excess of par value...................................... 1,309,799 Treasury stock, 43,006 shares at cost....................................... (261,603) Retained earnings........................................................... 1,791,018 --------- Total stockholders' equity................................................ 2,862,904 --------- Total liabilities and stockholders' equity................................ $5,600,910 --------- ---------
See notes to financial statements. -13- BIOSPHERICS INCORPORATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PAID-IN CAPITAL IN COMMON EXCESS OF TREASURY RETAINED STOCKHOLDERS' STOCK PAR STOCK EARNINGS EQUITY --------- ------------ ----------- ------------ ------------ Balance, December 31, 1994.................... $ 21,345 $ 659,329 $ -- $ 1,327,734 $2,008,408 Exercise of employee stock options........ 151 105,141 -- -- 105,292 Acquisition of treasury stock in connection with option exercises........ -- -- (160,258) -- (160,258) Issuance of treasury stock in payment of expense................................. -- -- 3,990 -- 3,990 Net reclassification for redeemable common stock................................... 1,430 8,580 -- -- 10,010 Net income................................ -- -- -- 394,294 394,294 --------- ------------ ----------- ------------ ------------ Balance, December 31, 1995.................... 22,926 773,050 (156,268) 1,722,028 2,361,736 Exercise of employee stock options........ 439 333,670 -- -- 334,109 Acquisition of treasury stock in connection with option exercises........ -- -- (114,166) -- (114,166) Issuance of treasury stock in payment of expense................................. -- -- 8,831 -- 8,831 Net reclassification for redeemable common stock................................... 325 1,950 -- -- 2,275 Tax benefit of stock options.............. -- 201,129 -- -- 201,129 Net income................................ -- -- -- 68,990 68,990 --------- ------------ ----------- ------------ ------------ Balance, December 31, 1996.................... $ 23,690 $1,309,799 $ (261,603) $ 1,791,018 $2,862,904 --------- ------------ ----------- ------------ ------------ --------- ------------ ----------- ------------ ------------
See notes to financial statements. -14- BIOSPHERICS INCORPORATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 ----------- ------------- Operating activities Net income............................................................................ $ 68,990 $ 394,294 ----------- ------------- Adjustments to reconcile net income to net cash provided by operating activities: Gain from sale of discontinued operations......................................... (29,313) -- Depreciation and amortization..................................................... 738,646 467,054 Loss on sales and retirements of property and equipment........................... 237,639 32,414 Treasury stock issued in payment of expense....................................... 8,831 3,990 Deferred income taxes............................................................. (193,615) (25,573) Provision for uncollectible accounts.............................................. 13,930 (11,216) Changes in assets and liabilities: Trade accounts receivable....................................................... (427,568) 1,036,801 Costs and estimated earnings in excess of billings on contracts................. (69,893) 213,194 Other receivables............................................................... 368,416 (360,314) Prepaid expenses and other assets............................................... (208,654) (75,558) Accounts payable and accrued expenses........................................... (154,332) (303,025) Accrued salaries and benefits................................................... 46,392 (53,506) Accrued vacation................................................................ (4,871) (9,504) Income taxes payable............................................................ 36,768 14,289 Deferred rent................................................................... 75,431 (44,388) Deferred revenue................................................................ (48,572) 191,461 Deferred compensation adjustment................................................ (62,782) (38,000) Liquidation of discontinued operations assets.................................... 278,698 -- ----------- ------------- Total adjustments............................................................... 605,151 1,038,119 ----------- ------------- Net cash provided by operating activities......................................... 674,141 1,432,413 Investing activities Proceeds from sale of ELSD, net of expenses......................................... 433,216 -- Sale of property and equipment...................................................... 1,131 -- Purchases of property and equipment................................................. (820,692) (468,657) Additions to patent costs........................................................... (65,204) (18,162) ----------- ------------- Net cash used in investing activities............................................... (451,549) (486,819) ----------- ------------- Financing activities Net repayments under line of credit................................................. (86,000) (1,214,000) Net change in book overdraft........................................................ 183,852 95,766 Proceeds from note payable.......................................................... 118,878 200,000 Long term loan...................................................................... (94,142) (10,190) Issuance of common stock............................................................ 219,943 4,712 Tax benefit of stock options exercised.............................................. 201,129 -- ----------- ------------- Net cash provided by (used in) financing activities................................. 543,660 (923,712) ----------- ------------- Net increase in cash and cash equivalents............................................. 766,252 21,882 Cash and cash equivalents, beginning of period........................................ 29,861 7,979 ----------- ------------- Cash and cash equivalents, end of period.............................................. $ 796,113 $ 29,861 ----------- ------------- ----------- ------------- Supplemental cash flow information: Income taxes (refunded) paid........................................................ $ (12,220) $ 73,135 Interest paid....................................................................... 195,158 110,473 Non-cash redemption of common stock in connection with stock option exercises....... 114,166 160,258
See notes to financial statements. -15- BIOSPHERICS INCORPORATED Notes to Financial Statements ----------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies are summarized below. REVENUE RECOGNITION Revenue is recognized using the following methods depending upon the terms of the contracts: time & materials, fixed price, and cost-plus-fixed-fee. Revenue recognized under time & material contracts is based upon direct labor hours and other direct costs incurred. Revenue for fixed-price contracts is recognized using the percentage-of-completion and unit-of-delivery methods. Revenue for cost-plus-fixed-fee contracts is recognized based on the allowable total costs incurred plus a pro rata share of the fee. Losses, if any, on contracts are recorded during the period when first determined. Included in prepaid expenses and other assets is $161,000 at December 31, 1996, attributable to certain start-up costs, which have been deferred and which will be amortized and recovered over the related period of service provided to the client. CASH EQUIVALENTS The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. At December 31, 1996, the Company had approximately $741,000 in a certificate of deposit, which exceeds FDIC insured limits by $641,000. RECEIVABLES Trade accounts receivable are reflected in the accompanying Balance Sheet net of an allowance for doubtful accounts of $55,000. Three major contracts constitute 55% of the trade accounts receivable, the components of which are 26%, 18% and 12%. No other single contract was greater than 10% of total trade accounts receivable. Costs and estimated earnings in excess of billings on contracts represent revenues recognized that are not billable as of December 31, 1996, under the terms of the contracts. There are no significant contract retainages as of December 31, 1996. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. DEPRECIATION AND AMORTIZATION Depreciation is provided on the straight-line basis over the estimated useful lives of the various assets. Leasehold improvements are amortized over the shorter of the periods of the leases or the useful lives of the improvements. Expenditures for maintenance, repairs, and minor renewals are charged to expense as incurred; expenditures for improvements, replacements, and major renewals are added to the property and equipment accounts. Assets retired or otherwise disposed of are removed from the asset accounts, along with the related amounts of accumulated depreciation. Gains or losses from disposals, if any, are included in earnings. In 1996, a $238,000 loss was recorded in connection with the disposal of obsolete property and equipment. The disposal of equipment is consistent with ongoing efforts to improve the Company's competitiveness in the marketplace through development of computer hardware and software technologies. -16- BIOSPHERICS INCORPORATED Notes to Financial Statements ----------- INCOME TAXES Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. PATENT COSTS Legal and acquisition costs relating to patents are capitalized when incurred. When patents are granted, costs are amortized over a term representing the lesser of the life of the patent or the projected sales period of the product or process. DEFERRED RENT The Company entered into a lease for its headquarters and research facilities in 1987. The excess of the rent expense over the cash payments for rent is recorded as deferred rent and is being amortized over the life of the lease. STOCK SPLIT The Company effected a two-for-one stock split on May 15, 1996. All references to shares and per share data have been retroactively adjusted to reflect the split. NET INCOME PER SHARE Net income per share is computed using the weighted average number of common shares outstanding during each period and the common stock equivalents. The effect of fully dilutive earnings per share is equivalent to the primary earnings per share and therefore is not presented in the statements of operations. ACCOUNTING STANDARDS In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement 123, "Accounting for Stock-Based Compensation" ("Statement 123"), which establishes fair value-based accounting and reporting standards for all transactions in which a company acquires goods or services by issuing equity securities. As such, Statement 123 covers stock-based compensation plans including all arrangements under which employees receive shares of stock. Statement 123 encourages, but does not require, employers to adopt its prescribed fair value-based method of accounting to recognize compensation expense for employee stock compensation plans. Employers must comply with the disclosure requirements set forth in the statement. The Company has adopted only the disclosure standards of Statement 123 in 1996. The Company accounts for its employee stock compensation plan under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." FAIR VALUE INFORMATION The carrying amounts of financial instruments, principally cash, accounts receivable, accounts payable, long-term notes payable, and short-term notes payable reported in the balance sheet approximate their fair value. -17- BIOSPHERICS INCORPORATED Notes to Financial Statements ----------- 2. DISCONTINUED OPERATIONS On January 5, 1996, the Board of Directors of the Company approved a formal plan to sell the net assets of ELSD because of a continuing lack of profitability and diminishing opportunity for profitable new sales. On February 27, 1996, the Company entered into an agreement to sell substantially all assets of ELSD, except for certain receivables retained by the Company relating to completed contracts. The sale closed on February 29, 1996. The purchase price equaled the book value of substantially all ELSD Beltsville branch assets, less certain liabilities, plus $113,000 of goodwill. The aggregate net proceeds received for the sale and liquidation of remaining assets were $433,000. Management believes that the sale will permit better focus on the major businesses of the Company, ISD and BioTech. Net proceeds from sale of discontinued operations, net of expenses as of February 29, 1996: Trade accounts receivable, net.................................... $ 308,943 Costs and estimated earnings in excess of billings on contracts........................................... 45,159 Prepaid expenses and other assets................................. 35,457 Property and equipment, net....................................... 67,424 --------- Total assets...................................................... 456,983 Accounts payable and accrued expenses............................. (24,556) --------- Net assets of discontinued operations............................. 432,427 Goodwill.......................................................... 113,000 Expenses relating to sale of discontinued operations.............. (80,762) Deferred payment.................................................. (31,449) --------- Net proceeds from sale of disontinued operations.................. $ 433,216 --------- --------- Assets are shown at their net realizable values and accounts payable and accrued expenses at their face amounts. 3. PROPERTY AND EQUIPMENT The components of property and equipment as of December 31, 1996 at cost, are as follows:
AMOUNT ESTIMATED LIFE ------------ --------------- Office furniture and equipment....................... $ 2,465,207 3 to 10 years Leasehold improvements............................... 296,436 3 to 7 years ------------ 2,761,643 Accumulated depreciation and amortization............ (1,111,778) ------------ Property and equipment, net.......................... $ 1,649,865 ------------ ------------
-18- BIOSPHERICS INCORPORATED Notes to Financial Statements ----------- 4. BANK LINE OF CREDIT On May 31, 1996, the Company entered into a Loan Agreement (the "New Loan Agreement") that replaced the Company's previous bank line of credit. The New Loan Agreement, which expires on May 31, 1997, provides for borrowings of up to $2 million, subject to an advance rate as defined in the agreement. Amounts outstanding under the New Loan Agreement accrue interest at the bank's prime rate plus .75% per annum and are collateralized by the Company's accounts receivable. The New Loan Agreement contains covenants that require the Company to meet certain tangible net worth and cash flow coverage ratios, and includes a specific limitation on research and development expenditures. The Company was in violation of the cash flow to debt covenant as of December 31, 1996. The violation has been waived by the bank. Included in accounts payable are the amounts of $404,396 and $220,926 related to book overdrafts at December 31, 1996 and 1995, respectively. 5. NOTE PAYABLE On April 25, 1996, the Company entered into a $119, 000 Promissory Note that will mature in three years. The Promissory Note will provide financing for start-up equipment costs related to new contract wins. The Promissory Note is collateralized by new equipment purchased and will accrue interest at the rate of 8.81% per annum. The Company is required to make monthly principal payments of $3,302 plus interest. The unpaid balance at December 31, 1996 was $92,065, of which $41,802, $39,626 and $10,637 matures in 1997, 1998 and 1999, respectively. On October 12, 1995, the Company entered into a $200,000 Promissory Note that matures on October 12, 1998. The Promissory Note accrues interest at the rate of 8.55% per annum and the Company is required to make monthly payments of interest and principal. The proceeds were used to provide financing for a portion of the Company's property and equipment purchases during 1995. The Promissory Note is collateralized by equipment purchased prior to October 12, 1995. The unpaid principal balance of the note was $122,481 as of December 31, 1996, of which $62,028 matures in 1997 and $60,453 matures in 1998. 6. INCOME TAXES The components of the provision (benefit) for income taxes from operations are as follows: YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 ---------- ----------- Current Federal..................................... $ 209,370 $ 114,065 State....................................... 46,349 26,611 ---------- ---------- Total current provision....................... 255,719 140,676 ---------- ---------- Deferred Federal..................................... (137,278) (21,207) State....................................... (30,389) (4,366) ---------- ---------- Total deferred benefit........................ (167,667) (25,573) ---------- ---------- Total income tax expense............... ...... $ 88,052 $ 115,103 ---------- ---------- ---------- ---------- -19- BIOSPHERICS INCORPORATED Notes to Financial Statements ----------- The tax effect of significant temporary differences representing deferred tax assets and liabilities as of December 31, 1996, is as follows: CURRENT NON-CURRENT ---------- ------------ Depreciation and amortization.............. $ 10,000 $ 40,583 Deferred compensation...................... -- (18,477) Deferred rent.............................. (78,015) -- Accrued vacation........................... (29,869) -- Allowance for doubtful accounts............ -- (21,167) Other...................................... 14,637 -- ----------- ---------- Deferred tax (asset) liability............. $ (83,247) $ 939 ----------- ---------- ----------- ---------- Differences between the effective income tax rates and the federal statutory rates for 1996 and 1995 are as follows:
1996 1995 --------- ---------- Federal income tax expense at 34%...................................... $ 72,971 $ 184,262 State income tax expense, net of federal............................... 10,533 12,898 Expenses not deductible for tax purposes............................... 4,548 9,096 Adjustments relating to resolving the IRS audit........................ -- (73,081) Other, primarily changes in prior year estimates....................... -- (18,072) --------- ---------- Income tax expense..................................................... $ 88,052 $ 115,103 --------- ---------- --------- ----------
As a result of routine audits of the Company's Federal income tax returns by the Internal Revenue Service ("IRS"), the IRS had disputed the timing of certain rent expense deductions taken during the 1986 through 1992 tax years. On August 28, 1995, the Company entered into a settlement agreement under which the IRS claims were substantially reduced and all penalties assessed were waived. The settlement agreement was resolved in 1996, resulting in a net refund of $12,220. 7. COMMITMENTS AND CONTINGENT LIABILITIES CONTRACT REVENUES The financial statements include revenues under U.S. Government contracts that are subject to final Government audit adjustments. The Defense Contracts Audit Agency (DCAA) has completed its audits for all years through 1993. The Company believes that no material adjustments to the financial statements will arise from the unaudited years. -20- BIOSPHERICS INCORPORATED Notes to Financial Statements ----------- LEASE COMMITMENTS The Company leases a 95,000 square foot of facility in Beltsville, Maryland, under the terms of a lease that expires on April 30, 1998. The Company currently occupies 43,000 square feet of this facility and has subleased the remaining space. Total incurred expenses were $1,469,197 in 1996 and $1,471,485 in 1995 under operating leases. It is obligated for future minimum rental payments under leases for office space and telecommunications equipment as follows: Years Ended December 31, ------------------------------ 1997 $ 1,462,934 1998 660,898 1999 222,978 2000 186,307 2001 174,083 Thereafter 43,521 ------------ $ 2,750,721 ------------ ------------ The Company recorded rental income of $518,337 in 1996 and $426,166 in 1995, under sublease agreements, which is offset against rent expense in the accompanying financial statements. Future minimum receipts under sublease agreements are as follows: Years Ended December 31, --------------------------- 1997 $ 514,971 1998 80,296 ---------- $ 595,267 ---------- ---------- RELATED PARTY TRANSACTIONS Stock Redemption Agreements --------------------------- In August 1978, the Company, with stockholders' approval, entered into agreements, which were restated on January 15, 1996, with two officer-stockholders who beneficially own 39.7% of the outstanding common stock. Under the agreement, upon their deaths, the Company may be required to redeem from their estates the number of shares of the Company's stock necessary to pay estate taxes and administrative expenses of the estate, if any, up to $5,000,000. Shares would be redeemed at the then-current market price. The Company is the beneficiary to an insurance policy on the lives of the two officer-stockholders, which the Company maintains to provide benefits of $5,000,000 for this agreement. Deferred Compensation and Consulting Agreements ----------------------------------------------- The Company has entered into agreements with two officer-stockholders, who beneficially own 39.7% of the outstanding common stock, whereby the officer-stockholders agreed to serve as full-time employees of the Company until their respective retirements. Under the agreements, upon retirement, the officer-stockholders will receive deferred compensation equal to 70% of their average annual total compensation less the assumed returns from investment of -21- BIOSPHERICS INCORPORATED Notes to Financial Statements ----------- their funded pension plans and their social security payments. The deferred compensation plan is unfunded. During 1996 and 1995, the deferred compensation liability was reduced by $62,782 and $38,000, respectively, as determined by actuarial calculation. Upon completion of their employment, the officer- stockholders also agreed to serve as consultants to the Company on a minimum part-time, plus as-needed basis, at a specified daily rate. OTHER On September 27, 1996, the Company signed an exclusive worldwide licensing agreement with MD Foods Ingredients amba of Denmark for the use, manufacture and sale of Biospherics' nonfattening sugar, D-tagatose, as a sweetener. The Company received a non-refundable $750,000 initial partial payment on signing. This $750,000 is classified as a licensing fee operating revenue in the financial statements. The Company received an additional payment of $1,750,000 on January 6, 1997, subsequent to the successful completion of MD Foods' due diligence. The $750,000 of $1,750,000 received on January 6, 1997, completes the initial non-refundable payment, and will be recognized as revenue in the first quarter of 1997. The remaining $1 million of the $1.75 million was paid as a non-refundable advance against future royalties, recoverable and to be recognized as revenue, at the rate of 50% of such annual royalties. Full running royalties will be paid to the Company on sales, which the Company believes will begin overseas in 1998 when the first full-scale production plant for D-tagatose is called for in the licensing agreement. The Company expects sales will escalate rapidly to become a major source of revenue. Under the terms of the agreement, MD Foods Ingredients has full responsibility for all development costs, including any regulatory requirements to sell in the U.S. and European Countries and costs of production and sales. In addition, MD Foods will support Biospherics' efforts toward commercializing D-tagatose to the extent of approximately $250,000 per year for 1996/1997 and 1997/1998. In November 1995, the Company received a notice of potential liability (the "Notice") from the U.S. EPA regarding a small quantity of hazardous materials shipped in 1988 and 1989 to a site owned and operated by a fully licensed company that was in the business of disposing of such materials. That company has since gone out of business. The EPA is conducting an investigation of the source, extent, and the nature of release or threatened release of hazardous substances at this site. The EPA has spent over $4.5 million in its investigation and restoration activities and the Company has a potential proportionate liability under the Comprehensive Environmental Response, Compensation and Liability Act, as amended, for such costs. Based upon information in the Notice, the amount of hazardous material shipped to the site by the Company is less than .2% of all such materials found at the site. If the EPA allocates its costs based upon the amount of materials shipped by each company to the site in proportion to the total materials shipped to the site, the Company's share of the costs should be immaterial. In December 1996, the Company instituted suit against Tetra Technologies, Inc. ("Tetra") in the Court of Common Pleas in Allegheny County, Pennsylvania. The suit alleged a breach by Tetra of its obligations to make minimum royalty payments to the Company as required by a 1991 agreement to which the Company transferred certain technology rights to Tetra ("the 1991 Agreement"). The complaint demanded damages in the amount of approximately one hundred thousand dollars ($100,000). Tetra has filed a counterclaim alleging various breaches of the 1991 agreement by the Company and demanding damages of approximately nine hundred thousand dollars ($900,000). The Company disputes the allegations contained in the counterclaim and intends to vigorously defend the counterclaim and prosecute its claim against Tetra. The Company is also a party to other legal actions arising in the ordinary course of business. Management believes that damages arising from these actions, if any, will not be material to the consolidated financial statements of the Company. -22- Biospherics Incorporated Notes to Financial Statements ----------------------------- 8. STOCK OPTION PLAN The Company has an Employees' Nonqualified Stock Option Plan (the "Plan"), whereby options may be granted to officers and other key employees to purchase up to 4,400,000 shares of common stock in amounts determined by the Board of Directors at a price not less than 50% of the fair market value of the stock on the date the options are granted, and for a term not to exceed five years and one month from the date of grant. The Board of Directors determines the vesting period of options granted. To date, all options granted, except for those part of an anti-hostile takeover plan explained below, have been at the then-publicly quoted price of the stock. Activity for the two years ending December 31, 1996, is shown below:
1996 1995 Weighted Weighted Average Average 1996 Exercise 1995 Exercise Shares Price Shares Price -------------- -------- -------------- -------- Outstanding at beginning of year......... 2,927,446 2.269 2,404,400 1.764 Granted.............................. 165,000 6.909 575,000 4.486 Exercised........................... (87,574) 3.816 (26,354) 3.636 Expired.............................. (108,000) 3.882 (25,600) 3.255 -------------- -------------- Outstanding at end of year............... 2,896,872 2.426 2,927,446 2.269 Exercisable at end of year............... 637,372 481,946 Available for grant at end of year....... 1,503,128 Price range of options Outstanding.......................... $1.43 to $7.25 $1.43 to $5.25 Exercised............................ $2.88 to $5.25 $2.88 to $4.00 Expired.............................. $2.88 to $5.25 $2.00 to $4.13 Weighted average fair value of options granted during the year.......... $3.93 $2.81
The following table summarizes information about fixed price stock options outstanding at December 31, 1996:
WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF OPTIONS REMAINING AVERAGE OPTIONS AVERAGE EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE - - ------------- ----------- ------------- --------- ------------- --------- $ 3.37-4.00 99,972 1 year $3.91 99,972 $3.91 3.25-3.50 26,400 2 years 3.44 21,400 3.43 2.875 135,500 3 years 2.88 106,000 2.88 3.31-5.25 480,000 4 years 4.57 342,000 4.81 7.125-7.25 104,000 5 years 7.19 68,000 7.23 5.25-7.00 51,000 6 years 6.66 -- -- 1.43 2,000,000 (1) 1.43 -- -- - - ------------- ---------- --------- $ 1.43-7.25 2,896,872 637,372 - - ------------- ---------- --------- - - ------------- ---------- ---------
- - ------------------------ (1) On November 18, 1994, two officer-shareholders were each granted options to purchase 1,000,000 shares of common stock of the Company at $1.4375 per share subject to two conditions. The options will be exercised in the event that both (i) a third party acquires 5% or more of the issued and outstanding common stock of the Company and (ii) the exercise is approved by the Board of Directors of the Company. This plan was put in place not for compensatory purposes but as a means of protecting shareholder value against unsolicited offers deemed inadequate by the Board of Directors and to help ensure fair and equal treatment of all shareholders. The Company applies APB Opinion No. 25 and related interpretations in accounting for the Plan. Accordingly, Because the exercise price of options granted have been at market price, no compensation cost has been recognized. Had compensation costs been determined based on the fair value at the grant dates for awards in 1996 and 1995 under the Plan consistent with the recognition method of FASB Statement No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts presented below:
1996 1995 Net earnings applicable to common stock As reported $ 68,990 $ 394,294) Pro forma (217,825) (204,066 Net earnings (loss) per share As reported $ 0.01 $0.04 Pro forma (0.02) (0.02)
23 Biospherics Incorporated Notes to Financial Statements ----------------------------- The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
1996 1995 --------- --------- Expected life (years)........................................................... 5 5 Interest rate................................................................... 6.26% 5.83% Volatility...................................................................... 75% 75% Dividend yield.................................................................. 0.0% 0.0%
9. EMPLOYEE BENEFIT PLANS Effective January 1, 1990, the Company established the Biospherics Incorporated 401(k) Retirement Plan. The plan is a discretionary defined contribution plan and covers substantially all employees who have attained the age of 21, have completed 1 year of service, and have worked a minimum of 1,000 hours in the past Plan or anniversary year. Under provisions of the plan, the Company, for any plan year, has contributed an amount equal to 50% of the participant's contribution or 2 1/2% of the participant's eligible compensation, whichever is less. The Company may, at its own discretion, make additional matching contributions to participants. Company contributions, net of forfeitures, amounted to $51,843 in 1996 and $58,662 in 1995. 24 Biospherics Incorporated Notes to Financial Statements ----------------------------- 10. INFORMATION BY BUSINESS SEGMENT Financial information by business segment for the two years ended December 31, 1996 is summarized below.
YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) ------------------------ 1996 1995 --------- --------- Revenues Information Services Division $ 12,980 $ 13,715 BioTech Programs Unit 820 25 --------- --------- Total revenues $ 13,800 $ 13,740 --------- --------- --------- --------- Operating Profit and Information Services Division $ 204 $ 1,006 Income Before BioTech Programs Unit 175 (583) Income Taxes --------- --------- Total operating profit 379 423 Other income (expense) (87) 330 Interest expense (77) (212) --------- --------- Income (loss) from continuing operations before income taxes $ 215 $ 541 --------- --------- --------- --------- Identifiable assets Information Services Division $ 3,291 $ 3,168 BioTech Programs Unit 1,152 174 General corporate assets 1,158 1,181 Discontinued operations -- 711 --------- --------- Total assets $ 5,601 $ 5,234 --------- --------- --------- --------- Capital Expenditures Information Services Division $ 521 $ 382 BioTech Programs Unit 15 17 General corporate assets 285 67 Discontinued operations -- 3 --------- --------- Total assets $ 821 $ 469 --------- --------- --------- --------- Depreciation and Amortization Information Services Division $ 554 $ 292 BioTech Programs Unit 31 27 General corporate assets 153 56 Discontinued operations -- 46 --------- --------- Total depreciation and amortization $ 738 $ 421 --------- --------- --------- ---------
The Information Services Division ("ISD") provides computerized medical data collection and clinical trial management, report and publication writing and editing, development of programmatic concepts in public health information and education, database management, and computer-assisted health resource information. During 1996, government and commercial business accounted for approximately 57% and 43%, respectively, of ISD's business compared with 46% and 54%, respectively, in 1995. During 1996, the Company recognized revenue from two of its customers, Parke-Davis and Federal Information Center (FIC), representing 20% and 18%, respectively, of the total Company revenues. During 1995, the Company recognized 23% and 16% of its total revenues from Parke-Davis and FIC, respectively. The BioTech Programs Unit has invented and patented for the Company the use of D-tagatose and L-sugars as low-calorie sweeteners and has invented and patented safe-for-humans pesticides. The Company also has filed for patents on other inventions. The Company has recently signed an exclusive worldwide licensing agreement with MD Foods Ingredients amba of Denmark for the use, manufacture and sale of Biospherics' nonfattening sugar, D-tagatose, as a sweetener (see Note 7). Operating profit consists of revenue less operating expenses. In computing operating profit, interest expense, and income taxes were not deducted. As a result of the sale of ELSD, G&A expenses of $76,000 and $3,000 in 1996 that would have 25 Biospherics Incorporated Notes to Financial Statements ----------------------------- 10. INFORMATION BY BUSINESS SEGMENT (CONTINUED) been absorbed by ELSD, have been allocated to ISD and BioTech, respectively; and G&A expenses of $355,000 and $17,000 in 1995 previously absorbed by ELSD, have been allocated to ISD and BioTech, respectively. Identifiable assets by business segment are those assets used in the Company's operations in each segment, such as accounts receivable, inventories, fixed assets, and patent costs. Corporate assets are principally cash and certain other assets not related to a particular segment's operations. 11. SUBSEQUENT EVENT On February 18, 1997, the Board of Directors approved a plan to convert the Company's Information Services Division (ISD) into a wholly-owned subsidiary. The plan will be proposed to shareholders at the Company's May 15, 1997, Annual Meeting. The new company will continue all of the current ISD business and will feature an expansion of its healthcare business into demand management. The subsidiary will evaluate methods of increasing its capitalization, including a possible IPO in order to accelerate growth. Under the reorganization, ISD, which to date has funded all of the Company's nonfattening sugar (D-tagatose) development costs, will be free to concentrate on opportunities in its primary field, the healthcare market. With the recent worldwide licensing of D-tagatose to MD Foods Ingredients of Denmark, the Company has received funds that, together with anticipated continuing royalties, will allow it to continue to develop other proprietary products. 26 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Biospherics Incorporated We have audited the financial statements of Biospherics Incorporated listed in Item 7 of this Form 10-KSB. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Biospherics Incorporated as of December 31, 1996 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Baltimore, Maryland March 7, 1997 27 Biospherics Incorporated ----------------------------- ITEM 8. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Item 9 is hereby incorporated by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 1997. ITEM 10. EXECUTIVE COMPENSATION Item 10 is hereby incorporated by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 1997. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Item 11 is hereby incorporated by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 1997. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Item 12 is hereby incorporated by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission on or prior to April 30, 1997. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 1. EXHIBITS 3.0 Articles of Incorporation and Bylaws of the Company (incorporated by reference to the Company's Annual Proxy Statement of May 15, 1992, as filed with the Commission) 10.1 Supplemental Executive Retirement Plan Agreement dated as of February 17, 1993, by and between Gilbert V. Levin and the Company (incorporated by reference to Form 10-KSB filed March 31, 1993) 10.2 Supplemental Executive Retirement Plan Agreement dated as of February 17, 1993, by and between M. Karen Levin and the Company (incorporated by reference to Form 10-KSB filed March 31, 1993) 10.3 Consulting Agreement dated as of February 17, 1993, by and between Gilbert V. Levin and the Company (incorporated by reference to Form 10-KSB filed March 31, 1993) 10.4 Consulting Agreement dated as of February 17, 1993, by and between M. Karen Levin and the Company (incorporated by reference to Form 10-KSB filed March 31, 1993)
28 Biospherics Incorporated ----------------------------- 10.5 Employment Agreement dated as of November 17, 1995, by and between Gilbert V. Levin and the Company (incorporated by reference to Form 10-KSB filed March 31, 1996) 10.6 Restated Stock Redemption Agreement dated as of January 15, 1996, by and between Gilbert V. Levin, M. Karen Levin, and the Company (incorporated by reference to Form 10-KSB filed March 3, 1996) 10.7 Asset Purchase Agreement dated February 27, 1996, by and between the Company and ManTech Environmental Corporation (incorporated by reference to Form 10-KSB filed March 31, 1996) 10.8 Agreement and license between the Company and MD Foods Ingredients Ambra 11.0 Schedule showing computations of average number of common shares outstanding, as used in the calculations of per share earnings for each of the two years ended December 31, 1996. 23.1 Consent of Coopers & Lybrand L.L.P. 27.0 Financial Data Schedule (included only with electronic filing)
2. Reports on Form 8-K No reports on Form 8-K were required to be filed for the fourth quarter of the year ended December 31, 1996. 29 Biospherics Incorporated ----------------------------- Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Biospherics Incorporated Date: March 24, 1997 By: /s/ Richard C. Levin ------------------------------------- Richard C. Levin Vice President and Chief Operating Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE - - ------------------------------ ------------------- /s/ Gilbert V. Levin Chairman of the March 24, 1997 - - ---------------------------- Board, President Gilbert V. Levin and Treasurer /s/ M. Karen Levin Director, Vice President March 24, 1997 - - ---------------------------- for Communications, M. Karen Levin Secretary /s/ Lee R. Zehner - - ---------------------------- Vice President for Science March 24, 1997 Services Lee R. Zehner /s/ Lionel V. Baldwin Director March 24, 1997 - - ---------------------------- Lionel V. Baldwin /s/ David A. Blake Director March 24, 1997 - - ---------------------------- David A. Blake /s/ A. Bruce Cleveland Director March 24, 1997 - - ---------------------------- A. Bruce Cleveland /s/ George S. Jenkins Director March 24, 1997 - - ---------------------------- George S. Jenkins /s/ Anne S. MacLeod Director March 24, 1997 - - ---------------------------- Anne S. MacLeod /s/ Rita R. Colwell Director March 24, 1997 - - ---------------------------- Rita R. Colwell 30 EX-10.8 2 EX-10.8 A G R E E M E N T A N D L I C E N S E 10.8 THIS AGREEMENT AND LICENSE (this "Agreement") is made, as of the 27th day of September, 1996 (the "Effective Date") by and among Biospherics Incorporated, a corporation of the State of Delaware with offices located at 12051 Indian Creek Court, Beltsville, MD 20705, United States ("LICENSOR"), and MD Foods Ingredients amba, a corporation of Denmark with offices located at Skanderborgvej 277 8260 Viby J, Denmark, ("LICENSEE"). W I T N E S S E T H WHEREAS, LICENSOR owns certain Intellectual Property Rights (as hereinafter defined) relating to the Licensed Products (as hereinafter defined) and Licensed Process (as hereinafter defined); and WHEREAS, LICENSOR has the exclusive right to license the Intellectual Property Rights hereinafter described; and WHEREAS, LICENSEE desires to obtain from LICENSOR, and LICENSOR desires to grant to LICENSEE, an exclusive, worldwide License (as hereinafter defined) under the Intellectual Property Rights in respect to the Licensed Products, Licensed Use and Licensed Process on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual agreement so, representations, warranties and undertakings contained herein the parties hereto agree as follows: 1. DEFINITIONS (a) "Foodstuff" shall mean any material defined by the U.S, Food & Drug Administration (FDA) as a "food," including beverages other than "Soft Drinks" as herein defined, and not "drugs" as defined by the FDA* (b) "LICENSOR" shall mean Biospherics Incorporated and its Affiliated Entities. (c) "LICENSEE" shall mean MD Foods ingredients amba and its Affiliated Entities (d) "License" shall mean the license described in Section 2. (e) "Licensed Product(s)" shall mean D-tagatose in any form (i) for use in any Foodstuff, Soft Drink or Drug; or 3 (ii) any Foodstuff or Soft Drink containing D-tagatose whether or not the subject of any of the Patent Rights. (f) "Licensed Process" shall mean any process developed heretofore or hereinafter during the term of this Agreement, by or for the benefit of LICENSOR, for manufacturing D-tagatose for any Licensed Use or to make Licensed Product. (g) "Licensed Use" shall mean any use of D-tagatose as an ingredient in a Foodstuff or Soft Drink developed heretofore or hereinafter during the term of this Agreement, by or for the benefit of LICENSOR, whether or not the subject of any Patent Rights. (h) "Patent Rights" shall mean the patents and patent applications listed in Schedule A and all additional patents and patent applications, if any, which have been or may in the future be issued or filed by or on behalf of LICENSOR, (and/or its officers, and/or its directors and/or its employees) concerning the Licensed Product and/or Licensed Process and/or Licensed Use and all improvements, thereto, as well as all extensions, divisions, revalidations, reissuances, additions or other continuations or renewals thereof. (i) "Know-How" shall mean all of LICENSOR's know-how, improvements, formulas, methods, plans, processes, specifications, designs, experience, trade secrets, technology, techniques, documentation, drawings, writings, applications to the FDA or other governmental agencies reflecting the LICENSOR' s special ability, skill and knowledge relating to the Licensed Product and/or Licensed Process and/or Licensed Use and useful in the production, sale or use of D-Tagatose. (j) "Intellectual Property Rights" shall mean the Patent Rights and Know-How. (k) "Agreement" shall mean this document or any modifications, revisions or amendments thereof signed and executed by or on behalf of LICENSOR and LICENSEE after the date hereof but shall not include any agreements or understandings whether written or oral, entered into before the Effective Date. (1) "Drug" shall mean any material defined by the FDA as a "drug". (m) "Soft Drink" shall mean any non-alcoholic beverage marketed without health or medicinal claims, other than that the Soft Drink is "non-fattening," "reduced calorie" and/or "low calorie." (n) Net Sales" shall mean the gross amount invoiced by LICENSEE and any sublicensee of LICENSEE for quantities of Licensed Products actually shipped by LICENSEE and each sublicensee during the relevant quarter to 4 parties not Affiliated Entities of the shipper after deducting, to the extent actually incurred, shipping costs separately stated on the shipper's invoice, returns in the normal course of trade, and, to the extent separately stated on the invoice or other appropriate document, any customs fees, duties and sales, use, value added or similar taxes. For Internal Transfers of D-tagatose, the applicable Net Sales price shall be deemed to be 75% of the average sales price for D-tagatose sold in other than Internal Transfers in normal commercial quantities during the reporting calendar quarter. If no sales in normal commercial quantities of D-tagatose other than Internal Transfers have occurred during a quarter, the per pound value of D-tagatose, for the purpose of this definition, shall be equal to a Conventional Price, computed as follows: The Conventional Price shall be $1.70 per pound, plus or minus the amount determined by multiplying the percentage by which the "settle price" quoted for the next month's delivery of domestic sugar on the last business day of the reporting quarter, as published in the Wall Street Journal, varies from $0.21 per pound, provided that no adjustment to the price so made will exceed $0.34 per pound of D-tagatose. To the extent normal commercial quantities of D-tagatose are, in fact, sold and reported in other than Internal Transfers in the first of the two following reporting quarters after a Conventional Price was used to compute Net Sales, LICENSEE may retroactively adjust its royalty obligations and payments for the reporting quarter by using the later Internal Transfer price based on actual sales in lieu of the Conventional Price. (o) "Internal Transfer" shall mean a transfer of D-tagatose from one entity to an Affiliated Entity for use in making Licensed Product(s). (p) "Affiliated Entity" shall mean a person or company under the common control or ownership of another person or company, commonality being presumed from the ownership by one of 50% or more of the voting rights or other indicia of control of the other. (q) "Drug Use Licensee" shall mean an entity licensed by LICENSOR to make, have made, use and/or sell Licensed Products solely for use in or as a Drug. (r) "Selected Markets" shall mean any of the following geographic areas for the manufacture, sale or use of Licensed Products in or as Licensed Uses: (i) the United States (ii) the European Union (as constituted at the relevant time); (iii) Japan; and 5 (iv) the "Pacific Rim Countries" excluding Japan, but including Korea, Hong Kong, Singapore, China, Taiwan, Australia and New Zealand. (s) "Introduce" shall mean active initial marketing efforts in each Selected Market, including personal contact with, and the shipment to, no less than two potential commercial buyers or users of Licensed Product of sufficient samples of Licensed Product to enable the recipient to evaluate the Licensed Product for Licensed Use and to make a reasonable determination of its interest in buying and/or using commercial quantities of Licensed Product for Licensed Use in such Selected Market. 2. GRANT OF LICENSE 2.1 EXCLUSIVE LICENSE LICENSOR hereby grants to LICENSEE and LICENSEE hereby accepts, subject to all of the terms and conditions of this Agreement, an exclusive, worldwide license to use the Intellectual Property Rights (a) to manufacture and/or sell the Licensed Product and/or (b) to use the Licensed Product in a Licensed Use and/or (c) to practice the Licensed Process. 2.2 SUBLICENSES LICENSEE is expressly authorized to grant sublicenses under the Intellectual Property Rights licensed hereby, and undertakes to assure the full and punctual performance by each sublicensee of all obligations that protect LICENSOR's rights to receive royalties and/or maintain and enforce the Intellectual Property Rights. 2.3 KNOW HOW TRANSFER Upon the receipt by LICENSOR of the Initial Payment under Section 4.1 below, LICENSOR shall complete the transfer to LICENSEE of the Know How then in LICENSOR's custody or control within sixty (60) days of the Effective Date. 3. TERM The term of this Agreement shall run until five years after the expiration of the last to expire U.S. patent of the Patent Rights having claims covering the Licensed Product and/or Licensed Process and/or Licensed Use. After the expiration of this Agreement, pursuant to this Section 3, to the extent that any Patent Rights remain in force and effect in any jurisdiction, except as provided in Section 17.1, LICENSEE shall be deemed to have a fully paid, irrevocable royalty free exclusive license thereof for the remaining term of such Patent Rights. 6 4. PAYMENT FOR LICENSE 4.1 INITIAL PAYMENT LICENSEE shall pay to LICENSOR an initial payment of one million, five hundred thousand ($1,500,000) U.S. dollars ("Initial Payment"). One half of the Initial Payment shall be made on the Effective Date upon the complete execution of this Agreement. The other half of the Initial Payment shall be paid in LICENSEE's sole discretion no later than January 6, 1997. If LICENSEE fails or declines to make the payment of the second half portion of the Initial Payment, this Agreement and all other obligations of LICENSEE and LICENSOR shall terminate on January 7, 1997, but for the Confidentiality Disclosure Agreement of March 1996 which shall remain in effect for its full term. No portion of the Initial Payment paid to the LICENSOR shall be refundable, except (a) if LICENSEE declines to pay the second half of the Initial Payment based solely on LICENSOR's breach of its warranties given under Sections 6.1 and 6.2, the first half of the Initial Payment shall be refundable, and (b) if LICENSEE has paid the full Initial payment as set forth in Section 6.3. 4.2 RUNNING ROYALTY DURING PATENT TERM 4.2.1 Except as provided by other Sections of this Agreement, LICENSEE shall pay a running royalty on all of its and its sublicensees' Net Sales of D-tagatose that LICENSEE or its sublicensee has reason to believe will be used in or as a Foodstuff: (a) manufactured anywhere in the world by a process patented in the United States by a patent of the Patent Rights; and/or (b) used anywhere in the world and covered by a use claim of any patent of the Patent Rights. To the extent that any Net Sales of Licensed Product are made at a price per pound exceeding a Base Price equal to 2.5 times the average per pound Net Sales price of D-tagatose during the entire year (or fraction of the first and last years) preceding the reporting quarter ("Premium Sales"), LICENSEE shall pay an additional royalty on the Net Sales of all Licensed Product sold in such quarter as Premium Sales pursuant to the following schedule and apportioned 80% for the Use Patents and 20% for the Process Patents. Quantities of Licensed Product sold for use in Soft Drinks or drugs shall not be included in "Sales" for the purposes of Section 4.2.1. 4.2.2 Except as provided in other sections of this Agreement, LICENSEE shall pay a running royalty on all of its and its sublicensees' Net Sales of 7 D-tagatose the seller has reason to believe will be used in Soft Drinks (a) manufactured anywhere in the world by a process covered by a claim of any United Sates patent of the Patent Rights; and/or (b) covered by a use claim of any patent in the Patent Rights. Quantities of Licensed Product sold for use in Soft Drinks pursuant to this Subsection 4.2.2 shall not be included in determining the royalty rate due for other sales of Licensed Product pursuant to Subsection 4.2.1. 4.2.3 Only one royalty shall be due LICENSOR Under Section 4.2 regardless of whether the manufacture and use of D-tagatose are the subject of more than one patent of the Patent Rights in the same or different countries. 4.3 RUNNING ROYALTY AFTER PATENT TERM OF USE PATENT RIGHTS 4.3.1 (a) Upon the expiration of EP 257626 or any other European use patent that is subsequently added to the Patent Rights on the use of D-Tagatose and covers LICENSEE's use of Licensed Product in the European Union, should LICENSEE continue in the European union (as then constituted) to manufacture D-tagatose, but by a process that is not covered by any claim of any European patent of the Patent Rights, the running royalty for sales made within the European Union (as constituted at the time of such sale) shall continue for the remaining term of this Agreement from the later of the date of expiration of EP 257626 or any subsequent European use patent. The sale of any quantities of Licensed Product subject to royalty pursuant to this Section shall not be included in determining the royalty rate due for other sales of Licensed Product subject to royalty pursuant to this section shall not be included in determining the royalty rate due for other sales of Licensed Product pursuant to Section 4.2. (b) Upon the expiration of U.S. Patent 4,786,722 or any other U.S. patent that is subsequently added to the Patent Rights on use of D-tagatose, and covers LICENSEE's use of Licensed Product outside the European Union, (as constituted at the time of such use), should LICENSEE continue outside the European Union to manufacture D-tagatose, but by a process that is not covered by any claim of any United States patent of the Patent Rights, the running royalty for sales made outside the European Union (as constituted at the time of such sale) shall continue for the remaining term of this Agreement from the later of the date of expiration of U.S. Patent 4,786,722, or any subsequently added U.S. use patent. The sale of any quantities of Licensed Product subject to royalty pursuant to this Section shall not be included in determining the royalty rate due for other sales of Licensed Product pursuant to Section 4.2. 8 4.3.2 For the purpose of this Agreement, royalty shall be based on the location of the manufacturer regardless of the place where the Licensed Product may thereafter be sold, resold or used. 4.4 CONVERSION TO PAID-UP LICENSE Upon the completion of LICENSEE's obligations to pay royalty pursuant to Sections 4.2, 4.3 or 17.1, the License granted herein shall be deemed to be paid up and no further royalty shall be due LICENSOR, notwithstanding any remaining unexpired term in any jurisdiction of any patent of the Patent Rights. 4.5 PAYMENT OF ROYALTIES AND ROYALTY REPORTS 4.5.1 Royalties shall be paid, by wire transfer to LICENSOR, or its order on a calendar quarter basis, less any applicable taxes which LICENSEE is obligated to withhold, based on the Net Sales during such quarter. The burden and obligation to pay all taxes due on such royalty shall rest solely with LICENSOR but LICENSEE shall provide LICENSOR with evidence that withheld taxes have been duly and timely paid to the relevant authorities by LICENSEE. Royalties shall be paid in U.S. dollars ($US) . The exchange rate used to calculate royalties due to LICENSOR for sales made in currencies other than U.S. dollars, shall be the rate of exchange for U.S. dollars for such currency in fact used by LICENSEE to exchange such currency for U.S. dollars, or if payment has not been received and converted to U.S. dollars by the time a royalty report is due and/or royalty payments are remitted, the buying rate for U.S. dollars for such currency as published in the Wall Street Journal on the last business day of the calendar quarter in which such royalty accrued. LICENSEE may deduct from subsequent royalty payments amounts reported and paid for Net Sales that, in any of the following 12 quarters, reflect returned goods or failures for any other reason to receive payment for the Licensed Products sold. The deduction shall not exceed the amount actually paid in a prior remittance to LICENSOR. 4.5.2 Should LICENSEE elect to pay to LICENSOR the second half portion of the initial payment, then, at the same time as LICENSEE makes the payment of the second half portion of the initial payment, LICENSEE shall prepay royalties to LICENSOR in the non-refundable (except as set forth in section 6.3) sum of one million (US $1,000,000) dollars. LICENSEE shall be entitled to recoup the one million (US $1,000,000) dollars of prepaid royalties by withholding from LICENSOR and taking as a credit against the royalty due one half (1/2) of the royalty due LICENSOR pursuant to Section 4.2 until the one million (US $1,000,000) dollars is recouped. Should LICENSEE elect not to pay to LICENSOR the second half portion of the initial payment, then LICENSEE shall have no obligation to prepay any running royalty pursuant to this section 4.5.2. 9 4.5.3 For each calendar year quarter of this Agreement (or portion thereof during the first and last years) the royalty shall be paid no later than sixty days following the last day of such calendar quarter. Late payments will bear interest at 1% per month or fraction of a month. 4.5.4 With each royalty payment, LICENSEE will render to LICENSOR a written statement of account (hereinafter referred to as Royalty Report") in accordance with a form mutually agreed upon by LICENSOR and LICENSEE to be determined within ninety (90) days of the Effective Date, duly signed by a responsible officer of LICENSEE, giving full particulars regarding all Net Sales during the previous calendar quarter and the extent to which royalties are due after giving effect to any permitted deductions taken pursuant to this Agreement. 4.5.5 LICENSEE shall permit, at the request of LICENSOR, a certified public accountant, selected by LICENSOR, and to whom LICENSEE has no reasonable objection, to inspect and audit such books of account and other records as might be necessary to determine the correctness of any Royalty Report or payment made under this Agreement including the procedures pursuant to which LICENSEE monitors sublicense performance. The cost of such audit shall be borne by LICENSOR unless an error in LICENSOR's favor of greater than 10% is uncovered, in which case LICENSEE shall bear the cost of such audit, Any under or over payments shall be corrected within sixty days of being uncovered and bear interest at 8% per year from the date due to the date paid. 5. PATENT RIGHTS 5.1 With respect to the jurisdictions where applications for patents have been filed, or are to be filed in the future, LICENSOR shall bear the full cost and expense for the filing of, prosecution of and maintenance of the patents and patent applications comprising the Patent Rights, including, without limitation, taxes, maintenance fees, renewal fees, annuities, translations, filing fees and attorneys' and patent agent fees, during the term of this Agreement. LICENSOR agrees that it will apply for any new patents in at least those jurisdictions in which Patent Rights exist on the Effective Date of this Agreement, and in such additional jurisdictions as may then be agreed by LICENSOR and LICENSEE. 5.2 LICENSOR agrees to instruct its patent attorneys and agents in each jurisdiction where a patent has issued or is pending (now or in the future) to request LICENSEE to pay any filing, maintenance and renewal fees and the fees of attorneys, patent agents and translators in connection with the implementation of Section 5.1, and LICENSEE agrees to pay such amounts promptly when requested to do so. In the event any such fee is not timely paid by LICENSEE, LICENSOR may pay such fees. All amounts paid by LICENSEE may be deducted by LICENSEE from the next running royalty payment due to LICENSOR pursuant to Article 4. If all 10 payments made by LICENSEE hereunder are not recovered by LICENSEE prior to the termination or expiration of this Agreement, LICENSOR will refund to LICENSEE 100% of such unrecovered amount. 5.3 To the extent possible and practical, LICENSEE agrees to print or stamp the numbers of LICENSOR's Patent Rights for the appropriate jurisdiction or the words "patent pending" on the Licensed Product(s), as appropriate and to state that such Patent Rights are used "under license from Biospherics Incorporated, U.S.A." 6. LICENSOR'S WARRANTIES 6.1 LICENSOR represents and warrants that it holds all rights, title and interest in the Intellectual Property Rights as required to permit LICENSOR to enter into this Agreement and expressly warrants that LICENSOR is the sole owner of all Intellectual Property Rights licensed hereunder and that it is not bound by the terms of any agreement with any third party that prevents it from granting the licenses or meeting any of its other obligations of this Agreement, provided however, that such warranty does not extend to the agreements that are the subject of Section 8.4. 6.2 LICENSOR represents and warrants that, as of the Effective Date of this Agreement, it has delivered to LICENSEE all the documentation in LICENSOR's custody or control pertaining to D-tagatose for human consumption, including, but not limited to, materials to be submitted to the FDA to obtain approval of the use of D-tagatose as or in "food" as defined by the FDA. LICENSOR further warrants that it is not aware of any data not delivered to LICENSEE prior to the Effective Date indicating that D-tagatose is unsafe or inappropriate for human consumption. 6.3 LICENSOR acknowledges that the warranties and representations of this Section 6 are essential to LICENSEE's entry into this Agreement. Should any warranty or representation of this Section 6 be materially breached and should LICENSOR be unable or unwilling (a) to cure such breach within 60 days after notice from LICENSEE, and/or (b) to indemnify and hold harmless LICENSEE from any cost or damage actually incurred as a result of such breach. LICENSEE shall be entitled to terminate this Agreement and receive a refund of its payment pursuant to Section 4.1 and any portion of the royalty prepaid pursuant to section 4.5.2 that LICENSEE has not taken as a credit against actual royalties due. Unless LICENSEE notifies LICENSOR of its intention to invoke this provision within 60 days of its awareness of the alleged breach, LICENSEE will be deemed to waived its rights to terminate the Agreement and to receive a refund of the Initial Payment based on such alleged breach. 11 7. THIRD PARTY INFRINGEMENTS OF THE INTELLECTUAL PROPERTY RIGHTS 7.1 LICENSEE agrees to assist LICENSOR, as LICENSOR may request, in the procurement, maintenance and protection of LICENSOR's Intellectual Property Rights. 7.2 LICENSEE agrees to notify LICENSOR of any infringement of the Intellectual Property Rights by others which comes to LICENSEE's attention and to review with LICENSOR the details of any actions LICENSEE intends to take to abate such infringement. 7.3 Unless LICENSOR agrees to indemnify LICENSEE from the direct consequences of any such infringement or, itself, to take action to abate the infringement notified, LICENSEE may, at its sole expense and discretion bring whatever action it deems appropriate to abate such infringement of the Intellectual Property Rights, including the bringing of appropriate legal action. If necessary, LICENSEE may name LICENSOR as a party to any such legal action. LICENSOR may, at its election, join with LICENSEE in any such action and, should LICENSOR do so the parties shall share the cost of such action and share in any recovery in the same proportion as the actual out of pocket expense they incurred in prosecuting the action. Should LICENSOR decline to join in any such action, than LICENSOR shall have no obligation to bear any expense in connection with such action, shall not be entitled to any portion of the recovery, and shall not object to any settlement of such action that LICENSEE may accept. 7.4 Should LICENSEE refuse to take action to abate any third party infringement of the Intellectual Property Rights licensed herein, then LICENSOR may bring action in its own name (naming LICENSEE as a nominal party, if necessary) and at its own expense, in which case, LICENSOR shall be entitled to keep any recovery, LICENSEE shall not share in any recovery and LICENSEE shall not object to any settlement of such action that LICENSOR may accept, provided such settlement is not inconsistent with the exclusive licenses granted to LICENSEE in this Agreement. 7.5 Each party agrees to assist and fully cooperate with the other in the maintenance of any legal action taken under Article 7. 8. INDEMNIFICATIONS AND THIRD PARTY RIGHTS 8.l Except as pertains to infringement claims as set forth in Section 8.2, LICENSOR shall indemnify and hold LICENSEE harmless from and against any and all claims, damages, lawsuits, liabilities and expenses including reasonable attorneys, fees and costs arising out of or in connection with any claims that the products, processes and uses claimed in the Patent Rights or disclosed in the Know How inherently were the cause of the damage or injury on which the claim is based. 12 8.2 LICENSEE shall indemnify and hold harmless LICENSOR from and against any and all claims, damages, lawsuits, liabilities and expenses, including reasonable attorneys, fees and costs, arising out of claims, or in connection with any other claims, that the practice, manufacture, use or sale of the Licensed Product(s), Licensed Process or Licensed Use by LICENSEE or any sublicensee of LICENSEE were the cause of the damage or injury on which the claim is based, or that LICENSEE or any sublicensee failed to follow Good Manufacturing Practices or other standards applicable to its operations pursuant to this Agreement. 8.3 Although LICENSOR has no knowledge of patents or other bases on which any third parties may claim any activity of LICENSEE under this Agreement infringes such third party's rights, no warranty is provided that such third party rights do not exist or may not be asserted. In the event LICENSEE seeks to avoid, or a third party initiates, any claim or suit against LICENSEE, on the ground that LICENSEE's use of the Intellectual Property Rights constitutes an infringement or violation of any similar right of the third party, LICENSEE shall give LICENSOR prompt written notice of any such claim or suit and shall conduct the defense thereof at LICENSEE's expense. LICENSOR shall have the right to participate in the conduct of any such suit, defense or settlement through counsel of its own choosing and at its own expense. If LICENSEE agrees (after notice to LICENSOR) to pay any royalty or sum in settlement of such claims, LICENSEE shall be entitled to set off against the royalties otherwise due to LICENSOR under Article 4.2, up to 50% of the amounts paid or payable to such third party, provided however, that any such set off shall not reduce the future royalties due to LICENSOR by more than 50%. If LICENSEE is required by a court or arbitrator, despite objection, to pay any royalty or sum in settlement of such claim or suit, LICENSEE shall be entitled to set off against any royalties otherwise due to LICENSOR under Article 4.2, all amounts paid or payable to such third party, provided however, that any such set off shall not reduce the future royalties due to LICENSOR by more than 50%. Should such third party obtain an injunction preventing LICENSEE from continuing operations material to the overall objectives of this Agreement, LICENSEE may terminate this Agreement. 8.4 As LICENSOR believes its agreements with such parties have, as of the Effective Date, been terminated, LICENSOR shall indemnify and hold LICENSEE and its agents and distributors harmless from all loss, expense, damage and costs, including reasonable attorneys, fees, by reason of any claim or suit against LICENSEE, on the ground that LICENSEE's manufacture, sale or use of D-tagatose, in any territory violates agreements entered into prior to the Effective Date hereof ("Prior Agreements") between LICENSOR and Daley & Associates and PC Wickham Pty, Ltd., (collectively and individually referred to herein as "D&W") respectively of Walnut Hollow, California, MD 20619 and Launceston, Australia. To the extent LICENSEE is required (or agrees with LICENSOR's consent) to pay any amounts to D&W based on the Prior Agreements, LICENSEE shall be permitted to deduct any and all payments paid to D&W, dollar for dollar, against any future royalty to be paid by LICENSEE under this Agreement. If D&W initiates any legal 13 action against LICENSEE, its agents or distributors, based on the Prior Agreements, LICENSOR shall be permitted to control the conduct of such action and any settlement thereof. LICENSOR agrees to cooperate fully with LICENSEE in any effort by LICENSEE, such as seeking competent legal advice, to ascertain the extent of the rights, if any, of D&W under the Prior Agreements. 8.5 LICENSOR agrees that it will obtain and, for the life of this Agreement maintain, insurance covering its indemnification obligations under Sections 8.1 and 8.4. LICENSOR shall name LICENSEE as an additional insured of such insurance and shall provide LICENSEE with a copy of the insurance policy. LICENSOR's liability to LICENSEE pursuant to Sections 8.1 and 8.4 shall be limited to the face amount of said insurance policy which shall be no less than $25 million. 8.6 LICENSEE agrees that it will obtain and, for the life of this Agreement maintain, insurance covering its indemnification obligations under Section 8.2. LICENSEE shall name LICENSOR as an additional insured of such insurance. LICENSEE's liability to LICENSOR pursuant to Section 8.2 shall be limited to the face amount of said insurance policy which shall be no less than $25 million. 9. SUBLICENSEES LICENSEE shall have the right to grant sublicenses to third parties under such terms and conditions as it deems appropriate provided that each sublicensee's sales are reported to LICENSEE and accounted and paid for by LICENSEE as though they were the sales of LICENSEE for the purposes of this Agreement. Each sublicensee shall be required (a) to submit quarterly reports to LICENSEE reflecting its shipments of Licensed Products in a form adequate to protect LICENSOR's rights to royalties and, (b) to adhere to practices and policies appropriate for the maintenance and enforceability of the Intellectual Property Rights sublicensed. The sales of Licensed Product by any sublicensee shall be treated as if the sale were made by LICENSEE for purposes of calculating and paying the royalty due LICENSOR pursuant to Section 4.2. LICENSOR shall have no right to share in any initial payments received by LICENSEE for any such sublicenses. 10. TERMINATION AND REVERSION 10.1 LICENSOR may terminate this Agreement prior to its expiration if (a) LICENSEE is in material breach of this Agreement and has failed within 60 days of notice of such breach to cure the breach; 14 (b) LICENSEE is bankrupt, in receivership or otherwise operated under the supervision or control of a court or trustee; or (c) LICENSOR exercises its right to seek reversion of the Intellectual Property Rights under Section 10.2 below. 10.2 Should LICENSEE fail (a) to Introduce D-tagatose in each Selected Market for use in or as a Foodstuff within the later of three years after the Effective Date, or such date as sales of Licensed Product as a low calorie sweetener in such Selected Market are authorized; and (b) to achieve annual Net Sales of 10,000 metric tons in each of the United States and European Union within five years after the date on which sales of D-tagatose as a low calorie sweetener were first authorized in each such Selected Market then LICENSOR shall have the right, pursuant to Section 10.3, to reacquire the Intellectual Property Rights granted to LICENSEE, unless prior to the fifth anniversary date of the authorization to sell D-tagatose as or in Foodstuffs is effective in the United States or the European Union, whichever is later, LICENSEE has paid to LICENSOR royalties under Section 4.2, based on actual or presumed Net Sales in each such selected Market equal to aggregate Net Sales of 10,000 metric tons in each such Selected Market. For the purposes of subsection (a) of this section only, the Selected Market consisting of the "European Union" shall be limited to Germany, France and the United Kingdom, and the date in subsection (a) shall be the date on which authorization is obtained in the last of such countries. For the purposes of subsection (b) of this Section, the Net Sales to be achieved in the "European Union" shall be the cumulative sales within all countries of the European Union as constituted on the relevant date and made within the period beginning with the date in subsection (a). 10.3 In the event LICENSOR exercises its right to reacquire the Intellectual Property Rights, LICENSOR will: 10.3.1 Reacquire all rights to and under the Intellectual Property Rights licensed to LICENSEE pursuant to this Agreement, within 90 days after providing notice ("Reacquisition Notice") of its intention to reacquire such rights; 10.3.2 Direct LICENSEE to return or deliver to LICENSOR within 90 days after the Reacquisition Notice, all Know How and other confidential material furnished to LICENSEE, or to provide evidence acceptable to LICENSOR that, with the prior consent of LICENSOR, such materials were destroyed; 15 10.3.3 Undertake to pay to LICENSEE during the remaining years of this Agreement had it not been terminated, 10% of all royalties actually collected by LICENSOR during such remaining years; 10.3.4 Acquire an option to require LICENSEE immediately to assign to LICENSOR any and all patents, patent applications, unpatented know how, trademarks and copyrighted materials then in LICENSEE's ownership or control without obligations to third party, that claim rights to or describe D-tagatose products, uses or processes for making D-tagatose. If such option is exercised by LICENSOR, the percentage of royalty collections to be paid to LICENSEE under Section 10.3.3 shall be increased by 50% to a maximum of 15% of all royalties actually collected by LICENSOR. 11. EFFECT OF HOLDING OF INVALIDITY 11.1 Should a competent authority render a decision holding invalid any claim of EP 257626 or other European Use Patent Rights covering LICENSEE's or any sublicensee's then actual, use of D-tagatose, unless and until such decision is reversed by a higher authority, any royalties otherwise due LICENSOR pursuant the royalty rates set forth in Column 2 of Section 4.2 for Net Sales within the European Union (at that time) shall be placed in an interest-bearing escrow account in a bank and paid to LICENSOR only upon reversal of such holding. Should such holding not be reversed in a decision that is final or cannot be further appealed, then the funds held in escrow pursuant to this Section shall be returned to LICENSEE and from then forward the schedule of Section 4.2 for Net Sales in any country of the European Union (at the time of such sales) shall be reduced to 0% and the sale of any quantities of Licensed Product subject to such reduced royalty shall not be included in determining the royalty rate due pursuant to section 4.2 for sales countries other than the European Union. 11.2 Should a competent authority render a decision holding invalid any claim of JP 95075524 or any other Japanese Use Patent Rights covering LICENSEE's or any sublicensee's then actual use of D-tagatose, unless and until such decision is reversed by a higher authority, any royalties otherwise due LICENSOR pursuant to the royalty rates set forth in Column 2 of Section 4.2 under such Use Patent Rights for Net Sales in Japan shall be placed in an interest-bearing escrow account in a bank and paid to LICENSOR only upon reversal of such holding. Should such holding not be reversed in a decision that is final or cannot be further appealed, then the funds held in escrow pursuant to this Section shall be returned to LICENSEE and the royalty rates set forth in Column 2 of the schedule of Section 4.2 for Net sales in Japan shall be reduced to 0% and such sales of any quantities of Licensed Product subject to such reduced royalty shall not be included in determining the royalty rate due pursuant to Section 4.2 for sales in countries other than Japan. 16 11.3 Should a competent authority render a decision holding invalid any claim of US Patent 4,786,722 or any other U.S. Use Patent Rights covering LICENSEE's or any sublicensee's then actual use of D-tagatose, unless and until such decision is reversed by a higher authority, any royalties otherwise due LICENSOR pursuant to the royalty rate set forth in Column 2 of Section 4.2 under such Use Patent Rights for Net Sales in the United States and all other countries other than the other Selected markets shall be placed in an interest-bearing escrow account in a bank and paid to LICENSOR only upon reversal of such holding. Should such holding not be reversed in a decision that is final or cannot be further appealed, then the funds held in escrow pursuant to this Section shall be returned to LICENSEE and from then forward the royalty rates set forth in Column 2 of the schedule of Section 4.2 for Net Sales of Licensed Product in the United States and all other countries other than the other Selected Markets shall be reduced to 0% and such sales shall not be included in determining the royalty rate, due pursuant to Section 4.2 for sales in the other selected markets. 11.4 Should a competent authority render a decision holding invalid any claim of European Patent EP 518874 or other European process Patent Rights covering LICENSEE's or any sublicensee's then actual use of a process for making D-tagatose unless and until such decision is reversed by a higher authority, any royalties otherwise due LICENSOR for use of the process within the European Union (at that time) pursuant to the royalty rates set forth in Column 3 of Section 4.2 shall be placed in an interest-bearing escrow account in a bank and paid to LICENSOR only upon reversal of such holding. Should such holding not be reversed in a decision that is final or cannot be further appealed, then the funds held in escrow payment to this Section shall be returned to LICENSEE and from then forward the royalty rates set forth in Column 3 of the schedule of Section 4.2, for Net Sales of Licensed Product in any country of the European Union (at the time of such sale) shall be applied to 25% of the actual sales volume in the European Union. 11.5 Unless and until the Japanese Patent office issues a patent on Japanese patent application 5504256 on processes for making D-tagatose for purposes of determining the applicable royalty rate pursuant to Column 3 of the schedule of Section 4.2, sales of Licensed Product in Japan shall be considered to be 50% the actual sales volume, Should a competent authority render a decision holding invalid any claim of any such patent that issues on Japanese application 5504256 or other Japanese process Patent Rights covering LICENSEE's or any sublicensees then actual use of a process, unless and until such decision is reversed by a higher authority, any royalties otherwise due LICENSOR for use of the process within Japan pursuant Column 3 of the schedule for Section 4.2, for Net Sales in Japan, shall be placed in an interest-bearing escrow account in a bank and paid to LICENSOR only upon reversal of such holding. Should such holding not be reversed in a decision that is final or cannot be further 17 appealed, then the funds held in escrow pursuant to this Section shall be returned to LICENSEE and the royalty rates set forth in Column 3 of the schedule of Section 4.2. for Net Sales of Licensed Product in Japan shall be applied to 25% of the actual sales volume in Japan. 11.6 Should a competent authority render a decision holding invalid any claim of U.S. Patent 5,078,796 or 5,002,612 or other U.S. process Patent Rights covering LICENSEE's or any sublicensees then actual use of a process for making D-tagatose, unless and until such decision is reversed by a higher authority, any royalties otherwise due LICENSOR pursuant to Colilmn 3 of the schedules of Section 4.2 for Net Sales in the United States and all other countries other than the other Selected Markets, shall be placed in an interest-bearing escrow account in a bank and paid to LICENSOR only upon reversal of such holding. Should such holding not be reversed in a decision that is final or cannot be further appealed, then all funds held in escrow pursuant to this Section shall be returned to LICENSEE and from then forward the royalty rates set forth in Column 3 of the schedule of Section 4.2, for Net Sales of Licensed Product in the United States and all other countries other than the other Selected markets, shall be applied to 25% of the actual sales volume in the United States and all other countries other than the other Selected Markets. 11.7 Should competent authority, whose decision may not be further appealed, in the European union, Japan or the United States hold invalid the claims of all use and process Patent Rights covering LICENSEE's and any sublicensee's then actual use of D-tagatose and then actual use of a process for making D-tagatose in the territory concerned, then all royalties under Section 4.2 for Net Sales in such territory shall be reduced to 0% and such Net Sales shall not be included in determining the royalty rate due pursuant to Section 4.2 for sales in other countries. If royalties are reduced to 0% in all such territories, no further running royalties will be due for Net Sales in any country. 12. ARBITRATION Any and all disputes concerning the negotiation, interpretation, performance or termination of this Agreement, shall be resolved through amicable discussion between the parties. Failing resolution of the disputed issue(s) in such discussions within 30 days after initiation of such discussions, either party may refer such disputed issue(s) for final and exclusive resolution by binding arbitration, conducted in the English language, pursuant to the then existing International Arbitration Rules of the American Arbitration Association. The arbitration shall be conducted by a single arbitrator, who shall be a lawyer familiar with technology development and transfer issues, and shall be held, absent agreement otherwise, in Copenhagen, Denmark. The parties shall cooperate in the expeditious and economical conduct of the proceedings by, inter alia, (a) promptly producing for examination by the other party's counsel all records and other evidence and all personnel reasonably requested and, if necessary, determined by the arbitrator to be relevant to the controversy, and (b) conducting the proceedings before the arbitrator on consecutive days. Any party may apply to a court of competent jurisdiction for injunctive relief or 18 other interim measures to maintain the status quo pending arbitration or rulings of the arbitrator, or in aid of the provisions of this arbitration agreement, but not otherwise, which application shall not be deemed incompatible with, or a waiver of, this agreement to arbitrate. In making an award, the arbitrator shall be guided by, in descending priority, the terms of this Agreement, the usages of the trade in the place where the party charged with an act or failure to act is principally located, and by what the arbitrator deems just and equitable under the circumstances without binding reference to the law of any Jurisdiction. The award of the arbitrator shall be in writing, providing the reasons for the award, final and binding and not subject to judicial review. Enforcement of the award may be sought in any court of competent jurisdiction over the parties or their assets, The costs of the arbitration shall be apportioned as the arbitrator directs. 13. D-TAGATOSE FOR DRUG USE 13.1 LICENSE TO MANUFACTURE LICENSED PRODUCT FOR DRUG USE The License granted herein gives LICENSEE the exclusive right (subject to section 13.3) to manufacture (and/or sublicense others to manufacture) Licensed Product for sale to third parties licensed by LICENSOR to sell or use Licensed Product in or as a Drug, or to fourth parties to sell Licensed Product to parties licensed to use such Licensed Product in or as a Drug (collectively "Drug Use Licensees"). 13.2 RIGHT TO SELL LICENSED PRODUCT FOR DRUG USE The License granted herein gives no right to LICENSEE to sell Licensed Product for Drug use except as specifically set forth in Section 13.1. 13.3 SPECIAL ROYALTY RELATING TO LICENSED PRODUCT FOR DRUG USE In the event LICENSOR seeks to make Licensed Product available to a Drug Use Licensee or to license a Drug Use Licensee, LICENSEE may (but has no obligation to), sell Licensed Product to LICENSOR or such third party, or grant a sublicense to a fourth party to manufacture Licensed Product and to sell Licensed Product to another Drug Use Licensee. Royalty on Licensed Product for Drug use provided by LICENSEE or a sublicensee of LICENSEE to LICENSOR or to a Drug Use Licensee shall be calculated and shared only in accordance with the provisions of this Article 13, and not in accordance with any other provision of this Agreement. 19 13.3 (a) LICENSED PRODUCT FOR DRUG USE MANUFACTURED BY LICENSEE AND SOLD TO DRUG USE LICENSEES The sale of Licensed Product to be used in and/or as a Drug By LICENSEE to LICENSOR or a Drug Use Licensee shall be royalty free. LICENSEE shall not share in any royalty received by LICENSOR from any such Drug Use Licensee if such Drug Use Licensee purchases the Licensed Product from LICENSEE. LICENSEE shall be free to negotiate for the sale of Licensed Product to any Drug Use Licensee under terms and conditions as it deems in its own best interests without regard for, or consideration of, LICENSOR's interests. 13.3 (b) LICENSED PRODUCT FOR DRUG USE NOT MANUFACTURED BY LICENSEE OR SOLD TO LICENSOR In the event LICENSEE refuses to sell Licensed Product to be used in and/or as a Drug to LICENSOR or a Drug use Licensee where requested by LICENSOR, LICENSEE shall sell Licensed Product to LICENSOR or LICENSOR'S order for the use of the Drug Use Licensee, or itself grant or permit LICENSOR to grant a sublicense to enable the Drug Use Licensee to make or have made Licensed Product for such sublicensee's own Drug use. If LICENSEE negotiates a sublicense to manufacture License Product, it may do so under terms and conditions as it deems appropriate in consideration of LICENSOR's interests in a reliable supply of Licensed Product for Drug use. If, after 180 days of a request for a sublicense, none is granted, LICENSOR may either (a) buy from LICENSEE and LICENSEE shall sell Licensed Products to be delivered to the Drug Use Licensee solely for Drug use, at a price equal to the average price per pound of all Net Sales by LICENSEE used to compute the royalty due under Section 4.2.1, during the prior calendar year (or part of the first year) plus an appropriate mark up to reflect LICENSEE's extra costs, if any, in supplying the Licensed Product for drug use; (b) if the Drug Use Licensee declines to buy the Licensed Product at the price so offered, or LICENSEE is unable or unwilling to sell the Licensed Product at such price, LICENSOR may grant a License to the Drug Use Licensee to make or have made Licensed Product solely for its use in or as a Drug on such terms and conditions as LICENSOR deems appropriate, and LICENSEE will take to action to prevent such manufacture or use of Licensed Product, No royalty shall be due to LICENSOR from LICENSEE for Licensed Product manufactured by or for a Drug Use Licensee or sold to LICENSOR hereunder. Any running royalty obtained by LICENSOR from a Drug Use Licensee for use of Licensed Product in or as a Drug, unless LICENSEE has supplied the Licensed Product, shall be shared equally between LICENSOR and LICENSEE. That is, it is the intent of this section that LICENSEE shall not be entitled to share in royalty income derived by LICENSOR from sales of Licensed Product sold to a Drug Use Licensee for Drug use if the Licensed Product was manufactured by LICENSEE, 20 but to share equally with LICENSOR any running royalty income derived by LICENSOR from sales of Licensed Product sold to a Drug Use Licensee if the Licensed Product was not manufactured by LICENSEE. LICENSOR shall be free to negotiate the terms and conditions of any license to a Drug Use Licensee to sell Licensed Product for Drug use as it deems in its own best interests, without regard for, or in consideration of, LICENSEE's interests except that if a running royalty which LICENSEE is entitled to share with LICENSOR, pursuant to this Section, is less than 8%, then LICENSEE shall be entitled to receive 75% of the royalty actually received, until LICENSEE has thereby recovered 50% of any initial lump sum payment received by LICENSOR and 50% of any running royalties received, whereafter all further running royalties will be shared equally. 14. CONFIDENTIAL INFORMATION Except as otherwise expressly authorized by this Agreement, LICENSOR and its Affiliated Entities, and LICENSEE, its Affiliated Entities and sublicensees, shall keep completely confidential, and solely use as necessary or appropriate to perform the purposes of this Agreement, any proprietary or confidential information furnished to the recipient by the other, expressly including the Know How. The restriction contained herein shall not apply to any information that the party claiming such exclusion can prove: (a) Was already known to the receiving party as shown by documentary evidence (other than through the wrongful act or omission of the receiving party or of a third party) at the time of its disclosure by the other party; (b) was generally available to the public or otherwise part of the public domain (other than through the wrongful act or omission of the receiving party or of a third party) at the time of its disclosure to the receiving party; (c) Becomes generally available to the public or otherwise part of the public domain (other than through the wrongful act or omission of the receiving party or of a third party) after its disclosure to the receiving party; (d) Is subsequently disclosed to the receiving party by a person not a party to this Agreement who has a lawful right to disclose such information to others; or (e) was independently developed by the receiving party or employees or agents of the receiving party without direct or indirect reference to, knowledge of, or access to, the disclosed information, as shown by documentary evidence. 15. FORCE MAJEURE Notwithstanding anything in this Agreement to the contrary, LICENSOR and LICENSEE shall not be deemed in default with respect to the performance of any 21 of the terms, covenants and conditions of this Agreement (except for obligations for payment of money) if such failure to perform such terms, covenants and conditions is due to any strike, lockout, labor dispute, civil commotion, war-like operation, invasion, rebellion, hostility, military or usurped power, sabotage, failure of power, inability to obtain any materials or services, Act of God, death, disability, fire or other casualty or other cause, whether similar or dissimilar to those enumerated in this Section 15, which is beyond the reasonable control of the party claiming such disability. 16. NON-COMPETITION 16.1 During the term of this Agreement, LICENSOR shall not, itself, nor directly or indirectly aid or assist any other person in the development, manufacture, sale, use, design, distribution, marketing, promotion or acquisition of any product or process directly competitive with Licensed Products, Licensed Processes or Licensed Uses, provided, however, that nothing contained herein shall prevent LICENSOR's (a) independent research and pre-market development in any field and/or (b) any activities of LICENSOR regarding L-sugars to the extent such activities are inapplicable to the use of L-sugars as a low calorie sweetener. 16.2 If LICENSOR terminates this Agreement pursuant to Article 10, LICENSEE shall not for a period of five years following such termination itself engage, nor directly or indirectly aid or assist any other person engaged in the development of any product or process, manufacture, sale, use, design, distribution, marketing, promotion or acquisition of Licensed Products, Licensed Processes or Licensed Uses, provided however, nothing contained herein shall prevent LICENSEE from divesting itself of any of the tangible and/or intangible assets it may own or control after termination that relate to its operations under this Agreement. 17. FUTURE DEVELOPMENTS 17.1 LICENSOR specifically acknowledges that any future developments that it makes during the term of this Agreement relating to the manufacture and use of D-tagatose shall fall within this Agreement, Should LICENSOR obtain any new patent covering a specific new use of D-tagatose that is otherwise licensed under this Agreement, upon expiration of this Agreement pursuant to Article 3, unless LICENSEE is practicing a process claimed in the Patent Rights, the only royalty that shall be due LICENSOR under this Agreement shall be for Licensed Product sold by LICENSEE for the specific new use in any jurisdiction where such new patent issued, and the term of the Agreement shall be extended in such jurisdiction until the expiration of such new use patent. The remaining royalty for such use shall be 1% of Net Sales for Licensed Product in or for use in such jurisdiction. 22 17.2 Nothing in this Agreement shall be construed in any way as a constraint on LICENSEE's right to develop new processes for the production of Licensed Product or new uses for Licensed Product. Any such development by LICENSEE and any patents that LICENSEE may obtain thereon shall be the sole property of LICENSEE and LICENSOR shall have no rights therein by virtue of any provision of this Agreement other than pursuant to Section 10.3.4. 18. FUTURE COOPERATION 18.1 Pursuant to a separate agreement to be negotiated and concluded by LICENSOR and LICENSEE immediately following the Effective Date, LICENSEE agrees to fund at a level of approximately $250,000 per year for two years studies to be undertaken by LICENSOR to aid in the commercialization of the use of D-tagatose. 18.2 LICENSOR and LICENSEE agree to establish a D-tagatose advisory committee consisting of three representatives of LICENSEE and one representative of LICENSOR. The committee shall meet at least once every four months. The meetings shall be held where designated by LICENSEE except that every fourth meeting shall be held where designated by LICENSOR. The committee shall render a report to the management of LICENSOR and LICENSEE following each meeting and shall indicate the portions of the report that may be publically disclosed. The advisory committee shall (1) review results since the last meeting regarding technical, regulatory, marketing, sales, facility schedules and special problems; (2) review LICENSEE's projections for D-tagatose for the next four month period with regard to technical, regulatory, marketing, sales, facility schedules and special problems; and (3) make recommendations as to (1) and (2), The advisory committee is advisory only and its recommendations are non-binding. 19. NABISCO LICENSOR has had discussions with NABISCO regarding NABISCO's desire to use Licensed Product in certain specific food products. In consideration of LICENSOR's work with NABISCO, if, before April 30, 1998, NABISCO enters into a sublicense agreement with LICENSEE under the Patent Rights, LICENSEE and LICENSOR agree to equally share any initial payment made by NABISCO for such sublicense and any such initial payment provision of a sublicense with NABISCO shall require the approval of both LICENSOR and LICENSEE. Any sublicense granted to NABISCO after May 1, 1998 shall be treated as any other sublicense granted by LICENSEE and LICENSOR shall have no right to share in any payments thereunder except as provided in Section 9. LICENSOR acknowledges that NABISCO presents a special situation that is not to be used as a precedent with regard to any other sublicensee. 23 20. MISCELLANEOUS 20.1 NO AGENCY Neither LICENSOR nor LICENSEE shall act or hold itself out as the agent, partner or joint venturer of or pledge the credit of the other. 20.2 ASSIGNMENT Neither LICENSOR nor LICENSEE may assign this Agreement or any of the rights granted hereunder to other than Affiliated Entities without the prior written consent of the other, Such consent shall not be withheld, except for good cause. If such assignment is as part of a transfer of all of the prospective Assignor's business or of that portion of the respective assignor's business pertaining to the production, use or sale of Licensed Products or Licensed Processes, no consent shall be required, unless such prospective assignment by LICENSEE predates LICENSOR's reversion rights under Section 10.2. Prior to the date such reversion may be exercised, LICENSOR's consent shall be required, but will not be withheld except for good cause. 20.3 NOTICES All notices and writings to be given, shall be in writing by telefax or airmail, addressed to the respective parties as set forth herein, unless notification of a change of address is given in writing. The date of dispatch shall be deemed the date the notice or writing is given, but it shall be the burden of the sender to prove receipts unless and until changed, all notices and writings shall be addressed to the attention of: TO LICENSEE: TO LICENSOR: Managing Director President MD Foods Ingredients amba Biospherics Incorporated Skanderborgvej 277 12051 Indian Creek Court 8260 Viby J Beltsville, MD 20705 DENMARK USA Telefax: (011-45) 86-28-18-38 Telefax: (301) 210-4908 Telephone: (011-45) 89-38-10-00 Telephone: (301) 419-3900 20.4 WAIVERS, MODIFICATION AND ENTIRE AGREEMENT This Agreement consists of this license of 23 pages and its attached Schedule A. None of the terms of this Agreement can be waived or modified except by an express further agreement in writing signed by both parties. There are no representations, promises, warranties, covenants, or undertakings other than those contained in this Agreements which represents the entire understanding of 24 the parties. The failure of either party to enforce, or the delay by either party in enforcing, any of its rights under this Agreement shall not be deemed a continuing waiver or a modification thereof and either party may, within the time provided by applicable law, commence appropriate dispute resolution provisions in this Agreement to enforce any or all of such rights. 20.5 SEVERABILITY Except as otherwise provided in this Agreement, if any provision of this Agreement is declared invalid or illegal or unenforceable by an arbitrator or a court of competent jurisdiction, the parties will determine within 60 days after the final determination by such arbitrator or unappealable court judgment whether the remaining provisions of this Agreement provide an adequate basis for continuing their relationship. 20.6 SURVIVAL Notwithstanding any termination or expiration of this Agreement, the following provisions shall survive with respect to any matter arising out of or related to the Agreement during its term: Article 3. Term (and post-term license). Section 4.5.5 Audit of records. Section 5.2 Refund of patent costs. Section 6.3 Indemnification for breach of warranty. Section 7.3 Cost sharing of infringement actions. Section 8.1 Indemnifications for tort claims. Section 8.2 Section 8.4 Indemnity for certain contract claims. Article 12 Arbitration. Article 14 Confidential Information. Section 16.2 Non-competition. Section 20.4 Waiver. Section 20.6 Survival. IN WITNESS WHEREOF the parties hereto have caused this instrument to be duly executed as of the day and year first above written. MD Foods Ingredients amba Biospherics Incorporated By: ____________________ By: _____________________ Name: Peter Lauritzen Name: Gilbert V. Levin ------------------ -------------------- Title: Managing Director Title: President/CEO ------------------- ------------------- EX-11 3 EX-11 Biospherics Incorporated ------------ Exhibit 11 Statement of computations of earnings per common share
YEARS ENDED DECEMBER 31, ------------------------ 1996 1995 ---------- ---------- Net income (loss) From continuing operations........................................ $ 126,566 $ 426,843 From discontinued operations...................................... (57,576) (32,549) ---------- ---------- Net income........................................................ $ 68,990 $ 394,294 ---------- ---------- ---------- ---------- Weighted average shares outstanding................................. 7,883,060 7,829,792 Common stock equivalents............................................ 1,877,763 1,634,157 ---------- ---------- Weighted average shares and common stock equivalents outstanding..................................... 9,760,823 9,463,949 ---------- ---------- ---------- ---------- Primary and fully diluted earnings (loss) per share From continuing operations........................................ $ 0.01 $ 0.05 From discontinued operations...................................... -- (0.01) ---------- ---------- Net income........................................................ $ 0.01 $ 0.04 ---------- ---------- ---------- ----------
-30- EX-23.1 4 EX-23.1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Biospherics Incorporated on Form S-8 (File No. 333-01005) of our report dated March 7, 1997, on our audits of the financial statements of Biospherics Incorporated as of and for each of the two years in the period ended December 31, 1996, which report is included in this Annual Report on Form 10-KSB. COOPERS & LYBRAND L.L.P. Baltimore, Maryland March 31, 1997 -33- EX-27 5 EX-27
5 0000012239 NONE 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 796,113 0 2,070,932 (54,808) 0 3,774,760 2,761,643 (1,111,778) 5,600,910 2,337,936 0 0 0 23,690 1,215,516 5,600,910 13,050,385 13,800,385 9,605,805 13,421,352 87,256 0 77,159 214,618 88,052 126,566 57,576 0 0 68,990 .01 .01
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