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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
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(Name of small business issuer in its charter)
Delaware 52-0849320
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12051 Indian Creek Court, Beltsville, Maryland 20705
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(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
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock ($.005 par value per share)
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(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
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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
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Page 1 of 33
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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
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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.
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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.
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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-
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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):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
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<S> <C> <C> <C> <C> <C> <C>
CURRENT LONG-TERM TOTAL CURRENT LONG-TERM TOTAL
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Information Services................................... $ 12,429 $ 16,504 $ 28,933 $ 10,693 $ 21,248 $ 31,941
BioTech Programs Unit.................................. 1,105 1,232 2,337 -- -- --
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$ 13,534 $ 17,736 $ 31,270 $ 10,693 $ 21,248 $ 31,941
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</TABLE>
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.
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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.
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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
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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.
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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
<PAGE>
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
<PAGE>
BIOSPHERICS INCORPORATED
--------------
ITEM 7. FINANCIAL STATEMENTS
Financial statements and supplementary data required by this Item 7 follow.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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
</TABLE>
-11-
<PAGE>
BIOSPHERICS INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
-12-
<PAGE>
BIOSPHERICS INCORPORATED
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
See notes to financial statements.
-13-
<PAGE>
BIOSPHERICS INCORPORATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PAID-IN
CAPITAL IN
COMMON EXCESS OF TREASURY RETAINED STOCKHOLDERS'
STOCK PAR STOCK EARNINGS EQUITY
--------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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
--------- ------------ ----------- ------------ ------------
--------- ------------ ----------- ------------ ------------
</TABLE>
See notes to financial statements.
-14-
<PAGE>
BIOSPHERICS INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
<S> <C> <C>
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
</TABLE>
See notes to financial statements.
-15-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
AMOUNT ESTIMATED LIFE
------------ ---------------
<S> <C> <C>
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
------------
------------
</TABLE>
-18-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
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
--------- ----------
--------- ----------
</TABLE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995
Weighted Weighted
Average Average
1996 Exercise 1995 Exercise
Shares Price Shares Price
-------------- -------- -------------- --------
<S> <C> <C> <C> <C>
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
</TABLE>
The following table summarizes information about fixed price stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
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
- - ------------- ----------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$ 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
- - ------------- ---------- ---------
- - ------------- ---------- ---------
</TABLE>
- - ------------------------
(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:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C>
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)
</TABLE>
23
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Expected life (years)........................................................... 5 5
Interest rate................................................................... 6.26% 5.83%
Volatility...................................................................... 75% 75%
Dividend yield.................................................................. 0.0% 0.0%
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
------------------------
1996 1995
--------- ---------
<S> <C> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<C> <S>
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)
</TABLE>
28
<PAGE>
Biospherics Incorporated
-----------------------------
<TABLE>
<S> <C>
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)
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
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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.
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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.
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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
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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.
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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.
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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
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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;
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(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;
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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.
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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
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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
<PAGE>
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.
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<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
------------------- -------------------
<PAGE>
Biospherics Incorporated
------------
Exhibit 11
Statement of computations of earnings per common share
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
-30-
<PAGE>
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-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000012239
<NAME> NONE
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 796,113
<SECURITIES> 0
<RECEIVABLES> 2,070,932
<ALLOWANCES> (54,808)
<INVENTORY> 0
<CURRENT-ASSETS> 3,774,760
<PP&E> 2,761,643
<DEPRECIATION> (1,111,778)
<TOTAL-ASSETS> 5,600,910
<CURRENT-LIABILITIES> 2,337,936
<BONDS> 0
0
0
<COMMON> 23,690
<OTHER-SE> 1,215,516
<TOTAL-LIABILITY-AND-EQUITY> 5,600,910
<SALES> 13,050,385
<TOTAL-REVENUES> 13,800,385
<CGS> 9,605,805
<TOTAL-COSTS> 13,421,352
<OTHER-EXPENSES> 87,256
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,159
<INCOME-PRETAX> 214,618
<INCOME-TAX> 88,052
<INCOME-CONTINUING> 126,566
<DISCONTINUED> 57,576
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,990
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
