To Our Shareholders:
I would like to thank your Board of Directors for offering to me the position
of Chief Executive Officer which I accepted in January 1996. Their
commitment, the employees' abilities and dedication and the Company's
opportunities made my decision easy.
The Company has continued to focus all of its resources on AstaXin , the
natural colorant from Phaffia yeast whose market is the pigmentation of farm
raised salmon, trout, sea bream and related fish. Research and development
efforts continue to focus on selection of new yeast strains with higher levels
of pigmentation and adaptation of these strains to commercial sized production
equipment. In the last several months alone, the research and development
team has made a major advance in the productivity of the yeast strains
and I am happy to report an extraordinary improvement in both the quality of
the final product and the projected commercial cost. With these improvements
the Company is in a much better position to find the right manufacturing
partner with the aim of bringing the product to market as immediately as
possible.
Emphasis on AstaXin and a shortage of cash have necessitated a minimal effort
on the marketing of ClandoSan with a resultant decline in 1995 sales.
Feedback from existing customers and the positive studies performed by the
University of Maryland certainly justify a renewed effort on this product when
finances permit.
Although we continue to improve our technical expertise and performance your
management team is focused on the rapid commercialization of AstaXin and the
growth of ClandoSan . We are dedicated to the generation of both sales and
profits based on these two exciting products. Unfortunately, we have again
had to rely on our non-management Directors to finance the Company. We thank
them for their financial support and as important, thank them for their
interest, their counsel and their wisdom.
We also thank you, our shareholders, for your support through these difficult
times. We remain committed to the success of your Company.
Sincerely,
/s/ Dexter W. Gaston
Chief Executive Officer
September 30, 1996
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
IGENE Biotechnology, Inc. ("The Company") is engaged in the business of
industrial microbiology and related biotechnologies. The Company was formed
on October 27, 1981 to develop, produce and market value-added specialty
biochemical products derived from abundant, inexpensive and renewable
agricultural residues and wastes through the use of state-of-the-art
fermentation technology, physical and chemical separation technology, and
related chemical and biochemical engineering technologies.
The Company has devoted its resources to the development of proprietary
processes to convert selected agricultural raw materials or feedstocks into
commercially useful and cost effective specialty biochemical products for the
food, feed, flavor and agrichemical industries. In developing these processes
and products, the Company has relied on the expertise and skills of its
in-house scientific staff and, for special projects, various consultants.
The Company has no manufacturing facilities other than its pilot plant
facility in Columbia, Maryland. To date, the Company has either licensed its
products to third-party manufacturers or joint venture partners.
Government Regulation
The manufacturing and marketing of most of the products the Company has
developed are and will likely continue to be subject to regulation by various
governmental agencies in the United States, including the Food and Drug
Administration ("FDA"), the Department of Agriculture ("USDA"), and the
Environmental Protection Agency ("EPA"), and comparable agencies in other
countries. Substantially all of the food products developed by the Company to
date have been reviewed by a panel of independent scientific experts (the
"Product Review Panel") who are qualified by scientific training and
experience to evaluate, among other things, the safety of ingredients intended
to be used directly or indirectly in foods. The Product Review Panel has
advised the Company that it considers such products to be Generally Recognized
As Safe ("GRAS") under the regulations of the FDA. The Company is not aware
of any action by the FDA, the USDA or the EPA contesting these affirmations or
of any basis for their doing so. There can be no assurance, however, that
such independent expert evaluations will be accepted by the FDA, the USDA or
the EPA and that the Company will not be required to obtain costly and
time-consuming approvals from these agencies or comparable agencies in foreign
countries. The Company, as a matter of policy, requires that its products
conform to current Good Manufacturing Practices (as defined under the Federal
Food, Drug and Cosmetic Act and the rules and regulations thereunder) and the
Company believes all of its products so conform. The extent of any adverse
governmental regulation that might arise from future administrative or
legislative action, including current rules and regulations pertaining to the
process of GRAS affirmations, cannot be predicted.
Research and Development
As of December 31, 1995, the Company had expended approximately
$9,900,000 on research and development since its inception on October 27, 1981
and has, as of December 31, 1995, received revenues from product sales of
approximately $1,738,000 from the proprietary processes resulting from such
research and development, excluding one-time license fees received in 1982 and
1985. The Company will continue to incur research and development costs in
connection with improvements in its existing processes and products, but it
does not anticipate development of new processes and products in 1996.
The Company's research and development activities have resulted in the
development of processes to produce the products hereinafter discussed.
Commercial Products
1. AstaXin
AstaXin is the Company's tradename for its dried yeast product made from
a proprietary microorganism developed by the Company. AstaXin is a natural
source of astaxanthin, a pigment which imparts the characteristic red color to
the flesh of salmon, trout, and prawns. In the ocean, salmon and trout
obtain astaxanthin from krill and other planktonic crustaceans in their diet.
A crustacean diet would be prohibitively expensive for farm raised salmonids;
without the addition of astaxanthin, the flesh of such fish is a pale,
off-white color which is less appealing to consumers expecting
"salmon-colored" fish. Efficacy of AstaXin has been demonstrated by fish
feeding trials in Europe, Asia, and North and South America. An
estimated 285,000 metric tons of farm raised salmon are produced annually
worldwide.
In 1991 the Company entered into a business arrangement with Lefersa
Alimentos, S.A., ("Lefersa") in Chile to manufacture AstaXin on a
non-exclusive basis. During 1991, Lefersa experienced manufacturing
problems attributed to microbial contamination which delayed Scale-Up and
commercial production. During 1992, Lefersa discontinued further attempts to
manufacture AstaXin . The Company has produced ton quantities of the product
on a limited basis for evaluation and testing purposes at a contract
manufacturing facility in Michigan.
During 1993, commercial quantities of AstaXin were manufactured by the
Fleischmann's Yeast Division of Burns Philp Food Inc. under contract as part
of a Technology License Agreement. On October 5, 1993, Burns Philp informed
the Company that it would no longer manufacture AstaXin .
During 1994 commercial quantities of AstaXin were manufactured by
Pfizer Inc for testing purposes as part of a Technology Evaluation Agreement.
Pfizer did not commit to any long-term manufacture of the product and the
Agreement was terminated in July 1995.
In 1995 the Company signed a nonexclusive licensing Agreement with Archer
Daniels Midland Company for manufacture and sale of AstaXin . The Agreement
provided for an initial payment and royalties based on sales. On February
29, 1996 Archer Daniels Midland Company informed IGENE that it would no longer
use IGENE's astaxanthin technology and terminated the licensing agreement.
The Company is in contact with other potential manufacturers for the product.
2. Crustacean Shell Products
ClandoSan is the Company's registered trademark for its natural
nematicide made from crab and crawfish exoskeletons and processed into pellets
or granules by patented and patent pending technology developed by the
Company. The product acts in soils as a biological control agent by
stimulating the growth of normal soil microorganisms which produce chitinase
and other enzymes that degrade chitin present in the cuticles and eggs of
plant-pathogenic nematodes. It has secondary effects as a slow release
organic fertilizer. ClandoSan does not have a direct adverse effect on
plant-pathogenic nematodes either in vitro or in sterilized or irradiated
soils and only acts indirectly to suppress nematode populations in soils. The
product generally is not water soluble and, consequently, does not contribute
to ground water contamination.
On March 17, 1988, ClandoSan was registered by the EPA for use with all
agricultural and horticultural crops in accordance with the Federal
Insecticide, Fungicide, and Rodenticide Act ("FIFRA") section 3(c)(5).
ClandoSan is now registered in 49 states and is produced at two contract
manufacturing facilities in the United States. During 1991, the inventories
related to the Company's ClandoSan product line were written down to net
realizable value due to the then prevailing market conditions.
3. Whey-Based Products
(a) MacroMin and MinraLac
MacroMin and MinraLac are the Company's registered trade names for
coproducts it developed for converting low economic value cheese whey into
economically and biologically useful products for the food industry. In spite
of extensive sales efforts throughout 1989, the Company was not able to
develop a market for these products and they were phased out in 1990.
(b) Weyco-Serv
Weyco-Serv (or NaturServ ) is the Company's trade name for a fermented
whey-based product containing calcium propionate and calcium acetate that can
be used as a food preservative and mold inhibitor in the baked goods industry,
in condiments, and in other foods and beverages. The product is produced by
fermenting modified cheese whey residues using a patented microbial co-culture
and fermentation process developed by the Company.
A license to manufacture and sell Weyco-Serv was granted by the Company
to Hercules Incorporated ("Hercules"), Wilmington, Delaware, in exchange for
an initial license fee of $500,000, pursuant to a license agreement dated as
of September 16, 1985. Hercules had not produced commercially any quantities
of Weyco-Serv and by an agreement dated October 15, 1987, the Company and
Hercules terminated the license agreement.
The termination arrangement provided that the Company pay Hercules
$25,000 for termination of the license. If the Company commercializes
Weyco-Serv , the Company will pay Hercules up to an additional
$600,000 from revenues from the sale or licensing of the product.
The Company continues to be interested in licensing the Weyco-Serv
technology.
4. Diagnostic Reagents
The Company has developed a number of enzymes that are suitable as
reagents for clinical diagnostic applications. Two such microorganisms and
fermentation processes yield high concentrations of stabilized
enzymes that can be used for the isolation of strain-specific cell wall
components in rapid diagnostic tests for streptococcal diseases. The Company
has been granted a patent for industrial production of a lytic enzyme
specific for Group A Streptococcus. To date, the Company has produced only
small commercial quantities of these enzymes and continues to be interested in
manufacturing and marketing these enzymes for use in diagnostic test kits.
5. Flavors and Fragrances
The Company has developed natural flavor and fragrance chemicals by
fermentation of whey and other carbohydrates. Patent applications on the
proprietary microorganisms developed by the Company have been
submitted in Europe and in the United States.
The fermentation processes yield a range of water-soluble low molecular
weight organic (carboxylic) acids which can be converted with naturally
occurring alcohols into esters which are commercially useful both
as food flavors and as fragrances in cosmetic and toiletry products.
The Company has also developed a fermentation process for the production
of Poly-LevuLan , its trademark for a high molecular weight fructose polymer
which can be used as a flavor carrier or as a foam stabilizer and thickener in
food and cosmetic applications.
The Company is continuing to seek opportunities to commercialize its
flavors/fragrances technology.
Patents and Trademarks
It is the Company's policy to protect its intellectual property rights by
a variety of means, including applying for patents and trade marks in the
United States and in other countries. The Company also relies upon
trade secrets and improvements, unpatented proprietary know-how and continuing
technological innovation to develop and maintain its competitive position. In
this regard, the Company places restrictions in its agreements with third
parties with respect to the use and disclosure of any of its proprietary
technology. The Company also has internal nondisclosure safeguards, including
confidentiality agreements with employees and consultants.
During fiscal years 1993, 1994, and 1995, as part of the Company's
stringent cost containment efforts, all patents and trademarks were carefully
reviewed and those with no foreseeable commercial value have been abandoned to
eliminate costly maintenance fees. Patents (and applications) and/or
trademarks on technology with recognized commercial value include those for
AstaXin , ClandoSan , Weyco-Serv , and streptococcus lytic enzyme. Extensive
additional foreign applications for AstaXin have been submitted.
Competition
Competitors in the biotechnology field in the United States and elsewhere
are numerous and include major chemical, pharmaceutical and food companies, as
well as specialized biotechnology companies. Competition can be expected to
increase as small biotechnology companies continue to be purchased by major
multinational corporations with their huge resources. Competition is also
expected to increase with the introduction of more diverse products developed
by biotechnology firms, increasing research cooperation among academic
institutions and large corporations, and continued government funding of
research and development activities in the biotechnology field, both in the
United States and overseas. Unlike the majority of biotechnology companies,
which are developing products principally for the pharmaceutical industry, the
Company has focused its own activities on the development of proprietary
products for use in food, fermentation and agricultural industries. In the
future, however, competitors may offer products which, by reason of price or
efficacy or more adequate resources for technology advances, may be superior
to the Company's existing or future products.
In addition, the aquaculture market into which the Company's product,
AstaXin , will be sold is a highly competitive industry worldwide and certain
large companies are presently known to be developing and marketing competitive
products.
Employees
At December 31, 1995, the Company had 9 employees, two of whom are in
administration and marketing, while the remainder are engaged in process
development and support of manufacturing activities.
None of the Company's employees is represented by a labor union and the
Company has experienced no work stoppages. The Company believes its relations
with its employees are satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 8,480 square feet of space in the Oakland Ridge
Industrial Center located at 9110 Red Branch Road, Columbia, Maryland. The
Company occupies the space under leases which expired on January 31, 1996 with
an approximate rental expense of $72,000 for 1995. In late 1995 the Company
signed a five year lease expiring on January 31, 2001. Approximate rental
expense for the year 1996 is $70,000 and $73,000 for each remaining year of
the lease expiring on January 31, 2001.
Approximately 2,000 square feet of the space occupied by the Company is
used for executive and administrative offices and approximately 2,300 feet is
used for research and development activities. Approximately 4,000 square feet
of space is used for the Company's intermediate-stage or scale-up pilot plant
facility.
In addition, the Company has a 180 square-foot Biosafety Level 2
Laboratory suitable for manufacturing bacterial enzymes for in vitro
diagnostic kits.
The Company owns all equipment necessary for its current operations and
all equipment is in satisfactory condition.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of the fiscal year ended December 31, 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Preferred Stock
Prices for the Preferred Stock were quoted on the over-the-counter market
on the National Association of Securities Dealers, Inc. Automated Quotation
System ("NASDAQ") from November 25, 1987 through January 25, 1988. Prior to
November 25, 1987 there was no public market for the Preferred Stock and since
January 25, 1988, no quotations for the Preferred Stock have been reported on
NASDAQ. The aggregate number of record holders of Preferred Stock as of
March 1, 1996 was 17 (17 in 1995).
Common Stock
The Common Stock has been traded in the over-the-counter market since
July 23, 1986. Prior to July 23, 1986, there was no public market for the
Common Stock.
On or about June 9, 1989, the Company was advised by NASDAQ that its
capital and surplus (exclusive of Redeemable Preferred Stock), based on its
financial statements at and for the quarter ended March 31, 1989,
did not meet requirements for continued inclusion in the NASDAQ System.
Accordingly, the quotation of Common Stock in the NASDAQ System was
terminated.
Commencing on or about June 12, 1989, the Company's Common Stock began
trading on the over-the- counter market on a limited basis and is quoted in
the national bureau's "Pink Sheets". The following table shows, by calendar
quarter, the range of representative bid prices for the Common Stock for 1994
and 1995.
<TABLE>
<CAPTION>
Calendar Quarter High Low
<S> <C> <C> <C>
1994: First Quarter $1.06 $ .13
Second Quarter $ .75 $ .25
Third Quarter $ .56 $ .31
Fourth Quarter $ .38 $ .31
1995: First Quarter $ .13 $ .06
Second Quarter $ .31 $ .02
Third Quarter $ .13 $ .02
Fourth Quarter $ .13 $ .01
The above information was obtained by management from the National
Quotation Bureau. Such quotations are inter-dealer quotations without retail
mark-up, mark-downs, or commissions, and may not represent actual
transactions. The above quotations do not reflect the "asking price"
quotations of the stock.
The aggregate number of record holders of the Common Stock as of March 1,
1996 was 252. As of March 1, 1996, the high and low bid prices for the Common
Stock, as shown in the "pink sheets" were $0.09 and $0.01, respectively.
</TABLE>
<PAGE>
Warrants
On or about February 15, 1991, the Company issued Warrants to purchase an
aggregate of 800,000 shares of Common Stock to Kimelman & Baird, LLC, an
employee of the same and Anthony B. Low-Beer, exercisable at $.25 per share
until February 14, 1995. The Warrants were issued to the aforementioned for
acting as placement agent in the Company's private placement of $1,149,000 in
gross proceeds which closed February 15, 1991 and there are substantial
restrictions against the transfer of these Warrants. The Warrants were not
publicly traded and there were no trades of these Warrants before the
expiration date.
On or about June 26, 1992, the Company issued Warrants to purchase an
aggregate of 252,400 shares of Common Stock to Kimelman & Baird, LLC, at $.75
per share until June 26, 1996. The Warrants were issued to the aforementioned
for acting as placement agent in the Company's private placement of $510,500
in gross proceeds which closed June 26, 1992 and there are substantial
restrictions against the transfer of these Warrants. In addition, 680,667
warrants to purchase common stock at $.75 per share were issued to other
qualified investors as part of the private placement. These warrants expired
June 26, 1995. These Warrants were not publicly traded and there were no
trades of these Warrants before the expiration date.
On December 14, 1995 stockholders of the Company approved the
cancellation of certain promissory notes of the Company in favor of those
directors who made loans to the Company on various dates from August
25, 1993 through March 7, 1995 for an aggregate amount of $536,300, and to
issue common stock and warrants to purchase the same number of shares as
common stock at the per share price of $.125, which warrants shall expire on
April 3, 1998.
The aggregate number of record holders of all Warrants as of March
1, 1996 was 6.
Dividend Policy
When and if funds are legally available for such payment under statutory
restrictions, the Company may pay annual cumulative dividends on the Preferred
Stock of $.64 per share on a quarterly basis. During 1988 the
Company declared and paid a cash dividend of $.16 per share. In December
1988, the Company suspended payment of the quarterly dividend of $.16 per
share of Preferred Stock. No dividends have been declared or
paid since 1988. Any resumption of dividend payments on Preferred Stock would
require significant improvement in cash flow. Preferred Stock dividends are
payable when and if declared by the Company's board. Unpaid dividends
accumulate for future payment or addition to the liquidation preference and
redemption price of the Preferred Stock. As of December 31, 1995 the total
amount of dividends in arrears with respect to the Company's Preferred Stock
was $1,047,907.
Dividends on Common Stock are currently prohibited because of the
preferential rights of holders of Preferred Stock. The Company has paid no
cash dividends on its Common Stock in the past and does not intend to declare
or pay any dividends on its Common Stock in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
1995 Compared with 1994
Sales revenue for the year ended December 31, 1995 decreased from $113,166
in 1994 to $25,563 in 1995. The decrease in overall sales revenues (77%)
resulted from a decrease in domestic sales of ClandoSan . Until
results of additional in progress field testing of ClandoSan are completed,
the Company expects to continue to focus its efforts on AstaXin . However,
long-term production and sales of AstaXin will depend on the Company's
ability to find suitable manufacturing partners since it has no commercial
scale manufacturing facilities of its own. No commercial quantities of
AstaXin were available for sale in 1995. In May 1995 the Company executed a
non-exclusive technology licensing and royalty agreement with Archer Daniels
Midland Co. However, on February 29, 1996 Archer Daniels Midland informed the
Company that it would no longer utilize the technology and terminated the
agreement. The Company is in discussion with other potential manufacturers
for AstaXin and, in addition, is seeking additional investment to enable it
to purchase or lease a manufacturing facility of its own. Additional sales of
ClandoSan will depend on continued marketing arrangements with distributors
for the product, the Company expects to continue its own limited sale of these
products in the near future.
Cost of product sales as a percentage of product sales increased to 66% in
1995 from 33% in 1994. The margins in 1994 reflect sales of AstaXin that was
received at a reduced cost as part of a contract agreement.
Research, development and pilot plant expenses decreased approximately
$44,000 for the current year. The expenses in 1994 reflected a one-time fee
related to the scale-up of the Company's AstaXin product which
was not incurred in 1995. Research and development costs may be expected to
increase gradually in support of increased manufacturing efforts for AstaXin ,
but would be offset by technology licensing and technology services income.
Marketing, general and administrative expenses in 1995 were comparable to
the expenses in 1994. Marketing expenses related to the Company's AstaXin
product could be expected to increase if production and sale of AstaXin
proceeds, but this will depend on marketing arrangements with distributors of
the product. This increase would be offset by sales income from licensing
additional technology. General and administrative expenses could be
expected to rise to reflect increasing costs of maintaining and enforcing the
Company's patents and patent applications for AstaXin and ClandoSan
worldwide, but only if commercial quantities of the products are manufactured.
Interest expense for the year ended December 31, 1995 decreased by
approximately $10,000 over the prior year. This decrease reflects the
decrease in accumulating interest due on promissory notes issued to
certain directors of the Company after conversion of some of the notes for
equity.
In 1995, the Company's operational costs were offset by aggregate payments
totalling $249,215, which are part of a Licensing Agreement for AstaXin .
As a result of the foregoing, the Company reported a net loss of $503,156,
or $.04 per common share in 1995, compared to a net loss of $540,260, or $.04
per common share in 1994. The weighted average number of common shares
outstanding increased to 13,694,343 in 1995 from 13,002,050 in 1994. This
increase in shares in 1995 reflects the annual issuance of common stock as
payment of interest on a variable note subordinated debenture, a private
placement of 1,200,000 shares of common stock by certain directors of the
Company and the issuance of an additional 4,290,400 shares of common stock in
cancellation of promissory notes to certain directors of the Company.
On January 19, 1995, 250 shares of redeemable preferred stock was converted
into 500 shares of common stock of the Company.
Financial Position
In December 1988, as part of an overall effort to contain costs and
conserve working capital, the Company suspended payment of the quarterly
dividend on its Preferred Stock. Resumption of the dividend will
require significant improvements in cash flow. Unpaid dividends cumulate for
future payment or addition to the liquidation preference or redemption value
of the Preferred Stock. As of December 31, 1995, total dividends
in arrears on the Company's Preferred Stock was $1,047,907 of which $177,907
($4.64 per share) was included in the carrying value of the redeemable
Preferred Stock and $870,000 ($4.64 per share) was included in the
liquidation preference of the Preferred Stock.
<PAGE>
Liquidity and Capital Resources
Historically, the Company has been funded primarily by equity
contributions, loans from stockholders and license fees. As of December 31,
1995 the Company had a working capital deficit of $336,992, and cash and
cash equivalents of $8,326.
Beginning in September of 1989, and continuing through 1995, the Company
followed a plan designed to reduce expenses and conserve working capital.
This plan included the reduction in staff as well as reductions in all areas
of the Company's selling, research, general and administrative expenses and
refocusing of research and development activities solely on the Company's
AstaXin product. These budgeted expenditures provided for minimizing capital
expenditures for the Company's pilot plant facility in Columbia, Maryland or
for any new manufacturing facilities.
Cash used by operations in 1994 and 1995 amounted to $287,195 and $340,904,
respectively. IGENE continues to focus on research and development of its
products, achieving only minimal sales of its ClandoSan and AstaXin
products. IGENE was able to reduce the amount of cash required to fund 1995
operations through a Licensing Agreement for AstaXin with Archer Daniels
Midland Co. ("ADM"), Decatur, Illinois, signed in May 1995. That Agreement
provided for a cash payment of $200,000 at signing and a royalty based
on sales. In addition, the Company has received $24,415 from ADM for
technology services related to the Agreement. On December 4, 1995, the
Company also received a payment of $25,000 from ADM as stipulated
in the Licensing Agreement. On February 29, 1996, ADM terminated its
Licensing Agreement with the Company.
Cash used in investing activities amounted to $ 2,369 and $5,973,
respectively in 1995 and 1994. Capital expenditures decreased from $20,973 in
1994 to $2,369 in 1995, reflecting the continuation of plans to minimize
capital expenditures. IGENE believes its existing equipment is substantially
sufficient to meet its needs in continuing its research and development
activities in the foreseeable future. Also, cash of $15,000 was provided
in 1994 by the sale of unused equipment. No equipment was sold in 1995.
Following is a detail of the Company's financing activities for 1995:
On January 23, 1995, and March 7, 1995, the Company issued Promissory Notes
to certain directors of the Company (Kimelman, Kempner, Abeles, Cenerazzo and
Knafel) for an aggregate consideration of $126,750. The notes specify that
interest will be paid quarterly in arrears at Prime Rate. In addition, at any
time before repayment, the value of the notes may be converted to common
shares of the Company at $.1875 per share for the notes dated January 23,
1995, and $.125 per share for the notes dated March 7, 1995. On December 14,
1995 the January 23, 1995 and March 7, 1995 notes were terminated, with equal
amounts of common stock and warrants being issued in their place equal to the
principal amount of each of the notes divided by $.125 which was the per share
price of the stock at the time.
On July 24, 1995 the Directors approved a Resolution to purchase from the
Company 1,200,000 shares of common stock of the Company at a price of $.125
per share for an aggregate purchase amount of $150,000. Such shares were
issued on August 15, 1995.
On November 16, and December 22, 1995, the Company issued Promissory Notes
to certain Directors of the Company for an aggregate consideration of
$100,000. These notes specify that at any time prior to repayment the holder
has the right to convert the notes to common stock of the Company at $.05 per
share and to receive a warrant for an equivalent number of common shares at
$.05 per share. $55,320 of this total was received prior to December 31,
1995, the remaining $44,680 was received during January 1996.
<PAGE>
At its Annual Meeting on December 14, 1995 the shareholders of the Company
approved the conversion of all Promissory Notes issued to certain directors of
the Company (Kimelman, Kempner, Abeles, Cenerazzo, Knafel, and Low-Beer) from
August 1993 until February 10, 1994, into Common Stock, along with Warrants to
purchase additional shares of Common Stock at a price of $.125 per share at
any time during the period from April 3, 1995 to April 3, 1998, all shares
being equal to the aggregate principal amount of the Loans divided by
$.125, which was the fair market value of the Common Stock as quoted on April
3, 1995 by the National Quotation Bureau. These shares were issued on
December 14, 1995.
To continue operations short term, the Company will consider issuing
additional stock to officers and directors and encouraging holders of
outstanding warrants to exercise these rights. To increase its working
capital position the Company will also encourage the holders of promissory
notes to convert them into common stock. To meet short-term cash needs the
Company plans to issue additional notes to certain directors in
February of 1996.
In the long-term, the Company is also continuing its development of
additional AstaXin technology which it plans to license and market and which
it hopes will benefit future periods.
The Company does not believe that inflation has had a significant impact on
the Company's operations during the past three years.
ITEM 7. FINANCIAL STATEMENTS
The financial statements appear after Part III of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS, AND KEY
EMPLOYEES
The Company's directors are elected annually by the shareholders of the
Company. The directors, executive officers and key employees of the Company
are as follows:
Name Age Position with IGENE
Michael G. Kimelman 57 Chairman of the Board of Directors
Thomas L. Kempner 68 Vice Chairman of the Board of Directors
Stephen F. Hiu 39 Director, President, Secretary, Acting
Treasurer, and Director of Research and
Development
Dexter W. Gaston * 50 Chief Executive Officer
Patrick F. Monahan 45 Director, and Director of Manufacturing
Joseph C. Abeles 81 Director
John A. Cenerazzo 72 Director
Sidney R. Knafel 65 Director
Anthony Low-Beer ** 53 Director
R. Todd Lorenz*** 35 Senior Research Microbiologist
* Mr. Gaston was appointed CEO of the Company on January 12, 1996.
** Mr. Low-Beer resigned as Director on May 15, 1995.
*** Dr. Lorenz resigned from IGENE employment on May 15, 1996.
MICHAEL G. KIMELMAN was elected a Director of the Company in February 1991 and
Chairman of the Board of Directors in March 1991. He is the Managing Partner
of Kimelman & Baird, LLC. He is a founder of Blue Chip Farms, a standardbred
horse-breeding farm, and has been an officer of the same since its inception
in 1968. Mr. Kimelman is currently a Director of the Harness Horse Breeders
of New York State and serves on the Board of the Hambletonian Society.
THOMAS L. KEMPNER is Vice Chairman of the Board of Directors and has been a
Director of the Company since its inception in October 1981. He is and has
been Chairman and Chief Executive Officer of Loeb Partners Corporation,
investment bankers, New York, and its predecessors since February 1978. He is
currently a Director of Alcide Corporation, Arlen Development Corp., Energy
Research Corp., Intermagnetics General Corp., Northwest Airlines, Inc., Roper
Worldwide, Inc., and Silent Radio, Inc.
<PAGE>
STEPHEN F. HIU was appointed President and Treasurer in March 1991, Secretary
in July 1990, and elected a Director in August 1990. He has been Director of
Research and Development since January 1989 and, prior thereto, was Senior
Scientist since December 1985, when he joined the Company. He was a
post-doctoral Research Associate at the Virginia Polytechnic Institute and
State University, Blacksburg, Virginia, from January 1984 until December 1985.
Dr. Hiu holds a Ph.D. degree in microbiology from Oregon State University and
a B.S. degree in biological sciences from the University of California,
Irvine.
DEXTER W. GASTON was appointed Chief Executive Officer on January 11, 1996.
Prior positions include CEO of Microbio Resources, Managing Director of
Algatec, CEO and Chairman of Reclaimex and Director of Technical Operations,
Revlon Health Care. He is also a Director of the California Wine Company. He
holds a B.S. in chemistry from Rutgers University and an M.B.A. from the
University of Chicago.
PATRICK F. MONAHAN was appointed Director of Manufacturing and elected a
Director of the Company in April 1991 and has managed the Company's
fermentation pilot plant since 1982. Prior thereto, he was a technical
specialist in the fermentation pilot plant of W.R. Grace and Co. from 1975 to
1982. He received an Associate in Arts degree in biology from Allegheny
Community College and a B.S. degree in biology with a minor in
Chemistry from Frostburg State College, Frostburg, Maryland.
JOSEPH C. ABELES, private investor, was elected Director of the Company on
February 28, 1991. Mr. Abeles serves as Director of Intermagnetics General
Corporation, Patten Corporation, Peridot Holdings, Inc. and Ultralife
Batteries, Inc.
JOHN A. CENERAZZO was Chairman of the Board from November 1989 to April 1991.
He served as President of the Company from August 1988 through September 1989
and has been a Director since September 1987. He is presently Chairman of the
Executive Committee and Director of National Penn Bank Shares, Inc. of
Boyertown, Pennsylvania and a Director of National Penn Bank, a Director of
U.S. Axle Corporation, and a Chairman and a Director of InfoCore,
Incorporated.
SIDNEY R. KNAFEL, a Director of the Company since 1982, has been Managing
Partner of SRK Management Company, a private investment concern, New York,
since 1981, Chairman of Insight Communications, Inc. since 1985, and of
Microbiological Associates, Inc. since 1985. Mr. Knafel is also currently a
Director of Cellular Communications, Inc., Cellular Communications
International, Inc., Cellular Communications of Puerto Rico, Inc., General
American Investors Company, Inc., International CableTel Inc., four
Prudential mutual funds, and other private companies.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
IGENE Biotechnology, Inc.
Columbia, MD
We have audited the financial statements of IGENE Biotechnology, Inc. as
listed in response to A.1. of Item 13. In connection with our audits of the
financial statements, we also have audited the financial statement
schedules as listed in response to A.1a. of Item 13. These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules 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 IGENE Biotechnology, Inc. as
of December 31, 1995 and 1994, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the information
set forth therein.
The accompanying financial statements and financial statement schedules have
been prepared assuming that IGENE Biotechnology, Inc. will continue as a going
concern. As discussed in note 13 to the financial statements, the Company's
recurring losses and limited capitalization raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in
regard to these matters are described in note 13. The financial statements
and financial statement schedules do not include any adjustments relating
to the recoverability and classification of reported asset amounts or the
amounts and classification of liabilities that might result from the outcome
of this uncertainty.
BERENSON & COMPANY LLP
New York, NY
March 14, 1996
<PAGE>
<TABLE>
IGENE Biotechnology, Inc.
Statement of Operations Data
<CAPTION>
Years Ended December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Sales $ 25,563 $ 113,166 $ 68,516 $ 165,060 $ 173,383
Total Revenues $ 274,978 $ 363,349 $ 69,089 $ 170,654 200,215
Cost of Sales $ 16,878 $ 36,945 $ 32,137 $ 118,652 100,810
Research,
Development
and Pilot Plant
Expenses $ 348,139 $ 391,912 $ 329,030 $ 409,645 460,372
Other Expenses $ 447,335 $ 474,752 $ 416,489 $ 432,380 526,802
Net Loss $ (503,156) $ (540,260) $(708,567) $(790,023) (887,769)
Net Loss
Per
Common Share (1) ( .04) $ (.04) $ (.06) $ (.07) $ (.08)
Coverage
Deficiency
of Fixed
Charges (2) $ 647,695 $ 684,959 $853,266 $ 934,722 $1,042,528
</TABLE>
<TABLE>
IGENE Biotechnology, Inc.
Balance Sheet Data
<CAPTION>
As of December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Cash and
Cash Equivalents $ 8,326 $ 19,529 $ 65,897 $ 128,118 $ 276,663
Working
Capital (Deficit)$ (336,992) $(645,815) $(286,881) $(26,918) $ 83,126
Total Assets $ 104,255 $ 77,556 $ 258,417 $315,834 $ 535,939
Long-term Debt $ 1,500,000 $1,500,000 $ 1,500,000 $1,500,000 $1,500,000
Total
Liabilities $ 1,901,127 $ 2,177,572$ 1,938,173 $1,677,272 $1,741,600
Redeemable
Preferred Stock $ 484,643 $ 463,104$ 438,405 $ 413,706 $ 518,788
Stockholders'
Deficit $(2,281,515)$(2,563,119)$(2,118,161)$(1,775,144)$(1,724,449)
Common
Shares
Outstanding 18,572,805 13,028,571 12,975,237 12,475,853 11,716,102
Preferred
Shares
Outstanding 225,842 226,092 226,092 226,092 238,967
(1)
Net loss per common share for the year ended December 31, 1991 is based on
11,052,647 shares. Net loss per common share for each of the years in the
four-year period ended December 31, 1995 is based on 12,084,190, 12,769,011,
13,002,050, and 13,694,343 weighted average shares, respectively. For
purposes of computing net loss per common share, the amount of net loss has
been increased by dividends declared and cumulative undeclared dividends in
arrears on preferred stock.
(2)
Earnings are not adequate to cover fixed charges. The "coverage deficiency of
fixed charges" for each year is equal to the net loss for the year plus
dividends on preferred stock.
</TABLE>
<PAGE>
<TABLE>
IGENE Biotechnology, Inc.
Balance Sheets
<CAPTION>
December 31
1995
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 8,326
Accounts receivable ........................................... 11,129
Due from stockholders (note 6)................................. 44,680
Total current assets .................................... 64,135
Property and equipment, net (note 3)............................ 29,520
Security deposits .............................................. 10,600
$ 104,255
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses (note 4)................ $ 271,127
Debenture interest payable (note 5)........................... 30,000
Promissory notes payable (note 6)............................. 100,000
Total current liabilities............................... 401,127
Long term liabilities:
Variable rate subordinated debenture (note 5)................. 1,500,000
1,901,127
Commitments and contingency (notes 10 and 11)
Carrying amount of redeemable preferred stock -- 8% cumulative, convertible,
voting, Series A, $.01 par value per share. Stated value $12.64 per share
Authorized 920,000 shares; issued 38,342 shares (notes 5, 7
and 8)........................................................ 484,643
Redemption amount $484,643.
Stockholders' deficit (notes 7 and 8):
Preferred stock -- $.01 par value per share. 8% cumulative, convertible.
voting, Series A. Authorized and issued 187,500 shares
(aggregate involuntary liquidation value of $2,370,000).... 1,875
Common stock -- $.01 par value per share. Authorized 35,000,000 shares;
issued 18,572,805 shares ................................ 185,728
Additional paid-in capital................................... 17,843,142
Deficit...................................................... (20,312,260)
(2,281,515)
$ 104,255
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
IGENE Biotechnology, Inc
Statements of Operations
<CAPTION>
Years ended December 31,
1995 1994 *
<S> <C> <C>
Sales ........................................ $ 25,563 $ 113,166
Cost of sales ................................ 16,878 36,945
Gross profit from sales of product ........... 8,685 76,221
Technology licensing income (note 14)......... 225,000 250,000
Technology services income (note 14).......... 24,415 ---
Net revenue .................................. 258,100 326,221
Selling, general and administrative expenses:
Marketing and selling ........................ 12,813 4,691
Research, development and pilot plant ........ 348,139 391,912
General and administrative ................... 303,998 314,671
Total selling, general and administrative
expenses ............................ 664,950 711,274
Operating loss ............................... (406,850) (385,053)
Other income (expenses):
Forgiveness of Debt (note 6)................. 33,395 ---
Investment income ............................ 527 183
Other income (expense) ....................... 296 (14,870)
Interest expense ............................. (130,524) (140,520)
Net Loss .................................. (503,156) (540,260)
Deficit at beginning of year ................. (19,809,104) (19,268,844)
Deficit at end of year ....................... ($20,312,260) ($19,809,104)
Net loss per common share (note 9) ........... ($.04) ($.04)
</TABLE>
* Certain items have been reclassified to conform to 1995 presentation.
See accompanying notes to financial statements.
<PAGE>
<TABLE>
IGENE Biotechnology, Inc.
Statements of Stockholders' Deficit
<CAPTION>
Redeemable
Preferred Stock Preferred Stock Common Stock
(Shares/Amount) (Shares/Amount) (Shares/Amount)
<S> <C> <C> <C>
Balance at December 31,
1993....................... 38,592/$438,405 187,500/$1,875 12,975,237/$129,752
Issuance of 53,334 shares
of common stock as
payment of interest
on variable rate
subordinate debenture
(note 5)................... --- --- 53,334/$533
Cumulative undeclared
dividends on redeemable
preferred stock.......... 24,699 --- ---
Net loss for 1994 ......... --- --- ---
Balance at December 31,
1994 ...................... 38,592/$463,104 187,500/$1,875 13,028,571/$130,285
Issuance of 53,334 shares
of common stock as
payment of interest
on variable rate
subordinate debenture
(note 5)................... --- --- 53,334/$533
Cumulative undeclared
dividends on redeemable
preferred stock............ 24,539 --- ---
Issuance of 1,200,000
shares of common stock
pursuant to direct
purchase of shares by
certain directors
of the Company
(note 8)................... --- --- 1,200,000/$12,000
Issuance of 4,290,400 shares
of common stock
on conversion of
promissory notes .......... --- --- 4,290,400/$42,905
Conversion of redeemable
preferred stock
into common stock ......... 250/($3,000) --- 500/$5
Net loss for 1995 ......... --- --- ---
Balance at December 31,
1995 ...................... 38,342/$484,643187,500/$1,875 18,572,805/$185,728
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
IGENE Biotechnology, Inc.
Statements of Stockholders' Deficit
(Continued)
<CAPTION>
Additional Total Stockholder's
Paid-In Capital Deficit Deficit
<S> <C> <C> <C>
Balance at December 31,
1993....................... $17,019,056 $(19,268,844) $(2,118,161)
Issuance of 53,334 shares
of common stock as
payment of interest on
variable rate
subordinate debenture
(note 5)................... 119,467 --- 120,000
Cumulative undeclared
dividends on redeemable
preferred stock............ (24,699) --- (24,699)
Net loss for 1994 ......... --- (540,260) (540,260)
Balance at December 31,
1994 ...................... 17,113,824 (19,809,104) (2,563,120)
Issuance of 53,334 shares
of common stock as
payment of interest on
variable rate
subordinate debenture
(note 5)................... 119,467 --- 120,000
Cumulative undeclared
dividends on redeemable
preferred stock............ (24,539) --- (24,539)
Issuance of 1,200,000 shares
of common stock
pursuant to direct purchase
of shares by
certain directors of the
Company (note 8)........... 138,000 --- 150,000
Issuance of 4,290,400 shares
of common stock
on conversion of promissory
notes ..................... 493,395 --- 536,300
Conversion of redeemable
preferred stock
into common stock ......... 2,995 --- 3,000
Net loss for 1995 ......... --- (503,156) (503,156)
Balance at December 31,
1995 ...................... $17,843,142 $(20,312,260) $(2,281,515)
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
IGENE Biotechnology, Inc.
Statements of Cash Flows
<CAPTION>
Years ended December 31,
1995 1994
<S> <C> <C>
Cash flows from operating activities
Net loss......................................... ($503,156) ($540,260)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 8,048 22,429
Loss on sale of assets ...................... --- 14,870
Interest on debenture paid in shares of
common stock............................. 120,000 120,000
Changes in assets and liabilities:
Increase (decrease) in accounts payable and
other accrued expenses................ 33,105 99,149
Decrease (increase) in accounts
receivable............................ (339) (2,778)
Decrease (increase) in prepaid expenses and
deposits.............................. 1,438 (605)
Net cash used in operating activities............ (340,904) (287,195)
Cash flows from investing activities:
Capital expenditures............................. (2,369) (20,973)
Sale of equipment................................ --- 15,000
Net cash used in investing activities ........... (2,369) (5,973)
Cash flows from financing activities:
Proceeds from issuance of common stock........... 150,000 76,550
Issuance of promissory notes..................... 182,070 170,250
Net cash provided by financing activities........ 332,070 246,800
Net decrease in cash and cash equivalents ........ (11,203) (46,368)
Cash and cash equivalents at beginning of year.... 19,529 65,897
Cash and cash equivalents at end of year.......... $ 8,326 $ 19,529
Supplementary disclosure - cash paid for interest. $ --- $ 236
</TABLE>
Noncash investing and financing activities:
During 1994 the Company sold equipment for $30,000, which was remitted by
the buyer directly to another company in payment of outstanding amounts due
for services performed for the Company. (See also note 3)
During 1995 and 1994, the Company issued 53,334 shares of common stock in
each year in payment of interest on the variable rate subordinated debenture.
If paid in cash, the interest would have been payable at 8% during 1995 and
1994, or $120,000 per year. Shares may be issued in lieu of cash under the
debenture agreement at the higher of $2.25 per share or market price per
share. The stock was issued and related interest expense for 1995 and 1994
were recorded at $2.25 per share, or $120,000 in each year. (See also note 5)
During 1995 and 1994 the Company recorded dividends in arrears on 8%
redeemable preferred stock at $.64 per share aggregating $24,539 and $24,699,
respectively in each year which has been removed from paid-in capital and
included in the carrying value of the redeemable preferred stock. (See also
note 7)
During 1995 the Company issued 4,290,400 shares upon the conversion of
$536,300 of promissory notes held by certain directors of the Company. (See
also note 8)
During 1995 the Company issued promissory notes to certain directors of the
Company for an aggregate consideration of $100,000. At December 31, 1995
$55,320 had been received by the Company. $44,680 remained due from certain
directors of the Company on December 31, 1995.
IGENE Biotechnology, Inc.
Notes to Financial Statements
(1) History of the Company
The Company was incorporated under the laws of the State of Maryland on
October 27, 1981 as "Industrial Genetics, Inc." The Company changed its name
to "IGI Biotechnology, Inc." onAugust 17, 1983 and to "IGENE Biotechnology,
Inc." on April 14, 1986. The Company is located in Columbia, Maryland and is
engaged in the business of industrial microbiology and related
biotechnologies.
(2) Summary of Significant Accounting Policies
Cash and cash equivalents
For purposes of the financial statements, cash equivalents have been
combined with cash. The Company considers cash equivalents to be short-term,
highly liquid investments that have maturities of less than three months.
These include interest bearing money market accounts and certificates
of deposit.
Research and development costs
For financial reporting purposes, research, development and pilot plant
scale-up costs are charged to expense when incurred.
Depreciation
Depreciation of property and equipment is provided under the
straight-line method over the lives of the respective assets.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair value of financial instruments
The carrying amount of cash and cash equivalents approximate fair value
because of the short maturity of those instruments. The carrying amount of
long-term debt approximates fair value because of similar current rates
at which the Company could borrow funds with consistent remaining maturities.
Sales Returns
The Company records sales returns in the period in which the product is
returned, rather than estimating future returns of current sales, since they
are expected to be immaterial in amount.
Interest on Variable Rate Subordinated Debenture
The Company records interest on its variable rate subordinated debenture
(see also note 6) at a level rate of 8%; rather than at the fair-market value
of shares which have been issued in lieu of cash payments of interest.
This is an estimated average rate based on the Company's plan to continue (as
it has since October 1, 1989) to pay interest on the debenture by issuing
shares of common stock at the higher of $2.25 per share or the current market
value of the Company's shares, as allowed under the terms of the debenture.
If the market value of the Company's stock remains below $2.25 per share
(during the period from October 1989 through December 1995 its highest price
was $1.25) the Company can continue to issue stock in lieu of cash payments at
$2.25 per share.
(3) Property and Equipment
Property and equipment are stated at cost and are summarized as follows:
Laboratory equipment and fixtures......... $ 85,092
Pilot plant equipment and fixtures........ 56,862
Machinery and equipment................... 101,682
Office furniture and fixtures............. 42,682
286,500
Less accumulated depreciation ............ 256,980
$ 29,520
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
During 1994 certain machinery and equipment was sold for $30,000 whereby
payment was remitted directly to a company who performed services for IGENE.
(4) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
Accounts payable ......................... $ 257,231
Audit fees and insurance expense ......... 13,476
Accrued interest, promissory notes ....... 420
$ 271,127
(5) Variable Rate Subordinated Debenture
In July 1988, the Company and a principal holder of the Company's
redeemable preferred stock agreed to exchange 187,500 shares of the Company's
8% cumulative convertible preferred stock, Series A for a $1,500,000
variable rate convertible subordinated debenture due 2002, Class A.
The debenture bears interest at a rate of 8% per annum through September
30, 1996 and thereafter at a rate of 12% per annum. Interest was payable in
cash through October 1, 1989. Thereafter, the debenture agreement
provides that at the option and at the discretion of the Company, interest may
be paid in shares of the Company's common stock at the greater of $2.25 per
share or the average market value per share. During 1995 and 1994, the
Company issued 106,668 of its common stock as payment of interest on the
debenture. The debenture is convertible into common stock of the Company at
any time at the option of the holder at an initial rate of $4 per share of
common stock. The debenture is redeemable at the option of the Company at any
interest payment date at par value plus accrued interest. Upon maturity of
the debenture, the Company, at its option, may repay the remaining
principal in shares of 8% cumulative convertible preferred stock, Series B at
a rate of $8 per preferred share.
(6) Promissory Notes Payable
On August 23, and November 19, 1993, the Company issued promissory notes
to certain directors of the Company for an aggregate consideration of
$239,300. The notes specify that at any time prior to repayment the holder
has the right to convert the note to common stock of the Company at $.48 per
share and to receive a warrant for an equivalent number of common shares at
$.48 per share. The promissory notes are due on demand with interest charged
at the prime rate.
On February 10, 1994, and September 26, October 24, 1994 and November
28, 1994, the Company issued additional promissory notes to certain directors
of the Company for an aggregate consideration of $170,250. The notes specify
that at any time prior to repayment the holder has the right to convert the
note to common stock of the Company at $.375 per share for the note issued
February 10, 1994 and at $.25 per share for all other notes and to receive
warrants for an equivalent number of common shares at $.375 per share for the
note issued February 10, 1994 and at $.25 per share for all other notes.
These promissory notes are also due on demand with interest charged at the
prime rate.
On January 23, 1995, and March 7, 1995, the Company issued additional
promissory notes to certain directors of the Company for an aggregate
consideration of $125,000. The notes specify that at any time prior to
repayment the holder has the right to convert the note to common stock of the
Company at $.1875 per share for the note issued January 23, 1995 and at $.125
per share for the note issued March 7, 1995 and to receive warrants for an
equivalent number of common shares at $.1875 per share for the note issued
January 23, 1995 and at $.125 per share for the note issued March 7, 1995.
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
On November 16, 1995, and December 22, 1995, the Company issued
additional promissory notes to certain directors of the Company for an
aggregate consideration of $100,000. Thesenotes specify that at any time
prior to repayment the holder has the right to convert the note to common
stock of the Company at $.05 per share and to receive a warrant for an
equivalent number of common shares at $.05 per share. The promissory notes
are due on demand with interest charged at the prime rate. As of December 31,
1995 $55,320 was received by the Company. The remaining $44,680 was received
in January, 1996.
On December 14, 1995 the shareholders of the Company approved
cancellation of Promissory Notes and Warrants issued to certain Directors of
the Company between August 25, 1993 and March 7, 1995 and the conversion of
these notes to common stock of the Company at $.125 per share and warrants to
purchase an equal amount of common stock of the Company at $.125 per share,
which was the fair market value of the common stock as quoted on April 3,
1995. Interest accrued of $33,395 was forgiven by the shareholders.
(7) Redeemable Preferred Stock
Each share of redeemable preferred stock is entitled to vote on all
matters requiring shareholder approval as one class with holders of common
stock, except that each share of redeemable preferred stock is entitled to two
votes and each share of common stock is entitled to one vote.
Redeemable preferred stock is convertible at the option of the holder at
any time, unless previously redeemed, into shares of the Company's common
stock at the rate of two shares of common stock for each share of
preferred stock (equivalent to a conversion price of $4.00 per common share),
subject to adjustment under certain conditions.
Shares of redeemable preferred stock are redeemable for cash in whole or
in part at the option of the Company at any time at the stated value plus
accrued and unpaid dividends to the redemption date. Dividends are cumulative
and payable quarterly on January 1, April 1, July 1 and October 1, since
January 1, 1988. See note 5 relating to exchange of redeemable preferred
stock and note 8 relating to conversion of redeemable preferred stock and
waiver of redemption privileges. Mandatory redemption is required by October
2002. As of December 31, 1995, cumulative dividends in arrears totaled
$177,907 ($4.64 per share) and were included in carrying value of redeemable
preferred stock.
(8) Stockholders' Equity
Common Stock
In January 1987, the Board of Directors approved the 1986 Stock Option
Plan ("Plan"). In August 1990, the shareholders approved an increase in the
number of shares issuable pursuant to options granted under the Plan.
Under the Plan options to acquire up to 978,850 shares of the Company's common
stock may be issued to certain directors, officers and employees. Options
granted under the Plan are exercisable in installments of twenty percent
each year beginning on the first anniversary of the date when such options are
granted and expire not later than ten years from the date of grant. On
January 22, 1987, the Board of Directors approved the granting, under the
Plan, of options to purchase 72,750 shares of the Company's common stock at
$5.40 per share to 23 full-time employees of the Company. The option price
represented a discount from the market price at the date of grant. The
total amount of such discount was accounted for as compensation expense and
recognized over the period in which employees were providing the related
services. In May 1989 the Compensation Committee of the Board of Directors
approved the reduction of the exercise price from $5.40 to $1.00 per share of
the aforementioned options. In addition, the Compensation Committee
approved the granting of options to purchase an additional 146,350 shares at
an exercise price of $1.00 per share pursuant to the Plan. In May 1990, the
Compensation Committee of the Board of Directors approved the granting of
options to purchase an additional 560,250 shares at an exercise price of $.10
rice of $.10
Balance at December 31,
1995 ...................... $17,843,142 $(20,312,260) $(2,281,515)
See accompanying notes to financial statements.
<PAGE>
............ $ 257,231
Audit fees and insurance expense ......... 13,476
y at $.625 per share were
granted to one officer and one key employee of the Company. In April 1993,
options to purchase 50,000 shares of common stock of the Company at $1.00
per share were granted to one key employee of the Company. The options granted
in May 1989, May 1990, January 1991, January 1992, and April 1993 were at an
exercise price in excess or equal to the current market price and,
accordingly, no additional compensation expense was recognized. Prior to 1993,
no options were exercised under the Plan. In 1993 options to purchase 87,000
shares of common stock at $.10 per share and 20,000 shares of common stock
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
at $.25 per share were exercised pursuant to the Plan. On March 17, 1994 the
Board of Directors approved an increase from 978,850 to 1,200,000 in the
number of shares issuable pursuant to options granted under the plan which
was approved by stockholders at the Company's 1994 Annual Meeting. On December
16, 1995 an increase from 1,200,000 to 2,000,000 in the number of shares
issuable pursuant to options granted under the plan which was approved by
stockholders at the Company's 1995 Annual Meeting.
In May and November 1988, holders of 314,092 shares of redeemable
preferred stock converted those shares into 628,184 shares of the Company's
common stock and received warrants to purchase 314,092 shares of common stock
at a rate of $6.00 per share which expired on July 30, 1993. During 1990,
holders of 13,500 shares of redeemable preferred stock converted those shares
to 27,000 shares of the Company's common stock. During 1991 holders of 5,125
shares of redeemable preferred stock converted those shares to 10,250 shares
of the Company's common stock. During 1993 and 1994 no shares of redeemable
preferred stock were converted to shares of the Company's common stock.
In February 1991, the Company sold 4,596,000 shares of common stock and
received net proceeds of $1,109,000. Also in February, 1991, the Company
issued warrants to purchase 800,000 shares of common stock at $.25 per share
to a stockholder controlled company for acting as placement agent.
In June 1992, the Company sold 680,667 shares of common stock and
received net proceeds of $503,693. Also in June, 1992, the Company issued
warrants to purchase 252,400 shares of common stock at $.75 per share to a
stockholder controlled Company for acting as placement agent. In addition,
680,667 warrants to purchase common stock at $.75 per share were issued to
other qualified investors as part of the private placement.
On March 25, 1993 the Company issued 33,334 shares of common stock at
$.75 upon execution of a Letter of Intent with Burns Philp Food Inc. to enter
into a Technology License Agreement. Upon execution of a Technology
License Option Agreement on April 16, 1993, Burns Philp purchased 166,666
newly issued shares of common stock at $.75 per share, and an additional
62,500 shares at $.48 per share on July 13, 1993. On October 13 the Company
issued 76,550 shares of common stock at $1.00 per share as part of the
termination of the Agreement with Burns Philp.
At December 31, 1994, 86,746 shares of authorized but unissued common
stock were reserved for exercise at $6.64 per share pursuant to a stock
purchase warrant granted to the underwriter in connection with the Company's
initial public offering, 978,850 shares of authorized but unissued common
stock were reserved for exercise pursuant to the 1986 Stock Option Plan,
452,184 shares of authorized but unissued common stock were reserved for
issuance upon conversion of the Company's outstanding preferred stock, 314,092
shares of authorized but unissued common stock were reserved for issuance upon
exercise at $6.00 per share of stock purchase warrants issued to preferred
stockholders who converted to common stock in 1988, 800,000 shares of
authorized but unissued common stock were reserved for issuance upon
reinvestment of interest on the variable rate subordinated debenture and
375,000 shares of authorized but unissued common stock were reserved for
issuance upon conversion of the variable rate subordinated debenture.
On August 15, 1995, the Company sold 1,200,000 shares of common stock to
certain directors of the Company at $.125 per share and received net proceeds
of $150,000.
On December 14, 1995, the Company issued 4,290,400 shares of common
stock in lieu of retired Promissory Notes and Warrants issued to certain
directors of the Company from August 25, 1993 through March 7, 1995. Issued
along with the common stock were warrants to purchase an equal amount of
common stock of the Company at $.125 per share, which was the fair market
value of the common stock as quoted on April 3, 1995 by the National Quotation
Bureau, which warrants shall expire on April 3, 1998.
The following table summarizes options and warrants issued, outstanding
and exercisable:
December 31,
1995 1994
[S] [C] [C]
Issued 5,642,550 2,792,817
Outstanding 5,537,550 2,685,817
Exercisable 5,237,550 2,291,517
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
Preferred Stock
In May 1988, the Company and a holder of its redeemable preferred stock
entered into an agreement under which the mandatory redemption rights referred
to in note 5 were waived as to 187,500 shares of the preferred stock.
These shares are subject to redemption at the option of the Company under
provisions governing the preferred stock which permit the Company to redeem
such stock at any time. Under these arrangements, the amounts attributable to
shares of the preferred stock as to which mandatory redemption rights were
waived are recorded and combined in total with the stockholders' equity
accounts.
On January 19, 1995 a holder of preferred stock converted 250 shares of
preferred stock into 500 shares of common stock of the Company.
At December 31, 1995, cumulative dividends in arrears totaled $870,000
($4.64 per share) and was included in the aggregate involuntary liquidation
value of the preferred stock.
At December 31, 1995, 187,500 shares of authorized but unissued
preferred stock were reserved for issuance upon maturity of the variable rate
subordinated debenture.
(9) Net Loss Per Common Share
Net loss per common share for 1995 and 1994 is based on 13,694,343 and
13,002,050 weighted average shares, respectively. For purposes of computing
net loss per common share, the amount of net loss has been increased by
dividends declared and cumulative undeclared dividends in arrears on preferred
stock.
(10) Commitments
The Company is obligated for office and laboratory facilities and other
rentals under separate operating lease agreements which expire in 2001. The
basic annual rentals are expected to be between $57-59,000 under such
lease. Annual rent expense relating to leases approximated $83,000 in 1995,
and $78,000 in 1994.
Exclusive worldwide rights to manufacture and sell one of the products
developed by the Company were granted to Hercules Incorporated ("Hercules"),
in exchange for an initial license fee of $500,000 pursuant to a licensing
agreement dated as of September 16, 1985. Hercules did not produce
commercially any quantities of the product and by an agreement dated October
15, 1987, the Company and Hercules agreed to terminate the license agreement.
Pursuant to termination agreements negotiated between the parties, the Company
paid Hercules $25,000 for termination of the license and will not refund the
$500,000 initial license fee paid by Hercules. If the Company commercializes
the product, the Company will pay Hercules up to an additional $600,000 from
revenues from the sale or licensing of the product.
(11) Contingency
On September 24, 1982, the Company and McKesson Corporation formed a
joint venture for the purpose of developing, manufacturing and selling certain
whey-based products. On June 26, 1984, McKesson Corporation assigned
to the Company all of its rights, titles and interests in the joint venture in
consideration of a cash payment for the joint venture's inventory and a
commitment to pay an additional amount of approximately $500,000, payable
without interest in five equal annual installments, commencing after the first
fiscal year in which the Company attains pre-tax profits, as defined, or at
least $1 million. Because the payment is dependent upon the Company's
attaining profitable operations in the future, no liability therefore has been
reflected in the accompanying balance sheet.
In May 1995, the Company signed a non-exclusive licensing agreement with
Archer Daniels Midland Company ("ADM") for the manufacture and sale of
AstaXin. On February 29, 1996 ADM informed the Company that it had decided
not to utilize the Technology and requested that IGENE return approximately
$250,000 in payments under the License Agreement. IGENE maintains that ADM is
not entitled to the payments and that additional monies are owed to IGENE.
It is management's contention that it is not probable that this dispute will
result in an unfavorable outcome. Accordingly, no liability has been
reflected in the accompanying balance sheet.
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(12) Income Taxes
At December 31, 1995 and 1994, the Company has federal and state net
operating loss carry-forwards of approximately $19,300,000 and $18,800,000,
respectively, that expire from 1997 to 2010. The recorded deferred tax
asset, representing the expected benefit from the future realization of the
net operating losses, net of the valuation allowance, was $-0- for both years.
The sources of the deferred tax asset is approximately as follows:
1995
Net operating loss carry-forward benefit $ 7,900,000
Valuation allowance (7,900,000)
Deferred tax asset $ ---
(13) Uncertainty
The Company has incurred net losses in each year of its existence,
aggregating approximately $20,300,000 from inception to December 31, 1995 and
its liabilities and redeemable preferred stock exceeded its assets by
approximately $2,300,000 at that date. These factors indicate that the
Company will not be able to continue in existence unless it is able to raise
additional capital and attain profitable operations.
Management has instituted a program of significant cost reductions,
deferred all except immediately necessary capital expenditures and suspended
payment of dividends on the Company's preferred stock. The implementation of
these measures to conserve working capital together with the successful
marketing and licensing of the Company's products, which management hopes to
achieve, may permit the Company to attract additional capital and enable it to
continue.
The Company is actively seeking and is in discussion with a potential
manufacturer of its AstaXin technology. The Company believes this technology
to be highly marketable and is hopeful that an income-producing
technology licensing agreement could be executed during 1996 for this product.
To increase working capital, the Company plans to issue additional stock
to officers and directors and to encourage holders of outstanding warrants to
exercise these rights. The Company will also encourage the holders
of convertible promissory notes to convert them into common stock. To meet
short-term cash needs the Company issued additional promissory notes to
officers and directors. (see also note 15)
(14) Technology Licensing Income
On March 4, 1994 the Company and the Food Science Group of Pfizer Inc.,
New York, N.Y., signed a Technology Evaluation Agreement for AstaXin . The
Agreement provided for cash compensation to IGENE of $250,000 over a three
month period ending May 18, 1994.
On May 11, 1995 the Company and Archer-Daniels-Midland Company signed a
non-exclusive licensing agreement for AstaXin . The Agreement provided for an
initial payment of $200,000 and royalties based on sales. In addition,
the Company received $24,415 in 1995 for technology services pertaining to the
Agreement. The Company also received payment of $25,000 in December, 1995
under the terms of the Agreement. (See Note 15)
(15) Subsequent Events
On February 9, 1996, and March 11, 1996, the Company issued promissory
notes to certain directors of the Company for an aggregate consideration of
$140,000. These notes specify that at any time prior to repayment the
holder has the right to convert the note to common stock of the Company at
$.10 per share for the note issued February 9, 1996 and at $.09 per share for
the note issued March 11, 1996, and to receive warrants for an equivalent
number of common shares at $.10 per share for the note issued February 9, 1996
and at $.09 per share for the note issued March 11, 1996. The promissory
notes are due on demand with interest charged at the prime rate.
On February 29, 1996 Archer Daniels Midland Company terminated its
licensing agreement with the Company. (see note 11)
<PAGE>
<TABLE>
Schedule V
<CAPTION>
IGENE Biotechnology, Inc.
Property, Plant and Equipment
Balance at Balance
beginning Additions at end
Classification of period at cost Retirements of period
Year ended December 31, 1995:
<S> <C> <C> <C> <C>
Laboratory equipment
and fixtures $ 85,092 $ --- $ --- $ 85,092
Pilot plant equipment
and fixtures 56,862 --- --- 56,862
Machinery and equipment 99,313 2,369 --- 101,682
Office furniture and fixtures 42,131 --- --- 42,864
$ 284,131 $ 2,369 $ --- $ 286,500
Schedule VI
<CAPTION>
Accumulated Depreciation and Amortization of Property, Plant and Equipment
Balance at Depreci- Balance
beginning ation at end
Classification of period Expense Retirements of period
Year ended December 31, 1995:
<S> <C> <C> <C> <C>
Laboratory equipment
and fixtures $ 71,758 $ 1,333 $ --- $ 73,091
Pilot plant equipment
and fixtures 56,430 425 --- 56,863
Machinery and equipment 79,021 5,213 --- 84,234
Office furniture and
fixtures 41,715 1,077 --- 42,792
$ 248,932 $ 8,048 $ --- $ 256,980
Schedule X
<CAPTION>
Supplementary Income Statement Information
1995 1994
<S> <C> <C>
Maintenance and repairs .........................$ 35,849 $ 34,251
Taxes, other than payroll and income taxes....... 15,267 15,438
Advertising costs................................ --- 4,691
</TABLE>
DIRECTORS
Michael G. Kimelman
Chairman of the Board
Partner of Kimelman & Baird, LLC
Thomas L. Kempner
Vice Chairman of the Board
Chairman and Chief Executive Officer of
Loeb Partners Corporation, investment bankers
Stephen F. Hiu, Ph.D.
President and Treasurer
John A. Cenerazzo
Chairman and Director, InfoCore, Inc.
of Great Britain
Joseph C. Abeles
Private Investor
Sidney R. Knafel
Managing Partner of SRK Management Company,
a private investment concern
Patrick F. Monahan
Director of Manufacturing
OFFICERS AND
PRINCIPAL EMPLOYEES
Stephen F. Hiu, Ph.D.
President, Secretary and Director
of Research and Development
Dexter W. Gaston
Chief Executive Officer
Patrick F. Monahan
Director of Manufacturing
COUNSEL
McGuire Woods Battle & Boothe LLP
Baltimore, Maryland
AUDITORS
Berenson & Company
100 Park Avenue, 11th Floor
New York, New York
ANNUAL MEETING
The Annual Meeting of the Shareholders of IGENE
Biotechnology, Inc. will be held on Tuesday,
November 12, 1996, 10:00 a.m. local time at Kimelman
& Baird, LLC, 100 Park Avenue, Suite 1101-S2, New
York, N.Y. 10017
INFORMATION REQUESTS
Requests for information about IGENE
Biotechnology, Inc. as well as for copies of filings
made to the Securities and Exchange Commission,
including a copy of the Company's Annual Report on
Form 10-KSB, may be obtained without charge by
written request to the Corporate Secretary or by
calling the Company's offices.
TELECOMMUNICATIONS
IGENE Biotechnology, Inc.
9110 Red Branch Road
Columbia, Maryland 21045-2020
Telephone : (410)997-2599
(800)346-6421
Telecopier : (410)730-0540
EMail: [email protected]
<PAGE>
