AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 23, 1998
FILE NO. 333-41581
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
IGENE BIOTECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 2899 52-1230461
(State or other jurisdiction Primary Standard Industrial (I.R.S. employer
of incorporation or Classification Code Number identification number)
organization)
9110 Red Branch Road
Columbia, Maryland 21045
410-997-2599
(Address, including zip code, and telephone
number, including area code, of
registrant's principal executive offices)
Stephen F. Hiu
9110 Red Branch Road
Columbia, Maryland 21045
410-997-2599
(Name, address including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Martin H. Neidell, Esq.
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038-4982
Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
================================================================================================================================
Title of Each
Class of Dollar Proposed Proposed Amount of
Securities Amount To Be Maximum Maximum Registration
to be Registered Offering Aggregate Fee
Registered Price Per Offering
Unit Price
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8% Notes $ 5,000,000 $1.00 $5,000,000 $1,475
- --------------------------------------------------------------------------------------------------------------------------------
Warrants 50,000,000 $ .10 $5,000,000 $1,475
Expiring 2007
- --------------------------------------------------------------------------------------------------------------------------------
Rights to Purchase 5,000,000 ---- ---- ----
Warrants and Notes
- --------------------------------------------------------------------------------------------------------------------------------
Units consisting
of $.10 5,000,000 $ .10 $5,000,000 ----
principal amount of
Notes and one Warrant
================================================================================================================================
</TABLE>
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 23, 1998
JANUARY __, 1998 PROSPECTUS
IGENE BIOTECHNOLOGY, INC.
Rights to Purchase
Warrants to Buy up to 50,000000 Shares of Common Stock Expiring 2008
and
$5,000,000 Principal Amount of 8% Notes due 2003
IGENE Biotechnology, Inc. (the "Company") is distributing, at no cost,
to holders of record on __________, 1998 (the "Record Date"), of the Company's
Common Stock, Preferred Stock, warrants, options and convertible notes
(collectively the "Securities"), transferable rights (the "Rights") to subscribe
for and purchase at $.10 (the "Subscription Price") per unit (a "Unit"), __ of a
Unit for each share of Common Stock (or common stock equivalent) owned by such
holder. Each holder of a Rights certificate (a "Rights Certificate") who
exercises his or her right to subscribe for all Units that can be subscribed for
with the Rights evidenced by such Certificates (the "Basic Subscription Right")
will have the Right to subscribe for additional Units, if any, available as a
result of any unexercised Rights. See "Subscription to Rights - Additional
Subscription Privilege."
The holders of the Preferred Stock, warrants, options and convertible
notes will receive the number of Rights they would have received had such
holders converted such securities into, or exercised such securities for, Common
Stock on the Record Date. Each whole Unit will entitle the holder to receive
$.10 principal amount of 8% Notes Due 2003 (the "Notes") and a ten year warrant
(the "New Warrants") to purchase one share of Common Stock at an exercise price
of $.10 per share.
The Investors (as defined in the Prospectus Summary) have entered into
an Agreement pursuant to which they have agreed to subscribe for, in accordance
with specified percentages, enough Rights so that the amount of Rights
subscribed for in the Rights Offering (as defined in the Section entitled "The
Rights Offering") shall total at least $2,000,000. (Cover continued on following
page)
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" beginning at Page __ of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
===============================================================================
Underwriting Proceeds to Company(1)
Discounts and
Price Subscription Price Commissions Minimum(2) Maximum(3)
- -------------------------------------------------------------------------------
Per Unit $.10 None $.10 $.10
- -------------------------------------------------------------------------------
Total $5,000,000 None $2,000,000 $5,000,000
===============================================================================
(1) Before deducting expenses payable by the Company estimated to
be $250,000.
(2) Minimum assumes that $2,000,000 in Rights are subscribed by the
Investors.
(3) Maximum assumes that the Rights Offering is fully subscribed.
<PAGE>
(cover page continued)
A transferable Rights Certificate evidencing the total number of
Rights to which a stockholder is entitled is being sent with this Prospectus to
each stockholder entitled to participate in the Rights Offering.
The New Warrants and Notes are immediately detachable upon the
issuance of the Units. The Company does not intend to list or quote the Rights,
Units, Notes or New Warrants. The New Warrants are immediately exercisable upon
issuance.
The Company's common stock is quoted on the OTC Bulletin Board. The
closing price of a share of the Company's common stock on January 21, 1998 was
$.10.
The Rights may not be exercised by any person, and neither this
Prospectus nor any Rights Certificate shall constitute an offer to sell or a
solicitation of an offer to purchase any Notes or New Warrants in any
jurisdiction in which such transactions would be unlawful.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (of which this Prospectus is
a part) under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Rights, Notes and New Warrants (the "Offered Securities")
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits thereto. For further
information with respect to the Company or the Offered Securities, reference is
hereby made to such Registration Statement and exhibits filed therewith.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports, proxy and information statements
and other information with the Commission. The Registration Statement, including
the exhibits thereto, as well as such reports, proxy and information statements
and other information filed by the Company with the Commission, may be
inspected, without charge, and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
Room 1024; 7 World Trade Center, 13th Floor, New York, New York 10048; and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials may be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, Room 1024, at
prescribed rates. The Commission maintains a Web site that contains reports,
proxy and information statements and other information relating to the Company.
The address of the Commission's Web site is (http://www.sec.gov). The Company's
Common Stock trades in the over-the-counter Market.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES CONTAINED IN THIS
PROSPECTUS. EACH INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY PRIOR
TO MAKING AN INVESTMENT IN THE OFFERED SECURITIES.
THE COMPANY
The Company was incorporated under the laws of the State of Maryland
on October 27, 1981. Its executive offices, laboratories and pilot plant unit
are located at 9110 Red Branch Road, Columbia, Maryland 21045, and its telephone
number is (410) 997-2599.
The Company is engaged in the business of industrial microbiology and
related biotechnologies. The Company was formed 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.
In 1996, the Company began commercial fermentation trials with another
potential manufacturing partner. On July 3, 1997, the Company signed a
non-exclusive toll manufacturing agreement with Fermic, S.A. de C.V., Mexico
City ("Fermic"), for the production of its natural astaxanthin pigment,
AstaXin(R). Commercial production is expected to be reached in the first quarter
of 1998. This agreement is intended to aid the Company in producing enough
AstaXin(R) to meet demand, although there is no assurance that sufficient
quantities will be able to be produced or that demand will materialize.
THE RIGHTS OFFERING
The Company is distributing at no cost to holders of Common Stock,
convertible notes, options, Preferred Stock and warrants, as of the Record Date,
one transferable Right for each share of Common Stock or, in the case of
convertible notes, options, Preferred Stock and warrants, a number of Rights
equal to the number of common shares such holder would receive had such
securities been converted into or exercised for Common Stock as of the Record
Date.
DESCRIPTION........... Each Right entitles the holder to purchase __ of a
Unit. The Subscription Price for each Unit is $.10
and entitles the holder to $.10 principal amount of
8% Notes Due 2003 and one New Warrant to purchase
Common Stock at an exercise price of $.10 for a
period of ten years.
RECORD DATE........... __________, 1998.
EXPIRATION DATE....... 5:00 p.m. (New York time), ______ __, 1998 (the
"Expiration Date").
TRANSFER.............. The Rights are transferable.
ADDITIONAL SUBSCRIPTION
PRIVILEGE............. Each holder of a Rights Certificate who exercises his
or her right to subscribe for all Units that can be
subscribed will have the privilege of subscribing at
the Subscription Price for additional Units, if any,
available as a result of Rights that are not
exercised. See "Subscription to Rights--Additional
Subscription Privilege."
STANDBY COMMITMENT
TO PURCHASE UNITS..... Several investors in the Company (Messrs.
Abeles, Cenerazzo, Kempner, Knafel and Manocherian)
(the "Investors"), have entered into an Agreement
pursuant to which they have agreed that if holders
of Securities of the Company purchase less than
$2,000,000 in Units, then the Investors will
purchase at the Subscription Price, the difference
between $2,000,000 and the amount of Units purchased
by such holders.
DILUTION OF
EXISTING COMMON
STOCK................. Upon consummation of the Rights Offering, the
percentage of the Company's voting securities owned
by existing stockholders, other than the Investors,
could be reduced significantly on a fully diluted
basis. On a fully diluted basis, assuming exercise
of the then outstanding options and warrants and
conversion of notes and Preferred Stock, the
outstanding voting power held by such stockholders
will be reduced from approximately 25% to
approximately 18% of the outstanding voting power of
the Company.
RISK FACTORS.......... An investment in the Offered Securities involves
various risks, and prospective investors should
carefully consider the matters discussed under "Risk
Factors" prior to any investment in the Company.
<PAGE>
RISK FACTORS
The Offered Securities involve a high degree of risk. Prospective
investors should review the entire Prospectus and carefully consider, among
other factors, the following matters:
REQUIREMENTS FOR ADDITIONAL FUNDS
The Company believes it will require additional financing of between
$1,000,000 and $2,000,000 (depending on whether the Company meets its $2,000,000
sales projections for fiscal 1998) in order to meet its operating expenses over
the next twelve months. There can be no assurance that the Company will be able
to secure additional financing, or that such financing will be available on
terms which are favorable to the Company.
LACK OF COVERAGE; SUSPENSION OF DIVIDENDS
The Company is not generating sufficient revenues from operations to
cover its fixed charges, including scheduled interest and dividend payments on
its outstanding Debenture and the Preferred Stock, or to fund cash repayment of
the Debenture or ultimate redemption of all of the Redeemable Preferred Stock.
In December 1988, the Company suspended payment of the fourth quarter dividend
payable on the Preferred Stock. Any resumption of dividend payments on Preferred
Stock would require significant improvements in cash flow. As of September 30,
1997, total dividends in arrears on the Company's preferred stock was
$1,286,450.
GOING CONCERN OPINION FROM INDEPENDENT AUDITORS
Due to the Company's past history of losses, the Independent Auditors'
Report contains an explanatory paragraph that states that the Company's
recurring losses and limited capitalization raise substantial doubt about the
Company's ability to continue as a going concern. In addition, the auditor
issued a going concern opinion for the Company.
HISTORICAL NET LOSSES; STOCKHOLDERS' DEFICIT
The Company has incurred net losses since its inception. During its
fiscal year ended December 31, 1996 and nine months ended September 30, 1997,
the Company incurred net losses of $776,873 and $958,726, respectively. The
Company expects to continue to incur net losses for a period of time, and hopes
to become profitable by the end of 1998. There can, however, be no assurance
that after the Rights Offering the Company will be able to achieve increased
revenue or profitability. At September 30, 1997, the Company had a stockholder's
deficit of $3,792,015.
DEBT FINANCING; INABILITY TO SERVICE DEBT
After completion of the Rights Offering, the Company will continue to
have substantial debt obligations of a minimum of approximately $4.6 million and
a maximum of approximately $7.6 million and will continue to have significant
Preferred Stock dividend obligations. Even if the Rights Offering is completed,
the Company's ability to meet its debt service obligations will depend on a
number of factors, including its ability to generate operating cash flow. There
can be no assurance that targeted levels of operating cash flow will actually be
achieved. The Company had a negative debt to capitalization ratio as of December
31, 1996 and as of September 30, 1997.
LACK OF LIQUIDITY
The operating activities of the Company continue to consume net cash.
The Company believes that as a result of the proceeds of the Rights Offering,
the Company will have sufficient cash liquidity through September 30, 1998. In
order for cash flow from operating activities to be sufficient to sustain the
Company's operations beyond that date, the Company will likely be required to
achieve an increase in revenue or to raise additional financing. There can be no
assurance that such an increase in revenue will occur or that it will be
sufficient to maintain adequate cash to continue operations beyond that date.
Negative cash flows from operations for the year ended December 31, 1996 were
$610,842. Negative cash flows from operations for the nine months ended
September 30, 1997 were $651,022.
POSSIBLE DECLINE OF STOCK PRICE AFTER RIGHTS OFFERING
The issuance of New Warrants pursuant to the Rights Offering to
purchase an aggregate of up to 50,000,000 shares of Common Stock would represent
approximately 42% of the equity of the Company on a fully diluted basis, which
could adversely affect the market price of the Common Stock.
DILUTION OF VOTING POWER OF EXISTING COMMON STOCK
Upon consummation of the Rights Offering, the percentage of the
Company's voting securities owned by existing stockholders, other than the
Investors, could be reduced significantly on a fully diluted basis. On a fully
diluted basis, assuming exercise of all outstanding options and warrants and
conversion of notes and Preferred Stock, the outstanding voting power held by
such stockholders will be reduced from approximately 25% to approximately 18% of
the outstanding voting power of the Company. Shareholders of the Company may
also experience additional dilution should the Company raise additional funds
through equity financing.
ANTI-DILUTION PROVISIONS OF THE SERIES A PREFERRED STOCK
The Rights Offering will trigger the anti-dilution provisions of the
Series A Preferred Stock. This will dilute the voting power of the holders of
Common Stock.
OWNERSHIP BY CONTROLLING STOCKHOLDERS AND POSSIBLE EFFECTS
The Investors currently hold approximately 35.8% of the outstanding
Common Stock of the Company, and approximately 75.4% on a fully diluted basis
assuming the exercise of warrants and conversion of notes. Following the
Financing Transaction, the Investors will (depending upon participation by
outside shareholders in the Rights Offering) own between 80.6% and 82.94% of the
Common Stock of the Company. As a result of the controlling ownership in the
Company, the Investors will be able to elect all the directors of the Company
and control management of the Company.
ABSENCE OF DIVIDENDS ON COMMON STOCK
The Company does not anticipate paying any cash dividends in the
foreseeable future. In addition, unless full cumulative dividends have been paid
on the outstanding Series A Preferred Stock, the Company will not be entitled to
pay dividends on the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Rights Offering, a total of approximately 140
million shares of Common Stock will be issuable upon conversion of notes and
upon exercise of warrants. The conversion of such notes and the exercise of such
warrants, would result in the issuance of a substantial number of shares of
Common Stock, thereby diluting the proportionate equity interests of the holders
of the Common Stock. No prediction can be made as to the effect, if any, that
future sales of shares, or the availability of shares for future sales, will
have on the market price of the Common Stock prevailing from time to time. Sales
of substantial amounts of Common Stock (including shares issued upon the
exercise of warrants or options or conversion of notes), or the perception that
such sales could occur, could adversely affect the prevailing market prices for
the Common Stock.
ABSENCE OF A STABLE MARKET
There is no established trading market for the Notes and New Warrants
and there can be no assurance as to the liquidity of any market that may develop
for these securities or as to the price at which holders will be able to sell
such securities. The Company does not intend to list or quote any of the Rights,
Units, Notes or New Warrants.
DEPENDENCE ON OTHERS
The Company has no manufacturing facilities other than its pilot plant
facility in Columbia, Maryland. Thus, to manufacture its products, the Company
has either licensed its products to third-party manufacturers or entered into
production arrangements with third-party manufacturers or joint venture
partners. The Company has no control over the delivery of such products, which
has resulted in delays in the Company's commercialization of its products. To
date, the Company has not had the resources to construct its own manufacturing
facilities, and the proceeds from this offering will not provide the funds
(which would be substantial) necessary for such construction.
PRICE FLUCTUATIONS OF MATERIALS USED IN PRODUCTION
The principal raw materials utilized by the Company are generally sold
as commodities and, thus, display cyclical price fluctuations. However, the
primary raw materials are sugar and corn syrup which do not fluctuate in a way
that could materially affect the business of the Company.
LACK OF PROFITABILITY AND RELIANCE ON ONE PRODUCT
The Company's success is dependent upon the successful development and
sale of AstaXin(R), a fermented yeast product used as a feed supplement in
aquaculture. The Company believes AstaXin(R) will be profitable based on
material costs, manufacturing costs and selling price. However, no assurance can
be given that sufficient quantities of AstaXin(R) will be available to meet
demand or that such demand will materialize.
To date, the Company has produced under contract and sold limited
commercial quantities of only one of its products, namely its ClandoSan(R)
chitin-based pesticide and has produced test market quantities of AstaXin(R).
The Company has not produced or sold significant commercial quantities of any
other products which it has developed. Expenses associated with research and
product development and manufacturing and marketing activities will continue to
impact profitability in the near future.
TECHNOLOGICAL CHANGE
The Company expects that technological developments in the
biotechnology field will continue at a rapid pace and that its commercial
success will depend upon its ability to be at the leading edge of specialized
biotechnologies and to attain a competitive technological position in
specialized product areas.
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(R) will be sold is a highly competitive industry worldwide and one large
company is marketing, and certain large companies are presently known to be
planning to develop and market, competitive products.
PATENTS AND PROPRIETARY INFORMATION
It is the Company's policy to protect its intellectual property rights
by a variety of means, including applying for patents and trademarks in the
United States and 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 on 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 1994, 1995, and 1996, 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(R),
ClandoSan(R), Weyco-Serv(R) and streptococcus lytic enzyme. Extensive additional
foreign applications for AstaXin(R) have been submitted.
GOVERNMENT REGULATION
The manufacturing and marketing of most of the products the Company
has developed or intends to develop will likely 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. All products developed by the Company to date have been affirmed to
be Generally Recognized as Safe ("GRAS") under applicable regulations of the FDA
by a panel of independent scientific experts convened by the Company to evaluate
its processes and products. All of the Company's products must 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 its products so conform. There can he no assurance, however, that
such assertions and affirmations will not be reversed by the FDA, the USDA or
the EPA and that the Company will not then be required to obtain costly and
time-consuming approvals from these agencies or comparable agencies in foreign
countries. 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.
ATTRACTION AND RETENTION OF KEY PERSONNEL
The Company's ability to develop marketable products and to maintain a
competitive position in light of technological developments will depend, in
part, on its ability to attract and retain highly qualified scientific,
technical and management personnel. Intense present competition for such
personnel is expected to continue into the future. The Company believes that it
has been successful in attracting skilled and experienced personnel and is
seeking additional scientific, technical and management personnel necessary for
its operations. Retention of such personnel will depend on the Company's ability
to provide such personnel with competitive compensation arrangements, equity
participation and other benefits.
LACK OF REVENUE FROM OPERATIONS
The Company did not receive any revenues from operations during the
third quarter of fiscal year 1997.
LACK OF LIQUIDITY OF COMMON STOCK
The trading market for, and liquidity of, the Company's common stock
is limited. The average daily trading volume for the common stock during the
period from December 12, 1997 through January 15, 1998 was 3,565 shares. This
represents approximately .0055% of the outstanding shares of common stock of the
Company, assuming exercise or conversion of all warrants, options, and
convertible notes, or approximately .019% assuming such securities are not
exercised or converted.
PROCEEDS FROM THE RIGHTS OFFERING MAY BE USED TO REPAY DEBT
If the Company does not raise at least $2 million in the Rights
Offering, the Investors have agreed to purchase Units equal to the difference
between $2 million and the proceeds received from the Rights Offering. This will
insure to the Company that the Company will receive at least $2 million of
proceeds pursuant to the Rights Offering; HOWEVER, concurrently therewith the
Company will have to repay the Bridge Loan if requested by the Investors so
that, in that event, the Company (after repayment of the Bridge Loan and payment
of the expenses of the Rights Offering) will not have any proceeds which could
be used for working capital purposes. In such case, the Company will have to
seek additional financing to continue its operations.
EFFECT OF LITIGATION ON THE COMPANY'S OPERATIONS
Archer Daniels Midland, Inc. ("ADM") has sued the Company for patent
infringement requesting a preliminary injunction. ADM's request for injunctive
relief was denied. The Company filed a $300,450,000 civil racketeering and trade
secrets lawsuit against ADM. The Company contends that ADM stole the Company's
new secret formula for making a natural compound that turns the pale flesh of
farmbred salmon into the bright pink of wild fish. The Company is also claiming
breach of contract. Should ADM ultimately prevail, the Company could be enjoined
from producing its natural astaxanthin pigment, AstaXin(R). (See "Legal
Proceedings").
RISK OF LOW PRICED STOCKS
Trading in the Company's Common Stock is subject to a Commission rule
that imposes additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors. For transactions covered by this rule, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. The rules require
the delivery, prior to any transaction involving a penny stock, of a disclosure
schedule prepared by the Commission explaining important concepts involving the
penny stock market, the nature of such market, terms used in such market,
broker-dealer's duties to the customer, a toll-free telephone number for
inquiries about the broker-dealer's disciplinary history and the customer's
rights and remedies in case of fraud or abuse in the sale. Disclosure must also
be made about commissions payable to both the broker-dealer and the registered
representative, and current quotations for the securities. Finally, monthly
statements must be sent disclosing recent price information for penny stock held
in the account and information on the limited market in penny stocks.
THE RIGHTS OFFERING
The Company has been without sufficient working capital with which to
fund its operations and has been borrowing funds, from time to time, on a demand
basis from various directors of the Company. Based on the Company's operations,
it now needs the infusion of a greater amount of funds on a long term basis. Due
to the size of the proposed new financing, the Company, as described below, has
determined that it is feasible to permit all stockholders of the Company to
participate in such financing. The Company felt it was impractical to enable
stockholders to participate in the prior financings due to the smaller nature of
the prior financings, the cost and time delay involved and the complete
uncertainty regarding the Company's prospects.
Commencing in 1997, the Company has had discussions with the directors
and potential outside investors with respect to a long-term financing. In June
1997, the Company substantially completed negotiations with its directors
relating to this financing. As part of this agreement and in view of the
advanced nature of the potential commercial production of the astaxanthin
pigment it was determined to offer to the stockholders of the Company the
opportunity to participate in the financing on the same terms as the directors.
Effective August 1997, various directors of the Company (Messr.
Abeles, Cenerazzo, Kempner and Knafel) and an outside investor (collectively the
"Investors") and the Company entered into the Loan Agreement pursuant to which
the Investors agreed to make advances to the Company from time to time in an
aggregate principal amount for all such advances outstanding not to exceed
$2,000,000 at any time (the "Bridge Loan"). The $2,000,000 of loans made on and
after June 5, 1997, as hereinafter described, are all part of the Bridge Loan.
The outstanding principal amount of the Bridge Loan bears interest at the rate
of 8% per annum. The Bridge Loan is due and payable on the first to occur of
March 31, 1998, or the closing of the Rights Offering (as described below). At
the option of each Investor, all indebtedness under the Bridge Loan will be
repaid and canceled through the use of proceeds from the Rights Offering or will
be converted into Common Stock of the Company at a conversion price of $.10 per
share.
The Company has agreed to undertake a Rights Offering (the " Rights
Offering") in which the Company would seek to raise up to $5,000,000 by issuing
to each holder of Common Stock (including Common Stock issuable upon exercise or
conversion of outstanding convertible notes, preferred stock, warrants and
options of the Company on an as converted basis) one transferable Right for each
share of Common Stock or equivalent thereof. Each Right will entitle the holder
to purchase prior to the Expiration Date of such Right at a subscription price
of $.10 per Unit, ____ of a Unit.
If the Company does not raise at least $2 million in the Rights
Offering, the Investors have agreed to purchase Units equal to the difference
between $2 million and the proceeds received from the Rights Offering. This will
insure to the Company that the Company will receive at least $2 million of
proceeds pursuant to the Rights Offering; however, concurrently therewith the
Company will have to repay the Bridge Loan if requested by the Investors so
that, in that event, the Company (after repayment of the Bridge Loan and payment
of the expense of the Rights Offering) will not have any proceeds.
In consideration of the Investors committing to make the Bridge Loan
and agreeing to subscribe for Units pursuant to the Rights Offering to insure
the Company receives at least $2 million pursuant to the Rights Offering, the
Company agreed to issue to the Investors warrants, at an exercise price of $.10
per share, to purchase 10 shares of Common Stock for each $1.00 of loans made by
each Investor. This represents an aggregate of 20,000,000 shares issuable upon
exercise of such warrants. In addition, the Investors agreed that all loans made
by them to the Company since November 1995 will be changed from a demand basis
and will mature concurrently with the maturity of the Notes.
DESCRIPTION OF UNITS
Each Unit will consist of $.10 principal amount of Notes and a New
Warrant to purchase one share of Common Stock. The Notes shall be general,
unsecured obligations of the Company and may be issued under an indenture with a
trustee to be selected by the Company. The Notes will bear interest at the rate
of 8% per annum and will be due and payable five years from the date of
issuance. Interest will be payable either annually or at maturity, at the
Company's option. Beginning at the end of 1998, the Notes will be prepayable to
the extent of 25% of the Company's net earnings determined in accordance with
generally accepted accounting principles, plus any applicable tax savings. The
prepayment right may be waived by the holders of two-thirds of the Notes. The
Notes may be tendered at the principal amount in payment of the exercise price
of the New Warrants. The Notes may be prepaid by the Company at any time and
from time to time. The Notes will not contain any negative or financial
covenants and are not subordinated to any indebtedness of the Company. The
following will constitute defaults under the Notes:
(a) failure to pay interest on the Notes after the interest becomes due
and payable and continuance of such default for a period of 30 days;
(b) failure to pay all or any portion of the principal of the Notes
when such principal becomes due and payable, whether at maturity or
otherwise and continuance of such default for a period of 5 days; or
(c) certain events of bankruptcy, insolvency, or reorganization which
are voluntary or, if involuntary, continue for a period of 90 days.
Upon default the Notes will become due and payable. Holders of two-thirds of the
principal amount of the Notes outstanding will be able to amend, modify or waive
any of the provisions of the Notes, including defaults. The Notes do not contain
any change of control provisions.
The New Warrants will expire ten years after issuance and will be
exercisable at an exercise price of $.10 per share. The New Warrants will be
exercisable for either cash, surrender of Notes valued at the principal amount
thereof or by cashless exercise in which the holders elect to receive a number
of shares of Common Stock of the Company having a fair market value equal to the
difference between the fair market value of a share of Common Stock and the
exercise price. If after three years, the closing price of a share of Common
Stock is $1.00 or more, then the Company shall have the option to redeem the New
Warrants at a price of $.01 per Warrant by notice given at least 30 days prior
to the redemption date. If the New Warrants are called for redemption, they must
be exercised prior to the redemption date or the right to exercise them will be
forfeited. The number of shares of Common Stock issuable on exercise of the New
Warrants and the exercise price thereof will be subject to adjustment in the
event of stock dividends, stock splits, reorganizations, consolidations or
mergers.
<PAGE>
SUBSCRIPTION TO RIGHTS
GENERAL
The Company is distributing as soon as practicable after the date of
this Prospectus, at no cost, to each holder of the Securities on the Record
Date, one Right for each share of Common Stock and Common Stock equivalent. Each
Right entitles the holder to purchase at the subscription price of $.10 per
Unit, ____ Units. Rights expire at 5:00 p.m. New York City time on __________,
1998 (the "Expiration Date"), unless the offering period is extended by the
Company. The Rights will be fully transferable and may be traded on any market
that develops for them, if any. The Rights are evidenced by transferable Rights
Certificates in registered form evidencing the total number of Rights to which
the holder is entitled. A Rights Certificate will be sent to each holder of
Securities.
There is no minimum number of Rights which must be exercised in the
Rights Offering.
Holders who receive Rights may (a) purchase Units through the exercise
of their Rights, (b) transfer the Rights, (c) subscribe for additional Units or
(d) allow the Rights to expire unexercised.
All commissions, fees and other expenses (including brokerage
commissions and transfer taxes) incurred in connection with the exercise of
Rights are the responsibility of the holder of the Rights and none of such
commissions, fees, or expenses shall be paid by the Company.
THE BOARD OF DIRECTORS OF THE COMPANY DOES NOT MAKE ANY RECOMMENDATION
WITH RESPECT TO THE EXERCISE OF THE RIGHTS BY ANY SHAREHOLDER OR OTHER PERSON.
FRACTIONAL UNITS
No fractional Units will be issued pursuant to the exercise of the
Rights. Persons exercising Rights will be able to purchase that number of Units
equal to the product of their Rights multiplied by _____, rounded down to the
next whole Unit.
RIGHTS OFFERING PERIOD
The Rights will be exercisable until the Expiration Date. At the
Expiration Date, any unexercised Rights will become void and have no value. In
the event the Expiration Date is extended, the Company will make a public
announcement setting forth the date to which the Rights Offering is being
extended.
METHOD OF OFFERING
The Rights Offering is being made directly by the Company. The Company
will not pay any underwriting discounts or commissions, finders fees or other
remuneration in connection with any distribution of the Rights or sales of the
Notes and New Warrants offered hereby, other than the fees paid to American
Stock Transfer & Trust Company (the "Exercise Agent"). The Company estimates
that the expenses of the Rights Offering will total approximately $250,000.
HOW TO EXERCISE AND SUBSCRIBE
The Exercise Agent will act as the Company's agent to accept exercises
of the Rights. The Rights may be exercised until the Expiration Date by
completing and signing the Rights Certificates, which accompany this Prospectus,
and by mailing or delivering the forms to the Exercise Agent accompanied by
payment in full for the number of whole Units. Subject to the late delivery and
payment procedures set forth below, a signed and completed Rights Certificate
together with proper payment must be received by the Exercise Agent no later
than the Expiration Date. If time does not permit delivery of any executed
Rights Certificate before the Expiration Date, but the Exercise Agent has
received, before the Expiration Date, full payment (subject to the limited
exception for delayed payment as described below), in proper form, for the
Rights exercised, together with a notice of guaranteed delivery and a letter
(which may be delivered by facsimile transmission) or telegram from a commercial
bank or trust company, or a member firm of any registered United States national
securities exchange or of the National Association of Securities Dealers, Inc.,
which contains (i) the certificate number of the Rights Certificate relating to
the Rights, (ii) the name and address of the Rights Offering participant, (iii)
the number of the Rights with respect to which the Rights Certificate was
issued, (iv) the number of the Rights being exercised and (v) a guarantee that a
properly completed and duly executed Rights Certificate will, within five
Business Days of the Expiration Date, be delivered to the Exercise Agent, then
the Company will treat such Rights as having been exercised, subject to receipt
of the properly completed and duly exercised Rights Certificate (and receipt of
payment in the case of a permitted delayed payment). LATE DELIVERY OF RIGHTS
CERTIFICATES WILL NOT BE ACCEPTED UNLESS THERE HAS BEEN STRICT COMPLIANCE WITH
THESE REQUIREMENTS OR THE COMPANY WAIVES DEFECTS IN SUCH LATE DELIVERY. The
Company will be the sole judge as to whether there has been compliance with such
requirements. Neither the Company or the Exercise Agent shall have any liability
whatsoever for any Rights Certificate not being accepted.
Rights Certificates and payment should be mailed or delivered by hand
or overnight courier by such holders to:
IF BY MAIL: IF BY HAND OR OVERNIGHT COURIER:
The Exercise Agent's telephone number is __
The method of delivery of a Rights Certificate to the Exercise Agent
is at the risk of the Rights Offering participants. The Company suggests that
express mail or similar overnight courier be used to insure timely delivery.
However, if delivery is by regular mail service, the use of registered or
certified mail, return receipt requested, properly insured, is recommended.
EXECUTED EXERCISE FORMS SHOULD BE MAILED OR DELIVERED TO THE EXERCISE AGENT AND
NOT TO THE COMPANY. QUESTIONS REGARDING THE RIGHTS OFFERING SHOULD BE DIRECTED
TO THE COMPANY.
ADDITIONAL SUBSCRIPTION PRIVILEGE
Any holder of a Rights Certificate who exercises his or her right (the
"Basic Subscription Right") to subscribe for all the Units that can be
subscribed for with the Rights evidenced by such certificate, has the privilege
(the "Additional Subscription Privilege") of subscribing for additional Units at
the Subscription Price. The Units available for additional subscriptions (the
"Remaining Units") will be those that have not been subscribed and paid for
pursuant to the Basic Subscription Rights.
To exercise such privilege, any holder of a Rights Certificate who
completes Form 1 thereon for the maximum number of Units that can be subscribed
for with the number of Rights evidenced by such certificate must also complete
Form 2 on the Rights Certificate and specify the number of additional Units
desired to be subscribed for. When delivering to the Exercise Agent the
completed Rights Certificate and payment for the Units initially subscribed for
under Form 1, IN ORDER FOR THE ADDITIONAL SUBSCRIPTION TO BE VALIDLY EXERCISED,
PAYMENT IN THE MANNER DESCRIBED BELOW UNDER "PAYMENT" MUST ALSO BE ENCLOSED FOR
THE ADDITIONAL UNITS SUBSCRIBED FOR UNDER FORM 2; THESE LATTER FUNDS WILL BE
PLACED IN A SEGREGATED ACCOUNT WITH THE EXERCISE AGENT PENDING ALLOCATION OF ANY
UNITS PURSUANT TO THE ADDITIONAL SUBSCRIPTION PRIVILEGE, WITH ANY EXCESS FUNDS
BEING RETURNED BY MAIL WITHOUT INTEREST OR DEDUCTION AS SOON AS PRACTICABLE
AFTER THE EXPIRATION DATE.
Where there are sufficient Remaining Units to satisfy all additional
subscriptions by participants in the Additional Subscription Privilege, each
such participant will be allotted the number of additional Units subscribed for.
If the aggregate number of Units subscribed for under the Additional
Subscription Privilege exceeds the number of Remaining Units, the number of
Remaining Units initially allotted to each participant in the Additional
Subscription Privilege will be the lesser of (a) the number of Units which that
participant has subscribed for under the Additional Subscription Privilege and
(b) the product (disregarding fractions) obtained by multiplying the number of
the Remaining Units by a fraction of which the numerator is the number of Units
subscribed for by that participant under the Basic Subscription Rights and the
denominator is the aggregate number of Units subscribed for under the Basic
Subscription Right. If after the initial allotment there are still Remaining
Units and holders of Rights whose exercise of the Additional Subscription
Privilege has not been fully satisfied, such Remaining Units will be allocated
(one or more times as necessary) in accordance with the foregoing principle
until all available Remaining Units have been allocated. Any fractional share to
which persons exercising their Additional Subscription Privilege would otherwise
be entitled pursuant to such allocation will be rounded down to the next whole
share.
Holders of Rights Certificates who participate in the Additional
Subscription Privilege will be notified as soon as practicable after the
Expiration Date of the number of additional Units, if any, allotted to them.
PAYMENT
Payment in full of the aggregate exercise price for the number of
whole Units subscribed for pursuant to the Rights Offering must be made by
Rights Offering participants in United States dollars by check, certified check,
cashier's check, postal or express money order or wire transfer. In order to
avoid any unnecessary delays, it is recommended that payment for Units be made
by certified check, cashier's check or postal or express money order. Checks or
money orders should be made payable to the order of America Stock Transfer &
Trust Company, as Exercise Agent. A member of a registered national securities
exchange, a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office or correspondent in the United
States may exercise Rights by delivering (including by facsimile transmission) a
completed and signed Rights Certificate as described above without including
payment of the exercise price therefor to the Exercise Agent, provided that (a)
such purchasing entity guarantees payment of the purchase price in form and
substance satisfactory to the Company and the Exercise Agent and (b) its payment
is actually received no later than five Business Days following the date of its
exercise. ALL EXERCISES OF RIGHTS CERTIFICATES ARE SUBJECT TO THE CLEARANCE OF
ALL CHECKS THROUGH NORMAL BANKING CHANNELS, AND THE RECEIPT OF PAYMENT BY THE
EXERCISE AGENT.
NO WITHDRAWAL RIGHTS
Exercises of Rights pursuant to the Rights Offering will be
irrevocable and will not be subject to withdrawal.
CERTAIN LEGAL MATTERS
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of any exercise will be determined by the Company in its
sole discretion, and its determination will be final and binding. The Company
reserves the absolute right to reject any exercise if such exercise is not in
accordance with the terms of the Rights Offering or not in proper form or if the
acceptance thereof or the issuance of Units pursuant thereto could be deemed
unlawful or for any other reason it deems appropriate. The Company also reserves
the absolute right to waive any deficiency or irregularity with respect to any
Rights Certificate or the exercise thereof.
PURCHASE AND SALE OF RIGHTS
Until the Expiration Date, the Rights may be bought and sold in
private transactions or in normal market transactions, such as those through
stockbrokers, assuming a market develops for the Rights. The sale of the Rights
may involve the payment of a commission and applicable taxes, if any. No trading
market exists as of the date of this Prospectus for the Rights. There is no
assurance that any market for the Rights will develop, or if developed, will be
sustained. The number of Rights evidenced by a Rights Certificate may be divided
or combined and transferred at the office of the Exercise Agent, but a Rights
Certificate may not be divided in such a way as to result in a fractional right.
<PAGE>
EFFECT OF RIGHTS OFFERING
The following table sets forth the equity ownership of the Company
prior to the consummation of the Financing Transaction* and assuming exercise of
outstanding warrants and conversion of outstanding notes and Preferred Stock.
<TABLE>
<CAPTION>
BEFORE FINANCING TRANSACTION
---------------------------------------------------------------------------
ASSUMING EXERCISE OF ALL WARRANTS
AND CONVERSION
OF NOTES, PREFERRED AND DOW DEBENTURE(1)
---------------------------------------
NUMBER OF PERCENT NUMBER OF PERCENT
COMMON OF COMMON OF
SHARES EQUITY SHARES EQUITY
"INVESTORS"
- -----------
<S> <C> <C> <C> <C>
Joseph C. Abeles 2,113,544 11.04% 12,303,804 18.86%
John A. Cenerazzo 283,872 1.48% 1,579,706 2.42%
Thomas L. Kempner 2,404,365 12.56% 17,033,669 26.11%
Sidney R. Knafel 2,044,716 10.68% 15,168,143 23.25%
Fraydun Manocherian 0 0.00% 3,750,000 5.75%
--------- ------ ---------- ------
All "Investors" as a 6,846,497 35.76% 49,835,321 76.40%
group
All other shareholders 12,297,476 64.24% 15,394,690 23.60%
----------- ------- ----------- -------
All shareholders 19,143,973 100.00% 65,230,012 100.00%
=========== ======== =========== ========
Net Tangible Book
Value per Share ($0.20) ($0.06)
======= ========
* The Bridge Loan and the Rights Offering are collectively referred to as the
Financing Transaction.
(1) "Dow Debenture" means that certain debenture dated July 1, 1988 issued by
the Company to Dow Chemical Company in the principal amount of $1,500,000.
</TABLE>
The above table has been prepared under the following assumptions:
1. Exercise of all warrants, conversion of notes, preferred and Dow
Debenture is defined as: (1) the exercise of all warrants outstanding prior to
the Financing Transaction which are exercisable as of July 31, 1997 or within 60
days thereafter; (2) conversion of all promissory notes outstanding as of July
31, 1997; (3) conversion of all preferred stock outstanding as of July 31, 1997;
and (4) conversion of the Dow Debenture.
<PAGE>
The following tables set forth the equity ownership of the Company
after the consummation of the Financing Transaction, assuming that stockholders
fully subscribe to the Rights Offering and assuming that stockholders do not
purchase any Units upon exercise of the Rights, and that the Investors acquire
$2 million of Units.
<TABLE>
<CAPTION>
AFTER FINANCING TRANSACTION
ASSUMING STOCKHOLDERS PURCHASE UNITS IN
RIGHTS OFFERING
------------------------------------------------------------------------------
ASSUMING EXERCISE OF ALL WARRANTS
AND CONVERSION
OF NOTES, PREFERRED AND DOW
DEBENTURE
--------------------------------------------
NUMBER OF PERCENT NUMBER OF PERCENT
COMMON OF COMMON OF
SHARES EQUITY SHARES EQUITY
INVESTORS
- ----------------------------
<S> <C> <C> <C> <C>
Joseph C. Abeles 2,113,544 11.04% 24,238,662 17.28%
John A. Cenerazzo 283,872 1.48% 3,089,966 2.20%
Thomas L. Kempner 2,404,365 12.56% 37,693,618 26.88%
Sidney R. Knafel 2,044,716 10.68% 34,427,887 24.55%
Fraydun Manocherian 0 0.00% 12,814,635 9.14%
-- ------ ----------- ------
All "Investors" as a 6,846,497 35.76% 112,264,768 80.06%
All other shareholders 12,297,476 64.24% 27,965,244 19.94%
---------- ------- ----------- -------
All shareholders 19,143,973 100.00% 140,230,012 100.00%
========== ========
Net Tangible Book
Value per Share ($0.20) ($0.03)
======= =======
The above table has been prepared under the following assumptions:
</TABLE>
1. Exercise of all warrants, conversion of notes, preferred and Dow
Debenture is defined as: (1) the exercise of all warrants outstanding prior to
the Financing Transaction which are exercisable as of July 31, 1997 or within 60
days thereafter and all New Warrants to be issued in connection with the
Financing Transaction and Bridge Loan; (2) conversion of all promissory notes
outstanding as of July 31, 1997; (3) conversion of notes issued to the Investors
as part of the Bridge Loan; (4) conversion of all preferred stock outstanding as
of July 31, 1997; and (5) conversion of the Dow Debenture.
2. The Investors convert all financing under the Bridge Loan into
common stock of the Company.
3. All stockholders, including the Investors, exercise all Rights
issued to them under the Rights Offering.
<PAGE>
<TABLE>
<CAPTION>
AFTER FINANCING TRANSACTION
ASSUMING STOCKHOLDERS DO NOT
PURCHASE UNITS IN RIGHTS OFFERING
- -------------------------------------------------------------------------------------------------------
ASSUMING EXERCISE OF ALL WARRANTS
AND CONVERSION
OF NOTES, PREFERRED AND DOW
DEBENTURE
--------------------------------------
NUMBER OF PERCENT NUMBER OF PERCENT
COMMON OF COMMON OF
SHARES EQUITY SHARES EQUITY
INVESTORS
- ----------------------
<S> <C> <C> <C> <C>
Joseph C. Abeles 2,113,544 11.04% 15,003,804 16.63%
John A. Cenerazzo 283,872 1.48% 1,879,706 2.08%
Thomas L. Kempner 2,404,365 12.56% 24,908,669 27.61%
Sidney R. Knafel 2,044,716 10.68% 23,043,143 25.54%
Fraydun Manocherian 0 0.00% 10,000,000 11.08%
--- ------ ----------- -------
All "Investors" as a 6,846,497 35.76% 74,835,321 82.94%
group
All other 12,297,476 64.24% 15,394,690 17.06%
shareholders
----------- ------- ----------- -------
All shareholders 19,143,973 100.00% 90,230,012 100.00%
============ =========== ========
Net Tangible Book
Value per Share ($0.20) ($0.04)
======= =======
(1) The effect of the transaction is to increase outstanding shares of
Common Stock, thereby producing an antidilutive effect on loss per
common share.
</TABLE>
The above table has been prepared under the following assumptions:
1. Exercise of all warrants, conversion of notes, preferred and Dow
Debenture is defined as: (1) the exercise of all warrants outstanding prior to
the Financing Transaction which are exercisable as of July 31, 1997 or within 60
days thereafter and only those New Warrants to be issued in connection with the
Financing Transaction such that Units purchased shall total $2,000,000; (2)
exercise of those warrants issued in connection with the Bridge Loan; (3)
conversion of all promissory notes outstanding as of July 31, 1997; (4)
conversion of all preferred stock outstanding as of July 31, 1997; and (5)
conversion of the Dow Debenture.
FINANCIAL INFORMATION
Financial information for the Company for the fiscal year ended
December 31, 1996 and for the nine months ended September 30, 1997, is included
in this Prospectus. In addition, set forth below are the Pro Forma Balance
Sheets, and accompanying notes, which give effect to the Financing Transaction
and Rights Offering. Pro Forma statements of operations have not been presented,
since the transaction does not affect net loss.
<PAGE>
<TABLE>
<CAPTION>
IGENE BIOTECHNOLOGY, INC. BALANCE SHEETS AFTER FINANCING TRANSACTION
ASSUMING STOCKHOLDERS DO NOT PURCHASE ANY UNITS IN RIGHTS OFFERING
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
HISTORICAL PROFORMA HISTORICAL PROFORMA
SEPTEMBER 30, PROFORMA SEPTEMBER 30, DECEMBER 31, PROFORMA DECEMBER 31,
1997 ADJUSTMENTS 1997 1996 ADJUSTMENTS 1996
ASSETS (UNAUDITED) (UNAUDITED) (AUDITED)
Current assets:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 304,581 $ 750,000 1,054,581 41,339 $ 2,000,000 $ 2,041,339
Accounts receivable 14,494 --- 14,494 9,996 --- 9,996
Due from stockholders 97,094 --- 97,094 16,870 --- 16,870
Supplies --- --- 0 6,126 --- 6,126
Equipment held for resale 512,848 --- 512,848 --- --- ---
Deferred costs 92,731 --- 92,731 --- --- ---
Prepaid expenses 946 --- 947 4,652 --- 4,652
--- --- --- ----- -----
Total current assets 1,022,694 750,000 1,772,695 78,983 2,000,000 2,078,983
--------- ------- --------- ------ --------- ---------
Other assets:
Property and equipment, net 53,045 --- 53,045 19,471 --- 19,471
Security deposits 10,600 --- 10,600 10,600 --- 10,600
Total assets $ 1,086,339 $ 750,000 $1,836,340 109,054 $2,000,000 $2,109,054
============ =========== =========== ======== ========== ===========
LIABILITIES,
REDEEMABLE PREFERRED STOCK AND
STOCKHOLDER'S DEFICIT
Current liabilities
Accounts payable and accrued
expenses $ 462,668 --- $ 462,668 300,799 $ --- $ 300,799
Debenture interest payable 90,000 --- 90,000 45,000 --- 45,000
Promissory notes payable 2,332,500 (2,332,500) --- 717,000 (717,000) 0
------------ ----------- ------------ ---------- ----------- -----------
Total current liabilities 2,885,168 (2,332,500) 552,668 1,062,799 --- 345,799
Long - term liabilities:
Promissory notes payable --- 3,082,500 3,082,500 2,717,000 2,717,000
Variable rate subordinated 1,500,000 --- 1,500,000 1,500,000 --- 1,500,000
debenture ----------- ----------- ---------- ----------- ----------- ----------
Total liabilities 4,385,168 750,000 5,135,168 2,562,799 2,717,000 4,562,799
---------- ----------- ----------- ------------ ------------ ----------
Redeemable preferred stock 493,186 --- 493,186 475,982 --- 475,982
------- ------- ------- -------
Stockholders' deficit:
Preferred stock 1,875 --- 1,875 1,875 --- 1,875
Common stock 191,440 --- 191,440 186,311 --- 186,311
Additional paid-in capital 18,062,529 --- 18,062,529 17,971,220 --- 17,971,220
Deficit (22,047,859) --- (22,047,859) 21,089,133 --- (21,089,133)
----------- ----------- ---------- -----------
Total stockholders' deficit (3,792,015) --- (3,792,015) (2,929,727) --- (2,929,727)
---------- ---------- ---------- ----------
Total liabilities, redeemable
preferred stock and stockholders'
deficit $1,086,339 $750,000 $1,836,339 $ 109,054 $2,717,000 $ 2,109,054
========== ======== ========== ========= ========== ===========
</TABLE>
<PAGE>
NOTES TO PROFORMA BALANCE SHEETS:
The above proforma balance sheets provide information about the impact of the
Financing Transaction by showing how it might have affected historical financial
statements if the Transaction had been consummated at an earlier time.
Proforma statements of operations have not been presented, since the Transaction
does not affect net loss. The Financing Transaction, under the assumptions
described below, does not affect common shares outstanding and increases fully
diluted common shares outstanding by 25,000,000 and 40,000,000 shares,
respectively, as of September 30, 1997 and December 31, 1996, thereby producing
an antidilutive effect on loss per common share.
$1,250,000 of Bridge Financing was outstanding as of September 30, 1997 and is
included in the historical balance sheet as of September 30, 1997.
The above unaudited proforma balance sheets have been prepared under the
following assumptions:
1. that the Bridge Loan will be repaid and canceled through the use of
proceeds from the Rights Offering;
2. that the Investors exercise only enough Rights so that the amount of the
Units purchased shall total $2 million;
3. that other stockholders do not purchase any Units; and
4. that, as part of the Financing Transaction, the terms of all promissory
notes will be changed from a demand basis and will mature concurrently
with the maturity of the New Notes.
DESCRIPTION OF BUSINESS
GENERAL
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 agrochemical 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 the FDA, the
USDA or the EPA will accept such independent expert evaluations 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.
The Company does not anticipate any material environmental compliance
costs due to the fact that production is taking place in Mexico and the
manufacturer has responsibility for environmental compliance.
RESEARCH AND DEVELOPMENT
As of December 31, 1996, the Company had expended approximately
$10,200,000 on research and development since its inception on October 27, 1981
and has, as of December 31, 1996 received revenues from product sales of
approximately $1,781,000 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 l997.
The Company's research and development activities have resulted in the
development of processes to produce the products hereinafter discussed.
COMMERCIAL PRODUCTS
ASTAXIN(R)
AstaXin(R) is the Company's tradename for its dried yeast product made
from a proprietary microorganism developed by the Company. AstaXin(R) 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(R) 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.
Prior to 1995 the Company entered into a number of manufacturing and
licensing agreements for commercial quantities of AstaXin(R). In the initial
trials the manufacturing process was successfully scaled-up to 50,000-gallon
fermentors. However, for a number of reasons, outside of the Company's control,
none of these agreements was extended beyond the initial trial periods. This was
not due to the failure of the Company's products, but rather, to outside factors
such as: (1) the manufacturer selling its fermenting plant; (2) the demand for
the manufacturer's own product prohibiting the manufacturer from guaranteeing
production of the Company's product; and (3) the manufacturer not being able to
commit to a long term contract.
In 1995 the Company signed a nonexclusive licensing Agreement with
Archer Daniels Midland Company for the manufacturing and sale of AstaXin(R). 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. ADM stated that its reason for terminating the license agreement was
that it had better technology from another company.
In 1996, the Company began commercial fermentation trials with another
potential manufacturing partner. On July 3, 1997, the Company signed a
non-exclusive toll manufacturing agreement with Fermic, S.A. de C.V., Mexico
City, for the production of its natural astaxanthin pigment, AstaXin(R) (the
"Fermic Contract"). Commercial production is expected to be reached in the first
quarter of 1998. This agreement is intended to aid the Company in producing
enough AstaXin(R) to meet demand, although there is no assurance that sufficient
quantities will be able to be produced or that demand will materialize. The
Company currently does not have agreements to sell AstaXin(R).
The Fermic Contract provides that the manufacturer has a non-exclusive
right to produce AstaXin(R). Fermic will provide the equipment and laboratory
facilities necessary to manufacture and store the product and be responsible for
purchasing raw materials. The Company is responsible for the sales effort and
for insuring the quality of the pigment. The Company also has a role in insuring
the manufacturing of AstaXin(R) works effectively. The term of the Fermic
Contract has been extended to terminate on December 31, 1998, unless extended
further.
Based on estimates of the worldwide amount of farmbred salmon
produced, the Company believes the market for AstaXin(R) is approximately
$185,000,000 worldwide.
CRUSTACEAN SHELL PRODUCTS
ClandoSan(R) is the Company's registered trademark for its natural
pesticide made from crab and crawfish shells and processed into pellets or
granules by patented and patent pending technology developed by the Company. The
product acts by stimulating the growth of normal soil microorganisms, which
produce enzymes that attack nematode eggs. It has secondary effects as a slow
release organic fertilizer. ClandoSan(R) does not have a direct adverse effect
on plantpathogenic 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(R) was registered by the EPA for use with
all agricultural and horticultural, crops in accordance with the Federal
Insecticide, Fungicide, and Rodenticide Act ("FlERA5) section 3(c)(5).
ClandoSan(R) is now registered in 49 states. ClandoSan(R) is not being currently
manufactured. The Company currently does not have any agreements to sell
ClandoSan(R).
WHEY-BASED PRODUCTS
(a) WEYCO-SERV(R)
Weyco-Serv(R) (or NaturServ(R)) 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(R) 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(R) 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(R), the Company will pay Hercules up to an additional $600,000 from
revenues from sale or licensing of the product.
The Company continues to be interested in licensing the Weyco-Serv(R)
technology.
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. The Company does not
have any agreements to manufacture or market these products.
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(TM), its trademark for a high molecular weight
fluctose 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 and fragrances technology. No such agreements are currently in place.
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 trademarks 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 1994, 1995, and 1996, 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(R),
ClandoSan(R), Weyco-Serv(R), and streptococcus lytic enzyme. Extensive
additional foreign applications for AstaXin(R) 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 specified 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(R), 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, 1997, the Company had 8 employees, three 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.
DESCRIPTION OF PROPERTY
The Company leases 8,480 square feet of space in the Oakland Ridge
Industrial Park located at 9110 Red Branch Road, Columbia, Maryland. The Company
occupies the space under a lease, expiring on January 31, 2001. Approximate
rental expense is $73,000 for each remaining year of the lease.
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.
USE OF PROCEEDS
The Company anticipates using the cash proceeds received by it from
the Financing Transaction for working capital and general corporate purposes.
The Company will receive between $2,000,000 and $5,000,000 from the Rights
Offering depending on the level of participation by outside stockholders. The
working capital will be used for research and development, marketing and general
overhead. If the Company does not attract participation in the Rights Offering
from outside investors, proceeds from the Rights Offering may be required to be
used to repay the Bridge Loan.
LEGAL PROCEEDINGS
Archer Daniels Midland, Inc. ("ADM") filed a lawsuit against the
Company on July 21, 1997 in the U.S. District Court in Greenbelt, Maryland
alleging patent infringement. ADM sought injunctive relief and damages.
On August 4, 1997, the Company filed a $300,450,000 civil racketeering
and trade secrets lawsuit in U.S. District Court in Baltimore, Maryland, against
ADM. The Company contends that ADM stole the Company's new secret formula for
making a natural compound that turns the pale flesh of farmbred salmon into the
bright pink of wild fish. The Company is also claiming breach of contract of the
license agreement entered into between ADM and the Company. The Company claims
that it complied with all material terms of this agreement including the
concentration levels of its pigment.
The Company's claim was re-asserted as a counterclaim against ADM and
the two cases were joined in the District Court in Baltimore, Maryland on August
24, 1997. On September 10, 1997 the District court denied ADM's request for a
preliminary injunction on the basis that ADM could not demonstrate a likelihood
of success on the merits. Management believes ADM's claims are meritless.
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITION WITH IGENE
Michael G. Kimelman 58 Chairman of the Board of Directors
Thomas L. Kempner 70 Vice Chairman of the Board of
Directors
Stephen F. Hiu 41 Director, President, Secretary,
Acting Treasurer, and Director of
Research and Development
Ramin Abrishamian 44 Director and Chief Executive Officer
Patrick F. Monahan 47 Director, and Director of
Manufacturing
Joseph C. Abeles 83 Director
John A. Cenerazzo 73 Director
Sidney R. Knafel 67 Director
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, a registered broker dealer and investment
advisor. He is a founder of Blue Chip Farms, a standard bred horse-breeding
farm, and has been an officer 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, CCC Information Services Group,
Inc., Energy Research Corp., Intermagnetics General Corp., Northwest Airlines,
Inc. and Roper Starch Worldwide, Inc.
RAMIN ABRISHAMIAN was appointed Chief Executive Officer in July 1997. From April
1996 to July 1997, he was an independent consultant. From February 1990 to April
1996, he held various positions with Remediation Technologies, including
president and general manager of a subsidiary. For seven years prior thereto he
held various positions with Arthur D. Little Co. He received a Master of Science
degree from M.I.T., and a Bachelor of Science degree from Strathcylde
University, Scotland, both in chemical and process engineering.
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.
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, Bluegreen Corporation (formerly Patten Corp.), 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 a Director
emeritus of National Penn Bank Shares, Inc. of Boyertown, Pennsylvania, a
Director emeritus of National Penn Bank and a Director of U.S. Axle Corporation.
SIDNEY R. KNAFEL, a Director of the Company since 1982, has been Managing
Partner of SRK Management Company, a private investment concern since
1981; Chairman of BioReliance Corporation since 1982 and Chairman of Insight
Communications, Inc. since 1985. Mr. Knafel is also currently a Director of
Cellular Communications International, Inc., CoreComm Incorporated, General
American Investors Company, Inc., NTL Incorporated and some private companies.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of July 31, 1997, with
respect to beneficial ownership of shares of the Company's outstanding Common
Stock by (i) each person known to the Company to own more than five percent of
its Common Stock, (ii) each Director, and (iii) all Directors and executive
officers as a group.
Number of
Name and Address Shares Percent*
Joseph C. Abeles 12,303,804 1 41.9%
220 E. 42nd Street, Suite 505
New York, NY 10017
John A. Cenerazzo 1,612,456 2 7.9%
Stokesay Castle Lane
Reading, PA 19606
Ramin Abrishamian 0 --
c/o IGENE Biotechnology, Inc.
9110 Red Branch Road
Columbia, MD 21045
Stephen F. Hiu 783,833 3 3.9%
c/o IGENE Biotechnology, Inc.
9110 Red Branch Road
Columbia, MD 21045
Thomas L. Kempner 17,033,668 4 50.4%
c/o Loeb Partners Corporation
61 Broadway
New York, NY 10006
Michael G. Kimelman 3,049,657 5 14.3%
c\o Kimelman & Baird, LLC
100 Park Avenue
Suite 1101-S2
New York, NY 10017
Sidney R. Knafel 15,168,144 6 47%
c\o SRK Management Company
126 East 56th Street
New York, NY 10022
Patrick F. Monahan 542,000 7 2.8%
c\o IGENE Biotechnology, Inc.
9110 Red Branch Road
Columbia, MD 21045
All Directors and Officers 50,493,562 8 81.6%
as a Group (8 persons)
Fraydun Manocherian 3,750,000 9 16.4%
* Under the rules of the Securities and Exchange Commission, the calculation
of the percent assumes for each person that only such person's warrants,
options or convertible notes are exercised or converted and that no other
person exercises or converts outstanding warrants, options or convertible
notes. Accordingly, these percentages are not on a fully-diluted basis.
1 Includes 2,109,404 shares, 2,250 shares issuable upon conversion of Series
A Preferred Stock, $392,663 in demand notes convertible into 4,592,083
shares and warrants to purchase 5,583,427 shares. Also includes 4,140
shares held by his wife and 12,500 shares issuable upon conversion of
Series A Preferred Stock held by his wife.
2 Includes 283,458 shares, warrants to purchase 713,513 shares, 32,750 shares
which are subject to options currently exercisable or exercisable within 60
days, and $49,622 in demand notes convertible into 582,321 shares. Also
includes 414 shares held by his wife.
3 Includes 500 shares held by Dr. Hiu and 783,333 shares which are subject to
options currently exercisable or exercisable within 60 days.
4 Includes 386,972 shares and warrants to purchase 212,960 shares held by Mr.
Kempner; 94,000 shares held by a trust under which Mr. Kempner is one of
two trustees and the sole beneficiary; $258,998 in demand notes convertible
into 2,797,320 shares and warrants to purchase 2,797,320 shares held by a
trust under which Mr. Kempner is one of two trustees and the sole
beneficiary; 1,482,987 shares and warrants to purchase 931,744 shares held
by a trust under which Mr. Kempner is one of two trustees and a one-third
beneficiary; $79,200 in demand notes convertible into 1,147,670 shares and
warrants to purchase 1,147,670 shares held by a trust under which Mr.
Kempner is one of two trustees and a one-third beneficiary; 182,526 shares
held by Mr. Kempner's wife; 257,880 shares held by trusts under which Mr.
Kempner is one of two trustees and whose brothers are beneficiaries;
$258,997 in demand notes convertible into 2,797,310 shares and warrants to
purchase 2,797,310 shares held in a trust under which Mr. Kempner is one of
two trustees and whose brother is beneficiary.
5 Includes 521,104 shares, warrants to purchase 1,325,674 shares and $63,070
in demand notes convertible into 804,568 shares held by Mr. Kimelman. Also
includes 81,600 shares held by Kimelman & Baird, LLC, in which Mr. Kimelman
has a 50% interest, and 180,000 shares held by M. Kimelman & Co., in which
Mr. Kimelman has a 60% interest. Also includes 136,713 shares held by his
wife, in which Mr. Kimelman disclaims beneficial ownership.
6 Includes 1,022,661 shares, warrants to purchase 3,522,835 shares, and
$271,225 in demand notes convertible into 3,039,103 shares owned by Mr.
Knafel. Also includes 1,022,055 shares, warrants to purchase 3,522,387
shares and $271,225 in demand notes convertible into 3,039,103 shares held
in trust for the benefit of Mr. Knafel's adult children, as to which Mr.
Knafel disclaims any beneficial interest.
7 Includes 2,000 shares held by Mr. Monahan and 540,000 shares which are
subject to options currently exercisable or exercisable within 60 days.
8 Includes 7,768,414 shares, 1,356,083 shares which are subject to options
currently exercisable or exercisable within 60 days, unexpired warrants to
purchase 22,554,837 shares, 14,750 shares subject to the redemption of
7,375 shares of redeemable preferred stock, and $1,645,000 in demand notes
convertible into 18,799,477 shares.
9 Includes $187,500 in demand notes convertible into 1,875,000 shares and
warrants to purchase 1,875,000 shares.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
RESULTS OF OPERATIONS
Sales revenue for the nine months ended September 30, 1997 and 1996 of
$14,394 and $40,315, respectively, decreased 64.3%. Gross profit from product
sales for the nine months ended September 30, 1997 and 1996 of $3,495 and
$18,005, respectively, decreased 80.6%. This revenue and gross profits from
product sales are composed entirely of sales and gross profit from sales of the
Company's ClandoSan(R) product. Sales and gross profits have decreased since the
Company has made only minimal marketing efforts for this product in 1997 and has
focused on the development, production and marketing of its AstaXin(R) product.
Additional sales of ClandoSan(R) will depend on continued marketing arrangements
with distributors for the product and the Company's own limited direct sales. In
the long term, the Company hopes to license rights to manufacture, sell, and
distribute ClandoSan(R). In the near term, the Company expects to continue to
focus its efforts on its AstaXin(R) product, and has signed, on June 24, 1997, a
toll manufacturing agreement for the production of AstaXin(R) which is to begin
no later than December 31, 1997.
Technology services income for the nine months ended September 30,
1996 resulted from a one-time technology licensing services fee earned in 1996.
Research, development and pilot plant expenses for the nine months
ended September 30, 1997 and 1996 of $255,681 and $241,049, respectively,
increased by 6.1%. This increase reflects increased development and pilot plant
activities for AstaXin(R), as described above.
Marketing and selling expenses for the nine months ended September 30,
1997 and 1996 of $7,216 and $3,918, respectively, increased by 84.2% and are
related primarily to the Company's marketing efforts for AstaXin(R). These
expenses would be expected to increase if production and sales increase, and
will depend on marketing arrangements with distributors of this product. These
expenses would be offset by revenues from sales of the product.
General and administrative expenses for the nine months ended
September 30, 1997 and 1996 of $250,814 and $245,848, respectively, increased by
2.0%. This increase reflects the support activities associated with the
increased development and pilot plant activities for AstaXin(R), as described
above.
Interest expense for the nine months ended September 30, 1997 and 1996
of $219,716 and $114,439, respectively, increased by 92.0%. This was caused by
the additional debt issued in the form of promissory notes to certain directors
of the Company and one individual investor during 1997 to finance the Company's
operations.
Litigation expenses of $280,000 for the quarter ended September 30,
1997 represent legal fees incurred in the Company's suit against Archer
Daniels-Midland Inc. ("ADM") alleging theft of trade secrets and breach of
contract and in its defense of ADM's suit against the Company alleging patent
infringement. Management expects to recover legal expenses through damage awards
and/or preservation of rights associated with the Company's product. There can
be no assurance that the Company will receive damage awards or have its rights
to its product preserved. The Company presently estimates that the cost of this
litigation will be approximately $1,000,000 per year. At the present time, a
range of reasonably possible loss from the litigation cannot be estimated.
As a result of the foregoing, the Company reported a net loss of
$541,619, or $.03 per common share during the third quarter of 1997, compared to
a net loss of $216,730, or $.01 per common share in the same period in 1996. The
weighted average number of common shares outstanding increased to 18,976,637, in
the third quarter of 1997 compared to 18,604,472 in the third quarter of 1996.
This increase in shares reflects the semi-annual issuance of common stock as
payment of interest on a variable note subordinated debenture and the issue of
472,834 shares for exercise of employee stock options.
UNCERTAINTY
The Company has incurred net losses in each year of its existence,
aggregating approximately $22,000,000 from inception to September 30, 1997 and
its liabilities and redeemable preferred stock exceeded its assets by
approximately $3,800,000 at that date. These factors indicated 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 has found a manufacturer for its AstaXin(R) product. The
Company believes this technology to be highly marketable and hopes to begin
distribution of this product in early 1998.
To increase working capital, the Company plans to issue additional
stock rights. To meet short-term cash needs the Company has issued additional
promissory notes to officers and directors.
FINANCIAL POSITION
In December 1988, 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 increase the liquidation preference or redemption value of the
preferred stock. As of September 30, 1997, total dividends in arrears on the
Company's preferred stock was $1,286,450, of which $206,450 ($5.76 per share)
was included in the carrying value of the redeemable preferred stock and
$1,080,000 ($5.76 per share) is included in the liquidation preference of the
limited redemption preferred stock.
1996 COMPARED TO 1995
RESULTS OF OPERATIONS
Sales revenue for the year ended December 31, 1996 increased from
$25,563 in 1995 to $43,091 in 1996. The increase in overall sales revenue (68%)
resulted from an increase in domestic sales of ClandoSan(R). The Company hopes
to find a licensee for ClandoSan(R) in 1997 as it continues to focus its efforts
on its AstaXin(R) product. Long-term production and sales of AstaXin(R) 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(R) were available for sale in 1996. 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 seeking additional investment to enable
it to purchase or lease a manufacturing facility of its own. Additional sales of
ClandoSan(R) will depend on continued marketing arrangements with distributors
for the product. The Company expects to continue its own limited sale of these
products until a suitable licensee is found and a Licensing Agreement
formalized.
Cost of product sales as a percentage of product sales decreased to
54% in 1996 from 66% in 1995 and are attributed to decreased freight charges
incurred by the Company.
Research, development and pilot plant expenses decreased approximately
11% for the current year. This decrease was attributed to reduced payroll
expenses resulting from a vacant position in the research department and reduced
equipment repair expenses. Research and development costs may be expected to
increase gradually in support of increased manufacturing efforts for AstaXin(R),
but would be offset by technology licensing and technology services income.
Marketing, general and administrative expenses increased 6% in 1996
when compared to the expenses in 1995. Marketing expenses related to the
Company's AstaXin(R) product could be expected to increase if production and
sale of AstaXin(R) proceeds, but this will depend on marketing arrangements with
distributors of the product. This increase would be offset by sales income or
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(R) and ClandoSan(R)
worldwide, but only if commercial quantities of THE products are manufactured.
Interest expense for the year ended December 31, 1996 increased by
approximately $40,600 over the prior year. This increase reflects the increase
in accumulating interest due on additional promissory notes issued to certain
directors of the Company, and an addition to the increase in the interest rate
being charged on the variable rate subordinate debenture from 8% to 12%
effective October 1, 1996.
In 1995, the Company's operational costs were offset by aggregate
payments totaling $249,215, which are part of a Licensing Agreement for
AstaXin(R), which was terminated on February 29, 1996.
As a result of the foregoing, the Company reported a net loss of
$776,873, or $.04 per common share in 1996, compared to a net loss of $503,156,
or $.04 per common share in 1995. The weighted average number of common shares
outstanding increased to 18,604,171 in 1996 from 13,694,343 in 1995. This
increase in shares in 1996 reflects the annual issuance of common stock as
payment of interest on a variable note subordinated debenture, the conversion of
2,500 shares of the Company's redeemable preferred stock into 5,000 shares of
common stock on January 23, 1996, and the issuance of 4,290,000 shares of common
stock to certain directors of the Company in lieu of retired Promissory Notes
and warrants issued from August 25, 1993 through March 7, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has been funded primarily by equity
contributions, loans from stockholders and license fees. As of September 30,
1997, the Company had a working capital deficit of approximately $1,862,473, and
cash and cash equivalents of $304,581, consisting of proceeds from Promissory
Notes issued to certain Directors and an individual investor of the Company
described below.
Cash used by operations in the nine months ended September 30, 1997
and 1996 amounted to $651,022 and $475,801, respectively. To date, the Company
has achieved only minimal sales of its ClandoSan(R) and AstaXin(R) products
while it seeks additional manufacturing capability for AstaXin(R).
$644,654 was used by investing activities for the nine months ended
September 30, 1997. This includes an investment of $512,848 in equipment to be
resold and deferred costs of $92,731 relating to an agreement to manufacture
AstaXin(R) as described below, and $39,075 in equipment required at the
Company's facilities to perform test runs for production of AstaXin(R).
For a summary of the Company's financing activities see "Certain
Relationships And Transactions." To continue operations short term, the Company
will consider issuing additional stock and debt 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.
Over the next twelve months, the Company believes it will need between
$1,000,000 and $2,000,000 (depending on whether the Company meets its sales
projections of $2,000,000 for fiscal 1998) for working capital. The Company
hopes to achieve this level from profits from the sales of its products, the
Rights Offering and from additional financing. The Company currently does not
have any material commitments for capital expenditures in 1998.
The Company intends to spend approximately $350,000 on technology
research over the next twelve months, which will be used to research new strains
of pigment.
The Company does not believe that inflation has had a significant
impact on the Company's operations during the past three years.
OTHER DEVELOPMENTS
On July 3, 1997, the Company signed a non-exclusive toll manufacturing
agreement with Fermic, S.A. de C.V., Mexico City, for the production of its
natural astaxanthin pigment, AstaXin(R). Commercial production is expected to be
reached in the first quarter of 1998. This agreement will aid the Company in
producing enough AstaXin(R) to meet demand. No demand has yet materialized for
the product.
The Fermic Contract provides that the manufacturer has a non-exclusive
right to produce AstaXin(R). Fermic will provide the equipment and laboratory
facilities necessary to manufacture and store the product and be responsible for
purchasing raw materials. The Company is responsible for the sales effort and
for insuring the quality of the pigment. The Company also has a role in insuring
the process of manufacturing AstaXin(R) works effectively. The term of Fermic
Contract has been extended to terminate on December 31, 1998, unless extended
further.
<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Since inception, the Company has been unable to pay its operating
expenses without outside assistance. Financing from outside sources, including
institutional lenders and customers, has not been available to the Company. Due
to the difficulty or impossibility in obtaining adequate outside financing, the
time delay and expense which would be occasioned in attempting to secure such
financing and the Company's immediate need for operating capital, since August
1993 various Directors of the Company have made periodic loans to the Company in
order to insure the Company's continued viability. The loans made by the
Directors are evidenced by demand promissory notes bearing interest at the prime
rate. All the notes are convertible into Common Stock at the market price at the
time the notes were issued. The Directors also received warrants to purchase the
number of shares of Common Stock into which the notes are convertible with an
exercise price equal to the market price at the time the note was issued. All
the Directors of the Company (excluding Ramin Abrishamian, Steven Hiu and
Patrick Monahan) participated in these transactions.
As of November 20, 1997 the amount owed to directors of the Company
was $2,395,000. The number of shares issuable to directors if all notes and
warrants are exercised is 52,598,954.
On November 16, 1995 and December 22, 1995, the Company issued demand
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 note to common stock of the
Company at $.05 (the then current market price) per share. In connection with
such issuance, the holders received warrants for an equivalent number of shares
of common stock exercisable at $.05 per share.
On December 14, 1995, the shareholders of the Company ratified action
taken by the Board of Directors on April 3, 1995, with respect to the
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 number of shares of common stock of the Company at $.125 per share,
which was the market price of the common stock on April 3, 1995, the date on
which the action was approved by the Board. Such warrants expire on April 3,
1998.
On February 9, 1996, and March 11, 1996, the Company issued demand
promissory notes to certain directors of the Company for an aggregate
consideration of $140,000. 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
$.10 per share for the note issued February 9, 1996, and at $.09 per share for
the note issued March 11, 1996 (the then current respective market prices). In
connection with such issuance's, the holders received 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.
On April 23, 1996, May 9, 1996 and June 7, 1996, the Company issued
demand promissory notes to certain Directors of the Company for an aggregate
consideration of $177,000. 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 $.06 per share for the notes issued April 23, 1996 and May 9, 1996,
and at $.05 for the note issued June 9, 1996 (the then current respective market
prices). In connection with such issuances, the holders received warrants for an
equivalent number of common shares at $.06 per share for the notes issued April
23, 1996 and May 9, 1996, and at $.05 per share for the note issued June 7,
1996.
On July 24, 1996 and September 24, 1996, the Company issued demand
promissory notes to certain Directors of the Company for an aggregate
consideration of $160,000. 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 $.115 per share for the note issued July 24, 1996, and at $.125 per
share for the note issued September 24, 1996 (the then current respective market
prices). In connection with such issuances, the holders received warrants for an
equivalent number of common shares at $.115 per share for the note issued July
24, 1996, and $.125 per share for the note issued September 24, 1996.
On November 13, 1996 and December 11, 1996, the Company issued demand
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 $.09 per share for the notes dated November 13, 1996 and December 11,
1996 (the then current market prices). In connection with such issuances, the
holders received warrants for an equivalent number of common shares at $.09 per
share for the notes issued November 13, 1996 and December 11, 1996.
On January 15, 1997, the Company issued demand promissory notes to
certain Directors of the Company for an aggregate consideration of $70,000.
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 $.07 per share (the then
current market price). In connection with such issuances, the holders received
warrants for an equivalent number of common shares at $.07 per share.
On February 24, 1997, the Company issued demand 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 note to common stock of the Company at $.11 per share (the then
current market price). In connection with such issuances, the holders received
warrants for an equivalent number of common shares at $.11 per share.
On April 3, 1997, the Company issued demand promissory notes to
certain Directors of the Company for an aggregate consideration of $99,500.
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 (the then current
market price) per share. In connection with such issuances, the holders received
warrants for an equivalent number of common shares at $.10 per share.
On May 8, 1997, the Company issued demand promissory notes to certain
Directors of the Company for an aggregate consideration of $96,000. 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 $.135 (the then current market price)
per share. In connection with such issuances, the holders received warrants for
an equivalent number of common shares at $.135 per share.
As part of the Financing Transaction, on June 5, 1997, July 3, 1997,
July 29, 1997, September 4, 1997, September 24, 1997, October 20, 1997, November
20, 1997 and December 5, 1997 the Company issued demand promissory notes to the
Investors for an aggregate consideration of $2,000,000. 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. In connection with such
Issuances, the holders received warrants for an equivalent number of common
shares at $.10 per share. These issuances are all part of the Bridge Loan.
<PAGE>
MARKET FOR 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, 1997 was 17. The Preferred Stock currently is not quoted on NASDAQ
or any system.
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 of 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 since 1995.
CALENDAR QUARTER High Low
- -----------------------------------------------------------------------------
First Quarter 1995 $.13 $.06
Second Quarter 1995 $.31 $.02
Third Quarter 1995 $.13 $.02
Fourth Quarter 1995 $.13 $.01
First Quarter 1996 $.16 $.03
Second Quarter 1996 $.14 $.04
Third Quarter 1996 $.16 $.11
Fourth Quarter 1996 $.12 $.07
First Quarter 1997 $.115 $.07
Second Quarter 1997 $.17 $.09
Third Quarter $.25 $.11
Fourth Quarter $.14 $.09
<PAGE>
Management obtained the above information 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
aggregate number of record holders of the Common Stock as of October 1, 1997 was
250. The Company believes it has more than 700 beneficial holders of its Common
Stock. As of ____________, 1998, the high and low bid and asked prices for the
Common Stock, as shown in the "Pink Sheets" were as follows:
HIGH Low
Bid $. $.
ASK $. $.
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, 1996 the total amount of dividends in arrears with
respect to the Company's Preferred Stock was $1,179,246.
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.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation paid by the Company to its Chief Executive Officer. No other
executive officer received a salary and bonus for 1996 which exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
ANNUAL COMPENSATION
- ------------------------------------------------------------------------------
Other Stock All
Name and Principal Salary Bonus Annual Options Other
Position Year ($) ($) Compensation (#) Compensation
------------------ ---- ----- ----- ($) ($)
<S> <C> <C> <C>
Dexter W. Gaston, 1996 48,494 1,418,502
Chief Executive
Officer (1)
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Gaston was employed by the Company from January 11, 1996
until January 7, 1997. The Board of Directors of the Company determined not to
renew Mr. Gaston's contract past such date.
</TABLE>
STOCK OPTION PLAN
Other than the 1986 Stock Option Plan (the "1986 Plan") and the 1997
Stock Option Plan, the Company does not have any profit sharing, incentive
compensation or retirement plans.
The table below sets forth information with respect to stock options
granted in 1996 to the executive officer named in the Summary Compensation
Table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------
Individual Grants
- ----------------------------------------------------------------------------
Number Percent
of of Total
Securities Options/SARs Exercise
Underlying Granted or Expiration
Name Option/SARs To Employees Base Date
(a) Granted(#) In Fiscal Price (e)
(b) Year ($/Sh)
(c) (d)
- ------------------------------------------------------------------------------
Dexter W.Gaston 1,418,502 63.9% .05 1/11/06
- ------------------------------------------------------------------------------
*Mr. Gaston's options vested as follows: 1/3 on signing with
the Company, 1/3 at the end of January 1997 and 1/3 in January 1998.
Due to the decision not to renew Mr. Gaston's contract, only 1/3 of
these options vested and 2/3 went back into the option pool.
On August 16, 1996, the Board of Directors approved the exchange of
all outstanding options under the 1986 Plan, including options held by all
officers of the Company, for new options having an exercise price of $.05 per
share, which was the market price of a share of Common Stock on that date.
The following table provides information regarding the number of
shares covered by both exercisable and unexercisable stock options for the
executive officer named in the Summary Compensation Table as of December 31,
1996, and the value of "in-the-money" options as of that date. An option is
"in-the-money" if the per share market value of the underlying stock exceeds the
option exercise price per share. No options were exercised in 1996.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
- -------------------------------------------------------------------------------
Value Of
Number Of Unexercised
Securities In-
Underlying The-Money
Shares Value Options/SARs Options/SARs
Name Acquired Realized At Fiscal At Fiscal
(a) On ($) Year-End Year-End
Exercise (c) (#) ($)
(b) Exercisable/Unexercisable Exercisable/
Unexercisable
(d) (e)
- ------------------------------------------------------------------------------
Dexter W. Gaston 0 ---- 472,834/945,668 18,913/37,827
- -------------------------------------------------------------------------------
(1) The value of unexercised in-the-money options at December 31, 1996, is
based on the difference between the market price on December 31, 1996
($.09 per share) and the per share option exercise price, multiplied by
the number of shares of common stock underlying such option.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of federal income tax consequences is based on
current law, is for general information only and is not based upon or supported
by a ruling of the Internal Revenue Service (the "Service"). The tax treatment
of a holder of Rights, Notes, Warrants or Common Stock may vary depending upon
the holder's particular situation. Certain holders (including insurance
companies, tax-exempt organizations, financial institutions, broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States) may be subject to special rules not discussed below. ALL HOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF
RECEIVING OR ACQUIRING, HOLDING, EXERCISING (IN THE CASE OF THE RIGHTS OR NEW
WARRANTS) AND DISPOSING OF THE RIGHTS, NOTES, NEW WARRANTS OR COMMON STOCK,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, FOREIGN AND PENDING
TAX LAWS.
RIGHTS
RECEIPT OF RIGHTS. Pursuant to Section 305(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), a holder should not recognize income for
federal income tax purposes by reason of the receipt of a Right, provided the
full Subscription Price for the Units is attributable to the Notes. The Company
believes that the full Subscription Price for the Units should be attributable
to the Notes and, accordingly, intends to treat the distribution of the Rights
as a nontaxable distribution.
If the Service were to take a contrary position with respect to this
matter, by deeming the distribution of Rights to constitute a partially or fully
taxable distribution, a holder receiving a Right would be required to treat some
or all of the fair market value of the Right received as a dividend, taxable as
ordinary income, but only to the extent of the current and accumulated earnings
and profits of the Company. To the extent the deemed distribution exceeds the
current and accumulated earnings and profits of the Company, such excess would
be treated first as a nontaxable recovery of adjusted tax basis in the security
with respect to which the Right was distributed and then as gain from the sale
or exchange of such security. To the extent a Right is received in a taxable
distribution, its tax basis would equal the fair market value of the Right as of
the date of the distribution.
Generally, the tax basis of a stock right received in a nontaxable
distribution is determined by allocating the holder's tax basis in the
securities with respect to which the right was distributed between such
securities and the right, in proportion to their relative fair market values on
the date the right is received, except that (unless the holder affirmatively
elects to determine its basis in the right as just described) the holder's tax
basis in the right is deemed to be zero if the fair market value of the right on
such date is less than 15% of the fair market value of the securities with
respect to which the right was distributed. If the right goes unexercised, any
basis allocated to the right is reallocated to the securities with respect to
which the right was distributed. It is expected that the Rights will have a tax
basis of zero. The holding period of a Right will include the holding period for
the securities with respect to which the Right was distributed.
EXERCISE OF RIGHTS. No gain or loss will be recognized by a holder of
Rights upon exercise of the Rights for cash. The adjusted tax basis of Units
acquired upon exercise of Rights will equal the sum of the Subscription Price
and the holder's adjusted tax basis in the Rights. The holding period for Units
acquired upon exercise of Rights will commence on the date of such exercise.
EXPIRATION OF RIGHTS WITHOUT EXERCISE. If a holder of a Right allows
it to expire without exercise, the expiration will be treated as a sale or
exchange of the Right on the expiration date. However, assuming the Rights were
received in a nontaxable distribution, a holder should not recognize a loss as a
result of the expiration of the Right.
NOTES
As a general rule, interest paid or accrued on the Notes, as well as
market discount, if any, and original issue discount ("OID") will be treated as
ordinary income to holders. Except as discussed below with respect to OID,
interest payable on the Notes will be includable in a holder's income as it is
received or accrued, in accordance with the holder's regular method of
accounting.
Since interest on a Note may accrue instead of being paid currently,
the Notes will be issued with OID. The amount of the OID will equal the
principal amount of the Notes plus all interest payable on the Notes (the
"stated redemption price at maturity"), less the issue price of the Notes. The
Company intends to treat the full Subscription Price as constituting the issue
price of the Notes. If, however, the Service were to take a contrary position
and treat part of the Subscription Price as being attributable to the Warrants,
the issue price of the Note would be reduced, and the amount of OID would be
increased.
A holder of a Note must include such OID in gross income as it
accrues, on a daily basis under a constant-yield method and, possibly, in
advance of the receipt of any cash attributable to such income. A subsequent
purchaser of a Note also will be required to include in gross income, for each
day on which it holds such Note, the daily portions of OID accruing with respect
to the Note under a constant-yield method. However, if the excess of the
remaining stated redemption price at maturity over the cost of the Note to such
purchaser is less than the aggregate amount of such daily portions for all days
after the date of purchase until final maturity of the Note , then such daily
portions will be reduced proportionately in determining the income of such
purchaser.
A holder who acquires a Note subsequent to its original issuance at a
market discount (that is, a discount that exceeds any unaccrued OID, where such
discount exceeds a prescribed de minimis amount) will recognize ordinary income
to the extent any principal prepayment does not exceed any accrued and
previously unrecognized market discount, and any gain upon the disposition or
retirement of the Note will be treated as ordinary income to the extent of any
accrued and previously unrecognized market discount. In addition a holder of a
Note with market discount may be required to defer deductions for a portion of
the holder's interest expense on any debt incurred or continued to purchase or
carry such Note. Holders should consult their tax advisors regarding the
existence, if any, and tax consequences of market discount.
If a Note is sold or exchanged, the seller will recognize gain or loss
equal to the difference between the amount realized on the sale or exchange and
the adjusted tax basis of the Note. The adjusted tax basis will generally be the
cost of the Note to such holder, increased by any OID or market discount
included in income by the holder with respect to the Note and reduced by any
distributions previously received. Such gain or loss will generally be capital
gain or loss.
NEW WARRANTS
A holder should not recognize income for federal income tax purposes
by reason of the purchase of a New Warrant as part of the purchase of a Unit.
Further, a holder of a New Warrant should not recognize income for federal
income tax purposes upon an exercise of a New Warrant using cash or by cashless
exercise described under "The Rights Offering--Description of Units." A holder
of New Warrants who uses Notes to pay the exercise price of the New Warrants,
may however recognize gain to the extent the exercise price exceeds the holder's
adjusted tax basis in the Notes surrendered upon such exercise, and may
recognize ordinary income to the extent of any accrued, but previously
unrecognized, interest on the surrendered Notes.
If a New Warrant is sold or exchanged, other than pursuant to a
redemption by the Company, the seller will recognize gain or loss equal to the
difference between the amount realized on the sale or exchange and the adjusted
tax basis of the New Warrant. Based on the assumption that the New Warrant has
no value, the adjusted tax basis of a New Warrant will be zero. Any such gain or
loss will generally be capital gain or loss. Amounts received upon redemption of
New Warrants by the Company may be treated as a dividend, taxable as ordinary
income, depending in part upon the holder's actual and constructive ownership of
Common Stock at the time of the redemption.
An adjustment to the exercise price of a New Warrant, or the failure
to make such an adjustment (and possibly an adjustment to the number of shares
of Common Stock purchasable upon the exercise of a New Warrant or the failure to
make such an adjustment), in certain circumstances may result in a distribution
that could be taxable as a dividend under the Code to the holder of the New
Warrant or the holders of Common Stock or rights to acquire Common Stock.
Alternatively, a modification of the terms of a New Warrant may be treated as a
taxable exchange of the New Warrant for a new right to purchase Common Stock,
with the holder recognizing gain or loss (as discussed above), even though no
cash may have been distributed to the holder.
COMMON STOCK
The sale or other disposition of Common Stock acquired on exercise of
a New Warrant will result in the recognition of gain or loss by the holder of
such Common Stock in an amount equal to the difference between the amount
realized and the holder's adjusted tax basis in the Common Stock. Any such gain
or loss will generally be capital gain or loss. The holding period of Common
Stock acquired upon the exercise of New Warrants commences on the date the New
Warrants are exercised
POTENTIAL LIMITATIONS ON USE OF LOSS CARRYFORWARDS
In general, upon a change of ownership, Section 382 of the Code limits
the amount of a loss corporation's taxable income that could be offset annually
by its carryforwards of net operating losses (and certain "built-in" losses that
are economically accrued but not recognized at the time of a change of
ownership) to an amount equal to the product obtained by multiplying the
aggregate value of such corporation's capital stock immediately prior to the
requisite change of ownership by the federal long-term tax-exempt interest rate.
A change of ownership occurs and Section 382 of the Code will apply if, within a
three year "testing period," there is more than a 50 percentage point increase
in the capital stock of the loss corporation held by persons who own (actually
or constructively) at least five percent in value of the loss corporation's
stock (with persons who separately are less than five percent stockholders
generally being treated in the aggregate as a single stockholder). Except in
limited circumstances, options to acquire stock generally will not be treated as
if they have been exercised.
Although the Rights Offering of itself will not trigger a change of
ownership for purposes of Section 382 of the Code, future events beyond the
control of the Company, such as transactions in its Common Stock or other
ownership interests, or rights to acquire Common Stock or other ownership
interests, could cause a change of ownership and result in limitations on the
use of losses by the Company. Therefore, there can be no assurance that
carryforwards of net operating losses (and certain "built-in" losses, when
recognized) of the Company will be available to offset future income of the
Company.
BACKUP WITHHOLDING
A holder of Notes or Common Stock may be subject to backup withholding
at the rate of 31% with respect to interest or dividends paid on, and gross
proceeds from the sale or redemption of, the Notes or Common Stock, unless the
holder (a) is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact, or (b) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the Code and
Treasury regulations relating to backup withholding. Holders of Rights or Units
who do not provide the Company with their correct taxpayer identification number
may be subject to penalties imposed by the Service. Any amount withheld under
these rules will be creditable against the holder's federal income tax
liability.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS
FOR GENERAL INFORMATION ONLY. ACCORDINGLY, ALL HOLDERS OF RIGHTS, NOTES, NEW
WARRANTS OR COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO
THE TAX CONSEQUENCES OF RECEIVING OR ACQUIRING, HOLDING, EXERCISING (IN THE CASE
OF THE RIGHTS OR NEW WARRANTS) AND DISPOSING OF THE RIGHTS, NOTES, NEW WARRANTS
OR COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL,
FOREIGN AND PENDING TAX LAWS.
LEGAL MATTERS
Certain legal matters, including the legality of the issuance of the
Units, Notes and the New Warrants are being passed upon for the Company by
Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York 10038.
EXPERTS
The consolidated financial statements of the Company as of December
31, 1996 and for the three years then ended have been included herein and in the
registration statement in reliance upon the report of Berenson & Company LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
<PAGE>
FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
<PAGE>
FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT
Board of Directors
IGENE Biotechnology, Inc.
Columbia, MD
We have audited the financial statements of IGENE Biotechnology, Inc.
as of December 31, 1996 and the statements of operations, stockholders' deficit
and cash flows for the years ended December 31, 1996 and 1995. We also have
audited the financial statement schedules of property, plant and equipment and
accumulated depreciation and amortization of property, plant and equipment for
the year ended December 31, 1996 and schedule of supplementary income statement
information for the years ended December 31, 1996 and 1995. 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 statements 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, 1996 and the results of its operations and its cash
flows for the years ended December 31, 1996 and 1995 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 that might result from the outcome of this uncertainty.
/s/ Berenson & Company LLP
New York, New York
March 13, 1997
<PAGE>
<TABLE>
<CAPTION>
IGENE BIOTECHNOLOGY, INC.
STATEMENT OF OPERATIONS DATA
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales 43,091 25,563 113,166 68,516 165,060
Total Revenues 66,573 274,978 363,349 69,089 170,654
Cost of Sales 23,198 16,878 36,945 32,137 118,652
Research, Development
and Pilot Plant Expenses 309,351 348,139 391,912 329,030 409,645
Other Expenses 512,504 447,335 474,752 416,489 432,380
Net Loss (776,873) (503,156) (540,260) (708,567) (790,023)
Net Loss Per Common Share (1) (.04) (.04) (.04) (.06) (.07)
Coverage Deficiency
of Fixed Charges (2) 921,572 647,695 684,959 853,266 934,722
IGENE BIOTECHNOLOGY, INC.
BALANCE SHEET DATA
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and Cash Equivalents 41,339 8,326 19,529 65,897 128,118
Working Capital (Deficit) (983,816) (336,992) (645,815) (286,881) (26,918)
Total Assets 109,054 104,255 77,556 258,417 315,834
Long-term Debt 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000
Total Liabilities 2,562,799 1,901,127 2,177,572 1,938,173 1,677,272
Redeemable Preferred Stock 475,982 484,643 463,104 438,405 413,706
Stockholders' Deficit (2,929,727) (2,281,515) (2,563,119) (2,118,161) (1,775,144)
Common Shares Outstanding 18,631,139 18,572,805 13,028,571 12,975,237 12,475,853
Preferred Shares Outstanding 223,342 225,842 226,092 226,092 226,092
1 Net loss per common share for the year ended December 31, 1992 is
based on 12,084,190 shares. Net loss per common share for each
of the years in the four-year period ended December 31, 1996 is
based on 12,769,011, 13,002,050, 13,694,343 and 18,604,171
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>
<CAPTION>
IGENE BIOTECHNOLOGY, INC.
BALANCE SHEET, DECEMBER 31
1996
ASSETS
CURRENT ASSETS
<S> <C>
Cash and cash equivalents $ 41,339
Accounts receivable 9,996
Supplies 6,126
Prepaid Expenses 4,652
Due from stockholders (note 6) 16,870
--------
TOTAL CURRENT ASSETS 78,983
---------
OTHER ASSETS
Property and equipment, net (note 3) 19,471
Security deposits 10,600
----------
TOTAL ASSETS $109,054
===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses (note 4) $ 300,799
Debenture interest payable (note 5) 45,000
Promissory notes payable (note 6) 717,000
------------
TOTAL CURRENT LIABILITIES 1,062,799
-------------
OTHER LIABILITIES
Variable rate subordinated debenture (note 5) 1,500,000
------------
TOTAL LIABILITIES 2,562,799
------------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)
REDEEMABLE PREFERRED STOCK
Carrying amount of redeemable preferred stock,
8% cumulative, Convertible,
voting, Series A, $.01 par value per share.
Stated Value $13.28 per share.
Authorized 920,000 shares; issued
35,842 shares. Redemption amount $475,982
(notes 5, 7 and 8) 475,982
----------
IGENE BIOTECHNOLOGY, INC.
BALANCE SHEET, DECEMBER 31 (CONTINUED)
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 1,875
(aggregate involuntary liquidation value of $2,490,000)
Common stock -- $.01 par value per share.
Authorized 35,000,000 shares;
Issued 18,631,139 shares 186,311
Additional paid-in capital 17,971,220
Deficit (21,089,133)
--------------
TOTAL STOCKHOLDERS' DEFICIT (2,929,727)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $109,054
===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IGENE BIOTECHNOLOGY, INC. STATEMENTS OF OPERATIONS
Years ended December 31,
1996 1995
<S> <C> <C>
Sales $ 43,091 $ 25,563
Cost of sales 23,198 16,878
----------- ----------
Gross profits 19,893 8,685
Technology licensing income (note 14) -- 225,000
Technology services income (note 14) 23,482 24,415
------ ------
Net Sales 43,375 258,100
------ -------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Marketing and selling 5,438 12,813
Research, development and pilot plant 309,351 348,139
General and administrative 331,211 303,998
------- -------
Total selling, general and administrative 646,000 664,950
expenses ------- -------
Operating loss (602,625) (406,850)
OTHER INCOME (EXPENSES):
Forgiveness of Debt (note 6) -- 33,395
Investment income 1,607 527
Other income (expense) (4,743) 296
Interest expense (171,112) (130,524)
-------- --------
Net Loss (776,873) (503,156)
Deficit at beginning of year (20,312,260) (19,809,104)
----------- -----------
Deficit at end of year $ (21,089,133) $ (20,312,260)
============= =============
Net loss per common share (note 9) $ (.04) $ (.04)
============= =============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IGENE BIOTECHNOLOGY, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
REDEEMABLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
(Shares/Amount) (Shares/Amount) (Shares/Amount)
<S> <C> <C> <C>
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 --- --- 53.3341533
subordinate debenture (note 5)
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 --- --- 1,200,000/$12,000
certain directors of the Company (note 8)
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/$484,643 187,500/$1,875 18,572,805/$185,728
===============================================================================
Issuance of 53,334 shares of
common stock as payment of
interest on variable rate --- --- 53,334/$533
subordinate debenture (note 5)
Cumulative undeclared dividends on 22,939 --- ---
redeemable preferred stock
Conversion of redeemable
preferred stock into common stock (2,500)/$(31,600) --- $5,000/$50
Net loss for 1996 --- --- ---
---------------------------------------------------------------------------------
Balance at December 31, 1996 35,842/$475,982 187,500/$1,875 18,631,139/$186,311
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IGENE BIOTECHNOLOGY, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(CONTINUED)
Total
Additional DEFICIT Stockholder's
Paid-In Deficit
Capital
<S> <C> <C> <C>
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 119,467 --- 120,000
subordinate debenture (note 5)
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 138,000 --- 150,000
certain directors of the Company (note 8)
Issuance of 4,290,400 shares of common stock on 493,395 --- 536,300
conversion of promissory notes
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)
=================================================================
Issuance of 53,334 shares of
common stock as payment of interest on variable rate 119,467 --- 120,000
subordinate debenture (note 5)
Cumulative undeclared dividends on redeemable (22,939) --- (22,939)
preferred stock
Conversion of redeemable preferred stock into
common stock 31,550 --- 31,600
Net loss for 1996 --- (776,873) (776,873)
-------------------------------------------------------------------
Balance at December 31, 1996 $17,971,220 $(21,089,133) $(2,929,727)
===================================================================
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IGENE BIOTECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1996 1995
------- --------
Cash flows from operating activities:
<S> <C> <C>
Net loss $(776,873) ($503,156)
Adjustments to reconcile net income to net cash
provided by operating activities: 6,261 8,048
Depreciation 4,743 ---
Loss on sale of assets
Interest on debenture paid in shares of 120,000 120,000
common stock
Decrease (increase) in: 1,133 (339)
Accounts receivable (10,778) 1,438
Prepaid expenses, supplies and deposits
Increase (decrease) in: 44,672 33,105
Accounts payable and other accrued expenses
--------------- -------------
Net cash used in operating activities (610,842) (340,904)
--------------- -------------
Cash flows from investing activities:
Capital expenditures (955) (2,369)
=============== ==============
Net cash used in investing activities (955) (2,369)
--------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 150,000
Issuance of promissory notes 644,810 182,070
--------------- --------------
Net cash provided by financing activities 644,810 332,070
--------------- --------------
Net increase (decrease) in cash 33,013 (11,203)
Cash and cash equivalents - beginning of the year 8,326 19,529
--------------- --------------
Cash and cash equivalents - end of the year 41,339 $ 8,326
=============== ==============
Supplementary disclosure and cash flow information:
Cash paid during the year for interest $ --- $ ---
Cash paid during the year for income taxes --- ---
</TABLE>
<PAGE>
Non-cash investing and financing activities:
During 1996 and 1995, 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 1996 and
1995, 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 was paid in 1996 and 1995 at $2.25 per
share, or $120,000 in each year. (See also note 5)
During 1996 and 1995 the Company recorded dividends in arrears on 8%
redeemable preferred stock at $.64 per share aggregating $22,939 and $24,539,
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 of common stock
pursuant to 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 in the face amount of $226,750. As of December 31, 1995 $182,070
had been received in cash proceeds by the Company. $44,680 remained due from
certain directors of the Company on December 31, 1995, which was received during
1996. (See also note 8)
During 1996 the Company issued promissory notes to certain directors
of the Company in the face amount of $617, 000. As of December 31, 1996 $600,130
had been received in cash proceeds by the Company. $16,870 remained due from
certain directors of the Company as of December 31, 1996. (See also note 8)
The directors also received warrants to purchase the number of shares
of Common Stock into which the promissory notes are convertible with an exercise
price equal to the market price at the time these notes were issued.
The accompanying notes are an integral part of the financial
statements.
<PAGE>
IGENE BIOTECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS
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." on August 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.
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 useful 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 amounts of cash and cash equivalents approximate fair
value because of the short maturity of those instruments. The carrying amount of
lone-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% through October 1, 1996;
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 issued stock in lieu of cash
payments at $2.25 per share. Effective October 1, 1996 the Company will begin
recording interest on its variable rate subordinated debenture at a level rate
of 12%; rather than at the fair-market value of shares, which have been issued
in lieu of cash payments of interest.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company applies APB Opinion 25 in accounting for employee stock
option plans (note 8). Accordingly, no compensation cost has been recognized in
1996 and 1995. Had compensation cost been determined on the basis of FASB
Statement 123, the following changes would have resulted:
1996 1995
Net loss:
As reported $ (776,873) $ (503,156)
Pro forma (781,189) (503,156)
Net loss per common share:
As reported $ (.04) $ (.04)
Pro forma (.04) (.04)
The fair value of compensation was computed using an option-pricing
model which took into account the following factors as of the grant date:
- The exercise price and expected life of the option.
- The current price of the stock and its expected volatility.
- Expected dividends, if any.
- the risk-free interest rate for the expected term of the
option using Treasury Note rates with a remaining term equal
to the expected life of the options.
(3) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are summarized as
follows:
Laboratory equipment and fixtures $ 70,060
Pilot plant equipment and fixtures 8,200
Machinery and equipment 57,979
Office furniture and fixtures 33,526
169,765
Less accumulated depreciation 150,294
$ 19,471
(4) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
Accounts payable $ 251,050
Audit fees and payroll taxes 13,600
Accrued interest, promissory notes 36,149
$ 300,799
(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 1996 and 1995, 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 were 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 were 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.
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. 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 $.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 Common approved
cancellation of Promissory Notes and Warrants issued to certain Directors of the
Company between August 23, 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 on $33,395 was forgiven by the shareholders.
On February 9, 1996, and March 11, 1996, the Company issued additional
promissory notes to certain directors of the Company for an aggregate
consideration of $140,000. 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
$.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.
On April 23, 1996, May 9, 1996 and June 7, 1996, the Company issued
Promissory Notes to certain Directors of the Company for an aggregate
consideration of $177,000. 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 $.06 per share for the notes issued April 23, 1996 and May 9, 1996,
and at $.05 for the note issued June 7, 1996, and to receive warrants for an
equivalent number of common shares at $.06 per share for the notes issued April
23, 1996 and May 9, 1996 and at $.05 per share for the note issued June 7, 1996.
On July 24, 1996 and September 24, 1996, the Company issued Promissory
Notes to certain Directors of the Company for an aggregate consideration of
$160,000. 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 $.115 per share
for the note issued July 24, 1996 and at $.125 per share for the note issued
September 24, 1996, and to receive warrants for an equivalent number of common
shares at $.115 per share for the note issued July 24, 1996 and $.125 per share
for the note issued September 24, 1996. As of December 31, 1996 the unpaid
portion of these Promissory Notes was $4,760.
On November 13, 1996 and December 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 $.09 per share for the notes dated November 13, 1996 and December 11,
1996, and to receive warrants for an equivalent number of common shares at $.09
per share for the note issued November 13, 1996 and December 11, 1996. As of
December 31, 1996 the unpaid portion of these Promissory Notes was $12,110.
The directors also received warrants to purchase the number of shares
of Common Stock into which the promissory notes are convertible with an exercise
price equal to the market price at the time these notes were issued.
(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,
1996, cumulative dividends in arrears totaled $189,246 ($5.28 per share) and
were included in carrying value of redeemable preferred stock. 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.
(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 per share pursuant to the Plan. In January 1991, options
to purchase 250,000 shares of common stock of the Company at $.25 per share were
granted to two officers and one key employee of the Company. In January 1992,
options to purchase 350,000 shares of common stock of the Company at $.625 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 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.
On January 11, 1996, warrants to purchase 1,418,502 shares of common
stock of the Company at $.05 were granted to the CEO of the company, and options
to purchase 800,000 shares to two officers of the Company at $.05 per common
share. One-third of the shares were to be vested immediately and one-third on
each anniversary of the grant. The Compensation Committee also recommended the
conversion of previously granted employee stock options issued between March 9,
1987 to March 9, 1995 to options at $.05 per share, which was the fair market
value at that time. The Board of Directors approved this recommendation on April
17, 1996. Upon termination of the CEO in January 1997, only 472,834 of shares
granted to the CEO were vested and are exercisable until January 7, 1998.
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 exchange for 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,
1996 1995
Issued 7,508,652 5,642,550
Outstanding 7,403,652 5,537,550
Exercisable 5,822,651 5,237,550
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 23, 1996 a holder of preferred stock converted 2,500 shares
of preferred stock into 5,000 shares of common stock of the Company.
At December 31, 1996, cumulative dividends in arrears totaled $990,000
($5.28 per share) and were included in the aggregate involuntary liquidation
value of the preferred stock.
At December 31, 1996, 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 1996 and 1995 is based on 18,604,171 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.
(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
$57,000 - $59,000 under such leases. Annual rent expense relating to the leases
for the years ended December 31, 1996 and 1995 approximated $68,000 and $83,000,
respectively.
Exclusive worldwide rights to manufacture and sell 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) CONTINGENCIES
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(R). On February 29, 1996 ADM informed the Company that it had decided
not to utilize the Technology and requested that the Company return
approximately $250,000 in payments under the License Agreement. The Company
maintains that ADM is not entitled to the payments and that additional monies
are owed to the Company because the concentrations of pigment met the contract
specifications. 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. Management's
basis for this is that ADM claims that the levels of pigment the Company said it
could produce did not meet the contract levels. Management has copies of ADM's
internal memos showing that the levels of pigment met the contract
specifications. Management approximates that future litigation expenses will
total $1,000,000 per year. At the present time, a range of reasonably possible
loss from the litigation cannot be estimated.
(12) INCOME TAXES
At December 31, 1996 and 1995, the Company has federal and state net
operating loss carry- forwards of approximately $20,100,000 and $19,300,000,
respectively, that expire from 1997 to 2011. 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:
1996
Net operating loss carry-forward benefit $ 8,200,000
Valuation allowance (8,200,000)
Deferred tax asset $
(13) UNCERTAINTY
The Company has incurred net losses in each year of its existence,
aggregating approximately $21,100,000 from inception to December 31, 1996 and
its liabilities and redeemable preferred stock exceeded its assets by
approximately $2,900,000 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 payments. 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(R) technology. The Company believes this technology
to be highly marketable and is hopeful that an income-producing technology
licensing agreement could be executed during 1997 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)
Over the next twelve months, the Company believes it will need between
$1,000,000 and $2,000,000 (depending on whether the Company meets its sales
projections of $2,000,000 for fiscal 1998) for working capital. The Company
hopes to achieve this level from profits from the sales of its products, the
Rights Offering and from additional financing. The Company currently does not
have any material commitments for capital expenditures in 1998.
(14) TECHNOLOGY LICENSING INCOME
On May 11, 1995 the Company and Archer-Daniels-Midland Company signed
a non-exclusive licensing agreement for AstaXin(R). The Agreement provided for
an initial payment of $200,000 and royalties based on sales. In addition, the
Company received $23,482 and $24,415 in 1996 and 1995, respectively, for
technology services pertaining to the Agreement. The Company also received
payment of $25,000 in December, 1995 under the terms of the Agreement. On
February 29, 1996 Archer-Daniels-Midland Company terminated its Licensing
Agreement with the Company (See Note 11).
(15) SUBSEQUENT EVENTS
Effective January 1, 1997 the Company initiated a SIMPLE retirement
plan. All employees who received at least $5,000 of compensation for the
preceding year are eligible to participate in the plan. The Company makes a
non-elective contribution for each participating employee equal to 2% of each
such employee's compensation.
On January 15, 1997 the Company issued Promissory Notes to certain
Directors of the Company for an aggregate consideration of $70,000. 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 $.07 per share and to receive
warrants for an equivalent number of common shares at $.07 per share.
On February 24, 1997 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 note to common stock of the Company at $.11 per share and to receive
warrants for an equivalent number of common shares at $.11 per share.
The directors also received warrants to purchase the number of shares
of Common Stock into which the promissory notes are convertible with an exercise
price equal to the market price at the time these notes were issued.
<TABLE>
<CAPTION>
SCHEDULE V
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, 1996:
<S> <C> <C> <C> <C>
Laboratory equipment and fixtures $ 85,092 $ --- 15,032 $ 70,060
Pilot plant equipment and fixtures 56,862 955 49,615 8,200
Machinery and equipment 101,683 --- 43,704 57,979
Office furniture and fixtures 42,864 --- 9,338 33,526
$ 286,501 $ 955 117,689 $ 169,765
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VI
ACCUMULATED DEPRECIATION AND
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
Balance at Balance
Beginning Depreciation at end
CLASSIFICATION OF PERIOD EXPENSE RETIREMENTS OF PERIOD
Year ended December 31, 1996:
<S> <C> <C> <C> <C>
Laboratory equipment and fixtures $ 73,091 $ 2,000 $ 15,032 $ 60,059
Pilot plant equipment and fixtures 56,863 67 49,614 7,314
Machinery and equipment 84,234 4,122 38,961 49,395
Office furniture and fixtures 42,792 72 9,338 33,526
$ 56,980 $ 6,261 $ 112,946 $ 150,294
</TABLE>
SCHEDULE X
SUPPLEMENTARY INCOME STATEMENT INFORMATION
1996 1995
Maintenance and repairs........................ $ 27,174 $ 35,849
Taxes, other than payroll and income taxes..... 18,193 15,267
<PAGE>
FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<PAGE>
<TABLE>
<CAPTION>
IGENE BIOTECHNOLOGY, INC. BALANCE SHEETS
SEPTEMBER 30,1997 SEPTEMBER 30, 1996
(UNAUDITED) (UNAUDITED) DECEMBER 31, 1996
ASSETS
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 304,581 35,975 41,339
Accounts receivable 14,494 47,509 9,996
Due from stockholders(note 6) 97,094 --- 16,870
Equipment held for resale 512,848 --- ---
Supplies --- 7,009 6,126
Deferred costs 92,731 --- ---
Prepaid expenses 947 953 4,652
Total current assets
1,022,695 91,446 78,983
Property and equipment, net
53,045 25,353 19,471
Security deposits
10,600 10,600 10,600
$1,086,340 $127,399 $109,054
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and
other accrued expenses 462,668 268,486 300,799
Debenture interest payable 90,000 60,000 45,000
Promissory Notes payable 2,332,500 558,770 717,000
Total current liabilities
2,885,168 887,256 1,062,799
Long term liabilities:
Variable rate subordinated debenture 1,500,000 1,500,000 1,500,000
Total liabilities 4,385,168 2,387,256 2,562,799
Redeemable preferred stock -- 8% cumulative,
convertible, voting, Series A,
$.01 par value per share;
redemption value $13.76,
$13.12 and $13.28 per share.
Authorized 920,000 shares; issued 35,842
shares
493,186 470,247 475,982
Stockholders' deficit:
Preferred stock -- $.01 par value per share.
8% cumulative, convertible, voting, Series A.
Authorized and issued 187,500 shares
(aggregate involuntary liquidation value of
$2,580,000, 2,460,000, and 2,490,000) 1,875 1,875 1,875
Common stock -- $.01 par value per share.
Authorized 35,000,000 shares; issued
19,143,973, 18,604,472, and 18,631,139 shares 191,440 186,045 186,311
Additional paid-in capital
18,062,529 17,917,221 17,971,220
Deficit (22,047,859) (20,835,245) (21,089,133)
Total stockholders' deficit (3,792,015) (2,730,104) (2,929,727)
$ 1,086,339 $ 127,399 $ 109,054
The accompanying notes are an integral part of the financial statement
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IGENE BIOTECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
--- THREE MONTHS ENDED ---
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
<S> <C> <C>
Sales $ --- $ 9,241
Cost of sales --- 3,927
Technology services income --- ---
Net revenue --- 5,314
Selling, general and administrative expenses:
Marketing and selling 2,681 1,323
Research, development and pilot plant 77,637 84,123
General and administrative 94,305 93,082
Litigation expenses 280,000 ---
Total selling, general and Administrative expenses 454,623 178,528
Operating loss (454,623) (173,214)
Other income (expenses):
Investment income --- 105
Other income (expense) --- ---
Interest expense (86,996) (43,621)
Net loss (541,619) (216,730)
Deficit at beginning of period (21,506,240) (20,618,515)
Deficit at end of period $(22,047,859) $(20,835,245)
Net loss per common share $ (.03) $ (0.01)
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IGENE BIOTECHNOLOGY, INC.
STATEMENTS OF STOCKHOLDER'S DEFICIT
(UNAUDITED)
REDEEMABLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
(SHARES/AMOUNT) (SHARES/AMOUNT) SHARES/AMOUNT
<S> <C> <C> <C>
Balance at December 31, 1995 38,342/$484,643 187,500/$1,875 18,572/$185,728
Issuance of 26,667 shares of
common stock in lieu of cash
payment for interest on
subordinated debenture --- --- 26,667/$267
Cumulative undeclared 17,204 --- ---
dividends on redeemable
preferred stock
Conversion of preferred stock (2,500)/$(31,600) --- 5,000/$50
to common stock
Net loss for nine months ended --- --- ---
September 30, 1996
Balance at September 30, 1996 35,842/$464,512 187,500/$1,875 18,604,472/$186,046
Balance at December 31, 1996 35,842/$475,982 187,500/$1,875 18,631,139/$186,311
Issuance of 40,000 shares of --- --- 40,000,$400
common stock in lieu of
cash payment for interest
on subordinated debenture
Issuance of common stock through
Exercise of employee stock options --- --- 472,834/$4,729
Cumulative undeclared
dividends on redeemable
preferred stock 17,204 --- ---
Net loss for nine months ended --- --- ---
September 30, 1997
Balance at
September 30, 1997 35,842/$493,186 187,500/$1,875 19,143,973/$191,440
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IGENE BIOTECHNOLOGY, INC.
STATEMENTS OF STOCKHOLDER'S DEFICIT
(UNAUDITED- CONTINUED)
ADDITIONAL TOTAL STOCKHOLDER'S
PAID-IN CAPITAL DEFICIT DEFICIT
<S> <C> <C> <C>
Balance at $17,843,142 $(20,312,260) $(2,281,515)
December 31, 1995
Issuance of 26,667 shares
Of common stock in lieu
of Cash payment for
interest On subordinated
debenture 59,733 --- 60,000
Cumulative undeclared
dividends on redeemable
preferred stock (17,204) --- (17,204)
Conversion of preferred
stock to common stock 31,550 --- 31,600
Net Loss for nine months
ended September 30,
1996 --- (522,985) (522,985)
Balance at June 30, 1996 $17,922,955 $(20,618,514) $(2,507,638)
Balance at December 31, $17,971,220 $(21,089,133) $(2,929,727)
1996
Issuance of 40,000 shares
Of common stock in lieu
of Cash payment for
interest On subordinated
debenture 89,600 --- 90,000
Issuance of common stock
through Exercise of
employee stock options 18,913 --- 23,842
Cumulative undeclared
dividends on redeemable
preferred stock (17,204) --- (17,204)
Net Loss for nine months
ended September 30, 1997 --- (958,726) (958,726)
Balance at September 30,
1997 $18,062,529 $(22,047,859) $(3,792,015)
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IGENE BIOTECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
Cash flows from operating activities:
<S> <C> <C>
Net loss $(958,726) $(522,985)
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 5,502 4,167
Interest on debenture paid in shares of
common stock 90,000 60,000
Decrease (increase) in:
Accounts receivable (4,498) (36,380)
Prepaid expenses, supplies and
deposits 9,831 (7,962)
Increase (decrease) in:
Accounts payable and other Accrued
expenses 206,869 27,359
Net cash used in operating activities (651,022) (475,801)
Cash flows from investing activities:
Capital expenditures (39,075) ---
Purchase of equipment held for resale (512,848) ---
Deferred costs (92,731) ---
Net cash used in investing activities (644,654) ---
Cash flows from financing activities:
Issuance of promissory notes 1,615,500 458,770
Proceeds from issuance of common stock 23,642 ---
Decrease (increase) in amounts Due from (80,224) 44,680
stockholders
Net cash provided by financing activities 1,558,918 503,450
Net increase in cash and cash equivalents 263,242 27,649
Cash and cash equivalents at beginning of 41,339 8,326
period
Cash and cash equivalents at end of period 304,581 35,975
Supplementary disclosure of cash flow
information:
Cash paid during the year for interest $ --- $ ---
Cash paid during the year For income taxes $ --- $ ---
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
IGENE BIOTECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED-CONTINUED)
Noncash investing and financing activities:
During 1997 and 1996 the Company issued 40,000 and 26,667 shares, respectively,
of common stock in each period in payment of interest on the variable rate
subordinated debenture. If paid in cash, the interest would have been payable at
12% and 8% during 1997 and 1996, of $90,000 and $60,000, respectively, in each
period. 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 was paid in 1997 and 1996 at $2.25 per share, or $90,000
and $60,000, respectively, in each period.
During 1997 and 1996 the Company recorded dividends in arrears on 8% redeemable
preferred stock at $0.48 per share aggregating $17,204 in each period which has
been removed from paid-in capital and included in the carrying value of the
redeemable preferred stock.
The accompanying notes are an integral part of the financial statements.
<PAGE>
IGENE BIOTECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) Unaudited Financial Statements
The financial statements presented herein as of September 30, 1997 and 1996 and
for the three month and nine month periods ended September 30, 1997 and 1996 are
unaudited and, in the opinion of management, include all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation of
financial position and results of operations. Such financial statements do not
include all of the information and footnote disclosures normally included in
audited financial statements prepared in accordance with generally accepted
accounting principles.
(2) Inventories
None.
(3) Stockholders' Equity
At September 30, 1997 and 1996, 71,684 shares of authorized but unissued common
stock were reserved for issuance upon conversion of the Company's outstanding
preferred stock.
As of September 30, 1997 and 1996, 2,000,000 shares of authorized but unissued
common stock were reserved for exercise pursuant to the 1986 Stock Option Plan.
As of September 30, 1997 and 1996, 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.
As of September 30, 1997 and 1996, 51,141,548 and 24,588,248 shares,
respectively, of common stock were reserved for the conversion of promissory
notes and the issue of warrants attached to those notes. The promissory notes
are held by Directors of the Company and one individual investor.
(4) Net Loss Per Common Share
Net loss per common share for the quarters ended September 30, 1997 and 1996 is
based on 18,976,637 and 18,604,472 weighted average shares, respectively. For
purposes of computing net loss per common share, the amount of net loss has been
increased by cumulative undeclared dividends in arrears on preferred stock.
(5) Contingencies
In May 1995, the Company signed a non-exclusive licensing agreement with Archer
Daniels Midland Company ("ADM") for the manufacture and sale of AstaXin(R). On
February 29, 1996, ADM informed the Company that it had decided not to utilize
its technology and requested that the Company return approximately $250,000 in
payments under the License Agreement. The Company maintains that ADM is not
entitled to the payments and that additional monies are owed to the Company. 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. Management's basis for this is that ADM claims that
the levels of pigment the Company said it could produce did not meet the
contract levels. Management has copies of ADM's internal memos showing that the
levels of pigment met the contract specifications. Management of the Company
estimates that the cost of this litigation will be approximately $1,000,000 per
year.
Litigation expenses of $280,000 for the quarter ended September 30,
1997 represent legal fees incurred in the Company's suit against ADM alleging
theft of trade secrets and breach of contract and in its defense of ADM's suit
against the Company alleging patent infringement. Management seeks damages of
$300,450,000 in its suit against ADM and is also seeking to preserve rights and
trade secrets associated with the Company's AstaXin(R) product. Management
believes that the suit filed by ADM has no merit.
(6) Manufacturing agreement and equipment held for resale
On June 24, 1997, the Company signed a non-exclusive toll
manufacturing agreement with Fermic, S.A. de C.V. of Mexico (Fermic) for the
production of AstaXin(R), its natural astaxanthin pigment. The agreement
provides that Fermic will manufacture, store, package and ship AstaXin(R) for
the Company using Fermic's facilities and production capacity. The Company
agrees to provide raw materials, patented processes and other proprietary
knowledge. In consideration of a twenty-three month, 10% note to the Company,
Fermic agrees to purchase manufacturing equipment, to be obtained and installed
by the Company, at cost, for up to $500,000. The Company has expended $467,848
for this equipment which is included as equipment held for resale in the
September 30, 1997 balance sheet. The Company will retain a security interest in
the equipment sold to Fermic. Equipment held for resale also includes $45,000 of
used manufacturing equipment which is not presently needed by Fermic and which
the Company plans to market to others. Its cost approximates its fair value.
Under the toll manufacturing agreement the Company will pay Fermic a
toll-manufacturing fee to be based on production capacity. Production is to
begin no later than December 31, 1997. Igene plans to market and distribute
AstaXin(R) to meet an expected demand for the product. The agreement terminates
on December 31, 1997 and may be extended, at the Company's option to December
31, 1998.
(7) Promissory notes payable
Between December 31, 1996 and September 30, 1997, the Company issued
on January 15, February 24, April 3, May 8, June 5, July 3, and July 29, a total
of $1,615,500 in promissory notes, $1,303,000 of which were issued to officers
and directors and $312,500 of which were issued to another individual. The 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 prices ranging from $.07 to $.135
per share (the market price at issue date), for a total of 16,115,202 shares. In
connection with the issue of these notes, the holders also received warrants for
an equivalent number of common shares at prices ranging from $.07 to $.135 per
share.
(8) Uncertainty
The Company has incurred net losses in each year of its existence,
aggregating approximately $22,000,000 from inception to September 30, 1997 and
its liabilities and redeemable preferred stock exceeded its assets by
approximately $3,800,000 at that date. These factors indicated 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 has found a manufacturer for its AstaXin(R) product. (See
also note 6). The Company believes this technology to be highly marketable and
hopes to begin distribution of this product in early 1998.
To increase working capital, the Company plans to issue additional
stock rights. To meet short- term cash needs the Company has issued additional
promissory notes to officers and directors. (See also notes 7 and 9).
Over the next twelve months, the Company believes it will need between
$1,000,000 and $2,000,000 (depending on whether the Company meets its sales
projections of $2,000,000 for fiscal 1998) for working capital. The Company
hopes to achieve this level from profits from the sales of its products, the
Rights Offering and from additional financing. The Company currently does not
have any material commitments for capital expenditures in 1998.
(9) Subsequent events
Subsequent to September 30, 1997, the Company issued demand promissory
notes totaling $250,000 on October 20, 1997. $187,500 of these notes were issued
to officers and directors, and $62,500 were issued to another individual. 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 a total
of 2,500,000 shares. In connection with these issuances, the holders also
received warrants for an equivalent number of common shares at $.10 per share.
The Company also plans to issue, on November 20, 1997, an additional $250,000 of
demand promissory notes with identical terms, conversion privileges, and
warrants.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company is a Maryland corporation. The Company's Articles of
Incorporation contain a provision limiting the liability of the directors and
officers to the fullest extent permitted by Section 5- 349 of the Courts and
Judicial Proceedings Code of Maryland. The Company's Articles of Incorporation
also contain a provision permitted under Maryland General Corporation Law
eliminating (with limited exceptions) each director's personal liability for
monetary damages for breach of any duty as a director. In addition, the
Company's Articles of Incorporation and Bylaws provide for the Company's
indemnification of its directors and officers from certain liabilities and
expenses, as well as advancement of costs, expenses and attorneys' fees, to the
fullest extent permitted under Maryland General Corporation Law. Such rights are
contract rights fully enforceable by each beneficiary thereof, and are in
addition to, and not exclusive of, any other right to indemnification.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC Registration Fee......................................$ 2,950
Legal fees and expenses...................................$ 125,000
Accountants' fees and expenses............................$ 25,000
Printing..................................................$ 50,000
Miscellaneous.............................................$ 47,050
------------
TOTAL..............................$ 250,000
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
See "Certain Relationships And Transactions."
ITEM 27. EXHIBITS
EXHIBIT NO.
**3.1 Articles of Incorporation of Registrant, as amended to date.
3.2 By-Laws, constituting Exhibit 3.2 to the Registrant's Registration
Statement No. 33- 5441 on Form S-1, are hereby incorporated herein by
reference.
4.1 Form of Variable Rate Convertible Subordinated Debenture Due 2002 (Class
A), constituting Exhibit 4.4 to Registration Statement No. 33-5441 on
Form S-1, is hereby incorporated herein by reference.
*4.2 Indenture between the Company and American Stock Transfer & Trust Company
as Trustee, relating to 8% notes due 2002.
*4.3 Warrant Agreement between the Company and American Stock Transfer Trust
Company, as Warrant Agent relating to warrants expiring 2007.
*5.1 Opinion of Stroock & Stroock & Lavan LLP as to the legality of the
Offered Securities.
10.1 Exchange Agreement made as of July 1, 1988 between the Company and Essex
Industrial Chemicals, Inc. with respect to the exchange of 187,500 shares
of Preferred Stock for a Debenture, constituting Exhibit 10.21 to
Registration Statement No. 33- 5441 on Form S-1, is hereby incorporated
herein by reference.
10.2 Preferred Stockholders' Waiver Agreement dated May 5, 1988, constituting
Exhibit 10.6 to Registration Statement No. 33-5441 on Form S-1, is hereby
incorporated herein by reference.
10.3 Form of Agreement between the Company and Certain Investors in Preferred
Stock dated September 30, 1987, constituting exhibit 10.7 to Registration
Statement No. 33- 5441 on Form S-1, is hereby incorporated herein by
reference.
10.4 Letter of Intent as of March 26, 1993, between Burns Philp Food, Inc. and
the Company, constituting Exhibit 10.9 to the Company's report on form
10-KSB for the year ended December 31, 1992, is hereby incorporated
herein by reference.
10.5 Technology Evaluation Agreement as of March 4, 1994 between the Food
Science Group of Pfizer Inc. and the Company, constituting Exhibit 10.10
to the Company's report on form 10-KSB for the year ended December 31,
1993, is hereby incorporated herein by reference.
10.6 Letter Agreement executed May 11, 1995 between Archer Daniels Midland and
the Company, along with November 11, 1995 Amendment, constituting Exhibit
10.11 to the Company's report on form 10-KSB for the year ended December
31, 1995, is hereby incorporated herein by reference.
**10.7 Loan Agreement dated August 1, 1997 between the Investors and the
Company.
10.8 Agreement of Lease effected December 15, 1995 between Columbia Warehouse
LP and the Company, constituting Exhibit 10.13 to the Company's report on
form 10-KSB for the year ended December 31, 1995, is hereby incorporated
herein by reference.
*10.9 Toll Agreement effective as of June 24, 1997 between IGENE Biotechnology,
Inc. and Fermic, S.A. de C.V. [Portions of this exhibit have been omitted
pursuant to a request for confidential treatment]
23.1 Consent of Stroock & Stroock & Lavan LLP (included as part of Exhibit
5.1).
*23.2 Consent of Berenson & Company LLP.
**24.1 Power of Attorney of Directors and Officers of Registrant.
- ----------
*Filed herewith
**Previously filed
<PAGE>
UNDERTAKINGS
The undersigned registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933, as amended (the" Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the law or high end of the estimate maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) Include any additional or changed material information on the plan of
distribution;
PROVIDED, HOWEVER, paragraphs (1)(i) and (1)(ii) do not apply
if the registration statement is on Form S-3 or S-8, and the
information required to be included in a post-effective
amendment by those paragraphs is incorporated by reference
from period reports filed by the registrant under the
Securities Exchange Act of 1934, as amended that are
incorporated by reference in the registration statement.
(2) For determining the liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as express in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that (1) for the purpose of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed pursuant to ruled
424(b)(1), and 42(b)(4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement at the time it was declared effective, and
(2) for the purpose of determining any liability under the Securities Act, each
post-effective amendment, if any, that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the obligations for filing on Form SB-2 and authorized this amendment to the
registration statement to be signed on its behalf by the undersigned, in the
city of Columbia, state of Maryland, on January 23, 1998.
IGENE Biotechnology, Inc.
By: /s/ STEPHEN F. HIU
Stephen F. Hiu
President
In accordance with the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following persons
in the capacities and on the dates stated.
SIGNATURE TITLE DATE
__________*______________ Chairman of the Board January 23, 1998
Michael G. Kimelman of Directors
__________*______________ Vice Chairman of the January 23, 1998
Thomas L. Kempner Board of Directors
__________*______________ Director and Chief January 23, 1998
Ramin Abrishamian Executive Officer
/S/ STEPHEN F. HIU Director, President, January 23, 1998
Stephen F. Hiu Chief Financial
Officer and Chief
Accounting Officer
___________*_____________ Director January 23, 1998
Joseph C. Abeles
____________*____________ Director January 23, 1998
John A. Cenerazzo
____________*____________ Director January 23, 1998
Sidney R. Knafel
_____________*___________ Director January 23, 1998
Patrick F. Monahan
*By:/S/ STEPHEN F. HIU
Stephen F. Hiu
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
**3.1 Articles of Incorporation of Registrant, as amended to date.
3.2 By-Laws, constituting Exhibit 3.2 to the Registrant's Registration
Statement No. 33- 5441 on Form S-1, are hereby incorporated herein by
reference.
4.1 Form of Variable Rate Convertible Subordinated Debenture Due 2002 (Class
A), constituting Exhibit 4.4 to Registration Statement No. 33-5441 on
Form S-1, is hereby incorporated herein by reference.
*4.2 Indenture between the Company and American Stock Transfer & Trust Company
as Trustee, relating to 8% notes due 2002.
*4.3 Warrant Agreement between the Company and American Stock Transfer Trust
Company, as Warrant Agent relating to warrants expiring 2007.
*5.1 Opinion of Stroock & Stroock & Lavan LLP as to the legality of the
Offered Securities.
10.1 Exchange Agreement made as of July 1, 1988 between the Company and Essex
Industrial Chemicals, Inc. with respect to the exchange of 187,500 shares
of Preferred Stock for a Debenture, constituting Exhibit 10.21 to
Registration Statement No. 33- 5441 on Form S-1, is hereby incorporated
herein by reference.
10.2 Preferred Stockholders' Waiver Agreement dated May 5, 1988, constituting
Exhibit 10.6 to Registration Statement No. 33-5441 on Form S-1, is hereby
incorporated herein by reference.
10.3 Form of Agreement between the Company and Certain Investors in Preferred
Stock dated September 30, 1987, constituting exhibit 10.7 to Registration
Statement No. 33- 5441 on Form S-1, is hereby incorporated herein by
reference.
10.4 Letter of Intent as of March 26, 1993, between Burns Philp Food, Inc. and
the Company, constituting Exhibit 10.9 to the Company's report on form
10-KSB for the year ended December 31, 1992, is hereby incorporated
herein by reference.
10.5 Technology Evaluation Agreement as of March 4, 1994 between the Food
Science Group of Pfizer Inc. and the Company, constituting Exhibit 10.10
to the Company's report on form 10-KSB for the year ended December 31,
1993, is hereby incorporated herein by reference.
10.6 Letter Agreement executed May 11, 1995 between Archer Daniels Midland and
the Company, along with November 11, 1995 Amendment, constituting Exhibit
10.11 to the Company's report on form 10-KSB for the year ended December
31, 1995, is hereby incorporated herein by reference.
**10.7 Loan Agreement dated August 1, 1997 between the Investors and the
Company.
10.8 Agreement of Lease effected December 15, 1995 between Columbia Warehouse
LP and the Company, constituting Exhibit 10.13 to the Company's report on
form 10-KSB for the year ended December 31, 1995, is hereby incorporated
herein by reference.
*10.9 Toll Agreement effective as of June 24, 1997 between IGENE Biotechnology,
Inc. and Fermic, S.A. de C.V. [Portions of this exhibit have been omitted
pursuant to a request for confidential treatment]
23.1 Consent of Stroock & Stroock & Lavan LLP (included as part of Exhibit
5.1).
*23.2 Consent of Berenson & Company LLP.
**24.1 Power of Attorney of Directors and Officers of Registrant.
- ----------
*Filed herewith
**Previously filed
IGENE BIOTECHNOLOGY, INC.
AND
AMERICAN STOCK TRANSFER & TRUST COMPANY
Trustee
---------------
Indenture
Dated as of [ ], 1998
---------------
8% Notes Due _________, 2003
<PAGE>
CROSS-REFERENCE TABLE
Indenture
TIA SECTION SECTION
SS 310(a)(1)....................................................... 7.10
(a)(2)....................................................... 7.10
(a)(3)....................................................... N.A.
(a)(4)....................................................... N.A.
(b) ......................................................... 7.08; 7.10
(c) ......................................................... N.A.
SS 311(a).......................................................... 7.11
(b).......................................................... 7.11
(c).......................................................... N.A.
SS 312(a).......................................................... 2.05
(b).......................................................... 10.03
(c).......................................................... 10.03
SS 313(a).......................................................... 7.06
(b)(1)....................................................... N.A.
(b)(2)....................................................... 7.06
(c).......................................................... 7.06; 9.02
(d).......................................................... 7.06
SS 314(a).......................................................... 4.02; 9.02
(b).......................................................... N.A.
(c)(1)....................................................... 10.04(a)
(c)(2)....................................................... 10.04(a)
(c)(3)....................................................... N.A.
(d).......................................................... N.A.
(e).......................................................... 10.04(b)
(f).......................................................... N.A.
SS 315(a).......................................................... 7.01(b)
(b).......................................................... 7.05;9.02
(c).......................................................... 7.01(a)
(d).......................................................... 7.01(c)
(e).......................................................... 6.11
SS 316(a)(last sentence)........................................... 2.09
(a)(1)(A).................................................... 6.05
(a)(1)(B).................................................... 6.04
(a)(2)....................................................... N.A.
(b).......................................................... 6.07
(c).......................................................... 10.05
SS 317(a)(1)....................................................... 6.08
(a)(2)....................................................... 6.09
(b).......................................................... 2.04
SS 318(a).......................................................... 10.01
- ----------------
N.A. means Not Applicable
<PAGE>
Note: This Cross-Reference Table shall not, for any purpose, be deemed to be a
part of this Indenture.
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE...................................1
SECTION 1.01. Definitions ..................................................1
SECTION 1.02. Other Definitions.............................................3
SECTION 1.03. Incorporation by Reference of Trust
Indenture Act...............................................3
SECTION 1.04. Rules of Construction.........................................4
ARTICLE 2
THE SECURITIES...............................................................5
SECTION 2.01. Form and Dating...............................................5
SECTION 2.02. Execution and Authentication..................................5
SECTION 2.03. Registrar and Paying Agent....................................6
SECTION 2.04. Paying Agent to Hold Money in Trust...........................6
SECTION 2.05. Securityholder Lists..........................................7
SECTION 2.06. Transfer and Exchange.........................................8
SECTION 2.07. Replacement Securities........................................8
SECTION 2.08. Outstanding Securities........................................9
SECTION 2.09. Treasury Securities...........................................9
SECTION 2.10. Temporary Securities..........................................9
SECTION 2.11. Cancellation.................................................10
SECTION 2.12. Defaulted Interest...........................................10
ARTICLE 3
REDEMPTION..................................................................11
SECTION 3.01. Notice to Trustee............................................11
SECTION 3.02. Selection of Securities to be Redeemed.......................11
SECTION 3.03. Notice of Redemption.........................................11
SECTION 3.04. Effect of Notice of Redemption...............................12
SECTION 3.05. Deposit of Redemption Price..................................12
SECTION 3.06. Securities Redeemed in Part..................................13
ARTICLE 4
COVENANTS...................................................................13
SECTION 4.01. Payment of Securities........................................13
SECTION 4.02. SEC Reports .................................................13
SECTION 4.03. Waiver of Usury Defense......................................14
SECTION 4.04. Compliance Certificates......................................14
SECTION 4.05. Payment of Taxes and Other Claims............................15
SECTION 4.06. Corporate Existence..........................................15
SECTION 4.07. Securities Purchased in Part.................................15
ARTICLE 5
SUCCESSOR CORPORATION.......................................................16
SECTION 5.01. When Company May Merge, etc..................................16
SECTION 5.02. Successor Corporation Substituted............................16
ARTICLE 6
DEFAULT AND REMEDIES........................................................17
SECTION 6.01. Events of Default............................................17
SECTION 6.02. Acceleration.................................................18
SECTION 6.03. Other Remedies...............................................19
SECTION 6.04. Waiver of Defaults and Events of Default.....................19
SECTION 6.05. Control by Two-Thirds........................................19
SECTION 6.06. Limitation on Suits..........................................20
SECTION 6.07. Rights of Holders to Receive Payment.........................20
SECTION 6.08. Collection Suit by Trustee...................................21
SECTION 6.09. Trustee May File Proofs of Claim.............................21
SECTION 6.10. Priorities .................................................22
SECTION 6.11. Undertaking for Costs........................................23
ARTICLE 7
TRUSTEE.....................................................................23
SECTION 7.01. Duties of Trustee............................................23
SECTION 7.02. Rights of Trustee............................................24
SECTION 7.03. Individual Rights of Trustee.................................25
SECTION 7.04. Trustee's Disclaimer.........................................25
SECTION 7.05. Notice of Defaults or Events of Default......................25
SECTION 7.06. Reports by Trustee to Holders................................26
SECTION 7.07. Compensation and Indemnity...................................26
SECTION 7.08. Replacement of Trustee.......................................27
SECTION 7.09. Successor Trustee by Merger, etc.............................28
SECTION 7.10. Eligibility; Disqualification................................28
SECTION 7.11. Preferential Collection of Claims
Against Company...........................................28
ARTICLE 8
SATISFACTION AND DISCHARGE OF INDENTURE.....................................29
SECTION 8.01. Termination of Company's Obligations.........................29
SECTION 8.02. Application of Trust Money...................................30
SECTION 8.03. Repayment to Company.........................................30
SECTION 8.04. Reinstatement................................................30
ARTICLE 9
AMENDMENTS, SUPPLEMENTS AND WAIVERS.........................................31
SECTION 9.01. Without Consent of Holders...................................31
SECTION 9.02. With Consent of Holders......................................31
SECTION 9.03. Compliance with Trust Indenture Act..........................32
SECTION 9.04. Revocation and Effect of Consents............................33
SECTION 9.05. Notation On or Exchange of Securities........................33
SECTION 9.06. Trustee to Sign Amendments, etc..............................33
ARTICLE 10
MISCELLANEOUS...............................................................34
SECTION 10.01. Trust Indenture Act Controls................................34
SECTION 10.02. Notices .................................................34
SECTION 10.03. Communications by Holders With
Other Holders............................................35
SECTION 10.04. Certificate and Opinion as to
Conditions Precedent.....................................35
SECTION 10.05. Record Date for Vote or Consent of
Securityholders..........................................36
SECTION 10.06. Rules by Trustee, Paying Agent, Registrar...................36
SECTION 10.07. Legal Holidays..............................................37
SECTION 10.08. Governing Law...............................................37
SECTION 10.09. No Adverse Interpretation of
Other Agreements........................................37
SECTION 10.10. No Recourse Against Others..................................37
SECTION 10.11. Successors .................................................37
SECTION 10.12. Multiple Counterparts.......................................37
SECTION 10.13. Separability................................................38
SECTION 10.14. Table of Contents, Headings, etc............................38
-----------------
Note: This Table of Contents shall not, for any purpose, be
deemed to be a part of this Indenture.
<PAGE>
INDENTURE dated as of [ ], 1998 between IGENE Biotechnology, Inc., a
Maryland corporation (the "Company"), and American Stock Transfer & Trust
Company, as Trustee (the "Trustee").
Both parties agree as follows for the benefit of the other and for the
equal and ratable benefit of the Holders of the Company's 8% Notes due _________
__, 2003.
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. DEFINITIONS
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"control" when used with respect to any person means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Agent" means any Registrar or Paying Agent.
"Board of Directors" means the Board of Directors of the Company or
any authorized committee of the Board of Directors.
"Business Day" means a day that is not a Legal Holiday.
"Company" means the party named as such in this Indenture until a
successor replaces it pursuant to this Indenture and thereafter means the
successor.
"default" means any event which is, or after notice or passage of
time, or both, would be, an Event of Default.
"Holder" or "Securityholder" means the person in whose name a Security
is registered on the Registrar's books.
"Indenture" means this Indenture as amended or supplemented from time
to time.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Chief Financial Officer, the Treasurer or the Secretary of the
Company.
"Officer's Certificate" means a certificate signed by any Officer of
the Company.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"person" means any individual, corporation, partnership, joint
venture, limited liability entity, association, joint-stock company, trust,
unincorporated organization or government or other agency or political
subdivision thereof.
"principal" of a debt security, including the Securities, means the
principal of the security plus, when appropriate, the premium, if any, on the
security.
"redemption date," when used with respect to any Security to be
redeemed, means the date fixed for such redemption pursuant to this Indenture,
as set forth in the form of Security annexed as Exhibit A hereto.
"redemption price," when used with respect to any Security to be
redeemed, means the price fixed for such redemption pursuant to this Indenture,
as set forth in the form of Security annexed as Exhibit A hereto.
"SEC" means the Securities and Exchange Commission.
"Securities" means the 8% Notes due _________ __, 2003 or any of them,
as amended or supplemented from time to time, that are issued under this
Indenture.
"TIA" means the Trust Indenture Act of 1939, as amended by the Trust
Indenture Reform Act of 1990 and as in effect on the date of this Indenture,
except as provided in Section 9.03 hereof.
"Trustee" means the party named as such in this Indenture until a
successor replaces it in accordance with the provisions of this Indenture and
thereafter means the successor.
"Trust Officer" means any Account Manager or officer within the
Corporate Trust Services Department (or any successor group) of the Trustee,
including without limitation any Vice President, Assistant Vice President, any
trust officer, any Assistant Secretary or any other officer customarily
performing functions similar to those performed by any of the above- designated
officers who shall, in any case, be responsible for the administration of this
Indenture or have familiarity with it, and also means, with respect to a
particular corporate matter, any other officer of the Trustee to whom corporate
trust matters are referred because of his knowledge of and familiarity with the
particular subject.
SECTION 1.02. OTHER DEFINITIONS
Defined in
TERM SECTION
"Bankruptcy Law"...................................... 6.01
"Custodian"........................................... 6.01
"Event of Default".................................... 6.01
"Exchange Act"........................................ 4.10
"Legal Holiday"....................................... 10.07
"Paying Agent"........................................ 2.03
"Registrar"........................................... 2.03
"U.S. Government Obligations"......................... 8.01
SECTION 1.03. Incorporation by Reference of Trust
INDENTURE ACT
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture. The
following TIA terms used in this Indenture have the following meanings:
"Commission" means the SEC.
"indenture securities" means the Securities.
"indenture security holder" means a Securityholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company or any other
obligor on the Securities.
All other terms used in this Indenture that are defined in the TIA,
defined by TIA reference to another statute or defined by SEC rule and not
otherwise defined herein have the meanings assigned to them therein.
SECTION 1.04. RULES OF CONSTRUCTION
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles in effect
on the date hereof, and any other reference in this Indenture to "generally
accepted accounting principles" refers to generally accepted accounting
principles in effect on the date hereof;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and words in the plural
include the singular;
(5) provisions apply to successive events and transactions; and
(6) "herein", "hereof" and other words of similar import refer to this
Indenture as a whole and not to any particular Article, Section or other
subdivision.
ARTICLE 2
THE SECURITIES
SECTION 2.01. FORM AND DATING
The Securities and the Trustee's certificate of authentication shall
be substantially in the form of Exhibit A, which is incorporated in and made
part of this Indenture. The Securities may have notations, legends or
endorsements required by law, stock exchange rule, agreements to which the
Company is subject or usage. The Company shall approve the form of the
Securities and any notation, legend or endorsement on them. Each Security shall
be dated the date of its authentication.
SECTION 2.02. EXECUTION AND AUTHENTICATION
Two Officers shall sign the Securities for the Company by manual or
facsimile signature. The Company's seal shall be reproduced on the Securities.
If an Officer whose signature is on a Security no longer holds that
office at the time the Trustee authenticates the Security, the Security shall be
valid nevertheless.
A Security shall not be valid until the Trustee manually signs the
certificate of authentication on the Security. The signature shall be conclusive
evidence that the Security has been authenticated under this Indenture.
The Trustee shall authenticate Securities for original issue in the
aggregate principal amount of up to $5,000,000, upon a written order or orders
of the Company signed by an Officer of the Company. The order shall specify the
amount of Securities to be authenticated and the date on which the original
issue of Securities is to be authenticated. The aggregate principal amount of
Securities outstanding at any time may not exceed $5,000,000, except as provided
in Section 2.07.
The Trustee shall act as the initial authenticating agent. Thereafter,
the Trustee may appoint an authenticating agent acceptable to the Company to
authenticate Securities. An authenticating agent may authenticate Securities
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with the Company or
an Affiliate of the Company.
The Securities shall be issuable only in registered form without
coupons.
SECTION 2.03. REGISTRAR AND PAYING AGENT
The Company shall maintain an office or agency where Securities may be
presented for registration of transfer or for exchange ("Registrar"), an office
or agency where Securities may be presented for payment ("Paying Agent"), and an
office or agency where notices and demands to or upon the Company in respect of
the Securities and this Indenture may be served. The Registrar shall keep a
register of the Securities and of their transfer and exchange. The Company may
have one or more co- Registrars and one or more additional Paying Agents. The
term "Registrar" includes any co-Registrar and the term "Paying Agent" includes
any additional Paying Agent. Except for purposes of Article 8, the Company or
any Affiliate of the Company may act as Paying Agent.
The Company shall enter into an appropriate agency agreement with any
Agent not a party to this Indenture. The agreement shall implement the
provisions of this Indenture that relate to such Agent. The Company shall notify
the Trustee of the name and address of any Agent not a party to this Indenture.
If the Company fails to maintain a Registrar, Paying Agent, or agent for service
of notices and demands, or fails to give the foregoing notice, the Trustee shall
act as such.
The Company initially appoints the Trustee as Registrar, Paying Agent,
and agent for service of notices and demands.
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST
On or prior to each due date of the principal of or interest on any
Securities, the Company shall deposit with the Paying Agent a sum sufficient to
pay such principal or interest so becoming due. The Paying Agent shall hold in
trust for the benefit of Securityholders or the Trustee all money held by the
Paying Agent for the payment of principal of or interest on the Securities, and
shall notify the Trustee of any default by the Company (or any other obligor on
the Securities) in making any such payment. If the Company or an Affiliate of
the Company acts as Paying Agent, it shall on or before each due date of the
principal of or interest on any Securities segregate the money and hold it as a
separate trust fund. The Company at any time may require a Paying Agent to pay
all money held by it to the Trustee and the Trustee may at any time during the
continuance of any default, upon written request to a Paying Agent, require such
Paying Agent to forthwith pay to the Trustee all sums so held in trust by such
Paying Agent. Upon doing so, the Paying Agent (other than the Company) shall
have no further liability for the money.
SECTION 2.05. SECURITYHOLDER LISTS
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Securityholders. If the Trustee is not the Registrar, the Company shall furnish
to the Trustee on or before each interest payment date and at such other times
as the Trustee may request in writing a list in such form and as of such date as
the Trustee may reasonably require of the names and addresses of
Securityholders.
SECTION 2.06. TRANSFER AND EXCHANGE
When a Security is presented to the Registrar with a request to
register a transfer thereof, the Registrar shall register the transfer as
requested and when Securities are presented to the Registrar with a request to
exchange them for an equal principal amount of Securities of other authorized
denominations, the Registrar shall make the exchange as requested; provided that
every Security presented or surrendered for registration of transfer or exchange
shall be duly endorsed or be accompanied by a written instrument of transfer in
form satisfactory to the Company and the Registrar duly executed by the Holder
thereof or his attorney duly authorized in writing. To permit registration of
transfers and exchanges, the Company shall execute and the Trustee shall
authenticate Securities at the Registrar's request. Any exchange or transfer
shall be without charge, except that the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
relation thereto, but this provision shall not apply to any exchange pursuant to
Section 2.10, 3.06 or 9.05.
SECTION 2.07. REPLACEMENT SECURITIES
If a mutilated Security is surrendered to the Trustee, or if the
Holder of a Security claims that the Security has been lost, destroyed or
wrongfully taken, and neither the Company nor the Trustee has received notice
that such Security has been acquired by a bona fide purchaser, the Company shall
issue and the Trustee shall authenticate a replacement Security if the
requirements of Section 8-405 of the New York Uniform Commercial Code, as in
effect on the date of this Indenture, are met, and there shall have been
delivered to the Company and the Trustee evidence to their satisfaction of the
loss, destruction or theft of any Security if such is the case. An indemnity
bond may be required that is sufficient in the judgment of the Company and the
Trustee to protect the Company, the Trustee or any Agent from any loss which any
of them may suffer if a Security is replaced. The Company may charge for its
expenses in replacing a Security. Every replacement Security is an additional
obligation of the Company.
SECTION 2.08. OUTSTANDING SECURITIES
Securities outstanding at any time are all Securities authenticated by
the Trustee, except for those canceled by it, those delivered to it for
cancellation and those described in this Section 2.08 as not outstanding.
If a Security is replaced pursuant to Section 2.07, it ceases to be
outstanding until the Trustee receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.
If the Paying Agent (other than the Company or an Affiliate of the
Company) holds on a redemption date or maturity date money sufficient to pay the
principal of and accrued interest on Securities payable on that date, then on
and after that date such Securities cease to be outstanding and interest on them
ceases to accrue.
A Security does not cease to be outstanding because the Company or an
Affiliate of the Company holds the Security.
SECTION 2.09. TREASURY SECURITIES
In determining whether the Holders of the required principal amount of
Securities have concurred in any notice, direction, waiver or consent,
Securities owned by the Company or any other obligor on the Securities or by any
Affiliate of the Company or of such other obligor shall be disregarded, except
that for purposes of determining whether the Trustee shall be protected in
relying on any such notice, direction, waiver or consent, only Securities which
the Trustee knows are so owned shall be so disregarded. Securities so owned
which have been pledged in good faith shall not be disregarded if the pledgee
establishes to the satisfaction of the Trustee the pledgee's right so to act
with respect to the Securities and that the pledgee is not the Company or any
other obligor upon the Securities or any Affiliate of the Company or of such
other obligor.
SECTION 2.10. TEMPORARY SECURITIES.
Until definitive Securities are ready for delivery, the Company may
prepare and, upon the order of the Company, the Trustee shall authenticate
temporary Securities. Temporary Securities shall be substantially in the form of
definitive Securities but may have variations that the Company considers
appropriate for temporary Securities. Without unreasonable delay, the Company
shall prepare and the Trustee shall authenticate definitive Securities in
exchange for temporary Securities.
SECTION 2.11. CANCELLATION.
The Company at any time may deliver Securities to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Securities surrendered to them for transfer, exchange, or payment. The Trustee
and no one else shall cancel all Securities surrendered for transfer, exchange,
payment (including redemption), or cancellation and shall dispose of cancelled
Securities as the Company shall direct. The Company may not issue new Securities
to replace Securities it has paid or delivered to the Trustee for cancellation
or which have been converted.
SECTION 2.12. DEFAULTED INTEREST.
If the Company defaults in a payment of interest on the Securities, it
shall pay the defaulted interest to the persons who are Securityholders on a
subsequent special record date, and such term as used in this Section 2.12 with
respect to the payment of any defaulted interest, shall mean the fifteenth day
next preceding the special payment date fixed by the Company, whether or not
such day is a Business Day. At least 15 days before the special record date, the
Company shall mail to each Securityholder and the Trustee a notice that states
the special record date, the special payment date and the amount of defaulted
interest to be paid.
ARTICLE 3
REDEMPTION
SECTION 3.01. NOTICE TO TRUSTEE.
If the Company wants to redeem Securities pursuant to paragraph 5 of
the Securities, it shall notify the Trustee at least 30 days prior to the
redemption date as fixed by the Company (unless a shorter notice shall be
satisfactory to the Trustee) of the redemption date and the principal amount of
Securities to be redeemed.
If the Company wants to reduce the principal amount of Securities to
be redeemed pursuant to paragraph 6 of the Securities, it shall notify the
Trustee at least 30 days prior to the redemption date (unless a shorter notice
shall be satisfactory to the Trustee) of the amount of the reduction and the
basis for it. If the Company wants to credit against any such redemption
Securities it has not previously delivered to the Trustee for cancellation, it
shall deliver the Securities with such notice.
SECTION 3.02. SELECTION OF SECURITIES TO BE REDEEMED.
If less than all of the Securities are to be redeemed, the Trustee
shall, not more than 60 days prior to the redemption date, select the Securities
to be redeemed pro rata or by lot, as the Trustee in its discretion shall
determine. The Trustee shall make the selection from the Securities outstanding
and not previously called for redemption. Securities in denominations of less
than $1,000 may only be redeemed in whole. The Trustee may select for redemption
portions (equal to $1,000 or any integral multiple thereof) of the principal of
Securities that have denominations of $1,000 or more. Provisions of this
Indenture that apply to Securities called for redemption also apply to portions
of Securities called for redemption.
SECTION 3.03. NOTICE OF REDEMPTION.
At least 15 days but not more than 60 days before a redemption date,
the Company shall mail a notice of redemption by first class mail to each Holder
of Securities to be redeemed.
The notice shall identify the Securities to be redeemed and shall
state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be surrendered to the
Paying Agent to collect the redemption price;
(5) that, unless the Company defaults in making the redemption
payment, interest on Securities called for redemption ceases to accrue on
and after the redemption date and the only remaining right of the Holder is
to receive payment of the redemption price upon surrender to the Paying
Agent of the Securities; and
(6) if any Security is being redeemed in part, the portion of the
principal amount of such Security to be redeemed and that, after the
redemption date, upon surrender of such Security, a new Security or
Securities in principal amount equal to the unredeemed portion thereof will
be issued.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense.
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption is mailed, Securities called for redemption
become due and payable on the redemption date and at the redemption price. Upon
surrender to the Paying Agent, such Securities shall be paid at the redemption
price, plus accrued interest to the redemption date.
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE
On or prior to the redemption date, the Company shall deposit with the
Paying Agent (or if the Company is its own Paying Agent, shall segregate and
hold in trust) money sufficient to pay the redemption price of and accrued
interest on all Securities to be redeemed on that date, other than Securities or
portions thereof called for redemption on that date which have been delivered by
the Company to the Trustee for cancellation. The Paying Agent shall return to
the Company any money not required for that purpose.
SECTION 3.06. SECURITIES REDEEMED IN PART.
Upon surrender of a Security that is redeemed in part, the Company
shall issue and the Trustee shall authenticate for the Holder a new Security
equal in principal amount to the unredeemed portion of the Security surrendered.
ARTICLE 4
COVENANTS
SECTION 4.01. PAYMENT OF SECURITIES.
The Company shall pay the principal of and interest on the Securities
on the dates and in the manner provided in the Securities and this Indenture. An
installment of principal or interest shall be considered paid on the date it is
due if the Paying Agent (other than the Company or an Affiliate of the Company)
holds on that date money designated for and sufficient to pay the installment.
The Company shall pay interest on overdue principal at the rate borne by the
Securities per annum; it shall pay interest on overdue installments of interest
at the same rate to the extent lawful.
SECTION 4.02. SEC REPORTS.
The Company shall file all reports and other information and documents
which it is required to file with the SEC pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and within 15
days after it files them with the SEC, the Company shall file copies of all such
reports, information and other documents with the Trustee. The Company will
cause any quarterly and annual reports which it mails to its stockholders to be
mailed to the Holders of the Securities.
If the Company is not subject to the reporting requirements of Section
13 or 15(d) of the Exchange Act, the Company will prepare, for the first three
quarters of each fiscal year, quarterly financial statements substantially
equivalent to the financial statements required to be included in a report on
Form 10-QSB under the Exchange Act. The Company will also prepare, on an annual
basis, complete audited consolidated financial statements including, but not
limited to, a balance sheet, a statement of operations, a statement of
stockholders' equity, a statement of cash flows and all appropriate notes. All
such financial statements will be prepared in accordance with generally accepted
accounting principles consistently applied, except for changes with which the
Company's independent accountants concur, and except that quarterly statements
may be subject to year-end adjustments. The Company will cause a copy of such
financial statements to be filed with the Trustee and mailed to the Holders of
the Securities within 50 days after the close of each of the first three
quarters of each fiscal year and within 95 days after the close of each fiscal
year. The Company will also comply with the other provisions of TIA ' 314(a).
SECTION 4.03. WAIVER OF USURY DEFENSE.
The Company agrees that it will not assert, plead (as a defense or
otherwise) or in any manner whatsoever claim (and will actively resist any
attempt to compel it to assert, plead or claim) in any action, suit or
proceeding that the interest rate on the Securities violates present or future
usury or other laws relating to the interest payable on any indebtedness and
will not otherwise avail itself (and will actively resist any attempt to compel
it to avail itself) of the benefits or advantages of any such laws.
SECTION 4.04. COMPLIANCE CERTIFICATES.
The Company shall deliver to the Trustee within 120 days after the end
of each fiscal year of the Company, an Officer's Certificate as to the signer's
knowledge of the Company's compliance with all conditions and covenants on its
part contained in this Indenture and stating whether or not the signer knows of
any default or Event of Default. If such signer knows of such a default or Event
of Default, the Certificate shall describe the default or Event of Default and
the efforts to remedy the same. For the purposes of this Section 4.04,
compliance shall be determined without regard to any grace period or requirement
of notice provided pursuant to the terms of this Indenture. The Certificate need
not comply with Section 10.04 hereof.
SECTION 4.05. PAYMENT OF TAXES AND OTHER CLAIMS.
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, all material taxes, assessments and
governmental charges levied or imposed upon the Company or upon the income,
profits or property of the Company; provided, however, that the Company shall
not be required to pay or discharge or cause to be paid or discharged any such
tax, assessment or charge whose amount, applicability or validity is being
contested in good faith by appropriate proceedings and for which adequate
provision has been made.
SECTION 4.06. CORPORATE EXISTENCE.
Subject to Article 5, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence and rights (charter and statutory); provided, however, that the
Company shall not be required to preserve any right if the Board of Directors
shall determine that the preservation is no longer desirable in the conduct of
the Company's business and that the loss thereof is not, and will not be,
adverse in any material respect to the Holders.
SECTION 4.07. SECURITIES PURCHASED IN PART.
Any Security that is to be purchased only in part shall be surrendered
at the office of the Paying Agent (with, if the Company or the Trustee so
requires, due endorsement by, or a written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by, the Holder thereof
or such Holder's attorney duly authorized in writing), and the Company shall
execute and the Trustee shall authenticate and deliver to the Holder of such
Security, without service charge, a new Security or Securities, of such
authorized denomination or denominations as may be requested by such Holder, in
aggregate principal amount equal to, and in exchange for, the portion of the
principal amount of the Security so surrendered that is not purchased.
ARTICLE 5
SUCCESSOR CORPORATION
SECTION 5.01. WHEN COMPANY MAY MERGE, ETC.
The Company shall not consolidate with or merge with or into, or
transfer all or substantially all of its assets to, any person unless:
(a) either the Company shall be the resulting or surviving
entity or such person is a corporation organized and existing under the
laws of the United States, a State thereof or the District of Columbia,
such person expressly assumes by supplemental indenture executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Securities and this Indenture (in
which case all such obligations of the Company shall terminate); and
(b) immediately before and immediately after giving effect to
such transaction and treating any indebtedness which becomes an
obligation of the Company as a result of such transaction as having
been incurred by the Company at the time of such transaction, no
default or Event of Default shall have occurred and be continuing.
The Company shall deliver to the Trustee prior to the proposed
transaction an Officer's Certificate and an Opinion of Counsel, each of which
shall comply with Section 10.04 and shall state that such consolidation, merger
or transfer and such supplemental indenture comply with this Article 5 and that
all conditions precedent herein provided for relating to such transaction have
been complied with.
SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED.
Upon any consolidation or merger, or any transfer of all or
substantially all of the assets of the Company in accordance with Section 5.01,
the successor corporation formed by such consolidation or into which the Company
is merged or to which such transfer is made shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under this Indenture
with the same effect as if such successor corporation had been named as the
Company herein.
ARTICLE 6
DEFAULT AND REMEDIES
SECTION 6.01. EVENTS OF DEFAULT.
An "Event of Default" occurs if:
(1) the Company defaults in the payment of interest on any
Security when the same becomes due and payable and the default
continues for a period of 30 days;
(2) the Company defaults in the payment of the principal of
any Security when the same becomes due and payable at maturity, upon
redemption or otherwise and the default continues for a period of five
days;
(3) the Company fails to comply with any of its other
agreements contained in the Securities or this Indenture and the
default continues for the period and after the notice specified below;
(4) the Company pursuant to or within the meaning of
any Bankruptcy Law
(A) commences a voluntary case or proceeding;
(B) consents to the entry of an order for relief
against it in an involuntary case or proceeding;
(C) consents to the appointment of a Custodian of
it or for all or substantially all of its property; or
(D) makes a general assignment for the benefit of
its creditors; or
(5) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(A) is for relief against the Company in an
involuntary case or proceeding;
(B) appoints a Custodian of the Company or for
all or substantially all of its property; or
(C) orders the liquidation of the Company;
and in each case the order or decree remains unstayed and in
effect for 90 days.
The term "Bankruptcy Law" means Title 11, U.S. Code or any similar
Federal or state law for the relief of debtors. The term "Custodian" means any
receiver, trustee, assignee, liquidator, sequestrator or similar official under
any Bankruptcy Law.
A default under clause (3) is not an Event of Default until the
Trustee notifies the Company or the Holders of at least 25% in principal amount
of the Securities then outstanding notify the Company and the Trustee, of the
default, and the Company does not cure the default within 30 days after receipt
of such notice. The notice given pursuant to this Section 6.01 must specify the
default, demand that it be remedied and state that the notice is a "Notice of
Default". When a default is cured, it ceases.
Subject to the provisions of Sections 7.01 and 7.02, the Trustee shall
not be charged with knowledge of any Event of Default unless written notice
thereof shall have been given to a Trust Officer at the corporate trust office
of the Trustee by the Company, the Paying Agent, any Holder or an agent of any
Holder.
SECTION 6.02. ACCELERATION.
If an Event of Default (other than an Event of Default specified in
Section 6.01(4) or (5)) occurs and is continuing, the Trustee may, by notice to
the Company, or the Holders of at least 25% in principal amount of the
Securities then outstanding may, by notice to the Company and the Trustee, and
the Trustee shall, upon the request of such Holders, declare all unpaid
principal of and accrued interest to the date of acceleration on the Securities
then outstanding (if not then due and payable) to be due and payable and upon
any such declaration, the same shall become and be immediately due and payable.
If an Event of Default specified in Section 6.01(4) or (5) occurs, all unpaid
principal and accrued interest on the Securities then outstanding shall IPSO
FACTO become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Securityholder. The Holders of at least
two-thirds in principal amount of the Securities then outstanding by notice to
the Trustee may rescind an acceleration and its consequences if (i) the
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction; and (ii) all payments due to the Trustee and any
predecessor Trustee under Section 7.07 have been made. Anything herein contained
to the contrary notwithstanding, in the event of any acceleration pursuant to
this Section 6.02, the Company shall not be obligated to pay any premium which
it would have had to pay.
SECTION 6.03. OTHER REMEDIES.
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy by proceeding at law or in equity to collect the
payment of the principal of or interest on the Securities or to enforce the
performance of any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Securityholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative to the
extent permitted by law.
SECTION 6.04. WAIVER OF DEFAULTS AND EVENTS OF DEFAULT.
Subject to Sections 6.07 and 9.02, the Holders of at least two-thirds
in principal amount of the Securities then outstanding by notice to the Trustee
may waive an existing default or Event of Default and its consequences,
including a default in the payment of the principal of or interest on any
Security as specified in clauses (1) and (2) of Section 6.01. When a default or
Event of Default is waived, it is cured and ceases.
SECTION 6.05. CONTROL BY TWO-THIRDS.
The Holders of at least two-thirds in principal amount of the
Securities then outstanding may direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred on it. However, the Trustee may refuse to follow any
direction that conflicts with law or this Indenture, that the Trustee determines
may be unduly prejudicial to the rights of another Securityholder, or that may
involve the Trustee in personal liability; provided that the Trustee may take
any other action deemed proper by the Trustee which is not inconsistent with
such direction.
SECTION 6.06. LIMITATION ON SUITS.
A Securityholder may not pursue any remedy with respect to this
Indenture or the Securities unless:
(1) the Holder gives to the Trustee written notice of
a continuing Event of Default;
(2) the Holders of at least 25% in principal amount of the
outstanding Securities make a written request to the Trustee to pursue
the remedy;
(3) such Holder or Holders offer to the Trustee indemnity
satisfactory to the Trustee against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60
days after receipt of the request and the offer of indemnity; and
(6) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the Holders of
at least two-thirds in principal amount of the Securities then
outstanding.
A Securityholder may not use this Indenture to prejudice the rights of
another Securityholder or to obtain a preference or priority over such other
Securityholder.
SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT.
The right of any Holder of a Security to receive payment of the
principal of and interest on the Security, on or after the respective due dates
expressed in the Security, or to bring suit for the enforcement of any such
payment on or after such respective dates, is not absolute and may be impaired
or affected without the consent of the Holder if the Holders of at least
two-thirds in principal amount of Securities so approve such action.
SECTION 6.08. COLLECTION SUIT BY TRUSTEE.
If an Event of Default in the payment of principal or interest
specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust against the
Company or any other obligor on the Securities for the whole amount of principal
and accrued interest remaining unpaid, together with interest on overdue
principal and, to the extent that payment of such interest is lawful, interest
on overdue installments of interest, in each case at the rate per annum borne by
the Securities and such further amount as shall be sufficient to cover the costs
and expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM.
The Trustee may file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Securityholders allowed in any judicial proceedings relative to the Company (or
any other obligor on the Securities), its creditors or its property and shall be
entitled and empowered to collect and receive any monies or other property
payable or deliverable on any such claims and to distribute the same, and any
Custodian in any such judicial proceeding is hereby authorized by each
Securityholder to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the
Securityholders, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under Section 7.07, and to
the extent that such payment for the reasonable compensation, expenses,
disbursements and advances in any such proceedings shall be denied for any
reason, payment of the same shall be secured by a lien on, and shall be paid out
of, any and all distributions, dividends, monies, securities and other property
which the Securityholders may be entitled to receive in such proceedings,
whether in liquidation or under any plan of reorganization or arrangement or
otherwise. Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or the Trustee to authorize or accept or adopt on behalf
of any Securityholder any plan of reorganization, arrangement, adjustment or
composition affecting the Securities or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Securityholder in
any such proceeding.
SECTION 6.10. PRIORITIES.
If the Trustee collects any money pursuant to this Article 6, it shall
pay out the money in the following order:
First: to the Trustee for amounts due under
Section 7.07;
Second: to Securityholders for amounts due and unpaid
on the Securities for principal and interest, ratably,
without preference or priority of any kind, according to the
amounts due and payable on the Securities for principal and
interest, respectively; and
Third: to the Company.
The Trustee may fix a record date and payment date for any payment to
Securityholders pursuant to this Section 6.10.
SECTION 6.11. UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defense made by the party litigant.
This Section 6.11 does not apply to a suit made by the Trustee, a suit by a
Holder pursuant to Section 6.06, or a suit by Holders of more than 10% in
principal amount of the Securities then outstanding.
ARTICLE 7
TRUSTEE
SECTION 7.01. DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture and
use the same degree of care and skill in their exercise as a prudent person
would exercise or use under the circumstances in the conduct of his own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee need perform only those duties as are
specifically set forth in this Indenture and no others; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture. The Trustee, however, shall examine the certificates
and opinions to determine whether or not they conform to the
requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(1) this paragraph does not limit the effect of
paragraph (b) of this Section 7.01;
(2) the Trustee shall not be liable for any error of judgment
made in good faith by a Trust Officer, unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05.
(d) The Trustee may refuse to perform any duty or exercise any right
or power unless it receives indemnity satisfactory to it against any loss,
liability, expense or fee.
(e) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b), (c) and (d) of this Section 7.01.
(f) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree in writing with the Company. Money held in
trust by the Trustee need not be segregated from other funds except to the
extent required by law.
SECTION 7.02. RIGHTS OF TRUSTEE.
Subject to Section 7.01:
(a) The Trustee may rely on any document believed by it to be genuine
and to have been signed or presented by the proper person. The Trustee need not
investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officer's Certificate or an Opinion of Counsel, which shall conform to Section
10.04(b). The Trustee shall not be liable for any action it takes or omits to
take in good faith in reliance on such Certificate or Opinion.
(c) The Trustee may act through its agents and shall not be
responsible for the misconduct or negligence of any agent appointed with due
care.
(d) The Trustee shall not be liable for any action it takes or omits
to take in good faith which it believes to be authorized or within its rights or
powers.
(e) The Trustee may consult with counsel and the advice or opinion of
such counsel as to matters of law shall be full and complete authorization and
protection in respect of any action taken, omitted or suffered by it hereunder
in good faith and in accordance with the advice or opinion of such counsel.
SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee in its individual or any other capacity may become the
owner or pledgee of Securities and may otherwise deal with the Company or an
affiliate of the Company with the same rights it would have if it were not
Trustee. Any Agent may do the same with like rights. However, the Trustee is
subject to Sections 7.10 and 7.11.
SECTION 7.04. TRUSTEE'S DISCLAIMER.
The Trustee makes no representation as to the validity or adequacy of
this Indenture or the Securities, it shall not be accountable for the Company's
use of the proceeds from the Securities, and it shall not be responsible for any
statement in the Securities other than its certificate of authentication.
SECTION 7.05. NOTICE OF DEFAULTS OR EVENTS OF DEFAULT.
If a default or an Event of Default occurs and is continuing and if it
is known to the Trustee, the Trustee shall mail to each Securityholder notice of
the default or Event of Default within 90 days after it occurs. Except in the
case of a default or an Event of Default in payment of the principal of or
interest on any Security, the Trustee may withhold the notice if and so long as
a committee of its Trust Officers in good faith determines that withholding the
notice is in the interest of Securityholders.
SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS.
Within 60 days after each May 15 beginning with the May 15 following
the date of this Indenture, the Trustee shall mail to each Securityholder a
brief report dated as of such May 15 that complies with TIA ' 313(a). The
Trustee also shall comply with TIA ' 313(b).
A copy of each report at the time of its mailing to Securityholders
shall be mailed to the Company and filed with the SEC and each stock exchange,
if any, on which the Securities are listed. The Company shall notify the Trustee
whenever the securities become listed on any stock exchange.
SECTION 7.07. COMPENSATION AND INDEMNITY.
The Company shall pay to the Trustee from time to time reasonable
compensation for its services (which compensation shall not be limited by any
provision of law in regard to the compensation of a trustee of an express
trust). The Company shall reimburse the Trustee upon request for all reasonable
disbursements, expenses and advances incurred or made by it. Such expenses may
include the reasonable compensation, disbursements and expenses of Trustee's
agents and counsel.
The Company shall indemnify the Trustee for, and hold it harmless
against, any loss, liability or expense incurred by it in connection with its
duties under this Indenture. The Trustee shall notify the Company promptly of
any claim asserted against the Trustee for which it may seek indemnity. The
Company shall defend the claim and the Trustee shall cooperate in the defense.
The Trustee may have separate counsel and the Company shall pay the reasonable
fees and expenses of such counsel. The Company need not pay for any settlement
made without its written consent.
The Company need not reimburse the Trustee for any expense or
indemnify it against any loss or liability incurred by it through its negligence
or bad faith.
To secure the Company's payment obligations in this Section, the
Trustee shall have a senior claim to which the Securities are hereby made
subordinate on all money or property held or collected by the Trustee, except
such money or property held in trust to pay the principal of and interest on
particular Securities. The obligations of the Company under this Section 7.07 to
compensate or indemnify the Trustee and to pay or reimburse the Trustee for
expenses, disbursements and advances shall be secured by a lien prior to that of
the Securities upon all property and funds held or collected by the Trustee as
such, except funds held in trust for the benefit of the Holders of particular
Securities. The obligation of the Company under this Section 7.07 shall survive
the satisfaction and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.01(4) and (5) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
SECTION 7.08. REPLACEMENT OF TRUSTEE.
The Trustee may resign by so notifying the Company. The Holders of a
majority in principal amount of the Securities then outstanding may remove the
Trustee by so notifying the Trustee and may appoint a successor Trustee with the
Company's written consent. The Company may remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged a bankrupt or an insolvent;
(3) a receiver or other public officer takes charge of the
Trustee or its property; or
(4) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee.
If a successor Trustee does not take office within 45 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of 10% in principal amount of the Securities then outstanding may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
If the Trustee fails to comply with Section 7.10, any Securityholder
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately after that,
the retiring Trustee shall transfer all property held by it as Trustee to the
successor Trustee, the resignation or removal of the retiring Trustee shall
become effective, and the successor Trustee shall have all the rights, powers
and duties of the Trustee under this Indenture. A successor Trustee shall mail
notice of its succession to each Securityholder.
Notwithstanding replacement of the Trustee pursuant to this Section
7.08, the Company's obligations under Section 7.07 hereof shall continue for the
benefit of the retiring Trustee.
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee consolidates with, merges or converts into, or
transfers all or substantially all of its corporate trust assets to, another
corporation, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee, provided such transferee corporation
shall qualify and be eligible under Section 7.10.
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION.
This Indenture shall always have a Trustee who satisfies the
requirements of paragraphs (1), (2) and (5) of TIA ' 310. If at any time the
Trustee shall cease to satisfy any such requirements, it shall resign
immediately in the manner and with the effect specified in this Article 7. The
Trustee shall be subject to the provisions of TIA ' 310(b). Nothing herein shall
prevent the Trustee from filing with the SEC the application referred to in the
penultimate paragraph of TIA ' 310(b).
SECTION 7.11. Preferential Collection of Claims
AGAINST COMPANY.
The Trustee shall comply with TIA ' 311(a), excluding any creditor
relationship listed in TIA ' 311(b). A trustee who has resigned or been removed
shall be subject to TIA ' 311(a) to the extent indicated therein.
ARTICLE 8
SATISFACTION AND DISCHARGE OF INDENTURE
SECTION 8.01. TERMINATION OF COMPANY'S OBLIGATIONS.
The Company may terminate all of its obligations under the Securities
and this Indenture (except those obligations referred to in the immediately
succeeding paragraph) if all Securities previously authenticated and delivered
(other than destroyed, lost or stolen Securities which have been replaced or
paid or Securities for whose payment money has theretofore been held in trust
and thereafter repaid to the Company, as provided in Section 8.03) have been
delivered to the Trustee for cancellation and the Company has paid all sums
payable by it hereunder, or if the Company irrevocably deposits in trust with
the Trustee money or U.S. Government Obligations maturing as to principal and
interest in such amounts and at such times as are sufficient, without
consideration of any reinvestment of such interest, to pay the principal of and
interest on the Securities then outstanding to maturity and to pay all other
sums payable by it hereunder.
The Company's obligations in paragraph 9 of the Securities and in
Sections 2.03, 2.04, 2.05, 2.06, 2.07, 4.01, 7.07, 7.08 and 8.04 shall survive
until the Securities are no longer outstanding. Thereafter, the Company's
obligations in such paragraph 9 and in Section 7.07 shall survive.
After such irrevocable deposit, the Trustee upon request shall
acknowledge in writing the discharge of the Company's obligations under the
Securities and this Indenture, except for those surviving obligations specified
above.
"U.S. Government Obligations" means direct non-callable obligations
of, or non-callable obligations guaranteed by, the United States of America for
the payment of which guarantee or obligation the full faith and credit of the
United States is pledged.
SECTION 8.02. APPLICATION OF TRUST MONEY.
The Trustee or Paying Agent shall hold in trust, for the benefit of
the Holders, money or U.S. Government Obligations deposited with it pursuant to
Section 8.01, and shall apply the deposited money and the money from U.S.
Government Obligations in accordance with this Indenture to the payment of the
principal of and interest on the Securities.
SECTION 8.03. REPAYMENT TO COMPANY.
Subject to Section 8.01, the Trustee and the Paying Agent shall
promptly pay to the Company upon request any excess money or U.S. Government
Obligations held by them at any time.
The Trustee and the Paying Agent shall pay to the Company upon request
any money held by them for the payment of principal or interest that remains
unclaimed for two years after a right to such money has matured; provided,
however, that the Trustee or such Paying Agent, before being required to make
any such payment, may at the expense of the Company cause to be published once
in a newspaper of general circulation in the City of New York or mail to each
Holder entitled to such money notice that such money remains unclaimed and that
after a date specified therein, which shall be at least 30 days from the date of
such publication or mailing, any unclaimed balance of such money then remaining
will be repaid to the Company. After payment to the Company, Securityholders
entitled to money must look to the Company for payment as general creditors
unless otherwise prohibited by law.
SECTION 8.04. REINSTATEMENT.
If the Trustee or Paying Agent is unable to apply any money or U.S.
Government Obligations in accordance with Section 8.01 by reason of any legal
proceeding or by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, the
Company's obligations under this Indenture and the Securities shall be revived
and reinstated as though no deposit had occurred pursuant to Section 8.01 until
such time as the Trustee or Paying Agent is permitted to apply all such money or
U.S. Government Obligations in accordance with Section 8.01; provided, however,
that if the Company has made any payment of the principal of or interest on any
Securities because of the reinstatement of its obligations, the Company shall be
subrogated to the rights of the Holders of such Securities to receive any such
payment from the money or U.S. Government Obligations held by the Trustee or
Paying Agent.
ARTICLE 9
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. WITHOUT CONSENT OF HOLDERS.
The Company and the Trustee may amend or supplement this Indenture or
the Securities without notice to or consent of any Securityholder:
(a) to comply with Sections 4.04 and 5.01;
(b) to provide for uncertificated Securities in
addition to or in place of certificated Securities;
(c) to cure any ambiguity, defect or inconsistency, or to make
any other change that does not adversely affect the rights of any
Securityholder; or
(d) to comply with the provisions of the TIA.
SECTION 9.02. WITH CONSENT OF HOLDERS.
The Company and the Trustee may amend or supplement this Indenture or
the Securities without notice to any Securityholder but with the written consent
of the Holders of at least two-thirds in principal amount of the Securities then
outstanding. The Holders of at least two-thirds in principal amount of the
Securities then outstanding may waive compliance in a particular instance by the
Company with any provision of this Indenture or the Securities without notice to
any Securityholder. Subject to Section 9.04, without the consent of each
Securityholder affected, however, an amendment, supplement or waiver, including
a waiver pursuant to Section 6.04, may not:
(1) reduce the amount of Securities whose Holders must
consent to an amendment, supplement or waiver;
(2) reduce the rate of interest on any Security;
(3) reduce the principal of any Security; or
(4) make any Security payable in money other than that stated
in the Security.
It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment, supplement or
waiver, but it shall be sufficient if such consent approves the substance
thereof.
After an amendment, supplement or waiver under this Section becomes
effective, the Company shall mail to the Holders affected thereby a notice
briefly describing the amendment, supplement or waiver. Any failure of the
Company to mail such notice, or any defect therein, shall not, however, in any
way impair or affect the validity of any such amendment, supplement or waiver.
SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT.
Every amendment to or supplement of this Indenture or the Securities
shall comply with the TIA as in effect at the date of such amendment or
supplement.
SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS.
Until an amendment or waiver becomes effective, a consent to it by a
Holder is a continuing consent by the Holder and every subsequent Holder of a
Security or portion of a Security that evidences the same debt as the consenting
Holder's Security, even if notation of the consent is not made on any Security.
However, any such Holder or subsequent Holder may revoke the consent as to his
Security or portion of a Security if the Trustee receives the notice of
revocation before the date the amendment, supplement or waiver becomes
effective.
After an amendment, supplement or waiver becomes effective, it shall
bind every Securityholder, unless it makes a change described in any of clauses
(1) through (4) of Section 9.02. In that case the amendment, supplement or
waiver shall bind each Holder of a Security who has consented to it and every
subsequent Holder of a Security or portion of a Security that evidences the same
debt as the consenting Holder's Security.
SECTION 9.05. NOTATION ON OR EXCHANGE OF SECURITIES.
If an amendment, supplement or waiver changes the terms of a Security,
the Trustee may require the Holder of the Security to deliver it to the Trustee.
The Trustee may place an appropriate notation on the Security about the changed
terms and return it to the Holder. Alternatively, if the Company or the Trustee
so determines, the Company in exchange for the Security shall issue and the
Trustee shall authenticate a new Security that reflects the changed terms.
SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC.
The Trustee shall sign any amendment or supplement authorized pursuant
to this Article 9 if the amendment or supplement does not adversely affect the
rights, duties, liabilities or immunities of the Trustee. If it does, the
Trustee may but need not sign it. In signing or refusing to sign such amendment
or supplement, the Trustee shall be entitled to receive and, subject to Section
7.01 shall be fully protected in relying upon, an Opinion of Counsel stating
that such amendment or supplement is authorized or permitted by this Indenture.
The Company may not sign an amendment or supplement until the Board of Directors
approves it.
ARTICLE 10
MISCELLANEOUS
SECTION 10.01. TRUST INDENTURE ACT CONTROLS.
If any provision of this Indenture limits, qualifies or conflicts with
the duties imposed by any of Sections 310 to 317, inclusive, of the TIA through
operation of Section 318(c) thereof, such imposed duties shall control.
SECTION 10.02. NOTICES.
Any notice or communication shall be given in writing and delivered in
person or mailed by certified or registered mail, return receipt requested,
addressed as follows:
if to the Company:
IGENE Biotechnology, Inc.
9110 Red Branch Road
Columbia, Maryland 21045
Attention: President
if to the Trustee:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Attention: Corporate Trust Administration
Such notices or communications shall be effective when received.
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Securityholder shall be mailed
by first-class mail to him at his address shown on the register kept by the
Registrar.
Failure to mail a notice or communication to a Securityholder or any
defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication to a Securityholder is mailed in
the manner provided above, it is duly given, whether or not the addressee
receives it.
SECTION 10.03. COMMUNICATIONS BY HOLDERS WITH OTHER HOLDERS.
Securityholders may communicate pursuant to TIA ' 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and any other person shall
have the protection of TIA ' 312(c).
SECTION 10.04. CERTIFICATE AND OPINION AS TO CONDITIONS
PRECEDENT.
(a) Upon any request or application by the Company to the Trustee to
take any action under this Indenture, the Company shall furnish to the Trustee
at the request of the Trustee:
(1) an Officer's Certificate stating that, in the
opinion of the signer, all conditions precedent (including any
covenants compliance with which constitutes a condition precedent), if
any, provided for in this Indenture relating to the proposed action
have been complied with; and
(2) an Opinion of Counsel stating that, in the
opinion of such counsel, all such conditions precedent (including any
covenants compliance with which constitutes a condition precedent) have
been complied with.
(b) Each Officer's Certificate and Opinion of Counsel with respect to
compliance with a condition or covenant provided for in this Indenture (other
than annual certificates provided pursuant to Section 4.05 hereof) shall
include:
(1) a statement that the person making such
certificate or opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of
the examination or investigation upon which the
statements or opinions contained in such certificate or
opinion are based;
(3) a statement that, in the opinion of such person,
he has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant
or condition has been complied with; and
(4) a statement as to whether or not, in the opinion
of such person, such condition or covenant has been complied with;
provided, however, that with respect to matters of fact an Opinion of
Counsel may rely on an Officer's Certificate or certificates of public
officials.
SECTION 10.05. Record Date for Vote or Consent of
SECURITYHOLDERS.
The Company may set a record date for purposes of determining the
identity of Securityholders entitled to vote or consent to any action by vote or
consent authorized or permitted under this Indenture, which record date shall be
the later of 10 days prior to the first solicitation of such vote or consent or
the date of the most recent list of Securityholders furnished to the Trustee
pursuant to Section 2.05 hereof prior to such solicitation. If a record date is
fixed, those persons who were Holders of Securities at such record date (or
their duly designated proxies), and only those persons, shall be entitled to
take such action by vote or consent or to revoke any vote or consent previously
given, whether or not such persons continue to be Holders after such record
date.
SECTION 10.06. RULES BY TRUSTEE, PAYING AGENT, REGISTRAR.
The Trustee may make reasonable rules for action by or at a meeting of
Holders. The Registrar or Paying Agent may make reasonable rules for its
functions.
SECTION 10.07. LEGAL HOLIDAYS.
A "Legal Holiday" is a Saturday, a Sunday or a day on which state or
Federally chartered banking institutions in New York, New York are not required
to be open. If a payment date is a Legal Holiday at a place of payment, payment
may be made at that place on the next succeeding day that is not a Legal
Holiday, and no interest shall accrue for the intervening period.
SECTION 10.08. GOVERNING LAW.
The laws of the State of New York shall govern this Indenture and the
Securities without regard to principles of conflicts of law.
SECTION 10.09. No Adverse Interpretation of Other
AGREEMENTS.
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company. Any such indenture, loan or debt agreement may
not be used to interpret this Indenture.
SECTION 10.10. NO RECOURSE AGAINST OTHERS.
All liability described in paragraph 15 of the Securities of any
director, officer, employee or stockholder, as such, of the Company is waived
and released.
SECTION 10.11. SUCCESSORS.
All agreements of the Company in this Indenture and the Securities
shall bind its successor. All agreements of the Trustee in this Indenture shall
bind its successor.
SECTION 10.12. MULTIPLE COUNTERPARTS.
The parties may sign multiple counterparts of this Indenture. Each
signed counterpart shall be deemed an original, but all of them together
represent the same agreement.
SECTION 10.13. SEPARABILITY.
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 10.14. TABLE OF CONTENTS, HEADINGS, ETC.
The table of contents, cross-reference sheet and headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part hereof, and shall in no way
modify or restrict any of the terms or provisions hereof.
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
as of the __ day of ____________, 1998.
IGENE Biotechnology, Inc.
By:_____________________
Name:
Title:
[SEAL]
Attest:_________________
Secretary
American Stock Transfer &
Trust Company
as Trustee
By______________________
Name:
Title:
<PAGE>
EXHIBIT A
[FACE OF SECURITY]
Number $
IGENE Biotechnology, Inc.
8% Notes due _____________, 2003
IGENE Biotechnology, Inc., a Maryland corporation promises to pay to
or registered assigns the principal sum of ________________ on ________________,
2003.
Additional provisions of this Note are set forth on the other side of
this Note.
Dated:
IGENE Biotechnology, Inc.
By:____________________
By:____________________
(Seal)
Certificate of Authentication:
This is one of the Securities referred
to in the within mentioned Indenture.
American Stock Transfer & Trust Company,
as Trustee,
By:____________________
Authorized Signatory
<PAGE>
[REVERSE SIDE]
1. INTEREST.
IGENE Biotechnology, Inc., a Maryland corporation (the "Company"),
promises to pay interest on the principal amount of this Note at the rate per
annum shown above. The Company shall pay interest at its option either annually
on ____________ of each year or at maturity. Interest on the Notes will accrue
from the most recent date to which interest has been paid or, if no interest has
been paid, from the date of first issuance of the Notes under the Indenture (as
defined below); provided that, if there is no existing default in the payment of
interest, and if this Note is authenticated between a record date referred to on
the face hereof and the next succeeding interest payment date, interest shall
accrue from such interest payment date. Interest will be computed on the basis
of a 360-day year of twelve 30-day months.
2. METHOD OF PAYMENT.
The Company will pay interest on this Note (except defaulted interest)
to the person who is the registered holder of this Note at the close of business
on the record payment date established by the Company. The holder must surrender
this Note to the Paying Agent to collect payment of principal. The Company will
pay principal and interest in money of the United States that at the time of
payment is legal tender for payment of public and private debts. The Company,
however, may pay principal and interest by its check payable in such money. It
may mail an interest check to the holder's registered address.
3. PAYING AGENT AND REGISTRAR.
Initially, American Stock Transfer & Trust Company (the "Trustee")
will act as Paying Agent and Registrar. The Company may change any Paying Agent
or Registrar without notice to the Holders. The Company may act as Paying Agent
or Registrar.
4. INDENTURE, LIMITATIONS.
The Company issued this Note under an Indenture dated as of
______________, 1998 (the "Indenture"), between the Company and the Trustee. The
terms of this Note include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. "
77aaa-77bbbb), as amended by the Trust Indenture Reform Act of 1990 and as in
effect on the date of the Indenture. This Note is subject to all such terms, and
the holder of this Note is referred to the Indenture and said Act for a
statement of them. The Notes are general unsecured obligations of the Company
limited to up to $5,000,000 aggregate principal amount.
5. OPTIONAL REDEMPTION.
The Notes may be redeemed, at the Company's option, in whole or in
part at any time and from time to time at the principal amount thereof, together
with accrued interest to the date fixed for redemption.
6. MANDATORY REDEMPTION.
The Company will redeem on April 15, 1999 and on each April 15
thereafter a principal amount of Notes issued under the Indenture at a
redemption price of 100% of the principal amount, plus accrued interest to the
redemption date, in an amount equal to 25% of the Company's net earnings for its
prior fiscal year determined in accordance with generally accepted accounting
principles, plus any applicable tax savings, as determined by the Company's
independent accountants (which determination shall be binding and conclusive on
the Company and the Holders). The Company may reduce the principal amount of
Notes required to be redeemed pursuant to this paragraph 6 by subtracting 100%
of the principal amount of any Notes acquired by the Company and delivered to
the Trustee for cancellation or redeemed otherwise than pursuant to this
paragraph 6. The Company may so subtract the same Note only once.
Notwithstanding anything to the contrary contained herein, the Holders of at
least two-thirds in principal amount of the Notes may waive or eliminate the
redemption obligation pursuant to this paragraph 6.
7. NOTICE OF REDEMPTION.
Notice of redemption will be mailed by first class mail at least 15
days but not more than 60 days before the redemption date to each holder of
Notes to be redeemed at his registered address. On and after the redemption date
interest ceases to accrue on Notes or portions of them called for redemption.
8. DENOMINATIONS, TRANSFER, EXCHANGE.
The Notes are in registered form without coupons. A holder may
register the transfer of or exchange Notes in accordance with the Indenture. The
Registrar may require a holder, among other things, to furnish appropriate
endorsements and transfer documents and to pay any taxes or other governmental
charges that may be imposed by law or permitted by the Indenture.
9. PERSONS DEEMED OWNERS.
The registered holder of a Note may be treated as the owner of it for
all purposes.
10. UNCLAIMED MONEY.
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent will pay the money back to the
Company at its request. After that, holders entitled to money must look to the
Company for payment.
11. AMENDMENT, SUPPLEMENT, WAIVER.
Subject to certain exceptions, the Indenture or the Notes may be
amended or supplemented with the consent of the holders of at least two-thirds
in principal amount of the Notes then outstanding and any past default or
compliance with any provision may be waived in a particular instance with the
consent of the holders of at least two-thirds in principal amount of the Notes
then outstanding. Without the consent of or notice to any Holder, the Company
and the Trustee may amend or supplement the Indenture or the Notes to, among
other things, provide for uncertificated Notes in addition to or in place of
certificated Notes, or to cure any ambiguity, defect or inconsistency or make
any other change that does not adversely affect the rights of any Holder.
12. SUCCESSOR CORPORATION.
When a successor corporation assumes all the obligations of its
predecessor under the Notes and the Indenture, the predecessor corporation will
be released from those obligations.
13. DEFAULTS AND REMEDIES.
An Event of Default is: default for 30 days in payment of interest on
the Notes; default for 5 days in payment of principal on the Notes; failure by
the Company for 30 days after notice to it to comply with any of its other
agreements in the Indenture or the Notes; and certain events of bankruptcy or
insolvency of the Company. If an Event of Default (other than as a result of
certain events of bankruptcy or insolvency), occurs and is continuing, the
Trustee or the holders of at least 25% in principal amount of the Notes then
outstanding may declare all unpaid principal of and accrued interest to the date
of acceleration on the Notes then outstanding to be due and payable immediately,
all as and to the extent provided in the Indenture. If an Event of Default
occurs as a result of certain events of bankruptcy or insolvency, all unpaid
principal of and accrued interest on the Notes then outstanding shall become due
and payable immediately without any declaration or other act on the part of the
Trustee or any Holder, all as and to the extent provided in the Indenture.
Holders may not enforce the Indenture or the Notes except as provided in the
Indenture. The Trustee may require indemnity satisfactory to it before it
enforces the Indenture or the Notes. Subject to certain limitations, holders of
at least two-thirds in principal amount of the Notes then outstanding may direct
the Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders notice of any continuing default (except a default in payment of
principal or interest) if it determines that withholding notice is in their
interests. The Company is required to file periodic reports with the Trustee as
to the absence of default.
14. TRUSTEE DEALINGS WITH THE COMPANY.
The Trustee under the Indenture, in its individual or any other
capacity, may make loans to, accept deposits from, and perform services for the
Company or an Affiliate of the Company, and may otherwise deal with the Company
or an Affiliate of the Company, as if it were not Trustee.
15. NO RECOURSE AGAINST OTHERS.
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the Notes
or the Indenture or for any claim based on, in respect or by reason of, such
obligations or their creation. The holder of this Note by accepting this Note
waives and releases all such liability. The waiver and release are part of the
consideration for the issue of this Note.
16. DISCHARGE PRIOR TO MATURITY.
If the Company deposits with the Trustee or Paying Agent money or U.S.
Government Obligations sufficient to pay the principal of and interest on the
Notes to maturity, the Company will be discharged from the Indenture except for
certain Sections thereof.
17. AUTHENTICATION.
This Note shall not be valid until the Trustee or an authenticating
agent signs the certificate of authentication on the other side of this Note.
18. ABBREVIATIONS AND DEFINITIONS.
Customary abbreviations may be used in the name of a Holder or an
assignee, such as: TEN COM ( = tenants in common), TEN ENT ( = tenants by the
entireties), JT TEN ( = joint tenants with right of survivorship and not as
tenants in common), CUST ( = Custodian) and U/G/M/A ( = Uniform Gifts to Minors
Act).
All capitalized terms used in this Note and not specifically defined
herein are defined in the Indenture and are used herein as so defined.
19. INDENTURE TO CONTROL.
In the case of any conflict between the provisions of this Note and
the Indenture, the provisions of the Indenture shall control.
The Company will furnish to any Holder, upon written request and
without charge, a copy of the Indenture. Requests may be made to: IGENE
Biotechnology, Inc., 9110 Red Branch Road, Columbia, Maryland 21045, Attention:
Secretary.
WARRANT AGREEMENT
WARRANT AGREEMENT dated as of _______ __, 1998 between IGENE
Biotechnology, Inc., a Maryland corporation, and American Stock Transfer & Trust
Company, a New York corporation (hereinafter called the "Warrant Agent").
IGENE Biotechnology, Inc. (hereinafter called the "Company") proposes
to issue stock purchase warrants (hereinafter called the "Warrants"). Each
Warrant entitles the holder thereof to purchase, within 10 years from the date
hereof, one share of Common Stock, par value $ .01 per share (the "Common
Stock"), at a purchase price of $.10 per whole share. The Warrant Agent, at the
request of the Company, has agreed to act as the agent of the Company in
connection with the issuance, registration, transfer, exchange, and exercise of
Warrants.
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein set forth:
SECTION 1. APPOINTMENT OF WARRANT AGENT. The Company hereby appoints
the Warrant Agent to act as agent for the Company in accordance with the
instructions hereinafter set forth in this Agreement, and the Warrant Agent
hereby accepts such appointment. The Company may from time to time appoint such
Co-Warrant Agents as it may deem necessary or desirable. The Company shall
promptly notify the Warrant Agent from time to time in writing of the number of
Warrants to be issued and furnish written instructions in connection therewith.
SECTION 2. FORM OF WARRANT CERTIFICATES. The Warrant Certificates (and
the forms of election to purchase shares and of assignment to be printed on the
reverse thereof) shall be substantially of the tenor and purport recited in
Exhibit A hereto and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Warrant Agreement, or as
may be required to comply with any law or with any rule or regulation made
pursuant thereto or with any rule or regulation of any stock exchange on which
the Warrants may from time to time be listed, or to conform to usage. The
Warrant Certificates shall be dated as of the date of issuance thereof by the
Warrant Agent, either upon initial issuance or upon transfer or exchange, and
initially shall entitle the holders thereof to purchase one share of Common
Stock, but the number of such shares and the purchase price per share of Common
Stock shall be subject to adjustments as provided herein.
SECTION 3. COUNTERSIGNATURE AND REGISTRATION. The Warrant Certificates
shall be executed on behalf of the Company by the Chairman of the Board, Chief
Executive Officer, President or any Vice President by facsimile signature, and
shall be attested by any Vice President, Treasurer or the Secretary of the
Company by facsimile signature. The Warrant Certificates shall be manually
countersigned by the Warrant Agent and shall not be valid for any purpose unless
so countersigned. In case any officer of the Company who shall have signed any
of the Warrant Certificates shall cease to be such officer of the Company before
countersignature by the Warrant Agent and issuance and delivery by the Company,
such Warrant Certificates, nevertheless, may be countersigned by the Warrant
Agent, issued and delivered with the same force and effect as though the person
who signed such Warrant Certificates had not ceased to be such officer of the
Company; and any Warrant Certificates may be signed on behalf of the Company by
any person who, at the actual date of the execution of such Warrant
Certificates, shall be a proper officer of the Company to sign such Warrant
Certificates, although at the date of the execution of this Warrant Agreement
any such person was not such an officer.
The Warrant Agent will keep or cause to be kept, at one of its offices
in the City of New York, State of New York, books for registration and transfer
of the Warrant Certificates issued hereunder. Such books shall show the names
and addresses of the respective holders of the Warrant Certificates, the number
of Warrants evidenced on its face by each of the Warrant Certificates, and the
date of each of the Warrant Certificates.
The Warrant Agent shall countersign a Warrant Certificate only (a)
upon initial issuance of the Warrants in accordance with the written order
signed by the Chairman of the Board, the Chief Executive Officer, the President
or any Vice President or (b) upon exchange, transfer or substitution for one or
more previously countersigned Warrant Certificates as hereinafter provided.
SECTION 4. TRANSFER AND EXCHANGE. Subject to Section 6 hereof, the
Warrant Agent shall, from time to time, register the transfer of any outstanding
Warrant Certificate upon the books to be maintained by the Warrant Agent for
that purpose, upon surrender thereof for transfer properly endorsed or
accompanied by appropriate instruments of transfer and written instructions for
transfer. Upon any such registration of transfer, a new Warrant Certificate
shall be issued to the transferee and the surrendered Warrant Certificate shall
be canceled by the Warrant Agent. Any Warrant Certificate may be exchanged at
the option of the holder thereof, upon surrender at the office of the Warrant
Agent specified in Section 22 hereof, for another Warrant Certificate, or other
Warrant Certificates of different denominations, representing in the aggregate
the right to purchase a like number of shares of Common Stock. No fractional
Warrant Certificates will be issued. The Company may require payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer or exchange of Warrant Certificates.
SECTION 5. COMMON STOCK AND WARRANT COMMON STOCK. As hereinafter used
in this Agreement, Common Stock shall mean stock of the Company of any class,
whether now or hereafter authorized, which has the right to participate in the
distribution of either earnings or assets of the Company without limit as to
amount or percentage, and Warrant Common Stock shall mean only Common Stock, and
stock of any other class into which such presently authorized Common Stock may
hereafter be changed, issuable upon exercise of Warrants. In case, by reason of
the operation of Section 7, the Warrants shall entitle the registered holders
thereof to purchase any other shares of stock or other securities or property of
the Company or of any other corporation, any reference in this Agreement to the
exercise of Warrants shall be deemed to refer to and include the purchase of
such other shares of stock or other securities or property upon such exercise.
SECTION 6. WARRANT PRICE AND EXPIRATION DATE OF WARRANTS. The
registered holder of any Warrant Certificate may exercise the Warrants evidenced
thereby in whole or in part at any time on or after the date hereof upon
surrender of the Warrant Certificate with the form of election to purchase on
the reverse side thereof duly executed, to the Warrant Agent at the principal
office of the Warrant Agent in the City of New York, State of New York, together
with payment of the purchase price for one share of Common Stock as to which the
Warrants are exercised, at or prior to 3:30 p.m. New York City Time on ______
__, 2008 (the "Expiration Date").
The purchase price for each share of Common Stock pursuant to the
exercise of a Warrant (the "Warrant Price") shall be $.10 during the period from
the date hereof until the Expiration Date, in each case as adjusted pursuant to
Section 7 hereof. The Warrant Price shall be payable as follows: (a) by payment
to the Company of the Warrant Price in cash, by check or by wire transfer of
funds; (b) by surrender to the Company for cancellation of securities of the
Company having a Current Market Price (as defined herein) on the date of
exercise equal to the Warrant Price for such shares; (c) by surrender to the
Company for cancellation of notes or debt securities of the Company having a
principal balance plus accrued interest on the date of exercise equal to the
Warrant Price for such shares; or (d) by a combination of the methods described
in clauses (a), (b) and (c) above. In lieu of exercising the Warrant, the holder
may elect to receive a payment equal to the difference between (i) the Current
Market Price of the number of shares of Common Stock for which the payment is
elected and (ii) the Warrant Price with respect to such shares, payable only in
shares of Common Stock valued at Current Market Price on the date of exercise.
SECTION 7. WARRANT ADJUSTMENTS. The Warrant Price and the number of
shares purchasable upon exercise of a Warrant shall be subject to adjustment as
follows:
(a) STOCK DIVIDENDS, SUBDIVISIONS, COMBINATIONS AND RECLASSIFICATIONS.
In case the Company shall at any time after the date of this Agreement (i)
declare a dividend on the Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, (iii) combine the outstanding Common
Stock into a smaller number of shares, or (iv) issue any shares of its capital
stock in a reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing corporation), the Warrant Price in effect at the time
of the record date for such dividend or of the effective date of such
subdivision, combination or reclassification, and/or the number and kind of
shares of capital stock issuable upon exercise of the Warrants on such date
shall be proportionately adjusted so that the holder of any Warrant exercised
after such time shall be entitled to receive the aggregate number and kind of
shares of capital stock which, if such Warrant had been exercised immediately
prior to such date and at a time when the Common Stock transfer books of the
Company were open, such holder would have owned upon such exercise and been
entitled to receive by virtue of such dividend, subdivision, combination or
reclassification. Such adjustment shall be made successively whenever any event
listed above shall occur.
(b) CONSOLIDATION, MERGER OR SALE OF ASSETS. If, prior to the exercise
of any Warrants, the Company shall at any time consolidate with or merge into
another corporation, the holder of any Warrants will thereafter receive, upon
the exercise thereof in accordance with the terms of this Agreement, the
securities or property to which the holder of the number of shares of Common
Stock then deliverable upon the exercise of such Warrants would have been
entitled upon such consolidation or merger, and the Company shall take such
steps in connection with such consolidation or merger as may be necessary to
assure that the provisions hereof shall thereafter be applicable, as nearly as
reasonably may be, in relation to any securities or property thereafter
deliverable upon the exercise of the Warrants. The Company or the successor
corporation, as the case may be, shall execute and deliver to the Warrant Agent
a supplemental agreement so providing. A sale of all or substantially all the
assets of the Company for a consideration (apart from the assumption of
obligations) consisting primarily of securities shall be deemed a consolidation
or merger for the foregoing purposes. The provisions of this subsection (b)
shall similarly apply to successive mergers or consolidations or sales or other
transfers.
(c) CALCULATIONS TO THE NEAREST ONE-TENTH OF A CENT AND ONE-HUNDREDTH
OF A SHARE. No adjustment in the Warrant Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in such price;
provided, however, that any adjustments which by reason of this Section 7(c) are
not required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 7 shall be made to
the nearest one-tenth of a cent and to the nearest one-hundredth of a share as
the case may be. Notwithstanding the first sentence of this subsection (c), any
adjustment required by this Section 7 shall be made no later than the earlier of
six months from the date of the transaction which mandates such adjustment or
the expiration of the right to exercise any Warrant.
(d) NOTICE OF WARRANT ADJUSTMENT. Whenever the Warrant Price or the
number of shares purchasable upon exercise of a Warrant shall be adjusted as
provided in this Section 7, the Company shall forthwith file with the Warrant
Agent a certificate, signed by an officer of the Company, showing in detail the
facts requiring such adjustment and the Warrant Price and number of shares so
purchasable that will be effective after such adjustment. The Company shall also
cause a notice setting forth any adjustments to be sent by mailing first class,
postage prepaid, to each registered holder of a Warrant or Warrants at its
address appearing on the Warrant register. The Warrant Agent shall have no duty
with respect to any certificate filed with it except to keep the same on file
and available for inspection by registered holders of Warrants during reasonable
business hours. The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of a Warrant to determine whether any facts exist
which may require any adjustment of the Warrant Price, or with respect to the
nature of any adjustment of the Warrant Price when made, or with respect to the
method employed in making such adjustment.
(e) OTHER NOTICES. In case the Company after the date hereof shall
propose to take any action of the type described in subsection (b) of this
Section 7, the Company shall file with the Warrant Agent a certificate, signed
by an officer of the Company, specifying the date on which such action shall
take place and shall also set forth such facts with respect thereto as shall be
reasonably necessary to indicate the effect of such action (to the extent such
facts may be known on the date of such notice) on the Warrant Price and the
number, or kind, or class of shares or other securities or property which shall
be purchasable upon exercise of Warrants. Such notice shall be given at least 10
days prior to the taking of such proposed action. The Company shall also cause a
notice setting forth any adjustments to be sent by mailing first class, postage
prepaid, to each registered holder of a Warrant Certificate or Warrant
Certificates at its address appearing on the Warrant register. Failure to give
such notice or any defect therein shall not affect the legality or validity of
such action.
(f) NO CHANGE IN WARRANT TERMS ON ADJUSTMENT. Irrespective of any of
the adjustments in the Warrant Price or the number of shares of Warrant Common
Stock, Warrant Certificates theretofore or thereafter issued may continue to
express the same prices and number of shares as are stated in a similar Warrant
Certificate issuable initially, or at some subsequent time, pursuant to this
Agreement and such number of Shares specified therein shall be deemed to have
been so adjusted.
(g) TREASURY SHARES. Shares of Common Stock at any time owned by the
Company shall not be deemed to be outstanding for purposes of any computation
under this Section 7.
SECTION 8. CURRENT MARKET PRICE. For all purposes of this Agreement,
the Current Market Price per share of Common Stock on any date shall be deemed
to be the average closing prices for the ten consecutive business days
commencing before such date on the principal national securities exchange or
Nasdaq System on which the shares of Common Stock or securities are listed or
admitted to trading or, if not listed or admitted to trading on any national
securities exchange or Nasdaq System, the average of the reported bid and asked
prices during such 10 trading day period in the over-the-counter market as
furnished by the National Quotation Bureau, Inc., or, if such firm is not then
engaged in the business of reporting such prices, as furnished by any similar
firm then engaged in such business selected by the Company, or, if there is no
such firm, as furnished by any member of the National Association of Securities
Dealers, Inc. selected by the Company or, if the shares of Common Stock or
securities are not publicly traded, the Current Market Price shall be determined
in good faith by the Board of Directors of the Company.
SECTION 9. EXERCISE OF WARRANTS. Subject to the provisions of this
Agreement, each registered holder of Warrants shall have the right, which may be
exercised as in such Warrant Certificates expressed, to purchase from the
Company (and the Company shall issue and sell to such registered holders of
Warrants) all or part of the number of fully paid and nonassessable shares of
Warrant Common Stock specified in such Warrant Certificates (subject to the
adjustments as herein provided), upon surrender to the Company at the office of
the Warrant Agent specified in Section 22 hereof, of such Warrant Certificates
with the exercise form on the reverse thereof duly filled in and signed, and
upon payment to the Warrant Agent to the account of the Company of the Warrant
Price for the number of shares of Warrant Common Stock in respect of which such
Warrants are then exercised. The date of exercise of any Warrant shall be deemed
to be the date of its receipt by the Warrant Agent duly filled in and signed and
accompanied by proper funds or other consideration as hereinafter provided.
Payment of such Warrant Price may be made in cash, or by certified or official
bank check, or as set forth in Section 6 hereof. No adjustment shall be made for
any cash dividends on shares of Warrant Common Stock issuable upon exercise of a
Warrant. Upon such surrender of Warrants, and payment of the Warrant Price as
aforesaid, the Company shall issue and cause to be delivered with all reasonable
dispatch to or upon the written order of the registered holder of such Warrants
and in such name or names as such registered holder may designate, a certificate
or certificates for the number of full shares of Warrant Common Stock so
purchased upon the exercise of such Warrants together with cash as provided in
Section 12 of this Agreement, in respect of any fraction of a share of such
stock issuable upon such surrender.
Each person in whose name any certificate for shares of Common Stock
is issued upon the exercise of Warrants shall for all purposes be deemed to have
become the holder of record of the Common Stock represented thereby on, and such
certificate shall be dated, the date upon which the Warrant Certificate
evidencing such Warrants was duly surrendered and payment of the Warrant Price
(and any applicable transfer taxes) was made; provided, however, that if the
date of such surrender and payment is a date upon which the Common Stock
transfer books of the Company are closed, such person shall be deemed to have
become the record holder of such shares on, and such certificate shall be dated,
the next succeeding business day on which the Common Stock transfer books of the
Company are open.
SECTION 10. UNEXERCISED WARRANTS. To the extent that any Warrant
Certificates remain outstanding at the Expiration Date, the unexercised Warrants
represented thereby shall be deemed null and void.
SECTION 11. REDEMPTION OF WARRANTS BY THE COMPANY.
(a) REDEMPTION. The Warrants may be redeemed, at the option of the
Company, as a whole at any time or in part from time to time commencing three
years from the date hereof, and prior to their expiration, in any proportion as
the Company in its sole discretion may determine, at the office of the Warrant
Agent, upon the notice referred to in Section 11(b), at the price of $.01 per
Warrant, provided that the closing price of a share of Common Stock commencing
three years from the date hereof has reached at least ten times the Warrant
Price.
(b) DATE FIXED FOR, AND NOTICE OF, REDEMPTION. In the event the
Company shall elect to redeem all or any part of the Warrants, the Company shall
fix a date for the redemption. Notice of redemption shall be mailed by first
class mail, postage prepaid, by the Company not less than 30 days from the date
fixed for redemption to the registered holders of the Warrants to be redeemed at
their last address as they shall appear on the registration books. Any notice
mailed in the manner herein provided shall be conclusively presumed to have been
duly given whether or not the registered holder received such notice.
(c) EXERCISE AFTER NOTICE OF REDEMPTION. The Warrants may be exercised
in accordance with Section 9 of this Agreement at any time after notice of
redemption shall have been given by the Company pursuant to Section 11(b) hereof
and prior to the date fixed for redemption.
SECTION 12. ELIMINATION OF FRACTIONS. The Company shall not be
required to issue fractional shares of stock upon any exercise of Warrants. As
to any final fraction of a share which the same registered holder of one or more
Warrants, the rights under which are exercised in the same transaction or series
of related transactions, would otherwise be entitled to purchase upon such
exercise, the Company shall pay a cash adjustment in respect of such final
fraction in an amount equal to the same fraction of the Current Market Price (as
determined in the manner prescribed in Section 8 hereof) on the business day
which next precedes the day of exercise.
SECTION 13. ISSUE TAXES. The Company will pay documentary stamp taxes,
if any, attributable to the initial issuance of shares of Warrant Common Stock
upon the exercise of any Warrant; PROVIDED, HOWEVER, that neither the Company
nor the Warrant Agent shall be required to pay any tax or taxes which may be
payable in respect of any transfer involved in the issue or delivery of any
certificates for shares of Warrant Common Stock in a name other than that of the
registered holder of Warrants, in respect of which such shares are initially
issued.
SECTION 14. RESERVATION OF SHARES. The Company shall at all times
reserve and keep available out of its authorized but unissued stock, for the
purpose of effecting the issuance of stock upon exercise of Warrants, such
number of shares of its duly authorized Warrant Common Stock as shall from time
to time be sufficient to effect the issuance of shares of Warrant Common Stock
upon exercise of all Warrants at the time outstanding.
SECTION 15. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT
AGENT. Any corporation into which the Warrant Agent may be merged or with which
it may be consolidated, or any corporation resulting from any merger or
consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the corporate trust business of the Warrant Agent, shall be the
successor to the Warrant Agent hereunder without the execution or filing of any
paper or any further act on the part of any of the parties hereto, anything
herein to the contrary notwithstanding. In the case of Warrants which have been
countersigned by the Warrant Agent, but not delivered at the time any such
successor to the Warrant Agent succeeds to the agency created by this Agreement,
any such successor may adopt the countersignature of the original Warrant Agent
and deliver such Warrants so countersigned; and in case at that time any of the
Warrants shall not have been countersigned, any successor to the Warrant Agent
may countersign such Warrants either in the name of the predecessor Warrant
Agent or in the name of the successor Warrant Agent; and in all such cases such
Warrants shall have the full force and effect provided in the Warrants and in
this Agreement.
In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrants shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignature under its prior name
and deliver Warrant Certificates so countersigned, and in case at that time any
of the Warrant Certificates shall not have been countersigned, the Warrant Agent
may countersign such Warrant Certificates either in its prior name or in its
changed name; and in all such cases such Warrant Certificates shall have the
full force and effect provided in the Warrant Certificates and in this
Agreement.
SECTION 16. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS, ETC. The
Warrant Agent shall account promptly to the Company with respect to Warrants
exercised and concurrently pay to the Company all moneys received by the Warrant
Agent for the purchase of shares of Common Stock through the exercise of such
Warrants.
The Warrant Agent shall keep copies of this Agreement available for
inspection by holders of Warrants during normal business hours at its office
specified in Section 22 hereof.
SECTION 17. SUPPLEMENTS AND AMENDMENTS. The parties hereto may from
time to time supplement or amend this Agreement without the approval of any
holders of Warrants to cure any ambiguity or to correct or supplement any
provision contained in this Agreement which may be defective or inconsistent
with any other provision contained herein, or to make such other provisions with
respect to any change or any supplemental agreement as the parties may deem
necessary or desirable and which shall not materially adversely affect the
interests of the registered holders of the Warrants.
SECTION 18. MUTILATED OR MISSING WARRANT CERTIFICATES. If any Warrant
shall be mutilated, lost, stolen or destroyed the Warrant Agent shall deliver a
new Warrant Certificate of like tenor and denomination in exchange and
substitution therefor upon surrender and cancellation of the mutilated Warrant
Certificate or, in the case of a lost, stolen or destroyed Warrant Certificate,
upon receipt of evidence satisfactory to the Company and the Warrant Agent of
the loss, theft or destruction of such Warrant Certificate and, in either case,
upon receipt of such indemnity as the Company and the Warrant Agent may
reasonably require. Applicants for substitute Warrant Certificates shall also
comply with such other reasonable regulations and pay such other reasonable
charges as the Warrant Agent or the Company may prescribe. Any such new Warrant
Certificate shall constitute an original contractual obligation of the Company,
whether or not the allegedly lost, stolen, mutilated or destroyed Warrant
Certificate shall be at any time enforceable by anyone.
SECTION 19. DUTIES OF THE WARRANT AGENT. The Warrant Agent undertakes
the duties and obligations imposed by this Warrant Agreement upon the following
terms and conditions, by all of which the Company and the holders of Warrants,
by their acceptance thereof, shall be bound:
(a) The Warrant Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Warrant
Certificates (except its countersignature thereof and except such as describes
the Warrant Agent or action taken or to be taken by it) or be required to verify
the same, but all such statements and recitals are and shall be deemed to have
been made by the Company only. The Warrant Agent shall not be under any
responsibility in respect of the validity of this Agreement or the execution and
delivery hereof or in respect of the validity or execution of any Warrant
Certificate (except its countersignature thereof); nor shall it be responsible
for any breach by the Company of any covenant or condition contained in this
Agreement or in any Warrant Certificate to be complied with by the Company; nor
shall it be responsible for the making of any adjustment in the Warrant Price or
the number of shares issuable upon the exercise of a Warrant required under the
provisions of Section 7 or responsible for the manner, method or amount of any
such change or the ascertaining of the existence of facts that would require any
such change; nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any shares
to be issued pursuant to this Agreement or any Warrant or as to whether any
shares will, when issued, be validly issued and fully paid and non-assessable.
(b) The Warrant Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys, agents or employees, and the Warrant Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys, agents or employees or for any loss to the Company resulting
from such neglect or misconduct, provided reasonable care had been exercised in
the selection and continued employment thereof.
(c) The Warrant Agent may consult at any time with legal counsel
satisfactory to it (who may be legal counsel for the Company) and the advice of
such counsel shall be full and complete authorization and protection to the
Warrant Agent as to any action taken or omitted by it in good faith and in
accordance with such advice.
(d) The Warrant Agent shall incur no liability or responsibility to
the Company or to any holder of a Warrant Certificate for any action taken in
reliance on any notice, resolution, waiver, consent, order, certificate, or
other paper, document or instrument believed by it to be genuine and to have
been signed, sent or presented by the proper party or parties.
(e) The Company agrees to pay to the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the execution of
this Warrant Agreement, to reimburse the Warrant Agent for all expenses
(including reasonable counsel fees), taxes and governmental charges and other
charges of any kind and nature incurred by the Warrant Agent in the execution of
this Warrant Agreement and to indemnify the Warrant Agent and save it harmless
against any and all liabilities, including judgments, costs and reasonable
counsel fees, for anything done or omitted by the Warrant Agent in the execution
of this Warrant Agreement except as a result of the Warrant Agent's negligence,
willful misconduct or bad faith.
(f) The Warrant Agent and any stockholder, director, officer or
employee of the Warrant Agent may buy, sell, or deal in any of the Warrants or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
Warrant Agent under this Warrant Agreement. Nothing herein shall preclude the
Warrant Agent from acting in any other capacity for the Company or for any other
legal entity.
(g) The Warrant Agent shall act hereunder solely as agent for the
Company and in a ministerial capacity, and its duties shall be determined solely
by the provisions hereof. The Warrant Agent shall not be liable for anything
which it may do or refrain from doing in connection with this Agreement except
for its own negligence, willful misconduct or bad faith.
SECTION 20. CHANGE OF WARRANT AGENT. The Warrant Agent may resign and
be discharged from its duties under this Agreement upon 30 days' notice in
writing mailed to the Company by registered or certified mail, and to the
holders of the Warrant Certificates by first-class mail. The Company may remove
the Warrant Agent or any successor Warrant Agent upon 30 days' notice in
writing, mailed to the Warrant Agent or successor Warrant Agent, as the case may
be, and to each transfer agent of the Common Stock by registered or certified
mail, and to the holders of the Warrant Certificates by first-class mail. If the
Warrant Agent shall resign or be removed or shall otherwise become incapable of
acting, the Company shall appoint a successor to the Warrant Agent. If the
Company shall fail to make such appointment within a period of 30 days after
such removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Warrant Agent or by the holder of a
Warrant Certificate (who shall, with such notice, submit such holder's Warrant
Certificate for inspection by the Company), then the registered holder of any
Warrant Certificate may apply to any court of competent jurisdiction for the
appointment of a new Warrant Agent. Any successor Warrant Agent, whether
appointed by the Company or by such a court, shall be a corporation organized
and doing business under the laws of the United States or of any State thereof,
which is authorized under such laws to exercise corporate trust powers and is
subject to supervision or examination by federal or state authority and which
has at the time of its appointment as Warrant Agent a combined capital and
surplus of at least $5,000,000. After appointment, the successor Warrant Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Warrant Agent without further act or deed; but
the predecessor Warrant Agent shall deliver and transfer to the successor
Warrant Agent any property at the time held by it hereunder, and execute and
deliver any further assurance, conveyance, act or deed necessary for the
purpose. Not later than the effective date of such appointment the Company shall
file notice thereof in writing with the predecessor Warrant Agent and each
transfer agent of the Common Stock, and mail a notice thereof in writing to the
registered holders of the Warrant Certificates. Failure to give any notice
provided for in this Section 20, however, or any defect therein, shall not
affect the legality or validity of the resignation or removal of the Warrant
Agent or the appointment of the successor Warrant Agent, as the case may be.
SECTION 21. IDENTITY OF TRANSFER AGENT. Forthwith upon the appointment
of any subsequent Transfer Agent for shares of the Common Stock, the Company
will file with the Warrant Agent a statement setting forth the name and address
of such Transfer Agent.
SECTION 22. NOTICES. Any notice pursuant to this Agreement to be given
by the Warrant Agent or by the registered holder of any Warrant to the Company
shall be sufficiently given if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing by the Company with the
Warrant Agent) as follows:
IGENE Biotechnology, Inc.
9110 Red Branch Road
Columbia, Maryland 21045
Attention: President
Any notice pursuant to this Agreement to be given by the Company or by the
registered holder of any Warrant to the Warrant Agent shall be sufficiently
given if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing by the Warrant Agent with the Company) as follows:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Attention: __________
SECTION 23. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
SECTION 24. GOVERNING LAW. This Agreement and each Warrant issued
hereunder shall be deemed to be a contract made under the laws of New York, and
for all purposes shall be construed in accordance with the laws of New York,
without regard to principles of conflict of laws.
SECTION 25. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company,
the Warrant Agent and the registered holders of the Warrant Certificates any
legal or equitable right, remedy or claim under this Agreement; but this
Agreement shall be for the sole and exclusive benefit of the Company, the
Warrant Agent and the registered holders of the Warrant Certificates.
SECTION 26. COUNTERPARTS. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
SECTION 27. REGISTRATION OF SHARES OF COMMON STOCK. The Company will
furnish to the Warrant Agent, upon request, an opinion of counsel to the effect
that (i) a Registration Statement under the Securities Act of 1933 is then in
effect with respect to the Warrants and/or the shares of Warrant Common Stock
issuable upon exercise of the Warrants and the Prospectuses hereinafter referred
to comply as to form in all material respects with the requirements of said Act
and the rules and regulations of the Securities and Exchange Commission
thereunder; or (ii) a Registration Statement under said Act with respect to said
warrants and/or shares is not required. In the event that said opinion states
that such a Registration Statement is in effect the Company will, from time to
time, furnish the Warrant Agent with current Prospectuses meeting the
requirements of said Act and all rules and regulations thereunder in sufficient
quantity to permit the Warrant Agent to deliver a Prospectus to each transferee
of a Warrant Certificate and each holder of a Warrant Certificate upon exercise
thereof. The Company further agrees to pay all fees, costs and expenses in
connection with the preparation and delivery to the Warrant Agent of the
foregoing opinions and Prospectuses.
If any shares of Warrant Common Stock issuable upon the exercise of
the Warrants or the issuance thereof requires registration or approval of any
governmental authority, including, without limitation, the filing of necessary
amendments, supplements or post-effective amendments to a Registration Statement
of the Company under the Securities Act of 1933, or the taking of any other
action under the laws of the United States of America or any political
subdivision hereof or under the laws of any state of the United States of
America before such shares may be validly and legally issued, then the Company
covenants that it will in good faith and as expeditiously as possible endeavor
to secure and keep effective such registration or approval or to take such other
action, as the case may be. Notwithstanding anything to the contrary contained
herein, the Company shall not be obligated to deliver any securities pursuant to
the exercise of a Warrant unless a registration statement under the Securities
Act of 1933 with respect to the securities is effective.
IN WITNESS WHEREOF, the parties hereto have caused this Warrant
Agreement to be executed and delivered as of the day and year first above
written.
IGENE BIOTECHNOLOGY, INC.
By:_________________________
Its:_____________________
Attest:
- ----------------------------
Its:_____________________
American Stock Transfer & Trust Company
as Warrant Agent
By:_________________________
Its:_____________________
Attest:
- ----------------------------
Its:_____________________
<PAGE>
EXHIBIT A
EXERCISABLE AT ANY TIME AT OR PRIOR TO
3:30 P.M. NEW YORK CITY TIME
ON ________ __, 2008
WARRANT CERTIFICATE
IGENE BIOTECHNOLOGY, INC.
NO. W-
This certifies that _____________________________ or registered
assigns is the registered holder of the number of Warrants set forth above, and
is entitled, upon surrender of this Warrant Certificate at the office of
American Stock Transfer & Trust Company, Warrant Agent (or any successor as such
Warrant Agent), in the City of New York, State of New York, at any time on or
after the date hereof and at or prior to 3:30 p.m. New York City Time on ______
__, 2008, to purchase one share of Common Stock, par value $.01, of IGENE
Biotechnology, Inc., a Maryland corporation (the "Company"), at the price of
$.10 per whole share.
The applicable per share purchase price shown above and the number of
shares issuable upon exercise of the Warrants represented by this Warrant
Certificate are subject to adjustment for the occurrence of certain events,
including stock dividends and split-ups, combinations, reorganizations,
reclassifications, consolidations, mergers or sales of properties and assets, as
set forth in the Warrant Agreement hereinafter referred to. A complete statement
with respect to such adjustments and to other terms and conditions pertaining to
the Warrants is contained in the Warrant Agreement, dated as of ______ __ 1998,
between the Company and American Stock Transfer & Trust Company, Warrant Agent,
a copy of which may be examined by the registered holder hereof at the office of
the Warrant Agent.
To exercise the Warrants represented by this Warrant Certificate the
form of election to purchase on the reverse hereof must be duly executed and the
accompanying instructions for the registration and delivery of the stock must be
filled in.
The Warrants represented by this Warrant Certificate are transferable
(subject to the conditions set forth in the preceding paragraphs) at the office
in the City of New York, State of New York, of the Warrant Agent (or of its
successor as Warrant Agent) by the registered holder thereof in person or by
attorney duly authorized in writing, upon surrender of this Warrant Certificate.
Upon any such transfer, a new Warrant Certificate, representing the right to
purchase a like number of shares of the Company's Common Stock, will be issued
to the transferee in exchange for this Warrant Certificate.
This Warrant Certificate and similar Warrant Certificates when
surrendered at the office in the City of New York, State of New York of the
Warrant Agent (or of its successor as Warrant Agent) by the registered holder
hereof in person or by attorney duly authorized in writing may be exchanged for
another Warrant Certificate or Warrant Certificates, representing in the
aggregate the right to purchase a like number of shares of the Company's Common
Stock.
If the Warrants evidenced by this Warrant Certificate remain
outstanding at the expiration of the period during which Warrants are
exercisable, as set forth in the first paragraph of this Warrant Certificate,
such Warrants shall thereupon be deemed null and void.
No fractional shares of Common Stock will be issued upon the exercise
of any Warrant or Warrants evidenced hereby, but in lieu thereof, a cash payment
will be made, as provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of Common Stock or of
any other securities of the Company which may at any time be issuable on the
exercise hereof, nor shall anything contained in the Warrant Agreement or herein
be construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action (whether upon any recapitalization, issue of stock,
reclassification of stock, change of par value, consolidation, merger,
conveyance, or otherwise) or, except as provided in the Warrant Agreement, to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise, until the Warrant or Warrants evidenced by this Warrant Certificate
shall have been exercised as provided in the Warrant Agreement.
IGENE BIOTECHNOLOGY, INC.
By: ________________________
Its: ___________________
Attest:
- -----------------------------
SECRETARY
This Warrant Certificate is not valid until countersigned by the
Warrant Agent.
Dated: Countersigned:
American Stock Transfer & Trust Company,
as Warrant Agent,
By:_________________________
AUTHORIZED OFFICER
<PAGE>
FORM OF ELECTION TO PURCHASE
(FORM OF EXERCISE TO BE EXECUTED BY THE WARRANT HOLDER AT THE TIME OF
EXERCISE IN ACCORDANCE WITH THE WARRANT AGREEMENT)
To American Stock Transfer & Trust Company, or its successor as WARRANT AGENT:
The undersigned, holder of the within Warrant Certificate, hereby (1)
irrevocably exercises the undersigned's right to purchase _________ shares of
Common Stock, par value $0.01 per share, of IGENE Biotechnology, Inc. (the
"Company") which the undersigned is entitled to purchase under the terms of the
within Warrant Certificate, or such other securities as the undersigned shall be
entitled to purchase under the terms of the Warrant Agreement referred to in
such Warrant Certificate by reason of the occurrence of certain events specified
therein, and (2) (a) elects to make payment in full for the number of shares of
Common Stock so purchased by payment of $______ in cash or by certified or
official bank check, (b) surrenders securities having a Current Marking Price of
$___, (c) surrenders for cancellation notes or debt securities of the Company,
(d) elects to receive the difference between Current Market Price and Warrant
Price, payable in shares of Common Stock, or (e) a combination of the above as
follows:____
Please issue the certificate for shares of Common Stock in the name
of, and pay any cash for any fractional share to:
- ----------------------------------------------------------------
Print or type name
- ----------------------------------------------------------------
Social Security or other Identifying Number
- ----------------------------------------------------------------
Street Address
- ----------------------------------------------------------------
City State Zip Code
If such number of shares shall not be all the shares purchasable upon the
exercise of the Warrants evidenced by this Warrant Certificate, a new Warrant
Certificate for the balance of such Warrants remaining unexercised shall be
registered in the name of and delivered to:
Please insert social security or other identifying number:
(Please print name and address)
Dated: _______________
Signature
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate)
(Signature Medallion Guaranteed): ___________________ Date: ________________
(If the Common Stock, cash in lieu of fractional shares, or Warrants for any
unexercised balance are to be issued or paid to a person other than the person
in whose name the within Warrant is registered, or if otherwise requested by the
Company or the Warrant Agent, a signature Medallion guarantee is required.)
<PAGE>
ASSIGNMENT
(FORM OF ASSIGNMENT TO BE EXECUTED IF WARRANT
HOLDER DESIRES TO TRANSFER WARRANT)
FOR VALUE RECEIVED, __________________________________ hereby sells,
assigns, and transfer unto ____________________ this Warrant Certificate
together with all right, title or interest therein and does hereby irrevocably
appoint ___________________ attorney to transfer the within Warrant Certificate
on the books of the Warrant Agent with full power of substitution in the
premises.
Dated: _____________
Signature
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate)
(Signature Medallion Guaranteed):________________ Date:______________________
Exhibit 5.1
January 23, 1998
IGENE Biotechnology, Inc.
9110 Red Branch Road
Columbia, Maryland 21045
Ladies and Gentlemen:
We have acted as counsel to IGENE Biotechnology, Inc., a Maryland corporation
(the "Company"), in connection with the preparation and filing with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Act"), of a Registration Statement on Form SB-2 (the
"Registration Statement"), relating to the proposed issuance by the Company of
up to 50,000,000 Units of the Company, including $5,000,000 principal amount of
8% Notes, rights to purchase the Units and 50,000,000 warrants (the "Warrants")
(all such securities being hereinafter collectively referred to as the
"Securities"). The Securities are to be issued or sold from time to time as set
forth in the Registration Statement, the prospectus contained therein and any
amendments or supplements thereto.
As such counsel, we have examined copies of the Certificate of Incorporation and
the By-Laws of the Company, each as amended to the date hereof, the Registration
Statement (including the exhibits thereto), the minutes of various meetings of
the Board of Directors of the Company, and the originals, copies or certified
copies of all such records of the Company, and all such agreements, certificates
of public officials, certificates of officers and representatives of the Company
or others, and such other documents, papers, statutes and authorities as we have
deemed necessary to form the basis of the opinion hereinafter expressed. In such
examination, we have assumed the genuineness of signatures and the conformity to
original documents of the documents supplied to us as copies. As to various
questions of fact material to such opinion, we have relied upon statements and
certificates of officers of the Company and others.
Attorneys involved in the preparation of this opinion are admitted to practice
law in the State of New York and we do not purport to be experts on, or express
any opinion herein concerning, any law other than the laws of the State of New
York or the federal laws of the United States of America.
Based upon and subject to the foregoing, we are of the opinion that:
The Securities to be issued by the Company, when issued under the circumstances
contemplated in the Registration Statement, will be legally issued, fully paid
and non-assessable.
We hereby consent to the reference to our firm under the caption "Legal Matters"
in the Prospectus. We further consent to your filing a copy of this opinion as
an exhibit to the Registration Statement. In giving such consent, we do not
admit hereby that we come within the category of persons whose consent is
required under Section 7 of the Act or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
STROOCK & STROOCK & LAVAN LLP
AMENDED AND RESTATED AGREEMENT
AMENDED AND RESTATED AGREEMENT effective as of the 24th day of June 1997 between
IGENE Biotechnology, Inc. of 9110 Red Branch Road, Columbia, Maryland 21045-2020
("IGENE") and Fermic, S.A. de C.V., Reforma No. 873-Iztapalapa, 09850 Mexico
D.F., Mexico ("Fermic").
RECITALS
IGENE owns patents, patents pending and proprietary know-how concerning
microbial and biochemical processes by which the astaxanthin-producing yeast,
PHAFFIA RHODOZYMA, is grown and processed to yield a dried yeast product
("AstaXin(R)") containing the pigment astaxanthin.
IGENE wishes to produce AstaXin(R) in commercial quantities and, in order to do
so, requires access to a facility with adequate fermentation capacity and a
trained labor force.
Fermic owns and operates a fermentation plant in Mexico City (the "Facility")
which has the capacity and the labor force required to produce a sufficient
quantity of AstaXin(R) for commercialization.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
ARTICLE I. DEFINITIONS
As used in this Agreement, the following terms shall have the meanings specified
in this Article I:
"AstaXin(R)" - as defined in the first recital.
"Auxiliary Equipment" - centrifuges, drum dryers and milling and packaging
equipment and piping and other items required for installation of the equipment.
"Cracking Enzyme" - enzyme needed for treatment of PHAFFIA RHODOZYMA.
"Equipment" - fermentors and Auxiliary Equipment.
"Facility" - as defined in the third recital.
"Know-How" - all confidential information, know-how and data not disclosed in a
published patent, whether or not patentable, relating to the Patented Process,
the Microorganism and AstaXin(R) including, without limitation, the Cracking
Enzyme.
"Microorganism" - A strain of PHAFFIA RHODOZYMA developed by and proprietary to
IGENE as modified from time to time by IGENE.
"Operations Manual" - the detailed written operations manual prepared by IGENE
describing the process for manufacturing AstaXin(R).
"Patents" - means the patents and patent applications set out in Exhibit A and
any patent and patents issuing therefrom or thereon, any patents and patent
applications based on improvements to the patent and patent applications set out
in Exhibit A, including foreign patents claiming priority under patent
conventions, the inventions claimed thereby and any continuations or
continuations in party, reissues, substitutions or divisions thereof.
"Patented Process" - means the process for manufacturing AstaXin(R) covered by
one or more of the claims of Patents.
"Proprietary Information" - any information, drawings, manuals and other
documents transmitted or communicated directly or indirectly on behalf of the
disclosing party to the receiving party and marked confidential or proprietary
and any information or data orally described as confidential or proprietary or
which the receiving party has reason to believe is such. Proprietary Information
may include, without limitation, information relating to the disclosing party's
business and activities, product research and development, marketing plans or
techniques, client lists, and any scientific or technical information, design,
process, procedure, formula, or know-how (whether or not patentable). The
Know-How, including the Operations Manual, and the Microorganism are Proprietary
Information of IGENE.
"Repayment Date" - the first day of the twenty-third month from the month for
which IGENE first pays the tolling fee.
ARTICLE II. AGREEMENT TO MANUFACTURE; LICENSE
2.1 Subject to the terms and conditions of this Agreement, Fermic agrees to
manufacture AstaXin(R) at the Facility during the term of this Agreement
using the Microorganism, the Patented Process and the Know-How provided
by IGENE.
2.2 IGENE hereby grants to Fermic a nonexclusive right and license during the
term of this Agreement, and only during the term of this Agreement, to
use the Patented Process, the Microorganism and the Know-How for the
purpose of manufacturing AstaXin(R). Except as otherwise agreed upon by
the parties pursuant to Article XI, all AstaXin(R) manufactured by Fermic
shall belong to IGENE and (a) Fermic may not produce AstaXin(R) other
than for or on behalf of IGENE and (b) no right, express or implied, is
granted by this Agreement to Fermic to use in any manner the trademark
"AstaXin(R)" or any other trade name of IGENE in connection with the
performance of this Agreement.
2.3 Fermic shall obtain and maintain all required licenses, certifications
and approvals necessary to authorize and permit (a) the import of the
Microorganism and any Auxiliary Equipment purchased by IGENE (b) the
manufacture of AstaXin(R) at the Facility and (c) the delivery and export
of the AstaXin(R) manufactured by this Agreement. Applications for such
licenses, certifications and approvals will be made in the name of IGENE
(except for the license, if any, required to manufacture AstaXin(R)) and
Fermic will furnish to IGENE copies of all such documentation promptly
after its creation. IGENE shall be responsible for obtaining any licenses
or permits required for export of the Microorganism from the United
States to Mexico.
ARTICLE III. PILOT PLANT RUN
3.1 As soon as practicable after signing of this Agreement, IGENE and Fermic
shall conduct pilot plant runs at the Facility using the Microorganism
provided by IGENE, and a 500 liter fermentor and Auxiliary Equipment
provided by Fermic.
3.2 IGENE will provide, at no cost to Fermic, a technical representative
knowledgeable about the Patented Process and the Know-How and acceptable
to Fermic to train Fermic's employees before and during the pilot plant
runs and to otherwise assist with the pilot plant runs. IGENE will
provide Fermic with a copy of the Operations Manual and such other
written or oral information and documents concerning the Patented Process
and the Know-How as IGENE considers necessary to permit Fermic to product
AstaXin(R).
3.3 If, in IGENE's sole judgment, the pilot plant runs reveal no significant
production problems with the Equipment, the Facility or the labor force
and if the yield is acceptable to IGENE, Fermic will begin large scale
production of AstaXin(R) as soon as possible, but in no event later than
October 1, 1997. If IGENE determines that there are significant
production problems or if the Microorganism fails to produce a yield that
is acceptable to IGENE, it shall promptly notify Fermic in writing
whereupon this Agreement will automatically terminate without either
party having any liability for breach as a result of such termination,
except that, if termination is caused by insufficient yield, IGENE will
pay Fermic U.S. $1,000 at the time of giving notice of termination. Upon
such payment, neither party shall have any liability to the other except
under those Sections of the Agreement which specifically survive its
termination.
3.4 Each party will bear its own costs in connection with the pilot test run.
Fermic will provide the raw materials for IGENE's account (other than the
Microorganism and the Cracking Enzyme) required for the pilot test run.
IGENE will reimburse Fermic for the raw materials within 30 days of
receipt of an invoice therefor.
ARTICLE IV. PRODUCTION; AUXILIARY EQUIPMENT
4.1 Fermic shall (a) provide the Equipment, laboratory facilities and labor
at the Facility necessary to manufacture and store the AstaXin(R) and (b)
be responsible for purchasing raw materials (other than the Microorganism
and the Cracking Enzyme which shall be supplied by IGENE). One [ 1 ]
liter fermentor and all necessary Auxiliary Equipment at the Facility
will initially be dedicated to the manufacture of AstaXin(R). IGENE shall
have the option to require an upgrade to a [ 2 ] liter fermentor by
giving one month's notice to Fermic.
4.2 The Equipment and laboratory facilities to be used by Fermic must be
acceptable to IGENE and no changes shall be made to the Equipment and
facilities used in the manufacture of AstaXin(R) unless approved in
advance by IGENE (except in an emergency and then only for the duration
of the emergency).
4.3 Fermic acknowledges that once manufactured, AstaXin(R) must be kept
refrigerated until shipment to IGENE's customers. Fermic agrees,
therefore, to provide refrigeration capacity sufficient for storage of up
to 45 days of production of AstaXin(R) and will, if necessary, rent
refrigeration equipment at its cost to provide such storage at the
Facility.
4.4 Fermic agrees to assign a technical representative acceptable to IGENE to
act as liaison with IGENE. Fermic warrants that the Equipment, the
laboratory facilities and the Facility will be maintained in good
condition and that Fermic will retain a trained workforce adequate to
manufacture AstaXin(R) under this Agreement notwithstanding any
obligations it might have to third parties. Fermic gives no warranty
whatsoever that the Patented Process or the Microorganism will produce
AstaXin(R) in any given quantity or of any given quality.
4.5 Fermic shall have sole responsibility for compliance with all
environmental laws and regulations applicable to the Facility and the
manufacture of AstaXin(R) and for disposal of wastes in compliance with
law and IGENE shall have no liability to Fermic or others in connection
with the disposal of wastes from the Facility or noncompliance with such
environmental laws or regulations.
4.6 Fermic agrees to package and ship the AstaXin(R) in such packaging,
volumes and to such IGENE customers as IGENE shall instruct. All shipping
and any other directly related costs actually incurred by Fermic in
connection with packaging and shipping the AstaXin(R) shall be invoiced
separately to IGENE which shall pay the amounts due within 30 days of
receipt of the invoice.
4.7 IGENE and Fermic have determined that additional Auxiliary Equipment is
needed for the downstream processing of AstaXin(R) at the Facility. IGENE
will determine the optimum design for the downstream processing, locate
vendors for the Auxiliary
- --------
1 This information has been omitted pursuant to a request for confidential
treatment. The omitted information has been filed separately with the
Commission.
2 This information has been omitted pursuant to a request for confidential
treatment. The omitted information has been filed separately with the
Commission.
<PAGE>
Equipment (new or used), purchase the Auxiliary Equipment for
installation at the Facility, and work with Fermic engineers in
installing it. Other than items included in Auxiliary Equipment, which
shall be paid by IGENE, Fermic will be responsible for the costs of any
structural changes or additions to the Facility that may be needed for
the installation and operation of the additional Auxiliary Equipment,
including the cost of labor. Fermic shall reimburse IGENE up to U.S.
$500,000 for the Auxiliary Equipment over a twenty-three month period by
reduction of the tolling fees as set forth in Section 5.3. Until the
Equipment is fully paid for, IGENE shall have a security interest in said
Equipment.
4.8 If, prior to the Repayment Date, Fermic terminates this Agreement or this
Agreement is terminated because of Fermic's breach, the additional
Auxiliary Equipment shall belong to IGENE and IGENE shall have the right
to remove said Equipment (at IGENE's expense). If, prior to the Repayment
Date, IGENE terminates this Agreement or this Agreement is terminated
because of IGENE's breach, Fermic may elect either to keep the additional
Auxiliary Equipment and pay IGENE the balance due or require IGENE to
remove the equipment (at IGENE's expense) and reimburse Fermic the total
amount of credits actually allowed toward payment pursuant to Section
5.3.
4.9 IGENE will provide Fermic with new variants of the Microorganism from
time to time. Each new variant will be subjected to a test run under the
supervision of Fermic and IGENE personnel before it is used to
manufacture AstaXin(R) in large volumes. There will be no additional
charge to IGENE for these test runs.
ARTICLE V. TOLLING FEES
5.1 As compensation to Fermic for manufacturing, storing, and labor involved
in packaging and handling the AstaXin(R), for any structural or other
additions made to the Facility, and for all of its other services under
this Agreement IGENE shall pay Fermic a tolling fee of [ 3 ] per month
per cubic meter of fermentor capacity. In addition, IGENE will reimburse
Fermic for the actual cost of raw materials used in the manufacture of
AstaXin(R).
5.2 Payment of the tolling fees shall be made monthly in advance on the first
business day of each month by wire transfer to the account designated by
Fermic. The cost of raw materials shall be invoiced monthly by Fermic and
paid by IGENE within 30 days of receipt of the invoice.
5.3 The amount owed by Fermic to IGENE for the purchase of the additional
Auxiliary Equipment for use by Fermic at the Facility shall be limited to
U.S. $500,000 and shall be paid by a monthly credit against the tolling
fee owed for each month of the first twenty-
- --------
3 This information has been omitted pursuant to a request for confidential
treatment. The omitted information has been filed separately with the
Commission.
<PAGE>
three months of production of AstaXin(R) at the Facility equal to the
smaller of one- twenty-third of the purchase price plus 10% interest or
U.S. $24,000.
5.4 If at anytime during the term of this Agreement production of AstaXin(R)
is stopped or delayed because of one or more problems with the Equipment
or the Facility, there will be a pro rata reduction in the tolling fee
proportional to the duration of the stoppage or delay. IGENE may either
credit the reduction against the tolling payment due immediately
following restoration of production or request direct reimbursement.
Fermic shall pay IGENE any reimbursement due within thirty (30) days of
request therefor by IGENE.
ARTICLE VI. CONFIDENTIALITY
6.1 Except as specifically provided by this Agreement, (a) Fermic shall not
acquire any right, title or interest in the Patents, the Microorganism or
the Know-How, (b) Fermic shall use the Patents, the Know-How and any
Microorganism in its possession solely in accordance with its rights and
licenses hereunder and not for any other purpose, and (c) IGENE shall not
acquire any right, title or interest in the Proprietary Information of
Fermic.
6.2 From and after the date hereof and for a period of five (5) years from
the date of expiration or termination of this Agreement, each party
agrees to hold in confidence all Proprietary Information of the other.
6.3 Each party will restrict disclosure of and access to the other's
Proprietary Information to the minimum number of its employees necessary
to carry out the purposes of this Agreement and each party will use its
best efforts, including efforts fully commensurate with those employed by
it for the protection of its own confidential information and
microorganisms to protect the other's Proprietary Information disclosed
to it pursuant to this Agreement.
6.4 The parties agree that these confidentiality obligations do not apply to
the following:
6.4.1 Information which appears in issued patents or printed
publications in integrated form or which otherwise is or becomes
generally known in the trade through no fault of the receiving
party;
6.4.2 Information which the receiving party can show by dated records
was in its possession prior to the disclosure thereof by it; or
6.4.3 Information which comes into a party's possession from a third
party without breach of any obligation to the other party to
maintain the confidentiality of the Information.
6.5 Notwithstanding the foregoing, a party may disclose the other's
Proprietary Information to the extent such disclosure is reasonably
necessary to comply with government regulations, provided that it gives
the other party reasonable advanced notice of the pending disclosure and
uses its best efforts to secure confidential treatment of the information
required to be disclosed.
6.6 The provisions of this Article VI shall not relieve the parties of their
obligations under the Confidentiality Disclosure Agreement dated April
24, 1997.
ARTICLE VII. INFRINGEMENT INDEMNITY; WARRANTY DISCLAIMER
7.1 IGENE shall indemnify and hold Fermic harmless against any liability for
infringement of any patents owned by others on the basis of the
manufacture by Fermic of AstaXin(R) for IGENE under this Agreement. The
defense, settlement, adjustment or compromise of any claim or suit for
which IGENE becomes obligated under this indemnity shall be in the sole
control of IGENE. Fermic may, if it desires, employ counsel at its own
expense.
7.2 EXCEPT FOR THE WARRANTY OF NON-INFRINGEMENT AS TO WHICH THE INDEMNITY IN
SECTION 7.1 IS PROVIDED, IGENE GIVES NO WARRANTY WHATSOEVER TO FERMIC
WITH RESPECT TO THE MICROORGANISM OR THE ASTAXIN(R) OR WHETHER PRODUCTION
OF ASTAXIN(R) AS CONTEMPLATED HEREIN WILL BE COMMERCIALLY VIABLE OR
WHETHER IGENE WILL BE SUCCESSFUL IN MARKETING ASTAXIN(R) IN COMMERCIAL
QUANTITIES. IGENE EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING WITHOUT LIMITATION WARRANTIES OR MERCHANTABILITY AND FITNESS
FOR A PARTICULAR PURPOSE.
ARTICLE VIII. TERM AND TERMINATION
8.1 Unless earlier terminated under Section 3.3 or pursuant to Sections 8.2
and 8.3, this Agreement shall terminate on December 31, 1997 unless IGENE
gives notice to Fermic on or prior to October 31, 1997 that IGENE is
extending the duration of the contract to December 31, 1998, in which
event this Agreement shall terminate on December 31, 1998.
8.2 If the Microorganism is not producing a yield that is acceptable to
IGENE, or if Fermic is unable to manufacture the AstaXin(R) at the
Facility for any reason, including force majeure, for a period of more
than one month, IGENE may terminate this Agreement effective as of the
end of a month by giving Fermic at least 30 days advanced written notice
of termination, whereupon neither party shall have any further obligation
to the other except payment for amounts due the other as of the date of
termination and obligations under those ARTICLES and Sections of the
Agreement that specifically survive its termination or expiration.
8.3 Either party shall have the right (but not the obligation), by giving
written notice to the other, to terminate this Agreement upon the
happening of any of the following events:
8.3.1 The other party defaults in the performance or observance of any
agreement contained in this Agreement and such default is not
cured within 30 days of notice thereof from the non-defaulting
party;
8.3.2 The other party admits in writing its inability to pay its debts
generally as they become due; files or consents to the filing
against it of a petition under bankruptcy or any insolvency or
similar law; appoints or consents to the appointment of a receiver
of itself of all or a substantial part of its property; becomes
subject to a court order under which all or a substantial part of
its property is under the control and custody of a court; is
subject to an involuntary filing against it of a petition under
bankruptcy or other insolvency law; or is in a circumstance
substantially similar in character to any of the above.
8.4 Upon termination of this Agreement for any reason, each party shall
promptly return or destroy all Proprietary Information of the other.
Without limiting the foregoing, Fermic shall return or destroy all
Cracking Enzyme and Microorganism. Each party shall certify in writing to
the other that it has fully complied with this Section 8.4.
8.5 The following Articles and Sections shall survive termination or
expiration of this Agreement: ARTICLE VI (Confidentiality), ARTICLE VII
(Indemnity; Warranty Disclaimer); Section 8.4 (return or destruction of
Proprietary Information); Section 12.3 (independent contractor
relationship); Section 12.6 (governing law); Section 12.7 (dispute
resolution); and Section 12.9 (mutual indemnification).
ARTICLE IX. RISK OF LOSS; INSURANCE
9.1 Fermic shall bear the risk of loss of the AstaXin(R) while the AstaXin(R)
is stored at the Facility. As between Fermic and IGENE, the risk of loss
shall pass to IGENE upon shipment of the AstaXin(R) to the customers
designated by IGENE or upon its purchase by Fermic.
9.2 Fermic shall maintain in continuous force insurance against loss or
damage of the Equipment (including any additional Auxiliary Equipment
purchased by IGENE pursuant to Section 4.7), the Facility, all raw
materials (other than the Microorganism), work in process, and the
AstaXin(R) while it is stored at the Facility from all casualty risks and
all other risks usually insured against by persons operating a similar
business. Fermic will authorize its insurance carrier to provide a
certificate of insurance to IGENE verifying such insurance coverage. In
the event of any casualty loss to Auxiliary Equipment purchased by IGENE
and installed at the Facility prior to payment therefor by Fermic, Fermic
hereby assigns to IGENE the right to collect insurance proceeds up to the
amount still owed by Fermic. In the event of any casualty loss to the
AstaXin(R), Fermic hereby assigns to IGENE the right to collect insurance
proceeds for such loss or damage to the extent the loss or damage to the
AstaXin(R) is covered by insurance maintained by Fermic.
9.3 IGENE shall maintain in continuous force insurance against loss of or
damage to the Microorganism.
ARTICLE X. FORCE MAJEURE
10.1 Except as specifically provided in Section 8.2, no failure or omission to
carry out or to observe any of the terms, provisions or conditions of
this Agreement shall give rise to any claim by one party against the
other, or be deemed to be a breach of this Agreement, if such failure or
omission is caused by one or more of the following: war (whether or not
declared and whether or not the United States is a participant) or
hostilities; acts of the public enemy or belligerents; sabotage;
blockade, revolution, insurrection, riot or disorder; expropriation,
requisition, confiscation or nationalization; embargoes; export or import
restrictions or rationing or allocation, whether imposed by law, decree
or regulation or by voluntary cooperation of industry at the instance or
request of any governmental authority or organization owned or controlled
by any government or person purporting to act therefor; interference by,
or restriction or onerous regulation imposed by, any governmental
authority to whose jurisdiction the party is subject; act of God; fire;
earthquake; storm; epidemics; quarantine; strikes, lockouts or other
labor disturbances; explosion; breakage or accidents by fire or otherwise
to transportation or distribution facilities or equipment; unavailability
of raw materials; failure of the Facility to operate for any reason
beyond the control of Fermic; shutdown of the Facility for prudent
maintenance; or any other event, matter or thing wherever occurring, and
whether or not of the same class or kind as those set forth above which,
by the exercise of due diligence, the party concerned is unable to
overcome.
10.2 A party affected by an actual or potential force majeure situation shall
promptly notify the other party of such situation. IGENE shall not be
required to pay Fermic a tolling fee and shall be entitled to a refund
for any tolling fee already paid for any period in excess of 24 hours
that the Equipment then being used to manufacture AstaXin(R) or the
Facility is not in operation. Any refund may be in the form of a credit
toward future tolling fees.
ARTICLE XI. SALES BY FERMIC
IGENE acknowledges that Fermic is interested in having the right to purchase
AstaXin(R) for resale and Fermic acknowledges that, at this time, IGENE is not
in a position to negotiate a distribution or other sales agreement with Fermic.
The parties agree therefore to begin good faith negotiations of such an
arrangement agreeable to both parties once the test plant runs are completed and
volume production of AstaXin(R) at the Facility has begun. Any agreement under
which Fermic is authorized to market and sell AstaXin(R) shall be independent of
this Agreement.
ARTICLE XII. MISCELLANEOUS
12.1 Any notice to be given under this Agreement shall be in writing and
delivered by a recognized overnight courier service, addressed as
follows:
If to Fermic to it at: If to IGENE to it at:
Fermic, S.A. de C.V. IGENE Biotechnology, Inc.
Reforma No. 873 - Iztapalapa 9110 Red Branch Road
09850 Mexico D.F., Mexico Columbia, Maryland 21045-2020
Attention: Mr. Alessandro Falzoni Attention: Ramin Abrishamian
Telephone: 011-525 656 1644 Telephone: 1-410-997-2599
Facsimile: 011-525 656 1542 Facsimile: 1-410-730-0540
12.2 Failure of either party to insist upon strict observance of or compliance
with all of the terms of this Agreement in one or more instances shall
not be deemed to be a waiver of its rights to insist upon such observance
in the future or compliance with the other terms hereof.
12.3 Except for the limited agency established in Section 4.6, this Agreement
shall not be deemed to establish the relationship of principal and agent,
master and servant or a partnership or joint venture of any kind between
Fermic and IGENE, and neither party shall be liable for any act of or
failure to act by the other party except as expressly provided in this
Agreement. Without in any way limiting the foregoing, Fermic will be
responsible for any liability derived from the labor relationship with
its employees and in no case nor under any circumstances shall IGENE be
considered a direct or substitute employer of Fermic or any of Fermic's
employees. Fermic agrees to indemnify IGENE from any claims demands,
liabilities, suits, costs and expenses (including reasonable attorney's
fees) of any kind or nature whatsoever arising out of claims that IGENE
has liability with respect to Fermic's employees, whether such claims,
demands, liabilities or suits are of a civil, commercial, labor, fiscal
or other nature. This provision shall survive termination of this
Agreement.
12.4 This Agreement constitutes the entire understanding and supersedes all
prior agreements between the parties hereto with respect to the subject
matter hereof. The provisions herein shall not be extended or modified
except by written agreement between Fermic and IGENE.
12.5 In the event that any provision of this Agreement shall be held to be
unenforceable, invalid or otherwise indefinite, the balance of this
Agreement shall continue in full force and effect, unless the severance
of the portions held unenforceable would reasonably frustrate the
commercial purposes of this Agreement, in which case, reasonable efforts
will be made to reform this Agreement to achieve such commercial
purposes.
12.6 This Agreement is written in English language and shall be construed
accordingly. This Agreement shall be performed, interpreted and enforced
under the applicable laws of the City of Mexico, Federal District.
12.7 The parties will use their best efforts to resolve by negotiation any
dispute, controversy or claim which may arise in connection with this
Agreement. In the event of parties cannot directly resolve such dispute,
controversy or claim, the parties agree to be bound by arbitration to
occur in New York, New York. The arbitration is to be conducted in
English by a single arbitration acceptable to both parties in accordance
with the Rules of Conciliation and Arbitration of the International
Chamber of Commerce. The arbitration decision shall be binding and final
and the local courts shall have no jurisdiction over this matter.
12.8 This Agreement may not be assigned by Fermic without the prior written
consent of IGENE. This Agreement shall inure to the benefit of and be
binding on the successors and permitted assigns of the parties.
12.9 Each party shall indemnify and hold the other harmless from any claims,
demands, liabilities, taxes, suits, costs and expenses (including
attorney's fees) of any kind or nature whatsoever arising out of any and
all activities carried out by the indemnifying party or its officers,
directors, employees or agents under this Agreement. This provision shall
survive termination of this Agreement.
12.10 Each party represents to the other that the person signing below on its
behalf is legally authorized and empowered to do so under applicable law
and that, upon signature by such individual on behalf of such party, this
Agreement and any amendments hereto shall be binding upon and enforceable
against it in accordance with its terms.
<PAGE>
IN WITNESS WHEREOF the parties have caused this instrument to be executed in
duplicate as of the year and day first above written.
FERMIC S.A. DE C.V. IGENE BIOTECHNOLOGY, INC.
Falzoni Alessandro Stephen F. Hiu, President
- --------------------------------- -------------------------------
/s/ Falzoni Alessandro /s/ Stephen F. Hiu
- --------------------------------- -------------------------------
Signature Signature
Date: 18th July 1997
BERENSON & COMPANY LLP
CERTIFIED PUBLIC ACCOUNTANTS
135 WEST 50TH STREET
NEW YORK, NY 10020
(212) 977-6800
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of IGENE Biotechnology,
Inc. on Form SB- 2 of our report dated March 13, 1997 (which expresses an
unqualified opinion and includes an explanatory paragraph relating to the
Company's ability to continue as a going concern) appearing in the Prospectus,
which is part of this Registration Statement, and of our report dated March 13,
1997 relating to the financial statement schedules appearing elsewhere in this
Registration Statement. We also consent to the reference to us under the heading
"Expert" in such Prospectus.
/s/ Berenson & Company LLP
New York, NY
January 21, 1998
