AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1998
FILE NO. 333-41581
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
AMENDMENT NO. 3 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. [ ]
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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
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock 50,000,000 $ .10 $5,000,000 $1,475
================================================================================================================================
</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 FEBRUARY 11, 1998
FEBRUARY __, 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 February 13, 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"), .54 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.
<TABLE>
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===================================================================================================================
Underwriting Proceeds to Company(1)
Subscription Discounts and
Price Price Commissions Minimum(2) Maximum(3)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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.
</TABLE>
<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 .54 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........... February 13, 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:
LACK OF REVENUE FROM OPERATIONS
The Company did not receive any revenues from operations during the third
quarter of fiscal year 1997.
REQUIREMENTS FOR ADDITIONAL FUNDS
The Company believes it will require additional financing of between
$1,000,000 and $2,000,000 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. These financing needs are in addition to the
$2,000,000 minimum that the Company will receive from the Rights Offering. In
order to continue the Company's case against ADM (see "Legal Proceedings"), the
Company believes it will need an additional $1,000,000 over the next twelve
months. Including this litigation, the Company believes it will need between
$2,000,000 and $3,000,000 of additional financing over the next twelve months.
PROCEEDS FROM THE RIGHTS OFFERING MAY BE USED TO REPAY DEBT
It is presently expected that $2 million of the proceeds from the Rights
Offering will be used to repay the Bridge Loan. 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. If the
Company only receives $2 million of proceeds from the Rights Offering, 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. The Investors will be entitled to exercise
their Rights, but will only be obligated to make up the difference between $2
million and the amount of proceeds received from the Rights Offering. The
Company has been advised that the Investors presently intend to exercise all
Rights to which they will be entitled to subscribe, which will result in the
Company receiving approximately $3 million from the exercise of Rights by the
Investors, of which $2 million will be used to repay in full the Bridge Loan.
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 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.
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 contract 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.
"Penny Stock" is defined as a stock that trades below $5 per share. 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 (Messrs. 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, .54 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 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, .54
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 .54, 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%
group
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)
======= =======
</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 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) (Unaudited)
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
debenture 1,500,000 --- 1,500,000 1,500,000 --- 1,500,000
--------- --- --------- --------- --- ---------
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) exceeds $150,000,000 worldwide, which
the Company estimates would be approximately 75 metric tons. The expected
production rate for the Company is approximately 1 metric ton of AstaXin(R) in
1998, which would correspond to approximately 1.3% of the world market.
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 will receive between $2,000,000 and $5,000,000 from the Rights
Offering depending on the level of participation by outside stockholders. It is
presently expected that $2,000,000 of the proceeds will be used to repay the
Bridge Loan. The balance, if any, will be used for working capital and general
corporate purposes. The working capital will be used for research and
development, marketing and general overhead.
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 contract 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 12,303,8041 41.9%
220 E. 42nd Street, Suite 505
New York, NY 10017
John A. Cenerazzo 1,612,4562 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 783,8333 3.9%
c/o IGENE Biotechnology, Inc.
9110 Red Branch Road
Columbia, MD 21045
Thomas L. Kempner 17,033,6684 50.4%
c/o Loeb Partners Corporation
61 Broadway
New York, NY 10006
Michael G. Kimelman 3,049,6575 14.3%
c\o Kimelman & Baird, LLC
100 Park Avenue
Suite 1101-S2
New York, NY 10017
Sidney R. Knafel 15,168,1446 47%
c\o SRK Management Company
126 East 56th Street
New York, NY 10022
Patrick F. Monahan 542,0007 2.8%
c\o IGENE Biotechnology, Inc.
9110 Red Branch Road
Columbia, MD 21045
All Directors and Officers 50,493,5628 81.6%
as a Group (8 persons)
Fraydun Manocherian 3,750,0009 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 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.
On January 13, 1998, the Company issued non-convertible demand promissory
notes to Messrs. Kempner and Knafel for an aggregate consideration of $200,000.
These loans bear interest at the prime rate.
<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 $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION
- ---------------------------------------------------------------------------------------------------------
Other Stock All Other
Name and Principal Salary Bonus Annual Options Compensation
POSITION YEAR ($) ($) Compensation (#) ($)
<S> <C> <C> <C> <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 of Percent of Total
Securities Options/SARs
Underlying Granted To Exercise or
Options/SARs Employees In Base Price Expiration
Name Granted(#) Fiscal Year ($/Sh) Date
(a) (b) (c) (d) (e)
- -------------------------------------------------------------------------------
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 $.05 per share,
which was the market price of a share of Common Stock on that date.
The following table provides information regarding the number of shares
covered by both exercisable and unexercisable stock options for the executive
officer named in the Summary Compensation Table as of December 31, 1996, and the
value of "in-the-money" options as of that date. An option is "in-the-money" if
the per share market value of the underlying stock exceeds the option exercise
price per share. No options were exercised in 1996.
<TABLE>
<CAPTION>
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
- --------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexpected In-
Underlying Options/SARs Options/SARs At Fiscal
At Fiscal Year-End Year-End
Shares Acquired Value Realized (#) ($)
Name On Exercise ($) Exercisable/Unexercisable Exercisable/Unexercisable
(a) (b) (c) (d) (e)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dexter W. Gaston 0 ---- 472,834/945,668 18,913/37,827
- --------------------------------------------------------------------------------------------------------------------
(1) The value of unexercised in-the-money options at December 31, 1996, is
based on the difference between the market price on December 31, 1996
($.09 per share) and the per share option exercise price, multiplied by
the number of shares of common stock underlying such option.
</TABLE>
<PAGE>
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. Based on its
own belief that no value should be attributed to the New Warrants (since the
exercise price of the New Warrants is approximately equal to or in excess of the
recent market price for a share of Common Stock), 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 Notes or Common
Stock 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
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
</TABLE>
<TABLE>
<CAPTION>
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
</TABLE>
<PAGE>
IGENE BIOTECHNOLOGY, INC.
BALANCE SHEET, DECEMBER 31 (CONTINUED)
<TABLE>
<CAPTION>
STOCKHOLDERS' DEFICIT (notes 7 and 8)
Preferred stock -- $.01 par value per share. 8% cumulative,
<S> <C>
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
</TABLE>
The accompanying notes are an integral part of the financial statements.
<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 expenses 646,000 664,950
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
subordinate debenture (note 5) --- --- 53.3341533
Cumulative undeclared dividends on redeemable
preferred stock 24,539 --- ---
Issuance of 1,200,000 shares of common stock
pursuant to direct purchase of shares by
certain directors of the Company (note 8) --- --- 1,200,000/$12,000
Issuance of 4,290,400 shares of common stock
on conversion of promissory notes --- --- 4,290,400/$42,905
Conversion of redeemable preferred stock into
common stock (250)/$(3,000) --- 500/$5
Net loss for 1995 --- --- ---
Balance at December 31, 1995 38,342/$484,64 187,500/$1,875 18,572,805/$185,728
3
Issuance of 53,334 shares of common stock as
payment of interest on variable rate
subordinate debenture (note 5) --- --- 53,334/$533
Cumulative undeclared dividends on redeemable
preferred stock 22,939 --- ---
Conversion of redeemable preferred stock into
common stock (2,500)/$(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)
Additional Total Stockholder's
PAID-IN CAPITAL DEFICIT DEFICIT
<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
subordinate debenture (note 5) 119,467 --- 120,000
Cumulative undeclared dividends on redeemable
preferred stock (24,539) --- (24,539)
Issuance of 1,200,000 shares of common stock
pursuant to direct purchase of shares by
certain directors of the Company (note 8) 138,000 --- 150,000
Issuance of 4,290,400 shares of common stock
on conversion of promissory notes............. 493,395 --- 536,300
Conversion of redeemable preferred stock into
common stock.................................. 2,995 --- 3,000
Net loss for 1995 --- (503,156) (503,156)
Balance at December 31, 1995 $17,843,142 $(20,312,260) $(2,281,515)
Issuance of 53,334 shares of common stock as
payment of interest on variable rate
subordinate debenture (note 5) 119,467 --- 120,000
Cumulative undeclared dividends on redeemable
preferred stock (22,939) --- (22,939)
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:
Depreciation 6,261 8,048
Loss on sale of assets 4,743 ---
Interest on debenture paid in shares of
common stock 120,000 120,000
Decrease (increase) in:
Accounts receivable 1,133 (339)
Prepaid expenses, supplies and deposits (10,778) 1,438
Increase (decrease) in:
Accounts payable and other accrued expenses 44,672 33,105
------------------------- -----------------------
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
execisable:
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.
<PAGE>
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 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>
<TABLE>
<CAPTION>
SCHEDULE X
SUPPLEMENTARY INCOME STATEMENT INFORMATION
1996 1995
<S> <C> <C>
Maintenance and repairs............................................................ $ 27,174 $ 35,849
Taxes, other than payroll and income taxes......................................... 18,193 15,267
</TABLE>
<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
</TABLE>
The accompanying notes are an integral part of the financial statement
<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 $ (0.03) $ (0.01)
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
IGENE BIOTECHNOLOGY, INC.
STATEMENTS OF STOCKHOLDER'S DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
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 35,842/$475,982 187,500/$1,875 18,631,139/$186,311
December 31, 1996
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 --- --- 472,834/$4,729
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 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.
**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 February 11, 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 February 11, 1998
*Michael G. Kimelman of Directors
- ---------------------- Vice Chairman of the February 11, 1998
*Thomas L. Kempner Board of Directors
- --------------------- Director and Chief February 11, 1998
*Ramin Abrishamian Executive Officer
/S/ STEPHEN F. HIU Director, President, February 11, 1998
- ------------------------ Officer and Chief
Stephen F. Hiu Accounting Officer
* Director February 11, 1998
Joseph C. Abeles
* Director February 11, 1998
John A. Cenerazzo
* Director February 11, 1998
Sidney R. Knafel
* Director February 11, 1998
Patrick F. Monahan
*By: /S/ STEPHEN F. HIU
Stephen F. Hiu
Attorney-in-Fact
