UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-15888
IGENE Biotechnology, Inc.
(Exact name of small business issuer in its charter)
Maryland 52-1230461
(State of other jurisdiction of (I.R.S. Employer Identification
No.) incorporation or organization)
9110 Red Branch Road
Columbia, Maryland 21045
Address of principal executive offices (Zip Code)
Issuer's telephone number, including area code: (410) 997-2599
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock (par value $.01 per share)
(Title of each class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's total revenues for its most recent fiscal year were $14,394.
As of March 1, 1998, there were 19,206,473 shares of the issuer's Common Stock
and 217,092 shares of the issuer's 8% Cumulative Convertible Preferred Stock,
Series A, outstanding. The aggregate market value of the Common Stock and
Preferred Stock held by non-affiliates was $1,303,224, based on the last bid
quotation prices of the Common Stock as reported by the National Association of
Securities Dealers pink sheets on such date and, with respect to the Preferred
Stock for which no quotations were available, based on the conversion rate
applicable to the Preferred Stock and the last bid price of the Common Stock as
reported above. (The officers and directors of the issuer are considered
affiliates only for purposes of this calculation.)
Page 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
IGENE Biotechnology, Inc. ("The Company") is engaged in the business of
industrial microbiology and related biotechnologies. The Company was formed on
October 27, 1981 to develop, produce and market value-added specialty
biochemical products derived from abundant, inexpensive and renewable
agricultural residues and wastes through the use of state-of-the-art
fermentation technology, physical and chemical separation technology, and
related chemical and biochemical engineering technologies.
The Company has devoted its resources to the development of proprietary
processes to convert selected agricultural raw materials or feedstocks into
commercially useful and cost effective specialty biochemical products for the
food, feed, flavor and agrichemical industries. In developing these processes
and products, the Company has relied on the expertise and skills of its
in-house scientific staff and, for special projects, various consultants.
The Company has no manufacturing facilities other than its pilot plant facility
in Columbia, Maryland. To date, the Company has either licensed its products
to third-party manufacturers or joint venture partners.
Government Regulation
The manufacturing and marketing of most of the products the Company has
developed are and will likely continue to be subject to regulation by various
governmental agencies in the United States, including the Food and Drug
Administration ("FDA"), the Department of Agriculture ("USDA"), and the
Environmental Protection Agency ("EPA"), and comparable agencies in other
countries. Substantially all of the food products developed by the Company to
date have been reviewed by a panel of independent scientific experts (the
"Product Review Panel") who are qualified by scientific training and experience
to evaluate, among other things, the safety of ingredients intended to be used
directly or indirectly in foods. The Product Review Panel has advised the
Company that it considers such products to be Generally Recognized As Safe
("GRAS") under the regulations of the FDA. The Company is not aware of any
action by the FDA, the USDA or the EPA contesting these affirmations or of any
basis for their doing so. There can be no assurance, however, that 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 Company's
contract manufacturer has responsibility for environmental compliance.
Research and Development
As of December 31, 1997, the Company had expended approximately $ 10,722,000 on
research and development since its inception on October 27, 1981 and has, as of
December 31, 1997, received revenues from product sales of approximately $
1,795,000 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 1998.
Page 3
Research and development expenditures for each of the last two years are
as follows:
1996 309,351
1997 521,669
The Company's research and development activities have resulted in the
development of processes to produce the products hereinafter discussed.
Commercial Products
1. 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 700,000 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 were extended beyond the initial trial
periods.
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 termination of this agreement was
that it could obtain better technology from another company.
During 1996, the Company began commercial fermentation trials with a potential
manufacturer. On July 3, 1997, the Company signed a non-exclusive toll
manufacturing agreement with Fermic, S.A. de C.V., of Mexico City, Mexico, for
the production of its natural astaxanthin pigment, AstaXin(r) in Fermic's
manufacturing facility in Mexico. Commercial production began in January of
1998, and the Company intends to sell AstaXin(r) worldwide through
distributors, including Fermic, to meet an anticipated demand for the product.
The Fermic contract provides that the manufacturer has a non-exclusive right to
produce AstaXin(r). Fermic will provide equipment and facilities necessary to
manufacture and store the product and will be responsible for purchasing raw
materials. The Company is responsible for sales efforts and for ensuring the
quality of the pigment. The Company will also have a role in ensuring that the
manufacturing process works effectively. The term of the contract has been
extended to December 31, 1998 (see also Item 2. Description of Property)
Based on estimates of worldwide production of farm-bred salmon, the Company
believes the market for AstaXin(r) exceeds $150,000,000 worldwide, which would
be approximately 75 metric tons. The expected production rate is approximately
1 metric ton for 1998, which is equal to approximately 1.3% of the worldwide
market.
During 1997, the Company was sued by and has counter-sued Archer-Daniels
Midland, Inc. (ADM) regarding its process for the marking of astaxanthin and
its 1995 agreement with ADM (See Item 3. Legal Proceedings).
Page 4
2. Crustacean Shell Products
ClandoSan(r) is the Company's registered trademark for its natural nematicide
made from crab and crawfish exoskeletons and processed into pellets or granules
by patented and patent pending technology developed by the Company. The product
acts in soils as a biological control agent by stimulating the growth of normal
soil microorganisms, which produce chitinase, and other enzymes that degrade
chitin present in the cuticles and eggs of plant-pathogenic nematodes. It has
secondary effects as a slow release organic fertilizer. ClandoSan(r) does not
have a direct adverse effect on plant-pathogenic nematodes either in vitro or
in sterilized or irradiated soils and only acts indirectly to suppress nematode
populations in soils. The product generally is not water-soluble and,
consequently, does not contribute to ground water contamination.
On March 17, 1988, ClandoSan(r) was registered by the EPA for use with all
agricultural and horticultural crops in accordance with the Federal
Insecticide, Fungicide, and Rodenticide Act ("FIFRA") section 3(c)(5).
ClandoSan(r) is now registered in 49 states and is produced at one contract
manufacturing facility in the United States.
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 1996 and 1997, 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) and
ClandoSan(r). 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 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 certain
large companies are presently known to be developing and marketing competitive
products.
Employees
At December 31, 1997, the Company had 7 full time employees and 1 part time
employee. Three of the full time employees are in administration and
marketing, while the remainder are engaged in process development and support
of manufacturing activities.
Page 5
None of the Company's employees is represented by a labor union and the Company
has experienced no work stoppages. The Company believes its relations with its
employees are satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 8,480 square feet of space in the Oakland Ridge Industrial
Park located at 9110 Red Branch Road, Columbia, Maryland. The Company occupies
the space under a five-year 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.
During 1997 the Company loaned $500,000 to its contract manufacturer for
the purchase of manufacturing equipment, which is being used for the production
of AstaXin(r). Under its agreement with this manufacturer, the Company will be
repaid for this equipment over a two-year period beginning January 1998. This
equipment is owned by Fermic, with the Company retaining only a security
interest. The Company also purchased approximately $285,000 of manufacturing
equipment for use in this manufacturing process in Mexico, in which the Company
will retain title.
The Company owns all equipment necessary for its current operations and all
equipment is in satisfactory condition and adequately insured.
ITEM 3. LEGAL PROCEEDINGS
On July 21, 1997 Archer Daniels Midland, Inc. (ADM) filed suit against the
Company in the U.S. District Court in Greenbelt, Maryland alleging patent
infringement and requesting a preliminary injunction against the Company to
cease the use of its astaxanthin manufacturing process. ADM's request for
injunctive relief was denied. 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, contending that ADM stole the Company's
formula for making its natural astaxanthin pigment, AstaXin(r). The Company is
also claiming breach of contract, in regards to the licensing agreement entered
into by the Company and ADM in 1995. The Company contends that it complied
with all material terms of this agreement, including 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 of its case. Management believes ADM's
claims are meritless. Managements basis for this is that ADM claims that the
levels of pigment the Company said it could produce did not meet contract
levels. Management has copies of ADM's internal memos showing that the levels
of pigment met the contract specifications.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of Stockholders held on November 17, 1997, the
following matters were submitted to stockholders' vote, and were approved by a
majority of votes: (1) eight directors were elected: Michael G. Kimelman,
Thomas L. Kempner, Ramin Abrishamian, Stephen F. Hiu, Patrick F. Monahan, Joseph
C. Abeles, John A. Cenerazzo, and Sidney R. Knafel; (2) an amendment to the
articles of incorporation increasing the number of authorized shares to
250,000,000 shares; (3) approval of the Company's 1997 Stock Option Plan, and
(4) approval of the appointment of Berenson & Company LLP as the Company's
independent auditors for 1997.
Page 6
Results of the voting were as follows:
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Abstained Unvoted
<S> <C> <C> <C> <C> <C>
(1) Election of Directors
Michael G. Kimelman 15,994,725 20,275 --- ---
Thomas L. Kempner 15,996,050 18,950 --- ---
Ramin Abrishamian 15,996,050 18,950 --- ---
Stephen F. Hiu 15,996,050 18,950 --- ---
Patrick F. Monahan 15,996,050 18,950 --- ---
Joseph C. Abeles 15,996,050 18,950 --- ---
John A. Cenerazzo 15,996,050 18,950 --- ---
Sidney R. Knafel 15,996,050 18,950 --- ---
(2) Proposition #2 15,771,137 25,303 3,450 215,110
(3) Proposition #3 10,058,076 74,302 11,315 5,871,307
(3) Proposition #4 16,011,804 850 2,350 ---
</TABLE>
Page 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Preferred Stock
There was no public market for the Preferred Stock during 1996 and 1997 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, 1998 was 14.
Common Stock
Commencing on or about June 12, 1989, the Company's Common Stock began trading
on the over-the-counter market on a limited basis and is quoted in the national
bureau's "Pink Sheets". The following table shows, by calendar quarter, the
range of representative bid prices for the Common Stock for 1996 and 1997.
<TABLE>
<CAPTION>
Calendar Quarter High Low
<S> <C> <C> <C> <C>
1996: First Quarter $ .16 $ .03
Second Quarter $ .14 $ .04
Third Quarter $ .16 $ .11
Fourth Quarter $ .12 $ .07
1997: First Quarter $ .08 $ .06
Second Quarter $ .17 $ .09
Third Quarter $ .20 $ .11
Fourth Quarter $ .13 $ .08
</TABLE>
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 above
quotations do not reflect the "asking price" quotations of the stock.
The aggregate number of record holders of the Common Stock as of March 1, 1998
was 246. As of March 1, 1998, the high bid and low offer prices for the Common
Stock, as shown in the "pink sheets" were $0.09 and $0.11, respectively.
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, 1997 the total amount of dividends in arrears with respect to the
Company's Preferred Stock was $1,285,185.
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.
Page 8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Revenues for the year ended December 31, 1997 decreased from $66,573 in 1996 to
$14,394 in 1997. This decrease in overall revenue of 78% resulted from a
decrease in domestic sales of ClandoSan(r) of $28,697, caused by reduced
marketing efforts for this product during 1997; and one-time technology
services fees of $23,482 which were earned only in 1996. The Company hopes to
find a licensee and to make marketing arrangements with distributors for
ClandoSan(r) in the future, but has continued to focus its efforts on its
AstaXin(r) product during 1997. No commercial quantities of AstaXin(r) were
available during 1996 and 1997. During 1997 the Company signed a contract with
a manufacturer to produce AstaXin(r) and began production in January 1998. The
Company expects to have sales of AstaXin(r) by June 30, 1998, however, there
can be no assurance that any such sales will occur or that they will be
material.
Cost of product sales, which are entirely composed of cost of product sales of
ClandoSan(r), increased as a percentage of product sales to 69%, or $9,963 in
1997 from 54%, or $23,198 in 1996 and can be attributed to decreased production
efficiency achieved with lower volume of sales.
Research, development and pilot plant expenses increased approximately 69%,
from $309,351 to $521,669 for 1996 and 1997, respectively. This increase
reflects the pilot plant and trial production manufacturing efforts during
1997 for AstaXin(r), in preparation for commercial production, which began in
January 1998.
Marketing and selling expenses increased 61% from $5,438 to $8,741 from 1996 to
1997, and are related to the Company's increased marketing efforts for
AstaXin(r) in preparation for commercial production and sales of the product.
These expenses would be expected to continue to increase as marketing efforts
for AstaXin(r) are continued.
General and administrative expenses increased 31% from $331,211 to $432,842
from 1996 to 1997, and reflect greater administrative support efforts for the
Company's activities preparatory to production and sales of AstaXin(r) and
costs related to the Company's Rights Offering of February 11, 1998. These
costs would be expected to continue to increase somewhat until an adequate level
of support for continuing manufacturing operations for AstaXin(r) is achieved.
Litigation expenses of $658,185 represent the Company's expenses associated
with its defense of the suit by Archer Daniels Midland, Inc. and the Company's
counter-suit. Management expects to recover legal expenses through damage
awards, and preservation of the commercial rights associated with AstaXin(r),
however, there can be no assurance that the Company will receive damage awards
or that its rights to AstaXin(r) will be preserved. The Company estimates that
the cost of this litigation will be $1,000,000 per year. At the present time,
a range of reasonably possible loss from the litigation cannot be estimated.
The Company reported other income of $51,204 from the renegotiations of certain
disputed vendor liabilities during 1997. This is expected to be a one-time
occurrence.
Interest expense increased 91% from $171,112 to $326,565 from 1996 to 1997.
This increase was caused by increased debt from the financing of the Company's
continued operation with loans from shareholders. This would be expected to
decrease only if the Company achieves profitable operations and is able to
repay its debt, or if shareholders convert the debt into common stock. There can
be no assurance that profitable operations will be achieved in the near future,
or that the shareholders will convert the debt.
As a result of the foregoing, the Company reported a net loss of $1,888,082, or
$0.10 per common share during the year ended December 31, 1997, compared to a
net loss of $776,873, or $0.04 per common share for the year ended December 31,
1996. The weighted average number of common shares outstanding increased to
18,870,314 for 1997 from 18,604,171 for 1996. This increase is caused by the
issuance of 80,000 shares of common stock as payment of interest on a variable
rate subordinated debenture, the issuance of 482,834 shares through the
exercise of employee stock options, and the conversion of 6,250 shares of
preferred stock into 12,500 shares of common stock during 1997.
Page 9
Financial Position
During 1997 and 1996, the following actions materially affected the Company's
financial position:
* The Company loaned $500,000 in 1997 to its contract manufacturer of
AstaXin(r) for the purchase of manufacturing equipment needed for the
production of AstaXin(r), all of which remains due as of December 31, 1997.
The loan is repayable over 23 months with interest at 10%. $249,217 of the
loan is classified as a current asset, and $250,783 is classified as a
long-term asset as of December 31, 1997.
* The Company purchased $285,355 in manufacturing equipment in 1997 for use in
the production of AstaXin(r).
* The Company issued $2,365,000 and $615,000, respectively during 1997 and
1996, in promissory notes to directors, $2,000,000 of which is due and payable
on March 31, 1998, and $1,082,500 of which mature March 31, 2003. $153,594
remains due from directors for these notes as of December 31, 1997, which the
Company expects to receive by March 31, 1998.
* The Company issued 80,000 and 53,334 shares, respectively in 1997 and 1996 of
common stock in payment of interest on a variable rate subordinated debenture
with a principal balance of $1,500,000, recording interest expense and
increasing common stock and paid-in capital for $180,000 and $120,000,
respectively in 1997 and 1996.
* Employees exercised 482,834 stock options in 1997, providing additional
capital of $24,142.
* The carrying value of redeemable preferred stock was increased and paid-in
capital available to common shareholders was decreased for $21,938 and $22,939,
respectively in 1997 and 1996, reflecting cumulative unpaid dividends on
redeemable preferred stock.
* Holders of redeemable preferred stock converted 6,250 and 2,500 shares,
respectively, in 1997 and 1996, of preferred stock into 12,500 and 5,000
shares, respectively, of common stock, providing additional capital of
$86,000 and $31,600, respectively in 1997 and 1996.
In December 1988, as part of an overall effort to contain costs and conserve
working capital, the Company suspended payment of the quarterly dividend on its
Preferred Stock. Resumption of the dividend will require significant
improvements in cash flow. Unpaid dividends cumulate for future payment or
addition to the liquidation preference or redemption value of the Preferred
Stock. As of December 31, 1997, total dividends in arrears on the Company's
Preferred Stock was $1,285,185 of which $175,185 ($5.92 per share) was included
in the carrying value of the redeemable Preferred Stock and $1,110,000 ($5.92
per share) was included in the liquidation preference of the Preferred Stock.
Liquidity and Capital Resources
Historically, the Company has been funded primarily by equity contributions,
loans from stockholders and license fees. As of December 31, 1997 the Company
had a working capital deficit of $2,113,574, and cash and cash equivalents of
$24,548.
Cash used by operating activities in 1997 and 1996 amounted to $1,484,353 and
$610,842, respectively.
Cash used by investing activities increased by $784,400, from $955 in 1996 to
$785,355 in 1997. This is a result of capital expenditures of $285,355 for
manufacturing equipment relating to production of AstaXin(r), and $500,000
loaned to Fermic for the purchase of manufacturing equipment relating to
production of AstaXin(r).
Page 10
Cash used by financing activities increased by $1,608,108, from $644,810 in
1996 to $2,252,918 in 1997. Financing activities are composed of net proceeds
of $2,228,776 and $644,810 from issuance of promissory notes to directors in
1997 and 1996, respectively; and $24,142 from the issuance of 482,834 shares of
common stock at $0.05 per share for the exercise of employee stock options in
1997.
Over the next twelve months, the Company believes it will need between
$1,000,000 and $2,000,000 in working capital. The Company hopes to achieve
this from profits from sales of AstaXin(r) production of which began in January
1998, proceeds of its Rights Offering of February 11, 1998, and additional
financing. The Company intends to spend approximately $350,000 on technology
research over the next twelve months to research new strains of pigments.
The Company does not believe that inflation has had a significant impact on its
operations during 1997 and 1996.
ITEM 7. FINANCIAL STATEMENTS
The financial statements appear after Part IV of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Page 11
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS, AND KEY
EMPLOYEES
The Company's directors are elected annually by the shareholders of the
Company. The directors, executive officers and key employees of the Company
are as follows:
<TABLE>
<CAPTION>
Name Age Position with IGENE
<S> <C> <C>
Michael G. Kimelman 59 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 Chief Executive Officer
Patrick F. Monahan 47 Director, and Director of
Manufacturing
Joseph C. Abeles 83 Director
John A. Cenerazzo 74 Director
Sidney R. Knafel 67 Director
* Mr. Abrishamian was hired as CEO on July 1, 1997.
</TABLE>
MICHAEL G. KIMELMAN was elected a Director of the Company in February 1991 and
Chairman of the Board of Directors in March 1991. He is the Managing Partner
of Kimelman & Baird, LLC. He is a founder of Blue Chip Farms, a standardbred
horse-breeding farm, and has been an officer of the same since its inception in
1968. Mr. Kimelman is currently a Director of the Harness Horse Breeders of
New York State and serves on the Board of the Hambletonian Society.
THOMAS L. KEMPNER is Vice Chairman of the Board of Directors and has been a
Director of the Company since its inception in October 1981. He is and has
been Chairman and Chief Executive Officer of Loeb Partners Corporation,
investment bankers, New York, and its predecessors since February 1978. He is
currently a Director of Alcide Corporation, CCC Information Services Group,
Inc., Energy Research Corp., Intermagnetics General Corp., Northwest Airlines,
Inc., and Roper Starch Worldwide, Inc.
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.
Page 12
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
Strathclyde University, Scotland, both in chemical and process engineering.
PATRICK F. MONAHAN was appointed Director of Manufacturing and elected a
Director of the Company in April 1991 and has managed the Company's fermen
tation 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 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 and a Director
Emeritus of National Penn Bank, a Director of U.S. Axle Corporation, and a
Chairman and a Director of InfoCore, Incorporated.
SIDNEY R. KNAFEL, a Director of the Company since 1982, has been Managing
Partner of SRK Management Company, a private investment concern, New York,
since 1981, Chairman of Insight Communications, Inc. since 1985, and of
BioReliance Corporation since 1982. Mr. Knafel is also currently a Director of
Cellular Communications International, Inc., CoreComm Incorporated, General
American Investors Company, Inc., and NTL Incorporated.
Compliance with Section 16(a) of the Exchange Act
The Company believes that during 1996 and 1997 all of its officers,
directors and holders of more than 10% of its Common Stock complied with all
filing requirements under Section 16(a) of the Securities Exchange Act of 1934,
except as follows. In 1996 and 1997 directors of the Company made various
loans to the Company. The loans are evidenced by demand promissory notes
convertible into Common Stock. The directors also received warrants to purchase
shares of Common Stock. In addition, in 1996, two directors of the Company
(who are also officers) were granted stock options under the Company's 1986
Plan. None of the foregoing securities were reported on Forms 4 or Forms 5
filed with the Securities and Exchange Commission. In making this disclosure,
the Company has relied solely on written representations of its directors,
officers and more than 10% holders and on copies of reports that have been
filed with the Securities and Exchange Commission.
ITEM 10. EXECUTIVE COMPENSATION
During 1997 and 1996 no executive officers annual cash compensation exceeded
$100,000.00. The Chief Executive Officer, Mr. Ramin Abrishamian, received
compensation as CEO of $50,000. He also was paid $59,591 as a consultant
prior to being appointed as CEO.
Other than the 1986 and 1997 stock option plans and the Simple Retirement
Plan described below, the Company has no profit sharing or incentive
compensation plans.
Simple Retirement Plan
Effective February 1, 1997 the Company adopted a Simple Retirement Plan
under Internal Revenue Code Section 408(p). The plan is a defined contribution
plan, which covers all of the Company's employees who receive at least $5,000
of compensation for the preceding year. The plan permits elective employee
contributions. The Company makes a nonelective contribution of 2% of each
eligible employee's compensation for each year. The Company's contributions to
the plan for 1997 were $5,483, which is expensed in the 1997 statement of
operations.
Page 13
Stock Option Plan
The 1997 Stock Option Plan (the "Plan"), which was approved by the stockholders
on November 17, 1997, and which succeeds the 1986 Stock Option Plan, provides
for the issuance of options to acquire up to 20,000,000 shares of Common Stock
of the Company.
The Plan is administered by a committee of the Board of Directors.
The purpose of the Plan is to advance the interests of the Company by
encouraging and enabling the acquisition of a larger personal proprietary
interest in the Company by directors, key employees, consultants and inde
pendent contractors who are employed by, or perform services for, the Company
and its subsidiaries and upon whose judgment and keen interest the Company is
largely dependent for the successful conduct of its operations. It is also
expected that the opportunity to acquire such a proprietary interest will
enable the Company and its subsidiaries to attract and retain desirable
personnel, directors and other service providers.
Options are exercisable at such rates and times as may be fixed by the
committee. Options become exercisable in full upon (i) the holder's retirement
on or after his 65th birthday, (ii) the disability or deal of the holder, (iii)
or under special circumstances as determined by the Committee. Options
generally terminate on the tenth business day following cessation of service as
an employee, director, consultant or independent contractor.
Options may be exercised by payment in full of the option price in cash or
check, or by delivery of previously-owned shares of common stock having a total
fair market value on the date of exercise equal to the option price, or by such
other methods as permitted by the Committee.
The Plan contains anti-dilution provisions in the event of certain corporate
transactions.
The Board of Directors may at any time withdraw from, or amend the Plan and any
options not heretofore granted. Stockholder approval is required to (i)
increase the number of shares issuable under the plan, (ii) increase the number
of options which may be granted to any individual during a year, (iii) or
change the class of persons to whom options may be granted. No options shall
be granted under the Plan after September 19, 2007.
Options to acquire 2,260,584 shares of common stock have been granted under the
1986 and 1997 Stock Option Plans and 1,670,750 options are outstanding under
the Plans. No options were granted during 1997.
The following table sets forth information as to all incentive and non-
statutory stock options that have been granted to the executive officers of the
Company. 10,000 in options were exercised by officers in 1997. The following
table provides information regarding the number of shares covered by both
exercisable and unexercisable stock options for executive officers as of
December 31, 1997 and the values of "in-the-money" options as of that date. An
option is "in-the-money" if the per share fair market value of the underlying
stock exceeds the option exercise price per share.
<TABLE>
<CAPTION>
Aggregate Fiscal Year End Option Values
Number of Dollar Value of
Number Unexercised Options In-The-Money Options
of Shares Dollar At End of Fiscal Year At End of FiscalYear1
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Stephen F. Hiu ------ ------- 955,000/None $57,300/None
Patrick F.
Monahan 10,000 $500 632,500/None $37,950/None
1. The value of unexercised in-the-money options at December 31, 1997 is based
on the difference between $.11 per share and the per share option exercise
price, multiplied by the number of shares of common stock underlying such
option.
</TABLE>
Page 14
Compensation of Directors
During 1996 and 1997, Directors were not compensated for their Board or
Committee activities.
Page 15
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 1, 1998 with respect to
beneficial ownership of shares of the Company's outstanding Common Stock and
Preferred Stock by (i) each person known to the Company to own more than five
percent of its Common Stock or Preferred Stock, (ii) each Director, and (iii)
all Directors and Officers as a group.
<TABLE>
<CAPTION>
Common Stock Preferred Stock
Number of Number
Name and Address Shares Percent* Shares Percent
<S> <C> <C> <C> <C>
Joseph C. Abeles 23,105,8581 57.48 ----- -----
c/o Abel Associates
220 E. 42nd Street
New York, NY 10017
John A. Cenerazzo 2,945,1822 13.47 ----- -----
Stokesay Castle Lane
Reading, PA 19606
Stephen F. Hiu 1,471,4703 7.12 ----- -----
9110 Red Branch Road
Columbia, MD 21045
Thomas L. Kempner 38,359,3504 69.54 ----- -----
c/o Loeb Partners Corporation
61 Broadway
New York, NY 10006
Michael G. Kimelman 4,696,4725 20.43 ----- -----
c/o Kimelman & Baird, LLC
100 Park Avenue, Suite 1105
New York, NY 10017
Sidney R. Knafel 35,486,4426 67.40 ----- -----
c/o SRK Management
126 East 56th Street
New York, NY 10022
Patrick F. Monahan 992,5307 4.92 ----- -----
9110 Red Branch Road
Columbia, MD 21045
All Directors and Officers 107,057,3048 90.35 ----- -----
as a Group (7 persons)
Others
Dow Chemical Company 1,360,3349 6.78 187,500 100.00
Anthony Low-Beer 1,021,91310 5.08 ----- -----
Fraydun Manocherian 15,400,00011 44.50 ----- -----
All Shareholders 141,950,76312 100.0 187,500 100.00
<NOTES>
* Under the rules of the Securities and Exchange Commission, the calculation of
the percentage assumes for each person that only that person's rights,
warrants, options or convertible notes or preferred stock are exercised or
converted, and that no other person exercises or converts outstanding rights,
warrants, options or convertible notes or preferred stock. Accordingly, these
percentages are not on a fully-diluted basis.
Page 16
1 Includes the following: 2,109,404 shares, 2,250 shares issuable upon
conversion of Series A Preferred Stock, $216,000 of short-term notes
convertible into 2,160,000 shares, $311,663 in long-term notes convertible into
3,782,083 shares, warrants to purchase 6,933,427 shares, and warrants to
purchase 8,093,069 shares subject to the exercise of rights expiring March 31,
1998. Also includes 4,140 shares, 12,500 shares issuable upon conversion of
Series A Preferred Stock, and warrants to purchase 8,986 shares subject to the
exercise or rights expiring March 31, 1998 held by Mr. Abeles' wife.
2 Includes 283,458 shares, $24,000 of short-term notes convertible into 240,000
shares, $40,622 in long-term notes convertible into 492,321 shares, warrants to
purchase 863,513 shares, 32,750 shares subject to options currently exercisable
or exercisable within 60 days and warrants to purchase 1,032,503 shares subject
to the exercise of rights expiring March 31, 1998. Also includes 414 shares
and warrants to purchase 224 shares subject to the exercise of rights expiring
March 31, 1998 held by Mr. Cenerazzo's wife.
3 Includes 500 shares, 955,000 shares subject to options currently exercisable
within sixty days, and warrants to purchase 515,970 shares subject to the
exercise or rights expiring March 31, 1998.
4 Includes 386,972 shares, $23,100 of long-term notes convertible into 256,667
shares, warrants to purchase 469,627 shares, and warrants to purchase 601,164
shares subject to the exercise of rights expiring March 31, 1998 held by Mr.
Kempner; 94,000 shares, $140,873 in long-term notes convertible into 1,616,065
shares, $315,000 in short-term notes convertible into 3,150,000 shares,
warrants to purchase 5,231,937 shares, and warrants to purchase 5,449,681 shares
subject to the exercise of rights expiring March 31, 1998 held by a trust under
which Mr. Kempner is one of two trustees and the sole beneficiary; 1,482,987
shares, $56,100 of long-term notes convertible into 891,003 shares, warrants to
purchase 891,003 shares, and warrants to purchase 1,763,096 shares subject to
the exercise or rights expiring March 31, 1998 held by a trust under which Mr.
Kempner is one of two trustees and a one-third beneficiary; 182,526 shares and
warrants to purchase 98,564 shares subject to the exercise of rights expiring
March 31, 1998 held by Mr. Kempner's wife; 54,000 shares, $140,872 in long-term
notes convertible into 1,616,065 shares, $315,000 in short-term notes
convertible into 3,150,000 shares, warrants to purchase 5,231,937 shares, and
warrants to purchase 5,428,081 shares subject to the exercise or rights
expiring March 31, 1998 held by a trust under which Mr. Kempner is one of two
trustees and one of his brothers is the beneficiary; and 203,880 shares and
warrants to purchase 110,095 shares subject to the exercise or rights expiring
March 31, 1998 held by another trust under which Mr. Kempner is one of two
trustees one of his brothers is the beneficiary.
5 Includes 919,417 shares, $63,070 in long-term notes convertible into 804,568
shares, warrants to purchase 1,325,672 shares, and warrants to purchase
1,646,815 shares which are subject to the exercise of rights expiring March 31,
1998.
6 Includes 2,044,716 shares, $306,200 in long-term notes convertible into
3,715,706 shares, $630,000 in short-term notes convertible into 6,300,000
shares, warrants to purchase 10,982,722 shares, and warrants to purchase
12,443,298 shares which are subject to the exercise of rights expiring March
31, 1998.
7 Includes 12,000 shares, 632,500 shares which are subject to options
currently exercisable or exercisable within 60 days, and warrants to purchase
348,030 shares which are subject to the exercise of rights expiring March 31,
1998.
8 Includes 7,778,414 shares outstanding as of March 1, 1998, and shares which
are subject to rights of acquisition as follows: 1,620,250 shares which are
subject to options currently exercisable or exercisable within 60 days;
unexpired warrants to purchase 31,929,838 shares; 14,750 shares subject to the
redemption of 7,375 shares of redeemable preferred stock, $1,082,500 in long-
term notes convertible into 13,174,478 shares, $1,500,000 in short-term notes
convertible into 15,000,000 shares, and warrants to purchase 37,539,574 shares
which are subject to the exercise of rights expiring March 31, 1998.
Page 17
9 Includes 508,334 shares of common stock which represents shares issued in
lieu of interest on the interest on the $1,500,000 debenture held by Dow
Chemical Co., 375,000 shares of common stock subject to the conversion of the
$1,500,000 debenture and warrants to purchase 447,000 shares which are subject
to the exercise or rights expiring March 31, 1998. Dow Chemical Co. also holds
187,500 shares of preferred stock as to which certain redemption rights have
been waived and which are not redeemable at Dow's option and which carry no
voting rights prior to redemption.
10 Includes 128,540 shares, warrants to purchase 535,040 shares, and warrants
to purchase 358,333 shares, which are subject to the exercise or rights
expiring March 31, 1998.
11 Includes $500,000 in short-term notes convertible into 5,000,000 shares,
warrants to purchase 5,000,000 shares, and warrants to purchase 5,400,000
shares which are subject to the exercise or rights expiring March 31, 1998.
12 Includes 19,206,473 shares outstanding as of March 1, 1998, and shares which
are subject to rights of acquisition as follows: 1,670,750 shares which are
subject to options currently exercisable or exercisable within 60 days;
unexpired warrants to purchase 37,464,878 shares; 59,184 shares subject to the
redemption of 29,592 shares of redeemable preferred stock, 375,000 shares
subject to the conversion of the $1,500,000 subordinated debenture, $1,082,500
in long-term notes convertible into 13,174,478 shares, $2,000,000 in short-term
notes convertible into 20,000,000 shares, and warrants to purchase 50,000,000
shares which are subject to the exercise of rights expiring March 31, 1998.
</NOTES>
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 14, 1995 the shareholders of the Company approved cancellation of
promissory notes and warrants issued to certain directors of the Company
between August 25, 1993 and March 7, 1995 and the conversion of these notes to
common stock of the Company at $.125 per share and warrants to purchase an equa
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. Such warrants
expire on April 3, 1998.
Beginning November 16, 1995 and continuing through May 8, 1997, the Company
issued promissory notes to certain directors for aggregate consideration of
$1,082,500. These notes specify that at any time prior to repayment the holder
has the right to convert the notes to common stock of the Company at prices
ranging from $0.05 per share to $0.135 per share, based on the market price of
common shares at the issue date. In connection with such issuance, the holders
also received warrants for an equivalent number of shares at the equivalent
price per share. The warrants expire ten years from the issue of the notes.
These notes are due on March 31, 2003. The notes bear interest at the prime
rate.
Page 18
The notes are detailed, by issue date, and by conversion and warrant price, as
follows:
<TABLE>
<CAPTION>
Conversion/
Note Warrant
Issue Date Amount Price/Share
<S> <C> <C>
November 16, 1995 $ 40,000 $ 0.050
December 22, 1995 60,000 0.050
Total issued in 1995 100,000
February 14, 1996 70,000 0.100
March 11, 1996 70,000 0.090
April 23, 1996 36,000 0.060
May 9, 1996 71,000 0.060
June 7, 1996 70,000 0.050
July 24, 1996 90,000 0.115
September 24, 1996 70,000 0.125
November 15, 1996 70,000 0.090
December 11, 1996 70,000 0.090
Total issued in 1996 617,000
January 14, 1997 70,000 0.070
February 24, 1997 100,000 0.110
March 31, 1997 75,000 0.100
April 3, 1997 24,500 0.100
May 8, 1997 80,000 0.135
May 8, 1997 16,000 0.135
Total issued in 1997 365,500
TOTAL $1,082,500
</TABLE>
Beginning June 5, 1997 and continuing through December 5, 1997, the
Company issued promissory notes to certain directors and another investor for
aggregate consideration of $2,000,000. These notes specify that at any time
prior to repayment the holder has the right to convert the notes to common
stock of the Company at $.10 per share. In connection with such issuance, the
holders also received warrants for an equivalent number of shares at $0.10 per
share. The warrants expire ten years from the issue of the notes. These notes
bear interest at 8%. These notes are due on March 31, 1998. The Company plans
to repay these notes with proceeds from the Rights Offering, as described below.
At the option of each investor, all indebtedness under these note will be
repaid and canceled through use of proceeds from the Rights Offering or will be
converted into Common Stock of the company at $0.10 per share.
The Company distributed, to holders of record on February 13, 1998,
transferable rights to subscribe for and purchase 0.54 of a Unit for each share
of common share or equivalent owned by such holder. Each Unit will entitle the
holder to receive $0.10 principal amount of 8% Notes due March 31, 2003 and
warrants to purchase one share of common stock at an exercise price of $0.10
per share. Common shares or equivalents include: Common Stock, Preferred
Stock, unexpired warrants, options exercisable, and convertible notes out
standing. The Company would raise up to $5,000,000 through this Rights
Offering, if fully subscribed. If the Company does not raise at least
$2,000,000 in the Rights Offering, certain directors and another investor, who
are the holders of $2,000,000 in promissory notes as described above, have
agreed to purchase Units equal to the difference between $2,000,000 and the
proceeds from the Rights Offering; however, concurrently therewith the Company
will have to repay $2,000,000 in promissory notes so that, in that event the
Company will not have any proceeds after repayment of those notes. The Rights
Offering expires March 31, 1998. In consideration of the investors agreeing
to subscribe to Units such that the Company receives at least $2,000,000, the
Company will issue additional warrants to these investors to purchase 10 shares
of Common Stock for each $1 of loans made by each investor, exercisable at $0.10
per share and expiring ten years after issue.
Page 19
As of March 31, 1998, the Company's stockholders have purchased a total of
50,000,000 Units, including additional Units available to fully subscribing
shareholders as a result of unexercised rights of other shareholders, under the
terms of the Rights Offering. The Rights Offering period expired March 31,
1998 and has not been extended. The Company's gross proceeds from the Rights
Offering are $5,000,000, of which $1,875,000 will be used to repay outstanding
promissory notes due on March 31, 1998; and $475,000 will be used to repay
demand promissory notes issued from January 1, 1998 through March 31, 1998 as
described above. The Company incurred transfer agent fees of $35,000 in
relation to the Rights Offering, resulting in net proceeds after fees and debt
repayment of $2,615,000. The Company will record $5,000,000 in principal of
new notes issued to holders of subscribed units, which are payable five years
from date of issue and bear interest at 8%. In connection with the Rights
Offering, the holders of subscriber Units will also receive warrants to
purchase 50,000,000 shares of common stock expiring ten years from date of issue
and exercisable at $.10 per share.
On January 13, and February 2 and 23, and March 10 and 20, 1998 the
Company issued non-convertible demand promissory notes to certain directors for
an aggregate consideration of $950,000. These loans bear interest at the prime
rate.
Page 20
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
A.1. The following financial statements relating to 1997 and 1996 are filed as
a part of this Report:
Independent Auditors' Report.
Balance Sheet as of December 31, 1997.
Statements of Operations for the years ended December 31, 1997 and December 31,
1996.
Statements of Stockholders' Deficit for the years ended December 31, 1997 and
December 31, 1996.
Statements of Cash Flows for the years ended December 31, 1997 and December 31,
1996.
Notes to Financial Statements.
A.2. Exhibits filed herewith or incorporated by reference herein are set forth
in the following table prepared in accordance with Item 601 of Regulations S-K.
3.1 Articles of Incorporation of the Registrant as amended to date,
constituting Exhibit 3.1 to Registration Statement No. 333-41581 on Form SB-1.
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.
10.1 Form of Conversion and Exchange Agreement used in May 1988 in connection
with the conversion and exchange by certain holders of shares of Preferred
Stock for Common Stock and Warrants, constituting Exhibit 10.19 to Registration
Statement No. 33-5441 on Form S-1, is hereby incorporated herein by reference.
10.2 Exchange Agreement made as of July 1, 1988 between the Registrant 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.
10.3 Preferred Stockholders' Waiver Agreement dated May 5, 1988, incorporated
by reference to the identically numbered exhibit in Form S-1 Registration
Statement No. 33-23266.
10.4 Form of Agreement between the Registrant and Certain Investors in
Preferred Stock dated September 30, 1987, incorporated by reference to the
identically numbered exhibit in Amendment No. 1 to Form S-1 Registration
Statement No. 33-23266.
10.5 Letter Agreement executed May 11, 1995 between Archer Daniels Midland and
IGENE Biotechnology, Inc., along with November 11, 1995 Amendment, constituting
Exhibit 10.11 to the Registrant's Report on Form 10-KSB for the year ended
December 31, 1995 is incorporated herein by reference.
10.6 Agreement of Lease effected December 15, 1995 between Columbia Warehouse
Limited Partnership and IGENE Biotechnology, Inc. constituting Exhibit 10.13 to
the registrant's report on Form 10-KSB for the year ended December 31, 1995 is
incorporated herein by reference.
10.7 Toll Agreement effective as of June 24, 1997 between Igene Biotechnology,
Inc. and Fermic, S.A. de C.V., is incorporated herein by reference. (Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment.)
Page 21
(b) No reports on Form 8-K were filed during the Fourth Quarter of 1997.
Page 22
<TABLE>
IGENE Biotechnology, Inc.
Statement of Operations Data
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Sales 14,394 43,091 25,563 113,166 68,516
Total Revenues 14,394 66,573 274,978 363,249 69,089
Cost of Sales 9,963 23,198 16,878 36,945 32,137
Research, Development and
Pilot Plant Expenses 521,669 309,351 348,139 391,912 329,030
Other Expenses 1,422,050 512,504 447,335 474,752 416,489
Net Loss (1,888,082) (776,873) (503,156) (540,260) (708,567)
Net Loss
Per Common Share(1) (.10) (.04) (.04) (.04) (.06)
Coverage Deficiency of
Fixed Charges(2) 2,030,021 921,572 647,695 684,959 853,266
</TABLE>
<TABLE>
Igene Biotechnology, Inc.
Balance Sheet Data
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Cash and
Cash Equivalents 24,548 41,339 8,326 19,529 65,897
Working Capital
(Deficit) (2,113,574) (983,816) (336,992) (645,815) (286,881)
Total Assets 1,004,952 109,054 104,255 77,556 258,417
Long-Term Debt 2,582,500 1,500,000 1,500,000 1,500,000 1,500,000
Total Liabilities 5,142,637 2,562,799 1,901,127 2,177,572 1,938,173
Redeemable
Preferred Stock 411,920 475,982 484,643 463,104 438,405
Stockholders'
Deficit (4,549,605) (2,929,727) (2,281,515) (2,563,119) (2,118,161)
Common Shares
Outstanding 19,206,473 18,631,139 18,572,805 13,028,571 12,975,237
Preferred Shares
Outstanding 217,092 223,342 225,842 226,092 226,092
<NOTES>
1 Net loss per common share for the year ended December 31, 1993 is based on
12,769,011 shares. Net loss per common share for each of the years in the four-
year period ended December 31, 1997 is based on 13,002,050, 13,694,343,
18,604,171 and 18,870,315 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.
</NOTES>
</TABLE>
Page 23
INDEPENDENT AUDITORS' REPORT
Board of Directors
IGENE Biotechnology, Inc.
Columbia, MD
We have audited the financial statements of IGENE Biotechnology, Inc. as listed
in response to A.1. of Item 13. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of IGENE Biotechnology, Inc. as
of December 31, 1997 and the results of its operations and its cash flows for
the years ended December 31, 1997 and 1996 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that IGENE
Biotechnology, Inc. will continue as a going concern. As discussed in note 14
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 14. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
BERENSON & COMPANY LLP
March 19, 1998, except for note 17 as to which the date is March 31, 1998
New York, NY
Page 24
<TABLE>
IGENE Biotechnology, Inc.
Balance Sheet
<CAPTION>
December 31,
ASSETS 1997
CURRENT ASSETS
<S> <C>
Cash and cash equivalents $ 24,548
Accounts receivable 14,494
Supplies 4,710
Due from stockholders and investors (note 7) 153,594
Loan Receivable (note 3) 249,217
TOTAL CURRENT ASSETS 446,563
OTHER ASSETS
Property and equipment, net (note 4) 297,006
Loan receivable, net of current portion (note 3) 250,783
Security deposits 10,600
TOTAL ASSETS $1,004,952
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses (note 5) $ 515,137
Debenture interest payable (note 6) 45,000
Promissory notes payable (note 7) 2,000,000
TOTAL CURRENT LIABILITIES` 2,560,137
LONG-TERM DEBT
Promissory notes payable (note 7) 1,082,500
Variable rate subordinated debenture (note 6) 1,500,000
TOTAL LIABILITIES 5,142,637
COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)
REDEEMABLE PREFERRED STOCK
Carrying amount of redeemable preferred stock, 8% cumulative,
convertible, voting, series A, $.01 par value per share.
Stated value $13.92 per share. Authorized 1,312,500 shares;
issued 29,592 shares. Redemption amount $411,920
(notes 6, 8 and 9) 411,920
STOCKHOLDERS' DEFICIT (notes 7, 8 and 9)
Preferred stock -- $.01 par value per share. 8% cumulative,
convertible, voting, series A. Authorized and issued
187,500 shares (aggregate involuntary liquidation value
of $2,610,000) 1,875
Common stock -- $.01 par value per share. Authorized
250,000,000 shares; issued 19,206,473 shares 192,065
Additional paid-in capital 18,233,670
Deficit (22,977,215)
TOTAL STOCKHOLDERS' DEFICIT ( 4,549,605)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $1,004,952
The accompanying notes are an integral part of the financial statements.
</TABLE>
Page 25
<TABLE>
IGENE Biotechnology, Inc.
Statements of Operations
<CAPTION>
Years ended December 31,
1997 1996
<S> <C> <C>
Sales 14,394 43,091
Cost of sales 9,963 23,198
Gross profit 4,431 19,893
Technology services income --- 23,482
Total revenue 4,431 43,375
Selling, general and administrative expenses:
Marketing and selling 8,741 5,438
Research, development and pilot plant 521,669 309,351
General and administrative 432,842 331,211
Litigation expenses (note 12) 658,185 ---
Total selling, general and
administrative expenses 1,621,437 646,000
Operating loss (1,617,006) (602,625)
Other income (expenses):
Income from renegotiated liabilities 51,204 ---
Investment income 2 1,607
Other income (expense) 4,283 (4,743)
Interest expense (326,565) (171,112)
Net Loss (1,888,082) (776,873)
Deficit at beginning of year (21,089,133) (20,312,260)
Deficit at end of year $(22,977,215) $(21,089,133)
Net loss per common share (note 10) $ (0.10) $ (0.04)
The accompanying notes are an integral part of the financial statements.
</TABLE>
Page 26
<TABLE>
IGENE Biotechnology, Inc.
Statement of Stockholders' Deficit
<CAPTION>
Redeemable
Preferred Preferred Common
Stock Stock Stock
# shares/amount #shares/amount # shares/amount
<S> <C> <C> <C>
Balance at December
31, 1995 38,342/$484,643 187,500/$1,875 18,572,805/$185,728
Issuance of 53,334 shares of
common stock as payment of
interest on variable rate
subordinated debenture
(note 6) --- --- 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
Issuance of 80,000 shares of
common stock as payment of
interest on variable rate
subordinated debenture
(note 6) --- --- 80,000/$800
Issuance of common stock through
exercise of employee stock
options --- --- 482,834/$4,829
Cumulative undeclared dividends on
redeemable preferred stock $ 21,938 --- ---
Conversion of redeemable
preferred stock
into common stock (6,250/$(86,000) --- 12,500/$125
Net loss for 1997 --- --- ---
Balance at December
31, 1997 29,592/$411,920 187,500/$1,875 19,206,473/$192,065
The accompanying notes are an integral part of the financial statements.
</TABLE>
Page 27
<TABLE>
IGENE Biotechnology, Inc.
Statement of Stockholders' Deficit
(Continued)
<CAPTION>
Additional Total
Paid-In Stockholder's
Capital Deficit Deficit
<S> <C> <C> <C>
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
subordinated debenture (note 6) 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)
Issuance of 80,000 shares of
common stock as payment of
interest on variable rate
subordinated debenture (note 6) 179,200 --- 180,000
Issuance of common stock through
exercise of employee
stock options 19,313 --- 24,142
Cumulative undeclared dividends on
redeemable preferred stock (21,938) --- (21,938)
Conversion of redeemable preferred
stock into common stock 85,875 --- 86,000
Net loss for 1997 --- (1,888,082) (1,888,082)
Balance at December 31, 1997 $18,233,670 $(22,977,215) $(4,549,605)
The accompanying notes are an integral part of the financial statements.
</TABLE>
Page 28
<TABLE>
IGENE Biotechnology, Inc.
Statements of Cash Flows
<CAPTION>
Years ended December 31,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,888,082) ($776,873)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 7,821 6,261
Loss on sale of assets --- 4,743
Interest on debenture paid in shares of
common stock 180,000 120,000
Decrease (increase) in:
Accounts receivable (4,498) 1,133
Prepaid expenses and supplies 6,068 (10,778)
Increase (decrease) in:
Accounts payable and other
accrued expenses 214,338 44,672
Net cash used in operating activities (1,484,353) (610,842)
Cash flows from investing activities:
Capital expenditures (285,356) (955)
Loan to contract manufacturer (500,000) ---
Net cash used in investing activities (785,356) (955)
Cash flows from financing activities:
Proceeds from issuance of common stock 24,142 ---
Issuance of promissory notes 2,228,776 644,810
Net cash provided by financing activities 2,252,918 644,810
Net increase (decrease) in cash
and cash equivalents (16,791) 33,013
Cash and cash equivalents - beginning of the year 41,339 8,326
Cash and cash equivalents - end of the year $ 24,548 $ 41,339
Supplementary disclosure and cash flow information:
Cash paid during the year for interest $ --- $ ---
Cash paid during the year for income taxes --- ---
<NOTES>
Non-cash investing and financing activities:
During 1997 and 1996, the Company issued 80,000 and 53,334 shares of common
stock, respectively, in each year in payment of interest on the variable rate
subordinated debenture. If paid in cash, the interest would have been payable
at 12% and 8%, respectively, during 1997 and 1996, or $180,000 and $120,000,
respectively, 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 1997 and 1996 at
$2.25 per share, or $180,000 and $120,000, respectively, in each year. (See
also note 6)
During 1997 and 1996 the Company recorded dividends in arrears on 8% redeemable
preferred stock at $.64 per share aggregating $21,938 and $22,939, 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 8)
Page 29
IGENE Biotechnology, Inc.
Statements of Cash Flows
(continued)
Non-cash investing and financing activities: (continued)
During 1997 the Company issued promissory notes to certain directors of the
Company in the face amount of $2,365,500. As of December 31, 1997 $2,226,186
had been received in cash proceeds by the Company. $139,314 remained due from
certain directors of the Company as of December 31, 1997. (See also note 7)
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 on December 31, 1996, of which $2,590 was
received during 1997. (See also note 7)
The accompanying notes are an integral part of the financial statements.
</NOTES>
</TABLE>
Page 30
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 which average 7 years for
all equipment.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and 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
long-term debt approximates fair value because of similar current rates at
which the Company could borrow funds with consistent remaining maturities.
Sales Returns
The Company records sales returns in the period in which the product is
returned, rather than estimating future returns of current sales, since they
are expected to be immaterial in amount.
Page 31
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
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 and at 12%
thereafter; 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 1997 its highest price was $1.25) the Company can continue to
issue stock in lieu of cash payments at $2.25 per share.
Accounting for stock based compensation
The Company applies APB Opinion 25 in accounting for employee stock option
plans (note 9). Accordingly, no compensation cost has been recognized in 1997
or 1996. Had compensation cost been determined on the basis of FASB Statement
123, the following changes would have resulted:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net loss:
As reported $ (1,888,082) $ (776,873)
Pro forma (1,888,082) (781,189)
Net loss per common share:
As reported $ (.10) $ (.04)
Pro forma (.10) (.04)
</TABLE>
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) Loan Receivable
During 1997, the Company loaned $500,000 to its contract manufacturer of
AstaXin(r) for the purchase of manufacturing equipment needed for the
production of AstaXin(r), all of which remains due as of December 31, 1997. The
loan is payable over 23 months with interest at 10%. As of December 31, 1997,
$249,217 of the loan is classified as a current asset, and $250,783 is
classified as a long-term asset.
Page 32
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(4) Property and Equipment
Property and equipment are stated at cost and are summarized as follows:
<TABLE>
<S> <C>
Laboratory equipment and fixtures $ 103,007
Pilot plant equipment and fixtures 8,201
Machinery and equipment 73,716
Manufacturing equipment 186,421
Idle equipment 50,250
Office furniture and fixtures 33,526
455,121
Less accumulated depreciation (158,115)
$ 297,006
</TABLE>
Idle equipment represents manufacturing equipment which is not presently needed
for production of AstaXin(r). The Company plans to retain the equipment for
use when needed due to increased production volume. This equipment is not
being depreciated and its cost approximates fair value.
(5) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
<TABLE>
<S> <C>
Accounts payable, trade $ 219,024
Audit fees 15,000
Legal fees 68,784
Equipment 29,633
Other accrued expenses 444
Accrued interest, promissory notes 182,252
$ 515,137
</TABLE>
(6) 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% cumula
tive 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 1997 and 1996, the Company issued 80,000 and
53,334 shares, respectively 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, at a rate of $8 per
preferred share. $45,000
Page 33
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
of accrued interest through December 31, 1997 is recorded in these financial
statements.
(7) Promissory Notes Payable
Beginning November 16, 1995 and continuing through May 8, 1997, the Company
issued promissory notes to certain directors for aggregate consideration of
$1,082,500. These notes specify that at any time prior to repayment the holder
has the right to convert the notes to common stock of the Company at prices
ranging from $0.05 per share to $0.135 per share, based on the market price of
common shares at the issue date. In connection with such issuance, the holders
also received warrants for an equivalent number of shares at the equivalent
price per share. The warrants expire ten years from the issue of the notes.
These notes are due on March 31, 2003 and bear interest at the prime rate.
The notes are detailed, by issue date, and by conversion and warrant price, as
follows:
<TABLE>
<CAPTION>
Conversion
Note Warrant
Issue Date Amount Price/Share
<S> <C> <C>
November 16, 1995 $ 40,000 $ 0.050
December 22, 1995 60,000 0.050
Total issued in 1995 100,000
February 14, 1996 70,000 0.100
March 11, 1996 70,000 0.090
April 23, 1996 36,000 0.060
May 9, 1996 71,000 0.060
June 7, 1996 70,000 0.050
July 24, 1996 90,000 0.115
September 24, 1996 70,000 0.125
November 15, 1996 70,000 0.090
December 11, 1996 70,000 0.090
Total issued in 1996 617,000
January 14, 1997 70,000 0.070
February 24, 1997 100,000 0.110
March 31, 1997 75,000 0.100
April 3, 1997 24,500 0.100
May 8, 1997 80,000 0.135
May 8, 1997 16,000 0.135
Total issued in 1997 365,500
TOTAL $ 1,082,500
</TABLE>
Page 34
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
Beginning June 5, 1997 and continuing through December 5, 1997, the Company
issued promissory notes to certain directors and investors for aggregate
consideration of $2,000,000. These notes specify that at any time prior to
repayment the holder has the right to convert the notes to common stock of the
Company at $.10 per share. In connection with such issuance, the holders also
received warrants for an equivalent number of shares at $0.10 per share. The
warrants expire ten years from the issue of the notes. These notes bear
interest at 8%. These notes are due on March 31, 1998. The company plans to
repay these notes with proceeds from the Rights Offering, as described below.
At the option of each investor, all indebtedness under these note will be
repaid and canceled through use of proceeds from the Rights Offering or will
be converted into Common Stock of the company at $0.10 per share.
As of December 31, 1997 the unpaid portion of these Promissory Notes was
$153,594, which the Company expects to receive by March 31, 1998.
(8) 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 6 relating to exchange of redeemable preferred stock and note 9
relating to conversion of redeemable preferred stock and waiver of redemption
privileges. Mandatory redemption is required by October 2002. As of December
31, 1997, cumulative dividends in arrears totaled $175,185 ($5.92 per share)
and were included in carrying value of redeemable preferred stock
(9) Stockholders' Equity
In November of 1997 the stockholders approved the 1997 Stock Option Plan which
succeeds the Company's 1986 Stock Option Plan, as amended. All outstanding,
unexercised options granted under the 1986 Plan have been cancelled and
reissued with unchanged terms under the 1997 Plan. The number of shares
issuable under the 1997 Plan is 20,000,000.
Page 35
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
On January 11, 1996 options to purchase 1,418,502 shares of common stock of the
Company at $0.05 per share were granted to the CEO of the Company, and options
to purchase 800,000 shares of common stock at $0.05 per share were granted to
two officers of the Company. One-third of these options were exercisable
immediately, and an additional one-third were to become exercisable on each
anniversary of the grant. The Compensation Committee also approved, on April
17, 1996, the decrease in the exercise price of outstanding, previously granted
employee stock options issued through March 9, 1995 to $0.05 per share, which
was the then current fair market value. On August 16, 1996 the Compensation
Committee approved the amendment of the prior vesting schedules for the options
of certain current employees, so that all of their outstanding stock options
became immediately exercisable. The CEO of the Company and a director who is a
former employee were not included in this amendment to vesting schedule of
options. No employee stock options were exercised during 1996.
During 1997, the former CEO, who was terminated in January of 1997, exercised
options to purchase 472,834 shares at $0.05 per share. An officer also
exercised options to purchase 10,000 shares at $0.05 per share. No employee
stock options were granted in 1997.
On December 14, 1995, the Company issued 4,290,400 shares of common stock in
lieu of retired Promissory Notes and Warrants issued to certain directors of
the Company from August 25, 1993 through March 7, 1995. Issued along with the
common stock were warrants to purchase an equal amount of common stock of the
Company at $.125 per share, which was the fair market value of the common stock
as quoted on April 3, 1995 by the National Quotation Bureau, which warrants
shall expire on April 3, 1998.
The following table summarizes options and warrants issued, outstanding and
exercisable:
<TABLE>
<CAPTION>
As of December 31,
1997 1996
<S> <C> <C>
Issued 39,725,462 16,110,259
Outstanding 39,135,628 16,003,259
Exercisable 39,135,628 16,003,259
</TABLE>
At December 31, 1997, 37,464,878 shares of authorized but unissued common stock
were reserved for exercise of outstanding warrants, 20,000,000 shares of
authorized but unissued common stock were reserved for exercise pursuant to the
1997 Stock Option Plan, 434,184 shares of authorized but unissued common stock
were reserved for issuance upon conversion of the Company's outstanding
preferred stock, 400,000 shares of authorized but unissued common stock were
reserved for issuance in lieu of payment of interest on the variable rate
subordinated debenture, 375,000 shares of authorized but unissued common stock
were reserved for issuance upon conversion of the variable rate subordinated
debenture and 33,174,477 shares of authorized but unissued stock were reserved
for issuance upon conversion of outstanding convertible notes.
Page 36
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
Preferred Stock
In May 1988, the Company and a holder of its redeemable preferred stock entered
into an agreement under which the mandatory redemption rights referred to in
note 6 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.
During 1996 and 1997, holders of redeemable preferred stock converted 2,500 and
6,250 shares, respectively, of preferred stock into 5,000 and 12,500 shares,
respectively, of common stock of the Company.
At December 31, 1997, cumulative dividends in arrears totaled $1,110,000 ($5.92
per share) and were included in the aggregate involuntary liquidation value of
the preferred stock.
At December 31, 1997, 187,500 shares of authorized but unissued preferred stock
were reserved for issuance upon maturity of the variable rate subordinated
debenture.
(10) Net Loss Per Common Share
Net loss per common share for 1997 and 1996 is based on 18,870,314 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.
Common Stock equivalents, including: options, warrants, convertible debt,
convertible preferred stock, and exercisable rights have not been included in
the computation of earnings per share in 1997 and 1996 because to do so would
have been anti-dilutive. However, these common stock equivalents could have
potentially dilutive effects in the future (see also notes 6, 7, 8 and 9).
(11) 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 approximately $73,000 under such leases.
Annual rent expense relating to the leases for the years ended December 31,
1997 and 1996 approximated $67,000 and $68,000, respectively.
Page 37
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(12) 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
the Technology and requested that IGENE return approximately $250,000 in
payments under the License Agreement. IGENE maintains that ADM is not entitled
to the payments and that additional monies are owed to IGENE. On July 21,
1997, ADM filed suit against the Company in the U.S. District Court in
Greenbelt, Maryland alleging patent infringement and requesting a preliminary
injunction against the Company to cease the use of its astaxanthin manufacturing
process. ADM's request for injunctive relief was denied. 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, contending that ADM stole the
Company's formula for making its natural astaxanthin pigment, AstaXin(r). The
Company is also claiming breach of contract, in regards to the licensing
agreement entered into by the Company and ADM in 1995. The Company contends
that it complied with all material terms of this agreement, including concen
tration levels of its pigment. The Company's claim was re-asserted as a counter-
claim 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 preliminary injunction on the basis that ADM
could not demonstrate a likelihood of success on the merits of its case.
Management believes ADM's claims are meritless. Managements basis for this is
that ADM claims that the levels of pigment the Company said it could produce
did not meet contract levels. Management has copies of ADM's internal memos
showing that the levels 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. The Company had expenses of $658,185 in 1997
relating to this litigation.
(13) Income Taxes
At December 31, 1997, the Company has federal and state net operating loss
carry-forwards of approximately $21,200,000 that expire at various dates from
1998 through 2011. The recorded deferred tax asset, representing the expected
benefit from the future realization of the net operating losses, net of the
valuation allowance, was $-0- for both years.
The sources of the deferred tax asset is approximately as follows:
<TABLE>
<CAPTION>
1997
<S> <C>
Net operating loss
Carry-forward benefit $ 8,480,000
Valuation allowance (8,480,000)
Deferred tax asset $ ---
</TABLE>
Page 38
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(14) Uncertainty
The Company has incurred net losses in each year of its existence, aggregating
approximately $23,000,000 from inception to December 31, 1997 and its
liabilities and redeemable preferred stock exceeded its assets by approximately
$4,600,000 at that date. These factors indicate that the Company will not be
able to continue in existence unless it is able to raise additional capital and
attain profitable operations.
Management has instituted a program of significant cost reductions, deferred
all except immediately necessary capital expenditures, and suspended payment of
dividends on the Company's preferred stock. The implementation of these
measures to conserve working capital together with the successful marketing and
licensing of the Company's products, which management hopes to achieve, may
permit the Company to attract additional capital and enable it to continue.
The Company has contracted with a manufacturer of its AstaXin(r) technology.
The Company believes this technology to be highly marketable.
To increase working capital, the Company issued a rights offering in February
1998 (see note 17). 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 17)
(15) 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 in 1996 for technology services pertaining to the
Agreement. On February 29, 1996 Archer-Daniels-Midland Company terminated its
Licensing Agreement with the Company (See Note 12).
(16) Simple Retirement Plan
Effective January 1, 1997, the Company adopted a Simple Retirement Plan under
Internal Revenue Code Section 408(p). The Plan is a defined contribution plan,
which covers all of the Company's employees who receive at least $5,000 of
compensation for the preceding year. The Plan permits elective employee
contributions. The Company makes a nonelective contribution of 2% of each
eligible employee's compensation for each year.
The Company's contributions to the Plan for 1997 were $5,483, which is expensed
in the 1997 statement of operations.
(17) Subsequent Events
During 1996 the Company began commercial fermentation trials with another
potential manufacturer. On July 3, 1997, the Company signed a non-exclusive
toll manufacturing agreement with Fermic, S.A. de C.V., of Mexico City, Mexico,
for the production of its natural astaxanthin pigment, AstaXin(r) in Fermic's
manufacturing facility in Mexico. Commercial production began in
Page 39
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
January of 1998, and the Company intends to sell AstaXin(r) worldwide through
distributors, including Fermic, to meet an anticipated demand for the product.
The Company distributed to holders of record on February 13, 1998, transferable
rights to subscribe for and purchase 0.54 of a Unit for each share of common
share equivalent owned by such holder. Each Unit will entitle the holder to
receive $0.10 principal amount of 8% Notes due March 31, 2003 and warrants to
purchase one share of common stock at an exercise price of $0.10 per share.
Common shares or equivalents include: Common Stock, Preferred Stock, unexpired
warrant, options exercisable, and convertible notes outstanding. The Company
would raise up to $5,000,000 through this Rights Offering, if fully subscribed.
If the Company does not raise at least $2,000,000 in the Rights Offering,
certain investors, who are the holders of $2,000,000 in promissory notes as
described above, have agreed to purchase Units equal to the difference between
$2,000,000 and the proceeds from the Rights Offering; however, concurrently
therewith the Company will have to repay $2,000,000 in promissory notes so
that, in that event the Company will not have any proceeds after repayment of
those notes. The Rights Offering expires March 31, 1998. In consideration of
the investors agreeing to subscribe to Units such that the Company receives at
least $2,000,000, the Company will issue additional warrants to these investors
to purchase 10 shares of Common Stock for each $1 of loans made by each
investor, exercisable at $0.10 per share and expiring ten years after issue.
On January 13, February 2, February 23, March 10, and March 20, 1998 the
Company issued non-convertible demand notes to certain directors for an
aggregate consideration of $950,000. These loans bear interest at the prime
rate.
As of March 31, 1998, the Company's stockholders have purchased a total of
50,000,000 Units, including additional Units available to fully subscribing
shareholders as a result of unexercised rights of other shareholders, under the
terms of the Rights Offering. The Rights Offering period expired March 31,
1998 and has not been extended. The Company's gross proceeds from the Rights
Offering are $5,000,000, of which $1,875,000 will be used to repay outstanding
promissory notes due on March 31, 1998; and $475,000 will be used to repay
demand promissory notes issued from January 1, 1998 through March 31, 1998 as
described above. The Company incurred transfer agent fees of $35,000 in
relation to the Rights Offering, resulting in net proceeds after fees and debt
repayment of $2,615,000. The Company will record $5,000,000 in principal of
new notes issued to holders of subscribed units, which are payable five years
from date of issue and bear interest at 8%. In connection with the Rights
Offering, the holders of subscriber Units will also receive warrants to
purchase 50,000,000 shares of common stock expiring ten years from date of issue
and exercisable at $.10 per share.
Page 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Columbia, Howard
County, State of Maryland on April 15, 1998.
IGENE Biotechnology, Inc.
Date: April 15, 1998 By: /S/ Stephen F. Hiu, President
Pursuant to the requirements of the Securities Act of 1933, this report is to
be signed below by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Joseph C. Abeles Director April 15, 1998
(Joseph C. Abeles)
/s/ Ramin Abrishamian Director, April 15, 1998
(Ramin Abrishamian) Chief Executive Officer
/s/ John A. Cenerazzo Director April 15, 1998
(John A. Cenerazzo)
/s/ Stephen F. Hiu Director, President, April 15, 1998
(Stephen F. Hiu) Secretary, and Treasurer
Chief Financial Officer,
Chief Accounting Officer
/s/ Thomas L. Kempner Vice Chairman of Board April 15, 1998
(Thomas L. Kempner)
/s/ Michael G. Kimelman Chairman of the Board April 15, 1998
(Michael G. Kimelman) of Directors
/s/ Sidney R. Knafel Director April 15, 1998
(Sidney R. Knafel)
/s/ Patrick F. Monahan Director April 15, 1998
(Patrick F. Monahan)
</TABLE>
/DOCUMENT>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 24,548
<SECURITIES> 0
<RECEIVABLES> 14,494
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 446,563
<PP&E> 455,121
<DEPRECIATION> 158,115
<TOTAL-ASSETS> 1,004,952
<CURRENT-LIABILITIES> 2,560,137
<BONDS> 2,582,500
<COMMON> 192,065
411,920
1,875
<OTHER-SE> (4,743,545)
<TOTAL-LIABILITY-AND-EQUITY> 1,004,952
<SALES> 14,394
<TOTAL-REVENUES> 14,394
<CGS> 9,963
<TOTAL-COSTS> 1,621,437
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 326,565
<INCOME-PRETAX> (1,888,082)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,888,082)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,888,082)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
