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, 1998
[ ] 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
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9110 Red Branch Road
Columbia, Maryland 21045
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(Address of principal (Zip Code)
executive offices)
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 $218,095.
As of March 1, 1999, there were 21,854,173 shares of the
issuer's Common Stock outstanding. The aggregate market value of
the Common Stock held by non-affiliates was $1,545,106, based on
the last bid quotation prices of the Common Stock as reported by
the National Quotation Bureau's bulletin board on such date.
(The officers and directors of the issuer are considered
affiliates only for purposes of this calculation.)
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CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
EXCEPT FOR HISTORICAL FACTS, ALL MATTERS DISCUSSED IN THIS
REPORT, WHICH ARE FORWARD LOOKING, INVOLVE A HIGH DEGREE OF RISKS
AND UNCERTAINTIES. POTENTIAL RISKS AND UNCERTAINTIES INCLUDE,
BUT ARE NOT LIMITED TO, COMPETITIVE PRESSURES FROM OTHER
COMPANIES AND WITHIN THE BIOTECH INDUSTRY, ECONOMIC CONDITIONS IN
THE COMPANY'S PRIMARY MARKETS AND OTHER UNCERTAINTIES DETAILED
FROM TIME-TO-TIME IN THE COMPANY'S SECURITIES AND EXCHANGE
COMMISSION FILINGS.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
IGENE Biotechnology, Inc. (the "Company") is engaged in the
business of developing, marketing, and manufacturing industrial
microbiology and related biotechnology products. The Company was
formed on October 27, 1981 to develop, produce and market value-
added specialty biochemical products derived from abundant,
inexpensive and renewable agricultural residues and wastes
through the use of state-of-the-art fermentation technology,
physical and chemical separation technology, and related chemical
and biochemical engineering technologies.
The Company has devoted its resources to the development of
proprietary processes to convert selected agricultural raw
materials or feedstocks into commercially useful and cost
effective specialty biochemical products for the food, feed,
flavor and agrochemical industries. In developing these
processes and products, the Company has relied on the expertise
and skills of its in-house scientific staff and, for special
projects, various consultants.
The Company leases manufacturing capacity in Mexico City,
Mexico, and also has pilot plant facilities in Columbia,
Maryland. The Company is manufacturing its own products and has
also licensed certain products to third-party manufacturers.
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 has not incurred and does not anticipate any
material environmental compliance costs due to the fact that the
Company's contract manufacturer and licensed manufacturer have
primary responsibility for environmental compliance.
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Research and Development
As of December 31, 1998, the Company had expended
approximately $11,175,000 on research and development since its
inception on October 27, 1981 and has, as of December 31, 1998,
received revenues from product sales and royalties of
approximately $2,013,000 from the proprietary processes resulting
from such research and development. 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 1999.
Research and development expenditures for each of the last
two years are as follows:
1997 $ 521,669
1998 $ 452,755
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, prawns, and certain other types of fish and
shellfish. In the ocean, salmon and trout obtain astaxanthin
from krill and other planktonic crustaceans in their diet. A
krill and 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 1997 the Company entered into a number of
manufacturing and licensing agreements for commercial quantities
of AstaXin(R). However, for a number of reasons, outside of the
Company's control, none of these agreements were extended beyond
the initial trial periods.
On July 3, 1997, the Company signed a non-exclusive
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
continues to manufacture and intends to sell AstaXin(R)worldwide,
directly or through distributors to meet an anticipated demand
for the product.
The Fermic contract provides that the manufacturer has a non-
exclusive right to produce AstaXin(R) and is paid a fixed monthly
fee which is based on manufacturing capacity. Fermic provides
equipment and facilities necessary to manufacture and store the
product and is responsible for purchasing raw materials. The
Company is responsible for sales efforts and for ensuring the
quality of the pigment. The Company also has a role in ensuring
that the manufacturing process works effectively. The term of
the contract has been extended on a month-to-month basis through
December 31, 1999, and it is anticipated that it will continue to
be extended beyond that date. (see also Item 2. Description of
Property) The Company intends to modify its fee arrangement with
the manufacturer in the near future so that fees will be based on
quantity of product produced.
Based on estimates of worldwide production of farm-bred
salmon, the Company believes the market for salmon feed additives
which improve coloration, such as AstaXin(R), exceeds
$150,000,000 worldwide, which would be approximately 7,500
metric tons. Production was approximately 50 metric tons
for 1998. The expected production rate is between 50 and 150
metric tons of AstaXin(R) for 1999, which is equal to
approximately 2% of the potential worldwide market for such
feed additives.
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The Company is presently engaged in preliminary discussions
with several companies regarding possible distribution and/or
licensing of AstaXin(R).
Sales of AstaXin(R) amounted to 93% and 0% of revenue for
1998 and 1997, respectively, of which 98% represent sales to a
single foreign distributor located in Mexico.
During 1997 Archer-Daniels Midland, Inc. (ADM) filed suit
against the Company alleging patent infringement regarding
AstaXin(R). The Company believes this suit is meritless and has
filed a counter-suit against ADM alleging theft of trade secrets.
This litigation is on-going. (See also Item 3. Legal
Proceedings).
2. ClandoSan(R)
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 and distributed by a licensed
manufacturer in the United States.
The Company receives royalties based on a percentage of
sales of ClandoSan(R). ClandoSan(R) royalties amounted to 7% and
100% of revenue for 1998 and 1997, respectively.
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 1997 and 1998, 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 during 1997 and 1998.
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
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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. This market is presently dominated by a
single producer, and certain other large companies are presently
known to be developing and marketing competitive products.
Sources and Availability of Raw Materials
Raw materials used in the manufacture of AstaXin(R) consist
principally of agricultural commodities widely available in world
markets from many suppliers, which may be used interchangeably.
Raw materials used in the manufacture of ClandoSan(R) consist
principally of by-products of the seafood processing industry and
are a commodity readily available from many suppliers, used
interchangeably. We do not anticipate material price
fluctuations or changes in availability in these raw materials in
the near future.
Employees
At December 31, 1998, 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 research, process development and support of manufacturing
activities.
None of the Company's employees is represented by a labor
union and the Company has experienced no work stoppages. The
Company believes its relations with its employees are
satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 8,500 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 2,500 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.
The Company also leases manufacturing capacity at Fermic
S.A. de C.V. (Fermic) in Mexico City, Mexico. During 1997 the
Company loaned $500,000 to Fermic for the purchase of
manufacturing equipment, which is being used for the production
of AstaXin(R), along with equipment which Fermic already owned.
Under its agreement with this manufacturer, the Company is being
repaid on this loan over a two-year period which began January
1998. This equipment is owned by the manufacturer, with the
Company retaining only a security interest. The Company has
approximately $245,000 of additional manufacturing equipment for
use in this manufacturing process in Mexico, in which the Company
retains title.
The Company owns, leases or contracts, all equipment and
facilities necessary for its current operations and all equipment
is in satisfactory condition and adequately insured.
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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
manufacture and sale of AstaXin(R). 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,
alleging theft of trade secrets. 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. 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. During 1998, a stay was imposed on both parties by
the court while a court-appointed expert analyzes the Company's
and ADM's yeast products. This litigation is on-going.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
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 on the National Quotation Bureau's "bulletin
board". The following table shows, by calendar quarter, the
range of representative bid prices for the Common Stock for 1997
and 1998.
<TABLE>
<CAPTION>
Calendar Quarter High Low
---------------- ----- -----
<S> <C> <C> <C>
1997: First Quarter $ .08 $ .06
Second Quarter $ .17 $ .09
Third Quarter $ .20 $ .11
Fourth Quarter $ .13 $ .08
1998: First Quarter $ .11 $ .06
Second Quarter $ .21 $ .10
Third Quarter $ .15 $ .05
Fourth Quarter $ .06 $ .04
</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, 1999 was 238. As of March 1, 1999, the high bid
and low offer prices for the Common Stock, as shown on the
"bulletin board" were $0.11 and $0.11, respectively.
Preferred Stock
There was no public market for the Preferred Stock during
1997 and 1998 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, 1999
was 12.
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, 1998 the total amount of
dividends in arrears with respect to the Company's Preferred
Stock was $194,124.
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.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Certain statements in this report set forth management's
intentions, plans, beliefs, expectations or predictions of the
future based on current facts and analyses. Actual results may
differ materially from those indicated in such statements, due to
a variety of factors including reduced product demand, increased
competition, government action, weather conditions, and other
factors.
Results of Operations
Sales and other revenues for the year ended December 31,
1998 increased from $14,394 in 1997 to $218,095 in 1998. This
increase in overall revenue of 1,415% resulted from sales of
AstaXin(R) of $203,860 during the second quarter of 1998. There
were no commercial quantities of AstaXin available for sale
during 1997. The Company began commercial production of
AstaXin(R) with a contract manufacturer in January 1998. The
Company is presently engaged in discussions with several
potential purchasers of AstaXin(R), and expects to have
additional sales during 1999. However, there can be no assurance
that any such sales will occur or that they will be material.
The Company earned licensing revenue (royalties) of $14,235 from
ClandoSan(R) during 1998, compared with gross revenue from direct
sales of ClandoSan(R) of $ 14,394 in 1997, which represents a
decrease of less than 1%. The Company is presently negotiating
continuation of a licensing agreement for ClandoSan(R), but has
continued to focus its efforts on AstaXin(R)during 1997 and 1998.
Costs of sales for 1998 and 1997 of $809,288 and $9,963,
respectively, increased by 8,023%, or $799,325. This increase
resulted entirely from production of AstaXin(R) during 1998.
During 1998, a gross loss on sales of AstaXin(R) of $605,428 was
recorded. This was caused by inefficiencies in the initial
commercial production runs, costs of which exceeded the market
value of the product. Production efficiency improved during 1998
and the Company expects to achieve gross profits on sales of
AstaXin(R) produced in 1999, provided that sufficient sales are
achieved. However, there can be no assurance that such gross
profits will be realized or that they will be material. During
January through March of 1999, the Company implemented certain
improvements in the production process. During this period, no
manufacturing fees were incurred. The Company expects to incur
future production costs for AstaXin(R) of at least $138,000 per
month beginning April 1999, which are expected to be funded by
product sales. However, there can be no assurance that such
sales will occur, or that they will be material. Once the
Company is producing and selling AstaXin(R) at a gross profit,
management plans to expand production capacity to meet an
expected increase in demand for AstaXin(R). There were no
production costs for ClandoSan(R) during 1998. The Company
discontinued direct production and sales of this product and has
earned revenue only through royalties on sales by its licensed
manufacturer in 1998, incurring no costs of sales. Cost of sales
of $9,963 in 1997 resulted entirely from contracted production of
ClandoSan(R).
Marketing and selling expenses for 1998 and 1997 of $9,862
and $8,741, respectively, increased $1,121, or 13%. This was
caused by increased marketing efforts for AstaXin(R) in 1998 as
compared to 1997. Marketing expenses for AstaXin(R) are expected
to continue to increase, since to achieve sales the Company will
need to make additional marketing efforts on its own and with the
help of distributors or marketers. These additional expenses are
expected to be funded by revenues from product sales, if future
product sales occur.
Research, development and pilot plant expenses for 1998 and
1997 were $452,755 and $521,669, respectively; a decrease of
$68,914, or 13%. This decrease resulted from transfer of efforts
from the pilot plant to direct support of commercial
manufacturing in the fourth quarter of 1998. These expenses are
expected to continue at approximately $35,000 per month in the
near term in support of increasing the efficiency of the
manufacturing process through experimentation in the Company's
pilot plant and additional research. These expenses are expected
to be funded through June of 1999 by available cash and
additional funding from stockholders, and by profitable
operations beyond that date, if profitable operations occur.
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General and administrative expenses for 1998 and 1997 were
$502,564 and $432,842, respectively; an increase of $69,722, or
16%. This increase resulted primarily from the hiring of a CEO
during 1997, which resulted in an increase of approximately
$92,000 in compensation and benefits in 1998 over 1997. The
Company's CEO resigned during 1998 and the Company does not plan
to hire a replacement in the near future, but will be operated by
its President and Board of Directors. General and administrative
expenses are expected to continue in the near future at
approximately $36,000 per month. These expenses are expected to
be funded through June of 1999 by available cash and additional
funding from stockholders, and by profitable operations beyond
that date, if profitable operations occur.
Litigation expenses for 1998 and 1997 were $399,492 and
658,185, respectively, a decrease of $258,693 or 39%. These
expenses in 1998 and 1997 represent continuing costs associated
with the Company's defense of the suit by ADM and the Company's
counter-suit. Management expects to recover legal expenses
through damage awards and through preservation of the commercial
product rights associated with AstaXin(R). However, there can be
no assurance that the Company will receive damage awards or that
its rights will be preserved. The Company estimates that the
costs of litigation will continue in the near future at levels
based on management's continuing assessments of potential costs
and benefits of various litigation strategies and alternatives.
These expenses are expected to be funded by available cash and
additional funding from stockholders. A range of reasonably
possible losses from the litigation cannot be estimated at this
time.
The Company reported other income of $51,204 in 1997 from
the renegotiation of certain disputed vendor liabilities. This
is expected to be a non-recurring event and no such income was
reported in 1998.
Net interest expense for 1998 and 1997 was $540,275 and
$326,563, respectively, an increase of $213,712, or 65%. This
increase resulted from additional debt issued in the Company's
rights offering of February 1998.
As a result of the foregoing, the Company reported net
losses of $(2,499,694) and $(1,888,082), respectively, for 1998
and 1997; an increased loss of $(611,612) or 32%. This is a loss
of $(.12) and $(.10) per share, respectively, for 1998 and 1997.
The weighted average number of shares of common stock outstanding
of 20,672,092 and 18,870,314, respectively, for 1998 and 1997
have increased by 1,801,778 shares. This resulted from the
issuance of 80,000 shares during 1998 in lieu of interest payment
on a subordinated debenture, the conversion of 187,500 shares of
preferred stock into 375,000 shares of common stock, and the
issuance of 2,190,000 shares of common stock in payment of legal
fees during 1998.
Financial Position
During 1998 and 1997, the following actions materially affected
the Company's financial position:
o 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). The loan is repayable over 23 months and
matures November 1999 with interest at 10%. The remaining
balance of this loan is $250,783 as of December 31, 1998,
which is classified as a current asset.
o The Company purchased $73,171 and $186,421, respectively,
in manufacturing equipment in 1998 and 1997 for use in
the production of AstaXin(R). The Company also purchased
$58,354 and $98,933, respectively of other equipment in
1998 and 1997, primarily for use in its pilot plant
facility.
o The Company issued $365,500, during 1997, in promissory
notes to directors, which along with amounts issued in
prior years' totals $1,082,500 outstanding as of December
31, 1998, and which mature on March 31, 2003.
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o The Company issued $950,000 and $1,875,000, respectively,
in debt during 1998 and 1997, which was cancelled and
repaid in March 1998 through use of proceeds from a rights
offering. The Company issued $5,000,000 in debt through a
rights offering in March 1998, which matures March 31,
2003. The Company capitalized $211,713 in debt issue
costs associated with this debt, of which $31,757 was
amortized in 1998. The net proceeds from the rights
offering was $1,963,287.
o The Company retained inventory from manufacture of
AstaXin(R) of $870,260 as of December 31, 1998, an
increase of $870,260 from 1997.
o The Company prepaid expenses of $83,933 in 1998 which have
been recorded as current assets as of December 31, 1998 and
consist mainly of legal retainers.
o The Company issued 80,000 shares in each of 1998 and 1997
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 in each of
1998 and 1997.
o Employees exercised 482,834 stock options in 1997,
providing additional capital of $24,142.
o The carrying value of redeemable preferred stock was
increased and paid-in capital available to common
shareholders was decreased for $18,940 and $21,938,
respectively, in 1998 and 1997, reflecting cumulative
unpaid dividends on redeemable preferred stock.
o Holders of limited redemption preferred stock and
redeemable preferred stock converted 187,500 and 6,250
shares, respectively, in 1998 and 1997, of preferred stock
into 375,000 and 12,500 shares, respectively, of common
stock, providing additional capital and reducing the
liquidation value of redeemable preferred stock by
$86,000 in 1997.
o The Company issued 2,190,000 shares of common stock in
payment of legal fees, recording additional capital and
legal expenses of $162,000 based on the market value of the
stock at date of issue.
o The Company recorded additional paid-in capital of $205,640
in 1998 to reflect forgiveness of interest on outstanding
promissory notes in conjunction with the Company's rights
offering.
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, 1998, total dividends in arrears on
the Company's Preferred Stock total $194,124 ($6.56 per share)
and are included in the carrying value of the redeemable
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, 1998 the Company had a working capital deficit
of $1,307,368, and cash and cash equivalents of $364,796.
Cash used by operating activities in 1998 and 1997 amounted
to $2,731,077 and $1,484,353, respectively.
Cash provided (used) by investing activities increased by
$914,530, from $(785,356) in 1997 to $129,174 in 1998. This is a
result of capital expenditures for manufacturing equipment
relating to production of AstaXin(R) in 1997, and $500,000 loaned
to Fermic for the purchase of manufacturing equipment relating to
production of AstaXin(R) in 1997 of which $249,217 was repaid in
1998.
-10-
<PAGE>
Cash provided by financing activities increased by $689,233
from $2,252,918 in 1997 to $2,942,151 in 1998. Financing
activities included net proceeds of $950,000 and $2,228,776 from
issuance of notes to directors in 1998 and 1997, respectively.
In 1998, financing activities also included $1,963,287 in net
proceeds from a rights offering.
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) and additional stockholder funding. The Company
intends to spend approximately $350,000 on technology research
over the next twelve months to improve manufacturing processes
and research new strains for production of pigments.
The Company does not believe that inflation has had a
significant impact on its operations during 1998 and 1997.
Year 2000 Issues
Many existing computer programs and systems use only the
last two digits to refer to a year. Therefore, these programs
and systems will not properly recognize dates, and may
malfunction when using dates after December 31, 1999. The Company
has made efforts to assess its exposure and vulnerability to Year
2000 Issues. This assessment is not yet completed. However,
management has determined that certain consequences of its Year
2000 Issues may have a material effect on the Company's business,
results of operations, or financial condition, without taking
into account the Company's effort to avoid those consequences.
The Company presently conducts substantially all of its
manufacturing operations at the facility of its contract
manufacturer, located in Mexico City, Mexico. The Company is in
the process of determining whether the systems of this contract
manufacturer are Year 2000 Compliant. However, the Company
believes that its manufacturing operation is not likely to be
materially affected if the contract manufacturer's internal
systems are not Year 2000 Compliant. The Company has also not
determined, and may be unable to determine, whether the municipal
infrastructure and utility providers' systems in Mexico City are
Year 2000 Compliant. The Company's manufacturing operations
could be materially affected by power failures or malfunctions
caused by Year 2000 Issues in Mexico City, if its efforts to
mitigate them are unsuccessful. The Company may suffer
production interruptions during power failures caused by Year
2000 Issues. The Company plans to have sufficient inventory
levels on hand to meet demand in case of short-term manufacturing
interruptions. The contract manufacturer plans to obtain back-up
generator power systems in case of prolonged power outages. The
Company does not anticipate significant costs associated with
addressing these Year 2000 Issues.
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.
-11-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL
PERSONS, AND KEY EMPLOYEES
The Company's directors are elected annually by the shareholders
of the Company. The directors, executive officers and key
employees of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position with IGENE
<S> <C> <C>
Michael G. Kimelman 60 Chairman of the Board of
Directors
Thomas L. Kempner 71 Vice Chairman of
the Board of Directors
Stephen F. Hiu 42 Director, President, Acting
Treasurer,and Director of
Research and Development
Patrick F. Monahan 48 Director, Secretary, and
Director of Manufacturing
Joseph C. Abeles 84 Director
John A. Cenerazzo 75 Director
Sidney R. Knafel 68 Director
</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, and elected a Director in August 1990. He has been
Director of Research and Development since January 1989 and,
prior thereto, was Senior Scientist since December 1985, when he
joined the Company. He was a post-doctoral Research Associate at
the Virginia Polytechnic Institute and State University,
Blacksburg, Virginia, from January 1984 until December 1985. Dr.
Hiu holds a Ph.D. degree in microbiology from Oregon State
University and a B.S. degree in biological sciences from the
University of California, Irvine.
PATRICK F. MONAHAN was appointed Director of Manufacturing and
elected a Director of the Company in April 1991 and was elected
as Secretary in September 1998. He has managed the Company's
fermentation pilot plant since 1982. Prior thereto, he was a
technical specialist in the fermentation pilot plant of W.R.
Grace and Co. from 1975 to 1982. He received an Associate in
Arts degree in biology from Allegheny Community College and a
B.S. degree in biology with a minor in Chemistry from Frostburg
State College, Frostburg, Maryland.
-12-
<PAGE>
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 1997 and 1998 all of its
officers, directors and holders of more than 5% of its Common
Stock complied with all filing requirements under Section 16(a)
of the Securities Exchange Act of 1934, except as follows: In
1997 certain directors of the Company made various loans to the
Company. The loans are evidenced by notes convertible into
Common Stock. Certain directors also received warrants to
purchase shares of Common Stock in 1997 and 1998 in conjunction
with the 1997 notes and with a 1998 rights offering. 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 5%
holders and on copies of reports that have been filed with the
Securities and Exchange Commission.
ITEM 10. EXECUTIVE COMPENSATION
During 1998 and 1997 no executive officer's annual cash
compensation exceeded $100,000.00. Following the resignation of
the Company's former CEO, Ramin Abrishamian during 1998, the
functions of chief executive officer were performed by the
Company's Board of Directors, acting as a group. During 1997
and 1998 the Directors were not compensated for their Board
or Committee activities.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term Compensation Awards-
------------------------------
# of Securities Underlying
Name/Position Year Salary Options
- ------------------ ---- -------- ------------------------------
<S> <C> <C> <C>
Ramin Abrishamian/ 1998 $ 83,700 1,500,000
Former CEO
</TABLE>
<TABLE>
OPTION GRANTS IN 1998
(Individual Grants)
<CAPTION>
# of Securities Percent of Exercise
Underlying Options Total Options or Base Expiration
Name Granted Granted in 1998 Price ($/sh.) Date
- ------------------ ------------------ --------------- ------------- --------------
<S> <C> <C> <C> <C>
Ramin Abrishamian 1,500,000 31% $.10 April 24, 2000
</TABLE>
-13-
<PAGE>
<TABLE>
AGGREGATED
YEAR-END OPTION VALUES
<CAPTION>
# of Unexercised Value of Unexercised
Options as of In-The-Money Options
Name December 31, 1998 as of December 31, 1998
- ------------------ ------------------ -----------------------
<S> <C> <C>
Ramin Abrishamian 1,500,000 $15,000
</TABLE>
No options were exercised by executive officers during 1998.
All options listed in the table above were exercisable as of
December 31, 1998. The value of unexercised in-the-money options
at December 31, 1998 is based on the difference between $.11 per
share (the market price at December 31, 1998) and the per share
option exercise price, multiplied by the number of shares of
common stock underlying such options.
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. The Company's
contributions to the plan for 1998 were $6,979, which is expensed
in the 1998 statement of operations.
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 1986 Stock Option Plan provided for the issuance of options
to acquire up to 2,000,000 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 independent 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 also become exercisable in full
upon (i) the holder's retirement on or after his 65th birthday,
(ii) the disability or death 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.
-14-
<PAGE>
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 6,947,719 shares of common stock have
been granted under the 1986 and 1997 Stock Option Plans and
6,327,885 options are outstanding under the Plans. 4,947,719
options were granted during 1998.
Compensation of Directors
During 1997 and 1998, Directors were not compensated for
their Board or Committee activities.
-15-
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information as of March 1,
1999 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 or beneficially 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
--------------------------
Number of
Name and Address Shares Percent *
- ------------------------ ------------- ----------
<S> <C> <C>
Joseph C. Abeles 15,012,789(1) 43
c/o Abel Associates
220 E. 42nd Street
New York, NY 10017
John A. Cenerazzo 1,912,456(2) 8
Stokesay Castle Lane
Reading, PA 19606
Stephen F. Hiu 3,030,500(3) 12
9110 Red Branch Road
Columbia, MD 21045
Thomas L. Kempner 44,241,169(4) 69
c/o Loeb Partners Corporation
61 Broadway
New York, NY 10006
Michael G. Kimelman 7,218,950(5) 26
c/o Kimelman & Baird, LLC
100 Park Avenue, Suite 1105
New York, NY 10017
Sidney R. Knafel 41,368,264(6) 68
c/o SRK Management
126 East 56th Street
New York, NY 10022
Patrick F. Monahan 1,756,900(7) 7
9110 Red Branch Road
Columbia, MD 21045
All Directors and Officers 114,541,028(8) 89
as a Group (7 persons)
Others
Ramin Abrishamian 1,500,000(9) 6
Jerry Finkelstein 1,000,000(10) 5
Fraydun Manocherian 7,500,000(11) 26
* 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.
-16-
<PAGE>
1. Includes the following: 2,109,404 shares; 2,250 shares
issuable upon the conversion of 1,125 shares of preferred stock;
3,782,083 shares issuable upon the conversion of $311,663 of
long-term notes issued by the Company; and 9,093,427 warrants
held by Mr. Abeles. Also includes 4,140 shares, and 12,500
shares issuable upon conversion of 6,250 shares of preferred
stock and 8,985 warrants held by Mr. Abeles' wife.
2. Includes the following: 283,458 shares; 32,750 options
currently exercisable; 492,321 shares issuable upon the
conversion of $40,622 of long-term notes issued by the Company;
and 1,103,513 warrants held by Mr. Cenerazzo. Also includes
414 shares held by Mr. Cenerazzo's wife.
3. Includes the following: 25,500 shares; 2,955,000 options
currently exercisable; and 50,000 warrants held by Dr. Hiu.
4. Includes 386,972 shares; and 536,920 warrants held by Mr.
Kempner. Also includes 94,000 shares, 1,616,066 shares subject
to the conversion of $140,872 of long-term notes issued by the
Company; and 16,055,091 warrants held by a trust under which
Mr.Kempner is one of two trustees and the sole beneficiary.
Also includes 54,000 shares; 1,616,067 shares subject to
the conversion of $140,873 of long-term notes issued by the
Company; and 16,033,487 warrants held a trust under which Mr.
Kempner is one of two trustees and one of his brothers
is the sole beneficiary. Also includes 203,880 shares and
110,095 warrants held by a trust under which Mr. Kempner is
one of two trustees and another of his brothers is the sole
beneficiary. Also includes 1,482,987 shares; 1,147,667 shares
subject to the conversion of $79,200 of long-term notes issued
by the Company; and 4,622,846 warrants held by trusts under
which Mr. Kempner is one of two trustees and is a one-third
beneficiary. Also includes 182,526 shares and 98,565 warrants
held by Mr. Kempner's wife.
5. Includes 911,360 shares; 804,568 shares subject to the
conversion of $63,070 of long-term notes issued by the Company;
and 5,503,022 warrants.
6. Includes 2,044,716 shares; 3,715,706 shares subject to the
conversion of $306,200 of long-term notes issued by the Company;
and 35,607,842 warrants.
7. Includes 24,400 shares; 1,682,500 options currently
exercisable; and 50,000 warrants held by Mr. Monahan.
8. Includes 7,807,757 shares; 14,750 shares issuable upon the
conversion of 7,375 shares of preferred stock; 4,670,250
options currently exercisable; 13,174,478 shares issuable
upon the conversion of $5,656,030 of long-term notes issued
by the Company; and 88,873,793 warrants.
9. Includes 1,500,000 options currently exercisable, held by
Mr. Abrishamian.
10. Includes 1,000,000 shares held by Mr. Finkelstein.
11. Includes 7,500,000 warrants held by Mr. Manocherian.
</TABLE>
-17-
<PAGE>
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
equal amount of common stock of the Company at $.125 per share,
originally expiring April 3, 1998, which was the fair market
value of the common stock as quoted on April 3, 1995. Such
warrants were extended during 1998 and their new expiration is
April 3, 2005.
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 were modified in conjunction with the 1998 rights offering
and are now due on March 31, 2003. The notes 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>
-18-
<PAGE>
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 $1,875,000.
These notes specified that at any time prior to repayment the
holder had the right to convert the notes to common stock of the
Company at $.10 per share. These notes bore interest at 8%.
These notes were due on March 31, 1998 and were repaid with
proceeds from the Rights Offering, as described below.
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 entitled 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 outstanding. The Company raised $5,000,000
through this Rights Offering, which was fully subscribed.
Certain directors and another investor, agreed to purchase Units
equal to the difference between $2,000,000 and the proceeds from
the Rights Offering; however, concurrently therewith the Company
was required to repay $1,875,000 in promissory notes. The Rights
Offering expired 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 issued additional
warrants to these investors to purchase 20,000,000 shares of
Common Stock, exercisable at $0.10 per share and expiring ten
years after issue.
The Company's stockholders 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. The Company's gross
proceeds from the Rights Offering were $5,000,000, of which
$1,875,000 was used to repay outstanding promissory notes due on
March 31, 1998; and $950,000 was used to repay demand promissory
notes issued from January 1, 1998 through March 31, 1998. The
Company incurred fees and costs of $211,713 in relation to the
Rights Offering, resulting in net proceeds after fees and debt
repayment of $1,963,287. The Company recorded $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 also received warrants to purchase 50,000,000
shares of common stock expiring ten years from date of issue and
exercisable at $.10 per share.
During 1998, the Company also issued 4,000,000 warrants, at
$.10 per share, to its Chairman of the Board; and 9,500,000
warrants, at $.10 per share, to certain directors who were the
holders of $950,000 in demand notes issued during 1998.
-19-
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS
ON FORM 8-K
A.1. The following financial statements relating to 1998 and
1997 are filed as a part of this Report:
Independent Auditors' Report.
Balance Sheet as of December 31, 1998.
Statements of Operations for the years ended December 31,
1998 and December 31, 1997.
Statements of Stockholders' Deficit for the years ended
December 31, 1998 and December 31, 1997.
Statements of Cash Flows for the years ended December 31,
1998 and December 31, 1997.
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., now Dow
Chemical Company, 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, Inc. 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.
-20-
<PAGE>
10.7 Toll Manufacturing Agreement effective as of June 24,
1997 between Igene Biotechnology, Inc. and Fermic, S.A. de
C.V., constituting Exhibit 10.7 to the Registrant's Report
on Form 10-KSB for the year ended December 31, 1997, is
incorporated herein by reference. (Portions of this
exhibit have been omitted pursuant to a request for
confidential treatment.)
21. Subsidiaries
None
27. Financial Data Schedule
(b) No reports on Form 8-K were filed during the Fourth Quarter
of 1998.
-21-
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
IGENE Biotechnology, Inc.
Columbia, MD
We have audited the financial statements of IGENE Biotechnology,
Inc. as listed in response to A.1. of Item 13. 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, 1998 and the
results of its operations and its cash flows for the years ended
December 31, 1998 and 1997 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 5, 1999
New York, NY
-22-
<PAGE>
IGENE Biotechnology, Inc.
Balance Sheet
December 31, 1998
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 364,796
Inventory 870,260
Supplies 11,145
Loan Receivable (note 3) 250,783
Prepaid expenses 83,933
-----------
TOTAL CURRENT ASSETS 1,580,917
OTHER ASSETS
Property and equipment, net (note 4) 370,057
Debt issue costs (note 7) 179,956
Security deposits 10,600
-----------
TOTAL ASSETS $ 2,141,530
===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses (note 5) $ 228,549
Debenture interest payable (note 6) 45,000
------------
TOTAL CURRENT LIABILITIES' 273,549
LONG-TERM DEBT
Notes payable (note 7) 6,092,500
Variable rate subordinated debenture (notes 6 and 7) 1,500,000
Accrued interest (note 7) 364,950
------------
TOTAL LIABILITIES 8,230,999
------------
COMMITMENTS AND CONTINGENCIES (Notes 11, 12, 14 and 15)
REDEEMABLE PREFERRED STOCK
Carrying amount of redeemable preferred stock, 8% cumulative,
convertible, voting, series A, $.01 par value per share.
Stated value $14.56 per share. Authorized 1,312,500 shares;
issued and outstanding 29,592 shares. Redemption amount
$430,860 (notes 8 and 9) 430,860
STOCKHOLDERS' DEFICIT (notes 8 and 9)
Common stock -- $.01 par value per share. Authorized
250,000,000 shares; issued and outstanding
21,854,173 shares 218,542
Additional paid-in capital 18,738,038
Deficit (25,476,909)
------------
TOTAL STOCKHOLDERS' DEFICIT (6,520,329)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,141,530
============
The accompanying notes are an integral part of the financial
statements.
-23-
<PAGE>
<TABLE>
IGENE Biotechnology, Inc.
Statements of Operations
<CAPTIONS>
Years ended December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Sales $ 203,860 $ 14,394
Cost of sales 809,288 9,963
--------------- ---------------
Gross profit (loss) (605,428) 4,431
Technology licensing income 14,235 ---
--------------- ---------------
Net revenue (591,193) 4,431
--------------- ---------------
Operating expenses:
Marketing and selling 9,862 8,741
Research, development and pilot plant 452,755 521,669
General and administrative 502,564 432,842
Litigation expenses (note 12) 399,492 658,185
--------------- ---------------
Total operating expenses 1,364,673 1,621,437
--------------- ---------------
Operating loss (1,955,866) (1,617,006)
Other income (expenses):
Income from renegotiation of liabilities --- 51,204
Miscellaneous (3,553) 4,283
Interest expense (net of interest income
of $74,565 and $2, respectively,
in 1998 and 1997) (540,275) (326,563)
--------------- ---------------
Net Loss (2,499,694) (1,888,082)
Deficit at beginning of year (22,977,215) (21,089,133)
--------------- ---------------
Deficit at end of year $ (25,476,909) $ (22,977,215)
=============== ===============
Net loss per common share (note 10) $ (0.12) $ (0.10)
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial
statements.
-24-
<PAGE>
<TABLE>
IGENE Biotechnology, Inc.
Statements of Stockholders' Deficit
<CAPTION>
Redeemable Preferred Stock Preferred Stock
-------------------------- --------------------------
# shares Amount # shares Amount
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 35,842 $ 475,982 187,500 $ 1,875
Issuance of common stock in lieu
of cash of in payment of
interest on variable rate
subordinated debenture (note 6) --- --- --- ---
Issuance of common stock through
exercise of employee stock options --- --- --- ---
Cumulative undeclared dividends
on redeemable preferred stock --- 21,938 --- ---
Conversion of redeemable preferred
stock into common stock (6,250) (86,000) --- ---
Net loss for 1997 --- --- --- ---
--------- --------- --------- ---------
Balance at December 31, 1997 29,592 411,920 187,500 1,875
Issuance of common stock in lieu
of cash in payment of interest on
subordinated debenture (note 6) --- --- --- ---
Cumulative undeclared dividends
on redeemable preferred stock --- 18,940 --- ---
Conversion of preferred stock
into common stock --- --- (187,500) (1,875)
Issuance of common stock in lieu of
cash in payment of legal fees --- --- --- ---
Exercise of warrants --- --- --- ---
Capital contribution - forgiveness of
interest on promissory notes --- --- --- ---
Net loss for 1998 --- --- --- ---
--------- --------- --------- ---------
Balance at December 31, 1998 29,592 $430,860 --- $ ---
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial
statements.
-25-
<PAGE>
<TABLE>
IGENE Biotechnology, Inc.
Statements of Stockholders' Deficit
(Continued)
<CAPTION> Common Stock Additional Total
---------------------- Paid-in Stockholders'
Shares Amount Capital Deficit Deficit
----------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 18,631,139 $ 186,311 $17,971,220 $(21,089,133) $ (2,929,727)
Issuance of common stock in lieu of
cash in payment of interest
on variable rate subordinated
debenture (note 6) 80,000 800 179,200 --- 180,000
Issuance of common stock through
exercise of employee stock options 482,834 4,829 19,313 --- 24,142
Cumulative undeclared dividends
on redeemable preferred stock --- --- (21,938) --- (21,938)
Conversion of redeemable preferred
stock into common stock 12,500 125 85,875 --- 86,000
Net loss for 1997 --- --- --- (1,888,082) (1,888,082)
----------- ---------- ------------ ------------- -------------
Balance at December 31, 1997 19,206,473 192,065 18,233,670 (22,977,215) (4,549,605)
Issuance of common stock in lieu
of cash in payment of interest on
subordinated debenture (note 6) 80,000 800 179,200 --- 180,000
Cumulative undeclared dividends
on redeemable preferred stock --- --- (18,940) --- (18,940)
Conversion of preferred stock
into common stock 375,000 3,750 (1,875) --- ---
Issuance of common stock in lieu of
cash in payment of legal fees 2,190,000 21,900 140,100 --- 162,000
Exercise of warrants 2,700 27 243 --- 270
Capital contribution - forgiveness of
interest on promissory notes --- --- 205,640 --- 205,640
Net loss for 1998 --- --- --- (2,499,694) (2,499,694)
----------- ---------- ------------ ------------- -------------
Balance at December 31, 1998 21,854,173 $ 218,542 $18,738,038 $(25,476,909) $( 6,520,329)
=========== ========== ============ ============= =============
</TABLE>
The accompanying notes are an integral part of the financial
statements.
-26-
<PAGE>
<TABLE>
IGENE Biotechnology, Inc.
Statements of Cash Flows
<CAPTION>
Years ended December 31,
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,499,694) $ (1,888,082)
Adjustments to reconcile net loss to net
Cash used by operating activities:
Depreciation 43,438 7,821
Amortization of debt issue costs 31,757 ---
Loss on sale of assets 3,553 ---
Interest on debenture paid
in shares of common stock 180,000 180,000
Legal fees paid in shares of common stock 162,000 ---
Decrease (increase) in:
Accounts receivable 14,494 (4,498)
Inventory (870,260) ---
Prepaid expenses and supplies (90,368) 6,068
Increase (decrease) in:
Accounts payable and other accrued expenses 294,003 214,338
-------------- --------------
Net cash used in operating activities (2,731,077) (1,484,353)
-------------- --------------
Cash flows from investing activities:
Proceeds from disposal of equipment 11,482 ---
Capital expenditures (131,525) (285,356)
Repayments from (loan to) contract manufacturer 249,217 (500,000)
-------------- --------------
Net cash provided by (used in)
investing activities 129,174 (785,356)
-------------- --------------
Cash flows from financing activities:
Repayments by stockholders 28,594 ---
Proceeds from issuance of common stock 270 24,142
Proceeds from rights offering 1,963,287 ---
Issuance of other debt 950,000 2,228,776
-------------- --------------
Net cash provided by financing activities 2,942,151 2,252,918
-------------- --------------
Net increase (decrease)in cash
and cash equivalents 340,248 (16,791)
Cash and cash equivalents - beginning of the year 24,548 41,339
-------------- --------------
Cash and cash equivalents - end of the year $ 364,796 $ 24,548
============== ==============
Supplementary disclosure and cash flow information:
Cash paid during the year for interest $ 924 $ ---
Cash paid during the year for income taxes --- ---
Non-cash investing and financing activities:
During 1998 and 1997, the Company issued 80,000 shares of
common stock, in each year, in payment of interest on a variable
rate subordinated debenture. If paid in cash, the interest would
have been payable at 12% during 1998 and 1997, or $180,000 per
year. Shares may be issued in lieu of cash under the debenture
agreement at the higher of $2.25 per share or market price per
share. The stock was issued and related interest was paid in
1998 and 1997 at $2.25 per share, or $180,000, in each year.
(See also note 6)
-27-
<PAGE>
IGENE Biotechnology, Inc.
Statements of Cash Flows
(continued)
Non-cash investing and financing activities: (continued)
During 1998 and 1997 the Company recorded dividends in arrears
on 8% redeemable preferred stock at $.64 per share aggregating
$18,940 and $21,938, respectively, which has been removed from
paid-in capital and included in the carrying value of the
redeemable preferred stock. (See also note 8)
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 $2,228,776 had been received in cash proceeds
by the Company. $136,724 remained due from certain directors of
the Company for these promissory notes as of December 31, 1997.
(See also note 7)
During the year ended December 31, 1998, the Company issued
notes payable of $5,000,000 through a rights offering.
Stockholders purchased rights, using $1,875,000 in promissory
notes and $950,000 of demand notes due to the Company, resulting
in net cash proceeds of $1,963,287 which is after fees associated
with the offering of $211,713. These related fees have been
capitalized as debt issue costs and will be amortized over the
term of the debt. As part of this transaction, the Company also
recorded forgiveness of interest on certain promissory notes of
$205,640 as additional paid-in capital.
During the year ended December 31, 1998, the Company cancelled
certain promissory notes payable to, and related amounts due from
a stockholder aggregating $125,000 by agreement with the
stockholder.
During the year ended December 31, 1998, the holder of 187,500
shares of preferred stock (par value of $.01 per share or $1,875)
as to which mandatory redemption rights had been waived,
converted the preferred stock into 375,000 shares of common stock
(par value of $0.01 per share or $3,750). Paid-in capital and
preferred stock have each been reduced by $1,875.
During the year ended December 31, 1998, the Company satisfied
prior years' accounts payable of $10,000 by issuing $10,000 in
notes payable.
</TABLE>
The accompanying notes are an integral part of the financial
statements.
-28-
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(1) Nature of Business
IGENE Biotechnology, Inc. (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.
Inventories
Inventory, stated at lower of cost, on a first-in first-out
basis, or market value, represents AstaXin(R) manufactured
and held for sale, as follows:
Raw materials $ ---
Work-in-process ---
Finished goods 870,260
------------------
Total inventory $ 870,260
==================
Inventory has been reduced by approximately $253,000 as of
December 31, 1998 to reflect the excess of inventory cost
over market value.
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.
-29-
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(2) Summary of Significant Accounting Policies (continued)
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.
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 1998 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 1998 or 1997. Had
compensation cost been determined on the basis of FASB
Statement 123, the following changes would have resulted:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Net loss:
As reported $ (2,499,694) $ (1,888,082)
Pro forma (2,572,480) (1,888,082)
Net loss per common share:
As reported $ (.12) $ (.10)
Pro forma (.12) (.10)
</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.
-30-
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(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). The loan
is payable over 23 months and matures November 1999 with
interest at 10%. As of December 31, 1998, the balance of
$250,783 is classified as a current asset.
(4) Property and Equipment
Property and equipment are stated at cost and are summarized
as follows:
Laboratory equipment and fixtures $ 127,433
Pilot plant equipment and fixtures 93,228
Manufacturing equipment 244,557
Idle equipment 56,150
Office furniture and fixtures 29,335
-----------
550,703
Less accumulated depreciation (180,646)
-----------
$ 370,057
===========
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:
Accounts payable, trade $ 206,049
Audit fees 22,500
-----------
$ 228,549
===========
(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% cumulative convertible
preferred stock, Series A for a $1,500,000 variable rate
convertible subordinated debenture due 2002, Class A.
The debenture bears interest at a rate of 8% per annum
through September 30, 1996 and thereafter at a rate of 12%
per annum. Interest was payable in cash through October 1,
1989. Thereafter, the debenture agreement provides that at
the option and at the discretion of the Company, interest
may be paid in shares of the Company's common stock at the
greater of $2.25 per share or the average market value per
share. During 1998 and 1997 the Company issued 80,000
shares, in each year, 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. Accrued interest of $45,000 through
December 31, 1998 is recorded in these financial statements.
-31-
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(7) 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 were
originally demand notes, but were modified in February 1998
to mature 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>
Beginning June 5, 1997 and continuing through December 5,
1997, the Company issued promissory notes to certain
directors and investors for aggregate consideration of
$1,875,000. These notes specified that at any time prior to
repayment the holder had the right to convert the notes to
common stock of the Company at $.10 per share. These notes
bore interest at 8% and were due on March 31, 1998. All
indebtedness under these notes was repaid and canceled
through use of proceeds from the Rights Offering, as
described below.
-32-
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(7) Notes Payable (continued)
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 entitled 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 outstanding. The Company
raised $5,000,000 through this Rights Offering, which was
fully subscribed. Concurrently therewith the Company repaid
$1,875,000 in promissory notes. The Rights Offering expired
March 31, 1998. In consideration of certain investors
agreeing to subscribe to Units such that the Company
received at least $2,000,000, the Company issued 20,000,000
additional warrants to these investors, 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 bore interest at the prime rate and
were cancelled and repaid through use of proceeds from the
rights offering.
As of March 31, 1998, the Company's stockholders 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 were $5,000,000, of
which $1,875,000 was used to repay outstanding promissory
notes due on March 31, 1998; and $950,000 was used to repay
demand promissory notes issued from January 1, 1998 through
March 31, 1998 as described above. The Company incurred
fees and costs of $211,713 in relation to the Rights
Offering, resulting in net proceeds after fees and debt
repayment of $1,963,287. The Company recorded $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 also received warrants to
purchase 50,000,000 shares of common stock expiring ten
years from date of issue and exercisable at $.10 per share.
The related fees and costs amounting to $211,713 were
capitalized as debt issue costs, which are being amortized
over the term of the debt, which is 5 years, on the straight-
line method.
As of December 31, 1998, these debt issue costs are shown in
the financial statements as follows:
Debt issue costs $ 211,713
Accumulated amortization (31,757)
------------
$ 179,956
============
-33-
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(7) Notes Payable (continued)
Notes Payable are summarized as follows as of December 31, 1998:
<TABLE>
<CAPTION>
Accrued
Principal Interest
------------- -------------
<S> <C> <C>
Long-term notes payable, bearing interest
at prime, maturing March 31, 2003,
convertible into common stock $ 1,082,500 $ 64,950
Long-term notes payable, bearing interest
at 8%, maturing March 31, 2003 5,000,000 300,000
Note payable to vendor, non-interest
bearing, maturing December 31, 2000 10,000 ---
------------- -------------
$ 6,092,500 $ 364,950
============= =============
</TABLE>
Combined aggregate amounts of maturities for all long-term
borrowings are as follows for each of next five years:
Year Amount
----- ------------
1999 $ ---
2000 10,000
2001 ---
2002 1,500,000
2003 6,082,500
(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, 1998, cumulative dividends in
arrears total $194,124($6.56 per share) and are included in
the carrying value of redeemable preferred stock.
-34-
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(9) Stockholders' Equity
Options
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 remain outstanding with
unchanged terms. The number of shares issuable under the
1997 Plan is 20,000,000, and the number issuable under the
1986 Plan was 2,000,000.
The following is a summary of options granted and
outstanding under the plans as of December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Number Price Number Price
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Options outstanding
and exercisable,
beginning of year 1,670,750 $.050 2,153,584 $.050
Options granted 4,947,719 $.099 --- ---
Options exercised --- --- (482,834) $.050
Options forfeited,
or withdrawn with
consent of holders (290,584) $.055 --- ---
Options expired --- --- --- ---
---------- ---------- ---------- ----------
Options outstanding
and exercisable,
end of year 6,327,885 $.077 1,670,750 $.050
========== ========== ========== ==========
</TABLE>
On April 17, 1996 the Company decreased the exercise price
of outstanding, previously granted employee stock options
issued through March 9, 1995 to $.05 per share, which was
the then current fair market value.
Warrants
During 1997, the Company issued 20,000,000 warrants to
purchase common stock at $.10 per share to certain investors
who guaranteed subscriptions of at least $2,000,000 in the
Company's Rights Offering of February 1998. These warrants
expire at various dates from June 5 through December 5,
2004.
-35-
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(9) Stockholders' Equity (continued)
During 1998, the Company issued 50,000,000 warrants to
purchase common stock at $.10 per share to investors who
exercised rights in the rights offering of February 1998, in
connection with the issuance of $5,000,000 in debt. These
warrants expire on March 31, 2003. During 1998, 2,700 of
these warrants were exercised, and 49,997,300 remain
outstanding as of December 31, 1998.
During 1998, the Company also issued 4,000,000 warrants, at
$.10 per share to its Chairman of the Board; and 9,500,000
warrants at $.10 per share to certain directors who were the
holders of $950,000 in demand notes issued during 1998.
The following table summarizes warrants issued, outstanding
and exercisable:
<TABLE>
<CAPTION>
As of December 31,
--------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Issued 100,964,877 37,464,877
Outstanding 100,962,177 37,464,877
Exercisable 100,962,177 37,464,877
</TABLE>
Common Stock
At December 31, 1998, 100,962,177 shares of authorized but
unissued common stock were reserved for exercise of
outstanding warrants, 21,410,166 shares of authorized but
unissued common stock were reserved for exercise pursuant to
the 1986 and 1997 Stock Option Plans, 59,184 shares of
authorized but unissued common stock were reserved for
issuance upon conversion of the Company's outstanding
preferred stock, 220,000 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 13,174,477 shares of authorized
but unissued stock were reserved for issuance upon
conversion of outstanding convertible notes.
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 8 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. During
1998, the holder of the redeemable preferred stock as to
which mandatory redemption rights were waived, as described
above, converted the 187,500 shares of such stock into
375,000 shares of common stock of the Company.
During 1997 holders of redeemable preferred stock converted
6,250 shares of preferred stock into 12,500 shares of common
stock of the Company.
At December 31, 1998, cumulative dividends in arrears
totaled $194,124 ($6.56 per share) and were included in the
aggregate involuntary liquidation value of the preferred
stock.
At December 31, 1998, 187,500 shares of authorized but
unissued preferred stock were reserved for issuance upon
maturity of the variable rate subordinated debenture.
-36-
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(10)Net Loss Per Common Share
Net loss per common share for 1998 and 1997 is based on
20,672,092 and 18,870,314 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 1998 and 1997 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, 1998 and 1997 approximated $67,000 in
each year.
Future minimum rental payments, in the aggregate and for
each of the next five years are as follows:
Year Amount
----- ---------------
1999 $ 59,360
2000 59,360
2001 4,947
2002 ---
2003 ---
---------------
$ 123,667
===============
On July 3, 1997, the Company signed a non-exclusive
manufacturing agreement with Fermic, S.A. de C.V.
("Fermic"), of Mexico City, Mexico, for the production of
AstaXin(R). The Fermic contract provides that the
manufacturer has a non-exclusive right to produce AstaXin(R)
and is paid a fixed monthly fee, which is based on
manufacturing capacity. Fermic provides equipment and
facilities necessary to manufacture and store the product
and is responsible for purchasing raw materials. The
Company is responsible for sales efforts and for ensuring
the quality of the pigment. The Company also has a role in
ensuring that the manufacturing process works effectively.
The term of the contract has been extended on a month-to-
month basis through December 31, 1999, and it is anticipated
that it will continue to be extended beyond that date. The
Company intends to modify its fee arrangement with the
manufacturer in the near future so that fees will be based
on quantity of product produced.
-37-
<PAGE>
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 the Company return
approximately $250,000 in payments under the License
Agreement. The Company maintains that ADM is not entitled
to the payments and that additional monies are owed to the
Company. 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 manufacture and
sale of AstaXin(R). 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, alleging theft of trade
secrets. 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. 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 preliminary
injunction on the basis that ADM could not demonstrate a
likelihood of success on the merits of its case. During
1998, a stay was imposed on both parties by the court while
a court-appointed expert analyzes the Company's and ADM's
yeast products. 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
$399,492 and $658,185, respectively, in 1998 and 1997
relating to this litigation, which is on-going.
(13)Income Taxes
At December 31, 1998, the Company has federal and state net
operating loss carry-forwards of approximately $22,350,000
that expire at various dates from 1999 through 2013. 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 1998
and 1997.
The sources of the deferred tax asset are approximately as
follows:
Net operating loss carry-forward benefit $ 8,940,000
Valuation allowance (8,940,000)
------------
Deferred tax asset, net $ ---
============
(14) Uncertainty
The Company has incurred net losses in each year of its
existence, aggregating approximately $25,500,000 from
inception to December 31, 1998 and its liabilities and
redeemable preferred stock exceeded its assets by
approximately $6,520,000 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 began manufacturing AstaXin(R) during 1998. The
Company believes this technology to be highly marketable.
-38-
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(14)Uncertainty (continued)
To increase working capital, the Company issued a rights
offering in February 1998, and modified the maturity of
convertible promissory notes. The Company will also
encourage the holders of convertible promissory notes to
convert them into common stock.
(15)Nature of Risks and Concentrations
The Company derived 93% of its revenue during 1998 from
sales of the product, AstaXin(R), 98% of which sales were to
one foreign distributor, located in Mexico. All of the
Company's manufacturing operations for AstaXin(R) are
conducted in a single manufacturing facility in Mexico City,
Mexico.
All of the preceding concentrations subject the Company to
certain risks. For example, it is considered at least
reasonably possible that any particular customer,
distributor, product line, or provider of services or
facilities may be lost in the near term. It is also
considered at least reasonably possible that operations
located outside the United States may be disrupted in the
near term. However, the Company has at present no
information that would lead it to believe that it will lose
its principal distributor, product, or its contracted
manufacturer; or that its operations in Mexico City will be
disrupted.
(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 1998 and 1997 were $6,979 and $5,483,
respectively, which are expensed in the 1998 and 1997
statements of operations.
(17) Subsequent Events
On January 18, 1999 certain directors and other stockholders
of the Company committed to provide up to $750,000 in
additional funding to the Company. In return, the investors
will be issued up to 12,500,000 in new shares of common
stock at $.06 per share, which was the market price of the
stock on that date. These investors will also receive
12,500,000 warrants to purchase common stock at $.06 per
share expiring in 10 years. The monies will be used to fund
continued operations of the Company and projected legal
expenses associated with the ADM litigation. Of this
commitment, $250,000 was received by the Company as of the
date of this report.
-39-
<PAGE>
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 March 31, 1999.
IGENE Biotechnology, Inc.
Date: April 13, 1999 By: /s/ Stephen F. Hiu, President
--------------------------------
By: /s/ Melissa M. Stump, Controller
--------------------------------
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.
Signature Title Date
/s/ Joseph C. Abeles Director April 13, 1999
- --------------------------
(Joseph C. Abeles)
/s/ John A. Cenerazzo Director April 13, 1999
- --------------------------
(John A. Cenerazzo)
/s/ Stephen F. Hiu Director, President, April 13, 1999
- --------------------------
(Stephen F. Hiu) and Acting Treasurer
Chief Financial Officer,
and Chief Accounting
Officer
/s/ Thomas L. Kempner Vice Chairman of Board April 13, 1999
- --------------------------
(Thomas L. Kempner)
/s/ Michael G. Kimelman Chairman of the Board April 13, 1999
- -------------------------- of Directors
(Michael G. Kimelman)
/s/ Sidney R. Knafel Director April 13, 1999
- --------------------------
(Sidney R. Knafel)
/s/ Patrick F. Monahan Director and Secretary April 13, 1999
- --------------------------
(Patrick F. Monahan)
-40-
<PAGE>
/DOCUMENT>
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<PERIOD-START> JAN-1-1998
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430,860
0
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