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, 1999
[ ] 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.
________________________________________________________
(Name of Small Business Issuer in Its Charter)
Maryland 52-1230461
________________________________ _________________________
State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.
9110 Red Branch Road, Columbia, Maryland 21045
________________________________________ ___________________
(Address of principal executive offices) (Zip Code)
(410) 997-2599
________________________________________________
(Issuer's telephone number, including area code)
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 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. [ ]
State issuer's revenues for its most recent fiscal year.
$27,441
State the aggregate market value of the voting and non-
voting common equity held by non-affiliates computed by reference
to the price at which the common equity was sold, or the average
bid and asked price of such common equity, as of a specified date
within the past 60 days. $9,228,393 as of March 1, 2000
(Note: The officers and directors of the issuer are considered
affiliates for purposes of this calculation.)
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date.
As of March 1, 2000 there were 48,098,758 shares of the issuer's
common stock outstanding.
<PAGE>
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 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.
<PAGE>
Additional foreign approval applications for AstaXin(R),
including those for the European Union, are in progress. The FDA
has also indicated to the Company that all of the necessary
documentation for the approval of the use of astaxanthin from
Phaffia as a fish feed additive has been received and should be
approved in the near future. When this occurs, it will allow the
use of AstaXin(R)in fish feed in the United States.
The Company is beginning to explore the possible use of
AstaXin(R) as a human nutritional supplement. If pursued,
additional safety tests may be required as well as pre-market
notification to the FDA. Comparable agencies in the European
Union and other foreign countries may have their own additional
registration procedures. No applications for approval of
AstaXin(R) as a human nutritional supplement have yet been
submitted.
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 and that the
Company's current products and manufacturing processes are not
associated with, and are not expected to result in any material
environmental compliance issues.
Research and Development
As of December 31, 1999, the Company had expended
approximately $11,526,000 on research and development since its
inception on October 27, 1981 and has, as of December 31, 1999,
received revenues from product sales and royalties of
approximately $2,040,000 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 2000.
Research and development expenditures for each of the last
two years are as follows:
1998 $452,755
1999 350,659
The Company's research and development activities have
resulted in the development of processes to produce the products
hereinafter discussed.
Commercial Products
AstaXin(R)
AstaXin(R) is the Company's tradename for its dried yeast
product made from a proprietary strain of yeast 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. Fish
feeding trials in Europe, Asia, and North and South America have
demonstrated the efficacy of AstaXin(R). An estimated 700,000
metric tons of farm raised salmon are produced annually
worldwide.
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.
<PAGE>
The Fermic contract provides that the manufacturer has a non-
exclusive right to produce AstaXin(R)and is paid a fee 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 through March 31, 2000. (See also item 2. Description
of Property). The Company is currently negotiating a contract
extension, including a modification of its fee arrangement with
the manufacturer so that future fees will be based on quantity of
product produced.
Based on estimates of worldwide production of farm raised
salmon, the Company believes the market for astaxanthin as a
color additive in salmon feed exceeds $200,000,000 per year
worldwide, which would be equivalent to approximately 10,000
metric tons of AstaXin(R). A single competitor, which produces a
chemically synthesized product, presently controls more than 95%
of the world market for astaxanthin as a pigment for aquaculture.
Igene's production for the year 2000 will depend on market demand
for the product, but is projected to exceed 75 metric tons of
AstaXin(R), which would be less than 1% of the potential
worldwide market for astaxanthin as a color additive in salmon
feed. The Company has significant unused production capacity at
its manufacturing plant in Mexico City which could be fully
utilized within 3 to 6 months to meet additional demand as deemed
necessary.
The Company is presently engaged in commercial trials of
AstaXin(R) with fish farming companies in Chile, which have been
successful and have resulted in total sales to date in 1999 and
through February 4, 2000 totaling approximately $100,000. The
Company is also beginning, during the first quarter of 2000, to
investigate other possible commercial uses of AstaXin(R),
including its application as a human nutritional supplement (See
also Competition).
Sales of AstaXin(R) amounted to 66% and 93% of revenue for
1999 and 1998, respectively, of which 98% of the 1998 revenue
represented sales to a single foreign distributor located in
Mexico. This distributor, to date, has had limited success in
marketing the product. Sales of AstaXin(R) in 1999 of
approximately $18,000 and subsequent sales during the quarter
ended March 31, 2000 of approximately $78,000 resulted from the
Company's marketing efforts on its own behalf, primarily based on
the completion of successful commercial sized fish production
trials with Chilean salmon farmers.
During 1997 Archer-Daniels Midland, Inc. (ADM) filed suit
against the Company alleging patent infringement regarding
AstaXin(R). The Company filed a counter-suit against ADM alleging
theft of trade secrets. This litigation is on going (See also
Item 3. Legal Proceedings).
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 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. 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.
On March 17, 1988, ClandoSan(R) was registered by the EPA
for use with 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 34% and
7% of revenue for 1999 and 1998, 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
<PAGE>
improvements, un-patented 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.
All patents and trademarks are carefully reviewed and those
with no foreseeable commercial value are abandoned to eliminate
costly maintenance fees. Patents, trademarks on technology and
products with recognized commercial value, and which the Company
is currently maintaining, include those for AstaXin(R) and
ClandoSan(R).
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, this Company has
focused its own activities on the development of proprietary
products for use in food, fermentation and agricultural
industries. In the future, however, competitors may offer
products, which, by reason of price, or efficacy, or more
adequate resources for technology advances, may be superior to
the Company's existing or future products.
A single large pharmaceutical company presently dominates
the market for astaxanthin pigment for aquaculture in which the
Company's product, AstaXin(R), is presently marketed and sold.
The Company believes that AstaXin(R) will be able to be
competitive with this dominant producer, and other producers
whose products are chemically synthesized, since AstaXin(R) is
made from yeast, which is a natural ingredient. As consumers
and producers of fish become more aware of other alternatives,
the Company believes that they will desire natural ingredients,
such as those in AstaXin(R).
Several companies are also known to be developing and
marketing other natural astaxanthin products. Some of these
companies' products are made from algae, while others are made
from yeast. The Company believes that AstaXin(R) will be
competitive with other companies' astaxanthin products which are
made from algae, due to higher production capacity, ease of
obtaining additional capacity as needed, and lower production
costs. The Company also believes that AstaXin(R) will be
competitive with other companies' astaxanthin products which are
also made from yeast due to our proprietary process to disrupt
yeast cell walls, which, as studies have shown, make AstaXin(R)
more readily absorbed by the fish.
The Company is also interested in, and is beginning to
explore, the possible use of AstaXin(R) as a human nutritional
supplement. This market is attractive because of potentially
higher profit margins. Other companies are known to also be
developing and marketing astaxanthin products for the human
nutritional supplement market. The Company can not yet predict
how competitive it would be in this market.
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, 1999, the Company had 9 employees, 8 of whom
were full-time employees. Four of the full time employees are in
administration and/or marketing, while the remainder are engaged
in research, process development and support of manufacturing
activities. The full time marketing employees include the
<PAGE>
Company's technical representative in Chile. The remainder of
the employees are based in the U.S. The Company also utilizes
various consultants on an as-needed or short-term basis.
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, on a continuing basis,
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 other equipment
which Fermic already owned. Under its agreement with this
manufacturer, the Company was to be repaid on this loan over a
two year period, which began January 1998. During 1999, the loan
has been modified so that it will be repaid by December 31, 2000.
The manufacturer owns this equipment, with the Company retaining
only a security interest until the loan is fully repaid. The
Company has also purchased approximately $245,000 of additional
manufacturing equipment for use in this manufacturing process in
Mexico, in which the Company currently retains full title.
During the fourth quarter of 1999, the Company began leasing
office space, on a month-to-month basis, in Chile, for the
conduct of marketing and technical support activities by its full-
time technical representative.
The Company currently owns or leases sufficient equipment
and facilities for its operations and all of this equipment is in
satisfactory condition and is adequately insured. There are no
current plans for improvement of this property. If demand for the
Company's product, AstaXin(R), increases, the Company plans to
lease additional, available manufacturing capacity at Fermic in
Mexico City.
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 Baltimore,
Maryland alleging patent infringement and requesting a
preliminary injunction against the Company to cease the use of
its axtaxanthin manufacturing process. On August 4, 1997, the
Company filed a $300,450,000 contract and trade secrets
counterclaim against ADM, alleging theft of trade secrets. The
Company is also claiming breach of contract, in regards to a
licensing agreement entered into by the Company and ADM in 1995.
The Company contends that it complied with all material terms of
this agreement. 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 patent infringement allegations. To date, the court has
imposed a stay on all discovery, while a court-appointed expert
analyzes the yeast products of both parties. Pursuant to an
order issued by the judge on July 16, 1999, both the Company and
ADM communicated to the court their willingness to pursue a
mediated settlement of this dispute. During the period from
October 1, 1999 through October 28, 1999, the parties were unable
to resolve the dispute through mediation. Thus, the litigation
has been returned to the court for a judicial disposition. 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 $530,882 and $399,492, respectively, in
1999 and 1998 relating to this litigation, which is on going.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
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 OTC
"bulletin board". The following table shows, by calendar
quarter, the range of representative bid prices for the Company's
common stock for 1998 and 1999.
<TABLE>
<CAPTION>
Calendar Quarter High Low
---------------- -------- --------
<S> <C> <C>
1998: First Quarter $ .1100 $ .0600
Second Quarter $ .2100 $ .1000
Third Quarter $ .1500 $ .0500
Fourth Quarter $ .0600 $ .0400
1999: First Quarter $ .1150 $ .0450
Second Quarter $ .1100 $ .0750
Third Quarter $ .0900 $ .0625
Fourth Quarter $ .0850 $ .0400
</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 approximate number of record holders of the Company's
common stock as of March 1, 2000 was 250. As of March 1, 2000,
the high bid and low offer prices for the common stock, as shown
on the "bulletin board" were $0.52 and $0.55, respectively.
Preferred Stock
There was no public market for the Company's preferred stock
during 1998 and 1999 and since January 25, 1988, no quotations
for the preferred stock have been reported on NASDAQ. The
approximate number of record holders of preferred stock as of
March 1, 2000 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, 1999 the total amount of
dividends in arrears with respect to the Company's preferred
stock was $190,562.
Dividends on common stock are currently prohibited because
of the preferential rights of holders of preferred stock. The
Company has paid no cash dividends on its common stock in the
past and does not intend to declare or pay any dividends on its
common stock in the foreseeable future.
<PAGE>
Sales of Unregistered Securities
During 1999, the Company issued to certain directors and
other accredited investors 24,791,668 new shares of common stock
at prices ranging from $.05 to $.08, based on the current market
price of the Company's stock at the time of issue. The total
proceeds received in these issues was $1,500,000. In return for
committing to these investments, these investors also received
24,791,668 warrants to purchase shares of common stock at
equivalent prices (ranging from $.05 to $.08 per share, based on
the current market price of the Company's stock at the time of
issue), expiring 10 years from the dates of issue. The funds
received in these transactions have been used to continue
operations of the Company and to fund legal expenses associated
with on going litigation (See item 3. Legal Proceedings).
During 1999, the Company issued 80,000 shares of common
stock to The Dow Chemical Co. in payment of interest on a
variable rate subordinated debenture . If paid in cash, the
interest would have been payable at 12%, 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
1999 at $2.25 per share, or $180,000, in each year.
The Company issued 866,667 shares of common stock in payment
of legal fees during 1999, recording additional capital and legal
expenses of $49,750, based on the market value of the stock at
date of issue.
All of the foregoing securities were issued pursuant to
Section 4(2) of the Securities Act of 1933.
<PAGE>
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 revenue
During the fourth quarter of 1999, the Company began large-
scale commercial trials of AstaXin(R) with several of the major
salmon farmers in Chile. These trials, which take between nine
and twelve months each to complete, resulted in sales of
AstaXin(R) of $18,131 in 1999, and have also resulted in sales of
approximately $78,500 during the first quarter of 2000. In the
first quarter of 2000, two of these customers completed their
trials with excellent results, and have indicated their desire to
expand their usage of AstaXin(R) to 5 to 10 times their current
usage, beginning in the second quarter of 2000. In addition to
sales for the first quarter of 2000, the Company has received
subsequent orders for approximately $150,000. However, there can
be no assurance that these communications and orders will result
in sales, or that they will be material. Throughout the second
through fourth quarters of 2000, other companies, whose trials
are now in progress, are expected to complete those trials.
These trials are expected to have similar results, based on
preliminary data obtained thus far, and should result in
additional and increased sales to these companies during and
following the trials. However, there can be no assurance that
such sales will occur or that they will be material. The Company
began commercial production of AstaXin(R) with a contract
manufacturer in January 1998. During 1998, the Company had
$203,860 in sales of AstaXin(R). This entire amount of 1998 sales
was to a single distributor. This distributor had not made
significant sales of AstaXin(R) to end users, and therefore the
Company discontinued marketing through this distributor during
1999 and began substantial marketing efforts on its own. The
Company also earned licensing revenue of $9,310 from ClandoSan(R)
during 1999, compared with gross revenue from licensing of
ClandoSan(R) of $14,236 in 1998, which represents a decrease of
35%. The Company has continued to focus its efforts primarily on
AstaXin(R) during 1999 and 1998. The foregoing resulted in sales
and other revenues for the year ended December 31, 1999 of
$27,441, decreased from $218,095 in 1998. This is a decrease in
overall revenue of $190,665 or 87%.
Cost of sales
During a successful implementation test of certain
improvements in its production process, which had been developed
in the Company's pilot plant, commercial production was suspended
during the first quarter of 1999. A temporary resumption of
production during the second quarter of 1999 confirmed that the
improvements resulted in increased efficiency and yields in the
manufacturing process. In June 1999, and continuing until the
present, production has been suspended, until sales volume
warranted additional production. While production was suspended,
the Company provided product for the market from its existing
inventory. The Company plans to resume commercial production in
the second quarter of 2000, since the successful trials have
resulted and are expected to continue to result in increased
sales of AstaXin(R). However, there can be no assurance that such
sales will occur or that they will be material. The preceding
resulted in cost of sales for 1999 and 1998 of $157,966 and
$809,288, respectively, a decrease of $651,322 or 80%. During
1999 and 1998, gross losses on sales of AstaXin(R) of $139,835
and $605,428, respectively, were recorded. These gross losses
were caused by inefficiencies in the initial commercial
production runs, the costs of which exceeded the market value
of the product. Production efficiency continued to improve during
1998 and 1999, and the Company expects to achieve gross profits
on sales of AstaXin(R) produced in 2000, 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.
The Company expects to incur future production costs for
AstaXin(R) of at least $200,000 per month beginning during the
second quarter of 2000, 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 1999 and 1998. The Company has discontinued
direct production and sales of this product and earns revenue
only through royalties on sales by its licensed manufacturer in
1999 and 1998, incurring no costs of sales.
<PAGE>
Marketing and selling expenses
The Company substantially increased its marketing efforts
during 1999 as it escalated the promotion of AstaXin(R). During
the commercial trials as described above, the Company delivered
large quantities of AstaXin(R) either free to the customer or at
reduced prices in exchange for agreements to purchase additional
product during the trial period. The Company's administrative
and marketing employees have traveled extensively to Chile to
promote AstaXin(R). The Company also hired a technical
representative in Chile during the fourth quarter of 1999, and
during the first quarter of 2000 has formed a foreign subsidiary
entity in Chile. The Company plans to hire an additional
technical representative during the second quarter of 2000. The
Company has also engaged, during the first quarter of 2000, a
full-time consultant to market AstaXin(R) in Europe and to
explore the market for the use of AstaXin(R) as a human
nutritional supplement. This consultant has considerable
experience in both the salmon farming industry and in the human
nutritional supplement market. The forgoing resulted in marketing
and selling expenses for 1999 and 1998 of $493,535 and $9,862,
respectively, an increase of $483,673. Marketing expenses for
AstaXin(R) are expected to continue to increase, since to achieve
continuing and increasing 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
A decrease in research, development and pilot plant expenses
resulted from the continuing transfer of efforts from the pilot
plant to direct support of commercial manufacturing during 1999.
Research, development and pilot plant expenses for 1999 and 1998
were $350,659 and $452,755, respectively, a decrease of $102,096,
or 23%. 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, development of higher yielding
strains of yeast and other improvements in the Company's
AstaXin(R) technology. However, there can be no assurance that
such improvements in efficiency and yield will occur, or that
they will be material. These expenses are expected to be funded
through June of 2000 by available cash and additional funding
from stockholders, and by profitable operations beyond that date,
if profitable operations occur.
General and administrative expenses
General and administrative expenses for 1999 and 1998 were
$324,239 and $502,564, respectively, a decrease of $178,325, or
35%. This decrease resulted primarily from the Company's
operating without a designated CEO during 1999. The Company does
not plan to hire a replacement in the near future, but will
continue to be operated by its 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 2000 by available cash and
additional funding from stockholders, and by profitable
operations beyond that date, if profitable operations occur.
Litigation expenses
Management expects to ultimately recover litigation
expenses, which are associated with the suit filed against the
Company by ADM and the Company's counterclaim, 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. Litigation expenses for 1999 and 1998 were
$530,882 and $399,492, respectively, an increase of $131,390 or
33%. 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.
Interest expense (net of interest income)
Net interest expense for 1999 and 1998 was $695,500 and
$540,275, respectively, an increase of $155,225, or 29%. This
increase resulted from additional debt of $5,000,000 issued in
the Company's rights offering of March 1998 and a reduction in
interest income of $60,565.
<PAGE>
Net loss and net loss per common share
As a result of the foregoing, the Company reported net
losses of $(2,525,340) and $(2,499,694), respectively, for 1999
and 1998; an increased loss of $(25,646) or 1%. This is a loss
of $(.08) and $(.12) per share, respectively, for 1999 and 1998.
The weighted average number of shares of common stock outstanding
of 33,979,575 and 20,672,092, respectively, for 1999 and 1998
have increased by 13,307,483 shares. This resulted from the
issuance of 80,000 shares during 1999 in lieu of interest payment
on a subordinated debenture, the conversion of 3,125 shares of
preferred stock into 6,250 shares of common stock, the issue of
24,791,668 shares of stock to directors and other investors in
direct purchases, and the issuance of 866,667 shares of common
stock in payment of legal fees during 1999.
Financial Position
During 1999 and 1998, the following actions materially affected
the Company's financial position:
* The Company loaned $500,000 in 1997 to its contract
manufacturer of AstaXin(R) for the purchase of manu-
facturing equipment needed for the production of
AstaXin(R). The loan was originally repayable over 23
months, beginning January 1998, with interest at 10%.
During 1999, the loan repayment schedule was modified so
that the loan matures December 31, 2000. The remaining
balance of this loan is $206,780 and $250,783, respectively
as of December 31, 1999 and 1998.
* The Company purchased $73,171 in manufacturing equipment in
1998 for use in the production of AstaXin(R). The Company
also purchased $28,593 and $58,354, respectively, of other
equipment in 1999 and 1998, primarily for use in its pilot
plant facility.
* The Company issued $950,000 in debt during 1998 which was
cancelled and repaid in March 1998 through use of proceeds
from a rights offering. The Company then 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
$42,342 and $31,757, respectively, was amortized in 1999
and 1998. The net proceeds from the rights offering were
$1,963,287.
* The Company retained inventory from manufacture of
AstaXin(R) of $707,595 and $870,260, respectively, as of
December 31, 1999 and 1998, a decrease of $162,665 from
1998.
* The Company issued 80,000 shares in each of 1999 and 1998
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
1999 and 1998.
* The carrying value of redeemable preferred stock was
increased and paid-in capital available to common
shareholders was decreased by $18,438 and $18,940,
respectively, in 1999 and 1998, reflecting cumulative
unpaid dividends on redeemable preferred stock.
* Holders of redeemable preferred stock and limited
redemption preferred stock converted 3,125 and 187,500
shares, respectively, in 1999 and 1998, of preferred stock
into 6,250 and 375,000 shares, respectively, of common
stock, providing additional capital and reducing the
liquidation value of redeemable preferred stock by $47,000
in 1999.
* The Company issued 866,667 and 2,190,000 shares,
respectively, of common stock in payment of legal fees in
1999 and 1998, recording additional capital and legal
expenses of $49,750 and $162,000, respectively, based on
the market value of the stock at date of issue.
* 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.
* The Company received $1,500,000 in proceeds during 1999 in
issuances of 24,791,668 shares of new common stock through
direct purchases by directors and other accredited
investors.
<PAGE>
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, 1999, total dividends in arrears on
the Company's preferred stock total $190,562 ($7.20 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 and loans from stockholders. As of December
31, 1999 the Company had working capital of $1,040,018, and cash
and cash equivalents of $216,297.
Cash used by operating activities in 1999 and 1998 amounted
to $(1,670,093) and $(2,731,077), respectively.
Cash provided by investing activities decreased by $107,580,
from $129,174 in 1998 to $21,594 in 1999. This is a result of
capital expenditures for manufacturing equipment relating to
production of AstaXin(R) in 1998, and repayments of $249,217
loaned to Fermic for the purchase of manufacturing equipment
relating to production of AstaXin(R) in 1998.
Cash provided by financing activities decreased by
$1,442,151 from $2,942,151 in 1998 to $1,500,000 in 1999.
Financing activities included net proceeds of $950,000 from
issuance of notes to directors and $1,963,287 in net proceeds
from a rights offering in 1998 and were entirely composed of
proceeds of $1,500,000 from issuances of new common stock through
direct purchases by directors and other accredited investors in
1999.
Over the next twelve months, the Company believes it will
need at least $2,000,000 in additional working capital. The
Company hopes to achieve this from profits from sales of
AstaXin(R) and additional stockholder funding through direct
purchases of stock. On February 8, 2000, certain directors of
the Company committed to provide up to $1,000,000 in additional
funding to the Company through direct purchases of stock.
However, there can be no assurance that profits, if any, from
sales, or additional funding will be available to the Company to
fund its continued operations. The Company intends to spend
approximately $420,000 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 1999 and 1998.
ITEM 7. FINANCIAL STATEMENTS
The financial statements appear after Part IV of this
Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
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 61 Chairman of the Board
of Directors
Thomas L. Kempner 72 Vice Chairman
of the Board of Directors
Stephen F. Hiu 43 Director, President, Treasurer,
and Director of Research and
Development
Patrick F. Monahan 49 Director, Secretary,
and Director of Manufacturing
Joseph C. Abeles 85 Director
John A. Cenerazzo 76 Director
Sidney R. Knafel 69 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., Fuel
Cell Energy, Inc. , Intermagnetics General Corp., and Roper
Starch Worldwide, Inc. He is a Director Emeritus of Northwest
Airlines, 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
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 of 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.
<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 of U.S. Axle Corporation and
Chairman and Director of Technicon Enterprises, Inc.
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 1999, 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 and
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. During 1999,
certain directors and other accredited investors also purchased
stock through direct purchases of new stock and received warrants
in conjunction with these purchases. The Company believes that
none of the foregoing securities were reported by these directors
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 1999 and 1998, no executive officer's annual cash
compensation exceeded $100,000. Following the resignation of the
Company's former CEO, Ramin Abrishamian during 1998, the
functions of chief executive officer have been performed by the
Company's Board of Directors (Messrs. Abeles, Cenerazzo, Hiu,
Kempner, Kimelman, Knafel, and Monahan (see Item 9)) acting as a
group. During 1999 and 1998 the Directors were not compensated
for their Board or Committee activities.
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 1998 were $6,979, which
is expensed in the 1998 statement of operations. The Company's
contributions to the plan for 1999 were $6,569, which is expensed
in the 1999 statement of operations.
Stock Option Plans
- ------------------
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.
A committee of the Board of Directors administers the Plans.
<PAGE>
The purpose of the Plans 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.
The Plans contain anti-dilution provisions in the event of
certain corporate transactions.
The Board of Directors may at any time withdraw from, or
amend, the Plans and any options not heretofore granted.
Stockholder approval is required to (i) increase the number of
shares issuable under the Plans, (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 1997 Plan after
September 19, 2007 and no additional options may be granted under
the 1986 Plan.
Options to acquire 8,660,584 shares of common stock have
been granted under the 1986 and 1997 Stock Option Plans and
8,070,750 options are outstanding under the Plans as of December
31, 1999. 1,742,865 options were granted during 1999.
Subsequent to December 31, 1999, an additional 4,677,500 options
were granted to employees on January 19, 2000.
Compensation of Directors
- -------------------------
During 1999, Directors were not compensated for their Board
or Committee activities.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information as of March 1,
2000 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>
Directors and officers
- ----------------------
Joseph C. Abeles 15,012,789(1) 24.57
220 E. 42nd Street
New York, NY 10017
John A. Cenerazzo 1,912,456(2) 3.84
PO Box 4067
Reading, PA 19606
Stephen F. Hiu 5,030,500(3) 9.45
9110 Red Branch Road
Columbia, MD 21045
Thomas L. Kempner 66,532,836(4) 65.75
61 Broadway
New York, NY 10006
Michael G. Kimelman 10,218,950(5) 18.00
100 Park Avenue
New York, NY 10017
Sidney R. Knafel 63,659,933(6) 64.51
126 East 56th Street
New York, NY 10022
Patrick F. Monahan 3,074,400(7) 6.00
9110 Red Branch Road
Columbia, MD 21045
All Directors and Officers 165,441,864(8) 90.50
as a Group (7 persons)
Others
- -------
Thomas R. Grossman 3,192,150(9) 6.43
461 Grant Road
North Salem, NY 10560
Fraydun Manocherian 9,232,500(10) 16.42
3 New York Plaza
New York, NY 10004
</TABLE>
* Under the rules of the Securities and Exchange Commission, the
calculation of the percentage assumes for each person that only
that person's rights, warrants, options or convertible notes or
preferred stock are exercised or converted, and that no other
person exercises or converts outstanding rights, warrants,
options or convertible notes or preferred stock. Accordingly,
these percentages are not on a fully-diluted basis.
<PAGE>
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; 4,955,000 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 5,666,916 shares, 1,616,066 shares
subject to the conversion of $140,872 of long-term notes
issued by the Company; and 21,628,007 warrants held by a
trust under which Mr. Kempner is one of two trustees
and the sole beneficiary. Also includes 5,626,918 shares;
1,616,067 shares subject to the conversion of $140,873 of
long-term notes issued by the Company; and 21,606,405
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 1,661,360 shares; 1,500,000 options currently
exercisable, 804,568 shares subject to the conversion of
$63,070 of long-term notes issued by the Company; and
6,253,022 warrants.
6. Includes 13,190,551 shares; 3,715,706 shares subject to the
conversion of $306,200 of long-term notes issued by the
Company; and 46,753,676 warrants owned or beneficially owned
by Mr. Knafel.
7. Includes 24,400 shares; 3,000,000 options currently
exercisable; and 50,000 warrants held by Mr. Monahan.
8. Includes 30,849,426 shares of common stock; 14,750 shares
issuable upon the conversion of 7,375 shares of preferred
stock; 9,487,750 options currently exercisable; 13,174,478
shares issuable upon the conversion of $5,656,030 of long-
term notes issued by the Company; and 111,915,460 warrants.
9. Includes 1,753,400 shares of common stock and 1,438,750
warrants.
10. Includes 1,201,500 shares of common stock owned or
beneficially owned by Mr. Manocherian and 8,031,000 warrants
held or beneficially owned by Mr. Manocherian.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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, and
issued $5,000,000 in 8% Notes due March 31, 2003 and 50,000,000
warrants to subscribers. Certain directors and investors 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 certain directors and investors agreeing to
subscribe to Units such that the Company receives at least
$2,000,000, the Company issued additional warrants to these
directors and 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. ($5,000,000 of these 8% notes and
49,997,300 of these warrants remained outstanding as of March 1,
2000)
During 1998, the Company also issued 4,000,000 warrants to
purchase common shares, at $.10 per share, to its Chairman of the
Board; and 9,500,000 warrants to purchase common shares, at $.10
per share, to certain directors who were the holders of $950,000
in demand notes issued during 1998.
During 1999, the Company also issued 1,500,000 options to
purchase common shares, at $.05 per share (which was the market
value of the stock as of the date issued), to its Chairman of the
Board under its 1997 Stock Option Plan.
During 1999, the Company issued to certain directors and
other accredited investors 24,791,668 new shares of common stock
at prices ranging from $.05 to $.08, based on the current market
price of the Company's stock at the time of issue. The total
proceeds received in these issues was $1,500,000. In return for
committing to these investments, these investors also received
24,791,668 warrants to purchase shares of common stock at
equivalent prices (ranging from $.05 to $.08 per share, based on
the current market price of the Company's stock at the time of
issue), expiring 10 years from the dates of issue. The funds
received in these transactions have been used to continue
operations of the Company and to fund legal expenses associated
with on going litigation (See item 3. Legal Proceedings).
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON
FORM 8-K
A.1. The following financial statements relating to 1999 and 1988
are filed as a part of this Report:
Independent Auditors' Report.
Balance Sheet as of December 31, 1999.
Statements of Operations for the years ended December 31,
1999 and December 31, 1998.
Statements of Stockholders' Deficit for the years ended
December 31, 1999 and December 31, 1998.
Statements of Cash Flows for the years ended December 31,
1999 and December 31, 1998.
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 now Dow Chemical Company, Inc. (f.k.a.
Essex Industrial Chemicals, Inc.),. with respect to the
exchange of 187,500 shares of preferred stock for a
Debenture, constituting Exhibit 10.21 to Registration
Statement No. 33-5441 on Form S-1, is hereby
incorporated herein by reference.
10.3 Preferred Stockholders' Waiver Agreement dated May 5,
1988, incorporated by reference to the identically
numbered exhibit in Form S-1 Registration Statement No.
33-23266.
10.4 Form of Agreement between the Registrant and Certain
Investors in Preferred Stock dated September 30, 1987,
incorporated by reference to the identically numbered
exhibit in Amendment No. 1 to Form S-1 Registration
Statement No. 33-23266.
10.5 Letter Agreement executed May 11, 1995 between Archer
Daniels Midland, 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.
<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
23. Consents of Berenson & Company LLP
27. Financial Data Schedule
(b) No reports on Form 8-K were filed during the Fourth Quarter
of 1999.
<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, 1999 and the
results of its operations and its cash flows for the years ended
December 31, 1999 and 1998 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
New York, NY
February 25, 2000
<PAGE>
<TABLE>
<CAPTION>
IGENE Biotechnology, Inc.
Balance Sheet
December 31, 1999
ASSETS
CURRENT ASSETS
<S> <C>
Cash and cash equivalents $ 216,297
Accounts receivable (note 15) 24,267
Inventory 707,595
Loan Receivable (note 3) 206,780
Prepaid expenses and other current assets 153,160
-------------
TOTAL CURRENT ASSETS 1,308,099
OTHER ASSETS
Property and equipment, net (note 4) 366,484
Other assets (note 7) 142,489
-------------
TOTAL ASSETS $ 1,817,072
=============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses (note 5) $ 268,081
LONG-TERM DEBT
Notes payable (note 7) 6,082,500
Variable rate subordinated debenture (notes 6 and 7) 1,500,000
Accrued interest (note 7) 851,550
-------------
TOTAL LIABILITIES 8,702,131
=============
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 $15.20 per share. Authorized 1,312,500 shares;
issued and outstanding 26,467 shares. Redemption amount
$402,298 (notes 8 and 9) 402,298
============
STOCKHOLDERS' DEFICIT (notes 8 and 9)
Common stock -- $.01 par value per share. Authorized
250,000,000 shares; issued and outstanding
47,598,758 shares 475,988
Additional paid-in capital 20,238,904
Deficit (28,002,249)
============
TOTAL STOCKHOLDERS' DEFICIT (7,287,357)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,817,072
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
IGENE Biotechnology, Inc.
Statements of Operations
Years ended December 31,
1999 1998
------------- -------------
<S> <C> <C>
Sales $ 18,131 $ 203,860
Cost of sales 157,966 809,288
------------- -------------
Gross profit (loss) (139,835) (605,428)
Technology licensing income 9,310 14,235
------------- -------------
Net revenue (130,525) (591,193)
------------- -------------
Operating expenses:
Marketing and selling 493,535 9,862
Research, development and pilot plant 350,659 452,755
General and administrative 324,239 502,564
Litigation expenses (note 12) 530,882 399,492
------------- -------------
Total operating expenses 1,699,315 1,364,673
------------- -------------
Operating loss (1,829,840) (1,955,866)
Other expenses:
Miscellaneous --- 3,553
Interest expense (net of interest
income of $14,000 and $74,565,
respectively, in 1999 and 1998) 695,500 540,275
------------- -------------
Net Loss (2,525,340) (2,499,694)
Deficit at beginning of year (25,476,909) (22,977,215)
------------- -------------
Deficit at end of year $(28,002,249) $(25,476,909)
============= =============
Net loss per common share (note 10) $ (0.08) $ (0.12)
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
IGENE Biotechnology, Inc.
Statements of Stockholders' Deficit
Redeemable
Preferred Stock Preferred Stock
------------------- -------------------
# shares Amount # shares Amount
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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 --- ---
Issuance of common stock in lieu
of cash in payment of interest on
subordinated debenture (note 6) --- --- --- ---
Cumulative undeclared dividends
on redeemable preferred stock --- 18,438 --- ---
Conversion of redeemable preferred
stock into common stock (3,125) (47,000) --- ---
Issuance of common stock in lieu of
cash in payment of legal fees --- --- --- ---
Issuance of shares of common stock
pursuant to direct purchase of shares
by certain directors and other
accredited investors (note 3) --- --- --- ---
Net loss for 1999 --- --- --- ---
--------- --------- --------- ---------
Balance at December 31, 1999 26,467 $402,298 --- $ ---
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
IGENE Biotechnology, Inc.
Statements of Stockholders' Deficit (Continued)
Additional Total
----Common Stock---- Paid-in Stockholders'
# Shares Amount Capital Deficit Deficit
---------- -------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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)
---------- -------- ----------- ------------- ------------
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 --- --- (18,438) --- (18,438)
Conversion of redeemable preferred
stock into common stock 6,250 62 46,938 --- 47,000
Issuance of common stock in lieu of
cash in payment of legal fees 866,667 8,667 41,083 --- 49,750
Issuance of shares of common stock
pursuant to direct purchase of shares
by certain directors and other
accredited investors (note 3) 24,791,668 247,917 1,252,083 --- 1,500,000
Net loss for 1999 --- --- --- (2,525,340) (2,525,340)
---------- -------- ----------- ------------- ------------
Balance at December 31, 1999 47,598,758 $475,988 $20,238,904 $(28,002,249) $(7,287,357)
========== ======== =========== ============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
IGENE Biotechnology, Inc.
Statements of Cash Flows
Years ended December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,525,340) $ (2,499,694)
Adjustments to reconcile net loss to net
Cash used by operating activities:
Depreciation 31,706 43,438
Amortization of debt issue costs 42,342 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 49,750 162,000
Decrease (increase) in:
Accounts receivable (24,267) 14,494
Inventory 162,665 (870,260)
Prepaid expenses and supplies (58,082) (90,368)
Increase (decrease) in:
Accounts payable and other accrued expenses 471,132 294,003
-------------- --------------
Net cash used in operating activities (1,670,094) (2,731,077)
-------------- --------------
Cash flows from investing activities:
Proceeds from disposal of equipment 460 11,482
Return of security deposit 5,725 ---
Capital expenditures (28,593) (131,525)
Repayments of loan receivable 44,003 249,217
-------------- --------------
Net cash provided by investing activities 21,595 129,174
-------------- --------------
Cash flows from financing activities:
Repayments by stockholders --- 28,594
Proceeds from issuance of common stock 1,500,000 270
Proceeds from rights offering --- 1,963,287
Issuance of other debt --- 950,000
-------------- --------------
Net cash provided by financing activities 1,500,000 2,942,151
-------------- --------------
Net increase (decrease) in cash
and cash equivalents (148,499) 340,248
Cash and cash equivalents - beginning of the year 364,796 24,548
-------------- --------------
Cash and cash equivalents - end of the year $ 216,297 $ 364,796
============== ==============
Supplementary disclosure and cash flow information:
Cash paid during the year for interest $ 558 $ 924
Cash paid during the year for income taxes --- ---
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
IGENE Biotechnology, Inc.
Statements of Cash Flows
(continued)
Non-cash investing and financing activities:
During 1999 and 1998, 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%, 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 1999 and 1998 at
$2.25 per share, or $180,000, in each year. (See also note 6)
During 1999 and 1998 the Company recorded dividends in arrears
on 8% redeemable preferred stock at $.64 per share aggregating
$18,438 and $18,940, 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 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.
The accompanying notes are an integral part of the financial
statements.
<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, is as follows:
<TABLE>
<S> <C>
Raw materials $ 7,050
Work-in-process ---
Finished goods 700,545
------------
Total inventory $ 707,595
============
</TABLE>
Inventory has been reduced by approximately $185,000 during
1999 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.
<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 recorded 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 1999 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 1999 or 1998. Had
compensation cost been determined on the basis of FASB
Statement 123, the following changes would have resulted:
<TABLE>
1999 1998
------------- --------------
<S> <C> <C>
Net loss:
As reported $ (2,525,340) $ (2,499,694)
Pro forma (2,567,336) (2,572,480)
Net loss per common share:
As reported $ (.08) $ (.12)
Pro forma (.08) (.12)
</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.
<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
was originally payable over 23 months, but its maturity has
been extended to December 31, 2000 with interest at 10%. As
of December 31, 1999, the remaining balance of $206,780 is
classified as a current asset.
(4) Property and Equipment
----------------------
Property and equipment are stated at cost and are summarized
as follows:
<TABLE>
<S> <C>
Laboratory equipment and fixtures $ 122,998
Pilot plant equipment and fixtures 98,429
Manufacturing equipment 267,464
Idle equipment 56,150
Office furniture and fixtures 29,820
-----------
574,861
Less accumulated depreciation (208,377)
-----------
$ 366,484
===========
</TABLE>
Idle equipment represents manufacturing equipment, which is
not presently needed for production of AstaXin(R). The
Company plans to retain the equipment for use when needed
due to increased production volume. This equipment is not
currently being depreciated and its cost approximates its
fair value.
(5) Accounts Payable and Accrued Expenses
-------------------------------------
Accounts payable and accrued expenses consist of the
following:
Accounts payable, trade $ 205,681
Accrued interest on variable rate
subordinated debenture (see note 6) 45,000
Audit fees 17,400
___________
$ 268,081
===========
(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 1999 and 1998 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, 1999 is recorded in these financial statements.
<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. The notes are convertible in total to
13,174,478 shares of common stock. Concurrently with such
issuance, the holders also received 13,174,478 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>
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 at March
31, 1998, as described below.
<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 was $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
(49,997,300 of these warrants remain outstanding as of
December 31, 1999). 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, 1999, these debt issue costs, which are
included as part of other assets, are shown in the financial
statements as follows:
Debt issue costs $ 211,713
Accumulated amortization (74,100)
------------
$ 137,613
============
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(7) Notes Payable (continued)
-------------------------
Notes Payable are summarized as follows as of December 31,
1999:
<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 $ 151,550
Long-term notes payable, bearing interest
at 8%, maturing March 31, 2003 5,000,000 700,000
---------- ----------
$6,082,500 $ 851,550
========== ==========
</TABLE>
Combined aggregate amounts of maturities for all long-term
borrowings are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ---------
<S> <C> <C>
2000 ---
2001 ---
2002 1,500,000
2003 6,934,050
</TABLE>
(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 the exchange of
certain redeemable preferred stock for a debenture).
Mandatory redemption is required by October 2002. As of
December 31, 1999, cumulative dividends in arrears total
$190,562 ($7.20 per share) and are included in the carrying
value of redeemable preferred stock.
<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, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Number Price Number Price
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Options outstanding
and exercisable,
beginning of year 6,327,885 $ .077 1,670,750 $ .050
Options granted 1,742,865 $ .055 4,947,719 $ .099
Options exercised --- --- --- ---
Options forfeited,
or withdrawn with
consent of holders --- --- (290,584) $ .055
Options expired --- --- --- ---
---------- -------- ---------- --------
Options outstanding
and exercisable,
end of year 8,070,750 $ .072 6,327,885 $ .077
========== ======== ========== ========
</TABLE>
Warrants
--------
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 March 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, 1999.
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.
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(9) Stockholders' Equity (continued)
--------------------------------
During 1999, the Company issued 24,791,668 warrants to
certain directors and investors who committed to purchase
new shares of common stock through direct purchases of
24,791,668 shares of common stock for a total price of
$1,500,000. The shares of stock and the warrants were
issued at various prices ranging from $.05 to $.08 per
share, based on the market value of the Company's stock at
the time of the commitment.
The following table summarizes warrants issued, outstanding
and exercisable:
<TABLE>
<CAPTION>
As of December 31,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Issued 125,756,545 100,964,877
Outstanding 125,753,845 100,962,177
Exercisable 125,753,845 100,962,177
</TABLE>
Common Stock
------------
At December 31, 1999, 125,753,845 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, 52,934 shares of
authorized but unissued common stock were reserved for
issuance upon conversion of the Company's outstanding
preferred stock, 140,000 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 13,174,478 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 1999 holders of redeemable preferred stock converted
3,125 shares of preferred stock into 6,250 shares of common
stock of the Company.
At December 31, 1999, cumulative dividends in arrears
totaled $190,562 ($7.20 per share) and were included in the
aggregate involuntary liquidation value of the preferred
stock.
At December 31, 1999, 187,500 shares of authorized but
unissued preferred stock were reserved for issuance upon
maturity of the variable rate subordinated debenture.
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(10) Net Loss Per Common Share
-------------------------
Net loss per common share for 1999 and 1998 is based on
33,979,575 and 20,672,092 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 1999 and 1998 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, 1999 and 1998 approximated $78,000 and
$67,000, respectively.
Future minimum rental payments, in the aggregate and for
each of the next five years are as follows:
<TABLE>
<CAPTION>
Year Amount
---- -------
<C> <C>
2000 $59,360
2001 4,947
2002 ---
2003 ---
2004 ---
-------
$64,307
=======
</TABLE>
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 through March 31,
2000. The Company is currently negotiating to extend and
modify its fee arrangement with the manufacturer so that
fees for subsequent periods will be based on quantity of
product produced.
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(12) Contingencies
-------------
On July 21, 1997 Archer Daniels Midland, Inc. (ADM) filed
suit against the Company in the U.S. District Court in
Baltimore, Maryland alleging patent infringement and
requesting a preliminary injunction against the Company to
cease the use of its axtaxanthin manufacturing process. On
August 4, 1997, the Company filed a $300,450,000 contract
and trade secrets counterclaim against ADM, alleging theft
of trade secrets. The Company is also claiming breach of
contract, in regards to a licensing agreement entered into
by the Company and ADM in 1995. The Company contends that it
complied with all material terms of this agreement. 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
patent infringement allegations. To date, the court has
imposed a stay on all discovery, while a court-appointed
expert analyzes the yeast products of both parties.
Pursuant to an order issued by the judge on July 16, 1999,
both the Company and ADM communicated to the court their
willingness to pursue a mediated settlement of this dispute.
During the period from October 1, 1999 through October 28,
1999, the parties were unable to resolve the dispute through
mediation. Thus, the litigation has been returned to the
court for a judicial disposition. 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 $530,882 and $399,492, respectively,
in 1999 and 1998 relating to this litigation, which is on
going.
(13) Income Taxes
------------
At December 31, 1999, the Company has federal and state net
operating loss carry-forwards of approximately $23,003,000
that expire at various dates from 2000 through 2019. 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 1999
and 1998.
The sources of the deferred tax asset are approximately as
follows:
<TABLE>
<S> <C>
Net operating loss carry-forward benefit $ 9,201,000
Valuation allowance ( 9,201,000)
------------
Deferred tax asset, net $ ---
============
</TABLE>
(14) Uncertainty
-----------
The Company has incurred net losses in each year of its
existence, aggregating approximately $28,000,000 from
inception to December 31, 1999 and its liabilities and
redeemable preferred stock exceeded its assets by
approximately $7,287,000 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 and selling AstaXin(R) during
1998 and 1999. The Company believes this technology to be
highly marketable.
<PAGE>
IGENE Biotechnology, Inc.
Notes to Financial Statements
(continued)
(14) Uncertainty (continued)
-----------------------
To increase working capital, the Company issued a rights
offering in March 1998, and modified the maturity of
convertible promissory notes. Since a majority of the 8%
Notes are held by officers and directors of the Company, the
Company believes that these holders will use the notes to
exercise warrants issued concurrently with those notes, so
that the notes will not be repaid in cash. However, there
can be no assurance that these holders will use their notes
to exercise these warrants.
During 1999, the Company funded its operations through the
issuance of stock through direct purchases by directors and
other accredited investors. This provided additional
capital of $1,500,000.
(15) Nature of Risks and Concentrations
----------------------------------
The Company derived approximately 66% and 93%, respectively,
of its revenue during 1999 and 1998 from sales of the
product, AstaXin(R). During 1998, 98% of these sales were to
one foreign distributor, located in Mexico. Substantially
all of the Company's 1999 sales were to fish producers in
the aquaculture industry located in Chile. 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 product, or its contracted manufacturer; or
that its operations in Mexico City or Chile will be
disrupted. The Company discontinued its relationship with
its distributor in Mexico during 1999, and is now serving as
its own distributor and marketer, since that distributor had
been unable to sell material quantities of the Company's
product to end-users.
(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 U.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 1999 and 1998 were $6,569 and $6,979,
respectively, which are expensed in the 1999 and 1998
Statements of operations.
(17) Subsequent Events
-----------------
On February 8, 2000, certain directors of the Company
committed to provide up to $1,000,000 in additional funding
to the Company. In return, these directors will be issued
up to 10,000,000 new shares of common stock at $.10 per
share, which was the market price of the stock on February
8, 2000. In return for committing to this funding, these
investors will also receive 10,000,000 warrants to purchase
common stock at $.10 per share expiring in 10 years. This
money will be used to fund continuing operations of the
Company and projected legal expenses associated with on
going litigation. The Company has not received any of these
funds as of the report date.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in Columbia,
Howard County, State of Maryland on April 6, 2000.
IGENE Biotechnology, Inc.
---------------------------------------
(Registrant)
By: /S/ Stephen F. Hiu, President
--------------------------------
Date: April 6, 2000
--------------------------------
By: /S/ Melissa M. Stump, Controller
--------------------------------
Date: April 6, 2000
--------------------------------
In accordance with the Exchange Act, this report is to be signed
below by the following persons on behalf of the registrant and in
the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------------- --------------------------- --------------
<S> <C> <C>
/s/ Joseph C. Abeles Director April 6, 2000
- ----------------------------
(Joseph C. Abeles)
/s/ John A. Cenerazzo Director April 6, 2000
- ----------------------------
(John A. Cenerazzo)
/s/ Stephen F. Hiu Director, President, April 6, 2000
- ----------------------------
(Stephen F. Hiu) Treasurer,
Chief Financial Officer, and
Chief Accounting Officer
/s/ Thomas L. Kempner Vice Chairman of Board April 6, 2000
- ----------------------------
(Thomas L. Kempner) of Directors
/s/ Michael G. Kimelman Chairman of the Board April 6, 2000
- ----------------------------
(Michael G. Kimelman) of Directors
/s/ Sidney R. Knafel Director April 6, 2000
- ----------------------------
(Sidney R. Knafel)
/s/ Patrick F. Monahan Director and Secretary April 6, 2000
- ----------------------------
(Patrick F. Monahan)
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the
Registration Statement on form S-8 pertaining to the 1986 Stock
Option Plan of IGENE Biotechnology, Inc. of our report dated
March 5, 1999, with respect to the financial statements of IGENE
Biotechnology, Inc. included in the annual report (Form 10-KSB)
of IGENE Biotechnology, Inc. for the year ended December 31,
1998.
BERENSON & COMPANY LLP
New York, NY
April 5, 2000
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the
Registration Statement on form S-8 pertaining to the 1997 Stock
Option Plan of IGENE Biotechnology, Inc. of our report dated
February 25, 2000, with respect to the financial statements of
IGENE Biotechnology, Inc. included in the annual report (Form 10-
KSB) of IGENE Biotechnology, Inc. for the year ended December 31,
1999.
BERENSON & COMPANY LLP
New York, NY
April 5, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 216,297
<SECURITIES> 0
<RECEIVABLES> 24,267
<ALLOWANCES> 0
<INVENTORY> 707,595
<CURRENT-ASSETS> 1,308,099
<PP&E> 574,861
<DEPRECIATION> 208,377
<TOTAL-ASSETS> 1,817,072
<CURRENT-LIABILITIES> 268,081
<BONDS> 8,434,050
402,298
0
<COMMON> 475,988
<OTHER-SE> (7,763,345)
<TOTAL-LIABILITY-AND-EQUITY> 1,817,072
<SALES> 18,131
<TOTAL-REVENUES> 27,441
<CGS> 157,966
<TOTAL-COSTS> 1,699,315
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 695,500
<INCOME-PRETAX> (2,525,340)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,525,340)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,525,340)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>