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SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d)OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File No.
December 31, 1995 1-8568
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FOR FISCAL YEAR ENDED COMMISSION FILE NO.
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DECEMBER 31, 1997 001-08568
IGI, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 01-0355758
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 01-0355758
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
Wheat Road and Lincoln Avenue, Buena, NJ 08310
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(Address of principal executive offices) (Zip code)
WHEAT ROAD AND LINCOLN AVENUE, BUENA, NJ 08310
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(609) 697-1441
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:-697-1441
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Common Stock ($.01 par value)
Registered on the American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ------ ------[X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of thethis Form 10-K or any
amendment to this Form 10-K. [X]
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33
[_]
The aggregate market value of the Registrant's Common Stock, par value $.01
per share, held by non-affiliates of the Registrant at March 15, 1996,July 31, 1998, as
computed by reference to the closinglast trading price of such stock, was
approximately $48,000,000.$16,600,000.
The number of shares of the Registrant's Common Stock, par value $.01 per
share, outstanding at March 15, 1996July 31, 1998 was 9,269,4209,466,667 shares.
Documents Incorporated by Reference:
Portions of the Proxy Statement to be sent to stockholders in connection
with the annual meeting to be held on May 8, 1996, are incorporated by
reference into Items 10, 11, 12, and 13 (Part III) of this Report.DOCUMENTS INCORPORATED BY REFERENCE: None.
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PartPART I
ItemITEM 1. BusinessBUSINESS
IGI, Inc. ("IGI" or the "Company") was incorporated in Delaware in 1977. Its
executive offices are at Wheat Road and Lincoln Avenue, Buena, New Jersey. The
Company is a diversified company engaged in two business segments:
. Animal Health Products Business - productionBusiness--production and marketing of animal health
-------------------------------
products such as poultry vaccines, veterinary pharmaceuticals and other
products, including nutritional supplements and grooming aids; and
. Cosmetics and Consumer Products Business - productionBusiness--production and marketing of ----------------------------------------
cosmeticcosmetics and
skin care products.
IGI is committed to grow by applying its technology to deliver cost
effective solutions to customer problems. IGI solves problems in poultry
production, pet care and consumer products such asand skin care markets. An increasing number
of its solutions are based on the patented Novasome(R) microencapsulation
technology. Licensed from a former subsidiary, the technology offers value-
added qualities to cosmetics, skin care products, chemicals, biocides,
pesticides, fuels, vaccines, medicines, foods, beverages, pet care products
and shampoos.
Since 1987,other products.
IMPORTANT DEVELOPMENTS
The Company has recently replaced a number of key personnel. On May 11,
1998, the earningsCompany employed Paul Woitach as its President and Chief Operating
Officer. On June 1, 1998, John F. Wall joined the Company as its Senior Vice
President and Chief Financial Officer. As of June 15, 1998, the Company has
hired a new Vice President of Vineland Operations, a new Vice President of
Vineland Research and Development, a new Vice President of International
Marketing and Sales and new Managers of Production and Quality Control. The
Company has also added managers with experience in materials and supply chain
management. Most of the new managers have experience in the poultry vaccine
industry. The Company has added these new employees without increasing its
historical overall payroll expenses.
From June 4, 1997 through March 27, 1998, the Company was subject to an
order by the Center for Veterinary Biologics ("CVB") of the United States
Department of Agriculture ("USDA") to stop distribution and sale of certain
serials and subserials of designated poultry vaccines produced by the
Company's Vineland Laboratories Division ("Stop Shipment Order"). The Stop
Shipment Order was based on CVB's findings that the Company shipped serials
before the Animal and Plant Health Inspection Service division of the USDA
("APHIS") had the opportunity to confirm the Company's testing results, failed
to destroy serials reported to APHIS as destroyed, and in general failed to
keep complete and accurate records and to submit accurate reports to APHIS.
The Stop Shipment Order affected 36 of the Company's USDA-licensed vaccines.
In July 1997, the Office of Inspector General of the USDA ("OIG") advised the
Company of its commencement of an investigation into alleged violations of the
Virus Serum Toxin Act and alleged false statements made to APHIS.
Following the Stop Shipment Order and the commencement of the OIG
investigation, in July 1997, the non-employee members of the Board of
Directors directed the Company to retain special counsel to investigate the
alleged violations and to advise the Board of Directors. The non-employee
members of the Board of Directors also instructed management to take immediate
action to assure that all future shipments comply with all regulatory
requirements. In addition, the Company took action designed to obtain the
approval of APHIS to the Company's resumption of shipments of the products
affected by the Stop Shipment Order, including submission of an amended
regulatory compliance program and testing procedures acceptable to the USDA,
reassignment of certain personnel and restructuring of the quality control and
quality assurance functions. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--U.S. Government Investigation
and Disciplinary Proceedings.")
Based on remedial action taken by the Company, including revised vaccine
production outlines, the USDA, during the period from August through December
of 1997, lifted the Stop Shipment Order with respect to all but three of the
36 affected products. As of March 27, 1998, the remaining three products were
released for sale and shipment by the Company.
2
As a result of the Company's internal investigation regarding the alleged
violations, the Company, in November 1997, terminated the employment of its
then President and Chief Operating Officer, John P. Gallo, and commenced a
lawsuit against Mr. Gallo on April 21, 1998. On April 28, 1998, Mr. Gallo
commenced a lawsuit against the Company and two of its directors, including
the Chairman of the Board. (See "Legal Proceedings.") In addition, six
employees, including members of the Company's management team (including two
Vice Presidents of the Company) resigned in April 1998 at the request of the
Company. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--U.S. Government Investigation and Disciplinary
Proceedings.")
In April 1998, the Company voluntarily disclosed to the U.S. Attorney for
the District of New Jersey, as well as to the USDA and OIG, information
resulting from the Company's Animal Health Products Businessinternal investigation. The U.S. Attorney
thereupon commenced its own investigation and requested that the Company
provide documents relating to the matters being investigated, including
documents relating to sales of poultry vaccines which may have been usedviolated U.S.
Customs laws and regulations.
During 1997 and at December 31, 1997, the Company was in default under
certain covenants contained in its bank credit agreement. The Company entered
into an Extension Agreement with its bank lenders as of April 29, 1998 which
provided, among other matters, for the waiver of the covenant defaults, an
extension of the bank credit agreement through March 31, 1999, revisions of
existing covenants and the addition of new covenants, the payment of
additional fees and the issuance to fund commercial development effortsthe bank lenders of warrants to purchase
common stock of the Company. The Company was in default under certain
covenants contained in the CosmeticsExtension Agreement at July 31, 1998. On August 19,
1998, the Company and Consumer Products Businessits bank lenders entered into a Forbearance Agreement
whereby the banks agreed to forbear from exercising their rights and remedies
arising from these covenant defaults through January 30, 1999. The Forbearance
Agreement terms require payment of all bank debt by January 31, 1999. The
Company is actively seeking alternative financing arrangements to replace its
existing debt and lending terms through a number of potential options
including, but not limited to, the Company's former Biotechnology Business which
was engaged in the businessissuance of developmentdebt or equity securities or a
combination of various applicationsboth. (See "Management's Discussion and Analysis of the
Company's proprietary encapsulation technology (Novasome(R) lipid vesicleFinancial
Condition and Ultrasponge/TM/ hydrogel technologiesResults of Operations--Liquidity and micellar nanoparticles, the "Novavax
Technologies"Capital Resources.") primarily for human medicines and vaccines.
Distribution of Biotechnology Business
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On March 30, 1998, the Company announced that it was unable to file its
Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997
Form 10-K") by the March 31, 1998 due date as it had not yet completed the
procedures it deemed necessary to prepare its financial statements. Based upon
information made known to it on March 17, 1994,1998, the Company's Board of
Directors adopteddirected the special counsel, who was conducting the internal
investigation regarding USDA issues, to expand the scope of its internal
inquiry to investigate information which could have a planmaterial impact on the
Company's financial reporting for 1997 and prior periods and authorized
special counsel to disposeengage independent accountants to assist it in the
investigation. As a result of the Biotechnology Business by spinning it off through a distributionfailure to file its 1997 Form 10-K, the
American Stock Exchange ("AMEX") suspended the trading of the Company's stockholders of all ofCommon
Stock on March 30, 1998. In addition, on April 30, 1998, the Securities and
Exchange Commission ("SEC") notified the Company that it was conducting an
informal inquiry and requested that the Company provide it with certain
documents.
On May 1, 1998, the Company was advised by its common stockformer independent
accountants, that based on the preliminary findings of the separate entity which
would conduct the Biotechnology Business in the future. Since 1991, the
development efforts of the Biotechnology Business were directed primarily
towards human pharmaceuticals, including vaccines. These development efforts
had reached the level where separate funding sources were required for the
Biotechnology Business to continue its development efforts, meet the
requirements of the FDA approval process and reach the stage of eventual
commercialization.
The Board of Directors determined that the best interests of the Company and
its stockholders would be servedspecial
investigation initiated by dividing the Company into two separate
publicly-traded entities. By doing so, the Board of Directors believed that
accessin March 1998, their reports
with respect to the Company's consolidated financial statements as of bothand for
the years ended December 31, 1995 and 1996 should no longer be relied upon. As
a result of the findings of the special investigation, the Company restated
its consolidated financial statements for the two years ended December 31,
1995 and 1996 and for the three quarters ended September 30, 1997. In the
opinion of management, all material adjustments necessary to correct the
financial statements have been recorded. The restatements resulted in
additional losses of $179,000 and $231,000 in 1995 and 1996, respectively. See
"Note 2 of Notes to Consolidated Financial Statements".
In addition to the restatements discussed above, the Company made certain
adjustments in the fourth quarter of 1997 which were the result of actions or
events which occurred in earlier quarters of 1997. The Company has restated
its financial statements for the first three quarters of 1997 to record such
adjustments in the applicable quarter. The restatements resulted in an
additional loss of $1,324,000 for the nine months ended September 30, 1997.
See "Note 18 of Notes to Consolidated Financial Statements".
3
For information relating to the impact of the above-described events on the
Company's operations during 1997 and the expected impact on its business in
1998, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
LICENSE OF TECHNOLOGY FROM FORMER SUBSIDIARY
In December 1995, IGI anddistributed its ownership of its majority-owned
subsidiary, Novavax, Inc. ("Novavax"), in the form of a tax-free stock
dividend, to IGI stockholders. Novavax had conducted the Biotechnology
Business to the capital markets would
significantly improve; IGI would be able to focus on its historically profitable
and growing Animal Health Products Business and its growing Cosmetics and
Consumer Products Business; and the management of the Biotechnology Business
would be able to focus mainly on developing human pharmaceutical applications.
The Company believed that the Distribution would also simplify IGI and permit
investors to more readily evaluate the earnings and growth potential of the
separate companies.
On December 12, 1995 (the "Distribution Date"), IGI distributed to the holders
of record of IGI's common stock, at the close of business on the Record Date,
November 28, 1995, one share of common stock of Novavax, Inc. ("Novavax") for
every one sharesegment of IGI, common stock outstanding (the "Distribution").which is reported as a discontinued operation. In
connection with the Distribution,distribution, the Company has paid Novavax $5,000,000 in
return for a fully paid-up, ten-year license (the "IGI License Agreement")
entitling it to the exclusive use of Novavax's Novasome lipid vesicle
encapsulation technologies ("Novavax Technologies") in the fields of (i) animal pharmaceuticals,
biologicals, and other animal
1
health products; (ii) foods, food applications, nutrients and flavorings; (iii)
cosmetics, consumer products and dermatological over-the-counter and
prescription products (excluding certain topically delivered hormones); (iv)
fragrances; and (v) chemicals, including herbicides, insecticides, pesticides,
paints and coatings, photographic chemicals and other specialty chemicals; and
the processes for making the same. The Company has the option, exercisable
within the last year of the ten-year term, to extend the License Agreement for
an additional ten-year period for $1,000,000. Novavax will retain the right to
use its Novavax Technologies for all other applications, including human
vaccines and pharmaceuticals. The Company has presented the payment under the
License Agreement as a capital contribution in its financial statements to
reflect the intercompany nature and substance of the transaction. The form was
structured as a prepaid licensing agreement to address various considerations of
the Distribution, including tax and financing considerations. For tax purposes,
the transaction will be treated as a prepaid licensing agreement. IGI has no
further obligations to fund Novavax. See Note 2 of Notes to IGI Financial
Statements.
IGI funded the $5,000,000 payment to Novavax from borrowings under its bank
loan agreement which has been amended to reflect the Distribution. The Amended
Loan Agreement with Fleet Bank - NH and Mellon Bank provides for:
. $12,000,000 revolving credit facility with interest contingent upon certain
financial ratios at the end of each quarter. The interest rate shall not
exceed prime plus 1 1/2%. The amount available under the revolving credit
facility decreases by $800,000 on the last day of each quarter from June 30,
1996 through December 31, 1999. At March 22, 1996 the Company had outstanding
borrowings of $12,000,000 under this facility and the interest rate was 10%.
. $10,000,000 working capital line of credit renewable annually, with
interest on the outstanding borrowings contingent upon certain financial
ratios at the end of each quarter. The interest rate shall not exceed prime
plus 1%. At March 22, 1996, the Company had $1,615,000 available under this
facility and the interest rate was 9.5%.
The Company was in default of its current ratio covenant as of December 31,
1995. The banks have amended the agreement to remove the default.
Under a transition services agreement, IGI will continue to provide certain
administrative services to Novavax, including services relating to human
resources, purchasing and accounting, data processing and payroll services for a
period not to extend beyond June 30, 1996. Novavax will pay IGI a fee for all
services provided by IGI employees, based on IGI's cost. In addition to these
services, Edward B. Hager will serve as Chairman of the Board and Chief
Executive Officer and John P. Gallo will serve as Chief Operating Officer and
Treasurer of Novavax through no later than June 30, 1996 (the "Transition
Termination Date"). Prior to the Transition Termination Date, Dr. Hager will
continue to devote the majority of his time to IGI and will receive no
compensation for his services as an officer of Novavax. Mr. Gallo will devote
approximately one half of his business time through the Transition Termination
Date to Novavax and its business, and IGI and Novavax will each pay Mr. Gallo
one half of his annual compensation. The Company does not believe that its
reliance on part-time management by Mr. Gallo will adversely affect IGI's
business during the transition period.
As a result of the Distribution, the Consolidated Financial Statements of IGI
present its Biotechnology Business as a discontinued operation. Losses incurred
by the Biotechnology Business through the date of the Distribution are included
in the "Loss from Discontinued Operations" in the financial statements.
Strategy
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The Company's business strategy for its operations is as follows:
. Continue growth of the Animal Health Products Business, especially in the
international markets, through new product development and intensified product
registration (for licenses in foreign countries) and marketing efforts.
2
. Continue growth of the Cosmetics and Consumer Products Business through
expanded efforts to develop and market additional cosmetic and dermatologic
products utilizing the Novavax Technologies internally through the Company's
Nova Skin Care Division and externally through industry partners and
customers.
. Continue development of the consumer product applications of the Novavax
Technologies, including flavors, beverage and food additives, coatings, paints
and chemicals.
. Explore opportunities for strategic acquisitions in its two business
segments.
Novavax Technologies
- --------------------
Liposome encapsulation is a process designed to entrap and deliver various
useful materials. Prior to the development of the Novavax Technologies, the
most commonly used technology, phospholipid liposome encapsulation, had a
limited capacity to encapsulate anything other than materials that can be
dissolved or suspended in water. Phospholipid liposomes are man-made,
microscopic spheres that are usually formed through a multi-step process, which
generally includes the mixing of water, organic solvents and phospholpids. Most
phospholipid-based liposomes are produced from materials that are expensive and
may require the use of potentially hazardous organic solvents. The standard,
multi-step phospholipid manufacturing process yields small quantities of
expensive, less stable vesicles with limited cargo capacity.
Based on the belief that certain forms of liposomes can stimulate the immune
system, various institutions and companies have tried to develop liposome-based
vaccines with advantageous properties over conventional vaccines. The Company
believes that efforts to commercially develop phospholipid-based liposomes have
been unsuccessful primarily because phospholipid-based liposomes have:
. high cost
. low stability
. low versatility
. commercial scale-up difficulties
Novasome Lipid Vesicles
While artificial lipid vesicle encapsulation technology has existed for almost
four decades, the Company believes that it was one of the first companies to
produce highly stable, versatile artificial lipid vesicles and structures of
various types from low-cost, readily available materials in commercial
quantities. The major advantages of Novasomes over other liposomes are as
follows:
Versatility, Stability and Low Cost
. Novasomes may be made from a number of inexpensive, readily available
chemicals, called amphiphiles, including fatty alcohols and acids, ethoxylated
fatty alcohols and acids, glycol esters of fatty acids, glycerol fatty acid
mono and diesters, ethoxylated glycerol fatty acid esters, glyceryl ethers,
fatty acid diethanolamides and dimethyl amides, fatty acyl sarcosinates,
"alkyds" as well as phospholipids.
3
. Novasomes have a large, stable central core that allows them to entrap and
deliver a wide variety of substances that may be too large or disruptive for
phospholipid vesicles, including lipids, solvents, particulates and
perfluorocarbons as well as aqueous materials.
. Novasomes can be varied according to the intended cargo and can be
engineered to release cargo in response to a variety of factors.
. Novasomes can be made to provide acceptable stability under a variety of
conditions, such as wide variations of alkalinity, acidity, temperature,
shear, detergents, solvents, enzymes and others.
Ease of Commercial Scale-up
Novasomes can be made in large quantities in a continuous flow process that
does not use organic solvents. The patented Novamix/TM/ production machinery
permits the blending of reagents under controlled conditions, and enables the
composition of the Novasomes to be adjusted to customize their structure and
release properties. The Novavax Technologies, the Company's ability to use
readily available materials and the patented Novamix production machinery allow
it to produce Novasomes with stability, versatility, large cargo carrying
capacity, high production volumes and low production costs. The Company
believes these advantages provide an opportunity to extend the commercial
potential of Novasomes from the near-term cosmetic and personal care products
produced and marketed by IGI.
Micellar Nanoparticles
Micellar nanoparticles ("MNP") are submicron-sized lipid structures. MNP have
different structural characteristics (e.g. do not have lipid bilayers) and are
generally smaller than Novasome lipid vesicles. MNP, like Novasomes, are made
from the family of materials derived from amphiphilic surfactants and can be
tailored for particular uses. They exhibit encapsulating and many other
properties similar to Novasomes, but differ in other properties. MNP are very
stable and can be prepared in commercial quantities at a reasonable cost. The
Company believes MNP may have commercial application in its Cosmetic and
Consumer Products.
Novavax holds 30 U.S. patents and 43 foreign patents covering its Novavax
Technologies (including a wide variety of component materials, its continuous
flow vesicle production process and its Novamix/TM/ production equipment).
License of Technology from Novavax
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On December 12, 1995, IGI, Inc. distributed its majority interest in Novavax
to the IGI stockholders. Immediately after the Distribution, IGI, through its
wholly-owned subsidiary IGEN, Inc., paid Novavax's wholly-owned subsidiary
Micro-Pak, Inc. approximately $5,000,000 in return for a fully paid-up,
exclusive ten-year license entitling it to use the Novavax Technologies in the
fields (the "IGI Field") of (i)
animal pharmaceuticals, biologicals and other animal health products; (ii)
foods, food applications, nutrients and flavorings; (iii) cosmetics, consumer
products and dermatological over-the-counter and prescription products
(excluding certain topically delivered hormones); (iv) fragrances; and (v)
chemicals, including herbicides, insecticides, pesticides, paints and
coatings, photographic chemicals and other specialty chemicals; 4
and the
processes for making the same (the(collectively, the "IGI License Agreement"Field"). IGI has the
option, exercisable within the last year of the ten-year term, to extend the
exclusive license for an additional ten-year period for $1,000,000. Novavax
will
retainhas retained the right to use its Novavax Technologies for all applications
outside the IGI Field, including human vaccines and pharmaceuticals.
If at any time during the term of the IGI License Agreement either party shall
make or discover any product improvements useful in the IGI Field (such
improvements being limited to those improvements that would be dominated by the
claims of a licensed patent), it shall communicate all details in respect
thereof to the other party. If Novavax makes such improvements, IGI shall be
entitled to use the same in the IGI Field during the term of the IGI License
Agreement without paying any increased royalty in respect thereof. If IGI makes
such improvements, Novavax shall have the right to use them outside the IGI
Field during the term of the IGI License Agreement. In the event employees of
Novavax and IGI are joint inventors as a result of inventions arising out of the
development of licensed products, any patent applications filed thereon shall be
owned by Novavax, and IGI shall have an exclusive license in the IGI Field.
Three of the members of the Board of Directors of IGI are also directors of
Novavax, and the terms of the IGI License Agreement were unilaterally
established by IGI. [It is the view of the Board of Directors and management of
Novavax, however, that the terms of the IGI License Agreement were at least as
favorable to Novavax as would have been obtained from any unaffiliated third
party.] The $5,000,000 license payment was determined unilaterally by IGI,
based on the present value of the estimated aggregate royalties IGI would expect
to pay Novavax over a ten-year period if such royalties were paid annually based
on IGI's annual revenues from the sale of its products that use or incorporate
the Novavax Technologies. The royalty rates used in calculating the license
payment were the same as those used by IGI in determining the annual royalties
paid by IGI for the Novavax Technologies when the Company was a subsidiary of
IGI during the period prior to the Distribution. Prior to the Distribution, IGI
paid a royalty rate of 10% on sales of products incorporating the Novavax
Technologies. This rate was determined based on a review of similar types of
licensing agreements and reflected the lack of any up-front payment by IGI to
Novavax. Novavax recognized revenues under its earlier license agreement of
$199,000, $210,000 and $268,000 for the years 1993, 1994 and 1995, respectively.
The lump sum license payment was determined to be preferable to annual royalty
payments, because the license payment would provide Novavax with immediate funds
to finance its operations after the Distribution. At the time the terms of the
IGI License Agreement were fixed, including the license payment, all of the
directors of IGI were also directors of Novavax.
5
Business Segments
- -----------------BUSINESS SEGMENTS
The following table sets forth the revenue and operating profit (in
thousands) of each of the Company's two business segments for the periods
indicated:
1997 1996 1995
1994 1993
-------- ------- ---------------- ---------
(IN THOUSANDS) (RESTATED) (RESTATED)
Revenue
- -------REVENUE
Animal Health Products $29,510 $27,471 $26,626
Cosmetics andProducts......................... $29,096 $31,262 $28,869
Consumer Products 1,711 1,477 1,378
Operating Profit (Loss)Products.............................. 5,097 3,523 1,632
OPERATING PROFIT (LOSS) *
- -----------------------
Animal Health Products 6,459 6,057 6,020
Cosmetics andProducts......................... 4,139 6,882 6,247
Consumer Products (159) 296 367Products.............................. 730 (917) (233)
- --------
* Excludes corporate expenses of $3,056, $2,845$5,032,000, $4,097,000 and $3,000$3,056,000 for
1995, 19941997, 1996 and 1993,1995, respectively. (See Note 1517 of Notes to Consolidated
Financial Statements.)
As a result of the Distribution of the Biotechnology Business, the operating
losses of that segment are included as "Loss from Discontinued Operations" in
the Company's financial statements. (See Note 2 of Notes to Consolidated
Financial Statements.)
Animal Health Products Business
- -------------------------------Statements).
ANIMAL HEALTH PRODUCTS BUSINESS
IGI manufactures and markets a broad range of animal health products used in
pet care and poultry production. The Company sells these products in the
United States and over 50 other countries principally under two trade names:
Vineland Laboratories and EVSCO Pharmaceuticals. The Company also sells
veterinary products to the over-the-counter ("OTC") pet products market under
the Tomlyn label.
Poultry Vaccines
- ----------------
The Company produces and markets poultry vaccines manufactured by the chick
embryo, tissue culture and bacteriologicalbacterial methods. The Company produces vaccines
for the prevention of various chicken and turkey diseases and has 8063 vaccine
licenses granted by the United States Department of Agriculture ("USDA")
(See "Government Regulation"). The
Company also produces and sells, under its Vineland Laboratories label,
nutritional, anti-infective and sanitation products used primarily by poultry
producers.
The Company manufactures poultry vaccines at its USDA approvedlicensed facility in
Vineland, New Jersey and sells them, primarily through its own sales force of
12nine persons, directly to large poultry producers and
4
distributors in the United States and, through its export sales staff of 15
persons, to local distributors in other countries. The sales force is
supplemented and supported by technical and customer service personnel. The
Company's vaccine production in the United States is regulated by the USDA.
Sales of poultry vaccines and related products accounted for approximately 60%49%
of the Company's sales in 1995, 59%1997, 57% in 19941996 and 58%60% in 1993.
6
The Company has two1995. For information
relating to the adverse effect on the Company's poultry vaccines licensedvaccine business of
the Stop Shipment Order by the USDA which use the
Novavax Technologiesin 1997, as well as ongoing governmental
investigations, see "Governmental Regulation" and is continuing development efforts on new vaccine
applications"Management's Discussion and
Analysis of this technology.Financial Condition and Results of Operations."
The Company's principal competitors in the poultry-vaccinepoultry vaccine market are
Intervet America, Inc., Solvay Veterinary,Fort Dodge Animal Health, Inc., Merial Select
Laboratories, Inc. and Rhone-Merieux Select Laboratories,
Inc.Schering Plough Animal Health. The Company believes
that it hasis one of the largest share of the domestic poultry vaccine market.producers. The Company
competes on the basis of product performance, price, customer service and
availability.
Veterinary Products
- -------------------
The EVSCO line of veterinary products is used by veterinarians in caring for
dogs and cats, and includes pharmaceuticals such as antibiotics, anti-inflammatories,anti-
inflammatories and cardiac care
drugs, as well as nutritional supplements,
vitamins, insecticides and diagnostics. Product forms include gels, tablets,
creams, liquids, ointments, powders, emulsions, shampoos and diagnostic kits.
EVSCO also produces professional grooming aids for dogs and cats.
EVSCO products are manufactured at the Company's facility in Buena, New
Jersey and sold through distributors to veterinarians. The facility operates
in accordance with Good Manufacturing Practices ("GMP") of the federal Food
and Drug Administration ("FDA") (See(see "Government Regulation").) Principal
competitors of the EVSCO product line include Solvay Veterinary, Inc., Vet-Kem,Vet-
Kem, a division of Sandoz Pharmaceuticals Corp., MSD AGVET (a division of Merck &
Co.), Schering Corp., Dermatologics
for Veterinary Medicine, Inc., Allerderm, Inc. and Pitman-Moore,Mallinckrodt, Inc. The
Company competes on the basis of price, marketing, customer service and
product qualities.
The Tomlyn product line includes pet grooming, nutritional and therapeutic
products, such as shampoos, grooming aids, vitamin and mineral supplements,
insecticides and OTC medications. TheseThe products are manufactured at the
Company's facility in Buena, New Jersey, and sold directly to pet superstores
and through distributors to
superstores, independent merchandising chains, shops and
kennels. Tomlyn's
largest selling product line is the Nova Pearl/TM/ line of shampoos which is
based upon the Novavax Technologies and provides combined moisturizing, cleaning
and conditioning.
Sales of the Company's veterinary products are handled by 2419 sales
employees.
Most of the Company's veterinary products are sold through distributors. Sales of veterinary products accounted for approximately 35%36% of the
Company's sales in 1995, 36%1997, 33% in 19941996 and 37%35% in 1993.
Cosmetics and1995.
CONSUMER PRODUCTS BUSINESS
IGI's Consumer Products - -------------------------------
IGI's Cosmetics and Consumer Products divisionsegment is primarily focused on the internalexpanded
commercialization of the Novavax Microencapsulation Technologies for skin care
applications. These efforts have been directed toward the development and marketing of high
quality skin care products utilizingthat the Novavax
TechnologiesCompany markets through its Nova Skin Care division.collaborative
arrangements with major cosmetic and consumer products companies. IGI is
continuing to workcurrently working with several cosmetics, food, personal care products, and
OTC pharmaceutical companies for various commercial microencapsulation
applications of the Novavax Technologies. Because of their ability to
encapsulate skin protective agents, oils, moisturizers, shampoos,
conditioners, skin cleansers and fragrances and to provide both a controlled
and a sustained release of the encapsulated materials, Novasome lipid vesicles
are well-suited to cosmetics and consumer product applications. For example,
NovasomesNovasome lipid vesicles may be used to deliver moisturizers and other active
ingredients to the deeper layers of the skin or hair follicles for a prolonged
period; to deliver or preserve ingredients which impart favorable cosmetic
characteristics
7
described in the cosmetics industry as "feel,"
"substantivity," "texture" or "fragrance"; to deliver normally incompatible
ingredients in the same preparation, with one ingredient being shielded or
protected from the other by encapsulation within the Novasome;Novasome vesicle; and to
deliver pharmaceutical agents to
and/or through the skin.agents.
The Company is presently producing Novasomesproduces Novasome vesicles for various skin care products,
including those marketed by the Prescriptives Division of Estee Lauder under
that company'ssuch as "All You Need" brand name as well as, "Re-Nutriv",
"Virtual Skin", "100% Time Release Moisturizer", and "Resilience".
5
At the end of December 1996, the Company entered into a license agreement
with Glaxo Wellcome ("Glaxo"), which grants Glaxo the exclusive right to
market a skin care product line in the United States to physicians, including
but not limited to dermatologists. Under the terms of the agreement, which was
amended in January 1997, IGI manufactures the products for Lauder's
"Resilience" brand. The first product was introduced in early 1993. The
Company also produces and sells NovasomesGlaxo. IGI retains
the rights to Revlon for use in lines of skin
moisturizers manufactured and marketed by Revlon as its "Results"market the product line to non-physicians in the U.S., and by Revlon's Almay Division in
its "Time Off" product line.all markets abroad.
In 1997, the Company entered into an Exclusive Supply Agreement with IMX
Pharmaceuticals, Inc. ("IMX"), which grants IMX the exclusive right to market
certain Novasome-based topical skin care products in certain mass
merchandising markets.
Sales of the Company's Cosmetics and Consumer Products were principally based on
formulations using the Novavax Technologies.Novasome encapsulation technology. Such sales
approximated 5% in
each of 1995, 1994 and 199315% of the Company's total sales.
Nova Skin Care
In Februarysales in 1997, 10% in 1996 under the Nova Skin Care label, IGI launched its own line of
Novasome(R) based alpha hydroxy acid skin care products. The first six over-
the-counter products were introduced at the annual meeting of the American
Academy of Dermatologyand 5% in February 1996. The Company is marketing these
products directly to dermatologists through a sales force of 16 employees.
Additions to this product line are planned for 1996.
On February 6, 1996, Johnson & Johnson and its wholly-owned subsidiary Ortho-
McNeil, Inc. (collectively, "J&J") filed a lawsuit against the Company and its
subsidiary, Igen, Inc. and its former subsidiary Micro-Pak, Inc. in the United
States District Court for the District of New Jersey alleging trademark
infringement and trademark dilution. J&J alleges that the Company's use of the
names NOVA SKIN, NOVA SKIN CARE, and NOVA-AESTHETICS infringes on rights
associated with J&J's trademark RENOVA for a prescription drug. J&J has also
moved for a preliminary injunction seeking to preclude the Company's use of the
NOVA SKIN, NOVA SKIN CARE, and NOVA-AESTHETICS names on the Company's
newly-launched line of skin care products sold through dermatologists. On March
18, 1996, following a period of expedited discovery, the Court held an
evidentiary hearing on the motion for preliminary injunction. The Court has not
yet issued a ruling.
Since 1988, the Company has used the trademark NOVASOME in connection with the
lipid vesicle encapsulation technology it developed, including in connection
with skin care products. In addition, numerous other companies use the term
NOCVA in a wide variety of product and corporate name formulations. The Company
is vigorously defending this lawsuit and believes that the outcome of the
proceedings will not have a material adverse effect on the Company's financial
position or results of operations.
Other Applications1995.
OTHER APPLICATIONS
The versatility of the Novavax Technologies combined with the Company's
commercial production capabilities allow the Company to target large, diverse
markets. Through product collaborations and license agreements, the Company is
seeking to develop additional products for this business segment. For example,
in 1992, the Company entered into a joint venture using the Novavax
Technologies, ("Flavorsome, Ltd."), to develop encapsulated flavors for foods
and beverages. Flavorsome is working with a number of food industry leaders on
various food, beverage and confection applications of the Novavax Technologies.
During 1995, Flavorsome received its first commercial orders. The Company
continues to pursue the development of food, beverage and confection
applications of Novavax Technologies. A major goal of Novasome flavor
preservation is to double or triple the useful shelf life of various foods,
beverages and candies which are dependent on volatile flavors. The Novavax
Technologies enables the
8
substitution of encapsulated, water or other calorie neutral material for fat in
confections. Other benefits include encapsulation of beverage flavors to give a
sequential taste phenomenon, development of higher melting point chocolate and
taste masking of nutritional supplements. The Company is evaluating affiliations
with potential industry partners. The efforts
for the development of additional products require extensive testing,
evaluation and trials, and therefore no assurance can be given that
commercialization of these products with NovasomesNovasome vesicles will be successful.
TheUnder a license agreement with the Company, has also developed a Novasome-encapsulated anthralin preparation
("Anthrasome Cream") for the treatment of psoriasis. Anthralin is an effective
medication for the treatment of psoriasis. However, it causes skin staining,
and because of its customary petrolatum-based formulation and insolubility, has
generally been a difficult substance to formulate in a cosmetically acceptable
form. The Company believes its Novasome cream formulation is more cosmetically
acceptable and reduces skin staining. The Company is seeking to market
Anthrasome Cream through an arrangement with a third-party.
The CompanyJohnson & Johnson has
encapsulated retinoids in Novasome vesicles in collaboration
with J&J.vesicles. Retinoids are derivatives of
retinoic acid and are effective in the treatment of acne and thought to be
effective in the treatment of various age-
associatedage-associated skin disorders.
Encapsulation of retinoids in NovasomesNovasome vesicles is designed to prolong
stability and reduce irritation and provide a sustained retinoid release of
certain active ingredients to
treat these disorders. The Company does not
expectJohnson & Johnson is beginning to derive any significant revenue from this application during 1996.
International Salesintroduce Novasome
encapsulated retinoid products in certain European countries and Operations
- ----------------------------------the United
States in the first half of 1998.
INTERNATIONAL SALES AND OPERATIONS
A staff of 12nine persons based in Buena, New Jersey and 4six individuals based
overseas handle all sales of Company products outside the United States. The
Company's sales personnel and poultry veterinarians travel abroad extensively to
develop business and support customers through local distributors. Exports
consist primarily of poultry vaccines, although the Company also exports some
veterinary pharmaceuticals and pet care products. Exports of vaccines require
product registration or licensing(ie. licenses) by foreign authorities. The Company has
519 products
registered or licensedapproximately 900 product registrations in over 50 countries outside the
United States and has over 1,328800 registrations pending. The Company anticipates
future growth in key markets including Brazil, China and Japan. The Company
entered the market in China in 1997 and expects to increase market penetration
in 1998. The Company has received product registrations in Japan and is
scaling up production for 1998 product sales. In Brazil, product registrations
are in process and the Company expects to commence sales by the fourth quarter
of 1998.
Mexico and certain Latin American countries are important markets for the
Company's poultry vaccines and other products. These countries have
historically experienced varying degrees of political unrest and economic and
currency instability. In addition, certain countries in the Far East,
including Indonesia and Thailand, have recently experienced economic and
currency instability. Because of the volume of business transacted by the
Company in those countries,these areas, continuation or the recurrence of such unrest or
instability could adversely affect the businesses of its customers, in those
countries or the Company's ability to collect its receivables from such
customers, which in
either case could adversely impact the Company's future operating results.
In 1995, sales(See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources.")
Sales to international customers of $12,234,000 represented 39%35% of the Company's sales as compared within
1997, 39% in 19941996 and 37%38% in 1993.1995. (See Note 1114 of Notes to Consolidated
Financial Statements.)
96
Manufacturing
- -------------MANUFACTURING
The Company's manufacturing operations include production and testing of
vaccines, lotions, emulsions, shampoos, gels, ointments, pills and powders;
packaging, bottling and labeling of the finished products; and packing and
shipment for distribution. Approximately 7890 employees are engaged in
manufacturing operations. The raw materials included in these products are
available from several suppliers. The Company produces quantities of NovasomesNovasome
lipid vesicles adequate to meet its current needs for cosmetics, and consumer
product and animal health product applications.
In 1995, the Company completed and began operating a new facility for marketing
staff and Novavax Technologies product development. This facility also houses
production facilities for cosmetics and consumer products. The Company intends
to increase its poultry vaccine production capacity during 1996. (See
"Properties".)
Research and Development
- ------------------------RESEARCH AND DEVELOPMENT
The Company's poultry vaccine research and development efforts are directed
towards developing more efficient single and multiple-component vaccines,
developing vaccines to combat new diseases and incorporating the Novavax
TechnologiesNovasome
lipid vesicle technology into existing vaccines. The Company is concentrating
its veterinary pharmaceutical research and development efforts on the use of Novavax
TechnologiesNovasome lipid
vesicle technology for various veterinary pharmaceutical and OTC pet care
products. The Company's cosmetics and consumer products research and development efforts are directed
towards liposomal encapsulation to improve performance and efficacy of
chemicals, fuels, pesticides, biocides cosmetics, consumer products, flavors
and dermatologic products. Under its license agreement with Novavax, the
Company has the right to continue to use the Novavax Technologies to develop
new products in those fields covered by the license.IGI Field.
In addition to its internal research and development efforts, which involves
23involve
11 employees, the Company encourages the development of products in areas
related to its present lines by making specific grants to universities.universities and by
entering into research and development agreements with industry partners.
Research expenses for IGI's continuing operations were $1,675,000, $2,013,000
and $1,345,000 $1,212,000in 1997, 1996 and $817,000 in 1995, 1994 and 1993, respectively.
Patents and Trademarks
- ----------------------PATENTS AND TRADEMARKS
All of the names of the Company's major products are registered in the
United States and all significant foreign markets in which the Company sells its
products. Under the terms of the IGI1995 License Agreement, IGI has an exclusive
ten-year license to use the Novavax Technologies in the IGI Field. Novavax
holds 3044 U.S. patents and 43a number of foreign patents covering its Novavax
Technologies (including a wide variety of component materials, its continuous
flow vesicle production process and its Novamix/TM/Novamix(TM) production equipment).
IGI intends to engage in collaborations, sponsored research agreements, and
preclinical and/or field testing agreements in connection with its future
vaccine and pharmaceutical products as well as clinical testing agreements with
academic and research institutions and U.S. government agencies, such as the
National Institutes of Health and the Department of Agriculture, to take
advantage of their technical expertise and staff and to gain access to clinical
evaluation models, patents, and related technology. Consistent with
pharmaceutical industry and academic standards, and the rules and regulations
under the Federal Technology Transfer Act of 1986, these
10
agreements may provide that developments and results will be freely published,
that information or materials supplied by the Company will not be treated as
confidential and that the Company may be required to negotiate a license to any
such developments and results in order to commercialize products incorporating
them. There can be no assurance that the Company will be able successfully to
obtain any such license at a reasonable cost or that such developments and
results will not be made available to competitors of the Company on an exclusive
or nonexclusive basis.
Government Regulation
- ---------------------GOVERNMENT REGULATION
The production and marketing of the Company's products and its research and
development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the United States and other
countries. The Company's development, manufacturing and marketing of poultry
biologics are subject to regulation in the United States for safety and
efficacy by the United States Department of AgricultureUSDA, including the Center for Veterinary Biologics ("USDA"CVB"),
in accordance with the Virus Serum Toxin Act of 1914. The development,
manufacturing and marketing of pharmaceuticals are subject to regulation in
the United States for safety and efficacy by the FDA in accordance with the
Food, Drug and Cosmetic Act.
From June 4, 1997 through March 27, 1998, the Company was subject to an
order by the CVB to stop distribution and sale of certain serials and
subserials of designated poultry vaccines produced by the Company's Vineland
Laboratories Division. In July 1997, the OIG advised the Company of its
commencement of an investigation into alleged violations of the Virus Serum
Toxin Act and alleged false statements made by certain former Company
personnel. In April 1998, the Company voluntarily disclosed to the U.S.
Attorney for the District of New Jersey, as well as to the USDA and the OIG,
information resulting from the Company's internal investigation of alleged
violations by certain officers and employees of USDA rules and regulations and
of the Virus Serum Toxin Act. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--U.S. Government Investigation
and Disciplinary Proceedings.")
7
On March 6, 1998, the Food and Drug Administration concluded an inspection
of the Company's EVSCO facility in Buena, New Jersey. This resulted in the
issuance of a form FDA-483 listing several "inspection observations". The FDA
reemphasized its observations on May 14, 1998 with a "Warning Letter". The
Company responded in a timely fashion to the Form-483 and to the Warning
Letter, and has been advised by the FDA compliance branch that the Company's
corrective action plan appears to address its concerns.
In the United States, pharmaceuticals and human vaccines are subject to
rigorous Food and Drug Administration ("FDA")FDA regulation including preclinical and clinical testing. The
process of completing clinical trials and obtaining FDA approvals for a new
drug or new biologic is likely to take a number of years, requires the expenditure of
substantial resources and is often subject to unanticipated delays. There can
be no assurance that any product will receive such approval on a timely basis,
if at all.
In addition to product approval, the Company may be required to obtain a
satisfactory inspection by the FDA covering the manufacturing facilities
before a product can be marketed in the United States. The FDA will review the
manufacturing procedures and inspect the facilities and equipment for
compliance with applicable rules and regulations. Any material change by the
Company in the manufacturing process, equipment or location would necessitate
additional FDA review and approval.
Whether or not FDA approval has been obtained, approval of a pharmaceutical
product by comparable governmental regulatory authorities in foreign countries must be
obtained prior to the commencement of clinical trials and subsequent marketing
of such product in such countries. The approval procedure varies from country
to country, and the time required may be longer or shorter than that required for FDA
approval. Although there are some procedures for unified filing for certain
European countries, in general each country has its own procedures and
requirements.
In addition to regulations enforced by the USDA and the FDA, the Company
also is subject to regulation under the Occupational Safety and Health Act,
the Environmental Protection Act, the Toxic Substances Control Act, the
Resource Conservation and Recovery Act and other present and potential future
federal, state or local regulations. The Company's research and development
involves the controlled use of hazardous materials, chemicals, viruses and
bacteria. Although the Company believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed
by state and federal regulations, the risk of accidental contamination 11
or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that result
and any such liability could exceed the resources of the Company.
Employees
- ---------
TheEMPLOYEES
At June 30, 1998, the Company currently has 213had 198 full-time employees, of whom 9272 are in
marketing, sales, distribution and customer support, 7890 in manufacturing, 2311
in research and development, and 2025 in executive, human resources, facilities,
information systems, finance and administration. Certain services
will be provided by IGI to Novavax through no later than June 30, 1996 on a
transitional basis while Novavax builds its support staff. The Company has no collective
bargaining agreement with its employees, and believes that its employee
relations are good.
ItemITEM 2. PropertiesPROPERTIES
The Company owns land and buildings housing offices, laboratories and
production facilities in four locations in New Jersey. The Company also owns a
warehouse and sales office space in Gainesville, Georgia. In addition, the
Company leases office space in Virginia and warehouses in New Jersey, California, Mississippi, and
Arkansas.
The Company's poultry vaccine production facilities are located in Vineland,
New Jersey, where the Company owns several buildings situated on approximately
16 acres of land. These buildings, containing 90,000 square feet of usable
floor space, house offices and facilities used for the production of poultry
vaccines. They were constructed and expanded from time to time between 1935
and 1992. The Company intends to renovate certain of these facilities in 1996the
future to expand its vaccine production capacity to meet expected growth in
existing poultry vaccines and to provide production of new vaccines. Financing
for such renovations will be provided by internally generated funds or leases.
8
In Buena, New Jersey, the Company owns a facility used for the production of
veterinary pharmaceuticals and cosmetics and consumer products.pharmaceuticals. The facility was built in 1971 and expanded in
1975 and in 1992 its capacity was increased
for production of Novasome lipid vesicles.1975. The facility presently contains 41,200 square feet of usable floor space
and is situated on eight acres of land. The Company's executive and
administrative offices are also located in Buena, New Jersey in a 10,000
square foot building situated on six acres of land. In 1995, the Company
completed and began operating a 25,000 square foot production, research and
product development, customer service, marketing, manufacturinginternational operations and
warehousing facility for cosmetic, dermatologic and personal care products on
this site.
Each of the properties owned by the Company is subject to a mortgage held by
Fleet Bank-NH of Nashua, New Hampshire and Mellon Bank. Except as discussed above, the Company believes
that its current production and office facilities are adequate for its present
and foreseeableforseeable future needs.
12
ItemITEM 3. Legal ProceedingsLEGAL PROCEEDINGS
In July 1997, the Office of Inspector General of the USDA ("OIG") advised
the Company of its commencement of an investigation into alleged violations of
the Virus Serum Toxin Act and alleged false statements made by Company
employees to the USDA. The Company is cooperating with the OIG and providing
documents subpoenaed by the OIG concerning certain products. The OIG
investigation is ongoing and the Company is unable to determine when it will
be completed. In April 1998, the Company voluntarily disclosed to the U.S.
Attorney for the District of New Jersey, as well as to the USDA and OIG,
information resulting from the Company's internal investigation. The U.S.
Attorney thereupon commenced its own investigation and requested that the
Company provide documents relating to the matters being investigated,
including documents relating to sales of poultry vaccines which may have
violated U.S. Customs laws and regulations. In addition, on April 30, 1998,
the SEC notified the Company that it is conducting an informal inquiry and has
requested that the Company provide it with certain documents. The Company is
cooperating fully with the U.S. Attorney and each of the regulatory agencies
and has produced a substantial amount of documents and information requested
by them. The U.S. Attorney has not indicated what course of action, if any, it
may pursue with respect to IGI in light of the Company's extensive
cooperation. Although there can be no assurance as to the outcome of any
proceeding, the Company expects that it will be able to achieve a satisfactory
resolution of its existing regulatory and litigation matters. However, if the
OIG, U.S. Attorney or SEC conclude that the Company's actions warrant
enforcement proceedings, those proceedings, as well as the costs and expenses
related to them, could have a materially adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
On February 6, 1996, Johnson & JohnsonApril 21, 1998, the Company commenced a lawsuit against its former
President and Chief Operating Officer, John P. Gallo, in the Superior Court of
New Jersey, Atlantic County. In its wholly-owned subsidiary Ortho-
McNeil, Inc. (collectively, "J&J") filedcomplaint, the Company alleges, among
other matters, that Mr. Gallo caused the Company to violate Department of
Agriculture statutes and regulations, made false and inaccurate
representations with respect to shipments and inventory, improperly converted
Company funds and assets for his personal benefit and knowingly engaged in
misconduct in the performance of his duties and responsibilities, all in
violation of his employment agreement and of his fiduciary duty to the
Company. The Company is seeking recovery of damages resulting from Mr. Gallo's
alleged misconduct and recovery of funds and assets that the Company alleges
were improperly diverted by him.
On April 28, 1998, Mr. Gallo commenced a lawsuit against the Company and two
of its subsidiary, Igen, Inc. and its former subsidiary Micro-Pak, Inc. in the United
States District Court for the District of New Jersey alleging trademark
infringement and trademark dilution. J&J alleges thatDirectors, including the Company's useChairman of the names NOVA SKIN, NOVA SKIN CARE,Board, Dr. Edward B.
Hager, alleging, among other matters, that they improperly caused the
termination of his employment with the Company in November 1997, wrongfully
terminated his compensation in violation of his employment agreement and
NOVA-AESTHETICS infringes on rights
associated with J&J's trademark RENOVAdefamed his reputation. Mr. Gallo is seeking recovery against the defendants
for his alleged actual damages as well as consequential and punitive damages.
The Company has denied Mr. Gallo's allegations and believes his claims are
without merit. The Company therefore has not reserved any amounts related to
these charges.
On May 27, 1998, Mr. Gallo sent a prescription drug. J&J has also
moved for a preliminary injunction seekingletter to preclude the Company's useDirectors
containing a number of the
NOVA SKIN, NOVA SKIN CARE,complaints and NOVA-AESTHETICS names on the Company's
newly-launched line of skin care products sold through dermatologists. On March
18, 1996, following a period of expedited discovery, the Court held an
evidentiary hearing on the motion for preliminary injunction. The Court has not
yet issued a ruling.
Since 1988, the Company has used the trademark NOVASOME in connection with the
lipid vesicle encapsulation technology it developed, including in connection
with skin care products. In addition, numerous other companies use the term
NOVA in a wide variety of productallegations and corporate name formulations. The Company
is vigorously defending this lawsuit and believesdemanded that the outcome of the
proceedings will not have a material adverse effect on the Company's financial
position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
13
Executive Officers of the Registrant
- ------------------------------------
The Company's executive officers hold office until the first meeting of the Board
of Directors commence litigation against certain of its officers and
9
Directors. The Board of Directors convened a special meeting and designated a
committee of independent members consisting of F. Steven Berg Esq. (Chairman)
and Terrence O'Donnell Esq. to investigate these allegations and report to the
Board. Also, the Board authorized the engagement of counsel to help with its
investigation and requested that Mr. Gallo provide information and support for
his allegations. The Company has been advised that Mr. Gallo has declined to
provide the Board with a sworn statement giving substance and detail to his
complaints. The Committee and its counsel are continuing to investigate Mr.
Gallo's allegations and will report their findings and recommendations to the
Board of Directors. To this point in the investigation, the Committee has
uncovered no evidence supporting the claims of Mr. Gallo.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
last quarter of 1997.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth (i) the annual meetingname and age of stockholders and until their
successors are duly chosen and qualified. For information concerning officers
who are also directorseach executive
officer of the Company please refer to Item 10as of this Report.
Information concerning otherJuly 31, 1998, (ii) the position with the Company
held by each such executive officers is as follows:officer and (iii) the principal occupation held by
each executive officer for at least the past five years.
Principal Occupation and Other
Officer Business Experience During
Name Age Since Past Five Years
-OFFICER PRINCIPAL OCCUPATION AND OTHER BUSINESS EXPERIENCE
NAME AGE SINCE DURING PAST FIVE YEARS
---- --- ----- ------------------------------------- --------------------------------------------------
Kevin J. Bratton 47Bratton........ 49 1983 Vice President and Treasurer of IGI, Inc.
since 1983.
Stephen G. Hoch 57 1991 Vice PresidentEdward B. Hager, M.D.... 67 1977 Chairman of the Board of Directors and
Chief Executive Officer of IGI, Inc. since
1991.
Surendra Kumar D.V.M., 60 19851977; Chairman of the Board of Directors
and Chief Executive Officer of Novavax,
Inc. from 1987 to June 1996; Chairman of
the Board of Directors of Novavax, Inc.
from February 1997 to March 1998.
John F. Wall............ 50 1998 Senior Vice President of IGI, Inc.
Ph.D. since 1985.
Donald J. MacPhee 44 1987 Vice President of IGI, Inc.
since 1990 and Chief Financial
Officer of IGI, Inc. since 1987.
Lawrence N. Zitto 53 1985 ViceJune 1998; Chief
Financial Officer of Diversa Corp. (startup
biotechnology company developing enzymes
for pharmaceuticals and chemicals) from
July 1995 to September 1997; and Chief
Financial Officer and a Co-founder of
GynoPharma, Inc. (womens' health care
manufacturer) from October 1987 to July
1995.
Paul Woitach............ 40 1998 President and Chief Operating Officer of
IGI, Inc. since 1985.May 1998; General Manager,
Laboratory Division of Mettler Toledo North
America (weighing and measurement systems)
from 1997 to 1998; Vice President,
Marketing and Sales, Balances and
Instrument Division of Mettler Toledo
International from 1996 to 1997; Vice
President and Executive Director from 1995
to 1996, and Director of Marketing Channels
from 1993 to 1995 of the Health Imaging
Division of Eastman Kodak Company
(diagnostic imaging).
14Officers are elected on an annual basis and serve at the discretion of the
Board of Directors, except Dr. Hager, who has an employment agreement with the
Company. Messrs. Wall and Woitach have finalized arrangements on the basic
terms of their employment with the Company that have not been formalized into
a final document. (See "Item 11. Executive Compensation--Employment
Agreements".)
10
PartPART II
ItemITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
There were 1,137 stockholders of record as of March 15, 1996.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company has never paid cash dividends on its Common Stock. The payment
of dividends is restrictedprohibited by the Company's Loan Agreement with Fleet Bank-NH
Nashua, New
Hampshire and Mellon to a maximum 25%Bank, N.A. without prior consent of earnings in any yearthe lenders. See "Item 7,
Management's Discussion and to retained
earnings in excessAnalysis of $1,000,000.Financial Condition and Results of
Operations-Liquidity and Capital Resources."
The principal market for the Company's Common Stock ($.01 par value) (the
"Common Stock") is the American Stock Exchange ("AMEX") (symbol: "IG"). The
following table shows the range of high and low tradingsale prices on the American Stock
ExchangeAMEX for
the periods indicated.
High LowHIGH LOW
---- ---
1994
- ----1996
First quarter 12 3/8 8quarter.................................................. $8 1/4 $6 3/8
Second quarter 11 1/4 8 1/2
Third quarter 10 5/8 8
Fourth quarter 14 3/8quarter................................................. 9 1/2 1995
- ----6 1/4
Third quarter.................................................. 7 3/4 5
Fourth quarter................................................. 6 5 1/8
1997
First quarter 17quarter.................................................. $7 3/8 $ 5
Second quarter................................................. 5 1/2 11 5/4
Third quarter.................................................. 5 1/2 3 7/8
Second quarter 16Fourth quarter................................................. 5 1/8 13
Third quarter 15 7/3 5/8 11 1/2
Fourth quarter 12 3/4 6 3/8*
* On December 12, 1995,March 30, 1998, the Company distributed to its shareholders allAMEX suspended the trading of the Common Stock of Novavax owned by the Company. Each IGI shareholder received
one share of Common Stock of Novavax for each share of Common StockCompany's common
stock as a result of the CompanyCompany's announcement that it would not be able to
file its 1997 Annual Report on Form 10-K with the AMEX and the Securities and
Exchange Commission by March 31, 1998, the due date of that report. The
approximate number of holders of record of the Company's common stock at June
30, 1998 was 897 (not including stockholders for whom shares are held on November 28, 1995. The Common Stock of IGI began trading "ex-
dividend" on December 13, 1995.
15in a
"nominee" or "street" name).
11
ItemITEM 6. Selected Financial Data
Five YearSELECTED FINANCIAL DATA
Five-Year Summary of Selected Financial Data (in thousands, except per share
information)
Year ended DecemberYEAR ENDED DECEMBER 31,
1991 1992-----------------------------------------------
1997 1996 1995 1994 1993
1994 1995
---- ---- ---- ---- ----------- ---------- --------- ------- -------
(RESTATED) (RESTATED)
Income Statement Data:
- ----------------------INCOME STATEMENT DATA:
Net sales $22,008,644 $24,434,638 $28,004,569 $28,947,911 $31,220,632sales.................... $34,193 $34,785 $30,501 $28,948 $28,005
Gross profit 11,418,562 13,143,029 14,839,332 15,012,669 15,789,098profit................. 16,359 18,204 15,213 15,013 14,839
Operating profit 2,054,589 2,491,792 3,386,418 3,508,075 3,244,550(loss)...... (163) 1,868 2,958 3,508 3,386
Income (loss) from continuing
operations 928,636 1,342,009 1,765,251 1,969,151 1,507,744
(Loss)operations.................. (1,453) (138) 1,329 1,969 1,765
Loss from discontinued operations* (883,751) (1,275,977) (5,942,921) (1,699,844) (4,033,768)opera-
tions*...................... -- -- (4,034) (1,700) (5,943)
Net income (loss) 44,885 66,032 (4,177,670) 269,307 (2,526,024)............ (1,453) (138) (2,705) 269 (4,178)
Income (loss) per share:share-ba-
sic:
From continuing operations
.11 .15operations. $ (.15) $ (.01) $ .14 $ .22 $ .20 .22 .16
From discontinued operations (.10) (.14) (.66)opera-
tions..................... -- -- (.44) (.19) (.42)(.69)
Net income (loss) .01 .01.......... (.15) (.01) (.29) .03 (.48)
Income (loss) per share-di-
luted:
From continuing operations. (.15) (.01) .14 .22 .20
From discontinued opera-
tions..................... -- -- (.41) (.19) (.66)
Net income (loss).......... (.15) (.01) (.28) .03 (.46) .03 (.26)
Cash dividends on common
stock 0 0 0 0 0
Balance Sheet Data:
- -------------------stock....................... -- -- -- -- --
DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ---------- --------- ------- -------
(RESTATED) (RESTATED)
BALANCE SHEET DATA:
Working capital $11,332,910 $11,506,779 $12,410,545 $10,670,973(deficit).... $(4,469) $ 4,283,4203,343 $ 4,139 $10,671 $12,411
Total assets 23,136,772 27,500,714 26,005,054 30,501,842 32,331,324assets................. 34,044 34,384 32,152 30,502 26,005
Short-term debt.............. 18,857 13,085 10,463 3,819 2,530
Long-term debt (excluding
current maturities) 5,427,593 7,825,586 8,798,475 10,019,138 9,624,303
Stockholders equity 12,803,509 15,266,774 12,320,633 13,711,499 8,547,642......... 36 6,893 9,624 10,019 8,798
Stockholders' equity......... 8,283 9,558 8,369 13,711 12,321
Average number of common and
common equivalent shares
8,408,769 8,999,182 9,048,895 9,155,231 9,725,230Basic...................... 9,458 9,323 9,173 8,804 8,668
Diluted.................... 9,458 9,323 9,725 9,155 9,049
- --------
* In March 1994, IGI's Board of Directors voted to dispose of its
Biotechnology Business segment through the combination of certain majority-ownedmajority-
owned subsidiaries and the subsequent tax-free Distributiondistribution of its
ownership of the combined entity to IGI's shareholders. The distribution of
this segment occurred on December 12, 1995. The Consolidated Financial
Statements of IGI present this segment as a discontinued operation. (See
Note 23 of Notes to Consolidated Financial Statements.)
1612
ItemITEM 7. Management's DiscussionMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
U.S. GOVERNMENT INVESTIGATION AND DISCIPLINARY PROCEEDINGS
From June 4, 1997 through March 27, 1998, the Company was subject to an
order by the CVB to stop distribution and Analysissale of Financial Conditioncertain serials and
Resultssubserials of Operations
Resultsdesignated poultry vaccines produced by the Company's Vineland
Laboratories Division ("Stop Shipment Order"). The Stop Shipment Order was
based on CVB's findings that the Company shipped serials before the Animal and
Plant Health Inspection Service division of Operations
- ---------------------
On December 12, 1995,the USDA ("APHIS") had the
opportunity to confirm the Company's testing results, failed to destroy
serials reported to APHIS as destroyed, and in ordergeneral failed to facilitate obtaining capital for its
Biotechnology Business operationskeep complete
and continued expansionaccurate records and to submit accurate reports to APHIS. The Stop
Shipment Order affected 36 of the Company's USDA-licensed vaccines. In July
1997, the Office of Inspector General of the USDA ("OIG") advised the Company
of its Animal Health
Productscommencement of an investigation into alleged violations of the Virus
Serum Toxin Act and Cosmeticsalleged false statements made to APHIS.
Because of the Stop Shipment Order and Consumer Products segments, IGI distributedthe commencement of the OIG
investigation, the non-employee members of the Board of Directors instructed
management to take immediate action to assure that all future shipments comply
with all regulatory requirements. In July 1997, the non-employee members of
the Board of Directors directed the Company to retain special counsel to
investigate the alleged violations and to advise the Board of Directors of its
ownershipfindings. In addition, the Company took action designed to obtain the approval
of Novavax,APHIS to IGI's shareholders ("Distribution"the Company's resumption of shipments of the products affected by
the Stop Shipment Order, including submission of an amended regulatory
compliance program and testing procedures acceptable to the USDA, reassignment
of certain personnel and restructuring of the quality control and quality
assurance functions.
Based on remedial action taken by the Company, including revised vaccine
production outlines, the USDA, during the period from August through December
of 1997, lifted the Stop Shipment Order with respect to all but three of the
36 affected products. As of March 27, 1998, the remaining three products were
released for sale and shipment by the Company.
Company Actions
As a result of the Company's internal investigation, in November 1997 the
Company terminated the employment of its President and Chief Operating
Officer, John P. Gallo, for willful misconduct in the performance of his
executive duties, and on April 21, 1998, the Company commenced a lawsuit
against Mr. Gallo (see "Legal Proceedings"). SinceIn addition, six employees,
including members of the Company's management team (including two Vice
Presidents of the Company), resigned in April 1998 at the request of the
Company. However, five of these former employees were retained by the Company
for approximately eight weeks to enable the Company to continue its operations
pending the hiring and training of Novavax comprise IGI's Biotechnology Business segment,qualified replacements. In connection with
the Consolidatedemployee terminations, the Company agreed to make severance payments to
the two non-management employees equal to four months salary.
The Company has recently replaced a number of key personnel. On May 11,
1998, the Company employed Paul Woitach as its President and Chief Operating
Officer. On June 1, 1998, John F. Wall joined the Company as its Senior Vice
President and Chief Financial StatementsOfficer. As of IGI present this segmentJune 15, 1998, the Company has
hired a new Vice President of Vineland Operations, a new Vice President of
Vineland Research and Development, a new Vice President of International
Marketing and Sales, and new Managers of Production and Quality Control. The
Company has also added managers with experience in materials and supply chain
management. Most of the new managers have experience in the poultry vaccine
industry. The Company has added these new employees without increasing its
historical overall payroll expenses.
Ongoing Government Investigations
In April 1998, the Company voluntarily disclosed to the U.S. Attorney for
the District of New Jersey, as well as to the USDA and OIG, information
resulting from its internal investigation of alleged violations by
13
certain former officers and employees of USDA rules and regulations and of the
Virus Serum Toxin Act and other statutes including U.S. Customs laws and
regulations. In connection with its investigation, the OIG has subpoenaed
Company documents and the Company has provided, and will continue to provide,
subpoenaed documents to Governmental authorities. The U.S. Government's
investigation is ongoing and could be expanded to other areas of the Company's
business in which violations of laws and regulations may be found to have
occurred. In addition, the Government's ongoing investigation could result in
action against the Company and certain of its former employees, including
fines and the possibility of criminal charges. Also, on April 30, 1998, the
SEC advised the Company that it is conducting an informal inquiry and
requested that the Company provide it with certain documents.
Effects of Stop Shipment Order and Investigations
The Stop Shipment Order adversely affected the Company's results of
operations for 1997, and the delay in approval of the remaining affected
products until the end of March 1998 will adversely affect overall sales
revenue in 1998. In addition, although the Company, on May 11, 1998, announced
the employment of a discontinued
operation. (See Notenew President and Chief Operating Officer, it needs to
replace and train certain key managers and other employees who have terminated
their employment at the request of the Company, which will have a materially
adverse effect on the Company's 1998 performance and operating results. Also,
if the OIG, the U.S. Attorney or the SEC concludes that the Company's actions
warrant enforcement proceedings, those proceedings, as well as the costs and
expenses related to them, could have a materially adverse effect on the
Company's business, financial condition and results of operations. Although
there can be no assurance as to the outcome of any proceeding, the Company
expects that it will be able to achieve a satisfactory resolution of its
existing regulatory and litigation matters.
RESTATEMENT OF PRIOR PERIODS
On March 27, 1998, the Board of Directors engaged special counsel to
investigate information first made known to it on March 17, 1998 which it
believed could have a material impact on the Company's financial reporting for
1997 and prior periods. The special counsel was authorized to engage
independent accountants to assist it in the investigation.
As a result of the findings of the special investigation initiated by the
Board of Directors in March 1998, the Company restated its consolidated
financial statements for 1995 and 1996. In the opinion of management, all
material adjustments necessary to correct the financial statements have been
recorded. The restatements amounted to additional losses of $179,000 and
$231,000 in 1995 and 1996, respectively. See "Note 2 of Notes to Consolidated
Financial Statements)Statements".
IGI's management believes that IGI's stockholders' interests were best served
by dividing IGI into two separate publicly-traded entities through the
Distribution; that the Distribution will enable IGI to focus on its historically
profitable and growing Animal Health Products business (Vineland Laboratories,
EVSCO Pharmaceuticals, and Tomlyn Products) as well as its Cosmetics and
Consumer Products which will continue to manufacture and market Novavax
technology based products under a license agreement; and that the Distribution
will simplify IGI and permit investors to more readily evaluate the earnings and
growth potentials of its businesses.
Income from continuing operations decreased by $461,000 or 23% compared to
1994. Operating profit decreased by $264,000 or 8% over 1994. The Animal
Health Products segment generated operating profits in 1995 of $6,459,000, an
increase of $403,000, or 7%, over 1994 dueIn addition to the increased sales volume.restatements discussed above, the Company made certain
adjustments in the fourth quarter of 1997 which were the result of actions or
events which occurred in earlier quarters of 1997. The Cosmetic and Consumer Products segment had an operating loss of $159,000 in
1995, compared to operating profits of $296,000 and $367,000 for 1994 and 1993,
respectively. The 1995 operating loss reflects the Company's development and
marketing of Novavax Technologies products for dermatologic and food
applications while continuing to market these technologies to major cosmetic and
consumer product companies. The operating loss for this segment in 1995
includes manufacturing variances related to the new production facility which
was not operating at full capacity and selling, marketing and development costsCompany has restated
its financial statements for the Company's Nova Skin Care division.first three quarters of 1997 to record such
adjustments in the applicable quarter. See "Note 18 of Notes to Consolidated
Financial Statements".
The operating profitsrestatements reflect inventory write-offs and inventory adjustments
which should have been recorded in different periods. Also reflected are
changes in the time periods in which certain product shipments were recognized
as sales.
14
A summary of these
segments do not reflect unallocated corporate expensesthe impact of $3,056,000, $2,845,000
and $3,000,000such restatements on the financial statements for
the years ended December 31, 1995 1994, and 1993
respectively,1996 is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995
-------------------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE
INFORMATION) AS REPORTED RESTATED AS REPORTED RESTATED
Net sales.......................... $35,140 $34,785 $31,221 $30,501
Income (loss) from continuing oper-
ations............................ 93 (138) 1,508 1,329
Net income (loss).................. 93 (138) (2,526) (2,705)
Income (loss) per common and common
equivalent share:
Basic:
From continuing operations..... $ .01 $ (.01) $ .16 $ .14
Net income (loss).............. $ .01 $ (.01) $ (.28) $ (.29)
Diluted:
From continuing operations..... $ .01 $ (.01) $ .16 $ .14
Net income (loss).............. $ .01 $ (.01) $ (.26) $ (.28)
See Note 18 of the Notes to the Consolidated Financial Statements for
discussion of the impact of the restatements on each of the three quarters in
the nine months ended September 30, 1997.
RESULTS OF OPERATIONS
1997 Compared to 1996
The Stop Shipment Order had a material adverse effect on the Company's
operations in 1997. Total sales decreased $592,000, or 2%, from $34,785,000 in
1996 to $34,193,000 in 1997. Sales of Animal Health Products in 1997 decreased
7% to $29,096,000, or 85% of total sales, compared with $31,262,000, or 90% of
1996 total sales. Sales of poultry vaccines decreased by $3,301,000, or 17%,
to $16,652,000, or 49% of the Company's total sales, compared with
$19,953,000, or 57% of 1996 total sales. This decrease was offset in part by
an increase of $1,135,000, or 10%, in sales of companion pet products to
$12,444,000, or 36% of the Company's total sales in 1997, compared with
$11,309,000, or 33% of total 1996 sales. International sales of Animal Health
Products decreased by $2,115,000, or 15%, to $11,841,000 in 1997 from
$13,956,000 in 1996. International sales represented 35% of the Company's
total sales in 1997 compared with 40% of total sales in 1996.
Sales of Consumer Products increased $1,574,000, or 45%, in 1997 to
$5,097,000 from $3,523,000 in 1996. Sales of Consumer Products represented 15%
of the Company's total 1997 sales, up from 10% of total 1996 sales. This
increase was due primarily to increased product sales to Glaxo Wellcome and
Kimberly Clark. Revenues from Glaxo increased by over $1,000,000 in 1997.
Gross profit decreased $1,845,000, or 10%, in 1997. As a percentage of
sales, gross profit was 48% in 1997 compared with 52% in 1996 due primarily to
(1) manufacturing variances; (2) inventory write-offs; (3) a less favorable
product sales mix at the Vineland Laboratories division due to the USDA
action; and (4) product sales to Glaxo which were chargedmade at cost plus a royalty
on Glaxo's sales which results in lower gross profit percentage than other
consumer product sales.
Selling, general and administrative expenses were 44% of sales in 1997
compared with 42% of sales in 1996. Although the Company decreased selling and
marketing expenses as a result of the license and supply agreement with Glaxo
("Glaxo Agreement"), total selling, general and administrative expenses
increased $512,000 in 1997 due to the segmentsadditional reserves for accounts receivable,
and legal and related expenses incurred in determiningconnection with the Company's operating profit. (See Note 15 of Notes to Consolidated Financial Statements.)
The loss from discontinued operations in 1995 resulted from increased
operating expenses related primarily to research efforts directed towardand
the development of human vaccinesUSDA and pharmaceuticals utilizing the Novavax
Technologies as well as transaction costs associated with the Distribution. The
Company had anticipated the effective date of the Distribution to be June 30,
1995. Due to delays in the final distribution of Novavax, the Company incurred
costs in excess of the $1,000,000 estimated loss on disposal of its
biotechnology business segment. These costs related to increased researchOIG investigations.
Research and development expenses fordecreased $338,000, or 17%, in 1997 as the
Company curtailed certain development projects primarily in the Consumer
Products segment. The Company intends to seek industry partners to fund such
research efforts.
15
Licensing and research revenue of $150,000 in 1997 represents $100,000 of
licensing income from Kimberly Clark and $50,000 of revenue attributable to an
agreement entered into on September 30, 1997 between the Company and IMX
Pharmaceuticals, Inc. ("IMX"), which grants IMX the exclusive right to market
certain Novasome-based topical skin care products in certain mass
merchandising markets. Pursuant to this agreement, the initial FDA approval process.Company received
271,714 shares of restricted common stock of IMX. The Biotechnology Business segment had nototal investment in IMX
stock is valued at $951,000 at December 31, 1997. Deferred revenue from product sales in 1995, 1994
or 1993. (See Note 2 of Notes to Consolidated Financial Statements.)
17
1995under this
agreement is also $951,000 at December 31, 1997.
1996 Compared to 1994
- ---------------------1995
Sales increased $2,273,000$4,284,000, or 14%, to $34,785,000. The growth occurred in
both of the Company's business segments. Sales of Animal Health Products in
1996 increased 8% to $31,221,000. The growth was principally
attributable to increases in poultry vaccine$31,262,000, or 90% of total sales, both domestically and
internationally.compared with
$28,869,000, or 95% of 1995 total sales. Poultry vaccine sales accounted for
$18,797,000$19,953,000, or 60%57% of the Company's total sales. International and domestic poultry vaccine sales experienced
growth rates of 14% and 7% respectively. The domestic increase was attributable
to the introduction of a new Rispen poultry vaccine during the second half of
1995. The Company expects the sales of
this productAnimal Health Products increased $2,073,000, or 17%, principally to continue to increase
during 1996. The international poultry sales increase relates directly to the
increased product registration activities, particularlycountries
in the Asia/Pacific marketplace, which experienced a 24%including China, Malaysia, Indonesia and
Taiwan. Domestic sales increase.of poultry vaccines decreased 2% from 1995 levels.
Companion pet product sales increased $225,000$597,000, or 2%6%, to $10,713,000, although international$11,309,000.
Sales of Consumer Products increased $1,891,000, or 116%, to $3,523,000 and
accounted for 10% of Company sales, up from $1,632,000, or 5% of these
products declined particularly in Europe. Tomlyn sales, which are directed to
the over-the-counter marketplace, experienced a 28%1995 total
sales. This increase was due principally to the placementcontinued expansion of these products in pet superstores. Increased sales to Estee
Lauder contributed to a $234,000 or 16% growth in the Cosmetics division. The
Company expects to increase the number
of products that it manufactures forcontaining the Company's licensed proprietary Novasome lipid
vesicle technology sold to Estee Lauder, during 1996 as well as complete licensing arrangements with two
other cosmetic and consumer product companies. In February 1996,resulting in a $1,000,000 increase
over 1995. Sales of the Company
launched aCompany's former line of Novasome based alpha hydroxy acid ("AHA") products through
its Nova Skin Care division. The Company is marketingproducts,
which were launched in February 1996, accounted for $402,000 of sales.
Marketing rights to these products directly(Novasome-based alpha-hydroxy acids) in the
United States to dermatologists through a sales force of 16 employees.physicians were licensed to Glaxo in late 1996.
The Company's gross profit increased $776,000$2,991,000, or 5%20%, with much of the
increase relatedattributable to the sales growth. As a percentage of sales, gross
profit droppedincreased to 52% from 52%50% during 1994 to 51% in 1995. Significant factorsThe significant factor in the
gross profit ratio
reduction weremargin improvement was the increased sales volume of certain lower-margin poultry vaccines, fixed
costs associated withhigher margined
consumer products. These sales increased the utilization of the Company's newskin
care manufacturing facility, which was
operating below full capacity and the discontinuance of certain product lines.
As the production requirements for the Cosmetic and Consumer Products segment
increases during 1996, the Company expects an improvementstarted producing products in its gross profit
percentage.1995.
Selling, general and administrative expenses increased $1,256,000$2,844,000, or 12% due24%.
As a percentage of sales, these expenses were 42%, up from 38% in 1995. This
increase relates, in part, to the variable selling and distribution costs
associated with the higher sales volume and additional
reserves established for international accounts receivables.volume. Selling and marketing costs
relating to the Company's new Nova Skin Care division were
$250,000. The Company expects significant increases in selling and marketing
expenses in 1996 related toassociated with the Nova Skin Care product line were $1,917,000, an increase
of $1,667,000 over 1995. In February 1997, the Company reduced its workforce
by 14 employees, most of whom were associated with its former Nova Skin Care
line. These costs
include introductory advertising, sampling and tradeshows as well as sales and
marketing management.
Research and development expenses increased by $132,000$668,000, or 11%50%, over 1995, due
principally to stepped upincreased new product development efforts in the Cosmetic and Consumer Products
segment, principally forboth of the
Company's business segments. These efforts were directed to developing the
Nova Skin Care dermatologic product line.line and other topical applications of the Novasome
technology. The Company intendscontinues to continuedevelop new vaccines for poultry. The
Company had $162,000 of research revenue in 1996, compared to increase its research and development efforts in
all of its businesses, with particular emphasis on developing new poultry
vaccines and developing additional products for the Nova Skin Care division.
During 1995, the Company recognized $731,000 in
research revenues, an increase
of $348,000 or 91% over 1994.
Interest1995.
Net interest expense increased $233,000$861,000, or 23%77%, due to the higher borrowings
which were required to meetfund the operational demands1995 operating losses of the Company's former
biotechnology business segment.
The Company expects interest expense to increase during 1996 related to
borrowings that were required in December 1995 to fundsegment and the $5,000,000 license payment that was
made in connection with the spin-off of Novavax in December 1995. In
connection with the settlement of a lawsuit brought against the Company
related to itsemployment contracts of certain IGI employees with their former
subsidiary, Novavax.
18
employers, the Company incurred charges of $175,000 for which the Company has
issued shares of IGI common stock. This amount is included in other expense.
The provision for income taxes on continuing operations was lower than the
statutory rate due principally to utilization ofsubsidiary Company operating losses reported
on a separate return basis for state income tax purposes and research and
development tax credits, as well as an adjustment to prior years accruals. (Seeoffset by non-deductible expenses. See also Notes 1,
23, and 710 of Notes to the Company's Consolidated Financial Statements.)
1994 Compared
16
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1998, the Company was engaged in negotiating
amendments to 1993
- ---------------------
Net sales increased by $943,000 or 3% compared to 1993. International salesits credit agreement with its bank lenders, including waivers of
poultry vaccines (Vineland Laboratories)its covenant defaults and small animal products (EVSCO and
Tomlyn) increased by $1,077,000 or 11% and accounted for $11,360,000 or 39%an extension of the Company's sales, up from $10,282,000 or 37% ofcredit agreement since the
Company's 1993 sales.
Domestic sales of EVSCOCompany was in default under certain covenants contained in its bank credit
agreement during 1997 and Tomlyn products increased by $97,000 or 1%.
Domestic sales by Vineland Laboratories in 1994 were $330,000 or 4% less than in
1993. This decrease was due to a combination of factors, including poultry
vaccine production capacity limitations which resulted in shipping of certain
vaccines to overseas rather than domestic markets, and domestic price erosion on
several vaccines. Overall, sales of the Company's Animal Health Products
segment increased by $845,000 or 3% and accounted for $27,471,000 or 95% of the
Company's sales, compared to $26,627,000 or 95% of the Company's 1993 sales.
Sales of the Company's Cosmetics and Consumer Products segment were $1,477,000,
an increase of $98,000 over 1993. These sales were principally of cosmetic
products utilizing the Novavax Technologies.
Gross profit increased by $173,000 or 1% compared to 1993. This increase was
attributable principally to the higher sales volume. As a percentage of sales,
gross profit was 52%, down from 53% in 1993, due in part to domestic poultry
vaccine price concessions as a result of competitive pricing pressures. In the
aggregate, gross profit margins from international sales were comparable to
those of domestic sales.
Selling, general and administrative expenses increased by $38,000 due in part
to variable expenses associated with the higher sales volume. As a percentage
of sales, the expenses decreased to 37% from 38% in 1993. This decrease is
attributable to absorption of fixed costs by the higher sales volume.
Gross research and development expenses increased $396,000 or 48% due
principally to additional technology application efforts focused at the
Company's core business operations, especially in the areas of flavors,
cosmetics and chemicals. These expenditures were offset, in part, by research
revenues from industry partners of $383,000.
Interest expense increased by $270,000 or 35% due principally to higher bank
borrowings at higher interest rates. The additional borrowings were required
principally to fund the operations of the Company's discontinued Biotechnology
Business segment.
The provision for income taxes on continuing operations was lower than the
statutory rate, due principally to a reduction in valuation allowances as well
as utilization of research and development tax credits. The loss from
discontinued operations reflects an expected tax benefit of $797,000. The
Company has recorded a full valuation allowance of $2,880,000 against the net
deferred tax asset from discontinued operations based on a determination of the
ultimate realizability of future deferred tax assets. (See Notes 1, 2 and 7 of
Notes to Consolidated Financial Statements.)
19
The loss from discontinued operations in 1994 consisted of $700,000 in
expenses incurred in excess of the $2,750,000 reserve established at December 31, 1993. The Company's anticipated effective date for1997. During the Distribution of
September 30, 1994 was delayed principally by the late receipt of a favorable
tax-free rulingperiod from the IRS. The Company received the requested ruling from
the IRS in March 1995 and had originally intended to complete the Distribution
by June 30, 1995. In addition to the aforementioned charges, the Company
established a reserve of $1,000,000 for additional operating and transaction
expenses to be incurred prior to the then anticipated effective date of the
Distribution. (See Note 2 of Notes to Consolidated Financial Statements.)
Liquidity and Capital Resources
- -------------------------------
On March 17, 1994, IGI's Board of Directors voted to dispose of the
biotechnology business segmentJanuary
1, 1998 through the combination of its majority-owned
subsidiaries Molecular Packaging Systems, Inc. ("MPS") and Novavax, Inc. and the
subsequent tax-free Distribution to IGI's shareholders. On March 20, 1995, the
Company received a favorable ruling from the IRS that the Distribution would be
tax-free to IGI and its shareholders and the Company ultimately disposed of this
segment on December 12, 1995. For the year ended December 31, 1995, the Company
incurred $5,034,000 in losses related to its biotechnology business segment of
which $1,000,000 were reserved for at December 31, 1994. Since the operations
of Novavax comprised IGI's biotechnology business segment, the Consolidated
Financial Statements of IGI for the year ended December 31, 1995 report the
results of the biotechnology business segment as discontinued operations. The
Company had anticipated the effective date of the Distribution to be June 30,
1995. Due to delays in the final distribution of Novavax, the Company incurred
costs in excess of the $1,000,000 estimated loss on disposal of its
biotechnology business segment. These costs related to increased research and
development expenses for products in the initial FDA approval process. The
Distribution became effective December 12, 1995.
Under the terms of the Distribution,April 29, 1998, the Company paid Novavax $5 million forinterest at a fully paid-up license to use the Novavax Technologies in its business and
converted $17,024,000rate of loans made to this operation in exchange for additional
shares of Novavax Stock, which was distributed to IGI shareholders in the
Distribution. IGI had loaned $17,591,000 to Novavax to fund Novavax operations
through the Distribution Date. Any advances made by IGI in excess of
$17,024,000 up to $250,000 have been deducted from the $5,000,000 payment under
the License Agreement.
IGI funded the $5,000,000 payment to Novavax fromprime
plus 4% on outstanding borrowings under its bank
loan agreement which has been amended to reflect the Distribution. The Amended
Loan Agreement with Fleet Bank - New Hampshire and Mellon Bank provides for:
. $12,000,000 revolving credit facility with interest contingent upon certain
financial ratios at the end of each quarter. Effective January 1, 1996, the
interest rate shall not exceed prime plus 1 1/2%. The amount available under
the revolving credit facility decreases by $800,000 on the last day of each
quarter from June 30, 1996 through December 31, 1999. At December 31, 1995
the Company had outstanding borrowings of $12,000,000 under this facility and
the interest rate was 9%.
20
. $10,000,000 working capital line and prime
plus 4 1/2% on outstanding borrowings under its revolving credit facility. The
Company entered into an Extension Agreement with its bank lenders as of April
29, 1998 (the "Closing Date") which provided for the waiver of the then
existing covenant defaults, extension of the bank credit renewable annually, with
interest onagreement through
March 31, 1999, a maximum credit line facility of $12,000,000 ("Credit Line")
and extended terms for repayment of the outstanding borrowings contingent upon certain financial
ratios at the end$6,857,142 balance (at
April 29, 1998) of each quarter. Effective January 1, 1996, the interest
rate shall not exceed prime plus 1%. At December 31, 1995 the Company had
$1,952,000 available under this facility and the interest rate was 9.5%revolving credit notes ("Revolving Facility").
The Company was in default under certain covenants contained in the
Extension Agreement at July 31, 1998. On August 19, 1998, the Company and its
bank lenders entered into a Forbearance Agreement whereby the banks agreed to
forbear from exercising their rights and remedies arising from these covenant
defaults through January 31, 1999.
The Extension Agreement and the Forbearance Agreement (the "Agreements")
provide for the following:
. The maximum availability under the Credit Line is subject to the
determination of the amount of eligible accounts receivable and eligible
inventories. The Credit Line is due and payable in full on January 31,
1999.
. The outstanding balance of $6,857,142 under the Revolving Facility is due
and payable on January 31, 1999.
. All of the Company's indebtedness to the banks is subject to a security
interest in all of the assets of the Company and its significant
subsidiaries.
. Interest on outstanding borrowings under both the Credit Line and the
Revolving Facility will be:
From August 1, 1998 through September 30, 1998............ Prime plus 3 1/2%
From October 1, 1998 through November 30, 1998............ Prime plus 4 1/2%
From December 1, 1998 through January 31, 1999............ Prime plus 5 1/2%
. At the Closing Date the Company issued to the lenders warrants to
purchase an aggregate of 540,000 shares of the Company's common stock at
an exercise price of $3.50 per share. Warrants ("Unconditional Warrants")
to purchase 270,000 shares are exercisable at any time during the period
commencing 60 days after issuance and ending on the fifth anniversary of
issuance, unless the Company is able to refinance its bank debt by
October 31, 1998 in which case these warrants expire. Warrants
("Conditional Warrants") to purchase the remaining 270,000 shares are
exercisable at any time during the period commencing September 1, 1998
and ending on the fifth anniversary of issuance, unless the Company is
able to refinance its bank debt by December 24, 1998 in which case these
warrants expire. The Company has a call option on the warrants, which can
only be exercised as to all of the shares issuable at that time, with a
repurchase price of $900,000 for each of the Conditional Warrants and
Unconditional Warrants. The Company will recognize a non-cash expense for
these warrants when earned in accordance with Statement of Financial
Accounting Standards No. 123. The Company estimates the total expense for
warrants is approximately $400,000, or $.04 per share, net of taxes.
. The Company agreed to pay Fleet Bank, as agent on behalf of the lenders,
a monthly agent's fee of $5,000 and an extension fee of $250,000, of
which $60,000 was paid at the time of the Extension, and the balance is
payable in three installments through March 24, 1999.
. The Company agreed to pay Fleet Bank, as agent on behalf of the lenders,
a forbearance fee of $140,000, of which $20,000 was paid at the time of
the Forbearance, and the balance is payable in three installments
17
through January 15, 1999. However, if the Company is able to replace its
existing bank debt within the
30 days following a forbearance fee due date, the installment then due
plus all future installments shall be waived.
The Agreements require the Company to maintain certain financial ratios and
comply with other non-financial covenants, and also prohibits the payment of
cash dividends without the prior written consent of the lenders. The Company
is actively seeking, and believes it will be able to secure, alternative
financing arrangements to replace its existing debt and lending terms through
a number of potential options including, but not limited to, the issuance of
debt or equity securities or a combination of both. The Company plans to
engage an investment banker for the purpose of formulating alternative
business strategies and to coordinate the orderly satisfaction of its
current ratio covenant as of December 31,
1995. The banks have amendedobligations. No assurance can be given that the agreementCompany will be able to removeobtain
alternative financing arrangements, and if it is unsuccessful in doing so, the
default.Company may be required to restrict its business operations or otherwise
modify its business strategy. The Company used $2,710,000 forbelieves it will be able to remain
in compliance with its debt covenants through January 30, 1999.
The Company's operating activities due principallyprovided $2,437,000 of cash during 1997.
Cash was provided from non-cash charges to operations for depreciation,
amortization, loss reserves and the $1,000,000 payment from Glaxo under the
Glaxo Agreement. These amounts were offset, in part, by increases in inventories, related primarily to new products being introduced
during 1995, and accounts
receivable, related to the increase in international
sales. Accountsinventories and other current assets. The accounts receivable
turnover ratio for 1997 was 3.894.51 compared to 4.084.24 for the
year ended December 31, 1994. Accounts1996. The accounts
receivable balances due from Mexico and Latin America were 13%24.5% of the total
receivable balancebalances before allowance for doubtful accounts as of December 31,
1997 and the Company believes the net amounts are fully collectible. Mexico and
certain Latin American countries are important markets for the Company's
poultry vaccines and other products. These countries have historically
experienced varying degrees of political unrest and economic and currency
instability. In addition, the Company has accounts receivable from countries
in the Far East, including Indonesia and Thailand, which represent 17.4% of
the total receivable balances before allowance for doubtful accounts at
December 31, 1997. This area has recently experienced political, economic and
currency instability. Because of the volume of business transacted by the
Company in those countries,these areas, continuation or the recurrence of such unrest or
instability could adversely affect the businessesbusiness of its customers in those
countries or the Company's ability to collect its receivables from such
customers, which in either case could materially adversely impactaffect the
Company's future operating results. The growth in inventories relates
principally to new animal health products thata build up in poultry vaccines as a result of the Company began selling during
the third quarter as well as products for the Nova Skin Care division which were
launched in February 1996.USDA stop
shipment actions. The inventory turnover ratio for 19951997 was 1.81,1.89, compared to
1.661.82 for the year ended December 31, 1994.1996. The Company believes its reserves
for inventory obsolescence and accounts receivable are adequate. The Company
used $2,397,000 in$568,000 for investing activities, forprincipally capital expenditures to
build and equip its new 25,000 square foot research, marketing and production
facility in Buena, New Jersey, as well as an additional $5,360,000 for
the payment of the License Agreement, patent costs and capital expenditures (See
Note 2 of Notes to Consolidated Financial Statements).Company's manufacturing operations. Funding for the Company's operating
and investing activities were provided by borrowings under the Company's
working capital line of credit and the revolving credit facility. The
Company has no further obligation or intention to fund Novavax.credit.
At March 22, 1996July 31, 1998, the Company had $1,485,000 ofno available borrowing capacity under the
working capital line of creditCredit Line and no borrowings available under the revolving line of credit.Revolving Facility. Funds
generated from operations and existing bank credit facilities are expected to
be sufficient to meet the Company's short-term cash requirements. However, the
funds available under its existing bank credit facilities are only sufficient
to finance the Company's operations at its current levels including the costs
associated with the USDA and other regulatory and litigation matters. The
Company has current maturities of long-term debt of
$800,000 per quarter commencing June 30, 1996. The Company believes that cash
generated from operating activitieswill be required to raise additional funds to finance capital
expenditures as well as available borrowings underthe expansion of its line of creditbusiness. Additionally, the bank
facility will be sufficientexpires in January 1999. The Company, therefore, intends to meet these obligations. However,
over the long-term, the Company will requireseek
additional funds to expand its
business.through the issuance of debt or equity securities or a
combination of both. No assurance can be given that the Company will be successful in
obtainingable
to obtain the additional required funds, and if not,it is unsuccessful in doing so
the Company may be required to cut
back onrestrict its expansion plansbusiness operations or otherwise appropriately
modify its business strategy.
21
Factors That May Affect Future ResultsFACTORS THAT MAY AFFECT FUTURE RESULTS
The industry segments in which the Company competes are constantly changing
and are subject to significant competitive pressures. The following sets forth
some of the risks which the Company faces.
AvailabilityADVERSE EFFECTS OF USDA ACTIONS AND OIG AND U.S. ATTORNEY INVESTIGATIONS
The Company believes that the Stop Shipment Order and other actions by the
USDA in 1997 and the ongoing government investigations described in
"Management's Discussion and Analysis of CapitalFinancial Condition
18
and Results of Operations" ("MD&A"), and the costs incurred in connection with
those investigations will have a materially adverse effect on its business and
results of operations in 1998. First, the Company needs to attract, train and
retain key employees for its management team to replace key employees
terminated in 1997 and 1998, including corporate officers to head up its
manufacturing operations, marketing and sales and business development.
Second, the Company needs to satisfy the USDA and the government agencies and
its customers that it has established and implemented compliance programs that
will prevent future violations of government regulations applicable to its
poultry vaccine business. Third, it must assure its customers that its future
business operations will comply with all applicable government rules and
regulations and that its financial condition is adequate to meet its business
commitments and to maintain a viable and stable business environment. Fourth,
it must comply with all of the covenants in its bank credit agreement to
assure continued bank financing of its operations and replace its current bank
agreement. Fifth, it must raise additional funds, either through additional
borrowing or the sale of equity, to meet its growth objective and to maintain
its competitive position. Sixth, it must overcome the adverse effects of the
AMEX's trading suspension of the Company's Common Stock to provide the
opportunity for the Company to raise additional funds for its business. No
assurance can be given that the Company will be able to accomplish all or any
of the foregoing requirements, and if it is unsuccessful in doing so, or if
the OIG, U.S. Attorney or the SEC decides to commence enforcement proceedings
against the Company, those proceedings, as well as the costs and expenses
related to them, could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
costs and expenses, including legal, accounting and consulting fees and
expenses, associated with the ongoing investigations and existing and
potential litigation have been, and are expected to continue to be,
substantial and will have a materially adverse effect on the Company's 1998
operating results.
The Company is cooperating fully with the U.S. Attorney and each of the
regulatory agencies and has produced a substantial amount of documents and
information requested by the U.S. Attorney. The U.S. Attorney has not
indicated what course of action, if any, it may pursue with respect to IGI in
light of the Company's extensive cooperation. The Company has not been advised
that it or any of its present employees are targets of any Justice Department
or regulatory investigation. Although there can be no assurance as to the
outcome of any proceeding, the Company expects that it will be able to achieve
a satisfactory resolution of its existing regulatory and litigation matters.
However, if criminal charges were to be brought against IGI, the Company could
incur substantial costs in fines and attorney's fees to defend the action. The
Company could also face additional substantial costs in administrative civil
penalties. Since the Company expects a satisfactory resolution of these
matters, no reserves were provided at December 31, 1997.
HIGHLY LEVERAGED; INABILITY TO OBTAIN ADDITIONAL FUNDING
The Company has historically applied the operating profits from its animal
health products business to fund the development of its cosmeticsconsumer products
business and its former biotechnology business, Novavax, Inc., which was distributed
to the Compay'sCompany's stockholders in December 1995. Therefore, theThe Company is currently very
highly leveraged and has negative working capital, and therefore will need
additional capital to finance the expansion of its aniimalanimal health and cosmeticsproducts and
consumer products businesses. No assurance can be given that such funds will
be obtained when required or, if obtainable, on terms that are favorable to
the Company.
The Company was in violation of certain covenants in its bank credit
agreements during 1997 and at December 31, 1997. In addition,April 1998 the banks
agreed to a waiver of the covenant defaults and to extend the credit agreement
on revised terms and conditions through March 31, 1999. The Company was in
default under certain covenants contained in the Extension Agreement at July
31, 1998. On August 19, 1998, the Company expectsand its bank lenders entered into a
Forbearance Agreement whereby the banks agreed to forbear from exercising
their rights and remedies arising from these covenant defaults through January
31, 1999. The Company is actively seeking alternative financing arrangements
to replace its existing debt and lending terms through a number of potential
options including, but not limited to, the issuance of debt or equity
securities or a combination of both. No assurance can be given that the
Company will be able to obtain alternative financing arrangements, and if it
is interest expenseunsuccessful in doing so, the Company may be required to restrict its
business operations or otherwise modify
19
its business strategy. The Company believes it will increasebe able to remain in
1996 ascompliance with its debt covenants through January 30, 1999. No assurance can
be given that the banks will waive future covenant defaults or modify the
terms of the credit agreement to accommodate the Company.
SUSPENSION OF TRADING
The Company was unable to file its 1997 Annual Report on Form 10-K by the
March 31, 1998 due date. As a result, the AMEX halted trading of increased borrowings,
which will impact the Company's
profitability.
Intense Competitioncommon stock. No assurance can be given that AMEX trading privileges will be
resumed in Cosmeticthe future. The failure of the Company to maintain its trading on
the AMEX could adversely affect its ability to raise additional funds required
for its business through the sale of debt or equity securities and would limit
and adversely affect the trading market for its outstanding common stock and
the ability of stockholders to liquify their holdings on favorable market
terms.
INTENSE COMPETITION IN CONSUMER PRODUCTS BUSINESS
The Company's Consumer Products Business
The Company's Cosmetics and Consumer Products Division competes with large, well-financed
cosmetics and consumer products companies with developpmentdevelopment and marketing
groups that are expepriencedexperienced in the industry and possess far greater resources
than those available to the Company. The Company expects to rely
principally on increased sales of its cometics andThere is no assurance that the Company's
consumer products can compete successfully against its competitors or that it
can develop and market new products that will be favorably received in the
marketplace. In addition, certain of the Company's customers that use the
Company's NovasomesNovasome lipid vesicles in their products may decide to reduce their
purchases from the Company or shift their business to other suppliers.
Price Competition in Poultry Vaccine Businesstechnologies.
COMPETITION IN POULTRY VACCINE BUSINESS
The Company is encountering increasingincreasingly severe competition from
international producers of poultry vaccines, particularly increased price
copetitioncompetition coupled with a downward trend in vaccine prices.
In addition, theFOREIGN REGULATORY AND ECONOMIC CONSIDERATIONS
The Company's business may be adversely affected by foreign import
restrictions and additional regulatory requirements. Also, unstable or adverse
economic conditions and fiscal and monetary policies in certain CentralLatin American
and South AmericanFar East countries, andan increasingly important market for the Company's
animal health products, could adversely affect the Company's future business
in these countries.
Rapidly Changing Marketplace for Animal Health ProductsRAPIDLY CHANGING MARKETPLACE FOR ANIMAL HEALTH PRODUCTS
The emergence of pet superstores, the consolidation of distribution channels
into a smaller number of large, more powerful comppaniescompanies and the diminishing
traditionalchanging role
of veterinarians in the distribution of animal health business mayproducts, could
adversely affect the Company's ability to expand its animal health business
and to operate this business at the gross margin levels historically enjoyed by the Company.
22
Effect of Rapidly Changing TechnologiesEFFECT OF RAPIDLY CHANGING TECHNOLOGIES
The Company expects to rely on the features of its Novavax Technologiestechnologies to license
the technologies to third parties which would manufacture and market and expand its line of internally-developed dermatologic products.products
incorporating the technologies. However, if its competitors develop new and
improved technologies that are superior to the Company's technologies, the Company's productsits
technologies could be less acceptable in the marketplace and therefore the
Company's planned expansion of
its line of personal care and dermatologic productstechnology licensing could be materially adversely affected.
Regulatory ConsiderationsREGULATORY CONSIDERATIONS
The FDA may determine that the Company's alpha hydroxy acid-basedanimal health products are "drugs"regulated by the USDA and therefore should bethe FDA
which subject the Company to thereview, oversight and periodic inspections. Any
new products are subject to expensive and sometimes protracted USDA and FDA
regulatory approval. Also, certain of the Company's products may not be
approved for sales overseas on a timely basis, thereby limiting the Company's
ability to expand its foreign sales.
Accounting Standards Changes
- ----------------------------20
YEAR 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
the processing errors potentially arising from calculations using the Year
2000 date are a known risk. The Company is addressing this risk to the
availability and integrity of financial systems and the reliability of
operational systems. The Company has established a management committee to
evaluate the risk and costs associated with this problem. An initial
assessment has been completed and the cost of achieving Year 2000 compliance
is currently estimated to be approximately $350,000 over the cost of normal
hardware and software upgrades and replacements and will be incurred from
October 1998 through fiscal 1999.
ACCOUNTING STANDARDS CHANGES
In March 1995,June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS")(SFAS) No. 121, "Accounting130 "Reporting Comprehensive Income." This
Statement establishes standards for the Impairmentreporting all components of Long-Lived Assets andcomprehensive
income. This Statement is effective for Long-Lived Assets to be Disposed
Of." SFAS No. 121 requires companies to adopt its provisionsfinancial statements issued for
fiscal years
beginningperiods ending after December 15, 1995. This standard specifies when assets should
be reviewed for impairment, how to determine1998. The Company is currently evaluating
the impact, if an asset is impaired, how to
measure an impairment loss, and what disclosures are necessary in theany, adoption of SAFS No. 130 will have on its financial
statements.
Management believes the impact of this pronouncement is not
material since the majority of the Company's long-lived assets are property,
plant and equipment that are utilized in the manufacturing of the Company's
products.
In October 1995,June 1997, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation.131 "Disclosures about Segments of an
Enterprise and Related Information," SFAS No. 123 requires companieswhich revises disclosure requirements
related to operating segments, products and services, the geographic areas in
which the Company operates and major customers. The Company will adopt its provisionsthis
statement for fiscal years beginning after December 15, 1995. SFAS No. 123 encourages a fair
value based method of accounting for employee stock options or similar equity
instruments, but allows continued use of the intrinsic value based method of
accounting prescribed by Accounting Principles Board (APB) Opinion No. 25
"Accounting for Stock Issued to Employees." Companies electing to continue to
use APB No. 25 must make pro forma disclosures of net income1998 and earnings per
share as if the fair value based method of accounting had been applied. The
Company is evaluating the provisions of SFAS No. 123, but hasdoes not yet determined
whether it will continue to follow the provisions of APB No. 25 orpresently anticipate any material
change to the
fair value method of SFAS No. 123.
Income Taxes
- ------------in its disclosures.
INCOME TAXES
The Company has a net deferred tax asset in the amount of $2.9approximately $4
million as of December 31, 1995.1997. The largest deferred tax assets relateasset relates to the
$5,000,000$5 million Novavax license payment which will bethat is being deducted over thea ten-year
period as the related
products are sold and the royalties incurred and to net operating loss
carryforwards.which began in 1996. Management believes, on a more likely than not
basis, that the Company's net deferred tax asset will be realized through the
reversal of existing taxable temporary differences and the generation of
sufficient future taxable operating income to ensure utilization of remaining
deductible temporary differences, net operating loss carryforwardslosses and the prepaid license against
future taxable income.tax credits. The
minimum level of future taxable income necessary to realize the Company's recordednet
deferred tax assetassets at
23
December 31, 1995,1997, is approximately $$15 million. There
can be no assurance, however, that the Company will be able to achieve the
minimum levels of taxable income necessary to realize its net deferred assets.
The majority of the net operating loss carryforwards expire in 20102007 and
there are no limitations on their use.federal research credits expire in varying amounts through the year 2012.
Management believes that it will be able to utilize these carryforwards. The
Company's consolidated federal taxable income (loss) variesloss in 1997 and 1996 differed from its
consolidated financial statement income (loss).loss. In 19931997 and 1994,1996, taxable incomeloss was
higherlower due to the establishment ofincreases in reserves for losses on discontinued
operations; ininventories and accounts receivable
plus lower depreciation claimed for tax purposes, which exceeded the tax
deductions for a portion of the prepaid license agreement. In 1995, taxable
income from continuing operations was lower as the reserves were utilized.
Itemdue to tax deductions relating to
nonqualifying stock dispositions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. Financial Statements and Supplementary DataFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto listed in the accompanying index
to financial statements (Item 14) are filed as part of this Annual Report.
ItemReport and
incorporated herein by reference.
ITEM 9. ChangesCHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 23, 1997, the Company was informed by Coopers & Lybrand L.L.P.
(C&L), who were the Company's independent accountants for the years ended
December 31, 1996 and 1995, that C&L was resigning as the Company's auditors
effective as of that date. C&L's reports on the Company's 1996 and 1995
financial
21
statements contained no adverse opinion or disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope or accounting principle.
The decision to terminate the client-auditor relationship between the Company
and C&L was made by C&L, and neither the Company's Board of Directors nor its
Audit Committee participated in the decision to change the Company's
independent accountants. In connection with its audits for the two years ended
December 31, 1996, and Disagreementsthrough July 23, 1997, there were no disagreements with
AccountantsC&L on Accountingany matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement would have
caused C&L to make reference thereto in their report on the financial
statements for such periods. On September 8, 1997, the Company engaged Price
Waterhouse LLP ("PW") to act as its independent accountants. The Company did
not consult with PW during the Company's two most recent fiscal years and Financial Disclosure
None.
24any
subsequent interim period prior to engaging them regarding matters that were
or should have been subject to Statement on Auditing Standard No. 50 or any
subject matter of a disagreement or reportable event with its former
accountant.
22
PartPART III
ItemITEM 10. Directors and Executive Officers of the RegistrantDIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the caption
"Executive Officers of the Registrant"Company" in PARTPart I hereof, and the remainder is
contained in the Company's Proxy Statement for the Company's Annual Meeting of
Stockholders to be held on May 8, 1996 (the "1996 Proxy Statement") under the
captions "PROPOSAL 1 - ELECTION OF DIRECTORS" and "Beneficial Ownership of
Common Stock" and is incorporated
herein by this reference.
The Company expectsfollowing table sets forth certain information with respect to the
directors and the Company:
PRINCIPAL OCCUPATION, OTHER
BUSINESS EXPERIENCE DURING
DIRECTOR PAST FIVE YEARS AND OTHER
NAME AGE SINCE DIRECTORSHIPS
---- --- -------- ------------------------------
Edward B. Hager, M.D. ........... 67 1977 Chairman of the Board of
Directors and Chief Executive
Officer of IGI, Inc. since
1977; Chairman of the Board of
Directors and Chief Executive
Officer of Novavax, Inc. from
1987 to June 1996; Chairman of
the Board of Directors of
Novavax, Inc. from February
1997 to March 1998; Dr. Hager
is the husband of Jane E.
Hager.
Jane E. Hager.................... 52 1977 President of Prescott
Investment Corp. (real estate
development), Lyndeboro, NH
since 1991; former Treasurer
and Secretary of IGI, Inc.;
Director of Fleet Bank-NH,
Nashua, NH from 1986 to 1997;
Trustee and Treasurer of the
University System of New
Hampshire; Overseer of
Dartmouth Mary Hitchcock
Hospital; Incorporator of New
Hampshire Charitable Fund,
Concord, NH; Director of
Novavax, Inc. from February
1997 to March 1998; Mrs. Hager
is the wife of Edward B.
Hager.
John P. Gallo.................... 55 1985 President and Chief Operating
Officer of IGI, Inc. from 1985
to November 1997; President of
Novavax, Inc. from January
through September 1995, and
Chief Operating Officer and
Treasurer of Novavax, Inc.
from September 1995 to May
1996.
David G. Pinosky, M.D. .......... 68 1980 Member of the faculty of the
University of Miami School of
Medicine since 1963; Medical
Director, Psychiatric Unit,
Palmetto General Hospital,
Hialeah, FL since 1986;
President, Miami Psychiatric
Associates since 1971; Medical
Director of Highland Park
General Hospital, Miami, FL
from 1971 to 1986.
Terrence O'Donnell............... 54 1993 Member of law firm of Williams
& Connolly, Washington, D.C.
since March 1992 and from
March 1977 to October 1989;
General Counsel of Department
of Defense from October 1989
to March 1992; Special
Assistant to President Ford
23
PRINCIPAL OCCUPATION, OTHER
BUSINESS EXPERIENCE DURING
DIRECTOR PAST FIVE YEARS AND OTHER
NAME AGE SINCE DIRECTORSHIPS
---- --- -------- ------------------------------
from August 1974 to January
1977; Deputy Special Assistant
to President Nixon from May
1972 to August 1974; Director
of MLC Holdings.
Constantine L. Hampers, MD....... 65 1994 Chief Executive Officer of MDL
Consulting Associates since
1996; Chairman of the Board of
Directors and Chief Executive
Officer of National Medical
Care, Inc., a provider of in-
center and home kidney
dialysis services and
products, from 1968 to 1996;
Executive Vice President and
Director of W. R. Grace & Co.
("W. R. Grace") from 1986 to
1996; Director of Artificial
Kidney Services at Peter Bent
Brigham Hospital and Assistant
Professor of Medicine at
Harvard University School of
Medicine prior to 1968 and for
several years thereafter.
Paul D. Paganucci................ 67 1996 1996 Chairman of the Board of
Directors of Ledyard National
Bank since 1991; Chairman of
the Executive Committee of
Board of Directors of W.R.
Grace from 1989 to 1991; Vice
Chairman of W.R. Grace from
1986 to 1989; Executive Vice
President of W.R. Grace from
January 1986 to November 1986;
Director of HRE Properties,
Inc., Filene's Basement, Inc.
and Allmerica Securities
Trust.
Terrence D. Daniels.............. 55 1996 President of Quad-C (a
structured investment firm)
since 1990; Vice Chairman of
W.R. Grace & Co. from 1986 to
1989; Director of DSG
International Ltd., Eskimo Pie
Corporation and Stimsonite
Corporation.
F. Steven Berg................... 63 1998 President of Bishopsgate
Financial Corp. (Investment
company) since 1990.
Mr. Gallo has not been nominated for election as a director at the next
Annual Meeting of Shareholders.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, executive officers and
holders of more than 10% of the Company's Common Stock ("Reporting Persons")
to file with the 1996 Proxy Statement within 120 days after the closeCommission initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the
Company. Except as set forth below, and based solely on its review of copies
of reports filed by Reporting Persons furnished to the Company, the Company
believes that during 1997 its Reporting Persons complied with all Section
16(a) filing requirements. F. Steven Berg, a director of the Company, failed
to file on a timely basis a Form 3--Initial Statement of Beneficial Ownership
of Securities.
24
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and noncash compensation for each of
the last three fiscal years awarded to or earned by the Chief Executive
Officer of the Company, the four most highly compensated executive officers of
the Company who received compensation in excess of $100,000 during 1997 and
who were serving as executive officers at the end of 1997 and the former
President of the Company, whose employment was terminated in November 1997
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION
---------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION OPTIONS(2) COMPENSATION
POSITION YEAR ($) ($) (1) ($) (#) (3) ($)
------------------ ---- -------- ------ ------------ ------------ ------------
Edward B. Hager......... 1997 $303,480 $ -- $ -- -- $11,944
Chief Executive Officer 1996 345,455 -- -- 50,000 12,864
1995 314,050 55,000 -- 50,000 12,062
John P. Gallo (4)....... 1997 329,172 -- 1,678 -- 12,288
President and Chief
Operating 1996 345,455 -- 44,860 50,000 12,772
Officer 1995 314,050 50,000 41,777 50,000 12,062
Stephen G. Hoch (5)..... 1997 218,149 -- 7,200 -- 8,166
Vice President 1996 200,293 10,000 7,200 5,000 9,128
1995 186,886 5,000 7,200 5,000 9,609
Lawrence N. Zitto (6)... 1997 166,689 -- 7,200 -- 9,381
Vice President 1996 155,138 10,000 7,200 10,000 11,562
1995 140,196 10,000 7,200 10,000 11,727
Surendra Kumar (7)...... 1997 140,947 -- 7,200 -- 7,834
Vice President 1996 130,698 5,000 7,200 5,000 9,362
1995 121,990 5,000 7,200 5,000 8,486
Kevin J. Bratton........ 1997 122,723 -- 6,000 -- 8,847
Vice President and
Treasurer 1996 116,416 3,000 6,000 5,000 10,588
1995 113,807 2,000 6,000 5,000 10,938
- --------
(1) The amounts shown in this column represent automobile allowances, medical
expense reimbursement, housing allowances and compensation for unused
vacation time. Mr. Gallo received $38,653 and $36,237 in 1996 and 1995,
respectively, as compensation for unused vacation time. Mr. Gallo received
no compensation for unused vacation time in 1997.
(2) The Company has never granted any stock appreciation rights.
(3) The amounts shown in this column represent premiums for group life
insurance and medical insurance paid by the Company and the Company's
contributions under its 401(k) plan. The group life insurance premiums
paid by the Company for each of Dr. Hager and Messrs. Gallo, Hoch, Zitto,
Kumar and Bratton for the last fiscal year endedwere $800, $1,128, $1,230,
$1,230, $1,058 and $1,023, respectively. The medical insurance premiums
paid by the Company during 1997 for each of Dr. Hager and Messrs. Gallo,
Hoch, Zitto, Kumar
25
and Bratton were $8,581, $7,843, $4,402, $6,259, $5,047 and $6,259,
respectively. The Company's matching contributions under its 401(k) savings
plan to each of Dr. Hager and Messrs. Gallo, Hoch, Zitto, Kumar and Bratton
for the last fiscal year were $2,563, $2,579, $2,534, $1,892, $1,729 and
$1,615, respectively.
(4) In November 1997, the Company terminated Mr. Gallo for willful misconduct
in the performance of his executive duties. In connection with the
December 1995 spin-off of Novavax, Inc. ("Novavax"), a formerly majority-
owned subsidiary of the Company, Mr. Gallo also served as Chief Operating
Officer and Treasurer of Novavax from January 1996 to June 30,1996.
Pursuant to a Transition Services Agreement entered into by the Company
and Novavax to facilitate the spin-off, Novavax agreed to pay half of Mr.
Gallo's salary during this time. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
(5) Mr. Hoch resigned in July 1998.
(6) Mr. Zitto resigned in April 1998.
(7) Dr. Kumar resigned in February 1998.
STOCK OPTIONS
No stock options or SAR's were granted to any Named Executive Officers
during 1997. The following table summarizes option exercises during 1997 by
the Named Executive Officers and the value of the options held by such persons
at the end of 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
VALUE OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED REALIZED YEAR-END (#) FISCAL YEAR-END ($)
NAME ON EXERCISE (#) ($) (1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (2)
---- --------------- -------- ------------------------- -----------------------------
Edward B. Hager......... 20,000 $11,950 425,000/0 $0/$0
John P. Gallo........... -- -- 325,000/0 0/0
Stephen G. Hoch......... -- -- 42,250/8,250 0/0
Lawrence N. Zitto....... -- -- 52,500/15,000 0/0
Surendra Kumar.......... -- -- 34,250/7,500 0/0
Kevin J. Bratton........ -- -- 21,000/7,000 0/0
- --------
(1) Represents the difference between the exercise price and the last sales
price of the Common Stock on the date of exercise.
(2) Value based on market value of the Company's Common Stock at December 31,
1995.
Officers are elected on1997 ($3.75 per share) minus the exercise price.
EMPLOYMENT AGREEMENTS
In October 1997, the Company amended the Employment Agreement with each of
Dr. Hager and Mr. Gallo to provide for a reduction in their annual salaries,
but extended the period for payment of the reduced salaries through the year
2005. On January 19, 1998, the Board of Directors rescinded the revised salary
arrangements for Dr. Hager and restored the annual salary payable under his
Employment Agreement ($380,000 for 1997). In addition, pursuant to his
Employment Agreement, Dr. Hager is entitled to an annual basisincrease of 10% of
his prior year's salary each year through December 31, 1999, the expiration
date of the Employment Agreement. However, Dr. Hager has waived the 10%
increase for 1998 and serveagreed to defer the payment of his annual salary,
without interest, to preserve cash for the Company's cash needs. Dr. Hager's
accrued unpaid salary as of June 30,
26
1998 was $190,000 and that amount plus future deferred salary payments will be
paid to Dr. Hager at such time as the discretionBoard of Directors of the Company, in
consultation with the Compensation Committee, determines that the Company's
cash position is adequate to pay the deferred amount and to resume the current
payment of his salary. His agreement also provides for continuation of his
salary through December 31, 1999, in the event he is terminated without cause
prior to that date.
Mr. Gallo, the former President of the Company, had an Employment Agreement
similar to Dr. Hager's. However, on November 22, 1997, the Company terminated
Mr. Gallo's employment for willful misconduct in the performance of his
executive duties, and on April 21, 1998 the Company commenced a lawsuit
against Mr. Gallo. See "Legal Proceedings."
Each of Dr. Hager and Mr. Gallo is bound by certain non-compete and non-
solicitation obligations for five years after termination of employment or
such longer period during which he receives severance payments under the
employment agreement.
The Company has finalized arrangements with each of Messrs. Wall and Woitach
on the basic terms of their employment by the Company that have not been
formalized into a final document. Pursuant to these agreements, Messrs. Wall
and Woitach are entitled to continuation of their respective salary for up to
one year for Mr. Wall and up to 18 months for Mr. Woitach, based upon the
length of service, if terminated without cause prior to that date. The
arrangements for Messrs. Wall and Woitach are for a one year period which is
automatically extended annually unless terminated by the Company by written
notice at least 90 days prior to renewal.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Drs. Hampers, Chairman of the Compensation and Stock Option Committee (the
"Committee"), and Pinosky and Messrs. Daniels and O'Donnell served as members
of the Committee during 1997.
DIRECTOR COMPENSATION AND STOCK OPTIONS
Each director not employed by the Company receives $2,000 for each meeting
of the Board of Directors.
Item 11.Directors he or she attends.
Pursuant to the Company's 1991 Stock Option Plan (the "1991 Plan"), each
director who is not an employee of the Company (an "Eligible Director") is
granted a stock option for the purchase of 20,000 shares of Common Stock sixty
days after his or her initial election as a director. In addition, the 1991
Plan provides that each Eligible Director will be granted a stock option to
purchase 10,000 shares of Common Stock on the last business day of each of the
calendar years through 1999. Each Eligible Director elected on or after March
13, 1991 received an option for the initial grant of 20,000 shares, and each
Eligible Director then serving as a director received additional options for
10,000 shares in each of the years 1992 through 1997. Options granted to
Eligible Directors are exercisable in full beginning six months after the date
of grant and terminate ten years after the date of grant. Such options cease
to be exercisable at the earlier of their expiration or three years after an
Eligible Director ceases to be a director for any reason. In the event that an
Eligible Director ceases to be a director on account of his death, his
outstanding options (whether exercisable or not on the date of death) may be
exercised within three years after such date (subject to the condition that no
such option may be exercised after the expiration of ten years from its date
of grant).
27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth information as of July 31, 1998 with respect
to the beneficial ownership of shares of Common Stock by (i) each person known
to the Company to own beneficially more than 5% of the outstanding shares of
Common Stock, (ii) the directors of the Company, (iii) the Named Executive
CompensationOfficers and (iv) the directors and executive officers of the Company as a
group. Unless otherwise noted, the persons named in the table have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
PERCENT OF
BENEFICIAL OWNER NUMBER OF SHARES CLASS
---------------- ---------------- ----------
Stephen J. Morris.................................. 2,254,635(1) 23.8%
66 Navesink Avenue
Rumson, New Jersey
Jane E. Hager...................................... 1,204,815(2) 12.5%
Pinnacle Mountain Farms
Lyndeboro, NH 03082
Edward B. Hager, M.D............................... 1,065,815(3) 10.8%
Pinnacle Mountain Farms
Lyndeboro, NH 03082
Mellon Bank Corporation............................ 881,310(4) 9.1%
One Mellon Bank Center
Pittsburgh, PA 15258
John P. Gallo...................................... 643,397(5) 6.6%
Country Club Lane
Buena, NJ 08310
David G. Pinosky, M.D.............................. 304,900(6) 3.1%
Terrence O'Donnell................................. 70,000(7) *
Constantine L. Hampers, M.D........................ 63,000(8) *
Terrence D. Daniels................................ 40,000(9) *
Paul D. Paganucci.................................. 40,000(9) *
F. Steven Berg..................................... -- *
Stephen G. Hoch.................................... 42,250(10) *
Lawrence N. Zitto.................................. 67,500(11) *
Surendra Kumar..................................... 8,000 *
Kevin J. Bratton................................... 26,500(12) *
All executive officers and directors, as a group
(13 Persons)...................................... 2,292,965(13) 21.8%
- --------
* Less than 1% of the Common Stock outstanding.
(1) The information requiredreported is based on Amendment No. 2 to Schedule 13D
dated December 29, 1997 and filed with the Securities and Exchange
Commission (the "Commission") by this itemStephen J. Morris. Mr. Morris has sole
voting power and investment power with respect to 1,481,000 shares and
shared voting power with respect to 773,635 shares.
(2) Includes 639,815 shares beneficially owned by Dr. Hager, as co-trustee of
the Hager Family Trust as to which Mrs. Hager as co-trustee of the Hager
Family Trust, has shared voting and investment power. Includes 140,000
shares which may be acquired pursuant to stock options exercisable within
60 days after July 31, 1998.
28
(3) Includes 425,000 shares which Dr. Hager may acquire pursuant to stock
options exercisable within 60 days after July 31, 1998, and 639,815
shares (also listed above) beneficially owned by Mrs. Hager as co-trustee
of the Hager family trust.
(4) The information reported is contained underbased on a Schedule 13G dated January 20,
1998, filed with the captions
"EXECUTIVE COMPENSATION"Commission by Mellon Bank Corporation. Includes
240,000 shares which may be acquired pursuant to warrants exercisable
within 60 days after July 31, 1998. (See "Management's Discussion and
"Director CompensationAnalysis of Financial Condition and Stock Options"Results of Operations--Liquidity and
Capital Resources".)
(5) Includes 325,000 shares which Mr. Gallo may acquire pursuant to stock
options exercisable within 60 days after July 31, 1998. The Company
terminated Mr. Gallo as President and Chief Operating Officer on November
22, 1997.
(6) Includes 140,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after July 31, 1998.
(7) Consists of 70,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after July 31, 1998.
(8) Includes 60,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after July 31, 1998.
(9) Consists of 40,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after July 31, 1998.
(10) Consists of 42,250 shares which may be acquired pursuant to stock options
exercisable within 60 days after July 31, 1998.
(11) Includes 52,500 shares which may be acquired pursuant to stock options
exercisable within 60 days after July 31, 1998.
(12) Includes 21,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after July 31, 1998.
(13) Includes 1,030,750 shares which may be acquired pursuant to stock options
exercisable within 60 days after July 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1990, the Company advanced $70,000 to Mr. Gallo, the President
and Chief Operating Officer of the Company until the termination of his
employment on November 22, 1997. Mr. Gallo issued the Company a note in the
principal amount of $70,000 bearing interest at the Company's 1996 Proxy Statementbank borrowing
rate plus 1/4% per annum and is incorporated hereinsecured by this reference.
Item 12. Security Ownership10,000 shares of Certain Beneficial Owners and Management
The information requiredCommon Stock. As of
June 30, 1998, the amount of indebtedness outstanding was $129,083. As set
forth above, in April 1998 the Company commenced a lawsuit against Mr. Gallo
for damages suffered by this item is containedthe Company for his willful misconduct in the
Company's 1996 Proxy
Statement underperformance of his executive duties. As part of the caption "Beneficial Ownershiplawsuit, the Company is
also demanding that Mr. Gallo repay this indebtedness. See "Legal
Proceedings". Due to the uncertainty of Common Stock"the outcome of the litigation against
Mr. Gallo, the Company has recorded a reserve against the note receivable
balance at December 31, 1997.
During 1997, Dr. Hager and other Company personnel traveled at various times
on Company business on an airplane owned by a company which is incorporated hereinwholly-owned by
this reference.
Item 13. Certain RelationshipsJane E. Hager, his wife and Related Transactionsa director of the Company. Total charges to the
Company for its use of the airplane in 1997 were $68,930. The information requiredBoard of
Directors authorized use of the aircraft for business travel, provided that
(i) the air travel rate billed to the Company for use of the airplane be at
least as favorable as the rate charged by this item is contained underprivate aircraft owners unaffiliated
with the caption "Certain
RelationshipsCompany, and Related Transactions" appearing in(ii) use of the airplane be limited to 100 hours at
$1,350 per hour. However, the Company was only billed for Dr. Hager's business
use of the aircraft at rates not exceeding those for first class commercial
airfare.
29
The Company has $6,857,142 of revolving credit notes and a $12,000,000
working capital line of credit with Fleet Bank--NH and Mellon Bank, N.A. Mrs.
Hager, a director of the Company, was a director of Fleet Bank--NH from 1986
to 1997. In connection with the April 29, 1998 Extension Agreement, the
Company issued to Mellon Bank warrants to purchase an aggregate of 240,000
shares of the Company's 1996 Proxy
Statementcommon stock at an exercise price of $3.50 per share.
On August 19, 1998, the Company and is incorporated herein by this reference.
25its bank lenders, Fleet Bank--NH and
Mellon Bank, N.A., entered into a Forbearance Agreement whereby the banks
agreed to forbear from exercising their rights and remedies arising from
covenant defaults through January 31, 1999. (See "Management Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources".) As of July 31, 1998, Mellon Bank was the beneficial owner
of 881,310 shares of the Company's common stock or 9.1% of the outstanding
shares.
30
PartPART IV
ItemITEM 14. Exhibits, Financial Statement Schedules, and Reports on FormEXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
ReportReports of Independent Accountants
Consolidated Balance Sheets, December 31, 19951997 and 19941996
Consolidated Statements of Operations for the years ended December
31, 1995, 19941997, 1996 and 19931995
Consolidated Statements of Cash Flows for the years ended December
31, 1995, 19941997, 1996 and 19931995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 19941997, 1996 and 19931995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule II. Valuation and Qualifying Accounts and Reserves.Reserves
Schedules other than those listed above are omitted for the reason
that they are either not applicable or not required or because the
information required is contained in the financial statements or
notes thereto.
Condensed financial information of the Registrant is omitted since
there are no substantial amounts of "restricted net assets"
applicable to the Company's consolidated subsidiaries.
(3) Exhibits Required to be Filed by Item 601 of Regulation S-K.
Exhibits marked with a single asteriskThe exhibits listed in the Exhibit Index immediately preceding such
exhibits are filed herewith, and
exhibits marked with a double asterisk reference management contract,
compensatory plan or arrangement, filed in response to Item 14 (a)
(3)as part of the instructions to Form 10-K. The other exhibits listed have
previously been filed with the Commission and are incorporated herein
by reference.
(a) Certificate of Incorporation of IGI, Inc., as amended.
[Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8, File No. 33-63700, filed
June 2, 1993]
(b) By-laws of IGI, Inc., as amended. [Incorporated by reference to
Exhibit 2 (b) to the Company's Registration Statement on Form
S-18, File No. 2-72262-B, filed May 12, 1981.
26
(4) Specimen stock certificate for shares of Common Stock, par value $.01
per share. [Incorporated by reference to Exhibit (4) to the Company'sthis Annual Report on Form 10-K for the fiscal year ended10-K.
(b) Reports on Form 8-K
On December 31,
1989, File No. 0-10063, filed April 2, 1990 (the "1989 Form 10-K".)]
** (10) (a) IGI, Inc. 1983 Incentive Stock Option Plan. [Incorporated by
reference to Exhibit A to the Company's Proxy Statement for the
Meeting of Annual Stockholders held May 11, 1983.]
** (b) IGI, Inc. 1989 Stock Option Plan. [Incorporated by reference to
the Company's Proxy Statement for the Annual Meeting of
Stockholders held May 11, 1989.]
** (c) Employment Agreement by and between4, 1997, the Company and Edward B.
Hager dated as of January 1, 1990. [Incorporated by reference to
Exhibit (10) (c) to the 1989 Form 10-K.]
** (d) Extension of Employment Agreement by and between the Company and
Edward B. Hager dated as of March 11, 1993. [Incorporated by
reference to Exhibit (10) (d) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992, File No.
0-10063, filed March 31, 1993 (the "1992 Form 10-K".)]
** (e) Extension of Employment Agreement by and between the Company and
Edward B. Hager dated as of March 14, 1995. [Incorporated by
reference to Exhibit (10)(e) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, File No.
0-10063, filed March 31, 1995 (the "1994 Form 10-K")]
** (f) Employment Agreement by and between the Company and John P.
Gallo dated as of January 1, 1990. [Incorporated by reference to
Exhibit (10) (d) to the 1989 Form 10-K.]
** (g) Extension of Employment Agreement by and between the Company and
John P. Gallo dated as of March 11, 1993. [Incorporated by
reference to Exhibit (10)(g) to the 1992 Form 10-K.]
** (h) Extension of Employment Agreement by and between the Company and
John P. Gallo dated as of March 14, 1995. [Incorporated by
reference to Exhibit (10)(h) to the 1994 Form 10-K.]
** (i) Employment Agreement by and between Micro Vesicular Systems,
Inc. and Donald F.H. Wallach dated as of January 1, 1990.
[Incorporated by reference to Exhibit (10) (e) to the 1989 Form
10-K.]
27
(j) Rights Agreement by and between the Company and Fleet National
Bank dated as of March 19, 1987. [Incorporated by reference
Exhibit (4) to the Company'sa Current Report on Form 8-K,
File
No. 0-10063, dated November 24, 1997, to report under Item 5 (Other Events) that
it had terminated the employment of John P. Gallo as of March 26, 1987.]
(k) Amendment to Rights Agreement byits President
and among the Company, Fleet
National Bank and State Street Bank and Trust Company dated as
of March 23, 1990. [Incorporated by reference to Exhibit (10)
(g) to the 1989 Form 10-K.]
(l) Loan Agreement by and between Fleet Bank - NH and IGI, Inc.
together with its subsidiaries, dated December 20, 1990.
[Incorporated by reference to Exhibit (10) (h) to the 1990 Form
10-K.]
(m) Amended and Restated Loan Agreement by and between Fleet Bank-NH
and IGI, Inc. together with its subsidiaries, dated May 12,
1992, and modified November 1, 1992, and DecemberChief Operating Officer.
31 1992.
[Incorporated by reference to Exhibit (10) (k) to the 1992 Form
10-K.]
(n) Fourth Amendment to Amended and Restated Loan Agreement by and
between Fleet Bank-NH and IGI, Inc. together with its
subsidiaries, dated December 23, 1993. [Incorporated by
reference to Exhibit (10) (l) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993, File No.
0-10063, filed March 31, 1994 (the "1993 Form 10-K".)]
* (o) Second Amended and Restated Loan Agreement by and between Fleet
Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its
subsidiaries, dated December 13, 1995.
(p) Promissory note by Donald F.H. Wallach to IGI, Inc.
[Incorporated by reference to Exhibit (10) (j) to the 1990 Form
10-K.]
** (q) IGI, Inc. Non-Qualified Stock Option Plan. [Incorporated by
reference to Exhibit (3) (k) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, File No.
0-10063, filed March 30, 1992 (the "1991 Form 10-K".)]
** (r) IGI, Inc. 1991 Stock Option Plan. [Incorporated by reference to
the Company's Proxy Statement for the Annual Meeting held May 9,
1991.]
** (s) Amendment No. 1 to IGI, Inc. 1991 Stock Option Plan as approved
by Board of Directors on March 11, 1993. [Incorporated by
reference to Exhibit 10 (p) to the 1992 Form 10-K.]
28
** (t) Amendment No. 2 to IGI, Inc. 1991 Stock Option Plan as approved
by Board of Directors on March 22, 1995. [Incorporated by
reference to the Company's Proxy Statement for the Annual
Meeting of Stockholders held May 9, 1995.]
(u) Form of Registration Rights Agreement signed by all purchasers
of Common Stock in connection with private placement on January
2, 1992. [Incorporated by reference to Exhibit (3) (m) to the
1991 Form 10-K.]
* (v) License Agreement by and between Micro-Pak, Inc. and IGEN, Inc.
(w) Registration Rights Agreement between IGI, Inc. and SmithKline
Beecham p.l.c. dated as of August 2, 1993. [Incorporated by
reference to Exhibit (10) (s) to the 1993 Form 10-K.]
* (11) Computation of net income per common share.
* (22) List of Subsidiaries.
* (24) Consent of Coopers & Lybrand L.L.P.
(b) Reports on Form 8-K:
On December 27, 1995, the Company filed a report on Form 8-K
disclosing that the Company had declared a dividend of one share of
Common Stock of Novavax, Inc. for each share of Common Stock of the
Company held on November 28, 1995, payable on December 12, 1995.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 27, 1996
Date: August 24, 1998 IGI, Inc.
By: /s/ Edward B. Hager
-----------------------
Edward B. Hager,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacity and on the date indicated.
Name Title Date
- ---- ----- ----
SIGNATURES TITLE DATE
/s/ Edward B. Hager Chairman of the August 24, 1998
- ------------------------------------- Board
EDWARD B. HAGER
/s/ John F. Wall Principal Financial August 24, 1998
- ------------------------------------- and Accounting
JOHN F. WALL Officer
/s/ Terrence D. Daniels Director August 24, 1998
- -------------------------------------
TERRENCE D. DANIELS
/s/ Jane E. Hager Director August 24, 1998
- -------------------------------------
JANE E. HAGER
/s/ Constantine L. Hampers Director August 24, 1998
- -------------------------------------
CONSTANTINE L. HAMPERS
/s/ Terrence O'Donnell Director August 24, 1998
- -------------------------------------
TERRENCE O'DONNELL
/s/ Paul D. Paganucci Director August 24, 1998
- -------------------------------------
PAUL D. PAGANUCCI
/s/ Edward B. Hager Chairman of the Board March 27, 1996
- ---------------------------
Edward B. Hager
/s/ John P. Gallo President and Director March 27, 1996
- ---------------------------
John P. Gallo
/s/ Donald J. MacPhee Principal Financial and March 27, 1996
- --------------------------- Accounting Officer
Donald J. MacPhee
/s/ Jane E. Hager Director March 27, 1996
- ---------------------------
Jane E. Hager
/s/ Constantine L. Hampers Director March 27, 1996
- ---------------------------
Constantine L. Hampers
/s/ John O. Marsh Director March 27, 1996
- ---------------------------
John O. Marsh
/s/ Terrence O'Donnell Director March 27, 1996
- ---------------------------
Terrence O'Donnell
/s/ David G. Pinosky
- --------------------------- Director March 27, 1996 David G. Pinosky
30Director August 24, 1998
- -------------------------------------
DAVID G. PINOSKY
Director
- -------------------------------------
F. STEVEN BERG
32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of IGI, Inc.:
We have auditedIn our opinion, the consolidated financial statements and financial
statement schedule of IGI, Inc. and subsidiaries as listed in Item 14(a) of this Form 10-K.10-K, after the
restatement described in Note 2, present fairly, in all material respects, the
financial position of IGI, Inc. and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. These financial statements and financial statement schedule are the
responsibility of the Company's management. Ourmanagement; our responsibility is to express
an opinion on these financial statements and financial statement schedule based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards. These standards which 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 the disclosures in the financial statements. An audit also
includesstatements, assessing
the accounting principles used and significant estimates made by management,
as well asand evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our
opinion.
In ourthe opinion expressed above.
As discussed in Note 8, the financial statements referredCompany has substantial debt due on January 31,
1999, and is actively seeking alternative financing arrangements. Also, as
discussed in Note 13, the Company is involved in certain litigation matters
and is responding to above present fairly,
in all material respects, the consolidated financial positioninquiries from regulatory agencies. The Company expects
to achieve a satisfactory resolution of IGI, Inc.its existing regulatory and its subsidiaries at December 31, 1995 and 1994 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Centerlitigation
matters.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 27, 1996
F-1July 31, 1998, except as to Note 8, which is as of August 19, 1998
33
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DecemberDECEMBER 31, 1995 and 19941997 AND 1996
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS 1995 1994
------------ ------------1997 1996
-------- ----------
(RESTATED)
ASSETS
Current assets:
Cash and cash equivalentsequivalents............................... $ 169,4891,196 $ 953,976317
Accounts receivable, less allowance for doubtful
accounts of $306,000$903 and $181,000$238 in 19951997 and 1994, respectively 8,455,610 7,276,843
Inventories 9,000,208 8,075,1471996,
respectively........................................... 6,851 8,365
Receivable due under royalty agreement.................. -- 1,000
Inventories............................................. 9,816 9,067
Current deferred taxes 55,347 36,641taxes.................................. 728 310
Prepaid expenses and other current assets 762,145 912,496
----------- -----------assets............... 819 1,217
-------- -------
Total current assets 18,442,799 17,255,103
----------- -----------
Notes receivable, less current maturities 285,087 570,589
----------- -----------assets.................................. 19,410 20,276
-------- -------
Investments............................................... 1,011 60
Property, plant and equipment - atequipment--at cost:
Land 624,723 416,011
Buildings 9,054,499 6,356,842Land.................................................... 625 625
Buildings............................................... 9,600 9,382
Machinery and equipment 8,655,831 7,981,998
Construction in progress -- 1,182,821
----------- -----------
18,335,053 15,937,672equipment................................. 9,659 9,241
-------- -------
19,884 19,248
Less accumulated depreciation (8,224,670) (7,454,437)
----------- -----------
10,110,383 8,483,235
----------- -----------depreciation............................. (10,048) (9,121)
-------- -------
9,836 10,127
-------- -------
Deferred income taxes 2,790,623 1,370,005
Net assets of biotechnology business segmenttaxes..................................... 3,247 3,073
Notes receivable.......................................... -- 2,066,303162
Other assets 702,432 756,607
----------- -----------
$32,331,324 $30,501,842
=========== ===========
Continued
The accompanying notes are an integral part
of the consolidated financial statements.
F-2
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
December 31, 1995 and 1994
assets.............................................. 540 686
-------- -------
$ 34,044 $34,384
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1994
------------ ------------
Current liabilities:
NoteNotes payable to bankbank................................... $ 8,048,00012,000 $ 3,790,000
Current maturities of long-term debt 2,415,101 29,3389,642
Revolving credit facility............................... 6,857 3,443
Accounts payable 2,446,716 1,580,349payable........................................ 3,841 2,665
Accrued payroll 460,835 498,880payroll......................................... 183 470
Other accrued expenses 772,061 660,989expenses.................................. 909 675
Income taxes payable 16,666 15,184
Deferred income taxes -- 9,390
----------- -----------payable.................................... 89 38
-------- -------
Total current liabilities 14,159,379 6,584,130
----------- -----------
Deferred income taxes -- 187,075
----------- -----------liabilities............................. 23,879 16,933
-------- -------
Long-term debt, less current maturities 9,624,303 10,019,138
----------- -----------
Commitmentsmaturities................... 36 6,893
-------- -------
Deferred income from royalty contract..................... 1,801 1,000
-------- -------
Commitment and contingencies
Stockholders' equity:
Common stock, $.01 par value, 30,000,000 shares authorized; 9,440,681autho-
rized; 9,602,681 and 9,018,6379,572,681 shares issued in 19951997
and 1994, respectively 94,407 90,1861996, respectively................................. 96 96
Stock subscribed........................................ -- 175
Additional paid-in capital 18,130,328 20,390,726
Deficit (6,878,956) (4,352,932)
----------- -----------
11,345,779 16,127,980capital.............................. 19,074 19,115
Accumulated deficit..................................... (8,649) (7,196)
-------- -------
10,521 12,190
Less treasury stock; 176,356136,014 and 156,145164,082 shares at cost,
in 19951997 and 1994,
respectively (2,608,937) (2,253,123)1996, respectively........................... (2,163) (2,518)
Stockholders' notes receivable (189,200) (163,358)
----------- -----------receivable............................ (30) (114)
-------- -------
Total stockholders' equity 8,547,642 13,711,499
----------- -----------
$32,331,324 $30,501,842
=========== ===========equity............................ 8,328 9,558
-------- -------
$ 34,044 $34,384
======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-334
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended DecemberFOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1994 and 1993(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
1997 1996 1995
1994 1993
------------ ------------ --------------------- ---------- ---------
(RESTATED) (RESTATED)
Net sales $31,220,632 $28,947,911 $28,004,569sales..................................... $ 34,193 $ 34,785 $ 30,501
Cost of sales 15,431,534 13,935,242 13,165,237
----------- ----------- -----------sales................................. 17,834 16,581 15,288
--------- --------- ---------
Gross profit 15,789,098 15,012,669 14,839,332profit.................................. 16,359 18,204 15,213
Selling, general and administrative expenses 11,930,555 10,674,611 10,636,207expenses.. 14,997 14,485 11,641
Research and development expenses 1,344,743 1,212,483 816,707
Research revenues (730,750) (382,500) --
----------- ----------- -----------expenses............. 1,675 2,013 1,345
Licensing and research revenues............... (150) (162) (731)
--------- --------- ---------
Operating profit 3,244,550 3,508,075 3,386,418(loss)....................... (163) 1,868 2,958
Interest expense (1,268,681) (1,035,691) (765,236)expense.............................. (1,853) (1,984) (1,269)
Interest income............................... -- -- 146
Other income 145,300 66,561 166,553
Other income(expense)(expense), net 7,358 10,206 (94,536)
----------- ----------- -----------net................... (11) (202) 7
--------- --------- ---------
Income (loss) from continuing operations
before provision for income taxes 2,128,527 2,549,151 2,693,199taxes............ (2,027) (318) 1,842
Provision (benefit) for income taxes 620,783 580,000 927,948
----------- ----------- -----------taxes.......... (574) (180) 513
--------- --------- ---------
Income (loss) from continuing operations 1,507,744 1,969,151 1,765,251operations...... (1,453) (138) 1,329
Loss from discontinued operations -
Distribution of biotechnology segment,
net of incomein-
come tax benefits:
Loss from operations (4,033,768) (699,844) (3,192,921)
Estimated loss on disposal -- (1,000,000) (2,750,000)
----------- ----------- -----------benefits............................ - - (4,034)
--------- --------- ---------
Net (loss) income $(2,526,024)loss...................................... $ 269,307 $(4,177,670)
=========== =========== ===========
(Loss) income(1,453) $ (138) $ (2,705)
========= ========= =========
Income (loss) per common and common equivalent
share:
Basic:
From continuing operationsoperations................ $ .16(.15) $ .22(.01) $ .20
====== ====== ======.14
========= ========= =========
From discontinued operationsoperations.............. $ (.42)-- $ (.19)-- $ (.66)
====== ====== ======(.44)
========= ========= =========
Net (loss) incomeloss.................................. $ (.26)(.15) $ .03(.01) $ (.46)
====== ====== ======(.29)
========= ========= =========
Diluted:
From continuing operations................ $ (.15) $ (.01) $ .14
========= ========= =========
From discontinued operations.............. $ -- $ -- $ (.41)
========= ========= =========
Net loss.................................. $ (.15) $ (.01) $ (.28)
========= ========= =========
Average number of common and common equivalent
sharesshares:
Basic....................................... 9,457,938 9,323,440 9,173,156
========= ========= =========
Diluted..................................... 9,457,938 9,323,440 9,725,230
9,155,231 9,048,895
=========== =========== ==================== ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-435
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended DecemberFOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1994 and 1993(IN THOUSANDS)
1997 1996 1995
1994 1993
------------ ------------- ------------------- ---------- ---------
(RESTATED) (RESTATED)
Cash flows from operating activities:
Net (loss) income $(2,526,024)loss...................................... $(1,453) $ 269,307 $(4,177,670)(138) $(2,705)
Reconciliation of net (loss) incomeloss to net cash used by
operating activities:
Depreciation and amortization 836,113 842,908 1,043,431amortization............... 1,037 992 836
Provision for loss on accounts and notes
receivable and inventories 787,737 271,555 352,492
Accrual for estimated loss on disposalinventories................. 1,610 412 825
Recognition of deferred revenue............. (150) -- 1,000,000 2,750,000--
Issuance of stock to 401(k) plan 69,149 50,498 44,075
Creditplan............ 40 91 69
Benefit for deferred income taxes (101,019) (219,800) (89,985)taxes........... (585) (189) (209)
Stock option compensation expense........... 47 156 --
Litigation settlement in common stock....... (50) 175 --
Changes in operating assets and liabilities:
Accounts receivable (1,321,040) (456,795) (2,007,533)
Inventories (1,570,525) 437,963 (1,148,984)receivable......................... 721 (300) (890)
Inventories................................. (1,352) (375) (1,751)
Receivable due under royalty agreement...... 1,000 -- --
Prepaid and other assets 150,351 (303,041) 104,469assets.................... 398 (455) 151
Accounts payable and accrued expenses 939,393 448,849 (954,203)expenses....... 1,123 130 939
Income taxes payable/refundable 1,482 45,748 258,979refundable............. 51 22 1
Reimbursement from former subsidiary 250,000subsidiary........ -- -- 250
Net assets of biotechnology segment (225,765) (2,501,062) 170,473
----------- ----------- -----------segment......... -- -- (226)
------- ------- -------
Net cash used byprovided from (used by) operating activities (2,710,148) (113,870) (3,654,456)
----------- ----------- -----------ac-
tivities....................................... 2,437 521 (2,710)
------- ------- -------
Cash flows from investing activities:
Capital expenditures, net (2,397,381) (1,833,536) (536,587)
Decrease(increase) in notes receivable -- 2,500 (27,238)
Decrease(increase) in notes receivable
from officers 57,489 12,045 (25,081)net..................... (636) (913) (2,397)
(Increase) decrease in other assets (62,105) (146,623) 135,133assets........... 68 59 (5)
License payment to former subsidiary (5,000,000)subsidiary.......... -- -- (5,000)
Net assets of biotechnology segment (359,786) (549,066) (453,067)
----------- ----------- -----------segment........... -- -- (360)
------- ------- -------
Net cash used by investing activities (7,761,783) (2,514,680) (906,840)
----------- ----------- -----------activities........... (568) (854) (7,762)
------- ------- -------
Cash flows from financing activities:
Net borrowings under line of credit
agreements 4,258,000 1,345,000 1,505,000agreements................................... 2,358 1,594 4,258
Borrowings under revolving credit agreement 2,000,000 1,250,000 1,025,000agreement... -- 12 2,000
Payments of long-term debt (9,072) (84,965) (45,780)debt.................... (3,443) (1,714) (9)
Proceeds from exercise of common stock
options 938,516 191,694 131,839options...................................... 95 589 938
Proceeds from sale of common stock 2,500,000stock............ -- 900,000
----------- ----------- ------------- 2,500
------- ------- -------
Net cash provided from (used in) financing activities 9,687,444 2,701,729 3,516,059
----------- ----------- -----------ac-
tivities....................................... (990) 481 9,687
------- ------- -------
Net increase (decrease) increase in cash and equivalents (784,487) 73,179 (1,045,237)equivalents. 879 148 (785)
Cash and cash equivalents at beginning of year 953,976 880,797 1,926,034
----------- ----------- -----------year.. 317 169 954
------- ------- -------
Cash and cash equivalents at end of yearyear........ $ 169,4891,196 $ 953,976317 $ 880,797
=========== =========== ===========169
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-536
IGI, INC.INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended DecemberFOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1994 and 1993(IN THOUSANDS, EXCEPT SHARE INFORMATION)
Common Stock Additional Subscriptions Total
------------ Paid-in and Other Stock Notes Treasury Shareholders
Shares Amount Capital Receivable Receivable Deficit Stock EquityCOMMON STOCK ADDITIONAL STOCKHOLDERS' ACCUMU- TOTAL
---------------- STOCK PAID-IN NOTES LATED TREASURY STOCKHOLDERS'
SHARES AMOUNT SUBSCRIBED CAPITAL RECEIVABLE DEFICIT STOCK EQUITY
--------- ------ ------ ----------- ----------- ---------- ------------------- ------------- ------- -------- -------------------------
Balance, December 31, 1992 8,678,139 $86,781 $17,578,915 $January 1,
1995................... 9,018,637 $90 -- $ -- $ (444,569) $(1,954,353) $15,266,774
Issuance of common stock for
exercise$20,391 $(163) $(4,353) $(2,253) $13,712
Exercise of stock
options, including tax
benefitbenefits of of $155,615 93,439 933 449,879 (163,358) 287,454
Conversion of 239 shares of MPS
stock into 43,895 of IGI common
stock 43,895 440 (440) 0$279....... 193,815 2 -- 1,152 -- -- (381) 773
Issuance of common stock to
401(k) plan 4,974 50 44,025 44,075plan............ 1,574 -- -- 44 -- -- 25 69
Issuance of stock to
industry partner, net 99,700 997 899,003 900,000
Net loss (4,177,670) (4,177,670)
---------- ------ ---------- -------- -------- ---------- ---------- ----------
Balance, December 31, 1993 8,920,147 $89,201 $18,971,382 $ $(163,358) $(4,622,239) $(1,954,353) $12,320,633
Issuance of common stock for
exercise of stock options
including tax benefit of
of $218,937 93,218 932 708,471 (298,770) 410,633
Adjustment of valuation
allowance 660,428 660,428
Issuance of common stock to
401(k) plan 5,272 53 50,445 50,498
Exercise of stock option agreement 2,500,000 2,500,000
Receivable due from exercise of
stock option agreement (2,500,000) (2,500,000)
Net income
Balance, December 31, 1994 269,307 269,307
---------- ------ ---------- -------- -------- ---------- ---------- ----------
9,018,637 $90,186 $20,390,726 $partner....... 226,655 2 -- $(163,358) $(4,352,932) $(2,253,123) $13,711,499
Issuance of common stock for
exercise of stock options
including a tax benefit
of $279,180 193,815 1,938 1,152,597 (381,250) 773,285
Issuance of common stock to
401(k) plan 1,574 16 43,697 25,436 69,149
Issuance of stock to
industry partner, net 226,655 2,267 2,497,733 2,500,0002,498 -- -- -- 2,500
License payment to
former subsidiary, net
of a deferred tax
benefit of $1,700,000 (3,300,000) (3,300,000)$1,700...... -- -- -- (3,300) -- -- -- (3,300)
Distribution of
biotechnology business
segment (2,654,425) (2,654,425)segment................ -- -- -- (2,654) -- -- -- (2,654)
Payment of stockholders'
notes receivable 74,548 74,548receivable....... -- -- -- -- 74 -- -- 74
Reclass of stockholders'
notes receivable (100,390) (100,390)receivable....... -- -- -- -- (100) -- -- (100)
Net loss (2,526,024) (2,526,024)
---------- ------ ---------- -------- -------- ---------- ---------- ----------(restated)..... -- -- -- -- -- (2,705) -- (2,705)
--------- --- ----- ------- ----- ------- ------- -------
Balance, December 31,
1995 (restated)........ 9,440,681 $94,407 $18,130,32894 -- 18,131 (189) (7,058) (2,609) 8,369
Exercise of stock
options, including tax
benefits of $79........ 132,000 2 -- 666 -- -- -- 668
Issuance of stock to
401(k) plan............ -- -- -- 1 -- -- 91 92
Settlement of
litigation............. -- -- $ 175 -- -- -- -- 175
Tax benefit of license
payment to former
subsidiary............. -- -- -- 161 -- -- -- 161
Issuance of non-employee
stock options.......... -- -- -- 156 -- -- -- 156
Interest earned on
stockholders' notes.... -- -- -- -- -- -- -- --
Repayment of
stockholders' notes.... -- -- -- -- 75 -- -- 75
Net loss (restated)..... -- -- -- -- -- (138) -- (138)
--------- --- ----- ------- ----- ------- ------- -------
Balance, December 31,
1996 (restated)........ 9,572,681 96 175 19,115 (114) (7,196) (2,518) 9,558
Settlement of
litigation............. -- -- (175) (118) -- -- 243 (50)
Exercise of stock
options, including tax
benefits of $7......... 30,000 -- -- 122 -- -- (20) 102
Issuance of stock to
401(k) plan............ -- -- -- (92) -- -- 132 40
Value of non-employee
stock options.......... -- -- -- 47 -- -- -- 47
Interest earned on
stockholders' notes.... -- -- -- -- (10) -- -- (10)
Reserve on stockholders'
notes receivable....... -- -- -- -- 94 -- -- 94
Net loss................ -- -- -- -- -- (1,453) -- (1,453)
--------- --- ----- ------- ----- ------- ------- -------
Balance, December 31,
1997................... 9,602,681 $96 $ -- $(189,200) $(6,878,956) $(2,608,937)$19,074 $ 8,547,642
========== ====== ========== ======== ======== ========== ========== ==========(30) $(8,649) $(2,163) $ 8,328
========= === ===== ======= ===== ======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-637
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------
1. Summary of Significant Accounting Policies
------------------------------------------SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business
- ----------------------
IGI, Inc. ("IGI(IGI" or the "Company") is a diversified company engaged in two
business segments.
The. Animal Health Products Business producesBusiness--production and marketsmarketing of animal health
products such as poultry vaccines, veterinary pharmaceuticals, and other
products, including nutritional supplements and grooming aids. The Cosmeticsaids; and
. Consumer Products Business producesBusiness--production and markets cosmeticmarketing of cosmetics and
skin care products.
IGI is committed to grow by applying its technology to deliver cost
effective solutions to customer problems. IGI solves problems in poultry
production, pet care and consumer products such asand skin care markets. An increasing number
of its solutions are based on the patented Novasome(R) microencapsulation
technology. Licensed from a former subsidiary, the technology offers value-
added qualities to cosmetics, skin care products, chemicals, biocides,
pesticides, fuels, vaccines, medicines, foods, beverages, pet care products
and shampoos.other products.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of IGI, Inc. and
its wholly-owned and majority-owned subsidiaries. The Company's financial
statements include 100% of the losses through December 12, 1995 of its formerlyformer
majority-owned subsidiaries which include Molecular Packaging Systems, ("MPS")
andsubsidiary, Novavax, Inc. ("Novavax"). All intercompany
accounts and transactions have been eliminated. Investment in an affiliated
company with a 20% ownership interest is accounted for on the cost method.
Cash equivalents
- ----------------
Cash equivalents consist of short termshort-term investments with initial maturities
of 90 days or less.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash, cash equivalents, accounts receivable,
notes receivable and certain restricted investments. The Company limits credit
risk associated with cash and cash equivalents by placing its cash and cash
equivalents with two high credit quality financial institutions. Accounts
receivable include customers in several key geographic areas; of these, Mexico
and other Latin American countries and countries in the Far East are important
markets for the Company's poultry vaccines and other products. These countries
have historically experienced varying degrees of political unrest and/or
currency instability. Because of the volume of business transacted by the
Company in those countries, continuation or recurrence of such unrest or
instability could adversely affect the businesses of its customers in those
countries or the Company's ability to collect its receivables from such
customers, which in either case could adversely impact the Company's future
operating results.
Inventories
- -----------
Inventories are stated at the lower of cost (last-in, first-out basis) or
market.
Property, Plant and Equipment
- -----------------------------
Depreciation of property, plant and equipment is provided for under the
straight-line method over the estimated useful lives as follows:
Useful Lives
------------
Buildings and improvements
USEFUL
LIVES
-----------
Buildings and improvements...................................... 10-30 years
Machinery and equipment......................................... 3-10 years
Machinery and equipment 3-10 years
Repair and maintenance costs are charged to operations as incurred while
major improvements are capitalized. When assets are retired or disposed of,
the cost and accumulated depreciation thereon are removed from the accounts
and any gains or losses are included in operations.
38
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Amortization
- ------------
Cost in excess of net assets of businesses acquired, which is included in
other assets, is amortized on a straight-line basis over 40 years. The Company
periodically evaluates the carrying amount of this asset using cash flow
projections and net income and if warranted, impairment would be recognized.
F-7
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
1. Summary of Significant Accounting Policies (continued)
------------------------------------------
Income Taxes (continued)
- ------------
The Company records income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes". SFAS 109 requires the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. Under SFAS No. 109, the effect on deferred taxes of a change
in tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance is recorded based on a determination of the
ultimate realizability of future deferred tax assets.
Stock-Based Compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any difference between the quoted market price of the
stock on the date of grant over the amount the employee is required to pay to
acquire the stock (the intrinsic value method under Accounting Principles
Board Opinion 25). Such amount, if any, is accrued over the related vesting
period, as appropriate. SFAS No. 123, "Accounting for Stock-Based
Compensation," requires companies electing to continue to use the intrinsic-
value method to make pro forma disclosures of net income and earnings per
share as if the fair-value-based method of accounting had been applied.
Long-lived Assets
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". The provisions of SFAS No. 121 require the Company to review its long-
lived assets for impairment on an exception basis whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable through future cash flows. If it is determined that an impairment
has occurred based on expected future cash flows, then the loss is recognized
in the income statement. The adoption of SFAS No. 121 did not have an effect
on the Company's consolidated financial statements.
Financial Instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, notes receivable, restricted common stock and long-term
debt. The carrying value of these instruments approximates the fair value.
Use of 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. Significant estimates include allowances for excess and
obsolete inventories, allowances for doubtful accounts and other assets and
provisions for income taxes and related valuation allowances. Actual results
could differ from those estimates.
Financial Instruments
- ---------------------
The Company's financial instruments include cash and cash equivalents, accounts
receivable, notes receivable and long-term debt. The carrying value of these
instruments approximates the fair value.
Accounting Standards Changes
- ----------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires companies to adopt its
provisions for fiscal years beginning after December 15, 1995. This standard
specifies when assets should be reviewed for impairment, how to determine if an
asset is impaired, how to measure an impairment loss, and what disclosures are
necessary in the financial statements. Management believes the impact of this
pronouncement is not material since the majority of the Company's long-lived
assets are property, plant and equipment that are utilized in the manufacturing
of the Company's products.
F-839
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
1. Summary of Significant Accounting Policies (continued)
------------------------------------------STATEMENTS--(CONTINUED)
Accounting Standards Changes
(continued)
----------------------------
In October 1995,March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". This Statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common
stock or potential common stock. This Statement is effective for financial
statements issued for periods ending after December 15, 1997. The Company has
restated all prior-period EPS data presented as required by SFAS No. 128.
In June 1997, the FASB issued SFAS No. 123, "Accounting130, "Reporting Comprehensive
Income". This Statement establishes standards for Stock-Based
Compensation." SFAS No. 123 requires companies to adopt its provisionsreporting all components of
comprehensive income. This Statement is effective for fiscal years beginningfinancial statements
issued for periods ending after December 15, 1995. SFAS No. 123 encourages a fair
value based method of accounting for employee stock options or similar equity
instruments, but allows continued use of the intrinsic value based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25
"Accounting for Stock Issued to Employees." Companies electing to continue to
use APB No. 25 must make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been applied.1998. The Company is currently
evaluating the provisionsimpact, if any, adoption of SFAS No. 123, but has not yet
determined whether it130 will continue to followhave on its
financial statements.
In June 1997, the provisions of APB No. 25 or
change to the fair value method ofFASB issued SFAS No. 123.131, "Disclosure about Segments of an
Enterprise and Related Information," which revises disclosure requirements
related to operating segments, products and services, the geographic areas in
which the Company operates and major customers. The Company intends to adopt
this Statement in fiscal 1998 and does not presently anticipate any material
change in its disclosures.
Revenue Recognition
-------------------Sales are recorded upon shipment of products. Revenues earned under research
contracts or licensing and supply agreements are recognized when the related
contract provisions are met.
Reclassification
----------------
Certain previously reported amounts have been reclassified to conform with
the current period presentation.
2. Corporate ActivitiesRESTATEMENT OF PRIOR PERIODS
On March 27, 1998, the Board of Directors engaged special counsel to
investigate information first made known to it on March 17, 1998 which it
believed could have a material impact on the Company's financial reporting for
1997 and prior periods. As a result of the findings of the special
investigation initiated by the Board of Directors in March 1998, the Company
restated its consolidated financial statements for 1995 and 1996. In the
opinion of management, all material adjustments necessary to correct the
financial statements have been recorded.
The restatements reflect inventory write-offs and inventory adjustments
which should have been recorded in different periods. Also reflected are
changes in the time periods in which certain product shipments were recognized
as sales.
40
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the impact of such restatements on the financial statements for
the years ended December 31, 1995 and 1996 is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995
-------------------- --------------------
AS REPORTED RESTATED AS REPORTED RESTATED
----------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
Net sales.......................... $35,140 $34,785 $31,221 $30,501
Income (loss) from continuing
operations........................ 93 (138) 1,508 1,329
Net income (loss).................. 93 (138) (2,526) (2,705)
Income (loss) per common and common
equivalent share:
Basic:
From continuing operations..... $ .01 $ (.01) $ .16 $ .14
Net income (loss).............. $ .01 $ (.01) $ (.28) $ (.29)
Diluted:
From continuing operations..... $ .01 $ (.01) $ .16 $ .14
Net income (loss).............. $ .01 $ (.01) $ (.26) $ (.28)
See Note 18 for discussion of the impact of the restatements on each of the
three quarters in the nine months ended September 30, 1997.
3. CORPORATE ACTIVITIES
Distribution of Biotechnology Segment
-------------------------------------
On March 17, 1994, IGI's Board of Directors voted to dispose of the
biotechnology business segment through the combination of its majority-owned
subsidiaries Molecular Packaging Systems, Inc. and Novavax, Inc. and the
subsequent tax-free Distributiondistribution to IGI's
shareholders of its ownership of the
combined entity.Novavax.
On December 12, 1995, (the "Distribution Date"), IGI distributed to the
holders of record of IGI's common stock, at the close of business on the Record Date,
November
28, 1995, one share of common stock of Novavax Inc. ("Novavax") for every one share of IGI
common stock outstanding (the "Distribution").
F-9
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
2. Corporate Activities (continued)
--------------------
Distribution of Biotechnology Segment (continued)
- -------------------------------------
In connection with the Distribution, the Company has paid Novavax $5,000,000 in
return for a fully-paid-up, ten-year license entitling it to the exclusive use
of Novavax's technologies in the fields of (i) animal pharmaceuticals,
biologicals, and other animal health products; (ii) foods, food applications,
nutrients and flavorings; (iii) cosmetics, consumer products and
dermatological over-the-counter and prescription products (excluding certain
topically delivered hormones); (iv) fragrances; and (v) chemicals, including
herbicides, insecticides, pesticides, paints and coatings, photographic
chemicals and other specialty chemicals; and the processes for making the
same. The Company has the option, exercisable within the last year of the ten-yearten-
year term, to extend the License Agreement for an additional ten-year period
for $1,000,000. Novavax will retainretained the right to use its Novavax Technologies for
all other applications, including human vaccines and pharmaceuticals. At the
time the terms of the IGI License Agreement were fixed, including the license
payment, all of the directors of IGI were also directors of Novavax and these
terms were unilaterally established by IGI. As of December 31, 1995, three
directors of IGI were also directors of Novavax. TheAccordingly, the Company
has presentedaccounted for the payment under the License Agreement as a capital
contribution in its financial statements to reflect the intercompany nature
and substance of the transaction. The form was structured as a prepaid license
agreement to address various considerations of the Distribution, including tax
and financing considerations. For tax purposes, the transaction will beis being
treated as a prepaid license agreement. IGI has no further obligations or
intentions to fund Novavax.
41
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Components of the losses from discontinued operations for each of the three
years in the period ended
December 31, 1995 were:
1995
1994 1993
------------ ------------ --------------------------
(IN THOUSANDS)
Selling, general and administrativeadministrative......................... $ 2,103,470 $ 1,762,408 $ 1,599,3052,103
Research and development expenses,net 3,647,893 2,484,436* 2,613,580* net...................... 3,648
Credit for income taxes (717,595) (797,000) (1,019,964)
----------- ----------- -----------taxes..................................... (717)
-------
Operating losses 5,033,768 3,449,844 3,192,921
Accruallosses............................................ 5,034
Less accrual for loss on disposal (1,000,000) (2,750,000) 2,750,000
Estimated loss on disposal -- 1,000,000 --
----------- ----------- -----------at December 31, 1994...... (1,000)
-------
Net loss from discontinued operationsoperations....................... $ 4,033,768 $ 1,699,844 $ 5,942,921
=========== =========== ===========4,034
=======
*Includes $475,000 and $380,700 of initial payments in 1994 and 1993,
respectively on product development and licensing agreements or detailed
agreements in principle which have been reflected as a reduction in research and
development expenses.
The Company had anticipated the effective date of the Distribution to be June
30, 1995. Due to delays in the final distribution of Novavax, the Company
incurred costs in excess of the $1,000,000 estimated loss onof disposal of its
biotechnology business segment. These costs related to increased research and
development expenses for products in the initial FDA approval process.
The credit for income taxes does not equal the statutory rate because of
valuation allowances related to loss carryforwards.
The components of the net assets of biotechnology segment at December 12, 1995
and December 31, 1994 were:
December 12, 1995 1994
----------------- ------------
Net current assets (liabilities) $ (56,071) $ 442,707
Property, plant and equipment, net 1,400,998 1,549,666
Deferred patent costs, net 1,309,498 1,073,930
Accrual for estimated loss on dispos -- (1,000,000)
---------- -----------
$2,654,425 $ 2,066,303
========== ===========
The distribution of the net assets of the Company's biotechnology business
segment as of the Distribution Date arewere recorded in the accompanying
financial statements in 1995 as a reduction in additional paid-in capital.
F-10
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
2. Corporate Activities (continued)
--------------------
Equity and Other Transactions
- -----------------------------
In August 1993, the Company entered intoconnection with an agreement with an industry partner for the testing of
Novavax's patented Novasome lipid vesicle encapsulation technology as a
microcarrier and adjuvant for various human vaccines. The
Company received $1,000,000vaccines, in exchange for 99,700 shares of the Company's
common stock. In addition, the Company received $100,000 from this partner to
offset research expenses. The $100,000 is included in the loss from discontinued
operations in 1993. In December 1994, the partner exercised its option to enter
into an exclusive license agreement by agreeing to pay the Company $475,000 for
the use of the technology in certain applications and additional research
funding. This amount is included in the loss from discontinued operations in
1994. Additionally,January 1995, the
partner exercised its option to purchase 226,655 shares of the Company's
common stock. In January 1995,stock for $2,500,000, and received an option to purchase additional
shares of IGI Common Stock and Novavax Common Stock. This option expired
unexercised in 1996.
4. INVESTMENTS
The Company has a 20% investment in Indovax, Ltd. an Indian poultry vaccine
company which is accounted for on the cost method. Dividends received from
Indovax were $23,000 in 1997. Other investments include 271,714 shares of
restricted common stock of IMX Corporation ("IMX"), a publicly traded company,
valued at a cost of $3.50 per share, received pursuant to an Exclusive Supply
Agreement dated September 30, 1997 between the Company issued 226,655and IMX. These shares
are restricted both by governmental and contractual requirements and the
Company is unsure when and if it will be able to sell these shares. The
Company will recognize income related to this agreement over the term of the
supply agreement. The total investment in IMX stock is valued at $951,000 at
December 31, 1997. Deferred revenue under this agreement is also $951,000 at
December 31, 1997.
Under the supply agreement, IGI has agreed to manufacture and supply 100% of
IMX's requirements for certain products at prices stipulated in the agreement,
subject to renegotiation subsequent to 1998. The Company is currently
renegotiating its common stock for $2,500,000. This agreement was amendedwith IMX. No shipments were made by IGI during
1997, and the first shipment of product is expected in December 19951998.
5. SUPPLY AND LICENSING AGREEMENTS
In 1996, the Company entered into a license and supply agreement with Glaxo
Wellcome, Inc. ("Glaxo"). The agreement granted Glaxo exclusive rights to
market a skin care product line in connection with the Distribution.United States to
42
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
physicians including, but not limited to, dermatologists. Under the terms of
the amended agreement, IGI manufactures these products for Glaxo. This agreement
provides for Glaxo to pay royalties to IGI based on sales and pay a $1,000,000
advance royalty to IGI in 1997 of which $300,000 is non-refundable. The
advance royalty has been recorded as deferred revenue. During 1997, IGI
recognized $150,000 of the industry partner hasnon-refundable royalty as income.
In March 1997, IGI granted Kimberly Clark the optionworldwide rights to purchase up to approximately $6,800,000use
certain patents and technologies in the industrial hand care and cleaning
products field. Upon signing of
IGI Common Stock and approximately $3,700,000 of Novavax Common Stock,
concurrently. These amounts were determined, pursuant to the agreement, Kimberly Clark paid IGI a
$100,000 license fee which was recognized as revenue by calculating the average ratioCompany in 1997.
The agreement requires Kimberly Clark to make royalty payments based on
quantities of closing pricesmaterial produced. The Company is also guaranteed minimum
royalties over the term of IGIthe agreement.
The Company has had a license agreement with Johnson & Johnson Consumer
Products, Inc. ("J&J") since 1995. The agreement provides J&J with a license
to produce and Novavax common stocksell Novasome(R) microencapsulated retinoid products and
provides for the payment of royalties on net sales of such products. J&J began
selling such products in the first twenty days following the Distribution. The price per share for
Novavax'squarter of 1998 and IGI's common stock is to be determined on the date of exercise and
is capped at an aggregate combined price per share of $13.00. This option will
expire in 1996.
3. Supplemental Cash Flow Information
----------------------------------has begun making
royalty payments.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest during the years ended December 31,
1995, 1994,1997, 1996, and 19931995 was as follows:
1997 1996 1995
1994 1993
---- ---- ---------- ------ ------
(IN THOUSANDS)
Income taxes (refunded),net 2,725 $(42,947) $(261,501)
Interest 1,235,616 931,401 767,257paid, net.............................. $ (33) $ 41 $ 3
Interest............................................ 1,853 1,955 1,236
In addition, during the years ended December 31, 1995, 1994,1997, 1996, and 1993,1995, the
Company had the following non-cash financing and investing activities:
1997 1996 1995
1994 1993
---------- --------- ------------- ------ ------
(IN THOUSANDS)
Tax benefits of exercise of common stock optionsoptions....... $ 279,180 $218,937 $155,615
Stockholders' notes receivable -- -- 163,3587 $ 79 $ 279
Distribution of the biotechnology segment 2,904,425segment.............. -- -- 2,904
Treasury stock repurchased, net 355,814 298,770repurchased............................. 20 -- 356
Tax benefit of license payment to former subsidiary.... -- (161) --
Receivable under royalty agreement..................... -- 1,000 --
Investment in IMX...................................... 951 -- --
F-11
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Inventories
-----------7. INVENTORIES
Inventories as of December 31, 19951997 and 1994 consist1996 consisted of:
1995 1994
----------- -----------1997 1996
------ ----------
(RESTATED)
(IN THOUSANDS)
Finished goods $3,103,685 $2,704,408
Work-in-process 2,850,838 2,925,494goods........................................... $3,365 $3,280
Raw materials 3,045,685 2,445,245
---------- ----------
$9,000,208 $8,075,147
========== ==========materials............................................ 3,259 2,812
Work-in-process.......................................... 3,192 2,975
------ ------
$9,816 $9,067
====== ======
If the first-in, first-out (FIFO) method of accounting for inventories had
been used, inventories would have been $307,774$461,000 and $462,362$844,000 lower than
reported in 19951997 and 1994,1996, respectively.
5. Long-Term Debt
---------------
Long-term debt as December 31, 1995 and 1994 consists of:
1995 1994
----------- -----------
Revolving credit facility $12,000,000 $10,000,000
Other debt due in annual
installments through March 1998
with interest at 9% 39,404 48,476
----------- -----------
12,039,404 10,048,476
Less current maturities 2,415,101 29,338
----------- -----------
$ 9,624,303 $10,019,138
=========== ===========
In December 1995, the Company and its banks reached an agreement to amend the
loan agreement. The amended and restated loan agreement provides for:
* $12,000,000 revolving credit facility with interest contingent upon certain
financial ratios at the end of each quarter. The interest rate shall not exceed
prime plus 1 1/2% effective January 1, 1996. The amount available under the
revolving credit facility decreases by $800,000 on the last day of each quarter
from June 30, 1996 through December 31, 1999. At December 31, 1995, the Company
had outstanding borrowings of $12,000,000 under this facility and the interest
rate was 9%.
* $10,000,000 working capital line of credit, renewable annually, with interest
on the outstanding borrowings contingent upon certain financial ratios at the
end of each quarter. The interest rate shall not exceed prime plus 1% effective
January 1, 1996. Amounts outstanding under the agreement at December 31, 1995
were $8,048,000. The average amounts outstanding during 1995 and 1994 were
$4,461,077 with a weighted interest rate of 8.7% and $3,723,077 with a weighted
interest rate of 7.8%, respectively. At December 31, 1995, the Company had
$1,952,000 available under this facility and the interest rate was 9.5%.
F-1243
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
------------------------
5. Long-Term Debt (continued)
--------------
A commitment feeSTATEMENTS--(CONTINUED)
8. LONG-TERM DEBT
Long-term debt as of 1/2% is payableDecember 31, 1997 and 1996 consisted of:
1997 1996
------ -------
(IN THOUSANDS)
Revolving credit facility.................................. $6,857 $10,285
Other debt due in annual installments through December 1999
with interest at 9%....................................... 36 51
------ -------
6,893 10,336
Less current maturities.................................... 6,857 3,443
------ -------
$ 36 $ 6,893
====== =======
During the first quarter of 1998, the Company negotiated amendments to its
credit agreement with its bank lenders, including waivers of its covenant
defaults and an extension of the credit agreement since the Company was in
default under certain covenants contained in its bank credit agreement during
1997 and at December 31, 1997. During the period from January 1, 1998 through
April 29, 1998, the Company paid interest at a rate of prime plus 4% on
the unused portion of theoutstanding borrowings under its working capital line and 1/prime plus 4% on
the unusedoutstanding borrowings under its revolving credit facility. The Company
entered into an Extension Agreement with its bank lenders as of April 29, 1998
(the "Closing Date") which provides for the waiver of all past and existing
covenant defaults, extension of the bank credit agreement requiresthrough March 31,
1999, a maximum credit line facility of $12,000,000 ("Credit Line") and
extended terms for repayment of the outstanding $6,857,142 balance of
revolving credit notes ("Revolving Facility").
The Company was in default under certain covenants contained in the
Extension Agreement at July 31, 1998. On August 19, 1998, the Company and its
bank lenders entered into a Forbearance Agreement whereby the banks agreed to
forbear from exercising their rights and remedies arising from these covenant
defaults through January 31, 1999.
The Extension Agreement and the Forbearance Agreement (the "Agreements")
provide for the following:
. The maximum availability under the Credit Line is subject to the
determination of the amount of eligible accounts receivable and eligible
inventories. The Credit Line is due and payable in full on January 31,
1999.
. The outstanding balance of $6,857,142 under the Revolving Facility is due
and payable on January 31, 1999.
. All of the Company's indebtedness to the banks is subject to a security
interest in all of the assets of the Company and its significant
subsidiaries.
. Interest on outstanding borrowings under both the Credit Line and the
Revolving Credit Facility will be:
From August 1, 1998 through September 30, 1998............ Prime plus 3 1/2%
From October 1, 1998 through November 30, 1998............ Prime plus 4 1/2%
From December 1, 1998 through January 31, 1999............ Prime plus 5 1/2%
. At the Closing Date the Company issued to the lenders warrants to
purchase an aggregate of 540,000 shares of the Company's common stock at
an exercise price of $3.50 per share. Warrants ("Unconditional Warrants")
to purchase 270,000 shares are exercisable at any time during the period
commencing 60 days
44
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
after issuance and ending on the fifth anniversary of issuance, unless the
Company is able to refinance its bank debt by October 31, 1998 in which
case these warrants expire. Warrants ("Conditional Warrants") to purchase
the remaining 270,000 shares are exercisable at any time during the period
commencing September 1, 1998 and ending on the fifth anniversary of
issuance, unless the Company is able to refinance its bank debt by
December 24, 1998 in which case these warrants expire. The Company has a
call option on the warrants, which can only be exercised as to all of the
shares issuable at that time, with a repurchase price of $900,000 for each
of the Conditional Warrants and Unconditional Warrants. The Company will
recognize a non-cash expense of approximately $200,000, or $.02 per share,
net of taxes, (unaudited) in each of the second and third quarters of 1998
in accordance with Statement for Financial Accounting Standards No. 123.
. The Company agreed to pay Fleet Bank, as agent on behalf of the lenders,
a monthly agent's fee of $5,000 and an extension fee of $250,000, of
which $60,000 was paid at the time of the Extension, with the balance
payable in three installments through March 24, 1999.
. The Company agreed to pay Fleet Bank, as agent on behalf of the lenders,
a forbearance fee of $140,000, of which $20,000 was paid at the time of
the forbearance, and the balance is payable in three installments through
January 15, 1999. However, if the Company is able to replace its existing
bank debt within the 30 days following a forbearance fee due date, the
installment then due plus all future installments shall be waived.
The Agreements require the Company to maintain certain financial ratios and
comply with other non-financial covenants, including remittance of cash flows
from debt or equity financing, income tax refunds and restrictsfixed asset dispositions
to the banks, and also prohibits the payment of cash dividends to not more than 25%without the
prior written consent of the net incomelenders. The Company believes it will be able to
remain in any one yearcompliance with its debt covenants through January 30, 1999, and
also believes that funds generated from operations and existing bank credit
facilities are sufficient to finance the Company's operations at its current
levels, including the costs associated with the regulatory and litigation
matters discussed in Notes 12 and 13, through January 30, 1999.
The Company is actively seeking, and believes it will be able to secure,
alternative financing arrangements to replace its existing debt and lending
terms through a number of potential options including, but not limited to, the
issuance of debt or equity securities or a combination of both. The Company
plans to engage an investment banker for the purpose of formulating
alternative business strategies and to retained earnings in excess of $1,000,000.
The Company was in defaultcoordinate the orderly satisfaction of
its current ratio covenant as of December 31,
1995. The banks have amendedobligations. No assurance can be given that the agreementCompany will be able to
removeobtain alternative financing arrangements, and if it is unsuccessful in doing
so, the default.Company may be required to restrict its business operations or
otherwise modify its business strategy.
Aggregate annual principal payments on long-term debt for the five years
subsequent to December 31, 1995 and thereafter1997 are as follows:
1996 $ 2,415,101
1997 3,214,847
1998 3,209,456
1999 3,200,000
-----------
$12,039,404
===========
All of the Company's assets are pledged as collateral
YEAR
----
(IN THOUSANDS)
1998.......................... $2,316
1999.......................... 4,577
------
$6,893
======
Borrowings under the terms ofrevolving credit facility have been classified as
current debt in the loan agreement.accompanying financial statements as the agreement
contains certain acceleration provisions subject to the bank's evaluation.
As of December 31, 1995,1997 and 1996, there were no outstanding equipment
leases.
At December 31, 1994, equipment under capital leases totaled $312,442,
less accumulated depreciation of $260,221.
6. Stock Options
-------------9. STOCK OPTIONS
Under the 1983 Incentive Stock Option Plan, options have been granted to key
employees to purchase a maximum of 500,000 shares of common stock. Options,
having a maximum term of 10 years, have been granted
45
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
at 100% of the fair market value of the Company's stock at the time of grant.
Options outstanding under this plan at December 31, 19951996 are generally
exercisable in cumulative increments over four years commencing one year from
the date of grant.
Under the 1989 and 1991 Stock Option Plans, options may be granted to key
employees, directors and directorsconsultants to purchase a maximum of 500,000 and
1,900,0002,600,000 shares of common stock, respectively. Options, having a maximum term
of 10 years, have been granted at 100% of the fair market value of the
Company's stock at the time of grant. Both incentive stock options and non-qualifiednon-
qualified stock options may be granted under the 1989 Plan and the 1991 Plan.
Incentive stock options are generally exercisable in cumulative increments
over four years commencing one year from the date of grant. Non-qualified
options are generally exercisable in full beginning six months after the date
of grant.
In 1991, the Company's Board of Directors also adopted a Non-Qualified Stock
Option Plan. TheThis plan provides that options may be granted to consultants,
scientific advisors and employees to purchase a maximum of 250,000 shares of
common stock. Options outstanding under this plan at December 31, 19951997 are
generally exercisable in cumulative increments over four years commencing one
year from the date of grant.
F-13
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
6. Stock Options (continued)
-------------
Stock option transactions in each of the past three years under the
aforementioned plans in total were:
Shares Price
January 1, 1993 shares
under option 1,156,075 $ 1.30 - $ 9.88
Granted 318,000 $ 5.75 - $ 7.61
Exercised (33,439) $ 2.91 - $ 3.42
Cancelled (40,858) $ 4.78 - $ 9.48
December 31, 1993 shares
under option 1,399,778 $ 1.30 - $ 9.88
Granted 408,500 $ 5.59 - $ 8.91
Exercised (6,000) $ 4.70 - $ 5.67
Cancelled (8,750) $ 5.02 - $ 9.88
December 31, 1994 shares
under option 1,793,528 $ 1.30 - $ 9.88
Granted 326,500 $ 6.63 - $ 9.39
Exercised (190,763) $ 1.30 - $ 9.88
Cancelled (9,750) $ 6.72 - $ 9.72
December 31, 1995 shares
under option 1,919,515 $ 3.64 - $ 9.88
============================
Shares subject to
outstanding options
exercisable at December 31,
1994 1,205,403
=========
1995 1,386,003
=========
Non-qualifiedIn addition, non-qualified stock options have been granted to officers and
directors at prices equal to the fair market value of the Company's stock on
the date the options were granted. During 1995, 1994, and 1993, 3,052, 87,218, and 60,000,
respectively, of such non-qualified options were exercised. At December 31,
1995, 1994, and 1993, 337,500, 340,552, and 427,770 respectively, of such
options were outstanding at prices ranging from $1.38 to $6.80 in 1995 and 1994,
and $1.22 to $6.80 in 1993. Exercise of the majority of these options
may be made at any time during a ten year period commencing on the date of
grant.
Stock option transactions in each of the past three years under the
aforementioned plans in total were:
PLAN NON-QUALIFIED PLAN
---------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED
SHARES PRICE PER SHARE AVERAGE PRICE SHARES PRICE PER SHARE AVERAGE PRICE
--------- --------------- ------------- -------- --------------- -------------
January 1, 1995 shares
under option........... 1,793,528 $1.30--$9.88 $6.63 340,552 $1.38--$6.80 $4.37
Granted................ 346,500 $6.63--$9.39 $7.35 -- -- --
Exercised.............. (190,763) $1.30--$9.88 $3.73 (3,052) $1.38 $1.38
Cancelled.............. (9,750) $6.72--$9.72 $7.47 -- -- --
--------- --------
December 31, 1995 shares
under option........... 1,939,515 $3.64--$9.88 $7.04 337,500 $1.38--$6.80 $4.40
Granted................ 381,000 $5.13--$7.69 $6.04 -- -- --
Exercised.............. (82,000) $4.70--$6.96 $6.33 (50,000) $1.38 $1.38
Cancelled.............. (29,500) $5.67--$9.48 $7.31 (1,000) $6.80 $6.80
--------- --------
December 31, 1996 shares
under option........... 2,209,015 $3.65--$9.88 $6.89 286,500 $3.97--$6.80 $4.92
Granted................ 111,500 $3.75--$5.69 $4.17 -- -- --
Exercised.............. (10,000) $3.65 $3.65 (20,000) $3.97 $3.97
Cancelled.............. (176,050) $3.97--$9.88 $7.21 (100,000) $5.67 $5.33
--------- --------
December 31, 1997 shares
under option........... 2,134,465 $3.75--$9.88 $6.74 166,500 $4.70--$6.80 $4.78
========= ========
Shares subject to
outstanding options
exercisable at
December 31, 1996...... 1,666,119 $7.01 286,500 $4.92
========= ===== ======== =====
December 31, 1997...... 1,854,715 $6.89 166,500 $4.78
========= ===== ======== =====
The Company makesadopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation." Accordingly, no chargescompensation cost has been
recognized for option grants to operations in connection with itsdirectors and employees pursuant to the stock
option plans. The Company has recorded compensation expense of $ 46,000 and
$156,000 in 1997 and 1996, respectively, for options granted to consultants.
Had compensation cost for all
46
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
grants under the Company's stock option plans been determined on fair value at
the grant date consistent with the provisions of SFAS 123, the Company's net
loss and loss per share would have been increased to the pro forma loss
amounts indicated below:
1997 1996 1995
------- ---------- ---------
(RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT
PER SHARE INFORMATION)
Net loss--as reported....................... $(1,453) $ (138) $(2,705)
Net loss--pro forma......................... $(1,648) $(1,054) $(3,449)
Loss income per share--as reported
Basic..................................... $ (.15) $ (.01) $ (.29)
Diluted................................... $ (.15) $ (.01) $ (.28)
Loss per share--pro forma
Basic..................................... $ (.17) $ (.11) $ (.38)
Diluted................................... $ (.17) $ (.11) $ (.35)
The pro forma information has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS
123. The fair value for these options was estimated at the grant date using
the Black-Scholes option pricing model with the following assumptions for
1997, 1996 and 1995:
Dividend yield............................................. 0%
Risk free interest rate.................................... 5.51%-- 7.10%
Estimated volatility factor................................ 33.07%--43.45%
Expected life.............................................. 6-- 9 years
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and additional awards in future years are anticipated.
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1997.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------
RANGE OF NUMBER OF WEIGHTED AVERAGE EXERCISE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICES OPTIONS REMAINING LIFE (YEARS) PRICE OPTIONS EXERCISE PRICE
- --------------- --------- ---------------------- -------- --------- ----------------
$3.00 to
$ 4.00 60,000 10.00 $3.75 -- --
$4.00 to
$ 5.00 358,000 2.87 $4.73 308,000 $4.75
$5.00 to
$ 6.00 511,500 6.51 $5.52 429,750 $5.48
$6.00 to
$ 7.00 580,750 6.93 $6.68 525,750 $6.68
$7.00 to
$ 8.00 331,000 5.54 $7.40 327,250 $7.39
$8.00 to
$ 9.00 284,000 7.25 $8.50 255,500 $8.49
$9.00 to
$10.00 175,715 4.97 $9.62 174,965 $9.62
--------- ---------
$3.75 to
$ 9.88 2,300,965 5.97 $6.59 2,021,215 $6.73
========= =========
In connection with the Distribution, holders of options to purchase IGI
common stock as of the Distribution Date were granted options to purchase
Novavax common stock and substitute options to purchase IGI common stock.
Exercise prices of the options were based on the relative market
capitalization of IGI and Novavax on the record date and the 20 trading days
immediately following the record date to restore holders of each option to the
economic position prior to the Distribution Date. The prices related to stock
option transactions have been adjusted to reflect the terms of the substitute
options.
F-1447
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
------------
6. Stock Options (continued)
-------------STATEMENTS--(CONTINUED)
In connection with the exercise of 25,0005,000 stock options in 1997 and 67,21825,000
stock options in 1995, and
1994, respectively, the Company received approximately4,735 and 23,644 and 26,300 shares of its
common stock in 1997 and 1995, respectively, as consideration for the exercise
price of the options. The total value of the shares used as consideration for
the exercise of stock options was $19,825 and $381,250 in 1997 and $298,770 in 1995, and 1994,
respectively, which has been recorded as treasury stock.
7. Income Taxes:
------------10. INCOME TAXES
The benefitprovision (benefit) for income taxes included in the consolidated
statements of benefitoperations for the years endingended December 31, 1995, 1994,1997, 1996 and 19931995
is as follows:
1997 1996 1995
1994 1993
---------- ----------- ---------------- ----- -----
(IN THOUSANDS)
Continuing operations:
Current tax expense:
FederalFederal............................................. $ 718,302-- $ 797,000 $1,020,000-- $ 718
State and local 3,500 2,800 3,000
--------- --------- ----------local..................................... 11 9 4
----- ----- -----
Total current 721,802 799,800 1,023,000
--------- --------- ----------current......................................... 11 9 722
----- ----- -----
Deferred tax expense (benefit)
expense:
Federal 5,624 (221,696) (128,327)Federal............................................. (756) (28) (59)
State and local (106,643) 1,896 33,275
--------- --------- ----------local..................................... 171 (161) (150)
----- ----- -----
Total deferred (101,019) (219,800) (95,052)
--------- --------- ----------deferred........................................ (585) (189) (209)
----- ----- -----
Total charge forprovision (benefit) from continuing operations $ 620,783 $ 580,000 $ 927,948
--------- --------- ----------operations.... (574) (180) 513
Discontinued operations:
Current tax benefit:
Federal and State (717,595) (797,000) (1,019,964)
--------- --------- ----------state................................... -- -- (718)
----- ----- -----
Total benefitprovision (benefit) for income taxes $ (96,812) $(217,000) $ (92,016)
========= ========= ==========taxes.............. $(574) $(180) $(205)
===== ===== =====
The provision for income taxes differed from the amount of income taxtaxes
determined by applying the applicable Federal tax rate (34%) to pretax income
from continuing operations as a result of the following:
1997 1996 1995
1994 1993
---------- ---------- --------------- ----- ----
(IN THOUSANDS)
Statutory tax provision $722,580 $ 859,511 $915,687(benefit)............................ $(689) $(108) $626
Non-deductible expenses 65,986 57,163 24,205expenses.................................. 51 66 66
State income taxes, net of federal benefit (46,207) 2,312 23,524benefit............... 120 (101) (99)
Research and development tax credits (39,713) (67,579) --
Reductioncredits..................... (65) (42) (33)
Increase (decrease) in valuation allowance (83,358) (271,407) (49,977)allowance............... 7 -- (83)
Other, net 1,495 -- 14,509
-------- --------- --------
$620,783 $ 580,000 $927,948
======== ========= ========net............................................... 2 5 36
----- ----- ----
$(574) $(180) $513
===== ===== ====
F-1548
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
------------
7. Income Taxes (continued)
------------
Gross deferredSTATEMENTS--(CONTINUED)
Deferred tax assets (liabilities) included in the consolidated balance sheets as of
December 31, 19951997 and 19941996, consist of the following:
1995
----1997 1996
------- -------
(IN THOUSANDS)
Property, plant and equipmentequipment........................... $ (968,904)(633) $ (763)
Prepaid license agreement 1,700,000agreement............................... 1,626 1,797
Net operating loss carryforwards 1,726,878carryforwards........................ 1,616 1,562
Deferred royalty payments............................... 345 --
Tax credit carryforwards 383,632carryforwards................................ 484 418
Inventory............................................... 238 158
Valuation allowances.................................... 500 140
Non-employee stock options.............................. 82 62
Other future deductible temporary differences 148,968differences........... 98 56
Other future taxable temporary differences (75,606)
-----------
2,914,968
Lessdifferences.............. (48) (13)
------- -------
4,308 3,417
Less: valuation allowance (68,998)
-----------allowance............................... (333) (34)
------- -------
Deferred taxes, netnet..................................... $ 2,845,970
==========
1994
----
Continuing Discontinued
----------- ------------
Property plant and equipment3,975 $ (801,614) $ (30,163)
Deferred patent costs -- (373,636)
Net operating loss carryforwards 1,371,378 2,300,930
Tax credit carryforwards 342,873 634,846
Reserve for discontinued operations -- 340,000
Other future deductible
temporary differences 304,644 91,095
Other future taxable
temporary differences 7,100) (83,382)
1,210,181 2,879,690
---------- -----------
Less valuation allowance -- (2,879,690)
Deferred taxes, net $1,210,181 $ --
========== ===========3,383
======= =======
Current and deferred tax benefits resulting from a prepaid license agreement
and the exercise of stock options not credited to the consolidated statements
of operations for the years ended December 31, 1997, 1996 and 1995, and 1994 includeincluding
the following
amounts:following:
1997 1996 1995
1994----- ---- ----------
(IN THOUSANDS)
Additional paid inpaid-in capital:
License payment to former subsidiary $1,700,000subsidiary.................. $ -- $161 $1,700
Exercise of stock options 279,180 218,937
Adjustment of valuation allowance -- 660,428
---------- --------
Total credited to additional paid in capital $1,979,180 $879,365
========== ========options............................. 7 79 279
----- ---- ------
$ 7 $240 $1,979
===== ==== ======
In 1994, due toThe Company evaluates the imminent Distribution, the Company reevaluated the
recoverabilityrecovery of its deferred tax assets and as such, adjusted its valuation
allowance to reflect its new estimates. Management has
determined, based on the Company's history of prior operating earnings, and its
expectations for the future, the timing of reversal of certain temporary
differences, and the expiration dates of the net operating loss carryforwards,
that operating income of the Company will more likely than not be sufficient
to recognize fully these net deferred tax assets.
Operating loss and tax credit carryforwards available for tax reporting purposes as of
December 31, 19951997 are as follows:
Federal:
Operating losses (expiring in the year
2010) $ 3,993,391
Research tax credits (expiring through
the year 2010) 369,954
Alternative minimum tax credits
(available without expiration) 13,678
F-16
(IN THOUSANDS)
Federal:
Operating losses (expiring through the year 2011)........ $4,727
Research tax credits (expiring through the year 2011).... 511
Alternative minimum tax credits (available without
expiration)............................................. 14
49
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
8. Net Income per Share:
--------------------
Net income per share of Common Stock is computed by dividing net income by the
weighted average number of shares of Common Stock and Common Stock Equivalents,
if dilutive, outstanding during the year. Common Stock Equivalents include
shares issuable upon the exercise of dilutive common stock options. Fully
diluted earnings per share approximate primary earnings per share.
9. Commitments and Contingencies:
-----------------------------STATEMENTS--(CONTINUED)
11. COMMITMENT AND CONTINGENCIES
The Company leases manufacturing and warehousing space, machinery and
equipment and automobiles under noncancellablenon-cancelable operating lease agreements
expiring at various dates through 1997.1998. Rental expense aggregated
approximately $ 281,501$348,000 in 1995, $185,9621997, $330,000 in 1994,1996, and $208,447$282,000 in 1993.1995. Future
minimum rental commitments under noncancellablenon-cancelable operating leases as of
December 31, 19951997 are as follows:
1996 77,152
1997 61,860
1998 49,043
1999 43,922
2000 38,154
YEAR $
---- -------
(IN THOUSANDS)
1998 99
1999 80
2000 55
2001 47
2002 46
The Company has entered into an employment contractscontract with an expiration dates throughdate
of December 31, 1999 with certain officersan officer which provideprovides that these officers arethis officer is
entitled to continuation of their salarieshis salary if they arehe is terminated without cause prior
to theirthe contract expiration date. Aggregate compensation through 1999 under
these agreementsthis agreement approximates $3,206,580.
10. Litigation
----------$845,000.
12. LITIGATION
The Company commenced a lawsuit on April 21, 1998 against its former
President and Chief Operating Officer, John P. Gallo, in the Superior Court of
New Jersey. In its complaint, IGI alleges, among other matters, that Mr. Gallo
caused the Company to violate Department of Agriculture statutes and
regulations, made false and inaccurate representations with respect to
shipments and inventory, improperly converted Company funds and assets for his
personal benefit and knowingly engaged in misconduct in the performance of his
duties and responsibilities, all in violation of his employment agreement and
of his fiduciary duty to the Company. The Company is seeking recovery of
damages resulting from Mr. Gallo's alleged misconduct and recovery of funds
and assets that the Company alleges were improperly diverted by him.
On April 28, 1998, Mr. Gallo commenced a lawsuit against the Company and two
of its Directors, including the Company's Chairman of the Board, Dr. Edward B.
Hager, alleging, among other matters, that they improperly caused the
termination of his employment with the Company in November 1997, wrongfully
terminated his compensation in violation of his employment agreement and
defamed his reputation. Mr. Gallo is seeking recovery against the defendants
for his alleged actual damages as well as consequential and punitive damages.
The Company has denied Mr. Gallo's allegations and believes his claims are
without merit.
Certain other claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company and its
subsidiaries. In the opinion of management, after consultation with legal
counsel, all such matters are adequately covered by insurance or, if not so
covered, are without merit or are of such kind, or involve such amounts, as
would not have a significant effect on the financial position or results of operationsstatements of the Company
if disposed of unfavorably.
On February 6, 1996, Johnson & Johnson and its wholly-owned subsidiary Ortho-
McNeil, Inc. (collectively, "J&J") filed a lawsuit against the Company and its
subsidiary, Igen, Inc. and its former subsidiary Micro-Pak, Inc. in the United
States District Court for the District of New Jersey alleging trademark
infringement and trademark dilution. J&J alleges that the Company's use of the
names NOVA SKIN, NOVA SKIN CARE, and NOVA-AESTHETICS infringes on rights
associated with J&J's trademark RENOVA for a prescription drug. J&J has also
moved for a preliminary injunction seeking to preclude the Company's use of the
NOVA SKIN, NOVA SKIN CARE, and NOVA-AESTHETICS names on the Company's
newly-launched line of skin care products sold through dermatologists. On March
18, 1996, following a period of expedited discovery, the Court held an
evidentiary hearing on the motion for preliminary injunction. The Court has not
yet issued a ruling.
Since 1988, the Company has used the trademark NOVASOME in connection with the
lipid vesicle encapsulation technology it developed, including in connection
with skin care products. In addition, numerous other companies use the term
NOCVA in a wide variety of product and corporate name formulations. The Company
is vigorously defending this lawsuit and believes that the outcome of the
proceedings will not have a material adverse effect on the Company's financial
position or results of operations.
F-1750
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
11. Export Sales:
------------STATEMENTS--(CONTINUED)
13. U.S. GOVERNMENT INVESTIGATION AND DISCIPLINARY PROCEEDINGS
From June 4, 1997 through March 27, 1998, the Company was subject to an
order by the Center for Veterinary Biologics ("CVB") of the United States
Department of Agriculture ("USDA") to stop distribution and sale of certain
serials and subserials of designated poultry vaccines produced by the
Company's Vineland Laboratories Division ("Stop Shipment Order"). The Stop
Shipment Order was based on CVB's findings that the Company shipped serials
before the Animal and Plant Health Inspection Service division of the USDA
("APHIS") had the opportunity to confirm the Company's testing results, failed
to destroy serials reported to APHIS as destroyed, and in general failed to
keep complete and accurate records and to submit accurate reports to APHIS.
The Stop Shipment Order affected 36 of the Company's USDA-licensed vaccines.
In July 1997, the Office of Inspector General of the USDA ("OIG") advised the
Company of its commencement of an investigation into alleged violations of the
Virus Serum Toxin Act and alleged false statements made to APHIS.
Following the Stop Shipment Order and the commencement of the OIG
investigation, in July 1997, the non-employee members of the Board of
Directors directed the Company to retain special counsel to investigate the
alleged violations and to advise the Board of Directors of its findings. The
non-employee members of the Board of Directors also instructed management to
take immediate action to assure that all future shipments comply with all
regulatory requirements. In addition, the Company took action designed to
obtain the approval of APHIS to the Company's resumption of shipments of the
products affected by the Stop Shipment Order, including submission of an
amended regulatory compliance program and testing procedures acceptable to the
USDA, reassignment of certain personnel and restructuring of the quality
control and quality assurance functions.
Based on remedial action taken by the Company, including revised vaccine
production outlines, the USDA, during the period from August through December
of 1997, lifted the Stop Shipment Order with respect to all but three of the
36 affected products. As of March 27, 1998, the remaining three products were
released for sale and shipment by the Company.
As a result of the Company's internal investigation regarding the alleged
violations, in November 1997 the Company terminated the employment of its then
President and Chief Operating Officer, John P. Gallo, for willful misconduct
in the performance of his executive duties and commenced a lawsuit against Mr.
Gallo on April 21, 1998. On April 28, 1998, Mr. Gallo commenced a lawsuit
against the Company and two of its directors, including the Chairman of the
Board. In addition, six employees, including members of the Company's
management team (including two Vice Presidents of the Company) resigned in
April 1998 at the request of the Company. However, five of these former
employees were retained by the Company for approximately eight weeks to enable
the Company to continue its operations pending the hiring of qualified
replacements. In connection with the employee terminations, the Company agreed
to make severance payments to each of two non-management employees equal to
four months salary.
In April 1998, the Company voluntarily disclosed to the U.S. Attorney for
the District of New Jersey, as well as to the USDA and OIG, information
resulting from its internal investigation of alleged violations by certain
officers and employees of USDA rules and regulations and of the Virus Serum
Toxin Act and other statutes including U.S. Customs laws and regulations. In
connection with its investigation, the OIG has subpoenaed Company documents
and the Company has provided, and will continue to provide, subpoenaed
documents to Governmental authorities. The U.S. Government's investigation is
ongoing and could be expanded to other areas of the Company's business in
which violations of laws and regulations may be found to have occurred. In
addition, the Government's ongoing investigation could result in action
against the Company and certain of its former employees, including fines and
the possibility of criminal charges. Also, on April 30, 1998, the Securities
and Exchange Commission (the "SEC") advised the Company that it is conducting
an informal inquiry and requested that the Company provide it with certain
documents.
51
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Stop Shipment Order adversely affected the Company's results of
operations for 1997, and the delay in approval of the remaining affected
products until the end of March 1998 will adversely affect overall sales
revenue in 1998. In addition, although the Company, on May 11, 1998, announced
the employment of a new President and Chief Operating Officer, it needs to
replace and train certain key managers and other employees who have terminated
their employment at the request of the Company, which will have a materially
adverse effect on the Company's 1998 performance and operating results. Also,
if the OIG, the U.S. Attorney or the SEC concludes that the Company's actions
warrant enforcement proceedings, those proceedings, as well as the costs and
expenses related to them, could have a materially adverse effect on the
Company's business, financial condition and results of operations.
The Company is cooperating fully with the U.S. Attorney and each of the
regulatory agencies and has produced a substantial amount of documents and
information requested by the U.S. Attorney. The U.S. Attorney has not
indicated what course of action, if any, it may pursue with respect to IGI in
light of the Company's extensive cooperation. The Company has not been advised
that it or any of its present employees are targets of any Justice Department
or regulatory investigation. Although there can be no assurance as to the
outcome of any proceeding, the Company expects that it will be able to achieve
a satisfactory resolution of its existing regulatory and litigation matters.
However, if charges were to be brought against IGI, the Company could incur
substantial costs in fines and attorney's fees to defend the action. The
Company could also face additional substantial costs in administrative civil
penalties. Since the Company expects that it will be able to achieve a
satisfactory resolution of its existing regulatory and litigation matters, no
reserves were provided for these matters at December 31, 1997.
14. EXPORT SALES
Export revenues by the Company's domestic operations accounted for
approximately 39%, 39% and 37%35% of the Company's total revenues in 1995, 1994,1997, 39% in 1996 and 1993 respectively.38%
in 1995. The following table shows the geographical distribution of the export
sales:
Year ended December 31,
-----------------------1997 1996 1995
1994 1993
---- ---- ----------- ---------- ----------
(RESTATED) (RESTATED)
(IN THOUSANDS)
Latin America $5,064,063America................................ $ 4,866,8264,593 $ 4,200,3725,076 $ 4,884
Asia/Pacific 4,573,828 3,692,373 3,259,780
Europe 1,307,830 1,817,143 1,021,739Pacific................................. 4,659 6,011 4,408
Europe....................................... 1,263 1,286 1,118
Africa/Middle East 1,288,094 983,542 1,800,426
---------- ----------- -----------
$12,233,815 $11,359,884 $10,282,317
=========== =========== ===========East........................... 1,362 1,141 1,184
------- ------- -------
$11,877 $13,514 $11,594
======= ======= =======
Related net accounts receivable balances at December 31, 1997, 1996 and 1995
1994approximated $4,144,000, $5,276,000 and 1993
approximated $4,921,253, $4,263,579 and $4,035,969,$4,569,000, respectively.
12. Certain Relationships and Related Party Transactions:
----------------------------------------------------
In 1990, the15. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The Company loaned $70,000 to its president and in 1993 loaned a total
of $182,400 to four other officers. The remaining balances of notes are
included in stockholders'has notes receivable in the accompanying Consolidated
Balance Sheets. In 1992, the Company loaned afrom certain of its employees. The total of $200,000 to two other
officers. The remaining balances of
these notes are included in notes
receivable, netis $249,000 as of current maturities, in the accompanying Consolidated Balance
Sheets.December 31, 1997. All of these loans are
evidenced by demand notes bearing interest at prime rate plus 1/4% and are
collateralized by shares of IGI common stockstock. Remaining balances of either IGI
or one of its subsidiaries. In 1989,these
notes from officers are included in the stockholders' equity as stockholders'
note receivable and all other notes receivable are included in notes
receivable in the accompanying Consolidated Balance Sheets. The Company loaned $200,000 to the
president of MPS, which was repaid in 1995 with MPS stock. During 1995, 1994,
and 1993, the Companyhas
recognized $38,566, $34,494 and $25,081, respectively, in interest income from these notes.
13. Employee Benefits:
-----------------notes of $10,000, $15,000 and $39,000
for the years ended December 31, 1997, 1996 and 1995 respectively. However,
the Company has provided reserves of $219,000 against these notes representing
the amount of notes receivable from terminated employees.
52
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. EMPLOYEE BENEFITS
The Company has a defined contribution retirement plan (401(k))(401k), pursuant to
which employees who have completed one year of employment with the Company or
its subsidiaries as of specified dates may elect to contribute to the Plan, in
whole percentages, up to 18%15% of compensation, subject to a minimum
contribution by participants of 2% of compensation and a maximum contribution
of $9,500 in 1997, and $9,240 in 19951996 and 1994, and $8,994 in 1993.1995. The Company matches 25% of the
first 5% of compensation contributed by participants and contributes on behalf
of each participant $4 per week of employment during the year. All
contributions of the Company are made quarterly in the form of the Company's
Common Stock ($.01 par value) and are immediately vested. The Company has
recorded charges to expense related to this plan of approximately $103,601, $62,200,$113,000,
$115,000, and $76,100$103,601 for the years 1997, 1996 and 1995, 1994, and 1993, respectively.
F-18
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------
14. Concentration of Credit Risk:
----------------------------
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash and cash equivalents. The company
places its cash and cash equivalents with two high credit quality financial
institutions. Export receivables include customers in several key geographic
areas; of these, Mexico and other Latin American countries are important markets
for the Company's poultry vaccines and other products. These countries have
historically experienced varying degrees of political unrest and economic and
currency instability. Because of the volume of business transacted by the
Company in those countries, continuation or recurrence of such unrest or
instability could adversely affect the businesses of its customers in those
countries or the Company's ability to collect its receivables from such
customers, which in either case could adversely impact the Company's future
operating results.
15. Business Segments:
-----------------17. BUSINESS SEGMENTS
Summary data related to continuing operations for the three years ended
December 31, 1995 appears1997 appear below:
Animal Health Cosmetics and Consumer
Products Products Corporate Consolidated
-----------ANIMAL HEALTH CONSUMER
PRODUCTS PRODUCTS CORPORATE CONSOLIDATED
------------- -------- --------- ------------
------------ ------------(IN THOUSANDS)
1995
----1997
Net sales $29,509,868 $1,710,764sales....................... $29,096 $5,097 $ - $31,220,632-- $34,193
Operating profit (loss) 6,459,486 (158,644) (3,056,292) 3,244,550......... 4,139 730 (5,032) (163)
Depreciation and amortization 819,867 16,246 - 836,113amortization... 876 161 -- 1,037
Identifiable assets 29,379,943 2,951,381 - 32,331,324assets............. 29,535 4,509 -- 34,044
Capital expenditures 745,692 1,651,689 - 2,397,381
1994
----expenditures............ 632 4 -- 636
1996 (RESTATED)
Net sales $27,470,989 $1,476,922sales....................... $31,262 $3,523 $ -- $28,947,911$34,785
Operating profit (loss) 6,056,835 296,143 (2,844,903) 3,508,075......... 6,882 (917) (4,097) 1,868
Depreciation and amortization 837,084 5,824amortization... 835 157 -- 842,908992
Identifiable assets 25,941,706 2,493,833assets............. 28,412 5,972 -- *28,435,53934,384
Capital expenditures 569,548 1,275,998expenditures............ 715 198 -- 1,845,546
1993
----913
1995 (RESTATED)
Net sales $26,626,127 $1,378,442sales....................... $28,869 $1,632 $ -- $28,004,569$30,501
Operating profit (loss) 6,019,658 366,541 (2,999,781) 3,386,418......... 6,247 (233) (3,056) 2,958
Depreciation and amortization 1,043,431amortization... 820 16 -- 836
Identifiable assets............. 29,280 2,872 -- 1,043,431
Identifiable assets 25,142,335 846,54432,152
Capital expenditures............ 745 1,652 -- *25,988,879
Capital expenditures 617,274 -- -- 617,2742,397
* Net53
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
In addition to the items discussed in Note 2, in the fourth quarter of 1997
the Company made adjustments to write off certain inventory, increase
valuation reserves for inventories and accounts receivable, record legal and
related expenses incurred in connection with the USDA OIG investigation, and
to adjust the recognition of licensing revenues. Certain of these adjustments
were the result of actions or events which occurred in earlier quarters of
1997. Had such adjustments been recorded in the applicable quarter, net assets of biotechnology segment of $2,066,303,income
and $16,175 for
1994 and 1993, respectively.
F-19earnings per share would have differed from the amounts previously
reported as follows:
FIRST QUARTER SECOND QUARTER THIRD QUARTER
----------------- ----------------- -----------------
AS AS AS AS AS AS
REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss)......... $363 $ 55 $356 $218 $380 $(498)
Earnings per share:
Basic................... $.04 $.01 $.04 $.02 $.04 $(.05)
Diluted................. $.04 $.01 $.04 $.02 $.04 $(.05)
54
SCHEDULE II - VALUATIONII--VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E
-------- -------- -------- -------- --------
Additions
------------------------------------
Balance at------ ------------ ------------------------ ---------- ----------
ADDITIONS
------------------------
(2) CHARGED
BALANCE AT (1) Charged to (2) Charged to
beginning of costs and other accounts Balance at
Description period expenses describe Deductions end of period
-----------------CHARGED TO OTHER BALANCE AT
BEGINNING OF TO COSTS ACCOUNTS END OF
DESCRIPTION PERIOD AND EXPENSES DESCRIBE DEDUCTIONS PERIOD
----------- -------------- --------------------------- ------------ ----------- ---------- -----------------------
Year ended December 31,
1993:
- ----------------------------1995 (Restated):
Allowance for doubtful
accountsaccounts............. $ 73,000 $ 101,419181 $142 -- $ 33,919(A)17(A) $ 140,500306
Inventory valuation
allowance 481,873 251,073allowance............ 507 645 -- 235,965(B) 496,981459(B) 693
Other assetassets valuation
allowance 192,119allowance............ 186 -- -- 6,000 186,119-- 186
Amortization of
goodwill 59,506 8,416goodwill............. 76 9 -- -- 67,92285
Amortization of other
intangibles 256,836 130,983intangibles.......... 464 58 -- -- 387,819522
Valuation allowance on
net deferred tax
assets 1,241,780 1,968,108assets............... 2,880 69 -- 49,977(C) 3,159,9112,880(C) 69
Year ended December 31,
1994:
- ----------------------------1996 (Restated):
Allowance for doubtful
accountsaccounts............. $ 140,500 $ 107,713306 $(40) -- $ 67,213(A)28(A) $ 181,000238
Inventory valuation
allowance 496,981 163,842allowance............ 693 123 -- 153,684(B) 507,139199(B) 617
Other asset valuation
allowance 186,119allowance............ 186 -- -- -- 186,119186
Amortization of
goodwill 67,922 8,416goodwill............. 85 8 -- -- 76,33893
Amortization of other
intangibles 387,819 76,466intangibles.......... 522 87 -- -- 464,285609
Valuation allowance on
net deferred tax
assets 3,159,911 651,614assets............... 69 -- 931,835(D) 2,879,690-- 35(C) 34
Year ended December 31,
1995:
- ----------------------------1997:
Allowance for doubtful
accountsaccounts............. $ 181,000 $ 142,273238 $793 -- $ 17,273(A)128(A) $ 306,000903
Inventory valuation
allowance 507,139 645,464allowance............ 617 603 -- 458,888(B) 693,715107(B) 1,113
Other asset valuation
allowance 186,119allowance............ 186 -- -- 186(A) -- 186,119
Amortization of
goodwill 76,338 8,416goodwill............. 93 8 -- -- 84,754101
Amortization of other
intangibles 464,285 57,464intangibles.......... 609 102 -- -- 521,749711
Valuation allowance on
net deferred tax
assets 2,879,690 68,998 2,879,690(E) 68,998assets............... 34 299 -- -- 333
- --------
(A) Relates to write-off of uncollectible accounts.
(B) DispositionsDisposition of obsolete inventories.
(C) Represents reversal of valuation allowance for a change in estimated
realizability of assets, credited to costs and expenses.
(D) Incorporates $660,428 reversal of valuation allowance relating to the
exercise of stock options, included in additional paid in capital and
$271,407, reversal of valuation allowance relating to research and
development tax credits, credited to costs and expenses.
(E) Related to spin off of certain discontinued operations during 1995.
F-2055
EXHIBIT INDEX
Exhibit Page
- ------- ----
3(a) *
3(b) *
4 *
10(a) *
10(b) *
10(c) *
10(d) *
10(e) *
10(f) *
10(g) *
10(h) *
10(i) *
10(j) *
10(k) *
10(l) *
10(m) *
10(n) *
10(o) *
10(p) *
10(q) *
10(r) *
10(s) *
10(t) *
10(u) *
11
22
24
* TheseExhibits marked with a single asterisk are filed herewith, and exhibits
marked with a double asterisk reference management contract, compensatory plan
or arrangement, filed in response to Item 14(a)(3) of the instructions to Form
10-K. The other exhibits listed have previously been filed with the Commission
and are incorporated herein by reference.
(3) (a) Certificate of Incorporation of IGI, Inc., as amended.
[Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8, File No. 33-63700, filed
June 2, 1993.]
(b) By-laws of IGI, Inc., as amended. [Incorporated by reference to
Exhibit 2(b) to the Company's Registration Statement on Form S-
18, File No. 2-72262-B, filed May 12, 1981.]
(4) Specimen stock certificate for shares of Common Stock, par value
$.01 per share. [Incorporated by reference to Exhibit (4) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 0-10063, filed April 2, 1990 (the
"1989 Form 10-K".)]
**(10.1) IGI, Inc. 1983 Incentive Stock Option Plan. [Incorporated by
reference to Exhibit A to the Company's Proxy Statement for the
Annual Meeting of Stockholders held May 11, 1983.]
**(10.2) IGI, Inc. 1989 Stock Option Plan. [Incorporated by reference to
the Company's Proxy Statement for the Annual Meeting of
Stockholders held May 11, 1989.]
**(10.3) Employment Agreement by and between the Company and Edward B.
Hager dated as of January 1, 1990. [Incorporated by reference to
Exhibit (10)(c) to the 1989 Form 10-K.]
**(10.4) Extension of Employment Agreement by and between the Company and
Edward B. Hager dated as of March 11, 1993. [Incorporated by
reference to Exhibit (10)(d) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992, File No.
0-10063, filed March 31, 1993 (the "1992 Form 10-K".)]
**(10.5) Extension of Employment Agreement by and between the Company and
Edward B. Hager dated as of March 14, 1995. [Incorporated by
reference to Exhibit (10)(e) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, File No.
0-10063, filed March 31, 1995 (the "1994 Form 10-K".)]
**(10.6) Amendment to Employment Agreement by and between the Company and
Edward B. Hager dated as of October 1, 1997. [Incorporated by
reference to Exhibit 10(a) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997, File No 1-
8568, filed November 13, 1997 (the "September 30, 1997 Form 10-
Q")]
**(10.7) Employment Agreement by and between the Company and John P.
Gallo dated as of January 1, 1990. [Incorporated by reference to
Exhibit (10)(d) to the 1989 Form 10-K.]
**(10.8) Extension of Employment Agreement by and between the Company and
John P. Gallo dated as of March 11, 1993. [Incorporated by
reference to Exhibit (10)(g) to the 1992 Form 10-K.]
**(10.9) Extension of Employment Agreement by and between the Company and
John P. Gallo dated as of March 14, 1995. [Incorporated by
reference to Exhibit (10)(h) to the 1994 Form 10-K.]
**(10.10) Amendment to Employment Agreement by and between the Company and
John P. Gallo dated as of October 1, 1997. [Incorporated by
reference to Exhibit 10(b) to the September 30, 1997 Form 10-Q.]
(10.11) Rights Agreement by and between the Company and Fleet National
Bank dated as of March 19, 1987. [Incorporated by reference to
Exhibit (4) to the Company's Current Report on Form 8-K, File
No. 0-10063, dated as of March 26, 1987.]
(10.12) Amendment to Rights Agreement by and among the Company, Fleet
National Bank and State Street Bank and Trust Company dated as
of March 23, 1990. [Incorporated by reference to Exhibit (10)(g)
to the 1989 Form 10-K.]
56
(10.13) Second Amended and Restated Loan Agreement by and between Fleet
Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its
subsidiaries, dated December 13, 1995. [Incorporated by
reference to Exhibit (10)(o) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, File No.
1-8568, filed March 29, 1996 (the "1995 Form 10-K".)]
(10.14) First Amendment to Second Amended and Restated Loan Agreement by
and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc.,
together with its subsidiaries, dated March 27, 1996.
[Incorporated by reference to Exhibit 10(l) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996, File No. 1-8568, filed April 10, 1997 (the "1996 Form
10-K".)]
(10.15) Second Amendment to Second Amended and Restated Loan Agreement
by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc.,
together with its subsidiaries, dated June 26, 1996.
[Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1996, File No. 1-8568, filed November 14, 1996 (the
"September 30, 1996 Form 10-Q".)]
(10.16) Third Amendment to Second Amended and Restated Loan Agreement by
and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc.,
together with its subsidiaries, dated August 23, 1996.
[Incorporated by reference to Exhibit 10.2 to the September 30,
1996 Form 10-Q.]
(10.17) Fourth Amendment to Second Amended and Restated Loan Agreement
by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc.
together with its subsidiaries, dated November 13, 1996.
[Incorporated by reference to exhibit 10(o) to the 1996 Form 10-
K.]
(10.18) Fifth Amendment to Second Amended and Restated Loan Agreement by
and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc.,
together with its subsidiaries, dated March 27, 1996.
[Incorporated by reference to exhibit 10(p) to the 1996 Form 10-
K.]
(10.19) Sixth Amendment to Second Amended and Restated Loan Agreement by
and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc.,
together with its subsidiaries, dated June 30, 1997.
[Incorporated by reference to Exhibit 10(c) to the September 30,
1997 Form 10-Q]
(10.20) Seventh Amendment to Second Amended and Restated Loan Agreement
by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc.,
together with its subsidiaries, dated July 31, 1997.
[Incorporated by reference to Exhibit 10(d) to the September 30,
1997 Form 10-Q.]
(10.21) Eight Amendment to Second Amended and Restated Loan Agreement by
and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc.,
together with its subsidiaries, dated September 30, 1997.
[Incorporated by reference to Exhibit 10(e) to the September 30,
1997 Form 10-Q.]
*(10.22) Extension Agreement by and between Fleet Bank-NH, Mellon Bank,
N.A. and IGI, Inc., together with its subsidiaries, dated April
29, 1998.
*(10.23) Forbearance Agreement by and between Fleet Bank-NH, Mellon Bank,
N.A. and IGI, Inc. together with its subsidiaries, dated August
19, 1998.
**(10.24) IGI, Inc. Non-Qualified Stock Option Plan. [Incorporated by
reference to Exhibit (3)(k) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, File No.
0-10063, filed March 30, 1992 (the "1991 Form 10-K".)]
**(10.25) IGI, Inc. 1991 Stock Option Plan, [Incorporated by reference to
the Company's Proxy Statement for the Annual Meeting held May 9,
1991.]
**(10.26) Amendment No. 1 to IGI, Inc. 1991 Stock Option Plan as approved
by Board of Directors on March 11, 1993. [Incorporated by
reference to Exhibit 10(p) to the 1992 Form 10-K.]
**(10.27) Amendment No. 2 to IGI, Inc. 1991 Stock Option Plan as approved
by Board of Directors on March 22, 1995. [Incorporated by
reference to the Appendix to the Company's Proxy Statement for
the Annual Meeting of Stockholders held May 9, 1995.]
**(10.28) Amendment No. 3 to IGI, Inc. 1991 Stock Option Plan as approved
by Board of Directors on March 19, 1997. [Incorporated by
reference to Exhibit 10 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, File No. 1-8568,
filed August 14, 1997.]
57
(10.29) Form of Registration Rights Agreement signed by all purchasers
of Common Stock in connection with private placement on January
2, 1992. [Incorporated by reference to Exhibit (3)(m) to the
1991 Form 10-K.]
(10.30) License Agreement by and between Micro-Pak, Inc. and IGEN, Inc.
[Incorporated by reference to Exhibit (10)(v) to the 1995 Form
10-K.]
(10.31) Registration Rights Agreement between IGI, Inc. and SmithKline
Beecham p.l.c. dated as of August 2, 1993. [Incorporated by
reference to Exhibit (10)(s) to the 1993 Form 10-K.]
(10.32) Supply Agreement, dated as of January 27, 1997, between IGI,
Inc. and Glaxo Wellcome Inc. [Incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q/A,
Amendment No.1, for the quarter ended March 31, 1997, File No.
1-8568, filed June 16, 1997.]
*(10.33) Common Stock Purchase Warrant No. 1 to purchase 150,000 shares
of IGI, Inc. Common Stock issued May 12, 1998 to Fleet Bank-NH.
*(10.34) Common Stock Purchase Warrant No. 2 to purchase 150,000 shares
of IGI, Inc. Common Stock issued May 12, 1998 to Fleet Bank-NH.
*(10.35) Common Stock Purchase Warrant No. 3 to purchase 120,000 shares
of IGI, Inc. Common Stock issued May 12, 1998 to Mellon Bank,
N.A.
*(10.36) Common Stock Purchase Warrant No. 4 to purchase 120,000 shares
of IGI, Inc. Common Stock issued May 12, 1998 to Mellon Bank,
N.A.
*(11) Computation of net income per common share.
*(21) List of Subsidiaries.
*(23) Consent of PricewaterhouseCoopers LLP.
*(27.1) Financial Data Schedule for the year ended December 31, 1997.
*(27.2) Restated Financial Data Schedules for the years ended December
31, 1995 and 1996.
58