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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)15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934



            FOR FISCAL YEAR ENDED                           COMMISSION FILE NO.
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              DECEMBER 31, 1997For Fiscal Year Ended                                        Commission File No.
December 31, 1998                                                      001-08568

                                    
IGI, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 01-0355758 -------- ---------- (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 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
WHEAT ROAD AND LINCOLN AVENUE, BUENA, NJ 08310 - --------------------------------------------- ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Wheat Road and Lincoln Avenue, Buena, NJ 08310 (Address of principal executive offices) (Zip Code) (609)-697-1441 ----------- REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: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 [_]|_| No [X]|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 this Form 10-K or any amendment to this Form 10-K. [_]|_| The aggregate market value of the Registrant's voting Common Stock, par value $.01 per share, held by non-affiliates of the Registrant at July 31, 1998,March 19, 1999, as computed by reference to the last trading price of such stock, was approximately $16,600,000.$11,100,000. The Registrant has no shares of non-voting Common Stock authorized or outstanding. The number of shares of the Registrant's Common Stock, par value $.01 per share, outstanding at July 31, 1998March 19, 1999 was 9,466,6679,526,854 shares. DOCUMENTS INCORPORATED BY REFERENCE: None. - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------Documents Incorporated by Reference: Portions of the Registrant's definitive proxy statement to be filed with the Commission on or before April 30, 1999 are incorporated herein by reference in Part III. 2 Exhibit Index located on pages 48-52 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 twothree business segments: . Animal Health Business--productiono Poultry Vaccine Business - production and marketing of animal healthpoultry vaccines and other related products; o Companion Pet Products Business - production and marketing of companion pet products such as poultry vaccines, veterinary pharmaceuticals, and other products, including nutritional supplements and grooming aids; and .o Consumer Products Business--productionBusiness - production and marketing 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 and skin care markets. An increasing numberRecent Developments: U.S. Regulatory Proceedings From mid-1997 through most 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 other products. IMPORTANT DEVELOPMENTS 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 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 subjectsubjected to an orderintense governmental and regulatory scrutiny relating to the Company's shipment of some of its poultry vaccine products without complying with certain applicable regulatory and record keeping requirements. As a result of actions taken by the Center for Veterinary Biologics ("CVB") of the United States Department of Agriculture ("USDA"), the Company was ordered in June 1997 to stop distribution and saleshipment of certain serials and subserials of designatedits poultry vaccines producedvaccine products. In July 1997, the Company was advised that the USDA's Office of Inspector General ("OIG") had commenced an investigation into possible violations by the Company's Vineland Laboratories Division ("Stop Shipment Order"). The Stop Shipment Order was based on CVB's findings thatCompany of the Virus Serum Toxin Act of 1914 and alleged false statements made by the Company shipped serials beforeto the USDA's Animal and Plant Health Inspection Service division("APHIS"). Company Actions Based on these events, the Company: o engaged independent counsel to conduct an investigation of the USDA ("APHIS") had the opportunityclaimed violations; o took corrective action 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 directedallow the Company to retain special counsel to investigate the alleged violations and to advise the Boardresume shipment 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 productsits 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,product lines; o terminated the employment of its then President and Chief Operating Officer John P. Gallo,of the Company for willful misconduct and commenced a lawsuit against Mr. Gallo on April 21, 1998. On April 28, 1998, Mr. Gallo commenced a lawsuit againsthim in the Company and twoNew Jersey Superior Court; o obtained the resignation 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 CompanyPresidents; o voluntarily disclosed information uncovered by its internal investigation to the U.S. Attorney for the District of New Jersey, as well as to the USDA and OIG,including 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 relatingrelated to sales of poultry vaccines which may have violated U.S. Customscustoms laws and regulations. During 1997regulations; 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 Agreemento cooperated 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 the bank lenders of warrants to purchase common stock of the Company. 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 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 issuance of debt or equity securities or a combination of both. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources.") 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, 1998, the Company's Board of Directors directed 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 material impact on the Company's financial reporting for 1997 and prior periods and authorized special counsel to engage independent accountants to assist it in the investigation. As a result of the failure to file its 1997 Form 10-K, the American Stock Exchange ("AMEX") suspended the trading of the Company's Common Stock on March 30, 1998. In addition, on April 30, 1998, the Securities and Exchange Commission ("SEC") notified the Company that it was conducting anin its informal inquiry, initiated in April 1998, regarding the foregoing matters. The USDA's stop shipment order and requested thatthe investigations by federal regulatory authorities disrupted the business of the Company provide it with certain documents. On May 1, 1998, the Company was advised by its former independent accountants, that based on the preliminary findings of the special investigation initiated by the Board of Directors in March 1998, their reports with respect to the Company's consolidated financial statements as of and 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 impact1998 and had a material adverse effect on its business in 1998, seeoperations and its liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." LICENSE OF TECHNOLOGY FROM FORMER SUBSIDIARYSettlement of U.S. Regulatory Proceedings On March 24, 1999, the Company reached settlement with the Departments of Justice, Treasury and Agriculture regarding their pending investigations and proceedings. This settlement is subject to court approval, which the Company believes will be obtained in due course. The terms of the settlement agreement provide that the Company will enter a plea of guilty to a misdemeanor and will pay a fine of $15,000 and restitution in the amount of $10,000. In addition, beginning in January 2000, the Company will make monthly payments to the Treasury Department through the period ending October 31, 2001 in the total amount of $225,000. The expense of settling with these agencies is reflected in the 1998 results of operations. The settlement does not affect the informal inquiry being conducted by the SEC, nor does it affect possible governmental action against former employees of the Company. Management does not expect that the SEC informal inquiry will have 3 a material adverse effect on the financial position, cash flow or operations of the Company. The Company is not aware of any other legal proceedings, which could have a material effect upon the Company. Licensed Technology In December 1995, IGI distributed 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 Businessbiotechnology business segment of IGI, which is reported as a discontinued operation.operation in the five year summary of selected financial data. In connection with the distribution, the Company 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 Novasomethe Novasome(R) lipid vesicle encapsulation and other technologies ("NovavaxMicroencapsulation Technologies" or collectively the "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;chemicals, and the processes for making the same (collectively, the "IGI 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 has retained the right to use its Novavaxthe Technologies for all applications outside the IGI Field, includingmainly human vaccines and pharmaceuticals. BUSINESS SEGMENTSBusiness Segments In 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach indicates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position but did affect the disclosure of segment information. The Company elected to change reportable segments from two segments (Animal Health Products and Consumer Products) into three segments (Poultry Vaccines, Companion Pet Products, and Consumer Products). Reasons leading to the change included the fact that products from each of the segments serve different markets, use different channels of distribution, and have two different forms of government oversight. The Company elected to change the reporting of its business segments as of January 1, 1998 and restated its prior years' presentation to conform to this revised segment reporting standard. The following table sets forth the revenue and operating profit (in thousands) of each of the Company's twothree business segments for the periods indicated:
1997 1996 1995 ------- --------- --------- (IN THOUSANDS) (RESTATED) (RESTATED) REVENUE Animal Health Products......................... $29,096 $31,262 $28,869 Consumer Products.............................. 5,097 3,523 1,632 OPERATING PROFIT (LOSS) * Animal Health Products......................... 4,139 6,882 6,247 Consumer Products.............................. 730 (917) (233)
-1998 1997* 1996* -------- -------- -------- Revenue (in thousands) Poultry Vaccines $ 14,843 $ 16,644 $ 19,953 Companion Pet Products 12,513 12,444 11,308 Consumer Products 5,839 5,255 3,686 -------- -------- -------- Total Revenues $ 33,195 $ 34,343 $ 34,947 ======== ======== ======== Operating Profit (Loss)** Poultry Vaccines $ (517) 1,202 $ 4,084 Companion Pet Products 2,844 2,577 2,300 Consumer Products 3,688 1,473 (955) * Prior year amounts restated to reflect the Company's change in its method of inventory pricing. (See Note 1 of Consolidated Financial Statements.) ** Excludes corporate expenses of $6,925,000, $5,032,000, and $4,097,000, for 1998, 1997, and $3,056,000 for 1997, 1996, and 1995, respectively. (See Note 17 of Notes to Consolidated Financial 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"Statements.) pet products market under the Tomlyn label.4 Poultry VaccinesVaccine Business The Company produces and markets poultry vaccines manufactured by the chick embryo, tissue culture and bacterialbacteriologic methods. The Company produces vaccines for the prevention of various chicken and turkey diseases and has 63more than 60 vaccine licenses granted by the United States Department of Agriculture ("USDA").USDA. The Company also produces and sells under its Vineland Laboratories label, nutritional, anti-infective and sanitation products used primarily by poultry producers. The Company sells these products in the United States and in over 50 other countries under the Vineland Laboratories trade name. The Company manufactures poultry vaccines at its USDA licensed facility in Vineland, New Jersey and sells them, primarily through its own sales force of nine 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 49%45% of the Company's salesrevenues in 1998, 49% in 1997 and 57% in 1996 and 60% in 1995.1996. For information relating to the adverse effect of the stop shipment order by the USDA on the Company's poultry vaccine business, of the Stop Shipment Order by the USDA in 1997, as well as ongoingother governmental investigations,actions, see "Governmental"Government Regulation" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's principal competitors in the poultry vaccine market are Intervet America, Inc., Fort Dodge, Animal Health, Inc., Merial Select Laboratories, Inc.Tri Bio and Schering Plough Animal Health. The Company believes that it is one of the largest domestic poultry vaccine producers. The Company competes on the basis of product performance, price, customer service and availability. VeterinaryCompanion Pet Products Business The Company sells its Companion Pet Products to the veterinarian market under the EVSCO Pharmaceuticals trade name and to the over-the-counter ("OTC") pet products market under the Tomlyn and Luv'Em labels. The EVSCO line of veterinary products is used by veterinarians in caring for dogs and cats, and includes pharmaceuticals such as antibiotics, anti- inflammatoriesanti-inflammatories and cardiac 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 are 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, a division of Sandoz Pharmaceuticals Corp.,DVM, Allerderm, Schering Corp., Dermatologics for Veterinary Medicine, Inc., Allerderm, Inc.Plough Animal Health and Mallinckrodt, Inc.Pfizer Animal Health. 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. The products are manufactured at the Company's facility in Buena, New Jersey, and are sold directly to pet superstores and through distributors to independent merchandising chains, shops and kennels. Principal competitors of the Tomlyn product line include Four Paws Products; Bio Groom Products; Lambert Kay, a division of Carter-Wallace; Eight In One Pet Products, Inc.; and Cardinal Labs, Inc. Sales of the Company's veterinary products are handled by 1920 sales employees. Most of the Company's veterinary products are sold through distributors. Sales of veterinary products accounted for approximately 36%38% of the Company's salesrevenues in 1998, 36% in 1997 33%and 32% in 1996 and 35% in 1995. CONSUMER PRODUCTS BUSINESS1996. 5 Consumer Products Business IGI's Consumer Products segmentbusiness is primarily focused on the expandedcontinued commercialization of the Novavax Microencapsulation Technologies for skin care applications. These efforts have been directed toward the development of high quality skin care products that the Company markets through collaborative arrangements with major cosmetic and consumer products companies. IGI is currently workingplans to continue to work with several cosmetics, food, personal care products, and OTC pharmaceutical companies for various commercial microencapsulation applications of the NovavaxMicroencapsulation 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, NovasomeNovasome(R) lipid vesicles are well-suitedwell suited to cosmetics and consumer product applications. For example, NovasomeNovasome(R) 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 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 otherothers by encapsulation within the NovasomeNovasome(R) vesicle; and to deliver pharmaceutical agents. The Company produces NovasomeNovasome(R) vesicles for various skin care products, including those marketed by Estee Lauder such as "All You Need", "Re-Nutriv",Need," "Re-Nutriv," "Virtual Skin",Skin," "100% Time Release Moisturizer",Moisturizer," "Resilience" and "Resilience". 5 Atothers. Sales to Estee Lauder accounted for $3,494,000 or 11% of 1998 sales, $2,408,000 or 7% for 1997, and $2,505,000 or 7% in 1996. The Company also markets a skin care product line to physicians through a distributor under the endCompany's WellSkin(TM) brand. Principal competitors to the Company's WellSkin(TM) product line include NeoStrata, Inc. and MD Formulations, a division of DecemberAllergen. The Company's Novasome(R) Technologies indirectly compete as a delivery system with, among others, Collaborative Labs, Liposomes, Inc. and Lipo Chemicals. In 1996, the Company entered into a license and supply agreement with Glaxo Wellcome, Inc. ("Glaxo"), which grants. The agreement granted Glaxo the exclusive rightrights to market a skin carethe WellSkin(TM) product line in the United States to physicians, including but not limited to dermatologists.physicians. Under the terms of the agreement, which was amended in January 1997, IGI manufactures themanufactured these products for Glaxo. This agreement provided for Glaxo to pay royalties to IGI retainsbased on sales and pay a $1,000,000 advance royalty to IGI in 1997 of which $300,000 was non-refundable. The advance royalty was recorded as deferred income. In October 1998, Glaxo notified the Company of its intent to exit the physician-dispensed skin care market. In December 1998, the license and supply agreement with Glaxo was terminated. The termination agreement provided that IGI would purchase all of Glaxo's inventory and marketing materials related to the WellSkin(TM) line in exchange for a $200,000 promissory note, due and payable in December 1999 and bearing interest at a rate of 11%. The Company also issued a promissory note to Glaxo for $608,000, representing the unearned portion of the advance royalty in exchange for Glaxo transferring all rights to market the product lineWellSkin(TM) trademark to non-physiciansIGI. This note bears interest at a rate of 11% and is payable in three installments between December 1999 and December 2000. In connection with the U.S.,Agreement termination, but unrelated to the advance royalty, IGI reduced cost of sales by $404,000 in 1998 for amounts owed to Glaxo that were forgiven. Beginning in 1997 and again in all markets abroad.1998, IGI recognized $150,000 and $326,000, respectively, of royalties as income. In 1997,December 1998, the Company entered into an Exclusive Supply Agreementa supply and sales agreement with IMX Pharmaceuticals,Genesis Pharmaceutical, Inc. ("IMX"Genesis"), which grants IMX for the exclusive right to market certain Novasome-based topical skin care products in certain mass merchandising markets. Salesmarketing and distribution of the Company's WellSkin(TM) line of skin care products. The agreement provides that Genesis will pay the Company a trademark and technology transfer fee in four equal annual payments of $250,000 each commencing November 1, 1999. In addition, Genesis will pay the Company a royalty on its net sales with certain guaranteed minimum royalty amounts. Genesis also purchased WellSkin(TM) inventory and marketing materials previously purchased by the Company from Glaxo. Genesis has signed a $200,000 promissory note for the inventory and marketing materials, which is due on November 1, 1999 bearing interest at 11%. The Genesis transaction did not significantly affect 1998 operating results. 6 In March 1997, IGI granted Kimberly Clark ("Kimberly") the worldwide rights to use certain patents and technologies in the industrial hand care and cleaning products field. Upon signing the agreement, Kimberly paid IGI a $100,000 license fee that was recognized as revenue by the Company in 1997. The agreement requires Kimberly to make royalty payments based on quantities of material produced. The Company is also guaranteed minimum royalties over the term of the agreement. In 1998, the Company earned $133,000 of minimum royalties, which is recorded as an accounts receivable due from Kimberly at December 31, 1998. The Company entered into a license agreement with Johnson & Johnson Consumer Products, Inc. ("J&J") in 1995. The agreement provides J&J with a license to produce and sell Novasome(R) microencapsulated retinoid products and provides for the payment of royalties on net sales of such products. J&J began selling such products and making royalty payments in the first quarter of 1998. The Company recognized $433,000 of revenue related to this agreement for the year ended December 31, 1998. In April 1998, the Company entered into a research and development agreement with National Starch and Chemical Company ("National Starch") to evaluate Novasome(R) technology which, if favorable, may result in negotiating a licensing agreement. The agreement provides for a minimum of at least six, or up to as much as nine, monthly payments commencing in June 1998 plus $100,000 for the purchase of a patented Novamix(R) machine. The Company recognized $210,000 in revenues in 1998 related to the National Starch agreement plus $100,000 for the purchase of the Novamix(R) machine. In August 1998, the Company granted Johnson & Johnson Medical ("JJM"), a Division of Ethicon, Inc., worldwide rights for the use of the Novasome(R) technology for certain products and distribution channels. The agreement provides for an up-front license fee of $150,000, of which $92,000 was recognized as revenue by the Company in 1998, and future royalty payments based on JJM's sales of licensed products. The Company is guaranteed minimum royalties over the term of the agreement. The Company entered into an exclusive Supply Agreement (the "Supply Agreement") dated September 30, 1997 with IMX Corporation ("IMX"), a publicly traded company. Under the IMX agreement, the Company agreed to manufacture and supply 100% of IMX's requirements for certain products at prices stipulated in the exclusive Supply Agreement, subject to renegotiation subsequent to 1998. The Company is currently involved in discussions with IMX concerning possible modifications to the Supply Agreement as it has determined the Company will not supply the products stipulated by the Supply Agreement but may supply certain other products based on negotiations with IMX. Under the Supply Agreement the Company received 271,714 shares of restricted common stock of IMX. These shares are restricted both by governmental and contractual requirements and the Company is unsure if or when it will be able to sell these shares. As of December 31, 1998, the Company has not yet recognized income related to this agreement. See Note 2 "Investments" of Consolidated Financial Statements. During 1998, the Company recognized a total of $1.2 million of licensing and royalty income which is included in the Consumer Products segment revenues. Revenues from the Company's Consumer Products segment were principally based on formulations using the NovasomeNovasome(R) encapsulation technology. Such sales approximated 15%Total Consumer Product revenues were approximately 17% of the Company's salestotal revenues in 1998, 15% in 1997 10%and 11% in 1996 and 5% in 1995. OTHER APPLICATIONS1996. Other Applications The versatility of the Novavax TechnologiesNovasome(R) lipid vesicles combined with the Company's commercial production capabilities allowallows the Company to target large, diverse markets. Through product collaborations and license agreements,markets including potential applications in the fuels industry. The Company is seeking collaboration with others to develop additionalits products for this business segment.industry. The efforts for the development of additionalfuel enhancement products require extensive testing, evaluation and trials, and therefore no assurance can be given that commercialization of theseIGI's fuel additive and enhancing products with Novasome vesicles will be successful. Under a license agreement with the Company, Johnson & Johnson has encapsulated retinoids in Novasome vesicles. Retinoids are derivatives of retinoic acidInternational Sales and are effective in the treatment of acne and thought to be effective in the treatment of various age-associated skin disorders. Encapsulation of retinoids in Novasome vesicles is designed to prolong stability and reduce irritation and provide a sustained retinoid release to treat these disorders. Johnson & Johnson is beginning to introduce Novasome encapsulated retinoid products in certain European countries and the United States in the first half of 1998. INTERNATIONAL SALES AND OPERATIONSOperations A staff of nineseven persons based in Buena, New Jersey and sixeight individuals based overseas handle all sales of Company products outside the United States. The Company's sales personnel and veterinarians travel abroad extensively to develop business and support customers through local distributors. Exports consist primarily of poultry vaccines, 7 although the Company also exports some veterinary pharmaceuticals and pet care products. Exports of vaccines and other products require product registration (ie.(e.g., licenses) by foreign authorities. The Company has approximately 900 product registrations in over 50 countries outside the United States and has over 800 registrations pending. The Company anticipates future growth in key markets including Brazil, China and Japan. The Companyis seeking to expand its international market presence. It entered the Chinese market in China in 1997 and expects to increase market penetrationcommenced product sales in Japan in 1998. The Company has received productobtained registrations for six products in JapanBrazil 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.in that country in mid-1999. Mexico, Indonesia, Thailand and certain other Latin American and Far Eastern countries are important markets for the Company's poultry vaccines and other products. These countries have historically experienced periods of 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 these areas, continuation or the recurrence of such unrest or instability could adversely affect the businesses of its customers, which in either case could adversely impact the Company's future operating results. In order to minimize risk, the Company maintains credit insurance for the majority of its international accounts receivable, and all sales are denominated in U.S. dollars to minimize currency fluctuation risk. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations--LiquidityOperations - Liquidity and Capital Resources.") Sales to international customers represented 35%32% of the Company's salesrevenues in 1998, 35% in 1997 and 39% in 1996 and 38% in 1995.1996. (See Note 14 "Export Sales" of Notes to Consolidated Financial Statements.) 6 MANUFACTURINGManufacturing The Company's manufacturing operations include the production and testing of vaccines, lotions,cosmetics, dermatologics, emulsions, shampoos, gels, ointments, pills and powders;powders. These operations also include the packaging, bottling and labeling of the finished products;products and packing and shipmentshipping for distribution. Approximately 90On March 1, 1999, 139 employees arewere engaged in manufacturing operations. The raw materials included in these products are available from several suppliers. The Company produces quantities of NovasomeNovasome(R) lipid vesicles adequate to meet its current needs for cosmetics, consumer product and animal health applications. RESEARCH AND DEVELOPMENTProduct Development and Research The Company's poultry vaccine research and development efforts are directed towardstowards: 1) developing more efficient single and multiple-component vaccines, 2) developing vaccines to combat new diseases, and 3) incorporating the NovasomeNovasome(R) lipid vesicle technologyadjuvants into existing vaccines. The Company is concentrating its veterinary pharmaceutical development efforts on the use of Novasome lipid vesicle technologyNovasome(R) microencapsulation for various veterinary pharmaceutical and OTCover-the-counter pet care products. The Company's consumer products development efforts are directed towards liposomalNovasome(R) encapsulation to improve performance and efficacy of chemicals, fuels, pesticides, specialty and other chemicals, 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 the IGI Field. In addition to its internal researchproduct development and developmentresearch efforts, which involve 11nine employees, the Company encourages the development of products in areas related to its present lines by making specific grants to universities, none of which had a material financial effect on the Company in 1998, 1997 or 1996. Total product development and by entering into research expenses were $1,425,000, $1,675,000, and development agreements with industry partners. Research expenses for IGI's continuing operations were $1,675,000, $2,013,000 in 1998, 1997 and $1,345,000 in 1997, 1996, respectively. Patents and 1995, respectively. PATENTS AND TRADEMARKSTrademarks All of the names of the Company's major products are registered in the United States and all significant markets in which the Company sells its products. Under the terms of the 1995 IGI License Agreement, IGIthe Company has an exclusive ten-year license to use the Technologies licensed from Novavax Technologies in the IGI Field. Novavax holds approximately 44 U.S. patents and a number of foreign patents covering its Novavaxthe Technologies (including a wide variety of component materials, its continuous flow vesicle production process and its Novamix(TM) production equipment). GOVERNMENT REGULATIONlicensed to IGI. 8 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 USDA, including the Center for Veterinary Biologics ("CVB"), in accordance with the Virus Serum Toxin Act of 1914. The development, manufacturing and marketing of animal and human 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. FromAlthough the Company has now resolved these matters, 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.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"Legal Proceedings - - Settlement of Financial Condition and Results of Operations--U.S. Government Investigation and Disciplinary Proceedings."U.S. Regulatory Proceedings".) 7 On March 6, 1998, the Food and Drug AdministrationFDA concluded an inspection of the Company's EVSCO facility in Buena, New Jersey. This resulted in the issuance of a form FDA-483FDA Form 483 listing several "inspection observations".observations." The FDA reemphasized its observations on May 14, 1998 with a "Warning Letter".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 FDA regulation including preclinicalpre-clinical and clinical testing. The process of completing clinical trials and obtaining FDA approvals for a new drug 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 review and approval. Whether or not FDA approval has been obtained, approval of a pharmaceutical product by comparable governmental 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 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 researchproduct development and developmentresearch 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 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. EMPLOYEES9 Employees At June 30, 1998,March 1, 1999, the Company had 198228 full-time employees, of whom 72 are53 were in marketing, sales, distribution and customer support, 90139 in manufacturing, 119 in research and development, and 2527 in executive, human resources, facilities, information systems, finance and administration. 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 housingused for 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 warehouses and poultry facilities 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 the future to expand its vaccine production capacity to meet expected growth in sales of existing poultry vaccines and to provide production ofcapability for new vaccines. Financing for suchThe Company plans to finance these renovations will be provided bywith internally generated funds or leases. 8 In Buena, New Jersey, the Company owns a facility used for the production of veterinary pharmaceuticals. The facility was built in 1971 and expanded in 1975. The facility presently contains 41,200 square feet of usable floor space and is situated on eight acres of land. TheAlso located in Buena are 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 facility built in 1995 which is used for production, research and product development, customer service, marketing, international operations and warehousing facility for cosmetic, dermatologic and personal care products on this site.products. This facility also houses IGI's international marketing operations. Each of the properties owned by the Company is subject to a mortgage held by Fleet Bank-NH and Mellon Bank.Bank, N.A. Except as discusseddescribed above, the Company believes that its current production and office facilities are adequate for its present and forseeableforeseeable future needs. ITEMItem 3. LEGAL PROCEEDINGSLegal Proceedings U.S. Regulatory Proceedings and Pending Litigation The Company has substantially resolved the legal and regulatory issues that arose in 1997 and 1998. For most of 1997 and 1998 the Company was subject to intensive government regulatory scrutiny by the U.S. Departments of Justice, Treasury and Agriculture. In June 1997, the Company was advised by APHIS of the USDA that the Company had shipped quantities of some of its poultry vaccine products without complying with certain regulatory and record keeping requirements. The USDA subsequently issued an order that the Company stop shipment of certain of its products. Shortly thereafter, in July 1997, the Office of Inspector General ofCompany was advised that the USDA ("OIG") advised the Company of its commencement ofUSDA's OIG had commenced an investigation into allegedpossible violations of the Virus Serum Toxin Act of 1914 and alleged false statements made to APHIS. Based upon these events, the Board of Directors caused an immediate and thorough investigation of the facts and circumstances of the alleged violations to be undertaken by independent counsel. The Company employeesalso took steps to obtain the approval of APHIS for resumption of shipments, including the submission of an amended and modified regulatory compliance program, improved testing procedures and other safeguards. Based upon these actions, APHIS began lifting the stop shipment order in August 1997 and released all remaining products from the order on March 27, 1998. In April 1998, the SEC advised the Company that it was conducting an informal inquiry and requested information and documents from the Company, which the Company has voluntarily provided to the USDA.SEC. The Company is cooperatinghas continued to refine and strengthen its regulatory programs with the OIGadoption of a series of compliance and providing documents subpoenaed byenforcement policies, the OIG concerning certain products.addition of new managers of Production and Quality Control and a new Senior 10 Vice President and General Counsel. At the instruction of the Board of Directors, the Company's General Counsel has established and oversees a comprehensive employee training program, has designated in writing a Regulatory Compliance Officer, and has established a fraud detection program, as well as an employee "hotline." The OIGCompany has continued to cooperate with the USDA in all aspects of its investigation is ongoing and regulatory activities. As a result of its internal investigation, the Company is unable to determine when it will be completed.terminated the employment of John P. Gallo as President and Chief Operating Officer in November 1997 for willful misconduct. In April 1998, the Company voluntarily disclosed torequested the U.S. Attorney forresignations of six additional employees including two Vice Presidents, and instituted a lawsuit against Mr. Gallo in the District of New Jersey Superior Court. The lawsuit alleged willful misconduct and malfeasance in office, as well as to the USDAembezzlement 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 April 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 complaint, the Company alleges, among other matters, thatclaims. 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 lawsuitfiled counterclaims 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.Company. 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,In June 1998, Mr. Gallo sent a letterwrote to the Company's Board of Directors containingalleging that he had been wrongfully terminated from employment and further alleging wrongdoing by two Directors. In response to these allegations the Company instituted an investigation of the two Directors by an Independent Committee ("Independent Committee") of the Board assisted by the Company's General Counsel. The investigation included a numberseries of complaintsinterviews of the Directors, both of whom cooperated with the Company, and a review of certain records and documents. The Company also requested an interview with Mr. Gallo who, through his counsel, declined to cooperate. In September 1998, the Independent Committee reported to the Board that it had found no credible evidence to support Mr. Gallo's claims and allegations and demandedrecommended no further action. The Board adopted the recommendation. In July 1998, the Company sought to depose Mr. Gallo in connection with the litigation filed in New Jersey. Through his counsel, Mr. Gallo asserted his Fifth Amendment privilege against self-incrimination and advised that he would not participate in the discovery process until such time as a federal grand jury investigation, in which he was a target, was concluded. At the suggestion of the court, the Company and Mr. Gallo agreed to a voluntary dismissal of the litigation, with the understanding that the Board of Directors commence litigationCompany was free to reinstate its suit against certainMr. Gallo at a later date, and that the Company was reserving all of its officersrights and 9 Directors.remedies with respect to Mr. Gallo. In addition, Mr. Gallo may reinstate his counterclaims against the Company at a later date. Settlement of U.S. Regulatory Proceedings On March 24, 1999, the Company reached settlement with the Departments of Justice, Treasury and Agriculture regarding their pending investigations and proceedings. The Boardsettlement is subject to court approval, which the Company believes will be obtained in due course. The terms of Directors convenedthe settlement agreement provide that the Company will enter a special meetingplea of guilty to a misdemeanor and designatedwill pay a committeefine of independent members consisting$15,000 and restitution in the amount of F. Steven Berg Esq. (Chairman) and Terrence O'Donnell Esq. to investigate these allegations and report$10,000. In addition, beginning in January 2000, the Company will make monthly payments to the Board. Also,Treasury Department through the Board authorizedperiod ending October 31, 2001 in the engagementtotal amount of counsel to help$225,000. The expense of settling with its investigation and requestedthese agencies is reflected in the 1998 results of operations. The settlement does not affect the informal inquiry being conducted by the SEC, nor does it affect possible governmental action against former employees of the Company. Management does not expect that Mr. Gallo provide information and support for his allegations.the SEC informal inquiry will have a material adverse effect on the financial position, cash flow or operations of the Company. The Company has been advised that Mr. Gallo has declinedis not aware of any other legal proceedings which could have a material effect upon the Company. Item 4. Submission of Matters 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 BoardVote 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 HOLDERSSecurity Holders No matters were submitted to a vote of the Company's stockholders during the last quarter of 1997. EXECUTIVE OFFICERS OF THE COMPANY1998. 11 Executive Officers of the Company The following table sets forth (i) the name and age of each executive officer of the Company as of July 31, 1998,March 15, 1999, (ii) the position with the Company held by each such executive officer and (iii) the principal occupation held by each executive officer for at least the past five years.
OFFICER PRINCIPAL OCCUPATION AND OTHER BUSINESS EXPERIENCE NAME AGE SINCE DURING PAST FIVE YEARSOfficer Principal Occupation and Other Business Name Age Since Experience During Past Five Years - ---- --- ------- ------------------------------------------------------- --------------------------------- Kevin J. Bratton........ 49 1983 Vice President and Treasurer of IGI, Inc. since 1983. Edward B. Hager, M.D....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. John F. Wall............ 50Rajiv Mathur 44 1999 Senior Vice President and Assistant Secretary of IGI, Inc. since March 1999; Vice President of Research and Development of IGI, Inc. since 1989. Robert E. McDaniel 48 1998 Senior Vice President and General Counsel of IGI, Inc. since May 1998; General Counsel of Presstek, Inc. (laser graphic arts company) from April 1997 to May 1998; and Commercial Litigation Partner, law firm of Devine, Millimet and Branch from April 1991 to April 1997. John F. Wall 51 1998 Senior Vice President, Chief Financial Officer of IGI, Inc. since June 1998;1998 and Treasurer since March 1999; 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 carehealthcare products manufacturer) from October 1987 to July 1995. Paul Woitach............Woitach 40 1998 President and Chief Operating Officer of IGI, Inc. since 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 Divisiondivision of Eastman Kodak Company (diagnostic imaging).
Officers are elected on an annual basis and serve at the discretionbasis. Three of the Board of Directors, except Dr. Hager, who has anabove named officers have employment agreementagreements with the Company. Messrs. Wall(See "Executive Compensation- Employment Agreements" contained in the Company's 1999 Proxy Statement, incorporated herein by reference.) 12 Part II Item 5. Market for the Registrant's Common Equity 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 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERSRelated Stockholder Matters The Company has never paid cash dividends on its Common Stock. The payment of dividends is prohibited by the Company's Loan Agreementloan agreement with Fleet Bank-NH and Mellon Bank, N.A. without prior consent of the lenders. See "Item 7, Management's Discussion and Analysis of 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 sale prices on the AMEX for the periods indicated.
HIGH LOW ---- --- 1996 First quarter.................................................. $8 1/4 $6 3/8 Second quarter................................................. 9 1/2 6 1/4 Third quarter.................................................. 7 3/4 5 Fourth quarter................................................. 6 5 1/8 1997 First quarter.................................................. $7 3/8 $ 5 Second quarter................................................. 5 1/2 4 Third quarter.................................................. 5 1/2 3 7/8 Fourth quarter.................................................High Low ---- --- 1997 First quarter $7 3/8 $5 Second quarter 5 1/2 4 Third quarter 5 1/2 3 7/8 Fourth quarter 5 1/8 3 5/8
On March 30, 1998 the AMEX suspended the trading of the Company's common stock as a result of the Company's announcement that it would not be ableFirst quarter $4 3/16 $2 3/4 Second quarter (A) (A) Third quarter 3 1 5/16 Fourth quarter 3 1/4 1 1/2 (A) The Company was unable to file its 1997 Annual Report on Form 10-K withuntil August 24, 1998 as a result of a special investigation initiated by the AMEXBoard of Directors which resulted in the restatement of financial results for each of the two years in the period ended December 31, 1996 and the Securities andfirst three quarters of year ended December 31, 1997. Accordingly, the American Stock Exchange Commission byhalted trading of the Company's Common Stock on March 31, 1998 until such time as this and other required filings were made. Trading resumed on September 8, 1998. Therefore, there are no trading prices reflected for the due datesecond quarter and most of that report.the third quarter of 1998. The approximate number of holders of record of the Company's common stockCommon Stock at June 30, 1998March 19, 1999 was 897860 (not including stockholders for whom shares are held in a "nominee" or "street" name). 11In connection with an Extension Agreement entered into with its bank lenders as of April 29, 1998, the Company issued to its 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. The issuance of the warrants is exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. The shares issuable upon the exercise of the warrants are subject to registration rights in favor of the lenders, pursuant to the terms of the Extension Agreement. (See "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.") 13 ITEMItem 6. SELECTED FINANCIAL DATASelected Financial Data Five-Year Summary of Selected Financial Data (in thousands, except per share information)
YEAR ENDED DECEMBERYear ended December 31, ----------------------------------------------- 1997 1996 1995 1994 1993 ------- ---------- --------- ------- ------- (RESTATED) (RESTATED)-------------------------------------------------------- 1998 1997* 1996* 1995* 1994* -------- -------- -------- -------- -------- INCOME STATEMENT DATA: Net sales.................... $34,193 $34,785 $30,501 $28,948 $28,005 Gross profit................. 16,359 18,204 15,213 15,013 14,839Income Statement Data: Revenues $ 33,195 $ 34,343 $ 34,947 $ 31,232 $ 29,331 Operating profit (loss)...... (163) 1,868 2,958 3,508 3,386 Income (loss) * (910) 220 1,332 3,112 3,312 (Loss) income from continuing operations.................. (1,453) (138) 1,329 1,969 1,765operations (3,029) (1,208) (481) 1,428 1,844 Loss from discontinued opera- tions*......................operations ** -- -- -- (4,034) (1,700) (5,943) Net (loss) income (loss)............ (1,453) (138) (2,705) 269 (4,178) Income (loss)(3,029) (1,208) (481) (2,606) 144 (Loss) income per share-ba- sic:share-basic: From continuing operations.operations $ (.15)(.32) $ (.01)(.13) $ .14(.05) $ .22.16 $ .21 From discontinued operations -- -- -- (.44) (.19) Net (loss) income (.32) (.13) (.05) (.28) .02 (Loss) income per share-diluted: From continuing operations $ (.32) $ (.13) $ (.05) $ .15 $ .20 From discontinued opera- tions.....................operations -- -- (.44) (.19) (.69) Net income (loss).......... (.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 (loss) income (loss).......... (.15) (.01) (.28) .03 (.46)(.32) (.13) (.05) (.26) .01 Cash dividends on common stock.......................stock $ -- $ -- $ -- $ -- $ -- DECEMBERDecember 31, ----------------------------------------------- 1997 1996 1995 1994 1993 ------- ---------- --------- ------- ------- (RESTATED) (RESTATED)-------------------------------------------------------- 1998 1997* 1996* 1995* 1994* -------- -------- -------- -------- -------- BALANCE SHEET DATA:Balance Sheet Data: Working (deficit) capital (deficit).... $(4,469) $ 3,343(8,107) $ 4,139 $10,671 $12,411(5,472) $ 2,499 $ 3,831 $ 10,209 Total assets................. 34,044 34,384 32,152 30,502 26,005assets 32,056 33,750 33,845 31,956 30,207 Short-term debt..............debt and notes payable 19,318 18,857 13,085 10,463 3,819 2,530 Long-term debt and notes payable (excluding current maturities)......... 408 36 6,893 9,624 10,019 8,798 Stockholders' equity......... 8,283 9,558 8,369 13,711 12,321equity 5,923 8,034 9,019 8,173 13,417 Average number of common and common equivalent shares Basic......................Basic 9,470 9,458 9,323 9,173 8,804 8,668 Diluted....................Diluted 9,470 9,458 9,323 9,725 9,155 9,049
- ------------------ * During the fourth quarter of 1998, the Company changed its method of determining the cost of inventories from the last-in, first-out ("LIFO") method to the first-in, first-out ("FIFO") method. As required by generally accepted accounting principles, the Company has retroactively restated all prior years' financial statements for this change. The net after-tax impact of the change in inventory costing method for 1998 to 1994 was: $0, $245,000, $(343,000), $99,000, and $(125,000) respectively. (See Note 1 of Consolidated Financial Statements.) ** 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 distribution 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. 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This "Management's Discussion and Analysis" section and other sections of this report contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates, management's beliefs and assumptions made by management. In addition, other written or oral statements which constitute forward-looking statements may be made by or on behalf of the Company. Words such as "expects," "anticipates," "intends," "plans," "believes," "seek," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. (See Note 3"Factors Which May Affect Future Results" below.) Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of Notes to Consolidated Financial Statements.) 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS U.S. GOVERNMENT INVESTIGATION AND DISCIPLINARY PROCEEDINGSnew information, future events or otherwise. Results of Operations From June 4, 1997mid-1997 through March 27,most of 1998, the Company was subjectsubjected to an order byintense governmental and regulatory scrutiny and was also confronted with a number of material operational issues (See Item 3. "Legal Proceedings"). These matters had a material adverse effect on the CVBCompany's financial condition and results of operations in 1998 and 1997, and resulted in the departure of most of the Company's senior management. 1998 Compared to stop distribution1997 (Restated) The Company had a net loss of $3,029,000, or $.32 per share in 1998, as compared to a net loss of $1,208,000, or $.13 per share in 1997. The major contributing factors to the increased loss were: increased legal, consulting and saleprofessional fees; increased expenses associated with investigating and addressing regulatory problems; the costs and expenses associated with termination of certain serialsemployees; the hiring of new management; and subserialsincreased bank fees and interest charges associated with the extension of designatedthe Company's credit line. The Company incurred approximately $2.6 million of legal, consulting and professional fees in 1998 and $1.1 million in 1997. Comparable expenditures for 1994 to 1996 averaged about $0.5 million. The increase of about $2.1 million in 1998 is principally attributable to the regulatory actions and investigations which began in 1997 and resulted in the recent settlement with the U.S. Departments of Justice, Treasury and Agriculture. Another major contributing factor was a decrease in sales of 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 divisionin 1998 as compared with 1997, primarily as a result of the USDA ("APHIS") had the opportunity to confirm the Company's testing results, failed to destroy serials reported to APHISregulatory action. Total revenues for 1998 were $33,195,000, which represents a decrease of $1,148,000 or 3% from revenues of $34,343,000 in 1997. Sales of poultry vaccines decreased by $1,801,000, or 11%, in 1998 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. Because of the Stop Shipment Order and the 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 complycompared 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 findings. In addition, the Company took action designed to obtain the approval of APHIS to the Company's resumption of shipments of the products1997. Poultry vaccine sales were adversely affected by the Stop Shipment Order, including submissionUSDA regulatory action which remained in effect until March 27, 1998. The Company also experienced lower production volumes of an amended regulatory compliance programpoultry vaccines while it made changes to improve its Vineland Laboratories operations. Sales of pet care products increased by $69,000, or 1%. Total Consumer Products revenues for 1998 increased by $584,000, or 11%, from 1997 revenues. This reflected a $1,028,000 increase in revenue from the Company's cosmetics and testing procedures acceptablepersonal care products partially offset by a decrease in revenues of $444,000 from the Company's dermatological products. The cosmetics and personal care products revenues increased in 1998 due to increased product sales to Estee Lauder and increased licensing and royalty income, primarily from the USDA, reassignment of certain personnel and restructuring of the quality control and quality assurance functions. Based on remedial action taken byCompany's relationships with Johnson & Johnson. In August 1998, the Company including revised vaccine production outlines,executed a second license agreement with a Johnson & Johnson division, licensing the USDA, duringNovasome(R) microencapsulation technology for use in certain products and distribution channels to Johnson & Johnson Medical, a division of Ethicon, Inc. The decrease in revenues from dermatological products was due in large part to a decline in revenues from Glaxo. In October, 1998, Glaxo notified the periodCompany that it intended to exit the physician-dispensed skin care market. The Company recognized $326,000 and $150,000 in revenue from August through December ofthis agreement in 1998 and 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 Actionsrespectively. As a result of the Company's internal investigation, in November 1997termination, the Company terminatedacquired the employmentWellSkin(TM) trade name from Glaxo along with Glaxo's remaining inventory of its Presidentproducts and Chief Operating Officer, John P. Gallo, for willful misconductmarketing materials. This termination resulted in the performance of his executive duties, and on April 21,Company owing $808,000 to Glaxo which is payable at specified intervals over the next two years. At December 31, 1998, $400,000 is classified as short-term debt. In December 1998, the Company commencedentered into an agreement with Genesis Pharmaceutical, Inc., ("Genesis") granting Genesis the exclusive right to market and distribute the Company's WellSkin(TM) line of skin care products. Genesis also purchased the entire inventory and marketing materials received from Glaxo. The Company has a lawsuit against Mr. Gallo (see "Legal Proceedings"). In addition, six employees, including membersreceivable from Genesis for approximately $112,000 at December 31, 1998. The Company recognized revenue of $6,000 in 1998 from Genesis. During 1998, the Company recognized $1.2 million of licensing revenue as compared to $150,000 in 1997. This revenue was comprised of $326,000 from Glaxo; $6,000 from Genesis; $92,000 from Johnson & Johnson Medical; $433,000 from Johnson & Johnson Consumer; $210,000 from National Starch; and $133,000 from Kimberly Clark. During 1997, the licensing revenue was comprised of amounts relating to the agreement with Glaxo. Cost of sales decreased by $497,000, or 3%, primarily due to the lower sales volume. However, as a percentage of sales, cost of sales increased from 51% in 1997 to 53% in 1998. This increase primarily resulted from costs relating to the Company's reassessment of product manufacturing processes and formulas, incurred in 1998, to increase future production efficiency and capacity in the Company's Vineland labs division. 15 Selling, general and administrative expenses increased by $729,000, or 5%, from $14,997,000 in 1997 to $15,726,000 in 1998. These expenses were 47% of revenues in 1998 compared with 44% of revenues in 1997. Much of the Company's management team (including two Vice Presidentsincrease was attributable to increased legal, consulting and professional fees in 1998. Total professional fees in 1998 were approximately $2.6 million, of which approximately $2.1 million was incurred primarily in response to the Company)regulatory actions and investigations which began in 1997 and resulted in the recent settlement with the U.S. Departments of Justice, Treasury and Agriculture. The Company expects its future professional expenses will be significantly below those incurred during 1998. Product development and research expenses decreased by $250,000, or 15%, resigned in April 1998 at the request of the Company. However, five of these former employees were retained bycompared with 1997 as the Company curtailed certain development projects primarily relating to the Consumer Products business. Interest expense increased $1,590,000, or 86% from $1,853,000 in 1997 to $3,443,000 in 1998. The increase was due to a charge to earnings of $645,000 for approximately eight weekswarrants issued to enable the Company to continue its operations pending the hiring and training of qualified replacements. InCompany's bank lenders in connection with the employee terminations, the Company agreed to make severance paymentsexecution of an extension agreement with its bank lenders, higher borrowings at increased interest rates in 1998, and fees paid to the two non-management employees equalbank lenders related to four months salary.extension and forbearance agreements. The Company has recently replaced a number of key personnel. On May 11,effective tax rates for 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 President1997 were 30% 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 experience27%, respectively. Changes 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,effective tax rates primarily reflect the Company voluntarily disclosed to the U.S. Attorney for the Districtlevel of New Jersey, as well as to the USDAfederal and OIG, information resulting from its internal investigation of alleged violationsstate tax credits offset 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 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. 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 itchanges in the investigation. As a resultvaluation allowance. The valuation allowance increased from 1997 primarily based on management's expectations regarding the realizability 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 necessarycertain state deferred tax assets. 1997 (Restated) Compared 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". In addition to the restatements discussed above, the Company made certain adjustments in(Restated) During the fourth quarter of 19971998, the Company changed its inventory costing method from the LIFO method to the FIFO method. The change was made because the Company believes its financial position is the primary concern of its constituents (shareholders, bank lenders, trade creditors, etc.), and that the accounting change will reflect inventory at a value which werebetter represents current costs. As required by generally accepted accounting principles, the result of actions or events which occurred in earlier quarters of 1997. The Company has retroactively restated itsprior years' financial statements for the first three quartersthis change. The aggregate effect of 1997 to record such adjustmentsthis restatement was a decrease in the applicable quarter. See "Note 18stockholders' equity of Notes to Consolidated Financial Statements". 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$294,000 as sales. 14 A summary of the impact of such restatements on the financial statements for the years ended December 31, 19951997. The restatement had no effect on 1998 results, decreased the net loss in 1997 by $245,000, and increased the net loss in 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 1996by $343,000. The Stop Shipment OrderUSDA's stop shipment order had a material adverse effect on the Company's operations in 1997. Total salesrevenues decreased $592,000,$604,000, or 2%, from $34,785,000$34,947,000 in 1996 to $34,193,000$34,343,000 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,$3,309,000, or 17%, to $16,652,000, or 49% of the Company's total sales,in 1997 as compared with $19,953,000, or 57% of 1996 total sales.1996. Poultry vaccine sales were adversely affected by the USDA regulatory action which remained in effect until March 27, 1998. This decrease was offset in part by an increase of $1,135,000,$1,136,000, 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,$11,308,000, or 33%32% 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,$1,569,000, or 45%43%, in 1997 to $5,097,000$5,255,000 from $3,523,000$3,686,000 in 1996. Sales of Consumer Products represented 15% of the Company's total 1997 sales, up from 10%11% of total 1996 sales. This increase was due primarily to increased product sales to Glaxo Wellcome and Kimberly Clark. RevenuesLicensing and royalty revenue of $150,000 in 1997 represents $100,000 of licensing income from GlaxoKimberly Clark and $50,000 of revenue attributable to an agreement on September 30, 1997 between the Company and IMX. This agreement granted IMX the exclusive right to market certain Novasome(R) based topical skin care products in certain mass-merchandising markets. Currently, negotiations are underway to further refine 16 specific applications. Pursuant to that agreement, the Company received 271,714 shares of restricted common stock of IMX. Cost of sales increased by over $1,000,000$334,000 in 1997. Gross profit decreased $1,845,000, or 10%, in 1997.1997 despite the lower sales volume. As a percentage of sales, gross profit was 48% in 1997 compared with 52%cost of sales increased from 49% in 1996 to 51% in 1997. The increase in percentage was due primarily toto: (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 made at cost plus a royalty on Glaxo's sales which resultsresulted in lower gross profita higher cost of sales percentage than other consumer product sales. Selling, general and administrative expenses were 44% of salesrevenues in 1997 compared with 42%41% of salesrevenues 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 additional reserves for accounts receivable and legal and related expenses incurred in connection with the Company's regulatory affairs. Product development and the USDA and OIG investigations. Research and developmentresearch expenses decreased $338,000, or 17%, in 1997 as the Company curtailed certain development projects primarily inrelating to the Consumer Products segment.business. The Company intendseffective tax rates for 1997 and 1996 were 27% and 44%, respectively. The decrease is primarily due 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 Company received 271,714 shares of restricted common stock of IMX. 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. 1996 Compared to 1995 Sales increased $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 $31,262,000, or 90% of total sales, compared with $28,869,000, or 95% of 1995 total sales. Poultry vaccine sales accounted for $19,953,000, or 57% of the Company's total sales. International sales of Animal Health Products increased $2,073,000, or 17%, principally to countriesincrease in the Asia/Pacific marketplace, including China, Malaysia, Indonesia and Taiwan. Domestic sales of poultry vaccines decreased 2% from 1995 levels. Companion pet product sales increased $597,000, or 6%, to $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 1995 total sales. This increase was due principally to continued expansion ofvaluation allowance, based on management's expectations, regarding the number of products containing the Company's licensed proprietary Novasome lipid vesicle technology sold to Estee Lauder, resulting in a $1,000,000 increase over 1995. Sales of the Company's former line of Nova Skin Care products, which were launched in February 1996, accounted for $402,000 of sales. Marketing rights to these products (Novasome-based alpha-hydroxy acids) in the United States to physicians were licensed to Glaxo in late 1996. The Company's gross profit increased $2,991,000, or 20%, with much of the increase attributable to the sales growth. As a percentage of sales, gross profit increased to 52% from 50% during 1995. The significant factor in the gross margin improvement was the increased sales volume of higher margined consumer products. These sales increased the utilization of the Company's skin care manufacturing facility, which started producing products in 1995. Selling, general and administrative expenses increased $2,844,000, or 24%. 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. Selling and marketing costs associated 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. Research and development expenses increased $668,000, or 50%, over 1995, due principally to increased new product development efforts in the both of the Company's business segments. These efforts were directed to developing the Nova Skin Care product line and other topical applications of the Novasome technology. The Company continues to develop new vaccines for poultry. The Company had $162,000 of research revenue in 1996, compared to $731,000 in 1995. Net interest expense increased $861,000, or 77%, due to higher borrowings which were required to fund the 1995 operating losses of the Company's former biotechnology business segment 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 employment contractsrealizability of certain IGI employees with their former 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 subsidiary Company operating losses reported on a separate return basis for state incomedeferred tax purposesassets. Liquidity and research and development tax credits, offset by non-deductible expenses. See also Notes 1, 3, and 10 of Notes to the Company's Consolidated Financial Statements. 16 LIQUIDITY AND CAPITAL RESOURCES During the first quarter of 1998, the Company was engaged in negotiating 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 outstanding borrowings under its working capital line and prime plus 4 1/2% on outstanding borrowings under its revolving credit facility.Capital Resources The Company entered into an Extension Agreement with its bank lenders as of April 29, 1998 (the "Closing Date") which provided for thea waiver of the thenall past and existing covenant defaults, extension of the bank credit agreement through 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$6,857,000 balance (at April 29, 1998) of revolving credit notes ("Revolving Facility"). and issuance to the lenders of warrants to purchase an aggregate of 540,000 shares of the Company's Common Stock at an exercise price of $3.50 per share. The Company has a call option on unexercised warrants at a repurchase price of $1,800,000. The Company recognized a non-cash expense related to the issuance of these warrants of approximately $645,000 in 1998. 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. TheDuring fiscal 1998, the Company paid interest at a rate of up to prime plus 5.5% on its outstanding borrowings under the Credit Line and under the Revolving Facility. Effective January 31, 1999, the Company and its bank lenders entered into a Second Extension Agreement andwhich provides for a waiver of the covenant defaults under the Forbearance Agreement, (the "Agreements") provide foramendment of certain covenants, extension of the bank credit agreement to March 31, 2000, and the following: .o The maximum availability under the Credit Line is subject to the determination of the amount of eligible accounts receivable and eligible inventories. The Credit LineThere is due and payable in full on Januaryno remaining availability as of December 31, 1998 or March 31, 1999. . Theo Mandatory principal payments of $4,000,000 and $2,000,000 of the outstanding balance of $6,857,142$18,657,000 at December 31, 1998, under the Revolving Facility isand Credit Line are due on August 31, 1999 and November 30, 1999, respectively, with the balance due and payable on JanuaryMarch 31, 1999. .2000. o 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. .Although the Company can sell operating assets, proceeds from such sale must be remitted directly to the lenders. 17 o Interest on outstanding borrowings of $18,657,000 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%
be at a rate of prime plus 5.5% of which prime plus 2.5% is paid monthly and 3.0% is accrued and payable on March 31, 2000. o The interest rate on outstanding borrowings will be reduced by 0.5% after each of the mandatory principal payments. In addition, the interest rate will be reduced by an additional 1.5% for each $1,000,000 of voluntary principal payments, but not lower than prime plus 1.0%. AtA pro rata portion of the Closing Dateaccrued interest will be waived for all principal payments occurring prior to December 31, 1999. o On March 11, 1999, the Company issued warrants to the bank lenders warrants to purchase an aggregate of 540,000270,000 shares of the Company's common stockCommon Stock at an exercise price of $3.50$2.00 per share. Warrants ("Unconditional Warrants") to purchase 270,000 sharesThese warrants are exercisable at any time during the period commencing 60 days after issuance and endingissuance. The Company also issued warrants to purchase an additional 270,000 shares of the Company's Common Stock exercisable at $2.00 per share if the bank debt is still outstanding at September 30, 1999. The warrants expire on the fifth anniversary of issuance. The Company has a call option on unexercised warrants at a repurchase price of $1,800,000. The Company will recognize a non-cash expense for each issuance unlessof warrants for approximately $195,000, or a total of about $390,000 during 1999. o The Company agreed to pay the bank lenders an extension fee of $350,000, which is being amortized over the life of the agreement. At the time of the extension, $50,000 was paid, with the balance payable in four installments through February 24, 2000. If the Company is able to refinance its bank debt, by October 31, 1998 in which case these warrants expire. Warrants ("Conditional Warrants")any extension fees due subsequent to purchase the remaining 270,000 shares are exercisable at any time duringclosing date of the period commencing September 1, 1998 and ending on the fifth anniversary of issuance, unless therefinancing will be waived. o 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 Companyrequired to maintain certain minimum financial ratioscovenants and comply with other non-financial covenants, including remittance of cash flows from debt or equity financing, income tax refunds and fixed asset dispositions to the banks, and the completion of Year 2000 compliance by September 30, 1999. The agreement also prohibits the payment of cash dividends without the prior written consent of the lenders. At March 1, 1999, the Company had cash and cash equivalent balances of $535,000, and no available borrowing capacity under the Credit Line or the Revolving Facility. The Company is actively seeking,currently generating losses that may extend through much of 1999. Further, the Company has significant debt it must repay on August 31, 1999, November 30, 1999 and March 31, 2000. The Company is pursuing additional debt and equity financing alternatives to meet these obligations. The Company believes it willcan obtain such financing on acceptable terms. However, if the Company is not successful in obtaining the required additional financing, it believes it has the ability and it plans to meet its 1999 debt repayment obligations by altering its business plans including, if necessary, a sale of selected Company operating and non-operating assets. Any sale of operating assets would involve a curtailment of certain of the Company's business operations and a modification of its business strategy. However, if the Company is unable to raise sufficient funds to repay or refinance the debt repayment due on March 31, 2000, the Company could be ablein default under its loan agreement and any such default could lead to secure, alternative financing arrangementsthe commencement of insolvency proceedings by its creditors subsequent to replacethat date. Accordingly, the Board of Directors of the Company has authorized management of the Company to seek additional equity capital through the sale of common stock of the Company, either through a private sale to institutional or individual investors or through a rights offering to its existing debtstockholders. Subject to shareholder approval, the Board has authorized an increase in the number of shares of common stock available and lending terms throughthe authorization of a preferred stock class. While the Company has contacted a number of potential options including, but not limited to, the issuanceproviders 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 obligations. No assurance can be given thatadditional capital who have expressed interest in negotiating financing arrangements with the Company, will be able to obtain alternative financing arrangements, and if it is unsuccessful in doing so, the Company may be required to restrict its business operationsdate no agreements or otherwise modify its business strategy. The Company believes it will be able to remain in compliance with its debt covenants through January 30, 1999.commitments have been obtained. 18 The Company's operating activities provided $2,437,000$816,000 of cash during 1997. Cash was provided from1998, which included net income and non-cash charges to operations for depreciation, amortization, loss reserves and the $1,000,000 payment from Glaxo under the Glaxo Agreement. These amounts werestock and warrant compensation expense, partially offset by an increase in part, by increases indeferred tax assets. Additionally, inventory, accounts receivable inventories and other current assets.assets decreased, while accounts payable and accrued expenses increased, all of which had the effect of increasing operating cash flow. The accounts receivable turnover ratio for 19971998 was 4.514.34 compared to 4.244.51 for 1996.1997. The accounts receivable balances due from Mexico and Latin America were 24.5%26% of the total receivable balances before allowance for doubtful accounts as of December 31, 19971998, and the Company believes the net amounts are 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%represented 25% of the total receivable balances before allowance for doubtful accounts at December 31, 1997. This area has1998. These geographic markets have recently experienced political, economic and currency instability. In order to minimize risk, the Company maintains credit insurance for the majority of its international accounts receivable, and all sales are denominated in U.S. dollars to minimize currency fluctuation risk. Because of the volume of business transacted by the Company in these areas, continuation or the recurrence of such unrest or instability could adversely affect the business 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 affect the Company's future operating results. The growth in inventories relates principally to a build up in poultry vaccines as a result of the USDA stop shipment actions. The inventory turnover ratio for 19971998 was 1.89,2.07, compared to 1.821.89 for the year ended December 31, 1996.1997. The Company believes its reserves for inventory obsolescence and accounts receivable are adequate. The Company used $568,000$708,000 for investing activities, principallywhich were primarily capital expenditures for the Company's manufacturing operations. Funding for the Company's operating and investing activities wereand repayment of debt was provided by borrowings under the Company's working capital line of credit. At July 31, 1998, the Company had no available borrowing capacity under the Credit Line and no borrowings available under the Revolving Facility. Funds generatedcash flow 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 will be required to raise additional funds to finance capital expenditures as well as the expansion of its business. Additionally, the bank facility expires in January 1999. The Company, therefore, intends to seek additional funds through 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 the additional required funds, and if it is unsuccessful in doing so the Company may be required to restrict its business operations or otherwise modify its business strategy. FACTORS THAT MAY AFFECT FUTURE RESULTSoperations. Factors Which May Affect Future Results The industry segments in which the Company competes are constantly changing and are subject to significantintense competitive pressures. The following sets forth some of the risks which the Company faces. ADVERSE EFFECTS OFAdverse Effects of USDA ACTIONS ANDActions and OIG ANDand U.S. ATTORNEY INVESTIGATIONSAttorney Investigations The Company believes that the Stop Shipment Orderstop shipment order and other actions by the USDA in 1997, and the ongoingother government investigations described in "Management's Discussion and Analysis of Financial Condition 18 and Results of Operations" ("MD&A"),"Legal Proceedings" and the costs incurred in connection with those investigations will have had a materiallymaterial adverse effect on itsthe Company's business and results of operations in 1998. First,1998 and are likely to continue to adversely affect the Company's business during the first half of 1999. The Company needshas continued to attract, trainrefine and retain key employees forstrengthen its management team to replace key employees terminated in 1997regulatory program with the adoption of a series of compliance and 1998, including corporate officers to head up its manufacturing operations, marketingenforcement policies, the addition of new managers of Production and salesQuality Control, and business development. Second,a new Senior Vice President and General Counsel. At the Company needs to satisfyinstruction of the USDA andBoard of Directors, the government agencies and its customers that itCompany's General Counsel has established and implementedoversees a comprehensive employee training program, has designated in writing a Regulatory Compliance Officer and has established a fraud detection program as well as an employee "hotline." The Company has continued to cooperate with the USDA in all aspects of its investigation and regulatory activities. While the Company has made progress in returning to normal business operations by hiring new management and taking corrective action to assure compliance programs that will prevent future violations of government regulations applicable to its poultry vaccine business. Third,with all regulatory requirements, it still faces important challenges. First, 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,Second, 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,Third, it must raise additional funds, either through additional borrowingdebt or the sale of equity funds to meet its growth objectivebusiness plan 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 doingthe failure to do 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 expected19 Highly Leveraged; Inability 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 consumer products business and its former biotechnology business, Novavax, which was distributed to the Company's stockholders in December 1995.Obtain Additional Funding The Company is currently very highly leveraged and has negative working capital, and therefore will need to obtain additional debt or equity capital to finance the expansion ofmeet its animal health productsbusiness plan, short-term repayment obligations, and consumer products businesses.to maintain its competitive position. No assurance can be given that such funds will be obtained when required or, if obtainable, on terms that are favorable to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." The Company was in violation ofdefault under certain covenants in its bank credit agreements during 1997 and at December 31, 1997.1998. In 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 theits 1998 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. Effective January 31, 1999, the Company and its bank lenders entered into a Second Extension Agreement pursuant to which the banks waived the existing covenant defaults under the Forbearance Agreement and extended the credit agreement on amended terms and conditions through March 31, 2000, including the addition of a covenant obligating the Company to reduce its loans to the banks by $4.0 million by August 31, 1999 and an additional $2.0 million by November 30, 1999. At March 1, 1999, the Company had cash and cash equivalent balances of $535,000, and no available borrowing capacity under the Credit Line or the Revolving Facility. The Company is actively seeking alternative financing arrangements to replace its existingcurrently generating losses that may extend through much of 1999. Therefore, the Company has significant debt it must repay on August 31, 1999, November 30, 1999 and March 31, 2000. The Company is pursuing additional debt and lending termsequity financing alternatives in order to meet these obligations. The Company believes it can obtain such financing on acceptable terms. However, if the Company is not successful in obtaining the required additional funds, it believes it has the ability and it plans to meet its 1999 debt repayment obligations by altering its business plans including, if necessary, a sale of selected Company operating and non-operating assets. Any sale of operating assets would involve a curtailment of certain of the Company's business operations and a modification of its business strategy. However, if the Company is unable to raise sufficient funds to repay or refinance the debt repayment due March 31, 2000, the Company could be in default under its loan agreement and any such default could lead to the commencement of insolvency proceedings by its creditors. Accordingly, the Board of Directors of the Company has authorized management of the Company to seek additional equity capital through the sale of common stock of the Company, either through a private sale to institutional or individual investors or through a rights offering to its stockholders. While the Company has contacted a number of potential options including, but not limitedproviders of additional capital, no agreements or commitments have been obtained 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 unsuccessfuldate. Intense Competition 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 be able to remain in compliance 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 the Company's common stock. No assurance can be given that AMEX trading privileges will be resumed in the 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 BUSINESSConsumer Products Business The Company's Consumer Products Businessbusiness competes with large, well-financed cosmetics and consumer products companies with development and marketing groups that are experienced in the industry and possess far greater resources than those available to the Company. There 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 NovasomeNovasome(R) lipid vesicles in their products may decide to reduce their purchases from the Company or shift their business to other technologies. COMPETITION IN POULTRY VACCINE BUSINESSsuppliers. 20 Competition in Poultry Vaccine Business The Company is encountering increasingly severe competition from international producers of poultry vaccines, particularly increased price competition coupled with a downward trend in vaccine prices. FOREIGN REGULATORY AND ECONOMIC CONSIDERATIONSForeign 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 Latin American and Far EastEastern countries, an increasingly important marketmarkets 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 Pet Products The emergence of pet superstores, the consolidation of distribution channels into a smaller number of large,fewer, more powerful companies and the changingdiminishing traditional role of veterinarians in the distribution of animal healthpet products could adversely affect the Company's ability to expand its animal health business andor to operate at theacceptable gross margin levels historically enjoyed by the Company. EFFECT OF RAPIDLY CHANGING TECHNOLOGIESlevels. Effect of Rapidly Changing Technologies The Company expects to rely on the features oflicense its technologies to license the technologies to third parties which would manufacture and market products incorporating the technologies. However, if its competitors develop new and improved technologies that are superior to the Company's technologies, its technologies could be less acceptable in the marketplace and therefore the Company's planned technology licensing could be materially adversely affected. REGULATORY CONSIDERATIONSRegulatory Considerations The Company's animal healthpoultry vaccines and pet products are regulated by the USDA and the FDA which subject the Company to review, 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. 20 YEARYear 2000 The "Year 2000 Issue" is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, a temporary inability to process transactions, prepare invoices or engage in similar normal business activities. As of December 31, 1998, the Company recognizes the needhad assessed its needs to ensure its operations will not be adversely impacted byassure full compliance with Year 2000 software failures. Software failures due to the processing errors potentially arising from calculations using the Year 2000 date arerequirements and has developed a known risk. The Company is addressing this risk to the availability and integrity of financial systems and the reliability of operational systems.comprehensive compliance plan. 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 estimatedneeds involving three areas: (i) financial and management computer systems, (ii) microprocessors and other electronic device components of equipment used by the Company ("embedded chips"), and (iii) computer systems used by third parties, in particular financial institutions, suppliers and customers of the Company. The Company decided that its financial and management computer system should be remediated. The Company's present financial and management computer systems are not all Year 2000 compliant. The Company has undertaken to update and remediate its existing computer system to make it Year 2000 compliant at a cost of about $65,000, and has entered into a contract with the system's vendor for such remediation. The Company expects its financial and management computer system to be Year 2000 compliant by September 1999. To date, the Company has incurred approximately $350,000 over the cost of normal$35,000 in hardware and software upgrades and replacementsreplacements. If the upgraded system fails, the Year 2000 issue could have a materially adverse effect on the operations and will be incurred from October 1998 through fiscal 1999. ACCOUNTING STANDARDS CHANGES In June 1997,financial condition of the Financial Accounting Board ("FASB") issued Statement of Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income." This Statement establishes standards for reporting all components of comprehensive income. This Statement is effective for financial statements issued for periods ending after December 15, 1998. The Company is currently evaluating the impact, if any, adoption of SAFS No. 130 will have on its financial statements. In June 1997, the FASB issued SFAS No. 131 "Disclosures 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 will adopt this statement for fiscal 1998 and does not presently anticipate any material change in its disclosures. INCOME TAXESCompany. 21 The Company has completed an inventory and assessment of its exposure to embedded chips in its facilities or equipment used in those facilities and the capability of vendors of such equipment to successfully remediate Year 2000 problems in equipment with embedded chips. The Company believes that the cost to remediate and/or replace its embedded chips to achieve Year 2000 compliance is approximately $15,000 and expects all remediation of embedded chips to be completed by June 1999. The Company has contacted vendors and customers to determine their exposure to Year 2000 issues, their anticipated risks and responses to those risks. The Company's vendors supply products and materials which are readily available and the Company has identified alternative sources in the event a vendor is not Year 2000 compliant. The Company believes that the cost related to non-compliance by vendors and customers is not expected to be material. While the Company believes that necessary modifications will be made on a timely basis, there can be no assurance that there will not be a delay in or increased costs associated with the implementation of such modifications. If the Company is unsuccessful in completing remediation of non-compliant systems or correcting embedded chips, the Company could incur additional costs to develop alternative methods of managing its business and replacing non-compliant equipment and may experience delays in payments from customers or to its vendors. Income Taxes The Company has net deferred tax assetassets in the amount of approximately $4$5.5 million as of December 31, 1997.1998. The largest deferred tax asset relates to the $5$2.8 million Novavax license payment that is being deducted over a ten-year period which began in 1996. Managementnet operating loss carryforwards. After considering the $726,000 valuation allowance at December 31, 1998, management believes on athe Company's remaining net deferred tax assets are more likely than not basis, that the Company's net deferred tax asset willto be realized through the reversal of existing taxable temporary differences, the sale of certain state net operating losses, and the generation of sufficient future taxable operating income to ensure utilization of remaining deductible temporary differences, net operating losses and tax credits. The minimum level of future taxable income necessary to realize the Company's net deferred tax assets at December 31, 1997,1998, is approximately $15$16 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 tax assets. The majority of theFederal net operating loss carryforwards expire through 2018. Significant components expire in 2007 (26%), 2010 (13%) and 2018 (56%). Also 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 loss in 19972018. Item 7A. Quantitative and 1996 differed from its consolidated financial statement loss. In 1997Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and 1996, taxable loss was lower due to increases in reserves for inventories 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 due 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 DATASupplementary 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 and incorporated herein by reference. ITEMItem 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On July 23, 1997,Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Part III Item 10. Directors and Executive Officers of the Company was informed by Coopers & Lybrand L.L.P. (C&L), who wereRegistrant A portion of 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 through July 23, 1997, there were no disagreements with C&L on any 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 any 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 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is contained in part under the caption "Executive Officers of the Company"Registrant" in Part 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 13, 1999 (the "1999 Proxy Statement") under the captions "PROPOSAL 1 - 22 ELECTION OF DIRECTORS" and "Section 16(a) Beneficial Ownership Reporting Compliance" which are incorporated herein by this reference. Officers are elected on an annual basis and serve at the discretion of the Board of Directors. The Company expects to file the 1999 Proxy Statement no later than April 14, 1999. Item 11. Executive Compensation The information required by this item is contained under the captions "EXECUTIVE COMPENSATION" and "Director Compensation and Stock Options" in the Company's 1999 Proxy Statement and is incorporated herein by this reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The following 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"), requiresrequired by this item is contained in the Company's directors, executive officers1999 Proxy Statement under the caption "Beneficial Ownership of Common Stock" and holders of more than 10% ofis incorporated herein by this reference. Item 13. Certain Relationships and Related Transactions The information required by this item is contained under the caption "Certain Relationships and Related Transactions" appearing in the Company's Common Stock ("Reporting Persons") to file with the Commission initial reports of ownership1999 Proxy Statement and reports of changes in ownership of Common Stockis incorporated herein by this reference. Part IV Item 14. Exhibits, Financial Statement Schedules, and other equity securities of the Company. Except as set forth below, and based solelyReports 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 were $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, 1997 ($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 increase 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 agreed 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 Board 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 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 Officers 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 reported is based on Amendment No. 2 to Schedule 13D dated December 29, 1997 and filed with the Securities and Exchange Commission (the "Commission") by Stephen 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 based on a Schedule 13G dated January 20, 1998, filed with the 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 Analysis of Financial Condition and 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 bank borrowing rate plus 1/4% per annum and secured by 10,000 shares of Common 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 the Company for his willful misconduct in the performance of his executive duties. As part of the lawsuit, the Company is also demanding that Mr. Gallo repay this indebtedness. See "Legal Proceedings". Due to the uncertainty of 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 wholly-owned by Jane E. Hager, his wife and a director of the Company. Total charges to the Company for its use of the airplane in 1997 were $68,930. The Board 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 private aircraft owners unaffiliated with the Company, and (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 common stock at an exercise price of $3.50 per share. On August 19, 1998, the Company and its 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 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements: Reports of Independent Accountants Consolidated Balance Sheets, December 31, 19971998 and 19961997 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 1996 and 19951996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 1996 and 19951996 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 1996 and 19951996 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: Schedule II. Valuation and Qualifying Accounts and 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. The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed as part of this Annual Report on Form 10-K.10-K, unless incorporated by reference as indicated. (b) Reports on Form 8-K On December 4, 1997, the Company filed a Current Report on Form 8-K, dated November 24, 1997, to report under Item 5 (Other Events) that it had terminated the employment of John P. Gallo as its President and Chief Operating Officer. 31None. 23 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: August 24, 1998 IGI, Inc. By: /s/ Edward B. Hager -----------------------Date: April 12, 1999 IGI, Inc. By: /s/ Edward B. Hager ---------------------------- Edward B. Hager, Chairman of the Board
Chief Executive Officer 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.
Signatures 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 April 12, 1999 - --------------------------- Chief Executive Officer Edward B. Hager (Principal executive officer) /s/ John F. Wall Senior Vice President April 12, 1999 - --------------------------- Chief Financial Officer John F. Wall (Principal financial officer) /s/ F. Steven Berg Director April 12, 1999 - --------------------------- F. Steven Berg /s/ Terrence D. Daniels Director April 12, 1999 - --------------------------- Terrence D. Daniels /s/ Jane E. Hager Director April 12, 1999 - --------------------------- Jane E. Hager /s/ Constantine L. Hampers Director April 12, 1999 - --------------------------- Constantine L. Hampers /s/ Terrence O'Donnell Director April 12, 1999 - --------------------------- Terrence O'Donnell /s/ Paul D. Paganucci Director April 12, 1999 - --------------------------- Paul D. Paganucci /s/ David G. Pinosky Director April 12, 1999 - --------------------------- David G. Pinosky Director 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.: In our opinion, the accompanying consolidated financial statements and financial statement schedule as listed in Item 14(a)(1) and (2) of this Form 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, 19971998 and 1996,1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 19971998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing 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 disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in NoteNotes 1 and 8, the Company has substantial debt due on JanuaryMarch 31, 1999,2000, and is actively seeking alternative financing arrangements. Also, asAs discussed in Note 13,1 to the financial statements, the Company is involvedchanged its method of inventory costing in certain litigation matters and is responding to inquiries from regulatory agencies. The Company expects to achieve a satisfactory resolution of its existing regulatory and litigation matters.1998. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Philadelphia, Pennsylvania JulyMarch 31, 1998, except as to Note 8, which is as of August 19, 1998 331999 25 IGI, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBERDecember 31, 1998 and 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE INFORMATION)(in thousands)
1997 19961998 1997* -------- ---------- (RESTATED)-------- ASSETS Current assets: Cash and cash equivalents...............................equivalents $ 1,1961,068 $ 3171,196 Accounts receivable, less allowance for doubtful accounts of $516 and $903 in 1998 and $238 in 1997, respectively 6,462 6,851 Licensing and 1996, respectively........................................... 6,851 8,365 Receivable due under royalty agreement..................receivable 440 -- 1,000 Inventories............................................. 9,816 9,067Inventories 7,406 8,942 Current deferred taxes..................................taxes 1,275 728 310 Prepaid expenses and other current assets............... 819 1,217assets 433 690 -------- --------------- Total current assets.................................. 19,410 20,276assets 17,084 18,407 -------- ------- Investments...............................................-------- Investments 535 1,011 60 Property, plant and equipment--at cost: Land.................................................... 625 625 Buildings............................................... 9,600 9,382 Machinery and equipment................................. 9,659 9,241 -------- ------- 19,884 19,248 Less accumulated depreciation............................. (10,048) (9,121) -------- -------equipment, net 9,479 9,836 10,127 -------- ------- Deferred income taxes..................................... 3,247 3,073 Notes receivable.......................................... -- 162taxes 4,188 3,414 Other assets.............................................. 540 686assets 770 1,082 -------- --------------- Total Assets $ 34,044 $34,38432,056 $ 33,750 ======== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to bank...................................Credit line $ 12,000 $ 9,64212,000 Revolving credit facility...............................facility 6,657 6,857 3,443Current portion of notes payable 661 -- Accounts payable........................................payable 3,235 3,841 2,665 Accrued payroll.........................................payroll 196 183 470Due to stockholder 380 -- Accrued interest 432 150 Other accrued expenses.................................. 909 675expenses 1,614 759 Income taxes payable....................................payable 16 89 38 -------- --------------- Total current liabilities.............................liabilities 25,191 23,879 16,933 -------- ------- Long-term debt, less current maturities...................-------- Notes payable 408 36 6,893 -------- --------------- Deferred income from royalty contract.....................contract 534 1,801 1,000 -------- ------- Commitment-------- Commitments and contingencies (Note 12) Stockholders' equity: Common stock, $.01 par value, 30,000,000 shares autho- rized;authorized; 9,648,931 and 9,602,681 and 9,572,681 shares issued in 1998 and 1997, and 1996, respectively.................................respectively 97 96 96 Stock subscribed........................................ -- 175 Additional paid-in capital..............................capital 19,961 19,074 19,115 Accumulated deficit..................................... (8,649) (7,196)deficit (11,972) (8,943) -------- ------- 10,521 12,190-------- 8,086 10,227 Less treasury stock; 136,014 and 164,082 shares at cost, in 1998 and 1997 and 1996, respectively........................... (2,163) (2,518)(2,163) Stockholders' notes receivable............................receivable -- (30) (114) -------- --------------- Total stockholders' equity............................ 8,328 9,558equity 5,923 8,034 -------- --------------- Total Liabilities and Stockholders' Equity $ 34,044 $34,38432,056 $ 33,750 ======== ===============
* Prior year amounts restated to reflect the Company's change in inventory costing method (See Note 1). The accompanying notes are an integral part of the consolidated financial statements. 3426 IGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBERfor the years ended December 31, 1998, 1997 and 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)(in thousands, except share and per share information)
1997 1996 1995 --------- ---------- --------- (RESTATED) (RESTATED)1998 1997* 1996* ----------- ----------- ----------- Net sales.....................................Revenues: Sales, net $ 31,995 $ 34,193 $ 34,785 $ 30,501Licensing and royalty income 1,200 150 162 ----------- ----------- ----------- Total revenues 33,195 34,343 34,947 Cost and Expenses: Cost of sales................................. 17,834 16,581 15,288 --------- --------- --------- Gross profit.................................. 16,359 18,204 15,213sales 16,954 17,451 17,117 Selling, general and administrative expenses..expenses 15,726 14,997 14,485 11,641 ResearchProduct development and development expenses.............research expenses 1,425 1,675 2,013 1,345 Licensing and research revenues............... (150) (162) (731) --------- --------- -------------------- ----------- ----------- Operating profit (loss)....................... (163) 1,868 2,958 (910) 220 1,332 Interest expense..............................expense, net (3,443) (1,853) (1,984) (1,269) Interest income............................... -- -- 146 Other income (expense), net...................net 33 (11) (202) 7 --------- --------- --------- Income (loss) from continuing operations----------- ----------- ----------- Loss before provision for income taxes............ (2,027) (318) 1,842 Provision (benefit)taxes (4,320) (1,644) (854) Benefit for income taxes.......... (574) (180) 513 --------- --------- --------- Income (loss) from continuing operations...... (1,453) (138) 1,329taxes (1,291) (436) (373) ----------- ----------- ----------- Net loss $ (3,029) $ (1,208) $ (481) =========== =========== =========== Loss from discontinued operations net of in- come tax benefits............................ - - (4,034) --------- --------- --------- Net loss...................................... $ (1,453) $ (138) $ (2,705) ========= ========= ========= Income (loss) per common and common equivalent share: Basic: From continuing operations................Basic $ (.15)(.32) $ (.01)(.13) $ .14 ========= ========= ========= From discontinued operations..............(.05) =========== =========== =========== Diluted $ --(.32) $ --(.13) $ (.44) ========= ========= ========= Net loss.................................. $ (.15) $ (.01) $ (.29) ========= ========= ========= Diluted: From continuing operations................ $ (.15) $ (.01) $ .14 ========= ========= ========= From discontinued operations.............. $ -- $ -- $ (.41) ========= ========= ========= Net loss.................................. $ (.15) $ (.01) $ (.28) ========= ========= =========(.05) =========== =========== =========== Average number of common and common equivalent shares: Basic.......................................Basic 9,470,413 9,457,938 9,323,440 9,173,156 ========= ========= ========= Diluted.....................................=========== =========== =========== Diluted 9,470,413 9,457,938 9,323,440 9,725,230 ========= ========= ==================== =========== ===========
* Prior year amounts restated to reflect the Company's change in inventory costing method (See Note 1). The accompanying notes are an integral part of the consolidated financial statements. 3527 IGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBERfor the years ended December 31, 1998, 1997 and 1996 AND 1995 (IN THOUSANDS)(in thousands)
1997 1996 19951998 1997* 1996* ------- ---------- --------- (RESTATED) (RESTATED)------- ------- Cash flows from operating activities: Net loss...................................... $(1,453)loss $(3,029) $(1,208) $ (138) $(2,705)(481) Reconciliation of net loss to net cash used by operating activities: Depreciation and amortization...............amortization 992 1,037 992 836Gain on sale of assets (62) -- -- Write off of other assets 558 -- -- Provision for loss on accounts and notes receivable and inventories.................inventories 1,482 1,610 412 825 Recognition of deferred revenue.............revenue (242) (150) -- -- Issuance of stock to 401(k) plan............plan -- 40 91 69 Benefit for deferred income taxes........... (585) (189) (209)taxes (1,321) (447) (382) Stock option compensation expense...........expense: Non-employee stock options 149 47 156 Warrants issued to lenders 645 -- -- Directors' stock issuance 94 -- -- Litigation settlement in common stock.......stock -- (50) 175 Other, net 17 -- -- Changes in operating assets and liabilities: Accounts receivable.........................receivable 239 721 (300) (890) Inventories................................. (1,352) (375) (1,751)Inventories 374 (1,735) 161 Receivable due under royalty agreement......agreement (328) 1,000 -- -- Prepaid and other assets....................assets 333 398 (455) 151 Accounts payable and accrued expenses.......expenses 929 1,123 130 939Deferred revenue 59 -- -- Income taxes payable/refundable.............payable (73) 51 22 1 Reimbursement from former subsidiary........ -- -- 250 Net assets of biotechnology segment......... -- -- (226) ------- ------- ------- Net cash provided from (used by) operating ac- tivities.......................................activities 816 2,437 521 (2,710) ------- ------- ------- Cash flows from investing activities: Capital expenditures net.....................(607) (636) (913) (2,397)Proceeds from sale of assets 165 -- -- (Increase) decrease in other assets...........assets (266) 68 59 (5) License payment to former subsidiary.......... -- -- (5,000) Net assets of biotechnology segment........... -- -- (360) ------- ------- ------- Net cash used by investing activities...........activities (708) (568) (854) (7,762) ------- ------- ------- Cash flows from financing activities: Net borrowings under line of credit agreements...................................agreements -- 2,358 1,594 4,258 Borrowings under revolving credit agreement...agreement -- -- 12 2,000 PaymentsRepayment of long-term debt....................debt (236) (3,443) (1,714) (9) Proceeds from exercise of common stock options......................................options -- 95 589 938 Proceeds from sale of common stock............ -- -- 2,500 ------- ------- ------- Net cash (used in) provided from (used in) financing ac- tivities.......................................activities (236) (990) 481 9,687 ------- ------- ------- Net (decrease) increase (decrease) in cash and equivalents.cash equivalents (128) 879 148 (785) Cash and cash equivalents at beginning of year..year 1,196 317 169 954 ------- ------- ------- Cash and cash equivalents at end of year........year $ 1,068 $ 1,196 $ 317 $ 169 ======= ======= =======
* Prior year amounts restated to reflect the Company's change in inventory costing method (See Note 1). The accompanying notes are an integral part of the consolidated financial statements. 3628 IGI, INCINC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBERfor the years ended December 31, 1998, 1997 and 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE INFORMATION)(in thousands, except share information)
COMMON STOCK ADDITIONAL STOCKHOLDERS' ACCUMU- TOTAL ---------------- STOCK PAID-IN NOTES LATED TREASURY STOCKHOLDERS' SHARES AMOUNT SUBSCRIBED CAPITAL RECEIVABLE DEFICIT STOCK EQUITY --------- ------Common Stock Additional Stockholders' ------------------------ Stock Paid-In Notes Shares Amount Subscribed Capital Receivable ---------- ---------- ------------- ------- -------- ----------------------- ---------- ---------- Balance, January 1, 1995................... 9,018,637 $901996* 9,440,681 $ 94 $ -- $20,391 $(163) $(4,353) $(2,253) $13,712$ 18,131 $ (189) Exercise of stock options, including tax benefits of $279....... 193,815$79 132,000 2 -- 1,152 -- -- (381) 773666 Issuance of stock to 401(k) plan............ 1,574 -- -- 44 -- -- 25 69 Issuanceplan 1 Settlement of stock to industry partner....... 226,655 2 -- 2,498 -- -- -- 2,500 Licenselitigation 175 Tax benefit of license payment to former subsidiary net161 Issuance of a deferred tax benefit of $1,700...... -- -- -- (3,300) -- -- -- (3,300) Distribution of biotechnology business segment................ -- -- -- (2,654) -- -- -- (2,654) Payment ofnon-employee stock options 156 Repayment on stockholders' notes receivable....... -- -- -- -- 74 -- -- 74 Reclass of stockholders' notes receivable....... -- -- -- -- (100) -- -- (100)75 Net loss (restated)..... -- -- -- -- -- (2,705) -- (2,705) --------- --- ----- ------- ----- ------- ------- -------loss* ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1995 (restated)........ 9,440,681 94 -- 18,131 (189) (7,058) (2,609) 8,3691996* 9,572,681 96 175 19,115 (114) Settlement of litigation (175) (118) Exercise of stock options, including tax benefits of $79........ 132,000 2$7 30,000 -- 666122 Issuance of stock to 401(k) plan (92) Value of non-employee stock options 47 Interest earned on stockholders' notes (10) Reserve on stockholders' notes receivable 94 Net loss* ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1997* 9,602,681 96 -- 19,074 (30) Issuance of stock pursuant to Directors' Stock Plan 46,250 1 93 Value of non-employee stock options 149 Value of warrants issued 645 Interest earned on stockholders' notes (3) Reserve on stockholders' notes receivable 33 Net loss ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1998 9,648,931 $ 97 $ -- $ 19,961 $ -- ========== ========== ========== ========== ========== Total Accumulated Treasury Stockholders' Deficit Stock Equity ---------- ---------- ---------- Balance, January 1, 1996* $ (7,254) $ (2,609) $ 8,173 Exercise of stock options, including tax benefits of $79 668 Issuance of stock to 401(k) plan............ -- -- -- 1 -- --plan 91 92 Settlement of litigation............. -- -- $ 175 -- -- -- --litigation 175 Tax benefit of license payment to former subsidiary............. -- -- -- 161 -- -- --subsidiary 161 Issuance of non-employee stock options.......... -- -- --options 156 -- -- -- 156 Interest earnedRepayment on stockholders' notes.... -- -- -- -- -- -- -- -- Repayment of stockholders' notes.... -- -- -- -- 75 -- --notes 75 Net loss (restated)..... -- -- -- -- -- (138) -- (138) --------- --- ----- ------- ----- ------- ------- -------loss* (481) (481) ---------- ---------- ---------- Balance, December 31, 1996 (restated)........ 9,572,681 96 175 19,115 (114) (7,196)1996* (7,735) (2,518) 9,5589,019 Settlement of litigation............. -- -- (175) (118) -- --litigation 243 (50) Exercise of stock options, including tax benefits of $7......... 30,000 -- -- 122 -- --$7 (20) 102 Issuance of stock to 401(k) plan............ -- -- -- (92) -- --plan 132 40 Value of non-employee stock options.......... -- -- -- 47 -- -- --options 47 Interest earned on stockholders' notes.... -- -- -- -- (10) -- --notes (10) Reserve on stockholders' notes receivable....... -- -- -- -- 94 -- --receivable 94 Net loss................ -- -- -- -- -- (1,453) -- (1,453) --------- --- ----- ------- ----- ------- ------- -------loss* (1,208) (1,208) ---------- ---------- ---------- Balance, December 31, 1997................... 9,602,681 $961997* (8,943) (2,163) 8,034 Issuance of stock pursuant to Directors' Stock Plan 94 Value of non-employee stock options 149 Value of warrants issued 645 Interest earned on stockholders' notes (3) Reserve on stockholders' notes receivable 33 Net loss (3,029) (3,029) ---------- ---------- ---------- Balance, December 31, 1998 $ -- $19,074(11,972) $ (30) $(8,649) $(2,163)(2,163) $ 8,328 ========= === ===== ======= ===== ======= ======= =======5,923 ========== ========== ==========
* Prior year amounts restated to reflect the Company's change in inventory costing method (See Note 1). The accompanying notes are an integral part of the consolidated financial statements. 3729 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESSummary of Significant Accounting Policies Nature of the Business IGI, Inc. (IGI"("IGI" or the "Company") is a diversified company engaged in twothree business segments. . Animal Health Business--productionsegments: o Poultry Vaccine Business - production and marketing of animal healthpoultry vaccines and other related products; o Companion Pet Products Business - production and marketing of companion pet products such as poultry vaccines, veterinary pharmaceuticals, and other products, including nutritional supplements and grooming aids; and .o Consumer Products Business--productionBusiness - production and marketing of cosmetics and skin care products. IGIFinancing Needs At March 1, 1999, the Company had cash and cash equivalent balances of $535,000, and no available borrowing capacity under the Credit Line or the Revolving Facility. The Company is committedcurrently generating losses that may extend through much of 1999. Therefore, the Company has significant debt that it must repay on August 31, 1999, November 30, 1999 and March 31, 2000. The Company is pursuing additional debt and equity financing alternatives in order to grow by applying its technology to deliver cost effective solutions to customer problems. IGI solves problems in poultry production, pet care and consumer and skin care markets. An increasing number of its solutions are basedmeet these obligations. The Company believes it can obtain such financing 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 other products.acceptable terms. See also Note 8 - "Debt." 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 former majority-owned subsidiary, Novavax, Inc. ("Novavax"). All intercompany accounts and transactions have been eliminated. InvestmentAn investment in an affiliated company with a 20% ownership interest is accounted for onusing the cost method. Cash equivalents Cash equivalents consist of short-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; ofareas. Of these, Mexico, Indonesia, Thailand and certain other Latin American countries and countries in the Far EastEastern countries are important markets for the Company's poultry vaccines and other products. These countries have historicallyfrom time to time experienced periods of varying degrees of political unrest and/orand economic and currency instability. Because of the volume of business transacted by the Company in those countries,these areas, continuation or recurrence of such unrest or instability could adversely affect the businesses of its customers in those countriesthese areas 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 order to minimize risk, the Company maintains credit insurance for the majority of its international accounts receivable and all sales are denominated in U.S. dollars to minimize currency fluctuation risk. 30 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Inventories Inventories are statedvalued at the lower of cost, (last-in,using the first-in, first-out basis)("FIFO") method, or market. During the fourth quarter of 1998, the Company changed its method of determining the cost of inventories from the last-in, first-out ("LIFO") method to the FIFO method. The change was made because the Company believes its financial position is the primary concern of its constituents (shareholders, bank lenders, trade creditors, etc.) and the accounting change will reflect inventory at a value which better represents current costs. As required by generally accepted accounting principles, the Company has retroactively restated prior years' financial statements for this change. The aggregate effect of this restatement was a decrease in stockholders' equity of $294,000 as of December 31, 1997. The restatement had no effect on 1998 results, decreased the net loss in 1997 by $245,000 and increased the net loss in 1996 by $343,000. Property, Plant and Equipment Depreciation of property, plant and equipment is provided for under the straight-line method over the assets' estimated useful lives as follows:
USEFUL LIVES ----------- Buildings and improvements...................................... 10-30Useful 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 Costoperating results. Other Assets Other assets include cost in excess of net assets of businesses acquired of $325,000, which is included in other assets, isbeing 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. Income Taxes The Company records income taxes underIn accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109,121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company reviews 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, the loss is then recognized in the income statement. Income Taxes". SFAS 109 requiresTaxes The Company records income taxes under 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, theThe 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 31 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) stock (the intrinsic value method under Accounting Principles Board Opinion 25)method). 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 useSince the intrinsic-Company uses the intrinsic value method, to makeit makes pro forma disclosures of net income and earnings per share as if the fair-value-baseda 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, notes payable and long-termshort-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 deferred tax asset valuation allowances. Actual results could differ from those estimates. 39 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Accounting Standards Changes In 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. 130, "Reporting Comprehensive Income". This Statement establishes standards for reporting all components of comprehensive income. This Statement is effective for financial statements issued for periods ending after December 15, 1998. The Company is currently evaluating the impact, if any, adoption of SFAS No. 130 will have on its financial statements. In June 1997, the FASB issued SFAS No. 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, net of appropriate cash discounts, product returns and sales reserves, 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. Product Development and Research Product development and research represents the Company's research and development efforts which are focused primarily on product development. Such costs are expensed as incurred. Business Segments In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach indicates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position but did affect the disclosure of segment information included in Note 17, "Business Segments." Reclassification Certain previously reported amounts have been reclassified to conform with the current period presentation. 2. 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. 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 tax-free distribution to IGI's shareholders of its ownership of 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 November 28, 1995, one share of common stock of Novavax for every one share of IGI common stock outstanding (the "Distribution"). In connection with the Distribution, the Company 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- year term, to extend the License Agreement for an additional ten-year period for $1,000,000. Novavax retained 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. Accordingly, the Company accounted 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 is 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 the period ended December 31, 1995 were:
1995 -------------- (IN THOUSANDS) Selling, general and administrative......................... $ 2,103 Research and development expenses, net...................... 3,648 Credit for income taxes..................................... (717) ------- Operating losses............................................ 5,034 Less accrual for loss on disposal at December 31, 1994...... (1,000) ------- Net loss from discontinued operations....................... $ 4,034 =======
The Company 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 of 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 of the net assets of the Company's biotechnology business segment as of the Distribution Date were recorded in the accompanying financial statements in 1995 as a reduction in additional paid-in capital. Equity and Other Transactions In connection 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, in January 1995, the partner exercised its option to purchase 226,655 shares of the Company's common 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. INVESTMENTSInvestments The Company has a 20% investment in Indovax, Ltd., an Indian poultry vaccine company, which investment, because of the lack of significant influence, is accounted for onusing the cost method. Dividends received from Indovax were $22,000 in 1998, $23,000 in 1997.1997 and $0 in 1996. Other investments include 271,714 shares of restricted common stock of IMX Corporation ("IMX"), a publicly tradedpublicly-traded 32 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) company, valued at a cost of$1.75 and $3.50 per share as of December 31, 1998 and 1997, respectively, received pursuant to an Exclusiveexclusive Supply Agreement (the "Supply Agreement") dated September 30, 1997 between the Company and IMX. These shares are restricted both by governmental and contractual requirements and the Company is unsure if or when and if it will be able to sell these shares. TheAs of December 31, 1998, the Company will recognizehas not yet recognized income related to this agreement over the term of the supply agreement. The total investment in IMX stock is valuedwas $475,000 at December 31, 1998 and $951,000 at December 31, 1997. Deferred revenue under this agreement is also $951,000 at December 31, 1997.1997, with corresponding amounts reflected as deferred income in the accompanying Consolidated Balance Sheet. Under the supplyIMX agreement, IGI hasthe Company agreed to manufacture and supply 100% of IMX's requirements for certain products at prices stipulated in the agreement,exclusive Supply Agreement, subject to renegotiation subsequent to 1998. The Company is currently renegotiating its agreementinvolved in discussions with IMX concerning possible modifications to the Supply Agreement as it has determined the Company will not supply the products stipulated by the Supply Agreement but may supply certain other products based on negotiations with IMX. No shipments were made by IGI during 1997,3. Supply and the first shipment of product is expected in 1998. 5. SUPPLY AND LICENSING AGREEMENTSLicensing 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 carethe WellSkin(TM) product line in the United States to 42 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) physicians including, but not limited to, dermatologists.physicians. Under the terms of the agreement, IGI manufacturesmanufactured these products for Glaxo. This agreement providesprovided for Glaxo to pay royalties to IGI based on sales, and to pay a $1,000,000 advance royalty to IGI in 1997 of which $300,000 iswas non-refundable. The advance royalty has beenwas recorded as deferred revenue. Duringincome. In October 1998, Glaxo notified the Company of its intent to exit the physician-dispensed skin care market. In December 1998, the license and supply agreement with Glaxo was terminated. The termination agreement provided that IGI would purchase all of Glaxo's inventory and marketing materials related to the WellSkin(TM) line in exchange for a $200,000 promissory note, due and payable in December 1999 bearing interest at a rate of 11%. The Company also issued a promissory note to Glaxo for $608,000, representing the unearned portion of the advance royalty in exchange for Glaxo transferring all rights to the WellSkin(TM) trademark to IGI. This note bears interest at a rate of 11% and is payable in three installments between December 1999 and December 2000. In connection with the agreement termination, but unrelated to the advance royalty, IGI reduced cost of sales by $404,000 in 1998 for amounts owed to Glaxo that were forgiven. In 1997 and 1998, IGI recognized $150,000 and $326,000, respectively, of royalty income under the Glaxo Agreement. In December 1998, the Company entered into a supply and sales agreement with Genesis Pharmaceutical, Inc. ("Genesis") for the marketing and distribution of the non-refundableCompany's WellSkin(TM) line of skin care products. The agreement provides that Genesis will pay the Company a trademark and technology transfer fee in four equal annual payments of $250,000 each commencing November 1, 1999. In addition, Genesis will pay the Company a royalty as income.on its net sales with certain guaranteed minimum royalty amounts. Genesis also purchased WellSkin(TM) inventory and marketing materials previously purchased by the Company from Glaxo of which $112,000 was shipped by December 31, 1998 and the remainder was shipped in early 1999. Genesis has signed a $200,000 promissory note for the inventory and marketing materials, which is due on November 1, 1999 bearing interest at 11%. In connection with the Genesis transaction, the Company recognized revenue of $6,000 in 1998. In March 1997, IGI granted Kimberly Clark ("Kimberly") the worldwide rights to use certain patents and technologies in the industrial hand care and cleaning products field. Upon signing of the agreement, Kimberly Clark paid IGI a $100,000 license fee whichthat was recognized as revenue by the Company in 1997. The agreement requires Kimberly Clark to make royalty payments based on quantities of material produced. The Company is also guaranteed minimum royalties over the term of the agreement. In 1998, the Company earned $133,000 of minimum royalties, which is recorded as an accounts receivable due from Kimberly Clark at December 31, 1998. 33 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company has hadentered into a license agreement with Johnson & Johnson Consumer Products, Inc. ("J&J") sincein 1995. The agreement provides J&J with a license to produce and sell Novasome(R) microencapsulated retinoid products and provides for the payment of royalties on net sales of such products. J&J began selling such products and making royalty payments in the first quarter of 1998. The Company recognized $433,000 of revenue related to this agreement for the year ended December 31, 1998. No revenue was recognized under this agreement in 1997 or 1996. In April 1998, the Company entered into a reseach and development agreement with National Starch and Chemical Company ("National Starch") to evaluate Novasome(R) technology which, if favorable, may result in negotiating a licensing agreement. The agreement provides for a minimum of at least six, or up to as much as nine, monthly payments commencing in June 1998 plus $100,000 for the purchase of a patented Novamix(R) machine. The Company recognized $210,000 in licensing revenues in 1998 related to the National Starch agreement. In August 1998, the Company granted Johnson & Johnson Medical ("JJM"), a Division of Ethicon, Inc., worldwide rights for use of the Novasome(R) technology for certain products and distribution channels. The agreement provides for an up-front license fee of $150,000, of which $92,000 was recognized as revenue by the Company in 1998, and has begun makingfuture royalty payments. 6. SUPPLEMENTAL CASH FLOW INFORMATIONpayments based on JJM's sales of licensed products. The Company is guaranteed minimum royalties over the term of the agreement. See also Note 2 "Investments" for a description of the IMX Supply Agreement. 4. Supplemental Cash paidFlow Information Cash payments for income taxes and interest during the years ended December 31, 1998, 1997 and 1996 and 1995 waswere as follows:
1998 1997 1996 1995 ------ ------ ------ (IN THOUSANDS)---- ---- ---- (in thousands) Income taxes paid, net..............................net $ 0 $ (33) $ 41 $ 3 Interest............................................Interest 2,163 1,853 1,955 1,236
In addition, during the years ended December 31, 1998, 1997 1996, and 1995,1996, the Company had the following non-cash financing and investing activities:
1998 1997 1996 1995 ---- ------ ------ (IN THOUSANDS)---- ---- (in thousands) Accrual for additions to other assets $ 40 $ -- $ -- Tax benefits of exercise of common stock options....... $options -- 7 $ 79 $ 279 Distribution of the biotechnology segment.............. -- -- 2,904 Treasury stock repurchased.............................repurchased -- 20 -- 356 Tax benefit of license payment to former subsidiary....subsidiary -- -- (161) -- Receivable under royalty agreement.....................agreement -- -- 1,000 Note payable to Glaxo (See Notes 3 and 7) 808 -- Investment in IMX...................................... 951-- Note receivable from Genesis (See Note 3) (112) -- --
7. INVENTORIES Inventories as of December 31, 1997 and 1996 consisted of:
1997 1996 ------ ---------- (RESTATED) (IN THOUSANDS) Finished goods........................................... $3,365 $3,280 Raw 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 accountingSee Note 2 "Investments" for inventories had been used, inventories would have been $461,000 and $844,000 lower than reported in 1997 and 1996, respectively. 43discussion regarding IMX investment. 34 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--STATEMENTS (CONTINUED) 8. LONG-TERM DEBT Long-term debt5. Inventories Inventories as of December 31, 1998 and 1997 consisted of: 1998 1997 ------- ------- (in thousands) Finished goods $ 2,785 $2,491 Raw materials 2,210 3,259 Work-in-process 2,411 3,192 ------- ------- $ 7,406 $ 8,942 ======= ======= See Note 1 for a description of the Company's change in inventory valuation method and resultant restatement of prior year balances. 6. Property, Plant and Equipment Property, plant and equipment, at cost, as of December 31, 1998 and 1997 consisted of: 1998 1997 ------- ------- (in thousands) Land $ 625 $ 625 Buildings 9,748 9,600 Machinery and equipment 9,986 9,659 ------- ------- 20,359 19,884 Less accumulated depreciation (10,880) (10,048) ------- ------- Property, plant and equipment, net $ 9,479 $ 9,836 ======= ======= The Company recorded depreciation expense of $861,000, $925,000 and $926,000 in each of the years 1998, 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 andrespectively. 7. Notes Payable Notes payable at December 31, 1997. During1998 and 1997 consisted of: 1998 1997 ------- ------- (in thousands) Glaxo $ 808 $ -- Other 261 36 ------ ------- 1,069 36 Less: Current portion 661 -- ------ ------- $ 408 $ 36 ======= ======= The Company's licensing and supply agreement with Glaxo was terminated in December 1998, resulting in the period from January 1, 1998 through April 29, 1998, the Company paidissuance of a $200,000 promissory note which is due and payable in December 1999 and bears interest at a rate of prime plus 4%11%. The Company also issued a promissory note to Glaxo for $608,000 bearing interest at 11%, which represents the unearned portion of the advanced royalty. Principal and interest amounts are payable semi-annually beginning in December 1999 in the amount of $200,000 with the remaining amount of $408,000 due in 2000. The remaining balance of short-term notes payable of $261,000 consists of amounts to finance the Company's 1998 insurance policies. 35 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Debt Debt as of December 31, 1998 and 1997 consisted of: 1998 1997 ------- ------- (in thousands) Credit line $12,000 $12,000 Revolving credit facility 6,657 6,857 ------- ------- $18,657 $18,857 ======= ======= Aggregate annual principal payments due on outstanding borrowings under its working capital line and prime plus 4% on outstanding borrowings under its revolving credit facility.debt for the years subsequent to December 31, 1998 are as follows: Year (in thousands) ---- -------------- 1999 $ 6,000 2000 12,657 ------- $18,657 ======= The Company entered into an Extension Agreement with its bank lenders as of April 29, 1998 (the "Closing Date") which providesprovided for thea waiver of all past and existing covenant defaults, extension of the bank credit agreement through 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$6,857,000 balance of revolving credit notes ("Revolving Facility"). and issuance to the lenders of warrants to purchase an aggregate of 540,000 shares of the Company's common stock at an exercise price of $3.50 per share. The Company has a call option on unexercised warrants at a repurchase price of $1,800,000. The Company recognized a non-cash expense related to the issuance of these warrants of approximately $645,000 in 1998. 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. TheDuring fiscal 1998, the Company paid interest at a rate of up to prime plus 5.5% on its outstanding borrowings under the Credit Line and under the Revolving Facility. Effective January 31, 1999, the Company and its bank lenders entered into a Second Extension Agreement andwhich provides for a waiver of the covenant defaults under the Forbearance Agreement, (the "Agreements") provide foramendment of certain covenants, extension of the bank credit agreement to March 31, 2000, and the following: .o The maximum availability under the Credit Line is subject to the determination of the amount of eligible accounts receivable and eligible inventories. The Credit LineThere is due and payable in full on Januaryno remaining availability as of December 31, 1998 or March 31, 1999. . Theo Mandatory principal payments of $4,000,000 and $2,000,000 of the outstanding balance of $6,857,142$18,657,000, at December 31, 1998, under the Revolving Facility isand Credit Line are due on August 31, 1999 and November 30, 1999, respectively, with the balance due and payable on JanuaryMarch 31, 1999. .2000. o 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. .Although the Company can sell operating assets, proceeds from such sale must be remitted directly to the lenders. o Interest on outstanding borrowings of $18,657,000 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%
be at a rate of prime plus 5.5% of which prime plus 2.5% is paid monthly and 3.0% is accrued and payable on March 31, 2000. 36 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) o The interest rate on outstanding borrowings will be reduced by 0.5% after each of the mandatory principal payments. In addition, the interest rate will be reduced by an additional 1.5% for each $1,000,000 of voluntary principal payments, but not lower than prime plus 1.0%. AtA pro rata portion of the Closing Dateaccrued interest will be waived for all principal payments occurring prior to December 31, 1999. o On March 11, 1999, the Company issued warrants to the bank lenders warrants to purchase an aggregate of 540,000270,000 shares of the Company's common stock at an exercise price of $3.50$2.00 per share. Warrants ("Unconditional Warrants") to purchase 270,000 sharesThese warrants 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 endingissuance. The Company also issued warrants to purchase an additional 270,000 shares of the Company's common stock exercisable at $2.00 per share, if the bank debt is still outstanding at September 30, 1999. The warrants expire on the fifth anniversary of issuance. The Company has a call option on unexercised warrants at a repurchase price of $1,800,000. The Company will recognize a non-cash expense for each issuance unlessof warrants of approximately $195,000, or a total of about $390,000 during 1999. o The Company agreed to pay the bank lenders an extension fee of $350,000, which is being amortized over the life of the agreement. At the time of the extension, $50,000 was paid, with the balance payable in four installments through February 24, 2000. If the Company is able to refinance its bank debt, by October 31, 1998 in which case these warrants expire. Warrants ("Conditional Warrants")any extension fees due subsequent to purchase the remaining 270,000 shares are exercisable at any time duringclosing date of the period commencing September 1, 1998 and ending on the fifth anniversary of issuance, unless therefinancing will be waived. o 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 Companyrequired to maintain certain minimum financial ratioscovenants and comply with other non-financial covenants, including remittance of cash flows from debt or equity financing, income tax refunds and fixed asset dispositions to the banks, and the completion of Year 2000 compliance by September 30, 1999. The agreement also prohibits the payment of cash dividends without the prior written consent of the lenders. At March 1, 1999, the Company had cash and cash equivalent balances of $535,000, and no available borrowing capacity under the Credit Line or the Revolving Facility. The Company is currently generating losses that may extend through much of 1999. Further, the Company has significant debt it must repay on August 31, 1999, November 30, 1999 and March 31, 2000. The Company is pursuing additional debt and equity financing alternatives to meet these obligations. The Company believes it will be ablecan obtain such financing on acceptable terms. However, if the Company is not successful in obtaining the required additional financing, it believes it has the ability and it plans to remain in compliance withmeet its 1999 debt covenants through January 30, 1999,repayment obligations by altering its business plans including, if necessary, a sale of selected Company operating and also believes that funds generated fromnon-operating assets. Any sale of operating assets would involve a curtailment of certain of the Company's business operations and existing bank credit facilities are sufficient to financea modification of its business strategy. However, if 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,unable to raise sufficient funds to repay or refinance the debt repayment due on March 31, 2000, the Company could be in default under its loan agreement and believes it will be ableany such default could lead to secure, alternative financing arrangementsthe commencement of insolvency proceedings by its creditors subsequent to replacethat date. Accordingly, the Board of Directors of the Company has authorized management of the Company to seek additional equity capital through the sale of common stock of the Company, either through a private sale to institutional or individual investors or through a rights offering to its existing debtstockholders. Subject to shareholder approval, the Board has authorized an increase in the number of shares of common stock available and lending terms throughthe authorization of a preferred stock class. While the Company has contacted a number of potential options including, but not limited to, the issuanceproviders 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 obligations. No assurance can be given thatadditional capital who have expressed interest in negotiating financing arrangements with the Company, will be able to obtain alternative financing arrangements, and if it is unsuccessful in doing so, the Company may be required to restrict its business operationsdate no agreements or otherwise modify its business strategy. Aggregate annual principal payments on long-term debt for the years subsequent to December 31, 1997 are as follows:
YEAR ---- (IN THOUSANDS) 1998.......................... $2,316 1999.......................... 4,577 ------ $6,893 ======
commitments have been obtained. Borrowings under the revolving credit facilityCredit Line and the Revolving Facility have been classified as current debt in the accompanying financial statements as certain repayments are due in 1999, and the agreement contains certain acceleration provisions subject to the bank's evaluation. As37 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. Common Stock In October 1998, the Company adopted the 1998 Directors Stock Plan. Under this plan, 200,000 shares of the Company's common stock are reserved for issuance to non-employee directors, in lieu of payment of directors' fees in cash. In 1998, 46,250 shares of common stock were issued as consideration for directors' fees. The Company recognized $94,000 of expense related to these shares during the year ended December 31, 19971998. See also Note 8 - "Debt" for a description of warrants issued to the Company's lenders in each of 1998 and 1996, there were no outstanding equipment leases. 9. STOCK OPTIONS1999 for 540,000 shares, or a total of 1,080,000 shares of the Company's common stock at an exercise price of $3.50 and $2.00 per share, respectively. 10. 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, 19961998 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 consultants to purchase a maximum of 500,000 and 2,600,000 shares of common stock, respectively. In 1998, the Board approved an increase of 500,000 shares to the 1991 Stock Plan, which increased the maximum to 3,100,000 shares. 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,Under the Company's Board of Directors also adopted a1988 Non-Qualified Stock Option Plan. This plan provides thatPlan, 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, 19971998 are generally exercisable in cumulative increments over four years commencing one year from the date of grant. In addition,The 1988 Non-Qualified Option Plan formalized the granting of individual non-qualified stock options havewhich had 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. Exercise of the majority of these options may be made at any timeanytime during a ten year period commencing on the date of grant. Effective November 23, 1998, the Company's Board of Directors approved the repricing of all outstanding options issued to then current employees and consultants, to $2.44 per share, 115% of the market value of the Company's Common Stock on that date. The Board also approved the repricing of 225,000 options held by the Chief Executive Officer, to $2.66 per share, 125% of the market value of the Company's common stock on that date. As a result, 331,465 and 225,000 outstanding options at November 23, 1998 were effectively rescinded and reissued at exercise prices of $2.44 and $2.66, respectively. This resulted in a non-cash expense related to non-employees of $84,000 being reflected in 1998 operating results. All other conditions, such as term of option and vesting schedules, remained unchanged. 38 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 ---------1983, 1989, and 1991 Plans 1988 Non-Qualified Plan -------------------------------------------- ------------------------------------------- Weighted Weighted Shares Price Per Share Average Price Shares Price Per Share Average Price ------ --------------- ------------- -------------- --------------- ------------- January 1, 19951996 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...........option 1,939,515 $3.64--$9.88$3.64 - $9.88 $7.04 337,500 $1.38--$1.38 - $6.80 $4.40 Granted................Granted 381,000 $5.13--$7.69$5.13 - $7.69 $6.04 -- - -- -- Exercised..............Exercised (82,000) $4.70--$6.96$4.70 - $6.96 $6.33 (50,000) $1.38 $1.38 Cancelled..............Cancelled (29,500) $5.67--$9.48$5.67 - $9.48 $7.31 (1,000) $6.80 $6.80 ----------------- -------- December 31, 1996 shares under option...........option 2,209,015 $3.65--$9.88$3.65 - $9.88 $6.89 286,500 $3.97--$3.97 - $6.80 $4.92 Granted................Granted 111,500 $3.75--$5.69$3.75 - $5.69 $4.17 -- - -- -- Exercised..............Exercised (10,000) $3.65 $3.65 (20,000) $3.97 $3.97 Cancelled..............Cancelled (176,050) $3.97--$9.88$3.97 - $9.88 $7.21 (100,000) $5.67 $5.33 ------------------- -------- December 31, 1997 shares under option...........option 2,134,465 $3.75--$9.88$3.75 - $9.88 $6.74 166,500 $4.70--$4.70 - $6.80 $4.78 Granted 491,450 $1.94 - $3.81 $2.56 -- - -- Exercised -- - -- -- - -- Cancelled (652,250) $2.00 - $9.88 $6.52 (166,500) $2.66 - $6.80 $4.78 Rescinded (506,465) $4.70 - $9.88 $6.75 (50,000) $4.70 $4.70 Reissued 506,465 $2.44 - $2.66 $2.52 50,000 $2.66 $2.66 --------- -------- December 31, 1998 shares under option 1,973,665 $1.94 - $9.88 $4.68 -- -- ========= ======== Shares subject to outstanding options exercisable atat: December 31, 1996......1996 1,666,119 $7.01 286,500 $4.92 ========= ===== ======== ===== December 31, 1997......1997 1,854,715 $6.89 166,500 $4.78 ========= ===== ======== =====December 31, 1998 1,599,840 $5.18 -- $ -- ========= ========
The Company adopteduses the disclosure provisions of SFAS No. 123, "Accountingintrinsic method to account for Stock-Based Compensation."stock options. Accordingly, no compensation cost has been recognized for option grants to directors and employees pursuant to the stock option plans.plans or for the November 1998 stock option repricing. Also, no compensation expense was recognized for option grants to non-employee directors from January 1, 1996 through December 14, 1998. The Company recorded compensation expense of $41,000 in 1998 for option grants to non-employee directors subsequent to December 15, 1998 as a result of a proposed Accounting Principles Board interpretation. The Company has recorded compensation expense of $ 46,000$108,000, $46,000 and $156,000 in 1998, 1997 and 1996, respectively, for options granted to consultants. Hadconsultants including the effect of the 1998 repricing. If compensation cost for all 46 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) grants under the Company's stock option plans had been determined based on the fair value at the grant date consistent with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" 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)
1998 1997* 1996* ---- ---- --- (in thousands, except per share information) Net loss - as reported $(3,029) $(1,208) $ (481) Net loss - pro forma (3,618) (1,403) (1,397) Loss per share - as reported Basic: $ (.32) $ (.13) $ (.05) Diluted: (.32) (.13) (.05) Loss per share - pro forma Basic: $ (.38) $ (.15) $ (.15) Diluted: (.38) (.15) (.15) * Prior years amounts restated to reflect the Company's change in inventory costing method (See Note 1). 39 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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.method. The fair value for these options was estimated at the grant date using the Black-Scholes option pricingoption-pricing model with the following assumptions for 1998, 1997 1996 and 1995:1996:
Assumption 1998 1997 1996 ---------- ---- ---- ---- Dividend yield.............................................yield 0% 0% 0% Risk free interest rate....................................rate 4.47% - 5.89% 5.84% - 6.63% 5.51%-- - 7.10% Estimated volatility factor................................factor 39.51% - 47.87% 40.02% - 43.68% 33.07%--43.45% - 43.45% Expected life.............................................. 6--life 6 - 9 years 6 - 9 years 6 - 9 years
The effects of applying SFAS 123 in this pro forma disclosurethe fair value method are not indicative of future amounts. SFAS 123 doesThe fair value method is not applyapplied 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, 1997.1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------- -------------------------- RANGE OF NUMBER OF WEIGHTED AVERAGE EXERCISE NUMBER OF WEIGHTED AVERAGE EXERCISE PRICES OPTIONS REMAINING LIFE (YEARS) PRICE OPTIONS EXERCISE PRICEOptions Outstanding Options Exercisable ------------------------------------------------------------- -------------------------------- Range of Number of Weighted Average Weighted Average Number of Weighted Average Exercise Prices Options Remaining Life (Years) Exercise Price Options Exercise Price - --------------- ---------------- ---------------------- -------- ----------------------- ------- ---------------- $1.00 to $ 2.00 231,750 9.55 $1.98 71,500 $2.00 $2.00 to $ 3.00 594,915 5.29 $2.56 462,340 $2.52 $3.00 to $ 4.00 60,000 10.00 $3.75 -- --216,000 9.24 $3.41 135,000 $3.47 $4.00 to $ 5.00 358,000 2.87 $4.73 308,000 $4.7560,000 1.33 $4.83 60,000 $4.83 $5.00 to $ 6.00 511,500 6.51 $5.52 429,750 $5.48200,000 7.10 $5.76 200,000 $5.76 $6.00 to $ 7.00 580,750 6.93 $6.68 525,750 $6.68290,000 6.15 $6.66 290,000 $6.66 $7.00 to $ 8.00 331,000 5.54 $7.40 327,250 $7.39150,000 4.44 $7.45 150,000 $7.45 $8.00 to $ 9.00 284,000 7.25 $8.50 255,500176,000 6.24 $8.49 176,000 $8.49 $9.00 to $10.00 175,715 4.97 $9.62 174,965 $9.6255,000 2.96 $9.66 55,000 $9.66 --------- --------- $3.75$1.94 to $ 9.88 2,300,965 5.97 $6.59 2,021,215 $6.731,973,665 6.37 $4.68 1,599,840 $5.18 ========= =========
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. 47 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In connection with the exercise of 5,000 stock options in 1997, and 25,000 stock options in 1995, the Company received 4,735 and 23,644 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 1995, respectively, which has been recorded as treasury stock. 10. INCOME TAXES11. Income Taxes The provision (benefit)benefit for income taxes included in the consolidated statements of operations for the years ended December 31, 1998, 1997 and 1996 and 1995 iswas as follows:
1997 1996 1995 ----- ----- ----- (IN THOUSANDS) Continuing operations: Current tax expense: Federal............................................. $ -- $ -- $ 718 State and local..................................... 11 9 4 ----- ----- ----- Total current......................................... 11 9 722 ----- ----- ----- Deferred tax expense (benefit) Federal............................................. (756) (28) (59) State and local..................................... 171 (161) (150) ----- ----- ----- Total deferred........................................ (585) (189) (209) ----- ----- ----- Total provision (benefit) from continuing operations.... (574) (180) 513 Discontinued operations: Current tax benefit: Federal and state................................... -- -- (718) ----- ----- ----- Total provision (benefit) for income taxes.............. $(574) $(180) $(205) ===== ===== =====
1998 1997* 1996* ------- ------- ------- (in thousands) Continuing operations: Current tax expense: Federal $ 14 $ -- $ -- State and local 16 11 9 ------- ------- ------- Total current 30 11 9 ------- ------- ------- Deferred tax expense (benefit): Federal (1,161) (637) (197) State and local (160) 190 (185) ------- ------- ------- Total deferred (1,321) (447) (382) ------- ------- ------- Total benefit for income taxes $(1,291) $ (436) $ (373) ======= ======= ======= 40 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The provisionbenefit for income taxes differed from the amount of income taxes determined by applying the applicable Federal tax rate (34%) to pretax income from continuing operations as a result of the following:
1997 1996 1995 ----- ----- ---- (IN THOUSANDS) Statutory provision (benefit)............................ $(689) $(108) $626 Non-deductible expenses.................................. 51 66 66 State income taxes, net of federal benefit............... 120 (101) (99) Research and development tax credits..................... (65) (42) (33) Increase (decrease) in valuation allowance............... 7 -- (83) Other, net............................................... 2 5 36 ----- ----- ---- $(574) $(180) $513 ===== ===== ====
48 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)1998 1997* 1996* ------- ------- ------- (in thousands) Statutory benefit $(1,469) $ (559) $ (290) Non-deductible expenses 111 51 66 State income taxes, net of federal benefit (240) (164) (112) Research and development tax credits (33) (65) (42) Increase in valuation allowance 393 299 -- Other, net (53) 2 5 ------- ------- ------- $(1,291) $ (436) $ (373) ======= ======= ======= Deferred tax assets included in the consolidated balance sheets as of December 31, 1998 and 1997 and 1996, consistconsisted of the following:
1997 1996 ------- ------- (IN THOUSANDS) Property, plant and equipment........................... $ (633) $ (763) Prepaid license agreement............................... 1,626 1,797 Net operating loss carryforwards........................ 1,616 1,562 Deferred royalty payments............................... 345 -- Tax credit carryforwards................................ 484 418 Inventory............................................... 238 158 Valuation allowances.................................... 500 140 Non-employee stock options.............................. 82 62 Other future deductible temporary differences........... 98 56 Other future taxable temporary differences.............. (48) (13) ------- ------- 4,308 3,417 Less: valuation allowance............................... (333) (34) ------- ------- Deferred taxes, net..................................... $ 3,975 $ 3,3831998 1997* ------- ------- (in thousands) Property, plant and equipment $ (498) $ (633) Prepaid license agreement 1,389 1,626 Deferred royalty payments 212 345 Net operating loss carryforwards 2,802 1,616 Tax credit carryforwards 610 484 Reserves 510 500 Inventory 537 405 Non-employee stock options 217 82 Other future deductible temporary differences 475 98 Other future taxable temporary differences (65) (48) ------- ------- 6,189 4,475 Less: valuation allowance (726) (333) ------- ------- Deferred taxes, net $ 5,463 $ 4,142 ======= =======
Current and deferred tax benefits resulting from a prepaid license agreement and* Prior year amounts restated to reflect the exercise of stock options not credited to the consolidated statements of operations for the years ended December 31, 1997, 1996 and 1995, including the following:
1997 1996 1995 ----- ---- ------ (IN THOUSANDS) Additional paid-in capital: License payment to former subsidiary.................. $ -- $161 $1,700 Exercise of stock options............................. 7 79 279 ----- ---- ------ $ 7 $240 $1,979 ===== ==== ======
Company's change in inventory costing method (See Note 1). The Company evaluates the recoveryrecoverability of its deferred tax assets and has determined, based on the Company'sits history of prior operating earnings prior to the recent conditional settlement of regulatory proceedings (see Note 13), its plans to sell the benefit of certain state net operating losses, 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 ofcarryforwards. As a result, the Company has concluded it is not likely it will more likely than not be sufficientable to recognize fully realize certain of these net deferred tax assets. Therefore, the Company increased its valuation allowance for certain deferred tax assets at December 31, 1998. 41 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Operating loss and tax credit carryforwards for tax reporting purposes as of December 31, 19971998 are as follows:
(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) 11. COMMITMENT AND CONTINGENCIES(in thousands) Federal: Operating losses (expiring through the year 2018) $6,958 Research tax credits (expiring through the year 2018) 507 Alternative minimum tax credits (available without expiration) 28 State: Net operating losses New Jersey (expiring through the year 2005) $7,213 Research tax credits New Jersey (expiring through the year 2005) 75 Federal net operating loss carryforwards that expire through 2018 have significant components expiring in 2007 (26%), 2010 (13%) and 2018 (56%). 12. Commitments and Contingencies The Company leases manufacturing and warehousing space, machinery and equipment and automobiles under non-cancelable operating lease agreements expiring at various dates through 1998.in the future. Rental expense aggregated approximately $371,000 in 1998, $348,000 in 1997, and $330,000 in 1996, and $282,000 in 1995.1996. Future minimum rental commitments under non-cancelable operating leases as of December 31, 19971998 are as follows:
YEAR $ ---- ------- (IN THOUSANDS) 1998 99 1999 80 2000 55 2001 47 2002 46
Year $ ---- -- (in thousands) 1999 56 2000 40 2001 33 2002 32 2003 11 The Company has entered into an employment contract with an expiration date of December 31, 1999 with an officer whichthat provides that this officer is entitled to continuation of his salary if he is terminated without cause prior to the contract expiration date. Aggregate compensation through 1999 under this agreement approximates $845,000. 12. LITIGATIONSee also Note 15, "Certain Relationships and Related Transactions." The Company has entered into employment agreements with two other senior executives that provide for their employment for a one year period, which is automatically renewed annually unless terminated by the Company by written notice at least 60 days prior to the renewal date. In the event their employment is terminated without cause, one executive is entitled to continuation of his annual salary for up to 18 months and the other executive is entitled to continuation of his annual salary for up to 12 months. 42 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. U.S. Regulatory Proceedings The Company has substantially resolved the legal and regulatory issues which arose in 1997 and 1998. For most of 1997 and 1998, the Company was subject to intensive government regulatory scrutiny by the U.S. Departments of Justice, Treasury and Agriculture. In June 1997, the Company was advised by the Animal and Plant Health Inspection Service ("APHIS") of the United States Department of Agriculture ("USDA") that the Company had shipped quantities of some of its poultry vaccine products without complying with certain regulatory and record keeping requirements. The USDA subsequently issued an order that the Company stop shipment of certain of its products. Shortly thereafter, in July 1997, the Company was advised that the USDA's Office of Inspector General ("OIG") had commenced an investigation into possible violations of the Virus Serum Toxin Act of 1914 and alleged false statements made to APHIS. Based upon these events, the Board of Directors caused an immediate and thorough investigation of the facts and circumstances of the alleged violations to be undertaken by independent counsel. The Company also took steps to obtain the approval of APHIS for resumption of shipments, including the submission of an amended and modified regulatory compliance program, improved testing procedures and other safeguards. Based upon these actions, APHIS began lifting the stop shipment order in August 1997 and released all remaining products from the order on March 27, 1998. In April 1998, the U.S. Securities and Exchange Commission ("SEC") advised the Company that it was conducting an informal inquiry and requested information and documents from the Company, which the Company voluntarily provided to the SEC. As a lawsuit on April 21, 1998 againstresult of its formerinternal investigation, the Company terminated the employment of John P. Gallo as President and Chief Operating Officer John P.in November 1997 for willful misconduct. In April 1998, the Company requested the resignations of six additional employees including two Vice Presidents and instituted a lawsuit against Mr. Gallo in the New Jersey 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.Court. The Company is seeking recovery of damages resulting from Mr. Gallo'slawsuit alleged willful 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 Companymalfeasance 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 damagesoffice, as well as consequentialembezzlement and punitive damages.related claims. Mr. Gallo filed counterclaims against the Company. The Company has denied Mr. Gallo's allegations and believes his claims are without merit. Certain otherThe Company has not reserved any amounts related to these charges. In June 1998, Mr. Gallo wrote to the Company's Board of Directors alleging that he had been wrongfully terminated from employment and further alleging wrongdoing by two Directors. In response to these allegations the Company instituted an investigation of the two Directors by an Independent Committee ("Independent Committee") of the Board assisted by the Company's General Counsel. The investigation included a series of interviews of the Directors, both of whom cooperated with the Company, and a review of certain records and documents. The Company also requested an interview with Mr. Gallo who, through his counsel, declined to cooperate. In September 1998, the Independent Committee reported to the Board that it had found no credible evidence to support Mr. Gallo's claims suits and complaints arisingallegations and recommended no further action. The Board adopted the recommendation. In July 1998, the Company sought to depose Mr. Gallo in connection with the litigation filed in New Jersey. Through his counsel, Mr. Gallo asserted his Fifth Amendment privilege against self-incrimination and advised that he would not participate in the ordinary coursediscovery process until such time as a federal grand jury investigation, in which he was a target, was concluded. At the suggestion of business have been filed or are pendingthe court, the Company and Mr. Gallo agreed to a voluntary dismissal of the litigation, with the understanding that the Company was free to reinstate its suit against Mr. Gallo at a later date, and that the Company was reserving all of its rights and remedies with respect to Mr. Gallo. In addition, Mr. Gallo may reinstate his counterclaims 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 haveat a significant effect on the financial statements of the Company if disposed of unfavorably. 50later date. 43 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--STATEMENTS (CONTINUED) 13.Settlement of U.S. GOVERNMENT INVESTIGATION AND DISCIPLINARY PROCEEDINGS From June 4, 1997 throughRegulatory Proceedings On March 27, 1998,24, 1999, the Company wasreached settlement with the Departments of Justice, Treasury and Agriculture regarding their pending investigations and proceedings. This settlement is subject to an order bycourt approval which the Center for Veterinary Biologics ("CVB")Company believes will be obtained in due course. The terms 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 findingssettlement agreement provide that the Company shipped serials beforewill enter a plea of guilty to a misdemeanor and will pay a fine of $15,000 and restitution in the Animal and Plant Health Inspection Service divisionamount of the USDA ("APHIS") had the opportunity to confirm the Company's testing results, failed to destroy serials reported to APHIS as destroyed, and$10,000. In addition, beginning 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") advisedJanuary 2000, 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 APHISwill make monthly payments to the Company's resumptionTreasury Department through the period ending October 31, 2001 in the total amount of shipments$225,000. The expense of settling with these agencies is reflected in the products affected1998 results of operations. The settlement does not affect the informal inquiry being conducted 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 remedialSEC, nor does it affect possible governmental 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, sixformer 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 theseManagement does not expect that the SEC informal inquiry or the possible governmental action against 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 materiallymaterial adverse effect on the Company's 1998 performance and operating results. Also, iffinancial position, cash flow or operations of the OIG, the U.S. Attorney or the SEC concludes that the Company's actions warrant enforcementCompany. The Company is not aware of any other legal proceedings those proceedings, as well as the costs and expenses related to them,which could have a materially adversematerial effect onupon 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.Company. 14. EXPORT SALESExport Sales Export revenues by the Company's domestic operations accounted for approximately 35%32% of the Company's total revenues in 1998, 35% in 1997, and 39% in 1996 and 38% in 1995.1996. The following table shows the geographical distribution of the export sales:
1997 1996 1995 ------- ---------- ---------- (RESTATED) (RESTATED) (IN THOUSANDS) Latin America................................ $ 4,593 $ 5,076 $ 4,884 Asia/Pacific................................. 4,659 6,011 4,408 Europe....................................... 1,263 1,286 1,118 Africa/Middle East........................... 1,362 1,141 1,184 ------- ------- ------- $11,877 $13,514 $11,594Company's total revenues: 1998 1997 1996 ------- ------- ------- (in thousands) Latin America $ 4,445 $ 4,593 $ 5,076 Asia/Pacific 3,787 4,659 6,011 Europe 1,151 1,263 1,286 Africa/Middle East 1,380 1,362 1,141 ------- ------- ------- 10,763 11,877 13,514 United States/Canada 22,432 22,466 21,433 ------- ------- ------- Total Revenues $33,195 $34,343 $34,947 ======= ======= =======
RelatedExport sales net accounts receivable balances at December 31, 1998, 1997 and 1996 approximated $4,002,000, $4,144,000, and 1995 approximated $4,144,000, $5,276,000, and $4,569,000, respectively. 15. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONSCertain Relationships and Related Party Transactions The Company hasCompany's notes receivable from certain of its employees. The total of these notes is $249,000stockholders amounted to $251,000 as of December 31, 1998 and $249,000 at December 31, 1997. All of these loansThese notes are evidenced by demand notes bearingand bear interest at prime rate plus 1/4% and are collateralized by shares of IGI common stock.stock of the Company. Remaining balances of these notes from officers are included in the stockholders' equity as stockholders' notenotes receivable and all other notes receivable are included in notes receivable in the accompanying Consolidated Balance Sheets. The Company has recognized interest income from these notes of $3,000, $10,000 $15,000 and $39,000$15,000 for the years ended December 31, 1998, 1997 1996 and 19951996, respectively. However, the Company has provided valuation reserves offor these balances totaling $251,000 and $219,000 against these notesfor 1998 and 1997, respectively, representing the amount of notes receivable from terminated employees. 52The Company's Chief Executive Officer has chosen to defer his salary until the Company's cash flow stabilizes. The total amount due to him was $380,000 at December 31, 1998, which the Company has recorded as a non-interest bearing, current obligation. 44 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--STATEMENTS (CONTINUED) 16. EMPLOYEE BENEFITSEmployee Benefits The Company has a defined401(k) contribution retirement plan, (401k), pursuant to which employees, who have completed one yearsix months of employment with the Company or its subsidiaries as of specified dates, may elect to contribute to the Plan,plan, in whole percentages, up to 15%18% of compensation, subject to a minimum contribution by participants of 2% of compensation and a maximum contribution of $10,000 for 1998 and $9,500 in 1997 and $9,240 in 1996 and 1995.1996. The Company contribution is in the form of Company common stock, which is vested immediately. The Company matches 25% of the first 5% of compensation contributed by participants and also 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 $81,000, $113,000, $115,000, and $103,601$115,000 for the years 1998, 1997 1996 and 1995,1996, respectively. 17. BUSINESS SEGMENTS Summary data relatedBusiness Segments The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," in 1998 which affects the way the Company reports information about its operating segments. The information for 1997 and 1996 has been restated from the prior years' presentations to continuing operationsconform to the 1998 presentation. The Company elected to change reportable segments from two segments (Animal Health Products and Consumer Products) into three segments (Poultry Vaccines, Companion Pet Products and Consumer Products). Reasons leading to the change included the fact that products from each of the segments serve different markets, use different channels of distribution, and have two different forms of government oversight. The Company elected to change the reporting of its business segments as of January 1, 1998 and restated its prior years' presentation to conform to this revised segment reporting standard. Poultry Vaccines The Company produces and markets poultry vaccines manufactured by the chick embryo, tissue culture and bacteriologic methods. The Company produces vaccines for the three years ended December 31, 1997 appear below:
ANIMAL HEALTH CONSUMER PRODUCTS PRODUCTS CORPORATE CONSOLIDATED ------------- -------- --------- ------------ (IN THOUSANDS) 1997 Net sales....................... $29,096 $5,097 $ -- $34,193 Operating profit (loss)......... 4,139 730 (5,032) (163) Depreciation and amortization... 876 161 -- 1,037 Identifiable assets............. 29,535 4,509 -- 34,044 Capital expenditures............ 632 4 -- 636 1996 (RESTATED) Net sales....................... $31,262 $3,523 $ -- $34,785 Operating profit (loss)......... 6,882 (917) (4,097) 1,868 Depreciation and amortization... 835 157 -- 992 Identifiable assets............. 28,412 5,972 -- 34,384 Capital expenditures............ 715 198 -- 913 1995 (RESTATED) Net sales....................... $28,869 $1,632 $ -- $30,501 Operating profit (loss)......... 6,247 (233) (3,056) 2,958 Depreciation and amortization... 820 16 -- 836 Identifiable assets............. 29,280 2,872 -- 32,152 Capital expenditures............ 745 1,652 -- 2,397
53prevention of various chicken and turkey diseases and has more than 60 vaccine licenses granted by the USDA. The Company also produces and sells nutritional, anti-infective and sanitation products used primarily by poultry producers. The Company sells these products in the United States and in over 50 other countries under the Vineland Laboratories trade name. The Company manufactures poultry vaccines at its USDA licensed facility in Vineland, New Jersey and sells them, primarily through its own sales force of nine persons, directly to large poultry producers and 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 USDA regulates the Company's vaccine production in the United States. Companion Pet Products The Company sells its Companion Pet Products to the veterinarian market under the EVSCO Pharmaceuticals trade name and to the over-the-counter ("OTC") pet products market under the Tomlyn and Luv'Em labels. The EVSCO line of veterinary products is used by veterinarians in caring for dogs and cats, and includes pharmaceuticals such as antibiotics, anti-inflammatories and cardiac 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. 45 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--STATEMENTS (CONTINUED) 18. FOURTH QUARTER ADJUSTMENTS (UNAUDITED) In additionEVSCO products are manufactured at the Company's facility in Buena, New Jersey and are sold through distributors to veterinarians. The facility operates in accordance with Good Manufacturing Practices ("GMP") of the federal Food and Drug Administration ("FDA"). The Tomlyn product line includes pet grooming, nutritional and therapeutic products, such as shampoos, grooming aids, vitamin and mineral supplements, insecticides and OTC medications. The products are manufactured at the Company's facility in Buena, New Jersey, and are sold directly to pet superstores and through distributors to independent merchandising chains, shops and kennels. Sales of the Company's veterinary products are handled by 20 sales employees. Most of the Company's veterinary products are sold through distributors. Consumer Products Business IGI's Consumer Products business is primarily focused on the continued commercial use of the Novasome(R) microencapsulation technologies for skin care applications. These efforts have been directed toward the development of high quality skin care products marketed by the Company or through collaborative arrangements with cosmetic and consumer products companies. Revenues from the Company's Consumer Products business were principally based on formulations using the Novasome(R) encapsulation technology. Sales to Estee Lauder accounted for $3,494,000 or 11% of 1998 sales, $2,408,000 or 7% for 1997, and $2,505,000 or 7% in 1996. Summary Segment Data Summary data related to the items discussed in Note 2, inCompany's reportable segments for 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 income and earnings per share would have differed from the amounts previously reported as follows:three years ended December 31, 1998 appear below:
FIRST QUARTER SECOND QUARTER THIRD QUARTER ----------------- ----------------- ----------------- AS AS AS AS AS AS REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTEDPoultry Companion Pet Consumer (in thousands) Vaccines Products Products Corporate* Consolidated -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)---------- ------------ Net income1998 Revenues $ 14,843 $ 12,513 $ 5,839 $ -- $ 33,195 Operating profit (loss)......... $363 (517) 2,844 3,688 (6,925) (910) Depreciation and amortization 587 206 199 -- 992 Identifiable assets 14,747 5,846 4,932 6,531 32,056 Capital expenditures 412 186 9 -- 607 1997** Revenues $ 55 $356 $218 $380 $(498) Earnings per share: Basic................... $.04 $.01 $.04 $.02 $.04 $(.05) Diluted................. $.04 $.01 $.04 $.02 $.04 $(.05)16,644 $ 12,444 $ 5,255 $ -- $ 34,343 Operating profit (loss) 1,202 2,577 1,473 (5,032) 220 Depreciation and amortization 651 225 161 -- 1,037 Identifiable assets 16,377 6,602 5,433 5,338 33,750 Capital expenditures 536 96 4 -- 636 1996** Revenues $ 19,953 $ 11,308 $ 3,686 $ -- $ 34,947 Operating profit (loss) 4,084 2,300 (955) (4,097) 1,332 Depreciation and amortization 667 168 157 -- 992 Identifiable assets 20,151 6,382 3,478 3,834 33,845 Capital expenditures 617 98 198 -- 913
54* Note: (A) Unallocated corporate expenses are principally general and administrative expenses. (B) Corporate assets represent deferred tax assets and cash and cash equivalents. (C) Transactions between reportable segments are not material. ** Prior year amounts restated to reflect the Company's change in inventory costing method (See Note 1). 46 IGI, INC. AND SUBSIDIARIES SCHEDULE II--VALUATIONII - VALUATION AND QUALIFYING ACCOUNTS (AMOUNTS IN THOUSANDS)(amounts in thousands)
COL. A COL. B COL. C COL. D COL. E ------ ------ ------ ------ ------ Additions ------------------------------ Balance (1) Charged Balance at beginning to costs (2) Charged to at end Description of period and expenses other accounts Deductions of period --------- ------------ -------------------------------------- ---------- ---------- ADDITIONS ------------------------ (2) CHARGED BALANCE AT (1) CHARGED TO OTHER BALANCE AT BEGINNING OF TO COSTS ACCOUNTS END OF DESCRIPTION PERIOD AND EXPENSES DESCRIBE DEDUCTIONS PERIOD ----------- ------------ ------------ ----------- ---------- ------------------- Year ended December 31, 1995 (Restated):1996: Allowance for doubtful accounts............. $ 181 $142 -- $ 17(A)accounts $ 306 Inventory valuation allowance............ 507 645 -- 459(B) 693 Other assets valuation allowance............ 186 -- -- -- 186 Amortization of goodwill............. 76 9 -- -- 85 Amortization of other intangibles.......... 464 58 -- -- 522 Valuation allowance on net deferred tax assets............... 2,880 69 -- 2,880(C) 69 Year ended December 31, 1996 (Restated): Allowance for doubtful accounts............. $ 306 $(40)(40) $ -- $ 28(A) $ 238 Inventory valuation allowance............allowance 693 123 -- 199(B) 617 Other asset valuation allowance............allowance 186 -- -- -- 186 Amortization of goodwill............. 85 8 -- -- 93 Amortization of other intangibles.......... 522 87 -- -- 609 Valuation allowance on net deferred tax assets...............assets 69 -- -- 35(C) 34 Year ended December 31, 1997: Allowance for doubtful accounts.............accounts $ 238 $793$ 793 $ -- $ 128(A) $ 903 Inventory valuation allowance............allowance 617 603 -- 107(B) 1,113 Other asset valuation allowance............allowance 186 -- -- 186(A) -- Amortization of goodwill............. 93 8 -- -- 101 Amortization of other intangibles.......... 609 102 -- -- 711 Valuation allowance on net deferred tax assets...............assets 34 299 -- -- 333 Year ended December 31, 1998: Allowance for doubtful accounts $ 903 $ 150 $ -- $ 537(A) $ 516 Inventory valuation allowance 1,113 1,332 -- 1,089(B) 1,356 Valuation allowance on net deferred tax assets 333 382 11 -- 726
- -------- (A) Relates to write-off of uncollectible accounts. (B) Disposition of obsolete inventories. (C)Related to spin off of certain discontinued operations during 1995. 5547 IGI, INC. AND SUBSIDIARIES EXHIBIT INDEX Exhibits marked with a single asterisk are filed herewith, and exhibits marked with a double asterisk reference a 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,(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. 002-72262-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. 001-08568, 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, File No. 000-10063, filed April 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, File No. 001-08568, filed April 12, 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. 001-08568, 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. 001-08568, 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. 001-08568, 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.] 48 IGI, INC. AND SUBSIDIARIES EXHIBIT INDEX (Continued) **(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. 000-10063, filed March 27, 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. 001-08568, 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. 001-08568, 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. 001-08568, 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, 1997. [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.] 49 (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,IGI, INC. AND SUBSIDIARIES EXHIBIT INDEX (Continued) (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) Eighth 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.[Incorporated by reference to Exhibit (10.22) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 001-08568, filed August 24, 1998 (the "1997 Form 10-K".)] (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. [Incorporated by reference to Exhibit 10.23 to the 1997 Form 10-K.] **(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. 001-08568, 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, File No. 001-08568, filed April 5, 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, File No. 001-08568, filed April 14, 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. 001-08568, filed August 14, 1997.]
57(10.29) Amendment No. 4 to IGI, Inc. 1991 Stock Option Plan as approved by Board of Directors on March 17, 1998. [Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 001-08568, filed November 6, 1998.] (10.30) 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.] (10.31) License Agreement by and between Micro-Pak, Inc. and IGEN, Inc. [Incorporated by reference to Exhibit (10)(v) to the 1995 Form 10-K.] 50 (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,IGI, INC. AND SUBSIDIARIES EXHIBIT INDEX (Continued) (10.32) Registration Rights Agreement between IGI, Inc. and SmithKline Beecham plc dated as of August 2, 1993. [Incorporated by reference to Exhibit (10)(s) to the 1993 Form 10-K.] (10.33) 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. 001-08568, filed June 16, 1997.] (10.34) Common Stock Purchase Warrant No. 1 to purchase 150,000 shares of IGI, Inc. Common Stock issued May 12, 1998 to Fleet Bank-NH. [Incorporated by reference to Exhibit (10.33) to the 1997 Form 10-K.] (10.35) Common Stock Purchase Warrant No. 2 to purchase 150,000 shares of IGI, Inc. Common Stock issued May 12, 1998 to Fleet Bank-NH. [Incorporated by reference to Exhibit (10.34) to the 1997 Form 10-K.] (10.36) 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. [Incorporated by reference to Exhibit (10.35) to the 1997 Form 10-K.] (10.37) 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. [Incorporated by reference to Exhibit (10.36) to the 1997 Form 10-K.] *(10.38) IGI, Inc. 1998 Directors Stock Option Plan as approved by the Board ** of Directors on October 19, 1998. *(10.39) Second Extension Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc. together with its subsidiaries. *(10.40) Common Stock Purchase Warrant No. 5 to purchase 150,000 shares, respectively, of IGI, Inc. Common Stock issued March 11, 1999 to Fleet Bank, NH. *(10.41) Common Stock Purchase Warrant No. 6 to purchase 150,000 shares, respectively, of IGI, Inc. Common Stock issued March 11, 1999 to Fleet Bank, NH. *(10.42) Common Stock Purchase Warrant No. 7 to purchase 120,000 shares, respectively, of IGI, Inc. Common Stock issued March 11, 1999 to Mellon Bank, N.A. *(10.43) Common Stock Purchase Warrant No. 8 to purchase 120,000 shares, respectively, of IGI, Inc. Common Stock issued March 11, 1999 to Mellon Bank, N.A. *(10.44) Employment Agreement, dated May 1, 1998 between IGI, Inc. and Paul ** Woitach. *(10.45) Employment Agreement, dated June 1, 1998, between IGI, Inc. and ** John F. Wall. *(11) Computation of Net Income Per Common Share. 51 IGI, INC. AND SUBSIDIARIES EXHIBIT INDEX (Continued) *(21) List of Subsidiaries. *(23) Consent of PricewaterhouseCoopers LLP. *(27.1) Financial Data Schedule for the year ended December 31, 1998. *(27.2) Restated Financial Data Schedules for the years ended December 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.
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