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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
-------------------------------------
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.
--------------------- -------------------
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
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.Inc.
(Exact name of registrant as specified in its charter)
Delaware 01-0355758
(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
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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.
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- -------------------------------------------------------------------------------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.
5852