SCHEDULE A14A INFORMATION

                Proxy Statement Pursuant to Section 14(a) of the
                         Securities Exchange Act of 1934
                               (Amendment No. __)


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|_|  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)14a-
     6(e)(2))

|X|  Definitive Proxy Statement

|_|  Definitive Additional Materials

|_|  Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12


                                    IGI, INC.
                ------------------------------------------------
                (Name of Registrant as Specified in Its Charter)


------------------------------------------------------------------------ --------------------------------------------------------------------------------
     (Name of Person(s) Filing Proxy Statement if other than the Registrant)


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     previously. Identify the previous filing by registration statement number,
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                                    IGI, INC.

                    NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
                             TO BE HELD SEPTEMBER 24, 1998May 13, 1999

     NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of IGI,
Inc., a Delaware corporation (the "Company"), will be held on Thursday, September 24, 1998May 13,
1999 at 1:10:00 p.m.a.m. at the offices of Hale and Dorr LLP, 60 State Street, Boston,
Massachusetts (the "Meeting") for the purpose of considering and voting upon the
following matters:

     1.   To elect eightseven directors to serve until the next Annual Meeting of
          Stockholders.

     2.   To approve an amendmentamendments to the Company's 1991 Stock Option Plan
             increasingCertificate of Incorporation,
          as amended, to (i) increase the number of authorized shares of Common
          Stock from 30,000,000 to 50,000,000 and (ii) authorize a new class of
          Preferred Stock consisting of 1,000,000 shares.

     3.   To approve the Company's Common1999 Employee Stock $.01
             par value per share, authorized for issuance from 2,600,000 to
             3,100,000 shares.
 
          3.Purchase Plan.

     4.   To approve the Company's 1999 Stock Incentive Plan.

     5.   To ratify the appointment of PricewaterhouseCoopers LLP as independent
          auditors of the Company for the current fiscal year.

     4.6.   To transact such other business as may properly come before the
          Meeting or any adjournment thereof.

     The Board of Directors has no knowledge of any other business to be
transacted at the Meeting.

     The Board of Directors has fixed the close of business on Friday, August 7,
1998March 19,
1999 as the record date for the determination of stockholders entitled to notice
of and to vote at the Meeting and at any adjournments thereof.

     A copy of the Company's Annual Report to Stockholders for the year ended
December 31, 1997,1998, which contains financial statements and other information of
interest to stockholders, accompanies this Notice and the enclosed Proxy
Statement.

                                             By Orderorder of the Board of Directors,

                                             ROBERTRobert E. MCDANIEL,McDaniel,
                                             Secretary

August 28, 1998April 14, 1999






     WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY COMPLETE,
DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. NO
POSTAGE NEEDNEEDS TO BE AFFIXED IF THE PROXY IS MAILED IN THE UNITED STATES.






                                    IGI, INC.

                          WHEAT ROAD AND LINCOLN AVENUE
                            BUENA, NEW JERSEYWheat Road and Lincoln Avenue
                             Buena, New Jersey 08310

                            -------------------------------------------------------

                                 PROXY STATEMENT

                       FOR ANNUAL MEETING OF STOCKHOLDERS
                         TO BE HELD SEPTEMBER 24, 1998
                         ------------------------------For Annual Meeting of Stockholders

                             To Be Held May 13, 1999

                            -------------------------

     This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of IGI, Inc. (the "Company") for use at the
Annual Meeting of Stockholders to be held on Thursday, September 24, 1998May 13, 1999 at 1:10:00
p.m.a.m. at the offices of Hale and Dorr LLP, 60 State Street, Boston,
Massachusetts, and at any adjournments thereof (the "Meeting").

     All proxies will be voted in accordance with the instructions of the
stockholder. If no choice is specified, the proxies will be voted in favor of
the proposals set forth in the accompanying Notice of Meeting. Any proxy may be
revoked by a stockholder at any time before its exercise by delivery of a
written revocation to the Secretary of the Company. Attendance at the Meeting
will not itself be deemed to revoke a Proxy unless the stockholder gives
affirmative notice at the Meeting that the stockholder intends to revoke the
Proxy and vote in person.

     Only the record holders of shares of common stock, $.01 par value per
share, of the Company (the "Common Stock") at the close of business on August 7,
1998March 19,
1999 may vote at the Meeting. Each share entitles the record holder to one vote
on each of the matters to be voted upon at the Meeting. On August 7, 1998,March 19, 1999 there
were 9,466,6679,526,854 shares of Common Stock outstanding.

     The Notice of Meeting, this Proxy Statement, the enclosed Proxy and the
Company's Annual Report for the year ended December 31, 19971998 are being mailed to
stockholders on or about August 28, 1998.
 
BENEFICIAL OWNERSHIP OF COMMON STOCKApril 14, 1999.

Beneficial Ownership of Common Stock

     The following table sets forth information as of July 31, 1998March 15, 1999 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 

                                      -1-

Stock, (ii) the directors of the Company, (iii) the Chief Executive Officer and
the executive officers of the Company listed in the "Summary Compensation Table"
below one of which is a former executive officer (collectively, 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.


                                                
NUMBER PERCENT BENEFICIAL OWNER OF SHARES OF 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%Number of Percent of Beneficial Owner Shares Class - ---------------- ---------- ----------- Stephen J. Morris............................ 2,319,200 (1) 24.3% 66 Navesink Avenue Rumson, New Jersey Jane E. Hager................................ 1,174,638 (2) 12.2% Pinnacle Mountain Farms Lyndeboro, NH 03082
Edward B. Hager, M.D. ....................... 1,015,815 (3) 10.3% Pinnacle Mountain Farms Lyndeboro, NH 03082 Mellon Bank Corporation...................... 732,801(4) 7.4% One Mellon Bank Center Pittsburgh, Pennsylvania 15258 David G. Pinosky, M.D........................ 271,723 (5) 2.8% Terrence O'Donnell........................... 84,565 (6) * Constantine L. Hampers, M.D.................. 71,073 (7) * Terrence D. Daniels.......................... 45,782 (8) * Paul D. Paganucci............................ 47,298 (8) * F. Steven Berg............................... 27,823 (9) * Paul Woitach................................. 200,000 (10) 2.1% John F. Wall................................. 30,000 (11) * Robert E. McDaniel........................... 25,000 (12) * Kevin J. Bratton............................. 29,750 (13) * Stephen G. Hoch.............................. 0 (14) * All executive officers and directors, as a group (13 Persons)(16)....................... 2,383,652 (15) 22.5% - ---------- * Less than 1% of the Common Stock outstanding. -2-
NUMBER PERCENT BENEFICIAL OWNER OF SHARES OF CLASS - ---------------- --------- -------- Mellon Bank Corporation ................................. 881,310(4) 9.1% One Mellon Bank Center Pittsburgh, Pennsylvania 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) * Stephen G. Hoch.......................................... 42,250(10) * Lawrence N. Zitto........................................ 67,500(11) * Surendra Kumar........................................... 8,000 * Kevin J. Bratton......................................... 26,500(12) * F. Steven Berg........................................... -- * 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 an 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. (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 (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(1) Includes 816,300 shares which Mr. Morris owns jointly with his wife, Xenia Morris. (2) Includes 639,815 shares beneficially owned by Dr. and Mrs. Hager, as co-trustees of the Hager Family Trust, who share voting and investment power. Includes 100,000 shares which Mrs. Hager may acquire pursuant to stock options exercisable within 60 days after March 15, 1999. (3) Includes 375,000 shares which Dr. Hager may acquire pursuant to stock options exercisable within 60 days after March 15, 1999, and 639,815 shares (listed above) beneficially owned by Mrs. Hager as co-trustee of the Hager Family Trust. (4) On February 19, 1999, Mellon Bank Corporation filed a Schedule 13G/A with the Securities and Exchange Commission reporting beneficial ownership of a total of 612,801 shares, which includes 240,000 shares of Common Stock issuable upon exercise of warrants within 60 days after March 15, 1999. Mellon Bank reported that it has sole voting power over 482,101 shares of Common Stock and sole dispositive power over 607,051 shares of Common Stock. The Company entered into a Second Extension Agreement with Mellon Bank, effective 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. (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 of the Company 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, 1999, pursuant to which Mellon Bank was granted warrants for the purchase of an additional 240,000 shares of Common Stock, of which 120,000 shares are exercisable within 60 days after March 15, 1999. (5) Includes 100,000 shares which may be acquired pursuant to stock options exercisable within 60 days after March 15, 1999. Dr. Pinosky is not standing for re-election to the Board of Directors. (6) Includes 70,000 shares which may be acquired pursuant to stock options exercisable within 60 days after March 15, 1999. (7) Includes 60,000 shares which may be acquired pursuant to stock options exercisable within 60 days after March 15, 1999. (8) Includes 40,000 shares which may be acquired pursuant to stock options exercisable within 60 days after March 15, 1999. (9) Includes 20,000 shares which may be acquired pursuant to stock options exercisable within 60 days after March 15, 1999. Mr. Berg is not standing for re-election to the Board of Directors. (10) Consists of 200,000 shares which may be acquired pursuant to stock options exercisable within 60 days after March 15, 1999. -3- (11) Consists of 5,000 shares Mr. Wall holds jointly with his wife, Rosa Wall, and 25,000 shares which may be acquired pursuant to stock options exercisable within 60 days after March 15, 1999. (12) Consists of 25,000 shares which may be acquired pursuant to stock options exercisable within 60 days after March 15, 1999. (13) Includes 24,250 shares which may be acquired pursuant to stock options exercisable within 60 days after March 15, 1999. Mr. Bratton resigned in January 1999. (14) Mr. Hoch does not hold any shares of Common Stock or stock options of the Company. Mr. Hoch resigned in September 1998.
2 (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) Consists of 21,000 shares which may be acquired pursuant to stock options exercisable within 60 days after July 31, 1998. (13) Includes 1,030,750(15) Includes 1,079,250 shares which may be acquired pursuant to stock options exercisable within 60 days after March 15, 1999. (16) As of July 31, 1998, John P. Gallo, a former President of the Company, whose employment was terminated as of November 1997, beneficially owned 643,397 shares of Common Stock (including 275,000 which may be acquired pursuant to stock options within 60 days after July 31, 1998). His holdings constituted more than 5% of the Company's outstanding shares of Common Stock. The Company has been unable to ascertain his current holdings by researching the appropriate filings with the Securities and Exchange Commission to determine if he is still a 5% security holder. However, his attorney represents that Mr. Gallo's holdings did not change during fiscal year 1998.
SECTIONSection 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCEBeneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's directors, executive officers and holders of more than 10% of the Company's Common Stock ("Reporting Persons") to file with the Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Except as set forth below, and basedBased solely on its review of copies of reports filed by Reporting Persons furnished to the Company, the Company believes that during 19971998 its officers, directors and holders of more than 10% of the Company's Common Stock complied with all Section 16(a) filing requirements.requirements, except that Initial Statements of Beneficial Ownership of Securities on Form 3 for F. Steven Berg, a director of the Company, failed to fileand Robert E. McDaniel, Senior Vice President and General Counsel of the Company, were inadvertently not filed by the Company on a timely basis a Form 3 -- Initial Statement of Beneficial Ownership of Securities. VOTES REQUIREDbasis. -4- Votes Required The holders of a majority of the shares of Common Stock outstanding shall constitute a quorum for the transaction of business at the Meeting. Shares of Common Stock present in person or represented by proxy (including shares which abstain or do not vote with respect to one or more of the matters presented for stockholder approval) will be counted for purposes of determining whether a quorum exists at the Meeting. The affirmative vote of the holders of a plurality of the shares of Common Stock voted at the Meeting is required for the election of directors.directors (Proposal 1). The affirmative vote of the holders of a majority of the outstanding shares of Common Stock of the Company is required for approval of the amendments to the Company's Certificate of Incorporation (Proposal 2). The affirmative vote of the holders of a majority of the shares of Common Stock voted at the Meeting is required to approve the amendment of1999 Employee Stock Purchase Plan and the 19911999 Stock OptionIncentive Plan (Proposals 3 and 4) and to ratify the appointment of PricewaterhouseCoopers LLP as independent auditors of the Company.Company (Proposal 5). Shares which abstain from voting as to a particular matter, and shares held in "street name" by brokers or nominees who indicate on their proxies that they do not have discretionary authority to vote such shares as to a particular matter, will not be counted as votes cast in favor of such matter, and also will not be counted as shares voting on such matter. Accordingly, abstentions and "broker non-votes" will have no effect on the voting on a matter that requires the affirmative vote of the holders of a certain percentage of the shares of Common Stock voting on a matter. PROPOSAL 1 --- ELECTION OF DIRECTORS NOMINEES FOR ELECTION AS DIRECTORSNominees for Election as Directors The persons named as proxies in the accompanying Proxy intend (unless authority to vote therefor is specifically withheld) to vote for the election of the persons named below as directors to hold office until the next Annual Meeting of Stockholders and until their respective successors are elected and qualified. Each nominee is presently serving as a director of the Company and has consented to being named in this Proxy Statement and to serve if elected. If any of the nominees becomes unavailable to serve as a director, the persons named as proxies in the accompanying Proxy may vote the Proxy for substitute nominees. The Board of Directors has no reason to believe that any of the nominees will be unable to serve if elected. John P. Gallo, a current director of the Company, has not been nominatedNeither David G. Pinosky nor F. Steven Berg is standing for re-election to the Board of Directors. 3Directors and, accordingly, the Board of Directors has voted to reduce the number of directors of the Company from eight to seven, effective as of the date of the Meeting. -5- The following table sets forth certain information with respect to the nominees:
DIRECTOR PRINCIPAL OCCUPATION, OTHER BUSINESS EXPERIENCE NAME AGE SINCE DURING PAST FIVE YEARS AND OTHER DIRECTORSHIPS -Principal Occupation, Other Business Experience During Director Past Five Years and Name Age Since Other Directorships ---- --- -------- ---------------------------------------------------- --------------------- Edward B. Hager, M.D. ......... 67 1977 Chairman of the Board of Directors and Chief Executive Officer of the Company 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.................. 52Hager 53 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;1998; 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. David G. Pinosky, M.D.......... 68 1980 MemberTrustee of the faculty of the University of MiamiDerryfield School of Medicine since 1963; Medical Director, Psychiatric Unit, Palmetto General Hospital, Hialeah, FL since 1986; President, Miami Psychiatric Associates since 1971; Medicalin Manchester, New Hampshire; Director of Highland Park General Hospital, Miami, FLNovavax, Inc. from 1971February 1997 to 1986.March 1998; Mrs. Hager is the wife of Edward B. Hager.
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Principal Occupation, Other Business Experience During Director Past Five Years and Name Age Since Other Directorships ---- --- ----- --------------------- Terrence O'Donnell............. 54O'Donnell 55 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 from August 1974 to January 1977; Deputy Special Assistant to President Nixon from May 1972 to August 1974; directorDirector of MLC Holdings.
4
DIRECTOR PRINCIPAL OCCUPATION, OTHER BUSINESS EXPERIENCE NAME AGE SINCE DURING PAST FIVE YEARS AND OTHER DIRECTORSHIPS - ---- --- -------- ----------------------------------------------- Constantine L. Hampers, M.D.... 6566 1994 Chief Executive Officer of MDL Hampers, M.D. 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.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.............. 67Paganucci 68 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 & Co. from 1989 to 1991; Vice Chairman of W.R. Grace & Co. from 1986 to 1989; Executive Vice President of W.R. Grace from January 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.
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Principal Occupation, Other Business Experience During Director Past Five Years and Name Age Since Other Directorships ---- --- ----- --------------------- Terrence D. Daniels............ 55Daniels 56 1996 President of Quad-C (a structured investment firm) since 1990; Vice Chairman of W.R. Grace & Co. from 1986 to 1989; Director of DSGStimsonite Corporation, Collins & Aikman Floorcoverings and numerous private companies. Stephen J. Morris 66 Co-founder and General Manager of John Morris & Sons, Inc., a hotel and restaurant enterprise; Co-founder and Advisor of International Ltd., Eskimo PieScientific Communications, a scientific publishing company; Director of Pure Energy Corporation, and Stimsonite Corporation. F. Steven Berg................. 63 1998 Presidenta developer of Bishopsgate Financial Corp., an investment company, since 1990.alternative motor fuels.
For information relating to shares of the Company owned by each of the directors, seedirectors. See "Beneficial Ownership of Common Stock." BOARD AND COMMITTEE MEETINGSBoard and Committee Meetings The Board of Directors met sevenfifteen times during 1997. Each1998. Except for Messrs. Daniels, Pinosky and Paganucci, each of the current directors attended at least 75% of the meetings of the Board of Directors and the committees on which he or she served. The Board of Directors has an Executive Committee, an Audit Committee, an Independent Committee of Outside Directors, a Financial AffairsCompensation and Stock Option Committee and a Compensation and Stock OptionGovernance Committee. The Executive Committee, whose members are Drs. Hager and Hampers and Mrs. Hager, has the authority to exercise the powers of the Board of Directors between Board meetings. Mr. Gallo served on the Executive Committee during 1997, but he is not standing for re-election to the Board of Directors in 1998. The Audit Committee, whose members are Dr. Pinosky, Messrs. O'Donnell (Chairman) and Paganucci and Mrs. Hager, reviews the audit of the Company's accounts, monitors the effectiveness of the audit and evaluates the scope of the audit. The Independent Committee of Outside Directors, whose members are Drs. Hampers (Chairman) and Pinosky and Messrs. O'Donnell, Daniels, Berg and Paganucci, reviews and approves transactions between Novavax, Inc. ("Novavax"), the Company's former subsidiary, and the Company and transactions between management and the Company. The Financial Affairs Committee, whose members are Dr. Hampers, Mr. O'Donnell and Mrs. Hager (Chairman), advises management with respect to the investment of the Company's liquid assets. The Compensation and Stock Option Committee, whose members are Drs. Hampers (Chairman) and Pinosky, and Messrs. Daniels, O'Donnell, Paganucci and O'Donnell,Berg, reviews and recommends salaries and other compensatory benefits for 5 the principal officers of the Company and grants stock options to key employees of the Company and its subsidiaries. In February 1999, the -8- Company formed a Governance Committee, whose members are Dr. Hampers (Chairman), Jane E. Hager and Terrence O'Donnell, to ensure that principles of appropriate corporate governance are developed and maintained. The Governance Committee also serves as the nominating body for the Board of Directors. During 1997, neither1998, the Executive Committee nor the Financial Affairs Committee met anddid not meet, the Independent Committee of Outside Directors andmet once, the Compensation and Stock Option Committee each met one timetwice and the Audit Committee met twofour times. Director Compensation and Stock Options The Company has no nominating committeeBoard of Directors adopted the 1998 Directors Stock Plan (the "1998 Plan") in October 1998 and each outside director agreed to receive shares of the BoardCompany's Common Stock as director compensation in lieu of Directors. DIRECTOR COMPENSATION AND STOCK OPTIONS Eachthe former practice of payment of director not employedfees in cash, thereby encouraging ownership in the Company by the Companydirectors. Each non-employee director receives $2,000 in value of Common Stock for each meeting of the Board of Directors he or she attends.attends in person, $1,000 in value of Common Stock for each telephonic meeting of the Board attended, $500 in value of Common Stock for each Committee meeting attended which is held on the same day as a Board meeting, $1,000 in value of Common Stock for each Committee meeting attended which is not held on the same day as the Board meeting, and up to $5,000 in value of Common Stock annually for the Chairman of certain of the Board Committees. The fees are payable quarterly and the number of shares of Common Stock issued to each director is determined by dividing the fees payable for the quarter by the closing price of the Company's Common Stock on the American Stock Exchange on the last business day of the applicable quarter. Pursuant to the 1998 Plan, Mrs. Hager and Messrs. Pinosky, Daniels, O'Donnell, Hampers, Berg and Paganucci each received the following number of shares, respectively, of Common Stock of the Company as compensation for 1998: 9,823; 6,823; 5,782; 14,565; 8,073; 7,823; and 7,298. These shares represented a total value at the time of issuance of $119,500. Directors' fees of $18,000 were paid in cash to directors in 1998 prior to the adoption of the 1998 Plan. 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 1993, 1994, 1995, 1996 and 1997.through 1998. Options granted to Eligible Directors are exercisable in full beginning on the date which is six months after the date -9- 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). CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In November 1990, theCertain Relationships and Related Transactions During 1998, Company advanced $70,000 to Mr. Gallo, the Presidentpersonnel and Chief Operating Officer of the Company until the termination of his employment on November 22, 1997. Mr. Gallo issued to the Company a note 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. 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. 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 personneladvisors 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.Company and spouse of Edward B. Hager, M.D. Total charges to the Company for its use of the airplane in 19971998 were $68,930.$82,500. The Board of Directors authorized use of the aircraft for business travel only, and 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,Notwithstanding these criteria, the Company was only billed for Dr. Hager's businesssuch use of the aircraft at rates not exceeding those for first class commercial airfare. 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, as 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 banksbank agreed to forbear from exercising theirits rights and remedies arising from covenant defaults through January 31, 1999. The Company then entered into a Second Extension Agreement with Mellon Bank, effective January 31, 1999, whereby the Company issued to Mellon Bank new warrants to purchase an additional 240,000 shares of the Company's Common Stock at an exercise price of $2.00 per share. As of July 31, 1998,March 15, 1999, Mellon Bank wasis the beneficial owner of 881,310732,801 shares of the Company's Common Stock or 9.1%7.4% of the outstanding shares. 6 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLESummary 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 both the Chief Executive Officer of the Company, the four most highly compensated executive officers of the Company who received compensation in excess of $100,000 during 19971998 and who were serving as executive officers at the end of 19971998, and the former President of the Companyone individual who would have been one of the Company's four most highly compensated executive officers, but for the fact that he was no longer employed by the Company terminated his employment prior toat the end of 1997. SUMMARY COMPENSATION TABLE1998. -10- Summary Compensation Table
LONG-TERM COMPENSATIONLong-Term Compensation Annual Compensation Awards ------------ AWARDS ANNUAL COMPENSATION ------------ ------------------------------------ SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND SALARY BONUS COMPENSATION(1) OPTIONS(2) COMPENSATION(3) PRINCIPAL POSITION YEARSecurities Other Annual Underlying All Other Name and Principal Salary Bonus Compensation Options Compensation Position Year ($) ($) ($)(1) (#)(2) ($) ------------------ ---- ------ ----- --------------- ---------- ---------------(3) - ---------------------------------------------------------------------------------------------------------------------- Edward B. Hager ....... 1997 $303,480Hager(4) 1998 $ -- $ -- $ -- $11,944225,000 $ 11,775 Chief Executive 1997 303,480 -- -- -- 11,944 Officer 1996 345,455 -- -- 50,000 12,864 Officer 1995 314,050 55,000Paul Woitach (5) 1998 151,442 -- 50,000 12,062 John P. Gallo (4) ..... 1997 329,172 -- 1,678 -- 12,2884,200 100,000 2,848 President and Chief 1996 345,455 -- 44,860 50,000 12,772 Operating Officer 1995 314,050John F. Wall(5) 1998 99,167 -- 4,200 50,000 41,777 50,000 12,0622,387 Senior Vice President and Chief Financial Officer Robert E. McDaniel (5) 1998 106,920 -- 3,000 60,000 2,963 Senior Vice President, General Counsel and Secretary Kevin J. Bratton(6) 1998 130,846 -- 3,000 53,000 9,373 Vice President and 1997 122,723 -- 6,000 -- 8,847 Treasurer 1996 116,416 3,000 6,000 5,000 10,588 Stephen G. Hoch (5) ...Hoch(7) 1998 182,572 -- 6,000 -- 6,642 Vice President 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 130,648 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 1996 116,416 3,000 6,000 5,000 10,588 Treasurer 1995 113,807 2,000 6,000 5,000 10,9389,128
- ---------------------------- (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.allowances. (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(4) Dr. Hager elected to defer payment of his salary in 1998. That salary, which amounted to $380,000 was accrued to expense in 1998. See "Employment Agreements." Dr. Hager's options for 225,000 shares were granted to him in November 1998 in substitution for lower-priced options for the same number of shares pursuant to an option repricing that took place in November 1998. See "10-Year Option Repricings." (5) Messrs. Woitach, Wall and McDaniel joined the Company in 1998. (6) Mr. Bratton's options for each of Dr. Hager and Messrs. Gallo, Hoch, Zitto, Kumar and53,000 shares include 28,000 shares which were granted in substitution for existing lower-priced options pursuant to the November 1998 option repricing. See "10-Year Option Repricings." Mr. 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 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 $1,615, respectively. (4) In connection with the December 1995 spinoff of Novavax, a formerly majority-owned subsidiary of the Company, Mr. Gallo also served as Chief Operating Officer and Treasurer of Novavax fromresigned in January 1996 to June 30, 1996. Pursuant to a Transition Services Agreement entered into by the 7 Company and Novavax to facilitate the spinoff, Novavax agreed to pay half of Mr. Gallo's salary during this time. In November 1997, the Company terminated Mr. Gallo for willful misconduct in the performance of his executive duties. (5)1999. (7) Mr. Hoch resigned in JulySeptember 1998. (6) Mr. Zitto resigned in April 1998. (7) Dr. Kumar resigned in February 1998. STOCK OPTIONS No stock options or SARs were granted-11- Stock Options The following tables set forth certain information concerning option grants during the fiscal year ended December 31, 1998 to anythe Named Executive Officers during 1997. The following table summarizes option exercises during 1997 byand the Named Executive Officers,number and the value of the options held by such persons on December 31, 1998. The first table does not include options granted to Dr. Hager and Mr. Bratton in November 1998 in substitution of lower-priced options. See "10-Year Option Repricings." No options were exercised by Named Executive Officers during 1998.
OPTION GRANTS IN LAST FISCAL YEAR Individual Grants ----------------- Potential Realizable Value Number of Percent of At Assumed Annual Rates Securities Total Options of Stock Price Appreciation Underlying Granted to Exercise or for Option Term (1) Options Employees in Base Price Per Expiration ------------------- Name Granted (#) Fiscal Year Share ($/sh) Date 5% 10% - ---- ----------- ----------- ------------ ---- --------- -------- Edward B. Hager -- -- -- -- -- -- Paul Woitach 100,000(2) 24.91% 2.00 5/11/08 $126,000 $318,000 John F. Wall 50,000(2) 12.45% 3.13 6/2/08 98,438 248,438 Robert E. McDaniel 50,000(2) 12.45% 3.13 6/2/08 98,438 248,438 10,000(3) 2.50% 3.00 9/24/08 18,900 47,700 Kevin J. Bratton 25,000(3) 6.23% 3.50 3/17/08 55,125 139,125 Stephen G. Hoch -- -- -- -- -- --
- ---------- (1) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of 1997. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUESthe option term. These gains are based on assumed rates of stock price appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date. Actual gains, if any, on stock option exercises will depend on the future performance of the Common Stock and the date on which the options are exercised. No gain to the optionees is possible without an appreciation in stock price, which will benefit all stockholders commensurately. (2) 50% of the shares covered by the options are exercisable on the six-month anniversary of the option grant and the remaining 50% of the shares are exercisable one year after the date of grant. (3) 25% of the shares covered by the options are exercisable on the first anniversary of the option grant date and an additional 25% of the shares are exercisable on each successive anniversary date, with full vesting occurring on the fourth anniversary date. -12-
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS ACQUIRED ON VALUE AT FISCAL YEAR-END AT FISCAL YEAR-END EXERCISE REALIZEDAggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values Number of Securities Value of Unexercised Shares Underlying Unexercised In-the-Money Options Acquired On Value Options at Fiscal Year-End at Fiscal Year-End Exercise Realized (#) (#) Name (#) ($) NAME (#) ($) (1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2)Exercisable/Unexercisable Exercisable/Unexercisable(2) - ---- ----------- -------- ------------------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------- Edward B. Hager.......... 20,000 $ 11,950 425,000/Hager -- -- 375,000/0 $0/$0 John P. Gallo............Paul Woitach -- -- 325,000/50,000/50,000 0/0 John F. Wall -- -- 25,000/25,000 0/0 Robert E. McDaniel -- -- 25,000/35,000 0/0 Kevin J. Bratton -- -- 24,250/28,750 0/0 Stephen G. Hoch..........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 the end of fiscal 19971998 ($3.751.94 per share) minus the exercise price. EMPLOYMENT AGREEMENTS In October 1997,-13- Repricing of Options The following table sets forth certain information concerning the Company amended the Employment Agreement with eachCompany's repricing in 1998 of Dr. Hager and Mr. Gallo to provide for a reduction in their annual salaries, but extended the period for paymentoptions held by two executive officers of the reduced salaries throughCompany. No other repricing of stock options has occurred during the year 2005.past ten years. 10-YEAR OPTION REPRICINGS
Length of Original Number of Exercise Option Shares Price at Term Underlying Market Price of Time of New Remaining Date of Options Stock at Time Repricing Exercise at Date of Name Repricing Repriced (#) of Repricing ($) ($) Price ($) Repricing - -------------------------------------------------------------------------------------------------------------------------- Edward B. Hager 11/23/98 50,000 $2.125 $4.70 $2.66 1 month Chief Executive 11/23/98 50,000 2.125 5.10 2.66 13 months Officer 11/23/98 25,000 2.125 5.02 2.66 25 months 11/23/98 25,000 2.125 4.78 2.66 28 months 11/23/98 25,000 2.125 9.88 2.66 37 months 11/23/98 25,000 2.125 7.29 2.66 46 months 11/23/98 25,000 2.125 7.12 2.66 49 months Kevin J. Bratton 11/23/98 5,000 $2.125 $5.10 $2.44 13 months Vice President and 11/23/98 4,000 2.125 5.02 2.44 25 months Treasurer 11/23/98 1,000 2.125 9.88 2.44 37 months 11/23/98 5,000 2.125 7.29 2.44 46 months 11/23/98 3,000 2.125 8.58 2.44 73 months 11/23/98 5,000 2.125 6.63 2.44 85 months 11/23/98 5,000 2.125 5.75 2.44 97 months
-14- Report on Option Repricing On January 19,November 9, 1998, the Compensation and Stock Option Committee of the Board of Directors rescindedapproved a repricing of options for current employees and consultants of the revised salary arrangementsCompany holding outstanding stock options with an exercise price of more than $4.00 per share, which included the two named executive officers listed in the table above. Because of the substantial decline in the market value of the Company's Common Stock, many of the options which were outstanding in November 1998 were exercisable at prices that exceeded the market value of the Common Stock. In view of this decline and in keeping with the Company's philosophy of using equity incentives to motivate and retain qualified employees and consultants, the Compensation and Stock Option Committee believed that it was in the best interests of the Company and its stockholders to restore the incentive intended when these options were originally granted. Pursuant to the terms of the repricing, 34 option holders, holding options to purchase an aggregate of 331,465 shares of the Company's Common Stock, which had an exercise price of greater than $4.00 per share ("Existing Options"), were issued new options as of November 23, 1998, at a reduced exercise price of $2.44 per share. Dr. Hager's options to purchase a total of 225,000 shares were only reduced to $2.66 per share (the "New Options"). Except for Dr. Hagerthe different exercise price, which is at a premium to the then fair market value of the Common Stock, the terms of the option agreements, including the vesting schedule relating to the New Options, are substantially the same as the terms of the option agreements for the Existing Options that they replaced. Compensation and restored the annual salary payable under hisStock Option Committee Constantine L. Hampers, M.D., Chairman Terrence D. Daniels Terrence O'Donnell Paul D. Paganucci F. Steven Berg David G. Pinosky, M.D. Employment Agreement ($380,000 for 1997). In addition, pursuantAgreements 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 agreedchose to defer the payment of his entire annual salary as of January 1, 1998, to preserve cashfunds for the Company's cash needs. Therefore, the Company accrued, but did not pay, Dr. Hager's 1998 salary of $380,000. Dr. Hager's accrued and unpaid salary as of June 30, 1998February 28, 1999 was $190,000$456,667 and that amount, plus future deferred salary payments, will be paid to Dr. Hager only at such time as the Board of Directors of the -15- Company, in consultation with the Compensation and Stock Option Committee, determines that the Company's cash position is adequate to pay the deferred amount and to resume the current payment of his salary. Dr. Hager's Employment 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. 8 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.Employment Agreement. The Company has finalized arrangementsentered into employment agreements with each of Messrs. Paul Woitach, President and Chief Operating Officer of the Company, and John F. Wall, and Paul Woitach, Senior Vice President and Chief Financial Officer of the Company and President and Chief Operating Officer of the Company, respectively, on the basic terms ofCompany. The agreements provide for 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 extendedrenewed annually unless terminated by the Company by written notice at least 9060 days prior to renewal. REPORT OF THE COMPENSATION COMMITTEEthe renewal date. In the event their employment is terminated without cause, Mr. Woitach is entitled to continuation of his annual salary for up to 18 months and Mr. Wall is entitled to continuation of his annual salary for up to 12 months. Report of the Compensation and Stock Option Committee Overview and Philosophy The Compensation and Stock Option Committee of the Board of Directors (the "Committee") is composedcomprised of foursix non-employee directors and is responsible for the development and administration of the Company's executive compensation policies and programs, subject to the review and approval by the full Board. The Committee reviews and recommends to the Board for its approval the salaries and incentive compensation for the executive officers of the Company and grants stock options to executives and other key employees of the Company and its subsidiaries. The objectives of the Company's executive compensation program are to: o Support the achievement of strategic goals and objectives of the Company. o Attract and retain key executives critical to the long-term success of the Company. o Align the executive officers' interests with the success of the Company. -16- Compensation Program The Company's executive compensation program consists of three principal elements --- base salary, annual cash incentive compensation and long-term incentive compensation in the form of stock options. The base salariessalary of Dr. Hager and Mr. Gallo werewas established pursuant to the terms of his employment agreements between each of them andagreement with the Company. See "Employment Agreements." Base salary levels for the Company's executive officers are generally established based on a review of compensation for competitive positions in the market, the executives' job skills and experience and judgments as to past and future contributions of the executives to the Company's success. BecauseDue to the mix of the types of businesses in which the Company is engaged, in the animal health products and skin care products, businesses, it is difficult to makefind similar companies with which meaningful comparisons with similar companies.can be made. The Committee seeks to set the annual base salaries of its executives at levels competitive with those paid to executives in these businesses. It seeks, however, to provide its executives with opportunities for substantially higher compensation through annual incentive awards and stock options. The Company made no cash incentive or bonus payments in 1998. The annual cash incentive compensation isprogram was designed to tie annual awards to Company and individual executive performance. Accordingly, the Committee consideredconsiders a number of factors in determining whether annual incentive awards should be paid, including (i) achievement by the Company and/or specific business units of approved budgets, new product introductions, progress in development of new products and operating income and cash flow goals and (ii) achievement by the executives of their assigned objectives. In considering individual performance, as contrasted to Company performance, the Committee relies more on subjective evaluations of executive performance than on quantitative data or objective criteria. Further, the Company is in the process of implementing a variable compensation plan for its top executives. The purpose of the plan is to directly link management compensation to Company performance. Present plans include expanding the application of the variable compensation plan to more upper level managers. Long-term incentives for executive officers and key managers are provided through stock options. The objectives of this program are to align executive and stockholder long-term interests by creating a 9 strong and direct link between executive compensation and stockholder return, and to enable executives to develop and maintain a significant, long-term stock ownership position in the Company's Common Stock. Stock options are granted at an option price equal to the fair market value of the Company's Common Stock on the date of grant and will only have value if the Company's stock price increases. In selecting executives eligible to receive option grants and determining the amount of such grants, the Committee evaluates a variety of factors including (i) the job level of the executive, (ii) option grants awarded by -17- competitors to executives at a comparable job level, and (iii) past, current and prospective service to the Company rendered, or to be rendered, by the executive. It has been the Company's practice to fix the exercise price of option grants at 100% of the fair market value per share on the date of grant. Chief Executive Officer's 19971998 Compensation Dr. Edward B. Hager, Chairman of the Board and Chief Executive Officer of the Company, is eligible to participate in the same executive compensation plans available to the other Company executives. In addition to his duties as Chief Executive Officer and Chairman of the Board, Dr. Hager serves as Chief Scientific Officer of the Company. The Committee has set Dr. Hager's total annual compensation, including annual incentive awards and potential additional compensation derived from the Company's stock option program, at a level it believes is competitive with other comparable companies. Dr. Hager's annual compensation is governed in large part by the terms of his employment agreement with the Company. 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 agreedchose to defer the payment of his annual salary to preserve cashfunds for the Company's cash needs. Dr. Hager's accrued unpaid salary as of June 30, 1998February 28, 1999 was $190,000$456,667, and that amount plus future deferred salary payments will be paid to Dr. Hager only 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. Dr. Hager's Employment Agreement also provides for continuation of his salary through December 31, 1999 in the event he is terminated without cause prior to that date. The Committee did not award Dr. Hager any additional options in 1997.1998. However, Dr. Hager did receive an option grant on January 5, 1999 to purchase 100,000 shares of Common Stock and, as set forth above, options held by Dr. Hager for the purchase of 225,000 shares of Common Stock were repriced on November 23, 1998 at a lower exercise price, but an exercise price higher than that offered to other employees. See "10-Year Option Repricings." Tax Considerations Section 162(m) of the Internal Revenue Code enacted in 1993,of 1986, as amended (the "Code"), generally disallows a tax deduction to public companies for compensation overin excess of one million dollars paid to its chief executive officer and its other Named Executive Officers. Qualifyingfour highest compensated officers. Qualified performance-based compensation will not be subject to the deduction limit if certain requirements are met. While the Committee does not -18- currently intend to qualify its annual cash incentive compensation as qualified performance-based compensation, it will continue to monitor the impact of Section 162(m) on the Company. Based on the compensation received by Dr. Hager and the other Named Executive Officers, it does not appear that the Section 162(m) limitation will have a significant impact on the Company in the near term. While the Committee does not currently intend to qualify its annual cash incentive compensation as a performance-based plan, it will continue to monitor the impact of Section 162(m) on the Company. Compensation and Stock Option Committee Constantine L. Hampers, M.D., Chairman Terrence D. Daniels Terrence O'Donnell Paul D. Paganucci F. Steven Berg David G. Pinosky, M.D. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Drs. Hampers, Chairman,Compensation Committee Interlocks and Pinosky and Messrs. Daniels and O'Donnell served onInsider Participation No member of the Compensation and Stock Option Committee was, during 1997. 10 COMPARATIVE STOCK PERFORMANCEfiscal year 1998, an officer or employee of the Company or any of its subsidiaries; or was formerly an officer of the Company or any of its subsidiaries. During fiscal year 1998, no executive officer of the Company served as a director or member of the compensation committee (or other board committee performing equivalent functions, or in the absence of such committee, the entire board of directors) of another entity, one of whose executive officers served as a member of the Compensation and Stock Option Committee, or as a director, of the Company. Comparative Stock Performance The graph below compares the cumulative total stockholder return on the Common Stock of the Company for the last five fiscal years with the cumulative total return on the AMEX Composite Index and a peer group over the same period (assuming the investment of $100 in the Company's Common Stock, the AMEX Composite Index and the peer group on December 31, 1992,1993, and reinvestment of all dividends). The peer group consists of the Company, The Liposome Company, Inc., Sequus Pharmaceuticals (formerly Liposome Technology, Inc.), Nexstar Pharmaceuticals (formerly Vestar, Inc.) and Advanced Polymer Systems, Inc. [GRAPHIC] InThe Company's Common Stock was suspended from trading on the printed versionAmerican Stock Exchange from March 31, 1998 to September 7, 1998 due to delays in filing periodic reports under the Securities Exchange Act of the document, a line graph appears which depicts the following plot points:
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 -------- -------- -------- -------- -------- -------- IGI Inc................................ 100 87 118 124 102 57 Peer Group............................. 100 71 72 153 154 74 AMEX Composite......................... 100 120 109 137 146 172
1934, as amended, and resumed trading on September 8, 1998. -19- [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Data Points Cumulative Total Return 12/93 12/94 12/95 12/96 12/97 12/98 ----- ----- ----- ----- ----- ----- IGI, Inc. 100 137 140 115 68 33 Peer Group 100 102 214 216 104 186 AMEX Market Value 100 91 115 122 148 151 PROPOSAL 2 -- PROPOSED- APPROVAL OF INCREASE IN NUMBER OF SHARES OF AUTHORIZED UNDER THE 1991COMMON STOCK OPTION PLANAND CREATION OF A NEW CLASS OF PREFERRED STOCK On March 17, 1998,16, 1999, the Company's Board of Directors adopted, subject to stockholder approval, an amendmentamendments to the Company's 1991Certificate of Incorporation to (1) increase the Company's authorized number of shares of Common Stock Option Planfrom 30,000,000 shares to 50,000,000 shares and (2) create a new class of Preferred Stock consisting of 1,000,000 shares. If approved by the stockholders, the amendments would become effective upon the filing of a Certificate of Amendment of the Company's Certificate of Incorporation (the "1991 Plan""Certificate of Amendment") with the Secretary of the State of Delaware. The Certificate of Amendment would amend Article Fourth of the Certificate of Incorporation to read as set forth in Appendix A annexed hereto. Increase in Common Stock Under the Company's Certificate of Incorporation, as currently in effect, the only class of capital stock which the Company is authorized to issue is Common Stock. If the Certificate of Amendment is approved, the additional shares of Common Stock would be part of the existing class of Common Stock and, if and when issued, would not affect the rights of the holders of currently outstanding Common Stock, except for effects incidental to increasing the number of shares of Common Stock outstanding, such as dilution of earnings per share and voting rights of current stockholders. At December 31, 1998, 9,512,917 shares of Common Stock were outstanding. At March 1, 1999, the Company had cash and cash equivalent balances of approximately $535,000, and no available borrowing capacity under its bank credit line or bank revolving facility. The Company is currently generating losses that may extend through much of 1999. Further, the Company has significant debt that it must repay on August 31, 1999, November 30, 1999, and March 31, 2000. Over the past 14 months, the Company's lending banks have modified the terms of their loan agreement at least three times, most recently extending the loan agreement to March 2000. In the event of future defaults the banks may or may not make additional changes in the loan agreement. -20- The Company is pursuing additional debt and equity financing alternatives 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 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 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 subsequent to that 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 stockholders. Subject to shareholder approval, the Board has authorized an increase in the number of shares of Common Stock and the creation of a class of preferred stock. While the Company has contacted a number of potential providers of additional capital who have expressed interest in negotiating financing arrangements with the Company, to date no agreements or commitments have been obtained. Therefore, the Board of Directors is considering offering all of its current stockholders the right to purchase shares of Common Stock in a rights offering, pursuant to which all stockholders would be entitled to purchase additional shares of Common Stock on a pro rata basis ("Proposed Financing"). The price per share of Common Stock to be sold in the Proposed Financing is expected to be determined based upon valuation advice from an independent investment bank. It is expected that the price will be fixed at a substantial discount to the prevailing market price to attract stockholder participation in the Proposed Financing. Although the Company has discussed the Proposed Financing with three of its largest stockholders, no commitment, agreement or understanding has been made by any of them with respect to their participation in the Proposed Financing. The proceeds from the Proposed Financing will be used to reduce the Company's bank indebtedness, including the payment of $4,000,000 to its bank lenders on August 31, 1999. The increase in the authorized Common Stock is needed, in the opinion of the Board of Directors, to give the Company the flexibility to consummate an equity sale while at the same time providing additional shares of Common Stock for possible future financings, the Company's stock plans for its employees, the establishment of future strategic relationships or the acquisition of other products or businesses. There is no assurance at this time that the Proposed Financing will be consummated. The terms of any equity financing have not been determined and will be subject to all applicable securities laws. The issuance of additional shares of Common Stock in the Proposed Financing would be dilutive to the current stockholders since the shares will be issued at a discount to the prevailing market price of the Company's Common Stock. Series Preferred Stock From time to time, in its efforts to replace its current bank debt, the Company has been advised that a Preferred Stock issuance would be an appropriate financing vehicle. -21- While the Company has no present plans to issue any shares of Preferred Stock, approval by the Company's stockholders would allow the Company to seek to sell shares of Preferred Stock to raise needed equity capital. Therefore, approval by the Company's stockholders of the Certificate of Amendment would also permit the Board of Directors (1) to issue from time to time shares of Preferred Stock, $.01 par value per share (the "Preferred Stock"), in one or more series, (2) determine the number of shares constituting each such series and (3) designate the rights, powers and preferences of each series, including, but not limited to, dividend rights, liquidation preferences, redemption provisions, conversion rights and voting rights, if any, in addition to those provided by law. Any issued shares of a series of Preferred Stock may rank prior to shares of Common Stock as to dividends or distributions upon liquidation, or both, and may rank prior to, on a parity with, or junior to shares of any other series of Preferred Stock with respect to the payment of dividends or distributions upon liquidation, or both, in each case as determined by the Board of Directors at the time such series is established (and subject to the rights of the holders of any previously issued shares of a series of Preferred Stock). The holders of shares of Common Stock do not have preemptive rights to subscribe for any of the Company's securities and will not have any such rights to subscribe for shares of any series of Preferred Stock. If the Certificate of Amendment is approved, the shares of Preferred Stock would be available for issuance underfrom time to time by the 1991 Plan from 2,600,000Board of Directors, without further action on the part of the Company's stockholders, for such corporate purposes as the Board of Directors may deem advisable, including without limitation, issuance of Preferred Stock in connection with any future financings or acquisitions or for other corporate purposes. The issuance of either the Common Stock or the Preferred Stock in certain circumstances may have the effect of deferring or preventing a change in control of the Company, may discourage a proposed acquisition of the Company at a premium over the market price of the Common Stock and, in the case of the Preferred Stock, may adversely affect the market price of, and other rights of the holders of, Common Stock. The Company is not aware of any attempt to 3,100,000.effect a change in control or takeover of the Company. If the Certificate of Amendment is approved, the Board of Directors will have shares of Preferred Stock available to effect a sale of shares (either in public or private transactions, mergers, consolidations or similar transactions) in which case the number of the Company's outstanding shares would be increased and would thereby dilute the interest of a party attempting to obtain control of the Company. Board Recommendation The affirmative vote of the holders of a majority of the outstanding shares of the Common Stock of the Company is required for the approval of the Certificate of -22- Amendment. The Board of Directors believes that stock options have been,the proposed amendments are in the best interests of the Company and will continueits stockholders and recommends a vote FOR the Certificate of Amendment. PROPOSAL 3 - PROPOSED APPROVAL OF THE 1999 EMPLOYEE STOCK PURCHASE PLAN The Board of Directors believes that the continued growth and profitability of the Company depends, in large part, upon the ability of the Company to be, an important elementmaintain a competitive position in attracting and maintaining key employees and directors.retaining quality personnel. The Company does not believebelieves that an employee stock purchase plan will be an integral component of the current numberbenefit package for all eligible employees. Accordingly, on December 7, 1998, the Board of shares authorized underDirectors adopted, subject to stockholder approval, the 19911999 Employee Stock Purchase Plan (the "1999 Stock Purchase Plan"). Summary of the 1999 Stock Purchase Plan The following summary of the 1999 Stock Purchase Plan is adequate forqualified in its entirety by reference to the Company's needs. As1999 Employee Stock Purchase Plan. An aggregate of July 31, 1998, 731,500300,000 shares of Common Stock remained available(subject to adjustment in the event of a subdivision of outstanding shares of Common Stock, or the payment of a dividend in Common Stock, or such other event in which it is deemed equitable to make an adjustment) may be issued pursuant to the 1999 Stock Purchase Plan. The 1999 Stock Purchase Plan is implemented through offerings, each approximately twelve months in length after an initial six month offering period, and provides eligible employees with the opportunity to purchase shares of the Company's Common Stock at a discounted price. The first offering will commence on July 1, 1999 and will terminate on December 31, 1999. Thereafter, each offering period will begin on the first day of each year and end on the last day of such year. It is anticipated that subsequent offerings will be twelve months in duration, although the Board may, at its discretion, choose a different offering period of less than twelve months for future grantssubsequent offering periods. Each employee of stock optionsthe Company and its eligible subsidiaries, including an officer or director who is also an employee, is eligible to participate in the 1999 Stock Purchase Plan, provided he or she (i) is employed by the Company or any eligible subsidiary on the applicable offering commencement date, (ii) is customarily employed by the Company or any eligible subsidiary for more than 20 hours per week and for more than five months in a calendar year, and (iii) has been employed by the Company or any eligible subsidiary for at least 90 days prior to enrolling in the 1999 Stock Purchase Plan. An employee may elect to have up to a maximum of 10% withheld from his or her base pay for purposes of purchasing shares under the 1991 Plan. 11 Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), enacted in 1993, generally disallows a tax deduction to public companies for compensation over $1 million paid to the corporation's Chief Executive Officer and four other most highly compensated executive officers. Qualifying performance-based compensation is not1999 Stock Purchase Plan, subject to certain limitations on the deduction limit if certain requirements are met. In particular, income recognized upon the exercise of a stock option is not subject to the deduction limit if the option was issued under a plan approved by stockholders that provides a limit to themaximum number of shares that may be issued underpurchased. The price -23- at which shares may be purchased during each offering will be the plan to any individual. ADMINISTRATION AND ELIGIBILITYlower of (i) 85% of the closing price of the Common Stock on the date that the offering commences or (ii) 85% of the closing price of the Common Stock on the date that the offering terminates. The 19911999 Stock Purchase Plan and the grant of options thereunder is administered by the Board of Directors of the Company and the Compensation and Stock Option Committee of the Company's Board of Directors. The CompensationBoard and Stock Option Committee has the power to determine which key employees of the Company will be granted options under the 1991 Plan, whether such options will be incentive stock options (ISOs) or nonstatutory stock options (NSOs), the number of shares of Common Stock covered by, and the duration of, each option so granted under the 1991 Plan, and other terms and conditions applicable to each option so granted under the 1991 Plan. All executive officers and the key employees of the Company and its subsidiaries are eligible to participate in the 1991 Plan. Consultants and advisors to the Company and its subsidiaries are eligible to receive NSOs under the 1991 Plan. At June 30, 1998, the Company and its subsidiaries had approximately 198 full-time employees. The last sale price of the Company's Common Stock reported by the American Stock Exchange on March 30, 1998 was $3.125 per share. 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 able to file its 1997 Annual Report on Form 10-K with the AMEX and the Securities and Exchange Commission by March 31, 1998, the due date of that report. The approximate number of holders of record of the Company's Common Stock at June 30, 1998 was 897 (not including stockholders for whom shares are held in a "nominee" or "street" name). As of July 31, 1998 the Company had approximately 198 employees and seven non-employee directors, all of whom were eligible to participate in the 1991 Plan. The number of individuals receiving awards varies from year to year depending on various factors, such as the number of promotions and the Company's hiring needs during the year, and thus the Company cannot now determine award recipients. From the initial adoption of the 1991 Plan through July 31, 1998, options to purchase an aggregate of 300,000 shares thereunder had been granted to Edward B. Hager, M.D., the Chairman of the Board of Directors, Chief Executive Officer and nominee for director of the Company; options to purchase an aggregate of 58,000 shares thereunder had been granted to Stephen G. Hoch, a former Vice President of the Company; options to purchase an aggregate of 47,000 shares thereunder had been granted to Lawrence Zitto, a former Vice President of the Company; options to purchase an aggregate of 30,000 shares thereunder had been granted to Surrendra Kumar, a former Vice President of the Company; options to purchase an aggregate of 43,000 shares thereunder had been granted to Kevin J. Bratton, Vice President and Treasurer of the Company; options to purchase an aggregate of 300,000 shares thereunder had been granted to John P. Gallo, a director and former employee of the Company; options to purchase an aggregate of 60,000 shares thereunder had been granted to Jane E. Hager, a non-employee director and nominee for director of the Company; options to purchase an aggregate of 60,000 shares thereunder had been granted to David G. Pinosky, M.D., a non-employee director and nominee for director of the Company; options to purchase an aggregate of 70,000 shares thereunder had been granted to Terrence O'Donnell, a non-employee director and nominee for director of the Company; options to purchase an aggregate of 60,000 shares thereunder had been granted to Constantine L. Hampers, M.D., a non-employee director and nominee for director of the Company; options to purchase an aggregate of 40,000 shares thereunder had been granted to Terrence D. Daniels, a non-employee director and nominee for director of the Company; options to purchase an aggregate of 40,000 shares thereunder had been granted to Paul D. Paganucci, a non-employee director and nominee for director of the Company; options to purchase an aggregate of 20,000 shares thereunder had been granted to F. Steven Berg, a nominee for director of the Company; options to purchase an aggregate of 1,028,000 shares and 350,000 shares thereunder had been granted 12 to all current executive officers as a group and all current non-employee directors as a group, respectively; no options to purchase shares thereunder had been granted to any associate of any director, executive officer or nominee for director of the Company, and an aggregate of 528,000 shares thereunder had been granted to all employees of the Company who are not executive officers. PURCHASE PRICE AND OPTION TERMS The price at which shares of Common Stock may be purchased upon the exercise of options granted under the 1991 Plan is determined by the Compensation and Stock Option Committee athave the timeauthority to make rules and regulations for the option is granted. In the case of ISOs granted to employees and options which the Company intends to qualify as performance-based compensation under Section 162(m)administration of the Code,1999 Stock Purchase Plan. Pursuant to the exercise price may not be less than the fair market value of a share of Common Stock on the date the option is granted. In the case of ISOs granted to an employee who owns more than 10%terms of the Common1999 Stock atPurchase Plan, the time of grant, the exercise price per share may not be less than 110% of such fair market value. The exercise price per share for NSOs granted to key employees may not be less than 50% of the fair market value of a share of Common Stock on the date of grant. The maximum number of shares for which options may be granted in any one calendar year to any one person is 100,000. In the case of NSOs granted to Eligible Directors, the exercise price per share shall be the fair market value of a share on the date of grant. No ISO granted under the 1991 Plan may be exercised more than ten years after the date of grant, and no ISO granted to a person who owns more than 10% of the Common Stock at the time of grant may be exercised more than five years following the date of grant. The 1991 Plan expires in 2001. While the Company may grant options which become exercisable at different times or within different periods, the CompanyBoard has generally granted options which are exercisable on a cumulative basis in annual installments of 25% each during the first, second, third and fourth years after the date of grant. Except asappointed the Compensation and Stock Option Committee to administer certain aspects of the 1999 Stock Purchase Plan. The Board may otherwise determineat any time terminate or provideamend the 1999 Stock Purchase Plan, except that (a) if the approval of any such amendment by the stockholders of the Company is required by Section 423 of the Code, such amendment shall not be effected without such approval, and (b) in an option grant, options grantedno event may any amendment be made which would cause the 1999 Stock Purchase Plan to fail to comply with Section 423 of the Code. The 1999 Stock Purchase Plan contains provisions relating to the disposition of the employee's rights to purchase shares in the event of certain mergers, acquisitions and other extraordinary corporate transactions involving the Company. As of March 1, 1999, approximately 208 employees would have been eligible to participate in the 1999 Stock Purchase Plan. The purchase of shares under the 19911999 Stock Purchase Plan cannot be sold, assigned, transferred, pledged or otherwise encumbered by the optionee, either voluntarily or by operation of law, except by will or the laws of descentis discretionary, and distribution. All options granted under the 1991 Plan to key employees will terminate no later than three months after the severance of the employment relationship between the Company andcannot now determine the optionee for any reason, for cause or without cause, other than death. In the event that an employee dies before the datenumber of expiration of an option, such option will terminate one year following the date of death (subject to the condition that no option is exercisable after the expiration of ten years from its date of grant). Optionees who exercise options to purchase securities under the 1991 Plan may pay cash in the amount of the option exercise price and/or deliver other shares of Common Stock owned by the optionee with a fair market value equal to the exercise price of the option shares to be purchased. Inpurchased in the event of a dissolution, liquidation, merger, consolidationfuture by any particular person or reorganization of the Company (an "Event"), the Board may decide to terminate each outstanding option. If the Board so decides, such option shall terminate as of the effective date of the Event, but the Board shall provide optionees a reasonable notice period during which options which are then exercisable may be exercised. DIRECTOR OPTIONS Sixty days after initial election as a non-employee director ("Eligible Director") by either the Board of Directors or the Company's stockholders, each Eligible Director is granted NSOs for 20,000 shares of Common Stock. In addition, each Eligible Director who was a director on the last business day of each 1992, 1993, 1994, 1995, 1996 and 1997 was granted a nonstatutory option to purchase 10,000 shares of Common Stock, and each Eligible Director then serving as a director on the last business day of each of 1998 and 1999 will be granted a nonstatutory option to purchase 10,000 shares of Common Stock. The exercise price per share is the fair market value on the date of grant. Options granted to Eligible Directors are exercisable in full beginning six months after the date of grant and 13 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). FEDERAL INCOME TAX CONSEQUENCESgroup. Federal Income Tax Consequences The following is a summary of the United States federal income tax consequences that generally will arise with respect to options grantedpurchases made under the 19911999 Stock Purchase Plan and with respect to the sale of Common Stock acquired under the 19911999 Stock Purchase Plan. Tax Consequences to Participants. In general, a participant will not recognize taxable income upon enrolling in the 1999 Stock Purchase Plan or upon purchasing shares of Common Stock at the end of any offering. If a participant sells Common Stock acquired under the 1999 Stock Purchase Plan at a sale price that exceeds the price at which the participant purchased the Common Stock, then the participant will recognize taxable income in an amount equal to the excess of the sale price of the Common Stock over the price at which the participant purchased the Common Stock. A portion of that taxable income will be ordinary income, and a portion may be capital gain. -24- If the participant sells the Common Stock more than one year after acquiring it and more than two years after the date on which the offering commenced (the "Grant Date"), then the participant will be taxed as follows. If the sale price of the Common Stock is higher than the price at which the participant purchased the Common Stock, then the participant will recognize ordinary compensation income in an amount equal to the lesser of: (i) fifteen percent of the fair market value of the Common Stock on the Grant Date; and (ii) the excess of the sale price of the Common Stock over the price at which the participant purchased the Common Stock. Any further income will be long-term capital gain. If the sale price of the Common Stock is less than the price at which the participant purchased the Common Stock, then the participant will recognize long-term capital loss in an amount equal to the excess of the price at which the participant purchased the Common Stock over the sale price of the Common Stock. If the participant sells the Common Stock within one year after acquiring it or within two years after the Grant Date (a "Disqualifying Disposition"), then the participant will recognize ordinary compensation income in an amount equal to the excess of the fair market value of the Common Stock on the date that it was purchased over the price at which the participant purchased the Common Stock. The participant will also recognize capital gain in an amount equal to the excess of the sale price of the Common Stock over the fair market value of the Common Stock on the date that it was purchased, or capital loss in an amount equal to the excess of the fair market value of the Common Stock on the date that it was purchased over the sale price of the Common Stock. This capital gain or loss will be a long-term capital gain or loss if the participant has held the Common Stock for more than one year prior to the date of the sale and will be a short-term capital gain or loss if the participant has held the Common Stock for a shorter period. Tax Consequences to the Company. The offering of Common Stock under the 1999 Stock Purchase Plan will have no tax consequences to the Company. Moreover, in general, neither the purchase nor the sale of Common Stock acquired under the 1999 Stock Purchase Plan will have any tax consequences to the Company except that the Company will be entitled to a business-expense deduction with respect to any ordinary compensation income recognized by a participant upon making a Disqualifying Disposition. Any such deduction will be subject to the limitations of Section 162(m) of the Code. Board Recommendation The Board of Directors believes that the 1999 Stock Purchase Plan is in the best interests of the Company and its stockholders and recommends that the stockholders vote FOR the adoption of the 1999 Stock Purchase Plan. -25- PROPOSAL 4 - PROPOSED APPROVAL OF THE 1999 STOCK INCENTIVE PLAN On March 16, 1999, the Board of Directors of the Company adopted, subject to stockholder approval, the 1999 Stock Incentive Plan (the "1999 Incentive Plan"). The 1999 Incentive Plan replaces all presently authorized stock option plans, and no additional options may be granted under those plans if the stockholders approve the 1999 Incentive Plan. Up to 1,200,000 shares of Common Stock of the Company (subject to adjustment in the event of stock splits and other similar events) may be issued pursuant to awards granted under the 1999 Incentive Plan. The purpose of the 1999 Incentive Plan is to advance the interests of the Company's stockholders by enhancing the Company's ability to attract, retain and motivate persons who make (or are expected to make) important contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives and thereby better aligning the interests of such persons with those of the Company's stockholders. Summary of the 1999 Incentive Plan The following summary of the 1999 Incentive Plan is qualified in its entirety by reference to the 1999 Incentive Plan. Description of Awards The 1999 Incentive Plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Code, nonstatutory stock options and restricted stock awards (collectively "Awards"). Incentive Stock Options and Nonstatutory Stock Options. The 1999 Incentive Plan authorizes the Board to determine the number of shares of Common Stock to be covered by each option, the exercise price of each option and the conditions and limitations applicable to the exercise of each option grant, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. Currently, under the Code, incentive stock options and options intended to qualify as performance-based compensation under Section 162(m) of the Code may not be granted at an exercise price less than the fair market value of the Common Stock on the date of grant (or less than 110% of the fair market value in the case of incentive stock options granted to optionees holding more than 10% of the voting power of the Company). No option will be granted for a term in excess of ten years. The 1999 Incentive Plan permits the Board to determine the manner of payment of the exercise price of options, including through payment by cash, check or in connection with a "cashless exercise" through a broker, by surrender to the Company of shares of Common Stock, by delivery to the Company of a promissory note or by any other lawful means. -26- Restricted Stock Awards. The Board may grant Awards entitling recipients to acquire shares of Common Stock, subject to the right of the Company to repurchase all or part of such shares at their issue price or other stated or formula price (or to require forfeiture of such shares if issued at no cost) from the recipient in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Board for such Award. Stock Available for Awards Subject to adjustment, Awards may be made under the 1999 Incentive Plan for up to 1,200,000 shares of Common Stock. If any Award expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part or results in any Common Stock not being issued, the unused Common Stock covered by such Award shall again be available for the grant of Awards under the 1999 Incentive Plan, subject, however, in the case of incentive stock options, to any limitation required under the Code. Shares issued under the 1999 Incentive Plan may consist in whole or in part of authorized but unissued shares or treasury shares. Eligibility to Receive Awards All of the Company's employees, officers, directors, consultants and advisors (and any individuals who have accepted an offer for employment) are eligible to be granted Awards under the 1999 Incentive Plan. Subject to adjustment, the maximum number of shares of Common Stock with respect to which Awards may be granted to any participant under the 1999 Incentive Plan shall be 300,000 per calendar year. This per-participant limit described shall be construed and applied consistently with Section 162(m) of the Code. As of March 1, 1999, approximately 230 persons were eligible to receive Awards under the 1999 Incentive Plan, including the Company's four executive officers and seven non-employee directors. The granting of Awards under the 1999 Incentive Plan is discretionary and the Company cannot now determine the number or type of Awards to be granted in the future to any person or group. Administration The 1999 Incentive Plan is administered by the Compensation and Stock Option Committee who then recommends awards to the Board of Directors for approval. The Board has authority to grant Awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the 1999 Incentive Plan as it shall deem advisable. Pursuant to the terms of the 1999 Incentive Plan, the Board of Directors may delegate authority under the 1999 Incentive Plan to one or more committees of the Board, and subject to certain limitations, to one or more executive -27- officers of the Company. Subject to any applicable limitations contained in the 1999 Incentive Plan, the Board of Directors, or any committee or executive officer to whom the Board delegates authority, as the case may be, selects the recipients of Awards and determines (i) the number of shares of Common Stock covered by options and the dates upon which such options become exercisable, (ii) the exercise price of options, (iii) the duration of options, and (iv) the number of shares of Common Stock subject to any restricted stock or other stock-based Awards and the terms and conditions of such Awards, including conditions for repurchase, issue price and repurchase price. The Board of Directors may make appropriate adjustments in connection with the 1999 Incentive Plan and any outstanding Awards to reflect stock dividends, stock splits and other certain events that affect the Company's capitalization. In the event of a merger, liquidation or other Acquisition Event (as defined in the 1999 Incentive Plan), the Board of Directors is authorized to provide for outstanding options or other stock-based Awards to be assumed or substituted for, to accelerate the Awards to make them fully exercisable prior to consummation of the Acquisition Event, or to provide for a cash-out of the value of any outstanding options. Upon the occurrence of an Acquisition Event in the case of restricted stock, the rights of the Company shall inure to the benefit of the Company's successor. If any Award expires or is terminated, surrendered, canceled or forfeited, the unused shares of Common Stock covered by such Award will again be available for grant under the 1999 Incentive Plan. Amendment or Termination No Award may be made under the 1999 Incentive Plan after March 16, 2009, but Awards previously granted may extend beyond that date. The Board may amend, modify or terminate any outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, and converting an incentive stock option to a nonstatutory stock option. The Board may also amend, suspend or terminate the 1999 Incentive Plan or any portion thereof at any time, provided that, to the extent required by Section 162(m) of the Code, no Award granted to a participant designated as subject to Section 162(m) by the Board after the date of such amendment shall become exercisable, realizable or vested, as applicable to such Award (to the extent that such amendment to the 1999 Incentive Plan was required to grant such Award to a particular participant), unless and until such amendment shall have been approved by the Company's stockholders as required by Section 162(m) (including the vote required under Section 162(m)). Federal Income Tax Consequences The following is a summary of the United States federal income tax consequences that generally will arise with respect to Awards granted under the 1999 Incentive Plan and with respect to the sale of Common Stock acquired under the 1999 Incentive Plan. -28- Incentive Stock Options In general, a participant will not recognize taxable income upon the grant or exercise of an incentive stock option. Instead, a participant will recognize taxable income with respect to an incentive stock option only upon the sale of Common Stock acquired through the exercise of the option ("ISO Stock"). The exercise of an incentive stock option, however, may however, subject the participant to the alternative minimum tax. Generally, the tax consequences of selling ISO Stock will vary with the length of time that the participant has owned the ISO Stock at the time it is sold. If the participant sells ISO Stock after having owned it for at least two years from the date the option was granted (the "Grant Date") and one year from the date the option was exercised (the "Exercise Date"), then the participant will recognize long-term capital gain in an amount equal to the excess of the sale price of the ISO Stock over the exercise price. If the participant sells ISO Stock for more than the exercise price prior to having owned it for at least two years from the Grant Date and one year from the Exercise Date (a "Disqualifying Disposition"), then all or a portion of the gain recognized by the participant will be ordinary compensation income and the remaining gain, if any, will be a capital gain. This capital gain will be a long-term capital gain if the participant has held the ISO Stock for more than one year prior to the date of sale. If a participant sells ISO Stock for less than the exercise price, then the participant will recognize capital loss in an amount equal to the excess of the exercise price over the sale price of the ISO Stock. This capital loss will be a long-term capital loss if the participant has held the ISO Stock for more than one year prior to the date of sale. Nonstatutory Stock Options As in the case of an incentive stock option, a participant will not recognize taxable income upon the grant of a nonstatutory stock option. Unlike the case of an incentive stock option, however, a participant who exercises a nonstatutory stock option generally will recognize ordinary compensation income in an amount equal to the excess of the fair market value of the Common Stock acquired through the exercise of the option ("NSO Stock") on the Exercise Dateexercise date over the exercise price. With respect to any NSO Stock, a participant will have a tax basis equal to the exercise price plus any income recognized upon the exercise of the option. Upon selling NSO Stock, a participant generally will recognize capital gain or -29- loss in an amount equal to the excess ofdifference between the sale price of the NSO Stock overand the participant's tax basis in the NSO Stock. This capital gain or loss will be a long-term capital gain or loss if the participant has held the NSO Stock for more than one year prior to the date of the sale. 14 Restricted Stock Awards A participant will not recognize taxable income upon the grant of a restricted stock Award, unless the participant makes an election under Section 83(b) of the Code (a "Section 83(b) Election"). If the participant makes a Section 83(b) Election within 30 days of the date of the grant, then the participant will recognize ordinary compensation income, for the year in which the Award is granted, in an amount equal to the difference between the fair market value of the Common Stock at the time the Award is granted and the purchase price paid for the Common Stock. If a Section 83(b) Election is not made, the participant will recognize ordinary compensation income, at the time that the forfeiture provisions or restrictions on transfer lapse, in an amount equal to the difference between the fair market value of the Common Stock at the time of such lapse and the original purchase price paid for the Common Stock. The participant will have a basis in the Common Stock acquired equal to the sum of the price paid and the amount of ordinary compensation income recognized. Upon the disposition of the Common Stock acquired pursuant to a restricted stock Award, the participant will recognize a capital gain or loss in an amount equal to the difference between the sale price of the Common Stock and the participant's basis in the Common Stock. This capital gain or loss will be a long-term capital gain or loss if the shares are held for more than one year. For this purpose, the holding period shall begin just after the date on which the forfeiture provisions or restrictions lapse if a Section 83(b) Election is not made or just after the Award is granted if a Section 83(b) Election is made. Tax Consequences to the Company The grant of an optionAward under the 19911999 Incentive Plan will have no tax consequences to the Company. Moreover, in general, neither the exercise of an incentive stock option nor the sale of any Common Stock acquired under the 19911999 Incentive Plan will have any tax consequences to the Company. The Company generally will be entitled to a business-expense deduction, however, with respect to any ordinary compensation income recognized by a participant under the 19911999 Incentive Plan, including in connection with a restricted stock Award or as a result of the exercise of a nonstatutory stock option or a Disqualifying Disposition. Any such deduction will be subject to the limitations of Section 162(m) of the Code. The Company will have a withholding obligation with respect to ordinary compensation income recognized by participants with respect to NSOs under the 1991 Plan who are employees or otherwise subject to withholding. BOARD RECOMMENDATION-30- Board Recommendation The Board of Directors believes that the amendment toapproval of the 19911999 Incentive Plan increasing the number of shares of Common Stock authorized for issuance from 2,600,000 to 3,100,000 shares is in the best interests of the Company and its stockholders and therefore recommends that the stockholders vote FOR the amendment.adoption of the 1999 Incentive Plan. PROPOSAL 3 --5 - RATIFICATION OF THE APPOINTMENT OF AUDITORS The Board of Directors has selected PricewaterhouseCoopers LLP as auditors of the Company for the fiscal year ending December 31, 1998,1999, subject to ratification by stockholders at the Meeting. If this proposal is not approved at the Meeting, the Board of Directors will reconsider this selection. A representative of PricewaterhouseCoopers LLP is expected to be present at the Meeting to respond to appropriate questions, and to make a statement if he or she so desires. On July 23, 1997, the Company was informed by Coopers & Lybrand L.L.P., who werehad acted as certifying accountants for the Company's independent accountantsCompany for the years ended December 31, 1996 and 1995, informed the Company that it was resigning as the Company's auditors effective as of that date. Coopers & Lybrand L.L.P.'sNone of the prior certifying accountants' reports on the Company's 1996 and 1995 financial statements for the past two years contained noan adverse opinion or disclaimer of opinion, and were notor was qualified or modified as to uncertainty, audit scope or accounting principle.principles. The decision to terminate the client-auditor relationship between the Company and Coopers & Lybrand L.L.P. was madeinitiated by Coopers & Lybrand L.L.P. and accordingly neither the Company's Board of Directors nor its Audit Committee participated in thea decision to change the Company's independent accountants. ForAt the end of the fiscal years ended December 31, 1996 and 1995 the Company iswas unaware of any disagreementsdisagreement with Coopers & Lybrand L.L.P. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which disagreements would have caused Coopers & Lybrand L.L.P. to make reference theretoto the subject matter in theirconnection with any report on the financial statements for such periods.it has issued. On September 8, 1997, the Company engaged Price Waterhouse LLP to act as itsthe Company's independent accountants.certified public accountant. The Company did not consult with Price Waterhouse LLP during the fiscal years ended December 31,1995 and 1996, and 1995 andor 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. 15On July 1, 1998 Price Waterhouse LLP and Coopers & Lybrand L.L.P. merged to become PricewaterhouseCoopers LLP. The Company has decided to retain the new entity, PricewaterhouseCoopers LLP, as its auditors. -31- STOCKHOLDER PROPOSALS FOR 19992000 ANNUAL MEETING Any proposal that a stockholder intends to present at the 19992000 Annual Meeting of Stockholders must be submitted to the Secretary of the Company at its offices, Wheat Road and Lincoln Avenue, Buena, New Jersey 08310, no later than Thursday, December 17, 1998,16, 1999, in order to be considered for inclusion in the Proxy Statement relating to that meeting. If a stockholder of the Company wishes to present a proposal before the 19992000 Annual Meeting but does not wish to have the proposal considered for inclusion in the Company's proxy statement and proxy card, such stockholder must also give written notice to the Secretary of the Company at the address noted above. The Secretary must receivehas not received notice of such noticematter prior to March 2, 1999. If a stockholder fails to provide timely notice of a proposal to be presented at the 1999 Annual Meeting, the proxies designated by the Board of Directors ofTuesday, February 29, 2000, the Company willshall have discretionary authority to vote on any such proposal.matter, if the Company includes a specific statement in the proxy statement or form of proxy to the effect that it has not received such notice in a timely fashion. OTHER MATTERS The Board of Directors knows of no other business which will be presented for consideration at the Meeting other than that described above. However, if any other business should come before the Meeting, it is the intention of the persons named in the enclosed Proxy to vote, or otherwise act, in accordance with their best judgment on such matters. The Company will bear the costs of soliciting proxies. In addition to solicitations by mail, the Company's directors, officers and regular employees may, without additional remuneration, solicit proxies by telephone, telegraph, facsimile and personal interviews. The Company will also request brokerage houses, custodians, nominees and fiduciaries to forward copies of the proxy material to those persons for whom they hold shares and request instructions for voting the Proxies. The Company will reimburse such brokerage houses and other persons for their reasonable expenses in connection with this distribution. THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS WILL ATTEND THE MEETING. WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. PROMPT RESPONSE WILL GREATLY FACILITATE ARRANGEMENTS FOR THE MEETING AND YOUR COOPERATION IS APPRECIATED. STOCKHOLDERS WHO ATTEND THE MEETING MAY VOTE THEIR STOCK PERSONALLY EVEN THOUGH THEY HAVE SENT IN THEIR PROXIES. By Order of the Board of Directors, ROBERTRobert E. MCDANIEL,McDaniel, Secretary August 28, 1998 16 APPENDIX A IGI, INC. 1991 STOCK OPTION PLAN 1. Purpose of Plan The purpose of this plan (the "Plan") is to encourage key employees, including officers, of IGI, Inc., a Delaware corporation, ("IGI") and any present or future subsidiary and parent of IGI (hereinafter collectively referred to as the "Company") to acquire shares of common stock of IGI, $.01 par value per share, (the "Common Stock") and thereby increase their proprietary interest in the Company's success and provide an added incentive to remain in the employ of the Company. It is also the purpose of the Plan to grant options to purchase Common Stock to Eligible Directors of IGI (as defined in Section 4 of the Plan) in order to enhance the Company's ability to attract and retain the services of such persons, to provide additional incentive to them and to encourage the highest level of performance by them by offering them a proprietary interest in the Company's success. The words parent and subsidiary shall be interpreted in accordance with Section 422A and Section 425 of the Internal Revenue Code of 1986, as from time to time amended (the "Code"). It is intended that options granted under the Plan shall constitute either "incentive stock options" within the meaning of Section 422A of the Code, or "non-qualified options," as determined by the Committee named in Section 3 of the Plan in its sole discretion and indicated on each form of option grant (the "Option Grant"), and the terms of the Plan and Option Grants shall be construed accordingly, provided, however, that Eligible Directors shall be granted only non-qualified options. 2. Shares Reserved under the Plan Subject to the adjustment provided in Section 9, the aggregate number of shares of Common Stock of IGI which may be issued and sold pursuant to options granted under the Plan shall not exceed 500,000 shares of Common Stock, which may be either authorized but unissued shares or treasury shares. If any options granted under the Plan shall terminate or expire without being fully exercised, the shares which have not been purchased will again become available for purposes of the Plan. 3. Administration The Plan shall be administered solely by a committee (the "Committee") consisting of not less than three (3) members of the Board of Directors of IGI (the "Board"). None of the members of the Committee shall be, or shall have been at any time within one year prior to the date of his appointment to the Committee, a person who in the opinion of counsel to the Company is not a A-1 "disinterested person" as such term is used in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Act"). The Committee shall be appointed by, and shall serve at the pleasure of, the Board of Directors. A majority of the members present at any meeting at which a quorum is present, and any acts approved in writing by all of the members of the Committee without a meeting, shall constitute the acts of the Committee. The Committee shall have the powers granted to it in Sections 3, 4, 5, 7, and 8 of this Plan. The Committee is authorized to interpret the Plan and, subject to the provisions of the Plan, to prescribe, amend, and rescind rules and regulations relating thereto. The Committee is further authorized, subject to the express provisions of the Plan, to alter or amend the form of Option Grant attached hereto and to make all other determinations necessary or advisable in the administration of the Plan. The interpretation and administration by the Committee of any provisions of the Plan and the Option Grant shall be final and conclusive on all persons having any interest therein. No member of the Committee or the Board shall be held liable for any action or determination made in good faith with respect to the Plan or any option granted thereunder. 4. Option Grants Options to purchase shares of Common Stock under the Plan may be granted to key employees (including officers and directors who are employees) of the Company. In selecting the employees to whom options will be granted and in deciding how many shares of Common Stock will be subject to each option, the Committee shall give consideration to the importance of an employee's duties, to his experience with the Company, to his future value to the Company, to his present and potential contribution to the success of the Company, and to such other factors as the Committee may deem relevant. Subject to the express provisions of the Plan and the form of Option Grant incorporated herein by reference as from time to time altered or amended, the Committee shall have authority to determine with respect to each Option Grant executed and delivered to a key employee the number of installments, the number of shares of Common Stock in each installment, and the exercise dates, and, to the extent not inconsistent with the applicable provisions of the Code, if any, may specify additional restrictions and conditions for any Option Grant executed and delivered to a key employee. Each incentive stock option shall expire not later than ten years from the date of the grant of such option. Except as provided in Section 7 below, no incentive stock option may be granted to any employee who, at the time such option is granted, owns stock possessing more than 10 percent of the A-2 total combined voting power of all classes of stock of the Company within the meaning of Section 422A of the Code. The date of grant of an option to a key employee under the Plan shall be the date the Committee votes to grant the option, but no optionee who is a key employee shall have the right to exercise his option until the Company has executed and delivered the Option Grant to such optionee. Each option granted under the Plan to a key employee shall be evidenced by and subject to the terms and conditions of the Option Grant which is incorporated into the Plan by reference as from time to time altered or amended. No stock option may be transferred by the optionee, other than by will or the laws of descent and distribution or a distribution pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act or the rules thereunder. A stock option can be exercised during the optionee's life only by him, or by any person to whom such option may have been transferred as described in this paragraph. "Eligible Directors" shall mean directors who are directors on the date of grant (and, if applicable, on the date of amendment of a grant), who are not employees of the Company and who are not eligible to participate under any other Company stock related plan unless in the opinion of counsel to the Company such participation would not impair the status of such Eligible Director as a "disinterested person" within the meaning of Rule 16b-3 promulgated under the Act. Sixty days after his or her initial election as a director by either the Board of Directors or the Company's shareholders, each Eligible Director shall be granted a non-qualified option to purchase 20,000 shares of Common Stock, and each Eligible Director who is a director on the last business day of calendar 1992 shall on such day be granted a non-qualified option to purchase 10,000 shares of Common Stock, and each Eligible Director who is a director on the last business day of calendar 1993 shall on such day be granted a non-qualified option to purchase 10,000 shares of Common Stock. The date of grant of an option to an Eligible Director under the Plan shall be the applicable day referred to immediately above. 5. Option Plan The price per share at which each option granted under the Plan to a key employee may be exercised shall be determined by the A-3 Committee subject to the provisions of this Section 5. In the case of an incentive stock option, the exercise price shall not be less than the fair market value per share on the date of grant, as determined by the Committee in accordance with applicable provisions of the Code then in effect with respect to incentive stock options. In the case of a non-qualified option, the exercise price shall not be less that 50% of the fair market value per share on the date of grant, as so determined. The purchase price per share of Common Stock under each non-qualified option granted to an Eligible Director shall be the fair market value of such Common Stock as determined by the closing sales price of such Common Stock on the principal exchange on which such Common Stock is traded on the date of grant, or if there are no sales on such date, on the trading day next preceding the date of grant on which a sale took place, or, if the Common Stock is not so traded, then as determined by a principal market maker for such Common Stock selected by the Committee. In no event shall the option price per share for any option under the Plan be less than the par value per share. 6. Limitation on Amount The aggregate fair market value (determined at the time the option is granted) of the stock with respect to which incentive stock options are exercisable for the first time by an individual during any calendar year under all plans of the Company shall not exceed $100,000. 7. Special Rule for 10 Percent Shareholders The Committee may grant incentive stock options under this Plan to persons who own more than 10 percent of the combined voting stock of the Company if (i) at the time of the Option Grant the price per share at which the option may be exercised is at least 110 percent of the fair market value of the stock subject to the option and (ii) such option is not exercisable after the expiration of five years from the date such option is granted. 8. Non-Qualified Options Notwithstanding the provisions of Sections 4, 5, 6 and 7 of this Plan, the Committee may grant options which in one or more respects do not meet the requirements for incentive stock options established by Section 422A of the Code. The Committee shall indicate on each Option Grant whether an incentive stock option within the meaning of Section 422A of the Code or a non-qualified option is thereby granted, provided, however, that Eligible Directors shall be granted only non-qualified options. A-4 Except as otherwise provided in this Plan, the Committee, in its sole discretion, shall establish the terms and conditions for each non-qualified option which it grants. Such terms and conditions may, but need not, include some or all of the provisions of Section 4, 5, 6 and 7 of this Plan with respect to incentive stock options. If the Committee grants an option which in all respects meets the requirements for incentive stock options it may nonetheless designate such option a non-qualified option on the Option Grant, in which case it shall be deemed not to be an incentive stock option. Each option granted under the Plan to an Eligible Director shall be evidenced by and subject to the terms and conditions of an Option Grant. Notwithstanding the provisions of the second paragraph of this Section 8, each Option Grant executed and delivered to an Eligible Director shall contain the following terms and conditions. Each non-qualified option granted to an Eligible Director shall expire ten years from the date of grant of such option, and shall be exercisable in full beginning on the date which is six months after the date of grant thereof and not before. Each Eligible Director to whom an option is granted may exercise such option from time to time, in whole or in part, during the period that it is exercisable, by payment of the option price of each share purchased, in cash or by delivery of other shares of the Company's Common Stock owned by the Eligible Director with a fair market value equal to the exercise price of the optioned shares purchased, or in any combination of the two forms of payment. Options granted to an Eligible Director shall cease to be exercisable at the earlier of their expiration or three years after the date such Director ceases to be a director for any reason. If an Eligible Director ceases to be a director on account of his death, any non-qualified option previously granted to him, whether or not exercisable at the date of death, may be exercised by his executor, administrator or the person or persons to whom his rights under the option shall pass by will or the applicable laws of descent and distribution, at any time within three years after the date of death, but in no event after the expiration of the option. In the event of an exercise of an option granted to an Eligible Director, the shares of Common Stock subject thereto will be acquired for investment and not with a view to distribution thereof unless there shall be an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), with respect thereto. In the event that the Company, upon the advice of counsel, deems it necessary to list upon official notice of issuance shares to be issued pursuant to the Plan on a national securities exchange or to register under the 1933 Act or other applicable federal or state statute any shares to be issued pursuant to the Plan, or to qualify any such shares for exemption from the registration requirements of the 1933 Act under the Rules and Regulations of the Securities and A-5 Exchange Commission or for similar exemption under state law, then the Company shall notify each Eligible Director to that effect and no shares of Common Stock subject to an option shall be issued until such registration, listing or exemption has been obtained. The Company shall make prompt application for any such registration, listing or exemption pursuant to federal or state law or rules of such securities exchange which it deems necessary and shall make reasonable efforts to cause such registration, listing or exemption to become and remain effective. Nothing in this Plan or in the Option Grant will confer upon any Eligible Director the right to continue as a director of IGI. The shares of Common Stock issued on exercise of the option shall be subject to any restrictions on transfer then in effect pursuant to the Certificate of Incorporation or By-laws of the Company. 9. Adjustment of Shares Reserved Under the Plan The aggregate number and kind of shares reserved under the Plan, the maximum number of shares as to which options may be granted to any individual and the option price per share shall be appropriately adjusted by the Board in the event of any recapitalization of the Company, but no adjustment in the option price shall be made which would reduce the option price per share to less than the par value per share. 10. Dissolution or Reorganization Prior to a dissolution, liquidation, merger, consolidation, or reorganization of the Company (the "Event"), the Board may decide to terminate each outstanding option. If the Board so decides, such option shall terminate as of the effective date of the Event, but the Board shall suspend the exercise of all outstanding options a reasonable time prior to the Event, giving each optionee not less than fourteen days' written notice of the date of suspension, prior to which an optionee may purchase in whole or in part the shares available to him as of the date of receipt of the notice. If the Event is not consummated, the suspension shall be removed and all options shall continue in full force and effect. 11. Amendment and Termination of Plan The Board may amend, suspend, or terminate the Plan, including the form of Option Grant incorporated herein by reference. No such action, however, may, without approval or ratification by the shareholders, increase the maximum number of shares reserved under the Plan except as provided in Section 9, alter the class or classes of employees eligible for options, change the number of shares of Common Stock subject to options to be granted to Eligible Directors or the exercise price thereof A-6 (other than pursuant to Section 9 of this Plan), or the date of grant or the terms and conditions expressly set forth in Section 8 of this Plan, with respect to options granted to Eligible Directors, or make any other change which, pursuant to the Code or regulations thereunder or Section 16(b) of the Act and regulations promulgated thereunder, requires action' by the shareholders. No such action may, without the consent of the holder of the option, alter or impair any option previously granted. The provisions of the Plan which relate to the grant of options to Eligible Directors shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder. In any event, the Plan shall terminate 10 years from the date of adoption by the Board of Directors, or if earlier, from the date of approval by the shareholders. Any shares remaining under the Plan at the time of termination which are not subject to outstanding options and any shares which thereafter become available because of the expiration or termination of an option shall cease to be reserved for purposes of the Plan. 12. Right to Terminate Employment Nothing contained herein or in any Option Grant executed pursuant hereto shall restrict the right of the Company to terminate the employment of any optionee at any time. 13. Date of Adoption The date of adoption of this Plan by the Board and the Plan's effective date is March 13, 1991. 14. Date of Approval The date of approval of this Plan by the shareholders is May 9, 1991. IGI, INC. KEY EMPLOYEE OPTION GRANT This incentive stock option/non-qualified option, granted as of , 19 (the "Option") is granted by IGI, Inc. ("IGI") to (the "Optionee"), an employee of IGI or a parent or subsidiary of IGI (hereinafter collectively referred to as the "Company"). A-7 1. Shares Subject to Option Pursuant to the provisions of the IGI, Inc. 1991 Stock Option Plan, as amended from time to time (the "Plan"), IGI hereby grants to the Optionee an option to purchase shares of its Common Stock ($.01 par value) (the "Optioned Shares") at a price of $ per share, in accordance with and subject to all the terms and conditions of the Plan and subject to the terms and conditions hereinafter set forth. The Plan and any amendments are hereby incorporated by reference and made a part hereof. 2. Term and Exercise of Option Except as otherwise provided in the Plan, or in this Option, the Option shall terminate at the close of business years from the date of grant and may be exercised only by the Optionee or, to the extent provided in Section 3(b) hereof, by his legal representative. While the Option is effective and the Optionee continues to be employed by the Company, the Optioned Shares shall become available for purchase by the Optionee in installments on the following dates: Date Number of Shares Unpurchased portions of available installments may be accumulated and subsequently purchased by the Optionee. The option price of each share purchased shall be paid in cash or by delivery of other shares of the Company's Common Stock owned by the Optionee with a fair market value equal to the exercise price of the Optioned Shares to be purchased, or in any combination of the two forms of payment. If the Option is not an incentive stock option within the meaning of Section 422A of the Internal Revenue Code of 1986, as from time to time amended, then in addition to payment of the option price for each share purchased, the Optionee shall pay the amount of federal and state withholding taxes determined by the Committee named in Section 3 of the Plan (or by the Committee's designate) to be owing with respect to the compensation income that the Optionee will realize upon each share purchased. The Company, upon fulfillment of the requirements for exercise, including receipt of the payment of the purchase price A-8 and all applicable withholding taxes, shall deliver the shares purchased hereunder to the Optionee. 3. Terms and Conditions of Exercise Each exercise and purchase of shares pursuant to the Option shall be subject to the following terms and conditions: (a) The Optionee shall have remained in the continuous employ of the Company from the date of the Option Grant until the date of exercise, provided that, if the Optionee's employment terminates for any cause other than death, the Optionee may purchase in whole or in part within three months after termination of employment the shares available to him on his termination date provided that the expiration date of the Option as to such shares shall not have occurred. (b) If the Optionee dies, then his legal representative or the person or persons to whom his rights under the Option shall pass by will or by the applicable laws of descent and distribution shall be entitled, subject to the condition that no Option shall be exercisable after the expiration of ten years from the date it was granted, within twelve months after the date of his death, to exercise the Option to the extent that the Optionee would have been entitled to exercise the Option on the date of his death. (c) The Optionee shall hold the Optioned Shares for investment and not with a view to, or for resale in connection with, any public distribution of such shares, and if requested, shall deliver to the Company appropriate certificates to that effect. This restriction shall terminate upon the registration of such shares under federal and state securities laws. (d) In the event that the Company, upon the advice of counsel, deems it necessary to list upon official notice of issuance any shares to be issued pursuant to the Plan on a national securities exchange or to register under the Securities Act of 1933 or other applicable federal or state statute any shares to be issued pursuant to the Plan, or to qualify any such shares for exemption from the registration requirements of the Securities Act of 1933 under the Rules and Regulations of the Securities and Exchange Commission or for similar exemption under state law, then the Company shall notify the Optionee to that effect and no Optioned Shares shall be issued until such registration, listing or exemption has been obtained. The Company shall make prompt application for any such registration, listing or exemption pursuant to federal or state law or rules of such securities exchange A-9 which it deems necessary and shall make reasonable efforts to cause such registration, listing or exemption to become and remain effective. 4. Option Non-Transferable The Option may not be transferred by the Optionee or by operation of law other than by will or by the laws of descent and distribution, or by a distribution pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act or the rules thereunder. It may be exercised during the lifetime of the Optionee only by him or by any person to whom the Option may have been transferred as described in this paragraph. 5. Right to Terminate Nothing contained in the Option Grant shall restrict the right of the Company to terminate the employment of the Optionee at any time. 6. Dissolution or Reorganization Prior to dissolution, liquidation, merger, consolidation, or reorganization of the Company (the "Event"), the Board may decide to terminate each outstanding option. If the Board so decides, each option shall terminate as of the effective date of the Event, but the Board shall suspend the exercise of all outstanding options a reasonable time prior to the Event, giving each Optionee not less than fourteen days' written notice of the date of suspension, prior to which an Optionee may purchase in whole or in part the Optioned Shares available to him as of the date of receipt of the notice. If the Event is not consummated, the suspension shall be removed and all options shall continue in full force and effect. 7. Restrictions on Transfer of Stock The shares of stock issued on exercise of the Option shall be subject to any restrictions on transfer then in effect pursuant to the Certificate of Incorporation or By-laws of the Company and to any other restrictions or provisions attached hereto and made a part hereof or set forth in any contract or agreement binding on the Optionee. 8. Notice Concerning Disposition of Shares If the Option granted hereby is an incentive stock option, any disposition by the Optionee of Optioned Shares A-10 purchased under the Option within two years from the date of grant or within one year after their transfer to the Optionee will deprive the Optionee of certain tax benefits with respect to the Option which might otherwise be available. Optionees are urged to review the Prospectus for the offering under which the Option is granted for a more detailed discussion of the federal tax consequences of such a disposition under current law. IGI, INC. (Corporate Seal) By:___________________________ JOHN P. GALLO, President Attest:_______________________ Secretary A-11 IGI, INC. AMENDMENT NO. 1 IGI, INC. 1991 STOCK OPTION PLAN The IGI, Inc. 1991 Stock Option Plan (the "Plan") is hereby amended as set forth below: 1. Increase in Authorized Shares Section 2 of the Plan is hereby amended by deleting the first sentence thereof and substituting the following therefor: "Subject to the adjustment provided in Section 9, the aggregate number of shares of Common Stock of IGI which may be issued and sold pursuant to options granted under the Plan shall not exceed 1,200,000 shares of Common Stock, which may be either authorized but unissued shares or treasury shares." 2. Eligible Director Shares The penultimate paragraph of Section 4 of the Plan is hereby amended by adding the following sentence to the end thereof: "In addition to the foregoing, each Eligible Director who is a director on the last business day of calendar 1994 shall on such day be granted a non-qualified option to purchase 10,000 shares of Common Stock, each Eligible Director who is a director on the last business day of calendar 1995 shall on such day be granted a non-qualified option to purchase 10,000 shares of Common Stock, and each Eligible Director who is a director on the last business day of calendar 1996 shall on such day be granted a non-qualified option to purchase 10,000 shares of Common Stock." 3. Transferability of Shares The first sentence of the paragraph in Section 4 of the Plan immediately preceding the paragraph defining "Eligible Directors" is hereby deleted and the following shall be substituted in lieu thereof: "No stock option may be transferred by the optionee, other than by will or the laws of descent and distribution or, in the case of non-qualified options, a distribution pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act or the rules thereunder." A-12 4. In all other respects, the Plan shall remain in full force and effect. Adopted by the Board of Directors on March 11, 1993 Adopted by the Stockholders on May 12, 1993 A-13 IGI, INC. AMENDMENT NO. 2 IGI, INC. 1991 STOCK OPTION PLAN The IGI, Inc. 1991 Stock Option Plan, as amended (the "Plan"), is hereby amended as set forth below: 1. Section 1 of the Plan is hereby deleted in its entirety and replaced by the following: "The purpose of this plan (the "Plan") is to encourage key employees, including officers, of IGI, Inc., a Delaware corporation ("IGI"), and any present or future subsidiary and parent of IGI (hereinafter collectively referred to as the "Company") to acquire shares of common stock of IGI, $.01 par value per share (the "Common Stock"), and thereby increase their proprietary interest in the Company's success and provide an added incentive to remain in the employ of the Company. It is also the purpose of the Plan to grant options to purchase Common Stock to Eligible Directors of IGI (as defined in Section 4 of the Plan) and consultants and advisors to the Company in order to enhance the Company's ability to attract and retain the services of such persons, to provide additional incentive to them and to encourage the highest level of performance by them by offering them a proprietary interest in the Company's success. The words parent and subsidiary shall be interpreted in accordance with Section 422A and Section 425 of the Internal Revenue Code of 1986, as from time to time amended (the "Code"). It is intended that options granted under the Plan shall constitute either "incentive stock options" within the meaning of Section 422A of the Code, or "non-qualified options," as determined by the Committee named in Section 3 of the Plan in its sole discretion and indicated on each form of option grant (the "Option Grant"), and the terms of the Plan and Option Grants shall be construed accordingly, provided, however, that Eligible Directors and consultants and advisors to the Company shall be granted only non-qualified options." A-14 2. Section 2 of the Plan is hereby deleted in its entirety and replaced by the following: "Subject to the adjustment provided in Section 9, the aggregate number of shares of Common Stock of IGI which may be issued and sold pursuant to options granted under the Plan shall not exceed 1,900,000 shares of Common Stock, which may be either authorized but unissued shares or treasury shares. Subject to the adjustment provided in Section 9, the maximum number of shares with respect to which options may be granted to any person under the Plan shall not exceed 100,000 shares of Common Stock during any calendar year during the term of the Plan. For the purpose of calculating such maximum number, (a) an option shall continue to be treated as outstanding notwithstanding its repricing, cancellation or expiration and (b) the repricing of an outstanding option or the issuance of a new option in substitution for a cancelled option shall be deemed to constitute the grant of a new additional option, separate from the original grant that is repriced or cancelled. If any options granted under the Plan shall terminate or expire without being fully exercised, the shares which have not been purchased will again become available for purposes of the Plan." 3. The first paragraph of Section 4 of the Plan is hereby deleted in its entirety and replaced by the following: "Options to purchase shares of Common Stock under the Plan may be granted to key employees (including officers and directors who are employees) of the Company and consultants and advisors to the Company. In selecting the individuals to whom options will be granted and in deciding how many shares of Common Stock will be subject to each option, the Committee shall give consideration to the importance of an optionee's duties and responsibilities, to his experience with the Company, to his future value to the Company, to his present and potential contribution to the success of the Company, and to such other factors as the Committee may deem relevant. Subject to the express provisions of the Plan and the form of Option Grant incorporated herein by reference as from time to time altered or amended, the Committee shall have authority to determine with respect to each Option Grant executed and delivered to an optionee the number of installments, the number of shares of Common Stock in each installment, and the exercise dates, and, to the extent not inconsistent with the applicable provisions of the Code, if any, may specify additional restrictions and conditions for any Option Grant executed and delivered to an optionee. Each incentive stock option shall expire not later than ten years from the date of the grant of such option." A-15 4. The third paragraph of Section 4 of the Plan is hereby deleted in its entirety and replaced by the following: "The date of grant of an option to an optionee under the Plan (other than an Eligible Director) shall be the date the Committee votes to grant the option, but no such optionee shall have the right to exercise his option until the Company has executed and delivered the Option Grant to such optionee. Each option granted under the Plan to an optionee (other than an Eligible Director) shall be evidenced by and subject to the terms and conditions of the Option Grant which is incorporated into the Plan by reference as from time to time altered or amended." 5. The first sentence of Section 5 of the Plan is hereby deleted in its entirety and replaced by the following: "The price per share at which each option granted under the Plan to an optionee (other than an Eligible Director) may be exercised shall be determined by the Committee subject to the provisions of this Section 5." 6. The last sentence of the first paragraph of Section 8 of the Plan is hereby deleted in its entirety and replaced by the following: "The Committee shall indicate on each Option Grant whether an incentive stock option within the meaning of Section 422A of the Code or a non-qualified option is thereby granted, provided, however, that Eligible Directors and consultants and advisors to the Company shall be granted only non-qualified options." 7. In all other respects, the Plan shall remain in full force and effect. Adopted by the Board of Directors on March 22, 1995 Adopted by the stockholders on May 9, 1995 A-16 IGI, INC. AMENDMENT NO. 3 IGI, INC. 1991 STOCK OPTION PLAN The IGI, Inc. 1991 Stock Option Plan, as amended (the "Plan"), is hereby amended as set forth below: 1. Section 2 of the Plan is hereby amended by deleting the first sentence thereof and substituting the following therefor: "Subject to the adjustment provided in Section 9, the aggregate number of shares of Common Stock of IGI which may be issued and sold pursuant to options granted under the Plan shall not exceed 2,600,000 shares of Common Stock, which may be either authorized but unissued shares or treasury shares." 2. Section 3 of the Plan is hereby amended by deleting the second sentence thereof. 3. The first paragraph of Section 4 of the Plan is hereby amended by deleting the first sentence thereof and substituting the following therefor: "Options to purchase shares of Common Stock under the Plan may be granted to key employees (including officers and directors who are employees) of the Company and consultants and advisors to the Company and, in accordance with the formula provisions set forth in Section 4 of the Plan, shall be granted to Eligible Directors (as defined below)." 4. The fourth paragraph of Section 4 of the Plan is hereby amended by deleting the first sentence thereof and substituting the following therefor: "Except as the Committee may otherwise determine or provide in an Option Grant, options shall not be sold, assigned, transferred, pledged or otherwise encumbered by the optionee, either voluntarily or by operation of law, except by will or the laws of descent and distribution." 5. The fifth paragraph of Section 4 of the Plan is hereby deleted in its entirety and replaced by the following: "'Eligible Directors' shall mean directors who are not employees of the Company on the date of grant." A-17 6. The last sentence of the penultimate paragraph of Section 4 of the Plan is hereby deleted in its entirety and replaced by the following: "In addition to the foregoing, each Eligible Director shall be granted a non-qualified option to purchase 10,000 shares of Common Stock on the last business day of each of calendar 1994, 1995, 1996, 1997, 1998 and 1999; provided, however, that he or she is then an Eligible Director on such date." 7. The word "Act" in the second sentence of Section 11 of the Plan is hereby amended to read "Securities Exchange Act of 1934, as amended,". 8. In all other respects, the Plan shall remain in full force and effect. Adopted by the Board of Directors on March 19, 1997 Adopted by the Stockholders on May 19, 1997 A-18 IGI, INC. AMENDMENT NO. 4 IGI, INC. 1991 STOCK OPTION PLAN The IGI, Inc. 1991 Stock Option Plan, as amended (the "Plan"), is hereby amended as set forth below: 1. Section 2 of the Plan is hereby amended by deleting the first sentence thereof and substituting the following therefor: "Subject to the adjustment provided in Section 9, the aggregate number of shares of Common Stock of IGI which may be issued and sold pursuant to options granted under the Plan shall not exceed 3,100,000 shares of Common Stock, which may be either authorized but unissued shares or treasury shares." 2. In all other respects, the Plan shall remain if full force and effect. Adopted by the Board of Directors on March 17, 1998April 14, 1999 -32- IGI, INC. PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD SEPTEMBER 24, 1998MAY 13, 1999 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY The undersigned, having received notice of the meeting and management's proxy statement therefor, and revoking all prior proxies, hereby appoint(s) Edward B. Hager and Paul P. Brountas,Robert E. McDaniel, and each of them singly, attorneys or attorney of the undersigned (with full power of substitution in them and each of them) for and in the name(s) of the undersigned to attend the Annual Meeting of Stockholders of IGI, Inc. (the "Company"), to be held on Thursday, September 24, 1998May 13, 1999 at 1:10:00 p.m.a.m. at the law offices of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts, and at any adjourned sessions thereof, and there to vote and act upon the following matters in respect of all shares of stock of the Company which the undersigned will be entitled to vote or act upon, with all the powers the undersigned would possess if personally present. THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE UNDERSIGNED. IF NO DIRECTION IS GIVEN WITH RESPECT TO ANY PROPOSAL, THIS PROXY WILL BE VOTED FOR SUCH PROPOSAL. PLEASE VOTE, DATE AND SIGN ON REVERSE SIDE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. Please sign this proxyProxy exactly as your name appears on the books of the Company. Joint owners should each sign personally. Trustees and other fiduciaries should indicate the capacity in which they sign, and where more than one name appears, a majority must sign. If a corporation, this signature should be that of an authorized officer who should state his or her title. HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS? | |[ ] PLEASE MARK VOTES AS IN THIS EXAMPLE THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED IN PROPOSAL 1 AND "FOR" PROPOSALS 2, 3, 4 AND 5. (1) Election of Directors | |Directors. [ ] For | |All Nominees [ ] Withhold | |[ ] For allAll Except Edward B. Hager, M.D., Jane E. Hager, David G. Pinosky, M.D., Constantine L. Hampers, M.D., Paul D. Paganucci, Terrence O'Donnell, Terrence D. Daniels and F. Steven Berg.Stephen J. Morris. NOTE: If you do not wish your shares voted "For" a particular nominee, mark the "For All Except" box and strike a line through the nominee's name.name(s) of the nominee(s). Your shares voted will be voted for the remaining nominee(s). (2) To approve an amendmentamendments to the Company's 1991 Stock Option Plan increasingCertificate of Incorporation, as amended, to (i) increase the number of authorized shares of Common Stock authorized for issuance from 2,600,00030,000,000 to 3,100,000.50,000,000 and (ii) authorize a new class of Preferred Stock consisting of 1,000,000 shares. For | |[ ] Against | |[ ] Abstain | |[ ] (3) To approve the adoption of the Company's 1999 Employee Stock Purchase Plan. For [ ] Against [ ] Abstain [ ] (4) To approve the adoption of the Company's 1999 Stock Incentive Plan. For [ ] Against [ ] Abstain [ ] (5) To ratify the appointment of PricewaterhouseCoopers LLP as the Company's independent auditors for the current fiscal year. For | |[ ] Against | |[ ] Abstain | | (4) IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.[ ] (6) In their discretion, the proxies are authorized to vote upon such other business as may properly come before the meeting or any adjournment thereof. Please be sure to sign and date this Proxy. Date: ----------------------- - ---------------------------------- ----------------------------_____________________ __________________________________________ __________________________ Stockholder sign here Co-owner sign here Appendix A IGI, INC. AMENDMENT TO CERTIFICATE OF INCORPORATION "FOURTH: The total number of shares of stock which the Corporation is authorized to issue is 51,000,000 shares, of which 50,000,000 shall be shares of Common Stock, $.01 par value per share, and 1,000,000 shall be shares of Series Preferred Stock, $.01 par value per share." The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation. A. COMMON STOCK. 1. General. The voting, dividend and liquidation rights of the holders of the Common Stock are subject to and qualified by the rights of the holders of the Preferred Stock of any series as may be designated by the Board of Directors upon any issuance of the Preferred Stock of any series. 2. Voting. The holders of the Common Stock are entitled to one vote for each share held at all meetings of stockholders (and written actions in lieu of meetings). There shall be no cumulative voting. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of Delaware. 3. Dividends. Dividends may be declared and paid on the Common Stock from funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding Preferred Stock. 4. Liquidation. Upon the dissolution or liquidation of the Corporation, whether voluntary or involuntary, holders of Common Stock will be entitled to receive all assets of the Corporation available for distribution to its stockholders, subject to any preferential rights of any then outstanding Preferred Stock. -A-1- B. PREFERRED STOCK. Preferred Stock may be issued from time to time in one of more series, each of such series to have such terms as stated or expressed herein and in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Corporation as hereinafter provided. Any shares of Preferred Stock which may be redeemed, purchased or acquired by the Corporation may be reissued except as otherwise provided by law. Different series of Preferred Stock shall not be construed to constitute different classes of shares for the purposes of voting by classes unless expressly provided. Authority is hereby expressly granted to the Board of Directors from time to time to issue the Preferred Stock in one or more series, and in connection with the creation of any such series, by resolution or resolutions providing for the issue of the shares thereof, to determine and fix such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation thereof, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be stated and expressed in such resolutions, all to the full extent now or hereafter permitted by the General Corporation Law of Delaware. Without limiting the generality of the foregoing, the resolutions providing for issuance of any series of Preferred Stock may provide that such series shall be superior or rank equally or be junior to the Preferred Stock of any other series to the extent permitted by law. Except as otherwise specifically provided in this Certificate of Incorporation, no vote of the holders of the Preferred Stock or Common Stock shall be a prerequisite to the issuance of any shares of any series of the Preferred Stock authorized by and complying with the conditions of this Certificate of Incorporation, the right to have such vote being expressly waived by all present and future holders of the capital stock of the Corporation. -A-2- Appendix B IGI, Inc. 1999 EMPLOYEE STOCK PURCHASE PLAN The purpose of this 1999 Employee Stock Purchase Plan (the "Plan") is to provide eligible employees of IGI, Inc. (the "Company") and certain of its subsidiaries with opportunities to purchase shares of the Company's common stock, $.01 par value (the "Common Stock"), commencing on July 1, 1999. Three hundred thousand (300,000) shares of Common Stock in the aggregate have been authorized for issuance under this Plan. 1. Administration. The Plan will be administered by the Company's Board of Directors (the "Board") or by a Committee appointed by the Board (the "Committee"). The Board or the Committee has authority to make rules and regulations for the administration of the Plan and its interpretation and decisions with regard thereto shall be final and conclusive. 2. Eligibility. Participation in the Plan will neither be permitted nor denied contrary to the requirements of Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"), and regulations promulgated thereunder. All employees of the Company, including Directors who are employees, and all employees of any subsidiary of the Company (as defined in Section 424(f) of the Code) designated by the Board or the Committee from time to time (a "Designated Subsidiary"), are eligible to participate in any one or more of the offerings of Options (as defined in Section 9) to purchase Common Stock under the Plan provided that: (a) they are customarily employed by the Company or a Designated Subsidiary for more than 20 hours per week and for more than five months in any calendar year; and (b) they have been employed by the Company or a Designated Subsidiary for at least 90 days prior to enrolling in the Plan; and (c) they are employees of the Company or a Designated Subsidiary on the first day of the applicable Plan Period (as defined below). -B-1- No employee may be granted an option hereunder if such employee, immediately after the option is granted, owns 5% or more of the total combined voting power or value of the stock of the Company or any subsidiary. For purposes of the preceding sentence, the attribution rules of Section 424(d) of the Code shall apply in determining the stock ownership of an employee, and all stock which the employee has a contractual right to purchase shall be treated as stock owned by the employee. 3. Offerings. The Company will make one or more offerings ("Offerings") to employees to purchase stock under this Plan. The first Offering will begin on July 1, 1999 and will terminate on December 31, 1999. Thereafter, each Offering will begin on the first day of each year and end on the last day of such year. Each commencement date of an Offering is hereinafter referred to as an "Offering Commencement Date" and the duration of each Plan period as a "Plan Period." During each Plan Period, payroll deductions will be made and held for the purchase of Common Stock at the end of the Plan Period. The Board or the Committee may, at its discretion, choose a different Plan Period of twelve (12) months or less for subsequent Offerings. 4. Participation. An employee eligible on the Offering Commencement Date of any Offering may participate in such Offering by completing and forwarding a payroll deduction authorization form to the employee's appropriate payroll office at least 10 days prior to the applicable Offering Commencement Date. The form will authorize a regular payroll deduction from the Compensation (as defined below) received by the employee during the Plan Period. Unless an employee files a new form or withdraws from the Plan, his deductions and purchases will continue at the same rate for future Offerings under the Plan as long as the Plan remains in effect. The term "Compensation" means the amount of money reportable on the employee's Federal Income Tax Withholding Statement, excluding allowances and reimbursements for expenses such as relocation allowances for travel expenses, income or gains on the exercise of Company stock options or stock appreciation rights, and similar items, whether or not shown on the employee's Federal Income Tax Withholding Statement. 5. Deductions. The Company will maintain payroll deduction accounts for all participating employees. With respect to any Offering made under this Plan, an employee may authorize a payroll deduction in any dollar amount up to a maximum of 10% of the Compensation he or she receives during the Plan Period or such shorter period during which deductions from payroll are made. The minimum payroll deduction is such percentage of Compensation as may be established from time to time by the Board or the Committee. No employee may be granted an Option (as defined in Section 9) which permits his rights to purchase Common Stock under this Plan and any other stock purchase plan of the Company and its subsidiaries, to accrue at a rate which exceeds $25,000 of the fair market value of such Common Stock (determined at the Offering Commencement Date of the Plan Period) for each calendar year in which the Option is outstanding at any time. -B-2- 6. Deduction Changes. An employee may decrease or discontinue his payroll deduction once during any Plan Period, by filing a new payroll deduction authorization form. However, an employee may not increase his payroll deduction during a Plan Period. If an employee elects to discontinue his payroll deductions during a Plan Period, but does not elect to withdraw his funds pursuant to Section 8 hereof, funds deducted prior to his election to discontinue will be applied to the purchase of Common Stock on the Exercise Date (as defined below). 7. Interest. Interest will not be paid on any employee accounts, except to the extent that the Board or the Committee, in its sole discretion, elects to credit employee accounts with interest at such per annum rate as it may from time to time determine. 8. Withdrawal of Funds. An employee may at any time prior to the close of business on the last business day in a Plan Period and for any reason permanently draw out the balance accumulated in the employee's account and thereby withdraw from participation in an Offering. Partial withdrawals are not permitted. The employee may not begin participation again during the remainder of the Plan Period. The employee may participate in any subsequent Offering in accordance with terms and conditions established by the Board or the Committee. 9. Purchase of Shares. On the Offering Commencement Date of each Plan Period, the Company will grant to each eligible employee who is then a participant in the Plan an option ("Option") to purchase on the last business day of such Plan Period (the "Exercise Date"), at the Option Price hereinafter provided for, such number of whole shares of Common Stock of the Company reserved for the purposes of the Plan as does not exceed the number of shares determined by dividing (a) the product of $2,083 and the number of whole months in such Plan Period by (b) the closing price (as defined below) on the Offering Commencement Date of such Plan Period or such other number as may be determined by the Board prior to the Offering Commencement Date. The purchase price for each share purchased will be 85% of the closing price of the Common Stock on (i) the first business day of such Plan Period or (ii) the Exercise Date, whichever closing price shall be less. Such closing price shall be (a) the closing price on any national securities exchange on which the Common Stock is listed, (b) the closing price of the Common Stock on the Nasdaq National Market or (c) the average of the closing bid and asked prices in the over-the-counter-market, whichever is applicable, as published in The Wall Street Journal. If no sales of Common Stock were made on such a day, the price of the Common Stock for purposes of clauses (a) and (b) above shall be the reported price for the next preceding day on which sales were made. Each employee who continues to be a participant in the Plan on the Exercise Date shall be deemed to have exercised his Option at the Option Price on such date and shall be deemed to have purchased from the Company the number of full shares of Common Stock reserved for the purpose of the Plan that his accumulated payroll deductions on -B-3- such date will pay for pursuant to the formula set forth above (but not in excess of the maximum number determined in the manner set forth above). Any balance remaining in an employee's payroll deduction account at the end of a Plan Period will be automatically refunded to the employee, except that any balance which is less than the purchase price of one share of Common Stock will be carried forward into the employee's payroll deduction account for the following Offering, unless the employee elects not to participate in the following Offering under the Plan, in which case the balance in the employee's account shall be refunded. 10. Issuance of Certificates. Certificates representing shares of Common Stock purchased under the Plan may be issued only in the name of the employee, in the name of the employee and another person of legal age as joint tenants with rights of survivorship, or (in the Company's sole discretion) in the street name of a brokerage firm, bank or other nominee holder designated by the employee. 11. Rights on Retirement, Death or Termination of Employment. In the event of a participating employee's termination of employment prior to the last business day of a Plan Period, no payroll deduction shall be taken from any pay due and owing to an employee and the balance in the employee's account shall be paid to the employee or, in the event of the employee's death, (a) to a beneficiary previously designated in a revocable notice signed by the employee (with any spousal consent required under state law) or (b) in the absence of such a designated beneficiary, to the executor or administrator of the employee's estate or (c) if no such executor or administrator has been appointed to the knowledge of the Company, to such other person(s) as the Company may, in its discretion, designate. If, prior to the last business day of the Plan Period, the Designated Subsidiary by which an employee is employed shall cease to be a subsidiary of the Company, or if the employee is transferred to a subsidiary of the Company that is not a Designated Subsidiary, the employee shall be deemed to have terminated employment for the purposes of this Plan. 12. Optionees Not Stockholders. Neither the granting of an Option to an employee nor the deductions from his pay shall constitute such employee a stockholder of the shares of Common Stock covered by an Option under this Plan until such shares have been purchased by and issued to him. 13. Rights Not Transferable. Rights under this Plan are not transferable by a participating employee other than by will or the laws of descent and distribution, and are exercisable during the employee's lifetime only by the employee. 14. Application of Funds. All funds received or held by the Company under this Plan may be combined with other corporate funds and may be used for any corporate purpose. -B-4- 15. Adjustment in Case of Changes Affecting Common Stock. In the event of a subdivision of outstanding shares of Common Stock, or the payment of a dividend in Common Stock, the number of shares approved for this Plan, and the share limitation set forth in Section 9, shall be increased proportionately, and such other adjustment shall be made as may be deemed equitable by the Board or the Committee. In the event of any other change affecting the Common Stock, such adjustment shall be made as may be deemed equitable by the Board or the Committee to give proper effect to such event. 16. Merger. If the Company shall at any time merge or consolidate with another corporation and the holders of the capital stock of the Company immediately prior to such merger or consolidation continue to hold at least 80% by voting power of the capital stock of the surviving corporation ("Continuity of Control"), the holder of each Option then outstanding will thereafter be entitled to receive at the next Exercise Date upon the exercise of such Option for each share as to which such Option shall be exercised the securities or property which a holder of one share of the Common Stock was entitled to upon and at the time of such merger, and the Committee shall take such steps in connection with such merger as the Committee shall deem necessary to assure that the provisions of Section 15 shall thereafter be applicable, as nearly as reasonably may be, in relation to the said securities or property as to which such holder of such Option might thereafter be entitled to receive thereunder. In the event of a merger or consolidation of the Company with or into another corporation which does not involve Continuity of Control, or of a sale of all or substantially all of the assets of the Company while unexercised Options remain outstanding under the Plan, (a) subject to the provisions of clauses (b) and (c), after the effective date of such transaction, each holder of an outstanding Option shall be entitled, upon exercise of such Option, to receive in lieu of shares of Common Stock, shares of such stock or other securities as the holders of shares of Common Stock received pursuant to the terms of such transaction; or (b) all outstanding Options may be cancelled by the Board or the Committee as of a date prior to the effective date of any such transaction and all payroll deductions shall be paid out to the participating employees; or (c) all outstanding Options may be cancelled by the Board or the Committee as of the effective date of any such transaction, provided that notice of such cancellation shall be given to each holder of an Option, and each holder of an Option shall have the right to exercise such Option in full based on payroll deductions then credited to his account as of a date determined by the Board or the Committee, which date shall not be less than ten (10) days preceding the effective date of such transaction. 17. Amendment of the Plan. The Board may at any time, and from time to time, amend this Plan in any respect, except that (a) if the approval of any such amendment by the shareholders of the Company is required by Section 423 of the Code, such amendment shall not be effected without such approval, and (b) in no event may any amendment be made which would cause the Plan to fail to comply with Section 423 of the Code. -B-5- 18. Insufficient Shares. In the event that the total number of shares of Common Stock specified in elections to be purchased under any Offering plus the number of shares purchased under previous Offerings under this Plan exceeds the maximum number of shares issuable under this Plan, the Board or the Committee will allot the shares then available on a pro rata basis. 19. Termination of the Plan. This Plan may be terminated at any time by the Board. Upon termination of this Plan all amounts in the accounts of participating employees shall be promptly refunded. 20. Governmental Regulations. The Company's obligation to sell and deliver Common Stock under this Plan is subject to listing on a national stock exchange or quotation on the Nasdaq National Market and the approval of all governmental authorities required in connection with the authorization, issuance or sale of such stock. 21. Governing Law. The Plan shall be governed by Delaware law except to the extent that such law is preempted by federal law. 22. Issuance of Shares. Shares may be issued upon exercise of an Option from authorized but unissued Common Stock, from shares held in the treasury of the Company, or from any other proper source. 23. Notification upon Sale of Shares. Each employee agrees, by entering the Plan, to promptly give the Company notice of any disposition of shares purchased under the Plan where such disposition occurs within two years after the date of grant of the Option pursuant to which such shares were purchased. 24. Effective Date and Approval of Shareholders. The Plan shall take effect on January 1, 1999, subject to approval by the shareholders of the Company as required by Section 423 of the Code, which approval must occur within twelve months of the adoption of the Plan by the Board. Adopted by the Board of Directors on December 7, 1998 -B-6- APPENDIX C IGI, INC. 1999 STOCK INCENTIVE PLAN 1. Purpose The purpose of this 1999 Stock Incentive Plan (the "Plan") of IGI, Inc., a Delaware corporation (the "Company"), is to advance the interests of the Company's stockholders by enhancing the Company's ability to attract, retain and motivate persons who make (or are expected to make) important contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives and thereby better aligning the interests of such persons with those of the Company's stockholders. Except where the context otherwise requires, the term "Company" shall include any of the Company's present or future subsidiary corporations as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the "Code") and any other business venture (including, without limitation, joint venture or limited liability company) in which the Company has a significant interest, as determined by the Board of Directors of the Company (the "Board"). 2. Eligibility All of the Company's employees, officers, directors, consultants and advisors (and any individuals who have accepted an offer for employment) are eligible to be granted options or restricted stock awards (each, an "Award") under the Plan. Each person who has been granted an Award under the Plan shall be deemed a "Participant." 3. Administration, Delegation (a) Administration by Board of Directors. The Plan will be administered by the Board. The Board shall have authority to grant Awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. All decisions by the Board shall be made in the Board's sole discretion and shall be final and binding on all persons having or claiming any interest in the Plan or in any Award. No director or person acting pursuant to the authority delegated by the Board shall be liable for any action or determination relating to or under the Plan made in good faith. -C-1- (b) Delegation to Executive Officers. To the extent permitted by applicable law, the Board may delegate to one or more executive officers of the Company the power to make Awards and exercise such other powers under the Plan as the Board may determine, provided that the Board shall fix the maximum number of shares subject to Awards and the maximum number of shares for any one Participant to be made by such executive officers. (c) Appointment of Committees. To the extent permitted by applicable law, the Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board (a "Committee"). All references in the Plan to the "Board" shall mean the Board or a Committee of the Board or the executive officer referred to in Section 3(b) to the extent that the Board's powers or authority under the Plan have been delegated to such Committee or executive officer. 4. Stock Available for Awards (a) Number of Shares. Subject to adjustment under Section 7, Awards may be made under the Plan for up to 1,200,000 shares of common stock, $.01 par value per share, of the Company (the "Common Stock"). If any Award expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part or results in any Common Stock not being issued, the unused Common Stock covered by such Award shall again be available for the grant of Awards under the Plan, subject, however, in the case of Incentive Stock Options (as hereinafter defined), to any limitation required under the Code. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. (b) Per-Participant Limit. Subject to adjustment under Section 7, the maximum number of shares of Common Stock with respect to which an Award may be granted to any Participant under the Plan shall be 300,000 per calendar year. The per-Participant limit described in this Section 4(b) shall be construed and applied consistently with Section 162(m) of the Code. 5. Stock Options (a) General. The Board may grant options to purchase Common Stock (each, an "Option") and determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. An Option which is not intended to be an Incentive Stock Option (as hereinafter defined) shall be designated a "Nonstatutory Stock Option." (b) Incentive Stock Options. An Option that the Board intends to be an "incentive stock option" as defined in Section 422 of the Code (an "Incentive Stock Option") shall only be granted to employees of the Company and shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code. -C-2- The Company shall have no liability to a Participant, or any other party, if an Option (or any part thereof) which is intended to be an Incentive Stock Option is not an Incentive Stock Option. (c) Exercise Price. The Board shall establish the exercise price at the time each Option is granted and specify it in the applicable option agreement. (d) Duration of Options. Each Option shall be exercisable at such times and subject to such terms and conditions as the Board may specify in the applicable option agreement; provided, however, that no Option will be granted for a term in excess of 10 years. (e) Exercise of Option. Options may be exercised by delivery to the Company of a written notice of exercise signed by the proper person or by any other form of notice (including electronic notice) approved by the Board together with payment in full as specified in Section 5(f) for the number of shares for which the Option is exercised. (f) Payment Upon Exercise. Common Stock purchased upon the exercise of an Option granted under the Plan shall be paid for as follows: (1) in cash or by check, payable to the order of the Company; (2) except as the Board may, in its sole discretion, otherwise provide in an option agreement, by (i) delivery of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price or (ii) delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price; (3) when the Common Stock is registered under the Exchange Act, by delivery of shares of Common Stock owned by the Participant valued at their fair market value as determined by (or in a manner approved by) the Board in good faith ("Fair Market Value"), provided (i) such method of payment is then permitted under applicable law and (ii) such Common Stock was owned by the Participant at least six months prior to such delivery; (4) to the extent permitted by the Board, in its sole discretion by (i) delivery of a promissory note of the Participant to the Company on terms determined by the Board, or (ii) payment of such other lawful consideration as the Board may determine; or (5) by any combination of the above permitted forms of payment. -C-3- 6. Restricted Stock (a) Grants. The Board may grant Awards entitling recipients to acquire shares of Common Stock, subject to the right of the Company to repurchase all or part of such shares at their issue price or other stated or formula price (or to require forfeiture of such shares if issued at no cost) from the recipient in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Board for such Award (each, a "Restricted Stock Award"). (b) Terms and Conditions. The Board shall determine the terms and conditions of any such Restricted Stock Award, including the conditions for repurchase (or forfeiture) and the issue price, if any. Any stock certificates issued in respect of a Restricted Stock Award shall be registered in the name of the Participant and, unless otherwise determined by the Board, deposited by the Participant, together with a stock power endorsed in blank, with the Company (or its designee). At the expiration of the applicable restriction periods, the Company (or such designee) shall deliver the certificates no longer subject to such restrictions to the Participant or if the Participant has died, to the beneficiary designated, in a manner determined by the Board, by a Participant to receive amounts due or exercise rights of the Participant in the event of the Participant's death (the "Designated Beneficiary"). In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate. 7. Adjustments for Changes in Common Stock and Certain Other Events (a) Changes in Capitalization. In the event of any stock split, reverse stock split, stock dividend, recapitalization, combination of shares, reclassification of shares, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a normal cash dividend, (i) the number and class of securities available under this Plan, (ii) the per-Participant limit set forth in Section 4(b), (iii) the number and class of securities and exercise price per share subject to each outstanding Option, (iv) the repurchase price per share subject to each outstanding Restricted Stock Award, and (v) the terms of each other outstanding Award shall be appropriately adjusted by the Company (or substituted Awards may be made, if applicable) to the extent the Board shall determine, in good faith, that such an adjustment (or substitution) is necessary and appropriate. If this Section 7(a) applies and Section 7(c) also applies to any event, Section 7(c) shall be applicable to such event, and this Section 7(a) shall not be applicable. (b) Liquidation or Dissolution. In the event of a proposed liquidation or dissolution of the Company, the Board shall upon written notice to the Participants provide that all then unexercised Options will (i) become exercisable in full as of a specified time at least 10 business days prior to the effective date of such liquidation or dissolution and (ii) terminate effective upon such liquidation or -C-4- dissolution, except to the extent exercised before such effective date. The Board may specify the effect of a liquidation or dissolution on any Restricted Stock Award or other Award granted under the Plan at the time of the grant of such Award. (c) Acquisition Events (1) Definition. An "Acquisition Event" shall mean: (a) any merger or consolidation of the Company with or into another entity as a result of which the Common Stock is converted into or exchanged for the right to receive cash, securities or other property or (b) any exchange of shares of the Company for cash, securities or other property pursuant to a statutory share exchange transaction. (2) Consequences of an Acquisition Event on Options. Upon the occurrence of an Acquisition Event, or the execution by the Company of any agreement with respect to an Acquisition Event, the Board shall provide that all outstanding Options shall be assumed, or equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof). For purposes hereof, an Option shall be considered to be assumed if, following consummation of the Acquisition Event, the Option confers the right to purchase, for each share of Common Stock subject to the Option immediately prior to the consummation of the Acquisition Event, the consideration (whether cash, securities or other property) received as a result of the Acquisition Event by holders of Common Stock for each share of Common Stock held immediately prior to the consummation of the Acquisition Event (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); provided, however, that if the consideration received as a result of the Acquisition Event is not solely common stock of the acquiring or succeeding corporation (or an affiliate thereof), the Company may, with the consent of the acquiring or succeeding corporation, provide for the consideration to be received upon the exercise of Options to consist solely of common stock of the acquiring or succeeding corporation (or an affiliate thereof) equivalent in fair market value to the per share consideration received by holders of outstanding shares of Common Stock as a result of the Acquisition Event. Notwithstanding the foregoing, if the acquiring or succeeding corporation (or an affiliate thereof) does not agree to assume, or substitute for, such Options, then the Board shall, upon written notice to the Participants, provide that all then unexercised Options will become exercisable in full as of a specified time prior to the Acquisition Event and will terminate immediately prior to the consummation of such Acquisition Event, except to the extent exercised by the Participants before the consummation of such Acquisition Event; provided, however, that in the event of an Acquisition Event under the terms of which holders of Common Stock will receive upon -C-5- consummation thereof a cash payment for each share of Common Stock surrendered pursuant to such Acquisition Event (the "Acquisition Price"), then the Board may instead provide that all outstanding Options shall terminate upon consummation of such Acquisition Event and that each Participant shall receive, in exchange therefor, a cash payment equal to the amount (if any) by which (A) the Acquisition Price multiplied by the number of shares of Common Stock subject to such outstanding Options (whether or not then exercisable), exceeds (B) the aggregate exercise price of such Options. (3) Consequences of an Acquisition Event on Restricted Stock Awards. Upon the occurrence of an Acquisition Event, the repurchase and other rights of the Company under each outstanding Restricted Stock Award shall inure to the benefit of the Company's successor and shall apply to the cash, securities or other property which the Common Stock was converted into or exchanged for pursuant to such Acquisition Event in the same manner and to the same extent as they applied to the Common Stock subject to such Restricted Stock Award. 8. General Provisions Applicable to Awards (a) Transferability of Awards. Except as the Board may otherwise determine or provide in an Award, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees. (b) Documentation. Each Award shall be evidenced by a written instrument in such form as the Board shall determine. Such written instrument may be in the form of an agreement signed by the Company and the Participant or a written confirming memorandum to the Participant from the Company. Each Award may contain terms and conditions in addition to those set forth in the Plan. (c) Board Discretion. Except as otherwise provided by the Plan, each Award may be made alone or in addition or in relation to any other Award. The terms of each Award need not be identical, and the Board need not treat Participants uniformly. (d) Termination of Status. The Board shall determine the effect on an Award of the disability, death, retirement, authorized leave of absence or other change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, the Participant's legal representative, conservator, guardian or Designated Beneficiary may exercise rights under the Award. (e) Withholding. Each Participant shall pay to the Company, or make provision satisfactory to the Board for payment of, any taxes required by law to be withheld in connection with Awards to such Participant no later than the date of the event creating the tax liability. Except as the Board may otherwise provide in an Award, Participants may, to the extent then permitted under applicable law, satisfy -C-6- such tax obligations in whole or in part by delivery of shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value. The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a Participant. (f) Amendment of Award. The Board may amend, modify or terminate any outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the Participant's consent to such action shall be required unless the Board determines that the action, taking into account any related action, would not materially and adversely affect the Participant. (g) Conditions on Delivery of Stock. The Company will not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company's counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations. (h) Acceleration. The Board may at any time provide that any Options shall become immediately exercisable in full or in part, that any Restricted Stock Awards shall be free of restrictions in full or in part or that any other Awards may become exercisable in full or in part or free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be. 9. Miscellaneous (a) No Right To Employment or Other Status. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award. (b) No Rights As Stockholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder of such shares. Notwithstanding the foregoing, in the event the Company effects a split of the Common Stock by means of a stock dividend and the exercise price of and the number of shares subject to such Option are adjusted -C-7- as of the date of the distribution of the dividend (rather than as of the record date for such dividend), then an optionee who exercises an Option between the record date and the distribution date for such stock dividend shall be entitled to receive, on the distribution date, the stock dividend with respect to the shares of Common Stock acquired upon such Option exercise, notwithstanding the fact that such shares were not outstanding as of the close of business on the record date for such stock dividend. (c) Effective Date and Term of Plan. The Plan shall become effective on the date on which it is adopted by the Board, but no Award granted to a Participant designated by the Board as subject to Section 162(m) of the Code by the Board shall become exercisable, vested or realizable, as applicable to such Award, unless and until the Plan has been approved by the Company's stockholders to the extent stockholder approval is required by Section 162(m) in the manner required under Section 162(m) (including the vote required under Section 162(m)). No Awards shall be granted under the Plan after the completion of ten years from the earlier of (i) the date on which the Plan was adopted by the Board or (ii) the date the Plan was approved by the Company's stockholders, but Awards previously granted may extend beyond that date. (d) Amendment of Plan. The Board may amend, suspend or terminate the Plan or any portion thereof at any time, provided that to the extent required by Section 162(m) of the Code, no Award granted to a Participant designated as subject to Section 162(m) by the Board after the date of such amendment shall become exercisable, realizable or vested, as applicable to such Award (to the extent that such amendment to the Plan was required to grant such Award to a particular Participant), unless and until such amendment shall have been approved by the Company's stockholders as required by Section 162(m) (including the vote required under Section 162(m)). (e) Governing Law. The provisions of the Plan and all Awards made hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware, without regard to any applicable conflicts of law. -C-8-