-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ST3sG8+asDnr3nNEgOdunIGwfMw4WSiwH8XXct5Qwyk5M7Q5B4p0CvZEssmjuLQw vHTf8jzoYkO/vTwrxa9G1w== 0000891554-99-000723.txt : 19990413 0000891554-99-000723.hdr.sgml : 19990413 ACCESSION NUMBER: 0000891554-99-000723 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IGI INC CENTRAL INDEX KEY: 0000352998 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 010355758 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08568 FILM NUMBER: 99591521 BUSINESS ADDRESS: STREET 1: WHEAT RD AND LINCOCN AVE STREET 2: P O BOX 687 CITY: BUENA STATE: NJ ZIP: 08310 BUSINESS PHONE: 6096971441 MAIL ADDRESS: STREET 1: WHEAT ROAD AND LINCOCN AVE STREET 2: P O BOX 687 CITY: BUENA STATE: NJ ZIP: 08310 FORMER COMPANY: FORMER CONFORMED NAME: IMMUNOGENETICS INC DATE OF NAME CHANGE: 19870814 10-K 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Fiscal Year Ended Commission File No. December 31, 1998 001-08568 IGI, Inc. (Exact name of registrant as specified in its charter) Delaware 01-0355758 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Wheat Road and Lincoln Avenue, Buena, NJ 08310 (Address of principal executive offices) (Zip Code) (609)-697-1441 Registrant's telephone number, including area code Securities registered pursuant to Section 12(b) of the Act: Common Stock ($.01 par value) Registered on the American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |_| No |X| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| The aggregate market value of the Registrant's voting Common Stock, par value $.01 per share, held by non-affiliates of the Registrant at March 19, 1999, as computed by reference to the last trading price of such stock, was approximately $11,100,000. The Registrant has no shares of non-voting Common Stock authorized or outstanding. The number of shares of the Registrant's Common Stock, par value $.01 per share, outstanding at March 19, 1999 was 9,526,854 shares. Documents Incorporated by Reference: Portions of the Registrant's definitive proxy statement to be filed with the Commission on or before April 30, 1999 are incorporated herein by reference in Part III. 2 Exhibit Index located on pages 48-52 Part I Item 1. Business IGI, Inc. ("IGI" or the "Company") was incorporated in Delaware in 1977. Its executive offices are at Wheat Road and Lincoln Avenue, Buena, New Jersey. The Company is a diversified company engaged in three business segments: o Poultry Vaccine Business - production and marketing of poultry vaccines and other related products; o Companion Pet Products Business - production and marketing of companion pet products such as pharmaceuticals, nutritional supplements and grooming aids; and o Consumer Products Business - production and marketing of cosmetics and skin care products. Recent Developments: U.S. Regulatory Proceedings From mid-1997 through most of 1998, the Company was subjected to intense governmental and regulatory scrutiny relating to the Company's shipment of some of its poultry vaccine products without complying with certain applicable regulatory and record keeping requirements. As a result of actions taken by the United States Department of Agriculture ("USDA"), the Company was ordered in June 1997 to stop shipment of certain of its poultry vaccine products. In July 1997, the Company was advised that the USDA's Office of Inspector General ("OIG") had commenced an investigation into possible violations by the Company of the Virus Serum Toxin Act of 1914 and alleged false statements made by the Company to the USDA's Animal and Plant Health Inspection Service ("APHIS"). Company Actions Based on these events, the Company: o engaged independent counsel to conduct an investigation of the claimed violations; o took corrective action to allow the Company to resume shipment of its affected product lines; o terminated the President and Chief Operating Officer of the Company for willful misconduct and commenced a lawsuit against him in the New Jersey Superior Court; o obtained the resignation of six employees, including two Vice Presidents; o voluntarily disclosed information uncovered by its internal investigation to the U.S. Attorney for the District of New Jersey, including information that related to sales of poultry vaccines which may have violated U.S. customs laws and regulations; and o cooperated with the Securities and Exchange Commission ("SEC") in its informal inquiry, initiated in April 1998, regarding the foregoing matters. The USDA's stop shipment order and the investigations by federal regulatory authorities disrupted the business of the Company during 1997 and 1998 and had a material adverse effect on its business operations and its liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Settlement of U.S. Regulatory Proceedings On March 24, 1999, the Company reached settlement with the Departments of Justice, Treasury and Agriculture regarding their pending investigations and proceedings. This settlement is subject to court approval, which the Company believes will be obtained in due course. The terms of the settlement agreement provide that the Company will enter a plea of guilty to a misdemeanor and will pay a fine of $15,000 and restitution in the amount of $10,000. In addition, beginning in January 2000, the Company will make monthly payments to the Treasury Department through the period ending October 31, 2001 in the total amount of $225,000. The expense of settling with these agencies is reflected in the 1998 results of operations. The settlement does not affect the informal inquiry being conducted by the SEC, nor does it affect possible governmental action against former employees of the Company. Management does not expect that the SEC informal inquiry will have 3 a material adverse effect on the financial position, cash flow or operations of the Company. The Company is not aware of any other legal proceedings, which could have a material effect upon the Company. Licensed Technology In December 1995, IGI distributed its ownership of its majority-owned subsidiary, Novavax, Inc. ("Novavax"), in the form of a tax-free stock dividend, to IGI stockholders. Novavax had conducted the biotechnology business segment of IGI, which is reported as a discontinued operation in the five year summary of selected financial data. In connection with the distribution, the Company paid Novavax $5,000,000 in return for a fully paid-up, ten-year license (the "IGI License Agreement") entitling it to the exclusive use of the Novasome(R) lipid vesicle encapsulation and other technologies ("Microencapsulation Technologies" or collectively the "Technologies") in the fields of (i) animal pharmaceuticals, biologicals and other animal health products; (ii) foods, food applications, nutrients and flavorings; (iii) cosmetics, consumer products and dermatological over-the-counter and prescription products (excluding certain topically delivered hormones); (iv) fragrances; and (v) chemicals, including herbicides, insecticides, pesticides, paints and coatings, photographic chemicals and other specialty chemicals, and the processes for making the same (collectively, the "IGI Field"). IGI has the option, exercisable within the last year of the ten-year term, to extend the exclusive license for an additional ten-year period for $1,000,000. Novavax has the right to use the Technologies for applications outside the IGI Field, mainly human vaccines and pharmaceuticals. Business Segments In 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach indicates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position but did affect the disclosure of segment information. The Company elected to change reportable segments from two segments (Animal Health Products and Consumer Products) into three segments (Poultry Vaccines, Companion Pet Products, and Consumer Products). Reasons leading to the change included the fact that products from each of the segments serve different markets, use different channels of distribution, and have two different forms of government oversight. The Company elected to change the reporting of its business segments as of January 1, 1998 and restated its prior years' presentation to conform to this revised segment reporting standard. The following table sets forth the revenue and operating profit of each of the Company's three business segments for the periods indicated: 1998 1997* 1996* -------- -------- -------- Revenue (in thousands) Poultry Vaccines $ 14,843 $ 16,644 $ 19,953 Companion Pet Products 12,513 12,444 11,308 Consumer Products 5,839 5,255 3,686 -------- -------- -------- Total Revenues $ 33,195 $ 34,343 $ 34,947 ======== ======== ======== Operating Profit (Loss)** Poultry Vaccines $ (517) 1,202 $ 4,084 Companion Pet Products 2,844 2,577 2,300 Consumer Products 3,688 1,473 (955) * Prior year amounts restated to reflect the Company's change in its method of inventory pricing. (See Note 1 of Consolidated Financial Statements.) ** Excludes corporate expenses of $6,925,000, $5,032,000, and $4,097,000, for 1998, 1997, and 1996, respectively. (See Note 17 of Consolidated Financial Statements.) 4 Poultry Vaccine Business The Company produces and markets poultry vaccines manufactured by the chick embryo, tissue culture and bacteriologic methods. The Company produces vaccines for the prevention of various chicken and turkey diseases and has more than 60 vaccine licenses granted by the USDA. The Company also produces and sells nutritional, anti-infective and sanitation products used primarily by poultry producers. The Company sells these products in the United States and in over 50 other countries under the Vineland Laboratories trade name. The Company manufactures poultry vaccines at its USDA licensed facility in Vineland, New Jersey and sells them, primarily through its own sales force of nine persons, directly to large poultry producers and distributors in the United States and, through its export sales staff of 15 persons, to local distributors in other countries. The sales force is supplemented and supported by technical and customer service personnel. The Company's vaccine production in the United States is regulated by the USDA. Sales of poultry vaccines and related products accounted for approximately 45% of the Company's revenues in 1998, 49% in 1997 and 57% in 1996. For information relating to the adverse effect of the stop shipment order by the USDA on the Company's poultry vaccine business, as well as other governmental actions, see "Government Regulation" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's principal competitors in the poultry vaccine market are Intervet America, Fort Dodge, Tri Bio and Schering Plough Animal Health. The Company believes that it is one of the largest domestic poultry vaccine producers. The Company competes on the basis of product performance, price, customer service and availability. Companion Pet Products Business The Company sells its Companion Pet Products to the veterinarian market under the EVSCO Pharmaceuticals trade name and to the over-the-counter ("OTC") pet products market under the Tomlyn and Luv'Em labels. The EVSCO line of veterinary products is used by veterinarians in caring for dogs and cats, and includes pharmaceuticals such as antibiotics, anti-inflammatories and cardiac drugs, as well as nutritional supplements, vitamins, insecticides and diagnostics. Product forms include gels, tablets, creams, liquids, ointments, powders, emulsions, shampoos and diagnostic kits. EVSCO also produces professional grooming aids for dogs and cats. EVSCO products are manufactured at the Company's facility in Buena, New Jersey and are sold through distributors to veterinarians. The facility operates in accordance with Good Manufacturing Practices ("GMP") of the federal Food and Drug Administration ("FDA") (See "Government Regulation"). Principal competitors of the EVSCO product line include DVM, Allerderm, Schering Plough Animal Health and Pfizer Animal Health. The Company competes on the basis of price, marketing, customer service and product qualities. The Tomlyn product line includes pet grooming, nutritional and therapeutic products, such as shampoos, grooming aids, vitamin and mineral supplements, insecticides and OTC medications. The products are manufactured at the Company's facility in Buena, New Jersey, and are sold directly to pet superstores and through distributors to independent merchandising chains, shops and kennels. Principal competitors of the Tomlyn product line include Four Paws Products; Bio Groom Products; Lambert Kay, a division of Carter-Wallace; Eight In One Pet Products, Inc.; and Cardinal Labs, Inc. Sales of the Company's veterinary products are handled by 20 sales employees. Most of the Company's veterinary products are sold through distributors. Sales of veterinary products accounted for approximately 38% of the Company's revenues in 1998, 36% in 1997 and 32% in 1996. 5 Consumer Products Business IGI's Consumer Products business is primarily focused on the continued commercialization of the Microencapsulation Technologies for skin care applications. These efforts have been directed toward the development of high quality skin care products that the Company markets through collaborative arrangements with major cosmetic and consumer products companies. IGI plans to continue to work with cosmetics, food, personal care products, and OTC pharmaceutical companies for commercial applications of the Microencapsulation Technologies. Because of their ability to encapsulate skin protective agents, oils, moisturizers, shampoos, conditioners, skin cleansers and fragrances and to provide both a controlled and a sustained release of the encapsulated materials, Novasome(R) lipid vesicles are well suited to cosmetics and consumer product applications. For example, Novasome(R) lipid vesicles may be used to deliver moisturizers and other active ingredients to the deeper layers of the skin or hair follicles for a prolonged period; to deliver or preserve ingredients which impart favorable cosmetic characteristics described in the cosmetics industry as "feel," "substantivity," "texture" or "fragrance"; to deliver normally incompatible ingredients in the same preparation, with one ingredient being shielded or protected from others by encapsulation within the Novasome(R) vesicle; and to deliver pharmaceutical agents. The Company produces Novasome(R) vesicles for various skin care products, including those marketed by Estee Lauder such as "All You Need," "Re-Nutriv," "Virtual Skin," "100% Time Release Moisturizer," "Resilience" and others. Sales to Estee Lauder accounted for $3,494,000 or 11% of 1998 sales, $2,408,000 or 7% for 1997, and $2,505,000 or 7% in 1996. The Company also markets a skin care product line to physicians through a distributor under the Company's WellSkin(TM) brand. Principal competitors to the Company's WellSkin(TM) product line include NeoStrata, Inc. and MD Formulations, a division of Allergen. The Company's Novasome(R) Technologies indirectly compete as a delivery system with, among others, Collaborative Labs, Liposomes, Inc. and Lipo Chemicals. In 1996, the Company entered into a license and supply agreement with Glaxo Wellcome, Inc. ("Glaxo"). The agreement granted Glaxo exclusive rights to market the WellSkin(TM) product line in the United States to physicians. Under the terms of the agreement, IGI manufactured these products for Glaxo. This agreement provided for Glaxo to pay royalties to IGI based on sales and pay a $1,000,000 advance royalty to IGI in 1997 of which $300,000 was non-refundable. The advance royalty was recorded as deferred income. In October 1998, Glaxo notified the Company of its intent to exit the physician-dispensed skin care market. In December 1998, the license and supply agreement with Glaxo was terminated. The termination agreement provided that IGI would purchase all of Glaxo's inventory and marketing materials related to the WellSkin(TM) line in exchange for a $200,000 promissory note, due and payable in December 1999 and bearing interest at a rate of 11%. The Company also issued a promissory note to Glaxo for $608,000, representing the unearned portion of the advance royalty in exchange for Glaxo transferring all rights to the WellSkin(TM) trademark to IGI. This note bears interest at a rate of 11% and is payable in three installments between December 1999 and December 2000. In connection with the Agreement termination, but unrelated to the advance royalty, IGI reduced cost of sales by $404,000 in 1998 for amounts owed to Glaxo that were forgiven. Beginning in 1997 and again in 1998, IGI recognized $150,000 and $326,000, respectively, of royalties as income. In December 1998, the Company entered into a supply and sales agreement with Genesis Pharmaceutical, Inc. ("Genesis") for the marketing and distribution of the Company's WellSkin(TM) line of skin care products. The agreement provides that Genesis will pay the Company a trademark and technology transfer fee in four equal annual payments of $250,000 each commencing November 1, 1999. In addition, Genesis will pay the Company a royalty on its net sales with certain guaranteed minimum royalty amounts. Genesis also purchased WellSkin(TM) inventory and marketing materials previously purchased by the Company from Glaxo. Genesis has signed a $200,000 promissory note for the inventory and marketing materials, which is due on November 1, 1999 bearing interest at 11%. The Genesis transaction did not significantly affect 1998 operating results. 6 In March 1997, IGI granted Kimberly Clark ("Kimberly") the worldwide rights to use certain patents and technologies in the industrial hand care and cleaning products field. Upon signing the agreement, Kimberly paid IGI a $100,000 license fee that was recognized as revenue by the Company in 1997. The agreement requires Kimberly to make royalty payments based on quantities of material produced. The Company is also guaranteed minimum royalties over the term of the agreement. In 1998, the Company earned $133,000 of minimum royalties, which is recorded as an accounts receivable due from Kimberly at December 31, 1998. The Company entered into a license agreement with Johnson & Johnson Consumer Products, Inc. ("J&J") in 1995. The agreement provides J&J with a license to produce and sell Novasome(R) microencapsulated retinoid products and provides for the payment of royalties on net sales of such products. J&J began selling such products and making royalty payments in the first quarter of 1998. The Company recognized $433,000 of revenue related to this agreement for the year ended December 31, 1998. In April 1998, the Company entered into a research and development agreement with National Starch and Chemical Company ("National Starch") to evaluate Novasome(R) technology which, if favorable, may result in negotiating a licensing agreement. The agreement provides for a minimum of at least six, or up to as much as nine, monthly payments commencing in June 1998 plus $100,000 for the purchase of a patented Novamix(R) machine. The Company recognized $210,000 in revenues in 1998 related to the National Starch agreement plus $100,000 for the purchase of the Novamix(R) machine. In August 1998, the Company granted Johnson & Johnson Medical ("JJM"), a Division of Ethicon, Inc., worldwide rights for the use of the Novasome(R) technology for certain products and distribution channels. The agreement provides for an up-front license fee of $150,000, of which $92,000 was recognized as revenue by the Company in 1998, and future royalty payments based on JJM's sales of licensed products. The Company is guaranteed minimum royalties over the term of the agreement. The Company entered into an exclusive Supply Agreement (the "Supply Agreement") dated September 30, 1997 with IMX Corporation ("IMX"), a publicly traded company. Under the IMX agreement, the Company agreed to manufacture and supply 100% of IMX's requirements for certain products at prices stipulated in the exclusive Supply Agreement, subject to renegotiation subsequent to 1998. The Company is currently involved in discussions with IMX concerning possible modifications to the Supply Agreement as it has determined the Company will not supply the products stipulated by the Supply Agreement but may supply certain other products based on negotiations with IMX. Under the Supply Agreement the Company received 271,714 shares of restricted common stock of IMX. These shares are restricted both by governmental and contractual requirements and the Company is unsure if or when it will be able to sell these shares. As of December 31, 1998, the Company has not yet recognized income related to this agreement. See Note 2 "Investments" of Consolidated Financial Statements. During 1998, the Company recognized a total of $1.2 million of licensing and royalty income which is included in the Consumer Products segment revenues. Revenues from the Company's Consumer Products segment were principally based on formulations using the Novasome(R) encapsulation technology. Total Consumer Product revenues were approximately 17% of the Company's total revenues in 1998, 15% in 1997 and 11% in 1996. Other Applications The versatility of the Novasome(R) lipid vesicles combined with the Company's commercial production capabilities allows the Company to target large, diverse markets including potential applications in the fuels industry. The Company is seeking collaboration with others to develop its products for this industry. The efforts for the development of fuel enhancement products require extensive testing, evaluation and trials, and therefore no assurance can be given that commercialization of IGI's fuel additive and enhancing products will be successful. International Sales and Operations A staff of seven persons based in Buena, New Jersey and eight individuals based overseas handle sales of Company products outside the United States. The Company's sales personnel and veterinarians travel abroad extensively to develop business and support customers through local distributors. Exports consist primarily of poultry vaccines, 7 although the Company also exports some veterinary pharmaceuticals and pet care products. Exports of vaccines and other products require product registration (e.g., licenses) by foreign authorities. The Company has approximately 900 product registrations in over 50 countries outside the United States and has over 800 registrations pending. The Company is seeking to expand its international market presence. It entered the Chinese market in 1997 and commenced product sales in Japan in 1998. The Company has obtained registrations for six products in Brazil and expects to commence sales in that country in mid-1999. Mexico, Indonesia, Thailand and certain other Latin American and Far Eastern countries are important markets for the Company's poultry vaccines and other products. These countries have experienced periods of varying degrees of political unrest and economic and currency instability. Because of the volume of business transacted by the Company in these areas, continuation or recurrence of such unrest or instability could adversely affect the businesses of its customers, which could adversely impact the Company's future operating results. In order to minimize risk, the Company maintains credit insurance for the majority of its international accounts receivable, and all sales are denominated in U.S. dollars to minimize currency fluctuation risk. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.") Sales to international customers represented 32% of the Company's revenues in 1998, 35% in 1997 and 39% in 1996. (See Note 14 "Export Sales" of Consolidated Financial Statements.) Manufacturing The Company's manufacturing operations include the production and testing of vaccines, cosmetics, dermatologics, emulsions, shampoos, gels, ointments, pills and powders. These operations also include the packaging, bottling and labeling of finished products and packing and shipping for distribution. On March 1, 1999, 139 employees were engaged in manufacturing operations. The raw materials included in these products are available from several suppliers. The Company produces quantities of Novasome(R) lipid vesicles adequate to meet its current needs for cosmetics, consumer product and animal health applications. Product Development and Research The Company's poultry vaccine development efforts are directed towards: 1) developing more efficient single and multiple-component vaccines, 2) developing vaccines to combat new diseases, and 3) incorporating Novasome(R) lipid vesicle adjuvants into vaccines. The Company is concentrating its veterinary pharmaceutical development efforts on the use of Novasome(R) microencapsulation for various veterinary pharmaceutical and over-the-counter pet care products. The Company's consumer products development efforts are directed towards Novasome(R) encapsulation to improve performance and efficacy of fuels, pesticides, specialty and other chemicals, biocides, cosmetics, consumer products, flavors and dermatologic products. In addition to its internal product development and research efforts, which involve nine employees, the Company encourages the development of products in areas related to its present lines by making specific grants to universities, none of which had a material financial effect on the Company in 1998, 1997 or 1996. Total product development and research expenses were $1,425,000, $1,675,000, and $2,013,000 in 1998, 1997 and 1996, respectively. Patents and Trademarks All of the names of the Company's major products are registered in the United States and all significant markets in which the Company sells its products. Under the terms of the 1995 IGI License Agreement, the Company has an exclusive ten-year license to use the Technologies licensed from Novavax in the IGI Field. Novavax holds approximately 44 U.S. patents and a number of foreign patents covering the Technologies licensed to IGI. 8 Government Regulation The production and marketing of the Company's products and its research and development activities are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. The Company's development, manufacturing and marketing of poultry biologics are subject to regulation in the United States for safety and efficacy by the USDA, including the Center for Veterinary Biologics ("CVB"), in accordance with the Virus Serum Toxin Act of 1914. The development, manufacturing and marketing of animal and human pharmaceuticals are subject to regulation in the United States for safety and efficacy by the FDA in accordance with the Food, Drug and Cosmetic Act. Although the Company has now resolved these matters, from June 4, 1997 through March 27, 1998, the Company was subject to an order by the CVB to stop distribution and sale of certain serials and subserials of designated poultry vaccines produced by the Company's Vineland Laboratories division. In July 1997, the OIG advised the Company of its commencement of an investigation into alleged violations of the Virus Serum Toxin Act and alleged false statements made by certain former Company personnel. In April 1998, the Company voluntarily disclosed to the U.S. Attorney for the District of New Jersey, as well as to the USDA and the OIG, information resulting from the Company's internal investigation of alleged violations by certain officers and employees of USDA rules and regulations and of the Virus Serum Toxin Act. (See "Legal Proceedings - - Settlement of U.S. Regulatory Proceedings".) On March 6, 1998, the FDA concluded an inspection of the Company's EVSCO facility in Buena, New Jersey. This resulted in the issuance of a FDA Form 483 listing several "inspection observations." The FDA reemphasized its observations on May 14, 1998 with a "Warning Letter." The Company responded in a timely fashion to the Form-483 and to the Warning Letter, and has been advised by the FDA compliance branch that the Company's corrective action plan appears to address its concerns. In the United States, pharmaceuticals are subject to rigorous FDA regulation including pre-clinical and clinical testing. The process of completing clinical trials and obtaining FDA approvals for a new drug is likely to take a number of years, requires the expenditure of substantial resources and is often subject to unanticipated delays. There can be no assurance that any product will receive such approval on a timely basis, if at all. In addition to product approval, the Company may be required to obtain a satisfactory inspection by the FDA covering the manufacturing facilities before a product can be marketed in the United States. The FDA will review the manufacturing procedures and inspect the facilities and equipment for compliance with applicable rules and regulations. Any material change by the Company in the manufacturing process, equipment or location would necessitate additional review and approval. Whether or not FDA approval has been obtained, approval of a pharmaceutical product by comparable governmental authorities in foreign countries must be obtained prior to the commencement of clinical trials and subsequent marketing of such product in such countries. The approval procedure varies from country to country, and the time required may be longer or shorter than that for FDA approval. Although there are some procedures for unified filing for certain European countries, in general each country has its own procedures and requirements. In addition to regulations enforced by the USDA and the FDA, the Company also is subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state or local regulations. The Company's product development and research involves the controlled use of hazardous materials, chemicals, viruses and bacteria. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. 9 Employees At March 1, 1999, the Company had 228 full-time employees, of whom 53 were in marketing, sales, distribution and customer support, 139 in manufacturing, 9 in research and development, and 27 in executive, finance and administration. The Company has no collective bargaining agreement with its employees and believes that its employee relations are good. Item 2. Properties The Company owns land and buildings used for offices, laboratories and production facilities in four locations in New Jersey. The Company also owns a warehouse and sales office space in Gainesville, Georgia. In addition, the Company leases warehouses and poultry facilities in New Jersey, California, Mississippi, and Arkansas. The Company's poultry vaccine production facilities are located in Vineland, New Jersey, where the Company owns several buildings situated on approximately 16 acres of land. These buildings, containing 90,000 square feet of usable floor space, house offices and facilities used for the production of poultry vaccines. They were constructed and expanded from time to time between 1935 and 1992. The Company intends to renovate certain of these facilities in the future to expand its vaccine production capacity to meet growth in sales of existing poultry vaccines and to provide production capability for new vaccines. The Company plans to finance these renovations with internally generated funds or leases. In Buena, New Jersey, the Company owns a facility used for the production of veterinary pharmaceuticals. The facility was built in 1971 and expanded in 1975. The facility presently contains 41,200 square feet of usable floor space and is situated on eight acres of land. Also located in Buena are the Company's executive and administrative offices and a 25,000 square foot facility built in 1995 which is used for production, product development, marketing, and warehousing for cosmetic, dermatologic and personal care products. This facility also houses IGI's international marketing operations. Each of the properties owned by the Company is subject to a mortgage held by Fleet Bank-NH and Mellon Bank, N.A. Except as described above, the Company believes that its current production and office facilities are adequate for its present and foreseeable future needs. Item 3. Legal Proceedings U.S. Regulatory Proceedings and Pending Litigation The Company has substantially resolved the legal and regulatory issues that arose in 1997 and 1998. For most of 1997 and 1998 the Company was subject to intensive government regulatory scrutiny by the U.S. Departments of Justice, Treasury and Agriculture. In June 1997, the Company was advised by APHIS of the USDA that the Company had shipped quantities of some of its poultry vaccine products without complying with certain regulatory and record keeping requirements. The USDA subsequently issued an order that the Company stop shipment of certain of its products. Shortly thereafter, in July 1997, the Company was advised that the USDA's OIG had commenced an investigation into possible violations of the Virus Serum Toxin Act of 1914 and alleged false statements made to APHIS. Based upon these events, the Board of Directors caused an immediate and thorough investigation of the facts and circumstances of the alleged violations to be undertaken by independent counsel. The Company also took steps to obtain the approval of APHIS for resumption of shipments, including the submission of an amended and modified regulatory compliance program, improved testing procedures and other safeguards. Based upon these actions, APHIS began lifting the stop shipment order in August 1997 and released all remaining products from the order on March 27, 1998. In April 1998, the SEC advised the Company that it was conducting an informal inquiry and requested information and documents from the Company, which the Company has voluntarily provided to the SEC. The Company has continued to refine and strengthen its regulatory programs with the adoption of a series of compliance and enforcement policies, the addition of new managers of Production and Quality Control and a new Senior 10 Vice President and General Counsel. At the instruction of the Board of Directors, the Company's General Counsel has established and oversees a comprehensive employee training program, has designated in writing a Regulatory Compliance Officer, and has established a fraud detection program, as well as an employee "hotline." The Company has continued to cooperate with the USDA in all aspects of its investigation and regulatory activities. As a result of its internal investigation, the Company terminated the employment of John P. Gallo as President and Chief Operating Officer in November 1997 for willful misconduct. In April 1998, the Company requested the resignations of six additional employees including two Vice Presidents, and instituted a lawsuit against Mr. Gallo in the New Jersey Superior Court. The lawsuit alleged willful misconduct and malfeasance in office, as well as embezzlement and related claims. Mr. Gallo filed counterclaims against the Company. The Company has denied Mr. Gallo's allegations and believes his claims are without merit. The Company has not reserved any amounts related to these charges. In June 1998, Mr. Gallo wrote to the Company's Board of Directors alleging that he had been wrongfully terminated from employment and further alleging wrongdoing by two Directors. In response to these allegations the Company instituted an investigation of the two Directors by an Independent Committee ("Independent Committee") of the Board assisted by the Company's General Counsel. The investigation included a series of interviews of the Directors, both of whom cooperated with the Company, and a review of certain records and documents. The Company also requested an interview with Mr. Gallo who, through his counsel, declined to cooperate. In September 1998, the Independent Committee reported to the Board that it had found no credible evidence to support Mr. Gallo's claims and allegations and recommended no further action. The Board adopted the recommendation. In July 1998, the Company sought to depose Mr. Gallo in connection with the litigation filed in New Jersey. Through his counsel, Mr. Gallo asserted his Fifth Amendment privilege against self-incrimination and advised that he would not participate in the discovery process until such time as a federal grand jury investigation, in which he was a target, was concluded. At the suggestion of the court, the Company and Mr. Gallo agreed to a voluntary dismissal of the litigation, with the understanding that the Company was free to reinstate its suit against Mr. Gallo at a later date, and that the Company was reserving all of its rights and remedies with respect to Mr. Gallo. In addition, Mr. Gallo may reinstate his counterclaims against the Company at a later date. Settlement of U.S. Regulatory Proceedings On March 24, 1999, the Company reached settlement with the Departments of Justice, Treasury and Agriculture regarding their pending investigations and proceedings. The settlement is subject to court approval, which the Company believes will be obtained in due course. The terms of the settlement agreement provide that the Company will enter a plea of guilty to a misdemeanor and will pay a fine of $15,000 and restitution in the amount of $10,000. In addition, beginning in January 2000, the Company will make monthly payments to the Treasury Department through the period ending October 31, 2001 in the total amount of $225,000. The expense of settling with these agencies is reflected in the 1998 results of operations. The settlement does not affect the informal inquiry being conducted by the SEC, nor does it affect possible governmental action against former employees of the Company. Management does not expect that the SEC informal inquiry will have a material adverse effect on the financial position, cash flow or operations of the Company. The Company is not aware of any other legal proceedings which could have a material effect upon the Company. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the Company's stockholders during the last quarter of 1998. 11 Executive Officers of the Company The following table sets forth (i) the name and age of each executive officer of the Company as of March 15, 1999, (ii) the position with the Company held by each such executive officer and (iii) the principal occupation held by each executive officer for at least the past five years.
Officer Principal Occupation and Other Business Name Age Since Experience During Past Five Years - ---- --- ----- --------------------------------- Edward B. Hager, M.D. 67 1977 Chairman of the Board of Directors and Chief Executive Officer of IGI, Inc. since 1977; Chairman of the Board of Directors and Chief Executive Officer of Novavax, Inc. from 1987 to June 1996; Chairman of the Board of Directors of Novavax, Inc. from February 1997 to March 1998. Rajiv Mathur 44 1999 Senior Vice President and Assistant Secretary of IGI, Inc. since March 1999; Vice President of Research and Development of IGI, Inc. since 1989. Robert E. McDaniel 48 1998 Senior Vice President and General Counsel of IGI, Inc. since May 1998; General Counsel of Presstek, Inc. (laser graphic arts company) from April 1997 to May 1998; and Commercial Litigation Partner, law firm of Devine, Millimet and Branch from April 1991 to April 1997. John F. Wall 51 1998 Senior Vice President, Chief Financial Officer of IGI, Inc. since June 1998 and Treasurer since March 1999; Chief Financial Officer of Diversa Corp. (startup biotechnology company developing enzymes for pharmaceuticals and chemicals) from July 1995 to September 1997; and Chief Financial Officer and a Co-founder of GynoPharma, Inc. (womens' healthcare products manufacturer) from October 1987 to July 1995. Paul Woitach 40 1998 President and Chief Operating Officer of IGI, Inc. since May 1998; General Manager, Laboratory Division of Mettler Toledo North America (weighing and measurement systems) from 1997 to 1998; Vice President, Marketing and Sales, Balances and Instrument Division of Mettler Toledo International from 1996 to 1997; Vice President and Executive Director from 1995 to 1996, and Director of Marketing Channels from 1993 to 1995 of the Health Imaging division of Eastman Kodak Company (diagnostic imaging).
Officers are elected on an annual basis. Three of the above named officers have employment agreements with the Company. (See "Executive Compensation- Employment Agreements" contained in the Company's 1999 Proxy Statement, incorporated herein by reference.) 12 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The Company has never paid cash dividends on its Common Stock. The payment of dividends is prohibited by the Company's loan agreement with Fleet Bank-NH and Mellon Bank, N.A. without prior consent of the lenders. See "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." The principal market for the Company's Common Stock ($.01 par value) (the "Common Stock") is the American Stock Exchange ("AMEX") (symbol: "IG"). The following table shows the range of high and low sale prices on the AMEX for the periods indicated. High Low ---- --- 1997 First quarter $7 3/8 $5 Second quarter 5 1/2 4 Third quarter 5 1/2 3 7/8 Fourth quarter 5 1/8 3 5/8 1998 First quarter $4 3/16 $2 3/4 Second quarter (A) (A) Third quarter 3 1 5/16 Fourth quarter 3 1/4 1 1/2 (A) The Company was unable to file its 1997 Annual Report on Form 10-K until August 24, 1998 as a result of a special investigation initiated by the Board of Directors which resulted in the restatement of financial results for each of the two years in the period ended December 31, 1996 and the first three quarters of year ended December 31, 1997. Accordingly, the American Stock Exchange halted trading of the Company's Common Stock on March 31, 1998 until such time as this and other required filings were made. Trading resumed on September 8, 1998. Therefore, there are no trading prices reflected for the second quarter and most of the third quarter of 1998. The approximate number of holders of record of the Company's Common Stock at March 19, 1999 was 860 (not including stockholders for whom shares are held in a "nominee" or "street" name). In connection with an Extension Agreement entered into with its bank lenders as of April 29, 1998, the Company issued to its lenders warrants to purchase an aggregate of 540,000 shares of the Company's Common Stock at an exercise price of $3.50 per share. The issuance of the warrants is exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. The shares issuable upon the exercise of the warrants are subject to registration rights in favor of the lenders, pursuant to the terms of the Extension Agreement. (See "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.") 13 Item 6. Selected Financial Data Five-Year Summary of Selected Financial Data (in thousands, except per share information)
Year ended December 31, -------------------------------------------------------- 1998 1997* 1996* 1995* 1994* -------- -------- -------- -------- -------- Income Statement Data: Revenues $ 33,195 $ 34,343 $ 34,947 $ 31,232 $ 29,331 Operating profit (loss) * (910) 220 1,332 3,112 3,312 (Loss) income from continuing operations (3,029) (1,208) (481) 1,428 1,844 Loss from discontinued operations ** -- -- -- (4,034) (1,700) Net (loss) income (3,029) (1,208) (481) (2,606) 144 (Loss) income per share-basic: From continuing operations $ (.32) $ (.13) $ (.05) $ .16 $ .21 From discontinued operations -- -- -- (.44) (.19) Net (loss) income (.32) (.13) (.05) (.28) .02 (Loss) income per share-diluted: From continuing operations $ (.32) $ (.13) $ (.05) $ .15 $ .20 From discontinued operations -- -- -- (.41) (.19) Net (loss) income (.32) (.13) (.05) (.26) .01 Cash dividends on common stock $ -- $ -- $ -- $ -- $ -- December 31, -------------------------------------------------------- 1998 1997* 1996* 1995* 1994* -------- -------- -------- -------- -------- Balance Sheet Data: Working (deficit) capital $ (8,107) $ (5,472) $ 2,499 $ 3,831 $ 10,209 Total assets 32,056 33,750 33,845 31,956 30,207 Short-term debt and notes payable 19,318 18,857 13,085 10,463 3,819 Long-term debt and notes payable (excluding current maturities) 408 36 6,893 9,624 10,019 Stockholders' equity 5,923 8,034 9,019 8,173 13,417 Average number of common and common equivalent shares Basic 9,470 9,458 9,323 9,173 8,804 Diluted 9,470 9,458 9,323 9,725 9,155
- ---------- * During the fourth quarter of 1998, the Company changed its method of determining the cost of inventories from the last-in, first-out ("LIFO") method to the first-in, first-out ("FIFO") method. As required by generally accepted accounting principles, the Company has retroactively restated all prior years' financial statements for this change. The net after-tax impact of the change in inventory costing method for 1998 to 1994 was: $0, $245,000, $(343,000), $99,000, and $(125,000) respectively. (See Note 1 of Consolidated Financial Statements.) ** In March 1994, IGI's Board of Directors voted to dispose of its Biotechnology Business segment through the combination of certain majority-owned subsidiaries and the subsequent tax-free distribution of its ownership of the combined entity to IGI's shareholders. The distribution of this segment occurred on December 12, 1995. The Consolidated Financial Statements of IGI present this segment as a discontinued operation. 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This "Management's Discussion and Analysis" section and other sections of this report contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates, management's beliefs and assumptions made by management. In addition, other written or oral statements which constitute forward-looking statements may be made by or on behalf of the Company. Words such as "expects," "anticipates," "intends," "plans," "believes," "seek," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. (See "Factors Which May Affect Future Results" below.) Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Results of Operations From mid-1997 through most of 1998, the Company was subjected to intense governmental and regulatory scrutiny and was also confronted with a number of material operational issues (See Item 3. "Legal Proceedings"). These matters had a material adverse effect on the Company's financial condition and results of operations in 1998 and 1997, and resulted in the departure of most of the Company's senior management. 1998 Compared to 1997 (Restated) The Company had a net loss of $3,029,000, or $.32 per share in 1998, as compared to a net loss of $1,208,000, or $.13 per share in 1997. The major contributing factors to the increased loss were: increased legal, consulting and professional fees; increased expenses associated with investigating and addressing regulatory problems; the costs and expenses associated with termination of certain employees; the hiring of new management; and increased bank fees and interest charges associated with the extension of the Company's credit line. The Company incurred approximately $2.6 million of legal, consulting and professional fees in 1998 and $1.1 million in 1997. Comparable expenditures for 1994 to 1996 averaged about $0.5 million. The increase of about $2.1 million in 1998 is principally attributable to the regulatory actions and investigations which began in 1997 and resulted in the recent settlement with the U.S. Departments of Justice, Treasury and Agriculture. Another major contributing factor was a decrease in sales of poultry vaccines in 1998 as compared with 1997, primarily as a result of the USDA regulatory action. Total revenues for 1998 were $33,195,000, which represents a decrease of $1,148,000 or 3% from revenues of $34,343,000 in 1997. Sales of poultry vaccines decreased by $1,801,000, or 11%, in 1998 as compared with 1997. Poultry vaccine sales were adversely affected by the USDA regulatory action which remained in effect until March 27, 1998. The Company also experienced lower production volumes of poultry vaccines while it made changes to improve its Vineland Laboratories operations. Sales of pet care products increased by $69,000, or 1%. Total Consumer Products revenues for 1998 increased by $584,000, or 11%, from 1997 revenues. This reflected a $1,028,000 increase in revenue from the Company's cosmetics and personal care products partially offset by a decrease in revenues of $444,000 from the Company's dermatological products. The cosmetics and personal care products revenues increased in 1998 due to increased product sales to Estee Lauder and increased licensing and royalty income, primarily from the Company's relationships with Johnson & Johnson. In August 1998, the Company executed a second license agreement with a Johnson & Johnson division, licensing the Novasome(R) microencapsulation technology for use in certain products and distribution channels to Johnson & Johnson Medical, a division of Ethicon, Inc. The decrease in revenues from dermatological products was due in large part to a decline in revenues from Glaxo. In October, 1998, Glaxo notified the Company that it intended to exit the physician-dispensed skin care market. The Company recognized $326,000 and $150,000 in revenue from this agreement in 1998 and 1997, respectively. As a result of the termination, the Company acquired the WellSkin(TM) trade name from Glaxo along with Glaxo's remaining inventory of products and marketing materials. This termination resulted in the Company owing $808,000 to Glaxo which is payable at specified intervals over the next two years. At December 31, 1998, $400,000 is classified as short-term debt. In December 1998, the Company entered into an agreement with Genesis Pharmaceutical, Inc., ("Genesis") granting Genesis the exclusive right to market and distribute the Company's WellSkin(TM) line of skin care products. Genesis also purchased the entire inventory and marketing materials received from Glaxo. The Company has a receivable from Genesis for approximately $112,000 at December 31, 1998. The Company recognized revenue of $6,000 in 1998 from Genesis. During 1998, the Company recognized $1.2 million of licensing revenue as compared to $150,000 in 1997. This revenue was comprised of $326,000 from Glaxo; $6,000 from Genesis; $92,000 from Johnson & Johnson Medical; $433,000 from Johnson & Johnson Consumer; $210,000 from National Starch; and $133,000 from Kimberly Clark. During 1997, the licensing revenue was comprised of amounts relating to the agreement with Glaxo. Cost of sales decreased by $497,000, or 3%, primarily due to the lower sales volume. However, as a percentage of sales, cost of sales increased from 51% in 1997 to 53% in 1998. This increase primarily resulted from costs relating to the Company's reassessment of product manufacturing processes and formulas, incurred in 1998, to increase future production efficiency and capacity in the Company's Vineland labs division. 15 Selling, general and administrative expenses increased by $729,000, or 5%, from $14,997,000 in 1997 to $15,726,000 in 1998. These expenses were 47% of revenues in 1998 compared with 44% of revenues in 1997. Much of the increase was attributable to increased legal, consulting and professional fees in 1998. Total professional fees in 1998 were approximately $2.6 million, of which approximately $2.1 million was incurred primarily in response to the regulatory actions and investigations which began in 1997 and resulted in the recent settlement with the U.S. Departments of Justice, Treasury and Agriculture. The Company expects its future professional expenses will be significantly below those incurred during 1998. Product development and research expenses decreased by $250,000, or 15%, in 1998 compared with 1997 as the Company curtailed certain development projects primarily relating to the Consumer Products business. Interest expense increased $1,590,000, or 86% from $1,853,000 in 1997 to $3,443,000 in 1998. The increase was due to a charge to earnings of $645,000 for warrants issued to the Company's bank lenders in connection with the execution of an extension agreement with its bank lenders, higher borrowings at increased interest rates in 1998, and fees paid to the bank lenders related to extension and forbearance agreements. The effective tax rates for 1998 and 1997 were 30% and 27%, respectively. Changes in the effective tax rates primarily reflect the level of federal and state tax credits offset by changes in the valuation allowance. The valuation allowance increased from 1997 primarily based on management's expectations regarding the realizability of certain state deferred tax assets. 1997 (Restated) Compared to 1996 (Restated) During the fourth quarter of 1998, the Company changed its inventory costing method from the LIFO method to the FIFO method. The change was made because the Company believes its financial position is the primary concern of its constituents (shareholders, bank lenders, trade creditors, etc.), and that the accounting change will reflect inventory at a value which better represents current costs. As required by generally accepted accounting principles, the Company has retroactively restated prior years' financial statements for this change. The aggregate effect of this restatement was a decrease in stockholders' equity of $294,000 as of December 31, 1997. The restatement had no effect on 1998 results, decreased the net loss in 1997 by $245,000, and increased the net loss in 1996 by $343,000. The USDA's stop shipment order had a material adverse effect on the Company's operations in 1997. Total revenues decreased $604,000, or 2%, from $34,947,000 in 1996 to $34,343,000 in 1997. Sales of poultry vaccines decreased by $3,309,000, or 17%, in 1997 as compared with 1996. Poultry vaccine sales were adversely affected by the USDA regulatory action which remained in effect until March 27, 1998. This decrease was offset in part by an increase of $1,136,000, or 10%, in sales of companion pet products to $12,444,000, or 36% of the Company's total sales in 1997, compared with $11,308,000, or 32% of total 1996 sales. Sales of Consumer Products increased $1,569,000, or 43%, in 1997 to $5,255,000 from $3,686,000 in 1996. Sales of Consumer Products represented 15% of the Company's total 1997 sales, up from 11% of total 1996 sales. This increase was due primarily to increased product sales to Glaxo and Kimberly Clark. Licensing and royalty revenue of $150,000 in 1997 represents $100,000 of licensing income from Kimberly Clark and $50,000 of revenue attributable to an agreement on September 30, 1997 between the Company and IMX. This agreement granted IMX the exclusive right to market certain Novasome(R) based topical skin care products in certain mass-merchandising markets. Currently, negotiations are underway to further refine 16 specific applications. Pursuant to that agreement, the Company received 271,714 shares of restricted common stock of IMX. Cost of sales increased $334,000 in 1997 despite the lower sales volume. As a percentage of sales, cost of sales increased from 49% in 1996 to 51% in 1997. The increase in percentage was due primarily to: (1) manufacturing variances; (2) inventory write-offs; (3) a less favorable product sales mix at the Vineland Laboratories division due to the USDA action; and (4) product sales to Glaxo which were made at cost plus a royalty on Glaxo's sales which resulted in a higher cost of sales percentage than other consumer product sales. Selling, general and administrative expenses were 44% of revenues in 1997 compared with 41% of revenues in 1996. Although the Company decreased selling and marketing expenses as a result of the license and supply agreement with Glaxo, total selling, general and administrative expenses increased $512,000 in 1997 due to additional reserves for accounts receivable and legal and related expenses incurred in connection with the Company's regulatory affairs. Product development and research expenses decreased $338,000, or 17%, in 1997 as the Company curtailed certain development projects primarily relating to the Consumer Products business. The effective tax rates for 1997 and 1996 were 27% and 44%, respectively. The decrease is primarily due to the increase in the valuation allowance, based on management's expectations, regarding the realizability of certain state deferred tax assets. Liquidity and Capital Resources The Company entered into an Extension Agreement with its bank lenders as of April 29, 1998 which provided for a waiver of all past and existing covenant defaults, extension of the bank credit agreement through March 31, 1999, a maximum credit line facility of $12,000,000 ("Credit Line"), extended terms for repayment of the outstanding $6,857,000 balance of revolving credit notes ("Revolving Facility") and issuance to the lenders of warrants to purchase an aggregate of 540,000 shares of the Company's Common Stock at an exercise price of $3.50 per share. The Company has a call option on unexercised warrants at a repurchase price of $1,800,000. The Company recognized a non-cash expense related to the issuance of these warrants of approximately $645,000 in 1998. The Company was in default under certain covenants contained in the Extension Agreement at July 31, 1998. On August 19, 1998, the Company and its bank lenders entered into a Forbearance Agreement whereby the banks agreed to forbear from exercising their rights and remedies arising from these covenant defaults through January 31, 1999. During fiscal 1998, the Company paid interest at a rate of up to prime plus 5.5% on its outstanding borrowings under the Credit Line and under the Revolving Facility. Effective January 31, 1999, the Company and its bank lenders entered into a Second Extension Agreement which provides for a waiver of the covenant defaults under the Forbearance Agreement, amendment of certain covenants, extension of the bank credit agreement to March 31, 2000, and the following: o The maximum availability under the Credit Line is subject to the determination of the amount of eligible accounts receivable and inventories. There is no remaining availability as of December 31, 1998 or March 31, 1999. o Mandatory principal payments of $4,000,000 and $2,000,000 of the outstanding balance of $18,657,000 at December 31, 1998, under the Revolving Facility and Credit Line are due on August 31, 1999 and November 30, 1999, respectively, with the balance due and payable on March 31, 2000. o All of the Company's indebtedness to the banks is subject to a security interest in all of the assets of the Company and its significant subsidiaries. Although the Company can sell operating assets, proceeds from such sale must be remitted directly to the lenders. 17 o Interest on outstanding borrowings of $18,657,000 under both the Credit Line and the Revolving Facility will be at a rate of prime plus 5.5% of which prime plus 2.5% is paid monthly and 3.0% is accrued and payable on March 31, 2000. o The interest rate on outstanding borrowings will be reduced by 0.5% after each of the mandatory principal payments. In addition, the interest rate will be reduced by an additional 1.5% for each $1,000,000 of voluntary principal payments, but not lower than prime plus 1.0%. A pro rata portion of the accrued interest will be waived for all principal payments occurring prior to December 31, 1999. o On March 11, 1999, the Company issued warrants to the bank lenders to purchase 270,000 shares of the Company's Common Stock at an exercise price of $2.00 per share. These warrants are exercisable at any time 60 days after issuance. The Company also issued warrants to purchase an additional 270,000 shares of the Company's Common Stock exercisable at $2.00 per share if the bank debt is still outstanding at September 30, 1999. The warrants expire on the fifth anniversary of issuance. The Company has a call option on unexercised warrants at a repurchase price of $1,800,000. The Company will recognize a non-cash expense for each issuance of warrants for approximately $195,000, or a total of about $390,000 during 1999. o The Company agreed to pay the bank lenders an extension fee of $350,000, which is being amortized over the life of the agreement. At the time of the extension, $50,000 was paid, with the balance payable in four installments through February 24, 2000. If the Company is able to refinance its bank debt, any extension fees due subsequent to the closing date of the refinancing will be waived. o The Company is required to maintain certain minimum financial covenants and comply with other non-financial covenants, including remittance of cash flows from debt or equity financing, income tax refunds and fixed asset dispositions to the banks, and the completion of Year 2000 compliance by September 30, 1999. The agreement also prohibits the payment of cash dividends without prior written consent of the lenders. At March 1, 1999, the Company had cash and cash equivalent balances of $535,000, and no available borrowing capacity under the Credit Line or the Revolving Facility. The Company is currently generating losses that may extend through much of 1999. Further, the Company has significant debt it must repay on August 31, 1999, November 30, 1999 and March 31, 2000. The Company is pursuing additional debt and equity financing alternatives to meet these obligations. The Company believes it 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 on 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 available and the authorization of a preferred stock class. 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. 18 The Company's operating activities provided $816,000 of cash during 1998, which included net income and non-cash charges to operations for depreciation, amortization, loss reserves and stock and warrant compensation expense, partially offset by an increase in deferred tax assets. Additionally, inventory, accounts receivable and other assets decreased, while accounts payable and accrued expenses increased, all of which had the effect of increasing operating cash flow. The accounts receivable turnover ratio for 1998 was 4.34 compared to 4.51 for 1997. The accounts receivable balances due from Mexico and Latin America were 26% of the total receivable balances as of December 31, 1998, and the Company believes the net amounts are collectible. Mexico and certain Latin American countries are important markets for the Company's poultry vaccines and other products. In addition, the Company has accounts receivable from countries in the Far East, including Indonesia and Thailand, which represented 25% of the total receivable balances at December 31, 1998. These geographic markets have recently experienced political, economic and currency instability. In order to minimize risk, the Company maintains credit insurance for the majority of its international accounts receivable, and all sales are denominated in U.S. dollars to minimize currency fluctuation risk. Because of the volume of business transacted by the Company in these areas, continuation or recurrence of such unrest or instability could adversely affect the business of its customers in those countries or the Company's ability to collect its receivables from such customers, which, in either case, could materially adversely affect the Company's future operating results. The inventory turnover ratio for 1998 was 2.07, compared to 1.89 for the year ended December 31, 1997. The Company believes its reserves for inventory obsolescence and accounts receivable are adequate. The Company used $708,000 for investing activities, which were primarily capital expenditures for the Company's manufacturing operations. Funding for the Company's investing activities and repayment of debt was provided by the Company's cash flow from operations. Factors Which May Affect Future Results The industry segments in which the Company competes are subject to intense competitive pressures. The following sets forth some of the risks which the Company faces. Adverse Effects of USDA Actions and OIG and U.S. Attorney Investigations The stop shipment order and other actions by the USDA in 1997, and other government investigations described in "Legal Proceedings" and the costs incurred in connection with those investigations have had a material adverse effect on the Company's business and results of operations in 1998 and are likely to continue to adversely affect the Company's business during the first half of 1999. The Company has continued to refine and strengthen its regulatory program with the adoption of a series of compliance and enforcement policies, the addition of new managers of Production and Quality Control, and a new Senior Vice President and General Counsel. At the instruction of the Board of Directors, the Company's General Counsel has established and oversees a comprehensive employee training program, has designated in writing a Regulatory Compliance Officer and has established a fraud detection program as well as an employee "hotline." The Company has continued to cooperate with the USDA in all aspects of its investigation and regulatory activities. While the Company has made progress in returning to normal business operations by hiring new management and taking corrective action to assure compliance with all regulatory requirements, it still faces important challenges. First, it must assure its customers that its future business operations will comply with all applicable government rules and regulations and that its financial condition is adequate to meet its business commitments and to maintain a viable and stable business environment. Second, it must comply with all of the covenants in its bank credit agreement to assure continued bank financing of its operations and replace its current bank agreement. Third, it must raise additional debt or equity funds to meet its business plan and to maintain its competitive position. No assurance can be given that the Company will be able to accomplish all or any of the foregoing requirements, and the failure to do so, could have a material adverse effect on the Company's business, financial condition and results of operations. 19 Highly Leveraged; Inability to Obtain Additional Funding The Company is currently very highly leveraged and has negative working capital, and therefore will need to obtain additional debt or equity capital to meet its business plan, short-term repayment obligations, and to maintain its competitive position. No assurance can be given that such funds will be obtained when required or, if obtainable, on terms that are favorable to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." The Company was in default under certain covenants in its bank credit agreements during 1998. In April 1998, the banks agreed to a waiver of the covenant defaults and to extend the credit agreement on revised terms and conditions through March 31, 1999. The Company was in default under certain covenants contained in its 1998 Extension Agreement at July 31, 1998. On August 19, 1998, the Company and its bank lenders entered into a Forbearance Agreement whereby the banks agreed to forbear from exercising their rights and remedies arising from these covenant defaults through January 31, 1999. Effective January 31, 1999, the Company and its bank lenders entered into a Second Extension Agreement pursuant to which the banks waived the existing covenant defaults under the Forbearance Agreement and extended the credit agreement on amended terms and conditions through March 31, 2000, including the addition of a covenant obligating the Company to reduce its loans to the banks by $4.0 million by August 31, 1999 and an additional $2.0 million by November 30, 1999. At March 1, 1999, the Company had cash and cash equivalent balances of $535,000, and no available borrowing capacity under the Credit Line or the Revolving Facility. The Company is currently generating losses that may extend through much of 1999. Therefore, the Company has significant debt it must repay on August 31, 1999, November 30, 1999 and March 31, 2000. The Company is pursuing additional debt and equity financing alternatives in order to meet these obligations. The Company believes it can obtain such financing on acceptable terms. However, if the Company is not successful in obtaining the required additional funds, it believes it has the ability and it plans to meet its 1999 debt repayment obligations by altering its business plans including, if necessary, a sale of selected Company operating and non-operating assets. Any sale of operating assets would involve a curtailment of certain of the Company's business operations and a modification of its business strategy. However, if the Company is unable to raise sufficient funds to repay or refinance the debt repayment due March 31, 2000, the Company could be in default under its loan agreement and any such default could lead to the commencement of insolvency proceedings by its creditors. Accordingly, the Board of Directors of the Company has authorized management of the Company to seek additional equity capital through the sale of common stock of the Company, either through a private sale to institutional or individual investors or through a rights offering to its stockholders. While the Company has contacted a number of potential providers of additional capital, no agreements or commitments have been obtained to date. Intense Competition in Consumer Products Business The Company's Consumer Products business competes with large, well-financed cosmetics and consumer products companies with development and marketing groups that are experienced in the industry and possess far greater resources than those available to the Company. There is no assurance that the Company's consumer products can compete successfully against its competitors or that it can develop and market new products that will be favorably received in the marketplace. In addition, certain of the Company's customers that use the Company's Novasome(R) lipid vesicles in their products may decide to reduce their purchases from the Company or shift their business to other suppliers. 20 Competition in Poultry Vaccine Business The Company is encountering increasingly severe competition from international producers of poultry vaccines, particularly increased price competition coupled with a downward trend in vaccine prices. Foreign Regulatory and Economic Considerations The Company's business may be adversely affected by foreign import restrictions and additional regulatory requirements. Also, unstable or adverse economic conditions and fiscal and monetary policies in certain Latin American and Far Eastern countries, increasingly important markets for the Company's animal health products, could adversely affect the Company's future business in these countries. Rapidly Changing Marketplace for Pet Products The emergence of pet superstores, the consolidation of distribution channels into fewer, more powerful companies and the diminishing traditional role of veterinarians in the distribution of pet products could adversely affect the Company's ability to expand its animal health business or to operate at acceptable gross margin levels. Effect of Rapidly Changing Technologies The Company expects to license its technologies to third parties which would manufacture and market products incorporating the technologies. However, if its competitors develop new and improved technologies that are superior to the Company's technologies, its technologies could be less acceptable in the marketplace and therefore the Company's planned technology licensing could be materially adversely affected. Regulatory Considerations The Company's poultry vaccines and pet products are regulated by the USDA and the FDA which subject the Company to review, oversight and periodic inspections. Any new products are subject to expensive and sometimes protracted USDA and FDA regulatory approval. Also, certain of the Company's products may not be approved for sales overseas on a timely basis, thereby limiting the Company's ability to expand its foreign sales. Year 2000 The "Year 2000 Issue" is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, a temporary inability to process transactions, prepare invoices or engage in similar normal business activities. As of December 31, 1998, the Company had assessed its needs to assure full compliance with Year 2000 requirements and has developed a comprehensive compliance plan. The Company has Year 2000 compliance needs involving three areas: (i) financial and management computer systems, (ii) microprocessors and other electronic device components of equipment used by the Company ("embedded chips"), and (iii) computer systems used by third parties, in particular financial institutions, suppliers and customers of the Company. The Company decided that its financial and management computer system should be remediated. The Company's present financial and management computer systems are not all Year 2000 compliant. The Company has undertaken to update and remediate its existing computer system to make it Year 2000 compliant at a cost of about $65,000, and has entered into a contract with the system's vendor for such remediation. The Company expects its financial and management computer system to be Year 2000 compliant by September 1999. To date, the Company has incurred approximately $35,000 in hardware and software upgrades and replacements. If the upgraded system fails, the Year 2000 issue could have a materially adverse effect on the operations and financial condition of the Company. 21 The Company has completed an inventory and assessment of its exposure to embedded chips in its facilities or equipment used in those facilities and the capability of vendors of such equipment to successfully remediate Year 2000 problems in equipment with embedded chips. The Company believes that the cost to remediate and/or replace its embedded chips to achieve Year 2000 compliance is approximately $15,000 and expects all remediation of embedded chips to be completed by June 1999. The Company has contacted vendors and customers to determine their exposure to Year 2000 issues, their anticipated risks and responses to those risks. The Company's vendors supply products and materials which are readily available and the Company has identified alternative sources in the event a vendor is not Year 2000 compliant. The Company believes that the cost related to non-compliance by vendors and customers is not expected to be material. While the Company believes that necessary modifications will be made on a timely basis, there can be no assurance that there will not be a delay in or increased costs associated with the implementation of such modifications. If the Company is unsuccessful in completing remediation of non-compliant systems or correcting embedded chips, the Company could incur additional costs to develop alternative methods of managing its business and replacing non-compliant equipment and may experience delays in payments from customers or to its vendors. Income Taxes The Company has net deferred tax assets in the amount of approximately $5.5 million as of December 31, 1998. The largest deferred tax asset relates to the $2.8 million net operating loss carryforwards. After considering the $726,000 valuation allowance at December 31, 1998, management believes the Company's remaining net deferred tax assets are more likely than not to be realized through the reversal of existing taxable temporary differences, the sale of certain state net operating losses, and the generation of sufficient future taxable operating income to ensure utilization of remaining deductible temporary differences, net operating losses and tax credits. The minimum level of future taxable income necessary to realize the Company's net deferred tax assets at December 31, 1998, is approximately $16 million. There can be no assurance, however, that the Company will be able to achieve the minimum levels of taxable income necessary to realize its net deferred tax assets. Federal net operating loss carryforwards expire through 2018. Significant components expire in 2007 (26%), 2010 (13%) and 2018 (56%). Also federal research credits expire in varying amounts through the year 2018. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data The financial statements and notes thereto listed in the accompanying index to financial statements (Item 14) are filed as part of this Annual Report and incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Part III Item 10. Directors and Executive Officers of the Registrant A portion of the information required by this item is contained in part under the caption "Executive Officers of the Registrant" in Part I hereof, and the remainder is contained in the Company's Proxy Statement for the Company's Annual Meeting of Stockholders to be held on May 13, 1999 (the "1999 Proxy Statement") under the captions "PROPOSAL 1 - 22 ELECTION OF DIRECTORS" and "Section 16(a) Beneficial Ownership Reporting Compliance" which are incorporated herein by this reference. Officers are elected on an annual basis and serve at the discretion of the Board of Directors. The Company expects to file the 1999 Proxy Statement no later than April 14, 1999. Item 11. Executive Compensation The information required by this item is contained under the captions "EXECUTIVE COMPENSATION" and "Director Compensation and Stock Options" in the Company's 1999 Proxy Statement and is incorporated herein by this reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is contained in the Company's 1999 Proxy Statement under the caption "Beneficial Ownership of Common Stock" and is incorporated herein by this reference. Item 13. Certain Relationships and Related Transactions The information required by this item is contained under the caption "Certain Relationships and Related Transactions" appearing in the Company's 1999 Proxy Statement and is incorporated herein by this reference. Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) Financial Statements: Reports of Independent Accountants Consolidated Balance Sheets, December 31, 1998 and 1997 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: Schedule II. Valuation and Qualifying Accounts and Reserves Schedules other than those listed above are omitted for the reason that they are either not applicable or not required or because the information required is contained in the financial statements or notes thereto. Condensed financial information of the Registrant is omitted since there are no substantial amounts of "restricted net assets" applicable to the Company's consolidated subsidiaries. (3) Exhibits Required to be Filed by Item 601 of Regulation S-K. The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed as part of this Annual Report on Form 10-K, unless incorporated by reference as indicated. (b) Reports on Form 8-K None. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: April 12, 1999 IGI, Inc. By: /s/ Edward B. Hager ---------------------------- Edward B. Hager, Chairman of the Board Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacity and on the date indicated.
Signatures Title Date - ---------- ----- ---- /s/ Edward B. Hager Chairman of the Board April 12, 1999 - --------------------------- Chief Executive Officer Edward B. Hager (Principal executive officer) /s/ John F. Wall Senior Vice President April 12, 1999 - --------------------------- Chief Financial Officer John F. Wall (Principal financial officer) /s/ F. Steven Berg Director April 12, 1999 - --------------------------- F. Steven Berg /s/ Terrence D. Daniels Director April 12, 1999 - --------------------------- Terrence D. Daniels /s/ Jane E. Hager Director April 12, 1999 - --------------------------- Jane E. Hager /s/ Constantine L. Hampers Director April 12, 1999 - --------------------------- Constantine L. Hampers /s/ Terrence O'Donnell Director April 12, 1999 - --------------------------- Terrence O'Donnell /s/ Paul D. Paganucci Director April 12, 1999 - --------------------------- Paul D. Paganucci /s/ David G. Pinosky Director April 12, 1999 - --------------------------- David G. Pinosky
24 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of IGI, Inc.: In our opinion, the accompanying consolidated financial statements and financial statement schedule as listed in Item 14(a)(1) and (2) of this Form 10-K present fairly, in all material respects, the financial position of IGI, Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Notes 1 and 8, the Company has substantial debt due on March 31, 2000, and is actively seeking alternative financing arrangements. As discussed in Note 1 to the financial statements, the Company changed its method of inventory costing in 1998. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 31, 1999 25 IGI, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 (in thousands)
1998 1997* -------- -------- ASSETS Current assets: Cash and cash equivalents $ 1,068 $ 1,196 Accounts receivable, less allowance for doubtful accounts of $516 and $903 in 1998 and 1997, respectively 6,462 6,851 Licensing and royalty receivable 440 -- Inventories 7,406 8,942 Current deferred taxes 1,275 728 Prepaid expenses and other current assets 433 690 -------- -------- Total current assets 17,084 18,407 -------- -------- Investments 535 1,011 Property, plant and equipment, net 9,479 9,836 Deferred income taxes 4,188 3,414 Other assets 770 1,082 -------- -------- Total Assets $ 32,056 $ 33,750 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Credit line $ 12,000 $ 12,000 Revolving credit facility 6,657 6,857 Current portion of notes payable 661 -- Accounts payable 3,235 3,841 Accrued payroll 196 183 Due to stockholder 380 -- Accrued interest 432 150 Other accrued expenses 1,614 759 Income taxes payable 16 89 -------- -------- Total current liabilities 25,191 23,879 -------- -------- Notes payable 408 36 -------- -------- Deferred income from royalty contract 534 1,801 -------- -------- Commitments and contingencies (Note 12) Stockholders' equity: Common stock, $.01 par value, 30,000,000 shares authorized; 9,648,931 and 9,602,681 shares issued in 1998 and 1997, respectively 97 96 Additional paid-in capital 19,961 19,074 Accumulated deficit (11,972) (8,943) -------- -------- 8,086 10,227 Less treasury stock; 136,014 shares at cost, in 1998 and 1997 (2,163) (2,163) Stockholders' notes receivable -- (30) -------- -------- Total stockholders' equity 5,923 8,034 -------- -------- Total Liabilities and Stockholders' Equity $ 32,056 $ 33,750 ======== ========
* Prior year amounts restated to reflect the Company's change in inventory costing method (See Note 1). The accompanying notes are an integral part of the consolidated financial statements. 26 IGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 1998, 1997 and 1996 (in thousands, except share and per share information)
1998 1997* 1996* ----------- ----------- ----------- Revenues: Sales, net $ 31,995 $ 34,193 $ 34,785 Licensing and royalty income 1,200 150 162 ----------- ----------- ----------- Total revenues 33,195 34,343 34,947 Cost and Expenses: Cost of sales 16,954 17,451 17,117 Selling, general and administrative expenses 15,726 14,997 14,485 Product development and research expenses 1,425 1,675 2,013 ----------- ----------- ----------- Operating profit (loss) (910) 220 1,332 Interest expense, net (3,443) (1,853) (1,984) Other income (expense), net 33 (11) (202) ----------- ----------- ----------- Loss before provision for income taxes (4,320) (1,644) (854) Benefit for income taxes (1,291) (436) (373) ----------- ----------- ----------- Net loss $ (3,029) $ (1,208) $ (481) =========== =========== =========== Loss per common and common equivalent share: Basic $ (.32) $ (.13) $ (.05) =========== =========== =========== Diluted $ (.32) $ (.13) $ (.05) =========== =========== =========== Average number of common and common equivalent shares: Basic 9,470,413 9,457,938 9,323,440 =========== =========== =========== Diluted 9,470,413 9,457,938 9,323,440 =========== =========== ===========
* Prior year amounts restated to reflect the Company's change in inventory costing method (See Note 1). The accompanying notes are an integral part of the consolidated financial statements. 27 IGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1998, 1997 and 1996 (in thousands)
1998 1997* 1996* ------- ------- ------- Cash flows from operating activities: Net loss $(3,029) $(1,208) $ (481) Reconciliation of net loss to net cash used by operating activities: Depreciation and amortization 992 1,037 992 Gain on sale of assets (62) -- -- Write off of other assets 558 -- -- Provision for loss on accounts and notes receivable and inventories 1,482 1,610 412 Recognition of deferred revenue (242) (150) -- Issuance of stock to 401(k) plan -- 40 91 Benefit for deferred income taxes (1,321) (447) (382) Stock compensation expense: Non-employee stock options 149 47 156 Warrants issued to lenders 645 -- -- Directors' stock issuance 94 -- -- Litigation settlement in common stock -- (50) 175 Other, net 17 -- -- Changes in operating assets and liabilities: Accounts receivable 239 721 (300) Inventories 374 (1,735) 161 Receivable due under royalty agreement (328) 1,000 -- Prepaid and other assets 333 398 (455) Accounts payable and accrued expenses 929 1,123 130 Deferred revenue 59 -- -- Income taxes payable (73) 51 22 ------- ------- ------- Net cash provided from operating activities 816 2,437 521 ------- ------- ------- Cash flows from investing activities: Capital expenditures (607) (636) (913) Proceeds from sale of assets 165 -- -- (Increase) decrease in other assets (266) 68 59 ------- ------- ------- Net cash used by investing activities (708) (568) (854) ------- ------- ------- Cash flows from financing activities: Net borrowings under line of credit agreements -- 2,358 1,594 Borrowings under revolving credit agreement -- -- 12 Repayment of debt (236) (3,443) (1,714) Proceeds from exercise of common stock options -- 95 589 ------- ------- ------- Net cash (used in) provided from financing activities (236) (990) 481 ------- ------- ------- Net (decrease) increase in cash and cash equivalents (128) 879 148 Cash and cash equivalents at beginning of year 1,196 317 169 ------- ------- ------- Cash and cash equivalents at end of year $ 1,068 $ 1,196 $ 317 ======= ======= =======
* Prior year amounts restated to reflect the Company's change in inventory costing method (See Note 1). The accompanying notes are an integral part of the consolidated financial statements. 28 IGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the years ended December 31, 1998, 1997 and 1996 (in thousands, except share information)
Common Stock Additional Stockholders' ------------------------ Stock Paid-In Notes Shares Amount Subscribed Capital Receivable ---------- ---------- ---------- ---------- ---------- Balance, January 1, 1996* 9,440,681 $ 94 $ -- $ 18,131 $ (189) Exercise of stock options, including tax benefits of $79 132,000 2 666 Issuance of stock to 401(k) plan 1 Settlement of litigation 175 Tax benefit of license payment to former subsidiary 161 Issuance of non-employee stock options 156 Repayment on stockholders' notes 75 Net loss* ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1996* 9,572,681 96 175 19,115 (114) Settlement of litigation (175) (118) Exercise of stock options, including tax benefits of $7 30,000 -- 122 Issuance of stock to 401(k) plan (92) Value of non-employee stock options 47 Interest earned on stockholders' notes (10) Reserve on stockholders' notes receivable 94 Net loss* ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1997* 9,602,681 96 -- 19,074 (30) Issuance of stock pursuant to Directors' Stock Plan 46,250 1 93 Value of non-employee stock options 149 Value of warrants issued 645 Interest earned on stockholders' notes (3) Reserve on stockholders' notes receivable 33 Net loss ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1998 9,648,931 $ 97 $ -- $ 19,961 $ -- ========== ========== ========== ========== ========== Total Accumulated Treasury Stockholders' Deficit Stock Equity ---------- ---------- ---------- Balance, January 1, 1996* $ (7,254) $ (2,609) $ 8,173 Exercise of stock options, including tax benefits of $79 668 Issuance of stock to 401(k) plan 91 92 Settlement of litigation 175 Tax benefit of license payment to former subsidiary 161 Issuance of non-employee stock options 156 Repayment on stockholders' notes 75 Net loss* (481) (481) ---------- ---------- ---------- Balance, December 31, 1996* (7,735) (2,518) 9,019 Settlement of litigation 243 (50) Exercise of stock options, including tax benefits of $7 (20) 102 Issuance of stock to 401(k) plan 132 40 Value of non-employee stock options 47 Interest earned on stockholders' notes (10) Reserve on stockholders' notes receivable 94 Net loss* (1,208) (1,208) ---------- ---------- ---------- Balance, December 31, 1997* (8,943) (2,163) 8,034 Issuance of stock pursuant to Directors' Stock Plan 94 Value of non-employee stock options 149 Value of warrants issued 645 Interest earned on stockholders' notes (3) Reserve on stockholders' notes receivable 33 Net loss (3,029) (3,029) ---------- ---------- ---------- Balance, December 31, 1998 $ (11,972) $ (2,163) $ 5,923 ========== ========== ==========
* Prior year amounts restated to reflect the Company's change in inventory costing method (See Note 1). The accompanying notes are an integral part of the consolidated financial statements. 29 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Nature of the Business IGI, Inc. ("IGI" or the "Company") is a diversified company engaged in three business segments: o Poultry Vaccine Business - production and marketing of poultry vaccines and other related products; o Companion Pet Products Business - production and marketing of companion pet products such as pharmaceuticals, nutritional supplements and grooming aids; and o Consumer Products Business - production and marketing of cosmetics and skin care products. Financing Needs At March 1, 1999, the Company had cash and cash equivalent balances of $535,000, and no available borrowing capacity under the Credit Line or the Revolving Facility. The Company is currently generating losses that may extend through much of 1999. Therefore, the Company has significant debt that it must repay on August 31, 1999, November 30, 1999 and March 31, 2000. The Company is pursuing additional debt and equity financing alternatives in order to meet these obligations. The Company believes it can obtain such financing on acceptable terms. See also Note 8 - "Debt." Principles of Consolidation The consolidated financial statements include the accounts of IGI, Inc. and its wholly-owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated. An investment in an affiliated company with a 20% ownership interest is accounted for using the cost method. Cash equivalents Cash equivalents consist of short-term investments with initial maturities of 90 days or less. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk are cash, cash equivalents, accounts receivable, notes receivable and certain restricted investments. The Company limits credit risk associated with cash and cash equivalents by placing its cash and cash equivalents with two high credit quality financial institutions. Accounts receivable include customers in several key geographic areas. Of these, Mexico, Indonesia, Thailand and certain other Latin American and Far Eastern countries are important markets for the Company's poultry vaccines and other products. These countries have from time to time experienced periods of varying degrees of political unrest and economic and currency instability. Because of the volume of business transacted by the Company in these areas, continuation or recurrence of such unrest or instability could adversely affect the businesses of its customers in these areas or the Company's ability to collect its receivables from such customers, which in either case could adversely impact the Company's future operating results. In order to minimize risk, the Company maintains credit insurance for the majority of its international accounts receivable and all sales are denominated in U.S. dollars to minimize currency fluctuation risk. 30 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Inventories Inventories are valued at the lower of cost, using the first-in, first-out ("FIFO") method, or market. During the fourth quarter of 1998, the Company changed its method of determining the cost of inventories from the last-in, first-out ("LIFO") method to the FIFO method. The change was made because the Company believes its financial position is the primary concern of its constituents (shareholders, bank lenders, trade creditors, etc.) and the accounting change will reflect inventory at a value which better represents current costs. As required by generally accepted accounting principles, the Company has retroactively restated prior years' financial statements for this change. The aggregate effect of this restatement was a decrease in stockholders' equity of $294,000 as of December 31, 1997. The restatement had no effect on 1998 results, decreased the net loss in 1997 by $245,000 and increased the net loss in 1996 by $343,000. Property, Plant and Equipment Depreciation of property, plant and equipment is provided for under the straight-line method over the assets' estimated useful lives as follows: Useful Lives ------------ Buildings and improvements 10 - 30 years Machinery and equipment 3 - 10 years Repair and maintenance costs are charged to operations as incurred while major improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation thereon are removed from the accounts and any gains or losses are included in operating results. Other Assets Other assets include cost in excess of net assets of businesses acquired of $325,000, which is being amortized on a straight-line basis over 40 years. In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company reviews its long-lived assets for impairment on an exception basis whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable through future cash flows. If it is determined that an impairment has occurred based on expected future cash flows, the loss is then recognized in the income statement. Income Taxes The Company records income taxes under the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded based on a determination of the ultimate realizability of future deferred tax assets. Stock-Based Compensation Compensation costs attributable to stock option and similar plans are recognized based on any difference between the quoted market price of the stock on the date of grant over the amount the employee is required to pay to acquire the 31 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) stock (the intrinsic value method). Such amount, if any, is accrued over the related vesting period, as appropriate. Since the Company uses the intrinsic value method, it makes pro forma disclosures of net income and earnings per share as if a fair value based method of accounting had been applied. Financial Instruments The Company's financial instruments include cash and cash equivalents, accounts receivable, notes receivable, restricted common stock, notes payable and short-term debt. The carrying value of these instruments approximates the fair value. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include allowances for excess and obsolete inventories, allowances for doubtful accounts and other assets, and provisions for income taxes and related deferred tax asset valuation allowances. Actual results could differ from those estimates. Revenue Recognition Sales, net of appropriate cash discounts, product returns and sales reserves, are recorded upon shipment of products. Revenues earned under research contracts or licensing and supply agreements are recognized when the related contract provisions are met. Product Development and Research Product development and research represents the Company's research and development efforts which are focused primarily on product development. Such costs are expensed as incurred. Business Segments In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach indicates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position but did affect the disclosure of segment information included in Note 17, "Business Segments." Reclassification Certain previously reported amounts have been reclassified to conform with the current period presentation. 2. Investments The Company has a 20% investment in Indovax, Ltd., an Indian poultry vaccine company, which investment, because of the lack of significant influence, is accounted for using the cost method. Dividends received from Indovax were $22,000 in 1998, $23,000 in 1997 and $0 in 1996. Other investments include 271,714 shares of restricted common stock of IMX Corporation ("IMX"), a publicly-traded 32 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) company, valued at $1.75 and $3.50 per share as of December 31, 1998 and 1997, respectively, received pursuant to an exclusive Supply Agreement (the "Supply Agreement") dated September 30, 1997 between the Company and IMX. These shares are restricted both by governmental and contractual requirements and the Company is unsure if or when it will be able to sell these shares. As of December 31, 1998, the Company has not yet recognized income related to this agreement. The total investment in IMX stock was $475,000 at December 31, 1998 and $951,000 at December 31, 1997, with corresponding amounts reflected as deferred income in the accompanying Consolidated Balance Sheet. Under the IMX agreement, the Company agreed to manufacture and supply 100% of IMX's requirements for certain products at prices stipulated in the exclusive Supply Agreement, subject to renegotiation subsequent to 1998. The Company is currently involved in discussions with IMX concerning possible modifications to the Supply Agreement as it has determined the Company will not supply the products stipulated by the Supply Agreement but may supply certain other products based on negotiations with IMX. 3. Supply and Licensing Agreements In 1996, the Company entered into a license and supply agreement with Glaxo Wellcome, Inc. ("Glaxo"). The agreement granted Glaxo exclusive rights to market the WellSkin(TM) product line in the United States to physicians. Under the terms of the agreement, IGI manufactured these products for Glaxo. This agreement provided for Glaxo to pay royalties to IGI based on sales, and to pay a $1,000,000 advance royalty to IGI in 1997 of which $300,000 was non-refundable. The advance royalty was recorded as deferred income. In October 1998, Glaxo notified the Company of its intent to exit the physician-dispensed skin care market. In December 1998, the license and supply agreement with Glaxo was terminated. The termination agreement provided that IGI would purchase all of Glaxo's inventory and marketing materials related to the WellSkin(TM) line in exchange for a $200,000 promissory note, due and payable in December 1999 bearing interest at a rate of 11%. The Company also issued a promissory note to Glaxo for $608,000, representing the unearned portion of the advance royalty in exchange for Glaxo transferring all rights to the WellSkin(TM) trademark to IGI. This note bears interest at a rate of 11% and is payable in three installments between December 1999 and December 2000. In connection with the agreement termination, but unrelated to the advance royalty, IGI reduced cost of sales by $404,000 in 1998 for amounts owed to Glaxo that were forgiven. In 1997 and 1998, IGI recognized $150,000 and $326,000, respectively, of royalty income under the Glaxo Agreement. In December 1998, the Company entered into a supply and sales agreement with Genesis Pharmaceutical, Inc. ("Genesis") for the marketing and distribution of the Company's WellSkin(TM) line of skin care products. The agreement provides that Genesis will pay the Company a trademark and technology transfer fee in four equal annual payments of $250,000 each commencing November 1, 1999. In addition, Genesis will pay the Company a royalty on its net sales with certain guaranteed minimum royalty amounts. Genesis also purchased WellSkin(TM) inventory and marketing materials previously purchased by the Company from Glaxo of which $112,000 was shipped by December 31, 1998 and the remainder was shipped in early 1999. Genesis has signed a $200,000 promissory note for the inventory and marketing materials, which is due on November 1, 1999 bearing interest at 11%. In connection with the Genesis transaction, the Company recognized revenue of $6,000 in 1998. In March 1997, IGI granted Kimberly Clark ("Kimberly") the worldwide rights to use certain patents and technologies in the industrial hand care and cleaning products field. Upon signing the agreement, Kimberly paid IGI a $100,000 license fee that was recognized as revenue by the Company in 1997. The agreement requires Kimberly to make royalty payments based on quantities of material produced. The Company is also guaranteed minimum royalties over the term of the agreement. In 1998, the Company earned $133,000 of minimum royalties, which is recorded as an accounts receivable due from Kimberly Clark at December 31, 1998. 33 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company entered into a license agreement with Johnson & Johnson Consumer Products, Inc. ("J&J") in 1995. The agreement provides J&J with a license to produce and sell Novasome(R) microencapsulated retinoid products and provides for the payment of royalties on net sales of such products. J&J began selling such products and making royalty payments in the first quarter of 1998. The Company recognized $433,000 of revenue related to this agreement for the year ended December 31, 1998. No revenue was recognized under this agreement in 1997 or 1996. In April 1998, the Company entered into a reseach and development agreement with National Starch and Chemical Company ("National Starch") to evaluate Novasome(R) technology which, if favorable, may result in negotiating a licensing agreement. The agreement provides for a minimum of at least six, or up to as much as nine, monthly payments commencing in June 1998 plus $100,000 for the purchase of a patented Novamix(R) machine. The Company recognized $210,000 in licensing revenues in 1998 related to the National Starch agreement. In August 1998, the Company granted Johnson & Johnson Medical ("JJM"), a Division of Ethicon, Inc., worldwide rights for use of the Novasome(R) technology for certain products and distribution channels. The agreement provides for an up-front license fee of $150,000, of which $92,000 was recognized as revenue by the Company in 1998, and future royalty payments based on JJM's sales of licensed products. The Company is guaranteed minimum royalties over the term of the agreement. See also Note 2 "Investments" for a description of the IMX Supply Agreement. 4. Supplemental Cash Flow Information Cash payments for income taxes and interest during the years ended December 31, 1998, 1997 and 1996 were as follows:
1998 1997 1996 ---- ---- ---- (in thousands) Income taxes paid, net $ 0 $ (33) $ 41 Interest 2,163 1,853 1,955
In addition, during the years ended December 31, 1998, 1997 and 1996, the Company had the following non-cash financing and investing activities:
1998 1997 1996 ---- ---- ---- (in thousands) Accrual for additions to other assets $ 40 $ -- $ -- Tax benefits of exercise of common stock options -- 7 79 Treasury stock repurchased -- 20 -- Tax benefit of license payment to former subsidiary -- -- (161) Receivable under royalty agreement -- -- 1,000 Note payable to Glaxo (See Notes 3 and 7) 808 -- -- Note receivable from Genesis (See Note 3) (112) -- --
See Note 2 "Investments" for discussion regarding IMX investment. 34 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. Inventories Inventories as of December 31, 1998 and 1997 consisted of: 1998 1997 ------- ------- (in thousands) Finished goods $ 2,785 $2,491 Raw materials 2,210 3,259 Work-in-process 2,411 3,192 ------- ------- $ 7,406 $ 8,942 ======= ======= See Note 1 for a description of the Company's change in inventory valuation method and resultant restatement of prior year balances. 6. Property, Plant and Equipment Property, plant and equipment, at cost, as of December 31, 1998 and 1997 consisted of: 1998 1997 ------- ------- (in thousands) Land $ 625 $ 625 Buildings 9,748 9,600 Machinery and equipment 9,986 9,659 ------- ------- 20,359 19,884 Less accumulated depreciation (10,880) (10,048) ------- ------- Property, plant and equipment, net $ 9,479 $ 9,836 ======= ======= The Company recorded depreciation expense of $861,000, $925,000 and $926,000 in each of the years 1998, 1997 and 1996 respectively. 7. Notes Payable Notes payable at December 31, 1998 and 1997 consisted of: 1998 1997 ------- ------- (in thousands) Glaxo $ 808 $ -- Other 261 36 ------ ------- 1,069 36 Less: Current portion 661 -- ------ ------- $ 408 $ 36 ======= ======= The Company's licensing and supply agreement with Glaxo was terminated in December 1998, resulting in the issuance of a $200,000 promissory note which is due and payable in December 1999 and bears interest at a rate of 11%. The Company also issued a promissory note to Glaxo for $608,000 bearing interest at 11%, which represents the unearned portion of the advanced royalty. Principal and interest amounts are payable semi-annually beginning in December 1999 in the amount of $200,000 with the remaining amount of $408,000 due in 2000. The remaining balance of short-term notes payable of $261,000 consists of amounts to finance the Company's 1998 insurance policies. 35 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Debt Debt as of December 31, 1998 and 1997 consisted of: 1998 1997 ------- ------- (in thousands) Credit line $12,000 $12,000 Revolving credit facility 6,657 6,857 ------- ------- $18,657 $18,857 ======= ======= Aggregate annual principal payments due on debt for the years subsequent to December 31, 1998 are as follows: Year (in thousands) ---- -------------- 1999 $ 6,000 2000 12,657 ------- $18,657 ======= The Company entered into an Extension Agreement with its bank lenders as of April 29, 1998 which provided for a waiver of all past and existing covenant defaults, extension of the bank credit agreement through March 31, 1999, a maximum credit line facility of $12,000,000 ("Credit Line"), extended terms for repayment of the outstanding $6,857,000 balance of revolving credit notes ("Revolving Facility") and issuance to the lenders of warrants to purchase an aggregate of 540,000 shares of the Company's common stock at an exercise price of $3.50 per share. The Company has a call option on unexercised warrants at a repurchase price of $1,800,000. The Company recognized a non-cash expense related to the issuance of these warrants of approximately $645,000 in 1998. The Company was in default under certain covenants contained in the Extension Agreement at July 31, 1998. On August 19, 1998, the Company and its bank lenders entered into a Forbearance Agreement whereby the banks agreed to forbear from exercising their rights and remedies arising from these covenant defaults through January 31, 1999. During fiscal 1998, the Company paid interest at a rate of up to prime plus 5.5% on its outstanding borrowings under the Credit Line and under the Revolving Facility. Effective January 31, 1999, the Company and its bank lenders entered into a Second Extension Agreement which provides for a waiver of the covenant defaults under the Forbearance Agreement, amendment of certain covenants, extension of the bank credit agreement to March 31, 2000, and the following: o The maximum availability under the Credit Line is subject to the determination of the amount of eligible accounts receivable and inventories. There is no remaining availability as of December 31, 1998 or March 31, 1999. o Mandatory principal payments of $4,000,000 and $2,000,000 of the outstanding balance of $18,657,000, at December 31, 1998, under the Revolving Facility and Credit Line are due on August 31, 1999 and November 30, 1999, respectively, with the balance due and payable on March 31, 2000. o All of the Company's indebtedness to the banks is subject to a security interest in all of the assets of the Company and its significant subsidiaries. Although the Company can sell operating assets, proceeds from such sale must be remitted directly to the lenders. o Interest on outstanding borrowings of $18,657,000 under both the Credit Line and the Revolving Facility will be at a rate of prime plus 5.5% of which prime plus 2.5% is paid monthly and 3.0% is accrued and payable on March 31, 2000. 36 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) o The interest rate on outstanding borrowings will be reduced by 0.5% after each of the mandatory principal payments. In addition, the interest rate will be reduced by an additional 1.5% for each $1,000,000 of voluntary principal payments, but not lower than prime plus 1.0%. A pro rata portion of the accrued interest will be waived for all principal payments occurring prior to December 31, 1999. o On March 11, 1999, the Company issued warrants to the bank lenders to purchase 270,000 shares of the Company's common stock at an exercise price of $2.00 per share. These warrants are exercisable at any time 60 days after issuance. The Company also issued warrants to purchase an additional 270,000 shares of the Company's common stock exercisable at $2.00 per share, if the bank debt is still outstanding at September 30, 1999. The warrants expire on the fifth anniversary of issuance. The Company has a call option on unexercised warrants at a repurchase price of $1,800,000. The Company will recognize a non-cash expense for each issuance of warrants of approximately $195,000, or a total of about $390,000 during 1999. o The Company agreed to pay the bank lenders an extension fee of $350,000, which is being amortized over the life of the agreement. At the time of the extension, $50,000 was paid, with the balance payable in four installments through February 24, 2000. If the Company is able to refinance its bank debt, any extension fees due subsequent to the closing date of the refinancing will be waived. o The Company is required to maintain certain minimum financial covenants and comply with other non-financial covenants, including remittance of cash flows from debt or equity financing, income tax refunds and fixed asset dispositions to the banks, and the completion of Year 2000 compliance by September 30, 1999. The agreement also prohibits the payment of cash dividends without prior written consent of the lenders. At March 1, 1999, the Company had cash and cash equivalent balances of $535,000, and no available borrowing capacity under the Credit Line or the Revolving Facility. The Company is currently generating losses that may extend through much of 1999. Further, the Company has significant debt it must repay on August 31, 1999, November 30, 1999 and March 31, 2000. The Company is pursuing additional debt and equity financing alternatives to meet these obligations. The Company believes it 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 on 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 available and the authorization of a preferred stock class. 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. Borrowings under the Credit Line and the Revolving Facility have been classified as current debt in the accompanying financial statements as certain repayments are due in 1999, and the agreement contains certain acceleration provisions subject to the bank's evaluation. 37 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. Common Stock In October 1998, the Company adopted the 1998 Directors Stock Plan. Under this plan, 200,000 shares of the Company's common stock are reserved for issuance to non-employee directors, in lieu of payment of directors' fees in cash. In 1998, 46,250 shares of common stock were issued as consideration for directors' fees. The Company recognized $94,000 of expense related to these shares during the year ended December 31, 1998. See also Note 8 - "Debt" for a description of warrants issued to the Company's lenders in each of 1998 and 1999 for 540,000 shares, or a total of 1,080,000 shares of the Company's common stock at an exercise price of $3.50 and $2.00 per share, respectively. 10. Stock Options Under the 1983 Incentive Stock Option Plan, options have been granted to key employees to purchase a maximum of 500,000 shares of common stock. Options, having a maximum term of 10 years, have been granted at 100% of the fair market value of the Company's stock at the time of grant. Options outstanding under this plan at December 31, 1998 are generally exercisable in cumulative increments over four years commencing one year from the date of grant. Under the 1989 and 1991 Stock Option Plans, options may be granted to key employees, directors and consultants to purchase a maximum of 500,000 and 2,600,000 shares of common stock, respectively. In 1998, the Board approved an increase of 500,000 shares to the 1991 Stock Plan, which increased the maximum to 3,100,000 shares. Options, having a maximum term of 10 years, have been granted at 100% of the fair market value of the Company's stock at the time of grant. Both incentive stock options and non-qualified stock options may be granted under the 1989 Plan and the 1991 Plan. Incentive stock options are generally exercisable in cumulative increments over four years commencing one year from the date of grant. Non-qualified options are generally exercisable in full beginning six months after the date of grant. Under the 1988 Non-Qualified Stock Option Plan, options may be granted to consultants, scientific advisors and employees to purchase a maximum of 250,000 shares of common stock. Options outstanding under this plan at December 31, 1998 are generally exercisable in cumulative increments over four years commencing one year from the date of grant. The 1988 Non-Qualified Option Plan formalized the granting of individual non-qualified stock options which had been granted to officers and directors at prices equal to the fair market value of the Company's stock on the date the options were granted. Exercise of the majority of these options may be made at anytime during a ten year period commencing on the date of grant. Effective November 23, 1998, the Company's Board of Directors approved the repricing of all outstanding options issued to then current employees and consultants, to $2.44 per share, 115% of the market value of the Company's Common Stock on that date. The Board also approved the repricing of 225,000 options held by the Chief Executive Officer, to $2.66 per share, 125% of the market value of the Company's common stock on that date. As a result, 331,465 and 225,000 outstanding options at November 23, 1998 were effectively rescinded and reissued at exercise prices of $2.44 and $2.66, respectively. This resulted in a non-cash expense related to non-employees of $84,000 being reflected in 1998 operating results. All other conditions, such as term of option and vesting schedules, remained unchanged. 38 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock option transactions in each of the past three years under the aforementioned plans in total were:
1983, 1989, and 1991 Plans 1988 Non-Qualified Plan -------------------------------------------- ------------------------------------------- Weighted Weighted Shares Price Per Share Average Price Shares Price Per Share Average Price ------ --------------- ------------- ------ --------------- ------------- January 1, 1996 shares under option 1,939,515 $3.64 - $9.88 $7.04 337,500 $1.38 - $ 6.80 $4.40 Granted 381,000 $5.13 - $7.69 $6.04 -- - -- Exercised (82,000) $4.70 - $6.96 $6.33 (50,000) $1.38 $1.38 Cancelled (29,500) $5.67 - $9.48 $7.31 (1,000) $6.80 $6.80 -------- -------- December 31, 1996 shares under option 2,209,015 $3.65 - $9.88 $6.89 286,500 $3.97 - $ 6.80 $4.92 Granted 111,500 $3.75 - $5.69 $4.17 -- - -- Exercised (10,000) $3.65 $3.65 (20,000) $3.97 $3.97 Cancelled (176,050) $3.97 - $9.88 $7.21 (100,000) $5.67 $5.33 ---------- -------- December 31, 1997 shares under option 2,134,465 $3.75 - $9.88 $6.74 166,500 $4.70 - $ 6.80 $4.78 Granted 491,450 $1.94 - $3.81 $2.56 -- - -- Exercised -- - -- -- - -- Cancelled (652,250) $2.00 - $9.88 $6.52 (166,500) $2.66 - $6.80 $4.78 Rescinded (506,465) $4.70 - $9.88 $6.75 (50,000) $4.70 $4.70 Reissued 506,465 $2.44 - $2.66 $2.52 50,000 $2.66 $2.66 --------- -------- December 31, 1998 shares under option 1,973,665 $1.94 - $9.88 $4.68 -- -- ========= ======== Shares subject to outstanding options exercisable at: December 31, 1996 1,666,119 $7.01 286,500 $4.92 ========= ======== December 31, 1997 1,854,715 $6.89 166,500 $4.78 ========= ======== December 31, 1998 1,599,840 $5.18 -- $ -- ========= ========
The Company uses the intrinsic method to account for stock options. Accordingly, no compensation cost has been recognized for option grants to employees pursuant to the stock option plans or for the November 1998 stock option repricing. Also, no compensation expense was recognized for option grants to non-employee directors from January 1, 1996 through December 14, 1998. The Company recorded compensation expense of $41,000 in 1998 for option grants to non-employee directors subsequent to December 15, 1998 as a result of a proposed Accounting Principles Board interpretation. The Company has recorded compensation expense of $108,000, $46,000 and $156,000 in 1998, 1997 and 1996, respectively, for options granted to consultants including the effect of the 1998 repricing. If compensation cost for all grants under the Company's stock option plans had been determined based on the fair value at the grant date consistent with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" the Company's net loss and loss per share would have been increased to the pro forma loss amounts indicated below: 1998 1997* 1996* ---- ---- --- (in thousands, except per share information) Net loss - as reported $(3,029) $(1,208) $ (481) Net loss - pro forma (3,618) (1,403) (1,397) Loss per share - as reported Basic: $ (.32) $ (.13) $ (.05) Diluted: (.32) (.13) (.05) Loss per share - pro forma Basic: $ (.38) $ (.15) $ (.15) Diluted: (.38) (.15) (.15) * Prior years amounts restated to reflect the Company's change in inventory costing method (See Note 1). 39 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The pro forma information has been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value for these options was estimated at the grant date using the Black-Scholes option-pricing model with the following assumptions for 1998, 1997 and 1996:
Assumption 1998 1997 1996 ---------- ---- ---- ---- Dividend yield 0% 0% 0% Risk free interest rate 4.47% - 5.89% 5.84% - 6.63% 5.51% - 7.10% Estimated volatility factor 39.51% - 47.87% 40.02% - 43.68% 33.07% - 43.45% Expected life 6 - 9 years 6 - 9 years 6 - 9 years
The effects of applying the fair value method are not indicative of future amounts. The fair value method is not applied to awards prior to 1995, and additional awards in future years are anticipated. The following table summarizes information concerning outstanding and exercisable options as of December 31, 1998:
Options Outstanding Options Exercisable ------------------------------------------------------------- -------------------------------- Range of Number of Weighted Average Weighted Average Number of Weighted Average Exercise Prices Options Remaining Life (Years) Exercise Price Options Exercise Price - --------------- ------- ---------------------- -------------- ------- ---------------- $1.00 to $ 2.00 231,750 9.55 $1.98 71,500 $2.00 $2.00 to $ 3.00 594,915 5.29 $2.56 462,340 $2.52 $3.00 to $ 4.00 216,000 9.24 $3.41 135,000 $3.47 $4.00 to $ 5.00 60,000 1.33 $4.83 60,000 $4.83 $5.00 to $ 6.00 200,000 7.10 $5.76 200,000 $5.76 $6.00 to $ 7.00 290,000 6.15 $6.66 290,000 $6.66 $7.00 to $ 8.00 150,000 4.44 $7.45 150,000 $7.45 $8.00 to $ 9.00 176,000 6.24 $8.49 176,000 $8.49 $9.00 to $10.00 55,000 2.96 $9.66 55,000 $9.66 --------- --------- $1.94 to $ 9.88 1,973,665 6.37 $4.68 1,599,840 $5.18 ========= =========
In connection with the exercise of 5,000 stock options in 1997, the Company received 4,735 shares of its common stock as consideration for the exercise price of the options. The total value of the shares used as consideration for the exercise of stock options was $19,825, which has been recorded as treasury stock. 11. Income Taxes The benefit for income taxes included in the consolidated statements of operations for the years ended December 31, 1998, 1997 and 1996 was as follows: 1998 1997* 1996* ------- ------- ------- (in thousands) Continuing operations: Current tax expense: Federal $ 14 $ -- $ -- State and local 16 11 9 ------- ------- ------- Total current 30 11 9 ------- ------- ------- Deferred tax expense (benefit): Federal (1,161) (637) (197) State and local (160) 190 (185) ------- ------- ------- Total deferred (1,321) (447) (382) ------- ------- ------- Total benefit for income taxes $(1,291) $ (436) $ (373) ======= ======= ======= 40 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The benefit for income taxes differed from the amount of income taxes determined by applying the applicable Federal tax rate (34%) to pretax income from continuing operations as a result of the following: 1998 1997* 1996* ------- ------- ------- (in thousands) Statutory benefit $(1,469) $ (559) $ (290) Non-deductible expenses 111 51 66 State income taxes, net of federal benefit (240) (164) (112) Research and development tax credits (33) (65) (42) Increase in valuation allowance 393 299 -- Other, net (53) 2 5 ------- ------- ------- $(1,291) $ (436) $ (373) ======= ======= ======= Deferred tax assets included in the consolidated balance sheets as of December 31, 1998 and 1997 consisted of the following: 1998 1997* ------- ------- (in thousands) Property, plant and equipment $ (498) $ (633) Prepaid license agreement 1,389 1,626 Deferred royalty payments 212 345 Net operating loss carryforwards 2,802 1,616 Tax credit carryforwards 610 484 Reserves 510 500 Inventory 537 405 Non-employee stock options 217 82 Other future deductible temporary differences 475 98 Other future taxable temporary differences (65) (48) ------- ------- 6,189 4,475 Less: valuation allowance (726) (333) ------- ------- Deferred taxes, net $ 5,463 $ 4,142 ======= ======= * Prior year amounts restated to reflect the Company's change in inventory costing method (See Note 1). The Company evaluates the recoverability of its deferred tax assets based on its history of operating earnings prior to the recent conditional settlement of regulatory proceedings (see Note 13), its plans to sell the benefit of certain state net operating losses, its expectations for the future, and the expiration dates of the operating loss carryforwards. As a result, the Company has concluded it is not likely it will be able to fully realize certain of these deferred tax assets. Therefore, the Company increased its valuation allowance for certain deferred tax assets at December 31, 1998. 41 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Operating loss and tax credit carryforwards for tax reporting purposes as of December 31, 1998 are as follows: (in thousands) Federal: Operating losses (expiring through the year 2018) $6,958 Research tax credits (expiring through the year 2018) 507 Alternative minimum tax credits (available without expiration) 28 State: Net operating losses New Jersey (expiring through the year 2005) $7,213 Research tax credits New Jersey (expiring through the year 2005) 75 Federal net operating loss carryforwards that expire through 2018 have significant components expiring in 2007 (26%), 2010 (13%) and 2018 (56%). 12. Commitments and Contingencies The Company leases manufacturing and warehousing space, machinery and equipment and automobiles under non-cancelable operating lease agreements expiring at various dates in the future. Rental expense aggregated approximately $371,000 in 1998, $348,000 in 1997, and $330,000 in 1996. Future minimum rental commitments under non-cancelable operating leases as of December 31, 1998 are as follows: Year $ ---- -- (in thousands) 1999 56 2000 40 2001 33 2002 32 2003 11 The Company has entered into an employment contract with an expiration date of December 31, 1999 with an officer that provides that this officer is entitled to continuation of his salary if he is terminated without cause prior to the contract expiration date. See also Note 15, "Certain Relationships and Related Transactions." The Company has entered into employment agreements with two other senior executives that provide for their employment for a one year period, which is automatically renewed annually unless terminated by the Company by written notice at least 60 days prior to the renewal date. In the event their employment is terminated without cause, one executive is entitled to continuation of his annual salary for up to 18 months and the other executive is entitled to continuation of his annual salary for up to 12 months. 42 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. U.S. Regulatory Proceedings The Company has substantially resolved the legal and regulatory issues which arose in 1997 and 1998. For most of 1997 and 1998, the Company was subject to intensive government regulatory scrutiny by the U.S. Departments of Justice, Treasury and Agriculture. In June 1997, the Company was advised by the Animal and Plant Health Inspection Service ("APHIS") of the United States Department of Agriculture ("USDA") that the Company had shipped quantities of some of its poultry vaccine products without complying with certain regulatory and record keeping requirements. The USDA subsequently issued an order that the Company stop shipment of certain of its products. Shortly thereafter, in July 1997, the Company was advised that the USDA's Office of Inspector General ("OIG") had commenced an investigation into possible violations of the Virus Serum Toxin Act of 1914 and alleged false statements made to APHIS. Based upon these events, the Board of Directors caused an immediate and thorough investigation of the facts and circumstances of the alleged violations to be undertaken by independent counsel. The Company also took steps to obtain the approval of APHIS for resumption of shipments, including the submission of an amended and modified regulatory compliance program, improved testing procedures and other safeguards. Based upon these actions, APHIS began lifting the stop shipment order in August 1997 and released all remaining products from the order on March 27, 1998. In April 1998, the U.S. Securities and Exchange Commission ("SEC") advised the Company that it was conducting an informal inquiry and requested information and documents from the Company, which the Company voluntarily provided to the SEC. As a result of its internal investigation, the Company terminated the employment of John P. Gallo as President and Chief Operating Officer in November 1997 for willful misconduct. In April 1998, the Company requested the resignations of six additional employees including two Vice Presidents and instituted a lawsuit against Mr. Gallo in the New Jersey Superior Court. The lawsuit alleged willful misconduct and malfeasance in office, as well as embezzlement and related claims. Mr. Gallo filed counterclaims against the Company. The Company has denied Mr. Gallo's allegations and believes his claims are without merit. The Company has not reserved any amounts related to these charges. In June 1998, Mr. Gallo wrote to the Company's Board of Directors alleging that he had been wrongfully terminated from employment and further alleging wrongdoing by two Directors. In response to these allegations the Company instituted an investigation of the two Directors by an Independent Committee ("Independent Committee") of the Board assisted by the Company's General Counsel. The investigation included a series of interviews of the Directors, both of whom cooperated with the Company, and a review of certain records and documents. The Company also requested an interview with Mr. Gallo who, through his counsel, declined to cooperate. In September 1998, the Independent Committee reported to the Board that it had found no credible evidence to support Mr. Gallo's claims and allegations and recommended no further action. The Board adopted the recommendation. In July 1998, the Company sought to depose Mr. Gallo in connection with the litigation filed in New Jersey. Through his counsel, Mr. Gallo asserted his Fifth Amendment privilege against self-incrimination and advised that he would not participate in the discovery process until such time as a federal grand jury investigation, in which he was a target, was concluded. At the suggestion of the court, the Company and Mr. Gallo agreed to a voluntary dismissal of the litigation, with the understanding that the Company was free to reinstate its suit against Mr. Gallo at a later date, and that the Company was reserving all of its rights and remedies with respect to Mr. Gallo. In addition, Mr. Gallo may reinstate his counterclaims against the Company at a later date. 43 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Settlement of U.S. Regulatory Proceedings On March 24, 1999, the Company reached settlement with the Departments of Justice, Treasury and Agriculture regarding their pending investigations and proceedings. This settlement is subject to court approval which the Company believes will be obtained in due course. The terms of the settlement agreement provide that the Company will enter a plea of guilty to a misdemeanor and will pay a fine of $15,000 and restitution in the amount of $10,000. In addition, beginning in January 2000, the Company will make monthly payments to the Treasury Department through the period ending October 31, 2001 in the total amount of $225,000. The expense of settling with these agencies is reflected in the 1998 results of operations. The settlement does not affect the informal inquiry being conducted by the SEC, nor does it affect possible governmental action against former employees of the Company. Management does not expect that the SEC informal inquiry or the possible governmental action against former employees will have a material adverse effect on the financial position, cash flow or operations of the Company. The Company is not aware of any other legal proceedings which could have a material effect upon the Company. 14. Export Sales Export revenues by the Company's domestic operations accounted for approximately 32% of the Company's total revenues in 1998, 35% in 1997, and 39% in 1996. The following table shows the geographical distribution of the Company's total revenues: 1998 1997 1996 ------- ------- ------- (in thousands) Latin America $ 4,445 $ 4,593 $ 5,076 Asia/Pacific 3,787 4,659 6,011 Europe 1,151 1,263 1,286 Africa/Middle East 1,380 1,362 1,141 ------- ------- ------- 10,763 11,877 13,514 United States/Canada 22,432 22,466 21,433 ------- ------- ------- Total Revenues $33,195 $34,343 $34,947 ======= ======= ======= Export sales net accounts receivable balances at December 31, 1998, 1997 and 1996 approximated $4,002,000, $4,144,000, and $5,276,000, respectively. 15. Certain Relationships and Related Party Transactions The Company's notes receivable from certain stockholders amounted to $251,000 as of December 31, 1998 and $249,000 at December 31, 1997. These notes are demand notes and bear interest at prime rate plus 1/4% and are collateralized by shares of common stock of the Company. Remaining balances of these notes from officers are included in stockholders' equity as stockholders' notes receivable and all other notes receivable are included in notes receivable in the accompanying Consolidated Balance Sheets. The Company has recognized interest income from these notes of $3,000, $10,000 and $15,000 for the years ended December 31, 1998, 1997 and 1996, respectively. However, the Company has provided valuation reserves for these balances totaling $251,000 and $219,000 for 1998 and 1997, respectively, representing the amount of notes receivable from terminated employees. The Company's Chief Executive Officer has chosen to defer his salary until the Company's cash flow stabilizes. The total amount due to him was $380,000 at December 31, 1998, which the Company has recorded as a non-interest bearing, current obligation. 44 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. Employee Benefits The Company has a 401(k) contribution plan, pursuant to which employees, who have completed six months of employment with the Company or its subsidiaries as of specified dates, may elect to contribute to the plan, in whole percentages, up to 18% of compensation, subject to a minimum contribution by participants of 2% of compensation and a maximum contribution of $10,000 for 1998 and $9,500 in 1997 and $9,240 in 1996. The Company contribution is in the form of Company common stock, which is vested immediately. The Company matches 25% of the first 5% of compensation contributed by participants and also contributes, on behalf of each participant, $4 per week of employment during the year. The Company has recorded charges to expense related to this plan of approximately $81,000, $113,000, and $115,000 for the years 1998, 1997 and 1996, respectively. 17. Business Segments The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," in 1998 which affects the way the Company reports information about its operating segments. The information for 1997 and 1996 has been restated from the prior years' presentations to conform to the 1998 presentation. The Company elected to change reportable segments from two segments (Animal Health Products and Consumer Products) into three segments (Poultry Vaccines, Companion Pet Products and Consumer Products). Reasons leading to the change included the fact that products from each of the segments serve different markets, use different channels of distribution, and have two different forms of government oversight. The Company elected to change the reporting of its business segments as of January 1, 1998 and restated its prior years' presentation to conform to this revised segment reporting standard. Poultry Vaccines The Company produces and markets poultry vaccines manufactured by the chick embryo, tissue culture and bacteriologic methods. The Company produces vaccines for the prevention of various chicken and turkey diseases and has more than 60 vaccine licenses granted by the USDA. The Company also produces and sells nutritional, anti-infective and sanitation products used primarily by poultry producers. The Company sells these products in the United States and in over 50 other countries under the Vineland Laboratories trade name. The Company manufactures poultry vaccines at its USDA licensed facility in Vineland, New Jersey and sells them, primarily through its own sales force of nine persons, directly to large poultry producers and distributors in the United States and, through its export sales staff of 15 persons, to local distributors in other countries. The sales force is supplemented and supported by technical and customer service personnel. The USDA regulates the Company's vaccine production in the United States. Companion Pet Products The Company sells its Companion Pet Products to the veterinarian market under the EVSCO Pharmaceuticals trade name and to the over-the-counter ("OTC") pet products market under the Tomlyn and Luv'Em labels. The EVSCO line of veterinary products is used by veterinarians in caring for dogs and cats, and includes pharmaceuticals such as antibiotics, anti-inflammatories and cardiac drugs, as well as nutritional supplements, vitamins, insecticides and diagnostics. Product forms include gels, tablets, creams, liquids, ointments, powders, emulsions, shampoos and diagnostic kits. EVSCO also produces professional grooming aids for dogs and cats. 45 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) EVSCO products are manufactured at the Company's facility in Buena, New Jersey and are sold through distributors to veterinarians. The facility operates in accordance with Good Manufacturing Practices ("GMP") of the federal Food and Drug Administration ("FDA"). The Tomlyn product line includes pet grooming, nutritional and therapeutic products, such as shampoos, grooming aids, vitamin and mineral supplements, insecticides and OTC medications. The products are manufactured at the Company's facility in Buena, New Jersey, and are sold directly to pet superstores and through distributors to independent merchandising chains, shops and kennels. Sales of the Company's veterinary products are handled by 20 sales employees. Most of the Company's veterinary products are sold through distributors. Consumer Products Business IGI's Consumer Products business is primarily focused on the continued commercial use of the Novasome(R) microencapsulation technologies for skin care applications. These efforts have been directed toward the development of high quality skin care products marketed by the Company or through collaborative arrangements with cosmetic and consumer products companies. Revenues from the Company's Consumer Products business were principally based on formulations using the Novasome(R) encapsulation technology. Sales to Estee Lauder accounted for $3,494,000 or 11% of 1998 sales, $2,408,000 or 7% for 1997, and $2,505,000 or 7% in 1996. Summary Segment Data Summary data related to the Company's reportable segments for the three years ended December 31, 1998 appear below:
Poultry Companion Pet Consumer (in thousands) Vaccines Products Products Corporate* Consolidated -------- -------- -------- ---------- ------------ 1998 Revenues $ 14,843 $ 12,513 $ 5,839 $ -- $ 33,195 Operating profit (loss) (517) 2,844 3,688 (6,925) (910) Depreciation and amortization 587 206 199 -- 992 Identifiable assets 14,747 5,846 4,932 6,531 32,056 Capital expenditures 412 186 9 -- 607 1997** Revenues $ 16,644 $ 12,444 $ 5,255 $ -- $ 34,343 Operating profit (loss) 1,202 2,577 1,473 (5,032) 220 Depreciation and amortization 651 225 161 -- 1,037 Identifiable assets 16,377 6,602 5,433 5,338 33,750 Capital expenditures 536 96 4 -- 636 1996** Revenues $ 19,953 $ 11,308 $ 3,686 $ -- $ 34,947 Operating profit (loss) 4,084 2,300 (955) (4,097) 1,332 Depreciation and amortization 667 168 157 -- 992 Identifiable assets 20,151 6,382 3,478 3,834 33,845 Capital expenditures 617 98 198 -- 913
* Note: (A) Unallocated corporate expenses are principally general and administrative expenses. (B) Corporate assets represent deferred tax assets and cash and cash equivalents. (C) Transactions between reportable segments are not material. ** Prior year amounts restated to reflect the Company's change in inventory costing method (See Note 1). 46 IGI, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (amounts in thousands)
COL. A COL. B COL. C COL. D COL. E ------ ------ ------ ------ ------ Additions ------------------------------ Balance (1) Charged Balance at beginning to costs (2) Charged to at end Description of period and expenses other accounts Deductions of period --------- ------------ -------------- ---------- --------- Year ended December 31, 1996: Allowance for doubtful accounts $ 306 $ (40) $ -- $ 28(A) $ 238 Inventory valuation allowance 693 123 -- 199(B) 617 Other asset valuation allowance 186 -- -- -- 186 Valuation allowance on net deferred tax assets 69 -- -- 35(C) 34 Year ended December 31, 1997: Allowance for doubtful accounts $ 238 $ 793 $ -- $ 128(A) $ 903 Inventory valuation allowance 617 603 -- 107(B) 1,113 Other asset valuation allowance 186 -- -- 186(A) -- Valuation allowance on net deferred tax assets 34 299 -- -- 333 Year ended December 31, 1998: Allowance for doubtful accounts $ 903 $ 150 $ -- $ 537(A) $ 516 Inventory valuation allowance 1,113 1,332 -- 1,089(B) 1,356 Valuation allowance on net deferred tax assets 333 382 11 -- 726
(A) Relates to write-off of uncollectible accounts. (B) Disposition of obsolete inventories. (C) Related to spin off of certain discontinued operations during 1995. 47 IGI, INC. AND SUBSIDIARIES EXHIBIT INDEX Exhibits marked with a single asterisk are filed herewith, and exhibits marked with a double asterisk reference a management contract, compensatory plan or arrangement, filed in response to Item 14(a)(3) of the instructions to Form 10-K. The other exhibits listed have previously been filed with the Commission and are incorporated herein by reference. (3)(a) Certificate of Incorporation of IGI, Inc., as amended. [Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, File No. 33-63700, filed June 2, 1993.] (b) By-laws of IGI, Inc., as amended. [Incorporated by reference to Exhibit 2(b) to the Company's Registration Statement on Form S-18, File No. 002-72262-B, filed May 12, 1981.] (4) Specimen stock certificate for shares of Common Stock, par value $.01 per share. [Incorporated by reference to Exhibit (4) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 001-08568, filed April 2, 1990 (the "1989 Form 10-K".)] **(10.1) IGI, Inc. 1983 Incentive Stock Option Plan. [Incorporated by reference to Exhibit A to the Company's Proxy Statement for the Annual Meeting of Stockholders held May 11, 1983, File No. 000-10063, filed April 11, 1983.] **(10.2) IGI, Inc. 1989 Stock Option Plan. [Incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Stockholders held May 11, 1989, File No. 001-08568, filed April 12, 1989.] **(10.3) Employment Agreement by and between the Company and Edward B. Hager dated as of January 1, 1990. [Incorporated by reference to Exhibit (10)(c) to the 1989 Form 10-K.] **(10.4) Extension of Employment Agreement by and between the Company and Edward B. Hager dated as of March 11, 1993. [Incorporated by reference to Exhibit (10)(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 001-08568, filed March 31, 1993 (the "1992 Form 10-K".)] **(10.5) Extension of Employment Agreement by and between the Company and Edward B. Hager dated as of March 14, 1995. [Incorporated by reference to Exhibit (10)(e) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 001-08568, filed March 31, 1995 (the "1994 Form 10-K".)] **(10.6) Amendment to Employment Agreement by and between the Company and Edward B. Hager dated as of October 1, 1997. [Incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 001-08568, filed November 13, 1997 (the "September 30, 1997 Form 10-Q".)] **(10.7) Employment Agreement by and between the Company and John P. Gallo dated as of January 1, 1990. [Incorporated by reference to Exhibit (10)(d) to the 1989 Form 10-K.] **(10.8) Extension of Employment Agreement by and between the Company and John P. Gallo dated as of March 11, 1993. [Incorporated by reference to Exhibit (10)(g) to the 1992 Form 10-K.] 48 IGI, INC. AND SUBSIDIARIES EXHIBIT INDEX (Continued) **(10.9) Extension of Employment Agreement by and between the Company and John P. Gallo dated as of March 14, 1995. [Incorporated by reference to Exhibit (10)(h) to the 1994 Form 10-K.] **(10.10) Amendment to Employment Agreement by and between the Company and John P. Gallo dated as of October 1, 1997. [Incorporated by reference to Exhibit 10(b) to the September 30, 1997 Form 10 Q.] (10.11) Rights Agreement by and between the Company and Fleet National Bank dated as of March 19, 1987. [Incorporated by reference to Exhibit (4) to the Company's Current Report on Form 8-K, File No. 000-10063, filed March 27, 1987.] (10.12) Amendment to Rights Agreement by and among the Company, Fleet National Bank and State Street Bank and Trust Company dated as of March 23, 1990. [Incorporated by reference to Exhibit (10)(g) to the 1989 Form 10-K.] (10.13) Second Amended and Restated Loan Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated December 13, 1995. [Incorporated by reference to Exhibit (10)(o) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 001-08568, filed March 29, 1996 (the "1995 Form 10-K".)] (10.14) First Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank- NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated March 27, 1996. [Incorporated by reference to Exhibit 10(l) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, File No. 001-08568, filed April 10, 1997 (the "1996 Form 10-K".)] (10.15) Second Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated June 26, 1996. [Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, File No. 001-08568, filed November 14, 1996 (the "September 30, 1996 Form 10-Q".)] (10.16) Third Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank- NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated August 23, 1996. [Incorporated by reference to Exhibit 10.2 to the September 30, 1996 Form 10-Q.] (10.17) Fourth Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank- NH, Mellon Bank, N.A. and IGI, Inc. together with its subsidiaries, dated November 13, 1996. [Incorporated by reference to Exhibit 10(o) to the 1996 Form 10-K.] (10.18) Fifth Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank- NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated March 27, 1997. [Incorporated by reference to Exhibit 10(p) to the 1996 Form 10-K.] (10.19) Sixth Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank- NH, Mellon Bank, N.A. and IGI, Inc. together with its subsidiaries, dated June 30, 1997. [Incorporated by reference to Exhibit 10(c) to the September 30, 1997 Form 10-Q.] 49 IGI, INC. AND SUBSIDIARIES EXHIBIT INDEX (Continued) (10.20) Seventh Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc. together with its subsidiaries dated July 31, 1997. [Incorporated by reference to Exhibit 10(d) to the September 30, 1997 Form 10-Q.] (10.21) Eighth Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank- NH, Mellon Bank, N.A. and IGI, Inc. together with its subsidiaries dated September 30, 1997. [Incorporated by reference to Exhibit 10(e) to the September 30, 1997 Form 10-Q.] (10.22) Extension Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc. together with its subsidiaries dated April 29, 1998.[Incorporated by reference to Exhibit (10.22) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 001-08568, filed August 24, 1998 (the "1997 Form 10-K".)] (10.23) Forbearance Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc. together with its subsidiaries, dated August 19, 1998. [Incorporated by reference to Exhibit 10.23 to the 1997 Form 10-K.] **(10.24) IGI, Inc. Non-Qualified Stock Option Plan. [Incorporated by reference to Exhibit (3)(k) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 001-08568, filed March 30, 1992 (the "1991 Form 10-K".)] **(10.25) IGI, Inc. 1991 Stock Option Plan, [Incorporated by reference to the Company's Proxy Statement for the Annual Meeting held May 9, 1991, File No. 001-08568, filed April 5, 1991.] **(10.26) Amendment No. 1 to IGI, Inc. 1991 Stock Option Plan as approved by Board of Directors on March 11, 1993. [Incorporated by reference to Exhibit 10(p) to the 1992 Form 10-K.] **(10.27) Amendment No. 2 to IGI, Inc. 1991 Stock Option Plan as approved by Board of Directors on March 22, 1995. [Incorporated by reference to the Appendix to the Company's Proxy Statement for the Annual Meeting of Stockholders held May 9, 1995, File No. 001-08568, filed April 14, 1995.] **(10.28) Amendment No. 3 to IGI, Inc. 1991 Stock Option Plan as approved by Board of Directors on March 19, 1997. [Incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, File No. 001-08568, filed August 14, 1997.] (10.29) Amendment No. 4 to IGI, Inc. 1991 Stock Option Plan as approved by Board of Directors on March 17, 1998. [Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 001-08568, filed November 6, 1998.] (10.30) Form of Registration Rights Agreement signed by all purchasers of Common Stock in connection with private placement on January 2, 1992. [Incorporated by reference to Exhibit (3)(m) to the 1991 Form 10-K.] (10.31) License Agreement by and between Micro-Pak, Inc. and IGEN, Inc. [Incorporated by reference to Exhibit (10)(v) to the 1995 Form 10-K.] 50 IGI, INC. AND SUBSIDIARIES EXHIBIT INDEX (Continued) (10.32) Registration Rights Agreement between IGI, Inc. and SmithKline Beecham plc dated as of August 2, 1993. [Incorporated by reference to Exhibit (10)(s) to the 1993 Form 10-K.] (10.33) Supply Agreement, dated as of January 27, 1997, between IGI, Inc. and Glaxo Wellcome Inc. [Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q/A, Amendment No. 1, for the quarter ended March 31, 1997, File No. 001-08568, filed June 16, 1997.] (10.34) Common Stock Purchase Warrant No. 1 to purchase 150,000 shares of IGI, Inc. Common Stock issued May 12, 1998 to Fleet Bank-NH. [Incorporated by reference to Exhibit (10.33) to the 1997 Form 10-K.] (10.35) Common Stock Purchase Warrant No. 2 to purchase 150,000 shares of IGI, Inc. Common Stock issued May 12, 1998 to Fleet Bank-NH. [Incorporated by reference to Exhibit (10.34) to the 1997 Form 10-K.] (10.36) Common Stock Purchase Warrant No. 3 to purchase 120,000 shares of IGI, Inc. Common Stock issued May 12, 1998 to Mellon Bank, N.A. [Incorporated by reference to Exhibit (10.35) to the 1997 Form 10-K.] (10.37) Common Stock Purchase Warrant No. 4 to purchase 120,000 shares of IGI, Inc. Common Stock issued May 12, 1998 to Mellon Bank, N.A. [Incorporated by reference to Exhibit (10.36) to the 1997 Form 10-K.] *(10.38) IGI, Inc. 1998 Directors Stock Option Plan as approved by the Board ** of Directors on October 19, 1998. *(10.39) Second Extension Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc. together with its subsidiaries. *(10.40) Common Stock Purchase Warrant No. 5 to purchase 150,000 shares, respectively, of IGI, Inc. Common Stock issued March 11, 1999 to Fleet Bank, NH. *(10.41) Common Stock Purchase Warrant No. 6 to purchase 150,000 shares, respectively, of IGI, Inc. Common Stock issued March 11, 1999 to Fleet Bank, NH. *(10.42) Common Stock Purchase Warrant No. 7 to purchase 120,000 shares, respectively, of IGI, Inc. Common Stock issued March 11, 1999 to Mellon Bank, N.A. *(10.43) Common Stock Purchase Warrant No. 8 to purchase 120,000 shares, respectively, of IGI, Inc. Common Stock issued March 11, 1999 to Mellon Bank, N.A. *(10.44) Employment Agreement, dated May 1, 1998 between IGI, Inc. and Paul ** Woitach. *(10.45) Employment Agreement, dated June 1, 1998, between IGI, Inc. and ** John F. Wall. *(11) Computation of Net Income Per Common Share. 51 IGI, INC. AND SUBSIDIARIES EXHIBIT INDEX (Continued) *(21) List of Subsidiaries. *(23) Consent of PricewaterhouseCoopers LLP. *(27.1) Financial Data Schedule for the year ended December 31, 1998. *(27.2) Restated Financial Data Schedules for the years ended December 31, 1997 and 1996. 52 EX-10.38 2 1998 DIRECTORS STOCK PLAN IGI, INC. 1998 DIRECTORS STOCK PLAN 1. Purpose. The purpose of the 1998 Directors Stock Plan (the "Plan") of IGI, Inc. (the "Company") is to provide for the payment of fees to the outside (non-employee) Directors of the Company in Common Stock of the Company in lieu of cash and thereby encourage ownership in the Company by the Directors. 2. Participation in the Plan. Directors of the Company who are not employees of the Company or any subsidiary of the Company shall be eligible to participate in the Plan. 3. Stock Subject to the Plan. The shares issuable under the Plan shall consist of 200,000 shares of the Company's Common Stock, $.01 par value per share (the "Common Stock"), subject to adjustment in the event of stock splits, reverse stock splits, stock dividends, reorganizations, recapitalizations and similar transactions. 4. Issuance of Common Stock in Lieu of Payment of Directors Fees in Cash. (a) Attached to the Plan as Appendix A is a schedule setting forth the fees payable (as of the date of adoption of the Plan) to outside Directors for their services as Directors, including fees payable for attendance at Directors meetings (both regular and telephonic) and committee meetings. If and when the fees payable to Directors are revised by action of the Board of Directors of the Company, the new fees shall be set forth in a schedule and annexed to the Plan as amended Appendix A and shall govern the payment of fees to Directors until any subsequent revisions are adopted by the Board of Directors. (b) The total fees payable to the outside Directors for each calendar quarter shall be determined on the basis of the cash fees set forth in Appendix A. As soon as practicable after the end of each calendar quarter, the Company shall issue to each outside Director that number of shares of Common Stock as shall be determined by dividing (i) the total dollar amount of fees payable to the Directors for the applicable quarter by (ii) the closing per share price of the Common stock on the American Stock Exchange on the last day of the applicable quarter. (c) The shares of Common Stock will be issued in the name of each outside Director and the certificate for such shares shall be delivered to the Directors as soon as practicable after the end of each calendar quarter, together with a notification from the Company containing the information set forth in Appendix B annexed hereto. (d) The Company plans to register the Common Stock covered by the Plan under the Securities Act of 1933 (the "Act") on Form S-8; but notwithstanding such registration, Directors serving as members of the Board at the time they wish to sell Common Stock received by them under the Plan shall be subject to the volume and other limitations contained in Rule 144 promulgated under the Act. (e) The shares of Common Stock received by Directors pursuant to the Plan shall be deemed to be compensation for services and therefore subject to ordinary income taxes and will be reported to the Internal Revenue Service on Form 1099 or such other appropriate Internal Revenue Service form. (f) The rights and benefits under the Plan are expressly provided to substitute Common Stock for cash payment of Directors fees, and the Plan shall be in addition to any other rights and benefits to which the Directors are entitled under any other plans of the Company, including any stock option plan for Directors currently in effect or adopted in the future. 5. The Effective Date and Duration of the Plan. (a) The Plan shall become effective when adopted by the Board of Directors and shall also apply to any past Directors fees earned by Directors which were unpaid by the Company at the time that the Plan was so adopted by the Board. (b) The Plan shall continue to apply to all fees earned by Directors from and after the date of its adoption by the Board of Directors until terminated by action of the Board of Directors or otherwise amended by the Board of Directors. 6. Governing Law. The Plan shall be governed by the laws of the State of Delaware. Approved by the Board of Directors of IGI on October 19, 1998. 2 APPENDIX A SCHEDULE OF DIRECTORS FEES The following sets forth the amount of fees payable to outside Directors of IGI, Inc. for their services as Directors: Event Fee ----- --- Scheduled Directors Meeting $2,000 Telephonic Directors Meeting 1,000 Committee Meeting Held on Same 500 Day as Directors Meeting Committee Meeting Not Held on 1,000 Same Day as Directors Meeting Annual Fee for Chairman of the 5,000 Audit Committee Annual Fee for Chairman of the 4,000 Compensation Committee Annual Fee for Chairman of a 4,000 Special Committee APPENDIX B IGI LETTERHEAD Date To: Name and Address of Director Dear _______: Today IGI, Inc. has requested its Stock Transfer Agent to issue you a certificate representing _____ shares of IGI, Inc. Common Stock in payment of the Directors fees to which you are entitled for the calendar quarter ended ______________, 19__. The following details the fees to which you are entitled for the quarter, amounting in the aggregate to $_____, and these fees have been converted into shares of IGI Common Stock using the quarter end closing price on the American Stock Exchange, which was $____. Attendance at Meetings of the Board of Directors $4,000 ($2,000 per meeting - 4/20, 6/18) Attendance at Telephonic Board of Directors Meetings 1,000 ($1,000 per meeting - 5/25) Attendance at Compensation Committee Meetings 500 ($500 per meeting held the same date as the Board meeting - 4/20) Attendance at Compensation Committee Meeting 1,000 ($1,000 per meeting held on non-Board meeting date -5/31) Annual Fee for services as Chairman of the Audit 1,250 ----- Committee (1/4 of $5,000 Annual Fee - $1,250) Total Due $7,750 EX-10.39 3 SECOND EXTENSION AGREEMENT SECOND EXTENSION AGREEMENT This Second Extension Agreement (hereinafter, the "Agreement") is made this 11th day of March, 1999 by and among: FLEET BANK-N.H., a banking and trust company organized under the laws of New Hampshire ("Fleet"); MELLON BANK, N.A., a national banking association ("Mellon"); and IGI, INC., a Delaware corporation ("IGI"), IGEN, INC., a Delaware corporation ("IGEN"); IMMUNOGENETICS, INC., a Delaware corporation ("Immunogenetics"); and BLOOD CELLS, INC., a Delaware corporation ("BCI"). Fleet and Mellon are hereinafter sometimes individually referred to as a "Lender" and collectively referred to as the "Lenders", and IGI, IGEN, Immunogenetics, BCI, and each of their subsidiaries as set forth on Exhibit "A" annexed hereto and specifically incorporated by reference herein, are hereinafter sometimes individually referred to as a "Borrower" and collectively referred to as the "Borrowers". BACKGROUND Reference is made to certain Loan Arrangements (hereinafter, the "Loan Arrangements") entered into by and between the Lenders and the Borrowers evidenced by, among other things, the following documents, instruments, and agreements (hereinafter, singly and collectively, as amended, the "Loan Documents"): (a) Fourth Amended and Restated Line of Credit Note dated September 30, 1997 in the original principal amount of $6,600,000.00 made by the Borrowers payable to Fleet (the "Fleet Line of Credit Note"); (b) Fourth Amended and Restated Line of Credit Note dated September 30, 1997 in the original principal amount of $5,400,000.00 made by the Borrowers payable to Mellon (the "Mellon Line of Credit Note"); (c) Third Amended and Restated Revolving Credit Note dated March 27, 1997 in the original principal amount of $6,171,428.40 made by the Borrowers payable to Fleet (the "Fleet Term Note"); (d) Third Amended and Restated Revolving Credit Note dated March 27, 1997 in the original principal amount of $4,114,285.60 made by the Borrowers payable to Mellon (the "Mellon Term Note"); (e) Second Amended and Restated Loan Agreement dated December 13, 1995 by and among the Lenders and the Borrowers, as amended by a certain First Amendment to Second Amended and Restated Loan Agreement dated March 27, 1996, a certain Second Amendment to Second Amended and Restated Loan Agreement dated as of June 26, 1996, a certain Third Amendment to Second Amended and Restated Loan Agreement dated August 13, 1996, a certain Fourth Amendment to Second Amended and Restated Loan Agreement dated as of November 13, 1996, a certain Fifth Amendment to Second Amended and Restated Loan Agreement dated March 27, 1997, a certain Sixth Amendment to Second Amended and Restated Loan Agreement dated June 30, 1997, a certain Seventh Amendment to Second Amended and Restated Loan Agreement dated July 31, 1997, and a certain Eighth Amendment to Second Amended and Restated Loan Agreement dated as of September 30, 1997 (hereinafter, as amended and in effect, the "Loan Agreement"); (f) A certain Security Agreement granted by, among others, IGI, IGEN and Immunogenetics, in favor of Fleet dated December 20, 1990; (g) A certain Security Agreement - Intellectual Property granted by, among others, IGI, IGEN and Immunogenetics in favor of Fleet dated December 20, 1990; (h) A certain Security Documents Modification Agreement entered into by, among others, the Borrowers and the Lenders dated as of December 13, 1995; (i) A certain Joinder, Assumption and Security Documents Modification Agreement dated as of May 12, 1992 entered into by, among others, the Borrowers, and Fleet; (j) A certain Mortgage granted by Immunogenetics in favor of Fleet dated December 20, 1990 encumbering certain property located in the borough of Buena, Atlantic County, New Jersey; (k) A certain Mortgage granted by Immunogenetics in favor of Fleet dated May 12, 1992 encumbering certain property located in the township of Buena Vista, Atlantic County, New Jersey; (l) A certain Mortgage granted by Immunogenetics in favor of Fleet dated December 20, 1990 encumbering certain property located in the city of Vineland, Cumberland County, New Jersey; (m) A certain Collateral Assignment of Lessee's Interest in Leases executed by, among others, Immunogenetics in favor of Fleet dated December 20, 1990; (n) A certain Stock Pledge Agreement executed by, among others, IGI and IGEN in favor of Fleet dated December 20, 1990; 2 (o) A certain Conditional Assignment of Contracts granted by, among others, IGI, IGEN and Immunogenetics in favor of Fleet dated December 20, 1990; (p) A certain Extension Agreement dated April 29, 1998 (the "Extension Agreement") by and among the Lenders and the Borrowers; and (q) A certain Forbearance Agreement dated August 19, 1998 (the "Forbearance Agreement") by and among the Lenders and the Borrowers. The Borrowers acknowledge and agree that the Lenders' agreement to forbear as set forth in the Forbearance Agreement has terminated, and have requested that the Lenders (i) extend the time for repayment of their entire outstanding indebtedness under the Loan Documents until March 31, 2000, (ii) waive certain existing defaults, and (iii) otherwise modify the existing Loan Documents. The Lenders have agreed, but only upon the terms and conditions set forth herein. Further, to the extent that the terms and conditions of the Extension Agreement are inconsistent with the terms and conditions of this Agreement, the terms and conditions of this Agreement shall supersede the conflicting terms of the Extension Agreement. Accordingly, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is hereby agreed by and among the Lenders and the Borrowers as follows: ACKNOWLEDGMENT OF INDEBTEDNESS 1. (a) The Borrowers hereby acknowledge and agree that they are jointly and severally liable to the Lenders for the following amounts which are outstanding under the Loan Documents as of February 22, 1999: Fleet Line of Credit Note: Principal $6,600,000.00 Pay Rate(1) Interest 39,462.50 Accrual(2) $ 79,200.00 ------------- Subtotal $6,718,662.50 - ---------- (1) As defined in Paragraph 2, below. (2) As defined in Paragraph 2, below. 3 Mellon Line of Credit Note: Principal $5,400,000.00 Pay Rate Interest 32,287.50 Accrual $ 64,800.00 ------------- Subtotal $5,497,087.50 Fleet Term Note: Principal $3,994,285.20 Pay Rate Interest 23,882.50 Accrual $ 47,931.43 ============= Subtotal $4,066,099.13 Mellon Term Note: Principal $2,662,856.80 Pay Rate Interest 15,921.67 Accrual $ 31,954.28 ============= Subtotal $2,710,732.75 TOTAL............................$18,992,581.88 (b) The Borrowers further acknowledge and agree that they are each jointly and severally liable to the Lenders for all interest accruing under the Loan Documents from and after February 22, 1999 (or January 31, 1999 as appropriate), and for all late fees, costs, expenses, and costs of collection (including attorneys' fees) heretofore or hereafter incurred by the Lenders in connection herewith. (Hereinafter, all amounts due as set forth in this Paragraph 1 shall be referred to collectively as the "Obligations"). REPAYMENT OF DEBT 2. (a) Fleet Line of Credit Note and Mellon Line of Credit Note. (i) From and after the execution of this Agreement, on the 1st day of each month, the Borrowers shall pay to the Lenders a monthly interest payment equal to the accrued interest on the principal balance of the Fleet Line of Credit Note and the Mellon Line of Credit Note, calculated at a floating rate equal to the aggregate of Fleet's Prime Rate (as such Prime Rate may be announced by Fleet from time to time) plus 2.50% per annum (the "Pay Rate"). Additional interest, the "Accrual", has accrued, and shall continue to accrue, on the principal balance of the Fleet Line of Credit Note and the Mellon Line of Credit Note at a fixed rate of 3.0% per annum (the "Accrual Rate"). The 4 Accrual shall be due and payable by the Borrowers upon the earlier of (x) satisfaction of the Obligations, in their entirety, or, (y) the Termination Date. (ii) Any amounts paid to cure the financial covenant default pursuant to Paragraph 12(a)(iii) of the Extension Agreement, shall be applied on a pro rata basis in reduction of the principal balance of the Fleet Line of Credit Note and the Mellon Line of Credit Note. (iii) At no time shall the combined principal balance of the Fleet Line of Credit Note and the Mellon Line of Credit Note exceed $12,000,000.00. (iv) Upon receipt by the Lenders of each of the payments set forth in Paragraph 2(b)(ii) below, as and when due, the interest rate charged on the principal balances of the Fleet Line of Credit Note and the Mellon Line of Credit Note shall be reduced by (x) 25 basis points for the Pay Rate, and (y) 25 basis points for the Accrual Rate. (b) Fleet Term Note and Mellon Term Note. (i) From and after the execution of this Agreement, on the 1st day of each month, the Borrowers shall pay to the Lenders a monthly interest payment equal to the accrued interest on the principal balance of the Fleet Term Note and the Mellon Term Note, calculated at the Pay Rate. Additional interest, the "Accrual", has accrued, and shall continue to accrue, on the principal balance of the Fleet Term Note and the Mellon Term Note at the Accrual Rate. The Accrual shall be due and payable by the Borrowers upon the earlier of (x) satisfaction of the Obligations, in their entirety, or, (y) the Termination Date. (ii) The Borrowers shall pay to the Lenders the following amounts on or before the following dates in collected funds to be applied by the Lenders on a pro rata basis in reduction of the outstanding indebtedness under the Fleet Term Note and the Mellon Term Note as permanent reductions to the outstanding indebtedness thereunder: Date: Amount ----- ------ August 31, 1999 $4,000,000.00 November 30, 1999 $2,000,000.00 Upon receipt by the Lenders of each of these payments as and when required above, then (x) the interest rate charged upon the remaining principal balances of the Fleet Term Note and the Mellon Term Note shall be reduced by (A) 25 basis 5 points for the Pay Rate, and (B) 25 basis points for the Accrual Rate, and (y) the Lenders shall waive the portion of the Accrual equal to the interest charges attributable to the amount of the principal payment from August 1, 1998 through the date paid. (Ex. Upon receipt of the $4,000,000.00 payment the Lenders shall waive the unpaid interest on the $4,000,000.00 earned at 3% from August 1, 1998 through the date of the payment). (iii) Any amounts paid or prepaid on account of the Fleet Term Note or the Mellon Term Note, whether pursuant to this Agreement or otherwise, shall not be available for reborrowing. (c) The entire balance of the Obligations, including, without limitation, all principal, interest (accrued and hereafter accruing), costs and expenses, and other charges due in connection therewith shall be paid in full by the Borrowers on or before 5:00 P.M. eastern standard time on March 31, 2000, it being expressly acknowledged and agreed that TIME IS OF THE ESSENCE. VOLUNTARY PRINCIPAL PAYMENTS; WAIVER OF ACCRUED INTEREST 3. (a) Provided that there is no then existing Event of Default as set forth in Paragraph 19, below, if the Borrowers shall make voluntary extraordinary principal reductions in excess of the payments set forth in Paragraph 2(b), above, as a consequence of fixed asset dispositions permitted by the Lenders in writing, or otherwise, then: (i) such payments shall be applied, on a pro rata basis, first to Fleet Term Note and the Mellon Term Note, and then to the Fleet Line of Credit Note and the Mellon Line of Credit Note, as permanent reductions which may not be reborrowed; (ii) for each $1,000,000.00 paid in principal reduction, the interest rate charged upon the remaining Obligations shall be reduced by (x) 50 basis points for the Pay Rate, and (y) 100 basis points for the Accrual Rate (however, in no event shall Pay Rate be reduced by more than 150 basis points, in the aggregate, nor shall the Accrual Rate be reduced by more than 300 basis points, in the aggregate, as a consequence of such mandatory and/or voluntary extraordinary principal payments as set forth in Paragraphs 2(b) and 3, and (iii), provided such payment is made on or before December 31, 1999, the Lenders shall waive the portion of the Accrual equal to the interest charges attributable to the amount of the principal payment from August 1, 1998 through the date paid. (b) All payments of principal made prior to the payment in full of the principal payments set forth in Paragraph 2(b)(ii) shall be applied first to the payments required by Paragraph 2(b)(ii), before being applied to the Obligations pursuant to this Paragraph. COMMITMENT LETTER 4. On or before June 30, 1999, the Borrowers shall deliver a commitment letter, or other evidence, reasonably acceptable to the Lenders, demonstrating a commitment, subject only 6 to documentation and no further contingencies of any kind, from a financial institution, shareholder group, investor(s), or other entity to provide a capital infusion (x) in an amount sufficient to satisfy the $4,000,000.00 principal payment required by Paragraph 2(b)(ii) above, and (y) to close on or before August 31, 1999. The identity of the entity or individual providing the capital, as well as all of terms and conditions of the proposed capital infusion, must be reasonably acceptable to the Lenders. To the extent that such funds are in the form of equity that may be converted to debt, or subordinated debt, the Borrowers shall obtain whatever additional documents, instruments, and agreements, including, without limitation, any subordination agreements, that the Lenders may require in connection therewith. EQUITY OR PERMITTED DEBT ISSUANCE; TAX REFUNDS 5. (a) In the event the Borrowers shall raise funds from the issuance of either debt permitted by the Lenders and/or equity instruments, such funds will be applied (i) first, on a pro rata basis in reduction of the outstanding indebtedness under the Fleet Term Note and the Mellon Term Note; and (ii) second, on a pro rata basis as permanent reductions to the outstanding indebtedness under the Fleet Line of Credit Note and the Mellon Line of Credit Note and shall permanently reduce the available credit thereunder by that amount. (b) In the event the Borrowers receive actual funds from any tax refund (local, state, federal, or otherwise), the Borrowers shall immediately deliver the same to the Lenders, in the identical form received and with all necessary endorsements thereon, which funds will be applied (i) first, on a pro rata basis in reduction of the outstanding indebtedness under the Fleet Term Note and the Mellon Term Note; and (ii) second, on a pro rata basis as permanent reductions to the outstanding indebtedness under the Fleet Line of Credit Note and the Mellon Line of Credit Note and shall permanently reduce the available credit thereunder by that amount. CASH MANAGEMENT; DEPOSITORY ACCOUNTS; PAYMENTS 6. (a) The Borrowers shall continue to maintain their corporate depository bank accounts with Fleet as required by the Loan Agreement. The Borrowers further acknowledge and agree that no overdrafts in any of their demand deposit accounts shall be permitted. (b) Until further notice from the Lenders, all payments required under this Agreement shall be made as and when due to Fleet's address set forth below in Paragraph 22. All receivables collected by the Borrowers shall be deposited into the Borrowers' account with Fleet, Account No. 099-0059-160 (the "General Account"). Any and all funds deposited in the Borrowers' existing lock box account at Fleet shall be transferred to the General Account on a daily basis. Until the occurrence of an Event of Default as defined in Paragraph 19 below, all funds in the General Account shall be available to the Borrowers, subject to Fleet's usual and customary rules and procedures regarding uncollected funds, to pay their regular and ordinary business expenses. 7 (c) Any payments due under this Agreement, or costs and expenses incurred by the Lenders which are reimbursable under this Agreement, may be debited by Fleet from the General Account without any further instruction or authorization of the Borrowers. WAIVER OF DEFAULTS 7. The Lenders hereby waive the following specific defaults which have occurred under the terms and conditions of the Extension Agreement prior to the execution of this Agreement: (a) Section 2(b)(ii) -$500,000.00 and $200,000.00 principal payments due on July 15, 1998 and August 15, 1998 not paid; (b) Section 12(a) - Minimum Eligible Accounts and Minimum Eligible Inventory levels not met; (c) Sections 12(b)-Minimum Fixed Charge Coverage Ratio of 1.00 to 1.00 not met; (d) Section 12(c) -Minimum Net Worth not met; (e) Section 13(d) -Submission of final, original, audited financial statements for fiscal year ended December 31, 1997, together with certified public accountant's unqualified opinion and management letter not delivered by May 15, 1998 and without material adverse change from the 1997 draft financial statement previously delivered to the Lenders; (f) Section 13(e) - Rolling thirteen week Cash Flow Forecast not met; (g) Section 13(f) -Business Plan/Refinancing not met; and (h) Section 15 -Additional Documents (failure to obtain foreign credit insurance on behalf of Lenders or failure to coordinate arrangement to factor receivables by May 31, 1998. Additionally, the Lenders hereby waive any defaults which have occurred under Section 6.10 of the Loan Agreement. The above-listed defaults constitute all of the defaults known to the Borrowers or the Lenders. However, nothing contained in this Paragraph 7 is intended to be, nor shall it be construed as, a waiver of any default or Event of Default occurring or continuing after the execution of this Agreement, or of any other default or Event of Default, other than the specific defaults referenced above. 8 INVESTMENT BANKER 8. The Borrowers have retained, and shall continue to retain, Berwind Financial Group, L.P., or some other nationally-recognized investment banker acceptable to the Lenders in their reasonable discretion (the "Investment Banker"), for the purpose of formulating alternative business strategies on behalf of the Borrowers and to coordinate the orderly satisfaction of the Obligations. The Investment Banker shall furnish the Lenders with monthly written progress reports and periodic verbal reports commencing on February 23, 1999 and continuing on the last Tuesday of each month during the term of this Agreement. WARRANTS 9. Grant. In addition to the Warrants (the "Existing Warrants") granted to the Lenders under the Extension Agreement (which Existing Warrants are no longer conditional and may be exercised by the Lenders at any time at a strike price of $3.50), upon the execution of this Agreement, IGI, Inc. shall, in consideration for the extension and other accommodations provided by the Lenders under this Agreement, grant to the Lenders, and their respective successors and assigns, stand-alone warrants (collectively, the "New Warrants"), the terms of which shall be in conformance with the provisions of this Paragraph 9 and which shall be in a form acceptable, in all respects, to the Lenders in their reasonable discretion, exercisable for shares of IGI, Inc. common stock, as follows: As to Fleet: Two Warrants, one for 150,000 shares (the "New Fleet Unconditional Warrant") and one for 150,000 shares (the "New Fleet Conditional Warrant") As to Mellon: Two Warrants, one for 120,000 shares (the "New Mellon Unconditional Warrant," and, together with the Fleet Unconditional Warrant, the "New Unconditional Warrants") and one for 120,000 shares (the "New Mellon Conditional Warrant," and, together with the Fleet Conditional Warrant, the "New Conditional Warrants"). Exercise Price. The exercise price for the New Warrants shall be $2.00 per common share (subject to customary adjustments). In addition to other customary warrant provisions, the New Warrants shall each contain "cashless" exercise provisions and anti-dilution provisions. Exercise Period. (a) New Unconditional Warrants. The New Unconditional Warrants will be exercisable at any time during the period commencing sixty (60) days after issuance and ending on October 1, 2004. (b) Conditional Warrants. The New Conditional Warrants will be exercisable during the period commencing September 30, 1999, and ending on October 1, 2004, unless, by 5:00 PM, Boston time, on September 30, 1999, either (a) all Obligations of the Borrowers to the Lenders shall have been paid in full, in which case the New Conditional 9 Warrants shall expire, or (b) the Borrowers have delivered an acceptable commitment letter, subject only to documentation and no further contingencies of any kind, from a financial institution acceptable to the Lenders, contemplating a full refinance of the existing obligations which contemplates a closing within thirty (30) days, in which case the New Conditional Warrants exercise start date shall be extended to October 30, 1999; provided, however, if all Obligations of the Borrowers to the Lenders have been paid in full on or before such extended start date, the New Conditional Warrants shall expire upon such payment. (c) Acceleration of Exercise Start Dates. Notwithstanding the foregoing, the New Unconditional Warrants and the New Conditional Warrants shall become immediately exercisable upon the occurrence of an Event of Default, or the exercise by IGI, Inc. of the call option for the issuable shares under such Warrant described below (to afford the Lenders the opportunity to exercise the subject Warrant before the call option closing). Call Option. IGI, Inc. shall have a call option on the New Warrants, subject to the following terms: (a) The option may only be exercised as to all, and not less than all, of the shares issuable at such time under the subject Warrant, and shall not cover issued shares (or shares pending issuance). (b) The option may be exercised as to a subject Warrant at any time up to the time that the Lender exercises its rights under the subject Warrant. (c) The repurchase price (subject to customary adjustments based upon the operation of the anti-dilution provisions of the New Warrants) will be (i) $500,000 for the 150,000 shares issuable under the New Fleet Unconditional Warrant; (ii) $500,000 for the 150,000 shares issuable under the New Fleet Conditional Warrant; (iii) $400,000 for the 120,000 shares issuable under the New Mellon Unconditional Warrant; and (iv) $400,000 for the 120,000 shares issuable under the New Mellon Conditional Warrant. In the event that the number of shares issuable under a Warrant at the time of a call exercise is less than the number of shares initially issuable thereunder due to an exercise thereunder or a transfer, the repurchase price will be proportionately adjusted. 10 Registration Rights. The Lenders acknowledge that the shares issuable upon the exercise of the New Warrants (when issued, the "Warrant Shares") will be "restricted securities" within the meaning of Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"). IGI, Inc. will use its best efforts to, as soon as practicable following the exercise of any of the New Warrants but in no event less that 180 days from the actual exercise date, (a) to file an appropriate registration statement under the Securities Act for the resale of the Warrant Shares by the Lenders, and (b) to cause such registration statement (which shall specifically permit sales either thereunder or under Rule 144 if it becomes available at any time during the period such registration statement is effective) to become effective, and to keep such registration statement effective until the earlier of (i) the resale of all of the Warrant Shares by the Lenders; or (ii) the later of (as may be applicable) (A) 120 days from the initial effective date of such registration statement; (B) the date which is one year from the date the New Warrants are issued to the Lenders; and (C) the date as of which the resale of all of the Warrant Shares has been permissible under Rule 144 for a continuous 120 day period without regard to the volume limitations set forth in Rule 144(e) and assuming only for purposes of determining permissibility under this clause (C) (regardless of whether the New Warrants are exercised in a cashless exercise) that all New Warrants were exercised in full in cashless exercises as of the respective dates when such New Warrants were first exercisable. IGI, Inc. will also use its best efforts to at all times while the New Warrants or Warrant Shares are held by the Lenders to comply with the current public information conditions of Rule 144(c). IGI, Inc. has informed the Lenders that IGI, Inc. is ineligible to utilize a Form S-3 registration statement until a date on or about October 1, 1999. Accordingly, notwithstanding the terms of the preceding paragraph, IGI, Inc. shall have no obligation to file a registration statement until the earlier of (x) October 1, 1999, or (y) such earlier date at which IGI, Inc. is eligible to file a registration statement on Form S-3. The Lenders will also be granted "piggy-back" registration rights for as long as they own Warrant Shares. IGI, Inc. agrees to list the Warrant Shares on the NASDAQ/American Stock Exchange within six months of any exercise under a New Warrant or New Warrants. Return of Warrants. If the Borrowers pay all of the Obligations in full on or before June 30, 1999, the Lenders shall return the following Existing Warrants to the Borrowers: (a) One Warrant for 150,000 shares defined in the Extension Agreement as the "Fleet Conditional Warrant", which shares have a strike price of $3.50; and (b) One Warrant for 120,000 shares defined in the Extension Agreement as the "Mellon Conditional Warrant", which shares have a strike price of $3.50. 11 Waiver of Anti-Dilution Provisions of Existing Warrants. In connection with the issuance of the New Warrants, the Lenders hereby irrevocably waive all rights to adjustment to the exercise price of the Existing Warrants, and any correlative adjustment to the number of Warrant Shares (as defined in the Existing Warrants) issuable upon exercise of the Existing Warrants, as set forth in Section 3 of the Existing Warrants, as a result of the issuance of the New Warrants or the issuance of Warrant Shares upon exercise of such New Warrants. EXTENSION FEE 10. In consideration of the Lenders' agreement to enter into this Agreement, the Borrowers shall pay to Fleet, as agent on behalf of the Lenders, an extension fee (the "Extension Fee") in the sum of $350,000.00 by bank cashiers' check, certified check, federal funds wire transfer, or direct debit from the General Account or the Collection Account as follows: (a) $50,000.00 on or before the execution of this Agreement; (b) $60,000.00 on or before May 31, 1999; (c) $70,000.00 on or before August 31, 1999; (d) $80,000.00 on or before November 30, 1999; and (e) $90,000.00 on or before February 24, 2000. Each portion of the Extension Fee shall be fully earned as of the date of this Agreement and shall be distributed upon receipt by Fleet to the Lenders on a pro rata basis as a fee and not applied to the Obligations. Notwithstanding the foregoing, if the Lenders receive payment in full of all of the Obligations, then the Lenders' shall waive any portion of the extension fee which becomes payable after the date the Lenders receive payment in full. AGENT'S FEE 11. In consideration of Fleet's agreement to enter into this Agreement and to continue to administer the Loan Arrangements as agent on behalf of the Lenders, the Borrowers shall pay to Fleet a monthly $5,000.00 agent's fee, commencing upon the execution of this Agreement and continuing on the 1st day of each month thereafter. The agent's fee for each month shall be fully earned as of the 1st day of that month, and shall be retained by Fleet as a fee and shall not be applied in reduction of the Obligations. 12 FINANCIAL COVENANTS 12. In addition to all other covenants contained in the Loan Documents, during the term of this Agreement, the Borrowers shall at all times comply with the following covenants: (a) Minimum Eligible Accounts Receivable and Minimum Eligible Inventory: The Borrowers shall maintain, at month end, combined "Minimum Eligible Accounts Receivable" and "Minimum Eligible Inventory" of $9,750,000.00. (i) "Minimum Eligible Accounts Receivable" shall include both "Eligible Domestic Accounts Receivable" and "Eligible Foreign Accounts Receivable". "Eligible Domestic Accounts Receivable" shall mean invoices for domestic shipments and services less than ninety (90) days old and otherwise reasonably acceptable to the Lenders. "Eligible Foreign Accounts Receivable" shall mean invoices for international shipments and services not more than sixty (60) days past due and otherwise reasonably acceptable to the Lenders. (ii) "Eligible Inventory" shall mean the lesser of (x) $6,000,000.00 or (y) gross inventory calculated on a FIFO basis less (a)work-in-process, (b) cartons, labels, and obsolescence reserves and (c) any other reserves reasonably deemed necessary by the Lenders. Until further notice from Fleet on behalf of the Lenders, the portion of work-in-process inventory consisting of completed products which has passed all quality assurance tests, and only awaits packaging and labeling, may be included in the calculation of "Eligible Inventory". (iii) The Borrowers may, within forty-eight (48) hours of actual knowledge of any violation under this covenant, cure such violation by either, or combination, of the following methods: (1) Paying to the Lenders an amount sufficient to reduce the aggregate balance of the Fleet Line of Credit Note and the Mellon Line of Credit Note by an amount equal to (x) $9,750,000.00 minus (y) the sum of Eligible Domestic Accounts Receivable, plus Eligible Foreign Accounts Receivable, plus Eligible Inventory, plus (z) amounts previously paid by the Borrowers under this subsection only in the event there shall exist a further decrease from the collateral level most recently reported. Said amounts may be reborrowed provided that the Borrowers remain in compliance with the terms and conditions of this Agreement, and the combined Minimum Eligible Accounts Receivable and Minimum Eligible Inventory totals at least $9,750,000.00; or (2) Providing the Lenders with (x) a covenant compliance certificate in the form of Exhibit C, demonstrating the Borrowers' 13 compliance with each of the covenants contained in Paragraph 12, and (y) documentary evidence, including, without limitation, all invoices for new shipments and services, demonstrating the increase in the Borrowers' Eligible Accounts Receivable and Eligible Inventory to the required collateral level. (b) Minimum Net Worth: The Borrowers shall maintain, at all times, a minimum "Net Worth" (as defined in accordance with generally accepted accounting principles) of no less than $4,200,000.00. In addition, the Borrowers shall maintain a Minimum Net Worth of no less than the following amounts on the dates set forth below: Dates Amount ----- ------ 3/31/99 $5,405,000.00 6/30/99 $5,019,000.00 9/30/99 $4,769,000.00 12/31/99 $4,718,000.00 3/31/00 $4,451,000.00 (c) Maximum Capital Expenditures: For the period from January 1, 1999 through December 31, 1999, the Borrower shall not incur consolidated Capital Expenditures (as defined in accordance with generally accepted accounting principles) in excess of the aggregate amount $2,000,000.00, and no more than the following amounts for each of the following periods: Dates Amount ----- ------ 1/1/99 through 3/31/99 $500,000.00 4/1/99 through 6/30/99 $500,000.00 7/1/99 through 9/30/99 $500,000.00 10/1/99 through 12/31/99 $500,000.00 In addition, for the period commencing January 1, 2000 through and including March 31, 2000, the Borrowers shall not incur consolidated Capital Expenditures in excess of $250,000.00. The Borrowers may obtain lease facilities and/or purchase money financing to fund the above referenced Capital Expenditures. (d) Cash Flow: The Borrowers shall, as of the end of each period set forth below, maintain consolidated cumulative EBITDA (as defined in accordance with generally accepted accounting principles) of no less than the following amounts: Dates: Amounts: ------ -------- 1/1/99 through 3/31/99 $253,000.00 1/1/99 through 6/30/99 $877,000.00 14 1/1/99 through 9/30/99 $1,586,000.00 1/1/99 through 12/31/99 $2,550,000.00 1/1/00 through 3/31/00 $ 633,000.00 (e) Dividends: The Borrowers shall not pay dividends, or make other distributions of any kind, nature, or manner to any party without the prior written consent of Fleet on behalf of the Lenders. (f) Additional Indebtedness/Liens: The Borrowers shall not incur any additional indebtedness from and after the date of this Agreement other than (i) in connection with the ordinary course of their business, or (ii) as set forth in Paragraph 12(c) above, nor shall the Borrowers grant or permit any lien or other encumbrance to exist or be placed upon any of their assets, except as approved by the Lenders in writing. (g) Year 2000 Compliance. The Borrowers will be "Year 2000 Compliant" by September 30, 1999. As used herein"Year 2000 Compliant" means, with respect to the Borrowers and/or their suppliers, vendors, and customers, that all software, embedded microchips, and other processing capabilities utilized by, and material to the business operations or financial condition of, such entity are able to interpret and manipulate data on and involving all calendar dates correctly, and without causing any abnormal ending scenario, including, without limitation, in relation to dates on or after January 1, 2000. Such compliance will be evidenced by a publicly issued statement by the Borrowers to the Securities and Exchange Commission ("SEC"), with a copy delivered to each of the Lenders. FINANCIAL REPORTING 13. In addition to all other reporting requirements contained in the Loan Documents, the Borrowers shall also furnish to the Lenders the following: (a) Accounts Receivable Agings and Borrowing Base Certificate: The Borrowers shall submit to each of the Lenders on Wednesday of each week both (i) Domestic and Foreign Accounts Receivable Agings and (ii) a certificate in the form of Exhibit B annexed hereto and specifically incorporated by reference herein and setting forth the Borrowers' compliance with Paragraph 12(a), above, each of which (i) and (ii) shall be dated as of the last day of the immediately preceding week. In connection with the provision of the Accounts Receivable Agings contemplated herein, the Borrowers shall include a detailed calculation of (x) the total value of the otherwise eligible domestic accounts receivable wherein fifty (50%) percent or more of an individual customer accounts account balances are in excess of ninety (90) days from the invoice date and (y) the total value of otherwise eligible foreign accounts receivable wherein fifty (50%) percent or more of an individual customer account balances are more than sixty (60) days past due. 15 (b) Inventory Report: The Borrowers shall submit to each of the Lenders by the 15th of each month, a detailed inventory report dated as of the last day of the immediately preceding month; and (c) Monthly Financial Statements: The Borrowers shall submit to each of the Lenders, within forty-five (45) days of the close of a calendar month, a consolidated and consolidating statement of profit or loss, cash flow and balance sheet for the immediately preceding month and year-to-date period. Simultaneously with the furnishing of such financial information, the Borrowers shall submit to each of the Lenders, a reconciliation analysis of the actual monthly and year-to-date results compared to the projected results set forth in the "IGI, Inc. Operating Plan Year 1999" dated January 5, 1999, and amended by an IGI, Inc. Bank Covenant Budget dated March 5, 1999 (the "Operating Plan"), together with a detailed explanation of any and all material variances. (d) Financial Statements: The Borrowers shall deliver final original copies of audited financial statements, together with their certified public accountant's unqualified opinion and management letter for the fiscal year ending December 31, 1998 to each of the Lenders on or before March 31, 1999. The final, original audited financial statements shall be in form and substance without material adverse deviation from the draft financial statements previously delivered to the Lenders. Further, the unqualified opinion shall not (i) disclaim the auditor's obligation to address the so called "Yk2" or "Year 2000 Risk" issue as it relates to the Borrower's liabilities or contingent liabilities, and (ii) be qualified as to the Borrower's possible failure to take all appropriate steps to successfully address the so called "Yk2" issue. (e) Cash Flow Reports: The Borrowers shall submit to each of the Lenders, by the fifteenth (15) day of each month, a consolidated summary of the actual cash flow results of the Borrowers for the preceding month. In addition, the Borrowers shall submit, with the Monthly Financial Statements set forth in sub-paragraph (c) above, detailed consolidated cash flow statements for the Borrowers comparing the actual cash flow for the preceding month with the projected results set forth in Operating Plan. In addition to the cash flow statements, the Borrowers shall submit a narrative description detailing the variances between the actual results with the projected results set forth in the Operating Plan. (f) Certifications: All such financial reporting shall be certified (to the best knowledge and belief of the certifying officer) both as to the accuracy and compliance with required covenants by IGI's Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, or Treasurer. Any such certification shall be deemed to have been made on behalf of each of the Borrowers. ADDITIONAL DOCUMENTS 14. Upon the execution of this Agreement, and at any time thereafter, the Borrowers shall also execute and deliver to the Lenders such additional documentation as the Lenders in 16 their discretion may reasonably require in order to grant and/or perfect the Lenders' security interest in all assets of the Borrowers, including, without limitation, all (i) motor vehicles, (ii) intellectual property including, without limitation, all patents and/or trademarks, and (iii) license agreements. The Borrowers represent that all locations where inventory is located and all patents or other intellectual property in which the Borrowers have an interest are listed, respectively, on Exhibit "D" and Exhibit "E" each as annexed hereto and specifically incorporated by reference herein. COMPLIANCE CERTIFICATE 15. Upon or before the execution of this Agreement, and within forty five (45) days of each month end during the term of this Agreement, the Borrowers shall deliver to each of the Lenders, a covenant compliance certificate in the form of Exhibit C setting forth the Borrowers' compliance with each of the financial covenants referenced in Paragraph 12, above. APPRAISALS; FIELD EXAMINATIONS; LENDERS' FINANCIAL CONSULTANT 16. (a) The Borrowers agree to cooperate with the Lenders to enable the Lenders to obtain updated appraisals of all real estate and personal property owned by the Borrowers and to conduct independent field examinations of the Borrowers' books and records which cooperation shall include, without limitation, providing the Lenders and/or their appraisers, examiners and/or other representatives, reasonable access to such property and shall make available such financial and/or other information regarding the property, books and records, and other assets of the Borrowers as may be reasonably requested by the Lenders in their discretion. The Borrowers shall reimburse the Lenders for all reasonable out of pocket costs and expenses of independent third parties incurred by the Lenders in connection with such appraisals and field examinations. (b) The Borrowers agree that the Lenders may continue to retain a financial consultant to act on behalf of the Lenders for the purpose of assessing the status of the business operations of the Borrowers and analyzing the Borrowers' current and future plans and business operations, and their effect on the ability of the Borrowers to satisfy the Obligations. The Borrowers agree to cooperate with any such financial consultant and agree to reimburse the Lenders for all reasonable fees and expenses incurred by the Lenders in connection with the retention of such financial consultant. WAIVER OF CLAIMS 17. The Borrowers hereby acknowledge and agree that they have no offsets, defenses, claims, or counterclaims against the Lenders or the Lenders' officers, directors, employees, attorneys, representatives, predecessors, affiliates, successors, and assigns with respect to the Obligations, or otherwise, and that if the Borrowers now have, or ever did have, any offsets, defenses, claims, or counterclaims against the Lenders or the Lenders' officers, directors, 17 employees, attorneys, representatives, predecessors, affiliates, successors, and assigns, whether known or unknown, at law or in equity, from the beginning of the world through this date and through the time of execution of this Agreement, all of them are hereby expressly WAIVED, and the Borrowers each hereby RELEASE the Lenders and the Lenders' officers, directors, employees, attorneys, representatives, predecessors, affiliates, successors, and assigns from any liability therefor, to the extent allowed by applicable laws. RATIFICATION OF LOAN DOCUMENTS; FURTHER ASSURANCES 18. (a) The Borrowers hereby ratify, confirm, and reaffirm all and singular the terms and conditions of the Loan Documents, and specifically ratify, confirm, and reaffirm their authority to execute same. The Borrowers further acknowledge and agree that, except as specifically modified in this Agreement, all terms and conditions of those documents, instruments, and agreements shall remain in full force and effect. (b) The Borrowers shall, from and after the execution of this Agreement, execute and deliver to the Lenders whatever additional documents, instruments, and agreements that the Lenders may reasonably require in order to vest or perfect the Loan Documents and the collateral granted therein more securely in the Lenders and to otherwise give effect to the terms and conditions of this Agreement, including, without limitation, a complete amendment and restatement of the Loan Documents within thirty (30) days of any request by the Lenders for any such additional documentation. EVENTS OF DEFAULT 19. The occurrence of any one or more of the following events shall constitute an event of default (hereinafter, an "Event of Default") under this Agreement: (a) The failure of the Borrowers to pay or deposit any amounts due hereunder or under any of the Loan Documents as and when due; (b) The failure of the Borrowers to comply with any other term or condition of this Agreement (which default, other than a default under Paragraph 12(a), may be cured within three (3) days in connection with any non-monetary default capable of being cured); (c) The filing of a petition for relief by or against any one or more of the Borrowers under the United States Bankruptcy Code; (d) The existence or issuance of any directive or action by either the United States Department of Agriculture or Office of the Inspector General of the United States, or any other governing body, which materially adversely impact the Borrowers' ability to manufacture, sell, or ship products, or otherwise have a Material Adverse Effect (defined below) on the Borrowers' financial condition or with the passage of time could have a material adverse impact 18 on the Borrowers' financial condition, assets, operating status, or projected financial condition. For the purposes of this Agreement, "Material Adverse Effect" shall be defined as any material adverse effect on the Borrowers' financial condition, assets, operating status or projected financial condition or any fact or circumstance that, singly or in the aggregate with any fact or circumstance, has a reasonable likelihood of resulting in or leading to the inability of the Borrowers to perform in any material respect their obligations under this Agreement or under any Loan Document or the inability of Agent and/or Lenders to enforce in any material respect the rights purported to be granted to them under this Agreement or any Loan Document or which have a reasonable likelihood of having a material adverse effect on the ability of the Borrowers to effectuate (including hindering or unduly delaying) the transactions contemplated by this Agreement and the loan Documents on the terms contemplated hereby and thereby. (e) The occurrence of any further event of default under, and as defined in, any of the Loan Documents. RIGHTS UPON DEFAULT 20. Upon the occurrence of any Event of Default: (a) All Obligations shall become immediately due and payable in full, without demand, notice, or protest, all of which are hereby expressly WAIVED. (b) The Lenders may immediately commence enforcing their rights and remedies pursuant to the Loan Documents and otherwise. (c) Interest shall accrue on the outstanding principal balance of the Obligations at the default rate of interest set forth in the Loan Documents. (d) Any waiver of the Accrual under Paragraphs 2(b)(ii) or 3(a) shall be void, and the full amount of the Accrual shall be due and payable in full. (e) The agreement of the Lenders contained in Paragraph 9 to return certain of the Existing Warrants shall be void, and of no further force and effect. Notwithstanding the occurrence of any Event of Default, if the Borrowers pay all Obligations in full, then the Borrowers shall retain the benefits of prepayment set forth in Paragraphs 2(b)(ii), 3(a), 9, and 10, provided that the ability of the Borrowers to obtain such benefits has not terminated or expired under the terms and conditions of those Paragraphs. REIMBURSEMENT OF COSTS AND EXPENSES 21. Upon the execution of this Agreement, the Borrowers shall pay to the Lenders an amount equal to any and all reasonable attorneys' fees and expenses incurred in connection with 19 this matter through the date of this Agreement. In addition, upon Demand, or upon the occurrence of any Event of Default, as defined in Paragraph 19, above, the Borrowers shall reimburse the Lenders for any and all reasonable costs and expenses, including, without limitation, all reasonable costs, expenses and fees of all accountants, appraisers, auditors and other representatives of the Lenders, and costs of collection (including attorneys' fees) hereafter incurred by the Lenders in connection with the clarification, modification, protection, preservation, and enforcement by the Lenders of their rights and remedies. NOTICES 22. Any notices required to be sent to the Lenders and the Borrowers shall be forwarded via recognized overnight courier, addressed as follows: If to the Lenders: Fleet National Bank 40 Westminster Street Mail Code: RI OP TO5A Providence, Rhode Island 02901 Attn: Mr. Daniel D. Butler, Vice President Telephone: (401) 459-4678 Fax: (401) 459-4963 With a copy to: Steven T. Greene, Esquire Riemer & Braunstein Three Center Plaza Boston, Massachusetts 02108 Telephone: (617) 523-9000 Fax: (617) 723-6831 Mellon Bank Mellon Bank Center 1735 Market Street, P.O. Box 7899 Philadelphia, PA 19101-7899 Telephone: 215-553-2043 Fax: 215-553-4560 Attn: Walter J. Letts Vice President With a copy to: Peter Leibundgut, Esquire Blank, Rome and Comisky Woodland Falls Corporate Park 210 Lake Drive East Cherry Hill, New Jersey 08002 Telephone: 609-779-3644 Fax: 609-779-7647 20 If to the Borrowers: IGI, Inc. IGEN, Inc. Immunogenetics, Inc. Blood Cells, Inc. Wheat Road and Lincoln Avenue Buena, New Jersey 08310 Attn: John F. Wall, CFO Telephone: (609) 697-1441 Fax: (609) 697-1001 With a copy to: Paul Brountas, Esquire Hale and Dorr, LLP 60 State Street Boston, Massachusetts 02109 Telephone: (617) 526-6000 Fax: (617)526-5000 WAIVERS 23. Non-Interference. From and after the occurrence of any Event of Default, the Borrowers agree not to interfere with the exercise by the Lenders of any of their rights and remedies. The Borrowers further agree that they shall not seek to distrain or otherwise hinder, delay, or impair the Lenders' lawful efforts to realize upon the Collateral, or otherwise to enforce their rights and remedies pursuant to the Loan Documents. This provision shall be specifically enforceable by the Lenders. 24. Automatic Stay. The Borrowers agree that upon the filing of any Petition for Relief by or against any one or more of the Borrowers under the United States Bankruptcy Code, the Lenders shall be entitled to file a motion for immediate and complete relief from the automatic stay, and the Lenders shall be permitted to proceed to protect and enforce their rights and remedies under applicable law. 25. Jury Trial. The Borrowers hereby make the following waiver knowingly, voluntarily, and intentionally, and understand that the Lenders, in entering into this Agreement or making any financial accommodations to the Borrowers, whether now or in the future, are relying on such waiver: TO THE EXTENT ALLOWED BY APPLICABLE LAW, THE BORROWERS HEREBY IRREVOCABLY WAIVE ANY PRESENT OR FUTURE RIGHT TO A JURY IN ANY TRIAL OF ANY CASE OR CONTROVERSY IN WHICH THE LENDERS BECOME A PARTY (WHETHER SUCH CASE OR CONTROVERSY IS INITIATED BY OR AGAINST THE LENDERS OR IN WHICH THE LENDERS ARE JOINED AS A PARTY LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT 21 OF, OR IS IN RESPECT OF, ANY RELATIONSHIP BETWEEN THE BORROWERS, OR ANY OTHER PERSON, AND THE LENDERS. ENTIRE AGREEMENT 26. This Agreement shall be binding upon the Borrowers and the Borrowers' officers, directors, employees, representatives, successors, and assigns, and shall inure to the benefit of the Lenders and the Lenders' successors and assigns. This Agreement and the Loan Documents and all documents, instruments, and agreements executed in connection herewith or therewith incorporate all of the discussions and negotiations between the Borrowers and the Lenders, either expressed or implied, concerning the matters included herein and in such other documents, instruments and agreements, any statute, custom, or usage to the contrary notwithstanding. No such discussions or negotiations shall limit, modify, or otherwise affect the provisions hereof. No modification, amendment, or waiver of any provision of this Agreement, or any provision of any other document, instrument, or agreement between the Borrowers and the Lenders shall be effective unless executed in writing by the party to be charged with such modification, amendment, or waiver, and if such party be the Lenders, then by a duly authorized officer thereof. CONSTRUCTION OF AGREEMENT 27. (a) This Agreement and all other documents, instruments, and agreements incidental hereto and all rights and obligations hereunder and thereunder, including matters of construction, validity, and performance, shall be governed by and construed in accordance with the law of the State of New Hampshire and are intended to take effect as sealed instruments. The Borrowers hereby consent to the jurisdiction of the Courts of the State of New Hampshire for all purposes with respect to this Agreement and the Obligations. The captions of this Agreement are for convenience purposes only, and shall not be used in construing the intent of the Lenders and the Borrowers under this Agreement. In the event of any inconsistency between the provisions of this Agreement and any other document, instruments, or agreement entered into by and between the Lenders and the Borrowers, including the Extension Agreement, the provisions of this Agreement shall govern and control. (b) The Borrowers further acknowledge and agree that the Lenders and the Borrowers have prepared this Agreement and all documents, instruments, and agreements incidental hereto and with the aid and assistance of their respective counsel. Accordingly, when interpreting this Agreement and all such other documents, instruments, and agreements, each of them shall be deemed to have been drafted by the Lenders and the Borrowers and shall not be construed against either the Lenders or the Borrowers. 22 ILLEGALITY OR UNENFORCEABILITY 28. Any determination that any provision or application of this Agreement is invalid, illegal, or unenforceable in any respect, or in any instance, shall not effect the validity, legality, or enforceability of any such provision in any other instance, or the validity, legality, or enforceability of any other provision of this Agreement. COMPREHENSIVE AGREEMENT 29. The Borrowers warrant and represent to the Lenders that the Borrowers: (i) have read and understand all of the terms and conditions of this Agreement, (ii) intend to be bound by the terms and conditions of this Agreement, (iii) are executing this Agreement freely and voluntarily, without duress, after consultation with independent counsel of their own selection. IN WITNESS WHEREOF, this Agreement has been executed this ____ day of March, 1999. FLEET BANK-N.H. IGI, INC. By: /s/ Fred H. Manning By: /s/ Edward B. Hager ------------------------- ------------------------- Title: Senior Vice President Title: MELLON BANK IGEN, INC. By: /s/ Walter Letts By: /s/ George P. Warren, Jr. ------------------------- ------------------------- Title: Vice President Title: Assistant Secretary IMMUNOGENETICS, INC. By: /s/ Edward B. Hager -------------------------- Title: Chairman and Chief Executive Officer BLOOD CELLS, INC. By: /s/ Edward B. Hager -------------------------- Title: Chairman and Chief Executive Officer 23 STATE OF RHODE ISLAND County of Providence, ss March 11, 1999 Then personally appeared the above named Fred H. Manning, the Sr. Vice President of Fleet Bank- N.H. and acknowledged the foregoing to be the free act and deed of Fleet Bank- N.H., before me, /s/ Jane A. Martin --------------------------------- Notary Public Jane A. Martin My Commission Expires: 2/12/02 STATE OF PENNSYLVANIA ______________, ss March 9, 1999 Then personally appeared the above named Walter Letts, the Vice President of Mellon Bank, N.A. and acknowledged the foregoing to be the free act and deed of Mellon Bank, N.A., before me, /s/ Yolanda D. Arnold --------------------------------- Notary Public Yolanda D. Arnold My Commission Expires: 3/13/00 STATE OF NEW JERSEY _____________, ss March 10, 1999 Then personally appeared the above named Edward B. Hager, the Chairman of IGI, Inc. and acknowledged the foregoing to be the free act and deed of IGI, Inc., before me, /s/ Theresa R. Dematte --------------------------------- Notary Public Theresa R. Dematte My Commission Expires: 5/24/00 24 STATE OF DELAWARE County of Newcastle, ss March 10, 1999 Then personally appeared the above named George P. Warren, Jr. , the Asst. Secretary of IGEN, Inc. and acknowledged the foregoing to be the free act and deed of IGEN, Inc., before me, /s/ Cynthia L. Conner --------------------------------- Notary Public Cynthia L. Conner My Commission Expires: 7/6/99 STATE OF NEW JERSEY _____________, ss March 10, 1999 Then personally appeared the above named Edward B. Hager, the Chariman of Immunogenetics, Inc. and acknowledged the foregoing to be the free act and deed of Immunogenetics, Inc., before me, /s/ Theresa R. Dematte --------------------------------- Notary Public Theresa R. Dematte My Commission Expires: 5/24/00 STATE OF NEW JERSEY _____________, ss March 10, 1999 Then personally appeared the above named Edward B. Hager, the Chairman of Blood Cells, Inc. and acknowledged the foregoing to be the free act and deed of Blood Cells, Inc., before me, /s/ Theresa R. Dematte --------------------------------- Notary Public Theresa R. Dematte My Commission Expires: 5/24/00 25 EX-10.40 4 WARRANT NO. 5 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON ITS EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 4 OF THIS WARRANT Warrant No. 5 Number of Shares: 150,000 (subject to adjustment) Date of Issuance: March 11, 1999 IGI, INC. Common Stock Purchase Warrant (Void after October 1, 2004) IGI, Inc., a Delaware corporation (the "Company"), for value received, hereby certifies that Fleet Bank-N.H., a banking and trust company organized under the laws of New Hampshire, or its registered assigns (the "Registered Holder"), is entitled, subject to the terms set forth below, to purchase from the Company, at any time or from time to time on or after the 60th day after the date of issuance and on or before October 1, 2004 at not later than 5:00 p.m. (Boston, Massachusetts time), 150,000 shares of Common Stock, $.01 par value per share (the "Common Stock"), of the Company, at a Exercise Price of $2.00 per share. The shares issuable upon exercise of this Warrant, and the Exercise Price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the "Warrant Shares" and the "Exercise Price," respectively. 1. Certain Definitions. As used in this Warrant, the following terms shall have the following respective meanings: "Commission" means the Securities and Exchange Commission, or any other Federal agency at the time administering the Securities Act. "Registration Statement" means a registration statement filed by the Company with the Commission for a public offering and sale of Common Stock (other than a registration statement on Form S-8 or Form S-4, or their successors, or any other form for a similar limited purpose, or any registration statement covering only securities proposed to be issued in exchange for securities or assets of another corporation). -1- "Registrable Shares" means (i) the Warrant Shares, and (ii) any other shares of Common Stock issued in respect of such shares (because of stock splits, stock dividends, reclassifications, recapitalizations, or similar events); provided, however, that shares of Common Stock which are Registrable Shares shall cease to be Registrable Shares (i) upon any sale pursuant to a Registration Statement or Rule 144 under the Securities Act or (ii) upon any sale in any manner to a person or entity which, by virtue of Section 13 of this Warrant, is not entitled to the rights provided by this Warrant. "Securities Act" means the Security Act of 1933, as amended, or any similar Federal statute, and the rules and regulations of the Commission issued under such Act, as they each may, from time to time, be in effect. 2. Exercise. (a) This Warrant may be exercised by the Registered Holder, in whole or in part, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by such Registered Holder or by such Registered Holder's duly authorized attorney, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full, in lawful money of the United States, of the Exercise Price payable in respect of the number of Warrant Shares issued upon such exercise. (b) The Registered Holder may, at its option, elect to pay some or all of the Exercise Price payable upon an exercise of this Warrant by cancelling a portion of this Warrant exercisable for such number of Warrant Shares as is determined by dividing (i) the total Exercise Price payable in respect of the number of Warrant Shares being issued upon such exercise by (ii) the excess of the Fair Market Value per share of Common Stock as of the effective date of exercise, as determined pursuant to subsection 2(c) below (the "Exercise Date") over the Exercise Price per share. If the Registered Holder wishes to exercise this Warrant pursuant to this method of payment with respect to the maximum number of Warrant Shares issuable pursuant to this method, then the number of Warrant Shares so issuable shall be equal to the total number of Warrant Shares, minus the product obtained by multiplying (x) the total number of Warrant Shares by (y) a fraction, the numerator of which shall be the Exercise Price per share and the denominator of which shall be the Fair Market Value per share of Common Stock as of the Exercise Date. The Fair Market Value per share of Common Stock shall be determined as follows: (i) If the Common Stock is listed on a national securities exchange, the Nasdaq Stock Market or another nationally recognized exchange or trading system as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the average of the last reported sale price per share of -2- Common Stock thereon for the ten consecutive trading days ending on the day immediately prior to the Exercise Date; (ii) If the Common Stock is not listed on a national securities exchange, the Nasdaq Stock Market or another nationally recognized exchange or trading system as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the amount most recently determined in good faith by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company); and, upon request of the Registered Holder, the Board of Directors (or a representative thereof) shall promptly notify the Registered Holder of the Fair Market Value per share of Common Stock. Notwithstanding the foregoing, if the Board of Directors has not made such a determination within a forty-five day period prior to the Exercise Date, then (A) the Fair Market Value per share of Common Stock shall be the amount next determined in good faith by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company), (B) the Board of Directors shall make such a determination within 15 days of a request by the Registered Holder that it do so, and (C) the exercise of this Warrant pursuant to this subsection 2(b) shall be delayed until such determination is made. (c) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company as provided in subsection 2(a) above. At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 2(d) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. (d) As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 10 days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Registered Holder, or as such Registered Holder (upon payment by such Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full Warrant Shares to which such Registered Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such Registered Holder would otherwise be entitled, cash in an amount determined pursuant to Section 4 hereof; and (ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or -3- faces thereof for the number of Warrant Shares equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the sum of (a) the number of such shares purchased by the Registered Holder upon such exercise plus (b) the number of Warrant Shares (if any) covered by the portion of this Warrant cancelled in payment of the Exercise Price payable upon such exercise pursuant to subsection 2(b) above. (e) Notwithstanding the foregoing, the Warrant shall become immediately exercisable by the Registered Holder upon (i) the occurrence of an Event of Default (as defined in the Second Extension Agreement dated March 11, 1999 by and among the Registered Holder, Fleet Bank-N.H., the Company and certain of its subsidiaries (the "Second Extension Agreement")) or (ii) the mailing date of written notice by the Company of its intention to exercise its right under Section 8 to redeem Available Warrant Shares (as defined under subsection 8(a)). 3. Adjustments. (a) General. The Exercise Price shall be subject to adjustment from time to time pursuant to the terms of this Section 3. (b) Diluting Issuances. (i) Special Definitions. For purposes of this subsection 3(b), the following definitions shall apply: (A) "Option" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities, excluding options described in clause (II) of subsection 3(b)(i)(D) below. (B) "Original Issue Date" shall mean the date on which this Warrant was first issued. (C) "Convertible Securities" shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to subsection 3(b)(iii) below, deemed to be issued) by the Company after the Original Issue Date, other than shares of Common Stock issued or issuable: (I) by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock that are -4- excluded from the definition of Additional Shares of Common Stock by this clause (I); or (II) to employees or directors of, or consultants to, the Company pursuant to a plan adopted by the Board of Directors of the Company. (ii) No Adjustment of Exercise Price. No adjustments to the Exercise Price shall be made unless the consideration per share (determined pursuant to subsection 3(b)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Company is less than the Exercise Price in effect on the date of, and immediately prior to, the issue of such Additional Shares. (iii) Issue of Securities Deemed Issue of Additional Shares of Common Stock. If the Company at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to subsection 3(b)(v) hereof) of such Additional Shares of Common Stock would be less than the Exercise Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) No further adjustment in the Exercise Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) If such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company, upon the exercise, conversion or exchange thereof, the Exercise Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase becoming effective, be recomputed to reflect such increase insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; -5- (C) Upon the expiration or termination of any unexercised Option, the Exercise Price shall not be readjusted, but the Additional Shares of Common Stock deemed issued as the result of the original issue of such Option shall not be deemed issued for the purposes of any subsequent adjustment of the Exercise Price; (D) In the event of any change in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any Option or Convertible Security, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Exercise Price then in effect shall forthwith be readjusted to such Exercise Price as would have obtained had the adjustment which was made upon the issuance of such Option or Convertible Security not exercised or converted prior to such change been made upon the basis of such change; and (E) No readjustment pursuant to Clause (B) or (D) above shall have the effect of increasing the Exercise Price to an amount which exceeds the lower of (i) the Exercise Price on the original adjustment date, or (ii) the Exercise Price that would have resulted from any issuances of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) Adjustment of Exercise Price Upon Issuance of Additional Shares of Common Stock. In the event the Company shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to subsection 3(b)(iii), but excluding shares issued as a dividend or distribution or upon a stock split or combination as provided in subsection 3(c)), without consideration or for a consideration per share less than the Exercise Price in effect on the date of and immediately prior to such issue, then and in such event, such Exercise Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Exercise Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Exercise Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, (i) for the purpose of this subsection 3(b)(iv), all shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding (other than shares excluded from the definition of "Additional Shares of Common Stock" by virtue of clause (II) of subsection 3(b)(i)(D)), and (ii) the number of shares of Common Stock deemed issuable upon conversion of such outstanding Options and Convertible Securities shall not give effect to any adjustments to the conversion price or conversion rate of -6- such Options or Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. Notwithstanding the foregoing, the applicable Exercise Price shall not be so reduced at such time if the amount of such reduction would be an amount less than $.05, but any such amount shall be carried forward and reduction with respect thereto made at the time of and together with any subsequent reduction which, together with such amount and any other amount or amounts so carried forward, shall aggregate $.05 or more. (v) Determination of Consideration. For purposes of this subsection 3(b), the consideration received by the Company for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: (I) insofar as it consists of cash, be computed at the aggregate of cash received by the Company, excluding amounts paid or payable for accrued interest or accrued dividends; (II) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (III) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Company for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration per share received by the Company for Additional Shares of Common Stock deemed to have been issued pursuant to subsection 3(b)(iii), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the Company as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by -7- (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (c) Recapitalizations. If outstanding shares of Common Stock shall be subdivided into a greater number of shares or a dividend in Common Stock shall be paid in respect of Common Stock, the Exercise Price in effect immediately prior to such subdivision or at the record date of such dividend shall simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend be proportionately reduced. If outstanding shares of Common Stock shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased. (d) Mergers, etc. If there shall occur any capital reorganization or reclassification of the Common Stock (other than a change in par value or a subdivision or combination as provided for in subsection 3(c) above), or any consolidation or merger of the Company with or into another corporation, or a transfer of all or substantially all of the assets of the Company, then, as part of any such reorganization, reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made so that the Registered Holder of this Warrant shall have the right thereafter to receive upon the exercise hereof the kind and amount of shares of stock or other securities or property which such Registered Holder would have been entitled to receive if, immediately prior to any such reorganization, reclassification, consolidation, merger or sale, as the case may be, such Registered Holder had held the number of shares of Common Stock which were then issuable upon the exercise of this Warrant. In any such case, appropriate adjustment (as reasonably determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Registered Holder of this Warrant, such that the provisions set forth in this Section 3 (including provisions with respect to adjustment of the Exercise Price) shall thereafter be applicable, as nearly as is reasonably practicable, in relation to any shares of stock or other securities or property thereafter deliverable upon the exercise of this Warrant. (e) Adjustment in Number of Warrant Shares. When any adjustment is required to be made in the Exercise Price, the number of Warrant Shares purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment. -8- (f) Certificate of Adjustment. When any adjustment is required to be made pursuant to this Section 3, the Company shall promptly mail to the Registered Holder a certificate setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such certificate shall also set forth the kind and amount of stock or other securities or property into which this Warrant shall be exercisable following such adjustment. 4. Fractional Shares. The Company shall not be required upon the exercise of this Warrant to issue any fractional shares, but shall make an adjustment therefor in cash on the basis of the Fair Market Value per share of Common Stock, as determined pursuant to subsection 2(b) above. 5. Requirements for Transfer. (a) This Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) the Company first shall have been furnished with an opinion of legal counsel, reasonably satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act. (b) Notwithstanding the foregoing, no registration or opinion of counsel shall be required for (i) a transfer by a Registered Holder which is a partnership to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner, if the transferee agrees in writing to be subject to the terms of this Section 5, (ii) a transfer made in accordance with Rule 144 under the Act, or (iii) a transfer by a Registered Holder which is a corporation to an affiliate, as defined under Rule 144 of the Securities Act, if the transferee agrees in writing to be subject to the terms of this Section. (c) Each certificate representing Warrant Shares shall bear a legend substantially in the following form: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such securities are registered under such Act or an opinion of counsel satisfactory to the Company is obtained to the effect that such registration is not required." -9- The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act. 6. No Impairment. The Company will not, by amendment of its charter or through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. 7. Liquidating Dividends. If the Company pays a dividend or makes a distribution on the Common Stock payable otherwise than in cash out of earnings or earned surplus (determined in accordance with generally accepted accounting principles) except for a stock dividend payable in shares of Common Stock (a "Liquidating Dividend"), then the Company will pay or distribute to the Registered Holder of this Warrant, upon the exercise hereof, in addition to the Warrant Shares issued upon such exercise, the Liquidating Dividend which would have been paid to such Registered Holder if he had been the owner of record of such Warrant Shares immediately prior to the date on which a record is taken for such Liquidating Dividend or, if no record is taken, the date as of which the record holders of Common Stock entitled to such dividends or distribution are to be determined. 8. Optional Redemption. (a) At any time, the Company may, at its option, redeem all, but not less than all, of the Warrant Shares for which the Registered Holder has not exercised its right to be issued (the "Available Warrant Shares"), by paying $3.33 per Available Warrant Share (subject to appropriate adjustment for stock splits, stock dividends, combinations or other similar recapitalizations affecting such shares) in cash for each Available Warrant Share then redeemed (hereinafter referred to as the "Redemption Price"); provided, however, that the Registered Holder may immediately exercise its Warrant or Warrants until such time on or 15 days prior to the Redemption Date (as defined below). (b) At least 15 days prior to the date fixed for any redemption of Available Warrant Shares (hereinafter referred to as the "Redemption Date"), written notice shall be mailed, by first class or registered mail, postage prepaid, to the Registered Holder, notifying such holder of the election of the Company to redeem such Available Warrant Shares, specifying the Redemption Date and calling upon the Registered Holder to surrender to the Company, in the manner and at the place designated, its Warrant or Warrants, representing the Available Warrant Shares to be redeemed (such notice is hereinafter referred to as the "Redemption Notice"). On or prior to the Redemption Date (subject to the Registered Holder's right to exercise -10- such Warrants prior to the Redemption Date), the Registered Holder shall surrender its Warrant or Warrants representing Available Warrant Shares to the Company, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the Registered Holder and each surrendered Warrant shall be cancelled. From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price (or the Registered Holder has exercised the Warrants prior to such Redemption Date), all rights of the Registered Holder designated for redemption in the Redemption Notice as the Registered Holder (except the right to receive the Redemption Price without interest upon surrender of the Warrant) shall cease with respect to the Warrant or Warrants representing the Available Warrant Shares, and such Warrant or Warrants shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever. 9. Notices of Record Date, etc. In case: (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or (b) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company; or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Registered Holder of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least ten (10) days prior to the record date or effective date for the event specified in such notice. -11- 10. Reservation of Stock. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, such number of Warrant Shares and other stock, securities and property, as from time to time shall be issuable upon the exercise of this Warrant. 11. Exchange of Warrants. Upon the surrender by the Registered Holder of any Warrant or Warrants, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of such Registered Holder, at the Company's expense, a new Warrant or Warrants of like tenor, in the name of such Registered Holder or as such Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 12. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. 13. Transfers, etc. (a) The Company will maintain a register containing the name and address of the Registered Holder of this Warrant. Any Registered Holder may change its or his address as shown on the warrant register by written notice to the Company requesting such change. (b) Subject to the provisions of Section 5 hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit II hereto) at the principal office of the Company. (c) Until any transfer of this Warrant is made in the warrant register, the Company may treat the Registered Holder of this Warrant as the absolute owner hereof for all purposes; provided, however, that if and when this Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. -12- 14. Mailing of Notices, etc. All notices and other communications from the Company to the Registered Holder of this Warrant shall be mailed by first-class certified or registered mail, postage prepaid, to the address furnished to the Company in writing by the last Registered Holder of this Warrant who shall have furnished an address to the Company in writing. All notices and other communications from the Registered Holder of this Warrant or in connection herewith to the Company shall be mailed by first-class certified or registered mail, postage prepaid, to the Company at its principal office set forth below. If the Company should at any time change the location of its principal office to a place other than as set forth below, it shall give prompt written notice to the Registered Holder of this Warrant and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice. 15. No Rights as Stockholder. Until the exercise of this Warrant, the Registered Holder of this Warrant shall not have or exercise any rights by virtue hereof as a stockholder of the Company. 16. Change or Waiver. Any term of this Warrant may be changed or waived only by an instrument in writing signed by the party against which enforcement of the change or waiver is sought. 17. Headings. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning of any provision of this Warrant. 18. Governing Law. This Warrant will be governed by and construed in accordance with the laws of Delaware. 19. Registration Rights. (a) The Registered Holder shall have the registration rights with respect to the Warrant Shares as specified in Section 9 of the Second Extension Agreement. (b) Furthermore, the Registered Holder shall be entitled to "piggyback" registration rights for so long as the Registered Holder shall own Warrant Shares. Whenever the Company proposes to file a Registration Statement (other than pursuant to subsection 19(a) at any time and from time to time, it will, prior to such filing, give written notice to the Registered Holder of its intention to do so and, upon the written request of the Registered Holder given within 20 days after the Company provides such notice (which request shall state the intended method of disposition of such Registrable Shares), the Company shall use its best efforts to cause all Registrable Shares which the Company has been requested by such Registered Holder to register to be registered under the Securities Act to the extent necessary to -13- permit their sale or other disposition in accordance with the intended methods of distribution specified in the request of the Registered Holder; provided that the Company shall have the right to postpone or withdraw any registration effected pursuant to this subsection 19(b) without obligation to the Registered Holder or any persons or entities to which the rights under this Warrant are transferred by the Registered Holder, its successors or assigns pursuant to Section 13 hereof. (c) In connection with any registration under subsection 19(b) involving an underwriting, the Company shall not be required to include any Registrable Shares in such registration unless the holders thereof accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (provided that such terms must be consistent with this Warrant). If in the opinion of the managing underwriter it is appropriate because of marketing factors to limit the number of Registrable Shares to be included in the offering, then the Company shall be required to include in the registration only that number of Registrable Shares, if any, which the managing underwriter believes should be included therein. If the number of Registrable Shares to be included in the offering in accordance with the foregoing is less than the total number of shares which the holders of Registrable Shares have requested to be included, then the holders of Registrable Shares who have requested registration and other holders of securities entitled to include them in such registration shall participate in the registration pro rata based upon their total ownership of shares of Common Stock (giving effect to the conversion into Common Stock of all securities convertible thereinto). If any holder would thus be entitled to include more securities than such holder requested to be registered, the excess shall be allocated among other requesting holders pro rata in the manner described in the preceding sentence. 20. Registration Procedures. If and whenever the Company is required by the provisions of this Warrant to use to effect the registration of any of the Registrable Shares under the Securities Act, the Company shall: (a) furnish to the Registered Holder such number of copies as the Registered Holder shall reasonably request of the prospectus, including a preliminary prospectus and any amendments or supplements thereto, in conformity with the requirements of the Securities Act; (b) use its best efforts to register or qualify the Registrable Shares covered by the Registration Statement under the securities laws of such states as the Registered Holder shall reasonably request; provided, however, that the Company shall not be required in connection with this subsection 20(b) to qualify as a foreign corporation or execute a general consent to service of process in any jurisdiction; (c) promptly notify the Registered Holder, if the Company has delivered preliminary or final prospectuses to the Registered Holder and after having -14- done so, the prospectus is amended to comply with the requirements of the Securities Act and, if requested by the Company, the Registered Holder shall immediately cease making offers or sales of Registrable Shares under the Registration Statement and return all prospectuses to the Company. The Company shall promptly provide the Registered Holder with revised prospectuses and, following receipt of the revised prospectuses, the Registered Holder shall be free to resume making offers and sales of the Registrable Shares; and (d) pay the expenses incurred by it in complying with its obligations under this Warrant in connection with registration rights, including all registration and filing fees, exchange listing fees, expenses for the preparation of the Registration statement, prospectus and any amendments and supplements thereto, printing and photocopy expenses, fees and expenses of counsel for the Company, and fees and expenses of accountants for the Company, but excluding: (i) selling commissions or underwriting discounts incurred by the Registered Holder in connection with sales of Registrable Shares under the Registration Statement and (ii) the fees and expenses of any counsel retained by the Registered Holder. 21. Requirements of Registered Holder. The Company shall not be required to effect the registration of any of the Registrable Shares under the Securities Act pursuant to this Warrant unless: (a) the Registered Holder owning such shares furnishes to the Company in writing such information regarding such Registered Holder and the proposed sale of Registrable Shares by such Registered Holder as the Company may reasonably request in writing in connection with the filing of a Registration Statement or as shall be required in connection therewith by the Commission or any state securities law authorities; and (b) Such Registered Holder shall have provided to the Company its written agreement that in the event of any registration of any of the Registrable Shares under the Securities Act pursuant to this Warrant, each Registered Holder will indemnify the Company and its officers and directors and each person, if any, who controls any thereof (within the meaning of the Securities Act) against any and all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of any material fact contained in any prospectus or other document incident to any registration, qualification or compliance (or in any related Registration Statement, notification or the like) or any omission (or alleged omission) to state therein any material fact required to be stated therein or necessary to make the statement therein not misleading, and such Registered Holder will reimburse the Company and each other person indemnified pursuant to this Section 21 for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that this Section 21 shall apply -15- only if (and only to the extent that) such statement or omission was made in reliance upon written information furnished to the Company in an instrument duly executed by such Registered Holder and stated to be specifically for use in such prospectus or other document (or related Registration Statement, notification or the like) or any amendment or supplement thereto; and, provided further that each Registered Holder's liability hereunder with respect to any particular registration shall be limited to an amount equal to the net proceeds received by such Registered Holder from the Registrable Securities sold by such Registered Holder in such registration. 22. Indemnification by Company. In the event of any registration of any of the Registrable Shares under the Securities Act pursuant to this Warrant, the Company will indemnify each Registered Holder and each person who controls the Registered Holder (within the meaning of the Securities Act) against any and all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of any material fact contained in any prospectus or other document incident to any registration, qualification or compliance (or in any related Registration Statement, notification or the like) or any omission (or alleged omission) to state therein any material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to any action or inaction required of the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Registered Holder and controlling person for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company in an instrument duly executed by such Registered Holder or controlling person and specifically for use in such prospectus or other document. IGI, INC. /s/ Edward B. Hager -------------------------------- By: Edward B. Hager Title: Chief Executive Officer -16- EXHIBIT I PURCHASE FORM To:_________________ Dated:____________ The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ___), hereby irrevocably elects to purchase _____ shares of the Common Stock covered by such Warrant. The undersigned herewith makes payment of $____________, representing the full Exercise Price for such shares at the price per share provided for in such Warrant. Such payment takes the form of (check applicable box or boxes): [_] $______ in lawful money of the United States; and/or [_] The cancellation of such portion of the attached Warrant as is exercisable for a total of _____ Warrant Shares (using a Fair Market Value of $_____ per share for purposes of this calculation). Signature:_____________________ Address:______________________ ______________________ -17- EXHIBIT II ASSIGNMENT FORM FOR VALUE RECEIVED, ________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. ____) with respect to the number of shares of Common Stock covered thereby set forth below, unto: Name of Assignee Address No. of Shares - ---------------- ------- ------------- Dated:_____________________ Signature:___________________________ Dated:_____________________ Witness:_____________________________ EX-10.41 5 WARRANT NO.6 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON ITS EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 4 OF THIS WARRANT Warrant No. 6 Number of Shares: 150,000 (subject to adjustment) Date of Issuance: March 11, 1999 IGI, INC. Common Stock Purchase Warrant (Void after October 1, 2004) IGI, Inc., a Delaware corporation (the "Company"), for value received, hereby certifies that Fleet Bank--N.H., a banking and trust company organized under the laws of New Hampshire, or its registered assigns (the "Registered Holder"), is entitled, subject to the terms set forth below, to purchase from the Company, at any time or from time to time on or after September 30, 1999 and on or before October 1, 2004 at not later than 5:00 p.m. 150,000 shares of Common Stock, $.01 par value per share (the "Common Stock"), of the Company, at a Exercise Price of $2.00 per share unless, by 5:00 p.m., Boston, Massachusetts time, on or before September 30, 1999, either (a) all Obligations (as defined in the Second Extension Agreement dated March 11, 1999 (the "Second Extension Agreement") by and among the Registered Holder, Mellon Bank, N.A., the Company and certain of its subsidiaries) of the Borrowers (as defined in the Second Extension Agreement) to the Lenders (as defined in the Second Extension Agreement) shall have been paid in full, in which case this Warrant and the Registered Holder's rights hereunder shall expire, or (b) the Borrowers have delivered an acceptable commitment letter, subject only to documentation and no further contingencies of any kind, from a financial institution acceptable to the Lenders, contemplating a full refinance of the existing Obligations which contemplates a closing within thirty (30) days, in which case this Warrant's exercise start date shall be extended to commence October 30, 1999; provided, however, if all Obligations to the Lenders have been paid in full on or before such extended start date, this Warrant and the Registered Holder's rights hereunder shall expire upon such payment. The shares issuable upon exercise of this Warrant, and the exercise price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the "Warrant Shares" and the "Exercise Price," respectively. -1- 1. Certain Definitions. As used in this Warrant, the following terms shall have the following respective meanings: "Commission" means the Securities and Exchange Commission, or any other Federal agency at the time administering the Securities Act. "Registration Statement" means a registration statement filed by the Company with the Commission for a public offering and sale of Common Stock (other than a registration statement on Form S-8 or Form S-4, or their successors, or any other form for a similar limited purpose, or any registration statement covering only securities proposed to be issued in exchange for securities or assets of another corporation). "Registrable Shares" means (i) the Warrant Shares, and (ii) any other shares of Common Stock issued in respect of such shares (because of stock splits, stock dividends, reclassifications, recapitalizations, or similar events); provided, however, that shares of Common Stock which are Registrable Shares shall cease to be Registrable Shares (i) upon any sale pursuant to a Registration Statement or Rule 144 under the Securities Act or (ii) upon any sale in any manner to a person or entity which, by virtue of Section 13 of this Warrant, is not entitled to the rights provided by this Warrant. "Securities Act" means the Security Act of 1933, as amended, or any similar Federal statute, and the rules and regulations of the Commission issued under such Act, as they each may, from time to time, be in effect. 2. Exercise. (a) This Warrant may be exercised by the Registered Holder, in whole or in part, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by such Registered Holder or by such Registered Holder's duly authorized attorney, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full, in lawful money of the United States, of the Exercise Price payable in respect of the number of Warrant Shares issued upon such exercise. (b) The Registered Holder may, at its option, elect to pay some or all of the Exercise Price payable upon an exercise of this Warrant by cancelling a portion of this Warrant exercisable for such number of Warrant Shares as is determined by dividing (i) the total Exercise Price payable in respect of the number of Warrant Shares being issued upon such exercise by (ii) the excess of the Fair Market Value per share of Common Stock as of the effective date of exercise, as determined pursuant to subsection 2(c) below (the "Exercise Date") over the Exercise Price per share. If the -2- Registered Holder wishes to exercise this Warrant pursuant to this method of payment with respect to the maximum number of Warrant Shares issuable pursuant to this method, then the number of Warrant Shares so issuable shall be equal to the total number of Warrant Shares, minus the product obtained by multiplying (x) the total number of Warrant Shares by (y) a fraction, the numerator of which shall be the Exercise Price per share and the denominator of which shall be the Fair Market Value per share of Common Stock as of the Exercise Date. The Fair Market Value per share of Common Stock shall be determined as follows: (i) If the Common Stock is listed on a national securities exchange, the Nasdaq Stock Market or another nationally recognized exchange or trading system as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the average of the last reported sale price per share of Common Stock thereon for the ten consecutive trading days ending on the day immediately prior to the Exercise Date. (ii) If the Common Stock is not listed on a national securities exchange, the Nasdaq Stock Market or another nationally recognized exchange or trading system as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the amount most recently determined in good faith by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company); and, upon request of the Registered Holder, the Board of Directors (or a representative thereof) shall promptly notify the Registered Holder of the Fair Market Value per share of Common Stock. Notwithstanding the foregoing, if the Board of Directors has not made such a determination within a forty-five day period prior to the Exercise Date, then (A) the Fair Market Value per share of Common Stock shall be the amount next determined in good faith by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company), (B) the Board of Directors shall make such a determination within 15 days of a request by the Registered Holder that it do so, and (C) the exercise of this Warrant pursuant to this subsection 2(b) shall be delayed until such determination is made. (c) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company as provided in subsection 2(a) above. At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 2(d) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. -3- (d) As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 10 days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Registered Holder, or as such Registered Holder (upon payment by such Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full Warrant Shares to which such Registered Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such Registered Holder would otherwise be entitled, cash in an amount determined pursuant to Section 4 hereof; and (ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of Warrant Shares equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the sum of (a) the number of such shares purchased by the Registered Holder upon such exercise plus (b) the number of Warrant Shares (if any) covered by the portion of this Warrant cancelled in payment of the Exercise Price payable upon such exercise pursuant to subsection 2(b) above. (e) Notwithstanding the foregoing, this Warrant shall become immediately exercisable by the Registered Holder upon (i) the occurrence of an Event of Default (as defined in the Second Extension Agreement) or (ii) the mailing date of written notice by the Company of its intention to exercise its right under Section 8 to redeem Available Warrant Shares (as defined under subsection 8(a)). 3. Adjustments. (a) General. The Exercise Price shall be subject to adjustment from time to time pursuant to the terms of this Section 3. (b) Diluting Issuances. (i) Special Definitions. For purposes of this subsection 3(b), the following definitions shall apply: (A) "Option" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities, excluding options described in clause (II) of subsection 3(b)(i)(D) below. (B) "Original Issue Date" shall mean the date on which this Warrant was first issued. -4- (C) "Convertible Securities" shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to subsection 3(b)(iii) below, deemed to be issued) by the Company after the Original Issue Date, other than shares of Common Stock issued or issuable: (I) by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock that are excluded from the definition of Additional Shares of Common Stock by this clause (I); or (II) to employees or directors of, or consultants to, the Company pursuant to a plan adopted by the Board of Directors of the Company. (ii) No Adjustment of Exercise Price. No adjustments to the Exercise Price shall be made unless the consideration per share (determined pursuant to subsection 3(b)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Company is less than the Exercise Price in effect on the date of, and immediately prior to, the issue of such Additional Shares. (iii) Issue of Securities Deemed Issue of Additional Shares of Common Stock. If the Company at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to subsection 3(b)(v) hereof) of such Additional Shares of Common Stock would be less than the Exercise Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) No further adjustment in the Exercise Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock -5- upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) If such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company, upon the exercise, conversion or exchange thereof, the Exercise Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase becoming effective, be recomputed to reflect such increase insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) Upon the expiration or termination of any unexercised Option, the Exercise Price shall not be readjusted, but the Additional Shares of Common Stock deemed issued as the result of the original issue of such Option shall not be deemed issued for the purposes of any subsequent adjustment of the Exercise Price; (D) In the event of any change in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any Option or Convertible Security, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Exercise Price then in effect shall forthwith be readjusted to such Exercise Price as would have obtained had the adjustment which was made upon the issuance of such Option or Convertible Security not exercised or converted prior to such change been made upon the basis of such change; and (E) No readjustment pursuant to Clause (B) or (D) above shall have the effect of increasing the Exercise Price to an amount which exceeds the lower of (i) the Exercise Price on the original adjustment date, or (ii) the Exercise Price that would have resulted from any issuances of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) Adjustment of Exercise Price Upon Issuance of Additional Shares of Common Stock. In the event the Company shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to subsection 3(b)(iii), but excluding shares issued as a dividend or distribution or upon a stock split or combination as provided in subsection 3(c)), without consideration or for a consideration per share less than the Exercise Price in effect on the date of and immediately prior to such issue, then and in such event, such Exercise Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Exercise Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the -6- aggregate consideration received or to be received by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Exercise Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, (i) for the purpose of this subsection 3(b)(iv), all shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding (other than shares excluded from the definition of "Additional Shares of Common Stock" by virtue of clause (II) of subsection 3(b)(i)(D)), and (ii) the number of shares of Common Stock deemed issuable upon conversion of such outstanding Options and Convertible Securities shall not give effect to any adjustments to the conversion price or conversion rate of such Options or Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. Notwithstanding the foregoing, the applicable Exercise Price shall not be so reduced at such time if the amount of such reduction would be an amount less than $.05, but any such amount shall be carried forward and reduction with respect thereto made at the time of and together with any subsequent reduction which, together with such amount and any other amount or amounts so carried forward, shall aggregate $.05 or more. (v) Determination of Consideration. For purposes of this subsection 3(b), the consideration received by the Company for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: (I) insofar as it consists of cash, be computed at the aggregate of cash received by the Company, excluding amounts paid or payable for accrued interest or accrued dividends; (II) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (III) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Company for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration per share received by the Company for Additional Shares of Common -7- Stock deemed to have been issued pursuant to subsection 3(b)(iii), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the Company as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (c) Recapitalizations. If outstanding shares of Common Stock shall be subdivided into a greater number of shares or a dividend in Common Stock shall be paid in respect of Common Stock, the Exercise Price in effect immediately prior to such subdivision or at the record date of such dividend shall simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend be proportionately reduced. If outstanding shares of Common Stock shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased. (d) Mergers, etc. If there shall occur any capital reorganization or reclassification of the Common Stock (other than a change in par value or a subdivision or combination as provided for in subsection 3(c) above), or any consolidation or merger of the Company with or into another corporation, or a transfer of all or substantially all of the assets of the Company, then, as part of any such reorganization, reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made so that the Registered Holder of this Warrant shall have the right thereafter to receive upon the exercise hereof the kind and amount of shares of stock or other securities or property which such Registered Holder would have been entitled to receive if, immediately prior to any such reorganization, reclassification, consolidation, merger or sale, as the case may be, such Registered Holder had held the number of shares of Common Stock which were then issuable upon the exercise of this Warrant. In any such case, appropriate adjustment (as reasonably determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Registered Holder of this Warrant, such that the -8- provisions set forth in this Section 3 (including provisions with respect to adjustment of the Exercise Price) shall thereafter be applicable, as nearly as is reasonably practicable, in relation to any shares of stock or other securities or property thereafter deliverable upon the exercise of this Warrant. (e) Adjustment in Number of Warrant Shares. When any adjustment is required to be made in the Exercise Price, the number of Warrant Shares issuable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment. (f) Certificate of Adjustment. When any adjustment is required to be made pursuant to this Section 3, the Company shall promptly mail to the Registered Holder a certificate setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such certificate shall also set forth the kind and amount of stock or other securities or property into which this Warrant shall be exercisable following such adjustment. 4. Fractional Shares. The Company shall not be required upon the exercise of this Warrant to issue any fractional shares, but shall make an adjustment therefor in cash on the basis of the Fair Market Value per share of Common Stock, as determined pursuant to subsection 2(b) above. 5. Requirements for Transfer. (a) This Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) the Company first shall have been furnished with an opinion of legal counsel, reasonably satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act. (b) Notwithstanding the foregoing, no registration or opinion of counsel shall be required for (i) a transfer by a Registered Holder which is a partnership to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner, if the transferee agrees in writing to be subject to the terms of this Section 5, (ii) a transfer made in accordance with Rule 144 under the Act, or (iii) a transfer by a Registered Holder which is a corporation to an affiliate, as defined under Rule 144 of the Securities Act, if the transferee agrees in writing to be subject to the terms of this Section. -9- (c) Each certificate representing Warrant Shares shall bear a legend substantially in the following form: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such securities are registered under such Act or an opinion of counsel satisfactory to the Company is obtained to the effect that such registration is not required." The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act. 6. No Impairment. The Company will not, by amendment of its charter or through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. 7. Liquidating Dividends. If the Company pays a dividend or makes a distribution on the Common Stock payable otherwise than in cash out of earnings or earned surplus (determined in accordance with generally accepted accounting principles) except for a stock dividend payable in shares of Common Stock (a "Liquidating Dividend"), then the Company will pay or distribute to the Registered Holder of this Warrant, upon the exercise hereof, in addition to the Warrant Shares issued upon such exercise, the Liquidating Dividend which would have been paid to such Registered Holder if he had been the owner of record of such Warrant Shares immediately prior to the date on which a record is taken for such Liquidating Dividend or, if no record is taken, the date as of which the record holders of Common Stock entitled to such dividends or distribution are to be determined. 8. Optional Redemption. (a) At any time, the Company may, at its option, redeem all, but not less than all, of the Warrant Shares for which the Registered Holder has not exercised its right to be issued (the "Available Warrant Shares"), by paying $3.33 per Available Warrant Share (subject to appropriate adjustment for stock splits, stock dividends, combinations or other similar recapitalizations affecting such shares) in cash for each -10- Available Warrant Share then redeemed (hereinafter referred to as the "Redemption Price"); provided, however, that the Registered Holder may immediately exercise its Warrant or Warrants until such time on or 15 days prior to the Redemption Date (as defined below). (b) At least 15 days prior to the date fixed for any redemption of Available Warrant Shares (hereinafter referred to as the "Redemption Date"), written notice shall be mailed, by first class or registered mail, postage prepaid, to the Registered Holder, notifying such holder of the election of the Company to redeem such Available Warrant Shares, specifying the Redemption Date and calling upon the Registered Holder to surrender to the Company, in the manner and at the place designated, its Warrant or Warrants, representing the Available Warrant Shares to be redeemed (such notice is hereinafter referred to as the "Redemption Notice"). On or prior to the Redemption Date (subject to the Registered Holder's right to exercise such Warrants prior to the Redemption Date), the Registered Holder shall surrender its Warrant or Warrants representing Available Warrant Shares to the Company, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the Registered Holder and each surrendered Warrant shall be cancelled. From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price (or the Registered Holder has exercised the Warrants prior to such Redemption Date), all rights of the Registered Holder designated for redemption in the Redemption Notice as the Registered Holder (except the right to receive the Redemption Price without interest upon surrender of the Warrant) shall cease with respect to the Warrant or Warrants representing the Available Warrant Shares, and such Warrant or Warrants shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever. 9. Notices of Record Date, etc. In case: (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or (b) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company; or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or -11- cause to be mailed to the Registered Holder of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least ten (10) days prior to the record date or effective date for the event specified in such notice. 10. Reservation of Stock. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, such number of Warrant Shares and other stock, securities and property, as from time to time shall be issuable upon the exercise of this Warrant. 11. Exchange of Warrants. Upon the surrender by the Registered Holder of any Warrant or Warrants, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of such Registered Holder, at the Company's expense, a new Warrant or Warrants of like tenor, in the name of such Registered Holder or as such Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 12. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. 13. Transfers, etc. (a) The Company will maintain a register containing the name and address of the Registered Holder of this Warrant. Any Registered Holder may change its or his address as shown on the warrant register by written notice to the Company requesting such change. -12- (b) Subject to the provisions of Section 5 hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit II hereto) at the principal office of the Company. (c) Until any transfer of this Warrant is made in the warrant register, the Company may treat the Registered Holder of this Warrant as the absolute owner hereof for all purposes; provided, however, that if and when this Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 14. Mailing of Notices, etc. All notices and other communications from the Company to the Registered Holder of this Warrant shall be mailed by first-class certified or registered mail, postage prepaid, to the address furnished to the Company in writing by the last Registered Holder of this Warrant who shall have furnished an address to the Company in writing. All notices and other communications from the Registered Holder of this Warrant or in connection herewith to the Company shall be mailed by first-class certified or registered mail, postage prepaid, to the Company at its principal office set forth below. If the Company should at any time change the location of its principal office to a place other than as set forth below, it shall give prompt written notice to the Registered Holder of this Warrant and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice. 15. No Rights as Stockholder. Until the exercise of this Warrant, the Registered Holder of this Warrant shall not have or exercise any rights by virtue hereof as a stockholder of the Company. 16. Change or Waiver. Any term of this Warrant may be changed or waived only by an instrument in writing signed by the party against which enforcement of the change or waiver is sought. 17. Headings. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning of any provision of this Warrant. 18. Governing Law. This Warrant will be governed by and construed in accordance with the laws of Delaware. 19. Registration Rights. -13- (a) The Registered Holder shall have the registration rights with respect to the Warrant Shares as specified in Section 9 of the Second Extension Agreement. (b) Furthermore, the Registered Holder shall be entitled to "piggyback" registration rights for so long as the Registered Holder shall own Warrant Shares. Whenever the Company proposes to file a Registration Statement (other than pursuant to subsection 19(a) at any time and from time to time, it will, prior to such filing, give written notice to the Registered Holder of its intention to do so and, upon the written request of the Registered Holder given within 20 days after the Company provides such notice (which request shall state the intended method of disposition of such Registrable Shares), the Company shall use its best efforts to cause all Registrable Shares which the Company has been requested by such Registered Holder to register to be registered under the Securities Act to the extent necessary to permit their sale or other disposition in accordance with the intended methods of distribution specified in the request of the Registered Holder; provided that the Company shall have the right to postpone or withdraw any registration effected pursuant to subsection 19(b) without obligation to the Registered Holder or any persons or entities to whom the rights under this Warrant are transferred by the Registered Holder, its successors or assigns pursuant to Section 13 hereof. (c) In connection with any registration under subsection 19(b) involving an underwriting, the Company shall not be required to include any Registrable Shares in such registration unless the holders thereof accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (provided that such terms must be consistent with this Warrant). If in the opinion of the managing underwriter it is appropriate because of marketing factors to limit the number of Registrable Shares to be included in the offering, then the Company shall be required to include in the registration only that number of Registrable Shares, if any, which the managing underwriter believes should be included therein. If the number of Registrable Shares to be included in the offering in accordance with the foregoing is less than the total number of shares which the holders of Registrable Shares have requested to be included, then the holders of Registrable Shares who have requested registration and other holders of securities entitled to include them in such registration shall participate in the registration pro rata based upon their total ownership of shares of Common Stock (giving effect to the conversion into Common Stock of all securities convertible thereinto). If any holder would thus be entitled to include more securities than such holder requested to be registered, the excess shall be allocated among other requesting holders pro rata in the manner described in the preceding sentence. 20. Registration Procedures. If and whenever the Company is required by the provisions of this Warrant to use its best efforts to effect the registration of any of the Registrable Shares under the Securities Act, the Company shall: -14- (a) furnish to the Registered Holder such number of copies as the Registered Holder shall reasonably request of the prospectus, including a preliminary prospectus and any amendments or supplements thereto, in conformity with the requirements of the Securities Act; (b) use its best efforts to register or qualify the Registrable Shares covered by the Registration Statement under the securities laws of such states as the Registered Holder shall reasonably request; provided, however, that the Company shall not be required in connection with this subsection 20(b) to qualify as a foreign corporation or execute a general consent to service of process in any jurisdiction; (c) promptly notify the Registered Holder, if the Company has delivered preliminary or final prospectuses to the Registered Holder and after having done so, the prospectus is amended to comply with the requirements of the Securities Act and, if requested by the Company, the Registered Holder shall immediately cease making offers or sales of Registrable Shares under the Registration Statement and return all prospectuses to the Company. The Company shall promptly provide the Registered Holder with revised prospectuses and, following receipt of the revised prospectuses, the Registered Holder shall be free to resume making offers and sales of the Registrable Shares; and (d) pay the expenses incurred by it in complying with its obligations under this Warrant in connection with registration rights, including all registration and filing fees, exchange listing fees, expenses for the preparation of the Registration Statement, prospectus and any amendments and supplements thereto, printing and photocopy expenses, fees and expenses of counsel for the Company, and fees and expenses of accountants for the Company, but excluding: (i) selling commissions or underwriting discounts incurred by the Registered Holder in connection with sales of Registrable Shares under the Registration Statement and (ii) the fees and expenses of any counsel retained by the Registered Holder. 21. Requirements of Registered Holder. The Company shall not be required to effect the registration of any of the Registrable Shares under the Securities Act pursuant to this Warrant unless: (a) the Registered Holder owning such shares furnishes to the Company in writing such information regarding such Registered Holder and the proposed sale of Registrable Shares by such Registered Holder as the Company may reasonably request in writing in connection with the filing of a Registration Statement or as shall be required in connection therewith by the Commission or any state securities law authorities; and (b) Such Registered Holder shall have provided to the Company its written agreement that in the event of any registration of any of the Registrable -15- Shares under the Securities Act pursuant to this Warrant, each Registered Holder will indemnify the Company and its officers and directors and each person, if any, who controls any thereof (within the meaning of the Securities Act) against any and all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of any material fact contained in any prospectus or other document incident to any registration, qualification or compliance (or in any related Registration Statement, notification or the like) or any omission (or alleged omission) to state therein any material fact required to be stated therein or necessary to make the statement therein not misleading, and such Registered Holder will reimburse the Company and each other person indemnified pursuant to this Section 21 for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that this Section 21 shall apply only if (and only to the extent that) such statement or omission was made in reliance upon written information furnished to the Company in an instrument duly executed by such Registered Holder and stated to be specifically for use in such prospectus or other document (or related Registration Statement, notification or the like) or any amendment or supplement thereto; and, provided further that each Registered Holder's liability hereunder with respect to any particular registration shall be limited to an amount equal to the net proceeds received by such Registered Holder from the Registrable Securities sold by such Registered Holder in such registration. 22. Indemnification by Company. In the event of any registration of any of the Registrable Shares under the Securities Act pursuant to this Warrant, the Company will indemnify each Registered Holder and each person who controls the Registered Holder (within the meaning of the Securities Act) against any and all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of any material fact contained in any prospectus or other document incident to any registration, qualification or compliance (or in any related Registration Statement, notification or the like) or any omission (or alleged omission) to state therein any material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to any action or inaction required of the Company in connection with any such registration, -16- qualification or compliance, and the Company will reimburse each such Registered Holder and controlling person for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company in an instrument duly executed by such Registered Holder or controlling person and specifically for use in such prospectus or other document. IGI, INC. /s/ Edward B. Hager ------------------------- By: Edward B. Hager [Corporate Seal] Title: Chief Executive Officer -17- EXHIBIT I PURCHASE FORM To:_________________ Dated:____________ The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ___), hereby irrevocably elects to purchase _____ shares of the Common Stock covered by such Warrant. The undersigned herewith makes payment of $____________, representing the full Exercise Price for such shares at the price per share provided for in such Warrant. Such payment takes the form of (check applicable box or boxes): [_] $______ in lawful money of the United States; and/or [_] The cancellation of such portion of the attached Warrant as is exercisable for a total of _____ Warrant Shares (using a Fair Market Value of $_____ per share for purposes of this calculation). Signature:_____________________ Address:______________________ ______________________ -18- EXHIBIT II ASSIGNMENT FORM FOR VALUE RECEIVED, ________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. ____) with respect to the number of shares of Common Stock covered thereby set forth below, unto: Name of Assignee Address No. of Shares - ---------------- ------- ------------- Dated:_____________________ Signature:________________________________ Dated:_____________________ Witness:__________________________________ EX-10.42 6 WARRANT NO. 7 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON ITS EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 4 OF THIS WARRANT Warrant No. 7 Number of Shares: 120,000 (subject to adjustment) Date of Issuance: March 11, 1999 IGI, INC. Common Stock Purchase Warrant (Void after October 1, 2004) IGI, Inc., a Delaware corporation (the "Company"), for value received, hereby certifies that Mellon Bank, N.A., a national banking association, or its registered assigns (the "Registered Holder"), is entitled, subject to the terms set forth below, to purchase from the Company, at any time or from time to time on or after the 60th day after the date of issuance and on or before October 1, 2004 at not later than 5:00 p.m. (Boston, Massachusetts time), 120,000 shares of Common Stock, $.01 par value per share (the "Common Stock"), of the Company, at a Exercise Price of $2.00 per share. The shares issuable upon exercise of this Warrant, and the Exercise Price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the "Warrant Shares" and the "Exercise Price," respectively. 1. Certain Definitions. As used in this Warrant, the following terms shall have the following respective meanings: "Commission" means the Securities and Exchange Commission, or any other Federal agency at the time administering the Securities Act. "Registration Statement" means a registration statement filed by the Company with the Commission for a public offering and sale of Common Stock (other than a registration statement on Form S-8 or Form S-4, or their successors, or any other form for a similar limited purpose, or any registration statement covering only securities proposed to be issued in exchange for securities or assets of another corporation). -1- "Registrable Shares" means (i) the Warrant Shares, and (ii) any other shares of Common Stock issued in respect of such shares (because of stock splits, stock dividends, reclassifications, recapitalizations, or similar events); provided, however, that shares of Common Stock which are Registrable Shares shall cease to be Registrable Shares (i) upon any sale pursuant to a Registration Statement or Rule 144 under the Securities Act or (ii) upon any sale in any manner to a person or entity which, by virtue of Section 13 of this Warrant, is not entitled to the rights provided by this Warrant. "Securities Act" means the Security Act of 1933, as amended, or any similar Federal statute, and the rules and regulations of the Commission issued under such Act, as they each may, from time to time, be in effect. 2. Exercise. (a) This Warrant may be exercised by the Registered Holder, in whole or in part, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by such Registered Holder or by such Registered Holder's duly authorized attorney, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full, in lawful money of the United States, of the Exercise Price payable in respect of the number of Warrant Shares issued upon such exercise. (b) The Registered Holder may, at its option, elect to pay some or all of the Exercise Price payable upon an exercise of this Warrant by cancelling a portion of this Warrant exercisable for such number of Warrant Shares as is determined by dividing (i) the total Exercise Price payable in respect of the number of Warrant Shares being issued upon such exercise by (ii) the excess of the Fair Market Value per share of Common Stock as of the effective date of exercise, as determined pursuant to subsection 2(c) below (the "Exercise Date") over the Exercise Price per share. If the Registered Holder wishes to exercise this Warrant pursuant to this method of payment with respect to the maximum number of Warrant Shares issuable pursuant to this method, then the number of Warrant Shares so issuable shall be equal to the total number of Warrant Shares, minus the product obtained by multiplying (x) the total number of Warrant Shares by (y) a fraction, the numerator of which shall be the Exercise Price per share and the denominator of which shall be the Fair Market Value per share of Common Stock as of the Exercise Date. The Fair Market Value per share of Common Stock shall be determined as follows: (i) If the Common Stock is listed on a national securities exchange, the Nasdaq Stock Market or another nationally recognized exchange or trading system as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the average of the last reported sale price per share of -2- Common Stock thereon for the ten consecutive trading days ending on the day immediately prior to the Exercise Date; (ii) If the Common Stock is not listed on a national securities exchange, the Nasdaq Stock Market or another nationally recognized exchange or trading system as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the amount most recently determined in good faith by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company); and, upon request of the Registered Holder, the Board of Directors (or a representative thereof) shall promptly notify the Registered Holder of the Fair Market Value per share of Common Stock. Notwithstanding the foregoing, if the Board of Directors has not made such a determination within a forty-five day period prior to the Exercise Date, then (A) the Fair Market Value per share of Common Stock shall be the amount next determined in good faith by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company), (B) the Board of Directors shall make such a determination within 15 days of a request by the Registered Holder that it do so, and (C) the exercise of this Warrant pursuant to this subsection 2(b) shall be delayed until such determination is made. (c) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company as provided in subsection 2(a) above. At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 2(d) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. (d) As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 10 days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Registered Holder, or as such Registered Holder (upon payment by such Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full Warrant Shares to which such Registered Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such Registered Holder would otherwise be entitled, cash in an amount determined pursuant to Section 4 hereof; and (ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or -3- faces thereof for the number of Warrant Shares equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the sum of (a) the number of such shares purchased by the Registered Holder upon such exercise plus (b) the number of Warrant Shares (if any) covered by the portion of this Warrant cancelled in payment of the Exercise Price payable upon such exercise pursuant to subsection 2(b) above. (e) Notwithstanding the foregoing, the Warrant shall become immediately exercisable by the Registered Holder upon (i) the occurrence of an Event of Default (as defined in the Second Extension Agreement dated March 11, 1999 by and among the Registered Holder, Fleet Bank-N.H., the Company and certain of its subsidiaries (the "Second Extension Agreement")) or (ii) the mailing date of written notice by the Company of its intention to exercise its right under Section 8 to redeem Available Warrant Shares (as defined under subsection 8(a)). 3. Adjustments. (a) General. The Exercise Price shall be subject to adjustment from time to time pursuant to the terms of this Section 3. (b) Diluting Issuances. (i) Special Definitions. For purposes of this subsection 3(b), the following definitions shall apply: (A) "Option" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities, excluding options described in clause (II) of subsection 3(b)(i)(D) below. (B) "Original Issue Date" shall mean the date on which this Warrant was first issued. (C) "Convertible Securities" shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to subsection 3(b)(iii) below, deemed to be issued) by the Company after the Original Issue Date, other than shares of Common Stock issued or issuable: (I) by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock that are -4- excluded from the definition of Additional Shares of Common Stock by this clause (I); or (II) to employees or directors of, or consultants to, the Company pursuant to a plan adopted by the Board of Directors of the Company. (ii) No Adjustment of Exercise Price. No adjustments to the Exercise Price shall be made unless the consideration per share (determined pursuant to subsection 3(b)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Company is less than the Exercise Price in effect on the date of, and immediately prior to, the issue of such Additional Shares. (iii) Issue of Securities Deemed Issue of Additional Shares of Common Stock. If the Company at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to subsection 3(b)(v) hereof) of such Additional Shares of Common Stock would be less than the Exercise Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) No further adjustment in the Exercise Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) If such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company, upon the exercise, conversion or exchange thereof, the Exercise Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase becoming effective, be recomputed to reflect such increase insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; -5- (C) Upon the expiration or termination of any unexercised Option, the Exercise Price shall not be readjusted, but the Additional Shares of Common Stock deemed issued as the result of the original issue of such Option shall not be deemed issued for the purposes of any subsequent adjustment of the Exercise Price; (D) In the event of any change in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any Option or Convertible Security, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Exercise Price then in effect shall forthwith be readjusted to such Exercise Price as would have obtained had the adjustment which was made upon the issuance of such Option or Convertible Security not exercised or converted prior to such change been made upon the basis of such change; and (E) No readjustment pursuant to Clause (B) or (D) above shall have the effect of increasing the Exercise Price to an amount which exceeds the lower of (i) the Exercise Price on the original adjustment date, or (ii) the Exercise Price that would have resulted from any issuances of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) Adjustment of Exercise Price Upon Issuance of Additional Shares of Common Stock. In the event the Company shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to subsection 3(b)(iii), but excluding shares issued as a dividend or distribution or upon a stock split or combination as provided in subsection 3(c)), without consideration or for a consideration per share less than the Exercise Price in effect on the date of and immediately prior to such issue, then and in such event, such Exercise Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Exercise Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Exercise Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, (i) for the purpose of this subsection 3(b)(iv), all shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding (other than shares excluded from the definition of "Additional Shares of Common Stock" by virtue of clause (II) of subsection 3(b)(i)(D)), and (ii) the number of shares of Common Stock deemed issuable upon conversion of such outstanding Options and Convertible Securities shall not give effect to any adjustments to the conversion price or conversion rate of -6- such Options or Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. Notwithstanding the foregoing, the applicable Exercise Price shall not be so reduced at such time if the amount of such reduction would be an amount less than $.05, but any such amount shall be carried forward and reduction with respect thereto made at the time of and together with any subsequent reduction which, together with such amount and any other amount or amounts so carried forward, shall aggregate $.05 or more. (v) Determination of Consideration. For purposes of this subsection 3(b), the consideration received by the Company for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: (I) insofar as it consists of cash, be computed at the aggregate of cash received by the Company, excluding amounts paid or payable for accrued interest or accrued dividends; (II) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (III) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Company for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration per share received by the Company for Additional Shares of Common Stock deemed to have been issued pursuant to subsection 3(b)(iii), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the Company as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by -7- (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (c) Recapitalizations. If outstanding shares of Common Stock shall be subdivided into a greater number of shares or a dividend in Common Stock shall be paid in respect of Common Stock, the Exercise Price in effect immediately prior to such subdivision or at the record date of such dividend shall simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend be proportionately reduced. If outstanding shares of Common Stock shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased. (d) Mergers, etc. If there shall occur any capital reorganization or reclassification of the Common Stock (other than a change in par value or a subdivision or combination as provided for in subsection 3(c) above), or any consolidation or merger of the Company with or into another corporation, or a transfer of all or substantially all of the assets of the Company, then, as part of any such reorganization, reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made so that the Registered Holder of this Warrant shall have the right thereafter to receive upon the exercise hereof the kind and amount of shares of stock or other securities or property which such Registered Holder would have been entitled to receive if, immediately prior to any such reorganization, reclassification, consolidation, merger or sale, as the case may be, such Registered Holder had held the number of shares of Common Stock which were then issuable upon the exercise of this Warrant. In any such case, appropriate adjustment (as reasonably determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Registered Holder of this Warrant, such that the provisions set forth in this Section 3 (including provisions with respect to adjustment of the Exercise Price) shall thereafter be applicable, as nearly as is reasonably practicable, in relation to any shares of stock or other securities or property thereafter deliverable upon the exercise of this Warrant. (e) Adjustment in Number of Warrant Shares. When any adjustment is required to be made in the Exercise Price, the number of Warrant Shares purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment. -8- (f) Certificate of Adjustment. When any adjustment is required to be made pursuant to this Section 3, the Company shall promptly mail to the Registered Holder a certificate setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such certificate shall also set forth the kind and amount of stock or other securities or property into which this Warrant shall be exercisable following such adjustment. 4. Fractional Shares. The Company shall not be required upon the exercise of this Warrant to issue any fractional shares, but shall make an adjustment therefor in cash on the basis of the Fair Market Value per share of Common Stock, as determined pursuant to subsection 2(b) above. 5. Requirements for Transfer. (a) This Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) the Company first shall have been furnished with an opinion of legal counsel, reasonably satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act. (b) Notwithstanding the foregoing, no registration or opinion of counsel shall be required for (i) a transfer by a Registered Holder which is a partnership to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner, if the transferee agrees in writing to be subject to the terms of this Section 5, (ii) a transfer made in accordance with Rule 144 under the Act, or (iii) a transfer by a Registered Holder which is a corporation to an affiliate, as defined under Rule 144 of the Securities Act, if the transferee agrees in writing to be subject to the terms of this Section. (c) Each certificate representing Warrant Shares shall bear a legend substantially in the following form: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such securities are registered under such Act or an opinion of counsel satisfactory to the Company is obtained to the effect that such registration is not required." -9- The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act. 6. No Impairment. The Company will not, by amendment of its charter or through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. 7. Liquidating Dividends. If the Company pays a dividend or makes a distribution on the Common Stock payable otherwise than in cash out of earnings or earned surplus (determined in accordance with generally accepted accounting principles) except for a stock dividend payable in shares of Common Stock (a "Liquidating Dividend"), then the Company will pay or distribute to the Registered Holder of this Warrant, upon the exercise hereof, in addition to the Warrant Shares issued upon such exercise, the Liquidating Dividend which would have been paid to such Registered Holder if he had been the owner of record of such Warrant Shares immediately prior to the date on which a record is taken for such Liquidating Dividend or, if no record is taken, the date as of which the record holders of Common Stock entitled to such dividends or distribution are to be determined. 8. Optional Redemption. (a) At any time, the Company may, at its option, redeem all, but not less than all, of the Warrant Shares for which the Registered Holder has not exercised its right to be issued (the "Available Warrant Shares"), by paying $3.33 per Available Warrant Share (subject to appropriate adjustment for stock splits, stock dividends, combinations or other similar recapitalizations affecting such shares) in cash for each Available Warrant Share then redeemed (hereinafter referred to as the "Redemption Price"); provided, however, that the Registered Holder may immediately exercise its Warrant or Warrants until such time on or 15 days prior to the Redemption Date (as defined below). (b) At least 15 days prior to the date fixed for any redemption of Available Warrant Shares (hereinafter referred to as the "Redemption Date"), written notice shall be mailed, by first class or registered mail, postage prepaid, to the Registered Holder, notifying such holder of the election of the Company to redeem such Available Warrant Shares, specifying the Redemption Date and calling upon the Registered Holder to surrender to the Company, in the manner and at the place designated, its Warrant or Warrants, representing the Available Warrant Shares to be redeemed (such notice is hereinafter referred to as the "Redemption Notice"). On or prior to the Redemption Date (subject to the Registered Holder's right to exercise -10- such Warrants prior to the Redemption Date), the Registered Holder shall surrender its Warrant or Warrants representing Available Warrant Shares to the Company, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the Registered Holder and each surrendered Warrant shall be cancelled. From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price (or the Registered Holder has exercised the Warrants prior to such Redemption Date), all rights of the Registered Holder designated for redemption in the Redemption Notice as the Registered Holder (except the right to receive the Redemption Price without interest upon surrender of the Warrant) shall cease with respect to the Warrant or Warrants representing the Available Warrant Shares, and such Warrant or Warrants shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever. 9. Notices of Record Date, etc. In case: (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or (b) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company; or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Registered Holder of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least ten (10) days prior to the record date or effective date for the event specified in such notice. -11- 10. Reservation of Stock. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, such number of Warrant Shares and other stock, securities and property, as from time to time shall be issuable upon the exercise of this Warrant. 11. Exchange of Warrants. Upon the surrender by the Registered Holder of any Warrant or Warrants, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of such Registered Holder, at the Company's expense, a new Warrant or Warrants of like tenor, in the name of such Registered Holder or as such Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 12. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. 13. Transfers, etc. (a) The Company will maintain a register containing the name and address of the Registered Holder of this Warrant. Any Registered Holder may change its or his address as shown on the warrant register by written notice to the Company requesting such change. (b) Subject to the provisions of Section 5 hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit II hereto) at the principal office of the Company. (c) Until any transfer of this Warrant is made in the warrant register, the Company may treat the Registered Holder of this Warrant as the absolute owner hereof for all purposes; provided, however, that if and when this Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. -12- 14. Mailing of Notices, etc. All notices and other communications from the Company to the Registered Holder of this Warrant shall be mailed by first-class certified or registered mail, postage prepaid, to the address furnished to the Company in writing by the last Registered Holder of this Warrant who shall have furnished an address to the Company in writing. All notices and other communications from the Registered Holder of this Warrant or in connection herewith to the Company shall be mailed by first-class certified or registered mail, postage prepaid, to the Company at its principal office set forth below. If the Company should at any time change the location of its principal office to a place other than as set forth below, it shall give prompt written notice to the Registered Holder of this Warrant and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice. 15. No Rights as Stockholder. Until the exercise of this Warrant, the Registered Holder of this Warrant shall not have or exercise any rights by virtue hereof as a stockholder of the Company. 16. Change or Waiver. Any term of this Warrant may be changed or waived only by an instrument in writing signed by the party against which enforcement of the change or waiver is sought. 17. Headings. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning of any provision of this Warrant. 18. Governing Law. This Warrant will be governed by and construed in accordance with the laws of Delaware. 19. Registration Rights. (a) The Registered Holder shall have the registration rights with respect to the Warrant Shares as specified in Section 9 of the Second Extension Agreement. (b) Furthermore, the Registered Holder shall be entitled to "piggyback" registration rights for so long as the Registered Holder shall own Warrant Shares. Whenever the Company proposes to file a Registration Statement (other than pursuant to subsection 19(a) at any time and from time to time, it will, prior to such filing, give written notice to the Registered Holder of its intention to do so and, upon the written request of the Registered Holder given within 20 days after the Company provides such notice (which request shall state the intended method of disposition of such Registrable Shares), the Company shall use its best efforts to cause all Registrable Shares which the Company has been requested by such Registered Holder to register to be registered under the Securities Act to the extent necessary to -13- permit their sale or other disposition in accordance with the intended methods of distribution specified in the request of the Registered Holder; provided that the Company shall have the right to postpone or withdraw any registration effected pursuant to this subsection 19(b) without obligation to the Registered Holder or any persons or entities to which the rights under this Warrant are transferred by the Registered Holder, its successors or assigns pursuant to Section 13 hereof. (c) In connection with any registration under subsection 19(b) involving an underwriting, the Company shall not be required to include any Registrable Shares in such registration unless the holders thereof accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (provided that such terms must be consistent with this Warrant). If in the opinion of the managing underwriter it is appropriate because of marketing factors to limit the number of Registrable Shares to be included in the offering, then the Company shall be required to include in the registration only that number of Registrable Shares, if any, which the managing underwriter believes should be included therein. If the number of Registrable Shares to be included in the offering in accordance with the foregoing is less than the total number of shares which the holders of Registrable Shares have requested to be included, then the holders of Registrable Shares who have requested registration and other holders of securities entitled to include them in such registration shall participate in the registration pro rata based upon their total ownership of shares of Common Stock (giving effect to the conversion into Common Stock of all securities convertible thereinto). If any holder would thus be entitled to include more securities than such holder requested to be registered, the excess shall be allocated among other requesting holders pro rata in the manner described in the preceding sentence. 20. Registration Procedures. If and whenever the Company is required by the provisions of this Warrant to use to effect the registration of any of the Registrable Shares under the Securities Act, the Company shall: (a) furnish to the Registered Holder such number of copies as the Registered Holder shall reasonably request of the prospectus, including a preliminary prospectus and any amendments or supplements thereto, in conformity with the requirements of the Securities Act; (b) use its best efforts to register or qualify the Registrable Shares covered by the Registration Statement under the securities laws of such states as the Registered Holder shall reasonably request; provided, however, that the Company shall not be required in connection with this subsection 20(b) to qualify as a foreign corporation or execute a general consent to service of process in any jurisdiction; (c) promptly notify the Registered Holder, if the Company has delivered preliminary or final prospectuses to the Registered Holder and after having -14- done so, the prospectus is amended to comply with the requirements of the Securities Act and, if requested by the Company, the Registered Holder shall immediately cease making offers or sales of Registrable Shares under the Registration Statement and return all prospectuses to the Company. The Company shall promptly provide the Registered Holder with revised prospectuses and, following receipt of the revised prospectuses, the Registered Holder shall be free to resume making offers and sales of the Registrable Shares; and (d) pay the expenses incurred by it in complying with its obligations under this Warrant in connection with registration rights, including all registration and filing fees, exchange listing fees, expenses for the preparation of the Registration Statement, prospectus and any amendments and supplements thereto, printing and photocopy expenses, fees and expenses of counsel for the Company, and fees and expenses of accountants for the Company, but excluding: (i) selling commissions or underwriting discounts incurred by the Registered Holder in connection with sales of Registrable Shares under the Registration Statement and (ii) the fees and expenses of any counsel retained by the Registered Holder. 21. Requirements of Registered Holder. The Company shall not be required to effect the registration of any of the Registrable Shares under the Securities Act pursuant to this Warrant unless: (a) the Registered Holder owning such shares furnishes to the Company in writing such information regarding such Registered Holder and the proposed sale of Registrable Shares by such Registered Holder as the Company may reasonably request in writing in connection with the filing of a Registration Statement or as shall be required in connection therewith by the Commission or any state securities law authorities; and (b) Such Registered Holder shall have provided to the Company its written agreement that in the event of any registration of any of the Registrable Shares under the Securities Act pursuant to this Warrant, each Registered Holder will indemnify the Company and its officers and directors and each person, if any, who controls any thereof (within the meaning of the Securities Act) against any and all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of any material fact contained in any prospectus or other document incident to any registration, qualification or compliance (or in any related Registration Statement, notification or the like) or any omission (or alleged omission) to state therein any material fact required to be stated therein or necessary to make the statement therein not misleading, and such Registered Holder will reimburse the Company and each other person indemnified pursuant to this Section 21 for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that this Section 21 shall apply -15- only if (and only to the extent that) such statement or omission was made in reliance upon written information furnished to the Company in an instrument duly executed by such Registered Holder and stated to be specifically for use in such prospectus or other document (or related Registration Statement, notification or the like) or any amendment or supplement thereto; and, provided further that each Registered Holder's liability hereunder with respect to any particular registration shall be limited to an amount equal to the net proceeds received by such Registered Holder from the Registrable Securities sold by such Registered Holder in such registration. 22. Indemnification by Company. In the event of any registration of any of the Registrable Shares under the Securities Act pursuant to this Warrant, the Company will indemnify each Registered Holder and each person who controls the Registered Holder (within the meaning of the Securities Act) against any and all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of any material fact contained in any prospectus or other document incident to any registration, qualification or compliance (or in any related Registration Statement, notification or the like) or any omission (or alleged omission) to state therein any material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to any action or inaction required of the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Registered Holder and controlling person for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company in an instrument duly executed by such Registered Holder or controlling person and specifically for use in such prospectus or other document. IGI, INC. /s/ Edward B. Hager ------------------------- By: Edward B. Hager Title: Chief Executive Officer -16- EXHIBIT I PURCHASE FORM To:_________________ Dated:____________ The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ___), hereby irrevocably elects to purchase _____ shares of the Common Stock covered by such Warrant. The undersigned herewith makes payment of $____________, representing the full Exercise Price for such shares at the price per share provided for in such Warrant. Such payment takes the form of (check applicable box or boxes): [_] $______ in lawful money of the United States; and/or [_] The cancellation of such portion of the attached Warrant as is exercisable for a total of _____ Warrant Shares (using a Fair Market Value of $_____ per share for purposes of this calculation). Signature:_____________________ Address:______________________ ______________________ EXHIBIT II ASSIGNMENT FORM FOR VALUE RECEIVED, ________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. ____) with respect to the number of shares of Common Stock covered thereby set forth below, unto: Name of Assignee Address No. of Shares - ---------------- ------- ------------- Dated:_____________________ Signature:__________________________ Dated:_____________________ Witness:____________________________ EX-10.43 7 WARRANT NO.8 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON ITS EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 4 OF THIS WARRANT Warrant No. 8 Number of Shares: 120,000 (subject to adjustment) Date of Issuance: March 11, 1999 IGI, INC. Common Stock Purchase Warrant (Void after October 1, 2004) IGI, Inc., a Delaware corporation (the "Company"), for value received, hereby certifies that Mellon Bank, N.A., a national banking association, or its registered assigns (the "Registered Holder"), is entitled, subject to the terms set forth below, to purchase from the Company, at any time or from time to time on or after September 30, 1999 and on or before October 1, 2004 at not later than 5:00 p.m. 120,000 shares of Common Stock, $.01 par value per share (the "Common Stock"), of the Company, at a Exercise Price of $2.00 per share unless, by 5:00 p.m., Boston, Massachusetts time, on or before September 30, 1999, either (a) all Obligations (as defined in the Second Extension Agreement dated March 11, 1999 (the "Second Extension Agreement") by and among the Registered Holder, Fleet Bank, N.A., the Company and certain of its subsidiaries) of the Borrowers (as defined in the Second Extension Agreement) to the Lenders (as defined in the Second Extension Agreement) shall have been paid in full, in which case this Warrant and the Registered Holder's rights hereunder shall expire, or (b) the Borrowers have delivered an acceptable commitment letter, subject only to documentation and no further contingencies of any kind, from a financial institution acceptable to the Lenders, contemplating a full refinance of the existing Obligations which contemplate a closing within thirty (30) days, in which case this Warrant's exercise start date shall be extended to commence October 30, 1999; provided, however, if all Obligations to the Lenders have been paid in full on or before such extended start date, this Warrant and the Registered Holder's rights hereunder shall expire upon such payment. The shares issuable upon exercise of this Warrant, and the exercise price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the "Warrant Shares" and the "Exercise Price," respectively. -1- 1. Certain Definitions. As used in this Warrant, the following terms shall have the following respective meanings: "Commission" means the Securities and Exchange Commission, or any other Federal agency at the time administering the Securities Act. "Registration Statement" means a registration statement filed by the Company with the Commission for a public offering and sale of Common Stock (other than a registration statement on Form S-8 or Form S-4, or their successors, or any other form for a similar limited purpose, or any registration statement covering only securities proposed to be issued in exchange for securities or assets of another corporation). "Registrable Shares" means (i) the Warrant Shares, and (ii) any other shares of Common Stock issued in respect of such shares (because of stock splits, stock dividends, reclassifications, recapitalizations, or similar events); provided, however, that shares of Common Stock which are Registrable Shares shall cease to be Registrable Shares (i) upon any sale pursuant to a Registration Statement or Rule 144 under the Securities Act or (ii) upon any sale in any manner to a person or entity which, by virtue of Section 13 of this Warrant, is not entitled to the rights provided by this Warrant. "Securities Act" means the Security Act of 1933, as amended, or any similar Federal statute, and the rules and regulations of the Commission issued under such Act, as they each may, from time to time, be in effect. 2. Exercise. (a) This Warrant may be exercised by the Registered Holder, in whole or in part, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by such Registered Holder or by such Registered Holder's duly authorized attorney, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full, in lawful money of the United States, of the Exercise Price payable in respect of the number of Warrant Shares issued upon such exercise. (b) The Registered Holder may, at its option, elect to pay some or all of the Exercise Price payable upon an exercise of this Warrant by cancelling a portion of this Warrant exercisable for such number of Warrant Shares as is determined by dividing (i) the total Exercise Price payable in respect of the number of Warrant Shares being issued upon such exercise by (ii) the excess of the Fair Market Value per share of Common Stock as of the effective date of exercise, as determined pursuant to subsection 2(c) below (the "Exercise Date") over the Exercise Price per share. If the Registered Holder wishes to exercise this Warrant pursuant to this method of -2- payment with respect to the maximum number of Warrant Shares issuable pursuant to this method, then the number of Warrant Shares so issuable shall be equal to the total number of Warrant Shares, minus the product obtained by multiplying (x) the total number of Warrant Shares by (y) a fraction, the numerator of which shall be the Exercise Price per share and the denominator of which shall be the Fair Market Value per share of Common Stock as of the Exercise Date. The Fair Market Value per share of Common Stock shall be determined as follows: (i) If the Common Stock is listed on a national securities exchange, the Nasdaq Stock Market or another nationally recognized exchange or trading system as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the average of the last reported sale price per share of Common Stock thereon for the ten consecutive trading days ending on the day immediately prior to the Exercise Date. (ii) If the Common Stock is not listed on a national securities exchange, the Nasdaq Stock Market or another nationally recognized exchange or trading system as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the amount most recently determined in good faith by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company); and, upon request of the Registered Holder, the Board of Directors (or a representative thereof) shall promptly notify the Registered Holder of the Fair Market Value per share of Common Stock. Notwithstanding the foregoing, if the Board of Directors has not made such a determination within a forty-five day period prior to the Exercise Date, then (A) the Fair Market Value per share of Common Stock shall be the amount next determined in good faith by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company), (B) the Board of Directors shall make such a determination within 15 days of a request by the Registered Holder that it do so, and (C) the exercise of this Warrant pursuant to this subsection 2(b) shall be delayed until such determination is made. (c) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company as provided in subsection 2(a) above. At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 2(d) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. -3- (d) As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 10 days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Registered Holder, or as such Registered Holder (upon payment by such Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full Warrant Shares to which such Registered Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such Registered Holder would otherwise be entitled, cash in an amount determined pursuant to Section 4 hereof; and (ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of Warrant Shares equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the sum of (a) the number of such shares purchased by the Registered Holder upon such exercise plus (b) the number of Warrant Shares (if any) covered by the portion of this Warrant cancelled in payment of the Exercise Price payable upon such exercise pursuant to subsection 2(b) above. (e) Notwithstanding the foregoing, this Warrant shall become immediately exercisable by the Registered Holder upon (i) the occurrence of an Event of Default (as defined in the Second Extension Agreement) or (ii) the mailing date of written notice by the Company of its intention to exercise its right under Section 8 to redeem Available Warrant Shares (as defined under subsection 8(a)). 3. Adjustments. (a) General. The Exercise Price shall be subject to adjustment from time to time pursuant to the terms of this Section 3. (b) Diluting Issuances. (i) Special Definitions. For purposes of this subsection 3(b), the following definitions shall apply: (A) "Option" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities, excluding options described in clause (II) of subsection 3(b)(i)(D) below. (B) "Original Issue Date" shall mean the date on which this Warrant was first issued. -4- (C) "Convertible Securities" shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to subsection 3(b)(iii) below, deemed to be issued) by the Company after the Original Issue Date, other than shares of Common Stock issued or issuable: (I) by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock that are excluded from the definition of Additional Shares of Common Stock by this clause (I); or (II) to employees or directors of, or consultants to, the Company pursuant to a plan adopted by the Board of Directors of the Company. (ii) No Adjustment of Exercise Price. No adjustments to the Exercise Price shall be made unless the consideration per share (determined pursuant to subsection 3(b)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Company is less than the Exercise Price in effect on the date of, and immediately prior to, the issue of such Additional Shares. (iii) Issue of Securities Deemed Issue of Additional Shares of Common Stock. If the Company at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to subsection 3(b)(v) hereof) of such Additional Shares of Common Stock would be less than the Exercise Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) No further adjustment in the Exercise Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock -5- upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) If such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company, upon the exercise, conversion or exchange thereof, the Exercise Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase becoming effective, be recomputed to reflect such increase insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) Upon the expiration or termination of any unexercised Option, the Exercise Price shall not be readjusted, but the Additional Shares of Common Stock deemed issued as the result of the original issue of such Option shall not be deemed issued for the purposes of any subsequent adjustment of the Exercise Price; (D) In the event of any change in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any Option or Convertible Security, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Exercise Price then in effect shall forthwith be readjusted to such Exercise Price as would have obtained had the adjustment which was made upon the issuance of such Option or Convertible Security not exercised or converted prior to such change been made upon the basis of such change; and (E) No readjustment pursuant to Clause (B) or (D) above shall have the effect of increasing the Exercise Price to an amount which exceeds the lower of (i) the Exercise Price on the original adjustment date, or (ii) the Exercise Price that would have resulted from any issuances of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) Adjustment of Exercise Price Upon Issuance of Additional Shares of Common Stock. In the event the Company shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to subsection 3(b)(iii), but excluding shares issued as a dividend or distribution or upon a stock split or combination as provided in subsection 3(c)), without consideration or for a consideration per share less than the Exercise Price in effect on the date of and immediately prior to such issue, then and in such event, such Exercise Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Exercise Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the -6- aggregate consideration received or to be received by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Exercise Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, (i) for the purpose of this subsection 3(b)(iv), all shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding (other than shares excluded from the definition of "Additional Shares of Common Stock" by virtue of clause (II) of subsection 3(b)(i)(D)), and (ii) the number of shares of Common Stock deemed issuable upon conversion of such outstanding Options and Convertible Securities shall not give effect to any adjustments to the conversion price or conversion rate of such Options or Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. Notwithstanding the foregoing, the applicable Exercise Price shall not be so reduced at such time if the amount of such reduction would be an amount less than $.05, but any such amount shall be carried forward and reduction with respect thereto made at the time of and together with any subsequent reduction which, together with such amount and any other amount or amounts so carried forward, shall aggregate $.05 or more. (v) Determination of Consideration. For purposes of this subsection 3(b), the consideration received by the Company for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: (I) insofar as it consists of cash, be computed at the aggregate of cash received by the Company, excluding amounts paid or payable for accrued interest or accrued dividends; (II) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (III) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Company for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration per share received by the Company for Additional Shares of Common -7- Stock deemed to have been issued pursuant to subsection 3(b)(iii), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the Company as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (c) Recapitalizations. If outstanding shares of Common Stock shall be subdivided into a greater number of shares or a dividend in Common Stock shall be paid in respect of Common Stock, the Exercise Price in effect immediately prior to such subdivision or at the record date of such dividend shall simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend be proportionately reduced. If outstanding shares of Common Stock shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased. (d) Mergers, etc. If there shall occur any capital reorganization or reclassification of the Common Stock (other than a change in par value or a subdivision or combination as provided for in subsection 3(c) above), or any consolidation or merger of the Company with or into another corporation, or a transfer of all or substantially all of the assets of the Company, then, as part of any such reorganization, reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made so that the Registered Holder of this Warrant shall have the right thereafter to receive upon the exercise hereof the kind and amount of shares of stock or other securities or property which such Registered Holder would have been entitled to receive if, immediately prior to any such reorganization, reclassification, consolidation, merger or sale, as the case may be, such Registered Holder had held the number of shares of Common Stock which were then issuable upon the exercise of this Warrant. In any such case, appropriate adjustment (as reasonably determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Registered Holder of this Warrant, such that the -8- provisions set forth in this Section 3 (including provisions with respect to adjustment of the Exercise Price) shall thereafter be applicable, as nearly as is reasonably practicable, in relation to any shares of stock or other securities or property thereafter deliverable upon the exercise of this Warrant. (e) Adjustment in Number of Warrant Shares. When any adjustment is required to be made in the Exercise Price, the number of Warrant Shares issuable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment. (f) Certificate of Adjustment. When any adjustment is required to be made pursuant to this Section 3, the Company shall promptly mail to the Registered Holder a certificate setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such certificate shall also set forth the kind and amount of stock or other securities or property into which this Warrant shall be exercisable following such adjustment. 4. Fractional Shares. The Company shall not be required upon the exercise of this Warrant to issue any fractional shares, but shall make an adjustment therefor in cash on the basis of the Fair Market Value per share of Common Stock, as determined pursuant to subsection 2(b) above. 5. Requirements for Transfer. (a) This Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) the Company first shall have been furnished with an opinion of legal counsel, reasonably satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act. (b) Notwithstanding the foregoing, no registration or opinion of counsel shall be required for (i) a transfer by a Registered Holder which is a partnership to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner, if the transferee agrees in writing to be subject to the terms of this Section 5, (ii) a transfer made in accordance with Rule 144 under the Act, or (iii) a transfer by a Registered Holder which is a corporation to an affiliate, as defined under Rule 144 of the Securities Act, if the transferee agrees in writing to be subject to the terms of this Section. -9- (c) Each certificate representing Warrant Shares shall bear a legend substantially in the following form: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such securities are registered under such Act or an opinion of counsel satisfactory to the Company is obtained to the effect that such registration is not required." The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act. 6. No Impairment. The Company will not, by amendment of its charter or through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. 7. Liquidating Dividends. If the Company pays a dividend or makes a distribution on the Common Stock payable otherwise than in cash out of earnings or earned surplus (determined in accordance with generally accepted accounting principles) except for a stock dividend payable in shares of Common Stock (a "Liquidating Dividend"), then the Company will pay or distribute to the Registered Holder of this Warrant, upon the exercise hereof, in addition to the Warrant Shares issued upon such exercise, the Liquidating Dividend which would have been paid to such Registered Holder if he had been the owner of record of such Warrant Shares immediately prior to the date on which a record is taken for such Liquidating Dividend or, if no record is taken, the date as of which the record holders of Common Stock entitled to such dividends or distribution are to be determined. 8. Optional Redemption. (a) At any time, the Company may, at its option, redeem all, but not less than all, of the Warrant Shares for which the Registered Holder has not exercised its right to be issued (the "Available Warrant Shares"), by paying $3.33 per Available Warrant Share (subject to appropriate adjustment for stock splits, stock dividends, combinations or other similar recapitalizations affecting such shares) in cash for each -10- Available Warrant Share then redeemed (hereinafter referred to as the "Redemption Price"); provided, however, that the Registered Holder may immediately exercise its Warrant or Warrants until such time on or 15 days prior to the Redemption Date (as defined below). (b) At least 15 days prior to the date fixed for any redemption of Available Warrant Shares (hereinafter referred to as the "Redemption Date"), written notice shall be mailed, by first class or registered mail, postage prepaid, to the Registered Holder, notifying such holder of the election of the Company to redeem such Available Warrant Shares, specifying the Redemption Date and calling upon the Registered Holder to surrender to the Company, in the manner and at the place designated, its Warrant or Warrants, representing the Available Warrant Shares to be redeemed (such notice is hereinafter referred to as the "Redemption Notice"). On or prior to the Redemption Date (subject to the Registered Holder's right to exercise such Warrants prior to the Redemption Date), the Registered Holder shall surrender its Warrant or Warrants representing Available Warrant Shares to the Company, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the Registered Holder and each surrendered Warrant shall be cancelled. From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price (or the Registered Holder has exercised the Warrants prior to such Redemption Date), all rights of the Registered Holder designated for redemption in the Redemption Notice as the Registered Holder (except the right to receive the Redemption Price without interest upon surrender of the Warrant) shall cease with respect to the Warrant or Warrants representing the Available Warrant Shares, and such Warrant or Warrants shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever. 9. Notices of Record Date, etc. In case: (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or (b) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company; or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or -11- cause to be mailed to the Registered Holder of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least ten (10) days prior to the record date or effective date for the event specified in such notice. 10. Reservation of Stock. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, such number of Warrant Shares and other stock, securities and property, as from time to time shall be issuable upon the exercise of this Warrant. 11. Exchange of Warrants. Upon the surrender by the Registered Holder of any Warrant or Warrants, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of such Registered Holder, at the Company's expense, a new Warrant or Warrants of like tenor, in the name of such Registered Holder or as such Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 12. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. 13. Transfers, etc. (a) The Company will maintain a register containing the name and address of the Registered Holder of this Warrant. Any Registered Holder may change its or his address as shown on the warrant register by written notice to the Company requesting such change. -12- (b) Subject to the provisions of Section 5 hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit II hereto) at the principal office of the Company. (c) Until any transfer of this Warrant is made in the warrant register, the Company may treat the Registered Holder of this Warrant as the absolute owner hereof for all purposes; provided, however, that if and when this Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 14. Mailing of Notices, etc. All notices and other communications from the Company to the Registered Holder of this Warrant shall be mailed by first-class certified or registered mail, postage prepaid, to the address furnished to the Company in writing by the last Registered Holder of this Warrant who shall have furnished an address to the Company in writing. All notices and other communications from the Registered Holder of this Warrant or in connection herewith to the Company shall be mailed by first-class certified or registered mail, postage prepaid, to the Company at its principal office set forth below. If the Company should at any time change the location of its principal office to a place other than as set forth below, it shall give prompt written notice to the Registered Holder of this Warrant and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice. 15. No Rights as Stockholder. Until the exercise of this Warrant, the Registered Holder of this Warrant shall not have or exercise any rights by virtue hereof as a stockholder of the Company. 16. Change or Waiver. Any term of this Warrant may be changed or waived only by an instrument in writing signed by the party against which enforcement of the change or waiver is sought. 17. Headings. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning of any provision of this Warrant. 18. Governing Law. This Warrant will be governed by and construed in accordance with the laws of Delaware. 19. Registration Rights. -13- (a) The Registered Holder shall have the registration rights with respect to the Warrant Shares as specified in Section 9 of the Second Extension Agreement. (b) Furthermore, the Registered Holder shall be entitled to "piggyback" registration rights for so long as the Registered Holder shall own Warrant Shares. Whenever the Company proposes to file a Registration Statement (other than pursuant to subsection 19(a) at any time and from time to time, it will, prior to such filing, give written notice to the Registered Holder of its intention to do so and, upon the written request of the Registered Holder given within 20 days after the Company provides such notice (which request shall state the intended method of disposition of such Registrable Shares), the Company shall use its best efforts to cause all Registrable Shares which the Company has been requested by such Registered Holder to register to be registered under the Securities Act to the extent necessary to permit their sale or other disposition in accordance with the intended methods of distribution specified in the request of the Registered Holder; provided that the Company shall have the right to postpone or withdraw any registration effected pursuant to subsection 19(b) without obligation to the Registered Holder or any persons or entities to whom the rights under this Warrant are transferred by the Registered Holder, its successors or assigns pursuant to Section 13 hereof. (c) In connection with any registration under subsection 19(b) involving an underwriting, the Company shall not be required to include any Registrable Shares in such registration unless the holders thereof accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (provided that such terms must be consistent with this Warrant). If in the opinion of the managing underwriter it is appropriate because of marketing factors to limit the number of Registrable Shares to be included in the offering, then the Company shall be required to include in the registration only that number of Registrable Shares, if any, which the managing underwriter believes should be included therein. If the number of Registrable Shares to be included in the offering in accordance with the foregoing is less than the total number of shares which the holders of Registrable Shares have requested to be included, then the holders of Registrable Shares who have requested registration and other holders of securities entitled to include them in such registration shall participate in the registration pro rata based upon their total ownership of shares of Common Stock (giving effect to the conversion into Common Stock of all securities convertible thereinto). If any holder would thus be entitled to include more securities than such holder requested to be registered, the excess shall be allocated among other requesting holders pro rata in the manner described in the preceding sentence. 20. Registration Procedures. If and whenever the Company is required by the provisions of this Warrant to use its best efforts to effect the registration of any of the Registrable Shares under the Securities Act, the Company shall: -14- (a) furnish to the Registered Holder such number of copies as the Registered Holder shall reasonably request of the prospectus, including a preliminary prospectus and any amendments or supplements thereto, in conformity with the requirements of the Securities Act; (b) use its best efforts to register or qualify the Registrable Shares covered by the Registration Statement under the securities laws of such states as the Registered Holder shall reasonably request; provided, however, that the Company shall not be required in connection with this subsection 20(b) to qualify as a foreign corporation or execute a general consent to service of process in any jurisdiction; (c) promptly notify the Registered Holder, if the Company has delivered preliminary or final prospectuses to the Registered Holder and after having done so, the prospectus is amended to comply with the requirements of the Securities Act and, if requested by the Company, the Registered Holder shall immediately cease making offers or sales of Registrable Shares under the Registration Statement and return all prospectuses to the Company. The Company shall promptly provide the Registered Holder with revised prospectuses and, following receipt of the revised prospectuses, the Registered Holder shall be free to resume making offers and sales of the Registrable Shares; and (d) pay the expenses incurred by it in complying with its obligations under this Warrant in connection with registration rights, including all registration and filing fees, exchange listing fees, expenses for the preparation of the Registration Statement, prospectus and any amendments and supplements thereto, printing and photocopy expenses, fees and expenses of counsel for the Company, and fees and expenses of accountants for the Company, but excluding: (i) selling commissions or underwriting discounts incurred by the Registered Holder in connection with sales of Registrable Shares under the Registration Statement and (ii) the fees and expenses of any counsel retained by the Registered Holder. 21. Requirements of Registered Holder. The Company shall not be required to effect the registration of any of the Registrable Shares under the Securities Act pursuant to this Warrant unless: (a) the Registered Holder owning such shares furnishes to the Company in writing such information regarding such Registered Holder and the proposed sale of Registrable Shares by such Registered Holder as the Company may reasonably request in writing in connection with the filing of a Registration Statement or as shall be required in connection therewith by the Commission or any state securities law authorities; and (b) Such Registered Holder shall have provided to the Company its written agreement that in the event of any registration of any of the Registrable -15- Shares under the Securities Act pursuant to this Warrant, each Registered Holder will indemnify the Company and its officers and directors and each person, if any, who controls any thereof (within the meaning of the Securities Act) against any and all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of any material fact contained in any prospectus or other document incident to any registration, qualification or compliance (or in any related Registration Statement, notification or the like) or any omission (or alleged omission) to state therein any material fact required to be stated therein or necessary to make the statement therein not misleading, and such Registered Holder will reimburse the Company and each other person indemnified pursuant to this Section 21 for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that this Section 21 shall apply only if (and only to the extent that) such statement or omission was made in reliance upon written information furnished to the Company in an instrument duly executed by such Registered Holder and stated to be specifically for use in such prospectus or other document (or related Registration Statement, notification or the like) or any amendment or supplement thereto; and, provided further that each Registered Holder's liability hereunder with respect to any particular registration shall be limited to an amount equal to the net proceeds received by such Registered Holder from the Registrable Securities sold by such Registered Holder in such registration. 22. Indemnification by Company. In the event of any registration of any of the Registrable Shares under the Securities Act pursuant to this Warrant, the Company will indemnify each Registered Holder and each person who controls the Registered Holder (within the meaning of the Securities Act) against any and all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of any material fact contained in any prospectus or other document incident to any registration, qualification or compliance (or in any related Registration Statement, notification or the like) or any omission (or alleged omission) to state therein any material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated -16- under the Securities Act applicable to the Company and relating to any action or inaction required of the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Registered Holder and controlling person for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company in an instrument duly executed by such Registered Holder or controlling person and specifically for use in such prospectus or other document. IGI, INC. /s/ Edward B. Hager -------------------------------- By: Edward B. Hager Title: Chief Executive Officer EXHIBIT I PURCHASE FORM To:_________________ Dated:____________ The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ___), hereby irrevocably elects to purchase _____ shares of the Common Stock covered by such Warrant. The undersigned herewith makes payment of $____________, representing the full Exercise Price for such shares at the price per share provided for in such Warrant. Such payment takes the form of (check applicable box or boxes): [_] $______ in lawful money of the United States; and/or [_] The cancellation of such portion of the attached Warrant as is exercisable for a total of _____ Warrant Shares (using a Fair Market Value of $_____ per share for purposes of this calculation). Signature:_____________________ Address:______________________ ______________________ -18- EXHIBIT II ASSIGNMENT FORM FOR VALUE RECEIVED, ________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. ____) with respect to the number of shares of Common Stock covered thereby set forth below, unto: Name of Assignee Address No. of Shares - ---------------- ------- ------------- Dated:_____________________ Signature:_________________ Dated:_____________________ Witness:___________________ EX-10.44 8 EMPLOYMENT AGREEMENT BETWEEN Employment Agreement between Paul Woitach ("Executive") and IGI, Inc. ("Corporation") 1. Position: Executive is to serve as President and Chief Operating Officer of corporation. Executive will also be nominated, as a director of the Corporation at the earliest time in the future deemed appropriate by the Board of Directors. Upon the retirement of the current Chief Executive Officer of the Corporation, Executive will be the principal candidate for the position of Chief Executive Officer. 2. Term: The Initial term of this agreement is one year, commencing May 1, 1998, (the "effective date") and continuing through April 30, 1999 and, unless either party gives written notice to the other on or before February 28, 1999 or February 29, 2000 that the term will not be extended, the term will be extended automatically through April 30, 2000 and April 30, 2001, respectively. 3. Base Salary: Executive's Initial base salary will be $200,000 per year, with review for possible merit increases, not less than annually, and with no reduction permitted. 4. Cash Bonuses: (a) Executive will receive bonuses at the end of 1998 and 1999 in amounts equal to 20% of the base salary for each year with no reduction permitted. (b) Executive will receive additional annual performance bonuses for 1998 and each subsequent year based upon the terms of the Corporation' s annual management performance bonus plan, which is to contain reasonable terms developed promptly by the Compensation Committee of the Corporation in consultation with Executive. Group/Executive Benefits: Executive and his family may participate on terms no less favorable to Executive than the terms provided to other senior executives of the Corporation, (with all waiting periods waived) in any group and/or executive life, hospitalization or disability insurance plan, health program, pension, profit sharing, ESOP, 401(k) and similar benefit plans (qualified, non-qualified and supplemental) or other fringe benefits of the Corporation, including not more than four weeks of vacation annually, and a monthly vehicle allowance. The company will pay all healthcare premiums for the Executive and his immediate family. 5. Equity Based Incentive Compensation: (a) Executive is to receive as of the Effective Date, a grant of a ten-year option to purchase 100,000 shares of the Corporation which shall vest on the date which is six months after the Effective Date; and, an additional option for 100,000 shares which shall be made on January 5, 1999 and which shall vest on the first anniversary of the Effective Date. The exercise price for the shares will be $2.00 per share. (b) Executive will receive additional option grants (and perhaps other equity awards) in subsequent years consistent with the Corporation's then-current policies and practices (which policies and practices will be developed promptly by the Compensation Committee of the Corporation in consultation with Executive which approval will not be withheld unreasonably). (c) All equity-based awards will fully vest upon a Change of Control (as defined in paragraph 11, below). 6. Automobile Allowance: Executive shall receive an automobile allowance in the amount of $600.00 per month. 7. Relocation: (a) The Corporation will pay all reasonable temporary living expenses for Executive in a location near the headquarters of the Corporation. If Executive elects to relocate his family's residence to be closer to the headquarters of the Corporation, the Corporation will pay up to $50,000 to cover all reasonable costs of such relocation 8. Termination: Employment under the agreement may be terminated: (a) By Executive's death or disability, (b) By the Corporation, upon written notice to Executive if for Cause (as described in paragraph 9, below), or by giving at least 15 days' written notice to Executive if not for Cause, or (c) By Executive, with or without Good Reason (as described in paragraph 10, below), without liability to the Corporation, by giving at least 15 days' written notice to the Corporation. 9. Cause for Termination by the Corporation: "Cause" for the Corporation to terminate Executive's employment shall mean: (a) Executive's commission of an act materially and demonstrably detrimental to the interests (including the goodwill) of the Corporation or any of its subsidiaries, including violation of any statutory or regulatory requirements applicable to the business of the Corporation or any of its subsidiaries, which act constitutes willful misconduct by Executive in the performance of his material duties to the Corporation or any of its subsidiaries, or (b) Executive's commission of any material act of dishonesty or breach of trust resulting or intended to result in material personal gain or enrichment of Executive at the expense of the Corporation or any of its subsidiaries, or (c) Executive's conviction of a felony involving moral turpitude, but specifically excluding any conviction based entirely on vicarious liability. No act or failure to act will be considered "willful" unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that his action or omission was in the best interests of the Corporation. 10. Good Reason for Termination by Executive: "Good Reason" for Executive to terminate his employment shall mean: (a) The failure to re-elect Executive as President and Chief Operating Officer, or as a member of the Board of Directors as provided in paragraph 1. (b) Assignment of duties inconsistent with Executive's position, authority, duties or responsibilities, or any other action by the Corporation which results in a substantial diminution of such position, authority, duties or responsibilities, including any such diminution resulting from a sale or other disposition of a substantial portion of the assets of the corporation, (c) Any substantial breach by the Corporation of any of the provisions of Executive's employment agreement, or (d) The Corporation giving notice to Executive that the term will not be extended beyond April 30, 1999 or April 30, 2000 respectively. In addition, termination by Executive for any reason during the 60-day period immediately after a Change of Control shall be deemed to be a termination for Good Reason. 11. Change of Control: A "Change of Control" will be deemed to have occurred if: (a) Any "person" (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding for this purpose the Corporation or any subsidiary of the Corporation, or any employee benefit plan of the Corporation or any subsidiary of the Corporation, or any person or entity organized, appointed or established by the Corporation for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of the Corporation, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Corporation representing thirty-five percent (35%) or more of the combined voting power of the Corporation's then outstanding securities; provided, however, that no Change of Control will be deemed to have occurred as a result of a change in ownership percentage resulting solely from an acquisition of securities by the Corporation; and provided further that no Change of Control will be deemed to have occurred if a person inadvertently acquires an ownership interest of 35% or more but then promptly reduces that ownership interest below 35%; (b) During any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such two-year period constitute the Board of Directors of the Corporation and no new director(s) (except for a director designated by a person who has entered into an agreement with the Corporation to effect a transaction described elsewhere in this paragraph 11) whose election by the Board or nomination for election by the Corporation's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously approved, cease for any reason to constitute at least a majority thereof; or (c) The shareholders of the Corporation approve a plan of complete liquidation of the Corporation, an agreement for the sale of disposition of the Corporation or all or substantially all of the Corporation's assets, or a plan of merger or consolidation of the Corporation with any other corporation, except for a merger or consolidation in which the security owners of the Corporation immediately prior to the merger or consolidation continue to own at least sixty-five percent (65%) of the voting securities of the new (or continued) entity immediately after such merger or consolidation. 12. Benefits Upon Termination of Employment: (a) If Executive's employment is terminated by death, disability, discharge by the Corporation for Cause, or resignation by Executive without Good Reason, Executive will be entitled to receive his base salary through the date of termination, any bonus or incentive or deferred compensation accrued as of the date of termination, and all other benefits which have accrued as of the date of termination. (b) If Executive's employment is terminated by death or disability, Executive will be entitled to receive, in addition to the compensation and benefits described in paragraph (a), above, the following benefits: (i) Immediate full vesting of all of Executive's otherwise unvested options to purchase shares of the Corporation, which options will be exercisable for a period of at least 2 years after the date of termination of employment, and (ii) Immediate vesting of all other equity or incentive compensation awards to Executive, which are not otherwise vested. (c) If, prior to May 1, 1999, Executive's employment is terminated by the Corporation other than for Cause of disability or is terminated by Executive for Good Reason, Executive will be entitled to receive, in addition to the compensation and benefits described in paragraphs (a) and (b), above, the following severance benefits: (i) Payment in a lump sum of an amount equal to Executive's twelve months Base Salary as in effect prior to the termination, (ii) Payment in a lump sum of the pro rata portion of Executive's Base Salary, guaranteed Cash Bonus, and target annual performance bonus as defined in sections 4(a) and 4(b) for the year of termination; and, (iii) Payment in a lump sum of an amount equal to Executive's target annual performance bonus for the year of termination, (iv) Continuation, for a period of twelve months after the date of termination , of Benefits and senior executive perquisites, including automobile allowance, at least equal to those which would have been provided if Executive's employment had continued for that time, including auto allowance and (v) Outplacement services, at the expense of the Corporation, from a provider reasonably selected by Executive. Provided, however if Executive's employment is terminated after April 30, 1999 by the Corporation other than for Cause disability or by Executive for Good Reason, the compensation and benefits described above will be modified in that the lump sum payments for base salary and bonuses will be one and one half times the respective amounts described in subparagraphs (i) and (iii), above, and the Benefits and perquisites described in subparagraph (iv), above, will be continued for a period of eighteen months. (d) If any Change of Control severance agreement between the Corporation and any other senior executive of the Corporation provides for any additional type of compensation or benefit, or a higher level of a particular type of compensation or benefit, compared to the compensation and benefits otherwise provided for Executive by his employment agreement in the event of the termination of Executive's employment after a Change of Control, Executive will also receive that additional type of, or higher level of, severance compensation or benefit. 13. No Duty to Mitigate: Any severance benefits payable to Executive will not be subject to reduction for any compensation received from other employment. 14. Gross-Up Payment for Golden Parachute Taxes: If it is determined that any payment by the Corporation to or for the benefit of Executive, under his employment agreement otherwise, would be subject to the federal excise taxes imposed on golden parachute payments, the Corporation will make an additional payment to Executive (the "Gross-Up Payment") in an amount sufficient to cover (a) any golden parachute excise tax payable by Executive, (b) all taxes on the Gross-Up Payment, and (c) all interest and/or penalties imposed with respect to such taxes. 15. Fees and Expenses: The Corporation will pay all reasonable legal, accounting and other professional fees and related expenses incurred by Executive in connection with the negotiation and preparation of his employment agreement with the Corporation, up to $2500.00 16. Indemnification: To the full extent permitted by law, and by the bylaws of the Corporation, the Corporation will indemnify Executive (including the advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by Executive in connection with the defense of any lawsuit or other claim to which he is made a party by reason of being an officer, director or employee of the Corporation or any of its subsidiaries. The Corporation will maintain reasonable director and officer liability insurance coverage for all acts or omissions of Executive during his employment with the Corporation. 17. Binding of Successors: The Corporation will be required to have any successor to all or substantially all of its business and/or assets expressly assume and agree to perform Executive's employment agreement in the same manner and to the same extent that the Corporation would be required to perform if no such succession had taken place. 18. Completeness of Disclosure: The Corporation represents and warrants that it has disclosed to Executive, prior to entering into his employment agreement, all material facts regarding the financial condition of the Corporation and the future conduct of business by the Corporation. /s/ Edward B. Hager 4/6/99 - ------------------------------------------ ------------------------- IGI Inc. Date /s/ Paul Woitach 4/6/99 - ------------------------------------------ ------------------------- Executive Date EX-10.45 9 EMPLOYMENT AGREEMENT BETWEEN Employment Agreement between John Wall ("Executive") and IGI, Inc. ("Corporation") 1. Position: Executive is to serve as Senior Vice President and Chief Financial Officer of the Corporation. 2. Term: The Initial term of this agreement is one year, commencing June 1, 1998, (the "effective date") and continuing through May 30, 1999 and, unless either party gives written notice to the other on or before ninety days before the end of the term, the term will be extended automatically from year to year. 3. Base Salary: Executive's Initial base salary will be $150,000 per year, plus $20,000 deferred salary due upon the successful completion of one year of service. Group/Executive Benefits: Executive and his family may participate on terms no less favorable to Executive than the terms provided to other senior vice president executives of the Corporation, (with all waiting periods waived) in any group and/or executive life, hospitalization or disability insurance plan, health program, 401(k) and similar benefit plans (qualified, non-qualified and supplemental) or other fringe benefits of the Corporation, including not more than four weeks of vacation annually, and a monthly vehicle allowance. The company will pay all healthcare premiums for the Executive and his immediate family. 4. Equity Based Incentive Compensation: Executive is to receive as of the Effective Date, a grant of a ten-year option to purchase 50,000 shares of the Corporation, 25,000 of which shall vest on the date which is six months after the Effective Date; and, 25,000 of which shall vest on the first anniversary of the Effective Date. Other performance based compensation is to be determined by the Compensation Committee of the Board. 5. Automobile Allowance: Executive shall receive an automobile allowance in the amount of $600.00 per month. 6. Change of Control: A "Change of Control" will be deemed to have occurred if: (a) Any "person" (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding for this purpose the Corporation or any subsidiary of the Corporation, or any employee benefit plan of the Corporation or any subsidiary of the Corporation, or any person or entity organized, appointed or established by the Corporation for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of the Corporation, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Corporation representing thirty-five percent (35%) or more of the combined voting power of the Corporation's then outstanding securities; provided, however, that no Change of Control will be deemed to have occurred as a result of a change in ownership percentage resulting solely from an acquisition of securities by the Corporation; and provided further that no Change of Control will be deemed to have occurred if a person inadvertently acquires an ownership interest of 35% or more but then promptly reduces that ownership interest below 35%; (b) During any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such two-year period constitute the Board of Directors of the Corporation and no new director(s) (except for a director designated by a person who has entered into an agreement with the Corporation to effect a transaction described elsewhere in this paragraph 8) whose election by the Board or nomination for election by the Corporation's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously approved, cease for any reason to constitute at least a majority thereof; or (c) The shareholders of the Corporation approve a plan of complete liquidation of the Corporation, an agreement for the sale of disposition of the Corporation or all or substantially all of the Corporation's assets, or a plan of merger or consolidation of the Corporation with any other corporation, except for a merger or consolidation in which the security owners of the Corporation immediately prior to the merger or consolidation continue to own at least sixty-five percent (65%) of the voting securities of the new (or continued) entity immediately after such merger or consolidation. 7. Benefits Upon Termination of Employment: (a) If Executive's employment is terminated by death, disability, discharge by the Corporation for Cause, or resignation, Executive will be entitled to receive his base salary through the date of termination, any bonus or incentive or deferred compensation accrued as of the date of termination, and all other benefits which have accrued as of the date of termination. (b) If Executive's employment is terminated by death or disability, Executive will be entitled to receive, in addition to the compensation and benefits described in paragraph (a), above, the following benefits: (i) Immediate full vesting of all of Executive's otherwise unvested options to purchase shares of the Corporation, which options will be exercisable for a period of at least 2 years after the date of termination of employment, and (ii) Immediate vesting of all other equity or incentive compensation awards to Executive, which are not otherwise vested. (c) If Executive's employment is terminated by the Corporation other than for Cause or disability, Executive will be entitled to receive, in addition to the compensation and benefits described in paragraphs (a) and (b), above, the following severance benefits: (i) Payment in a lump sum of an amount equal to Executive's twelve months salary as in effect prior to the termination, (ii) Continuation, for a period of twelve months after the date of termination , of Benefits and senior executive perquisites at least equal to those which would have been provided if Executive's employment had continued for that time, including auto allowance and (iii) Outplacement services, at the expense of the Corporation, from a provider reasonably selected by Executive. 10. Indemnification: To the full extent permitted by law, and the bylaws of the corporation, the Corporation will indemnify Executive (including the advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by Executive in connection with the defense of any lawsuit or other claim to which he is made a party, except due to intentional misconduct by reason of being an officer, director or employee of the Corporation or any of its subsidiaries. The Corporation will maintain reasonable director and officer liability insurance coverage for all acts or omissions of Executive during his employment with the Corporation. 11. Binding of Successors: The Corporation will be required to have any successor to all or substantially all of its business and/or assets expressly assume and agree to perform Executive's employment agreement in the same manner and to the same extent that the Corporation would be required to perform if no such succession had taken place. 12. Completeness of Disclosure: The Corporation represents and warrants that it has disclosed to Executive, prior to entering into his employment agreement, all material facts regarding the financial condition of the Corporation and the future conduct of business by the Corporation. /s/ Edward B. Hager 4/6/99 - ------------------------------------------ ------------------------- IGI Inc. Date /s/ John F. Wall 4/6/99 - ------------------------------------------ ------------------------- Executive Date EX-11 10 COMPUTATION OF NET INCOME PER COMMON SHARE EXHIBIT 11 IGI, INC. AND SUBSIDIARIES COMPUTATION OF NET INCOME PER COMMON SHARE (amounts in thousands, except per share information)
For the years ended December 31, 1998 1997* 1996* ---------- ---------- ---------- Net loss $ (3,029) $ (1,208) $ (481) ========== ========== ========== Weighted average shares outstanding 9,470,413 9,457,938 9,323,440 Dilutive common stock equivalents (net of Common Stock deemed reacquired) based on Average market stock price -- -- -- ---------- ---------- ---------- Diluted common and common equivalent shares 9,470,413 9,457,938 9,323,440 ========== ========== ========== Loss per common and common equivalent share: Basic $ (.32) $ (.13) $ (.05) Diluted $ (.32) $ (.13) $ (.05)
* Prior year amounts are restated to reflect the Company's change in inventory costing method (See Note 1 to Consolidated Financial Statements). 53 EX-21 11 LIST OF SUBSIDIARIES EXHIBIT 21 IGI, INC. AND SUBSIDIARIES LIST OF SUBSIDIARIES OF IGI, INC. IGEN, Inc., a Delaware corporation ImmunoGenetics, Inc., a Delaware corporation Marketing Aspects, Inc., a Delaware corporation Blood Cells, Inc., a Delaware corporation Flavorsome, Ltd., a Delaware corporation Vista, Inc., a Virgin Island corporation IGI Do Brasil, a Brazil corporation Microburst, Inc., a Delaware corporation 54 EX-23 12 CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of IGI, Inc. on Form S-8 (No. 2-90713), on Form S-8 and S-3 (No. 33-35047), on Form S-8 and S-3 (No. 33-43212), on Form S-3 (No. 33-47777), on Form S-3 (No. 33-54920), on Form S-8 (No. 33-63700), on Form S-8 (No. 33-65706), on Form S-8 (No. 33-58479), on Form S-8 (No. 33-65249), on Form S-3 (No. 333-27173), on Form S-8 (No. 333-28183), on Form S-8 (No. 333-65553) and on Form S-8 (No. 333-67565), of our report dated March 31, 1999 on our audits of the consolidated financial statements and financial statement schedule of IGI, Inc. and subsidiaries as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997, and 1996, which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 31, 1999 55 EX-27.1 13 FDS, YEAR ENDED DEC. 31, 1998
5 1,000 YEAR DEC-31-1998 DEC-31-1998 1,068 0 6,978 516 7,406 17,084 20,359 10,880 32,056 25,191 0 0 0 97 7,989 32,056 31,995 33,195 16,954 16,954 17,151 0 3,443 (4,320) (1,291) (3,029) 0 0 0 (3,029) (.32) (.32)
EX-27.2 14 RESTATED FDS, YEARS ENDED DEC. 31, 1997 AND 1996
5 1,000 YEAR YEAR DEC-31-1997 DEC-31-1996 DEC-31-1997 DEC-31-1996 1,196 317 0 0 7,754 8,603 903 238 8,942 8,223 18,407 19,432 19,884 19,248 10,048 9,121 33,750 33,845 23,879 16,933 0 0 0 0 0 0 96 96 10,131 8,923 33,750 33,845 34,193 34,785 34,343 34,947 17,451 17,117 17,451 17,117 16,672 16,498 0 0 1,853 1,984 (1,644) (854) (436) (373) (1,208) (481) 0 0 0 0 0 0 (1,208) (481) (.13) (.05) (.13) (.05)
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