-----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, IPDTLGXTIBL3bLs4k9IZd/5gjMucvLTi+RrOOkvdpH8RdcUu5iIA9sPi1QcE6Bv4 RatGPkx1A8mDZd5G/cZC6Q== /in/edgar/work/20000901/0000910647-00-500046/0000910647-00-500046.txt : 20000922 0000910647-00-500046.hdr.sgml : 20000922 ACCESSION NUMBER: 0000910647-00-500046 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000901 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IGI INC CENTRAL INDEX KEY: 0000352998 STANDARD INDUSTRIAL CLASSIFICATION: [2836 ] IRS NUMBER: 010355758 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-08568 FILM NUMBER: 715766 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 EX-10 1 igi-10.txt EXHIBIT 10.6-TERMINATION AGREEMENT Exhibit 10.61 TERMINATION AGREEMENT THIS TERMINATION AGREEMENT ("Termination Agreement") is made and entered into this the 10th day of December, 1998, by and among IGI, INC., a Delaware corporation, having a principal place of business at Wheat Road & Lincoln Avenue, Buena, New Jersey 08310, IGEN, INC., a Delaware corporation, having a principal place of business at 103 Springier Building, 3411 Silverside Road, Wilmington, Delaware (hereinafter referred to as "Igen"), IMMUNOGENETICS, INC., a Delaware corporation, having a principal place of business at Wheat Road & Lincoln Avenue, Buena, New Jersey 08310 (hereinafter referred to as "Immunogenetics") [IGI, Inc. and its Affiliates (including but not limited to Igen and Immunogenetics) are hereinafter collectively referred to as "IGI"], and GLAXO WELLCOME, INC., a North Carolina corporation, having a principal place of business at Five Moore Drive, Research Triangle Park, North Carolina 27709 (hereinafter referred to as "GW"). W I T N E S S E T H : WHEREAS, IGI and GW have previously entered into a certain Amended and Restated Exclusive Supply Agreement, dated as of January 27, 1997, as amended by Amendment No. 1 to the Amended and Restated Exclusive Supply Agreement, dated as of April 7, 1998, relating to the manufacture and supply by IGI, and the purchase by GW, of certain facial health products sold by GW under the WellSkin(R) trademark (such agreement, as amended, hereinafter referred to as the "Supply Agreement"); and WHEREAS, IGI and GW now mutually desire to terminate the Supply Agreement, subject to the terms and conditions set forth below. NOW, THEREFORE, in consideration of the premises, the mutual covenants contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, IGI and GW hereby agree as follows: 1. Definitions. Except as otherwise defined herein, all capitalized terms used herein but not defined herein shall have the meanings ascribed to such terms in the Supply Agreement. 2. Termination of the Agreement. IGI and GW hereby agree that the Supply Agreement is terminated in its entirety effective at the close of business on December 18, 1998 (the "Effective Date") and, accordingly, all of their respective rights, obligations and duties under the Agreement shall be terminated as of the Effective Date and shall thereafter no longer have any force and effect, except as specifically set forth in this Termination Agreement. Without limiting the foregoing, the parties agree that all rights granted by IGI to GW with respect to the NOVASOME(r) trademark pursuant to Section 2 of the Supply Agreement shall terminate as of the Effective Date. 3. Confidential Information. Upon the Effective Date, each party shall promptly terminate all use of any Confidential Information of the other party. The parties agree that the Confidentiality provisions contained in Section 8 of the Supply Agreement shall survive for a period of three (3) years from the Effective Date. 4. Debt Owed From Operations. (a) The parties acknowledge that certain amounts are owed by one party to the other party due to the operating business relationship established by the Supply Agreement, including but not limited to the purchase of Product, the return of Product, shipping and delivery costs with respect to the Product, elimination of duplicate payments for the Product, additional funds due with respect to pricing modifications for the Products, determination of Target Inventory Amounts, and all amounts determined under Sections 3.2, 3.3, 3.4 and 3.5 of the Supply Agreement (such amounts to be hereinafter referred to as 'Operational Debt"). The parties hereby agree that all amounts owed by IGI to GW as Operational Debt, approximately Five Hundred Eighty-Four Thousand Five Hundred Dollars ( $584,500) (the "IGI Operational Debt"), and all amounts owed by GW to IGI, approximately One Hundred Seventy-Two Thousand Dollars ($172,000) (the "GW Operational Debt"), shall be written-off, forgiven and cancelled. The parties agree that the terms Operational Debt, IGI Operational Debt and GW Operational Debt do not include, and do not refer to, amounts which relate to (i) the Royalty Advance or the Remaining Royalty Advance, or the calculation thereof (ii) the Trademark Assignment (as defined below), (iii) the purchase of the Inventory, (iv) the transfer of the Promotional Materials and the Clinical Studies, and (v) the transfer of Product to the GW company outlet, all of which items are addressed in separate provisions of this Agreement. (b) GW hereby releases and forever discharges IGI from any and all manner of claims related to, or arising out of the IGI Operational Debt. (c) IGI hereby releases and forever discharges GW from any and all manner of claims related to, or arising out of the GW Operational Debt. 5. Royalty Advance. Reference is made to Section 3.1 of the Supply Agreement, pursuant to which GW paid to IGI the Royalty Advance of One Million Dollars ($1,000,000), and to Section 13.2 of the Supply Agreement, pursuant to which IGI was to repay to GW the Remaining Royalty Advance as such term is defined in the Supply Agreement. The parties hereby agree that the Remaining Royalty Advance is Six Hundred and Eight Thousand Dollars ($608,000). IGI agrees to repay the Remaining Royalty Advance to GW according to the terms and conditions contained in the secured promissory note, a copy of which is attached hereto as Exhibit A (the "Royalty Promissory Note"). On the Effective Date, IGI shall execute and deliver the Royalty Promissory Note to GW. 6. Assignment of WellSkin(R) Trademark. GW agrees to transfer its interest in the WELLSKIN(R) trademark in the United States to IGI pursuant to the form of trademark assignment attached hereto as Exhibit B (the "Trademark Assignment"). On the Effective Date, or on such other date as the parties may agree, GW shall execute and deliver the Trademark Assignment to IGI. It is understood and agreed, however, that the obligation on behalf of GW to assign the WELLSKIN(r) trademark to IGI, shall be expressly conditioned upon the execution and delivery by IGI of the Security Agreement, the Subordination Agreement (as such term is defined below) and the Royalty Promissory Note to GW. 7. Purchase of Inventory. (a) GW shall transfer to IGI, and IGI shall accept delivery of GW's entire stock of inventory of Product listed on Exhibit C hereof (the "Inventory"). The parties hereby agree that the aggregate consideration to be paid to GW with respect to the purchase of the Inventory shall be Two Hundred Thousand Dollars ($200,000), and IGI agrees to pay such amount to GW according to the terms and conditions contained in the secured promissory note, a copy of which is attached hereto as Exhibit D (the "Inventory Promissory Note"). On the Effective Date, IGI shall execute and deliver the Inventory Promissory Note to GW. It is understood and agreed that the purchase price of the Inventory (and the corresponding principal amount of the Inventory Promissory Note) shall be adjusted by the value of any material deviations from reasonable FIFO inventory management practices. Any adjustments shall be by mutual consent and agreement, and the principal amount of the Inventory Promissory Note shall be amended only in accordance with such agreement. (b) IGI shall use its best efforts to move all of the inventory to an IGI warehouse by December 15, 1998. Time is of the essence with respect to this obligation. If IGI fails to take title to, and physical possession of, the Inventory by December 18, 1998, then in such case the Inventory shall be transferred to a third party storage facility with all costs of transfer and storage of the Inventory to be paid by IGI. (c) Upon the execution of this Agreement, the customers shall be informed to send any Product returns to IGI, and IGI shall have sole responsibility for managing the returns of the Product by issuing credits to such customers who return Product, or by shipping replacement Product to such customers out of the Inventory of Product being transferred to IGI pursuant to this Section. (d) Each of GW and IGI acknowledge that the inventory of the Product owned by GW was manufactured by IGI under the terms of the Supply Agreement. THE INVENTORY OF PRODUCT TO BE TRANSFERRED TO IGI HEREUNDER SHALL BE SUPPLIED "AS IS" AND GW MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, WITH RESPECT THERETO. (e) The parties acknowledge that the Inventory contains markings and labeling which indicate that GW is the marketer or distributor of the Products. IGI promises and agrees that it shall not sell or distribute any portion of the Inventory which is damaged or for which the expiration date has occurred. GW shall not be liable to IGI, or any other third party, for any claims, damages, liabilities or costs associated with the sale, marketing or distribution of the Products after the Effective Date. In no event shall GW be liable to IGI, or any third party, for any claims, damages, liabilities or costs associated with the manufacture of the Products regardless of when such Product was manufactured. The parties agree that the provisions of this Section do not constitute an obligation to indemnify each other. 8. Security Agreement. In order to secure the obligations evidenced by each of the Royalty Promissory Note and the Inventory Promissory Note, as well as the obligations of IGI contained herein, IGI shall enter into a security agreement, the form of which is attached hereto as Exhibit E (the "Security Agreement"). IGI shall use its best efforts to obtain from its current lenders, Fleet Bank, N.A. and Mellon Bank, N.A. (collectively referred to as the "Lenders") by the Effective Date, an executed and delivered subordination agreement, which will provide, among other things, that IGI, GW and the Lenders agree that GW shall have a first priority lien with respect to the WELLSKIN(R) trademark, and that the Lenders' interest in the WELLSKIN(R) trademark, if any, shall be subordinated to the GW interest in the WELLSKIN(R) trademark in all respects (the "Subordination Agreement"). On the Effective Date, IGI shall execute and deliver the Security Agreement and the Subordination Agreement to GW. It is understood and agreed, however, that the obligation on behalf of GW to execute and deliver the Trademark Assignments to IGI, shall be expressly conditioned upon the execution and delivery by IGI of the Security Agreement, the Subordination Agreement and the Royalty Promissory Note to GW. 9. Promotional Materials and Clinical Studies. (a ) On the Effective Date, GW shall transfer to IGI all of GW's inventory of marketing materials and electronic promotional pieces which were used by GW for promoting and marketing the Products as well as the copies of the results from the clinical studies referenced on Exhibit F attached hereto (together, the "Materials"). (b) The parties acknowledge that IGI may, at its option, desire to use the printed advertising and promotional materials previously prepared by GW with respect to the Products. If IGI requests the use of such materials, IGI shall affix a non-removable sticker to each and every promotional piece which covers all references to GW and Glaxo Dermatology in its entirety. 10. Company Store. IGI agrees that subsequent to the Effective Date, on an annually renewable basis, it shall continue to supply products to the GW company employee outlets (the "Company Store") owned and operated by Aramark on such terms and at such prices as IGI and Aramark shall agree, provided, however, that the parties understand that the pricing for such Products sold to Aramark shall be generally in accordance with the prices charged by IGI to physicians for such Products. 11. Misdirected Payments. The parties agree that all proceeds of product sold prior to the Effective Date are the property of GW, while all proceeds of Product sold on or subsequent to the Effective Date are the property of IGI. If IGI shall receive payment with respect to Product which was sold prior to the Effective Date, IGI shall promptly transfer such amounts to GW. If GW shall receive payment with respect to Product which was sold on or subsequent to the Effective Date, GW shall promptly transfer such amounts to IGI. 12. In-Bound Product Requests. GW agrees that, subsequent to the Effective Date, it will refer all in-coming inquiries with respect to requests for the WELLSKIN(R) product line directly to the telemarketing phone number maintained by IGI or its designee. In addition, GW shall advise NeoStrata Company, Inc. ("NeoStrata"), the former distributor of the WELLSKIN(R) product line, that all in-coming inquiries with respect to the WELLSKIN(R) product line shall be directly, immediately and only referred to the telemarketing phone number maintained by IGI or its designee. The obligations referred to in the previous two sentences shall be expressly conditioned upon the provision by IGI of the telemarketing phone number with respect to the WELLSKIN(R) product line to GW. 13. Representations. (a) IGI represents and warrants to GW that: (i) The execution and delivery of the Termination Agreement and all other documents and agreements related to the termination of the Supply Agreement (including but not limited to the Royalty Promissory Note, the Trademark Assignment, the Inventory Promissory Note and the Security Agreement) have been duly authorized by all necessary corporate action and constitute the legal, valid and binding obligations of IGI enforceable in accordance with their terms. (ii) The officer executing and delivering the Termination Agreement and all other documents and agreements related to the termination of the Supply Agreement (including but not limited to the Royalty Promissory Note, the Trademark Assignment, the Inventory Promissory Note and the Security Agreement), on behalf of each IGI entity executing this Termination Agreement, is duly authorized by such IGI entity, and has the full power and authority to execute these agreements and instruments. (b) GW represents and warrants to IGI that: (i) The execution and delivery of the Termination Agreement and all other documents and agreements related to the termination of the Supply Agreement (including but not limited to the Royalty Promissory Note, the Trademark Assignment, the Inventory Promissory Note and the Security Agreement) have been duly authorized by all necessary corporate action and constitute the legal, valid and binding obligations of GW enforceable in accordance with their terms. (ii) The officer executing and delivering the Termination Agreement and all other documents and agreements related to the termination of the Supply Agreement (including but not limited to the Royalty Promissory Note, the Trademark Assignment, the Inventory Promissory Note and the Security Agreement), on behalf of GW is duly authorized by GW, and has the full power and authority to execute these agreements and instruments. 14. Press Release. Except as may be required by law or stock exchange regulation, any public announcements regarding the transactions contemplated hereby shall be made only with the mutual consent of IGI and GW. In the event that a public announcement is required by law or stock exchange regulation, the party subject to such law or regulation shall deliver an advance copy of such public announcement to the other party for purposes of review and comment. 15. Headings. All headings are for reference purposes only and shall not in any way affect the meaning or interpretation of this Termination Agreement. 16. Notices . Any notice required or permitted to be given hereunder shall be either delivered by hand or mailed by certified or registered mail or delivered by nationally recognized courier service, to the party to whom such notice is required or permitted to be given hereunder. Any notice shall be deemed to have been given when delivered, if delivered by hand, or when received by the other party if otherwise mailed or delivered. All notices to GW shall be addressed as follows: Glaxo Wellcome, Inc. Glaxo Wellcome, Inc. Five Moore Drive Five Moore Drive Research Triangle Park, NC 27709 Research Triangle Park, NC 27709 Attn: Vice President-Dermatology Attn: General Counsel All notices to IGI shall be addressed as follows: IGI, Inc. IGI, Inc. Wheat Road &Lincoln Avenue Wheat Road & Lincoln Avenue Buena, NJ 08310 Buena, NJ 08310 Attn: President Attn: General Counsel 17. Successors and Assigns. This Termination Agreement shall bind, inure to the benefit of, and be enforceable by the successors and assigns of the parties hereto. 18. Expenses. IGI and GW shall each bear their own fees, costs and expenses incurred by them in connection with the negotiation, execution and performance of this Agreement. 19. Entire Agreement. This Termination Agreement (and the Royalty Promissory Note, the Trademark Assignment, the Inventory Promissory Note and the Security Agreement) constitutes the entire agreement and understanding between the parties with respect to the termination of the Agreement. There are no collateral understandings, agreements or other representations, expressed or implied, between the parties relating to such termination. Any previous discussions, agreements or understandings between the parties regarding such termination are hereby superseded by this Termination Agreement (and the Royalty Promissory Note, the Trademark Assignment, the Inventory Promissory Note and the Security Agreement). This Termination Agreement may not be modified, altered or amended except by written agreement of authorized representatives of the parties. 20. Governing Law. This Termination Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to agreements made and to be fully performed therein, without regard to principles of conflict of law. 21. Counterparts. This Termination Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Termination Agreement to be executed as of the date first above written. GLAXO WELLCOME, INC. IGI, INC. By: /s/ Dean J. Mitchell By: /s/ Paul Woitach ----------------- -------------------- Dean J. Mitchell, Vice President - Paul Woitach, President Business Development and Planning General Manager, Specialty Division IGEN, INC. IMMUNOGENETICS, INC. By: /s/ Paul Woitach By: /s/ Paul Woitach ----------------- ---------------- Paul Woitach, President Paul Woitach, President EX-23 2 igi-23.txt EXHIBIT 23.2-CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.2 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), on Form S-8 (No. 333-67565), on Form S-8 (No. 333-79333) and on Form S-8 (No. 333-79341), of our report dated April 12, 2000, except as to Note 8, which is as of August 18, 2000 relating to the consolidated financial statements and financial statement schedule of IGI, Inc. as of December 31, 1999 and 1998, and for the three years in the period ended December 31, 1999, which report is included in this Amendment on Form 10- K/A to the Annual Report on Form 10-K of IGI, Inc. for the fiscal year ended December 31, 1999. /s/ PricewaterhouseCoopers LLP ------------------------------ PRICEWATERHOUSECOOPERS LLP Philadelphia, Pennsylvania August 28, 2000 10-K/A 3 igik-a.txt BODY OF 10-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________________ FORM 10-K/A AMENDMENT NO. 1 TO 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, 1999 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) (856)-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 [x] No [ ] 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 Common Stock, par value $.01 per share, held by non-affiliates of the Registrant at March 27, 2000, as computed by reference to the last trading price of such stock, was approximately $15,900,000. The number of shares of the Registrant's Common Stock, par value $.01 per share, outstanding at March 27, 2000 was 10,163,126 shares. Documents Incorporated by Reference: Portions of the Registrant's definitive proxy statement to be filed with the Commission on or before April 29, 2000 are incorporated herein by reference in Part III. PRELIMINARY STATEMENT IGI, Inc. ("IGI" or the "Company") is hereby amending its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 to reclassify certain of the Company's long-term debt, outstanding as of December 31, 1999, as short-term debt and to provide relevant information with respect to such reclassification. These actions are taken in respect of certain amendments to the Company's debt agreements at the end of June, 2000. In connection with these amendments, the Company's independent accountants have determined that substantial doubt exists about the Company's ability to continue as a going concern and, accordingly, have amended the audit report on the Company's 1999 financial statements. 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: * Consumer Products Business - production and marketing of cosmetics and skin care products, * Companion Pet Products Business - production and marketing of companion pet products such as pharmaceuticals, nutritional supplements and grooming aids, and * Poultry Vaccines Business - production and marketing of poultry vaccines and other related products. 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 certain 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 retained the right to use the Technologies for applications outside the IGI Field, mainly human vaccines and pharmaceuticals. Business Segments The following table sets forth the revenue and operating profit of each of the Company's three business segments for the periods indicated:
1999 1998 1997 ---- ---- ---- (in thousands) Revenue Consumer Products $ 6,938 $ 5,839 $ 5,255 Companion Pet Products 13,595 12,513 12,444 Poultry Vaccines 14,061 14,843 16,644 ------------------------------ $34,594 $33,195 $34,343 ============================== Operating Profit (Loss)* Consumer Products $ 3,913 $ 3,688 $ 1,473 Companion Pet Products 3,850 2,844 2,577 Poultry Vaccines (1,041) (517) 1,202 - -------------------- * Excludes corporate expenses of $5,216,000, $6,925,000, and $5,032,000, for 1999, 1998 and 1997, respectively. (See Note 17 of the Consolidated Financial Statements.)
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 the other 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 $4,237,000 or 13% of 1999 sales, $3,494,000 or 11% of 1998 sales, and $2,408,000 or 7% of 1997 sales. 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 Microencapsulation Technologies indirectly compete as a delivery system with, among others, Collaborative Labs, The Liposome Company, Lipo Chemicals and Advanced Polymer Systems. 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 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 to date the Company has paid $200,000 and is to pay $200,000 and $208,000 in June 2000 and December 2000, respectively. 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. Glaxo royalties recognized as income were $0, $326,000 and $150,000 in 1999, 1998 and 1997, respectively. In December 1998, the Company entered into a ten-year 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 provided that Genesis will pay the Company a $1,000,000 trademark and technology transfer fee, in four equal annual payments, which will be recognized as revenue over the life of the agreement. 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 for $200,000, which were previously purchased by the Company from Glaxo. In March 1997, IGI granted Kimberly Clark ("Kimberly") the worldwide rights to use certain patents and technologies in the industrial hand care and cleaning products field. Upon signing of the agreement, Kimberly paid IGI a $100,000 license fee that was recognized as revenue by the Company. 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 both 1999 and 1998, the Company recognized $133,000 as revenue as a result of the agreement. In July 1999, the Company signed a new exclusive license agreement with Kimberly which replaced the agreement dated March 1997. The July 1999 agreement granted Kimberly an exclusive license pertaining to patents and improvements within the fields of industrial hand care and cleansing products for non-retail markets. The new agreement will be in effect from July 29, 1999 through July 30, 2000. Under the new agreement, Kimberly paid the Company consideration of $120,000, which is being recognized over the term of the agreement. The Company recognized $60,000 of this income during 1999. The Company entered into a license agreement with Johnson & Johnson Consumer Products, Inc. ("J&J") in 1995. The agreement provided 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 $1,210,000 and $433,000 of royalty income related to this agreement for the years ended December 31, 1999 and 1998, respectively. 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. The agreement provided for a minimum of at least six, or up to as many as nine monthly payments commencing in June 1998 plus $100,000 for the purchase of a patented Novamix(R) machine. The Company recognized $60,000 and $210,000 of income in 1999 and 1998, respectively, related to the National Starch agreement. The agreement ended in June of 1999. 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, and future royalty payments based on JJM's sales of licensed products. The Company is guaranteed minimum royalties over the ten-year term of the agreement. In 1999, the Company recognized $126,000 of royalty income. The Company entered into an exclusive Supply Agreement (the "Supply Agreement") dated September 30, 1997 with IMX Corporation ("IMX"). 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 the Company has determined that it 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. Through December 31, 1999, the Company had not yet recognized income related to this agreement. See Note 2 "Investments" of the Consolidated Financial Statements. The Company recognized a total of $1,869,000, $1,200,000 and $150,000 in 1999, 1998 and 1997, respectively, 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) Microencapsulation Technology. Total Consumer Product revenues were approximately 20% of the Company's total revenues in 1999, 17% in 1998 and 15% in 1997. 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. Most of the Company's veterinary products are sold through distributors. Sales of veterinary products accounted for approximately 39% of the Company's revenues in 1999, 38% in 1998 and 36% in 1997. Poultry Vaccines 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 United States Department of Agriculture ("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 over 58 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, directly to large poultry producers and distributors in the United States and, through its export sales staff, 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 41% of the Company's revenues in 1999, 45% in 1998 and 49% in 1997. 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, Merial/Select 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. 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 product for this industry. The efforts for the development of fuel enhancement products require extensive testing, evaluation and trials; 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, although the Company also exports some veterinary pharmaceuticals and petcare products. Exports of vaccines require product registration (i.e., 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 commenced sales in that country in the fourth quarter of 1999. Mexico, Indonesia, Thailand and certain 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 business 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 33% of the Company's revenues in 1999, 32% in 1998 and 35% in 1997. (See Note 14, "Export Sales" of the Consolidated Financial Statements.) Manufacturing The Company's manufacturing operations include 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 shipment for distribution. On March 1, 2000, 128 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 and foreseeable needs. Research and Development 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 adjuvant 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 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 1999, 1998 or 1997. Total product development and research expenses were $1,418,000, $1,425,000 and $1,675,000 in 1999, 1998 and 1997, 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. The Company maintains various trademarks in various countries covering certain of 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 44 U.S. patents and a number of foreign patents covering the Technologies licensed to IGI. Government Regulation and Regulatory Proceedings U.S. Regulatory Proceedings From mid-1997 through most of 1998, the Company was subject to intense governmental and regulatory scrutiny relating to the Company's shipment of some of its poultry vaccine products without complying with The Virus Serum Toxin Act of 1914, the federal securities laws and the rules and regulations promulgated thereunder and USDA regulations. The Company was alleged to have engaged in the sale of poultry vaccines to Iran during the period from 1996 through 1998 and to have prepared poultry vaccine products without complying with USDA regulations. As a result of actions taken by the 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: * engaged independent counsel to conduct an investigation of the claimed violations; * took corrective action to allow the Company to resume shipment of its affected product lines; * 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; * obtained the resignation of a number of employees, including three Vice Presidents; * 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; * cooperated with the Securities and Exchange Commission ("SEC") in its inquiry, initiated in April 1998, regarding the foregoing matters; * restated the Company's financial statements for the two years ended December 31, 1996 and the nine months ended September 30, 1997. The USDA's stop shipment order and the investigations by Federal regulatory authorities disrupted the business of the Company during 1997, 1998 and the first quarter of 1999, 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 In March 1999, the Company reached settlement with the Departments of Justice, Treasury and Agriculture regarding their pending investigations and proceedings. The terms of the settlement agreement provided that the Company enter a plea of guilty to a misdemeanor and pay a fine of $15,000 and restitution in the amount of $10,000. In addition, the Company was assessed a penalty of $225,000 and began making monthly payments to the Treasury Department which will continue through the period ending October 31, 2001. The expense of settling with these agencies was 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. Other Pending Matters 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. On July 26, 2000, the Company reached an agreement in principle with the staff of the SEC to resolve matters arising with respect to the informal investigation. Under the agreement, which will not be final until approved by the SEC, the Company neither admits nor denies that the Company violated the financial reporting and record-keeping requirements of Section 13 of the Securities Exchange Act of 1934, as amended, for the fiscal years 1995, 1996 and 1997. Further, in the agreement, the Company agrees to the entry of an order to cease and desist from any such violation in the future. No monetary penalty is expected. On April 14, 1999, a lawsuit was filed in the U.S. District Court for the Southern District of New York by Cohanzick Partners, LP, against IGI, Inc., Edward B. Hager, the Company's Chairman, the following directors of the Company: Terrence D. Daniels, Jane E. Hager, Constantine L. Hampers and Terrence O'Donnell and the following former directors and officers of the Company: Kevin J. Bratton, Stephen G. Hoch, Surendra Kumar, Donald J. Machpee, Lawrence N. Zitto, Paul D. Paganucci, David G. Pinosky and John O. Marsh (collectively, the "IGI Defendents") and John P. Gallo, the Company's former President. The suit which seeks approximately $420,000 in actual damages together with fees, costs and interest, alleges violations of the securities laws, fraud, and negligent misrepresentation concerning certain disclosures made and other actions taken by the Company in 1996 and 1997. The IGI Defendants settled the matter pursuant to a Stipulation and Order of Dismissal signed by the Court on July 19, 2000. In exchange for the plaintiff's agreement to dismiss its claims against the IGI Defendants, the Company issued to the plaintiff 35,000 shares of unregistered Common Stock of the Company, $.01 par value per share, and the Company's insurer agreed to pay $97,500 to the plaintiff. The Company issued the 35,000 shares of Common Stock in June, 2000 and recorded the issuance at the fair market value of the Common Stock on the date of issuance ($1.375 per share) or $48,125 in the aggregate. As of December 31, 1999, the Company established a reserve with respect the Cohanzick suit of $88,750. The Company intends to record the $48,125 upon issuance of stock as an offset to its reserve in the third quarter 2000. The Company is not aware of any other legal proceedings which could have a material effect upon the Company. Government Regulations 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 all serials and subserials of thirty six (36) product codes 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 now former Company personnel, the names of whom were not disclosed to the Company because of the ongoing grand jury investigation. 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 all Company directors, officer and other personnel who, the Company believed, could have been connected to the Company's alleged violations 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 form FDA-483 listing several "inspection observations". The FDA reemphasized its observations on May 14, 1998 with a "Warning Letter". The Company responded in a timely fashion to the Form-483 and to the Warning Letter, and has been advised by the FDA compliance branch that the Company's corrective action plan appears to address its concerns. In the United States, pharmaceuticals 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. Subsequent Events In May, 2000, the FDA initiated an inspection of the Company's Companion Pet Products division and issued an inspection report on Form FDA 483 on July 5, 2000. The July 5, 2000 FDA report includes several unfavorable observations of manufacturing and quality assurance practices and products of the division. The Company is currently compiling its responses to the July 5, 2000 FDA report. In an effort to address a number of the FDA's stated concerns, on May 24, 2000, the Company discontinued production and shipment of Liquichlor and on June 1, 2000 temporarily stopped production of Cerumite, both products of the Pet Products Division. The aggregate annual sales volume for these products for the fiscal year ended December 31, 1999 was $1,059,000. Upon receipt of the Company's formal response to the July 5, 2000 observations, the FDA will evaluate the Company's response and will determine the ultimate outcome of the FDA inspection. An unfavorable outcome could result in fines, penalties and the potential halt of the sale of certain regulated products, any or all of which could have a material, adverse effect on the Company. The Company has incurred $634,000 year to date in related expenses to improve production, to meet documentation, procedural and regulatory compliance. Employees At March 1, 2000, the Company had 234 full-time employees, of whom 63 were in marketing, sales, distribution and customer support, 128 in manufacturing, 11 in research and development, and 32 in executive, finance and administration. The Company has no collective bargaining agreement with its employees, and believes that its employee relations are good. Part II Item 6. Selected Financial Data Five-Year Summary of Selected Financial Data (in thousands, except per share information) (revised as of August 18, 2000):
Year ended December 31, --------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Statement of Operating Results Revenues $34,594 $33,195 $34,343 $34,947 $31,232 Operating profit (loss) 1,506 (910) 220 1,332 3,112 (Loss) income from continuing operations (1,971) (3,029) (1,208) (481) 1,428 Loss from discontinued operations * - - - - (4,034) Extraordinary gain from early extinguishment of debt, net of tax 387 - - - - Net loss (1,584) (3,029) (1,208) (481) (2,606) (Loss) income per share-basic: From continuing operations $ (.21) $ (.32) $ (.13) $ (.05) $ .16 From discontinued operations - - - - (.44) Extraordinary gain, net of tax .04 - - - - Net loss (.17) (.32) (.13) (.05) (.28) (Loss) income per share-diluted: From continuing operations $ (.21) $ (.32) $ (.13) $ (.05) $ .15 From discontinued operations - - - - (.41) Extraordinary gain, net of tax .04 - - - - Net loss (.17) (.32) (.13) (.05) (.26) 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Balance Sheet Data Working capital (deficit) $ 3,567 $(8,107) $(5,472) $ 2,499 $ 3,831 Total assets 33,862 32,056 33,750 33,845 31,956 Short-term debt and notes payable 17,341 19,318 18,857 13,085 10,463 Long-term debt and notes payable (excluding current maturities)** 0 408 36 6,893 9,624 Stockholders' equity 5,533 5,923 8,034 9,019 8,173 Average number of common and Common equivalent shares: Basic and diluted 9,605 9,470 9,458 9,323 9,173 - -------------------- * 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. ** In connection with certain amendments to the Company's debt agreements at the end of June, 2000, the Company has revised its financial statements as of December 31, 1999 to reclassify certain long-term debt as short-term debt.
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 Annual Report on Form 10-K 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," "seeks," "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 subject 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 materially adverse effect on the Company's financial condition and results of operations in 1997 and 1998 and the first quarter of 1999 and resulted in the departure of most of the Company's senior management from 1997. 1999 Compared to 1998 The Company had a net loss of $1,584,000, or $.17 per share, in 1999, as compared to a net loss of $3,029,000, or $.32 per share, in 1998. The reduction in net loss was primarily attributable to increased revenues and improved margins complemented by lower operating expenses. Total revenues for 1999 were $34,594,000, which represents an increase of $1,399,000, or 4%, from revenues of $33,195,000 in 1998. The increased revenues were generated by increased Consumer Products and Companion Pet Products revenues, offset by a decline in Poultry Vaccines revenue. Total Consumer Products revenues for 1999 increased 19% to $6,938,000, compared to 1998 revenues of $5,839,000. This increase was primarily attributable to increased licensing and royalty income and increased product sales. Licensing and royalty income of $1,869,000 in 1999 increased by $669,000 compared to 1998, primarily as a result of increased licensing revenues from Johnson & Johnson. Consumer product sales of $5,069,000 in 1999 increased by $430,000 compared to 1998, primarily as a result of increased sales to Estee Lauder. Companion Pet Products revenues for 1999 amounted to $13,595,000, an increase of $1,082,000, or 9%, compared to 1998. This increase was primarily attributable to increased product sales associated with the EVSCO line of veterinary products. Poultry Vaccines revenues for 1999 amounted to $14,061,000, a decrease of $782,000, or 5%, compared to 1998. Limited production capacity, old equipment, and increased potency requirements have limited Vineland's ability to produce as much quality vaccine as it can sell. Cost of sales increased by $285,000, or 2%, primarily due to the higher sales volume. As a percentage of total revenues, cost of sales decreased from 52.2% in 1998 to 50.9% in 1999. The resulting increase in gross profit in 1999 to 49.1% from 47.8% in 1998 was primarily attributable to efficiencies gained through higher product sales, licensing revenues and production volumes generated from Companion Pet Products and Consumer Products, which were offset by lower margins associated with lower Poultry Vaccines revenues. Consumer Products cost of sales for 1999 increased 30% to $1,893,000, compared to 1998 cost of sales of $1,459,000. As a percentage of total revenues, cost of sales increased from 25.0% in 1998 to 27.3% in 1999. Companion Pet Products cost of sales for 1999 increased $55,000 to $6,427,000, compared to 1998 cost of sales of $6,372,000. As a percentage of total revenues, cost of sales decreased from 50.9% in 1998 to 47.3% in 1999. Poultry Vaccines cost of sales for 1999 decreased 2% to $9,286,000, compared to 1998 cost of sales of $9,490,000. As a percentage of total revenues, cost of sales increased from 63.9% in 1998 to 66.0% in 1999. Selling, general and administrative expenses decreased by $1,295,000, or 8%, from $15,359,000 in 1998 to $14,064,000 in 1999. These expenses were 41% of revenues in 1999 compared with 46% of revenues in 1998. Much of the decrease was primarily attributable to decreased legal, consulting and professional fees in 1999 due to resolution of many of the regulatory actions faced by the Company in the prior year. Product development and research expenses decreased by $7,000, or 0.5%, in 1999 as compared with 1998. Certain equipment purchased for use in the Poultry Vaccine business could not be used due to patent issues of the manufacturer. In 1998, the Company recognized a pre-tax loss of $278,000 to adjust the carrying value of this idle equipment to the amount expected to be recovered from the manufacturer. In 1999, the Company disposed of this equipment, and realized an additional pre-tax loss of $140,000. Further, in 1998, the Company also wrote off poultry vaccine product samples and containers not returned by its customers resulting in the recognition of a pre-tax loss of $280,000. Interest expense increased $666,000, or 19%, from $3,443,000 in 1998 to $4,109,000 in 1999. The increase was primarily due to the valuation of the put warrants issued in conjunction with the American Capital Strategies, Ltd. subordinated notes. These warrants are marked-to-market on a monthly basis; the 1999 charge of $854,000 since inception is a result of the increase in the market price of the Company's stock. Extraordinary gain on the early extinguishment of debt of $387,000 related to the elimination of accrued interest which was forgiven by the former bank lenders of $611,000, offset by income tax expense of $224,000. ( See "Liquidity and Capital Resources"). The effective tax rates for 1999 and 1998 were 19% and 30%, respectively. The change in the effective tax rate is primarily due to the $854,000 of non-deductible interest expense relating to the mark-to-market feature of the warrants issued to American Capital Strategies, Ltd. The valuation allowance decreased from 1998 as a result of certain fully reserved state tax net operating loss carryforwards expiring in 1999. 1998 Compared to 1997 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 in 1998 was principally attributable to the regulatory actions and investigations which began in 1997 and resulted in the March 1999 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 $1,809,000, or 11%, in 1998 as compared with 1997. Poultry vaccine sales were adversely affected by the USDA regulatory action which remained in partial 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 Companion Pet Products increased by $69,000, or 1%. Total Consumer Products revenues for 1998 increased by $584,000, or 11%, from 1997 revenues. This increase 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 its 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 the decline in sales to Glaxo. In October 1998, Glaxo notified the Company that it intended to exit the physician-dispensed skin care market, which resulted in a loss of sales to Glaxo and the termination of the royalty agreement. 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 through 2000. In December 1998, the Company entered into an agreement with Genesis Pharmaceutical, Inc., ("Genesis") granting them 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 $1,200,000 of licensing revenue as compared to $150,000 in 1997. This revenue consisted 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 consisted of amounts relating to the agreement with Glaxo. Cost of sales decreased by $332,000, or 2%, primarily due to the lower sales volume. However, as a percentage of sales, cost of sales increased from 51% in 1997 to 52% 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 Laboratories division. Selling, general and administrative expenses increased by $564,000, or 4%, from $14,795,000 in 1997 to $15,359,000 in 1998. These expenses were 46% of revenues in 1998 compared with 43% 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 $2.1 million was incurred primarily in response to the regulatory actions and investigations which began in 1997 and resulted in the March 1999 settlement with the U.S. Departments of Justice, Treasury and Agriculture. Product development and research expenses decreased by $250,000, or 15%, in 1998 as 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 lender, higher borrowings at increased interest rates in 1998, and fees paid to the bank lenders related to the extension and forbearance agreements. The effective tax rates for 1998 and 1997 were 30% and 27%, respectively. Changes in the effective 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. Liquidity and Capital Resources On October 29, 1999, the Company entered into a $22 million senior bank credit agreement ("Senior Debt Agreement") with Fleet Capital Corporation ("Fleet") and a $7 million subordinated debt agreement ("Subordinated Debt Agreement") with American Capital Strategies, Ltd. ("ACS") These agreements enabled the Company to retire approximately $18.6 million of outstanding debt with its former bank lenders, Fleet Bank, NH, and Mellon Bank, N.A. In connection with the repayment of the loans, the Company's former bank lenders agreed to return to the Company, for cancellation, warrants held by them for the purchase of 810,000 shares of the Company's Common Stock at exercise prices ranging from $2.00 to $3.50. Also, approximately $611,000 of accrued interest was waived by the former bank group and is classified as an extraordinary gain from the early extinguishment of debt in the 1999 Consolidated Statements of Operations. There are two sets of warrants remaining with the former lenders. There are unconditional warrants to purchase 150,000 shares which remain exercisable by Fleet Bank, NH at $2.00 per share and unconditional warrants to purchase 120,000 shares which remain exercisable by Mellon Bank, N.A. at $2.00 per share. The Senior Debt Agreement provides for a revolving line of credit facility of up to $12 million based upon qualifying accounts receivable and inventory, a $7 million term loan and a $3 million capital expenditures credit facility. The borrowings under the revolving line of credit bear interest at the prime rate plus 1.0% or the London Interbank offered rate plus 3.25%. The borrowings under the term loan and capital expenditure credit facility bear interest at the prime rate plus 1.5% or the London Interbank offered rate plus 3.75%. As of December 31, 1999, borrowings under the revolving line of credit, term loan and capital expenditures credit facility were $5,708,000, $7,000,000 and $0, respectively. Provisions under the revolving line of credit require the Company to maintain a lockbox with the lender, allowing Fleet Capital to sweep cash receipts from vendors and pay down the line of credit. Drawdowns on the line of credit are made when needed to fund operations. Quarterly repayments of the term loan begin on August 1, 2000 in the amount of $233,000. Repayment of the capital expenditures credit facility are to be made quarterly over a five year period after any initial drawdown. Borrowings under the Subordinated Debt Agreement bear interest at the rate of 12.5% ("cash portion of interest on subordinated debt") plus an additional interest component at the rate of 2% which is payable at the Company's election in cash or Company Common Stock. As of December 31, 1999, borrowings under the subordinated notes were $7,000,000, offset by an unamortized debt discount of $2,775,000. The Subordinated Debt Agreement matures in October 2006. In connection with the Subordinated Debt Agreement the Company issued to the lender warrants to purchase 1,907,543 shares of IGI Common Stock at an exercise price of $.01 per share. The debt discount was recorded at issuance, representing the difference between the $7,000,000 proceeds received by the Company and the total obligation, which included principal of $7,000,000 and an initial warrant liability of $2,842,000. (See Note 9 "Detachable Stock Warrants" in the Consolidated Financial Statements.) These agreements contain financial and other covenants and restrictions. The Company was not in compliance under certain covenants under the agreements related to the fixed charges coverage ratio, maximum debt to equity ratio and accounts payable ratio as of December 31, 1999; however, the lenders involved have amended, as of April 12, 2000, the related agreements to waive the defaults as of December 31, 1999 and to establish new covenants as of April 12, 2000. The Company was in compliance with all debt agreement covenants as of April 12, 2000 and the Company expected that it would be able to comply with the covenants in the amended debt agreements through at least December 31, 2000. American Capital Strategies, Ltd. has the right to designate for election to the Company's Board of Directors that number of directors that bears the same ratio to the total number of directors as the number of shares of Company Common Stock owned by it plus the number of shares issuable upon exercise of its warrants bear to the total number of outstanding shares of Company Common Stock on a fully-diluted basis, provided that so long as it owns any Common Stock, or warrants or any of its loans are outstanding, it shall have the right to designate at least one director or observer on the Board of Directors. At December 31, 1999, American Capital Strategies, Ltd. had one observer on the Company's Board of Directors. Approximately $24.5 million was immediately available to the Company under the Senior Debt and Subordinated Debt Agreements; borrowings under these new agreements amounted to $19.7 million as of December 31, 1999. The new agreements enabled the Company to retire approximately $18.6 million outstanding with the previous bank lenders, cover associated closing costs and provide a borrowing facility for working capital and capital expenditures. As of December 31, 1999 the Company had $4.5 million available borrowings under these agreements, $3.0 million of which was related to the capital expenditure credit facility. To secure all of its obligations under these agreements, the Company has granted the lenders a security interest in all of the assets and properties of the Company and its subsidiaries. Subsequent Events In May, 2000, the FDA initiated an inspection of the Company's Companion Pet Products division and issued an inspection report on Form FDA 483 on July 5, 2000. The July 5, 2000 FDA report includes several unfavorable observations of manufacturing and quality assurance practices and products of the division. The Company is currently compiling its responses to the July 5, 2000 FDA report. In an effort to address a number of the FDA's stated concerns, on May 24, 2000, the Company discontinued production and shipment of Liquichlor and on June 1, 2000 temporarily stopped production of Cerumite, both products of the Pet Products Division. The aggregate annual sales volume for these products for the fiscal year ended December 31, 1999 was $1,059,000. The Company has incurred $634,000 year to date in related expenses to improve production, to meet documentation, procedural and regulatory compliance. After accounting for this cessation of production and combining these results with continued operating losses in the poultry vaccine business, the Company determined that it was not in compliance with the financial covenants in the debt agreements, as amended. On June 26, 2000, the Company entered into Amendment No. 2 to Note and Equity Purchase Agreement ("Second Subordinated Amendment") with ACS. Pursuant to the Second Subordinated Amendment, the Company received $500,000 and issued to ACS $500,000 of Series C Senior Subordinated Notes due September 30, 2000 (the "Series C Notes"); and ACS waived compliance with certain financial covenants applicable to Borrower contained in the Subordinated Debt Agreement and modified certain interest payment dates with respect to the Notes. In addition, the Second Subordinated Amendment permits the Company to issue additional Series C Notes on July 31, 2000 to pay the interest then due and payable on the Notes and the Series C Notes. The Company will issue, in the beginning of August 2000, to ACS an additional Series C Note in the aggregate principal amount of approximately $300,000 for the interest due. Also, on June 26, 2000, the Company entered into a Second Amendment to Loan and Security Agreement dated as of June 23, 2000 (the "Second Senior Amendment") with Fleet. Pursuant to the Second Senior Amendment, the Company obtained an "overadvance" of $500,000 under the senior revolving line of credit (the "Overadvance"), repayable in full on the earlier to occur of September 22, 2000 or the date of the consummation of the Vineland Sale (defined below). Under the Second Senior Amendment, Fleet agreed to forbear from exercising its right to accelerate the maturity of the Senior Loans upon the default by the Borrower under certain financial covenants (the "Forbearance Covenants") until the first to occur of: (a) September 22, 2000, (b) the date on which any default, other than a default under the Forbearance Covenants, occurs under the Senior Debt Agreement, as amended; or (c) the date of the termination of the Vineland Agreement (defined below). On June 26, 2000, the Company entered into an Asset Purchase Agreement dated as of June 19, 2000 (the "Vineland Agreement"), with Vineland International, a general partnership which has changed its name to Lohmann Animal Health International (the "Buyer"). The Vineland Agreement provides for the sale (the "Vineland Sale") by the Company to the Buyer of the assets associated with the business of manufacturing, marketing, licensing and selling poultry vaccines and related equipment conducted by the Vineland Laboratories division of the Company. In exchange for receipt of such assets, the Buyer will assume certain Company liabilities, in the aggregate, equal to approximately $2,300,000 and will pay the Company cash in the amount of $12,500,000, of which $500,000 will be placed in an escrow fund to secure potential obligations of the Company relating to final purchase price adjustments and indemnification. The Company projects a $98,000 after tax gain on the Vineland Sale offset by a $528,000 after tax extraordinary loss on the early extinguishment of debt. The Vineland Agreement may be terminated prior to the closing if any of the following occurs: 1. The Buyer and the Company mutually consent to the termination, or the Vineland Sale is not consummated on or before the date (September 19, 2000) that is three (3) months after the date of the Vineland Agreement (June 19, 2000), unless the failure to consummate the transaction is the result of a material breach of the Vineland Agreement by the party seeking to terminate the Vineland Agreement; provided, however, that the passage of such period shall be tolled for any part thereof (but not exceeding ninety (90) days in the aggregate) during which any party shall be subject to a non-final order, decree, ruling or action restraining, enjoining or otherwise prohibiting the consummation of the transaction; 2. A governmental entity issues an order, decree or ruling or takes any other action permanently enjoining, restraining or otherwise prohibiting the transaction and such order, decree, ruling or other action shall have become final and non-appealable; 3. The stockholders of the Company do not approve the Vineland Agreement and transaction. The Company has scheduled a special meeting of stockholders and filed a Preliminary Proxy Statement with the SEC with respect to stockholder consideration of the Vineland Sale. Due to the terms of the Second Senior Amendment and the Second Subordinated Amendment discussed above, the Company has classified all debt owed to ACS and Fleet as short-term debt. In this connection, the Company's independent accountants have determined that substantial doubt exists about the Company's ability to continue as a going concern. Even if the Company timely consummates the Vineland Sale and repays the Overadvance and the Series C Notes, the Company remains highly leveraged; furthermore, availability for borrowings under the revolving line of credit facility is dependent on the level of its qualifying accounts receivable and inventory. The Company is currently generating losses that may extend through the year 2000, which could unfavorably impact future financial covenants and the Company's availability for borrowing under the revolving line of credit facility, which is dependent on the level of its qualifying accounts and inventory. Although, after giving effect to Fleet's agreement with respect to the Forbearance Covenants, the Company believes it will be in compliance with covenants and, upon repayment of the Overadvance, that it will have availability for borrowing under the revolving line of credit, there can be no assurance of such continued compliance and availability. The Company believes it will be able to meet its debt obligations. If the Company were not able to meet its debt obligations it would consider altering its business plan, including, if necessary, a sale of selected Company operating and non operating assets either in addition to or in lieu of the assets to be sold pursuant to the Vineland Sale. Any significant sale of assets would require lender approval. Any sale of operating assets would involve a curtailment of certain of the Company's business operations and a modification of its business strategy. The Company's operating activities provided $391,000 of cash during 1999, which included net income and non-cash charges to operations for depreciation, amortization, loss reserves, and stock and warrant compensation expense. Additionally, increases in inventory, accounts payable and accrued expenses, offset by decreases in accounts receivable, other assets and notes payable, had the effect of decreasing operating cash flow as compared to 1998. Working capital as of December 31, 1999 amounted to $3,567,000 as compared to negative $8,107,000 as of December 31, 1998. The increase in working capital of $11,674,000 was primarily the result of refinancing in October 1999 and the improvement in operations for the year ended December 31, 1999. The accounts receivable turnover ratio for 1999 was 4.89 compared to 4.34 for 1998. This increase was primarily as a result of increased collection efforts. The inventory turnover ratio for 1999 was 1.91 compared to 1.84 for 1998. The Company believes its reserves for inventory and accounts receivables are adequate. Certain geographic markets in which the Company does business 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 internationally, continuation or recurrence of such unrest or instability could adversely affect the business of its customers in those countries and 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 Company used $1,007,000 in 1999 for investing activities compared to $633,000 in 1998. The increase was primarily due to an increase in capital expenditures for the Company's manufacturing 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. Highly Leveraged and Debt Covenant Compliance The ability of the Company to repay the Overadvance and the Series C Notes pursuant to the June, 2000, amendments to the Company's debt agreements is dependent upon the consummation of the Vineland Sale or another similar transaction on or before September 22, 2000. There can be no assurance that the Company will be successful in doing so. Further, in connection with the June, 2000 amendments to the Company's debt agreements, the Company reclassified its long-term debt, outstanding as of December 31, 1999 as short-term debt. In response these events, the Company's independent accountants have determined that substantial doubt exists about the Company's ability to continue as a going concern. Even if the Vineland Sale is timely consummated and the Overadvance and Series C Notes are timely repaid, the Company is very highly leveraged and subject to restrictive covenants and restraints which are contained in its Senior Debt Agreement, as amended, and its Subordinated Debt Agreement, as amended. The debt agreements contain various affirmative and negative covenants, such as requirements to achieve minimum tangible net worth and minimum fixed charge coverage ratios. Furthermore, the Company's available borrowings under the revolving line of credit are dependent upon the level of the Company's qualifying accounts receivable and inventory. 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. Competition in Poultry Vaccine Business The Company is encountering increased price competition from international producers of poultry vaccines. 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, particularly poultry vaccines, 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 pharmaceutical products are regulated by the USDA and the FDA, respectively, 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, which ultimately may not be granted. 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. Income Taxes The Company has net deferred tax assets in the amount of $5,850,000 at December 31, 1999. The largest deferred tax asset relates to the $3,672,000 of net operating loss carryforwards. After considering the $955,000 valuation allowance at December 31, 1999, 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, 1999, is approximately $20 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 2019. Significant components expire in 2007 (36%), 2018 (40%) and 2019 (20%). Also federal research credits expire in varying amounts through the year 2019. Recent Pronouncements In 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Transactions." This statement requires companies to record derivatives on the balance sheet as assets and liabilities measured at fair value. The accounting treatment of gains and losses resulting from changes in the value of derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. The Company expects to adopt SFAS 133, as amended by SFAS No. 138, no earlier than January 1, 2001, and is currently assessing the impact of adoption on its financial position, results of operations and liquidity. In December 1999, the SEC released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB 101 allows companies to report any changes in revenue recognition related to adopting its provisions as an accounting change at the time of implementation in accordance with Accounting Principles Board (APB) No. 20, "Accounting Changes". The Company is currently in the process of assessing the impact of adopting SAB 101 on its revenue recognition policies and on prior revenue transactions. While the Company has not yet completed its review, the Company currently anticipates that SAB 101 will not have a material impact on its financial position, cash flows, results of operations or liquidity. Any accounting changes that might result from the adoption of SAB 101 must be made no later that the fourth quarter of 2000, retroactively effective to January 1, 2000"). In March 2000, the FASB issued Financial Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB No. 25," which clarifies (a) the criteria for definition of an employee for purposes of applying APB No. 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequence of various modifications to the terms of a previous fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. This interpretation is effective July 1, 2000, with certain provisions effective earlier. The Company does not expect FIN 44 to have a significant impact on its financial position, results of operations or liquidity. Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) Financial Statements: Report of Independent Accountants Consolidated Balance Sheets, December 31, 1999 and 1998 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 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. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment on Form 10-K/A to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 28, 2000 IGI, Inc. By: /s/ Paul Woitach ---------------- Paul Woitach President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Amendment on Form 10-K/A to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 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 August 29, 2000 - ------------------- Edward B. Hager /s/ Paul Woitach President and Chief Executive Officer August 29, 2000 - ---------------- (Principal executive officer Paul Woitach) /s/ Robert E. McDaniel Executive Vice President August 29, 2000 - ---------------------- Robert E. McDaniel /s/ Domenic N. Golato Senior Vice President August 29, 2000 - --------------------- Chief Financial Officer Domenic N. Golato (Principal financial officer) /s/ Charles R. Carroll Controller, Treasurer and Chief August 29, 2000 - ---------------------- Accounting Officer Charles R. Carroll (Principal accounting officer) /s/Stephen J. Morris Director August 29, 2000 - -------------------- Stephen J. Morris /s/ Terrence D. Daniels Director August 29, 2000 - ----------------------- Terrence D. Daniels /s/ Jane E. Hager Director August 29, 2000 - ----------------- Jane E. Hager /s/ Constantine L. Hampers Director August 29, 2000 - -------------------------- Constantine L. Hampers /s/ Terrence O'Donnell Director August 29, 2000 - ---------------------- Terrence O'Donnell - -------------------- Director Donald W. Joseph
REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of IGI, Inc.: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of IGI, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule 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 auditing standards generally accepted in the United States, 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. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 8 to the financial statements, on June 26, 2000, the Company received waivers as to certain debt covenant violations, which waivers expire at the earlier of September 22, 2000, or upon termination of an agreement to sell one of the Company's businesses. The Company expects to complete the sale before September 22, 2000, however the sale of this business is subject to certain contingencies, including approval of the transaction by the Company's shareholders. If the waivers expire, a significant amount of the Company's outstanding debt would be callable. Accordingly, substantial doubt exists about the Company's ability to continue as a going concern. Management's plans in regard to this matter are also discussed in Note 8. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania April 12, 2000, except as to Note 8, which is as of August 18, 2000 IGI, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Revised as of August 18, 2000) December 31, 1999 and 1998 (in thousands, except share and per share information)
1999 1998 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 416 $ 1,068 Accounts receivable, less allowance for doubtful accounts of $354 and $516 in 1999 and 1998, respectively 6,061 6,462 Licensing and royalty income receivable 432 440 Inventories 8,762 7,406 Current deferred taxes 1,096 1,275 Prepaid expenses and other current assets 348 433 --------------------- Total current assets 17,115 17,084 --------------------- Investments 144 535 Property, plant and equipment, net 9,781 9,479 Deferred income taxes 4,754 4,188 Deferred financing costs 1,678 75 Other assets 390 695 --------------------- Total assets $ 33,862 $ 32,056 ===================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Revolving credit facility $ 5,708 $ 6,657 Current portion of long-term debt 11,225 - Credit line - 12,000 Current portion of notes payable 408 661 Accounts payable 4,268 3,235 Accrued payroll 253 196 Due to stockholder 115 380 Accrued interest 164 432 Other accrued expenses 2,150 1,614 Income taxes payable 15 16 --------------------- Total current liabilities 24,306 25,191 --------------------- Long-term debt, net of discount and current portion - - Notes payable - 408 Deferred income 327 534 Detachable stock warrants 3,696 - --------------------- Total liabilities 28,329 26,133 --------------------- Commitments and contingencies - - Stockholders' equity: Preferred stock, $.01 par value; 1,000,000 shares authorized, None outstanding - - Common stock, $.01 par value; 50,000,000 and 30,000,000 Shares authorized in 1999 and 1998, respectively; 10,133,183 and 9,648,931 shares issued in 1999 and 1998, respectively 102 97 Additional paid-in capital 20,628 19,961 Accumulated deficit (13,556) (11,972) Less treasury stock, 105,510 and 136,014 shares at cost, in 1999 and 1998, respectively (1,641) (2,163) --------------------- Total Stockholders' Equity 5,533 5,923 --------------------- Total liabilities and stockholders' equity $ 33,862 $ 32,056 =====================
The accompanying notes are an integral part of the consolidated financial statements. IGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 1999, 1998 and 1997 (in thousands, except share and per share information)
1999 1998 1997 ---- ---- ---- Revenues: Sales, net $ 32,725 $ 31,995 $ 34,193 Licensing and royalty income 1,869 1,200 150 ---------------------------------------- Total revenues 34,594 33,195 34,343 Cost and Expenses: Cost of sales 17,606 17,321 17,653 Selling, general and administrative expenses 14,064 15,359 14,795 Product development and research expenses 1,418 1,425 1,675 ---------------------------------------- Operating profit (loss) 1,506 (910) 220 Interest expense, net (4,109) (3,443) (1,853) Other income (expense), net 31 33 (11) ---------------------------------------- Loss before benefit for income taxes and Extraordinary gain (2,572) (4,320) (1,644) Benefit for income taxes (601) (1,291) (436) ---------------------------------------- Loss before extraordinary item (1,971) (3,029) (1,208) Extraordinary gain on early extinguishment of debt, net of income tax expense of $224 387 - - ---------------------------------------- Net loss $ (1,584) $ (3,029) $ (1,208) ======================================== Loss per share: Basic and diluted: Loss before extraordinary gain $ (.21) $ (.32) $ ( .13) Extraordinary gain, net of tax .04 - - ---------------------------------------- Net loss $ (.17) $ (.32) $ (.13) ======================================== Average number of common shares: Basic and diluted 9,604,768 9,470,413 9,457,938 ========================================
The accompanying notes are an integral part of the consolidated financial statements. IGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1999, 1998 and 1997 (in thousands)
1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net loss $ (1,584) $(3,029) $(1,208) Reconciliation of net loss to net cash provided from operating activities: Depreciation and amortization 1,027 992 1,037 Amortization of deferred financing costs and debt discount 123 - - Extraordinary gain on early extinguishment of debt, net of tax (387) - - Gain on sale of assets (30) (62) - Write off of other assets 140 558 - Provision for loss on accounts and notes receivable and inventories 1,116 1,482 1,610 Recognition of deferred revenue (203) (242) (150) Issuance of stock to 401(k) plan 82 - 40 Benefit for deferred income taxes (611) (1,321) (447) Interest expense relating to put feature of warrants 854 - - Warrants issued to lenders under prior extension agreements 223 645 - Stock option compensation expense: Non-employee stock options 49 149 47 Directors' stock issuance 116 94 - Other, net - 17 (50) Changes in operating assets and liabilities: Accounts receivable 158 239 721 Inventories (2,244) 374 (1,735) Receivable due under royalty agreement 8 (328) 1,000 Prepaid and other current assets 238 333 398 Accounts payable and accrued expenses 1,856 929 1,123 Deferred revenue 275 59 - Short-term notes payable, operating (814) - - Income taxes payable (1) (73) 51 ------------------------------ Net cash provided from operating activities 391 816 2,437 ------------------------------ Cash flows from investing activities: Capital expenditures (1,064) (607) (636) Proceeds from sale of assets 40 165 - (Increase) decrease in other assets 17 (191) 68 ------------------------------ Net cash used in investing activities (1,007) (633) (568) ------------------------------ Cash flows from financing activities: Borrowings under term loan 7,000 - 2,358 Borrowings under subordinated note agreements, net of discount 4,158 - - Cash proceeds from issuance of warrants to lenders 2,842 - - Borrowings under revolving credit agreement 11,584 - - Repayment of revolving credit agreement (5,876) - - Repayments of debt (18,657) (236) (3,443) Payments of deferred financing costs (1,659) (75) - Proceeds from exercise of common stock options - - 95 Change in book overdraft 572 - - ------------------------------ Net cash used in financing activities (36) (311) (990) ------------------------------ Net (decrease) increase in cash and cash equivalents (652) (128) 879 Cash and cash equivalents at beginning of year 1,068 1,196 317 ------------------------------ Cash and cash equivalents at end of year $ 416 $ 1,068 $ 1,196 ==============================
The accompanying notes are an integral part of the consolidated financial statements. See Note 4 for Supplemental Cash Flow information. IGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the years ended December 31, 1999, 1998 and 1997 (in thousands, except share information)
Common Stock Additional -------------------- Stock Paid-In Shares Amount Subscribed Capital ------ ------ ---------- ------- Balance January 1, 1997 9,572,681 $ 96 $ 175 $19,115 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 stock options issued to non-employees 47 Interest earned on stockholders' notes Reserve on stockholders' notes receivable Net loss -------------------------------------------- Balance, December 31, 1997 9,602,681 96 - 19,074 Issuance of stock pursuant to Directors' Stock Plan 46,250 1 93 Value of stock options issued to non-employees 149 Value of warrants issued under extension agreement 645 Interest earned on stockholders' notes Reserve on stockholders' notes receivable Net loss -------------------------------------------- Balance, December 31, 1998 9,648,931 97 - 19,961 Issuance of stock pursuant to Directors' Stock Plan 66,509 1 115 Partial settlement of amounts due to stockholder in lieu of cash 417,744 4 720 Value of stock options issued to non-employees 49 Value of warrants issued under second extension agreement 223 Issuance of stock to 401(k) Plan (440) Net loss -------------------------------------------- Balance, December 31, 1999 10,133,184 $102 $ - $20,628 ============================================ Stockholders' Accumu- Total Notes lated Treasury Stockholders' Receivable Deficit Stock Equity ------------- ---------------------------------- Balance January 1, 1997 $(114) $ (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 stock options issued to non-employees 47 Interest earned on stockholders' notes (10) (10) Reserve on stockholders' notes receivable 94 94 Net loss (1,208) (1,208) ----------------------------------------------- Balance, December 31, 1997 (30) (8,943) (2,163) 8,034 Issuance of stock pursuant to Directors' Stock Plan 94 Value of stock options issued to non-employees 149 Value of warrants issued under extension agreement 645 Interest earned on stockholders' notes (3) (3) Reserve on stockholders' notes receivable 33 33 Net loss (3,029) (3,029) ----------------------------------------------- Balance, December 31, 1998 - (11,972) (2,163) 5,923 Issuance of stock pursuant to Directors' Stock Plan 116 Partial settlement of amounts due to stockholder in lieu of cash 724 Value of stock options issued to non-employees 49 Value of warrants issued under second extension agreement 223 Issuance of stock to 401(k) Plan 522 82 Net loss (1,584) (1,584) ----------------------------------------------- Balance, December 31, 1999 $ - $(13,556) $(1,641) $ 5,533 ===============================================
The accompanying notes are an integral part of the consolidated financial statements. 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: * Consumer Products Business - production and marketing of cosmetics and skin care products, * Companion Pet Products Business - production and marketing of companion pet products such as veterinary pharmaceuticals, nutritional supplements and grooming aids; and * Poultry Vaccines Business - production and marketing of poultry vaccines and related products. 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. Investment in an affiliated company with a 20% ownership interest is accounted for under the cost method. Cash Equivalents Cash equivalents consist of short-term investments which, at the date of purchase, have maturities of 90 days or less. Book overdraft balances of $572,000 have been reclassified to accounts payable in the Consolidated Balance Sheets at December 31, 1999. 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 includes 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 varying degrees of political unrest 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 U.S. dollars to minimize currency fluctuation risk. Inventories Inventories are valued at the lower of cost, using the first-in, first-out ("FIFO") method, or market. 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, 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 acquired of $325,000, related to the Company's 1994 acquisition of a petcare business, which is being amortized on a straight-line basis over 40 years. At December 31, 1999, this goodwill net of amortization was $207,000. Deferred financing costs include fees paid to the lenders and external legal counsel to assist the Company in obtaining new financing. These costs are being amortized over the term of the related debt. 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 whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In performing such review for recoverability, the Company compares expected future cash flows of assets to the carrying value of long-lived assets and related identifiable intangibles. If the expected future cash flows (undiscounted) are less than the carrying amount of such assets, the Company recognizes an impairment loss for the difference between the carrying value of the assets and their estimated fair value, with fair values being determined using projected discounted cash flows at the lowest level of cash flows identifiable in relation to the assets being reviewed. 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 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 the 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. 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 either recognized when the related contract provisions are met, or, if under such contracts or agreements the Company has continuing obligations, the revenue is initially deferred and then recognized over the life of the agreement. The Company is still assessing the impact of adoption of SAB 101. However, based upon its preliminary review: (a) for the one contract identified in which up-front fees were recognized immediately, the Company did not have continuing performance obligations, either under the specific contract or related contracts, and (b) for each contract with up-front fees where the company had additional performance obligations, or related contracts with performance obligations, the Company recognized the up-front fees over the life of the agreement or the related agreements, whichever was longer. Product Development and Research The Company's research and development costs are expensed as incurred. Net Loss per Common Share Basic net loss per share of Common Stock was computed based on the weighted average number of shares of Common Stock outstanding during the period. Diluted net loss per share of Common Stock is computed using the weighted average number of shares of Common Stock and potential dilutive stock outstanding during the period. Potential dilutive Common Stock includes shares issuable upon the exercise of Common Stock options and warrants. Due to the Company's net loss for the years ended December 31, 1999, 1998 and 1997, the effect of the Company's potential dilutive Common Stock was anti-dilutive for each year; as a result, the basic and diluted weighted average number of Common Shares outstanding and net loss per Common Share are the same. Potentially dilutive common stock equivalents which were excluded from the net loss per share calculations due to their anti-dilutive effect amounted to 5,424,743 for 1999, 2,513,665 for 1998, and 2,134,465 for 1997. Comprehensive Income The Company has adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income is defined to include all changes in stockholders' equity during a period except those resulting from investments by owners and distributions to owners. Since inception, the Company has not had transactions that are required to be reported in other comprehensive income. Comprehensive income (loss) for each period presented is equal to the net loss for each period as presented in the Consolidated Statements of Operations. Asset Write-Off's Certain equipment purchased for use in the Poultry Vaccine business could not be used due to patent issues of the manufacturer. In 1998, the Company recognized a pre-tax loss of $278,000 to adjust the carrying value of this idle equipment to the amount expected to be recovered from the manufacturer. In 1999, the Company disposed of this equipment, and realized an additional pre-tax loss of $140,000. Further, in 1998 the Company also wrote off poultry vaccine product samples and containers not returned by its customers resulting in the recognition of a pre-tax loss of $280,000. Business Segments In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 superseded 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. 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. Environmental Accounting Accruals for environmental remediation are recorded when it is probable a liability has been incurred and costs are reasonably estimable. The estimated liabilities are recorded at undiscounted amounts. It is the Company's practice to reflect environmental insurance recoveries in the results of operations for the quarter in which the litigation is resolved through settlement or other appropriate legal process. Recent Pronouncements In 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Transactions." This statement requires companies to record derivatives on the balance sheet as assets and liabilities measured at fair value. The accounting treatment of gains and losses resulting from changes in the value of derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. The Company expects to adopt SFAS 133, as amended by SFAS No. 138, no earlier than January 1, 2001, and is currently assessing the impact of adoption on its financial position, results of operations and liquidity. In December 1999, the SEC released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB 101 allows companies to report any changes in revenue recognition related to adopting its provisions as an accounting change at the time of implementation in accordance with Accounting Principles Board (APB) No. 20, "Accounting Changes". The Company is currently in the process of assessing the impact of adopting SAB 101 on its revenue recognition policies and on prior revenue transactions. While the Company has not yet completed its review, the Company currently anticipates that SAB 101 will not have a material impact on its financial position, cash flows, results of operations or liquidity. Any accounting changes that might result from the adoption of SAB 101 must be made no later that the fourth quarter of 2000, retroactively effective to January 1, 2000"). In March 2000, the FASB issued Financial Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB No. 25," which clarifies (a) the criteria for definition of an employee for purposes of applying APB No. 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequence of various modifications to the terms of a previous fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. This interpretation is effective July 1, 2000, with certain provisions effective earlier. The Company does not expect FIN 44 to have a significant impact on its financial position, results of operations or liquidity. 2. Investments The Company has a 20% investment in Indovax, Ltd., an Indian poultry vaccine company. The Indovax investment, which amounted to $59,000 at December 31, 1999, and 1998 was principally made to obtain technical fees, and to sell the Company's products to Indovax so that they could be distributed in India. The Company considers its investment to be incidental to earning such fees and profits. The Company does not participate in the operating and financial policy making of Indovax and, because Indian nationals control Indovax, does not believe it exercises significant influence over Indovax's operating and financial policies. Accordingly, the Company accounts for its Indovax investment using the cost method. Dividends received from Indovax were $0 in 1999, $22,000 in 1998 and $23,000 in 1997. The Company has not received any payments or fees from Indovax . Other investments include 271,714 shares of restricted Common Stock of IMX Corporation ("IMX"), a publicly-traded company, valued at $0.31 and $1.75 per share as of December 31, 1999 and 1998, 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. Through December 31, 1999, the Company had not yet recognized income related to this agreement. The total investment in IMX stock was $84,000 at December 31, 1999 and $475,000 at December 31, 1998, with corresponding amounts reflected as deferred income in the accompanying Consolidated Balance Sheets. Under the IMX agreement, the Company agreed to manufacture and supply 100% of IMX's requirements for two products at prices stipulated in the exclusive Supply Agreement, subject to renegotiation subsequent to 1998. . The IMX shares received were not registered, and were restricted by contractual requirements. IGI has never successfully supplied the products designated in the agreement. The Company is currently involved in discussions with IMX concerning possible modifications to the Supply Agreement as the Company has determined that it will not supply the products stipulated by the Supply Agreement but may supply certain other products based on negotiations with IMX. If the Company is not successful in these negotiations, the Company may return the IMX shares to 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 1999, 1998 and 1997, IGI recognized $0, $326,000 and $150,000, respectively, of royalty income under the Glaxo Agreement. By an agreement dated December 10, 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%. This inventory was immediately resold for $200,000 in connection with a new agreement for the WellSkin(TM) line. The Company recognized no gain or loss on this inventory transaction and, since the Company never took title to the inventory, it did not recognize this transaction as revenue. 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 to date the Company has paid $200,000 and is to pay $200,000 and $208,000 in June 2000 and December 2000, respectively. Prior to the date of the termination agreement, the Company had accrued through cost of sales a net amount due Glaxo of $404,000 for operational issues related to the Glaxo agreement. By the terms of the termination agreement, the net amount payable to Glaxo was forgiven and canceled. Accordingly, the Company recognized the effect of this settlement by reversing the net accrual and reducing cost of sales by $404,000. In December, 1998, the Company entered into a ten-year 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 provided that Genesis would pay the Company a $1,000,000 trademark and technology transfer fee, in four equal annual payments, which is being recognized as revenue over the life of the agreement. 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 for $200,000. 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. The agreement requires Kimberly to make royalty payments based on quantities of material produced. The Company was also guaranteed minimum royalties over the term of the agreement. In both 1999 and 1998, the Company recognized $133,000 as income as a result of the agreement. In July 1999, the Company signed a new exclusive license agreement with Kimberly which terminated the agreement dated March 1997. The July 1999 agreement granted Kimberly an exclusive license pertaining to the patents and improvements within the field of industrial hand care and cleansing products for non-retail markets. The new agreement will be in effect from July 29, 1999 through July 30, 2000. Under the new agreement, Kimberly paid the Company consideration of $120,000 which is being recognized over the term of the agreement. The Company entered into a ten-year license agreement with Johnson & Johnson Consumer Products, Inc. ("J&J") in 1995. The agreement provided J&J with a license to produce and sell Novasome(R) microencapsulated retinoid products for royalties to the Company 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 $1,210,000 and $433,000 of income related to this agreement for the years ended December 31, 1999 and 1998, respectively. 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. The agreement provided for a minimum of at least six, or up to as many as nine, monthly payments commencing in June 1998 plus $100,000 for the purchase of a patented Novamix(R) machine. The Company recognized $60,000 and $210,000 in licensing income in 1999 and 1998, respectively, related to the National Starch agreement. The agreement ended in June of 1999. 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 provided for an up-front license fee of $150,000, which 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 ten-year term of the agreement. In 1999, the Company recognized $126,000 of royalty income. 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, 1999, 1998, and 1997 were as follows:
1999 1998 1997 ---- ---- ---- (in thousands) Income taxes paid (refunded), net $ (1) $ 0 $ (33) Interest 2,153 2,163 1,853
In addition, during the years ended December 31, 1999, 1998, and 1997, the Company had the following non-cash financing and investing activities:
1999 1998 1997 ---- ---- ---- (in thousands) Accrual for additions to other assets $ - $ 40 $ - Tax benefits of exercise of common stock options - - 7 Treasury stock repurchased - - 20 Note payable to Glaxo (See Notes 3 and 7) - 808 - Note receivable from Genesis (See Note 3) - (112) - Partial settlement of amounts due to stockholder in Company Common Stock (See Note 15) 725 - -
See Note 2 "Investments" for discussion regarding IMX investment. 5. Inventories Inventories as of December 31, 1999 and 1998 consisted of:
1999 1998 ---- ---- (in thousands) Finished goods $2,445 $2,785 Raw materials 2,464 2,210 Work-in-process 3,853 2,411 ---------------- $8,762 $7,406 ================
6. Property, Plant and Equipment Property, plant and equipment, at cost, as of December 31, 1999 and 1998 consisted of:
1999 1998 ---- ---- (in thousands) Land $ 625 $ 625 Buildings 9,796 9,748 Machinery and equipment 10,598 9,986 Construction in progress 329 - -------------------- 21,348 20,359 Less accumulated depreciation (11,567) (10,880) -------------------- Property, plant and equipment, net $ 9,781 $ 9,749 ====================
The Company recorded depreciation expense of $864,000, $861,000 and $925,000 in 1999, 1998 and 1997, respectively. 7. Notes Payable Notes payable at December 31, 1999 and 1998 consisted of:
1999 1998 ---- ---- (in thousands) Glaxo (See Note 3) $ 408 $ 808 Other - 261 ---------------- 408 1,069 Less current portion (408) (661) ---------------- $ - $ 408 ================
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 bore interest at a rate of 11% and was paid in December 1999. The Company also issued a promissory note to Glaxo for $608,000 bearing interest at 11%, which represents the unearned portion of the advance royalty. Principal and interest amounts are payable semi-annually; the Company made the first payment of $200,000 in December 1999 and will make payments of $200,000 and $208,000 in June 2000 and December 2000, respectively. 8. Debt Debt as of December 31, 1999 and 1998 consisted of:
1999 1998 ---- ---- (in thousands) Revolving credit facility $ 5,708 $ 6,657 Credit line - 12,000 Term loan under Senior Debt Agreement 7,000 - Notes under Subordinated Debt Agreement 7,000 - -------------------- 19,708 18,657 Less unamortized debt discount under Subordinated Debt Agreement (See Note 9) 2,775 - -------------------- Revolving Credit Facility and current portion of long-term debt $16,933 $18,657 ====================
According to the terms of the debt agreements, aggregate annual principal payments due on debt for the years subsequent to December 31, 1999 are as follows:
Year (in thousands) ---- ------------- 2000 $ 6,175 2001 933 2002 933 2003 933 2004 and thereafter 10,734 ------- $19,708 =======
On October 29, 1999, the Company entered into a $22 million senior bank credit agreement ("Senior Debt Agreement") with Fleet Capital Corporation and a $7 million subordinated debt agreement ("Subordinated Debt Agreement") with American Capital Strategies, Ltd. These agreements enabled the Company to retire approximately $18.6 million of outstanding debt with its former bank lenders, Fleet Bank, NH, and Mellon Bank, N.A. In connection with the repayment of their loans, the Company's former bank lenders agreed to return to the Company, for cancellation, warrants held by them for the purchase of 810,000 shares of the Company's Common Stock at exercise prices ranging from $2.00 to $3.50. Also, approximately $611,000 of accrued interest was waived by the former bank group and is classified as an extraordinary gain from the early extinguishment of debt in the 1999 Consolidated Statements of Operations. The Senior Debt Agreement provides for a revolving line of credit facility of up to $12 million based upon qualifying accounts receivable and inventory, a $7 million term loan and a $3 million capital expenditures credit facility. The borrowings under the revolving line of credit bear interest at the prime rate plus 1.0% or the London Interbank offered rate plus 3.25%. The borrowings under the term loan and capital expenditure credit facility bear interest at the prime rate plus 1.5% or the London Interbank offered rate plus 3.75%. As of December 31, 1999, borrowings under the revolving line of credit, term loan and capital expenditures credit facility were $5,708,000, $7,000,000 and $0, respectively. Provisions under the revolving line of credit require the Company to maintain a lockbox with the lender, allowing Fleet Capital to sweep cash receipts from vendors and pay down the line of credit. Drawdowns on the line of credit are made when needed to fund operations. Quarterly repayments of the term loan begin on August 1, 2000 in the amount of $233,000. Repayments of the capital expenditures credit facility are to be made quarterly over a five year period after any initial drawdown. Borrowings under the Subordinated Debt Agreement bear interest, payable monthly, at the rate of 12.5%, ("cash portion of interest on subordinated debt"), plus an additional interest component at the rate of 2%, ("Additional interest component") which is payable at the Company's election in cash or in Company Common Stock. As of December 31, 1999, borrowings under the subordinated notes were $7,000,000, offset by an unamortized debt discount of $2,775,000. The Subordinated Debt Agreement matures in October 2006. In connection with the Subordinated Debt Agreement, the Company issued to the lender warrants to purchase 1,907,543 shares of IGI Common Stock at an exercise price of $.01 per share. (See Note 9, "Detachable Stock Warrants".) American Capital Strategies, Ltd. has the right to designate for election to the Company's Board of Directors that number of directors that bears the same ratio to the total number of directors as the number of shares of Company Common Stock owned by it plus the number of shares issuable upon exercise of its warrants bear to the total number of outstanding shares of Company Common Stock on a fully-diluted basis, provided that so long as it owns any Common Stock, or warrants or any of its loans are outstanding, it shall have the right to designate at least one director or observer on the Board of Directors. At December 31, 1999 American Capital Strategies, Ltd. had one observer on the Company's Board of Directors. Borrowings under these new agreements amounted to $19.7 million at December 31, 1999. The new agreements enabled the Company to retire approximately $18.6 million outstanding with the previous bank lenders, cover associated closing costs and provide a borrowing facility for working capital and capital expenditures. To secure all of its obligations under these agreements, the Company has granted the lenders a security interest in all of the assets and properties of the Company and its subsidiaries. These agreements contain financial and other covenants and restrictions. The Company was not in compliance under certain covenants under the agreements related to the fixed charges coverage ratio, maximum debt to equity ratio and accounts payable ratio as of December 31, 1999; however, the lenders involved amended, as of April 12, 2000, the related agreements to waive the defaults as of December 31, 1999 and to establish new covenants as of April 12, 2000. The Company was in compliance with all debt agreement covenants at April 12, 2000 and the Company expected that it would be able to comply with the covenants in the amended debt agreements through at least December 31, 2000. In connection with the amendment to the Subordinated Debt Agreement, American Capital Strategies, Ltd. agreed to defer the payment of its cash portion of interest on subordinated debt from the period April 2000 to July 2000 until July 31, 2000. Interest payment of its cash portion of interest on subordinated debt will be payable at the end of each subsequent three month period thereafter. Furthermore, the existing Additional interest component at the rate of 2% was increased to 2.25%, which is payable at the Company's election in cash or in Company Common Stock. The increase of .25% in the Additional interest component is in effect through March 2001 at which time the Additional interest component rate is adjusted back down to 2%. Subsequent Events In May, 2000, the FDA initiated an inspection of the Company's Companion Pet Products division and issued an inspection report on Form FDA 483 on July 5, 2000. The July 5, 2000 FDA report includes several unfavorable observations of manufacturing and quality assurance practices and products of the division. The Company is currently compiling its responses to the July 5, 2000 FDA report. In an effort to address a number of the FDA's stated concerns, on May 24, 2000, the Company discontinued production and shipment of Liquichlor and on June 1, 2000 temporarily stopped production of Cerumite, both products of the Pet Products Division. The aggregate annual sales volume for these products for the fiscal year ended December 31, 1999 was $1,059,000. The Company has incurred $634,000 year to date in related expenses to improve production, to meet documentation, procedural and regulatory compliance. After accounting for this cessation of production and combining these results with continued operating losses in the poultry vaccine business, the Company determined that it was not in compliance with the financial covenants in the debt agreements, as amended. On June 26, 2000, the Company entered into an Asset Purchase Agreement dated as of June 19, 2000 (the "Vineland Agreement"), with Vineland International, a general partnership which has changed its name to Lohmann Animal Health International (the "Buyer"). The Vineland Agreement provides for the sale (the "Vineland Sale") by the Company to the Buyer of the assets associated with the business of manufacturing, marketing, licensing and selling poultry vaccines and related equipment conducted by the Vineland Laboratories division of the Company. In exchange for receipt of such assets, the Buyer will assume certain Company liabilities, in the aggregate, equal to approximately $2,300,000 and will pay the Company cash in the amount of $12,500,000, of which $500,000 will be placed in an escrow fund to secure potential obligations of the Company relating to final purchase price adjustments and indemnification. The consummation of the sale is contingent on receipt by September 19, 2000 of the approval of the Vineland Sale by the holders of a majority of the outstanding shares of the Company's stock. The Company projects a $300,000 after tax gain on the Vineland Sale offset by a $525,000 after tax extraordinary loss on the early extinguishment of debt. On June 26, 2000, the Company entered into Amendment No. 2 to Note and Equity Purchase Agreement ("Second Subordinated Amendment") with American Capital Strategies Ltd. ("ACS"). Pursuant to the Second Subordinated Amendment, the Company received $500,000 and issued to ACS $500,000 of Series C Senior Subordinated Notes due September 30, 2000 (the "Series C Notes"); and ACS waived compliance with certain financial covenants applicable to Borrower contained in the Subordinated Debt Agreement and modified certain interest payment dates with respect to the Notes. In addition, the Second Subordinated Amendment permits the Company to issue additional Series C Notes on July 31, 2000 to pay the interest then due and payable on the Notes and the Series C Notes. The Company will issue, in the beginning of August 2000, to ACS an additional Series C Note in the aggregate principal amount of approximately $300,000 for the interest due. Also, on June 26, 2000, the Company entered into a Second Amendment to Loan and Security Agreement dated as of June 23, 2000 (the "Second Senior Amendment") with Fleet Capital Corporation ("Fleet"). Pursuant to the Second Senior Amendment, the Company obtained an "overadvance" of $500,000 under the senior revolving line of credit (the "Overadvance"), repayable in full on the earlier to occur of September 22, 2000 or the date of the consummation of the Vineland Sale. Under the Second Senior Amendment, Fleet agreed to forbear from exercising its right to accelerate the maturity of the Senior Loans upon the default by the Borrower under certain financial covenants (the "Forbearance Covenants") until the first to occur of: (a) September 22, 2000, (b) the date on which any default, other than a default under the Forbearance Covenants, occurs under the Senior Debt Agreement, as amended; or (c) the date of the termination of the Vineland Agreement. The Vineland Agreement may be terminated prior to the closing if any of the following occurs: 1. The Buyer and the Company mutually consent to the termination, or Vineland Sale is not consummated on or before the date (September 19, 2000) that is three (3) months after the date of the Vineland Agreement (June 19, 2000), unless the failure to consummate the transaction is the result of a material breach of the Vineland Agreement by the party seeking to terminate the Vineland Agreement; provided, however, that the passage of such period shall be tolled for any part thereof (but not exceeding ninety (90) days in the aggregate) during which any party shall be subject to a non-final order, decree, ruling or action restraining, enjoining or otherwise prohibiting the consummation of the transaction; 2. A governmental entity issues an order, decree or ruling or takes any other action permanently enjoining, restraining or otherwise prohibiting the transaction and such order, decree, ruling or other action shall have become final and non-appealable; 3. The stockholders of the Company do not approve the Vineland Agreement and transaction. Due to the terms of the Second Senior Amendment and the Second Subordinated Amendment discussed above, the Company has classified all debt owed to ACS and Fleet as short-term debt. The Company has scheduled a special meeting of stockholders and has filed a Preliminary Proxy Statement with the Securities and Exchange Commission with respect to Stockholder consideration of the Vineland Sale. 9. Detachable Stock Warrants
1999 1998 ---- ---- (in thousands) Initial valuation $2,842 $ - Mark-to-market adjustment 854 - ---------------- $3,696 $ - ================
In connection with the October 29, 1999 refinancing, specifically the $7 million subordinated debt agreement, the Company issued warrants to purchase 1,907,543 shares of IGI Common Stock at an exercise price of $.01 per share to American Capital Strategies, Ltd. These warrants contain a right ("the put") to require the Company to repurchase the warrants or the Common Stock acquired upon exercise of such warrants at their then fair market value under certain circumstances, including the earliest to occur of the following: a) October 29, 2004; b) the date of payment in full of the Senior Debt and Subordinated Debt and all senior indebtedness of the Company; or c) the sale of the Company or 30% or more of its assets. The repurchase is to be settled in cash or Common Stock, at the option of American Capital Strategies, Ltd. Due to the put feature and the potential cash settlement which is outside of the Company's control, the warrants are recorded as a liability which is marked-to-market, with changes in the market value being recognized as a component of interest expense in the period of change. The warrants issued to American Capital Strategies, Ltd. were valued at issuance date utilizing the Black-Scholes model and initially recorded as a liability of $2,842,000. A corresponding debt discount was recorded at issuance, representing the difference between the $7,000,000 proceeds received by the Company and the total obligation, which includes principal of $7,000,000 and the initial warrant liability of $2,842,000. The debt discount is being amortized to interest expense over the term of the Subordinated Debt Agreement. In 1999, the Company recognized $854,000 of non-deductible interest expense associated with the mark-to-market adjustment of the warrants. The underlying liability for the put is marked- to-market with changes to market value being recognized as a component of interest expense On April 12, 2000, American Capital Strategies, Ltd. amended its loan agreement whereby the put provision was replaced by a "make-whole" feature. The "make-whole" feature requires the Company to compensate American Capital Strategies, Ltd., in either Common Stock or cash, at the option of the Company, in the event that American Capital Strategies, Ltd. ultimately realizes proceeds from the sale of its Common Stock obtained upon exercise of its warrants that are less than the fair value of the Common Stock upon exercise of such warrants multiplied by the number of shares obtained upon exercise. Fair value of the Common Stock upon exercise is defined as the 30 day average value prior to notice of exercise. American Capital Strategies, Ltd. must exercise reasonable effort to sell or place its shares in the marketplace over a 180 day period before it can invoke the make-whole provision. As a result of the amendment, the liability recognized related to the warrants will be reclassified as a component of equity without a future mark-to-market adjustment effective April 12, 2000. 10. Stock Options Under the 1988 Non-Qualified Stock Option Plan, options have been 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, 1999 are generally exercisable in cumulative increments over four years commencing one year from the date of grant. The 1988 Non- Qualified Stock 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 any time during a ten year period commencing on the date of grant. Under the 1989 and 1991 Stock Option Plans, options have been granted to key employees, directors and consultants to purchase a maximum of 500,000 and 2,600,000 shares of Common Stock, respectively. Options, having a maximum term of 10 years, have been granted at 100% of the fair market value of the Company's stock at the time of grant. Both incentive stock options and non-qualified stock options have been granted under the 1989 Plan and the 1991 Plan. Incentive stock options are generally exercisable in cumulative increments over four years commencing one year from the date of grant. Non-qualified options are generally exercisable in full beginning six months after the date of grant. In 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 1999 and 1998, 67,000 and 46,000 shares of Common Stock were issued as consideration for directors' fees, respectively. The Company recognized $116,000 and $94,000 of expense related to these shares during the years ended December 31, 1999, and 1998, respectively. 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. In December 1998, the Company's Board of Directors adopted the 1999 Employee Stock Purchase Plan ("Plan"). An aggregate of 300,000 shares of Common Stock may be issued pursuant to this plan. All the Company and its subsidiaries' employees, including an officer or director who is also an employee, are eligible to participate in the Plan. Shares under this plan are available for purchase at 85% of the fair market value of the Company's stock on the first or last day of the offering, whichever is lower. The Plan is implemented through offerings; the first offering commenced August 26, 1999 and terminated December 31, 1999. The Company issued 27,000 shares pursuant to this initial offering. Each offering thereafter will begin on the first day of each year and end on the last day of each year. In March 1999, the Company's Board of Directors approved the 1999 Stock Incentive Plan ("1999 Plan"). The 1999 Plan replaces all presently authorized stock option plans, and no additional options may be granted under those plans. Under the 1999 Plan, options may be granted to all of the Company's employees, officers, directors, consultants and advisors to purchase a maximum of 1,200,000 shares of Common Stock. A total of 872,000 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, 1999 are generally exercisable in cumulative increments over four years commencing one year from date of grant. In September 1999, the Company's Board of Directors approved the 1999 Director Stock Option Plan. The 1999 Director Stock Option Plan provides, through 2002, for the grant of stock options to non-employee directors of the Company at an exercise price equal to the fair market value per share on the date of the grant. In September 1999, a total of 300,000 options were granted to non-employee directors. The options granted under the 1999 Director Stock Option plan vest in full twelve months after their respective grant dates and have a maximum term of ten years. Stock option transactions in each of the past three years under the aforementioned plans in total were:
1989, 1991 and 1999 Plans 1988 Non-Qualified Plan --------------------------------------------- -------------------------------------------- Weighted Weighted Shares Price Per Share Average Price Shares Price Per Share Average Price ------ --------------- ------------- ------ --------------- ------------- January 1, 1997 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 - Granted 1,447,000 $1.56 - $2.00 $1.62 ======== Exercised - - Cancelled (173,465) $2.00 - $8.58 $3.67 --------- December 31, 1999 shares Under option 3,247,200 $1.56 - $9.88 $3.37 ========= Shares subject to outstanding Options exercisable at: December 31, 1997 1,854,715 $6.89 166,500 $4.78 ========= ===== ======== ===== December 31, 1998 1,599,840 $5.18 - $ - ========= ===== ======== ===== December 31, 1999 1,909,866 $4.52 - $ - ========= ===== ======== =====
The Company uses the intrinsic method to account for stock options issued to employees and to directors. The Company uses the fair-value method to account for stock options issued to consultants. The Company has recorded compensation expense of $49,000, $108,000 and $46,000 in 1999, 1998 and 1997, respectively, for options granted to consultants, including the effects 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:
1999 1998 1997 ---- ---- ---- (in thousands, except per share information) Net loss - as reported $(1,584) $(3,029) $(1,208) Net loss - pro forma (1,943) (3,618) (1,403) Loss per share - as reported Basic and diluted $ (.17) $ (.32) $ (.13) Loss per share - pro forma Basic and diluted $ (.21) $ (.38) $ (.15)
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 1999, 1998 and 1997:
Assumptions 1999 1998 1997 ----------- ---- ---- ---- Dividend yield 0% 0% 0% Risk free interest rate 4.93% - 6.36% 4.47% - 5.89% 5.84% - 6.63% Estimated volatility factor 59.52% - 63.73% 39.51% - 47.87% 40.02% - 43.68% Expected life 6 - 9 years 6 - 9 years 6 - 9 years
The following table summarizes information concerning outstanding and exercisable options as of December 31, 1999:
Options Outstanding Options Exercisable --------------------------------------- ---------------------- Weighted Weighted Weighted Average Average Average Range of Number of Remaining Exercise Number of Exercise Exercise Price Options Life (Years) Price Options Price - -------------- --------- ------------ -------- --------- -------- $1.00 to $ 2.00 1,670,250 9.30 $1.64 416,938 $1.63 $2.01 to $ 3.00 506,450 4.75 $2.55 445,303 $2.53 $3.01 to $ 4.00 215,500 8.24 $3.41 192,625 $3.39 $4.01 to $ 5.00 20,000 1.00 $4.62 20,000 $4.62 $5.01 to $ 6.00 200,000 6.10 $5.76 200,000 $5.76 $6.01 to $ 7.00 290,000 5.15 $6.66 290,000 $6.66 $7.01 to $ 8.00 140,000 3.47 $7.47 140,000 $7.47 $8.01 to $ 9.00 150,000 5.29 $8.47 150,000 $8.47 $9.01 to $10.00 55,000 1.96 $9.66 55,000 $9.66 --------- --------- $1.56 to $ 9.88 3,247,200 8.13 $2.65 1,909,866 $2.94 ========= =========
11. Income Taxes The benefit for income taxes attributable to earnings before income taxes and extraordinary gain included in the Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997, was as follows:
1999 1998 1997 ---- ---- ---- (in thousands) Current tax expense: Federal $ - $ 14 $ - State and local 9 16 11 --------------------------- Total current tax expense 9 30 11 --------------------------- Deferred tax expense (benefit) Federal (505) (1,161) (637) State and local (105) (160) 190 --------------------------- Total deferred tax benefit (610) (1,321) (447) --------------------------- Total benefit for income taxes $(601) $(1,291) $(436) ===========================
The charge for income taxes related to the extraordinary gain of $611,000 for the year ended December 31, 1999 consisted of $200,000 of deferred federal income taxes and $24,000 of deferred state income taxes. The benefit for income taxes differed from the amount of income taxes determined by applying the applicable Federal tax rate (34%) to pretax loss before extraordinary items as a result of the following:
1999 1998 1997 ---- ---- ---- (in thousands) Statutory benefit $(874) $(1,469) $(559) Non-deductible interest expense relating to mark-to-market of put warrants (See Note 9) 290 - - Other non-deductible expenses 72 111 51 State income taxes, net of federal benefit 30 (240) (164) Research and development tax credits (19) (33) (65) (Decrease) Increase in valuation allowance (106) 393 299 Other, net 6 53 2 --------------------------- $(601) $(1,291) $(436) ===========================
Deferred tax assets included in the Consolidated Balance Sheets as of December 31, 1999 and 1998, consisted of the following:
1999 1998 ---- ---- (in thousands) Property, plant and equipment $ (384) $ (498) Prepaid license agreement 1,168 1,389 Deferred royalty payments 127 212 Tax operating loss carryforwards 3,672 3,046 Tax credit carryforwards 684 651 Reserves on inventory 407 510 Inventory 412 537 Non-employee stock options 156 217 Other future deductible temporary differences 606 525 Other future taxable temporary differences (43) (65) ------------------- 6,805 6,524 Less: valuation allowance (955) (1,061) ------------------- Deferred taxes, net $5,850 $ 5,463 ===================
The Company evaluates the recoverability of its deferred tax assets based on its history of operating earnings, its plans to sell the benefit of certain state net operating losses, its expectations for the future, and the expiration dates of the net 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. The Company establishes full valuation allowances for net operating losses related to a specific subsidiary and for all net operating losses expiring before 2002 in the states where the Company does not plan on selling the benefit of the net operating losses. Where the Company intends to sell the benefit of the state net operating losses, a valuation allowance is established so that the net deferred tax asset is reflected at its net realizable value. Operating loss and tax credit carryforwards for tax reporting purposes as of December 31, 1999 were as follows:
(in thousands) -------------- Federal: Operating losses (expiring through 2019) $9,432 Research tax credits (expiring through 2019) 567 Alternative minimum tax credits (available without expiration) 28 State: Net operating losses - New Jersey (expiring through 2006) 7,412 Net operating losses - other states (expiring through 2019) 2,285 Research tax credits - New Jersey (expiring through 2006) 90
Federal net operating loss carryforwards that expire through 2019 have significant components expiring in 2007 (36%), 2018 (40%) and 2019 (20%). 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 $362,000 in 1999, $371,000 in 1998, and $348,000 in 1997. Future minimum rental commitments under non-cancelable operating leases as of December 31, 1999 are as follows:
Year (in thousands) ---- ------------- 2000 $57 2001 50 2002 32 2003 20 2004 5
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 products. Shortly thereafter, in July 1997, the Company was advised that 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 within a month of its issuance and released all remaining products on March 27, 1998. On March 24, 1999, the Company reached settlement with the Departments of Justice, Treasury and Agriculture regarding their pending investigations and proceedings. The terms of the settlement agreement provided that the Company enter a plea of guilty to a misdemeanor and pay a fine of $15,000 and restitution in the amount of $10,000. In addition, the Company was assessed a penalty of $225,000 and began making monthly payments to the Treasury Department which will continue through the period ending October 31, 2001. The expense of settling with these agencies was reflected in the 1998 results of operations. Further, in response to these events, the Company restated the Company's financial statements for the two years ended December 31, 1996 and the nine months ended September 30, 1997. 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. 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. At December 31, 1999, the informal inquiry remained open. On July 26, 2000, the Company reached an agreement in principle with the staff of the SEC to resolve matters arising with respect to the SEC Investigation commenced in April 1998. Under the agreement, which will not be final until approved by the SEC, the Company neither admits nor denies that the Company violated the financial reporting and record-keeping requirements of Section 13 of the Securities Exchange Act of 1934, as amended, for the fiscal years 1995, 1996 and 1997. Further, in the agreement, the Company agrees to the entry of an order to cease and desist from any such violation in the future. No monetary penalty is expected. Other Pending Matters On April 14, 1999, a lawsuit was filed in the U.S. District Court for the Southern District of New York by Cohanzick Partners, LP, against IGI, Inc. and certain of its present and former directors, officers and employees. The suit, which seeks approximately $420,000 in actual damages together with fees, costs and interests, alleges violations of the securities laws, fraud, and negligent misrepresentation concerning certain disclosures made and other actions taken by the Company in 1996 and 1997. The Company believes that the plaintiff's allegations are factually incorrect and legally inadequate and will defend the lawsuit vigorously. The Company believes that an unfavorable outcome in the suit would not have a material adverse impact upon the Company's financial condition, although it could negatively affect the results of operations for the period in which the matter is resolved. 14. Export Sales Export revenues by the Company's domestic operations accounted for approximately 33% of the Company's total revenues in 1999, 32% in 1998, and 35% in 1997. The following table shows the geographical distribution of the Company's total revenues:
1999 1998 1997 ---- ---- ---- (in thousands) Latin America $ 3,038 $ 4,445 $ 4,593 Asia/Pacific 5,250 3,787 4,659 Europe 1,335 1,151 1,263 Africa/Middle East 1,681 1,380 1,362 ----------------------------- 11,304 10,763 11,877 United States/Canada 23,290 22,432 22,466 ----------------------------- Total revenues $34,594 $33,195 $34,343 =============================
Export sales net accounts receivable balances at December 31, 1999 and 1998 approximated $4,044,000 and $4,002,000, respectively. 15. Certain Relationships and Related Party Transactions The Company's former Chief Executive Officer had chosen to defer payment of his salary earned in 1999 and 1998 until the Company's cash flow stabilized. Compensation earned for which payment was to be deferred under this plan was $460,000 and $380,000 for 1999 and 1998, respectively, which amounts were included in accrued expenses in the accompanying balance sheets. On September 15, 1999, the Company agreed to pay portions of the Company's obligation in shares of Company Common Stock. Total payments through December 31, 1999 resulted in issuance of 417,744 shares, valued at $725,000. The shares were valued using the then trading price of the Company's stock at the date of stock issuance. At December 31, 1999, accrued compensation totaling $115,000 is included in the Consolidated Balance Sheets representing compensation earned but not yet paid. As of December 31, 1999, the Company agreed to pay this amount using Company Common Stock in the first quarter of 2000, valued at the trading price of the Company stock as of December 31, 1999 or $1.81 per share. 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 1999. 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 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 $77,000, $82,000, and $113,000 for the years 1999, 1998 and 1997, respectively. 17. Business Segments The Company has three reportable segments: Consumer Products, Companion Pet Products and Poultry Vaccines. Products from each of the segments serve different markets, use different channels of distribution, and, for two of the segments, have different forms of government oversight. 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 $4,237,000 or 13% of 1999 sales, $3,494,000 or 11% for 1998, and $2,408,000 or 7% in 1997. Companion Pet Products The Company sells its Companion Pet Products to the veterinarian market under the EVSCO Pharmaceuticals trade name and to 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 gel, tablets, creams, liquids, ointments, powders, emulsions and shampoos. 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"). 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. Most of the Company's veterinary products are sold through distributors. 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, through its export sales staff, 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. Summary Segment Data Summary data related to the Company's reportable segments for the three years ended December 31, 1999 appears below:
Consumer Companion Pet Poultry Products Products Vaccines Corporate* Consolidated -------- ------------- -------- ---------- ------------ (in thousands) 1999 Revenues $6,938 $13,595 $14,061 $ - $34,594 Operating profit 3,913 3,850 (1,041) (5,216) 1,506 Depreciation and amortization 188 254 557 28 1,027 Identifiable assets 3,885 6,994 13,178 9,805 33,862 Capital expenditures 57 207 800 - 1,064 1998 Revenues $5,839 $12,513 $14,843 $ - $33,195 Operating profit (loss) 3,688 2,844 (517) (6,925) (910) Depreciation and amortization 199 206 560 27 992 Identifiable assets 4,886 5,660 13,190 8,320 32,056 Capital expenditures 9 186 412 - 607 1997 Revenues $5,255 $12,444 $16,644 $ - $34,343 Operating profit (loss) 1,473 2,577 1,202 (5,032) 220 Depreciation and amortization 161 225 625 26 1,037 Identifiable assets 4,466 6,386 15,434 7,464 33,750 Capital expenditures 4 96 536 - 636 - -------------------- * Note: A Unallocated corporate expenses are principally general and administrative expenses. B Corporate assets represent fixed assets, deferred tax assets, cash and cash equivalents and deferred financing costs. C Transactions between reportable segments are not material.
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 ----------- ------------ ------------ -------------- ---------- --------- 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 369 299 - - 668 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 668 382 11 - 1,061 December 31, 1999: Allowance for doubtful accounts $ 516 $ 243 $ - $ 320(A) $ 354 Inventory valuation allowance 1,356 873 - 1,361(B) 868 Valuation allowance on net Deferred tax assets 1,061 - - 105(C) 955 - -------------------- FN> A Relates to write-off of uncollectible accounts and recoveries of previously reserved amounts. B Disposition of obsolete inventories. C Relates to reduction in the valuation allowance as a result of the expiration of certain state net operating losses in 1999, for which full valuation allowances had previously been provided.
IGI, INC. AND SUBSIDIARIES EXHIBIT INDEX Exhibits marked with a single asterisk are filed herewith. 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.] (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.] (10.7) 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".)] (10.8) 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.] (10.9) 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.] (10.10) 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, filed April 14, 1995.] (10.11) 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.] (10.12) 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.] (10.13) 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.] (10.14) License Agreement by and between Micro-Pak, Inc. and IGEN, Inc. [Incorporated by reference to Exhibit (10)(v) 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.] (10.15) Registration Rights Agreement between IGI, Inc. and SmithKline Beecham p.l.c. dated as of August 2, 1993. [Incorporated by reference to Exhibit (10)(s) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 001-08568, filed March 31, 1994.] (10.16) 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.] (10.17) IGI, Inc. 1998 Director Stock Option Plan as approved by the Board of Directors on October 19, 1998. [Incorporated by reference to Exhibit (10.38) to the Company's Annual Report on form 10-K for the fiscal year ended December 31, 1998, File No. 001-08568, filed April 12, 1999. (the "1998 Form 10-K".)] (10.18) Common Stock Purchase Warrant No. 5 to purchase 150,000 shares of IGI, Inc. Common Stock issued to Fleet Bank, NH on March 11, 1999. [Incorporated by reference to Exhibit (10.40) to the 1998 Form 10-K.] (10.19) Common Stock Purchase Warrant No. 7 to purchase 120,000 shares of IGI, Inc. Common Stock issued to Mellon Bank, N.A. on March 11, 1999. [Incorporated by reference to Exhibit (10.42) to the 1998 Form 10-K.] (10.20) Employment Agreement, dated May 1, 1998, between IGI, Inc. and Paul Woitach. [Incorporated by reference to Exhibit (10.44) to the 1998 Form 10-K.] (10.21) Loan and Security Agreement by and among Fleet Capital Corporation and IGI, Inc., together with its subsidiaries, dated October 29, 1999. (10.22) Revolving Credit Note issued by IGI, Inc., together with its subsidiaries, to Fleet Capital Corporation, dated October 29, 1999. (10.23) Term Loan A Note issued by IGI, Inc., together with its subsidiaries, to Fleet Capital Corporation, dated October 29, 1999. (10.24) Term Loan B Note issued by IGI, Inc., together with its subsidiaries, to Fleet Capital Corporation, dated October 29, 1999. (10.25) Capital Expenditure Loan Note issued by IGI, Inc., together with its subsidiaries, to Fleet Capital Corporation, dated October 29, 1999. (10.26) Trademark Security Agreement issued by IGI, Inc. in favor of Fleet Capital Corporation, dated October 29, 1999. (10.27) Trademark Security Agreement issued by IGEN, Inc. in favor of Fleet Capital Corporation, dated October 29, 1999. (10.28) Trademark Security Agreement issued by ImmunoGenetics, Inc. in favor of Fleet Capital Corporation, dated October 29, 1999. (10.29) Patent Security Agreement issued by IGI, Inc. in favor of Fleet Capital Corporation, dated October 29, 1999. (10.30) Patent Security Agreement issued by IGEN, Inc. in favor of Fleet Capital Corporation, dated October 29, 1999. (10.31) Pledge Agreement by and between Fleet Capital Corporation and IGEN, Inc., dated October 29, 1999. (10.32) Open-Ended Mortgage, Security Agreement and Assignment of Leases and Rents (Atlantic County, New Jersey) issued by IGI, Inc. to Fleet Capital Corporation, dated October 29, 1999. (10.33) Open-Ended Mortgage, Security Agreement and Assignment of Leases and Rents (Cumberland County, New Jersey) issued by IGI, Inc. to Fleet Capital Corporation, dated October 29, 1999. (10.34) Subordination Agreement by and between Fleet Capital Corporation and American Capital Strategies, Ltd., dated October 29, 1999. (10.35) Note and Equity Purchase Agreement by and among American Capital Strategies, Ltd. and IGI, Inc., together with its subsidiaries, dated as of October 29, 1999. (10.36) Series A Senior Secured Subordinated Note issued by IGI, Inc., together with its subsidiaries, to American Capital Strategies, Ltd., dated as of October 29, 1999. (10.37) Series B Senior Secured Subordinated Note issued by IGI, Inc., together with its subsidiaries, to American Capital Strategies, Ltd., dated as of October 29, 1999. (10.38) Warrant to purchase 1,907,543 shares of IGI, Inc. Common Stock, issued to American Capital Strategies, Ltd. on October 29, 1999. (10.39) Security Agreement issued by IGI, Inc., together with its subsidiaries, in favor of American Capital Strategies, Ltd., dated as of October 29, 1999. (10.40) Trademark Security Agreement issued by IGI, Inc. in favor of American Capital Strategies, Ltd., dated as of October 29, 1999. (10.41) Trademark Security Agreement issued by ImmunoGenetics, Inc. in favor of American Capital Strategies, Ltd., dated as of October 29, 1999. (10.42) Trademark Security Agreement issued by Blood Cells, Inc. in favor of American Capital Strategies, Ltd., dated as of October 29, 1999. (10.43) Trademark Security Agreement issued by IGEN, Inc. in favor of American Capital Strategies, Ltd., dated as of October 29, 1999. (10.44) Patent Security Agreement issued by IGI, Inc. in favor of American Capital Strategies, Ltd., dated as of October 29, 1999. (10.45) Patent Security Agreement issued by ImmunoGenetics, Inc. in favor of American Capital Strategies, Ltd., dated as of October 29, 1999. (10.46) Patent Security Agreement issued by Blood Cells, Inc. in favor of American Capital Strategies, Ltd., dated as of October 29, 1999. (10.47) Patent Security Agreement issued by IGEN, Inc. in favor of American Capital Strategies, Ltd., dated as of October 29, 1999. (10.48) Georgia Leasehold Deed to Secure Debt issued by IGI, Inc. in favor of American Capital Strategies, dated as of October 29, 1999. (10.49) Open-Ended Mortgage, Security Agreement and Assignment of Leases and Rents (Cumberland County, New Jersey) issued by IGI, Inc. in favor of American Capital Strategies, Ltd., dated as of October 29, 1999. (10.50) Open-Ended Mortgage, Security Agreement and Assignment of Leases and Rents (Atlantic County, New Jersey) issued by IGI, Inc. in favor of American Capital Strategies, Ltd., dated as of October 29, 1999. (10.51) Pledge and Security Agreement issued by IGI, Inc. and ImmunoGenetics, Inc. in favor of American Capital Strategies, Ltd., dated as of October 29, 1999. (10.52) Employment Agreement between IGI, Inc. and Manfred Hanuschek dated as of July 26, 1999. (10.53) Amendment to Employment Agreement between Manfred Hanuschek and IGI, Inc. dated March 9, 2000. (10.54) Employment Agreement between IGI, Inc. and Robert McDaniel dated as of September 1, 1999. (10.55) Pledge Agreement by and between Fleet Capital Corporation and IGI, Inc., dated October 29, 1999 (10.56) Employment Agreement between IGI, Inc., and Rajiv Mathur dated February 22, 1999. (10.57) Amendment No. 1 to the Note and Equity Purchase Agreement by and between American Capital Strategies, Ltd. and IGI, Inc., together with its subsidiaries dated as of April 12, 2000. (10.58) Amendment to Loan and Security Agreement by and between Fleet Capital Corporation and IGI, Inc., together with its subsidiaries dated as of April 12, 2000. (10.59) Amendment No. 2 to Note and Equity Purchase Agreement dated as of June 26, 2000 by and among IGI, Inc., IGEN, Inc., Immunogenetics, Inc., Blood Cells, Inc., American Capital Strategies, Ltd. and ACS Funding Trust I.[Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed July 23, 2000.] (10.60) Second Amendment to Loan and Security Agreement dated as of June 23, 2000 by and among IGI, Inc., IGEN, Inc., Immunogenetics, Inc., Blood Cells, Inc. and Fleet Capital Corporation. [Incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K filed July 23, 2000.] *(10-61) Termination Agreement dated December 10, 1998 between the Company and Glaxo Wellcome, Inc. (21) List of Subsidiaries. (23) Consent of PricewaterhouseCoopers LLP. *(23.2) Consent of PricewaterhouseCoopers LLP. Dated August 18, 2000 (27.1) Financial Data Schedules for the year ended December 31, 1999. (27.2) Financial Data Schedules for the year ended December 31, 1998. *(27.3) Financial Data Schedule for the year ended December 31, 1999 (revised as of August 18, 2000) EX-27 4 igi-27.xfd FINANCIAL DATA SCHEDULE-ARTICLE 5
5 12-MOS Jan-01-1999 Dec-31-1999 Dec-31-2000 416 0 6,847 354 8,762 17,115 21,348 (11,567) 33,862 24,306 0 0 0 102 0 33,862 32,725 34,594 17,606 17,606 15,482 0 4,109 (2,572) 601 (1,971) 0 387 0 (1,584) (0.17) (0.17)
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