-----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, HYPkcO9yDhUOwDKOTL+6OOI9PEtHviZFq6JasAaa4AAt42d3hcLqTn5D7+sVierM POjzdL2RgK26lx3ki214Tw== 0001036050-98-001461.txt : 19980825 0001036050-98-001461.hdr.sgml : 19980825 ACCESSION NUMBER: 0001036050-98-001461 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980824 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: IGI INC CENTRAL INDEX KEY: 0000352998 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 010355758 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08568 FILM NUMBER: 98696394 BUSINESS ADDRESS: STREET 1: WHEAT RD AND LINCOCN AVE STREET 2: P O BOX 687 CITY: BUENA STATE: NJ ZIP: 08310 BUSINESS PHONE: 6096971441 MAIL ADDRESS: STREET 1: WHEAT ROAD AND LINCOCN AVE STREET 2: P O BOX 687 CITY: BUENA STATE: NJ ZIP: 08310 FORMER COMPANY: FORMER CONFORMED NAME: IMMUNOGENETICS INC DATE OF NAME CHANGE: 19870814 10-K 1 IGI, INC. FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED COMMISSION FILE NO. --------------------- ------------------- DECEMBER 31, 1997 001-08568
IGI, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 01-0355758 -------- ---------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
WHEAT ROAD AND LINCOLN AVENUE, BUENA, NJ 08310 - --------------------------------------------- ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(609)-697-1441 ----------- REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Common Stock ($.01 par value) Registered on the American Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [_] No [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the Registrant's Common Stock, par value $.01 per share, held by non-affiliates of the Registrant at July 31, 1998, as computed by reference to the last trading price of such stock, was approximately $16,600,000. The number of shares of the Registrant's Common Stock, par value $.01 per share, outstanding at July 31, 1998 was 9,466,667 shares. DOCUMENTS INCORPORATED BY REFERENCE: None. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 two business segments: . Animal Health Business--production and marketing of animal health products such as poultry vaccines, veterinary pharmaceuticals and other products, including nutritional supplements and grooming aids; and . Consumer Products Business--production and marketing of cosmetics and skin care products. IGI is committed to grow by applying its technology to deliver cost effective solutions to customer problems. IGI solves problems in poultry production, pet care and consumer and skin care markets. An increasing number of its solutions are based on the patented Novasome(R) microencapsulation technology. Licensed from a former subsidiary, the technology offers value- added qualities to cosmetics, skin care products, chemicals, biocides, pesticides, fuels, vaccines, medicines, foods, beverages, pet care products and other products. IMPORTANT DEVELOPMENTS The Company has recently replaced a number of key personnel. On May 11, 1998, the Company employed Paul Woitach as its President and Chief Operating Officer. On June 1, 1998, John F. Wall joined the Company as its Senior Vice President and Chief Financial Officer. As of June 15, 1998, the Company has hired a new Vice President of Vineland Operations, a new Vice President of Vineland Research and Development, a new Vice President of International Marketing and Sales and new Managers of Production and Quality Control. The Company has also added managers with experience in materials and supply chain management. Most of the new managers have experience in the poultry vaccine industry. The Company has added these new employees without increasing its historical overall payroll expenses. From June 4, 1997 through March 27, 1998, the Company was subject to an order by the Center for Veterinary Biologics ("CVB") of the United States Department of Agriculture ("USDA") to stop distribution and sale of certain serials and subserials of designated poultry vaccines produced by the Company's Vineland Laboratories Division ("Stop Shipment Order"). The Stop Shipment Order was based on CVB's findings that the Company shipped serials before the Animal and Plant Health Inspection Service division of the USDA ("APHIS") had the opportunity to confirm the Company's testing results, failed to destroy serials reported to APHIS as destroyed, and in general failed to keep complete and accurate records and to submit accurate reports to APHIS. The Stop Shipment Order affected 36 of the Company's USDA-licensed vaccines. In July 1997, the Office of Inspector General of the USDA ("OIG") advised the Company of its commencement of an investigation into alleged violations of the Virus Serum Toxin Act and alleged false statements made to APHIS. Following the Stop Shipment Order and the commencement of the OIG investigation, in July 1997, the non-employee members of the Board of Directors directed the Company to retain special counsel to investigate the alleged violations and to advise the Board of Directors. The non-employee members of the Board of Directors also instructed management to take immediate action to assure that all future shipments comply with all regulatory requirements. In addition, the Company took action designed to obtain the approval of APHIS to the Company's resumption of shipments of the products affected by the Stop Shipment Order, including submission of an amended regulatory compliance program and testing procedures acceptable to the USDA, reassignment of certain personnel and restructuring of the quality control and quality assurance functions. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations--U.S. Government Investigation and Disciplinary Proceedings.") Based on remedial action taken by the Company, including revised vaccine production outlines, the USDA, during the period from August through December of 1997, lifted the Stop Shipment Order with respect to all but three of the 36 affected products. As of March 27, 1998, the remaining three products were released for sale and shipment by the Company. 2 As a result of the Company's internal investigation regarding the alleged violations, the Company, in November 1997, terminated the employment of its then President and Chief Operating Officer, John P. Gallo, and commenced a lawsuit against Mr. Gallo on April 21, 1998. On April 28, 1998, Mr. Gallo commenced a lawsuit against the Company and two of its directors, including the Chairman of the Board. (See "Legal Proceedings.") In addition, six employees, including members of the Company's management team (including two Vice Presidents of the Company) resigned in April 1998 at the request of the Company. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations--U.S. Government Investigation and Disciplinary Proceedings.") In April 1998, the Company voluntarily disclosed to the U.S. Attorney for the District of New Jersey, as well as to the USDA and OIG, information resulting from the Company's internal investigation. The U.S. Attorney thereupon commenced its own investigation and requested that the Company provide documents relating to the matters being investigated, including documents relating to sales of poultry vaccines which may have violated U.S. Customs laws and regulations. During 1997 and at December 31, 1997, the Company was in default under certain covenants contained in its bank credit agreement. The Company entered into an Extension Agreement with its bank lenders as of April 29, 1998 which provided, among other matters, for the waiver of the covenant defaults, an extension of the bank credit agreement through March 31, 1999, revisions of existing covenants and the addition of new covenants, the payment of additional fees and the issuance to the bank lenders of warrants to purchase common stock of the Company. The Company was in default under certain covenants contained in the Extension Agreement at July 31, 1998. On August 19, 1998, the Company and its bank lenders entered into a Forbearance Agreement whereby the banks agreed to forbear from exercising their rights and remedies arising from these covenant defaults through January 30, 1999. The Forbearance Agreement terms require payment of all bank debt by January 31, 1999. The Company is actively seeking alternative financing arrangements to replace its existing debt and lending terms through a number of potential options including, but not limited to, the issuance of debt or equity securities or a combination of both. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources.") On March 30, 1998, the Company announced that it was unable to file its Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K") by the March 31, 1998 due date as it had not yet completed the procedures it deemed necessary to prepare its financial statements. Based upon information made known to it on March 17, 1998, the Company's Board of Directors directed the special counsel, who was conducting the internal investigation regarding USDA issues, to expand the scope of its internal inquiry to investigate information which could have a material impact on the Company's financial reporting for 1997 and prior periods and authorized special counsel to engage independent accountants to assist it in the investigation. As a result of the failure to file its 1997 Form 10-K, the American Stock Exchange ("AMEX") suspended the trading of the Company's Common Stock on March 30, 1998. In addition, on April 30, 1998, the Securities and Exchange Commission ("SEC") notified the Company that it was conducting an informal inquiry and requested that the Company provide it with certain documents. On May 1, 1998, the Company was advised by its former independent accountants, that based on the preliminary findings of the special investigation initiated by the Board of Directors in March 1998, their reports with respect to the Company's consolidated financial statements as of and for the years ended December 31, 1995 and 1996 should no longer be relied upon. As a result of the findings of the special investigation, the Company restated its consolidated financial statements for the two years ended December 31, 1995 and 1996 and for the three quarters ended September 30, 1997. In the opinion of management, all material adjustments necessary to correct the financial statements have been recorded. The restatements resulted in additional losses of $179,000 and $231,000 in 1995 and 1996, respectively. See "Note 2 of Notes to Consolidated Financial Statements". In addition to the restatements discussed above, the Company made certain adjustments in the fourth quarter of 1997 which were the result of actions or events which occurred in earlier quarters of 1997. The Company has restated its financial statements for the first three quarters of 1997 to record such adjustments in the applicable quarter. The restatements resulted in an additional loss of $1,324,000 for the nine months ended September 30, 1997. See "Note 18 of Notes to Consolidated Financial Statements". 3 For information relating to the impact of the above-described events on the Company's operations during 1997 and the expected impact on its business in 1998, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." LICENSE OF TECHNOLOGY FROM FORMER SUBSIDIARY 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 connection with the distribution, the Company paid Novavax $5,000,000 in return for a fully paid-up, ten-year license (the "IGI License Agreement") entitling it to the exclusive use of Novavax's Novasome lipid vesicle encapsulation technologies ("Novavax 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 its Novavax Technologies for all applications outside the IGI Field, including human vaccines and pharmaceuticals. BUSINESS SEGMENTS The following table sets forth the revenue and operating profit (in thousands) of each of the Company's two business segments for the periods indicated:
1997 1996 1995 ------- --------- --------- (IN THOUSANDS) (RESTATED) (RESTATED) REVENUE Animal Health Products......................... $29,096 $31,262 $28,869 Consumer Products.............................. 5,097 3,523 1,632 OPERATING PROFIT (LOSS) * Animal Health Products......................... 4,139 6,882 6,247 Consumer Products.............................. 730 (917) (233)
- -------- * Excludes corporate expenses of $5,032,000, $4,097,000 and $3,056,000 for 1997, 1996 and 1995, respectively. (See Note 17 of Notes to Consolidated Financial Statements). ANIMAL HEALTH PRODUCTS BUSINESS IGI manufactures and markets a broad range of animal health products used in pet care and poultry production. The Company sells these products in the United States and over 50 other countries principally under two trade names: Vineland Laboratories and EVSCO Pharmaceuticals. The Company also sells veterinary products to the over-the-counter ("OTC") pet products market under the Tomlyn label. Poultry Vaccines The Company produces and markets poultry vaccines manufactured by the chick embryo, tissue culture and bacterial methods. The Company produces vaccines for the prevention of various chicken and turkey diseases and has 63 vaccine licenses granted by the United States Department of Agriculture ("USDA"). The Company also produces and sells, under its Vineland Laboratories label, nutritional, anti-infective and sanitation products used primarily by poultry producers. The Company manufactures poultry vaccines at its USDA licensed facility in Vineland, New Jersey and sells them, primarily through its own sales force of nine persons, directly to large poultry producers and 4 distributors in the United States and, through its export sales staff of 15 persons, to local distributors in other countries. The sales force is supplemented and supported by technical and customer service personnel. The Company's vaccine production in the United States is regulated by the USDA. Sales of poultry vaccines and related products accounted for approximately 49% of the Company's sales in 1997, 57% in 1996 and 60% in 1995. For information relating to the adverse effect on the Company's poultry vaccine business of the Stop Shipment Order by the USDA in 1997, as well as ongoing governmental investigations, see "Governmental Regulation" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's principal competitors in the poultry vaccine market are Intervet America, Inc., Fort Dodge Animal Health, Inc., Merial Select Laboratories, Inc. 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. Veterinary Products 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 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 Solvay Veterinary, Inc., Vet- Kem, a division of Sandoz Pharmaceuticals Corp., Schering Corp., Dermatologics for Veterinary Medicine, Inc., Allerderm, Inc. and Mallinckrodt, Inc. 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 sold directly to pet superstores and through distributors to independent merchandising chains, shops and kennels. Sales of the Company's veterinary products are handled by 19 sales employees. Sales of veterinary products accounted for approximately 36% of the Company's sales in 1997, 33% in 1996 and 35% in 1995. CONSUMER PRODUCTS BUSINESS IGI's Consumer Products segment is primarily focused on the expanded commercialization of the Novavax Microencapsulation Technologies for skin care applications. These efforts have been directed toward the development of high quality skin care products that the Company markets through collaborative arrangements with major cosmetic and consumer products companies. IGI is currently working with several cosmetics, food, personal care products, and OTC pharmaceutical companies for various commercial microencapsulation applications of the Novavax 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 lipid vesicles are well-suited to cosmetics and consumer product applications. For example, Novasome 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 vesicle; and to deliver pharmaceutical agents. The Company produces Novasome 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", and "Resilience". 5 At the end of December 1996, the Company entered into a license agreement with Glaxo Wellcome ("Glaxo"), which grants Glaxo the exclusive right to market a skin care product line in the United States to physicians, including but not limited to dermatologists. Under the terms of the agreement, which was amended in January 1997, IGI manufactures the products for Glaxo. IGI retains the rights to market the product line to non-physicians in the U.S., and in all markets abroad. In 1997, the Company entered into an Exclusive Supply Agreement with IMX Pharmaceuticals, Inc. ("IMX"), which grants IMX the exclusive right to market certain Novasome-based topical skin care products in certain mass merchandising markets. Sales of the Company's Consumer Products were principally based on formulations using the Novasome encapsulation technology. Such sales approximated 15% of the Company's sales in 1997, 10% in 1996 and 5% in 1995. OTHER APPLICATIONS The versatility of the Novavax Technologies combined with the Company's commercial production capabilities allow the Company to target large, diverse markets. Through product collaborations and license agreements, the Company is seeking to develop additional products for this business segment. The efforts for the development of additional products require extensive testing, evaluation and trials, and therefore no assurance can be given that commercialization of these products with Novasome vesicles will be successful. Under a license agreement with the Company, Johnson & Johnson has encapsulated retinoids in Novasome vesicles. Retinoids are derivatives of retinoic acid and are effective in the treatment of acne and thought to be effective in the treatment of various age-associated skin disorders. Encapsulation of retinoids in Novasome vesicles is designed to prolong stability and reduce irritation and provide a sustained retinoid release to treat these disorders. Johnson & Johnson is beginning to introduce Novasome encapsulated retinoid products in certain European countries and the United States in the first half of 1998. INTERNATIONAL SALES AND OPERATIONS A staff of nine persons based in Buena, New Jersey and six individuals based overseas handle all sales of Company products outside the United States. The Company's sales personnel and veterinarians travel abroad extensively to develop business and support customers through local distributors. Exports consist primarily of poultry vaccines, although the Company also exports some veterinary pharmaceuticals and pet care products. Exports of vaccines require product registration (ie. licenses) by foreign authorities. The Company has approximately 900 product registrations in over 50 countries outside the United States and has over 800 registrations pending. The Company anticipates future growth in key markets including Brazil, China and Japan. The Company entered the market in China in 1997 and expects to increase market penetration in 1998. The Company has received product registrations in Japan and is scaling up production for 1998 product sales. In Brazil, product registrations are in process and the Company expects to commence sales by the fourth quarter of 1998. Mexico and certain Latin American countries are important markets for the Company's poultry vaccines and other products. These countries have historically experienced varying degrees of political unrest and economic and currency instability. In addition, certain countries in the Far East, including Indonesia and Thailand, have recently experienced economic and currency instability. Because of the volume of business transacted by the Company in these areas, continuation or the recurrence of such unrest or instability could adversely affect the businesses of its customers, which in either case could adversely impact the Company's future operating results. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources.") Sales to international customers represented 35% of the Company's sales in 1997, 39% in 1996 and 38% in 1995. (See Note 14 of Notes to Consolidated Financial Statements.) 6 MANUFACTURING The Company's manufacturing operations include production and testing of vaccines, lotions, emulsions, shampoos, gels, ointments, pills and powders; packaging, bottling and labeling of the finished products; and packing and shipment for distribution. Approximately 90 employees are engaged in manufacturing operations. The raw materials included in these products are available from several suppliers. The Company produces quantities of Novasome lipid vesicles adequate to meet its current needs for cosmetics, consumer product and animal health applications. RESEARCH AND DEVELOPMENT The Company's poultry vaccine research and development efforts are directed towards developing more efficient single and multiple-component vaccines, developing vaccines to combat new diseases and incorporating the Novasome lipid vesicle technology into existing vaccines. The Company is concentrating its veterinary pharmaceutical development efforts on the use of Novasome lipid vesicle technology for various veterinary pharmaceutical and OTC pet care products. The Company's consumer products development efforts are directed towards liposomal encapsulation to improve performance and efficacy of chemicals, fuels, pesticides, biocides cosmetics, consumer products, flavors and dermatologic products. Under its license agreement with Novavax, the Company has the right to continue to use the Novavax Technologies to develop new products in the IGI Field. In addition to its internal research and development efforts, which involve 11 employees, the Company encourages the development of products in areas related to its present lines by making specific grants to universities and by entering into research and development agreements with industry partners. Research expenses for IGI's continuing operations were $1,675,000, $2,013,000 and $1,345,000 in 1997, 1996 and 1995, respectively. PATENTS AND TRADEMARKS All of the names of the Company's major products are registered in the United States and all significant markets in which the Company sells its products. Under the terms of the 1995 License Agreement, IGI has an exclusive ten-year license to use the Novavax Technologies in the IGI Field. Novavax holds 44 U.S. patents and a number of foreign patents covering its Novavax Technologies (including a wide variety of component materials, its continuous flow vesicle production process and its Novamix(TM) production equipment). GOVERNMENT REGULATION The production and marketing of the Company's products and its research and development activities are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. The Company's development, manufacturing and marketing of poultry biologics are subject to regulation in the United States for safety and efficacy by the USDA, including the Center for Veterinary Biologics ("CVB"), in accordance with the Virus Serum Toxin Act of 1914. The development, manufacturing and marketing of 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. From June 4, 1997 through March 27, 1998, the Company was subject to an order by the CVB to stop distribution and sale of certain serials and subserials of designated poultry vaccines produced by the Company's Vineland Laboratories Division. In July 1997, the OIG advised the Company of its commencement of an investigation into alleged violations of the Virus Serum Toxin Act and alleged false statements made by certain former Company personnel. In April 1998, the Company voluntarily disclosed to the U.S. Attorney for the District of New Jersey, as well as to the USDA and the OIG, information resulting from the Company's internal investigation of alleged violations by certain officers and employees of USDA rules and regulations and of the Virus Serum Toxin Act. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations--U.S. Government Investigation and Disciplinary Proceedings.") 7 On March 6, 1998, the Food and Drug Administration 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 and human vaccines are subject to rigorous FDA regulation including preclinical 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 research and development 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. EMPLOYEES At June 30, 1998, the Company had 198 full-time employees, of whom 72 are in marketing, sales, distribution and customer support, 90 in manufacturing, 11 in research and development, and 25 in executive, human resources, facilities, information systems, finance and administration. The Company has no collective bargaining agreement with its employees, and believes that its employee relations are good. ITEM 2. PROPERTIES The Company owns land and buildings housing offices, laboratories and production facilities in four locations in New Jersey. The Company also owns a warehouse and sales office space in Gainesville, Georgia. In addition, the Company leases warehouses in New Jersey, California, Mississippi, and Arkansas. The Company's poultry vaccine production facilities are located in Vineland, New Jersey, where the Company owns several buildings situated on approximately 16 acres of land. These buildings, containing 90,000 square feet of usable floor space, house offices and facilities used for the production of poultry vaccines. They were constructed and expanded from time to time between 1935 and 1992. The Company intends to renovate certain of these facilities in the future to expand its vaccine production capacity to meet expected growth in existing poultry vaccines and to provide production of new vaccines. Financing for such renovations will be provided by internally generated funds or leases. 8 In Buena, New Jersey, the Company owns a facility used for the production of veterinary pharmaceuticals. The facility was built in 1971 and expanded in 1975. The facility presently contains 41,200 square feet of usable floor space and is situated on eight acres of land. The Company's executive and administrative offices are also located in Buena, New Jersey in a 10,000 square foot building situated on six acres of land. In 1995, the Company completed and began operating a 25,000 square foot production, research and product development, customer service, marketing, international operations and warehousing facility for cosmetic, dermatologic and personal care products on this site. Each of the properties owned by the Company is subject to a mortgage held by Fleet Bank-NH and Mellon Bank. Except as discussed above, the Company believes that its current production and office facilities are adequate for its present and forseeable future needs. ITEM 3. LEGAL PROCEEDINGS In July 1997, the Office of Inspector General of the USDA ("OIG") advised the Company of its commencement of an investigation into alleged violations of the Virus Serum Toxin Act and alleged false statements made by Company employees to the USDA. The Company is cooperating with the OIG and providing documents subpoenaed by the OIG concerning certain products. The OIG investigation is ongoing and the Company is unable to determine when it will be completed. In April 1998, the Company voluntarily disclosed to the U.S. Attorney for the District of New Jersey, as well as to the USDA and OIG, information resulting from the Company's internal investigation. The U.S. Attorney thereupon commenced its own investigation and requested that the Company provide documents relating to the matters being investigated, including documents relating to sales of poultry vaccines which may have violated U.S. Customs laws and regulations. In addition, on April 30, 1998, the SEC notified the Company that it is conducting an informal inquiry and has requested that the Company provide it with certain documents. The Company is cooperating fully with the U.S. Attorney and each of the regulatory agencies and has produced a substantial amount of documents and information requested by them. The U.S. Attorney has not indicated what course of action, if any, it may pursue with respect to IGI in light of the Company's extensive cooperation. Although there can be no assurance as to the outcome of any proceeding, the Company expects that it will be able to achieve a satisfactory resolution of its existing regulatory and litigation matters. However, if the OIG, U.S. Attorney or SEC conclude that the Company's actions warrant enforcement proceedings, those proceedings, as well as the costs and expenses related to them, could have a materially adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." On April 21, 1998, the Company commenced a lawsuit against its former President and Chief Operating Officer, John P. Gallo, in the Superior Court of New Jersey, Atlantic County. In its complaint, the Company alleges, among other matters, that Mr. Gallo caused the Company to violate Department of Agriculture statutes and regulations, made false and inaccurate representations with respect to shipments and inventory, improperly converted Company funds and assets for his personal benefit and knowingly engaged in misconduct in the performance of his duties and responsibilities, all in violation of his employment agreement and of his fiduciary duty to the Company. The Company is seeking recovery of damages resulting from Mr. Gallo's alleged misconduct and recovery of funds and assets that the Company alleges were improperly diverted by him. On April 28, 1998, Mr. Gallo commenced a lawsuit against the Company and two of its Directors, including the Company's Chairman of the Board, Dr. Edward B. Hager, alleging, among other matters, that they improperly caused the termination of his employment with the Company in November 1997, wrongfully terminated his compensation in violation of his employment agreement and defamed his reputation. Mr. Gallo is seeking recovery against the defendants for his alleged actual damages as well as consequential and punitive damages. The Company has denied Mr. Gallo's allegations and believes his claims are without merit. The Company therefore has not reserved any amounts related to these charges. On May 27, 1998, Mr. Gallo sent a letter to the Company's Directors containing a number of complaints and allegations and demanded that the Board of Directors commence litigation against certain of its officers and 9 Directors. The Board of Directors convened a special meeting and designated a committee of independent members consisting of F. Steven Berg Esq. (Chairman) and Terrence O'Donnell Esq. to investigate these allegations and report to the Board. Also, the Board authorized the engagement of counsel to help with its investigation and requested that Mr. Gallo provide information and support for his allegations. The Company has been advised that Mr. Gallo has declined to provide the Board with a sworn statement giving substance and detail to his complaints. The Committee and its counsel are continuing to investigate Mr. Gallo's allegations and will report their findings and recommendations to the Board of Directors. To this point in the investigation, the Committee has uncovered no evidence supporting the claims of Mr. Gallo. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's stockholders during the last quarter of 1997. EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth (i) the name and age of each executive officer of the Company as of July 31, 1998, (ii) the position with the Company held by each such executive officer and (iii) the principal occupation held by each executive officer for at least the past five years.
OFFICER PRINCIPAL OCCUPATION AND OTHER BUSINESS EXPERIENCE NAME AGE SINCE DURING PAST FIVE YEARS ---- --- ------- -------------------------------------------------- Kevin J. Bratton........ 49 1983 Vice President and Treasurer of IGI, Inc. since 1983. Edward B. Hager, M.D.... 67 1977 Chairman of the Board of Directors and Chief Executive Officer of IGI, Inc. since 1977; Chairman of the Board of Directors and Chief Executive Officer of Novavax, Inc. from 1987 to June 1996; Chairman of the Board of Directors of Novavax, Inc. from February 1997 to March 1998. John F. Wall............ 50 1998 Senior Vice President and Chief Financial Officer of IGI, Inc. since June 1998; Chief Financial Officer of Diversa Corp. (startup biotechnology company developing enzymes for pharmaceuticals and chemicals) from July 1995 to September 1997; and Chief Financial Officer and a Co-founder of GynoPharma, Inc. (womens' health care manufacturer) from October 1987 to July 1995. Paul Woitach............ 40 1998 President and Chief Operating Officer of IGI, Inc. since May 1998; General Manager, Laboratory Division of Mettler Toledo North America (weighing and measurement systems) from 1997 to 1998; Vice President, Marketing and Sales, Balances and Instrument Division of Mettler Toledo International from 1996 to 1997; Vice President and Executive Director from 1995 to 1996, and Director of Marketing Channels from 1993 to 1995 of the Health Imaging Division of Eastman Kodak Company (diagnostic imaging).
Officers are elected on an annual basis and serve at the discretion of the Board of Directors, except Dr. Hager, who has an employment agreement with the Company. Messrs. Wall and Woitach have finalized arrangements on the basic terms of their employment with the Company that have not been formalized into a final document. (See "Item 11. Executive Compensation--Employment Agreements".) 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company has never paid cash dividends on its Common Stock. The payment of dividends is prohibited by the Company's Loan Agreement with Fleet Bank-NH and Mellon Bank, N.A. without prior consent of the lenders. See "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." The principal market for the Company's Common Stock ($.01 par value) (the "Common Stock") is the American Stock Exchange ("AMEX") (symbol: "IG"). The following table shows the range of high and low sale prices on the AMEX for the periods indicated.
HIGH LOW ---- --- 1996 First quarter.................................................. $8 1/4 $6 3/8 Second quarter................................................. 9 1/2 6 1/4 Third quarter.................................................. 7 3/4 5 Fourth quarter................................................. 6 5 1/8 1997 First quarter.................................................. $7 3/8 $ 5 Second quarter................................................. 5 1/2 4 Third quarter.................................................. 5 1/2 3 7/8 Fourth quarter................................................. 5 1/8 3 5/8
On March 30, 1998, the AMEX suspended the trading of the Company's common stock as a result of the Company's announcement that it would not be able to file its 1997 Annual Report on Form 10-K with the AMEX and the Securities and Exchange Commission by March 31, 1998, the due date of that report. The approximate number of holders of record of the Company's common stock at June 30, 1998 was 897 (not including stockholders for whom shares are held in a "nominee" or "street" name). 11 ITEM 6. SELECTED FINANCIAL DATA Five-Year Summary of Selected Financial Data (in thousands, except per share information)
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1997 1996 1995 1994 1993 ------- ---------- --------- ------- ------- (RESTATED) (RESTATED) INCOME STATEMENT DATA: Net sales.................... $34,193 $34,785 $30,501 $28,948 $28,005 Gross profit................. 16,359 18,204 15,213 15,013 14,839 Operating profit (loss)...... (163) 1,868 2,958 3,508 3,386 Income (loss) from continuing operations.................. (1,453) (138) 1,329 1,969 1,765 Loss from discontinued opera- tions*...................... -- -- (4,034) (1,700) (5,943) Net income (loss)............ (1,453) (138) (2,705) 269 (4,178) Income (loss) per share-ba- sic: From continuing operations. $ (.15) $ (.01) $ .14 $ .22 $ .20 From discontinued opera- tions..................... -- -- (.44) (.19) (.69) Net income (loss).......... (.15) (.01) (.29) .03 (.48) Income (loss) per share-di- luted: From continuing operations. (.15) (.01) .14 .22 .20 From discontinued opera- tions..................... -- -- (.41) (.19) (.66) Net income (loss).......... (.15) (.01) (.28) .03 (.46) Cash dividends on common stock....................... -- -- -- -- -- DECEMBER 31, ----------------------------------------------- 1997 1996 1995 1994 1993 ------- ---------- --------- ------- ------- (RESTATED) (RESTATED) BALANCE SHEET DATA: Working capital (deficit).... $(4,469) $ 3,343 $ 4,139 $10,671 $12,411 Total assets................. 34,044 34,384 32,152 30,502 26,005 Short-term debt.............. 18,857 13,085 10,463 3,819 2,530 Long-term debt (excluding current maturities)......... 36 6,893 9,624 10,019 8,798 Stockholders' equity......... 8,283 9,558 8,369 13,711 12,321 Average number of common and common equivalent shares Basic...................... 9,458 9,323 9,173 8,804 8,668 Diluted.................... 9,458 9,323 9,725 9,155 9,049
- -------- * 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. (See Note 3 of Notes to Consolidated Financial Statements.) 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS U.S. GOVERNMENT INVESTIGATION AND DISCIPLINARY PROCEEDINGS From June 4, 1997 through March 27, 1998, the Company was subject to an order by the CVB to stop distribution and sale of certain serials and subserials of designated poultry vaccines produced by the Company's Vineland Laboratories Division ("Stop Shipment Order"). The Stop Shipment Order was based on CVB's findings that the Company shipped serials before the Animal and Plant Health Inspection Service division of the USDA ("APHIS") had the opportunity to confirm the Company's testing results, failed to destroy serials reported to APHIS as destroyed, and in general failed to keep complete and accurate records and to submit accurate reports to APHIS. The Stop Shipment Order affected 36 of the Company's USDA-licensed vaccines. In July 1997, the Office of Inspector General of the USDA ("OIG") advised the Company of its commencement of an investigation into alleged violations of the Virus Serum Toxin Act and alleged false statements made to APHIS. Because of the Stop Shipment Order and the commencement of the OIG investigation, the non-employee members of the Board of Directors instructed management to take immediate action to assure that all future shipments comply with all regulatory requirements. In July 1997, the non-employee members of the Board of Directors directed the Company to retain special counsel to investigate the alleged violations and to advise the Board of Directors of its findings. In addition, the Company took action designed to obtain the approval of APHIS to the Company's resumption of shipments of the products affected by the Stop Shipment Order, including submission of an amended regulatory compliance program and testing procedures acceptable to the USDA, reassignment of certain personnel and restructuring of the quality control and quality assurance functions. Based on remedial action taken by the Company, including revised vaccine production outlines, the USDA, during the period from August through December of 1997, lifted the Stop Shipment Order with respect to all but three of the 36 affected products. As of March 27, 1998, the remaining three products were released for sale and shipment by the Company. Company Actions As a result of the Company's internal investigation, in November 1997 the Company terminated the employment of its President and Chief Operating Officer, John P. Gallo, for willful misconduct in the performance of his executive duties, and on April 21, 1998, the Company commenced a lawsuit against Mr. Gallo (see "Legal Proceedings"). In addition, six employees, including members of the Company's management team (including two Vice Presidents of the Company), resigned in April 1998 at the request of the Company. However, five of these former employees were retained by the Company for approximately eight weeks to enable the Company to continue its operations pending the hiring and training of qualified replacements. In connection with the employee terminations, the Company agreed to make severance payments to the two non-management employees equal to four months salary. The Company has recently replaced a number of key personnel. On May 11, 1998, the Company employed Paul Woitach as its President and Chief Operating Officer. On June 1, 1998, John F. Wall joined the Company as its Senior Vice President and Chief Financial Officer. As of June 15, 1998, the Company has hired a new Vice President of Vineland Operations, a new Vice President of Vineland Research and Development, a new Vice President of International Marketing and Sales, and new Managers of Production and Quality Control. The Company has also added managers with experience in materials and supply chain management. Most of the new managers have experience in the poultry vaccine industry. The Company has added these new employees without increasing its historical overall payroll expenses. Ongoing Government Investigations In April 1998, the Company voluntarily disclosed to the U.S. Attorney for the District of New Jersey, as well as to the USDA and OIG, information resulting from its internal investigation of alleged violations by 13 certain former officers and employees of USDA rules and regulations and of the Virus Serum Toxin Act and other statutes including U.S. Customs laws and regulations. In connection with its investigation, the OIG has subpoenaed Company documents and the Company has provided, and will continue to provide, subpoenaed documents to Governmental authorities. The U.S. Government's investigation is ongoing and could be expanded to other areas of the Company's business in which violations of laws and regulations may be found to have occurred. In addition, the Government's ongoing investigation could result in action against the Company and certain of its former employees, including fines and the possibility of criminal charges. Also, on April 30, 1998, the SEC advised the Company that it is conducting an informal inquiry and requested that the Company provide it with certain documents. Effects of Stop Shipment Order and Investigations The Stop Shipment Order adversely affected the Company's results of operations for 1997, and the delay in approval of the remaining affected products until the end of March 1998 will adversely affect overall sales revenue in 1998. In addition, although the Company, on May 11, 1998, announced the employment of a new President and Chief Operating Officer, it needs to replace and train certain key managers and other employees who have terminated their employment at the request of the Company, which will have a materially adverse effect on the Company's 1998 performance and operating results. Also, if the OIG, the U.S. Attorney or the SEC concludes that the Company's actions warrant enforcement proceedings, those proceedings, as well as the costs and expenses related to them, could have a materially adverse effect on the Company's business, financial condition and results of operations. Although there can be no assurance as to the outcome of any proceeding, the Company expects that it will be able to achieve a satisfactory resolution of its existing regulatory and litigation matters. RESTATEMENT OF PRIOR PERIODS On March 27, 1998, the Board of Directors engaged special counsel to investigate information first made known to it on March 17, 1998 which it believed could have a material impact on the Company's financial reporting for 1997 and prior periods. The special counsel was authorized to engage independent accountants to assist it in the investigation. As a result of the findings of the special investigation initiated by the Board of Directors in March 1998, the Company restated its consolidated financial statements for 1995 and 1996. In the opinion of management, all material adjustments necessary to correct the financial statements have been recorded. The restatements amounted to additional losses of $179,000 and $231,000 in 1995 and 1996, respectively. See "Note 2 of Notes to Consolidated Financial Statements". In addition to the restatements discussed above, the Company made certain adjustments in the fourth quarter of 1997 which were the result of actions or events which occurred in earlier quarters of 1997. The Company has restated its financial statements for the first three quarters of 1997 to record such adjustments in the applicable quarter. See "Note 18 of Notes to Consolidated Financial Statements". The restatements reflect inventory write-offs and inventory adjustments which should have been recorded in different periods. Also reflected are changes in the time periods in which certain product shipments were recognized as sales. 14 A summary of the impact of such restatements on the financial statements for the years ended December 31, 1995 and 1996 is as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------ 1996 1995 -------------------- -------------------- (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) AS REPORTED RESTATED AS REPORTED RESTATED Net sales.......................... $35,140 $34,785 $31,221 $30,501 Income (loss) from continuing oper- ations............................ 93 (138) 1,508 1,329 Net income (loss).................. 93 (138) (2,526) (2,705) Income (loss) per common and common equivalent share: Basic: From continuing operations..... $ .01 $ (.01) $ .16 $ .14 Net income (loss).............. $ .01 $ (.01) $ (.28) $ (.29) Diluted: From continuing operations..... $ .01 $ (.01) $ .16 $ .14 Net income (loss).............. $ .01 $ (.01) $ (.26) $ (.28)
See Note 18 of the Notes to the Consolidated Financial Statements for discussion of the impact of the restatements on each of the three quarters in the nine months ended September 30, 1997. RESULTS OF OPERATIONS 1997 Compared to 1996 The Stop Shipment Order had a material adverse effect on the Company's operations in 1997. Total sales decreased $592,000, or 2%, from $34,785,000 in 1996 to $34,193,000 in 1997. Sales of Animal Health Products in 1997 decreased 7% to $29,096,000, or 85% of total sales, compared with $31,262,000, or 90% of 1996 total sales. Sales of poultry vaccines decreased by $3,301,000, or 17%, to $16,652,000, or 49% of the Company's total sales, compared with $19,953,000, or 57% of 1996 total sales. This decrease was offset in part by an increase of $1,135,000, or 10%, in sales of companion pet products to $12,444,000, or 36% of the Company's total sales in 1997, compared with $11,309,000, or 33% of total 1996 sales. International sales of Animal Health Products decreased by $2,115,000, or 15%, to $11,841,000 in 1997 from $13,956,000 in 1996. International sales represented 35% of the Company's total sales in 1997 compared with 40% of total sales in 1996. Sales of Consumer Products increased $1,574,000, or 45%, in 1997 to $5,097,000 from $3,523,000 in 1996. Sales of Consumer Products represented 15% of the Company's total 1997 sales, up from 10% of total 1996 sales. This increase was due primarily to increased product sales to Glaxo Wellcome and Kimberly Clark. Revenues from Glaxo increased by over $1,000,000 in 1997. Gross profit decreased $1,845,000, or 10%, in 1997. As a percentage of sales, gross profit was 48% in 1997 compared with 52% in 1996 due primarily to (1) manufacturing variances; (2) inventory write-offs; (3) a less favorable product sales mix at the Vineland Laboratories division due to the USDA action; and (4) product sales to Glaxo which were made at cost plus a royalty on Glaxo's sales which results in lower gross profit percentage than other consumer product sales. Selling, general and administrative expenses were 44% of sales in 1997 compared with 42% of sales in 1996. Although the Company decreased selling and marketing expenses as a result of the license and supply agreement with Glaxo ("Glaxo Agreement"), total selling, general and administrative expenses increased $512,000 in 1997 due to additional reserves for accounts receivable, and legal and related expenses incurred in connection with the Company's and the USDA and OIG investigations. Research and development expenses decreased $338,000, or 17%, in 1997 as the Company curtailed certain development projects primarily in the Consumer Products segment. The Company intends to seek industry partners to fund such research efforts. 15 Licensing and research revenue of $150,000 in 1997 represents $100,000 of licensing income from Kimberly Clark and $50,000 of revenue attributable to an agreement entered into on September 30, 1997 between the Company and IMX Pharmaceuticals, Inc. ("IMX"), which grants IMX the exclusive right to market certain Novasome-based topical skin care products in certain mass merchandising markets. Pursuant to this agreement, the Company received 271,714 shares of restricted common stock of IMX. The total investment in IMX stock is valued at $951,000 at December 31, 1997. Deferred revenue under this agreement is also $951,000 at December 31, 1997. 1996 Compared to 1995 Sales increased $4,284,000, or 14%, to $34,785,000. The growth occurred in both of the Company's business segments. Sales of Animal Health Products in 1996 increased 8% to $31,262,000, or 90% of total sales, compared with $28,869,000, or 95% of 1995 total sales. Poultry vaccine sales accounted for $19,953,000, or 57% of the Company's total sales. International sales of Animal Health Products increased $2,073,000, or 17%, principally to countries in the Asia/Pacific marketplace, including China, Malaysia, Indonesia and Taiwan. Domestic sales of poultry vaccines decreased 2% from 1995 levels. Companion pet product sales increased $597,000, or 6%, to $11,309,000. Sales of Consumer Products increased $1,891,000, or 116%, to $3,523,000 and accounted for 10% of Company sales, up from $1,632,000, or 5% of 1995 total sales. This increase was due principally to continued expansion of the number of products containing the Company's licensed proprietary Novasome lipid vesicle technology sold to Estee Lauder, resulting in a $1,000,000 increase over 1995. Sales of the Company's former line of Nova Skin Care products, which were launched in February 1996, accounted for $402,000 of sales. Marketing rights to these products (Novasome-based alpha-hydroxy acids) in the United States to physicians were licensed to Glaxo in late 1996. The Company's gross profit increased $2,991,000, or 20%, with much of the increase attributable to the sales growth. As a percentage of sales, gross profit increased to 52% from 50% during 1995. The significant factor in the gross margin improvement was the increased sales volume of higher margined consumer products. These sales increased the utilization of the Company's skin care manufacturing facility, which started producing products in 1995. Selling, general and administrative expenses increased $2,844,000, or 24%. As a percentage of sales, these expenses were 42%, up from 38% in 1995. This increase relates, in part, to the variable selling and distribution costs associated with the higher sales volume. Selling and marketing costs associated with the Nova Skin Care product line were $1,917,000, an increase of $1,667,000 over 1995. In February 1997, the Company reduced its workforce by 14 employees, most of whom were associated with its former Nova Skin Care line. Research and development expenses increased $668,000, or 50%, over 1995, due principally to increased new product development efforts in the both of the Company's business segments. These efforts were directed to developing the Nova Skin Care product line and other topical applications of the Novasome technology. The Company continues to develop new vaccines for poultry. The Company had $162,000 of research revenue in 1996, compared to $731,000 in 1995. Net interest expense increased $861,000, or 77%, due to higher borrowings which were required to fund the 1995 operating losses of the Company's former biotechnology business segment and the $5,000,000 license payment that was made in connection with the spin-off of Novavax in December 1995. In connection with the settlement of a lawsuit brought against the Company related to employment contracts of certain IGI employees with their former employers, the Company incurred charges of $175,000 for which the Company has issued shares of IGI common stock. This amount is included in other expense. The provision for income taxes on continuing operations was lower than the statutory rate due principally to subsidiary Company operating losses reported on a separate return basis for state income tax purposes and research and development tax credits, offset by non-deductible expenses. See also Notes 1, 3, and 10 of Notes to the Company's Consolidated Financial Statements. 16 LIQUIDITY AND CAPITAL RESOURCES During the first quarter of 1998, the Company was engaged in negotiating amendments to its credit agreement with its bank lenders, including waivers of its covenant defaults and an extension of the credit agreement since the Company was in default under certain covenants contained in its bank credit agreement during 1997 and at December 31, 1997. During the period from January 1, 1998 through April 29, 1998, the Company paid interest at a rate of prime plus 4% on outstanding borrowings under its working capital line and prime plus 4 1/2% on outstanding borrowings under its revolving credit facility. The Company entered into an Extension Agreement with its bank lenders as of April 29, 1998 (the "Closing Date") which provided for the waiver of the then existing covenant defaults, extension of the bank credit agreement through March 31, 1999, a maximum credit line facility of $12,000,000 ("Credit Line") and extended terms for repayment of the outstanding $6,857,142 balance (at April 29, 1998) of revolving credit notes ("Revolving Facility"). The Company was in default under certain covenants contained in the Extension Agreement at July 31, 1998. On August 19, 1998, the Company and its bank lenders entered into a Forbearance Agreement whereby the banks agreed to forbear from exercising their rights and remedies arising from these covenant defaults through January 31, 1999. The Extension Agreement and the Forbearance Agreement (the "Agreements") provide for the following: . The maximum availability under the Credit Line is subject to the determination of the amount of eligible accounts receivable and eligible inventories. The Credit Line is due and payable in full on January 31, 1999. . The outstanding balance of $6,857,142 under the Revolving Facility is due and payable on January 31, 1999. . All of the Company's indebtedness to the banks is subject to a security interest in all of the assets of the Company and its significant subsidiaries. . Interest on outstanding borrowings under both the Credit Line and the Revolving Facility will be: From August 1, 1998 through September 30, 1998............ Prime plus 3 1/2% From October 1, 1998 through November 30, 1998............ Prime plus 4 1/2% From December 1, 1998 through January 31, 1999............ Prime plus 5 1/2%
. At the Closing Date the Company issued to the lenders warrants to purchase an aggregate of 540,000 shares of the Company's common stock at an exercise price of $3.50 per share. Warrants ("Unconditional Warrants") to purchase 270,000 shares are exercisable at any time during the period commencing 60 days after issuance and ending on the fifth anniversary of issuance, unless the Company is able to refinance its bank debt by October 31, 1998 in which case these warrants expire. Warrants ("Conditional Warrants") to purchase the remaining 270,000 shares are exercisable at any time during the period commencing September 1, 1998 and ending on the fifth anniversary of issuance, unless the Company is able to refinance its bank debt by December 24, 1998 in which case these warrants expire. The Company has a call option on the warrants, which can only be exercised as to all of the shares issuable at that time, with a repurchase price of $900,000 for each of the Conditional Warrants and Unconditional Warrants. The Company will recognize a non-cash expense for these warrants when earned in accordance with Statement of Financial Accounting Standards No. 123. The Company estimates the total expense for warrants is approximately $400,000, or $.04 per share, net of taxes. . The Company agreed to pay Fleet Bank, as agent on behalf of the lenders, a monthly agent's fee of $5,000 and an extension fee of $250,000, of which $60,000 was paid at the time of the Extension, and the balance is payable in three installments through March 24, 1999. . The Company agreed to pay Fleet Bank, as agent on behalf of the lenders, a forbearance fee of $140,000, of which $20,000 was paid at the time of the Forbearance, and the balance is payable in three installments 17 through January 15, 1999. However, if the Company is able to replace its existing bank debt within the 30 days following a forbearance fee due date, the installment then due plus all future installments shall be waived. The Agreements require the Company to maintain certain financial ratios and comply with other non-financial covenants, and also prohibits the payment of cash dividends without the prior written consent of the lenders. The Company is actively seeking, and believes it will be able to secure, alternative financing arrangements to replace its existing debt and lending terms through a number of potential options including, but not limited to, the issuance of debt or equity securities or a combination of both. The Company plans to engage an investment banker for the purpose of formulating alternative business strategies and to coordinate the orderly satisfaction of its obligations. No assurance can be given that the Company will be able to obtain alternative financing arrangements, and if it is unsuccessful in doing so, the Company may be required to restrict its business operations or otherwise modify its business strategy. The Company believes it will be able to remain in compliance with its debt covenants through January 30, 1999. The Company's operating activities provided $2,437,000 of cash during 1997. Cash was provided from non-cash charges to operations for depreciation, amortization, loss reserves and the $1,000,000 payment from Glaxo under the Glaxo Agreement. These amounts were offset, in part, by increases in accounts receivable, inventories and other current assets. The accounts receivable turnover ratio for 1997 was 4.51 compared to 4.24 for 1996. The accounts receivable balances due from Mexico and Latin America were 24.5% of the total receivable balances before allowance for doubtful accounts as of December 31, 1997 and the Company believes the net amounts are collectible. Mexico and certain Latin American countries are important markets for the Company's poultry vaccines and other products. These countries have historically experienced varying degrees of political unrest and economic and currency instability. In addition, the Company has accounts receivable from countries in the Far East, including Indonesia and Thailand, which represent 17.4% of the total receivable balances before allowance for doubtful accounts at December 31, 1997. This area has recently experienced political, economic and currency instability. Because of the volume of business transacted by the Company in these areas, continuation or the recurrence of such unrest or instability could adversely affect the business of its customers in those countries or the Company's ability to collect its receivables from such customers, which in either case could materially adversely affect the Company's future operating results. The growth in inventories relates principally to a build up in poultry vaccines as a result of the USDA stop shipment actions. The inventory turnover ratio for 1997 was 1.89, compared to 1.82 for the year ended December 31, 1996. The Company believes its reserves for inventory obsolescence and accounts receivable are adequate. The Company used $568,000 for investing activities, principally capital expenditures for the Company's manufacturing operations. Funding for the Company's operating and investing activities were provided by borrowings under the Company's working capital line of credit. At July 31, 1998, the Company had no available borrowing capacity under the Credit Line and no borrowings available under the Revolving Facility. Funds generated from operations and existing bank credit facilities are expected to be sufficient to meet the Company's short-term cash requirements. However, the funds available under its existing bank credit facilities are only sufficient to finance the Company's operations at its current levels including the costs associated with the USDA and other regulatory and litigation matters. The Company will be required to raise additional funds to finance capital expenditures as well as the expansion of its business. Additionally, the bank facility expires in January 1999. The Company, therefore, intends to seek additional funds through the issuance of debt or equity securities or a combination of both. No assurance can be given that the Company will be able to obtain the additional required funds, and if it is unsuccessful in doing so the Company may be required to restrict its business operations or otherwise modify its business strategy. FACTORS THAT MAY AFFECT FUTURE RESULTS The industry segments in which the Company competes are constantly changing and are subject to significant competitive pressures. The following sets forth some of the risks which the Company faces. ADVERSE EFFECTS OF USDA ACTIONS AND OIG AND U.S. ATTORNEY INVESTIGATIONS The Company believes that the Stop Shipment Order and other actions by the USDA in 1997 and the ongoing government investigations described in "Management's Discussion and Analysis of Financial Condition 18 and Results of Operations" ("MD&A"), and the costs incurred in connection with those investigations will have a materially adverse effect on its business and results of operations in 1998. First, the Company needs to attract, train and retain key employees for its management team to replace key employees terminated in 1997 and 1998, including corporate officers to head up its manufacturing operations, marketing and sales and business development. Second, the Company needs to satisfy the USDA and the government agencies and its customers that it has established and implemented compliance programs that will prevent future violations of government regulations applicable to its poultry vaccine business. Third, it must assure its customers that its future business operations will comply with all applicable government rules and regulations and that its financial condition is adequate to meet its business commitments and to maintain a viable and stable business environment. Fourth, it must comply with all of the covenants in its bank credit agreement to assure continued bank financing of its operations and replace its current bank agreement. Fifth, it must raise additional funds, either through additional borrowing or the sale of equity, to meet its growth objective and to maintain its competitive position. Sixth, it must overcome the adverse effects of the AMEX's trading suspension of the Company's Common Stock to provide the opportunity for the Company to raise additional funds for its business. No assurance can be given that the Company will be able to accomplish all or any of the foregoing requirements, and if it is unsuccessful in doing so, or if the OIG, U.S. Attorney or the SEC decides to commence enforcement proceedings against the Company, those proceedings, as well as the costs and expenses related to them, could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the costs and expenses, including legal, accounting and consulting fees and expenses, associated with the ongoing investigations and existing and potential litigation have been, and are expected to continue to be, substantial and will have a materially adverse effect on the Company's 1998 operating results. The Company is cooperating fully with the U.S. Attorney and each of the regulatory agencies and has produced a substantial amount of documents and information requested by the U.S. Attorney. The U.S. Attorney has not indicated what course of action, if any, it may pursue with respect to IGI in light of the Company's extensive cooperation. The Company has not been advised that it or any of its present employees are targets of any Justice Department or regulatory investigation. Although there can be no assurance as to the outcome of any proceeding, the Company expects that it will be able to achieve a satisfactory resolution of its existing regulatory and litigation matters. However, if criminal charges were to be brought against IGI, the Company could incur substantial costs in fines and attorney's fees to defend the action. The Company could also face additional substantial costs in administrative civil penalties. Since the Company expects a satisfactory resolution of these matters, no reserves were provided at December 31, 1997. HIGHLY LEVERAGED; INABILITY TO OBTAIN ADDITIONAL FUNDING The Company has historically applied the operating profits from its animal health products business to fund the development of its consumer products business and its former biotechnology business, Novavax, which was distributed to the Company's stockholders in December 1995. The Company is currently very highly leveraged and has negative working capital, and therefore will need additional capital to finance the expansion of its animal health products and consumer products businesses. No assurance can be given that such funds will be obtained when required or, if obtainable, on terms that are favorable to the Company. The Company was in violation of certain covenants in its bank credit agreements during 1997 and at December 31, 1997. In April 1998 the banks agreed to a waiver of the covenant defaults and to extend the credit agreement on revised terms and conditions through March 31, 1999. The Company was in default under certain covenants contained in the Extension Agreement at July 31, 1998. On August 19, 1998, the Company and its bank lenders entered into a Forbearance Agreement whereby the banks agreed to forbear from exercising their rights and remedies arising from these covenant defaults through January 31, 1999. The Company is actively seeking alternative financing arrangements to replace its existing debt and lending terms through a number of potential options including, but not limited to, the issuance of debt or equity securities or a combination of both. No assurance can be given that the Company will be able to obtain alternative financing arrangements, and if it is unsuccessful in doing so, the Company may be required to restrict its business operations or otherwise modify 19 its business strategy. The Company believes it will be able to remain in compliance with its debt covenants through January 30, 1999. No assurance can be given that the banks will waive future covenant defaults or modify the terms of the credit agreement to accommodate the Company. SUSPENSION OF TRADING The Company was unable to file its 1997 Annual Report on Form 10-K by the March 31, 1998 due date. As a result, the AMEX halted trading of the Company's common stock. No assurance can be given that AMEX trading privileges will be resumed in the future. The failure of the Company to maintain its trading on the AMEX could adversely affect its ability to raise additional funds required for its business through the sale of debt or equity securities and would limit and adversely affect the trading market for its outstanding common stock and the ability of stockholders to liquify their holdings on favorable market terms. INTENSE COMPETITION IN CONSUMER PRODUCTS 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 lipid vesicles in their products may decide to reduce their purchases from the Company or shift their business to other technologies. COMPETITION IN POULTRY VACCINE BUSINESS The Company is encountering increasingly severe competition from international producers of poultry vaccines, particularly increased price competition coupled with a downward trend in vaccine prices. FOREIGN REGULATORY AND ECONOMIC CONSIDERATIONS The Company's business may be adversely affected by foreign import restrictions and additional regulatory requirements. Also, unstable or adverse economic conditions and fiscal and monetary policies in certain Latin American and Far East countries, an increasingly important market for the Company's animal health products, could adversely affect the Company's future business in these countries. RAPIDLY CHANGING MARKETPLACE FOR ANIMAL HEALTH PRODUCTS The emergence of pet superstores, the consolidation of distribution channels into a smaller number of large, more powerful companies and the changing role of veterinarians in the distribution of animal health products, could adversely affect the Company's ability to expand its animal health business and to operate at the gross margin levels historically enjoyed by the Company. EFFECT OF RAPIDLY CHANGING TECHNOLOGIES The Company expects to rely on the features of its technologies to license the technologies to third parties which would manufacture and market products incorporating the technologies. However, if its competitors develop new and improved technologies that are superior to the Company's technologies, its technologies could be less acceptable in the marketplace and therefore the Company's planned technology licensing could be materially adversely affected. REGULATORY CONSIDERATIONS The Company's animal health products are regulated by the USDA and the FDA which subject the Company to review, oversight and periodic inspections. Any new products are subject to expensive and sometimes protracted USDA and FDA regulatory approval. Also, certain of the Company's products may not be approved for sales overseas on a timely basis, thereby limiting the Company's ability to expand its foreign sales. 20 YEAR 2000 The Company recognizes the need to ensure its operations will not be adversely impacted by Year 2000 software failures. Software failures due to the processing errors potentially arising from calculations using the Year 2000 date are a known risk. The Company is addressing this risk to the availability and integrity of financial systems and the reliability of operational systems. The Company has established a management committee to evaluate the risk and costs associated with this problem. An initial assessment has been completed and the cost of achieving Year 2000 compliance is currently estimated to be approximately $350,000 over the cost of normal hardware and software upgrades and replacements and will be incurred from October 1998 through fiscal 1999. ACCOUNTING STANDARDS CHANGES In June 1997, the Financial Accounting Board ("FASB") issued Statement of Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income." This Statement establishes standards for reporting all components of comprehensive income. This Statement is effective for financial statements issued for periods ending after December 15, 1998. The Company is currently evaluating the impact, if any, adoption of SAFS No. 130 will have on its financial statements. In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information," which revises disclosure requirements related to operating segments, products and services, the geographic areas in which the Company operates and major customers. The Company will adopt this statement for fiscal 1998 and does not presently anticipate any material change in its disclosures. INCOME TAXES The Company has a net deferred tax asset in the amount of approximately $4 million as of December 31, 1997. The largest deferred tax asset relates to the $5 million Novavax license payment that is being deducted over a ten-year period which began in 1996. Management believes, on a more likely than not basis, that the Company's net deferred tax asset will be realized through the reversal of existing taxable temporary differences and the generation of sufficient future taxable operating income to ensure utilization of remaining deductible temporary differences, net operating losses and tax credits. The minimum level of future taxable income necessary to realize the Company's net deferred tax assets at December 31, 1997, is approximately $15 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 assets. The majority of the net operating loss carryforwards expire in 2007 and federal research credits expire in varying amounts through the year 2012. Management believes that it will be able to utilize these carryforwards. The Company's consolidated federal taxable loss in 1997 and 1996 differed from its consolidated financial statement loss. In 1997 and 1996, taxable loss was lower due to increases in reserves for inventories and accounts receivable plus lower depreciation claimed for tax purposes, which exceeded the tax deductions for a portion of the prepaid license agreement. In 1995, taxable income from continuing operations was lower due to tax deductions relating to nonqualifying stock dispositions. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and notes thereto listed in the accompanying index to financial statements (Item 14) are filed as part of this Annual Report and incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On July 23, 1997, the Company was informed by Coopers & Lybrand L.L.P. (C&L), who were the Company's independent accountants for the years ended December 31, 1996 and 1995, that C&L was resigning as the Company's auditors effective as of that date. C&L's reports on the Company's 1996 and 1995 financial 21 statements contained no adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principle. The decision to terminate the client-auditor relationship between the Company and C&L was made by C&L, and neither the Company's Board of Directors nor its Audit Committee participated in the decision to change the Company's independent accountants. In connection with its audits for the two years ended December 31, 1996, and through July 23, 1997, there were no disagreements with C&L on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement would have caused C&L to make reference thereto in their report on the financial statements for such periods. On September 8, 1997, the Company engaged Price Waterhouse LLP ("PW") to act as its independent accountants. The Company did not consult with PW during the Company's two most recent fiscal years and any subsequent interim period prior to engaging them regarding matters that were or should have been subject to Statement on Auditing Standard No. 50 or any subject matter of a disagreement or reportable event with its former accountant. 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is contained in part under the caption "Executive Officers of the Company" in Part I hereof, and is incorporated herein by reference. The following table sets forth certain information with respect to the directors and the Company:
PRINCIPAL OCCUPATION, OTHER BUSINESS EXPERIENCE DURING DIRECTOR PAST FIVE YEARS AND OTHER NAME AGE SINCE DIRECTORSHIPS ---- --- -------- ------------------------------ Edward B. Hager, M.D. ........... 67 1977 Chairman of the Board of Directors and Chief Executive Officer of IGI, Inc. since 1977; Chairman of the Board of Directors and Chief Executive Officer of Novavax, Inc. from 1987 to June 1996; Chairman of the Board of Directors of Novavax, Inc. from February 1997 to March 1998; Dr. Hager is the husband of Jane E. Hager. Jane E. Hager.................... 52 1977 President of Prescott Investment Corp. (real estate development), Lyndeboro, NH since 1991; former Treasurer and Secretary of IGI, Inc.; Director of Fleet Bank-NH, Nashua, NH from 1986 to 1997; Trustee and Treasurer of the University System of New Hampshire; Overseer of Dartmouth Mary Hitchcock Hospital; Incorporator of New Hampshire Charitable Fund, Concord, NH; Director of Novavax, Inc. from February 1997 to March 1998; Mrs. Hager is the wife of Edward B. Hager. John P. Gallo.................... 55 1985 President and Chief Operating Officer of IGI, Inc. from 1985 to November 1997; President of Novavax, Inc. from January through September 1995, and Chief Operating Officer and Treasurer of Novavax, Inc. from September 1995 to May 1996. David G. Pinosky, M.D. .......... 68 1980 Member of the faculty of the University of Miami School of Medicine since 1963; Medical Director, Psychiatric Unit, Palmetto General Hospital, Hialeah, FL since 1986; President, Miami Psychiatric Associates since 1971; Medical Director of Highland Park General Hospital, Miami, FL from 1971 to 1986. Terrence O'Donnell............... 54 1993 Member of law firm of Williams & Connolly, Washington, D.C. since March 1992 and from March 1977 to October 1989; General Counsel of Department of Defense from October 1989 to March 1992; Special Assistant to President Ford
23
PRINCIPAL OCCUPATION, OTHER BUSINESS EXPERIENCE DURING DIRECTOR PAST FIVE YEARS AND OTHER NAME AGE SINCE DIRECTORSHIPS ---- --- -------- ------------------------------ from August 1974 to January 1977; Deputy Special Assistant to President Nixon from May 1972 to August 1974; Director of MLC Holdings. Constantine L. Hampers, MD....... 65 1994 Chief Executive Officer of MDL Consulting Associates since 1996; Chairman of the Board of Directors and Chief Executive Officer of National Medical Care, Inc., a provider of in- center and home kidney dialysis services and products, from 1968 to 1996; Executive Vice President and Director of W. R. Grace & Co. ("W. R. Grace") from 1986 to 1996; Director of Artificial Kidney Services at Peter Bent Brigham Hospital and Assistant Professor of Medicine at Harvard University School of Medicine prior to 1968 and for several years thereafter. Paul D. Paganucci................ 67 1996 1996 Chairman of the Board of Directors of Ledyard National Bank since 1991; Chairman of the Executive Committee of Board of Directors of W.R. Grace from 1989 to 1991; Vice Chairman of W.R. Grace from 1986 to 1989; Executive Vice President of W.R. Grace from January 1986 to November 1986; Director of HRE Properties, Inc., Filene's Basement, Inc. and Allmerica Securities Trust. Terrence D. Daniels.............. 55 1996 President of Quad-C (a structured investment firm) since 1990; Vice Chairman of W.R. Grace & Co. from 1986 to 1989; Director of DSG International Ltd., Eskimo Pie Corporation and Stimsonite Corporation. F. Steven Berg................... 63 1998 President of Bishopsgate Financial Corp. (Investment company) since 1990.
Mr. Gallo has not been nominated for election as a director at the next Annual Meeting of Shareholders. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's directors, executive officers and holders of more than 10% of the Company's Common Stock ("Reporting Persons") to file with the Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Except as set forth below, and based solely on its review of copies of reports filed by Reporting Persons furnished to the Company, the Company believes that during 1997 its Reporting Persons complied with all Section 16(a) filing requirements. F. Steven Berg, a director of the Company, failed to file on a timely basis a Form 3--Initial Statement of Beneficial Ownership of Securities. 24 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth the cash and noncash compensation for each of the last three fiscal years awarded to or earned by the Chief Executive Officer of the Company, the four most highly compensated executive officers of the Company who received compensation in excess of $100,000 during 1997 and who were serving as executive officers at the end of 1997 and the former President of the Company, whose employment was terminated in November 1997 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------ AWARDS ------------ ANNUAL COMPENSATION ---------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL SALARY BONUS COMPENSATION OPTIONS(2) COMPENSATION POSITION YEAR ($) ($) (1) ($) (#) (3) ($) ------------------ ---- -------- ------ ------------ ------------ ------------ Edward B. Hager......... 1997 $303,480 $ -- $ -- -- $11,944 Chief Executive Officer 1996 345,455 -- -- 50,000 12,864 1995 314,050 55,000 -- 50,000 12,062 John P. Gallo (4)....... 1997 329,172 -- 1,678 -- 12,288 President and Chief Operating 1996 345,455 -- 44,860 50,000 12,772 Officer 1995 314,050 50,000 41,777 50,000 12,062 Stephen G. Hoch (5)..... 1997 218,149 -- 7,200 -- 8,166 Vice President 1996 200,293 10,000 7,200 5,000 9,128 1995 186,886 5,000 7,200 5,000 9,609 Lawrence N. Zitto (6)... 1997 166,689 -- 7,200 -- 9,381 Vice President 1996 155,138 10,000 7,200 10,000 11,562 1995 140,196 10,000 7,200 10,000 11,727 Surendra Kumar (7)...... 1997 140,947 -- 7,200 -- 7,834 Vice President 1996 130,698 5,000 7,200 5,000 9,362 1995 121,990 5,000 7,200 5,000 8,486 Kevin J. Bratton........ 1997 122,723 -- 6,000 -- 8,847 Vice President and Treasurer 1996 116,416 3,000 6,000 5,000 10,588 1995 113,807 2,000 6,000 5,000 10,938
- -------- (1) The amounts shown in this column represent automobile allowances, medical expense reimbursement, housing allowances and compensation for unused vacation time. Mr. Gallo received $38,653 and $36,237 in 1996 and 1995, respectively, as compensation for unused vacation time. Mr. Gallo received no compensation for unused vacation time in 1997. (2) The Company has never granted any stock appreciation rights. (3) The amounts shown in this column represent premiums for group life insurance and medical insurance paid by the Company and the Company's contributions under its 401(k) plan. The group life insurance premiums paid by the Company for each of Dr. Hager and Messrs. Gallo, Hoch, Zitto, Kumar and Bratton for the last fiscal year were $800, $1,128, $1,230, $1,230, $1,058 and $1,023, respectively. The medical insurance premiums paid by the Company during 1997 for each of Dr. Hager and Messrs. Gallo, Hoch, Zitto, Kumar 25 and Bratton were $8,581, $7,843, $4,402, $6,259, $5,047 and $6,259, respectively. The Company's matching contributions under its 401(k) savings plan to each of Dr. Hager and Messrs. Gallo, Hoch, Zitto, Kumar and Bratton for the last fiscal year were $2,563, $2,579, $2,534, $1,892, $1,729 and $1,615, respectively. (4) In November 1997, the Company terminated Mr. Gallo for willful misconduct in the performance of his executive duties. In connection with the December 1995 spin-off of Novavax, Inc. ("Novavax"), a formerly majority- owned subsidiary of the Company, Mr. Gallo also served as Chief Operating Officer and Treasurer of Novavax from January 1996 to June 30,1996. Pursuant to a Transition Services Agreement entered into by the Company and Novavax to facilitate the spin-off, Novavax agreed to pay half of Mr. Gallo's salary during this time. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". (5) Mr. Hoch resigned in July 1998. (6) Mr. Zitto resigned in April 1998. (7) Dr. Kumar resigned in February 1998. STOCK OPTIONS No stock options or SAR's were granted to any Named Executive Officers during 1997. The following table summarizes option exercises during 1997 by the Named Executive Officers and the value of the options held by such persons at the end of 1997. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED VALUE OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT SHARES ACQUIRED REALIZED YEAR-END (#) FISCAL YEAR-END ($) NAME ON EXERCISE (#) ($) (1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (2) ---- --------------- -------- ------------------------- ----------------------------- Edward B. Hager......... 20,000 $11,950 425,000/0 $0/$0 John P. Gallo........... -- -- 325,000/0 0/0 Stephen G. Hoch......... -- -- 42,250/8,250 0/0 Lawrence N. Zitto....... -- -- 52,500/15,000 0/0 Surendra Kumar.......... -- -- 34,250/7,500 0/0 Kevin J. Bratton........ -- -- 21,000/7,000 0/0
- -------- (1) Represents the difference between the exercise price and the last sales price of the Common Stock on the date of exercise. (2) Value based on market value of the Company's Common Stock at December 31, 1997 ($3.75 per share) minus the exercise price. EMPLOYMENT AGREEMENTS In October 1997, the Company amended the Employment Agreement with each of Dr. Hager and Mr. Gallo to provide for a reduction in their annual salaries, but extended the period for payment of the reduced salaries through the year 2005. On January 19, 1998, the Board of Directors rescinded the revised salary arrangements for Dr. Hager and restored the annual salary payable under his Employment Agreement ($380,000 for 1997). In addition, pursuant to his Employment Agreement, Dr. Hager is entitled to an annual increase of 10% of his prior year's salary each year through December 31, 1999, the expiration date of the Employment Agreement. However, Dr. Hager has waived the 10% increase for 1998 and agreed to defer the payment of his annual salary, without interest, to preserve cash for the Company's cash needs. Dr. Hager's accrued unpaid salary as of June 30, 26 1998 was $190,000 and that amount plus future deferred salary payments will be paid to Dr. Hager at such time as the Board of Directors of the Company, in consultation with the Compensation Committee, determines that the Company's cash position is adequate to pay the deferred amount and to resume the current payment of his salary. His agreement also provides for continuation of his salary through December 31, 1999, in the event he is terminated without cause prior to that date. Mr. Gallo, the former President of the Company, had an Employment Agreement similar to Dr. Hager's. However, on November 22, 1997, the Company terminated Mr. Gallo's employment for willful misconduct in the performance of his executive duties, and on April 21, 1998 the Company commenced a lawsuit against Mr. Gallo. See "Legal Proceedings." Each of Dr. Hager and Mr. Gallo is bound by certain non-compete and non- solicitation obligations for five years after termination of employment or such longer period during which he receives severance payments under the employment agreement. The Company has finalized arrangements with each of Messrs. Wall and Woitach on the basic terms of their employment by the Company that have not been formalized into a final document. Pursuant to these agreements, Messrs. Wall and Woitach are entitled to continuation of their respective salary for up to one year for Mr. Wall and up to 18 months for Mr. Woitach, based upon the length of service, if terminated without cause prior to that date. The arrangements for Messrs. Wall and Woitach are for a one year period which is automatically extended annually unless terminated by the Company by written notice at least 90 days prior to renewal. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Drs. Hampers, Chairman of the Compensation and Stock Option Committee (the "Committee"), and Pinosky and Messrs. Daniels and O'Donnell served as members of the Committee during 1997. DIRECTOR COMPENSATION AND STOCK OPTIONS Each director not employed by the Company receives $2,000 for each meeting of the Board of Directors he or she attends. Pursuant to the Company's 1991 Stock Option Plan (the "1991 Plan"), each director who is not an employee of the Company (an "Eligible Director") is granted a stock option for the purchase of 20,000 shares of Common Stock sixty days after his or her initial election as a director. In addition, the 1991 Plan provides that each Eligible Director will be granted a stock option to purchase 10,000 shares of Common Stock on the last business day of each of the calendar years through 1999. Each Eligible Director elected on or after March 13, 1991 received an option for the initial grant of 20,000 shares, and each Eligible Director then serving as a director received additional options for 10,000 shares in each of the years 1992 through 1997. Options granted to Eligible Directors are exercisable in full beginning six months after the date of grant and terminate ten years after the date of grant. Such options cease to be exercisable at the earlier of their expiration or three years after an Eligible Director ceases to be a director for any reason. In the event that an Eligible Director ceases to be a director on account of his death, his outstanding options (whether exercisable or not on the date of death) may be exercised within three years after such date (subject to the condition that no such option may be exercised after the expiration of ten years from its date of grant). 27 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT BENEFICIAL OWNERSHIP OF COMMON STOCK The following table sets forth information as of July 31, 1998 with respect to the beneficial ownership of shares of Common Stock by (i) each person known to the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) the directors of the Company, (iii) the Named Executive Officers and (iv) the directors and executive officers of the Company as a group. Unless otherwise noted, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them.
PERCENT OF BENEFICIAL OWNER NUMBER OF SHARES CLASS ---------------- ---------------- ---------- Stephen J. Morris.................................. 2,254,635(1) 23.8% 66 Navesink Avenue Rumson, New Jersey Jane E. Hager...................................... 1,204,815(2) 12.5% Pinnacle Mountain Farms Lyndeboro, NH 03082 Edward B. Hager, M.D............................... 1,065,815(3) 10.8% Pinnacle Mountain Farms Lyndeboro, NH 03082 Mellon Bank Corporation............................ 881,310(4) 9.1% One Mellon Bank Center Pittsburgh, PA 15258 John P. Gallo...................................... 643,397(5) 6.6% Country Club Lane Buena, NJ 08310 David G. Pinosky, M.D.............................. 304,900(6) 3.1% Terrence O'Donnell................................. 70,000(7) * Constantine L. Hampers, M.D........................ 63,000(8) * Terrence D. Daniels................................ 40,000(9) * Paul D. Paganucci.................................. 40,000(9) * F. Steven Berg..................................... -- * Stephen G. Hoch.................................... 42,250(10) * Lawrence N. Zitto.................................. 67,500(11) * Surendra Kumar..................................... 8,000 * Kevin J. Bratton................................... 26,500(12) * All executive officers and directors, as a group (13 Persons)...................................... 2,292,965(13) 21.8%
- -------- * Less than 1% of the Common Stock outstanding. (1) The information reported is based on Amendment No. 2 to Schedule 13D dated December 29, 1997 and filed with the Securities and Exchange Commission (the "Commission") by Stephen J. Morris. Mr. Morris has sole voting power and investment power with respect to 1,481,000 shares and shared voting power with respect to 773,635 shares. (2) Includes 639,815 shares beneficially owned by Dr. Hager, as co-trustee of the Hager Family Trust as to which Mrs. Hager as co-trustee of the Hager Family Trust, has shared voting and investment power. Includes 140,000 shares which may be acquired pursuant to stock options exercisable within 60 days after July 31, 1998. 28 (3) Includes 425,000 shares which Dr. Hager may acquire pursuant to stock options exercisable within 60 days after July 31, 1998, and 639,815 shares (also listed above) beneficially owned by Mrs. Hager as co-trustee of the Hager family trust. (4) The information reported is based on a Schedule 13G dated January 20, 1998, filed with the Commission by Mellon Bank Corporation. Includes 240,000 shares which may be acquired pursuant to warrants exercisable within 60 days after July 31, 1998. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources".) (5) Includes 325,000 shares which Mr. Gallo may acquire pursuant to stock options exercisable within 60 days after July 31, 1998. The Company terminated Mr. Gallo as President and Chief Operating Officer on November 22, 1997. (6) Includes 140,000 shares which may be acquired pursuant to stock options exercisable within 60 days after July 31, 1998. (7) Consists of 70,000 shares which may be acquired pursuant to stock options exercisable within 60 days after July 31, 1998. (8) Includes 60,000 shares which may be acquired pursuant to stock options exercisable within 60 days after July 31, 1998. (9) Consists of 40,000 shares which may be acquired pursuant to stock options exercisable within 60 days after July 31, 1998. (10) Consists of 42,250 shares which may be acquired pursuant to stock options exercisable within 60 days after July 31, 1998. (11) Includes 52,500 shares which may be acquired pursuant to stock options exercisable within 60 days after July 31, 1998. (12) Includes 21,000 shares which may be acquired pursuant to stock options exercisable within 60 days after July 31, 1998. (13) Includes 1,030,750 shares which may be acquired pursuant to stock options exercisable within 60 days after July 31, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In November 1990, the Company advanced $70,000 to Mr. Gallo, the President and Chief Operating Officer of the Company until the termination of his employment on November 22, 1997. Mr. Gallo issued the Company a note in the principal amount of $70,000 bearing interest at the Company's bank borrowing rate plus 1/4% per annum and secured by 10,000 shares of Common Stock. As of June 30, 1998, the amount of indebtedness outstanding was $129,083. As set forth above, in April 1998 the Company commenced a lawsuit against Mr. Gallo for damages suffered by the Company for his willful misconduct in the performance of his executive duties. As part of the lawsuit, the Company is also demanding that Mr. Gallo repay this indebtedness. See "Legal Proceedings". Due to the uncertainty of the outcome of the litigation against Mr. Gallo, the Company has recorded a reserve against the note receivable balance at December 31, 1997. During 1997, Dr. Hager and other Company personnel traveled at various times on Company business on an airplane owned by a company which is wholly-owned by Jane E. Hager, his wife and a director of the Company. Total charges to the Company for its use of the airplane in 1997 were $68,930. The Board of Directors authorized use of the aircraft for business travel, provided that (i) the air travel rate billed to the Company for use of the airplane be at least as favorable as the rate charged by private aircraft owners unaffiliated with the Company, and (ii) use of the airplane be limited to 100 hours at $1,350 per hour. However, the Company was only billed for Dr. Hager's business use of the aircraft at rates not exceeding those for first class commercial airfare. 29 The Company has $6,857,142 of revolving credit notes and a $12,000,000 working capital line of credit with Fleet Bank--NH and Mellon Bank, N.A. Mrs. Hager, a director of the Company, was a director of Fleet Bank--NH from 1986 to 1997. In connection with the April 29, 1998 Extension Agreement, the Company issued to Mellon Bank warrants to purchase an aggregate of 240,000 shares of the Company's common stock at an exercise price of $3.50 per share. On August 19, 1998, the Company and its bank lenders, Fleet Bank--NH and Mellon Bank, N.A., entered into a Forbearance Agreement whereby the banks agreed to forbear from exercising their rights and remedies arising from covenant defaults through January 31, 1999. (See "Management Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources".) As of July 31, 1998, Mellon Bank was the beneficial owner of 881,310 shares of the Company's common stock or 9.1% of the outstanding shares. 30 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements: Reports of Independent Accountants Consolidated Balance Sheets, December 31, 1997 and 1996 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 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. (b) Reports on Form 8-K On December 4, 1997, the Company filed a Current Report on Form 8-K, dated November 24, 1997, to report under Item 5 (Other Events) that it had terminated the employment of John P. Gallo as its President and Chief Operating Officer. 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 24, 1998 IGI, Inc. By: /s/ Edward B. Hager ----------------------- Edward B. Hager, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacity and on the date indicated.
SIGNATURES TITLE DATE /s/ Edward B. Hager Chairman of the August 24, 1998 - ------------------------------------- Board EDWARD B. HAGER /s/ John F. Wall Principal Financial August 24, 1998 - ------------------------------------- and Accounting JOHN F. WALL Officer /s/ Terrence D. Daniels Director August 24, 1998 - ------------------------------------- TERRENCE D. DANIELS /s/ Jane E. Hager Director August 24, 1998 - ------------------------------------- JANE E. HAGER /s/ Constantine L. Hampers Director August 24, 1998 - ------------------------------------- CONSTANTINE L. HAMPERS /s/ Terrence O'Donnell Director August 24, 1998 - ------------------------------------- TERRENCE O'DONNELL /s/ Paul D. Paganucci Director August 24, 1998 - ------------------------------------- PAUL D. PAGANUCCI /s/ David G. Pinosky Director August 24, 1998 - ------------------------------------- DAVID G. PINOSKY Director - ------------------------------------- F. STEVEN BERG 32 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of IGI, Inc.: In our opinion, the consolidated financial statements and financial statement schedule as listed in Item 14(a) of this Form 10-K, after the restatement described in Note 2, present fairly, in all material respects, the financial position of IGI, Inc. and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 8, the Company has substantial debt due on January 31, 1999, and is actively seeking alternative financing arrangements. Also, as discussed in Note 13, the Company is involved in certain litigation matters and is responding to inquiries from regulatory agencies. The Company expects to achieve a satisfactory resolution of its existing regulatory and litigation matters. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania July 31, 1998, except as to Note 8, which is as of August 19, 1998 33 IGI, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE INFORMATION)
1997 1996 -------- ---------- (RESTATED) ASSETS Current assets: Cash and cash equivalents............................... $ 1,196 $ 317 Accounts receivable, less allowance for doubtful accounts of $903 and $238 in 1997 and 1996, respectively........................................... 6,851 8,365 Receivable due under royalty agreement.................. -- 1,000 Inventories............................................. 9,816 9,067 Current deferred taxes.................................. 728 310 Prepaid expenses and other current assets............... 819 1,217 -------- ------- Total current assets.................................. 19,410 20,276 -------- ------- Investments............................................... 1,011 60 Property, plant and equipment--at cost: Land.................................................... 625 625 Buildings............................................... 9,600 9,382 Machinery and equipment................................. 9,659 9,241 -------- ------- 19,884 19,248 Less accumulated depreciation............................. (10,048) (9,121) -------- ------- 9,836 10,127 -------- ------- Deferred income taxes..................................... 3,247 3,073 Notes receivable.......................................... -- 162 Other assets.............................................. 540 686 -------- ------- $ 34,044 $34,384 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to bank................................... $ 12,000 $ 9,642 Revolving credit facility............................... 6,857 3,443 Accounts payable........................................ 3,841 2,665 Accrued payroll......................................... 183 470 Other accrued expenses.................................. 909 675 Income taxes payable.................................... 89 38 -------- ------- Total current liabilities............................. 23,879 16,933 -------- ------- Long-term debt, less current maturities................... 36 6,893 -------- ------- Deferred income from royalty contract..................... 1,801 1,000 -------- ------- Commitment and contingencies Stockholders' equity: Common stock, $.01 par value, 30,000,000 shares autho- rized; 9,602,681 and 9,572,681 shares issued in 1997 and 1996, respectively................................. 96 96 Stock subscribed........................................ -- 175 Additional paid-in capital.............................. 19,074 19,115 Accumulated deficit..................................... (8,649) (7,196) -------- ------- 10,521 12,190 Less treasury stock; 136,014 and 164,082 shares at cost, in 1997 and 1996, respectively........................... (2,163) (2,518) Stockholders' notes receivable............................ (30) (114) -------- ------- Total stockholders' equity............................ 8,328 9,558 -------- ------- $ 34,044 $34,384 ======== =======
The accompanying notes are an integral part of the consolidated financial statements. 34 IGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
1997 1996 1995 --------- ---------- --------- (RESTATED) (RESTATED) Net sales..................................... $ 34,193 $ 34,785 $ 30,501 Cost of sales................................. 17,834 16,581 15,288 --------- --------- --------- Gross profit.................................. 16,359 18,204 15,213 Selling, general and administrative expenses.. 14,997 14,485 11,641 Research and development expenses............. 1,675 2,013 1,345 Licensing and research revenues............... (150) (162) (731) --------- --------- --------- Operating profit (loss)....................... (163) 1,868 2,958 Interest expense.............................. (1,853) (1,984) (1,269) Interest income............................... -- -- 146 Other income (expense), net................... (11) (202) 7 --------- --------- --------- Income (loss) from continuing operations before provision for income taxes............ (2,027) (318) 1,842 Provision (benefit) for income taxes.......... (574) (180) 513 --------- --------- --------- Income (loss) from continuing operations...... (1,453) (138) 1,329 Loss from discontinued operations net of in- come tax benefits............................ - - (4,034) --------- --------- --------- Net loss...................................... $ (1,453) $ (138) $ (2,705) ========= ========= ========= Income (loss) per common and common equivalent share: Basic: From continuing operations................ $ (.15) $ (.01) $ .14 ========= ========= ========= From discontinued operations.............. $ -- $ -- $ (.44) ========= ========= ========= Net loss.................................. $ (.15) $ (.01) $ (.29) ========= ========= ========= Diluted: From continuing operations................ $ (.15) $ (.01) $ .14 ========= ========= ========= From discontinued operations.............. $ -- $ -- $ (.41) ========= ========= ========= Net loss.................................. $ (.15) $ (.01) $ (.28) ========= ========= ========= Average number of common and common equivalent shares: Basic....................................... 9,457,938 9,323,440 9,173,156 ========= ========= ========= Diluted..................................... 9,457,938 9,323,440 9,725,230 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 35 IGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
1997 1996 1995 ------- ---------- --------- (RESTATED) (RESTATED) Cash flows from operating activities: Net loss...................................... $(1,453) $ (138) $(2,705) Reconciliation of net loss to net cash used by operating activities: Depreciation and amortization............... 1,037 992 836 Provision for loss on accounts and notes receivable and inventories................. 1,610 412 825 Recognition of deferred revenue............. (150) -- -- Issuance of stock to 401(k) plan............ 40 91 69 Benefit for deferred income taxes........... (585) (189) (209) Stock option compensation expense........... 47 156 -- Litigation settlement in common stock....... (50) 175 -- Changes in operating assets and liabilities: Accounts receivable......................... 721 (300) (890) Inventories................................. (1,352) (375) (1,751) Receivable due under royalty agreement...... 1,000 -- -- Prepaid and other assets.................... 398 (455) 151 Accounts payable and accrued expenses....... 1,123 130 939 Income taxes payable/refundable............. 51 22 1 Reimbursement from former subsidiary........ -- -- 250 Net assets of biotechnology segment......... -- -- (226) ------- ------- ------- Net cash provided from (used by) operating ac- tivities....................................... 2,437 521 (2,710) ------- ------- ------- Cash flows from investing activities: Capital expenditures, net..................... (636) (913) (2,397) (Increase) decrease in other assets........... 68 59 (5) License payment to former subsidiary.......... -- -- (5,000) Net assets of biotechnology segment........... -- -- (360) ------- ------- ------- Net cash used by investing activities........... (568) (854) (7,762) ------- ------- ------- Cash flows from financing activities: Net borrowings under line of credit agreements................................... 2,358 1,594 4,258 Borrowings under revolving credit agreement... -- 12 2,000 Payments of long-term debt.................... (3,443) (1,714) (9) Proceeds from exercise of common stock options...................................... 95 589 938 Proceeds from sale of common stock............ -- -- 2,500 ------- ------- ------- Net cash provided from (used in) financing ac- tivities....................................... (990) 481 9,687 ------- ------- ------- Net increase (decrease) in cash and equivalents. 879 148 (785) Cash and cash equivalents at beginning of year.. 317 169 954 ------- ------- ------- Cash and cash equivalents at end of year........ $ 1,196 $ 317 $ 169 ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. 36 IGI, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK ADDITIONAL STOCKHOLDERS' ACCUMU- TOTAL ---------------- STOCK PAID-IN NOTES LATED TREASURY STOCKHOLDERS' SHARES AMOUNT SUBSCRIBED CAPITAL RECEIVABLE DEFICIT STOCK EQUITY --------- ------ ---------- ---------- ------------- ------- -------- ------------- Balance, January 1, 1995................... 9,018,637 $90 -- $20,391 $(163) $(4,353) $(2,253) $13,712 Exercise of stock options, including tax benefits of $279....... 193,815 2 -- 1,152 -- -- (381) 773 Issuance of stock to 401(k) plan............ 1,574 -- -- 44 -- -- 25 69 Issuance of stock to industry partner....... 226,655 2 -- 2,498 -- -- -- 2,500 License payment to former subsidiary, net of a deferred tax benefit of $1,700...... -- -- -- (3,300) -- -- -- (3,300) Distribution of biotechnology business segment................ -- -- -- (2,654) -- -- -- (2,654) Payment of stockholders' notes receivable....... -- -- -- -- 74 -- -- 74 Reclass of stockholders' notes receivable....... -- -- -- -- (100) -- -- (100) Net loss (restated)..... -- -- -- -- -- (2,705) -- (2,705) --------- --- ----- ------- ----- ------- ------- ------- Balance, December 31, 1995 (restated)........ 9,440,681 94 -- 18,131 (189) (7,058) (2,609) 8,369 Exercise of stock options, including tax benefits of $79........ 132,000 2 -- 666 -- -- -- 668 Issuance of stock to 401(k) plan............ -- -- -- 1 -- -- 91 92 Settlement of litigation............. -- -- $ 175 -- -- -- -- 175 Tax benefit of license payment to former subsidiary............. -- -- -- 161 -- -- -- 161 Issuance of non-employee stock options.......... -- -- -- 156 -- -- -- 156 Interest earned on stockholders' notes.... -- -- -- -- -- -- -- -- Repayment of stockholders' notes.... -- -- -- -- 75 -- -- 75 Net loss (restated)..... -- -- -- -- -- (138) -- (138) --------- --- ----- ------- ----- ------- ------- ------- Balance, December 31, 1996 (restated)........ 9,572,681 96 175 19,115 (114) (7,196) (2,518) 9,558 Settlement of litigation............. -- -- (175) (118) -- -- 243 (50) Exercise of stock options, including tax benefits of $7......... 30,000 -- -- 122 -- -- (20) 102 Issuance of stock to 401(k) plan............ -- -- -- (92) -- -- 132 40 Value of non-employee stock options.......... -- -- -- 47 -- -- -- 47 Interest earned on stockholders' notes.... -- -- -- -- (10) -- -- (10) Reserve on stockholders' notes receivable....... -- -- -- -- 94 -- -- 94 Net loss................ -- -- -- -- -- (1,453) -- (1,453) --------- --- ----- ------- ----- ------- ------- ------- Balance, December 31, 1997................... 9,602,681 $96 $ -- $19,074 $ (30) $(8,649) $(2,163) $ 8,328 ========= === ===== ======= ===== ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. 37 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 two business segments. . Animal Health Business--production and marketing of animal health products such as poultry vaccines, veterinary pharmaceuticals, and other products, including nutritional supplements and grooming aids; and . Consumer Products Business--production and marketing of cosmetics and skin care products. IGI is committed to grow by applying its technology to deliver cost effective solutions to customer problems. IGI solves problems in poultry production, pet care and consumer and skin care markets. An increasing number of its solutions are based on the patented Novasome(R) microencapsulation technology. Licensed from a former subsidiary, the technology offers value- added qualities to cosmetics, skin care products, chemicals, biocides, pesticides, fuels, vaccines, medicines, foods, beverages, pet care products and other products. Principles of Consolidation The consolidated financial statements include the accounts of IGI, Inc. and its wholly-owned and majority-owned subsidiaries. The Company's financial statements include 100% of the losses through December 12, 1995 of its former majority-owned subsidiary, Novavax, Inc. ("Novavax"). All intercompany accounts and transactions have been eliminated. Investment in an affiliated company with a 20% ownership interest is accounted for on the cost method. Cash equivalents Cash equivalents consist of short-term investments with initial maturities of 90 days or less. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk are cash, cash equivalents, accounts receivable, notes receivable and certain restricted investments. The Company limits credit risk associated with cash and cash equivalents by placing its cash and cash equivalents with two high credit quality financial institutions. Accounts receivable include customers in several key geographic areas; of these, Mexico and other Latin American countries and countries in the Far East are important markets for the Company's poultry vaccines and other products. These countries have historically experienced varying degrees of political unrest and/or currency instability. Because of the volume of business transacted by the Company in those countries, continuation or recurrence of such unrest or instability could adversely affect the businesses of its customers in those countries 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. Inventories Inventories are stated at the lower of cost (last-in, first-out basis) or market. Property, Plant and Equipment Depreciation of property, plant and equipment is provided for under the straight-line method over the estimated useful lives as follows:
USEFUL LIVES ----------- Buildings and improvements...................................... 10-30 years Machinery and equipment......................................... 3-10 years
Repair and maintenance costs are charged to operations as incurred while major improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation thereon are removed from the accounts and any gains or losses are included in operations. 38 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Amortization Cost in excess of net assets of businesses acquired, which is included in other assets, is amortized on a straight-line basis over 40 years. The Company periodically evaluates the carrying amount of this asset using cash flow projections and net income and if warranted, impairment would be recognized. Income Taxes The Company records income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS 109 requires the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Under SFAS No. 109, 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 under Accounting Principles Board Opinion 25). Such amount, if any, is accrued over the related vesting period, as appropriate. SFAS No. 123, "Accounting for Stock-Based Compensation," requires companies electing to continue to use the intrinsic- value method to make pro forma disclosures of net income and earnings per share as if the fair-value-based method of accounting had been applied. Long-lived Assets Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The provisions of SFAS No. 121 require the Company to review its long- lived assets for impairment on an exception basis whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable through future cash flows. If it is determined that an impairment has occurred based on expected future cash flows, then the loss is recognized in the income statement. The adoption of SFAS No. 121 did not have an effect on the Company's consolidated financial statements. Financial Instruments The Company's financial instruments include cash and cash equivalents, accounts receivable, notes receivable, restricted common stock and long-term debt. The carrying value of these instruments approximates the fair value. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include allowances for excess and obsolete inventories, allowances for doubtful accounts and other assets and provisions for income taxes and related valuation allowances. Actual results could differ from those estimates. 39 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Accounting Standards Changes In March 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". This Statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This Statement is effective for financial statements issued for periods ending after December 15, 1997. The Company has restated all prior-period EPS data presented as required by SFAS No. 128. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". This Statement establishes standards for reporting all components of comprehensive income. This Statement is effective for financial statements issued for periods ending after December 15, 1998. The Company is currently evaluating the impact, if any, adoption of SFAS No. 130 will have on its financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which revises disclosure requirements related to operating segments, products and services, the geographic areas in which the Company operates and major customers. The Company intends to adopt this Statement in fiscal 1998 and does not presently anticipate any material change in its disclosures. Revenue Recognition Sales are recorded upon shipment of products. Revenues earned under research contracts or licensing and supply agreements are recognized when the related contract provisions are met. Reclassification Certain previously reported amounts have been reclassified to conform with the current period presentation. 2. RESTATEMENT OF PRIOR PERIODS On March 27, 1998, the Board of Directors engaged special counsel to investigate information first made known to it on March 17, 1998 which it believed could have a material impact on the Company's financial reporting for 1997 and prior periods. As a result of the findings of the special investigation initiated by the Board of Directors in March 1998, the Company restated its consolidated financial statements for 1995 and 1996. In the opinion of management, all material adjustments necessary to correct the financial statements have been recorded. The restatements reflect inventory write-offs and inventory adjustments which should have been recorded in different periods. Also reflected are changes in the time periods in which certain product shipments were recognized as sales. 40 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A summary of the impact of such restatements on the financial statements for the years ended December 31, 1995 and 1996 is as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------ 1996 1995 -------------------- -------------------- AS REPORTED RESTATED AS REPORTED RESTATED ----------- -------- ----------- -------- (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) Net sales.......................... $35,140 $34,785 $31,221 $30,501 Income (loss) from continuing operations........................ 93 (138) 1,508 1,329 Net income (loss).................. 93 (138) (2,526) (2,705) Income (loss) per common and common equivalent share: Basic: From continuing operations..... $ .01 $ (.01) $ .16 $ .14 Net income (loss).............. $ .01 $ (.01) $ (.28) $ (.29) Diluted: From continuing operations..... $ .01 $ (.01) $ .16 $ .14 Net income (loss).............. $ .01 $ (.01) $ (.26) $ (.28)
See Note 18 for discussion of the impact of the restatements on each of the three quarters in the nine months ended September 30, 1997. 3. CORPORATE ACTIVITIES Distribution of Biotechnology Segment On March 17, 1994, IGI's Board of Directors voted to dispose of the biotechnology business segment through the tax-free distribution to IGI's shareholders of its ownership of Novavax. On December 12, 1995, (the "Distribution Date"), IGI distributed to the holders of record of IGI's common stock, at the close of business on November 28, 1995, one share of common stock of Novavax for every one share of IGI common stock outstanding (the "Distribution"). In connection with the Distribution, the Company paid Novavax $5,000,000 in return for a fully-paid-up, ten-year license entitling it to the exclusive use of Novavax's technologies in the fields of (i) animal pharmaceuticals, biologicals, and other animal health products; (ii) foods, food applications, nutrients and flavorings; (iii) cosmetics, consumer products and dermatological over-the-counter and prescription products (excluding certain topically delivered hormones); (iv) fragrances; and (v) chemicals, including herbicides, insecticides, pesticides, paints and coatings, photographic chemicals and other specialty chemicals; and the processes for making the same. The Company has the option, exercisable within the last year of the ten- year term, to extend the License Agreement for an additional ten-year period for $1,000,000. Novavax retained the right to use its Novavax Technologies for all other applications, including human vaccines and pharmaceuticals. At the time the terms of the IGI License Agreement were fixed, including the license payment, all of the directors of IGI were also directors of Novavax and these terms were unilaterally established by IGI. As of December 31, 1995, three directors of IGI were also directors of Novavax. Accordingly, the Company accounted for the payment under the License Agreement as a capital contribution in its financial statements to reflect the intercompany nature and substance of the transaction. The form was structured as a prepaid license agreement to address various considerations of the Distribution, including tax and financing considerations. For tax purposes, the transaction is being treated as a prepaid license agreement. IGI has no further obligations or intentions to fund Novavax. 41 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Components of the losses from discontinued operations for the period ended December 31, 1995 were:
1995 -------------- (IN THOUSANDS) Selling, general and administrative......................... $ 2,103 Research and development expenses, net...................... 3,648 Credit for income taxes..................................... (717) ------- Operating losses............................................ 5,034 Less accrual for loss on disposal at December 31, 1994...... (1,000) ------- Net loss from discontinued operations....................... $ 4,034 =======
The Company anticipated the effective date of the Distribution to be June 30, 1995. Due to delays in the final distribution of Novavax, the Company incurred costs in excess of the $1,000,000 estimated loss of disposal of its biotechnology business segment. These costs related to increased research and development expenses for products in the initial FDA approval process. The distribution of the net assets of the Company's biotechnology business segment as of the Distribution Date were recorded in the accompanying financial statements in 1995 as a reduction in additional paid-in capital. Equity and Other Transactions In connection with an agreement with an industry partner for the testing of Novavax's patented Novasome lipid vesicle encapsulation technology as a microcarrier and adjuvant for various human vaccines, in January 1995, the partner exercised its option to purchase 226,655 shares of the Company's common stock for $2,500,000, and received an option to purchase additional shares of IGI Common Stock and Novavax Common Stock. This option expired unexercised in 1996. 4. INVESTMENTS The Company has a 20% investment in Indovax, Ltd. an Indian poultry vaccine company which is accounted for on the cost method. Dividends received from Indovax were $23,000 in 1997. Other investments include 271,714 shares of restricted common stock of IMX Corporation ("IMX"), a publicly traded company, valued at a cost of $3.50 per share, received pursuant to an Exclusive 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 when and if it will be able to sell these shares. The Company will recognize income related to this agreement over the term of the supply agreement. The total investment in IMX stock is valued at $951,000 at December 31, 1997. Deferred revenue under this agreement is also $951,000 at December 31, 1997. Under the supply agreement, IGI has agreed to manufacture and supply 100% of IMX's requirements for certain products at prices stipulated in the agreement, subject to renegotiation subsequent to 1998. The Company is currently renegotiating its agreement with IMX. No shipments were made by IGI during 1997, and the first shipment of product is expected in 1998. 5. 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 a skin care product line in the United States to 42 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) physicians including, but not limited to, dermatologists. Under the terms of the agreement, IGI manufactures these products for Glaxo. This agreement provides 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 is non-refundable. The advance royalty has been recorded as deferred revenue. During 1997, IGI recognized $150,000 of the non-refundable royalty as income. In March 1997, IGI granted Kimberly Clark the worldwide rights to use certain patents and technologies in the industrial hand care and cleaning products field. Upon signing of the agreement, Kimberly Clark paid IGI a $100,000 license fee which was recognized as revenue by the Company in 1997. The agreement requires Kimberly Clark to make royalty payments based on quantities of material produced. The Company is also guaranteed minimum royalties over the term of the agreement. The Company has had a license agreement with Johnson & Johnson Consumer Products, Inc. ("J&J") since 1995. The agreement provides J&J with a license to produce and sell Novasome(R) microencapsulated retinoid products and provides for the payment of royalties on net sales of such products. J&J began selling such products in the first quarter of 1998 and has begun making royalty payments. 6. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for income taxes and interest during the years ended December 31, 1997, 1996, and 1995 was as follows:
1997 1996 1995 ------ ------ ------ (IN THOUSANDS) Income taxes paid, net.............................. $ (33) $ 41 $ 3 Interest............................................ 1,853 1,955 1,236
In addition, during the years ended December 31, 1997, 1996, and 1995, the Company had the following non-cash financing and investing activities:
1997 1996 1995 ---- ------ ------ (IN THOUSANDS) Tax benefits of exercise of common stock options....... $ 7 $ 79 $ 279 Distribution of the biotechnology segment.............. -- -- 2,904 Treasury stock repurchased............................. 20 -- 356 Tax benefit of license payment to former subsidiary.... -- (161) -- Receivable under royalty agreement..................... -- 1,000 -- Investment in IMX...................................... 951 -- --
7. INVENTORIES Inventories as of December 31, 1997 and 1996 consisted of:
1997 1996 ------ ---------- (RESTATED) (IN THOUSANDS) Finished goods........................................... $3,365 $3,280 Raw materials............................................ 3,259 2,812 Work-in-process.......................................... 3,192 2,975 ------ ------ $9,816 $9,067 ====== ======
If the first-in, first-out (FIFO) method of accounting for inventories had been used, inventories would have been $461,000 and $844,000 lower than reported in 1997 and 1996, respectively. 43 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. LONG-TERM DEBT Long-term debt as of December 31, 1997 and 1996 consisted of:
1997 1996 ------ ------- (IN THOUSANDS) Revolving credit facility.................................. $6,857 $10,285 Other debt due in annual installments through December 1999 with interest at 9%....................................... 36 51 ------ ------- 6,893 10,336 Less current maturities.................................... 6,857 3,443 ------ ------- $ 36 $ 6,893 ====== =======
During the first quarter of 1998, the Company negotiated amendments to its credit agreement with its bank lenders, including waivers of its covenant defaults and an extension of the credit agreement since the Company was in default under certain covenants contained in its bank credit agreement during 1997 and at December 31, 1997. During the period from January 1, 1998 through April 29, 1998, the Company paid interest at a rate of prime plus 4% on outstanding borrowings under its working capital line and prime plus 4% on outstanding borrowings under its revolving credit facility. The Company entered into an Extension Agreement with its bank lenders as of April 29, 1998 (the "Closing Date") which provides for the waiver of all past and existing covenant defaults, extension of the bank credit agreement through March 31, 1999, a maximum credit line facility of $12,000,000 ("Credit Line") and extended terms for repayment of the outstanding $6,857,142 balance of revolving credit notes ("Revolving Facility"). The Company was in default under certain covenants contained in the Extension Agreement at July 31, 1998. On August 19, 1998, the Company and its bank lenders entered into a Forbearance Agreement whereby the banks agreed to forbear from exercising their rights and remedies arising from these covenant defaults through January 31, 1999. The Extension Agreement and the Forbearance Agreement (the "Agreements") provide for the following: . The maximum availability under the Credit Line is subject to the determination of the amount of eligible accounts receivable and eligible inventories. The Credit Line is due and payable in full on January 31, 1999. . The outstanding balance of $6,857,142 under the Revolving Facility is due and payable on January 31, 1999. . All of the Company's indebtedness to the banks is subject to a security interest in all of the assets of the Company and its significant subsidiaries. . Interest on outstanding borrowings under both the Credit Line and the Revolving Credit Facility will be: From August 1, 1998 through September 30, 1998............ Prime plus 3 1/2% From October 1, 1998 through November 30, 1998............ Prime plus 4 1/2% From December 1, 1998 through January 31, 1999............ Prime plus 5 1/2%
. At the Closing Date the Company issued to the lenders warrants to purchase an aggregate of 540,000 shares of the Company's common stock at an exercise price of $3.50 per share. Warrants ("Unconditional Warrants") to purchase 270,000 shares are exercisable at any time during the period commencing 60 days 44 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) after issuance and ending on the fifth anniversary of issuance, unless the Company is able to refinance its bank debt by October 31, 1998 in which case these warrants expire. Warrants ("Conditional Warrants") to purchase the remaining 270,000 shares are exercisable at any time during the period commencing September 1, 1998 and ending on the fifth anniversary of issuance, unless the Company is able to refinance its bank debt by December 24, 1998 in which case these warrants expire. The Company has a call option on the warrants, which can only be exercised as to all of the shares issuable at that time, with a repurchase price of $900,000 for each of the Conditional Warrants and Unconditional Warrants. The Company will recognize a non-cash expense of approximately $200,000, or $.02 per share, net of taxes, (unaudited) in each of the second and third quarters of 1998 in accordance with Statement for Financial Accounting Standards No. 123. . The Company agreed to pay Fleet Bank, as agent on behalf of the lenders, a monthly agent's fee of $5,000 and an extension fee of $250,000, of which $60,000 was paid at the time of the Extension, with the balance payable in three installments through March 24, 1999. . The Company agreed to pay Fleet Bank, as agent on behalf of the lenders, a forbearance fee of $140,000, of which $20,000 was paid at the time of the forbearance, and the balance is payable in three installments through January 15, 1999. However, if the Company is able to replace its existing bank debt within the 30 days following a forbearance fee due date, the installment then due plus all future installments shall be waived. The Agreements require the Company to maintain certain financial ratios and comply with other non-financial covenants, including remittance of cash flows from debt or equity financing, income tax refunds and fixed asset dispositions to the banks, and also prohibits the payment of cash dividends without the prior written consent of the lenders. The Company believes it will be able to remain in compliance with its debt covenants through January 30, 1999, and also believes that funds generated from operations and existing bank credit facilities are sufficient to finance the Company's operations at its current levels, including the costs associated with the regulatory and litigation matters discussed in Notes 12 and 13, through January 30, 1999. The Company is actively seeking, and believes it will be able to secure, alternative financing arrangements to replace its existing debt and lending terms through a number of potential options including, but not limited to, the issuance of debt or equity securities or a combination of both. The Company plans to engage an investment banker for the purpose of formulating alternative business strategies and to coordinate the orderly satisfaction of its obligations. No assurance can be given that the Company will be able to obtain alternative financing arrangements, and if it is unsuccessful in doing so, the Company may be required to restrict its business operations or otherwise modify its business strategy. Aggregate annual principal payments on long-term debt for the years subsequent to December 31, 1997 are as follows:
YEAR ---- (IN THOUSANDS) 1998.......................... $2,316 1999.......................... 4,577 ------ $6,893 ======
Borrowings under the revolving credit facility have been classified as current debt in the accompanying financial statements as the agreement contains certain acceleration provisions subject to the bank's evaluation. As of December 31, 1997 and 1996, there were no outstanding equipment leases. 9. STOCK OPTIONS Under the 1983 Incentive Stock Option Plan, options have been granted to key employees to purchase a maximum of 500,000 shares of common stock. Options, having a maximum term of 10 years, have been granted 45 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) at 100% of the fair market value of the Company's stock at the time of grant. Options outstanding under this plan at December 31, 1996 are generally exercisable in cumulative increments over four years commencing one year from the date of grant. Under the 1989 and 1991 Stock Option Plans, options may be granted to key employees, directors and consultants to purchase a maximum of 500,000 and 2,600,000 shares of common stock, respectively. Options, having a maximum term of 10 years, have been granted at 100% of the fair market value of the Company's stock at the time of grant. Both incentive stock options and non- qualified stock options may be granted under the 1989 Plan and the 1991 Plan. Incentive stock options are generally exercisable in cumulative increments over four years commencing one year from the date of grant. Non-qualified options are generally exercisable in full beginning six months after the date of grant. In 1991, the Company's Board of Directors also adopted a Non-Qualified Stock Option Plan. This plan provides that options may be granted to consultants, scientific advisors and employees to purchase a maximum of 250,000 shares of common stock. Options outstanding under this plan at December 31, 1997 are generally exercisable in cumulative increments over four years commencing one year from the date of grant. In addition, non-qualified stock options have 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. Stock option transactions in each of the past three years under the aforementioned plans in total were:
PLAN NON-QUALIFIED PLAN ---------------------------------------- --------------------------------------- WEIGHTED WEIGHTED SHARES PRICE PER SHARE AVERAGE PRICE SHARES PRICE PER SHARE AVERAGE PRICE --------- --------------- ------------- -------- --------------- ------------- January 1, 1995 shares under option........... 1,793,528 $1.30--$9.88 $6.63 340,552 $1.38--$6.80 $4.37 Granted................ 346,500 $6.63--$9.39 $7.35 -- -- -- Exercised.............. (190,763) $1.30--$9.88 $3.73 (3,052) $1.38 $1.38 Cancelled.............. (9,750) $6.72--$9.72 $7.47 -- -- -- --------- -------- December 31, 1995 shares under option........... 1,939,515 $3.64--$9.88 $7.04 337,500 $1.38--$6.80 $4.40 Granted................ 381,000 $5.13--$7.69 $6.04 -- -- -- Exercised.............. (82,000) $4.70--$6.96 $6.33 (50,000) $1.38 $1.38 Cancelled.............. (29,500) $5.67--$9.48 $7.31 (1,000) $6.80 $6.80 --------- -------- December 31, 1996 shares under option........... 2,209,015 $3.65--$9.88 $6.89 286,500 $3.97--$6.80 $4.92 Granted................ 111,500 $3.75--$5.69 $4.17 -- -- -- Exercised.............. (10,000) $3.65 $3.65 (20,000) $3.97 $3.97 Cancelled.............. (176,050) $3.97--$9.88 $7.21 (100,000) $5.67 $5.33 --------- -------- December 31, 1997 shares under option........... 2,134,465 $3.75--$9.88 $6.74 166,500 $4.70--$6.80 $4.78 ========= ======== Shares subject to outstanding options exercisable at December 31, 1996...... 1,666,119 $7.01 286,500 $4.92 ========= ===== ======== ===== December 31, 1997...... 1,854,715 $6.89 166,500 $4.78 ========= ===== ======== =====
The Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for option grants to directors and employees pursuant to the stock option plans. The Company has recorded compensation expense of $ 46,000 and $156,000 in 1997 and 1996, respectively, for options granted to consultants. Had compensation cost for all 46 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) grants under the Company's stock option plans been determined on fair value at the grant date consistent with the provisions of SFAS 123, the Company's net loss and loss per share would have been increased to the pro forma loss amounts indicated below:
1997 1996 1995 ------- ---------- --------- (RESTATED) (RESTATED) (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) Net loss--as reported....................... $(1,453) $ (138) $(2,705) Net loss--pro forma......................... $(1,648) $(1,054) $(3,449) Loss income per share--as reported Basic..................................... $ (.15) $ (.01) $ (.29) Diluted................................... $ (.15) $ (.01) $ (.28) Loss per share--pro forma Basic..................................... $ (.17) $ (.11) $ (.38) Diluted................................... $ (.17) $ (.11) $ (.35)
The pro forma information has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the grant date using the Black-Scholes option pricing model with the following assumptions for 1997, 1996 and 1995: Dividend yield............................................. 0% Risk free interest rate.................................... 5.51%-- 7.10% Estimated volatility factor................................ 33.07%--43.45% Expected life.............................................. 6-- 9 years
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. The following table summarizes information concerning outstanding and exercisable options as of December 31, 1997.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------- -------------------------- RANGE OF NUMBER OF WEIGHTED AVERAGE EXERCISE NUMBER OF WEIGHTED AVERAGE EXERCISE PRICES OPTIONS REMAINING LIFE (YEARS) PRICE OPTIONS EXERCISE PRICE - --------------- --------- ---------------------- -------- --------- ---------------- $3.00 to $ 4.00 60,000 10.00 $3.75 -- -- $4.00 to $ 5.00 358,000 2.87 $4.73 308,000 $4.75 $5.00 to $ 6.00 511,500 6.51 $5.52 429,750 $5.48 $6.00 to $ 7.00 580,750 6.93 $6.68 525,750 $6.68 $7.00 to $ 8.00 331,000 5.54 $7.40 327,250 $7.39 $8.00 to $ 9.00 284,000 7.25 $8.50 255,500 $8.49 $9.00 to $10.00 175,715 4.97 $9.62 174,965 $9.62 --------- --------- $3.75 to $ 9.88 2,300,965 5.97 $6.59 2,021,215 $6.73 ========= =========
In connection with the Distribution, holders of options to purchase IGI common stock as of the Distribution Date were granted options to purchase Novavax common stock and substitute options to purchase IGI common stock. Exercise prices of the options were based on the relative market capitalization of IGI and Novavax on the record date and the 20 trading days immediately following the record date to restore holders of each option to the economic position prior to the Distribution Date. The prices related to stock option transactions have been adjusted to reflect the terms of the substitute options. 47 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In connection with the exercise of 5,000 stock options in 1997 and 25,000 stock options in 1995, the Company received 4,735 and 23,644 shares of its common stock in 1997 and 1995, respectively, as consideration for the exercise price of the options. The total value of the shares used as consideration for the exercise of stock options was $19,825 and $381,250 in 1997 and 1995, respectively, which has been recorded as treasury stock. 10. INCOME TAXES The provision (benefit) for income taxes included in the consolidated statements of operations for the years ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995 ----- ----- ----- (IN THOUSANDS) Continuing operations: Current tax expense: Federal............................................. $ -- $ -- $ 718 State and local..................................... 11 9 4 ----- ----- ----- Total current......................................... 11 9 722 ----- ----- ----- Deferred tax expense (benefit) Federal............................................. (756) (28) (59) State and local..................................... 171 (161) (150) ----- ----- ----- Total deferred........................................ (585) (189) (209) ----- ----- ----- Total provision (benefit) from continuing operations.... (574) (180) 513 Discontinued operations: Current tax benefit: Federal and state................................... -- -- (718) ----- ----- ----- Total provision (benefit) for income taxes.............. $(574) $(180) $(205) ===== ===== =====
The provision for income taxes differed from the amount of income taxes determined by applying the applicable Federal tax rate (34%) to pretax income from continuing operations as a result of the following:
1997 1996 1995 ----- ----- ---- (IN THOUSANDS) Statutory provision (benefit)............................ $(689) $(108) $626 Non-deductible expenses.................................. 51 66 66 State income taxes, net of federal benefit............... 120 (101) (99) Research and development tax credits..................... (65) (42) (33) Increase (decrease) in valuation allowance............... 7 -- (83) Other, net............................................... 2 5 36 ----- ----- ---- $(574) $(180) $513 ===== ===== ====
48 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Deferred tax assets included in the consolidated balance sheets as of December 31, 1997 and 1996, consist of the following:
1997 1996 ------- ------- (IN THOUSANDS) Property, plant and equipment........................... $ (633) $ (763) Prepaid license agreement............................... 1,626 1,797 Net operating loss carryforwards........................ 1,616 1,562 Deferred royalty payments............................... 345 -- Tax credit carryforwards................................ 484 418 Inventory............................................... 238 158 Valuation allowances.................................... 500 140 Non-employee stock options.............................. 82 62 Other future deductible temporary differences........... 98 56 Other future taxable temporary differences.............. (48) (13) ------- ------- 4,308 3,417 Less: valuation allowance............................... (333) (34) ------- ------- Deferred taxes, net..................................... $ 3,975 $ 3,383 ======= =======
Current and deferred tax benefits resulting from a prepaid license agreement and the exercise of stock options not credited to the consolidated statements of operations for the years ended December 31, 1997, 1996 and 1995, including the following:
1997 1996 1995 ----- ---- ------ (IN THOUSANDS) Additional paid-in capital: License payment to former subsidiary.................. $ -- $161 $1,700 Exercise of stock options............................. 7 79 279 ----- ---- ------ $ 7 $240 $1,979 ===== ==== ======
The Company evaluates the recovery of its deferred tax assets and has determined, based on the Company's history of prior operating earnings, its expectations for the future, the timing of reversal of certain temporary differences, and the expiration dates of the net operating loss carryforwards, that operating income of the Company will more likely than not be sufficient to recognize fully these net deferred tax assets. Operating loss and tax credit carryforwards for tax reporting purposes as of December 31, 1997 are as follows:
(IN THOUSANDS) Federal: Operating losses (expiring through the year 2011)........ $4,727 Research tax credits (expiring through the year 2011).... 511 Alternative minimum tax credits (available without expiration)............................................. 14
49 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 11. COMMITMENT AND CONTINGENCIES The Company leases manufacturing and warehousing space, machinery and equipment and automobiles under non-cancelable operating lease agreements expiring at various dates through 1998. Rental expense aggregated approximately $348,000 in 1997, $330,000 in 1996, and $282,000 in 1995. Future minimum rental commitments under non-cancelable operating leases as of December 31, 1997 are as follows:
YEAR $ ---- ------- (IN THOUSANDS) 1998 99 1999 80 2000 55 2001 47 2002 46
The Company has entered into an employment contract with an expiration date of December 31, 1999 with an officer which provides that this officer is entitled to continuation of his salary if he is terminated without cause prior to the contract expiration date. Aggregate compensation through 1999 under this agreement approximates $845,000. 12. LITIGATION The Company commenced a lawsuit on April 21, 1998 against its former President and Chief Operating Officer, John P. Gallo, in the Superior Court of New Jersey. In its complaint, IGI alleges, among other matters, that Mr. Gallo caused the Company to violate Department of Agriculture statutes and regulations, made false and inaccurate representations with respect to shipments and inventory, improperly converted Company funds and assets for his personal benefit and knowingly engaged in misconduct in the performance of his duties and responsibilities, all in violation of his employment agreement and of his fiduciary duty to the Company. The Company is seeking recovery of damages resulting from Mr. Gallo's alleged misconduct and recovery of funds and assets that the Company alleges were improperly diverted by him. On April 28, 1998, Mr. Gallo commenced a lawsuit against the Company and two of its Directors, including the Company's Chairman of the Board, Dr. Edward B. Hager, alleging, among other matters, that they improperly caused the termination of his employment with the Company in November 1997, wrongfully terminated his compensation in violation of his employment agreement and defamed his reputation. Mr. Gallo is seeking recovery against the defendants for his alleged actual damages as well as consequential and punitive damages. The Company has denied Mr. Gallo's allegations and believes his claims are without merit. Certain other claims, suits and complaints arising in the ordinary course of business have been filed or are pending against the Company and its subsidiaries. In the opinion of management, after consultation with legal counsel, all such matters are adequately covered by insurance or, if not so covered, are without merit or are of such kind, or involve such amounts, as would not have a significant effect on the financial statements of the Company if disposed of unfavorably. 50 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 13. U.S. GOVERNMENT INVESTIGATION AND DISCIPLINARY PROCEEDINGS From June 4, 1997 through March 27, 1998, the Company was subject to an order by the Center for Veterinary Biologics ("CVB") of the United States Department of Agriculture ("USDA") to stop distribution and sale of certain serials and subserials of designated poultry vaccines produced by the Company's Vineland Laboratories Division ("Stop Shipment Order"). The Stop Shipment Order was based on CVB's findings that the Company shipped serials before the Animal and Plant Health Inspection Service division of the USDA ("APHIS") had the opportunity to confirm the Company's testing results, failed to destroy serials reported to APHIS as destroyed, and in general failed to keep complete and accurate records and to submit accurate reports to APHIS. The Stop Shipment Order affected 36 of the Company's USDA-licensed vaccines. In July 1997, the Office of Inspector General of the USDA ("OIG") advised the Company of its commencement of an investigation into alleged violations of the Virus Serum Toxin Act and alleged false statements made to APHIS. Following the Stop Shipment Order and the commencement of the OIG investigation, in July 1997, the non-employee members of the Board of Directors directed the Company to retain special counsel to investigate the alleged violations and to advise the Board of Directors of its findings. The non-employee members of the Board of Directors also instructed management to take immediate action to assure that all future shipments comply with all regulatory requirements. In addition, the Company took action designed to obtain the approval of APHIS to the Company's resumption of shipments of the products affected by the Stop Shipment Order, including submission of an amended regulatory compliance program and testing procedures acceptable to the USDA, reassignment of certain personnel and restructuring of the quality control and quality assurance functions. Based on remedial action taken by the Company, including revised vaccine production outlines, the USDA, during the period from August through December of 1997, lifted the Stop Shipment Order with respect to all but three of the 36 affected products. As of March 27, 1998, the remaining three products were released for sale and shipment by the Company. As a result of the Company's internal investigation regarding the alleged violations, in November 1997 the Company terminated the employment of its then President and Chief Operating Officer, John P. Gallo, for willful misconduct in the performance of his executive duties and commenced a lawsuit against Mr. Gallo on April 21, 1998. On April 28, 1998, Mr. Gallo commenced a lawsuit against the Company and two of its directors, including the Chairman of the Board. In addition, six employees, including members of the Company's management team (including two Vice Presidents of the Company) resigned in April 1998 at the request of the Company. However, five of these former employees were retained by the Company for approximately eight weeks to enable the Company to continue its operations pending the hiring of qualified replacements. In connection with the employee terminations, the Company agreed to make severance payments to each of two non-management employees equal to four months salary. In April 1998, the Company voluntarily disclosed to the U.S. Attorney for the District of New Jersey, as well as to the USDA and OIG, information resulting from its internal investigation of alleged violations by certain officers and employees of USDA rules and regulations and of the Virus Serum Toxin Act and other statutes including U.S. Customs laws and regulations. In connection with its investigation, the OIG has subpoenaed Company documents and the Company has provided, and will continue to provide, subpoenaed documents to Governmental authorities. The U.S. Government's investigation is ongoing and could be expanded to other areas of the Company's business in which violations of laws and regulations may be found to have occurred. In addition, the Government's ongoing investigation could result in action against the Company and certain of its former employees, including fines and the possibility of criminal charges. Also, on April 30, 1998, the Securities and Exchange Commission (the "SEC") advised the Company that it is conducting an informal inquiry and requested that the Company provide it with certain documents. 51 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Stop Shipment Order adversely affected the Company's results of operations for 1997, and the delay in approval of the remaining affected products until the end of March 1998 will adversely affect overall sales revenue in 1998. In addition, although the Company, on May 11, 1998, announced the employment of a new President and Chief Operating Officer, it needs to replace and train certain key managers and other employees who have terminated their employment at the request of the Company, which will have a materially adverse effect on the Company's 1998 performance and operating results. Also, if the OIG, the U.S. Attorney or the SEC concludes that the Company's actions warrant enforcement proceedings, those proceedings, as well as the costs and expenses related to them, could have a materially adverse effect on the Company's business, financial condition and results of operations. The Company is cooperating fully with the U.S. Attorney and each of the regulatory agencies and has produced a substantial amount of documents and information requested by the U.S. Attorney. The U.S. Attorney has not indicated what course of action, if any, it may pursue with respect to IGI in light of the Company's extensive cooperation. The Company has not been advised that it or any of its present employees are targets of any Justice Department or regulatory investigation. Although there can be no assurance as to the outcome of any proceeding, the Company expects that it will be able to achieve a satisfactory resolution of its existing regulatory and litigation matters. However, if charges were to be brought against IGI, the Company could incur substantial costs in fines and attorney's fees to defend the action. The Company could also face additional substantial costs in administrative civil penalties. Since the Company expects that it will be able to achieve a satisfactory resolution of its existing regulatory and litigation matters, no reserves were provided for these matters at December 31, 1997. 14. EXPORT SALES Export revenues by the Company's domestic operations accounted for approximately 35% of the Company's total revenues in 1997, 39% in 1996 and 38% in 1995. The following table shows the geographical distribution of the export sales:
1997 1996 1995 ------- ---------- ---------- (RESTATED) (RESTATED) (IN THOUSANDS) Latin America................................ $ 4,593 $ 5,076 $ 4,884 Asia/Pacific................................. 4,659 6,011 4,408 Europe....................................... 1,263 1,286 1,118 Africa/Middle East........................... 1,362 1,141 1,184 ------- ------- ------- $11,877 $13,514 $11,594 ======= ======= =======
Related net accounts receivable balances at December 31, 1997, 1996 and 1995 approximated $4,144,000, $5,276,000 and $4,569,000, respectively. 15. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS The Company has notes receivable from certain of its employees. The total of these notes is $249,000 as of December 31, 1997. All of these loans are evidenced by demand notes bearing interest at prime rate plus 1/4% and are collateralized by shares of IGI common stock. Remaining balances of these notes from officers are included in the stockholders' equity as stockholders' note receivable and all other notes receivable are included in notes receivable in the accompanying Consolidated Balance Sheets. The Company has recognized interest income from these notes of $10,000, $15,000 and $39,000 for the years ended December 31, 1997, 1996 and 1995 respectively. However, the Company has provided reserves of $219,000 against these notes representing the amount of notes receivable from terminated employees. 52 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 16. EMPLOYEE BENEFITS The Company has a defined contribution retirement plan (401k), pursuant to which employees who have completed one year of employment with the Company or its subsidiaries as of specified dates may elect to contribute to the Plan, in whole percentages, up to 15% of compensation, subject to a minimum contribution by participants of 2% of compensation and a maximum contribution of $9,500 in 1997, and $9,240 in 1996 and 1995. The Company matches 25% of the first 5% of compensation contributed by participants and contributes on behalf of each participant $4 per week of employment during the year. All contributions of the Company are made quarterly in the form of the Company's Common Stock ($.01 par value) and are immediately vested. The Company has recorded charges to expense related to this plan of approximately $113,000, $115,000, and $103,601 for the years 1997, 1996 and 1995, respectively. 17. BUSINESS SEGMENTS Summary data related to continuing operations for the three years ended December 31, 1997 appear below:
ANIMAL HEALTH CONSUMER PRODUCTS PRODUCTS CORPORATE CONSOLIDATED ------------- -------- --------- ------------ (IN THOUSANDS) 1997 Net sales....................... $29,096 $5,097 $ -- $34,193 Operating profit (loss)......... 4,139 730 (5,032) (163) Depreciation and amortization... 876 161 -- 1,037 Identifiable assets............. 29,535 4,509 -- 34,044 Capital expenditures............ 632 4 -- 636 1996 (RESTATED) Net sales....................... $31,262 $3,523 $ -- $34,785 Operating profit (loss)......... 6,882 (917) (4,097) 1,868 Depreciation and amortization... 835 157 -- 992 Identifiable assets............. 28,412 5,972 -- 34,384 Capital expenditures............ 715 198 -- 913 1995 (RESTATED) Net sales....................... $28,869 $1,632 $ -- $30,501 Operating profit (loss)......... 6,247 (233) (3,056) 2,958 Depreciation and amortization... 820 16 -- 836 Identifiable assets............. 29,280 2,872 -- 32,152 Capital expenditures............ 745 1,652 -- 2,397
53 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 18. FOURTH QUARTER ADJUSTMENTS (UNAUDITED) In addition to the items discussed in Note 2, in the fourth quarter of 1997 the Company made adjustments to write off certain inventory, increase valuation reserves for inventories and accounts receivable, record legal and related expenses incurred in connection with the USDA OIG investigation, and to adjust the recognition of licensing revenues. Certain of these adjustments were the result of actions or events which occurred in earlier quarters of 1997. Had such adjustments been recorded in the applicable quarter, net income and earnings per share would have differed from the amounts previously reported as follows:
FIRST QUARTER SECOND QUARTER THIRD QUARTER ----------------- ----------------- ----------------- AS AS AS AS AS AS REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income (loss)......... $363 $ 55 $356 $218 $380 $(498) Earnings per share: Basic................... $.04 $.01 $.04 $.02 $.04 $(.05) Diluted................. $.04 $.01 $.04 $.02 $.04 $(.05)
54 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (AMOUNTS IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E ------ ------------ ------------------------ ---------- ---------- ADDITIONS ------------------------ (2) CHARGED BALANCE AT (1) CHARGED TO OTHER BALANCE AT BEGINNING OF TO COSTS ACCOUNTS END OF DESCRIPTION PERIOD AND EXPENSES DESCRIBE DEDUCTIONS PERIOD ----------- ------------ ------------ ----------- ---------- ---------- Year ended December 31, 1995 (Restated): Allowance for doubtful accounts............. $ 181 $142 -- $ 17(A) $ 306 Inventory valuation allowance............ 507 645 -- 459(B) 693 Other assets valuation allowance............ 186 -- -- -- 186 Amortization of goodwill............. 76 9 -- -- 85 Amortization of other intangibles.......... 464 58 -- -- 522 Valuation allowance on net deferred tax assets............... 2,880 69 -- 2,880(C) 69 Year ended December 31, 1996 (Restated): Allowance for doubtful accounts............. $ 306 $(40) -- $ 28(A) $ 238 Inventory valuation allowance............ 693 123 -- 199(B) 617 Other asset valuation allowance............ 186 -- -- -- 186 Amortization of goodwill............. 85 8 -- -- 93 Amortization of other intangibles.......... 522 87 -- -- 609 Valuation allowance on net deferred tax assets............... 69 -- -- 35(C) 34 Year ended December 31, 1997: Allowance for doubtful accounts............. $ 238 $793 -- $ 128(A) $ 903 Inventory valuation allowance............ 617 603 -- 107(B) 1,113 Other asset valuation allowance............ 186 -- -- 186(A) -- Amortization of goodwill............. 93 8 -- -- 101 Amortization of other intangibles.......... 609 102 -- -- 711 Valuation allowance on net deferred tax assets............... 34 299 -- -- 333
- -------- (A) Relates to write-off of uncollectible accounts. (B) Disposition of obsolete inventories. (C)Related to spin off of certain discontinued operations during 1995. 55 EXHIBIT INDEX Exhibits marked with a single asterisk are filed herewith, and exhibits marked with a double asterisk reference management contract, compensatory plan or arrangement, filed in response to Item 14(a)(3) of the instructions to Form 10-K. The other exhibits listed have previously been filed with the Commission and are incorporated herein by reference. (3) (a) Certificate of Incorporation of IGI, Inc., as amended. [Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, File No. 33-63700, filed June 2, 1993.] (b) By-laws of IGI, Inc., as amended. [Incorporated by reference to Exhibit 2(b) to the Company's Registration Statement on Form S- 18, File No. 2-72262-B, filed May 12, 1981.] (4) Specimen stock certificate for shares of Common Stock, par value $.01 per share. [Incorporated by reference to Exhibit (4) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 0-10063, filed April 2, 1990 (the "1989 Form 10-K".)] **(10.1) IGI, Inc. 1983 Incentive Stock Option Plan. [Incorporated by reference to Exhibit A to the Company's Proxy Statement for the Annual Meeting of Stockholders held May 11, 1983.] **(10.2) IGI, Inc. 1989 Stock Option Plan. [Incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Stockholders held May 11, 1989.] **(10.3) Employment Agreement by and between the Company and Edward B. Hager dated as of January 1, 1990. [Incorporated by reference to Exhibit (10)(c) to the 1989 Form 10-K.] **(10.4) Extension of Employment Agreement by and between the Company and Edward B. Hager dated as of March 11, 1993. [Incorporated by reference to Exhibit (10)(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 0-10063, filed March 31, 1993 (the "1992 Form 10-K".)] **(10.5) Extension of Employment Agreement by and between the Company and Edward B. Hager dated as of March 14, 1995. [Incorporated by reference to Exhibit (10)(e) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 0-10063, filed March 31, 1995 (the "1994 Form 10-K".)] **(10.6) Amendment to Employment Agreement by and between the Company and Edward B. Hager dated as of October 1, 1997. [Incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No 1- 8568, filed November 13, 1997 (the "September 30, 1997 Form 10- Q")] **(10.7) Employment Agreement by and between the Company and John P. Gallo dated as of January 1, 1990. [Incorporated by reference to Exhibit (10)(d) to the 1989 Form 10-K.] **(10.8) Extension of Employment Agreement by and between the Company and John P. Gallo dated as of March 11, 1993. [Incorporated by reference to Exhibit (10)(g) to the 1992 Form 10-K.] **(10.9) Extension of Employment Agreement by and between the Company and John P. Gallo dated as of March 14, 1995. [Incorporated by reference to Exhibit (10)(h) to the 1994 Form 10-K.] **(10.10) Amendment to Employment Agreement by and between the Company and John P. Gallo dated as of October 1, 1997. [Incorporated by reference to Exhibit 10(b) to the September 30, 1997 Form 10-Q.] (10.11) Rights Agreement by and between the Company and Fleet National Bank dated as of March 19, 1987. [Incorporated by reference to Exhibit (4) to the Company's Current Report on Form 8-K, File No. 0-10063, dated as of March 26, 1987.] (10.12) Amendment to Rights Agreement by and among the Company, Fleet National Bank and State Street Bank and Trust Company dated as of March 23, 1990. [Incorporated by reference to Exhibit (10)(g) to the 1989 Form 10-K.]
56 (10.13) Second Amended and Restated Loan Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated December 13, 1995. [Incorporated by reference to Exhibit (10)(o) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-8568, filed March 29, 1996 (the "1995 Form 10-K".)] (10.14) First Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated March 27, 1996. [Incorporated by reference to Exhibit 10(l) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, File No. 1-8568, filed April 10, 1997 (the "1996 Form 10-K".)] (10.15) Second Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated June 26, 1996. [Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, File No. 1-8568, filed November 14, 1996 (the "September 30, 1996 Form 10-Q".)] (10.16) Third Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated August 23, 1996. [Incorporated by reference to Exhibit 10.2 to the September 30, 1996 Form 10-Q.] (10.17) Fourth Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc. together with its subsidiaries, dated November 13, 1996. [Incorporated by reference to exhibit 10(o) to the 1996 Form 10- K.] (10.18) Fifth Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated March 27, 1996. [Incorporated by reference to exhibit 10(p) to the 1996 Form 10- K.] (10.19) Sixth Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated June 30, 1997. [Incorporated by reference to Exhibit 10(c) to the September 30, 1997 Form 10-Q] (10.20) Seventh Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated July 31, 1997. [Incorporated by reference to Exhibit 10(d) to the September 30, 1997 Form 10-Q.] (10.21) Eight Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated September 30, 1997. [Incorporated by reference to Exhibit 10(e) to the September 30, 1997 Form 10-Q.] *(10.22) Extension Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated April 29, 1998. *(10.23) Forbearance Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc. together with its subsidiaries, dated August 19, 1998. **(10.24) IGI, Inc. Non-Qualified Stock Option Plan. [Incorporated by reference to Exhibit (3)(k) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 0-10063, filed March 30, 1992 (the "1991 Form 10-K".)] **(10.25) IGI, Inc. 1991 Stock Option Plan, [Incorporated by reference to the Company's Proxy Statement for the Annual Meeting held May 9, 1991.] **(10.26) Amendment No. 1 to IGI, Inc. 1991 Stock Option Plan as approved by Board of Directors on March 11, 1993. [Incorporated by reference to Exhibit 10(p) to the 1992 Form 10-K.] **(10.27) Amendment No. 2 to IGI, Inc. 1991 Stock Option Plan as approved by Board of Directors on March 22, 1995. [Incorporated by reference to the Appendix to the Company's Proxy Statement for the Annual Meeting of Stockholders held May 9, 1995.] **(10.28) Amendment No. 3 to IGI, Inc. 1991 Stock Option Plan as approved by Board of Directors on March 19, 1997. [Incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, File No. 1-8568, filed August 14, 1997.]
57 (10.29) Form of Registration Rights Agreement signed by all purchasers of Common Stock in connection with private placement on January 2, 1992. [Incorporated by reference to Exhibit (3)(m) to the 1991 Form 10-K.] (10.30) License Agreement by and between Micro-Pak, Inc. and IGEN, Inc. [Incorporated by reference to Exhibit (10)(v) to the 1995 Form 10-K.] (10.31) Registration Rights Agreement between IGI, Inc. and SmithKline Beecham p.l.c. dated as of August 2, 1993. [Incorporated by reference to Exhibit (10)(s) to the 1993 Form 10-K.] (10.32) Supply Agreement, dated as of January 27, 1997, between IGI, Inc. and Glaxo Wellcome Inc. [Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q/A, Amendment No.1, for the quarter ended March 31, 1997, File No. 1-8568, filed June 16, 1997.] *(10.33) Common Stock Purchase Warrant No. 1 to purchase 150,000 shares of IGI, Inc. Common Stock issued May 12, 1998 to Fleet Bank-NH. *(10.34) Common Stock Purchase Warrant No. 2 to purchase 150,000 shares of IGI, Inc. Common Stock issued May 12, 1998 to Fleet Bank-NH. *(10.35) Common Stock Purchase Warrant No. 3 to purchase 120,000 shares of IGI, Inc. Common Stock issued May 12, 1998 to Mellon Bank, N.A. *(10.36) Common Stock Purchase Warrant No. 4 to purchase 120,000 shares of IGI, Inc. Common Stock issued May 12, 1998 to Mellon Bank, N.A. *(11) Computation of net income per common share. *(21) List of Subsidiaries. *(23) Consent of PricewaterhouseCoopers LLP. *(27.1) Financial Data Schedule for the year ended December 31, 1997. *(27.2) Restated Financial Data Schedules for the years ended December 31, 1995 and 1996.
58 EX-10.22 2 EXTENSION AGREEMENT DATED 04/29/98 Exhibit 10.22 EXTENSION AGREEMENT ------------------- This Extension Agreement (hereinafter, the "Agreement") is made this 29 day of April, 1998 by and among: FLEET BANK-N.H., a banking and trust company organized under the laws of New Hampshire ("Fleet"); MELLON BANK, N.A., a national banking association ("Mellon"); and IGI, INC., a Delaware corporation ("IGI"), IGEN, INC., a Delaware corporation ("IGEN"); IMMUNOGENETICS, INC., a Delaware corporation ("Immunogenetics"); and BLOOD CELLS, INC., a Delaware corporation ("BCI"). Fleet and Mellon are hereinafter sometimes individually referred to as a "Lender" and collectively referred to as the "Lenders", and IGI, IGEN, Immunogenetics, BCI, and each of their subsidiaries as set forth on Exhibit "A" annexed hereto and specifically incorporated by reference herein, are hereinafter sometimes individually referred to as a "Borrower" and collectively referred to as the "Borrowers". BACKGROUND ---------- Reference is made to certain Loan Arrangements (hereinafter, the "Loan Arrangements") entered into by and between the Lenders and the Borrowers evidenced by, among other things, the following documents, instruments, and agreements (hereinafter, singly and collectively, the "Loan Documents"): (a) Fourth Amended and Restated Line of Credit Note dated September 30, 1997 in the original principal amount of $6,600,000.00 made by the Borrowers payable to Fleet (the "Fleet Line of Credit Note"); (b) Fourth Amended and Restated Line of Credit Note dated September 30, 1997 in the original principal amount of $5,400,000.00 made by the Borrowers payable to Mellon (the "Mellon Line of Credit Note"); (c) Third Amended and Restated Revolving Credit Note dated March 27, 1997 in the original principal amount of $6,171,428.40 made by the Borrowers payable to Fleet (the "Fleet Term Note"); (d) Third Amended and Restated Revolving Credit Note dated March 27, 1997 in the original principal amount of $4,114,285.60 made by the Borrowers payable to Mellon (the "Mellon Term Note"); (e) Second Amended and Restated Loan Agreement dated December 13, 1995 by and among the Lenders and the Borrowers, as amended by a certain First Amendment to Second Amended and Restated Loan Agreement dated March 27, 1996, a certain Second Amendment to Second Amended and Restated Loan Agreement dated as of June 26, 1996, a certain Third Amendment to Second Amended and Restated Loan Agreement dated August 13, 1996, a certain Fourth Amendment to Second Amended and Restated Loan Agreement dated as of November 13, 1996, a certain Fifth Amendment to Second Amended and Restated Loan Agreement dated March 27, 1997, a certain Sixth Amendment to Second Amended and Restated Loan Agreement dated June 30, 1997, a certain Seventh Amendment to Second Amended and Restated Loan Agreement dated July 31, 1997, and a certain Eighth Amendment to Second Amended and Restated Loan Agreement dated as of September 30, 1997 (hereinafter, as amended and in effect, the "Loan Agreement"); (f) A certain Security Agreement granted by, among others, IGI, IGEN and Immunogenetics, in favor of Fleet dated December 20, 1990; (g) A certain Security Agreement - Intellectual Property granted by, among others, IGI, IGEN and Immunogenetics in favor of Fleet dated December 20, 1990; (h) A certain Security Documents Modification Agreement entered into by, among others, the Borrowers and the Lenders dated as of December 13, 1995; (i) A certain Joinder, Assumption and Security Documents Modification Agreement dated as of May 12, 1992 entered into by, among others, the Borrowers, and Fleet; (j) A certain Mortgage granted by Immunogenetics in favor of Fleet dated December 20, 1990 encumbering certain property located in the borough of Buena, Atlantic County, New Jersey; (k) A certain Mortgage granted by Immunogenetics in favor of Fleet dated May 12, 1992 encumbering certain property located in the township of Buena Vista, Atlantic County, New Jersey; (l) A certain Mortgage granted by Immunogenetics in favor of Fleet dated December 20, 1990 encumbering certain property located in the city of Vineland, Cumberland County, New Jersey; (m) A certain Collateral Assignment of Lessee's Interest in Leases executed by, among others, Immunogenetics in favor of Fleet dated December 20, 1990; (n) A certain Stock Pledge Agreement executed by, among others, IGI and IGEN in favor of Fleet dated December 20, 1990; and 2 (o) A certain Conditional Assignment of Contracts granted by, among others, IGI, IGEN and Immunogenetics in favor of Fleet dated December 20, 1990. The Borrowers acknowledge the expiration of the Fleet Line of Credit Note and the Mellon Line of Credit Note upon the December 31, 1997 maturity and have requested that the Lenders (i) extend the time for repayment of their entire outstanding indebtedness under the Loan Documents until March 31, 1999, (ii) waive certain existing covenant defaults, and (iii) otherwise modify the existing Loan Documents. The Lenders have agreed, but only upon the terms and conditions set forth herein. Accordingly, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is hereby agreed by and among the Lenders and the Borrowers as follows: ACKNOWLEDGMENT OF INDEBTEDNESS ------------------------------ 1. (A) THE bORROWERS HEREBY ACKNOWLEDGE AND AGREE THAT THEY ARE JOINTLY AND SEVERALLY LIABLE TO THE LENDERS FOR THE FOLLOWING AMOUNTS WHICH ARE OUTSTANDING UNDER THE LOAN DOCUMENTS AS OF APRIL 23, 1998:
Fleet Line of Credit Note: -------------------------- Principal $ 6,600,000.00 Interest $ 52,708.34 -------------- Subtotal $ 6,652,708.34 Mellon Line of Credit Note: --------------------------- Principal $ 5,400,000.00 Interest $ 43,125.00 -------------- Subtotal $ 5,443,125.00 Fleet Term Note: ---------------- Principal $ 4,114,285.20 Interest $ 34,171.42 -------------- Subtotal $ 4,148,456.62 Mellon Term Note: ----------------- Principal $ 2,742,856.80 Interest $ 22,780.95 -------------- Subtotal $ 2,765,637.75 TOTAL.................................. $19,009,927.71
3 (b) The Borrowers further acknowledge and agree that they are each jointly and severally liable to the Lenders for all interest accruing under the Loan Documents from and after April 23, 1998, and for all late fees, costs, expenses, and costs of collection (including attorneys' fees) heretofore or hereafter incurred by the Lenders in connection herewith. (Hereinafter, all amounts due as set forth in this Paragraph 1 shall be referred to collectively as the "Obligations"). REPAYMENT OF DEBT ----------------- 2. (a) Fleet Line of Credit Note and Mellon Line of Credit Note. -------------------------------------------------------- (i) From and after the execution of this Agreement, on the 1st day of each month, the Borrowers shall pay to the Lenders a monthly interest payment equal to all accrued interest on the principal balance of the Fleet Line of Credit Note and the Mellon Line of Credit Note, with interest calculated at a floating rate equal to the aggregate of Fleet's Prime Rate (as such Prime Rate may be announced by Fleet from time to time) plus the following percentages for the time periods set forth below each calculated on a per annum basis: Time Period Applicable Interest Rate ----------- ------------------------ Date of Execution of this Prime Rate plus 2.50% Agreement through 7/31/98 From 8/1/98 through 9/30/98 Prime Rate plus 3.00% From 10/1/98 through 12/31/98 Prime Rate plus 4.00% From and after 1/1/99 Prime Rate plus 4.50% In the event the Borrowers have delivered to the Lenders a commitment letter on or before July 31, 1998 reasonably satisfactory to the Lenders, in their discretion, contemplating satisfaction of all obligations due and owing to the Lenders under the Loan Documents on or before August 31, 1998, which commitment letter is issued by a financial institution reasonably acceptable to the Lenders and is subject only to documentation and no further contingencies, the interest rate increase scheduled for August 1, 1998 shall be deferred. In the event that the Borrowers do not satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before August 31, 1998, the August 1, 1998 scheduled interest rate increase to the Prime Rate plus 3.0% shall be effective retroactive to August 1, 1998. In the event that the Borrowers do satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or 4 before August 31, 1998, the August 1, 1998 scheduled interest rate increase shall be waived. Similarly if such commitment letter is received by the Lenders on or before September 30, 1998 contemplating satisfaction of all obligations due and owing to the Lenders under the Loan Documents on or before October 31, 1998, the interest rate increase scheduled for October 1, 1998 shall be deferred. In the event that the Borrowers do satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before October 31, 1998, the October 1, 1998 scheduled interest rate increase shall be waived. In the event the Borrowers do not satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before October 31, 1998, the October 1, 1998 scheduled interest rate increase to the Prime Rate plus 4.00 % shall be effective retroactive to October 1, 1998. Similarly if such commitment letter is received by the Lenders on or before December 31, 1998 contemplating satisfaction of all obligations due and owing to the Lenders under the Loan Documents on or before January 30, 1999, the interest rate increase scheduled for January 1, 1999 shall be deferred. In the event that the Borrowers do satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before January 30, 1999, the January 1, 1999 scheduled interest rate increase shall be waived. In the event the Borrowers do not satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before January 30, 1998, the January 1, 1999 scheduled interest rate increase to the Prime Rate plus 4.50 % shall be effective retroactive to January 1, 1999. (ii) Any amounts paid to cure the financial covenant default pursuant to Paragraph 12(a)(iii) below, shall be applied on a pro rata basis in reduction of the principal balance of the Fleet Line of Credit Note and the Mellon Line of Credit Note. (iii) The entire principal balance, interest (accrued and hereafter accruing), costs, expenses, and other charges due in connection therewith shall be paid in full by the Borrowers on or before 5:00 P.M. eastern standard time on March 31, 1999, it being expressly acknowledged and agreed that TIME IS OF THE ESSENCE . (b) Fleet Term Note and Mellon Term Note. ------------------------------------ (i) From and after the execution of this Agreement, on the 1st day of each month, the Borrowers shall pay to the Lenders a monthly interest payment equal to all accrued interest on the principal balance of the Fleet Term Note and 5 the Mellon Term Note, with interest calculated at a floating rate equal to the aggregate of Fleet's Prime Rate (as such Prime Rate may be announced by Fleet from time to time) plus the following percentages for the time period set forth below each calculated on a per annum basis: Time Period Applicable Interest Rate ----------- ------------------------ Date of Execution of this Prime Rate plus 2.50% Agreement through 7/31/98 From 8/1/98 through 9/30/98 Prime Rate plus 3.00% From 10/1/98 through 12/31/98 Prime Rate plus 4.00% From and after 1/1/99 Prime Rate plus 4.50% In the event the Borrowers have delivered to the Lenders a commitment letter on or before July 31, 1998 satisfactory to the Lenders, in their discretion, contemplating satisfaction of all obligations due and owing to the Lenders under the Loan Documents on or before August 31, 1998, which commitment letter is issued by a financial institution acceptable to the Lenders and is subject only to documentation and no further contingencies, the interest rate increase scheduled for August 1, 1998 shall be deferred. In the event that the Borrowers do not satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before August 31, 1998, the August 1, 1998 scheduled interest rate increase to the Prime Rate plus 3.0% shall be effective retroactive to August 1, 1998. In the event that the Borrowers do satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before August 31, 1998, the August 1, 1998 scheduled interest rate increase shall be waived. Similarly if such commitment letter is received by the Lenders on or before September 30, 1998 contemplating satisfaction of all obligations due and owing to the Lenders under the Loan Documents on or before October 31, 1998, the interest rate increase scheduled for October 1, 1998 shall be deferred. In the event the Borrowers do satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before October 31, 1998, the October 1, 1998 scheduled interest rate increase shall be waived. In the event the Borrowers do not satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before October 31, 1998, the October 1, 1998 scheduled interest rate increase to the Prime Rate plus 4.00 % shall be effective retroactive to October 1, 1998. 6 Similarly if such commitment letter is received by the Lenders on or before December 31, 1998 contemplating satisfaction of all obligations due and owing to the Lenders under the Loan Documents on or before January 30, 1999, the interest rate increase scheduled for January 1, 1999 shall be deferred. In the event that the Borrowers do satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before January 30, 1999, the January 1, 1999 scheduled interest rate increase shall be waived. In the event the Borrowers do not satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before January 30, 1998, the January 1, 1999 scheduled interest rate increase to the Prime Rate plus 4.50 % shall be effective retroactive to January 1, 1999. (ii) The Borrowers shall pay to the Lenders the following amounts on or before the following dates in collected funds to be applied by the Lenders (x) first, on a pro rata basis in reduction of the outstanding indebtedness under the Fleet Term Note and the Mellon Term Note and (y) second, on a pro rata basis as permanent reductions to the outstanding indebtedness under the Fleet Line of Credit Note and the Mellon Line of Credit Note and shall permanently reduce the available credit thereunder by that amount:
Date Amount ---- ------ June 15, 1998 $200,000.00 July 15, 1998 $500,000.00 August 15, 1998 $200,000.00 September 15, 1998 $200,000.00 October 15, 1998 $500,000.00 November 15, 1998 $200,000.00 December 15, 1998 $500,000.00 January 15, 1999 $100,000.00 February 15, 1999 $100,000.00 March 15, 1999 $200,000.00
(iii) In addition to the scheduled principal payments set forth herein, commencing with the month of September, 1998, the Borrowers shall make further principal payments to the Lenders in an amount representing seventy-five (75%) percent of "Monthly Excess Cash Flow", which payments shall be made in collected funds and applied by the Lenders (x) first, on a pro rata basis in reduction of the outstanding indebtedness under the Fleet Term Note and the Mellon Term Note, and (y) second, on a pro rata basis as permanent reductions to the outstanding indebtedness under the Fleet Line of Credit Note and the Mellon Line of Credit Note and shall permanently reduce the available credit thereunder by that amount. "Monthly Excess Cash Flow", as used herein, shall mean balance sheet cash at the end of the month minus the immediately succeeding six (6) weeks' forecasted cash disbursements, inclusive of scheduled principal payments as 7 detailed in Section 2(b)(iii). Such principal payments shall be due and payable forty-five (45) days after the close of each month. (iv) The entire principal balance, interest (accrued and hereafter accruing), costs and expenses, and other charges due in connection therewith shall be paid in full by the Borrowers on or before 5:00 P.M. eastern standard time on March 31, 1999, it being expressly acknowledged and agreed that TIME IS OF THE ESSENCE. (v) Any amounts paid or prepaid on account of the Fleet Term Note or the Mellon Term Note, whether pursuant to this Agreement or otherwise, shall not be available for reborrowing. EQUITY OR PERMITTED DEBT ISSUANCE; TAX REFUNDS ---------------------------------------------- 3. (a) In the event the Borrowers shall raise funds from the issuance of either debt permitted by the Lenders and/or equity instruments, such funds will be applied (i) first, on a pro rata basis in reduction of the outstanding indebtedness under the Fleet Term Note and the Mellon Term Note; and (ii) second, on a pro rata basis as permanent reductions to the outstanding indebtedness under the Fleet Line of Credit Note and the Mellon Line of Credit Note and shall permanently reduce the available credit thereunder by that amount. (b) In the event the Borrowers receive actual funds from any tax refund (local, state, federal, or otherwise), the Borrowers shall immediately deliver the same to the Lenders, in the identical form received and with all necessary endorsements thereon, which funds will be applied (i) first, on a pro rata basis in reduction of the outstanding indebtedness under the Fleet Term Note and the Mellon Term Note; and (ii) second, on a pro rata basis as permanent reductions to the outstanding indebtedness under the Fleet Line of Credit Note and the Mellon Line of Credit Note and shall permanently reduce the available credit thereunder by that amount. CASH MANAGEMENT; DEPOSITORY ACCOUNTS; PAYMENTS ---------------------------------------------- 4. (a) The Borrowers shall continue to maintain their corporate depository bank accounts with Fleet as required by the Loan Agreement. (b) The Borrowers acknowledge that their previous cash management relationship with Fleet, sometimes referred to as the "Target Balance Account", has been terminated. The Borrowers further acknowledge and agree that no overdrafts in any of their demand deposit accounts shall be permitted. (c) Until further notice from the Lenders, all payments required under this Agreement shall be made as and when due to Fleet's address set forth below in Paragraph 23. All receivables collected by the Borrowers shall be deposited into the Borrowers' account with Fleet, 8 Account No. 099-0059-160 (the "General Account"). Any and all funds deposited in the Borrowers' existing lock box account at Fleet shall be transferred to the General Account on a daily basis. Until the occurrence of an Event of Default as defined in Paragraph 20 below, all funds in the General Account shall be available to the Borrowers, subject to Fleet's usual and customary rules and procedures regarding uncollected funds, to pay their regular and ordinary business expenses. (d) Any payments due under this Agreement, or costs and expenses incurred by the Lenders which are reimbursable under this Agreement, may be debited by Fleet from the General Account without any further instruction or authorization of the Borrowers. REQUEST FOR ADVANCES UNDER FLEET LINE OF CREDIT NOTE ---------------------------------------------------- AND MELLON LINE OF CREDIT NOTE ------------------------------ 5. From and after the date of this Agreement, all requests for advances under the Fleet Line of Credit Note and/or the Mellon Line of Credit Note shall be submitted directly to Mr. Daniel D. Butler, Vice President of Fleet, on behalf of the Lenders, for approval and shall be accompanied by a Borrowing Base Certificate in the form of Exhibit "B" and a Covenant Compliance Certificate in the form of Exhibit "C", each as annexed hereto and specifically incorporated by reference herein. WAIVER OF COVENANT DEFAULTS --------------------------- 6. The Lenders hereby waive the following specific covenant defaults which have occurred under the terms and conditions of the Loan Agreement prior to the execution of this Agreement: (a) Sections 3.02 and 5.02 - The Borrowers' failure to remain in good standing under the laws of the State of Delaware as a result of a delay in the filing of IGI's and BCI's franchise taxes; (b) Sections 3.04 and 5.03 - The Borrowers' failure, prior to the execution of this Agreement, to promptly advise the Lenders of all litigation, actions, proceedings, or suits which, if adversely determined, may have a Material Adverse Effect (as defined in Paragraph 20(d) below) on the Borrowers; (c) Section 5.04(a) - The Borrowers' failure to submit audited annual financial statements not more than ninety (90) days after the close of their fiscal year ended December 31, 1997; (d) Section 5.04(e)(iii) - The Borrowers' failure to submit a consolidated capital expenditure budget and separate research and development budget within thirty (30) days after the commencement of their fiscal year beginning January 1, 1998; 9 (e) Section 5.04(e)(iv) - The Borrowers' failure to submit a consolidated cash flow and profit and loss projection within thirty (30) days after commencement of their fiscal year beginning January 1, 1998; (f) Section 5.10 - The Borrowers' failure to maintain an Interest Coverage Ratio of not less than 1.50 to 1.00 for the fiscal year ended December 31, 1997; (g) Section 5.11 - The Borrowers' failure to maintain an Adjusted Interest Coverage Ratio of not less than 3.00 to 1.00 for the fiscal year ended December 31, 1997; (h) Section 7.01(a) - The Borrowers' representation that reports, certificates, financial statements and/or other instrument furnished prior to December 31, 1997 may have been false, inaccurate or misleading in any material respect; and (i) Section 7.01(k) - The Borrowers' failure to generate a positive Net Income for any fiscal quarter ending prior to the execution of this Agreement. Nothing contained in this Paragraph 6 is intended to be, nor shall it be construed as, a waiver of any default or Event of Default occurring or continuing after the execution of this Agreement, or of any other default or Event of Default, other than the specific defaults referenced above. COVENANT AMENDMENTS ------------------- 7. (a) The Loan Agreement is hereby amended by deleting the following specific terms and covenants in their entirety: (i) Section 5.08 - Capital Base; (ii) Section 5.09 - Indebtedness to Capital Base Ratio; (iii) Section 5.09(a) - Current Ratio; (iv) Section 6.06(a)(ii) - Investment; (v) Section 6.06(c) - Acquisition; and (vi) Section 6.09 - Indebtedness for Capital Expenditures (b) The Loan Agreement is hereby amended to delete Mr. John P. Gallo, former President and Chief Executive Officer of IGI, Inc. from the definition of "Management Group" and substituting Mr. Kevin J. Bratton, Treasurer of IGI, Inc. therefor. 10 (c) Section 5.18 of the Loan Agreement is hereby amended by deleting reference to Mr. John P. Gallo as a "senior executive officer" of IGI, Inc. and substituting Mr. Kevin J. Bratton therefor. VOLUNTARY PRINCIPAL PAYMENTS ---------------------------- 8. Provided that there is no then existing Event of Default as set forth in Paragraph 20, below, if the Borrowers shall make voluntary extraordinary principal reductions to the Fleet Term Note and the Mellon Term Note in excess of the payments set forth in Paragraph 2(b), above, in an amount in excess of $250,000.00, as a consequence of fixed asset dispositions permitted by the Lenders in writing, or otherwise, then the effective interest rate applicable to the Fleet Term Note and the Mellon Term Note shall be reduced by twenty-five (25) basis points for each incremental $250,000.00 principal reduction. In no event shall the effective interest rate be reduced by more than one hundred (100) basis points, in the aggregate, as a consequence of such voluntary principal payments. WARRANTS -------- 9. Grant. In consideration for the extension and other accommodations ----- provided by the Lenders under this Agreement, within fourteen (14) days of the execution of this Agreement, IGI, Inc. shall grant to the Lenders, and their respective successors and assigns, stand-alone warrants (collectively, the "Warrants"), the terms of which shall be in conformance with the provisions of -------- this Paragraph 9 and which shall be in a form acceptable, in all respects, to the Lenders in their reasonable discretion, exercisable for shares of IGI, Inc. common stock, as follows: As to Fleet: Two Warrants, one for 150,000 shares (the "Fleet ----- Unconditional Warrant") and one for 150,000 shares (the "Fleet --------------------- ----- Conditional Warrant") ------------------- As to Mellon: Two Warrants, one for 120,000 shares (the "Mellon ------ Unconditional Warrant," and, together with the Fleet Unconditional --------------------- Warrant, the "Unconditional Warrants") and one for 120,000 shares (the ---------------------- "Mellon Conditional Warrant," and, together with the Fleet Conditional -------------------------- Warrant,the "Conditional Warrant"). -------------------- Exercise Price. The exercise price for the Warrants shall be $3.50 per -------------- common share (subject to customary adjustments). In addition to other customary warrant provisions, the Warrants shall each contain "cashless" exercise provisions and anti-dilution provisions. Exercise Period. --------------- (a) Unconditional Warrants. The Unconditional ---------------------- Warrants will be exercisable at any time during the period 11 commencing sixty (60) days after issuance and ending on the fifth (5th) anniversary of issuance. (b) Conditional Warrants. The Conditional Warrants -------------------- will be exercisable during the period commencing September 1, 1998, and ending on the fifth (5th) anniversary of issuance, unless, by 5:00 PM, Boston time, on August 31, 1998, either (a) all Obligations of the Borrowers to the Lenders shall have been paid in full, in which case the Conditional Warrants shall expire, or (b) the Borrowers have delivered an acceptable commitment letter, subject only to documentation and no further contingencies of any kind, from a financial institution acceptable to the Lenders, contemplating a full refinance of the existing obligations which contemplates a closing within thirty (30) days, in which case the Conditional Warrant exercise start date shall be extended to September 30, 1998; provided, however, if all -------- ------- Obligations of the Borrowers to the Lenders have been paid in full on or before such extended start date, the Conditional Warrants shall expire upon such payment. (c) Acceleration of Exercise Star Dates. ----------------------------------- Notwithstanding the foregoing, the Unconditional Warrants shall become immediately exercisable upon the occurrence of an Event of Default, or the exercise by IGI, Inc. of the call option for the issuable shares under such Warrant described below (to afford the Lenders the opportunity exercise the subject Warrant before the call option closing). Call Option. IGI, Inc. shall have a call option on the Warrants, ----------- subject to the following terms: (a) The option may only be exercised as to all,and not less than all, of the shares issuable at such time under the subject Warrant, and shall not cover issued shares (or shares pending issuance). (b) The repurchase price (subject to customary adjustments based upon the operation of the anti-dilution provisions of the Warrants) will be (i) $500,000 for the150,000 shares issuable under the Fleet Unconditional Warrant; (ii)$500,000 for the150,000 shares issuable under the Fleet Conditional Warrant; (iii) $400,000 for the 120,000 shares issuable under the Mellon Unconditional Warrant;and(iv) $400,000 for the 120,000 shares issuable under the Mellon Conditional Warrant. In the event that the number of shares issuable under a Warrant at the time of a call exercise is less than the number of shares initially issuable thereunder due to an exercise 12 there under or a transfer, the repurchase price will be proportionately adjusted. Registration Rights. The Lenders acknowledge that the shares issuable ------------------- upon the exercise of the Warrants (when issued, the "Warrant Shares") will be -------------- "restricted securities" within the meaning of Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"). At any time during the period -------------- commencing (a) as to the Unconditional Warrants, 120 days after their issuance, and (b) as to the Conditional Warrants, on their exercise start date (determined as provided above), and ending on the earlier of (x) the second anniversary of the date as of which all of the Warrants have been exercised (or, as to any unexercised Warrants, the right to exercise has lapsed) and the underlying Warrant Shares are held by the applicable Lender, or (y) the date as of which Rule 144(k) becomes available to the Lenders for the resale of all Warrant Shares held by the Lenders, the Lenders will have the right to demand that IGI, Inc. file an appropriate registration statement under the Securities Act for the resale of the Warrant Shares by the Lenders. The Lenders together will have only one demand registration right; however, (I) if the underwriter cuts back on the number of shares to be marketed, the Lenders together shall be entitled to an additional demand registration right, and (ii) if an S-3 registration is available, the Lenders' demand registration right shall be unlimited. IGI, Inc. will use its best efforts to as soon as practicable following such demand cause such registration statement (which shall specifically permit sales either thereunder or under Rule 144 if it becomes available at any time during the period such registration statement is effective) to become effective, and to keep such registration statement effective until the earlier of (a) the resale of all of the Warrant Shares by the Lenders; or (b) the later of (as may be applicable) (i) 120 days from the initial effective date of such registration statement; (ii) the date which is one year from the date the Warrants are issued to the Lenders; and (iii) the date as of which the resale of all of the Warrant Shares has been permissible under Rule 144 for a continuous 120 day period [without regard to the volume limitations set forth in Rule 144(e) and assuming only for purposes of determining permissibility under this clause (iii) (regardless of whether the Warrants are exercised in a cashless exercise) that all Warrants were exercised in full in cashless exercises as of the respective dates when such Warrants were first exercisable]. IGI, Inc. will also use its best efforts to at all times while the Warrants or Warrant Shares are held by the Lenders to comply with the current public information conditions of Rule 144(c). The Lenders will also be granted "piggy-back" registration rights for as long as they own Warrant Shares. IGI, Inc. agrees to list the Warrant Shares on the American Stock Exchange. 13 EXTENSION FEE ------------- 10. In consideration of the Lenders' agreement to enter into this Agreement, the Borrowers shall pay to Fleet, as agent on behalf of the Lenders, an extension fee (the "Extension Fee") in the sum of $250,000.00 by bank cashiers' check, certified check, federal funds wire transfer, or direct debit from the General Account or the Collection Account as follows: (a) $60,000.00 on or before the execution of this Agreement; (b) $50,000.00 on or before September 30, 1998; and (c) $70,000.00 on or before December 24, 1998; (d) $70,000.00 on or before March 24, 1999. Each portion of the Extension Fee shall be fully earned as of its due date and shall be distributed to the Lenders on a pro rata basis as a fee and not applied to the Obligations. Notwithstanding the foregoing, payment of the portion of the Extension Fee due on September 30, 1998 shall be deferred in the event the Borrowers have delivered to the Lenders on or before September 30, 1998, a commitment letter reasonably satisfactory to the Lenders, in their discretion, contemplating payment in full of all outstanding obligations under the Loan Documents on or before October 31, 1998, which commitment letter is issued by a financial institution reasonably acceptable to the Lenders and is subject only to documentation with no further contingencies. If the Borrowers satisfy their outstanding obligations to the Bank under the Loan Documents in full on or before October 31, 1998, the portion of the Extension Fee payable on September 30, 1998, December 24, 1998, and March 24, 1999 shall be waived. If the Borrowers fail to satisfy their outstanding obligations to the Lenders under the Loan Documents in full on or before October 31, 1998, the portion of the Extension Fee otherwise payable on September 30, 1998 shall be due and payable in full on October 31, 1998, and the portion of the Extension Fee due and payable on December 24, 1998 and on March 24, 1999 shall remain due and payable in full on December 24, 1998 and March 24, 1999, respectively. Similarly, payment of the portion of the Extension Fee due on December 24, 1998 shall be deferred in the event the Borrowers have delivered to the Lenders on or before December 24, 1998, a commitment letter reasonably satisfactory to the Lenders, in their discretion, contemplating payment in full of all outstanding obligations under the Loan Documents on or before January 24, 1999, which commitment letter is issued by a financial institution reasonably acceptable to the Lenders and is subject only to documentation with no further contingencies. If the Borrowers satisfy their outstanding obligations to the Lenders under the Loan Documents in full on or before January 24, 14 1999, the portion of the Extension Fee payable on December 24, 1998, and March 24, 1999 shall be waived. If the Borrowers fail to satisfy their outstanding obligations to the Lenders under the Loan Documents in full on or before January 24, 1999, the portion of the Extension Fee otherwise payable on December 24 1998 shall be due and payable in full on January 24, 1999, and the portion of the Extension Fee due and payable on March 24, 1999 shall remain due and payable in full on March 24, 1999 unless the outstanding obligations to the Lenders under the Loan Documents are paid in full prior to March 24, 1999, in which event, the March 24, 1999 payment shall be waived. AGENT'S FEE ----------- 11. In consideration of Fleet's agreement to enter into this Agreement and to continue to administer the Loan Arrangements as agent on behalf of the Lenders, the Borrowers shall pay to Fleet a monthly $5,000.00 agent's fee commencing March 1, 1998 and continuing on the 1st day of each month thereafter. The agent's fee for each month shall be fully earned as of the first (1st) day of that month, and shall be retained by Fleet as a fee and shall not be applied in reduction of the Obligations. The agent's fees earned as of March 1, 1998 and April 1, 1998, in the aggregate amount of $10,000.00, shall be paid to Fleet upon the execution of this Agreement. FINANCIAL COVENANTS ------------------- 12. In addition to all other covenants contained in the Loan Documents, during the term of this Agreement, the Borrowers shall at all times comply with the following covenants: (a) Minimum Eligible Accounts Receivable and Minimum Eligible ---------------------------------------------------------- Inventory: The Borrowers shall maintain, at all times, combined "Minimum - --------- Eligible Accounts Receivable" and "Minimum Eligible Inventory" of $11,000,000.00. (i) "Minimum Eligible Accounts Receivable" shall include both "Eligible Domestic Accounts Receivable" and "Eligible Foreign Accounts Receivable". "Eligible Domestic Accounts Receivable" shall mean invoices for domestic shipments and services less than ninety (90) days old and otherwise reasonably acceptable to the Lenders. "Eligible Foreign Accounts Receivable" shall mean invoices for international shipments and services not more than sixty (60) days past due and otherwise reasonably acceptable to the Lenders. (ii) "Eligible Inventory" shall mean the lesser of (x) $6,000,000.00 or (y) gross inventory calculated on a FIFO basis less (a)work-in-process, (b) cartons, labels, and obsolescence reserves and (c) any other reserves reasonably deemed necessary by the Lenders. Until 15 further notice from Fleet on behalf of the Lenders, the portion of work-in-process inventory consisting of completed products which has passed all quality assurance tests, and only awaits packaging and labeling, may be included in the calculation of "Eligible Inventory". (1) The Borrowers may, within forty-eight (48) hours of actual knowledge of any violation under this covenant, cure such violation by either, or combination, of the following methods: (1) Paying to the Lenders an amount sufficient to reduce the aggregate balance of the Fleet Line of Credit Note and the Mellon Line of Credit Note by an amount equal to (x) $11,000,000.00 minus (y) the sum of Eligible Domestic Accounts Receivable, plus Eligible Foreign Accounts Receivable, plus ---- Eligible Inventory, plus (z) amounts previously paid by the Borrowers under this subsection only in the event there shall exist a further decrease from the collateral level most recently reported. Said amounts may be reborrowed provided that the Borrowers remain in compliance with the terms and conditions of this Agreement, and the combined Minimum Eligible Accounts Receivable and Minimum Eligible Inventory totals at least $11,000,000.00; or (2) Providing the Lenders with (x) a covenant compliance certificate in the form of Exhibit C, demonstrating the Borrowers' compliance with each of the covenants contained in Paragraph 12, and (y) documentary evidence, including, without limitation, all invoices for new shipments and services, demonstrating the increase in the Borrowers' Eligible Accounts Receivable and Eligible Inventory to the required collateral level. (b) Minimum Fixed Charge Coverage Ratio: The Borrowers will not, ----------------------------------- as of the end of each month during the term of this Agreement, permit their ratio of Cash Flow to Fixed Charges, measured on a rolling three (3) month basis, to be less than the following values during the following periods on the following dates:
Dates Ratio ----- ----- 5/31/98 1.00 to 1.00 6/30/98 1.00 to 1.00 7/31/98 1.00 to 1.00
16 8/31/98 1.00 to 1.00 9/30/98 0.85 to 1.00 10/31/98 0.85 to 1.00 11/31/98 0.85 to 1.00 12/31/98 0.85 to 1.00
As used herein, "Cash Flow" shall be defined as earnings before interest, taxes, depreciation, amortization, and non-cash warrant expenses. As used herein, "Fixed Charges" shall be defined as the sum of scheduled principal payments plus interest expense plus capital expenditures. (c) Minimum Net Worth: The Borrowers shall maintain, at all times, a ----------------- minimum "Net Worth" (as defined in accordance with generally accepted accounting principles) which shall be determined by adding the Borrowers' Total Net Worth as stated in the Borrowers' final, audited financial statements for the fiscal year ended December 31, 1997 minus (a) $500,000.00, minus (b) the non-cash ----- ----- impact of any warrants granted to the Lenders, plus (c) the following amounts as ---- of the last day of each month:
Dates Amount ----- ------ June 30, 1998 $ 0.00 September 30, 1998 $ 475,000.00 December 31, 1998 $1,025,000.00 March 31, 1999 $1,050,000.00
(d) Maximum Capital Expenditures: For the period commencing ---------------------------- January 1, 1998 through and including December 31, 1998, the Borrowers shall not incur consolidated Capital Expenditures (as defined in accordance with generally accepted accounting principles) in excess of the following amounts for the following periods calculated on a cumulative basis: 17
Dates Amount ----- ------ 1/1/98 through 6/30/98 $441,000.00 7/1/98 through 9/30/98 $690,000.00 10/1/98 through 12/31/98 $790,000.00
In addition, for the period commencing January 1, 1999 through and including March 31, 1999, the Borrowers shall not incur consolidated Capital Expenditures in excess of $180,000.00. (e) Disbursements: Commencing with the month of May, 1998, and ------------- continuing each month thereafter, cumulative cash disbursements shall not exceed the lesser of (i) monthly cumulative cash receipts, or (ii) 120% of monthly "Cumulative Budgeted Disbursements". "Cumulative Budgeted Disbursements" shall be based upon the rolling thirteen (13) week cash flow forecast to be delivered to the Lenders in accordance with the provisions of Section 13(e) below. (f) Dividends: The Borrowers shall not pay dividends, or make other --------- distributions of any kind, nature, or manner to any party without the prior written consent of Fleet on behalf of the Lenders. (g) Additional Indebtedness/Liens: The Borrowers shall not incur any ----------------------------- additional indebtedness from and after the date of this Agreement other than in connection with the ordinary course of their business nor shall the Borrowers grant or permit any lien or other encumbrance to exist or be placed upon any of their assets. FINANCIAL REPORTING ------------------- 13. In addition to all other reporting requirements contained in the Loan Documents, the Borrowers shall also furnish to the Lenders the following: (a) Accounts Receivable Agings and Borrowing Base Certificate: The --------------------------------------------------------- Borrowers shall submit to each of the Lenders on Wednesday of each week both (i) Domestic and Foreign Accounts Receivable Agings and (ii) a certificate in the form of Exhibit B annexed hereto and specifically incorporated by reference herein and setting forth the Borrowers' compliance with Paragraph 12(a), above, each of which (i) and (ii) shall be dated as of the last day of the immediately preceding week. In connection with the provision of the Accounts Receivable Agings contemplated herein, the Borrowers shall include a detailed calculation of (x) the total value of the otherwise eligible domestic accounts receivable wherein fifty (50%) percent or more of an individual customer accounts account balances are in excess of ninety (90) days from the invoice date and (y) the total value of otherwise eligible foreign accounts receivable wherein fifty (50%) percent or more of an individual customer account balances are more than sixty (60) days past due. 18 (b) Inventory Report: The Borrowers shall submit to each of the ---------------- Lenders by the 15th of each month, a detailed inventory report dated as of the last day of the immediately preceding month; and (c) Monthly Financial Statements: The Borrowers shall submit to each ---------------------------- of the Lenders, within forty-five (45) days of the close of a calendar month, a consolidated and consolidating statement of profit or loss, cash flow and balance sheet for the immediately preceding month and year-to-date period. Simultaneously with the furnishing of such financial information, the Borrowers shall submit to each of the Lenders, a reconciliation analysis of the actual monthly and year-to-date results compared to the projected results set forth in the "IGI, Inc. 1998 Updated Budget, delivered to the Lenders on March 10, 1998, together with a detailed explanation of any and all material variances. (d) Financial Statements: On or before the execution of this -------------------- Agreement, the Borrowers shall deliver to each of the Lenders internally prepared, draft financial statements, and a draft copy of their certified public accountant's management letter, for the fiscal year ended December 31, 1997. The Borrowers shall use their best efforts to deliver final original copies of audited financial statements, together with their certified public accountant's unqualified opinion and management letter to each of the Lenders on or before April 15, 1998, but, in any event, shall deliver the same to each of the Lenders no later than May 15, 1998. The final, original audited financial statements shall be in form and substance without material adverse deviation from the draft financial statements to be delivered to the Lenders on or before the execution of this Agreement. The unqualified opinion may include an explanatory paragraph with respect to U.S. Department of Agriculture actions or directives and with respect to possible restatements of prior periods. (e) Rolling Thirteen (13) Week Cash Flow Forecast: The Borrowers --------------------------------------------- shall submit to each of the Lenders, by the fifteenth (15) day of each month, an updated rolling thirteen (13) week cash flow forecast, similar in form and substance to the report provided to the Lenders at the meeting on March 10, 1998, which report is incorporated herein by reference, whereby the first four (4) week period shall be deleted and updated with the four (4) week period immediately succeeding the last week included in the previous report. (f) Business Plan/Refinancing: On or before May 31, 1998, the ------------------------- Borrowers shall submit to each of the Lenders, (i) a business plan encompassing the fiscal periods 1998 through 2000, which business plan shall include, at a minimum, monthly pro forma profit and loss statements, balance sheets and cash flow statements; and (ii) a schedule of their proposed efforts to coordinate a refinancing of the entire outstanding indebtedness due and owing to the Lenders under the Loan Documents which schedule shall include, without limitation, detailed action steps and target dates with respect to obtaining alternative financing arrangements. 19 (g) Certifications: All such financial reporting shall be certified -------------- (to the best knowledge and belief of the certifying officer) both as to the accuracy and compliance with required covenants by IGI's Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, or Treasurer. Any such certification shall be deemed to have been made on behalf of each of the Borrowers. FINANCIAL CONSULTANT -------------------- 14. The Borrowers shall continue to employ Executive Sounding Board Associates, Inc., or such other turnaround consultant which the Borrowers wish to employ and which is reasonably acceptable to the Lenders in their discretion for a minimum of fifty (50) hours per week, whose duties shall include, without limitation, interim management. The Borrowers further acknowledge and agree that Executive Sounding Board, Inc. and/or such other turnaround consultant retained by the Borrowers shall at all times make available to the Lenders such financial or other information which the Lenders in their discretion may reasonably request concerning the Borrowers. Upon the hiring of both a permanent President/Chief Operating Officer and Chief Financial Officer, the employment of Executive Sounding Board Associates, Inc., or such other turnaround consultant acceptable to the Lenders, may be reduced to twenty-four (24) hours per week. ADDITIONAL DOCUMENTS -------------------- 15. Upon the execution of this Agreement, and at any time thereafter, the Borrowers shall also execute and deliver to the Lenders such additional documentation as the Lenders in their discretion may reasonably require in order to grant and/or perfect the Lenders' security interest in all assets of the Borrowers, including, without limitation, all (i) motor vehicles, (ii) intellectual property including, without limitation, all patents and/or trademarks, and (iii) license agreements. The Borrowers represent that all locations where inventory is located and all patents or other intellectual property in which the Borrowers have an interest are listed, respectively, on Exhibit "D" and Exhibit "E" each as annexed hereto and specifically incorporated by reference herein. In addition, on or before April 30, 1998, the Borrowers shall submit to the Lenders for their review and consideration a minimum of one (1) proposal to factor the Borrowers' foreign accounts receivable and obtain a minimum of one (1) proposal for the issuance of foreign credit insurance. On or before May 31, 1998 the Borrowers shall (i) obtain for the benefit of the Lenders foreign credit insurance in form and substance reasonably satisfactory to the Lenders, wherein the Lenders shall be named as Loss Payee, or (ii) enter into an arrangement to factor the Borrowers' foreign accounts receivable, upon such terms and conditions as are reasonably satisfactory to the Lenders. 20 COMPLIANCE CERTIFICATE ---------------------- 16. Upon or before the execution of this Agreement, and within forty five (45) days of each month end during the term of this Agreement, the Borrowers shall deliver to each of the Lenders, a covenant compliance certificate in the form of Exhibit C setting forth the Borrowers' compliance with each of the financial covenants referenced in Paragraph 12, above. APPRAISALS; FIELD EXAMINATIONS ------------------------------ 17. The Borrowers agree to cooperate with the Lenders to enable the Lenders to obtain updated appraisals of all real estate and personal property owned by the Borrowers and to conduct independent field examinations of the Borrowers' books and records which cooperation shall include, without limitation, providing the Lenders and/or their appraisers, examiners and/or other representatives, reasonable access to such property and shall make available such financial and/or other information regarding the property, books and records, and other assets of the Borrowers as may be reasonably requested by the Lenders in their discretion. The Borrowers shall reimburse the Lenders for all reasonable out of pocket costs and expenses of independent third parties incurred by the Lenders in connection with such appraisals and field examinations. WAIVER OF CLAIMS ---------------- 18. The Borrowers hereby acknowledge and agree that they have no offsets, defenses, claims, or counterclaims against the Lenders or the Lenders' officers, directors, employees, attorneys, representatives, predecessors, affiliates, successors, and assigns with respect to the Obligations, or otherwise, and that if the Borrowers now have, or ever did have, any offsets, defenses, claims, or counterclaims against the Lenders or the Lenders' officers, directors, employees, attorneys, representatives, predecessors, affiliates, successors, and assigns, whether known or unknown, at law or in equity, from the beginning of the world through this date and through the time of execution of this Agreement, all of them are hereby expressly WAIVED, and the Borrowers each hereby RELEASE the Lenders and the Lenders' officers, directors, employees, attorneys, representatives, predecessors, affiliates, successors, and assigns from any liability therefor, to the extent allowed by applicable laws. RATIFICATION OF LOAN DOCUMENTS; FURTHER ASSURANCES -------------------------------------------------- 19. (a) THE BORROWERS HEREBY RATIFY, CONFIRM, AND REAFFIRM ALL AND SINGULAR THE TERMS AND CONDITIONS OF THE LOAN DOCUMENTS, AND SPECIFICALLY RATIFY, CONFIRM, AND REAFFIRM THEIR AUTHORITY TO EXECUTE SAME. THE BORROWERS FURTHER ACKNOWLEDGE AND AGREE THAT, EXCEPT AS SPECIFICALLY MODIFIED IN THIS AGREEMENT, ALL TERMS AND CONDITIONS OF THOSE DOCUMENTS, INSTRUMENTS, AND AGREEMENTS SHALL REMAIN 21 IN FULL FORCE AND EFFECT. (b) THE BORROWERS SHALL, FROM AND AFTER THE EXECUTION OF THIS AGREEMENT, EXECUTE AND DELIVER TO THE LENDERS WHATEVER ADDITIONAL DOCUMENTS, INSTRUMENTS, AND AGREEMENTS THAT THE LENDERS MAY REASONABLY REQUIRE IN ORDER TO VEST OR PERFECT THE LOAN DOCUMENTS AND THE COLLATERAL GRANTED THEREIN MORE SECURELY IN THE LENDERS AND TO OTHERWISE GIVE EFFECT TO THE TERMS AND CONDITIONS OF THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, A COMPLETE AMENDMENT AND RESTATEMENT OF THE LOAN DOCUMENTS WITHIN THIRTY (30) DAYS OF ANY REQUEST BY THE LENDERS FOR ANY SUCH ADDITIONAL DOCUMENTATION. EVENTS OF DEFAULT ----------------- 20. The occurrence of any one or more of the following events shall constitute an event of default (hereinafter, an "Event of Default") under this Agreement: (a) The failure of the Borrowers to pay or deposit any amounts due hereunder or under any of the Loan Documents as and when due; (b) The failure of the Borrowers to comply with any other term or condition of this Agreement (which default, other than a default under Paragraph 12(a), may be cured within three (3) days in connection with any non-monetary default capable of being cured); (c) The filing of a petition for relief by or against any one or more of the Borrowers under the United States Bankruptcy Code; (d) The existence or issuance of any directive or action by either the United States Department of Agriculture or Office of the Inspector General of the United States, or any other governing body, which materially adversely impact the Borrowers' ability to manufacture, sell, or ship products, or otherwise have a Material Adverse Effect (defined below) on the Borrowers' financial condition or with the passage of time could have a material adverse impact on the Borrowers' financial condition, assets, operating status, or projected financial condition. For the purposes of this Agreement, "Material Adverse Effect" shall be defined as any material adverse effect on the Borrowers' financial condition, assets, operating status or projected financial condition or any fact or circumstance that, singly or in the aggregate with any fact or circumstance, has a reasonable likelihood of resulting in or leading to the inability of the Borrowers to perform in any material respect their obligations under this Agreement or under any Loan Document or the inability of Agent and/or Lenders to enforce in any material respect the rights purported to be granted to them under this Agreement or any Loan Document or which have a reasonable likelihood of having a material adverse effect on the ability of the 22 Borrowers to effectuate (including hindering or unduly delaying) the transactions contemplated by this Agreement and the loan Documents on the terms contemplated hereby and thereby. (e) The occurrence of any further event of default under, and as defined in, any of the Loan Documents. RIGHTS UPON DEFAULT ------------------- 21. Upon the occurrence of any Event of Default, all Obligations shall become immediately due and payable in full, without demand, notice, or protest, all of which are hereby expressly WAIVED. In addition, upon the occurrence of any such Event of Default, the Lenders may immediately commence enforcing their rights and remedies pursuant to the Loan Documents and otherwise. Further, upon the occurrence of an Event of Default, interest shall accrue on the outstanding principal balance of the Obligations at the default rate of interest set forth in the Loan Documents. REIMBURSEMENT OF COSTS AND EXPENSES ----------------------------------- 22. Upon the execution of this Agreement, the Borrowers shall pay to the Lenders an amount equal to any and all reasonable attorneys' fees and expenses incurred in connection with this matter through the date of this Agreement. In addition, upon Demand, or upon the occurrence of any Event of Default, as defined in Paragraph 20, above, the Borrowers shall reimburse the Lenders for any and all reasonable costs and expenses, including, without limitation, all reasonable costs, expenses and fees of all accountants, appraisers, auditors and other representatives of the Lenders, and costs of collection (including attorneys' fees) hereafter incurred by the Lenders in connection with the clarification, modification, protection, preservation, and enforcement by the Lenders of their rights and remedies. NOTICES ------- 23. Any notices required to be sent to the Lenders and the Borrowers shall be forwarded via recognized overnight courier, addressed as follows: If to the Lenders: Fleet National Bank 40 Westminster Street Mail Code: RI OP TO5A Providence, Rhode Island 02901 Attn: Mr. Daniel D. Butler, Vice President Telephone: (401) 459-4678 Fax: (401) 459-4963 23 With a copy to: Steven T. Greene, Esquire Riemer & Braunstein Three Center Plaza Boston, Massachusetts 02108 Telephone: (617) 523-9000 Fax: (617) 723-6831 Mellon Bank Mellon Bank Center 1735 Market Street, P.O. Box 7899 Philadelphia, PA 19101-7899 Telephone: 215-553-2614 Fax: 215-553-4560 Attn: Susan C. Saxer Senior Vice President With a copy to: Peter Leibundgut, Esquire Blank, Rome and Comisky Woodland Falls Corporate Park 210 Lake Drive East Cherry Hill, New Jersey 08002 Telephone: 609-779-3644 Fax: 609-779-7647 If to the Borrowers: IGI, Inc. IGEN, Inc. Immunogenetics, Inc. Blood Cells, Inc. Wheat Road and Lincoln Avenue Buena, New Jersey 08310 Attn: Kevin Bratton, Treasurer Telephone: (609) 697-1441 Fax: (609) 697-1001 24 With a copy to: Paul Brountas, Esquire Hale and Dorr, LLP 60 State Street Boston, Massachusetts 02109 Telephone: (617) 526-6000 Fax: (617) 526-5000 WAIVERS ------- 24. Non-Interference. From and after the occurrence of any Event of ---------------- Default, the Borrowers agree not to interfere with the exercise by the Lenders of any of their rights and remedies. The Borrowers further agree that they shall not seek to distrain or otherwise hinder, delay, or impair the Lenders' lawful efforts to realize upon the Collateral, or otherwise to enforce their rights and remedies pursuant to the Loan Documents. This provision shall be specifically enforceable by the Lenders. 25. Automatic Stay. The Borrowers agree that upon the filing of any -------------- Petition for Relief by or against any one or more of the Borrowers under the United States Bankruptcy Code, the Lenders shall be entitled to file a motion for immediate and complete relief from the automatic stay, and the Lenders shall be permitted to proceed to protect and enforce their rights and remedies under applicable law. 26. Jury Trial. The Borrowers hereby make the following waiver knowingly, ---------- voluntarily, and intentionally, and understand that the Lenders, in entering into this Agreement or making any financial accommodations to the Borrowers, whether now or in the future, are relying on such waiver: TO THE EXTENT ALLOWED BY APPLICABLE LAW, THE BORROWERS HEREBY IRREVOCABLY WAIVE ANY PRESENT OR FUTURE RIGHT TO A JURY IN ANY TRIAL OF ANY CASE OR CONTROVERSY IN WHICH THE LENDERS BECOME A PARTY (WHETHER SUCH CASE OR CONTROVERSY IS INITIATED BY OR AGAINST THE LENDERS OR IN WHICH THE LENDERS ARE JOINED AS A PARTY LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF, OR IS IN RESPECT OF, ANY RELATIONSHIP BETWEEN THE BORROWERS, OR ANY OTHER PERSON, AND THE LENDERS. ENTIRE AGREEMENT ---------------- 27. This Agreement shall be binding upon the Borrowers and the Borrowers' officers, directors, employees, representatives, successors,and assigns, and shall inure to the benefit of the Lenders and the Lenders' successors and assigns. This Agreement and the Loan Documents and all documents, instruments, and agreements executed in connection herewith 25 or therewith incorporate all of the discussions and negotiations between the Borrowers and the Lenders, either expressed or implied, concerning the matters included herein and in such other documents, instruments and agreements, any statute, custom, or usage to the contrary notwithstanding. No such discussions or negotiations shall limit, modify, or otherwise affect the provisions hereof. No modification, amendment, or waiver of any provision of this Agreement, or any provision of any other document, instrument, or agreement between the Borrowers and the Lenders shall be effective unless executed in writing by the party to be charged with such modification, amendment, or waiver, and if such party be the Lenders, then by a duly authorized officer thereof. CONSTRUCTION OF AGREEMENT ------------------------- 28. (a) This Agreement and all other documents, instruments, and agreements incidental hereto and all rights and obligations hereunder and thereunder, including matters of construction, validity, and performance, shall be governed by and construed in accordance with the law of the State of New Hampshire and are intended to take effect as sealed instruments. The Borrowers hereby consent to the jurisdiction of the Courts of the State of New Hampshire for all purposes with respect to this Agreement and the Obligations. The captions of this Agreement are for convenience purposes only, and shall not be used in construing the intent of the Lenders and the Borrowers under this Agreement. In the event 26 of any inconsistency between the provisions of this Agreement and any other document, instruments, or agreement entered into by and between the Lenders and the Borrowers, the provisions of this Agreement shall govern and control. (b) The Borrowers further acknowledge and agree that the Lenders and the Borrowers have prepared this Agreement and all documents, instruments, and agreements incidental hereto and with the aid and assistance of their respective counsel. Accordingly, when interpreting this Agreement and all such other documents, instruments, and agreements, each of them shall be deemed to have been drafted by the Lenders and the Borrowers and shall not be construed against either the Lenders or the Borrowers. ILLEGALITY OR UNENFORCEABILITY ------------------------------ 29. Any determination that any provision or application of this Agreement is invalid, illegal, or unenforceable in any respect, or in any instance, shall not effect the validity, legality, or enforceability of any such provision in any other instance, or the validity, legality, or enforceability of any other provision of this Agreement. COMPREHENSIVE AGREEMENT ----------------------- 30. The Borrowers warrant and represent to the Lenders that the Borrowers: (i) have read and understand all of the terms and conditions of this Agreement, (ii) intend to be bound by the terms and conditions of this Agreement, (iii) are executing this Agreement freely and voluntarily, without duress, after consultation with independent counsel of their own selection. IN WITNESS WHEREOF, this Agreement has been executed this 29 day of April, 1998. FLEET BANK-N.H. IGI, INC. By: /s/ Daniel B. Butler By: /s/ Edward B. Hager ---------------------------- --------------------------- Title: Banking Officer Title: Chairman ------------------------- ------------------------ MELLON BANK IGEN, INC. By: /s/ Walter Letts By: /s/ George P. Warren, Jr. ----------------------------- -------------------------- Title: Vice President Title: Secretary ------------------------- ------------------------ IMMUNOGENETICS, INC. By: /s/ Edward B. Hager -------------------------- 27 Title: Chairman ------------------------ BLOOD CELLS, INC. By: /s/ Edward B. Hager ------------------------------ Title: Chairman --------------------------- 28 STATE OF RHODE ISLAND ______________, ss April ____, 1998 Then personally appeared the above named ___________________, the _______________ of Fleet Bank- N.H. and acknowledged the foregoing to be the free act and deed of Fleet Bank- N.H., before me, _________________________ Notary Public My Commission Expires: STATE OF ___________ ______________, ss April ____, 1998 Then personally appeared the above named ________________ , the ____________ of Mellon Bank, N.A. and acknowledged the foregoing to be the free act and deed of Mellon Bank, N.A., before me, _________________________ Notary Public My Commission Expires: STATE OF ________________ _____________, ss April ____, 1998 Then personally appeared the above named __________________________, the ________________ of IGI, Inc. and acknowledged the foregoing to be the free act and deed of IGI, Inc., before me, _________________________ Notary Public My Commission Expires: 29 STATE OF ________________ _____________, ss April ____, 1998 Then personally appeared the above named __________________________, the ________________ of IGEN, Inc. and acknowledged the foregoing to be the free act and deed of IGEN, Inc., before me, _________________________ Notary Public My Commission Expires: STATE OF ________________ _____________, ss April ____, 1998 Then personally appeared the above named __________________________, the ________________ of Immunogenetics, Inc. and acknowledged the foregoing to be the free act and deed of Immunogenetics, Inc., before me, _________________________ Notary Public My Commission Expires: STATE OF ________________ _____________, ss April ____, 1998 Then personally appeared the above named __________________________, the ________________ of Blood Cells, Inc. and acknowledged the foregoing to be the free act and deed of Blood Cells, Inc., before me, _________________________ Notary Public My Commission Expires: 30 EX-10.23 3 FORBEARANCE AGREEMENT DATED 8/19/98 EXHIBIT 10.23 FORBEARANCE AGREEMENT --------------------- This Forbearance Agreement (hereinafter, the "Agreement") is made this _19th__ day of August, 1998 by and among: FLEET BANK-N.H., a banking and trust company organized under the laws of New Hampshire ("Fleet"); MELLON BANK, N.A., a national banking association ("Mellon"); and IGI, INC., a Delaware corporation ("IGI"), IGEN, INC., a Delaware corporation ("IGEN"); IMMUNOGENETICS, INC., a Delaware corporation ("Immunogenetics"); and BLOOD CELLS, INC., a Delaware corporation ("BCI"). Fleet and Mellon are hereinafter sometimes individually referred to as a "Lender" and collectively referred to as the "Lenders", and IGI, IGEN, Immunogenetics, BCI, and each of their subsidiaries as set forth on Exhibit "A" annexed hereto and specifically incorporated by reference herein, are hereinafter sometimes individually referred to as a "Borrower" and collectively referred to as the "Borrowers". BACKGROUND ---------- Reference is made to certain Loan Arrangements (hereinafter, the "Loan Arrangements") entered into by and between the Lenders and the Borrowers evidenced by, among other things, the following documents, instruments, and agreements (hereinafter, singly and collectively, the "Loan Documents"): (a) Fourth Amended and Restated Line of Credit Note dated September 30, 1997 in the original principal amount of $6,600,000.00 made by the Borrowers payable to Fleet (the "Fleet Line of Credit Note"); (b) Fourth Amended and Restated Line of Credit Note dated September 30, 1997 in the original principal amount of $5,400,000.00 made by the Borrowers payable to Mellon (the "Mellon Line of Credit Note"); (c) Third Amended and Restated Revolving Credit Note dated March 27, 1997 in the original principal amount of $6,171,428.40 made by the Borrowers payable to Fleet (the "Fleet Term Note"); (d) Third Amended and Restated Revolving Credit Note dated March 27, 1997 in the original principal amount of $4,114,285.60 made by the Borrowers payable to Mellon (the "Mellon Term Note"); (e) Second Amended and Restated Loan Agreement dated December 13, 1995 by and among the Lenders and the Borrowers, as amended by a certain First Amendment to Second Amended and Restated Loan Agreement dated March 27, 1996, a certain Second Amendment to Second Amended and Restated Loan Agreement dated as of June 26, 1996, a certain Third Amendment to Second Amended and Restated Loan Agreement dated August 13, 1996, a certain Fourth Amendment to Second Amended and Restated Loan Agreement dated as of November 13, 1996, a certain Fifth Amendment to Second Amended and Restated Loan Agreement dated March 27, 1997, a certain Sixth Amendment to Second Amended and Restated Loan Agreement dated June 30, 1997, a certain Seventh Amendment to Second Amended and Restated Loan Agreement dated July 31, 1997, and a certain Eighth Amendment to Second Amended and Restated Loan Agreement dated as of September 30, 1997 (hereinafter, as amended and in effect, the "Loan Agreement"); (f) A certain Security Agreement granted by, among others, IGI, IGEN and Immunogenetics, in favor of Fleet dated December 20, 1990; (g) A certain Security Agreement - Intellectual Property granted by, among others, IGI, IGEN and Immunogenetics in favor of Fleet dated December 20, 1990; (h) A certain Security Documents Modification Agreement entered into by, among others, the Borrowers and the Lenders dated as of December 13, 1995; (i) A certain Joinder, Assumption and Security Documents Modification Agreement dated as of May 12, 1992 entered into by, among others, the Borrowers, and Fleet; (j) A certain Mortgage granted by Immunogenetics in favor of Fleet dated December 20, 1990 encumbering certain property located in the borough of Buena, Atlantic County, New Jersey; (k) A certain Mortgage granted by Immunogenetics in favor of Fleet dated May 12, 1992 encumbering certain property located in the township of Buena Vista, Atlantic County, New Jersey; (l) A certain Mortgage granted by Immunogenetics in favor of Fleet dated December 20, 1990 encumbering certain property located in the city of Vineland, Cumberland County, New Jersey; (m) A certain Collateral Assignment of Lessee's Interest in Leases executed by, among others, Immunogenetics in favor of Fleet dated December 20, 1990; (n) A certain Stock Pledge Agreement executed by, among others, IGI and IGEN in favor of Fleet dated December 20, 1990; and 2 (o) A certain Conditional Assignment of Contracts granted by, among others, IGI, IGEN and Immunogenetics in favor of Fleet dated December 20, 1990. (p) A certain Extension Agreement dated April 29, 1998 (the "Extension Agreement"). The Borrowers acknowledge and agree that (i) the Borrowers are in default of the terms and conditions of the Loan Documents (ii)all amounts outstanding under the Loan Documents are due and owing in full, and (iii) the Lenders have no obligation to make any advances under the Loan Documents. The Borrowers have requested that the Lenders forbear from enforcing their rights and remedies under the Loan Documents upon default and the Lenders have agreed, but only upon the terms and conditions set forth herein. Accordingly, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is hereby agreed by and among the Lenders and the Borrowers as follows: ACKNOWLEDGMENT OF INDEBTEDNESS ------------------------------ 1. (a) The Borrowers hereby acknowledge and agree that they are jointly and severally liable to the Lenders for the following amounts which are outstanding under the Loan Documents as of August 18, 1998: Fleet Line of Credit Note: ------------------------- Principal $6,600,000.00 ------------- Interest $ 35,841.67 ------------- Subtotal $6,635,841.67 ------------- Mellon Line of Credit Note: -------------------------- Principal $5,400,000.00 ------------- Interest $ 29,325.00 ------------- Subtotal $5,429,325.00 Fleet Term Note: --------------- Principal $3,994,285.20 Interest $ 21,691.19 ------------- Subtotal $4,015,976.39 3 Mellon Term Note: ----------------- Principal $ 2,662,856.80 Interest $ 14,460.79 -------------- Subtotal $ 2,677,317.59 TOTAL................ $18,758,460.65 -------------- (b) The Borrowers further acknowledge and agree that they are each jointly and severally liable to the Lenders for all interest accruing under the Loan Documents from and after April 23, 1998, and for all late fees, costs, expenses, and costs of collection (including attorneys' fees) heretofore or hereafter incurred by the Lenders in connection herewith. (Hereinafter, all amounts due as set forth in this Paragraph 1 shall be referred to collectively as the "Obligations"). REPAYMENT OF DEBT ----------------- 2. (a) Fleet Line of Credit Note and Mellon Line of Credit Note. -------------------------------------------------------- (i) From and after the execution of this Agreement, on the 1st day of each month, the Borrowers shall pay to the Lenders a monthly interest payment equal to the cash portion of all accrued interest on the principal balance of the Fleet Line of Credit Note and the Mellon Line of Credit Note, with the cash portion of the interest calculated at a floating rate equal to the aggregate of Fleet's Prime Rate (as such Prime Rate may be announced by Fleet from time to time) plus the following percentages scheduled under "cash portion"for the time periods set forth below each calculated on a per annum basis:
Time Period Cash Portion Accrued Portion Total Interest ------------ ------------- ---------------- --------------- From 8/1/98 Prime Rate 1.0% Prime Plus through 9/30/98 plus 2.50% 3.5% From 10/1/98 Prime Rate 2.0% Prime Plus through 11/30/98 plus 2.50% 4.5% From 12/1/98 Prime Rate 3.0% Prime Plus through 1/31/99 plus 2.50% 5.5%
Additional interest shall accrue on the principal balance of the Fleet Line of Credit Note and the Mellon Line of Credit Note at the rate scheduled above under "accrued portion" on a per annum basis. The "accrued portion" of the interest charges shall be paid by the Borrowers upon the earlier of (x) satisfaction of the Obligations, in their entirety, or, (y) the Termination Date. In the event the Borrowers have delivered to the Lenders a commitment letter on or before 4 September 30, 1998 reasonably satisfactory to the Lenders, in their discretion, contemplating satisfaction of all obligations due and owing to the Lenders under the Loan Documents on or before October 31, 1998, which commitment letter is issued by a financial institution and/or other party reasonably acceptable to the Lenders and is subject only to documentation and no further contingencies other than such contingencies acceptable to the Lenders as are ordinary and necessary in transactions of similar type, the interest rate increase scheduled for October 1, 1998 shall be deferred. In the event that the Borrowers do not satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before October 31, 1998, the October 1, 1998 scheduled interest rate increase to the Prime Rate plus 4.5% shall be effective retroactive to October 1, 1998. In the event that the Borrowers do satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before October 31, 1998, the October 1, 1998 scheduled interest rate increase shall be waived. Similarly if such commitment letter is received by the Lenders on or before November 30, 1998 contemplating satisfaction of all obligations due and owing to the Lenders under the Loan Documents on or before December 31, 1998, the interest rate increase scheduled for December 1, 1998 shall be deferred. In the event that the Borrowers do satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before December 31, 1998, the December 1, 1998 scheduled interest rate increase shall be waived. In the event the Borrowers do not satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before December 31, 1998, the December 1, 1998 scheduled interest rate increase to the Prime Rate plus 5.5 % shall be effective retroactive to December 1, 1998. (ii) Any amounts paid to cure the financial covenant default pursuant to Paragraph 12(a)(iii) of the Extension Agreement, shall be applied on a pro rata basis in reduction of the principal balance of the Fleet Line of Credit Note and the Mellon Line of Credit Note. (iii) The entire principal balance, interest (accrued and hereafter accruing), costs, expenses, and other charges due in connection therewith shall be paid in full by the Borrowers on or before 5:00 P.M. eastern standard time on January 31, 1999, it being expressly acknowledged and agreed that TIME IS OF THE ESSENCE. (b) Fleet Term Note and Mellon Term Note. ------------------------------------ 5 (i) From and after the execution of this Agreement, on the 1st day of each month, the Borrowers shall pay to the Lenders a monthly interest payment equal to the cash portion of the interest on the principal balance of the Fleet Term Note and the Mellon Term Note, with the cash portion of the interest calculated at a floating rate equal to the aggregate of Fleet's Prime Rate (as such Prime Rate may be announced by Fleet from time to time) plus the following percentages for the time period set forth below each calculated on a per annum basis:
Time Period Cash Portion Accrued Portion Total Interest ----------- ------------ --------------- -- ------------ From 8/1/98 Prime Rate 1.0% Prime Plus through 9/30/98 plus 2.50% 3.5% From 10/1/98 Prime Rate 2.0% Prime Plus through 11/30/98 plus 2.50% 4.5% From 12/1/98 Prime Rate 3.0% Prime Plus through 1/31/99 plus 2.50% 5.5%
Additional interest shall accrue on the principal balance of the Fleet Term Note and the Mellon Term Note at the rate scheduled above under "accrued Portion" on a per annum basis. The "accrued portion" of the interest charges shall be paid by the Borrowers upon the earlier of (x) satisfaction of the Obligations, in their entirety, or, (y) the Termination Date. In the event the Borrowers have delivered to the Lenders a commitment letter on or before September 30, 1998 reasonably satisfactory to the Lenders, in their discretion, contemplating satisfaction of all obligations due and owing to the Lenders under the Loan Documents on or before October 31, 1998, which commitment letter is issued by a financial institution and/or other party reasonably acceptable to the Lenders and is subject only to documentation and no further contingencies other than such contingencies acceptable to the Lenders as are ordinary and necessary in transactions of similar type, the interest rate increase scheduled for October 1, 1998 shall be deferred. In the event that the Borrowers do not satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before October 31, 1998, the October 1, 1998 scheduled interest rate increase to the Prime Rate plus 4.5% shall be effective retroactive to October 1, 1998. In the event that the Borrowers do satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before October 31, 1998, the October 1, 1998 scheduled interest rate increase shall be waived. Similarly if such commitment letter is received by the Lenders on or before November 30, 1998 contemplating satisfaction of all obligations due and 6 owing to the Lenders under the Loan Documents on or before December 31, 1998, the interest rate increase scheduled for December 1, 1998 shall be deferred. In the event that the Borrowers do satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before December 31, 1998, the December 1, 1998 scheduled interest rate increase shall be waived. In the event the Borrowers do not satisfy their entire outstanding obligations to the Lenders under the Loan Documents on or before December 31, 1998, the December 1, 1998 scheduled interest rate increase to the Prime Rate plus 5.5 % shall be effective retroactive to December 1, 1998. (ii) The entire principal balance, interest (accrued and hereafter accruing), costs and expenses, and other charges due in connection therewith shall be paid in full by the Borrowers on or before 5:00 P.M. eastern standard time on January 31, 1999, it being expressly acknowledged and agreed that TIME IS OF THE ESSENCE. (iii) Any amounts paid or prepaid on account of the Fleet Term Note or the Mellon Term Note, whether pursuant to this Agreement or otherwise, shall not be available for reborrowing. REQUEST FOR ADVANCES UNDER FLEET LINE OF CREDIT NOTE ----------------------------------------------------- AND MELLON LINE OF CREDIT NOTE ------------------------------ 3. From and after the date of this Agreement, all requests for advances under the Fleet Line of Credit Note and/or the Mellon Line of Credit Note shall be submitted directly to Mr. Daniel D. Butler, Vice President of Fleet, on behalf of the Lenders, for approval and shall be accompanied by a Borrowing Base Certificate in the form of Exhibit "B" and a Covenant Compliance Certificate in the form of Exhibit "C", each as annexed hereto and specifically incorporated by reference herein. The Borrowers acknowledge and agree that (i) the Lenders have no obligation to make any advances under the Loan Documents, (ii) any determination to make any advance shall be solely in the discretion of the Lenders, (iii) the determination by the Lender to make any advance shall not result in any obligation to make any further advances, and (iv) any advance made by the Lenders in the discretion of the Lenders shall be secured by and governed by the terms of the Loan Documents. FORBEARANCE FROM ACTION BASED ON SPECIFIC COVENANT DEFAULTS ----------------------------------------------------------- 4. During the term of this Agreement, the Lenders hereby agree to forbear from exercising their rights and remedies under the Loan Documents arising from the following specific covenant defaults which have occurred under the terms and conditions of the Extension Agreement prior to the execution of this Agreement: 7 (a) Section 2(b)(ii) - $500,000.00 and $200,000.00 principal payments due on July 15, 1998 and August 15, 1998 not paid; (b) Section 12(a) - Minimum Eligible Accounts and Minimum Eligible Inventory levels not met; (c) Sections 12(b)- Minimum Fixed Charge Coverage Ratio of 1.00 to 1.00 not met; (d) Section 12(c) - Minimum Net Worth not met; (e) Section 13(d) - Submission of final, original, audited financial statements for fiscal year ended December 31, 1997, together with certified public accountant's unqualified opinion and management letter not delivered by May 15, 1998 and without material adverse change from the 1997 draft financial statement previously delivered to the Lenders; (f) Section 13(f) - Business Plan/Refinancing not met; and (g) Section 15 - Additional Documents (failure to obtain foreign credit insurance on behalf of Lenders or failure to coordinate arrangement to factor receivables by May 31, 1998. Nothing contained in this Paragraph 5 is intended to be, nor shall it be construed as, a waiver of any default or Event of Default nor shall anything contained herein be deemed to constitute an agreement on the part of the Lenders to forbear from exercising their rights and remedies under the Loan Documents based upon the occurrence of any default or Event of Default occurring or continuing after the execution of this Agreement, other than the specific defaults referenced above through the date of this Agreement. COVENANT AMENDMENTS ------------------- 5. (a) The Loan Agreement is hereby amended as follows: (i) The Loan Agreement is hereby amended to add to the definition of "Management Group" Mr. Paul Woitach, President and Chief Operating Officer, and Mr. John F. Wall, Chief Financial Officer of IGI, Inc. (ii) Section 5.18 of the Loan Agreement is hereby amended to add as "senior executive officers" of IGI, Inc. Mr. Paul Woitach and Mr. John F. Wall. (b) The Extension Agreement is hereby amended as follows: (i) Section 8 of the Extension Agreement is hereby deleted in its entirety; 8 (ii) During the term of this Agreement, the Borrowers shall not be required to make payments required pursuant to Sections 2(b)(ii) and 2(b)(iii) of the Extension Agreement. WARRANTS -------- 6. (a) In the event the Obligations are paid in full in their entirety on or before October 31, 1998, the Unconditional Warrants (as defined in Section 9 of the Extension Agreement) shall be returned to the Borrowers. (b) In the event the Obligations are paid in full in their entirety on or before December 24, 1998, the Conditional Warrants (as defined in Section 9 of the Extension Agreement) shall be returned to the Borrowers. FORBEARANCE FEE --------------- 7. In consideration of the Lenders' agreement to enter into this Agreement, the Borrowers shall pay to Fleet, as agent on behalf of the Lenders, an incremental forbearance fee (the "Forbearance Fee") in the sum of $140,000.00 by bank cashiers' check, certified check, federal funds wire transfer, or direct debit from the General Account or the Collection Account as follows: (a) $20,000.00 on or before the execution of this Agreement; (b) $30,000.00 on or before September 15, 1998; and (c) $40,000.00 on or before December 15, 1998; (d) $50,000.00 on or before January 15, 1999. Each portion of the Forbearance Fee shall be fully earned as of its due date and shall be distributed to the Lenders on a pro rata basis as a fee and not applied to the Obligations. In the event the Obligations have been paid in their entirety prior to a specified Forbearance Fee payment date, all subsequent fee(s) shall be waived. The Forbearance Fee shall be in addition to, and not in replacement of, the Extension Fee set forth in Section 10 of the Extension Agreement. Notwithstanding the foregoing, payment of the portion of the Forbearance Fee due on September 15, 1998 shall be deferred in the event the Borrowers have delivered to the Lenders on or before September 15, 1998, a commitment letter reasonably satisfactory to the Lenders, in their discretion, contemplating payment in full of all outstanding obligations under the Loan Documents on or before October 15, 1998, which commitment letter is issued by a financial 9 institution and/or other party reasonably acceptable to the Lenders and is subject only to documentation with no further contingencies other than such contingencies acceptable to the Lenders as are ordinary and necessary in transactions of similar type. If the Borrowers satisfy their outstanding obligations to the Bank under the Loan Documents in full on or before October 15, 1998, the portion of the Forbearance Fee payable on September 15, 1998, December 15, 1998, and January 15, 1999 shall be waived. If the Borrowers fail to satisfy their outstanding obligations to the Lenders under the Loan Documents in full on or before October 15, 1998, the portion of the Forbearance Fee otherwise payable on September 15, 1998 shall be due and payable in full on October 15, 1998, and the portion of the Forbearance Fee due and payable on December 15, 1998 and on January 15, 1999 shall remain due and payable in full on December 15, 1998 and January 15, 1999, respectively. Similarly, payment of the portion of the Forbearance Fee due on December 15, 1998 shall be deferred in the event the Borrowers have delivered to the Lenders on or before December 15, 1998, a commitment letter reasonably satisfactory to the Lenders, in their discretion, contemplating payment in full of all outstanding obligations under the Loan Documents on or before January 15, 1999, which commitment letter is issued by a financial institution and/or other party reasonably acceptable to the Lenders and is subject only to documentation with no further contingencies other than such contingencies acceptable to the Lenders as are ordinary and necessary in transactions of similar type. If the Borrowers satisfy their outstanding obligations to the Lenders under the Loan Documents in full on or before January 15, 1999, the portion of the Forbearance Fee payable on December 15, 1998, and January 15, 1999 shall be waived. If the Borrowers fail to satisfy their outstanding obligations to the Lenders under the Loan Documents in full on or before January 15, 1999, the portion of the Forbearance Fee otherwise payable on December 15, 1998 shall be due and payable in full on January 24, 1999, and the portion of the Forbearance Fee due and payable on January 15, 1999 shall remain due and payable in full on January 15, 1999. AGENT'S FEE ----------- 7. In consideration of Fleet's agreement to enter into this Agreement and to continue to administer the Loan Arrangements as agent on behalf of the Lenders, the Borrowers shall continue to pay to Fleet a monthly $5,000.00 agent's fee on the 1st day of each month during the term of this Agreement. The agent's fee for each month shall be fully earned as of the first (1st) day of that month, and shall be retained by Fleet as a fee and shall not be applied in reduction of the Obligations. FINANCIAL COVENANTS ------------------- 8. In addition to all other covenants contained in the Loan Documents, during the term of this Agreement, the Borrowers shall at all times comply with the following covenants: (a) Minimum Eligible Accounts Receivable and Minimum Eligible --------------------------------------------------------- Inventory: The Borrowers shall maintain, at month end, combined "Minimum - --------- Eligible Accounts 10 Receivable" and "Minimum Eligible Inventory" of $9,750,000.00. From and after the date of this Agreement, any and all reference to "$11,000,000.00 in Section 12(a) of the Extension Agreement shall mean and refer to $9,750,000.00. (b) Minimum Fixed Charge Coverage Ratio: During the Term of this ----------------------------------- Agreement, the Borrowers shall not be required to comply with the terms of Section 12(b) of the Extension Agreement. (c) Minimum Net Worth: The Borrowers shall maintain, at all times, a ----------------- minimum "Net Worth" (as defined in accordance with generally accepted accounting principles) in the following amounts as of the last day of each month: Dates Amount ----- ------ 7/31/98 $6,870,000.00 8/31/98 $6,581,000.00 9/30/98 $6,103,000.00 10/31/98 $5,871,000.00 11/30/98 $5,637,000.00 12/31/98 $5,363,000.00 1/31/99 $5,128,000.00 INVESTMENT BANKER ----------------- 9. On or before August 31, 1998, the Borrower shall enter into a retention agreement (the "Investment Banker Retention Agreement") with a nationally-recognized investment banker acceptable to the Lenders in their reasonable discretion for the purpose of formulating alternative business strategies on behalf of the Borrowers and to coordinate to orderly satisfaction of the Obligations. On or before August 31, 1998, the Borrowers shall furnish the Bank with a fully executed copy of the Investment Banker Retention Agreement. The investment banker referenced in the Investment Banker Retention Agreement shall furnish the Lenders with monthly written progress reports and periodic verbal reports commencing on September 8, 1998 and continuing on the last Tuesday of each month during the term of this Agreement. 11 ADDITIONAL DOCUMENTS -------------------- 4. Upon the execution of this Agreement, and at any time thereafter, the Borrowers shall also execute and deliver to the Lenders such additional documentation as the Lenders in their discretion may reasonably require in order to grant and/or perfect the Lenders' security interest in all assets of the Borrowers, including, without limitation, all (i) motor vehicles, (ii) intellectual property including, without limitation, all patents and/or trademarks, and (iii) license agreements. The Borrowers represent that all locations where inventory is located and all patents or other intellectual property in which the Borrowers have an interest are listed, respectively, on Exhibit "D" and Exhibit "E" each as annexed hereto and specifically incorporated by reference herein. On or before August 31, 1998 the Borrowers shall (i) obtain for the benefit of the Lenders foreign credit insurance in form and substance reasonably satisfactory to the Lenders, wherein the Lenders shall be named as Loss Payee, or (ii) enter into an arrangement to factor the Borrowers' foreign accounts receivable, upon such terms and conditions as are reasonably satisfactory to the Lenders. COMPLIANCE CERTIFICATE ---------------------- 5. Upon or before the execution of this Agreement, and within forty five (45) days of each month end during the term of this Agreement, the Borrowers shall deliver to each of the Lenders, a covenant compliance certificate in the form of Exhibit C setting forth the Borrowers' compliance with each of the financial covenants referenced in the Loan Documents. FINANCIAL CONSULTANT; APPRAISALS; FIELD EXAMINATIONS ---------------------------------------------------- 6. The Borrowers agree to cooperate with the Lenders and any financial consultant retained on behalf of the Lenders to enable the Lenders to obtain updated appraisals of all real estate and personal property owned by the Borrowers and to conduct independent field examinations of the Borrowers' books and records which cooperation shall include, without limitation, providing the Lenders and/or their appraisers, examiners and/or other representatives, reasonable access to such property and shall make available such financial and/or other information regarding the property, books and records, and other assets of the Borrowers as may be reasonably requested by the Lenders in their discretion. The Borrowers shall reimburse the Lenders for all reasonable out of pocket costs and expenses of independent third parties incurred by the Lenders in connection with such appraisals and field examinations. 12 WAIVER OF CLAIMS ---------------- 7. The Borrowers hereby acknowledge and agree that they have no offsets, defenses, claims, or counterclaims against the Lenders or the Lenders' officers, directors, employees, attorneys, representatives, parent, predecessors, affiliates, successors, and assigns with respect to the Obligations, or otherwise, and that if the Borrowers now have, or ever did have, any offsets, defenses, claims, or counterclaims against the Lenders or the Lenders' officers, directors, employees, attorneys, representatives, parent, predecessors, affiliates, successors, and assigns, whether known or unknown, at law or in equity, from the beginning of the world through this date and through the time of execution of this Agreement, all of them are hereby expressly WAIVED, and the Borrowers each hereby RELEASE the Lenders and the Lenders' officers, directors, employees, attorneys, representatives, parents, predecessors, affiliates, successors, and assigns from any liability therefor, to the extent allowed by applicable laws. FORBEARANCE BY BANK ------------------- 8. In consideration of the Borrowers' performance in accordance with this Agreement, the Lenders shall forbear from enforcing the Lenders' rights and remedies as a result of the Borrowers' defaults, until the occurrence of an Event of Default, as defined in Paragraph 16, below. Notwithstanding the foregoing, nothing contained in this Agreement shall constitute a waiver by the Lenders of any Event of Default, whether now existing or hereafter arising. This Agreement shall only constitute an agreement by the Lenders to forbear from enforcing their rights and remedies upon the terms and conditions set forth herein. RATIFICATION OF LOAN DOCUMENTS; FURTHER ASSURANCES -------------------------------------------------- 9. (a) THE BORROWERS HEREBY RATIFY, CONFIRM, AND REAFFIRM ALL AND SINGULAR THE TERMS AND CONDITIONS OF THE LOAN DOCUMENTS, AND SPECIFICALLY RATIFY, CONFIRM, AND REAFFIRM THEIR AUTHORITY TO EXECUTE SAME. THE BORROWERS FURTHER ACKNOWLEDGE AND AGREE THAT, EXCEPT AS SPECIFICALLY MODIFIED IN THIS AGREEMENT, ALL TERMS AND CONDITIONS OF THOSE DOCUMENTS, INSTRUMENTS, AND AGREEMENTS SHALL REMAIN IN FULL FORCE AND EFFECT. (b) THE BORROWERS SHALL, FROM AND AFTER THE EXECUTION OF THIS AGREEMENT, EXECUTE AND DELIVER TO THE LENDERS WHATEVER ADDITIONAL DOCUMENTS, INSTRUMENTS, AND AGREEMENTS THAT THE LENDERS MAY REASONABLY REQUIRE IN ORDER TO VEST OR PERFECT THE LOAN DOCUMENTS AND THE COLLATERAL GRANTED THEREIN MORE SECURELY IN THE LENDERS AND TO OTHERWISE GIVE EFFECT TO THE TERMS AND CONDITIONS OF THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, A COMPLETE AMENDMENT AND RESTATEMENT OF THE LOAN DOCUMENTS WITHIN THIRTY (30) DAYS OF ANY REQUEST BY THE LENDERS FOR ANY SUCH ADDITIONAL DOCUMENTATION. 13 EVENTS OF DEFAULT ----------------- 10. The occurrence of any one or more of the following events shall constitute an event of default (hereinafter, an "Event of Default") under this Agreement: (a) The failure of the Borrowers to pay or deposit any amounts due hereunder or under any of the Loan Documents as and when due; (b) The failure of the Borrowers to comply with any other term or condition of this Agreement (which default, other than a default under Paragraph 12(a) of the Extension Agreement, may be cured within three (3) days in connection with any non-monetary default capable of being cured); (c) The filing of a petition for relief by or against any one or more of the Borrowers under the United States Bankruptcy Code; (d) The occurrence of any event or circumstances, including, without limitation, the existence or issuance of any directive or action by either the United States Department of Agriculture or Office of the Inspector General of the United States, or any other governing body, which materially adversely impact the Borrowers' ability to manufacture, sell, or ship products, or otherwise have a Material Adverse Effect (defined below) on the Borrowers' financial condition or with the passage of time could have a material adverse impact on the Borrowers' financial condition, assets, operating status, or projected financial condition. For the purposes of this Agreement, "Material Adverse Effect" shall be defined as any material adverse effect as reasonably determined by the Lenders, on the Borrowers' financial condition, assets, operating status or projected financial condition or any fact or circumstance that, singly or in the aggregate with any fact or circumstance, has a reasonable likelihood of resulting in or leading to the inability of the Borrowers to perform in any material respect their obligations under this Agreement or under any Loan Document or the inability of Agent and/or Lenders to enforce in any material respect the rights purported to be granted to them under this Agreement or any Loan Document or which have a reasonable likelihood of having a material adverse effect on the ability of the Borrowers to effectuate (including hindering or unduly delaying) the transactions contemplated by this Agreement and the Loan Documents on the terms contemplated hereby and thereby. (e) The occurrence of any further event of default under, and as defined in, any of the Loan Documents. (f) Failure to pay all obligations in full on or before January 31, 1999 (the "Termination Date"). 14 RIGHTS UPON DEFAULT ------------------- 11. Upon the occurrence of any Event of Default, the Lenders may immediately commence enforcing their rights and remedies pursuant to the Loan Documents and otherwise. Further, upon the occurrence of an Event of Default, interest shall accrue on the outstanding principal balance of the Obligations at the default rate of interest set forth in the Loan Documents. The Borrowers expressly waive demand, notice and protest with respect to the Obligations. REIMBURSEMENT OF COSTS AND EXPENSES ----------------------------------- 12. Upon the execution of this Agreement, the Borrowers shall pay to the Lenders an amount equal to any and all reasonable attorneys' fees and expenses incurred in connection with this matter through the date of this Agreement. In addition, upon Demand, or upon the occurrence of any Event of Default, as defined in Paragraph 16, above, the Borrowers shall reimburse the Lenders for any and all reasonable costs and expenses, including, without limitation, all reasonable costs, expenses and fees of all accountants, appraisers, auditors and other representatives of the Lenders, and costs of collection (including attorneys' fees and allocated costs of Lenders' staff counsel) hereafter incurred by the Lenders in connection with the clarification, modification, protection, preservation, and enforcement by the Lenders of their rights and remedies. NOTICES ------- 13. Any notices required to be sent to the Lenders and the Borrowers shall be forwarded via recognized overnight courier, addressed as follows: If to the Lenders: Fleet National Bank 40 Westminster Street Mail Code: RI OP TO5A Providence, Rhode Island 02901 Attn: Mr. Daniel D. Butler, Vice President Telephone: (401) 459-4678 Fax: (401) 459-4963 With a copy to: Steven T. Greene, Esquire Riemer & Braunstein Three Center Plaza Boston, Massachusetts 02108 Telephone: (617) 523-9000 Fax: (617) 723-6831 15 Mellon Bank Mellon Bank Center 1735 Market Street, P.O. Box 7899 Philadelphia, PA 19101-7899 Telephone: 215-553-2614 Fax: 215-553-4560 Attn: Susan C. Saxer Senior Vice President With a copy to: Peter Leibundgut, Esquire Blank, Rome and Comisky Woodland Falls Corporate Park 210 Lake Drive East Cherry Hill, New Jersey 08002 Telephone: 609-779-3644 Fax: 609-779-7647 If to the Borrowers: IGI, Inc. IGEN, Inc. Immunogenetics, Inc. Blood Cells, Inc. Wheat Road and Lincoln Avenue Buena, New Jersey 08310 Attn: Kevin Bratton, Treasurer Telephone: (609) 697-1441 Fax: (609) 697-1001 With a copy to: Paul Brountas, Esquire Hale and Dorr, LLP 60 State Street Boston, Massachusetts 02109 Telephone: (617) 526-6000 Fax: (617) 526-5000 WAIVERS ------- 14. Non-Interference. From and after the occurrence of any Event of ---------------- Default, the Borrowers agree not to interfere with the exercise by the Lenders of any of their rights and remedies. The Borrowers further agree that they shall not seek to distrain or otherwise hinder, delay, or impair the Lenders' lawful efforts to realize upon the Collateral, or otherwise to enforce 16 their rights and remedies pursuant to the Loan Documents. This provision shall be specifically enforceable by the Lenders. 15. Automatic Stay. The Borrowers agree that upon the filing of any -------------- Petition for Relief by or against any one or more of the Borrowers under the United States Bankruptcy Code, the Lenders shall be entitled to file a motion for immediate and complete relief from the automatic stay, and the Lenders shall be permitted to proceed to protect and enforce their rights and remedies under applicable law. 16. Jury Trial. The Borrowers hereby make the following waiver knowingly, ---------- voluntarily, and intentionally, and understand that the Lenders, in entering into this Agreement or making any financial accommodations to the Borrowers, whether now or in the future, are relying on such waiver: TO THE EXTENT ALLOWED BY APPLICABLE LAW, THE BORROWERS HEREBY IRREVOCABLY WAIVE ANY PRESENT OR FUTURE RIGHT TO A JURY IN ANY TRIAL OF ANY CASE OR CONTROVERSY IN WHICH THE LENDERS BECOME A PARTY (WHETHER SUCH CASE OR CONTROVERSY IS INITIATED BY OR AGAINST THE LENDERS OR IN WHICH THE LENDERS ARE JOINED AS A PARTY LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF, OR IS IN RESPECT OF, ANY RELATIONSHIP BETWEEN THE BORROWERS, OR ANY OTHER PERSON, AND THE LENDERS. ENTIRE AGREEMENT ---------------- 17. This Agreement shall be binding upon the Borrowers and the Borrowers' officers, directors, employees, representatives, successors, and assigns, and shall inure to the benefit of the Lenders and the Lenders' successors and assigns. This Agreement and the Loan Documents and all documents, instruments, and agreements executed in connection herewith or therewith incorporate all of the discussions and negotiations between the Borrowers and the Lenders, either expressed or implied, concerning the matters included herein and in such other documents, instruments and agreements, any statute, custom, or usage to the contrary notwithstanding. No such discussions or negotiations shall limit, modify, or otherwise affect the provisions hereof. No modification, amendment, or waiver of any provision of this Agreement, or any provision of any other document, instrument, or agreement between the Borrowers and the Lenders shall be effective unless executed in writing by the party to be charged with such modification, amendment, or waiver, and if such party be the Lenders, then by a duly authorized officer thereof. CONSTRUCTION OF AGREEMENT ------------------------- 17 18. (a) This Agreement and all other documents, instruments, and agreements incidental hereto and all rights and obligations hereunder and thereunder, including matters of construction, validity, and performance, shall be governed by and construed in accordance with the law of the State of New Hampshire and are intended to take effect as sealed instruments. The Borrowers hereby consent to the jurisdiction of the Courts of the State of New Hampshire for all purposes with respect to this Agreement and the Obligations. The captions of this Agreement are for convenience purposes only, and shall not be used in construing the intent of the Lenders and the Borrowers under this Agreement. In the event of any inconsistency between the provisions of this Agreement and any other document, instruments, or agreement entered into by and between the Lenders and the Borrowers, the provisions of this Agreement shall govern and control. (b) The Borrowers further acknowledge and agree that the Lenders and the Borrowers have prepared this Agreement and all documents, instruments, and agreements incidental hereto and with the aid and assistance of their respective counsel. Accordingly, when interpreting this Agreement and all such other documents, instruments, and agreements, each of them shall be deemed to have been drafted by the Lenders and the Borrowers and shall not be construed against either the Lenders or the Borrowers. ILLEGALITY OR UNENFORCEABILITY ------------------------------ 19. Any determination that any provision or application of this Agreement is invalid, illegal, or unenforceable in any respect, or in any instance, shall not effect the validity, legality, or enforceability of any such provision in any other instance, or the validity, legality, or enforceability of any other provision of this Agreement. COMPREHENSIVE AGREEMENT ----------------------- 20. The Borrowers warrant and represent to the Lenders that the Borrowers: (i) have read and understand all of the terms and conditions of this Agreement, (ii) intend to be bound by the terms and conditions of this Agreement, (iii) are executing this Agreement freely and voluntarily, without duress, after consultation with independent counsel of their own selection. IN WITNESS WHEREOF, this Agreement has been executed this 19 day of August, 1998. FLEET BANK-N.H. IGI, INC. By: /s/ Daniel B. Butler By: /s/ Kevin J. Bratton -------------------------------- ------------------------------ Title: Vice President Title: Treasurer ----------------------------- ---------------------------- MELLON BANK IGEN, INC. By: /s/ Walter Letts By: /s/ George P. Warren, Jr. -------------------------------- ------------------------------- 18 Title: Vice President Title: Secretary --------------------------- -------------------------- IMMUNOGENETICS, INC. By: /s/ Kevin J. Bratton ------------------------------ Title: Treasurer ---------------------------- BLOOD CELLS, INC. By: /s/ Kevin J. Bratton ------------------------------- Title: Treasurer ---------------------------- [ADDITIONAL SUBSIDIARIES] STATE OF RHODE ISLAND ______________, ss August ____, 1998 Then personally appeared the above named ___________________, the _______________ of Fleet Bank- N.H. and acknowledged the foregoing to be the free act and deed of Fleet Bank- N.H., before me, _________________________ Notary Public My Commission Expires: STATE OF ___________ ______________, ss August ____, 1998 Then personally appeared the above named ________________ , the ____________ of Mellon Bank, N.A. and acknowledged the foregoing to be the free act and deed of Mellon Bank, N.A., before me, _________________________ Notary Public My Commission Expires: STATE OF ________________ _____________, ss August ____, 1998 19 Then personally appeared the above named __________________________, the ________________ of IGI, Inc. and acknowledged the foregoing to be the free act and deed of IGI, Inc., before me, _________________________ Notary Public My Commission Expires: STATE OF ________________ _____________, ss August ____, 1998 Then personally appeared the above named __________________________, the ________________ of IGEN, Inc. and acknowledged the foregoing to be the free act and deed of IGEN, Inc., before me, _________________________ Notary Public My Commission Expires: STATE OF ________________ _____________, ss August ____, 1998 Then personally appeared the above named __________________________, the ________________ of Immunogenetics, Inc. and acknowledged the foregoing to be the free act and deed of Immunogenetics, Inc., before me, _________________________ Notary Public My Commission Expires: STATE OF ________________ _____________, ss August ____, 1998 20 Then personally appeared the above named __________________________, the ________________ of Immunogenetics, Inc. and acknowledged the foregoing to be the free act and deed of Immunogenetics, Inc., before me, _________________________ Notary Public My Commission Expires: 21 EX-10.33 4 COMMON STOCK PURCHASE WARRANT DATED 05/12/98 Exhibit 10.33 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON ITS EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 4 OF THIS WARRANT ----------------------------------------------------------- Warrant No. 1 Number of Shares: 150,000 (subject to adjustment) Date of Issuance: May 12, 1998 IGI, INC. --------- Common Stock Purchase Warrant ----------------------------- (Void after May 12, 2003) IGI, Inc., a Delaware corporation (the "Company"), for value received, hereby certifies that Fleet Bank--N.H., a banking and trust company organized under the laws of New Hampshire, or its registered assigns (the "Registered Holder"), is entitled, subject to the terms set forth below, to purchase from the Company, at any time or from time to time on or after September 1, 1998 and on or before May 12, 2003 at not later than 5:00 p.m. 150,000 shares of Common Stock, $.01 par value per share (the "Common Stock"), of the Company, at a Exercise Price of $3.50 per share unless, by 5:00 p.m., Buena, New Jersey time, on or before August 31, 1998, either (a) all Obligations (as defined in the Extension Agreement dated April 29, 1998 (the "Extension Agreement") by and among the Registered Holder, Fleet Bank, N.A., Mellon Bank, N.A., the Company and certain of its subsidiaries) of the Borrowers (as defined in the Extension Agreement) to the Lenders (as defined in the Extension Agreement) shall have been paid in full, in which case this Warrant and the Registered Holder's rights hereunder shall expire, or (b) the Borrowers have delivered a commitment letter reasonably satisfactory to the Lenders, subject only to documentation and no further contingencies of any kind, from a financial institution acceptable to the Lenders, contemplating a full refinancing of the then existing Obligations and a closing of such financing within thirty (30) days of such commitment letter, in which case this Warrant's exercise start date shall be extended to commence September 30, 1998; provided, however, if all Obligations to the -------- ------- Lenders have been paid in full on or before such extended start date, this Warrant and the Registered Holder's rights hereunder shall expire upon such payment. The shares issuable upon exercise of this Warrant, and the exercise price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the "Warrant Shares" and the "Exercise Price," respectively. -1- 1. Certain Definitions. As used in this Warrant, the following terms ------------------- shall have the following respective meanings: "Commission" means the Securities and Exchange Commission, or any ---------- other Federal agency at the time administering the Securities Act. "Registration Statement" means a registration statement filed by the ---------------------- Company with the Commission for a public offering and sale of Common Stock (other than a registration statement on Form S-8 or Form S-4, or their successors, or any other form for a similar limited purpose, or any registration statement covering only securities proposed to be issued in exchange for securities or assets of another corporation). "Registrable Shares" means (i) the Warrant Shares, and (ii) any other ------------------ shares of Common Stock issued in respect of such shares (because of stock splits, stock dividends, reclassifications, recapitalizations, or similar events); provided, however, that shares of Common Stock which are Registrable -------- ------- Shares shall cease to be Registrable Shares (i) upon any sale pursuant to a Registration Statement or Rule 144 under the Securities Act or (ii) upon any sale in any manner to a person or entity which, by virtue of Section 13 of this Warrant, is not entitled to the rights provided by this Warrant. "Securities Act" means the Security Act of 1933, as amended, or any similar -------------- Federal statute, and the rules and regulations of the Commission issued under such Act, as they each may, from time to time, be in effect. 2. Exercise. -------- (a) This Warrant may be exercised by the Registered Holder, in whole or in part, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by such Registered Holder or by such Registered Holder's duly authorized attorney, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full, in lawful money of the United States, of the Exercise Price payable in respect of the number of Warrant Shares issued upon such exercise. (b) The Registered Holder may, at its option, elect to pay some or all of the Exercise Price payable upon an exercise of this Warrant by cancelling a portion of this Warrant exercisable for such number of Warrant Shares as is determined by dividing (i) the total Exercise Price payable in respect of the number of Warrant Shares being issued upon such exercise by (ii) the excess of the Fair Market Value per share of Common Stock as of the effective date of exercise, as determined pursuant to subsection 2(c) below (the "Exercise Date") over the Exercise Price per share. If the -2- Registered Holder wishes to exercise this Warrant pursuant to this method of payment with respect to the maximum number of Warrant Shares issuable pursuant to this method, then the number of Warrant Shares so issuable shall be equal to the total number of Warrant Shares, minus the product obtained by multiplying (x) the total number of Warrant Shares by (y) a fraction, the numerator of which shall be the Exercise Price per share and the denominator of which shall be the Fair Market Value per share of Common Stock as of the Exercise Date. The Fair Market Value per share of Common Stock shall be determined as follows: (i) If the Common Stock is listed on a national securities exchange, the Nasdaq Stock Market or another nationally recognized exchange or trading system as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the average of the last reported sale price per share of Common Stock thereon for the ten consecutive trading days ending on the day immediately prior to the Exercise Date. (ii) If the Common Stock is not listed on a national securities exchange, the Nasdaq Stock Market or another nationally recognized exchange or trading system as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the amount most recently determined in good faith by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company); and, upon request of the Registered Holder, the Board of Directors (or a representative thereof) shall promptly notify the Registered Holder of the Fair Market Value per share of Common Stock. Notwithstanding the foregoing, if the Board of Directors has not made such a determination within a forty-five day period prior to the Exercise Date, then (A) the Fair Market Value per share of Common Stock shall be the amount next determined in good faith by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company), (B) the Board of Directors shall make such a determination within 15 days of a request by the Registered Holder that it do so, and (C) the exercise of this Warrant pursuant to this subsection 2(b) shall be delayed until such determination is made. (c) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company as provided in subsection 2(a) above. At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 2(d) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. -3- (d) As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 10 days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Registered Holder, or as such Registered Holder (upon payment by such Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full Warrant Shares to which such Registered Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such Registered Holder would otherwise be entitled, cash in an amount determined pursuant to Section 4 hereof; and (ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of Warrant Shares equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the sum of (a) the number of such shares purchased by the Registered Holder upon such exercise plus (b) the number of Warrant Shares (if any) covered by the portion of this Warrant cancelled in payment of the Exercise Price payable upon such exercise pursuant to subsection 2(b) above. 3. Adjustments. ----------- (a) General. The Exercise Price shall be subject to adjustment from ------- time to time pursuant to the terms of this Section 3. (b) Diluting Issuances. ------------------ (i) Special Definitions. For purposes of this subsection 3(b), ------------------- the following definitions shall apply: (A) "Option" shall mean rights, options or warrants to ------ subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities, excluding options described in clause (II) of subsection 3(b)(i)(D) below. (B) "Original Issue Date" shall mean the date on which this ------------------- Warrant was first issued. (C) "Convertible Securities" shall mean any evidences of ---------------------- indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" shall mean all --------------------------------- shares of Common Stock issued (or, pursuant to subsection 3(b)(iii) below, deemed to -4- be issued) by the Company after the Original Issue Date, other than shares of Common Stock issued or issuable: (I) by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock that are excluded from the definition of Additional Shares of Common Stock by this clause (I); or (II) to employees or directors of, or consultants to, the Company pursuant to a plan adopted by the Board of Directors of the Company. (ii) No Adjustment of Exercise Price. No adjustments to the Exercise ------------------------------- Price shall be made unless the consideration per share (determined pursuant to subsection 3(b)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Company is less than the Exercise Price in effect on the date of, and immediately prior to, the issue of such Additional Shares. (iii) Issue of Securities Deemed Issue of Additional Shares of Common --------------------------------------------------------------- Stock. If the Company at any time or from time to time after the Original Issue - ----- Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to subsection 3(b)(v) hereof) of such Additional Shares of Common Stock would be less than the Exercise Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) No further adjustment in the Exercise Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) If such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company, upon the exercise, conversion or exchange -5- thereof, the Exercise Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase becoming effective, be recomputed to reflect such increase insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) Upon the expiration or termination of any unexercised Option, the Exercise Price shall not be readjusted, but the Additional Shares of Common Stock deemed issued as the result of the original issue of such Option shall not be deemed issued for the purposes of any subsequent adjustment of the Exercise Price; (D) In the event of any change in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any Option or Convertible Security, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Exercise Price then in effect shall forthwith be readjusted to such Exercise Price as would have obtained had the adjustment which was made upon the issuance of such Option or Convertible Security not exercised or converted prior to such change been made upon the basis of such change; and (E) No readjustment pursuant to Clause (B) or (D) above shall have the effect of increasing the Exercise Price to an amount which exceeds the lower of (i) the Exercise Price on the original adjustment date, or (ii) the Exercise Price that would have resulted from any issuances of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) Adjustment of Exercise Price Upon Issuance of Additional Shares --------------------------------------------------------------- of Common Stock. In the event the Company shall at any time after the Original - --------------- Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to subsection 3(b)(iii), but excluding shares issued as a dividend or distribution or upon a stock split or combination as provided in subsection 3(c)), without consideration or for a consideration per share less than the Exercise Price in effect on the date of and immediately prior to such issue, then and in such event, such Exercise Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Exercise Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Exercise Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided -------- that, (i) for the purpose of this subsection 3(b)(iv), all shares of Common - ---- Stock issuable upon exercise or -6- conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding (other than shares excluded from the definition of "Additional Shares of Common Stock" by virtue of clause (II) of subsection 3(b)(i)(D)), and (ii) the number of shares of Common Stock deemed issuable upon conversion of such outstanding Options and Convertible Securities shall not give effect to any adjustments to the conversion price or conversion rate of such Options or Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. Notwithstanding the foregoing, the applicable Exercise Price shall not be so reduced at such time if the amount of such reduction would be an amount less than $.05, but any such amount shall be carried forward and reduction with respect thereto made at the time of and together with any subsequent reduction which, together with such amount and any other amount or amounts so carried forward, shall aggregate $.05 or more. (v) Determination of Consideration. For purposes of this ------------------------------ subsection 3(b), the consideration received by the Company for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: ----------------- (I) insofar as it consists of cash, be computed at the aggregate of cash received by the Company, excluding amounts paid or payable for accrued interest or accrued dividends; (II) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (III) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Company for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration ---------------------------------- per share received by the Company for Additional Shares of Common Stock deemed to have been issued pursuant to subsection 3(b)(iii), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the Company as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional -7- consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (c) Recapitalizations. If outstanding shares of Common Stock shall be ----------------- subdivided into a greater number of shares or a dividend in Common Stock shall be paid in respect of Common Stock, the Exercise Price in effect immediately prior to such subdivision or at the record date of such dividend shall simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend be proportionately reduced. If outstanding shares of Common Stock shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased. (d) Mergers, etc. If there shall occur any capital reorganization or ------------ reclassification of the Common Stock (other than a change in par value or a subdivision or combination as provided for in subsection 3(c) above), or any consolidation or merger of the Company with or into another corporation, or a transfer of all or substantially all of the assets of the Company, then, as part of any such reorganization, reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made so that the Registered Holder of this Warrant shall have the right thereafter to receive upon the exercise hereof the kind and amount of shares of stock or other securities or property which such Registered Holder would have been entitled to receive if, immediately prior to any such reorganization, reclassification, consolidation, merger or sale, as the case may be, such Registered Holder had held the number of shares of Common Stock which were then issuable upon the exercise of this Warrant. In any such case, appropriate adjustment (as reasonably determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Registered Holder of this Warrant, such that the provisions set forth in this Section 3 (including provisions with respect to adjustment of the Exercise Price) shall thereafter be applicable, as nearly as is reasonably practicable, in relation to any shares of stock or other securities or property thereafter deliverable upon the exercise of this Warrant. -8- (e) Adjustment in Number of Warrant Shares. When any adjustment is -------------------------------------- required to be made in the Exercise Price, the number of Warrant Shares issuable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment. (f) Certificate of Adjustment. When any adjustment is required to ------------------------- be made pursuant to this Section 3, the Company shall promptly mail to the Registered Holder a certificate setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such certificate shall also set forth the kind and amount of stock or other securities or property into which this Warrant shall be exercisable following such adjustment. 4. Fractional Shares. The Company shall not be required upon the ----------------- exercise of this Warrant to issue any fractional shares, but shall make an adjustment therefor in cash on the basis of the Fair Market Value per share of Common Stock, as determined pursuant to subsection 2(b) above. 5. Requirements for Transfer. ------------------------- (a) This Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) the Company first shall have been furnished with an opinion of legal counsel, reasonably satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act. (b) Notwithstanding the foregoing, no registration or opinion of counsel shall be required for (i) a transfer by a Registered Holder which is a partnership to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner, if the transferee agrees in writing to be subject to the terms of this Section 5, (ii) a transfer made in accordance with Rule 144 under the Act, or (iii) a transfer by a Registered Holder which is a corporation to an affiliate, as defined under Rule 144 of the Securities Act, if the transferee agrees in writing to be subject to the terms of this Section. (c) Each certificate representing Warrant Shares shall bear a legend substantially in the following form: "The securities represented by this certificate have not been registered under the Securities -9- Act of 1933, as amended, and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such securities are registered under such Act or an opinion of counsel satisfactory to the Company is obtained to the effect that such registration is not required." The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act. 6. No Impairment. The Company will not, by amendment of its charter or ------------- through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. 7. Liquidating Dividends. If the Company pays a dividend or makes a --------------------- distribution on the Common Stock payable otherwise than in cash out of earnings or earned surplus (determined in accordance with generally accepted accounting principles) except for a stock dividend payable in shares of Common Stock (a "Liquidating Dividend"), then the Company will pay or distribute to the Registered Holder of this Warrant, upon the exercise hereof, in addition to the Warrant Shares issued upon such exercise, the Liquidating Dividend which would have been paid to such Registered Holder if he had been the owner of record of such Warrant Shares immediately prior to the date on which a record is taken for such Liquidating Dividend or, if no record is taken, the date as of which the record holders of Common Stock entitled to such dividends or distribution are to be determined. 8. Optional Redemption. ------------------- (a) At any time, the Company may, at its option, redeem all, but not less than all, of the Warrant Shares for which the Registered Holder has not exercised its right to be issued (the "Available Warrant Shares"), by paying $3.33 per Available Warrant Share (subject to appropriate adjustment for stock splits, stock dividends, combinations or other similar recapitalizations affecting such shares) in cash for each Available Warrant Share then redeemed (hereinafter referred to as the "Redemption Price"); provided, however, that the Registered Holder may immediately exercise its Warrant or Warrants until such time on or 15 days prior to the Redemption Date (as defined below). -10- (b) At least 15 days prior to the date fixed for any redemption of Available Warrant Shares (hereinafter referred to as the "Redemption Date"), written notice shall be mailed, by first class or registered mail, postage prepaid, to the Registered Holder, notifying such holder of the election of the Company to redeem such Available Warrant Shares, specifying the Redemption Date and calling upon the Registered Holder to surrender to the Company, in the manner and at the place designated, its Warrant or Warrants, representing the Available Warrant Shares to be redeemed (such notice is hereinafter referred to as the "Redemption Notice"). On or prior to the Redemption Date (subject to the Registered Holder's right to exercise such Warrants prior to the Redemption Date), the Registered Holder shall surrender its Warrant or Warrants representing Available Warrant Shares to the Company, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the Registered Holder and each surrendered Warrant shall be cancelled. From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price (or the Registered Holder has exercised the Warrants prior to such Redemption Date), all rights of the Registered Holder designated for redemption in the Redemption Notice as the Registered Holder (except the right to receive the Redemption Price without interest upon surrender of the Warrant) shall cease with respect to the Warrant or Warrants representing the Available Warrant Shares, and such Warrant or Warrants shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever. 9. Notices of Record Date, etc. In case: --------------------------- (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or (b) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company; or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Registered Holder of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up -11- is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least ten (10) days prior to the record date or effective date for the event specified in such notice. 10. Reservation of Stock. The Company will at all times reserve and keep -------------------- available, solely for issuance and delivery upon the exercise of this Warrant, such number of Warrant Shares and other stock, securities and property, as from time to time shall be issuable upon the exercise of this Warrant. 11. Exchange of Warrants. Upon the surrender by the Registered Holder of -------------------- any Warrant or Warrants, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of such Registered Holder, at the Company's expense, a new Warrant or Warrants of like tenor, in the name of such Registered Holder or as such Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 12. Replacement of Warrants. Upon receipt of evidence reasonably ----------------------- satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. 13. Transfers, etc. -------------- (a) The Company will maintain a register containing the name and address of the Registered Holder of this Warrant. Any Registered Holder may change its or his address as shown on the warrant register by written notice to the Company requesting such change. (b) Subject to the provisions of Section 5 hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit II ---------- hereto) at the principal office of the Company. (c) Until any transfer of this Warrant is made in the warrant register, the Company may treat the Registered Holder of this Warrant as the absolute owner -12- hereof for all purposes; provided, however, that if and when this Warrant is -------- ------- is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 14. Mailing of Notices, etc. All notices and other communications from ----------------------- the Company to the Registered Holder of this Warrant shall be mailed by first- class certified or registered mail, postage prepaid, to the address furnished to the Company in writing by the last Registered Holder of this Warrant who shall have furnished an address to the Company in writing. All notices and other communications from the Registered Holder of this Warrant or in connection herewith to the Company shall be mailed by first-class certified or registered mail, postage prepaid, to the Company at its principal office set forth below. If the Company should at any time change the location of its principal office to a place other than as set forth below, it shall give prompt written notice to the Registered Holder of this Warrant and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice. 15. No Rights as Stockholder. Until the exercise of this Warrant, the ------------------------ Registered Holder of this Warrant shall not have or exercise any rights by virtue hereof as a stockholder of the Company. 16. Change or Waiver. Any term of this Warrant may be changed or waived ---------------- only by an instrument in writing signed by the party against which enforcement of the change or waiver is sought. 17. Headings. The headings in this Warrant are for purposes of reference -------- only and shall not limit or otherwise affect the meaning of any provision of this Warrant. 18. Governing Law. This Warrant will be governed by and construed in ------------- accordance with the laws of Delaware. 19. Registration Rights. ------------------- (a) The Registered Holder shall have the registration rights with respect to the Warrant Shares as specified in Section 9 of the Extension Agreement dated April 29, 1998 by and among the Registered Holder, Fleet Bank, N.A., Mellon Bank, N.A., the Company and certain of its subsidiaries. (b) Furthermore, the Registered Holder shall be entitled to "piggy- back" registration rights for so long as the Registered Holder shall own Warrant Shares. Whenever the Company proposes to file a Registration Statement (other than pursuant to subsection 19(a) at any time and from time to time, it will, prior to such -13- filing, give written notice to the Registered Holder of its intention to do so and, upon the written request of the Registered Holder given within 20 days after the Company provides such notice (which request shall state the intended method of disposition of such Registrable Shares), the Company shall use its best efforts to cause all Registrable Shares which the Company has been requested by such Registered Holder to register to be registered under the Securities Act to the extent necessary to permit their sale or other disposition in accordance with the intended methods of distribution specified in the request of the Registered Holder; provided that the Company shall have the right to postpone or withdraw any registration effected pursuant to subsection 19(b) without obligation to the Registered Holder or any persons or entities to whom the rights under this Warrant are transferred by the Registered Holder, its successors or assigns pursuant to Section 13 hereof. (c) In connection with any registration under subsection 19(b) involving an underwriting, the Company shall not be required to include any Registrable Shares in such registration unless the holders thereof accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (provided that such terms must be consistent with this Warrant). If in the opinion of the managing underwriter it is appropriate because of marketing factors to limit the number of Registrable Shares to be included in the offering, then the Company shall be required to include in the registration only that number of Registrable Shares, if any, which the managing underwriter believes should be included therein. If the number of Registrable Shares to be included in the offering in accordance with the foregoing is less than the total number of shares which the holders of Registrable Shares have requested to be included, then the holders of Registrable Shares who have requested registration and other holders of securities entitled to include them in such registration shall participate in the registration pro rata based upon their total ownership of shares of Common Stock (giving effect to the conversion into Common Stock of all securities convertible thereinto). If any holder would thus be entitled to include more securities than such holder requested to be registered, the excess shall be allocated among other requesting holders pro rata in the manner described in the preceding sentence. 20. Registration Procedures. If and whenever the Company is required by ----------------------- the provisions of this Warrant to use its best efforts to effect the registration of any of the Registrable Shares under the Securities Act, the Company shall: (a) furnish to the Registered Holder such number of copies as the Registered Holder shall reasonably request of the prospectus, including a preliminary prospectus and any amendments or supplements thereto, in conformity with the requirements of the Securities Act; (b) use its best efforts to register or qualify the Registrable Shares covered by the Registration Statement under the securities laws of such states as the -14- Registered Holder shall reasonably request; provided, however, that the Company -------- ------- shall not be required in connection with this subsection 20(b) to qualify as a foreign corporation or execute a general consent to service of process in any jurisdiction; (c) promptly notify the Registered Holder, if the Company has delivered preliminary or final prospectuses to the Registered Holder and after having done so, the prospectus is amended to comply with the requirements of the Securities Act and, if requested by the Company, the Registered Holder shall immediately cease making offers or sales of Registrable Shares under the Registration Statement and return all prospectuses to the Company. The Company shall promptly provide the Registered Holder with revised prospectuses and, following receipt of the revised prospectuses, the Registered Holder shall be free to resume making offers and sales of the Registrable Shares; and (d) pay the expenses incurred by it in complying with its obligations under this Warrant in connection with registration rights, including all registration and filing fees, exchange listing fees, expenses for the preparation of the Registration statement, prospectus and any amendments and supplements thereto, printing and photocopy expenses, fees and expenses of counsel for the Company, and fees and expenses of accountants for the Company, but excluding: (i) selling commissions or underwriting discounts incurred by the Registered Holder in connection with sales of Registrable Shares under the Registration Statement and (ii) the fees and expenses of any counsel retained by the Registered Holder. 21. Requirements of Registered Holder. The Company shall not be required --------------------------------- to effect the registration of any of the Registrable Shares under the Securities Act pursuant to this Warrant unless: (a) the Registered Holder owning such shares furnishes to the Company in writing such information regarding such Registered Holder and the proposed sale of Registrable Shares by such Registered Holder as the Company may reasonably request in writing in connection with the filing of a Registration Statement or as shall be required in connection therewith by the Commission or any state securities law authorities; and (b) Such Registered Holder shall have provided to the Company its written agreement that in the event of any registration of any of the Registrable Shares under the Securities Act pursuant to this Warrant, each Registered Holder will indemnify the Company and its officers and directors and each person, if any, who controls any thereof (within the meaning of the Securities Act) against any and all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of any material fact contained in any prospectus or other document incident to any registration, qualification or compliance (or in any related Registration Statement, notification or -15- the like) or any omission (or alleged omission) to state therein any material fact required to be stated therein or necessary to make the statement therein not misleading, and such Registered Holder will reimburse the Company and each other person indemnified pursuant to this Section 21 for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that this -------- ------- Section 21 shall apply only if (and only to the extent that) such statement or omission was made in reliance upon written information furnished to the Company in an instrument duly executed by such Registered Holder and stated to be specifically for use in such prospectus or other document (or related Registration Statement, notification or the like) or any amendment or supplement thereto; and, provided further that each Registered Holder's liability hereunder -------- ------- with respect to any particular registration shall be limited to an amount equal to the net proceeds received by such Registered Holder from the Registrable Securities sold by such Registered Holder in such registration. 22. Indemnification by Company. In the event of any registration of any -------------------------- of the Registrable Shares under the Securities Act pursuant to this Warrant, the Company will indemnify each Registered Holder and each person who controls the Registered Holder (within the meaning of the Securities Act) against any and all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of any material fact contained in any prospectus or other document incident to any registration, qualification or compliance (or in any related Registration Statement, notification or the like) or any omission (or alleged omission) to state therein any material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to any action or inaction required of the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Registered Holder and controlling person for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable in any such case to the - -------- ------- extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company in an instrument duly executed by such Registered Holder or controlling person and specifically for use in such prospectus or other document. IGI, INC. /s/ Edward B, Hager --------------------------------- By: Edward B, Hager [Corporate Seal] Title: Chairman -16- EXHIBIT I --------- PURCHASE FORM ------------- To:_________________ Dated:____________ The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ___), hereby irrevocably elects to purchase _____ shares of the Common Stock covered by such Warrant. The undersigned herewith makes payment of $____________, representing the full Exercise Price for such shares at the price per share provided for in such Warrant. Such payment takes the form of (check applicable box or boxes): [_] $______ in lawful money of the United States; and/or [_] The cancellation of such portion of the attached Warrant as is exercisable for a total of _____ Warrant Shares (using a Fair Market Value of $_____ per share for purposes of this calculation). Signature:_____________________ Address:______________________ ______________________ EXHIBIT II ---------- ASSIGNMENT FORM --------------- FOR VALUE RECEIVED, ________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. ____) with respect to the number of shares of Common Stock covered thereby set forth below, unto: Name of Assignee Address No. of Shares - ---------------- ------- ------------- Dated:_____________________ Signature:________________________________ Dated:_____________________ Witness:__________________________________ EX-10.34 5 COMMON STOCK PURCHASE WARRANT NO. 2 DATED 05/12/98 Exhibit 10.34 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON ITS EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 4 OF THIS WARRANT ------------------------------------------------------------------------ Warrant No. 2 Number of Shares: 150,000 (subject to adjustment) Date of Issuance: May 12, 1998 IGI, INC. --------- Common Stock Purchase Warrant ----------------------------- (Void after May 12, 2003) IGI, Inc., a Delaware corporation (the "Company"), for value received, hereby certifies that Fleet Bank-N.H., a banking and trust company organized under the laws of New Hampshire, or its registered assigns (the "Registered Holder"), is entitled, subject to the terms set forth below, to purchase from the Company, at any time or from time to time on or after the 60th day after the date of issuance and on or before May 12, 2003 at not later than 5:00 p.m. (Buena, New Jersey time), 150,000 shares of Common Stock, $.01 par value per share (the "Common Stock"), of the Company, at a Exercise Price of $3.50 per share. The shares issuable upon exercise of this Warrant, and the Exercise Price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the "Warrant Shares" and the "Exercise Price," respectively. 1. Certain Definitions. As used in this Warrant, the following terms ------------------- shall have the following respective meanings: "Commission" means the Securities and Exchange Commission, or any ---------- other Federal agency at the time administering the Securities Act. "Registration Statement" means a registration statement filed by the ---------------------- Company with the Commission for a public offering and sale of Common Stock (other than a registration statement on Form S-8 or Form S-4, or their successors, or any other form for a similar limited purpose, or any registration statement covering only securities proposed to be issued in exchange for securities or assets of another corporation). -1- "Registrable Shares" means (i) the Warrant Shares, and (ii) any other ------------------ shares of Common Stock issued in respect of such shares (because of stock splits, stock dividends, reclassifications, recapitalizations, or similar events); provided, however, that shares of Common Stock which are Registrable -------- ------- Shares shall cease to be Registrable Shares (i) upon any sale pursuant to a Registration Statement or Rule 144 under the Securities Act or (ii) upon any sale in any manner to a person or entity which, by virtue of Section 13 of this Warrant, is not entitled to the rights provided by this Warrant. "Securities Act" means the Security Act of 1933, as amended, or any -------------- similar Federal statute, and the rules and regulations of the Commission issued under such Act, as they each may, from time to time, be in effect. 2. Exercise. -------- (a) This Warrant may be exercised by the Registered Holder, in whole or in part, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by such Registered Holder or by such Registered --------- Holder's duly authorized attorney, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full, in lawful money of the United States, of the Exercise Price payable in respect of the number of Warrant Shares issued upon such exercise. (b) The Registered Holder may, at its option, elect to pay some or all of the Exercise Price payable upon an exercise of this Warrant by cancelling a portion of this Warrant exercisable for such number of Warrant Shares as is determined by dividing (i) the total Exercise Price payable in respect of the number of Warrant Shares being issued upon such exercise by (ii) the excess of the Fair Market Value per share of Common Stock as of the effective date of exercise, as determined pursuant to subsection 2(c) below (the "Exercise Date") over the Exercise Price per share. If the Registered Holder wishes to exercise this Warrant pursuant to this method of payment with respect to the maximum number of Warrant Shares issuable pursuant to this method, then the number of Warrant Shares so issuable shall be equal to the total number of Warrant Shares, minus the product obtained by multiplying (x) the total number of Warrant Shares by (y) a fraction, the numerator of which shall be the Exercise Price per share and the denominator of which shall be the Fair Market Value per share of Common Stock as of the Exercise Date. The Fair Market Value per share of Common Stock shall be determined as follows: (i) If the Common Stock is listed on a national securities exchange, the Nasdaq Stock Market or another nationally recognized exchange or trading system as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the average of the last reported sale price per share of -2- Common Stock thereon for the ten consecutive trading days ending on the day immediately prior to the Exercise Date; (ii) If the Common Stock is not listed on a national securities exchange, the Nasdaq Stock Market or another nationally recognized exchange or trading system as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the amount most recently determined in good faith by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company); and, upon request of the Registered Holder, the Board of Directors (or a representative thereof) shall promptly notify the Registered Holder of the Fair Market Value per share of Common Stock. Notwithstanding the foregoing, if the Board of Directors has not made such a determination within a forty-five day period prior to the Exercise Date, then (A) the Fair Market Value per share of Common Stock shall be the amount next determined in good faith by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company), (B) the Board of Directors shall make such a determination within 15 days of a request by the Registered Holder that it do so, and (C) the exercise of this Warrant pursuant to this subsection 2(b) shall be delayed until such determination is made. (c) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company as provided in subsection 2(a) above. At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 2(d) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. (d) As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 10 days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Registered Holder, or as such Registered Holder (upon payment by such Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full Warrant Shares to which such Registered Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such Registered Holder would otherwise be entitled, cash in an amount determined pursuant to Section 4 hereof; and (ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of Warrant Shares equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this -3- Warrant minus the sum of (a) the number of such shares purchased by the Registered Holder upon such exercise plus (b) the number of Warrant Shares (if any) covered by the portion of this Warrant cancelled in payment of the Exercise Price payable upon such exercise pursuant to subsection 2(b) above. (e) Notwithstanding the foregoing, the Warrant shall become immediately exercisable by the Registered Holder upon (i) the occurrence of an Event of Default (as defined in the Extension Agreement dated April 29, 1998 by and among the Registered Holder, Fleet Bank-N.H., Mellon Bank, N.A., the Company and certain of its subsidiaries) or (ii) the mailing date of written notice by the Company of its intention to exercise its right under Section 8 to redeem Available Warrant Shares (as defined under subsection 8(a)). 3. Adjustments. ----------- (a) General. The Exercise Price shall be subject to adjustment from ------- time to time pursuant to the terms of this Section 3. (b) Diluting Issuances. ------------------ (i) Special Definitions. For purposes of this subsection ------------------- 3(b), the following definitions shall apply: (A) "Option" shall mean rights, options or warrants to ------ subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities, excluding options described in clause (II) of subsection 3(b)(i)(D) below. (B) "Original Issue Date" shall mean the date on which ------------------- this Warrant was first issued. (C) "Convertible Securities" shall mean any evidences of ---------------------- indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" shall mean all --------------------------------- shares of Common Stock issued (or, pursuant to subsection 3(b)(iii) below, deemed to be issued) by the Company after the Original Issue Date, other than shares of Common Stock issued or issuable: (I) by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock that are excluded from the definition of Additional Shares of Common Stock by this clause (I); or -4- (II) to employees or directors of, or consultants to, the Company pursuant to a plan adopted by the Board of Directors of the Company. (ii) No Adjustment of Exercise Price. No adjustments to the ------------------------------- Exercise Price shall be made unless the consideration per share (determined pursuant to subsection 3(b)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Company is less than the Exercise Price in effect on the date of, and immediately prior to, the issue of such Additional Shares. (iii) Issue of Securities Deemed Issue of Additional Shares of -------------------------------------------------------- Common Stock. If the Company at any time or from time to time after the - ------------ Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to subsection 3(b)(v) hereof) of such Additional Shares of Common Stock would be less than the Exercise Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) No further adjustment in the Exercise Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) If such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company, upon the exercise, conversion or exchange thereof, the Exercise Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase becoming effective, be recomputed to reflect such increase insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; -5- (C) Upon the expiration or termination of any unexercised Option, the Exercise Price shall not be readjusted, but the Additional Shares of Common Stock deemed issued as the result of the original issue of such Option shall not be deemed issued for the purposes of any subsequent adjustment of the Exercise Price; (D) In the event of any change in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any Option or Convertible Security, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Exercise Price then in effect shall forthwith be readjusted to such Exercise Price as would have obtained had the adjustment which was made upon the issuance of such Option or Convertible Security not exercised or converted prior to such change been made upon the basis of such change; and (E) No readjustment pursuant to Clause (B) or (D) above shall have the effect of increasing the Exercise Price to an amount which exceeds the lower of (i) the Exercise Price on the original adjustment date, or (ii) the Exercise Price that would have resulted from any issuances of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) Adjustment of Exercise Price Upon Issuance of Additional -------------------------------------------------------- Shares of Common Stock. In the event the Company shall at any time after the - ---------------------- Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to subsection 3(b)(iii), but excluding shares issued as a dividend or distribution or upon a stock split or combination as provided in subsection 3(c)), without consideration or for a consideration per share less than the Exercise Price in effect on the date of and immediately prior to such issue, then and in such event, such Exercise Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Exercise Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Exercise Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, (i) for the purpose of this subsection -------- ---- 3(b)(iv), all shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding (other than shares excluded from the definition of "Additional Shares of Common Stock" by virtue of clause (II) of subsection 3(b)(i)(D)), and (ii) the number of shares of Common Stock deemed issuable upon conversion of such outstanding Options and Convertible Securities shall not give effect to any adjustments to the conversion price or conversion rate of -6- such Options or Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. Notwithstanding the foregoing, the applicable Exercise Price shall not be so reduced at such time if the amount of such reduction would be an amount less than $.05, but any such amount shall be carried forward and reduction with respect thereto made at the time of and together with any subsequent reduction which, together with such amount and any other amount or amounts so carried forward, shall aggregate $.05 or more. (v) Determination of Consideration. For purposes of this ------------------------------ subsection 3(b), the consideration received by the Company for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: ----------------- (I) insofar as it consists of cash, be computed at the aggregate of cash received by the Company, excluding amounts paid or payable for accrued interest or accrued dividends; (II) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (III) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Company for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The ---------------------------------- consideration per share received by the Company for Additional Shares of Common Stock deemed to have been issued pursuant to subsection 3(b)(iii), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the Company as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by -7- (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (c) Recapitalizations. If outstanding shares of Common Stock shall ----------------- be subdivided into a greater number of shares or a dividend in Common Stock shall be paid in respect of Common Stock, the Exercise Price in effect immediately prior to such subdivision or at the record date of such dividend shall simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend be proportionately reduced. If outstanding shares of Common Stock shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased. (d) Mergers, etc. If there shall occur any capital reorganization or ------------ reclassification of the Common Stock (other than a change in par value or a subdivision or combination as provided for in subsection 3(c) above), or any consolidation or merger of the Company with or into another corporation, or a transfer of all or substantially all of the assets of the Company, then, as part of any such reorganization, reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made so that the Registered Holder of this Warrant shall have the right thereafter to receive upon the exercise hereof the kind and amount of shares of stock or other securities or property which such Registered Holder would have been entitled to receive if, immediately prior to any such reorganization, reclassification, consolidation, merger or sale, as the case may be, such Registered Holder had held the number of shares of Common Stock which were then issuable upon the exercise of this Warrant. In any such case, appropriate adjustment (as reasonably determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Registered Holder of this Warrant, such that the provisions set forth in this Section 3 (including provisions with respect to adjustment of the Exercise Price) shall thereafter be applicable, as nearly as is reasonably practicable, in relation to any shares of stock or other securities or property thereafter deliverable upon the exercise of this Warrant. (e) Adjustment in Number of Warrant Shares. When any adjustment is -------------------------------------- required to be made in the Exercise Price, the number of Warrant Shares purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment. -8- (f) Certificate of Adjustment. When any adjustment is required to be ------------------------- made pursuant to this Section 3, the Company shall promptly mail to the Registered Holder a certificate setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such certificate shall also set forth the kind and amount of stock or other securities or property into which this Warrant shall be exercisable following such adjustment. 4. Fractional Shares. The Company shall not be required upon the exercise ----------------- of this Warrant to issue any fractional shares, but shall make an adjustment therefor in cash on the basis of the Fair Market Value per share of Common Stock, as determined pursuant to subsection 2(b) above. 5. Requirements for Transfer. ------------------------- (a) This Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) the Company first shall have been furnished with an opinion of legal counsel, reasonably satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act. (b) Notwithstanding the foregoing, no registration or opinion of counsel shall be required for (i) a transfer by a Registered Holder which is a partnership to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner, if the transferee agrees in writing to be subject to the terms of this Section 5, (ii) a transfer made in accordance with Rule 144 under the Act, or (iii) a transfer by a Registered Holder which is a corporation to an affiliate, as defined under Rule 144 of the Securities Act, if the transferee agrees in writing to be subject to the terms of this Section. (c) Each certificate representing Warrant Shares shall bear a legend substantially in the following form: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such securities are registered under such Act or an opinion of counsel satisfactory to the Company is obtained to the effect that such registration is not required." -9- The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act. 6. No Impairment. The Company will not, by amendment of its charter or ------------- through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. 7. Liquidating Dividends. If the Company pays a dividend or makes a --------------------- distribution on the Common Stock payable otherwise than in cash out of earnings or earned surplus (determined in accordance with generally accepted accounting principles) except for a stock dividend payable in shares of Common Stock (a "Liquidating Dividend"), then the Company will pay or distribute to the Registered Holder of this Warrant, upon the exercise hereof, in addition to the Warrant Shares issued upon such exercise, the Liquidating Dividend which would have been paid to such Registered Holder if he had been the owner of record of such Warrant Shares immediately prior to the date on which a record is taken for such Liquidating Dividend or, if no record is taken, the date as of which the record holders of Common Stock entitled to such dividends or distribution are to be determined. 8. Optional Redemption. ------------------- (a) At any time, the Company may, at its option, redeem all, but not less than all, of the Warrant Shares for which the Registered Holder has not exercised its right to be issued (the "Available Warrant Shares"), by paying $3.33 per Available Warrant Share (subject to appropriate adjustment for stock splits, stock dividends, combinations or other similar recapitalizations affecting such shares) in cash for each Available Warrant Share then redeemed (hereinafter referred to as the "Redemption Price"); provided, however, that the Registered Holder may immediately exercise its Warrant or Warrants until such time on or 15 days prior to the Redemption Date (as defined below). (b) At least 15 days prior to the date fixed for any redemption of Available Warrant Shares (hereinafter referred to as the "Redemption Date"), written notice shall be mailed, by first class or registered mail, postage prepaid, to the Registered Holder, notifying such holder of the election of the Company to redeem such Available Warrant Shares, specifying the Redemption Date and calling upon the Registered Holder to surrender to the Company, in the manner and at the place designated, its Warrant or Warrants, representing the Available Warrant Shares to be redeemed (such notice is hereinafter referred to as the "Redemption Notice"). On or prior to the Redemption Date (subject to the Registered Holder's right to exercise -10- such Warrants prior to the Redemption Date), the Registered Holder shall surrender its Warrant or Warrants representing Available Warrant Shares to the Company, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the Registered Holder and each surrendered Warrant shall be cancelled. From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price (or the Registered Holder has exercised the Warrants prior to such Redemption Date), all rights of the Registered Holder designated for redemption in the Redemption Notice as the Registered Holder (except the right to receive the Redemption Price without interest upon surrender of the Warrant) shall cease with respect to the Warrant or Warrants representing the Available Warrant Shares, and such Warrant or Warrants shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever. 9. Notices of Record Date, etc. In case: --------------------------- (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or (b) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company; or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Registered Holder of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least ten (10) days prior to the record date or effective date for the event specified in such notice. -11- 10. Reservation of Stock. The Company will at all times reserve and keep -------------------- available, solely for issuance and delivery upon the exercise of this Warrant, such number of Warrant Shares and other stock, securities and property, as from time to time shall be issuable upon the exercise of this Warrant. 11. Exchange of Warrants. Upon the surrender by the Registered Holder of -------------------- any Warrant or Warrants, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of such Registered Holder, at the Company's expense, a new Warrant or Warrants of like tenor, in the name of such Registered Holder or as such Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 12. Replacement of Warrants. Upon receipt of evidence reasonably ----------------------- satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. 13. Transfers, etc. -------------- (a) The Company will maintain a register containing the name and address of the Registered Holder of this Warrant. Any Registered Holder may change its or his address as shown on the warrant register by written notice to the Company requesting such change. (b) Subject to the provisions of Section 5 hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit II ---------- hereto) at the principal office of the Company. (c) Until any transfer of this Warrant is made in the warrant register, the Company may treat the Registered Holder of this Warrant as the absolute owner hereof for all purposes; provided, however, that if and when this -------- ------- Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. -12- 14. Mailing of Notices, etc. All notices and other communications from the ----------------------- Company to the Registered Holder of this Warrant shall be mailed by first-class certified or registered mail, postage prepaid, to the address furnished to the Company in writing by the last Registered Holder of this Warrant who shall have furnished an address to the Company in writing. All notices and other communications from the Registered Holder of this Warrant or in connection herewith to the Company shall be mailed by first-class certified or registered mail, postage prepaid, to the Company at its principal office set forth below. If the Company should at any time change the location of its principal office to a place other than as set forth below, it shall give prompt written notice to the Registered Holder of this Warrant and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice. 15. No Rights as Stockholder. Until the exercise of this Warrant, the ------------------------ Registered Holder of this Warrant shall not have or exercise any rights by virtue hereof as a stockholder of the Company. 16. Change or Waiver. Any term of this Warrant may be changed or waived ---------------- only by an instrument in writing signed by the party against which enforcement of the change or waiver is sought. 17. Headings. The headings in this Warrant are for purposes of reference ------- only and shall not limit or otherwise affect the meaning of any provision of this Warrant. 18. Governing Law. This Warrant will be governed by and construed in ------------- accordance with the laws of Delaware. 19. Registration Rights. ------------------- (a) The Registered Holder shall have the demand registration rights with respect to the Warrant Shares as specified in Section 9 of the Extension Agreement dated April 29, 1998 by and among the Registered Holder, Fleet Bank, N.A., Mellon Bank, N.A., the Company and certain of its subsidiaries. (b) Furthermore, the Registered Holder shall be entitled to "piggy- back" registration rights for so long as the Registered Holder shall own Warrant Shares. Whenever the Company proposes to file a Registration Statement (other than pursuant to subsection 19(a) at any time and from time to time, it will, prior to such filing, give written notice to the Registered Holder of its intention to do so and, upon the written request of the Registered Holder given within 20 days after the Company provides such notice (which request shall state the intended method of disposition of such Registrable Shares), the Company shall use its best efforts to cause all Registrable Shares which the Company has been requested by such Registered -13- Holder to register to be registered under the Securities Act to the extent necessary to permit their sale or other disposition in accordance with the intended methods of distribution specified in the request of the Registered Holder; provided that the Company shall have the right to postpone or withdraw any registration effected pursuant to this subsection 19(b) without obligation to the Registered Holder or any persons or entities to which the rights under this Warrant are transferred by the Registered Holder, its successors or assigns pursuant to Section 13 hereof. (a) In connection with any registration under subsection 19(b) involving an underwriting, the Company shall not be required to include any Registrable Shares in such registration unless the holders thereof accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (provided that such terms must be consistent with this Warrant). If in the opinion of the managing underwriter it is appropriate because of marketing factors to limit the number of Registrable Shares to be included in the offering, then the Company shall be required to include in the registration only that number of Registrable Shares, if any, which the managing underwriter believes should be included therein. If the number of Registrable Shares to be included in the offering in accordance with the foregoing is less than the total number of shares which the holders of Registrable Shares have requested to be included, then the holders of Registrable Shares who have requested registration and other holders of securities entitled to include them in such registration shall participate in the registration pro rata based upon their total ownership of shares of Common Stock (giving effect to the conversion into Common Stock of all securities convertible thereinto). If any holder would thus be entitled to include more securities than such holder requested to be registered, the excess shall be allocated among other requesting holders pro rata in the manner described in the preceding sentence. 20. Registration Procedures. If and whenever the Company is required by ----------------------- the provisions of this Warrant to use to effect the registration of any of the Registrable Shares under the Securities Act, the Company shall: (a) furnish to the Registered Holder such number of copies as the Registered Holder shall reasonably request of the prospectus, including a preliminary prospectus and any amendments or supplements thereto, in conformity with the requirements of the Securities Act; (b) use its best efforts to register or qualify the Registrable Shares covered by the Registration Statement under the securities laws of such states as the Registered Holder shall reasonably request; provided, however, -------- ------- that the Company shall not be required in connection with this subsection 20(b) to qualify as a foreign corporation or execute a general consent to service of process in any jurisdiction; -14- (c) promptly notify the Registered Holder, if the Company has delivered preliminary or final prospectuses to the Registered Holder and after having done so, the prospectus is amended to comply with the requirements of the Securities Act and, if requested by the Company, the Registered Holder shall immediately cease making offers or sales of Registrable Shares under the Registration Statement and return all prospectuses to the Company. The Company shall promptly provide the Registered Holder with revised prospectuses and, following receipt of the revised prospectuses, the Registered Holder shall be free to resume making offers and sales of the Registrable Shares; and (d) pay the expenses incurred by it in complying with its obligations under this Warrant in connection with registration rights, including all registration and filing fees, exchange listing fees, expenses for the preparation of the Registration statement, prospectus and any amendments and supplements thereto, printing and photocopy expenses, fees and expenses of counsel for the Company, and fees and expenses of accountants for the Company, but excluding: (i) selling commissions or underwriting discounts incurred by the Registered Holder in connection with sales of Registrable Shares under the Registration Statement and (ii) the fees and expenses of any counsel retained by the Registered Holder. 21. Requirements of Registered Holder. The Company shall not be required ---------------------------------- to effect the registration of any of the Registrable Shares under the Securities Act pursuant to this Warrant unless: (a) the Registered Holder owning such shares furnishes to the Company in writing such information regarding such Registered Holder and the proposed sale of Registrable Shares by such Registered Holder as the Company may reasonably request in writing in connection with the filing of a Registration Statement or as shall be required in connection therewith by the Commission or any state securities law authorities; and (b) Such Registered Holder shall have provided to the Company its written agreement that in the event of any registration of any of the Registrable Shares under the Securities Act pursuant to this Warrant, each Registered Holder will indemnify the Company and its officers and directors and each person, if any, who controls any thereof (within the meaning of the Securities Act) against any and all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of any material fact contained in any prospectus or other document incident to any registration, qualification or compliance (or in any related Registration Statement, notification or the like) or any omission (or alleged omission) to state therein any material fact required to be stated therein or necessary to make the statement therein not misleading, and such Registered Holder will reimburse the Company and each other person indemnified pursuant to this Section 21 for any legal and any other expenses -15- reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that this Section -------- ------- 21 shall apply only if (and only to the extent that) such statement or omission was made in reliance upon written information furnished to the Company in an instrument duly executed by such Registered Holder and stated to be specifically for use in such prospectus or other document (or related Registration Statement, notification or the like) or any amendment or supplement thereto; and, provided -------- further that each Registered Holder's liability hereunder with respect to any - ------- particular registration shall be limited to an amount equal to the net proceeds received by such Registered Holder from the Registrable Securities sold by such Registered Holder in such registration. 22. Indemnification by Company. In the event of any registration of any -------------------------- of the Registrable Shares under the Securities Act pursuant to this Warrant, the Company will indemnify each Registered Holder and each person who controls the Registered Holder (within the meaning of the Securities Act) against any and all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of any material fact contained in any prospectus or other document incident to any registration, qualification or compliance (or in any related Registration Statement, notification or the like) or any omission (or alleged omission) to state therein any material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to any action or inaction required of the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Registered Holder and controlling person for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable in any such case to the - -------- ------- extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company in an instrument duly executed by such Registered Holder or controlling person and specifically for use in such prospectus or other document. IGI, INC. /s/ Edward B. Hager ----------------------------- By: EDWARD B. HAGER Title: CHAIRMAN -16- EXHIBIT I --------- PURCHASE FORM ------------- To:_________________ Dated:____________ The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ___), hereby irrevocably elects to purchase _____ shares of the Common Stock covered by such Warrant. The undersigned herewith makes payment of $____________, representing the full Exercise Price for such shares at the price per share provided for in such Warrant. Such payment takes the form of (check applicable box or boxes): [_] $______ in lawful money of the United States; and/or [_] The cancellation of such portion of the attached Warrant as is exercisable for a total of _____ Warrant Shares (using a Fair Market Value of $_____ per share for purposes of this calculation). Signature:_____________________ Address:______________________ ______________________ EXHIBIT II ---------- ASSIGNMENT FORM --------------- FOR VALUE RECEIVED, ________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. ____) with respect to the number of shares of Common Stock covered thereby set forth below, unto: Name of Assignee Address No. of Shares - ---------------- ------- ------------- Dated:_____________________ Signature:_______________________________ Dated:_____________________ Witness:_________________________________ EX-10.35 6 COMMON STOCK PURCHASE WARRANT NO. 3 DATED 05/12/98 Exhibit 10.35 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON ITS EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 4 OF THIS WARRANT ------------------------------------------------------------ Warrant No. 3 Number of Shares: 120,000 (subject to adjustment) Date of Issuance: May 12, 1998 IGI, INC. --------- Common Stock Purchase Warrant ----------------------------- (Void after May 12, 2003) IGI, Inc., a Delaware corporation (the "Company"), for value received, hereby certifies that Mellon Bank, N.A., a national banking association, or its registered assigns (the "Registered Holder"), is entitled, subject to the terms set forth below, to purchase from the Company, at any time or from time to time on or after September 1, 1998 and on or before May 12, 2003 at not later than 5:00 p.m. 120,000 shares of Common Stock, $.01 par value per share (the "Common Stock"), of the Company, at a Exercise Price of $3.50 per share unless, by 5:00 p.m., Buena, New Jersey time, on or before August 31, 1998, either (a) all Obligations (as defined in the Extension Agreement dated April 29, 1998 (the "Extension Agreement") by and among the Registered Holder, Fleet Bank, N.A., Mellon Bank, N.A., the Company and certain of its subsidiaries) of the Borrowers (as defined in the Extension Agreement) to the Lenders (as defined in the Extension Agreement) shall have been paid in full, in which case this Warrant and the Registered Holder's rights hereunder shall expire, or (b) the Borrowers have delivered a commitment letter reasonably satisfactory to the Lenders, subject only to documentation and no further contingencies of any kind, from a financial institution acceptable to the Lenders, contemplating a full refinancing of the then existing Obligations and a closing of such financing within thirty (30) days of such commitment letter, in which case this Warrant's exercise start date shall be extended to commence September 30, 1998; provided, -------- however, if all Obligations to the Lenders have been paid in full on or before - ------- such extended start date, this Warrant and the Registered Holder's rights hereunder shall expire upon such payment. The shares issuable upon exercise of this Warrant, and the exercise price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the "Warrant Shares" and the "Exercise Price," respectively. -1- 1. Certain Definitions. As used in this Warrant, the following terms ------------------- shall have the following respective meanings: "Commission" means the Securities and Exchange Commission, or any ---------- other Federal agency at the time administering the Securities Act. "Registration Statement" means a registration statement filed by the ---------------------- Company with the Commission for a public offering and sale of Common Stock (other than a registration statement on Form S-8 or Form S-4, or their successors, or any other form for a similar limited purpose, or any registration statement covering only securities proposed to be issued in exchange for securities or assets of another corporation). "Registrable Shares" means (i) the Warrant Shares, and (ii) any other ------------------ shares of Common Stock issued in respect of such shares (because of stock splits, stock dividends, reclassifications, recapitalizations, or similar events); provided, however, that shares of Common Stock which are Registrable -------- ------- Shares shall cease to be Registrable Shares (i) upon any sale pursuant to a Registration Statement or Rule 144 under the Securities Act or (ii) upon any sale in any manner to a person or entity which, by virtue of Section 13 of this Warrant, is not entitled to the rights provided by this Warrant. "Securities Act" means the Security Act of 1933, as amended, or any -------------- similar Federal statute, and the rules and regulations of the Commission issued under such Act, as they each may, from time to time, be in effect. 2. Exercise. -------- (a) This Warrant may be exercised by the Registered Holder, in whole or in part, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by such Registered Holder or by such Registered --------- Holder's duly authorized attorney, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full, in lawful money of the United States, of the Exercise Price payable in respect of the number of Warrant Shares issued upon such exercise. (b) The Registered Holder may, at its option, elect to pay some or all of the Exercise Price payable upon an exercise of this Warrant by cancelling a portion of this Warrant exercisable for such number of Warrant Shares as is determined by dividing (i) the total Exercise Price payable in respect of the number of Warrant Shares being issued upon such exercise by (ii) the excess of the Fair Market Value per share of Common Stock as of the effective date of exercise, as determined pursuant to subsection 2(c) below (the "Exercise Date") over the Exercise Price per share. If the Registered Holder wishes to exercise this Warrant pursuant to this method of -2- payment with respect to the maximum number of Warrant Shares issuable pursuant to this method, then the number of Warrant Shares so issuable shall be equal to the total number of Warrant Shares, minus the product obtained by multiplying (x) the total number of Warrant Shares by (y) a fraction, the numerator of which shall be the Exercise Price per share and the denominator of which shall be the Fair Market Value per share of Common Stock as of the Exercise Date. The Fair Market Value per share of Common Stock shall be determined as follows: (i) If the Common Stock is listed on a national securities exchange, the Nasdaq Stock Market or another nationally recognized exchange or trading system as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the average of the last reported sale price per share of Common Stock thereon for the ten consecutive trading days ending on the day immediately prior to the Exercise Date. (ii) If the Common Stock is not listed on a national securities exchange, the Nasdaq Stock Market or another nationally recognized exchange or trading system as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the amount most recently determined in good faith by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company); and, upon request of the Registered Holder, the Board of Directors (or a representative thereof) shall promptly notify the Registered Holder of the Fair Market Value per share of Common Stock. Notwithstanding the foregoing, if the Board of Directors has not made such a determination within a forty-five day period prior to the Exercise Date, then (A) the Fair Market Value per share of Common Stock shall be the amount next determined in good faith by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company), (B) the Board of Directors shall make such a determination within 15 days of a request by the Registered Holder that it do so, and (C) the exercise of this Warrant pursuant to this subsection 2(b) shall be delayed until such determination is made. (c) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company as provided in subsection 2(a) above. At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 2(d) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. -3- (d) As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 10 days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Registered Holder, or as such Registered Holder (upon payment by such Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full Warrant Shares to which such Registered Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such Registered Holder would otherwise be entitled, cash in an amount determined pursuant to Section 4 hereof; and (ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of Warrant Shares equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the sum of (a) the number of such shares purchased by the Registered Holder upon such exercise plus (b) the number of Warrant Shares (if any) covered by the portion of this Warrant cancelled in payment of the Exercise Price payable upon such exercise pursuant to subsection 2(b) above. 3. Adjustments. ----------- (a) General. The Exercise Price shall be subject to adjustment from ------- time to time pursuant to the terms of this Section 3. (b) Diluting Issuances. ------------------ (i) Special Definitions. For purposes of this subsection 3(b), ------------------- the following definitions shall apply: (A) "Option" shall mean rights, options or warrants to ------ subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities, excluding options described in clause (II) of subsection 3(b)(i)(D) below. (B) "Original Issue Date" shall mean the date on which ------------------- this Warrant was first issued. (C) "Convertible Securities" shall mean any evidences of ---------------------- indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" shall mean all --------------------------------- shares of Common Stock issued (or, pursuant to subsection 3(b)(iii) below, deemed to -4- be issued) by the Company after the Original Issue Date, other than shares of Common Stock issued or issuable: (I) by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock that are excluded from the definition of Additional Shares of Common Stock by this clause (I); or (II) to employees or directors of, or consultants to, the Company pursuant to a plan adopted by the Board of Directors of the Company. (ii) No Adjustment of Exercise Price. No adjustments to the ------------------------------- Exercise Price shall be made unless the consideration per share (determined pursuant to subsection 3(b)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Company is less than the Exercise Price in effect on the date of, and immediately prior to, the issue of such Additional Shares. (iii) Issue of Securities Deemed Issue of Additional Shares of -------------------------------------------------------- Common Stock. If the Company at any time or from time to time after the Original - ------------ Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to subsection 3(b)(v) hereof) of such Additional Shares of Common Stock would be less than the Exercise Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) No further adjustment in the Exercise Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) If such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company, upon the exercise, conversion or exchange -5- thereof, the Exercise Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase becoming effective, be recomputed to reflect such increase insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) Upon the expiration or termination of any unexercised Option, the Exercise Price shall not be readjusted, but the Additional Shares of Common Stock deemed issued as the result of the original issue of such Option shall not be deemed issued for the purposes of any subsequent adjustment of the Exercise Price; (D) In the event of any change in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any Option or Convertible Security, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Exercise Price then in effect shall forthwith be readjusted to such Exercise Price as would have obtained had the adjustment which was made upon the issuance of such Option or Convertible Security not exercised or converted prior to such change been made upon the basis of such change; and (E) No readjustment pursuant to Clause (B) or (D) above shall have the effect of increasing the Exercise Price to an amount which exceeds the lower of (i) the Exercise Price on the original adjustment date, or (ii) the Exercise Price that would have resulted from any issuances of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) Adjustment of Exercise Price Upon Issuance of Additional -------------------------------------------------------- Shares of Common Stock. In the event the Company shall at any time after the - ---------------------- Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to subsection 3(b)(iii), but excluding shares issued as a dividend or distribution or upon a stock split or combination as provided in subsection 3(c)), without consideration or for a consideration per share less than the Exercise Price in effect on the date of and immediately prior to such issue, then and in such event, such Exercise Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Exercise Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Exercise Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, (i) for the purpose of this -------- ---- subsection 3(b)(iv), all shares of Common Stock issuable upon exercise or -6- conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding (other than shares excluded from the definition of "Additional Shares of Common Stock" by virtue of clause (II) of subsection 3(b)(i)(D)), and (ii) the number of shares of Common Stock deemed issuable upon conversion of such outstanding Options and Convertible Securities shall not give effect to any adjustments to the conversion price or conversion rate of such Options or Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. Notwithstanding the foregoing, the applicable Exercise Price shall not be so reduced at such time if the amount of such reduction would be an amount less than $.05, but any such amount shall be carried forward and reduction with respect thereto made at the time of and together with any subsequent reduction which, together with such amount and any other amount or amounts so carried forward, shall aggregate $.05 or more. (v) Determination of Consideration. For purposes of this ------------------------------ subsection 3(b), the consideration received by the Company for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: ----------------- (I) insofar as it consists of cash, be computed at the aggregate of cash received by the Company, excluding amounts paid or payable for accrued interest or accrued dividends; (II) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (III) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Company for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration ---------------------------------- per share received by the Company for Additional Shares of Common Stock deemed to have been issued pursuant to subsection 3(b)(iii), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the Company as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional -7- consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (c) Recapitalizations. If outstanding shares of Common Stock shall be ----------------- subdivided into a greater number of shares or a dividend in Common Stock shall be paid in respect of Common Stock, the Exercise Price in effect immediately prior to such subdivision or at the record date of such dividend shall simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend be proportionately reduced. If outstanding shares of Common Stock shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased. (d) Mergers, etc. If there shall occur any capital reorganization or ------------ reclassification of the Common Stock (other than a change in par value or a subdivision or combination as provided for in subsection 3(c) above), or any consolidation or merger of the Company with or into another corporation, or a transfer of all or substantially all of the assets of the Company, then, as part of any such reorganization, reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made so that the Registered Holder of this Warrant shall have the right thereafter to receive upon the exercise hereof the kind and amount of shares of stock or other securities or property which such Registered Holder would have been entitled to receive if, immediately prior to any such reorganization, reclassification, consolidation, merger or sale, as the case may be, such Registered Holder had held the number of shares of Common Stock which were then issuable upon the exercise of this Warrant. In any such case, appropriate adjustment (as reasonably determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Registered Holder of this Warrant, such that the provisions set forth in this Section 3 (including provisions with respect to adjustment of the Exercise Price) shall thereafter be applicable, as nearly as is reasonably practicable, in relation to any shares of stock or other securities or property thereafter deliverable upon the exercise of this Warrant. -8- (e) Adjustment in Number of Warrant Shares. When any adjustment is -------------------------------------- required to be made in the Exercise Price, the number of Warrant Shares issuable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment. (f) Certificate of Adjustment. When any adjustment is required to be ------------------------- made pursuant to this Section 3, the Company shall promptly mail to the Registered Holder a certificate setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such certificate shall also set forth the kind and amount of stock or other securities or property into which this Warrant shall be exercisable following such adjustment . 4. Fractional Shares. The Company shall not be required upon the exercise ----------------- of this Warrant to issue any fractional shares, but shall make an adjustment therefor in cash on the basis of the Fair Market Value per share of Common Stock, as determined pursuant to subsection 2(b) above. 5. Requirements for Transfer. ------------------------- (a) This Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) the Company first shall have been furnished with an opinion of legal counsel, reasonably satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act. (b) Notwithstanding the foregoing, no registration or opinion of counsel shall be required for (i) a transfer by a Registered Holder which is a partnership to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner, if the transferee agrees in writing to be subject to the terms of this Section 5, (ii) a transfer made in accordance with Rule 144 under the Act, or (iii) a transfer by a Registered Holder which is a corporation to an affiliate, as defined under Rule 144 of the Securities Act, if the transferee agrees in writing to be subject to the terms of this Section. (c) Each certificate representing Warrant Shares shall bear a legend substantially in the following form: "The securities represented by this certificate have not been registered under the Securities -9- Act of 1933, as amended, and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such securities are registered under such Act or an opinion of counsel satisfactory to the Company is obtained to the effect that such registration is not required." The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act. 6. No Impairment. The Company will not, by amendment of its charter or ------------- through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. 7. Liquidating Dividends. If the Company pays a dividend or makes a --------------------- distribution on the Common Stock payable otherwise than in cash out of earnings or earned surplus (determined in accordance with generally accepted accounting principles) except for a stock dividend payable in shares of Common Stock (a "Liquidating Dividend"), then the Company will pay or distribute to the Registered Holder of this Warrant, upon the exercise hereof, in addition to the Warrant Shares issued upon such exercise, the Liquidating Dividend which would have been paid to such Registered Holder if he had been the owner of record of such Warrant Shares immediately prior to the date on which a record is taken for such Liquidating Dividend or, if no record is taken, the date as of which the record holders of Common Stock entitled to such dividends or distribution are to be determined. 8. Optional Redemption. ------------------- (a) At any time, the Company may, at its option, redeem all, but not less than all, of the Warrant Shares for which the Registered Holder has not exercised its right to be issued (the "Available Warrant Shares"), by paying $3.33 per Available Warrant Share (subject to appropriate adjustment for stock splits, stock dividends, combinations or other similar recapitalizations affecting such shares) in cash for each Available Warrant Share then redeemed (hereinafter referred to as the "Redemption Price"); provided, however, that the Registered Holder may immediately exercise its Warrant or Warrants until such time on or 15 days prior to the Redemption Date (as defined below). -10- (b) At least 15 days prior to the date fixed for any redemption of Available Warrant Shares (hereinafter referred to as the "Redemption Date"), written notice shall be mailed, by first class or registered mail, postage prepaid, to the Registered Holder, notifying such holder of the election of the Company to redeem such Available Warrant Shares, specifying the Redemption Date and calling upon the Registered Holder to surrender to the Company, in the manner and at the place designated, its Warrant or Warrants, representing the Available Warrant Shares to be redeemed (such notice is hereinafter referred to as the "Redemption Notice"). On or prior to the Redemption Date (subject to the Registered Holder's right to exercise such Warrants prior to the Redemption Date), the Registered Holder shall surrender its Warrant or Warrants representing Available Warrant Shares to the Company, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the Registered Holder and each surrendered Warrant shall be cancelled. From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price (or the Registered Holder has exercised the Warrants prior to such Redemption Date), all rights of the Registered Holder designated for redemption in the Redemption Notice as the Registered Holder (except the right to receive the Redemption Price without interest upon surrender of the Warrant) shall cease with respect to the Warrant or Warrants representing the Available Warrant Shares, and such Warrant or Warrants shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever. 9. Notices of Record Date, etc. In case: --------------------------- (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or (b) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company; or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Registered Holder of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up -11- is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least ten (10) days prior to the record date or effective date for the event specified in such notice. 10. Reservation of Stock. The Company will at all times reserve and keep -------------------- available, solely for issuance and delivery upon the exercise of this Warrant, such number of Warrant Shares and other stock, securities and property, as from time to time shall be issuable upon the exercise of this Warrant. 11. Exchange of Warrants. Upon the surrender by the Registered Holder of -------------------- any Warrant or Warrants, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of such Registered Holder, at the Company's expense, a new Warrant or Warrants of like tenor, in the name of such Registered Holder or as such Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 12. Replacement of Warrants. Upon receipt of evidence reasonably ----------------------- satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. 13. Transfers, etc. -------------- (a) The Company will maintain a register containing the name and address of the Registered Holder of this Warrant. Any Registered Holder may change its or his address as shown on the warrant register by written notice to the Company requesting such change. (b) Subject to the provisions of Section 5 hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit II ---------- hereto) at the principal office of the Company. (c) Until any transfer of this Warrant is made in the warrant register, the Company may treat the Registered Holder of this Warrant as the absolute owner -12- hereof for all purposes; provided, however, that if and when this Warrant is -------- ------- properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 14. Mailing of Notices, etc. All notices and other communications from the ----------------------- Company to the Registered Holder of this Warrant shall be mailed by first-class certified or registered mail, postage prepaid, to the address furnished to the Company in writing by the last Registered Holder of this Warrant who shall have furnished an address to the Company in writing. All notices and other communications from the Registered Holder of this Warrant or in connection herewith to the Company shall be mailed by first-class certified or registered mail, postage prepaid, to the Company at its principal office set forth below. If the Company should at any time change the location of its principal office to a place other than as set forth below, it shall give prompt written notice to the Registered Holder of this Warrant and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice. 15. No Rights as Stockholder. Until the exercise of this Warrant, the ------------------------ Registered Holder of this Warrant shall not have or exercise any rights by virtue hereof as a stockholder of the Company. 16. Change or Waiver. Any term of this Warrant may be changed or waived ---------------- only by an instrument in writing signed by the party against which enforcement of the change or waiver is sought. 17. Headings. The headings in this Warrant are for purposes of reference -------- only and shall not limit or otherwise affect the meaning of any provision of this Warrant. 18. Governing Law. This Warrant will be governed by and construed in ------------- accordance with the laws of Delaware. 19. Registration Rights. ------------------- (a) The Registered Holder shall have the registration rights with respect to the Warrant Shares as specified in Section 9 of the Extension Agreement dated April 29, 1998 by and among the Registered Holder, Fleet Bank, N.A., Mellon Bank, N.A., the Company and certain of its subsidiaries. (b) Furthermore, the Registered Holder shall be entitled to "piggy- back" registration rights for so long as the Registered Holder shall own Warrant Shares. Whenever the Company proposes to file a Registration Statement (other than pursuant to subsection 19(a) at any time and from time to time, it will, prior to such -13- filing, give written notice to the Registered Holder of its intention to do so and, upon the written request of the Registered Holder given within 20 days after the Company provides such notice (which request shall state the intended method of disposition of such Registrable Shares), the Company shall use its best efforts to cause all Registrable Shares which the Company has been requested by such Registered Holder to register to be registered under the Securities Act to the extent necessary to permit their sale or other disposition in accordance with the intended methods of distribution specified in the request of the Registered Holder; provided that the Company shall have the right to postpone or withdraw any registration effected pursuant to subsection 19(b) without obligation to the Registered Holder or any persons or entities to whom the rights under this Warrant are transferred by the Registered Holder, its successors or assigns pursuant to Section 13 hereof. (c) In connection with any registration under subsection 19(b) involving an underwriting, the Company shall not be required to include any Registrable Shares in such registration unless the holders thereof accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (provided that such terms must be consistent with this Warrant). If in the opinion of the managing underwriter it is appropriate because of marketing factors to limit the number of Registrable Shares to be included in the offering, then the Company shall be required to include in the registration only that number of Registrable Shares, if any, which the managing underwriter believes should be included therein. If the number of Registrable Shares to be included in the offering in accordance with the foregoing is less than the total number of shares which the holders of Registrable Shares have requested to be included, then the holders of Registrable Shares who have requested registration and other holders of securities entitled to include them in such registration shall participate in the registration pro rata based upon their total ownership of shares of Common Stock (giving effect to the conversion into Common Stock of all securities convertible thereinto). If any holder would thus be entitled to include more securities than such holder requested to be registered, the excess shall be allocated among other requesting holders pro rata in the manner described in the preceding sentence. 20. Registration Procedures. If and whenever the Company is required by ----------------------- the provisions of this Warrant to use its best efforts to effect the registration of any of the Registrable Shares under the Securities Act, the Company shall: (a) furnish to the Registered Holder such number of copies as the Registered Holder shall reasonably request of the prospectus, including a preliminary prospectus and any amendments or supplements thereto, in conformity with the requirements of the Securities Act; (b) use its best efforts to register or qualify the Registrable Shares covered by the Registration Statement under the securities laws of such states as the -14- Registered Holder shall reasonably request; provided, however, that the Company -------- ------- shall not be required in connection with this subsection 20(b) to qualify as a foreign corporation or execute a general consent to service of process in any jurisdiction; (c) promptly notify the Registered Holder, if the Company has delivered preliminary or final prospectuses to the Registered Holder and after having done so, the prospectus is amended to comply with the requirements of the Securities Act and, if requested by the Company, the Registered Holder shall immediately cease making offers or sales of Registrable Shares under the Registration Statement and return all prospectuses to the Company. The Company shall promptly provide the Registered Holder with revised prospectuses and, following receipt of the revised prospectuses, the Registered Holder shall be free to resume making offers and sales of the Registrable Shares; and (d) pay the expenses incurred by it in complying with its obligations under this Warrant in connection with registration rights, including all registration and filing fees, exchange listing fees, expenses for the preparation of the Registration statement, prospectus and any amendments and supplements thereto, printing and photocopy expenses, fees and expenses of counsel for the Company, and fees and expenses of accountants for the Company, but excluding: (i) selling commissions or underwriting discounts incurred by the Registered Holder in connection with sales of Registrable Shares under the Registration Statement and (ii) the fees and expenses of any counsel retained by the Registered Holder. 21. Requirements of Registered Holder. The Company shall not be required --------------------------------- to effect the registration of any of the Registrable Shares under the Securities Act pursuant to this Warrant unless: (a) the Registered Holder owning such shares furnishes to the Company in writing such information regarding such Registered Holder and the proposed sale of Registrable Shares by such Registered Holder as the Company may reasonably request in writing in connection with the filing of a Registration Statement or as shall be required in connection therewith by the Commission or any state securities law authorities; and (b) Such Registered Holder shall have provided to the Company its written agreement that in the event of any registration of any of the Registrable Shares under the Securities Act pursuant to this Warrant, each Registered Holder will indemnify the Company and its officers and directors and each person, if any, who controls any thereof (within the meaning of the Securities Act) against any and all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of any material fact contained in any prospectus or other document incident to any registration, qualification or compliance (or in any related Registration Statement, notification or -15- the like) or any omission (or alleged omission) to state therein any material fact required to be stated therein or necessary to make the statement therein not misleading, and such Registered Holder will reimburse the Company and each other person indemnified pursuant to this Section 21 for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that this -------- ------- Section 21 shall apply only if (and only to the extent that) such statement or omission was made in reliance upon written information furnished to the Company in an instrument duly executed by such Registered Holder and stated to be specifically for use in such prospectus or other document (or related Registration Statement, notification or the like) or any amendment or supplement thereto; and, provided further that each Registered Holder's liability hereunder -------- ------- with respect to any particular registration shall be limited to an amount equal to the net proceeds received by such Registered Holder from the Registrable Securities sold by such Registered Holder in such registration. 22. Indemnification by Company. In the event of any registration of any of -------------------------- the Registrable Shares under the Securities Act pursuant to this Warrant, the Company will indemnify each Registered Holder and each person who controls the Registered Holder (within the meaning of the Securities Act) against any and all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of any material fact contained in any prospectus or other document incident to any registration, qualification or compliance (or in any related Registration Statement, notification or the like) or any omission (or alleged omission) to state therein any material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to any action or inaction required of the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Registered Holder and controlling person for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable in any such case to the - -------- ------- extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company in an instrument duly executed by such Registered Holder or controlling person and specifically for use in such prospectus or other document. IGI, INC. /s/ Edward B. Hager ________________________________ By: EDWARD B. HAGER Title: CHAIRMAN -16- EXHIBIT I --------- PURCHASE FORM ------------- To:_________________ Dated:____________ The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ___), hereby irrevocably elects to purchase _____ shares of the Common Stock covered by such Warrant. The undersigned herewith makes payment of $____________, representing the full Exercise Price for such shares at the price per share provided for in such Warrant. Such payment takes the form of (check applicable box or boxes): [_] $______ in lawful money of the United States; and/or [_] The cancellation of such portion of the attached Warrant as is exercisable for a total of _____ Warrant Shares (using a Fair Market Value of $_____ per share for purposes of this calculation). Signature:_____________________ Address:______________________ ______________________ EXHIBIT II ---------- ASSIGNMENT FORM --------------- FOR VALUE RECEIVED, ________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. ____) with respect to the number of shares of Common Stock covered thereby set forth below, unto: Name of Assignee Address No. of Shares - ---------------- ------- ------------- Dated:_____________________ Signature:________________________________ Dated:_____________________ Witness:__________________________________ EX-10.36 7 COMMON STOCK PURCHASE WARRANT NO. 4 DATED 05/12/98 Exhibit 10.36 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON ITS EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 4 OF THIS WARRANT ----------------------------------------------------------- Warrant No. 4 Number of Shares: 120,000 (subject to adjustment) Date of Issuance: May 12, 1998 IGI, INC. --------- Common Stock Purchase Warrant ----------------------------- (Void after May 12, 2003) IGI, Inc., a Delaware corporation (the "Company"), for value received, hereby certifies that Mellon Bank, N.A., a national banking association, or its registered assigns (the "Registered Holder"), is entitled, subject to the terms set forth below, to purchase from the Company, at any time or from time to time on or after the 60th day after the date of issuance and on or before May 12, 2003 at not later than 5:00 p.m. (Buena, New Jersey time), 120,000 shares of Common Stock, $.01 par value per share (the "Common Stock"), of the Company, at a Exercise Price of $3.50 per share. The shares issuable upon exercise of this Warrant, and the Exercise Price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the "Warrant Shares" and the "Exercise Price," respectively. 1. Certain Definitions. As used in this Warrant, the following terms ------------------- shall have the following respective meanings: "Commission" means the Securities and Exchange Commission, or any ---------- other Federal agency at the time administering the Securities Act. "Registration Statement" means a registration statement filed by the ---------------------- Company with the Commission for a public offering and sale of Common Stock (other than a registration statement on Form S-8 or Form S-4, or their successors, or any other form for a similar limited purpose, or any registration statement covering only securities proposed to be issued in exchange for securities or assets of another corporation). -1- "Registrable Shares" means (i) the Warrant Shares, and (ii) any other ------------------ shares of Common Stock issued in respect of such shares (because of stock splits, stock dividends, reclassifications, recapitalizations, or similar events); provided, however, that shares of Common Stock which are Registrable -------- ------- Shares shall cease to be Registrable Shares (i) upon any sale pursuant to a Registration Statement or Rule 144 under the Securities Act or (ii) upon any sale in any manner to a person or entity which, by virtue of Section 13 of this Warrant, is not entitled to the rights provided by this Warrant. "Securities Act" means the Security Act of 1933, as amended, or any -------------- similar Federal statute, and the rules and regulations of the Commission issued under such Act, as they each may, from time to time, be in effect. 2. Exercise. -------- (a) This Warrant may be exercised by the Registered Holder, in whole or in part, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by such Registered Holder or by such --------- Registered Holder's duly authorized attorney, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full, in lawful money of the United States, of the Exercise Price payable in respect of the number of Warrant Shares issued upon such exercise. (b) The Registered Holder may, at its option, elect to pay some or all of the Exercise Price payable upon an exercise of this Warrant by cancelling a portion of this Warrant exercisable for such number of Warrant Shares as is determined by dividing (i) the total Exercise Price payable in respect of the number of Warrant Shares being issued upon such exercise by (ii) the excess of the Fair Market Value per share of Common Stock as of the effective date of exercise, as determined pursuant to subsection 2(c) below (the "Exercise Date") over the Exercise Price per share. If the Registered Holder wishes to exercise this Warrant pursuant to this method of payment with respect to the maximum number of Warrant Shares issuable pursuant to this method, then the number of Warrant Shares so issuable shall be equal to the total number of Warrant Shares, minus the product obtained by multiplying (x) the total number of Warrant Shares by (y) a fraction, the numerator of which shall be the Exercise Price per share and the denominator of which shall be the Fair Market Value per share of Common Stock as of the Exercise Date. The Fair Market Value per share of Common Stock shall be determined as follows: (i) If the Common Stock is listed on a national securities exchange, the Nasdaq Stock Market or another nationally recognized exchange or trading system as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the average of the last reported sale price per share of Common Stock thereon for the ten consecutive trading days ending on the day immediately prior to the Exercise Date; -2- (ii) If the Common Stock is not listed on a national securities exchange, the Nasdaq Stock Market or another nationally recognized exchange or trading system as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the amount most recently determined in good faith by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company); and, upon request of the Registered Holder, the Board of Directors (or a representative thereof) shall promptly notify the Registered Holder of the Fair Market Value per share of Common Stock. Notwithstanding the foregoing, if the Board of Directors has not made such a determination within a forty-five day period prior to the Exercise Date, then (A) the Fair Market Value per share of Common Stock shall be the amount next determined in good faith by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company), (B) the Board of Directors shall make such a determination within 15 days of a request by the Registered Holder that it do so, and (C) the exercise of this Warrant pursuant to this subsection 2(b) shall be delayed until such determination is made. (c) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company as provided in subsection 2(a) above. At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 2(d) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. (d) As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 10 days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Registered Holder, or as such Registered Holder (upon payment by such Holder of any applicable transfer taxes) may direct: (i) a certificate or certificates for the number of full Warrant Shares to which such Registered Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such Registered Holder would otherwise be entitled, cash in an amount determined pursuant to Section 4 hereof; and (ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of Warrant Shares equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the sum of (a) the number of such shares purchased by the Registered Holder upon such exercise plus (b) the number of Warrant Shares (if any) covered by -3- the portion of this Warrant cancelled in payment of the Exercise Price payable upon such exercise pursuant to subsection 2(b) above. (e) Notwithstanding the foregoing, the Warrant shall become immediately exercisable by the Registered Holder upon (i) the occurrence of an Event of Default (as defined in the Extension Agreement dated April 29, 1998 by and among the Registered Holder, Fleet Bank-N.H., Mellon Bank, N.A., the Company and certain of its subsidiaries) or (ii) the mailing date of written notice by the Company of its intention to exercise its right under Section 8 to redeem Available Warrant Shares (as defined under subsection 8(a)). 3. Adjustments. ----------- (a) General. The Exercise Price shall be subject to adjustment ------- from time to time pursuant to the terms of this Section 3. (b) Diluting Issuances. ------------------ (i) Special Definitions. For purposes of this subsection ------------------- 3(b), the following definitions shall apply: (A) "Option" shall mean rights, options or warrants to ------ subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities, excluding options described in clause (II) of subsection 3(b)(i)(D) below. (B) "Original Issue Date" shall mean the date on which ------------------- this Warrant was first issued. (C) "Convertible Securities" shall mean any evidences ---------------------- of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" shall mean all --------------------------------- shares of Common Stock issued (or, pursuant to subsection 3(b)(iii) below, deemed to be issued) by the Company after the Original Issue Date, other than shares of Common Stock issued or issuable: (I) by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock that are excluded from the definition of Additional Shares of Common Stock by this clause (I); or (II) to employees or directors of, or consultants to, the Company pursuant to a plan adopted by the Board of Directors of the Company. -4- (ii) No Adjustment of Exercise Price. No adjustments to the ------------------------------- Exercise Price shall be made unless the consideration per share (determined pursuant to subsection 3(b)(v)) for an Additional Share of Common Stock issued or deemed to be issued by the Company is less than the Exercise Price in effect on the date of, and immediately prior to, the issue of such Additional Shares. (iii) Issue of Securities Deemed Issue of Additional Shares ----------------------------------------------------- of Common Stock. If the Company at any time or from time to time after the - --------------- Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to subsection 3(b)(v) hereof) of such Additional Shares of Common Stock would be less than the Exercise Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) No further adjustment in the Exercise Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) If such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company, upon the exercise, conversion or exchange thereof, the Exercise Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase becoming effective, be recomputed to reflect such increase insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) Upon the expiration or termination of any unexercised Option, the Exercise Price shall not be readjusted, but the Additional Shares of Common Stock deemed issued as the result of the original issue of such Option shall not be deemed issued for the purposes of any subsequent adjustment of the Exercise Price; -5- (D) In the event of any change in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any Option or Convertible Security, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Exercise Price then in effect shall forthwith be readjusted to such Exercise Price as would have obtained had the adjustment which was made upon the issuance of such Option or Convertible Security not exercised or converted prior to such change been made upon the basis of such change; and (E) No readjustment pursuant to Clause (B) or (D) above shall have the effect of increasing the Exercise Price to an amount which exceeds the lower of (i) the Exercise Price on the original adjustment date, or (ii) the Exercise Price that would have resulted from any issuances of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) Adjustment of Exercise Price Upon Issuance of --------------------------------------------- Additional Shares of Common Stock. In the event the Company shall at any - --------------------------------- time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to subsection 3(b)(iii), but excluding shares issued as a dividend or distribution or upon a stock split or combination as provided in subsection 3(c)), without consideration or for a consideration per share less than the Exercise Price in effect on the date of and immediately prior to such issue, then and in such event, such Exercise Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Exercise Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issue plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Exercise Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, (i) for the purpose of this subsection -------- ---- 3(b)(iv), all shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding immediately prior to such issue shall be deemed to be outstanding (other than shares excluded from the definition of "Additional Shares of Common Stock" by virtue of clause (II) of subsection 3(b)(i)(D)), and (ii) the number of shares of Common Stock deemed issuable upon conversion of such outstanding Options and Convertible Securities shall not give effect to any adjustments to the conversion price or conversion rate of such Options or Convertible Securities resulting from the issuance of Additional Shares of Common Stock that is the subject of this calculation. Notwithstanding the foregoing, the applicable Exercise Price shall not be so reduced at such time if the amount of such reduction would be an amount less than $.05, but any such amount shall be carried forward and reduction with respect thereto made at the time of and together with any subsequent reduction which, -6- together with such amount and any other amount or amounts so carried forward, shall aggregate $.05 or more. (v) Determination of Consideration. For purposes of this ------------------------------ subsection 3(b), the consideration received by the Company for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: ----------------- (I) insofar as it consists of cash, be computed at the aggregate of cash received by the Company, excluding amounts paid or payable for accrued interest or accrued dividends; (II) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (III) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Company for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration ---------------------------------- per share received by the Company for Additional Shares of Common Stock deemed to have been issued pursuant to subsection 3(b)(iii), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the Company as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (c) Recapitalizations. If outstanding shares of Common Stock shall ----------------- be subdivided into a greater number of shares or a dividend in Common Stock shall -7- be paid in respect of Common Stock, the Exercise Price in effect immediately prior to such subdivision or at the record date of such dividend shall simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend be proportionately reduced. If outstanding shares of Common Stock shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased. (d) Mergers, etc. If there shall occur any capital reorganization or ------------ subdivision or combination as provided for in subsection 3(c) above), or any consolidation or merger of the Company with or into another corporation, or a transfer of all or substantially all of the assets of the Company, then, as part of any such reorganization, reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made so that the Registered Holder of this Warrant shall have the right thereafter to receive upon the exercise hereof the kind and amount of shares of stock or other securities or property which such Registered Holder would have been entitled to receive if, immediately prior to any such reorganization, reclassification, consolidation, merger or sale, as the case may be, such Registered Holder had held the number of shares of Common Stock which were then issuable upon the exercise of this Warrant. In any such case, appropriate adjustment (as reasonably determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Registered Holder of this Warrant, such that the provisions set forth in this Section 3 (including provisions with respect to adjustment of the Exercise Price) shall thereafter be applicable, as nearly as is reasonably practicable, in relation to any shares of stock or other securities or property thereafter deliverable upon the exercise of this Warrant. (e) Adjustment in Number of Warrant Shares. When any adjustment is -------------------------------------- required to be made in the Exercise Price, the number of Warrant Shares purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment. (f) Certificate of Adjustment. When any adjustment is required to be ------------------------- made pursuant to this Section 3, the Company shall promptly mail to the Registered Holder a certificate setting forth the Exercise Price after such adjustment. Such certificate shall also set forth the kind and amount of stock or other securities or property into which this Warrant shall be exercisable following such adjustment. -8- 4. Fractional Shares. The Company shall not be required upon the exercise ----------------- of this Warrant to issue any fractional shares, but shall make an adjustment therefor in cash on the basis of the Fair Market Value per share of Common Stock, as determined pursuant to subsection 2(b) above. 5. Requirements for Transfer. ------------------------- (a) This Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) the Company first shall have been furnished with an opinion of legal counsel, reasonably satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act. (b) Notwithstanding the foregoing, no registration or opinion of counsel shall be required for (i) a transfer by a Registered Holder which is a partnership to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner, if the transferee agrees in writing to be subject to the terms of this Section 5, (ii) a transfer made in accordance with Rule 144 under the Act, or (iii) a transfer by a Registered Holder which is a corporation to an affiliate, as defined under Rule 144 of the Securities Act, if the transferee agrees in writing to be subject to the terms of this Section. (c) Each certificate representing Warrant Shares shall bear a legend substantially in the following form: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such securities are registered under such Act or an opinion of counsel satisfactory to the Company is obtained to the effect that such registration is not required." The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act. -9- 6. No Impairment. The Company will not, by amendment of its charter or ------------- through reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. 7. Liquidating Dividends. If the Company pays a dividend or makes a --------------------- distribution on the Common Stock payable otherwise than in cash out of earnings or earned surplus (determined in accordance with generally accepted accounting principles) except for a stock dividend payable in shares of Common Stock (a "Liquidating Dividend"), then the Company will pay or distribute to the Registered Holder of this Warrant, upon the exercise hereof, in addition to the Warrant Shares issued upon such exercise, the Liquidating Dividend which would have been paid to such Registered Holder if he had been the owner of record of such Warrant Shares immediately prior to the date on which a record is taken for such Liquidating Dividend or, if no record is taken, the date as of which the record holders of Common Stock entitled to such dividends or distribution are to be determined. 8. Optional Redemption. ------------------- (a) At any time, the Company may, at its option, redeem all, but not less than all, of the Warrant Shares for which the Registered Holder has not exercised its right to be issued (the "Available Warrant Shares"), by paying $3.33 per Available Warrant Share (subject to appropriate adjustment for stock splits, stock dividends, combinations or other similar recapitalizations affecting such shares) in cash for each Available Warrant Share then redeemed (hereinafter referred to as the "Redemption Price"); provided, however, that the Registered Holder may immediately exercise its Warrant or Warrants until such time on or 15 days prior to the Redemption Date (as defined below). (b) At least 15 days prior to the date fixed for any redemption of Available Warrant Shares (hereinafter referred to as the "Redemption Date"), written notice shall be mailed, by first class or registered mail, postage prepaid, to the Registered Holder, notifying such holder of the election of the Company to redeem such Available Warrant Shares, specifying the Redemption Date and calling upon the Registered Holder to surrender to the Company, in the manner and at the place designated, its Warrant or Warrants, representing the Available Warrant Shares to be redeemed (such notice is hereinafter referred to as the "Redemption Notice"). On or prior to the Redemption Date (subject to the Registered Holder's right to exercise such Warrants prior to the Redemption Date), the Registered Holder shall surrender its Warrant or Warrants representing Available Warrant Shares to the Company, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the Registered Holder and each surrendered Warrant shall be cancelled. From and after the -10- Redemption Date, unless there shall have been a default in payment of the Redemption Price (or the Registered Holder has exercised the Warrants prior to such Redemption Date), all rights of the Registered Holder designated for redemption in the Redemption Notice as the Registered Holder (except the right to receive the Redemption Price without interest upon surrender of the Warrant) shall cease with respect to the Warrant or Warrants representing the Available Warrant Shares, and such Warrant or Warrants shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever. 9. Notices of Record Date, etc. In case: --------------------------- (a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or (b) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company; or (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Registered Holder of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least ten (10) days prior to the record date or effective date for the event specified in such notice. 10. Reservation of Stock. The Company will at all times reserve and keep -------------------- available, solely for issuance and delivery upon the exercise of this Warrant, such number of Warrant Shares and other stock, securities and property, as from time to time shall be issuable upon the exercise of this Warrant. 11. Exchange of Warrants. Upon the surrender by the Registered Holder of -------------------- any Warrant or Warrants, properly endorsed, to the Company at the principal office -11- of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of such Registered Holder, at the Company's expense, a new Warrant or Warrants of like tenor, in the name of such Registered Holder or as such Registered Holder (upon payment by such Registered Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 12. Replacement of Warrants. Upon receipt of evidence reasonably ----------------------- satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. 13. Transfers, etc. -------------- (a) The Company will maintain a register containing the name and address of the Registered Holder of this Warrant. Any Registered Holder may change its or his address as shown on the warrant register by written notice to the Company requesting such change. (b) Subject to the provisions of Section 5 hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit II ---------- hereto) at the principal office of the Company. (c) Until any transfer of this Warrant is made in the warrant register, the Company may treat the Registered Holder of this Warrant as the absolute owner hereof for all purposes; provided, however, that if and when -------- -------- this Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 14. Mailing of Notices, etc. All notices and other communications from the ----------------------- Company to the Registered Holder of this Warrant shall be mailed by first-class certified or registered mail, postage prepaid, to the address furnished to the Company in writing by the last Registered Holder of this Warrant who shall have furnished an address to the Company in writing. All notices and other communications from the Registered Holder of this Warrant or in connection herewith to the Company shall be mailed by first-class certified or registered mail, postage prepaid, to the Company at its principal office set forth below. If the Company should at any time change the location of its principal office to a place other than as set forth below, it shall give prompt written notice to the Registered -12- Holder of this Warrant and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice. 15. No Rights as Stockholder. Until the exercise of this Warrant, the ------------------------ Registered Holder of this Warrant shall not have or exercise any rights by virtue hereof as a stockholder of the Company. 16. Change or Waiver. Any term of this Warrant may be changed or waived ---------------- only by an instrument in writing signed by the party against which enforcement of the change or waiver is sought. 17. Headings. The headings in this Warrant are for purposes of reference -------- only and shall not limit or otherwise affect the meaning of any provision of this Warrant. 18. Governing Law. This Warrant will be governed by and construed in ------------- accordance with the laws of Delaware. 19. Registration Rights. ------------------- (a) The Registered Holder shall have the demand registration rights with respect to the Warrant Shares as specified in Section 9 of the Extension Agreement dated April 29, 1998 by and among the Registered Holder, Fleet Bank, N.A., Mellon Bank, N.A., the Company and certain of its subsidiaries. (b) Furthermore, the Registered Holder shall be entitled to "piggy- back" registration rights for so long as the Registered Holder shall own Warrant Shares. Whenever the Company proposes to file a Registration Statement (other than pursuant to subsection 19(a) at any time and from time to time, it will, prior to such filing, give written notice to the Registered Holder of its intention to do so and, upon the written request of the Registered Holder given within 20 days after the Company provides such notice (which request shall state the intended method of disposition of such Registrable Shares), the Company shall use its best efforts to cause all Registrable Shares which the Company has been requested by such Registered Holder to register to be registered under the Securities Act to the extent necessary to permit their sale or other disposition in accordance with the intended methods of distribution specified in the request of the Registered Holder; provided that the Company shall have the right to postpone or withdraw any registration effected pursuant to this subsection 19(b) without obligation to the Registered Holder or any persons or entities to which the rights under this Warrant are transferred by the Registered Holder, its successors or assigns pursuant to Section 13 hereof. (c) In connection with any registration under subsection 19(b) involving an underwriting, the Company shall not be required to include any Registrable Shares in such registration unless the holders thereof accept the terms of -13- the underwriting as agreed upon between the Company and the underwriters selected by it (provided that such terms must be consistent with this Warrant). If in the opinion of the managing underwriter it is appropriate because of marketing factors to limit the number of Registrable Shares to be included in the offering, then the Company shall be required to include in the registration only that number of Registrable Shares, if any, which the managing underwriter believes should be included therein. If the number of Registrable Shares to be included in the offering in accordance with the foregoing is less than the total number of shares which the holders of Registrable Shares have requested to be included, then the holders of Registrable Shares who have requested registration and other holders of securities entitled to include them in such registration shall participate in the registration pro rata based upon their total ownership of shares of Common Stock (giving effect to the conversion into Common Stock of all securities convertible thereinto). If any holder would thus be entitled to include more securities than such holder requested to be registered, the excess shall be allocated among other requesting holders pro rata in the manner described in the preceding sentence. 20. Registration Procedures. If and whenever the Company is required by ----------------------- the provisions of this Warrant to use to effect the registration of any of the Registrable Shares under the Securities Act, the Company shall: (a) furnish to the Registered Holder such number of copies as the Registered Holder shall reasonably request of the prospectus, including a preliminary prospectus and any amendments or supplements thereto, in conformity with the requirements of the Securities Act; (b) use its best efforts to register or qualify the Registrable Shares covered by the Registration Statement under the securities laws of such states as the Registered Holder shall reasonably request; provided, however, that the -------- -------- Company shall not be required in connection with this subsection 20(b) to qualify as a foreign corporation or execute a general consent to service of process in any jurisdiction; (c) promptly notify the Registered Holder, if the Company has delivered preliminary or final prospectuses to the Registered Holder and after having done so, the prospectus is amended to comply with the requirements of the Securities Act and, if requested by the Company, the Registered Holder shall immediately cease making offers or sales of Registrable Shares under the Registration Statement and return all prospectuses to the Company. The Company shall promptly provide the Registered Holder with revised prospectuses and, following receipt of the revised prospectuses, the Registered Holder shall be free to resume making offers and sales of the Registrable Shares; and (d) pay the expenses incurred by it in complying with its obligations under this Warrant in connection with registration rights, including all registration and filing fees, exchange listing fees, expenses for the preparation of the Registration -14- statement, prospectus and any amendments and supplements thereto, printing and photocopy expenses, fees and expenses of counsel for the Company, and fees and expenses of accountants for the Company, but excluding: (i) selling commissions or underwriting discounts incurred by the Registered Holder in connection with sales of Registrable Shares under the Registration Statement and (ii) the fees and expenses of any counsel retained by the Registered Holder. 21. Requirements of Registered Holder. The Company shall not be required ---------------------------------- to effect the registration of any of the Registrable Shares under the Securities Act pursuant to this Warrant unless: (a) the Registered Holder owning such shares furnishes to the Company in writing such information regarding such Registered Holder and the proposed sale of Registrable Shares by such Registered Holder as the Company may reasonably request in writing in connection with the filing of a Registration Statement or as shall be required in connection therewith by the Commission or any state securities law authorities; and (b) Such Registered Holder shall have provided to the Company its written agreement that in the event of any registration of any of the Registrable Shares under the Securities Act pursuant to this Warrant, each Registered Holder will indemnify the Company and its officers and directors and each person, if any, who controls any thereof (within the meaning of the Securities Act) against any and all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of any material fact contained in any prospectus or other document incident to any registration, qualification or compliance (or in any related Registration Statement, notification or the like) or any omission (or alleged omission) to state therein any material fact required to be stated therein or necessary to make the statement therein not misleading, and such Registered Holder will reimburse the Company and each other person indemnified pursuant to this Section 21 for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that this Section 21 -------- ------- shall apply only if (and only to the extent that) such statement or omission was made in reliance upon written information furnished to the Company in an instrument duly executed by such Registered Holder and stated to be specifically for use in such prospectus or other document (or related Registration Statement, notification or the like) or any amendment or supplement thereto; and, provided -------- further that each Registered Holder's liability hereunder with respect to any - ------- particular registration shall be limited to an amount equal to the net proceeds received by such Registered Holder from the Registrable Securities sold by such Registered Holder in such registration. 22. Indemnification by Company. In the event of any registration of any of -------------------------- the Registrable Shares under the Securities Act pursuant to this Warrant, the Company will indemnify each Registered Holder and each person who controls the -15- Registered Holder (within the meaning of the Securities Act) against any and all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of any material fact contained in any prospectus or other document incident to any registration, qualification or compliance (or in any related Registration Statement, notification or the like) or any omission (or alleged omission) to state therein any material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to any action or inaction required of the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Registered Holder and controlling person for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable in any such case to the - -------- ------- extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company in an instrument duly executed by such Registered Holder or controlling person and specifically for use in such prospectus or other document. IGI, INC. /s/ Edward B. Hager --------------------------- By: EDWARD B. HAGER Title: CHAIRMAN -16- EXHIBIT I --------- PURCHASE FORM ------------- To:_________________ Dated:____________ The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ___), hereby irrevocably elects to purchase _____ shares of the Common Stock covered by such Warrant. The undersigned herewith makes payment of $____________, representing the full Exercise Price for such shares at the price per share provided for in such Warrant. Such payment takes the form of (check applicable box or boxes): [_] $______ in lawful money of the United States; and/or [_] The cancellation of such portion of the attached Warrant as is exercisable for a total of _____ Warrant Shares (using a Fair Market Value of $_____ per share for purposes of this calculation). Signature:_____________________ Address:______________________ ______________________ EXHIBIT II ---------- ASSIGNMENT FORM --------------- FOR VALUE RECEIVED, ________________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. ____) with respect to the number of shares of Common Stock covered thereby set forth below, unto: Name of Assignee Address No. of - ---------------- ------- ------ Shares - ------ Dated:_____________________ Signature:________________________________ Dated:_____________________ Witness:_________________________________ EX-11 8 COMPUTATION OF NET INCOME PER COMMON SHARE EXHIBIT 11 COMPUTATION OF NET INCOME PER COMMON SHARE (amounts in thousands except share and per share information)
For the years ended December 31, 1997 1996 1995 ---- ---- ---- (Restated) (Restated) Income (loss) from continuing operations............................. $ (1,453) $ (138) $ 1,329 Loss from discontinued operations.................................... - - (4,034) ---------- ---------- ----------- Net Loss............................................................. $ (1,453) $ (138) $ (2,705) ========== ========== =========== Weighted average shares outstanding................................... 9,457,938 9,323,440 9,173,156 Dilutive common stock equivalents (net of common stock deemed reacquired) based on average market price........................................................ - - 552,074 ---------- ---------- ----------- Diluted common and common equivalent shares................................................... 9,457,938 9,323,440 9,725,230 ========== ========== =========== Income (loss) per common and common equivalent share: Basic: From continuing operations.................................. $ (.15) $ (.01) $ .14 ========== ========== =========== From discontinued operations................................ $ - $ - $ (.44) ========== ========== =========== Net loss.................................................... $ (.15) $ (.01) $ (.29) ========== ========== =========== Diluted: From continuing operations.................................. $ (.15) $ (.01) $ .14 ========== ========== =========== From discontinued operations................................ $ - $ - $ (.41) ========== ========== =========== Net loss.................................................... $ (.15) $ (.01) $ (.28) ========== ========== ===========
EX-21 9 LIST OF SUBSIDIARIES OF IGI, INC. EXHIBIT 21 LIST OF SUBSIDIARIES OF IGI, INC. IGEN, Inc., a Delaware corporation ImmunoGenetics, Inc., a Delaware corporation Marketing Aspects, Inc., a Delaware corporation Blood Cells, Inc., a Delaware corporation Flavorsome, Ltd., a Delaware corporation Vista, Inc., a Virgin Island corporation EX-23 10 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 2-90713) of IGI, Inc., the Registration Statement on Form S-8 and S-3 (No. 33-35047) of IGI, Inc., the Registration Statement on Form S-8 and S-3 (No. 33-43212) of IGI, Inc. the Registration Statement of IGI, Inc. on Form S-8 and S-3 (No. 33-47777) of IGI, Inc., the Registration Statement on Form S-3 (No. 33-54920) of IGI, Inc., the Registration Statement of IGI, Inc. on Form S-8 (No. 33-58479) of IGI, Inc. the Registration Statement on Form S-8 (No. 33-65249) of IGI, Inc. the Registration Statement on Form S-3 (No. 333-27173) of IGI, Inc. and the Registration Statement of IGI, Inc on Form S-8 (No. 333-28183) of IGI, Inc. of our report, dated July 31, 1998, except as to Note 8, which is as of August 19, 1998, appearing on page 33 of this Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedules, which appears on page 55 of this Form 10-K. PricewaterhouseCoopers llp 30 South 17th Street Philadelphia, Pennsylvania July 31, 1998 EX-27.1 11 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 DEC-31-1997 1,196 0 7,754 903 9,816 19,410 19,884 10,048 34,044 23,879 0 0 0 96 0 34,044 34,293 34,293 17,834 16,622 0 0 1,853 (2,027) (574) (1,453) 0 0 0 (1,453) (.15) (.15)
EX-27.2 12 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1995 317 169 0 0 8,603 8,331 238 306 9,067 9,144 19,966 18,298 19,248 18,335 9,121 8,225 34,384 32,152 16,933 14,159 0 0 0 0 0 0 96 94 0 0 34,384 32,152 34,785 30,501 34,785 30,501 16,581 15,288 16,336 12,255 0 0 0 0 1,984 1,269 (318) 1,842 (180) 513 (138) 1,329 0 (4,034) 0 0 0 0 (138) (2,705) (.01) (.29) (.01) (.28)
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