IGI, Inc.

SECURITIES EXCHANGE ACT OF l934
Release No.45553 /March 12, 2002

ACCOUNTING AND AUDITING ENFORCEMENT
Release No.1520 / March 12, 2002

ADMINISTRATIVE PROCEEDING
File No. 3-10722

I.

The Securities and Exchange Commission deems it appropriate to institute public administrative proceedings against Respondent IGI, Inc. ("IGI"), pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").

II.

In anticipation of the institution of these public administrative proceedings, IGI has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained herein, except as to the Commission's jurisdiction over it and over the subject matter of the proceeding, which it admits, IGI consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (the "Order").

III.

On the basis of this Order and IGI's Offer, the Commission makes the following findings¹:

A. RESPONDENT

IGI, Inc., located in Buena, New Jersey, is a diversified company engaged in producing and marketing animal health products, such as poultry vaccines, veterinary pharmaceuticals, and other animal products, and producing and marketing cosmetics and skin care products. IGI's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and is listed for trading on the American Stock Exchange.

B. SUMMARY

This matter involves reporting, internal controls, and books and records violations by IGI. In 1995, 1996, and for the first three quarters of 1997, IGI's former President manipulated IGI's annual and quarterly earnings by directing former IGI senior management and others to engage in improper accounting practices that caused IGI to overstate materially its assets, revenues, and net income. Former senior management manipulated IGI's earnings by failing to: (1) write off inventory that was either defective or that had been destroyed; (2) record sales revenue in the proper accounting periods; and (3) process and record sales credits in a timely manner. These accounting improprieties primarily concerned IGI's production and storage of mareks, a poultry vaccine that is used to inoculate chickens against cancer. During the relevant time period, IGI derived most of its revenues from the sale of poultry vaccines, of which mareks was the most important, and other animal health products.

In March 1998, IGI engaged Price Waterhouse Financial Advisory Services ("PWFAS") to assist with an internal investigation concerning its inventory and other related problems.² On May 1, 1998, based on PWFAS' preliminary findings, IGI's former auditor withdrew its audit reports on the company's financial statements for fiscal years 1995 and 1996.

On August 24, 1998, IGI, in its 1997 Form 10-K, restated its financial results for the fiscal years ended December 31, 1995 and 1996, and for the first three quarters of fiscal year 1997. The restatements were material. For the fiscal year ended December 31, 1995, IGI originally reported a net loss of approximately $2.5 million and a net loss per share of $.28. As a result of the restatement, IGI's net loss increased to approximately $2.7 million and its net loss per share increased to $.29. For the fiscal year ended December 31, 1996, IGI originally reported net income of $93,000 and earnings per share of $.01. Upon restatement, IGI reported a net loss of $138,000, and net loss per share of $.01.

IGI also restated its net income and earnings per share in its Forms 10-Q for the first three quarters of 1997 as follows:

C. FACTS

1. Overstatement of Inventory and Understatement of
Related Expenses_______________________

From 1995 through the third quarter of 1997, IGI overstated its assets and net income by not recording properly the costs associated with reductions in its inventory for large quantities of mareks that either were destroyed or were defective and could not be sold.

At the direction of IGI's former President, IGI employees included large quantities of destroyed and defective mareks on the books to inflate IGI's assets and net income. Thereafter, at the direction of IGI's former President, the destruction of these products occurred in steps so that inventory write-offs could be metered into the financial results in order to manage the company's earnings. IGI's former senior management also overrode the company's internal accounting controls to further the scheme, and concealed the true state of the company's affairs from the board of directors and IGI's independent auditor.

IGI's former President ensured that the company's accounting staff was not timely notified, as they should have been, when inventory was destroyed. He saw to it that the accounting staff was notified only when he had determined that the timing was right for a write-off. To keep control of the information concerning inventory destruction, the former President instructed certain IGI employees to keep inventory destruction secret.

Another former manager, the mareks production manager, maintained a separate record-keeping system, a production log book, for the mareks vaccines. The production log book was a more accurate record of the inventory of mareks vaccines than IGI's general ledger or perpetual inventory records. The former production manager concealed this log book from the former assistant controller and from IGI's independent auditors during the audits for fiscal years 1995, 1996, and 1997.

As a result of these improper practices relating to IGI's inventory, IGI overstated its assets and net income for fiscal years 1995 and 1996, and for the first three quarters of fiscal year 1997.

2. Improper Recognition of Revenue - Sales Cut-off

IGI's revenue recognition policy required that sales revenue be recognized when products were shipped. Contrary to this policy, IGI routinely recorded sales of its products prior to shipment during fiscal years 1995, 1996, and the first three quarters of fiscal year 1997. Senior management utilized this practice primarily at the end of each quarter to increase improperly IGI's quarterly and annual revenues and to manipulate its earnings.

At or around the end of each quarter, the former President directed his subordinates to hold IGI's books open and to backdate invoices and shipping documents. This caused IGI to record out-of-period sales and to overstate its revenue and net income at the end of each quarter.

As a result of these improper sales cut-off practices, IGI misstated its assets, revenue, and net income for fiscal years 1995 and 1996, during the interim quarters thereof, and for the first three quarters of fiscal year 1997.

3. Failure to Process and Record Sales
Credits on a Timely a Basis____

IGI failed to process and record sales credits on a timely basis in fiscal years 1995, 1996, and 1997. By delaying the processing and recording of such credits, IGI misstated its accounts receivable, sales, and net income from 1995 through 1996, and during the first three quarters of fiscal year 1997.

IGI typically issued sales credits to its customers for returned products, for the return of liquid nitrogen containers used to ship mareks, or for promotional allowances. Customers generally sent requests for credits to the sales clerks who prepared credit memoranda. Before entering the credits into IGI's accounting system, the sales clerks sent the credit memoranda to their managers for approval. At the direction of the former President, the managers routinely delayed approval of large sales credits until the revenue levels were high enough to allow write-offs of the credits without affecting expected or targeted earnings. In some instances, at the direction of the former President, IGI's mangers instructed the sales clerks not to process or record large sales credits at all. In one instance, management deferred a sales credit of $101,000 for more than a year before charging the related receivable off against sales.

As a result of these improper accounting practices involving sales credits, IGI misstated its assets, revenues, and net income for fiscal years 1995 and 1996, during the interim quarters thereof, and for the first three quarters of fiscal year 1997.

4. IGI Files Materially False and Misleading
Financial Statements_______________

As a consequence of the above-described fraudulent practices by its former senior officers, IGI's Forms 10-K for the fiscal years ended December 31, 1995 and 1996, and its Forms 10-Q for the periods ended March 31, June 30, and September 30, 1997, contained materially false and misleading financial statements that were not prepared in conformity with Generally Accepted Accounting Principles ("GAAP").

IGI failed to write off the cost of defective or destroyed inventory in the proper periods in order to inflate both its balance sheet and income statement and to recognize the charge to earnings only when its former President deemed it appropriate to do so. By intentionally misstating the charge to earnings and the inventory on its balance sheet, IGI's financial statements were not in conformity with GAAP.

In the footnotes to its financial statements, IGI stated that it recognized revenue when it shipped its products. However, IGI routinely recognized revenue prior to shipping its products. By holding the books open and recognizing revenue prior to shipment, IGI's financial statements were not in conformity with GAAP.

Finally, IGI did not process and record sales credits on a timely basis and, in some instances, failed to record them at all. The company was aware prior to issuing its financial statements that an asset, accounts receivable, had been impaired. Moreover, IGI could have reasonably estimated the amount of loss. IGI's delay in processing and recording sales credits, and its failure to record credits in certain instances, resulted in its filing financial statements that were not in conformity with GAAP.

D. SUBSEQUENT EVENTS

IGI immediately commenced an internal investigation when it became aware of the fraudulent activities. Based upon the results of the investigation, IGI terminated the senior officers responsible for the violations and instituted internal controls to prevent recurrence of similar problems. IGI voluntarily disclosed the results of its internal investigation to the staff. The company has cooperated fully with the staff during its investigation by, among other things, waiving its attorney-client privilege with respect to documents and communications.

E. LEGAL DISCUSSION

Issuers must file accurate annual and quarterly reports with the Commission, pursuant to Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. See SEC v. Savoy Industries Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). Moreover, Rule 12b-20 requires that an issuer's statements and reports contain all information necessary to ensure that statements made in them are not materially misleading. Scienter is not necessary to establish a violation of Section 13(a). See SEC v. McNulty, 137 F.3d 732 (2d Cir. 1998).

Under Section 13(b)(2)(A) of the Exchange Act, issuers must make and keep books, records and accounts that accurately and fairly reflect the transactions and dispositions of their assets. Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain a system of internal controls sufficient to provide reasonable assurances that, among other things, transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain the accountability of assets.

F. IGI'S VIOLATIONS

1. Reporting Violations

IGI failed to write off the cost of destroyed or defective inventory in a timely manner, failed to reduce accounts receivable and revenue by recording, on a timely basis, valid sales credits, and failed to recognize revenue in the proper time periods. These improper practices caused IGI's balance sheet and statement of operations to be materially false and misleading. These financial statements were contained in IGI's Forms 10-K for the fiscal years ended December 31, 1995 and 1996, as well as in its Forms 10-Q for the quarters ended March 31, June 30, and September 30, 1997.

2. Books and Records and Internal Controls Violations

IGI falsely recorded in its books and records as assets products that were either destroyed or defective. In addition, IGI overstated its net income by not recording expenses related to the reductions in inventory for destroyed or defective inventory. IGI also overstated its revenues by recording sales in improper time periods and by failing to record sales credits in a timely manner.

IGI further failed to adequately devise and maintain a system of internal accounting controls sufficient to maintain accountability for assets and to permit preparation of financial statements in conformity with GAAP. The absence of adequate internal accounting controls, among other things, enabled IGI to conceal the aforementioned fraudulent practices.

Accordingly, based on the foregoing, the Commission finds that IGI violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 thereunder.

IV.

IGI has submitted an Offer, in which, without admitting or denying the findings herein, it consents to the Commission's entry of this Order, which: (1) makes findings as set forth above; and (2) orders IGI to cease and desist from committing or causing any violation, and any future violation, of certain provisions of the federal securities laws.

V.

Based on the foregoing, the Commission deems it appropriate to accept the Offer submitted by IGI and to impose the relief specified herein.

Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that IGI cease and desist from committing or causing any violation, and any future violations, of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 thereunder.

By the Commission.

Jonathan G. Katz
Secretary

Footnotes