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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, 1999 001-08568
IGI, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 01-0355758
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
WHEAT ROAD AND LINCOLN AVENUE, BUENA, NJ 08310
(Address of principal executive offices) (Zip Code)
(856)-697-1441
Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock ($.01 par value)
Registered on the American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the Registrant's Common Stock, par value $.01 per
share, held by non-affiliates of the Registrant at March 27, 2000, as computed
by reference to the last trading price of such stock, was approximately
$15,900,000.
The number of shares of the Registrant's Common Stock, par value $.01 per share,
outstanding at March 27, 2000 was 10,163,126 shares.
Documents Incorporated by Reference: Portions of the Registrant's definitive
proxy statement to be filed with the Commission on or before April 29, 2000 are
incorporated herein by reference in Part III.
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PART I
ITEM 1. BUSINESS
IGI, Inc. ("IGI" or the "Company") was incorporated in Delaware in 1977.
Its executive offices are at Wheat Road and Lincoln Avenue, Buena, New Jersey.
The Company is a diversified company engaged in three business segments:
- Consumer Products Business - production and marketing of cosmetics
and skin care products,
- Companion Pet Products Business - production and marketing of
companion pet products such as pharmaceuticals, nutritional
supplements and grooming aids, and
- Poultry Vaccines Business - production and marketing of poultry
vaccines and other related products.
In December 1995, IGI distributed its ownership of its majority-owned
subsidiary, Novavax, Inc. ("Novavax"), in the form of a tax-free stock dividend,
to IGI stockholders. Novavax had conducted the biotechnology business segment of
IGI, which is reported as a discontinued operation in the five year summary of
selected financial data. In connection with the distribution, the Company paid
Novavax $5,000,000 in return for a fully paid-up, ten-year license (the "IGI
License Agreement") entitling it to the exclusive use of the Novasome(R) lipid
vesicle encapsulation and certain other technologies ("Microencapsulation
Technologies" or collectively the "Technologies") in the fields of (i) animal
pharmaceuticals, biologicals and other animal health products; (ii) foods, food
applications, nutrients and flavorings; (iii) cosmetics, consumer products and
dermatological over-the-counter and prescription products (excluding certain
topically delivered hormones); (iv) fragrances; and (v) chemicals, including
herbicides, insecticides, pesticides, paints and coatings, photographic
chemicals and other specialty chemicals, and the processes for making the same
(collectively, the "IGI Field"). IGI has the option, exercisable within the last
year of the ten-year term, to extend the exclusive license for an additional
ten-year period for $1,000,000. Novavax has retained the right to use the
Technologies for applications outside the IGI Field, mainly human vaccines and
pharmaceuticals.
BUSINESS SEGMENTS
The following table sets forth the revenue and operating profit of each of
the Company's three business segments for the periods indicated:
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
REVENUE
Consumer Products $ 6,938 $ 5,839 $ 5,255
Companion Pet Products 13,595 12,513 12,444
Poultry Vaccines 14,061 14,843 16,644
-------- -------- --------
$ 34,594 $ 33,195 $ 34,343
======== ======== ========
OPERATING PROFIT (LOSS)*
Consumer Products $ 3,913 $ 3,688 $ 1,473
Companion Pet Products 3,850 2,844 2,577
Poultry Vaccines (1,041) (517) 1,202
* Excludes corporate expenses of $5,216,000, $6,925,000, and $5,032,000, for
1999, 1998 and 1997, respectively. (See Note 17 of the Consolidated Financial
Statements.)
CONSUMER PRODUCTS BUSINESS
IGI's Consumer Products business is primarily focused on the continued
commercialization of the Microencapsulation Technologies for skin care
applications. These efforts have been directed toward the development of high
quality skin care products that the Company markets through collaborative
arrangements with major cosmetic and consumer products companies. IGI plans to
continue to work with cosmetics, food, personal care products, and OTC
pharmaceutical companies for commercial applications of the Microencapsulation
Technologies. Because of their ability to encapsulate skin protective agents,
oils, moisturizers, shampoos, conditioners, skin cleansers and fragrances and to
provide both a controlled and a sustained release of the encapsulated materials,
Novasome(R) lipid vesicles are well-suited to cosmetics and consumer product
applications. For example, Novasome(R) lipid vesicles may be used to deliver
moisturizers and other active ingredients to the deeper layers of the skin or
hair follicles for a prolonged period; to deliver or preserve ingredients which
impart favorable cosmetic characteristics described in the cosmetics industry as
"feel," "substantivity," "texture" or "fragrance"; to deliver normally
incompatible ingredients in the same preparation, with one ingredient being
shielded or protected from the other by encapsulation within the Novasome(R)
vesicle; and to deliver pharmaceutical agents.
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The Company produces Novasome(R) vesicles for various skin care products,
including those marketed by Estee Lauder such as "All You Need", "Re-Nutriv",
"Virtual Skin", "100% Time Release Moisturizer", "Resilience" and others. Sales
to Estee Lauder accounted for $4,237,000 or 13% of 1999 sales, $3,494,000 or 11%
of 1998 sales, and $2,408,000 or 7% of 1997 sales. The Company also markets a
skin care product line to physicians through a distributor under the Company's
WellSkin(TM) brand.
Principal competitors to the Company's WellSkin(TM) product line include
NeoStrata, Inc. and MD Formulations, a division of Allergen. The Company's
Microencapsulation Technologies indirectly compete as a delivery system with,
among others, Collaborative Labs, The Liposome Company, Lipo Chemicals and
Advanced Polymer Systems.
In 1996, the Company entered into a license and supply agreement with
Glaxo Wellcome, Inc. ("Glaxo"). The agreement granted Glaxo exclusive rights to
market the WellSkin(TM) product line in the United States to physicians. Under
the terms of the agreement, IGI manufactured these products for Glaxo. This
agreement provided for Glaxo to pay royalties to IGI based on sales and pay a
$1,000,000 advance royalty to IGI in 1997 of which $300,000 was non-refundable.
The advance royalty was recorded as deferred income. In December 1998, the
license and supply agreement with Glaxo was terminated. The termination
agreement provided that IGI would purchase all of Glaxo's inventory and
marketing materials related to the WellSkin(TM) line in exchange for a $200,000
promissory note, due and payable in December 1999 and bearing interest at a rate
of 11%. The Company also issued a promissory note to Glaxo for $608,000,
representing the unearned portion of the advance royalty in exchange for Glaxo
transferring all rights to the WellSkin(TM) trademark to IGI. This note bears
interest at a rate of 11%, and to date the Company has paid $200,000 and is to
pay $200,000 and $208,000 in June 2000 and December 2000, respectively. In
connection with the Agreement termination, but unrelated to the advance royalty,
IGI reduced cost of sales by $404,000 in 1998 for amounts owed to Glaxo that
were forgiven. Glaxo royalties recognized as income were $0, $326,000 and
$150,000 in 1999, 1998 and 1997, respectively.
In December 1998, the Company entered into a ten-year supply and sales
agreement with Genesis Pharmaceutical, Inc. ("Genesis") for the marketing and
distribution of the Company's WellSkin(TM) line of skin care products. The
agreement provided that Genesis will pay the Company a $1,000,000 trademark and
technology transfer fee, in four equal annual payments, which will be recognized
as revenue over the life of the agreement. In addition, Genesis will pay the
Company a royalty on its net sales with certain guaranteed minimum royalty
amounts. Genesis also purchased WellSkin(TM) inventory and marketing materials
for $200,000, which were previously purchased by the Company from Glaxo.
In March 1997, IGI granted Kimberly Clark ("Kimberly") the worldwide
rights to use certain patents and technologies in the industrial hand care and
cleaning products field. Upon signing of the agreement, Kimberly paid IGI a
$100,000 license fee that was recognized as revenue by the Company. The
agreement requires Kimberly to make royalty payments based on quantities of
material produced. The Company is also guaranteed minimum royalties over the
term of the agreement. In both 1999 and 1998, the Company recognized $133,000 as
revenue as a result of the agreement. In July 1999, the Company signed a new
exclusive license agreement with Kimberly which replaced the agreement dated
March 1997. The July 1999 agreement granted Kimberly an exclusive license
pertaining to patents and improvements within the fields of industrial hand care
and cleansing products for non-retail markets. The new agreement will be in
effect from July 29, 1999 through July 30, 2000. Under the new agreement,
Kimberly paid the Company consideration of $120,000, which is being recognized
over the term of the agreement. The Company recognized $60,000 of this income
during 1999.
The Company entered into a license agreement with Johnson & Johnson
Consumer Products, Inc. ("J&J") in 1995. The agreement provided J&J with a
license to produce and sell Novasome(R) microencapsulated retinoid products and
provides for the payment of royalties on net sales of such products. J&J began
selling such products and making royalty payments in the first quarter of 1998.
The Company recognized $1,210,000 and $433,000 of royalty income related to this
agreement for the years ended December 31, 1999 and 1998, respectively.
In April 1998, the Company entered into a research and development
agreement with National Starch and Chemical Company ("National Starch") to
evaluate Novasome(R) technology. The agreement provided for a minimum of at
least six, or up to as many as nine monthly payments commencing in June 1998
plus $100,000 for the purchase of a patented Novamix(R) machine. The Company
recognized $60,000 and $210,000 of income in 1999 and 1998, respectively,
related to the National Starch agreement. The agreement ended in June of 1999.
In August 1998, the Company granted Johnson & Johnson Medical ("JJM"), a
division of Ethicon, Inc., worldwide rights for the use of the Novasome(R)
technology for certain products and distribution channels. The agreement
provides for an up-front license fee of $150,000, and future royalty payments
based on JJM's sales of licensed products. The Company is guaranteed minimum
royalties over the ten-year term of the agreement. In 1999, the Company
recognized $126,000 of royalty income.
The Company entered into an exclusive Supply Agreement (the "Supply
Agreement") dated September 30, 1997 with IMX Corporation ("IMX"). Under the IMX
agreement, the Company agreed to manufacture and supply 100% of IMX's
requirements for certain products at prices stipulated in the exclusive Supply
Agreement, subject to renegotiation subsequent to 1998. The Company is currently
involved in discussions with IMX concerning possible modifications to the Supply
Agreement as the Company has determined that it will not supply the products
stipulated by the Supply Agreement but may supply certain other products based
on negotiations with IMX. Under the Supply Agreement the Company received
271,714 shares of restricted Common Stock of IMX. These shares are restricted
both by governmental and contractual requirements and the Company is unsure if
or when it will be able to
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sell these shares. Through December 31, 1999, the Company had not yet recognized
income related to this agreement. See Note 2 "Investments" of the Consolidated
Financial Statements.
The Company recognized a total of $1,869,000, $1,200,000 and $150,000 in
1999, 1998 and 1997, respectively, of licensing and royalty income which is
included in the Consumer Products segment revenues. Revenues from the Company's
Consumer Products segment were principally based on formulations using the
Novasome(R) Microencapsulation Technology. Total Consumer Product revenues were
approximately 20% of the Company's total revenues in 1999, 17% in 1998 and 15%
in 1997.
COMPANION PET PRODUCTS BUSINESS
The Company sells its Companion Pet Products to the veterinarian market
under the EVSCO Pharmaceuticals trade name and to the over-the-counter ("OTC")
pet products market under the Tomlyn and Luv'Em labels.
The EVSCO line of veterinary products is used by veterinarians in caring
for dogs and cats, and includes pharmaceuticals such as antibiotics,
anti-inflammatories and cardiac drugs, as well as nutritional supplements,
vitamins, insecticides and diagnostics. Product forms include gels, tablets,
creams, liquids, ointments, powders, emulsions, shampoos and diagnostic kits.
EVSCO also produces professional grooming aids for dogs and cats.
EVSCO products are manufactured at the Company's facility in Buena, New
Jersey and are sold through distributors to veterinarians. The facility operates
in accordance with Good Manufacturing Practices ("GMP") of the federal Food and
Drug Administration ("FDA") (See "Government Regulation"). Principal competitors
of the EVSCO product line include DVM, Allerderm, Schering Plough Animal Health
and Pfizer Animal Health. The Company competes on the basis of price, marketing,
customer service and product qualities.
The Tomlyn product line includes pet grooming, nutritional and therapeutic
products, such as shampoos, grooming aids, vitamin and mineral supplements,
insecticides and OTC medications. The products are manufactured at the Company's
facility in Buena, New Jersey, and are sold directly to pet superstores and
through distributors to independent merchandising chains, shops and kennels.
Principal competitors of the Tomlyn product line include Four Paws Products, Bio
Groom Products, Lambert Kay, a division of Carter-Wallace, Eight In One Pet
Products, Inc., and Cardinal Labs, Inc.
Most of the Company's veterinary products are sold through distributors.
Sales of veterinary products accounted for approximately 39% of the Company's
revenues in 1999, 38% in 1998 and 36% in 1997.
POULTRY VACCINES BUSINESS
The Company produces and markets poultry vaccines manufactured by the
chick embryo, tissue culture and bacteriologic methods. The Company produces
vaccines for the prevention of various chicken and turkey diseases and has more
than 60 vaccine licenses granted by the United States Department of Agriculture
("USDA"). The Company also produces and sells nutritional, anti-infective and
sanitation products used primarily by poultry producers. The Company sells these
products in the United States and over 58 other countries under the Vineland
Laboratories trade name.
The Company manufactures poultry vaccines at its USDA licensed facility in
Vineland, New Jersey and sells them, primarily through its own sales force,
directly to large poultry producers and distributors in the United States and,
through its export sales staff, to local distributors in other countries. The
sales force is supplemented and supported by technical and customer service
personnel. The Company's vaccine production in the United States is regulated by
the USDA. Sales of poultry vaccines and related products accounted for
approximately 41% of the Company's revenues in 1999, 45% in 1998 and 49% in
1997. For information relating to the adverse effect of the stop shipment order
by the USDA on the Company's poultry vaccine business, as well as other
governmental actions, see "Government Regulation" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company's principal competitors in the poultry vaccine market are
Intervet America, Fort Dodge, Merial/Select and Schering Plough Animal Health.
The Company believes that it is one of the largest domestic poultry vaccine
producers. The Company competes on the basis of product performance, price,
customer service and availability.
OTHER APPLICATIONS
The versatility of the Novasome(R) lipid vesicles combined with the
Company's commercial production capabilities allows the Company to target large,
diverse markets including potential applications in the fuels industry. The
Company is seeking collaboration with others to develop its product for this
industry. The efforts for the development of fuel enhancement products require
extensive testing, evaluation and trials; therefore no assurance can be given
that commercialization of IGI's fuel additive and enhancing products will be
successful.
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INTERNATIONAL SALES AND OPERATIONS
A staff of seven persons based in Buena, New Jersey and eight individuals
based overseas handle sales of Company products outside the United States. The
Company's sales personnel and veterinarians travel abroad extensively to develop
business and support customers through local distributors. Exports consist
primarily of poultry vaccines, although the Company also exports some veterinary
pharmaceuticals and petcare products. Exports of vaccines require product
registration (i.e., licenses) by foreign authorities. The Company has
approximately 900 product registrations in over 50 countries outside the United
States and has over 800 registrations pending. The Company is seeking to expand
its international market presence. It entered the Chinese market in 1997 and
commenced product sales in Japan in 1998. The Company has obtained registrations
for six products in Brazil and commenced sales in that country in the fourth
quarter of 1999.
Mexico, Indonesia, Thailand and certain Latin American and Far Eastern
countries are important markets for the Company's poultry vaccines and other
products. These countries have experienced periods of varying degrees of
political unrest and economic and currency instability. Because of the volume of
business transacted by the Company in these areas, continuation or recurrence of
such unrest or instability could adversely affect the business of its customers,
which could adversely impact the Company's future operating results. In order to
minimize risk, the Company maintains credit insurance for the majority of its
international accounts receivable, and all sales are denominated in U.S. dollars
to minimize currency fluctuation risk. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources.")
Sales to international customers represented 33% of the Company's revenues
in 1999, 32% in 1998 and 35% in 1997. (See Note 14, "Export Sales" of the
Consolidated Financial Statements.)
MANUFACTURING
The Company's manufacturing operations include production and testing of
vaccines, cosmetics, dermatologics, emulsions, shampoos, gels, ointments, pills
and powders. These operations also include the packaging, bottling and labeling
of finished products and packing and shipment for distribution. On March 1,
2000, 128 employees were engaged in manufacturing operations. The raw materials
included in these products are available from several suppliers. The Company
produces quantities of Novasome(R) lipid vesicles adequate to meet its current
and foreseeable needs.
RESEARCH AND DEVELOPMENT
The Company's poultry vaccine development efforts are directed towards: 1)
developing more efficient single and multiple-component vaccines, 2) developing
vaccines to combat new diseases, and 3) incorporating Novasome(R) lipid vesicle
adjuvant into vaccines. The Company is concentrating its veterinary
pharmaceutical development efforts on the use of Novasome(R) microencapsulation
for various veterinary pharmaceutical and over-the-counter pet care products.
The Company's consumer products development efforts are directed towards
Novasome(R) encapsulation to improve performance and efficacy of fuels,
pesticides, specialty and other chemicals, biocides, cosmetics, consumer
products, flavors and dermatologic products.
In addition to its internal product development research efforts, which
involve nine employees, the Company encourages the development of products in
areas related to its present lines by making specific grants to universities,
none of which had a material financial effect on the Company in 1999, 1998 or
1997. Total product development and research expenses were $1,418,000,
$1,425,000 and $1,675,000 in 1999, 1998 and 1997, respectively.
PATENTS AND TRADEMARKS
All of the names of the Company's major products are registered in the
United States and all significant markets in which the Company sells its
products. The Company maintains various trademarks in various countries covering
certain of its products. Under the terms of the 1995 IGI License Agreement, the
Company has an exclusive ten-year license to use the Technologies licensed from
Novavax in the IGI Field. Novavax holds 44 U.S. patents and a number of foreign
patents covering the Technologies licensed to IGI.
GOVERNMENT REGULATION AND REGULATORY PROCEEDINGS
U.S. Regulatory Proceedings
From mid-1997 through most of 1998, the Company was subject to intense
governmental and regulatory scrutiny relating to the Company's shipment of some
of its poultry vaccine products without complying with certain applicable
regulatory and record keeping requirements. As a result of actions taken by the
USDA, the Company was ordered in June 1997 to stop shipment of certain of its
poultry vaccine products. In July 1997, the Company was advised that the USDA's
Office of Inspector General ("OIG") had commenced an investigation into possible
violations by the Company of the Virus Serum Toxin Act of 1914 and alleged false
statements made by the Company to the USDA's Animal and Plant Health Inspection
Service ("APHIS").
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Company Actions
Based on these events, the Company:
- engaged independent counsel to conduct an investigation of the
claimed violations;
- took corrective action to allow the Company to resume shipment of
its affected product lines;
- terminated the President and Chief Operating Officer of the Company
for willful misconduct and commenced a lawsuit against him in the
New Jersey Superior Court;
- obtained the resignation of a number of employees, including three
Vice Presidents;
- voluntarily disclosed information uncovered by its internal
investigation to the U.S. Attorney for the District of New Jersey,
including information that related to sales of poultry vaccines
which may have violated U.S. customs laws and regulations; and
- cooperated with the Securities and Exchange Commission ("SEC") in
its inquiry, initiated in April 1998, regarding the foregoing
matters.
The USDA's stop shipment order and the investigations by Federal
regulatory authorities disrupted the business of the Company during 1997, 1998
and the first quarter of 1999, and had a material adverse effect on its business
operations and its liquidity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Settlement of U.S. Regulatory Proceedings
In March 1999, the Company reached settlement with the Departments of
Justice, Treasury and Agriculture regarding their pending investigations and
proceedings. The terms of the settlement agreement provided that the Company
enter a plea of guilty to a misdemeanor and pay a fine of $15,000 and
restitution in the amount of $10,000. In addition, the Company was assessed a
penalty of $225,000 and began making monthly payments to the Treasury Department
which will continue through the period ending October 31, 2001. The expense of
settling with these agencies was reflected in the 1998 results of operations.
The settlement does not affect the informal inquiry being conducted by the SEC,
nor does it affect possible governmental action against former employees of the
Company.
Other Pending Matters
In April 1998, the SEC advised the Company that it was conducting an
informal inquiry and requested information and documents from the Company, which
the Company has voluntarily provided to the SEC. At December 31, 1999, the
informal inquiry remained open; however, management does not expect that this
inquiry will have a material adverse effect on the financial position, cash
flows or operations of the Company.
On April 14, 1999, a lawsuit was filed in the U.S. District Court for the
Southern District of New York by Cohanzick Partners, LP, against IGI, Inc. and
certain of its present and former directors, officers and employees. The suit
which seeks approximately $420,000 in actual damages together with fees, costs
and interest, alleges violations of the securities laws, fraud, and negligent
misrepresentation concerning certain disclosures made and other actions taken by
the Company in 1996 and 1997. The Company believes that the plaintiff's
allegations are factually incorrect and legally inadequate and will defend the
lawsuit vigorously. The Company believes that an unfavorable outcome in the suit
would not have a material adverse impact upon the Company's financial condition,
although it could negatively affect the results of operations for the period in
which the matter is resolved.
The Company is not aware of any other legal proceedings which could have a
material effect upon the Company.
Government Regulations
The production and marketing of the Company's products and its research
and development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the United States and other
countries. The Company's development, manufacturing and marketing of poultry
biologics are subject to regulation in the United States for safety and efficacy
by the USDA, including the Center for Veterinary Biologics ("CVB"), in
accordance with the Virus Serum Toxin Act of 1914. The development,
manufacturing and marketing of animal and human pharmaceuticals are subject to
regulation in the United States for safety and efficacy by the FDA in accordance
with the Food, Drug and Cosmetic Act.
Although the Company has now resolved these matters, from June 4, 1997
through March 27, 1998, the Company was subject to an order by the CVB to stop
distribution and sale of 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 now former Company personnel. In April
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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 former
officers and employees of USDA rules and regulations and of the Virus Serum
Toxin Act. (See "Legal Proceedings - Settlement of U.S. Regulatory
Proceedings.")
On March 6, 1998, the FDA concluded an inspection of the Company's EVSCO
facility in Buena, New Jersey. This resulted in the issuance of a form FDA-483
listing several "inspection observations". The FDA reemphasized its observations
on May 14, 1998 with a "Warning Letter". The Company responded in a timely
fashion to the Form-483 and to the Warning Letter, and has been advised by the
FDA compliance branch that the Company's corrective action plan appears to
address its concerns.
In the United States, pharmaceuticals are subject to rigorous FDA
regulation including pre-clinical and clinical testing. The process of
completing clinical trials and obtaining FDA approvals for a new drug is likely
to take a number of years, requires the expenditure of substantial resources and
is often subject to unanticipated delays. There can be no assurance that any
product will receive such approval on a timely basis, if at all.
In addition to product approval, the Company may be required to obtain a
satisfactory inspection by the FDA covering the manufacturing facilities before
a product can be marketed in the United States. The FDA will review the
manufacturing procedures and inspect the facilities and equipment for compliance
with applicable rules and regulations. Any material change by the Company in the
manufacturing process, equipment or location would necessitate additional review
and approval.
Whether or not FDA approval has been obtained, approval of a
pharmaceutical product by comparable governmental authorities in foreign
countries must be obtained prior to the commencement of clinical trials and
subsequent marketing of such product in such countries. The approval procedure
varies from country to country, and the time required may be longer or shorter
than that for FDA approval. Although there are some procedures for unified
filing for certain European countries, in general each country has its own
procedures and requirements.
In addition to regulations enforced by the USDA and the FDA, the Company
also is subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and potential future federal,
state or local regulations. The Company's product development and research
involves the controlled use of hazardous materials, chemicals, viruses and
bacteria. Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by state
and federal regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company.
EMPLOYEES
At March 1, 2000, the Company had 234 full-time employees, of whom 63 were
in marketing, sales, distribution and customer support, 128 in manufacturing, 11
in research and development, and 32 in executive, finance and administration.
The Company has no collective bargaining agreement with its employees, and
believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company owns land and buildings used for offices, laboratories and
production facilities in four locations in New Jersey. The Company also owns a
warehouse and sales office space in Gainesville, Georgia. In addition, the
Company leases warehouses and poultry test facilities in New Jersey, California,
Mississippi, and Arkansas.
The Company's poultry vaccine production facilities are located in
Vineland, New Jersey, where the Company owns several buildings situated on
approximately 16 acres of land. These buildings, containing 90,000 square feet
of usable floor space, house offices and facilities used for the production of
poultry vaccines. They were constructed and expanded from time to time between
1935 and 1992.
In Buena, New Jersey, the Company owns a facility used for the production
of veterinary pharmaceuticals. The facility was built in 1971 and expanded in
1975. The facility presently contains 41,200 square feet of usable floor space
and is situated on eight acres of land. Also located in Buena are the Company's
executive and administrative offices and a 25,000 square foot facility built in
1995 which is used for production, product development, marketing, and
warehousing facility for cosmetic, dermatologic and personal care products. This
facility also houses IGI's marketing operations.
Each of the properties owned by the Company is subject to a mortgage held
by Fleet Capital Corporation and American Capital Strategies, Ltd. Except as
described above, the Company believes that its current production and office
facilities are adequate for its present and foreseeable future needs.
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ITEM 3. LEGAL PROCEEDINGS
U.S. REGULATORY PROCEEDINGS AND PENDING LITIGATION
The Company has substantially resolved the legal and regulatory issues
which arose in 1997 and 1998. For most of 1997 and 1998 the Company was subject
to intensive government regulatory scrutiny by the U.S. Departments of Justice,
Treasury and Agriculture. In June 1997, the Company was advised by APHIS of the
USDA that the Company had shipped quantities of some of its poultry vaccine
products without complying with certain regulatory and record keeping
requirements. The USDA subsequently issued an order that the Company stop
shipment of certain of its products. Shortly thereafter, in July 1997, the
Company was advised that USDA's OIG had commenced an investigation into possible
violations of the Virus Serum Toxin Act of 1914 and alleged false statements
made to APHIS.
Based upon these events, the Board of Directors caused an immediate and
thorough investigation of the facts and circumstances of the alleged violations
to be undertaken by independent counsel. The Company also took steps to obtain
the approval of APHIS for resumption of shipments, including the submission of
an amended and modified regulatory compliance program, improved testing
procedures, and other safeguards. Based upon these actions, APHIS began lifting
the stop shipment order within a month of its issuance and released all
remaining products from the order on March 27, 1998.
The Company continues to refine and strengthen its regulatory programs
with the adoption of a series of compliance and enforcement policies, the
addition of new managers of Production and Quality Control. At the instruction
of the Board of Directors, the Company's General Counsel has established and
oversees a comprehensive employee training program, has designated a "Regulatory
Compliance Officer" and has established a fraud detection program as well as an
employee "hotline". The Company has continued to cooperate with the USDA in all
aspects of its investigation and regulatory activities.
In March 1999, the Company reached settlement with the Departments of
Justice, Treasury and Agriculture regarding their pending investigations and
proceedings. The terms of the settlement agreement provided that the Company
enter a plea of guilty to a misdemeanor and pay a fine of $15,000 and
restitution in the amount of $10,000. In addition, the Company was assessed a
penalty of $225,000 and began making monthly payments to the Treasury Department
which will continue through October 31, 2001. The expense of settling with these
agencies was reflected in the 1998 results of operations. The settlement does
not affect the informal inquiry being conducted by the SEC, nor does it affect
possible governmental action against former employees of the Company.
In April 1998, the SEC advised the Company that it was conducting an
informal inquiry and requested information and documents from the Company, which
the Company voluntarily provided to the SEC. At December 31, 1999, the informal
inquiry remained open; however, management does not expect that this inquiry
will have a material adverse effect on the financial position, cash flows, or
operations of the Company.
On April 14, 1999, a lawsuit was filed in the U.S. District Court for the
Southern District of New York by Cohanzick Partners, LP, against IGI, Inc., and
certain of its present and former directors, officers and employees. The suit,
which seeks approximately $420,000 in actual damages together with fees, costs
and interest, alleges violations of the securities laws, fraud, and negligent
misrepresentation concerning certain disclosures made and other actions taken by
the Company in 1996 and 1997. The Company believes that the plaintiff's
allegations are factually incorrect and legally inadequate and will defend the
lawsuit vigorously. The Company believes that an unfavorable outcome in the suit
would not have a material adverse impact upon the Company's financial condition,
although it could negatively affect the results of operations for the period in
which the matter is resolved.
The Company is not aware of any other legal proceedings which could have a
material effect upon the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the last quarter of 1999.
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EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth (i) the name and age of each executive
officer of the Company as of March 15, 2000, (ii) the position with the Company
held by each such executive officer and (iii) the principal occupation held by
each executive officer for at least the past five years.
OFFICER PRINCIPAL OCCUPATION AND OTHER BUSINESS
NAME AGE SINCE EXPERIENCE DURING PAST FIVE YEARS
- ---- --- ----- ---------------------------------
Edward B. Hager 68 1977 Chairman of the Board of Directors and
Chairman of the Executive Committee
since 1977; Chief Executive Officer of
IGI from 1977 through February
2000;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.
Paul Woitach 41 1998 Chief Executive Officer of IGI since
February 2000; 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).
Robert E. McDaniel 49 1998 Executive Vice President and General
Counsel of IGI, Inc. since April 1999;
Senior Vice President and General
Counsel of IGI, Inc. since May 1998;
General Counsel of Presstek, Inc.
(laser graphic arts company) from April
1997 to May 1998; and Commercial
Litigation Partner, Law Firm of Devine,
Millimet and Branch from April 1991 to
April 1997.
Manfred Hanuschek 39 1999 Senior Vice President and Chief
Financial Officer of IGI, Inc. since
July 1999; Chief Financial Officer of
Fresh Air Solutions LP and its
predecessor entity ICC Technologies,
Inc. (both entities high technology
manufacturers of desiccant cooling
systems) from 1994 to 1998; Served in
various capacities with Coopers &
Lybrand LLP from 1983 to 1994,
including last held position as Senior
Audit Manager.
Rajiv Mathur 45 1999 Senior Vice President and Assistant
Secretary of IGI, Inc. since March
1999; Vice President of Research and
Development of IGI, Inc. since 1989.
Officers are elected on an annual basis. Four of the above named officers
have employment agreements with the Company.
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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 under the Company's loan agreements 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
1998
First quarter $4 3/16 $2 3/4
Second quarter $ (A) $ (A)
Third quarter $3 $1 5/16
Fourth quarter $3 1/4 $1 1/2
1999
First quarter $2 1/4 $1 5/8
Second quarter $2 $1 1/4
Third quarter $1 15/16 $1 1/4
Fourth quarter $2 $1 1/16
(A) The Company was unable to file its 1997 Annual Report on Form 10-K until
August 24, 1998 as a result of a special investigation initiated by the
Board of Directors which resulted in the restatement of financial results
for each of the two years in the period ended December 31, 1996 and the
first three quarters of year ended December 31, 1997. Accordingly, the
American Stock Exchange halted trading of the Company's Common Stock on
March 31, 1998 until such time as this and other required filings were
made. Trading resumed on September 8, 1998. Therefore, there are no
trading prices reflected for the second quarter and most of the third
quarter of 1998.
The approximate number of holders of record of the Company's Common Stock
at March 27, 2000 was 814 (not including stockholders for whom shares are held
in a "nominee" or "street" name).
In connection with the refinancing of the Company debt with its bank
lenders as of October 29, 1999, the Company issued to a new lender, American
Capital Strategies ("ACS") warrants to purchase an aggregate of 1,907,543 shares
of the Company's Common Stock at an exercise price of $.01 per share. The
issuance of the warrants is exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended as a transaction not involving a public
offering. The shares issuable upon the exercise of the warrants are subject to
registration rights in favor of the lenders, pursuant to the terms of the
Extension Agreement. No underwriters were involved with this private placement.
These warrants contain a right ("the put") to require the Company to repurchase
the warrants or the Common Stock acquired upon exercise of such warrants at
their then fair market value under certain circumstances, including the earliest
to occur of the following: a) October 29, 2004; b) the date of payment in full
of the Senior Debt and Subordinated Debt and all senior indebtedness of the
Company; or c) the sale of the Company or 30% or more of its assets. (See Item
7,"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.")
On April 12, 2000 American Capital Strategies, Ltd. amended its loan
agreement whereby the put provision was replaced by a "make-whole" feature. The
"make-whole" feature requires the Company to compensate American Capital
Strategies, Ltd., in either Common Stock or cash, at the option of the Company,
in the event that American Capital Strategies, Ltd. ultimately realizes proceeds
from the sale of its Common Stock obtained upon exercise of its warrants that
are less than the fair value of the Common Stock upon exercise of such warrants
multiplied by the number of shares obtained upon exercise. Fair value of the
Common Stock upon exercise is defined as the 30 day average value prior to
notice of exercise. American Capital Strategies, Ltd. must exercise reasonable
effort to sell or place its shares in the marketplace over a 180 day period
before it can invoke the make-whole provision. As a result of the amendment, the
liability recognized related to the warrants will be reclassified as a component
of equity without a future mark-to-market adjustment effective April 12, 2000.
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ITEM 6. SELECTED FINANCIAL DATA
Five-Year Summary of Selected Financial Data (in thousands, except per share
information)
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
STATEMENT OF OPERATING RESULTS
Revenues $ 34,594 $ 33,195 $ 34,343 $ 34,947 $ 31,232
Operating profit (loss) 1,506 (910) 220 1,332 3,112
(Loss) income from continuing operations (1,971) (3,029) (1,208) (481) 1,428
Loss from discontinued operations * -- -- -- -- (4,034)
Extraordinary gain from early extinguishment of debt, net of tax 387 -- -- -- --
Net loss (1,584) (3,029) (1,208) (481) (2,606)
(Loss) income per share-basic:
From continuing operations $ (.21) $ (.32) $ (.13) $ (.05) $ .16
From discontinued operations -- -- -- -- (.44)
Extraordinary gain, net of tax .04 -- -- -- --
Net loss (.17) (.32) (.13) (.05) (.28)
(Loss) income per share-diluted:
From continuing operations $ (.21) $ (.32) $ (.13) $ (.05) $ .15
From discontinued operations -- -- -- -- (.41)
Extraordinary gain, net of tax .04 -- -- -- --
Net loss (.17) (.32) (.13) (.05) (.26)
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
BALANCE SHEET DATA
Working capital (deficit) $ 3,567 $ (8,107) $ (5,472) $ 2,499 $ 3,831
Total assets 33,862 32,056 33,750 33,845 31,956
Short-term debt and notes payable 6,583 19,318 18,857 13,085 10,463
Long-term debt and notes payable
(excluding current maturities) 13,533 408 36 6,893 9,624
Stockholders' equity 5,533 5,923 8,034 9,019 8,173
Average number of common and
common equivalent shares:
Basic and diluted 9,605 9,470 9,458 9,323 9,173
* In March 1994, IGI's Board of Directors voted to dispose of its
Biotechnology Business segment through the combination of certain
majority-owned subsidiaries and the subsequent tax-free distribution of
its ownership of the combined entity to IGI's shareholders. The
distribution of this segment occurred on December 12, 1995. The
Consolidated Financial Statements of IGI present this segment as a
discontinued operation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This "Management's Discussion and Analysis" section and other sections of
this Annual Report on Form 10-K contain forward looking statements that are
based on current expectations, estimates, forecasts and projections about the
industry and markets in which the Company operates, management's beliefs and
assumptions made by management. In addition, other written or oral statements
which constitute forward-looking statements may be made by or on behalf of the
Company. Words such as "expects," "anticipates," "intends," plans," "believes,"
"seeks," "estimates," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance, and involve certain risks, uncertainties and
assumptions which are difficult to predict. (See "Factors Which May Affect
Future Results" below.) Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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RESULTS OF OPERATIONS
From mid-1997 through most of 1998, the Company was subject to intense
governmental and regulatory scrutiny and was also confronted with a number of
material operational issues. (See Item 3. "Legal Proceedings"). These matters
had a materially adverse effect on the Company's financial condition and results
of operations in 1997 and 1998 and the first quarter of 1999 and resulted in the
departure of most of the Company's senior management from 1997.
1999 Compared to 1998
The Company had a net loss of $1,584,000, or $.17 per share, in 1999, as
compared to a net loss of $3,029,000, or $.32 per share, in 1998. The reduction
in net loss was primarily attributable to increased revenues and improved
margins complemented by lower operating expenses.
Total revenues for 1999 were $34,594,000, which represents an increase of
$1,399,000, or 4%, from revenues of $33,195,000 in 1998. The increased revenues
were generated by increased Consumer Products and Companion Pet Products
revenues, offset by a decline in Poultry Vaccines revenue.
Total Consumer Products revenues for 1999 increased 19% to $6,938,000,
compared to 1998 revenues of $5,839,000. This increase was primarily
attributable to increased licensing and royalty income and increased product
sales. Licensing and royalty income of $1,869,000 in 1999 increased by $669,000
compared to 1998, primarily as a result of increased licensing revenues from
Johnson & Johnson. Consumer product sales of $5,069,000 in 1999 increased by
$430,000 compared to 1998, primarily as a result of increased sales to Estee
Lauder.
Companion Pet Products revenues for 1999 amounted to $13,595,000, an
increase of $1,082,000, or 9%, compared to 1998. This increase was primarily
attributable to increased product sales associated with the EVSCO line of
veterinary products.
Poultry Vaccines revenues for 1999 amounted to $14,061,000, a decrease of
$782,000, or 5%, compared to 1998. Limited production capacity, old equipment,
and increased potency requirements have limited Vineland's ability to produce as
much quality vaccine as it can sell.
Cost of sales increased by $285,000, or 2%, primarily due to the higher
sales volume. As a percentage of total revenues, cost of sales decreased from
52.2% in 1998 to 50.9% in 1999. The resulting increase in gross profit in 1999
to 49.1% from 47.8% in 1998 was primarily attributable to efficiencies gained
through higher product sales, licensing revenues and production volumes
generated from Companion Pet Products and Consumer Products, which were offset
by lower margins associated with lower Poultry Vaccines revenues.
Consumer Products cost of sales for 1999 increased 30% to $1,893,000,
compared to 1998 cost of sales of $1,459,000. As a percentage of total revenues,
cost of sales increased from 25.0% in 1998 to 27.3% in 1999.
Companion Pet Products cost of sales for 1999 increased $55,000 to
$6,427,000, compared to 1998 cost of sales of $6,372,000. As a percentage of
total revenues, cost of sales decreased from 50.9% in 1998 to 47.3% in 1999.
Poultry Vaccines cost of sales for 1999 decreased 2% to $9,286,000,
compared to 1998 cost of sales of $9,490,000. As a percentage of total revenues,
cost of sales increased from 63.9% in 1998 to 66.0% in 1999.
Selling, general and administrative expenses decreased by $1,295,000, or
8%, from $15,359,000 in 1998 to $14,064,000 in 1999. These expenses were 41% of
revenues in 1999 compared with 46% of revenues in 1998. Much of the decrease was
primarily attributable to decreased legal, consulting and professional fees in
1999 due to resolution of many of the regulatory actions faced by the Company in
the prior year. Product development and research expenses decreased by $7,000,
or 0.5%, in 1999 as compared with 1998.
Interest expense increased $666,000, or 19%, from $3,443,000 in 1998 to
$4,109,000 in 1999. The increase was primarily due to the valuation of the put
warrants issued in conjunction with the American Capital Strategies, Ltd.
subordinated notes. These warrants are marked-to-market on a monthly basis; the
1999 charge of $854,000 since inception is a result of the increase in the
market price of the Company's stock.
Extraordinary gain on the early extinguishment of debt of $387,000 related
to the elimination of accrued interest which was forgiven by the former bank
lenders of $611,000, offset by income tax expense of $224,000. ( See "Liquidity
and Capital Resources").
The effective tax rates for 1999 and 1998 were 19% and 30%, respectively.
The change in the effective tax rate is primarily due to the $854,000 of
non-deductible interest expense relating to the mark-to-market feature of the
warrants issued to American Capital Strategies, Ltd. The valuation allowance
decreased from 1998 as a result of certain fully reserved state tax net
operating loss carryforwards expiring in 1999.
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1998 Compared to 1997
The Company had a net loss of $3,029,000, or $.32 per share, in 1998, as
compared to a net loss of $1,208,000, or $.13 per share, in 1997. The major
contributing factors to the increased loss were: increased legal, consulting and
professional fees; increased expenses associated with investigating and
addressing regulatory problems; the costs and expenses associated with
termination of certain employees; the hiring of new management; and increased
bank fees and interest charges associated with the extension of the Company's
credit line. The Company incurred approximately $2.6 million of legal,
consulting and professional fees in 1998 and $1.1 million in 1997. Comparable
expenditures for 1994 to 1996 averaged about $0.5 million. The increase in 1998
was principally attributable to the regulatory actions and investigations which
began in 1997 and resulted in the March 1999 settlement with the U.S.
Departments of Justice, Treasury and Agriculture. Another major contributing
factor was a decrease in sales of poultry vaccines in 1998 as compared with
1997, primarily as a result of the USDA regulatory action.
Total revenues for 1998 were $33,195,000, which represents a decrease of
$1,148,000, or 3%, from revenues of $34,343,000 in 1997. Sales of poultry
vaccines decreased by $1,809,000, or 11%, in 1998 as compared with 1997. Poultry
vaccine sales were adversely affected by the USDA regulatory action which
remained in partial effect until March 27, 1998. The Company also experienced
lower production volumes of poultry vaccines while it made changes to improve
its Vineland Laboratories operations. Sales of Companion Pet Products increased
by $69,000, or 1%.
Total Consumer Products revenues for 1998 increased by $584,000, or 11%,
from 1997 revenues. This increase reflected a $1,028,000 increase in revenue
from the Company's cosmetics and personal care products partially offset by a
decrease in revenues of $444,000 from the Company's dermatological products. The
cosmetics and personal care products revenues increased in 1998 due to increased
product sales to Estee Lauder and increased licensing and royalty income,
primarily from the Company's relationships with Johnson & Johnson. In August
1998, the Company executed its second license agreement with a Johnson & Johnson
division, licensing the Novasome(R) microencapsulation technology for use in
certain products and distribution channels to Johnson & Johnson Medical, a
Division of Ethicon, Inc.
The decrease in revenues from dermatological products was due in large
part to the decline in sales to Glaxo. In October 1998, Glaxo notified the
Company that it intended to exit the physician-dispensed skin care market, which
resulted in a loss of sales to Glaxo and the termination of the royalty
agreement. As a result of the termination, the Company acquired the WellSkin(TM)
trade name from Glaxo along with Glaxo's remaining inventory of products and
marketing materials. This termination resulted in the Company owing $808,000 to
Glaxo which is payable at specified intervals through 2000. In December 1998,
the Company entered into an agreement with Genesis Pharmaceutical, Inc.,
("Genesis") granting them the exclusive right to market and distribute the
Company's WellSkin(TM) line of skin care products. Genesis also purchased the
entire inventory and marketing materials received from Glaxo. The Company has a
receivable from Genesis for approximately $112,000 at December 31, 1998. The
Company recognized revenue of $6,000 in 1998 from Genesis.
During 1998, the Company recognized $1,200,000 of licensing revenue as
compared to $150,000 in 1997. This revenue consisted of $326,000 from Glaxo;
$6,000 from Genesis; $92,000 from Johnson & Johnson Medical; $433,000 from
Johnson & Johnson Consumer; $210,000 from National Starch; and $133,000 from
Kimberly Clark. During 1997, the licensing revenue consisted of amounts relating
to the agreement with Glaxo.
Cost of sales decreased by $332,000, or 2%, primarily due to the lower
sales volume. However, as a percentage of sales, cost of sales increased from
51% in 1997 to 52% in 1998. This increase primarily resulted from costs relating
to the Company's reassessment of product manufacturing processes and formulas
incurred in 1998 to increase future production efficiency and capacity in the
Company's Vineland Laboratories division.
Selling, general and administrative expenses increased by $564,000, or 4%,
from $14,795,000 in 1997 to $15,359,000 in 1998. These expenses were 46% of
revenues in 1998 compared with 43% of revenues in 1997. Much of the increase was
attributable to increased legal, consulting and professional fees in 1998. Total
professional fees in 1998 were approximately $2.6 million, of which $2.1 million
was incurred primarily in response to the regulatory actions and investigations
which began in 1997 and resulted in the March 1999 settlement with the U.S.
Departments of Justice, Treasury and Agriculture.
Product development and research expenses decreased by $250,000, or 15%,
in 1998 as compared with 1997, as the Company curtailed certain development
projects primarily relating to the Consumer Products business.
Interest expense increased $1,590,000, or 86%, from $1,853,000 in 1997 to
$3,443,000 in 1998. The increase was due to a charge to earnings of $645,000 for
warrants issued to the Company's bank lenders in connection with the execution
of an extension agreement with its bank lender, higher borrowings at increased
interest rates in 1998, and fees paid to the bank lenders related to the
extension and forbearance agreements.
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The effective tax rates for 1998 and 1997 were 30% and 27%, respectively.
Changes in the effective rates primarily reflect the level of federal and state
tax credits offset by changes in the valuation allowance. The valuation
allowance increased from 1997 primarily based on management's expectations
regarding the realizability of certain state deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
On October 29, 1999, the Company entered into a $22 million senior bank
credit agreement ("Senior Debt Agreement") with Fleet Capital Corporation and a
$7 million subordinated debt agreement ("Subordinated Debt Agreement") with
American Capital Strategies, Ltd.
These agreements enabled the Company to retire approximately $18.6 million
of outstanding debt with its former bank lenders, Fleet Bank, NH, and Mellon
Bank, N.A. In connection with the repayment of the loans, the Company's former
bank lenders agreed to return to the Company, for cancellation, warrants held by
them for the purchase of 810,000 shares of the Company's Common Stock at
exercise prices ranging from $2.00 to $3.50. Also, approximately $611,000 of
accrued interest was waived by the former bank group and is classified as an
extraordinary gain from the early extinguishment of debt in the 1999
Consolidated Statements of Operations. There are two sets of warrants remaining
with the former lenders. There are unconditional warrants to purchase 150,000
shares which remain exercisable by Fleet Bank, NH at $2.00 per share and
unconditional warrants to purchase 120,000 shares which remain exercisable by
Mellon Bank, N.A. at $2.00 per share.
The Senior Debt Agreement provides for a revolving line of credit facility
of up to $12 million based upon qualifying accounts receivable and inventory, a
$7 million term loan and a $3 million capital expenditures credit facility. The
borrowings under the revolving line of credit bear interest at the prime rate
plus 1.0% or the London Interbank offered rate plus 3.25%. The borrowings under
the term loan and capital expenditure credit facility bear interest at the prime
rate plus 1.5% or the London Interbank offered rate plus 3.75%. As of December
31, 1999, borrowings under the revolving line of credit, term loan and capital
expenditures credit facility were $5,708,000, $7,000,000 and $0, respectively.
Provisions under the revolving line of credit require the Company to maintain a
lockbox with the lender, allowing Fleet Capital to sweep cash receipts from
vendors and pay down the line of credit. Drawdowns on the line of credit are
made when needed to fund operations. Quarterly repayments of the term loan begin
on August 1, 2000 in the amount of $233,000. Repayment of the capital
expenditures credit facility are to be made quarterly over a five year period
after any initial drawdown.
Borrowings under the Subordinated Debt Agreement bear interest at the rate
of 12.5% ("cash portion of interest on subordinated debt") plus an additional
interest component at the rate of 2% which is payable at the Company's election
in cash or Company Common Stock. As of December 31, 1999, borrowings under the
subordinated notes were $7,000,000, offset by an unamortized debt discount of
$2,775,000. The Subordinated Debt Agreement matures in October 2006. In
connection with the Subordinated Debt Agreement the Company issued to the lender
warrants to purchase 1,907,543 shares of IGI Common Stock at an exercise price
of $.01 per share. The debt discount was recorded at issuance, representing the
difference between the $7,000,000 proceeds received by the Company and the total
obligation, which included principal of $7,000,000 and an initial warrant
liability of $2,842,000. (See Note 9 "Detachable Stock Warrants" in the
Consolidated Financial Statements.)
These agreements contain financial and other covenants and restrictions.
The Company was not in compliance under certain covenants under the agreements
related to the the fixed charges coverage ratio, maximum debt to equity ratio
and accounts payable ratio as of December 31, 1999; however, the lenders
involved have amended, as of April 12, 2000, the related agreements to waive the
defaults as of December 31, 1999. American Capital Strategies, Ltd. has the
right to designate for election to the Company's Board of Directors that number
of directors that bears the same ratio to the total number of directors as the
number of shares of Company Common Stock owned by it plus the number of shares
issuable upon exercise of its warrants bear to the total number of outstanding
shares of Company Common Stock on a fully-diluted basis, provided that so long
as it owns any Common Stock, or warrants or any of its loans are outstanding, it
shall have the right to designate at least one director or observer on the Board
of Directors. At December 31, 1999, American Capital Strategies, Ltd. had one
observer on the Company's Board of Directors.
Approximately $24.5 million was immediately available to the Company under
the Senior Debt and Subordinated Debt Agreements; borrowings under these new
agreements amounted to $19.7 million as of December 31, 1999. The new agreements
enabled the Company to retire approximately $18.6 million outstanding with the
previous bank lenders, cover associated closing costs and provide a borrowing
facility for working capital and capital expenditures. As of December 31, 1999
the Company had $4.5 million available borrowings under these agreements, $3.0
million of which was related to the capital expenditure credit facility. To
secure all of its obligations under these agreements, the Company has granted
the lenders a security interest in all of the assets and properties of the
Company and its subsidiaries.
Despite its new financing arrangements, the Company remains highly
leveraged; furthermore, availability for borrowings under the revolving line of
credit facility is dependent on the level of its qualifying accounts receivable
and inventory. The Company expects to maintain compliance with the covenants
contained in its loan agreements through the year 2000.
The Company is currently generating losses that may extend through the
year 2000, which could unfavorably impact future financial covenants and the
Company's availability for borrowing under the revolving line of credit
facility, which is dependent on the level of its qualifying accounts and
inventory. Although the Company believes it will be in compliance with covenants
and will have
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availability for borrowing under the revolving line of credit, there can be no
assurance of such continued compliance and availability. The Company believes it
will be able to meet its debt obligations. If the Company were not able to meet
its debt obligations it would consider altering its business plan, including, if
necessary, a sale of selected Company operating and non operating assets. Any
significant sale of assets would require lender approval. Any sale of operating
assets would involve a curtailment of certain of the Company's business
operations and a modification of its business strategy.
The Company's operating activities provided $391,000 of cash during 1999,
which included net income and non-cash charges to operations for depreciation,
amortization, loss reserves, and stock and warrant compensation expense.
Additionally, increases in inventory, accounts payable and accrued expenses,
offset by decreases in accounts receivable, other assets and notes payable, had
the effect of decreasing operating cash flow as compared to 1998. Working
capital as of December 31, 1999 amounted to $3,567,000 as compared to negative
$8,107,000 as of December 31, 1998. The increase in working capital of
$11,674,000 was primarily the result of refinancing in October 1999 and the
improvement in operations for the year ended December 31, 1999. The accounts
receivable turnover ratio for 1999 was 4.89 compared to 4.34 for 1998. This
increase was primarily as a result of increased collection efforts. The
inventory turnover ratio for 1999 was 1.91 compared to 1.84 for 1998. The
Company believes its reserves for inventory and accounts receivables are
adequate.
Certain geographic markets in which the Company does business have
recently experienced political, economic and currency instability. In order to
minimize risk, the Company maintains credit insurance for the majority of its
international accounts receivable, and all sales are denominated in U.S. dollars
to minimize currency fluctuation risk. Because of the volume of business
transacted by the Company internationally, continuation or recurrence of such
unrest or instability could adversely affect the business of its customers in
those countries and the Company's ability to collect its receivables from such
customers, which, in either case, could materially adversely affect the
Company's future operating results.
The Company used $1,007,000 in 1999 for investing activities compared to
$633,000 in 1998. The increase was primarily due to an increase in capital
expenditures for the Company's manufacturing operations.
FACTORS WHICH MAY AFFECT FUTURE RESULTS
The industry segments in which the Company competes are subject to intense
competitive pressures. The following sets forth some of the risks which the
Company faces.
HIGHLY LEVERAGED AND DEBT COVENANT COMPLIANCE
The Company remains highly leveraged and subject to restrictive covenants
and restraints which are contained in its Senior Debt and Subordinated Debt
Agreements. The debt agreements contain various affirmative and negative
covenants, such as minimum tangible net worth and minimum fixed charge coverage
ratios. Furthermore, the Company's available borrowings under the revolving line
of credit facility are dependent on the level of qualifying accounts receivable
and inventory. The Company expects to remain in compliance with these covenants
in the future; however, there can be no assurance that the Company will be
successful in doing so. If the Company is not successful in meeting its
financial covenants, it could result in a default under its loan agreements and
any such default, if not resolved, could lead to curtailment of certain of its
business operations, sale of certain assets or the commencement of insolvency
proceedings by its creditors.
INTENSE COMPETITION IN CONSUMER PRODUCTS BUSINESS
The Company's Consumer Products business competes with large,
well-financed cosmetics and consumer products companies with development and
marketing groups that are experienced in the industry and possess far greater
resources than those available to the Company. There is no assurance that the
Company's consumer products can compete successfully against its competitors or
that it can develop and market new products that will be favorably received in
the marketplace. In addition, certain of the Company's customers that use the
Company's Novasome(R) lipid vesicles in their products may decide to reduce
their purchases from the Company or shift their business to other suppliers.
COMPETITION IN POULTRY VACCINE BUSINESS
The Company is encountering increased price competition from international
producers of poultry vaccines.
FOREIGN REGULATORY AND ECONOMIC CONSIDERATIONS
The Company's business may be adversely affected by foreign import
restrictions and additional regulatory requirements. Also, unstable or adverse
economic conditions and fiscal and monetary policies in certain Latin American
and Far Eastern countries, increasingly important markets for the Company's
animal health products, particularly poultry vaccines, could adversely affect
the Company's future business in these countries.
15
16
RAPIDLY CHANGING MARKETPLACE FOR PET PRODUCTS
The emergence of pet superstores, the consolidation of distribution
channels into fewer, more powerful companies and the diminishing traditional
role of veterinarians in the distribution of pet products could adversely affect
the Company's ability to expand its animal health business or to operate at
acceptable gross margin levels.
EFFECT OF RAPIDLY CHANGING TECHNOLOGIES
The Company expects to license its technologies to third parties which
would manufacture and market products incorporating the technologies. However,
if its competitors develop new and improved technologies that are superior to
the Company's technologies, its technologies could be less acceptable in the
marketplace and therefore the Company's planned technology licensing could be
materially adversely affected.
REGULATORY CONSIDERATIONS
The Company's poultry vaccines and pet pharmaceutical products are
regulated by the USDA and the FDA, respectively, which subject the Company to
review, oversight and periodic inspections. Any new products are subject to
expensive and sometimes protracted USDA and FDA regulatory approval, which
ultimately may not be granted. Also, certain of the Company's products may not
be approved for sales overseas on a timely basis, thereby limiting the Company's
ability to expand its foreign sales.
INCOME TAXES
The Company has net deferred tax assets in the amount of $5,850,000 at
December 31, 1999. The largest deferred tax asset relates to the $3,672,000 of
net operating loss carryforwards. After considering the $955,000 valuation
allowance at December 31, 1999, management believes the Company's remaining net
deferred tax assets are more likely than not to be realized through the reversal
of existing taxable temporary differences, the sale of certain state net
operating losses, and the generation of sufficient future taxable operating
income to ensure utilization of remaining deductible temporary differences, net
operating losses and tax credits. The minimum level of future taxable income
necessary to realize the Company's net deferred tax assets at December 31, 1999,
is approximately $20 million. There can be no assurance, however, that the
Company will be able to achieve the minimum levels of taxable income necessary
to realize its net deferred tax assets. Federal net operating loss carryforwards
expire through 2019. Significant components expire in 2007 (36%), 2018 (40%) and
2019 (20%). Also federal research credits expire in varying amounts through the
year 2019.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS RELATED TO OUR BUSINESS
At December 31, 1999, variable rate debt of $19,708,000 with a
weighted average interest rate of 11.4% was outstanding.
In connection with the Subordinated Debt Agreement, the Company
issued warrants to purchase 1,907,543 shares of IGI Common Stock at an exercise
price of $.01 per share. These warrants contain a right ("the put") to require
the Company to repurchase the warrants or the Common Stock acquired upon
exercise of such warrants at their then fair market value under certain
circumstances, including the earliest to occur of the following: a) October 29,
2004; b) the date of payment in full of the Senior Debt and Subordinated Debt
and all senior indebtedness of the Company; or c) the sale of the Company or 30%
or more of its assets. The repurchase is to be settled in cash or Common Stock,
at the option of the lender. The warrants are recorded as a liability which is
marked-to-market, with changes in the market value being recognized as a
component of interest expense in the period of change. At December 31, 1999, the
Company had recorded a liability of $3,696,000 for these warrants. If the market
value of the Company's Common Stock were to increase by 10%, the charge to
earnings would be $369,586.
On April 12, 2000 American Capital Strategies, Ltd. amended its loan
agreement whereby the put provision was replaced by a "make-whole" feature. The
"make-whole" feature requires the Company to compensate American Capital
Strategies, Ltd., in either Common Stock or cash, at the option of the Company,
in the event that American Capital Strategies, Ltd. ultimately realizes proceeds
from the sale of its Common Stock obtained upon exercise of its warrants that
are less than the fair value of the Common Stock upon exercise of such warrants
multiplied by the number of shares obtained upon exercise. Fair value of the
Common Stock upon exercise is defined as the 30 day average value prior to
notice of exercise. American Capital Strategies, Ltd. must exercise reasonable
effort to sell or place its shares in the marketplace over a 180 day period
before it can invoke the make-whole provision. As a result of the amendment, the
liability recognized related to the warrants will be reclassified as a component
of equity without a future mark-to-market adjustment effective April 12, 2000.
16
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto listed in the accompanying
index to financial statements (Item 14) are filed as part of this Annual Report
and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A portion of the information required by this item is contained in part
under the caption "Executive Officers of the Registrant" in Part I hereof, and
the remainder is contained in the Company's Proxy Statement for the Company's
2000 Annual Meeting of Stockholders. Section 16(a) (the "2000 Proxy Statement")
under the captions "PROPOSAL 1 - ELECTION OF DIRECTORS" - Nominees for Election
as Directors and "Beneficial Ownership Reporting Compliance" which are
incorporated herein by this reference. Officers are elected on an annual basis
and serve at the discretion of the Board of Directors. The Company expects to
file the 2000 Proxy Statement no later than April 29, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained under the captions
"EXECUTIVE COMPENSATION," "Compensation Committee Interlocks and Insider
Participation," and "Director Compensation and Stock Options" in the Company's
2000 Proxy Statement and is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the Company's 2000
Proxy Statement under the caption "Beneficial Ownership of Common Stock" and is
incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the caption
"Certain Relationships and Related Transactions" appearing in the Company's 2000
Proxy Statement and is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
Reports of Independent Accountants
Consolidated Balance Sheets, December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December
31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule II. Valuation and Qualifying Accounts and Reserves
Schedules other than those listed above are omitted for the reason
that they are either not applicable or not required or because the
information required is contained in the financial statements or
notes thereto.
Condensed financial information of the Registrant is omitted since
there are no substantial amounts of "restricted net assets"
applicable to the Company's consolidated subsidiaries.
(3) Exhibits Required to be Filed by Item 601 of Regulation S-K.
17
18
The exhibits listed in the Exhibit Index immediately preceding such
exhibits are filed as part of this Annual Report on Form 10-K unless
incorporated by reference as indicated.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 12, 2000 IGI, Inc.
By: /s/ Paul Woitach
----------------
PAUL WOITACH
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacity and on the date indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ Edward B. Hager Chairman of the Board April 12, 2000
- --------------------------
EDWARD B. HAGER
/s/ Paul Woitach President and Chief Executive Officer April 12, 2000
- -------------------------- (Principal executive officer)
PAUL WOITACH
/s/ Robert E. McDaniel Executive Vice President April 12, 2000
- --------------------------
ROBERT E. MCDANIEL
/s/ Manfred Hanuschek Senior Vice President April 12, 2000
- -------------------------- Chief Financial Officer
MANFRED HANUSCHEK (Principal financial officer)
/s/ Charles R. Carroll Controller, Treasurer and Chief Accounting April 12, 2000
- -------------------------- Officer
CHARLES R. CARROLL (Principal accounting officer)
/s/ Stephen J. Morris Director April 12, 2000
- --------------------------
STEPHEN J. MORRIS
/s/ Terrence D. Daniels Director April 12, 2000
- --------------------------
TERRENCE D. DANIELS
/s/ Jane E. Hager Director April 12, 2000
- --------------------------
JANE E. HAGER
/s/ Constantine L. Hampers Director April 12, 2000
- --------------------------
CONSTANTINE L. HAMPERS
/s/ Terrence O'Donnell Director April 12, 2000
- --------------------------
TERRENCE O'DONNELL
/s/ Paul D. Paganucci Director April 12, 2000
- --------------------------
PAUL D. PAGANUCCI
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19
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of IGI, Inc.:
In our opinion, the accompanying consolidated financial statements listed in the
index appearing under Item 14(a)(1) of this Form 10-K present fairly, in all
material respects, the financial position of IGI, Inc. and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) of this Form 10-K presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
April 12, 2000
19
20
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 416 $ 1,068
Accounts receivable, less allowance for doubtful accounts
of $354 and $516 in 1999 and 1998, respectively 6,061 6,462
Licensing and royalty income receivable 432 440
Inventories 8,762 7,406
Current deferred taxes 1,096 1,275
Prepaid expenses and other current assets 348 433
-------- --------
Total current assets 17,115 17,084
-------- --------
Investments 144 535
Property, plant and equipment, net 9,781 9,479
Deferred income taxes 4,754 4,188
Deferred financing costs 1,678 75
Other assets 390 695
-------- --------
Total assets $ 33,862 $ 32,056
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility $ 5,708 $ 6,657
Current portion of long-term debt 467 --
Credit line -- 12,000
Current portion of notes payable 408 661
Accounts payable 4,268 3,235
Accrued payroll 253 196
Due to stockholder 115 380
Accrued interest 164 432
Other accrued expenses 2,150 1,614
Income taxes payable 15 16
-------- --------
Total current liabilities 13,548 25,191
-------- --------
Long-term debt, net of discount and current portion 10,758 --
Notes payable -- 408
Deferred income 327 534
Detachable stock warrants 3,696 --
-------- --------
Total liabilities 28,329 26,133
-------- --------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized,
none outstanding -- --
Common stock, $.01 par value; 50,000,000 and 30,000,000
shares authorized in 1999 and 1998, respectively; 10,133,183
and 9,648,931 shares issued in 1999 and 1998, respectively 102 97
Additional paid-in capital 20,628 19,961
Accumulated deficit (13,556) (11,972)
Less treasury stock, 105,510 and 136,014 shares at cost, in 1999
and 1998, respectively (1,641) (2,163)
-------- --------
Total Stockholders' Equity 5,533 5,923
-------- --------
Total liabilities and stockholders' equity $ 33,862 $ 32,056
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
20
21
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
1999 1998 1997
----------- ----------- -----------
Revenues:
Sales, net $ 32,725 $ 31,995 $ 34,193
Licensing and royalty income 1,869 1,200 150
----------- ----------- -----------
Total revenues 34,594 33,195 34,343
Cost and Expenses:
Cost of sales 17,606 17,321 17,653
Selling, general and administrative expenses 14,064 15,359 14,795
Product development and research expenses 1,418 1,425 1,675
----------- ----------- -----------
Operating profit (loss) 1,506 (910) 220
Interest expense, net (4,109) (3,443) (1,853)
Other income (expense), net 31 33 (11)
----------- ----------- -----------
Loss before benefit for income taxes and
extraordinary gain (2,572) (4,320) (1,644)
Benefit for income taxes (601) (1,291) (436)
----------- ----------- -----------
Loss before extraordinary item (1,971) (3,029) (1,208)
Extraordinary gain on early extinguishment of debt,
net of income tax expense of $224 387 -- --
----------- ----------- -----------
Net loss $ (1,584) $ (3,029) $ (1,208)
=========== =========== ===========
Loss per share:
Basic and diluted:
Loss before extraordinary gain $ (.21) $ (.32) $ (.13)
Extraordinary gain, net of tax .04 -- --
----------- ----------- -----------
Net loss $ (.17) $ (.32) $ (.13)
=========== =========== ===========
Average number of common shares:
Basic and diluted 9,604,768 9,470,413 9,457,938
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
21
22
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net loss $ (1,584) $ (3,029) $ (1,208)
Reconciliation of net loss to net cash provided from operating
activities:
Depreciation and amortization 1,027 992 1,037
Amortization of deferred financing costs and debt discount 123 -- --
Extraordinary gain on early extinguishment of debt, net of tax (387) -- --
Gain on sale of assets (30) (62) --
Write off of other assets 140 558 --
Provision for loss on accounts and notes receivable
and inventories 1,116 1,482 1,610
Recognition of deferred revenue (203) (242) (150)
Issuance of stock to 401(k) plan 82 -- 40
Benefit for deferred income taxes (611) (1,321) (447)
Interest expense relating to put feature of warrants 854 -- --
Warrants issued to lenders under prior extension agreements 223 645 --
Stock option compensation expense:
Non-employee stock options 49 149 47
Directors' stock issuance 116 94 --
Other, net -- 17 (50)
Changes in operating assets and liabilities:
Accounts receivable 158 239 721
Inventories (2,244) 374 (1,735)
Receivable due under royalty agreement 8 (328) 1,000
Prepaid and other current assets 238 333 398
Accounts payable and accrued expenses 1,856 929 1,123
Deferred revenue 275 59 --
Short-term notes payable, operating (814) -- --
Income taxes payable (1) (73) 51
-------- -------- --------
Net cash provided from operating activities 391 816 2,437
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (1,064) (607) (636)
Proceeds from sale of assets 40 165 --
(Increase) decrease in other assets 17 (191) 68
-------- -------- --------
Net cash used in investing activities (1,007) (633) (568)
-------- -------- --------
Cash flows from financing activities:
Borrowings under term loan 7,000 -- 2,358
Borrowings under subordinated note agreements, net of discount 4,158 -- --
Cash proceeds from issuance of warrants to lenders 2,842 -- --
Borrowings under revolving credit agreement 11,584 -- --
Repayment of revolving credit agreement (5,876) -- --
Repayments of debt (18,657) (236) (3,443)
Payments of deferred financing costs (1,659) (75) --
Proceeds from exercise of common stock options -- -- 95
Change in book overdraft 572 -- --
-------- -------- --------
Net cash used in financing activities (36) (311) (990)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (652) (128) 879
Cash and cash equivalents at beginning of year 1,068 1,196 317
-------- -------- --------
Cash and cash equivalents at end of year $ 416 $ 1,068 $ 1,196
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
See Note 4 for Supplemental Cash Flow information.
22
23
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK ADDITIONAL
------------ STOCK PAID-IN
SHARES AMOUNT SUBSCRIBED CAPITAL
------ ------ ---------- -------
Balance January 1, 1997 9,572,681 $ 96 $ 175 $19,115
Settlement of litigation (175) (118)
Exercise of stock options, including tax benefits of $7 30,000 122
Issuance of stock to 401(k) plan (92)
Value of stock options issued to non-employees 47
Interest earned on stockholders' notes
Reserve on stockholders' notes receivable
Net loss
---------- ---- ----- -------
Balance, December 31, 1997 9,602,681 96 -- 19,074
Issuance of stock pursuant to Directors' Stock Plan 46,250 1 93
Value of stock options issued to non-employees 149
Value of warrants issued under extension agreement 645
Interest earned on stockholders' notes
Reserve on stockholders' notes receivable
Net loss
---------- ---- ----- -------
Balance, December 31, 1998 9,648,931 97 -- 19,961
Issuance of stock pursuant to Directors' Stock Plan 66,509 1 115
Partial settlement of amounts due to stockholder in lieu of cash 417,744 4 720
Value of stock options issued to non-employees 49
Value of warrants issued under second extension agreement 223
Issuance of stock to 401(k) Plan (440)
Net loss
---------- ---- ----- -------
Balance, December 31, 1999 10,133,184 $102 $ -- $20,628
========== ==== ===== =======
STOCKHOLDERS' ACCUMU- TOTAL
NOTES LATED TREASURY STOCKHOLDERS'
RECEIVABLE DEFICIT STOCK EQUITY
---------- ------- ----- ------
Balance January 1, 1997 $(114) $ (7,735) $(2,518) $ 9,019
Settlement of litigation 243 (50)
Exercise of stock options, including tax benefits of $7 (20) 102
Issuance of stock to 401(k) plan 132 40
Value of stock options issued to non-employees 47
Interest earned on stockholders' notes (10) (10)
Reserve on stockholders' notes receivable 94 94
Net loss (1,208) (1,208)
----- -------- ------- -------
Balance, December 31, 1997 (30) (8,943) (2,163) 8,034
Issuance of stock pursuant to Directors' Stock Plan 94
Value of stock options issued to non-employees 149
Value of warrants issued under extension agreement 645
Interest earned on stockholders' notes (3) (3)
Reserve on stockholders' notes receivable 33 33
Net loss (3,029) (3,029)
----- -------- ------- -------
Balance, December 31, 1998 -- (11,972) (2,163) 5,923
Issuance of stock pursuant to Directors' Stock Plan 116
Partial settlement of amounts due to stockholder in lieu of cash 724
Value of stock options issued to non-employees 49
Value of warrants issued under second extension agreement 223
Issuance of stock to 401(k) Plan 522 82
Net loss (1,584) (1,584)
----- -------- ------- -------
Balance, December 31, 1999 $ -- $(13,556) $(1,641) $ 5,533
===== ======== ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
23
24
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business
IGI, Inc. ("IGI" or the "Company") is a diversified company engaged
in three business segments:
- Consumer Products Business - production and marketing of
cosmetics and skin care products,
- Companion Pet Products Business - production and marketing of
companion pet products such as veterinary pharmaceuticals,
nutritional supplements and grooming aids; and
- Poultry Vaccines Business - production and marketing of
poultry vaccines and related products.
Principles of Consolidation
The consolidated financial statements include the accounts of IGI, Inc.
and its wholly owned and majority-owned subsidiaries. All intercompany accounts
and transactions have been eliminated. Investment in an affiliated company with
a 20% ownership interest is accounted for under the cost method.
Cash Equivalents
Cash equivalents consist of short-term investments which, at the date of
purchase, have maturities of 90 days or less. Book overdraft balances of
$572,000 have been reclassified to accounts payable in the Consolidated Balance
Sheets at December 31, 1999.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash, cash equivalents, accounts receivable,
notes receivable and certain restricted investments. The Company limits credit
risk associated with cash and cash equivalents by placing its cash and cash
equivalents with two high credit quality financial institutions. Accounts
receivable includes customers in several key geographic areas. Of these, Mexico,
Indonesia, Thailand and certain other Latin American and Far Eastern countries
are important markets for the Company's poultry vaccines and other products.
These countries have from time to time experienced varying degrees of political
unrest and currency instability. Because of the volume of business transacted by
the Company in these areas, continuation or recurrence of such unrest or
instability could adversely affect the businesses of its customers in these
areas or the Company's ability to collect its receivables from such customers,
which in either case could adversely impact the Company's future operating
results. In order to minimize risk, the Company maintains credit insurance for
the majority of its international accounts receivable and all sales are
denominated U.S. dollars to minimize currency fluctuation risk.
Inventories
Inventories are valued at the lower of cost, using the first-in, first-out
("FIFO") method, or market.
Property, Plant and Equipment
Depreciation of property, plant and equipment is provided for under the
straight-line method over the assets' estimated useful lives as follows:
USEFUL LIVES
------------
Buildings and improvements 10 - 30 years
Machinery and equipment 3 - 10 years
Repair and maintenance costs are charged to operations as incurred while
major improvements are capitalized. When assets are retired or disposed, the
cost and accumulated depreciation thereon are removed from the accounts and any
gains or losses are included in operating results.
24
25
Other Assets
Other assets include cost in excess of net assets of businesses acquired
of $325,000, which is being amortized on a straight-line basis over 40 years.
Deferred financing costs include fees paid to the lenders and external legal
counsel to assist the Company in obtaining new financing. These costs are being
amortized over the term of the related debt.
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," the Company reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of the asset may not be recoverable through future cash
flows. If it is determined that an impairment has occurred based on expected
future cash flows, the loss is then recognized in the income statement.
Income Taxes
The Company records income taxes under the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of "temporary differences"
by applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. The effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance is recorded based on a determination of the ultimate
realizability of future deferred tax assets.
Stock-Based Compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any difference between the quoted market price of the stock
on the date of grant over the amount the employee is required to pay to acquire
the stock (the intrinsic value method). Such amount, if any, is accrued over the
related vesting period, as appropriate. Since the Company uses the intrinsic
value method, it makes pro forma disclosures of net income and earnings per
share as if the fair-value based method of accounting had been applied.
Financial Instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, notes receivable, restricted Common Stock, notes payable
and short-term debt. The carrying value of these instruments approximates the
fair value.
Revenue Recognition
Sales, net of appropriate cash discounts, product returns and sales
reserves, are recorded upon shipment of products. Revenues earned under research
contracts or licensing and supply agreements are either recognized when the
related contract provisions are met, or, if under such contracts or agreements
the Company has continuing obligations, the revenue is initially deferred and
then recognized over the life of the agreement.
Product Development and Research
The Company's research and development costs are expensed as incurred.
Net Loss per Common Share
Basic net loss per share of Common Stock was computed based on the
weighted average number of shares of Common Stock outstanding during the period.
Diluted net loss per share of Common Stock is computed using the weighted
average number of shares of Common Stock and potential dilutive stock
outstanding during the period. Potential dilutive Common Stock includes shares
issuable upon the exercise of Common Stock options and warrants. The effect of
the Company's potential dilutive Common Stock was anti-dilutive for the years
ended December 31, 1999, 1998, and 1997; as a result, basic and diluted weighted
average number of Common Shares outstanding and net loss per common share is the
same.
Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income and its components. Comprehensive income is defined to include all
changes in stockholders' equity during a period except those resulting from
investments by owners and distributions to owners. Since inception, the Company
has not had transactions that are required to be reported in other comprehensive
income. Comprehensive income (loss) for each period presented is equal to the
net loss for each period as presented in the Consolidated Statements of
Operations.
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26
Business Segments
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 superseded SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach indicates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers. The adoption of
SFAS No. 131 did not affect results of operations or financial position but did
affect the disclosure of segment information included in Note 17, "Business
Segments."
Reclassification
Certain previously reported amounts have been reclassified to conform with
the current period presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include allowances for excess and
obsolete inventories, allowances for doubtful accounts and other assets, and
provisions for income taxes and related deferred tax asset valuation allowances.
Actual results could differ from those estimates.
2. INVESTMENTS
The Company has a 20% investment in Indovax, Ltd., an Indian poultry vaccine
company, which investment, because of the lack of significant influence, is
accounted for using the cost method. Dividends received from Indovax were $0 in
1999, $22,000 in 1998 and $23,000 in 1997. Other investments include 271,714
shares of restricted Common Stock of IMX Corporation ("IMX"), a publicly-traded
company, valued at $0.31 and $1.75 per share as of December 31, 1999 and 1998,
respectively, received pursuant to an exclusive Supply Agreement (the "Supply
Agreement") dated September 30, 1997 between the Company and IMX. These shares
are restricted both by governmental and contractual requirements and the Company
is unsure if or when it will be able to sell these shares. Through December 31,
1999, the Company had not yet recognized income related to this agreement. The
total investment in IMX stock was $84,000 at December 31, 1999 and $475,000 at
December 31, 1998, with corresponding amounts reflected as deferred income in
the accompanying Consolidated Balance Sheets.
Under the IMX agreement, the Company agreed to manufacture and supply 100%
of IMX's requirements for certain products at prices stipulated in the exclusive
Supply Agreement, subject to renegotiation subsequent to 1998. The Company is
currently involved in discussions with IMX concerning possible modifications to
the Supply Agreement as the Company has determined that it will not supply the
products stipulated by the Supply Agreement but may supply certain other
products based on negotiations with IMX.
3. SUPPLY AND LICENSING AGREEMENTS
In 1996, the Company entered into a license and supply agreement with Glaxo
Wellcome, Inc. ("Glaxo"). The agreement granted Glaxo exclusive rights to market
the WellSkin(TM) product line in the United States to physicians. Under the
terms of the agreement, IGI manufactured these products for Glaxo. This
agreement provided for Glaxo to pay royalties to IGI based on sales, and to pay
a $1,000,000 advance royalty to IGI in 1997 of which $300,000 was
non-refundable. The advance royalty was recorded as deferred income. In December
1998, the license and supply agreement with Glaxo was terminated. The
termination provided that IGI would purchase all of Glaxo's inventory and
marketing materials related to the WellSkin(TM) line in exchange for a $200,000
promissory note, due and payable in December 1999 bearing interest at a rate of
11%. The Company also issued a promissory note to Glaxo for $608,000,
representing the unearned portion of the advance royalty in exchange for Glaxo
transferring all rights to the WellSkin(TM) trademark to IGI. This note bears
interest at a rate of 11% and to date the Company has paid $200,000 and is to
pay $200,000 and $208,000 in June 2000 and December 2000, respectively. In
connection with the termination agreement, IGI reduced cost of sales by $404,000
in 1998 for amounts owed to Glaxo that were forgiven. In 1999, 1998 and 1997,
IGI recognized $0, $326,000 and $150,000, respectively, of royalty income under
the Glaxo Agreement.
In December 1998, the Company entered into a ten-year supply and sales
agreement with Genesis Pharmaceutical, Inc. ("Genesis") for the marketing and
distribution of the Company's WellSkin(TM) line of skin care products. The
agreement provided that Genesis would pay the Company a $1,000,000 trademark and
technology transfer fee, in four equal annual payments, which is being
recognized as revenue over the life of the agreement. In addition, Genesis will
pay the Company a royalty on its net sales with certain guaranteed minimum
royalty amounts. Genesis also purchased WellSkin(TM) inventory and marketing
materials previously purchased by the Company from Glaxo for $200,000.
In March 1997, IGI granted Kimberly Clark ("Kimberly") the worldwide rights
to use certain patents and technologies in the industrial hand care and cleaning
products field. Upon signing the agreement, Kimberly paid IGI a $100,000 license
fee that was recognized as revenue by the Company. The agreement requires
Kimberly to make royalty payments based on quantities of material
26
27
produced. The Company was also guaranteed minimum royalties over the term of the
agreement. In both 1999 and 1998, the Company recognized $133,000 as income as a
result of the agreement. In July 1999, the Company signed a new exclusive
license agreement with Kimberly which terminated the agreement dated March 1997.
The July 1999 agreement granted Kimberly an exclusive license pertaining to the
patents and improvements within the field of industrial hand care and cleansing
products for non-retail markets. The new agreement will be in effect from July
29, 1999 through July 30, 2000. Under the new agreement, Kimberly paid the
Company consideration of $120,000 which is being recognized over the term of the
agreement.
The Company entered into a ten-year license agreement with Johnson & Johnson
Consumer Products, Inc. ("J&J") in 1995. The agreement provided J&J with a
license to produce and sell Novasome(R) microencapsulated retinoid products for
royalties to the Company on net sales of such products. J&J began selling such
products and making royalty payments in the first quarter of 1998. The Company
recognized $1,210,000 and $433,000 of income related to this agreement for the
years ended December 31, 1999 and 1998, respectively.
In April 1998, the Company entered into a research and development agreement
with National Starch and Chemical Company ("National Starch") to evaluate
Novasome(R) technology. The agreement provided for a minimum of at least six, or
up to as many as nine, monthly payments commencing in June 1998 plus $100,000
for the purchase of a patented Novamix(R) machine. The Company recognized
$60,000 and $210,000 in licensing income in 1999 and 1998, respectively, related
to the National Starch agreement. The agreement ended in June of 1999.
In August 1998, the Company granted Johnson & Johnson Medical ("JJM"), a
Division of Ethicon, Inc., worldwide rights for use of the Novasome(R)
technology for certain products and distribution channels. The agreement
provided for an up-front license fee of $150,000, which was recognized as
revenue by the Company in 1998, and future royalty payments based on JJM's sales
of licensed products. The Company is guaranteed minimum royalties over the
ten-year term of the agreement. In 1999, the Company recognized $126,000 of
royalty income.
See also Note 2 "Investments" for a description of the IMX Supply Agreement.
4. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for income taxes and interest during the years ended December
31, 1999, 1998, and 1997 were as follows:
1999 1998 1997
------- ------ -------
(in thousands)
Income taxes paid (refunded), net $ (1) $ 0 $ (33)
Interest 2,153 2,163 1,853
In addition, during the years ended December 31, 1999, 1998, and 1997, the
Company had the following non-cash financing and investing activities:
1999 1998 1997
---- ----- ---
(in thousands)
Accrual for additions to other assets $ -- $ 40 $--
Tax benefits of exercise of common stock options -- -- --
7
Treasury stock repurchased -- -- 20
Note payable to Glaxo (See Notes 3 and 7) -- 808 --
Note receivable from Genesis (See Note 3) -- (112) --
Partial settlement of amounts due to stockholder in
Company Common Stock (See Note 15) 725 -- --
See Note 2 "Investments" for discussion regarding IMX investment.
5. INVENTORIES
Inventories as of December 31, 1999 and 1998 consisted of:
1999 1998
------ ------
(in thousands)
Finished goods $2,445 $2,785
Raw materials 2,464 2,210
Work-in-process 3,853 2,411
------ ------
$8,762 $7,406
====== ======
27
28
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, as of December 31, 1999 and 1998
consisted of:
1999 1998
-------- --------
(in thousands)
Land $ 625 $ 625
Buildings 9,796 9,748
Machinery and equipment 10,598 9,986
Construction in progress 329 --
-------- --------
21,348 20,359
Less accumulated depreciation (11,567) (10,880)
-------- --------
Property, plant and equipment, net $ 9,781 $ 9,749
======== ========
The Company recorded depreciation expense of $864,000, $861,000 and
$925,000 in 1999, 1998 and 1997, respectively.
7. NOTES PAYABLE
Notes payable at December 31, 1999 and 1998 consisted of:
1999 1998
------- -------
(in thousands)
Glaxo (See Note 3) $ 408 $ 808
Other -- 261
------- -------
408 1,069
Less current portion (408) (661)
------- -------
$ -- $ 408
======= =======
The Company's licensing and supply agreement with Glaxo was terminated in
December 1998, resulting in the issuance of a $200,000 promissory note which
bore interest at a rate of 11% and was paid in December 1999. The Company also
issued a promissory note to Glaxo for $608,000 bearing interest at 11%, which
represents the unearned portion of the advance royalty. Principal and interest
amounts are payable semi-annually; the Company made the first payment of
$200,000 in December 1999 and will make payments of $200,000 and $208,000 in
June 2000 and December 2000, respectively.
8. DEBT
Debt as of December 31, 1999 and 1998 consisted of:
1999 1998
-------- --------
(in thousands)
Revolving credit facility $ 5,708 $ 6,657
Credit line -- 12,000
Term loan under Senior Debt Agreement 7,000 --
Notes under Subordinated Debt Agreement 7,000 --
-------- --------
19,708 18,657
Less unamortized debt discount under Subordinated Debt Agreement
(See Note 9) (2,775) --
-------- --------
16,933 18,657
Less revolving credit facility and current portion of long-term debt (6,175) (18,657)
-------- --------
$ 10,758 $ --
======== ========
Aggregate annual principal payments due on debt for the years subsequent
to December 31, 1999 are as follows:
YEAR (in thousands)
---- ------------
2000 $ 6,175
2001 933
2002 933
2003 933
2004 and thereafter 10,734
-------
$19,708
=======
28
29
On October 29, 1999, the Company entered into a $22 million senior bank
credit agreement ("Senior Debt Agreement") with Fleet Capital Corporation and a
$7 million subordinated debt agreement ("Subordinated Debt Agreement") with
American Capital Strategies, Ltd.
These agreements enabled the Company to retire approximately $18.6 million
of outstanding debt with its former bank lenders, Fleet Bank, NH, and Mellon
Bank, N.A. In connection with the repayment of their loans, the Company's former
bank lenders agreed to return to the Company, for cancellation, warrants held by
them for the purchase of 810,000 shares of the Company's Common Stock at
exercise prices ranging from $2.00 to $3.50. Also, approximately $611,000 of
accrued interest was waived by the former bank group and is classified as an
extraordinary gain from the early extinguishment of debt in the 1999
Consolidated Statements of Operations.
The Senior Debt Agreement provides for a revolving line of credit facility
of up to $12 million based upon qualifying accounts receivable and inventory, a
$7 million term loan and a $3 million capital expenditures credit facility. The
borrowings under the revolving line of credit bear interest at the prime rate
plus 1.0% or the London Interbank offered rate plus 3.25%. The borrowings under
the term loan and capital expenditure credit facility bear interest at the prime
rate plus 1.5% or the London Interbank offered rate plus 3.75%. As of December
31, 1999, borrowings under the revolving line of credit, term loan and capital
expenditures credit facility were $5,708,000, $7,000,000 and $0, respectively.
Provisions under the revolving line of credit require the Company to maintain a
lockbox with the lender, allowing Fleet Capital to sweep cash receipts from
vendors and pay down the line of credit. Drawdowns on the line of credit are
made when needed to fund operations. Quarterly repayments of the term loan begin
on August 1, 2000 in the amount of $233,000. Repayments of the capital
expenditures credit facility are to be made quarterly over a five year period
after any initial drawdown.
Borrowings under the Subordinated Debt Agreement bear interest, payable
monthly, at the rate of 12.5%, ("cash portion of interest on subordinated
debt"), plus an additional interest component at the rate of 2%, ("Additional
interest component") which is payable at the Company's election in cash or in
Company Common Stock. As of December 31, 1999, borrowings under the subordinated
notes were $7,000,000, offset by an unamortized debt discount of $2,775,000. The
Subordinated Debt Agreement matures in October 2006. In connection with the
Subordinated Debt Agreement, the Company issued to the lender warrants to
purchase 1,907,543 shares of IGI Common Stock at an exercise price of $.01 per
share. (See Note 9, "Detachable Stock Warrants".)
American Capital Strategies, Ltd. has the right to designate for election
to the Company's Board of Directors that number of directors that bears the same
ratio to the total number of directors as the number of shares of Company Common
Stock owned by it plus the number of shares issuable upon exercise of its
warrants bear to the total number of outstanding shares of Company Common Stock
on a fully-diluted basis, provided that so long as it owns any Common Stock, or
warrants or any of its loans are outstanding, it shall have the right to
designate at least one director or observer on the Board of Directors. At
December 31, 1999 American Capital Strategies, Ltd. had one observer on the
Company's Board of Directors.
Borrowings under these new agreements amounted to $19.7 million at
December 31, 1999. The new agreements enabled the Company to retire
approximately $18.6 million outstanding with the previous bank lenders, cover
associated closing costs and provide a borrowing facility for working capital
and capital expenditures. To secure all of its obligations under these
agreements, the Company has granted the lenders a security interest in all of
the assets and properties of the Company and its subsidiaries.
These agreements contain financial and other covenants and restrictions.
The Company was not in compliance under certain covenants under the agreements
related to the fixed charges coverage ratio, maximum debt to equity ratio and
accounts payable ratio as of December 31, 1999; however, the lenders involved
have amended, as of April 12, 2000, the related agreements to waive the defaults
as of December 31, 1999.
In connection with the amendment to the Subordinated Debt Agreement,
American Capital Strategies, Ltd. agreed to defer the payment of its cash
portion of interest on subordinated debt from the period April 2000 to July 2000
until July 31, 2000. Interest payment of its cash portion of interest on
subordinated debt will be payable at the end of each subsequent three month
period thereafter. Furthermore, the existing Additional interest component at
the rate of 2% was increased to 2.25%, which is payable at the Company's
election in cash or in Company Common Stock. The increase of .25% in the
Additional interest component is in effect through March 2001 at which time the
Additional interest component rate is adjusted back down to 2%.
Despite its new financing arrangements, the Company remains highly
leveraged; furthermore, availability for borrowings under the revolving line of
credit facility is dependent on the level of its qualifying accounts receivable
and inventory. The Company expects to maintain compliance with the covenants
contained it its loan agreements through the year 2000.
9. DETACHABLE STOCK WARRANTS
1999 1998
------ --------
(in thousands)
Initial valuation $2,842 $ --
Mark-to-market adjustment 854 --
------ --------
$3,696 $ --
====== ========
29
30
In connection with the October 29, 1999 refinancing, specifically the $7
million subordinated debt agreement, the Company issued warrants to purchase
1,907,543 shares of IGI Common Stock at an exercise price of $.01 per share to
American Capital Strategies, Ltd.
These warrants contain a right ("the put") to require the Company to
repurchase the warrants or the Common Stock acquired upon exercise of such
warrants at their then fair market value under certain circumstances, including
the earliest to occur of the following: a) October 29, 2004; b) the date of
payment in full of the Senior Debt and Subordinated Debt and all senior
indebtedness of the Company; or c) the sale of the Company or 30% or more of its
assets. The repurchase is to be settled in cash or Common Stock, at the option
of American Capital Strategies, Ltd. Due to the put feature and the potential
cash settlement which is outside of the Company's control, the warrants are
recorded as a liability which is marked-to-market, with changes in the market
value being recognized as a component of interest expense in the period of
change.
The warrants issued to American Capital Strategies, Ltd. were valued at
issuance date utilizing the Black-Scholes model and initially recorded as a
liability of $2,842,000. A corresponding debt discount was recorded at issuance,
representing the difference between the $7,000,000 proceeds received by the
Company and the total obligation, which includes principal of $7,000,000 and the
initial warrant liability of $2,842,000. The debt discount is being amortized to
interest expense over the term of the Subordinated Debt Agreement. In 1999, the
Company recognized $854,000 of non-deductible interest expense associated with
the mark-to-market adjustment of the warrants. The underlying liability for the
put is marked-to-market with changes to market value being recognized as a
component of interest expense.
On April 12, 2000, American Capital Strategies, Ltd. amended its loan
agreement whereby the put provision was replaced by a "make-whole" feature. The
"make-whole" feature requires the Company to compensate American Capital
Strategies, Ltd., in either Common Stock or cash, at the option of the Company,
in the event that American Capital Strategies, Ltd. ultimately realizes proceeds
from the sale of its Common Stock obtained upon exercise of its warrants that
are less than the fair value of the Common Stock upon exercise of such warrants
multiplied by the number of shares obtained upon exercise. Fair value of the
Common Stock upon exercise is defined as the 30 day average value prior to
notice of exercise. American Capital Strategies, Ltd. must exercise reasonable
effort to sell or place its shares in the marketplace over a 180 day period
before it can invoke the make-whole provision. As a result of the amendment, the
liability recognized related to the warrants will be reclassified as a component
of equity without a future mark-to-market adjustment effective April 12, 2000.
10. STOCK OPTIONS
Under the 1988 Non-Qualified Stock Option Plan, options have been granted
to consultants, scientific advisors and employees to purchase a maximum of
250,000 shares of Common Stock. Options outstanding under this plan at December
31, 1999 are generally exercisable in cumulative increments over four years
commencing one year from the date of grant. The 1988 Non-Qualified Stock Option
Plan formalized the granting of individual non-qualified stock options which had
been granted to officers and directors at prices equal to the fair market value
of the Company's stock on the date the options were granted. Exercise of the
majority of these options may be made at any time during a ten year period
commencing on the date of grant.
Under the 1989 and 1991 Stock Option Plans, options have been granted to
key employees, directors and consultants to purchase a maximum of 500,000 and
2,600,000 shares of Common Stock, respectively. Options, having a maximum term
of 10 years, have been granted at 100% of the fair market value of the Company's
stock at the time of grant. Both incentive stock options and non-qualified stock
options have been granted under the 1989 Plan and the 1991 Plan. Incentive stock
options are generally exercisable in cumulative increments over four years
commencing one year from the date of grant. Non-qualified options are generally
exercisable in full beginning six months after the date of grant.
In October 1998, the Company adopted the 1998 Directors Stock Plan. Under
this plan, 200,000 shares of the Company's Common Stock are reserved for
issuance to non-employee directors, in lieu of payment of directors' fees in
cash. In 1999 and 1998, 67,000 and 46,000 shares of Common Stock were issued as
consideration for directors' fees, respectively. The Company recognized $116,000
and $94,000 of expense related to these shares during the years ended December
31, 1999, and 1998, respectively.
Effective November 23, 1998, the Company's Board of Directors approved the
repricing of all outstanding options issued to then current employees and
consultants to $2.44 per share, 115% of the market value of the Company's Common
Stock on that date. The Board also approved the repricing of 225,000 options
held by the Chief Executive Officer to $2.66 per share, 125% of the market value
of the Company's Common Stock on that date. As a result, 331,465 and 225,000
outstanding options at November 23, 1998 were effectively rescinded and reissued
at exercise prices of $2.44 and $2.66, respectively. This resulted in a non-cash
expense related to non-employees of $84,000 being reflected in 1998 operating
results. All other conditions, such as term of option and vesting schedules,
remained unchanged.
In December 1998, the Company's Board of Directors adopted the 1999
Employee Stock Purchase Plan ("Plan"). An aggregate of 300,000 shares of Common
Stock may be issued pursuant to this plan. All the Company and its subsidiaries'
employees, including an officer or director who is also an employee, are
eligible to participate in the Plan. Shares under this plan are available for
purchase at 85% of the fair market value of the Company's stock on the first or
last day of the offering, whichever is lower. The Plan is
30
31
implemented through offerings; the first offering commenced August 26, 1999 and
terminated December 31, 1999. The Company issued 27,000 shares pursuant to this
initial offering. Each offering thereafter will begin on the first day of each
year and end on the last day of each year.
In March 1999, the Company's Board of Directors approved the 1999 Stock
Incentive Plan ("1999 Plan"). The 1999 Plan replaces all presently authorized
stock option plans, and no additional options may be granted under those plans.
Under the 1999 Plan, options may be granted to all of the Company's employees,
officers, directors, consultants and advisors to purchase a maximum of 1,200,000
shares of Common Stock. A total of 872,000 options, having a maximum term of 10
years, have been granted at 100% of the fair market value of the Company's stock
at the time of grant. Options outstanding under this plan at December 31, 1999
are generally exercisable in cumulative increments over four years commencing
one year from date of grant.
In September 1999, the Company's Board of Directors approved the 1999
Director Stock Option Plan. The 1999 Director Stock Option Plan provides,
through 2002, for the grant of stock options to non-employee directors of the
Company at an exercise price equal to the fair market value per share on the
date of the grant. In September 1999, a total of 300,000 options were granted to
non-employee directors. The options granted under the 1999 Director Stock Option
plan vest in full twelve months after their respective grant dates and have a
maximum term of ten years.
31
32
Stock option transactions in each of the past three years under the
aforementioned plans in total were:
1989, 1991 AND 1999 PLANS 1988 NON-QUALIFIED PLAN
------------------------------------------------ -------------------------------------------
WEIGHTED WEIGHTED
SHARES PRICE PER SHARE AVERAGE PRICE SHARES PRICE PER SHARE AVERAGE PRICE
----------- --------------- ------------- ------ --------------- -------------
January 1, 1997 shares
Under option 2,209,015 $3.65 - $9.88 $6.89 286,500 $3.97 - $6.80 $4.92
Granted 111,500 $3.75 - $5.69 $4.17 -- -- --
Exercised (10,000) $3.65 $3.65 (20,000) $3.97 $3.97
Cancelled (176,050) $3.97 - $9.88 $7.21 (100,000) $5.67 $5.33
---------- ---------
December 31, 1997 shares
Under option 2,134,465 $3.75 - $9.88 $6.74 166,500 $4.70 - $6.80 $4.78
Granted 491,450 $1.94 - $3.81 $2.56 -- -- --
Exercised -- -- -- -- -- --
Cancelled (652,250) $2.00 - $9.88 $6.52 (166,500) $2.66 - $6.80 $4.78
Rescinded (506,465) $4.70 - $9.88 $6.75 (50,000) $4.70 $4.70
Reissued 506,465 $2.44 - $2.66 $2.52 50,000 $2.66 $2.66
---------- ---------
December 31, 1998 shares
Under option 1,973,665 $1.94 - $9.88 $4.68 --
=========
Granted 1,447,000 $1.56 - $2.00 $1.62
Exercised -- --
Cancelled (173,465) $2.00 - $8.58 $3.67
---------
December 31, 1999 shares
Under option 3,247,200 $1.56 - $9.88 $3.37
=========
Shares subject to outstanding
options exercisable at:
December 31, 1997 1,854,715 $6.89 166,500 $4.78
========= ===== ======= =====
December 31, 1998 1,599,840 $5.18 -- $ --
========= ===== ======= =====
December 31, 1999 1,909,866 $4.52 -- $ --
========= ===== ======= =====
The Company uses the intrinsic method to account for stock options. The
Company has recorded compensation expense of $49,000, $108,000 and $46,000 in
1999, 1998 and 1997, respectively, for options granted to consultants, including
the effects of the 1998 repricing.
If compensation cost for all grants under the Company's stock option plans
had been determined based on the fair value at the grant date consistent with
the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net loss and loss per share would have been increased to the pro forma
loss amounts indicated below:
1999 1998 1997
--------- --------- ---------
(in thousands, except per share information)
Net loss - as reported $ (1,584) $ (3,029) $ (1,208)
Net loss - pro forma (1,943) (3,618) (1,403)
Loss per share - as reported
Basic and diluted $ (.17) $ (.32) $ (.13)
Loss per share - pro forma
Basic and diluted $ (.21) $ (.38) $ (.15)
The pro forma information has been determined as if the Company had
accounted for its employee stock options under the fair value method. The fair
value for these options was estimated at the grant date using the Black-Scholes
option-pricing model with the following assumptions for 1999, 1998 and 1997:
ASSUMPTIONS 1999 1998 1997
----------- ---- ---- ----
Dividend yield 0% 0% 0%
Risk free interest rate 4.93% - 6.36% 4.47% - 5.89% 5.84% - 6.63%
Estimated volatility factor 59.52% - 63.73% 39.51% - 47.87% 40.02% - 43.68%
Expected life 6 - 9 years 6 - 9 years 6 - 9 years
32
33
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER OF REMAINING EXERCISE NUMBER OF EXERCISE
EXERCISE PRICE OPTIONS LIFE (YEARS) PRICE OPTIONS PRICE
- -------------- ------- ------------ ----------- --------- ---------
$1.00 to $ 2.00 1,670,250 9.30 $1.64 416,938 $1.63
$2.01 to $ 3.00 506,450 4.75 $2.55 445,303 $2.53
$3.01 to $ 4.00 215,500 8.24 $3.41 192,625 $3.39
$4.01 to $ 5.00 20,000 1.00 $4.62 20,000 $4.62
$5.01 to $ 6.00 200,000 6.10 $5.76 200,000 $5.76
$6.01 to $ 7.00 290,000 5.15 $6.66 290,000 $6.66
$7.01 to $ 8.00 140,000 3.47 $7.47 140,000 $7.47
$8.01 to $ 9.00 150,000 5.29 $8.47 150,000 $8.47
$9.01 to $10.00 55,000 1.96 $9.66 55,000 $9.66
---------- ---------
$1.56 to $ 9.88 3,247,200 8.13 $2.65 1,909,866 $2.94
========= =========
11. INCOME TAXES
The benefit for income taxes attributable to earnings before income taxes
and extraordinary gain included in the Consolidated Statements of Operations for
the years ended December 31, 1999, 1998 and 1997, was as follows:
1999 1998 1997
----- ------- -----
(in thousands)
Current tax expense:
Federal $ -- $ 14 $ --
State and local 9 16 11
----- ------- -----
Total current tax expense 9 30 11
----- ------- -----
Deferred tax expense (benefit)
Federal (505) (1,161) (637)
State and local (105) (160) 190
----- ------- -----
Total deferred tax benefit (610) (1,321) (447)
----- ------- -----
Total benefit for income taxes $(601) $(1,291) $(436)
===== ======= =====
The charge for income taxes related to the extraordinary gain of $611,000
for the year ended December 31, 1999 consisted of $200,000 of deferred federal
income taxes and $24,000 of deferred state income taxes.
The benefit for income taxes differed from the amount of income taxes
determined by applying the applicable Federal tax rate (34%) to pretax loss
before extraordinary items as a result of the following:
1999 1998 1997
------- ------- -----
(in thousands)
Statutory benefit $ (874) $(1,469) $(559)
Non-deductible interest expense relating to mark-to-market of put 290 -- --
warrants (See Note 9)
Other non-deductible expenses 72 111 51
State income taxes, net of federal benefit 30 (240) (164)
Research and development tax credits (19) (33) (65)
(Decrease) Increase in valuation allowance (106) 393 299
Other, net 6 53 2
------- ------- -----
$ (601) $(1,291) $(436)
======= ======= =====
33
34
Deferred tax assets included in the Consolidated Balance Sheets as of
December 31, 1999 and 1998, consisted of the following:
1999 1998
------- -------
(in thousands)
Property, plant and equipment $ (384) $ (498)
Prepaid license agreement 1,168 1,389
Deferred royalty payments 127 212
Tax operating loss carryforwards 3,672 3,046
Tax credit carryforwards 684 651
Reserves on inventory 407 510
Inventory 412 537
Non-employee stock options 156 217
Other future deductible temporary differences 606 525
Other future taxable temporary differences (43) (65)
------- -------
6,805 6,524
Less: valuation allowance (955) (1,061)
------- -------
Deferred taxes, net $ 5,850 $ 5,463
======= =======
The Company evaluates the recoverability of its deferred tax assets based
on its history of operating earnings, its plans to sell the benefit of certain
state net operating losses, its expectations for the future, and the expiration
dates of the net operating loss carryforwards. As a result, the Company has
concluded it is not likely it will be able to fully realize certain of these
deferred tax assets. The Company establishes full valuation allowances for net
operating losses related to a specific subsidiary and for all net operating
losses expiring before 2002 in the states where the Company does not plan on
selling the benefit of the net operating losses. Where the Company intends to
sell the benefit of the state net operating losses, a valuation allowance is
established so that the net deferred tax asset is reflected at its net
realizable value.
Operating loss and tax credit carryforwards for tax reporting purposes as
of December 31, 1999 were as follows:
(in thousands)
-------------
Federal:
Operating losses (expiring through 2019) $9,432
Research tax credits (expiring through 2019) 567
Alternative minimum tax credits (available without expiration) 28
State:
Net operating losses - New Jersey (expiring through 2006) 7,412
Net operating losses - other states (expiring through 2019) 2,285
Research tax credits - New Jersey (expiring through 2006) 90
Federal net operating loss carryforwards that expire through 2019 have
significant components expiring in 2007 (36%), 2018 (40%) and 2019 (20%).
12. COMMITMENTS AND CONTINGENCIES
The Company leases manufacturing and warehousing space, machinery and
equipment and automobiles under non-cancelable operating lease agreements
expiring at various dates in the future. Rental expense aggregated approximately
$362,000 in 1999, $371,000 in 1998, and $348,000 in 1997. Future minimum rental
commitments under non-cancelable operating leases as of December 31, 1999 are as
follows:
YEAR (IN THOUSANDS)
--------------
2000 $57
2001 50
2002 32
2003 20
2004 5
34
35
13. U.S. REGULATORY PROCEEDINGS
The Company has substantially resolved the legal and regulatory issues
which arose in 1997 and 1998. For most of 1997 and 1998, the Company was subject
to intensive government regulatory scrutiny by the U.S. Departments of Justice,
Treasury and Agriculture. In June 1997, the Company was advised by the Animal
and Plant Health Inspection Service ("APHIS") of the United States Department of
Agriculture ("USDA") that the Company had shipped quantities of some of its
poultry vaccine products without complying with certain regulatory and record
keeping requirements. The USDA subsequently issued an order that the Company
stop shipment of certain products. Shortly thereafter, in July 1997, the Company
was advised that USDA's Office of Inspector General ("OIG") had commenced an
investigation into possible violations of the Virus Serum Toxin Act of 1914 and
alleged false statements made to APHIS.
Based upon these events the Board of Directors caused an immediate and
thorough investigation of the facts and circumstances of the alleged violations
to be undertaken by independent counsel. The Company also took steps to obtain
the approval of APHIS for resumption of shipments, including the submission of
an amended and modified regulatory compliance program, improved testing
procedures, and other safeguards. Based upon these actions, APHIS began lifting
the stop shipment order within a month of its issuance and released all
remaining products on March 27, 1998.
On March 24, 1999, the Company reached settlement with the Departments of
Justice, Treasury and Agriculture regarding their pending investigations and
proceedings. The terms of the settlement agreement provided that the Company
enter a plea of guilty to a misdemeanor and pay a fine of $15,000 and
restitution in the amount of $10,000. In addition, the Company was assessed a
penalty of $225,000 and began making monthly payments to the Treasury Department
which will continue through the period ending October 31, 2001. The expense of
settling with these agencies was reflected in the 1998 results of operations.
The settlement does not affect the informal inquiry being conducted by the SEC,
nor does it affect possible governmental action against former employees of the
Company.
In April 1998, the U.S. Securities and Exchange Commission ("SEC") advised
the Company that it was conducting an informal inquiry and requested information
and documents from the Company, which the Company voluntarily provided to the
SEC. At December 31, 1999, the informal inquiry remained open; however,
management does not expect that the inquiry will have a material adverse effect
on the financial position, cash flows or operations of the Company.
Other Pending Matters
On April 14, 1999, a lawsuit was filed in the U.S. District Court for the
Southern District of New York by Cohanzick Partners, LP, against IGI, Inc. and
certain of its present and former directors, officers and employees. The suit,
which seeks approximately $420,000 in actual damages together with fees, costs
and interests, alleges violations of the securities laws, fraud, and negligent
misrepresentation concerning certain disclosures made and other actions taken by
the Company in 1996 and 1997.
The Company believes that the plaintiff's allegations are factually
incorrect and legally inadequate and will defend the lawsuit vigorously. The
Company believes that an unfavorable outcome in the suit would not have a
material adverse impact upon the Company's financial condition, although it
could negatively affect the results of operations for the period in which the
matter is resolved.
14. EXPORT SALES
Export revenues by the Company's domestic operations accounted for
approximately 33% of the Company's total revenues in 1999, 32% in 1998, and 35%
in 1997. The following table shows the geographical distribution of the
Company's total revenues:
1999 1998 1997
------- ------- -------
(in thousands)
Latin America $ 3,038 $ 4,445 $ 4,593
Asia/Pacific 5,250 3,787 4,659
Europe 1,335 1,151 1,263
Africa/Middle East 1,681 1,380 1,362
------- ------- -------
11,304 10,763 11,877
United States/Canada 23,290 22,432 22,466
------- ------- -------
Total revenues $34,594 $33,195 $34,343
======= ======= =======
Export sales net accounts receivable balances at December 31, 1999 and
1998 approximated $4,044,000 and $4,002,000, respectively.
35
36
15. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The Company's former Chief Executive Officer had chosen to defer his
salary earned in 1999 and 1998 until the Company's cash flow stabilized.
Compensation earned which was to be deferred under this plan would have been
$460,000 and $380,000 for 1999 and 1998, respectively.
In September 1999, the Company's Board of Directors agreed to settle the
Company's obligation in shares of Company Common Stock. The total settlement to
date of $725,000 in the form of 417,744 shares reflects compensation earned from
January 1998 through September 1999. The breakdown of the dollar amounts and
resulting number of shares is as follows: $610,000 representing the period from
January 1998 through June 1999 was settled using the September 15 grant price of
$1 3/4, resulting in the issuance of 348,571 shares, and $115,000 representing
the period from July 1999 through September 1999 was settled using the average
trading price for the five days prior to the end of the third quarter, resulting
in the issuance of 69,173 shares.
Accrued compensation of $115,000 in the Consolidated Balance Sheets as of
December 31, 1999 represents compensation earned during the period October 1999
through December 1999. This amount will be settled in Company Common Stock in
the first quarter of 2000.
16. EMPLOYEE BENEFITS
The Company has a 401(k) contribution plan, pursuant to which employees,
who have completed six months of employment with the Company or its subsidiaries
as of specified dates, may elect to contribute to the plan, in whole
percentages, up to 18% of compensation, subject to a minimum contribution by
participants of 2% of compensation and a maximum contribution of $10,000 for
1999. The Company contribution is in the form of Company Common Stock, which is
vested immediately. The Company matches 25% of the first 5% of compensation
contributed by participants and contributes, on behalf of each participant, $4
per week of employment during the year. The Company has recorded charges to
expense related to this plan of approximately $77,000, $82,000, and $113,000 for
the years 1999, 1998 and 1997, respectively.
17. BUSINESS SEGMENTS
The Company has three reportable segments: Consumer Products, Companion
Pet Products and Poultry Vaccines. Products from each of the segments serve
different markets, use different channels of distribution, and, for two of the
segments, have different forms of government oversight.
Consumer Products Business
IGI's Consumer Products business is primarily focused on the continued
commercial use of the Novasome(R) microencapsulation technologies for skin care
applications. These efforts have been directed toward the development of high
quality skin care products marketed by the Company or through collaborative
arrangements with cosmetic and consumer products companies. Revenues from the
Company's Consumer Products business were principally based on formulations
using the Novasome(R) encapsulation technology. Sales to Estee Lauder accounted
for $4,237,000 or 13% of 1999 sales, $3,494,000 or 11% for 1998, and $2,408,000
or 7% in 1997.
Companion Pet Products
The Company sells its Companion Pet Products to the veterinarian market
under the EVSCO Pharmaceuticals trade name and to over-the-counter ("OTC") pet
products market under the Tomlyn and Luv'Em labels.
The EVSCO line of veterinary products is used by veterinarians in caring
for dogs and cats, and includes pharmaceuticals such as antibiotics,
anti-inflammatories and cardiac drugs, as well as nutritional supplements,
vitamins, insecticides and diagnostics. Product forms include gel, tablets,
creams, liquids, ointments, powders, emulsions and shampoos. EVSCO also produces
professional grooming aids for dogs and cats.
EVSCO products are manufactured at the Company's facility in Buena, New
Jersey and are sold through distributors to veterinarians. The facility operates
in accordance with Good Manufacturing Practices ("GMP") of the federal Food and
Drug Administration ("FDA").
The Tomlyn product line includes pet grooming, nutritional and therapeutic
products, such as shampoos, grooming aids, vitamin and mineral supplements,
insecticides and OTC medications. The products are manufactured at the Company's
facility in Buena, New Jersey, and are sold directly to pet superstores and
through distributors to independent merchandising chains, shops and kennels.
Most of the Company's veterinary products are sold through distributors.
Poultry Vaccines
The Company produces and markets poultry vaccines manufactured by the
chick embryo, tissue culture and bacteriologic methods. The Company produces
vaccines for the prevention of various chicken and turkey diseases and has more
than 60 vaccine
36
37
licenses granted by the USDA. The Company also produces and
sells nutritional, anti-infective and sanitation products used primarily by
poultry producers. The Company sells these products in the United States and,
through its export sales staff, to local distributors in other countries. The
sales force is supplemented and supported by technical and customer service
personnel. The USDA regulates the Company's vaccine production in the United
States.
Summary Segment Data
Summary data related to the Company's reportable segments for the three
years ended December 31, 1999 appears below:
CONSUMER COMPANION PET POULTRY
PRODUCTS PRODUCTS VACCINES CORPORATE* CONSOLIDATED
-------- ------------- -------- ---------- ------------
(in thousands)
1999
Revenues $6,938 $13,595 $ 14,061 $ -- $ 34,594
Operating profit 3,913 3,850 (1,041) (5,216) 1,506
Depreciation and amortization 188 254 557 28 1,027
Identifiable assets 3,885 6,994 13,178 9,805 33,862
Capital expenditures 57 207 800 -- 1,064
1998
Revenues $5,839 $12,513 $ 14,843 $ -- $ 33,195
Operating profit (loss) 3,688 2,844 (517) (6,925) (910)
Depreciation and amortization 199 206 560 27 992
Identifiable assets 4,886 5,660 13,190 8,320 32,056
Capital expenditures 9 186 412 -- 607
1997
Revenues $5,255 $12,444 $ 16,644 $ -- $ 34,343
Operating profit (loss) 1,473 2,577 1,202 (5,032) 220
Depreciation and amortization 161 225 625 26 1,037
Identifiable assets 4,466 6,386 15,434 7,464 33,750
Capital expenditures 4 96 536 -- 636
* Note:
(A) Unallocated corporate expenses are principally general and administrative
expenses.
(B) Corporate assets represent fixed assets, deferred tax assets, cash and cash
equivalents and deferred financing costs.
(C) Transactions between reportable segments are not material.
37
38
IGI, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------
ADDITIONS
----------------------------
BALANCE (1) CHARGED BALANCE
AT BEGINNING TO COSTS (2) CHARGED TO AT END
DESCRIPTION OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD
----------- ------------ ------------ -------------- ---------- ---------
December 31, 1997:
Allowance for doubtful accounts $ 238 $ 793 $ -- $ 128(A) $ 903
Inventory valuation allowance 617 603 -- 107(B) 1,113
Other asset valuation allowance 186 -- -- 186(A) --
Valuation allowance on net
deferred tax assets 369 299 -- -- 668
December 31, 1998:
Allowance for doubtful accounts $ 903 $ 150 $ -- $ 537(A) $ 516
Inventory valuation allowance 1,113 1,332 -- 1,089(B) 1,356
Valuation allowance on net
deferred tax assets 668 382 11 -- 1,061
December 31, 1999:
Allowance for doubtful accounts $ 516 $ 243 $ -- $ 320(A) $ 354
Inventory valuation allowance 1,356 873 -- 1,361(B) 868
Valuation allowance on net
deferred tax assets 1,061 -- -- 105(C) 955
(A) Relates to write-off of uncollectible accounts and recoveries of previously
reserved amounts.
(B) Disposition of obsolete inventories.
(C) Relates to reduction in the valuation allowance as a result of the
expiration of certain state net operating losses in 1999, for which full
valuation allowances had previously been provided.
39
IGI, INC. AND SUBSIDIARIES
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. 002-72262-B, filed May 12, 1981.]
(4) Specimen stock certificate for shares of Common Stock, par value
$.01 per share. [Incorporated by reference to Exhibit (4) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 001-08568, filed April 2, 1990 (the
"1989 Form 10-K".)]
**(10.1) IGI, Inc. 1983 Incentive Stock Option Plan. [Incorporated by
reference to Exhibit A to the Company's Proxy Statement for the
Annual Meeting of Stockholders held May 11, 1983, File No.
000-10063, filed April 11, 1983.]
**(10.2) IGI, Inc. 1989 Stock Option Plan. [Incorporated by reference to the
Company's Proxy Statement for the Annual Meeting of Stockholders
held May 11, 1989, File No. 001-08568, filed April 12, 1989.]
**(10.3) Employment Agreement by and between the Company and Edward B. Hager
dated as of January 1, 1990. [Incorporated by reference to Exhibit
(10)(c) to the 1989 Form 10-K.]
**(10.4) Extension of Employment Agreement by and between the Company and
Edward B. Hager dated as of March 11, 1993. [Incorporated by
reference to Exhibit (10)(d) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1992, File No.
001-08568, filed March 31, 1993 (the "1992 Form 10-K".)]
**(10.5) Extension of Employment Agreement by and between the Company and
Edward B. Hager dated as of March 14, 1995. [Incorporated by
reference to Exhibit (10)(e) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994, File No.
001-08568, filed March 31, 1995.]
**(10.6) Amendment to Employment Agreement by and between the Company and
Edward B. Hager dated as of October 1, 1997. [Incorporated by
reference to Exhibit 10(a) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997, File No.
001-08568, filed November 13, 1997.]
**(10.7) IGI, Inc. Non-Qualified Stock Option Plan. [Incorporated by
reference to Exhibit (3)(k) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1991, File No.
001-08568, filed March 30, 1992 (the "1991 Form 10-K".)]
**(10.8) IGI, Inc. 1991 Stock Option Plan, [Incorporated by reference to the
Company's Proxy Statement for the Annual Meeting held May 9, 1991,
File No. 001-08568, filed April 5, 1991.]
**(10.9) Amendment No. 1 to IGI, Inc. 1991 Stock Option Plan as approved by
Board of Directors on March 11, 1993. [Incorporated by reference to
Exhibit 10(p) to the 1992 Form 10-K.]
**(10.10) Amendment No. 2 to IGI, Inc. 1991 Stock Option Plan as approved by
Board of Directors on March 22, 1995. [Incorporated by reference to
the Appendix to the Company's Proxy Statement for the Annual
Meeting of Stockholders held May 9, 1995, filed April 14, 1995.]
**(10.11) Amendment No. 3 to IGI, Inc. 1991 Stock Option Plan as approved by
Board of Directors on March 19, 1997. [Incorporated by reference to
Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, File No. 001-08568, filed August 14,
1997.]
**(10.12) Amendment No. 4 to IGI, Inc. 1991 Stock Option Plan as approved by
Board of Directors on March 17, 1998. [Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, File No. 001-08568, filed November 6, 1998.]
(10.13) Form of Registration Rights Agreement signed by all purchasers of
Common Stock in connection with private placement on January 2,
1992. [Incorporated by reference to Exhibit (3)(m) to the 1991 Form
10-K.]
40
(10.14) License Agreement by and between Micro-Pak, Inc. and IGEN, Inc.
[Incorporated by reference to Exhibit (10)(v) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995, File No. 001-08568, filed March 29, 1996.]
(10.15) Registration Rights Agreement between IGI, Inc. and SmithKline
Beecham p.l.c. dated as of August 2, 1993. [Incorporated by
reference to Exhibit (10)(s) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993, File No.
001-08568, filed March 29, 1994.]
(10.16) Supply Agreement, dated as of January 27, 1997, between IGI, Inc.
and Glaxo Wellcome Inc. [Incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q/A, Amendment No. 1,
for the quarter ended March 31, 1997, File No. 001-08568, filed
June 16, 1997.]
**(10.17) IGI, Inc. 1998 Director Stock Option Plan as approved by the Board
of Directors on October 19, 1998. [Incorporated by reference to
Exhibit (10.38) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, File No. 001-08568, filed
April 12, 1999. (the "1998 Form 10-K".)]
(10.18) Common Stock Purchase Warrant No. 5 to purchase 150,000 shares of
IGI, Inc. Common Stock issued to Fleet Bank, NH on March 11, 1999.
[Incorporated by reference to Exhibit (10.40) to the 1998 Form
10-K.]
(10.19) Common Stock Purchase Warrant No. 7 to purchase 120,000 shares of
IGI, Inc. Common Stock issued to Mellon Bank, N.A. on March 11,
1999. [Incorporated by reference to Exhibit (10.42) to the 1998
Form 10-K.]
**(10.20) Employment Agreement, dated May 1, 1998, between IGI, Inc. and Paul
Woitach. [Incorporated by reference to Exhibit (10.44) to the 1998
Form 10-K.]
*(10.21) Loan and Security Agreement by and among Fleet Capital Corporation
and IGI, Inc., together with its subsidiaries, dated October 29,
1999.
*(10.22) Revolving Credit Note issued by IGI, Inc., together with its
subsidiaries, to Fleet Capital Corporation, dated October 29, 1999.
*(10.23) Term Loan A Note issued by IGI, Inc., together with its
subsidiaries, to Fleet Capital Corporation, dated October 29, 1999.
*(10.24) Term Loan B Note issued by IGI, Inc., together with its
subsidiaries, to Fleet Capital Corporation, dated October 29, 1999.
*(10.25) Capital Expenditure Loan Note issued by IGI, Inc., together with
its subsidiaries, to Fleet Capital Corporation, dated October 29,
1999.
*(10.26) Trademark Security Agreement issued by IGI, Inc. in favor of Fleet
Capital Corporation, dated October 29, 1999.
*(10.27) Trademark Security Agreement issued by IGEN, Inc. in favor of Fleet
Capital Corporation, dated October 29, 1999.
*(10.28) Trademark Security Agreement issued by ImmunoGenetics, Inc. in
favor of Fleet Capital Corporation, dated October 29, 1999.
*(10.29) Patent Security Agreement issued by IGI, Inc. in favor of Fleet
Capital Corporation, dated October 29, 1999.
*(10.30) Patent Security Agreement issued by IGEN, Inc. in favor of Fleet
Capital Corporation, dated October 29, 1999.
*(10.31) Pledge Agreement by and between Fleet Capital Corporation and IGEN,
Inc., dated October 29, 1999.
*(10.32) Open-Ended Mortgage, Security Agreement and Assignment of Leases
and Rents (Atlantic County, New Jersey) issued by IGI, Inc. to
Fleet Capital Corporation, dated October 29, 1999.
*(10.33) Open-Ended Mortgage, Security Agreement and Assignment of Leases
and Rents (Cumberland County, New Jersey) issued by IGI, Inc. to
Fleet Capital Corporation, dated October 29, 1999.
*(10.34) Subordination Agreement by and between Fleet Capital Corporation
and American Capital Strategies, Ltd., dated October 29, 1999.
*(10.35) Note and Equity Purchase Agreement by and among American Capital
Strategies, Ltd. and IGI, Inc., together with its subsidiaries,
dated as of October 29, 1999.
*(10.36) Series A Senior Secured Subordinated Note issued by IGI, Inc.,
together with its subsidiaries, to American Capital Strategies,
Ltd., dated as of October 29, 1999.
*(10.37) Series B Senior Secured Subordinated Note issued by IGI, Inc.,
together with its subsidiaries, to American Capital Strategies,
Ltd., dated as of October 29, 1999.
*(10.38) Warrant to purchase 1,907,543 shares of IGI, Inc. Common Stock,
issued to American Capital Strategies, Ltd. on October 29, 1999.
*(10.39) Security Agreement issued by IGI, Inc., together with its
subsidiaries, in favor of American Capital Strategies, Ltd., dated
as of October 29, 1999.
*(10.40) Trademark Security Agreement issued by IGI, Inc. in favor of
American Capital Strategies, Ltd., dated as of October 29, 1999.
*(10.41) Trademark Security Agreement issued by ImmunoGenetics, Inc. in
favor of American Capital Strategies, Ltd., dated as of October 29,
1999.
41
*(10.42) Trademark Security Agreement issued by Blood Cells, Inc. in favor
of American Capital Strategies, Ltd., dated as of October 29, 1999.
*(10.43) Trademark Security Agreement issued by IGEN, Inc. in favor of
American Capital Strategies, Ltd., dated as of October 29, 1999.
*(10.44) Patent Security Agreement issued by IGI, Inc. in favor of American
Capital Strategies, Ltd., dated as of October 29, 1999.
*(10.45) Patent Security Agreement issued by ImmunoGenetics, Inc. in favor
of American Capital Strategies, Ltd., dated as of October 29, 1999.
*(10.46) Patent Security Agreement issued by Blood Cells, Inc. in favor of
American Capital Strategies, Ltd., dated as of October 29, 1999.
*(10.47) Patent Security Agreement issued by IGEN, Inc. in favor of American
Capital Strategies, Ltd., dated as of October 29, 1999.
*(10.48) Georgia Leasehold Deed to Secure Debt issued by IGI, Inc. in favor
of American Capital Strategies, dated as of October 29, 1999.
*(10.49) Open-Ended Mortgage, Security Agreement and Assignment of Leases
and Rents (Cumberland County, New Jersey) issued by IGI, Inc. in
favor of American Capital Strategies, Ltd., dated as of October 29,
1999.
*(10.50) Open-Ended Mortgage, Security Agreement and Assignment of Leases
and Rents (Atlantic County, New Jersey) issued by IGI, Inc. in
favor of American Capital Strategies, Ltd., dated as of October 29,
1999.
*(10.51) Pledge and Security Agreement issued by IGI, Inc. and
ImmunoGenetics, Inc. in favor of American Capital Strategies, Ltd.,
dated as of October 29, 1999.
* **(10.52) Employment Agreement between IGI, Inc. and Manfred Hanuschek dated
as of July 26, 1999.
* **(10.53) Amendment to Employment Agreement between Manfred Hanuschek and
IGI, Inc., dated March 9, 2000.
* **(10.54) Employment Agreement between IGI, Inc. and Robert McDaniel, dated
as of September 1, 1999.
*(10.55) Pledge Agreement by and between Fleet Capital Corporation and IGI,
Inc., dated October 29, 1999.
* **(10.56) Employment Agreement between IGI, Inc. and Rajiv Mathur, dated
February 22, 1999.
*(10.57) Amendment No.1 to the Note and Equity Purchase Agreement by and
between American Capital Strategies, Ltd. and IGI, Inc., together
with its subsidiaries dated as of April 12, 2000.
*(10.58) Amendment to Loan and Security Agreement by and between Fleet
Capital Corporation and IGI, Inc., together with its subsidiaries
dated as of April 12, 2000.
*(21) List of Subsidiaries.
*(23) Consent of PricewaterhouseCoopers LLP.
*(27.1) Financial Data Schedules for the year ended December 31, 1999.
*(27.2) Financial Data Schedules for the year ended December 31, 1998.