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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.
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December 31, 2000 001-08568
IGI, Inc.
(Exact name of registrant as specified in its charter)
Delaware 01-0355758
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
Wheat Road and Lincoln Avenue, Buena, NJ 08310
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(Address of principal executive offices) (Zip Code)
(856)-697-1441
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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 16, 2001, as
computed by reference to the last trading price of such stock, was
approximately $2,712,000.
The number of shares of the Registrant's Common Stock, par value $.01 per
share, outstanding at March 16, 2001 was 10,577,731 shares.
Documents Incorporated by Reference: Portions of the Registrant's
definitive proxy statement to be filed with the Commission on or before
April 30, 2001 are incorporated herein by reference in Part III.
Part I
Item 1. Business
IGI, Inc. ("IGI" or the "Company") was incorporated in Delaware in
1977. Its executive offices are at Wheat Road and Lincoln Avenue, Buena,
New Jersey. The Company is a diversified company engaged in two business
segments:
* 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.
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. 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 two business segments for the periods indicated:
2000 1999 1998
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(in thousands)
Revenue
Consumer Products $ 6,552 $ 6,938 $ 5,839
Companion Pet Products 12,700 13,595 12,513
-------------------------------
$19,252 $20,533 $18,352
===============================
Operating Profit*
Consumer Products $ 4,094 $ 3,913 $ 3,688
Companion Pet Products 836 3,850 2,844
* Excludes corporate expenses of $5,087,000, $5,216,000, and $6,925,000
for 2000, 1999, and 1998 respectively. (See Note 19 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 over-the-counter ("OTC") pharmaceutical companies for
commercial applications of the Microencapsulation Technologies. Because of
their ability to encapsulate skin protective agents, oils, moisturizers,
shampoos, conditioners, skin cleansers and fragrances and to provide both a
controlled and a sustained release of the encapsulated materials,
Novasome(R) lipid vesicles are well-suited to cosmetics and consumer
product applications. For example, Novasome(R) lipid vesicles may be used
to deliver moisturizers and other active ingredients to the deeper layers
of the skin or hair follicles for a prolonged period; to deliver or
preserve ingredients which impart favorable cosmetic characteristics
described in the cosmetics industry as "feel," "substantivity," "texture"
or "fragrance"; to deliver normally incompatible ingredients in the same
preparation, with one ingredient being shielded or protected from the other
by encapsulation within the Novasome(R) vesicle; and to deliver
pharmaceutical agents.
The Company produces Novasome(R) vesicles for various skin care
products, including those marketed by Estee Lauder such as "All You Need,"
"Re-Nutriv," "Virtual Skin," "100% Time Release Moisturizer," "Resilience,"
"Surface Optimizing," "Vibrant" and others. Sales to Estee Lauder
accounted for $3,692,000 or 19% of 2000 sales, $4,237,000 or 21% of 1999
sales, and $3,494,000 or 19% of 1998 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 Allergan. 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 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 1998, IGI recognized $326,000 of royalty income under
the Glaxo Agreement. By an agreement dated December 10, 1998, the license
and supply agreement with Glaxo was terminated. The termination agreement
provided that IGI would purchase all Glaxo's inventory and marketing
materials related to the WellSkin(TM) line in exchange for a $200,000
promissory note, due and payable in December 1999 bearing interest at a
rate of 11%. This inventory was immediately resold for $200,000 in
connection with a new agreement for the WellSkin(TM) line. The Company
recognized no gain or loss on this inventory transaction and, since the
Company never took title to the inventory, it did not recognize this
transaction as revenue.
The Company also issued a promissory note to Glaxo for $608,000,
representing the unearned portion of the advance royalty in exchange for
Glaxo transferring all rights to the WellSkin(TM) trademark to IGI. The
note, which bore interest at 11%, was paid in full, including interest, by
the Company in 2000. In connection with the Agreement termination, but
unrelated to the advance royalty, IGI reduced cost of sales by $404,000 in
1998 for amounts owed to Glaxo that were forgiven.
In 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, in
four equal annual payments, a $1,000,000 trademark and technology transfer
fee which would be recognized as revenue over the life of the agreement.
In addition, Genesis agreed to pay the Company a royalty on its net sales
with certain guaranteed minimum royalty amounts. Genesis also purchased
for $200,000 the WellSkin(TM) inventory and marketing materials which were
previously purchased by the Company from Glaxo. The Company recognized
$541,000 and $280,000 of income related to this agreement for the years
ended December 31, 2000 and 1999, respectively.
On February 14, 2001, the agreement with Genesis was terminated and
replaced with a new manufacturing and supply agreement and an assignment of
trademark agreement for the WellSkin(TM) line of skin care products. The
manufacturing and supply agreement expires on December 13, 2005 and
contains two ten-year renewal options. The Company received a lump sum
payment of $525,000 for the assignment of the trademark.
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 required Kimberly to make royalty payments based on
quantities of material produced. The Company was also guaranteed minimum
royalties over the term of the agreement. In both 1999 and 1998, the
Company recognized $133,000 as 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 latter agreement was in effect from
June 29, 1999 through June 30, 2000. Under this agreement, Kimberly paid
the Company consideration of $120,000, which was recognized over the term
of the agreement ($60,000 during 2000 and $60,000 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 $1,487,000, $1,210,000, and
$433,000 of royalty income related to this agreement for the years ended
December 31, 2000, 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 provided for an up-front license fee of $150,000. In addition,
the agreement provided for additional payments of $50,000 in June 1999,
October 1999 and June 2000, as well as 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. The Company recognized
$55,000, $126,000 and $91,000 of income in 2000, 1999 and 1998,
respectively, related to this agreement. See Note 5 "Supply and Licensing
Agreements" of the Consolidated Financial Statements for a discussion of
the cumulative effect of an accounting change which relates to this
agreement.
The Company entered into an exclusive Supply Agreement (the "Supply
Agreement") dated September 30, 1997 with IMX Corporation ("IMX"). Under
the IMX agreement, the Company agreed to manufacture and supply 100% of
IMX's requirements for certain products at prices stipulated in the
exclusive Supply Agreement, subject to renegotiation subsequent to 1998.
The Company is currently involved in discussions with IMX concerning
possible modifications to the Supply Agreement as the Company has
determined that it will not supply the products stipulated by the Supply
Agreement but may supply certain other products based on negotiations with
IMX. Under the Supply Agreement, the Company received 271,714 shares of
restricted Common Stock of IMX. These shares are restricted both by
governmental and contractual requirements and the Company is unsure if or
when it will be able to sell these shares. Through December 31, 2000, the
Company had not yet recognized income related to this agreement. See Note
4 "Investments" of the Consolidated Financial Statements.
In January 2000, the Company entered into a Feasibility and Option
Agreement with Church & Dwight Co. Inc. The agreement provided that the
Company would develop stable Novasome(R) systems for use in oral care
applications. The Company completed its obligation in 2000, and provided
the product to Church & Dwight, who will test the stability, efficiency and
consumer acceptance of the product. The Company recognized $60,000 as
income in 2000 related to this agreement. If Church & Dwight chooses to
proceed with this product, the Company will need to enter into a definitive
license and supply agreement with Church & Dwight.
Also in January 2000, the Company entered into an agreement with
Fujisawa Pharmaceutical, Co. Ltd. The purpose of this agreement is for IGI
to incorporate its Novasome(R) Technology into a new formulation of their
topical products. This project will be completed in stages with amounts
being paid to the Company with the successful completion of each stage.
The agreement is in effect for a 15 month period. In 2000, the Company
recognized $250,000 of income relating to this project.
The Company recognized a total of $2,505,000, $1,869,000, and
$1,200,000 in 2000, 1999 and 1998, 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 34% of the Company's
total revenues in 2000, 34% in 1999 and 32% in 1998.
Companion Pet Products Business
The Company sells its Companion Pet Products to the veterinarian
market under the EVSCO Pharmaceuticals trade name and to the 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.
On March 2, 2001, the Company became aware of a potential heating oil
leak at its Companion Pet Products manufacturing facility. The Company
immediately notified the New Jersey Department of Environmental Protection
and the local authorities, and hired a contractor to assess the exposure
and required clean up. During the first quarter of 2001, the Company had
decided to outsource the manufacturing for this division. On March 6,
2001, the Company signed a supply agreement with a company to manufacture
the products for the Companion Pet Products division. Due to the
environmental situation noted above, the Company has decided to accelerate
the outsourcing process (originally anticipated to be completed by June
2001), and has ceased operations at the Companion Pet Products
manufacturing facility. On March 8, 2001, the Company terminated the
employment of the manufacturing personnel at this facility. The Company
anticipates recording a charge in the first quarter of 2001 related to the
termination of these employees and the write down of equipment used in the
manufacturing process to its estimated salvage value.
EVSCO products were manufactured at the Company's facility in Buena,
New Jersey and are sold through distributors to veterinarians. The
facility operated 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 were
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 66%
of the Company's revenues in 2000, 66% in 1999 and 68% in 1998.
Discontinued Operations
On September 15, 2000, the shareholders of the Company approved, and
the Company consummated, the sale of the assets and transfer of the
liabilities of the Vineland division, which produced and marketed poultry
vaccines and related products. The buyer assumed liabilities of
approximately $2,300,000, and paid the Company cash in the amount of
$12,500,000, of which $500,000 was placed in an escrow fund to secure
potential obligations of the Company relating to final purchase price
adjustments and indemnification. Currently, the Company has commenced an
arbitration proceeding with the purchaser of the Vineland division, related
to the funds held in escrow. There are disputes by the parties over
certain issues which final outcome can not be determined as of this date.
Amounts, if any, that are recovered through the arbitration process will be
reflected in income when received. The Company's results reflect a
$114,000 gain on the sale of the Vineland division. The Vineland division
incurred a loss of $1,978,000, $841,000 and $362,000 for 2000, 1999 and
1998, respectively.
Other Applications
The versatility of the Novasome(R) lipid vesicles combined with the
Company's commercial production capabilities allows the Company to target
large, diverse markets including potential applications in the fuels
industry. The Company is seeking collaboration with others to develop its
product for this industry. The efforts for the development of fuel
enhancement products require extensive testing, evaluation and trials;
therefore no assurance can be given that commercialization of IGI's fuel
additive and enhancing products will be successful.
International Sales and Operations
Two individuals are based overseas to handle sales of the Company's
products outside the United States. Exports consist of some veterinary
pharmaceuticals and petcare products. The Company is seeking to expand its
international market presence.
Japan, Germany, Korea, and certain Latin American and Far Eastern
countries are important markets for the Company's Companion Pet Products
business. Some of 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.
Sales to international customers represented 11% of the Company's
revenues in 2000, 1999 and 1998. See Note 16, "Export Sales" of the
Consolidated Financial Statements.
Manufacturing
The Company's manufacturing operations include production and testing
of 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 February 23, 2001, 27 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. As
noted above, the Company ceased operations at the Companion Pet Products
manufacturing facility in March 2001.
Research and Development
The Company is concentrating its veterinary pharmaceutical
development efforts on the use of Novasome(R) microencapsulation for
various veterinary pharmaceutical and OTC pet care products. The Company's
consumer products development efforts are directed toward 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 six 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 2000, 1999 or 1998. Total product development and research expenses
were $853,000, $668,000 and $603,000 in 2000, 1999 and 1998, 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 trademarks in various countries
covering certain of its products. Under the terms of the 1995 IGI License
Agreement, the Company has an exclusive ten-year license to use the
Technologies licensed from Novavax in the IGI Field. Novavax holds 44 U.S.
patents and a number of foreign patents covering the Technologies licensed
to IGI.
Government Regulation and Regulatory Proceedings
U.S. Regulatory Proceedings
From mid-1997 through most of 1998, the Company was subject to
intense governmental and regulatory scrutiny relating to the Company's
shipment of some of its poultry vaccine products without complying with The
Virus Serum Toxin Act of 1914, the federal securities laws and the rules
and regulations promulgated thereunder and USDA regulations. The Company
was alleged to have engaged in the sale of poultry vaccines to Iran during
the period from 1996 through 1998 and to have prepared poultry vaccine
products without complying with USDA regulations. As a result of actions
taken by the USDA, the Company was ordered in June 1997 to stop shipment of
certain of its poultry vaccine products. In July 1997, the Company was
advised that the USDA's Office of Inspector General ("OIG") had commenced
an investigation into possible violations by the Company of the Virus Serum
Toxin Act of 1914 and alleged false statements made by the Company to the
USDA's Animal and Plant Health Inspection Service ("APHIS").
Company Actions
Based on these events, the Company:
* engaged independent counsel to conduct an investigation of the
claimed violations;
* took corrective action to allow the Company to resume shipment
of its affected product lines;
* terminated the President and Chief Operating Officer of the
Company for willful misconduct and commenced a lawsuit against
him in the New Jersey Superior Court;
* obtained the resignation of a number of employees, including
three Vice Presidents;
* voluntarily disclosed information uncovered by its internal
investigation to the U.S. Attorney for the District of New
Jersey, including information that related to sales of poultry
vaccines which may have violated U.S. customs laws and
regulations;
* cooperated with the Securities and Exchange Commission ("SEC")
in its inquiry, initiated in April 1998, regarding the
foregoing matters;
* restated the Company's consolidated financial statements for
the two years ended December 31, 1996 and the nine months ended
September 30, 1997.
The USDA's stop shipment order and the investigations by Federal
regulatory authorities disrupted the business of the Company during 1997,
1998 and the first quarter of 1999, and had a material adverse effect on
its business operations and its liquidity.
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 were 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.
From June 4, 1997 through March 27, 1998, the Company was subject to
an order by the CVB to stop distribution and sale of all serials and
subserials of thirty-six (36) product codes of designated poultry vaccines
produced by the Company's Vineland Laboratories Division. In July 1997,
the OIG advised the Company of its commencement of an investigation into
alleged violations of the Virus Serum Toxin Act of 1914 and alleged false
statements made by certain now former Company personnel, the names of whom
were not disclosed to the Company because of the ongoing grand jury
investigation. In April 1998, the Company voluntarily disclosed to the
U.S. Attorney for the District of New Jersey, as well as to the USDA and
the OIG, information resulting from the Company's internal investigation of
all Company directors, officers and other personnel who the Company
believed could have been connected to the Company's alleged violations of
USDA rules and regulations and of the Virus Serum Toxin Act of 1914. (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 FDA-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 April 2000, the FDA initiated an inspection of the Company's
Companion Pet Products division and issued an inspection report on Form
FDA-483 on July 5, 2000. The July 5, 2000 FDA report includes several
unfavorable observations of manufacturing and quality assurance practices
and products of the division. In an effort to address a number of the FDA's
stated concerns, on May 24, 2000, the Company permanently discontinued
production and shipment of Liquichlor and on June 1, 2000 temporarily
stopped production of Cerumite, both products of the Companion Pet Products
division. The aggregate annual sales volume for these products for the
fiscal year ended December 31, 2000, 1999 and 1998, respectively, were
$625,000, $1,059,000 and $937,000 in total ($358,000, $534,000, and
$621,000 for Liquichlor and $267,000, $525,000, and $316,000 for Cerumite).
The Company has responded to the July 5, 2000 FDA report and is currently
preparing the required written procedures and documentation on product
preparation to comply with the FDA regulations. The FDA will evaluate the
Company's response and will determine the ultimate outcome of the FDA
inspection. An unfavorable outcome could result in fines, penalties and
the potential permanent or temporary halt of the sale of certain regulated
products, any or all of which could have a material, adverse effect on the
Company. During the year ended December 31, 2000, the Company has incurred
$884,000 in related expenses to improve production, and to meet
documentation, procedural and regulatory compliance.
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 and chemicals. 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 February 23, 2001, the Company had 81 full-time employees, of whom
33 were in marketing, sales, distribution and customer support, 27 in
manufacturing, 6 in research and development, and 15 in executive, finance
and administration. The Company has no collective bargaining agreement
with its employees, and believes that its employee relations are good. As
noted above, the Company terminated the Companion Pet Products
manufacturing personnel on March 8, 2001, in connection with the
outsourcing of the manufacturing process.
Item 2. Properties
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 security
interest held by Fleet Capital Corporation and American Capital Strategies,
Ltd. The Company believes that its current production and office
facilities are adequate for its present and foreseeable future needs.
Item 3. Legal Proceedings
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.
In April 1998, the SEC advised the Company that it was conducting an
informal inquiry and requested information and documents from the Company,
which the Company has voluntarily provided to the SEC. On July 26, 2000,
the Company reached an agreement in principle with the staff of the SEC to
resolve matters arising with respect to the informal investigation. Under
the agreement, which will not be final until approved by the SEC, the
Company neither admits nor denies that the Company violated the financial
reporting and record-keeping requirements of Section 13 of the Securities
Exchange Act of 1934, as amended, for the fiscal years 1995, 1996 and 1997.
Further, in the proposed agreement, the Company agrees to the entry of an
order to cease and desist from any such violation in the future. No
monetary penalty is expected.
On April 14, 1999, a lawsuit was filed in the U.S. District Court for
the Southern District of New York by Cohanzick Partners, LP, against IGI,
Inc., Edward B. Hager, the Company's former Chairman, the following
directors of the Company: Terrence D. Daniels, Jane E. Hager, Constantine
L. Hampers and Terrence O'Donnell and the following former directors and
officers of the Company: Kevin J. Bratton, Stephen G. Hoch, Surendra Kumar,
Donald J. MacPhee, Lawrence N. Zitto, Paul D. Paganucci, David G. Pinosky
and John O. Marsh (collectively, the "IGI Defendents") and John P. Gallo,
the Company's former President. The suit, which sought approximately
$420,000 in actual damages together with fees, costs and interest, alleged
violations of the securities laws, fraud, and negligent misrepresentation
concerning certain disclosures made and other actions taken by the Company
in 1996 and 1997. The IGI Defendants settled the matter pursuant to a
Stipulation and Order of Dismissal signed by the Court on July 19, 2000.
In exchange for the plaintiff's agreement to dismiss its claims against the
IGI Defendants, the Company issued to the plaintiff 35,000 shares of
unregistered Common Stock of the Company, $.01 par value per share, and the
Company's insurer agreed to pay $97,500 to the plaintiff. The Company
issued the 35,000 shares of Common Stock in June 2000 and recorded the
issuance at the fair market value of the Common Stock on the date of
issuance ($1.375 per share) or $48,125 in the aggregate. As of December
31, 1999, the Company had established a reserve with respect to the
Cohanzick suit. The Company recorded the $48,125 as an offset to the
reserve. The Company is not aware of any other legal proceedings which
could have a material effect upon the Company.
Other Pending Regulatory Matters
In April 2000, the FDA initiated an inspection of the Company's
Companion Pet Products division and issued an inspection report on Form FDA
483 on July 5, 2000. The July 5, 2000 FDA report includes several
unfavorable observations of manufacturing and quality assurance practices
and products of the division. The Company has responded to the July 5,
2000 FDA report and is currently preparing the required written procedures
and documentation on product preparation to comply with the FDA
regulations. The FDA will evaluate the Company's response and will
determine the ultimate outcome of the FDA inspection. An unfavorable
outcome could result in fines, penalties and the potential permanent or
temporary halt of the sale of certain regulated products, any or all of
which could have a material adverse effect on the Company. In March 2001,
the Company signed a supply agreement with an entity to outsource the
manufacturing of products for the Companion Pet Products division, and
ceased operations at the Companion Pet Products manufacturing facility.
On April 6, 2000, officials of the New Jersey Department of
Environmental Protection inspected the Company's storage site in Buena, New
Jersey and issued a Notice of Violation relating to the storage of waste
materials in a number of trailers at the site. The Company has established
a disposal and cleanup schedule and has commenced operations to remove
materials from the site. Small amounts of hazardous waste were discovered
and the Company was issued a notice of violation relating to the storage of
these materials. The Company is cooperating with the authorities and does
not expect to incur any material fines or penalties.
On or around, May 17, 2000, the Company became aware of a spill at
its Vineland manufacturing facility of about 965 gallons of heating oil.
By May 26, 2000 the Company had completed remediation of the soil and
nearby creek that were affected by the heating oil spill. To assure that
the nearby groundwater was not contaminated by the spill, the Company's
environmental consultants advised the Company to drill a test well. The
well has been drilled and the analytical results found no contamination of
groundwater.
On March 2, 2001, the Company became aware of a potential heating oil
leak at its Companion Pet Products manufacturing facility. The Company
immediately notified the New Jersey Department of Environmental Protection
and the local authorities, and hired a contractor to assess the exposure
and required clean up. The Company is not able to estimate its financial
exposure related to this incident at this time.
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 2000.
Executive Officers of the Company
The following table sets forth (i) the name and age of each executive
officer of the Company as of February 23, 2001, (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
- ---- --- ------- ---------------------------------------
Robert E. McDaniel 50 1998 Chief Executive Officer of IGI, Inc. since September 2000.
Executive Vice President and General Counsel of IGI, Inc. from
April 1999 to September 2000; Senior Vice President and
General Counsel of IGI, Inc. from May 1998 to April 1999;
General Counsel of Presstek, Inc. (laser graphic arts company)
from April 1997 to May 1998; and Commercial Litigation Partner,
law firm of Devine, Millimet and Branch from April 1991
to April 1997.
John Ambrose 61 2000 President and Chief Operating Officer since September 2000.
Vice President of Sales and Marketing at Digitrace Care
Services of Boston from November 1997 through September 2000.
Vice President of Field Operations at NMC Homecare from
July 1990 through November 1996.
Domenic Golato 45 2000 Senior Vice President and Chief Financial Officer of IGI, Inc.
since July 2000. Vice President and Chief Financial Officer of
IVC, Inc., a publicly traded manufacturer of vitamins and
nutritional products from 1998 to June 2000. Vice President and
Chief Financial Officer of RF Power Products, Inc., a publicly
traded high technology manufacturer of radio frequency power
delivery systems to the semiconductor and flat panel display
industries from 1993 to 1998.
Rajiv Mathur 46 1999 President of Consumer Products Division since September 2000.
Senior Vice President and Assistant Secretary of IGI, Inc.
from March 1999 to September 2000. Vice President of
Research and Development of IGI, Inc. since 1989.
Officers are elected on an annual basis. Two of the above named officers
have employment agreements with the Company.
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 "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"). In a letter dated February 1, 2001, the AMEX indicated that it will
continue the Company's listing pending a review of the Company's Form 10-K
for the period ending December 31, 2000. This determination is subject to
the Company's favorable progress in satisfying the AMEX guidelines for
continued listing and to AMEX's routine periodic reviews of the Company's
SEC filings. The following table shows the range of high and low sale
prices on the AMEX for the periods indicated:
High Low
---- ---
1999
- ----
First quarter $2.25 $1.625
Second quarter $2.00 $1.25
Third quarter $1.9375 $1.25
Fourth quarter $2.00 $1.0625
2000
- ----
First quarter $3.75 $1.625
Second quarter $2.625 $1.125
Third quarter $1.6875 $ .9375
Fourth quarter $1.25 $ .4375
The approximate number of holders of record of the Company's Common
Stock at March 16,2001 was 786 (not including stockholders for whom shares
are held in a "nominee" or "street" name).
In connection with the refinancing of the Company's 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 was 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 Subordinated Debt Agreement. No underwriters
were involved with this private placement. These warrants contained 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.")
On April 12, 2000 ACS amended its loan agreement whereby the put
provision was replaced by a "make-whole" feature. The make-whole feature
requires the Company to compensate ASC in either Common Stock or cash, at
the option of the Company, in the event that ACS 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. ACS 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.
The Company recorded a non-taxable $1,073,000 provision reflected as
interest expense for the mark-to-market adjustment for the fair value of
the "put" warrant for the three month period ended March 31, 2000. A non-
taxable reduction of interest expense of $1,431,000 was recognized in the
second quarter ended June 30, 2000, reflecting a decrease in the fair value
of the warrants from April 1 to April 12, 2000. As a result of the April
12, 2000 amendment, the remaining liability at April 12, 2000 of $3,338,000
was reclassified to additional paid-in capital. The April 12, 2000
amendment required the Company to file a shelf registration statement with
respect to resales of shares acquired by ACS by October 9, 2000. On
September 30, 2000, ACS granted an extension to December 2000 for the
registration statement to be declared effective by the SEC. The
registration statement became effective on December 4, 2000.
As noted above, the make-whole feature requires the Company to
compensate ACS for any decrease in value between the date that ACS notifies
the Company that they intend to sell some or all of the stock and the date
that ACS ultimately disposes of the underlying stock, assuming that such
disposition occurs in an orderly fashion over a period of not more than 180
days. The shortfall can be paid using either cash or shares of the
Company's Common Stock, at the option of the Company. Due to accounting
guidance that was issued in September 2000, the Company has reflected the
detachable stock warrants outside of stockholders' equity (deficit) as of
December 31, 2000, since the ability to satisfy the make-whole obligation
using shares of the Company's Common Stock is not totally within the
Company's control.
Part II
Item 6. Selected Financial Data
Five-Year Summary of Selected Financial Data (in thousands, except per
share information):
Year ended December 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Statement of Operating Results
Revenues $19,252 $20,533 $18,352 $17,699 $14,994
Operating profit (loss) (157) 2,547 (393) (982) (2,752)
Loss from continuing operations (8,775) (1,130) (2,667) (2,078) (2,765)
(Loss) income from discontinued operations * (1,978) (841) (362) 870 2,284
Gain on disposal of discontinued operations 114 - - - -
Extraordinary gain (loss) from early
extinguishment of debt (630) 387 - - -
Cumulative effect of accounting change (168) - - - -
Net loss (11,437) (1,584) (3,029) (1,208) (481)
(Loss) income per share-basic and diluted:
From continuing operations $ (.86) $ (.12) $ (.28) $ (.22) $ (.29)
From discontinued operations (.19) (.09) (.04) .09 .24
Gain on disposal of discontinued operations .01 - - - -
Extraordinary gain (loss) from early
extinguishment of debt (.06) .04 - - -
Cumulative effect of accounting change (.02) - - - -
Net loss (1.12) (.17) (.32) (.13) (.05)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Balance Sheet Data***
Working capital (deficit) $(8,456) $(3,084) $(4,378) $(1,464) $ 2,499
Total assets 12,387 31,517 30,604 32,560 33,845
Short-term debt and notes payable 9,785 17,341 19,318 18,857 13,085
Long-term debt and notes payable
(excluding current maturities)** - - 408 36 6,893
Stockholders' equity (deficit) (3,275) 5,533 5,923 8,034 9,019
Average number of common and
common equivalent shares:
Basic and diluted 10,205 9,605 9,470 9,458 9,323
- --------------------
* On September 15, 2000, the shareholders of the Company approved, and
the Company consummated, the sale of the assets and transfers of the
liabilities of the Vineland Laboratories division. The Consolidated
Financial Statements of IGI present this segment as a discontinued
operation.
** In connection with certain amendments to the Company's debt
agreements, the Company has reflected certain debt as short-term debt
as of December 31, 2000 and 1999.
*** Balance sheet data for 1996 has not been reclassified to reflect the
discontinued operations.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
This "Management's Discussion and Analysis" section and other
sections of this Annual Report on Form 10-K contain forward-looking
statements that are based on current expectations, estimates, forecasts and
projections about the industry and markets in which the Company operates,
management's beliefs and assumptions made by management. In addition,
other written or oral statements, which constitute forward-looking
statements, may be made by or on behalf of the Company. Words such as
"expects," "anticipates," "intends," plans," "believes," "seeks,"
"estimates," variations of such words and similar expressions are intended
to identify such forward-looking statements. These statements are not
guarantees of future performance, and involve certain risks, uncertainties
and assumptions, which are difficult to predict. (See "Factors Which May
Affect Future Results" below.) Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in such forward-
looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Results of Operations
From mid-1997 through most of 2000, 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 have had a materially adverse effect on the Company's
financial condition and results of operations, and resulted in the
departure of most of the Company's senior management from 1997.
2000 compared to 1999
The Company had a net loss of $11,437,000, or $1.12 per share, in
2000, as compared to a net loss of $1,584,000, or $.17 per share, in 1999.
The increase in the net loss compared to the prior year, was primarily due
to the loss from discontinued operations, an extraordinary charge for early
extinguishment of debt, decreased revenues and increased cost of sales for
the Companion Pet Products division, and the establishment of an additional
valuation allowance for deferred taxes.
Total revenues for 2000 were $19,252,000, which represents a decrease
of $1,281,000, or 6%, from revenues of $20,533,000 in 1999. The decreased
revenues were due to lower product sales for the Consumer Products division
and the Companion Pet Products division, offset partially by higher
licensing revenues.
Total Consumer Products revenues for 2000 decreased 6% to $6,552,000,
compared to 1999 revenues of $6,938,000. Licensing and royalty income of
$2,453,000 in 2000 increased by $584,000 compared to 1999, primarily as a
result of increased licensing revenues from Johnson & Johnson and Fujisawa.
Consumer product sales of $4,099,000 in 2000 decreased by $970,000 compared
to 1999, primarily as a result of decreased sales to Estee Lauder.
Companion Pet Products revenues for 2000 amounted to $12,700,000, a
decrease of $895,000, or 7%, compared to 1999. This decrease was primarily
attributable to decreased product sales due to product recalls and removal
of the affected products from the product line.
Cost of sales increased by $1,767,000, or 20%, in 2000 as compared to
1999. As a percentage of revenues, cost of sales increased from 43% in
1999 to 55% in 2000. The resulting decrease in gross profit from 57% in
1999 to 45% in 2000 is the result of unusual charges of $884,000 for
consulting and other related costs for Companion Pet Products
documentation, procedural and regulatory compliance issues, $160,000 for
hazardous waste removal and $796,000 for Companion Pet Product recall and
inventory related reserves.
Consumer Products cost of sales for 2000 decreased 26% to $1,393,000
compared to 1999 cost of sales of $1,894,000. As a percentage of revenues,
cost of sales decreased from 27% in 1999 to 21% in 2000.
Companion Pet Products cost of sales for 2000 increased $2,268,000 to
$9,173,000, compared to 1999 cost of sales of $6,905,000. As a percentage
of revenues, cost of sales increased from 51% in 1999 to 72% in 2000.
Selling, general and administrative expenses decreased by $529,000,
or 6%, from $8,519,000 in 1999 to $7,990,000 in 2000. As a percentage of
revenues, these expenses were 41% of revenues for 1999 compared to 42% in
2000. Overall expenses decreased due to cost saving measures implemented
during 2000, which were offset by the former President's severance package,
fees for investment banking services and increased legal costs related to
SEC filings.
Product development and research expenses increased by $185,000, or
28%, compared to 1999. The increase is principally for additional research
staff to work on new and existing projects.
Net interest expense decreased $1,355,000, or 33%, from $4,109,000 in
1999 to $2,754,000 in 2000. The decrease is a result of the amendment of
the ACS Subordinated Debt, whereby the "put" provision associated with the
original warrants granted to purchase 1,907,543 shares of the Company's
stock was replaced by a "make-whole" feature. In 2000, the Company recorded
a non-taxable interest expense reduction of $358,000, which reflects the
decrease in the fair value of the warrants from January 1, 2000 to April
12, 2000, compared to a $854,000 charge for non-taxable interest expense in
1999 that reflected the mark-to-market adjustment for the put provision.
The increase in tax expense is the result of an additional valuation
allowance of $6,448,000 recorded during the quarter ended September 30,
2000. On a quarterly basis, the Company evaluates the recoverability of
its deferred tax assets based on its history of operating earnings, its
expectations for the future, and the expiration dates of the net operating
loss carryforwards. At September 30, 2000, there were a number of events
that were not originally forecasted or expected by the Company, which
negatively impacted the earnings and cash flows of the Company and will
continue to impact the Company in the future. The Company initially
expected to receive $17,500,000 on the sale of the Vineland division; the
final negotiated price was for approximately $15,000,000 (including assumed
liabilities). In addition, the Company projected the Vineland division to
generate an operating profit in 2000 but instead it incurred a substantial
operating loss, including a third quarter operating loss for the Vineland
division through September 15, 2000, the date of the sale of Vineland, of
$1,499,000. Also, the Companion Pet Products division, due to the FDA
inspection and related inspection report received on July 5, 2000,
suspended production and sales of two significant products and incurred
substantial consulting fees related to the products that the FDA requested
to be recalled. In the third quarter, the Company decided to permanently
discontinue the manufacture and sale of Liquichlor, which had sales of
$358,000 and $534,000 in 2000 and 1999, respectively. In addition, the
Company cannot predict when or if it will resume production of Cerumite.
The Company's Consumer Products division also generated less profit than
was originally projected in 2000. All of the above events had a negative
impact on profitability and cash flow and resulted in the Company being in
violation of its debt covenants. As a result, the Company concluded that
based on its evaluation of the events that have arisen through the fourth
quarter of 2000, and its forecast of future operating results, it is more
likely than not that it will be unable to realize the deferred tax assets
in the foreseeable future.
Extraordinary loss on the early extinguishment of debt of $630,000 in
2000 relates to the write off of a portion of the deferred financing costs,
due to a reduction in the Company's borrowing base under its one of its
debt agreements. See Note 10 "Debt" of the Consolidated Financial
Statements.
The cumulative effect of an accounting change of $168,000 in 2000
relates to the adoption of Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" (SAB 101). See Note 5 "Supply and
Licensing Agreements" of the Consolidated Financial Statements.
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 the net loss was primarily attributable to increased revenues
and improved margins complemented by lower operating expenses.
Total revenues for 1999 were $20,533,000, which represents an
increase of $2,181,000, or 12%, from revenues of $18,352,000 in 1998. The
increased revenues were generated by both the Consumer Products and the
Companion Pet Products divisions.
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.
Cost of sales increased by $532,000, or 6%, primarily due to the
higher sales volume. As a percentage of total revenues, cost of sales
decreased from 45% in 1998 to 43% in 1999. The resulting increase in gross
profit in 1999 to 57% from 55% in 1998 was primarily attributable to
efficiencies gained through higher product sales, licensing revenues and
production volumes.
Consumer Products cost of sales for 1999 increased 28% to $1,894,000,
compared to 1998 cost of sales of $1,476,000. As a percentage of revenues,
cost of sales increased from 25% in 1998 to 27% in 1999.
Companion Pet Products cost of sales for 1999 increased $114,000 to
$6,905,000, compared to 1998 cost of sales of $6,791,000. As a percentage
of revenues, cost of sales decreased from 54% in 1998 to 51% in 1999.
Selling, general and administrative expenses decreased by $1,356,000,
or 14%, from $9,875,000 in 1998 to $8,519,000 in 1999. These expenses were
41% of revenues in 1999 compared with 54% of revenues in 1998. 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 increased by $65,000, or 11%, 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 ACS 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 ACS. The valuation allowance decreased
from 1998 as a result of certain fully reserved state tax net operating
loss carryforwards expiring in 1999.
Liquidity and Capital Resources
On October 29, 1999, the Company entered into a $22 million senior
bank credit agreement ("Senior Debt Agreement") with Fleet Capital
Corporation ("Fleet") and a $7 million subordinated debt agreement
("Subordinated Debt Agreement") with ACS.
These agreements enabled the Company to retire approximately $18.6
million of outstanding debt with its former bank lenders, Fleet Bank, NH,
and Mellon Bank, N.A. In connection with the repayment of the loans, the
Company's former bank lenders agreed to return to the Company, for
cancellation, warrants held by them for the purchase of 810,000 shares of
the Company's Common Stock at exercise prices ranging from $2.00 to $3.50.
Also, approximately $611,000 of accrued interest was waived by the former
bank group and is classified as an extraordinary gain from the early
extinguishment of debt in the 1999 Consolidated Statements of Operations.
There are two sets of warrants remaining with the former lenders. There
are unconditional warrants to purchase 150,000 shares which remain
exercisable by Fleet Bank, NH at $2.00 per share and unconditional warrants
to purchase 120,000 shares which remain exercisable by Mellon Bank, N.A. at
$2.00 per share.
The Senior Debt Agreement provides for i) a revolving line of credit
facility of up to $12 million, which was reduced to $5 million after the
sale of the Vineland division, based upon qualifying accounts receivable
and inventory, ii) a $7 million term loan, which was reduced to $2.7
million after the sale of the Vineland division, and iii) a $3 million
capital expenditures credit facility, which was paid in full and cancelled
after the sale of the Vineland division. 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% (10.5% at December 31, 2000). The
borrowings under the term loan credit facility bear interest at the prime
rate plus 1.5% or the London Interbank Offered Rate plus 3.75% (11% at
December 31, 2000). Provisions under the revolving line of credit require
the Company to maintain a lockbox with the lender, allowing Fleet to sweep
cash receipts from customers and pay down the revolving line of credit.
Drawdowns on the revolving line of credit are made when needed to fund
operations. Quarterly repayments of the term loan began on August 1, 2000
in the amount of $233,000.
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 11 "Detachable Stock Warrants" in the Consolidated
Financial Statements.)
To secure all of its obligations under these agreements, the Company
granted the lenders a security interest in all of the assets and properties
of the Company and its subsidiaries. In addition, ACS 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, 2000 and
1999, ACS was entitled to one observer on the Company's Board of Directors.
On April 12, 2000, ACS amended its Subordinated Debt Agreement with
the Company whereby the "put" provision associated with the original
warrants granted to purchase 1,907,543 shares of the Company's Common Stock
was replaced by a "make-whole" feature. The "make-whole" feature requires
the Company to compensate ACS, in either Common Stock or cash, at the
option of the Company, in the event that ACS ultimately realizes proceeds
from the sale of the Common Stock obtained upon exercise of its warrants
that are less than the fair value of the Common Stock upon exercise of such
warrants. Fair value of the Common Stock upon exercise is defined as the
30-day average value prior to notice of intent to sell. ACS 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.
In connection with an amendment to the Subordinated Debt Agreement,
ACS also agreed to defer the payment by the Company of the cash portion of
interest on subordinated debt for the period April 1, 2000 to July 31, 2000
until July 31, 2000. Payment of the cash portion of interest on
subordinated debt would 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 will be adjusted back
down to 2%.
On June 26, 2000, the Company entered into the Second Subordinated
Amendment with ACS. Pursuant to the Second Subordinated Amendment, the
Company borrowed an additional $500,000 from ACS through the issuance of
Series C Senior Subordinated Notes due September 30, 2000. In addition,
ACS waived compliance with certain financial covenants contained in the
Subordinated Debt Agreement and modified certain interest payment dates
with respect to the Subordinated Notes. The Second Subordinated Amendment
permitted the Company to issue additional Series C Notes on July 31, 2000
to pay the interest then due and payable on the Subordinated Debt and the
Series C Notes. In August 2000, the Company issued an additional Series C
Note to ACS in the aggregate principal amount of approximately $306,000 for
the interest due. The Series C Notes, including interest, were paid on
September 15, 2000, the date of the closing of the sale of the Vineland
division.
Also, on June 26, 2000, the Company entered into a Second Senior
Amendment dated as of June 23, 2000 with Fleet. Pursuant to the Second
Senior Amendment, the Company obtained an "overadvance" of $500,000 under
the senior revolving line of credit, repayable in full on the earlier to
occur of September 22, 2000 or the date of the consummation of the sale of
the Vineland division. Under the Second Senior Amendment, Fleet agreed to
forbear from exercising its right to accelerate the maturity of the senior
loans upon the default by the Company under certain financial covenants.
The Company did not borrow any funds from the overadvance.
On September 15, 2000, the shareholders of the Company approved and
the Company consummated the sale of the assets of the Vineland Laboratories
division. In exchange for receipt of such assets, the buyer assumed
certain Company liabilities, equal to approximately $2,300,000 in the
aggregate, and paid the Company cash in the amount of $12,500,000, of which
$500,000 was placed in an escrow fund to secure potential obligations of
the Company relating to final purchase price adjustments and
indemnification. Currently, the Company has commenced an arbitration
proceeding with the purchaser of the Vineland Laboratories division related
to the funds held in escrow. There are disputes by the parties over
certain issues whose final outcome can not be determined as of this date.
Amounts, if any, that are recovered through the arbitration process will be
reflected in income when received. The Company applied a portion of the
proceeds from the sale of the Vineland division to the revolving loan,
capital expenditure loan and term loan, totaling approximately $10,875,000.
At December 31, 2000, the Company had balances due of $2,401,000 on
the revolving credit facility, $2,605,000 on the term loan and $7,148,000
on the Subordinated Debt Agreement.
Due to the terms of the Second Senior Amendment and the Second
Subordinated Amendment where the Company was not in compliance with the
covenants, as discussed below, the Company has classified all debt owed to
ACS and Fleet as short-term debt. The debt agreements contain various
affirmative and negative covenants, such as minimum tangible net worth and
minimum fixed charge coverage ratios. The covenants under the debt
agreements were further amended on April 12, 2000. ACS has waived
compliance with certain financial covenants through December 31, 2000, and
the Company is currently in discussions with Fleet to waive the debt
covenant violations as of December 31, 2000. In addition, the Company is
currently in discussions with ACS and Fleet to renegotiate the covenants
going forward.
The Company remains highly leveraged and access to additional funding
sources is limited. The Company's available borrowings under the revolving
line of credit facility are dependent on the level of qualifying accounts
receivable and inventory. Unfavorable product sales performance since
April 1, 2000 has limited the available borrowing capacity of the Company
under the revolving line of credit facility. If the Company's operating
results deteriorate or product sales do not improve or the Company is not
successful in renegotiating its financial covenants or meeting its
financial obligations, a default could result under the Company's 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 bankruptcy or insolvency proceedings by the Company or its
creditors. As of December 31, 2000, the Company had available borrowings
under the revolving line of credit facility of $866,000.
The Company's operating activities used $4.1 million of cash during
2000. Cash utilized in the Company's operating and financing activities
were provided by the Company's investing activities, which primarily
related to proceeds from the sale of the Vineland division.
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.
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.
Foreign Regulatory and Economic Considerations
The Company's business may be adversely affected by foreign import
restrictions and additional regulatory requirements. Also, unstable or
adverse economic conditions and fiscal and monetary policies in certain
Latin American and Far Eastern countries, increasingly important markets
for the Company's animal health products, could adversely affect the
Company's future business in these countries.
Rapidly Changing Marketplace for Pet Products
The emergence of pet superstores, the consolidation of distribution
channels into fewer, more powerful companies and the diminishing
traditional role of veterinarians in the distribution of pet products could
adversely affect the Company's ability to expand its animal health business
or to operate at acceptable gross margin levels.
Effect of Rapidly Changing Technologies
The Company expects to license its technologies to third parties
which would manufacture and market products incorporating the technologies.
However, if its competitors develop new and improved technologies that are
superior to the Company's technologies, its technologies could be less
acceptable in the marketplace and therefore the Company's planned
technology licensing could be materially adversely affected.
Regulatory Considerations
The Company's pet pharmaceutical products are regulated by the FDA,
which subject the Company to review, oversight and periodic inspections.
Any new products are subject to expensive and sometimes protracted 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 provided a full valuation allowance on its deferred
tax assets consisting primarily of $6,637,000 of net operating losses,
because of uncertainty regarding its realizability. The minimum level of
future taxable income necessary to realize the Company's gross deferred tax
assets at December 31, 2000, is approximately $28.5 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 gross deferred tax
assets. Federal net operating loss carryforwards expire through 2020.
Significant components expire in 2007 (16%), 2018 (23%), 2019 (11%) and
2020 (42%). Also federal research credits expire in varying amounts
through the year 2020.
Recent Pronouncements
In 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Transactions." This statement requires
companies to record derivatives on the balance sheet as assets and
liabilities measured at fair value. The accounting treatment of gains and
losses resulting from changes in the value of derivatives depends on the
use of the derivative and whether it qualifies for hedge accounting. The
Company will adopt SFAS 133, as amended by SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" on January
1, 2001. The Company has concluded that SFAS No. 133 will not have a
significant impact on its financial position, results of operations or
liquidity.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company's Senior Debt Agreement with Fleet includes a revolving
line of credit facility and a term loan. 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%. Borrowings under the term loan bear
interest at the prime rate plus 1.5% or the London Interbank Offered Rate
plus 3.75%. Both the prime rate and the London Interbank Offered Rate are
subject to fluctuations which cannot be predicted. Based upon the
aggregate amount outstanding under these two facilities as of December 31,
2000, a 100 basis point change in the prime rate or the London Interbank
Offered Rate would result in a change in interest charges to the Company of
approximately $50,000.
Under the Company's Subordinated Debt Agreement with ACS, as amended,
ACS has been granted warrants to purchase 1,907,543 shares of the Company's
Common Stock. The terms associated with the warrants include a "make-
whole" feature that requires the Company to compensate ACS, either in
Common Stock or cash, at the option of the Company, in the event that ACS
ultimately realizes proceeds from the sale of the Common Stock obtained
upon exercise of the warrants that are less than the fair value of the
Common Stock upon the exercise of such warrants. Fair value of the Common
Stock upon exercise is defined as the 30-day average value prior to notice
of intent to sell. ACS must use reasonable efforts to sell or place its
shares in the market place over a 180-day period before it can invoke the
make-whole provision. Once ACS has provided notice of its intent to sell,
subsequent changes in the market value of the Company's Common Stock will
affect the Company's obligation to compensate ACS under the make-whole
provision in cash or shares of Common Stock. Because ACS has neither
exercised the warrants nor issued notice of its intent to sell, the
Company's exposure under this provision cannot be predicted at this time.
Item 8. Financial Statements and Supplementary Data
The financial statements and notes thereto listed in the accompanying
index to financial statements (Item 14) are filed as part of this Annual
Report and incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On November 28, 2000, the Company's Board of Directors approved and
the Company notified PricewaterhouseCoopers LLP ("PwC") of its dismissal as
the Company's principal independent accountants. During the fiscal years
ended December 31, 1998 and December 31, 1999, and for the period from
January 1, 2000 through November 28, 2000, there were no disagreements with
PwC on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which if not resolved
to the satisfaction of PwC would have caused them to make reference in
their report on the financial statements for such periods. On November 29,
2000, the Company engaged KPMG LLP as its new principal independent
auditors.
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 2001 Annual Meeting of Stockholders (the "2001 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 2001 Proxy Statement no later
than April 29, 2001.
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 2001 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
2001 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
2001 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:
Independent Auditors' Report
Report of Independent Accountants
Consolidated Balance Sheets, December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule II. Valuation and Qualifying Accounts and Reserves
Schedules other than those listed above are omitted for the
reason that they are either not applicable or not required or
because the information required is contained in the financial
statements or notes thereto.
Condensed financial information of the Registrant is omitted
since there are no substantial amounts of "restricted net assets"
applicable to the Company's consolidated subsidiaries.
(3) Exhibits Required to be Filed by Item 601 of Regulation S-K.
The exhibits listed in the Exhibit Index immediately preceding
such exhibits are filed as part of this Annual Report on Form
10-K unless incorporated by reference as indicated.
(b) Report on Form 8-K.
A Report on Form 8-K was filed on December 5, 2000, reporting the
change in the Company's independent public accountants.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000 to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 27, 2001 IGI, Inc.
By: /s/ John Ambrose
--------------------------
John Ambrose
President & Chief Operating
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K for the fiscal year ended December 31, 2000
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/ Robert E. McDaniel Chief Executive Officer March 27, 2001
- -------------------------- (Principal executive officer)
Robert E. McDaniel
/s/ John Ambrose President and Chief Operating Officer March 27, 2001
- --------------------------
John Ambrose
/s/ Domenic N. Golato Senior Vice President, March 27, 2001
- -------------------------- Chief Financial Officer
Domenic N. Golato (Principal financial officer)
/s/ Stephen J. Morris Director March 27, 2001
- --------------------------
Stephen J. Morris
/s/ Terrence D. Daniels Director March 27, 2001
- --------------------------
Terrence D. Daniels
/s/ Jane E. Hager Director March 27, 2001
- --------------------------
Jane E. Hager
/s/ Constantine L. Hampers Director March 27, 2001
- --------------------------
Constantine L. Hampers
/s/ Terrence O'Donnell Director March 27, 2001
- --------------------------
Terrence O'Donnell
/s/ Donald W. Joseph Director March 27, 2001
- --------------------------
Donald W. Joseph
/s/ Earl Lewis Director March 27, 2001
- --------------------------
Earl Lewis
INDEPENDENT AUDITORS' REPORT
The Board of Directors
IGI, Inc.:
We have audited the accompanying consolidated balance sheet of IGI, Inc.
and subsidiaries as of December 31, 2000, and the related consolidated
statements of operations, cash flows and stockholders' equity (deficit) for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards 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. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IGI,
Inc. and subsidiaries as of December 31, 2000, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Note 2 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has negative working capital
and a stockholders' deficit as of December 31, 2000. These matters raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described
in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG LLP
Philadelphia, Pennsylvania
March 2, 2001, except as
to Note 21, which is as
of March 9, 2001
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of IGI, Inc.:
In our opinion, the consolidated financial statements listed in the index
on page 18 present fairly, in all material respects, the financial position
of IGI, Inc. and its subsidiaries at December 31, 1999, and the results of
their operations and their cash flows for each of the two years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the index on page 18
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 of America, 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 our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 8 to the
financial statements (which appears in IGI, Inc.'s Annual Report on Form
10-KA for the year ended December 31, 1999, which was filed on September 1,
2000), on June 26, 2000, the Company received waivers as to certain debt
covenant violations, which waivers expire at the earlier of September 22,
2000, or upon termination of an agreement to sell one of the Company's
businesses. The Company expects to complete the sale before September 22,
2000, however the sale of this business is subject to certain
contingencies, including approval of the transaction by the Company's
shareholders. If the waivers expire, a significant amount of the Company's
outstanding debt would be callable. Accordingly, substantial doubt exists
about the Company's ability to continue as a going concern. Management's
plans in regard to this matter are also discussed in Note 8 (which appears
in IGI, Inc.'s Annual Report on Form 10-KA for the year ended December 31,
1999, which was filed on September 1, 2000). The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
April 12, 2000, except as to Note 8,
which is as of August 18, 2000
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
(in thousands, except share and per share information)
2000 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 69 $ 416
Restricted cash 102 -
Accounts receivable, less allowance for doubtful
accounts of $280 and $145 in 2000 and 1999,
respectively 2,482 2,314
Licensing and royalty income receivable 413 432
Inventories 2,585 3,856
Current deferred taxes - 1,096
Prepaid expenses and other current assets 140 282
Net assets of discontinued operations - 10,481
-------------------
Total current assets 5,791 18,877
Investments 3 85
Property, plant and equipment, net 5,343 5,733
Deferred income taxes - 4,754
Deferred financing costs 829 1,678
Other assets 421 390
-------------------
Total assets $12,387 $31,517
===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving credit facility $ 2,401 $ 5,708
Current portion of long-term debt 7,384 11,225
Current portion of notes payable - 408
Accounts payable 2,359 2,288
Accrued payroll 106 253
Due to stockholder - 115
Accrued interest 254 164
Other accrued expenses 1,728 1,785
Income taxes payable 15 15
-------------------
Total current liabilities 14,247 21,961
-------------------
Deferred income 223 327
Detachable stock warrants - 3,696
-------------------
Total liabilities 14,470 25,984
-------------------
Commitments and contingencies - -
Detachable stock warrants 1,192 -
-------------------
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 1,000,000 shares
authorized, none outstanding - -
Common stock, $.01 par value, 50,000,000 shares
authorized; 10,343,073 and 10,133,184 shares
issued in 2000 and 1999, respectively 104 102
Additional paid-in capital 22,508 20,628
Accumulated deficit (24,993) (13,556)
Less treasury stock, 66,698 and 105,510 shares
at cost, in 2000 and 1999, respectively (894) (1,641)
-------------------
Total stockholders' equity (deficit) (3,275) 5,533
-------------------
Total liabilities and stockholders' equity (deficit) $12,387 $31,517
===================
The accompanying notes are an integral part of the
consolidated financial statements.
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2000, 1999 and 1998
(in thousands, except share and per share information)
2000 1999 1998
---- ---- ----
Revenues:
Sales, net $ 16,799 $ 18,664 $ 17,152
Licensing and royalty income 2,453 1,869 1,200
------------------------------------
Total revenues 19,252 20,533 18,352
Cost and Expenses:
Cost of sales 10,566 8,799 8,267
Selling, general and administrative expenses 7,990 8,519 9,875
Product development and research expenses 853 668 603
------------------------------------
Operating profit (loss) (157) 2,547 (393)
Interest expense, net 2,754 4,109 3,443
Other income, net - 31 33
------------------------------------
Loss from continuing operations before provision
(benefit) for income taxes and extraordinary item (2,911) (1,531) (3,803)
Provision (benefit) for income taxes 5,864 (401) (1,136)
------------------------------------
Loss from continuing operations before
extraordinary item (8,775) (1,130) (2,667)
------------------------------------
Discontinued operations:
Loss from operations of discontinued business,
net of tax (1,978) (841) (362)
Gain on disposal of discontinued business 114 - -
------------------------------------
Loss before extraordinary item (10,639) (1,971) (3,029)
Extraordinary gain (loss) from early
extinguishment of debt, net of tax (630) 387 -
Cumulative effect of accounting change (168) - -
------------------------------------
Net loss $ (11,437) $ (1,584) $ (3,029)
====================================
Basic and Diluted Loss Per Common Share
Continuing operations before extraordinary item $ (.86) $ (.12) $ (.28)
Discontinued operations (.18) (.09) (.04)
------------------------------------
(1.04) (.21) (.32)
Extraordinary gain (loss) (.06) .04 -
Cumulative effect of accounting change (.02) - -
------------------------------------
Net loss $ (1.12) $ (.17) $ (.32)
====================================
Basic and diluted weighted average number
of common shares outstanding 10,204,649 9,604,768 9,470,413
The accompanying notes are an integral part of the
consolidated financial statements.
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2000, 1999 and 1998
(in thousands)
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net loss $(11,437) $(1,584) $(3,029)
Reconciliation of net loss to net cash
(used in) provided by operating activities:
Gain on sale of discontinued operations (114) - -
Depreciation and amortization 682 738 804
Amortization of deferred financing costs and debt discount 690 123 -
Extraordinary (gain) loss on early extinguishment of debt,
net of tax 630 (387) -
Gain on sale of assets - (30) (59)
Write off of other assets - - 153
Provision for accounts and notes receivable and inventories 162 60 192
Recognition of deferred revenue (242) (203) (242)
Deferred income taxes 5,850 (407) (1,162)
Interest expense related to subordinated note agreements 148 - -
Interest expense related to put feature of warrants (358) 854 -
Warrants issued to lenders under prior extension agreements - 223 645
Stock based compensation expense:
Non-employee stock options 39 49 149
Directors' stock issuance 84 116 94
Changes in operating assets and liabilities:
Restricted cash (102) - -
Accounts receivable (303) 317 336
Inventories 1,244 (698) (33)
Receivable due under royalty agreement 19 8 (328)
Prepaid expenses and other current assets 142 292 255
Accounts payable and accrued expenses 81 1,045 652
Deferred revenue 220 275 59
Short-term notes payable, operating (408) (814) -
Income taxes payable - (1) (73)
Discontinued operations - working capital changes
and non-cash charges (1,090) 407 2,311
--------------------------------
Net cash (used in) provided by operating activities (4,063) 383 724
--------------------------------
Cash flows from investing activities:
Capital expenditures (237) (280) (306)
Capital expenditures for discontinued operations (315) (784) (301)
Proceeds from sale of assets - 40 162
(Increase) decrease in other assets (86) 25 (96)
Proceeds from sale of discontinued operations 12,000 - -
--------------------------------
Net cash provided by (used in) investing activities 11,362 (999) (541)
--------------------------------
Cash flows from financing activities:
Borrowings under term loan and capital expenditures facility 257 7,000 -
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 33,413 11,584 -
Repayment of revolving credit agreement (36,720) (5,876) -
Repayment of debt (4,652) (18,657) (236)
Payment of deferred financing costs (65) (1,659) (75)
Proceeds from exercise of common stock options
and purchase of common stock 121 - -
Change in book overdraft - 572 -
--------------------------------
Net cash used in financing activities (7,646) (36) (311)
--------------------------------
Net decrease in cash and cash equivalents (347) (652) (128)
Cash and cash equivalents at beginning of year 416 1,068 1,196
--------------------------------
Cash and cash equivalents at end of year $ 69 $ 416 $ 1,068
================================
The accompanying notes are an integral part of the
consolidated financial statements.
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 2000, 1999 and 1998
(in thousands, except share information)
Common Stock Additional Stockholders' Total
------------------- Paid-in Notes Accumulated Treasury Stockholders'
Shares Amount Capital Receivable Deficit Stock Equity (Deficit)
------ ------ ---------- ------------- ----------- -------- ----------------
Balance, January 1, 1998 9,602,681 $ 96 $ 19,074 $(30) $ (8,943) $(2,163) $ 8,034
Issuance of stock pursuant to
Directors' Stock Plan 46,250 1 93 94
Value of stock options issued to
non-employees 149 149
Value of warrants issued under
extension agreement 645 645
Interest earned on stockholders'
notes (3) (3)
Reserve on stockholders' notes
receivable 33 33
Net loss (3,029) (3,029)
----------------------------------------------------------------------------------------
Balance, December 31, 1998 9,648,931 97 19,961 - (11,972) (2,163) 5,923
Issuance of stock pursuant to
Directors' Stock Plan 66,509 1 115 116
Partial settlement of amounts due
to stockholder in lieu of cash 417,744 4 720 724
Value of stock options issued to
non-employees 49 49
Value of warrants issued under
second extension agreement 223 223
Issuance of stock to 401(k) plan (440) 522 82
Net loss (1,584) (1,584)
----------------------------------------------------------------------------------------
Balance, December 31, 1999 10,133,184 102 20,628 - (13,556) (1,641) 5,533
Issuance of stock pursuant to
Directors' Stock Plan 50,398 1 83 84
Value of stock options issued to
non-employees 39 39
Amendment to detachable stock
warrants to remove put feature 3,338 3,338
Reclassification of detachable stock
warrants (1,192) (1,192)
Issuance of stock to 401(k) plan (670) 747 77
Litigation settlement costs 35,000 48 48
Partial settlement of amounts due to
stockholder in lieu of cash 63,448 1 114 115
Stock options exercised 34,125 83 83
Employee stock purchase plan 26,918 37 37
Net loss (11,437) (11,437)
----------------------------------------------------------------------------------------
Balance, December 31, 2000 10,343,073 $104 $ 22,508 $ - $(24,993) $ (894) $(3,275)
========================================================================================
The accompanying notes are an integral part of the
consolidated financial statements.
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of the Business
IGI, Inc. ("IGI" or the "Company") is a diversified company that is
currently engaged in two business segments. During 2000, the Company sold
its Vineland division, which produced and marketed poultry vaccines and
related products. The two ongoing business segments are:
* Consumer Products
IGI's Consumer Products business is primarily focused on the
continued commercial use of the Novasome(R) microencapsulation technologies
for skin care applications. These efforts have been directed toward the
development of high quality skin care products marketed by the Company or
through collaborative arrangements with cosmetic and consumer products
companies. Revenues from the Company's Consumer Products business were
principally based on formulations using the Novasome(R) encapsulation
technology. Sales to Estee Lauder accounted for $3,692,000 or 19% of 2000
sales, $4,237,000 or 21% of 1999 sales, and $3,494,000 or 19% of 1998
sales.
* Companion Pet Products
The Company sells its Companion Pet Products to the veterinarian
market under the EVSCO Pharmaceuticals trade name and to the over-the-
counter ("OTC") pet products market under the Tomlyn and Luv'Em labels.
The EVSCO line of veterinary products is used by veterinarians in
caring for dogs and cats, and includes pharmaceuticals such as antibiotics,
anti-inflammatories and cardiac drugs, as well as nutritional supplements,
vitamins, insecticides and diagnostics. Product forms include 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 of the
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.
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.
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, 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, such as
Thailand, Korea, Japan and other Far Eastern countries. 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 in U.S. dollars to minimize currency fluctuation
risk.
Inventories
Inventories are valued at the lower of cost, using the first-in,
first-out ("FIFO") method, or market.
Property, Plant and Equipment
Depreciation of property, plant and equipment is provided for under
the straight-line method over the assets' estimated useful lives as
follows:
Useful Lives
------------
Buildings and improvements 10 - 30 years
Machinery and equipment 3 - 10 years
Repair and maintenance costs are charged to operations as incurred
while major improvements are capitalized. When assets are retired or
disposed, the cost and accumulated depreciation thereon are removed from
the accounts and any gains or losses are included in operating results.
Other Assets and Deferred Financing Costs
Other assets include cost in excess of net assets acquired of
$325,000, related to the Company's 1994 acquisition of a petcare business,
which is being amortized on a straight-line basis over 40 years. At
December 31, 2000, goodwill, net of amortization, was $198,000. Deferred
financing costs include fees paid to the lenders and external legal counsel
to assist the Company in obtaining new financing. These costs are being
amortized over the term of the related debt.
In accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company
reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. In performing such review for recoverability, the Company
compares expected future cash flows of assets to the carrying value of
long-lived assets and related identifiable intangibles. If the expected
future cash flows (undiscounted) are less than the carrying amount of such
assets, the Company recognizes an impairment loss for the difference
between the carrying value of the assets and their estimated fair value,
with fair values being determined using projected discounted cash flows at
the lowest level of cash flows identifiable in relation to the assets being
reviewed.
Accounting for Environmental Costs
Accruals for environmental remediation are recorded when it is
probable a liability has been incurred and costs are reasonably estimable.
The estimated liabilities are recorded at undiscounted amounts. It is the
Company's practice to reflect environmental insurance recoveries in the
results of operations for the year in which the litigation is resolved
through settlement or other appropriate legal process.
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 operating loss and tax credit carryforwards and 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, restricted cash, accounts receivable, notes receivable,
restricted common stock, accounts payable, notes payable and current
portion of long-term debt. The carrying value of these instruments
approximates their 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.
In December 1999, the SEC released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101), which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements. SAB 101 allows companies to report certain changes
in revenue recognition related to adopting its provisions as an accounting
change at the time of implementation in accordance with Accounting
Principles Board Opinion No. 20, "Accounting Changes."
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
common stock equivalents outstanding during the period. Potential dilutive
common stock equivalents include shares issuable upon the exercise of
options and warrants. Due to the Company's net loss for the years ended
December 31, 2000, 1999 and 1998, the effect of the Company's potential
dilutive common stock equivalents was anti-dilutive for each year; as a
result, the basic and diluted weighted average number of Common Shares
outstanding and net loss per Common Share are the same. Potentially
dilutive common stock equivalents which were excluded from the net loss per
share calculations due to their anti-dilutive effect amounted to 4,997,869
for 2000, 5,424,743 for 1999, and 2,513,665 for 1998.
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 loss for each period
presented is equal to the net loss for each period as presented in the
Consolidated Statements of Operations.
Reclassifications
Certain previously reported amounts have been reclassified to conform
with the current period presentation.
Business Segments
In 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 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 19, "Business Segments."
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.
Recent Pronouncements
In 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Transactions."
This statement requires companies to record derivatives on the balance
sheet as assets and liabilities measured at fair value. The accounting
treatment of gains and losses resulting from changes in the value of
derivatives depends on the use of the derivative and whether it qualifies
for hedge accounting. The Company will adopt SFAS 133, as amended by SFAS
No. 138, "Accounting for Certain Derivative Investments and Certain Hedging
Activities" on January 1, 2001. The Company has concluded that SFAS No.
133 will not have a significant impact on its financial position, results
of operation or liquidity.
2. Going Concern
The consolidated financial statements have been prepared on the
going-concern basis of accounting, which assumes the Company will realize
its assets and discharge its liabilities in the normal course of business.
The Company has suffered recurring losses from operations, and has negative
working capital and a stockholders' deficit as of December 31, 2000. The
Company is currently highly leveraged, and access to alternative funding
sources is limited. If the Company's operating results deteriorate or the
Company is not successful in renegotiating its financial covenants, a
default could result under the existing loan agreements. Any such default
that is not resolved could result in the curtailment of certain of the
Company's business operations, sale of certain assets or the commencement
of bankruptcy or insolvency proceedings by the Company or its creditors.
Management's plans with regards to the Company's liquidity issues
include an expense reduction program (including the outsourcing of some of
its manufacturing capability) and the expansion of the product line
produced by its Consumer Products division. The Company's continuation as
a going concern is dependent upon its ability to generate sufficient cash
from operations and financing sources to meet its obligations as they
become due. There can be no assurance, however, that management's plan
will be successful.
3. Discontinued Operations
On September 15, 2000, the shareholders of the Company approved, and
the Company consummated, the sale of the assets and transfer of the
liabilities of the Vineland division, and accordingly this division has
been accounted for as a discontinued operation. The buyer assumed
liabilities of approximately $2,300,000, and paid the Company cash in the
amount of $12,500,000, of which $500,000 was placed in an escrow fund to
secure potential obligations of the Company relating to final purchase
price adjustments and indemnification. Currently, the Company has
commenced arbitration proceeding with the purchaser of the Vineland
Laboratories division related to the funds held in escrow. There are
disputes by the parties over certain issues whose financial outcome can not
be determined at this time. Amounts, if any, that are recovered through
the arbitration process will be reflected in income when received. The
Company's results reflect a $114,000 gain on the Vineland sale. Also, the
Vineland division incurred a loss of $1,978,000, $841,000 and $362,000 for
the years ended December 31, 2000, 1999 and 1998, respectively, which are
reflected as a loss from operations of discontinued business.
In 1998, the Company recognized a pre-tax loss of $278,000 to adjust
the carrying value of certain equipment used in the Vineland division,
which the Company had to cease using due to patent issues of the
manufacturer. In 1999, the Company disposed of this equipment, and
realized an additional pre-tax loss of $140,000. Further, in 1998 the
Company also wrote off poultry vaccine product samples and containers not
returned by its customers resulting in the recognition of a pre-tax loss of
$280,000.
Revenues for the Vineland division were $8,609,000, $14,061,000, and
$14,843,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. The assets and liabilities of the Vineland division have
been reflected as net assets of discontinued operations on the Consolidated
Balance Sheet as of December 31, 1999. The components are as follows:
(in thousands)
Receivables, net $ 3,747
Inventory, net 4,906
Property, plant and equipment, net 4,048
Other assets 125
Accounts payable and
accrued expenses (2,345)
-------
$10,481
=======
4. Investments
The Company previously owned a 20% investment in Indovax, Ltd., an
Indian poultry vaccine company. The Indovax investment, which amounted to
$59,000 at December 31, 1999, was principally made to obtain technical
fees, and to sell the Company's products to Indovax so that they could be
distributed in India. The Company considered its investment to be
incidental to earning such fees and profits. The Company did not
participate in the operating and financial policy making of Indovax and,
because Indian nationals controlled Indovax, did not believe it exercised
significant influence over Indovax's operating and financial policies.
Accordingly, the Company accounted for its Indovax investment using the
cost method. Dividends received from Indovax were $0 in 2000 and 1999, and
$22,000 in 1998. The Company did not receive any other payments or fees
from Indovax. During 2000, the Company terminated its relationship with
Indovax subsequent to the sale of the Vineland division. The Company
received $40,000 for the return of all shares held by the Company. A loss
of $20,000 was recorded as a result of this termination and is included as
a component of the gain on the sale of discontinued operations.
Other investments include 271,714 shares of restricted common stock
of IMX Corporation ("IMX"), a publicly-traded company, valued at $.01 and
$.31 per share as of December 31, 2000 and 1999, respectively. The shares
were originally 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, 2000, the Company had not yet recognized
any income related to this agreement. The total investment in IMX stock
was $3,000 at December 31, 2000 and $84,000 at December 31, 1999, with
corresponding amounts reflected as deferred income in the accompanying
Consolidated Balance Sheets.
Under the IMX agreement, the Company agreed to manufacture and supply
100% of IMX's requirements for two products at prices stipulated in the
exclusive Supply Agreement, subject to renegotiation subsequent to 1998.
The IMX shares received were not registered, and were restricted by
contractual requirements. IGI has never successfully supplied the products
designated in the agreement. The Company is currently involved in
discussions with IMX concerning possible modifications to the Supply
Agreement as the Company has determined that it will not supply the
products stipulated by the Supply Agreement but may supply certain other
products based on negotiations with IMX. If the Company is not successful
in these negotiations, the Company may return the IMX shares to IMX.
5. Supply and Licensing Agreements
In 1996, the Company entered into a license and supply agreement with
Glaxo Wellcome, Inc. ("Glaxo"). The agreement granted Glaxo exclusive
rights to market 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, and was to be recognized as revenue over the life of the
agreement. The Company recognized $326,000 of royalty income under the
original Glaxo agreement in 1998. By an agreement dated December 10, 1998,
the license and supply agreement with Glaxo was terminated. The
termination agreement provided that IGI would purchase all of Glaxo's
inventory and marketing materials related to the WellSkin(TM) line in
exchange for a $200,000 promissory note, due and payable in December 1999
bearing interest at a rate of 11%. This inventory was immediately resold
for $200,000 in connection with a new agreement for the WellSkin(TM) line.
The Company recognized no gain or loss on this inventory transaction and,
since the Company never took title to the inventory, it did not recognize
this transaction as revenue.
The Company also issued a promissory note to Glaxo for $608,000,
representing the unearned portion of the advance royalty in exchange for
Glaxo transferring all rights to the WellSkin(TM) trademark to IGI. This
note bore interest at a rate of 11% and was paid in full in 2000.
Prior to the date of the termination agreement, the Company had
accrued through cost of sales a net amount due Glaxo of $404,000 for
operational issues related to the Glaxo agreement. By the terms of the
termination agreement, the net amount payable to Glaxo was forgiven and
cancelled. Accordingly, the Company recognized the effect of this
settlement by reversing the net accrual and reducing cost of sales by
$404,000.
In December 1998, the Company entered into a ten-year supply and
sales agreement with Genesis Pharmaceutical, Inc. ("Genesis") for the
marketing and distribution of the Company's WellSkin(TM) line of skin care
products. The agreement provided that Genesis would pay the Company, in
four equal annual payments, a $1,000,000 trademark and technology transfer
fee which would be recognized as revenue over the life of the agreement.
In addition, Genesis agreed to pay the Company a royalty on its net sales
with certain guaranteed minimum royalty amounts. Genesis also purchased
for $200,000 the WellSkin(TM) inventory and marketing materials which were
previously purchased by the Company from Glaxo. The Company recognized
$541,000 and $280,000 of income related to this agreement for the years
ended December 31, 2000 and 1999, respectively.
On February 14, 2001, the agreement with Genesis was terminated and
replaced with a new manufacturing and supply agreement and an assignment of
the trademark for the WellSkin(TM) line of skin care products. The
manufacturing and supply agreement expires on December 13, 2005 and
contains two ten-year renewal options. The Company received a lump sum
payment of $525,000 for the assignment of the trademark.
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 required Kimberly to make royalty payments based on quantities of
material produced. The Company was also guaranteed minimum royalties over
the term of the agreement. In both 1999 and 1998, the Company recognized
$133,000 as income as a result of the agreement. In July 1999, the Company
signed a new exclusive license agreement with Kimberly, which terminated
the agreement dated March 1997. The July 1999 agreement granted Kimberly
an exclusive license pertaining to patents and improvements within the
field of industrial hand care and cleansing products for non-retail
markets. The latter agreement was in effect from June 29, 1999 through
June 30, 2000. Under this agreement, Kimberly paid the Company
consideration of $120,000, which was recognized over the term of the
agreement. The Company recognized $60,000 of royalty income in 2000 and
$60,000 in 1999.
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 and provides for the payment of 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
$1,487,000, $1,210,000 and $433,000 of royalty income related to this
agreement for the years ended December 31, 2000, 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 use of the
Novasome(R) technology for certain products and distribution channels. The
agreement provided for an up-front license fee of $150,000. In addition,
the agreement provided for additional payments of $50,000 in June 1999,
October 1999 and June 2000, as well as 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. The Company recognized
$126,000 and $91,000 of income from this agreement in 1999 and 1998,
respectively. The Company assessed the impact of SAB 101 on this
agreement, and recorded a cumulative adjustment of $168,000 as of January
1, 2000. The cumulative adjustment relates to the recognition of the up-
front license fee and the three $50,000 payments over the estimated
economic life of the agreement. The Company recognized $55,000 of income
from this agreement in 2000.
In January 2000, the Company entered into a Feasibility and Option
Agreement with Church & Dwight Co., Inc. The agreement provided that the
Company would develop stable Novasome(R) systems for use in oral care
applications. The Company completed its obligation in 2000, and provided
the product to Church & Dwight, who will test the stability, efficiency and
consumer acceptance of the product. The Company recognized $60,000 as
income in 2000 related to the agreement. If Church & Dwight chooses to
proceed with this product, the Company will need to enter into a definitive
license and supply agreement with Church & Dwight.
In January 2000, the Company also entered into an agreement with
Fujisawa Pharmaceutical, Co. Ltd. The purpose of this agreement is for IGI
to incorporate its Novasome(R) technology into a new formulation of their
topical products. This project will be completed in stages with amounts
being paid to the Company with the successful completion of each stage.
The agreement is in effect for a 15 month period. In 2000, the Company
recognized $250,000 of income relating to this product.
6. Supplemental Cash Flow Information
Cash payments for income taxes and interest during the years ended
December 31, 2000, 1999, and 1998 were as follows:
2000 1999 1998
---- ---- ----
(in thousands)
Income taxes refunded, net $ 0 $ 1 $ 0
Interest 757 2,153 2,163
In addition, during the years ended December 31, 2000, 1999, and 1998
the Company had the following non-cash financing and investing activities:
2000 1999 1998
---- ---- ----
(in thousands)
Accrual for additions to other assets $ - $ - $ 40
Note payable to Glaxo (see Notes 5 and 9) - - 808
Note receivable from Genesis (see Note 5) - - (112)
Partial settlement of amounts due to
stockholder in Company Common Stock
(see Note 17) 115 725 -
Issuance of stock for litigation settlement 48 - -
Issuance of stock to 401(k) plan 77 82 -
Issuance of Subordinated Note for interest (see Note 10) 148 - -
See Note 4 "Investments" for discussion regarding the IMX investment.
7. Inventories
Inventories as of December 31, 2000 and 1999 consisted of:
2000 1999
---- ----
(in thousands)
Finished goods $1,458 $2,251
Raw materials 1,127 1,605
----------------
$2,585 $3,856
================
The above amounts are net of reserves for obsolete and slow moving
inventory of $300,000 and $273,000 as of December 31, 2000 and 1999,
respectively.
8. Property, Plant and Equipment
Property, plant and equipment, at cost, as of December 31, 2000 and
1999 consisted of:
2000 1999
---- ----
(in thousands)
Land $ 338 $ 338
Buildings 5,569 5,457
Machinery and equipment 4,657 4,525
Construction in progress - 7
-------------------
10,564 10,327
Less accumulated depreciation (5,221) (4,594)
-------------------
Property, plant and equipment, net $ 5,343 $ 5,733
===================
The Company recorded depreciation expense related to continuing
operations of $627,000, $598,000 and $681,000 in 2000, 1999 and 1998,
respectively.
9. Notes Payable
The Company's licensing and supply agreement with Glaxo was
terminated in December 1998, resulting in the issuance of a $200,000
promissory note. The note, which bore interest at a rate of 11%, was paid
in December 1999. The Company also issued a promissory note to Glaxo for
$608,000 bearing interest at 11%, which represented the unearned portion of
the advance royalty. Principal and interest amounts were payable semi-
annually; the Company made the first payment of $200,000 in December 1999
and the remaining $408,000 was paid in 2000.
10. Debt
Debt as of December 31, 2000 and 1999 consisted of:
2000 1999
---- ----
(in thousands)
Revolving credit facility $ 2,401 $ 5,708
Term loan under Senior Debt Agreement 2,605 7,000
Notes under Subordinated Debt Agreement 7,148 7,000
------------------
12,154 19,708
Less unamortized debt discount under
Subordinated Debt Agreement (see Note 11) 2,369 2,775
------------------
Revolving credit facility and current
portion of long-term debt $ 9,785 $16,933
==================
According to the revised terms of the debt agreements, aggregate
annual principal payments due on debt for the years subsequent to December
31, 2000 are as follows:
Year (in thousands)
---- --------------
2001 $ 367
2002 492
2003 592
2004 1,154
2005 and thereafter 9,549
-------
$12,154
=======
On October 29, 1999, the Company entered into a $22 million senior
bank credit agreement ("Senior Debt Agreement") with Fleet Capital
Corporation ("Fleet Capital") and a $7 million subordinated debt agreement
("Subordinated Debt Agreement") with American Capital Strategies, Ltd.
("ACS").
These agreements enabled the Company to retire approximately $18.6
million of outstanding debt with its former bank lenders, Fleet Bank, NH,
and Mellon Bank, N.A. In connection with the repayment of 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 Statement of Operations.
The Senior Debt Agreement provides for i) a revolving line of credit
facility of up to $12 million, which was reduced to $5 million after the
sale of the Vineland division, based upon qualifying accounts receivable
and inventory, ii) a $7 million term loan, which was reduced to $2.7
million after the sale of the Vineland division, and iii) a $3 million
capital expenditures credit facility, which was paid in full and cancelled
after the sale of the Vineland division. 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% (10.5% at December 31, 2000). The
borrowings under the term loan credit facility bear interest at the prime
rate plus 1.5% or the London Interbank Offered Rate plus 3.75% (11% at
December 31, 2000). As of December 31, 2000, borrowings under the
revolving line of credit and term loan were $2,401,000 and $2,605,000,
respectively. 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 customers and
pay down the revolving line of credit. Drawdowns on the revolving line of
credit are made when needed to fund operations. Quarterly repayments of
the term loan began on August 1, 2000 in the amount of $233,000.
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; if not paid in this fashion,
the additional interest component is capitalized to the principal amount of
the debt. Borrowings under the subordinated notes were $7,148,000, offset
by unamortized debt discount of $2,369,000, as of December 31, 2000 and
$7,000,000, offset by unamortized debt discount of $2,775,000, as of
December 31, 1999. The Subordinated Debt Agreement matures in October
2006. In connection with the Subordinated Debt Agreement, ACS received
warrants to purchase 1,907,543 shares of IGI Common Stock at an exercise
price of $.01 per share (see Note 11, "Detachable Stock Warrants").
ACS 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, 2000 and 1999, ACS was entitled to 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 granted the lenders a security interest in
all of the assets and properties of the Company and its subsidiaries.
These agreements contain financial and other covenants and
restrictions. The Company was not in compliance under certain covenants
under the agreements related to the fixed charges coverage ratio, maximum
debt to equity ratio and accounts payable ratio as of December 31, 1999;
however, the lenders involved amended, as of April 12, 2000, the related
agreements to waive the defaults as of December 31, 1999 and to establish
new covenants as of April 12, 2000.
In connection with the amendment to the Subordinated Debt Agreement,
ACS also agreed to defer the payment by the Company of the cash portion of
interest on subordinated debt for the period from April 1, 2000 to July 31,
2000. Payment of the cash portion of interest on subordinated debt would
be due 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 will be in effect through March 2001, at which time the
additional interest component rate will be adjusted back down to 2%.
On June 26, 2000, the Company entered into the Second Subordinated
Amendment with ACS. Pursuant to the Second Subordinated Amendment, the
Company borrowed an additional $500,000 from ACS through the issuance of
Series C Senior Subordinated Notes due September 30, 2000. In addition,
ACS waived compliance with certain financial covenants contained in the
Subordinated Debt Agreement and modified certain interest payment dates
with respect to the Subordinated Notes. The Second Subordinated Amendment
permitted the Company to issue additional Series C Notes on July 31, 2000
to pay the interest then due and payable on the Subordinated Notes and the
Series C Notes. In August 2000, the Company issued an additional Series C
Note to ACS in the aggregate principal amount of approximately $306,000 for
the interest due. The Series C Notes, including interest, were paid in
full on September 15, 2000, the date of the closing of the sale of the
Vineland division.
Also, on June 26, 2000, the Company entered into a Second Senior
Amendment dated as of June 23, 2000 with Fleet Capital. Pursuant to the
Second Senior Amendment, the Company obtained an "overadvance" of $500,000
under the senior revolving line of credit, repayable in full on the earlier
to occur of September 22, 2000 or the date of the consummation of the sale
of the Vineland division. Under the Second Senior Amendment, Fleet Capital
agreed to forbear from exercising its right to accelerate the maturity of
the senior loans upon the default by the Company under certain financial
covenants. The Company did not borrow any funds from the overadvance.
On September 15, 2000, the shareholders of the Company approved and
the Company consummated the sale of the assets of the Vineland division.
In exchange for receipt of such assets, the buyer assumed certain Company
liabilities, equal to approximately $2,300,000 in the aggregate, and paid
the Company cash in the amount of $12,500,000, of which $500,000 was placed
in an escrow fund to secure potential obligations of the Company relating
to final purchase price adjustments and indemnification. The Company
applied a portion of the proceeds from the sale of the Vineland division to
the outstanding balance on the revolving credit facility, capital
expenditure loan and term loan, totaling approximately $10,875,000. The
Company's operating results reflect a $630,000 extraordinary loss on the
early extinguishment of debt, representing the write off of a portion of
the deferred financing costs, due to the reduction in the Company's
borrowing base under the Senior Debt Agreement.
The Senior Debt Agreement and the Subordinated Debt Agreement, as
amended, contain various affirmative and negative covenants, such as
minimum tangible net worth and minimum fixed charge coverage ratios. Due
to the terms of the Second Senior Amendment and the Second Subordinated
Amendment discussed above, the Company has classified all debt owed to ACS
and Fleet Capital as short-term debt. ACS has waived compliance with
certain financial covenants through December 31, 2000, and the Company is
currently in discussions with Fleet Capital to waive the debt covenant
violations as of December 31, 2000. In addition, the Company is currently
in discussions with ACS and Fleet to renegotiate the covenants going
forward.
The Company remains highly leveraged and as a result, access to
additional funding sources is limited. The Company's available borrowing
under the revolving line of credit facility are dependent on the level of
qualifying accounts receivable and inventory. Unfavorable product sales
performance since April 1, 2000 has limited the available borrowing
capacity of the Company under the revolving line of credit facility. If the
Company's operating results deteriorate or product sales do not improve or
the Company is not successful in renegotiating its financial covenants or
meeting its financial obligations, a default could result 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 bankruptcy or insolvency proceedings by the Company or its
creditors.
11. Detachable Stock Warrants
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 ACS.
These warrants contained 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 was to be settled in cash or
Common Stock, at the option of ACS. Due to the put feature and the
potential cash settlement which was outside of the Company's control, the
warrants were recorded as a liability which was 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 ACS 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. The
Company recognized $358,000 of non-deductible interest income, and $854,000
of non-deductible interest expense for the years ended December 31, 2000
and 1999, respectively, associated with the mark-to-market adjustment of
the warrants.
On April 12, 2000, ACS amended its Subordinated Debt Agreement with
the Company whereby the put provision associated with the original warrants
was replaced by a make-whole feature. The make-whole feature requires the
Company to compensate ACS, in either Common Stock or cash, at the option of
the Company, in the event that ACS ultimately realizes proceeds from the
sale of the Common Stock obtained upon exercise of its warrants that are
less than the fair value of the Common Stock upon exercise of such
warrants. Fair value of the Common Stock upon exercise is defined as the
30-day average value prior to notice of intent to sell. ACS must exercise
reasonable effort to sell or place its shares in the marketplace over a
180-day period, beginning with the date of notice by ACS, before it can
invoke the make-whole provision. As a result of the April 12, 2000
amendment, the remaining liability at April 12, 2000 of $3,338,000 was
reclassified to equity.
As noted above, the make-whole feature requires the Company to
compensate ACS for any decrease in value between the date that ACS notifies
the Company that they intend to sell some or all of the stock and the date
that ACS ultimately disposes the underlying stock, assuming that such
disposition occurs in an orderly fashion over a period of not more than 180
days. The shortfall can be paid using either cash or shares of the
Company's Common Stock, at the option of the Company. Due to accounting
guidance that was issued in September 2000, the Company has reflected the
detachable stock warrants outside of stockholders' equity (deficit) as of
December 31, 2000, since the ability to satisfy the make-whole obligation
using shares of the Company's Common Stock is not totally within the
Company's control.
12. Stock Options
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 2000, 1999 and 1998, 50,398, 66,509 and 46,250 shares of
Common Stock were issued as consideration for directors' fees,
respectively. The Company recognized $84,000, $116,000 and $94,000 of
expense related to these shares during the years ended December 31, 2000,
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. The options were repriced to $2.44 per share,
which was 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, which was 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 ("ESPP"). An aggregate of 300,000 shares of
Common Stock may be issued pursuant to the ESPP. All employees of the
Company and its subsidiaries, including an officer or director who is also
an employee, are eligible to participate in the ESPP. 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 ESPP is implemented through offerings; the first offering
commenced August 26, 1999 and terminated December 31, 1999. The Company
issued 26,918 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. The Company will issue approximately 65,000 shares in 2001
for the 2000 plan 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 891,000
options (net of cancellations), 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 the 1999 Plan 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
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. An aggregate of 675,000 shares have been approved and
authorized for issuance pursuant to this plan. A total of 445,000 options
have been granted to non-employee directors through December 31, 2000. The
options granted under the 1999 Director Stock Option Plan vest in full
twelve months after their respective grant dates and have a maximum term of
ten years.
Stock option transactions in each of the past three years under the
aforementioned plans in total were:
1989, 1991 and 1999 Plans 1988 Non-Qualified Plan
------------------------------------------------ ----------------------------------------------
Weighted Weighted
Shares Price Per Share Average Price Shares Price Per Share Average Price
------ --------------- ------------- ------ --------------- -------------
January 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
Granted 629,700 $ .50 - $2.75 $1.15
Exercised (34,125) $2.00 - $2.44 $2.42
Cancelled (1,022,449) $1.56 - $9.88 $1.92
----------
December 31, 2000 shares
Under option 2,820,326 $ .50 - $9.48 $2.87
==========
Exercisable options at:
December 31, 1998 1,599,840 $5.18 - $ -
========== ======== =====
December 31, 1999 1,909,866 $4.52 - $ -
========== ======== =====
December 31, 2000 2,149,268 $3.32 - $ -
========== ======== =====
The Company uses the intrinsic value method to account for stock
options issued to employees and to directors. The Company uses the fair
value method to account for stock options issued to consultants. The
Company has recorded compensation expense of $39,000, $49,000 and $149,000
in 2000, 1999 and 1998, 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:
2000 1999 1998
---- ---- ----
(in thousands, except per
share information)
Net loss - as reported $(11,437) $(1,584) $(3,029)
Net loss - pro forma (12,521) (1,943) (3,618)
Loss per share - as reported
Basic and diluted $ (1.12) $ (.17) $ (.32)
Loss per share - pro forma
Basic and diluted $ (1.23) $ (.21) $ (.38)
The pro forma information has been determined as if the Company had
accounted for its employee and director 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 2000, 1999 and 1998:
Assumptions 2000 1999 1998
----------- ---- ---- ----
Dividend yield 0% 0% 0%
Risk free interest rate 5.33% - 6.74% 4.93% - 6.36% 4.47% - 5.89%
Estimated volatility factor 216.07% 59.52% - 63.73% 39.51% - 47.87%
Expected life 7 years 6 - 9 years 6 - 9 years
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 2000:
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
- -------------- --------- ------------ -------- --------- --------
$ .50 to $ .99 160,700 9.93 $ .50 25,700 $ .50
$1.00 to $1.99 1,271,000 8.96 $1.58 760,814 $1.56
$2.00 to $2.99 632,626 4.63 $2.25 617,254 $2.24
$3.00 to $3.99 196,000 7.32 $3.32 185,500 $3.33
$4.00 to $4.99 - - - - -
$5.00 to $5.99 150,000 4.81 $5.76 150,000 $5.76
$6.00 to $6.99 190,000 4.28 $6.67 190,000 $6.67
$7.00 to $7.99 90,000 2.83 $7.62 90,000 $7.62
$8.00 to $8.99 100,000 4.46 $8.42 100,000 $8.42
$9.00 to $9.48 30,000 1.00 $9.48 30,000 $9.48
--------- ---------
$ .50 to $9.48 2,820,326 6.95 $2.87 2,149,268 $3.32
========= =========
13. Income Taxes
Total tax provision (benefit) for the years ended December 31, 2000,
1999 and 1998 is as follows:
2000 1999 1998
---- ---- ----
(in thousands)
Loss from continuing operations $5,864 $(401) $(1,136)
Loss from operations of discontinued business - (200) (155)
Extraordinary item - 224 -
---------------------------
Total tax provision (benefit) $5,864 $(377) $(1,291)
===========================
The provision (benefit) for income taxes attributable to loss from
continuing operations before income taxes and extraordinary gain (loss)
included in the Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 is as follows:
2000 1999 1998
---- ---- ----
(in thousands)
Current tax expense:
Federal $ - $ - $ 12
State and local 14 6 14
--------------------------
Total current tax expense 14 6 26
--------------------------
Deferred tax expense (benefit)
Federal 5,133 (337) (1,021)
State and local 717 (70) (141)
--------------------------
Total deferred tax expense (benefit) 5,850 (407) (1,162)
--------------------------
Total expense (benefit) for income taxes $5,864 $(401) $(1,136)
==========================
The provision (benefit) for income taxes differed from the amount of
income taxes determined by applying the applicable Federal tax rate (34%)
to pretax loss from continuing operations before extraordinary items as a
result of the following:
2000 1999 1998
---- ---- ----
(in thousands)
Statutory benefit $ (972) $(521) $(1,293)
Non-deductible interest expense relating to
mark-to-market of put warrants (see Note 11) (122) 290 -
Other non-deductible expenses 36 48 98
State income taxes, net of federal benefit 482 (42) (84)
Research and development tax credits (23) (19) (33)
(Decrease) increase in valuation allowance 6,459 (106) 393
Other, net 4 (51) (217)
----------------------------
$5,864 $(401) $(1,136)
============================
Deferred tax assets included in the Consolidated Balance Sheets as of
December 31, 2000 and 1999, consisted of the following:
2000 1999
---- ----
(in thousands)
Property, plant and equipment $ (88) $ (384)
Prepaid license agreement 1,016 1,168
Deferred royalty payments 1 127
Tax operating loss carryforwards 6,637 3,672
Tax credit carryforwards 711 684
Reserves 331 407
Inventory 158 412
Non-employee stock options 179 156
Other future deductible temporary differences 476 606
Other future taxable temporary differences (40) (43)
-----------------
9,471 6,805
Less: valuation allowance (9,471) (955)
-----------------
Deferred taxes, net $ - $5,850
=================
The Company evaluates the recoverability of its deferred tax assets
based on its history of operating earnings, its plan 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. During 2000,
a number of events occurred which negatively impacted the earnings and cash
flow of the Company and will continue to impact the Company in the future.
These events included the sale of the Vineland division for a lesser amount
than was originally anticipated, the substantial operating loss incurred by
the Vineland division prior to its disposal, and the decrease in the
operating profits of the Companion Pet Product division, due in part to the
ongoing regulatory issues with the FDA (see Note 15). As a result, the
Company has concluded that it is more likely than not that it will be
unable to realize the gross deferred tax assets in the foreseeable future
and has established a valuation reserve for all such deferred tax assets.
Operating loss and tax credit carryforwards for tax reporting
purposes as of December 31, 2000 were as follows:
(in thousands)
--------------
Federal:
Operating losses (expiring through 2020) $16,327
Research tax credits (expiring through 2020) 590
Alternative minimum tax credits (available without expiration) 28
State:
Net operating losses - New Jersey (expiring through 2007) 10,351
Research tax credits - New Jersey (expiring through 2007) 93
Federal net operating loss carryforwards that expire through 2020
have significant components expiring in 2007 (16%), 2018 (23%), 2019 (11%)
and 2020 (42%).
14. Commitments and Contingencies
The Company leases warehousing space, machinery and equipment under
non-cancellable operating lease agreements expiring at various dates in the
future. Rental expense aggregated approximately $232,000 in 2000, $362,000
in 1999 and $371,000 in 1998. Future minimum rental commitments under non-
cancellable operating leases as of December 31, 2000 are as follows:
Year (in thousands)
---- --------------
2001 $28
2002 28
2003 28
2004 28
2005 28
15. U.S. Regulatory Proceedings
For most of 1997 and 1998, the Company was subject to intensive
government regulatory scrutiny by the U.S. Departments of Justice, Treasury
and Agriculture. In June 1997, the Company was advised by the Animal and
Plant Health Inspection Service ("APHIS") of the United States Department
of Agriculture ("USDA") that the Company had shipped quantities of some of
its poultry vaccine products without complying with certain regulatory and
record keeping requirements. The USDA subsequently issued an order that
the Company stop shipment of certain products. Shortly thereafter, in July
1997, the Company was advised that USDA's Office of Inspector General
("OIG") had commenced an investigation into possible violations of the
Virus Serum Toxin Act of 1914 and alleged false statements made to APHIS.
Based upon these events the Board of Directors caused an immediate
and thorough investigation of the facts and circumstances of the alleged
violations to be undertaken by independent counsel. The Company also took
steps to obtain the approval of APHIS for resumption of shipments,
including the submission of an amended and modified regulatory compliance
program, improved testing procedures, and other safeguards. Based upon
these actions, APHIS began lifting the stop shipment order within a month
of its issuance and released all remaining products on March 27, 1998.
On March 24, 1999, the Company reached settlement with the Departments
of Justice, Treasury and Agriculture regarding their pending investigations
and proceedings. The terms of the settlement agreement provided that the
Company enter a plea of guilty to a misdemeanor and pay a fine of $15,000
and restitution in the amount of $10,000. In addition, the Company was
assessed a penalty of $225,000 and began making monthly payments to the
Treasury Department which will continue through the period ending October
31, 2001. The expense of settling with these agencies was reflected in the
1998 results of operations. Further, in response to these events, the
Company restated the Company's consolidated financial statements for the
two years ended December 31, 1996 and the nine months ended September 30,
1997. The settlement did not affect the informal inquiry being conducted by
the U.S. Securities and Exchange Commission ("SEC"), nor did 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. On July 26, 2000, the
Company reached an agreement in principle with the staff of the SEC to
resolve matters arising with respect to the informal investigation of the
Company commenced by the SEC in April 1998. Under the proposed agreement,
which will not be final until approved by the SEC, the Company neither
admits nor denies that the Company violated the financial reporting and
record-keeping requirements of Section 13 of the Securities and Exchange
Act of 1934, as amended, for the three years ended December 31,1997.
Further, in the proposed agreement, the Company agrees to the entry of an
order to cease and desist from any such violation in the future. No
monetary penalty is expected.
The SEC's investigation and proposed settlement focus on alleged
fraudulent actions taken by former members of the Company's management.
Upon becoming aware of the alleged fraudulent activity, IGI, through its
Board of Directors, immediately commenced an internal investigation, which
led to the termination of employment of those responsible. IGI then
cooperated fully with the staff of the SEC and disclosed to the Commission
the results of the internal investigation.
On April 14, 1999, a lawsuit was filed in the U.S. District Court for
the Southern District of New York by Cohanzick Partners, LP, against IGI,
Inc., Edward B. Hager, the Company's former Chairman, the following
directors of the Company: Terrence D. Daniels, Jane E. Hager, Constantine
L. Hampers and Terrence O'Donnell and the following former directors and
officers of the Company: Kevin J. Bratton, Stephen G. Hoch, Surendra Kumar,
Donald J. MacPhee, Lawrence N. Zitto, Paul D. Paganucci, David G. Pinosky
and John O. Marsh (collectively, the "IGI Defendants") and John P. Gallo,
the Company's former President. The suit, which sought approximately
$420,000 in actual damages together with fees, costs and interest, alleged
violations of the securities laws, fraud, and negligent misrepresentation
concerning certain disclosures made and other actions taken by the Company
in 1996 and 1997. The IGI Defendants settled the matter pursuant to a
Stipulation and Order of Dismissal signed by the Court on July 19, 2000.
In exchange for the plaintiff's agreement to dismiss its claims against the
IGI Defendants, the Company issued to the plaintiff 35,000 shares of
unregistered Common Stock of the Company, $.01 par value per share, and the
Company's insurer agreed to pay $97,500 to the plaintiff. The Company
issued the 35,000 shares of Common Stock in June 2000 and recorded the
issuance at the fair market value of the Common Stock on the date of
issuance ($1.375 per share) or $48,125 in the aggregate. As of December
31, 1999, the Company had established a reserve with respect to the
Cohanzick suit. The Company offset the amount of the settlement against
the reserve that had been established.
Other Pending Matters
In April 2000, the FDA initiated an inspection of the Company's
Companion Pet Products division and issued an inspection report on Form FDA
483 on July 5, 2000. The July 5, 2000 FDA report includes several
unfavorable observations of manufacturing and quality assurance practices
and products of the division. On May 24, 2000, in an effort to address a
number of the FDA's stated concerns, the Company permanently discontinued
production and shipment of Liquichlor and on June 1, 2000 temporarily
stopped production of Cerumite. The aggregate annual sales volume for
these products for the years ended December 31, 2000, 1999 and 1998 were
$625,000, $1,059,000 and $937,000 ($358,000, $534,000 and $621,000 for
Liquichlor and $267,000, $525,000 and $316,000 for Cerumite, respectively).
The Company has responded to the July 5, 2000 FDA report and is currently
preparing the required written procedures and documentation on product
preparation to comply with the FDA regulations. The FDA will evaluate the
Company's response and will determine the ultimate outcome of the FDA
inspection. An unfavorable outcome could result in fines, penalties and
the potential permanent or temporary halt of the sale of certain regulated
products, any or all of which could have a material adverse effect on the
Company. The Company has incurred $884,000 year to date in related
expenses to improve production, and to meet documentation, procedural and
regulatory compliance.
On April 6, 2000, officials of the New Jersey Department of
Environmental Protection inspected the Company's storage site in Buena, New
Jersey and issued a Notice of Violation relating to the storage of waste
materials in a number of trailers at the site. The Company has established
a disposal and cleanup schedule and has commenced operations to remove
materials from the site. Small amounts of hazardous waste were discovered
and the Company was issued a notice of violation relating to the storage of
these materials. The Company is cooperating with the authorities and does
not expect to incur any material fines or penalties. The Company has
expensed $160,000, which represents its estimate of the total cost related
to the disposal and cleanup process.
On or around, May 17, 2000, the Company became aware of a spill at
its Vineland manufacturing facility of about 965 gallons of heating oil.
By May 26, 2000 the Company had completed remediation of the soil and
nearby creek that were affected by the heating oil spill. To assure that
the nearby groundwater was not contaminated by the spill, the Company's
environmental consultants advised the Company to drill a test well. The
well has been drilled and the analytical results found no contamination of
groundwater. The Company has expensed all costs related to the initial
remediation and the drilling of the test well.
16. Export Sales
Export revenues by the Company's domestic operations accounted for
approximately 11% of the Company's total revenues in 2000, 1999 and 1998,
respectively. The following table shows the geographical distribution of
the Company's total revenues:
2000 1999 1998
---- ---- ----
(in thousands)
Latin America $ 188 $ 214 $ 154
Asia/Pacific 1,151 1,018 930
Europe 836 1,055 804
Africa/Middle East 38 36 54
-----------------------------
2,213 2,323 1,942
United States/Canada 17,039 18,210 16,410
-----------------------------
Total revenues $19,252 $20,533 $18,352
=============================
Net accounts receivable balances from export sales as of December 31,
2000 and 1999 approximated $598,000 and $523,000, respectively.
17. Certain Relationships and Related Party Transactions
In 1999 and 1998, the Company's former Chief Executive Officer chose
to defer payment of his salary until the Company's cash flow stabilized.
Compensation earned for which payment was to be deferred under this plan
was $460,000 and $380,000 for 1999 and 1998, respectively.
On September 15, 1999, the Company agreed to pay a portion of the
Company's obligation using shares of Company Common Stock. Total payments
through December 31, 1999 resulted in the issuance of 417,744 shares,
valued at $725,000. The shares were valued using the then trading price of
the Company's stock at the date of stock issuance.
At December 31, 1999, accrued compensation totaling $115,000 is
included in the Consolidated Balance Sheets representing compensation
earned but not yet paid. The Company paid this amount in the first quarter
of 2000 by issuing 63,448 shares in satisfaction of the remaining amount
owed.
18. 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. Employees'
contributions are subject to a minimum contribution by participants of 2%
of compensation and a maximum contribution of $10,500 for 2000. 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 $69,000,
$77,000 and $82,000 for the years 2000, 1999 and 1998, respectively.
19. Business Segments
The Company has two reportable segments: Consumer Products and
Companion Pet Products. Products from each of the segments serve different
markets and use different channels of distribution.
Summary data related to the Company's reportable segments for the
three years ended December 31, 2000 appears below:
Consumer Companion Pet
Products Products Corporate Consolidated
-------- ------------- --------- ------------
(in thousands)
2000
Revenues $6,552 $12,700 $ - $19,252
Operating profit (loss) 4,094 836 (5,087) (157)
Depreciation and amortization 243 251 188 682
Identifiable assets 3,647 5,697 3,043 12,387
Capital expenditures 2 235 - 237
1999
Revenues $6,938 $13,595 $ - $20,533
Operating profit (loss) 3,913 3,850 (5,216) 2,547
Depreciation and amortization 188 384 183 738
Identifiable assets 3,885 6,994 10,157 21,036
Capital expenditures 57 188 35 280
1998
Revenues $5,839 $12,513 $ - $18,352
Operating profit (loss) 3,688 2,844 (6,925) (393)
Depreciation and amortization 204 391 209 804
Identifiable assets 4,886 5,660 8,320 18,866
Capital expenditures 9 227 70 306
- --------------------
Note:
(A) Unallocated corporate expenses are principally general and
administrative expenses.
(B) Corporate assets primarily represent fixed assets, deferred tax
assets, cash and cash equivalents and deferred financing costs.
(C) Transactions between reportable segments are not material.
(D) The summary data for the three years ended December 31, 2000 only
represents continuing operations.
20. Quarterly Consolidated Financial Data (Unaudited)
Following is a summary of the Company's quarterly results for each of
the quarters in the years ended December 31, 2000 and 1999 (in thousands,
except per share information).
March 31, June 30, September 30, December 31,
2000 2000 2000 2000 Total
--------- -------- ------------- ------------ -----
Total revenues $ 5,265 $5,208 $ 4,319 $4,460 $ 19,252
Operating profit (loss) 786 (104) (1,351) 512 (157)
Income (loss) from continuing operations (817) 760 (8,684) (34) (8,775)
Net income (loss) (1,046) 510 (10,772) (129) (11,437)
Basic and diluted income (loss) per share
Continuing operations (.08) .07 (.84) (.01) (.86)
Net loss (.10) .05 (1.05) (.02) (1.12)
March 31, June 30, September 30, December 31,
1999 1999 1999 1999 Total
--------- -------- ------------- ------------ -----
Total revenues $ 4,876 $5,602 $ 5,369 $4,686 $ 20,533
Operating profit 496 939 617 495 2,547
Income (loss) from continuing operations (241) 39 (181) (747) (1,130)
Net loss (319) (132) (334) (799) (1,584)
Basic and diluted income (loss) per share
Continuing operations (.02) - (.02) (.08) (.12)
Net loss (.03) (.02) (.04) (.08) (.17)
21. Subsequent Events
On March 2, 2001, the Company became aware of a potential heating oil
leak at its Companion Pet Products manufacturing facility. The Company
immediately notified the New Jersey Department of Environmental Protection
and the local authorities, and hired a contractor to assess the exposure
and required clean up. The Company is not able to estimate its financial
exposure related to this incident at this time.
During the first quarter of 2001, the Company had decided to
outsource the manufacturing for this division. On March 6, 2001, the
Company signed a supply agreement with an entity to manufacture the
products for the Companion Pet Products division. Due to the environmental
situation noted above, the Company has decided to accelerate the
outsourcing process (originally anticipated to be completed by June 2001),
and has ceased operations at the Companion Pet Products manufacturing
facility. On March 8, 2001, the Company terminated the employment of the
manufacturing personnel at this facility. The Company anticipates
recording a charge in the first quarter of 2001 related to the termination
of these employees and the write down of equipment used in the
manufacturing process to its estimated salvage value.
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 Charged to Balance
at beginning costs and Charged to at end
Description of period expenses other accounts Deductions of period
----------- ------------ ---------- -------------- ---------- ---------
December 31, 1998:
Allowance for doubtful accounts $ 128 $ 156 $ - $187 (A) $ 97
Inventory valuation allowance 328 286 - 210 (B) 404
Valuation allowance on net
deferred tax assets 668 382 11 - 1,061
December 31, 1999:
Allowance for doubtful accounts $ 97 $ 48 $ - $ - (A) $ 145
Inventory valuation allowance 404 86 - 217 (B) 273
Valuation allowance on net
deferred tax assets 1,061 - - 105 (C) 955
December 31, 2000:
Allowance for doubtful accounts $ 145 $ 276 $ - $141 (A) $ 280
Inventory valuation allowance 273 843 - 816 (B) 300
Valuation allowance on net
deferred tax assets 955 5,850 2,666 - 9,471
- --------------------
(A) Relates to write-off of uncollectable accounts and recoveries of
previously reserved amounts.
(B) Disposition of obsolete inventories.
(C) Relates to reduction in the valuation allowance as a result of the
expiration of certain state net operating losses in 1999, for which
full valuation allowances had previously been provided.
IGI, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibits marked with a single asterisk are filed herewith. The other exhibits
listed have previously been filed with the Commission and are incorporated
herein by reference.
(3)(a) Certificate of Incorporation of IGI, Inc., as amended.
[Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8, File No. 33-63700, filed June
2, 1993.]
(b) By-laws of IGI, Inc., as amended. [Incorporated by reference to
Exhibit 2(b) to the Company's Registration Statement on Form S-18,
File No. 002-72262-B, filed May 12, 1981.]
*(4) Specimen stock certificate for shares of Common Stock, par value
$.01 per share.
(10.1) 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.]
(10.2) 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.]
(10.3) 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.]
(10.4) 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.]
(10.5) 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.]
(10.6) 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.]
(10.7) 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.]
(10.8) 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".)]
(10.9) 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.]
(10.10) IGI, Inc. 1999 Director Stock Option Plan as approved by the Board
of Directors on September 15, 1999. [Incorporated by reference to
Exhibit 99.1 to the Company's Registration on Form S-8, File No.
333-52312 filed December 20, 2000.]
(10.11) 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.]
(10.12) 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.]
(10.13) Loan and Security Agreement by and among Fleet Capital Corporation
and IGI, Inc., together with its subsidiaries, dated October 29,
1999. [Incorporated by reference to Exhibit 10.21 to the 1999
Form 10-K.]
(10.14) Revolving Credit Note issued by IGI, Inc., together with its
subsidiaries, to Fleet Capital Corporation, dated October 29,
1999. [Incorporated by reference to Exhibit 10.22 to the 1999 Form
10-K.]
(10.15) Term Loan A Note issued by IGI, Inc., together with its
subsidiaries, to Fleet Capital Corporation, dated October 29,
1999. [Incorporated by reference to Exhibit 10.23 to the 1999
Form 10-K.]
(10.16) Term Loan B Note issued by IGI, Inc., together with its
subsidiaries, to Fleet Capital Corporation, dated October 29,
1999. [Incorporated by reference to Exhibit 10.24 to the 1999 Form
10-K.]
(10.17) Capital Expenditure Loan Note issued by IGI, Inc., together with
its subsidiaries, to Fleet Capital Corporation, dated October 29,
1999. [Incorporated by reference to Exhibit 10.25 to the 1999
Form 10-K.]
(10.18) Trademark Security Agreement issued by IGI, Inc. in favor of Fleet
Capital Corporation, dated October 29, 1999. [Incorporated by
reference to Exhibit 10.26 to the 1999 Form 10-K.]
(10.19) Trademark Security Agreement issued by IGEN, Inc. in favor of
Fleet Capital Corporation, dated October 29, 1999. [Incorporated
by reference to Exhibit 10.27 to the 1999 Form 10-K.]
(10.20) Trademark Security Agreement issued by ImmunoGenetics, Inc. in
favor of Fleet Capital Corporation, dated October 29, 1999.
[Incorporated by reference to Exhibit 10.28 to the 1999 Form
10-K.]
(10.21) Patent Security Agreement issued by IGI, Inc. in favor of Fleet
Capital Corporation, dated October 29, 1999. [Incorporated by
reference to Exhibit 10.29 to the 1999 Form 10-K.]
(10.22) Patent Security Agreement issued by IGEN, Inc. in favor of Fleet
Capital Corporation, dated October 29, 1999. [Incorporated by
reference to Exhibit 10.30 to the 1999 Form 10-K.]
(10.23) Pledge Agreement by and between Fleet Capital Corporation and
IGEN, Inc., dated October 29, 1999. [Incorporated by reference to
Exhibit 10.31 to the 1999 Form 10-K.]
(10.24) 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. [Incorporated
by reference to Exhibit 10.32 to the 1999 Form 10-K.]
(10.25) 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. [Incorporated
by reference to Exhibit 10.33 to the 1999 Form 10-K.]
(10.26) Subordination Agreement by and between Fleet Capital Corporation
and American Capital Strategies, Ltd., dated October 29, 1999.
[Incorporated by reference to Exhibit 10.34 to the 1999 Form
10-K.]
(10.27) 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. [Incorporated by reference to
Exhibit 10.35 to the 1999 Form 10-K.]
(10.28) 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. [Incorporated by reference to
Exhibit 10.36 to the 1999 Form 10-K.]
(10.29) 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. [Incorporated by reference to
Exhibit 10.37 to the 1999 Form 10-K.]
(10.30) Warrant to purchase 1,907,543 shares of IGI, Inc. Common Stock,
issued to American Capital Strategies, Ltd. on October 29, 1999.
[Incorporated by reference to Exhibit 10.38 to the 1999 Form
10-K.]
(10.31) Security Agreement issued by IGI, Inc., together with its
subsidiaries, in favor of American Capital Strategies, Ltd., dated
as of October 29, 1999. [Incorporated by reference to Exhibit
10.39 to the 1999 Form 10-K.]
(10.32) Trademark Security Agreement issued by IGI, Inc. in favor of
American Capital Strategies, Ltd., dated as of October 29, 1999.
[Incorporated by reference to Exhibit 10.40 to the 1999 Form
10-K.]
(10.33) Trademark Security Agreement issued by ImmunoGenetics, Inc. in
favor of American Capital Strategies, Ltd., dated as of October
29, 1999. [Incorporated by reference to Exhibit 10.41 to the 1999
Form 10-K.]
(10.34) Trademark Security Agreement issued by Blood Cells, Inc. in favor
of American Capital Strategies, Ltd., dated as of October 29,
1999. [Incorporated by reference to Exhibit 10.42 to the 1999
Form 10-K.]
(10.35) Trademark Security Agreement issued by IGEN, Inc. in favor of
American Capital Strategies, Ltd., dated as of October 29, 1999.
[Incorporated by reference to Exhibit 10.43 to the 1999 Form
10-K.]
(10.36) Patent Security Agreement issued by IGI, Inc. in favor of American
Capital Strategies, Ltd., dated as of October 29, 1999.
[Incorporated by reference to Exhibit 10.44 to the 1999 Form
10-K.]
(10.37) Patent Security Agreement issued by ImmunoGenetics, Inc. in favor
of American Capital Strategies, Ltd., dated as of October 29,
1999. [Incorporated by reference to Exhibit 10.45 to the 1999 Form
10-K.]
(10.38) Patent Security Agreement issued by Blood Cells, Inc. in favor of
American Capital Strategies, Ltd., dated as of October 29, 1999.
[Incorporated by reference to Exhibit 10.46 to the 1999 Form
10-K.]
(10.39) Patent Security Agreement issued by IGEN, Inc. in favor of
American Capital Strategies, Ltd., dated as of October 29, 1999.
[Incorporated by reference to Exhibit 10.21 to the 1999 Form
10-K.]
(10.40) Georgia Leasehold Deed to Secure Debt issued by IGI, Inc. in favor
of American Capital Strategies, dated as of October 29, 1999.
[Incorporated by reference to Exhibit 10.48 to the 1999 Form
10-K.]
(10.41) 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. [Incorporated by reference to Exhibit 10.21 to the 1999
Form 10-K.]
(10.42) 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. [Incorporated by reference to Exhibit 10.50 to the 1999
Form 10-K.]
(10.43) Pledge and Security Agreement issued by IGI, Inc. and
ImmunoGenetics, Inc. in favor of American Capital Strategies,
Ltd., dated as of October 29, 1999. [Incorporated by reference to
Exhibit 10.51 to the 1999 Form 10-K.]
(10.44) Employment Agreement between IGI, Inc. and Manfred Hanuschek dated
as of July 26, 1999. [Incorporated by reference to Exhibit 10.52
to the 1999 Form 10-K.]
(10.45) Amendment to Employment Agreement between Manfred Hanuschek and
IGI, Inc. dated March 9, 2000. [Incorporated by reference to
Exhibit 10.53 to the 1999 Form 10-K.]
(10.46) Employment Agreement between IGI, Inc. and Robert McDaniel dated
as of September 1, 1999. [Incorporated by reference to Exhibit
10.54 to the 1999 Form 10-K.]
(10.47) Pledge Agreement by and between Fleet Capital Corporation and IGI,
Inc., dated October 29, 1999. [Incorporated by reference to
Exhibit 10.55 to the 1999 Form 10-K.]
(10.48) Employment Agreement between IGI, Inc., and Rajiv Mathur dated
February 22, 1999. [Incorporated by reference to Exhibit 10.56 to
the 1999 Form 10-K.]
(10.49) 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. [Incorporated
by reference to Exhibit 10.57 to the 1999 Form 10-K.]
(10.50) 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. [Incorporated by reference to Exhibit
10.58 to the 1999 Form 10-K.]
(10.51) Amendment No. 2 to Note and Equity Purchase Agreement dated as of
June 26, 2000 by and among IGI, Inc., IGEN, Inc., ImmunoGenetics,
Inc., Blood Cells, Inc., American Capital Strategies, Ltd. and ACS
Funding Trust I. [Incorporated by reference to Exhibit 99.1 to
the Company's Current Report on Form 8-K filed July 23, 2000.]
(10.52) Second Amendment to Loan and Security Agreement dated as of June
23, 2000 by and among IGI, Inc., IGEN, Inc., ImmunoGenetics, Inc.,
Blood Cells, Inc. and Fleet Capital Corporation. [Incorporated by
reference to Exhibit 99.2 to the Company's Current Report on Form
8-K filed July 23, 2000.]
(10.53) Termination Agreement dated December 10, 1998 between the Company
and Glaxo Wellcome, Inc. [Incorporated by reference to Exhibit
10.61 to the 1999 Form 10-K.]
(10.54) Asset Purchase Agreement dated as of June 19, 2000 by and between
the Buyer and the Company [Incorporated by reference to Annex A to
the Company's Definitive Proxy Statement on Schedule 14A effective
September 1, 2000].
(10.55) Amendment and Waiver to Loan and Security Agreement dated as of
October 31, 2000 between Fleet Capital Corporation and the Company
and its affiliates. [Incorporated by reference to Exhibit 10.1 to
the Quarterly Report on Form 10-Q for the quarter ended September
30, 2001.]
(10.56) Letter Waiver dated November 9, 2000 between American Capital
Strategies, Ltd. and the Company and its affiliates. [Incorporated
by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001.]
(10.57) Separation Agreement and General Release dated September 1, 2000
between the Company and Paul Woitach. [Incorporated by reference
to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001.]
*(10.58) Certificate of Release and Termination of Contract dated as of
March 1, 2001 between Genesis Pharmaceutical, Inc. and Tristrata
Technology, Inc.
*(10.59) Manufacturing and Supply Agreement dated as of February 14, 2001
among IGI, Inc., IGEN, Inc., ImmunoGenetics, Inc. and Genesis
Pharmaceutical, Inc.
*(10.60) Assignment of Trademark dated as of February 14, 2001 among IGI,
Inc., IGEN, Inc, ImmunoGenetics, Inc. and Genesis Pharmaceutical,
Inc.
*(10.61) Supply Agreement dated as of March 6, 2001 between Corwood
Laboratory, Inc. and IGI, Inc.
*(10.62) License Agreement dated as of March 6, 2001 among IGI, Inc., IGEN,
Inc., ImmunoGenetics, Inc. and its division EVSCO Pharmaceutical
and Corwood Laboratory, Inc.
*(10.63) Employment Agreement between IGI, Inc. and Domenic N. Golato
dated as of August 31, 2000.
(21) List of Subsidiaries.
*(23.1) Consent of KPMG LLP.
*(23.2) Consent of PricewaterhouseCoopers LLP. Dated August 18, 2000