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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year Ended Commission File No.
- --------------------- -------------------
December 31, 2002 001-08568
IGI, Inc.
(Exact name of registrant as specified in its charter)
Delaware 01-0355758
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
105 Lincoln Avenue, Buena, NJ 08310
- ----------------------------- -----
(Address of principal executive offices) (Zip Code)
(856) 697-1441
--------------
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Common Stock ($.01 par value)
Registered on the American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___ No _X_.
The aggregate market value of the Registrant's Common Stock, par value $.01
per share, held by non-affiliates of the Registrant at June 28, 2002, as
computed by reference to the closing price of such stock, was approximately
$6,340,000.
The number of shares of the Registrant's Common Stock, par value $.01 per
share, outstanding at March 7, 2003 was 11,385,803 shares.
Documents Incorporated by Reference: Portions of the Registrant's definitive
proxy statement to be filed with the Commission on or before April 30, 2003
are incorporated herein by reference in Part III.
1
Part I
Item 1. Business
IGI, Inc. ("IGI" or the "Company") was incorporated in Delaware in
1977. Its executive offices are at 105 Lincoln Avenue, Buena, New Jersey.
The Company is engaged in the production and marketing of cosmetics and skin
care products.
In December 1995, IGI distributed its ownership of its majority-owned
subsidiary, Novavax, Inc. ("Novavax"), in the form of a tax-free stock
dividend, to IGI stockholders. Novavax had comprised the biotechnology
business segment of IGI. In connection with the distribution, the Company
paid Novavax $5,000,000 in return for a 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.
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 likewise 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" and 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.
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 $2,629,000 or 60% of 2002 revenues, $2,725,000 or 63% of 2001 revenues
and $3,692,000 or 56% of 2000 revenues.
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 installment 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. The Company recognized $541,000
of royalty income related to this agreement for the year ended December 31,
2000.
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, which is being recognized
ratably over the term of the arrangement. The Company recognized $105,000 of
income related to this agreement in each of the years ended December 31,
2002 and 2001.
The Company entered into a sublicense agreement with Johnson & Johnson
Consumer Products, Inc. ("J&J") in 1995. The agreement provided J&J with a
sublicense 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 $714,000, $856,000 and
$1,487,000 of royalty income related to this agreement for the years ended
December 31, 2002, 2001 and 2000, respectively. As noted above, royalties
are calculated on net sales of microencapsulated retinoid products. The
future sales trends of these products are not known by the Company.
In August 1998, the Company granted Johnson & Johnson Medical ("JJM"),
a division of Ethicon, Inc., worldwide sublicense rights for the use of the
Novasome(R) technology for certain products and distribution channels. The
agreement provided for an up-front sublicense 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 sublicensed products. The Company recognized $32,000,
$105,000 and $55,000 of royalty income in 2002, 2001 and 2000, respectively,
related to the agreement. See Note 5 "Supply and Sublicensing Agreements" of
the Consolidated Financial Statements for a discussion of the cumulative
effect of an accounting change which relates to this agreement. In March of
2002, the agreement between the Company and JJM was amended stating that JJM
is no longer required to make minimum payments and the sublicense has been
converted to a non-exclusive worldwide sublicense with
2
the exception of Japan, which will remain exclusive. If the amount of
royalties paid by JJM equals or exceeds $200,000 in any year, the following
calendar year will become an exclusive worldwide agreement and will remain
so until royalties fall below that amount.
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 tested the stability, efficiency and
consumer acceptance of the product. The Company recognized $60,000 of income
related to this agreement for the year ended December 31, 2000. If Church &
Dwight chooses to proceed with this product, the Company will need to enter
into a definitive sublicense and supply agreement with Church & Dwight.
Also in January 2000, the Company entered into an agreement with
Fujisawa Pharmaceutical, Co. Ltd. ("Fujisawa") The purpose of this agreement
was for IGI to incorporate its Novasome(R) technology into a new formulation
of its topical products. This project was completed in stages with amounts
being paid to the Company with the successful completion of each stage. The
agreement was in effect for a 15 month period. The Company recognized
$250,000 of income relating to this project for the year ended December 31,
2000. Currently, the project has been suspended by Fujisawa.
In July 2001, the Company entered into a Research, Development and
Manufacturing Agreement with Prime Pharmaceutical Corporation ("Prime"). The
purpose of the agreement was to develop a facial lotion, a facial creme and
scalp application for the treatment of psoriasis. The project has been
completed in stages with amounts being paid to the Company with the
successful completion of each stage. In addition, the Company has agreed to
rebate $3.60 per kilogram for the first 12,500 kilograms of product
manufactured for and sold to Prime. The Company recognized $40,000 of
product sales related to this project in 2001.
In November 2002, the Company entered into a Manufacturing Service
Agreement with Desert Whale Jojoba Company, Inc. The purpose of this
agreement is to develop and manufacture jojobasomes to be used as a personal
care product. This project is still in the developmental stage and no
revenue has been recognized as of December 31, 2002.
Non-recurring Charge
During September 2001, the Company committed to a plan of sale for its
corporate office building. An impairment charge of $605,000 was recorded in
the third quarter of 2001 to reflect the difference between the selling
price, less related selling costs, and the net book value of the building.
The Company sold the building during February 2002.
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. In March 2001, the Company negotiated a
resolution and received approximately $237,000 of the escrowed funds. In
addition, the Company reduced an accrual by $46,000 for costs related to the
sale. The Company's results reflect a $283,000 and $114,000 gain on the sale
of the Vineland division for the years ended December 31, 2001 and 2000,
respectively. The Vineland division incurred an operating loss of $1,978,000
for the year ended December 31, 2000.
On May 31, 2002, the shareholders of the Company approved, and the
Company consummated, the sale of the assets and transfer of the liabilities
of the Companion Pet Products division, which marketed companion pet care
related products. The buyer assumed liabilities of approximately $986,000,
and paid the Company cash in the amount of $16,254,000. The Company's
results reflect a $12,433,000 gain on the sale of the Companion Pet Products
division for the year ended December 31, 2002. The gain is net of direct
costs incurred by the Company in connection with the sale and the reduction
in the purchase price resulting from post-closing adjustments. The Companion
Pet Products division incurred losses of $523,000, $720,000 and $581,000 for
the years ended December 31, 2002, 2001 and 2000, respectively. The results
for the year ended December 31, 2002 included an impairment charge of
$630,000 related to the Companion Pet Products warehouse. Also, upon the
sale, the Company paid all of its debt and interest owed to Fleet Capital
Corporation ("Fleet") and American Capital Strategies, Ltd. ("ACS"). As a
result, the Company incurred a $2,654,000 extraordinary loss from early
extinguishment of debt in connection with the prepayment fees paid to Fleet
and ACS and the write-off of the ACS debt discount.
In the first quarter of 2001, the Company decided to outsource the
manufacturing for its Companion Pet Products division. The Company
accelerated the outsourcing process (originally anticipated to be completed
by June 2001) due primarily to the discovery on March 2, 2001 of the
presence of environmental contamination resulting from an unknown heating
oil leak at the Companion Pet Products manufacturing site, at which time the
Company ceased its manufacturing operations at the facility. On March 6,
2001, the Company signed a supply agreement with a third party to
manufacture products for the Companion Pet Products division. On March 8,
2001, the Company terminated the employment of the manufacturing personnel
at this facility.
During 2001, the Company recorded non-recurring charges related to the
cessation and shutdown of the manufacturing operations at the Companion Pet
Products facility of $991,000 offset by a grant from the State of New Jersey
for $81,000, for a net charge of $910,000. The Company applied to the New
Jersey Economic Development Authority (NJEDA) and the New Jersey Department
of Environmental Protection (NJDEP) for a grant and loan to provide partial
funding for the costs of investigation and remediation of the environmental
contamination discovered at the Companion Pet Products facility. On June 26,
2001, the Company
3
was awarded an $81,000 grant and a $246,000 loan. The $81,000 grant was
received in the third quarter of 2001. The loan, which requires monthly
principal payments, has a term of ten years at a rate of interest of 5%. The
Company received funding of $182,000 from the loan during 2002.
The composition and activity of the non-recurring charges (including
the amount related to the sale of the corporate office building) are as
follows (amounts in thousands):
Reduction of Cash Net accrual at Cash Additional Net accrual at
Description Amount assets Expenditure December 31, 2001 expenditure expense December 31, 2002
- ----------- ------ ------------ ----------- ----------------- ----------- ---------- ------------------
Impairment of property and
equipment $ 314 $ (314) $ - $ - $ - $ - $ -
Environmental clean upcosts,
net of State grant 469 - (187) 282 (23) 70 329
Impairment of corporate
office building 605 (605) - - - - -
Write off of inventory 91 (91) - - - - -
Plant shutdown costs 21 (11) (10) - - - -
Severance 15 - (15) - - - -
-----------------------------------------------------------------------------------------------
$1,515 $(1,021) $(212) $282 $(23) $70 $329
===============================================================================================
Manufacturing
The Company's manufacturing operations include bulk manufacturing and
testing of cosmetics, dermatologics, emulsions and shampoos. The raw
materials included in these products are available from several suppliers.
The Company produces quantities of Novasome(R) lipid vesicles adequate to
meet its current and foreseeable needs.
Research and Development
The Company's consumer products development efforts are directed
toward Novasome(R) encapsulation to improve performance and efficacy of
pesticides, specialty and other chemicals, biocides, cosmetics, consumer
products, flavors and dermatologic products. Total product development and
research expenses were $549,000, $536,000 and $853,000 in 2002, 2001 and
2000, 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 patents 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
Government Regulations
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 its 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 FDA, the Company also is
subject to regulation under the Occupational Safety and Health 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.
4
Employees
At February 22, 2003, the Company had 21 full-time employees, of whom
three were in marketing, sales, distribution and customer support, six in
manufacturing, five in research and development, and seven in executive,
finance and administrative functions. The Company has no collective
bargaining agreement with its employees, and believes that its employee
relations are good.
Item 2. Properties
The Company's executive administrative offices are located in Buena in
a 25,000 square foot facility built in 1995. This facility is also used for
production, product development, marketing, and warehousing for the
Company's cosmetic, dermatologic and personal care products. In addition,
the Company owns a vacant facility, also located in Buena, New Jersey, which
was used for warehousing and distribution of veterinary pharmaceuticals
prior to the sale of the Companion Pet Products business. The facility was
built in 1971 and expanded in 1975. The facility presently contains 41,200
square feet of usable floor space and is situated on eight acres of land.
The Company's former corporate office building in Buena, New Jersey was sold
in the first quarter of 2002.
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 investigations and proceedings
that they had initiated earlier. 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. The fine and
restitution were paid in 2002. In addition, the Company was assessed a
penalty of $225,000 and began making monthly payments to the Treasury
Department which continued through the period ending January 31, 2002. The
expense of settling with these agencies was reflected in the 1998 results of
operations. The settlement did not affect the inquiry being conducted by the
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
inquiry and requested information and documents from the Company, which the
Company voluntarily provided to the SEC. On March 13, 2002, the Company
reached a settlement with the staff of the SEC to resolve matters arising
with respect to the investigation of the Company. Under the settlement, the
Company neither admitted nor denied 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 three years ended December 31,
1997. Further, the Company agreed to the entry of an order to cease and
desist from any such violation in the future. No monetary penalty was
assessed.
The SEC's investigation and settlement focused 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 cooperated fully with
the staff of the SEC and disclosed to the SEC the results of the internal
investigation.
Other Pending Regulatory Matters
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 Notices of Violation relating to the storage of waste
materials in a number of trailers at the site. The Company established a
disposal and cleanup schedule and completed the removal of materials from
the site. The Company is cooperating with the authorities and has accrued
the estimated expense of settling with this agency.
On March 2, 2001, the Company discovered the presence of environmental
contamination resulting from an unknown heating oil leak at its Companion
Pet Products manufacturing site. 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. Based on
the initial information from the contractor, the Company originally
estimated the cost for the cleanup and remediation to be $310,000. In
September 2001, the contractor updated the estimated total cost for the
cleanup and remediation to be $550,000. A further update was performed in
December 2002 and the final estimated cost was increased to $620,000, of
which $329,000 remains accrued as of December 31, 2002. As a result of the
increase in estimated costs, the Company recorded an additional $240,000 of
expense during the third quarter of 2001, and an additional expense of
$70,000 in the fourth quarter of 2002. The majority of the remediation will
be completed by the Spring of 2003. Subsequently, there will be periodic
testing and removal performed, which is projected to span over the next five
years. The estimated cost of the monitoring is included in the accrual.
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 2002.
5
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 22, 2003, (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
- ---- --- ------- ---------------------------------------
John F. Ambrose 63 2000 President and Chief Executive Officer since September 2000.
Vice President of Sales and Marketing at Digitrace Care
Services of Boston from November 1997 through September
2000.
Domenic N. Golato 47 2000 Senior Vice President and Chief Financial Officer 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.
Officers are elected on an annual basis. Domenic N. Golato has an employment
agreement with the Company subject to an annual automatic renewal for a one-
year term unless the Company provides Mr. Golato with timely notice of non-
renewal as per the terms thereof.
6
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company has never paid cash dividends on its Common Stock. (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").
On June 12, 2002, AMEX notified the Company that it had accepted the
Company's plan of compliance and had granted the Company an extension of
time to regain compliance with the continued listing standards by December
31, 2002. 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
---- ---
2001
- ----
First quarter $ .88 $ .47
Second quarter $1.00 $ .45
Third quarter $ .71 $ .46
Fourth quarter $ .95 $ .52
2002
- ----
First quarter $ .96 $ .54
Second quarter $ .80 $ .50
Third quarter $ .79 $ .46
Fourth quarter $ .90 $ .44
The approximate number of holders of record of the Company's Common
Stock at March 7, 2003 was 717 (not including stockholders for whom shares
are held in a "nominee" or "street" name).
7
Part II
Item 6. Selected Financial Data
Five-Year Summary of Selected Financial Data (in thousands, except per share
information):
Year ended December 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Statement of Operating Results
Revenues $ 4,364 $ 4,294 $ 6,552 $ 6,938 $ 5,839
Operating profit (loss) 79 (752) (993) (1,303) (3,237)
Loss from continuing operations (476) (1,303) (8,194) (2,533) (3,534)
Income (loss) from discontinued operations * (523) (720) (2,559) 561 505
Gain on disposal of discontinued operations 12,433 283 114 - -
Extraordinary gain (loss) from early
extinguishment of debt (2,654) - (630) 387 -
Cumulative effect of accounting change - - (168) - -
Net income (loss) 8,780 (1,740) (11,437) (1,584) (3,029)
Income (loss) per share-basic and diluted:
From continuing operations $ (.05) $ (.11) $ (.80) $ (.12) $ (.28)
From discontinued operations (.05) (.07) (.25) (.09) (.04)
Gain on disposal of discontinued operations 1.09 .03 .01 - -
Extraordinary gain (loss) from early
extinguishment of debt (.23) - (.06) .04 -
Cumulative effect of accounting change - - (.02) - -
Net income (loss) .76 (.15) (1.12) (.17) (.32)
As of December 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance Sheet Data
Working capital equity (deficit) $ 2,208 $ (6,588) $ (6,894) $ (3,084) $ (4,378)
Total assets 5,929 10,539 12,387 31,517 30,604
Short-term debt and notes payable 18 9,804 9,785 17,341 19,318
Long-term debt and notes payable
(excluding current maturities)** 164 - - - 408
Stockholders' equity (deficit) 4,509 (4,185) (3,275) 5,533 5,923
Average number of common and
common equivalent shares:
Basic and diluted 11,430 10,957 10,205 9,605 9,470
* 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. On May 31, 2002 the shareholders
of the Company approved and the Company consummated the sale of the
assets and transfer of the liabilities of the Companion Pet Products
division. The Consolidated Financial Statements present these segments
as discontinued operations.
** In connection with certain amendments to the Company's debt
agreements, the Company reflected certain debt as short-term debt as
of December 31, 2001, 2000 and 1999.
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 and on
management's beliefs and assumptions. 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.
8
Results of Operations
From mid-1997 through 2001, the Company was subject to intense
governmental and regulatory scrutiny and was also confronted with a number
of material operational issues. These matters have had material adverse
effects on the Company's financial condition and results of operations.
2002 Compared to 2001
The Company had net income attributable to common stock of $8,647,000,
or $.76 per share, in 2002 compared to a net loss attributable to common
stock of $1,693,000, or $(.15) per share, in 2001. The majority of the
change from 2002 to 2001 is the result of the gain on the sale of the
Companion Pet Products division net of the extraordinary loss from the early
extinguishment of debt.
Total revenues for 2002 were $4,364,000, which represents an increase
of $70,000, or 2%, from revenues of $4,294,000 in 2001. The increased
revenues were due to product sales to a new customer, Vetoquinol, USA,
offset by lower licensing revenues. Licensing and royalty income of $851,000
in 2002 decreased by $215,000 compared to 2001, primarily as a result of
decreased licensing revenues from Johnson & Johnson. Licensing revenues from
Johnson & Johnson are based on their sales. A significant portion of the
Company's product sales are attributable to a single customer. In addition,
licensing and royalty income is primarily generated from arrangements with
two customers.
Product sales of $3,513,000 in 2002 increased $285,000 compared to
2001 as a result of sales of our pet care products to Vetoquinol, USA.
Vetoquinol became a new customer for the Company as a result of the sale of
the Companion Pet Products division. The Company continues to manufacture
several of the pet care shampoos and lotions for Vetoquinol.
Cost of sales increased by $266,000, or 24%, in 2002 as compared to
2001. As a percentage of product sales, cost of sales increased from 34% in
2001 to 39% in 2002. The decrease in gross profit from 66% in 2001 to 61% in
2002 was the result of fixed costs being allocated solely to the Consumer
Products division since the sale of the Companion Pet Products division and
the change in the mix of the products sold.
Selling, general and administrative expenses decreased by $435,000, or
16%, from $2,793,000 in 2001 to $2,358,000 in 2002. As a percentage of
revenues, these expenses were 65% of revenues for 2001 compared to 54% in
2002. Overall, expenses decreased due to staff reductions after the sale of
the Companion Pet Products division, reduction in accounting fees and bank
charges and from the forgiveness of penalties from a New Jersey Sales Tax
Assessment, which was waived due to an amnesty program.
Product development and research expenses increased by $13,000 in
2002, or 2%, compared to 2001. The increase was principally for an
additional research staff to work on new and existing projects.
Net interest expense decreased $539,000, or 66%, from $822,000 in 2001
to $283,000 in 2002. The decrease was a result of the Senior Debt and
Subordinated Debt Agreements being paid off with proceeds from the sale of
the Companion Pet Products division.
Tax expense in 2002 is a result of a New Jersey change in the tax law
in July 2002 that is retroactive to January 1, 2002. The change suspended
the use of net operating losses for a two year period. Therefore, the gain
from the sale of the Companion Pet Products division could not be offset
against prior net operating losses, resulting in the current year's tax
expense. The effect of this change is required to be reflected as a
component of continuing operations. The Company sold some of its state
operating loss carryforwards in exchange for proceeds of $249,000 and
$289,000 in 2002 and 2001, respectively. The 2002 proceeds partially offset
the effect of the tax law change.
Discontinued operations for 2002 consisted of the gain on the sale of
the Companion Pet Products division and their loss from operations. In 2001,
discontinued operations consisted of the remaining gain from the sale of the
Vineland division and the loss from operations from the Companion Pet
Products division.
The extraordinary loss on the early extinguishment of debt of
$2,654,000 in 2002 relates to the write off of the deferred financing costs
and the unamortized debt discount under the Subordinated Debt Agreement in
connection with the repayment of the Senior Debt and the Subordinated Debt.
2001 Compared to 2000
The Company had a net loss attributable to common stock of $1,693,000,
or $(.15) per share, in 2001 compared to a net loss attributable to common
stock of $11,437,000, or $(1.12) per share, in 2000. Excluding the mark-to-
market adjustment for the detachable stock warrants, the Company had a net
loss of $1,740,000 for 2001 compared to a net loss of $11,437,000 for 2000.
The decrease in the net loss was primarily due to lower operating expenses
of $2,499,000 in 2001, a lower loss from discontinued operations in 2001 and
the establishment of an additional valuation allowance for deferred taxes in
2000. This was offset by a reduction in revenues and $605,000 of non-
recurring charges in 2001.
Total revenues in 2001 were $4,294,000, which represents a decrease of
$2,258,000, or 34%, from revenues of $6,552,000 in 2000. Licensing and
royalty income of $1,066,000 in 2001 decreased by $1,387,000 compared to
2000 mainly due to reductions in one time research and development contracts
and Johnson & Johnson royalty income. Licensing revenues from Johnson &
Johnson are based on their sales. Product sales decreased by $871,000,
primarily due to lower Estee Lauder sales.
Cost of sales, as a percentage of product sales, remained constant at
34% for 2001 and 2000.
9
Selling, general and administrative expenses decreased $2,506,000, or
47%, from $5,299,000 in 2000. As a percentage of revenues, these expenses
were 81% of revenues for 2000 compared to 65% in 2001. Overall expenses
decreased due to decreased professional fees, reduced staffing, and
additional cost saving measures that were implemented during 2000.
Product development and research expenses decreased $317,000, or 37%,
compared to 2000. The decrease was principally related to the departure from
the Company of the head of Research and Development.
Interest expense decreased $515,000, or 39%, from $1,337,000 in 2000
to $822,000 in 2001. The decrease in interest was due to the reduction of
outstanding debt and lower interest rates, offset by the net adjustment
amounting to $358,000 in 2000 related to the mark-to-market adjustment on
warrants granted to ACS to purchase 1,907,543 shares of the Company's stock.
During the year ended December 31, 2001, the Company sold some of its
state operating loss carryforwards in exchange for net proceeds of $289,000.
The increase in tax expense in 2000 was the result of an additional
valuation allowance of $6,448,000 that was recorded during the quarter ended
September 30, 2000.
Discontinued operations for 2001 consisted of the remaining gain from
the sale of the Vineland division and the loss from the Companion Pet
Products division. In 2000, discontinued operations consisted of the gain
from the sale of the Vineland division and the loss from operations of both
the Companion Pet Products and Vineland divisions.
On March 2, 2001, the Company discovered the presence of environmental
contamination resulting from an unknown heating oil leak at the Companion
Pet Products manufacturing site. The Company immediately notified the New
Jersey Department of Environmental Protection and the local authorities, and
hired a contractor to assess the exposure and start the clean up. The
Company had previously decided that it would outsource the manufacturing for
this division during the second quarter of 2001. Due to the environmental
situation noted above, the Company accelerated the outsourcing process and
executed a supply agreement on March 6, 2001 and ceased manufacturing
operations at the facility. During 2001, the Company recorded, as part of
discontinued operations, non-recurring charges related to the cessation and
shutdown of the manufacturing operations at the Companion Pet Products
facility of $991,000 offset by a grant from the State of New Jersey for
$81,000, for a net charge of $910,000.
Liquidity and Capital Resources
The Company's operating activities used $724,000 of cash during
2002, compared to $177,000 provided in 2001. The majority of the change was
due to reductions in accounts payable and accrued expenses, using proceeds
from the sale of the Company's Companion Pet Products division.
The Company generated $15,925,000 of cash in 2002 from investing
activities compared to $32,000 in 2001. The increase in the source of cash
was primarily due to the proceeds from the sale of the Companion Pet
Products division and the former corporate office building.
The Company's financing activities used $13,212,000 of cash in 2002
compared to $268,000 in 2001. The difference is the result of the pay-off of
the Fleet and ACS debt using the proceeds from the sale of the Companion Pet
Products division and the purchase of treasury shares.
The Company's principal sources of liquidity are cash from operations
and cash and cash equivalents. Management believes that existing cash and
cash equivalents and cash flows from operations will be sufficient to meet
the Company's foreseeable cash needs for at least the next year. However,
there may be acquisition and other growth opportunities that require
additional external financing. Management may, from time to time, seek to
obtain additional funds from the public or private issuances of equity or
debt securities. There can be no assurance that such financings will be
available or available on terms acceptable to the Company.
10
Our total committed contracts that will affect cash over the next five
years and beyond are as follows:
Expected Cash Payments By Year
------------------------------
(in thousands)
2007 and
Contractual Commitments 2003 2004 2005 2006 beyond Total
- ----------------------- ---- ---- ---- ---- -------- -----
Debt obligations $14 $15 $16 $17 $120 $182
Operating lease obligations 51 50 48 17 - 166
------------------------------------------------
$65 $65 $64 $34 $120 $348
------------------------------------------------
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.
Effect of Rapidly Changing Technologies
- ---------------------------------------
The Company expects to sublicense 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
sublicensing could be materially adversely affected.
American Stock Exchange (AMEX) Continuing Listing Standards
- -----------------------------------------------------------
On March 28, 2002, the Company was notified by AMEX that it was below
certain of the Exchange's continuing listing standards. Specifically, the
Company was required to reflect a profit from continuing operations and a
net profit for 2002 and a minimum of $4,000,000 in stockholders' equity by
December 31, 2002 in order to remain listed.
On April 25, 2002, the Company submitted a plan of compliance to AMEX.
On June 12, 2002, AMEX notified the Company that it had accepted the
Company's plan of compliance and had granted the Company an extension of
time to regain compliance with the continued listing standards by December
31, 2002. The Company will be subjected to periodic review by the AMEX staff
during the extension period. The 2002 loss from continuing operations
reflects tax expense associated with a change in the New jersey tax law that
was retroactive to January 1, 2002. As a result of this tax expense, the
Company will not be in compliance with the AMEX listing standards for income
from continuing operations. The Company notified AMEX of this issue on
November 14, 2002 after release of the Company's 2003 third quarter results.
As of this date, AMEX has not responded to the Company. The Company will
contact AMEX shortly after release of the 2002 year end results to resolve
its listing status.
Recent Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated or completed after June 30, 2001. SFAS No.
141 also specifies criteria that must be met for intangible assets acquired
in a purchase method business combination to be recognized and reported
separately from goodwill, noting that any amounts allocable to an assembled
workforce may not be accounted for separately. SFAS No. 142, which was
effective January 1, 2002, requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS No.
142. SFAS No. 142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets."
As of the January 1, 2002 adoption date of SFAS No.142, the Company
had unamortized goodwill of approximately $190,000, which was subject to the
transition provisions of SFAS Nos. 141 and 142. In connection with the sale
of the Companion Pet Products division on May 31, 2002, the goodwill was
written off.
In August 2001, the FASB issued SFAS No. 144, which supersedes both
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of" and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of
11
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
(Opinion 30), for the disposal of a segment of a business (as previously
defined in that Opinion). SFAS No. 144 retains the fundamental provisions in
SFAS No. 121 for recognizing and measuring impairment losses on long-lived
assets held for use and long-lived assets to be disposed of by sale, while
also resolving significant implementation issues associated with SFAS No.
121. For example, SFAS No. 144 provides guidance on how a long-lived asset
that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be disposed of
other than by sale. SFAS No. 144 retains the basic provisions of Opinion 30
on how to present discontinued operations in the statement of operations but
broadens that presentation to include a component of an entity (rather than
a segment of a business). Unlike SFAS No. 121, an impairment assessment
under SFAS No. 144 will never result in a write-down of goodwill. Rather,
goodwill is evaluated for impairment under SFAS No. 142.
The Company adopted SFAS No. 144 effective January 1, 2002. The
adoption of SFAS No. 144 for long-lived assets held for use did not have an
impact on the Company's consolidated financial statements as the impairment
assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. The
provisions of the Statement for assets held for sale or other disposal
generally are required to be applied prospectively after the adoption date
to newly initiated disposal activities.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and
Technical Corrections", which is effective for fiscal years beginning after
May 15, 2002 for provisions related to SFAS No. 4, effective for all
transactions occurring after May 15, 2002 for provisions related to SFAS No.
13 and effective for all financial statements issued on or after May 15,
2002 for all other provisions of this Statement. The Company's loss from
early extinguishment of debt realized in the second quarter of 2002 will be
presented within continuing operations, rather than presented as an
extraordinary item, when the Company adopts this Statement in 2003.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses the
financial accounting and reporting of expenses related to restructurings
initiated after 2002, and applies to costs associated with an exit activity
(including a restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. Under
SFAS No. 146, a company will record a liability for a cost associated with
an exit or disposal activity when the liability is incurred and can be
measured at fair value. The provisions of this Statement are effective
prospectively for exit or disposal activities initiated after December 31,
2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure", which amends SFAS No, 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements. Certain of the disclosure
modifications are required for fiscal years ending after December 15, 2002.
Critical Accounting Policies
In December 2001, the Securities and Exchange Commission (SEC) issued
disclosure guidance for "critical accounting policies." The SEC defines
"critical accounting policies" as those that require application of
management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods.
Our significant accounting policies are described in Note 1 in the
Notes to Consolidated Financial Statements. Not all of these significant
accounting policies require management to make difficult, subjective or
complex judgements or estimates. However, the following policies could be
deemed to be critical within the SEC definition.
Environmental Remediation Liability
- -----------------------------------
On March 2, 2001, the Company became aware of environmental
contamination resulting from an unknown heating oil leak at the 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. Based
on the initial information from the contractor, the Company originally
estimated the cost for the cleanup and remediation to be $310,000. In
September 2001, the contractor updated the estimated total cost for the
cleanup and remediation to be $550,000. In December 2002, a further update
was performed and the final estimated costs were increased to $620,000, of
which $329,000 remains accrued as of December 31, 2002. As a result of the
increase in estimated costs, the Company recorded an additional $240,000 of
expense in the third quarter of 2001 and an additional expense of $70,000 in
the fourth quarter of 2002. Based on information provided to the Company
from it's environmental consultant and what is known to date, the Company
believes the reserve is sufficient for the future clean up and remediation
of the environmental contamination. There is a possibility, however, that
the cleanup and remediation costs may exceed the Company's estimates.
Long-Lived Assets
- -----------------
The Company's long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. The recoverability of assets to be held and
used is measured by a comparison of the carrying amount of the asset to
future net undiscounted cash flows expected to be generated by the asset.
Based on available information, management believes that the carrying value
of its long-lived assets are currently recoverable from future net
undiscounted cash flows expected to be generated from such assets. There is
a possibility, however, that changes could occur in the
12
future (e.g., the loss of a significant customer) which would negatively
impact the Company's ability to recover the carrying amount of its long-
lived assets. The occurrence of such an event might result in the Company
having to record an impairment charge.
Deferred Tax Valuation Allowance
- --------------------------------
During 2001 and 2000, a number of events occurred which negatively
impacted the earnings and cash flow of the Company. 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 operating profits of the
Companion Pet Products division due in part to regulatory issues with the
FDA and the NJDEP at the Companion Pet Products manufacturing facility. As a
result, the Company concluded that it was more likely than not that it will
be unable to realize the gross deferred tax assets in the foreseeable future
and established a valuation reserve for all such deferred tax assets.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company does not utilize financial instruments for trading
purposes and holds no derivative financial instruments which could expose
the Company to significant market risk. The Company's primary market risk
exposure with regard to financial instruments is changes in interest rates.
The Company's cash equivalents consist primarily of investments in mutual
funds. Management believes, based on the current interest rate environment,
that a 100 basis point change in interest rates would have an immaterial
impact on interest income.
Item 8. Financial Statements and Supplementary Data
The financial statements and notes thereto listed in the accompanying
index to financial statements (Item 15) are filed as part of this Annual
Report and incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
13
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 2003 Annual Meeting of Stockholders (the "2003 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 2003 Proxy Statement no later
than April 30, 2003.
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 2003 Proxy Statement and is incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this item is contained in the Company's
2003 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
2003 Proxy Statement and is incorporated herein by this reference.
Item 14. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures within 90 days of the filing date of this annual
report, and, based on their evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that these disclosure controls and
procedures are effective. There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
14
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 2002 and 2001
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 2002, 2001 and 2000
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 27, 2002, reporting
that IGI's Board of Directors authorized the buy-back of up to
one million shares of the Company's common stock on the open
market. Also, Frank Gerardi, a private investor, with beneficial
ownership of 8.73% of the Company's stock, was unanimously
elected as a Director of the Company by the Company's Board of
Directors.
15
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, 2002 to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 10, 2003 IGI, Inc.
By: /s/John F. Ambrose
-----------------------------
John F. Ambrose
President and Chief Executive
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, 2002
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/John F. Ambrose President and Chief Executive March 10, 2003
- ------------------------- Officer
John F. Ambrose
/s/Domenic N. Golato Senior Vice President, March 10, 2003
- ------------------------- Chief Financial Officer
Domenic N. Golato (Principal financial officer)
/s/Earl Lewis Director and Chairman of the Board March 10, 2003
- -------------------------
Earl Lewis
/s/Stephen J. Morris Director March 10, 2003
- -------------------------
Stephen J. Morris
/s/Constantine L. Hampers Director March 10, 2003
- -------------------------
Constantine L. Hampers
/s/Terrence O'Donnell Director March 10, 2003
- -------------------------
Terrence O'Donnell
/s/Donald W. Joseph Director March 10, 2003
- -------------------------
Donald W. Joseph
/s/Frank Gerardi Director March 10, 2003
- -------------------------
Frank Gerardi
16
CERTIFICATION
OF
DOMENIC N. GOLATO
CHIEF FINANCIAL OFFICER
OF
IGI, INC.
-----------------------------
I, Domenic N. Golato, Chief Financial Officer of IGI, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of IGI, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 10, 2003
/s/ Domenic N. Golato
---------------------
Domenic N. Golato
Chief Financial Officer
17
CERTIFICATION
OF
JOHN F. AMBROSE
PRESIDENT & CHIEF EXECUTIVE OFFICER
OF
IGI, INC.
-----------------------------
I, John F. Ambrose, President & Chief Executive Officer of IGI, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of IGI, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 10, 2003
/s/ John F. Ambrose
-------------------
John F. Ambrose
President & Chief Executive Officer
18
INDEPENDENT AUDITORS' REPORT
The Board of Directors
IGI, Inc.:
We have audited the accompanying consolidated balance sheets of IGI, Inc.
and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, cash flows and stockholders' equity
(deficit) for each of the years in the three-year period ended December 31,
2002. In connection with our audits of the consolidated financial statements,
we also have audited the financial statement schedule as of and for the three
years ended December 31, 2002. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audits 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
audits provide 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, 2002 and 2001, and the results of
their operations and their cash flows for each of the years in the three-
year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Philadelphia, Pennsylvania
February 28, 2003
19
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(in thousands, except share and per share information)
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 1,999 $ 10
Accounts receivable, less allowance for doubtful accounts
of $35 and $122 in 2002 and 2001, respectively 460 286
Licensing and royalty income receivable 166 255
Inventories 209 89
Prepaid expenses and other current assets 146 134
Assets of discontinued operations - 5,597
---------------------
Total current assets 2,980 6,371
Property, plant and equipment, net 2,862 3,392
Other assets 87 776
---------------------
Total assets $ 5,929 $ 10,539
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving credit facility $ - $ 2,326
Current portion of long-term debt 18 7,478
Accounts payable 115 773
Accrued payroll 71 93
Accrued interest - 111
Other accrued expenses 551 692
Income taxes payable 16 12
Liabilities of discontinued operations - 1,474
---------------------
Total current liabilities 771 12,959
Deferred income 485 620
Long-term debt 164 -
---------------------
Total liabilities 1,420 13,579
---------------------
Detachable stock warrants - 1,145
Stockholders' equity (deficit):
Common stock, $.01 par value, 50,000,000 shares authorized;
13,262,657 and 11,243,720 shares issued in 2002 and 2001,
respectively 133 112
Additional paid-in capital 23,644 22,436
Accumulated deficit (17,953) (26,733)
Less treasury stock, 1,878,640 and 0 shares at cost, in 2002
and 2001, respectively (1,315) -
---------------------
Total stockholders' equity (deficit) 4,509 (4,185)
---------------------
Total liabilities and stockholders' equity (deficit) $ 5,929 $ 10,539
=====================
The accompanying notes are an integral part of the consolidated financial
statements.
20
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2002, 2001 and 2000
(in thousands, except share and per share information)
2002 2001 2000
---- ---- ----
Revenues:
Product sales, net $ 3,513 $ 3,228 $ 4,099
Licensing and royalty income 851 1,066 2,453
----------------------------------
Total revenues 4,364 4,294 6,552
Cost and Expenses:
Cost of sales 1,378 1,112 1,393
Selling, general and administrative expenses 2,358 2,793 5,299
Product development and research expenses 549 536 853
Non-recurring charges - 605 -
----------------------------------
Operating profit (loss) 79 (752) (993)
Interest expense, net (283) (822) (1,337)
Other income, net 58 - -
----------------------------------
Loss from continuing operations before provision
(benefit) for income taxes, extraordinary item
and cumulative effect of accounting change (146) (1,574) (2,330)
Provision (benefit) for income taxes 330 (271) 5,864
----------------------------------
Loss from continuing operations before extraordinary
item and cumulative effect of accounting change (476) (1,303) (8,194)
----------------------------------
Discontinued operations:
Loss from operations of discontinued businesses,
net of tax (523) (720) (2,559)
Gain on disposal of discontinued businesses 12,433 283 114
----------------------------------
Income (loss) before extraordinary item and
cumulative effect of accounting change 11,434 (1,740) (10,639)
Extraordinary loss from early extinguishment
of debt, net of tax (2,654) - (630)
Cumulative effect of accounting change - - (168)
----------------------------------
Net income (loss) 8,780 (1,740) (11,437)
Mark to market for detachable stock warrants (133) 47 -
----------------------------------
Net income (loss) attributable to common stock $ 8,647 $ (1,693) $(11,437)
==================================
Basic and Diluted Earnings (Loss) Per Common Share
Continued operations $ (.05) $ (.11) $ (.80)
Discontinued operations 1.04 (.04) (.24)
Extraordinary item (.23) - (.06)
Cumulative effect of accounting change - - (.02)
----------------------------------
Net income (loss) per share $ .76 $ (.15) $ (1.12)
==================================
Weighted average of common stock outstanding
Basic and diluted 11,429,978 10,956,553 10,204,649
The accompanying notes are an integral part of the consolidated financial
statements.
21
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2002, 2001 and 2000
(in thousands)
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 8,780 $ (1,740) $(11,437)
Reconciliation of net income (loss) to net cash provided
by (used in) operating activities:
Gain on sale of discontinued operations (12,433) (283) (114)
Depreciation and amortization 306 284 487
Amortization of deferred financing costs and
debt discount 275 577 690
Extraordinary loss on early extinguishment of debt 2,654 - 630
Write down of assets relating to sale of EVSCO 630 - -
Impairment of property, plant and equipment - 605 -
Gain on sale of marketable securities (58) - -
Provision for accounts and notes receivable
and inventories 23 142 162
Recognition of deferred revenue (135) (135) (242)
Deferred income taxes - - 5,850
Interest expense related to subordinated note agreement 41 180 148
Interest income related to put feature of warrants - - (358)
Stock based compensation expense:
Non-employee stock options - - 39
Directors' stock issuance 48 79 84
Changes in operating assets and liabilities:
Restricted cash - 102 (102)
Accounts receivable (177) 293 (69)
Inventories (140) (19) (108)
Receivables due under license and royalty agreements 89 158 19
Prepaid expenses and other assets 12 15 95
Accounts payable and accrued expenses (986) (1,190) 325
Deferred revenue - 535 220
Short-term notes payable, operating - - (408)
Income taxes payable 4 (3) -
Discontinued operations - working capital changes and
non-cash charges 343 577 26
----------------------------------
Net cash provided by (used in) operating activities (724) 177 (4,063)
----------------------------------
Cash flows from investing activities:
Capital expenditures (104) (63) (2)
Proceeds from sale of property, plant and equipment 550 - -
Increase in other assets (33) (5) (51)
Proceeds from sale of marketable securities 58 - -
Discontinued operations - other investing activities (8) (137) (585)
Proceeds from sale of discontinued operations,
net of direct costs 15,462 237 12,000
----------------------------------
Net cash provided by investing activities 15,925 32 11,362
----------------------------------
Cash flows from financing activities:
Borrowings under term loan and capital expenditures
facility - - 257
Borrowings under revolving credit agreement 5,958 18,787 33,413
Repayment of revolving credit agreement (8,284) (18,862) (36,720)
Repayment of debt (9,516) (517) (4,652)
Payment of deferred financing costs (273) - (65)
Repayment of EDA loan (15) - -
Borrowings under EDA loan 197 - -
Proceeds from issuance of stock under stock
subscription agreement - 250 -
Proceeds from exercise of common stock options
and purchase of common stock 36 74 121
Purchase of treasury shares (1,315) - -
----------------------------------
Net cash used in financing activities (13,212) (268) (7,646)
----------------------------------
Net increase (decrease) in cash and cash equivalents 1,989 (59) (347)
Cash and cash equivalents at beginning of year 10 69 416
----------------------------------
Cash and cash equivalents at end of year $ 1,999 $ 10 $ 69
==================================
Supplemental cash flow information:
Cash payments for interest $ 507 $ 968 $ 757
Cash payment (receipt) for taxes 328 (268) -
The accompanying notes are an integral part of the consolidated financial
statements.
22
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 2002, 2001 and 2000
(in thousands, except share information)
Common Stock Additional Total
-------------------- Paid-In Accumulated Treasury Stockholders'
Shares Amount Capital Deficit Stock Equity (Deficit)
------ ------ ---------- ----------- -------- ----------------
Balance, January 1, 2000 10,133,184 $102 $ 20,834 $(13,556) $(1,641) $ 5,739
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 former
officer 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 22,714 (24,993) (894) (3,069)
Issuance of stock pursuant to Directors'
Stock Plan 129,989 1 78 79
Settlement of amounts due to former officer
in lieu of cash 125,625 1 128 129
Issuance of stock to 401(k) plan (849) 894 45
Stock options exercised 80,000 1 39 40
Employee stock purchase plan 65,033 34 34
Adjustment of detachable stock warrants 47 47
Issuance of stock pursuant to stock
subscription agreement 500,000 5 245 250
Net loss (1,740) (1,740)
-----------------------------------------------------------------------------
Balance, December 31, 2001 11,243,720 112 22,436 (26,733) - (4,185)
Issuance of stock pursuant to Directors'
Stock Plan 70,322 1 47 48
Stock options exercised 39,000 1 20 21
Employee stock purchase plan 30,975 15 15
Adjustment of detachable stock warrants (133) (133)
Detachable stock warrant exercised 1,878,640 19 1,259 1,278
Buyback of stock (1,315) (1,315)
Net income 8,780 8,780
-----------------------------------------------------------------------------
Balance, December 31, 2002 13,262,657 $133 $ 23,644 $(17,953) $(1,315) $ 4,509
=============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
23
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 currently engaged in the
production and marketing of cosmetics and skin care products. During 2000,
the Company sold its Vineland division, which produced and marketed poultry
vaccines and related products. During 2002, the Company sold its Companion
Pet Products division, which manufactured and sold companion pet care
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 are principally based
on formulations using the Novasome(R) microencapsulation technology.
Estee Lauder, a significant customer, accounted for $2,629,000 or 60%
of 2002 revenues, $2,725,000 or 63% of 2001 revenues and $3,692,000 or 56%
of 2000 revenues. Johnson & Johnson, a significant customer, accounted for
$714,000 or 16% of 2002 revenues, $856,000 or 20% of 2001 revenues and
$1,487,000 or 23% of 2000 revenues.
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.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash, cash equivalents and accounts
receivable. The Company limits credit risk associated with cash and cash
equivalents by placing its cash and cash equivalents with one high credit
quality financial institution.
Inventories
Inventories are valued at the lower of cost, using the first-in,
first-out ("FIFO") method, or market.
Property, Plant and Equipment
Depreciation of property, plant and equipment is provided for under
the straight-line method over the assets' estimated useful lives as follows:
Useful Lives
------------
Buildings and improvements 10 - 30 years
Machinery and equipment 3 - 10 years
Repair and maintenance costs are charged to operations as incurred
while major improvements are capitalized. When assets are retired or
disposed, the cost and accumulated depreciation thereon are removed from the
accounts and any gains or losses are included in operating results.
Other Assets
Other assets primarily consist of the net unamortized patent costs
associated with the Novasome(R) microencapsulation technology and deferred
financing costs. Patent costs are being amortized over the legal lives of
the patents. Deferred financing costs include fees paid to external parties
to obtain financing. These deferred financing costs are being amortized over
the term of the related debt.
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," 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 the 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
24
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.
Financial Instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable, revolving credit facility and long-
term debt. The carrying value of cash and cash equivalents, accounts
receivable and accounts payable approximates their fair value based on their
short duration. The carrying value of the revolving credit facility and
long-term debt approximated their fair value based on rates offered to
companies with similar financial circumstances.
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 sublicensing 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.
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). No stock-based employee
compensation cost is reflected in net income (loss) for options that have
been granted, as all options granted under the plans had an exercise price
equal to the market value of the underlying common stock on the date of
grant. Since the Company uses the intrinsic value method, it makes pro forma
disclosures of net income (loss) and net income (loss) per share as if the
fair-value based method of accounting had been applied.
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 income (loss) and net income (loss) per
share would have changed to the pro forma amounts indicated below:
2002 2001 2000
---- ---- ----
(in thousands, except per share information)
Net income (loss) - as reported $8,780 $(1,693) $(11,437)
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method (496) (453) (1,084)
-------------------------------------------
Net income (loss) - pro forma $8,284 $(2,146) $(12,521)
===========================================
Income (loss) per share - as reported
Basic and diluted $ .76 $ (.15) $ (1.12)
===========================================
Income (loss) per share - pro forma
Basic and diluted $ .71 $ (.20) $ (1.23)
===========================================
Product Development and Research
The Company's research and development costs are expensed as incurred.
25
Net Income (Loss) per Common Share
Basic net income (loss) per share of Common Stock is computed based on
the weighted average number of shares of Common Stock outstanding during the
period. Diluted net income (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 from continuing
operations for the years ended December 31, 2002, 2001 and 2000, 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 income (loss) per Common Share
are the same. Potentially dilutive common stock equivalents which were
excluded from the net income (loss) per share calculations due to their
anti-dilutive effect amounted to 2,852,000 for 2002, 4,880,543 for 2001 and
4,997,869 for 2000.
Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income and its components. Comprehensive income is defined to
include all changes in stockholders' equity during a period except those
resulting from investments by owners and distributions to owners. Since
inception, the Company has not had transactions that are required to be
reported in other comprehensive income. Comprehensive income (loss) for each
period presented is equal to the net income (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.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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, provisions for income taxes and related deferred tax
asset valuation allowances, and accruals for environmental cleanup and
remediation costs. Actual results could differ from those estimates.
Recent Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated or completed
after June 30, 2001. SFAS No. 141 also specifies criteria that must be met
for intangible assets acquired in a purchase method business combination to
be recognized and reported separately from goodwill, noting that any amount
allocable to an assembled workforce may not be accounted for separately.
SFAS No. 142, which was effective January 1, 2002, requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized,
but instead be tested for impairment at least annually in accordance with
the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets".
As of the January 1, 2002 adoption date of SFAS No.142, the Company
had unamortized goodwill of approximately $190,000, which was subject to the
transition provisions of SFAS Nos. 141 and 142. Amortization expense related
to goodwill was $8,000 in each of the years ended December 31, 2001 and
2000. In connection with the sale of the Companion Pet Products division on
May 31, 2002, the goodwill was written off.
In August 2001, the FASB issued SFAS No. 144, which supersedes both
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be
Disposed Of" and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" (Opinion 30), for the disposal of a
segment of a business (as previously defined in that Opinion). SFAS No. 144
retains the fundamental provisions in SFAS No. 121 for recognizing and
measuring impairment losses on long-lived assets held for use and long-lived
assets to be disposed of by sale, while also resolving significant
implementation issues associated with SFAS No. 121. For example, SFAS No.
144 provides guidance on how a long-lived asset that is used as part of a
group should be evaluated for impairment, establishes criteria for when a
long-lived asset is held for sale, and prescribes the accounting for a long-
lived asset that will be disposed of other than by sale. SFAS No. 144
retains the basic provisions of Opinion 30 on how to present discontinued
operations in the statement of operations but broadens that presentation to
include a component of an entity (rather than a segment of a business).
Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never
result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under SFAS No. 142.
The Company adopted SFAS No. 144 effective January 1, 2002. The
adoption of SFAS No. 144 for long-lived assets held for use did not have an
impact on the Company's consolidated financial statements as the impairment
assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. The
provisions of SFAS No. 144 for assets held for sale or other disposal
generally are required to be applied prospectively after the adoption date
to newly initiated disposal activities.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and
Technical Corrections", which is effective for fiscal years beginning after
May 15, 2002 for provisions related to
26
SFAS No. 4, effective for all transactions occurring after May 15, 2002 for
provisions related to SFAS No. 13 and effective for all financial statements
issued on or after May 15, 2002 for all other provisions of this Statement.
The Company's loss from early extinguishment of debt realized in the second
quarter of 2002 will be presented within continuing operations, rather than
presented as an extraordinary item, when the Company adopts this Statement
in 2003.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses the
financial accounting and reporting of expenses related to restructurings
initiated after 2002, and applies to costs associated with an exit activity
(including a restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. Under
SFAS No. 146, a company will record a liability for a cost associated with
an exit or disposal activity when the liability is incurred and can be
measured at fair value. The provisions of this Statement are effective
prospectively for exit or disposal activities initiated after December 31,
2002.
In December 2002, the FASB issued SFAS No. 148, " Accounting for
Stock-Based Compensation - Transition and Disclosure", which amends SFAS No,
123, to provide alternative methods of transition for a voluntary change to
the fair value method of accounting for stock-based employee compensation.
In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for fiscal
years ending after December 15, 2002.
2. Liquidity
The Company's principal sources of liquidity are cash and cash equivalents
of approximately $1,999,000 and cash from operations. Management believes
that existing cash and cash equivalents and cash flows from operations will
be sufficient to meet the Company's foreseeable cash needs for at least the
next year. However, there may be acquisition and other growth opportunities
that require additional external financing. Management may, from time to
time, seek to obtain additional funds from the public or private issuances
of equity or debt securities. There can be no assurance that such financings
will be available or available on terms acceptable to the Company.
3. Non-recurring Charges
During September 2001, the Company committed to a plan of sale for its
corporate office building. An impairment charge of $605,000 was recorded in
the third quarter of 2001 to reflect the difference between the selling
price, less related selling costs, and the net book value of the building.
The Company sold the building during February 2002.
4. 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. In March 2001, the Company negotiated a
resolution and received approximately $237,000 of the escrowed funds. In
addition, the Company reduced an accrual by $46,000 for costs related to the
sale. The Company's results reflect a $283,000 and $114,000 gain on the sale
of the Vineland division for the years ended December 31, 2001 and 2000,
respectively. The Vineland division incurred an operating loss of $1,978,000
for the year ended December 31, 2000.
On May 31, 2002, the shareholders of the Company approved, and the
Company consummated, the sale of the assets and transfer of the liabilities
of the Companion Pet Products division, which marketed companion pet care
related products. The buyer assumed liabilities of approximately $986,000,
and paid the Company cash in the amount of $16,254,000. The Company's
results reflect a $12,433,000 gain on the sale of the Companion Pet Products
division for the year ended December 31, 2002. The gain is net of direct
costs incurred by the Company in connection with the sale and the reduction
in the purchase price resulting from post-closing adjustments. The Companion
Pet Products division incurred losses of $523,000, $720,000 and $581,000 for
the years ended December 31, 2002, 2001 and 2000, respectively. The results
for the year ended December 31, 2002 included an impairment charge of
$630,000 related to the Companion Pet Products warehouse.
In the first quarter of 2001, the Company decided to outsource the
manufacturing for the Companion Pet Products division. The Company
accelerated the outsourcing process (originally anticipated to be completed
by June 2001) due primarily to the discovery on March 2, 2001 of the
presence of environmental contamination resulting from an unknown heating
oil leak at the Companion Pet Products manufacturing site, at which time the
Company ceased its manufacturing operations at the facility. On March 6,
2001, the Company signed a supply agreement with a third party to
manufacture products for the Companion Pet Products division. On March 8,
2001, the Company terminated the employment of the manufacturing personnel
at this facility.
During 2001, the Company recorded non-recurring charges related to the
cessation and shutdown of the manufacturing operations at the Companion Pet
Products facility of $991,000 offset by a grant from the State of New Jersey
for $81,000, for a net charge of $910,000. This charge was included as a
component of loss from operations of discontinued business. The Company
applied to the New Jersey Economic and Development Authority (NJEDA) and the
New Jersey Department of Environmental Protection (NJDEP) for a grant and
loan to provide partial funding for the costs of investigation and
remediation of the environmental contamination discovered
27
at the Companion Pet Products facility. On June 26, 2001, the Company was
awarded a $81,000 grant and a $246,000 loan. The $81,000 grant was received
in the third quarter of 2001. The Company received the initial funding from
the loan during the first quarter of 2002.
The composition and activity of the non-recurring charges (including
the amount recorded in continuing operations) are as follows (amounts in
thousands):
Reduction Cash Net accrual at Cash Additional Net accrual at
Description Amount of assets Expenditure December 31, 2001 expenditure expense December 31, 2002
- ----------- ------ --------- ----------- ----------------- ----------- ---------- -----------------
Impairment of property and
equipment $ 314 $ (314) $ - $ - $ - $ - $ -
Environmental clean up costs,
net of State grant 469 - (187) 282 (23) 70 329
Impairment of corporate
office building 605 (605) - - - - -
Write off of inventory 91 (91) - - - - -
Plant shutdown costs 21 (11) (10) - - - -
Severance 15 - (15) - - - -
--------------------------------------------------------------------------------------------
$1,515 $(1,021) $(212) $282 $(23) $70 $329
============================================================================================
5. Supply and Sublicensing Agreements
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 installment 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. The Company recognized $541,000
of royalty income related to this agreement for the year ended December 31,
2000.
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, which is being recognized
ratably over the term of the arrangement. The Company recognized $105,000 of
income related to this agreement in each of the years ended December 31,
2002 and 2001.
The Company entered into a sublicense agreement with Johnson & Johnson
Consumer Products, Inc. ("J&J") in 1995. The agreement provided J&J with a
sublicense 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 $714,000, $856,000 and
$1,487,000 of royalty income related to this agreement for the years ended
December 31, 2002, 2001 and 2000, respectively.
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 sublicense 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 sublicensed products. The Company assessed the impact of Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements", 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
sublicense fee and the three $50,000 payments over the estimated economic
life of the agreement. The Company recognized $32,000, $105,000 and $55,000
of royalty income in 2002, 2001 and 2000, respectively, related to the
agreement. In March of 2002, the agreement between the Company and JJM was
amended stating that JJM is no longer required to make minimum payments and
the license has been converted to a non-exclusive worldwide license with the
exception of Japan, which will remain exclusive. If the amount of royalties
paid by JJM equals or exceeds $200,000 in any year, the following calendar
year will become an exclusive worldwide agreement and will remain so until
royalties fall below that amount.
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 tested the stability, efficiency and
consumer acceptance of the product. The Company recognized $60,000 of income
related to this agreement for the year ended December 31, 2000. If Church &
Dwight chooses to proceed with this product, the Company will need to enter
into a definitive sublicense and supply agreement with Church & Dwight.
Also in January 2000, the Company entered into an agreement with
Fujisawa Pharmaceutical, Co. Ltd ("Fujisawa"). The purpose of this agreement
was for IGI to incorporate its Novasome(R) technology into a new formulation
of their topical products. This project was completed in stages with amounts
being paid to the Company with the successful completion of each stage. The
agreement was in effect for a 15 month period. The Company recognized
$250,000 of income relating to this project for the year ended December 31,
2000. Currently, the project has been suspended by Fujisawa.
28
In July 2001, the Company entered into a Research, Development and
Manufacturing Agreement with Prime Pharmaceutical Corporation ("Prime"). The
purpose of the agreement was to develop a facial lotion, facial creme and
scalp treatment for the treatment of psoriasis. The project has been
completed in stages with amounts being paid to the Company with the
successful completion of each stage. In addition, the Company has agreed to
rebate $3.60 per kilogram for the first 12,500 kilograms of product
manufactured for and sold to Prime. The Company recognized $40,000 of
product sales related to this project in 2001.
In November 2002, the Company entered into a manufacturing service
agreement with Desert Whale Jojoba Company, Inc. The purpose of this
agreement is to develop and manufacture jojobasomes to be used as a personal
care product. This project is still in the developmental stage and no
revenue has been recognized as of December 31, 2002.
6. Supplemental Cash Flow Information
During the years ended December 31, 2002, 2001 and 2000, the Company
had the following non-cash financing and investing activities:
2002 2001 2000
---- ---- ----
(in thousands)
Issuance of stock to settle amounts due to former
officer (see Note 15) $ - $129 $115
Issuance of stock for litigation settlement - - 48
Issuance of stock to 401(k) plan - 45 77
Issuance of Subordinated Note for interest - 205 148
Mark to market adjustment on warrants (133) 47 -
Issuance of stock pursuant to Directors' Stock Plan 48 79 84
7. Inventories
Inventories as of December 31, 2002 and 2001 consisted of:
2002 2001
---- ----
(in thousands)
Finished goods $ 52 $84
Raw materials 157 5
--------------
$209 $89
==============
The above amounts are net of reserves for obsolete and slow moving
inventory of $10,000 and $5,000 as of December 31, 2002 and 2001,
respectively.
29
8. Property, Plant and Equipment
Property, plant and equipment, at cost, as of December 31, 2002 and
2001 consisted of:
2002 2001
---- ----
(in thousands)
Land $ 257 $ 257
Buildings 2,831 3,145
Machinery and equipment 2,359 2,334
-------------------
5,447 5,736
Less accumulated depreciation (2,585) (2,344)
-------------------
Property, plant and equipment, net $ 2,862 $ 3,392
===================
The Company recorded depreciation expense related to continuing
operations of $268,000, $266,000 and $480,000 in 2002, 2001 and 2000,
respectively.
9. Debt
Debt as of December 31, 2002 and 2001 consisted of:
2002 2001
---- ----
(in thousands)
Revolving credit facility $ - $ 2,326
Term loan under Senior Debt Agreement - 2,088
Notes under Subordinated Debt Agreement - 7,353
NJEDA Loan 182 -
---------------
182 11,767
Less unamortized debt discount under Subordinated Debt
Agreement (see Note 10) - (1,963)
---------------
Revolving credit facility and long-term debt $182 $ 9,804
===============
On October 29, 1999, the Company entered into a $22,000,000 senior
bank credit agreement ("Senior Debt Agreement") with Fleet Capital
Corporation ("Fleet Capital") and a $7,000,000 subordinated debt agreement
("Subordinated Debt Agreement") with American Capital Strategies, Ltd.
("ACS"). 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.
The borrowings under the revolving line of credit bore interest at the
prime rate plus 1.0% or the London Interbank Offered Rate plus 3.25%. The
borrowings under the term loan credit facility bore interest at the prime
rate plus 1.5% or the London Interbank Offered Rate plus 3.75%. Upon the
sale of the Companion Pet Product division on May 31, 2002, the revolving
line of credit, term loan and accrued interest were paid in full.
Borrowings under the Subordinated Debt Agreement bore 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
2.25%, ("additional interest component") which was payable at the Company's
election in cash or in Company Common Stock; if not paid in this fashion,
the additional interest component was capitalized to the principal amount of
the debt. Upon the sale of the Companion Pet Products division on May 31,
2002, the Subordinated Debt Agreement was paid in full. 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. On June
26, 2002, the Company received notice from ACS that it was exercising the
warrant for purchase of 1,907,543 of the Company's shares. ACS opted to
satisfy payment of the exercise price through the use of the cashless
exercise provisions of the warrant. The Company issued 1,878,640 fully paid
up net shares to ACS on July 7, 2002.
On September 15, 2000, the shareholders of the Company approved and
the Company consummated the sale of the assets of the Vineland division. 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 in 2000 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.
On May 31, 2002, the shareholders of the Company approved, and the
Company consummated, the sale of the assets and transfer of the liabilities
of the Companion Pet Products division. Upon the sale, the Company paid all
of its debt and interest owed to Fleet and ACS. As a result, the Company
incurred a $2,654,000 extraordinary loss from early extinguishment of debt
in connection with the prepayment fees paid to Fleet and ACS and the write-
off of the ACS debt discount.
The Company received a $246,000 loan to provide partial funding for
the costs of investigation and remediation of the environmental
contamination discovered at the Companion Pet Products facility. The loan
requires monthly principal payments over a term of ten years at a rate of
interest of 5%. The Company received initial funding of $182,000 under the
loan during 2002.
30
10. Detachable Stock Warrants
In connection with the $7,000,000 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 included principal of $7,000,000 and the initial
warrant liability of $2,842,000. The remaining unamortized debt discount was
written off in connection with the payoff of the Subordinated Debt in 2002.
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 required the
Company to compensate ACS, in either Common Stock or cash, at the option of
the Company, in the event that ACS ultimately realized proceeds from the
sale of the Common Stock obtained upon exercise of its warrants that were
less than the fair value of the Common Stock upon exercise of such warrants.
Fair value of the Common Stock upon exercise was defined as the 30-day
average value prior to notice of intent to sell. ACS was required to
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
could 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 required the Company to
compensate ACS for any decrease in value between the date that ACS notified
the Company that they intended to sell some or all of the stock and the date
that ACS ultimately disposed the underlying stock, assuming that such
disposition occurred in an orderly fashion over a period of not more than
180 days. The shortfall could 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 reflected the
detachable stock warrants outside of stockholders' deficit as of December
31, 2001, since the ability to satisfy the make-whole obligation using
shares of the Company's Common Stock was not totally within the Company's
control.
On June 26, 2002, the Company received notice from ACS that it was
exercising the warrant for purchase of 1,907,543 of the Company's shares.
ACS opted to satisfy payment of the exercise price through the use of the
cashless exercise provisions of the warrant. The Company issued 1,878,640
fully paid up net shares to ACS on July 7, 2002. Based on the provisions of
the make-whole feature, the fair value of the Common Stock was $.67 per
share as of the notification date. On July 19, 2002, the Company's Board of
Directors approved the purchase of the 1,878,640 shares from ACS for $.70
per share. The Company completed the purchase on July 29, 2002 for
$1,315,000 and classified the shares as treasury shares.
11. Stock Options, Warrants and Common Stock
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 ten 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 2002, 2001 and 2000, 70,322, 129,989, and 50,398 shares of
Common Stock were issued as consideration for directors' fees, respectively.
The Company recognized $48,000, $79,000 and $84,000 of expense related to
these shares during the years ended December 31, 2002, 2001 and 2000,
respectively.
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 officers or directors who are 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 period, 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 begins on
the first day of each year and ends on the last day of each year. The
Company issued 30,975 and 65,033 shares in 2002 and 2001 respectively under
the ESPP.
In March 1999, the Company's Board of Directors approved the 1999
Stock Incentive Plan ("1999 Plan"). The 1999 Plan replaced all previously
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
31
of 1,200,000 shares of Common Stock. In May 2002, the Company's shareholders
approved increased the maximum amount of shares to be granted by 800,000,
for a total of 2,000,000 shares available for grant. A total of 927,250
options (net of cancellations), having a maximum term of ten 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. In May 2001, an additional 800,000 shares
were approved for issuance under this plan, bringing the total to 1,475,000
available for issue under this plan. A total of 920,000 options have been
granted to non-employee directors through December 31, 2002. The options
granted under the 1999 Director Stock Option Plan vest in full one year
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
-----------------------------------------------
Weighted
Shares Price Per Share Average Price
------ --------------- -------------
January 1, 2000 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 - $8.58 $2.87
Granted 1,002,000 $ .52 - $ .80 $ .70
Exercised (80,000) $ .50 $ .50
Cancelled (1,039,326) $ .50 - $8.58 $2.08
----------
December 31, 2001 shares
Under option 2,703,000 $ .50 - $8.58 $2.30
Granted 280,000 $ .53 - $ .70 $ .67
Exercised (39,000) $ .50 - $ .56 $ .53
Cancelled (362,000) $ .50 - $8.25 $2.50
----------
December 31, 2002 shares
Under option 2,582,000 $ .50 - $8.58 $2.12
==========
Exercisable options at:
December 31, 2000 2,149,268 $3.32
========== =====
December 31, 2001 1,705,942 $3.21
========== =====
December 31, 2002 2,454,398 $2.19
========== =====
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 $0 for the years 2002 and 2001 and
$39,000 for the year 2000 for options granted to consultants.
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 2002, 2001 and 2000:
Assumptions 2002 2001 2000
----------- ---- ---- ----
Dividend yield 0% 0% 0%
Risk free interest rate 3.53% - 4.97% 4.45% - 5.30% 5.33% - 6.74%
Estimated volatility factor 175.85% 217.19% 216.07%
Expected life 7 years 7 years 7 years
32
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 2002:
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 1,161,500 8.66 $ .67 1,043,584 $ .67
$1.00 to $1.99 729,750 6.93 $1.61 723,564 $1.62
$2.00 to $2.99 223,750 4.33 $2.23 220,250 $2.22
$3.00 to $3.99 57,000 5.09 $3.66 57,000 $3.66
$5.00 to $5.99 130,000 3.09 $5.77 130,000 $5.77
$6.00 to $6.99 150,000 2.62 $6.67 150,000 $6.67
$7.00 to $7.99 50,000 1.35 $7.76 50,000 $7.76
$8.00 to $8.58 80,000 2.33 $8.46 80,000 $8.46
--------- ---------
$ .50 to $8.58 2,582,000 6.75 $2.12 2,454,398 $2.19
========= =========
In 2001, the Company issued 500,000 shares to a private investor in
exchange for $250,000, pursuant to a stock subscription agreement. The value
received per share approximated the quoted value of the Common Stock at the
time of the sale.
12. Income Taxes
The provision (benefit) for income taxes attributable to loss from
continuing operations before income taxes, extraordinary item and cumulative
effect of accounting change included in the Consolidated Statements of
Operations for the years ended December 31, 2002, 2001 and 2000 is as
follows:
2002 2001 2000
---- ---- ----
(in thousands)
Current tax expense (benefit):
Federal $ - $ - $ -
State and local 330 (271) 14
------------------------
Total current tax expense (benefit) 330 (271) 14
------------------------
Deferred tax expense
Federal - - 5,133
State and local - - 717
------------------------
Total deferred tax expense - - 5,850
------------------------
Total expense (benefit) for income taxes $330 $(271) $5,864
========================
During the year ended December 31, 2001, the Company sold some of its
New Jersey operating loss carryforwards in exchange for net proceeds of
$289,000. During the year ended 2002, the Company paid $558,000 to purchase
some New Jersey operating loss carryforwards. In addition, in 2002 the
Company sold some state operating loss carryforwards in exchange for
proceeds of $249,000.
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 item and
cumulative effect of accounting change as a result of the following:
2002 2001 2000
---- ---- ----
(in thousands)
Statutory benefit $(50) $(535) $ (792)
Other non-deductible expenses 16 12 36
State income taxes 330 (271) 731
Research and development tax credits - - (23)
Increase in valuation allowance 34 523 5,920
Other, net - - (8)
-------------------------
$330 $(271) $5,864
=========================
33
Deferred tax assets included in the Consolidated Balance Sheets as of
December 31, 2002 and 2001, consisted of the following:
2002 2001
---- ----
(in thousands)
Property, plant and equipment $ 147 $ 145
Prepaid license agreement 620 762
Deferred royalty payments 201 236
Tax operating loss carryforwards 5,536 6,584
Tax credit carryforwards 726 726
Reserves 17 254
Inventory 4 178
Non-employee stock options 182 168
Other future deductible temporary differences 107 573
Other future taxable temporary differences (28) (32)
-----------------
7,512 9,594
Less: valuation allowance (7,512) (9,594)
-----------------
Deferred taxes, net $ - $ -
=================
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. 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, 2002 were as follows:
(in thousands)
--------------
Federal:
Operating losses (expiring through 2021) $11,466
Research tax credits (expiring through 2021) 590
Alternative minimum tax credits (available without expiration) 28
State:
Net operating losses - New Jersey (expiring through 2010) 17,636
Research tax credits - New Jersey (expiring through 2009) 108
Federal net operating loss carryforwards that expire through 2021 have
significant components expiring in 2018 (16%), 2019 (16%), 2020 (58%) and
2021 (10%).
13. Commitments and Contingencies
The Company leases machinery and equipment under non-cancelable
operating lease agreements expiring at various dates in the future. Rental
expense aggregated approximately $70,000 in 2002, $112,000 in 2001 and
$232,000 in 2000. Future minimum rental commitments under non-cancelable
operating leases as of December 31, 2002 are as follows:
Year (in thousands)
---- --------------
2003 $51
2004 50
2005 48
2006 17
14. U.S. Regulatory Proceedings
On March 24, 1999, the Company reached settlement with the Departments
of Justice, Treasury and Agriculture regarding investigations and
proceedings that they had initiated earlier. 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. The fine
and restitution were paid in 2002. In addition, the Company was assessed a
penalty of $225,000 and began making monthly payments to the Treasury
Department which continued through the period ending January 31, 2002. The
expense of settling with these agencies was reflected in the 1998 results of
operations. The settlement did not affect the 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
inquiry and requested information and documents from the Company, which the
Company voluntarily provided to the SEC. On March 13, 2002, the Company
reached a settlement with the staff of the SEC to resolve matters arising
with respect to the investigation of the Company. Under the settlement, the
Company neither admitted nor denied 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, the Company agreed to the entry of an order to cease and
desist from any such violation in the future. No monetary penalty was
assessed.
34
The SEC's investigation and the settlement focused 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 cooperated fully with
the staff of the SEC and disclosed to the SEC the results of the internal
investigation.
Other Pending Matters
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 Notices of Violation relating to the storage of waste
materials in a number of trailers at the site. The Company established a
disposal and cleanup schedule and removed waste materials from the site. The
Company is cooperating with the authorities and has accrued the estimated
expense of settling with this agency. In addition, the Company expensed
$160,000 in 2000 related to the disposal and cleanup process.
On March 2, 2001, the Company discovered the presence of environmental
contamination resulting from an unknown heating oil leak at its Companion
Pet Products manufacturing site. 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. Based on
the initial information from the contractor, the Company originally
estimated the cost for the cleanup and remediation to be $310,000. In
September 2001, the contractor updated the estimated total cost for the
cleanup and remediation to be $550,000. In December 2002, a further update
was performed and the final estimated cost was increased to $620,000, of
which $329,000 remains accrued as of December 31, 2002. As a result of the
increase in estimated costs, the Company recorded an additional $240,000 of
expense during the third quarter of 2001, and an additional expense of
$70,000 in the fourth quarter of 2002. The majority of remediation will be
completed by the spring of 2003. Subsequently, there will be periodic
testing and removal performed, which is projected to span over the next five
years. The estimated cost of the monitoring is included in the accrual.
15. Certain Relationships and Related Party Transactions
At December 31, 1999, accrued compensation totaling $115,000 was owed
to the Company's former Chief Executive Officer, which represented
compensation earned but not yet paid. The Company paid this amount in the
first quarter of 2000 by issuing 63,448 shares of its Common Stock in
satisfaction of the amount owed.
In 2000, the Company's former Chief Executive Officer chose to defer
payment of 2000 and 1999 travel expenses amounting to $129,000 until the
Company's cash flow stabilized. On February 14, 2001, the Company agreed to
pay the Company's obligation using shares of Company Common Stock. Total
payments through December 31, 2001 resulted in the issuance of 125,625
shares valued at $129,000.
16. Employee Benefits
The Company has a 401(k) contribution plan, pursuant to which
employees who have completed six months of employment with the Company or
its subsidiaries as of specified dates, may elect to contribute to the plan,
in whole percentages, up to 18% of compensation. Employees' contributions
are subject to a minimum contribution by participants of 1% of compensation
and a maximum contribution of $11,000 for 2002. 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 contribution is in the form of either Common Stock or cash, which is
vested immediately. The Company has recorded charges to expense related to
this plan of approximately $23,000, $31,000 and $69,000 in 2002, 2001 and
2000, respectively.
35
17. 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, 2002 and 2001 (in thousands,
except per share information).
March 31, June 30, September 30, December 31,
2002 2002 2002 2002 Total
--------- -------- ------------- ------------ -----
Total revenues $ 1,063 $ 1,064 $ 1,146 $ 1,091 $ 4,364
Operating profit (loss) (113) (109) 85 216 79
Income (loss) from continuing operations (245) (228) (841) 838 (476)
Net income (loss) (125) 9,065 (877) 717 8,780
Basic income (loss) per share
Continuing operations (.04) - (.07) .07 (.05)
Net income (loss) (.04) .82 (.07) .06 .76
Diluted income (loss) per share
Continuing operations (.04) - (.07) .07 (.05)
Net income (loss) (.04) .70 (.07) .06 .76
March 31, June 30, September 30, December 31,
2001 2001 2001 2001 Total
--------- -------- ------------- ------------ -----
Total revenues $ 1,429 $ 1,202 $ 1,067 $ 596 $ 4,294
Operating profit (loss) 293 148 (632) (559) (752)
Income (loss) from continuing operations 81 (70) (840) (474) (1,303)
Net income (loss) (368) 293 (929) (736) (1,740)
Basic and diluted income (loss) per share
Continuing operations (.01) .02 (.06) (.06) (.11)
Net income (loss) (.05) .05 (.07) (.08) (.15)
During the fourth quarter of 2002, the Company reduced income tax
expense by approximately $600,000 based on the finalization of its year end
tax provision calculation.
36
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, 2000:
Allowance for doubtful accounts $ 65 $(26) $ - $ - $ 39
Obsolete and slow moving inventory reserve 38 - - - 38
December 31, 2001:
Allowance for doubtful accounts $ 39 $ (7) $92 $ 2(A) $122
Obsolete and slow moving inventory reserve 38 (33) - - 5
December 31, 2002:
Allowance for doubtful accounts $122 $ 3 $24 $114(A) $ 35
Obsolete and slow moving inventory reserve 5 20 - 15(B) 10
(A) Relates to write-off of uncollectible accounts and recoveries of
previously reserved amounts.
(B) Relates to disposition of obsolete inventory.
37
IGI, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS REQUIRED TO BE FILED BY
ITEM 601 OF REGULATION S-K ([SECTION]229.601)
(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.]
(3)(b) By-laws of IGI, Inc., as amended. [Incorporated by reference to
Exhibit 2(b) to the Company's Registration Statement on Form
S-18, File No. 002-72262-B, filed May 12, 1981.]
(4) Specimen stock certificate for shares of Common Stock, par value
$.01 per share. [Incorporated by reference to Exhibit 4 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, File No. 001-08568, filed March 28, 2001 ("the
2000 Form 10-K").]
(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").]
(10.3) 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 Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1992 ("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.]
38
(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 Company's Annual Report for the fiscal year ended December
31, 1999, File No. 0001-08568, filed April 14, 2000 ("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.]
39
(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 10.47 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 10.49 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 March 30, 2000. [Incorporated
by reference to Exhibit 10.57 to the 1999 Form 10-K.]
40
(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 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
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 Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000, filed November 14, 2000.]
(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 Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000, filed November 14, 2000.]
(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 Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000, filed November 14,
2000.]
(10.58) Certificate of Release and Termination of Contract dated as of
March 1, 2001 between Genesis Pharmaceutical, Inc. and Tristrata
Technology, Inc. [Incorporated by reference to Exhibit 10.58 to
the 2000 Form 10-K.]
(10.59) Manufacturing and Supply Agreement dated as of February 14, 2001
among IGI, Inc., IGEN, Inc., Immunogenetics, Inc. and Genesis
Pharmaceutical, Inc. [Incorporated by reference to Exhibit 10.59
to the 2000 Form 10-K.]
(10.60) Assignment of Trademark dated as of February 14, 2001 among IGI,
Inc., IGEN, Inc, Immunogenetics, Inc. and Genesis Pharmaceutical,
Inc. [Incorporated by reference to Exhibit 10.60 to the 2000 Form
10-K.]
(10.61) Supply Agreement dated as of March 6, 2001 between Corwood
Laboratory, Inc. and IGI, Inc. [Incorporated by reference to
Exhibit 10.61 to the 2000 Form 10-K.]
(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. [Incorporated by
reference to Exhibit 10.62 to the 2000 Form 10-K.]
(10.63) Employment Agreement between IGI, Inc. and Domenic N. Golato
dated as of August 31, 2000. [Incorporated by reference to
Exhibit 10.63 to the 2000 Form 10-K.]
(10.64) 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.]
(10.65) Fourth Amendment to Loan and Security Agreement dated as of
February 28, 2001 by and among IGI, Inc., IGEN, Inc.,
Immunogenetics, Inc., Blood Cells, Inc., and Fleet Capital
Corporation. [Incorporated by reference to Exhibit 99.1 to the
Company's Report on Form 8-K filed April 20, 2001.]
(10.66) Amendment No. 4 to Note and Equity Purchase Agreement dated as of
February 28, 2001 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 99.2 to the Company's Report on Form 8-K
filed April 20, 2001.]
41
(10.67) Asset Purchase Agreement dated as of February 6, 2002 by and
between Vetoquinol, U.S.A., Inc. and IGI, Inc. with Vetoquinol,
S.A. a party thereto with respect to Article X thereof.
[Incorporated by reference to Exhibit 99.1 to the Company's
Report on Form 8-K filed February 7, 2002.]
(10.68) Research and Development Agreement dated as of January 2, 2001
between IGI, Inc. and Prime Pharmaceutical Corporation.
[Incorporated by reference to Exhibit 10.68 on the Company's
Annual Report on Form 10-K for fiscal year ended December 31,
2001, File No. 001-08568, filed on March 15, 2002 ("the 2001 Form
10-K").]
*(10.69) Manufacturing and Supply Agreement dated November 5, 2002 between
IGI, Inc. and Desert Whale Jojoba Company, Inc.
*(10.70) Loan Agreement dated January 10, 2002 between IGI, Inc. and the
New Jersey Economic Development Authority.
*(10.71) Promissory Note dated January 10, 2002 by IGI, Inc. to the New
Jersey Economic Development Authority.
*(10.72) Mortgage and Security Agreement and Fixture Filing dated January
10, 2002 between IGI, Inc. and the New Jersey Economic
Development Authority.
*(10.73) Contract of Sale for Real Estate dated October 21, 2001 between
IGI, Inc. and Poultry Investors, LLC.
*(10.74) Addendum dated November 14, 2001 to Contract of Sale for Real
Estate dated October 21, 2001 between IGI, Inc. and Poultry
Investors, LLC.
*(10.75) Partial Mortgage Release dated February 20, 2002 by Fleet Capital
Corporation for real property designated on the municipal tax map
for the Township of Buena Vista, New Jersey as Lot 23.01, Block
5501.
*(10.76) Partial Mortgage Release dated February 22, 2002 by American
Capital Strategies, Ltd. for real property designated on the
municipal tax map for the Township of Buena Vista, New Jersey as
Lot 23.01, Block 5501.
*(10.77) Amendment No. 5 dated May 30, 2002 to Note and Equity Agreement
by and among IGI, Inc., IGEN, Inc., Immunogenetics, Inc., Blood
Cells, Inc. and American Capital Strategies, Ltd.
*(10.78) Termination and Release of Pledge and Security Agreement dated
May 31, 2002 by and among IGI, Inc., IGEN, Inc., Immunogenetics,
Inc., Blood Cells, Inc. and American Capital Strategies, Ltd.
*(10.79) Termination and Release of Patent Security Agreement (United
States Patents) dated May 30, 2002 between American Capital
Strategies, Ltd. and IGI, Inc.
*(10.80) Termination and Release of Patent Security Agreement (United
States Patents) dated May 30, 2002 between American Capital
Strategies, Ltd. and Blood Cells, Inc.
*(10.81) Termination and Release of Patent Security Agreement (United
States Patents) dated May 30, 2002 between American Capital
Strategies, Ltd. and IGEN, Inc.
*(10.82) Termination and Release of Patent Security Agreement (United
States Patents) dated May 30, 2002 between American Capital
Strategies, Ltd. and Immunogenetics, Inc.
*(10.83) Termination and Release of Trademark Security Agreement dated May
30, 2002 between American Capital Strategies, Ltd. and IGI, Inc.
*(10.84) Termination and Release of Trademark Security Agreement dated May
30, 2002 between American Capital Strategies, Ltd. and IGEN,
Inc.
*(10.85) Termination and Release of Trademark Security Agreement dated May
30, 2002 between American Capital Strategies, Ltd. and
Immunogenetics, Inc.
*(10.86) Termination and Release of Trademark Security Agreement dated May
30, 2002 between American Capital Strategies, Ltd. and Blood
Cells, Inc.
*(10.87) Termination and Release of Trademark Security Agreement dated May
31, 2002 by and among Wachovia Bank, N.A. and IGI, Inc., IGEN,
Inc., Immunogenetics, Inc., Micro-Pak, Inc. and Micro Vescular
Systems, Inc.
*(10.88) Termination and Release of Trademark Security Agreement dated May
31, 2002 between Fleet Capital Corporation and IGI, Inc.
*(10.89) Termination and Release of Trademark Security Agreement dated May
31, 2002 between Fleet Capital Corporation and Immunogenetics,
Inc.
42
*(10.90) Termination and Release of Trademark Security Agreement dated May
31, 2002 between Fleet Capital Corporation and IGEN, Inc.
*(10.91) Termination and Release of Patent Security Agreement dated May
31, 2002 between Fleet Capital Corporation and IGI, Inc.
*(10.92) Termination and Release of Patent Security Agreement dated May
31, 2002 between Fleet Capital Corporation and IGEN, Inc.
*(10.93) Manufacturing and Supply Agreement dated May 31, 2002 between
IGI, Inc. and IGEN, Inc. (collectively Suppliers) and Vetoquinol,
USA, Inc. (Purchaser).
*(10.94) Technological Rights Agreement dated May 31, 2002 between IGI,
Inc. and IGEN, Inc. (collectively Sellers) and Vetoquinol, USA,
Inc. (Purchaser).
*(10.95) Supplemental Agreement dated May 31, 2002 between IGI, Inc.
(Seller) and Vetoquinol, USA, Inc. (Buyer).
*(10.96) Discharge of Mortgage dated May 29, 2002 by Fleet Capital
Corporation.
*(10.97) Partial Release of Mortgage dated May 31, 2002 by American
Capital Strategies, Ltd. for real property designated on the
municipal tax map of the Borough of Buena as Lot 1, Block 205.
*(10.98) Amendment dated March 19, 2002, to License Agreement by and among
Ethicon on, Inc. and IGI, Inc., IGEN, Inc. and Immunogenetics, Inc.
(21) List of Subsidiaries. [Incorporated by reference to Exhibit 21 to
the 1999 Form 10-K.]
*(23.1) Consent of KPMG LLP.
*(99.1) Certification pursuant to 18 U.S.C. Section 1350, as enacted
under Section 906 of the Sarbanes-Oxley Act of 2002 for John F.
Ambrose, President and Chief Executive Officer.
*(99.2) Certification pursuant to 18 U.S.C. Section 1350, as enacted
under Section 906 of the Sarbanes-Oxley Act of 2002 for Domenic
N. Golato, Senior Vice President and Chief Financial Officer.
43