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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 the Fiscal Year Ended Commission File No.
December 31, 1995 1-8568
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IGI, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 01-0355758
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Wheat Road and Lincoln Avenue, Buena, NJ 08310
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(Address of principal executive offices) (Zip code)
(609) 697-1441
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Common Stock ($.01 par value)
Registered on the American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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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 the Form 10-K or any
amendment to this Form 10-K. [X]
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The aggregate market value of the Registrant's Common Stock, par value $.01 per
share, held by non-affiliates of the Registrant at March 15, 1996, as computed
by reference to the closing price of such stock, was approximately $48,000,000.
The number of shares of the Registrant's Common Stock, par value $.01 per share,
outstanding at March 15, 1996 was 9,269,420 shares.
Documents Incorporated by Reference:
Portions of the Proxy Statement to be sent to stockholders in connection
with the annual meeting to be held on May 8, 1996, are incorporated by
reference into Items 10, 11, 12, and 13 (Part III) of this Report.
Part I
Item 1. Business
IGI, Inc. ("IGI" or the "Company") was incorporated in Delaware in 1977. Its
executive offices are at Wheat Road and Lincoln Avenue, Buena, New Jersey. The
Company is a diversified company engaged in two business segments:
. Animal Health Products Business - production and marketing of animal health
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products such as poultry vaccines, veterinary products, nutritional
supplements and grooming aids; and
. Cosmetics and Consumer Products Business - production and marketing of
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cosmetic and consumer products such as skin care products and shampoos.
Since 1987, the earnings from the Company's Animal Health Products Business
have been used to fund commercial development efforts in the Cosmetics and
Consumer Products Business and the Company's former Biotechnology Business which
was engaged in the business of development of various applications of the
Company's proprietary encapsulation technology (Novasome(R) lipid vesicle and
Ultrasponge/TM/ hydrogel technologies and micellar nanoparticles, the "Novavax
Technologies") primarily for human medicines and vaccines.
Distribution of Biotechnology Business
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On March 17, 1994, the Company's Board of Directors adopted a plan to dispose
of the Biotechnology Business by spinning it off through a distribution to the
Company's stockholders of all of its common stock of the separate entity which
would conduct the Biotechnology Business in the future. Since 1991, the
development efforts of the Biotechnology Business were directed primarily
towards human pharmaceuticals, including vaccines. These development efforts
had reached the level where separate funding sources were required for the
Biotechnology Business to continue its development efforts, meet the
requirements of the FDA approval process and reach the stage of eventual
commercialization.
The Board of Directors determined that the best interests of the Company and
its stockholders would be served by dividing the Company into two separate
publicly-traded entities. By doing so, the Board of Directors believed that
access of both IGI and the Biotechnology Business to the capital markets would
significantly improve; IGI would be able to focus on its historically profitable
and growing Animal Health Products Business and its growing Cosmetics and
Consumer Products Business; and the management of the Biotechnology Business
would be able to focus mainly on developing human pharmaceutical applications.
The Company believed that the Distribution would also simplify IGI and permit
investors to more readily evaluate the earnings and growth potential of the
separate companies.
On December 12, 1995 (the "Distribution Date"), IGI distributed to the holders
of record of IGI's common stock, at the close of business on the Record Date,
November 28, 1995, one share of common stock of Novavax, Inc. ("Novavax") for
every one share of IGI common stock outstanding (the "Distribution"). In
connection with the Distribution, the Company has paid Novavax $5,000,000 in
return for a fully paid-up, ten-year license entitling it to the exclusive use
of Novavax's technologies in the fields of (i) animal pharmaceuticals,
biologicals, and other animal
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health products; (ii) foods, food applications, nutrients and flavorings; (iii)
cosmetics, consumer products and dermatological over-the-counter and
prescription products (excluding certain topically delivered hormones); (iv)
fragrances; and (v) chemicals, including herbicides, insecticides, pesticides,
paints and coatings, photographic chemicals and other specialty chemicals; and
the processes for making the same. The Company has the option, exercisable
within the last year of the ten-year term, to extend the License Agreement for
an additional ten-year period for $1,000,000. Novavax will retain the right to
use its Novavax Technologies for all other applications, including human
vaccines and pharmaceuticals. The Company has presented the payment under the
License Agreement as a capital contribution in its financial statements to
reflect the intercompany nature and substance of the transaction. The form was
structured as a prepaid licensing agreement to address various considerations of
the Distribution, including tax and financing considerations. For tax purposes,
the transaction will be treated as a prepaid licensing agreement. IGI has no
further obligations to fund Novavax. See Note 2 of Notes to IGI Financial
Statements.
IGI funded the $5,000,000 payment to Novavax from borrowings under its bank
loan agreement which has been amended to reflect the Distribution. The Amended
Loan Agreement with Fleet Bank - NH and Mellon Bank provides for:
. $12,000,000 revolving credit facility with interest contingent upon certain
financial ratios at the end of each quarter. The interest rate shall not
exceed prime plus 1 1/2%. The amount available under the revolving credit
facility decreases by $800,000 on the last day of each quarter from June 30,
1996 through December 31, 1999. At March 22, 1996 the Company had outstanding
borrowings of $12,000,000 under this facility and the interest rate was 10%.
. $10,000,000 working capital line of credit renewable annually, with
interest on the outstanding borrowings contingent upon certain financial
ratios at the end of each quarter. The interest rate shall not exceed prime
plus 1%. At March 22, 1996, the Company had $1,615,000 available under this
facility and the interest rate was 9.5%.
The Company was in default of its current ratio covenant as of December 31,
1995. The banks have amended the agreement to remove the default.
Under a transition services agreement, IGI will continue to provide certain
administrative services to Novavax, including services relating to human
resources, purchasing and accounting, data processing and payroll services for a
period not to extend beyond June 30, 1996. Novavax will pay IGI a fee for all
services provided by IGI employees, based on IGI's cost. In addition to these
services, Edward B. Hager will serve as Chairman of the Board and Chief
Executive Officer and John P. Gallo will serve as Chief Operating Officer and
Treasurer of Novavax through no later than June 30, 1996 (the "Transition
Termination Date"). Prior to the Transition Termination Date, Dr. Hager will
continue to devote the majority of his time to IGI and will receive no
compensation for his services as an officer of Novavax. Mr. Gallo will devote
approximately one half of his business time through the Transition Termination
Date to Novavax and its business, and IGI and Novavax will each pay Mr. Gallo
one half of his annual compensation. The Company does not believe that its
reliance on part-time management by Mr. Gallo will adversely affect IGI's
business during the transition period.
As a result of the Distribution, the Consolidated Financial Statements of IGI
present its Biotechnology Business as a discontinued operation. Losses incurred
by the Biotechnology Business through the date of the Distribution are included
in the "Loss from Discontinued Operations" in the financial statements.
Strategy
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The Company's business strategy for its operations is as follows:
. Continue growth of the Animal Health Products Business, especially in the
international markets, through new product development and intensified product
registration (for licenses in foreign countries) and marketing efforts.
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. Continue growth of the Cosmetics and Consumer Products Business through
expanded efforts to develop and market additional cosmetic and dermatologic
products utilizing the Novavax Technologies internally through the Company's
Nova Skin Care Division and externally through industry partners and
customers.
. Continue development of the consumer product applications of the Novavax
Technologies, including flavors, beverage and food additives, coatings, paints
and chemicals.
. Explore opportunities for strategic acquisitions in its two business
segments.
Novavax Technologies
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Liposome encapsulation is a process designed to entrap and deliver various
useful materials. Prior to the development of the Novavax Technologies, the
most commonly used technology, phospholipid liposome encapsulation, had a
limited capacity to encapsulate anything other than materials that can be
dissolved or suspended in water. Phospholipid liposomes are man-made,
microscopic spheres that are usually formed through a multi-step process, which
generally includes the mixing of water, organic solvents and phospholpids. Most
phospholipid-based liposomes are produced from materials that are expensive and
may require the use of potentially hazardous organic solvents. The standard,
multi-step phospholipid manufacturing process yields small quantities of
expensive, less stable vesicles with limited cargo capacity.
Based on the belief that certain forms of liposomes can stimulate the immune
system, various institutions and companies have tried to develop liposome-based
vaccines with advantageous properties over conventional vaccines. The Company
believes that efforts to commercially develop phospholipid-based liposomes have
been unsuccessful primarily because phospholipid-based liposomes have:
. high cost
. low stability
. low versatility
. commercial scale-up difficulties
Novasome Lipid Vesicles
While artificial lipid vesicle encapsulation technology has existed for almost
four decades, the Company believes that it was one of the first companies to
produce highly stable, versatile artificial lipid vesicles and structures of
various types from low-cost, readily available materials in commercial
quantities. The major advantages of Novasomes over other liposomes are as
follows:
Versatility, Stability and Low Cost
. Novasomes may be made from a number of inexpensive, readily available
chemicals, called amphiphiles, including fatty alcohols and acids, ethoxylated
fatty alcohols and acids, glycol esters of fatty acids, glycerol fatty acid
mono and diesters, ethoxylated glycerol fatty acid esters, glyceryl ethers,
fatty acid diethanolamides and dimethyl amides, fatty acyl sarcosinates,
"alkyds" as well as phospholipids.
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. Novasomes have a large, stable central core that allows them to entrap and
deliver a wide variety of substances that may be too large or disruptive for
phospholipid vesicles, including lipids, solvents, particulates and
perfluorocarbons as well as aqueous materials.
. Novasomes can be varied according to the intended cargo and can be
engineered to release cargo in response to a variety of factors.
. Novasomes can be made to provide acceptable stability under a variety of
conditions, such as wide variations of alkalinity, acidity, temperature,
shear, detergents, solvents, enzymes and others.
Ease of Commercial Scale-up
Novasomes can be made in large quantities in a continuous flow process that
does not use organic solvents. The patented Novamix/TM/ production machinery
permits the blending of reagents under controlled conditions, and enables the
composition of the Novasomes to be adjusted to customize their structure and
release properties. The Novavax Technologies, the Company's ability to use
readily available materials and the patented Novamix production machinery allow
it to produce Novasomes with stability, versatility, large cargo carrying
capacity, high production volumes and low production costs. The Company
believes these advantages provide an opportunity to extend the commercial
potential of Novasomes from the near-term cosmetic and personal care products
produced and marketed by IGI.
Micellar Nanoparticles
Micellar nanoparticles ("MNP") are submicron-sized lipid structures. MNP have
different structural characteristics (e.g. do not have lipid bilayers) and are
generally smaller than Novasome lipid vesicles. MNP, like Novasomes, are made
from the family of materials derived from amphiphilic surfactants and can be
tailored for particular uses. They exhibit encapsulating and many other
properties similar to Novasomes, but differ in other properties. MNP are very
stable and can be prepared in commercial quantities at a reasonable cost. The
Company believes MNP may have commercial application in its Cosmetic and
Consumer Products.
Novavax holds 30 U.S. patents and 43 foreign patents covering its Novavax
Technologies (including a wide variety of component materials, its continuous
flow vesicle production process and its Novamix/TM/ production equipment).
License of Technology from Novavax
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On December 12, 1995, IGI, Inc. distributed its majority interest in Novavax
to the IGI stockholders. Immediately after the Distribution, IGI, through its
wholly-owned subsidiary IGEN, Inc., paid Novavax's wholly-owned subsidiary
Micro-Pak, Inc. approximately $5,000,000 in return for a fully paid-up,
exclusive ten-year license entitling it to use the Novavax Technologies in the
fields (the "IGI Field") 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;
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and the processes for making the same (the "IGI License Agreement"). 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 will
retain the right to use its Novavax Technologies for all applications outside
the IGI Field, including human vaccines and pharmaceuticals.
If at any time during the term of the IGI License Agreement either party shall
make or discover any product improvements useful in the IGI Field (such
improvements being limited to those improvements that would be dominated by the
claims of a licensed patent), it shall communicate all details in respect
thereof to the other party. If Novavax makes such improvements, IGI shall be
entitled to use the same in the IGI Field during the term of the IGI License
Agreement without paying any increased royalty in respect thereof. If IGI makes
such improvements, Novavax shall have the right to use them outside the IGI
Field during the term of the IGI License Agreement. In the event employees of
Novavax and IGI are joint inventors as a result of inventions arising out of the
development of licensed products, any patent applications filed thereon shall be
owned by Novavax, and IGI shall have an exclusive license in the IGI Field.
Three of the members of the Board of Directors of IGI are also directors of
Novavax, and the terms of the IGI License Agreement were unilaterally
established by IGI. [It is the view of the Board of Directors and management of
Novavax, however, that the terms of the IGI License Agreement were at least as
favorable to Novavax as would have been obtained from any unaffiliated third
party.] The $5,000,000 license payment was determined unilaterally by IGI,
based on the present value of the estimated aggregate royalties IGI would expect
to pay Novavax over a ten-year period if such royalties were paid annually based
on IGI's annual revenues from the sale of its products that use or incorporate
the Novavax Technologies. The royalty rates used in calculating the license
payment were the same as those used by IGI in determining the annual royalties
paid by IGI for the Novavax Technologies when the Company was a subsidiary of
IGI during the period prior to the Distribution. Prior to the Distribution, IGI
paid a royalty rate of 10% on sales of products incorporating the Novavax
Technologies. This rate was determined based on a review of similar types of
licensing agreements and reflected the lack of any up-front payment by IGI to
Novavax. Novavax recognized revenues under its earlier license agreement of
$199,000, $210,000 and $268,000 for the years 1993, 1994 and 1995, respectively.
The lump sum license payment was determined to be preferable to annual royalty
payments, because the license payment would provide Novavax with immediate funds
to finance its operations after the Distribution. At the time the terms of the
IGI License Agreement were fixed, including the license payment, all of the
directors of IGI were also directors of Novavax.
5
Business Segments
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The following table sets forth the revenue and operating profit (in thousands)
of each of the Company's two business segments for the periods indicated:
1995 1994 1993
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Revenue
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Animal Health Products $29,510 $27,471 $26,626
Cosmetics and Consumer Products 1,711 1,477 1,378
Operating Profit (Loss) *
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Animal Health Products 6,459 6,057 6,020
Cosmetics and Consumer Products (159) 296 367
* Excludes corporate expenses of $3,056, $2,845 and $3,000 for 1995, 1994 and
1993, respectively. (See Note 15 of Notes to Consolidated Financial
Statements.)
As a result of the Distribution of the Biotechnology Business, the operating
losses of that segment are included as "Loss from Discontinued Operations" in
the Company's financial statements. (See Note 2 of Notes to Consolidated
Financial Statements.)
Animal Health Products Business
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IGI manufactures and markets a broad range of animal health products used in
pet care and poultry production. The Company sells these products in the United
States and over 50 other countries principally under two trade names: Vineland
Laboratories and EVSCO Pharmaceuticals. The Company also sells veterinary
products to the over-the-counter pet products market under the Tomlyn label.
Poultry Vaccines
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The Company produces and markets poultry vaccines manufactured by the chick
embryo, tissue culture and bacteriological methods. The Company produces
vaccines for the prevention of various chicken and turkey diseases and has 80
vaccine licenses granted by the United States Department of Agriculture ("USDA")
(See "Government Regulation"). The Company also produces and sells, under its
Vineland Laboratories label, nutritional, anti-infective and sanitation products
used primarily by poultry producers.
The Company manufactures poultry vaccines at its USDA approved facility in
Vineland, New Jersey and sells them, primarily through its own sales force of 12
persons, directly to large poultry producers and distributors in the United
States and, through its export sales staff, to local distributors in other
countries. The sales force is supplemented and supported by technical and
customer service personnel. The Company's vaccine production in the United
States is regulated by the USDA. Sales of poultry vaccines and related products
accounted for approximately 60% of the Company's sales in 1995, 59% in 1994 and
58% in 1993.
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The Company has two poultry vaccines licensed by the USDA which use the
Novavax Technologies and is continuing development efforts on new vaccine
applications of this technology.
The Company's principal competitors in the poultry-vaccine market are Intervet
America, Inc., Solvay Veterinary, Inc. and Rhone-Merieux Select Laboratories,
Inc. The Company believes that it has the largest share of the domestic poultry
vaccine market. The Company competes on the basis of product performance,
price, customer service and availability.
Veterinary Products
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The EVSCO line of veterinary products is used by veterinarians in caring for
dogs and cats, and includes antibiotics, anti-inflammatories, cardiac care
drugs, nutritional supplements, vitamins, insecticides and diagnostics. Product
forms include gels, tablets, creams, liquids, ointments, powders, emulsions and
diagnostic kits. EVSCO also produces professional grooming aids for dogs and
cats.
EVSCO products are manufactured at the Company's facility in Buena, New Jersey
and sold through distributors to veterinarians. The facility operates in
accordance with Good Manufacturing Practices ("GMP") of the federal Food and
Drug Administration ("FDA") (See "Government Regulation".) Principal
competitors of the EVSCO product line include Solvay Veterinary, Inc., Vet-Kem,
a division of Sandoz Pharmaceuticals Corp., MSD AGVET (a division of Merck &
Co.), Schering Corp., and Pitman-Moore, Inc. The Company competes on the basis
of price, marketing, customer service and product qualities.
The Tomlyn product line includes pet grooming, nutritional and therapeutic
products, such as shampoos, grooming aids, vitamin and mineral supplements,
insecticides and OTC medications. These products are manufactured at the
Company's facility in Buena, New Jersey, and sold through distributors to
superstores, independent merchandising chains, shops and kennels. Tomlyn's
largest selling product line is the Nova Pearl/TM/ line of shampoos which is
based upon the Novavax Technologies and provides combined moisturizing, cleaning
and conditioning.
Sales of the Company's veterinary products are handled by 24 sales employees.
Most of the Company's veterinary products are sold through distributors. Sales
of veterinary products accounted for approximately 35% of the Company's sales in
1995, 36% in 1994 and 37% in 1993.
Cosmetics and Consumer Products
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IGI's Cosmetics and Consumer Products division is focused on the internal
development and marketing of skin care products utilizing the Novavax
Technologies through its Nova Skin Care division. IGI is continuing to work
with several cosmetics, personal care products, and OTC pharmaceutical companies
for various commercial applications of Novavax Technologies. Because of their
ability to encapsulate skin protective agents, oils, moisturizers, shampoos,
conditioners, skin cleansers and fragrances and to provide both a controlled and
a sustained release of the encapsulated materials, Novasome lipid vesicles are
well-suited to cosmetics and consumer product applications. For example,
Novasomes 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
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described in the cosmetics industry as "feel," "substantivity," "texture" or
"fragrance"; to deliver normally incompatible ingredients in the same
preparation, with one ingredient being shielded or protected from the other by
encapsulation within the Novasome; and to deliver pharmaceutical agents to
and/or through the skin.
The Company is presently producing Novasomes for various skin care products
including those marketed by the Prescriptives Division of Estee Lauder under
that company's "All You Need" brand name as well as products for Lauder's
"Resilience" brand. The first product was introduced in early 1993. The
Company also produces and sells Novasomes to Revlon for use in lines of skin
moisturizers manufactured and marketed by Revlon as its "Results" product line
and by Revlon's Almay Division in its "Time Off" product line.
Sales of the Company's Cosmetics and Consumer Products were principally based
on formulations using the Novavax Technologies. Such sales approximated 5% in
each of 1995, 1994 and 1993 of the Company's total sales.
Nova Skin Care
In February 1996, under the Nova Skin Care label, IGI launched its own line of
Novasome(R) based alpha hydroxy acid skin care products. The first six over-
the-counter products were introduced at the annual meeting of the American
Academy of Dermatology in February 1996. The Company is marketing these
products directly to dermatologists through a sales force of 16 employees.
Additions to this product line are planned for 1996.
On February 6, 1996, Johnson & Johnson and its wholly-owned subsidiary Ortho-
McNeil, Inc. (collectively, "J&J") filed a lawsuit against the Company and its
subsidiary, Igen, Inc. and its former subsidiary Micro-Pak, Inc. in the United
States District Court for the District of New Jersey alleging trademark
infringement and trademark dilution. J&J alleges that the Company's use of the
names NOVA SKIN, NOVA SKIN CARE, and NOVA-AESTHETICS infringes on rights
associated with J&J's trademark RENOVA for a prescription drug. J&J has also
moved for a preliminary injunction seeking to preclude the Company's use of the
NOVA SKIN, NOVA SKIN CARE, and NOVA-AESTHETICS names on the Company's
newly-launched line of skin care products sold through dermatologists. On March
18, 1996, following a period of expedited discovery, the Court held an
evidentiary hearing on the motion for preliminary injunction. The Court has not
yet issued a ruling.
Since 1988, the Company has used the trademark NOVASOME in connection with the
lipid vesicle encapsulation technology it developed, including in connection
with skin care products. In addition, numerous other companies use the term
NOCVA in a wide variety of product and corporate name formulations. The Company
is vigorously defending this lawsuit and believes that the outcome of the
proceedings will not have a material adverse effect on the Company's financial
position or results of operations.
Other Applications
The versatility of the Novavax Technologies combined with the Company's
commercial production capabilities allow the Company to target large, diverse
markets. Through product collaborations and license agreements, the Company is
seeking to develop additional products for this business segment. For example,
in 1992, the Company entered into a joint venture using the Novavax
Technologies, ("Flavorsome, Ltd."), to develop encapsulated flavors for foods
and beverages. Flavorsome is working with a number of food industry leaders on
various food, beverage and confection applications of the Novavax Technologies.
During 1995, Flavorsome received its first commercial orders. The Company
continues to pursue the development of food, beverage and confection
applications of Novavax Technologies. A major goal of Novasome flavor
preservation is to double or triple the useful shelf life of various foods,
beverages and candies which are dependent on volatile flavors. The Novavax
Technologies enables the
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substitution of encapsulated, water or other calorie neutral material for fat in
confections. Other benefits include encapsulation of beverage flavors to give a
sequential taste phenomenon, development of higher melting point chocolate and
taste masking of nutritional supplements. The Company is evaluating affiliations
with potential industry partners. The efforts for the development of additional
products require extensive testing, evaluation and trials, and therefore no
assurance can be given that commercialization of these products with Novasomes
will be successful.
The Company has also developed a Novasome-encapsulated anthralin preparation
("Anthrasome Cream") for the treatment of psoriasis. Anthralin is an effective
medication for the treatment of psoriasis. However, it causes skin staining,
and because of its customary petrolatum-based formulation and insolubility, has
generally been a difficult substance to formulate in a cosmetically acceptable
form. The Company believes its Novasome cream formulation is more cosmetically
acceptable and reduces skin staining. The Company is seeking to market
Anthrasome Cream through an arrangement with a third-party.
The Company has encapsulated retinoids in Novasome vesicles in collaboration
with J&J. Retinoids are derivatives of retinoic acid and are effective in the
treatment of acne and thought to be effective in the treatment of various age-
associated skin disorders. Encapsulation of retinoids in Novasomes is designed
to prolong stability and reduce irritation and provide a sustained release of
certain active ingredients to treat these disorders. The Company does not
expect to derive any significant revenue from this application during 1996.
International Sales and Operations
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A staff of 12 persons based in Buena, New Jersey and 4 individuals based
overseas handle all sales of Company products outside the United States. The
Company's sales personnel and poultry veterinarians travel abroad extensively to
develop business through local distributors. Exports consist primarily of
poultry vaccines, although the Company also exports some veterinary
pharmaceuticals and pet care products. Exports of vaccines require product
registration or licensing by foreign authorities. The Company has 519 products
registered or licensed in over 50 countries outside the United States and has
over 1,328 registrations pending.
Mexico and certain Latin American countries are important markets for the
Company's poultry vaccines and other products. These countries have
historically experienced varying degrees of political unrest and economic and
currency instability. Because of the volume of business transacted by the
Company in those countries, continuation or the recurrence of such unrest or
instability could adversely affect the businesses of its customers in those
countries or the Company's ability to collect its receivables from such
customers, which in either case could adversely impact the Company's future
operating results.
In 1995, sales to international customers of $12,234,000 represented 39% of
the Company's sales, as compared with 39% in 1994 and 37% in 1993. (See Note 11
of Notes to Consolidated Financial Statements.)
9
Manufacturing
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The Company's manufacturing operations include production and testing of
vaccines, lotions, pills and powders; packaging, bottling and labeling of the
finished products; and packing and shipment for distribution. Approximately 78
employees are engaged in manufacturing operations. The raw materials included
in these products are available from several suppliers.
The Company produces quantities of Novasomes adequate to meet its current
needs for cosmetics and consumer product and animal health product applications.
In 1995, the Company completed and began operating a new facility for marketing
staff and Novavax Technologies product development. This facility also houses
production facilities for cosmetics and consumer products. The Company intends
to increase its poultry vaccine production capacity during 1996. (See
"Properties".)
Research and Development
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The Company's poultry vaccine research and development efforts are directed
towards developing more efficient single and multiple-component vaccines,
developing vaccines to combat new diseases and incorporating the Novavax
Technologies into existing vaccines. The Company is concentrating its
veterinary pharmaceutical research and development efforts on the use of Novavax
Technologies for various veterinary pharmaceutical and OTC pet care products.
The Company's cosmetics and consumer products research and development efforts
are directed towards liposomal encapsulation to improve performance and efficacy
of cosmetics, consumer products, flavors and dermatologic products. Under its
license agreement with Novavax, the Company has the right to continue to use the
Novavax Technologies to develop new products in those fields covered by the
license.
In addition to its internal research and development efforts, which involves
23 employees, the Company encourages the development of products in areas
related to its present lines by making specific grants to universities.
Research expenses for IGI's continuing operations were $1,345,000, $1,212,000
and $817,000 in 1995, 1994 and 1993, respectively.
Patents and Trademarks
- ----------------------
All of the names of the Company's major products are registered in the United
States and all significant foreign markets in which the Company sells its
products. Under the terms of the IGI License Agreement, IGI has an exclusive
ten-year license to use the Novavax Technologies in the IGI Field. Novavax
holds 30 U.S. patents and 43 foreign patents covering its Novavax Technologies
(including a wide variety of component materials, its continuous flow vesicle
production process and its Novamix/TM/ production equipment).
IGI intends to engage in collaborations, sponsored research agreements, and
preclinical and/or field testing agreements in connection with its future
vaccine and pharmaceutical products as well as clinical testing agreements with
academic and research institutions and U.S. government agencies, such as the
National Institutes of Health and the Department of Agriculture, to take
advantage of their technical expertise and staff and to gain access to clinical
evaluation models, patents, and related technology. Consistent with
pharmaceutical industry and academic standards, and the rules and regulations
under the Federal Technology Transfer Act of 1986, these
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agreements may provide that developments and results will be freely published,
that information or materials supplied by the Company will not be treated as
confidential and that the Company may be required to negotiate a license to any
such developments and results in order to commercialize products incorporating
them. There can be no assurance that the Company will be able successfully to
obtain any such license at a reasonable cost or that such developments and
results will not be made available to competitors of the Company on an exclusive
or nonexclusive basis.
Government Regulation
- ---------------------
The production and marketing of the Company's products and its research and
development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the United States and other
countries. The Company's development, manufacturing and marketing of poultry
biologics are subject to regulation in the United States for safety and efficacy
by the United States Department of Agriculture ("USDA") in accordance with the
Virus Serum Toxin Act of 1914. The development, manufacturing and marketing of
pharmaceuticals are subject to regulation in the United States for safety and
efficacy by the FDA in accordance with the Food, Drug and Cosmetic Act.
In the United States, pharmaceuticals and vaccines are subject to rigorous
Food and Drug Administration ("FDA") regulation including preclinical and
clinical testing. The process of completing clinical trials and obtaining FDA
approvals for a new drug or new biologic is likely to take a number of years,
requires the expenditure of substantial resources and is often subject to
unanticipated delays. There can be no assurance that any product will receive
such approval on a timely basis, if at all.
In addition to product approval, the Company may be required to obtain a
satisfactory inspection by the FDA covering the manufacturing facilities before
a product can be marketed in the United States. The FDA will review the
manufacturing procedures and inspect the facilities and equipment for compliance
with applicable rules and regulations. Any material change by the Company in
the manufacturing process, equipment or location would necessitate additional
FDA review and approval.
Whether or not FDA approval has been obtained, approval of a pharmaceutical
product by comparable governmental regulatory 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
required 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 Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and potential future federal, state or local
regulations. The Company's research and development involves the controlled use
of hazardous materials, chemicals, viruses and bacteria. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination
11
or injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that result
and any such liability could exceed the resources of the Company.
Employees
- ---------
The Company currently has 213 full-time employees, of whom 92 are in
marketing, sales and customer support, 78 in manufacturing, 23 in research and
development, and 20 in executive, finance and administration. Certain services
will be provided by IGI to Novavax through no later than June 30, 1996 on a
transitional basis while Novavax builds its support staff. The Company has no
collective bargaining agreement with its employees, and believes that its
employee relations are good.
Item 2. Properties
The Company owns land and buildings housing offices, laboratories and
production facilities in four locations in New Jersey. The Company also owns a
warehouse and sales office space in Gainesville, Georgia. In addition, the
Company leases office space in Virginia and warehouses in New Jersey,
California, Mississippi, and Arkansas.
The Company's poultry vaccine production facilities are located in Vineland,
New Jersey, where the Company owns several buildings situated on approximately
16 acres of land. These buildings, containing 90,000 square feet of usable
floor space, house offices and facilities used for the production of poultry
vaccines. They were constructed and expanded from time to time between 1935 and
1992. The Company intends to renovate certain of these facilities in 1996 to
expand its vaccine production capacity to meet expected growth in existing
poultry vaccines and to provide production of new vaccines.
In Buena, New Jersey, the Company owns a facility used for the production of
veterinary pharmaceuticals and cosmetics and consumer products. The facility
was built in 1971 and expanded in 1975 and in 1992 its capacity was increased
for production of Novasome lipid vesicles. The facility presently contains
41,200 square feet of usable floor space, and is situated on eight acres of
land. The Company's executive and administrative offices are also located in
Buena, New Jersey in a 10,000 square foot building situated on six acres of
land. In 1995, the Company completed and began operating a 25,000 square foot
production, product development, marketing, manufacturing and warehousing
facility for cosmetic, dermatologic and personal care products on this site.
Each of the properties owned by the Company is subject to a mortgage held by
Fleet Bank-NH of Nashua, New Hampshire and Mellon Bank. Except as discussed
above, the Company believes that its current production and office facilities
are adequate for its present and foreseeable future needs.
12
Item 3. Legal Proceedings
On February 6, 1996, Johnson & Johnson and its wholly-owned subsidiary Ortho-
McNeil, Inc. (collectively, "J&J") filed a lawsuit against the Company and its
subsidiary, Igen, Inc. and its former subsidiary Micro-Pak, Inc. in the United
States District Court for the District of New Jersey alleging trademark
infringement and trademark dilution. J&J alleges that the Company's use of the
names NOVA SKIN, NOVA SKIN CARE, and NOVA-AESTHETICS infringes on rights
associated with J&J's trademark RENOVA for a prescription drug. J&J has also
moved for a preliminary injunction seeking to preclude the Company's use of the
NOVA SKIN, NOVA SKIN CARE, and NOVA-AESTHETICS names on the Company's
newly-launched line of skin care products sold through dermatologists. On March
18, 1996, following a period of expedited discovery, the Court held an
evidentiary hearing on the motion for preliminary injunction. The Court has not
yet issued a ruling.
Since 1988, the Company has used the trademark NOVASOME in connection with the
lipid vesicle encapsulation technology it developed, including in connection
with skin care products. In addition, numerous other companies use the term
NOVA in a wide variety of product and corporate name formulations. The Company
is vigorously defending this lawsuit and believes that the outcome of the
proceedings will not have a material adverse effect on the Company's financial
position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
13
Executive Officers of the Registrant
- ------------------------------------
The Company's executive officers hold office until the first meeting of the
Board of Directors following the annual meeting of stockholders and until their
successors are duly chosen and qualified. For information concerning officers
who are also directors of the Company, please refer to Item 10 of this Report.
Information concerning other executive officers is as follows:
Principal Occupation and Other
Officer Business Experience During
Name Age Since Past Five Years
- ---- --- ----- ------------------------------
Kevin J. Bratton 47 1983 Vice President and Treasurer
of IGI, Inc. since 1983.
Stephen G. Hoch 57 1991 Vice President of IGI, Inc.
since 1991.
Surendra Kumar D.V.M., 60 1985 Vice President of IGI, Inc.
Ph.D. since 1985.
Donald J. MacPhee 44 1987 Vice President of IGI, Inc.
since 1990 and Chief Financial
Officer of IGI, Inc. since
1987.
Lawrence N. Zitto 53 1985 Vice President of IGI, Inc.
since 1985.
14
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
There were 1,137 stockholders of record as of March 15, 1996. The Company has
never paid cash dividends on its Common Stock. The payment of dividends is
restricted by the Company's Loan Agreement with Fleet Bank-NH, Nashua, New
Hampshire and Mellon to a maximum 25% of earnings in any year and to retained
earnings in excess of $1,000,000.
The principal market for the Company's Common Stock ($.01 par value) (the
"Common Stock") is the American Stock Exchange (symbol: "IG"). The following
table shows the range of high and low trading prices on the American Stock
Exchange for the periods indicated.
High Low
---- ---
1994
- ----
First quarter 12 3/8 8 3/8
Second quarter 11 1/4 8 1/2
Third quarter 10 5/8 8
Fourth quarter 14 3/8 9 1/2
1995
- ----
First quarter 17 1/2 11 5/8
Second quarter 16 1/8 13
Third quarter 15 7/8 11 1/2
Fourth quarter 12 3/4 6 3/8*
* On December 12, 1995, the Company distributed to its shareholders all of
the Common Stock of Novavax owned by the Company. Each IGI shareholder received
one share of Common Stock of Novavax for each share of Common Stock of the
Company held on November 28, 1995. The Common Stock of IGI began trading "ex-
dividend" on December 13, 1995.
15
Item 6. Selected Financial Data
Five Year Summary of Selected Financial Data
Year ended December 31,
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Income Statement Data:
- ----------------------
Net sales $22,008,644 $24,434,638 $28,004,569 $28,947,911 $31,220,632
Gross profit 11,418,562 13,143,029 14,839,332 15,012,669 15,789,098
Operating profit 2,054,589 2,491,792 3,386,418 3,508,075 3,244,550
Income from continuing
operations 928,636 1,342,009 1,765,251 1,969,151 1,507,744
(Loss) from discontinued operations* (883,751) (1,275,977) (5,942,921) (1,699,844) (4,033,768)
Net income (loss) 44,885 66,032 (4,177,670) 269,307 (2,526,024)
Income (loss) per share:
From continuing operations
.11 .15 .20 .22 .16
From discontinued operations (.10) (.14) (.66) (.19) (.42)
Net income (loss) .01 .01 (.46) .03 (.26)
Cash dividends on common stock 0 0 0 0 0
Balance Sheet Data:
- -------------------
Working capital $11,332,910 $11,506,779 $12,410,545 $10,670,973 $ 4,283,420
Total assets 23,136,772 27,500,714 26,005,054 30,501,842 32,331,324
Long-term debt (excluding current
maturities) 5,427,593 7,825,586 8,798,475 10,019,138 9,624,303
Stockholders equity 12,803,509 15,266,774 12,320,633 13,711,499 8,547,642
Average number of common and common
equivalent shares 8,408,769 8,999,182 9,048,895 9,155,231 9,725,230
* In March 1994, IGI's Board of Directors voted to dispose of its Biotechnology
Business segment through the combination of certain majority-owned subsidiaries
and the subsequent tax-free Distribution of its ownership of the combined entity
to IGI's shareholders. The distribution of this segment occurred on December
12, 1995. The Consolidated Financial Statements of IGI present this segment as
a discontinued operation. (See Note 2 of Notes to Consolidated Financial
Statements.)
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
On December 12, 1995, in order to facilitate obtaining capital for its
Biotechnology Business operations and continued expansion of its Animal Health
Products and Cosmetics and Consumer Products segments, IGI distributed its
ownership of Novavax, to IGI's shareholders ("Distribution"). Since the
operations of Novavax comprise IGI's Biotechnology Business segment, the
Consolidated Financial Statements of IGI present this segment as a discontinued
operation. (See Note 2 of Notes to Consolidated Financial Statements).
IGI's management believes that IGI's stockholders' interests were best served
by dividing IGI into two separate publicly-traded entities through the
Distribution; that the Distribution will enable IGI to focus on its historically
profitable and growing Animal Health Products business (Vineland Laboratories,
EVSCO Pharmaceuticals, and Tomlyn Products) as well as its Cosmetics and
Consumer Products which will continue to manufacture and market Novavax
technology based products under a license agreement; and that the Distribution
will simplify IGI and permit investors to more readily evaluate the earnings and
growth potentials of its businesses.
Income from continuing operations decreased by $461,000 or 23% compared to
1994. Operating profit decreased by $264,000 or 8% over 1994. The Animal
Health Products segment generated operating profits in 1995 of $6,459,000, an
increase of $403,000, or 7%, over 1994 due to the increased sales volume. The
Cosmetic and Consumer Products segment had an operating loss of $159,000 in
1995, compared to operating profits of $296,000 and $367,000 for 1994 and 1993,
respectively. The 1995 operating loss reflects the Company's development and
marketing of Novavax Technologies products for dermatologic and food
applications while continuing to market these technologies to major cosmetic and
consumer product companies. The operating loss for this segment in 1995
includes manufacturing variances related to the new production facility which
was not operating at full capacity and selling, marketing and development costs
for the Company's Nova Skin Care division. The operating profits of these
segments do not reflect unallocated corporate expenses of $3,056,000, $2,845,000
and $3,000,000 for the years ended December 31, 1995, 1994, and 1993
respectively, which were charged to the segments in determining the Company's
operating profit. (See Note 15 of Notes to Consolidated Financial Statements.)
The loss from discontinued operations in 1995 resulted from increased
operating expenses related primarily to research efforts directed toward the
development of human vaccines and pharmaceuticals utilizing the Novavax
Technologies as well as transaction costs associated with the Distribution. The
Company had anticipated the effective date of the Distribution to be June 30,
1995. Due to delays in the final distribution of Novavax, the Company incurred
costs in excess of the $1,000,000 estimated loss on disposal of its
biotechnology business segment. These costs related to increased research and
development expenses for products in the initial FDA approval process. The
Biotechnology Business segment had no revenue from product sales in 1995, 1994
or 1993. (See Note 2 of Notes to Consolidated Financial Statements.)
17
1995 Compared to 1994
- ---------------------
Sales increased $2,273,000 or 8% to $31,221,000. The growth was principally
attributable to increases in poultry vaccine sales, both domestically and
internationally. Poultry vaccine sales accounted for $18,797,000 or 60% of the
Company's sales. International and domestic poultry vaccine sales experienced
growth rates of 14% and 7% respectively. The domestic increase was attributable
to the introduction of a new Rispen poultry vaccine during the second half of
1995. The Company expects the sales of this product to continue to increase
during 1996. The international poultry sales increase relates directly to the
increased product registration activities, particularly in the Asia/Pacific
marketplace which experienced a 24% sales increase. Companion pet product sales
increased $225,000 or 2% to $10,713,000, although international sales of these
products declined particularly in Europe. Tomlyn sales, which are directed to
the over-the-counter marketplace, experienced a 28% increase, due principally to
the placement of these products in pet superstores. Increased sales to Estee
Lauder contributed to a $234,000 or 16% growth in the Cosmetics division. The
Company expects to increase the number of products that it manufactures for
Estee Lauder during 1996 as well as complete licensing arrangements with two
other cosmetic and consumer product companies. In February 1996, the Company
launched a line of Novasome based alpha hydroxy acid ("AHA") products through
its Nova Skin Care division. The Company is marketing these products directly
to dermatologists through a sales force of 16 employees.
The Company's gross profit increased $776,000 or 5%, with much of the increase
related to sales growth. As a percentage of sales, gross profit dropped from
52% during 1994 to 51% in 1995. Significant factors in the gross profit ratio
reduction were increased sales of certain lower-margin poultry vaccines, fixed
costs associated with the Company's new manufacturing facility which was
operating below full capacity and the discontinuance of certain product lines.
As the production requirements for the Cosmetic and Consumer Products segment
increases during 1996, the Company expects an improvement in its gross profit
percentage.
Selling, general and administrative expenses increased $1,256,000 or 12% due
in part to variable costs associated with the higher sales volume and additional
reserves established for international accounts receivables. Selling and
marketing costs relating to the Company's new Nova Skin Care division were
$250,000. The Company expects significant increases in selling and marketing
expenses in 1996 related to the Nova Skin Care product line. These costs
include introductory advertising, sampling and tradeshows as well as sales and
marketing management. Research and development expenses increased by $132,000
or 11% due to stepped up development in the Cosmetic and Consumer Products
segment, principally for the Nova Skin Care dermatologic product line. The
Company intends to continue to increase its research and development efforts in
all of its businesses, with particular emphasis on developing new poultry
vaccines and developing additional products for the Nova Skin Care division.
During 1995, the Company recognized $731,000 in research revenues, an increase
of $348,000 or 91% over 1994.
Interest expense increased $233,000 or 23% due to the higher borrowings
required to meet the operational demands of the biotechnology business segment.
The Company expects interest expense to increase during 1996 related to
borrowings that were required in December 1995 to fund the $5,000,000 license
payment to its former subsidiary, Novavax.
18
The provision for income taxes on continuing operations was lower than the
statutory rate due principally to utilization of research and development tax
credits as well as an adjustment to prior years accruals. (See Notes 1, 2 and 7
of Notes to Consolidated Financial Statements.)
1994 Compared to 1993
- ---------------------
Net sales increased by $943,000 or 3% compared to 1993. International sales
of poultry vaccines (Vineland Laboratories) and small animal products (EVSCO and
Tomlyn) increased by $1,077,000 or 11% and accounted for $11,360,000 or 39% of
the Company's sales, up from $10,282,000 or 37% of the Company's 1993 sales.
Domestic sales of EVSCO and Tomlyn products increased by $97,000 or 1%.
Domestic sales by Vineland Laboratories in 1994 were $330,000 or 4% less than in
1993. This decrease was due to a combination of factors, including poultry
vaccine production capacity limitations which resulted in shipping of certain
vaccines to overseas rather than domestic markets, and domestic price erosion on
several vaccines. Overall, sales of the Company's Animal Health Products
segment increased by $845,000 or 3% and accounted for $27,471,000 or 95% of the
Company's sales, compared to $26,627,000 or 95% of the Company's 1993 sales.
Sales of the Company's Cosmetics and Consumer Products segment were $1,477,000,
an increase of $98,000 over 1993. These sales were principally of cosmetic
products utilizing the Novavax Technologies.
Gross profit increased by $173,000 or 1% compared to 1993. This increase was
attributable principally to the higher sales volume. As a percentage of sales,
gross profit was 52%, down from 53% in 1993, due in part to domestic poultry
vaccine price concessions as a result of competitive pricing pressures. In the
aggregate, gross profit margins from international sales were comparable to
those of domestic sales.
Selling, general and administrative expenses increased by $38,000 due in part
to variable expenses associated with the higher sales volume. As a percentage
of sales, the expenses decreased to 37% from 38% in 1993. This decrease is
attributable to absorption of fixed costs by the higher sales volume.
Gross research and development expenses increased $396,000 or 48% due
principally to additional technology application efforts focused at the
Company's core business operations, especially in the areas of flavors,
cosmetics and chemicals. These expenditures were offset, in part, by research
revenues from industry partners of $383,000.
Interest expense increased by $270,000 or 35% due principally to higher bank
borrowings at higher interest rates. The additional borrowings were required
principally to fund the operations of the Company's discontinued Biotechnology
Business segment.
The provision for income taxes on continuing operations was lower than the
statutory rate, due principally to a reduction in valuation allowances as well
as utilization of research and development tax credits. The loss from
discontinued operations reflects an expected tax benefit of $797,000. The
Company has recorded a full valuation allowance of $2,880,000 against the net
deferred tax asset from discontinued operations based on a determination of the
ultimate realizability of future deferred tax assets. (See Notes 1, 2 and 7 of
Notes to Consolidated Financial Statements.)
19
The loss from discontinued operations in 1994 consisted of $700,000 in
expenses incurred in excess of the $2,750,000 reserve established at December
31, 1993. The Company's anticipated effective date for the Distribution of
September 30, 1994 was delayed principally by the late receipt of a favorable
tax-free ruling from the IRS. The Company received the requested ruling from
the IRS in March 1995 and had originally intended to complete the Distribution
by June 30, 1995. In addition to the aforementioned charges, the Company
established a reserve of $1,000,000 for additional operating and transaction
expenses to be incurred prior to the then anticipated effective date of the
Distribution. (See Note 2 of Notes to Consolidated Financial Statements.)
Liquidity and Capital Resources
- -------------------------------
On March 17, 1994, IGI's Board of Directors voted to dispose of the
biotechnology business segment through the combination of its majority-owned
subsidiaries Molecular Packaging Systems, Inc. ("MPS") and Novavax, Inc. and the
subsequent tax-free Distribution to IGI's shareholders. On March 20, 1995, the
Company received a favorable ruling from the IRS that the Distribution would be
tax-free to IGI and its shareholders and the Company ultimately disposed of this
segment on December 12, 1995. For the year ended December 31, 1995, the Company
incurred $5,034,000 in losses related to its biotechnology business segment of
which $1,000,000 were reserved for at December 31, 1994. Since the operations
of Novavax comprised IGI's biotechnology business segment, the Consolidated
Financial Statements of IGI for the year ended December 31, 1995 report the
results of the biotechnology business segment as discontinued operations. The
Company had anticipated the effective date of the Distribution to be June 30,
1995. Due to delays in the final distribution of Novavax, the Company incurred
costs in excess of the $1,000,000 estimated loss on disposal of its
biotechnology business segment. These costs related to increased research and
development expenses for products in the initial FDA approval process. The
Distribution became effective December 12, 1995.
Under the terms of the Distribution, the Company paid Novavax $5 million for a
fully paid-up license to use the Novavax Technologies in its business and
converted $17,024,000 of loans made to this operation in exchange for additional
shares of Novavax Stock, which was distributed to IGI shareholders in the
Distribution. IGI had loaned $17,591,000 to Novavax to fund Novavax operations
through the Distribution Date. Any advances made by IGI in excess of
$17,024,000 up to $250,000 have been deducted from the $5,000,000 payment under
the License Agreement.
IGI funded the $5,000,000 payment to Novavax from borrowings under its bank
loan agreement which has been amended to reflect the Distribution. The Amended
Loan Agreement with Fleet Bank - New Hampshire and Mellon Bank provides for:
. $12,000,000 revolving credit facility with interest contingent upon certain
financial ratios at the end of each quarter. Effective January 1, 1996, the
interest rate shall not exceed prime plus 1 1/2%. The amount available under
the revolving credit facility decreases by $800,000 on the last day of each
quarter from June 30, 1996 through December 31, 1999. At December 31, 1995
the Company had outstanding borrowings of $12,000,000 under this facility and
the interest rate was 9%.
20
. $10,000,000 working capital line of credit renewable annually, with
interest on the outstanding borrowings contingent upon certain financial
ratios at the end of each quarter. Effective January 1, 1996, the interest
rate shall not exceed prime plus 1%. At December 31, 1995 the Company had
$1,952,000 available under this facility and the interest rate was 9.5%.
The Company was in default of its current ratio covenant as of December 31,
1995. The banks have amended the agreement to remove the default.
The Company used $2,710,000 for operating activities due principally to
increases in inventories, related primarily to new products being introduced
during 1995, and accounts receivable related to the increase in international
sales. Accounts receivable turnover ratio was 3.89 compared to 4.08 for the
year ended December 31, 1994. Accounts receivable balances due from Mexico and
Latin America were 13% of the total receivable balance and the Company believes
the net amounts are fully collectible. Mexico and certain Latin American
countries are important markets for the Company's poultry vaccines and other
products. These countries have historically experienced varying degrees of
political unrest and economic and currency instability. Because of the volume
of business transacted by the Company in those countries, continuation or the
recurrence of such unrest or instability could adversely affect the businesses
of its customers in those countries or the Company's ability to collect its
receivables from such customers, which in either case could adversely impact the
Company's future operating results. The growth in inventories relates
principally to new animal health products that the Company began selling during
the third quarter as well as products for the Nova Skin Care division which were
launched in February 1996. The inventory turnover ratio for 1995 was 1.81,
compared to 1.66 for the year ended December 31, 1994. The Company believes its
reserves for inventory obsolescence and accounts receivable are adequate. The
Company used $2,397,000 in investing activities for capital expenditures to
build and equip its new 25,000 square foot research, marketing and production
facility in Buena, New Jersey, as well as an additional $5,360,000 for the
payment of the License Agreement, patent costs and capital expenditures (See
Note 2 of Notes to Consolidated Financial Statements). Funding for the Company's
operating and investing activities were provided by borrowings under the
Company's working capital line of credit and the revolving credit facility. The
Company has no further obligation or intention to fund Novavax.
At March 22, 1996 the Company had $1,485,000 of available borrowing capacity
under the working capital line of credit and no borrowings available under the
revolving line of credit. Funds generated from operations and existing bank
credit facilities are expected to be sufficient to meet the Company's short-term
cash requirements. The Company has current maturities of long-term debt of
$800,000 per quarter commencing June 30, 1996. The Company believes that cash
generated from operating activities as well as available borrowings under its
line of credit facility will be sufficient to meet these obligations. However,
over the long-term, the Company will require additional funds to expand its
business. No assurance can be given that the Company will be successful in
obtaining the required funds, and, if not, the Company may be required to cut
back on its expansion plans or otherwise appropriately modify its business
strategy.
21
Factors That May Affect Future Results
The industry segments in which the Company competes are constantly changing
and are subject to significant competitive pressures. The following sets forth
some of the risks which the Company faces.
Availability of Capital
The Company has historically applied the operating profits from its animal
health business to fund the development of its cosmetics business and its former
biotechnology business, Novavax, Inc., which was distributed to the Compay's
stockholders in December 1995. Therefore, the Company is currently highly
leveraged and will need additional capital to finance the expansion of its
aniimal health and cosmetics and consumer products businesses. No assurance can
be given that such funds will be obtained when required or, if obtainable, on
terms that are favorable to the Company. In addition, the Company expects that
is interest expense will increase in 1996 as a result of increased borrowings,
which will impact the Company's profitability.
Intense Competition in Cosmetic and Consumer Products Business
The Company's Cosmetics and Consumer Products Division competes with large,
well-financed cosmetics and consumer products companies with developpment and
marketing groups that are expeprienced in the industry and possess far greater
resources than those available to the Company. The Company expects to rely
principally on increased sales of its cometics and 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 Novasomes in their
products may decide to reduce their purchases from the Company or shift their
business to other suppliers.
Price Competition in Poultry Vaccine Business
The Company is encountering increasing severe competition from international
producers of poultry vaccines, particularly increased price copetition coupled
with a downward trend in vaccine prices. In addition, the Company's business
may be adversely affected by foreign import restrictions and additional
regulatory requirements. Also, unstable or adverse economic conditions and
fiscal and monetary policies in certain Central and South American countries,
and increasingly important market for the Company's animal health products,
could adversely affect the Company's future business in these countries.
Rapidly Changing Marketplace for Animal Health Products
The emergence of pet superstores, the consolidation of distribution channels
into a smaller number of large, more powerful comppanies and the diminishing
traditional role of veterinarians in the animal health business may adversely
affect the Company's ability to expand its animal health business and to operate
this business at the gross margin levels historically enjoyed by the Company.
22
Effect of Rapidly Changing Technologies
The Company expects to rely on the features of its Novavax Technologies to
market and expand its line of internally-developed dermatologic products.
However, if its competitors develop new and improved technologies that are
superior to the Company's technologies, the Company's products could be less
acceptable in the marketplace and therefore the Company's planned expansion of
its line of personal care and dermatologic products could be adversely affected.
Regulatory Considerations
The FDA may determine that the Company's alpha hydroxy acid-based products are
"drugs" and therefore should be subject to the expensive and sometimes
protracted FDA regulatory approval. Also, certain of the Company's products may
not be approved for sales overseas on a timely basis, thereby limiting the
Company's ability to expand its foreign sales.
Accounting Standards Changes
- ----------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 121 requires companies to adopt its provisions for fiscal years
beginning after December 15, 1995. This standard specifies when assets should
be reviewed for impairment, how to determine if an asset is impaired, how to
measure an impairment loss, and what disclosures are necessary in the financial
statements. Management believes the impact of this pronouncement is not
material since the majority of the Company's long-lived assets are property,
plant and equipment that are utilized in the manufacturing of the Company's
products.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 requires companies to adopt its provisions for
fiscal years beginning after December 15, 1995. SFAS No. 123 encourages a fair
value based method of accounting for employee stock options or similar equity
instruments, but allows continued use of the intrinsic value based method of
accounting prescribed by Accounting Principles Board (APB) Opinion No. 25
"Accounting for Stock Issued to Employees." Companies electing to continue to
use APB No. 25 must make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been applied. The
Company is evaluating the provisions of SFAS No. 123, but has not yet determined
whether it will continue to follow the provisions of APB No. 25 or change to the
fair value method of SFAS No. 123.
Income Taxes
- ------------
The Company has a net deferred tax asset in the amount of $2.9 million as of
December 31, 1995. The largest deferred tax assets relate to the $5,000,000
license payment which will be deducted over the ten-year period as the related
products are sold and the royalties incurred and to net operating loss
carryforwards. Management believes that the Company's deferred tax asset will
be realized through the reversal of existing temporary differences and the
utilization of net operating loss carryforwards and the prepaid license against
future taxable income. The minimum level of future taxable income necessary to
realize the Company's recorded deferred tax asset at
23
December 31, 1995, is approximately $ million. The net operating loss
carryforwards expire in 2010 and there are no limitations on their use.
Management believes that it will be able to utilize these carryforwards. The
Company's consolidated federal taxable income (loss) varies from its
consolidated financial statement income (loss). In 1993 and 1994, taxable income
was higher due to the establishment of reserves for losses on discontinued
operations; in 1995, taxable income was lower as the reserves were utilized.
Item 8. Financial Statements and Supplementary Data
The financial statements and notes thereto listed in the accompanying index to
financial statements (Item 14) are filed as part of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
24
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is contained in part under the caption
"Executive Officers of the Registrant" in PART I hereof, and the remainder is
contained in the Company's Proxy Statement for the Company's Annual Meeting of
Stockholders to be held on May 8, 1996 (the "1996 Proxy Statement") under the
captions "PROPOSAL 1 - ELECTION OF DIRECTORS" and "Beneficial Ownership of
Common Stock" and is incorporated herein by this reference. The Company expects
to file the 1996 Proxy Statement within 120 days after the close of the fiscal
year ended December 31, 1995.
Officers are elected on an annual basis and serve at the discretion of the
Board of Directors.
Item 11. Executive Compensation
The information required by this item is contained under the captions
"EXECUTIVE COMPENSATION" and "Director Compensation and Stock Options" in the
Company's 1996 Proxy Statement and is incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is contained in the Company's 1996 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 1996 Proxy
Statement and is incorporated herein by this reference.
25
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets, December 31, 1995 and 1994
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1994 and 1993
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.
Exhibits marked with a single asterisk are filed herewith, and
exhibits marked with a double asterisk reference management contract,
compensatory plan or arrangement, filed in response to Item 14 (a)
(3) of the instructions to Form 10-K. The other exhibits listed have
previously been filed with the Commission and are incorporated herein
by reference.
(a) Certificate of Incorporation of IGI, Inc., as amended.
[Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8, File No. 33-63700, filed
June 2, 1993]
(b) By-laws of IGI, Inc., as amended. [Incorporated by reference to
Exhibit 2 (b) to the Company's Registration Statement on Form
S-18, File No. 2-72262-B, filed May 12, 1981.
26
(4) Specimen stock certificate for shares of Common Stock, par value $.01
per share. [Incorporated by reference to Exhibit (4) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1989, File No. 0-10063, filed April 2, 1990 (the "1989 Form 10-K".)]
** (10) (a) IGI, Inc. 1983 Incentive Stock Option Plan. [Incorporated by
reference to Exhibit A to the Company's Proxy Statement for the
Meeting of Annual Stockholders held May 11, 1983.]
** (b) 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.]
** (c) Employment Agreement by and between the Company and Edward B.
Hager dated as of January 1, 1990. [Incorporated by reference to
Exhibit (10) (c) to the 1989 Form 10-K.]
** (d) Extension of Employment Agreement by and between the Company and
Edward B. Hager dated as of March 11, 1993. [Incorporated by
reference to Exhibit (10) (d) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992, File No.
0-10063, filed March 31, 1993 (the "1992 Form 10-K".)]
** (e) Extension of Employment Agreement by and between the Company and
Edward B. Hager dated as of March 14, 1995. [Incorporated by
reference to Exhibit (10)(e) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, File No.
0-10063, filed March 31, 1995 (the "1994 Form 10-K")]
** (f) Employment Agreement by and between the Company and John P.
Gallo dated as of January 1, 1990. [Incorporated by reference to
Exhibit (10) (d) to the 1989 Form 10-K.]
** (g) Extension of Employment Agreement by and between the Company and
John P. Gallo dated as of March 11, 1993. [Incorporated by
reference to Exhibit (10)(g) to the 1992 Form 10-K.]
** (h) Extension of Employment Agreement by and between the Company and
John P. Gallo dated as of March 14, 1995. [Incorporated by
reference to Exhibit (10)(h) to the 1994 Form 10-K.]
** (i) Employment Agreement by and between Micro Vesicular Systems,
Inc. and Donald F.H. Wallach dated as of January 1, 1990.
[Incorporated by reference to Exhibit (10) (e) to the 1989 Form
10-K.]
27
(j) Rights Agreement by and between the Company and Fleet National
Bank dated as of March 19, 1987. [Incorporated by reference
Exhibit (4) to the Company's Current Report on Form 8-K, File
No. 0-10063, dated as of March 26, 1987.]
(k) Amendment to Rights Agreement by and among the Company, Fleet
National Bank and State Street Bank and Trust Company dated as
of March 23, 1990. [Incorporated by reference to Exhibit (10)
(g) to the 1989 Form 10-K.]
(l) Loan Agreement by and between Fleet Bank - NH and IGI, Inc.
together with its subsidiaries, dated December 20, 1990.
[Incorporated by reference to Exhibit (10) (h) to the 1990 Form
10-K.]
(m) Amended and Restated Loan Agreement by and between Fleet Bank-NH
and IGI, Inc. together with its subsidiaries, dated May 12,
1992, and modified November 1, 1992, and December 31, 1992.
[Incorporated by reference to Exhibit (10) (k) to the 1992 Form
10-K.]
(n) Fourth Amendment to Amended and Restated Loan Agreement by and
between Fleet Bank-NH and IGI, Inc. together with its
subsidiaries, dated December 23, 1993. [Incorporated by
reference to Exhibit (10) (l) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993, File No.
0-10063, filed March 31, 1994 (the "1993 Form 10-K".)]
* (o) Second Amended and Restated Loan Agreement by and between Fleet
Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its
subsidiaries, dated December 13, 1995.
(p) Promissory note by Donald F.H. Wallach to IGI, Inc.
[Incorporated by reference to Exhibit (10) (j) to the 1990 Form
10-K.]
** (q) IGI, Inc. Non-Qualified Stock Option Plan. [Incorporated by
reference to Exhibit (3) (k) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, File No.
0-10063, filed March 30, 1992 (the "1991 Form 10-K".)]
** (r) IGI, Inc. 1991 Stock Option Plan. [Incorporated by reference to
the Company's Proxy Statement for the Annual Meeting held May 9,
1991.]
** (s) Amendment No. 1 to IGI, Inc. 1991 Stock Option Plan as approved
by Board of Directors on March 11, 1993. [Incorporated by
reference to Exhibit 10 (p) to the 1992 Form 10-K.]
28
** (t) 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 Company's Proxy Statement for the Annual
Meeting of Stockholders held May 9, 1995.]
(u) Form of Registration Rights Agreement signed by all purchasers
of Common Stock in connection with private placement on January
2, 1992. [Incorporated by reference to Exhibit (3) (m) to the
1991 Form 10-K.]
* (v) License Agreement by and between Micro-Pak, Inc. and IGEN, Inc.
(w) Registration Rights Agreement between IGI, Inc. and SmithKline
Beecham p.l.c. dated as of August 2, 1993. [Incorporated by
reference to Exhibit (10) (s) to the 1993 Form 10-K.]
* (11) Computation of net income per common share.
* (22) List of Subsidiaries.
* (24) Consent of Coopers & Lybrand L.L.P.
(b) Reports on Form 8-K:
On December 27, 1995, the Company filed a report on Form 8-K
disclosing that the Company had declared a dividend of one share of
Common Stock of Novavax, Inc. for each share of Common Stock of the
Company held on November 28, 1995, payable on December 12, 1995.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 27, 1996 IGI, Inc.
By: /s/ Edward B. Hager
Edward B. Hager,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacity and on the date indicated.
Name Title Date
- ---- ----- ----
/s/ Edward B. Hager Chairman of the Board March 27, 1996
- ---------------------------
Edward B. Hager
/s/ John P. Gallo President and Director March 27, 1996
- ---------------------------
John P. Gallo
/s/ Donald J. MacPhee Principal Financial and March 27, 1996
- --------------------------- Accounting Officer
Donald J. MacPhee
/s/ Jane E. Hager Director March 27, 1996
- ---------------------------
Jane E. Hager
/s/ Constantine L. Hampers Director March 27, 1996
- ---------------------------
Constantine L. Hampers
/s/ John O. Marsh Director March 27, 1996
- ---------------------------
John O. Marsh
/s/ Terrence O'Donnell Director March 27, 1996
- ---------------------------
Terrence O'Donnell
/s/ David G. Pinosky
- --------------------------- Director March 27, 1996
David G. Pinosky
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of IGI, Inc.:
We have audited the consolidated financial statements and financial
statement schedule of IGI, Inc. and subsidiaries as listed in Item 14(a) of this
Form 10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These 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 the 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IGI, Inc. and
its subsidiaries at December 31, 1995 and 1994 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 27, 1996
F-1
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
ASSETS 1995 1994
------------ ------------
Current assets:
Cash and cash equivalents $ 169,489 $ 953,976
Accounts receivable, less allowance
for doubtful accounts of $306,000 and
$181,000 in 1995 and 1994, respectively 8,455,610 7,276,843
Inventories 9,000,208 8,075,147
Current deferred taxes 55,347 36,641
Prepaid expenses and other current assets 762,145 912,496
----------- -----------
Total current assets 18,442,799 17,255,103
----------- -----------
Notes receivable, less current maturities 285,087 570,589
----------- -----------
Property, plant and equipment - at cost:
Land 624,723 416,011
Buildings 9,054,499 6,356,842
Machinery and equipment 8,655,831 7,981,998
Construction in progress -- 1,182,821
----------- -----------
18,335,053 15,937,672
Less accumulated depreciation (8,224,670) (7,454,437)
----------- -----------
10,110,383 8,483,235
----------- -----------
Deferred income taxes 2,790,623 1,370,005
Net assets of biotechnology business segment -- 2,066,303
Other assets 702,432 756,607
----------- -----------
$32,331,324 $30,501,842
=========== ===========
Continued
The accompanying notes are an integral part
of the consolidated financial statements.
F-2
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
December 31, 1995 and 1994
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
------------ ------------
Current liabilities:
Note payable to bank $ 8,048,000 $ 3,790,000
Current maturities of long-term debt 2,415,101 29,338
Accounts payable 2,446,716 1,580,349
Accrued payroll 460,835 498,880
Other accrued expenses 772,061 660,989
Income taxes payable 16,666 15,184
Deferred income taxes -- 9,390
----------- -----------
Total current liabilities 14,159,379 6,584,130
----------- -----------
Deferred income taxes -- 187,075
----------- -----------
Long-term debt, less current maturities 9,624,303 10,019,138
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 30,000,000
shares authorized; 9,440,681 and
9,018,637 shares issued in 1995
and 1994, respectively 94,407 90,186
Additional paid-in capital 18,130,328 20,390,726
Deficit (6,878,956) (4,352,932)
----------- -----------
11,345,779 16,127,980
Less treasury stock; 176,356 and
156,145 shares, at cost,
in 1995 and 1994,
respectively (2,608,937) (2,253,123)
Stockholders' notes receivable (189,200) (163,358)
----------- -----------
Total stockholders' equity 8,547,642 13,711,499
----------- -----------
$32,331,324 $30,501,842
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ ------------ ------------
Net sales $31,220,632 $28,947,911 $28,004,569
Cost of sales 15,431,534 13,935,242 13,165,237
----------- ----------- -----------
Gross profit 15,789,098 15,012,669 14,839,332
Selling, general and
administrative expenses 11,930,555 10,674,611 10,636,207
Research and development expenses 1,344,743 1,212,483 816,707
Research revenues (730,750) (382,500) --
----------- ----------- -----------
Operating profit 3,244,550 3,508,075 3,386,418
Interest expense (1,268,681) (1,035,691) (765,236)
Interest income 145,300 66,561 166,553
Other income(expense), net 7,358 10,206 (94,536)
----------- ----------- -----------
Income from continuing operations
before provision for income taxes 2,128,527 2,549,151 2,693,199
Provision for income taxes 620,783 580,000 927,948
----------- ----------- -----------
Income from continuing operations 1,507,744 1,969,151 1,765,251
Loss from discontinued operations -
Distribution of biotechnology segment,
net of income tax benefits:
Loss from operations (4,033,768) (699,844) (3,192,921)
Estimated loss on disposal -- (1,000,000) (2,750,000)
----------- ----------- -----------
Net (loss) income $(2,526,024) $ 269,307 $(4,177,670)
=========== =========== ===========
(Loss) income per common and common
equivalent share:
From continuing operations $ .16 $ .22 $ .20
====== ====== ======
From discontinued operations $ (.42) $ (.19) $ (.66)
====== ====== ======
Net (loss) income $ (.26) $ .03 $ (.46)
====== ====== ======
Average number of common and common
equivalent shares 9,725,230 9,155,231 9,048,895
=========== =========== ===========
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ ------------- ------------
Cash flows from operating activities:
Net (loss) income $(2,526,024) $ 269,307 $(4,177,670)
Reconciliation of net (loss) income to net cash
used by operating activities:
Depreciation and amortization 836,113 842,908 1,043,431
Provision for loss on accounts
receivable and inventories 787,737 271,555 352,492
Accrual for estimated loss on disposal -- 1,000,000 2,750,000
Issuance of stock to 401(k) plan 69,149 50,498 44,075
Credit for deferred income taxes (101,019) (219,800) (89,985)
Changes in operating assets and liabilities:
Accounts receivable (1,321,040) (456,795) (2,007,533)
Inventories (1,570,525) 437,963 (1,148,984)
Prepaid and other assets 150,351 (303,041) 104,469
Accounts payable and accrued expenses 939,393 448,849 (954,203)
Income taxes payable/refundable 1,482 45,748 258,979
Reimbursement from former subsidiary 250,000 -- --
Net assets of biotechnology segment (225,765) (2,501,062) 170,473
----------- ----------- -----------
Net cash used by operating
activities (2,710,148) (113,870) (3,654,456)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures, net (2,397,381) (1,833,536) (536,587)
Decrease(increase) in notes receivable -- 2,500 (27,238)
Decrease(increase) in notes receivable
from officers 57,489 12,045 (25,081)
(Increase) decrease in other assets (62,105) (146,623) 135,133
License payment to former subsidiary (5,000,000) -- --
Net assets of biotechnology segment (359,786) (549,066) (453,067)
----------- ----------- -----------
Net cash used by investing activities (7,761,783) (2,514,680) (906,840)
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings under line
of credit agreements 4,258,000 1,345,000 1,505,000
Borrowings under revolving credit
agreement 2,000,000 1,250,000 1,025,000
Payments of long-term debt (9,072) (84,965) (45,780)
Proceeds from exercise of common
stock options 938,516 191,694 131,839
Proceeds from sale of common stock 2,500,000 -- 900,000
----------- ----------- -----------
Net cash provided from financing
activities 9,687,444 2,701,729 3,516,059
----------- ----------- -----------
Net (decrease) increase in cash and equivalents (784,487) 73,179 (1,045,237)
Cash and cash equivalents at beginning of year 953,976 880,797 1,926,034
----------- ----------- -----------
Cash and cash equivalents at end of year $ 169,489 $ 953,976 $ 880,797
=========== =========== ===========
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1995, 1994 and 1993
Common Stock Additional Subscriptions Total
------------ Paid-in and Other Stock Notes Treasury Shareholders
Shares Amount Capital Receivable Receivable Deficit Stock Equity
------ ------ ----------- ----------- ---------- --------- -------- ------------
Balance, December 31, 1992 8,678,139 $86,781 $17,578,915 $ -- $ -- $ (444,569) $(1,954,353) $15,266,774
Issuance of common stock for
exercise of stock options
including tax benefit of
of $155,615 93,439 933 449,879 (163,358) 287,454
Conversion of 239 shares of MPS
stock into 43,895 of IGI common
stock 43,895 440 (440) 0
Issuance of common stock to
401(k) plan 4,974 50 44,025 44,075
Issuance of stock to
industry partner, net 99,700 997 899,003 900,000
Net loss (4,177,670) (4,177,670)
---------- ------ ---------- -------- -------- ---------- ---------- ----------
Balance, December 31, 1993 8,920,147 $89,201 $18,971,382 $ $(163,358) $(4,622,239) $(1,954,353) $12,320,633
Issuance of common stock for
exercise of stock options
including tax benefit of
of $218,937 93,218 932 708,471 (298,770) 410,633
Adjustment of valuation
allowance 660,428 660,428
Issuance of common stock to
401(k) plan 5,272 53 50,445 50,498
Exercise of stock option agreement 2,500,000 2,500,000
Receivable due from exercise of
stock option agreement (2,500,000) (2,500,000)
Net income
Balance, December 31, 1994 269,307 269,307
---------- ------ ---------- -------- -------- ---------- ---------- ----------
9,018,637 $90,186 $20,390,726 $ -- $(163,358) $(4,352,932) $(2,253,123) $13,711,499
Issuance of common stock for
exercise of stock options
including a tax benefit
of $279,180 193,815 1,938 1,152,597 (381,250) 773,285
Issuance of common stock to
401(k) plan 1,574 16 43,697 25,436 69,149
Issuance of stock to
industry partner, net 226,655 2,267 2,497,733 2,500,000
License payment to former subsidiary, net
of a deferred tax benefit of $1,700,000 (3,300,000) (3,300,000)
Distribution of biotechnology
business segment (2,654,425) (2,654,425)
Payment of stockholders' notes receivable 74,548 74,548
Reclass of stockholders' notes receivable (100,390) (100,390)
Net loss (2,526,024) (2,526,024)
---------- ------ ---------- -------- -------- ---------- ---------- ----------
Balance, December 31, 1995 9,440,681 $94,407 $18,130,328 $ -- $(189,200) $(6,878,956) $(2,608,937) $ 8,547,642
========== ====== ========== ======== ======== ========== ========== ==========
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------
1. Summary of Significant Accounting Policies
------------------------------------------
Nature of the Business
- ----------------------
IGI, Inc. ("IGI or the "Company") is a diversified company engaged in two
business segments. The Animal Health Products Business produces and markets
animal health products such as poultry vaccines, veterinary products,
nutritional supplements and grooming aids. The Cosmetics and Consumer Products
Business produces and markets cosmetic and consumer products such as skin care
products and shampoos.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of IGI, Inc. and its
wholly-owned and majority-owned subsidiaries. The Company's financial
statements include 100% of the losses through December 12, 1995 of its formerly
majority-owned subsidiaries which include Molecular Packaging Systems, ("MPS")
and Novavax, Inc. All intercompany accounts and transactions have been
eliminated.
Cash equivalents
- ----------------
Cash equivalents consist of short term investments with initial maturities of 90
days or less.
Inventories
- -----------
Inventories are stated at the lower of cost (last-in, first-out basis)
or market.
Property, Plant and Equipment
- -----------------------------
Depreciation of property, plant and equipment is provided for under the
straight-line method over the estimated useful lives as follows:
Useful Lives
------------
Buildings and improvements 10-30 years
Machinery and equipment 3-10 years
Repair and maintenance costs are charged to operations as incurred while major
improvements are capitalized. When assets are retired or disposed of, the cost
and accumulated depreciation thereon are removed from the accounts and any gains
or losses are included in operations.
Amortization
- ------------
Cost in excess of net assets of businesses acquired, which is included in other
assets, is amortized on a straight-line basis over 40 years.
The Company periodically evaluates the carrying amount of this asset using cash
flow projections and net income and if warranted, impairment would be
recognized.
F-7
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
1. Summary of Significant Accounting Policies (continued)
------------------------------------------
Income Taxes (continued)
- ------------
The Company records income taxes under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS 109
requires the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Under
SFAS No. 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. A
valuation allowance is recorded based on a determination of the ultimate
realizability of future deferred tax assets.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates include allowances for excess and obsolete inventories,
allowances for doubtful accounts and other assets and provisions for income
taxes and related valuation allowances. Actual results could differ from those
estimates.
Financial Instruments
- ---------------------
The Company's financial instruments include cash and cash equivalents, accounts
receivable, notes receivable and long-term debt. The carrying value of these
instruments approximates the fair value.
Accounting Standards Changes
- ----------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires companies to adopt its
provisions for fiscal years beginning after December 15, 1995. This standard
specifies when assets should be reviewed for impairment, how to determine if an
asset is impaired, how to measure an impairment loss, and what disclosures are
necessary in the financial statements. Management believes the impact of this
pronouncement is not material since the majority of the Company's long-lived
assets are property, plant and equipment that are utilized in the manufacturing
of the Company's products.
F-8
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
1. Summary of Significant Accounting Policies (continued)
------------------------------------------
Accounting Standards Changes (continued)
----------------------------
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 requires companies to adopt its provisions for
fiscal years beginning after December 15, 1995. SFAS No. 123 encourages a fair
value based method of accounting for employee stock options or similar equity
instruments, but allows continued use of the intrinsic value based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25
"Accounting for Stock Issued to Employees." Companies electing to continue to
use APB No. 25 must make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been applied. The
Company is evaluating the provisions of SFAS No. 123, but has not yet
determined whether it will continue to follow the provisions of APB No. 25 or
change to the fair value method of SFAS No. 123.
Revenue Recognition
-------------------
Revenues earned under research contracts are recognized when the related
contract provisions are met.
Reclassification
----------------
Certain previously reported amounts have been reclassified to conform with the
current period presentation.
2. Corporate Activities
--------------------
Distribution of Biotechnology Segment
-------------------------------------
On March 17, 1994, IGI's Board of Directors voted to dispose of the
biotechnology business segment through the combination of its majority-owned
subsidiaries Molecular Packaging Systems, Inc. and Novavax, Inc. and the
subsequent tax-free Distribution to IGI's shareholders of its ownership of the
combined entity.
On December 12, 1995 (the "Distribution Date"), IGI distributed to the holders
of record of IGI's common stock, at the close of business on the Record Date,
November 28, 1995, one share of common stock of Novavax, Inc. ("Novavax") for
every one share of IGI common stock outstanding (the "Distribution").
F-9
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
2. Corporate Activities (continued)
--------------------
Distribution of Biotechnology Segment (continued)
- -------------------------------------
In connection with the Distribution, the Company has paid Novavax $5,000,000 in
return for a fully-paid-up, ten-year license entitling it to the exclusive use
of Novavax's technologies in the fields of (i) animal pharmaceuticals,
biologicals, and other animal health products; (ii) foods, food applications,
nutrients and flavorings; (iii) cosmetics, consumer products and dermatological
over-the-counter and prescription products (excluding certain topically
delivered hormones); (iv) fragrances; and (v) chemicals, including herbicides,
insecticides, pesticides, paints and coatings, photographic chemicals and other
specialty chemicals; and the processes for making the same. The Company has the
option, exercisable within the last year of the ten-year term, to extend the
License Agreement for an additional ten-year period for $1,000,000. Novavax
will retain the right to use its Novavax Technologies for all other
applications, including human vaccines and pharmaceuticals. At the time the
terms of the IGI License Agreement were fixed, including the license payment,
all of the directors of IGI were also directors of Novavax and these terms were
unilaterally established by IGI. As of December 31, 1995, three directors of
IGI were also directors of Novavax. The Company has presented the payment under
the License Agreement as a capital contribution in its financial statements to
reflect the intercompany nature and substance of the transaction. The form was
structured as a prepaid license agreement to address various considerations of
the Distribution, including tax and financing considerations. For tax purposes,
the transaction will be treated as a prepaid license agreement. IGI has no
further obligations or intentions to fund Novavax.
Components of the losses from discontinued operations for each of the three
years in the period ended December 31, 1995 were:
1995 1994 1993
------------ ------------ ------------
Selling, general and administrative $ 2,103,470 $ 1,762,408 $ 1,599,305
Research and development expenses,net 3,647,893 2,484,436* 2,613,580*
Credit for income taxes (717,595) (797,000) (1,019,964)
----------- ----------- -----------
Operating losses 5,033,768 3,449,844 3,192,921
Accrual for loss on disposal (1,000,000) (2,750,000) 2,750,000
Estimated loss on disposal -- 1,000,000 --
----------- ----------- -----------
Net loss from discontinued operations $ 4,033,768 $ 1,699,844 $ 5,942,921
=========== =========== ===========
*Includes $475,000 and $380,700 of initial payments in 1994 and 1993,
respectively on product development and licensing agreements or detailed
agreements in principle which have been reflected as a reduction in research and
development expenses.
The Company had anticipated the effective date of the Distribution to be June
30, 1995. Due to delays in the final distribution of Novavax, the Company
incurred costs in excess of the $1,000,000 estimated loss on disposal of its
biotechnology business segment. These costs related to increased research and
development expenses for products in the initial FDA approval process.
The credit for income taxes does not equal the statutory rate because of
valuation allowances related to loss carryforwards.
The components of the net assets of biotechnology segment at December 12, 1995
and December 31, 1994 were:
December 12, 1995 1994
----------------- ------------
Net current assets (liabilities) $ (56,071) $ 442,707
Property, plant and equipment, net 1,400,998 1,549,666
Deferred patent costs, net 1,309,498 1,073,930
Accrual for estimated loss on dispos -- (1,000,000)
---------- -----------
$2,654,425 $ 2,066,303
========== ===========
The distribution of the net assets of the Company's biotechnology business
segment as of the Distribution Date are recorded in the accompanying financial
statements as a reduction in additional paid-in capital.
F-10
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
2. Corporate Activities (continued)
--------------------
Equity and Other Transactions
- -----------------------------
In August 1993, the Company entered into an agreement with an industry partner
for the testing of Novavax's patented Novasome lipid vesicle encapsulation
technology as a microcarrier and adjuvant for various human vaccines. The
Company received $1,000,000 in exchange for 99,700 shares of the Company's
common stock. In addition, the Company received $100,000 from this partner to
offset research expenses. The $100,000 is included in the loss from discontinued
operations in 1993. In December 1994, the partner exercised its option to enter
into an exclusive license agreement by agreeing to pay the Company $475,000 for
the use of the technology in certain applications and additional research
funding. This amount is included in the loss from discontinued operations in
1994. Additionally, the partner exercised its option to purchase shares of the
Company's common stock. In January 1995, the Company issued 226,655 shares of
its common stock for $2,500,000. This agreement was amended in December 1995 in
connection with the Distribution. Under the terms of the amended agreement, the
industry partner has the option to purchase up to approximately $6,800,000 of
IGI Common Stock and approximately $3,700,000 of Novavax Common Stock,
concurrently. These amounts were determined, pursuant to the agreement, by
calculating the average ratio of closing prices of IGI and Novavax common stock
for the first twenty days following the Distribution. The price per share for
Novavax's and IGI's common stock is to be determined on the date of exercise and
is capped at an aggregate combined price per share of $13.00. This option will
expire in 1996.
3. Supplemental Cash Flow Information
----------------------------------
Cash paid for income taxes and interest during the years ended December 31,
1995, 1994, and 1993 was as follows:
1995 1994 1993
---- ---- ----
Income taxes (refunded),net 2,725 $(42,947) $(261,501)
Interest 1,235,616 931,401 767,257
In addition, during the years ended December 31, 1995, 1994, and 1993, the
Company had the following non-cash financing and investing activities:
1995 1994 1993
---------- --------- ---------
Tax benefits of exercise of
common stock options $ 279,180 $218,937 $155,615
Stockholders' notes receivable -- -- 163,358
Distribution of the
biotechnology segment 2,904,425 -- --
Treasury stock repurchased, net 355,814 298,770 --
F-11
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Inventories
-----------
Inventories as of December 31, 1995 and 1994 consist of:
1995 1994
----------- -----------
Finished goods $3,103,685 $2,704,408
Work-in-process 2,850,838 2,925,494
Raw materials 3,045,685 2,445,245
---------- ----------
$9,000,208 $8,075,147
========== ==========
If the first-in, first-out (FIFO) method of accounting for inventories had been
used, inventories would have been $307,774 and $462,362 lower than reported in
1995 and 1994, respectively.
5. Long-Term Debt
---------------
Long-term debt as December 31, 1995 and 1994 consists of:
1995 1994
----------- -----------
Revolving credit facility $12,000,000 $10,000,000
Other debt due in annual
installments through March 1998
with interest at 9% 39,404 48,476
----------- -----------
12,039,404 10,048,476
Less current maturities 2,415,101 29,338
----------- -----------
$ 9,624,303 $10,019,138
=========== ===========
In December 1995, the Company and its banks reached an agreement to amend the
loan agreement. The amended and restated loan agreement provides for:
* $12,000,000 revolving credit facility with interest contingent upon certain
financial ratios at the end of each quarter. The interest rate shall not exceed
prime plus 1 1/2% effective January 1, 1996. The amount available under the
revolving credit facility decreases by $800,000 on the last day of each quarter
from June 30, 1996 through December 31, 1999. At December 31, 1995, the Company
had outstanding borrowings of $12,000,000 under this facility and the interest
rate was 9%.
* $10,000,000 working capital line of credit, renewable annually, with interest
on the outstanding borrowings contingent upon certain financial ratios at the
end of each quarter. The interest rate shall not exceed prime plus 1% effective
January 1, 1996. Amounts outstanding under the agreement at December 31, 1995
were $8,048,000. The average amounts outstanding during 1995 and 1994 were
$4,461,077 with a weighted interest rate of 8.7% and $3,723,077 with a weighted
interest rate of 7.8%, respectively. At December 31, 1995, the Company had
$1,952,000 available under this facility and the interest rate was 9.5%.
F-12
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
------------------------
5. Long-Term Debt (continued)
--------------
A commitment fee of 1/2% is payable on the unused portion of the working
capital line and 1/4% on the unused revolving credit facility. The agreement
requires the Company to maintain certain financial ratios, comply with other
covenants and restricts the payment of cash dividends to not more than 25% of
the net income in any one year and to retained earnings in excess of $1,000,000.
The Company was in default of its current ratio covenant as of December 31,
1995. The banks have amended the agreement to remove the default.
Aggregate annual principal payments on long-term debt, for the five years
subsequent to December 31, 1995 and thereafter are as follows:
1996 $ 2,415,101
1997 3,214,847
1998 3,209,456
1999 3,200,000
-----------
$12,039,404
===========
All of the Company's assets are pledged as collateral under the terms of the
loan agreement. As of December 31, 1995, there were no outstanding equipment
leases. At December 31, 1994, equipment under capital leases totaled $312,442,
less accumulated depreciation of $260,221.
6. Stock Options
-------------
Under the 1983 Incentive Stock Option Plan, options have been granted to key
employees to purchase a maximum of 500,000 shares of common stock. Options,
having a maximum term of 10 years, have been granted at 100% of the fair market
value of the Company's stock at the time of grant. Options outstanding under
this plan at December 31, 1995 are generally exercisable in cumulative
increments over four years commencing one year from the date of grant.
Under the 1989 and 1991 Stock Option Plans, options may be granted to key
employees and directors to purchase a maximum of 500,000 and 1,900,000 shares of
common stock, respectively. Options, having a maximum term of 10 years, have
been granted at 100% of the fair market value of the Company's stock at the time
of grant. Both incentive stock options and non-qualified stock options may be
granted under the 1989 Plan and the 1991 Plan. Incentive stock options are
generally exercisable in cumulative increments over four years commencing one
year from the date of grant. Non-qualified options are generally exercisable in
full beginning six months after the date of grant.
In 1991, the Company's Board of Directors adopted a Non-Qualified Stock Option
Plan. The plan provides that options may be granted to consultants, scientific
advisors and employees to purchase a maximum of 250,000 shares of common stock.
Options outstanding under this plan at December 31, 1995 are generally
exercisable in cumulative increments over four years commencing one year from
the date of grant.
F-13
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
6. Stock Options (continued)
-------------
Stock option transactions in each of the past three years under the
aforementioned plans in total were:
Shares Price
January 1, 1993 shares
under option 1,156,075 $ 1.30 - $ 9.88
Granted 318,000 $ 5.75 - $ 7.61
Exercised (33,439) $ 2.91 - $ 3.42
Cancelled (40,858) $ 4.78 - $ 9.48
December 31, 1993 shares
under option 1,399,778 $ 1.30 - $ 9.88
Granted 408,500 $ 5.59 - $ 8.91
Exercised (6,000) $ 4.70 - $ 5.67
Cancelled (8,750) $ 5.02 - $ 9.88
December 31, 1994 shares
under option 1,793,528 $ 1.30 - $ 9.88
Granted 326,500 $ 6.63 - $ 9.39
Exercised (190,763) $ 1.30 - $ 9.88
Cancelled (9,750) $ 6.72 - $ 9.72
December 31, 1995 shares
under option 1,919,515 $ 3.64 - $ 9.88
============================
Shares subject to
outstanding options
exercisable at December 31,
1994 1,205,403
=========
1995 1,386,003
=========
Non-qualified stock options have been granted to officers and directors at
prices equal to the fair market value of the Company's stock on the date the
options were granted. During 1995, 1994, and 1993, 3,052, 87,218, and 60,000,
respectively, of such non-qualified options were exercised. At December 31,
1995, 1994, and 1993, 337,500, 340,552, and 427,770 respectively, of such
options were outstanding at prices ranging from $1.38 to $6.80 in 1995 and 1994,
and $1.22 to $6.80 in 1993. Exercise of the majority of these options may be
made at any time during a ten year period commencing on the date of grant.
The Company makes no charges to operations in connection with its stock option
plans.
In connection with the Distribution, holders of options to purchase IGI common
stock as of the Distribution Date were granted options to purchase Novavax
common stock and substitute options to purchase IGI common stock. Exercise
prices of the options were based on the relative market capitalization of IGI
and Novavax on the record date and the 20 trading days immediately following the
record date to restore holders of each option to the economic position prior to
the Distribution Date. The prices related to stock option transactions have
been adjusted to reflect the terms of the substitute options.
F-14
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
------------
6. Stock Options (continued)
-------------
In connection with the exercise of 25,000 and 67,218 stock options in 1995 and
1994, respectively, the Company received approximately 23,644 and 26,300 shares
of its common stock as consideration for the exercise price of the options. The
total value of the shares used as consideration for the exercise of stock
options was $381,250 and $298,770 in 1995 and 1994, respectively, which has been
recorded as treasury stock.
7. Income Taxes:
------------
The benefit for income taxes included in the consolidated statements of benefit
for the years ending December 31, 1995, 1994, and 1993 is as follows:
1995 1994 1993
---------- ----------- -----------
Continuing operations:
Current tax expense:
Federal $ 718,302 $ 797,000 $1,020,000
State and local 3,500 2,800 3,000
--------- --------- ----------
Total current 721,802 799,800 1,023,000
--------- --------- ----------
Deferred tax (benefit) expense:
Federal 5,624 (221,696) (128,327)
State and local (106,643) 1,896 33,275
--------- --------- ----------
Total deferred (101,019) (219,800) (95,052)
--------- --------- ----------
Total charge for
continuing operations $ 620,783 $ 580,000 $ 927,948
--------- --------- ----------
Discontinued operations:
Current tax benefit:
Federal and State (717,595) (797,000) (1,019,964)
--------- --------- ----------
Total benefit for income taxes $ (96,812) $(217,000) $ (92,016)
========= ========= ==========
The provision for income taxes differed from the amount of income tax
determined by applying the applicable Federal tax rate (34%) to pretax income
from continuing operations as a result of the following:
1995 1994 1993
---------- ---------- ----------
Statutory tax provision $722,580 $ 859,511 $915,687
Non-deductible expenses 65,986 57,163 24,205
State income taxes, net of
federal benefit (46,207) 2,312 23,524
Research and development
tax credits (39,713) (67,579) --
Reduction in valuation allowance (83,358) (271,407) (49,977)
Other, net 1,495 -- 14,509
-------- --------- --------
$620,783 $ 580,000 $927,948
======== ========= ========
F-15
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
------------
7. Income Taxes (continued)
------------
Gross deferred tax assets (liabilities) included in the consolidated balance
sheets as of December 31, 1995 and 1994 consist of the following:
1995
----
Property plant and equipment $ (968,904)
Prepaid license agreement 1,700,000
Net operating loss carryforwards 1,726,878
Tax credit carryforwards 383,632
Other future deductible
temporary differences 148,968
Other future taxable
temporary differences (75,606)
-----------
2,914,968
Less valuation allowance (68,998)
-----------
Deferred taxes, net $ 2,845,970
==========
1994
----
Continuing Discontinued
----------- ------------
Property plant and equipment $ (801,614) $ (30,163)
Deferred patent costs -- (373,636)
Net operating loss carryforwards 1,371,378 2,300,930
Tax credit carryforwards 342,873 634,846
Reserve for discontinued operations -- 340,000
Other future deductible
temporary differences 304,644 91,095
Other future taxable
temporary differences 7,100) (83,382)
1,210,181 2,879,690
---------- -----------
Less valuation allowance -- (2,879,690)
Deferred taxes, net $1,210,181 $ --
========== ===========
Current and deferred tax benefits resulting from a prepaid license agreement
and the exercise of stock options not credited to the consolidated statements of
operations for the years ended December 31, 1995 and 1994 include the following
amounts:
1995 1994
---- ----
Additional paid in capital:
License payment to former subsidiary $1,700,000 $ --
Exercise of stock options 279,180 218,937
Adjustment of valuation allowance -- 660,428
---------- --------
Total credited to additional paid in capital $1,979,180 $879,365
========== ========
In 1994, due to the imminent Distribution, the Company reevaluated the
recoverability of its deferred tax assets and as such, adjusted its valuation
allowance to reflect its new estimates. Management has determined, based on the
Company's history of prior operating earnings and its expectations for the
future, that operating income of the Company will more likely than not be
sufficient to recognize fully these net deferred tax assets.
Operating loss and tax credit carryforwards available for tax reporting
purposes as December 31, 1995 are as follows:
Federal:
Operating losses (expiring in the year
2010) $ 3,993,391
Research tax credits (expiring through
the year 2010) 369,954
Alternative minimum tax credits
(available without expiration) 13,678
F-16
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
8. Net Income per Share:
--------------------
Net income per share of Common Stock is computed by dividing net income by the
weighted average number of shares of Common Stock and Common Stock Equivalents,
if dilutive, outstanding during the year. Common Stock Equivalents include
shares issuable upon the exercise of dilutive common stock options. Fully
diluted earnings per share approximate primary earnings per share.
9. Commitments and Contingencies:
-----------------------------
The Company leases manufacturing and warehousing space, machinery and equipment
and automobiles under noncancellable operating lease agreements expiring at
various dates through 1997. Rental expense aggregated approximately $ 281,501
in 1995, $185,962 in 1994, and $208,447 in 1993. Future minimum rental
commitments under noncancellable operating leases as of December 31, 1995 are as
follows:
1996 77,152
1997 61,860
1998 49,043
1999 43,922
2000 38,154
The Company has entered into employment contracts with expiration dates through
December 31, 1999 with certain officers which provide that these officers are
entitled to continuation of their salaries if they are terminated without cause
prior to their contract expiration date. Aggregate compensation through 1999
under these agreements approximates $3,206,580.
10. Litigation
----------
Certain claims, suits and complaints arising in the ordinary course of business
have been filed or are pending against the Company and its subsidiaries. In the
opinion of management, after consultation with legal counsel, all such matters
are adequately covered by insurance or, if not so covered, are without merit or
are of such kind, or involve such amounts, as would not have a significant
effect on the financial position or results of operations of the Company if
disposed of unfavorably.
On February 6, 1996, Johnson & Johnson and its wholly-owned subsidiary Ortho-
McNeil, Inc. (collectively, "J&J") filed a lawsuit against the Company and its
subsidiary, Igen, Inc. and its former subsidiary Micro-Pak, Inc. in the United
States District Court for the District of New Jersey alleging trademark
infringement and trademark dilution. J&J alleges that the Company's use of the
names NOVA SKIN, NOVA SKIN CARE, and NOVA-AESTHETICS infringes on rights
associated with J&J's trademark RENOVA for a prescription drug. J&J has also
moved for a preliminary injunction seeking to preclude the Company's use of the
NOVA SKIN, NOVA SKIN CARE, and NOVA-AESTHETICS names on the Company's
newly-launched line of skin care products sold through dermatologists. On March
18, 1996, following a period of expedited discovery, the Court held an
evidentiary hearing on the motion for preliminary injunction. The Court has not
yet issued a ruling.
Since 1988, the Company has used the trademark NOVASOME in connection with the
lipid vesicle encapsulation technology it developed, including in connection
with skin care products. In addition, numerous other companies use the term
NOCVA in a wide variety of product and corporate name formulations. The Company
is vigorously defending this lawsuit and believes that the outcome of the
proceedings will not have a material adverse effect on the Company's financial
position or results of operations.
F-17
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
11. Export Sales:
------------
Export revenues by the Company's domestic operations accounted for
approximately 39%, 39% and 37% of the Company's total revenues in 1995, 1994,
and 1993 respectively. The following table shows the geographical distribution
of the export sales:
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Latin America $5,064,063 $ 4,866,826 $ 4,200,372
Asia/Pacific 4,573,828 3,692,373 3,259,780
Europe 1,307,830 1,817,143 1,021,739
Africa/Middle East 1,288,094 983,542 1,800,426
---------- ----------- -----------
$12,233,815 $11,359,884 $10,282,317
=========== =========== ===========
Related net accounts receivable balances at December 31, 1995, 1994 and 1993
approximated $4,921,253, $4,263,579 and $4,035,969, respectively.
12. Certain Relationships and Related Party Transactions:
----------------------------------------------------
In 1990, the Company loaned $70,000 to its president and in 1993 loaned a total
of $182,400 to four other officers. The remaining balances of notes are
included in stockholders' notes receivable in the accompanying Consolidated
Balance Sheets. In 1992, the Company loaned a total of $200,000 to two other
officers. The remaining balances of these notes are included in notes
receivable, net of current maturities, in the accompanying Consolidated Balance
Sheets. All of these loans are evidenced by demand notes bearing interest at
prime plus 1/4% and are collateralized by shares of common stock of either IGI
or one of its subsidiaries. In 1989, the Company loaned $200,000 to the
president of MPS, which was repaid in 1995 with MPS stock. During 1995, 1994,
and 1993, the Company recognized $38,566, $34,494 and $25,081, respectively, in
interest income from these notes.
13. Employee Benefits:
-----------------
The Company has a defined contribution retirement plan (401(k)), pursuant to
which employees who have completed one year of employment with the Company or
its subsidiaries as of specified dates may elect to contribute to the Plan, in
whole percentages, up to 18% of compensation, subject to a minimum contribution
by participants of 2% of compensation and a maximum contribution of $9,240 in
1995 and 1994, and $8,994 in 1993. The Company matches 25% of the first 5% of
compensation contributed by participants and contributes on behalf of each
participant $4 per week of employment during the year. All contributions of the
Company are made quarterly in the form of the Company's Common Stock ($.01 par
value) and are immediately vested. The Company has recorded charges to expense
related to this plan of approximately $103,601, $62,200, and $76,100 for the
years 1995, 1994, and 1993, respectively.
F-18
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------
14. Concentration of Credit Risk:
----------------------------
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash and cash equivalents. The company
places its cash and cash equivalents with two high credit quality financial
institutions. Export receivables include customers in several key geographic
areas; of these, Mexico and other Latin American countries are important markets
for the Company's poultry vaccines and other products. These countries have
historically experienced varying degrees of political unrest and economic and
currency instability. Because of the volume of business transacted by the
Company in those countries, continuation or recurrence of such unrest or
instability could adversely affect the businesses of its customers in those
countries or the Company's ability to collect its receivables from such
customers, which in either case could adversely impact the Company's future
operating results.
15. Business Segments:
-----------------
Summary data related to continuing operations for the three years ended
December 31, 1995 appears below:
Animal Health Cosmetics and Consumer
Products Products Corporate Consolidated
----------- ------------ ------------ ------------
1995
----
Net sales $29,509,868 $1,710,764 $ - $31,220,632
Operating profit (loss) 6,459,486 (158,644) (3,056,292) 3,244,550
Depreciation and
amortization 819,867 16,246 - 836,113
Identifiable assets 29,379,943 2,951,381 - 32,331,324
Capital expenditures 745,692 1,651,689 - 2,397,381
1994
----
Net sales $27,470,989 $1,476,922 $ -- $28,947,911
Operating profit (loss) 6,056,835 296,143 (2,844,903) 3,508,075
Depreciation and
amortization 837,084 5,824 -- 842,908
Identifiable assets 25,941,706 2,493,833 -- *28,435,539
Capital expenditures 569,548 1,275,998 -- 1,845,546
1993
----
Net sales $26,626,127 $1,378,442 $ -- $28,004,569
Operating profit (loss) 6,019,658 366,541 (2,999,781) 3,386,418
Depreciation and
amortization 1,043,431 -- -- 1,043,431
Identifiable assets 25,142,335 846,544 -- *25,988,879
Capital expenditures 617,274 -- -- 617,274
* Net of net assets of biotechnology segment of $2,066,303, and $16,175 for
1994 and 1993, respectively.
F-19
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
-------- -------- -------- -------- --------
Additions
------------------------------------
Balance at (1) Charged to (2) Charged to
beginning of costs and other accounts Balance at
Description period expenses describe Deductions end of period
----------------- ----------- -------------- --------------- ---------- -------------
Year ended December 31, 1993:
- ----------------------------
Allowance for doubtful accounts $ 73,000 $ 101,419 -- $ 33,919(A) $ 140,500
Inventory valuation allowance 481,873 251,073 -- 235,965(B) 496,981
Other asset valuation allowance 192,119 -- -- 6,000 186,119
Amortization of goodwill 59,506 8,416 -- -- 67,922
Amortization of other intangibles 256,836 130,983 -- -- 387,819
Valuation allowance on net
deferred tax assets 1,241,780 1,968,108 -- 49,977(C) 3,159,911
Year ended December 31, 1994:
- ----------------------------
Allowance for doubtful accounts $ 140,500 $ 107,713 -- $ 67,213(A) $ 181,000
Inventory valuation allowance 496,981 163,842 -- 153,684(B) 507,139
Other asset valuation allowance 186,119 -- -- -- 186,119
Amortization of goodwill 67,922 8,416 -- -- 76,338
Amortization of other intangibles 387,819 76,466 -- -- 464,285
Valuation allowance on net
deferred tax assets 3,159,911 651,614 -- 931,835(D) 2,879,690
Year ended December 31, 1995:
- ----------------------------
Allowance for doubtful accounts $ 181,000 $ 142,273 -- $ 17,273(A) $ 306,000
Inventory valuation allowance 507,139 645,464 -- 458,888(B) 693,715
Other asset valuation allowance 186,119 -- -- -- 186,119
Amortization of goodwill 76,338 8,416 -- -- 84,754
Amortization of other intangibles 464,285 57,464 -- -- 521,749
Valuation allowance on net
deferred tax assets 2,879,690 68,998 2,879,690(E) 68,998
(A) Relates to write-off of uncollectible accounts.
(B) Dispositions of obsolete inventories.
(C) Represents reversal of valuation allowance for a change in estimated
realizability of assets, credited to costs and expenses.
(D) Incorporates $660,428 reversal of valuation allowance relating to the
exercise of stock options, included in additional paid in capital and
$271,407, reversal of valuation allowance relating to research and
development tax credits, credited to costs and expenses.
(E) Related to spin off of certain discontinued operations during 1995.
F-20
EXHIBIT INDEX
Exhibit Page
- ------- ----
3(a) *
3(b) *
4 *
10(a) *
10(b) *
10(c) *
10(d) *
10(e) *
10(f) *
10(g) *
10(h) *
10(i) *
10(j) *
10(k) *
10(l) *
10(m) *
10(n) *
10(o) *
10(p) *
10(q) *
10(r) *
10(s) *
10(t) *
10(u) *
11
22
24
* These exhibits are incorporated by reference.
31