Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED COMMISSION FILE NO.
--------------------- -------------------
DECEMBER 31, 1997 001-08568
IGI, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 01-0355758
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
WHEAT ROAD AND LINCOLN AVENUE, BUENA, NJ 08310
- --------------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(609)-697-1441
-----------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Common Stock ($.01 par value)
Registered on the American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the Registrant's Common Stock, par value $.01
per share, held by non-affiliates of the Registrant at July 31, 1998, as
computed by reference to the last trading price of such stock, was
approximately $16,600,000.
The number of shares of the Registrant's Common Stock, par value $.01 per
share, outstanding at July 31, 1998 was 9,466,667 shares.
DOCUMENTS INCORPORATED BY REFERENCE: None.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 Business--production and marketing of animal health
products such as poultry vaccines, veterinary pharmaceuticals and other
products, including nutritional supplements and grooming aids; and
. Consumer Products Business--production and marketing of cosmetics and
skin care products.
IGI is committed to grow by applying its technology to deliver cost
effective solutions to customer problems. IGI solves problems in poultry
production, pet care and consumer and skin care markets. An increasing number
of its solutions are based on the patented Novasome(R) microencapsulation
technology. Licensed from a former subsidiary, the technology offers value-
added qualities to cosmetics, skin care products, chemicals, biocides,
pesticides, fuels, vaccines, medicines, foods, beverages, pet care products
and other products.
IMPORTANT DEVELOPMENTS
The Company has recently replaced a number of key personnel. On May 11,
1998, the Company employed Paul Woitach as its President and Chief Operating
Officer. On June 1, 1998, John F. Wall joined the Company as its Senior Vice
President and Chief Financial Officer. As of June 15, 1998, the Company has
hired a new Vice President of Vineland Operations, a new Vice President of
Vineland Research and Development, a new Vice President of International
Marketing and Sales and new Managers of Production and Quality Control. The
Company has also added managers with experience in materials and supply chain
management. Most of the new managers have experience in the poultry vaccine
industry. The Company has added these new employees without increasing its
historical overall payroll expenses.
From June 4, 1997 through March 27, 1998, the Company was subject to an
order by the Center for Veterinary Biologics ("CVB") of the United States
Department of Agriculture ("USDA") to stop distribution and sale of certain
serials and subserials of designated poultry vaccines produced by the
Company's Vineland Laboratories Division ("Stop Shipment Order"). The Stop
Shipment Order was based on CVB's findings that the Company shipped serials
before the Animal and Plant Health Inspection Service division of the USDA
("APHIS") had the opportunity to confirm the Company's testing results, failed
to destroy serials reported to APHIS as destroyed, and in general failed to
keep complete and accurate records and to submit accurate reports to APHIS.
The Stop Shipment Order affected 36 of the Company's USDA-licensed vaccines.
In July 1997, the Office of Inspector General of the USDA ("OIG") advised the
Company of its commencement of an investigation into alleged violations of the
Virus Serum Toxin Act and alleged false statements made to APHIS.
Following the Stop Shipment Order and the commencement of the OIG
investigation, in July 1997, the non-employee members of the Board of
Directors directed the Company to retain special counsel to investigate the
alleged violations and to advise the Board of Directors. The non-employee
members of the Board of Directors also instructed management to take immediate
action to assure that all future shipments comply with all regulatory
requirements. In addition, the Company took action designed to obtain the
approval of APHIS to the Company's resumption of shipments of the products
affected by the Stop Shipment Order, including submission of an amended
regulatory compliance program and testing procedures acceptable to the USDA,
reassignment of certain personnel and restructuring of the quality control and
quality assurance functions. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--U.S. Government Investigation
and Disciplinary Proceedings.")
Based on remedial action taken by the Company, including revised vaccine
production outlines, the USDA, during the period from August through December
of 1997, lifted the Stop Shipment Order with respect to all but three of the
36 affected products. As of March 27, 1998, the remaining three products were
released for sale and shipment by the Company.
2
As a result of the Company's internal investigation regarding the alleged
violations, the Company, in November 1997, terminated the employment of its
then President and Chief Operating Officer, John P. Gallo, and commenced a
lawsuit against Mr. Gallo on April 21, 1998. On April 28, 1998, Mr. Gallo
commenced a lawsuit against the Company and two of its directors, including
the Chairman of the Board. (See "Legal Proceedings.") In addition, six
employees, including members of the Company's management team (including two
Vice Presidents of the Company) resigned in April 1998 at the request of the
Company. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--U.S. Government Investigation and Disciplinary
Proceedings.")
In April 1998, the Company voluntarily disclosed to the U.S. Attorney for
the District of New Jersey, as well as to the USDA and OIG, information
resulting from the Company's internal investigation. The U.S. Attorney
thereupon commenced its own investigation and requested that the Company
provide documents relating to the matters being investigated, including
documents relating to sales of poultry vaccines which may have violated U.S.
Customs laws and regulations.
During 1997 and at December 31, 1997, the Company was in default under
certain covenants contained in its bank credit agreement. The Company entered
into an Extension Agreement with its bank lenders as of April 29, 1998 which
provided, among other matters, for the waiver of the covenant defaults, an
extension of the bank credit agreement through March 31, 1999, revisions of
existing covenants and the addition of new covenants, the payment of
additional fees and the issuance to the bank lenders of warrants to purchase
common stock of the Company. The Company was in default under certain
covenants contained in the Extension Agreement at July 31, 1998. On August 19,
1998, the Company and its bank lenders entered into a Forbearance Agreement
whereby the banks agreed to forbear from exercising their rights and remedies
arising from these covenant defaults through January 30, 1999. The Forbearance
Agreement terms require payment of all bank debt by January 31, 1999. The
Company is actively seeking alternative financing arrangements to replace its
existing debt and lending terms through a number of potential options
including, but not limited to, the issuance of debt or equity securities or a
combination of both. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources.")
On March 30, 1998, the Company announced that it was unable to file its
Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997
Form 10-K") by the March 31, 1998 due date as it had not yet completed the
procedures it deemed necessary to prepare its financial statements. Based upon
information made known to it on March 17, 1998, the Company's Board of
Directors directed the special counsel, who was conducting the internal
investigation regarding USDA issues, to expand the scope of its internal
inquiry to investigate information which could have a material impact on the
Company's financial reporting for 1997 and prior periods and authorized
special counsel to engage independent accountants to assist it in the
investigation. As a result of the failure to file its 1997 Form 10-K, the
American Stock Exchange ("AMEX") suspended the trading of the Company's Common
Stock on March 30, 1998. In addition, on April 30, 1998, the Securities and
Exchange Commission ("SEC") notified the Company that it was conducting an
informal inquiry and requested that the Company provide it with certain
documents.
On May 1, 1998, the Company was advised by its former independent
accountants, that based on the preliminary findings of the special
investigation initiated by the Board of Directors in March 1998, their reports
with respect to the Company's consolidated financial statements as of and for
the years ended December 31, 1995 and 1996 should no longer be relied upon. As
a result of the findings of the special investigation, the Company restated
its consolidated financial statements for the two years ended December 31,
1995 and 1996 and for the three quarters ended September 30, 1997. In the
opinion of management, all material adjustments necessary to correct the
financial statements have been recorded. The restatements resulted in
additional losses of $179,000 and $231,000 in 1995 and 1996, respectively. See
"Note 2 of Notes to Consolidated Financial Statements".
In addition to the restatements discussed above, the Company made certain
adjustments in the fourth quarter of 1997 which were the result of actions or
events which occurred in earlier quarters of 1997. The Company has restated
its financial statements for the first three quarters of 1997 to record such
adjustments in the applicable quarter. The restatements resulted in an
additional loss of $1,324,000 for the nine months ended September 30, 1997.
See "Note 18 of Notes to Consolidated Financial Statements".
3
For information relating to the impact of the above-described events on the
Company's operations during 1997 and the expected impact on its business in
1998, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
LICENSE OF TECHNOLOGY FROM FORMER SUBSIDIARY
In December 1995, IGI distributed its ownership of its majority-owned
subsidiary, Novavax, Inc. ("Novavax"), in the form of a tax-free stock
dividend, to IGI stockholders. Novavax had conducted the Biotechnology
Business segment of IGI, which is reported as a discontinued operation. In
connection with the distribution, the Company paid Novavax $5,000,000 in
return for a fully paid-up, ten-year license (the "IGI License Agreement")
entitling it to the exclusive use of Novavax's Novasome lipid vesicle
encapsulation technologies ("Novavax Technologies") in the fields of (i)
animal pharmaceuticals, biologicals and other animal health products; (ii)
foods, food applications, nutrients and flavorings; (iii) cosmetics, consumer
products and dermatological over-the-counter and prescription products
(excluding certain topically delivered hormones); (iv) fragrances; and (v)
chemicals, including herbicides, insecticides, pesticides, paints and
coatings, photographic chemicals and other specialty chemicals; and the
processes for making the same (collectively, the "IGI Field"). IGI has the
option, exercisable within the last year of the ten-year term, to extend the
exclusive license for an additional ten-year period for $1,000,000. Novavax
has retained the right to use its Novavax Technologies for all applications
outside the IGI Field, including human vaccines and pharmaceuticals.
BUSINESS SEGMENTS
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:
1997 1996 1995
------- --------- ---------
(IN THOUSANDS) (RESTATED) (RESTATED)
REVENUE
Animal Health Products......................... $29,096 $31,262 $28,869
Consumer Products.............................. 5,097 3,523 1,632
OPERATING PROFIT (LOSS) *
Animal Health Products......................... 4,139 6,882 6,247
Consumer Products.............................. 730 (917) (233)
- --------
* Excludes corporate expenses of $5,032,000, $4,097,000 and $3,056,000 for
1997, 1996 and 1995, respectively. (See Note 17 of Notes to Consolidated
Financial Statements).
ANIMAL HEALTH PRODUCTS BUSINESS
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 ("OTC") pet products market under
the Tomlyn label.
Poultry Vaccines
The Company produces and markets poultry vaccines manufactured by the chick
embryo, tissue culture and bacterial methods. The Company produces vaccines
for the prevention of various chicken and turkey diseases and has 63 vaccine
licenses granted by the United States Department of Agriculture ("USDA"). 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 licensed facility in
Vineland, New Jersey and sells them, primarily through its own sales force of
nine persons, directly to large poultry producers and
4
distributors in the United States and, through its export sales staff of 15
persons, 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 49%
of the Company's sales in 1997, 57% in 1996 and 60% in 1995. For information
relating to the adverse effect on the Company's poultry vaccine business of
the Stop Shipment Order by the USDA in 1997, as well as ongoing governmental
investigations, see "Governmental Regulation" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company's principal competitors in the poultry vaccine market are
Intervet America, Inc., Fort Dodge Animal Health, Inc., Merial Select
Laboratories, Inc. and Schering Plough Animal Health. The Company believes
that it is one of the largest domestic poultry vaccine producers. The Company
competes on the basis of product performance, price, customer service and
availability.
Veterinary Products
The EVSCO line of veterinary products is used by veterinarians in caring for
dogs and cats, and includes pharmaceuticals such as antibiotics, anti-
inflammatories and cardiac drugs, as well as nutritional supplements,
vitamins, insecticides and diagnostics. Product forms include gels, tablets,
creams, liquids, ointments, powders, emulsions, shampoos and diagnostic kits.
EVSCO also produces professional grooming aids for dogs and cats.
EVSCO products are manufactured at the Company's facility in Buena, New
Jersey and 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., Schering Corp., Dermatologics
for Veterinary Medicine, Inc., Allerderm, Inc. and Mallinckrodt, 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. The products are manufactured at the
Company's facility in Buena, New Jersey, and sold directly to pet superstores
and through distributors to independent merchandising chains, shops and
kennels.
Sales of the Company's veterinary products are handled by 19 sales
employees. Sales of veterinary products accounted for approximately 36% of the
Company's sales in 1997, 33% in 1996 and 35% in 1995.
CONSUMER PRODUCTS BUSINESS
IGI's Consumer Products segment is primarily focused on the expanded
commercialization of the Novavax Microencapsulation Technologies for skin care
applications. These efforts have been directed toward the development of high
quality skin care products that the Company markets through collaborative
arrangements with major cosmetic and consumer products companies. IGI is
currently working with several cosmetics, food, personal care products, and
OTC pharmaceutical companies for various commercial microencapsulation
applications of the 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,
Novasome lipid vesicles may be used to deliver moisturizers and other active
ingredients to the deeper layers of the skin or hair follicles for a prolonged
period; to deliver or preserve ingredients which impart favorable cosmetic
characteristics described in the cosmetics industry as "feel,"
"substantivity," "texture" or "fragrance"; to deliver normally incompatible
ingredients in the same preparation, with one ingredient being shielded or
protected from the other by encapsulation within the Novasome vesicle; and to
deliver pharmaceutical agents.
The Company produces Novasome vesicles for various skin care products,
including those marketed by Estee Lauder such as "All You Need", "Re-Nutriv",
"Virtual Skin", "100% Time Release Moisturizer", and "Resilience".
5
At the end of December 1996, the Company entered into a license agreement
with Glaxo Wellcome ("Glaxo"), which grants Glaxo the exclusive right to
market a skin care product line in the United States to physicians, including
but not limited to dermatologists. Under the terms of the agreement, which was
amended in January 1997, IGI manufactures the products for Glaxo. IGI retains
the rights to market the product line to non-physicians in the U.S., and in
all markets abroad.
In 1997, the Company entered into an Exclusive Supply Agreement with IMX
Pharmaceuticals, Inc. ("IMX"), which grants IMX the exclusive right to market
certain Novasome-based topical skin care products in certain mass
merchandising markets.
Sales of the Company's Consumer Products were principally based on
formulations using the Novasome encapsulation technology. Such sales
approximated 15% of the Company's sales in 1997, 10% in 1996 and 5% in 1995.
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. 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 Novasome vesicles will be successful.
Under a license agreement with the Company, Johnson & Johnson has
encapsulated retinoids in Novasome vesicles. 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 Novasome vesicles is designed to prolong
stability and reduce irritation and provide a sustained retinoid release to
treat these disorders. Johnson & Johnson is beginning to introduce Novasome
encapsulated retinoid products in certain European countries and the United
States in the first half of 1998.
INTERNATIONAL SALES AND OPERATIONS
A staff of nine persons based in Buena, New Jersey and six individuals based
overseas handle all sales of Company products outside the United States. The
Company's sales personnel and veterinarians travel abroad extensively to
develop business and support customers through local distributors. Exports
consist primarily of poultry vaccines, although the Company also exports some
veterinary pharmaceuticals and pet care products. Exports of vaccines require
product registration (ie. licenses) by foreign authorities. The Company has
approximately 900 product registrations in over 50 countries outside the
United States and has over 800 registrations pending. The Company anticipates
future growth in key markets including Brazil, China and Japan. The Company
entered the market in China in 1997 and expects to increase market penetration
in 1998. The Company has received product registrations in Japan and is
scaling up production for 1998 product sales. In Brazil, product registrations
are in process and the Company expects to commence sales by the fourth quarter
of 1998.
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. In addition, certain countries in the Far East,
including Indonesia and Thailand, have recently experienced economic and
currency instability. Because of the volume of business transacted by the
Company in these areas, continuation or the recurrence of such unrest or
instability could adversely affect the businesses of its customers, which in
either case could adversely impact the Company's future operating results.
(See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources.")
Sales to international customers represented 35% of the Company's sales in
1997, 39% in 1996 and 38% in 1995. (See Note 14 of Notes to Consolidated
Financial Statements.)
6
MANUFACTURING
The Company's manufacturing operations include production and testing of
vaccines, lotions, emulsions, shampoos, gels, ointments, pills and powders;
packaging, bottling and labeling of the finished products; and packing and
shipment for distribution. Approximately 90 employees are engaged in
manufacturing operations. The raw materials included in these products are
available from several suppliers. The Company produces quantities of Novasome
lipid vesicles adequate to meet its current needs for cosmetics, consumer
product and animal health applications.
RESEARCH AND DEVELOPMENT
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 Novasome
lipid vesicle technology into existing vaccines. The Company is concentrating
its veterinary pharmaceutical development efforts on the use of Novasome lipid
vesicle technology for various veterinary pharmaceutical and OTC pet care
products. The Company's consumer products development efforts are directed
towards liposomal encapsulation to improve performance and efficacy of
chemicals, fuels, pesticides, biocides 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 the IGI Field.
In addition to its internal research and development efforts, which involve
11 employees, the Company encourages the development of products in areas
related to its present lines by making specific grants to universities and by
entering into research and development agreements with industry partners.
Research expenses for IGI's continuing operations were $1,675,000, $2,013,000
and $1,345,000 in 1997, 1996 and 1995, respectively.
PATENTS AND TRADEMARKS
All of the names of the Company's major products are registered in the
United States and all significant markets in which the Company sells its
products. Under the terms of the 1995 License Agreement, IGI has an exclusive
ten-year license to use the Novavax Technologies in the IGI Field. Novavax
holds 44 U.S. patents and a number of 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).
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 USDA, including the Center for Veterinary Biologics ("CVB"),
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.
From June 4, 1997 through March 27, 1998, the Company was subject to an
order by the CVB to stop distribution and sale of certain serials and
subserials of designated poultry vaccines produced by the Company's Vineland
Laboratories Division. In July 1997, the OIG advised the Company of its
commencement of an investigation into alleged violations of the Virus Serum
Toxin Act and alleged false statements made by certain former Company
personnel. In April 1998, the Company voluntarily disclosed to the U.S.
Attorney for the District of New Jersey, as well as to the USDA and the OIG,
information resulting from the Company's internal investigation of alleged
violations by certain officers and employees of USDA rules and regulations and
of the Virus Serum Toxin Act. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--U.S. Government Investigation
and Disciplinary Proceedings.")
7
On March 6, 1998, the Food and Drug Administration concluded an inspection
of the Company's EVSCO facility in Buena, New Jersey. This resulted in the
issuance of a form FDA-483 listing several "inspection observations". The FDA
reemphasized its observations on May 14, 1998 with a "Warning Letter". The
Company responded in a timely fashion to the Form-483 and to the Warning
Letter, and has been advised by the FDA compliance branch that the Company's
corrective action plan appears to address its concerns.
In the United States, pharmaceuticals and human vaccines are subject to
rigorous FDA regulation including preclinical and clinical testing. The
process of completing clinical trials and obtaining FDA approvals for a new
drug is likely to take a number of years, requires the expenditure of
substantial resources and is often subject to unanticipated delays. There can
be no assurance that any product will receive such approval on a timely basis,
if at all.
In addition to product approval, the Company may be required to obtain a
satisfactory inspection by the FDA covering the manufacturing facilities
before a product can be marketed in the United States. The FDA will review the
manufacturing procedures and inspect the facilities and equipment for
compliance with applicable rules and regulations. Any material change by the
Company in the manufacturing process, equipment or location would necessitate
additional review and approval.
Whether or not FDA approval has been obtained, approval of a pharmaceutical
product by comparable governmental authorities in foreign countries must be
obtained prior to the commencement of clinical trials and subsequent marketing
of such product in such countries. The approval procedure varies from country
to country, and the time required may be longer or shorter than that for FDA
approval. Although there are some procedures for unified filing for certain
European countries, in general each country has its own procedures and
requirements.
In addition to regulations enforced by the USDA and the FDA, the Company
also is subject to regulation under the Occupational Safety and Health Act,
the Environmental Protection Act, the Toxic Substances Control Act, the
Resource Conservation and Recovery Act and other present and potential future
federal, state or local regulations. The Company's 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 or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that result
and any such liability could exceed the resources of the Company.
EMPLOYEES
At June 30, 1998, the Company had 198 full-time employees, of whom 72 are in
marketing, sales, distribution and customer support, 90 in manufacturing, 11
in research and development, and 25 in executive, human resources, facilities,
information systems, finance and administration. The Company has no collective
bargaining agreement with its employees, and believes that its employee
relations are good.
ITEM 2. PROPERTIES
The Company owns land and buildings 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 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 the
future to expand its vaccine production capacity to meet expected growth in
existing poultry vaccines and to provide production of new vaccines. Financing
for such renovations will be provided by internally generated funds or leases.
8
In Buena, New Jersey, the Company owns a facility used for the production of
veterinary pharmaceuticals. The facility was built in 1971 and expanded in
1975. The facility presently contains 41,200 square feet of usable floor space
and is situated on eight acres of land. 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, research and
product development, customer service, marketing, international operations 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 and Mellon Bank. Except as discussed above, the Company believes
that its current production and office facilities are adequate for its present
and forseeable future needs.
ITEM 3. LEGAL PROCEEDINGS
In July 1997, the Office of Inspector General of the USDA ("OIG") advised
the Company of its commencement of an investigation into alleged violations of
the Virus Serum Toxin Act and alleged false statements made by Company
employees to the USDA. The Company is cooperating with the OIG and providing
documents subpoenaed by the OIG concerning certain products. The OIG
investigation is ongoing and the Company is unable to determine when it will
be completed. In April 1998, the Company voluntarily disclosed to the U.S.
Attorney for the District of New Jersey, as well as to the USDA and OIG,
information resulting from the Company's internal investigation. The U.S.
Attorney thereupon commenced its own investigation and requested that the
Company provide documents relating to the matters being investigated,
including documents relating to sales of poultry vaccines which may have
violated U.S. Customs laws and regulations. In addition, on April 30, 1998,
the SEC notified the Company that it is conducting an informal inquiry and has
requested that the Company provide it with certain documents. The Company is
cooperating fully with the U.S. Attorney and each of the regulatory agencies
and has produced a substantial amount of documents and information requested
by them. The U.S. Attorney has not indicated what course of action, if any, it
may pursue with respect to IGI in light of the Company's extensive
cooperation. Although there can be no assurance as to the outcome of any
proceeding, the Company expects that it will be able to achieve a satisfactory
resolution of its existing regulatory and litigation matters. However, if the
OIG, U.S. Attorney or SEC conclude that the Company's actions warrant
enforcement proceedings, those proceedings, as well as the costs and expenses
related to them, could have a materially adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
On April 21, 1998, the Company commenced a lawsuit against its former
President and Chief Operating Officer, John P. Gallo, in the Superior Court of
New Jersey, Atlantic County. In its complaint, the Company alleges, among
other matters, that Mr. Gallo caused the Company to violate Department of
Agriculture statutes and regulations, made false and inaccurate
representations with respect to shipments and inventory, improperly converted
Company funds and assets for his personal benefit and knowingly engaged in
misconduct in the performance of his duties and responsibilities, all in
violation of his employment agreement and of his fiduciary duty to the
Company. The Company is seeking recovery of damages resulting from Mr. Gallo's
alleged misconduct and recovery of funds and assets that the Company alleges
were improperly diverted by him.
On April 28, 1998, Mr. Gallo commenced a lawsuit against the Company and two
of its Directors, including the Company's Chairman of the Board, Dr. Edward B.
Hager, alleging, among other matters, that they improperly caused the
termination of his employment with the Company in November 1997, wrongfully
terminated his compensation in violation of his employment agreement and
defamed his reputation. Mr. Gallo is seeking recovery against the defendants
for his alleged actual damages as well as consequential and punitive damages.
The Company has denied Mr. Gallo's allegations and believes his claims are
without merit. The Company therefore has not reserved any amounts related to
these charges.
On May 27, 1998, Mr. Gallo sent a letter to the Company's Directors
containing a number of complaints and allegations and demanded that the Board
of Directors commence litigation against certain of its officers and
9
Directors. The Board of Directors convened a special meeting and designated a
committee of independent members consisting of F. Steven Berg Esq. (Chairman)
and Terrence O'Donnell Esq. to investigate these allegations and report to the
Board. Also, the Board authorized the engagement of counsel to help with its
investigation and requested that Mr. Gallo provide information and support for
his allegations. The Company has been advised that Mr. Gallo has declined to
provide the Board with a sworn statement giving substance and detail to his
complaints. The Committee and its counsel are continuing to investigate Mr.
Gallo's allegations and will report their findings and recommendations to the
Board of Directors. To this point in the investigation, the Committee has
uncovered no evidence supporting the claims of Mr. Gallo.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
last quarter of 1997.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth (i) the name and age of each executive
officer of the Company as of July 31, 1998, (ii) the position with the Company
held by each such executive officer and (iii) the principal occupation held by
each executive officer for at least the past five years.
OFFICER PRINCIPAL OCCUPATION AND OTHER BUSINESS EXPERIENCE
NAME AGE SINCE DURING PAST FIVE YEARS
---- --- ------- --------------------------------------------------
Kevin J. Bratton........ 49 1983 Vice President and Treasurer of IGI, Inc.
since 1983.
Edward B. Hager, M.D.... 67 1977 Chairman of the Board of Directors and
Chief Executive Officer of IGI, Inc. since
1977; Chairman of the Board of Directors
and Chief Executive Officer of Novavax,
Inc. from 1987 to June 1996; Chairman of
the Board of Directors of Novavax, Inc.
from February 1997 to March 1998.
John F. Wall............ 50 1998 Senior Vice President and Chief Financial
Officer of IGI, Inc. since June 1998; Chief
Financial Officer of Diversa Corp. (startup
biotechnology company developing enzymes
for pharmaceuticals and chemicals) from
July 1995 to September 1997; and Chief
Financial Officer and a Co-founder of
GynoPharma, Inc. (womens' health care
manufacturer) from October 1987 to July
1995.
Paul Woitach............ 40 1998 President and Chief Operating Officer of
IGI, Inc. since May 1998; General Manager,
Laboratory Division of Mettler Toledo North
America (weighing and measurement systems)
from 1997 to 1998; Vice President,
Marketing and Sales, Balances and
Instrument Division of Mettler Toledo
International from 1996 to 1997; Vice
President and Executive Director from 1995
to 1996, and Director of Marketing Channels
from 1993 to 1995 of the Health Imaging
Division of Eastman Kodak Company
(diagnostic imaging).
Officers are elected on an annual basis and serve at the discretion of the
Board of Directors, except Dr. Hager, who has an employment agreement with the
Company. Messrs. Wall and Woitach have finalized arrangements on the basic
terms of their employment with the Company that have not been formalized into
a final document. (See "Item 11. Executive Compensation--Employment
Agreements".)
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company has never paid cash dividends on its Common Stock. The payment
of dividends is prohibited by the Company's Loan Agreement with Fleet Bank-NH
and Mellon Bank, N.A. without prior consent of the lenders. See "Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
The principal market for the Company's Common Stock ($.01 par value) (the
"Common Stock") is the American Stock Exchange ("AMEX") (symbol: "IG"). The
following table shows the range of high and low sale prices on the AMEX for
the periods indicated.
HIGH LOW
---- ---
1996
First quarter.................................................. $8 1/4 $6 3/8
Second quarter................................................. 9 1/2 6 1/4
Third quarter.................................................. 7 3/4 5
Fourth quarter................................................. 6 5 1/8
1997
First quarter.................................................. $7 3/8 $ 5
Second quarter................................................. 5 1/2 4
Third quarter.................................................. 5 1/2 3 7/8
Fourth quarter................................................. 5 1/8 3 5/8
On March 30, 1998, the AMEX suspended the trading of the Company's common
stock as a result of the Company's announcement that it would not be able to
file its 1997 Annual Report on Form 10-K with the AMEX and the Securities and
Exchange Commission by March 31, 1998, the due date of that report. The
approximate number of holders of record of the Company's common stock at June
30, 1998 was 897 (not including stockholders for whom shares are held in a
"nominee" or "street" name).
11
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Summary of Selected Financial Data (in thousands, except per share
information)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ---------- --------- ------- -------
(RESTATED) (RESTATED)
INCOME STATEMENT DATA:
Net sales.................... $34,193 $34,785 $30,501 $28,948 $28,005
Gross profit................. 16,359 18,204 15,213 15,013 14,839
Operating profit (loss)...... (163) 1,868 2,958 3,508 3,386
Income (loss) from continuing
operations.................. (1,453) (138) 1,329 1,969 1,765
Loss from discontinued opera-
tions*...................... -- -- (4,034) (1,700) (5,943)
Net income (loss)............ (1,453) (138) (2,705) 269 (4,178)
Income (loss) per share-ba-
sic:
From continuing operations. $ (.15) $ (.01) $ .14 $ .22 $ .20
From discontinued opera-
tions..................... -- -- (.44) (.19) (.69)
Net income (loss).......... (.15) (.01) (.29) .03 (.48)
Income (loss) per share-di-
luted:
From continuing operations. (.15) (.01) .14 .22 .20
From discontinued opera-
tions..................... -- -- (.41) (.19) (.66)
Net income (loss).......... (.15) (.01) (.28) .03 (.46)
Cash dividends on common
stock....................... -- -- -- -- --
DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ---------- --------- ------- -------
(RESTATED) (RESTATED)
BALANCE SHEET DATA:
Working capital (deficit).... $(4,469) $ 3,343 $ 4,139 $10,671 $12,411
Total assets................. 34,044 34,384 32,152 30,502 26,005
Short-term debt.............. 18,857 13,085 10,463 3,819 2,530
Long-term debt (excluding
current maturities)......... 36 6,893 9,624 10,019 8,798
Stockholders' equity......... 8,283 9,558 8,369 13,711 12,321
Average number of common and
common equivalent shares
Basic...................... 9,458 9,323 9,173 8,804 8,668
Diluted.................... 9,458 9,323 9,725 9,155 9,049
- --------
* 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 3 of Notes to Consolidated Financial Statements.)
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
U.S. GOVERNMENT INVESTIGATION AND DISCIPLINARY PROCEEDINGS
From June 4, 1997 through March 27, 1998, the Company was subject to an
order by the CVB to stop distribution and sale of certain serials and
subserials of designated poultry vaccines produced by the Company's Vineland
Laboratories Division ("Stop Shipment Order"). The Stop Shipment Order was
based on CVB's findings that the Company shipped serials before the Animal and
Plant Health Inspection Service division of the USDA ("APHIS") had the
opportunity to confirm the Company's testing results, failed to destroy
serials reported to APHIS as destroyed, and in general failed to keep complete
and accurate records and to submit accurate reports to APHIS. The Stop
Shipment Order affected 36 of the Company's USDA-licensed vaccines. In July
1997, the Office of Inspector General of the USDA ("OIG") advised the Company
of its commencement of an investigation into alleged violations of the Virus
Serum Toxin Act and alleged false statements made to APHIS.
Because of the Stop Shipment Order and the commencement of the OIG
investigation, the non-employee members of the Board of Directors instructed
management to take immediate action to assure that all future shipments comply
with all regulatory requirements. In July 1997, the non-employee members of
the Board of Directors directed the Company to retain special counsel to
investigate the alleged violations and to advise the Board of Directors of its
findings. In addition, the Company took action designed to obtain the approval
of APHIS to the Company's resumption of shipments of the products affected by
the Stop Shipment Order, including submission of an amended regulatory
compliance program and testing procedures acceptable to the USDA, reassignment
of certain personnel and restructuring of the quality control and quality
assurance functions.
Based on remedial action taken by the Company, including revised vaccine
production outlines, the USDA, during the period from August through December
of 1997, lifted the Stop Shipment Order with respect to all but three of the
36 affected products. As of March 27, 1998, the remaining three products were
released for sale and shipment by the Company.
Company Actions
As a result of the Company's internal investigation, in November 1997 the
Company terminated the employment of its President and Chief Operating
Officer, John P. Gallo, for willful misconduct in the performance of his
executive duties, and on April 21, 1998, the Company commenced a lawsuit
against Mr. Gallo (see "Legal Proceedings"). In addition, six employees,
including members of the Company's management team (including two Vice
Presidents of the Company), resigned in April 1998 at the request of the
Company. However, five of these former employees were retained by the Company
for approximately eight weeks to enable the Company to continue its operations
pending the hiring and training of qualified replacements. In connection with
the employee terminations, the Company agreed to make severance payments to
the two non-management employees equal to four months salary.
The Company has recently replaced a number of key personnel. On May 11,
1998, the Company employed Paul Woitach as its President and Chief Operating
Officer. On June 1, 1998, John F. Wall joined the Company as its Senior Vice
President and Chief Financial Officer. As of June 15, 1998, the Company has
hired a new Vice President of Vineland Operations, a new Vice President of
Vineland Research and Development, a new Vice President of International
Marketing and Sales, and new Managers of Production and Quality Control. The
Company has also added managers with experience in materials and supply chain
management. Most of the new managers have experience in the poultry vaccine
industry. The Company has added these new employees without increasing its
historical overall payroll expenses.
Ongoing Government Investigations
In April 1998, the Company voluntarily disclosed to the U.S. Attorney for
the District of New Jersey, as well as to the USDA and OIG, information
resulting from its internal investigation of alleged violations by
13
certain former officers and employees of USDA rules and regulations and of the
Virus Serum Toxin Act and other statutes including U.S. Customs laws and
regulations. In connection with its investigation, the OIG has subpoenaed
Company documents and the Company has provided, and will continue to provide,
subpoenaed documents to Governmental authorities. The U.S. Government's
investigation is ongoing and could be expanded to other areas of the Company's
business in which violations of laws and regulations may be found to have
occurred. In addition, the Government's ongoing investigation could result in
action against the Company and certain of its former employees, including
fines and the possibility of criminal charges. Also, on April 30, 1998, the
SEC advised the Company that it is conducting an informal inquiry and
requested that the Company provide it with certain documents.
Effects of Stop Shipment Order and Investigations
The Stop Shipment Order adversely affected the Company's results of
operations for 1997, and the delay in approval of the remaining affected
products until the end of March 1998 will adversely affect overall sales
revenue in 1998. In addition, although the Company, on May 11, 1998, announced
the employment of a new President and Chief Operating Officer, it needs to
replace and train certain key managers and other employees who have terminated
their employment at the request of the Company, which will have a materially
adverse effect on the Company's 1998 performance and operating results. Also,
if the OIG, the U.S. Attorney or the SEC concludes that the Company's actions
warrant enforcement proceedings, those proceedings, as well as the costs and
expenses related to them, could have a materially adverse effect on the
Company's business, financial condition and results of operations. Although
there can be no assurance as to the outcome of any proceeding, the Company
expects that it will be able to achieve a satisfactory resolution of its
existing regulatory and litigation matters.
RESTATEMENT OF PRIOR PERIODS
On March 27, 1998, the Board of Directors engaged special counsel to
investigate information first made known to it on March 17, 1998 which it
believed could have a material impact on the Company's financial reporting for
1997 and prior periods. The special counsel was authorized to engage
independent accountants to assist it in the investigation.
As a result of the findings of the special investigation initiated by the
Board of Directors in March 1998, the Company restated its consolidated
financial statements for 1995 and 1996. In the opinion of management, all
material adjustments necessary to correct the financial statements have been
recorded. The restatements amounted to additional losses of $179,000 and
$231,000 in 1995 and 1996, respectively. See "Note 2 of Notes to Consolidated
Financial Statements".
In addition to the restatements discussed above, the Company made certain
adjustments in the fourth quarter of 1997 which were the result of actions or
events which occurred in earlier quarters of 1997. The Company has restated
its financial statements for the first three quarters of 1997 to record such
adjustments in the applicable quarter. See "Note 18 of Notes to Consolidated
Financial Statements".
The restatements reflect inventory write-offs and inventory adjustments
which should have been recorded in different periods. Also reflected are
changes in the time periods in which certain product shipments were recognized
as sales.
14
A summary of the impact of such restatements on the financial statements for
the years ended December 31, 1995 and 1996 is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995
-------------------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE
INFORMATION) AS REPORTED RESTATED AS REPORTED RESTATED
Net sales.......................... $35,140 $34,785 $31,221 $30,501
Income (loss) from continuing oper-
ations............................ 93 (138) 1,508 1,329
Net income (loss).................. 93 (138) (2,526) (2,705)
Income (loss) per common and common
equivalent share:
Basic:
From continuing operations..... $ .01 $ (.01) $ .16 $ .14
Net income (loss).............. $ .01 $ (.01) $ (.28) $ (.29)
Diluted:
From continuing operations..... $ .01 $ (.01) $ .16 $ .14
Net income (loss).............. $ .01 $ (.01) $ (.26) $ (.28)
See Note 18 of the Notes to the Consolidated Financial Statements for
discussion of the impact of the restatements on each of the three quarters in
the nine months ended September 30, 1997.
RESULTS OF OPERATIONS
1997 Compared to 1996
The Stop Shipment Order had a material adverse effect on the Company's
operations in 1997. Total sales decreased $592,000, or 2%, from $34,785,000 in
1996 to $34,193,000 in 1997. Sales of Animal Health Products in 1997 decreased
7% to $29,096,000, or 85% of total sales, compared with $31,262,000, or 90% of
1996 total sales. Sales of poultry vaccines decreased by $3,301,000, or 17%,
to $16,652,000, or 49% of the Company's total sales, compared with
$19,953,000, or 57% of 1996 total sales. This decrease was offset in part by
an increase of $1,135,000, or 10%, in sales of companion pet products to
$12,444,000, or 36% of the Company's total sales in 1997, compared with
$11,309,000, or 33% of total 1996 sales. International sales of Animal Health
Products decreased by $2,115,000, or 15%, to $11,841,000 in 1997 from
$13,956,000 in 1996. International sales represented 35% of the Company's
total sales in 1997 compared with 40% of total sales in 1996.
Sales of Consumer Products increased $1,574,000, or 45%, in 1997 to
$5,097,000 from $3,523,000 in 1996. Sales of Consumer Products represented 15%
of the Company's total 1997 sales, up from 10% of total 1996 sales. This
increase was due primarily to increased product sales to Glaxo Wellcome and
Kimberly Clark. Revenues from Glaxo increased by over $1,000,000 in 1997.
Gross profit decreased $1,845,000, or 10%, in 1997. As a percentage of
sales, gross profit was 48% in 1997 compared with 52% in 1996 due primarily to
(1) manufacturing variances; (2) inventory write-offs; (3) a less favorable
product sales mix at the Vineland Laboratories division due to the USDA
action; and (4) product sales to Glaxo which were made at cost plus a royalty
on Glaxo's sales which results in lower gross profit percentage than other
consumer product sales.
Selling, general and administrative expenses were 44% of sales in 1997
compared with 42% of sales in 1996. Although the Company decreased selling and
marketing expenses as a result of the license and supply agreement with Glaxo
("Glaxo Agreement"), total selling, general and administrative expenses
increased $512,000 in 1997 due to additional reserves for accounts receivable,
and legal and related expenses incurred in connection with the Company's and
the USDA and OIG investigations.
Research and development expenses decreased $338,000, or 17%, in 1997 as the
Company curtailed certain development projects primarily in the Consumer
Products segment. The Company intends to seek industry partners to fund such
research efforts.
15
Licensing and research revenue of $150,000 in 1997 represents $100,000 of
licensing income from Kimberly Clark and $50,000 of revenue attributable to an
agreement entered into on September 30, 1997 between the Company and IMX
Pharmaceuticals, Inc. ("IMX"), which grants IMX the exclusive right to market
certain Novasome-based topical skin care products in certain mass
merchandising markets. Pursuant to this agreement, the Company received
271,714 shares of restricted common stock of IMX. The total investment in IMX
stock is valued at $951,000 at December 31, 1997. Deferred revenue under this
agreement is also $951,000 at December 31, 1997.
1996 Compared to 1995
Sales increased $4,284,000, or 14%, to $34,785,000. The growth occurred in
both of the Company's business segments. Sales of Animal Health Products in
1996 increased 8% to $31,262,000, or 90% of total sales, compared with
$28,869,000, or 95% of 1995 total sales. Poultry vaccine sales accounted for
$19,953,000, or 57% of the Company's total sales. International sales of
Animal Health Products increased $2,073,000, or 17%, principally to countries
in the Asia/Pacific marketplace, including China, Malaysia, Indonesia and
Taiwan. Domestic sales of poultry vaccines decreased 2% from 1995 levels.
Companion pet product sales increased $597,000, or 6%, to $11,309,000.
Sales of Consumer Products increased $1,891,000, or 116%, to $3,523,000 and
accounted for 10% of Company sales, up from $1,632,000, or 5% of 1995 total
sales. This increase was due principally to continued expansion of the number
of products containing the Company's licensed proprietary Novasome lipid
vesicle technology sold to Estee Lauder, resulting in a $1,000,000 increase
over 1995. Sales of the Company's former line of Nova Skin Care products,
which were launched in February 1996, accounted for $402,000 of sales.
Marketing rights to these products (Novasome-based alpha-hydroxy acids) in the
United States to physicians were licensed to Glaxo in late 1996.
The Company's gross profit increased $2,991,000, or 20%, with much of the
increase attributable to the sales growth. As a percentage of sales, gross
profit increased to 52% from 50% during 1995. The significant factor in the
gross margin improvement was the increased sales volume of higher margined
consumer products. These sales increased the utilization of the Company's skin
care manufacturing facility, which started producing products in 1995.
Selling, general and administrative expenses increased $2,844,000, or 24%.
As a percentage of sales, these expenses were 42%, up from 38% in 1995. This
increase relates, in part, to the variable selling and distribution costs
associated with the higher sales volume. Selling and marketing costs
associated with the Nova Skin Care product line were $1,917,000, an increase
of $1,667,000 over 1995. In February 1997, the Company reduced its workforce
by 14 employees, most of whom were associated with its former Nova Skin Care
line.
Research and development expenses increased $668,000, or 50%, over 1995, due
principally to increased new product development efforts in the both of the
Company's business segments. These efforts were directed to developing the
Nova Skin Care product line and other topical applications of the Novasome
technology. The Company continues to develop new vaccines for poultry. The
Company had $162,000 of research revenue in 1996, compared to $731,000 in
1995.
Net interest expense increased $861,000, or 77%, due to higher borrowings
which were required to fund the 1995 operating losses of the Company's former
biotechnology business segment and the $5,000,000 license payment that was
made in connection with the spin-off of Novavax in December 1995. In
connection with the settlement of a lawsuit brought against the Company
related to employment contracts of certain IGI employees with their former
employers, the Company incurred charges of $175,000 for which the Company has
issued shares of IGI common stock. This amount is included in other expense.
The provision for income taxes on continuing operations was lower than the
statutory rate due principally to subsidiary Company operating losses reported
on a separate return basis for state income tax purposes and research and
development tax credits, offset by non-deductible expenses. See also Notes 1,
3, and 10 of Notes to the Company's Consolidated Financial Statements.
16
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1998, the Company was engaged in negotiating
amendments to its credit agreement with its bank lenders, including waivers of
its covenant defaults and an extension of the credit agreement since the
Company was in default under certain covenants contained in its bank credit
agreement during 1997 and at December 31, 1997. During the period from January
1, 1998 through April 29, 1998, the Company paid interest at a rate of prime
plus 4% on outstanding borrowings under its working capital line and prime
plus 4 1/2% on outstanding borrowings under its revolving credit facility. The
Company entered into an Extension Agreement with its bank lenders as of April
29, 1998 (the "Closing Date") which provided for the waiver of the then
existing covenant defaults, extension of the bank credit agreement through
March 31, 1999, a maximum credit line facility of $12,000,000 ("Credit Line")
and extended terms for repayment of the outstanding $6,857,142 balance (at
April 29, 1998) of revolving credit notes ("Revolving Facility").
The Company was in default under certain covenants contained in the
Extension Agreement at July 31, 1998. On August 19, 1998, the Company and its
bank lenders entered into a Forbearance Agreement whereby the banks agreed to
forbear from exercising their rights and remedies arising from these covenant
defaults through January 31, 1999.
The Extension Agreement and the Forbearance Agreement (the "Agreements")
provide for the following:
. The maximum availability under the Credit Line is subject to the
determination of the amount of eligible accounts receivable and eligible
inventories. The Credit Line is due and payable in full on January 31,
1999.
. The outstanding balance of $6,857,142 under the Revolving Facility is due
and payable on January 31, 1999.
. All of the Company's indebtedness to the banks is subject to a security
interest in all of the assets of the Company and its significant
subsidiaries.
. Interest on outstanding borrowings under both the Credit Line and the
Revolving Facility will be:
From August 1, 1998 through September 30, 1998............ Prime plus 3 1/2%
From October 1, 1998 through November 30, 1998............ Prime plus 4 1/2%
From December 1, 1998 through January 31, 1999............ Prime plus 5 1/2%
. At the Closing Date the Company issued to the lenders warrants to
purchase an aggregate of 540,000 shares of the Company's common stock at
an exercise price of $3.50 per share. Warrants ("Unconditional Warrants")
to purchase 270,000 shares are exercisable at any time during the period
commencing 60 days after issuance and ending on the fifth anniversary of
issuance, unless the Company is able to refinance its bank debt by
October 31, 1998 in which case these warrants expire. Warrants
("Conditional Warrants") to purchase the remaining 270,000 shares are
exercisable at any time during the period commencing September 1, 1998
and ending on the fifth anniversary of issuance, unless the Company is
able to refinance its bank debt by December 24, 1998 in which case these
warrants expire. The Company has a call option on the warrants, which can
only be exercised as to all of the shares issuable at that time, with a
repurchase price of $900,000 for each of the Conditional Warrants and
Unconditional Warrants. The Company will recognize a non-cash expense for
these warrants when earned in accordance with Statement of Financial
Accounting Standards No. 123. The Company estimates the total expense for
warrants is approximately $400,000, or $.04 per share, net of taxes.
. The Company agreed to pay Fleet Bank, as agent on behalf of the lenders,
a monthly agent's fee of $5,000 and an extension fee of $250,000, of
which $60,000 was paid at the time of the Extension, and the balance is
payable in three installments through March 24, 1999.
. The Company agreed to pay Fleet Bank, as agent on behalf of the lenders,
a forbearance fee of $140,000, of which $20,000 was paid at the time of
the Forbearance, and the balance is payable in three installments
17
through January 15, 1999. However, if the Company is able to replace its
existing bank debt within the
30 days following a forbearance fee due date, the installment then due
plus all future installments shall be waived.
The Agreements require the Company to maintain certain financial ratios and
comply with other non-financial covenants, and also prohibits the payment of
cash dividends without the prior written consent of the lenders. The Company
is actively seeking, and believes it will be able to secure, alternative
financing arrangements to replace its existing debt and lending terms through
a number of potential options including, but not limited to, the issuance of
debt or equity securities or a combination of both. The Company plans to
engage an investment banker for the purpose of formulating alternative
business strategies and to coordinate the orderly satisfaction of its
obligations. No assurance can be given that the Company will be able to obtain
alternative financing arrangements, and if it is unsuccessful in doing so, the
Company may be required to restrict its business operations or otherwise
modify its business strategy. The Company believes it will be able to remain
in compliance with its debt covenants through January 30, 1999.
The Company's operating activities provided $2,437,000 of cash during 1997.
Cash was provided from non-cash charges to operations for depreciation,
amortization, loss reserves and the $1,000,000 payment from Glaxo under the
Glaxo Agreement. These amounts were offset, in part, by increases in accounts
receivable, inventories and other current assets. The accounts receivable
turnover ratio for 1997 was 4.51 compared to 4.24 for 1996. The accounts
receivable balances due from Mexico and Latin America were 24.5% of the total
receivable balances before allowance for doubtful accounts as of December 31,
1997 and the Company believes the net amounts are 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. In addition, the Company has accounts receivable from countries
in the Far East, including Indonesia and Thailand, which represent 17.4% of
the total receivable balances before allowance for doubtful accounts at
December 31, 1997. This area has recently experienced political, economic and
currency instability. Because of the volume of business transacted by the
Company in these areas, continuation or the recurrence of such unrest or
instability could adversely affect the business of its customers in those
countries or the Company's ability to collect its receivables from such
customers, which in either case could materially adversely affect the
Company's future operating results. The growth in inventories relates
principally to a build up in poultry vaccines as a result of the USDA stop
shipment actions. The inventory turnover ratio for 1997 was 1.89, compared to
1.82 for the year ended December 31, 1996. The Company believes its reserves
for inventory obsolescence and accounts receivable are adequate. The Company
used $568,000 for investing activities, principally capital expenditures for
the Company's manufacturing operations. Funding for the Company's operating
and investing activities were provided by borrowings under the Company's
working capital line of credit.
At July 31, 1998, the Company had no available borrowing capacity under the
Credit Line and no borrowings available under the Revolving Facility. Funds
generated from operations and existing bank credit facilities are expected to
be sufficient to meet the Company's short-term cash requirements. However, the
funds available under its existing bank credit facilities are only sufficient
to finance the Company's operations at its current levels including the costs
associated with the USDA and other regulatory and litigation matters. The
Company will be required to raise additional funds to finance capital
expenditures as well as the expansion of its business. Additionally, the bank
facility expires in January 1999. The Company, therefore, intends to seek
additional funds through the issuance of debt or equity securities or a
combination of both. No assurance can be given that the Company will be able
to obtain the additional required funds, and if it is unsuccessful in doing so
the Company may be required to restrict its business operations or otherwise
modify its business strategy.
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.
ADVERSE EFFECTS OF USDA ACTIONS AND OIG AND U.S. ATTORNEY INVESTIGATIONS
The Company believes that the Stop Shipment Order and other actions by the
USDA in 1997 and the ongoing government investigations described in
"Management's Discussion and Analysis of Financial Condition
18
and Results of Operations" ("MD&A"), and the costs incurred in connection with
those investigations will have a materially adverse effect on its business and
results of operations in 1998. First, the Company needs to attract, train and
retain key employees for its management team to replace key employees
terminated in 1997 and 1998, including corporate officers to head up its
manufacturing operations, marketing and sales and business development.
Second, the Company needs to satisfy the USDA and the government agencies and
its customers that it has established and implemented compliance programs that
will prevent future violations of government regulations applicable to its
poultry vaccine business. Third, it must assure its customers that its future
business operations will comply with all applicable government rules and
regulations and that its financial condition is adequate to meet its business
commitments and to maintain a viable and stable business environment. Fourth,
it must comply with all of the covenants in its bank credit agreement to
assure continued bank financing of its operations and replace its current bank
agreement. Fifth, it must raise additional funds, either through additional
borrowing or the sale of equity, to meet its growth objective and to maintain
its competitive position. Sixth, it must overcome the adverse effects of the
AMEX's trading suspension of the Company's Common Stock to provide the
opportunity for the Company to raise additional funds for its business. No
assurance can be given that the Company will be able to accomplish all or any
of the foregoing requirements, and if it is unsuccessful in doing so, or if
the OIG, U.S. Attorney or the SEC decides to commence enforcement proceedings
against the Company, those proceedings, as well as the costs and expenses
related to them, could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
costs and expenses, including legal, accounting and consulting fees and
expenses, associated with the ongoing investigations and existing and
potential litigation have been, and are expected to continue to be,
substantial and will have a materially adverse effect on the Company's 1998
operating results.
The Company is cooperating fully with the U.S. Attorney and each of the
regulatory agencies and has produced a substantial amount of documents and
information requested by the U.S. Attorney. The U.S. Attorney has not
indicated what course of action, if any, it may pursue with respect to IGI in
light of the Company's extensive cooperation. The Company has not been advised
that it or any of its present employees are targets of any Justice Department
or regulatory investigation. Although there can be no assurance as to the
outcome of any proceeding, the Company expects that it will be able to achieve
a satisfactory resolution of its existing regulatory and litigation matters.
However, if criminal charges were to be brought against IGI, the Company could
incur substantial costs in fines and attorney's fees to defend the action. The
Company could also face additional substantial costs in administrative civil
penalties. Since the Company expects a satisfactory resolution of these
matters, no reserves were provided at December 31, 1997.
HIGHLY LEVERAGED; INABILITY TO OBTAIN ADDITIONAL FUNDING
The Company has historically applied the operating profits from its animal
health products business to fund the development of its consumer products
business and its former biotechnology business, Novavax, which was distributed
to the Company's stockholders in December 1995. The Company is currently very
highly leveraged and has negative working capital, and therefore will need
additional capital to finance the expansion of its animal health products 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.
The Company was in violation of certain covenants in its bank credit
agreements during 1997 and at December 31, 1997. In April 1998 the banks
agreed to a waiver of the covenant defaults and to extend the credit agreement
on revised terms and conditions through March 31, 1999. The Company was in
default under certain covenants contained in the Extension Agreement at July
31, 1998. On August 19, 1998, the Company and its bank lenders entered into a
Forbearance Agreement whereby the banks agreed to forbear from exercising
their rights and remedies arising from these covenant defaults through January
31, 1999. The Company is actively seeking alternative financing arrangements
to replace its existing debt and lending terms through a number of potential
options including, but not limited to, the issuance of debt or equity
securities or a combination of both. No assurance can be given that the
Company will be able to obtain alternative financing arrangements, and if it
is unsuccessful in doing so, the Company may be required to restrict its
business operations or otherwise modify
19
its business strategy. The Company believes it will be able to remain in
compliance with its debt covenants through January 30, 1999. No assurance can
be given that the banks will waive future covenant defaults or modify the
terms of the credit agreement to accommodate the Company.
SUSPENSION OF TRADING
The Company was unable to file its 1997 Annual Report on Form 10-K by the
March 31, 1998 due date. As a result, the AMEX halted trading of the Company's
common stock. No assurance can be given that AMEX trading privileges will be
resumed in the future. The failure of the Company to maintain its trading on
the AMEX could adversely affect its ability to raise additional funds required
for its business through the sale of debt or equity securities and would limit
and adversely affect the trading market for its outstanding common stock and
the ability of stockholders to liquify their holdings on favorable market
terms.
INTENSE COMPETITION IN CONSUMER PRODUCTS BUSINESS
The Company's Consumer Products Business competes with large, well-financed
cosmetics and consumer products companies with development and marketing
groups that are experienced in the industry and possess far greater resources
than those available to the Company. There is no assurance that the Company's
consumer products can compete successfully against its competitors or that it
can develop and market new products that will be favorably received in the
marketplace. In addition, certain of the Company's customers that use the
Company's Novasome lipid vesicles in their products may decide to reduce their
purchases from the Company or shift their business to other technologies.
COMPETITION IN POULTRY VACCINE BUSINESS
The Company is encountering increasingly severe competition from
international producers of poultry vaccines, particularly increased price
competition coupled with a downward trend in vaccine prices.
FOREIGN REGULATORY AND ECONOMIC CONSIDERATIONS
The Company's business may be adversely affected by foreign import
restrictions and additional regulatory requirements. Also, unstable or adverse
economic conditions and fiscal and monetary policies in certain Latin American
and Far East countries, an 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 companies and the changing role
of veterinarians in the distribution of animal health products, could
adversely affect the Company's ability to expand its animal health business
and to operate at the gross margin levels historically enjoyed by the Company.
EFFECT OF RAPIDLY CHANGING TECHNOLOGIES
The Company expects to rely on the features of its technologies to license
the technologies to third parties which would manufacture and market products
incorporating the technologies. However, if its competitors develop new and
improved technologies that are superior to the Company's technologies, its
technologies could be less acceptable in the marketplace and therefore the
Company's planned technology licensing could be materially adversely affected.
REGULATORY CONSIDERATIONS
The Company's animal health products are regulated by the USDA and the FDA
which subject the Company to review, oversight and periodic inspections. Any
new products are subject to expensive and sometimes protracted USDA and FDA
regulatory approval. 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.
20
YEAR 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
the processing errors potentially arising from calculations using the Year
2000 date are a known risk. The Company is addressing this risk to the
availability and integrity of financial systems and the reliability of
operational systems. The Company has established a management committee to
evaluate the risk and costs associated with this problem. An initial
assessment has been completed and the cost of achieving Year 2000 compliance
is currently estimated to be approximately $350,000 over the cost of normal
hardware and software upgrades and replacements and will be incurred from
October 1998 through fiscal 1999.
ACCOUNTING STANDARDS CHANGES
In June 1997, the Financial Accounting Board ("FASB") issued Statement of
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income." This
Statement establishes standards for reporting all components of comprehensive
income. This Statement is effective for financial statements issued for
periods ending after December 15, 1998. The Company is currently evaluating
the impact, if any, adoption of SAFS No. 130 will have on its financial
statements.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information," which revises disclosure requirements
related to operating segments, products and services, the geographic areas in
which the Company operates and major customers. The Company will adopt this
statement for fiscal 1998 and does not presently anticipate any material
change in its disclosures.
INCOME TAXES
The Company has a net deferred tax asset in the amount of approximately $4
million as of December 31, 1997. The largest deferred tax asset relates to the
$5 million Novavax license payment that is being deducted over a ten-year
period which began in 1996. Management believes, on a more likely than not
basis, that the Company's net deferred tax asset will be realized through the
reversal of existing taxable temporary differences and the generation of
sufficient future taxable operating income to ensure utilization of remaining
deductible temporary differences, net operating losses and tax credits. The
minimum level of future taxable income necessary to realize the Company's net
deferred tax assets at December 31, 1997, is approximately $15 million. There
can be no assurance, however, that the Company will be able to achieve the
minimum levels of taxable income necessary to realize its net deferred assets.
The majority of the net operating loss carryforwards expire in 2007 and
federal research credits expire in varying amounts through the year 2012.
Management believes that it will be able to utilize these carryforwards. The
Company's consolidated federal taxable loss in 1997 and 1996 differed from its
consolidated financial statement loss. In 1997 and 1996, taxable loss was
lower due to increases in reserves for inventories and accounts receivable
plus lower depreciation claimed for tax purposes, which exceeded the tax
deductions for a portion of the prepaid license agreement. In 1995, taxable
income from continuing operations was lower due to tax deductions relating to
nonqualifying stock dispositions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto listed in the accompanying index
to financial statements (Item 14) are filed as part of this Annual Report and
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 23, 1997, the Company was informed by Coopers & Lybrand L.L.P.
(C&L), who were the Company's independent accountants for the years ended
December 31, 1996 and 1995, that C&L was resigning as the Company's auditors
effective as of that date. C&L's reports on the Company's 1996 and 1995
financial
21
statements contained no adverse opinion or disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope or accounting principle.
The decision to terminate the client-auditor relationship between the Company
and C&L was made by C&L, and neither the Company's Board of Directors nor its
Audit Committee participated in the decision to change the Company's
independent accountants. In connection with its audits for the two years ended
December 31, 1996, and through July 23, 1997, there were no disagreements with
C&L on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement would have
caused C&L to make reference thereto in their report on the financial
statements for such periods. On September 8, 1997, the Company engaged Price
Waterhouse LLP ("PW") to act as its independent accountants. The Company did
not consult with PW during the Company's two most recent fiscal years and any
subsequent interim period prior to engaging them regarding matters that were
or should have been subject to Statement on Auditing Standard No. 50 or any
subject matter of a disagreement or reportable event with its former
accountant.
22
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 Company" in Part I hereof, and is incorporated
herein by reference.
The following table sets forth certain information with respect to the
directors and the Company:
PRINCIPAL OCCUPATION, OTHER
BUSINESS EXPERIENCE DURING
DIRECTOR PAST FIVE YEARS AND OTHER
NAME AGE SINCE DIRECTORSHIPS
---- --- -------- ------------------------------
Edward B. Hager, M.D. ........... 67 1977 Chairman of the Board of
Directors and Chief Executive
Officer of IGI, Inc. since
1977; Chairman of the Board of
Directors and Chief Executive
Officer of Novavax, Inc. from
1987 to June 1996; Chairman of
the Board of Directors of
Novavax, Inc. from February
1997 to March 1998; Dr. Hager
is the husband of Jane E.
Hager.
Jane E. Hager.................... 52 1977 President of Prescott
Investment Corp. (real estate
development), Lyndeboro, NH
since 1991; former Treasurer
and Secretary of IGI, Inc.;
Director of Fleet Bank-NH,
Nashua, NH from 1986 to 1997;
Trustee and Treasurer of the
University System of New
Hampshire; Overseer of
Dartmouth Mary Hitchcock
Hospital; Incorporator of New
Hampshire Charitable Fund,
Concord, NH; Director of
Novavax, Inc. from February
1997 to March 1998; Mrs. Hager
is the wife of Edward B.
Hager.
John P. Gallo.................... 55 1985 President and Chief Operating
Officer of IGI, Inc. from 1985
to November 1997; President of
Novavax, Inc. from January
through September 1995, and
Chief Operating Officer and
Treasurer of Novavax, Inc.
from September 1995 to May
1996.
David G. Pinosky, M.D. .......... 68 1980 Member of the faculty of the
University of Miami School of
Medicine since 1963; Medical
Director, Psychiatric Unit,
Palmetto General Hospital,
Hialeah, FL since 1986;
President, Miami Psychiatric
Associates since 1971; Medical
Director of Highland Park
General Hospital, Miami, FL
from 1971 to 1986.
Terrence O'Donnell............... 54 1993 Member of law firm of Williams
& Connolly, Washington, D.C.
since March 1992 and from
March 1977 to October 1989;
General Counsel of Department
of Defense from October 1989
to March 1992; Special
Assistant to President Ford
23
PRINCIPAL OCCUPATION, OTHER
BUSINESS EXPERIENCE DURING
DIRECTOR PAST FIVE YEARS AND OTHER
NAME AGE SINCE DIRECTORSHIPS
---- --- -------- ------------------------------
from August 1974 to January
1977; Deputy Special Assistant
to President Nixon from May
1972 to August 1974; Director
of MLC Holdings.
Constantine L. Hampers, MD....... 65 1994 Chief Executive Officer of MDL
Consulting Associates since
1996; Chairman of the Board of
Directors and Chief Executive
Officer of National Medical
Care, Inc., a provider of in-
center and home kidney
dialysis services and
products, from 1968 to 1996;
Executive Vice President and
Director of W. R. Grace & Co.
("W. R. Grace") from 1986 to
1996; Director of Artificial
Kidney Services at Peter Bent
Brigham Hospital and Assistant
Professor of Medicine at
Harvard University School of
Medicine prior to 1968 and for
several years thereafter.
Paul D. Paganucci................ 67 1996 1996 Chairman of the Board of
Directors of Ledyard National
Bank since 1991; Chairman of
the Executive Committee of
Board of Directors of W.R.
Grace from 1989 to 1991; Vice
Chairman of W.R. Grace from
1986 to 1989; Executive Vice
President of W.R. Grace from
January 1986 to November 1986;
Director of HRE Properties,
Inc., Filene's Basement, Inc.
and Allmerica Securities
Trust.
Terrence D. Daniels.............. 55 1996 President of Quad-C (a
structured investment firm)
since 1990; Vice Chairman of
W.R. Grace & Co. from 1986 to
1989; Director of DSG
International Ltd., Eskimo Pie
Corporation and Stimsonite
Corporation.
F. Steven Berg................... 63 1998 President of Bishopsgate
Financial Corp. (Investment
company) since 1990.
Mr. Gallo has not been nominated for election as a director at the next
Annual Meeting of Shareholders.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, executive officers and
holders of more than 10% of the Company's Common Stock ("Reporting Persons")
to file with the Commission initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the
Company. Except as set forth below, and based solely on its review of copies
of reports filed by Reporting Persons furnished to the Company, the Company
believes that during 1997 its Reporting Persons complied with all Section
16(a) filing requirements. F. Steven Berg, a director of the Company, failed
to file on a timely basis a Form 3--Initial Statement of Beneficial Ownership
of Securities.
24
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and noncash compensation for each of
the last three fiscal years awarded to or earned by the Chief Executive
Officer of the Company, the four most highly compensated executive officers of
the Company who received compensation in excess of $100,000 during 1997 and
who were serving as executive officers at the end of 1997 and the former
President of the Company, whose employment was terminated in November 1997
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION
---------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION OPTIONS(2) COMPENSATION
POSITION YEAR ($) ($) (1) ($) (#) (3) ($)
------------------ ---- -------- ------ ------------ ------------ ------------
Edward B. Hager......... 1997 $303,480 $ -- $ -- -- $11,944
Chief Executive Officer 1996 345,455 -- -- 50,000 12,864
1995 314,050 55,000 -- 50,000 12,062
John P. Gallo (4)....... 1997 329,172 -- 1,678 -- 12,288
President and Chief
Operating 1996 345,455 -- 44,860 50,000 12,772
Officer 1995 314,050 50,000 41,777 50,000 12,062
Stephen G. Hoch (5)..... 1997 218,149 -- 7,200 -- 8,166
Vice President 1996 200,293 10,000 7,200 5,000 9,128
1995 186,886 5,000 7,200 5,000 9,609
Lawrence N. Zitto (6)... 1997 166,689 -- 7,200 -- 9,381
Vice President 1996 155,138 10,000 7,200 10,000 11,562
1995 140,196 10,000 7,200 10,000 11,727
Surendra Kumar (7)...... 1997 140,947 -- 7,200 -- 7,834
Vice President 1996 130,698 5,000 7,200 5,000 9,362
1995 121,990 5,000 7,200 5,000 8,486
Kevin J. Bratton........ 1997 122,723 -- 6,000 -- 8,847
Vice President and
Treasurer 1996 116,416 3,000 6,000 5,000 10,588
1995 113,807 2,000 6,000 5,000 10,938
- --------
(1) The amounts shown in this column represent automobile allowances, medical
expense reimbursement, housing allowances and compensation for unused
vacation time. Mr. Gallo received $38,653 and $36,237 in 1996 and 1995,
respectively, as compensation for unused vacation time. Mr. Gallo received
no compensation for unused vacation time in 1997.
(2) The Company has never granted any stock appreciation rights.
(3) The amounts shown in this column represent premiums for group life
insurance and medical insurance paid by the Company and the Company's
contributions under its 401(k) plan. The group life insurance premiums
paid by the Company for each of Dr. Hager and Messrs. Gallo, Hoch, Zitto,
Kumar and Bratton for the last fiscal year were $800, $1,128, $1,230,
$1,230, $1,058 and $1,023, respectively. The medical insurance premiums
paid by the Company during 1997 for each of Dr. Hager and Messrs. Gallo,
Hoch, Zitto, Kumar
25
and Bratton were $8,581, $7,843, $4,402, $6,259, $5,047 and $6,259,
respectively. The Company's matching contributions under its 401(k) savings
plan to each of Dr. Hager and Messrs. Gallo, Hoch, Zitto, Kumar and Bratton
for the last fiscal year were $2,563, $2,579, $2,534, $1,892, $1,729 and
$1,615, respectively.
(4) In November 1997, the Company terminated Mr. Gallo for willful misconduct
in the performance of his executive duties. In connection with the
December 1995 spin-off of Novavax, Inc. ("Novavax"), a formerly majority-
owned subsidiary of the Company, Mr. Gallo also served as Chief Operating
Officer and Treasurer of Novavax from January 1996 to June 30,1996.
Pursuant to a Transition Services Agreement entered into by the Company
and Novavax to facilitate the spin-off, Novavax agreed to pay half of Mr.
Gallo's salary during this time. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
(5) Mr. Hoch resigned in July 1998.
(6) Mr. Zitto resigned in April 1998.
(7) Dr. Kumar resigned in February 1998.
STOCK OPTIONS
No stock options or SAR's were granted to any Named Executive Officers
during 1997. The following table summarizes option exercises during 1997 by
the Named Executive Officers and the value of the options held by such persons
at the end of 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
VALUE OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED REALIZED YEAR-END (#) FISCAL YEAR-END ($)
NAME ON EXERCISE (#) ($) (1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (2)
---- --------------- -------- ------------------------- -----------------------------
Edward B. Hager......... 20,000 $11,950 425,000/0 $0/$0
John P. Gallo........... -- -- 325,000/0 0/0
Stephen G. Hoch......... -- -- 42,250/8,250 0/0
Lawrence N. Zitto....... -- -- 52,500/15,000 0/0
Surendra Kumar.......... -- -- 34,250/7,500 0/0
Kevin J. Bratton........ -- -- 21,000/7,000 0/0
- --------
(1) Represents the difference between the exercise price and the last sales
price of the Common Stock on the date of exercise.
(2) Value based on market value of the Company's Common Stock at December 31,
1997 ($3.75 per share) minus the exercise price.
EMPLOYMENT AGREEMENTS
In October 1997, the Company amended the Employment Agreement with each of
Dr. Hager and Mr. Gallo to provide for a reduction in their annual salaries,
but extended the period for payment of the reduced salaries through the year
2005. On January 19, 1998, the Board of Directors rescinded the revised salary
arrangements for Dr. Hager and restored the annual salary payable under his
Employment Agreement ($380,000 for 1997). In addition, pursuant to his
Employment Agreement, Dr. Hager is entitled to an annual increase of 10% of
his prior year's salary each year through December 31, 1999, the expiration
date of the Employment Agreement. However, Dr. Hager has waived the 10%
increase for 1998 and agreed to defer the payment of his annual salary,
without interest, to preserve cash for the Company's cash needs. Dr. Hager's
accrued unpaid salary as of June 30,
26
1998 was $190,000 and that amount plus future deferred salary payments will be
paid to Dr. Hager at such time as the Board of Directors of the Company, in
consultation with the Compensation Committee, determines that the Company's
cash position is adequate to pay the deferred amount and to resume the current
payment of his salary. His agreement also provides for continuation of his
salary through December 31, 1999, in the event he is terminated without cause
prior to that date.
Mr. Gallo, the former President of the Company, had an Employment Agreement
similar to Dr. Hager's. However, on November 22, 1997, the Company terminated
Mr. Gallo's employment for willful misconduct in the performance of his
executive duties, and on April 21, 1998 the Company commenced a lawsuit
against Mr. Gallo. See "Legal Proceedings."
Each of Dr. Hager and Mr. Gallo is bound by certain non-compete and non-
solicitation obligations for five years after termination of employment or
such longer period during which he receives severance payments under the
employment agreement.
The Company has finalized arrangements with each of Messrs. Wall and Woitach
on the basic terms of their employment by the Company that have not been
formalized into a final document. Pursuant to these agreements, Messrs. Wall
and Woitach are entitled to continuation of their respective salary for up to
one year for Mr. Wall and up to 18 months for Mr. Woitach, based upon the
length of service, if terminated without cause prior to that date. The
arrangements for Messrs. Wall and Woitach are for a one year period which is
automatically extended annually unless terminated by the Company by written
notice at least 90 days prior to renewal.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Drs. Hampers, Chairman of the Compensation and Stock Option Committee (the
"Committee"), and Pinosky and Messrs. Daniels and O'Donnell served as members
of the Committee during 1997.
DIRECTOR COMPENSATION AND STOCK OPTIONS
Each director not employed by the Company receives $2,000 for each meeting
of the Board of Directors he or she attends.
Pursuant to the Company's 1991 Stock Option Plan (the "1991 Plan"), each
director who is not an employee of the Company (an "Eligible Director") is
granted a stock option for the purchase of 20,000 shares of Common Stock sixty
days after his or her initial election as a director. In addition, the 1991
Plan provides that each Eligible Director will be granted a stock option to
purchase 10,000 shares of Common Stock on the last business day of each of the
calendar years through 1999. Each Eligible Director elected on or after March
13, 1991 received an option for the initial grant of 20,000 shares, and each
Eligible Director then serving as a director received additional options for
10,000 shares in each of the years 1992 through 1997. Options granted to
Eligible Directors are exercisable in full beginning six months after the date
of grant and terminate ten years after the date of grant. Such options cease
to be exercisable at the earlier of their expiration or three years after an
Eligible Director ceases to be a director for any reason. In the event that an
Eligible Director ceases to be a director on account of his death, his
outstanding options (whether exercisable or not on the date of death) may be
exercised within three years after such date (subject to the condition that no
such option may be exercised after the expiration of ten years from its date
of grant).
27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth information as of July 31, 1998 with respect
to the beneficial ownership of shares of Common Stock by (i) each person known
to the Company to own beneficially more than 5% of the outstanding shares of
Common Stock, (ii) the directors of the Company, (iii) the Named Executive
Officers and (iv) the directors and executive officers of the Company as a
group. Unless otherwise noted, the persons named in the table have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
PERCENT OF
BENEFICIAL OWNER NUMBER OF SHARES CLASS
---------------- ---------------- ----------
Stephen J. Morris.................................. 2,254,635(1) 23.8%
66 Navesink Avenue
Rumson, New Jersey
Jane E. Hager...................................... 1,204,815(2) 12.5%
Pinnacle Mountain Farms
Lyndeboro, NH 03082
Edward B. Hager, M.D............................... 1,065,815(3) 10.8%
Pinnacle Mountain Farms
Lyndeboro, NH 03082
Mellon Bank Corporation............................ 881,310(4) 9.1%
One Mellon Bank Center
Pittsburgh, PA 15258
John P. Gallo...................................... 643,397(5) 6.6%
Country Club Lane
Buena, NJ 08310
David G. Pinosky, M.D.............................. 304,900(6) 3.1%
Terrence O'Donnell................................. 70,000(7) *
Constantine L. Hampers, M.D........................ 63,000(8) *
Terrence D. Daniels................................ 40,000(9) *
Paul D. Paganucci.................................. 40,000(9) *
F. Steven Berg..................................... -- *
Stephen G. Hoch.................................... 42,250(10) *
Lawrence N. Zitto.................................. 67,500(11) *
Surendra Kumar..................................... 8,000 *
Kevin J. Bratton................................... 26,500(12) *
All executive officers and directors, as a group
(13 Persons)...................................... 2,292,965(13) 21.8%
- --------
* Less than 1% of the Common Stock outstanding.
(1) The information reported is based on Amendment No. 2 to Schedule 13D
dated December 29, 1997 and filed with the Securities and Exchange
Commission (the "Commission") by Stephen J. Morris. Mr. Morris has sole
voting power and investment power with respect to 1,481,000 shares and
shared voting power with respect to 773,635 shares.
(2) Includes 639,815 shares beneficially owned by Dr. Hager, as co-trustee of
the Hager Family Trust as to which Mrs. Hager as co-trustee of the Hager
Family Trust, has shared voting and investment power. Includes 140,000
shares which may be acquired pursuant to stock options exercisable within
60 days after July 31, 1998.
28
(3) Includes 425,000 shares which Dr. Hager may acquire pursuant to stock
options exercisable within 60 days after July 31, 1998, and 639,815
shares (also listed above) beneficially owned by Mrs. Hager as co-trustee
of the Hager family trust.
(4) The information reported is based on a Schedule 13G dated January 20,
1998, filed with the Commission by Mellon Bank Corporation. Includes
240,000 shares which may be acquired pursuant to warrants exercisable
within 60 days after July 31, 1998. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources".)
(5) Includes 325,000 shares which Mr. Gallo may acquire pursuant to stock
options exercisable within 60 days after July 31, 1998. The Company
terminated Mr. Gallo as President and Chief Operating Officer on November
22, 1997.
(6) Includes 140,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after July 31, 1998.
(7) Consists of 70,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after July 31, 1998.
(8) Includes 60,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after July 31, 1998.
(9) Consists of 40,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after July 31, 1998.
(10) Consists of 42,250 shares which may be acquired pursuant to stock options
exercisable within 60 days after July 31, 1998.
(11) Includes 52,500 shares which may be acquired pursuant to stock options
exercisable within 60 days after July 31, 1998.
(12) Includes 21,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after July 31, 1998.
(13) Includes 1,030,750 shares which may be acquired pursuant to stock options
exercisable within 60 days after July 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1990, the Company advanced $70,000 to Mr. Gallo, the President
and Chief Operating Officer of the Company until the termination of his
employment on November 22, 1997. Mr. Gallo issued the Company a note in the
principal amount of $70,000 bearing interest at the Company's bank borrowing
rate plus 1/4% per annum and secured by 10,000 shares of Common Stock. As of
June 30, 1998, the amount of indebtedness outstanding was $129,083. As set
forth above, in April 1998 the Company commenced a lawsuit against Mr. Gallo
for damages suffered by the Company for his willful misconduct in the
performance of his executive duties. As part of the lawsuit, the Company is
also demanding that Mr. Gallo repay this indebtedness. See "Legal
Proceedings". Due to the uncertainty of the outcome of the litigation against
Mr. Gallo, the Company has recorded a reserve against the note receivable
balance at December 31, 1997.
During 1997, Dr. Hager and other Company personnel traveled at various times
on Company business on an airplane owned by a company which is wholly-owned by
Jane E. Hager, his wife and a director of the Company. Total charges to the
Company for its use of the airplane in 1997 were $68,930. The Board of
Directors authorized use of the aircraft for business travel, provided that
(i) the air travel rate billed to the Company for use of the airplane be at
least as favorable as the rate charged by private aircraft owners unaffiliated
with the Company, and (ii) use of the airplane be limited to 100 hours at
$1,350 per hour. However, the Company was only billed for Dr. Hager's business
use of the aircraft at rates not exceeding those for first class commercial
airfare.
29
The Company has $6,857,142 of revolving credit notes and a $12,000,000
working capital line of credit with Fleet Bank--NH and Mellon Bank, N.A. Mrs.
Hager, a director of the Company, was a director of Fleet Bank--NH from 1986
to 1997. In connection with the April 29, 1998 Extension Agreement, the
Company issued to Mellon Bank warrants to purchase an aggregate of 240,000
shares of the Company's common stock at an exercise price of $3.50 per share.
On August 19, 1998, the Company and its bank lenders, Fleet Bank--NH and
Mellon Bank, N.A., entered into a Forbearance Agreement whereby the banks
agreed to forbear from exercising their rights and remedies arising from
covenant defaults through January 31, 1999. (See "Management Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources".) As of July 31, 1998, Mellon Bank was the beneficial owner
of 881,310 shares of the Company's common stock or 9.1% of the outstanding
shares.
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
Reports of Independent Accountants
Consolidated Balance Sheets, December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended December
31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule II. Valuation and Qualifying Accounts and Reserves
Schedules other than those listed above are omitted for the reason
that they are either not applicable or not required or because the
information required is contained in the financial statements or
notes thereto.
Condensed financial information of the Registrant is omitted since
there are no substantial amounts of "restricted net assets"
applicable to the Company's consolidated subsidiaries.
(3) Exhibits Required to be Filed by Item 601 of Regulation S-K.
The exhibits listed in the Exhibit Index immediately preceding such
exhibits are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
On December 4, 1997, the Company filed a Current Report on Form 8-K,
dated November 24, 1997, to report under Item 5 (Other Events) that
it had terminated the employment of John P. Gallo as its President
and Chief Operating Officer.
31
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: August 24, 1998 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.
SIGNATURES TITLE DATE
/s/ Edward B. Hager Chairman of the August 24, 1998
- ------------------------------------- Board
EDWARD B. HAGER
/s/ John F. Wall Principal Financial August 24, 1998
- ------------------------------------- and Accounting
JOHN F. WALL Officer
/s/ Terrence D. Daniels Director August 24, 1998
- -------------------------------------
TERRENCE D. DANIELS
/s/ Jane E. Hager Director August 24, 1998
- -------------------------------------
JANE E. HAGER
/s/ Constantine L. Hampers Director August 24, 1998
- -------------------------------------
CONSTANTINE L. HAMPERS
/s/ Terrence O'Donnell Director August 24, 1998
- -------------------------------------
TERRENCE O'DONNELL
/s/ Paul D. Paganucci Director August 24, 1998
- -------------------------------------
PAUL D. PAGANUCCI
/s/ David G. Pinosky Director August 24, 1998
- -------------------------------------
DAVID G. PINOSKY
Director
- -------------------------------------
F. STEVEN BERG
32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of IGI, Inc.:
In our opinion, the consolidated financial statements and financial
statement schedule as listed in Item 14(a) of this Form 10-K, after the
restatement described in Note 2, present fairly, in all material respects, the
financial position of IGI, Inc. and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 8, the Company has substantial debt due on January 31,
1999, and is actively seeking alternative financing arrangements. Also, as
discussed in Note 13, the Company is involved in certain litigation matters
and is responding to inquiries from regulatory agencies. The Company expects
to achieve a satisfactory resolution of its existing regulatory and litigation
matters.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
July 31, 1998, except as to Note 8, which is as of August 19, 1998
33
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
1997 1996
-------- ----------
(RESTATED)
ASSETS
Current assets:
Cash and cash equivalents............................... $ 1,196 $ 317
Accounts receivable, less allowance for doubtful
accounts of $903 and $238 in 1997 and 1996,
respectively........................................... 6,851 8,365
Receivable due under royalty agreement.................. -- 1,000
Inventories............................................. 9,816 9,067
Current deferred taxes.................................. 728 310
Prepaid expenses and other current assets............... 819 1,217
-------- -------
Total current assets.................................. 19,410 20,276
-------- -------
Investments............................................... 1,011 60
Property, plant and equipment--at cost:
Land.................................................... 625 625
Buildings............................................... 9,600 9,382
Machinery and equipment................................. 9,659 9,241
-------- -------
19,884 19,248
Less accumulated depreciation............................. (10,048) (9,121)
-------- -------
9,836 10,127
-------- -------
Deferred income taxes..................................... 3,247 3,073
Notes receivable.......................................... -- 162
Other assets.............................................. 540 686
-------- -------
$ 34,044 $34,384
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank................................... $ 12,000 $ 9,642
Revolving credit facility............................... 6,857 3,443
Accounts payable........................................ 3,841 2,665
Accrued payroll......................................... 183 470
Other accrued expenses.................................. 909 675
Income taxes payable.................................... 89 38
-------- -------
Total current liabilities............................. 23,879 16,933
-------- -------
Long-term debt, less current maturities................... 36 6,893
-------- -------
Deferred income from royalty contract..................... 1,801 1,000
-------- -------
Commitment and contingencies
Stockholders' equity:
Common stock, $.01 par value, 30,000,000 shares autho-
rized; 9,602,681 and 9,572,681 shares issued in 1997
and 1996, respectively................................. 96 96
Stock subscribed........................................ -- 175
Additional paid-in capital.............................. 19,074 19,115
Accumulated deficit..................................... (8,649) (7,196)
-------- -------
10,521 12,190
Less treasury stock; 136,014 and 164,082 shares at cost,
in 1997 and 1996, respectively........................... (2,163) (2,518)
Stockholders' notes receivable............................ (30) (114)
-------- -------
Total stockholders' equity............................ 8,328 9,558
-------- -------
$ 34,044 $34,384
======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
34
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
1997 1996 1995
--------- ---------- ---------
(RESTATED) (RESTATED)
Net sales..................................... $ 34,193 $ 34,785 $ 30,501
Cost of sales................................. 17,834 16,581 15,288
--------- --------- ---------
Gross profit.................................. 16,359 18,204 15,213
Selling, general and administrative expenses.. 14,997 14,485 11,641
Research and development expenses............. 1,675 2,013 1,345
Licensing and research revenues............... (150) (162) (731)
--------- --------- ---------
Operating profit (loss)....................... (163) 1,868 2,958
Interest expense.............................. (1,853) (1,984) (1,269)
Interest income............................... -- -- 146
Other income (expense), net................... (11) (202) 7
--------- --------- ---------
Income (loss) from continuing operations
before provision for income taxes............ (2,027) (318) 1,842
Provision (benefit) for income taxes.......... (574) (180) 513
--------- --------- ---------
Income (loss) from continuing operations...... (1,453) (138) 1,329
Loss from discontinued operations net of in-
come tax benefits............................ - - (4,034)
--------- --------- ---------
Net loss...................................... $ (1,453) $ (138) $ (2,705)
========= ========= =========
Income (loss) per common and common equivalent
share:
Basic:
From continuing operations................ $ (.15) $ (.01) $ .14
========= ========= =========
From discontinued operations.............. $ -- $ -- $ (.44)
========= ========= =========
Net loss.................................. $ (.15) $ (.01) $ (.29)
========= ========= =========
Diluted:
From continuing operations................ $ (.15) $ (.01) $ .14
========= ========= =========
From discontinued operations.............. $ -- $ -- $ (.41)
========= ========= =========
Net loss.................................. $ (.15) $ (.01) $ (.28)
========= ========= =========
Average number of common and common equivalent
shares:
Basic....................................... 9,457,938 9,323,440 9,173,156
========= ========= =========
Diluted..................................... 9,457,938 9,323,440 9,725,230
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
35
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
1997 1996 1995
------- ---------- ---------
(RESTATED) (RESTATED)
Cash flows from operating activities:
Net loss...................................... $(1,453) $ (138) $(2,705)
Reconciliation of net loss to net cash used by
operating activities:
Depreciation and amortization............... 1,037 992 836
Provision for loss on accounts and notes
receivable and inventories................. 1,610 412 825
Recognition of deferred revenue............. (150) -- --
Issuance of stock to 401(k) plan............ 40 91 69
Benefit for deferred income taxes........... (585) (189) (209)
Stock option compensation expense........... 47 156 --
Litigation settlement in common stock....... (50) 175 --
Changes in operating assets and liabilities:
Accounts receivable......................... 721 (300) (890)
Inventories................................. (1,352) (375) (1,751)
Receivable due under royalty agreement...... 1,000 -- --
Prepaid and other assets.................... 398 (455) 151
Accounts payable and accrued expenses....... 1,123 130 939
Income taxes payable/refundable............. 51 22 1
Reimbursement from former subsidiary........ -- -- 250
Net assets of biotechnology segment......... -- -- (226)
------- ------- -------
Net cash provided from (used by) operating ac-
tivities....................................... 2,437 521 (2,710)
------- ------- -------
Cash flows from investing activities:
Capital expenditures, net..................... (636) (913) (2,397)
(Increase) decrease in other assets........... 68 59 (5)
License payment to former subsidiary.......... -- -- (5,000)
Net assets of biotechnology segment........... -- -- (360)
------- ------- -------
Net cash used by investing activities........... (568) (854) (7,762)
------- ------- -------
Cash flows from financing activities:
Net borrowings under line of credit
agreements................................... 2,358 1,594 4,258
Borrowings under revolving credit agreement... -- 12 2,000
Payments of long-term debt.................... (3,443) (1,714) (9)
Proceeds from exercise of common stock
options...................................... 95 589 938
Proceeds from sale of common stock............ -- -- 2,500
------- ------- -------
Net cash provided from (used in) financing ac-
tivities....................................... (990) 481 9,687
------- ------- -------
Net increase (decrease) in cash and equivalents. 879 148 (785)
Cash and cash equivalents at beginning of year.. 317 169 954
------- ------- -------
Cash and cash equivalents at end of year........ $ 1,196 $ 317 $ 169
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
36
IGI, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK ADDITIONAL STOCKHOLDERS' ACCUMU- TOTAL
---------------- STOCK PAID-IN NOTES LATED TREASURY STOCKHOLDERS'
SHARES AMOUNT SUBSCRIBED CAPITAL RECEIVABLE DEFICIT STOCK EQUITY
--------- ------ ---------- ---------- ------------- ------- -------- -------------
Balance, January 1,
1995................... 9,018,637 $90 -- $20,391 $(163) $(4,353) $(2,253) $13,712
Exercise of stock
options, including tax
benefits of $279....... 193,815 2 -- 1,152 -- -- (381) 773
Issuance of stock to
401(k) plan............ 1,574 -- -- 44 -- -- 25 69
Issuance of stock to
industry partner....... 226,655 2 -- 2,498 -- -- -- 2,500
License payment to
former subsidiary, net
of a deferred tax
benefit of $1,700...... -- -- -- (3,300) -- -- -- (3,300)
Distribution of
biotechnology business
segment................ -- -- -- (2,654) -- -- -- (2,654)
Payment of stockholders'
notes receivable....... -- -- -- -- 74 -- -- 74
Reclass of stockholders'
notes receivable....... -- -- -- -- (100) -- -- (100)
Net loss (restated)..... -- -- -- -- -- (2,705) -- (2,705)
--------- --- ----- ------- ----- ------- ------- -------
Balance, December 31,
1995 (restated)........ 9,440,681 94 -- 18,131 (189) (7,058) (2,609) 8,369
Exercise of stock
options, including tax
benefits of $79........ 132,000 2 -- 666 -- -- -- 668
Issuance of stock to
401(k) plan............ -- -- -- 1 -- -- 91 92
Settlement of
litigation............. -- -- $ 175 -- -- -- -- 175
Tax benefit of license
payment to former
subsidiary............. -- -- -- 161 -- -- -- 161
Issuance of non-employee
stock options.......... -- -- -- 156 -- -- -- 156
Interest earned on
stockholders' notes.... -- -- -- -- -- -- -- --
Repayment of
stockholders' notes.... -- -- -- -- 75 -- -- 75
Net loss (restated)..... -- -- -- -- -- (138) -- (138)
--------- --- ----- ------- ----- ------- ------- -------
Balance, December 31,
1996 (restated)........ 9,572,681 96 175 19,115 (114) (7,196) (2,518) 9,558
Settlement of
litigation............. -- -- (175) (118) -- -- 243 (50)
Exercise of stock
options, including tax
benefits of $7......... 30,000 -- -- 122 -- -- (20) 102
Issuance of stock to
401(k) plan............ -- -- -- (92) -- -- 132 40
Value of non-employee
stock options.......... -- -- -- 47 -- -- -- 47
Interest earned on
stockholders' notes.... -- -- -- -- (10) -- -- (10)
Reserve on stockholders'
notes receivable....... -- -- -- -- 94 -- -- 94
Net loss................ -- -- -- -- -- (1,453) -- (1,453)
--------- --- ----- ------- ----- ------- ------- -------
Balance, December 31,
1997................... 9,602,681 $96 $ -- $19,074 $ (30) $(8,649) $(2,163) $ 8,328
========= === ===== ======= ===== ======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
37
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.
. Animal Health Business--production and marketing of animal health
products such as poultry vaccines, veterinary pharmaceuticals, and other
products, including nutritional supplements and grooming aids; and
. Consumer Products Business--production and marketing of cosmetics and
skin care products.
IGI is committed to grow by applying its technology to deliver cost
effective solutions to customer problems. IGI solves problems in poultry
production, pet care and consumer and skin care markets. An increasing number
of its solutions are based on the patented Novasome(R) microencapsulation
technology. Licensed from a former subsidiary, the technology offers value-
added qualities to cosmetics, skin care products, chemicals, biocides,
pesticides, fuels, vaccines, medicines, foods, beverages, pet care products
and other products.
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 former
majority-owned subsidiary, Novavax, Inc. ("Novavax"). All intercompany
accounts and transactions have been eliminated. Investment in an affiliated
company with a 20% ownership interest is accounted for on the cost method.
Cash equivalents
Cash equivalents consist of short-term investments with initial maturities
of 90 days or less.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash, cash equivalents, accounts receivable,
notes receivable and certain restricted investments. The Company limits credit
risk associated with cash and cash equivalents by placing its cash and cash
equivalents with two high credit quality financial institutions. Accounts
receivable include customers in several key geographic areas; of these, Mexico
and other Latin American countries and countries in the Far East are important
markets for the Company's poultry vaccines and other products. These countries
have historically experienced varying degrees of political unrest and/or
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.
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.
38
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Income Taxes
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.
Stock-Based Compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any difference between the quoted market price of the
stock on the date of grant over the amount the employee is required to pay to
acquire the stock (the intrinsic value method under Accounting Principles
Board Opinion 25). Such amount, if any, is accrued over the related vesting
period, as appropriate. SFAS No. 123, "Accounting for Stock-Based
Compensation," requires companies electing to continue to use the intrinsic-
value method to make pro forma disclosures of net income and earnings per
share as if the fair-value-based method of accounting had been applied.
Long-lived Assets
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". The provisions of SFAS No. 121 require the Company to review its long-
lived assets for impairment on an exception basis whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable through future cash flows. If it is determined that an impairment
has occurred based on expected future cash flows, then the loss is recognized
in the income statement. The adoption of SFAS No. 121 did not have an effect
on the Company's consolidated financial statements.
Financial Instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, notes receivable, restricted common stock and long-term
debt. The carrying value of these instruments approximates the fair value.
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.
39
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accounting Standards Changes
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". This Statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common
stock or potential common stock. This Statement is effective for financial
statements issued for periods ending after December 15, 1997. The Company has
restated all prior-period EPS data presented as required by SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This Statement establishes standards for reporting all components of
comprehensive income. This Statement is effective for financial statements
issued for periods ending after December 15, 1998. The Company is currently
evaluating the impact, if any, adoption of SFAS No. 130 will have on its
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which revises disclosure requirements
related to operating segments, products and services, the geographic areas in
which the Company operates and major customers. The Company intends to adopt
this Statement in fiscal 1998 and does not presently anticipate any material
change in its disclosures.
Revenue Recognition
Sales are recorded upon shipment of products. Revenues earned under research
contracts or licensing and supply agreements 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. RESTATEMENT OF PRIOR PERIODS
On March 27, 1998, the Board of Directors engaged special counsel to
investigate information first made known to it on March 17, 1998 which it
believed could have a material impact on the Company's financial reporting for
1997 and prior periods. As a result of the findings of the special
investigation initiated by the Board of Directors in March 1998, the Company
restated its consolidated financial statements for 1995 and 1996. In the
opinion of management, all material adjustments necessary to correct the
financial statements have been recorded.
The restatements reflect inventory write-offs and inventory adjustments
which should have been recorded in different periods. Also reflected are
changes in the time periods in which certain product shipments were recognized
as sales.
40
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the impact of such restatements on the financial statements for
the years ended December 31, 1995 and 1996 is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995
-------------------- --------------------
AS REPORTED RESTATED AS REPORTED RESTATED
----------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
Net sales.......................... $35,140 $34,785 $31,221 $30,501
Income (loss) from continuing
operations........................ 93 (138) 1,508 1,329
Net income (loss).................. 93 (138) (2,526) (2,705)
Income (loss) per common and common
equivalent share:
Basic:
From continuing operations..... $ .01 $ (.01) $ .16 $ .14
Net income (loss).............. $ .01 $ (.01) $ (.28) $ (.29)
Diluted:
From continuing operations..... $ .01 $ (.01) $ .16 $ .14
Net income (loss).............. $ .01 $ (.01) $ (.26) $ (.28)
See Note 18 for discussion of the impact of the restatements on each of the
three quarters in the nine months ended September 30, 1997.
3. 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 tax-free distribution to IGI's
shareholders of its ownership of Novavax.
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 November
28, 1995, one share of common stock of Novavax for every one share of IGI
common stock outstanding (the "Distribution").
In connection with the Distribution, the Company 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 retained 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. Accordingly, the Company
accounted for 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 is being
treated as a prepaid license agreement. IGI has no further obligations or
intentions to fund Novavax.
41
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Components of the losses from discontinued operations for the period ended
December 31, 1995 were:
1995
--------------
(IN THOUSANDS)
Selling, general and administrative......................... $ 2,103
Research and development expenses, net...................... 3,648
Credit for income taxes..................................... (717)
-------
Operating losses............................................ 5,034
Less accrual for loss on disposal at December 31, 1994...... (1,000)
-------
Net loss from discontinued operations....................... $ 4,034
=======
The Company 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 of 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 of the net assets of the Company's biotechnology business
segment as of the Distribution Date were recorded in the accompanying
financial statements in 1995 as a reduction in additional paid-in capital.
Equity and Other Transactions
In connection with 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, in January 1995, the
partner exercised its option to purchase 226,655 shares of the Company's
common stock for $2,500,000, and received an option to purchase additional
shares of IGI Common Stock and Novavax Common Stock. This option expired
unexercised in 1996.
4. INVESTMENTS
The Company has a 20% investment in Indovax, Ltd. an Indian poultry vaccine
company which is accounted for on the cost method. Dividends received from
Indovax were $23,000 in 1997. Other investments include 271,714 shares of
restricted common stock of IMX Corporation ("IMX"), a publicly traded company,
valued at a cost of $3.50 per share, received pursuant to an Exclusive Supply
Agreement dated September 30, 1997 between the Company and IMX. These shares
are restricted both by governmental and contractual requirements and the
Company is unsure when and if it will be able to sell these shares. The
Company will recognize income related to this agreement over the term of the
supply agreement. The total investment in IMX stock is valued at $951,000 at
December 31, 1997. Deferred revenue under this agreement is also $951,000 at
December 31, 1997.
Under the supply agreement, IGI has agreed to manufacture and supply 100% of
IMX's requirements for certain products at prices stipulated in the agreement,
subject to renegotiation subsequent to 1998. The Company is currently
renegotiating its agreement with IMX. No shipments were made by IGI during
1997, and the first shipment of product is expected in 1998.
5. SUPPLY AND LICENSING AGREEMENTS
In 1996, the Company entered into a license and supply agreement with Glaxo
Wellcome, Inc. ("Glaxo"). The agreement granted Glaxo exclusive rights to
market a skin care product line in the United States to
42
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
physicians including, but not limited to, dermatologists. Under the terms of
the agreement, IGI manufactures these products for Glaxo. This agreement
provides for Glaxo to pay royalties to IGI based on sales and pay a $1,000,000
advance royalty to IGI in 1997 of which $300,000 is non-refundable. The
advance royalty has been recorded as deferred revenue. During 1997, IGI
recognized $150,000 of the non-refundable royalty as income.
In March 1997, IGI granted Kimberly Clark the worldwide rights to use
certain patents and technologies in the industrial hand care and cleaning
products field. Upon signing of the agreement, Kimberly Clark paid IGI a
$100,000 license fee which was recognized as revenue by the Company in 1997.
The agreement requires Kimberly Clark to make royalty payments based on
quantities of material produced. The Company is also guaranteed minimum
royalties over the term of the agreement.
The Company has had a license agreement with Johnson & Johnson Consumer
Products, Inc. ("J&J") since 1995. The agreement provides J&J with a license
to produce and sell Novasome(R) microencapsulated retinoid products and
provides for the payment of royalties on net sales of such products. J&J began
selling such products in the first quarter of 1998 and has begun making
royalty payments.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest during the years ended December 31,
1997, 1996, and 1995 was as follows:
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
Income taxes paid, net.............................. $ (33) $ 41 $ 3
Interest............................................ 1,853 1,955 1,236
In addition, during the years ended December 31, 1997, 1996, and 1995, the
Company had the following non-cash financing and investing activities:
1997 1996 1995
---- ------ ------
(IN THOUSANDS)
Tax benefits of exercise of common stock options....... $ 7 $ 79 $ 279
Distribution of the biotechnology segment.............. -- -- 2,904
Treasury stock repurchased............................. 20 -- 356
Tax benefit of license payment to former subsidiary.... -- (161) --
Receivable under royalty agreement..................... -- 1,000 --
Investment in IMX...................................... 951 -- --
7. INVENTORIES
Inventories as of December 31, 1997 and 1996 consisted of:
1997 1996
------ ----------
(RESTATED)
(IN THOUSANDS)
Finished goods........................................... $3,365 $3,280
Raw materials............................................ 3,259 2,812
Work-in-process.......................................... 3,192 2,975
------ ------
$9,816 $9,067
====== ======
If the first-in, first-out (FIFO) method of accounting for inventories had
been used, inventories would have been $461,000 and $844,000 lower than
reported in 1997 and 1996, respectively.
43
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LONG-TERM DEBT
Long-term debt as of December 31, 1997 and 1996 consisted of:
1997 1996
------ -------
(IN THOUSANDS)
Revolving credit facility.................................. $6,857 $10,285
Other debt due in annual installments through December 1999
with interest at 9%....................................... 36 51
------ -------
6,893 10,336
Less current maturities.................................... 6,857 3,443
------ -------
$ 36 $ 6,893
====== =======
During the first quarter of 1998, the Company negotiated amendments to its
credit agreement with its bank lenders, including waivers of its covenant
defaults and an extension of the credit agreement since the Company was in
default under certain covenants contained in its bank credit agreement during
1997 and at December 31, 1997. During the period from January 1, 1998 through
April 29, 1998, the Company paid interest at a rate of prime plus 4% on
outstanding borrowings under its working capital line and prime plus 4% on
outstanding borrowings under its revolving credit facility. The Company
entered into an Extension Agreement with its bank lenders as of April 29, 1998
(the "Closing Date") which provides for the waiver of all past and existing
covenant defaults, extension of the bank credit agreement through March 31,
1999, a maximum credit line facility of $12,000,000 ("Credit Line") and
extended terms for repayment of the outstanding $6,857,142 balance of
revolving credit notes ("Revolving Facility").
The Company was in default under certain covenants contained in the
Extension Agreement at July 31, 1998. On August 19, 1998, the Company and its
bank lenders entered into a Forbearance Agreement whereby the banks agreed to
forbear from exercising their rights and remedies arising from these covenant
defaults through January 31, 1999.
The Extension Agreement and the Forbearance Agreement (the "Agreements")
provide for the following:
. The maximum availability under the Credit Line is subject to the
determination of the amount of eligible accounts receivable and eligible
inventories. The Credit Line is due and payable in full on January 31,
1999.
. The outstanding balance of $6,857,142 under the Revolving Facility is due
and payable on January 31, 1999.
. All of the Company's indebtedness to the banks is subject to a security
interest in all of the assets of the Company and its significant
subsidiaries.
. Interest on outstanding borrowings under both the Credit Line and the
Revolving Credit Facility will be:
From August 1, 1998 through September 30, 1998............ Prime plus 3 1/2%
From October 1, 1998 through November 30, 1998............ Prime plus 4 1/2%
From December 1, 1998 through January 31, 1999............ Prime plus 5 1/2%
. At the Closing Date the Company issued to the lenders warrants to
purchase an aggregate of 540,000 shares of the Company's common stock at
an exercise price of $3.50 per share. Warrants ("Unconditional Warrants")
to purchase 270,000 shares are exercisable at any time during the period
commencing 60 days
44
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
after issuance and ending on the fifth anniversary of issuance, unless the
Company is able to refinance its bank debt by October 31, 1998 in which
case these warrants expire. Warrants ("Conditional Warrants") to purchase
the remaining 270,000 shares are exercisable at any time during the period
commencing September 1, 1998 and ending on the fifth anniversary of
issuance, unless the Company is able to refinance its bank debt by
December 24, 1998 in which case these warrants expire. The Company has a
call option on the warrants, which can only be exercised as to all of the
shares issuable at that time, with a repurchase price of $900,000 for each
of the Conditional Warrants and Unconditional Warrants. The Company will
recognize a non-cash expense of approximately $200,000, or $.02 per share,
net of taxes, (unaudited) in each of the second and third quarters of 1998
in accordance with Statement for Financial Accounting Standards No. 123.
. The Company agreed to pay Fleet Bank, as agent on behalf of the lenders,
a monthly agent's fee of $5,000 and an extension fee of $250,000, of
which $60,000 was paid at the time of the Extension, with the balance
payable in three installments through March 24, 1999.
. The Company agreed to pay Fleet Bank, as agent on behalf of the lenders,
a forbearance fee of $140,000, of which $20,000 was paid at the time of
the forbearance, and the balance is payable in three installments through
January 15, 1999. However, if the Company is able to replace its existing
bank debt within the 30 days following a forbearance fee due date, the
installment then due plus all future installments shall be waived.
The Agreements require the Company to maintain certain financial ratios and
comply with other non-financial covenants, including remittance of cash flows
from debt or equity financing, income tax refunds and fixed asset dispositions
to the banks, and also prohibits the payment of cash dividends without the
prior written consent of the lenders. The Company believes it will be able to
remain in compliance with its debt covenants through January 30, 1999, and
also believes that funds generated from operations and existing bank credit
facilities are sufficient to finance the Company's operations at its current
levels, including the costs associated with the regulatory and litigation
matters discussed in Notes 12 and 13, through January 30, 1999.
The Company is actively seeking, and believes it will be able to secure,
alternative financing arrangements to replace its existing debt and lending
terms through a number of potential options including, but not limited to, the
issuance of debt or equity securities or a combination of both. The Company
plans to engage an investment banker for the purpose of formulating
alternative business strategies and to coordinate the orderly satisfaction of
its obligations. No assurance can be given that the Company will be able to
obtain alternative financing arrangements, and if it is unsuccessful in doing
so, the Company may be required to restrict its business operations or
otherwise modify its business strategy.
Aggregate annual principal payments on long-term debt for the years
subsequent to December 31, 1997 are as follows:
YEAR
----
(IN THOUSANDS)
1998.......................... $2,316
1999.......................... 4,577
------
$6,893
======
Borrowings under the revolving credit facility have been classified as
current debt in the accompanying financial statements as the agreement
contains certain acceleration provisions subject to the bank's evaluation.
As of December 31, 1997 and 1996, there were no outstanding equipment
leases.
9. 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
45
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1996 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, directors and consultants to purchase a maximum of 500,000 and
2,600,000 shares of common stock, respectively. Options, having a maximum term
of 10 years, have been granted at 100% of the fair market value of the
Company's stock at the time of grant. Both incentive stock options and non-
qualified stock options 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 also adopted a Non-Qualified Stock
Option Plan. This 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, 1997 are
generally exercisable in cumulative increments over four years commencing one
year from the date of grant.
In addition, 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. Exercise of the majority of these options
may be made at any time during a ten year period commencing on the date of
grant.
Stock option transactions in each of the past three years under the
aforementioned plans in total were:
PLAN NON-QUALIFIED PLAN
---------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED
SHARES PRICE PER SHARE AVERAGE PRICE SHARES PRICE PER SHARE AVERAGE PRICE
--------- --------------- ------------- -------- --------------- -------------
January 1, 1995 shares
under option........... 1,793,528 $1.30--$9.88 $6.63 340,552 $1.38--$6.80 $4.37
Granted................ 346,500 $6.63--$9.39 $7.35 -- -- --
Exercised.............. (190,763) $1.30--$9.88 $3.73 (3,052) $1.38 $1.38
Cancelled.............. (9,750) $6.72--$9.72 $7.47 -- -- --
--------- --------
December 31, 1995 shares
under option........... 1,939,515 $3.64--$9.88 $7.04 337,500 $1.38--$6.80 $4.40
Granted................ 381,000 $5.13--$7.69 $6.04 -- -- --
Exercised.............. (82,000) $4.70--$6.96 $6.33 (50,000) $1.38 $1.38
Cancelled.............. (29,500) $5.67--$9.48 $7.31 (1,000) $6.80 $6.80
--------- --------
December 31, 1996 shares
under option........... 2,209,015 $3.65--$9.88 $6.89 286,500 $3.97--$6.80 $4.92
Granted................ 111,500 $3.75--$5.69 $4.17 -- -- --
Exercised.............. (10,000) $3.65 $3.65 (20,000) $3.97 $3.97
Cancelled.............. (176,050) $3.97--$9.88 $7.21 (100,000) $5.67 $5.33
--------- --------
December 31, 1997 shares
under option........... 2,134,465 $3.75--$9.88 $6.74 166,500 $4.70--$6.80 $4.78
========= ========
Shares subject to
outstanding options
exercisable at
December 31, 1996...... 1,666,119 $7.01 286,500 $4.92
========= ===== ======== =====
December 31, 1997...... 1,854,715 $6.89 166,500 $4.78
========= ===== ======== =====
The Company adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for option grants to directors and employees pursuant to the stock
option plans. The Company has recorded compensation expense of $ 46,000 and
$156,000 in 1997 and 1996, respectively, for options granted to consultants.
Had compensation cost for all
46
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
grants under the Company's stock option plans been determined on fair value at
the grant date consistent with the provisions of SFAS 123, the Company's net
loss and loss per share would have been increased to the pro forma loss
amounts indicated below:
1997 1996 1995
------- ---------- ---------
(RESTATED) (RESTATED)
(IN THOUSANDS, EXCEPT
PER SHARE INFORMATION)
Net loss--as reported....................... $(1,453) $ (138) $(2,705)
Net loss--pro forma......................... $(1,648) $(1,054) $(3,449)
Loss income per share--as reported
Basic..................................... $ (.15) $ (.01) $ (.29)
Diluted................................... $ (.15) $ (.01) $ (.28)
Loss per share--pro forma
Basic..................................... $ (.17) $ (.11) $ (.38)
Diluted................................... $ (.17) $ (.11) $ (.35)
The pro forma information has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS
123. The fair value for these options was estimated at the grant date using
the Black-Scholes option pricing model with the following assumptions for
1997, 1996 and 1995:
Dividend yield............................................. 0%
Risk free interest rate.................................... 5.51%-- 7.10%
Estimated volatility factor................................ 33.07%--43.45%
Expected life.............................................. 6-- 9 years
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and additional awards in future years are anticipated.
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1997.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------
RANGE OF NUMBER OF WEIGHTED AVERAGE EXERCISE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICES OPTIONS REMAINING LIFE (YEARS) PRICE OPTIONS EXERCISE PRICE
- --------------- --------- ---------------------- -------- --------- ----------------
$3.00 to
$ 4.00 60,000 10.00 $3.75 -- --
$4.00 to
$ 5.00 358,000 2.87 $4.73 308,000 $4.75
$5.00 to
$ 6.00 511,500 6.51 $5.52 429,750 $5.48
$6.00 to
$ 7.00 580,750 6.93 $6.68 525,750 $6.68
$7.00 to
$ 8.00 331,000 5.54 $7.40 327,250 $7.39
$8.00 to
$ 9.00 284,000 7.25 $8.50 255,500 $8.49
$9.00 to
$10.00 175,715 4.97 $9.62 174,965 $9.62
--------- ---------
$3.75 to
$ 9.88 2,300,965 5.97 $6.59 2,021,215 $6.73
========= =========
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.
47
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the exercise of 5,000 stock options in 1997 and 25,000
stock options in 1995, the Company received 4,735 and 23,644 shares of its
common stock in 1997 and 1995, respectively, 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 $19,825 and $381,250 in 1997 and 1995,
respectively, which has been recorded as treasury stock.
10. INCOME TAXES
The provision (benefit) for income taxes included in the consolidated
statements of operations for the years ended December 31, 1997, 1996 and 1995
is as follows:
1997 1996 1995
----- ----- -----
(IN THOUSANDS)
Continuing operations:
Current tax expense:
Federal............................................. $ -- $ -- $ 718
State and local..................................... 11 9 4
----- ----- -----
Total current......................................... 11 9 722
----- ----- -----
Deferred tax expense (benefit)
Federal............................................. (756) (28) (59)
State and local..................................... 171 (161) (150)
----- ----- -----
Total deferred........................................ (585) (189) (209)
----- ----- -----
Total provision (benefit) from continuing operations.... (574) (180) 513
Discontinued operations:
Current tax benefit:
Federal and state................................... -- -- (718)
----- ----- -----
Total provision (benefit) for income taxes.............. $(574) $(180) $(205)
===== ===== =====
The provision for income taxes differed from the amount of income taxes
determined by applying the applicable Federal tax rate (34%) to pretax income
from continuing operations as a result of the following:
1997 1996 1995
----- ----- ----
(IN THOUSANDS)
Statutory provision (benefit)............................ $(689) $(108) $626
Non-deductible expenses.................................. 51 66 66
State income taxes, net of federal benefit............... 120 (101) (99)
Research and development tax credits..................... (65) (42) (33)
Increase (decrease) in valuation allowance............... 7 -- (83)
Other, net............................................... 2 5 36
----- ----- ----
$(574) $(180) $513
===== ===== ====
48
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets included in the consolidated balance sheets as of
December 31, 1997 and 1996, consist of the following:
1997 1996
------- -------
(IN THOUSANDS)
Property, plant and equipment........................... $ (633) $ (763)
Prepaid license agreement............................... 1,626 1,797
Net operating loss carryforwards........................ 1,616 1,562
Deferred royalty payments............................... 345 --
Tax credit carryforwards................................ 484 418
Inventory............................................... 238 158
Valuation allowances.................................... 500 140
Non-employee stock options.............................. 82 62
Other future deductible temporary differences........... 98 56
Other future taxable temporary differences.............. (48) (13)
------- -------
4,308 3,417
Less: valuation allowance............................... (333) (34)
------- -------
Deferred taxes, net..................................... $ 3,975 $ 3,383
======= =======
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, 1997, 1996 and 1995, including
the following:
1997 1996 1995
----- ---- ------
(IN THOUSANDS)
Additional paid-in capital:
License payment to former subsidiary.................. $ -- $161 $1,700
Exercise of stock options............................. 7 79 279
----- ---- ------
$ 7 $240 $1,979
===== ==== ======
The Company evaluates the recovery of its deferred tax assets and has
determined, based on the Company's history of prior operating earnings, its
expectations for the future, the timing of reversal of certain temporary
differences, and the expiration dates of the net operating loss carryforwards,
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 for tax reporting purposes as of
December 31, 1997 are as follows:
(IN THOUSANDS)
Federal:
Operating losses (expiring through the year 2011)........ $4,727
Research tax credits (expiring through the year 2011).... 511
Alternative minimum tax credits (available without
expiration)............................................. 14
49
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. COMMITMENT AND CONTINGENCIES
The Company leases manufacturing and warehousing space, machinery and
equipment and automobiles under non-cancelable operating lease agreements
expiring at various dates through 1998. Rental expense aggregated
approximately $348,000 in 1997, $330,000 in 1996, and $282,000 in 1995. Future
minimum rental commitments under non-cancelable operating leases as of
December 31, 1997 are as follows:
YEAR $
---- -------
(IN THOUSANDS)
1998 99
1999 80
2000 55
2001 47
2002 46
The Company has entered into an employment contract with an expiration date
of December 31, 1999 with an officer which provides that this officer is
entitled to continuation of his salary if he is terminated without cause prior
to the contract expiration date. Aggregate compensation through 1999 under
this agreement approximates $845,000.
12. LITIGATION
The Company commenced a lawsuit on April 21, 1998 against its former
President and Chief Operating Officer, John P. Gallo, in the Superior Court of
New Jersey. In its complaint, IGI alleges, among other matters, that Mr. Gallo
caused the Company to violate Department of Agriculture statutes and
regulations, made false and inaccurate representations with respect to
shipments and inventory, improperly converted Company funds and assets for his
personal benefit and knowingly engaged in misconduct in the performance of his
duties and responsibilities, all in violation of his employment agreement and
of his fiduciary duty to the Company. The Company is seeking recovery of
damages resulting from Mr. Gallo's alleged misconduct and recovery of funds
and assets that the Company alleges were improperly diverted by him.
On April 28, 1998, Mr. Gallo commenced a lawsuit against the Company and two
of its Directors, including the Company's Chairman of the Board, Dr. Edward B.
Hager, alleging, among other matters, that they improperly caused the
termination of his employment with the Company in November 1997, wrongfully
terminated his compensation in violation of his employment agreement and
defamed his reputation. Mr. Gallo is seeking recovery against the defendants
for his alleged actual damages as well as consequential and punitive damages.
The Company has denied Mr. Gallo's allegations and believes his claims are
without merit.
Certain other 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 statements of the Company
if disposed of unfavorably.
50
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. U.S. GOVERNMENT INVESTIGATION AND DISCIPLINARY PROCEEDINGS
From June 4, 1997 through March 27, 1998, the Company was subject to an
order by the Center for Veterinary Biologics ("CVB") of the United States
Department of Agriculture ("USDA") to stop distribution and sale of certain
serials and subserials of designated poultry vaccines produced by the
Company's Vineland Laboratories Division ("Stop Shipment Order"). The Stop
Shipment Order was based on CVB's findings that the Company shipped serials
before the Animal and Plant Health Inspection Service division of the USDA
("APHIS") had the opportunity to confirm the Company's testing results, failed
to destroy serials reported to APHIS as destroyed, and in general failed to
keep complete and accurate records and to submit accurate reports to APHIS.
The Stop Shipment Order affected 36 of the Company's USDA-licensed vaccines.
In July 1997, the Office of Inspector General of the USDA ("OIG") advised the
Company of its commencement of an investigation into alleged violations of the
Virus Serum Toxin Act and alleged false statements made to APHIS.
Following the Stop Shipment Order and the commencement of the OIG
investigation, in July 1997, the non-employee members of the Board of
Directors directed the Company to retain special counsel to investigate the
alleged violations and to advise the Board of Directors of its findings. The
non-employee members of the Board of Directors also instructed management to
take immediate action to assure that all future shipments comply with all
regulatory requirements. In addition, the Company took action designed to
obtain the approval of APHIS to the Company's resumption of shipments of the
products affected by the Stop Shipment Order, including submission of an
amended regulatory compliance program and testing procedures acceptable to the
USDA, reassignment of certain personnel and restructuring of the quality
control and quality assurance functions.
Based on remedial action taken by the Company, including revised vaccine
production outlines, the USDA, during the period from August through December
of 1997, lifted the Stop Shipment Order with respect to all but three of the
36 affected products. As of March 27, 1998, the remaining three products were
released for sale and shipment by the Company.
As a result of the Company's internal investigation regarding the alleged
violations, in November 1997 the Company terminated the employment of its then
President and Chief Operating Officer, John P. Gallo, for willful misconduct
in the performance of his executive duties and commenced a lawsuit against Mr.
Gallo on April 21, 1998. On April 28, 1998, Mr. Gallo commenced a lawsuit
against the Company and two of its directors, including the Chairman of the
Board. In addition, six employees, including members of the Company's
management team (including two Vice Presidents of the Company) resigned in
April 1998 at the request of the Company. However, five of these former
employees were retained by the Company for approximately eight weeks to enable
the Company to continue its operations pending the hiring of qualified
replacements. In connection with the employee terminations, the Company agreed
to make severance payments to each of two non-management employees equal to
four months salary.
In April 1998, the Company voluntarily disclosed to the U.S. Attorney for
the District of New Jersey, as well as to the USDA and OIG, information
resulting from its internal investigation of alleged violations by certain
officers and employees of USDA rules and regulations and of the Virus Serum
Toxin Act and other statutes including U.S. Customs laws and regulations. In
connection with its investigation, the OIG has subpoenaed Company documents
and the Company has provided, and will continue to provide, subpoenaed
documents to Governmental authorities. The U.S. Government's investigation is
ongoing and could be expanded to other areas of the Company's business in
which violations of laws and regulations may be found to have occurred. In
addition, the Government's ongoing investigation could result in action
against the Company and certain of its former employees, including fines and
the possibility of criminal charges. Also, on April 30, 1998, the Securities
and Exchange Commission (the "SEC") advised the Company that it is conducting
an informal inquiry and requested that the Company provide it with certain
documents.
51
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Stop Shipment Order adversely affected the Company's results of
operations for 1997, and the delay in approval of the remaining affected
products until the end of March 1998 will adversely affect overall sales
revenue in 1998. In addition, although the Company, on May 11, 1998, announced
the employment of a new President and Chief Operating Officer, it needs to
replace and train certain key managers and other employees who have terminated
their employment at the request of the Company, which will have a materially
adverse effect on the Company's 1998 performance and operating results. Also,
if the OIG, the U.S. Attorney or the SEC concludes that the Company's actions
warrant enforcement proceedings, those proceedings, as well as the costs and
expenses related to them, could have a materially adverse effect on the
Company's business, financial condition and results of operations.
The Company is cooperating fully with the U.S. Attorney and each of the
regulatory agencies and has produced a substantial amount of documents and
information requested by the U.S. Attorney. The U.S. Attorney has not
indicated what course of action, if any, it may pursue with respect to IGI in
light of the Company's extensive cooperation. The Company has not been advised
that it or any of its present employees are targets of any Justice Department
or regulatory investigation. Although there can be no assurance as to the
outcome of any proceeding, the Company expects that it will be able to achieve
a satisfactory resolution of its existing regulatory and litigation matters.
However, if charges were to be brought against IGI, the Company could incur
substantial costs in fines and attorney's fees to defend the action. The
Company could also face additional substantial costs in administrative civil
penalties. Since the Company expects that it will be able to achieve a
satisfactory resolution of its existing regulatory and litigation matters, no
reserves were provided for these matters at December 31, 1997.
14. EXPORT SALES
Export revenues by the Company's domestic operations accounted for
approximately 35% of the Company's total revenues in 1997, 39% in 1996 and 38%
in 1995. The following table shows the geographical distribution of the export
sales:
1997 1996 1995
------- ---------- ----------
(RESTATED) (RESTATED)
(IN THOUSANDS)
Latin America................................ $ 4,593 $ 5,076 $ 4,884
Asia/Pacific................................. 4,659 6,011 4,408
Europe....................................... 1,263 1,286 1,118
Africa/Middle East........................... 1,362 1,141 1,184
------- ------- -------
$11,877 $13,514 $11,594
======= ======= =======
Related net accounts receivable balances at December 31, 1997, 1996 and 1995
approximated $4,144,000, $5,276,000 and $4,569,000, respectively.
15. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The Company has notes receivable from certain of its employees. The total of
these notes is $249,000 as of December 31, 1997. All of these loans are
evidenced by demand notes bearing interest at prime rate plus 1/4% and are
collateralized by shares of IGI common stock. Remaining balances of these
notes from officers are included in the stockholders' equity as stockholders'
note receivable and all other notes receivable are included in notes
receivable in the accompanying Consolidated Balance Sheets. The Company has
recognized interest income from these notes of $10,000, $15,000 and $39,000
for the years ended December 31, 1997, 1996 and 1995 respectively. However,
the Company has provided reserves of $219,000 against these notes representing
the amount of notes receivable from terminated employees.
52
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. EMPLOYEE BENEFITS
The Company has a defined contribution retirement plan (401k), 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 15% of compensation, subject to a minimum
contribution by participants of 2% of compensation and a maximum contribution
of $9,500 in 1997, and $9,240 in 1996 and 1995. 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 $113,000,
$115,000, and $103,601 for the years 1997, 1996 and 1995, respectively.
17. BUSINESS SEGMENTS
Summary data related to continuing operations for the three years ended
December 31, 1997 appear below:
ANIMAL HEALTH CONSUMER
PRODUCTS PRODUCTS CORPORATE CONSOLIDATED
------------- -------- --------- ------------
(IN THOUSANDS)
1997
Net sales....................... $29,096 $5,097 $ -- $34,193
Operating profit (loss)......... 4,139 730 (5,032) (163)
Depreciation and amortization... 876 161 -- 1,037
Identifiable assets............. 29,535 4,509 -- 34,044
Capital expenditures............ 632 4 -- 636
1996 (RESTATED)
Net sales....................... $31,262 $3,523 $ -- $34,785
Operating profit (loss)......... 6,882 (917) (4,097) 1,868
Depreciation and amortization... 835 157 -- 992
Identifiable assets............. 28,412 5,972 -- 34,384
Capital expenditures............ 715 198 -- 913
1995 (RESTATED)
Net sales....................... $28,869 $1,632 $ -- $30,501
Operating profit (loss)......... 6,247 (233) (3,056) 2,958
Depreciation and amortization... 820 16 -- 836
Identifiable assets............. 29,280 2,872 -- 32,152
Capital expenditures............ 745 1,652 -- 2,397
53
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
In addition to the items discussed in Note 2, in the fourth quarter of 1997
the Company made adjustments to write off certain inventory, increase
valuation reserves for inventories and accounts receivable, record legal and
related expenses incurred in connection with the USDA OIG investigation, and
to adjust the recognition of licensing revenues. Certain of these adjustments
were the result of actions or events which occurred in earlier quarters of
1997. Had such adjustments been recorded in the applicable quarter, net income
and earnings per share would have differed from the amounts previously
reported as follows:
FIRST QUARTER SECOND QUARTER THIRD QUARTER
----------------- ----------------- -----------------
AS AS AS AS AS AS
REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss)......... $363 $ 55 $356 $218 $380 $(498)
Earnings per share:
Basic................... $.04 $.01 $.04 $.02 $.04 $(.05)
Diluted................. $.04 $.01 $.04 $.02 $.04 $(.05)
54
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E
------ ------------ ------------------------ ---------- ----------
ADDITIONS
------------------------
(2) CHARGED
BALANCE AT (1) CHARGED TO OTHER BALANCE AT
BEGINNING OF TO COSTS ACCOUNTS END OF
DESCRIPTION PERIOD AND EXPENSES DESCRIBE DEDUCTIONS PERIOD
----------- ------------ ------------ ----------- ---------- ----------
Year ended December 31,
1995 (Restated):
Allowance for doubtful
accounts............. $ 181 $142 -- $ 17(A) $ 306
Inventory valuation
allowance............ 507 645 -- 459(B) 693
Other assets valuation
allowance............ 186 -- -- -- 186
Amortization of
goodwill............. 76 9 -- -- 85
Amortization of other
intangibles.......... 464 58 -- -- 522
Valuation allowance on
net deferred tax
assets............... 2,880 69 -- 2,880(C) 69
Year ended December 31,
1996 (Restated):
Allowance for doubtful
accounts............. $ 306 $(40) -- $ 28(A) $ 238
Inventory valuation
allowance............ 693 123 -- 199(B) 617
Other asset valuation
allowance............ 186 -- -- -- 186
Amortization of
goodwill............. 85 8 -- -- 93
Amortization of other
intangibles.......... 522 87 -- -- 609
Valuation allowance on
net deferred tax
assets............... 69 -- -- 35(C) 34
Year ended December 31,
1997:
Allowance for doubtful
accounts............. $ 238 $793 -- $ 128(A) $ 903
Inventory valuation
allowance............ 617 603 -- 107(B) 1,113
Other asset valuation
allowance............ 186 -- -- 186(A) --
Amortization of
goodwill............. 93 8 -- -- 101
Amortization of other
intangibles.......... 609 102 -- -- 711
Valuation allowance on
net deferred tax
assets............... 34 299 -- -- 333
- --------
(A) Relates to write-off of uncollectible accounts.
(B) Disposition of obsolete inventories.
(C)Related to spin off of certain discontinued operations during 1995.
55
EXHIBIT INDEX
Exhibits marked with a single asterisk are filed herewith, and exhibits
marked with a double asterisk reference management contract, compensatory plan
or arrangement, filed in response to Item 14(a)(3) of the instructions to Form
10-K. The other exhibits listed have previously been filed with the Commission
and are incorporated herein by reference.
(3) (a) Certificate of Incorporation of IGI, Inc., as amended.
[Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8, File No. 33-63700, filed
June 2, 1993.]
(b) By-laws of IGI, Inc., as amended. [Incorporated by reference to
Exhibit 2(b) to the Company's Registration Statement on Form S-
18, File No. 2-72262-B, filed May 12, 1981.]
(4) Specimen stock certificate for shares of Common Stock, par value
$.01 per share. [Incorporated by reference to Exhibit (4) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 0-10063, filed April 2, 1990 (the
"1989 Form 10-K".)]
**(10.1) IGI, Inc. 1983 Incentive Stock Option Plan. [Incorporated by
reference to Exhibit A to the Company's Proxy Statement for the
Annual Meeting of Stockholders held May 11, 1983.]
**(10.2) IGI, Inc. 1989 Stock Option Plan. [Incorporated by reference to
the Company's Proxy Statement for the Annual Meeting of
Stockholders held May 11, 1989.]
**(10.3) Employment Agreement by and between the Company and Edward B.
Hager dated as of January 1, 1990. [Incorporated by reference to
Exhibit (10)(c) to the 1989 Form 10-K.]
**(10.4) Extension of Employment Agreement by and between the Company and
Edward B. Hager dated as of March 11, 1993. [Incorporated by
reference to Exhibit (10)(d) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992, File No.
0-10063, filed March 31, 1993 (the "1992 Form 10-K".)]
**(10.5) Extension of Employment Agreement by and between the Company and
Edward B. Hager dated as of March 14, 1995. [Incorporated by
reference to Exhibit (10)(e) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, File No.
0-10063, filed March 31, 1995 (the "1994 Form 10-K".)]
**(10.6) Amendment to Employment Agreement by and between the Company and
Edward B. Hager dated as of October 1, 1997. [Incorporated by
reference to Exhibit 10(a) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997, File No 1-
8568, filed November 13, 1997 (the "September 30, 1997 Form 10-
Q")]
**(10.7) 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.]
**(10.8) 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.]
**(10.9) 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.]
**(10.10) Amendment to Employment Agreement by and between the Company and
John P. Gallo dated as of October 1, 1997. [Incorporated by
reference to Exhibit 10(b) to the September 30, 1997 Form 10-Q.]
(10.11) Rights Agreement by and between the Company and Fleet National
Bank dated as of March 19, 1987. [Incorporated by reference to
Exhibit (4) to the Company's Current Report on Form 8-K, File
No. 0-10063, dated as of March 26, 1987.]
(10.12) 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.]
56
(10.13) 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. [Incorporated by
reference to Exhibit (10)(o) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, File No.
1-8568, filed March 29, 1996 (the "1995 Form 10-K".)]
(10.14) First Amendment to Second Amended and Restated Loan Agreement by
and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc.,
together with its subsidiaries, dated March 27, 1996.
[Incorporated by reference to Exhibit 10(l) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996, File No. 1-8568, filed April 10, 1997 (the "1996 Form
10-K".)]
(10.15) Second Amendment to Second Amended and Restated Loan Agreement
by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc.,
together with its subsidiaries, dated June 26, 1996.
[Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1996, File No. 1-8568, filed November 14, 1996 (the
"September 30, 1996 Form 10-Q".)]
(10.16) Third Amendment to Second Amended and Restated Loan Agreement by
and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc.,
together with its subsidiaries, dated August 23, 1996.
[Incorporated by reference to Exhibit 10.2 to the September 30,
1996 Form 10-Q.]
(10.17) Fourth Amendment to Second Amended and Restated Loan Agreement
by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc.
together with its subsidiaries, dated November 13, 1996.
[Incorporated by reference to exhibit 10(o) to the 1996 Form 10-
K.]
(10.18) Fifth Amendment to Second Amended and Restated Loan Agreement by
and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc.,
together with its subsidiaries, dated March 27, 1996.
[Incorporated by reference to exhibit 10(p) to the 1996 Form 10-
K.]
(10.19) Sixth Amendment to Second Amended and Restated Loan Agreement by
and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc.,
together with its subsidiaries, dated June 30, 1997.
[Incorporated by reference to Exhibit 10(c) to the September 30,
1997 Form 10-Q]
(10.20) Seventh Amendment to Second Amended and Restated Loan Agreement
by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc.,
together with its subsidiaries, dated July 31, 1997.
[Incorporated by reference to Exhibit 10(d) to the September 30,
1997 Form 10-Q.]
(10.21) Eight Amendment to Second Amended and Restated Loan Agreement by
and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc.,
together with its subsidiaries, dated September 30, 1997.
[Incorporated by reference to Exhibit 10(e) to the September 30,
1997 Form 10-Q.]
*(10.22) Extension Agreement by and between Fleet Bank-NH, Mellon Bank,
N.A. and IGI, Inc., together with its subsidiaries, dated April
29, 1998.
*(10.23) Forbearance Agreement by and between Fleet Bank-NH, Mellon Bank,
N.A. and IGI, Inc. together with its subsidiaries, dated August
19, 1998.
**(10.24) 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".)]
**(10.25) IGI, Inc. 1991 Stock Option Plan, [Incorporated by reference to
the Company's Proxy Statement for the Annual Meeting held May 9,
1991.]
**(10.26) Amendment No. 1 to IGI, Inc. 1991 Stock Option Plan as approved
by Board of Directors on March 11, 1993. [Incorporated by
reference to Exhibit 10(p) to the 1992 Form 10-K.]
**(10.27) Amendment No. 2 to IGI, Inc. 1991 Stock Option Plan as approved
by Board of Directors on March 22, 1995. [Incorporated by
reference to the Appendix to the Company's Proxy Statement for
the Annual Meeting of Stockholders held May 9, 1995.]
**(10.28) Amendment No. 3 to IGI, Inc. 1991 Stock Option Plan as approved
by Board of Directors on March 19, 1997. [Incorporated by
reference to Exhibit 10 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, File No. 1-8568,
filed August 14, 1997.]
57
(10.29) 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.]
(10.30) License Agreement by and between Micro-Pak, Inc. and IGEN, Inc.
[Incorporated by reference to Exhibit (10)(v) to the 1995 Form
10-K.]
(10.31) 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.]
(10.32) Supply Agreement, dated as of January 27, 1997, between IGI,
Inc. and Glaxo Wellcome Inc. [Incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q/A,
Amendment No.1, for the quarter ended March 31, 1997, File No.
1-8568, filed June 16, 1997.]
*(10.33) Common Stock Purchase Warrant No. 1 to purchase 150,000 shares
of IGI, Inc. Common Stock issued May 12, 1998 to Fleet Bank-NH.
*(10.34) Common Stock Purchase Warrant No. 2 to purchase 150,000 shares
of IGI, Inc. Common Stock issued May 12, 1998 to Fleet Bank-NH.
*(10.35) Common Stock Purchase Warrant No. 3 to purchase 120,000 shares
of IGI, Inc. Common Stock issued May 12, 1998 to Mellon Bank,
N.A.
*(10.36) Common Stock Purchase Warrant No. 4 to purchase 120,000 shares
of IGI, Inc. Common Stock issued May 12, 1998 to Mellon Bank,
N.A.
*(11) Computation of net income per common share.
*(21) List of Subsidiaries.
*(23) Consent of PricewaterhouseCoopers LLP.
*(27.1) Financial Data Schedule for the year ended December 31, 1997.
*(27.2) Restated Financial Data Schedules for the years ended December
31, 1995 and 1996.
58