SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-K/A
AMENDMENT NO. 1 TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year Ended Commission File No.
--------------------- -------------------
December 31, 1999 001-08568
IGI, Inc.
(Exact name of registrant as specified in its charter)
Delaware 01-0355758
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
Wheat Road and Lincoln Avenue, Buena, NJ 08310
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(856)-697-1441
--------------
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Common Stock ($.01 par value)
Registered on the American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock, par value $.01
per share, held by non-affiliates of the Registrant at March 27, 2000, as
computed by reference to the last trading price of such stock, was
approximately $15,900,000.
The number of shares of the Registrant's Common Stock, par value $.01 per
share, outstanding at March 27, 2000 was 10,163,126 shares.
Documents Incorporated by Reference: Portions of the Registrant's
definitive proxy statement to be filed with the Commission on or before
April 29, 2000 are incorporated herein by reference in Part III.
PRELIMINARY STATEMENT
IGI, Inc. ("IGI" or the "Company") is hereby amending its Annual
Report on Form 10-K for the fiscal year ended December 31, 1999 to
reclassify certain of the Company's long-term debt, outstanding as of
December 31, 1999, as short-term debt and to provide relevant information
with respect to such reclassification. These actions are taken in respect
of certain amendments to the Company's debt agreements at the end of June,
2000. In connection with these amendments, the Company's independent
accountants have determined that substantial doubt exists about the
Company's ability to continue as a going concern and, accordingly, have
amended the audit report on the Company's 1999 financial statements.
Part I
Item 1. Business
IGI, Inc. ("IGI" or the "Company") was incorporated in Delaware in
1977. Its executive offices are at Wheat Road and Lincoln Avenue, Buena, New
Jersey. The Company is a diversified company engaged in three business
segments:
* Consumer Products Business - production and marketing of cosmetics
and skin care products,
* Companion Pet Products Business - production and marketing of
companion pet products such as pharmaceuticals, nutritional
supplements and grooming aids, and
* Poultry Vaccines Business - production and marketing of poultry
vaccines and other related products.
In December 1995, IGI distributed its ownership of its majority-owned
subsidiary, Novavax, Inc. ("Novavax"), in the form of a tax-free stock
dividend, to IGI stockholders. Novavax had conducted the biotechnology
business segment of IGI, which is reported as a discontinued operation in
the five year summary of selected financial data. In connection with the
distribution, the Company paid Novavax $5,000,000 in return for a fully
paid-up, ten-year license (the "IGI License Agreement") entitling it to the
exclusive use of the Novasome(R) lipid vesicle encapsulation and certain other
technologies ("Microencapsulation Technologies" or collectively the
"Technologies") in the fields of (i) animal pharmaceuticals, biologicals and
other animal health products; (ii) foods, food applications, nutrients and
flavorings; (iii) cosmetics, consumer products and dermatological over-the-
counter and prescription products (excluding certain topically delivered
hormones); (iv) fragrances; and (v) chemicals, including herbicides,
insecticides, pesticides, paints and coatings, photographic chemicals and
other specialty chemicals, and the processes for making the same
(collectively, the "IGI Field"). IGI has the option, exercisable within the
last year of the ten-year term, to extend the exclusive license for an
additional ten-year period for $1,000,000. Novavax has retained the right to
use the Technologies for applications outside the IGI Field, mainly human
vaccines and pharmaceuticals.
Business Segments
The following table sets forth the revenue and operating profit of
each of the Company's three business segments for the periods indicated:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenue
Consumer Products $ 6,938 $ 5,839 $ 5,255
Companion Pet Products 13,595 12,513 12,444
Poultry Vaccines 14,061 14,843 16,644
------------------------------
$34,594 $33,195 $34,343
==============================
Operating Profit (Loss)*
Consumer Products $ 3,913 $ 3,688 $ 1,473
Companion Pet Products 3,850 2,844 2,577
Poultry Vaccines (1,041) (517) 1,202
--------------------
<FN>
* Excludes corporate expenses of $5,216,000, $6,925,000, and $5,032,000,
for 1999, 1998 and 1997, respectively. (See Note 17 of the Consolidated
Financial Statements.)
</FN>
</TABLE>
Consumer Products Business
IGI's Consumer Products business is primarily focused on the continued
commercialization of the Microencapsulation Technologies for skin care
applications. These efforts have been directed toward the development of
high quality skin care products that the Company markets through
collaborative arrangements with major cosmetic and consumer products
companies. IGI plans to continue to work with cosmetics, food, personal care
products, and OTC pharmaceutical companies for commercial applications of
the Microencapsulation Technologies. Because of their ability to encapsulate
skin protective agents, oils, moisturizers, shampoos, conditioners, skin
cleansers and fragrances and to provide both a controlled and a sustained
release of the encapsulated materials, Novasome(R) lipid vesicles are well-
suited to cosmetics and consumer product applications. For example,
Novasome(R) lipid vesicles may be used to deliver moisturizers and other
active ingredients to the deeper layers of the skin or hair follicles for a
prolonged period; to deliver or preserve ingredients which impart favorable
cosmetic characteristics described in the cosmetics industry as "feel,"
"substantivity," "texture" or "fragrance"; to deliver normally incompatible
ingredients in the same preparation, with one ingredient being shielded or
protected from the other by encapsulation within the Novasome(R) vesicle;
and to deliver pharmaceutical agents.
The Company produces Novasome(R) vesicles for various skin care
products, including those marketed by Estee Lauder such as "All You Need",
"Re-Nutriv", "Virtual Skin", "100% Time Release Moisturizer", "Resilience"
and others. Sales to Estee Lauder accounted for $4,237,000 or 13% of 1999
sales, $3,494,000 or 11% of 1998 sales, and $2,408,000 or 7% of 1997 sales.
The Company also markets a skin care product line to physicians through a
distributor under the Company's WellSkin(TM) brand.
Principal competitors to the Company's WellSkin(TM) product line
include NeoStrata, Inc. and MD Formulations, a division of Allergen. The
Company's Microencapsulation Technologies indirectly compete as a delivery
system with, among others, Collaborative Labs, The Liposome Company, Lipo
Chemicals and Advanced Polymer Systems.
In 1996, the Company entered into a license and supply agreement with
Glaxo Wellcome, Inc. ("Glaxo"). The agreement granted Glaxo exclusive rights
to market the WellSkin(TM) product line in the United States to physicians.
Under the terms of the agreement, IGI manufactured these products for Glaxo.
This agreement provided for Glaxo to pay royalties to IGI based on sales and
pay a $1,000,000 advance royalty to IGI in 1997 of which $300,000 was non-
refundable. The advance royalty was recorded as deferred income. In December
1998, the license and supply agreement with Glaxo was terminated. The
termination agreement provided that IGI would purchase all of Glaxo's
inventory and marketing materials related to the WellSkin(TM) line in
exchange for a $200,000 promissory note, due and payable in December 1999
and bearing interest at a rate of 11%. The Company also issued a promissory
note to Glaxo for $608,000, representing the unearned portion of the advance
royalty in exchange for Glaxo transferring all rights to the WellSkin(TM)
trademark to IGI. This note bears interest at a rate of 11%, and to date the
Company has paid $200,000 and is to pay $200,000 and $208,000 in June 2000
and December 2000, respectively. In connection with the Agreement
termination, but unrelated to the advance royalty, IGI reduced cost of sales
by $404,000 in 1998 for amounts owed to Glaxo that were forgiven. Glaxo
royalties recognized as income were $0, $326,000 and $150,000 in 1999, 1998
and 1997, respectively.
In December 1998, the Company entered into a ten-year supply and sales
agreement with Genesis Pharmaceutical, Inc. ("Genesis") for the marketing
and distribution of the Company's WellSkin(TM) line of skin care products.
The agreement provided that Genesis will pay the Company a $1,000,000
trademark and technology transfer fee, in four equal annual payments, which
will be recognized as revenue over the life of the agreement. In addition,
Genesis will pay the Company a royalty on its net sales with certain
guaranteed minimum royalty amounts. Genesis also purchased WellSkin(TM)
inventory and marketing materials for $200,000, which were previously
purchased by the Company from Glaxo.
In March 1997, IGI granted Kimberly Clark ("Kimberly") the worldwide
rights to use certain patents and technologies in the industrial hand care
and cleaning products field. Upon signing of the agreement, Kimberly paid
IGI a $100,000 license fee that was recognized as revenue by the Company.
The agreement requires Kimberly to make royalty payments based on quantities
of material produced. The Company is also guaranteed minimum royalties over
the term of the agreement. In both 1999 and 1998, the Company recognized
$133,000 as revenue as a result of the agreement. In July 1999, the Company
signed a new exclusive license agreement with Kimberly which replaced the
agreement dated March 1997. The July 1999 agreement granted Kimberly an
exclusive license pertaining to patents and improvements within the fields
of industrial hand care and cleansing products for non-retail markets. The
new agreement will be in effect from July 29, 1999 through July 30, 2000.
Under the new agreement, Kimberly paid the Company consideration of
$120,000, which is being recognized over the term of the agreement. The
Company recognized $60,000 of this income during 1999.
The Company entered into a license agreement with Johnson & Johnson
Consumer Products, Inc. ("J&J") in 1995. The agreement provided J&J with a
license to produce and sell Novasome(R) microencapsulated retinoid products
and provides for the payment of royalties on net sales of such products. J&J
began selling such products and making royalty payments in the first quarter
of 1998. The Company recognized $1,210,000 and $433,000 of royalty income
related to this agreement for the years ended December 31, 1999 and 1998,
respectively.
In April 1998, the Company entered into a research and development
agreement with National Starch and Chemical Company ("National Starch") to
evaluate Novasome(R) technology. The agreement provided for a minimum of at
least six, or up to as many as nine monthly payments commencing in June 1998
plus $100,000 for the purchase of a patented Novamix(R) machine. The Company
recognized $60,000 and $210,000 of income in 1999 and 1998, respectively,
related to the National Starch agreement. The agreement ended in June of
1999.
In August 1998, the Company granted Johnson & Johnson Medical ("JJM"),
a division of Ethicon, Inc., worldwide rights for the use of the Novasome(R)
technology for certain products and distribution channels. The agreement
provides for an up-front license fee of $150,000, and future royalty
payments based on JJM's sales of licensed products. The Company is
guaranteed minimum royalties over the ten-year term of the agreement. In
1999, the Company recognized $126,000 of royalty income.
The Company entered into an exclusive Supply Agreement (the "Supply
Agreement") dated September 30, 1997 with IMX Corporation ("IMX"). Under the
IMX agreement, the Company agreed to manufacture and supply 100% of IMX's
requirements for certain products at prices stipulated in the exclusive
Supply Agreement, subject to renegotiation subsequent to 1998. The Company
is currently involved in discussions with IMX concerning possible
modifications to the Supply Agreement as the Company has determined that it
will not supply the products stipulated by the Supply Agreement but may
supply certain other products based on negotiations with IMX. Under the
Supply Agreement the Company received 271,714 shares of restricted Common
Stock of IMX. These shares are restricted both by governmental and
contractual requirements and the Company is unsure if or when it will be
able to sell these shares. Through December 31, 1999, the Company had not
yet recognized income related to this agreement. See Note 2 "Investments" of
the Consolidated Financial Statements.
The Company recognized a total of $1,869,000, $1,200,000 and $150,000
in 1999, 1998 and 1997, respectively, of licensing and royalty income which
is included in the Consumer Products segment revenues. Revenues from the
Company's Consumer Products segment were principally based on formulations
using the Novasome(R) Microencapsulation Technology. Total Consumer Product
revenues were approximately 20% of the Company's total revenues in 1999, 17%
in 1998 and 15% in 1997.
Companion Pet Products Business
The Company sells its Companion Pet Products to the veterinarian
market under the EVSCO Pharmaceuticals trade name and to the over-the-
counter ("OTC") pet products market under the Tomlyn and Luv'Em labels.
The EVSCO line of veterinary products is used by veterinarians in
caring for dogs and cats, and includes pharmaceuticals such as antibiotics,
anti-inflammatories and cardiac drugs, as well as nutritional supplements,
vitamins, insecticides and diagnostics. Product forms include gels, tablets,
creams, liquids, ointments, powders, emulsions, shampoos and diagnostic
kits. EVSCO also produces professional grooming aids for dogs and cats.
EVSCO products are manufactured at the Company's facility in Buena,
New Jersey and are sold through distributors to veterinarians. The facility
operates in accordance with Good Manufacturing Practices ("GMP") of the
federal Food and Drug Administration ("FDA") (See "Government Regulation").
Principal competitors of the EVSCO product line include DVM, Allerderm,
Schering Plough Animal Health and Pfizer Animal Health. The Company competes
on the basis of price, marketing, customer service and product qualities.
The Tomlyn product line includes pet grooming, nutritional and
therapeutic products, such as shampoos, grooming aids, vitamin and mineral
supplements, insecticides and OTC medications. The products are manufactured
at the Company's facility in Buena, New Jersey, and are sold directly to pet
superstores and through distributors to independent merchandising chains,
shops and kennels. Principal competitors of the Tomlyn product line include
Four Paws Products, Bio Groom Products, Lambert Kay, a division of Carter-
Wallace, Eight In One Pet Products, Inc., and Cardinal Labs, Inc.
Most of the Company's veterinary products are sold through
distributors. Sales of veterinary products accounted for approximately 39%
of the Company's revenues in 1999, 38% in 1998 and 36% in 1997.
Poultry Vaccines Business
The Company produces and markets poultry vaccines manufactured by the
chick embryo, tissue culture and bacteriologic methods. The Company produces
vaccines for the prevention of various chicken and turkey diseases and has
more than 60 vaccine licenses granted by the United States Department of
Agriculture ("USDA"). The Company also produces and sells nutritional, anti-
infective and sanitation products used primarily by poultry producers. The
Company sells these products in the United States and over 58 other
countries under the Vineland Laboratories trade name.
The Company manufactures poultry vaccines at its USDA licensed
facility in Vineland, New Jersey and sells them, primarily through its own
sales force, directly to large poultry producers and distributors in the
United States and, through its export sales staff, to local distributors in
other countries. The sales force is supplemented and supported by technical
and customer service personnel. The Company's vaccine production in the
United States is regulated by the USDA. Sales of poultry vaccines and
related products accounted for approximately 41% of the Company's revenues
in 1999, 45% in 1998 and 49% in 1997. For information relating to the
adverse effect of the stop shipment order by the USDA on the Company's
poultry vaccine business, as well as other governmental actions, see
"Government Regulation" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company's principal competitors in the poultry vaccine market are
Intervet America, Fort Dodge, Merial/Select and Schering Plough Animal
Health. The Company believes that it is one of the largest domestic poultry
vaccine producers. The Company competes on the basis of product performance,
price, customer service and availability.
Other Applications
The versatility of the Novasome(R) lipid vesicles combined with the
Company's commercial production capabilities allows the Company to target
large, diverse markets including potential applications in the fuels
industry. The Company is seeking collaboration with others to develop its
product for this industry. The efforts for the development of fuel
enhancement products require extensive testing, evaluation and trials;
therefore no assurance can be given that commercialization of IGI's fuel
additive and enhancing products will be successful.
International Sales and Operations
A staff of seven persons based in Buena, New Jersey and eight
individuals based overseas handle sales of Company products outside the
United States. The Company's sales personnel and veterinarians travel abroad
extensively to develop business and support customers through local
distributors. Exports consist primarily of poultry vaccines, although the
Company also exports some veterinary pharmaceuticals and petcare products.
Exports of vaccines require product registration (i.e., licenses) by foreign
authorities. The Company has approximately 900 product registrations in over
50 countries outside the United States and has over 800 registrations
pending. The Company is seeking to expand its international market presence.
It entered the Chinese market in 1997 and commenced product sales in Japan
in 1998. The Company has obtained registrations for six products in Brazil
and commenced sales in that country in the fourth quarter of 1999.
Mexico, Indonesia, Thailand and certain Latin American and Far Eastern
countries are important markets for the Company's poultry vaccines and other
products. These countries have experienced periods of varying degrees of
political unrest and economic and currency instability. Because of the
volume of business transacted by the Company in these areas, continuation or
recurrence of such unrest or instability could adversely affect the business
of its customers, which could adversely impact the Company's future
operating results. In order to minimize risk, the Company maintains credit
insurance for the majority of its international accounts receivable, and all
sales are denominated in U.S. dollars to minimize currency fluctuation risk.
(See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources.")
Sales to international customers represented 33% of the Company's
revenues in 1999, 32% in 1998 and 35% in 1997. (See Note 14, "Export Sales"
of the Consolidated Financial Statements.)
Manufacturing
The Company's manufacturing operations include production and testing
of vaccines, cosmetics, dermatologics, emulsions, shampoos, gels, ointments,
pills and powders. These operations also include the packaging, bottling and
labeling of finished products and packing and shipment for distribution. On
March 1, 2000, 128 employees were engaged in manufacturing operations. The
raw materials included in these products are available from several
suppliers. The Company produces quantities of Novasome(R) lipid vesicles
adequate to meet its current and foreseeable needs.
Research and Development
The Company's poultry vaccine development efforts are directed
towards: 1) developing more efficient single and multiple-component
vaccines, 2) developing vaccines to combat new diseases, and 3)
incorporating Novasome(R) lipid vesicle adjuvant into vaccines. The Company
is concentrating its veterinary pharmaceutical development efforts on the
use of Novasome(R) microencapsulation for various veterinary pharmaceutical
and over-the-counter pet care products. The Company's consumer products
development efforts are directed towards Novasome(R) encapsulation to
improve performance and efficacy of fuels, pesticides, specialty and other
chemicals, biocides, cosmetics, consumer products, flavors and dermatologic
products.
In addition to its internal product development research efforts, which
involve nine employees, the Company encourages the development of products
in areas related to its present lines by making specific grants to
universities, none of which had a material financial effect on the Company
in 1999, 1998 or 1997. Total product development and research expenses were
$1,418,000, $1,425,000 and $1,675,000 in 1999, 1998 and 1997, respectively.
Patents and Trademarks
All of the names of the Company's major products are registered in the
United States and all significant markets in which the Company sells its
products. The Company maintains various trademarks in various countries
covering certain of its products. Under the terms of the 1995 IGI License
Agreement, the Company has an exclusive ten-year license to use the
Technologies licensed from Novavax in the IGI Field. Novavax holds 44 U.S.
patents and a number of foreign patents covering the Technologies licensed
to IGI.
Government Regulation and Regulatory Proceedings
U.S. Regulatory Proceedings
From mid-1997 through most of 1998, the Company was subject to intense
governmental and regulatory scrutiny relating to the Company's shipment of
some of its poultry vaccine products without complying with The Virus Serum
Toxin Act of 1914, the federal securities laws and the rules and regulations
promulgated thereunder and USDA regulations. The Company was alleged to have
engaged in the sale of poultry vaccines to Iran during the period from 1996
through 1998 and to have prepared poultry vaccine products without complying
with USDA regulations. As a result of actions taken by the USDA, the Company
was ordered in June 1997 to stop shipment of certain of its poultry vaccine
products. In July 1997, the Company was advised that the USDA's Office of
Inspector General ("OIG") had commenced an investigation into possible
violations by the Company of the Virus Serum Toxin Act of 1914 and alleged
false statements made by the Company to the USDA's Animal and Plant Health
Inspection Service ("APHIS").
Company Actions
Based on these events, the Company:
* engaged independent counsel to conduct an investigation of the
claimed violations;
* took corrective action to allow the Company to resume shipment of
its affected product lines;
* terminated the President and Chief Operating Officer of the
Company for willful misconduct and commenced a lawsuit against
him in the New Jersey Superior Court;
* obtained the resignation of a number of employees, including
three Vice Presidents;
* voluntarily disclosed information uncovered by its internal
investigation to the U.S. Attorney for the District of New
Jersey, including information that related to sales of poultry
vaccines which may have violated U.S. customs laws and
regulations;
* cooperated with the Securities and Exchange Commission ("SEC") in
its inquiry, initiated in April 1998, regarding the foregoing
matters;
* restated the Company's financial statements for the two years
ended December 31, 1996 and the nine months ended September 30,
1997.
The USDA's stop shipment order and the investigations by Federal
regulatory authorities disrupted the business of the Company during 1997,
1998 and the first quarter of 1999, and had a material adverse effect on its
business operations and its liquidity. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Settlement of U.S. Regulatory Proceedings
In March 1999, the Company reached settlement with the Departments of
Justice, Treasury and Agriculture regarding their pending investigations and
proceedings. The terms of the settlement agreement provided that the Company
enter a plea of guilty to a misdemeanor and pay a fine of $15,000 and
restitution in the amount of $10,000. In addition, the Company was assessed
a penalty of $225,000 and began making monthly payments to the Treasury
Department which will continue through the period ending October 31, 2001.
The expense of settling with these agencies was reflected in the 1998
results of operations. The settlement does not affect the informal inquiry
being conducted by the SEC, nor does it affect possible governmental action
against former employees of the Company.
Other Pending Matters
In April 1998, the SEC advised the Company that it was conducting an
informal inquiry and requested information and documents from the Company,
which the Company has voluntarily provided to the SEC. On July 26, 2000, the
Company reached an agreement in principle with the staff of the SEC to
resolve matters arising with respect to the informal investigation. Under
the agreement, which will not be final until approved by the SEC, the
Company neither admits nor denies that the Company violated the financial
reporting and record-keeping requirements of Section 13 of the Securities
Exchange Act of 1934, as amended, for the fiscal years 1995, 1996 and 1997.
Further, in the agreement, the Company agrees to the entry of an order to
cease and desist from any such violation in the future. No monetary penalty
is expected.
On April 14, 1999, a lawsuit was filed in the U.S. District Court for
the Southern District of New York by Cohanzick Partners, LP, against IGI,
Inc., Edward B. Hager, the Company's Chairman, the following directors of
the Company: Terrence D. Daniels, Jane E. Hager, Constantine L. Hampers and
Terrence O'Donnell and the following former directors and officers of the
Company: Kevin J. Bratton, Stephen G. Hoch, Surendra Kumar, Donald J.
Machpee, Lawrence N. Zitto, Paul D. Paganucci, David G. Pinosky and John O.
Marsh (collectively, the "IGI Defendents") and John P. Gallo, the Company's
former President. The suit which seeks approximately $420,000 in actual
damages together with fees, costs and interest, alleges violations of the
securities laws, fraud, and negligent misrepresentation concerning certain
disclosures made and other actions taken by the Company in 1996 and 1997.
The IGI Defendants settled the matter pursuant to a Stipulation and Order of
Dismissal signed by the Court on July 19, 2000. In exchange for the
plaintiff's agreement to dismiss its claims against the IGI Defendants, the
Company issued to the plaintiff 35,000 shares of unregistered Common Stock
of the Company, $.01 par value per share, and the Company's insurer agreed
to pay $97,500 to the plaintiff. The Company issued the 35,000 shares of
Common Stock in June, 2000 and recorded the issuance at the fair market
value of the Common Stock on the date of issuance ($1.375 per share) or
$48,125 in the aggregate. As of December 31, 1999, the Company established a
reserve with respect the Cohanzick suit of $88,750. The Company intends to
record the $48,125 upon issuance of stock as an offset to its reserve in the
third quarter 2000. The Company is not aware of any other legal proceedings
which could have a material effect upon the Company.
Government Regulations
The production and marketing of the Company's products and its
research and development activities are subject to regulation for safety,
efficacy and quality by numerous governmental authorities in the United
States and other countries. The Company's development, manufacturing and
marketing of poultry biologics are subject to regulation in the United
States for safety and efficacy by the USDA, including the Center for
Veterinary Biologics ("CVB"), in accordance with the Virus Serum Toxin Act
of 1914. The development, manufacturing and marketing of animal and human
pharmaceuticals are subject to regulation in the United States for safety
and efficacy by the FDA in accordance with the Food, Drug and Cosmetic Act.
Although the Company has now resolved these matters, from June 4, 1997
through March 27, 1998, the Company was subject to an order by the CVB to
stop distribution and sale of all serials and subserials of thirty six (36)
product codes of designated poultry vaccines produced by the Company's
Vineland Laboratories Division. In July 1997, the OIG advised the Company of
its commencement of an investigation into alleged violations of the Virus
Serum Toxin Act and alleged false statements made by certain now former
Company personnel, the names of whom were not disclosed to the Company
because of the ongoing grand jury investigation. In April 1998, the Company
voluntarily disclosed to the U.S. Attorney for the District of New Jersey,
as well as to the USDA and the OIG, information resulting from the Company's
internal investigation of all Company directors, officer and other personnel
who, the Company believed, could have been connected to the Company's
alleged violations of USDA rules and regulations and of the Virus Serum
Toxin Act. (See "Legal Proceedings - Settlement of U.S. Regulatory
Proceedings.")
On March 6, 1998, the FDA concluded an inspection of the Company's
EVSCO facility in Buena, New Jersey. This resulted in the issuance of a form
FDA-483 listing several "inspection observations". The FDA reemphasized its
observations on May 14, 1998 with a "Warning Letter". The Company responded
in a timely fashion to the Form-483 and to the Warning Letter, and has been
advised by the FDA compliance branch that the Company's corrective action
plan appears to address its concerns.
In the United States, pharmaceuticals are subject to rigorous FDA
regulation including pre-clinical and clinical testing. The process of
completing clinical trials and obtaining FDA approvals for a new drug is
likely to take a number of years, requires the expenditure of substantial
resources and is often subject to unanticipated delays. There can be no
assurance that any product will receive such approval on a timely basis, if
at all.
In addition to product approval, the Company may be required to obtain
a satisfactory inspection by the FDA covering the manufacturing facilities
before a product can be marketed in the United States. The FDA will review
the manufacturing procedures and inspect the facilities and equipment for
compliance with applicable rules and regulations. Any material change by the
Company in the manufacturing process, equipment or location would
necessitate additional review and approval.
Whether or not FDA approval has been obtained, approval of a
pharmaceutical product by comparable governmental authorities in foreign
countries must be obtained prior to the commencement of clinical trials and
subsequent marketing of such product in such countries. The approval
procedure varies from country to country, and the time required may be
longer or shorter than that for FDA approval. Although there are some
procedures for unified filing for certain European countries, in general
each country has its own procedures and requirements.
In addition to regulations enforced by the USDA and the FDA, the
Company also is subject to regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substances Control
Act, the Resource Conservation and Recovery Act and other present and
potential future federal, state or local regulations. The Company's product
development and research involves the controlled use of hazardous materials,
chemicals, viruses and bacteria. Although the Company believes that its
safety procedures for handling and disposing of such materials comply with
the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held
liable for any damages that result and any such liability could exceed the
resources of the Company.
Subsequent Events
In May, 2000, the FDA initiated an inspection of the Company's
Companion Pet Products division and issued an inspection report on Form FDA
483 on July 5, 2000. The July 5, 2000 FDA report includes several
unfavorable observations of manufacturing and quality assurance practices
and products of the division. The Company is currently compiling its
responses to the July 5, 2000 FDA report. In an effort to address a number
of the FDA's stated concerns, on May 24, 2000, the Company discontinued
production and shipment of Liquichlor and on June 1, 2000 temporarily
stopped production of Cerumite, both products of the Pet Products Division.
The aggregate annual sales volume for these products for the fiscal year
ended December 31, 1999 was $1,059,000.
Upon receipt of the Company's formal response to the July 5, 2000
observations, the FDA will evaluate the Company's response and will
determine the ultimate outcome of the FDA inspection. An unfavorable outcome
could result in fines, penalties and the potential halt of the sale of
certain regulated products, any or all of which could have a material,
adverse effect on the Company. The Company has incurred $634,000 year to
date in related expenses to improve production, to meet documentation,
procedural and regulatory compliance.
Employees
At March 1, 2000, the Company had 234 full-time employees, of whom 63
were in marketing, sales, distribution and customer support, 128 in
manufacturing, 11 in research and development, and 32 in executive, finance
and administration. The Company has no collective bargaining agreement with
its employees, and believes that its employee relations are good.
Part II
Item 6. Selected Financial Data
Five-Year Summary of Selected Financial Data (in thousands, except per share
information) (revised as of August 18, 2000):
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operating Results
Revenues $34,594 $33,195 $34,343 $34,947 $31,232
Operating profit (loss) 1,506 (910) 220 1,332 3,112
(Loss) income from continuing operations (1,971) (3,029) (1,208) (481) 1,428
Loss from discontinued operations * - - - - (4,034)
Extraordinary gain from early
extinguishment of debt, net of tax 387 - - - -
Net loss (1,584) (3,029) (1,208) (481) (2,606)
(Loss) income per share-basic:
From continuing operations $ (.21) $ (.32) $ (.13) $ (.05) $ .16
From discontinued operations - - - - (.44)
Extraordinary gain, net of tax .04 - - - -
Net loss (.17) (.32) (.13) (.05) (.28)
(Loss) income per share-diluted:
From continuing operations $ (.21) $ (.32) $ (.13) $ (.05) $ .15
From discontinued operations - - - - (.41)
Extraordinary gain, net of tax .04 - - - -
Net loss (.17) (.32) (.13) (.05) (.26)
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Working capital (deficit) $ 3,567 $(8,107) $(5,472) $ 2,499 $ 3,831
Total assets 33,862 32,056 33,750 33,845 31,956
Short-term debt and notes payable 17,341 19,318 18,857 13,085 10,463
Long-term debt and notes payable
(excluding current maturities)** 0 408 36 6,893 9,624
Stockholders' equity 5,533 5,923 8,034 9,019 8,173
Average number of common and
Common equivalent shares:
Basic and diluted 9,605 9,470 9,458 9,323 9,173
--------------------
<FN>
* 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.
** In connection with certain amendments to the Company's debt agreements
at the end of June, 2000, the Company has revised
its financial statements as of December 31, 1999 to reclassify certain
long-term debt as short-term debt.
</FN>
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
This "Management's Discussion and Analysis" section and other sections
of this Annual Report on Form 10-K contain forward looking statements that
are based on current expectations, estimates, forecasts and projections
about the industry and markets in which the Company operates, management's
beliefs and assumptions made by management. In addition, other written or
oral statements which constitute forward-looking statements may be made by
or on behalf of the Company. Words such as "expects," "anticipates,"
"intends," plans," "believes," "seeks," "estimates," variations of such
words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance, and
involve certain risks, uncertainties and assumptions which are difficult to
predict. (See "Factors Which May Affect Future Results" below.) Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements. The Company undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
Results of Operations
From mid-1997 through most of 1998, the Company was subject to intense
governmental and regulatory scrutiny and was also confronted with a number
of material operational issues. (See Item 3. "Legal Proceedings"). These
matters had a materially adverse effect on the Company's financial condition
and results of operations in 1997 and 1998 and the first quarter of 1999 and
resulted in the departure of most of the Company's senior management from
1997.
1999 Compared to 1998
The Company had a net loss of $1,584,000, or $.17 per share, in 1999,
as compared to a net loss of $3,029,000, or $.32 per share, in 1998. The
reduction in net loss was primarily attributable to increased revenues and
improved margins complemented by lower operating expenses.
Total revenues for 1999 were $34,594,000, which represents an increase
of $1,399,000, or 4%, from revenues of $33,195,000 in 1998. The increased
revenues were generated by increased Consumer Products and Companion Pet
Products revenues, offset by a decline in Poultry Vaccines revenue.
Total Consumer Products revenues for 1999 increased 19% to $6,938,000,
compared to 1998 revenues of $5,839,000. This increase was primarily
attributable to increased licensing and royalty income and increased product
sales. Licensing and royalty income of $1,869,000 in 1999 increased by
$669,000 compared to 1998, primarily as a result of increased licensing
revenues from Johnson & Johnson. Consumer product sales of $5,069,000 in
1999 increased by $430,000 compared to 1998, primarily as a result of
increased sales to Estee Lauder.
Companion Pet Products revenues for 1999 amounted to $13,595,000, an
increase of $1,082,000, or 9%, compared to 1998. This increase was primarily
attributable to increased product sales associated with the EVSCO line of
veterinary products.
Poultry Vaccines revenues for 1999 amounted to $14,061,000, a decrease
of $782,000, or 5%, compared to 1998. Limited production capacity, old
equipment, and increased potency requirements have limited Vineland's
ability to produce as much quality vaccine as it can sell.
Cost of sales increased by $285,000, or 2%, primarily due to the
higher sales volume. As a percentage of total revenues, cost of sales
decreased from 52.2% in 1998 to 50.9% in 1999. The resulting increase in
gross profit in 1999 to 49.1% from 47.8% in 1998 was primarily attributable
to efficiencies gained through higher product sales, licensing revenues and
production volumes generated from Companion Pet Products and Consumer
Products, which were offset by lower margins associated with lower Poultry
Vaccines revenues.
Consumer Products cost of sales for 1999 increased 30% to $1,893,000,
compared to 1998 cost of sales of $1,459,000. As a percentage of total
revenues, cost of sales increased from 25.0% in 1998 to 27.3% in 1999.
Companion Pet Products cost of sales for 1999 increased $55,000 to
$6,427,000, compared to 1998 cost of sales of $6,372,000. As a percentage of
total revenues, cost of sales decreased from 50.9% in 1998 to 47.3% in 1999.
Poultry Vaccines cost of sales for 1999 decreased 2% to $9,286,000,
compared to 1998 cost of sales of $9,490,000. As a percentage of total
revenues, cost of sales increased from 63.9% in 1998 to 66.0% in 1999.
Selling, general and administrative expenses decreased by $1,295,000,
or 8%, from $15,359,000 in 1998 to $14,064,000 in 1999. These expenses were
41% of revenues in 1999 compared with 46% of revenues in 1998. Much of the
decrease was primarily attributable to decreased legal, consulting and
professional fees in 1999 due to resolution of many of the regulatory
actions faced by the Company in the prior year. Product development and
research expenses decreased by $7,000, or 0.5%, in 1999 as compared with
1998.
Certain equipment purchased for use in the Poultry Vaccine business
could not be used due to patent issues of the manufacturer. In 1998, the
Company recognized a pre-tax loss of $278,000 to adjust the carrying value
of this idle equipment to the amount expected to be recovered from the
manufacturer. In 1999, the Company disposed of this equipment, and realized
an additional pre-tax loss of $140,000. Further, in 1998, the Company also
wrote off poultry vaccine product samples and containers not returned by
its customers resulting in the recognition of a pre-tax loss of $280,000.
Interest expense increased $666,000, or 19%, from $3,443,000 in 1998
to $4,109,000 in 1999. The increase was primarily due to the valuation of
the put warrants issued in conjunction with the American Capital Strategies,
Ltd. subordinated notes. These warrants are marked-to-market on a monthly
basis; the 1999 charge of $854,000 since inception is a result of the
increase in the market price of the Company's stock.
Extraordinary gain on the early extinguishment of debt of $387,000
related to the elimination of accrued interest which was forgiven by the
former bank lenders of $611,000, offset by income tax expense of $224,000. (
See "Liquidity and Capital Resources").
The effective tax rates for 1999 and 1998 were 19% and 30%,
respectively. The change in the effective tax rate is primarily due to the
$854,000 of non-deductible interest expense relating to the mark-to-market
feature of the warrants issued to American Capital Strategies, Ltd. The
valuation allowance decreased from 1998 as a result of certain fully
reserved state tax net operating loss carryforwards expiring in 1999.
1998 Compared to 1997
The Company had a net loss of $3,029,000, or $.32 per share, in 1998,
as compared to a net loss of $1,208,000, or $.13 per share, in 1997. The
major contributing factors to the increased loss were: increased legal,
consulting and professional fees; increased expenses associated with
investigating and addressing regulatory problems; the costs and expenses
associated with termination of certain employees; the hiring of new
management; and increased bank fees and interest charges associated with the
extension of the Company's credit line. The Company incurred approximately
$2.6 million of legal, consulting and professional fees in 1998 and $1.1
million in 1997. Comparable expenditures for 1994 to 1996 averaged about
$0.5 million. The increase in 1998 was principally attributable to the
regulatory actions and investigations which began in 1997 and resulted in
the March 1999 settlement with the U.S. Departments of Justice, Treasury and
Agriculture. Another major contributing factor was a decrease in sales of
poultry vaccines in 1998 as compared with 1997, primarily as a result of the
USDA regulatory action.
Total revenues for 1998 were $33,195,000, which represents a decrease
of $1,148,000, or 3%, from revenues of $34,343,000 in 1997. Sales of poultry
vaccines decreased by $1,809,000, or 11%, in 1998 as compared with 1997.
Poultry vaccine sales were adversely affected by the USDA regulatory action
which remained in partial effect until March 27, 1998. The Company also
experienced lower production volumes of poultry vaccines while it made
changes to improve its Vineland Laboratories operations. Sales of Companion
Pet Products increased by $69,000, or 1%.
Total Consumer Products revenues for 1998 increased by $584,000, or
11%, from 1997 revenues. This increase reflected a $1,028,000 increase in
revenue from the Company's cosmetics and personal care products partially
offset by a decrease in revenues of $444,000 from the Company's
dermatological products. The cosmetics and personal care products revenues
increased in 1998 due to increased product sales to Estee Lauder and
increased licensing and royalty income, primarily from the Company's
relationships with Johnson & Johnson. In August 1998, the Company executed
its second license agreement with a Johnson & Johnson division, licensing
the Novasome(R) microencapsulation technology for use in certain products
and distribution channels to Johnson & Johnson Medical, a Division of
Ethicon, Inc.
The decrease in revenues from dermatological products was due in large
part to the decline in sales to Glaxo. In October 1998, Glaxo notified the
Company that it intended to exit the physician-dispensed skin care market,
which resulted in a loss of sales to Glaxo and the termination of the
royalty agreement. As a result of the termination, the Company acquired the
WellSkin(TM) trade name from Glaxo along with Glaxo's remaining inventory of
products and marketing materials. This termination resulted in the Company
owing $808,000 to Glaxo which is payable at specified intervals through
2000. In December 1998, the Company entered into an agreement with Genesis
Pharmaceutical, Inc., ("Genesis") granting them the exclusive right to
market and distribute the Company's WellSkin(TM) line of skin care products.
Genesis also purchased the entire inventory and marketing materials received
from Glaxo. The Company has a receivable from Genesis for approximately
$112,000 at December 31, 1998. The Company recognized revenue of $6,000 in
1998 from Genesis.
During 1998, the Company recognized $1,200,000 of licensing revenue as
compared to $150,000 in 1997. This revenue consisted of $326,000 from Glaxo;
$6,000 from Genesis; $92,000 from Johnson & Johnson Medical; $433,000 from
Johnson & Johnson Consumer; $210,000 from National Starch; and $133,000 from
Kimberly Clark. During 1997, the licensing revenue consisted of amounts
relating to the agreement with Glaxo.
Cost of sales decreased by $332,000, or 2%, primarily due to the lower
sales volume. However, as a percentage of sales, cost of sales increased
from 51% in 1997 to 52% in 1998. This increase primarily resulted from costs
relating to the Company's reassessment of product manufacturing processes
and formulas incurred in 1998 to increase future production efficiency and
capacity in the Company's Vineland Laboratories division.
Selling, general and administrative expenses increased by $564,000, or
4%, from $14,795,000 in 1997 to $15,359,000 in 1998. These expenses were 46%
of revenues in 1998 compared with 43% of revenues in 1997. Much of the
increase was attributable to increased legal, consulting and professional
fees in 1998. Total professional fees in 1998 were approximately $2.6
million, of which $2.1 million was incurred primarily in response to the
regulatory actions and investigations which began in 1997 and resulted in
the March 1999 settlement with the U.S. Departments of Justice, Treasury and
Agriculture.
Product development and research expenses decreased by $250,000, or
15%, in 1998 as compared with 1997, as the Company curtailed certain
development projects primarily relating to the Consumer Products business.
Interest expense increased $1,590,000, or 86%, from $1,853,000 in 1997
to $3,443,000 in 1998. The increase was due to a charge to earnings of
$645,000 for warrants issued to the Company's bank lenders in connection
with the execution of an extension agreement with its bank lender, higher
borrowings at increased interest rates in 1998, and fees paid to the bank
lenders related to the extension and forbearance agreements.
The effective tax rates for 1998 and 1997 were 30% and 27%,
respectively. Changes in the effective rates primarily reflect the level of
federal and state tax credits offset by changes in the valuation allowance.
The valuation allowance increased from 1997 primarily based on management's
expectations regarding the realizability of certain state deferred tax
assets.
Liquidity and Capital Resources
On October 29, 1999, the Company entered into a $22 million senior
bank credit agreement ("Senior Debt Agreement") with Fleet Capital
Corporation ("Fleet") and a $7 million subordinated debt agreement
("Subordinated Debt Agreement") with American Capital Strategies, Ltd.
("ACS")
These agreements enabled the Company to retire approximately $18.6
million of outstanding debt with its former bank lenders, Fleet Bank, NH,
and Mellon Bank, N.A. In connection with the repayment of the loans, the
Company's former bank lenders agreed to return to the Company, for
cancellation, warrants held by them for the purchase of 810,000 shares of
the Company's Common Stock at exercise prices ranging from $2.00 to $3.50.
Also, approximately $611,000 of accrued interest was waived by the former
bank group and is classified as an extraordinary gain from the early
extinguishment of debt in the 1999 Consolidated Statements of Operations.
There are two sets of warrants remaining with the former lenders. There are
unconditional warrants to purchase 150,000 shares which remain exercisable
by Fleet Bank, NH at $2.00 per share and unconditional warrants to purchase
120,000 shares which remain exercisable by Mellon Bank, N.A. at $2.00 per
share.
The Senior Debt Agreement provides for a revolving line of credit
facility of up to $12 million based upon qualifying accounts receivable and
inventory, a $7 million term loan and a $3 million capital expenditures
credit facility. The borrowings under the revolving line of credit bear
interest at the prime rate plus 1.0% or the London Interbank offered rate
plus 3.25%. The borrowings under the term loan and capital expenditure
credit facility bear interest at the prime rate plus 1.5% or the London
Interbank offered rate plus 3.75%. As of December 31, 1999, borrowings under
the revolving line of credit, term loan and capital expenditures credit
facility were $5,708,000, $7,000,000 and $0, respectively. Provisions under
the revolving line of credit require the Company to maintain a lockbox with
the lender, allowing Fleet Capital to sweep cash receipts from vendors and
pay down the line of credit. Drawdowns on the line of credit are made when
needed to fund operations. Quarterly repayments of the term loan begin on
August 1, 2000 in the amount of $233,000. Repayment of the capital
expenditures credit facility are to be made quarterly over a five year
period after any initial drawdown.
Borrowings under the Subordinated Debt Agreement bear interest at the
rate of 12.5% ("cash portion of interest on subordinated debt") plus an
additional interest component at the rate of 2% which is payable at the
Company's election in cash or Company Common Stock. As of December 31, 1999,
borrowings under the subordinated notes were $7,000,000, offset by an
unamortized debt discount of $2,775,000. The Subordinated Debt Agreement
matures in October 2006. In connection with the Subordinated Debt Agreement
the Company issued to the lender warrants to purchase 1,907,543 shares of
IGI Common Stock at an exercise price of $.01 per share. The debt discount
was recorded at issuance, representing the difference between the $7,000,000
proceeds received by the Company and the total obligation, which included
principal of $7,000,000 and an initial warrant liability of $2,842,000. (See
Note 9 "Detachable Stock Warrants" in the Consolidated Financial
Statements.)
These agreements contain financial and other covenants and
restrictions. The Company was not in compliance under certain covenants
under the agreements related to the fixed charges coverage ratio, maximum
debt to equity ratio and accounts payable ratio as of December 31, 1999;
however, the lenders involved have amended, as of April 12, 2000, the
related agreements to waive the defaults as of December 31, 1999 and to
establish new covenants as of April 12, 2000. The Company was in compliance
with all debt agreement covenants as of April 12, 2000 and the Company
expected that it would be able to comply with the covenants in the amended
debt agreements through at least December 31, 2000. American Capital
Strategies, Ltd. has the right to designate for election to the Company's
Board of Directors that number of directors that bears the same ratio to the
total number of directors as the number of shares of Company Common Stock
owned by it plus the number of shares issuable upon exercise of its warrants
bear to the total number of outstanding shares of Company Common Stock on a
fully-diluted basis, provided that so long as it owns any Common Stock, or
warrants or any of its loans are outstanding, it shall have the right to
designate at least one director or observer on the Board of Directors. At
December 31, 1999, American Capital Strategies, Ltd. had one observer on the
Company's Board of Directors.
Approximately $24.5 million was immediately available to the Company
under the Senior Debt and Subordinated Debt Agreements; borrowings under
these new agreements amounted to $19.7 million as of December 31, 1999. The
new agreements enabled the Company to retire approximately $18.6 million
outstanding with the previous bank lenders, cover associated closing costs
and provide a borrowing facility for working capital and capital
expenditures. As of December 31, 1999 the Company had $4.5 million available
borrowings under these agreements, $3.0 million of which was related to the
capital expenditure credit facility. To secure all of its obligations under
these agreements, the Company has granted the lenders a security interest in
all of the assets and properties of the Company and its subsidiaries.
Subsequent Events
In May, 2000, the FDA initiated an inspection of the Company's
Companion Pet Products division and issued an inspection report on Form FDA
483 on July 5, 2000. The July 5, 2000 FDA report includes several
unfavorable observations of manufacturing and quality assurance practices
and products of the division. The Company is currently compiling its
responses to the July 5, 2000 FDA report. In an effort to address a number
of the FDA's stated concerns, on May 24, 2000, the Company discontinued
production and shipment of Liquichlor and on June 1, 2000 temporarily
stopped production of Cerumite, both products of the Pet Products Division.
The aggregate annual sales volume for these products for the fiscal year
ended December 31, 1999 was $1,059,000. The Company has incurred $634,000
year to date in related expenses to improve production, to meet
documentation, procedural and regulatory compliance. After accounting for
this cessation of production and combining these results with continued
operating losses in the poultry vaccine business, the Company determined
that it was not in compliance with the financial covenants in the debt
agreements, as amended.
On June 26, 2000, the Company entered into Amendment No. 2 to Note and
Equity Purchase Agreement ("Second Subordinated Amendment") with ACS.
Pursuant to the Second Subordinated Amendment, the Company received $500,000
and issued to ACS $500,000 of Series C Senior Subordinated Notes due
September 30, 2000 (the "Series C Notes"); and ACS waived compliance with
certain financial covenants applicable to Borrower contained in the
Subordinated Debt Agreement and modified certain interest payment dates with
respect to the Notes. In addition, the Second Subordinated Amendment permits
the Company to issue additional Series C Notes on July 31, 2000 to pay the
interest then due and payable on the Notes and the Series C Notes. The
Company will issue, in the beginning of August 2000, to ACS an additional
Series C Note in the aggregate principal amount of approximately $300,000
for the interest due.
Also, on June 26, 2000, the Company entered into a Second Amendment to
Loan and Security Agreement dated as of June 23, 2000 (the "Second Senior
Amendment") with Fleet. Pursuant to the Second Senior Amendment, the Company
obtained an "overadvance" of $500,000 under the senior revolving line of
credit (the "Overadvance"), repayable in full on the earlier to occur of
September 22, 2000 or the date of the consummation of the Vineland Sale
(defined below). Under the Second Senior Amendment, Fleet agreed to forbear
from exercising its right to accelerate the maturity of the Senior Loans
upon the default by the Borrower under certain financial covenants (the
"Forbearance Covenants") until the first to occur of: (a) September 22,
2000, (b) the date on which any default, other than a default under the
Forbearance Covenants, occurs under the Senior Debt Agreement, as amended;
or (c) the date of the termination of the Vineland Agreement (defined
below).
On June 26, 2000, the Company entered into an Asset Purchase Agreement
dated as of June 19, 2000 (the "Vineland Agreement"), with Vineland
International, a general partnership which has changed its name to Lohmann
Animal Health International (the "Buyer"). The Vineland Agreement provides
for the sale (the "Vineland Sale") by the Company to the Buyer of the assets
associated with the business of manufacturing, marketing, licensing and
selling poultry vaccines and related equipment conducted by the Vineland
Laboratories division of the Company. In exchange for receipt of such
assets, the Buyer will assume certain Company liabilities, in the aggregate,
equal to approximately $2,300,000 and will pay the Company cash in the
amount of $12,500,000, of which $500,000 will be placed in an escrow fund to
secure potential obligations of the Company relating to final purchase price
adjustments and indemnification. The Company projects a $98,000 after tax
gain on the Vineland Sale offset by a $528,000 after tax extraordinary loss
on the early extinguishment of debt. The Vineland Agreement may be
terminated prior to the closing if any of the following occurs:
1. The Buyer and the Company mutually consent to the termination, or the
Vineland Sale is not consummated on or before the date (September 19,
2000) that is three (3) months after the date of the Vineland
Agreement (June 19, 2000), unless the failure to consummate the
transaction is the result of a material breach of the Vineland
Agreement by the party seeking to terminate the Vineland Agreement;
provided, however, that the passage of such period shall be tolled for
any part thereof (but not exceeding ninety (90) days in the aggregate)
during which any party shall be subject to a non-final order, decree,
ruling or action restraining, enjoining or otherwise prohibiting the
consummation of the transaction;
2. A governmental entity issues an order, decree or ruling or takes any
other action permanently enjoining, restraining or otherwise
prohibiting the transaction and such order, decree, ruling or other
action shall have become final and non-appealable;
3. The stockholders of the Company do not approve the Vineland Agreement
and transaction.
The Company has scheduled a special meeting of stockholders and filed a
Preliminary Proxy Statement with the SEC with respect to stockholder
consideration of the Vineland Sale.
Due to the terms of the Second Senior Amendment and the Second
Subordinated Amendment discussed above, the Company has classified all debt
owed to ACS and Fleet as short-term debt. In this connection, the Company's
independent accountants have determined that substantial doubt exists about
the Company's ability to continue as a going concern. Even if the Company
timely consummates the Vineland Sale and repays the Overadvance and the
Series C Notes, the Company remains highly leveraged; furthermore,
availability for borrowings under the revolving line of credit facility is
dependent on the level of its qualifying accounts receivable and inventory.
The Company is currently generating losses that may extend through the
year 2000, which could unfavorably impact future financial covenants and the
Company's availability for borrowing under the revolving line of credit
facility, which is dependent on the level of its qualifying accounts and
inventory. Although, after giving effect to Fleet's agreement with respect
to the Forbearance Covenants, the Company believes it will be in compliance
with covenants and, upon repayment of the Overadvance, that it will have
availability for borrowing under the revolving line of credit, there can be
no assurance of such continued compliance and availability. The Company
believes it will be able to meet its debt obligations. If the Company were
not able to meet its debt obligations it would consider altering its
business plan, including, if necessary, a sale of selected Company operating
and non operating assets either in addition to or in lieu of the assets to
be sold pursuant to the Vineland Sale. Any significant sale of assets would
require lender approval. Any sale of operating assets would involve a
curtailment of certain of the Company's business operations and a
modification of its business strategy.
The Company's operating activities provided $391,000 of cash during
1999, which included net income and non-cash charges to operations for
depreciation, amortization, loss reserves, and stock and warrant
compensation expense. Additionally, increases in inventory, accounts payable
and accrued expenses, offset by decreases in accounts receivable, other
assets and notes payable, had the effect of decreasing operating cash flow
as compared to 1998. Working capital as of December 31, 1999 amounted to
$3,567,000 as compared to negative $8,107,000 as of December 31, 1998. The
increase in working capital of $11,674,000 was primarily the result of
refinancing in October 1999 and the improvement in operations for the year
ended December 31, 1999. The accounts receivable turnover ratio for 1999 was
4.89 compared to 4.34 for 1998. This increase was primarily as a result of
increased collection efforts. The inventory turnover ratio for 1999 was 1.91
compared to 1.84 for 1998. The Company believes its reserves for inventory
and accounts receivables are adequate.
Certain geographic markets in which the Company does business have
recently experienced political, economic and currency instability. In order
to minimize risk, the Company maintains credit insurance for the majority of
its international accounts receivable, and all sales are denominated in U.S.
dollars to minimize currency fluctuation risk. Because of the volume of
business transacted by the Company internationally, continuation or
recurrence of such unrest or instability could adversely affect the business
of its customers in those countries and the Company's ability to collect its
receivables from such customers, which, in either case, could materially
adversely affect the Company's future operating results.
The Company used $1,007,000 in 1999 for investing activities compared
to $633,000 in 1998. The increase was primarily due to an increase in
capital expenditures for the Company's manufacturing operations.
Factors Which May Affect Future Results
The industry segments in which the Company competes are subject to
intense competitive pressures. The following sets forth some of the risks
which the Company faces.
Highly Leveraged and Debt Covenant Compliance
The ability of the Company to repay the Overadvance and the Series C
Notes pursuant to the June, 2000, amendments to the Company's debt
agreements is dependent upon the consummation of the Vineland Sale or
another similar transaction on or before September 22, 2000. There can be no
assurance that the Company will be successful in doing so. Further, in
connection with the June, 2000 amendments to the Company's debt agreements,
the Company reclassified its long-term debt, outstanding as of December 31,
1999 as short-term debt. In response these events, the Company's independent
accountants have determined that substantial doubt exists about the
Company's ability to continue as a going concern.
Even if the Vineland Sale is timely consummated and the Overadvance
and Series C Notes are timely repaid, the Company is very highly leveraged
and subject to restrictive covenants and restraints which are contained in
its Senior Debt Agreement, as amended, and its Subordinated Debt Agreement,
as amended. The debt agreements contain various affirmative and negative
covenants, such as requirements to achieve minimum tangible net worth and
minimum fixed charge coverage ratios. Furthermore, the Company's available
borrowings under the revolving line of credit are dependent upon the level
of the Company's qualifying accounts receivable and inventory.
Intense Competition in Consumer Products Business
The Company's Consumer Products business competes with large, well-
financed cosmetics and consumer products companies with development and
marketing groups that are experienced in the industry and possess far
greater resources than those available to the Company. There is no assurance
that the Company's consumer products can compete successfully against its
competitors or that it can develop and market new products that will be
favorably received in the marketplace. In addition, certain of the Company's
customers that use the Company's Novasome(R) lipid vesicles in their
products may decide to reduce their purchases from the Company or shift
their business to other suppliers.
Competition in Poultry Vaccine Business
The Company is encountering increased price competition from
international producers of poultry vaccines.
Foreign Regulatory and Economic Considerations
The Company's business may be adversely affected by foreign import
restrictions and additional regulatory requirements. Also, unstable or
adverse economic conditions and fiscal and monetary policies in certain
Latin American and Far Eastern countries, increasingly important markets for
the Company's animal health products, particularly poultry vaccines, could
adversely affect the Company's future business in these countries.
Rapidly Changing Marketplace for Pet Products
The emergence of pet superstores, the consolidation of distribution
channels into fewer, more powerful companies and the diminishing traditional
role of veterinarians in the distribution of pet products could adversely
affect the Company's ability to expand its animal health business or to
operate at acceptable gross margin levels.
Effect of Rapidly Changing Technologies
The Company expects to license its technologies to third parties which
would manufacture and market products incorporating the technologies.
However, if its competitors develop new and improved technologies that are
superior to the Company's technologies, its technologies could be less
acceptable in the marketplace and therefore the Company's planned technology
licensing could be materially adversely affected.
Regulatory Considerations
The Company's poultry vaccines and pet pharmaceutical products are
regulated by the USDA and the FDA, respectively, which subject the Company
to review, oversight and periodic inspections. Any new products are subject
to expensive and sometimes protracted USDA and FDA regulatory approval,
which ultimately may not be granted. Also, certain of the Company's products
may not be approved for sales overseas on a timely basis, thereby limiting
the Company's ability to expand its foreign sales.
Income Taxes
The Company has net deferred tax assets in the amount of $5,850,000 at
December 31, 1999. The largest deferred tax asset relates to the $3,672,000
of net operating loss carryforwards. After considering the $955,000
valuation allowance at December 31, 1999, management believes the Company's
remaining net deferred tax assets are more likely than not to be realized
through the reversal of existing taxable temporary differences, the sale of
certain state net operating losses, and the generation of sufficient future
taxable operating income to ensure utilization of remaining deductible
temporary differences, net operating losses and tax credits. The minimum
level of future taxable income necessary to realize the Company's net
deferred tax assets at December 31, 1999, is approximately $20 million.
There can be no assurance, however, that the Company will be able to achieve
the minimum levels of taxable income necessary to realize its net deferred
tax assets. Federal net operating loss carryforwards expire through 2019.
Significant components expire in 2007 (36%), 2018 (40%) and 2019 (20%). Also
federal research credits expire in varying amounts through the year 2019.
Recent Pronouncements
In 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Transactions." This statement requires
companies to record derivatives on the balance sheet as assets and
liabilities measured at fair value. The accounting treatment of gains and
losses resulting from changes in the value of derivatives depends on the use
of the derivative and whether it qualifies for hedge accounting. The Company
expects to adopt SFAS 133, as amended by SFAS No. 138, no earlier than
January 1, 2001, and is currently assessing the impact of adoption on its
financial position, results of operations and liquidity.
In December 1999, the SEC released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101), which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements. SAB 101 allows companies to report any changes in
revenue recognition related to adopting its provisions as an accounting
change at the time of implementation in accordance with Accounting
Principles Board (APB) No. 20, "Accounting Changes". The Company is
currently in the process of assessing the impact of adopting SAB 101 on its
revenue recognition policies and on prior revenue transactions. While the
Company has not yet completed its review, the Company currently anticipates
that SAB 101 will not have a material impact on its financial position, cash
flows, results of operations or liquidity. Any accounting changes that might
result from the adoption of SAB 101 must be made no later that the fourth
quarter of 2000, retroactively effective to January 1, 2000").
In March 2000, the FASB issued Financial Interpretation No. 44 (FIN
44), "Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB No. 25," which clarifies (a) the criteria for
definition of an employee for purposes of applying APB No. 25, (b) the
criteria for determining whether a plan qualifies as a non-compensatory
plan, (c) the accounting consequence of various modifications to the terms
of a previous fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. This
interpretation is effective July 1, 2000, with certain provisions effective
earlier. The Company does not expect FIN 44 to have a significant impact on
its financial position, results of operations or liquidity.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets, December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule II. Valuation and Qualifying Accounts and Reserves
Schedules other than those listed above are omitted for the
reason that they are either not applicable or not required or
because the information required is contained in the financial
statements or notes thereto.
Condensed financial information of the Registrant is omitted
since there are no substantial amounts of "restricted net
assets" applicable to the Company's consolidated subsidiaries.
(3) Exhibits Required to be Filed by Item 601 of Regulation S-K.
The exhibits listed in the Exhibit Index immediately preceding
such exhibits are filed as part of this Annual Report on Form
10-K unless incorporated by reference as indicated.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment on Form
10-K/A to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: August 28, 2000 IGI, Inc.
By: /s/ Paul Woitach
----------------
Paul Woitach
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Amendment on Form 10-K/A to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999 has been signed below by the
following persons on behalf of the Registrant in the capacity and on the
date indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Edward B. Hager Chairman of the Board August 29, 2000
-------------------
Edward B. Hager
/s/ Paul Woitach President and Chief Executive Officer August 29, 2000
---------------- (Principal executive officer
Paul Woitach)
/s/ Robert E. McDaniel Executive Vice President August 29, 2000
----------------------
Robert E. McDaniel
/s/ Domenic N. Golato Senior Vice President August 29, 2000
--------------------- Chief Financial Officer
Domenic N. Golato (Principal financial officer)
/s/ Charles R. Carroll Controller, Treasurer and Chief August 29, 2000
---------------------- Accounting Officer
Charles R. Carroll (Principal accounting officer)
/s/Stephen J. Morris Director August 29, 2000
--------------------
Stephen J. Morris
/s/ Terrence D. Daniels Director August 29, 2000
-----------------------
Terrence D. Daniels
/s/ Jane E. Hager Director August 29, 2000
-----------------
Jane E. Hager
/s/ Constantine L. Hampers Director August 29, 2000
--------------------------
Constantine L. Hampers
/s/ Terrence O'Donnell Director August 29, 2000
----------------------
Terrence O'Donnell
-------------------- Director
Donald W. Joseph
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of IGI, Inc.:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of IGI, Inc. and its subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. In addition,
in our opinion, the financial statement schedule listed in the accompanying
index presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 8 to the
financial statements, on June 26, 2000, the Company received waivers as to
certain debt covenant violations, which waivers expire at the earlier of
September 22, 2000, or upon termination of an agreement to sell one of the
Company's businesses. The Company expects to complete the sale before
September 22, 2000, however the sale of this business is subject to certain
contingencies, including approval of the transaction by the Company's
shareholders. If the waivers expire, a significant amount of the Company's
outstanding debt would be callable. Accordingly, substantial doubt exists
about the Company's ability to continue as a going concern. Management's
plans in regard to this matter are also discussed in Note 8. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
April 12, 2000, except as to Note 8,
which is as of August 18, 2000
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Revised as of August 18, 2000)
December 31, 1999 and 1998
(in thousands, except share and per share information)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 416 $ 1,068
Accounts receivable, less allowance for doubtful
accounts of $354 and $516 in 1999 and 1998,
respectively 6,061 6,462
Licensing and royalty income receivable 432 440
Inventories 8,762 7,406
Current deferred taxes 1,096 1,275
Prepaid expenses and other current assets 348 433
---------------------
Total current assets 17,115 17,084
---------------------
Investments 144 535
Property, plant and equipment, net 9,781 9,479
Deferred income taxes 4,754 4,188
Deferred financing costs 1,678 75
Other assets 390 695
---------------------
Total assets $ 33,862 $ 32,056
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility $ 5,708 $ 6,657
Current portion of long-term debt 11,225 -
Credit line - 12,000
Current portion of notes payable 408 661
Accounts payable 4,268 3,235
Accrued payroll 253 196
Due to stockholder 115 380
Accrued interest 164 432
Other accrued expenses 2,150 1,614
Income taxes payable 15 16
---------------------
Total current liabilities 24,306 25,191
---------------------
Long-term debt, net of discount and current portion - -
Notes payable - 408
Deferred income 327 534
Detachable stock warrants 3,696 -
---------------------
Total liabilities 28,329 26,133
---------------------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, None outstanding - -
Common stock, $.01 par value; 50,000,000 and
30,000,000 Shares authorized in 1999 and 1998,
respectively; 10,133,183 and 9,648,931 shares
issued in 1999 and 1998, respectively 102 97
Additional paid-in capital 20,628 19,961
Accumulated deficit (13,556) (11,972)
Less treasury stock, 105,510 and 136,014 shares
at cost, in 1999 and 1998, respectively (1,641) (2,163)
---------------------
Total Stockholders' Equity 5,533 5,923
---------------------
Total liabilities and stockholders' equity $ 33,862 $ 32,056
=====================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1999, 1998 and 1997
(in thousands, except share and per share information)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Sales, net $ 32,725 $ 31,995 $ 34,193
Licensing and royalty income 1,869 1,200 150
----------------------------------------
Total revenues 34,594 33,195 34,343
Cost and Expenses:
Cost of sales 17,606 17,321 17,653
Selling, general and administrative expenses 14,064 15,359 14,795
Product development and research expenses 1,418 1,425 1,675
----------------------------------------
Operating profit (loss) 1,506 (910) 220
Interest expense, net (4,109) (3,443) (1,853)
Other income (expense), net 31 33 (11)
----------------------------------------
Loss before benefit for income taxes and
Extraordinary gain (2,572) (4,320) (1,644)
Benefit for income taxes (601) (1,291) (436)
----------------------------------------
Loss before extraordinary item (1,971) (3,029) (1,208)
Extraordinary gain on early extinguishment of debt,
net of income tax expense of $224 387 - -
----------------------------------------
Net loss $ (1,584) $ (3,029) $ (1,208)
========================================
Loss per share:
Basic and diluted:
Loss before extraordinary gain $ (.21) $ (.32) $ ( .13)
Extraordinary gain, net of tax .04 - -
----------------------------------------
Net loss $ (.17) $ (.32) $ (.13)
========================================
Average number of common shares:
Basic and diluted 9,604,768 9,470,413 9,457,938
========================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,584) $(3,029) $(1,208)
Reconciliation of net loss to net cash provided
from operating activities:
Depreciation and amortization 1,027 992 1,037
Amortization of deferred financing costs and debt discount 123 - -
Extraordinary gain on early extinguishment of debt, net of tax (387) - -
Gain on sale of assets (30) (62) -
Write off of other assets 140 558 -
Provision for loss on accounts and notes
receivable and inventories 1,116 1,482 1,610
Recognition of deferred revenue (203) (242) (150)
Issuance of stock to 401(k) plan 82 - 40
Benefit for deferred income taxes (611) (1,321) (447)
Interest expense relating to put feature of warrants 854 - -
Warrants issued to lenders under prior extension agreements 223 645 -
Stock option compensation expense:
Non-employee stock options 49 149 47
Directors' stock issuance 116 94 -
Other, net - 17 (50)
Changes in operating assets and liabilities:
Accounts receivable 158 239 721
Inventories (2,244) 374 (1,735)
Receivable due under royalty agreement 8 (328) 1,000
Prepaid and other current assets 238 333 398
Accounts payable and accrued expenses 1,856 929 1,123
Deferred revenue 275 59 -
Short-term notes payable, operating (814) - -
Income taxes payable (1) (73) 51
------------------------------
Net cash provided from operating activities 391 816 2,437
------------------------------
Cash flows from investing activities:
Capital expenditures (1,064) (607) (636)
Proceeds from sale of assets 40 165 -
(Increase) decrease in other assets 17 (191) 68
------------------------------
Net cash used in investing activities (1,007) (633) (568)
------------------------------
Cash flows from financing activities:
Borrowings under term loan 7,000 - 2,358
Borrowings under subordinated note agreements, net of discount 4,158 - -
Cash proceeds from issuance of warrants to lenders 2,842 - -
Borrowings under revolving credit agreement 11,584 - -
Repayment of revolving credit agreement (5,876) - -
Repayments of debt (18,657) (236) (3,443)
Payments of deferred financing costs (1,659) (75) -
Proceeds from exercise of common stock options - - 95
Change in book overdraft 572 - -
------------------------------
Net cash used in financing activities (36) (311) (990)
------------------------------
Net (decrease) increase in cash and cash equivalents (652) (128) 879
Cash and cash equivalents at beginning of year 1,068 1,196 317
------------------------------
Cash and cash equivalents at end of year $ 416 $ 1,068 $ 1,196
==============================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
See Note 4 for Supplemental Cash Flow information.
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1999, 1998 and 1997
(in thousands, except share information)
<TABLE>
<CAPTION>
Common Stock Additional
-------------------- Stock Paid-In
Shares Amount Subscribed Capital
------ ------ ---------- -------
<S> <C> <C> <C> <C>
Balance January 1, 1997 9,572,681 $ 96 $ 175 $19,115
Settlement of litigation (175) (118)
Exercise of stock options, including tax benefits of $7 30,000 122
Issuance of stock to 401(k) plan (92)
Value of stock options issued to non-employees 47
Interest earned on stockholders' notes
Reserve on stockholders' notes receivable
Net loss
--------------------------------------------
Balance, December 31, 1997 9,602,681 96 - 19,074
Issuance of stock pursuant to Directors' Stock Plan 46,250 1 93
Value of stock options issued to non-employees 149
Value of warrants issued under extension agreement 645
Interest earned on stockholders' notes
Reserve on stockholders' notes receivable
Net loss
--------------------------------------------
Balance, December 31, 1998 9,648,931 97 - 19,961
Issuance of stock pursuant to Directors' Stock Plan 66,509 1 115
Partial settlement of amounts due to stockholder in
lieu of cash 417,744 4 720
Value of stock options issued to non-employees 49
Value of warrants issued under second extension agreement 223
Issuance of stock to 401(k) Plan (440)
Net loss
--------------------------------------------
Balance, December 31, 1999 10,133,184 $102 $ - $20,628
============================================
<CAPTION>
Stockholders' Accumu- Total
Notes lated Treasury Stockholders'
Receivable Deficit Stock Equity
------------- ----------------------------------
<S> <C> <C> <C> <C>
Balance January 1, 1997 $(114) $ (7,735) $(2,518) $ 9,019
Settlement of litigation 243 (50)
Exercise of stock options, including tax benefits of $7 (20) 102
Issuance of stock to 401(k) plan 132 40
Value of stock options issued to non-employees 47
Interest earned on stockholders' notes (10) (10)
Reserve on stockholders' notes receivable 94 94
Net loss (1,208) (1,208)
-----------------------------------------------
Balance, December 31, 1997 (30) (8,943) (2,163) 8,034
Issuance of stock pursuant to Directors' Stock Plan 94
Value of stock options issued to non-employees 149
Value of warrants issued under extension agreement 645
Interest earned on stockholders' notes (3) (3)
Reserve on stockholders' notes receivable 33 33
Net loss (3,029) (3,029)
-----------------------------------------------
Balance, December 31, 1998 - (11,972) (2,163) 5,923
Issuance of stock pursuant to Directors' Stock Plan 116
Partial settlement of amounts due to stockholder in lieu of cash 724
Value of stock options issued to non-employees 49
Value of warrants issued under second extension agreement 223
Issuance of stock to 401(k) Plan 522 82
Net loss (1,584) (1,584)
-----------------------------------------------
Balance, December 31, 1999 $ - $(13,556) $(1,641) $ 5,533
===============================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of the Business
IGI, Inc. ("IGI" or the "Company") is a diversified company engaged in
three business segments:
* Consumer Products Business - production and marketing of cosmetics
and skin care products,
* Companion Pet Products Business - production and marketing of
companion pet products such as veterinary pharmaceuticals,
nutritional supplements and grooming aids; and
* Poultry Vaccines Business - production and marketing of poultry
vaccines and related products.
Principles of Consolidation
The consolidated financial statements include the accounts of IGI,
Inc. and its wholly owned and majority-owned subsidiaries. All intercompany
accounts and transactions have been eliminated. Investment in an affiliated
company with a 20% ownership interest is accounted for under the cost
method.
Cash Equivalents
Cash equivalents consist of short-term investments which, at the date
of purchase, have maturities of 90 days or less. Book overdraft balances of
$572,000 have been reclassified to accounts payable in the Consolidated
Balance Sheets at December 31, 1999.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash, cash equivalents, accounts
receivable, notes receivable and certain restricted investments. The Company
limits credit risk associated with cash and cash equivalents by placing its
cash and cash equivalents with two high credit quality financial
institutions. Accounts receivable includes customers in several key
geographic areas. Of these, Mexico, Indonesia, Thailand and certain other
Latin American and Far Eastern countries are important markets for the
Company's poultry vaccines and other products. These countries have from
time to time experienced varying degrees of political unrest and currency
instability. Because of the volume of business transacted by the Company in
these areas, continuation or recurrence of such unrest or instability could
adversely affect the businesses of its customers in these areas or the
Company's ability to collect its receivables from such customers, which in
either case could adversely impact the Company's future operating results.
In order to minimize risk, the Company maintains credit insurance for the
majority of its international accounts receivable and all sales are
denominated U.S. dollars to minimize currency fluctuation risk.
Inventories
Inventories are valued at the lower of cost, using the first-in,
first-out ("FIFO") method, or market.
Property, Plant and Equipment
Depreciation of property, plant and equipment is provided for under
the straight-line method over the assets' estimated useful lives as follows:
<TABLE>
<CAPTION>
Useful Lives
--------------
<S> <C>
Buildings and improvements 10 - 30 years
Machinery and equipment 3 - 10 years
</TABLE>
Repair and maintenance costs are charged to operations as incurred
while major improvements are capitalized. When assets are retired or
disposed, the cost and accumulated depreciation thereon are removed from the
accounts and any gains or losses are included in operating results.
Other Assets
Other assets include cost in excess of net assets acquired of
$325,000, related to the Company's 1994 acquisition of a petcare business,
which is being amortized on a straight-line basis over 40 years. At December
31, 1999, this goodwill net of amortization was $207,000. Deferred financing
costs include fees paid to the lenders and external legal counsel to assist
the Company in obtaining new financing. These costs are being amortized over
the term of the related debt.
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," the Company reviews its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. In
performing such review for recoverability, the Company compares expected
future cash flows of assets to the carrying value of long-lived assets and
related identifiable intangibles. If the expected future cash flows
(undiscounted) are less than the carrying amount of such assets, the Company
recognizes an impairment loss for the difference between the carrying value
of the assets and their estimated fair value, with fair values being
determined using projected discounted cash flows at the lowest level of cash
flows identifiable in relation to the assets being reviewed.
Income Taxes
The Company records income taxes under the asset and liability method
of accounting for income taxes. Under the asset and liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future
years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is recorded based on a
determination of the ultimate realizability of future deferred tax assets.
Stock-Based Compensation
Compensation costs attributable to stock option and similar plans are
recognized based on any difference between the quoted market price of the
stock on the date of grant over the amount the employee is required to pay
to acquire the stock (the intrinsic value method). Such amount, if any, is
accrued over the related vesting period, as appropriate. Since the Company
uses the intrinsic value method, it makes pro forma disclosures of net
income and earnings per share as if the fair-value based method of
accounting had been applied.
Financial Instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, notes receivable, restricted Common Stock, notes
payable and short-term debt. The carrying value of these instruments
approximates the fair value.
Revenue Recognition
Sales, net of appropriate cash discounts, product returns and sales
reserves, are recorded upon shipment of products. Revenues earned under
research contracts or licensing and supply agreements are either recognized
when the related contract provisions are met, or, if under such contracts or
agreements the Company has continuing obligations, the revenue is initially
deferred and then recognized over the life of the agreement.
The Company is still assessing the impact of adoption of SAB 101.
However, based upon its preliminary review: (a) for the one contract
identified in which up-front fees were recognized immediately, the Company
did not have continuing performance obligations, either under the specific
contract or related contracts, and (b) for each contract with up-front fees
where the company had additional performance obligations, or related
contracts with performance obligations, the Company recognized the up-front
fees over the life of the agreement or the related agreements, whichever was
longer.
Product Development and Research
The Company's research and development costs are expensed as incurred.
Net Loss per Common Share
Basic net loss per share of Common Stock was computed based on the
weighted average number of shares of Common Stock outstanding during the
period. Diluted net loss per share of Common Stock is computed using the
weighted average number of shares of Common Stock and potential dilutive
stock outstanding during the period. Potential dilutive Common Stock
includes shares issuable upon the exercise of Common Stock options and
warrants. Due to the Company's net loss for the years ended December 31,
1999, 1998 and 1997, the effect of the Company's potential dilutive Common
Stock was anti-dilutive for each year; as a result, the basic and diluted
weighted average number of Common Shares outstanding and net loss per Common
Share are the same. Potentially dilutive common stock equivalents which were
excluded from the net loss per share calculations due to their anti-dilutive
effect amounted to 5,424,743 for 1999, 2,513,665 for 1998, and 2,134,465
for 1997.
Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income and its components. Comprehensive income is defined to
include all changes in stockholders' equity during a period except those
resulting from investments by owners and distributions to owners. Since
inception, the Company has not had transactions that are required to be
reported in other comprehensive income. Comprehensive income (loss) for each
period presented is equal to the net loss for each period as presented in
the Consolidated Statements of Operations.
Asset Write-Off's
Certain equipment purchased for use in the Poultry Vaccine business
could not be used due to patent issues of the manufacturer. In 1998, the
Company recognized a pre-tax loss of $278,000 to adjust the carrying value
of this idle equipment to the amount expected to be recovered from the
manufacturer. In 1999, the Company disposed of this equipment, and realized
an additional pre-tax loss of $140,000. Further, in 1998 the Company also
wrote off poultry vaccine product samples and containers not returned by its
customers resulting in the recognition of a pre-tax loss of $280,000.
Business Segments
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 superseded SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise," replacing
the "industry segment" approach with the "management" approach. The
management approach indicates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major
customers. The adoption of SFAS No. 131 did not affect results of operations
or financial position but did affect the disclosure of segment information
included in Note 17, "Business Segments."
Reclassification
Certain previously reported amounts have been reclassified to conform
with the current period presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include allowances for excess and
obsolete inventories, allowances for doubtful accounts and other assets, and
provisions for income taxes and related deferred tax asset valuation
allowances. Actual results could differ from those estimates.
Environmental Accounting
Accruals for environmental remediation are recorded when it is
probable a liability has been incurred and costs are reasonably estimable.
The estimated liabilities are recorded at undiscounted amounts. It is the
Company's practice to reflect environmental insurance recoveries in the
results of operations for the quarter in which the litigation is resolved
through settlement or other appropriate legal process.
Recent Pronouncements
In 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Transactions." This statement requires
companies to record derivatives on the balance sheet as assets and
liabilities measured at fair value. The accounting treatment of gains and
losses resulting from changes in the value of derivatives depends on the use
of the derivative and whether it qualifies for hedge accounting. The Company
expects to adopt SFAS 133, as amended by SFAS No. 138, no earlier than
January 1, 2001, and is currently assessing the impact of adoption on its
financial position, results of operations and liquidity.
In December 1999, the SEC released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101), which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements. SAB 101 allows companies to report any changes in
revenue recognition related to adopting its provisions as an accounting
change at the time of implementation in accordance with Accounting
Principles Board (APB) No. 20, "Accounting Changes". The Company is
currently in the process of assessing the impact of adopting SAB 101 on its
revenue recognition policies and on prior revenue transactions. While the
Company has not yet completed its review, the Company currently anticipates
that SAB 101 will not have a material impact on its financial position, cash
flows, results of operations or liquidity. Any accounting changes that might
result from the adoption of SAB 101 must be made no later that the fourth
quarter of 2000, retroactively effective to January 1, 2000").
In March 2000, the FASB issued Financial Interpretation No. 44 (FIN
44), "Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB No. 25," which clarifies (a) the criteria for
definition of an employee for purposes of applying APB No. 25, (b) the
criteria for determining whether a plan qualifies as a non-compensatory
plan, (c) the accounting consequence of various modifications to the terms
of a previous fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. This
interpretation is effective July 1, 2000, with certain provisions effective
earlier. The Company does not expect FIN 44 to have a significant impact on
its financial position, results of operations or liquidity.
2. Investments
The Company has a 20% investment in Indovax, Ltd., an Indian poultry
vaccine company. The Indovax investment, which amounted to $59,000 at
December 31, 1999, and 1998 was principally made to obtain technical fees,
and to sell the Company's products to Indovax so that they could be
distributed in India. The Company considers its investment to be incidental
to earning such fees and profits. The Company does not participate in the
operating and financial policy making of Indovax and, because Indian
nationals control Indovax, does not believe it exercises significant
influence over Indovax's operating and financial policies. Accordingly, the
Company accounts for its Indovax investment using the cost method. Dividends
received from Indovax were $0 in 1999, $22,000 in 1998 and $23,000 in 1997.
The Company has not received any payments or fees from Indovax .
Other investments include 271,714 shares of restricted Common Stock of
IMX Corporation ("IMX"), a publicly-traded company, valued at $0.31 and
$1.75 per share as of December 31, 1999 and 1998, respectively, received
pursuant to an exclusive Supply Agreement (the "Supply Agreement") dated
September 30, 1997 between the Company and IMX. These shares are restricted
both by governmental and contractual requirements and the Company is unsure
if or when it will be able to sell these shares. Through December 31, 1999,
the Company had not yet recognized income related to this agreement. The
total investment in IMX stock was $84,000 at December 31, 1999 and $475,000
at December 31, 1998, with corresponding amounts reflected as deferred
income in the accompanying Consolidated Balance Sheets.
Under the IMX agreement, the Company agreed to manufacture and supply
100% of IMX's requirements for two products at prices stipulated in the
exclusive Supply Agreement, subject to renegotiation subsequent to 1998. .
The IMX shares received were not registered, and were restricted by
contractual requirements. IGI has never successfully supplied the products
designated in the agreement. The Company is currently involved in
discussions with IMX concerning possible modifications to the Supply
Agreement as the Company has determined that it will not supply the products
stipulated by the Supply Agreement but may supply certain other products
based on negotiations with IMX. If the Company is not successful in these
negotiations, the Company may return the IMX shares to IMX.
3. Supply and Licensing Agreements
In 1996, the Company entered into a license and supply agreement with
Glaxo Wellcome, Inc. ("Glaxo"). The agreement granted Glaxo exclusive rights
to market the WellSkin(TM) product line in the United States to physicians.
Under the terms of the agreement, IGI manufactured these products for Glaxo.
This agreement provided for Glaxo to pay royalties to IGI based on sales,
and to pay a $1,000,000 advance royalty to IGI in 1997 of which $300,000 was
non-refundable. The advance royalty was recorded as deferred income. In
1999, 1998 and 1997, IGI recognized $0, $326,000 and $150,000, respectively,
of royalty income under the Glaxo Agreement. By an agreement dated December
10, 1998, the license and supply agreement with Glaxo was terminated. The
termination agreement provided that IGI would purchase all of Glaxo's
inventory and marketing materials related to the WellSkin(TM) line in
exchange for a $200,000 promissory note, due and payable in December 1999
bearing interest at a rate of 11%. This inventory was immediately resold for
$200,000 in connection with a new agreement for the WellSkin(TM) line. The
Company recognized no gain or loss on this inventory transaction and, since
the Company never took title to the inventory, it did not recognize this
transaction as revenue.
The Company also issued a promissory note to Glaxo for $608,000,
representing the unearned portion of the advance royalty in exchange for
Glaxo transferring all rights to the WellSkin(TM) trademark to IGI. This
note bears interest at a rate of 11% and to date the Company has paid
$200,000 and is to pay $200,000 and $208,000 in June 2000 and December 2000,
respectively.
Prior to the date of the termination agreement, the Company had
accrued through cost of sales a net amount due Glaxo of $404,000 for
operational issues related to the Glaxo agreement. By the terms of the
termination agreement, the net amount payable to Glaxo was forgiven and
canceled. Accordingly, the Company recognized the effect of this settlement
by reversing the net accrual and reducing cost of sales by $404,000.
In December, 1998, the Company entered into a ten-year supply and
sales agreement with Genesis Pharmaceutical, Inc. ("Genesis") for the
marketing and distribution of the Company's WellSkin(TM) line of skin care
products. The agreement provided that Genesis would pay the Company a
$1,000,000 trademark and technology transfer fee, in four equal annual
payments, which is being recognized as revenue over the life of the
agreement. In addition, Genesis will pay the Company a royalty on its net
sales with certain guaranteed minimum royalty amounts. Genesis also
purchased WellSkin(TM) inventory and marketing materials previously
purchased by the Company from Glaxo for $200,000.
In March 1997, IGI granted Kimberly Clark ("Kimberly") the worldwide
rights to use certain patents and technologies in the industrial hand care
and cleaning products field. Upon signing the agreement, Kimberly paid IGI a
$100,000 license fee that was recognized as revenue by the Company. The
agreement requires Kimberly to make royalty payments based on quantities of
material produced. The Company was also guaranteed minimum royalties over
the term of the agreement. In both 1999 and 1998, the Company recognized
$133,000 as income as a result of the agreement. In July 1999, the Company
signed a new exclusive license agreement with Kimberly which terminated the
agreement dated March 1997. The July 1999 agreement granted Kimberly an
exclusive license pertaining to the patents and improvements within the
field of industrial hand care and cleansing products for non-retail markets.
The new agreement will be in effect from July 29, 1999 through July 30,
2000. Under the new agreement, Kimberly paid the Company consideration of
$120,000 which is being recognized over the term of the agreement.
The Company entered into a ten-year license agreement with Johnson &
Johnson Consumer Products, Inc. ("J&J") in 1995. The agreement provided J&J
with a license to produce and sell Novasome(R) microencapsulated retinoid
products for royalties to the Company on net sales of such products. J&J
began selling such products and making royalty payments in the first quarter
of 1998. The Company recognized $1,210,000 and $433,000 of income related to
this agreement for the years ended December 31, 1999 and 1998, respectively.
In April 1998, the Company entered into a research and development
agreement with National Starch and Chemical Company ("National Starch") to
evaluate Novasome(R) technology. The agreement provided for a minimum of at
least six, or up to as many as nine, monthly payments commencing in June
1998 plus $100,000 for the purchase of a patented Novamix(R) machine. The
Company recognized $60,000 and $210,000 in licensing income in 1999 and
1998, respectively, related to the National Starch agreement. The agreement
ended in June of 1999.
In August 1998, the Company granted Johnson & Johnson Medical ("JJM"),
a Division of Ethicon, Inc., worldwide rights for use of the Novasome(R)
technology for certain products and distribution channels. The agreement
provided for an up-front license fee of $150,000, which was recognized as
revenue by the Company in 1998, and future royalty payments based on JJM's
sales of licensed products. The Company is guaranteed minimum royalties over
the ten-year term of the agreement. In 1999, the Company recognized $126,000
of royalty income.
See also Note 2 "Investments" for a description of the IMX Supply
Agreement.
4. Supplemental Cash Flow Information
Cash payments for income taxes and interest during the years ended
December 31, 1999, 1998, and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Income taxes paid (refunded), net $ (1) $ 0 $ (33)
Interest 2,153 2,163 1,853
</TABLE>
In addition, during the years ended December 31, 1999, 1998, and 1997,
the Company had the following non-cash financing and investing activities:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Accrual for additions to other assets $ - $ 40 $ -
Tax benefits of exercise of common stock
options - - 7
Treasury stock repurchased - - 20
Note payable to Glaxo (See Notes 3 and 7) - 808 -
Note receivable from Genesis (See Note 3) - (112) -
Partial settlement of amounts due to
stockholder in Company Common Stock
(See Note 15) 725 - -
</TABLE>
See Note 2 "Investments" for discussion regarding IMX investment.
5. Inventories
Inventories as of December 31, 1999 and 1998 consisted of:
<TABLE>
<CAPTION>
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Finished goods $2,445 $2,785
Raw materials 2,464 2,210
Work-in-process 3,853 2,411
----------------
$8,762 $7,406
================
</TABLE>
6. Property, Plant and Equipment
Property, plant and equipment, at cost, as of December 31, 1999 and
1998 consisted of:
<TABLE>
<CAPTION>
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Land $ 625 $ 625
Buildings 9,796 9,748
Machinery and equipment 10,598 9,986
Construction in progress 329 -
--------------------
21,348 20,359
Less accumulated depreciation (11,567) (10,880)
--------------------
Property, plant and equipment, net $ 9,781 $ 9,749
====================
</TABLE>
The Company recorded depreciation expense of $864,000, $861,000 and
$925,000 in 1999, 1998 and 1997, respectively.
7. Notes Payable
Notes payable at December 31, 1999 and 1998 consisted of:
<TABLE>
<CAPTION>
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Glaxo (See Note 3) $ 408 $ 808
Other - 261
----------------
408 1,069
Less current portion (408) (661)
----------------
$ - $ 408
================
</TABLE>
The Company's licensing and supply agreement with Glaxo was terminated
in December 1998, resulting in the issuance of a $200,000 promissory note
which bore interest at a rate of 11% and was paid in December 1999. The
Company also issued a promissory note to Glaxo for $608,000 bearing interest
at 11%, which represents the unearned portion of the advance royalty.
Principal and interest amounts are payable semi-annually; the Company made
the first payment of $200,000 in December 1999 and will make payments of
$200,000 and $208,000 in June 2000 and December 2000, respectively.
8. Debt
Debt as of December 31, 1999 and 1998 consisted of:
<TABLE>
<CAPTION>
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Revolving credit facility $ 5,708 $ 6,657
Credit line - 12,000
Term loan under Senior Debt Agreement 7,000 -
Notes under Subordinated Debt Agreement 7,000 -
--------------------
19,708 18,657
Less unamortized debt discount under
Subordinated Debt Agreement (See Note 9) 2,775 -
--------------------
Revolving Credit Facility and current
portion of long-term debt $16,933 $18,657
====================
</TABLE>
According to the terms of the debt agreements, aggregate annual
principal payments due on debt for the years subsequent to December 31, 1999
are as follows:
<TABLE>
<CAPTION>
Year (in thousands)
---- -------------
<S> <C>
2000 $ 6,175
2001 933
2002 933
2003 933
2004 and thereafter 10,734
-------
$19,708
=======
</TABLE>
On October 29, 1999, the Company entered into a $22 million senior
bank credit agreement ("Senior Debt Agreement") with Fleet Capital
Corporation and a $7 million subordinated debt agreement ("Subordinated Debt
Agreement") with American Capital Strategies, Ltd.
These agreements enabled the Company to retire approximately $18.6
million of outstanding debt with its former bank lenders, Fleet Bank, NH,
and Mellon Bank, N.A. In connection with the repayment of their loans, the
Company's former bank lenders agreed to return to the Company, for
cancellation, warrants held by them for the purchase of 810,000 shares of
the Company's Common Stock at exercise prices ranging from $2.00 to $3.50.
Also, approximately $611,000 of accrued interest was waived by the former
bank group and is classified as an extraordinary gain from the early
extinguishment of debt in the 1999 Consolidated Statements of Operations.
The Senior Debt Agreement provides for a revolving line of credit
facility of up to $12 million based upon qualifying accounts receivable and
inventory, a $7 million term loan and a $3 million capital expenditures
credit facility. The borrowings under the revolving line of credit bear
interest at the prime rate plus 1.0% or the London Interbank offered rate
plus 3.25%. The borrowings under the term loan and capital expenditure
credit facility bear interest at the prime rate plus 1.5% or the London
Interbank offered rate plus 3.75%. As of December 31, 1999, borrowings under
the revolving line of credit, term loan and capital expenditures credit
facility were $5,708,000, $7,000,000 and $0, respectively. Provisions under
the revolving line of credit require the Company to maintain a lockbox with
the lender, allowing Fleet Capital to sweep cash receipts from vendors and
pay down the line of credit. Drawdowns on the line of credit are made when
needed to fund operations. Quarterly repayments of the term loan begin on
August 1, 2000 in the amount of $233,000. Repayments of the capital
expenditures credit facility are to be made quarterly over a five year
period after any initial drawdown.
Borrowings under the Subordinated Debt Agreement bear interest,
payable monthly, at the rate of 12.5%, ("cash portion of interest on
subordinated debt"), plus an additional interest component at the rate of
2%, ("Additional interest component") which is payable at the Company's
election in cash or in Company Common Stock. As of December 31, 1999,
borrowings under the subordinated notes were $7,000,000, offset by an
unamortized debt discount of $2,775,000. The Subordinated Debt Agreement
matures in October 2006. In connection with the Subordinated Debt Agreement,
the Company issued to the lender warrants to purchase 1,907,543 shares of
IGI Common Stock at an exercise price of $.01 per share. (See Note 9,
"Detachable Stock Warrants".)
American Capital Strategies, Ltd. has the right to designate for
election to the Company's Board of Directors that number of directors that
bears the same ratio to the total number of directors as the number of
shares of Company Common Stock owned by it plus the number of shares
issuable upon exercise of its warrants bear to the total number of
outstanding shares of Company Common Stock on a fully-diluted basis,
provided that so long as it owns any Common Stock, or warrants or any of its
loans are outstanding, it shall have the right to designate at least one
director or observer on the Board of Directors. At December 31, 1999
American Capital Strategies, Ltd. had one observer on the Company's Board of
Directors.
Borrowings under these new agreements amounted to $19.7 million at
December 31, 1999. The new agreements enabled the Company to retire
approximately $18.6 million outstanding with the previous bank lenders,
cover associated closing costs and provide a borrowing facility for working
capital and capital expenditures. To secure all of its obligations under
these agreements, the Company has granted the lenders a security interest in
all of the assets and properties of the Company and its subsidiaries.
These agreements contain financial and other covenants and
restrictions. The Company was not in compliance under certain covenants
under the agreements related to the fixed charges coverage ratio, maximum
debt to equity ratio and accounts payable ratio as of December 31, 1999;
however, the lenders involved amended, as of April 12, 2000, the related
agreements to waive the defaults as of December 31, 1999 and to establish
new covenants as of April 12, 2000. The Company was in compliance with all
debt agreement covenants at April 12, 2000 and the Company expected that it
would be able to comply with the covenants in the amended debt agreements
through at least December 31, 2000.
In connection with the amendment to the Subordinated Debt Agreement,
American Capital Strategies, Ltd. agreed to defer the payment of its cash
portion of interest on subordinated debt from the period April 2000 to July
2000 until July 31, 2000. Interest payment of its cash portion of interest
on subordinated debt will be payable at the end of each subsequent three
month period thereafter. Furthermore, the existing Additional interest
component at the rate of 2% was increased to 2.25%, which is payable at the
Company's election in cash or in Company Common Stock. The increase of .25%
in the Additional interest component is in effect through March 2001 at
which time the Additional interest component rate is adjusted back down to
2%.
Subsequent Events
In May, 2000, the FDA initiated an inspection of the Company's
Companion Pet Products division and issued an inspection report on Form FDA
483 on July 5, 2000. The July 5, 2000 FDA report includes several
unfavorable observations of manufacturing and quality assurance practices
and products of the division. The Company is currently compiling its
responses to the July 5, 2000 FDA report. In an effort to address a number
of the FDA's stated concerns, on May 24, 2000, the Company discontinued
production and shipment of Liquichlor and on June 1, 2000 temporarily
stopped production of Cerumite, both products of the Pet Products Division.
The aggregate annual sales volume for these products for the fiscal year
ended December 31, 1999 was $1,059,000. The Company has incurred $634,000
year to date in related expenses to improve production, to meet
documentation, procedural and regulatory compliance. After accounting for
this cessation of production and combining these results with continued
operating losses in the poultry vaccine business, the Company determined
that it was not in compliance with the financial covenants in the debt
agreements, as amended.
On June 26, 2000, the Company entered into an Asset Purchase Agreement
dated as of June 19, 2000 (the "Vineland Agreement"), with Vineland
International, a general partnership which has changed its name to Lohmann
Animal Health International (the "Buyer"). The Vineland Agreement provides
for the sale (the "Vineland Sale") by the Company to the Buyer of the assets
associated with the business of manufacturing, marketing, licensing and
selling poultry vaccines and related equipment conducted by the Vineland
Laboratories division of the Company. In exchange for receipt of such
assets, the Buyer will assume certain Company liabilities, in the aggregate,
equal to approximately $2,300,000 and will pay the Company cash in the
amount of $12,500,000, of which $500,000 will be placed in an escrow fund to
secure potential obligations of the Company relating to final purchase price
adjustments and indemnification. The consummation of the sale is contingent
on receipt by September 19, 2000 of the approval of the Vineland Sale by the
holders of a majority of the outstanding shares of the Company's stock. The
Company projects a $300,000 after tax gain on the Vineland Sale offset by a
$525,000 after tax extraordinary loss on the early extinguishment of debt.
On June 26, 2000, the Company entered into Amendment No. 2 to Note and
Equity Purchase Agreement ("Second Subordinated Amendment") with American
Capital Strategies Ltd. ("ACS"). Pursuant to the Second Subordinated
Amendment, the Company received $500,000 and issued to ACS $500,000 of
Series C Senior Subordinated Notes due September 30, 2000 (the "Series C
Notes"); and ACS waived compliance with certain financial covenants
applicable to Borrower contained in the Subordinated Debt Agreement and
modified certain interest payment dates with respect to the Notes. In
addition, the Second Subordinated Amendment permits the Company to issue
additional Series C Notes on July 31, 2000 to pay the interest then due and
payable on the Notes and the Series C Notes. The Company will issue, in the
beginning of August 2000, to ACS an additional Series C Note in the
aggregate principal amount of approximately $300,000 for the interest due.
Also, on June 26, 2000, the Company entered into a Second Amendment to
Loan and Security Agreement dated as of June 23, 2000 (the "Second Senior
Amendment") with Fleet Capital Corporation ("Fleet"). Pursuant to the Second
Senior Amendment, the Company obtained an "overadvance" of $500,000 under
the senior revolving line of credit (the "Overadvance"), repayable in full
on the earlier to occur of September 22, 2000 or the date of the
consummation of the Vineland Sale. Under the Second Senior Amendment, Fleet
agreed to forbear from exercising its right to accelerate the maturity of
the Senior Loans upon the default by the Borrower under certain financial
covenants (the "Forbearance Covenants") until the first to occur of: (a)
September 22, 2000, (b) the date on which any default, other than a default
under the Forbearance Covenants, occurs under the Senior Debt Agreement, as
amended; or (c) the date of the termination of the Vineland Agreement. The
Vineland Agreement may be terminated prior to the closing if any of the
following occurs:
1. The Buyer and the Company mutually consent to the termination, or
Vineland Sale is not consummated on or before the date (September 19,
2000) that is three (3) months after the date of the Vineland
Agreement (June 19, 2000), unless the failure to consummate the
transaction is the result of a material breach of the Vineland
Agreement by the party seeking to terminate the Vineland Agreement;
provided, however, that the passage of such period shall be tolled for
any part thereof (but not exceeding ninety (90) days in the aggregate)
during which any party shall be subject to a non-final order, decree,
ruling or action restraining, enjoining or otherwise prohibiting the
consummation of the transaction;
2. A governmental entity issues an order, decree or ruling or takes any
other action permanently enjoining, restraining or otherwise
prohibiting the transaction and such order, decree, ruling or other
action shall have become final and non-appealable;
3. The stockholders of the Company do not approve the Vineland Agreement
and transaction.
Due to the terms of the Second Senior Amendment and the Second Subordinated
Amendment discussed above, the Company has classified all debt owed to ACS
and Fleet as short-term debt. The Company has scheduled a special meeting of
stockholders and has filed a Preliminary Proxy Statement with the Securities
and Exchange Commission with respect to Stockholder consideration of the
Vineland Sale.
9. Detachable Stock Warrants
<TABLE>
<CAPTION>
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Initial valuation $2,842 $ -
Mark-to-market adjustment 854 -
----------------
$3,696 $ -
================
</TABLE>
In connection with the October 29, 1999 refinancing, specifically the
$7 million subordinated debt agreement, the Company issued warrants to
purchase 1,907,543 shares of IGI Common Stock at an exercise price of $.01
per share to American Capital Strategies, Ltd.
These warrants contain a right ("the put") to require the Company to
repurchase the warrants or the Common Stock acquired upon exercise of such
warrants at their then fair market value under certain circumstances,
including the earliest to occur of the following: a) October 29, 2004; b)
the date of payment in full of the Senior Debt and Subordinated Debt and all
senior indebtedness of the Company; or c) the sale of the Company or 30% or
more of its assets. The repurchase is to be settled in cash or Common Stock,
at the option of American Capital Strategies, Ltd. Due to the put feature
and the potential cash settlement which is outside of the Company's control,
the warrants are recorded as a liability which is marked-to-market, with
changes in the market value being recognized as a component of interest
expense in the period of change.
The warrants issued to American Capital Strategies, Ltd. were valued
at issuance date utilizing the Black-Scholes model and initially recorded as
a liability of $2,842,000. A corresponding debt discount was recorded at
issuance, representing the difference between the $7,000,000 proceeds
received by the Company and the total obligation, which includes principal
of $7,000,000 and the initial warrant liability of $2,842,000. The debt
discount is being amortized to interest expense over the term of the
Subordinated Debt Agreement. In 1999, the Company recognized $854,000 of
non-deductible interest expense associated with the mark-to-market
adjustment of the warrants. The underlying liability for the put is marked-
to-market with changes to market value being recognized as a component of
interest expense
On April 12, 2000, American Capital Strategies, Ltd. amended its loan
agreement whereby the put provision was replaced by a "make-whole" feature.
The "make-whole" feature requires the Company to compensate American Capital
Strategies, Ltd., in either Common Stock or cash, at the option of the
Company, in the event that American Capital Strategies, Ltd. ultimately
realizes proceeds from the sale of its Common Stock obtained upon exercise
of its warrants that are less than the fair value of the Common Stock upon
exercise of such warrants multiplied by the number of shares obtained upon
exercise. Fair value of the Common Stock upon exercise is defined as the 30
day average value prior to notice of exercise. American Capital Strategies,
Ltd. must exercise reasonable effort to sell or place its shares in the
marketplace over a 180 day period before it can invoke the make-whole
provision. As a result of the amendment, the liability recognized related to
the warrants will be reclassified as a component of equity without a future
mark-to-market adjustment effective April 12, 2000.
10. Stock Options
Under the 1988 Non-Qualified Stock Option Plan, options have been
granted to consultants, scientific advisors and employees to purchase a
maximum of 250,000 shares of Common Stock. Options outstanding under this
plan at December 31, 1999 are generally exercisable in cumulative increments
over four years commencing one year from the date of grant. The 1988 Non-
Qualified Stock Option Plan formalized the granting of individual non-
qualified stock options which had been granted to officers and directors at
prices equal to the fair market value of the Company's stock on the date the
options were granted. Exercise of the majority of these options may be made
at any time during a ten year period commencing on the date of grant.
Under the 1989 and 1991 Stock Option Plans, options have been granted
to key employees, directors and consultants to purchase a maximum of 500,000
and 2,600,000 shares of Common Stock, respectively. Options, having a
maximum term of 10 years, have been granted at 100% of the fair market value
of the Company's stock at the time of grant. Both incentive stock options
and non-qualified stock options have been granted under the 1989 Plan and
the 1991 Plan. Incentive stock options are generally exercisable in
cumulative increments over four years commencing one year from the date of
grant. Non-qualified options are generally exercisable in full beginning six
months after the date of grant.
In October 1998, the Company adopted the 1998 Directors Stock Plan.
Under this plan, 200,000 shares of the Company's Common Stock are reserved
for issuance to non-employee directors, in lieu of payment of directors'
fees in cash. In 1999 and 1998, 67,000 and 46,000 shares of Common Stock
were issued as consideration for directors' fees, respectively. The Company
recognized $116,000 and $94,000 of expense related to these shares during
the years ended December 31, 1999, and 1998, respectively.
Effective November 23, 1998, the Company's Board of Directors approved
the repricing of all outstanding options issued to then current employees
and consultants to $2.44 per share, 115% of the market value of the
Company's Common Stock on that date. The Board also approved the repricing
of 225,000 options held by the Chief Executive Officer to $2.66 per share,
125% of the market value of the Company's Common Stock on that date. As a
result, 331,465 and 225,000 outstanding options at November 23, 1998 were
effectively rescinded and reissued at exercise prices of $2.44 and $2.66,
respectively. This resulted in a non-cash expense related to non-employees
of $84,000 being reflected in 1998 operating results. All other conditions,
such as term of option and vesting schedules, remained unchanged.
In December 1998, the Company's Board of Directors adopted the 1999
Employee Stock Purchase Plan ("Plan"). An aggregate of 300,000 shares of
Common Stock may be issued pursuant to this plan. All the Company and its
subsidiaries' employees, including an officer or director who is also an
employee, are eligible to participate in the Plan. Shares under this plan
are available for purchase at 85% of the fair market value of the Company's
stock on the first or last day of the offering, whichever is lower. The Plan
is implemented through offerings; the first offering commenced August 26,
1999 and terminated December 31, 1999. The Company issued 27,000 shares
pursuant to this initial offering. Each offering thereafter will begin on
the first day of each year and end on the last day of each year.
In March 1999, the Company's Board of Directors approved the 1999
Stock Incentive Plan ("1999 Plan"). The 1999 Plan replaces all presently
authorized stock option plans, and no additional options may be granted
under those plans. Under the 1999 Plan, options may be granted to all of the
Company's employees, officers, directors, consultants and advisors to
purchase a maximum of 1,200,000 shares of Common Stock. A total of 872,000
options, having a maximum term of 10 years, have been granted at 100% of the
fair market value of the Company's stock at the time of grant. Options
outstanding under this plan at December 31, 1999 are generally exercisable
in cumulative increments over four years commencing one year from date of
grant.
In September 1999, the Company's Board of Directors approved the 1999
Director Stock Option Plan. The 1999 Director Stock Option Plan provides,
through 2002, for the grant of stock options to non-employee directors of
the Company at an exercise price equal to the fair market value per share on
the date of the grant. In September 1999, a total of 300,000 options were
granted to non-employee directors. The options granted under the 1999
Director Stock Option plan vest in full twelve months after their respective
grant dates and have a maximum term of ten years.
Stock option transactions in each of the past three years under the
aforementioned plans in total were:
<TABLE>
<CAPTION>
1989, 1991 and 1999 Plans 1988 Non-Qualified Plan
--------------------------------------------- --------------------------------------------
Weighted Weighted
Shares Price Per Share Average Price Shares Price Per Share Average Price
------ --------------- ------------- ------ --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
January 1, 1997 shares
Under option 2,209,015 $3.65 - $9.88 $6.89 286,500 $3.97 - $6.80 $4.92
Granted 111,500 $3.75 - $5.69 $4.17 - - -
Exercised (10,000) $3.65 $3.65 (20,000) $3.97 $3.97
Cancelled (176,050) $3.97 - $9.88 $7.21 (100,000) $5.67 $5.33
--------- --------
December 31, 1997 shares
Under option 2,134,465 $3.75 - $9.88 $6.74 166,500 $4.70-$6.80 $4.78
Granted 491,450 $1.94 - $3.81 $2.56 - - -
Exercised - - - - - -
Cancelled (652,250) $2.00 - $9.88 $6.52 (166,500) $2.66 - $6.80 $4.78
Rescinded (506,465) $4.70 - $9.88 $6.75 (50,000) $4.70 $4.70
Reissued 506,465 $2.44 - $2.66 $2.52 50,000 $2.66 $2.66
--------- --------
December 31, 1998 shares
Under option 1,973,665 $1.94 - $9.88 $4.68 -
Granted 1,447,000 $1.56 - $2.00 $1.62 ========
Exercised - -
Cancelled (173,465) $2.00 - $8.58 $3.67
---------
December 31, 1999 shares
Under option 3,247,200 $1.56 - $9.88 $3.37
=========
Shares subject to outstanding
Options exercisable at:
December 31, 1997 1,854,715 $6.89 166,500 $4.78
========= ===== ======== =====
December 31, 1998 1,599,840 $5.18 - $ -
========= ===== ======== =====
December 31, 1999 1,909,866 $4.52 - $ -
========= ===== ======== =====
</TABLE>
The Company uses the intrinsic method to account for stock options
issued to employees and to directors. The Company uses the fair-value method
to account for stock options issued to consultants. The Company has recorded
compensation expense of $49,000, $108,000 and $46,000 in 1999, 1998 and
1997, respectively, for options granted to consultants, including the
effects of the 1998 repricing.
If compensation cost for all grants under the Company's stock option
plans had been determined based on the fair value at the grant date
consistent with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and loss per share would have been
increased to the pro forma loss amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in thousands, except per
share information)
<S> <C> <C> <C>
Net loss - as reported $(1,584) $(3,029) $(1,208)
Net loss - pro forma (1,943) (3,618) (1,403)
Loss per share - as reported
Basic and diluted $ (.17) $ (.32) $ (.13)
Loss per share - pro forma
Basic and diluted $ (.21) $ (.38) $ (.15)
</TABLE>
The pro forma information has been determined as if the Company had
accounted for its employee stock options under the fair value method. The
fair value for these options was estimated at the grant date using the
Black-Scholes option-pricing model with the following assumptions for 1999,
1998 and 1997:
<TABLE>
<CAPTION>
Assumptions 1999 1998 1997
----------- ---- ---- ----
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Risk free interest rate 4.93% - 6.36% 4.47% - 5.89% 5.84% - 6.63%
Estimated volatility factor 59.52% - 63.73% 39.51% - 47.87% 40.02% - 43.68%
Expected life 6 - 9 years 6 - 9 years 6 - 9 years
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Range of Number of Remaining Exercise Number of Exercise
Exercise Price Options Life (Years) Price Options Price
-------------- --------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$1.00 to $ 2.00 1,670,250 9.30 $1.64 416,938 $1.63
$2.01 to $ 3.00 506,450 4.75 $2.55 445,303 $2.53
$3.01 to $ 4.00 215,500 8.24 $3.41 192,625 $3.39
$4.01 to $ 5.00 20,000 1.00 $4.62 20,000 $4.62
$5.01 to $ 6.00 200,000 6.10 $5.76 200,000 $5.76
$6.01 to $ 7.00 290,000 5.15 $6.66 290,000 $6.66
$7.01 to $ 8.00 140,000 3.47 $7.47 140,000 $7.47
$8.01 to $ 9.00 150,000 5.29 $8.47 150,000 $8.47
$9.01 to $10.00 55,000 1.96 $9.66 55,000 $9.66
--------- ---------
$1.56 to $ 9.88 3,247,200 8.13 $2.65 1,909,866 $2.94
========= =========
</TABLE>
11. Income Taxes
The benefit for income taxes attributable to earnings before income
taxes and extraordinary gain included in the Consolidated Statements of
Operations for the years ended December 31, 1999, 1998 and 1997, was as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current tax expense:
Federal $ - $ 14 $ -
State and local 9 16 11
---------------------------
Total current tax expense 9 30 11
---------------------------
Deferred tax expense (benefit)
Federal (505) (1,161) (637)
State and local (105) (160) 190
---------------------------
Total deferred tax benefit (610) (1,321) (447)
---------------------------
Total benefit for income taxes $(601) $(1,291) $(436)
===========================
</TABLE>
The charge for income taxes related to the extraordinary gain of
$611,000 for the year ended December 31, 1999 consisted of $200,000 of
deferred federal income taxes and $24,000 of deferred state income taxes.
The benefit for income taxes differed from the amount of income taxes
determined by applying the applicable Federal tax rate (34%) to pretax loss
before extraordinary items as a result of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Statutory benefit $(874) $(1,469) $(559)
Non-deductible interest expense relating to
mark-to-market of put warrants (See Note 9) 290 - -
Other non-deductible expenses 72 111 51
State income taxes, net of federal benefit 30 (240) (164)
Research and development tax credits (19) (33) (65)
(Decrease) Increase in valuation allowance (106) 393 299
Other, net 6 53 2
---------------------------
$(601) $(1,291) $(436)
===========================
</TABLE>
Deferred tax assets included in the Consolidated Balance Sheets as of
December 31, 1999 and 1998, consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Property, plant and equipment $ (384) $ (498)
Prepaid license agreement 1,168 1,389
Deferred royalty payments 127 212
Tax operating loss carryforwards 3,672 3,046
Tax credit carryforwards 684 651
Reserves on inventory 407 510
Inventory 412 537
Non-employee stock options 156 217
Other future deductible temporary differences 606 525
Other future taxable temporary differences (43) (65)
-------------------
6,805 6,524
Less: valuation allowance (955) (1,061)
-------------------
Deferred taxes, net $5,850 $ 5,463
===================
</TABLE>
The Company evaluates the recoverability of its deferred tax assets
based on its history of operating earnings, its plans to sell the benefit of
certain state net operating losses, its expectations for the future, and the
expiration dates of the net operating loss carryforwards. As a result, the
Company has concluded it is not likely it will be able to fully realize
certain of these deferred tax assets. The Company establishes full valuation
allowances for net operating losses related to a specific subsidiary and for
all net operating losses expiring before 2002 in the states where the
Company does not plan on selling the benefit of the net operating losses.
Where the Company intends to sell the benefit of the state net operating
losses, a valuation allowance is established so that the net deferred tax
asset is reflected at its net realizable value.
Operating loss and tax credit carryforwards for tax reporting purposes
as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
Federal:
Operating losses (expiring through 2019) $9,432
Research tax credits (expiring through 2019) 567
Alternative minimum tax credits (available without expiration) 28
State:
Net operating losses - New Jersey (expiring through 2006) 7,412
Net operating losses - other states (expiring through 2019) 2,285
Research tax credits - New Jersey (expiring through 2006) 90
</TABLE>
Federal net operating loss carryforwards that expire through 2019 have
significant components expiring in 2007 (36%), 2018 (40%) and 2019 (20%).
12. Commitments and Contingencies
The Company leases manufacturing and warehousing space, machinery and
equipment and automobiles under non-cancelable operating lease agreements
expiring at various dates in the future. Rental expense aggregated
approximately $362,000 in 1999, $371,000 in 1998, and $348,000 in 1997.
Future minimum rental commitments under non-cancelable operating leases as
of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year (in thousands)
---- -------------
<S> <C>
2000 $57
2001 50
2002 32
2003 20
2004 5
</TABLE>
13. U.S. Regulatory Proceedings
The Company has substantially resolved the legal and regulatory issues
which arose in 1997 and 1998. For most of 1997 and 1998, the Company was
subject to intensive government regulatory scrutiny by the U.S. Departments
of Justice, Treasury and Agriculture. In June 1997, the Company was advised
by the Animal and Plant Health Inspection Service ("APHIS") of the United
States Department of Agriculture ("USDA") that the Company had shipped
quantities of some of its poultry vaccine products without complying with
certain regulatory and record keeping requirements. The USDA subsequently
issued an order that the Company stop shipment of certain products. Shortly
thereafter, in July 1997, the Company was advised that USDA's Office of
Inspector General ("OIG") had commenced an investigation into possible
violations of the Virus Serum Toxin Act of 1914 and alleged false statements
made to APHIS.
Based upon these events the Board of Directors caused an immediate and
thorough investigation of the facts and circumstances of the alleged
violations to be undertaken by independent counsel. The Company also took
steps to obtain the approval of APHIS for resumption of shipments, including
the submission of an amended and modified regulatory compliance program,
improved testing procedures, and other safeguards. Based upon these actions,
APHIS began lifting the stop shipment order within a month of its issuance
and released all remaining products on March 27, 1998.
On March 24, 1999, the Company reached settlement with the Departments
of Justice, Treasury and Agriculture regarding their pending investigations
and proceedings. The terms of the settlement agreement provided that the
Company enter a plea of guilty to a misdemeanor and pay a fine of $15,000
and restitution in the amount of $10,000. In addition, the Company was
assessed a penalty of $225,000 and began making monthly payments to the
Treasury Department which will continue through the period ending October
31, 2001. The expense of settling with these agencies was reflected in the
1998 results of operations. Further, in response to these events, the
Company restated the Company's financial statements for the two years ended
December 31, 1996 and the nine months ended September 30, 1997. The
settlement does not affect the informal inquiry being conducted by the SEC,
nor does it affect possible governmental action against former employees of
the Company.
In April 1998, the U.S. Securities and Exchange Commission ("SEC")
advised the Company that it was conducting an informal inquiry and requested
information and documents from the Company, which the Company voluntarily
provided to the SEC. At December 31, 1999, the informal inquiry remained
open.
On July 26, 2000, the Company reached an agreement in principle with
the staff of the SEC to resolve matters arising with respect to the SEC
Investigation commenced in April 1998. Under the agreement, which will not
be final until approved by the SEC, the Company neither admits nor denies
that the Company violated the financial reporting and record-keeping
requirements of Section 13 of the Securities Exchange Act of 1934, as
amended, for the fiscal years 1995, 1996 and 1997. Further, in the
agreement, the Company agrees to the entry of an order to cease and desist
from any such violation in the future. No monetary penalty is expected.
Other Pending Matters
On April 14, 1999, a lawsuit was filed in the U.S. District Court for
the Southern District of New York by Cohanzick Partners, LP, against IGI,
Inc. and certain of its present and former directors, officers and
employees. The suit, which seeks approximately $420,000 in actual damages
together with fees, costs and interests, alleges violations of the
securities laws, fraud, and negligent misrepresentation concerning certain
disclosures made and other actions taken by the Company in 1996 and 1997.
The Company believes that the plaintiff's allegations are factually
incorrect and legally inadequate and will defend the lawsuit vigorously. The
Company believes that an unfavorable outcome in the suit would not have a
material adverse impact upon the Company's financial condition, although it
could negatively affect the results of operations for the period in which
the matter is resolved.
14. Export Sales
Export revenues by the Company's domestic operations accounted for
approximately 33% of the Company's total revenues in 1999, 32% in 1998, and
35% in 1997. The following table shows the geographical distribution of the
Company's total revenues:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Latin America $ 3,038 $ 4,445 $ 4,593
Asia/Pacific 5,250 3,787 4,659
Europe 1,335 1,151 1,263
Africa/Middle East 1,681 1,380 1,362
-----------------------------
11,304 10,763 11,877
United States/Canada 23,290 22,432 22,466
-----------------------------
Total revenues $34,594 $33,195 $34,343
=============================
</TABLE>
Export sales net accounts receivable balances at December 31, 1999 and
1998 approximated $4,044,000 and $4,002,000, respectively.
15. Certain Relationships and Related Party Transactions
The Company's former Chief Executive Officer had chosen to defer
payment of his salary earned in 1999 and 1998 until the Company's cash flow
stabilized. Compensation earned for which payment was to be deferred under
this plan was $460,000 and $380,000 for 1999 and 1998, respectively, which
amounts were included in accrued expenses in the accompanying balance
sheets.
On September 15, 1999, the Company agreed to pay portions of the
Company's obligation in shares of Company Common Stock. Total payments
through December 31, 1999 resulted in issuance of 417,744 shares, valued at
$725,000. The shares were valued using the then trading price of the
Company's stock at the date of stock issuance.
At December 31, 1999, accrued compensation totaling $115,000 is
included in the Consolidated Balance Sheets representing compensation earned
but not yet paid. As of December 31, 1999, the Company agreed to pay this
amount using Company Common Stock in the first quarter of 2000, valued at
the trading price of the Company stock as of December 31, 1999 or $1.81 per
share.
16. Employee Benefits
The Company has a 401(k) contribution plan, pursuant to which
employees, who have completed six months of employment with the Company or
its subsidiaries as of specified dates, may elect to contribute to the plan,
in whole percentages, up to 18% of compensation, subject to a minimum
contribution by participants of 2% of compensation and a maximum
contribution of $10,000 for 1999. The Company contribution is in the form of
Company Common Stock, which is vested immediately. The Company matches 25%
of the first 5% of compensation contributed by participants and contributes,
on behalf of each participant, $4 per week of employment during the year.
The Company has recorded charges to expense related to this plan of
approximately $77,000, $82,000, and $113,000 for the years 1999, 1998 and
1997, respectively.
17. Business Segments
The Company has three reportable segments: Consumer Products,
Companion Pet Products and Poultry Vaccines. Products from each of the
segments serve different markets, use different channels of distribution,
and, for two of the segments, have different forms of government oversight.
Consumer Products Business
IGI's Consumer Products business is primarily focused on the continued
commercial use of the Novasome(R) microencapsulation technologies for skin
care applications. These efforts have been directed toward the development
of high quality skin care products marketed by the Company or through
collaborative arrangements with cosmetic and consumer products companies.
Revenues from the Company's Consumer Products business were principally
based on formulations using the Novasome(R) encapsulation technology. Sales
to Estee Lauder accounted for $4,237,000 or 13% of 1999 sales, $3,494,000 or
11% for 1998, and $2,408,000 or 7% in 1997.
Companion Pet Products
The Company sells its Companion Pet Products to the veterinarian
market under the EVSCO Pharmaceuticals trade name and to over-the-counter
("OTC") pet products market under the Tomlyn and Luv'Em labels.
The EVSCO line of veterinary products is used by veterinarians in
caring for dogs and cats, and includes pharmaceuticals such as antibiotics,
anti-inflammatories and cardiac drugs, as well as nutritional supplements,
vitamins, insecticides and diagnostics. Product forms include gel, tablets,
creams, liquids, ointments, powders, emulsions and shampoos. EVSCO also
produces professional grooming aids for dogs and cats.
EVSCO products are manufactured at the Company's facility in Buena,
New Jersey and are sold through distributors to veterinarians. The facility
operates in accordance with Good Manufacturing Practices ("GMP") of the
federal Food and Drug Administration ("FDA").
The Tomlyn product line includes pet grooming, nutritional and
therapeutic products, such as shampoos, grooming aids, vitamin and mineral
supplements, insecticides and OTC medications. The products are manufactured
at the Company's facility in Buena, New Jersey, and are sold directly to pet
superstores and through distributors to independent merchandising chains,
shops and kennels. Most of the Company's veterinary products are sold
through distributors.
Poultry Vaccines
The Company produces and markets poultry vaccines manufactured by the
chick embryo, tissue culture and bacteriologic methods. The Company produces
vaccines for the prevention of various chicken and turkey diseases and has
more than 60 vaccine licenses granted by the USDA. The Company also produces
and sells nutritional, anti-infective and sanitation products used primarily
by poultry producers. The Company sells these products in the United States
and, through its export sales staff, to local distributors in other
countries. The sales force is supplemented and supported by technical and
customer service personnel. The USDA regulates the Company's vaccine
production in the United States.
Summary Segment Data
Summary data related to the Company's reportable segments for the
three years ended December 31, 1999 appears below:
<TABLE>
<CAPTION>
Consumer Companion Pet Poultry
Products Products Vaccines Corporate* Consolidated
-------- ------------- -------- ---------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
1999
Revenues $6,938 $13,595 $14,061 $ - $34,594
Operating profit 3,913 3,850 (1,041) (5,216) 1,506
Depreciation and amortization 188 254 557 28 1,027
Identifiable assets 3,885 6,994 13,178 9,805 33,862
Capital expenditures 57 207 800 - 1,064
1998
Revenues $5,839 $12,513 $14,843 $ - $33,195
Operating profit (loss) 3,688 2,844 (517) (6,925) (910)
Depreciation and amortization 199 206 560 27 992
Identifiable assets 4,886 5,660 13,190 8,320 32,056
Capital expenditures 9 186 412 - 607
1997
Revenues $5,255 $12,444 $16,644 $ - $34,343
Operating profit (loss) 1,473 2,577 1,202 (5,032) 220
Depreciation and amortization 161 225 625 26 1,037
Identifiable assets 4,466 6,386 15,434 7,464 33,750
Capital expenditures 4 96 536 - 636
--------------------
<FN>
* Note:
A Unallocated corporate expenses are principally general and
administrative expenses.
B Corporate assets represent fixed assets, deferred tax assets, cash and
cash equivalents and deferred financing costs.
C Transactions between reportable segments are not material.
</FN>
</TABLE>
IGI, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ------ Additions ------ ------
-------------------------------
Balance (1) Charged Balance
at beginning to costs (2) Charged to at end
Description of period and expenses other accounts Deductions of period
----------- ------------ ------------ -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1997:
Allowance for doubtful accounts $ 238 $ 793 $ - $ 128(A) $ 903
Inventory valuation allowance 617 603 - 107(B) 1,113
Other asset valuation allowance 186 - - 186(A) -
Valuation allowance on net
Deferred tax assets 369 299 - - 668
December 31, 1998:
Allowance for doubtful accounts $ 903 $ 150 $ - $ 537(A) $ 516
Inventory valuation allowance 1,113 1,332 - 1,089(B) 1,356
Valuation allowance on net
Deferred tax assets 668 382 11 - 1,061
December 31, 1999:
Allowance for doubtful accounts $ 516 $ 243 $ - $ 320(A) $ 354
Inventory valuation allowance 1,356 873 - 1,361(B) 868
Valuation allowance on net
Deferred tax assets 1,061 - - 105(C) 955
--------------------
FN>
A Relates to write-off of uncollectible accounts and recoveries of
previously reserved amounts.
B Disposition of obsolete inventories.
C Relates to reduction in the valuation allowance as a result of the
expiration of certain state net operating losses in 1999, for which
full valuation allowances had previously been provided.
</FN>
</TABLE>
IGI, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibits marked with a single asterisk are filed herewith. The other
exhibits listed have previously been filed with the Commission and are
incorporated herein by reference.
(3)(a) Certificate of Incorporation of IGI, Inc., as amended.
[Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8, File No. 33-63700, filed
June 2, 1993.]
(b) By-laws of IGI, Inc., as amended. [Incorporated by reference to
Exhibit 2(b) to the Company's Registration Statement on Form S-
18, File No. 002-72262-B, filed May 12, 1981.]
(4) Specimen stock certificate for shares of Common Stock, par value
$.01 per share. [Incorporated by reference to Exhibit (4) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 001-08568, filed April 2, 1990 (the
"1989 Form 10-K".)]
(10.1) IGI, Inc. 1983 Incentive Stock Option Plan. [Incorporated by
reference to Exhibit A to the Company's Proxy Statement for the
Annual Meeting of Stockholders held May 11, 1983, File No. 000-
10063, filed April 11, 1983.]
(10.2) IGI, Inc. 1989 Stock Option Plan. [Incorporated by reference to
the Company's Proxy Statement for the Annual Meeting of
Stockholders held May 11, 1989, File No. 001-08568, filed April
12, 1989.]
(10.3) Employment Agreement by and between the Company and Edward B.
Hager dated as of January 1, 1990. [Incorporated by reference to
Exhibit (10)(c) to the 1989 Form 10-K.]
(10.4) Extension of Employment Agreement by and between the Company and
Edward B. Hager dated as of March 11, 1993. [Incorporated by
reference to Exhibit (10)(d) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992, File No.
001-08568, filed March 31, 1993 (the "1992 Form 10-K".)]
(10.5) Extension of Employment Agreement by and between the Company and
Edward B. Hager dated as of March 14, 1995. [Incorporated by
reference to Exhibit (10)(e) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, File No.
001-08568, filed March 31, 1995.]
(10.6) Amendment to Employment Agreement by and between the Company and
Edward B. Hager dated as of October 1, 1997. [Incorporated by
reference to Exhibit 10(a) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997, File No.
001-08568, filed November 13, 1997.]
(10.7) IGI, Inc. Non-Qualified Stock Option Plan. [Incorporated by
reference to Exhibit (3)(k) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, File No.
001-08568, filed March 30, 1992 (the "1991 Form 10-K".)]
(10.8) IGI, Inc. 1991 Stock Option Plan, [Incorporated by reference to
the Company's Proxy Statement for the Annual Meeting held May 9,
1991, File No. 001-08568, filed April 5, 1991.]
(10.9) Amendment No. 1 to IGI, Inc. 1991 Stock Option Plan as approved
by Board of Directors on March 11, 1993. [Incorporated by
reference to Exhibit 10(p) to the 1992 Form 10-K.]
(10.10) Amendment No. 2 to IGI, Inc. 1991 Stock Option Plan as approved
by Board of Directors on March 22, 1995. [Incorporated by
reference to the Appendix to the Company's Proxy Statement for
the Annual Meeting of Stockholders held May 9, 1995, filed April
14, 1995.]
(10.11) Amendment No. 3 to IGI, Inc. 1991 Stock Option Plan as approved
by Board of Directors on March 19, 1997. [Incorporated by
reference to Exhibit 10 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, File No. 001-
08568, filed August 14, 1997.]
(10.12) Amendment No. 4 to IGI, Inc. 1991 Stock Option Plan as approved
by Board of Directors on March 17, 1998. [Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, File No. 001-08568, filed
November 6, 1998.]
(10.13) Form of Registration Rights Agreement signed by all purchasers
of Common Stock in connection with private placement on January
2, 1992. [Incorporated by reference to Exhibit (3)(m) to the
1991 Form 10-K.]
(10.14) License Agreement by and between Micro-Pak, Inc. and IGEN, Inc.
[Incorporated by reference to Exhibit (10)(v) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995, File No. 001-08568, filed March 29, 1996.]
(10.15) Registration Rights Agreement between IGI, Inc. and SmithKline
Beecham p.l.c. dated as of August 2, 1993. [Incorporated by
reference to Exhibit (10)(s) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993, File No.
001-08568, filed March 31, 1994.]
(10.16) Supply Agreement, dated as of January 27, 1997, between IGI,
Inc. and Glaxo Wellcome Inc. [Incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q/A,
Amendment No. 1, for the quarter ended March 31, 1997, File No.
001-08568, filed June 16, 1997.]
(10.17) IGI, Inc. 1998 Director Stock Option Plan as approved by the
Board of Directors on October 19, 1998. [Incorporated by
reference to Exhibit (10.38) to the Company's Annual Report on
form 10-K for the fiscal year ended December 31, 1998, File No.
001-08568, filed April 12, 1999. (the "1998 Form 10-K".)]
(10.18) Common Stock Purchase Warrant No. 5 to purchase 150,000 shares
of IGI, Inc. Common Stock issued to Fleet Bank, NH on March 11,
1999. [Incorporated by reference to Exhibit (10.40) to the 1998
Form 10-K.]
(10.19) Common Stock Purchase Warrant No. 7 to purchase 120,000 shares
of IGI, Inc. Common Stock issued to Mellon Bank, N.A. on March
11, 1999. [Incorporated by reference to Exhibit (10.42) to the
1998 Form 10-K.]
(10.20) Employment Agreement, dated May 1, 1998, between IGI, Inc. and
Paul Woitach. [Incorporated by reference to Exhibit (10.44) to
the 1998 Form 10-K.]
(10.21) Loan and Security Agreement by and among Fleet Capital
Corporation and IGI, Inc., together with its subsidiaries, dated
October 29, 1999.
(10.22) Revolving Credit Note issued by IGI, Inc., together with its
subsidiaries, to Fleet Capital Corporation, dated October 29,
1999.
(10.23) Term Loan A Note issued by IGI, Inc., together with its
subsidiaries, to Fleet Capital Corporation, dated October 29,
1999.
(10.24) Term Loan B Note issued by IGI, Inc., together with its
subsidiaries, to Fleet Capital Corporation, dated October 29,
1999.
(10.25) Capital Expenditure Loan Note issued by IGI, Inc., together with
its subsidiaries, to Fleet Capital Corporation, dated October
29, 1999.
(10.26) Trademark Security Agreement issued by IGI, Inc. in favor of
Fleet Capital Corporation, dated October 29, 1999.
(10.27) Trademark Security Agreement issued by IGEN, Inc. in favor of
Fleet Capital Corporation, dated October 29, 1999.
(10.28) Trademark Security Agreement issued by ImmunoGenetics, Inc. in
favor of Fleet Capital Corporation, dated October 29, 1999.
(10.29) Patent Security Agreement issued by IGI, Inc. in favor of Fleet
Capital Corporation, dated October 29, 1999.
(10.30) Patent Security Agreement issued by IGEN, Inc. in favor of Fleet
Capital Corporation, dated October 29, 1999.
(10.31) Pledge Agreement by and between Fleet Capital Corporation and
IGEN, Inc., dated October 29, 1999.
(10.32) Open-Ended Mortgage, Security Agreement and Assignment of Leases
and Rents (Atlantic County, New Jersey) issued by IGI, Inc. to
Fleet Capital Corporation, dated October 29, 1999.
(10.33) Open-Ended Mortgage, Security Agreement and Assignment of Leases
and Rents (Cumberland County, New Jersey) issued by IGI, Inc. to
Fleet Capital Corporation, dated October 29, 1999.
(10.34) Subordination Agreement by and between Fleet Capital Corporation
and American Capital Strategies, Ltd., dated October 29, 1999.
(10.35) Note and Equity Purchase Agreement by and among American Capital
Strategies, Ltd. and IGI, Inc., together with its subsidiaries,
dated as of October 29, 1999.
(10.36) Series A Senior Secured Subordinated Note issued by IGI, Inc.,
together with its subsidiaries, to American Capital Strategies,
Ltd., dated as of October 29, 1999.
(10.37) Series B Senior Secured Subordinated Note issued by IGI, Inc.,
together with its subsidiaries, to American Capital Strategies,
Ltd., dated as of October 29, 1999.
(10.38) Warrant to purchase 1,907,543 shares of IGI, Inc. Common Stock,
issued to American Capital Strategies, Ltd. on October 29, 1999.
(10.39) Security Agreement issued by IGI, Inc., together with its
subsidiaries, in favor of American Capital Strategies, Ltd.,
dated as of October 29, 1999.
(10.40) Trademark Security Agreement issued by IGI, Inc. in favor of
American Capital Strategies, Ltd., dated as of October 29, 1999.
(10.41) Trademark Security Agreement issued by ImmunoGenetics, Inc. in
favor of American Capital Strategies, Ltd., dated as of October
29, 1999.
(10.42) Trademark Security Agreement issued by Blood Cells, Inc. in
favor of American Capital Strategies, Ltd., dated as of October
29, 1999.
(10.43) Trademark Security Agreement issued by IGEN, Inc. in favor of
American Capital Strategies, Ltd., dated as of October 29, 1999.
(10.44) Patent Security Agreement issued by IGI, Inc. in favor of
American Capital Strategies, Ltd., dated as of October 29, 1999.
(10.45) Patent Security Agreement issued by ImmunoGenetics, Inc. in
favor of American Capital Strategies, Ltd., dated as of October
29, 1999.
(10.46) Patent Security Agreement issued by Blood Cells, Inc. in favor
of American Capital Strategies, Ltd., dated as of October 29,
1999.
(10.47) Patent Security Agreement issued by IGEN, Inc. in favor of
American Capital Strategies, Ltd., dated as of October 29, 1999.
(10.48) Georgia Leasehold Deed to Secure Debt issued by IGI, Inc. in
favor of American Capital Strategies, dated as of October 29,
1999.
(10.49) Open-Ended Mortgage, Security Agreement and Assignment of Leases
and Rents (Cumberland County, New Jersey) issued by IGI, Inc. in
favor of American Capital Strategies, Ltd., dated as of October
29, 1999.
(10.50) Open-Ended Mortgage, Security Agreement and Assignment of Leases
and Rents (Atlantic County, New Jersey) issued by IGI, Inc. in
favor of American Capital Strategies, Ltd., dated as of October
29, 1999.
(10.51) Pledge and Security Agreement issued by IGI, Inc. and
ImmunoGenetics, Inc. in favor of American Capital Strategies,
Ltd., dated as of October 29, 1999.
(10.52) Employment Agreement between IGI, Inc. and Manfred Hanuschek
dated as of July 26, 1999.
(10.53) Amendment to Employment Agreement between Manfred Hanuschek and
IGI, Inc. dated March 9, 2000.
(10.54) Employment Agreement between IGI, Inc. and Robert McDaniel dated
as of September 1, 1999.
(10.55) Pledge Agreement by and between Fleet Capital Corporation and
IGI, Inc., dated October 29, 1999
(10.56) Employment Agreement between IGI, Inc., and Rajiv Mathur dated
February 22, 1999.
(10.57) Amendment No. 1 to the Note and Equity Purchase Agreement by and
between American Capital Strategies, Ltd. and IGI, Inc.,
together with its subsidiaries dated as of April 12, 2000.
(10.58) Amendment to Loan and Security Agreement by and between Fleet
Capital Corporation and IGI, Inc., together with its
subsidiaries dated as of April 12, 2000.
(10.59) Amendment No. 2 to Note and Equity Purchase Agreement dated as
of June 26, 2000 by and among IGI, Inc., IGEN, Inc.,
Immunogenetics, Inc., Blood Cells, Inc., American Capital
Strategies, Ltd. and ACS Funding Trust I.[Incorporated by
reference to Exhibit 99.1 to the Company's Current Report on
Form 8-K filed July 23, 2000.]
(10.60) Second Amendment to Loan and Security Agreement dated as of June
23, 2000 by and among IGI, Inc., IGEN, Inc., Immunogenetics,
Inc., Blood Cells, Inc. and Fleet Capital Corporation.
[Incorporated by reference to Exhibit 99.2 to the Company's
Current Report on Form 8-K filed July 23, 2000.]
*(10-61) Termination Agreement dated December 10, 1998 between the
Company and Glaxo Wellcome, Inc.
(21) List of Subsidiaries.
(23) Consent of PricewaterhouseCoopers LLP.
*(23.2) Consent of PricewaterhouseCoopers LLP. Dated August 18, 2000
(27.1) Financial Data Schedules for the year ended December 31, 1999.
(27.2) Financial Data Schedules for the year ended December 31, 1998.
*(27.3) Financial Data Schedule for the year ended December 31, 1999
(revised as of August 18, 2000)
