-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R1kBthRsNVclX+YpUSDMCowTSk89pJife86sUgZvenufHGHX5HWewrqTRcb0B9HE QynPswEyXi1cJd4fdqeotA== 0000950115-97-000554.txt : 19970411 0000950115-97-000554.hdr.sgml : 19970411 ACCESSION NUMBER: 0000950115-97-000554 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970410 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: IGI INC CENTRAL INDEX KEY: 0000352998 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 010355758 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08568 FILM NUMBER: 97578020 BUSINESS ADDRESS: STREET 1: WHEAT ROAD AND LINCOCN AVENUE STREET 2: P O BOX 687 CITY: BUENA STATE: NJ ZIP: 08310 BUSINESS PHONE: 6096971441 MAIL ADDRESS: STREET 1: WHEAT ROAD AND LINCOCN AVE STREET 2: P O BOX 687 CITY: BUENA STATE: NJ ZIP: 08310 FORMER COMPANY: FORMER CONFORMED NAME: IMMUNOGENETICS INC DATE OF NAME CHANGE: 19870814 10-K405 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Fiscal Year Ended Commission File No. December 31, 1996 1-8568 --------------------- ------------------- IGI, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 01-0355758 -------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Wheat Road and Lincoln Avenue, Buena, NJ 08310 ---------------------------------------- ---------- (Address of principal executive offices) (Zip code) (609) 697-1441 -------------------------------------------------- Registrant's telephone number, including area code Securities registered pursuant to Section 12(b) of the Act: Common Stock ($.01 par value) Registered on the American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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. [X] The aggregate market value of the Registrant's Common Stock, par value $.01 per share, held by non-affiliates of the Registrant at March 14, 1997, as computed by reference to the closing price of such stock, was approximately $36,000,000. The number of shares of the Registrant's Common Stock, par value $.01 per share, outstanding at March 14, 1997 was 9,433,599 shares. Documents Incorporated by Reference: Portions of the Proxy Statement to be sent to stockholders in connection with the annual meeting to be held on May 13, 1997, are incorporated by reference into Items 10, 11, 12, and 13 (Part III) of this Report. Part I Item 1. Business IGI, Inc. ("IGI" or the "Company") was incorporated in Delaware in 1977. Its executive offices are at Wheat Road and Lincoln Avenue, Buena, New Jersey. The Company is a diversified company engaged in two business segments: o Animal Health Business - production and marketing of animal health products such as poultry vaccines, veterinary pharmaceuticals and other products, including nutritional supplements and grooming aids; and o Consumer Products Business - production and marketing of cosmetic and consumer products such as skin care products and shampoos. Strategy The Company's business strategy for its operations is as follows: o Continue growth of the Animal Health Products Business, especially in the international markets, through new product development and intensified product registration (for licenses in foreign countries) and marketing efforts. o Continue growth of the Consumer Products Business through expanded efforts to develop and market additional cosmetic and dermatologic products utilizing the licensed Novasome(R) technology internally through the Company's skin care division and externally through industry partners and customers. o Continue development of consumer product applications of the technologies licensed from the Company's former subsidiary, Novavax, Inc. (the "Novavax Technologies"), including flavors, beverage and food additives, coatings, paints and chemicals. o Explore opportunities for strategic transactions in its two business segments. Business Segments The following table sets forth the revenue and operating profit (in thousands) of each of the Company's two business segments for the periods indicated: 1996 1995 1994 ---- ---- ---- Revenue Animal Health Products $ 31,444 $ 29,510 $ 27,471 Consumer Products 3,696 1,711 1,477 Operating Profit (Loss)* Animal Health Products 7,108 6,459 6,057 Consumer Products (796) (159) 296 * Excludes corporate expenses of $4,097, $3,056 and $2,845 for 1996, 1995 and 1994, respectively. (See Note 15 of Notes to Consolidated Financial Statements.) 3 License of Technology from Former Subsidiary In December 1995, IGI distributed its ownership of its majority-owned subsidiary, Novavax, Inc. ("Novavax"), in the form of a tax-free stock dividend, to IGI stockholders. Novavax had conducted the Biotechnology Business segment of IGI, which had been reported as a discontinued operation. In connection with the distribution, the Company paid Novavax $5,000,000 in return for a fully paid-up, ten-year license (the "IGI License Agreement") entitling it to the exclusive use of the Novavax Technologies in the fields of (i) animal pharmaceuticals, biologicals and other animal health products; (ii) foods, food applications, nutrients and flavorings; (iii) cosmetics, consumer products and dermatological over-the-counter and prescription products (excluding certain topically delivered hormones); (iv) fragrances; and (v) chemicals, including herbicides, insecticides, pesticides, paints and coatings, photographic chemicals and other specialty chemicals; and the processes for making the same (collectively, the "IGI Field"). IGI has the option, exercisable within the last year of the ten-year term, to extend the exclusive license for an additional ten-year period for $1,000,000. Novavax has retained the right to use its Novavax Technologies for all applications outside the IGI Field, including human vaccines and pharmaceuticals. Novavax Technologies Novasome Lipid Vesicles While artificial lipid vesicle encapsulation technology has existed for four decades, the Company believes that it was one of the first companies to produce highly stable, versatile artificial lipid vesicles and structures of various types from low-cost, readily available materials in commercial quantities. The major advantages of Novasome lipid vesicles over other liposomes are as follows: Versatility, Stability, Scale-up and Low Cost o Novasome lipid vesicles may be made from a number of inexpensive, readily available chemicals, called amphiphiles, including fatty alcohols and acids, ethoxylated fatty alcohols and acids, glycol esters of fatty acids, glycerol fatty acid mono and diesters, ethoxylated glycerol fatty acid esters, glyceryl ethers, fatty acid diethanolamides and dimethylamides, fatty acylsarcosinates, "alkyds" as well as phospholipids. o Novasome lipid vesicles have a large, stable central core that allows them to entrap and deliver a wide variety of substances that may be too large or disruptive for phospholipid vesicles, including lipids, solvents, particulates and perfluorocarbons as well as aqueous materials. o Novasome lipid vesicles can be varied according to the intended cargo and can be engineered to release cargo in response to a variety of factors. o Novasome lipid vesicles can be made to provide acceptable stability under a variety of conditions, such as wide variations of alkalinity, acidity, temperature, shear, detergents, solvents, enzymes and others. 4 o Novasome lipid vesicles can be made in large quantities in a continuous flow process that does not use organic solvents. The patented Novamix(TM) production machinery permits the blending of reagents under controlled conditions, and enables the composition of the Novasomes to be adjusted to customize their structure and release properties. Micellar Nanoparticles Micellar nanoparticles ("MNP") are submicron-sized lipid structures. MNP have different structural characteristics (e.g., do not have lipid bilayers) and are generally smaller than Novasome lipid vesicles. MNP, like Novasome vesicles, are made from the family of materials derived from amphiphilic surfactants and can be tailored for particular uses. They exhibit encapsulating and many other properties similar to Novasome vesicles, but differ in other properties. MNP are very stable and can be prepared in commercial quantities at a reasonable cost. The Company believes MNP may have commercial applications in its Consumer Products segment. Novavax holds 36 U.S. patents and a number of foreign patents covering its Novavax Technologies (including a wide variety of component materials, its continuous flow vesicle production process and its Novamix production equipment). Animal Health Products Business IGI manufactures and markets a broad range of animal health products used in pet care and poultry production. The Company sells these products in the United States and over 50 other countries principally under two trade names: Vineland Laboratories and EVSCO Pharmaceuticals. The Company also sells veterinary products to the over-the-counter ("OTC") pet products market under the Tomlyn label. Poultry Vaccines The Company produces and markets poultry vaccines manufactured by the chick embryo, tissue culture and bacteriological methods. The Company produces vaccines for the prevention of various chicken and turkey diseases and has 80 vaccine licenses granted by the United States Department of Agriculture ("USDA") (See "Government Regulation"). The Company also produces and sells, under its Vineland Laboratories label, nutritional, anti-infective and sanitation products used primarily by poultry producers. The Company manufactures poultry vaccines at its USDA approved facility in Vineland, New Jersey and sells them, primarily through its own sales force of 11 persons, directly to large poultry producers and distributors in the United States and, through its export sales staff, to local distributors in other countries. The sales force is supplemented and supported by technical and customer service personnel. The Company's vaccine production in the United States is regulated by the USDA. Sales of poultry vaccines and related products accounted for approximately 57% of the Company's sales in 1996, 60% in 1995 and 59% in 1994. The Company has two poultry vaccines licensed by the USDA which use the Novavax 5 Technologies and is continuing development efforts on new vaccine applications of these technologies. The Company's principal competitors in the poultry vaccine market are Intervet America, Inc., Solvay Veterinary, Inc. and Rhone-Merieux Select Laboratories, Inc. The Company believes that it is one of the largest domestic poultry vaccine producers. The Company competes on the basis of product performance, price, customer service and availability. Veterinary Products The EVSCO line of veterinary products is used by veterinarians in caring for dogs and cats, and includes pharmaceuticals such as antibiotics, anti-inflammatories and cardiac drugs, as well as nutritional supplements, vitamins, insecticides and diagnostics. Product forms include gels, tablets, creams, liquids, ointments, powders, emulsions and diagnostic kits. EVSCO also produces professional grooming aids for dogs and cats. EVSCO products are manufactured at the Company's facility in Buena, New Jersey and sold through distributors to veterinarians. The facility operates in accordance with Good Manufacturing Practices ("GMP") of the federal Food and Drug Administration ("FDA") (See "Government Regulation".) Principal competitors of the EVSCO product line include Solvay Veterinary, Inc., Vet-Kem, a division of Sandoz Pharmaceuticals Corp., Schering Corp., and Mallinckrodt, Inc. The Company competes on the basis of price, marketing, customer service and product qualities. The Tomlyn product line includes pet grooming, nutritional and therapeutic products, such as shampoos, grooming aids, vitamin and mineral supplements, insecticides and OTC medications. These products are manufactured at the Company's facility in Buena, New Jersey, and sold directly to pet superstores and through distributors to independent merchandising chains, shops and kennels. Tomlyn's largest selling product line is the Nova Pearl(TM) line of shampoos which is based upon the Novasome lipid vesicle encapsulation technology and provides combined moisturizing, cleaning and conditioning. Sales of the Company's veterinary products are handled by 27 sales employees. Most of the Company's veterinary products are sold through distributors. Sales of veterinary products accounted for approximately 32% of the Company's sales in 1996, 35% in 1995 and 36% in 1994. Consumer Products Business IGI's Consumer Products segment is primarily focused on the continued commercialization of the Novasome technology for skin care applications. These efforts have been directed toward the internal development of high quality skin care products that the Company markets directly and through collaborative arrangements with major cosmetic and consumer products companies. IGI is continuing to work with several cosmetics, personal care products, and OTC pharmaceutical companies for various commercial applications of Novavax Technologies. Because of their ability to encapsulate skin protective agents, oils, moisturizers, shampoos, conditioners, skin cleansers and fragrances and to provide both a controlled and a sustained release of the encapsulated materials, Novasome 6 lipid vesicles are well-suited to cosmetics and consumer product applications. For example, Novasome lipid vesicles may be used to deliver moisturizers and other active ingredients to the deeper layers of the skin or hair follicles for a prolonged period; to deliver or preserve ingredients which impart favorable cosmetic characteristics described in the cosmetics industry as "feel," "substantivity," "texture" or "fragrance"; to deliver normally incompatible ingredients in the same preparation, with one ingredient being shielded or protected from the other by encapsulation within the Novasome vesicle; and to deliver pharmaceutical agents to and/or through the skin. The Company is presently producing Novasome vesicles for various skin care products, including those marketed by the Prescriptives Division of Estee Lauder under that company's "All You Need" brand name as well as products for Lauder's "Resilience" brand. The Company also produces and sells Novasome vesicles to Revlon for use in lines of skin moisturizers manufactured and marketed by Revlon as its "Results" product line and by Revlon's Almay Division in its "Time Off" product line. Sales of the Company's Consumer Products were principally based on formulations using the Novasome encapsulation technology. Such sales approximated 11% of the Company's sales in 1996 and 5% in each of 1995 and 1994. Nova Skin Care In February 1996, under the Nova Skin Care label, IGI launched its own line of Novasome-based alpha hydroxy acid skin care products. At the end of December 1996, the Company entered into a license agreement with Glaxo Wellcome ("Glaxo"), which grants Glaxo the exclusive right to market this product line in the United States to physicians, including but not limited to dermatologists. Under the terms of the agreement, which was amended in January 1997, IGI will manufacture and distribute these products to Glaxo customers. IGI retains the rights to market this product line to non-physicians in the U.S., and in all markets abroad. In connection with the settlement of a trademark infringement lawsuit filed against the Company by Johnson & Johnson, IGI has agreed to discontinue the use of the trademark Nova Skin Care. Other Applications The versatility of the Novavax Technologies combined with the Company's commercial production capabilities allow the Company to target large, diverse markets. Through product collaborations and license agreements, the Company is seeking to develop additional products for this business segment. The Company is evaluating affiliations with potential industry partners. The efforts for the development of additional products require extensive testing, evaluation and trials, and therefore no assurance can be given that commercialization of these products with Novasome vesicles will be successful. The Company has encapsulated retinoids in Novasome vesicles in collaboration with Johnson & Johnson. Retinoids are derivatives of retinoic acid and are effective in the treatment of acne and thought to be effective in the treatment of various age-associated skin disorders. Encapsulation of retinoids in Novasome vesicles is designed to prolong stability and reduce irritation and provide a sustained release of certain active ingredients to treat 7 these disorders. The Company expects revenues from this application during 1997. International Sales and Operations A staff of 12 persons based in Buena, New Jersey and 5 individuals based overseas handle all sales of Company products outside the United States. The Company's sales personnel and veterinarians travel abroad extensively to develop business and support customers through local distributors. Exports consist primarily of poultry vaccines, although the Company also exports some veterinary pharmaceuticals and pet care products. Exports of vaccines require product registration or licensing by foreign authorities. The Company has over 630 product registrations and licenses in over 50 countries outside the United States and has over 1,000 registrations pending. The Company intends to increase its marketing efforts of these products into new key markets, including Brazil and China. Mexico and certain Latin American countries are important markets for the Company's poultry vaccines and other products. These countries have historically experienced varying degrees of political unrest and economic and currency instability. Because of the volume of business transacted by the Company in those countries, continuation or the recurrence of such unrest or instability could adversely affect the businesses of its customers in those countries or the Company's ability to collect its receivables from such customers, which in either case could adversely impact the Company's future operating results. In 1996, sales to international customers of $13,680,000 represented 39% of the Company's sales, the same percentage as 1995 and 1994. (See Note 11 of Notes to Consolidated Financial Statements.) Manufacturing The Company's manufacturing operations include production and testing of vaccines, lotions, pills and powders; packaging, bottling and labeling of the finished products; and packing and shipment for distribution. Approximately 100 employees are engaged in manufacturing operations. The raw materials included in these products are available from several suppliers. The Company produces quantities of Novasome lipid vesicles adequate to meet its current needs for cosmetics and consumer product and animal health product applications. In 1995, the Company completed and began operating a new facility for marketing staff and Novasome vesicle product development. This facility also houses production facilities for consumer products. (See "Properties".) 8 Research and Development The Company's poultry vaccine research and development efforts are directed towards developing more efficient single and multiple-component vaccines, developing vaccines to combat new diseases and incorporating the Novasome lipid vesicle technology into existing vaccines. The Company is concentrating its veterinary pharmaceutical research and development efforts on the use of Novasome lipid vesicle technology for various veterinary pharmaceutical and OTC pet care products. The Company's consumer products research and development efforts are directed towards liposomal encapsulation to improve performance and efficacy of cosmetics, consumer products, flavors and dermatologic products. Under its license agreement with Novavax, the Company has the right to continue to use the Novavax Technologies to develop new products in the IGI Field. In addition to its internal research and development efforts, which involve 13 employees, the Company encourages the development of products in areas related to its present lines by making specific grants to universities. Research expenses for IGI's continuing operations were $2,013,000, $1,345,000 and $1,212,000 in 1996, 1995 and 1994, respectively. Patents and Trademarks All of the names of the Company's major products are registered in the United States and all significant foreign markets in which the Company sells its products. Under the terms of the IGI License Agreement, IGI has an exclusive ten-year license to use the Novavax Technologies in the IGI Field. Novavax holds 36 U.S. patents and a number of foreign patents covering its Novavax Technologies (including a wide variety of component materials, its continuous flow vesicle production process and its Novamix production equipment). IGI intends to engage in collaborations, sponsored research agreements, and preclinical and/or field testing agreements in connection with its future products as well as clinical testing agreements with academic and research institutions and U.S. government agencies, such as the National Institutes of Health and the Department of Agriculture, to take advantage of their technical expertise and staff and to gain access to clinical evaluation models, patents and related technology. Consistent with pharmaceutical industry and academic standards, and the rules and regulations under the Federal Technology Transfer Act of 1986, these agreements may provide that developments and results will be freely published, that information or materials supplied by the Company will not be treated as confidential and that the Company may be required to negotiate a license to any such developments and results in order to commercialize products incorporating them. There can be no assurance that the Company will be able to obtain any such license at a reasonable cost or that such developments and results will not be made available to competitors of the Company on an exclusive or nonexclusive basis. Government Regulation The production and marketing of the Company's products and its research and development activities are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. The Company's development, manufacturing and marketing of poultry biologics are subject to regulation in 9 the United States for safety and efficacy by the USDA in accordance with the Virus Serum Toxin Act of 1914. The development, manufacturing and marketing of pharmaceuticals are subject to regulation in the United States for safety and efficacy by the FDA in accordance with the Food, Drug and Cosmetic Act. In the United States, pharmaceuticals and vaccines are subject to rigorous FDA regulation including preclinical and clinical testing. The process of completing clinical trials and obtaining FDA approvals for a new drug is likely to take a number of years, requires the expenditure of substantial resources and is often subject to unanticipated delays. There can be no assurance that any product will receive such approval on a timely basis, if at all. In addition to product approval, the Company may be required to obtain a satisfactory inspection by the FDA covering the manufacturing facilities before a product can be marketed in the United States. The FDA will review the manufacturing procedures and inspect the facilities and equipment for compliance with applicable rules and regulations. Any material change by the Company in the manufacturing process, equipment or location would necessitate additional FDA review and approval. Whether or not FDA approval has been obtained, approval of a pharmaceutical product by comparable governmental regulatory authorities in foreign countries must be obtained prior to the commencement of clinical trials and subsequent marketing of such product in such countries. The approval procedure varies from country to country, and the time required may be longer or shorter than that required for FDA approval. Although there are some procedures for unified filing for certain European countries, in general each country has its own procedures and requirements. In addition to regulations enforced by the USDA and the FDA, the Company also is subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state or local regulations. The Company's research and development involves the controlled use of hazardous materials, chemicals, viruses and bacteria. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. Employees At February 28, 1997, the Company had 209 full-time employees of whom 75 are in marketing, sales, distribution and customer support, 100 in manufacturing, 13 in research and development, and 21 in executive, finance and administration. Certain services were provided by IGI to Novavax through June 30, 1996 on a transitional basis while Novavax built its support systems and staff. The Company has no collective bargaining agreement with its employees, and believes that its employee relations are good. 10 Item 2. Properties The Company owns land and buildings housing offices, laboratories and production facilities in four locations in New Jersey. The Company also owns a warehouse and sales office space in Gainesville, Georgia. In addition, the Company leases office space in Virginia and warehouses in New Jersey, California, Mississippi, and Arkansas. The Company's poultry vaccine production facilities are located in Vineland, New Jersey, where the Company owns several buildings situated on approximately 16 acres of land. These buildings, containing 90,000 square feet of usable floor space, house offices and facilities used for the production of poultry vaccines. They were constructed and expanded from time to time between 1935 and 1992. The Company intends to renovate certain of these facilities in the future to expand its vaccine production capacity to meet expected growth in existing poultry vaccines and to provide production of new vaccines. In Buena, New Jersey, the Company owns a facility used for the production of veterinary pharmaceuticals and consumer products. The facility was built in 1971, expanded in 1975 and its production capacity was increased in 1992. The facility presently contains 41,200 square feet of usable floor space and is situated on eight acres of land. The Company's executive and administrative offices are also located in Buena, New Jersey in a 10,000 square foot building situated on six acres of land. In 1995, the Company completed and began operating a 25,000 square foot production, product development, marketing, manufacturing and warehousing facility for cosmetic, dermatologic and personal care products on this site. Each of the properties owned by the Company is subject to a mortgage held by Fleet Bank-NH and Mellon Bank. Except as discussed above, the Company believes that its current production and office facilities are adequate for its present and foreseeable future needs. Item 3. Legal Proceedings On February 6, 1996, Johnson & Johnson and its wholly-owned subsidiary Ortho-McNeil, Inc. (collectively, "J&J") filed a lawsuit against the Company and its subsidiary, Igen, Inc. and its former subsidiary Micro-Pak, Inc. in the United States District Court for the District of New Jersey alleging trademark infringement and trademark dilution. J&J alleged that the Company's use of the names NOVA SKIN, NOVA SKIN CARE, and NOVA-AESTHETICS infringed on rights associated with J&J's trademark RENOVA for a prescription drug. In January 1997, the Company and J&J reached an agreement settling this litigation. On November 15, 1996, Embrex, Inc. ("Embrex") filed a lawsuit against the Company in the United States District Court for the Eastern District of North Carolina alleging patent infringement. Embrex alleges that IGI, through a Distributor Agreement with Service Engineering Corp. ("Service Engineering"), is infringing on U.S. Patent No. 4,458,630, entitled Disease Control in Avian Species by Embryonal Vaccination, which Embrex has licensed from the USDA. Embrex is seeking to enjoin IGI from selling Service Engineering's egg injection systems and unspecified damages. Pursuant to the Distributor 11 Agreement, Service Engineering is paying for the litigation and has agreed to indemnify the Company for any losses. The lawsuit is in the discovery stage. Item 4. Submission of Matters to a Vote of Security Holders None. 12 Executive Officers of the Registrant The Company's executive officers hold office until the first meeting of the Board of Directors following the annual meeting of stockholders and until their successors are duly chosen and qualified. For information concerning officers who are also directors of the Company, please refer to Item 10 of this Report. Information concerning other executive officers is as follows:
Officer Principal Occupation and Other Business Name Age Since Experience During Past Five Years - ---- --- ------- ---------------------------------------- Kevin J. Bratton 48 1983 Vice President and Treasurer of IGI, Inc. since 1983. Stephen G. Hoch 58 1991 Vice President of IGI, Inc. since 1991. Surendra Kumar 61 1985 Vice President of IGI, Inc. since 1985. D.V.M., Ph.D. Donald J. MacPhee 45 1987 Vice President of IGI, Inc. since 1990 and Chief Financial Officer of IGI, Inc. since 1987. Lawrence N. Zitto 54 1985 Vice President of IGI, Inc. since 1985.
13 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters There were 1,005 stockholders of record as of March 14, 1997. The Company has never paid cash dividends on its Common Stock. The payment of dividends is restricted by the Company's Loan Agreement with Fleet Bank-NH and Mellon Bank, N.A. to a maximum 25% of earnings in any year and to retained earnings in excess of $1,000,000. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources. The principal market for the Company's Common Stock ($.01 par value) (the "Common Stock") is the American Stock Exchange (symbol: "IG"). The following table shows the range of high and low trading prices on the American Stock Exchange for the periods indicated. High Low ---- --- 1995 - ---- First quarter $17 1/2 $11 5/8 Second quarter 16 1/8 13 Third quarter 15 7/8 11 1/2 Fourth quarter 12 3/4 6 3/8* 1996 - ---- First quarter $ 8 1/4 $ 6 3/8 Second quarter 9 1/2 6 1/4 Third quarter 7 3/4 5 Fourth quarter 6 7/8 5 1/8 * On December 12, 1995, the Company distributed to its shareholders all of the Common Stock of Novavax owned by the Company. Each IGI shareholder received one share of Common Stock of Novavax for each share of Common Stock of the Company held on November 28, 1995. The Common Stock of IGI began trading "ex-dividend" on December 13, 1995. Recent Sales of Unregistered Securities On October 16, 1996, the Company issued a warrant to purchase 60,000 shares of Common Stock to The Research Works, Inc. as consideration for certain consulting and research services. The warrant is exercisable at $7.00 per share and expires on October 16, 2001. No underwriters were involved in this transaction. The warrant issued to The Research Works, Inc. was not registered under the Securities Act of 1933 in reliance upon an exemption set forth in Section 4(2) of the Securities Act of 1933 relating to sales by an issuer not involving any public offering. 14 Item 6. Selected Financial Data Five-Year Summary of Selected Financial Data (in thousands, except per share information)
Year ended December 31, -------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Income Statement Data: Net sales $ 35,140 $ 31,221 $ 28,948 $ 28,005 $ 24,435 Gross profit 18,993 15,789 15,013 14,839 13,143 Operating profit 2,215 3,245 3,508 3,386 2,492 Income from continuing operation 93 1,508 1,969 1,765 1,342 Loss from discontinued operations* -- (4,034) (1,700) (5,943) (1,276) Net income (loss) 93 (2,526) 269 (4,178) 66 Income (loss) per share: From continuing operations .01 .16 .22 .20 .15 From discontinued operations .00 (.42) (.19) (.66) (.14) Net income (loss) .01 (.26) .03 (.46) .01 Cash dividends on common stock -- -- -- -- -- December 31, -------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Balance Sheet Data: Working capital $ 3,667 $ 4,284 $ 10,671 $ 12,411 $ 11,507 Total assets 34,794 32,331 30,502 26,005 27,501 Long-term debt (excluding current maturities) 6,893 9,624 10,019 8,798 7,826 Stockholders' equity 9,968 8,548 13,711 12,321 15,267 Average number of common and common equivalent shares 10,021 9,725 9,155 9,049 8,999
* In March 1994, IGI's Board of Directors voted to dispose of its Biotechnology Business segment through the combination of certain majority-owned subsidiaries and the subsequent tax-free Distribution of its ownership of the combined entity to IGI's shareholders. The distribution of this segment occurred on December 12, 1995. The Consolidated Financial Statements of IGI present this segment as a discontinued operation. (See Note 2 of Notes to Consolidated Financial Statements.) 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The Company had net income in 1996 of $93,000, or $.01 per share, compared to a net loss of $2,526,000, or $.26 per share, in 1995. Income from continuing operations decreased by $1,415,000. Operating profit decreased $1,030,000, or 32%, compared to 1995. The Animal Health Products segment generated operating profits in 1996 of $7,108,000, an increase of $649,000, or 10%, over 1995 due to the increased sales volume. The Consumer Products segment, despite a $1,985,000 increase in sales revenue, had an operating loss of $796,000 compared to an operating loss in 1995 of $159,000 on $1,711,000 in sales. The Company launched a line of Novasome-based alpha-hydroxy acid products in February 1996 under the name of Nova Skin Care. Product sales of these products were $402,000, which were offset by selling and marketing costs associated with the market introduction of these products of $1,917,000 and research and development costs of $500,000. At the end of December 1996, the Company entered into a license and supply agreement with Glaxo Wellcome, Inc. ("Glaxo"). The agreement grants Glaxo the exclusive right to market the Nova Skin Care product line in the United States to physicians including but not limited to dermatologists. Under the terms of the agreement IGI will manufacture and distribute these products to Glaxo customers. IGI retains the rights to market this line to non-physicians in the U.S., and in all markets abroad. The agreement provides for Glaxo to: 1) pay royalties to IGI based on Glaxo's sales to physicians, 2) pay a $1,000,000 advance royalty to IGI which will be credited against royalties earned after 1997, and 3) pay for all selling and marketing costs associated with sales of these products to physicians. The operating results of these segments do not reflect unallocated corporate expenses of $4,097,000, $3,056,000 and $2,845,000 for the years ended December 31, 1996, 1995 and 1994, respectively, which were charged to the segments in determining the Company's operating profit. (See Note 15 of Notes to Consolidated Financial Statements.) 1996 Compared to 1995 Sales increased $3,919,000, or 13%, to $35,140,000. The growth occurred in both of the Company's business segments. Sales of Animal Health Products in 1996 increased 7% to $31,444,000, or 89% of total sales, compared with $29,510,000, or 95% of 1995 sales. Poultry vaccines sales accounted for $20,119,000 or 57% of the Company's total sales. International sales of Animal Health Products increased $1,447,000 or 12%, principally to countries in the Asia/Pacific marketplace, including China, Malaysia, Indonesia and Taiwan. Domestic sales of poultry vaccines remained at 1995 levels. Companion pet product sales increased $612,000, or 6%, to $11,325,000. Tomlyn sales, which are directed to the over-the-counter pet marketplace, increased $526,000, or 21%, in domestic sales, while international sales of these products increased $147,000, or 95%, over 1995 levels. Sales of Consumer Products increased $1,985,000, or 116%, to $3,696,000 and accounted for 11% of Company sales, up from $1,711,000, or 5% of 1995 total sales. This increase was due principally to continued expansion of the number of products containing the Company's proprietary Novasome technology sold to Estee Lauder, resulting in a $1,100,000 increase over 1995. Sales of the Company's Nova Skin Care products, which were launched in 16 February 1996, accounted for $402,000 of sales. Marketing rights to these products (Novasome-based alpha-hydroxy acids) in the United States to physicians have been licensed to Glaxo. The Company's gross profit increased $3,204,000 or 20%, with much of the increase attributable to the sales growth. As a percentage of sales, gross profit improved to 54% from 51% during 1995. The significant factor in the gross profit margin improvement was the increased sales volume of higher margined consumer products. These sales increased the utilization of the Company's skin care manufacturing facility which started producing products in 1995. Selling, general and administrative expenses increased $2,997,000 or 25%. As a percentage of sales, these expenses were 42%, up from 38% in 1995. This increase relates, in part, to the variable selling and distribution costs associated with the higher sales volume. Selling and marketing costs associated with the Nova Skin Care product line were $1,917,000, an increase of $1,667,000 over 1995. In February 1997, the Company reduced its workforce by 14 employees, most of whom were associated with the Nova Skin Care line. Research and development expenses increased $668,000 or 50% over 1995, due principally to increased new product development efforts in the both of the Company's business segments. These efforts were directed to developing the Nova Skin Care product line and other topical applications of the Novasome technology. The Company continues to develop new vaccines for poultry. The Company had $162,000 of research revenue in 1996, compared to $731,000 in 1995. Net interest expense increased $861,000 or 77% due to higher borrowings which were required to fund the 1995 operating losses of the Company's former biotechnology business segment and the $5,000,000 license payment that was made in connection with the spinoff of Novavax in December 1995. In connection with the settlement of a lawsuit brought against the Company related to employment contracts of certain IGI employees with their former employers, the Company incurred charges of $175,000, for which the Company has issued shares of IGI common stock. Although, the Company is seeking reimbursement for these charges under its insurance policy,this amount is included in other expense. The provision for income taxes on continuing operations was lower than the statutory rate due principally to subsidiary company operating losses reported on a separate return basis for state income tax purposes and research and development tax credits offset non-deductible expenses. See also Notes 1, 2 and 7 of Notes to Consolidated Financial Statements. 1995 Compared to 1994 Sales increased 8% in 1995 to $31,221,000. The growth was principally attributable to increases in poultry vaccine sales, both domestically and internationally. Poultry vaccine sales were $18,797,000, or 60% of the Company's sales. International and domestic poultry vaccine sales experienced growth rates of 14% and 7%, respectively during 1995. The domestic increase was attributable to the introduction of a new Rispen poultry vaccine during the second half of 1995. The Company expects the sales of this product to continue to 17 increase during 1996. The international poultry sales increase relates directly to the increased product registration activities, particularly in the Asia/Pacific marketplace, which experienced a 24% sales increase. Companion pet product sales increased $225,000, or 2%, to $10,713,000, although international sales of these products declined, particularly in Europe. Tomlyn sales, experienced a 28% increase, due principally to the placement of these products in pet superstores. Increased sales to Estee Lauder contributed to a $234,000 or 16% growth in the Consumer Products division. The Company's gross profit during 1995 increased $776,000 or 5%, with much of the increase related to sales growth. As a percentage of sales, gross profit dropped from 52% during 1994 to 51% in 1995. Significant factors in the gross margin reduction were increased sales of certain lower-margin poultry vaccines, fixed costs associated with the Company's new manufacturing facility, which was operating below full capacity, and the discontinuance of certain product lines. Selling, general and administrative expenses in 1995 increased $1,256,000, or 12%, due in part to variable costs associated with the higher sales volume and additional reserves established for international accounts receivables. Selling and marketing costs relating to the Company's new Nova Skin Care division were $250,000. These costs include introductory advertising, sampling and tradeshows as well as sales and marketing management. Research and development expenses increased by $132,000, or 11%, due to stepped up development in the Consumer Products segment, principally for the Nova Skin Care dermatologic product line. The Company intends to continue to increase its research and development efforts in all of its businesses, with particular emphasis on developing new poultry vaccines and developing additional products for the Nova Skin Care division. During 1995, the Company recognized $731,000 in research revenues, an increase of $348,000, or 91%, over 1994. Interest expense increased $233,000, or 23%, due to the higher borrowings required to meet the operational demands of the biotechnology business segment. The provision for income taxes on continuing operations was lower than the statutory rate due principally to subsidiary company operating losses reported on a separate return basis for state income tax purposes, research and development tax credits and a reduction in the valuation allowance offset by non-deductible expenses. See also Notes 1, 2 and 7 of Notes to Consolidated Financial Statements. Liquidity and Capital Resources Under the terms of the December 1995 distribution, the Company paid Novavax $5 million for a fully paid-up license to use the Novavax Technologies in its business. IGI funded the $5,000,000 payment to Novavax from borrowings under its bank loan agreement which has been amended to reflect the Distribution. The Amended Loan Agreement with Fleet Bank-NH and Mellon Bank provides for: o $12,000,000 revolving credit facility with interest contingent upon certain financial ratios at the end of each quarter. Effective January 1, 1996, the interest rate shall not exceed prime plus 1 1/2%. The amount available under the revolving credit facility decreases by $857,000 on the last day of each quarter from September 30, 1996 18 through December 31, 1999. At December 31, 1996, the Company had outstanding borrowings of $10,285,000 under this facility and the interest rate was 9.25%. o $10,000,000 working capital line of credit renewable annually on July 1, with interest on the outstanding borrowings contingent upon certain financial ratios at the end of each quarter. Effective January 1, 1996, the interest rate shall not exceed prime plus 1%. At December 31, 1996, the Company had $358,000 available under this facility and the interest rate was 8.75%. The loan Agreement restricts the payment of dividends to a maximum 25% of earnings in any year and to retained earnings in excess of $1,000,000. The Company was in default of certain financial covenants during the year ended and at December 31, 1996. The banks have waived such defaults and have amended certain of the financial covenants in the loan agreement effective as of January 1, 1997. The Company believes the working capital line of credit will be renewed on July 1, 1997. The Company's operating activities provided $521,000 of cash during 1996. Cash was provided from net income and non-cash charges to operations for depreciation, amortization and loss reserves. These amounts were offset, in part, by increases in accounts receivables, inventories and other current assets. The accounts receivable turnover ratio for 1996 was 4.09 compared to 3.89 for 1995. The accounts receivable balances due from Mexico and Latin America were 27% of the total receivable balance as of December 31, 1996 and the Company believes the net amounts are fully collectible. Mexico and certain Latin American countries are important markets for the Company's poultry vaccines and other products. These countries have historically experienced varying degrees of political unrest and economic and currency instability. Because of the volume of business transacted by the Company in those countries, continuation or the recurrence of such unrest or instability could adversely affect the businesses of its customers in those countries or the Company's ability to collect its receivables from such customers, which in either case could adversely impact the Company's future operating results. The growth in inventories relates principally to new animal health products that the Company began selling during the third quarter of 1996 as well as products for the Nova Skin Care division which were launched in February 1996. The inventory turnover ratio for 1996 was 1.75, compared to 1.81 for the year ended December 31, 1995. The Company believes its reserves for inventory obsolescence and accounts receivable are adequate. The Company used $854,000 for investing activities, principally capital expenditures for the Company's manufacturing operations. Funding for the Company's operating and investing activities were provided by borrowings under the Company's working capital line of credit and proceeds from the exercise of common stock options. At April 2, 1997, after paying the March 31, 1997 payment of $857,000 due under the revolving credit facility, the Company had $876,000 of available borrowing capacity under the working capital line of credit and no borrowings available under the revolving credit facility. Funds generated from operations and existing bank credit facilities are expected to be sufficient to meet the Company's short-term cash requirements. The Company has current maturities of long-term debt of $857,000 per quarter. The Company believes that cash generated from operating activities as well as available borrowings under its line of credit facility will be sufficient to meet these obligations. However, over the long-term, the 19 Company will require additional funds to expand its business. No assurance can be given that the Company will be successful in obtaining the required funds, and, if not, the Company may be required to cut back on its expansion plans or otherwise appropriately modify its business strategy. Factors That May Affect Future Results The industry segments in which the Company competes are constantly changing and are subject to significant competitive pressures. The following sets forth some of the risks which the Company faces. Highly Leveraged The Company has historically applied the operating profits from its animal health products business to fund the development of its consumer products business and its former biotechnology business, Novavax, Inc., which was distributed to the Company's stockholders in December 1995. Therefore, the Company is currently highly leveraged and will need additional capital to finance the expansion of its animal health products and consumer products businesses. No assurance can be given that such funds will be obtained when required or, if obtainable, on terms that are favorable to the Company. Due to the $5,000,000 payment to Novavax for the IGI License Agreement, which was funded by bank borrowings, and operating losses associated with the development and launch of the Nova Skin line, the Company was in violation of certain covenants in its bank credit agreements during the year and at December 31, 1996. The banks have waived such defaults as of December 31, 1996 and have amended certain of the financial covenants in the loan agreement effective as of January 1, 1997. No assurance can be given that if the Company violates credit agreement covenants in the future, the banks will issue waivers or modify the agreements to remove any such defaults or violations. The Company has a $10,000,000 line of credit which is renewable on an annual basis. The Company believes the line of credit will be renewed by the banks effective as of July 1, 1997. Intense Competition in Consumer Products Business The Company's Consumer Products Business competes with large, well-financed cosmetics and consumer products companies with development and marketing groups that are experienced in the industry and possess far greater resources than those available to the Company. There is no assurance that the Company's consumer products can compete successfully against its competitors or that it can develop and market new products that will be favorably received in the marketplace. In addition, certain of the Company's customers that use the Company's Novasome lipid vesicles in their products may decide to reduce their purchases from the Company or shift their business to other suppliers. Price Competition in Poultry Vaccine Business The Company has encountered increasingly severe competition from international 20 producers of poultry vaccines, particularly increased price competition coupled with a downward trend in vaccine prices. Foreign Regulatory and Economic Considerations The Company's business may be adversely affected by foreign import restrictions and additional regulatory requirements. Also, unstable or adverse economic conditions and fiscal and monetary policies in certain Latin American countries, an increasingly important market for the Company's animal health products, could adversely affect the Company's future business in these countries. Rapidly Changing Marketplace for Animal Health Products The emergence of pet superstores, the consolidation of distribution channels into a smaller number of large, more powerful companies and the diminishing traditional role of veterinarians in the animal health business may adversely affect the Company's ability to expand its animal health business and to operate this business at the gross margin levels historically enjoyed by the Company. Effect of Rapidly Changing Technologies The Company expects to rely on the features of the Novavax Technologies to market and expand its line of internally-developed dermatologic products. However, if its competitors develop new and improved technologies that are superior to the Company's technologies, the Company's products could be less acceptable in the marketplace and therefore the Company's planned expansion of its line of personal care and dermatologic products could be adversely affected. Regulatory Considerations The FDA may determine that the Company's alpha hydroxy acid-based products are "drugs" and therefore should be subject to the expensive and sometimes protracted FDA regulatory approval. Also, certain of the Company's products may not be approved for sales overseas on a timely basis, thereby limiting the Company's ability to expand its foreign sales. Accounting Standards Changes In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share." This Statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This Statement is effective for financial statements issued for periods ending after December 15, 1997, earlier application is not permitted. This Statement requires restatement of all prior-period EPS data presented. The Company is currently evaluating the impact, if any, adoption of SFAS No. 128 will have on its financial statements. 21 Income Taxes The Company has a net deferred tax asset in the amount of $3.2 million as of December 31, 1996. The largest deferred tax assets relate to the $5,000,000 license payment to Novavax which will be deducted over the ten-year period as the related products are sold and the royalties incurred and to net operating loss carryforwards. Management believes that the Company's deferred tax asset will be realized through the reversal of existing temporary differences and the utilization of net operating loss carryforwards and the prepaid license against future taxable income. The minimum level of future taxable income necessary to realize the Company's recorded deferred tax asset at December 31, 1996, is approximately $7.6 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 deferred tax assets. The net operating loss carryforwards expire in 2010 and there are no limitations on their use. Management believes that it will be able to utilize these carryforwards. The Company's consolidated federal taxable income (loss) varies from its consolidated financial statement income (loss). In 1994, taxable income was higher due to the establishment of reserves for losses on discontinued operations; in 1995 and 1996, taxable income was lower as the reserves were utilized. Item 8. Financial Statements and Supplementary Data The financial statements and notes thereto listed in the accompanying index to financial statements (Item 14) are filed as part of this Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 22 Part III Item 10. Directors and Executive Officers of the Registrant The information required by this item is contained in part under the caption "Executive Officers of the Registrant" in PART I hereof, and the remainder is contained in the Company's Proxy Statement for the Company's Annual Meeting of Stockholders to be held on May 13, 1997 (the "1997 Proxy Statement") under the captions "PROPOSAL 1 -- ELECTION OF DIRECTORS" and "Beneficial Ownership of Common Stock" and is incorporated herein by this reference. The Company expects to file the 1997 Proxy Statement within 120 days after the close of the fiscal year ended December 31, 1996. Officers are elected on an annual basis and serve at the discretion of the Board of Directors. Item 11. Executive Compensation The information required by this item is contained under the captions "EXECUTIVE COMPENSATION" and "Director Compensation and Stock Options" in the Company's 1997 Proxy Statement and is incorporated herein by this reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is contained in the Company's 1997 Proxy Statement under the caption "Beneficial Ownership of Common Stock" and is incorporated herein by this reference. Item 13. Certain Relationships and Related Transactions The information required by this item is contained under the caption "Certain Relationships and Related Transactions" appearing in the Company's 1997 Proxy Statement and is incorporated herein by this reference. 23 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, 1996 and 1995 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: Schedule II. Valuation and Qualifying Accounts and Reserves. Schedules other than those listed above are omitted for the reason that they are either not applicable or not required or because the information required is contained in the financial statements or notes thereto. Condensed financial information of the Registrant is omitted since there are no substantial amounts of "restricted net assets" applicable to the Company's consolidated subsidiaries. (3) Exhibits Required to be Filed by Item 601 of Regulation S-K. The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 27, 1997 IGI, Inc. By: /s/ Edward B. Hager ------------------------- Edward B. Hager, Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacity and on the date indicated.
Name Title Date - ---- ----- ---- /s/ Edward B. Hager Chairman of the Board March 27, 1997 - ------------------- Edward B. Hager /s/ John P. Gallo President and Director March 27, 1997 - ------------------- John P. Gallo /s/ Donald J. MacPhee Principal Financial and March 27, 1997 - --------------------- Accounting Officer Donald J. MacPhee - --------------------- Director Terrence D. Daniels /s/ Jane E. Hager Director March 27, 1997 - ----------------- Jane E. Hager /s/ Constantine L. Hampers Director March 27, 1997 - -------------------------- Constantine L. Hampers /s/ Terrence O'Donnell Director March 27, 1997 - ---------------------- Terrence O'Donnell /s/ Paul D. Paganucci Director March 27, 1997 - --------------------- Paul D. Paganucci /s/ David G. Pinosky Director March 27, 1997 ------------------- David G. Pinosky
25 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of IGI, Inc.: We have audited the consolidated financial statements and financial statement schedule of IGI, Inc. and subsidiaries as listed in Item 14(a) of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and the disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of IGI, Inc. and subsidiaries at December 31, 1996 and 1995 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania March 27, 1997 F-1 IGI, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995 (amounts in thousands) ASSETS 1996 1995 -------- --------- Current assets: Cash and cash equivalents ........................ $ 317 $ 169 Accounts receivable, less allowance for doubtful accounts of $238 and $306 in 1996 and 1995, respectively ......... 8,709 8,456 Receivable due under royalty agreement ........... 1,000 -- Inventories ...................................... 9,357 9,000 Current deferred taxes ........................... -- 56 Prepaid expenses and other current assets ........ 1,217 762 -------- -------- Total current assets .......................... 20,600 18,443 -------- -------- Notes receivable ................................... 162 285 -------- -------- Property, plant and equipment - at cost: Land .......................................... 625 625 Buildings ..................................... 9,382 9,054 Machinery and equipment ....................... 9,241 8,656 -------- -------- 19,248 18,335 Less accumulated depreciation ...................... (9,121) (8,225) -------- -------- 10,127 10,110 -------- -------- Deferred income taxes .............................. 3,159 2,791 Other assets ....................................... 746 702 -------- -------- $ 34,794 $ 32,331 ======== ======== Continued The accompanying notes are an integral part of the consolidated financial statements. F-2 IGI, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, Continued December 31, 1996 and 1995 (amounts in thousands except share information) LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 -------- -------- Current liabilities: Notes payable to bank .............................. $ 9,642 $ 8,048 Current maturities of long-term debt ............... 3,443 2,415 Accounts payable ................................... 2,665 2,447 Accrued payroll .................................... 470 461 Other accrued expenses ............................. 675 772 Income taxes payable ............................... 38 16 -------- -------- Total current liabilities ....................... 16,933 14,159 -------- -------- Long-term debt, less current maturities .............. 6,893 9,624 -------- -------- Deferred income from royalty contract ................ 1,000 -- -------- -------- Commitments and contingencies Stockholders' equity: Common stock, $.01 par value, 30,000,000 shares authorized; 9,572,681 and 9,440,681 shares issued in 1996 and 1995, respectively .... 96 94 Stock subscribed ................................... 175 -- Additional paid-in capital ......................... 19,115 18,131 Deficit ............................................ (6,786) (6,879) -------- -------- 12,600 11,346 Less treasury stock; 164,082 and 176,356 shares at cost, in 1996 and 1995 respectively ........... (2,518) (2,609) Stockholders' notes receivable ..................... (114) (189) -------- -------- Total stockholders' equity ...................... 9,968 8,548 -------- -------- $ 34,794 $ 32,331 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. F-3 IGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 1996, 1995 and 1994
(thousands, except share and per share information) 1996 1995 1994 ----------- ---------- ------------ Net sales ................................................................ $ 35,140 $ 31,221 $ 28,948 Cost of sales ............................................................ 16,147 15,432 13,935 ----------- ---------- ---------- Gross profit ............................................................. 18,993 15,789 15,013 Selling, general and administrative expenses ............................. 14,927 11,930 10,675 Research and development expenses ........................................ 2,013 1,345 1,212 Research revenues ........................................................ (162) (731) (382) ----------- ---------- ---------- Operating profit ......................................................... 2,215 3,245 3,508 Interest expense ......................................................... (1,984) (1,269) (1,036) Interest income .......................................................... -- 146 67 Other income (expense), net .............................................. (202) 7 10 ----------- ---------- ---------- Income from continuing operations before provision for income taxes .............................................. 29 2,129 2,549 (Benefit) provision for income taxes ..................................... (64) 621 580 ----------- ---------- ---------- Income from continuing operations ........................................ 93 1,508 1,969 Loss from discontinued operations -- Distribution of biotechnology segment, net of income tax benefits: Loss from operations ................................................. -- (4,034) (700) Estimated loss on disposal ........................................... -- -- (1,000) ----------- ---------- ---------- Net income (loss) ........................................................ $ 93 $ (2,526) $ 269 =========== ========== ========== Income (loss) per common and common equivalent share: From continuing operations ........................................... $ .01 $ .16 $ .22 =========== ========== ========== From discontinued operations ......................................... $ -- $ (.42) $ (.19) =========== ========== ========== Net income (loss) .................................................... $ .01 $ (.26) $ .03 =========== ========== ========== Average number of common and common equivalent shares ....................................................... 10,021,288 9,725,230 9,155,231 =========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-4 IGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1996, 1995 and 1994
(thousands, except per share information) 1996 1995 1994 ------- -------- -------- Cash flows from operating activities: Net income (loss) ................................ $ 93 $(2,526) $ 269 Reconciliation of net income (loss) to net cash used by operating activities: Depreciation and amortization .................... 992 836 843 Provision for loss on accounts receivable and inventories ..................... 83 788 272 Accrual for estimated loss on disposal ........... -- -- 1,000 Issuance of stock to 401(k) plan ................. 91 69 50 Benefit for deferred income taxes ................ (73) (101) (220) Stock option compensation expense ................ 156 -- -- Litigation settlement in common stock ............ 175 -- -- Changes in operating assets and liabilities: Accounts receivable .............................. (213) (1,321) (457) Inventories ...................................... (480) (1,570) 438 Prepaid and other assets ......................... (455) 151 (303) Accounts payable and accrued expenses ............ 130 939 449 Income taxes payable/refundable .................. 22 1 46 Reimbursement from former subsidiary ............. -- 250 -- Net assets of biotechnology segment .............. -- (226) (2,501) ------- ------- ------- Net cash provided from (used by) operating activities 521 (2,710) (114) ------- ------- ------- Cash flows from investing activities: Capital expenditures, net ......................... (913) (2,397) (1,834) (Increase) decrease in other assets ............... 59 (5) (132) License payment to former subsidiary .............. -- (5,000) -- Net assets of biotechnology segment ............... -- (360) (549) ------- ------- ------- Net cash used by investing activities ............... (854) (7,762) (2,515) ------- ------- ------- Cash flows from financing activities: Net borrowings under line of credit agreements .... 1,594 4,258 1,345 Borrowings under revolving credit agreement ....... 12 2,000 1,250 Payments of long-term debt ........................ (1,714) (9) (85) Proceeds from exercise of common stock options .... 589 938 192 Proceeds from sale of common stock ................ -- 2,500 -- ------- ------- ------- Net cash provided from financing activities ......... 481 9,687 2,702 ------- ------- ------- Net (decrease) increase in cash and equivalents ..... 148 (785) 73 Cash and cash equivalents at beginning of year ...... 169 954 881 ------- ------- ------- Cash and cash equivalents at end of year ............ $ 317 $ 169 $ 954 ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-5 IGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the years ended December 31, 1996, 1995 and 1994
Additional Common Stock Stock Paid-In Notes (thousands, except share information) Shares Amount Subscribed Capital Receivable --------- ---------- ---------- ------- ---------- Balance, January 1, 1994 ................................ 8,920,147 $ 89 $ -- $ 18,971 $ (163) Exercise of stock options, including tax benefits of $219 93,218 1 709 Adjustment of valuation allowance ....................... 660 660 Issuance of stock to 401(k) plan ........................ 5,272 -- 51 Net income .............................................. ------------------------------------------------------------------ Balance, December 31, 1994 .............................. 9,018,637 90 -- 20,391 (163) Exercise of stock options, including tax benefits of $279 193,815 2 1,152 Issuance of stock to 401(k) plan ........................ 1,574 -- 44 Issuance of stock to industry partner ................... 226,655 2 2,498 License payment to former subsidiary, net of a deferred tax benefit of $1,700 ................................. (3,300) Distribution of biotechnology business segment .......... (2,654) Payment of stockholders' notes receivable ............... 74 Reclass of stockholders' notes receivable ............... (100) Net loss ................................................ ------------------------------------------------------------------ Balance December 31, 1995 ............................... 9,440,681 94 -- 18,131 (189) Exercise of stock options, including tax benefits of $79 132,000 2 666 Issuance of stock to 401(k) plan ........................ 1 Settlement of litigation ................................ 175 Tax benefit of license payment to former subsidiary .... 161 Value of non-employee stock options ..................... 156 Repayments of shareholders' notes ....................... 75 Net income ............................................. ------------------------------------------------------------------ Balance, December 31, 1996 .............................. 9,572,681 $ 96 $ 175 $ 19,115 $ (114) ================================================================== Total Treasury Stockholders' Deficit Stock Equity ---------- ---------- -------- Balance, January 1, 1994 ................................ $ (4,622) $ (1,954) $ 12,321 Exercise of stock options, including tax benefits of $219 (299) 411 Adjustment of valuation allowance ....................... 660 Issuance of stock to 401(k) plan ........................ 51 Net income .............................................. 269 269 ------------------------------------ Balance, December 31, 1994 .............................. (4,353) (2,253) 13,712 Exercise of stock options, including tax benefits of $279 (381) 773 Issuance of stock to 401(k) plan ........................ 25 69 Issuance of stock to industry partner ................... 2,500 License payment to former subsidiary, net of a deferred tax benefit of $1,700 ................................. (3,300) Distribution of biotechnology business segment .......... (2,654) Payment of stockholders' notes receivable ............... 74 Reclass of stockholders' notes receivable ............... (100) Net loss ................................................ (2,526) ------------------------------------ Balance December 31, 1995 ............................... (6,879) (2,609) 8,548 Exercise of stock options, including tax benefits of $79 668 Issuance of stock to 401(k) plan ........................ 91 92 Settlement of litigation ................................ 175 Tax benefit of license payment to former subsidiary .... 161 Value of non-employee stock options ..................... 156 Repayments of shareholders' notes ....................... 75 Net income ............................................. 93 ------------------------------------ Balance, December 31, 1996 .............................. $(6,786) $ (2,518) $ 9,968 ====================================
The accompanying notes are an integral part of the consolidated financial statements. F-6 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Nature of the Business IGI, Inc. ("IGI" or the "Company") is a diversified company engaged in two business segments. The Animal Health Products business produces and markets animal health products such as poultry vaccines, veterinary products, nutritional supplements and grooming aids. The Consumer Products business produces and markets cosmetic and consumer products such as skin care products and shampoos. Principles of Consolidation The consolidated financial statements include the accounts of IGI, Inc. and its wholly-owned and majority-owned subsidiaries. The Company's financial statements include 100% of the losses through December 12, 1995 of its formerly majority- owned subsidiary Novavax, Inc. ("Novavax"). All intercompany accounts and transactions have been eliminated. Cash equivalents Cash equivalents consist of short term investments with initial maturities of 90 days or less. Inventories Inventories are stated at the lower of cost (last-in, first-out basis) or market. Property, Plant and Equipment Depreciation of property, plant and equipment is provided for under the straight-line method over the estimated useful lives as follows: Useful Lives ------------ Buildings and improvements 10-30 years Machinery and equipment 3-10 years Repair and maintenance costs are charged to operations as incurred while major improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation thereon are removed from the accounts and any gains or losses are included in operations. Amortization Cost in excess of net assets of businesses acquired, which is included in other assets, is amortized on a straight-line basis over 40 years. The Company periodically evaluates the carrying amount of this asset using cash flow projections and net income and if warranted, impairment would be recognized. F-7 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 1. Summary of Significant Accounting Policies, (continued) Income Taxes The Company records income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS 109 requires the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded based on a determination of the ultimate realizability of future deferred tax assets. Stock-Based Compensation Compensation costs attributable to stock option and simliar plans are recognized based on any difference between the quoted market price of the stock on the date of grant over the amount the employee is required to pay to acquire the stock (the intrinsic value method under Accounting Principles Board [APB] Opinion 25). Such amount, if any, is accrued over the related vesting period, as appropriate. SFAS No. 123, "Accounting for Stock-Based Compensation," requires companies electing to continue to use the intrinsic-value method to make pro forma disclosures of net income and earnings per share as if the fair-value-based method of accounting had been applied. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include allowances for excess and obsolete inventories, allowances for doubtful accounts and other assets and provisions for income taxes and related valuation allowances. Actual results could differ from those estimates. Long-Lived Assets Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The provisions of SFAS No. 121 require the Company to review its long-lived assets for impairment on an exception basis whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through future cash flows. If it is determined that an impairment has occurred based on expected future cash flows, then the loss is recognized in the income statement. The adoption of SFAS No. 121 did not have an effect on the Company's consolidated financial statements. Financial Instruments The Company's financial instruments include cash and cash equivalents, accounts receivable, notes receivable and long-term debt. The carrying value of these instruments approximates the fair value. F-8 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 1. Summary of Significant Accounting Policies, (continued) Accounting Standards Changes In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share." This Statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This Statement is effective for financial statements issued for periods ending after December 15, 1997, earlier application is not permitted. This Statement requires restatement of all prior-period EPS data presented. The Company is currently evaluating the impact, if any, adoption of SFAS No. 128 will have on its financial statements. Revenue Recognition Revenues earned under research contracts are recognized when the related contract provisions are met. Reclassification Certain previously reported amounts have been reclassified to conform with the current period presentation. 2. Corporate Activities Distribution of Biotechnology Segment On March 17, 1994, IGI's Board of Directors voted to dispose of the biotechnology business segment through the tax-free distribution to IGI's shareholders of its ownership of Novavax. On December 12, 1995 (the "Distribution Date"), IGI distributed to the holders of record of IGI's common stock, at the close of business on November 28, 1995, one share of common stock of Novavax for every one share of IGI common stock outstanding (the "Distribution"). In connection with the Distribution, the Company paid Novavax $5,000,000 in return for a fully-paid-up, ten-year license entitling it to the exclusive use of Novavax's technologies in the fields of (i) animal pharmaceuticals, biologicals, and other animal health products; (ii) foods, food applications, nutrients and flavorings; (iii) cosmetics, consumer products and dermatological over-the-counter and prescription products (excluding certain topically delivered hormones); (iv) fragrances; and (v) chemicals, including herbicides, insecticides, pesticides, paints and coatings, photographic chemicals and other specialty chemicals; and the processes for making the same. The Company has the option, exercisable within the last year of the ten-year term, to extend the License Agreement for an additional ten-year period for $1,000,000. Novavax retained the right to use its Novavax Technologies for all other applications, including human vaccines and pharmaceuticals. At the time the terms of the IGI License Agreement were fixed, including the license payment, all of the directors of IGI were also directors of Novavax and these terms were unilaterally established by IGI. As of December 31, 1995, three directors of IGI were also directors of Novavax. The Company has presented the payment under the License Agreement as a capital contribution in its financial statements to reflect the intercompany nature and substance of the transaction. The form was structured as a prepaid license agreement to address various considerations of the Distribution, including tax and financing considerations. For tax purposes, the transaction has been treated as a prepaid license agreement. IGI has no further obligations or intentions to fund Novavax. F-9 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 2. Corporate Activities, (continued) Distribution of Biotechnology Segment, (continued) Components of the losses from discontinued operations for each of the two years in the period ended December 31, 1995 were: (amounts in thousands) 1995 1994 ------- -------- Selling, general and administrative .............. $ 2,103 $ 1,762 Research and development expenses, net ........... 3,648 2,485* Credit for income taxes .......................... (717) (797) ------- ------- Operating losses ................................. 5,034 3,450 Accrual for loss on disposal ..................... (1,000) (2,750) Estimated loss on disposal ....................... -- 1,000 ------- ------- Net loss from discontinued operations ............ $ 4,034 $ 1,700 ======= ======= * Includes $475,000 of initial payments in 1994 on product development and licensing agreements or detailed agreements in principle which have been reflected as a reduction in research and development expenses. The Company had anticipated the effective date of the Distribution to be June 30, 1995. Due to delays in the final distribution of Novavax, the Company incurred costs in excess of the $1,000,000 estimated loss of disposal of its biotechnology business segment. These costs related to increased research and development expenses for products in the initial FDA approval process. The components of the net assets of the biotechnology segment at December 12, 1995 were: (amounts in thousands) Net current liabilities ..................................... $ (56) Property, plant and equipment, net .......................... 1,401 Deferred patent costs, net .................................. 1,309 ------- $ 2,654 ======= The distribution of the net assets of the Company's biotechnology business segment as of the Distribution Date are recorded in the accompanying financial statements as a reduction in additional paid-in capital. Equity and Other Transactions In August 1993, the Company entered into an agreement with an industry partner for the testing of Novavax's patented Novasome lipid vesicle encapsulation technology as a microcarrier and adjuvant for various human vaccines. The Company received $1,000,000 in exchange for 99,700 shares of the Company's common stock. In December 1994, the partner exercised its option to enter into an exclusive license agreement by agreeing to pay the Company $475,000 for the use of the technology in certain applications and additional research funding. This amount is included in the loss from discontinued operations in 1994. Additionally, the partner exercised its option to purchase shares of the Company's common stock. In January 1995, the Company issued 226,655 shares of its common stock for $2,500,000. This agreement was amended in December 1995 in connection with the Distribution. Under the terms of the amended agreement, the industry partner has the option to purchase up to approximately $6,800,000 of IGI Common Stock and approximately $3,700,000 of Novavax Common Stock, concurrently. These amounts were determined, pursuant to the agreement, by calculating the average ratio of closing prices of IGI and Novavax common stock for the first twenty days following the Distribution. The price per share for Novavax's and IGI's common stock was to be determined on the date of exercise and was capped at an aggregate combined price per share of $13.00. This option expired unexercised in 1996. F-10 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 3. Supplemental Cash Flow Information Cash paid for income taxes and interest during the years ended December 31, 1996, 1995, and 1994 was as follows: (amounts in thousands) 1996 1995 1994 ------ ------ ------- Income taxes paid (refunded), net ......... $ 41 3 $ (43) Interest .................................. 1,955 1,236 931 In addition, during the years ended December 31, 1996, 1995, and 1994, the Company had the following non-cash financing and investing activities: (amounts in thousands) 1996 1995 1994 ------ ------ ------ Tax benefits of exercise of common stock options ..................... $ 79 $ 279 $ 219 Distribution of the biotechnology segment .................... -- 2,904 -- Treasury stock repurchased ................ -- 356 299 Tax benefit of license payment to former subsidiary ........................ (161) -- -- Receivable under royalty agreement......... 1,000 -- -- 4. Inventories Inventories as of December 31, 1996 and 1995 consisted of: (amounts in thousands) 1996 1995 ------ ------ Finished goods ........................... $3,570 $3,104 Work-in-process .......................... 2,975 2,851 Raw materials ............................ 2,812 3,045 ------ ------ $9,357 $9,000 ====== ====== If the first-in, first-out (FIFO) method of accounting for inventories had been used, inventories would have been $844 and $307 lower than reported in 1996 and 1995, respectively. 5. Long-Term Debt Long-term debt as of December 31, 1996 and 1995 consisted of: (amounts in thousands) 1996 1995 ------ ------- Revolving credit facility ...................... $10,285 $12,000 Other debt due in annual installments through December 1999 with interest at 9% ...................... 51 39 ------- ------- 10,336 12,039 Less current maturities ........................ 3,443 2,415 ------- ------- $ 6,893 $ 9,624 ======= ======= F-11 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 5. Long-Term Debt, (continued) In December 1995, the Company and its banks reached an agreement to amend the loan agreement. The amended and restated loan agreement provides for: o $12,000,000 revolving credit facility with interest contingent upon certain financial ratios at the end of each quarter. The interest rate shall not exceed prime plus 1 1/2% effective January 1, 1996. The amount available under the revolving credit facility decreases by $857,000 on the last day of each quarter from September 30, 1996 through December 31, 1999. At December 31, 1996, the Company had outstanding borrowings of $10,285,000 under this facility and the interest rate was 9.25%. o $10,000,000 working capital line of credit, renewable annually on July 1, with interest on the outstanding borrowings contingent upon certain financial ratios at the end of each quarter. The interest rate shall not exceed prime plus 1% effective January 1, 1996. The aggregate amount outstanding under the agreement at December 31, 1996 was $9,642,000. The average amounts outstanding during 1996 and 1995 were $8,759,000 with a weighted interest rate of 9.2% and $4,461,000 with a weighted interest rate of 8.7%, respectively. At December 31, 1996, the Company had $358,000 available under this facility and the interest rate was 8.75%. A commitment fee of 1/2% is payable on the unused portion of the working capital line and 1/4% on the unused revolving credit facility. The agreement requires the Company to maintain certain financial ratios and comply with other non-financial covenants, and also restricts the payment of cash dividends to not more than 25% of the net income in any one year and to retained earnings in excess of $1,000,000. The Company was in default of certain financial covenants during the year ended and at December 31, 1996. The banks have waived such defaults and have amended certain of the financial covenants in the loan agreement effective as of January 1, 1997. The Company believes the working capital line of credit will be renewed on July 1, 1997. Aggregate annual principal payments on long-term debt, for the five years subsequent to December 31, 1996 and thereafter are as follows: (amounts in thousands) Year $ ---- ------- 1997.................. $ 3,443 1998.................. 3,446 1999.................. 3,447 ------- $10,336 ======= All of the Company's assets are pledged as collateral under the terms of the loan agreement. As of December 31, 1996 and 1995, there were no outstanding equipment leases. F-12 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 6. Stock Options Under the 1983 Incentive Stock Option Plan, options have been granted to key employees to purchase a maximum of 500,000 shares of common stock. Options, having a maximum term of 10 years, have been granted at 100% of the fair market value of the Company's stock at the time of grant. Options outstanding under this plan at December 31, 1996 are generally exercisable in cumulative increments over four years commencing one year from the date of grant. Under the 1989 and 1991 Stock Option Plans, options may be granted to key employees, directors and consultants to purchase a maximum of 500,000 and 1,900,000 shares of common stock, respectively. Options, having a maximum term of 10 years, have been granted at 100% of the fair market value of the Company's stock at the time of grant. Both incentive stock options and non-qualified stock options may be granted under the 1989 Plan and the 1991 Plan. Incentive stock options are generally exercisable in cumulative increments over four years commencing one year from the date of grant. Non-qualified options are generally exercisable in full beginning six months after the date of grant. In 1991, the Company's Board of Directors adopted a Non-Qualified Stock Option Plan. The plan provides that options may be granted to consultants, scientific advisors and employees to purchase a maximum of 250,000 shares of common stock. Options outstanding under this plan at December 31, 1996 are generally exercisable in cumulative increments over four years commencing one year from the date of grant. In addition, non-qualified stock options have been granted to officers and directors at prices equal to the fair market value of the Company's stock on the date the options were granted. Exercise of the majority of these options may be made at any time during a ten year period commencing on the date of grant. Stock option transactions in each of the past three years under the aforementioned plans in total were:
Plan Non-Qualified Plan -------------------------------------------- -------------------------------------------- Weighted Weighted Weighted Share Price Per Share Average Price Shares Price Per Share Average Price ----- --------------- ------------- ------ --------------- ------------- January 1, 1994 shares under option 1,399,778 $ 1.30 - $ 9.88 $ 6.27 427,770 $ 1.22 - $ 6.80 $ 4.15 Granted 408,500 $ 5.59 - $ 8.91 $ 7.86 -- -- -- Exercised (6,000) $ 4.70 - $ 5.67 $ 5.04 (87,218) $ 1.22 - $ 6.80 $ 3.30 Cancelled (8,750) $ 5.02 - $ 9.88 $ 7.01 -- -- -- December 31, 1994 shares under option 1,793,528 $ 1.30 - $ 9.88 $ 6.63 340,552 $ 1.38 - $ 6.80 $ 4.37 Granted 346,500 $ 6.63 - $ 9.39 $ 7.35 -- -- -- Exercised (190,763) $ 1.30 - $ 9.88 $ 3.73 (3,052) $ 1.38 $ 1.38 Cancelled (9,750) $ 6.72 - $ 9.72 $ 7.47 -- -- -- December 31, 1995 shares under option 1,939,515 $ 3.64 - $ 9.88 $ 7.04 337,500 $ 1.38 - $ 6.80 $ 4.40 Granted 381,000 $ 5.13 - $ 7.69 $ 6.04 -- -- -- Exercised (82,000) $ 4.70 - $ 6.96 $ 6.33 (50,000) $ 1.38 $ 1.38 Cancelled (29,500) $ 5.67 - $ 9.48 $ 7.31 (1,000) $ 6.80 $ 6.80 ------- ---------------- December 31, 1996 shares under option 2,209,015 $ 3.65 - $ 9.88 $ 6.89 286,500 $ 3.97 - $ 6.80 $ 4.92 ========= =============== ======== ======= ================ Shares subject to outstanding options exercisable at December 31, 1995 1,386,003 $ 6.94 337,500 $ 4.40 ========= ======== ======= ====== December 31, 1996 1,665,619 $ 7.01 286,500 $ 4.92 ========= ======== ======= ======
F-13 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 6. Stock Options, (continued) The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for option grants to directors and employees pursuant to the stock option plans. The Company has recorded compensation expense of $156,000 in 1996 for options granted to consultants. Had compensation cost for all grants under the Company's stock option plans been determined based on the fair value at the grant date consistent with the provisions of SFAS 123, the Company's net income and income per share would have been reduced to the pro forma amounts indicated below: (thousands, except per share information) 1996 1995 ------- --------- Net income (loss) - as reported ................ $ 93 $ (2,526) Net loss - pro forma ........................... $ (823) $ (3,270) Income (loss) per share - as reported .......... $ .01 $ (.26) Loss per share - pro forma ..................... $ (.08) $ (.34) The pro forma information has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the grant date using the Black-Scholes option pricing model with the following assumptions for 1996 and 1995: Dividend yield ............................ 0% Risk free interest rate ................... 5.51% - 7.10% Estimated volatility factor ............... 33.07% - 43.45% Expected life ............................. 6 - 9 years The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. The following table summarizes information concerning outstanding and exercisable options as of December 31, 1996.
Options Outstanding Options Exercisable ------------------- -------------------- Range of Weighted Average Exercise Number of Remaining Exercise Number of Weighted Average Prices Options Life (Years) Price Options Exercise Price - ------ ------- ------------ ----- ------- -------------- $ 3.00 to $ 4.00 55,000 1.00 $ 3.91 55,000 $ 3.91 $ 4.00 to $ 5.00 313,000 2.70 $ 4.75 313,000 $ 4.75 $ 5.00 to $ 6.00 633,000 6.650 $ 5.54 366,500 $ 5.38 $ 6.00 to $ 7.00 599,250 7.856 $ 6.68 417,729 $ 6.67 $ 7.00 to $ 8.00 427,550 6.982 $ 7.44 415,050 $ 7.43 $ 8.00 to $ 9.00 249,000 8.100 $ 8.55 168,250 $ 8.57 $ 9.00 to $10.00 218,215 5.871 $ 9.64 217,090 $ 9.64 ------- ------- $ 3.65 to $ 9.88 2,495,515 6.453 $ 6.66 1,952,619 $ 6.70
In connection with the Distribution, holders of options to purchase IGI common stock as of the Distribution Date were granted options to purchase Novavax common stock and substitute options to purchase IGI common stock. Exercise prices of the options were based on the relative market capitalization of IGI and Novavax on the record date and the 20 trading days immediately following the record date to restore holders of each option to the economic position prior to the Distribution Date. The prices related to stock option transactions have been adjusted to reflect the terms of the substitute options. In connection with the exercise of 25,000 and 67,218 stock options in 1995 and 1994, respectively, the Company received approximately 23,644 and 26,300 shares of its common stock as consideration for the exercise price of the options. The total value of the shares used as consideration for the exercise of stock options was $381,250 and $298,770 in 1995 and 1994, respectively, which has been recorded as treasury stock. F-14 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 7. Income Taxes The provision (benefit) for income taxes included in the consolidated statements of operations for the years ended December 31, 1996, 1995 and 1994 is as follows: (amounts in thousands) 1996 1995 1994 ----- ----- ----- Continuing operations: Current tax expense: Federal ........................................ $-- $ 718 $ 797 State and local ................................ 9 4 3 ----- ----- ----- Total current ................................... 9 722 800 ----- ----- ----- Deferred tax (benefit) expense Federal ........................................ 78 6 (222) State and local ................................ (151) (107) 2 ----- ----- ----- Total deferred .................................. (73) (101) (220) ----- ----- ----- Total (benefit) provision from continuing operations ..................................... (64) 621 580 ===== ===== ===== Discontinued operations: Current tax benefit: Federal and state .............................. -- (718) (797) ----- ----- ----- Total provision (benefit) for income taxes ....... $ (64) $ (97) $(217) ===== ===== ===== The provision for income taxes differed from the amount of income taxes determined by applying the applicable Federal tax rate (34%) to pretax income from continuing operations as a result of the following: (amounts in thousands) 1996 1995 1994 ----- ----- ----- Statutory provision .............................. $ 10 $ 723 $ 860 Non-deductible expenses .......................... 66 66 57 State income taxes, net of federal benefit ....... (70) (46) 2 Research and development tax credits ............. (42) (40) (68) Reduction in valuation allowance ................. -- (83) (271) Other, net ....................................... (28) 1 -- ----- ----- ----- $ (64) $ 621 $ 580 ===== ===== ===== Gross deferred tax assets (liabilities) included in the consolidated balance sheets as of December 31, 1996 and 1995, consist of the following: (amounts in thousands) 1996 1995 -------- -------- Property, plant and equipment ........................ $ (689) $ (969) Prepaid license agreement ............................ 1,802 1,700 Net operating loss carryforwards ..................... 1,687 1,727 Tax credit carryforwards ............................. 418 384 Other future deductible temporary differences ........ 168 149 Other future taxable temporary differences ........... (183) (76) ------- ------- 3,203 2,915 Less: valuation allowance ............................ (44) (69) ------- ------- Deferred taxes, net .................................. $ 3,159 $ 2,846 ======= ======= F-15 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 7. Income Taxes, continued Current and deferred tax benefits resulting from a prepaid license agreement and the exercise of stock options not credited to the consolidated statements of operations for the years ended December 31, 1996 and 1995, include the following: (amounts in thousands) 1996 1995 ------ ------ Additional paid-in capital: License payment to former subsidiary ............... $ 161 $1,700 Exercise of stock options .......................... 79 279 ------ ------ $ 240 $1,979 ====== ====== In 1994, due to the Distribution, the Company re-evaluated the recoverability of its deferred tax assets and as such, adjusted its valuation allowance to reflect new estimates. Management has determined, based on the Company's history of prior operating earnings and its expectations for the future, that operating income of the Company will more likely than not be sufficient to recognize fully these net deferred tax assets. Operating loss and tax credit carryforwards for tax reporting purposes as of December 31, 1996 are as follows: (amounts in thousands) $ ----- Federal: Operating losses (expiring through the year 2011) .................... 4,193 Research tax credits (expiring through the year 2011) ................ 404 Alternative minimum tax credits (available without expiration) ....... 14 8. Net Income per Share Net income per share of Common Stock is computed by dividing net income by the weighted average number of shares of Common Stock and Common Stock Equivalents, if dilutive, outstanding during the year. Common Stock Equivalents include shares issuable upon the exercise of dilutive common stock options. Fully diluted earnings per share approximate primary earnings per share. 9. Commitments and Contingencies The Company leases manufacturing and warehousing space, machinery and equipment and automobiles under non-cancelable operating lease agreements expiring at various dates through 1998. Rental expense aggregated approximately $317,000 in 1996, $282,000 in 1995, and $186,000 in 1994. Future minimum rental commitments under non-cancelable operating leases as of December 31, 1996 are as follows: (amounts in thousands) Year $ ---- -- 1997.................... 62 1998.................... 48 1999.................... 43 2000.................... 32 2001.................... 32 F-16 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 9. Commitments and Contingencies, continued The Company has entered into employment contracts with expiration dates of December 31, 1999 with certain officers which provide that these officers are entitled to continuation of their salaries if they are terminated without cause prior to their contract expiration date. Aggregate compensation through 1999 under these agreements approximates $2,516,000. 10. Litigation Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against the Company and its subsidiaries. In the opinion of management, after consultation with legal counsel, all such matters are adequately covered by insurance or, if not so covered, are without merit or are of such kind, or involve such amounts, as would not have a significant effect on the financial statements of the Company if disposed of unfavorably. In February 6, 1996, Johnson & Johnson and its wholly-owned subsidiary OrthoMcNeil, Inc. (collectively, "J&J") filed a lawsuit against the Company and its subsidiary, Igen, Inc. and its former subsidiary Micro-Pak, Inc. in United States District Court for the District of New Jersey alleging trademark infringement and trademark dilution. In January 1997, the Company and J&J reached an agreement settling this litigation. 11. Export Sales Export revenues by the Company's domestic operations accounted for approximately 39% of the Company's total revenues in 1996, 1995, and 1994. The following table shows the geographical distribution of the export sales: (amounts in thousands) Year ended December 31, 1996 1995 1994 ------- ------- ------- Latin America .................. $ 5,023 $ 5,064 $ 4,867 Asia/Pacific ................... 5,932 4,574 3,692 Europe ......................... 1,502 1,308 1,817 Africa/Middle East ............. 1,223 1,288 984 ------- ------- ------- $13,680 $12,234 $11,360 ======= ======= ======= Related net accounts receivable balances at December 31, 1996, 1995 and 1994 approximated $5,000, $4,921 and $4,264, respectively. F-17 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 12. Certain Relationships and Related Party Transactions The Company has notes receivable from certain of its employees. The total of these notes is $162,000. All of these loans are evidenced by demand notes bearing interest at prime rate plus 1/4% and are collateralized by shares of IGI common stock. Remaining balances of these notes from officers are included in the stockholders' equity as stockholders' note receivable and all other notes receivable are included in notes receivable in the accompanying Consolidated Balance Sheets. The Company has recognized interest income from these notes of $15,000, $39,000 and $34,000 for the years ended December 31, 1996, 1995 and 1994, respectively. 13. Employee Benefits The Company has a defined contribution retirement plan (401(k)), pursuant to which employees who have completed one year of employment with the Company or its subsidiaries as of specified dates may elect to contribute to the Plan, in whole percentages, up to 18% of compensation, subject to a minimum contribution by participants of 2% of compensation and a maximum contribution of $9,240 in 1996, 1995 and 1994. The Company matches 25% of the first 5% of compensation contributed by participants and contributes on behalf of each participant $4 per week of employment during the year. All contributions of the Company are made quarterly in the form of the Company's Common Stock ($.01 par value) and are immediately vested. The Company has recorded charges to expense related to this plan of approximately $115,000, $103,601 and $62,200 for the years 1996, 1995 and 1994, respectively. 14. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents. The Company places its cash and cash equivalents with two high credit quality financial institutions. Export receivables include customers in several key geographic areas; of these, Mexico and other Latin American countries are important markets for the Company's poultry vaccines and other products. These countries have historically experienced varying degrees of political unrest and economic and currency instability. Because of the volume of business transacted by the Company in those countries, continuation or recurrence of such unrest or instability could adversely affect the businesses of its customers in those countries or the Company's ability to collect its receivables from such customers, which in either case could adversely impact the Company's future operating results. F-18 IGI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 15. Business Segments Summary data related to continuing operations for the three years ended December 31, 1996 appears below: (amounts in thousands) Animal Health Consumer Products Products Corporate Consolidated ------------- -------- --------- ------------ 1996 Net sales .................... $31,444 $ 3,696 $ -- $35,140 Operating profit (loss) ...... 7,108 (796) (4,097) 2,215 Depreciation and amortization ................ 835 157 -- 992 Identifiable assets .......... 28,649 6,145 -- 34,794 Capital expenditures ......... 715 198 -- 913 1995 Net sales .................... $29,510 $ 1,711 $ -- $31,221 Operating profit (loss) ...... 6,460 (159) (3,056) 3,245 Depreciation and amortization ................ 820 16 -- 836 Identifiable assets .......... 29,380 2,951 -- 32,331 Capital expenditures ......... 745 1,652 -- 2,397 1994 Net sales .................... $27,471 $ 1,477 $ -- $28,948 Operating profit (loss) ...... 6,057 296 (2,845) 3,508 Depreciation and amortization ................ 837 6 -- 843 Identifiable assets .......... 25,942 2,494 -- *28,436 Capital expenditure .......... 558 1,276 -- 1,834 * Net of net assets of biotechnology business segment of $2,066,000 for 1994. F-19 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (amounts in thousands)
COL. A COL. B COL. C COL. D COL. E ------ ------ ----- ------ ------ Additions Balance at (1) Charged to (2) Charged to beginning of costs and other accounts Balance at Description period expenses describe Deductions end of period ----------- ------------ -------------- -------------- ---------- ------------- Year ended December 31, 1994: Allowance for doubtful accounts ..................... $ 140 $ 108 - $ 67(A) $ 181 Inventory valuation allowance ....................... 497 164 - 154(B) 507 Other asset valuation allowance ..................... 186 -- - -- 186 Amortization of goodwill ............................ 68 8 - -- 76 Amortization of other intangibles ................... 388 76 - -- 464 Valuation allowance on net deferred tax assets .............................. 3,160 652 - 932(C) 2,880 Year ended December 31, 1995: Allowance for doubtful accounts ..................... $ 181 $ 142 - $ 17(A) $ 306 Inventory valuation allowance ....................... 507 645 - 459(B) 693 Other asset valuation allowance ..................... 186 -- - -- 186 Amortization of goodwill ............................ 76 9 - -- 85 Amortization of other intangibles ................... 464 58 - -- 522 Valuation allowance on net deferred tax assets .............................. 2,880 69 - 2,880(D) 69 Year ended December 31, 1996: Allowance for doubtful accounts ..................... $ 306 $ (40) - $ 28(A) $ 238 Inventory valuation allowance ....................... 693 123 - 199(B) 617 Other asset valuation allowance ..................... 186 -- - -- 186 Amortization of goodwill ............................ 85 8 - -- 93 Amortization of other intangibles ................... 522 87 - -- 609 Valuation allowance on net deferred tax assets ............................... 69 -- - 25(D) 44
(A) Relates to write-off of uncollectible accounts. (B) Dispositions of obsolete inventories. (C) Incorporates $660 reversal of valuation allowance relating to the exercise of stock options, included in additional paid in capital and $271 reversal of valuation allowance relating to research and development tax credits, credited to costs and expenses. (D) Related to spin off of certain discontinued operations during 1995. F-21 EXHIBIT INDEX Exhibits marked with a single asterisk are filed herewith, and exhibits marked with a double asterisk reference management contract, compensatory plan or arrangement, filed in response to Item 14 (a) (3) of the instructions to Form 10-K. The other exhibits listed have previously been filed with the Commission and are incorporated herein by reference. (3) (a) Certificate of Incorporation of IGI, Inc., as amended. [Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, File No. 33-63700, filed June 2, 1993.] (b) By-laws of IGI, Inc., as amended. [Incorporated by reference to Exhibit 2 (b) to the Company's Registration Statement on Form S-18, File No. 2-72262-B, filed May 12, 1981.] (4) Specimen stock certificate for shares of Common Stock, par value $.01 per share. [Incorporated by reference to Exhibit (4) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 0-10063, filed April 2, 1990 (the "1989 Form 10-K".)] ** (10) (a) 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.] ** (b) IGI, Inc. 1989 Stock Option Plan. [Incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Stockholders held May 11, 1989.] ** (c) Employment Agreement by and between the Company and Edward B. Hager dated as of January 1, 1990. [Incorporated by reference to Exhibit (10) (c) to the 1989 Form 10-K.] ** (d) Extension of Employment Agreement by and between the Company and Edward B. Hager dated as of March 11, 1993. [Incorporated by reference to Exhibit (10) (d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 0-10063, filed March 31, 1993 (the "1992 Form 10-K".)] ** (e) Extension of Employment Agreement by and between the Company and Edward B. Hager dated as of March 14, 1995. [Incorporated by reference to Exhibit (10) (e) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 0-10063, filed March 1 31, 1995 (the "1994 Form 10-K".)] ** (f) Employment Agreement by and between the Company and John P. Gallo dated as of January 1, 1990. [Incorporated by reference to Exhibit (10) (d) to the 1989 Form 10-K.] ** (g) Extension of Employment Agreement by and between the Company and John P. Gallo dated as of March 11, 1993. [Incorporated by reference to Exhibit (10) (g) to the 1992 Form 10-K.] ** (h) Extension of Employment Agreement by and between the Company and John P. Gallo dated as of March 14, 1995. [Incorporated by reference to Exhibit (10) (h) to the 1994 Form 10-K.] 2 (i) Rights Agreement by and between the Company and Fleet National Bank dated as of March 19, 1987. [Incorporated by reference Exhibit (4) to the Company's Current Report on Form 8-K, File No. 0-10063, dated as of March 26, 1987.] (j) Amendment to Rights Agreement by and among the Company, Fleet National Bank and State Street Bank and Trust Company dated as of March 23, 1990. [Incorporated by reference to Exhibit (10) (g) to the 1989 Form 10-K.] (k) Second Amended and Restated Loan Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated December 13, 1995. [Incorporated by reference to Exhibit (10) (o) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-8568, filed March 29, 1996 (the "1995 Form 10-K".)] * (l) First Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated March 27, 1996. (m) Second Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated June 26, 1996. [Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, File No. 1-8568, filed November 14, 1996 (the "September 30, 1996 Form 10-Q".)] (n) Third Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated August 23, 1996. [Incorporated by reference to Exhibit 10.2 to the September 30, 1996 Form 10-Q.] 3 * (o) Fourth Amendment to Second Amended and Restated Loan Agreement by and between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc. together with its subsidiaries, dated November 13, 1996. * (p) Fifth Amendment to Second Amended and Restated Loan Agreement by and Between Fleet Bank-NH, Mellon Bank, N.A. and IGI, Inc., together with its subsidiaries, dated March 27, 1997. ** (q) IGI, Inc. Non-Qualified Stock Option Plan. [Incorporated by reference to Exhibit (3) (k) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 0-10063, filed March 30, 1992 (the "1991 Form 10-K".)] ** (r) IGI, Inc. 1991 Stock Option Plan. [Incorporated by reference to the Company's Proxy Statement for the Annual Meeting held May 9, 1991.] ** (s) Amendment No. 1 to IGI, Inc. 1991 Stock Option Plan as approved by Board of Directors on March 11, 1993. [Incorporated by reference to Exhibit 10 (p) to the 1992 Form 10-K.] ** (t) Amendment No. 2 to IGI, Inc. 1991 Stock Option Plan as approved by Board of Directors on March 22, 1995. [Incorporated by reference to the Appendix to the Company's Proxy Statement for the Annual Meeting of Stockholders held May 9, 1995.] (u) Form of Registration Rights Agreement signed by all purchasers of Common Stock in connection with private placement on January 2, 1992. [Incorporated by reference to Exhibit (3) (m) to the 1991 Form 10-K.] (v) License Agreement by and between Micro-Pak, Inc. and IGEN, Inc. [Incorporated by reference to Exhibit (10) (v) to the 1995 Form 10-K.] (w) Registration Rights Agreement between IGI, Inc. and SmithKline Beecham p.l.c. dated as of August 2, 1993. [Incorporated by reference to Exhibit (10) (s) to the 1993 Form 10-K.] * (11) Computation of net income per common share. * (21) List of Subsidiaries. * (23) Consent of Coopers & Lybrand L.L.P. * (27) Financial Data Schedule 4 EX-10.(L) 2 FIRST AMEND. TO SECOND AMENDED AND REST. LOAN AGT. EXHIBIT (10) (l) March 27, 1996 IGI, Inc. and Subsidiaries Wheat Road and Lincoln Avenue Buena, New Jersey 08310 Re: First Amendment to Second Amended and Restated Loan Agreement Dear Sirs: Reference is made to the Second Amended and Restated Loan Agreement, dated as of December 13, 1995, by and among Fleet Bank-NH, Mellon Bank, N.A., and IGI, Inc. and certain of its subsidiaries (the "Loan Agreement"). All capitalized terms used herein without definition have the respective meanings ascribed to them in the Loan Agreement. This will confirm our agreement to grant a one-time covenant waiver under the Loan Agreement, to amend the Loan Agreement, and to clarify the application of certain provisions thereof, as follows: 1. Certain Waiver. By their execution and delivery hereof, the Lenders hereby permanently waive, as of December 31, 1995, compliance with the minimum Current Ratio covenant pursuant to Section 5.09A of the Loan Agreement. Such waiver shall only be applicable in this specific instance and for the specific date, and shall not be deemed a waiver (or an agreement to grant a waiver) with respect to any other covenant or for any other time period. 2. Certain Amendment. Section 5.09A of the Loan Agreement is hereby amended so as to read in full as follows: "Section 5.09A. Current Ratio. As at the end of each quarter of each Fiscal Year commencing with the quarter ending March 31, 1996, maintain a Current Ratio of not less than 1.10 to 1." 3. Certain Clarification. In all calculations of Operating Income for the Fiscal Year ended December 31, 1995 and each quarter therein, the Borrowers' loss from discontinued operations shall constitute an item of "other expense" within clause (d) of the definition of Operating Income contained in Section 1.01 of the Loan Agreement. Except as expressly set forth herein, all of the terms and conditions of the Loan Agreement shall remain unmodified and in full force and effect. Kindly confirm the Borrowers' agreement to the foregoing by countersigning a counterpart copy of this letter in the spaces provided below. Very truly yours, FLEET BANK-NH By:__________________________________ MELLON BANK, N.A. By:__________________________________ Acknowledged, Confirmed and Agreed to: IGI, INC. By:_______________________________ IGEN, INC. By:_______________________________ IMMUNOGENETICS, INC. By:_______________________________ BLOOD CELLS, INC. By:_______________________________ EX-10.(O) 3 FOURTH AMEND. TO SEC. AMENDED AND REST. LOAN AGT. EXHIBIT (10) (O) As of November 13, 1996 IGI, Inc. and Subsidiaries Wheat Road and Lincoln Avenue Buena, New Jersey 08310 Re: Fourth Amendment to Second Amended and Restated Loan Agreement Dear Sirs: Reference is made to the Second Amended and Restated Loan Agreement, dated as of December 13, 1995, by and among Fleet Bank-NH, Mellon Bank, N.A., and IGI, Inc. and certain of its subsidiaries (as heretofore amended, the "Loan Agreement"). All capitalized terms used herein without definition have the respective meanings ascribed to them in the Loan Agreement. This will confirm our agreement to amend the Loan Agreement, as follows: 1. Certain Amendment. Section 5.08 of the Loan Agreement is hereby amended so as to read in full as follows: "Section 5.08. Net Income. In each quarter of each Fiscal Year as set forth below, achieve Net Income of not less than the minimum amount set forth below for such fiscal quarter: Quarter Ending Minimum Net Income -------------- ------------------ September 30, 1996 $100,000 December 31, 1996 $300,000 March 31, 1997 $500,000 June 30, 1997 $500,000 September 30, 1997 $500,000 December 31, 1997 $500,000 March 31, 1998 $625,000" and each quarter thereafter Except as expressly set forth herein, all of the terms and conditions of the Loan Agreement shall remain unmodified and in full force and effect. Kindly confirm the Borrowers' agreement to the foregoing by countersigning a counterpart copy of this letter in the spaces provided below. Very truly yours, FLEET BANK-NH By:___________________________________ MELLON BANK, N.A. By:___________________________________ Acknowledged, Confirmed and Agreed to: IGI, INC. By:___________________________________ IGEN, INC. By:___________________________________ IMMUNOGENETICS, INC. By:___________________________________ BLOOD CELLS, INC. By:___________________________________ EX-10.(P) 4 FIFTH AMEND. TO SECOND AMENDED AND REST. LOAN AGT. EXHIBIT (10) (p) FIFTH AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT AGREEMENT (this "Agreement"), made as of this 27th day of March, 1997, by and among FLEET BANK-NH, a trust company organized under the laws of New Hampshire ("Fleet"); MELLON BANK, N.A., a national banking association ("Mellon"); and IGI, INC., a Delaware corporation ("IGI"), IGEN, INC., a Delaware corporation ("IGEN"), IMMUNOGENETICS, INC., a Delaware corporation ("ImmunoGen"), and BLOOD CELLS, INC., a Delaware corporation ("BCI"). Fleet and Mellon are hereinafter sometimes individually referred to as a "Lender" and collectively referred to as the "Lenders", and IGI, IGEN, ImmunoGen and BCI are hereinafter sometimes individually referred to as a "Borrower" and collectively referred to as the "Borrowers". W I T N E S S E T H: WHEREAS, the Lenders and the Borrowers are parties to a Second Amended and Restated Loan Agreement between them dated as of December 13, 1995 (as amended to date, the "Loan Agreement"), the terms and conditions of which are hereby incorporated herein by reference; and WHEREAS, the Borrowers have requested certain waivers and amendments with respect to the covenants, terms and conditions of the Loans under the Loan Agreement; and WHEREAS, the Lenders are willing to grant such waivers and amendments upon the terms and conditions contained in this Agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereby agree as follows: 1. Definitions. (a) Except as otherwise defined herein, all capitalized terms used in this Agreement have the respective meanings ascribed to them in the Loan Agreement. (b) The following new definitions are hereby added to Section 1.01 of the Loan Agreement in their appropriate alphabetical order: "EBITDA" shall mean, as to the Borrowers on a consolidated basis as of the date of determination thereof, an amount equal to the sum of: (a) Net Income for the four (4) consecutive fiscal quarters of the Borrowers then ended (except that, in calculating Net Income for purposes of determining EBITDA, full effect shall be given to, and the Borrowers will be required to deduct, any and all net losses (net of any related tax savings thereon) of the type described in clause (b) of the definition of Net Income), plus (b) all federal and state income taxes paid or accrued in respect of such fiscal period as reflected on the consolidated statement of income of the Borrowers for such period, plus (c) all Interest Expense paid or accrued in such fiscal period, plus (d) all amounts deducted by the Borrowers in such fiscal period for depreciation of tangible assets, plus (e) all amounts deducted by the Borrowers in such fiscal period in respect of amortization of good will and/or other intangible assets. "Senior Debt to EBITDA Ratio" shall mean, as of any date of determination thereof, the ratio of Senior Debt as of such date to EBITDA for the four (4) consecutive fiscal quarters of the Borrowers ended on such date. 2. Replacement of Existing Notes. Each of the Notes outstanding immediately prior to the execution and delivery of this Agreement shall be superseded and replaced by new Notes in substantially the forms attached hereto as Exhibits A-1, A-2, B-1 and B-2, respectively, and such replacement Notes shall, from and after the effectiveness of this Agreement, be deemed to be the Fleet Revolving Credit Note, the Mellon Revolving Credit Note, the Fleet Line of Credit Note, and the Mellon Line of Credit Note, respectively, for all purposes of the Loan Agreement, Security Documents and other agreements and instruments under and pursuant to the Loan Agreement. 3. Modification of Certain Financial Covenants. (a) Section 5.08 of the Loan Agreement is hereby amended so as to read in full as follows: Section 5.08. Net Income. In each quarter of each Fiscal Year as set forth below, achieve Net Income of not less than the minimum amount set forth below for such fiscal quarter: Quarter Ending Minimum Net Income -------------- ------------------ March 31, 1997 $200,000 June 30, 1997 $400,000 September 30, 1997 $500,000 December 31, 1997 $500,000 March 31, 1998 $625,000 and each quarter thereafter (b) Section 5.09 of the Loan Agreement is hereby amended so as to read in full as follows: Section 5.09. Indebtedness to Capital Base Ratio. As at the end of each quarter of each Fiscal Year, maintain an Indebtedness to Capital Base Ratio of not more than (a) 2.50 to 1 from January 1, 1997 through June 30, 1997, (b) 2.00 to 1 from July 1, 1997 through September 30, 1997, and (c) 1.50 to 1 from and after October 1, 1997. (c) Section 5.10 of the Loan Agreement is hereby deleted from the Loan Agreement effective as of December 31, 1996, and replaced with the following new Section 5.10, which is hereby incorporated into the Loan Agreement by this reference: Section 5.10. Senior Debt to EBITDA Ratio. As at the end of each quarter of each Fiscal Year, maintain a Senior Debt to EBITDA Ratio of not more than (a) 3.0 to 1 from December 31, 1997 through September 30, 1998, and (b) 2.50 to 1 from and after December 31, 1998. (d) Section 5.11 is hereby deleted from the Loan Agreement effective as of December 31, 1996. (e) Each Compliance Certificate delivered pursuant to Section 5.04(d) of the Loan Agreement shall include a detailed calculation of EBITDA, in addition to all other information and calculations required to be stated or included therein. 4. Waivers of Certain Financial Covenant Defaults. (a) The Lenders hereby waive the Events of Default which have occurred under and in respect of (i) Section 5.08 of the Loan Agreement as of December 31, 1996, and (ii) Section 5.11 of the Loan Agreement as at the end of the Fiscal Year ended December 31, 1996; and the Lenders hereby agree not to assert such Events of Default or any of the Agent's or the Lenders' remedies solely in respect of such Events of Default. (b) The waivers set forth in this paragraph 4 shall only apply to the specific matters stated and only in the specific instances and as of the specific dates and for the specific periods stated herein; and nothing contained in this Agreement shall be deemed to constitute the Lenders' agreement or consent to any other waiver or forbearance of any kind (whether of like or unlike nature) at any other time, in any other instance, or under any other circumstances. 5. Waiver Fees. In the event that, at any time from and after the date of this Agreement, the Borrowers shall request any waiver or forbearance by the Lenders in respect of any Event of Default (including but not limited to Events of Default under Sections 5.08 through 5.10 of Loan Agreement), and the Lenders agree to grant such waiver and/or forbearance, the Borrowers shall pay to the Agent (for allocation and payment 60% to Fleet and 40% to Mellon) the sum of $10,000 for each such waiver or forbearance, which fee shall be charged separately for each covenant under which waiver or forbearance is sought or required, regardless of whether such Events of Default arise out of the same acts, events, conditions or circumstances or occur as of the same dates or at the same time. The Borrowers hereby acknowledge that the Lenders have required the imposition of such fees as a result of the frequency with which the Borrowers have historically required and requested waivers and/or forbearances in respect of Events of Default, and that such fees constitute fair and reasonable charges in respect of the additional risk normally entailed by the occurrence of Events of Default and the additional investigation and diligence prompted thereby. The Borrowers further acknowledge that such fees may be charged and collected in addition to any other conditions or payments (payable then or thereafter) which the Lenders may require in connection with any particular waivers or forbearances. The foregoing notwithstanding, in the event and to the extent that the Lenders' receipt of any fees under this paragraph 5 would cause the aggregate amounts paid or agreed to be paid for the use, forbearance or detention of the indebtedness under and pursuant to the Loan Agreement to exceed the maximum amount permitted under Applicable Law, then the fees under this paragraph 5 shall be subject to reduction as and in the manner provided in the Notes. 6. Representations and Warranties. The Borrowers hereby confirm that (a) all representations and warranties made by the Borrowers in the Loan Agreement are true and correct on and as of the date hereof, and (b) no Default or Event of Default (other than those waived pursuant to paragraph 4(a) above) has occurred and is continuing on the date hereof. 7. Conditions Precedent. The effectiveness of this Agreement and the amendments to be effected hereby are expressly subject to (a) the execution and delivery of this Agreement by the Borrowers and the Lenders, (b) the execution and delivery by the Borrowers to the respective Lenders of the replacement Notes contemplated by paragraph 2 above, (c) the payment by the Borrowers to the Agent (for allocation and payment 60% to Fleet and 40% to Mellon) of an amendment and restructuring fee in the aggregate amount of $40,000, and (d) the truth and accuracy, at the time of satisfaction of the conditions set forth in the foregoing paragraphs 7(a), 7(b) and 7(c), of the Borrower's representations and warranties contained in paragraph 6 above. 8. No Novation; Confirmation and Reaffirmation. (a) Each of the Borrowers hereby reaffirms all of its representations and warranties in the Loan Agreement (as amended hereby) and the Security Documents on and as of the date hereof, as if expressly made on and as of the date hereof. (b) Each of the Borrowers hereby confirms the ongoing validity of all of the Obligations outstanding on the date hereof (including but not limited to Obligations under the Notes), and further acknowledges, confirms and agrees that none of the amendments effected by this Agreement constitutes a novation of any of the Obligations outstanding on the date hereof or immediately prior to the effectiveness of this Agreement. (c) Each of the Borrowers hereby reaffirms the validity of all of the liens and security interests heretofore granted to the Agent as collateral security for the Obligations, and acknowledges that all of such liens and security interests, and all collateral heretofore pledged as security for the Obligations, continue to be and remain collateral for the Obligations (whether now existing and/or hereafter arising, including but not limited to the Bridge Advances) from and after the effectiveness of this Agreement. 9. Ongoing Force and Effect. Except as and to the extent expressly provided in this Agreement, all covenants, terms and conditions of the Loan Agreement shall remain unchanged and in full force and effect. All references to the Loan Agreement contained in the Notes and the Security Documents shall hereafter mean and refer to the Loan Agreement as amended by this Agreement, and all references to the Notes contained in the Loan Agreement and the Security Documents shall hereafter mean and refer to the Notes as amended and supplemented pursuant to this Agreement. 10. Miscellaneous. (a) The Borrowers will jointly and severally reimburse the Lenders and the Agent upon demand for all out-of-pocket costs, charges and expenses of the Lenders and the Agent (including, without limitation, the reasonable fees and disbursements of counsel to the Lenders and the Agent) in connection with the preparation, execution and delivery of this Agreement, the replacement Notes pursuant to paragraph 2 above, any and all further agreements and instruments in connection herewith, and any amendments, modifications, consents, waivers or enforcement action in connection herewith. (b) This Agreement shall be governed by and construed in accordance with the laws of the State of New Hampshire (without giving effect to principles of conflicts of laws). (c) Neither this Agreement nor any provision hereof may be waived, amended or modified except by means of a written agreement signed by the party to be charged therewith, and then only in the specific instance and for the specific purpose stated therein. (d) This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, except that none of the Borrowers shall have any right to assign any of its rights or obligations hereunder or any interest herein without the prior written consent of the Lenders. (e) Each of the Borrowers hereby consents to the jurisdiction of all courts (state and federal) sitting in the State of New Hampshire, and of all courts from which an appeal may be taken from any of such courts, for the purpose of any suit, action or other proceeding arising out of any of its obligations hereunder or with respect to the transactions contemplated hereby. Each of the Borrowers hereby expressly waives any and all objections which it may have as to venue in any of such courts, and also hereby knowingly WAIVES TRIAL BY JURY in any such suit, action or other proceeding. (f) The paragraph headings in this Agreement are included for convenience of reference only, and shall not affect the construction or interpretation of any of the provisions hereof. (g) This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. (h) The parties acknowledge and agree that each of them and its counsel have reviewed and negotiated the terms and provisions of this Agreement, and have contributed to its final form; accordingly, any rules of construction to the effect of construing ambiguities against the drafting party shall not be employed in the interpretation of this Agreement, which shall be construed fairly as to all parties hereto and not in favor of or against any particular party who might generally have been responsible for the preparation hereof. (i) This Agreement is intended for the sole and exclusive benefit of the parties hereto and their respective successors and permitted assigns, and no other person or entity shall have any right to rely on this Agreement or to derive any benefit herefrom absent the express written consent of the party to be charged with such reliance or benefit. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the date first set forth above. FLEET BANK-NH By: ___________________________ MELLON BANK, N.A. By: ___________________________ IGI, INC. By: ___________________________ IGEN, INC. By: ___________________________ IMMUNOGENETICS, INC. By: ___________________________ BLOOD CELLS, INC. By: ___________________________ STATE OF NEW HAMPSHIRE ) ) ss: COUNTY OF ___________ ) On the _____ day of March, 1997, personally appeared before me ________________, of Fleet Bank-NH, who acknowledged that he is the _________ of Fleet Bank-NH, and that said instrument was signed by him on behalf of said corporation by due authority. ------------------------------------ Notary Public My Commission Expires: - ------------------------ STATE OF _________ ) ) ss: COUNTY OF ________ ) On the _____ day of March, 1997, personally appeared before me ________________, of Mellon Bank, N.A., who acknowledged that he is the _________ of Mellon Bank, N.A., and that said instrument was signed by him on behalf of said corporation by due authority. ------------------------------------ Notary Public My Commission Expires: - ------------------------ STATE OF NEW JERSEY ) ) ss: COUNTY OF ________ ) On the _____ day of March, 1997, personally appeared before me ________________, of IGI, Inc., who acknowledged that he is the _________ of IGI, Inc., and that said instrument was signed by him on behalf of said corporation by due authority. ------------------------------------ Notary Public My Commission Expires: - ------------------------ STATE OF _________ ) ) ss: COUNTY OF ________ ) On the _____ day of March, 1997, personally appeared before me ________________, of IGEN, Inc., who acknowledged that he is the _________ of IGEN, Inc., and that said instrument was signed by him on behalf of said corporation by due authority. ------------------------------------ Notary Public My Commission Expires: - ------------------------ STATE OF NEW JERSEY ) ) ss: COUNTY OF ________ ) On the _____ day of March, 1997, personally appeared before me ________________, of Immunogenetics, Inc., who acknowledged that he is the _________ of Immunogenetics, Inc., and that said instrument was signed by him on behalf of said corporation by due authority. ------------------------------------ Notary Public My Commission Expires: - ------------------------ STATE OF NEW JERSEY ) ) ss: COUNTY OF ________ ) On the _____ day of March, 1997, personally appeared before me ________________, of Blood Cells, Inc., who acknowledged that he is the _________ of Blood Cells, Inc., and that said instrument was signed by him on behalf of said corporation by due authority. ------------------------------------ Notary Public My Commission Expires: - ------------------------ EX-11 5 COMPUTATION OF NET INCOME PER COMMON SHARE EXHIBIT 11 COMPUTATION OF NET INCOME PER COMMON SHARE (amounts in thousands except share and per share information) For the years ended December 31, 1996 1995 1994 Income from continuing operations $ 93 $ 1,508 $ 1,969 Loss from discontinued operations -- (4,034) (1,700) ----------- ----------- ----------- Net income (loss) for primary earnings per share $ 93 $ (2,526) $ 269 =========== =========== =========== Weighted average shares outstanding 9,323,440 9,173,156 8,803,979 Common stock equivalents (net of common stock deemed reacquired) based on average market price 697,848 552,074 351,252 ----------- ----------- ----------- Total equivalent shares for primary computation 10,021,288 9,725,230 9,155,231 =========== =========== =========== Per share amounts: Primary: Income from continuing operations $.01 $ .16 $ .22 ==== ===== ===== Loss from discontinued operations $ -- $(.42) $(.19) ==== ===== ===== Net income (loss) $.01 $(.26) $ .03 ==== ===== ===== Fully diluted earnings per share have been omitted as they approximate primary earnings per share. EX-21 6 LIST OF SUBSIDIARIES OF IGI, INC. EXHIBIT 21 LIST OF SUBSIDIARIES OF IGI, INC. IGEN, Inc., a Delaware corporation ImmunoGenetics, Inc., a Delaware corporation Marketing Aspects, Inc., a Delaware corporation Blood Cells, Inc., a Delaware corporation Flavorsome, Ltd., a Delaware corporation Vista, Inc., a Virgin Island corporation EX-23 7 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement of IGI, Inc. on Form S-8 (No. 2-90713), the Registration Statement of IGI, Inc. on Form S-8 and S-3 (No. 33-35047), the Registration Statement of IGI, Inc. on Form S-8 and S-3 (No. 33-43212), the Registration Statement of IGI, Inc. on Form S-8 and S-3 (No. 33-47777), the Registration Statement of IGI, Inc., on Form S-3 (No. 33-54920), the Registration Statement of IGI, Inc. on Form S-8 (No. 33-58479) and the Registration Statement of IGI, Inc. on Form S-8 (No. 33-65249) of our report, dated March 27, 1997, on our audits of the consolidated financial statements and financial statement schedule of IGI, Inc. and subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 1996, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania April 9, 1997 EX-27 8 FDS
5 This schedule contains summary financial information extracted from the Consolidated Financial Statements of IGI, Inc. for the year ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 US 12-MOS DEC-31-1996 DEC-31-1996 1.000 317 0 8,947 238 9,357 20,600 19,248 9,121 34,794 16,933 0 0 0 96 0 34,794 35,140 35,140 16,147 16,778 202 0 1,984 29 (64) 93 0 0 0 93 0.01 0.01
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