UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
Commission file number 001-08568
-----------------------------
IGI, Inc.
(Exact name of registrant as specified in its charter)
Delaware 01-0355758
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Lincoln Ave., Buena, NJ 08310
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (856) 697-1441
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock-$0.01 Par Value 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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the registrant's common stock held by non-
affiliates on June 30, 2004 (based on the closing stock price on the
American Stock Exchange) on such date was approximately $17,490,000.
As of March 15, 2005, there were 11,732,880 shares of common stock
outstanding.
Documents Incorporated By Reference
Certain information contained in the definitive Proxy Statement for the
Company's Annual Meeting of Stockholders to be held on May 23, 2005 is
incorporated by reference into Part III hereof.
PART I
ITEM 1. BUSINESS
Overview
IGI, Inc. ("IGI" or the "Company") was incorporated in Delaware in
1977. Its executive offices are at 105 Lincoln Avenue, Buena, New Jersey.
The Company is currently engaged in the production and marketing of
cosmetics and skin care (consumer) products. Beginning in the first
quarter of 2005, the Company will also be engaged in the metal finishing
business, specifically nickel boride, using the UltraCem technology (refer
to Item 7 for more detail).
In December 1995, IGI distributed its ownership of its majority-owned
subsidiary, Novavax, Inc. ("Novavax"), in the form of a tax-free stock
dividend, to IGI stockholders. Novavax had comprised the biotechnology
business segment of IGI. In connection with the distribution, the Company
paid Novavax $5,000,000 in return for a ten-year license (the "IGI License
Agreement") entitling IGI to the exclusive use of the Novasome(R) lipid
vesicle encapsulation and certain other technologies ("Microencapsulation
Technologies" or collectively the "Technologies") in the fields of (i)
animal pharmaceuticals, biologicals and other animal health products; (ii)
foods, food applications, nutrients and flavorings; (iii) cosmetics,
consumer products and dermatological over-the-counter and prescription
products (excluding certain topically delivered hormones); (iv) fragrances;
and (v) chemicals, including herbicides, insecticides, pesticides, paints
and coatings, photographic chemicals and other specialty chemicals, and the
processes for making the same (collectively, the "IGI Field"). IGI has the
option, exercisable within the last year of the ten-year term, to extend
the exclusive license for an additional ten-year period for $1,000,000.
Novavax has retained the right to use the Technologies for applications
outside the IGI Field, mainly human vaccines and pharmaceuticals.
Consumer Products Business IGI's Consumer Products business is
primarily focused on the continued commercialization of the
Microencapsulation Technologies for skin care applications. These efforts
have been directed toward the development of high quality skin care
products that the Company markets through collaborative arrangements with
major cosmetic and consumer products companies. IGI plans to continue to
work with cosmetics, food, personal care products and over-the-counter
("OTC") pharmaceutical companies for commercial applications of the
Microencapsulation Technologies. Because of their ability to encapsulate
skin protective agents, oils, moisturizers, shampoos, conditioners, skin
cleansers and fragrances and to provide both a controlled and a sustained
release of the encapsulated materials, Novasome(R) lipid vesicles are well-
suited to cosmetics and consumer product applications. For example,
Novasome(R) lipid vesicles may be used to deliver moisturizers and other
active ingredients to the deeper layers of the skin or hair follicles for a
prolonged period; to deliver or preserve ingredients which impart favorable
cosmetic characteristics described in the cosmetics industry as "feel,"
"substantivity," "texture" or "fragrance" and to deliver normally
incompatible ingredients in the same preparation, with one ingredient being
shielded or protected from the other by encapsulation within the
Novasome(R) vesicle.
The Company produces Novasome(R) vesicles for various skin care
products. Pursuant to the Company's agreement with Estee Lauder, Estee Lauder
utilizes the Novasome technology in their products such as "All You Need,"
"Re-Nutriv," "Virtual Skin," "100% Time Release Moisturizer," "Resilience,"
"Surface Optimizing," "Vibrant" and others. Sales to Estee Lauder
accounted for $1,248,000 or 35% of 2004 revenues $1,812,000 or 51% of 2003
revenues and $2,629,000 or 60% of 2002 revenues. Also, the Company
received $184,000 and $28,000 of royalty income in 2004 and 2003,
respectively, from Estee Lauder pursuant to the Company's agreement with
Estee Lauder for various Novasome(R) vesicles skin care products produced
by Estee Lauder.
In February 2001, the Company signed a new manufacturing and supply
agreement and an assignment of trademark agreement for the WellSkin(tm)
line of skin care products with Genesis Pharmaceutical, Inc. The
manufacturing and supply agreement expires on December 13, 2005 and
contains two ten-year renewal options. The Company received a lump sum
payment of $525,000 for the assignment of the trademark, which is being
recognized ratably over the term of the arrangement. The Company
recognized $105,000 of income related to this agreement in each of the
years ended December 31, 2004, 2003 and 2002.
The Company entered into a sublicense agreement with Johnson &
Johnson Consumer Products, Inc. ("J&J") in 1995. The agreement provided
J&J with a sublicense to produce and sell Novasome(R) microencapsulated
retinoid products and provides for the payment of royalties on net sales of
such products. J&J began selling such products and making royalty payments
in the first quarter of 1998. The Company recognized $385,000, $488,000
and $714,000 of royalty income related to this agreement for the years
ended December 31, 2004, 2003 and 2002, respectively. As noted above,
royalties are calculated on net sales of microencapsulated retinoid
products. The sales of these products have been declining; we anticipate
this trend will continue in the future.
In August 1998, the Company granted Johnson & Johnson Medical
("JJM"), a division of Ethicon, Inc., worldwide sublicense rights for the
use of the Novasome(R) technology for certain products and distribution
channels. The agreement provided for JJM to pay the Company $300,000 as
well as future royalty payments based on JJM's sales of sublicensed
products. The Company
2
recognized $30,000, $35,000 and $32,000 of royalty income in 2004, 2003 and
2002, respectively, related to the agreement. In March of 2002, the
agreement between the Company and JJM was amended stating that JJM is no
longer required to make minimum payments and the sublicense has been
converted to a non-exclusive worldwide sublicense with the exception of
Japan, which will remain exclusive. If the amount of royalties paid by JJM
equals or exceeds $200,000 in any year, the following calendar year will
become an exclusive worldwide agreement and will remain so until royalties
fall below that amount.
In July 2001, the Company entered into a Research, Development and
Manufacturing Agreement with Apollo Pharmaceutical (Canada), Inc.
("Apollo"), previously known as Prime Pharmaceutical Corporation. The
purpose of the agreement was to develop a facial lotion, a facial creme and
scalp application for the treatment of psoriasis. The project has been
completed in stages with amounts being paid to the Company with the
successful completion of each stage. In addition, the Company has agreed to
rebate $3.60 per kilogram for the first 12,500 kilograms of product
manufactured for and sold to Apollo. During 2002 and 2003, there was no
activity between the Company and Apollo due to a change in management at
Apollo. In 2004, the Company resumed activity with Apollo and recognized
$137,000 of product sales.
In November 2002, the Company entered into a Manufacturing Service
Agreement with Desert Whale Jojoba Company, Inc. The purpose of this
agreement was to develop and manufacture jojobasomes to be used as a
personal care product. This project was in a developmental stage through
2002. The Company recognized $7,000 of product sales related to this project
in 2003. The Company is no longer doing business with Desert Whale Jojoba
Company, Inc.
In July 2004, the Company, in order to allow growth and new business
opportunities, renegotiated its contract with Estee Lauder, a significant
customer. The goal of the Company was to lift the exclusivity it had under
the prior agreement with Estee Lauder that did not allow the Company to do
business with competitors of Estee Lauder. The exclusivity provision was
removed from the agreement, the terms of which are as follows: Estee Lauder
is manufacturing all Novasome(R) and non-Novasome(R) products at their
facility and is paying the Company a royalty per kilogram on all
Novasome(R) products manufactured by Estee Lauder, including all new
products developed, plus they paid to the Company a one time payment of
$100,000, which was paid in 2004 for the use of the Novamix machine. The
Company's contract manufacturing of Estee Lauder non-Novasome(R) products,
which accounted for $559,000 of the $1,248,000 (i.e., 45%) in revenues in
2004, terminated contractually on June 30, 2004, without any required
future royalties or other payments to be received by the Company on any
non-Novasome(R) products manufactured by Estee Lauder. However, Estee
Lauder may from time to time require the assistance of IGI to manufacture
Novasome(R) and non-Novasome(R) products at Estee Lauder's request. In
addition, during the six month period from January through June 2004, the
Company agreed to provide Estee Lauder's contract manufacturing services at
a reduced price of $2.00 per kilo, as compared to the prior rate of $3.03
per kilo.
Metal Plating Business In February 2004, the Company signed a
license agreement with Universal Chemical Technologies, Inc. ("UCT") to
utilize its patented technology for an electroless nickel boride metal
finishing process. This is a new venture for the Company and the Company
has had initial capital expenditures of approximately $782,000 in order to
set up the operations. The Company has also hired two new employees to
oversee the facility operations and for sales and marketing of the product.
The Company has an exclusive license within a 150 mile radius of its
facility for commercial and military applications. The Company believes
there is the possibility of revenue and profit growth using this
application, but there is no guarantee that it will materialize. Frank
Gerardi, the Company's Chairman and Chief Executive Officer, as well as a
major IGI stockholder, has personally invested $350,000 in UCT, which
represents less than a 1% ownership interest in UCT. We anticipate
additional capital expendirures of approximately $120,000 in 2005.
Other Novasome(R) Lipid Vesicles Developments
On July 23, 2003, Dr. Michael F. Holick, a professor of Medicine,
Dermatology, Physiology and Biophysics at the Boston University School of
Medicine, was appointed to head IGI's newly formed Scientific Advisory
Board. Dr. Holick's many accomplishments, including the discovery of the
active form of Vitamin D, and his extensive research in dermatology,
combined with IGI's exclusive use of the patented Novasome( technologies in
its delivery systems, should enable the Company to further advance IGI's
position in the topical dermatologics market.
On August 11, 2003, researchers at Boston University Medical Center,
led by Dr. Holick, reported the first successful development of a topical
peptide drug for the treatment of psoriasis. The parathyroid hormone analog
PTH (1-34) was successfully encapsulated in Novasome(R) A cream, which
enhanced the absorption of this peptide drug into human skin. This study
appeared in the August 2003 issue of the British Journal of Dermatology.
The study conducted a randomized, self-controlled double-blinded trial of
15 adult patients with chronic plaque psoriasis. Each patient applied to
one lesion Novasome(R) A cream and a comparable lesion with Novasome(R) A
cream that contained PTH (1-34). The psoriatic lesions treated with PTH
(1-34) showed marked improvement in scaling, erythema and in duration.
There was a 67.3% improvement in the global severity score for the lesion
treated with Novasome(R) A cream containing PTH (1-34) compared to the
placebo-treated lesion, which only showed a 17.8% improvement. In an open
trial, ten patients topically applied PTH (1-34) in Novasome(R) A cream on
all of their lesions in a step wise manner. A Psoriasis Area and Severity
Index score analysis of all patients revealed an improvement of 42.6%
(p < 0.02). None of the patients experienced
3
hypercalcemia or hypercalciuria or developed any side effects with the
medication. The study concluded that patients who were resistant to at
least one standard therapy for psoriasis had an improvement in their
psoriasis when they applied PTH (1-34) in Novasome(R) A cream to their
lesion. No patients experienced any significant adverse events. This
pilot study suggests that topical PTH (1-34) encapsulated in Novasome(R) A
cream is a safe and effective novel therapy for psoriasis. This was the
first demonstration for the successful encapsulation of a peptide drug for
the treatment of a skin disease.
On August 26, 2003, Dr. Holick and his team of scientists at Boston
University Medical Center reported that in animal studies a parathyroid
hormone related peptide antagonist [PTH (7-34)] stimulated epidermal
proliferation and hair growth in mice. The biologic action of parathyroid
hormone (PTH) related peptide (PTHrP) in normal skin was investigated in
cultured human keratinocytes and in SKH-1 hairless mice. The results
indicated that the PTHrP receptor antagonist PTH (7-34) stimulated
epidermal DNA synthesis in SKH-1 hairless mice by 144%. In addition, these
hairless mice had marked increase in the number (146%) and length (80%) of
hair shafts, respectively. They also found that the PTHrP receptor agonist
[PTH (1-34)] was effective in inhibiting DNA synthesis in the epidermis
(Holick, M.F., Ray, S., Chen, T.C., Tian, X., and Persons, K.S., A
Parathyroid Hormone Antagonist Stimulates Epidermal Proliferation and Hair
Growth in Mice, Proc. Nat'l. Acad. Sci, Vol. 91, 8014-8016 (1994)). These
results provide evidence that PTHrP may be an important regulator in normal
skin physiology and that its receptor agonists and antagonists have
potentially wide therapeutic applications in the treatment of
hyperproliferative skin disorders and aging skin and could also be
effective in stimulating and maintaining hair growth.
Chemotherapy-induced alopecia is one of the fundamental unsolved
problems of clinical oncology, which is driven in part by abnormalities
induced by the chemotherapy on the hair follicle cycle. Dr. Holick and his
team have explored the therapeutic potential of PTHrP receptor agonists and
antagonists in a mouse model of chemotherapy (cyclophosphamide) induced
alopecia. Mice that received PTH (7-34) significantly mitigated the hair
follicular response to cyclophosphamide. Furthermore, there was more rapid
hair regrowth of more robust hair follicles, compared to the animals that
received placebo and chemotherapy (Peters, Eva, M.J., Foitzik, K., Paus,
R., Ray, S., and Holick, M.F., A New Strategy for Modulating Chemotherapy-
Induced Alopecia, Using PTH/PTHrP Receptor Agonist and Antagonist, J.
Invest. Dermatol. 117:173-178; 2001).
This study is an established animal model for chemotherapy-induced
alopecia, which closely mimics human chemotherapy induced alopecia,
suggests the possibility that PTHrP receptor agonists and antagonists can
be developed as novel therapeutic agents in chemotherapy-induced alopecia.
Based on these findings, a study is planned to determine whether topical
PTH (7-34) formulated in Novasome(R) cream will be effective in mitigating
chemotherapy induced alopecia in breast cancer patients and help accelerate
more robust hair regrowth.
On September 26, 2003, the Company entered into an employment
agreement with Dr. Holick where he will serve as the Company's Vice
President of Research and Development and Chief Scientific Officer for a
term of three years.
On December 24, 2003, the Company entered into a License Agreement
with Dr. Holick and A&D Bioscience, Inc., a Massachusetts corporation
wholly owned by Dr. Holick (collectively referred to as "Holick"), whereby
Holick granted an exclusive license to the Company to all his rights to the
parathyroid hormone related peptide technologies and the glycoside
technologies (referred to as "PTH Technologies" and "Glycoside
Technologies", respectively) that he developed for various clinical usages,
including treatment of psoriasis, hair loss and other skin disorders. In
consideration for entering into the License Agreement, Holick received up-
front a $50,000 non-refundable payment from the Company. He also received a
grant of 300,000 stock options under the Company's authorized stock option
plans. Holick was also entitled to receive a $236,000 milestone payment
that was contingent on the execution of a sublicense agreement between the
Company and a third-party for the licensed technology.
On April 19, 2004, IGI signed a sublicense agreement with Tarpan
Therapeutics, Inc. ("Tarpan") for the PTH (1-34) technology under which the
third party will be obligated at its sole cost and expense to develop and
bring the PTH (1-34) technology to market as timely and efficiently as
possible, which includes its sole responsibility for the cost of
preclinical and clinical development, research and development,
manufacturing, laboratory and clinical testing and trials and marketing of
products. In addition, the sublicense agreement calls for various payments
to IGI throughout the term. IGI was paid a lump sum sublicense fee of
$300,000, from which amount IGI paid the sum of $232,000 to Dr. Holick,
representing the $236,000 payment due to Dr. Holick in accordance with the
terms of his License Agreement with the Company, net of $4,000 of additional
legal fees. Certain subsequent royalty payments received by the Company under
the sublicense agreement will be shared with Holick after the Company has
recovered any payments previously made to Holick under the License
Agreement and an amount equal to the value of the options received
by Holick under the License Agreement. The Company is responsible for any
and all costs, fees and expenses for the prosecution and oversight of any
intellectual property rights related to the licensed technologies. The
term of the License Agreement is the longer of twenty (20) years or the
life of each of the patents thereunder. The License Agreement, however,
granted Holick the right to terminate the Company's license to (i) the
Glycoside Technologies if the Company did not sublicense the Glycoside
Technologies within 90 days of the effective date of the License Agreement,
and (ii) the PTH Technologies if the Company did not sublicense the PTH
Technologies within 90 days of the effective date of the License Agreement.
As noted above, the Company entered into a sublicense agreement for the PTH
Technologies on April 19, 2004. The Company did not, however, sublicense
the Glycoside Technologies within the 90 day period.
4
As a result, Holick terminated the Company's license to the Glycoside
Technologies on April 5, 2004. The Company is engaged in discussions with
the same third party entity for a similar sublicense for the PTH (7-34)
technology.
The $50,000 payment to Holick was expensed in the third quarter of
2003 and the $236,000 payment to Holick was expensed in the second quarter
of 2004 because the PTH Technologies are in a preliminary development phase
and do not have any readily determinable alternative future use. The other
consideration called for under the License Agreement, such as amounts
advanced for the prosecution and oversight of any intellectual property
rights related to the licensed technologies which amounted to $27,500 and
the fair value of the 300,000 stock options granted to Holick, which
amounted to $520,000, was also expensed by the Company in the second
quarter of 2004 (included in product development and research expenses in
the consolidated statement of operations), when the sublicense agreement
with Tarpan was executed and Holick could no longer terminate the license
agreement as it relates to the PTH Technologies and the options became
fully vested. The fair value of the stock options was calculated under
SFAS No. 123 using the Black -Scholes model.
On July 27, 2004, the Company signed an exclusive license agreement
with the University of Massachusetts Medical School (University) for the
patented invention entitled "The Treatment of Skin with Adenosine or
Adenosine Analogs." The Company intends to encapsulate adenosine or
adenosine analogs in Novasome(R) for use in the skin care field. As
consideration of the rights granted in this agreement, the Company made
nonrefundable payments of $25,000 upon the execution of this agreement and
$25,000 in September 2004. Both of these payments were expensed during the
third quarter of 2004 and are included in product development and research
expenses. The agreement also calls for minimum royalty payments of $25,000
per year commencing on July 27, 2007. If the Company enters into a sublicense
agreement with a third party, the Company must pay the University 50% of all
sublicense income.
Discontinued Operations
On May 31, 2002, the stockholders of the Company approved, and the
Company consummated, the sale of the assets and transfer of the liabilities
of the Companion Pet Products division, which marketed companion pet care
related products. The buyer assumed liabilities of approximately $986,000,
and paid the Company cash in the amount of $16,254,000. The Company's
results reflect a $12,433,000 gain on the sale of the Companion Pet
Products division for the year ended December 31, 2002. The gain is net of
direct costs incurred by the Company in connection with the sale and the
reduction in the purchase price resulting from post-closing adjustments.
For the year ended December 31, 2003, the Company had a gain on the
disposal of discontinued operations of $435,000, which primarily consisted
of a net gain of $169,000 for an insurance settlement, net of legal costs,
for damages incurred by the Company as a result of a heating oil leak at
the Companion Pet Products manufacturing site and a net gain of $288,000 on
the sale of the former Companion Pet Products manufacturing site land and
building on December 18, 2003. The Companion Pet Products division incurred
a loss of $523,000 for the year ended December 31, 2002. The results for
the year ended December 31, 2002 included an impairment charge of $630,000
related to the Companion Pet Products warehouse. Upon the sale of the
Companion Pet Products division, the Company paid all of its debt and
interest owed to Fleet Capital Corporation ("Fleet") and American Capital
Strategies, Ltd. ("ACS"). As a result, the Company incurred a $2,654,000
loss from early extinguishment of debt in connection with the prepayment
fees paid to Fleet and ACS and the write-off of the ACS debt discount.
During 2001, the Company recorded non-recurring charges related to
the cessation and shutdown of the manufacturing operations at the Companion
Pet Products facility. The Company applied to the New Jersey Economic
Development Authority and the New Jersey Department of Environmental
Protection for a grant and loan to provide partial funding for the costs of
investigation and remediation of the environmental contamination discovered
at the Companion Pet Products facility. On June 26, 2001, the Company was
awarded an $81,000 grant and a $246,000 loan. The $81,000 grant was
received in the third quarter of 2001. The loan, which required monthly
principal payments, had a term of ten years at a rate of interest of 5%.
The Company received funding of $45,000 and $182,000 from the loan during
2003 and 2002, respectively. On December 18, 2003, the loan was paid in
full upon the sale of the former Companion Pet Products facility, which had
served as collateral for the loan.
Manufacturing
The Company's manufacturing operations include bulk manufacturing and
testing of cosmetics, dermatologics, emulsions and shampoos. The raw
materials included in these products are available from several suppliers.
The Company produces quantities of Novasome(R) lipid vesicles adequate to
meet its current and foreseeable needs.
5
Research and Development
The Company's consumer products development efforts are directed
toward Novasome(R) encapsulation to improve performance and efficacy of
pesticides, specialty and other chemicals, biocides, cosmetics, consumer
products, flavors and dermatologic products. Total product development and
research expenses were $1,727,000, $762,000 and $549,000 in 2004, 2003 and
2002, respectively.
Patents
All of the names of the Company's major products are registered in
the United States and all significant markets in which the Company sells
its products. The Company maintains patents in various countries covering
certain of its products. Under the terms of the 1995 IGI License
Agreement, the Company has an exclusive ten-year license to use the
Technologies licensed from Novavax in the IGI Field. Novavax holds 44 U.S.
patents and a number of foreign patents covering the Technologies licensed
to IGI.
Government Regulation and Regulatory Proceedings
Government Regulations
In the United States, pharmaceuticals, including over-the-counter
products that are manufactured by the Company are subject to rigorous Food
and Drug Administration ("FDA") regulations, including pre-clinical and
clinical testing. The process of completing clinical trials and obtaining
FDA approvals for a new drug often takes 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, or at all.
In addition to product approval, the Company may be required to
obtain a satisfactory inspection by the FDA covering its manufacturing
facilities before a product can be marketed in the United States. The FDA
will review the manufacturing procedures and inspect the facilities and
equipment for compliance with applicable rules and regulations. Any
material change by the Company in the manufacturing process, equipment or
location would necessitate additional review and approval.
Whether or not FDA approval has been obtained, approval of a
pharmaceutical product by comparable governmental authorities in foreign
countries must be obtained prior to the commencement of clinical trials and
subsequent marketing of such product in such countries. The approval
procedure varies from country to country, and the time required may be
longer or shorter than that for FDA approval. Although there are some
procedures for unified filing for certain European countries, in general,
each country has its own procedures and requirements.
In addition to regulations enforced by the FDA, the Company also is
subject to regulation under the Occupational Safety and Health Act, the
Toxic Substances Control Act, the Resource Conservation and Recovery Act
and other present and potential future federal, state or local regulations.
The Company's product development and research involves the controlled use
of hazardous materials and chemicals. Although the Company believes that
its safety procedures for handling and disposing of such materials comply
with the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could
be held liable for any damages that result and any such liability could
exceed the resources of the Company.
Intense Competition in Consumer Products Business
The Company's Consumer Products business competes with large, well-
financed cosmetics and consumer products companies with development and
marketing groups that are experienced in the industry and possess far
greater resources than those available to the Company. There is no
assurance that the Company's consumer products can compete successfully
against its competitors or that it can develop and market new products that
will be favorably received in the marketplace. In addition, certain of the
Company's customers that use the Company's Novasome(R) lipid vesicles in
their products may decide to reduce their purchases from the Company or
shift their business to other suppliers.
Employees
At March 15, 2005, the Company had 20 full-time employees. Two of
these employees were in marketing, distribution and customer support, five
were in manufacturing, seven were in research and development, four were in
executive, finance and administrative functions, and two were in the metal
plating operations. The Company has no collective bargaining agreement
with its employees, and believes that its employee relations are good.
6
Executive Officers of the Company
The following table sets forth (i) the name and age of each executive
officer of the Company as of March 30, 2005, (ii) the position with the
Company held by each such executive officer and (iii) the principal
occupation held by each executive officer for at least the past five years.
Officer Principal Occupation and Other Business
Name Age Since Experience During Past Five Years
---- --- ------- ---------------------------------------
Frank Gerardi 60 2003 Appointed Chief Executive Officer on
September 5, 2003 and Chairman on June 27,
2003. President of Univest Management, Inc.,
a management consulting company since 1986;
member of the New York Stock Exchange from
1969 to 1986.
Dr. Michael F. Holick 59 2003 Appointed Vice President of Research and
Development and Chief Scientific Officer in
September 2003. Dr. Holick has been a
Professor of Medicine, Physiology and
Biophysics at Boston University School of
Medicine since 1987.
Nadya Lawrence 36 1995 Appointed Vice President of Operations in
2001. Prior to that, Ms. Lawrence served
as the Company's R&D Technical Director and
R&D Manger from 1995 to 2001.
Carlene Lloyd 32 2004 Appointed Vice President of Finance in July
2004. Prior to that, Ms. Lloyd served as
the Company's Controller and Senior
Accountant from 1998 to 2004.
ITEM 2. PROPERTIES
The Company's executive administrative offices are located in Buena,
New Jersey, in a 25,000 square foot facility built in 1995, which the
Company owns. This facility is also used for production, product
development, marketing and warehousing for the Company's cosmetic,
dermatologic and personal care products.
ITEM 3. LEGAL PROCEEDINGS
Gallo Matter
As previously reported by the Company in its historical filings with
the Securities and Exchange Commission ("SEC"), including without
limitation its Form 10-K for the year ending December 31, 1999, for most of
1997 and 1998 the Company was subject to intensive government regulatory
scrutiny by the U.S. Departments of Justice, Treasury and Agriculture. In
June 1997, the Company was advised by the Animal and Plant Health
Inspection Service ("APHIS") of the United States Department of Agriculture
("USDA") that the Company had shipped quantities of some of its poultry
vaccine products without complying with certain regulatory and record
keeping requirements. The USDA subsequently issued an order that the
Company stop shipment of certain of its products. Shortly thereafter, in
July 1997, the Company was advised that the USDA's Office of Inspector
General had commenced an investigation into possible violations of the
Virus Serum Toxin Act of 1914 and alleged false statements made to APHIS.
In April 1998, the SEC advised the Company that it was conducting an
informal inquiry and requested information and documents from the Company,
which the Company voluntarily provided to the SEC.
Based upon these events, the Board of Directors caused an immediate
and thorough investigation of the facts and circumstances of the alleged
violations to be undertaken by independent counsel. The Company continued
to refine and strengthen its regulatory programs with the adoption of a
series of compliance and enforcement policies, the addition of new managers
of Production and Quality Control and a new Senior Vice President and
General Counsel. At the instruction of the Board of Directors, the
Company's General Counsel established and oversaw a comprehensive employee
training program, designated in writing a Regulatory Compliance Officer,
and established a fraud detection program, as well as an employee
"hotline." The Company continued to cooperate with the USDA and SEC in all
aspects of their investigation and regulatory activities. On March 13,
2002, the Company reached a settlement with the staff of the SEC to resolve
matters arising with respect to the investigation of the Company. Under
the settlement, the Company neither admitted nor denied that the Company
violated the financial reporting and record-keeping requirements of Section
13 of the Securities and Exchange Act of 1934, as amended, for the three
years ended December 31, 1997. Further, the Company agreed to the entry of
an order to cease and desist from any such violation in the future. No
monetary penalty was assessed.
As a result of its internal investigation, in November 1997, the
Company terminated the employment of John P. Gallo as President and Chief
Operating Officer for willful misconduct. On April 21, 1998, the Company
instituted a lawsuit against Mr. Gallo in the New Jersey Superior Court.
The lawsuit alleged willful misconduct and malfeasance in office, as well
as embezzlement and
7
related claims (referred to as the "IGI Action"). On April 28, 1998, Mr.
Gallo instituted a separate action against the Company and two of its
Directors, Edward Hager, M.D. and Constantine Hampers, M.D., alleging that
he had been wrongfully terminated from employment and further alleging
wrongdoings by the two Directors (referred to as the "Gallo Action"). The
Court subsequently ordered the consolidation of the IGI Action and the
Gallo Action (collectively referred to as the "Consolidated Action").
In response to these allegations, the Company instituted an
investigation of the two Directors by an independent committee
("Independent Committee") of the Board assisted by the Company's General
Counsel. The investigation included a series of interviews of the
Directors, both of whom cooperated with the Company, and a review of
certain records and documents. The Company also requested an interview
with Mr. Gallo who, through his counsel, declined to cooperate. In
September 1998, the Independent Committee reported to the Board that it had
found no credible evidence to support Mr. Gallo's claims and allegations
and recommended no further action. The Board adopted the recommendation.
The Company denied all allegations plead in the Gallo Action and
asserted all claims in the Gallo Action to be without merit. The Company
did not reserve any amount relating to such claims. The Company tendered
the claim to its insurance carriers, but was denied insurance coverage for
both defense and indemnity of the Gallo Action.
In July 1998, the Company sought to depose Mr. Gallo in connection
with the Consolidated Action. Through his counsel, Mr. Gallo asserted his
Fifth Amendment privilege against self-incrimination and advised that he
would not participate in the discovery process until such time as a federal
grand jury investigation, in which he was a target, was concluded. In
January 1999, at the suggestion of the Court, the Company and Mr. Gallo
agreed to a voluntary dismissal without prejudice of the Consolidated
Action, with the understanding that the statute of limitations was tolled
for all parties and all claims, and that the Company and Mr. Gallo were
free to reinstate their suits against each other at a later date, with each
party reserving all of their rights and remedies against the other.
As of the date hereof, neither the Company nor Mr. Gallo have filed
suit against each other in the Superior Court of New Jersey or any other
court of competent jurisdiction to reinstitute the claims, in whole or
part, previously at issue in the Consolidated Action, and pursuant to the
previous order of dismissal entered in the Consolidated Action, the statute
of limitation on all claims and defenses continues to be tolled as to both
parties. However, the Company did receive a letter dated November 21, 2003
from Mr. Gallo's attorneys seeking to reach a settlement of the claims
asserted against IGI in the Gallo Action without further resort to the
courts. The letter provides a general description of Mr. Gallo's claims
and a calculation of damages allegedly sustained by Mr. Gallo relative
thereto. The letter states that Mr. Gallo's damages are calculated to be
in the range of $3,400,000 to $5,100,000. The Company denies liability for
the claims and damages alleged in the letter from Mr. Gallo's counsel dated
November 21, 2003, and as such, the Company did not make any formal
response thereto. Mr. Gallo has contacted the Company's Chief Executive
Officer & Chairman, Frank Gerardi, in a continued effort to initiate
settlement discussions. As of the present date, the Company continues to
deny any merit and/or liability for the claims alleged by Mr. Gallo and has
not engaged in any formal settlement discussions with either Mr. Gallo or
his attorneys.
On December 8, 2003, Mr. Gallo filed suit against Novavax, Inc. in
the Superior Court of New Jersey, Law Division, Atlantic County, docket no.
ATL-L-3388-03, asserting claims under seven counts for damages allegedly
sustained as a result of the cancellation of certain Novavax stock options
held by Mr. Gallo due to his termination from IGI in November 1997 for
willful misconduct (referred to as the "Novavax Action").
On March 5, 2004, Novavax filed an Answer denying the allegations
asserted by Mr. Gallo in his First Amended Complaint. In addition, while
denying any liability under the First Amended Complaint, Novavax also filed
a Third Party Complaint in the Novavax Action against the Company for
contribution and indemnification, alleging that if liability for Mr.
Gallo's claims is found, the Company has primary liability for any and all
such damages sustained.
IGI has been notified by its insurance carriers that coverage is not
afforded under their respective policies of insurance for defense and/or
indemnification of the claims alleged by the Third Party Complaint. After
IGI was notified of the foregoing, but prior to IGI's filing of any
responsive pleading, the Third Party Complaint against IGI was voluntarily
dismissed without prejudice by Novavax on June 30, 2004. Novavax may at
any time pursuant to the rules of court re-file its Third Party Complaint
against IGI.
In July 2004, Novavax filed a motion for summary judgment on all
claims asserted under Gallo's First Amended Complaint (referred to as the
"SJ Motion"). Gallo filed in opposition to the SJ Motion contesting all
relief sought thereunder. In August 2004, the Court held a hearing on the
SJ Motion and denied without prejudice the relief sought by the motion for
dismissal of Gallo's First Amended Complaint. Upon information and belief,
the parties are currently proceeding with discovery in the Novavax Action.
The Company, as a non-party witness in the Novavax Action, was recently
served by counsel for Gallo with a subpoena for the production of documents
as responsive thereto.
As of the date hereof, Novavax has not sought to re-file its Third
Party Complaint against IGI for which coverage was previously denied by its
insurance carriers, but Novavax is not precluded from doing so and may seek to
do so in the future.
8
Other Matters
On April 6, 2000, officials of the New Jersey Department of
Environmental Protection inspected the Company's storage site in Buena, New
Jersey, and issued Notices of Violation ("NOV") relating to the storage of
waste materials in a number of trailers at the site. The Company
established a disposal and cleanup schedule and completed the removal of
materials from the site. The Company continues to discuss with the
authorities a resolution of any potential assessment under the NOV and has
accrued the estimated penalties related to such NOV.
On March 2, 2001, the Company discovered the presence of
environmental contamination resulting from an unknown heating oil leak at
its Companion Pet Products manufacturing site. The Company immediately
notified the New Jersey Department of Environmental Protection and the
local authorities, and hired a certified environmental contractor to assess
the exposure and required clean up. Based on the initial information from
the contractor, the Company originally estimated the cost for the cleanup
and remediation to be $310,000. In September 2001, the contractor updated
the estimated total cost for the cleanup and remediation to be $550,000. A
further update was performed in December 2002 and the final estimated cost
was increased to $620,000, of which $82,000 remains accrued as of December
31, 2004. The remediation was completed by September 30, 2003. There will
be periodic testing and removal performed, which is projected to span over
the next four years. The estimated cost of the monitoring is included in
the accrual.
This contamination also spread to the property adjacent to the
manufacturing facility and the Company is currently involved in a lawsuit
with the owner of that property, Ted Borz. Mr. Borz runs a business on
that property and he seeking remuneration for loss of income and the
reduction in his property value from IGI as a result of the oil spill. IGI
believes that it has performed all the necessary tasks required to properly
decontaminate Mr. Borz's property. Management does not, however, feel that
it is possible to estimate the outcome of this case at this date.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the last quarter of 2004.
9
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company has never paid cash dividends on its Common Stock. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.")
The principal market for the Company's Common Stock ($.01 par value)
(the "Common Stock") is the American Stock Exchange ("AMEX") (symbol:
"IG"). On March 28, 2002, the Company was notified by AMEX that it was
below certain of the Exchange's continuing listing standards. Specifically,
the Company was required to reflect income from continuing operations and
net income for 2002 and a minimum of $4,000,000 in stockholders' equity by
December 31, 2002 in order to remain listed. On April 25, 2002, the
Company submitted a plan of compliance to AMEX. On June 12, 2002, AMEX
notified the Company that it had accepted the Company's plan of compliance
and had granted the Company an extension of time to regain compliance with
the continued listing standards by December 31, 2002. In February 2003,
the Company contacted AMEX after release of the Company's 2002 year-end
results. On April 14, 2003, the Company received formal notification from
AMEX that the Company was deemed to be in compliance with all AMEX
requirements for continued listing on AMEX. This determination is subject
to the Company's favorable progress in satisfying the AMEX guidelines for
continued listing and to AMEX's routine periodic reviews of the Company's
SEC filings. Based on the Company's 2004 year-end results, the Company is
not in compliance with the AMEX requirement for reporting income from
continuing operations and net income for the year ended December 31, 2004.
As of the date of the filing of the Form 10-K, the Company has not been
contacted by AMEX concerning the Company's non-compliance with the AMEX
requirements. While as of this date, the Company has not received any
notification of non-compliance from AMEX, the Company has no knowledge of
nor can it predict whether AMEX shall at any time hereafter issue formal
notification to the Company of its non-compliance with the requirements for
continued listing on AMEX, which could result in the Company's delisting
from AMEX or otherwise adversely affect the Company.
The following table shows the range of high and low closing sale
prices on the AMEX for the periods indicated:
High Low
---- ---
2003
----
First quarter $ .78 $ .54
Second quarter 1.78 .75
Third quarter 2.87 .98
Fourth quarter 2.39 1.25
2004
----
First quarter $2.35 $1.40
Second quarter 2.54 2.05
Third quarter 2.33 1.30
Fourth quarter 1.58 1.16
The approximate number of holders of record of the Company's Common
Stock at March 15, 2005 was 667 (not including stockholders for whom shares
are held in a "nominee" or "street" name).
10
PART II
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Summary of Selected Financial Data (in thousands, except
earnings per share information):
Year ended December 31,
-----------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Statement of Operating Results
Revenues $ 3,558 $ 3,557 $ 4,364 $ 4,294 $ 6,552
Operating profit (loss) (1,220) (972) 79 (752) (993)
Loss from continuing operations (892) (757) (3,130) (1,303) (8,824)
Loss from discontinued operations * - - (523) (720) (2,559)
Gain on disposal of discontinued operations - 435 12,433 283 114
Cumulative effect of accounting change - - - - (168)
Net income (loss) (892) (322) 8,780 (1,740) (11,437)
======= ======= ======= ======= ========
Income (loss) per share-basic and diluted:
Continuing operations $ (.08) $ (.07) $ (.28) $ (.11) $ (.86)
Discontinued operations - - (.05) (.07) (.25)
Gain on disposal of discontinued operations - .04 1.09 .03 .01
Cumulative effect of accounting change - - - - (.02)
------- ------- ------- ------- --------
Net income (loss) $ (.08) $ (.03) $ .76 $ (.15) $ (1.12)
======= ======= ======= ======= ========
As of December 31,
-----------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Balance Sheet Data
Working capital $ 922 $ 1,710 $ 2,064 $(6,733) $ (6,917)
Total assets 4,730 5,024 5,929 10,539 12,387
Short-term debt and notes payable - - 18 9,804 9,785
Long-term debt and notes payable
(excluding current maturities)** - - 164 - -
Stockholders' equity (deficit) 4,008 4,166 4,509 (4,185) (3,275)
Average number of common and
common equivalent shares:
Basic and diluted 11,548 11,374 11,430 10,957 10,205
* On September 15, 2000, the stockholders of the Company approved, and
the Company consummated, the sale of the assets and transfer of the
liabilities of the Vineland division. On May 31, 2002, the
stockholders of the Company approved and the Company consummated the
sale of the assets and transfer of the liabilities of the Companion
Pet Products division. The Consolidated Financial Statements present
these segments as discontinued operations.
** In connection with certain amendments to the Company's debt
agreements, the Company reflected certain debt as short-term debt as
of December 31, 2001 and 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section and other sections of this Annual Report on
Form 10-K contain forward-looking statements that are based on current
expectations, estimates, forecasts and projections about the industry and
markets in which the Company operates and on management's beliefs and
assumptions. In addition, other written or oral statements, which
constitute forward-looking statements, may be made by or on behalf of the
Company. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance, and involve
certain risks, uncertainties and assumptions, which are difficult to
predict. (See "Factors Which May Affect Future Results" below.)
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
11
Overview
In 2003, the three goals in place for management were a reduction of
general and administration expenses, an expansion of research and
development expenditures and to lay the foundation for revenue growth. In
2004, with these goals having been achieved, the Company's focus was on
growth. Management feels that the decisions that were made during this
past year will open up new doors and provide new opportunities for the
Company in the very near future. One of the decisions made was to change
the way the Company did business with Estee Lauder. Estee Lauder's
agreement contained an exclusivity clause that did not allow the Company to
sell its technology to any of Estee Lauder's competitors. In July 2004,
the Company signed an amendment to the contract with Estee Lauder which (i)
removed the exclusivity clause, (ii) moved the production of Estee Lauder's
Novasome(R) products to their facility, and (iii) obligates Estee Lauder to
pay IGI a royalty of $5.00 per kilogram produced, up to $2 million, and
then $2.00 per kilogram thereafter. With the exclusivity removed, IGI may
now offer its technology to other cosmetics companies that it once could
not.
Realizing that the renegotiation of the Estee Lauder contract would
leave a void in revenues, management decided to fill the void with a new
technology, unrelated to cosmetics, while we develop our relationships with
new cosmetic companies, which can sometimes take several years. The new
technology is UltraCem metal finishing. In February 2004, the Company
signed a license agreement with Universal Chemical Technologies, Inc.
("UCT") to utilize its patented technology for an electroless nickel boride
metal finishing process. This is a new venture for the Company and the
Company has had initial capital expenditures of approximately $782,000 in
order to set up the operations. The Company has also hired two new
employees to oversee the facility operations and for sales and marketing of
the product. The Company has an exclusive license within a 150 mile radius
of its facility for commercial and military applications. The Company
believes there is the possibility of revenue and profit growth using this
application, but there is no guarantee that it will materialize.
As an additional cost saving measure, the Company authorized a
reduction in the size of its Board of Directors to four members. In
furtherance of this purpose, Dr. Constantine Hampers and Earl Lewis
voluntarily tendered their resignations from the Board, effective January
4, 2004. In April of 2004, the Vice President of Business Development left
the Company and management decided not to fill the position but rather
delegate those responsibilities primarily to outside distributors who work
on a contingency basis. In June of 2004, the Company also decided not to
renew the employment contract with its Chief Financial Officer, Domenic
Golato, which resulted in additional cost savings for the Company.
In 2004, product and developmental expenses increased. Through such
product development efforts, the Company gained two new customers for
Novasome(R) encapsulated products. Our existing customers are beginning to
incorporate Novasomes(R) into additional product lines. Genesis
Pharmaceutical, Inc., a division of Pierre-Fabre, has approved a new line
of products utilizing the patented Novasome(R) delivery system. Chattem,
Inc., makers of Gold Bond and Icy Hot, launched a new Novasome(R) based
product with an advertising campaign that will be sold in mass markets and
other outlets, and we are currently working on another new product for
them.
IGI will continue its efforts to identify new opportunities in
dermatologics, cosmetics, pharmaceuticals and nutrients for topical
delivery. The Company will also seek to expand the use of its Novasome(R)
encapsulation technology for flavors and fragrances, as well as fuel
additives. The Company has a Joint Development Agreement with Pure Energy
Corporation ("PEC). The goal of the Joint Development Agreement is to
develop a new class of cleaner burning alternative fuel formulations based
on PEC's proprietary fuel formulations and IGI's microencapsulation
technology or a new class of high performance fuel additives based on PEC's
proprietary fuel additives and IGI's microencapsulation technology. Stephen
J. Morris, a Director and a major stockholder of the Company, is the sole
shareholder of PEC and a member of the PEC Board of Directors.
12
Results of Operations
2004 Compared to 2003
The Company had a net loss of $892,000, or $(.08) per share, in 2004
compared to a net loss of $322,000, or $(.03) per share, in 2003.
Total revenues for 2004 were $3,558,000, which represented an
increase of $1,000 from revenues of $3,557,000 in 2003. Licensing and
royalty income of $1,007,000 in 2004 increased by $351,000 compared to
2003, primarily as a result of a $300,000 payment from Tarpan Therapeutics
and royalties from Estee Lauder. A significant portion of the Company's
product sales are attributable to a single customer. In addition,
licensing and royalty income is primarily generated from arrangements with
three customers.
Product sales of $2,551,000 in 2004 decreased $350,000, or 12%,
compared to 2003 due mainly to lower product sales to Estee Lauder, the
Company's major customer, but were partially offset by higher sales to
Genesis, Vetoquinol USA and new customers. Vetoquinol USA, the company
that purchased our Companion Pet Care Division, became a new customer for
the Company in 2002 as a result of the sale of the Companion Pet Care
Division. The Company continues to manufacture several of the pet care
shampoos and lotions for Vetoquinol USA.
Cost of sales decreased by $92,000, or 7%, in 2004 as compared to
2003. As a percentage of product sales, cost of sales increased from 46%
in 2003 to 49% in 2004. The decrease in gross profit from 54% in 2003 to
51% in 2004, as a percent of product sales, was the result of the change in
mix to lower gross profit products sold.
Selling, general and administrative expenses decreased by $624,000,
or 26%, from $2,422,000 in 2003 to $1,798,000 in 2004. These expenses were
68% of revenues for 2003 compared to 51% in 2004. The decrease is
primarily due to a reduction of salaries in 2004, which was a goal of
management in 2004.
Product development and research expenses increased by $965,000 in
2004, or 127%, compared to 2003. The increase is a result of the Company
recording a $545,000 non cash expense related to the SFAS No. 123 value of
300,000 stock options granted to Dr. Holick under his license agreement and
25,000 stock options granted to Dr. Holick for his service on the
Scientific Advisory Board, plus a cash payment of $232,000 made to Dr.
Holick in accordance with his license agreement. The Company has also made
a $50,000 cash payment to the University of Massachusetts in accordance
with the license agreement between the Company and the University. There
are many new projects being undertaken by the research and development
department as a result of new agreements signed in 2004.
Interest income amounted to $25,000 in 2004 compared to interest
income (net of expense) of $7,000 in 2003. The Company had no interest
expense in 2004 and only recorded income related to marketable securities
and overnight investments of our daily cash balance.
The tax benefit of $290,000 in 2004 was a result of the sale of a
portion of the Company's state tax operating loss carryforwards in exchange
for proceeds of $298,000, offset by the current year's state tax expense of
$82,000. The tax benefit increased by $82,000 from 2003 to 2004.
2003 Compared to 2002
The Company had a net loss of $322,000, or $(.03) per share, in 2003
compared to net income attributable to common stockholders of $8,647,000,
or $.76 per share, in 2002. The majority of the change from 2002 to 2003
is the result of the gain on the sale of the Companion Pet Products
division in 2002.
Total revenues for 2003 were $3,557,000, which represented a decrease
of $807,000, or 18%, from revenues of $4,364,000 in 2002. The decreased
revenues were due mainly to lower product sales. Licensing and royalty
income of $656,000 in 2003 decreased by $195,000 compared to 2002,
primarily as a result of decreased licensing revenues from Johnson &
Johnson offset by royalty revenue from Estee Lauder. Licensing revenues
from Johnson & Johnson are based on its sales. A significant portion of
the Company's product sales are attributable to a single customer. In
addition, licensing and royalty income is primarily generated from
arrangements with two customers.
Product sales of $2,901,000 in 2003 decreased $612,000, or 17%,
compared to 2002 due mainly to lower product sales to Estee Lauder, the
Company's major customer, but were partially offset by higher sales to
Genesis, Vetoquinol USA and new customers.
13
Vetoquinol USA, the company that purchased our Companion Pet Care Division,
became a new customer for the Company in 2002 as a result of the sale of
the Companion Pet Care Division. The Company continues to manufacture
several of the pet care shampoos and lotions for Vetoquinol USA.
Cost of sales decreased by $33,000, or 2%, in 2003 as compared to
2002. As a percentage of product sales, cost of sales increased from 39%
in 2002 to 46% in 2003. The decrease in gross profit from 61% in 2002 to
54% in 2003, as a percentage of product sales, was the result of the change
in mix to lower gross profit products sold and underabsorbed fixed costs.
Selling, general and administrative expenses increased by $64,000, or
3%, from $2,358,000 in 2002 to $2,422,000 in 2003. These expenses were 54%
of revenues for 2002 compared to 68% in 2003. The increase is primarily
due to a $202,000 charge in the second quarter of 2003 for the cost of
benefits provided by the Company under a severance package to one of the
Company's executives, offset by a decline in salary expense due to staff
reductions after the sale of the Companion Pet Products division.
Product development and research expenses increased by $213,000 in
2003, or 39%, compared to 2002. The increase is a result of additional
projects undertaken by the Company for existing and potential new customers
and the $50,000 payment made to Dr. Holick related to the licensing of the
PTH and Glycoside Technologies.
Interest income (expense) went from a net interest expense of
$283,000 in 2002 to a net interest income of $7,000 in 2003. The change is
due to lower interest rates and the payment of debt on May 31, 2002 using
the proceeds from the sale of the Companion Pet Products division.
The loss on the early extinguishment of debt of $2,654,000 in 2002
related to the write off of the deferred financing costs and the
unamortized debt discount in connection with the repayment of the Company's
senior debt and the subordinated debt.
The tax benefit of $208,000 in 2003 was a result of the sale of a
portion of the Company's state tax operating loss carryforwards in exchange
for proceeds of $224,000, offset by the current year's state tax expense of
$16,000. Tax expense in 2002 was a result of a New Jersey change in the tax
law in July 2002 that was retroactive to January 1, 2002. The change
suspended the use of net operating losses for a two year period.
Therefore, the gain from the sale of the Companion Pet Products division
could not be offset against prior net operating losses, resulting in tax
expense for 2002. The effect of this change was required to be reflected
as a component of continuing operations. The Company sold some of its
state tax operating loss carryforwards in exchange for proceeds of $249,000
in 2002. The 2002 proceeds partially offset the effect of the tax law
change.
The $435,000 of income from discontinued operations in 2003 consisted
of a $169,000 insurance settlement, net of legal costs, received for
damages incurred by the Company as a result of a heating oil leak at the
Company's Companion Pet Products site and a $288,000 gain on the sale of
the Company's Companion Pet Products facility offset by $15,000 of
regulatory expenses and $7,000 of other expenses. In 2002, discontinued
operations consisted of the gain on the sale of the Companion Pet Products
division and the loss from operations of that division.
Liquidity and Capital Resources
The Company's operating activities used $235,000 of cash during 2004,
compared to $468,000 used in 2003.
The Company used $427,000 of cash in 2004 for investing activities
compared to $452,000 used 2003. The majority of the 2004 investing
activities were for the machinery and equipment purchases to set up the
metal plating line, which was offset by proceeds from the sale of marketable
securities. In 2003, the cash was primarily used to purchase marketable
securities offset by proceeds from the sale of property.
The Company's financing activities provided $221,000 of cash in 2004
compared to $258,000 used in 2003. The cash provided in 2004 was from the
exercise of stock options by a former director of the Company and in 2003
cash was used primarily to pay off the loan from the New Jersey Economic
Development Authority.
The Company's principal sources of liquidity are cash from
operations, cash and cash equivalents and marketable securities. The
Company has undergone many changes within the past year, including the
release of the exclusivity on the Estee Lauder contract and the expansion
of the facility to house the metal plating line. These changes have made
it necessary for the Company to utilize its cash. However, these changes
were made in an effort to position the Company for future growth and
expansion. Management was aware of the impact these changes would have on
the cash balance and management believes that existing cash and cash
equivalents and cash flows from operations will be sufficient to meet the
Company's foreseeable cash needs for at least the next year. If these
funds are not sufficient to meet the Company's needs, two stockholders of
the Company have agreed to loan the Company up to $500,000 each, if
necessary, to fund the Company's commitment to Novavax due December 13, 2005
or to fund the deficit through December 31, 2005. There may be acquisition
and other growth opportunities that may require additional external
financing.
14
Management may, from time to time, seek additional funds from the public or
private issuances of equity or debt securities. There can be no assurance
that such financing will be available or available on terms acceptable to
the Company.
The total contractual obligations over the next five years and beyond
are as follows:
Expected Cash Payments By Year
(in thousands)
2009 and
Contractual Commitments 2005 2006 2007 2008 beyond Total
----------------------- ---- ---- ---- ---- -------- -----
Operating lease obligations $34 $25 $22 $22 $22 $125
In February 2004, the Company signed a license agreement with UCT to
utilize their patented technology for an electroless nickel boride metal
finishing process. The Company spent $782,000 in capital expenditures on
this new venture in order to set up the operations.
The Company has an option, which is exercisable on December 13, 2005,
to extend its exclusive license for the use of the Technologies in the IGI
Field for an additional ten-year term in exchange for a $1,000,000 cash
payment.
Factors Which May Affect Future Results
The industry segments in which the Company competes are subject to
intense competitive pressures. The following sets forth some of the risks
which the Company faces.
Intense Competition in Consumer Products Business
-------------------------------------------------
The Company's Consumer Products business competes with large, well-
financed cosmetics and consumer products companies with development and
marketing groups that are experienced in the industry and possess far
greater resources than those available to the Company. There is no
assurance that the Company's consumer products can compete successfully
against its competitors or that it can develop and market new products that
will be favorably received in the marketplace. In addition, certain of the
Company's customers that use the Company's Novasome(R) lipid vesicles in
their products may decide to reduce their purchases from the Company or
shift their business to other suppliers.
Effect of Rapidly Changing Technologies
---------------------------------------
The Company expects to sublicense its technologies to third parties,
which would manufacture and market products incorporating the technologies.
However, if its competitors develop new and improved technologies that are
superior to the Company's technologies, its technologies could be less
acceptable in the marketplace and therefore the Company's planned
technology sublicensing could be materially adversely affected.
Revision of Current Contract with Estee Lauder
----------------------------------------------
As noted above, in 2004, the Company renegotiated its agreement
with Estee Lauder. The Company will no longer manufacture products for
Estee Lauder. Estee Lauder now manufactures all products in house and pays
the Company $5.00 per kilogram produced, up to $2 million, and then $2.00 per
kilogram thereafter. In addition, the exclusivity clause was removed from
the Estee Lauder agreement and, consequently, the Company may now sell its
products in department and specialty stores. Although it is the Company's
belief that this will increase business and revenue in the future, there is
no guarantee that it will occur.
Licensing Agreement with Universal Chemical Technologies, Inc.
--------------------------------------------------------------
In February 2004, the Company signed a license agreement with UCT to
utilize their patented technology for an electroless nickel boride metal
finishing process. This is a new venture for the Company that required
$782,000 to be spent to date to set up the operations at our facility. The
Company has an exclusive license within a 150 mile radius of its facility
for commercial and military applications. The Company believes there is the
possibility of major revenue and profit growth using this application, but
there is no guarantee that it will materialize.
16
American Stock Exchange (AMEX) Continuing Listing Standards
-----------------------------------------------------------
On March 28, 2002, the Company was notified by AMEX that it was below
certain of the Exchange's continuing listing standards. Specifically, the
Company was required to reflect income from continuing operations and net
income for 2002 and a minimum of $4,000,000 in stockholders' equity by
December 31, 2002 in order to remain listed.
On April 25, 2002, the Company submitted a plan of compliance to
AMEX. On June 12, 2002, AMEX notified the Company that it had accepted the
Company's plan of compliance and had granted the Company an extension of
time to regain compliance with the continued listing standards by December
31, 2002. The Company was subject to periodic review by the AMEX staff
during the extension period. Based on the Company's reported results for
2002, the Company was not in compliance with the AMEX listing standards for
income from continuing operations. On April 14, 2003, the Company received
formal notification from AMEX that the Company was deemed to be in
compliance with all AMEX requirements for continued listing on AMEX. This
determination is subject to the Company's favorable progress in satisfying
the AMEX guidelines for continued listing and to AMEX's routine periodic
reviews of the Company's SEC filings. Based on the Company's 2004 year-end
results, the Company is not in compliance with the AMEX requirement for
reporting income from continuing operations and net income for the year
ended December 31, 2004. As of the date of the filing of the Form 10-K, the
Company has not been contacted by AMEX concerning the Company's non-
compliance with the AMEX requirements. While as of this date, the Company
has not received any notification of non-compliance from AMEX, the Company
has no knowledge of nor can it predict whether AMEX shall at any time
hereafter issue formal notification to the Company of its non-compliance
with the requirements for continued listing on AMEX, which could result in
the Company's delisting from AMEX or otherwise adversely affect the
Company.
Recent Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities"
(FIN 46), which addresses consolidation by business enterprises of variable
interest entities ("VIEs"). FIN 46 is applicable immediately for VIEs
created after January 31, 2003 and is effective for reporting periods ending
after December 15, 2003, for VIEs created prior to February 1, 2003. In
December 2003, the FASB published a revision to FIN 46 ("FIN 46R") to clarify
some of the provisions of the interpretation and to defer the effective date
of implementation for certain entities. Under the guidance of FIN 46R, public
companies that have interests in VIE's that are commonly referred to as
special purpose entities are required to apply the provisions of FIN 46R for
periods ending after December 15, 2003. A public company that does not have
any interests in special purpose entities but does have a variable interest
in a VIE created before February 1, 2003, must apply the provisions of FIN
46R by the end of the first interim or annual reporting period ending after
March 14, 2004. The adoption of FIN 46 had no impact on the financial
condition or results of operations since the Company does not have investments
in VIEs.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs,"
which clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). The
provisions of this Statement shall be effective for inventory costs
incurred during the fiscal years beginning after June 15, 2005. The
Company is currently evaluating the effects the adoption of this statement
will have on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based
Payment." SFAS No. 123R requires employee stock options and rights to
purchase shares under stock participation plans to be accounted for under
the fair value method, and eliminates the ability to account for these
instruments under the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees",
and allowed under the original provisions of SFAS No. 123. SFAS No. 123R
requires the use of an option-pricing model for estimating fair value,
which is amortized to expense over the service periods. The requirements of
SFAS No. 123R are effective for fiscal periods beginning after June 15,
2005. The Company is currently evaluating the transition methods.
Critical Accounting Policies and Estimates
In December 2001, the SEC issued disclosure guidance for "critical
accounting policies." The SEC defines "critical accounting policies" as
those that require application of management's most difficult, subjective
or complex judgments, often as a result of the need to make estimates about
the effect of matters that are inherently uncertain and may change in
subsequent periods.
Our significant accounting policies are described in Note 1 in the
Notes to Consolidated Financial Statements. Not all of these significant
accounting policies require management to make difficult, subjective or
complex judgements or estimates. However, the following policies could be
deemed to be critical within the SEC definition.
16
Environmental Remediation Liability
-----------------------------------
On March 2, 2001, the Company became aware of environmental
contamination resulting from an unknown heating oil leak at its Companion
Pet Products manufacturing facility. The Company immediately notified the
New Jersey Department of Environmental Protection and the local
authorities, and hired a contractor to assess the exposure and required
clean up. Based on the initial information from the contractor, the
Company originally estimated the cost for the cleanup and remediation to be
$310,000. In September 2001, the contractor updated the estimated total
cost for the cleanup and remediation to be $550,000. In December 2002, a
further update was performed and the final estimated costs were increased
to $620,000, of which $82,000 remains accrued as of December 31, 2004.
Based on information provided to the Company from its environmental
consultant and what is known to date, the Company believes the reserve is
sufficient for the remediation of the environmental contamination. There is
a possibility, however, that the remediation costs may exceed the Company's
estimates.
Long-Lived Assets
-----------------
The Company's long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. The recoverability of assets to be held and
used is measured by a comparison of the carrying amount of the asset to
future net undiscounted cash flows expected to be generated by the asset.
Based on available information, management believes that the carrying value
of its long-lived assets are currently recoverable from future net
undiscounted cash flows expected to be generated from such assets. There
is a possibility, however, that changes could occur in the future (e.g.,
the loss of a significant customer) which would negatively impact the
Company's ability to recover the carrying amount of its long-lived assets.
The occurrence of such an event might result in the Company having to
record an impairment charge.
Deferred Tax Valuation Allowance
--------------------------------
Deferred taxes arise due to temporary differences in the bases of
assets and liabilities and from net operating losses and credit
carryforwards. In general, deferred tax assets represent future tax
benefits to be received when certain expenses previously recognized in the
Company's statement of operations become deductible expenses under
applicable income tax laws or loss or credit carryforwards are utilized.
Accordingly, realization of deferred tax assets is dependent on future
taxable income against which these deductions, losses and credits can be
utilized. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Management considers
historical operating losses, scheduled reversals of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. As a result, the Company concluded that it was more
likely than not that it will be unable to realize the gross deferred tax
assets in the foreseeable future and established a valuation reserve for
all such deferred tax assets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations, or cash flow of the Company due to adverse
changes in market prices and interest rates. The Company is exposed to
market risk because of changes in interest rates and changes in the fair
market value of its marketable securities portfolio.
The Company does not use derivative instruments in its marketable
securities portfolio. The Company classifies its investments in its
marketable securities portfolio as available-for-sale and records them at
fair value. The securities unrealized holding gains and losses are excluded
from income (loss) and are recorded directly to stockholders' equity in
accumulated other comprehensive income (loss). Changes in interest rates are
not expected to have an adverse effect on the Company's financial condition or
results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and notes thereto listed in the
accompanying index to financial statements (Item 15) are filed as part of
this Annual Report and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of certain members
of the Company's management, including the Chief Executive Officer and Vice
President of Finance, the Company completed an evaluation of the
effectiveness of the design and operation of its disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on
this evaluation, the Company's Chief Executive Officer and Vice President
of Finance believe that the disclosure controls and procedures were
generally effective as of the end of the period covered by this report with
respect to timely communicating to them and other members of management
responsible for preparing periodic reports all material information
required to be disclosed in this report as it relates to the Company and
its consolidated subsidiaries. Such evaluation did not identify any
change in the Company's internal control over financial reporting during
the Company's last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
In a report to the Audit Committee of our Board of Directors and
management of the Company, delivered by our independent audit firm, Amper,
Politziner, & Mattia P.C., on March 24,2005 in connection with their review
of our financial results for the year ended December 31, 2004, two items were
identified to be material weaknesses in our internal controls. A "material
weakness" is a reportable condition in which the design or operation of
one or more of the internal control components does not reduce to a relatively
low level the risk that misstatements caused by error or fraud in amounts that
would be material in relation to the financial statements being audited
may occur and not be detected within a timely period by employees in the
normal course of performing their assigned functions. Our material weaknesses
are insufficient resources and administrative support in the accounting
department and an unreliable accounting software package. As a result of
these material weaknesses, our internal controls over financial reporting are
ineffective. We agree with our independent auditors and we have begun taking
steps to alleviate these material weaknesses. We will be hiring an additional
support person in the accounting department and a new accounting/manufacturing
software package is currently being installed throughout the Company. The
impact of the above conditions did not affect the results of this period or
any prior period.
The Company's management cannot assure that its disclosure controls
and procedures or its internal control over financial reporting will
prevent all errors and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to
their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and breakdowns can occur because of
simple errors or mistakes. Additionally, controls can be circumvented by
the individual acts of some person or by collusion of two or more people.
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under
all potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected. Accordingly, the Company's disclosure controls
and procedures are designed to provide reasonable, not absolute, assurance
that the objectives of its disclosure control system are met and, as set
forth above.
ITEM 9B. OTHER INFORMATION
None.
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A portion of the information required by this item is contained in
part under the caption "Executive Officers of the Registrant" in Part I
hereof, and the remainder is contained in the Company's Proxy Statement for
the Company's 2005 Annual Meeting of Stockholders (the "2005 Proxy
Statement") under the captions "PROPOSAL 1 - Election of Directors -
Nominees for Election as Directors," "Committees of the Board - Audit
Committee" and "Section 16(a) Beneficial Ownership Reporting Compliance"
which are incorporated herein by this reference. Officers are elected on
an annual basis and serve at the discretion of the Board of Directors. The
Company expects to file the 2005 Proxy Statement no later than April 29,
2005.
The Company has adopted a code of ethics that applies to all
directors, officers and employees of the Company and its subsidiaries. The
Company's code of ethics is available at its web site at www.askigi.com.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the Company's
2005 Proxy Statement under the captions "EXECUTIVE COMPENSATION," "OPTION
GRANTS IN LAST FISCAL YEAR", "AGGREGATED OPTION EXERCISES IN FISCAL YEAR
2004 AND YEAR END 2004 OPTION VALUES," "Compensation Committee Interlocks
and Insider Participation," and "Director Compensation and Stock Options"
and is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
A portion of the information required by this item is contained in
the Company's 2005 Proxy Statement under the caption "Beneficial Ownership
of Common Stock" and is incorporated herein by this reference.
Securities Authorized For Issuance Under Equity Compensation Plans
The following table includes information as of December 31, 2004
relating to the Company's 1989 Stock Incentive Plan, 1991 Stock Incentive,
1999 Stock Incentive Plan and 1999 Director Stock Option Plan, which
comprise all of the equity compensation plans of the Company. The table
provides the number of securities to be issued upon the exercise of
outstanding options under such plans, the weighted-average exercise price
of such outstanding options and the number of securities remaining
available for future issuance under such equity compensation plans:
-----------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected
Plan category warrants and rights warrants and rights in column(a))
-----------------------------------------------------------------------------------------------------------
(a) (b) (c)
-----------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 2,588,048 $1.85 940,902
-----------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders - - -
-----------------------------------------------------------------------------------------------------------
Total 2,588,048 $1.85 940,902
-----------------------------------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Company's
2005 Proxy Statement under the caption "Certain Relationships and Related
Transactions" and is incorporated herein by this reference.
19
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is contained in the Company's
2005 Proxy Statement under the caption "Relationship with Independent
Public Accountants" and is incorporated herein by this reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, December 31, 2004 and 2003
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002
Consolidated Statements of Stockholders' Equity (Deficit) and
Comprehensive Income (Loss) for the years ended December 31,
2004, 2003 and 2002
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule II. Valuation and Qualifying Accounts and Reserves
Schedules other than those listed above are omitted for the
reason that they are either not applicable or not required or
because the information required is contained in the financial
statements or notes thereto.
Condensed financial information of the Registrant is omitted
since there are no substantial amounts of "restricted net
assets" applicable to the Company's consolidated subsidiaries.
(3) Exhibits Required to be Filed by Item 601 of Regulation S-K:
The exhibits listed in the Exhibit Index immediately preceding
such exhibits are filed as part of this Annual Report on Form
10-K unless incorporated by reference as indicated.
20
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: April 12, 2005 IGI, Inc.
By: /s/Frank Gerardi
-------------------------------
Frank Gerardi
Chairman and Chief Executive
Officer
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 dates indicated.
Signatures Title Date
---------- ----- ----
/s/Frank Gerardi Chairman and Chief Executive Officer April 12, 2005
Frank Gerardi
/s/Carlene A. Lloyd Vice President of Finance April 12, 2005
Carlene A.Lloyd
/s/Stephen J. Morris Director April 12, 2005
Stephen J. Morris
/s/Terrence O'Donnell Director April 12, 2005
Terrence O'Donnell
/s/Donald W. Joseph Director April 12, 2005
Donald W. Joseph
21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
IGI, Inc.:
We have audited the accompanying consolidated balance sheet of IGI, Inc.
and subsidiaries as of December 31, 2003 and the related consolidated
statements of operations, cash flows and stockholders' equity (deficit) and
comprehensive income (loss) for each of the years in the two year period
ended December 31, 2003. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedule
for the years ended December 31, 2003 and 2002. These consolidated financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the Public
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IGI,
Inc. and subsidiaries as of December 31, 2003, and the results of their
operations and their cash flows for each of the years in the two year period
ended December 31, 2003, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting
Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections, relating to
the classification of losses from the extinguishment of debt in 2003.
/s/ KPMG LLP
Philadelphia, Pennsylvania
April 7, 2004
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
IGI, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of IGI, Inc.
and Subsidiaries as of December 31, 2004, and the related consolidated
statements of operations, cash flows, and stockholders' equity (deficit) and
comprehensive income (loss) for the year then ended. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the 2004 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
IGI, Inc. and Subsidiaries as of December 31, 2004, and the results of
its operations and its cash flows for the year ended December 31, 2004, in
conformity with U.S generally accepted accounting principles.
In connection with our audit of the consolidated financial statements
referred to above, we audited Schedule II - Valuation and Qualifying
Accounts. In our opinion, this financial schedule, when considered in
relation to the consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information stated therein.
/s/ AMPER, POLITZINER & MATTIA P.C.
March 30, 2005
Edison, New Jersey
23
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
(in thousands, except share and per share information)
2004 2003
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 380 $ 821
Restricted cash 50 50
Marketable securities 377 800
Accounts receivable, less allowance for doubtful
accounts of $10 and $16 in 2004 and 2003,
respectively 306 350
Licensing and royalty income receivable 155 17
Inventories 247 192
Prepaid expenses and other current assets 8 133
-------- --------
Total current assets 1,523 2,363
Property, plant and equipment, net 3,168 2,607
Other assets 39 54
-------- --------
Total assets $ 4,730 $ 5,024
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 157 105
Accrued payroll 16 75
Other accrued expenses 243 301
Income taxes payable 5 7
Deferred income 180 165
-------- --------
Total current liabilities 601 653
Deferred income 121 205
-------- --------
Total liabilities 722 858
-------- --------
Commitments and contingencies (Notes 13 and 14)
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized; 13,547,520 and 13,351,237 shares
issued in 2004 and 2003, respectively 135 134
Additional paid-in capital 24,467 23,702
Accumulated other comprehensive loss (32) -
Accumulated deficit (19,167) (18,275)
Less treasury stock, 1,965,740 shares at cost
in 2004 and 2003 (1,395) (1,395)
-------- --------
Total stockholders' equity 4,008 4,166
-------- --------
Total liabilities and stockholders' equity $ 4,730 $ 5,024
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
24
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2004, 2003 and 2002
(in thousands, except share and per share information)
2004 2003 2002
---- ---- ----
Revenues:
Sales, net $ 2,551 $ 2,901 $ 3,513
Licensing and royalty income 1,007 656 851
-------- -------- --------
Total revenues 3,558 3,557 4,364
Costs and Expenses:
Cost of sales 1,253 1,345 1,378
Selling, general and administrative expenses 1,798 2,422 2,358
Product development and research expenses 1,727 762 549
-------- -------- --------
Operating profit (loss) (1,220) (972) 79
Interest income (expense), net 25 7 (283)
Other income, net 13 - 58
Loss on early extinguishment of debt - - (2,654)
-------- -------- --------
Loss from continuing operations before
provision (benefit) for income taxes (1,182) (965) (2,800)
Provision (benefit) for income taxes (290) (208) 330
-------- -------- --------
Loss from continuing operations (892) (757) (3,130)
Discontinued operations:
Loss from operations of discontinued businesses - - (523)
Gain on disposal of discontinued businesses - 435 12,433
-------- -------- --------
Net income (loss) (892) (322) 8,780
Mark to market for detachable stock warrants - - (133)
-------- -------- --------
Net income (loss) attributable to common
stockholders $ (892) $ (322) $ 8,647
======== ======== ========
Basic and Diluted Earnings (Loss) Per Common Share
Continued operations $ (.08) $ (.07) $ (.28)
Discontinued operations - .04 1.04
-------- -------- --------
Net income (loss) per share $ (.08) $ (.03) $ .76
======== ======== ========
Weighted average of common stock outstanding
Basic and diluted 11,547,791 11,373,952 11,429,978
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
25
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2004, 2003 and 2002
(in thousands)
2004 2003 2002
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (892) $ (322) $ 8,780
Reconciliation of net income (loss) to net cash used in
operating activities:
Gain on disposal of discontinued operations - (435) (12,433)
Proceeds from insurance settlement, net of expenses
related to discontinued operations - 147 -
Depreciation and amortization 271 269 306
Amortization of deferred financing costs and debt
discount - - 275
Loss on early extinguishment of debt - - 2,654
Impairment of property, plant and equipment - - 630
Loss (gain) on sale of marketable securities 1 - (58)
Provision for accounts and notes receivable and
inventories 7 11 23
Recognition of deferred income (169) (135) (135)
Interest expense related to subordinated note agreement - - 41
Stock-based compensation expense 545 55 48
Changes in operating assets and liabilities:
Restricted cash - (50) -
Accounts receivable 43 128 (177)
Inventories (61) 8 (140)
Licensing and royalty income receivable (138) 149 89
Prepaid expenses and other assets 125 6 12
Accounts payable and accrued expenses (65) (290) (986)
Deferred income 100 - -
Income taxes payable (2) (9) 4
Discontinued operations - working capital changes and
non-cash charges - - 343
-------- --------- ---------
Net cash used in operating activities (235) (468) (724)
-------- --------- ---------
Cash flows from investing activities:
Capital expenditures (817) (99) (104)
Proceeds from sale of property, plant and equipment - 450 550
Increase in other assets - (3) (33)
Proceeds from sale of marketable securities 500 - 58
Purchase of marketable securities (110) (800) -
Discontinued operations - other investing activities - - (8)
Proceeds from sale of discontinued operations, net of
direct costs - - 15,462
-------- --------- ---------
Net cash provided by (used in) investing activities (427) (452) 15,925
-------- --------- ---------
Cash flows from financing activities:
Borrowings under revolving credit agreement - - 5,958
Repayment of revolving credit agreement - - (8,284)
Repayment of debt - - (9,516)
Payment of deferred financing costs - - (273)
Repayment of EDA loan - (227) (15)
Borrowings under EDA loan - 45 197
Proceeds from exercise of common stock options
and purchase of common stock 221 4 36
Purchase of treasury shares - (80) (1,315)
-------- --------- ---------
Net cash provided by (used in) financing activities 221 (258) (13,212)
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents (441) (1,178) 1,989
Cash and cash equivalents at beginning of year 821 1,999 10
-------- --------- ---------
Cash and cash equivalents at end of year $ 380 $ 821 $ 1,999
======== ========= =========
Supplemental cash flow information:
Cash payments for interest $ - $ 10 $ 507
Cash payment (receipt) for taxes (288) (199) 328
The accompanying notes are an integral part of the consolidated financial
statements.
26
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
for the years ended December 31, 2004, 2003 and 2002
(in thousands, except share information)
Accumulated
Additional Other Total
Common Stock Paid-In Comprehensive Comprehensive Accumulated Treasury Stockholders'
Shares Amount Capital Loss Income (Loss) Deficit Stock Equity (Deficit)
------ ------ ---------- ------------- ------------- ----------- -------- -----------------
Balance, January 1, 2002 11,243,720 $112 $22,436 $ - $(26,733) $ - $(4,185)
Issuance of stock pursuant
to Directors' Stock Plan 70,322 1 47 48
Stock options exercised 39,000 1 20 21
Employee stock purchase plan 30,975 15 15
Adjustment of detachable
stock warrants (133) (133)
Detachable stock warrant
exercised 1,878,640 19 1,259 1,278
Buyback of stock (1,315) (1,315)
Net income $8,780 8,780 8,780
---------- ---- ------- ---- ====== -------- --------- -------
Balance, December 31, 2002 13,262,657 133 23,644 (17,953) (1,315) 4,509
Issuance of stock pursuant
to Directors' Stock Plan 79,327 1 54 55
Employee stock purchase plan 9,253 4 4
Buyback of stock (80) (80)
Net loss $ (322) (322) (322)
---------- ---- ------- ---- ====== -------- --------- -------
Balance, December 31, 2003 13,351,237 134 23,702 (18,275) (1,395) 4,166
Stock options exercised 176,666 1 212 213
Employee stock purchase plan 19,617 8 8
Issuance of stock option to
non-employee 545 545
Comprehensive Income
Net loss $(892) (892) (892)
Unrealized loss on
marketable securities (32) (32) (32)
-----
Comprehensive loss $(924)
---------- ---- ------- ---- ===== -------- --------- -------
Balance, December 31, 2004 13,547,520 $135 $24,467 $(32) $(19,167) $ (1,395) $ 4,008
========== ==== ======= ==== ======== ========= =======
The accompanying notes are an integral part of the consolidated financial
statements.
27
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"), a Delaware corporation, operating
in the State of New Jersey, is primarily engaged in the production and
marketing of cosmetics and skin care products. During 2002, the Company
sold its Companion Pet Products division, which manufactured and sold
companion pet care products. Beginning in the first quarter of 2005, the
Company will also be engaged in the metal finishing business, specifically
nickel boride, using the UltraCem technology.
IGI's Consumer Products business is primarily focused on the
continued commercial use of the Novasome(R) microencapsulation technologies
for skin care applications. These efforts have been directed toward the
development of high quality skin care products marketed by the Company or
through collaborative arrangements with cosmetic and consumer products
companies.
Estee Lauder, a significant customer, accounted for $1,248,000, or
35%, of 2004 revenues, $1,812,000, or 51%, of 2003 revenues, and
$2,629,000, or 60%, of 2002 revenues. In July 2004, the Company amended
its agreement with Estee Lauder. Estee Lauder is now manufacturing all
Novasome(R) and non Novasome(R) products in house and must pay the Company
a royalty per kilogram on all Novasome(R) products they manufacture,
including all new products developed. In addition, Estee Lauder paid to
the Company a one time payment of $100,000 in connection with the amendment
of the agreement. The Company's contract manufacturing of Estee Lauder
non-Novasome(R) products, which accounted for $559,000 of the $1,248,000 in
revenues in 2004, terminated contractually on June 30, 2004, without any
required future royalties or other payments to be received by the Company
on any non-Novasome(R) products manufactured by Estee Lauder.
Vetoquinol USA, a significant customer, accounted for $442,000 or 12%
of 2004 revenues, $523,000, or 15%, of 2003 revenues, and $361,000, or 7%, of
2002 revenues.
Johnson & Johnson, a significant customer, accounted for $385,000 or
11% of 2004 revenues, $488,000, or 14%, of 2003 revenues, and $714,000, or
16%, of 2002 revenues.
Principles of Consolidation
The consolidated financial statements include the accounts of IGI,
Inc. and its wholly-owned and majority-owned subsidiaries. All
intercompany accounts and transactions have been eliminated.
Cash Equivalents
Cash equivalents consist of short-term investments which have
original maturities of 90 days or less.
Accounts Receivable and Allowance for Doubtful Accounts
The Company extends credit to its customers, based upon credit
evaluations, in the normal course of business, primarily with 30- day
terms. The Company does not require collateral from its customers. Bad
debts are provided for on the allowance method based on historical experience
and management's evaluation of outstanding accounts receivable. The Company
charges off uncollectible receivables when the likelihood of collection is
remote.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash, cash equivalents and accounts
receivable. The Company limits credit risk associated with cash and cash
equivalents by placing its cash and cash equivalents with one high credit
quality financial institution. The Company's cash and cash equivalents, at
times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts. The Company believes it is not exposed to any
credit risk on cash and cash equivalents.
Marketable Securities
Realized gains and losses are determined using the specific-
identification method.
Inventories
Inventories are valued at the lower of cost, using the first-in,
first-out ("FIFO") method, or market.
28
Property, Plant and Equipment
Depreciation of property, plant and equipment is provided for under
the straight-line method over the assets' estimated useful lives as
follows:
Useful Lives
------------
Buildings and improvements 10 - 30 years
Machinery and equipment 3 - 10 years
Repair and maintenance costs are charged to operations as incurred
while major improvements are capitalized. When assets are retired or
disposed, the cost and accumulated depreciation thereon are removed from
the accounts and any gains or losses are included in operating results.
Long-Lived Assets
In accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the Company reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable. In performing
such review for recoverability, the Company compares expected future cash
flows of assets to the carrying value of the long-lived assets and related
identifiable intangibles. If the expected future cash flows (undiscounted)
are less than the carrying amount of such assets, the Company recognizes an
impairment loss for the difference between the carrying value of the assets
and their estimated fair value, with fair values being determined using
projected discounted cash flows at the lowest level of cash flows
identifiable in relation to the assets being reviewed.
Accounting for Environmental Costs
Accruals for environmental remediation are recorded when it is
probable a liability has been incurred and costs are reasonably estimable.
The estimated liabilities are recorded at undiscounted amounts.
Environmental insurance recoveries are included in the statement of
operations in the year in which the issue is resolved through settlement or
other appropriate legal process.
Income Taxes
The Company records income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," under the asset and liability method of
accounting for income taxes. Under the asset and liability method,
deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future
years to operating loss and tax credit carryforwards and differences
between the financial statement carrying amounts and the tax bases of
existing assets and liabilities. The effect on deferred taxes of a change
in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recorded based on a determination
of the ultimate realizability of future deferred tax assets.
Revenue Recognition
Sales, net of appropriate cash discounts, product returns and sales
reserves, are recorded upon shipment of products. Revenues earned under
research contracts or sublicensing and supply agreements are either
recognized when the related contract provisions are met, or, if under such
contracts or agreements the Company has continuing obligations, the revenue
is initially deferred and then recognized over the life of the agreement.
Stock-Based Compensation
As permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation", which establishes a fair value based method of accounting
for stock-based compensation plans, the Company had elected to follow
Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock
Issued to Employees" for recognizing stock-based compensation expense for
financial statement purposes. For companies that choose to continue applying
the intrinsic value method, SFAS No. 123 mandates certain pro forma disclosures
as if the fair value method had been utilized. The Company accounts for
stock based compensation to consultants in accordance with EITF Issue No.
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services"
and SFAS No. 123.
29
The following table illustrates the effect on income (loss)
attributable to common stockholders and earnings (loss) per share if the
Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation:
2004 2003 2002
---- ---- ----
(in thousands, except per share information)
Net income (loss) attributable to common
stockholders - as reported $ (892) $(322) $8,647
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method (193) (129) (496)
------- ----- ------
Net income (loss) attributable to
common stockholders - pro forma $(1,085) $(451) $8,151
======= ===== ======
Income (loss) per share - as reported
Basic and diluted $ (.08) $(.03) $ .76
======= ===== ======
Income (loss) per share - pro forma
Basic and diluted $ (.09) $(.04) $ .71
======= ===== ======
The pro forma information has been determined as if the Company had
accounted for its employee and director stock options under the fair value
method. The fair value for these options was estimated at the grant date
using the Black-Scholes option-pricing model with the following assumptions
for 2004, 2003 and 2002:
Assumptions 2004 2003 2002
----------- ---- ---- ----
Dividend yield 0% 0% 0%
Risk free interest rate 3.59%-4.27% 2.89%-3.62% 3.53%-4.97%
Estimated volatility factor 88% 176% 176%
Expected life 7 years 7 years 7 years
Product Development and Research
The Company's research and development costs are expensed as
incurred.
Advertising Costs
Advertising costs are expensed as incurred. Such expenses for the
years ended December 31, 2004, 2003, and 2002 were $39,000, $60,000 and
$17,000, respectively.
Shipping and Handling Costs
Costs related to shipping and handling are comprised of outbound and
inbound freight and the associated labor. These costs are recorded in
costs of sales.
Net Income (Loss) per Common Share
Basic net income (loss) per share of common stock is computed based
on the weighted average number of shares of common stock outstanding during
the period. Diluted net income (loss) per share of common stock is
computed using the weighted average number of shares of common stock and
potential dilutive common stock equivalents outstanding during the period.
Potential dilutive common stock equivalents include shares issuable upon
the exercise of options and warrants. Due to the Company's net loss from
continuing operations for the years ended December 31, 2004, 2003 and 2002,
the effect of the Company's potential dilutive common stock equivalents was
anti-dilutive for each year; as a result, the basic and diluted weighted
average number of common shares outstanding and net income (loss) per
common share are the same. Potentially dilutive common stock equivalents
which were excluded from the net income (loss) per share calculations due
to their anti-dilutive effect amounted to 1,140,379 for 2004, 2,550,000 for
2003, and 2,852,000 for 2002.
Comprehensive Income (Loss)
The Company has adopted SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income (loss) and its components. Comprehensive income (loss)
is defined to include all changes in stockholders' equity during a period
except those resulting from investments by owners and distributions to owners.
Comprehensive income (loss) is the sum of net income (loss) and unrealized
gains (losses) on marketable securities. Unrealized gains (losses) on
investments are excluded from net income (loss) and are reported in
accumulated other comprehensive loss in the accompanying consolidated
financial statements.
30
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Significant
estimates include allowances for excess and obsolete inventories,
allowances for doubtful accounts, provisions for income taxes and related
deferred tax asset valuation allowances, and accruals for environmental
cleanup and remediation costs. Actual results could differ from those
estimates.
Effect of Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical Corrections," which is
effective for fiscal years beginning after May 15, 2002 for provisions
related to SFAS No. 4, effective for all transactions occurring after May
15, 2002 for provisions related to SFAS No. 13 and effective for all
financial statements issued on or after May 15, 2002 for all other
provisions of SFAS No. 145. The Company's loss from early extinguishment
of debt realized in the second quarter of 2002 has been presented within
continuing operations, rather than presented as an extraordinary item, in
accordance with SFAS No. 145.
In January 2003, FASB issued Interpretation 46, "Consolidation of
Variable Interest Entities" (FIN 46), which addresses consolidation by
business enterprises of variable interest entities ("VIEs"). FIN No.46
is applicable immediately for VIEs created after January 31, 2003 and are
effective for reporting periods ending after December 15, 2003, for VIEs
created prior to February 1, 2003. In December 2003, the FASB published a
revision to FIN 46 ("FIN 46R") to clarify some of the provisions of the
interpretation and to defer the effective date of implementation for certain
entities. Under the guidance of FIN 46R, public companies that have interests
in VIE's that are commonly referred to as special purpose entities are
required to apply the provisions of FIN 46R for periods ending after December
15, 2003. A public company that does not have any interests in special purpose
entities but does have a variable interest in a VIE created before February
1, 2003, must apply the provisions of FIN 46R by the end of the first interim
or annual reporting period ending after March 14, 2004. The adoption of FIN 46
has no impact on the financial condition or results of operations since the
Company does not have investments in VIE's.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs,"
which clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). The
provisions of this statement shall be effective for inventory costs
incurred during the fiscal years beginning after June 15, 2005. The
Company is currently evaluating the effects that adoption of this statement
will have on the Company's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based
Payment." SFAS No. 123R requires employee stock options and rights to
purchase shares under stock participation plans to be accounted for under
the fair value method, and eliminates the ability to account for these
instruments under the intrinsic value method prescribed by APB Opinion
No. 25 "Accounting for Stock Issued to Employees," and allowed under the
original provisions of SFAS No. 123. SFAS No. 123R requires the use of an
option-pricing model for estimating fair value, which is amortized to expense
over the service periods. The requirements of SFAS No. 123R are effective for
fiscal periods beginning after June 15, 2005. The Company is currently
evaluating the transition methods.
2. Liquidity
The Company's principal sources of liquidity are cash, cash
equivalents and marketable securities of approximately $757,000 and cash
from operations. Management believes that existing cash, cash equivalents,
marketable securities and cash flows from operations will be sufficient to
meet the Company's foreseeable operating cash needs for at least the next
year. In addition, two stockholders of the Company have agreed to loan the
Company up to $500,000 each, if necessary, to help fund the Company's
commitment to Novavax due on December 13, 2005 or to fund the Company's
deficit through December 31, 2005. There may be acquisition and other
growth opportunities, however, that require additional external financing.
Several of the board members have voiced their willingness to exercise
stock options should the need for additional cash arise. Management may,
from time to time, seek to obtain additional funds from public or private
issuances of equity or debt securities. There can be no assurance that
such additional financings will be available or available on terms
acceptable to the Company.
3. Marketable Securities
Marketable securities at December 31, 2004 and 2003 consist of an
investment in a short-term bond mutual fund and an investment in stock.
The Company currently classifies all marketable securities as available-
for-sale in accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Securities classified as available-for-
sale are required to be reported at fair value with unrealized gains and
losses, net of taxes, excluded from operations and shown separately as a
component of accumulated other comprehensive loss within stockholders'
equity. Realized gains and losses on the sale of available-for-sale
securities are determined using the specific-identification method.
31
The amortized cost, gross unrealized gains and losses and fair value
of the available-for-sale marketable securities as of December 31, 2004 and
2003 are as follows (amounts in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair Carrying
2004 Cost Gains Losses Value Amount
---- --------- ---------- ---------- ----- --------
Mutual funds $ 299 $ - $ (4) $ 295 $ 295
Securities 110 - (28) 82 82
----- --- ---- ----- -----
$ 409 $ - $(32) $ 377 $ 377
===== === ==== ===== =====
Gross Gross
Amortized Unrealized Unrealized Fair Carrying
2003 Cost Gains Losses Value Amount
---- --------- ---------- ---------- ----- --------
Mutual funds $ 800 $ - $ - $ 800 $ 800
===== === ==== ===== =====
Sales of available-for-sale securities for the year ended December
31, 2004, 2003, and 2002 were as follows (amounts in thousands):
2004 2003 2002
---- ---- ----
Proceeds from sales $500 - $58
Gross realized gains - - 58
Gross realized losses (1) - -
The increase in net unrealized holding losses on available-for-sale
securities in the amount of $32,000 was recorded directly to stockholders'
equity as of December 31, 2004.
4. Discontinued Operations
On May 31, 2002, the stockholders of the Company approved, and the
Company consummated, the sale of the assets and transfer of the liabilities
of the Companion Pet Products division, which marketed companion pet care
related products. The buyer assumed liabilities of approximately $986,000,
and paid the Company cash in the amount of $16,254,000. The Company's
results reflect a $12,433,000 gain on the sale of the Companion Pet
Products division for the year ended December 31, 2002. The gain is net of
direct costs incurred by the Company in connection with the sale and the
reduction in the purchase price resulting from post-closing adjustments.
For the year ended December 31, 2003, the Company had a gain on the
disposal of discontinued operations of $435,000 which primarily consisted
of a net gain of $169,000 for an insurance settlement, net of legal costs,
for damages incurred by the Company as a result of a heating oil leak at
the Companion Pet Products manufacturing site and a net gain of $288,000 on
the sale of the former Companion Pet Products manufacturing site land and
building on December 18, 2003. The Companion Pet Products division incurred
losses of $523,000 in the year ended December 31, 2002. The results for the
year ended December 31, 2002 included an impairment charge of $630,000
related to the Companion Pet Products warehouse. Upon the sale of the
Companion Pet Products division, the Company paid all of its debt and
interest owed to Fleet Capital Corporation ("Fleet") and American Capital
Strategies, Ltd. ("ACS"). As a result, the Company incurred a $2,654,000
loss from early extinguishment of debt in connection with the prepayment
fees paid to Fleet and ACS and the write-off of the ACS debt discount.
During 2001, the Company recorded non-recurring charges related to
the cessation and shutdown of the manufacturing operations at the Companion
Pet Products facility. The Company applied to the New Jersey Economic
Development Authority (NJEDA) and the New Jersey Department of
Environmental Protection for a grant and loan to provide partial funding
for the costs of investigation and remediation of the environmental
contamination discovered at the Companion Pet Products facility. On June
26, 2001, the Company was awarded an $81,000 grant and a $246,000 loan.
The $81,000 grant was received in the third quarter of 2001. The loan,
which required monthly principal payments, had a term of ten years at a
rate of interest of 5%. The Company received funding of $45,000 and
$182,000 from the loan during 2003 and 2002, respectively. On December 18,
2003, the loan was paid in full upon the sale of the Companion Pet Products
facility, which had served as the collateral for the loan.
The activity in 2004 related to the environmental clean up costs is as
follows (amounts in thousands):
Net accrual at Cash Net accrual at
Description December 31, 2003 expenditures December 31, 2004
----------- ----------------- ------------ -----------------
Environmental cleanup costs $102 $(20) $82
==== ==== ===
32
5. Supply and Sublicensing Agreements
In February 2001, the Company signed a new manufacturing and supply
agreement and an assignment of trademark agreement for the WellSkin(tm)
line of skin care products with Genesis Pharmaceutical, Inc. The
manufacturing and supply agreement expires on December 13, 2005 and
contains two ten-year renewal options. The Company received a lump sum
payment of $525,000 for the assignment of the trademark, which is being
recognized ratably over the term of the arrangement. The Company
recognized $105,000 of income related to this agreement in each of the
years ended December 31, 2004, 2003 and 2002.
The Company entered into a sublicense agreement with Johnson &
Johnson Consumer Products, Inc. ("J&J") in 1995. The agreement provided
J&J with a sublicense to produce and sell Novasome(R) microencapsulated
retinoid products and provides for the payment of royalties on net sales of
such products. J&J began selling such products and making royalty payments
in the first quarter of 1998. The Company recognized $385,000, $488,000
and $714,000 of royalty income related to this agreement for the years
ended December 31, 2004, 2003 and 2002, respectively.
In August 1998, the Company granted Johnson & Johnson Medical
("JJM"), a division of Ethicon, Inc., worldwide rights for the use of the
Novasome(R) technology for certain products and distribution channels. The
agreement provided for JJM to pay the Company $300,000 as well as future
royalty payments based on JJM's sales of sublicensed products. The Company
recognized $30,000, $35,000 and $32,000 of royalty income in 2004, 2003 and
2002, respectively, related to the agreement. In March of 2002, the
agreement between the Company and JJM was amended stating that JJM is no
longer required to make minimum payments and the license has been converted
to a non-exclusive worldwide license with the exception of Japan, which
will remain exclusive. If the amount of royalties paid by JJM equals or
exceeds $200,000 in any year, the following calendar year will become an
exclusive worldwide agreement and will remain so until royalties fall below
that amount.
In July 2001, the Company entered into a Research, Development and
Manufacturing Agreement with Apollo Pharmaceutical (Canada), Inc.
("Apollo"), previously known as Prime Pharmaceutical Corporation. The
purpose of the agreement was to develop a facial lotion, a facial creme and
scalp application for the treatment of psoriasis. The project has been
completed in stages with amounts being paid to the Company with the
successful completion of each stage. In addition, the Company has agreed to
rebate $3.60 per kilogram for the first 12,500 kilograms of product
manufactured for and sold to Apollo. During 2002 and 2003, there was no
activity between the Company and Apollo due to a change in management at
Apollo. In 2004, the Company recognized $137,000 of product sales from
Apollo.
In November 2002, the Company entered into a Manufacturing Service
Agreement with Desert Whale Jojoba Company, Inc. The purpose of this
agreement is to develop and manufacture jojobasomes to be used as a
personal care product. This project was in a developmental stage through
2002. The Company recognized $7,000 of product sales related to this project
in 2003. The Company is no longer doing business with Desert Whale Jojoba
Company, Inc.
In July 2004, the Company, in order to allow growth and new business
opportunities, renegotiated its contract with Estee Lauder, a significant
customer. Estee Lauder is manufacturing all Novasome(R) and non-Novasome(R)
products in house and is paying the Company a royalty per kilo on all
Novasome(R) products manufactured by Estee Lauder, including all new
products developed plus a one time payment of $100,000 per the contract.
The Company's contract manufacturing of Estee Lauder non-Novasome(R)
products, which accounted for $559,000 of the $1,248,000 in revenues in 2004,
terminated contractually on June 30, 2004, without any required future
royalties or other payments to be received by the Company on any non-
Novasome(R) products manufactured by Estee Lauder. However, Estee Lauder
may from time to time require the assistance of IGI to manufacture
Novasome(R) and non Novasome(R) products at Estee Lauder's request. In
addition, during the six month period from January through June 2004, the
Company agreed to provide Estee Lauder's contract manufacturing services at
a reduced price of $2.00 per kilo, as compared to the prior rate of $3.03
per kilo. The Company received $184,000 in 2004 and $28,000 in 2003 of
royalty income from Estee Lauder pursuant to the Company's agreement with
Estee Lauder for various Novasome(R) vesicles skin care products produced
by Estee Lauder.
On July 27, 2004, the Company signed an exclusive license agreement
with the University of Massachusetts Medical School (University) for the
patented invention entitled "The Treatment of Skin with Adenosine or
Adenosine Analogs." The Company intends to encapsulate adenosine or
adenosine analogs in Novasome(R) for use in the skin care field. As
consideration of the rights granted in this agreement, the Company made
nonrefundable payments of $25,000 upon the execution of this agreement and
$25,000 in September 2004. Both of these payments were expensed during the
third quarter of 2004 and are included in the product development and
research expenses. The agreement also calls for minimum royalty payments
of $25,000 per year commencing on July 27, 2007. If the Company enters
into a sublicense agreement with a third-party entity, which it will
attempt to do, the Company must pay the University 50% of all sublicense
income.
33
6. Supplemental Cash Flow Information
During the years ended December 31, 2004, 2003 and 2002, the Company
had the following non-cash financing and investing activities:
2004 2003 2002
---- ---- ----
(in thousands)
Mark to market adjustment on warrants $- $- $(133)
Issuance of stock pursuant to Directors' Stock Plan - 55 48
7. Inventories
Inventories as of December 31, 2004 and 2003 consisted of:
2004 2003
---- ----
(in thousands)
Finished goods $ 42 $ 15
Raw materials 205 177
----- -----
$ 247 $ 192
===== =====
The above amounts are net of reserves for obsolete and slow moving
inventory of $21,000 and $15,000 as of December 31, 2004 and 2003,
respectively.
8. Property, Plant and Equipment
Property, plant and equipment, at cost, as of December 31, 2004 and
2003 consisted of:
2004 2003
---- ----
(in thousands)
Land $ 257 $ 257
Buildings 2,695 2,695
Machinery and equipment 1,635 1,600
Construction in progress 782 -
------- -------
5,369 4,552
Less accumulated depreciation (2,201) (1,945)
------- -------
Property, plant and equipment, net $ 3,168 $ 2,607
======= =======
The Company recorded depreciation expense related to continuing
operations of $256,000, $254,000 and $268,000 in 2004, 2003 and 2002,
respectively.
9. Debt
On May 31, 2002, the stockholders of the Company approved, and the
Company consummated, the sale of the assets and transfer of the liabilities
of the Companion Pet Products division. Upon the sale, the Company paid
all of its debt and interest owed to Fleet and ACS. As a result, the
Company incurred a $2,654,000 loss from early extinguishment of debt in
connection with the prepayment fees paid to Fleet and ACS and the write-off
of the ACS debt discount.
The Company received a $246,000 loan to provide partial funding for
the costs of investigating and remediating the environmental contamination
discovered at the Companion Pet Products facility. The loan required
monthly principal payments over a term of ten years at a rate of interest
of 5%. The Company received funding of $45,000 and $197,000 under the loan
during 2003 and 2002, respectively. On December 18, 2003, the loan was paid
in full upon the sale of the former Companion Pet Products facility, which
served as collateral for the loan.
10. Stock Warrants
In connection with the $7,000,000 borrowing from American Capital
Strategies (ACS), the Company issued a warrant to purchase 1,907,543 shares
of IGI common stock at an exercise price of $.01 per share to ACS.
34
The warrant issued to ACS was valued at issuance date utilizing the
Black-Scholes model and initially recorded as a liability, due to the
presence of a put right which required the Company to repurchase the
warrant or underlying common stock under certain circumstances. The
liability was marked-to-market, based on changes in the value of the
underlying common stock, with the change in market value recognized as a
component of interest expense in the period of change.
On April 12, 2000, ACS and the Company amended the debt agreement
and the put provision associated with the original warrant was replaced by
a make-whole feature. The make-whole feature required the Company to
compensate ACS, in either common stock or cash, at the option of the
Company, in the event that ACS ultimately realized proceeds from the sale
of the common stock obtained upon exercise of its warrant that were less
than the fair value of the common stock upon exercise of such warrant.
Fair value of the common stock upon exercise was defined as the 30-day
average value prior to notice of intent to sell. ACS was required to
exercise reasonable effort to sell or place its shares in the marketplace
over a 180-day period, beginning with the date of notice by ACS, before it
could invoke the make-whole provision.
As noted above, the make-whole feature required the Company to
compensate ACS for any decrease in value between the date that ACS notified
the Company that they intended to sell some or all of the stock and the
date that ACS ultimately disposed of the underlying stock, assuming that
such disposition occurred in an orderly fashion over a period of not more
than 180 days. The shortfall could be paid using either cash or shares of
the Company's common stock, at the option of the Company. Based on
accounting guidance that was issued in September 2000, the Company
reflected the detachable stock warrant outside of stockholders' equity
(deficit), since the ability to satisfy the make-whole obligation using
shares of the Company's common stock was not totally within the Company's
control.
On June 26, 2002, the Company received notice from ACS that it was
exercising the warrant. ACS opted to satisfy payment of the exercise price
through the use of the cashless exercise provisions of the warrant. The
Company issued 1,878,640 fully paid up shares of common stock to ACS on
July 7, 2002. Based on the provisions of the make-whole feature, the fair
value of the common stock was $.67 per share as of the notification date.
On July 19, 2002, the Company's Board of Directors approved the purchase of
the 1,878,640 shares from ACS for $.70 per share. The Company completed the
purchase on July 29, 2002 for $1,315,000 and classified the shares as
treasury shares.
In February 1999, the Company granted a warrant to purchase 270,000
shares of common stock, with an exercise price of $2.00 per share. The
warrant expired on January 31, 2004.
11. Stock Options and Common Stock
In October 1998, the Company adopted the 1998 Directors Stock Plan.
Under this plan, 200,000 shares of the Company's common stock are reserved
for issuance to non-employee directors, in lieu of payment of directors'
fees in cash. In 2002, 70,011 shares of common stock were issued as
consideration for directors' fees. In 2003 and 2002, the Company issued
79,318 and 311 shares of common stock as consideration for directors' fees
under the 1999 Stock Incentive Plan ("1999 Plan"). The Company did not
issue any shares as consideration for directors' fees in 2004. The Company
recognized $24,000, $55,000 and $48,000 of expense related to shares issued
to directors during the years ended December 31, 2004, 2003 and 2002,
respectively. The amount related to 2004 remains in accrued expenses until
the shares are issued.
In December 1998, the Company's Board of Directors adopted the 1999
Employee Stock Purchase Plan ("ESPP"). An aggregate of 300,000 shares of
common stock may be issued pursuant to the ESPP. All employees of the
Company and its subsidiaries, including officers or directors who are also
an employee, are eligible to participate in the ESPP. Shares under this
plan are available for purchase at 85% of the fair market value of the
Company's stock on the first or last day of the offering period, whichever
is lower. The Company issued 19,617, 9,253 and 30,975 shares in 2004, 2003
and 2002, respectively, under the ESPP.
In March 1999, the Company's Board of Directors approved the 1999
Stock Incentive Plan ("1999 Plan"). The 1999 Plan replaced all previously
authorized stock option plans, and no additional options may be granted
under those plans. Under the 1999 Plan, options or stock awards may be
granted to all of the Company's employees, officers, directors, consultants
and advisors to purchase a maximum of 1,200,000 shares of common stock. In
May 2002, the Company's stockholders approved an increase in the maximum
amount of shares to be granted by 800,000, for a total of 2,000,000 shares
available for grant. A total of 1,335,916 options (net of cancellations),
having a maximum term of ten years, have been granted at 100% of the fair
market value of the Company's stock at the time of grant. Options
outstanding under the 1999 Plan are generally exercisable in cumulative
increments over four years commencing one year from date of grant. In
addition, as noted above, 79,629 stock awards have been granted under the
1999 Plan.
In September 1999, the Company's Board of Directors approved the 1999
Director Stock Option Plan. The 1999 Director Stock Option Plan provides
for the grant of stock options to non-employee directors of the Company at
an exercise price equal to the fair market value per share on the date of
the grant. An aggregate of 675,000 shares have been approved and
authorized for issuance
35
pursuant to this plan. In May 2001, an additional 800,000 shares were
approved for issuance under this plan, bringing the total to 1,475,000
available for issue under this plan. A total of 1,111,048 options (net of
cancellations) have been granted to non-employee directors through December
31, 2004. The options granted under the 1999 Director Stock Option Plan
vest in full one year after their respective grant dates and have a maximum
term of ten years.
Stock option transactions in each of the past three years under the
aforementioned plans in total were:
1999 Plan
---------------------------------------------
Weighted
Shares Price Per Share Average Price
------ --------------- -------------
January 1, 2002 shares
Under option 2,703,000 $ .50 - $8.58 $2.30
Granted 280,000 .53 - .70 .67
Exercised (39,000) .50 - .56 .53
Cancelled (362,000) .50 - 8.25 2.50
---------
December 31, 2002 shares
Under option 2,582,000 .50 - 8.58 2.12
Granted 290,000 .55 - 1.07 .82
Exercised - - -
Cancelled (592,000) .52 - 7.61 1.53
---------
December 31, 2003 shares
Under option 2,280,000 .50 - 8.58 2.03
Granted 618,048 1.05 - 2.25 1.74
Exercised (176,666) .55 - 1.94 1.21
Expired (100,000) 5.59 - 8.58 7.77
Cancelled (33,334) .85 .85
---------
December 31, 2004
Under option 2,588,048 .50 - 8.25 1.85
=========
Exercisable options at:
December 31, 2002 2,454,398 $2.19
========= =====
December 31, 2003 2,019,252 $2.24
========= =====
December 31, 2004 2,320,001 $1.92
========= =====
The Company uses the intrinsic value method to account for stock
options issued to employees and to directors. The Company uses the fair
value method to account for stock options issued to non-employee
consultants. No options were granted to consultants in 2002. The Company
granted 300,000 and 25,000 options in 2004 and 2003, respectively, to a
consultant. The expense related to such options, which amounted to
$545,000 in 2004 was recorded in product development and research expense.
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 2004:
Options Outstanding Options Exercisable
------------------------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Range of Number of Remaining Exercise Number of Exercise
Exercise Price Options Life (Years) Price Options Price
-------------- --------- ------------ -------- --------- --------
$ .50 to $1.00 800,500 6.79 $ .65 800,500 $ .65
1.01 to 2.00 1,097,798 6.45 1.52 829,751 1.60
2.01 to 3.00 419,750 7.61 2.32 419,750 2.32
3.01 to 4.00 50,000 3.00 3.75 50,000 3.75
5.01 to 6.00 90,000 1.91 5.81 90,000 5.81
6.01 to 7.00 100,000 1.47 6.69 100,000 6.69
8.01 to 8.25 30,000 0.99 8.25 30,000 8.25
--------- ---------
$ .50 to $8.25 2,588,048 6.25 $1.85 2,320,001 $1.92
========= =========
36
12. Income Taxes
The provision (benefit) for income taxes attributable to loss from
continuing operations before provision (benefit) for income taxes for the
years ended December 31, 2004, 2003 and 2002 is as follows:
2004 2003 2002
---- ---- ----
(in thousands)
Current tax expense (benefit):
Federal $ - $ - $ -
State and local (290) (208) 330
----- ----- -----
Total current tax expense (benefit) (290) (208) 330
----- ----- -----
Deferred tax expense
Federal - - -
State and local - - -
----- ----- -----
Total deferred tax expense - - -
----- ----- -----
Total expense (benefit) for income taxes $(290) $(208) $ 330
===== ===== =====
The Company sold some of its New Jersey operating loss carryforwards
in exchange for net proceeds of $298,000, $224,000 and $249,000 in 2004,
2003 and 2002, respectively. During the year ended December 31, 2002, the
Company paid $558,000 to purchase some New Jersey operating loss
carryforwards.
The provision (benefit) for income taxes differed from the amount of
income taxes determined by applying the applicable Federal tax rate (34%)
to pretax loss from continuing operations as a result of the following:
2004 2003 2002
---- ---- ----
(in thousands)
Statutory benefit $(405) $(328) $(952)
Other non-deductible expenses 1 25 16
State income taxes, net of valuation allowance (191) (137) 330
Increase in Federal valuation allowance 305 234 936
Other, net - (2) -
----- ----- -----
$(290) $(208) $ 330
===== ===== =====
Deferred tax assets included in the Consolidated Balance Sheets as of
December 31, 2004 and 2003 consisted of the following:
2004 2003
---- ----
(in thousands)
Property, plant and equipment $ 67 $ 52
Prepaid license agreement 202 402
Deferred royalty payments 121 149
Tax operating loss carryforwards 5,978 5,349
Tax credit carryforwards 666 691
Reserves 15 6
Inventory 31 16
Non-employee stock options 394 177
Other future deductible temporary differences 33 41
Other future taxable temporary differences (16) (21)
------- -------
7,491 6,862
Less: valuation allowance (7,491) (6,862)
------- -------
Deferred taxes, net $ - $ -
======= =======
The Company evaluates the recoverability of its deferred tax assets
based on its history of operating earnings, its plan to sell the benefit of
certain state net operating loss carryforwards, its expectations for the
future, and the expiration dates of the net operating loss carryforwards.
The Company has concluded that it is more likely than not that it will be
unable to realize the gross deferred tax assets in the foreseeable future
and has established a valuation reserve for all such deferred tax assets.
37
Operating loss and tax credit carryforwards for tax reporting
purposes as of December 31, 2004 were as follows:
(in thousands)
Federal:
Operating losses (expiring through 2024) $ 13,722
Research tax credits (expiring through 2020) 551
Alternative minimum tax credits (available without
expiration) 28
State:
Net operating losses - New Jersey (expiring through 2012) 13,715
Research tax credits - New Jersey (expiring through 2010) 58
Alternative minimum assessment - New Jersey (available
without expiration) 29
Federal net operating loss carryforwards that expire through 2024
have significant components expiring in 2018 (15%), 2019 (15%), 2020 (53%),
and 2021 (9%).
13. Commitments and Contingencies
The Company leases machinery and equipment under non-cancelable
operating lease agreements expiring at various dates in the future. Rental
expense aggregated approximately $42,000 in 2004, $44,000 in 2003, and
$70,000 in 2002. Future minimum rental commitments under non-cancelable
operating leases as of December 31, 2004 are as follows:
Year (in thousands)
---- --------------
2005 $ 34
2006 25
2007 22
2008 22
2009 22
Thereafter -
----
Total $125
====
The Company has an option, which is exercisable on December 13, 2005,
to extend its exclusive license for the use of the Novasome(R)
microencapsulation technologies in certain specific fields for an
additional ten-year term in exchange for a $1,000,000 cash payment.
14. Legal and U.S. Regulatory Proceedings
Gallo Matter
As previously reported by the Company in its historical filings with
the Securities and Exchange Commission ("SEC"), including, without
limitation, its Form 10-K for the year ending December 31, 1999, for most
of 1997 and 1998 the Company was subject to intensive government regulatory
scrutiny by the U.S. Departments of Justice, Treasury and Agriculture. In
June 1997, the Company was advised by the Animal and Plant Health
Inspection Service ("APHIS") of the United States Department of Agriculture
("USDA") that the Company had shipped quantities of some of its poultry
vaccine products without complying with certain regulatory and record
keeping requirements. The USDA subsequently issued an order that the
Company stop shipment of certain of its products. Shortly thereafter, in
July 1997, the Company was advised that the USDA's Office of Inspector
General had commenced an investigation into possible violations of the
Virus Serum Toxin Act of 1914 and alleged false statements made to APHIS.
In April 1998, the SEC advised the Company that it was conducting an
informal inquiry and requested information and documents from the Company,
which the Company voluntarily provided to the SEC.
Based upon these events, the Board of Directors caused an immediate
and thorough investigation of the facts and circumstances of the alleged
violations to be undertaken by independent counsel. The Company continued
to refine and strengthen its regulatory programs with the adoption of a
series of compliance and enforcement policies, the addition of new managers
of Production and Quality Control and a new Senior Vice President and
General Counsel. At the instruction of the Board of Directors, the
Company's General Counsel established and oversaw a comprehensive employee
training program, designated in writing a Regulatory Compliance Officer,
and established a fraud detection program, as well as an employee
"hotline." The Company continued to cooperate with the USDA and SEC in all
aspects of their investigation and regulatory activities. On March 13,
2002, the Company reached a settlement with the staff of the SEC to resolve
matters arising with respect to the investigation of the Company. Under
the settlement, the Company neither admitted nor denied that the Company
violated the financial reporting and record-keeping requirements of Section
13 of the Securities and Exchange Act of 1934, as amended, for the three
years ended December 31, 1997.
38
Further, the Company agreed to the entry of an order to cease and desist
from any such violation in the future. No monetary penalty was assessed.
As a result of its internal investigation, in November 1997, the
Company terminated the employment of John P. Gallo as President and Chief
Operating Officer for willful misconduct. On April 21, 1998, the Company
instituted a lawsuit against Mr. Gallo in the New Jersey Superior Court.
The lawsuit alleged willful misconduct and malfeasance in office, as well
as embezzlement and related claims (referred to as the "IGI Action"). On
April 28, 1998, Mr. Gallo instituted a separate action against the Company
and two of its Directors, Edward Hager, M.D. and Constantine Hampers, M.D.,
alleging that he had been wrongfully terminated from employment and
further alleging wrongdoings by the two Directors (referred to as the
"Gallo Action"). The Court subsequently ordered the consolidation of the
IGI Action and the Gallo Action (collectively referred to as the
"Consolidated Action").
In response to these allegations, the Company instituted an
investigation of the two Directors by an independent committee
("Independent Committee") of the Board assisted by the Company's General
Counsel. The investigation included a series of interviews of the
Directors, both of whom cooperated with the Company, and a review of
certain records and documents. The Company also requested an interview
with Mr. Gallo who, through his counsel, declined to cooperate. In
September 1998, the Independent Committee reported to the Board that it had
found no credible evidence to support Mr. Gallo's claims and allegations
and recommended no further action. The Board adopted the recommendation.
The Company denied all allegations plead in the Gallo Action and
asserted all claims in the Gallo Action to be without merit. The Company
did not reserve any amount relating to such claims. The Company tendered
the claim to its insurance carriers, but was denied insurance coverage for
both defense and indemnity of the Gallo Action.
In July 1998, the Company sought to depose Mr. Gallo in connection
with the Consolidated Action. Through his counsel, Mr. Gallo asserted his
Fifth Amendment privilege against self-incrimination and advised that he
would not participate in the discovery process until such time as a federal
grand jury investigation, in which he was a target, was concluded. In
January 1999, at the suggestion of the Court, the Company and Mr. Gallo
agreed to a voluntary dismissal without prejudice of the Consolidated
Action, with the understanding that the statute of limitations was tolled
for all parties and all claims, and that the Company and Mr. Gallo were
free to reinstate their suits against each other at a later date, with each
party reserving all of their rights and remedies against the other.
As of the date hereof, neither the Company nor Mr. Gallo have filed
suit against each other in the Superior Court of New Jersey or any other
court of competent jurisdiction to reinstitute the claims, in whole or
part, previously at issue in the Consolidated Action, and pursuant to the
previous order of dismissal entered in the Consolidated Action, the statute
of limitation on all claims and defenses continues to be tolled as to both
parties. However, the Company did receive a letter dated November 21, 2003
from Mr. Gallo's attorneys seeking to reach a settlement of the claims
asserted against IGI in the Gallo Action without further resort to the
courts. The letter provides a general description of Mr. Gallo's claims
and a calculation of damages allegedly sustained by Mr. Gallo relative
thereto. The letter states that Mr. Gallo's damages are calculated to be
in the range of $3,400,000 to $5,100,000. The Company denies liability for
the claims and damages alleged in the letter from Mr. Gallo's counsel dated
November 21, 2003, and as such, the Company did not make any formal
response thereto. Mr. Gallo has contacted the Company's Chief Executive
Officer & Chairman, Frank Gerardi, in a continued effort to initiate
settlement discussions. As of the present date, the Company continues to
deny any merit and/or liability for the claims alleged by Mr. Gallo and has
not engaged in any formal settlement discussions with either Mr. Gallo or
his attorneys.
On December 8, 2003, Mr. Gallo filed suit against Novavax, Inc. in
the Superior Court of New Jersey, Law Division, Atlantic County, docket no.
ATL-L-3388-03, asserting claims under seven counts for damages allegedly
sustained as a result of the cancellation of certain Novavax stock options
held by Mr. Gallo due to his termination from IGI in November 1997 for
willful misconduct (referred to as the "Novavax Action").
On March 5, 2004, Novavax filed an Answer denying the allegations
asserted by Mr. Gallo in his First Amended Complaint. In addition, while
denying any liability under the First Amended Complaint, Novavax also filed
a Third Party Complaint in the Novavax Action against the Company for
contribution and indemnification, alleging that if liability for Mr.
Gallo's claims is found, the Company has primary liability for any and all
such damages sustained.
IGI has been notified by its insurance carriers that coverage is not
afforded under their respective policies of insurance for defense and/or
indemnification of the claims alleged by the Third Party Complaint. After
IGI was notified of the foregoing, but prior to IGI's filing of any
responsive pleading, the Third Party Complaint against IGI was voluntarily
dismissed without prejudice by Novavax on June 30, 2004. Novavax may at
any time pursuant to the rules of court re-file its Third Party Complaint
against IGI.
In July 2004, Novavax filed a motion for summary judgment on all
claims asserted under Gallo's First Amended Complaint (referred to as "the
SJ Motion"). Gallo filed in opposition to the SJ Motion contesting all
relief sought thereunder. In August 2004, the Court held a hearing on the
SJ Motion and denied without prejudice the relief sought by the motion for
dismissal of Gallo's First
39
Amended Complaint. Upon information and belief, the parties are currently
proceeding with discovery in the Novavax Action. The Company, as a non-
party witness in the Novavax Action, was recently served by counsel for
Gallo with a subpoena for the production of documents as responsive
thereto.
As of the date hereof, Novavax has not sought to re-file its Third
Party Complaint against IGI for which coverage was previously denied by its
insurance carriers, Novavax is not precluded from doing so and may seek to
do so in the future.
Other Matters
On April 6, 2000, officials of the New Jersey Department of
Environmental Protection inspected the Company's storage site in Buena, New
Jersey and issued Notices of Violation relating to the storage of waste
materials in a number of trailers at the site. The Company established a
disposal and cleanup schedule and completed the removal of materials from
the site. The Company continues to discuss with the authorities a
resolution of any potential assessment under the NOV's and has accrued the
estimated penalties related to such NOV's.
On March 2, 2001, the Company discovered the presence of
environmental contamination resulting from an unknown heating oil leak at
its Companion Pet Products manufacturing site. The Company immediately
notified the New Jersey Department of Environmental Protection and the
local authorities, and hired a certified environmental contractor to assess
the exposure and required clean up. Based on the initial information from
the contractor, the Company originally estimated the cost for the cleanup
and remediation to be $310,000. In September 2001, the contractor updated
the estimated total cost for the cleanup and remediation to be $550,000. A
further update was performed in December 2002 and the final estimated cost
was increased to $620,000, of which $82,000 remains accrued as of December
31, 2004. The remediation was completed by September 30, 2003. There will
be periodic testing and removal performed, which is projected to span over
the next five years. The estimated cost of the monitoring is included in
the accrual.
This contamination also spread to the property adjacent to the
manufacturing facility and the Company is currently involved in a lawsuit
with the owner of that property, Ted Borz. Mr. Borz runs a business on
that property and he seeking remuneration for loss of income and the
reduction in his property value from IGI as a result of the oil spill. IGI
believes that it has performed all the necessary tasks required to properly
decontaminate Mr. Borz's property. Management does not feel that it is
possible to estimate the outcome of this case at this date.
The Company's common stock is listed on the American Stock Exchange
("AMEX"). Based on the Company's 2004 results, the Company is not in
compliance with the AMEX requirement for reporting income from continuing
operations and net income for the year ended December 31, 2004 which could
subject it to potentially being delisted from AMEX. As of March 15, 2005,
the Company has not been contacted by AMEX concerning the Company's non-
compliance with the AMEX requirements.
15. Employee Benefits
The Company has a 401(k) contribution plan, pursuant to which
employees who have completed six months of employment with the Company or
its subsidiaries as of specified dates, may elect to contribute to the
plan, in whole percentages, up to 18% of compensation. Employees'
contributions are subject to a minimum contribution by participants of 1%
of compensation and a maximum contribution of $13,000 for 2004 and $12,000
for 2003. The Company matches 25% of the first 5% of compensation
contributed by participants and contributes, on behalf of each participant,
$4 per week of employment during the year. The Company contribution is in
the form of either common stock or cash, which is vested immediately. The
Company has recorded charges to expense related to this plan of
approximately $ 8,000, $15,000 and $23,000 in 2004, 2003 and 2002,
respectively.
16. License Agreement with Dr. Michael Holick
On December 24, 2003, the Company entered into a License Agreement
with Dr. Holick and A&D Bioscience, Inc., a Massachusetts corporation
wholly owned by Dr. Holick (collectively referred to as "Holick"), whereby
Holick granted an exclusive license to the Company to all his rights to the
parathyroid hormone related peptide technologies and the glycoside
technologies (referred to as "PTH Technologies" and "Glycoside
Technologies", respectively) that he developed for various clinical usages
including treatment of psoriasis, hair loss and other skin disorders. In
consideration for entering into the License Agreement, Holick received up-
front a $50,000 non-refundable payment from the Company. He also received a
grant of 300,000 stock options under the Company's authorized stock option
plans. Holick was also entitled to receive a $236,000 milestone payment
that was contingent on the execution of a sublicense agreement between the
Company and a third-party for the licensed technology.
40
On April 19, 2004, IGI signed a sublicense agreement with Tarpan
Therapeutics, Inc. ("Tarpan") for the PTH (1-34) technology under which the
third-party will be obligated at its sole cost and expense to develop and
bring the PTH (1-34) technology to market as timely and efficiently as
possible, which includes its sole responsibility for the cost of
preclinical and clinical development, research and development,
manufacturing, laboratory and clinical testing and trials and marketing of
products. In addition, the sublicense agreement calls for various payments
to IGI throughout the term. IGI was paid a lump sum sublicense fee of
$300,000, from which amount IGI paid the sum of $232,000 to Dr. Holick,
representing the $236,000 payment due to Dr. Holick in accordance with the
terms of his License Agreement with the Company, net of $4,000 of additional
legal fees. Certain subsequent royalty payments received by the Company under
the sublicense agreement will be shared with Holick after the Company has
recovered any payments previously made to Holick under the License
Agreement and an amount equal to the value of the options received by
Holick under the License Agreement. The Company is responsible for any and
all costs, fees and expenses for the prosecution and oversight of any
intellectual property rights related to the licensed technologies. The
term of the License Agreement is the longer of twenty (20) years or the
life of each of the patents thereunder. The License Agreement, however,
granted Holick the right to terminate the Company's license to (i) the
Glycoside Technologies if the Company did not sublicense the Glycoside
Technologies within 90 days of the effective date of the License Agreement,
and (ii) the PTH Technologies if the Company did not sublicense the PTH
Technologies within 90 days of the effective date of the License Agreement.
As noted above, the Company entered into a sublicense agreement for the PTH
Technologies on April 19, 2004. The Company did not, however, sublicense
the Glycoside Technologies within the 90 day period. As a result, Holick
terminated the Company's license to the Glycoside Technologies on April 5,
2004. The Company is engaged in discussions with the same third-party
entity for a similar sublicense for the PTH (7-34) technology.
The $50,000 payment to Holick was expensed in the third quarter of
2003 and the $236,000 payment to Holick was expensed in the second quarter
of 2004 because the PTH Technologies are in a preliminary development phase
and do not have any readily determinable alternative future use. The other
consideration called for under the License Agreement, such as amounts
advanced for the prosecution and oversight of any intellectual property
rights related to the licensed technologies which amounted to $27,500 and
the fair value of the 300,000 stock options granted to Holick, which
amounted to $520,000, was also expensed by the Company in the second
quarter of 2004 (included in product development and research expenses in
the Consolidated Statement of Operations), when the sublicense agreement
with Tarpan was executed and Holick could no longer terminate the license
agreement as it relates to the PTH Technologies and the options became
fully vested. The fair value of the stock options was calculated under
SFAS No. 123 using the Black-Scholes model.
41
17. Quarterly Consolidated Financial Data (Unaudited)
Following is a summary of the Company's quarterly results for each of
the quarters in the years ended December 31, 2004 and 2003 (in thousands,
except per share information).
March June September December
31, 2004 30, 2004 30, 2004 31, 2004
-------- -------- --------- ---------
Total revenues $ 987 $ 1,198 $ 582 $ 791
Operating loss (4) (846) (223) (147)
Income (loss) from continuing
operations 3 (842) (219) 166
Net income (loss) 3 (842) (219) 166
======= ======= ======= =======
Basic income (loss) per share $ .00 $ (.07) $ (.02) $ .01
Diluted income (loss) per share .00 (.07) (.02) .01
March June September December
31, 2003 30, 2003 30, 2003 31, 2003
-------- -------- --------- ---------
Total revenues $ 1,008 $ 844 $ 899 $ 806
Operating profit (loss) 32 (520) (241) (243)
Income (loss) from continuing
operations 36 (518) (242) (33)
Net income (loss) 36 (349) (257) 248
======= ======= ======= =======
Basic and diluted income
(loss) per share
Continuing operations $ .00 $ (.05) $ (.02) $ .00
Net income (loss) .00 (.03) (.02) .02
The fourth quarter of 2004 and 2003 include $298,000 and $224,000
respectively of tax benefit from the sale of New Jersey state net operating
loss carryforwards.
42
IGI, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
Additions
Balance -----------------------
at Charged to Charged to Balance
beginning costs and other at end
Description of period expenses accounts Deductions of period
----------- --------- ---------- ---------- ---------- ---------
December 31, 2002:
Allowance for doubtful accounts $122 $ 3 $ 24(C) $114(A) $35
Obsolete and slow moving inventory reserve 5 20 - 15(B) 10
December 31, 2003
Allowance for doubtful accounts $ 35 $ 1 $(20)(D) $ - $16
Obsolete and slow moving inventory reserve 10 9 - 4(B) 15
December 31, 2004
Allowance for doubtful accounts $ 16 1 $ 7(A) $10
Obsolete and slow moving inventory reserve 15 6 - - 21
(A) Relates to write-off of uncollectible accounts and recoveries of
reviously reserved amounts.
(B) Relates to disposition of obsolete inventory.
(C) Relates to a credit balance in accounts receivable that was reclassed
to allowance for doubtful accounts.
(D) Relates to a reclass to deferred income from allowance for doubtful
accounts.
43
IGI, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF
REGULATION S-K (Section 229.601)
(3)(a) Certificate of Incorporation of IGI, Inc., as amended.
[Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8, File No. 33-63700, filed June
2, 1993.]
(3)(b) By-laws of IGI, Inc., as amended. [Incorporated by reference to
Exhibit 2(b) to the Company's Registration Statement on Form S-18,
File No. 002-72262-B, filed May 12, 1981.]
(4) Specimen stock certificate for shares of Common Stock, par value
$.01 per share. [Incorporated by reference to Exhibit 4 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, File No. 001-08568, filed March 28, 2001 ("the
2000 Form 10-K").]
(10.1) IGI, Inc. 1989 Stock Option Plan. [Incorporated by reference to
the Company's Proxy Statement for the Annual Meeting of
Stockholders held May 11, 1989, File No. 001-08568, filed April
12, 1989.]
(10.2) IGI, Inc. Non-Qualified Stock Option Plan. [Incorporated by
reference to Exhibit 3(k) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1991, File No. 001-
08568, filed March 30, 1992 ("the 1991 Form 10-K").]
(10.3) Amendment No. 1 to IGI, Inc. 1991 Stock Option Plan as approved by
Board of Directors on March 11, 1993. [Incorporated by reference
to Exhibit 10(p) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992 ("the 1992 Form 10-K").]
(10.4) Amendment No. 2 to IGI, Inc. 1991 Stock Option Plan as approved by
Board of Directors on March 22, 1995. [Incorporated by reference
to the Appendix to the Company's Proxy Statement for the Annual
Meeting of Stockholders held May 9, 1995, filed April 14, 1995.]
(10.5) Amendment No. 3 to IGI, Inc. 1991 Stock Option Plan as approved by
Board of Directors on March 19, 1997. [Incorporated by reference
to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, File No. 001-08568, filed August
14, 1997.]
(10.6) Amendment No. 4 to IGI, Inc. 1991 Stock Option Plan as approved by
Board of Directors on March 17, 1998. [Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998, File No. 001-08568, filed November 6,
1998.]
(10.7) Supply Agreement, dated as of January 27, 1997, between IGI, Inc.
and Glaxo Wellcome Inc. [Incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q/A, Amendment No. 1,
for the quarter ended March 31, 1997, File No. 001-08568, filed
June 16, 1997.]
(10.8) IGI, Inc. 1998 Director Stock Option Plan as approved by the Board
of Directors on October 19, 1998. [Incorporated by reference to
Exhibit 10.38 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, File No. 001-08568, filed
April 12, 1999 ("the 1998 Form 10-K").]
(10.9) Common Stock Purchase Warrant No. 5 to purchase 150,000 shares of
IGI, Inc. Common Stock issued to Fleet Bank, NH on March 11, 1999.
[Incorporated by reference to Exhibit 10.40 to the 1998 Form
10-K.]
(10.10) IGI, Inc. 1999 Director Stock Option Plan as approved by the Board
of Directors on September 15, 1999. [Incorporated by reference to
Exhibit 99.1 to the Company's Registration on Form S-8, File No.
333-52312, filed December 20, 2000.]
(10.11) Common Stock Purchase Warrant No. 7 to purchase 120,000 shares of
IGI, Inc. Common Stock issued to Mellon Bank, N.A. on March 11,
1999. [Incorporated by reference to Exhibit 10.42 to the 1998
Form 10-K.]
(10.12) Employment Agreement, dated May 1, 1998, between IGI, Inc. and
Paul Woitach. [Incorporated by reference to Exhibit 10.44 to the
1998 Form 10-K.]
(10.13) Loan and Security Agreement by and among Fleet Capital Corporation
and IGI, Inc., together with its subsidiaries, dated October 29,
1999. [Incorporated by reference to Exhibit 10.21 to the
Company's Annual Report for the fiscal year ended December 31,
1999, File No. 0001-08568, filed April 14, 2000 ("the 1999 Form
10-K").]
(10.14) Revolving Credit Note issued by IGI, Inc., together with its
subsidiaries, to Fleet Capital Corporation, dated October 29,
1999. [Incorporated by reference to Exhibit 10.22 to the 1999 Form
10-K.]
(10.15) Term Loan A Note issued by IGI, Inc., together with its
subsidiaries, to Fleet Capital Corporation, dated October 29,
1999. [Incorporated by reference to Exhibit 10.23 to the 1999
Form 10-K.]
(10.16) Term Loan B Note issued by IGI, Inc., together with its
subsidiaries, to Fleet Capital Corporation, dated October 29,
1999. [Incorporated by reference to Exhibit 10.24 to the 1999 Form
10-K.]
(10.17) Capital Expenditure Loan Note issued by IGI, Inc., together with
its subsidiaries, to Fleet Capital Corporation, dated October 29,
1999. [Incorporated by reference to Exhibit 10.25 to the 1999
Form 10-K.]
44
(10.18) Trademark Security Agreement issued by IGI, Inc. in favor of Fleet
Capital Corporation, dated October 29, 1999. [Incorporated by
reference to Exhibit 10.26 to the 1999 Form 10-K.]
(10.19) Trademark Security Agreement issued by IGEN, Inc. in favor of
Fleet Capital Corporation, dated October 29, 1999. [Incorporated
by reference to Exhibit 10.27 to the 1999 Form 10-K.]
(10.20) Trademark Security Agreement issued by Immunogenetics, Inc. in
favor of Fleet Capital Corporation, dated October 29, 1999.
[Incorporated by reference to Exhibit 10.28 to the 1999 Form
10-K.]
(10.21) Patent Security Agreement issued by IGI, Inc. in favor of Fleet
Capital Corporation, dated October 29, 1999. [Incorporated by
reference to Exhibit 10.29 to the 1999 Form 10-K.]
(10.22) Patent Security Agreement issued by IGEN, Inc. in favor of Fleet
Capital Corporation, dated October 29, 1999. [Incorporated by
reference to Exhibit 10.30 to the 1999 Form 10-K.]
(10.23) Pledge Agreement by and between Fleet Capital Corporation and
IGEN, Inc., dated October 29, 1999. [Incorporated by reference to
Exhibit 10.31 to the 1999 Form 10-K.]
(10.24) Open-Ended Mortgage, Security Agreement and Assignment of Leases
and Rents (Atlantic County, New Jersey) issued by IGI, Inc. to
Fleet Capital Corporation, dated October 29, 1999. [Incorporated
by reference to Exhibit 10.32 to the 1999 Form 10-K.]
(10.25) Open-Ended Mortgage, Security Agreement and Assignment of Leases
and Rents (Cumberland County, New Jersey) issued by IGI, Inc. to
Fleet Capital Corporation, dated October 29, 1999. [Incorporated
by reference to Exhibit 10.33 to the 1999 Form 10-K.]
(10.26) Subordination Agreement by and between Fleet Capital Corporation
and American Capital Strategies, Ltd., dated October 29, 1999.
[Incorporated by reference to Exhibit 10.34 to the 1999 Form
10-K.]
(10.27) Note and Equity Purchase Agreement by and among American Capital
Strategies, Ltd. and IGI, Inc., together with its subsidiaries,
dated as of October 29, 1999. [Incorporated by reference to
Exhibit 10.35 to the 1999 Form 10-K.]
(10.28) Series A Senior Secured Subordinated Note issued by IGI, Inc.,
together with its subsidiaries, to American Capital Strategies,
Ltd., dated as of October 29, 1999. [Incorporated by reference to
Exhibit 10.36 to the 1999 Form 10-K.]
(10.29) Series B Senior Secured Subordinated Note issued by IGI, Inc.,
together with its subsidiaries, to American Capital Strategies,
Ltd., dated as of October 29, 1999. [Incorporated by reference to
Exhibit 10.37 to the 1999 Form 10-K.]
(10.30) Warrant to purchase 1,907,543 shares of IGI, Inc. Common Stock,
issued to American Capital Strategies, Ltd. on October 29, 1999.
[Incorporated by reference to Exhibit 10.38 to the 1999 Form
10-K.]
(10.31) Security Agreement issued by IGI, Inc., together with its
subsidiaries, in favor of American Capital Strategies, Ltd., dated
as of October 29, 1999. [Incorporated by reference to Exhibit
10.39 to the 1999 Form 10-K.]
(10.32) Trademark Security Agreement issued by IGI, Inc. in favor of
American Capital Strategies, Ltd., dated as of October 29, 1999.
[Incorporated by reference to Exhibit 10.40 to the 1999 Form
10-K.]
(10.33) Trademark Security Agreement issued by Immunogenetics, Inc. in
favor of American Capital Strategies, Ltd., dated as of October
29, 1999. [Incorporated by reference to Exhibit 10.41 to the 1999
Form 10-K.]
(10.34) Trademark Security Agreement issued by Blood Cells, Inc. in favor
of American Capital Strategies, Ltd., dated as of October 29,
1999. [Incorporated by reference to Exhibit 10.42 to the 1999
Form 10-K.]
(10.35) Trademark Security Agreement issued by IGEN, Inc. in favor of
American Capital Strategies, Ltd., dated as of October 29, 1999.
[Incorporated by reference to Exhibit 10.43 to the 1999 Form
10-K.]
(10.36) Patent Security Agreement issued by IGI, Inc. in favor of American
Capital Strategies, Ltd., dated as of October 29, 1999.
[Incorporated by reference to Exhibit 10.44 to the 1999 Form
10-K.]
(10.37) Patent Security Agreement issued by Immunogenetics, Inc. in favor
of American Capital Strategies, Ltd., dated as of October 29,
1999. [Incorporated by reference to Exhibit 10.45 to the 1999 Form
10-K.]
(10.38) Patent Security Agreement issued by Blood Cells, Inc. in favor of
American Capital Strategies, Ltd., dated as of October 29, 1999.
[Incorporated by reference to Exhibit 10.46 to the 1999 Form
10-K.]
(10.39) Patent Security Agreement issued by IGEN, Inc. in favor of
American Capital Strategies, Ltd., dated as of October 29, 1999.
[Incorporated by reference to Exhibit 10.47 to the 1999 Form
10-K.]
(10.40) Georgia Leasehold Deed to Secure Debt issued by IGI, Inc. in favor
of American Capital Strategies, dated as of October 29, 1999.
[Incorporated by reference to Exhibit 10.48 to the 1999 Form
10-K.]
(10.41) Open-Ended Mortgage, Security Agreement and Assignment of Leases
and Rents (Cumberland County, New Jersey) issued by IGI, Inc. in
favor of American Capital Strategies, Ltd., dated as of October
29, 1999. [Incorporated by reference to Exhibit 10.49 to the 1999
Form 10-K.]
(10.42) Open-Ended Mortgage, Security Agreement and Assignment of Leases
and Rents (Atlantic County, New Jersey) issued by IGI, Inc. in
favor of American Capital Strategies, Ltd., dated as of October
29, 1999. [Incorporated by reference to Exhibit 10.50 to the 1999
Form 10-K.]
(10.43) Pledge and Security Agreement issued by IGI, Inc. and
Immunogenetics, Inc. in favor of American Capital Strategies,
Ltd., dated as of October 29, 1999. [Incorporated by reference to
Exhibit 10.51 to the 1999 Form 10-K.]
(10.44) Employment Agreement between IGI, Inc. and Manfred Hanuschek dated
as of July 26, 1999. [Incorporated by reference to Exhibit 10.52
to the 1999 Form 10-K.]
(10.45) Amendment to Employment Agreement between Manfred Hanuschek and
IGI, Inc. dated March 9, 2000. [Incorporated by reference to
Exhibit 10.53 to the 1999 Form 10-K.]
45
(10.46) Employment Agreement between IGI, Inc. and Robert McDaniel dated
as of September 1, 1999. [Incorporated by reference to Exhibit
10.54 to the 1999 Form 10-K.]
(10.47) Pledge Agreement by and between Fleet Capital Corporation and IGI,
Inc., dated October 29, 1999. [Incorporated by reference to
Exhibit 10.55 to the 1999 Form 10-K.]
(10.48) Employment Agreement between IGI, Inc., and Rajiv Mathur dated
February 22, 1999. [Incorporated by reference to Exhibit 10.56 to
the 1999 Form 10-K.]
(10.49) Amendment No. 1 to the Note and Equity Purchase Agreement by and
between American Capital Strategies, Ltd. and IGI, Inc., together
with its subsidiaries dated as of March 30, 2000. [Incorporated
by reference to Exhibit 10.57 to the 1999 Form 10-K.]
(10.50) Amendment to Loan and Security Agreement by and between Fleet
Capital Corporation and IGI, Inc., together with its subsidiaries
dated as of April 12, 2000. [Incorporated by reference to Exhibit
10.58 to the 1999 Form 10-K.]
(10.51) Amendment No. 2 to Note and Equity Purchase Agreement dated as of
June 26, 2000 by and among IGI, Inc., IGEN, Inc., Immunogenetics,
Inc., Blood Cells, Inc., American Capital Strategies, Ltd. and ACS
Funding Trust I. [Incorporated by reference to Exhibit 99.1 to
the Company's Report on Form 8-K filed July 23, 2000.]
(10.52) Second Amendment to Loan and Security Agreement dated as of June
23, 2000 by and among IGI, Inc., IGEN, Inc., Immunogenetics, Inc.,
Blood Cells, Inc. and Fleet Capital Corporation. [Incorporated by
reference to Exhibit 99.2 to the Company's Report on Form 8-K
filed July 23, 2000.]
(10.53) Termination Agreement dated December 10, 1998 between the Company
and Glaxo Wellcome, Inc. [Incorporated by reference to Exhibit
10.61 to the 1999 Form 10-K.]
(10.54) Asset Purchase Agreement dated as of June 19, 2000 by and between
the Buyer and the Company. [Incorporated by reference to Annex A
to the Company's Definitive Proxy Statement on Schedule 14A
effective September 1, 2000.]
(10.55) Amendment and Waiver to Loan and Security Agreement dated as of
October 31, 2000 between Fleet Capital Corporation and the Company
and its affiliates. [Incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000, filed November 14, 2000.]
(10.56) Letter Waiver dated November 9, 2000 between American Capital
Strategies, Ltd. and the Company and its affiliates. [Incorporated
by reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000, filed November
14, 2000.]
(10.57) Separation Agreement and General Release dated September 1, 2000
between the Company and Paul Woitach. [Incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000, filed November 14, 2000.]
(10.58) Certificate of Release and Termination of Contract dated as of
March 1, 2001 between Genesis Pharmaceutical, Inc. and Tristrata
Technology, Inc. [Incorporated by reference to Exhibit 10.58 to
the 2000 Form 10-K.]
(10.59) Manufacturing and Supply Agreement dated as of February 14, 2001
among IGI, Inc., IGEN, Inc., Immunogenetics, Inc. and Genesis
Pharmaceutical, Inc. [Incorporated by reference to Exhibit 10.59
to the 2000 Form 10-K.]
(10.60) Assignment of Trademark dated as of February 14, 2001 among IGI,
Inc., IGEN, Inc, Immunogenetics, Inc. and Genesis Pharmaceutical,
Inc. [Incorporated by reference to Exhibit 10.60 to the 2000 Form
10-K.]
(10.61) Supply Agreement dated as of March 6, 2001 between Corwood
Laboratory, Inc. and IGI, Inc. [Incorporated by reference to
Exhibit 10.61 to the 2000 Form 10-K.]
(10.62) License Agreement dated as of March 6, 2001 among IGI, Inc., IGEN,
Inc., Immunogenetics, Inc. and its division EVSCO Pharmaceutical
and Corwood Laboratory, Inc. [Incorporated by reference to Exhibit
10.62 to the 2000 Form 10-K.]
(10.63) Employment Agreement between IGI, Inc. and Domenic N. Golato dated
as of August 31, 2000. [Incorporated by reference to Exhibit 10.63
to the 2000 Form 10-K.]
(10.64) IGI, Inc. 1991 Stock Option Plan. [Incorporated by reference to
the Company's Proxy Statement for the Annual Meeting held May 9,
1991, File No. 001-08568, filed April 5, 1991.]
(10.65) Fourth Amendment to Loan and Security Agreement dated as of
February 28, 2001 by and among IGI, Inc., IGEN, Inc.,
Immunogenetics, Inc., Blood Cells, Inc., and Fleet Capital
Corporation. [Incorporated by reference to Exhibit 99.1 to the
Company's Report on Form 8-K filed April 20, 2001.]
(10.66) Amendment No. 4 to Note and Equity Purchase Agreement dated as of
February 28, 2001 by and among IGI, Inc., IGEN, Inc.,
Immunogenetics, Inc., Blood Cells, Inc., American Capital
Strategies, Ltd. and ACS Funding Trust I. [Incorporated by
reference to Exhibit 99.2 to the Company's Report on Form 8-K
filed April 20, 2001.]
(10.67) Asset Purchase Agreement dated as of February 6, 2002 by and
between Vetoquinol, U.S.A., Inc. and IGI, Inc. with Vetoquinol,
S.A. a party thereto with respect to Article X thereof.
[Incorporated by reference to Exhibit 99.1 to the Company's Report
on Form 8-K filed February 7, 2002.]
(10.68) Research and Development Agreement dated as of January 2, 2001
between IGI, Inc. and Prime Pharmaceutical Corporation.
[Incorporated by reference to Exhibit 10.68 on the Company's
Annual Report on Form 10-K for fiscal year ended December 31,
2001, File No. 001-08568, filed on March 15, 2002 ("the 2001 Form
10-K").]
(10.69) Manufacturing and Supply Agreement dated November 5, 2002 between
IGI, Inc. and Desert Whale Jojoba Company, Inc. [Incorporated by
reference to Exhibit 10.69 on the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2002, File No.
001-08568, filed March 10, 2003 ("the 2002 Form 10-K).]
(10.70) Loan Agreement dated January 10, 2002 between IGI, Inc. and the
New Jersey Economic Development Authority. [Incorporated by
reference to Exhibit 10.70 to the 2002 Form 10-K]
(10.71) Promissory Note dated January 10, 2002 by IGI, Inc. to the New
Jersey Economic Development Authority. [Incorporated by reference
to Exhibit 10.71 to the 2002 Form 10-K]
46
(10.72) Mortgage and Security Agreement and Fixture Filing dated January
10, 2002 between IGI, Inc. and the New Jersey Economic
Development Authority. [Incorporated by reference to Exhibit
10.72 to the 2002 Form 10-K]
(10.73) Contract of Sale for Real Estate dated October 21, 2001 between
IGI, Inc. and Poultry Investors, LLC. [Incorporated by reference
to Exhibit 10.73 to the 2002 Form 10-K]
(10.74) Addendum dated November 14, 2001 to Contract of Sale for Real
Estate dated October 21, 2001 between IGI, Inc. and Poultry
Investors, LLC. [Incorporated by reference to Exhibit 10.74 to
the 2002 Form 10-K]
(10.75) Partial Mortgage Release dated February 20, 2002 by Fleet Capital
Corporation for real property designated on the municipal tax map
for the Township of Buena Vista, New Jersey as Lot 23.01, Block
5501. [Incorporated by reference to Exhibit 10.75 to the 2002
Form 10-K]
(10.76) Partial Mortgage Release dated February 22, 2002 by American
Capital Strategies, Ltd. for real property designated on the
municipal tax map for the Township of Buena Vista, New Jersey as
Lot 23.01, Block 5501. [Incorporated by reference to Exhibit
10.76 to the 2002 Form 10-K]
(10.77) Amendment No. 5 dated May 30, 2002 to Note and Equity Agreement
by and among IGI, Inc., IGEN, Inc., Immunogenetics, Inc., Blood
Cells, Inc. and American Capital Strategies, Ltd. [Incorporated
by reference to Exhibit 10.77 to the 2002 Form 10-K]
(10.78) Termination and Release of Pledge and Security Agreement dated
May 31, 2002 by and among IGI, Inc., IGEN, Inc., Immunogenetics,
Inc., Blood Cells, Inc. and American Capital Strategies, Ltd.
[Incorporated by reference to Exhibit 10.78 to the 2002 Form
10-K]
(10.79) Termination and Release of Patent Security Agreement (United
States Patents) dated May 30, 2002 between American Capital
Strategies, Ltd. and IGI, Inc. [Incorporated by reference to
Exhibit 10.79 to the 2002 Form 10-K]
(10.80) Termination and Release of Patent Security Agreement (United
States Patents) dated May 30, 2002 between American Capital
Strategies, Ltd. and Blood Cells, Inc. [Incorporated by reference
to Exhibit 10.80 to the 2002 Form 10-K]
(10.81) Termination and Release of Patent Security Agreement (United
States Patents) dated May 30, 2002 between American Capital
Strategies, Ltd. and IGEN, Inc. [Incorporated by reference to
Exhibit 10.81 to the 2002 Form 10-K]
(10.82) Termination and Release of Patent Security Agreement (United
States Patents) dated May 30, 2002 between American Capital
Strategies, Ltd. and Immunogenetics, Inc. [Incorporated by
reference to Exhibit 10.82 to the 2002 Form 10-K]
(10.83) Termination and Release of Trademark Security Agreement dated May
30, 2002 between American Capital Strategies, Ltd. and IGI, Inc.
[Incorporated by reference to Exhibit 10.83 to the 2002 Form
10-K]
(10.84) Termination and Release of Trademark Security Agreement dated May
30, 2002 between American Capital Strategies, Ltd. and IGEN, Inc.
[Incorporated by reference to Exhibit 10.84 to the 2002 Form
10-K]
(10.85) Termination and Release of Trademark Security Agreement dated May
30, 2002 between American Capital Strategies, Ltd. and
Immunogenetics, Inc. [Incorporated by reference to Exhibit 10.85
to the 2002 Form 10-K]
(10.86) Termination and Release of Trademark Security Agreement dated May
30, 2002 between American Capital Strategies, Ltd. and Blood
Cells, Inc.[Incorporated by reference to Exhibit 10.86 to the
2002 Form 10-K]
(10.87) Termination and Release of Trademark Security Agreement dated May
31, 2002 by and among Wachovia Bank, N.A. and IGI, Inc., IGEN,
Inc., Immunogenetics, Inc., Micro-Pak, Inc. and Micro Vescular
Systems, Inc. [Incorporated by reference to Exhibit 10.87 to the
2002 Form 10-K]
(10.88) Termination and Release of Trademark Security Agreement dated May
31, 2002 between Fleet Capital Corporation and IGI, Inc.
[Incorporated by reference to Exhibit 10.88 to the 2002 Form
10-K]
(10.89) Termination and Release of Trademark Security Agreement dated May
31, 2002 between Fleet Capital Corporation and Immunogenetics,
Inc. [Incorporated by reference to Exhibit 10.89 to the 2002 Form
10-K]
(10.90) Termination and Release of Trademark Security Agreement dated May
31, 2002 between Fleet Capital Corporation and IGEN, Inc.
[Incorporated by reference to Exhibit 10.90 to the 2002 Form
10-K]
(10.91) Termination and Release of Patent Security Agreement dated May
31, 2002 between Fleet Capital Corporation and IGI, Inc.
[Incorporated by reference to Exhibit 10.91 to the 2002 Form
10-K]
(10.92) Termination and Release of Patent Security Agreement dated May
31, 2002 between Fleet Capital Corporation and IGEN, Inc.
[Incorporated by reference to Exhibit 10.92 to the 2002 Form
10-K]
(10.93) Manufacturing and Supply Agreement dated May 31, 2002 between
IGI, Inc. and IGEN, Inc. (collectively Suppliers) and Vetoquinol,
USA, Inc. (Purchaser). [Incorporated by reference to Exhibit
10.93 to the 2002 Form 10-K]
(10.94) Technological Rights Agreement dated May 31, 2002 between IGI,
Inc. and IGEN, Inc. (collectively Sellers) and Vetoquinol, USA,
Inc. (Purchaser). [Incorporated by reference to Exhibit 10.94 to
the 2002 Form 10-K]
(10.95) Supplemental Agreement dated May 31, 2002 between IGI, Inc.
(Seller) and Vetoquinol, USA, Inc. (Buyer). [Incorporated by
reference to Exhibit 10.95 to the 2002 Form 10-K]
(10.96) Discharge of Mortgage dated May 29, 2002 by Fleet Capital
Corporation. [Incorporated by reference to Exhibit 10.96 to the
2002 Form 10-K]
(10.97) Partial Release of Mortgage dated May 31, 2002 by American
Capital Strategies, Ltd. for real property designated on the
municipal tax map of the Borough of Buena as Lot 1, Block 205.
[Incorporated by reference to Exhibit 10.97 to the 2002 Form
10-K]
(10.98) Amendment dated March 19, 2002, to License Agreement by and among
Ethicon, Inc. and IGI, Inc., IGEN, Inc. and Immunogenetics, Inc.
[Incorporated by reference to Exhibit 10.98 to the 2002 Form
10-K]
(10.99) Product Development Agreement dated November 10, 2003, between
Pure Energy Corporation d/b/a/ Pure Energy of America, Inc. and
IGI, Inc. [Incorporated by reference to Exhibit 10.99 on the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2003, File No. 001-08568, filed April 14, 2004 ("the
2003 Form 10-K).]
(10.100) Severance Agreement dated effective as of August 15, 2003,
between John F. Ambrose and IGI, Inc. [Incorporated by reference
to Exhibit 10.100 to the 2003 Form 10-K]
(10.101) Employment Agreement dated September 26, 2003, between Michael F.
Holick, MD, PhD and IGI, Inc. [Incorporated by reference to
Exhibit 10.101 to the 2003 Form 10-K]
(10.102) Severance Agreement dated effective as of January 9, 2004,
between Garry Hardwick and IGI, Inc. [Incorporated by reference
to Exhibit 10.102 to the 2003 Form 10-K]
(10.103) License Agreement effective December 24, 2003, by and among
Michael F. Holick, MD, PhD, A&D Bioscience, Inc. and IGI, Inc.
[Incorporated by reference to Exhibit 10.103 to the 2003 Form
10-K]
(10.104) License Agreement dated February 9, 2004, between Universal
Chemical Technologies, Inc. and IGI, Inc. [Incorporated by
reference to Exhibit 10.104 to the 2003 Form 10-K]
(10.105) Contract for Sale of Real Estate dated October 22, 2003, between
CPB, Inc. ("Buyer") and IGI, Inc. ("Seller").[Incorporated by
reference to Exhibit 10.105 to the 2003 Form 10-K]
(10.106) Cancellation of Mortgage and Security Agreement and Fixture
Filing dated February 10, 2004 by the New Jersey Economic
Development Authority for real property real property and
premises situated, lying and being known as 701 Harding Highway,
Buena, Atlantic Country, New Jersey, designated on the Municipal
Tax Map of the Borough of Buena as Block 205, Lot 1.
[Incorporated by reference to Exhibit 10.106 to the 2003 Form
10-K]
47
(10.107) Agreement for Development Services dated March 27, 2003, between
Chattem, Inc. and IGI, Inc. [Incorporated by reference to Exhibit
10.107 to the 2003 Form 10-K]
(10.108) Material Transfer Agreement dated December 1, 2003, between The
Procter & Gamble Company and IGI, Inc. [Incorporated by
reference to Exhibit 10.108 to the 2003 Form 10-K]
(10.109) Sublicense Agreement between IGI, Inc. and Tarpan Therapeutics,
Inc. dated April 19, 2004 [Incorporated by reference to Exhibit
10.109 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004, filed May 14, 2004]
(10.110) Severance agreement between IGI, Inc. and Domenic N. Golato,
Chief Financial Officer dated June 30, 2004. [Incorporated by
reference to Exhibit 10.110 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004, filed August 13,
2004.]
(10.111) Sublicense Agreement between IGI, Inc. and University of
Massachusetts dated July 27, 2004 [Incorporated by reference to
Exhibit 10.111 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004, filed August 13, 2004.]
(10.112) Amendment of the supply and license agreement between IGI, Inc.
and Estee Lauder, Inc. [Incorporated by reference to Exhibit 10.1
to the Company's Report on Form 8-K filed November 24, 2004.]
(21) List of Subsidiaries. [Incorporated by reference to Exhibit 21 to
the 1999 Form 10-K.]
*(23.1) Consent of KPMG LLP.
*(23.2) Consent of Amper, Politziner & Mattia P.C.
*(31.1) Certification of the Chairman and Chief Executive Officer
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
*(31.2) Certification of the Vice President of Finance Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*(32.1) Certification of the Chairman and Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
*(32.2) Certification of the Vice President of Finance Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Filed herewith.
48