SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No.
----------------- -------------------
September 30, 1999 001-08568
IGI, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 01-0355758
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Wheat Road and Lincoln Avenue, Buena, NJ 08310
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
856-697-1441
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Registrant's telephone number, including area code
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 |_|
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
Common Shares Outstanding at November 9, 1999
9,609,930
<PAGE>
Item 1. Financial Statements
PART I FINANCIAL INFORMATION
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(thousands, except share and per share information) Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Sales, net $ 8,150 $ 8,125 $ 24,982 $ 23,863
Licensing and royalty income 634 54 1,407 257
----------- ----------- ----------- -----------
Total revenues 8,784 8,179 26,389 24,120
Cost and expenses:
Cost of sales 4,615 4,636 13,395 13,086
Selling, general and administrative expenses 3,427 3,495 10,595 11,223
Product development and research expenses 381 346 1,017 1,050
----------- ----------- ----------- -----------
Operating profit (loss) 361 (298) 1,382 (1,239)
Interest expense, net 835 745 2,500 2,284
----------- ----------- ----------- -----------
Loss before provision for income taxes (474) (1,043) (1,118) (3,523)
Benefit for income taxes 140 375 333 1,268
----------- ----------- ----------- -----------
Net loss $ (334) $ (668) $ (785) $ (2,255)
=========== =========== =========== ===========
Basic and diluted net loss per common share $ (.03) $ (.07) $ (.08) $ (.24)
Basic and diluted weighted average number of
common shares outstanding 9,593,644 9,466,667 9,554,470 9,466,667
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(amounts in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 1,051 $ 1,068
Accounts receivable, less allowance for doubtful accounts
of $555 and $516, in 1999 and 1998, respectively 6,178 6,462
Licensing and royalty receivable 496 440
Inventories, net 7,797 7,406
Current deferred taxes, net 1,275 1,275
Prepaid and other current assets 394 433
---------- ----------
Total current assets 17,191 17,084
Investments 535 535
Property, plant and equipment, net 9,572 9,479
Deferred income taxes,net 4,525 4,188
Other assets 918 770
---------- ----------
Total Assets $ 32,741 $ 32,056
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Credit line 12,000 $ 12,000
Revolving credit facility 6,657 6,657
Current portion of notes payable 650 661
Accounts payable 3,172 3,235
Accrued payroll 567 196
Due to stockholder 725 380
Accrued interest 926 432
Other accrued expenses 1,642 1,614
Income taxes payable 16 16
---------- ----------
Total current liabilities 26,355 25,191
Notes payable 208 408
Deferred income 566 534
---------- ----------
Total Liabilities 27,129 26,133
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock $.01 par value, 1,000,000 authorized, -- --
none outstanding
Common stock $.01 par value, 50,000,000 and 30,000,000 shares authorized in
1999 and 1998, respectively; 9,691,155 and
9,648,931 shares issued in 1999 and 1998, respectively 97 97
Additional paid-in capital 19,913 19,961
Accumulated deficit (12,757) (11,972)
---------- ----------
7,253 8,086
Less treasury stock, 105,510 and 136,014 shares at cost in
1999 and 1998, respectively (1,641) (2,163)
---------- ----------
Total stockholders' equity 5,612 5,923
---------- ----------
Total Liabilities and Stockholders' Equity $ 32,741 $ 32,056
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1999 1998
---- ----
(amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (785) $ (2,255)
Reconciliation of net loss to net cash used by operating activities:
Depreciation and amortization 706 926
Gain on Sale of Assets (30)
Write-off of other assets 105 --
Provision for loss on accounts receivable and inventories 328 1,240
Recognition of deferred revenue (138) --
Deferred income taxes (337) (1,521)
Stock compensation expense for warrants and options 423 337
Changes in operating assets and liabilities:
Accounts receivable 253 423
Inventories (688) 1,872
Receivable under royalty agreements (56) --
Prepaid and other assets 192 215
Accounts payable and accrued expenses 1,226 113
Deferred revenue 58 --
Short term notes payable, operating (364) --
---------- ----------
Net cash provided by operating activities: 893 1,350
---------- ----------
Cash flows from investing activities:
Capital expenditures (616) (318)
Proceeds from sale of assets 40 --
(Increase) in other assets (334) (361)
---------- ----------
Net cash (used by) investing activities (910) (679)
---------- ----------
Cash flows from financing activities:
Repayments of debt -- (436)
---------- ----------
Net cash (used by) financing activities -- (436)
---------- ----------
Net decrease in cash and equivalents (17) 235
Cash and equivalents at beginning of year 1,068 1,196
---------- ----------
Cash and equivalents at September 30, 1999 and 1998 $ 1,051 $ 1,431
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared by
IGI, Inc. without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"), and reflect all adjustments
which, in the opinion of management, are necessary for a fair statement of
the results for the interim periods presented. All such adjustments are of
a normal recurring nature. Certain previously reported amounts have been
reclassified to conform with the current period presentation.
Certain information in footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the SEC, although the Company believes the disclosures are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the financial statements and
the notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 (the "1998 10-K Annual Report").
2. Refinancing
On October 29, 1999, the Company entered into a $22 million senior bank
credit agreement ("Senior Debt Agreement") with Fleet Capital Corporation
and a $7 million subordinated debt agreement ("Subordinated Debt
Agreement") with American Capital Strategies Ltd.
These agreements have enabled the Company to retire the approximately
$18.6 million of outstanding debt with its former bank lenders, Fleet
Bank, NH, and Mellon Bank, N.A. In connection with the repayment of their
loans, the Company's former bank lenders agreed to return to the Company
for cancellation, warrants held by them for the purchase of 810,000 shares
of the Company's common stock at exercise prices ranging from $2.00 to
$3.50. Also, approximately $600,000 of accrued interest was waived by the
former bank group.
The Senior Debt Agreement provides for a revolving line of credit facility
of up to $12 million based upon qualifying accounts receivable and
inventory, a $7 million term loan and a $3 million capital expenditures
credit facility. The borrowings under the revolving line of credit bear
interest at the prime rate plus 1.0% or the London Interbank offered rate
plus 3.25%. The borrowings under the term loan and capital expenditure
credit facility bear interest at the prime rate plus 1.5% or the London
Interbank offered rate plus 3.75%. The Senior Debt Agreement has a
maturity date of October 2004, but does provide for renewal subject to
satisfaction of certain conditions.
Borrowings under the Subordinated Debt Agreement bear interest at the rate
of 12.5% plus an additional interest component at the rate of 2% which is
payable at the Company's election in cash or Company common stock. The
Subordinated Debt Agreement matures in October 2006. In connection with
the Subordinated Debt Agreement the Company issued to the lender warrants
to purchase 1,907,543 shares of IGI Common Stock at an exercise price of
$.01 per share. These warrants contain a right to require the Company to
repurchase the warrants and the common stock acquired upon exercise of
such warrants at their then fair market value under certain circumstances,
including the earliest to occur of the following: before October 29, 2004,
the date of payment in full of the Senior Debt and Subordinate Debt and
all senior indebtedness of the Company or the sale of the Company or 30%
or more of its assets. American Capital Strategies, Ltd. has also agreed
under certain circumstances, to limit or relinquish its right to require
repurchase of these warrants and the Common Stock acquired upon exercise
of such warrants. The warrants issued to American Capital Strategies, Ltd.
will be valued utilizing the Black-Scholes valuation model and amortized
over the life of the underlying agreement as a component of interest
expense. The Company estimates the fair value of each warrant to
approximate the fair market value of a share of the Company Common Stock
at the date of grant. The underlying warrants are considered to be a
derivative instrument and will be marked-to-market.
5
<PAGE>
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
These agreements also contain financial and other covenants and
restrictions, which if breached by the Company would allow the lenders to
demand prompt repayment of all outstanding indebtedness. In addition,
American Capital Strategies, Ltd. has the right to designate for election
to the Company's Board of Directors that number of directors that bears
the same ratio to the total number of directors as the number of shares of
Company common stock owned by it plus the number of shares issuable upon
exercise of its warrants bear to the total number of outstanding shares of
Company common stock on a fully-diluted basis, provided that so long as it
owns any common stock, or warrants or any of its loans are outstanding, it
shall have the right to designate at least one director.
Approximately $24.5 million was immediately available to the Company under
the Senior Debt and Subordinated Debt Agreements. The new agreements have
enabled the Company to retire the approximately $18.6 million outstanding
with the previous bank lenders, cover associated closing costs and provide
a borrowing facility for working capital and capital expenditures. To
secure all of its obligations under these agreements, the Company has
granted the lenders a security interest in all of the assets and
properties of the Company and its subsidiaries.
Despite its new financing arrangements, the Company remains highly
leveraged, and it must improve its operating results in the future to
maintain compliance with the covenants contained in its loan agreements;
furthermore, availability for borrowing under the revolving line of credit
facility is dependent on the level of its qualifying accounts receivable
and inventory. The Company will require an increase in its available
working capital for any significant expansion of its business in the
future, including capital for any significant expansion of its business in
the future, including improvement and modernization of its production
facilities. Accordingly, the Company will continue to seek additional
equity funds for these purposes; however, no assurance can be given that
it will be successful in obtaining additional equity on terms favorable to
the Company or on any terms.
3. Net Loss Per Common Share
Basic net 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 loss per share of common stock is computed using the weighted
average number of shares of common stock and potential dilutive stock
outstanding during the period. Potential dilutive common stock includes
shares issuable upon the exercise of common stock options and warrants.
The effect of the Company's potential dilutive common stock was
anti-dilutive for the three and nine months ended September 30, 1999 and
1998; as a result, basic and dilutive weighted average number of common
shares outstanding and net loss per common share is the same.
4. Inventories
Inventories are valued at the lower of cost, using the first-in, first-out
("FIFO") method, or market. During the fourth quarter of 1998, the Company
changed its method of determining the cost of inventories from the
last-in, first-out ("LIFO") method to the FIFO method. The change was made
because the Company believes its financial position is the primary concern
of its constituents (shareholders, bank lenders, trade creditors, etc.)
and the accounting change reflects inventory at a value which better
represents current costs. As required by generally accepted accounting
principles, the Company retroactively restated prior years' financial
statements for this change in the fourth quarter of 1998. The aggregate
effect of this restatement was a decrease in stockholders' equity of
$294,000 as of December 31, 1997. The restatement had no effect on 1998
results.
6
<PAGE>
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Inventories at September 30, 1999 and December 31, 1998 consist of:
(amounts in thousands) September 30, 1999 December 31, 1998
------------------ -----------------
Finished goods $2,617 $2,785
Work-in-process 2,997 2,210
Raw materials 2,183 2,411
------ ------
Total $7,797 $7,406
====== ======
5. Legal Proceedings
There were no material developments in the legal matters previously
reported in the 1998 10-K Annual Report.
On April 14, 1999, a lawsuit was filed in the U.S. District Court for the
Southern District of New York by Cohanzick Partners, LP, against IGI,
Inc., and certain of its present and former directors, officers and
employees. The suit, seeks approximately $420,000 in actual damages
together with fees, costs and interest, alleges violations of the
securities laws, fraud, and negligent misrepresentation concerning certain
disclosures made and other actions taken by the Company in 1996 and 1997.
The Company will be required to respond to the suit by the end of 1999.
The Company believes that the plaintiff's allegations are factually
incorrect and legally inadequate and will defend the lawsuit vigorously.
While the lawsuit is at a very preliminary stage and no discovery has
taken place, the Company believes that an unfavorable outcome in the suit
would not have a material adverse impact upon the Company's financial
condition, although it could negatively affect the results of operations
for the period in which the matter is resolved.
6. Business Segments
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," in
1998 which affects the way the Company reports information about its
operating segments. The Company elected to change reportable segments from
two segments (Animal Health Products and Consumer Products) into three
segments (Poultry Vaccines, Companion Pet Products and Consumer Products).
The principal reasons for the change are that products from each of the
Company's segments serve different markets, use different channels of
distribution, and have two different forms of government oversight. The
Company elected to change the reporting of its business segments as of
January 1, 1998.
7
<PAGE>
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Summary data related to the Company's reportable segments for the three
and nine month periods ended September 30, 1999 and 1998 appear below:
<TABLE>
<CAPTION>
Poultry Companion Pet Consumer
Vaccines Products Products Corporate* Consolidated
-------- -------- -------- ---------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Three months ended September 30:
1999
Revenues $ 3,415 $ 3,861 $ 1,508 $ -- $ 8,784
Operating profit (loss) (256) 1,119 840 (1,342) 361
1998
Revenues $ 3,705 $ 3,155 $ 1,319 $ -- $ 8,179
Operating profit (loss) (335) 641 724 (1,328) (298)
Nine months ended September 30:
1999
Revenues $ 10,542 $ 10,788 $ 5,059 $ -- $ 26,389
Operating profit (loss) (670) 3,289 2,845 (4,082) 1,382
1998
Revenues $ 11,485 $ 9,266 $ 3,369 $ -- $ 24,120
Operating profit (loss) 67 2,092 1,303 (4,701) (1,239)
</TABLE>
* Notes:
(A) Unallocated corporate expenses are principally general and
administrative expenses.
(B) Transactions between reportable segments are not material.
8
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This information should be read in conjunction with the unaudited
consolidated financial statements and the notes thereto included in Item 1
of this Quarterly Report and the audited consolidated financial statements
and notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations for the fiscal year ended December 31,
1998, contained in the Company's 1998 10-K Annual Report.
The following discussion and analysis may contain forward-looking
statements. Such statements are subject to certain risks and
uncertainties, including those discussed below or in the Company's 1998
10-K Annual Report, that could cause actual results to differ materially
from the Company's expectations. See "Factors Which May Affect Future
Results" below and in the 1998 10-K Annual Report. Readers are cautioned
not to place undue reliance on any forward-looking statements, as they
reflect management's analysis as of the data hereof. The Company
undertakes no obligation to release the results of any revision to these
forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
anticipated events.
Results Of Operations
Settlement of U.S. Regulatory Proceedings
The Company has substantially resolved the legal and regulatory issues
that arose in 1997 and 1998. From mid-1997 through most of 1998, the
Company was subjected to intense governmental and regulatory scrutiny and
was also confronted with a number of material operational issues, as
previously reported in Item 3. "Legal Proceedings" in the 1998 10-K Annual
Report. These matters had a material adverse effect on the Company's
financial condition and results of operations in 1998 and 1997, and
resulted in the departure of most of the Company's senior management.
On March 24, 1999, the Company reached settlement with the Departments of
Justice, Treasury and Agriculture regarding their pending investigations.
Part of the settlement is subject to court approval, which the Company
believes will be obtained in due course. The terms of the settlement
agreement provide that the Company will enter a plea of guilty to a
misdemeanor and will pay a fine of $15,000 and restitution in the amount
of $10,000. In addition, beginning January 2000, the Company will make
monthly payments to the Treasury Department through the period ending
October 31, 2001 in the total amount of $225,000. The expense of settling
with these agencies was reflected in the 1998 results of operations. The
settlement does not affect the informal inquiry being conducted by the
Securities and Exchange Commission ("SEC"), nor does it affect possible
governmental action against former employees of the Company. Management
does not expect that the SEC informal inquiry will have a material adverse
effect on the financial position, cash flow or operations of the Company.
Three months ended September 30, 1999 compared to September 30, 1998
The Company had a net loss of $334,000, or $.03 per share, for the three
months ended September 30, 1999 as compared to a net loss of $668,000, or
$.07 per share, for the third quarter ended September 30, 1998. The
principal reasons for the reduction in the loss from last year were higher
revenues and gross profit.
Total revenues for the quarter ended September 30, 1999 were $8,784,000,
which represents an increase of $605,000, or 7%, from revenues of
$8,179,000 for the quarter ended September 30, 1998. Companion Pet
Products increased $706,000 or 22% over the comparable quarter in 1998,
primarily due to increased product domestic sales which includes new
product launches. Consumer Products revenues increased $189,000, or 14%,
for the third quarter of 1999 due primarily to royalty income under
licensing and supply agreements. These increases were partially offset by
decreased Poultry Vaccine sales of $290,000 or 8% related to limited
production capacity at the Company's Vineland facility. Management has
sought to modernize its Vineland poultry vaccine equipment and facilities
and to increase production capacity to match orders from its sales
9
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
force. Limited production capacity, old equipment, combined with increased
requirements for higher potency and larger volume vaccines has limited
Vineland's ability to produce as much vaccine as it can sell. Management
expects that the capital expenditure facility availability under its new
financing arrangements (refer to "Liquidity and Capital Resources") will
aid the Company in financing the commencement of its modernization and
production capacity program.
Cost of sales decreased by $21,000, or .5%, from the quarter ended
September 30, 1998. As a percentage of revenues, cost of sales decreased
from 57% in the quarter ended September 30, 1998 to 53% in the quarter
ended September 30, 1999. The resulting increase in gross profit in 1999
compared to 1998 was attributable to higher revenues generated from
Companion Pet Products and Consumer Products which offset the lower
margins associated with Poultry Vaccine revenue.
Selling, general and administrative expenses decreased by $68,000, or 2%,
from $3,495,000 in the quarter ended September 30, 1998 to $3,427,000 in
the quarter ended September 30, 1999. As a percentage of revenues, these
expenses were 43% of revenues for the quarter ended September 30, 1998
compared to 39% in the quarter ended September 30, 1999. Selling and
marketing expenses decreased by $145,000 compared to the same period last
year principally related to lower vaccine selling expenses due to the
lower vaccine sales. General and administrative expenses increased by
$77,000, or 6% compared to the third quarter 1998.
Product development and research expenses increased by $35,000, or 10%,
compared to the quarter ended September 30, 1998. The increase was
principally related to the timing of expenditures.
Net interest expense increased $90,000, or 12%, from $745,000 in the
quarter ended September 30, 1998 to $835,000 in the quarter ended
September 30, 1999, due principally to the amortization of the warrant
cost in 1999 of $84,000, which did not occur in the third quarter of 1998.
Nine months ended September 30, 1999 compared to September 30, 1998
The Company had a net loss of $785,000 or $.08 per share, for the nine
months ended September 30, 1999 as compared to a net loss of $2,255,000 or
$.24 per share, for the nine months ended September 30, 1998. The
principal factors contributing to the decreased loss in 1999 were higher
revenues and gross profit coupled with lower operating costs offset
somewhat by higher interest expense in the nine months of 1999.
Total revenues for the nine months ended September 30, 1999 were
$26,389,000, an increase of $2,269,000, or 9%, over revenues of
$24,120,000 for the nine months ended September 30, 1998. Consumer
Products revenues increased $1,690,000, or 50%, for the nine months of
1999 due primarily to an increase of $1,150,000 in license and royalty
income in 1999 over 1998 and an increase in revenues from Estee Lauder.
Companion Pet Products revenues increased $1,522,000 or 16% over the
comparable period in 1998, due to increased international sales of
$480,000 and increased domestic sales of $1,042,000 for the nine months
ended in September 1999 over the comparable period in 1998. This revenue
increase includes the launch of new products which generated approximately
$400,000 in additional revenue. These increases were partially offset by
decreased poultry vaccine sales of $943,000 or 8% from the nine months
ended in September 1998. Revenues of approximately $1,200,000 from poultry
vaccine sales included in the nine months ended September 1998 were
attributable to orders received in prior periods that were not released
for shipment until the first quarter of 1998 when the United States
Department of Agriculture ("USDA") imposed stop shipment order was lifted.
Management has sought to modernize its Vineland poultry vaccine equipment
and facilities and to increase production capacity to match orders from
its sales force. Limited production capacity, old equipment, combined with
increased requirements for higher potency and larger volume vaccines has
limited Vineland's ability to produce as much vaccine as it can sell.
Management expects that the capital expenditure facility availability
under its new financing arrangements (refer to "Liquidity and Capital
Resources") will aid the Company in financing the commencement of its
modernization and production capacity program.
10
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Cost of sales increased by $309,000, or 2%, for the nine months September
30, 1999 due primarily to increased sales volume. However, as a percentage
of revenues, cost of sales decreased from 54% for the nine months ended
September 30, 1998 to 51% for the same period ended September 30, 1999.
This decrease in cost of sales as a percentage of revenues was
attributable to increased sales and improved production efficiency
primarily from Companion Pet Products and Consumer Products revenues.
Selling, general and administrative expenses decreased by $628,000, or 6%,
from $11,223,000 for the nine months ended September 30, 1998 to
$10,595,000 for the same period in 1999. As a percentage of revenues,
these selling, general and administrative expenses were 40% of revenues
for the nine months ended September 30, 1999 compared to 47% for the same
period in 1998. General and administrative expenses declined by $583,000
compared to the nine months of 1998 principally due to a decrease in
expenditures for professional fees primarily related to the legal, audit
and consulting expenses that were incurred in the nine months of 1998 in
connection with the Company's internal and governmental investigations.
Selling and marketing expenses decreased by $45,000 compared to the same
period last year.
Product development and research expenses decreased by $33,000, or 3%,
compared to the nine months ended September 30, 1998 principally related
to the timing of expenditures.
Net interest expense increased $216,000, or 9%, from $2,284,000 for the
nine months ended September 30, 1998 to $2,500,000 for the nine months
ended September 30, 1999, due to higher interest rates and additional bank
fees in the third quarter of 1999.
Liquidity and Capital Resources
On October 29, 1999, the Company entered into a $22 million senior bank
credit agreement ("Senior Debt Agreement") with Fleet Capital Corporation
and a $7 million subordinated debt agreement ("Subordinated Debt
Agreement") with American Capital Strategies Ltd.
These agreements have enabled the Company to retire the approximately
$18.6 million of outstanding debt with its former bank lenders, Fleet
Bank, NH, and Mellon Bank, N.A. In connection with the repayment of their
loans, the Company's former bank lenders agreed to return to the Company
for cancellation, warrants held by them for the purchase of 810,000 shares
of the Company's common stock at exercise prices ranging from $2.00 to
$3.50. Also, approximately $600,000 of accrued interest was waived by the
former bank group which amount will be reflected in the consolidated
statement of operations in the fourth quarter of 1999.
The Senior Debt Agreement provides for a revolving line of credit facility
of up to $12 million based upon qualifying accounts receivable and
inventory, a $7 million term loan and a $3 million capital expenditures
credit facility. The borrowings under the revolving line of credit bear
interest at the prime rate plus 1.0% or the London Interbank offered rate
plus 3.25%. The borrowings under the term loan and capital expenditure
credit facility bear interest at the prime rate plus 1.5% or the London
Interbank offered rate plus 3.75%. The Senior Debt Agreement has a
maturity date of October 2004, but does provide for renewal subject to
satisfaction of certain conditions.
Borrowings under the Subordinated Debt Agreement bear interest at the rate
of 12.5% plus an additional interest component at the rate of 2% which is
payable at the Company's election in cash or Company common stock. The
Subordinated Debt Agreement matures in October 2006. In connection with
the Subordinated Debt Agreement the Company issued to the lender warrants
to purchase 1,907,543 shares of IGI Common Stock at an exercise price of
$.01 per share. These warrants contain a right to require the Company to
repurchase the warrants and the common stock acquired upon exercise of
such warrants at their then fair market value under
11
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
certain circumstances, including the earliest to occur of the following:
before October 29, 2004, the date of payment in full of the Senior Debt
and Subordinate Debt and all senior indebtedness of the Company or the
sale of the Company or 30% or more of its assets. American Capital
Strategies, Ltd. has also agreed under certain circumstances, to limit or
relinquish its right to require repurchase of these warrants and the
Common Stock acquired upon exercise of such warrants. The warrants issued
to American Capital Strategies, Ltd. will be valued utilizing the
Black-Scholes valuation model and amortized over the life of the
underlying agreement as a component of interest expense. The Company
estimates the fair value of each warrant to approximate the fair market
value of a share of the Company Common Stock at the date of grant. The
underlying warrants are considered to be a derivative instrument and will
be marked-to-market.
These agreements also contain financial and other covenants and
restrictions, which if breached by the Company would allow the lenders to
demand prompt repayment of all outstanding indebtedness. In addition,
American Capital Strategies, Ltd. has the right to designate for election
to the Company's Board of Directors that number of directors that bears
the same ratio to the total number of directors as the number of shares of
Company common stock owned by it plus the number of shares issuable upon
exercise of its warrants bear to the total number of outstanding shares of
Company common stock on a fully-diluted basis, provided that so long as it
owns any common stock, or warrants or any of its loans are outstanding, it
shall have the right to designate at least one director.
Approximately $24.5 million was immediately available to the Company under
the Senior Debt and Subordinated Debt Agreements. The new agreements have
enabled the Company to retire the approximately $18.6 million outstanding
with the previous bank lenders, cover associated closing costs and provide
a borrowing facility for working capital and capital expenditures. To
secure all of its obligations under these agreements, the Company has
granted the lenders a security interest in all of the assets and
properties of the Company and its subsidiaries.
Despite its new financing arrangements, the Company remains highly
leveraged, and it must improve its operating results in the future to
maintain compliance with the covenants contained in its loan agreements;
furthermore, availability for borrowing under the revolving line of credit
facility is dependent on the level of its qualifying accounts receivable
and inventory. The Company will require an increase in its available
working capital for any significant expansion of its business in the
future, including capital for any significant expansion of its business in
the future, including improvement and modernization of its production
facilities. Accordingly, the Company will continue to seek additional
equity funds for these purposes; however, no assurance can be given that
it will be successful in obtaining additional equity on terms favorable to
the Company or on any terms.
The Company's operating activities provided $893,000 of cash during the
nine-month period ended September 30, 1999. The Company utilized
approximately $910,000 in investing activities, which were primarily
capital expenditures for the Company's manufacturing operations. Funding
for the Company's investing activities was provided by cash from operation
and the cash on hand at the beginning of the period.
Factors Which May Affect Future Results
Highly Leveraged and Debt Covenant Compliance
The Company remains very highly leveraged and subject to restrictive
covenants and restraints which are contained in its senior debt and
subordinate debt agreements. The debt agreements contain various
affirmative and negative covenants, such as minimum tangible net worth and
minimum fixed charge coverage ratios. Furthermore, the Company's available
borrowings under the revolving line of credit facility are dependent on
the level of qualifying accounts receivable and inventory. The Company
must improve its
12
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
financial performance in order to remain in compliance with these
covenants in the future. The Company believes that it can achieve the
requisite financial performance in doing so; however, there can be no
assurance that the Company will be successful in doing so. If the Company
is not successful in meeting its financial covenants it could result in a
default under its loan agreements and any such default, not resolved,
could lead to curtailment of certain of its business operations, sale of
certain assets or the commencement of insolvency proceedings by its
creditors.
Intense Competition in Consumer Products Business
The Company's Consumer Products business competes with large,
well-financed cosmetics and consumer products companies with development
and marketing groups that are experienced in the industry and possess far
greater resources than those available to the Company. There is no
assurance that the Company's consumer products can compete successfully
against its competitors or that it can develop and market new products
that will be favorably received in the marketplace. In addition, certain
of the Company's customers that use the Company's Novasome(R) lipid
vesicles in their products may decide to reduce their purchases from the
Company or shift their business to other suppliers.
Competition in Poultry Vaccine Business
The Company is encountering increased price competition from international
producers of poultry vaccines.
Foreign Regulatory and Economic Considerations
The Company's business may be adversely affected by foreign import
restrictions and additional regulatory requirements. Also, unstable or
adverse economic conditions and fiscal and monetary policies in certain
Latin American and Far Eastern countries, increasingly important markets
for the Company's animal health products, could adversely affect the
Company's future business in these countries.
Rapidly Changing Marketplace for Pet Products
The emergence of pet superstores, the consolidation of distribution
channels into fewer, more powerful companies and the diminishing
traditional role of veterinarians in the distribution of pet products
could adversely affect the Company's ability to expand its animal health
business or to operate at acceptable gross margin levels.
Effect of Rapidly Changing Technologies
The Company expects to license its technologies to third parties which
would manufacture and market products incorporating the technologies.
However, if its competitors develop new and improved technologies that are
superior to the Company's technologies, its technologies could be less
acceptable in the marketplace and therefore the Company's planned
technology licensing could be materially adversely affected.
13
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Regulatory Considerations
The Company's poultry vaccines and pet products are regulated by the USDA
and the FDA respectively which subject the Company to review, oversight
and periodic inspections. Any new products are subject to expensive and
sometimes protracted USDA and FDA regulatory approval, which ultimately
may not be granted. Also, certain of the Company's products may not be
approved for sales overseas on a timely basis, thereby limiting the
Company's ability to expand its foreign sales.
Year 2000
The "Year 2000 Issue" is the result of computer programs being written
using two digits rather than four to define the applicable year. As a
result, computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations, causing disruptions of
operations, a temporary inability to process transactions, prepare
invoices or engage in similar normal business activities.
As of December 31, 1998, the Company had assessed its needs to assure full
compliance with Year 2000 requirements and had developed a comprehensive
compliance plan. The Company has Year 2000 compliance needs involving
three areas: (i) financial and management computer systems, (ii)
microprocessors and other electronic device components of equipment used
by the Company ("embedded chips"), and (iii) computer systems used by
third parties, in particular financial institutions, suppliers and
customers of the Company.
The Company believes that its: (i) financial and management computer
systems and (ii) microprocessors and other electronic device components of
equipment used by the Company are Year 2000 compliant. The Company has
updated its existing computer system to make it Year 2000 compliant at a
cost of approximately $65,000, and additionally has incurred approximately
$35,000 in hardware and software upgrades and replacements. If the
upgraded system fails, the Year 2000 issue could have a materially adverse
effect on the operations and financial condition of the Company.
The Company has contacted vendors and customers to determine their
exposure to Year 2000 issues, their anticipated risks and responses to
those risks. The Company's vendors supply products and materials which are
readily available and the Company has identified alternative sources in
the event a vendor is not Year 2000 compliant. The Company believes that
the cost related to non-compliance by vendors and customers is not
expected to be material.
Income Taxes
The Company had net deferred tax assets in the amount of approximately
$5.5 million as of December 31, 1998 and $5.8 million as of September 30,
1999. The largest deferred tax asset relates to $3.1 million of net
operating loss carryforwards. After considering a $726,000 valuation
allowance at September 30, 1999, management believes the Company's
remaining net deferred tax assets are more likely than not to be realized
through the reversal of existing taxable temporary differences, the sale
of certain state net operating losses, and the generation of sufficient
future taxable operating income to ensure utilization of remaining
deductible temporary differences, net operating losses and tax credits.
The minimum level of future taxable income necessary to realize the
Company's net deferred tax assets at September 30, 1999, was approximately
$17 million. There can be no assurance, however, that the Company will be
able to achieve the minimum levels of taxable income necessary to realize
its net deferred tax assets. Federal net operating loss carryforwards
expire through 2018. Significant components expire in 2007 (26%), 2010
(13%) and 2018 (56%). Also federal research credits expire in varying
amounts through the year 2018.
14
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II OTHER INFORMATION
Item 1 - Legal Proceedings
There were no material developments in the legal matters previously
reported in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
On April 14, 1999, a lawsuit was filed in the U.S. District Court for the
Southern District of New York by Cohanzick Partners, LP, against IGI,
Inc., and certain of its present and former directors, officers and
employees. The suit, which has now been served on the defendants, seeks
approximately $420,000 in actual damages together with fees, costs and
interest, alleges violations of the securities laws, fraud, and negligent
misrepresentation concerning certain disclosures made and other actions
taken by the Company in 1996 and 1997. The Company will be required to
respond to the suit by the end of 1999.
The Company believes that the plaintiff's allegations are factually
incorrect and legally inadequate and will defend the lawsuit vigorously.
While the lawsuit is at a very preliminary stage and no discovery has
taken place, the Company believes that an unfavorable outcome in the suit
would not have a material adverse impact upon the Company's financial
condition, although it could negatively affect the results of operations
for the period in which the matter is resolved.
Item 2 - Changes in Securities and Use of Proceeds
None.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports
(a) Exhibits:
Exhibit 27.1 Financial Data Schedule for nine months ended
September 30, 1999
Exhibit 27.2 Financial Data Schedule for nine months ended
September 30, 1998
(b) Reports on Form 8K
None.
15
<PAGE>
IGI, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements 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.
IGI, Inc.
(Registrant)
Date: November 10, 1999 By: /s/ Manfred Hanuschek
--------------------------------
Manfred Hanuschek
Senior Vice President and
Chief Financial Officer
16
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