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.
March 31, 1999 001-08568
- ----------------- -------------------
IGI, Inc.
(Exact name of registrant as specified in its charter)
Delaware 01-0355758
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Wheat Road and Lincoln Avenue, Buena, NJ 08310
(Address of principal executive offices) (Zip Code)
(609)-697-1441
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 March 19, 1999
9,526,854
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(thousands, except share and per share information) Three months ended March 31,
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Sales, net $ 8,328 $ 8,134
Licensing and royalty income 415 82
----------- -----------
Total revenues 8,743 8,216
----------- -----------
Cost and expenses:
Cost of sales 4,445 4,039
Selling, general and administrative expenses 3,615 3,558
Product development and research expenses 316 325
----------- -----------
Operating profit 367 294
Interest expense, net (822) (611)
----------- -----------
Loss before benefit for income taxes (455) (317)
Benefit for income taxes 136 114
----------- -----------
Net loss $ (319) $ (203)
=========== ===========
Net loss per common and common equivalent share:
Basic $ (0.03) $ (0.02)
Diluted $ (0.03) $ (0.02)
Average number of common and common equivalent shares:
Basic 9,519,266 9,466,667
Diluted 9,519,266 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>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
ASSETS (amounts in thousands)
Current assets:
Cash and equivalents $ 744 $ 1,068
Accounts receivable, less allowance for doubtful
accounts of $604 and $516, in 1999 and 1998, respectively 6,401 6,462
Licensing and royalty receivable 454 440
Inventories 7,614 7,406
Current deferred taxes, net 1,275 1,275
Prepaid and other current assets 716 433
-------- --------
Total current assets 17,204 17,084
Investments 739 535
Property, plant and equipment, net 9,560 9,479
Deferred income taxes 4,324 4,188
Other assets 764 770
-------- --------
Total assets $ 32,591 $ 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 661 661
Accounts payable 3,274 3,235
Accrued payroll 447 196
Due to stockholder 495 380
Accrued interest 604 432
Other accrued expenses 1,647 1,614
Income taxes payable 16 16
-------- --------
Total current liabilities 25,801 25,191
Notes payable 408 408
Deferred income 703 534
-------- --------
Total liabilities 26,912 26,133
Commitments and contingencies
Stockholders' equity:
Common stock $.01 par value, 30,000,000 shares
authorized; 9,662,868 and 9,648,931 shares issued in
1999 and 1998, respectively 97 97
Additional paid-in capital 20,036 19,961
Accumulated deficit (12,291) (11,972)
-------- --------
7,842 8,086
Less treasury stock; 136,014 shares at cost
in 1999 and 1998 (2,163) (2,163)
-------- --------
Total stockholders' equity 5,679 5,923
-------- --------
Total liabilities and stockholders' equity $ 32,591 $ 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>
Three months ended March 31,
1999 1998
------- -------
(amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (319) $ (203)
Reconciliation of net loss to net cash provided
(used) by operating activities:
Depreciation and amortization 237 277
Provision for losses on accounts receivable and
inventories 172 245
Write-off of other assets 32 --
Gain on sale of assets -- (7)
Recognition of deferred income (35) (23)
Deferred income taxes (136) (115)
Stock option compensation and warrant expense 75 19
Changes in operating assets and liabilities:
Accounts receivable (96) (718)
Receivables due under license and royalty agreements (14) --
Inventories (292) 94
Prepaid and other assets (61) 192
Accounts payable and accrued expenses 610 610
Short-term notes payable, operating (153) --
------- -------
Net cash provided from operating activities 20 371
------- -------
Cash flows from investing activities:
Capital expenditures (289) (216)
Decrease in investments -- 24
Increase in other assets (55) (159)
------- -------
Net cash used by investing activities: (344) (351)
------- -------
Cash flows from financing activities:
Net borrowings under line of credit agreements -- --
Payments of long-term debt -- (36)
------- -------
Net cash used by financing activities -- (36)
------- -------
Net decrease in cash and equivalents (324) (16)
Cash and equivalents at beginning of year 1,068 1,196
------- -------
Cash and equivalents at March 31, 1999 and 1998 $ 744 $ 1,180
======= =======
</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
has 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
filed with the SEC on April 12, 1999 (the "1998 10-K Annual Report").
2. Financing Needs
At March 31, 1999, the Company had cash and cash equivalent balances of
$744,000, and no available borrowing capacity under its Credit Line or its
Revolving Facility. The Company is currently generating losses that are expected
to extend through much of 1999. The Company has significant debt that it must
repay on August 31, 1999, November 30, 1999 and March 31, 2000. The Company is
pursuing additional debt and equity financing alternatives in order to repay
these debt obligations. For a more complete description of the Company's
financing needs, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources" contained
in this quarterly report.
3. Net Income Per Common Share
Basic net income per share of common stock is computed based only on the
weighted average number of shares of common stock outstanding during the period.
Diluted net income per share of common stock is computed using the weighted
average number of shares of common stock and common stock equivalents, if
dilutive, outstanding during the period. Common stock equivalents include shares
issuable upon the exercise of dilutive common stock options.
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 will reflect 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 and decreased the net loss in 1997 by
$245,000.
5
<PAGE>
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Inventories at March 31, 1999 and December 31, 1998 consisted of:
(amounts in thousands) March 31, 1999 December 31, 1998
-------------- -----------------
Finished goods $2,864 $2,785
Work-in-process 2,364 2,210
Raw materials 2,386 2,411
------ ------
Total $7,614 $7,406
====== ======
5. Debt
Effective January 31, 1999, the Company and its bank lenders entered into a
Second Extension Agreement which provided for a waiver of the covenant defaults
under the Forbearance Agreement, amendment of certain covenants and, extension
of the bank credit agreement to March 31, 2000. In connection with the Second
Extension Agreement, on March 11, 1999, the Company issued warrants to the bank
lenders to purchase 270,000 shares of the Company's Common Stock at an exercise
price of $2.00 per share. These warrants are exercisable at any time 60 days
after issuance. The Company also issued warrants to purchase an additional
270,000 shares of the Company's Common Stock exercisable at $2.00 per share, if
the bank debt is still outstanding at September 30, 1999. The warrants expire on
the fifth anniversary of issuance. The Company has a call option on unexercised
warrants at a repurchase price of $1,800,000. The Company will recognize a
non-cash expense for each issuance of warrants of approximately $195,000, or a
total of about $390,000, over the term of the agreement. For a more complete
description of the Company's debt and the issuance of warrants in connection
with the Second Extension Agreement, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources" contained in this quarterly report.
6. Legal Proceedings
There were no material developments in the legal matters previously
reported in the 1998 10-K Annual Report.
The Company has learned that on April 14, 1999, a lawsuit was filed in the
U.S. District Court for the Southern District of New York by Cohanzick Partners,
LP, against IGI, Inc., and certain of its present and former directors, officers
and employees. The suit, which seeks approximately $420,000 in actual damages
together with fees, costs and 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 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
<PAGE>
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. 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.
Summary data related to the Company's reportable segments for the three
month periods ended March 31, 1999 and 1998 appear below:
<TABLE>
<CAPTION>
Poultry Companion Pet Consumer
Vaccines Products Products Corporate* Consolidated
-------- -------- -------- ---------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
1999
- ----
Revenues $ 3,866 $ 3,319 $ 1,558 $ -- $ 8,743
Operating profit (loss) (127) 1,009 850 (1,365) 367
1998
- ----
Revenues $ 4,107 $ 3,195 $ 914 $ -- $ 8,216
Operating profit (loss) 636 830 384 (1,556) 294
</TABLE>
* Notes:
(A) Unallocated corporate expenses are principally general and administrative
expenses.
(B) Transactions between reportable segments are not material.
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
date 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.
7
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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. 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 is 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 March 31, 1999 compared to March 31, 1998
The Company had a net loss of $319,000, or $0.03 per share, for the quarter
ended March 31, 1999 as compared to net loss of $203,000, or $.02 per share, for
the quarter ended March 31, 1998. The principal factor contributing to the
increased loss in the 1999 quarter was increased interest expense.
Total revenues for the quarter ended March 31, 1999 were $8,743,000, which
represents an increase of $527,000, or 6%, from revenues of $8,216,000 for the
quarter ended March 31, 1998. Consumer Products revenues increased $644,000, or
70%, for the first quarter of 1999 due primarily to an increase of $333,000 in
license and royalty income in 1999 over 1998 and an increase of $271,000 in
sales to Estee Lauder. Companion Pet Products increased $124,000 or 4% over the
comparable quarter in 1998, primarily due to increased international sales of
$172,000 in the first quarter 1999 over the comparable period in 1998. These
increases were partially offset by decreased poultry vaccine sales of $241,000
or 6% from the first quarter of 1998. Revenues of approximately $1,200,000 for
poultry vaccine sales in the first quarter of 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.
Cost of sales increased by $406,000, or 10%, from the quarter ended March
31, 1998 due to increased sales volume. However, as a percentage of revenues,
cost of sales increased from 49% in the quarter ended March 31, 1998 to 51% in
the quarter ended March 31, 1999. This increase primarily resulted from costs
relating to the Company's reassessment of product manufacturing processes and
8
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
formulas to increase future production efficiency and capacity in the Company's
poultry vaccines division.
Selling, general and administrative expenses increased by $57,000, or 2%,
from $3,558,000 in the quarter ended March 31, 1998 to $3,615,000 in the quarter
ended March 31, 1999. However, as a percentage of revenues, these expenses were
41% of revenues for the quarter ended March 31, 1999 compared to 43% in the
quarter ended March 31, 1998. Selling and marketing expenses increased by
$261,000 compared to the same period last year. This was offset by a decline in
general and administrative expenses by $204,000 versus the first quarter 1998
principally due to a decrease from the first quarter 1998 in expenditures for
professional fees of $412,000 primarily related to the legal, audit and
consulting expenses that were incurred in the first quarter 1998 in connection
with the Company's internal and government investigations.
Product development and research expenses decreased by $9,000, or 3%,
compared to the quarter ended March 31, 1998.
Net interest expense increased $211,000, or 35%, from $611,000 in the
quarter ended March 31, 1998 to $822,000 in the quarter ended March 31, 1999 due
to higher interest rates and additional bank fees in the first quarter of 1999.
Liquidity and Capital Resources
On April 29, 1998, the Company entered into an Extension Agreement with its
bank lenders which provided for a waiver of all past and existing covenant
defaults, extension of the bank credit agreement through March 31, 1999, a
maximum credit line facility of $12,000,000 ("Credit Line"), extended terms for
repayment of the outstanding $6,857,000 balance of revolving credit notes
("Revolving Facility") and issuance to the lenders of warrants to purchase an
aggregate of 540,000 shares of the Company's Common Stock at an exercise price
of $3.50 per share. The Company has a call option on unexercised warrants at a
repurchase price of $1,800,000. The Company recognized a non-cash expense
related to the issuance of these warrants of approximately $645,000 in 1998.
As of July 31, 1998, the Company was in default under certain covenants
contained in the Extension Agreement. On August 19, 1998, the Company and its
bank lenders entered into a Forbearance Agreement whereby the banks agreed to
forbear from exercising their rights and remedies arising from these covenant
defaults through January 31, 1999. During fiscal 1998 and the first quarter of
1999, the Company incurred interest expense at a rate of up to prime plus 5.5%
on its outstanding borrowings under the Credit Line and under the Revolving
Facility.
9
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Effective January 31, 1999, the Company and its bank lenders entered into a
Second Extension Agreement which provides for a waiver of the covenant defaults
under the Forbearance Agreement, amendment of certain covenants, extension of
the bank credit agreement to March 31, 2000, and the following:
o The maximum availability under the Credit Line is subject to the
determination of the amount of eligible accounts receivable and
inventories. There was no remaining availability as of December 31, 1998 or
March 31, 1999.
o Mandatory principal payments of $4,000,000 and $2,000,000 of the
outstanding balance of $18,657,000 at December 31, 1998, under the
Revolving Facility and Credit Line are due on August 31, 1999 and November
30, 1999, respectively, with the balance due and payable on March 31, 2000.
o All of the Company's indebtedness to the banks is subject to a security
interest in all of the assets of the Company and its significant
subsidiaries. Although the Company can sell operating assets, proceeds from
such sale must be remitted directly to the lenders.
o Interest on outstanding borrowings of $18,657,000 under both the Credit
Line and the Revolving Facility will be at a rate of prime plus 5.5% of
which prime plus 2.5% is paid monthly and 3.0% is accrued and payable on
March 31, 2000.
o The interest rate on outstanding borrowings will be reduced by 0.5% after
each of the mandatory principal payments. In addition, the interest rate
will be reduced by an additional 1.5% for each $1,000,000 of voluntary
principal payments, but not lower than prime plus 1.0%. A pro rata portion
of the accrued interest will be waived for all principal payments occurring
prior to December 31, 1999.
o On March 11, 1999, the Company issued warrants to the bank lenders to
purchase 270,000 shares of the Company's Common Stock at an exercise price
of $2.00 per share. These warrants are exercisable at any time 60 days
after issuance. The Company also issued warrants to purchase an additional
270,000 shares of the Company's Common Stock exercisable at $2.00 per share
if the bank debt is still outstanding at September 30, 1999. The warrants
expire on the fifth anniversary of issuance. The Company has a call option
on unexercised warrants at a repurchase price of $1,800,000. The Company
will recognize a non-cash expense for each issuance of warrants for
approximately $195,000, or a total of about $390,000, over the term of the
agreement.
o The Company agreed to pay the bank lenders an extension fee of $350,000,
which is being amortized over the life of the agreement. At the time of the
extension, $50,000 was paid, with the balance payable in four installments
through February 24, 2000. If the Company is able to refinance its bank
debt, any extension fees due subsequent to the closing date of the
refinancing will be waived.
10
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
o The Company is required to maintain certain minimum financial covenants and
comply with other non-financial covenants, including remittance of cash
flows from debt or equity financing, income tax refunds and fixed asset
dispositions to the banks, and the completion of Year 2000 compliance by
September 30, 1999. The agreement also prohibits the payment of cash
dividends without prior written consent of the lenders. As of March 31,
1999, the Company was in compliance with all financial covenants and all
other terms and requirements of the Second Extension Agreement.
At March 31, 1999, the Company had cash and cash equivalent balances of
$744,000, and no available borrowing capacity under the Credit Line or the
Revolving Facility. The Company is currently generating losses that are expected
to extend through much of 1999. Further, the Company has significant debt it
must repay on August 31, 1999, November 30, 1999 and March 31, 2000.
The Company is pursuing additional debt and equity financing alternatives
to meet its debt repayment obligations. The Company believes it can obtain such
financing on acceptable terms. However, if the Company is not successful in
obtaining the required additional financing, it believes it has the ability and
it plans to meet its 1999 debt repayment obligations by altering its business
plans including, if necessary, a sale of selected Company operating and
non-operating assets. Any sale of operating assets would involve a curtailment
of certain of the Company's business operations and a modification of its
business strategy. However, if the Company is unable to raise sufficient funds
to repay or refinance the debt repayment due on March 31, 2000, the Company
could be in default under its loan agreement and any such default could lead to
the commencement of insolvency proceedings by its creditors subsequent to that
date.
Accordingly, the Board of Directors of the Company has authorized
management of the Company to seek additional equity capital through the sale of
Common Stock of the Company, either through a private sale to institutional or
individual investors or through a rights offering to its stockholders. Subject
to shareholder approval, the Board has authorized an increase in the number of
shares of Common Stock available and the authorization of a Preferred Stock
class. While the Company has contacted a number of potential providers of
additional capital who have expressed interest in negotiating financing
arrangements with the Company, to date no agreements or commitments have been
obtained.
The Company's operating activities provided $20,000 of cash during the
first quarter of 1999, which included net loss and non-cash charges to
operations for depreciation, amortization, loss reserves, write-offs and stock
and warrant compensation expense; and the addition to operations of a non-cash
recognition of deferred income. This was equaled by increases in accounts
receivable, inventories, deferred tax assets and prepaids and other assets,
offset by an accounts payable and accrued expenses increase, all of which had
the net effect of increasing operating cash flow.
The Company used $344,000 for investing activities, which were primarily
capital expenditures for the Company's manufacturing operations. Funding for the
Company's operating and investing activities was provided from the Company's
cash on hand at the beginning of the period.
11
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Factors Which May Affect Future Results
Adverse Effects of USDA Actions and U.S. Attorney Investigations
Regulatory matters and the costs incurred in connection with government and
other investigations, as previously described in Item 3 "Legal Proceedings" in
the 1998 10-K Annual Report, had a material adverse effect on the Company's
business and results of operations in 1998 and are likely to continue to
adversely affect the Company's business during the first half of 1999.
While the Company has made progress in returning to normal business
operations by hiring new management and taking corrective action to assure
compliance with all regulatory requirements, it still faces important
challenges. First, it must assure its customers that its future business
operations will comply with all applicable government rules and regulations and
that its financial condition is adequate to meet its business commitments and to
maintain a viable and stable business environment. Second, it must comply with
all of the covenants in its bank credit agreement to assure continued bank
financing of its operations and replace its current bank agreement. Third, it
must raise additional debt or equity funds to meet its business plan and to
maintain its competitive position. No assurance can be given that the Company
will be able to accomplish all or any of the foregoing requirements, and the
failure to do so, could have a material adverse effect on the Company's
business, financial condition and results of operations.
Highly Leveraged; Inability to Obtain Additional Funding
The Company is currently very highly leveraged and has negative working
capital, and therefore will need to obtain additional debt or equity capital to
meet its business plan, short-term repayment obligations, and to maintain its
competitive position. No assurance can be given that such funds will be obtained
when required or, if obtainable, on terms that are favorable to the Company. See
"Liquidity and Capital Resources" above.
The Company was in default under certain covenants in its bank credit
agreements during 1998. In April 1998, the banks agreed to a waiver of the
covenant defaults and to extend the credit agreement on revised terms and
conditions through March 31, 1999. Also, the Company was in default under
certain covenants contained in its 1998 Extension Agreement at July 31, 1998. On
August 19, 1998, the Company and its bank lenders entered into a Forbearance
Agreement whereby the banks agreed to forbear from exercising their rights and
remedies arising from these covenant defaults through January 31, 1999.
Effective January 31, 1999, the Company and its bank lenders entered into a
Second Extension Agreement pursuant to which the banks waived the existing
covenant defaults under the Forbearance Agreement and extended the credit
agreement on amended terms and conditions through March 31, 2000, including the
addition of a covenant obligating the Company to reduce its loans to the banks
by $4.0 million by August 31, 1999 and an additional $2.0 million by November
30, 1999.
12
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
At March 31, 1999, the Company had cash and cash equivalent balances of
$744,000, and no available borrowing capacity under the Credit Line or the
Revolving Facility. The Company is currently generating losses that are expected
to extend through much of 1999. Therefore, the Company will need additional
funds to repay its debt due on August 31, 1999, November 30, 1999 and March 31,
2000.
The Company is pursuing additional debt and equity financing alternatives
in order to meet its debt repayment obligations. The Company believes it can
obtain such financing on acceptable terms. However, if the Company is not
successful in obtaining the required additional funds, it believes it has the
ability and it plans to meet its 1999 debt repayment obligations by altering its
business plans including, if necessary, a sale of selected Company operating and
non-operating assets. Any sale of operating assets would involve a curtailment
of certain of the Company's business operations and a modification of its
business strategy. However, if the Company is unable to raise sufficient funds
to repay or refinance the debt repayment due March 31, 2000, the Company could
be in default under its loan agreement and any such default could lead to the
commencement of insolvency proceedings by its creditors subsequent to that date.
Accordingly, the Board of Directors of the Company has authorized
management of the Company to seek additional equity capital through the sale of
common stock of the Company, either through a private sale to institutional or
individual investors or through a rights offering to its stockholders. While the
Company has contacted a number of potential providers of additional capital, no
agreements or commitments have been obtained to date.
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 increasing competition from international
producers of poultry vaccines, particularly increased price competition coupled
with a downward trend in vaccine prices.
Foreign Regulatory and Economic Considerations
The Company's business may be adversely affected by foreign import
restrictions and additional regulatory requirements. Also, unstable or adverse
economic conditions and fiscal and monetary policies in certain Latin American
and Far Eastern countries, increasingly important markets for the Company's
animal health products, could adversely affect the Company's future business in
these countries.
13
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Rapidly Changing Marketplace for Pet Products
The emergence of pet superstores, the consolidation of distribution
channels into fewer, more powerful companies and the diminishing traditional
role of veterinarians in the distribution of pet products could adversely affect
the Company's ability to expand its animal health business or to operate at
acceptable gross margin levels.
Effect of Rapidly Changing Technologies
The Company expects to license its technologies to third parties, which
would manufacture and market products incorporating the technologies. However,
if its competitors develop new and improved technologies that are superior to
the Company's technologies, its technologies could be less acceptable in the
marketplace and therefore the Company's planned technology licensing could be
materially adversely affected.
Regulatory Considerations
The Company's poultry vaccines and pet products are regulated by the USDA
and the FDA, which subject the Company to review, oversight and periodic
inspections. Any new products are subject to expensive and sometimes protracted
USDA and FDA regulatory approval. Also, certain of the Company's products may
not be approved for sales overseas on a timely basis, thereby limiting the
Company's ability to expand its foreign sales.
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 has 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 decided that its financial and management computer system
should be remediated. The Company's present financial and management computer
systems are not all Year 2000 compliant. The Company has undertaken to update
and remediate its existing computer system to make it Year 2000 compliant at a
cost of about $65,000, and has entered into a contract with the system's vendor
for such remediation. The Company expects its financial and management computer
system to be Year 2000 compliant by September 1999. To date, the Company has
incurred approximately $35,000 in
14
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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 completed an inventory and assessment of its exposure to
embedded chips in its facilities or equipment used in those facilities and the
capability of vendors of such equipment to successfully remediate Year 2000
problems in equipment with embedded chips. The Company believes that the cost to
remediate and/or replace its embedded chips to achieve Year 2000 compliance is
approximately $15,000 and expects all remediation of embedded chips to be
completed by June 1999.
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 that 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.
While the Company believes that necessary modifications will be made on a
timely basis, there can be no assurance that there will not be a delay in or
increased costs associated with the implementation of such modifications. If the
Company is unsuccessful in completing remediation of non-compliant systems or
correcting embedded chips, the Company could incur additional costs to develop
alternative methods of managing its business and replacing non-compliant
equipment and may experience delays in payments from customers or to its
vendors.
Income Taxes
The Company had net deferred tax assets in the amount of approximately $5.5
million as of December 31, 1998 and $5.6 million as of March 31, 1999. The
largest deferred tax asset relates to the nearly $3 million of net operating
loss carryforwards. After considering a $726,000 valuation allowance at December
31, 1998, 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 March 31, 1999, was approximately $16.5
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.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
15
<PAGE>
IGI, INC. AND SUBSIDIARIES
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.
The Company has learned that on April 14, 1999, a lawsuit was filed in the
U.S. District Court for the Southern District of New York by Cohanzick Partners,
LP, against IGI, Inc., and certain of its present and former directors, officers
and employees. The suit, which seeks approximately $420,000 in actual damages
together with fees, costs and 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 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
On March 11, 1999, the Company issued warrants for 540,000 shares of Common
Stock to the Company's bank lenders, Fleet Bank-NH and Mellon Bank, N.A., in
connection with the Second Extension Agreement. The warrants were issued in
consideration of the Second Extension Agreement. Each warrant may be exercised
for shares of Common Stock at an exercise price of $2.00 per share. See the
description of the warrants in "Liquidity and Capital Resources" above which is
incorporated herein by reference.
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 on Form 8-K
(a) Exhibits:
16
<PAGE>
IGI, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION (Continued)
Exhibit 11 - Computation of Net Income Per Common Share
Exhibit 27.1 - Financial Data Schedule for the quarter ended March 31, 1999
Exhibit 27.2 - Financial Data Schedule for the quarter ended March 31, 1998
(b) Reports on Form 8-K
None.
17
<PAGE>
IGI, INC. AND SUBSIDIAREIS
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: May 12, 1999 By: /s/ John F. Wall
----------------------
John F. Wall
Senior Vice President
Chief Financial Officer
18
EXHIBIT 11
IGI, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
(Unaudited)
<TABLE>
<CAPTION>
(thousands, except share and per share information) Three months ended
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Net income (loss) for earnings per share $ (319) $ (203)
=========== ===========
Weighted average shares outstanding 9,519,266 9,466,667
Common stock equivalents (net of common stock
deemed reacquired) based on average market price -- --
----------- -----------
Total equivalent shares for diluted computation 9,519,266 9,466,667
=========== ===========
Per Share Income (loss):
Basic $ (0.03) $ (0.02)
Diluted $ (0.03) $ (0.02)
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Mar-31-1999
<CASH> 744
<SECURITIES> 0
<RECEIVABLES> 7,005
<ALLOWANCES> (604)
<INVENTORY> 7,614
<CURRENT-ASSETS> 17,204
<PP&E> 20,648
<DEPRECIATION> (11,088)
<TOTAL-ASSETS> 32,591
<CURRENT-LIABILITIES> 25,801
<BONDS> 0
0
0
<COMMON> 97
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 32,591
<SALES> 8,328
<TOTAL-REVENUES> 8,743
<CGS> 4,445
<TOTAL-COSTS> 3,931
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 822
<INCOME-PRETAX> (455)
<INCOME-TAX> (136)
<INCOME-CONTINUING> (319)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (319)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,180
<SECURITIES> 0
<RECEIVABLES> 7,533
<ALLOWANCES> 939
<INVENTORY> 9,513
<CURRENT-ASSETS> 19,581
<PP&E> 20,066
<DEPRECIATION> (10,250)
<TOTAL-ASSETS> 34,411
<CURRENT-LIABILITIES> 24,498
<BONDS> 0
0
0
<COMMON> 96
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 34,411
<SALES> 8,134
<TOTAL-REVENUES> 8,216
<CGS> 4,039
<TOTAL-COSTS> 3,883
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 611
<INCOME-PRETAX> (317)
<INCOME-TAX> (114)
<INCOME-CONTINUING> (203)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (203)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
