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.
---------------------- ----------------------
June 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)
(609)-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 August 10, 1999
9,585,645
<PAGE>
PART 1 - 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 June 30, Six months ended June 30,
--------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Sales, net $ 8,504 $ 7,604 $ 16,832 $ 15,738
Licensing and royalty income 358 121 773 203
----------- ----------- ----------- -----------
Total revenues 8,862 7,725 17,605 15,941
Cost and expenses:
Cost of sales 4,335 4,411 8,780 8,450
Selling, general and administrative expenses 3,553 4,170 7,168 7,728
Product development and research expenses 320 378 636 703
----------- ----------- ----------- -----------
Operating profit (loss) 654 (1,234) 1,021 (940)
Interest expense, net 843 929 1,665 1,540
----------- ----------- ----------- -----------
Loss before provision for income taxes (189) (2,163) (644) (2,480)
Benefit for income taxes 57 779 193 893
----------- ----------- ----------- -----------
Net loss $ (132) $ (1,384) $ (451) $ (1,587)
=========== =========== =========== ===========
Basic and diluted net loss per common share $ (.02) $ (.15) $ (.05) $ (.17)
Basic and diluted weighted average number of
common shares outstanding 9,550,191 9,466,667 9,534,883 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>
June 30, 1999 December 31, 1998
------------- -----------------
ASSETS (amounts in thousands)
<S> <C> <C>
Current assets:
Cash and equivalents $ 859 $ 1,068
Accounts receivable, less allowance for doubtful accounts
of $713 and $516, in 1999 and 1998, respectively 6,321 6,462
Licensing and royalty receivable 533 440
Inventories, net 7,631 7,406
Current deferred taxes, net 1,275 1,275
Prepaid and other current assets 614 433
-------- --------
Total current assets 17,233 17,084
Investments 535 535
Property, plant and equipment, net 9,519 9,479
Deferred income taxes 4,382 4,188
Other assets 832 770
-------- --------
Total Assets $ 32,501 $ 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 739 661
Accounts payable 3,042 3,235
Accrued payroll 669 196
Due to stockholder 610 380
Accrued interest 813 432
Other accrued expenses 1,565 1,614
Income taxes payable 16 16
-------- --------
Total current liabilities 26,111 25,191
Notes payable 208 408
Deferred income 514 534
-------- --------
Total Liabilities 26,833 26,133
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock $.01 par value, 1,000,000 and 0 shares
authorized in 1999 and 1998, respectively -- --
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 19,635 19,961
Accumulated deficit (12,423) (11,972)
-------- --------
7,309 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 5,668 5,923
-------- --------
Total Liabilities and Stockholders' Equity $ 32,501 $ 32,056
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE>
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1999 1998
---- ----
(amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (451) $(1,587)
Reconciliation of net loss to net cash used by operating activities:
Depreciation and amortization 474 440
Write-off of other assets 70 --
Provision for loss on accounts receivable and inventories 231 667
Recognition of deferred revenue (70) --
Deferred income taxes (194) (893)
Stock compensation expense:
Non-employee stock options 44 19
Warrants issued to lenders 168 318
Changes in operating assets and liabilities:
Accounts receivable (125) (475)
Inventories (259) 707
Receivable under royalty agreements (43) --
Prepaid and other assets 41 462
Accounts payable and accrued expenses 826 993
Deferred revenue -- (23)
Short term notes payable, operating (275) --
------- -------
Net cash provided by operating activities: 437 628
------- -------
Cash flows from investing activities:
Capital expenditures (461) (262)
Proceeds from sale of assets -- 24
Decrease in other assets (185) (182)
------- -------
Net cash (used by) investing activities (646) (420)
------- -------
Cash flows from financing activities:
Net borrowing under line of credit agreements -- (200)
Repayments of debt -- (36)
------- -------
Net cash (used by) financing activities -- (236)
------- -------
Net decrease in cash and equivalents (209) (28)
Cash and equivalents at beginning of year 1,068 1,196
------- -------
Cash and equivalents at June 30, 1999 and 1998 $ 859 $ 1,168
======= =======
</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 such 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 and filed with the SEC on April 12, 1999
(the "1998 10-K Annual Report").
2. Financing Needs
At June 30, 1999, the Company had cash and cash equivalent balances of
$859,000, 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 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 six months ended June 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 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 (Continued)
(Unaudited)
Inventories at June 30, 1999 and December 31, 1998 consist of:
(amounts in thousands) June 30, 1999 December 31, 1998
------------- -----------------
Finished goods $2,911 $2,785
Work-in-process 2,319 2,210
Raw materials 2,401 2,411
------ ------
Total $7,631 $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 to be amortized over the life of the
extension 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.
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 not been served on any Company 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 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.
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.
6
<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 six month periods ended June 30, 1999 and 1998 appear below:
<TABLE>
<CAPTION>
Poultry Companion Consumer
Vaccines Pet Products Products Corporate * Consolidated
-------- ------------ -------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Three months ended June 30:
1999
----
Revenues $ 3,261 $3,608 $1,993 $ -- $ 8,862
Operating profit (loss) (287) 1,161 1,155 (1,375) 654
1998
----
Revenues $ 3,673 $2,916 $1,136 $ -- $ 7,725
Operating profit (loss) (234) 622 196 (1,818) (1,234)
Six months ended June 30:
1999
----
Revenues $ 7,127 $6,927 $3,551 $ -- $ 17,605
Operating profit (loss) (414) 2,170 2,005 (2,740) 1,021
1998
----
Revenues $ 7,780 $6,111 $2,050 $ -- $ 15,941
Operating profit (loss) 402 1,452 580 (3,374) (940)
</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 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.
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.
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 June 30, 1999 compared to June 30, 1998
The Company had a net loss of $132,000, or $0.02 per share, for the three
months ended June 30, 1999 as compared to net loss of $1,384,000, or $0.15
per share, for the second quarter ended June 30, 1998. The principal
reasons for the reduction in the loss from last year were higher sales and
gross margin coupled with lower operating costs and lower interest
expense.
Total revenues for the quarter ended June 30, 1999 were $8,862,000, which
represents an increase of $1,137,000, or 15%, from revenues of $7,725,000
for the quarter ended June 30, 1998. Consumer Products revenues increased
$857,000, or 75%, for the second quarter of 1999 due primarily to royalty
income under the licensing and supply agreements and sales to Estee
Lauder. Companion Pet Products increased $692,000 or 24% over the
comparable quarter in 1998, primarily due to new product launches
amounting to nearly $250,000 and increased international sales of about
$200,000 in the second quarter 1999 over the comparable period in 1998.
These increases were partially offset by decreased poultry vaccine sales
of $412,000 or 12% from the second quarter of 1998 related to the
refinement of manufacturing process to increase production efficiency and
capacity.
Cost of sales decreased by $76,000, or 2%, from the quarter ended June 30,
1998 due principally to improved efficiencies in the vaccine business
manufacturing processes and lower vaccine sales in the second quarter 1999
as compared to the comparable period in 1998. As a percentage of revenues,
cost of sales decreased from 57% in the quarter ended June 30, 1998 to 49%
in the quarter ended June 30, 1999. This decrease primarily resulted from
the lowering of costs due to the Company's refinement of product
manufacturing processes and formulas to increase production efficiency and
capacity in the Company's Vineland Laboratories vaccine division.
8
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Selling, general and administrative expenses decreased by $617,000, or
15%, from $4,170,000 in the quarter ended June 30, 1998 to $3,553,000 in
the quarter ended June 30, 1999. As a percentage of revenues, these
expenses were 40% of revenues for the quarter ended June 30, 1999 compared
to 54% in the quarter ended June 30, 1998. Selling and marketing expenses
decreased by $161,000 compared to the same period last year principally
related to lower vaccine selling expenses due to the lower vaccine sales.
General and administrative expenses decreased by $456,000 compared to the
second quarter 1998 principally due to a decrease from the second quarter
1998 in expenditures for professional fees of $806,000 primarily related
to the legal, audit and consulting expenses that were incurred in the
second quarter 1998 in connection with the Company's internal and
governmental investigations.
Product development and research expenses decreased by $58,000, or 15%,
compared to the quarter ended June 30, 1998. The decrease is principally
related to the timing of expenditures.
Net interest expense decreased $86,000, or 9%, from $929,000 in the
quarter ended June 30, 1998 to $843,000 in the quarter ended June 30,
1999, due principally to lower bank fees in the second quarter of 1999.
Six months ended June 30, 1999 compared to June 30, 1998
The Company had a net loss of $451,000 or $0.05 per share, for the six
months ended June 30, 1999 as compared to a net loss of $1,587,000 or
$0.17 per share, for the six months ended June 30, 1998. The principal
factors contributing to the decreased loss in 1999 were higher sales
coupled with lower operating costs offset somewhat by higher interest
expense in the first quarter of 1999.
Total revenues for the six months ended June 30, 1999 were $17,605,000,
which represents an increase of $1,664,000, or 10%, from revenues of
$15,941,000 for the six months ended June 30, 1998. Consumer Products
revenues increased $1,501,000, or 73%, for the second quarter of 1999 due
primarily to an increase of $570,000 in license and royalty income in 1999
over 1998 and an increase in revenues from Estee Lauder. Companion Pet
Products increased $816,000 or 13% over the comparable period in 1998,
primarily due to increased international sales of $380,000 for the six
months ended in June 1999 over the comparable period in 1998 and the
launch of new products which generated $470,000 in additional revenue.
These increases were partially offset by decreased poultry vaccine sales
of $653,000 or 8% from the six months ended in June 1998. Revenues of
approximately $1,200,000 from poultry vaccine sales for the six months
ended June 1998 were attributable principally 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 $330,000, or 4%, for the six months June 30,
1999 due primarily to increased sales volume. However, as a percentage of
revenues, cost of sales decreased from 53% for the six months ended June
30, 1998 to 50% for the same period ended June 30, 1999. This decrease
primarily resulted from decreased costs relating to the Company's
refinement of product manufacturing processes and formulas to increase
production efficiency and capacity in the Company's Vineland Laboratories
vaccine division.
Selling, general and administrative expenses decreased by $560,000, or 7%,
from $7,728,000 for the six months ended June 30, 1998 to $7,168,000 for
the same period in 1999. As a percentage of revenues, these expenses were
41% of revenues for the six months ended June 30, 1999 compared to 48% for
the same period ended in 1998. General and administrative expenses
declined by $659,000 compared to the first half of 1998 principally due to
a decrease in expenditures for professional fees of $1,218,000 primarily
related to the legal, audit and consulting expenses that were incurred in
the first half of 1998 in connection with the Company's internal and
governmental investigations. Selling and marketing expenses increased by
$99,000 compared to the same period last year.
9
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Product development and research expenses decreased by $67,000, or 10%,
compared to the six months ended June 30, 1998 principally related to the
timing of expenditures.
Net interest expense increased $125,000, or 8%, from $1,540,000 for the
six months ended June 30, 1998 to $1,665,000 for the six months ended June
30, 1999, due to higher interest rates and additional bank fees in the
first half 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.
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 certain covenant defaults through
January 31, 1999. During most of fiscal 1998 and the first half 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.
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 June 30, 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.
10
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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 during 1999.
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.
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 June 30, 1999, the Company was in compliance with all financial
covenants and all other terms and requirements of the Second Extension
Agreement.
At June 30, 1999, the Company had cash and cash equivalent balances of
$859,000, 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 has obtained from
providers of additional capital certain debt and equity financing
commitments and proposals and is currently negotiating such financing
arrangements. The Company believes it can obtain such financing on
acceptable terms and in a timely manner; however, there can be no
assurances that the Company will be successful in finalizing these
arrangements. 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 repayments on
their scheduled due dates, 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.
Accordingly, the Board of Directors of the Company has authorized
management of the Company to seek additional equity capital through the
sale of stock of the Company, either through a private sale to
institutional or individual investors or through a rights offering to its
stockholders. The Board has authorized an increase in the number of shares
of Common Stock available and has authorized a class of preferred stock.
The Company's operating activities provided $437,000 of cash during the
first six months 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, partially offset by an increase in
deferred tax assets. Also
11
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
gross accounts receivable, inventory and prepaid and other current assets
increased, while accounts payable and accrued expenses decreased, all of
which had the effect of increasing operating cash flow.
The Company used $646,000 during the six month period ended June 30, 1999
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 by the Company's cash on
hand at the beginning of the period.
Factors Which May Affect Future Results
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.
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 repay
its loans to the banks by $4.0 million by August 31, 1999 and an
additional $2.0 million by November 30, 1999.
At June 30, 1999, the Company had cash and cash equivalent balances of
$859,000, 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 has obtained
from various providers of additional capital certain debt and equity
financing commitments and proposals and is currently negotiating such
financing arrangements. The Company believes it can obtain such financing
on acceptable terms in a timely manner; however, there can be no
assurances that the Company will be successful in finalizing these
arrangements. 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 repayments on their scheduled due
dates, 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.
Accordingly, the Board of Directors of the Company has authorized
management of the Company to seek additional equity capital through the
sale of stock of the Company, either through a private sale to
institutional or individual investors or through a rights offering to its
stockholders.
12
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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.
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. 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.
13
<PAGE>
IGI, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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 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
non-compliant embedded chips in its facilities or non-compliant equipment
used in those facilities and the capability of vendors of such equipment
to successfully remediate Year 2000 problems in equipment with
non-compliant embedded chips. The cost to remediate and/or replace the
Company's non-compliant embedded chips to achieve Year 2000 compliance was
estimated to be approximately $20,000. To date, the Company has incurred
approximately $10,000 in costs relating to non-compliant embedded chips
and equipment and expects to be compliant by September 30, 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 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.
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 $5.7 million as of June 30, 1999.
The largest deferred tax asset relates to $3.2 million of net operating
loss carryforwards. After considering a $726,000 valuation allowance at
June 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 June 30, 1999, was approximately $16.7 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 not been served on any of the named
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 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
At the Company's Annual Meeting of Stockholders held on May 12, 1999, the
following proposals were adopted by the vote specified below:
Proposal
1. Election of Directors For Withheld Authority
--------------------- --- ------------------
Terrence D. Daniels 7,993,763 586,415
Edward B. Hager, MD 7,986,313 593,865
Jane E. Hager 7,986,313 593,865
Constantine L. Hampers, MD 7,993,763 586,415
Stephen J. Morris 7,993,763 586,415
Terrence O'Donnell 7,993,763 586,415
Paul D. Paganucci 7,993,763 586,415
15
<PAGE>
IGI, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION (Continued)
2. To approve an amendment increasing the number of authorized Common
Stock from 30,000,000 to 50,000,000 and to create a new class of
Preferred Stock consisting of 1,000,000 shares.
Number of Shares:
-----------------
For 5,081,626
Against 1,080,595
Abstain 18,499
Broker Non-Vote 2,399,458
3. To approve the newly created 1999 Employee Stock Option Plan
authorizing the issuance of 300,000 shares of Common Stock of the
Company.
Number of Shares:
-----------------
For 5,533,763
Against 619,013
Abstain 27,944
Broker Non-Vote 2,399,458
4. To approve the 1999 Stock Incentive Plan authorizing the issuance of
1,200,000 shares of Common Stock of the Company.
Number of Shares:
-----------------
For 4,888,713
Against 1,258,963
Abstain 33,044
Broker Non-Vote 2,399,458
5. Ratification of PricewaterhouseCoopers LLP as independent auditors for
the 1999 fiscal year.
Number of Shares:
-----------------
For 7,950,849
Against 621,791
Abstain 7,538
Broker Non-Vote -0-
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports
(a) Exhibits:
Exhibit 27.1 Financial Data Schedule for six months ended June 30,
1999
Exhibit 27.2 Financial Data Schedule for six months ended June 30,
1998
16
<PAGE>
IGI, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION (Continued)
(b) Reports on Form 8K
On May 5, 1999 the Company filed a Current Report on Form 8-K, dated
May 3, 1999, to report under Item 5 (Other Events) 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 the Company
and certain of its present and former directors, officers and
employees. The suit, which has not been served on any of the named
defendants, seeks approximately $420,000 in damages and 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. No financial statements
were required to be filed with such report.
17
<PAGE>
IGI, INC. AND SUBSIDARIES
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: August 12, 1999 By: /s/ Charles R. Carroll, Jr.
--------------------------------------
Charles R. Carroll, Jr.
Treasurer and Chief Accounting Officer
18
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