<PAGE> 1
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
<TABLE>
<S> <C>
For Quarter Ended Commission File No.
MARCH 31, 2000 001-08568
</TABLE>
IGI, Inc.
(Exact name of registrant as specified in
its charter)
<TABLE>
<S> <C>
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)
</TABLE>
856-697-1441
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 May 5, 2000
10,173,629
<PAGE> 2
ITEM 1. FINANCIAL STATEMENTS
PART I FINANCIAL INFORMATION
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(THOUSANDS, EXCEPT SHARE AND PER SHARE THREE MONTHS ENDED MARCH 31,
INFORMATION) -------------------------------
2000 1999
------------ -----------
Revenues:
<S> <C> <C>
Sales, net $ 7,660 $ 8,328
Licensing and royalty income 794 415
------------ -----------
Total revenues 8,454 8,743
Cost and expenses:
Cost of sales 4,317 4,445
Selling, general and administrative expenses 3,300 3,615
Product development and research expenses 432 316
------------ -----------
Operating profit 405 367
Interest expense 1,899 822
------------ -----------
Loss before provision for income taxes (1,494) (455)
Benefit for income taxes 448 136
------------ -----------
Net loss $ (1,046) $ (319)
============ ===========
Basic and diluted net loss per common share $ (.10) $ (.03)
Basic and diluted weighted average number of
common shares outstanding 10,126,899 9,519,266
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE> 3
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 2000
(UNAUDITED) DECEMBER 31, 1999
--------------- -----------------
ASSETS (AMOUNTS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and equivalents $ 357 $ 416
Accounts receivable, less allowance for
doubtful accounts of $357 and $354 in 2000 and 1999, respectively 6,266 6,061
Licensing and royalty receivable 606 432
Inventories, net 9,476 8,762
Current deferred taxes, net 1,096 1,096
Prepaid and other current assets 1,060 348
-------- --------
Total current assets 18,861 17,115
Property, plant and equipment, net 9,925 9,781
Deferred income taxes, net 5,202 4,754
Deferred financing costs 1,596 1,678
Investments 144 144
Other assets 386 390
-------- --------
Total Assets $ 36,114 $ 33,862
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility 6,990 5,708
Current portion of long-term debt 700 467
Current portion of notes payable 961 408
Accounts payable 4,024 4,268
Accrued payroll 492 253
Due to stockholder -- 115
Accrued interest 341 164
Other accrued expenses 1,909 2,150
Income taxes payable 10 15
-------- --------
Total current liabilities 15,427 13,548
Long-term debt, net of discount and current portion 10,884 10,758
Deferred income 253 327
Detachable stock warrants 4,769 3,696
-------- --------
Total Liabilities 31,333 28,329
-------- --------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock $.01 par value, 1,000,000 authorized,
none outstanding -- --
Common stock $.01 par value, 50,000,000 shares authorized;
10,279,139 and 10,133,183 shares issued in 2000 and 1999, respectively 103 102
Additional paid-in capital 20,921 20,628
Accumulated deficit (14,602) (13,556)
-------- --------
Less treasury stock, 105,510 shares at cost in
2000 and 1999, respectively (1,641) (1,641)
-------- --------
Total stockholders' equity 4,781 5,533
-------- --------
Total Liabilities and Stockholders' Equity $ 36,114 $ 33,862
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
IGI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,046) $ (319)
Reconciliation of net loss to net cash (used by) provided by operating
activities:
Depreciation and amortization 269 237
Amortization of deferred financing costs and debt discount 184 --
Write-off of other assets -- 32
Provision for loss on accounts receivable and inventories 383 172
Recognition of deferred revenue (74) (35)
Benefit for deferred income taxes (448) (136)
Accrued interest expense relating to put feature of warrants 1,073 --
Stock compensation expense:
Non employee stock options 23 --
Directors' stock issuance 36 75
Changes in operating assets and liabilities:
Accounts receivable (209) (96)
Inventories (1,093) (292)
Receivables under royalty agreements (174) (14)
Prepaid and other assets 38 (61)
Accounts payable and accrued expenses (474) 610
Income taxes payable (5) --
Short term notes payable, operating (197) (153)
------- -------
Net cash (used by) provided by operating activities: (1,714) 20
------- -------
Cash flows from investing activities:
Capital expenditures (369) (289)
(Increase) in other assets (40) (55)
------- -------
Net cash used by investing activities (409) (344)
------- -------
Cash flows from financing activities:
Borrowings under capital expenditures facility 257 --
Borrowings under revolving credit agreement 9,741 --
Repayments of revolving credit agreement (8,459) --
Proceeds from exercise of common stock options and
purchase of common stock 120 --
Change in book overdraft 405 --
------- -------
Net cash provided by financing activities 2,064 --
------- -------
Net decrease in cash and equivalents (59) (324)
Cash and equivalents at beginning of period 416 1,068
------- -------
Cash and equivalents at end of period $ 357 $ 744
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
IGI, Inc. without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"), and reflect all adjustments
which, in the opinion of management, are necessary for a fair statement of
the results for the interim periods presented. All such adjustments are of
a normal recurring nature. Certain previously reported amounts have been
reclassified to conform with the current period presentation.
Certain information in footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the SEC, although the Company believes the disclosures are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the financial statements and
the notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 (the "1999 10-K Annual Report").
2. DEBT AND STOCK WARRANTS
On October 29, 1999, the Company entered into a $22 million senior bank
credit agreement ("Senior Debt Agreement") with Fleet Capital Corporation
and a $7 million subordinated debt agreement ("Subordinated Debt
Agreement") with American Capital Strategies, Ltd.
On April 12, 2000, American Capital Strategies, Ltd. amended its
Subordinated Debt Agreement with the Company whereby the "put" provision
associated with the original warrants granted to purchase 1,907,543 shares
of the Company's common stock was replaced by a "make-whole" feature. The
"make-whole" feature requires the Company to compensate American Capital
Strategies, Ltd., in either Common Stock or cash, at the option of the
Company, in the event that American Capital Strategies, Ltd. ultimately
realizes proceeds from the sale of its Common Stock obtained upon exercise
of its warrants that are less than the fair value of the Common Stock upon
exercise of such warrants. Fair value of the Common Stock upon exercise is
defined as the 30-day average value prior to notice of intent to sell.
American Capital Strategies, Ltd. must exercise reasonable effort to sell
or place its shares in the marketplace over a 180-day period before it can
invoke the make-whole provision.
The Company recorded a $1,073,000 provision reflected as interest expense
for the mark-to-market adjustment for the fair value of the "put" warrant
for the three month period ended March 31, 2000. As a result of the
amendment, the liability recognized related to the warrants will be
reclassified as a component of equity without a future mark-to-market
adjustment effective April 12, 2000. A reduction of interest expense of
approximately $1.4 million will be recognized in the second quarter
reflecting a decrease in the fair value of the warrants from April 1 to
April 12, 2000.
In connection with the amendment to the Subordinated Debt Agreement,
American Capital Strategies, Ltd. also agreed to defer the payment by the
Company of the cash portion of interest on subordinated debt, for the
period April 1, 2000 to July 31, 2000, until July 31, 2000. Payment of the
cash portion of interest on subordinated debt will be payable at the end
of each subsequent three month period thereafter. Furthermore, the
existing additional interest component at the rate of 2% was increased to
2.25%, which is payable at the Company's election in cash or in Company
Common Stock. The increase of .25% in the additional interest component
will be in effect through March 2001, at which time the additional
interest component rate will be adjusted back down to 2%.
The debt agreements contain various affirmative and negative covenants,
such as minimum tangible net worth and minimum fixed charge coverage
ratios. The covenants under the debt agreements were further amended on
April 12, 2000. The financial covenants are dependent upon continued
improved operating results. The Company remains highly leveraged; as a
result, access to additional funding sources is limited. The Company's
available borrowings under the revolving line of credit facility are
dependent on the level of qualifying accounts receivable and inventory.
Unfavorable product sales performance since April 1, 2000 has limited the
available borrowing capacity of the Company under the revolving line of
credit facility. If the
5
<PAGE> 6
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Company's product sales do not improve or the Company is not successful in
meeting its financial obligations, it could result in a default under its
loan agreements and any such default, not resolved, could lead to
curtailment of certain of its business operations, sale of certain assets
or the commencement of insolvency proceedings by its creditors. The
Company believes it will be able to continue to be in compliance with its
debt covenants; however, there can be no assurance it will be able to
remain in compliance. A deterioration of operating results or an
unfavorable outcome on regulatory proceedings would prevent the Company
from being in compliance with its debt covenants.
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.
Because the Company recorded net losses in each period, the effect of the
Company's potential dilutive common stock was anti-dilutive for the three
months ended March 31, 2000 and 1999; as a result, basic and diluted
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
Inventories at March 31, 2000 and December 31, 1999 consist of:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Finished goods $4,009 $2,445
Work-in-process 2,837 3,853
Raw materials 2,630 2,464
------ ------
Total $9,476 $8,762
====== ======
</TABLE>
5. REGULATORY PROCEEDINGS AND LEGAL PROCEEDINGS
The Company is subject to review, oversight and periodic inspections by
governmental regulatory agencies such as the federal USDA and FDA and the
New Jersey Department of Environmental Protection and the local department
of health. The Company's Companion Pet Products segment is currently under
review and inspection by the FDA. The results of such FDA inspection have
not been completed, therefore, the ultimate outcome can not be determined
at this time. An unfavorable outcome could result in fines and penalties
and the potential halt of the sale of certain regulated products, all of
which would have a material adverse impact to the Company.
In April 1998, the U.S. Securities and Exchange Commission ("SEC") advised
the Company that it was conducting an informal inquiry and requested
information and documents from the Company, which the Company voluntarily
provided to the SEC. At March 31, 2000, the informal inquiry remained open;
however, management does not expect that the inquiry will have a material
adverse effect on the financial position, cash flows or operation of the
Company.
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 interests, 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.
The Company believes that an unfavorable outcome in the suit would not have
a
6
<PAGE> 7
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
material adverse impact upon the Company's financial condition, although it
could negatively affect the results of operations for the period in which
the matter is resolved.
6. BUSINESS SEGMENTS
Summary data related to the Company's reportable segments for the
three-month periods ended March 31, 2000 and 1999 appear below:
<TABLE>
<CAPTION>
POULTRY COMPANION CONSUMER
VACCINES PET PRODUCTS PRODUCTS CORPORATE* CONSOLIDATED
-------- ------------ -------- --------- ------------
<S> <C> <C> <C> <C> <C>
2000
Revenues $ 3,189 $3,329 $1,936 $ -- $8,454
Operating profit (loss) (381) 652 1,252 (1,118) 405
1999
Revenues $ 3,866 $3,319 $1,558 $ -- $8,743
Operating profit (loss) (127) 1,009 850 (1,365) 367
</TABLE>
* Notes
(A) Unallocated corporate expenses are principally general and administrative
expenses.
(B) Transactions between reportable segments are not material.
7
<PAGE> 8
IGI, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 1999
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 1999 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO MARCH 31, 1999
The Company had a net loss of $1,046,000, or $.10 per share, for the three
months ended March 31, 2000 as compared to a net loss of $319,000, or $.03
per share, for the first quarter ended March 31, 1999. The increase in the
net loss compared to the prior year was primarily the result of a
$1,073,000 mark-to-market valuation charge related to the put warrants
issued in 1999 in conjunction with the American Capital Strategies, Ltd.
subordinated notes.
Total revenues for the quarter ended March 31, 2000 were $8,454,000, which
represents a decrease of $289,000, or 3%, from revenues of $8,743,000 for
the quarter ended March 31, 1999. The decrease in revenues was primarily
attributable to decreased Poultry Vaccine sales partially offset by
increased Consumer and Companion Pet Product revenues. Poultry Vaccine
revenue decreased by $677,000 or 18% as a result of limited production
capacity and lost customers at the Company's Vineland facility. Management
has sought to modernize its Vineland poultry vaccine equipment and
facilities and to increase production capacity. Limited production
capacity and old equipment, combined with increased requirements for
higher potency and larger volume vaccines has continued to limit
Vineland's ability to produce vaccines. Consumer Products revenues
increased $378,000, or 24%, for the first quarter of 2000 as a result of
licensing and royalty income. Licensing and royalty income increased by
$379,000 or 91% over the comparable period last year as a result of
increased license revenue from Johnson & Johnson due to new product
introductions. Companion Pet Products revenues increased $10,000 or .3%
over the comparable quarter in 1999, primarily due to increased product
sales.
Cost of sales decreased by $128,000, or 3%, from the quarter ended March
31, 1999. As a percentage of revenues, cost of sales increased from 50.8%
in the quarter ended March 31, 1999 to 51.1% in the quarter ended March
31, 2000. The resulting decrease in gross profit from 49.2% in 1999 to
48.9% in 2000 was attributable primarily to lower gross profit
contribution by Poultry Vaccines related to reduced revenues, partially
offset by increased licensing and royalty income.
Selling, general and administrative expenses decreased by $315,000, or 9%,
from $3,615,000 in the quarter ended March 31, 1999 to $3,300,000 in the
quarter ended March 31, 2000. As a percentage of revenues, these expenses
were 41% of revenues for the quarter ended March 31, 1999 compared to 39%
in the quarter ended March 31, 2000. Selling and marketing expenses
decreased by $28,000 compared to the same period last year principally
related to lower vaccine selling expenses associated with lower vaccine
sales. General and administrative expenses decreased by $287,000, or 22%
compared to the first quarter 1999, primarily as a result of decreased
professional fees.
Product development and research expenses increased by $116,000, or 37%,
compared to the quarter ended March 31, 1999. The increase was principally
related to the timing of expenditures.
8
<PAGE> 9
IGI, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Net interest expense increased $1,077,000, or 131%, from $822,000 for the
quarter ended March 31, 1999 to $1,899,000 in the quarter ended March 31,
2000. The increase was primarily due to the valuation of the put warrants
issued in conjunction with the American Capital Strategies, Ltd.
subordinated notes. These warrants are marked-to-market on a monthly
basis; the first quarter 2000 charge of $1,073,000 is as a result of the
increase in the market price of the Company's stock.
LIQUIDITY AND CAPITAL RESOURCES
On April 12, 2000, American Capital Strategies, Ltd. amended its
Subordinated Debt Agreement with the Company whereby the "put" provision
associated with the original warrants granted to purchase 1,907,543 shares
of the Company's common stock was replaced by a "make-whole" feature. The
"make-whole" feature requires the Company to compensate American Capital
Strategies, Ltd., in either Common Stock or cash, at the option of the
Company, in the event that American Capital Strategies, Ltd. ultimately
realizes proceeds from the sale of its Common Stock obtained upon exercise
of its warrants that are less than the fair value of the Common Stock upon
exercise of such warrants. Fair value of the Common Stock upon exercise is
defined as the 30-day average value prior to notice of intent to sell.
American Capital Strategies, Ltd. must exercise reasonable effort to sell
or place its shares in the marketplace over a 180-day period before it can
invoke the make-whole provision.
The Company recorded a $1,073,000 provision reflected as interest expense
for the mark-to-market adjustment for the fair value of the "put" warrant
for the three month period ended March 31, 2000. As a result of the
amendment, the liability recognized related to the warrants will be
reclassified as a component of equity without a future mark-to-market
adjustment effective April 12, 2000. A reduction of interest expense of
approximately $1.4 million will be recognized in the second quarter
reflecting a decrease in the fair value of the warrants from April 1,
2000.
In connection with the amendment to the Subordinated Debt Agreement,
American Capital Strategies, Ltd. also agreed to defer the payment by the
Company of the cash portion of interest on subordinated debt, for the
period April 1, 2000 to July 31, 2000, until July 31, 2000. Payment of the
cash portion of interest on subordinated debt will be payable at the end
of each subsequent three month period thereafter. Furthermore, the
existing additional interest component at the rate of 2% was increased to
2.25%, which is payable at the Company's election in cash or in Company
Common Stock. The increase of .25% in the additional interest component is
in effect through March 2001, at which time the additional interest
component rate is adjusted back down to 2%.
The debt agreements contain various affirmative and negative covenants,
such as minimum tangible net worth and minimum fixed charge coverage
ratios. The covenants under the debt agreements were further amended on
April 12, 2000. The financial covenants are dependent upon continued
improved operating results. The Company remains highly leveraged and as a
result, access to additional funding sources is limited. The Company's
available borrowings under the revolving line of credit facility are
dependent on the level of qualifying accounts receivable and inventory.
Unfavorable product sales performance since April 1, 2000 has limited the
available borrowing capacity of the Company under the revolving line of
credit facility. If the Company's operating results deteriorate or product
sales do not improve or the Company is not successful in meeting its
financial obligations, it could result in a default under its loan
agreements and any such default, not resolved, could lead to curtailment
of certain of its business operations, sale of certain assets or the
commencement of insolvency proceedings by its creditors.
The Company's operating activities used $1,714,000 of cash during the
three-month period ended March 31, 2000. The Company utilized
approximately $409,000 in investing activities, which were primarily
capital expenditures for the Company's manufacturing operations. Cash
utilized in the Company's operating and investing activities were provided
by the Company's financing activities, which primarily related to
increased borrowings under the line of credit facility and capital
expenditures facility.
9
<PAGE> 10
IGI, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
REGULATORY PROCEEDING AND LEGAL PROCEEDINGS
The Company is subject to review, oversight and periodic inspections by
governmental regulatory agencies such as the federal USDA and FDA and the
New Jersey Department of Environmental Protection and the local department
of health. The Company's Companion Pet Products segment is currently under
review and inspection by the FDA. The results of such FDA inspection have
not been completed, therefore, the ultimate outcome can not be determined
at this time. An unfavorable outcome could result in fines and penalties
and the potential halt of the sale of certain regulated products, all of
which would have a material adverse impact to the Company.
In April 1998, the U.S. Securities and Exchange Commission ("SEC") advised
the Company that it was conducting an informal inquiry and requested
information and documents from the Company, which the Company voluntarily
provided to the SEC. At March 31, 2000, the informal inquiry remained open;
however, management does not expect that the inquiry will have a material
adverse effect on the financial position, cash flows or operation of the
Company.
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 interests, 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.
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.
FACTORS WHICH MAY AFFECT FUTURE RESULTS
HIGHLY LEVERAGED AND DEBT COVENANT COMPLIANCE
The Company remains very highly leveraged and subject to restrictive
covenants and restraints which are contained in its senior debt and
subordinate debt agreements. The debt agreements contain various
affirmative and negative covenants, such as minimum tangible net worth
and minimum fixed charge coverage ratios. The Company's available
borrowings under the revolving line of credit facility are dependent on
the level of qualifying accounts receivable and inventory. As a result,
fluctuations in monthly performance can create constraints in available
borrowings. The financial covenants are dependent upon continued improved
operating results. The Company believes that it can achieve the requisite
financial performance; however, there can be no assurance that the
Company will be successful. If the Company is not successful in meeting
its financial covenants it could result in a default under its loan
agreements and any such default, not resolved, could lead to curtailment
of certain of its business operations, sale of certain assets or the
commencement of insolvency proceedings by its creditors.
INTENSE COMPETITION IN CONSUMER PRODUCTS BUSINESS
The Company's Consumer Products business competes with large,
well-financed cosmetics and consumer products companies with development
and marketing groups that are experienced in the industry and possess far
greater resources than those available to the Company. There is no
assurance that the Company's consumer products can compete successfully
against its competitors or that it can develop and market new products
that will be favorably received in the marketplace. In addition, certain
of the Company's customers that use the Company's Novasome(R) lipid
vesicles in their products may decide to reduce their purchases from the
Company or shift their business to other suppliers.
10
<PAGE> 11
IGI, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
COMPETITION IN POULTRY VACCINE BUSINESS
The Company is encountering increased price competition from other
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 these 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, which ultimately
may not be granted. Also, certain of the Company's products may not be
approved for sales overseas on a timely basis, thereby limiting the
Company's ability to expand its foreign sales.
INCOME TAXES
The Company had net deferred tax assets in the amount of approximately
$5.9 million as of December 31, 1999 and $6.3 million as of March 31,
2000. The largest deferred tax asset relates to $3.7 million of net
operating loss carryforwards. After considering a $955,000 valuation
allowance at March 31, 2000, 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, 2000, was approximately $21
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 2019. Significant components expire in 2007, 2018 and 2019. Also
federal research credits expire in varying amounts through the year 2019.
11
<PAGE> 12
IGI, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On April 12, 2000, American Capital Strategies, Ltd. amended its
Subordinated Debt Agreement with the Company whereby the "put" provision
associated with the original warrants granted to purchase 1,907,543 shares
of the Company's common stock was replaced by a "make-whole" feature. The
"make-whole" feature requires the Company to compensate American Capital
Strategies, Ltd., in either Common Stock or cash, at the option of the
Company, in the event that American Capital Strategies, Ltd. ultimately
realizes proceeds from the sale of its Common Stock obtained upon exercise
of its warrants that are less than the fair value of the Common Stock upon
exercise of such warrants. Fair value of the Common Stock upon exercise is
defined as the 30-day average value prior to notice of intent to sell.
American Capital Strategies, Ltd. must exercise reasonable effort to sell
or place its shares in the marketplace over a 180-day period before it can
invoke the make-whole provision.
The Company recorded a $1,073,000 provision reflected as interest expense
for the mark-to-market adjustment for the fair value of the "put" warrant
for the three month period ended March 31, 2000. As a result of the
amendment, the liability recognized related to the warrants will be
reclassified as a component of equity without a future mark-to-market
adjustment effective April 12, 2000. A reduction of interest expense of
approximately $1.4 million will be recognized in the second quarter
reflecting a decrease in the fair value of the warrants from April 1 to
April 12, 2000.
12
<PAGE> 13
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, 1999.
Item 2 - Changes in Securities and Use of Proceeds
None.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports
(a) Exhibits:
Exhibit 27.1 Financial Data Schedule for three months ended March 31, 2000
(b)Reports on Form 8K
None.
13
<PAGE> 14
IGI, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IGI, Inc.
(Registrant)
Date: May 5, 2000 By: /s/Paul Woitach
-------------------------------------
Paul Woitach
President and Chief Executive Officer
Date: May 5, 2000 By: /s/Manfred Hanuschek
-------------------------------------
Manfred Hanuschek
Senior Vice President and
Chief Financial Officer
14
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<PERIOD-END> MAR-31-2000
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