<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
For Quarter Ended Commission File No.
--------------------------- -----------------------
SEPTEMBER 30, 2000 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)
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 November 14, 2000
10,256,564
<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 INFORMATION) THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Sales, net $ 3,773 $ 4,735 $ 12,735 $ 14,440
Licensing and royalty income 546 634 2,057 1,407
------------ ----------- ------------ -----------
Total revenues 4,319 5,369 14,792 15,847
------------ ----------- ------------ -----------
Cost and expenses:
Cost of sales 2,665 2,231 7,968 6,382
Selling, general and administrative expenses 2,786 2,342 6,817 6,970
Product development and research expenses 219 179 676 443
------------ ----------- ------------ -----------
Operating profit (loss) (1,351) 617 (669) 2,052
Interest expense, net 885 835 2,220 2,500
------------ ----------- ------------ -----------
Loss from continuing operations before income taxes (2,236) (218) (2,889) (448)
Provision (benefit) for income taxes (note 9) 6,448 (37) 5,852 (65)
------------ ----------- ------------ -----------
LOSS FROM CONTINUING OPERATIONS (8,684) (181) (8,741) (383)
------------ ----------- ------------ -----------
DISCONTINUED OPERATIONS (note 2)
Loss from Operations of Discontinued Business (1,499) (153) (1,978) (402)
Gain on Disposal of Discontinued Business 395 -- 395 --
------------ ----------- ------------ -----------
Loss before extraordinary item (9,788) (334) (10,324) (785)
Extraordinary loss from early extinguishment of debt 984 -- 984 --
(note 8) ------------ ----------- ------------ -----------
Net Loss $ (10,772) $ (334) $ (11,308) $ (785)
============ =========== ============ ===========
BASIC AND DILUTED LOSS PER COMMON SHARE
Continuing Operations Before Extraordinary Item $ (0.84) $ (0.02) $ (0.86) $ (0.04)
Discontinued Operations (0.11) (0.01) (0.15) (0.04)
------------ ----------- ------------ -----------
(0.95) (0.03) (1.01) (0.08)
Extraordinary Loss (0.10) -- (0.10) --
------------ ----------- ------------ -----------
Net income $ (1.05) $ (0.03) $ (1.11) $ (0.08)
============ =========== ============ ===========
Basic and diluted weighted average number of 10,243,355 9,593,644 10,220,842 9,554,470
Common shares outstanding
</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>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
(UNAUDITED)
-----------
ASSETS (AMOUNTS IN THOUSANDS)
Current assets:
<S> <C> <C>
Cash and equivalents $ 168 $ 416
Accounts receivable, less allowance for doubtful accounts 2,014 2,314
of $259 and $354 in 2000 and 1999, respectively
Licensing and royalty receivable 735 432
Inventories, net 3,024 3,856
Current deferred taxes, net -- 1,096
Prepaid and other current assets 967 282
Net assets of discontinued operations -- 10,093
-------- --------
Total current assets 6,908 18,489
Property, plant and equipment, net 5,455 6,062
Deferred income taxes, net -- 4,754
Deferred financing costs 503 1,678
Investments 169 144
Other assets 406 390
-------- --------
Total Assets $ 13,441 $ 31,517
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving credit facility $ 1,773 $ 5,708
Current portion of long-term debt, net of discount 7,468 11,225
Current portion of notes payable 291 408
Accounts payable 2,653 2,288
Accrued payroll 398 253
Due to stockholder -- 115
Accrued interest 449 164
Other accrued expenses 2,117 1,785
Income taxes payable 10 15
-------- --------
Total current liabilities 15,159 21,961
Deferred income 245 327
Detachable stock warrants -- 3,696
-------- --------
Total Liabilities 15,404 25,984
-------- --------
Commitments and contingencies -- --
Stockholders' equity (deficit):
Preferred stock $.01 par value, 1,000,000 authorized, -- --
none outstanding
Common stock $.01 par value, 50,000,000 shares authorized; 103 102
10,323,262 and 10,133,183 shares issued and outstanding
in 2000 and 1999, respectively
Additional paid-in capital 23,692 20,628
Accumulated deficit (24,864) (13,556)
Less treasury stock, 66,698 and 105,510 shares at cost in
2000 and 1999, respectively (894) (1,641)
-------- --------
Total stockholders' equity (deficit) (1,963) 5,533
-------- --------
Total Liabilities and Stockholders' Equity (Deficit) $ 13,441 $ 31,517
======== ========
</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>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
-------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(11,308) $ (785)
Reconciliation of net loss to net cash (used by) provided by operating
activities:
Gain on sale of discontinued operations (395) --
Depreciation and amortization 778 706
Amortization of deferred financing costs and debt discount 256 --
Extraordinary expense on early extinguishment of debt 984 --
Gain on sale of assets -- (30)
Write-off of other assets -- 105
Provision for loss on accounts receivable and inventories 26 328
Recognition of deferred revenue (167) (138)
Charge (benefit) for deferred income taxes 5,850 (337)
Interest expense relating to put feature of warrants (53) --
Warrants issued to lenders under prior extension agreements -- 223
Stock compensation expense:
Non employee stock options 40 55
Directors' stock issuance 75 145
Changes in operating assets and liabilities:
Accounts receivable 148 253
Inventories 234 (688)
Receivables under royalty agreements (303) (56)
Prepaid and other assets 596 192
Accounts payable and accrued expenses 564 1,226
Deferred revenue -- 58
Short term notes payable, operating (867) (364)
Income taxes payable/refundable (5) --
-------- -------
Net cash (used in) provided by operating activities (3,547) 893
-------- -------
Cash flows from investing activities:
Capital expenditures (565) (616)
Proceeds from sales of assets -- 40
(Increase) decrease in other assets (259) (334)
Proceeds from sale of discontinued operations 12,000 --
-------- -------
Net cash provided by (used in) investing activities 11,176 (910)
-------- -------
Cash flows from financing activities:
Borrowings under capital expenditures facility 257 --
Borrowings under revolving credit agreement 27,557 --
Repayments of revolving credit agreement (31,492) --
Payments of deferred financing costs (4,319) --
Proceeds from exercise of common stock options and
Purchase of common stock 120 --
-------- -------
Net cash increase (used in) financing activities (7,877) --
-------- -------
Net decrease in cash and equivalents (248) (17)
Cash and equivalents at beginning of period 416 1,068
-------- -------
Cash and equivalents at end of period $ 168 $ 1,051
======== =======
</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, as amended by Form 10-K/A, for
the year ended December 31, 1999 (the "1999 10-K Annual Report").
Certain prior period information has been reclassified to reflect the
effect of discontinued operations.
2. DISCONTINUED OPERATIONS
On September 15, 2000, the shareholders of the Company approved, and
the Company consummated, the sale of the assets and transfers of the
liabilities of the Vineland Laboratories division. The buyer assumed
liabilities of approximately $2,300,000, and paid the Company cash in
the amount of $12,500,000, of which $500,000 was placed in an escrow
fund to secure potential obligations of the Company relating to final
purchase price adjustments and indemnification. The Company's results
reflects a $395,000 gain on the Vineland Sale under Gain on Disposal of
Discontinued Business. Also, the Vineland Laboratories division
incurred a loss of $1,499,000 and $1,978,000 for the three and nine
months ended September 30, 2000, respectively, as reflected as a loss
from operations of discontinued business.
3. 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 ("Fleet") and a $7 million subordinated debt agreement
("Subordinated Debt Agreement") with American Capital Strategies, Ltd.,
("ACS").
On April 12, 2000, ACS 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 ACS, in either Common Stock or cash,
at the option of the Company, in the event that ACS 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. ACS must exercise reasonable effort to sell or place its shares
in the marketplace over a 180-day period, beginning with the date of
notice by ACS, before it can invoke the make-whole provision.
The Company recorded a non-taxable $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. A
non-taxable reduction of interest expense of $1,431,000 was recognized
in the second quarter ended June 30, 2000, reflecting a decrease in the
fair value of the warrants from April 1 to April 12, 2000. As a result
of the April 12, 2000 amendment, the remaining liability at April 12,
5
<PAGE> 6
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2000 of $3,338,000 was reclassified to paid in capital. The April 12,
2000 amendment required the Company to file a shelf Registration
Statement with respect to resales of shares acquired by ACS by October
9, 2000. On September 30, 2000, ACS granted an extension to November
30, 2000 for the registration to be effective by the SEC. If the
registration is not effective by this date, the Company can be required
by ACS to reclassify the $3,338,000 from paid in capital to a liability
and resume mark-to-market accounting.
In connection with the amendment to the Subordinated Debt Agreement,
ACS 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. Payment of the cash portion of interest on subordinated debt
will be due 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%.
On June 26, 2000, the Company entered into the Second Subordinated
Amendment with ACS. Pursuant to the Second Subordinated Amendment, the
Company received $500,000 and issued to ACS $500,000 of Series C Senior
Subordinated Notes due September 30, 2000; and ACS waived compliance
with certain financial covenants applicable to Borrower contained in
the Subordinated Debt Agreement and modified certain interest payment
dates with respect to the Notes. In addition, the Second Subordinated
Amendment permits the Company to issue additional Series C Notes on
July 31, 2000 to pay the interest then due and payable on the Notes and
the Series C Notes. The Company issued in August 2000, an additional
Series C Note to ACS in the aggregate principal amount of approximately
$306,000 for the interest due. The Series C Notes were paid with
interest totaling approximately $818,000 on September 15, 2000, the
date of the closing of the Vineland Sale.
Also, on June 26, 2000, the Company entered into a Second Senior
Amendment dated as of June 23, 2000 with Fleet. Pursuant to the Second
Senior Amendment, the Company obtained an "Overadvance" of $500,000
under the senior revolving line of credit, repayable in full on the
earlier to occur of September 22, 2000 or the date of the consummation
of the Vineland Sale. Under the Second Senior Amendment, Fleet agreed
to forbear from exercising its right to accelerate the maturity of the
senior loans upon the default by the Borrower under certain financial
covenants (the Forbearance Covenants). The Company did not borrow any
funds from the overadvance.
On September 15, 2000 the shareholders of the Company approved and the
Company consummated the sale of the assets of the Vineland Laboratories
division. In exchange for receipt of such assets, the Buyer assumed
certain Company liabilities, in the aggregate, equal to approximately
$2,300,000 and paid the Company cash in the amount of $12,500,000, of
which $500,000 was placed in an escrow fund to secure potential
obligations of the Company relating to final purchase price adjustments
and indemnification. The Company applied a portion of the proceeds of
the Vineland Sale to the Fleet required payments on the Revolving Loan,
Capital Expenditure Loan and Term Loans totaling approximately
$10,875,000. The Company's operating results reflect a $395,000 gain on
the Vineland Sale, and a $984,000 extraordinary loss on the early
extinguishment of debt.
Due to the terms of the Second Senior Amendment and the Second
Subordinated Amendment discussed above, the Company has classified all
debt owed to ACS and Fleet as short-term debt. The Company's
independent accountants determined that substantial doubt exists about
the Company's ability to continue as a going concern. Even after the
Vineland Sale and repayment of the Series C Notes, the Company remains
highly leveraged; furthermore, availability for borrowings under the
revolving line of credit facility is dependent on the level of its
qualifying accounts receivable and inventory.
6
<PAGE> 7
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ACS and Fleet have waived compliance with certain financial covenants
through September 30, 2000. As of October 1, 2000, the Company is not
in compliance with the bank covenants. Based on the results through the
third quarter of 2000, which reflects a lower sales price for the
Vineland Division, operating losses and the additional deferred tax
valuation allowance, none of which were anticipated at the time the
covenants were established, ACS and Fleet have agreed to renegotiate
the covenants going forward prior to 2001.
4. PER SHARE DATA
Per share data is computed based upon the weighted average number of
shares of common stock, adjusted for the potential conversion of
dilutive common stock equivalents. Given the Company's net loss, basic
and dilutive earnings per share data are equal for the periods ended
September 30, 2000 and 1999.
5. INVENTORIES
Inventories are valued at the lower of cost, using the first-in,
first-out ("FIFO") method, or market.
Inventories at September 30, 2000 and December 31, 1999 consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------- -----------------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Finished goods $1,832 $2,445
Work-in-process -- 3,853
Raw materials 1,192 2,464
------ ------
Total $3,024 $8,762
====== ======
</TABLE>
6. REGULATORY PROCEEDINGS AND LEGAL PROCEEDINGS
The Company is subject to review, oversight and periodic inspections by
governmental regulatory agencies such as the SEC, the U.S. Department
of Agriculture ("USDA"), the Federal Food and Drug Administration
("FDA") and the New Jersey Department of Environmental Protection
("NJDEP") and the local department of health.
FDA INSPECTION OBSERVATIONS
In April 2000, the FDA initiated an inspection of the Company's
Companion Pet Products division and issued an inspection report on Form
FDA 483 on July 5, 2000. The July 5, 2000 FDA report includes several
unfavorable observations of manufacturing and quality assurance
practices and products of the division. In an effort to address a
number of the FDA's stated concerns, on May 24, 2000, the Company
permanently discontinued production and shipment of Liquichlor and on
June 1, 2000 temporarily stopped production of Cerumite, both products
of the Pet Products Division.The aggregate annual sales volume for
these products for the fiscal year ended December 31, 1999 was
$1,059,000 in total, $534,000 for Liquichlor and $525,000 for Cerumite.
The Company has responded to the July 5, 2000 FDA report and is
currently preparing the required written procedures and documentation
on product preparation to comply with the FDA regulations. After this
is completed, the Company will contact the FDA for a return visit. The
Company is unable to estimate, at this time, when it will request the
FDA's return visit.
The Company formally responded to the July 5, 2000 observations. The
FDA will evaluate the Company's response and will determine the
ultimate outcome of the FDA inspection. An unfavorable
7
<PAGE> 8
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
outcome could result in fines, penalties and the potential permanent or
temporary halt of the sale of certain regulated products, any or all of
which could have a material, adverse effect on the Company. The Company
has incurred $884,000 year to date in related expenses to improve
production, to meet documentation, procedural and regulatory
compliance.
SEC INVESTIGATION
On July 26, 2000, the Company reached an agreement in principle with
the staff of the SEC to resolve matters arising with respect to the
informal investigation of the Company commenced by the SEC in April
1998. Under the agreement, which will not be final until approved by
the SEC, the Company neither admits nor denies that the Company
violated the financial reporting and record-keeping requirements of
Section 13 of the Securities Exchange Act of 1934, as amended, for the
fiscal years 1995, 1996 and 1997. Further, in the agreement, the
Company agrees to the entry of an order to cease and desist from any
such violation in the future. No monetary penalty is expected.
The investigation and settlement focus on fraudulent actions taken by
former members of the company's management. Upon becoming aware of the
fraudulent activity, IGI, through its Board of Directors, immediately
commenced an internal investigation which led to the termination of
employment of those responsible. IGI then cooperated fully with the
staff of the SEC and disclosed to the Commission the results of the
internal investigation.
NJDEP ACTION
On April 6, 2000, officials of the New Jersey Department of
Environmental Protection inspected a company storage site in Buena, New
Jersey and issued a Notice of Violation relating to the storage of
waste materials in a number of trailers at the site. The Company has
established a disposal and cleanup schedule and has commenced
operations to remove materials from the site. Small amounts of
hazardous waste were discovered and the Company was issued a notice of
violation relating to the storage of these materials. The Company is
cooperating with the authorities and expects the assessment of fines or
penalties. The Company has expensed the full expected cost of $160,000
related to the disposal and cleanup.
On or around, May 17, 2000, the Company became aware of a spill at its
Vineland Laboratories facility of about 965 gallons of #2 fuel oil. By
May 26, 2000 the Company had completed remediation of the soil and
nearby creek that were affected by the heating oil spill. To assure
that the nearby groundwater was not contaminated by the spill, the
Company's environmental consultants advised the Company to drill a test
well. The well has been drilled and the analytical results found no
contamination of groundwater. The Company has expensed the costs of the
initial remediation and accrued the costs of drilling the test well.
Accruals for environmental remediation are recorded when it is probable
a liability has been incurred and costs are reasonably estimable. The
estimated liabilities are recorded at undiscounted amounts. It is the
Company's practice to reflect environmental insurance recoveries in the
results of operations for the quarter in which the litigation is
resolved through settlement or other appropriate legal process.
COHANZICK PARTNERS, LP ACTION
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., Edward B. Hager, the Company's Chairman, the following
directors of the Company: Terrence D. Daniels, Jane E. Hager,
Constantine L. Hampers
8
<PAGE> 9
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
and Terrence O'Donnell and the following former directors and officers
of the Company: Kevin J. Bratton, Stephen G. Hoch, Surendra Kumar,
Donald J. MacPhee, Lawrence N. Zitto, Paul D. Paganucci, David G.
Pinosky and John O. Marsh (collectively, the "IGI Defendants") and John
P. Gallo, the Company's former President. The suit which sought
approximately $420,000 in actual damages together with fees, costs and
interest, alleged 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 IGI Defendants
settled the matter pursuant to a Stipulation and Order of Dismissal
signed by the Court on July 19, 2000. In exchange for the plaintiff's
agreement to dismiss its claims against the IGI Defendants, the Company
issued to the plaintiff 35,000 shares of unregistered Common Stock of
the Company, $.01 par value per share, and the Company's insurer agreed
to pay $97,500 to the plaintiff. The Company issued the 35,000 shares
of Common Stock in June, 2000 and recorded the issuance at the fair
market value of the Common Stock on the date of issuance ($1.375 per
share) or $48,125 in the aggregate. As of December 31, 1999, the
Company established a reserve with respect the Cohanzick suit of
$88,750. The Company offset the $48,125 upon issuance of stock to the
reserve during this quarter.
7. BUSINESS SEGMENTS
Summary data related to the reportable segments for the Company's
continuing operations for the nine-month periods ended September 30,
2000 and 1999 appear below:
<TABLE>
<CAPTION>
COMPANION CONSUMER
PET PRODUCTS PRODUCTS CORPORATE * CONSOLIDATED
------------ -------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30:
2000
----
Revenues $ 3,033 $ 1,286 $ -- $ 4,319
Operating profit (loss) (163) 719 (1,907) (1,351)
1999
----
Revenues 3,861 1,508 -- 5,369
Operating profit (loss) 1,119 840 (1,342) 617
NINE MONTHS ENDED SEPTEMBER 30:
2000
----
Revenues 9,736 5,056 -- 14,792
Operating profit (loss) 410 3,138 (4,217) (669)
1999
----
Revenues 10,788 5,059 -- 15,847
Operating profit (loss) 3,289 2,845 (4,082) 2,052
</TABLE>
*Notes:
(A) Unallocated corporate expenses are principally general and
administrative expenses.
(B) Transactions between reportable segments are not material.
8. EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT
A portion of the cash proceeds for the sale of the Vineland
Laboratories division was used to pay down bank debt of $10,875,000. An
extraordinary loss of $984,000 was recognized in connection with this
pay-down, representing unamortized deferred charges related to the bank
financing.
9
<PAGE> 10
IGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
9. INCOME TAXES
The increase in tax expense is the result of an additional valuation
allowance of $6,448,000 recorded during the quarter ended September 30,
2000. On a quarterly basis, the Company evaluates the recoverability of
its deferred tax assets based on its history of operating earnings, its
expectations for the future, and the expiration dates of the net
operating loss carryforwards. At September 30, 2000, there were a
number of events that were not originally forecasted or expected by the
Company, which negatively impacted the earnings and cash flow of the
Company and will continue to impact the Company in the future. The
Company initially expected to receive $17.5 million on the sale of the
Vineland division; the final negotiated price was for $15.0 million. In
addition, the Company projected the Vineland division to generate an
operating profit in 2000 but instead it incurred a substantial
operating loss, including a third quarter operating loss for the
Vineland division through September 15, 2000, the date of the sale of
Vineland of $1,499,000. Also, the Petcare division, due to the FDA
inspection and related inspection report received on July 5, 2000, has
suspended production and sales of two significant Petcare products and
incurred substantial consulting fees related to the products that the
FDA requested to be recalled. In the third quarter, the Company decided
to permanently discontinue the manufacture and sale of Liquichlor,
which had sales of $534,000 in 1999. In addition, the Company cannot
predict when or if it will resume production of Cerumite. The Company's
Consumer division has also generated less profit than was originally
projected in 2000. All of the above events have had a negative impact
on profitability and cash flow and resulted in the Company being in
violation of its bank covenants. As a result, the Company has concluded
that based on its evaluation of the events that have arisen through the
third quarter of 2000, and its forecast of future operating results, it
is not likely that it will be able to fully realize their deferred tax
assets in the foreseeable future. Also, upon future positive operating
results the deferred tax assets can be reinstituted.
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 CONTINUING OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO SEPTEMBER 30, 1999
The Company had a net loss of $8,684,000 or $.84 per share, for the
three months ended September 30, 2000 as compared to a net loss of
$181,000, or $.02 per share, for the quarter ended September 30, 1999.
The increase in net loss is a result of charges for additional
Companion Pet consulting fees, write off of Companion Pet Products
obsolete inventory and product recalls, executive severance, investment
banker's fee, additional legal costs, and establishment of additional
valuation allowances for deferred tax assets.
Total revenues for the quarter ended September 30, 2000 were
$4,319,000, which represents a decrease of $1,050,000 or 20%, compared
to revenues of $5,369,000, for the quarter ended September 30, 1999.
The decrease is due to lower Companion Pet and Consumer Product
revenues. Companion Pet Product revenue decreased $828,000 or 21%
primarily due to lost
10
<PAGE> 11
IGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
revenues from product recalls and removal of these products from the
product line. Consumer Product revenue decreased $222,000 or 15% mainly
from reduced sales to Estee Lauder and lower royalty income from
Johnson & Johnson, offset by higher Genesis related licensing income.
Cost of sales increased by $434,000, or 19%, from the quarter ended
September 30, 1999. As a percentage of revenues, cost of sales
increased from 42% in the quarter ended September 30, 1999 to 62% in
the quarter ended September 30, 2000. The resulting decrease in gross
profit from 58% in 1999 to 38% in 2000 is the result of unusual charges
of an additional $250,000 for consulting and other related costs for
Pet Care Products documentation, procedural and regulatory compliance
issues, a $146,000 charge for recall of certain Pet Care products and a
charge of $315,000 for Pet Products' inventory obsolescence. Without
these the unusual charges of $711,000, the gross profit for the quarter
would have been 47%.
Selling, general and administrative expenses increased by $444,000 or
19%, from $2,342,000 in the quarter ended September 30, 1999 to
$2,786,000 in the quarter ended September 30, 2000. As a percentage of
revenues, these expense were 44% of revenues for the quarter ended
September 30, 1999 compared to 65% in the quarter ended September 30,
2000. The increase is the result of $280,000 for the former President's
severance package, $206,000 fee for investment banking services and
$134,000 for additional legal costs related to recent SEC filings.
Product development and research expenses increased by $40,000 or 22%
compared to the quarter ended September 30, 1999. The increase is
mainly for additional research staff to work on new and existing
projects.
Net interest expense changed by $50,000 from $835,000 net interest
expense for the three months ended September 30, 1999 to $885,000 for
the three months ended September 30, 2000. The increase is the result
of higher borrowing required to fund operations until the sale of the
Vineland Division on September 15, 2000.
The increase in tax expense is the result of an additional valuation
allowance of $6,448,000 recorded during the quarter ended September 30,
2000. On a quarterly basis, the Company evaluates the recoverability of
its deferred tax assets based on its history of operating earnings, its
expectations for the future, and the expiration dates of the net
operating loss carryforwards. At September 30, 2000, there were a
number of events that were not originally forecasted or expected by the
Company, which negatively impacted the earnings and cash flow of the
Company and will continue to impact the Company in the future. The
Company initially expected to receive $17.5 million on the sale of the
Vineland division; the final negotiated price was for $15.0 million. In
addition, the Company projected the Vineland division to generate an
operating profit in 2000 but instead it incurred a substantial
operating loss, including a third quarter operating loss for the
Vineland division through September 15, 2000, the date of the sale of
Vineland of $1,499,000. Also, the Petcare division, due to the FDA
inspection and related inspection report received on July 5, 2000, has
suspended production and sales of two significant Petcare products and
incurred substantial consulting fees related to the products that the
FDA requested to be recalled. In the third quarter, the Company decided
to permanently discontinue the manufacture and sale of Liquichlor,
which had sales of $534,000 in 1999. In addition, the Company cannot
predict when or if it will resume production of Cerumite. The Company's
Consumer division has also generated less profit than was originally
projected in 2000. All of the above events have had a negative impact
on profitability and cash flow and resulted in the Company being in
violation of its bank covenants. As a result, the Company has concluded
that based on its evaluation of the events that have arisen through the
third quarter of 2000, and its forecast of future operating results, it
is not likely that it will be able to fully realize their deferred tax
assets in the foreseeable future. Also, upon future positive operating
results the deferred tax assets can be reinstituted.
11
<PAGE> 12
IGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DISCONTINUED OPERATIONS
On September 15, 2000, the shareholders of the Company approved and the
Company consummated the sales of the assets and transfers of the
liabilities of the Vineland Laboratories division. The buyer assumed
liabilities of approximately $2,300,000, and paid the Company cash in
the amount of $12,500,000, of which $500,000 was placed in an escrow
fund to secure potential obligations of the Company relating to final
purchase price adjustments and indemnification. The Company's results
reflects a $395,000 gain on the Vineland Sale under Gain on Disposal of
Discontinued Business. Also, the Vineland Laboratories division
incurred a loss of $1,499,000 and $1,978,000 for the three and nine
months ended September 30, 2000, respectively, as reflected as a loss
from operations of discontinued business.
RESULTS OF CONTINUING OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO SEPTEMBER 30, 1999
The Company had a net loss of $8,741,000, or $.86 per share, for the
nine months ended September 30, 2000 as compared to a net loss of
$383,000, or $.04 per share, for the nine months ended September 30,
1999. The increase in the net loss compared to the prior year, was
primarily due to decreased revenue for Companion Pet Products,
increased cost of sales for Companion Pet Products, and establishment
of an additional valuation allowance for deferred taxes.
Total revenues for the nine months ended September 30, 2000 were
$14,792,000, which represents a decrease of $1,055,000, or 7%, from
revenues of $15,847,000 for the nine months ended September 30, 1999.
The decrease in revenues was primarily attributable to decreased
Companion Pet sales from product recalls and removal of these products
from the product line. Consumer Products revenues decreased because of
lower Estee Lauder shipments but this was offset by higher licensing
and royalty income.
Cost of sales increased by $1,586,000, or 25%, from the nine months
ended September 30, 1999. As a percentage of revenues, cost of sales
increased from 40% in the nine months ended September 30, 1999 to 54%
in the nine months ended September 30, 2000. The resulting decrease in
gross profit from 60% in 1999 to 46% in 2000, is the result of unusual
charges of $884,000 for consulting and other related costs for Petcare
Products documentation, procedural and regulatory compliance issues,
$160,000 for hazardous waste removal and $796,000 for Pet Product
recall and inventory related reserve. In addition, on May 17, 2000, an
oil tank spill occurred at the Poultry Vaccine Vineland facility.
$167,000 in expenses was incurred to clean up the oil spill. Excluding
the unusual charges above of $2,007,000, this would have resulted in a
60% gross profit for the nine months ended September 30, 2000.
Selling, general and administrative expenses decreased by $153,000, or
2%, from $6,970,000 in the nine months ended September 30, 1999 to
$6,817,000 in the nine months ended September 30, 2000. As a percentage
of revenues, these expenses were 44% of revenues for the nine months
ended September 30, 1999 compared to 46% in the nine months ended
September 30, 2000. Overall expenses decreased due to cost saving
measures implemented offset by the former President's severance
package, fees for investment banking services and increased legal costs
related to recent SEC filings.
12
<PAGE> 13
IGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Product development and research expenses increased by $233,000, or
53%, compared to the nine months ended September 30, 1999. The increase
is principally for additional research staff to work on new and
existing projects.
Net interest expense decreased $280,000, or 20%, from $2,500,000 for
the nine months ended September 30, 1999 to $2,220,000 in the nine
months ended September 30, 2000. The decrease is a result of the
amendment of the ACS Subordinated notes, whereby the "put" provision
associated with the original warrants granted to purchase 1,907,543
shares of the Company's stock were replaced by a "make-whole" feature.
The non-taxable interest expense reduction of $1,431,000 reflects the
decrease in the fair value of the warrants from April 1, 2000 to April
12, 2000.
The increase in tax expense is the result of an additional valuation
allowance of $6,448,000 recorded during the quarter ended September 30,
2000. On a quarterly basis, the Company evaluates the recoverability of
its deferred tax assets based on its history of operating earnings, its
expectations for the future, and the expiration dates of the net
operating loss carryforwards. At September 30, 2000, there were a
number of events that were not originally forecasted or expected by the
Company, which negatively impacted the earnings and cash flow of the
Company and will continue to impact the Company in the future. The
Company initially expected to receive $17.5 million on the sale of the
Vineland division; the final negotiated price was for $15.0 million. In
addition, the Company projected the Vineland division to generate an
operating profit in 2000 but instead it incurred a substantial
operating loss, including a third quarter operating loss for the
Vineland division through September 15, 2000, the date of the sale of
Vineland of $1,499,000. Also, the Petcare division, due to the FDA
inspection and related inspection report received on July 5, 2000, has
suspended production and sales of two significant Petcare products and
incurred substantial consulting fees related to the products that the
FDA requested to be recalled. In the third quarter, the Company decided
to permanently discontinue the manufacture and sale of Liquichlor,
which had sales of $534,000 in 1999. In addition, the Company cannot
predict when or if it will resume production of Cerumite. The Company's
Consumer division has also generated less profit than was originally
projected in 2000. All of the above events have had a negative impact
on profitability and cash flow and resulted in the Company being in
violation of its bank covenants. As a result, the Company has concluded
that based on its evaluation of the events that have arisen through the
third quarter of 2000, and its forecast of future operating results, it
is not likely that it will be able to fully realize their deferred tax
assets in the foreseeable future. Also, upon future positive operating
results the deferred tax assets can be reinstituted.
LIQUIDITY AND CAPITAL RESOURCES
On April 12, 2000, ACS 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 ACS, in either Common Stock or cash,
at the option of the Company, in the event that ACS 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. ACS 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.
During the nine months ended September 30, 2000, the Company recognized
a benefit of $358,000 reflected as a reduction of interest expense for
the mark-to-market adjustment for the fair value of the "put" warrant
for the nine month period ended September 30, 2000. As a result of the
amendment, the net liability recognized related to these warrants was
reclassified as a component of equity without a future mark-to-market
adjustment effective April 12, 2000.
13
<PAGE> 14
IGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In connection with the amendment to the Subordinated Debt Agreement,
ACS 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.
In April, 2000, the FDA initiated an inspection of the Company's
Companion Pet Products division and issued an inspection report on Form
FDA 483 on July 5, 2000. The July 5, 2000 FDA report included several
unfavorable observations of manufacturing and quality assurance
practices and products of the division. In an effort to address a
number of the FDA's stated concerns, on May 24, 2000, the Company
permanently discontinued production and shipment of Liquichlor and on
June 1, 2000 temporarily stopped production of Cerumite, both products
of the Pet Products Division.The aggregate annual sales volume for
these products for the fiscal year ended December 31, 1999 was
$1,059,000, $534,000 for Liquichlor and $525,000 for Cerumite. The
Company has responded to the July 5, 2000 FDA report, and is currently
preparing the required written procedures and documentation on product
preparation to comply with the FDA regulations. After this is
completed, the Company will contact the FDA for a return visit. The
Company is unable to estimate, at this time, when it will request the
FDA" return visit. The Company has incurred $884,000 year to date in
related expenses to improve production, to meet documentation,
procedural and regulatory compliance.After accounting for this
cessation of production and combining these results with continued
operating losses in the poultry vaccine business, the Company
determined that it was not in compliance with the financial covenants
in the debt agreements, as amended.
On June 26, 2000, the Company entered into the Second Subordinated
Amendment with ACS. Pursuant to the Second Subordinated Amendment, the
Company received $500,000 and issued to ACS $500,000 of Series C Senior
Subordinated Notes due September 30, 2000; and ACS waived compliance
with certain financial covenants applicable to Borrower contained in
the Subordinated Debt Agreement and modified certain interest payment
dates with respect to the Notes. In addition, the Second Subordinated
Amendment permits the Company to issue additional Series C Notes on
July 31, 2000 to pay the interest then due and payable on the Notes and
the Series C Notes. The Company issued in August 2000, an additional
Series C Note to ACS in the aggregate principal amount of approximately
$306,000 for the interest due. The Series C Notes were paid with
interest totaling approximately $818,000 on September 15, 2000, the
date of the closing of the Vineland Sale.
Also, on June 26, 2000, the Company entered into a Second Senior
Amendment dated as of June 23, 2000 with Fleet. Pursuant to the Second
Senior Amendment, the Company obtained an "Overadvance" of $500,000
under the senior revolving line of credit, repayable in full on the
earlier to occur of September 22, 2000 or the date of the consummation
of the Vineland Sale. Under the Second Senior Amendment, Fleet agreed
to forbear from exercising its right to accelerate the maturity of the
senior loans upon the default by the Borrower under certain financial
covenants (the Forbearance Covenants). The Company did not borrow any
funds from the overadvance.
On September 15, 2000 the shareholders of the Company approved and the
Company consummated the sale of the assets of the Vineland Laboratories
division. In exchange for receipt of such assets, the Buyer assumed
certain Company liabilities, in the aggregate, equal to approximately
$2,300,000 and paid the Company cash in the amount of $12,500,000, of
which $500,000 was
14
<PAGE> 15
IGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
placed in an escrow fund to secure potential obligations of the Company
relating to final purchase price adjustments and indemnification. The
Company applied a portion of the proceeds of the Vineland Sale to the
Fleet required payments on the Revolving Loan, Capital Expenditure Loan
and Term Loans totaling approximately $10,875,000. The Company's
operating results reflect a $395,000 gain on the Vineland Sale, and a
$984,000 extraordinary loss on the early extinguishment of debt.
Due to the terms of the Second Senior Amendment and the Second
Subordinated Amendment discussed above, the Company has classified all
debt owed to ACS and Fleet as short-term debt. The Company's
independent accountants determined that substantial doubt exists about
the Company's ability to continue as a going concern. Even after the
Vineland Sale and repayment of the Overadvance and the Series C Notes,
the Company remains highly leveraged; furthermore, availability for
borrowings under the revolving line of credit facility is dependent on
the level of its qualifying accounts receivable and inventory.
ACS and Fleet have waived compliance with certain financial covenants
through September 30, 2000. As of October 1, 2000, the Company is not
in compliance with the bank covenants. Based on the results through the
third quarter of 2000, which reflects a lower sales price for the
Vineland Division, operating losses and the additional deferred tax
valuation allowance, none of which were anticipated at the time the
covenants were established, ACS and Fleet have agreed to renegotiate
the covenants going forward prior to 2001.
The Company remains highly leveraged and as a result, access to
additional funding sources is limited. The Company's available
borrowing 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 renegotiating
its financial covenants or 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 $3.5 million of cash during the
nine-month period ended September 30, 2000. The Company generated
approximately $11.2 million of cash in investing activities, primarily
from the sale of the Vineland Division. 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.
REGULATORY PROCEEDING AND LEGAL PROCEEDINGS
The Company is subject to review, oversight and periodic inspections by
governmental regulatory agencies such as the SEC, the USDA, the FDA and the
NJDEP and the local department of health.
FDA INSPECTION OBSERVATIONS
In April 2000, the FDA initiated an inspection of the Company's Companion
Pet Products division and issued an inspection report on Form FDA 483 on
July 5, 2000. The July 5, 2000 FDA report includes several unfavorable
observations of manufacturing and quality assurance practices and products
of the division. In an effort to address a number of the FDA's stated
concerns, on May 24, 2000, the Company permanently discontinued production
and shipment of Liquichlor and on June 1, 2000 temporarily stopped
production of Cerumite, both products of the Pet Products Division.The
aggregate annual sales volume for these products for the fiscal year ended
December 31, 1999 was
15
<PAGE> 16
IGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
$1,059,000 in total, $534,000 for Liquichlor and $525,000 for Cerumite.
The Company has responded to the July 5, 2000 FDA report and is
currently preparing the required written procedures and documentation
on product preparation to comply with the FDA regulations. After this
is completed, the Company will contact the FDA for a return visit. The
Company is unable to estimate, at this time, when it will request the
FDA's return visit.
Upon receipt of the Company's formal response to the July 5, 2000
observations, the FDA will evaluate the Company's response and will
determine the ultimate outcome of the FDA inspection. An unfavorable
outcome could result in fines, penalties and the potential halt of the
sale of certain regulated products, any or all of which could have a
material, adverse effect on the Company. The Company has incurred
$884,000 year to date in related expenses to improve production, to
meet documentation, procedural and regulatory compliance.
SEC INVESTIGATION
On July 26, 2000, the Company reached an agreement in principle with
the staff of the SEC to resolve matters arising with respect to the
informal investigation of the Company commenced by the SEC in April
1998. Under the agreement, which will not be final until approved by
the SEC, the Company neither admits nor denies that the Company
violated the financial reporting and record-keeping requirements of
Section 13 of the Securities Exchange Act of 1934, as amended, for the
fiscal years 1995, 1996 and 1997. Further, in the agreement, the
Company agrees to the entry of an order to cease and desist from any
such violation in the future. No monetary penalty is expected.
The investigation and settlement focus on fraudulent actions taken by
former members of the company's management. Upon becoming aware of the
fraudulent activity, IGI, through its Board of Directors, immediately
commenced an internal investigation which led to the termination of
employment of those responsible. IGI then cooperated fully with the
staff of the SEC and disclosed to the Commission the results of the
internal investigation.
NJDEP ACTION
On April 6, 2000, officials of the New Jersey Department of
Environmental Protection inspected a company storage site in Buena, New
Jersey and issued a Notice of Violation relating to the storage of
waste materials in a number of trailers at the site. The Company has
established a disposal and cleanup schedule and has commenced
operations to remove materials from the site. Small amounts of
hazardous waste were discovered and the Company was issued a notice of
violation relating to the storage of these materials. The Company is
cooperating with the authorities and expects the assessment of fines or
penalties. The Company has expensed the full cost of $160,000 related
to the disposal and cleanup.
On or around, May 17, 2000, the Company became aware of a spill at its
Vineland Laboratories facility of about 965 gallons of #2 fuel oil.By
May 26, 2000 the Company had completed remediation of the soil and
nearby creek that were affected by the heating oil spill. To assure
that the nearby groundwater was not contaminated by the spill, the
Company's environmental consultants advised the Company to drill a test
well. The well has been drilled and the analytical results found no
contamination of groundwater. The Company has expensed the costs of the
initial remediation and accrued the costs of drilling the test well.
Accruals for environmental remediation are recorded when it is probable
a liability has been incurred and costs are reasonably estimable. The
estimated liabilities are recorded at undiscounted amounts. It is the
Company's practice to reflect environmental insurance recoveries in the
results of operations
16
<PAGE> 17
IGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
for the quarter in which the litigation is resolved through settlement
or other appropriate legal process.
COHANZICK PARTNERS, LP ACTION
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., Edward B. Hager, the Company's Chairman, the following
directors of the Company: Terrence D. Daniels, Jane E. Hager,
Constantine L. Hampers and Terrence O'Donnell and the following former
directors and officers of the Company: Kevin J. Bratton, Stephen G.
Hoch, Surendra Kumar, Donald J. MacPhee, Lawrence N. Zitto, Paul D.
Paganucci, David G. Pinosky and John O. Marsh (collectively, the "IGI
Defendants") and John P. Gallo, the Company's former President. 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 IGI
Defendants settled the matter pursuant to a Stipulation and Order of
Dismissal signed by the Court on July 19, 2000. In exchange for the
plaintiff's agreement to dismiss its claims against the IGI Defendants,
the Company issued to the plaintiff 35,000 shares of unregistered
Common Stock of the Company, $.01 par value per share, and the
Company's insurer agreed to pay $97,500 to the plaintiff. The Company
issued the 35,000 shares of Common Stock in June, 2000 and recorded the
issuance at the fair market value of the Common Stock on the date of
issuance ($1.375 per share) or $48,125 in the aggregate. As of December
31, 1999, the Company established a reserve with respect the Cohanzick
suit of $88,750. The Company offset the $48,125 upon issuance of stock
to the reserve during this quarter .
FACTORS WHICH MAY AFFECT FUTURE RESULTS
HIGHLY LEVERAGED AND DEBT COVENANT COMPLIANCE
In connection with the June, 2000 amendments to the Company's debt
agreements, the Company reclassified its long-term debt, outstanding as
of December 31, 1999 as short-term debt and the Company's independent
accountants have determined that substantial doubt exists about the
Company's ability to continue as a going concern.
Even after the Vineland Sale, the Company is very highly leveraged and
subject to restrictive covenants and restraints which are contained in
its Senior Debt Agreement, as amended, and its Subordinated Debt
Agreement, as amended.
The debt agreements contain various affirmative and negative covenants,
such as requirements to achieve minimum tangible net worth and minimum
fixed charge coverage ratios. Furthermore, the Company's available
borrowings under the revolving line of credit are dependent upon the
level of the Company's qualifying accounts receivable and inventory.
ACS and Fleet have waived compliance with certain financial covenants
through September 30, 2000. As of October 1, 2000, the Company is not
in compliance with the bank covenants. Based on the results through the
third quarter of 2000, which reflects a lower sales price for the
Vineland Division, operating losses and the additional deferred tax
valuation allowance, none of which were anticipated at the time the
covenants were established, ACS and Fleet have agreed to renegotiate
the covenants going forward prior to 2001.
If the Company is not successful in meeting its financial covenants, a
default could occur under the debt agreements and any such default, if
not resolved, could lead to curtailment of certain the Company's
business operations, sale of certain assets or commencement of
insolvency proceedings by the Company's creditors.
17
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IGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
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.
18
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IGI, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On April 12, 2000, ACS 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 ACS, in either Common Stock or cash,
at the option of the Company, in the event that ACS 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. ACS 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.
As a result of the amendment, the liability recognized related to the
warrants was reclassified as a component of equity without a future
mark-to-market adjustment effective April 12, 2000. A reduction of
interest expense of $1,431,000 was recognized in the second quarter
reflecting a decrease in the fair value of the warrants from April 1 to
April 12, 2000.
19
<PAGE> 20
IGI, INC. AND SUBSIDIARIES
FINANCIAL SCHEDULES
PART II OTHER INFORMATION
Item 1 - Legal Proceedings
SEC INVESTIGATION
On July 26, 2000, the Company reached an agreement in principle with
the staff of the SEC to resolve matters arising with respect to the
informal investigation of the Company commenced by the SEC in April
1998. Under the agreement, which will not be final until approved by
the SEC, the Company neither admits nor denies that the Company
violated the financial reporting and record-keeping requirements of
Section 13 of the Securities Exchange Act of 1934, as amended, for the
fiscal years 1995, 1996 and 1997. Further, in the agreement, the
Company agrees to the entry of an order to cease and desist from any
such violation in the future. No monetary penalty is expected.
The investigation and settlement focus on fraudulent actions taken by
former members of the company's management. Upon becoming aware of the
fraudulent activity, IGI, through its Board of Directors, immediately
commenced an internal investigation which led to the termination of
employment of those responsible. IGI then cooperated fully with the
staff of the SEC and disclosed to the Commission the results of the
internal investigation.
COHANZICK PARTNERS, LP ACTION
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., Edward B. Hager, the Company's Chairman, the following
directors of the Company: Terrence D. Daniels, Jane E. Hager,
Constantine L. Hampers and Terrence O'Donnell and the following former
directors and officers of the Company: Kevin J. Bratton, Stephen G.
Hoch, Surendra Kumar, Donald J. MacPhee, Lawrence N. Zitto, Paul D.
Paganucci, David G. Pinosky and John O. Marsh (collectively, the "IGI
Defendants") and John P. Gallo, the Company's former President. 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 IGI Defendants settled the matter pursuant to a Stipulation
and Order of Dismissal signed by the Court on July 19, 2000. In
exchange for the plaintiff's agreement to dismiss its claims against
the IGI Defendants, the Company issued to the plaintiff 35,000 shares
of unregistered Common Stock of the Company, $.01 par value per share,
and the Company's insurer agreed to pay $97,500 to the plaintiff.
Item 3 - Defaults on Senior Securities
The Company has failed to comply with the financial covenants contained
in its loan agreements with Fleet and ACS regards to the fixed charge
coverage, the maximum leverage ratio and the maximum debt-to-equity
ratio. The Company's lenders had agreed to forbear through September
30, 2000 from taking action with regards to non-compliance 2000. The
Company has also failed to comply with the same covenants for the
quarter ended September 30, 2000. The lenders have also agreed to waive
non-compliance. The Company and its lenders have agreed to renegotiate
these covenants. However, the Company cannot predict whether it will be
able to negotiate new covenants with which it can comply.
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IGI, INC. AND SUBSIDIARIES
FINANCIAL SCHEDULES
Item 5 - Other Information
The Company has entered into a Separation Agreement with Paul Woitach,
formerly President and Chief Executive Officer of the Company,
regarding his separation from the Company. The Agreement provides for
the continued payment of his salary through August 31, 2001 and for the
continuation of certain other benefits. The Company also agreed to
extend the period in which he may exercise Company stock options to
December 31, 2001.
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IGI, INC. AND SUBSIDIARIES
FINANCIAL SCHEDULES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IGI, Inc.
(Registrant)
Date: November 14, 2000 By: /s/John Ambrose
----------------------------------------------
John Ambrose
President and Chief Operating Officer
Date: November 14, 2000 By: /s/ Domenic N. Golato
----------------------------------------------
Domenic N. Golato
Senior Vice President and Chief Financial Officer
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IGI, INC. AND SUBSIDIARIES
FINANCIAL SCHEDULES
The following exhibits are filed herewith:
10.1 Amendment and Waiver to Loan and Security Agreement dated as
of October 31, 2000 between Fleet Capital Corporation and the
Company and its affiliates.
10.2 Letter Waiver dated November 9, 2000 between American Capital
Strategies, Ltd. and the Company and its affiliates.
10.3 Separation Agreement and General Release dated September 1,
2000 between the Company and Paul Woitach.
