-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LFwolbeoPpxIZzRsxpna9a1XVcuzFNiAwO1ByabusOrGfgkiTwcL3YnJME+vyIDD RdD9YEu0PIlokQu8+eeuAg== 0000893220-00-000685.txt : 20000516 0000893220-00-000685.hdr.sgml : 20000516 ACCESSION NUMBER: 0000893220-00-000685 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IGI INC CENTRAL INDEX KEY: 0000352998 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 010355758 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08568 FILM NUMBER: 635365 BUSINESS ADDRESS: STREET 1: WHEAT RD AND LINCOCN AVE STREET 2: P O BOX 687 CITY: BUENA STATE: NJ ZIP: 08310 BUSINESS PHONE: 6096971441 MAIL ADDRESS: STREET 1: WHEAT ROAD AND LINCOCN AVE STREET 2: P O BOX 687 CITY: BUENA STATE: NJ ZIP: 08310 FORMER COMPANY: FORMER CONFORMED NAME: IMMUNOGENETICS INC DATE OF NAME CHANGE: 19870814 10-Q 1 QUARTERLY REPORT ON FORM 10-Q 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. MARCH 31, 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 May 5, 2000 10,173,629 2 ITEM 1. FINANCIAL STATEMENTS PART I FINANCIAL INFORMATION IGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(THOUSANDS, EXCEPT SHARE AND PER SHARE THREE MONTHS ENDED MARCH 31, INFORMATION) ------------------------------- 2000 1999 ------------ ----------- Revenues: 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
The accompanying notes are an integral part of the consolidated financial statements. 2 3 IGI, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 (UNAUDITED) DECEMBER 31, 1999 --------------- ----------------- ASSETS (AMOUNTS IN THOUSANDS) 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 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 3 4 IGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------------- 2000 1999 ------- ------- (AMOUNTS IN THOUSANDS) 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 ======= =======
The accompanying notes are an integral part of the consolidated financial statements. 4 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 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:
MARCH 31, 2000 DECEMBER 31, 1999 -------------- ----------------- (AMOUNTS IN THOUSANDS) Finished goods $4,009 $2,445 Work-in-process 2,837 3,853 Raw materials 2,630 2,464 ------ ------ Total $9,476 $8,762 ====== ======
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 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:
POULTRY COMPANION CONSUMER VACCINES PET PRODUCTS PRODUCTS CORPORATE* CONSOLIDATED -------- ------------ -------- --------- ------------ 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
* Notes (A) Unallocated corporate expenses are principally general and administrative expenses. (B) Transactions between reportable segments are not material. 7 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 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 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 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 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 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 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 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-2000 MAR-31-2000 357 0 7,229 (357) 9,476 18,861 21,717 (11,792) 36,114 15,427 0 0 0 103 0 36,114 7,660 8,454 4,317 3,732 0 0 1,899 (1,494) 448 (1,046) 0 0 0 (1,046) (.10) (.10)
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