10-Q/A 1 igi-qa2.txt AMENDMENT TO JUNE 30, 2000 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A FIRST AMENDMENT TO QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File No. ----------------- ------------------- June 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 August 11, 2000 10,247,442 PRELIMINARY STATEMENT IGI, Inc. ("IGI" or the "Company") is hereby amending its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000 to reclassify certain of the Company's long-term debt, outstanding as of June 30, 2000, as short-term debt and to provide relevant information with respect to such reclassification. These actions are taken in respect of certain amendments to the Company's debt agreements at the end of June, 2000. In connection with these amendments, the Company's independent accountants have determined that substantial doubt exists about the Company's ability to continue as a going concern and, accordingly, have amended the audit report on the Company's 1999 financial statements. Item 1. Financial Statements PART I FINANCIAL INFORMATION IGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(thousands, except share and per share information) Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Revenues: Sales, net $7,694 $8,504 $15,354 $16,832 Licensing and royalty income 717 358 1,511 773 ------------------------------------------------- Total revenues 8,411 8,862 16,865 17,605 Cost and expenses: Cost of sales 4,970 4,335 9,287 8,780 Selling, general and administrative expenses 3,210 3,553 6,510 7,168 Product development and research expenses 433 320 865 636 ------------------------------------------------- Operating profit (loss) (202) 654 203 1,021 Interest expense (income), net (564) 843 1,335 1,665 ------------------------------------------------- Income (loss) before provision for income taxes 362 (189) (1,132) (644) Benefit for income taxes 148 57 596 193 ------------------------------------------------- Net income (loss) $ 510 $ (132) $ (536) $ (451) ================================================= Basic and diluted income (loss) per common share $ .05 $ (.02) $ (.05) $ (.05) Basic and diluted weighted average number of Common shares outstanding 10,181,873 9,550,191 10,154,386 9,534,883
The accompanying notes are an integral part of the consolidated financial statements. IGI, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, 2000 December 31, 1999 (restated) (restated) (unaudited) ------------- ----------------- (amounts in thousands) ASSETS Current assets: Cash and equivalents $ 443 $ 416 Accounts receivable, less allowance for doubtful accounts of $431 and $354 in 2000 and 1999, respectively 6,701 6,061 Licensing and royalty receivable 720 432 Inventories, net 9,905 8,762 Current deferred taxes, net 1,096 1,096 Prepaid and other current assets 766 348 -------------------------- Total current assets 19,631 17,115 Property, plant and equipment, net 9,858 9,781 Deferred income taxes, net 5,349 4,754 Deferred financing costs 1,566 1,678 Investments 263 144 Other assets 477 390 -------------------------- Total Assets $ 37,144 $ 33,862 ========================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Revolving credit facility 7,364 5,708 Current portion of long-term debt, net of discount 11,686 11,225 Current portion of notes payable 829 408 Accounts payable 5,468 4,268 Accrued payroll 296 253 Due to stockholder - 115 Accrued interest 536 164 Other accrued expenses 2,001 2,150 Income taxes payable 10 15 -------------------------- Total current liabilities 28,190 24,306 Long-term debt, net of discount and current portion -(a) -(a) Deferred income 298 327 Detachable stock warrants - 3,696 -------------------------- Total Liabilities 28,488 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; 10,314,140 and 10,133,183 shares issued in 2000 and 1999, respectively 103 102 Additional paid-in capital 24,286 20,628 Accumulated deficit (14,092) (13,556) Less treasury stock, 105,510 shares at cost in 2000 and 1999, respectively (1,641) (1,641) -------------------------- Total stockholders' equity 8,656 5,533 -------------------------- Total Liabilities and Stockholders' Equity $ 37,144 $ 33,862 ========================== (a) The adjustment reflects the correction of a typographical error on the Form 10-Q, whereby an amount was listed in the column adjacent to "Long term debt. . ." but never included in or added to the "Total Liabilities" amount presented.
The accompanying notes are an integral part of the consolidated financial statements. IGI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six months ended June 30, ------------------------- 2000 1999 ---- ---- (amounts in thousands) Cash flows from operating activities: Net loss $ (536) $ (451) Reconciliation of net loss to net cash (used by) provided by operating Activities: Depreciation and amortization 550 474 Amortization of deferred financing costs and debt discount 112 - Write-off of other assets - 70 Provision for loss on accounts receivable and inventories 792 231 Recognition of deferred revenue (148) (70) Benefit for deferred income taxes (595) (194) Accrued interest expense relating to put feature of warrants (154) - Stock compensation expense: Non employee stock options 36 44 Directors' stock issuance 50 168 Changes in operating assets and liabilities: Accounts receivable (650) (125) Inventories (1,925) (259) Receivables under royalty agreements (288) (43) Prepaid and other assets 332 41 Accounts payable and accrued expenses 1,466 826 Income taxes payable (5) - Short-term notes payable, operating (329) (275) ----------------------- Net cash (used by) provided by operating activities: (1,292) 437 ----------------------- Cash flows from investing activities: Capital expenditures (548) (461) (Increase) in other assets (166) (185) ----------------------- Net cash used by investing activities (714) (646) ----------------------- Cash flows from financing activities: Borrowings under capital expenditures facility 257 - Borrowings under revolving credit agreement 17,800 - Repayments of revolving credit agreement (16,144) - Proceeds from exercise of common stock options and purchase of common stock 120 - ----------------------- Net cash provided by financing activities 2,033 - ----------------------- Net decrease in cash and equivalents 27 (209) Cash and equivalents at beginning of period 416 1,068 ----------------------- Cash and equivalents at end of period $ 443 $ 859 =======================
The accompanying notes are an integral part of the consolidated financial statements. 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"). 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 ("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, 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. If the registration is not filed by this date, the Company will be required to reverse the $1,431,000 interest expense reduction. 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%. Subsequent Events ----------------- In May, 2000, the federal Food and Drug Administration (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. The Company is currently compiling its responses to the July 5, 2000 FDA report. In an effort to address a number of the FDA's stated concerns, on May 24, 2000, the Company 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. The Company has incurred $634,000 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 an Asset Purchase Agreement dated as of June 19, 2000 (the "Vineland Agreement"), with Vineland International, a general partnership which has changed its name to Lohmann Animal Health International (the "Buyer"). The Vineland Agreement provides for the sale (the "Vineland Sale") by the Company to the Buyer of the assets associated with the business of manufacturing, marketing, licensing and selling poultry vaccines and related equipment conducted by the Vineland Laboratories division of the Company. In exchange for receipt of such assets, the Buyer will assume certain Company liabilities, in the aggregate, equal to approximately $2,300,000 and will pay the Company cash in the amount of $12,500,000, of which $500,000 will be placed in an escrow fund to secure potential obligations of the Company relating to final purchase price adjustments and indemnification. The consummation of the sale is contingent on receipt by September 19, 2000 of the approval of the Vineland Sale by the holders of a majority of the outstanding shares of the Company's stock. The Company projects a $98,000 after tax gain on the Vineland Sale offset by a $528,000 after tax extraordinary loss on the early extinguishment of debt. On June 26, 2000, the Company entered into Amendment No. 2 to Note and Equity Purchase Agreement ("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 (the "Series C Notes"); 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 will issue, in the beginning of August 2000, to ACS an additional Series C Note in the aggregate principal amount of approximately $300,000 for the interest due. Also, on June 26, 2000, the Company entered into a Second Amendment to Loan and Security Agreement dated as of June 23, 2000 (the "Second Senior Amendment") with Fleet. Pursuant to the Second Senior Amendment, the Company obtained an "overadvance" of $500,000 under the senior revolving line of credit (the "Overadvance"), 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") until the first to occur of: (a) September 22, 2000, (b) the date on which any default, other than a default under the Forbearance Covenants, occurs under the Senior Debt Agreement, as amended; or (c) the date of the termination of the Vineland Agreement. The Vineland Agreement may be terminated prior to the closing if any of the following occurs: 1. The Buyer and the Company mutually consent to the termination, or Vineland Sale is not consummated on or before the date that is three (3) months after the date of the Vineland Agreement (the date that is three months after the Vineland Agreement date is September 19, 2000), unless the failure to consummate the transaction is the result of a material breach of the Vineland Agreement by the party seeking to terminate the Vineland Agreement; provided, however, that the passage of such period shall be tolled for any part thereof (but not exceeding ninety (90) days in the aggregate) during which any party shall be subject to a non-final order, decree, ruling or action restraining, enjoining or otherwise prohibiting the consummation of the transaction; 2. A governmental entity issues an order, decree or ruling or takes any other action permanently enjoining, restraining or otherwise prohibiting the transaction and such order, decree, ruling or other action shall have become final and non-appealable; 3. The stockholders of the Company do not approve the Vineland Agreement and transaction. 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. In connection with these amendments, the Company's independent accountants have determined that substantial doubt exists about the Company's ability to continue as a going concern and, accordingly, have amended the audit report on the Company's 1999 financial statements. The Company has scheduled a special meeting of stockholders and has filed a Preliminary Proxy Statement with the Securities and Exchange Commission with respect to Stockholder consideration of the Vineland Sale. 3. 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. The fully dilutive earnings per share data is not shown since the dilutive and basic are equal on June 30, 2000. 4. Inventories Inventories are valued at the lower of cost, using the first-in, first-out ("FIFO") method, or market. Inventories at June 30, 2000 and December 31, 1999 consist of:
June 30, 2000 December 31, 1999 ------------- ----------------- (amounts in thousands) Finished goods $4,010 $2,445 Work-in-process 3,676 3,853 Raw materials 2,219 2,464 ------ ------ Total $9,905 $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 U.S. Securities and Exchange Commission (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 May, 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. The Company is currently compiling its responses to the July 5, 2000 FDA report. In an effort to address a number of the FDA's stated concerns, on May 24, 2000, the Company 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. 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 $634,000 year to date in related expenses to improve production, to meet documentation, procedural and regulatory compliance. On July 5, 2000, the FDA completed its inspection of the Company's Companion Pet Products division and issued an inspection report on Form FDA 483. The July 5, 2000 FDA report includes several unfavorable observations of manufacturing and quality assurance practices and products of the division. The Company is currently compiling its responses to the July 5, 2000 FDA report. In an effort to address a number of the FDA's stated concerns, on May 24, 2000, the Company 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. 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 is being drilled and the Company expects to have analytical results by the end of September, 2000. 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 and Terrence O'Donnell and the following former directors and officers of the Company: Kevin J. Bratton, Stephen G. Hoch, Surendra Kumar, Donald J. Machpee, 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 intends to record the $48,125 upon issuance of stock as an offset to its reserve in the third quarter 2000. 6. Business Segments Summary data related to the Company's reportable segments for the six-month periods ended June 30, 2000 and 1999 appear below:
Poultry Companion Consumer Vaccines Pet Products Products Corporate* Consolidated -------- ------------ -------- ---------- ------------ (in thousands) Three months ended June 30: 2000 Revenues $3,203 $3,374 $1,834 $ - $8,411 Operating profit (loss) (98) (79) 1,167 (1,192) (202) 1999 Revenues 3,261 3,608 1,993 - 8,862 Operating profit (loss) (287) 1,161 1,155 (1,375) 654 Six months ended June 30: 2000 Revenues 6,392 6,703 3,770 - 16,865 Operating profit (loss) (479) 573 2,419 (2,310) 203 1999 Revenues 7,127 6,927 3,551 - 17,605 Operating profit (loss) (414) 2,170 2,005 (2,740) 1,021 *Notes: (A) Unallocated corporate expenses are principally general and administrative expenses. (B) Transactions between reportable segments are not material.
IGI, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations 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 June 30, 2000 compared to June 30, 1999 The Company had net income of $510,000 or $.05 per share, for the three months ended June 30, 2000 as compared to a net loss of $132,000, or $.02 per share, for the second quarter ended June 30, 1999. The increase in net income was primarily the result of the reduction of interest expense of $1,431,000 reflecting the decrease from April 1, 2000 to April 12, 2000 in the fair value of a "put" provision related to warrants granted to ACS. On April 12, 2000 the ACS Subordinated notes were amended, whereby the "put" provision was replaced by a "make-whole" feature. Total revenues for the quarter ended June 30, 2000 were $8,411,000, which represents a decrease of $451,000 or 5%, compared to revenues $8,862,000, for the quarter ended June 30, 1999. The decrease is due to lower Companion Pet and Consumer Product revenues. Companion Pet Product revenue decreased $234,000 or 7% primarily due to lost revenues from a product recall and a decrease in shipments by distributors who are reducing inventory to increase their inventory turnover. Consumer Product revenue decreased $159,000 or 8% mainly from reduced sales to Estee Lauder of $508,000 offset by higher licensing and royalty income of $358,000 primarily from Johnson & Johnson due to new product introductions by it. Poultry Vaccine revenue decreased $58,000 or 2% as a result of lost customers of the Company's Vineland Division. Cost of sales increased by $635,000, or 15%, from the quarter ending June 30, 1999. As a percentage of revenues, cost of sales increased from 49% in the quarter ended June 30, 1999 to 59% in the quarter ended June 30, 2000. The resulting decrease in gross profit from 51% in 1999 to 41% in 2000 is the result of unusual charges of $536,000 for consulting and other related costs for Petcare Products documentation, procedural and regulatory compliance issues, $154,000 for hazardous waste removal and $335,000 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, in which $167,000 in expenses were incurred to clean up the oil spill. Excluding the unusual charges above of $1,192,000, this would have resulted in a 55% gross profit for the quarter. Selling, general and administrative expenses decreased by $343,000, or 10 %, from $3,553,000 in the quarter ended June 30, 1999 to $3,210,000 in the quarter ended June 30, 2000. As a percentage of revenues, these expenses were 40% of revenues for the quarter ended June 30, 1999 compared to 38% in the quarter ended June 30, 2000. Selling and marketing expenses decreased by $38,000 compared to the same period last year principally related to lower vaccine selling expenses. General and administrative expenses decreased by $305,000, or 22% compared to the second quarter 1999, primarily as a result of decreased professional fees, management compensation and additional cost saving measures implemented. Product development and research expenses increased by $113,000 or 35%, compared to the quarter ended June 30, 1999. The increase is mainly for additional research staff to work on new and existing projects. Net interest expense changed by $1,407,000, from $843,000 net interest expense for the three months ended June 30, 1999 to net interest income of $564,000 for the three months ended June 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 was replaced by a "make-whole" feature. The interest expense reduction of non-taxable $1,431,000 reflects the decrease in the fair value of the warrants from April 1, 2000 to April 12, 2000. Results Of Operations Six months ended June 30, 2000 compared to June 30, 1999 The Company had a net loss of $536,000, or $.05 per share, for the six months ended June 30, 2000 as compared to a net loss of $451,000, or $.05 per share, for the six months ended June 30, 1999. The increase in the net loss compared to the prior year was primarily due to decreased revenues and increased cost of sales offset by decreased operating expenses and decreased interest expense. Total revenues for the six months ended June 30, 2000 were $16,865,000, which represents a decrease of $740,000, or 4%, from revenues of $17,605,000 for the six months ended June 30, 1999. The decrease in revenues was primarily attributable to decreased Poultry Vaccine and Companion Pet sales partially offset by increased Consumer revenues. Poultry Vaccine revenue decreased by $735,000 or 10% as a result of limited production capacity and lost customers at the Company's Vineland business. 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 super potency and larger volume vaccines has continued to limit Vineland's ability to produce sufficient quantities of vaccines. Companion Pet Products revenues decreased $224,000 or 3% under the comparable six months in 1999 due to lost revenues from a product recall and a decrease in shipments by distributors who are reducing inventory to increase their inventory turnover. Consumer Products revenues increased $219,000, or 6%, for the six months of 2000 as a result of licensing and royalty income. Licensing and royalty income increased by $738,000 or 95% over the comparable period last year as a result of increased license revenue from Johnson & Johnson due to it's new product introductions. Cost of sales increased by $507,000, or 6%, from the six months ended June 30, 1999. As a percentage of revenues, cost of sales increased from 50% in the six months ended June 30, 1999 to 55% in the six months ended June 30, 2000. The resulting decrease in gross profit from 50% in 1999 to 45% in 2000 is the result of unusual charges of $634,000 for consulting and other related costs for Petcare Products documentation, procedural and regulatory compliance issues, $160,000 for hazardous waste removal and $335,000 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 $1,296, 000, this would have resulted in a 53% gross profit for the six months ended June 30, 2000. Selling, general and administrative expenses decreased by $658,000, or 9%, from $7,168,000 in the six months ended June 30, 1999 to $6,510,000 in the six months ended June 30, 2000. As a percentage of revenues, these expenses were 41% of revenues for the six months ended June 30, 1999 compared to 39% in the six months ended June 30, 2000. Selling and marketing expenses decreased by $65,000 compared to the same period last year principally related to lower vaccine selling expenses. General and administrative expenses decreased by $593,000, or 22% compared to the six months ended 1999, primarily as a result of decreased professional fees, management compensation and director fees and additional cost saving measures implemented. Product development and research expenses increased by $229,000, or 36%, compared to the six months ended June 30, 1999. The increase is principally for additional research staff to work on new and existing projects. Net interest expense decreased $330,000, or 20%, from $1,665,00 for the six months ended June 30, 1999 to $1,335,000 in the six months ended June 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. 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. 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. 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 nontaxable reduction of interest expense of approximately $1,431,000 was recognized in the second quarter reflecting a decrease in the fair value of the warrants from April 1 to 12, 2000. 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. 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. In May, 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. The Company is currently compiling its responses to the July 5, 2000 FDA report. In an effort to address a number of the FDA's stated concerns, on May 24, 2000, the Company 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. The Company has incurred $634,000 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 will issue, in the beginning of August 2000, to ACS an additional Series C Note in the aggregate principal amount of approximately $300,000 for the interest due. 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) until the first to occur of: (a) September 22, 2000, (b) the date on which any default, other than a default under the Forbearance Covenants, occurs under the Senior Debt Agreement, as amended; or (c) the date of the termination of the Vineland Agreement. On June 26, 2000, the Company entered into the Vineland Agreement with Buyer. The Vineland Agreement provides for the sale (the Vineland Sale) by the Company to the Buyer of the assets associated with the business of manufacturing, marketing, licensing and selling poultry vaccines and related equipment conducted by the Vineland Laboratories division of the Company. In exchange for receipt of such assets, the Buyer will assume certain Company liabilities, in the aggregate, equal to approximately $2,300,000 and will pay the Company cash in the amount of $12,500,000, of which $500,000 will be placed in an escrow fund to secure potential obligations of the Company relating to final purchase price adjustments and indemnification. The Company projects a $98,000 after tax gain on the Vineland Sale offset by a $528,000 after tax extraordinary loss on the early extinguishment of debt. The Vineland Agreement may be terminated prior to the closing if any of the following occurs: 1. The Buyer and the Company mutually consent to the termination, or the Vineland Sale is not consummated on or before the date (September 19, 2000) that is three (3) months after the date of the Vineland Agreement (June 19, 2000), unless the failure to consummate the transaction is the result of a material breach of the Vineland Agreement by the party seeking to terminate the Vineland Agreement; provided, however, that the passage of such period shall be tolled for any part thereof (but not exceeding ninety (90) days in the aggregate) during which any party shall be subject to a non-final order, decree, ruling or action restraining, enjoining or otherwise prohibiting the consummation of the transaction; 2. A governmental entity issues an order, decree or ruling or takes any other action permanently enjoining, restraining or otherwise prohibiting the transaction and such order, decree, ruling or other action shall have become final and non-appealable; 3. The stockholders of the Company do not approve the Vineland Agreement and transaction. The Company has scheduled a special meeting of stockholders and filed a Preliminary Proxy Statement with the SEC with respect to stockholder consideration of the Vineland Sale. 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. In this connection, the Company's independent accountants have determined that substantial doubt exists about the Company's ability to continue as a going concern. Even if the Company timely consummates the Vineland Sale and repays 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. Under the Second Senior Amendment, Fleet agreed to release its security interests in and liens on all property to be transferred by the Company to Buyer pursuant to the Vineland Sale (the "Vineland Collateral") upon consummation of the Vineland Sale. The release of the Vineland Collateral is conditioned upon the application of the proceeds of the Vineland Sale, net of certain closing and other costs approved by Fleet, to repay the senior loans, the Overadvance and the Series C Notes as follows: (i) first to repay the Overadvance in full; (ii) second, to repay that amount of the outstanding Revolving Loan equal to 85% of certain of the accounts receivable transferred to the Buyer pursuant to the Vineland Sale; (iii) third, to repay that amount of the revolving line of credit equal to 100% of the Revolving Loan made with respect to inventory transferred pursuant to the Vineland Sale; (iv) fourth, to repay in full the total amount of capital expenditure loans then outstanding; (v) fifth, to repay in full the total amount of the $350,000 term loan then outstanding; (vi) sixth, to repay the portion of the $6,750,000 term loan in an amount sufficient to reduce the outstanding principal balance of that term loan to $2,705,000; (vii) seventh, to pay the Series C Notes in an amount not to exceed $826,798.93; and (viii) eighth, to repay any portion of the then outstanding revolving line of credit. 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 $1.3 million of cash during the six- month period ended June 30, 2000. The Company utilized approximately $714,000 cash in investing activities, primarily for 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. Regulatory Proceeding and Legal Proceedings The Company is subject to review, oversight and periodic inspections by governmental regulatory agencies such as the U.S. Securities and Exchange Commission (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 May, 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. The Company is currently compiling its responses to the July 5, 2000 FDA report. In an effort to address a number of the FDA's stated concerns, on May 24, 2000, the Company 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. 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 $634,000 year to date in related expenses to improve production, to meet documentation, procedural and regulatory compliance. On July 5, 2000, the FDA completed its inspection of the Company's Companion Pet Products division and issued an inspection report on Form FDA 483. The July 5, 2000 FDA report includes several unfavorable observations of manufacturing and quality assurance practices and products of the division. The Company is currently compiling its responses to the July 5, 2000 FDA report. In an effort to address a number of the FDA's stated concerns, on May 24, 2000, the Company 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. 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 is being drilled and the Company expects to have analytical results by the end of September, 2000. 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 and Terrence O'Donnell and the following former directors and officers of the Company: Kevin J. Bratton, Stephen G. Hoch, Surendra Kumar, Donald J. Machpee, Lawrence N. Zitto, Paul D. Paganucci, David G. Pinosky and John O. Marsh (collectively, the "IGI Defendents") 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 intends to record the $48,125 upon issuance of stock as an offset to its reserve in the third quarter 2000. Factors Which May Affect Future Results Highly Leveraged and Debt Covenant Compliance The ability of the Company to repay the Overadvance and the Series C Notes pursuant to the June, 2000, amendments to the Company's debt agreements is dependent upon the consummation of the Vineland Sale or another similar transaction on or before September 19, 2000. There can be no assurance that the Company will be successful in doing so. Further, 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. In response these events, the Company's independent accountants have determined that substantial doubt exists about the Company's ability to continue as a going concern. Even if the Vineland Sale is timely consummated and the Overadvance and Series C Notes are timely repaid, 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. If the Company is not successful in meeting its financial covenants and timely closing the Vineland Sale, 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. Intense Competition in Consumer Products Business The Company's Consumer Products business competes with large, well-financed cosmetics and consumer products companies with development and marketing groups that are experienced in the industry and possess far greater resources than those available to the Company. There is no assurance that the Company's consumer products can compete successfully against its competitors or that it can develop and market new products that will be favorably received in the marketplace. In addition, certain of the Company's customers that use the Company's Novasome(R) lipid vesicles in their products may decide to reduce their purchases from the Company or shift their business to other suppliers. Competition in Poultry Vaccine Business The Company is encountering increased price competition from 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 $6.1 million as of June 30, 2000. The largest deferred tax asset relates to $3.7 million of net operating loss carryforwards. After considering a $955,000 valuation allowance at June 30, 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 June 30, 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. 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. 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. Machpee, Lawrence N. Zitto, Paul D. Paganucci, David G. Pinosky and John O. Marsh (collectively, the "IGI Defendents") 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. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IGI, Inc. (Registrant) Date: August 30, 2000 By: /s/Paul Woitach Paul Woitach President and Chief Executive Officer Date August 30, 2000 By: /s/Domenic N. Golato Domenic N. Golato Senior Vice President and Chief Financial Officer