U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
X Annual Report under Section 13 or 15(d) of the Securities Exchange
- ------ Act of 1934
For the fiscal year ended: July 31, 1996
- ------ Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ____________ to ________________
Commission file number 33-73406
IVC INDUSTRIES, INC.
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(Name of small business issuer in its charter)
Delaware 22-1567481
- -------------------------------------- -------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
500 Halls Mill Road, Freehold, New Jersey 07728
- ----------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (908) 308-3000
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
Redeemable Common Stock Purchase Warrants
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
State the issuer's revenues for its most recent fiscal year: $104,159,000
State the aggregate market value of the voting stock held by non-affiliates
of the registrant:
$5,574,139 based on the closing price on October 28, 1996.
State the number of shares outstanding of each of the issuer's classes of
common equity:
17,094,742 Shares of Common Stock, par value $.01 per share,
as of October 28,1996
DOCUMENTS INCORPORATED BY REFERENCE: None
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IVC INDUSTRIES, INC.
TABLE OF CONTENTS
Annual Report on Form 10-KSB
For the Fiscal Year ended July 31, 1996
Page No.
--------
PART I
Item 1 Description Of Business......................................... 1
Item 2 Description of Property......................................... 9
Item 3 Legal Proceedings............................................... 10
Item 4 Submission of Matters to a Vote of Security Holders............. 10
PART II
Item 5 Market for Common Equity and Related Shareholder Matters........ 11
Item 6 Management's Discussion and Analysis or Plan of Operation....... 12
Item 7 Financial Statements............................................ 16
Item 8 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure........................................ 16
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............... 17
Item 10 Executive Compensation.......................................... 20
Item 11 Security Ownership of Certain Beneficial Owners and Management.. 25
Item 12 Certain Relationships and Related Transactions.................. 27
Item 13 Exhibits and Reports on Form 8-K................................ 29
<PAGE>
PART I
Item 1 Description of Business
The Company
IVC Industries, Inc. (the "Company" or "IVC") is engaged in the
manufacturing, packaging and sale and distribution of branded and store brand
(private label) vitamins and nutritional supplements. The Company's Fields of
Nature(R), Rybutol(R) and Nature's Wonder(R) brands are sold in drug store,
supermarket and mass merchandising chains, its Synergy Plus brand is sold in
health food stores and its Nature's Wonder brand is sold through independent
drug stores. In addition, the Company manufactures and markets a line of
vitamins under the Revlon name, pursuant to a license agreement with Revlon. The
Company produces store brand products for over 40 retail chains located
principally in the Northeast and Northwest. Certain of the Company's products
are also marketed internationally.
IVC markets over 600 different products which are packaged under various
labels and tablet counts. They are sold in single vitamin and in multivitamin
combinations, with varying potency levels in tablets (including chewable and
time released tablets), powders, two-piece hard shell capsules, as well as soft
gelatin encapsulated capsules ("soft gels"). The Company has traditionally
manufactured virtually all of its products except for soft gels, which it had
until recently purchased from others. During 1996, the construction of the
Company's new soft gel encapsulation facility was completed. The stages of
operations attained in the latter part of the year enabled the Company to become
self-sufficient relative to its own soft gel needs and subsequently to generate
revenues from third party sales of soft gel products. (See "Soft Gel
Encapsulation Facility.")
The Company was incorporated in the State of Delaware in 1971. In May 1989,
IVC was purchased from its founders by certain members of current management. On
February 1, 1992 and January 1, 1993, the Company merged with International
Vitamin Supplements, Inc. ("IVS") and Vitamin Factory Outlets, Inc. ("VFO"),
respectively, in transactions accounted for as poolings of interests. Arthur S.
Edell, the Company's President, owned 100 percent of IVS and VFO at the time of
these mergers. On May 5, 1995, the Company merged with American Vitamin
Products, Inc. ("American"), and in a simultaneously consummated transaction,
the Company acquired all the outstanding partnership interests of Hidel Partners
("Hidel"). The merger with American and the acquisition of Hidel were accounted
for as poolings of interests. E. Joseph Edell, the Chairman of the Board of
Directors and Chief Executive Officer of the Company, and members of his family
owned 100 percent of American and Hidel at the time of these transactions.
Arthur S. Edell and E. Joseph Edell are brothers.
On March 15, 1996, the Company changed its name from International Vitamin
Corporation to IVC Industries, Inc.
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On April 30, 1996, the Company acquired Hall Laboratories, Inc. ("Hall")
for 3,821,363 shares of IVC Common Stock. The transaction was accounted for as a
pooling of interests. Hall, located in Portland, Oregon, was founded in 1953,
and was engaged in the manufacturing, packaging, and sale and distribution of
vitamins, nutritional supplements and over-the-counter pharmaceutical products
primarily through chain drug stores, supermarkets, mass merchandisers and
warehouse clubs. Hall's products have been distributed throughout the United
States (with a significant concentration on the West Coast) and in Canada
through its wholly owned Canadian subsidiary, Hall Laboratories, Ltd.,
headquartered in British Columbia. The majority of Hall's products were marketed
under the private labels of its retail chain customers.
Products and Product Development
IVC's vitamin, mineral and nutritional supplement product lines include
vitamins C and E, beta carotene, magnesium, folic acid, calcium and potassium,
as well as various herbs and multivitamin combinations. IVC has the capacity to
produce millions of tablets per day using technologically advanced high-speed
manufacturing equipment. Its fully automated packaging lines are capable of
packaging in excess of 200,000 bottles per shift, per day.
Products are marketed under its customers' store brands (private label) as
well as under its own brands and under the licensed Revlon brand. Store brand
products are positioned as high quality, lower priced alternatives to nationally
advertised brands. Branded and licensed products, including IVC's flagship
brand, Fields of Nature(R), are targeted at consumers who desire high quality,
recognizable brand names at moderate prices.
The Company introduces new products and reformulates existing products on
an ongoing basis in response to consumer trends and emerging scientific
evidence. Product concepts are generally developed by the Company's management,
key employees and consultants. The Company also develops and formulates new
products based on customers' requests. The Company's products sold under the
Synergy Plus brand are free of sugar, salt and starch, and most are
hypo-allergenic. IVC has also obtained kosher certification for a substantial
portion of the Synergy Plus line. The Company believes that its kosher
certification can help to achieve increased market share both domestically and
on an international basis.
Manufacturing and Packaging
IVC owns and operates facilities located in Freehold, New Jersey, and
leases facilities in Portland, Oregon, equipped with large volume blending,
tableting and coating equipment, high-speed packaging equipment, including
"cartoning" and "stretch carding equipment", and ultra-modern testing and
quality control laboratories. The Company has an additional leased facility
located in British Columbia, Canada, which is presently utilized for warehousing
and distribution activities relative to its Canadian operations. The Company's
new soft gel operations are located in a leased facility in Irvington, New
Jersey. IVC believes that the capacity of its facilities enables it to meet its
current business needs and that unit volume increases, allowing for better
absorption of fixed costs and operating efficiencies, will provide opportunities
for substantial additional profits. IVC presently manufactures substantially all
of its products.
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Soft Gel Encapsulation Facility
In recent years, an ever increasing number of vitamins, herbs,
over-the-counter and cosmetic products have been introduced in, or converted to,
soft gels. Factors contributing to the popularity of soft gels over tablets
include the fact that soft gels can be easier to swallow than tablets or hard
capsules, soft gels are aesthetically pleasing, odor-free, and provide superior
absorption, stability, content uniformity and precision of dosage.
The Company's new soft gel encapsulation division ("Intergel") completed
construction of its facility and the installation and start-up of the initial
eight production lines during fiscal 1996. Initial production of soft gel
products commenced in the first quarter of fiscal 1996. Production levels
increased in each ensuing quarter until the first quarter of fiscal 1997 when
all lines were being operated at virtually an "around-the-clock" basis.
Intergel produces soft gels in various shapes and sizes. Among the vitamin
and nutritional supplement products generally sold in soft gel form are vitamin
E, beta carotene, cod liver oil, garlic oil and lecithin. With the construction
and initial equipment installation program completed, IVC is now able to
internally manufacture all its own soft gel requirements, and to supply soft
gels to a variety of customers, as well as to custom formulate unique soft gel
products targeted towards nutritional and cosmetic applications. The existing
facility can accommodate additional production lines which can be installed as
the demand for Intergel's products increases. The Company's strategic business
decision to manufacture soft gel products will allow it to better control its
own supply, quality and cost of such products while it pursues the opportunities
of marketing soft gel products to third parties.
Marketing and Distribution Strategies
Retail Chains
In contrast with nationally advertised brand manufacturers, which focus
primarily on the consumer, IVC's strategy is to build relationships with drug
store, supermarket and mass merchandising retail chain customers. Generally, IVC
enters into supply agreements with these customers and its marketing efforts are
directed at developing customized marketing programs with them. As part of these
programs, IVC provides its retail customers with comprehensive sales and
marketing support designed to maximize their sales and profits. Since the cost
to a retailer of IVC's branded products and the retailer's private label
products are generally significantly lower than that of advertised national
brand products, retail chains are usually able to commit funds to promote IVC's
and its own private label products through its use of money saving coupons,
individualized promotions and advertising (such as store circulars and newspaper
inserts), yet still realizing a significantly higher profit margin than on
advertised national brand products. In most cases, the retailer earns a greater
dollar profit per unit on both IVC's brands as well as the retailer's own
store-brand products. In addition, the product itself is retailed at a lower
price than the national brands thereby delivering "better value" to consumers
and providing the retailer with an important marketing tool in today's
competitive retailing environment.
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IVC provides its retail chain customers with comprehensive sales and
marketing support, including category management planning. The Company uses the
ECR-recommended process for evaluating consumer needs and applying them to
retailers' categories. IVC employs its own direct sales force which regularly
calls on customers to obtain an in-depth understanding of each customer's
competitive environment. Then, working in tandem with its sales force, IVC's
marketing department and creative arts group develops customized marketing
programs for customers, including product introductions, promotional planning
support and market research.
Health Food and Independent Drug Stores
Historically, the Company has focused its health food and independent drug
store marketing and promotional activities on its branded products, Synergy Plus
and Nature's Wonder. IVC has been successful in expanding its markets to
geographic areas in proximity to those where these brand names are well known.
The Company believes that this strategy of expanding its geographical
penetration is the most rapid and cost effective method to enter new markets.
The Company utilizes both its own internal sales force as well as distributors
to market these brands.
Export Sales
The Company has begun to capitalize on the global opportunities created by
the increasing worldwide recognition of the benefits of vitamins and nutritional
supplements and the perception that "American made pharmaceutical products" are
the safest and highest quality products available. During the past few years,
the Company has successfully developed certain export markets and established
relationships with distributors throughout the world, including Canada, China,
Israel, Venezuela, Brazil, Argentina, United Kingdom, Egypt, Lebanon, Hong Kong,
Indonesia, Philippines, Malaysia, Poland, Saudi Arabia, Singapore, Spain and the
Czech Republic. In addition, the Company has either obtained, or is in the
process of obtaining, approvals relative to the registration of its products for
sale in approximately 10 additional countries during fiscal 1997. The Company
anticipates to begin exporting to these additional countries in the second half
of fiscal 1997, or shortly thereafter.
Other Channels of Distribution
The Company supplies certain customers who sell products similar to IVC's,
but do not manufacture these products or directly compete with IVC or its
customers. The Company has also begun to manufacture and package products for
certain customers who need to supplement their own capacities either on an
emergency basis during peak season demands or those customers who "outsource" a
portion of their needs on an ongoing basis. These strategies represent
additional opportunities for IVC to increase its plant utilization rates and
profitability without any significant additional capital outlays.
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Industry Overview
Based on industry sources, including trade publications, the Company
believes that the retail market for vitamins and nutritional supplements in the
United States exceeds $4.5 billion annually, representing an increase of
approximately 40% since 1991. Approximately 37 percent of adults in the United
States take some form of vitamin or nutritional supplement, up from 33 percent
in 1991.
IVC believes that this market will continue to expand due to increasing
consumer awareness of the health benefits of vitamins and nutritional
supplements and the widely publicized reports of medical research findings
indicating a correlation between the consumption of micro-nutrients, such as
beta carotene, vitamin C and vitamin E (the antioxidants) and reduced incidence
of diseases such as heart disease, cancer and stroke. However, there have been
studies relating to certain antioxidants with results which have been contrary
to certain of the favorable indications of other prior and subsequent studies.
As scientific research to date is preliminary, there can be no assurance of
future favorable scientific results and media attention, or the absence of
unfavorable or inconsistent findings.
The Company believes that the market for vitamins and other nutritional
supplements will continue to grow as the nation's demographics continue to shift
towards a more senior-aged population, who have a greater tendency to use
vitamins on a regular basis. Industry sources indicate that during recent years,
approximately 40% of Americans aged 65 and over were vitamin users.
Private Label Industry
A major part of IVC's sales consists of store brand (private label)
products. Private label vitamins have grown to approximately 40% of total sales
of vitamins in chain drug stores. Private label products have become a key
ingredient in the success of retailers. From the consumer's standpoint, store
brand products offer lower priced and equal if not better quality alternatives,
to nationally advertised brand name products. From the retailer's standpoint,
such products allow for lower retail pricing than national brands and yet
provide retailers with significantly higher profit margins. Industry analysts
predict that private label's share of the overall market should grow
significantly over the next 10 years. IVC believes that it is well positioned to
participate in this growth.
Source and Availability of Raw Materials
The principal raw materials used in the manufacturing process are natural
and synthetic vitamins, purchased from manufacturers primarily in the United
States, with certain materials imported from Japan and Europe. IVC purchases its
raw materials from numerous sources. Although one of the Company's suppliers
individually accounted for approximately 34% of total purchases in 1996, the
Company believes that the materials purchased from this supplier are readily
available from numerous sources and that the loss of this supplier would not
adversely affect its operations. No other supplier accounts for more than 10
percent of IVC's raw material purchases.
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Major Customers
IVC has over 2,000 active customers, with its 10 largest customers
accounting for approximately 60% of sales in fiscal 1996. Two individual
customers, PriceCostco and Revco D.S., Inc., accounted for approximately 21% and
13% respectively, of IVC's sales during this period. If any of IVC's major
customers substantially reduced their volume of purchases from IVC, results of
operations could be materially adversely affected. The Company's current supply
agreements with Revco to supply both private brand products, as well as Fields
of Nature(R), ended in October 1996. The private brand supply agreement has not
been renewed, therefore the Company will no longer supply private label product
to Revco (approximately 8% of sales). A renewal of the Fields of Nature(R)
supply agreement is currently being negotiated. IVC recently entered into a
long-term supply agreement with Thrifty PayLess Drug Stores. In October 1996,
Rite Aid Corp. announced that it expects to acquire Thrifty PayLess in early
1997, and it is not known what effect, if any, this acquisition will have on the
Company's sales in the future.
Quality Control
IVC's manufacturing operations include ultra-modern quality control
laboratories and testing facilities. All raw materials used in production are
initially held in quarantine during which time IVC's laboratory employees assay
the product against the manufacturer's certificate of analysis. Once cleared, a
lot number is assigned, samples are retained and the material is processed by
formulating, mixing and blending, encapsulating or compressing and where
required, by coating operations. Throughout the manufacturing process the
Quality Control Group conducts "in process" testing procedures. After tablets or
capsules are manufactured, laboratory employees test for weight, purity,
potency, dissolution and stability. When products are ready for bottling, IVC's
automated equipment counts the tablets or capsules, inserts them into bottles,
applies a cap (closure) which includes a tamper-resistant inner seal, affixes a
label and adds a tamper-resistant outer safety seal. All products, including
soft gels that are produced by Intergel, are subject to the Company's rigorous
quality control procedures.
Competition
The market for vitamins and other nutritional supplements is highly
competitive in all of the Company's channels of distribution. For sales to drug
store, supermarket and mass merchandising chains, IVC's Fields of Nature(R),
Rybutol(R) and Nature's Wonder(R) brands compete with numerous brands of larger
vitamin distributors and manufacturers such as Your Life(R), Nature Made(R),
Sundown(R) and Nature's Bounty(R), which are brands of Leiner Health Products
Group, Inc., Pharmavite Corp., Rexall Sundown, Inc. and NBTY, Inc. These
companies are also IVC's competitors for private label business. In addition,
IVC competes with the more heavily advertised national brands which are
manufactured by large pharmaceutical companies. The marketplace for private
label business is extremely price sensitive with service levels, quality,
innovative packaging, marketing and promotional programs and uniqueness of
products being the key factors influencing competitiveness. It is the Company's
belief that there are between 10 to 15 companies competing for the chain drug
store, supermarket and mass merchandiser private label business.
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The Company believes that there are numerous companies competing for health
food and independent drug store customers in its geographical markets. As most
companies are privately held, the Company is unable to precisely assess the size
of its competitors or where it stands with respect to sales volume in comparison
to each of its competitors. The Company's Synergy Plus brand competes with
brands such as Twin Labs(R), Solgar(R), Schiff(R), and Country Life(R) in health
food stores while Nature's Wonder(R) competes with brands such as Windmill(R)
and Hudson(R) in independent drug stores. Although certain of these competitors
are substantially larger than the Company and have greater financial resources,
the Company believes that it competes favorably with the vitamin and nutritional
supplement companies serving these markets because of its competitive pricing,
marketing strategies, quality of products, kosher certification, special
formulation of products, sales support and its full line of products. IVC also
derives a competitive advantage from its being one of the few vertically
integrated tablet and soft gel manufacturers, thereby having the ability to
manufacture and package all of its vitamin and nutritional supplement products.
This affords IVC the flexibility to respond rapidly to the shifting demands of
the market place and, consequently, enjoy the manufacturing and operating
efficiencies resulting from longer production runs.
Government Regulation
The processing, formulation, packaging, labeling and advertising of the
Company's products are subject to regulation by one or more federal agencies,
including the Food and Drug Administration ("FDA"), the Federal Trade
Commission, the Consumer Product Safety Commission, the United States Department
of Agriculture and the United States Environmental Protection Agency. These
activities are also regulated by various agencies of the states, localities, and
countries in which IVC's products are sold. The FDA, in particular, regulates
the labeling and sales of vitamins and supplements if the FDA considers them to
be unapproved drugs or food additives rather than food supplements.
The Dietary Supplemental Health and Education Act of 1994 ("DSHEA")
recognizes the importance of good nutrition and the availability of safe dietary
supplements in preventive health care. DSHEA amends the Federal Food, Drug and
Cosmetic Act by defining dietary supplements, which include vitamins, minerals,
nutritional supplements and herbs, as a new category of food, separate from
conventional food. Under DSHEA, the FDA is generally prohibited from regulating
such dietary supplements as food additives or drugs. It requires the FDA to
regulate dietary supplements so as to guarantee consumer access to beneficial
dietary supplements, allowing truthful and proven claims. The Act allows
statements to be put on labels that describe how and why supplements provide
nutritional support, as long as the statements are "truthful and not misleading"
and are followed by a statement that reads: "This statement has not been
evaluated by the Food and Drug Administration. This product is not intended to
diagnose, treat, cure or prevent any disease." DSHEA also clarifies that the FDA
bears the burden of proving that a dietary supplement is unsafe before it can be
removed from the market. Although IVC believes the passage of this legislation
will be beneficial to the Company, FDA regulations implementing DSHEA have not
yet been finalized. Such regulations are likely, among other things, to require
expanded or different labeling, and could require expanded documentation of the
properties of certain products and scientific substantiation regarding
ingredients, product claims or safety. In addition, there can be no assurance
that other new legislation or regulations will not be enacted by legislative
bodies or promulgated by agencies that could have an adverse effect on IVC's
operations.
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Trademarks
IVC owns trademarks registered with the United States Patent and Trademark
Office and in certain other major jurisdictions of the world for its Fields of
Nature(R), Rybutol(R), and Nature's Wonder(R) brands. Federally registered
trademarks have a perpetual life, as long as they are renewed on a timely basis
and used properly as trademarks, subject to the rights of third parties to seek
cancellation of the marks. IVC believes that its registered and unregistered
trademarks and other proprietary rights are valuable assets and believes they
have significant value in the marketing of its products. IVC vigorously protects
its trademarks against infringement.
Research and Development
IVC does not conduct primary research for the development of new
ingredients. Instead, IVC's research efforts are focused on developing new
products in response to market trends and consumer demands. IVC's staff also
continually reformulates existing IVC products in response to changes in
nationally advertised brand formulas in order to maintain product comparability.
IVC believes that flexibility and innovation with respect to new products
are crucial factors in competing for market share in the field of nutritional
supplements. By monitoring market trends and by avoiding short-lived "fad"
items, the Company's marketing department anticipates significant consumer
demand for certain types of products. The Company's tablet formulation
department and its new soft gel formulation department develop high-quality new
products on an ongoing basis, capitalizing on the emerging science relative to
nutritional products, as well as shifts in consumer demand. Thus, while the
introduction of new products does not entail the expenditure of significant
funds by the Company for scientific research and for the development of
ingredients, considerable time and effort are devoted to market research
activities, product formulation and packaging.
Employees
IVC employs approximately 610 employees of which approximately 40 are in
sales and marketing, 390 are in manufacturing and packaging, 40 are in quality
assurance, 25 are in laboratory, 55 are in warehousing and 60 are in executive
and administrative positions. IVC believes that it has a satisfactory
relationship with its employees. IVC and its employees are not currently parties
to any collective bargaining agreement. Recently, a union petition was filed
with the National Labor Relations Board seeking an election among Intergel
production and maintenance employees. The Company is opposing the petition.
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Product Liability
The Company, like other manufacturers and distributors of products that are
ingested, faces an inherent risk of exposure to product liability claims.
Accordingly, the Company maintains product liability insurance coverage and
requires each of its suppliers to carry product liability insurance covering the
Company. While management believes that its insurance coverage is adequate,
there can be no assurance that any judgment against the Company will not exceed
liability coverage. A judgment significantly in excess of the amount of
insurance coverage would have a material adverse effect on the Company.
Item 2 Description of Property
The following table sets forth the Company's properties:
Approximate Leased or
Location Type of Facility Square Feet Owned
- -------- ---- ----------- ----------- -----
Freehold, NJ Manufacturing, Packaging, Warehousing, 160,000 Owned
Distribution and Corporate Offices
Freehold, NJ Warehousing and Distribution 120,000 Owned
Portland, OR Manufacturing and Administration 39,000 Leased
Portland, OR Packaging and Warehousing 50,000 Leased
Irvington, NJ Manufacturing and Administration 35,000 Leased
Irvington, NJ Warehousing and Distribution 43,000(1) Leased
Surrey, British Warehousing, Distribution and 8,000 Leased
Columbia, Canada Administration
The Company believes that its properties will satisfy its foreseeable needs
for office, manufacturing and warehouse space.
(1) The Company subleases approximately 21,500 square feet of this facility to
a third party.
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Item 3 Legal Proceedings
L-tryptophan
In November 1989, the Company halted sales and distribution and initiated a
voluntary recall of one of its products, L-tryptophan. In December 1989, the FDA
determined that there may be an unequivocal epidemiological link between the
ingestion of L-tryptophan and a blood disorder known as eosinophilia myalgia
syndrome and ordered a nationwide recall. The FDA has been unable to determine
the exact cause of the illness and it appears it will be some time before the
causative factor and the pathogenesis of the disease can be determined. To date,
38 cases have been filed against IVC, all of which have been settled, with all
costs being covered by the raw material supplier. As to liability, the Company
believes that its product liability insurance should cover any potential
additional L-tryptophan related claims, subject to applicable policy limits.
Trade Dress Claims
IVC designs the packaging of certain of its branded products and its
customers' private label products to communicate to consumers which national
brand product is comparable to the product manufactured by the Company. Although
IVC designs its packaging to avoid infringing any proprietary rights of national
brand marketers, it has from time to time been subject to certain legal actions
regarding infringement. The Company and its legal counsel do not believe the
outcome of these matters will have a material adverse effect on its financial
position or operations.
Other Actions
In March 1995, Arthur S. Edell, the president of the Company, was involved
in a fatal automobile accident. In connection with the accident, Mr. Edell plead
guilty to a single count of vehicular homicide and received a five year
suspended sentence. The court ordered that the plea of guilty be inadmissible in
any subsequent related civil proceedings. The family of the decedent has brought
a civil action in the Superior Court of New Jersey, Monmouth County, against Mr.
Edell and the Company seeking compensatory and punitive damages. The Company
does not believe that such action will have a material adverse effect on its
business or financial position.
The Company is engaged in various other legal actions and governmental
claims incident to its business. The Company believes the amount of liability,
if any, from these proceedings will not have a material adverse impact on IVC's
financial position or operations.
Item 4 Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended July 31, 1996.
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PART II
Item 5 Market For Common Equity and Related Shareholder Matters
IVC Common Stock trades on the National Association of Securities Dealers
Automated Quotation (NASDAQ) Small-Cap Market System under the symbol "IVCO".
The table below presents the quarterly high and low sales prices for the
Company's Common Stock and Warrants as reported by the NASDAQ Small-Cap Market
System.
Common Stock Warrants
------------ --------
High Low High Low
---- --- ---- ---
Fiscal Year 1995
First Quarter 3-15/16 2-3/8 1-5/16 7/8
Second Quarter 3- 1/4 2-1/2 1-3/16 7/8
Third Quarter 3- 1/4 2-1/2 1-3/16 1
Fourth Quarter 3- 1/16 2-3/8 1-1/8 3/4
Fiscal Year 1996
First Quarter 3-3/8 2-1/4 29/32 11/16
Second Quarter 3 2-1/32 13/16 1/2
Third Quarter 4-1/16 2-1/2 7/8 7/16
Fourth Quarter 3-5/8 2-3/4 3/4 5/16
IVC has not declared and does not have any plans to pay any cash dividends
on its Common Stock in the foreseeable future. The Board of Directors intends to
retain future earnings to finance the growth of IVC. The payment of future cash
dividends will depend on such factors as earnings levels, dividend restrictions
required by lenders, anticipated capital requirements, the operating and
financial conditions of the IVC and other factors deemed relevant by the Board
of Directors.
As of October 14, 1996, there were approximately 94 holders of record of
IVC's Common Stock and 14 holders of record of IVC's Warrants.
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Item 6 Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes to Consolidated Financial
Statements contained in this report.
Results of Operations
The following table sets forth income statement data of the Company, in
thousands of dollars and as a percentage of net sales, for the periods
indicated.
Years Ended July 31,
--------------------
1996 1995
---------- ----------
Net sales ...................................... $ 104,159 $ 89,097
---------- ----------
Cost and expenses:
Cost of sales ............................. 77,086 70,949
Selling, general and administrative ....... 22,350 16,355
Merger and integration costs .............. 3,183 1,533
---------- ----------
102,619 88,837
---------- ----------
Income from operations ......................... 1,540 260
Other expenses-net ............................. 818 775
---------- ----------
Income (loss) before income taxes .............. 722 (515)
Income taxes (benefit) ......................... 426 (1,108)
---------- ----------
Net income ..................................... $ 296 $ 593
========== ==========
Net sales ...................................... 100.0% 100.0%
---------- ----------
Cost and expenses:
Cost of sales ............................. 74.0 79.6
Selling, general and administrative ....... 21.4 18.4
Merger and integration costs .............. 3.1 1.7
---------- ----------
98.5 99.7
---------- ----------
Income from operations ......................... 1.5 .3
Other expenses-net ............................. .8 .9
---------- ----------
Income (loss) before income taxes .............. .7 (.6)
Income taxes (benefit) ......................... .4 (1.3)
---------- ----------
Net income ..................................... .3% .7%
========== ==========
12
<PAGE>
Year Ended July 31, 1996 Compared to the Year Ended July 31, 1995
Net Sales. Net sales for the year ended July 31, 1996 were $104.2 million,
an increase of $15.1 million, or 16.9%, over the year ended July 31, 1995. This
increase was principally attributable to growth in unit sales of most of the
Company's vitamin products to its chain drug store and mass merchandising
customers, the initial sales relative to Intergel, whose operations commenced in
January 1996, the initial shipments of the new Revlon line of vitamins, new
product introductions, such as the Company's new line of herbal products, and
growth in the international division. Partially offsetting these factors was the
sale of the Company's contract manufacturing division in December 1995, which
impacted sales in the second half of fiscal 1996.
Cost and Expenses. Cost of sales for the year ended July 31, 1996 was $77.1
million, an increase of $6.1 million, or 8.6%, over the year ended July 31 1995.
Cost of sales decreased 5.6% as a percentage of net sales. Such decrease as a
percentage of sales was due to: (i) an improvement in the overall sales mix
towards higher margin products such as the Company's Fields of Nature(R) brand,
the new herbal product line and the new Revlon vitamin line, (ii) the reduction
in net sales attributable to the Company's contract manufacturing division,
whose products are generally sold at lower profit margins, (iii) a general
decrease in the Company's manufacturing costs resulting from the improvement in
manufacturing efficiencies stemming from higher volume in the Company's tablet
manufacturing divisions where longer production runs coupled with larger batch
sizes enabled the Company to attain lower packaging and manufacturing costs on a
per unit basis, (iv) lower acquisition costs of certain raw materials
attributable in part to the increased purchasing power of the Company as a
result of the recent merger with Hall. The overall decrease in cost of sales, as
a percentage of net sales, was achieved in spite of the impact of Intergel's
initial operations. Intergel's operations commenced in January 1996, and have
only recently reached operating levels which allow for a positive gross profit
contribution.
Selling, general and administrative expenses for the year ended July 31,
1996 were $22.4 million, an increase of $6.0 million or 36.7% over the year
ended July 31, 1995. This increase was primarily attributable to: (i) increased
advertising and promotional activities, (ii) increases in sales commission,
broker fees and other selling expenses attributable to the sales growth in the
Company's core operations, (iii) advertising and promotion costs associated with
the introduction of the Revlon line of vitamins, (iv) royalty payments
associated with the Revlon line of vitamins, (v) increased distribution expenses
attributable to higher levels of shipments associated with the Company's core
operations, the new Revlon vitamin line and Intergel's sales activities, and
(vi) expenses relating to the initial operations of the Intergel division. The
overall increase was partially offset by the savings resulting from the
coordination of certain sales, marketing, distribution and general and
administrative functions between the East coast and West coast operations
subsequent to the Hall merger in April, 1996.
Merger Costs. Merger costs for the year ended July 31, 1996 were $3.2
million, representing costs associated with the Hall merger, including $1.75
million relating to discharging the obligations relative to Hall's Stock
Appreciation Rights in the third quarter.
13
<PAGE>
Other Expenses, Net. Other expenses, net for the year ended July 31, 1996,
principally represent interest expense of $1,579, interest income of $227,
rental income of $203 and a gain of $225 relative to the sale of the Company's
contract manufacturing division. Net interest expense for the year ended July
31, 1996 increased from the prior year due to higher average amounts of
borrowing outstanding, and due to the expensing of interest relative to
Intergel's operations from January 1996, (when the start-up of operations
occurred), as opposed to all related interest costs being capitalized in fiscal
1995 during Intergel's construction phase.
Income Taxes. See "Income Taxes" Footnote to Consolidated Financial
Statements for a reconciliation of the amount of tax computed under the
statutory rates to the income tax provision.
Year Ended July 31, 1995 Compared to the Year Ended July 31, 1994
Net Sales. Net sales for the year ended July 31, 1995 were $89.1 million,
an increase of $6.4 million, or 7.8%, over the year ended July 31, 1994. This
increase was principally attributable to growth in unit sales of private label
products to chain drug store customers, as well as unit growth of the Company's
Fields of Nature(R) brand.
Cost and Expenses. Cost of sales for the year ended July 31, 1995 was $70.9
million, an increase of $5.7 million, or 8.8%, over the year ended July 31,
1994. Cost of sales increased 0.8% as a percentage of net sales. Such increase
as a percentage of sales was due to: (i) increased costs of certain raw
materials and packaging components which were not yet passed on to customers,
(ii) more aggressive pricing to increase market share, (iii) additional labor
costs, including the start-up of a second shift in the Company's East Coast
tablet manufacturing associated with the increase in sales levels. Partially
offsetting these costs was better absorption of overhead, due to higher volume
and higher profit margins on increased sales of the Company's Fields of
Nature(R) product line.
Selling, general and administrative expenses for the year ended July 31,
1995 were $16.3 million, an increase of $1.8 million or 12.4% over the year
ended July 31, 1994. This increase was primarily attributable to: (i) additional
advertising, promotion, sales commission, broker fees and other selling expenses
attributable to the increase in sales, (ii) additional sales personnel, travel,
entertainment and related employee benefit costs, (iii) increases in executive
compensation, (iv) additional distribution expenses attributable to the increase
in shipments, (v) increased professional fees and other costs relating to the
Company's public status.
Merger Costs. Merger costs for the year ended July 31, 1995 were $1.5
million, principally representing transaction and integration costs associated
with the merger with American Vitamin Products, Inc., the acquisition of all of
the partnership interests of Hidel Partners on May 5, 1995, as well as the
initial costs relative to the Hall merger.
Other Expenses, Net. Other expenses, net for the year ended July 31, 1995,
principally represent interest expense of $1,334, interest income of $324 and
rental income of $237. Net interest expense increased from the prior year as a
result of higher average amounts of borrowings outstanding partially offset by
the capitalization of interest costs relative to the construction phase of
Intergel.
14
<PAGE>
Income Taxes. See "Income Taxes" Footnote to Consolidated Financial
Statements for a reconciliation of the amount of tax computed under the
statutory rates to the income tax provision.
Liquidity and Capital Resources
As the Company's business has grown, its working capital needs, primarily
related to accounts receivable, inventory, start-up of the Intergel division,
introduction and launch of the Revlon product line, higher levels of capital
expenditures and costs associated with securing long-term sales contracts, have
been satisfied by cash flow generated from operations and bank borrowings.
The Company's working capital increased $8.9 million to $22.9 million at
July 31, 1996 from $14.0 million at July 31, 1995. The increase in working
capital was principally due to increased trade accounts receivable and inventory
due to higher sales in fiscal 1996 compared to fiscal 1995.
Net cash used in operating activities in fiscal 1996 was $2.9 million,
compared to $1.9 million provided by operating activities in fiscal 1995. Net
cash was used in operating activities primarily due to increases in accounts
receivable and inventory which has been partially offset by increases in
accounts payable and accrued expenses. Net cash used in investing activities was
$3.3 million for fiscal 1996, compared to $3.9 million for fiscal 1995. Net cash
used in investing activities decreased primarily due to lower capital
expenditures which was offset by the decrease in restricted cash and cash
equivalents. Net cash provided by financing activities was $6.0 million for
fiscal 1996, compared to $400,000 for fiscal 1995. This increase was the result
of the refinancing of the Company's debt and credit facilities.
On April 30, 1996, the Company entered into a credit agreement with its
bank, which expires on March 31, 1999. The agreement can be extended under
certain circumstances through August 31, 1999. Under the agreement, the Company
is allowed to borrow up to $15.0 million under borrowing Facility A, and $6.5
million under borrowing Facility B, subject to certain borrowing base
limitations, as defined. Borrowings under Facility A bear interest at either the
bank's prime rate plus .50%, or at money market rates or LIBOR plus 2.25% (7.69%
at July 31, 1996), at the Company's option. Borrowings under Facility B bear
interest at the bank's prime rate, or at money market rates or LIBOR plus .50%
(6.19% at July 31, 1996), at the Company's option. The agreement has a
commitment fee of .375% of the average daily unused portion of the overall
borrowing commitment relative to Facility A, and .25% relative to Facility B.
The amount of borrowings allowable under Facility B are subject to semi-annual
adjustments, based upon purchases from a vendor during the preceding twelve
months. The notes are collateralized by substantially all of the Company's
assets. The agreement with the bank requires the Company to maintain certain
financial ratios, minimum working capital and contains various restrictions
customary in such a financial arrangement, including limitations on capital
expenditures and payment of cash dividends.
15
<PAGE>
Item 7 Financial Statements
Index to Financial Statements
Independent Auditors' Reports.................................... F-1 to F-3
Consolidated Balance Sheets
As of July 31, 1996 and 1995................................. F-4
Consolidated Statements of Operations for the Years Ended
July 31, 1996 and 1995....................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
July 31, 1996 and 1995....................................... F-6 to F-7
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended July 31, 1996 and 1995............ F-8
Notes to Consolidated Financial Statements....................... F-9 to F-26
Item 8 Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
Incorporated herein by reference is the Company's Form 8-K dated July 28,
1995, which discloses a change in independent auditors.
16
<PAGE>
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The Company's directors and executive officers, are as follows:
Name Age Position
---- --- --------
E. Joseph Edell 69 Chief Executive Officer and Chairman
of the Board of Directors
Arthur S. Edell 63 President and Director
Andrew M. Pinkowski 62 Vice Chairman of the Board of Directors
I. Alan Hirschfeld 45 Executive Vice President
Dr. Mark S. Gold 46 Director
Dennis E. Groat 56 Director
David Popofsky 62 Director
Marc Z. Edell 45 Director
Biographical Information
E. Joseph Edell has been Chairman of the Board of Directors and Chief
Executive Officer of IVC since the Company's merger with American. Prior to that
merger, E. Joseph Edell had been president of American since 1955. Mr. Edell is
the brother of Arthur S. Edell.
Arthur S. Edell has been President of IVC since 1989. The brother of E.
Joseph Edell, he has over 40 years of experience in the vitamin, pharmaceutical
and health food industries in all facets of production, distribution and
marketing. Since 1979, Mr. Edell has owned Healthfair Vitamin Centers, Inc., a
company which operates two health food stores in New Jersey. Mr. Edell was a 50%
owner of Hitex Investments, Inc., a vitamin manufacturing company, from 1974 to
1979, and was a 50% owner of American from 1955 to 1975. In March 1995, Mr.
Edell was involved in a fatal automobile accident. In connection with the
accident, Mr. Edell plead guilty to a single count of vehicular homicide and
received a five year suspended sentence. (See "Item 3 - Legal Proceedings".)
Andrew M. Pinkowski has been Vice Chairman of the Board of Directors of IVC
since the merger with Hall. He had previously been president and Chief Executive
Officer of Hall since 1970. He joined Hall in 1969 as manager of marketing.
Prior to joining Hall, he held various marketing positions with Boise Cascade,
Sterling Drug and Universal Oil Products.
17
<PAGE>
I. Alan Hirschfeld, Executive Vice President, had been Chief Operating
Officer of IVC since the Company's merger with American. At the time of the
merger, he had been Chief Operating Officer of American. He joined American in
1987 as Chief Financial Officer. Prior to 1987, he was a partner in Grossman,
Brown, Weinberg & Lawson, Certified Public Accountants, where he was employed
since 1979. Prior to that time, Mr. Hirschfeld held various positions at Coopers
& Lybrand, a national public accounting and consulting firm, where he was
employed for six years. Mr. Hirschfeld's wife is the daughter of E. Joseph
Edell.
Dr. Mark S. Gold has been on IVC's Board of Directors since 1996. He is a
Professor at the University of Florida Brain Institute. Dr. Gold is a medical
researcher, author and inventor. He was previously a Resident, Chief Resident
and Faculty Member at the Yale University School of Medicine, and has written of
over 500 scientific publications and numerous professional texts.
Dennis E. Groat has been on IVC's Board of Directors since 1996. He has
been President of Dentalogic, a dental technology business, since 1993. From
1989 to 1993 he was President of Denar Corporation, a business specializing in
precision dental instrumentation. Mr. Groat was Chief Operating Officer of Hall
from 1984 to 1988. Prior to joining Hall, he held executive positions with
Scherer Healthcare, Inc., R.P. Scherer Corporation and Mead Johnson
Laboratories.
David Popofsky has been on IVC's Board of Directors since 1996. He is
currently President of Popofsky Advertising in New York City. He has been the
creative/marketing strategist responsible for the consumer launch of various
leading over-the-counter products. Mr. Popofsky is also the founder of The
Retail Drug Institute at Arnold Marie College of Pharmacy, served as visiting
professor for ten years in their graduate school and on the Board of Overseers
for many years. In addition, he served on the Graduate School faculty of
Columbia University Pharmacy School.
Marc Z. Edell has been on IVC's Board of Directors since 1996. He is an
attorney who has been practicing law in New York and New Jersey for the past
twenty years. He has been Managing Partner of Edell and Associates, a
Morristown, NJ law firm, since 1995. From 1985 through 1995, Mr. Edell was a
Partner with Budd Larner Gross in Short Hills, NJ. He is internationally known
for his work in product liability litigation. Mr. Edell is the son of E. Joseph
Edell.
Directors hold their offices until each annual meeting of the stockholders
and thereafter until their successors have been duly elected and qualified.
Executive officers are elected by the Board of Directors on an annual basis and
serve at the discretion of the Board or pursuant to employment agreements.
18
<PAGE>
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers and Directors to file reports of ownership with
the Securities and Exchange Commission ("SEC") and with NASDAQ. The Company
believes that its executive officers and Directors have complied with all
applicable Section 16(a) filing requirements, except that one director, Marc
Edell, was several days late in filing his initial Form 3. This conclusion is
based solely on a review of such forms furnished to the Company in accordance
with SEC regulations.
19
<PAGE>
Item 10 Executive Compensation
The following table sets forth all compensation paid or distributed
during the years ended July 31, 1996, 1995 and 1994 by the Company for services
rendered by (i) the Chief Executive Officer of IVC and (ii) the four most highly
compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
----------------------
Annual Compensation Awards
------------------------------------
Securities All
Underlying Other
Name and Year Salary Bonus Options Compensation
Principal Position ($) ($) ($) ($) (5)
- --------------------------------------------------------------------------------
E. Joseph Edell 1996 500,000 -- -- --
Chairman and 1995 494,000 80,000 -- --
Chief Executive Officer 1994 500,331 -- --
Arthur S. Edell 1996 170,000 (1) 3,640
President 1995 125,571 (1) 200,000 3,640
1994 86,155 (1) 200,000 3,640
I. Alan Hirschfeld 1996 250,000 50,000 (2) 1,028
Executive Vice President 1995 257,500 207,165 -- 1,028
1994 212,500 -- -- 1,028
Sheldon Drucker 1996 147,500 20,000 -- 3,318
Chief Financial Officer(3) 1995 143,212(4) -- -- 2,765
1994 18,425(4) -- -- --
Andrew M. Pinkowski 1996 120,308 90,000 -- --
Vice Chairman 1995 100,308 81,000 -- --
1994 100,308 115,000 -- --
(1) Arthur S. Edell has waived his rights to receive incentive compensation of
5% of the Company's net income which he was entitled under his employment
agreement.
(2) Subsequent to the end of fiscal 1996, the Company granted Mr. Hirschfeld an
option to acquire 50,000 shares under the 1995 Stock Option Plan.
(3) In October 1996, Mr. Drucker resigned from the Company.
(4) Includes consulting fees paid to Mr. Drucker.
(5) Represents term life insurance premiums.
20
<PAGE>
No other annual compensation, Stock Appreciation Rights, long-term
restricted stock awards, or long-term incentive plan payouts were awarded to,
earned by, or paid to the named executive officers during any of the Company's
last three fiscal years.
Directors
Subsequent to the end of fiscal year 1996, the Company granted each
non-employee director an option to acquire 10,000 shares under the 1995 Stock
Option Plan.
21
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The Company did not grant any options in the last fiscal year to the named
executive officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money
Acquired Options At Fiscal Year-End Options at Fiscal Year-End (1)
Name on Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Arthur S. Edell - $- 400,000 - $ 285,000 $-
</TABLE>
(1) The fair market value of the Company's Common Stock on July 31, 1996
($2 27/32 per share) minus the exercise price.
Employment Agreements
The Company has entered into employment agreements with E. Joseph Edell and
I. Alan Hirschfeld as of April 28, 1996, providing for base annual compensation
of $500,000 and $250,000 per annum, respectively. The agreements are for one
year and are automatically extended for successive one-year periods unless the
Company or these executives give three months' notice that they elect that the
term of employment shall not be further extended. In the event notice is given
in accordance with the terms of the agreements, these executives shall receive a
severance payment equal to their base annual salaries, provided that no
severance payment shall be required in the event that the executive retires. The
Board of Directors, at its discretion, may increase the executive's base annual
salary if the term is extended. In the event the Company terminates without
cause the employment of either of the executives, such executives shall receive
a severance payment equal to the remaining salary due under the unexpired term
of his agreement, plus one year's base salary. The agreements each contain
confidentiality and non-disclosure provisions.
The Company has entered into an employment agreement with Arthur S. Edell,
effective as of January 1, 1996, providing for base annual compensation of
$170,000. The agreement is for a one-year period from its effective date, and is
automatically renewed for successive one-year periods unless canceled by either
party. In the event the Company terminates his employment without cause, he
shall receive a severance payment equal to six month's base salary plus accrued
benefits. The employment agreement also contains a provision in which he would
receive three times one year's base salary plus the value of his other
employment benefits in the event of a hostile takeover. The agreement contains
confidentiality and non-disclosure provisions.
22
<PAGE>
The Company has entered into an employment agreement with Andrew M.
Pinkowski, dated as of April 30, 1996, providing for base compensation of
$180,000 per annum. The agreement is effective for three years. In the event the
Company terminates his employment without cause, the Company is obligated to pay
his base salary throughout the remainder of his term of employment. The
agreement contains confidentiality and non-disclosure provisions. In addition,
upon expiration of his term of employment, the agreement provides that he remain
a consultant to the Company for a term of five years at $80,000 per annum.
In addition, the Company has entered into employment agreements with
certain former Hall employees in management positions. These agreements are for
three year terms, and provide for a base salary and certain performance
incentives. They all contain restrictive covenants.
1993 Stock Option Plan
The Company's 1993 Stock Option Plan (the "1993 Option Plan") was adopted
by the Board of Directors and the stockholders on October 14, 1993. The 1993
Option Plan provides for the granting of options, at the discretion of the Board
of Directors, that are intended to qualify as Incentive Stock Options
("Incentive Stock Options"), within the meaning of section 422A of the Code, to
certain employees, and also provides for the granting of options that are not
intended to so qualify ("Non-Qualified Stock Options"). The total number of
shares of Common Stock for which options may be granted under the 1993 Option
Plan is 500,000.
The 1993 Option Plan is administered by the Board of Directors (the
"Board") which determines the terms and conditions of the options exercised,
including the exercise price and the number of shares subject to the option. No
option granted under the 1993 Option Plan is transferable by the optionee other
than by will or the laws of descent and distribution, and each option is
exercisable during the lifetime of the optionee only by such optionee.
The exercise price of all stock options granted under the 1993 Option Plan
must be at least equal to the fair market value of the shares subject to the
options on the date of grant. With respect to any participant who owns stock
possessing more than 10% of the voting rights of the Company's outstanding
capital stock, the exercise price of any Incentive Stock Option must be not less
than 110% of the fair market value on the date of grant. The maximum term of any
Incentive Stock Option is five years and 10 years for any Non-Qualified Stock
Option. Options shall become exercisable at such times and in such installments
as the Board shall provide in the terms of each individual option.
As of the date hereof, under the 1993 Option Plan, options have been
granted to purchase 464,000 shares of IVC Common Stock, 18,000 of which have
been exercised, 2,000 of which have been canceled and 444,000 of which remain
outstanding. Of the 444,000 options remaining outstanding, all of which are
fully vested and exercisable, 200,000 have an exercise price of $1.65 and 39,000
have an exercise price of $1.50 per share, all of which are exercisable on or
before October 14, 1998; 200,000 have an exercise price of $2.612 per share and
are exercisable on or before July 27, 2000 and 5,000 have an exercise price of
$2.375 per share and are exercisable on or before July 27, 2000. A total of
38,000 shares remain available for future grants under the 1993 Option Plan.
23
<PAGE>
1995 Stock Option Plan
On July 27, 1995, the Board adopted the 1995 Stock Option Plan (the "1995
Option Plan") pursuant to which 1,000,000 shares of IVC Common stock were
reserved for issuance to key employees of the Company. The Company's
shareholders approved the 1995 Option Plan at the Annual Meeting on March 15,
1996. Its terms are substantially the same as those of the 1993 Stock Option
Plan. In April 1996, 161,984 options were granted under the 1995 Option Plan at
an exercise price of $3.31 per share, which are exercisable on or before April
30, 2001. In October 1996, 50,000 options were granted under the 1995 Option
Plan at an exercise price of $1.925 per share, and 40,000 options were granted
at an exercise price of $1.75 per share, which are exercisable on or before
October 3, 2001.
24
<PAGE>
Item 11 Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding shares of IVC
Common Stock beneficially owned by (i) each person or group, known to the
Company, who beneficially owns more than 5% of IVC Common Stock, (ii) each of
the Company's directors, (iii) each executive officer named in the summary
compensation table in Item 10 hereto, and (iv) all officers and directors as a
group.
Name and Address of Number of Percentage
Title of Class Beneficial Owner Shares of Class
-------------- ---------------- ------ --------
Common E. Joseph Edell (1)(6) 5,457,430 31.92%
c/o IVC Industries, Inc.
500 Halls Mill Road
Freehold, NJ 07728
Common Arthur S. Edell (2)(6) 2,026,488 11.58%
c/o IVC Industries, Inc.
500 Halls Mill Road
Freehold, NJ 07728
Common Andrew M. Pinkowski (3)(6) 2,794,062 16.34%
c/o IVC Industries, Inc.
3580 N.E. Broadway
Portland, OR 97232
Common I. Alan Hirschfeld (4)(6) 2,631,039 15.35%
c/o IVC Industries, Inc.
500 Halls Mill Road
Freehold, NJ 07728
Common Dr. Mark S. Gold (5) 10,000 *
c/o 2002 San Marco Boulevard
Jacksonville, FL 32207
Common Dennis E. Groat (5) 10,000 *
c/o IVC Industries, Inc.
3580 N.E. Broadway
Portland, OR 97232
Common David Popofsky (5) 10,000 *
c/o Popofsky Advertising
60 Madison Avenue
New York, NY 10010
Common Marc Z. Edell (5) 184,000 1.08%
c/o Edell & Associates
1776 On the Green
Morristown, NJ 07962
25
<PAGE>
Name and Address of Number of Percentage
Title of Class Beneficial Owner Shares of Class
-------------- ---------------- ------ --------
Common All Executive Officers and 13,123,019 74.01%
Directors as a group
(8 persons) (7)
* Less than one percent of the IVC Common Stock
(1) Includes 1,000 shares of IVC Common Stock issuable upon exercise of
warrants and 601,410 shares of IVC Common Stock owned by Beverlee Edell,
the wife of E. Joseph Edell. Mr. Edell disclaims beneficial ownership of
the shares owned by his wife.
(2) Includes 400,000 shares of IVC Common Stock issuable upon exercise of stock
options and 150,000 shares owned by the two Edell Family Partnerships
(750,000 each).
(3) Includes 999,845 shares owned by his wife. Mr. Pinkowski disclaims
beneficial ownership of the shares owned by his wife.
(4) Includes 50,000 shares of IVC Common Stock issuable upon exercise of stock
options, 179,868 shares of IVC Common Stock owned by Susan H. Hirschfeld,
the wife of I. Alan Hirschfeld and 31,194 shares of IVC Common Stock owned
by Mr. Hirschfeld's minor children. Mr. Hirschfeld disclaims beneficial
ownership of the shares owned by his wife and children.
(5) Director. Includes 10,000 shares of IVC Common Stock issuable upon exercise
of stock options.
(6) Director and Executive Officer.
(7) Includes 491,000 shares of IVC Common Stock issuable upon the exercise of
stock options and warrants held by all executive officers and directors.
26
<PAGE>
Item 12 Certain Relationships and Related Transactions
Loans, Guarantees and Advances
Prior to fiscal 1994, Arthur S. Edell loaned the Company $250,000. This
loan has no stated terms of repayment and bears interest at the applicable
federal interest rates in effect during the year 5% as of July 31, 1996 and
5.63% as of July 31, 1995.
Concept Industries, Inc., a company wholly owned by Arthur S. Edell, Ethel
Edell and their children, loaned the Company $90,000 in August 1990, payable in
monthly installments of $2,414 including interest at the rate of 13% per year
over a four-year term. Concept Industries, Inc. also loaned the Company $120,000
in April 1991, payable in monthly installments of $2,792 including interest at
the rate of 14% per year over a term of five years. In each case, the monies
were advanced for the purchase of equipment. The outstanding balances of these
loans were repaid in May 1995.
The above loans were obtained on terms no less favorable to the Company
than could be obtained from non-related parties.
From time to time the Company has made advances to E. Joseph Edell and I.
Alan Hirschfeld. Such advances bear interest at 5% per annum. At July 31, 1996,
and 1995 the aggregate net advances were $506,000 and $532,000 respectively. The
balance due the Company at July 31, 1996 is payable by July 1997.
Mergers and Acquisitions
On April 30, 1996, the Company merged with Hall Laboratories, Inc.,
exchanging IVC Common Stock for all outstanding Hall shares and Stock
Appreciation Rights. Andrew M. Pinkowski and his wife received 2,794,062 of the
total shares of IVC Common Stock exchanged as part of the transaction.
On May 5, 1995, the Company merged with American Vitamin Products, Inc. and
acquired all the outstanding partnership interest of Hidel Partners. As a
result, E. Joseph Edell, Marc Z. Edell and I. Alan Hirschfeld and members of
their families received 8,304,469 shares of IVC Common Stock and $317,737 in
cash. In connection with these transactions the shareholders of American and
partners of Hidel were granted certain registration rights with respect to their
shares of IVC Common Stock.
Other Matters
The Company routinely sells its products on arm's-length terms to
Healthfair Vitamin Centers, Inc., a company wholly owned by Arthur S. Edell and
Ethel Edell. The Company's sales to Healthfair Vitamin Centers for the years
ended July 31, 1996 and 1995 were $154,000 and $125,000, respectively.
27
<PAGE>
The Company periodically sells its products on arm's-length terms to D.N.R.
Inc., a company located in Israel. A principal shareholder of D.N.R. Inc. is
Isaac Tagansky, the brother-in-law of the President of the Company's
International Division . The Company's sales to D.N.R. Inc. for the years ended
July 31, 1996 and 1995 were approximately $390,000 and $315,000, respectively.
In addition, Mr. Tagansky is to be paid a fee based on revenues relating to
American Vitamin brand sales in Israel.
The Company rented warehouse space in Lakewood, New Jersey from E. Joseph
Edell on a month to month basis during 1995 and up to January 1996. Rent expense
for this space was $18 and $36 respectively. Additionally the Company was
responsible for all costs of operations, maintenance and upkeep of the related
property including insurance and real estate taxes.
The Company holds a contract receivable from Agora Holding Company
("Agora"), a partnership consisting of Andrew M. Pinkowski and certain previous
shareholders of Hall. Interest income earned by the Company on this contract was
$85 and $83 for the years ended July 31, 1996 and 1995, respectively. The
Company leases its manufacturing and administration facility in Portland, Oregon
from Agora. Rent expense incurred by the Company for this property was $161 and
$161 for the years ended July 31, 1996 and 1995, respectively.
The above sales and rentals were made on terms no less favorable to the
Company than could be obtained from non-related parties.
The law firm of Edell & Associates, of which Marc Z. Edell is managing
partner, was paid $41,600 to perform certain legal work in the fiscal year
ending July 31, 1996.
28
<PAGE>
Item 13 Exhibits and Reports on Form 8-K
(A) Index of Exhibits as required by Item 601 of Regulation S-B
Exhibit Description of
Number Exhibit
------ -------
2.1 Merger Agreement, dated as of November 13, 1995, amended
and restated as of February 13, 1996, among
International Vitamin Corporation, Hall Laboratories,
Inc., Andrew M. Pinkowski, Rita Pinkowski, Vicki Welsh
Jones and The Amelia Welsh Jones Trust, under a Trust
Agreement dated June 4, 1993 (1)
3.1 Amended Certificate of Incorporation of IVC Industries,
Inc. (2)
3.2 Amended and Restated By-laws of IVC Industries, Inc. (2)
4.1 Common Stock Specimen (3)
4.2 Warrant Specimen (3)
4.3 Warrant Agreement (3)
10.1 Registration Rights Agreement (4)
10.2 Registration Rights Agreement, dated April 30, 1996,
among IVC Industries, Inc., Andrew M. Pinkowski, Rita
Pinkowski, Vicki Welsh Jones, The Amelia Welsh Jones
Trust, under a Trust Agreement dated June 4, 1993,
Lawrence A. Newman, Duane Baxter, Peter W. Schreiber,
John H. Dettra, Jr. And Larry Corbridge (2)
10.3 International Vitamin Corporation 1995 Stock Option Plan
(1)
10.4 Credit Agreement, dated as of April 30, 1996, among IVC
Industries, Inc., the Bank's party thereto and The Chase
Manhattan Bank (National Association), as Agent (2)
10.5 Guaranty, dated as of April 30, 1996, by the Guarantor
(2)
10.6 Guaranty Reimbursement Agreement, dated as of April 30,
1996, by IVC Industries, Inc., International Vitamin
Overseas Sales Corp. and Hall Laboratories, Ltd., in
favor of the Guarantor (2)
10.7 Letter of Reimbursement Agreement, dated as of April 30,
1996, by and between IVC Industries, Inc., International
Vitamin Overseas Sales Corp. and The Chase Manhattan
Bank (National Association) (2)
29
<PAGE>
(A) Index of Exhibits as required by Item 601 of Regulation S-B - (continued)
10.8 Subordination and Intercreditor Agreement, dated as of
April 30, 1996, by the Guarantor, The Chase Manhattan
Bank (National Association), IVC Industries, Inc.,
International Vitamin Overseas Sales Corp. and Hall
Laboratories, Ltd. (2)
10.9 Security Agreement, dated as of April 30, 1996, by IVC
Industries, Inc., in favor of the Guarantor (2)
10.10 Security Agreement, dated as of April 30, 1996, by
International Vitamin Overseas Sales Corp., in favor of
the Guarantor (2)
10.11 Security Agreement, dated as of April 30, 1996, by Hall
Laboratories, Ltd., in favor of the Guarantor (2)
10.12 Trademark Collateral Assignment Agreement, dated as of
April 30, 1996, by IVC Industries, Inc. (2)
10.13 Guaranty and Security Agreement, dated as of May 10,
1996, by IVC Industries, Inc., in favor of the Guarantor
(5)
10.14 Guaranty and Security Agreement, dated as of May 10,
1996, by International Vitamin Overseas Sales Corp., in
favor of the Guarantor (5)
10.15 Guaranty and Security Agreement, dated as of May 10,
1996, by Hall Laboratories, Ltd., in favor of the
Guarantor (5)
10.16 Trademark Collateral Assignment Agreement, dated as of
May 10, 1996, by IVC Industries, Inc. (5)
10.17 Employment Agreement with E. Joseph Edell (4)
10.18 Employment Agreement with Arthur S. Edell (3)
10.19 Employment Agreement with Andrew M. Pinkowski (2)
10.20 Employment Agreement with I. Alan Hirschfeld (4)
10.21 Loan and Security Agreement with NatWest Bank, N.A. (4)
30
<PAGE>
(A) Index of Exhibits as required by Item 601 of Regulation S-B - (continued)
(1) Incorporated herein by reference from the Company's Proxy Statement
and Annual Report to Shareholders, dated March 5, 1996.
(2) Incorporated herein by reference from the Form 8-K filed on May 14,
1996.
(3) Incorporated herein by reference from the Registration Statement
number 33-73406 filed by the Company on Form SB-2.
(4) Incorporated herein by reference from Form 10-QSB filed by the Company
for the quarterly period ended April 30, 1995.
(5) Incorporated herein by reference from Amendment 2 to the Form 8-K
filed on May 14, 1996, which was filed on August 9, 1996.
(B) Reports on Form 8-K
Amendments 1 and 2 to the Form 8-K filed on May 14, 1996 were filed on July
12, 1996 and August 9, 1996, respectively, for the purposes of filing financial
statement information for Hall Laboratories, Inc., certain pro forma financial
statements and certain exhibits.
31
<PAGE>
SIGNATURES
In accordance with Sections 13 and 15 (d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
IVC INDUSTRIES, INC.
Date: October 28, 1996 By: /s/ E. Joseph Edell
--------------------- --------------------------
E. Joseph Edell
Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/ E. Joseph Edell Chairman of the Board of October 28, 1996
- -------------------------- Directors and Chief
E. Joseph Edell Executive Officer
/s/ Arthur S. Edell President and Director October 28, 1996
- --------------------------
Arthur S. Edell
/s/ Andrew M. Pinkowski Vice Chairman and Director October 28, 1996
- --------------------------
Andrew M. Pinkowski
/s/ I. Alan Hirschfeld Executive Vice President, October 28, 1996
- -------------------------- Acting Chief Financial
I. Alan Hirschfeld Officer and Director
/s/ Dennis E. Groat Director October 28, 1996
- --------------------------
Dennis E. Groat
32
<PAGE>
/s/ David Popofsky Director October 28, 1996
- --------------------------
David Popofsky
/s/ Dr. Mark S. Gold Director October 28, 1996
- --------------------------
Dr. Mark S. Gold
/s/ Marc Z. Edell Director October 28, 1996
- --------------------------
Marc Z. Edell
33
<PAGE>
[Letterhead of Amper, Politziner & Mattia]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
IVC Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of IVC Industries,
inc. and Subsidiaries as of July 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
The financial statements as of July 31, 1995, and for the year then ended, have
been restated to reflect the pooling of interest of IVC Industries, Inc. and
Subsidiaries, and Hall Laboratories, Inc. and Subsidiary, as described in Note 2
of the financial statements. An adjustment, also described in Note 2, has been
applied to restate the 1995 financial statements of IVC Industries, Inc. and
Subsidiaries. We did not audit the 1995 financial statements of Hall
Laboratories, Inc. and Subsidiary prior to such adjustments, which statements
reflects total assets of approximately $14,153,000 and revenues of approximately
$39,125,000. These statements were audited by other auditors whose report has
been furnished to us, and our opinion expressed herein, insofar as it relates to
the amounts included for Hall Laboratories, Inc. and Subsidiary, is based solely
on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also included
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for the opinion expressed below.
F-1
<PAGE>
In our opinion, based on our audits and the report of the other auditors
referred to above on the financial statements of Hall Laboratories, Inc. and
Subsidiary, which have been subsequently restated as described in Note 2 to the
financial statements, the consolidated financial statements referred to in the
first paragraph present fairly in all material aspects, the financial position
of IVC Industries, Inc. and Subsidiaries as of July 31, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ AMPER POLITZINER & MATTIA
AMPER POLITZINER & MATTIA
October 29, 1996
Edison, New Jersey
F-2
<PAGE>
[Letterhead of Yergen and Meyer LLP]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Hall Laboratories, Inc.
Portland, Oregon
We have audited the accompanying consolidated balance sheets of Hall
Laboratories, Inc., and its subsidiary, as of July 31, 1995 and 1994, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the corporation's management. Our responsibility is to
express and opinion on these consolidated financial statements based on our
audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Hall
Laboratories, Inc., and subsidiary as of July 31, 1995 and 1994, and the results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Yergen and Meyer LLP
August 13, 1996
F-3
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS AT JULY 31, 1996 AND 1995 (Dollars
in Thousands, Except Per Share Information)
1996 1995
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 420 $ 529
Accounts receivable 17,507 9,395
Inventories 26,045 18,903
Deferred taxes 1,755 1,333
Prepaid expenses and other current assets 1,864 2,113
-------- --------
Total Current Assets 47,591 32,273
Property and Equipment - Net 18,071 16,436
Deferred taxes 105 --
Other Assets 2,908 2,432
-------- --------
Total Assets $ 68,675 $ 51,141
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Note payable $ -- $ 2,742
Current portion of long-term debt 1,070 786
Accounts payable and accrued expenses 23,809 14,779
-------- --------
Total Current Liabilities 24,669 18,307
Long-Term Debt - Less Current Portion 28,656 20,193
Deferred taxes -- 115
Other 99 98
-------- --------
Total Liabilities 53,634 38,713
-------- --------
Shareholders' Equity:
Preferred stock, no par,
2,000,000 shares authorized -- --
Common stock, $.01 par value,
25,000,000 shares authorized;
17,094,742 and 17,078,742 issued
and outstanding, respectively 171 171
Additional paid-in capital 11,345 9,078
Foreign currency translation adjustment (99) (149)
Retained earnings 3,624 3,328
-------- --------
Total Shareholders' Equity 15,041 12,428
-------- --------
Total Liabilities and Shareholders' Equity $ 68,675 $ 51,141
======== ========
See notes to consolidated financial statements.
F-4
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1996 AND 1995
(Dollars in Thousands, Except Per Share Information)
__________________________
1996 1995
-------- -------
Net sales $104,159 $89,097
Cost of sales 77,086 70,949
-------- -------
Gross profit 27,073 18,148
Selling, general and administrative expenses 22,350 16,355
-------- -------
Income before items shown below 4,723 1,793
Merger and integration costs 3,183 1,533
-------- -------
Income from operations 1,540 260
Other expenses - net 818 775
-------- -------
Income (loss) before income taxes 722 (515)
Income tax provision (benefit) 426 (1,108)
-------- -------
Net income $ 296 $ 593
======== =======
Net income per share $ .02 $ .03
======== =======
Weighted average shares 17,222,160 17,202,811
See notes to consolidated financial statements.
F-5
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1996 AND 1995
(Dollars in Thousands)
__________________________
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 296 $ 593
-------- --------
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 1,784 787
Deferred income taxes (642) (1,035)
Conversion of stock appreciation rights to
common stock 2,243 --
Gain on sale of assets 41 --
Changes in assets - (increase) decrease:
Accounts receivable (8,112) (836)
Inventories (7,142) 1,293
Prepaid expenses and other current assets 249 260
Other assets (632) 760
Changes in liabilities - increase (decrease):
Accounts payable and accrued expenses 9,031 305
Income taxes payable -- (257)
-------- --------
Total adjustments (3,180) 1,277
-------- --------
Net Cash Provided (Used) By Operating Activities (2,884) 1,870
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Foreign currency translation adjustment 50 21
Additions to property and equipment (3,547) (6,507)
Proceeds from sale of assets 244 --
Restricted cash and cash equivalents -- 2,538
-------- --------
Net Cash (Used) By Investment Activities (3,253) (3,948)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to American shareholders and
Hidel partners -- (1,335)
Net proceeds from demand notes payable - bank -- (713)
Proceeds from notes payable - banks 31,230 37,513
Principal payments on notes payable - banks (34,048) (38,404)
Principal payments on long-term debt (43,528) (2,029)
Proceeds from long-term debt 52,350 5,703
Acquisition of shareholder interests in American -- (318)
Proceeds from exercise of stock options 24 --
-------- --------
Net Cash Provided By Financing Activities 6,028 417
-------- --------
NET INCREASE (DECREASE) IN CASH (109) (1,661)
CASH AND CASH EQUIVALENTS - BEGINNING 529 2,190
-------- --------
CASH AND CASH EQUIVALENTS - ENDING $ 420 $ 529
======== ========
See notes to consolidated financial statements.
F-6
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,325 $1,622
======== ======
Taxes $ 752 $ 313
======== ======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
On May 5, 1995, as a result of the Hidel acquisition, the Company recognized a
deferred tax benefit attributable to temporary timing differences created as a
result of the increase in the tax basis of Hidel's assets. The recognition of
this tax benefit has been allocated to additional paid-in capital.
See notes to consolidated financial statements.
F-7
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended July 31, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock
------------
Additional Foreign
Number Paid-In Retained Currency
of Shares Amount Capital Earnings Translation Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, August 1, 1994:
As previously reported 17,078,742 171 9,366 4,014 (170) 13,381
Distribution to American
shareholders and Hidel Partners -- -- (1,335) -- -- (1,335)
Acquisition of shareholder
interests in American -- -- (318) -- -- (318)
Tax benefit of increase in basis
of assets acquired from Hidel -- -- 86 -- -- 86
Net income -- -- 1,279 (686) -- 593
Foreign currency translation
adjustment -- -- -- -- 21 21
---------- ---------- ---------- ---------- ---------- ----------
Balance, July 31, 1995 17,078,742 171 9,078 3,328 (149) 12,428
Conversion of Stock
Appreciation Rights -- -- 2,243 -- -- 2,243
Exercise of stock options 16,000 -- 24 -- -- 24
Net income -- -- -- 296 -- 296
Foreign currency translation
adjustment -- -- -- -- 50 50
---------- ---------- ---------- ---------- ---------- ----------
Balance, July 31, 1996 17,094,742 $ 171 $ 11,345 $ 3,624 $ (99) $ 15,041
========== ========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except Per Share Information)
__________________________
Note 1 - Summary of Significant Accounting Policies:
Organization
IVC Industries, Inc. ("the Company") is engaged in a single business
segment - manufacturing, packaging and worldwide sales and distribution of
vitamins and nutritional supplements through drug stores, supermarkets and
mass merchandising chains as well as health food stores and independent
drug stores. Its products are distributed under the Fields of Nature(R),
Rybutol(R), Nature's Wonder(R), American Vitamin(R), Synergy Plus and
Nature's Blend brands as well as under the private labels of its retail
chain store customers. The Company also markets a line of products under a
license agreement with Revlon Consumer Products Corporation ("Revlon").
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Financial data for all periods presented
reflect the retroactive effects of the business combinations, accounted for
as pooling of interests, of Hall Laboratories, Inc. ("Hall") on April 30,
1996 and American Vitamin Products, Inc. ("American") and Hidel Partners
("Hidel") on May 5, 1995 (see "Business Combinations"). All material
intercompany transactions and balances have been eliminated.
Foreign Currency Translation
Assets and liabilities of the subsidiary operating in Canada are translated
into U.S. dollars using the exchange rates in effect at the balance sheet
date. Results of operations are translated using the average exchange rates
prevailing throughout the period. The effects of exchange rate fluctuations
on translating foreign currency assets and liabilities into U.S. dollars
are included in stockholders' equity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Cash Equivalents and Restricted Cash
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. Cash and cash
equivalents includes restricted cash of $296 and $339 in 1996 and 1995,
respectively, representing deposits held by trustees in connection with
payments for the current portion and interest on long-term debt.
F-9
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except Per Share Information)
__________________________
Note 1 - Summary of Significant Accounting Policies - (continued):
Accounts Receivable
Accounts receivable are stated at their net values. Included in net
accounts receivable is an allowance for bad debts as well as a reserve for
future customer returns and allowances. At July 31, 1996 and 1995 the
reserve for bad debts was $607 and $298, respectively.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents, short-term borrowings and the
current portion of long-term debt approximate cost due to the short period
of time to maturity. Fair values of long-term debt, which have been
determined based on borrowing rates currently available to the Company for
loans with similar terms or maturity, approximate the carrying amounts in
the consolidated financial statements.
Inventories
Inventories are stated at the lower of cost or market. The cost of the
material component of inventories is determined on the LIFO (last-in,
first-out) method. The labor and overhead components of inventories are
determined on the FIFO (first-in, first-out) method.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided on accelerated and straight-line methods over the
estimated useful lives of the respective assets. Maintenance and repairs
are charged to expense as incurred; major renewals and betterments are
capitalized. When property and equipment is sold or retired, the related
cost and accumulated depreciation are removed from the accounts and any
gain or loss is included in the results of operations.
Other Assets
Other assets, including other current assets, include trademarks, security
deposits, a covenant not to compete, deferred financing costs and a
contract receivable from a related party (see "Related Party" Footnote to
Consolidated Financial Statements). The covenant not to compete is being
amortized over the period of expected benefit, and the deferred financing
costs are being amortized over the life of the related financing
agreements. Also included in other assets are the costs associated with
acquiring long-term sales agreements with certain customers, which are
being charged to operations over the specific terms of the individual
agreements.
F-10
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except Per Share Information)
__________________________
Note 1 - Summary of Significant Accounting Policies - (continued):
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment,
which is recorded net of estimated sales returns, discounts and allowances.
Stock-Based Compensation
The Company accounts for stock-based compensation plans in accordance with
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees", and related interpretations. Under the provisions of
APB 25, compensation expense is measured at the grant date for the
difference between the fair value of the stock, less the exercise price.
Income Taxes
The Company uses the liability method of accounting for income taxes. The
liability method measures deferred income taxes by applying enacted
statutory rates in effect at the balance sheet date to the differences
between the tax bases of assets and liabilities and their reported amounts
in the financial statements. The resulting deferred tax asset or liability
is adjusted to reflect changes in tax laws as they occur.
Prior to the merger with American and the acquisition of Hidel by the
Company, American was taxed as an S-Corporation and Hidel was taxed as a
partnership. Accordingly, profits, losses and tax credits of these entities
were generally passed on to their individual shareholders or partners.
Effective with the American merger and Hidel acquisition, the Company
recorded deferred tax assets representing (i) the net tax effect of certain
of American's expenses which have not yet been deducted for tax purposes,
but have been expensed for financial reporting purposes, as a result of the
termination of American's S-Corporation tax status and (ii) the estimated
tax benefit available to the Company relating to an increase in the tax
basis of certain of Hidel's assets resulting from the acquisition. These
deferred tax assets have been credited to fiscal 1995 operations and
paid-in capital, respectively.
Earnings Per Share
Earnings per share on common stock is computed on the basis of the weighted
average number of common and common equivalent shares outstanding during
each year. It is assumed that all dilutive stock options are exercised at
the beginning of each year (or at time of issuance, if later) and that the
proceeds are used to purchase shares of the Company's common stock at the
average market price during the year. Fully diluted earnings per share are
not shown, as there is less than a 3% dilution.
F-11
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except Per Share Information)
__________________________
Note 1 - Summary of Significant Accounting Policies - (continued):
Concentration of Cash Balances
Periodically, the Company maintains cash balances in excess of the $100
insured by the Federal Deposit Insurance Corporation (FDIC).
Impact of Recently Issued Accounting Standards
During the year ended June 30, 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", which had no effect on its financial condition
or results of operations. The Company records impairment losses on
long-lived assets used in operations or expected to be disposed of when
events and circumstances indicate that the assets might be impaired, and
the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amounts of those assets.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation", which establishes financial accounting and
reporting standards for stock-based employee compensation plans. The
Company will comply with this standard in fiscal 1997. It is currently
determining which alternatives available within the standard will be
adopted.
Note 2 - Business Combinations:
Hall Laboratories, Inc.
On April 30, 1996, Hall, an Oregon corporation engaged in the
manufacturing, packaging, sales and distribution of vitamins and
nutritional supplements primarily on West Coast, was merged into the
Company. Pursuant to the merger agreement executed in connection therewith,
all of the outstanding equity shares of Hall, including Hall's Stock
Appreciation Rights, were exchanged for 3,821,363 shares of the Company
Common Stock. The accompanying consolidated financial statements for the
periods prior to this transaction have been restated to present the
combined financial position and operating results of the Company and Hall.
Prior to the Hall merger, Hall had a fiscal year end of January 31 for
financial reporting purposes. In the accompanying consolidated financial
statements, information as it to Hall has been recast to conform with the
Company's historical reporting periods.
F-12
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except Per Share Information)
__________________________
Note 2 - Business Combinations - (continued):
Operating results of the separate entities for the periods presented below
are as follows:
Nine Months
Ended
April 30, 1996 Year Ended
(unaudited) July 31, 1995
-------------- -------------
Net revenues:
IVC Industries, Inc. $ 42,252 $ 49,972
Hall Laboratories, Inc. 34,628 39,125
-------- --------
Combined $ 76,880 $ 89,097
======== ========
Net income (loss):
IVC Industries, Inc. $ (141) $ 799
Hall Laboratories, Inc. 205 (206)
-------- --------
Combined $ 64 $ 593
======== ========
In connection with the Hall merger, the Company recognized merger and
integration costs representing transaction expenses, compensation paid to
certain Hall employees who held SARs and projected costs of integrating the
business operations of the Companies.
F-13
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except Per Share Information)
__________________________
Note 2 - Business Combinations - (continued):
American Vitamin Products, Inc. and Hidel Partners
On May 5, 1995, the Company merged with American and acquired all the
partnership interests of Hidel in transactions accounted for as poolings of
interests. As a result, 715,907 of American's common stock and all the
outstanding partnership interests of Hidel were exchanged for 8,184,469 (a
ratio of one share of American for 11.68355247 of the Company's) plus $318
in cash and 120,000 shares of the Company's common stock, respectively. The
accompanying consolidated financial statements for the periods prior to
these transactions have been restated to present the combined financial
position and operating results of the Company, American and Hidel. To
affect the restatement, certain adjustments were necessary to conform the
accounting practices of the Company to that of American. That portion of
the Company's raw material components being accounting for under the FIFO
method were retroactively restated to a LIFO cost basis, resulting in a net
charge to the August 1, 1993 retained earnings of $76. In addition, this
change in accounting method resulted in a reduction of net income of $68
for the year ended July 31, 1995. Prior to the American merger and Hidel
acquisition these entities had a fiscal year end of December 31 for
financial reporting purposes. In the accompanying consolidated financial
statements, information as it relates to American and Hidel has been
recasted to conform with the Company's historical financial reporting
periods. Net income earned by American as a S-Corporation and net income of
Hidel, through May 5, 1995, has been credited to additional paid-in
capital.
Operating results of the separate entities for the nine months ended April
30, 1995 are represented
Nine Months
Ended
April 30, 1995
--------------
(unaudited)
Net revenues:
IVC Industries, Inc. $ 8,402
American Vitamin Products, Inc. 28,636
Hidel Partners --
--------
Combined $ 37,038
========
Net income (loss):
IVC Industries, Inc. $ (21)
American Vitamin Products, Inc. 1,102
Hidel Partners 267
--------
Combined $ 1,348
========
F-14
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except Per Share Information)
__________________________
Note 2 - Business Combinations - (continued):
In connection with the American merger and Hidel acquisition, the Company
recognized charges of $1,533, pre-tax, representing transaction expenses
and projected costs of integrating the business operations of the
companies. Net of related taxes, this charge reduced earnings by
approximately $1,035 ($.06 per share) for the year ended July 31, 1995. Of
the total integration and restructuring charges accrued, approximately
$1,400 had been incurred as of July 31,
Note 3 - Inventories:
Inventories consist of the following: July 31,
--------
1996 1995
------- -------
Finished goods $10,736 $ 7,692
Bulk 9,155 5,073
Work in process 1,777 1,395
Raw materials 2,450 2,988
Packaging components 1,927 1,755
------- -------
Total inventory $26,045 $18,903
======= =======
The LIFO reserve at July 31, 1996 and 1995, was approximately $165 and
$1,900, respectively. The $1,735 reduction in the LIFO reserve resulted
from decreases in the cost of certain raw materials during the year ended
July 31, 1996. This reduction had the effect of increasing net income by
approximately $1,000 or $0.06 per share. In 1995, the LIFO reserve
increased by $32 and reduced net income by approximately $20 or $0.00 per
share.
F-15
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except Per Share Information)
__________________________
Note 4 - Property and Equipment:
Property and equipment consist of the following:
July 31,
--------
1996 1995
------- -------
Land $ 1,644 $ 1,451
Buildings and improvements 6,485 5,186
Machinery and equipment 6,673 8,138
Leasehold improvements 678 625
Furniture and fixtures 1,678 1,162
Encapsulation facility 10,635 --
------- -------
27,793 16,562
Accumulated depreciation and amortization 9,722 8,137
------- -------
18,071 8,425
Encapsulation facility under construction -- 8,011
------- -------
Net property and equipment $18,071 $16,436
======= =======
The property and equipment relative to the encapsulation facility
represents leasehold improvements and acquisition of machinery and
equipment. Depreciation on these costs commenced in fiscal 1996, in
accordance with the initial operations of the facility.
Depreciation expense for the years ended July 31, 1996 and 1995 was $1,617
and $715, respectively.
Note 5 - Short-Term Financing:
At July 31, 1995, the Company had short-term borrowing arrangements with
its bank under a committed line of credit, with maximum borrowings of $6.5
million, bearing interest at 1% above bank's prime rate, collateralized by
certain assets related to Hall, which was repaid in April 1996.
F-16
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except Per Share Information)
__________________________
Note 6 - Long-Term Debt:
Long-term debt consists of the following: July 31,
1996 1995
------- -------
Notes payable, bank, under a $21.5
million revolving line of credit, due
March 31, 1999 $19,500 $ --
Bonds payable, New Jersey Economic
Development Authority, interest at
the floating tax-free rate (3.55%
at July 31, 1996), due May
1, 2003 5,000 --
Bonds payable, New Jersey Economic
Development Authority, interest
at 6.9%, due June 30, 2007 4,976 5,300
Term note payable, bank, under $6.0
million revolving line of credit,
repaid April 1996 -- 5,250
Term note payable, bank, repaid
October 1995 -- 5,000
Notes payable to various parties,
repaid April 1996 -- 5,179
Loan payable, shareholder, interest
at 5% with no stated terms 250 250
------- -------
Total 29,726 20,979
Less current portion 1,070 786
------- -------
Long-Term Debt - Less current portion $28,656 $20,193
======= =======
On April 30, 1996, the Company entered into a credit agreement with its
bank, which expires on March 31, 1999. The agreement can be extended under
certain circumstances through August 31, 1999. Under the agreement, the
Company is allowed to borrow up to $15.0 million under borrowing Facility
A, and $6.5 million under borrowing Facility B, subject to certain
borrowing base limitations, as defined. Borrowings under Facility A bear
interest at either the bank's prime rate plus 0.50%, or at money market
rates or LIBOR plus 2.25% (7.69% at July 31, 1996), at the Company's
option. Borrowings under Facility B bear interest at the bank's prime rate,
or at money market rates or LIBOR plus .50% (6.19% at July 31, 1996) at the
Company's option. The agreement entails a commitment fee of .375% of the
average daily unused portion of the overall borrowing commitment amount
relative to Facility A, and .25% relative to Facility B. The amount of
borrowings allowable under Facility B are subject to semi-annual
adjustments based
F-17
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except Per Share Information)
__________________________
Note 6 - Long-Term Debt - (continued):
upon purchases from a vendor during the preceding twelve months. The notes
are collateralized by substantially all of the Company's assets. The
agreement with the bank requires the Company to maintain certain financial
ratios, minimum working capital and contains various restrictions customary
in such a financial arrangement, including limitations on capital
expenditures and payment of cash dividends.
On October 5, 1995 the Company retired its $5.0 million term loan with its
bank by utilizing the proceeds of a New Jersey Economic Development
Authority tax exempt bond issue of the same amount. Interest on these bonds
is payable based upon the weekly tax-free floating rate. The bonds called
for interest only through May 1996. Thereafter, the bonds require aggregate
annual principal payments of $720, (payable monthly), through May 2002, and
a final payment of $680 in May 2003. In connection with this bond issue,
the Company is required to maintain a letter of credit from a bank in an
amount equal to the outstanding principal balance. The fee for this letter
of credit is 1% per annum.
The mortgage payable of $4,976 is collateralized by the Company's real
property in Freehold, New Jersey. Interest is paid semiannually on June 1
and December 1 of each year. Annual principal payments are due December 1
of each year and vary from $100 to $525 during the term of the mortgage.
The Company is required to make monthly escrow payments to a trustee for
principal and interest. The Company maintains a letter of credit in an
amount equal to the outstanding mortgage principal. The fee on this letter
of credit is .75% per annum of the outstanding principal balance. The
mortgage agreement contains certain restrictions including limitation of
dividends based upon a formula.
The aggregate amount of long-term debt, excluding the $250 shareholder loan
payable, maturing in each of the five years subsequent to July 31, 1996 and
thereafter is as follows:
1997 $ 1,070
1998 1,095
1999 20,620
2000 1,145
2001 1,170
Thereafter 4,376
--------
Total $ 29,476
========
F-18
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except Per Share Information)
__________________________
Note 7 - Income Taxes:
The income tax provision (benefit) consisted of the following for the
periods ended:
July 31,
--------
1996 1995
------- -------
Current tax expense (benefit):
Federal $ 839 $ (62)
State 134 (11)
Foreign 131 --
------- -------
1,104 (73)
------- -------
Deferred tax expense (benefit):
Federal (483) (462)
State (159) (155)
Foreign -- --
------- -------
(642) (617)
------- -------
Effect of change in tax status -- (418)
Other (36) --
Total Income Tax Provision $ 426 $(1,108)
======= =======
The income tax provision (benefit) for 1995 was reduced by a benefit of net
operating loss carryforwards of $330.
The effect of change in tax status for the year ended July 31, 1995 was caused
by the termination of American's S-Corporation status for federal and state tax
purposes due to the merger.
F-19
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except Per Share Information)
__________________________
Note 7 - Income Taxes - (continued):
The differences between the provision for income taxes and income taxes
computed using the federal income tax rate were as follows for the periods
ended:
July 31,
--------
1996 1995
------- -------
Amount computed using statutory rate $ 244 $ (175)
Foreign tax benefit -- (29)
State taxes provision (benefit) (net of federal 88 (10)
benefit)
Effect of foreign income not subject to federal -- 47
income tax
S-Corporation and partnership earnings not -- (434)
subject to income taxes
Effect of change in tax status -- (418)
Nondeductible merger costs 94 --
Other -- (89)
------- -------
Income Tax Provision (Benefit) $ 426 $(1,108)
======= =======
As a result of a change in the estimated taxable income of American and
Hidel, for the period prior to their combination with the Company, the
Company has recorded additional taxes of $283 in the year ended July 31,
1995. As of July 31, 1996 there are unused net operating loss carryforwards
for federal income tax purposes of approximately $750 expiring from July
31, 2002 to July 31, 2011. The amount of federal net operating loss
carryforwards that may be used on any year is limited due to change of
control.
F-20
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except Per Share Information)
__________________________
Note 7 - Income Taxes - (continued):
Deferred tax attributes resulting from differences between financial
accounting amounts and tax basis of assets and liabilities at July 31, 1996
and 1995 are as follows:
July 31,
--------
1996 1995
------- -------
Current assets and liabilities
Allowance for doubtful accounts $ 660 $ 104
Inventory valuation 379 291
Accrued expenses 252 230
Accrued merger costs 268 307
Net operating loss carryforward 265 330
Other (69) (61)
Stock Appreciation Rights -- 132
------- -------
Valuation allowance -- --
------- -------
Net current deferred asset $ 1,755 $ 1,333
======= =======
Non-current assets and liabilities
Step up in basis of assets $ -- $ 85
Installment contract (237) (202)
Property and equipment 213 2
Other 87 --
Net operating loss carryforward 42 --
------- -------
Net non-current deferred asset (liability) $ 105 $ (115)
======= =======
Net income as presented in the accompanying 1995 consolidated financial
statements does not include provisions for income taxes on the income of
American and Hidel for the periods prior to their combination with the
Company.
Note 8 - Other Income Statement Information:
The Company sells its products to a geographically diverse base of
customers, primarily drug store, mass merchandiser and supermarket chains.
Two customers who individually accounted for more than 10% of sales
represented 21% and 13%, respectively, of net sales in the fiscal year
ended July 31, 1996. These same two customers individually represented
approximately 19% and 16% of sales for the fiscal year ended July 31, 1995.
F-21
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except Per Share Information)
__________________________
Note 8 - Other Income Statement Information:
Other expenses, income are comprised of the following for the year ended:
July 31,
--------
1996 1995
------- -------
Interest expense $ 1,579 $ 1,334
Rental income (203) (237)
Interest income (227) (324)
Gain on sales of contract
manufacturing division (225) --
Other (106) 2
------- -------
Total other expenses, net $ 818 $ 775
======= =======
Interest expense for the years ended July 31, 1996 and 1995, excludes
capitalized interest, relating to the construction of the soft gel
encapsulation facility, of approximately $231 and $325, respectively.
Note 9 - Shareholders' Equity:
In October 1993, the Company adopted a stock option plan (the "1993 Option
Plan") under which options may be granted for up to 500,000 shares of the
Company's common stock. The 1993 Option Plan terminates on December 14,
2003 unless terminated earlier by action of the Board of Directors. The
term of each option shall not exceed 10 years from date of grant (five
years for options granted to employees owning more than 10% of the
Company's voting stock). During fiscal year 1994, options to purchase
259,000 shares of the Company's stock for five years were granted to
employees at a price of $1.50 per share, of which 2,000 shares were
exercised. The exercise price of 200,000 of these options was subsequently
adjusted to $1.65 per share. 2,000 options were canceled in fiscal year
1995. During fiscal year 1995, options to purchase 205,000 shares of the
Company's stock for five years were granted to employees at prices ranging
from $2.375 to $2.612 per share. At July 31, 1996, options for 444,000
shares remain outstanding and 36,000 shares remain available for future
grants. During the year ended July 31, 1996, 16,000 options were exercised.
F-22
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except Per Share Information)
__________________________
Note 9 - Shareholders' Equity - (continued):
In February 1994, the Company sold 1,267,300 units in a public offering for
$7 a unit, aggregating $8,871. Each unit consisted of two shares of the
Company's common stock and one five year warrant to purchase an additional
share for a price of $7 subject to certain restrictions and redemption
rights afforded the Company. The net proceeds from the offering, after
deducting underwriter's commissions and expenses of the offering, of $7,259
has been credited to shareholders' equity. In addition, the Company granted
the underwriter an option to purchase up to 110,200 units at an exercise
price of $8.40. Such option is exercisable for a three year period
commencing February 16, 1996.
In April 1995, the Company's shareholders voted to increase the Company's
authorized common shares to 25,000,000 from 10,000,000 and to authorize
2,000,000 shares of preferred stock to be used from time to time on terms
to be determined by the Board of Directors.
In April 1995, an option to purchase 100,000 shares of the Company's common
stock was granted to a consultant to the Company at a price of $4.50 per
share. The option expires three years from date of grant.
In July 1995, the Board of Directors adopted the 1995 Stock Option Plan
(the "1995 Option Plan") pursuant to which 1,000,000 shares of IVC common
stock were reserved for issuance to key employees of the Company. The
Company's shareholders approved the 1995 Option Plan at the Annual meeting
on March 15, 1996. Its terms are substantially the same as those of the
1993 Stock Option Plan.
In April 1996, 161,984 options were granted under the 1995 Option Plan at
an exercise price of $3.31 per share, which are exercisable on or before
April 30, 2001.
In October 1996, 50,000 options were granted under the 1995 Option Plan at
an exercise price of $1.925 per share, and 40,000 options were granted at
an exercise price of $1.75 per share, which are exercisable on or before
October 3, 2001.
Note 10 - Related Party Transactions:
The Company has advanced funds to certain shareholders with interest of
approximately 5% per annum. The amounts due at July 31, 1996 and July 31,
1995 of $506 and $532, respectively, is payable by July 1997. Interest
income earned on loans receivable - shareholders was approximately $31 and
$47 for the years ended July 31, 1996 and 1995, respectively. The amounts
due from shareholders are included in other assets.
F-23
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except Per Share Information)
__________________________
Note 10 - Related Party Transactions - (continued):
Interest on loans payable to shareholder aggregated approximately $12 for
the year ended July 31, 1996.
The Company advanced funds and sold product to an affiliate that is owned
by certain shareholders of the Company. Sales to this affiliate were $154
and $125 for the years ended July 31, 1996 and 1995, respectively. The
amount due from this affiliate including accounts receivable and advances,
was $6 and $18 at July 31, 1996 and 1995, respectively.
Sales to other related parties aggregated $389 and $315 for the years ended
July 31, 1996 and 1995, respectively. Accounts receivable from these
related parties aggregated $274 and $151 at July 31, 1996 and 1995,
respectively.
The Company had rented warehouse space in Lakewood, New Jersey from the
Company's Chairman and major shareholder on a month-to-month basis. Rent
expense for this space was $18 and $36 for the years ended July 31, 1996
and 1995, respectively. Additionally, the Company was responsible for all
cost of operations, maintenance and upkeep of the related property,
including insurance and real estate taxes.
The Company holds a contract receivable from Agora Holding Company
("Agora"), a partnership consisting of Andrew M. Pinkowski and certain
previous shareholders of Hall. The amount due from Agora was $906 and $932
at July 31, 1996 and 1995, respectively. The contract receivable requires a
monthly payment of $9, which includes interest and principal through its
maturity in January 2012. Interest income earned by the Company on this
contract was $85 and $83 for the years ended July 31, 1996 and 1995,
respectively. The Company leases its manufacturing and administration
facility in Portland, Oregon from Agora. Rent expense incurred by the
Company for this property was $161 and $161 for the years ended July 31,
1996 and 1995, respectively.
F-24
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except Per Share Information)
__________________________
Note 11 - Commitments and Contingencies:
Leases:
The Company leases certain production and warehouse facilities under
long-term operating leases expiring in fiscal years through 2002. The
leases provide that in addition to rent, the Company pay taxes,
maintenance, insurance and other related expenses. Rent expense aggregated
$640 and $797 for the years ended July 31, 1996 and 1995, respectively.
Future minimum lease payments due under these leases at July 31, 1996 are
as follows:
1997 $ 744
1998 666
1999 529
2000 367
2001 298
Thereafter 124
-------
Total $ 2,728
=======
Employment Agreements:
The Company has entered into employment agreements with certain of the
Company's officers. The employment agreements call for salaries aggregating
$1,683 in fiscal 1997, $578 in fiscal 1998 and $578 in fiscal 1999.
Some of the agreements with certain of the Company's officers are for one
year and are automatically extended for successive one-year periods unless
the company or these executives give three month's notice that they elect
that the term of employment shall not be further extended. In the event
notice is given in accordance with the terms of the agreements, each of
these executives are entitled to receive a severance payment equal to their
annual salary.
Revlon License Agreement:
The Company has a license agreement with Revlon, under which it is
committed to make minimum licensing payments of $526 in fiscal 1997 and
$234 in fiscal 1998. In addition, the agreement requires the Company to
expend a certain percentage of its sales on advertising. The initial term
of the agreement ends on December 31, 1997, and may be automatically
extended for two additional five-year periods under specific performance
criteria, including certain sales and distribution targets.
F-25
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except Per Share Information)
__________________________
Note 11 - Commitments and Contingencies - (continued):
Litigation:
In November 1989, the Company halted sales and distribution and initiated a
voluntary recall of one of its products, L-tryptophan. In December 1989,
the Food and Drug Administration (FDA) determined that there may be an
unequivocal epidemiological link between the ingestion of L-tryptophan and
a blood disorder known as eosinophilia myalgia syndrome and ordered a
nationwide recall. The FDA has been unable to determine the exact cause of
the illness and it appears it will be some time before the causative factor
and the pathogenesis of the disease can be determined. To date, 38 cases
have been filed against the Company, all of which have been settled, with
all costs being covered by the raw material supplier. Any possible
additional costs cannot be reasonably estimated. However, it is probable
that the raw material supplier will continue to cover future L-tryptophan
settlements. In the event that the supplier does not cover future
settlements, the raw material distributor's insurance coverage, coupled
with the indemnification fund established by the raw material supplier and
the Company's product liability insurance should satisfy any claims,
subject to applicable policy limits.
Standby Letter of Credit:
The Company has two standby letters of credit aggregating $10.1 million
related to certain long-term debt.
F-26
