SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended January 31, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 13(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _______________________ TO ______________________
COMMISSION FILE NUMBER 33-73406.
IVC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(exact name of small business issuer as specified in its charter)
DELAWARE 22-1567481
- ------------------------------- -------------------
(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
500 HALLS MILL ROAD, FREEHOLD, NEW JERSEY 07728
- ----------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (908) 308-3000
NOT APPLICABLE
- --------------------------------------------------------------------------------
(former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has 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 [_]
Registrant had 17,094,742 shares of common stock outstanding as of March 14,
1997.
<PAGE>
IVC INDUSTRIES, INC.
Table of Contents
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
January 31, 1997 and July 31, 1996.................................. 1
Consolidated Statements of Operations
For the Three and Six Months Ended January 31, 1997 and 1996........ 2
Consolidated Statements of Cash Flows
For the Six Months Ended January 31, 1997 and 1996.................. 3
Notes to Consolidated Financial Statements.......................... 4
Item 2. Management's Discussion and Analysis or Plan of Operations. 5
Part II. Other Information................................................... 11
Signature Page............................................................... 12
<PAGE>
Item 1. Financial Statements.
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS AT
(Dollars in Thousands, Except Per Share Information)
--------------------------
<TABLE>
<CAPTION>
January 31, July 31,
1997 1996
----------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 608 $ 420
Accounts receivable 13,325 14,947
Inventories 24,061 26,045
Deferred taxes 1,755 1,755
Prepaid expenses and other current assets 2,673 1,864
-------- --------
Total Current Assets 42,422 45,031
Property and Equipment - Net 17,916 18,071
Deferred Taxes 105 105
Other Assets 3,966 2,908
-------- --------
Total Assets $ 64,409 $ 66,115
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt $ 1,455 $ 1,070
Accounts payable and accrued expenses 22,020 21,249
-------- --------
Total Current Liabilities 23,475 22,319
Long Term Debt - Less Current Portion 24,464 28,656
Other 177 99
-------- --------
Total Liabilities 48,116 51,074
-------- --------
Shareholders' Equity:
Preferred stock, no par value, 2,000,000 shares authorized,
none issued -- --
Common stock, $.01 par value, 25,000,000 shares authorized;
17,094,742 issued and outstanding 171 171
Additional paid-in capital 11,345 11,345
Foreign currency translation adjustment (110) (99)
Retained earnings 4,887 3,624
-------- --------
Total Shareholders' Equity 16,293 15,041
-------- --------
Total Liabilities and Shareholders' Equity $ 64,409 $ 66,115
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JANUARY 31, 1997 AND 1996
(Dollars in Thousands, Except Per Share Information)
(unaudited)
--------------------------
Three Months Six Months
Ended January 31, Ended January 31,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Net sales $ 27,267 $ 24,722 $ 58,830 $ 49,208
Cost of sales 20,965 18,549 44,433 37,543
----------- ----------- ----------- -----------
Gross profit 6,302 6,173 14,397 11,665
Selling, general and
administrative expenses 5,573 4,635 11,785 8,899
Merger and integration costs -- 261 -- 417
----------- ----------- ----------- -----------
Income from operations 729 1,277 2,612 2,349
Other expense - net 78 30 509 116
----------- ----------- ----------- -----------
Income before income taxes 651 1,247 2,103 2,233
Income tax provision 260 506 840 913
----------- ----------- ----------- -----------
Net income $ 391 $ 741 $ 1,263 $ 1,320
=========== =========== =========== ===========
Net income per share $ .02 $ .04 $ .07 $ .08
=========== =========== =========== ===========
Weighted average shares 17,112,446 17,169,516 17,152,620 17,191,948
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
2
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996
(Dollars in Thousands)
(unaudited)
--------------------------
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,263 $ 1,320
-------- --------
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,040 632
Deferred income taxes -- (174)
Changes in assets - (increase) decrease:
Accounts receivable 1,622 (1,662)
Inventories 1,984 (4,558)
Prepaid expenses and other current assets (809) 13
Other assets (1,058) 337
Increases in liabilities:
Accounts payable and accrued expenses 771 3,227
Other 78 (203)
-------- --------
Total adjustments 3,628 (2,388)
-------- --------
Net Cash Provided (Used In) By Operating Activities 4,891 (1,068)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Foreign currency translation adjustment (11) (26)
Additions to property and equipment (885) (661)
-------- --------
Net Cash (Used In) By Investment Activities (896) (687)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments - notes payable - bank -- (23,670)
Proceeds from notes payable - banks -- 24,628
Principal payments on long term debt (18,711) (5,420)
Proceeds from long term debt 14,904 6,000
-------- --------
Net Cash Provided (Used) By Financing Activities (3,807) 1,538
-------- --------
NET INCREASE IN CASH 188 (217)
CASH AND CASH EQUIVALENTS - BEGINNING 420 529
-------- --------
CASH AND CASH EQUIVALENTS - ENDING $ 608 $ 312
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the
period for:
Interest $ 986 $ 601
======== ========
Taxes $ 811 $ 100
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------
Note 1 - Basis of Presentation and Other Matters:
The accompanying unaudited consolidated financial statements, which are
for interim periods, do not include all disclosures provided in the annual
consolidated financial statements. Financial data for the periods presented
reflects the retroactive effect of the business combination, accounted for as a
pooling of interests with Hall Laboratories, Inc. ("Hall") on April 30, 1996.
These unaudited consolidated financial statements should be read in conjunction
with the consolidated financial statements and the footnotes thereto contained
in the IVC Industries, Inc. (the "Company") Annual Report on Form 10-KSB for the
year ended July 31, 1996, as filed with the Securities and Exchange Commission.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (which are of a normal recurring
nature) necessary for a fair presentation of the financial statements. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
Certain amounts have been reclassified to conform with the current period
presentation. These reclassifications had no effect on net income.
Note 2 - Inventories:
Inventories consist of the following:
January 31, July 31,
1997 1996
----------- -----------
(dollars in thousands)
Finished Goods $ 10,005 $ 10,736
Bulk 8,420 9,155
Work in Process 1,666 1,777
Raw Materials 2,177 2,450
Packaging Components 1,793 1,927
----------- -----------
Total Inventory $ 24,061 $ 26,045
=========== ===========
Note 3 - Subsequent Event:
On February 5, 1997 the Company closed on a new term loan, which is
secured by a mortgage on its recently acquired warehousing and distribution
facility. The loan amount is $1.5 million and bears interest at either the
Treasury Bond rate plus 1.50%, the bank's floating rate less .25%, or LIBOR plus
1.50%, at the Company's option. The loan calls for monthly principal payments of
$8,333 plus interest and matures on February 1, 2002, at which time the entire
outstanding principal balance is due.
4
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operations.
Three Months Ended January 31, 1997 Compared to the Three Months Ended January
31, 1996
Net Sales. Net sales for the three months ended January 31, 1997 were
$27.3 million, an increase of $2.5 million or approximately 10% over the three
months ended January 31, 1996. The increase was primarily attributable to the
inclusion of the operations of Intergel, the Company's soft gelatin
encapsulation division, for a three month period during the current quarter.
During the year ago quarter, Intergel's operations only included the month of
January 1996, during which time its operations commenced. Also contributing to
the increase in net sales was the continued growth in unit sales primarily to
the Company's chain drug and mass merchandising customers, as well as new
product introductions, such as zinc lozenges and the Company's line of herbal
products, which were initially shipped during the latter part of fiscal 1996.
Partially offsetting these factors was the reduction in sales of a line of
products to a significant customer, reflecting the termination of the supply
agreement relative to the customer's store brand, during the quarter. The
Company's core business products are distributed through leading chain drug,
supermarket and mass merchandising retailers. The current consolidation trend
amongst these retailers poses additional opportunities, as well as challenges,
in the future. The Company believes that, based on its relationships with its
retail customers, it is well positioned to participate in the industry's future
growth. However, there can be no assurance that the Company's current growth
rates will continue, nor what effect, if any, continued consolidation amongst
the Company's retail customers will have on the Company.
Cost and Expenses. Cost of sales for the three months ended January 31,
1997 were $21.0 million, an increase of $2.45 million or approximately 13% over
the three months ended January 31, 1996. Cost of sales increased 2% as a
percentage of net sales over the comparative period in the prior year. The
inclusion of Intergel's operations for three months during the current quarter,
compared to the prior year's quarter which included one month, increased overall
cost of sales for the quarter. Intergel's operations, which have only recently
reached full scale operating levels, are expected to impact future quarters as
well. During the quarter, the overall sales mix shifted toward lower margin
products, reflecting certain promotional activities by the Company's core
customers which were focused on store branded products rather than the Company's
higher margined brands. Cost of sales also reflected increased amortization
expense attributable to the higher general costs associated with securing longer
term customer supply agreements. These agreements, for the most part, extend
over two or three year periods, and the related costs are amortized over the
expected lives of the agreements. The Company is presently negotiating an
agreement with the union representing Intergel's production and maintenance
employees. It is not known what effect, if any, this agreement will have on
Intergel's future cost of operations.
5
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended January 31, 1997 were $5.6
million, an increase of $0.9 million or approximately 20% over the prior year's
comparable period. This increase was primarily attributable to: (i) increased
levels of advertising and promotional activities, (ii) the expansion of the
Company's sales and marketing department, (iii) the hiring of sales personnel at
Intergel, (iv) increased distribution expenses attributable to higher levels of
shipments associated with Intergel's sales activities, and (v) general and
administrative expenses relating to the initial operations of the Intergel
division. The Company's Revlon line of vitamins, which continued to experience
disappointingly low sales levels, contributed to the increased advertising and
promotional costs, in addition to requiring the payment of the quarterly
royalties during the three months ended January 31, 1997. These increases in
selling, general and administrative costs were offset, in part, 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 and Integration Costs. Merger and integration costs for the three
months ended January 31, 1996 were $261,000 and represent transaction costs
associated with the merger with Hall.
Other Expenses, Net. Other expenses, net, for the three months ended
January 31, 1997, principally represent interest expense of $663,000, rental
income of $65,000, interest income of $21,000, miscellaneous income, including
equipment and other asset dispositions, of $85,000 and insurance proceeds in
excess of the net book value of the related assets in the amount of $415,000.
Other expenses, net, for the three months ended January 31, 1996, principally
represent interest expense of $301,000, rental income of $59,000, interest
income of $25,000, a gain on the sale of the Company's contract manufacturing
division of $225,000 and miscellaneous expense, including exchange gains,
equipment and other asset dispositions, of $40,000.
Income Taxes. Income taxes generally reflect the effect of statutory
federal and state income tax rates and certain non-deductible expenses.
6
<PAGE>
Six Months Ended January 31, 1997 Compared to the Six Months Ended January 31,
1996
Net Sales. Net sales for the six months ended January 31, 1997 were $58.8
million, an increase of $9.6 million or approximately 20% over the six months
ended January 31, 1996. The increase was attributable, in part, to the inclusion
of the operations of Intergel, the Company's soft gelatin encapsulation
division, for a six month period during the current period. During the year ago
period, Intergel's operations were included only for the month of January 1996,
during which time initial operations were commenced. Also contributing to the
increase in net sales was the continued growth in unit sales primarily to the
Company's chain drug and mass merchandising customers and new product
introductions. Partially offsetting these factors was the reduction in sales of
a line of products to a significant customer, reflecting the termination of the
related supply agreement during the second quarter for this customer's store
brand.
Cost and Expenses. Cost of sales for the six months ended January 31, 1997
were $44.4 million, an increase of $6.9 million or approximately 18% over the
six months ended January 31, 1996. Cost of sales decreased 0.8% as a percentage
of net sales over the comparative period in the prior year. Such decrease as a
percentage of sales was due to: (i) an improvement in the overall sales mix
toward higher margin products such as the Company's Fields of Nature brand and
the new herbal product line, (ii) 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,
(iii) lower acquisition costs of certain raw materials, attributable, in part,
to the increased purchasing power of the Company as a result of the merger with
Hall, and (iv) the reduction in net sales attributable to the Company's contract
manufacturing division (which was sold in December 1995), whose products were
generally sold at a lower profit margins. The overall decrease in cost of sales,
as a percentage of net sales, was achieved in spite of the impact of the costs
associated with Intergel's initial operations.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the six months ended January 31, 1997 were $11.8
million, an increase of $2.9 million or approximately 32% over the prior year's
comparable period. 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) increased distribution expenses attributable to
higher levels of shipments associated with the Company's core operations and
Intergel's sales activities, and (iv) expenses relating to the initial
operations of the Intergel division. The Company's Revlon line of vitamins,
which continued to experience disappointingly low sales levels, contributed to
the increased advertising and promotional costs, in addition to requiring
payment of royalties during the six months ended January 31, 1997. These
increases in selling, general and administrative costs were 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.
7
<PAGE>
Merger and Integration Costs. Merger and integration costs for the six
months ended January 31, 1996 were $417,000 and represent transaction costs
associated with the merger with Hall.
Other Expenses, Net. Other expenses, net, for the six months ended January
31, 1997, principally represent interest expense of $1,057,000, rental income of
$138,000, interest income of $48,000, miscellaneous expenses, including
equipment and other asset dispositions, of $52,000 and insurance proceeds in
excess of the net book value of the related assets in the amount of $415,000.
Other expenses, net, for the three months ended January 31, 1996, principally
Other expenses, net, for the six months ended January 31, 1996, principally
represent interest expense of $617,000, rental income of $116,000, interest
income of $47,000, a gain on the sale of the Company's contract manufacturing
division of $225,000 and miscellaneous income, including exchange gains,
equipment and other asset dispositions, of $110,000.
Income Taxes. Income taxes generally reflect the effect of statutory
federal and state income tax rates and certain non-deductible expenses.
8
<PAGE>
Liquidity and Capital Resources
As the Company's business has grown its working capital needs, primarily
related to accounts receivable, inventory, costs associated with securing
long-term sales contracts, startup of Intergel's operations and higher levels of
capital expenditures, have been satisfied by cash flow generated from operations
and bank borrowings. Cash flow from operations for the six months ended January
31, 1997 was $4.9 million. Accounts receivable, inventories and accounts payable
and accrued expenses provided $1.6 million, and $2.0 million and $0.8 million,
respectively during the six months ended January 31, 1997.
In September 1996, the Company entered into a capital lease agreement that
provides for up to an additional $1 million for acquisitions of computer and
manufacturing equipment. This lease calls for monthly payments of principal and
interest at prime rate over a five year period. At January 31, 1997, the Company
had $453,000 available for future equipment purchases.
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 therein. 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% (7.78% at January 31, 1997), 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% (6.03% at January 31, 1997), 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 agreement, including limitations on
capital expenditures and payment of cash dividends.
9
<PAGE>
"Safe Harbor" Statement
When used in this document, the words "believe", "anticipate", "think",
"intend", "will be" and similar expressions identify forward-looking statements.
In addition, other statements that provide more than historical information may
be deemed to constitute forward-looking statements. There are important factors
that could cause results to differ materially from those anticipated by these
forward-looking statements. These factors include risks and uncertainties such
as, among other things, beneficial or adverse trends in the domestic market for
vitamins and nutritional supplements, the gain or loss of significant customers
for the Company's products, the competitive environment in the vitamin and
nutritional supplement industry, and the enactment or promulgation of new
government legislation or regulation, as well as other risks and uncertainties
that may be detailed from time to time in IVC's reports filed with the
Securities and Exchange Commission.
10
<PAGE>
Part II. Other Information
Item 1. - Legal Proceedings
Not applicable
Item 2. - Changes in Securities
Not applicable
Item 3. - Defaults upon Senior Securities
Not applicable
Item 4. - Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. - Other Information
Not applicable
Item 6. - Exhibits and Reports on Form 8-K
Reports on Form 8-K:
None
Exhibits:
None
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: March 14, 1997 By: /s/ E. Joseph Edell
----------------------------- -------------------------
Chairman of the Board and
Chief Executive Officer
Dated: March 14, 1997 By: /s/ I. Alan Hirschfeld
----------------------------- -------------------------
Executive Vice President and
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the 10-KSB
for the fiscal year ended July 31, 1996 and is qualified in it's entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 608
<SECURITIES> 0
<RECEIVABLES> 13325
<ALLOWANCES> 0
<INVENTORY> 24061
<CURRENT-ASSETS> 42422
<PP&E> 17916
<DEPRECIATION> 0
<TOTAL-ASSETS> 64409
<CURRENT-LIABILITIES> 23475
<BONDS> 24464
0
0
<COMMON> 171
<OTHER-SE> 16122
<TOTAL-LIABILITY-AND-EQUITY> 64409
<SALES> 58830
<TOTAL-REVENUES> 58830
<CGS> 44433
<TOTAL-COSTS> 44433
<OTHER-EXPENSES> 509
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2103
<INCOME-TAX> 840
<INCOME-CONTINUING> 1263
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1263
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
