U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
|X| Annual Report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the fiscal year ended: July 31, 1997
|_|
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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(Exact name of registrant as specified in its charter)
Delaware 22-1567481
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
500 Halls Mill Road, Freehold, New Jersey 07728
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (732) 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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [_]
As of October 14, 1997, the aggregate market value of the Common Stock of the
registrant held by non-affiliates of the registrant was $9,045,940.
The number of shares of Common Stock ($.01 par value) outstanding as of October
14, 1997 was 17,127,392.
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IVC INDUSTRIES, INC.
TABLE OF CONTENTS
Annual Report on Form 10-K
For the Fiscal Year ended July 31, 1997
Page No.
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PART I
Item 1 Description Of Business ..................................... 1
Item 2 Description of Property ..................................... 11
Item 3 Legal Proceedings ........................................... 12
Item 4 Submission of Matters to a Vote of Security Holders ......... 12
PART II
Item 5 Market for Common Equity and Related Shareholder Matters .... 13
Item 6 Selected Financial Data ..................................... 14
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 15
Item 8 Financial Statements and Supplementary Data ................. 20
Item 9 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure .................................... 20
PART III
Item 10 Directors and Executive Officers of the Registrant .......... 21
Item 11 Executive Compensation ...................................... 24
Item 12 Security Ownership of Certain Beneficial Owners
and Management .............................................. 29
Item 13 Certain Relationships and Related Transactions .............. 31
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K ......................................... 32
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PART I
Item 1 Description of Business
The Company
IVC Industries, Inc. (the "Company" or "IVC") was incorporated in the
state of Delaware in 1971. The Company 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, as well as the Company-manufactured
store brands, are sold in national and regional drug store, supermarket and mass
merchandising chains, Synergy Plus(R) is sold in health food stores, Nature's
Wonder is also sold through independent drug stores, and newly acquired Vitamin
Specialties(R) is sold in the Company-owned Vitamin Specialties retail stores
and through the Vitamin Specialties mail order catalogues. The Company's
products are also marketed internationally under its own brands and private
brands, as well as in bulk form.
IVC markets over 600 different products which are packaged under various
labels and bottle 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 1996 and early 1997 enabled the
Company to become self-sufficient relative to its own soft gel needs and
subsequently to begin to generate revenues from third party sales of soft gel
products. (See "Soft Gel Encapsulation Facility").
The Company merged with American Vitamin Products, Inc. ("American") on
May 5, 1995, 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")
in a transaction 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. The majority of Hall's products were marketed
under the private labels of its retail chain customers.
On June 13, 1997, the Company acquired the Vitamin Specialties brand and
related distribution operations of HealthRite, Inc. for $2.8 million (including
inventory). Vitamin Specialties products are distributed through a chain of 15
retail health food/vitamin stores located in Eastern Pennsylvania and Southern
New Jersey, as well as through a mail order catalogue operation.
Products and Product Development
The Company offers a comprehensive assortment of vitamin, mineral and
nutritional supplement products, which include vitamin C and E, beta carotene,
magnesium, folic acid, calcium and potassium, as well as various herbs such as
Echinacea, St. John's Wort and Saw Palmetto and various 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. Intergel, the Company's soft gel division, can presently produce in
excess of 2 billion capsules annually and could approach 4 billion capsules on
an annual basis in its existing facility once additional equipment is installed.
Products are marketed under its customers' store brands (private label) as
well as under its own brands. Store brand products are positioned as high
quality, lower priced alternatives to nationally advertised brands. Branded
products, including IVC's flagship brand, Fields of Nature, 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 and responds to changes in existing
national brands by reformulating existing products and redesigning packaging.
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 it to achieve increased market
share both domestically and on an international basis.
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Manufacturing and Packaging
IVC owns and operates facilities located in Freehold, New Jersey, and
leases facilities in Portland, Oregon. These facilities are 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. IVC presently
manufactures substantially all of its products.
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 are more aesthetically pleasing, odor-free, and
easier to swallow than tablets or hard capsules, and in certain cases provide
superior absorption and stability, content uniformity and more precise dosage,
and generally have longer shelf lives.
The Company's new soft gel encapsulation division ("Intergel") completed
construction of its facility and the installation and start-up of the initial
production lines during the first quarter of fiscal 1996. Production levels
increased in each ensuing quarter until the first half of fiscal 1997, at which
time all lines reached full scale levels of operations.
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 Intergel facility, which can produce in excess of 2 billion
capsules annually, can accommodate additional production lines which will be
installed as the demand for Intergel's products increases. The Company believes
that with these additional lines, its existing facility can reach production
levels approaching 4 billion capsules per year. 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.
Intergel has applied for and was granted a license from the Food and Drug
Administration ("FDA") for the production of over-the-counter (non-drug)
pharmaceutical products ("OTCs"). During the latter half of 1997, Intergel
embarked upon a substantial OTC product development program. The Company expects
that shipments of some of these newly developed OTC products will begin to make
a contribution to its sales and earnings in fiscal 1998. In particular, Intergel
has worked closely with one major multinational pharmaceutical company to
jointly develop products which will be manufactured for this
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company. The first product has already been approved and initial shipments of
this first product have begun in the first quarter of 1998. Intergel has also
developed a nutritional product line which is being introduced under the
Company's Fields of Nature brand. The line will be marketed under the Company's
new "Liquifil(TM)" product line, and will be comprised of a full spectrum of
nutritional and herbal products, all of which will be in soft gel form. The
Company began initial shipments of the Liquifil line to existing customers in
October 1997. In addition, through the Liquifil line, the Company has been able
to secure additional distribution through such new customers as Kmart Corp. and
Osco Drug, who are introducing these products on a chain-wide basis. As
additional soft gel products are added to the Liquifil line during the course of
fiscal 1998, the Company anticipates introducing these products as line
extensions to both its existing and new customers who will be carrying this
unique line of soft gel nutritional and herbal products.
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
national and regional 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. Since the cost to a
retailer of IVC's branded products and the retailer's private label products are
generally lower than that of advertised national brand products, retail chains
are usually able to commit funds to promote IVC's and their own private label
products through the use of money saving coupons, individualized promotions and
advertising (such as store circulars and newspaper inserts), while still
realizing a higher profit margin than on advertised national brand products.
Often, 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.
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 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
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expanding its geographical penetration is an effective method to enter new
markets. The Company utilizes both its own internal sales force as well as
distributors to market these brands.
Direct-to-Consumer Sales
The acquisition of the Vitamin Specialties retail stores and mail order
operations marked the first step in the Company's pursuit of direct-to-consumer
distribution channels which the Company has earmarked as a key element of its
growth strategy. The Company believes that the integration of the Vitamin
Specialties operations into its core business will allow it to capitalize on its
ability to internally manufacture all of its products by bringing them directly
to their ultimate consumers.
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, Peru, United Kingdom, Egypt, Lebanon, Hong
Kong, Taiwan, Indonesia, Philippines, Malaysia, Poland, Saudi Arabia, Singapore,
Spain, Greece, Turkey 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 six additional countries
during fiscal 1998. The Company anticipates to begin exporting to some of these
additional countries in the second half of fiscal 1998, 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.
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 presently exceeds $6 billion annually, representing a compounded
annual increase of 15% from the $3.7 billion in 1992. Approximately 40% of
adults in the United States take some form of vitamin or nutritional supplement,
up from 33% in 1992.
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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
vitamin C and vitamin E (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. Also, 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 approximately 50% of
Americans aged 50 and over are regular vitamin users. It is anticipated that the
50 and over age group will be the fastest growing segment of the United States
population as the baby boom generation continues to mature.
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 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 44% of total purchases in 1997 and 34%
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.
Major Customers
IVC's active customer base approaches 2,000 customers. The Company's ten
largest customers accounted for 66% of sales during fiscal 1997, with one
individual customer, PriceCostco, accounting for approximately 23% of sales.
During 1996, the Company's ten
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largest customers accounted for approximately 61% of sales, with two customers,
PriceCostco and Revco, D.S., Inc. ("Revco") accounting for 21% and 13%,
respectively, of sales. No other customers accounted for more than 10% of net
sales. If any of IVC's major customers substantially reduce their volume of
purchases from IVC, results of operations could be materially adversely
affected. The Company's private brand agreement with Revco, which ended October
31, 1996, was not renewed. This resulted in a significant reduction in private
brand sales to Revco during the latter part of 1997. The Company, however,
negotiated a new supply agreement for its Fields of Nature brand with Revco, as
well as a new Fields of Nature supply agreement with Eckerd Corp. and, more
recently, with Fred Meyer, Inc.
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 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,
Rybutol and Nature's Wonder 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.,
respectively. 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.
The Company believes that there are also 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 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 competes with brands such as Windmill(R) and
Hudson(R) in independent drug stores. Although certain of these competitors are
substantially
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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 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 marketplace 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 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. In addition, the Company manufactures and markets certain of its products
in compliance with the guidelines promulgated by the United States Pharmacopoeia
Convention, Inc. ("USP") and other voluntary standard organizations.
The Dietary Supplemental Health and Education Act ("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. Generally, dietary ingredients
that were on the market before October 15, 1994 may be sold without FDA
pre-approval and without notifying the FDA. However, new dietary ingredients
(those not used in dietary supplements marketed before October 15, 1994) require
premarket submission to the FDA of evidence of a history of their safe use, or
other evidence establishing that they are reasonably expected to be safe. There
can be no assurance that the FDA will accept the evidence of safety for any new
dietary ingredient that the Company may decide to use, and the FDA's refusal to
accept such evidence could result in regulation of such dietary ingredients as
food additives, requiring the FDA pre-approval based on newly conducted, costly
safety testing. Also, while DSHEA authorizes the use of statements of
nutritional support in the labeling of dietary supplements, the FDA is required
to be notified of such statements, and there can be no assurance that the FDA
will not consider particular labeling statements used by the Company to be drug
claims rather than acceptable statements of nutritional support, necessitating
approval of a costly new drug application, or relabeling to delete such
statements.
DSHEA also authorizes the FDA to promulgate good manufacturing practice
regulations ("GMP") for dietary supplements, which would require special quality
controls for the manufacture, packaging, storage and distribution of
supplements. There can be no assurance, if
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such GMP rules are issued, that the Company will be able to comply with them
without incurring material expenses to do so. DSHEA further authorizes the FDA
to promulgate regulations governing the labeling of dietary supplements,
including claims for supplements pursuant to recommendations made by the
Presidential Commission on Dietary Supplement Labels. Such rules, which were
issued on September 23, 1997, entail specific requirements relative to the
labeling of the Company's dietary supplements. The rules, which are to take
effect by March 1999, also require additional record keeping and claim
substantiation, reformulation, or the discontinuance of certain products which
could have a material expense to the Company.
The Company's products which are sold in Canada are further subject to
Canadian government regulation under that country's Food and Drug Act and the
regulations thereunder (the "Canadian Act"), which includes regulatory approvals
of applicable products through a drug identification number ("DIN") and general
proprietary number ("GP") by Health Canada. The loss of a particular DIN or GP
would adversely affect the Company's ability to continue to sell the particular
product to which the DIN or GP was assigned. Material non-compliance with the
provisions of the Canadian Act may result in the loss of a DIN or GP or the
seizure and forfeiture of the particular products which are sold in
non-compliance with the Canadian Act.
In addition, the Company cannot predict whether new legislation or
regulations governing the Company's activities will be enacted by legislative
bodies or promulgated by agencies regulating the Company's activities, or what
the effect of any such legislation or regulations on the Company's business
would be.
Trademarks
IVC owns trademarks registered with the United States Patent and Trademark
Office and with agencies in certain other major jurisdictions of the world for
its Fields of Nature, Rybutol, Nature's Wonder, Vitamin Specialties, Pine
Bros.(TM) and Liquifil 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 is able to anticipate 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
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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 782 employees, of which approximately 21 are in sales and
marketing, 68 are in retail sales, 468 are in manufacturing and packaging, 82
are in quality control and regulatory compliance departments, 56 are in
warehousing and 87 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. A
union petition has been filed with the National Labor Relations Board seeking an
election among Intergel production and maintenance employees. The Company is
opposing the petition.
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.
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Item 2 Description of Property
The following table sets forth the Company's properties:
Approximate Leased or
Location Type of Facility Square Feet Owned
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Freehold, NJ Manufacturing, Packaging, 160,000(1) Owned
Warehousing,
Distribution and
Corporate Offices
Freehold, NJ Warehousing and Distribution 120,000(2) 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(3) Leased
New Jersey
and Pennsylvania 15 Retail Stores 16,000 Leased
Surrey, British Warehousing, Distribution
Columbia, Canada and Administration 8,000 Leased
The Company believes that its properties will satisfy its foreseeable
needs for office, manufacturing and warehouse space.
(1) The Company subleases approximately 8,000 square feet of this facility to
a third party.
(2) The Company subleases approximately 30,000 square feet of this facility to
a third party.
(3) 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 may 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 covered by the raw material supplier. 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
The Company is engaged from time to time 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, 1997.
12
<PAGE>
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 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
Fiscal Year 1997
First Quarter 2-7/8 1-11/16 11/32 3/16
Second Quarter 2-1/4 1-9/32 1/2 3/16
Third Quarter 2-1/8 1-1/8 15/32 3/16
Fourth Quarter 2-1/16 1-9/16 7/16 3/16
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 IVC and other factors deemed relevant by the Board of
Directors.
On April 14, 1997, the Board of Directors authorized the Company to
initiate a repurchase program for up to 250,000 shares of the Company's Common
Stock. As of July 31, 1997, 32,000 shares had been repurchased pursuant to this
program.
As of October 14, 1997, there were approximately 96 holders of record of
IVC's Common Stock and 18 holders of record of IVC's Warrants. The Company
believes that there were in excess of 900 beneficial holders of Common Stock as
of such date.
13
<PAGE>
Item 6 Selected Financial Data
The following table sets forth income statement data and balance sheet
data of the Company, in thousands of dollars (except per share information), for
the periods indicated.
Years Ended July 31,
--------------------
1997 1996 1995
----------- ----------- ------------
OPERATING RESULTS
Net sales $ 108,531 $ 104,159 $ 89,097
Cost of sales 80,480 77,086 70,949
----------- ----------- ------------
Gross profit 28,051 27,073 18,148
Selling, general and administrative
expenses 23,628 22,350 16,355
Merger and integration costs -- 3,183 1,533
----------- ----------- ------------
Income from operations 4,423 1,540 260
Other expenses-net 1,639 818 775
----------- ----------- ------------
Income (loss) before income taxes 2,784 722 (515)
Income tax provision (benefit) 1,438 426 (1,108)
----------- ----------- ------------
Net income $ 1,346 $ 296 $ 593
=========== =========== ============
Net income per share $ .08 $ .02 $ .03
=========== =========== ============
Weighted average shares 17,093,979 17,222,160 17,202,811
As at July 31,
--------------
1997 1996 1995
----------- ----------- ------------
BALANCE SHEET DATA
Working capital 24,356 22,712 13,966
Total assets 69,391 68,675 51,141
Long term debt - less current 31,430 28,656 20,193
portion
Shareholders' equity 16,417 15,041 12,428
14
<PAGE>
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
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, as a
percentage of net sales, for the fiscal years indicated.
Years Ended July 31,
--------------------
1997 1996 1995
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of sales 74.1 74.0 79.6
----- ----- -----
Gross profit 25.9 26.0 20.4
Selling, general and
administrative expenses 21.8 21.5 18.4
Merger and integration costs -- 3.0 1.7
----- ----- -----
Income from operations 4.1 1.5 .3
Other expenses-net 1.5 .8 .9
----- ----- -----
Income (loss) before income taxes 2.6 .7 (.6)
Income taxes provision (benefit) 1.4 .4 (1.3)
----- ----- -----
Net income 1.2% .3% .7%
===== ===== =====
Year Ended July 31, 1997 Compared to the Year Ended July 31, 1996
Net Sales. Net sales for the year ended July 31, 1997 were $108.5 million,
an increase of $4.3 million, or 4.1% over $104.2 million for the year ended July
31, 1996. This increase was principally attributable to growth in unit sales of
most of the Company's vitamin products to its core customers, the increased
level of sales relative to Intergel, whose operations commenced in January 1996,
new product introductions, such as the Company's new line of herbal products,
continued growth in the international division and the initial sales
contribution from the recently acquired Vitamin Specialties operations.
Offsetting these factors was the impact of the discontinuation of the Company's
Revlon line of licensed products and the reduced sales to
15
<PAGE>
Revco during the second half of 1997 as a result of the termination of the
supply agreement during the second quarter of 1997. 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 year ended July 31, 1997 was
$80.5 million, an increase of $3.4 million, or 4.4% over $77.1 million for the
year ended July 31, 1996. Cost of sales increased 0.1% as a percentage of net
sales. The increase in cost of sales was limited as a result of the improvement
in the overall sales mix towards higher margin products such as the Company's
Fields of Nature brand and the new herbal product line, coupled with 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 in April
1996. In addition, certain of the Company's new product introductions, such as
Glucosamine and St. John's Wort, entail higher gross profit margins than the
Company's overall profit margins.
The above factors were offset by the lower sales levels experienced by the
Revlon line of licensed products which had significantly higher margins than
the Company's overall profit margins, coupled with the changes recorded in the
fourth quarter relative to the discontinuation of the Revlon line. In addition,
the higher level of sales contributed by the Intergel division, which entailed
lower profit margins than the Company's core business segments, also contributed
to the increase in overall cost of sales during 1997. 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. In addition, the cost of sales was
impacted by the increased amortization expense attributable to the increased
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.
Selling, general and administrative expenses for the year ended July 31,
1997 were $23.6 million, an increase of $1.2 million or 5.4% over $22.4 million
for the year ended July 31, 1996. This increase was primarily attributable to:
(i) increased advertising and promotional activities, (ii) increases in sales
commissions, broker fees and other selling expenses attributable to the sales
growth in the Company's core operations, (iii) increased minimum royalty
payments associated with the Revlon line of vitamins, (iv) increased
distribution expenses attributable to higher levels of shipments associated with
the Company's core operations and Intergel's sales activities, and (v) 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, the reduced levels of advertising and promotion costs associated
with the Revlon product line compared to 1996, during which time significant
expenditures were incurred associated with the launch of the line.
16
<PAGE>
Merger Costs. Merger costs decreased by $3.2 million for the year ended
July 31, 1997, as there were no merger costs incurred during the year ended July
31, 1997.
Other Expenses - Net. Other expenses - net increased by $821,000 for the
year ended July 31, 1997. This principally represents interest expense of
$2,386,000, offset by interest income of $190,000 and rental income of $332,000.
Net interest expense for the year ended July 31, 1997 increased from the prior
year due to higher average amounts of borrowing outstanding.
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, 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
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 36.6% 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
17
<PAGE>
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.
Other Expenses Net. Other expenses net for the year ended July 31, 1996
increased by $43,000. This principally represent interest expense of $1,579,000,
interest income of $227,000, rental income of $203,000 and a gain of $225,000
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.
Liquidity and Capital Resources
The Company had working capital of $24.4 million at July 31, 1997,
compared with $22.7 million at July 31, 1996, an increase of $1.7 million. As
the business has grown, its working capital needs, primarily related to
inventory, start-up of the Intergel division, introduction of a new product
line, increased capital expenditures, costs associated with securing long-term
sales contracts, as well as the acquisition of the Vitamin Specialties
operations have been satisfied by cash flow generated from operations and bank
borrowings.
Inventories increased by $5.1 million for the year ended July 31, 1997.
This increase is mainly attributable to the anticipated higher level of sales
activities expected from existing customers, new product introductions, as well
as anticipated sales to new customers in the first half of fiscal 1998. In
addition, the Company also increased its inventories to support the recently
acquired Vitamin Specialties retail stores and mail order catalogue operations.
The Company presently has a revolving line of credit with its bank in the
amount of $22 million of which $0.5 million is due March 31, 1998. This
agreement expires on March 31, 1999, but can be extended under certain
circumstances to August 31, 1999. The notes are collateralized by substantially
all of the Company's assets. In addition, the Company has a lease financing
agreement with the same bank for up to $1 million for acquisitions of computer
and manufacturing equipment. At July 31, 1997, $131 was available for additions.
The Company believes that its existing cash balance, internally generated
funds from operations and available financing will provide the liquidity
required to satisfy the Company's working capital needs and anticipated capital
expenditures for the next fiscal year.
18
<PAGE>
Forward Looking Statements
This report, including the Description of Business and Management's
Discussion and Analysis, contains certain "forward-looking statements", within
the meaning of Section 27A of the Securities Act of 1933, which represent the
Company's expectations or beliefs, including, but not limited to, statements
concerning industry performance, the Company's operations, performance,
financial condition, growth and acquisition strategies, margins and growth in
sales of the Company's products. For this purpose, any statements contained in
this Report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may", "will", "expect", "believe", "anticipate", "intend",
"could", "estimate" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
certain of which are beyond the Company's control, and actual results may differ
materially depending on a variety of important factors, including 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 deleted from time to time in
the Company's reports filed with the Securities and Exchange Commission.
19
<PAGE>
Item 8 Financial Statements and Supplementary Data
Index to Financial Statements
Independent Auditors' Reports.......................................F-1 to F-3
Consolidated Balance Sheets
As of July 31, 1997 and 1996....................................F-4
Consolidated Statements of Operations for the Years Ended
July 31, 1997, 1996 and 1995....................................F-5
Consolidated Statements of Cash Flows for the Years Ended
July 31, 1997, 1996 and 1995....................................F-6 to F-7
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended July 31, 1997, 1996 and 1995................F-8
Notes to Consolidated Financial Statements..........................F-9 to F-33
Item 9 Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
20
<PAGE>
PART III
Item 10 Directors and Executive Officers of the Registrant
The Company's directors and executive officers, are as follows:
Name Age Position
---- --- --------
E. Joseph Edell 70 Chief Executive Officer and
Chairman of the Board of Directors
Arthur S. Edell 64 President and Director
Andrew M. Pinkowski 63 Vice Chairman of the Board of
Directors
I. Alan Hirschfeld 46 Executive Vice President and
Chief Financial Officer
Dr. Mark S. Gold 48 Director
Dennis E. Groat 56 Director
David Popofsky 63 Director
Marc Z. Edell 46 Director
Mac Allen Culver III 55 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.
21
<PAGE>
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.
I. Alan Hirschfeld, Executive Vice President and Chief Financial Officer,
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. Mr. Hirschfeld currently
serves on the Board of Directors of Room Plus, Inc.
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
over 500 scientific publications and numerous professional texts. Dr. Gold
currently serves on the Board of Directors of Somerset Valley Bank.
Dennis E. Groat has been on IVC's Board of Directors since 1996. He is a
Principal of Groat and Associate, a consulting firm. He was President of
Dentalogic, a dental technology business, from 1993 to 1996. 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. Mr. Edell is the son of E.
Joseph Edell.
Mac Allen Culver III was appointed to IVC's Board of Directors in 1997. He
had been President and Chief Operating Officer of St. Ives Laboratories, Inc., a
hair and skin care company, since 1987. Prior to 1987, he was Chairman and Chief
Executive Officer of Pay `N Save, Inc., President and Chief Executive Officer of
Gray Drug Fair and a Senior Vice President of Payless Drugstores NW, Inc., all
retail drug store chains.
22
<PAGE>
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.
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 E. Joseph Edell filed
late with respect to four transactions, and each of the Company's non-employee
directors filed late, or will be filing late, with respect to their receipt of
stock options as director compensation. This conclusion is based solely on a
review of such forms furnished to the Company in accordance with SEC
regulations and on representations from its executive officers and Directors.
23
<PAGE>
Item 11 Executive Compensation
The following table sets forth all compensation paid or distributed during
the years ended July 31, 1997, 1996 and 1995 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 Salary Bonus Options Compensation
Principal Position Year ($) ($) (Shares) ($)(1)
- --------------------------------------------------------------------------------
E. Joseph Edell 1997 500,000 -- -- --
Chairman and 1996 500,000 -- -- --
Chief Executive Officer 1995 494,000 80,000 -- --
Arthur S. Edell 1997 170,000 -- -- 9,190
President 1996 170,000 -- -- 3,640
1995 125,571 -- 200,000 3,640
I. Alan Hirschfeld 1997 250,000 -- 50,000 1,528
Executive Vice President 1996 250,000 50,000 -- 1,028
and Chief Financial Officer 1995 257,500 207,165 -- 1,028
Andrew M. Pinkowski 1997 180,000 -- -- 500
Vice Chairman 1996 120,308 90,000 -- --
1995 100,308 81,000 -- --
Duane J. Baxter 1997 120,000 81,000 10,000 500
President/Hall Division 1996 100,000 10,873 50,036 --
1995 97,344 8,104 -- --
(1) Represents term life insurance premiums and the value of the shares
granted under the 401(k) Savings Plan.
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
On September 10, 1996, the Company granted each non-employee director an
option to acquire 10,000 shares of the Company's common stock at $1.75 per
share.
24
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Percent of Total Potential Realizable Value
Securities Options at Assumed Annual Rates of
Underlying Granted to Stock Price Appreciation for
Options Employees in Exercise Expiration Option Term
Name Granted(#) Fiscal Year Price($/Sh) Date 5% ($) 10% ($)
---- ---------- ----------- ----------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
I. Alan Hirschfeld 50,000 42% $ 1.925 09/10/01 $15,000 $45,000
Duane J. Baxter 10,000 8% $ 1.438 04/30/02 $ 4,000 $ 9,000
</TABLE>
FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options At Fiscal Year-End Options at Fiscal Year-End (1)
-------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Arthur S. Edell 400,000 -- $285,000 --
I. Alan Hirschfeld 50,000 -- $ 2,000 --
Duane J. Baxter -- 10,000 -- $ 5,000
(1) The fair market value of the Company's Common Stock on July 31, 1997
($1 31/32 per share) minus the exercise price.
None of the named executive officers exercised options during the fiscal
year ended July 31, 1997.
Employment Agreements
The Company 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.
25
<PAGE>
The Company 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.
The Company 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.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee for the fiscal year ended July
31, 1997 were Dr. Mark S. Gold, Dennis E. Groat (Chairman) and David Popofsky.
There were no interlocks or insider participation as defined in the Securities
and Exchange Commission's Regulation S-K.
Compensation Committee Report on Executive Compensation
The responsibilities of the Compensation Committee include administering
the Company's 1995 Stock Option Plan and fixing the compensation, including
salaries and bonuses, of all officers of the Company.
Overall Policy
The Compensation Committee believes that the Company's officers have been
largely responsible for the Company's success. Based on this belief, the
Compensation Committee has structured the Company's compensation program to
compensate its executive officers on an annual basis with a cash salary at a
sufficient level to retain and motivate these officers. In addition, executive
officers may be granted a bonus based on the Company's performance and may be
granted stock options in order to link a portion of executive compensation to
appreciation of the Company's stock price. The objectives of this strategy are
to attract and retain effective and highly qualified executives, to motivate
executives to achieve the goals inherent in the Company's business strategy and
to link executive and shareholder interest through stock options.
26
<PAGE>
Base Salaries
Annual base salaries for the officers are determined by evaluating the
performance of the individuals and their contributions to the performance of the
Company and are based on the recommendation of E. Joseph Edell as Chief
Executive Officer. Financial results, as well as non-financial measures such as
the magnitude of responsibility of the position, individual experience, and the
Compensation Committee's knowledge of compensation practices for comparable
positions at other companies are considered.
In establishing E. Joseph Edell's annual base salary of $500,000 for the
fiscal year ending July 31, 1998 (which amount was originally established in
1996 in conjunction with execution of his employment agreement), the
Compensation Committee took into account the Company's achievements in fiscal
1995 and 1996, its assessment of Mr. Edell's individual performance, as well as
base salaries for chief executive officers at companies of comparable size and
complexity, both public and private, known to members of the Compensation
Committee. The Compensation Committee also took into account Mr. Edell's
contribution to the Company's growth and diversity and his future anticipated
contributions to the Company.
Long-Term Incentives
Under the 1995 Stock Option Plan, stock options may be granted to
executives of the Company. Stock options are designed to focus the executives'
attention on stock values and to align the interests of executives with those of
the shareholders. Stock options are generally granted at prices equal to the
fair market value at the date of grant, or 110% of such value with respect to
grants to executives who own more than 10% of the Common Stock of the Company,
and are not exercisable until six months after the date of the grant. The
options generally remain exercisable during employment until the tenth
anniversary of the date of the grant or five years with respect to grants to
executives who own more than 10% of the Common Stock. This approach provides an
incentive to executives to increase shareholder value over the long term since
the full benefit of the options cannot be realized unless stock price
appreciation occurs over a number of years.
Compensation Committee
Dr. Mark S. Gold
Dennis E. Groat (Chairman)
David Popofsky
27
<PAGE>
PERFORMANCE GRAPH
The following performance graph is a line graph comparing the yearly
change in the cumulative total shareholder return on the Company's Common Stock
against the cumulative return of the Nasdaq Index and the S&P Health Care -
Drugs Index for the fiscal years ended July 31, 1994, 1995, 1996 and 1997. The
Company's Common Stock was initially registered under Section 12 of the Exchange
Act in February 1994.
[The following table was represented as a line graph in the printed material.]
Value of $100 investment
S&P Health Care -
Date IVC Industries, Inc. NASDAQ Composite Index Drugs Index
---- -------------------- ---------------------- -----------
31-Mar-94 100 100 100
31-Jul-94 85 97 106
31-Jul-95 64 135 168
31-Jul-96 69 145 228
31-Jul-97 48 214 376
28
<PAGE>
Item 12 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 11 hereto, and (iv) all officers and directors as a
group as of October 14, 1997.
Name and Address of Number of Percentage
Title of Class Beneficial Owner Shares of Class
- -------------- ---------------- ------ --------
Common E. Joseph Edell (1) 5,388,591 31.46%
c/o IVC Industries, Inc.
500 Halls Mill Road
Freehold, NJ 07728
Common Andrew M. Pinkowski (2) 2,794,062 16.31%
c/o IVC Industries, Inc.
3580 N.E. Broadway
Portland, OR 97232
Common I. Alan Hirschfeld (3) 2,323,889 13.57%
c/o IVC Industries, Inc.
500 Halls Mill Road
Freehold, NJ 07728
Common Arthur S. Edell (4) 2,026,488 11.83%
c/o IVC Industries, Inc.
500 Halls Mill Road
Freehold, NJ 07728
Common Duane J. Baxter (5) 222,904 1.30%
c/o IVC Industries, Inc.
3580 N.E. Broadway
Portland, OR 97232
Common Marc Z. Edell (6) 169,000 .99%
c/o Edell & Associates
1776 On the Green
Morristown, NJ 07962
Common Dr. Mark S. Gold (6) 10,000 .06%
c/o 2002 San Marco Boulevard
Jacksonville, FL 32207
Common Dennis E. Groat (6) 10,000 .06%
c/o IVC Industries, Inc.
3580 N.E. Broadway
Portland, OR 97232
29
<PAGE>
Name and Address of Number of Percentage
Title of Class Beneficial Owner Shares of Class
- -------------- ---------------- ------ --------
Common David Popofsky (6) 10,000 .06%
c/o Popofsky Advertising
60 Madison Avenue
New York, NY 10010
Common All Executive Officers and 12,954,934 75.64%
Directors as a group (9
persons) (7)
(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 999,845 shares owned by his wife. Mr. Pinkowski disclaims
beneficial ownership of the shares owned by his wife.
(3) 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, 31,194 shares of IVC Common Stock owned by
Mr. Hirschfeld's minor children, and 120,000 shares owned by Two Seas
Ventures, a family partnership. Mr. Hirschfeld disclaims beneficial
ownership of the shares owned by his wife and children.
(4) Includes 400,000 shares of IVC Common Stock issuable upon exercise of
stock options and 1,500,000 shares owned by the two Edell Family
Partnerships (750,000 each).
(5) Includes 60,036 shares of IVC Common Stock issuable upon exercise of stock
options.
(6) Includes 10,000 shares of IVC Common Stock issuable upon exercise of stock
options.
(7) Includes 551,036 shares of IVC Common Stock issuable upon the exercise of
stock options and warrants held by all executive officers and directors.
30
<PAGE>
Item 13 Certain Relationships and Related Transactions
Loans, Guarantees and Advances
Prior to fiscal 1994, Arthur S. Edell loaned the Company $250,000. The
current loan balance is $165,000. This loan has no stated terms of repayment and
bears interest at 6% and 5% for the fiscal years ended July 31, 1997 and 1996,
respectively. The above loan was 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, 1997,
the aggregate net advances were $475,000. The balance due the Company at July
31, 1997 is payable by July 1998.
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, 1997, 1996 and 1995 were $169,000, $154,000 and $125,000,
respectively.
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 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, 1997, 1996 and
1995 were approximately $313,000, $389,000 and $315,000, respectively.
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 $18,000 and $36,000, respectively. Additionally, the Company
was responsible for all costs of operations, maintenance and upkeep of the
related property including insurance and real estate tax.
The Company holds a contract receivable, due in January 2012, from Agora
Holding Company ("Agora"), a partnership consisting of Andrew M. Pinkowski and
certain previous shareholders of Hall in the amount of $878,000 and $906,000,as
at July 31, 1997 and 1996 respectively. Interest income earned by the Company on
this contract was $80,000, $85,000 and $83,000 for the years ended July 31,
1997, 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 $163,000, $161,000 and $161,000 for the years
ended July 31, 1997, 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.
31
<PAGE>
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(A) Documents Included As Part of This Report
(1) Financial Statements
See "Item 8. Financial Statements and Supplementary Data"
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts (Page S-1)
All other schedules have been omitted because they are not required,
are inapplicable or the information is otherwise set forth in the
financial statements or notes thereto.
(3) Exhibits
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 1993 Stock Option Plan
(3)
10.4 International Vitamin Corporation 1995 Stock Option Plan
(1)
10.5 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)
10.6 Guaranty, dated as of April 30, 1996, by the Guarantor
(2)
10.7 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)
32
<PAGE>
(A) Documents Included as Part of This Report - (continued)
10.8 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)
10.9 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)
10.10 Security Agreement, dated as of April 30, 1996, by IVC
Industries, Inc., in favor of the Guarantor (2)
10.11 Security Agreement, dated as of April 30, 1996, by
International Vitamin Overseas Sales Corp., in favor of
the Guarantor (2)
10.12 Security Agreement, dated as of April 30, 1996, by Hall
Laboratories, Ltd., in favor of the Guarantor (2)
10.13 Trademark Collateral Assignment Agreement, dated as of
April 30, 1996, by IVC Industries, Inc. (2)
10.14 Guaranty and Security Agreement, dated as of May 10,
1996, by IVC Industries, Inc., in favor of the Guarantor
(5)
10.15 Guaranty and Security Agreement, dated as of May 10,
1996, by International Vitamin Overseas Sales Corp., in
favor of the Guarantor (5)
10.16 Guaranty and Security Agreement, dated as of May 10,
1996, by Hall Laboratories, Ltd., in favor of the
Guarantor (5)
10.17 Trademark Collateral Assignment Agreement, dated as of
May 10, 1996, by IVC Industries, Inc. (5)
10.18 Employment Agreement with E. Joseph Edell (4)
10.19 Employment Agreement with Arthur S. Edell (3)
10.20 Employment Agreement with Andrew M. Pinkowski (2)
10.21 Employment Agreement with I. Alan Hirschfeld (4)
10.22 Loan and Security Agreement with NatWest Bank, N.A. (4)
11 Earnings Per Share Computation (Page E-1)
33
<PAGE>
(A) Documents Included as Part of This Report - (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
None.
34
<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: 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 ________
- ---------------------------- Directors and Chief
E. Joseph Edell Executive Officer
/s/ Arthur S. Edell President and Director ________
- ----------------------------
Arthur S. Edell
/s/ Andrew M. Pinkowski Vice Chairman and Director _________
- ----------------------------
Andrew M. Pinkowski
/s/ I. Alan Hirschfeld Executive Vice President, _________
- ---------------------------- Chief Financial Officer
I. Alan Hirschfeld and Director
/s/ Dennis E. Groat Director _________
- ----------------------------
Dennis E. Groat
35
<PAGE>
/s/ David Popofsky Director _________
- ----------------------------
David Popofsky
/s/ Dr. Mark S. Gold Director _________
- ----------------------------
Dr. Mark S. Gold
/s/ Marc Z. Edell Director _________
- ----------------------------
Marc Z. Edell
/s/ Mac Allen Culver III Director _________
- ----------------------------
Mac Allen Culver III
36
<PAGE>
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, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended July 31, 1997, 1996 and 1995. These consolidated 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.
We did not audit the 1995 financial statements of Hall Laboratories, Inc., a
wholly-owned subsidiary, which statements reflect total revenues of
approximately $39,125,000 for the year ended July 31, 1995. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Hall Laboratories,
Inc., 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 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 a reasonable basis for the opinion expressed
below.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT (Continued)
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, the consolidated financial statements referred to in the first
paragraph present fairly in all material respects the financial position of IVC
Industries, Inc. and Subsidiaries as of July 31, 1997 and 1996, and the results
of their operations and their cash flows for the years ended July 31, 1997, 1996
and 1995 in conformity with generally accepted accounting principles.
In connection with our audits of the financial statements referred to above, we
audited the financial schedules listed under Item 14. In our opinion, these
financial schedules, when considered in relation to the financial statements
taken as a whole, present fairly, in all material respects, the information
stated therein.
AMPER POLITZINER & MATTIA P.A.
October 29, 1997
Edison, New Jersey
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Hall Laboratories, Inc.
Portland, Oregon
We have audited the accompanying consolidated statement of income of Hall
Laboratories, Inc., and its Subsidiary, for the year ended July 31, 1995, and
the related consolidated statement of cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express and opinion on these consolidated
financial statements based on our audit.
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 audit of the income
statement and statement of cash flows provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of the operations and
cash flows of Hall Laboratories, Inc., and Subsidiary for the year ended July
31, 1995, in conformity with generally accepted accounting principles.
YERGEN AND MEYER LLP
August 13, 1996
Portland, Oregon
F-3
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS AT JULY 31, 1997 AND 1996
(Dollars in Thousands, Except as Noted or Per Share Information)
1997 1996
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 179 $ 420
Accounts receivable 9,567 17,507
Inventories 31,185 26,045
Deferred taxes 2,353 1,755
Prepaid expenses and other current assets 2,347 1,864
-------- --------
Total Current Assets 45,631 47,591
Property, Plant and Equipment - Net 17,999 18,071
Deferred Taxes -- 105
Notes Receivable - Related Parties 568 --
Goodwill - Net 1,867 --
Other Assets 3,326 2,908
-------- --------
Total Assets $ 69,391 $ 68,675
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,434 $ 1,070
Accounts payable and accrued expenses 19,841 23,809
-------- --------
Total Current Liabilities 21,275 24,879
Long-Term Debt 31,430 28,656
Deferred Taxes 170 --
Other Liabilities 99 99
-------- --------
Total Liabilities 52,974 53,634
-------- --------
Shareholders' Equity:
Preferred stock, no par, 2,000,000 shares authorized -- --
Common stock, $.01 par value, 25,000,000 shares
authorized; 17,127,392 and 17,094,742 issued,
respectively 171 171
Additional paid-in capital 11,446 11,345
Foreign currency translation adjustment (116) (99)
Retained earnings 4,970 3,624
Less: Common stock in treasury at cost: 32,000 shares
at July 31, 1997 (54) --
-------- --------
Total Shareholders' Equity 16,417 15,041
-------- --------
Total Liabilities and Shareholders' Equity $ 69,391 $ 68,675
======== ========
See notes to consolidated financial statements.
F-4
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1997, 1996 AND 1995
(Dollars in Thousands, Except as Noted or Per Share Information)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Net sales $ 108,531 $ 104,159 $ 89,097
Cost of sales 80,480 77,086 70,949
----------- ----------- ------------
Gross profit 28,051 27,073 18,148
Selling, general and administrative expenses 23,628 22,350 16,355
Merger and integration costs -- 3,183 1,533
----------- ----------- ------------
Income from operations 4,423 1,540 260
Other expenses - net 1,639 818 775
----------- ----------- ------------
Income (loss) before income taxes 2,784 722 (515)
Income tax provision (benefit) 1,438 426 (1,108)
----------- ----------- ------------
Net income $ 1,346 $ 296 $ 593
=========== =========== ============
Net income per share $ .08 $ .02 $ .03
=========== =========== ============
Weighted average shares 17,093,979 17,222,160 17,202,811
</TABLE>
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, 1997, 1996 AND 1995
(Dollars in Thousands, Except as Noted or Per Share Information)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,346 $ 296 $ 593
-------- -------- --------
Adjustments to reconcile net income to net cash (used in) operating
activities:
Depreciation and amortization 2,126 1,784 787
Deferred income taxes (benefit) (321) (642) (1,035)
Stock distributed to Employee Savings Plan 63 -- --
Stock option issued to non-employee directors 38 -- --
Conversion of stock appreciation rights to common stock -- 2,243 --
(Gain) loss on sale of assets (138) 41 --
Changes in assets - (increase) decrease:
Accounts receivable 7,940 (8,112) (836)
Inventories (5,140) (7,142) 1,293
Prepaid expenses and other current assets (506) 249 260
Other assets (398) (632) 760
Changes in liabilities - increase (decrease):
Accounts payable and accrued expenses (3,968) 9,031 305
Income taxes payable -- -- (257)
-------- -------- --------
Total adjustments (304) (3,180) 1,277
-------- -------- --------
Net Cash Provided (Used) By Operating Activities 1,042 (2,884) 1,870
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for notes receivable (568) -- --
Additions to property, plant and equipment (1,120) (3,547) (6,507)
Proceeds from sale of assets 138 244 --
Restricted cash and cash equivalents -- -- 2,538
Purchase of Vitamin Specialties assets (2,800) -- --
-------- -------- --------
Net Cash (Used) By Investment Activities (4,350) (3,303) (3,969)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (33,936) (43,528) (2,029)
Proceeds from long-term debt 37,074 52,350 5,703
Acquisition of treasury shares (54) -- --
Proceeds from notes payable - banks -- 31,230 37,513
Principal payments on notes payable - banks -- (34,048) (38,404)
Proceeds from exercise of stock options -- 24 --
Distributions to American shareholders and Hidel partners -- -- (1,335)
Net proceeds from demand notes payable - bank -- -- (713)
Acquisition of shareholder interests in American -- -- (318)
-------- -------- --------
Net Cash Provided By Financing Activities 3,084 6,028 417
-------- -------- --------
Foreign currency translation adjustment (17) 50 21
-------- -------- --------
NET INCREASE (DECREASE) IN CASH (241) (109) (1,661)
CASH AND CASH EQUIVALENTS - BEGINNING 420 529 2,190
-------- -------- --------
CASH AND CASH EQUIVALENTS - ENDING $ 179 $ 420 $ 529
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,075 $ 1,325 $ 1,622
======== ======== ========
Taxes $ 811 $ 752 $ 313
======== ======== ========
</TABLE>
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, 1997, 1996 AND 1995
(Dollars in Thousands, Except as Noted or Per Share Information)
<TABLE>
<CAPTION>
Foreign
Common Treasury Additional Currency
Stock Stock Common Treasury Paid-In Retained Translation
(Shares) (Shares) Stock Stock Capital Earnings Adjustment Total
---------- -------- ---- ---- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - August 1, 1994 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
- ------------------------
Purchase of treasury shares -- (32,000) -- (54) -- -- -- (54)
Issuance of shares to employee
benefit plan 32,650 -- -- -- 63 -- -- 63
Issuance of options to
non-employee Directors -- -- -- -- 38 -- -- 38
Net income -- -- -- -- -- 1,346 -- 1,346
Foreign currency translation
adjustment -- -- -- -- -- -- (17) (17)
---------- -------- ---- ---- -------- ------- ----- --------
Balance - July 31, 1997 17,127,392 (32,000) $171 $(54) $ 11,446 $ 4,970 $(116) $ 16,417
- ------------------------ ========== ======== ==== ==== ======== ======= ===== ========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except As Noted or 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, health food and independent drug stores, as
well as sales through its own retail stores and mail order operation. Its
products are distributed under the Fields of Nature, Rybutol, Nature's
Wonder, American Vitamin(R), Synergy Plus, Nature's Blend and Vitamin
Specialties brands, as well as under the private labels of its retail
chain store customers.
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. The financial data also reflects
the operations of Vitamin Specialties since the date of acquisition,
June 13, 1997, accounted for as a purchase (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 the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-9
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except As Noted or Per Share Information)
Note 1 - Summary of Significant Accounting Policies - (continued):
Cash and Cash Equivalents
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 $471 and $296 in 1997 and 1996,
respectively, representing deposits held by trustees in connection with
payments for the current portion and interest on long-term debt.
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, 1997 and 1996 the
reserve for bad debts was $831 and $607, 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.
F-10
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as noted or Per Share Information)
Note 1 - Summary of Significant Accounting Policies - (continued):
Property, Plant and Equipment
Property,Plant 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.
Goodwill
Goodwill represents the excess of purchase price over the fair value of
identifiable net assets acquired. Goodwill is amortized on a straight-line
basis over 15 years, and accordingly, $21 was amortized during the fiscal
year ended July 31, 1997.
Other Assets
Other 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.
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
During October 1995, The FASB issued Statement No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation", which established a fair value
based method for accounting for stock-based compensation plans and
requires additional disclosures for those companies who elect not to adopt
the new method of accounting. The Company will continue to account for
employee purchase rights and stock options under APB Option No. 25,
"Accounting for Stock Issued to Employees". SFAS No. 123 disclosures are
effective in the accompanying financial statements.
F-11
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 1 - Summary of Significant Accounting Policies - (continued):
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. Under this
method, compensation cost is measured as the amount by which the market
price of the underlying stock exceeds the exercise price of the stock
option at the date at which both the number of options granted and the
exercise price are known.
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.
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.
Concentration of Cash Balances
Periodically, the Company maintains cash balances in excess of the $100
insured by the Federal Deposit Insurance Corporation (FDIC).
F-12
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 1 - Summary of Significant Accounting Policies - (continued):
Impact of Recently Issued Accounting Standards
In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings Per Share". The Statement simplifies the standards for
computing earnings per share (EPS) and makes them comparable to
international EPS standards. The Statement requires the presentation of
both "basic" and "diluted" EPS on the face of the income statement with a
supplementary reconciliation of the numerators and denominators used in
the calculations. The Statement is effective for financial statements
issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted.
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distribution to owners.
Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
In July 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise", which
establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in
interim financial statements issued to the public. It also establishes
standards for disclosures regarding products and services, geographic
areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
These new standards are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Due to the recent issuance of these
standards, management has been unable to fully evaluate the impact, if
any, they may have on future financial statement disclosures.
Reclassifications
Certain reclassifications have been made to conform prior year amounts to
the current year presentation.
F-13
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 2 - Business Combinations:
Vitamin Specialties
----------------------
On June 13, 1997, the Company acquired the assets of the Vitamin
Specialties operations of HealthRite, Inc. for $2.8 million. Vitamin
Specialties is engaged, among other things, in the retail sales through 15
health food/vitamin stores and by mail order of vitamins and nutritional
supplements. The acquisition was accounted for as a purchase and
accordingly, goodwill of $1.9 million was recorded on the books of the
Company. The operations of Vitamin Specialties are included in the
financial statements since the date of acquisition.
Operating results of the Vitamin Specialties operations since the date of
acquisition are not considered material with regard to the fiscal year
ended July 31, 1997.
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 relates to Hall has been recast to
conform with the Company's historical reporting periods.
Operating results of the separate entities for the periods presented below
are as follows:
Nine Months
Ended Year Ended
April 30, 1996 July 31, 1995
-------------- -------------
(unaudited)
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
======== ========
F-14
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 2 - Business Combinations - (Continued):
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.
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 below:
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-15
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or 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, 1996.
Note 3 - Inventories:
Inventories consist of the following:
July 31,
--------
1997 1996
---- ----
Finished goods $ 16,697 $ 10,736
Bulk and Work in Process 9,155 10,932
Raw materials and Packaging Components 5,333 4,377
--------- ---------
Total inventory $ 31,185 $ 26,045
========= =========
The LIFO reserve at July 31, 1997 and 1996, was approximately $0 and $165,
respectively.
Note 4 - Property, Plant and Equipment:
Property, plant and equipment consist of the following:
July 31,
--------
1997 1996
---- ----
Land $ 1,644 $ 1,644
Buildings and improvements 7,451 6,485
Machinery and equipment 14,448 14,203
Leasehold improvements 3,899 3,783
Furniture and fixtures 2,310 1,678
-------- --------
29,752 27,793
Accumulated depreciation and amortization 11,753 9,722
-------- --------
Net property, plant and equipment $ 17,999 $ 18,071
======== ========
Depreciation expense for the years ended July 31, 1997, 1996 and 1995 was
$2,105, $1,617 and $715, respectively.
F-16
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
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-17
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 6 - Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
July 31,
--------
1997 1996
------- -------
<S> <C> <C>
Notes payable, bank, under a $22.0 million revolving line of
credit, due March 31, 1999 (of which $.5 million is due
March 31, 1998) $21,475 $19,500
Bonds payable, New Jersey Economic Development Authority,
interest at the floating tax-free rate (3.60% at July 31, 1997),
due May 1, 2003 4,280 5,000
Bonds payable, New Jersey Economic Development Authority,
interest at 6.9%, due June 30, 2007 4,625 4,976
Term note payable to bank, due February 1, 2002,
interest at a floating rate (7.31% at July 31, 1997) 1,450 --
Equipment financing agreement, due June 30, 2002,
interest at 8.25% - 8.50% 869 --
Loan payable, shareholder, interest at 6%
- (See Note 12) 165 250
------- -------
Total 32,864 29,726
Less current portion 1,434 1,070
------- -------
Long-Term Debt - Less current portion $31,430 $28,656
======= =======
</TABLE>
F-18
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 6 - Long-Term Debt - (Continued):
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. The Company is allowed to
borrow up to $15.5 million under borrowing Facility A (of which $.5
million is due March 31, 1998), 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 applicable LIBOR rates plus 2.25% (7.98% at
July 31, 1997, based on 90 day LIBOR), at the Company's option. Borrowings
under Facility B bear interest at the bank's prime rate, or at money
market rates or applicable LIBOR rates plus .50% (6.34% at July 31, 1997,
based on 120 day LIBOR) 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 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 bonds payable to the New Jersey Economic Development Authority of
$4,625 are collateralized by the Company's real property in Freehold, New
Jersey. Interest is paid semi-annually 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.
F-19
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 6 - Long-Term Debt - (Continued):
The term note is secured by a mortgage on the Company's recently acquired
warehousing and distribution facility. The loan balance is $1.45 million
and bears interest at either the Treasury Bond rate plus 1.50%, the bank's
floating rate less .25%, or applicable LIBOR rates plus 1.50% (7.31% at
July 31, 1997 based on 90 day LIBOR), at the Company's option. The loan
calls for monthly principal payments of $8.3 plus interest, and matures on
February 1, 2002, at which time the remaining outstanding principal is
due.
The equipment financing agreement provides for up to $1.0 million for
acquisitions of computer and manufacturing equipment. This agreement calls
for monthly payments of principal and interest at prime rate over a five
year period. At July 31, 1997, the Company had $131 available for future
equipment purchases.
The aggregate amount of long-term debt maturing in each of the five years
subsequent to July 31, 1997 and thereafter is as follows:
1998 $ 1,434
1999 22,956
2000 1,439
2001 1,481
2002 2,374
Thereafter 3,180
---------
Total $ 32,864
=========
F-20
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 7 - Income Taxes:
The income tax provision (benefit) consisted of the following for the
periods ended:
July 31,
--------
1997 1996 1995
---- ---- ----
Current tax expense (benefit):
Federal $ 1,273 $ 839 $ (62)
State 359 134 (11)
Foreign 127 131 --
------- ------- -------
1,759 1,104 (73)
------- ------- -------
Deferred tax expense (benefit):
Federal (287) (483) (462)
State (34) (159) (155)
Foreign -- -- --
------- ------- -------
(321) (642) (617)
------- ------- -------
Effect of change in tax status -- -- (418)
Other -- (36) --
------- ------- -------
Total Income Tax Provision $ 1,438 $ 426 $(1,108)
======= ======= =======
The income tax provisions (benefits) for 1997, 1996 and 1995 were
respectively reduced by a benefit of net operating loss carryforwards of
$54, $107 and $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-21
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or 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,
--------
1997 1996 1995
---- ---- ----
Amount computed using statutory rate $ 975 $ 244 $ (175)
Foreign tax benefit -- -- (29)
State taxes provision (benefit) (net of federal
benefit) 250 88 (10)
Effect of foreign income not subject to federal
income tax -- -- 47
S-Corporation and partnership earnings not
subject to income taxes -- -- (434)
Effect of change in tax status -- -- (418)
Nondeductible merger costs -- 94 --
Other 213 -- (89)
------- ------- -------
Income Tax Provision (Benefit) $ 1,438 $ 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-22
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or 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,
1997 and 1996 are as follows:
July 31,
--------
1997 1996
---- ----
Current assets and liabilities
Allowance for doubtful accounts $ 804 $ 660
Inventory valuation 390 379
Accrued expenses 147 252
Accrued merger costs 239 268
Net operating loss carryforward 22 265
Inventory obsolescence and other 751 (69)
------- -------
Valuation allowance -- --
------- -------
Net current deferred asset $ 2,353 $ 1,755
======= =======
Non-current assets and liabilities
Installment contract $ (232) $ (237)
Property and equipment (42) 213
Other 87 87
Net operating loss carryforward 17 42
------- -------
Net non-current deferred asset (liability) $ (170) $ 105
======= =======
F-23
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 8 - Other Income Statement Information:
Other expenses, income are comprised of the following for the year ended:
July 31,
--------
1997 1996 1995
---- ---- ----
Interest expense $ 2,386 $ 1,579 $ 1,334
Rental income (332) (203) (237)
Interest income (190) (227) (324)
Gain on sale of contract
manufacturing division -- (225) --
Other (225) (106) 2
------- ------- -------
Total other expenses, net $ 1,639 $ 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).
F-24
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or 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, 2006.
In September 1996, 50,000 options were granted under the 1995 Option Plan
at an exercise price of $1.925 per share, which are exercisable on or
before September 10, 2001. This grant was ratified by the Board of
Directors in October 1996.
In September 1996, an option to purchase 10,000 shares of the Company's
common stock was granted to each of the Company's four non-employee
directors at an exercise price of $1.75 per share, which are exercisable
on or before September 10, 2001. The Company recorded an expense of $38
relating to the issuance of these options.
In April 1997, 40,000 options were granted under the 1995 Stock Option
Plan at an exercise price of $1.44 per share, which are exercisable on or
before April 30, 2007.
In May 1997, 30,000 options were granted under the 1995 Stock Option Plan
at an exercise price of $1.88 per share, which are exercisable on or
before May 7, 2007.
F-25
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 10 - Stock Option Plans:
The Company has options outstanding under two plans. Under the "1993
Option Plan" and the "1995 Option Plan", options may be granted for
500,000 and 1,000,000 shares, respectively. The term of each option may
not exceed ten years from the date of the grant (five years for options
granted to employees owning more than 10% of the Company's voting stock).
F-26
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 10 - Stock Option Plans - (Continued):
A summary of the Company's stock option activity and related information
for the years ended July 31, follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------ ------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - Beginning of Year 705,984 $2.70 355,000 $2.43 0 $0.00
Granted 160,000 1.75 366,984 2.92 359,000 2.42
Exercised -- -- (16,000) 1.50 (2,000) 1.50
Canceled -- -- -- -- (2,000) 1.50
Outstanding - End of Year 865,984 2.53 705,984 2.70 355,000 2.43
Exercisable - End of year 705,984 2.70 600,984 3.01 100,000 4.50
Weighted-average fair value of options granted during the year:
Where exercise price equals stock price $0.91 $1.52
Where exercise price exceeds stock price $1.05 --
</TABLE>
The table below summarizes information relating to options outstanding and
exercisable at July 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Exercise Options Weighted-Average Remaining Estimated Options Weighted-Average
Prices Outstanding Exercise Price Life (Years) Exercisable Exercise Price
------ ----------- -------------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.44 40,000 $ 1.44 4.8 $
1.50 39,000 1.50 2.3 39,000 1.50
1.65 200,000 1.65 2.3 200,000 1.65
1.75 40,000 1.75 4.1
1.88 30,000 1.88 4.8
1.93 50,000 1.93 4.1
2.38 5,000 2.38 3.0 5,000 2.38
2.61 200,000 2.61 3.0 200,000 2.61
3.31 161,984 3.31 3.7 161,984 3.31
4.50 100,000 4.50 .8 100,000 4.50
</TABLE>
F-27
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 10 - Stock Option Plans - (Continued):
The fair value of options granted in the years ended July 31, 1997 and
1996 is estimated on the date the options are granted based on the
Black-Scholes option-pricing model. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
The following weighted-average assumptions were used:
Year Ended
July 31,
----------
1997 1996
---- ----
Risk-free interest rate 6.6% 6.3%
Expected volatility 54.6% 42.1%
Dividend yield 0% 0%
Expected life 5 years 5 years
F-28
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 10 - Stock Option Plans - (Continued):
The Company accounts for the costs of stock-based compensation in
accordance with Accounting Principle Board Opinion No. 25, "Accounting for
Stock Issued to Employees", rather than the fair value-based method in
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation". No compensation cost has been
recognized for the Company's stock option plans. Had compensation cost
been determined based on the fair values of the stock options at the date
of grant in accordance with SFAS 123, the Company would have recognized
additional compensation expense, net of taxes, of $83 and $121 for the
years ended July 31, 1997 and 1996, respectively. The Company's pro-forma
net income and pro-forma net income per share for the years ended July 31,
1997 and 1996 would have been as follows:
Year Ended
July 31,
----------
1997 1996
---- ----
Net income:
------------------------------------------------------------
As reported $1,346 $ 296
Pro-forma 1,263 175
Net income per share:
------------------------------------------------------------
As reported $ 0.08 $ 0.02
Pro-forma 0.08 0.01
Since compensation expense associated with option grants is recognized
over the vesting period, the initial impact of applying SFAS No. 123 on
pro-forma disclosure is not representative of the potential impact on net
income for future years, when the effect of the recognition of a portion
of compensation expense from vesting of prior awards would be reflected.
Note 11 - Employee Benefit Plan:
Effective April 1, 1997, the Company adopted a Defined Contribution
Savings Plan ("the Plan") which qualifies under Section 401 (k) of the
Internal Revenue Code. Under the Plan, the Company matches the employee's
contributions up to a maximum of $.5 per year. For the fiscal year ended
July 31, 1997, the Company contributed $117 to the plan, including 50
shares of its common stock to each employee at the Plan's inception.
F-29
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 12 - Related Party Transactions:
The Company has advanced funds to certain shareholders with interest of
approximately 5% per annum. The amounts due at July 31, 1997 and July 31,
1996 of $475 and $506, respectively, is payable by July 1997. Interest
income earned on loans receivable - shareholders was approximately $29 and
$31 for the years ended July 31, 1997 and 1996, respectively. The amounts
due from shareholders are included in other assets.
Interest on a loan payable to a shareholder aggregated approximately $11
and $12 for the years ended July 31, 1997 and 1996, respectively (see
Note 6).
The Company advanced funds and sells products to Healthfair Vitamin
Centers, Inc., a company wholly owned by Arthur and Ethel Edell. Sales to
this affiliate were $169, $154 and $125 for the years ended July 31, 1997,
1996 and 1995, respectively. The amount due from this affiliate including
accounts receivable and advances, was $4, $6 and $18 at July 31, 1997,
1996 and 1995, respectively.
The Company sells products to D.N.R. Inc., an Israeli company of which one
of its principal shareholders is the brother-in-law of the President of
the Company's International Division. These sales aggregated $313, $389
and $315 for the years ended July 31, 1997, 1996 and 1995, respectively.
Accounts receivable from these related parties aggregated $102, $274 and
$151 at July 31, 1997, 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 $0, $18 and $36 for the years ended July 31,
1997, 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 lease was
discontinued in January 1996.
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 $878, $906
and $932 at July 31, 1997, 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 $80, $85 and $83 for the years ended July
31, 1997, 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 $163, $161 and
$161 for the years ended July 31, 1997, 1996 and 1995, respectively.
F-30
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 13 - Commitments and Contingencies:
Leases:
The Company leases certain production and warehouse facilities, and
conducts retail operations 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 $760, $640 and $797 for the years ended July 31, 1997,
1996 and 1995, respectively. Future minimum lease payments due under these
leases at July 31, 1997 are as follows:
Year Ending
July 31,
-----------
1998 $ 1,090
1999 800
2000 450
2001 385
2002 150
-------
Total $ 2,875
=======
Employment Agreements:
The Company has entered into employment agreements with certain of the
Company's officers. The employment agreements call for salaries
aggregating $1,678 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 is entitled to receive a severance payment equal to their
annual salary.
F-31
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 13 - 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 $8.9 million
related to the New Jersey Economic Development Authority borrowings.
Note 14 - Major Customers:
The Company sells its products to a geographically diverse base of
customers, primarily national and regional drug store, mass merchandiser
and supermarket chains. One customer individually accounted for more than
10% of sales, representing approximately 23% of net sales in the fiscal
year ended July 31, 1997. Two customers individually represented
approximately 21% and 13% of sales for the fiscal year ended July 31,
1996.
F-32
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 15 - Unaudited Quarterly Financial Data:
<TABLE>
<CAPTION>
First Second Third Fourth Full
Year Ended: Quarter Quarter Quarter Quarter Year
- ----------- ------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
July 31, 1997
Net sales $ 31,563 $ 27,267 $ 25,381 $ 24,320 $108,531
Gross profit 8,095 6,302 6,989 6,665 28,051
Income from operations 1,883 729 1,091 720 4,423
Net income 872 391 337 (254) 1,346
Net income per share 0.05 0.02 0.02 (0.01) 0.08
July 31, 1996
Net sales $ 24,486 $ 24,722 $ 27,672 $ 27,279 $104,159
Gross profit 5,492 6,173 7,359 8,049 27,073
Income (loss) from operations 1,072 1,277 (1,740) 931 1,540
Net income (loss) 579 741 (1,256) 232 296
Net income (loss) per share 0.03 0.04 (0.07) 0.01 0.02
</TABLE>
F-33
<PAGE>
SCHEDULE II
IVC INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JULY 31, 1997, 1996 AND 1995
(Dollars in Thousands, Except as Noted or Per Share Information)
<TABLE>
<CAPTION>
For the Year Balance at Added Charged to Charged to Balance at
Ended Beginning During Cost and Other End
July 31, Description of Year the Year Expenses Accounts Deductions of Year
-------- ----------- ------- -------- -------- -------- ---------- -------
<C> <S> <C> <C> <C> <C> <C> <C>
Goodwill - Net of
1997 Accumulated Amortization -- $ 1,888 $ 21 -- -- $ 1,867
=========== =========== =========== =========== =========== ===========
1997 Allowance for Doubtful Accounts $ 607 -- $ 224 -- -- $ 831
=========== =========== =========== =========== =========== ===========
1996 Allowance for Doubtful Accounts $ 298 -- $ 309 -- -- $ 607
=========== =========== =========== =========== =========== ===========
1995 Allowance for Doubtful Accounts $ 256 -- $ 42 -- -- $ 298
=========== =========== =========== =========== =========== ===========
</TABLE>
S-1
EXHIBIT 11
IVC INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE OF EARNINGS PER SHARE COMPUTATION
FOR THE YEARS ENDED JULY 31, 1997, 1996 AND 1995
(Dollars in Thousands, Except as Noted or Per Share Information)
<TABLE>
<CAPTION>
Years Ended
July 31,
--------
PRIMARY 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income $ 1,346 $ 296 $ 593
Less - preferred stock dividends -- -- --
----------- ----------- -----------
Net income for primary income per common share $ 1,346 $ 296 $ 593
Weighted average number of common shares
outstanding during the year 17,075,525 17,084,726 17,202,811
Add- common equivalent shares
(determined using the "treasury stock"
method) representing shares issuable
upon exercise of employee stock
options and incentive
performance shares 18,454 137,434 --
----------- ----------- -----------
Weighted average number of common shares
used in calculation of primary income per
share 17,093,979 17,222,160 17,202,811
=========== =========== ===========
Primary income per common share $ 0.08 $ 0.02 $ 0.03
=========== =========== ===========
</TABLE>
E-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-K
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 179
<SECURITIES> 0
<RECEIVABLES> 9,567
<ALLOWANCES> 0
<INVENTORY> 31,185
<CURRENT-ASSETS> 45,631
<PP&E> 29,752
<DEPRECIATION> 11,753
<TOTAL-ASSETS> 69,391
<CURRENT-LIABILITIES> 21,275
<BONDS> 0
0
0
<COMMON> 171
<OTHER-SE> 16,246
<TOTAL-LIABILITY-AND-EQUITY> 69,391
<SALES> 108,531
<TOTAL-REVENUES> 0
<CGS> 80,480
<TOTAL-COSTS> 23,628
<OTHER-EXPENSES> 1,639
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,784
<INCOME-TAX> 1,438
<INCOME-CONTINUING> 1,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,346
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
