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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended October 31, 1997
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 13(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _______________ TO ________________
COMMISSION FILE NUMBER 33-73406.
IVC INDUSTRIES, INC.
--------------------
(exact name of Registrant as specified in its charter)
DELAWARE 22-1567481
- ------------------------------- ------------------
(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
500 HALLS MILL ROAD, FREEHOLD, NEW JERSEY 07728
- ----------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (732) 308-3000
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NOT APPLICABLE
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(former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No |_|
Registrant had 17,127,392 shares of common stock outstanding as of December 10,
1997.
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<PAGE>
IVC INDUSTRIES, INC.
Table of Contents
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as at
October 31, 1997 and July 31, 1997.........................3
Consolidated Statements of Income
For the Three Months Ended October 31, 1997 and 1996.......4
Consolidated Statements of Cash Flows
For the Three Months Ended October 31, 1997 and 1996.......5
Notes to Consolidated Financial Statements.................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............7
Part II. Other Information.........................................10
Signature Page............................................................13
<PAGE>
Item 1. Financial Statements.
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS AT OCTOBER 31, 1997 AND JULY 31, 1997
(Dollars in Thousands, Except Per Share Information)
--------------------------
<TABLE>
<CAPTION>
October 31, July 31,
1997 1997
----------- ---------
<S> <C> <C>
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents $ 882 $ 179
Accounts receivable 15,041 9,567
Inventories 27,882 31,185
Deferred taxes 2,353 2,353
Prepaid expenses and other current assets 2,985 2,347
-------- --------
Total Current Assets 49,143 45,631
Property and Equipment - Net 17,809 17,999
Notes Receivable - Related Parties 568 568
Goodwill - Net 1,839 1,867
Other Assets 3,405 3,326
-------- --------
Total Assets $ 72,764 $ 69,391
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,614 $ 1,434
Accounts payable and accrued expenses 22,479 19,841
-------- --------
Total Current Liabilities 24,093 21,275
Long-Term Debt 31,608 31,430
Deferred Taxes 170 170
Other Liabilities 99 99
-------- --------
Total Liabilities 55,970 52,974
-------- --------
Shareholders' Equity:
Preferred stock, no par value, 2,000,000 shares authorized, none
issued -- --
Common stock, $.01 par value, 25,000,000 shares authorized;
17,127,392 issued and outstanding 171 171
Additional paid-in capital 11,446 11,446
Foreign currency translation adjustment (125) (116)
Retained earnings 5,302 4,970
Less: Common stock in treasury at cost; 0 and 32,000 shares at
October 31, 1997 and July 31, 1997, respectively -- (54)
-------- --------
Total Shareholders' Equity 16,794 16,417
-------- --------
Total Liabilities and Shareholders' Equity $ 72,764 $ 69,391
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED OCTOBER 31, 1997 AND 1996
(Dollars in Thousands, Except Per Share Information)
(unaudited)
--------------------------
1997 1996
----------- -----------
Net sales $ 27,709 $ 31,563
Cost of sales 20,908 23,468
----------- -----------
Gross profit 6,801 8,095
Selling, general and administrative expenses 5,779 6,212
----------- -----------
Income from operations 1,022 1,883
Other expenses - net 547 431
----------- -----------
Income before income taxes 475 1,452
Income tax provision 143 580
----------- -----------
Net income $ 332 $ 872
=========== ===========
Net income per share $ .02 $ .05
=========== ===========
Weighted average shares 17,150,176 17,177,872
=========== ===========
See accompanying notes to consolidated financial statements.
4
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1997 AND 1996
(Dollars in Thousands, Except Per Share Information)
(unaudited)
--------------------------
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 332 $ 872
------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 593 529
Stock distributed to employee savings plan 54 --
Changes in assets - (increase) decrease:
Accounts receivable (5,474) (941)
Inventories 3,303 694
Prepaid expenses and other current assets (638) (421)
Other assets (79) 54
Changes in liabilities - increase:
Accounts payable and accrued expenses 2,638 1,139
Other -- --
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Total adjustments 397 1,054
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Net Cash Provided By Operating Activities 729 1,926
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (375) (452)
------- --------
Net Cash Provided By (Used In) Investment Activities (375) (452)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long term debt (625) (15,558)
Proceeds from long term debt 983 14,478
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Net Cash Provided By (Used In) Financing Activities 358 (1,080)
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Foreign currency translation adjustment (9) (4)
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NET INCREASE IN CASH 703 390
CASH AND CASH EQUIVALENTS - BEGINNING 179 420
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CASH AND CASH EQUIVALENTS - ENDING $ 882 $ 810
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 294 $ 365
======= ========
Taxes $ 258 $ 415
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</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
--------------------------
Note 1 - Basis of Presentation and Other Matters:
The accompanying unaudited consolidated financial statements, which are
for interim periods, do not include all disclosures provided in the annual
consolidated financial statements. These unaudited consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the footnotes thereto contained in the IVC Industries, Inc. (the
"Company") Annual Report on Form 10-K for the year ended July 31, 1997, as filed
with the Securities and Exchange Commission.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (which are of a normal recurring
nature) necessary for a fair presentation of the financial statements. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
Certain amounts have been reclassified to conform with the current
period presentation.
Note 2 - Inventories:
Inventories consist of the following:
October 31, July 31,
1997 1997
----------- -----------
(dollars in thousands)
Finished Goods $ 12,367 $ 16,697
Bulk and Work in Process 9,314 9,155
Raw Materials and Packaging Components 6,201 5,333
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Total Inventory $ 27,882 $ 31,185
=========== ===========
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Three Months Ended October 31, 1997 Compared to the Three Months Ended October
31, 1996
Net Sales. Net sales for the three months ended October 31, 1997 were
$27.7 million, a decrease of $3.9 million or approximately 12.2% from the $31.6
million for the three months ended October 31, 1996. The decrease was attributed
to reduced sales of private brand (label) products to certain customers due to
the discontinuation of the private brand portion of the related supply
agreements. In addition, sales were also impacted by the continued disappointing
performance of the Revlon product line, and by the temporary disruption of
manufacturing activities at the Company's soft gel encapsulation facility
(Intergel) caused by a fire which occurred in September. Sales of the Company's
branded product lines continued to grow, reaching 22% of total sales (compared
to 18% during the three months ended October 31, 1996). Sales were also
positively impacted by the Company's recently acquired Vitamin Specialties
operations. 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 core business growth rates will continue, nor what effect, if
any, continued consolidation amongst the Company's retail customers will have on
the Company.
Cost and Expenses. Cost of sales for the three months ended October 31,
1997 was $20.9 million, a decrease of $2.6 million or approximately 11.1% from
the $23.5 million for the three months ended October 31, 1996. Cost of sales
increased 1.2% as a percentage of net sales over the prior year's period. The
increase was limited as a result of the improvement in the overall sales mix
towards higher margin products such as the Company's flagship Fields of Nature
brand. In addition, certain of the Company's recently introduced products, 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 impact of
the lower sales levels experienced by the Revlon line of licensed products which
had significantly higher gross profit margins than the Company's overall profit
margins. 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
also experienced an increase in its manufacturing and packaging costs, resulting
from the decreased operating efficiencies which prevailed during the current
quarter. These decreased efficiencies are attributable to the lower operating
levels caused by the reduction in private brand sales activities, coupled with
the Company's inventory reduction program. In addition, cost of sales was
impacted by higher amortization
7
<PAGE>
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. 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.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended October 31, 1997 were $5.8
million, a decrease of $0.4 million or approximately 6.5% when compared to the
prior year's quarter. This decrease is primarily attributable to: (i) lower
advertising and promotional activities, relative to the Company's core business
operations, (ii) the discontinuation of all advertising relative to the Revlon
line of licensed products, and (iii) decreased sales commissions, broker fees
and other selling expenses due to the lower sales levels in the Company's core
operations. The decrease was partially offset by the impact of the recently
acquired Vitamin Specialties operations.
Other Expenses, Net. Other expenses, net, for the three months ended
October 31, 1997, principally represent interest expense of $556, rental income
of $20, and miscellaneous expenses of $11. Other expenses, net, for the three
months ended October 31, 1996, principally represent interest expense of $394,
rental income of $73, interest income of $27 and miscellaneous expenses,
including equipment and other asset dispositions of $137.
Income Taxes. Income taxes generally reflect the effect of statutory
federal and state income tax rates and certain non-deductible expenses.
Liquidity and Capital Resources
The Company had working capital of $25.1 million at October 31, 1997,
compared to $24.4 million at July 31, 1997, an increase of $0.7 million. As the
business continues to grow, its working capital needs, primarily related to
increased accounts receivable, costs associated with securing long-term sales
contracts and new product introductions have been satisfied by cash generated
from operations, bank borrowings and trade credit.
For the quarter ended October 31, 1997, cash flow from operations was
$0.7 million. Accounts receivable increased by $5.5 million from July 31, 1997,
mainly due to the increased sales levels toward the end of the quarter.
Inventories decreased by $3.3 million, as the Company effectively reduced
inventory levels as part of its inventory reduction program. Accounts payable
and accrued expenses provided $2.6 million for the quarter.
8
<PAGE>
The Company believes that its existing cash balance, internally
generated funds from operations and available financing will provide the
liquidity necessary to satisfy the Company's working capital needs and
anticipated capital expenditures for the balance of the fiscal year.
Forward Looking Statements
This report, including 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 detailed from time to time in the Company's reports filed with the
Securities and Exchange Commission.
9
<PAGE>
Part II. Other Information
Item 1. - Legal Proceedings
Not applicable
Item 2. - Changes in Securities and Use of Proceeds
Not applicable
Item 3. - Defaults upon Senior Securities
Not applicable
Item 4. - Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. - Other Information
Not applicable
Item 6. - Exhibits and Reports on Form 8-K
Reports on Form 8-K:
None
Exhibits:
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)
10
<PAGE>
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)
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)
11
<PAGE>
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 (6)
- ----------
(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.
(6) Incorporated herein by reference from Form 10-K filed by the
Company for the fiscal year ended July 31, 1997
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: December 12, 1997 By: /s/ Arthur S. Edell
------------------ ----------------------------
President
Dated: December 12, 1997 By: /s/ I. Alan Hirschfeld
------------------ ----------------------------
Executive Vice President and
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
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<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
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0
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</TABLE>
