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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 January 31, 1999
|_| 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 0-23624
IVC INDUSTRIES, INC.
--------------------
(exact name of Registrant as specified in its charter)
DELAWARE 22-1567481
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(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 17,211,540 shares of common stock outstanding as of March 1, 1999
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<PAGE>
IVC INDUSTRIES, INC.
Table of Contents
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets as at
January 31, 1999 and July 31, 1998.................................3
Consolidated Statements of Income
For The Three and Six Months Ended January 31, 1999 and 1998.......4
Consolidated Statements of Cash Flows
For the Six Months Ended January 31, 1999 and 1998.................5
Notes to Consolidated Financial Statements.........................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................8
Part II. Other Information, Reports on Form 8-K and Exhibits..............12
Signature Page............................................................14
<PAGE>
Item 1. Financial Statements.
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Information)
------------------
<TABLE>
<CAPTION>
January 31, July 31,
1999 1998
-------- --------
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,140 $ 1,604
Accounts receivable 14,660 11,725
Inventories 27,847 37,389
Due from related parties 97 95
Deferred taxes 2,238 2,238
Prepaid expenses 1,385 2,006
Other current assets 539 979
-------- --------
Total Current Assets 47,906 56,036
Property, Plant and Equipment - Net 20,182 20,766
Due from related parties 1,868 1,876
Goodwill - Net 1,665 1,773
Other Assets 3,404 803
-------- --------
Total Assets $ 75,025 $ 81,254
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 24,765 $ 22,749
Current portion of capital lease payable 157 134
Current portion of deferred gain on building 101 97
Accounts payable 15,945 25,504
Accrued expenses 3,434 3,003
-------- --------
Total Current Liabilities 44,402 51,487
Long-term Debt - Less current portion 7,488 7,271
Capital lease obligation 3,228 3,317
Deferred gain on building sale 1,057 1,109
Deferred taxes 211 211
Other liabilities 99 99
-------- --------
Total Liabilities 56,485 63,494
-------- --------
Shareholders' Equity:
Preferred stock, no par value, 2,000,000 shares authorized -- --
Common stock, $.01 par value, 25,000,000 shares authorized;
17,211,540 shares issued 172 172
Additional paid-in capital 11,703 11,673
Foreign currency translation adjustment (200) (202)
Retained earnings 6,865 6,117
-------- --------
Total Shareholders' Equity 18,540 17,760
-------- --------
Total Liabilities and Shareholders' Equity $ 75,025 $ 81,254
======== ========
</TABLE>
3
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Information)
(unaudited)
------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
----------- -----------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 30,661 $ 29,253 $ 59,901 $ 56,962
Cost of sales 22,169 21,215 44,402 42,123
----------- ----------- ----------- -----------
Gross profit 8,492 8,038 15,499 14,839
Selling, general and administrative expenses 6,945 6,637 13,000 12,416
----------- ----------- ----------- -----------
Income from operations 1,547 1,401 2,499 2,423
Other expenses - net 599 613 1,249 1,160
----------- ----------- ----------- -----------
Income before income taxes 948 788 1,250 1,263
Income tax provision 379 252 502 394
----------- ----------- ----------- -----------
Net income $ 569 $ 536 $ 748 $ 869
=========== =========== =========== ===========
Basic earnings per share $ .03 $ .03 $ .04 $ .05
=========== =========== =========== ===========
Diluted earnings per share $ .03 $ .03 $ .04 $ .05
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 17,211,540 17,127,392 17,211,540 17,124,957
=========== =========== =========== ===========
Diluted 17,211,639 17,196,917 17,211,998 17,182,172
=========== =========== =========== ===========
</TABLE>
4
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(unaudited)
------------------
<TABLE>
<CAPTION>
Six Months Ended
January 31,
---------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 748 $ 869
-------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,538 1,131
Stock distributed to employee savings plan -- 54
Stock issued to non-employee directors 30 --
Changes in assets - (increase) decrease:
Accounts receivable (2,935) (7,116)
Inventories 9,542 4,712
Prepaid expenses and other current assets 1,059 (467)
Other assets (2,593) 261
Changes in liabilities - increase (decrease):
Accounts payable and accrued expenses (9,128) 2,516
Other (48) --
-------- --------
Total adjustments (2,535) 1,091
-------- --------
Net Cash Provided By (Used In) Operating Activities (1,787) 1,960
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (846) (710)
-------- --------
Net Cash Used In Investment Activities (846) (710)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt 2,016 25
Proceeds/(payments) of long-term debt 217 (177)
Principal payments of capital lease obligations (66) --
-------- --------
Net Cash Provided By (Used In) Financing Activities 2,167 (152)
-------- --------
Foreign currency translation adjustment 2 (49)
-------- --------
NET INCREASE (DECREASE) IN CASH (464) 1,049
CASH AND CASH EQUIVALENTS - BEGINNING 1,604 179
-------- --------
CASH AND CASH EQUIVALENTS - ENDING $ 1,140 $ 1,228
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 1,390 $ 896
======== ========
Taxes $ 676 $ 258
======== ========
</TABLE>
5
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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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, 1998, 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:
January 31, July 31,
1999 1998
-------- --------
(dollars in thousands)
Finished Goods $ 11,987 $ 15,129
Bulk and Work in Process 10,438 14,180
Raw Materials and Packaging Components 5,422 8,080
-------- --------
Total Inventory $ 27,847 $ 37,389
======== ========
6
<PAGE>
Note 3 - Earnings Per Share (EPS):
Basic EPS is calculated based on income available to common shareholders
and the weighted average number of shares outstanding during the reported
period. Diluted EPS includes additional dilution from potential common stock
issuable pursuant to the exercise of stock options outstanding. Prior year
amounts have been restated to conform with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share".
Note 4 - Comprehensive Income:
As of August 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for the reporting and
displaying of comprehensive income. The following table presents the Company's
comprehensive income for the three and six month periods ended January 31, 1999
and 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
----------- -----------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 569 $ 536 $ 748 $ 869
Other comprehensive income (loss) , net of tax:
Foreign exchange translation adjustments 15 (40) 2 (49)
----------- ----------- ----------- -----------
Comprehensive income $ 584 $ 496 $ 750 $ 820
=========== =========== =========== ===========
</TABLE>
Note 5 - Noncash Financing Activities:
During the quarter ended October 31, 1998, a capital lease obligation of
$891,000 was incurred when the Company entered into a lease for new equipment.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Three Months Ended January 31, 1999 Compared to the Three Months Ended January
31, 1998
Results of Operations. For the quarter ended January 31, 1999, net income
was $569,000 equivalent to basic earnings per share of $.03 as compared to
$536,000 or $.03 per share, in the same quarter last year. Diluted earnings per
share were also $.03 as compared to $.03 last year.
Net Sales. Net sales for the quarter were $30.7 million, representing an
increase of $1.4 million or 4.8% versus the same period of 1998. The increase is
primarily due to an increase in private brand (label) sales. This was offset, in
part, by a decline in sales of the Company's branded product lines and sales to
outside customers by the Company's soft gel encapsulation facility, as
production was shifted to meet internal requirements for soft gels.
Costs and Expenses. Cost of sales for the three months ended January 31,
1999 was $22.2 million, an increase of $1.0 million or 4.5% from the $21.2
million for the three months ended January 31, 1998. Cost of sales decreased .2%
as a percentage of sales over the prior year's period. This was primarily due to
favorable manufacturing costs at the company's soft gel encapsulation and
Freehold manufacturing facilities, favorable product mix towards herbal
nutritional products which entail higher margins and favorable efficiencies at
our west coast operations. These were offset by a charge for anticipated
expenses for the shutdown of the Portland manufacturing facility and unfavorable
sales mix towards private label products..
The Company began a major effort to reduce overall expenses. In October,
the manufacturing workforce in Freehold and at the soft gel encapsulation
facility was reduced significantly and operations realigned to meet projected
sales growth. The Company expects this to have a favorable impact on gross
margins during the balance of the year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended January 31, 1999 were $6.9
million, an increase of $.3 million or 4.6% as compared to the prior year's
quarter. As a percentage of sales, these expenses remained constant with the
prior year. The increase is primarily attributable to: (i) higher promotion
costs, due to the higher sales levels, (ii) increased administrative staff and
fringe costs, and (iii) increased reserves for doubtful accounts. These were
partially offset by a decrease in selling and marketing salaries and staff
levels, lower commissions and lower professional and consulting costs.
Other Expenses, Net. Other expenses, net, for the three months ended
January 31, 1999 were $599,000. This principally represents net interest expense
of $632,000, which
8
<PAGE>
was offset by the amortization of deferred gain on sale of building of $24,000
and other miscellaneous income. Other expenses, net, for the three months ended
January 31, 1998 were $613,000. This included net interest expense of $609,000,
and other miscellaneous expense.
Income Taxes. Income taxes generally reflect the effect of statutory
federal and state income tax rates and certain non-deductible expenses.
Six Months Ended January 31, 1999 Compared to the Six Months Ended January 31,
1998
Results of Operations. For the six months ended January 31, 1999, net
income was $748,000, equivalent to basic earnings per share of $.04, as compared
to $869,000 or $.05 per share, in the same period last year. Diluted earnings
per share were also $.04 as compared to $.05 last year.
Net Sales. Net sales for the six months were $59.9 million, representing
an increase of $2.9 million or 5.2% versus the same period of 1998. The increase
is primarily due to an increase in private brand (label) sales. This was offset,
in part, by a decline in sales of the Company's branded product lines and sales
to outside customers by the Company's soft gel encapsulation facility, as
production was shifted to meet internal requirements for soft gels.
Costs and Expenses. Cost of sales for the six months ended January 31,
1999 was $44.4 million, an increase of $2.3 million or 5.4% from the $42.1
million for the six months ended January 31, 1998. Cost of sales increased .2%
as a percentage of sales over the prior year's period. This was primarily due to
an unfavorable sales mix towards private label products, which entail lower
margins, and for anticipated expenses for the shutdown of the Portland
manufacturing facility. These were offset by favorable manufacturing costs at
the Company's soft gel encapsulation and Freehold manufacturing facilities and
favorable efficiencies at the Company's west coast operations.
The Company began a major effort to reduce overall expenses. In October,
the manufacturing workforce in Freehold and at the soft gel encapsulation
facility was reduced significantly and operations realigned to meet projected
sales growth. The Company expects this to have a favorable impact on gross
margins during the balance of the year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended January 31, 1999 were $13.0
million, an increase of $.6 million or 4.7% as compared to the same period
during the prior year. As a percentage of sales however, these were .1% lower
than the prior year. The increase is primarily attributable to: (i) higher
promotion costs, due to the higher sales levels, (ii) increased sales and
distribution staff costs, and (iii) increased reserves for doubtful accounts.
These were partially offset by a decrease in executive and administrative
salaries and staff levels, lower consulting and professional fees, and lower
office expenses.
9
<PAGE>
Other Expenses, Net. Other expenses, net, for the six months ended January
31, 1999 were $1,249,000. This principally represents net interest expense of
$1,310,000, which was offset by other miscellaneous income, primarily the
deferred gain on sale of building of $48,000. Other expenses, net, for the six
months ended January 31, 1998 were $1,160,000. This included net interest
expense of $1,187,000, offset by other miscellaneous income.
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
In August 1998, the Company entered into an equipment lease agreement in
the amount of $2 million to finance the purchase of manufacturing equipment to
upgrade its operation capabilities. To date, the Company utilized $890,000 under
this agreement. The lease is for a seven-year term at an interest rate of 7.2%,
with interest and principal paid monthly. The equipment purchased with the
proceeds of the lease financing secures the lease.
During the second quarter, the Company received additional short-term
funding from its bank for working capital needs. This was repaid in full by the
end of February 1999.
Operating activities utilized $1.8 million in cash for the six-month
period ended January 31, 1999, versus $2.0 million provided for the comparable
period in 1998. $2.3 million was generated from net income plus non-cash
depreciation and amortization. In addition, cash was generated by decreases in
inventory of $9.5 million and prepaid expenses of $1.1 million and were utilized
by a decrease in accounts payable and accrued expenses of $9.1 million and
increases in accounts receivable of $2.9 million and other assets of $2.6
million.
The Company presently has a revolving line of credit and term loans with
its bank in the amount of $21.5 million and $4.5 million, respectively. These
agreements expire 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 lease financing
agreements with two banks in the amount of $3 million for the acquisition of
computer and manufacturing equipment. At January 31, 1999, approximately $1.3
million was available for additions.
The agreement with the bank requires the Company to maintain certain
financial ratios and minimum working capital. At January 31, 1999, the Company
was in violation of certain of these covenants, which have been waived by the
bank. The entire balance due to the bank is classified as a current liability.
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.
10
<PAGE>
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.
11
<PAGE>
Part II. Other Information
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits:
(II) Computation of earnings per share
(b) Reports on Form 8-K:
o November 24, 1998 ---- Change of Annual Meeting date to
January 7, 1999
o November 30, 1998 ------ Resignation of Board Member
12
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT II
COMPUTATION OF EARNINGS PER SHARE
(Dollars in Thousands, Except Per Share Information)
(unaudited)
------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic:
Net income $ 569 $ 536 $ 748 $ 869
Weighted average shares outstanding 17,211,540 17,127,392 17,211,540 17,122,522
=========== =========== =========== ===========
Basic earnings per share $ .03 $ .03 $ .04 $ .05
=========== =========== =========== ===========
Diluted:
Net income $ 569 $ 536 $ 748 $ 869
Weighted average shares outstanding 17,211,540 17,127,392 17,211,540 17,124,957
Incremental shares under Stock Option Plan 99 69,525 458 57,215
----------- ----------- ----------- -----------
Adjusted weighted average shares outstanding 17,211,639 17,196,917 17,211,998 17,182,172
=========== =========== =========== ===========
Diluted earnings per share $ .03 $ .03 $ .04 $ .05
=========== =========== =========== ===========
</TABLE>
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: March 9, 1999 By: /s/ E. Joseph Edell
------------------ ------------------------------------
Chairman and
Chief Executive Officer
Dated: March 9, 1999 By: /s/ Domenic N. Golato
------------------ ------------------------------------
Chief Accounting Officer and
Acting Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10Q and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 1,140
<SECURITIES> 0
<RECEIVABLES> 14,660
<ALLOWANCES> 0
<INVENTORY> 27,847
<CURRENT-ASSETS> 47,906
<PP&E> 20,182
<DEPRECIATION> 0
<TOTAL-ASSETS> 75,025
<CURRENT-LIABILITIES> 44,402
<BONDS> 0
0
0
<COMMON> 172
<OTHER-SE> 18,368
<TOTAL-LIABILITY-AND-EQUITY> 75,025
<SALES> 30,661
<TOTAL-REVENUES> 0
<CGS> 22,169
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,945
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 632
<INCOME-PRETAX> 948
<INCOME-TAX> 379
<INCOME-CONTINUING> 569
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 569
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10Q and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 1,140
<SECURITIES> 0
<RECEIVABLES> 14,660
<ALLOWANCES> 0
<INVENTORY> 27,847
<CURRENT-ASSETS> 47,906
<PP&E> 20,182
<DEPRECIATION> 0
<TOTAL-ASSETS> 75,025
<CURRENT-LIABILITIES> 44,402
<BONDS> 0
0
0
<COMMON> 172
<OTHER-SE> 18,368
<TOTAL-LIABILITY-AND-EQUITY> 75,025
<SALES> 59,901
<TOTAL-REVENUES> 0
<CGS> 44,402
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,310
<INCOME-PRETAX> 1,250
<INCOME-TAX> 502
<INCOME-CONTINUING> 748
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 748
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
