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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, 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.
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(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 2,088,092 shares of common stock outstanding as of December 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
October 31, 1999 and July 31, 1999..............................3
Consolidated Statements of Income
For the Three Months Ended October 31, 1999 and 1998............4
Consolidated Statements of Cash Flows
For the Three Months Ended October 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...................9
Item 3. Quantitative and Qualitative Disclosure about
Market Risk....................................................13
Part II. Other Information, Reports on Form 8-K and Exhibits............14
Signature Page.............................................................15
<PAGE>
Item 1. Financial Statements.
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Information)
--------------------
October 31, July 31,
1999 1999
-------- --------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,130 $ 287
Accounts receivable 7,059 7,296
Inventories 32,723 27,374
Due from related parties 26 26
Deferred taxes 3,944 4,673
Prepaid expenses 660 671
Refundable income taxes -- 2,117
Other current assets 406 483
-------- --------
Total Current Assets 45,948 42,927
Property, Plant and Equipment - Net 19,732 19,839
Due from related parties 1,308 1,313
Other Assets 1,290 1,162
-------- --------
Total Assets $ 68,278 $ 65,241
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 2,285 $ 2,697
Current portion of capital lease payable 192 180
Current portion of deferred gain on building 106 104
Accounts payable 12,866 14,785
Income taxes payable 422 --
Advance on settlement 2,700 --
Accrued expenses 4,968 4,896
-------- --------
Total Current Liabilities 23,539 22,662
Long-term debt - Less current portion 25,073 27,898
Capital lease obligation 3,081 3,136
Deferred gain on building sale 977 1,005
-------- --------
Total Liabilities 52,670 54,701
-------- --------
Shareholders' Equity:
Preferred stock, no par value, 2,000,000 shares
authorized -- --
Common stock, $.08 par value, 25,000,000 shares
authorized; 2,088,092 shares issued 167 167
Additional paid-in capital 11,548 11,499
Foreign currency translation adjustment (159) (202)
Retained earnings 4,052 (924)
-------- --------
Total Shareholders' Equity 15,608 10,540
-------- --------
Total Liabilities and Shareholders' Equity $ 68,278 $ 65,241
======== ========
3
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Information)
(unaudited)
--------------------
Three Months Ended
October 31,
-----------------------------
1999 1998
----------- -----------
Net sales $ 21,412 $ 29,239
Cost of sales 16,354 22,233
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Gross profit 5,058 7,006
Selling, general and administrative expenses 6,394 6,092
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Income (loss) from operations (1,336) 914
Recovery, price fixing settlement 10,000 --
Other expenses - net (345) (612)
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Income before income taxes 8,319 302
Income tax provision 3,343 123
----------- -----------
Net income $ 4,976 $ 179
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Basic earnings per share $ 2.38 $ .08
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Diluted earnings per share $ 2.38 $ .08
=========== ===========
Weighted average shares outstanding:
Basic 2,088,092 2,151,443
=========== ===========
Diluted 2,089,851 2,151,545
=========== ===========
4
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(unaudited)
--------------------
Three Months Ended
October 31,
-------------------
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,976 $ 179
------- -------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 583 667
Deferred income taxes 848 --
Stock issued to non-employee directors 49 15
Changes in assets - (increase) decrease:
Accounts receivable 236 (2,862)
Inventories (5,349) 4,817
Prepaid expenses and other current assets 2,206 (142)
Other assets (242) (2,673)
Changes in liabilities - increase (decrease):
Accounts payable and accrued expenses (1,451) (713)
Other 2,700 (403)
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Total adjustments (420) (1,294)
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Net Cash Provided By (Used In) Operating Activities 4,556 (1,115)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (476) (357)
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Net Cash Used In Investment Activities (476) (357)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long term debt (8,364) (60)
Proceeds from long term debt 5,154 772
Principal payments of capital lease obligations (70) (33)
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Net Cash Provided (used) By Financing Activities (3,280) 679
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Foreign currency translation adjustment 43 (13)
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NET INCREASE (DECREASE) IN CASH 843 (806)
CASH AND CASH EQUIVALENTS - BEGINNING 287 1,604
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CASH AND CASH EQUIVALENTS - ENDING $ 1,130 $ 798
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 354 $ 529
======= =======
Taxes $ -- $ 181
======= =======
5
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Dollars in Thousands Except as noted or Per Share Information
--------------------
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, 1999, 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,
1999 1999
----------- --------
(unaudited)
Finished Goods $11,758 $ 9,427
Bulk and Work in Process 10,592 9,789
Raw Materials and Packaging Components 10,373 8,158
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Total Inventories $32,723 $27,374
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6
<PAGE>
Note 3 - Long-Term Debt:
Effective September 24, 1999, the Company entered into an amended and
restated credit agreement with its current bank, Chase Manhattan Bank, and
Citizens Business Credit Company, a subsidiary of the Royal Bank of Scotland to
replace the previously existing credit agreement. The agreement matures on July
31, 2002. The Company can borrow up to $22 million under a revolving credit
commitment (as of October 31, 1999 the amount borrowed was $14.7 million)
subject to borrowing base limitations, as defined and $5.2 million under a term
loan commitment, (as of October 31, 1999 the entire amount was outstanding).
Borrowings under the revolving credit commitment bear interest at the bank's
Alternative Base Rate (which is the greater of the Prime Rate, the Federal Funds
Rate plus .05% and the Base CD Rate plus 1%) plus a spread ranging from 0% to
.50%, based on the Company's consolidated leverage ratio (the ratio of
consolidated funded debt to consolidated EBITDA or "CLR"), or, alternatively, at
LIBOR plus a spread ranging from 2.0% to 2.75% based on the Company's CLR.
Borrowings under the term loan commitment bear interest at the bank's
Alternative Base Rate plus a spread ranging from .25% to .75% based on the
Company's CLR, or, alternatively, at LIBOR plus a spread ranging from 2.25% to
3.0%, based on the Company's CLR. The term loan requires quarterly payments of
$258 at the end of each quarter with the balance due on the maturity date. The
agreement includes a facility fee ranging from .25% to .50%, based on the
Company's CLR, of the average daily unused portion of the overall borrowing
commitment. The notes are collateralized by substantially all of the Company's
assets. The agreement requires the company to maintain certain financial ratios,
minimum net worth and contains various restrictions customary in such a
financial arrangement, including limitations on capital expenditures and payment
of cash dividends.
Note 4 - 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.
7
<PAGE>
Note 5 - 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 months ended October 31, 1999 and 1998.
Three Months Ended
October 31,
1999 1998
------ ------
Net income $4,976 $ 179
Other comprehensive income (loss), net of tax:
Foreign exchange translation adjustments 43 (13)
------ ------
Comprehensive income $5,019 $ 166
====== ======
Note 6 - Recovery, price fixing settlement:
On September 24, 1999, the Company received $12,700 as part of a
price-fixing settlement with a supplier. Of this amount, $10,000 has been
included in the Company's statement of income during the quarter ended October
31, 1999 as an uncontested portion of the settlement. The remaining $2,700
received has not been included in operations and is contingent upon the final
outcome of the pending class action suit against this supplier, which the
Company has opted out of.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Three Months Ended October 31, 1999 Compared to the Three Months Ended October
31, 1998.
Results of operations. (Dollars in Thousands except As Noted or Per Share
Information)
For the quarter ended October 31, 1999, net income was $4,976, equivalent to
basic earnings of $2.38 per share, versus $179 or $.08 per share, in last year's
first quarter. Diluted earnings were $2.38 per share compared to $.08 per share
last year. These results include an after-tax gain of $6,000 or $2.87 per share
from a previously announced price-fixing settlement with a supplier. Excluding
this one-time gain, the Company would have incurred a net loss of $1,024, or
($.49) per diluted share.
Net sales for the quarter ended October 31, 1999 were $21,412 as compared to
$29,239 in the prior year, a decrease of $7,827 or 26.8%. This reduction was
primarily related to lower private brand (label) sales to existing accounts. In
addition, the Company cancelled sales contracts to a number of customers, which
did not meet the Company's gross margin targets, resulting in lower branded and
private brand sales. The market for nutritional products has experienced
increased price and product competition, which also negatively impacted sales.
The Company has recently introduced a number of new products and secured
distribution in a number of new accounts.
Cost of sales for the three months ended October 31, 1999 was $16,354, a
decrease of $5,879 or 26.4% from the $22,233 for three months ended October 31,
1998. Cost of sales increased .4% as a percentage of sales over the prior year's
period. Costs increased as a result of hiring additional labor force at the
Company's facility in Freehold, New Jersey in advance of the shutdown of the
Portland, Oregon facilities, as part of the consolidation of the Company's
manufacturing facilities and also because of the under-absorption of costs due
to lower sales. This increase was offset by a reduction in amortization of long
term contracts. The recently implemented Enterprise Resource Planning system,
which was a key element in the restructuring process, has enabled the Company to
better manage and control its inventories and production planning activities.
Selling, general and administrative expenses for the three months ended October
31, 1999 were $6,394, an increase $302 or 5.0% as compared to the prior year's
quarter. This increase is primarily attributable to: (i) the Company's
renegotiation of certain long-term contracts resulting in a shifting to higher
promotional costs, simultaneously with a decrease in amortization of contract
costs and (ii) increased sales and marketing staff. These were partially offset
by lower distribution costs due to reduced sales levels, lower bad debt expense
and the absence of selling, general and administrative costs in the current year
for Vitamin Specialties Corp. which was sold at the end of the last fiscal year.
9
<PAGE>
Other expenses, net for the three months ended October 31, 1999 were $345. This
principally represents interest expense of $427, which was offset by other
miscellaneous income of $72. Other expenses, net for the three months ended
October 31, 1998, were $612. This included interest of $686, offset by other
miscellaneous income. Interest expense was lower during the current year
primarily because of reduced borrowings needed as a result of the cash received
from the price fixing settlement.
Liquidity and Capital Resources
On September 17, 1999, the Company entered into a Settlement Agreement
with a key supplier in connection with the supplier's alleged participation in
an unlawful conspiracy related to pricing of vitamins in the United States and
elsewhere in violation of Section 1 of the Sherman Antitrust Act and other
wrongful anti-competitive conduct in violation of various federal and state
laws.
Pursuant to the terms of the Settlement Agreement, the Company agreed to
release all claims it may have against the supplier based on the Company's
purchases of various vitamins from the supplier since 1990 and to opt out of any
settlement in connection with a pending class action suit.
In exchange for the Company's release and agreement to opt out of any
settlement in the pending class action suit, the Company received a settlement
compensation package comprised of the following: (i) a $10 million cash payment;
(ii) a price discount of 5% on future purchases up to $1 million per year over
three years; and (iii) an advance, refundable in cash or stock, of $2.7 million
on any payments that may be due to the Company under a Most Favored Nations
Clause contained in the Settlement Agreement. Under this clause, in the event
that the pending class action suit is settled and the settlement amount that
would have been received thereunder exceeds $12.7 million, the supplier agrees
to make additional payments to the Company based on, and subject to certain
adjustments to, the amounts recovered by the plaintiffs in the pending class
action suit. The Company received a cash payment of $12.7 million on September
24, 1999.
Effective September 24, 1999, the Company entered into an amended and
restated credit agreement with its current bank, Chase Manhattan Bank, and
Citizens Business Credit Company, a subsidiary of the Royal Bank of Scotland to
replace the previously existing credit agreement. The agreement matures on July
31, 2002. The Company can borrow up to $22 million under a revolving credit
commitment (as of October 31, 1999 the amount borrowed was $14.7 million)
subject to borrowing base limitations, as defined and $5.2 million under a term
loan commitment, (as of October 31, 1999 the entire amount was outstanding).
Borrowings under the revolving credit commitment bear interest at the bank's
Alternative Base Rate (which is the greater of the Prime Rate, the Federal Funds
Rate plus .05% and the Base CD Rate plus 1%) plus a spread ranging from 0% to
.50%, based on the Company's consolidated leverage ratio (the ratio of
consolidated funded debt to consolidated EBITDA or "CLR"), or, alternatively, at
LIBOR plus a spread ranging from 2.0% to 2.75% based on the Company's CLR.
10
<PAGE>
Borrowings under the term loan commitment bear interest at the bank's
Alternative Base Rate plus a spread ranging from .25% to .75% based on the
Company's CLR, or, alternatively, at LIBOR plus a spread ranging from 2.25% to
3.0%, based on the Company's CLR. The term loan requires quarterly payments of
$258 at the end of each quarter with the balance due on the maturity date. The
agreement includes a facility fee ranging from .25% to .50%, based on the
Company's CLR, of the average daily unused portion of the overall borrowing
commitment. The notes are collateralized by substantially all of the Company's
assets. The agreement requires the company to maintain certain financial ratios,
minimum net worth and contains various restrictions customary in such a
financial arrangement, including limitations on capital expenditures and payment
of cash dividends.
Operating activities provided $4.6 million in cash for the three months
ended October 31, 1999, versus $1.1 million used in operating activities for the
comparable period in 1998. Cash of $5.6 million was generated from net income,
which included proceeds from the settlement agreement, and depreciation. In
addition, $2.2 million of cash was generated by a decrease in prepaid expenses
and other current assets, primarily income taxes, a decrease in deferred taxes
of $.8 million and an increase of $2.7 million in other liabilities which is the
advance on the settlement. Cash was utilized to increase inventories by $5.3
million in advance of the Portland shutdown and to reduce accounts payable and
accrued expenses by $1.5 million.
Offsetting the cash provided from operating activities, cash was also
utilized for additions to property, plant and equipment and to reduce
outstanding debt.
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.
Year 2000 ("Y2K")
Over the past two years the Company has replaced all information
technologies hardware and software, upgraded laboratory equipment, and replaced
facilities equipment. The Company has completed comprehensive, company wide Y2K
testing during which the systems performed successfully. The Company also
requested compliance information from its significant vendors, suppliers, and
service providers. Nevertheless, satisfactorily addressing the Y2K issue is
dependent on many factors, some of which are not within the Company's control.
Should the Company's internal systems or the internal systems of one or more
significant vendors or suppliers fail to achieve Y2K compliance, the Company's
business and its results of operations could be adversely affected.
11
<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.
12
<PAGE>
Item 3 Quantitative and Qualitative Disclosure about Market Risk
The Company has no market risk sensitive instruments that subject the
Company to material market risk exposures.
13
<PAGE>
Part II. Other Information
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits:
(11) Computation of earnings per share
(27) Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed on September 24, 1999 with respect to
a Settlement Agreement with a key supplier.
A report on Form 8-K was filed on October 1, 1999 with respect to an
Amended and Restated Credit Agreement.
14
<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 15, 1999 By: /s/ E. Joseph Edell
----------------------------- ------------------------------------
Chairman and
Chief Executive Officer
Dated: December 15, 1999 By: /s/ Domenic N. Golato
----------------------------- ------------------------------------
Vice President and
Chief Financial Officer
15
IVC INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(Dollars in Thousands, Except Per Share Information)
(unaudited)
Three Months ended
October 31,
1999 1998
---------- ----------
Basic:
Net income $ 4,976 $ 179
Weighted average shares outstanding 2,088,092 2,151,443
Basic earnings per share $ 2.38 $ .08
---------- ----------
Diluted:
Net income $ 4,976 $ 179
Weighted average shares outstanding 2,088,092 2,151,443
Incremental shares under Stock Option Plan 1,759 102
---------- ----------
Adjusted weighted average shares outstanding 2,089,851 2,151,545
---------- ----------
Diluted earnings per share $ 2.38 $ .08
---------- ----------
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from 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-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 1,130
<SECURITIES> 0
<RECEIVABLES> 7,059
<ALLOWANCES> 0
<INVENTORY> 32,723
<CURRENT-ASSETS> 45,948
<PP&E> 19,732
<DEPRECIATION> 0
<TOTAL-ASSETS> 68,278
<CURRENT-LIABILITIES> 23,538
<BONDS> 25,073
0
0
<COMMON> 167
<OTHER-SE> 15,442
<TOTAL-LIABILITY-AND-EQUITY> 68,278
<SALES> 21,412
<TOTAL-REVENUES> 0
<CGS> 16,354
<TOTAL-COSTS> 6,394
<OTHER-EXPENSES> (10,082)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 427
<INCOME-PRETAX> 8,319
<INCOME-TAX> 3,343
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,976
<EPS-BASIC> 2.38
<EPS-DILUTED> 2.38
</TABLE>
