U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
|X| Annual Report under Section 13 or 15 (d) of the Securities Exchange Act of
1934
For the fiscal year ended: July 31, 1999
|_| Transition report under Section 13 or 15 (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
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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))
Registrant's telephone number: (732) 308-3000
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Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
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 1, 1999, the aggregate market value of the Common Stock of the
registrant held by non-affiliates of the registrant was $2,984,300.
The number of shares of Common Stock ($.08 par value) outstanding as of October
1, 1999 was 2,088,092.
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IVC INDUSTRIES, INC.
TABLE OF CONTENTS
Annual Report on Form 10-K
For the Fiscal Year ended July 31, 1999
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 .................... 22
Item 9 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure ....................................... 22
PART III
Item 10 Directors and Executive Officers of the Registrant ............. 23
Item 11 Executive Compensation ......................................... 26
Item 12 Security Ownership of Certain Beneficial Owners and Management . 33
Item 13 Certain Relationships and Related Transactions ................. 35
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 36
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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),
LiquaFil(TM), 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. The Company's Synergy Plus(R) brand
is sold primarily in health food stores and its Nature's Wonder brand is also
sold through independent drug stores. The Company's products are also marketed
internationally under its own brands and private brands, and sold in bulk form.
IVC markets over 600 different products, which are packaged under various
labels and bottle counts. They are sold in single vitamin, herb and other
nutritional supplements as well as in multivitamin combinations, with varying
potency levels in tablets (including chewable and time released tablets),
powders, two-piece hard shell capsules and soft gelatin encapsulated capsules
("soft gels"). The Company manufactures virtually all of its products.
On July 8, 1999, the shareholders of IVC approved an eight-for-one reverse
split of the common stock of IVC. The reverse split became effective July 8,
1999. All share information included in this report has been restated to reflect
the reverse stock split.
On July 13, 1999, IVC completed the sale of its Vitamin Specialties Corp.
("VSC") subsidiary to Archon Vitamin Corporation. VSC operated 16 retail stores
located in New Jersey and Pennsylvania and a mail order operation. The assets of
VSC consisted primarily of leases for its stores, its mail order operations and
its inventory located in the retail stores and IVC's warehouse in Freehold, New
Jersey.
Risk Factor
Competition
The market for vitamins and other nutritional supplements is highly
competitive. See "Competition." The Company's higher-margin branded products
compete with the brands of vitamin distributors and manufacturers that are
substantially larger than the Company and have greater financial resources to
devote to advertising, marketing and promotion of their products (including,
without limitation, the distribution of free trial products). Many of these
manufacturers are also the Company's competitors for the lower-margin private
label business. If one or more of these manufacturers significantly reduce their
prices on existing products in an effort to gain market share or aggressively
promote new products in an effort to enter a market, the Company's results of
operations or market position could be adversely affected.
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Industry Consolidation
The Company's core business products are distributed through leading chain
drug, supermarket and mass merchandising retailers. If the current consolidation
trend among vitamin retailers continues, the number of customers of the Company
could decline, resulting in increased customer concentration which could have an
adverse effect on the Company. There can be no assurance as to what other
effects, if any, the continued consolidation among the Company's retail
customers will have on the Company.
New Product Development
The Company's failure to develop and introduce new products could have an
adverse effect on the Company. See "Research and Development."
Effect of Adverse Publicity
The Company's products consist of vitamins, minerals, herbs and other
ingredients that the Company regards as safe when taken as suggested by the
Company and that various scientific studies have suggested may involve health
benefits. While the Company conducts extensive quality control testing on its
products, the Company generally does not conduct or sponsor clinical studies
relating to the benefits of its products. The Company is highly dependent upon
consumers' perception of the overall integrity of its business, as well as the
safety and quality of its products and similar products distributed by other
companies which may not adhere to the same quality standards as the Company. The
Company could be adversely affected if any of the Company's products or any
similar products distributed by other companies should prove or be asserted to
be harmful to consumers or should scientific studies provide unfavorable
findings regarding the effectiveness of the Company's products. IVC's ability to
attract and retain distributors could be adversely affected by negative
publicity relating to it or to other direct sales organizations or by the
announcement by any governmental agency of investigatory proceedings regarding
the business practices of IVC or other direct sales organizations.
Product Liability Claims
The Company, like other manufacturers and distributors of products that
are ingested, faces an inherent risk of exposure to product liability claims.
See "Product Liability."
Government Regulation
The processing, formulation, packaging, labeling and advertising of the
Company's products are subject to regulation by one or more federal agencies and
various agencies of the states, localities, and countries in which IVC's
products are sold. See "Government Regulation."
The regulations imposed by such entities could, among other things,
require the recall, reformulation or discontinuance of certain products,
additional recordkeeping, warnings, notification procedures and expanded
documentation of the properties of certain products and scientific
substantiation regarding ingredients, product claims, safety or efficacy.
Failure to comply with applicable regulatory requirements can result in
sanctions being imposed on the Company, including, warning letters, fines,
product recalls and seizures.
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Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into a market or prevent or
delay the introduction, or require the reformulation, of certain of the
Company's products.
Products and Product Development
The Company offers a comprehensive assortment of vitamin, mineral and
nutritional supplement products, which include vitamins C and E, beta carotene,
magnesium, folic acid, calcium and potassium, as well as various herbs such as
Echinacea, St. John's Wort, Saw Palmetto and Ginseng and various multivitamin
combinations. IVC has the capacity to produce millions of tablets per day using
technologically advanced high-speed manufacturing equipment. IVC's fully
automated packaging lines are capable of packaging in excess of 200,000 bottles
per shift, per day. Intergel, the Company's soft gel encapsulation division, has
the capacity to produce in excess of 2 billion soft gel capsules annually.
IVC's products are marketed under its customers' store brands (private
label) as well as under the Company's 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 hypoallergenic. 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.
Manufacturing and Packaging
IVC owns and leases facilities located in Freehold, New Jersey, and leases
facilities in Portland, Oregon. These facilities are equipped with large-volume
blending, and coating equipment, high-speed packaging equipment, including
"cartoning," "stretch carding" and "blister carding" equipment, and testing and
quality control laboratories. In addition, these facilities have been certified
by an independent auditing firm to be in compliance with Good Manufacturing
Practices (GMP's) as they appear in the United States Pharmacopoeia (USP).
During the fiscal year ended July 31, 1999, the Company announced that it will
shut down the Portland Oregon facilities and integrate the operations into the
Freehold facility. The Company anticipates the integration to be completed by
the end of calendar 1999. 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 soft
gel operations are located in a leased facility in Irvington, New Jersey. IVC
presently manufactures substantially all of its products, and the Company
believes that the capacity of its facilities is sufficient to meet its current
business needs.
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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.
Intergel, the Company's soft gel encapsulation division, produces soft
gels in various shapes and sizes. Among the new vitamin and nutritional
supplements produced by Intergel in soft gel form are Saw Palmetto, Lycopene,
Green Tea, St. John's Wort, Kava Kava and Ginseng. The Intergel facility, which
can produce in excess of 2 billion capsules annually, can accommodate additional
production lines which could 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. With this plant at full scale levels of production, IVC is 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 other applications.
Intergel has been granted a license from the Food and Drug Administration
("FDA") for the production of over-the-counter (non-drug) pharmaceutical
products ("OTCs"). Intergel entered into a multi-product development agreement
with Block Drug Company, Inc., a major multinational pharmaceutical company, to
jointly develop soft gel encapsulated OTC products, which are currently being
manufactured by Intergel for that company. Intergel is also working on various
other OTC products for other companies and expects to introduce these during
2000. Recently, Intergel has expanded its sales efforts for soft gels, including
participating in trade advertising and trade shows and has made soft gels a
major focus in all international business development areas.
Soft gel nutritional and herbal products manufactured by Intergel are
marketed as "Liquafil" soft gel under the Company's Fields of Nature, Synergy
Plus and private label brands. As new soft gel products have been added to the
line, the Company has introduced these products as line extensions to its
existing customers and to new customers who will be carrying this unique line of
soft gel nutritional and herbal products. The Company has secured additional
distribution through customers including Costco Wholesale, Eckerd Drug, American
Stores and Kerr Drug with soft gels such as Green Tea, St. John's Wort and
Ginseng.
Marketing and Distribution Strategies
Mass Market 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. The Company believes that
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partnerships with mass retailers, coupled with new product introductions, gives
IVC the ability to react to changing market conditions more rapidly.
In addition, IVC is working with its customers to develop their store
branded product category management programs. All supply agreements are being
reviewed with customers to ensure the development of a comprehensive sales and
marketing program. 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. Fields of Nature products are
currently positioned below "premium brands" and above store branded products.
The Company uses the Efficient Consumer Response (ECR) recommended
processes for evaluating consumer needs and applying them to the various retail
trade avenues of distribution. 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 new product introductions, promotional
planning support, market research and packaging design.
Health Food Stores
Although many vitamins, minerals, and herbals are now marketed at mass
market channels, health and natural food stores remain the strongest single
outlet for specialty supplements and new products. The Company estimates that
since 1996, health and natural food stores have accounted for more than
one-third of total vitamin, mineral and herb product sales. With a low cost of
market entry, many marketers choose to launch products in the health food
segment rather than through the mass market.
Synergy Plus, IVC's health food store brand, is preparing, via a label
change and new marketing strategies, to capitalize on distribution opportunities
created by dynamic changes within the health food market. The industry has seen
several leading brands make the transition into mass channels thus creating
available shelf space in the natural products market place. Additionally, with a
leading pharmaceutical company purchasing Solgar Vitamin and Herb Company, one
of the most respected health food store brands of vitamins, the Company believes
that this business may also enter the mass market. As a result, the Company
believes that health food retailers may begin to de-emphasize these brands,
thereby creating new market opportunities.
The Company believes that changes in the industry along with increased
media focus and attention on supplements will fuel continued growth within the
nutrition market over the next several years. Much of this growth stems from the
continuous stream of new products entering into the marketplace. According to
industry surveys, over 800 new stock keeping units enter the marketplace every
year.
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Export Sales
The Company has refocused its international sales efforts on several key
locations, products and marketing strategies. Distribution agreements have been
completed for sales in the Middle East, Canada, Mexico, South America, China and
Europe.
Other Channels of Distribution
The Companysupplies 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. This business represents additional
opportunities for IVC to increase its plant utilization rates and profitability
without any significant additional capital outlays.
Industry Overview
Based upon current industry estimates, the Company believes that the U.S.
retail market for vitamins and supplements to be in excess of $11 billion
annually with compounded sales growth since 1993 in double digits. Packaged
Facts, an industry market research company, estimates that the market will
experience double-digit growth through the year 2003. According to a recent
survey, more than half of all adults in the United States take some form of
vitamin and/or nutritional supplement.
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. According to the U.S. Census, the segment of the
U.S. population aged 45 and above will continue to grow, increasing 42% by the
year 2030. The Company believes that as consumers grow older, chronic health
problems will become more of a concern. Most significant among these are cancer,
lack of energy, cardiovascular problems, joint pain and high cholesterol. The
Company believes that more senior-aged consumers will seek alternative
treatments for these health problems, as well as invest in preventative
measures.
Private Label Industry
A major part of IVC's sales consists of store brand (private label)
products. Sales growth of store brand products has outpaced the overall industry
growth as retailers continue to add and expand their store branded segment of
vitamins, supplements and herbs. Consumers continue to play a major role in the
growth of store branded products, as they become more aware that store brand
products offer lower-priced and equal if not better quality alternatives to
nationally advertised brand name products, which may be priced up to 60% higher.
IVC believes that, as herbal supplements become every day items, store brands
will continue to take share away from branded products. Retailers are also
taking a more aggressive approach to their store brands positioning them against
premium brands and adding "Compare to" statements on packaging and in
advertising.
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Source and Availability of Raw Materials
IVC has developed relationships with its raw material suppliers that have
led to increased efficiencies in operations. Raw material suppliers are
evaluated on price, quality, and on-time delivery. In addition, the Company has
hired new purchasing personnel with industry experience, and has implemented a
new Material Requirement Planning (MRP) system. These steps have allowed IVC to
obtain better raw materials at lower prices and to remain competitive in the
nutritional industry. Although one of the Company's suppliers individually
accounted for approximately 25% of the total purchases in 1999 and 26% in 1998,
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% of
IVC's raw material purchases.
Major Customers
IVC's active customer base approaches 2,000 accounts. The Company's ten
largest customers accounted for 78% of sales during fiscal 1999 with one
individual customer, Costco Wholesale accounting for 48% of sales. During fiscal
1998, the Company's ten largest customers accounted for approximately 73% of
sales, with one customer, Costco Wholesale accounting for 36% of sales. A high
priority has been placed on efforts to diversify distribution. Major accounts
currently not supplied have been identified and contacted. Marketing and sales
programs are being produced for presentation to potential new customers.
Quality Control
IVC's manufacturing operations include 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,
LiquaFil, Rybutol and Nature's Wonder brands compete with numerous brands of
larger vitamin distributors and manufacturers, such as NBTY, Inc., Rexhall
Sundown, Inc., Leiner Health Products Group, Inc. and Pharmavite Corp. These
manufacturers are also IVC's competitors for private label business. In
addition, IVC competes with the more heavily advertised national brands, which
have been marketed by major over-the-counter manufacturers. According to the
National Ad Council, spending for branded supplements and herbal products could
top $700 million in 1999, representing an increase of over 50%. The marketplace
for private label business is extremely price sensitive with service
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levels, quality, innovative packaging, marketing and promotional programs and
uniqueness of products being the key factors influencing competitiveness.
There are also numerous companies competing with the Company's Synergy
Plus brand 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 competes with brands manufactured by Twinlab Corporation, the Solgar
Vitamin and Health division of American Home Products Corporation and the Schiff
division of Weider Nutrition International, Inc. Although certain of these
competitors are substantially 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.
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
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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. Although the final version of the GMP rules has not yet been
issued, the Company has already commenced significant facility renovations that
should allow the Company to comply with the new regulations, once they are
enacted. 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 took effect in March 1999, also require additional record keeping
and claim substantiation, reformulation, or discontinuance of certain products,
which required the Company to incur a significant expense.
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, Pine Bros.(TM) and LiquaFil
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
Historically, IVC has not conducted primary research for the development
of new ingredients. Instead, IVC's research efforts were solely focused on
developing new products in response to market trends and consumer demands. While
this method of product development is still employed by IVC, shifting market
demands for leading edge new products has led IVC into an agreement with Dr.
Alexander Schauss, a leading dietary supplement researcher and new product
developer. The Company believes that its affiliation with Dr. Schauss will
enhance the Company's ability to develop and introduce new products. IVC's staff
also continually
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reformulates existing 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 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 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 571 employees, of which 35 are in sales and marketing, 345 are
in manufacturing and packaging, 58 are in quality control and regulatory
compliance departments, 55 are in warehousing and 78 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.
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
- -------- ---------------- ----------- -----
Freehold, NJ Manufacturing, Packaging, 160,000 Owned
Warehousing, Distribution and
Corporate Offices
Freehold, NJ Warehousing and Distribution 130,000(1) Leased
Portland, OR Manufacturing and Administration 39,000(2) Leased
Portland, OR Packaging and Warehousing 50,000(3) Leased
Irvington, NJ Manufacturing and Administration 35,000 Leased
Irvington, NJ Warehousing and Distribution 43,000(4) Leased
Surrey, British Warehousing, Distribution and
Columbia, Canada Administration 8,000 Leased
- -----------------
(1) The Company subleases approximately 30,000 square feet of this facility to
a third party.
(2) Production ceased at this facility in mid-September 1999
(3) This facility is scheduled to be closed by the end of December 1999.
(4) The Company subleases approximately 21,500 square feet of this facility to
a third party.
The Company believes that its properties will satisfy its foreseeable needs for
office, manufacturing and warehouse space.
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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
On July 8, 1999, shareholders of IVC at a special meeting of shareholders,
approved a eight-for-one reverse split of the common stock of IVC. Of the
17,211,540 shares eligible to vote at the meeting, 11,543,468 shares voted for
and 96,300 shares voted against the reverse stock split and 1,000 shares
abstained.
12
<PAGE>
PART II
Item 5 Market For Common Equity and Related Shareholder Matters
IVC Common Stock trades on The Nasdaq SmallCap Market System under the
symbol "IVCO". The table below presents the quarterly high and low sales prices,
adjusted for the eight-for-one reverse split, for the Company's Common Stock as
reported by The Nasdaq SmallCap Market System.
Common Stock
------------
High Low
---- ---
Fiscal Year 1998
First Quarter $19.76 $12.48
Second Quarter 19.52 12.00
Third Quarter 21.04 15.04
Fourth Quarter 18.48 12.00
Fiscal Year 1999
First Quarter 14.87 9.00
Second Quarter 11.00 4.00
Third Quarter 13.50 4.00
Fourth Quarter 8.50 2.75
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.
As of October 1, 1999, there were approximately 110 holders of record of
IVC's Common Stock. The Company believes that there were in excess of 1,100
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.
<TABLE>
<CAPTION>
Years Ended July 31,
--------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
OPERATING RESULTS
<S> <C> <C> <C> <C> <C>
Net sales $ 107,339 $ 119,775 $ 108,531 $ 104,159 $ 89,097
Income (loss) from operations (8,502) 3,484 4,423 1,540 260
Net income (loss) (7,041) $ 1,147 $ 1,346 $ 296 $ 593
Net income (loss) per share - Basic $ (3.28) $ .54 $ .63 $ .14 $ .28
Net income (loss) per share - Diluted $ (3.28) $ .53 $ .63 $ .14 $ .28
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
FINANCIAL POSITION
<S> <C> <C> <C> <C> <C>
Total assets 65,241 81,254 68,210 68,675 51,141
Long term obligations -
less current portion 31,034 10,588 31,430 28,656 20,193
Shareholders' equity 10,540 17,760 16,417 15,041 12,428
</TABLE>
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. (Dollars in Thousands Except as Noted or
Per Share Information)
Strategic Restructuring Strategy
During fiscal 1999, the Company undertook a number of steps which are part of a
long-term strategic restructuring strategy. These steps accelerated during the
fourth quarter of fiscal 1999 and continued into the first quarter of fiscal
2000. The strategy is intended to (i) control expenses and assets, (ii) invest
in processes and systems and (iii) focus on IVC's core business.
In July 1999 the Company sold its Vitamin Specialties retail operations and
recorded a loss from the sale in the fourth quarter of $2.3 million. Management
had determined that the retail business conducted by Vitamin Specialties was not
part of its core business.
In an effort to improve manufacturing efficiencies, the Company is integrating
its Portland, Oregon manufacturing operations into its New Jersey facility. The
cost of this integration, which should be completed in calendar 1999, including
obtaining appropriate quality certifications, resulted in a fiscal 1999 cost of
$1.3 million.
The Company implemented a new Enterprise Resource Planning ("ERP") system and
related internal training program. The software system includes accounting, cost
and inventory control, order processing, enterprise planning, production
planning and engineering management. Fiscal 1999 charges related to
implementation of this system, primarily inventory adjustments and reserves,
amounted to $3.3 million, and an additional $4.3 million was attributable to
marketing promotional adjustments. IVC is expensing the cost of using internal
personnel on this project, as well as training costs, which amounted to $815,000
for fiscal 1999. In addition, cost of sales due to under-utilization of capacity
amounted to $650,000 and certain new governmental label regulations (DSHEA)
necessitated a write off of label inventory of $576,000 in the fourth quarter.
Implementation of this system is expected to improve inventory utilization,
improve manufacturing capacity analysis and utilization, and allow nationwide
purchasing programs to be implemented.
A key element of the restructuring strategy was the restructuring of management.
This involved the resignation of one executive officer, the retirement of
another and the hiring or promotion of three new executive officers. Severance
expenses in connection with this restructuring resulted in a cost of $1.2
million during the third and fourth quarter.
Also during the fourth quarter of fiscal 1999, the Company renegotiated several
customer supply agreements in order to align promotional aspects with purchases
and related cash receipts. This resulted in a write off of capitalized
promotional costs of $2.2 million.
Subsequent to year-end, in September 1999, the Company restructured its
financing arrangements and remedied all prior covenant violations. The
restructured credit facility substantially increased the borrowing availability
of the Company. See Note 4 to the Financial Statements.
15
<PAGE>
Also in September 1999, the Company finalized a settlement with a key supplier
related to pricing discrepancies. The settlement, which provided the Company
with a cash flow infusion of $12.7 million, increased stockholders equity by
$6.2 million in the first quarter of fiscal 2000. See Note 16 to the Financial
Statements.
The sales and marketing team has been refocused and staffed for future growth.
In the core business, for both the Fields of Nature and private label customers,
a major focus will be on launching new and innovative products, which are
intended to allow the Company to stand out from its competition. A new promotion
and media program will promote these new products. Orders for some of these new
products have already been booked and will be shipped in the second quarter of
fiscal 2000. Several of these new products will be introduced in a soft gel
form, which has been favorably accepted in the marketplace. In addition, new
products will be added to the Synergy Plus product line, along with new
advertising and retail programs geared to the health foods market. The Synergy
Plus sales group has been reorganized under newly hired Vice President with an
extensive background and experience in the health foods market.
The Company is also evaluating other channels of distribution for its products
including e-commerce opportunities.
16
<PAGE>
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,
--------------------
1999 1998 1997
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 75.6 76.2 74.1
----- ----- -----
Gross profit 24.4 23.8 25.9
Selling, general and administrative
expenses 25.8 20.9 21.8
Special and unusual charges 3.1 -- --
Loss on sale of retail subsidiary 2.2 -- --
Shutdown of manufacturing facility 1.2 -- --
----- ----- -----
Income (loss) from operations (7.9) 2.9 4.1
Other expenses-net 2.3 1.3 1.5
----- ----- -----
Income (loss) before income taxes (10.2) 1.6 2.6
Income taxes provision (benefit) (3.6) .6 1.4
----- ----- -----
Net income (loss) (6.6%) 1.0% 1.2%
===== ===== =====
17
<PAGE>
Year Ended July 31, 1999 Compared to the Year Ended July 31, 1998
Net Sales. Net sales for the year ended July 31, 1999 were $107.3 million,
a decrease of $12.5 million or 10.4% compared to $119.8 million in the year
ended July 31, 1998. This decrease was principally related to lower sales levels
at Intergel, and lower sales of Synergy Plus and Vitamin Specialties products.
Sales at Intergel were lower than fiscal 1998 because fiscal 1998 sales included
one-time shipments approximating $8 million which were made at a minimum gross
profit margin. The Company also terminated sales to certain branded and private
label customers with lower than normal profit margins.
Costs and Expenses. Cost of sales for the year ended July 31, 1999 was
$81.2 million, a decrease of $10.1 million, or 11% as compared to $91.3 million
for the year ended July 31, 1998. As a percentage of net sales, cost of sales
decreased .6% to 75.6% of net sales. The decrease in the percentage of sales was
primarily related to the favorable manufacturing costs at the Company's
manufacturing facilities as the Company realized the benefits of the reduced
workforce at the Freehold and soft gel encapsulation facilities and reduced cost
of raw materials. Favorable product mix towards herbal nutritional products,
which entail higher margins, and the absence of one-time low margin sales at
Intergel recorded during the prior year also contributed to the favorable
margins. These were offset by one-time charges discussed above related to the
restructuring strategy, including the implementation of the ERP system, capacity
under-utilization and label write-off.
Selling, general and administration expenses for the year ended July 31,1999
were $27.7 million, an increase of $2.7 million or 10.9% over the $25.0 million
for the year ended July 31, 1998. The increase was primarily related to the
one-time charges discussed above relating to marketing promotional adjustments,
in addition to higher personnel costs due to increased sales and marketing
staffing and bad debts. The cost of rent increased at our facilities primarily
due to rent at the Freehold warehouse facility exceeding depreciation of the
facility in fiscal 1998, as a result of the sale and leaseback of the building
at the end of fiscal 1998. These were offset by lower sales commissions paid to
brokers, reduced compensation paid to executives, lower cost of workers
compensation and other insurance, office supplies and postage.
Special and Unusual Charges. Special and unusual charges incurred as a
result of the restructuring strategy including the cost of the management
severance agreements and the write-off of the capitalized promotional costs.
Loss on Sale of Retail Subsidiary. Loss on sale of retail subsidiary
represents the loss realized on the sale of the Vitamin Specialties subsidiary.
Shutdown of Manufacturing Facility. Shutdown of manufacturing facility consists
of the cost of closing the Portland manufacturing facility, including severance
to employees, lease continuation costs and other facility closing costs.
Other Expenses-Net. Other expenses-net increased $857 for the year ended
July 31, 1999. Interest expense was flat as compared to the prior year. However,
during the prior year the expense was offset by the gain on the sale of land of
$683 and interest income of $209.
Income Taxes. See "Income Taxes" note to Consolidated Financial Statements
for reconciliation of the amount of tax computed under statutory rates to the
income tax provision
18
<PAGE>
Year Ended July 31, 1998 Compared to the Year Ended July 31, 1997
Net Sales. Net sales for the year ended July 31, 1998 were $119.8 million,
an increase of $11.3 million, or 10.4% over $108.5 million for the year ended
July 31, 1997. This increase was principally attributable to the higher sales
levels recorded at Intergel, the Company's soft gel encapsulation division, the
inclusion of the Company's Vitamin Specialties health food store and mail order
operations, which were acquired in June of 1997, the introduction of the
Company's LiquaFil soft gel encapsulated vitamin and supplement product line,
and increased private brand sales levels at the Company's west coast and
Canadian operations. Partially offsetting these factors was the reduction in
sales of a line of products to a significant customer, reflecting the
termination of the supply agreement relative to the customer's store brand,
during the second quarter of fiscal 1997, and the discontinuance of the Revlon
product line.
Cost and Expenses. Cost of sales for the year ended July 31, 1998 was
$91.3 million, an increase of $10.8 million, or 13.4% over $80.5 million for the
year ended July 31, 1997. Cost of sales increased 2.1% as a percentage of net
sales. These increases are attributable to the shift in sales mix toward private
brand products, resulting from increased promotional activities carried out by
certain of the Company's private brand customers, and the higher level of
nutritional sales by the Intergel division, which have lower profit margins than
the Company's core business segments. The fourth quarter 1998 gross profit was
detrimentally impacted by excess manufacturing labor caused by the unexpected
volume decrease in the fourth quarter, as compared to the third quarter. At July
31, 1998, the Company took a physical count of all inventories and adjusted to
these counts and valuations.
The above factors were partially offset by the inclusion of the Vitamin
Specialties operations for the full year, and the increase in the gross profit
margins at the Portland facility attributable to new higher margin products
which have been added to the line during the year.
Selling, general and administrative expenses for the year ended July 31,
1998 were $25.0 million, an increase of $1.4 million or 5.9% over $23.6 million
for the year ended July 31, 1997. This increase was primarily attributable to:
(i) achieving proper professional staff levels, mainly in accounting and
finance, (ii) the inclusion of the Vitamin Specialties operations for the full
year, (iii) increased consulting costs, primarily related to the implementation
of new computer systems, and (iv) increased professional fees. In addition,
distribution costs were higher as a result of the higher overall level of
shipments. These were partially offset by the overall lower level of spending in
selling and marketing, primarily related to the discontinuance of the Revlon
product line.
Other Expenses - Net. Other expenses - net decreased by $67 for the year
ended July 31, 1998. This principally represents interest expense of $2.56
million, offset by interest income of $209 and rental income of $220, and the
gain of $683 recognized for the sale of land. Net interest expense for the year
ended July 31, 1998 increased from the prior year due to higher average amounts
of borrowing outstanding.
Income Taxes. See "Income Taxes" note to Consolidated Financial Statements
for a reconciliation of the amount of tax computed under the statutory rates to
the income tax provision.
19
<PAGE>
Liquidity and Capital Resources
At July 31, 1999, the Company had working capital of $20.3 million compared to
$4.5 million at July 31, 1998, an increase of $15.8 million. During the year
ended July 31, 1998 the entire long-term debt was classified as a current
liability as the Company was in violation of certain covenants with its bank. As
indicated above, for the current year, the Company restructured its financing
arrangements and remedied all prior covenant violations.
Net cash provided by operating activities totaled $174. This was primarily the
result of cash provided by reductions in inventory of $8.7 million as management
placed greater emphasis on reducing the inventory to more acceptable levels,
collections of accounts receivable of $4.4 million and reductions of prepaid
expenses and other assets of $1.7 million. These were offset by the cash used in
decreasing the accounts payable and accrued expenses of $9.3 million and the net
loss of $7.0 million reduced by adjustments for non-cash charges of $1.6
million.
In addition the Company spent $1.6 million on additions to property, plant and
equipment.
With the amended and restated credit agreement, the Company presently has a
revolving line of credit and a term loan in the amounts of $22.0 million and
$5.2 million, respectively. These agreements mature on July 31, 2002. The notes
are collateralized by substantially all of the Company's assets. In addition the
Company has a lease financing agreement which it entered into in August 1998
with a bank for up to $2.0 million for acquisitions of machinery and equipment.
At July 31, 1999, $1.1 million was available for additions.
For the year, the Company's working capital needs and funds for capital
expenditures were satisfied by cash flow generated from operations and bank
borrowings. 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 year.
Year 2000 ("Y2K") Compliance Program
Over the past two years IVC Industries, Inc. has replaced all information
technologies hardware and software, upgraded laboratory equipment, and replaced
facilities equipment. The Company completed comprehensive, company wide Y2K
testing during which the systems performed successfully. The Company also
contacted its vendors, suppliers, and service providers to seek assurance that
they will be Y2K compliant. Nevertheless, satisfactorily addressing the Y2K
issue is dependent on many factors, some of which are not completely 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.
The total costs associated with the Company's compliance program are not
expected to be material to the Company's financial position. (The Company's new
Y2K-compliant management information systems would have been installed
regardless of the Y2K issue.) The Company's current estimates of the impact of
the Y2K issue on its financial position do not include costs that may result
from other companies' failure to become Y2K-compliant.
20
<PAGE>
If, based on the responses to its inquiries, the Company determines that any of
its suppliers or vendors are not Y2K-compliant, the Company plans to arrange for
alternative sources of supply. The Company believes that the products and
services it purchases from its vendors and suppliers are available from numerous
sources and that the loss of a particular supplier would not adversely affect
its operations. However, if the Company is unable to locate suppliers that are
Y2K-compliant, there could be a material adverse affect on its operations.
Due to the general uncertainty with respect to the Y2K issue, however, there can
be no assurance that all Y2K issues will be foreseen and corrected on a timely
basis, or that no material disruption of the Company's business will occur.
Further, the Company's expectations are based on the assumption that there will
be no general failure of external local, national or international systems
(including power, communications, postal or transportation systems) necessary
for the ordinary conduct of business. The Company will, however, continue to
assess the risks presented by the Y2K problem and will develop contingency plans
if and when such plans become necessary.
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 detailed from time to time in
the Company's reports filed with the Securities and Exchange Commission.
21
<PAGE>
Item 8 Financial Statements and Supplementary Data
Index to Financial Statements
Independent Auditors' Reports........................................F-1
Consolidated Balance Sheets
As of July 31, 1998 and 1999.....................................F-2
Consolidated Statements of Operations for the Years Ended
July 31, 1997, 1998 and 1999.....................................F-3
Consolidated Statements of Cash Flows for the Years Ended
July 31, 1997, 1998 and 1999.....................................F-4 to F-5
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended July 31, 1997, 1998 and 1999..........F-6
Notes to Consolidated Financial Statements...........................F-7 to F-27
Item 9 Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
22
<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 72 Chairman, Chief Executive Officer and
President
Domenic N. Golato 44 Vice President, Chief Financial Officer and
Secretary
William Lederman 52 Chief Operating Officer
Michael Durso 41 Senior Vice President of Sales and Marketing
Jesus Febus 37 Chief Information Officer and
Senior Vice President of Information
Technologies
John H. Dettra Jr. 54 Senior Vice President Manufacturing Systems
Arthur S. Edell 66 Director
Marc Z. Edell 48 Director
Dr. Mark S. Gold 50 Director
Dennis E. Groat 58 Director
Erwin Lehr 71 Director
Andrew M. Pinkowski 65 Director
David Popofsky 65 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 Vitamin in
1995. Prior to that merger, Mr. Edell had been president of American since 1955.
Mr. Edell is the brother of Arthur S. Edell.
Domenic N. Golato was elected a Vice President in October 1999 and has
been Chief Financial Officer and Secretary of IVC since March 1999. He joined
the Company in 1998 as Vice President Finance, Corporate Controller. From 1993
to 1998, Mr. Golato was Vice
23
<PAGE>
President and Chief Financial Officer of RF Power Products, Inc., a publicly
traded company in the semiconductor industry.
William Lederman has been Chief Operating Officer of the Company since
December 1998. From 1996 to 1998, Mr. Lederman was the Chief Operating Officer
of Solgar Vitamin & Herb Company, Inc., a leading manufacturer of vitamins and
nutritional products. From 1995 to 1996, he was the Vice President of Operations
of Solgar. From 1991 to 1995, he was Vice President of Operations at Pharmline,
Inc., a leading vitamin raw material supplier.
Michael A. Durso has been Senior Vice President of Sales and Marketing of
the Company since September 1998. From 1997 to 1998, he was Director of Sales at
Pharmaceutical Formulations, Inc., a manufacturer and distributor of private
label, over the counter products. From 1995 to 1997, he was Director of Sales
and Merchandising at Pathmark Stores, Inc. From 1993 to 1995 he was Director of
Category Management at Pathmark Stores, Inc.
Jesus Febus has been Chief Information Officer and Senior Vice President
of Information Technologies of the Company since August 1999. From 1998 to 1999,
he was Vice President of Information Technologies of the Company and from 1997
to 1998 he was Director of Information Technologies of the Company. Prior to
joining the Company, he was a Systems Manager for Materials Research
Corporation, a division of Sony Corporation, from 1996 to 1997 and a Senior
Project Manager for Kuehne & Nagel, Inc., an international freight forwarding
company, from 1995 to 1996. From 1989 to 1995, he was a Systems Manager for
Lever Brothers Company, a major manufacturer of consumer products.
John H. Dettra Jr. has been Senior Vice President Operations/Manufacturing
Systems since the merger with Hall in 1996. Prior to that he was Senior Vice
President Operations of Hall Laboratories Inc. from 1987-1996.
Arthur S. Edell has been on IVC's Board of Directors since 1989. He was
President of the Company from 1989 to 1998. 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 Vitamin from 1955 to 1975. In March 1995, Mr. Edell was
involved in a fatal automobile accident. In connection with the accident, Mr.
Edell pleaded guilty to a single count of vehicular homicide and received a five
year suspended sentence.
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 a 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.
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
24
<PAGE>
School of Medicine, and has written over 500 scientific publications and
numerous professional texts. Dr. Gold also 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
also a principal of Groat and Associates, 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
Laboratories from 1984 to 1988. Prior to joining Hall, he held executive
positions with Scherer Healthcare, Inc., R.P. Scherer Corporation and Mead
Johnson Laboratories.
Erwin Lehr has been on IVC's Board of Directors since January 1999. He was
President, Chief Executive Officer and a director of Valley Fair Corp., a chain
of discount drug stores in New Jersey, and L.F. Widman, Inc., a chain of health,
beauty-aid and drug stores in Pennsylvania, from 1978 to 1998. He also was
Chairman and a director of the Associated Chain Drug Stores.
Andrew M. Pinkowski has been on IVC's Board of Directors since the merger
with Hall Laboratories Inc. in 1996 and since May 1999, he has served as a
consultant to IVC. From the merger with Hall to May 1999, he served as the Vice
Chairman of the Board of Directors of IVC. 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.
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.
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. 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.
25
<PAGE>
Item 11 Executive Compensation
The following table sets forth all compensation paid or distributed during
the years ended July 31, 1999, 1998 and 1997 by the Company for services
rendered by (i) the Chief Executive Officer of IVC, (ii) the four most highly
compensated executive officers of the Company who were serving as executive
officers at the end of the last fiscal year and (iii) Alan Hirschfeld and Andrew
Pinkowski, former executives of IVC, who would have been two of IVC's four most
highly compensated executive officers but for the fact that they were not
serving as executive officers at the end of IVC's last fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Awards Compensation
Annual Compensation ------
------------------- Securities All
Underlying Other
Name and Salary Bonus Options Compensation
Principal Position Year ($) ($) (Shares) ($) (1)
------------------ ---- --- --- -------- -------
<S> <C> <C> <C> <C> <C>
E. Joseph Edell 1999 295,432 - - -
Chairman, Chief Executive Officer 1998 442,307 - - -
And President 1997 500,000 - - -
Domenic N. Golato 1999 132,596 - 23,750 500
Vice President, Chief Financial 1998 16,153 - - -
Officer and Secretary
William Lederman 1999 87,019 25,000 12,500 360
Chief Operating Officer
Michael Durso 1999 130,411 - 25,625 500
Senior Vice President
of Sales and Marketing
Jesus Febus 1999 119,885 - 18,875 -
Chief Information Officer and
Senior Vice President of
Information Technologies 1998 91,730 - 250 -
I. Alan Hirschfeld 1999 147,249 - - 336
Former Executive Vice 1998 221,153 - - 1,528(2)
President and Chief 1997 250,000 - 50,000 1,528(2)
Financial Officer
Andrew M. Pinkowski 1999 90,962 - - 550
Former Vice Chairman 1998 159,230 - - 500
1997 180,000 - - 500
</TABLE>
(1) Unless otherwise noted, represents the value of shares granted under the
401(k) Savings Plan.
(2) Represents term life insurance premiums and the value of 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.
26
<PAGE>
Non-employee Director Stock Option Plan
The Company's Non-Employee Directors' Stock Option Plan provides for the
grant as of September 1 of each year of an option to purchase 1,250 shares of
IVC Common Stock to each of IVC's non-employee directors. On March 10, 1999, the
Board of Directors unanimously approved, subject to shareholder approval, the
grant to each of IVC's non-employee directors of an option to purchase 1,875
shares of IVC Common Stock at an exercise price of $7.52 and an amendment to the
Non-Employee Directors' Stock Option Plan, to provide that as of September 1 of
each year commencing with 1999, each non-employee director be granted an option
to purchase 3,125 shares of IVC Common Stock. The exercise price of each option
is the fair market value of IVC Common Stock at the time the option is granted.
27
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Percent of Potential Realizable Value
Securities Total Options at Assumed Annual Rates of
Underlying Granted to Exercise Stock Price Appreciation for
Options Employees in Price Expiration Option Term
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
---- ----------- ----------- ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Domenic N. Golato 625 * 8.00 11/05/08 3,100 8,000
3,125 1% 7.04 11/24/08 13,800 35,100
20,000 8% 4.63 07/30/09 58,200 147,600
William Lederman 12,500 5% 7.04 11/24/08 55,300 140,200
Michael Durso 12,500 5% 11.52 10/01/08 90,600 229,500
625 * 8.00 11/05/08 3,100 8,000
6,250 3% 7.52 03/10/09 29,600 74,900
6,250 3% 5.52 07/01/09 21,700 55,000
Jesus Febus 625 * 8.00 11/15/08 3,100 8,000
6,250 3% 7.04 11/24/08 27,700 70,100
12,000 5% 4.63 07/30/09 34,900 88,500
</TABLE>
- ---------------------
* Less than 1%.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
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
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Domenic N. Golato 2,187 21,563 -- --
William Lederman -- 12,500 -- --
Michael Durso 625 25,000 -- --
Jesus Febus 4,000 15,125 -- --
I. Alan Hirschfeld 6,250 -- -- --
</TABLE>
(1) The fair market value of the Company's Common Stock on July 30, 1999
($4.63 per share) minus the exercise price.
None of the named executive officers exercised options during the fiscal
year ended July 31, 1999.
28
<PAGE>
Employment Agreements
E. Joseph Edell is employed as the Chairman and Chief Executive Officer of
IVC pursuant to an employment agreement dated as of April 28, 1996 and amended
as of February 1, 1998. Mr. Edell's employment agreement provides for a base
salary of $312,500 for the period of February 1, 1998 through January 31, 1999
and $343,750 for the period of February 1, 1999 through January 31, 2000. The
employment agreement also provides that on each January 31 during Mr. Edell's
term of employment, he shall be entitled to performance-based bonus compensation
in an amount equal to the sum of (i) Mr. Edell's base salary on such January 31
multiplied by (ii) the percentage increase, if any, in the income before income
taxes of the Company for the 12-month period ended on such January 31 over the
income before income taxes of the Company for the 12-month period ended the
prior January 31. No bonus compensation was paid to Mr. Edell for the 12-month
period ended January 31, 1999. The employment agreement also provides that the
Company may, in its discretion, grant Mr. Edell's options to purchase shares of
IVC Common Stock pursuant to the Company's 1995 Stock Option Plan. Mr. Edell was
not awarded stock options during the year ended July 31, 1999. The term of his
employment agreement ends on January 31, 2000 and is automatically extended for
successive one-year periods unless the Company or Mr. Edell gives 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
agreement, Mr. Edell shall receive a severance payment equal to his base annual
salary, provided that no severance payment shall be required in the event that
Mr. Edell retires. The Board of Directors, at its discretion, may increase Mr.
Edell's base annual salary if the term is extended. In the event the Company
terminates without cause the employment of Mr. Edell, he 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 agreement contains
confidentiality and non-disclosure provisions.
Jesus Febus is employed as Chief Information Officer and Senior Vice
President of Information Technologies of IVC pursuant to an employment agreement
dated as of November 30, 1998 and amended as of July 26, 1999. Mr. Febus'
employment agreement provides for a base salary of $125,000 for the year ending
November 29, 1999. Thereafter, Mr. Febus shall receive $147,500 per annum. The
employment agreement also provides that Mr. Febus will be entitled to receive
options to purchase shares of IVC Common Stock pursuant to the Company's 1995
Stock Option Plan. Mr. Febus was awarded options to purchase 18,875 shares of
Common Stock during the year ended July 31, 1999. The term of his employment
agreement ends on November 30, 2000 and is automatically extended for successive
two-year periods unless sooner terminated by the Company or Mr. Febus. In the
event the Company terminates without cause the employment of Mr. Febus, he shall
receive a severance payment equal to one year's base salary. The agreement
contains confidentiality and non-disclosure provisions.
Under the terms of the employment agreement between the Company and Andrew
M. Pinkowski dated April 30, 1996, as amended as of February 1, 1998, Mr.
Pinkowski's employment with the Company ended April 30, 1999. The agreement
provides that following the expiration of the term of employment, Mr. Pinkowski
shall serve as a consultant to the Company for a term of five years at $80,000
per annum. The agreement further provides that the Company may, in its
discretion, grant Mr. Pinkowski options to purchase shares of IVC Common Stock
pursuant to the Company's 1995 Stock Option Plan. Mr. Pinkowski was not awarded
stock options during the year ended July 31, 1999. The agreement contains
confidentiality and non-disclosure provisions.
29
<PAGE>
The Company entered into a severance agreement with I. Alan Hirschfeld,
effective as of March 1, 1999. Under the agreement Mr. Hirschfeld resigned as an
officer and director of the Company. The agreement provides for a severance
payment of $90,000 payable over one year commencing March 1, 2001. The agreement
also provides that Mr. Hirschfeld remain a consultant to the Company for a term
of three years beginning March 1, 1999 at $96,000 per annum for the first and
second year and $9,000 for the third year. Under the agreement, Mr. Hirschfeld
covenants not compete with the Company during such consulting period. In
consideration for such covenant not to compete, the Company agreed to pay Mr.
Hirschfeld $75,000 for the first and second year of the consulting period and
$9,000 for the third year of the consulting period. The agreement further
provides that the options granted to Mr. Hirschfeld under the 1995 Stock Option
Plan will remain exercisable during the three year consulting period. The
agreement provides for certain medical benefits and for the reimbursement of
certain expenses, and contains mutual releases and confidentiality and
non-disclosure provisions.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee for the fiscal year ended July
31, 1999 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 are
largely responsible for the Company's success. Based on this belief, during 1998
the Compensation Committee revised its compensation program for the Company's
executive officers to reduce each executive's base salary and provide for bonus
compensation based on the Company's performance and for the granting of stock
options in order to link a portion of executive compensation to appreciation of
the Company's stock price (see "Employment Agreements"). 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.
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.
The compensation paid to the Company's Chief Executive Officer, E. Joseph
Edell, for the year ended July 31, 1999 consisted solely of base salary and was
established pursuant to his
30
<PAGE>
employment agreement with the Company. The terms of the agreement are described
in detail on page 29 of this report.
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
31
<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 Composite Index and the S&P Health
Care - Drugs Index for each of the fiscal years ended July 31, 1995 through
1999.
The following table was represented as a line graph in the printed material.
Value of $100 investment
<TABLE>
<CAPTION>
Date IVC Industries, Inc. NASDAQ Composite S&P Health Care - Drugs Index
Index
<S> <C> <C> <C>
31-Jul-94 100 100 100
31-Jul-95 75 139 163
31-Jul-96 81 150 214
31-Jul-97 56 221 355
31-Jul-98 54 259 505
31-Jul-99 17 365 511
</TABLE>
32
<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 1, 1999.
<TABLE>
<CAPTION>
Name and Address of Number of Percentage
Title of Class Beneficial Owner Shares of Class
-------------- ---------------- ------ --------
<S> <C> <C> <C>
Common E. Joseph Edell (1) 669,805 32.1%
c/o IVC Industries, Inc.
500 Halls Mill Road
Freehold, NJ 07728
Common Domenic Golato (2) 3,750 *
c/o IVC Industries, Inc.
500 Halls Mill Road
Freehold, NJ 07728
Common William Lederman (2) 6,250 *
c/o IVC Industries, Inc.
500 Halls Mill Road
Freehold, NJ 07728
Common Michael Durso (2) 11,042 *
c/o IVC Industries, Inc.
500 Halls Mill Road
Freehold, NJ 07728
Common Jesus Febus (2) 7,125 *
c/o IVC Industries, Inc.
500 Halls Mill Road
Freehold, NJ 07728
Common Andrew M. Pinkowski (3) 328,509 15.7%
c/o IVC Industries, Inc.
3580 N.E. Broadway
Portland, OR 97232
Common I. Alan Hirschfeld (4) 239,088 11.5%
14 Malke Drive
Ocean, NJ 07712
Common Arthur S. Edell (5) 231,436 11.1%
c/o IVC Industries, Inc.
500 Halls Mill Road
Freehold, NJ 07728
Common Marc Z. Edell (6) 13,975 *
c/o Edell & Associates
1776 On the Green
Morristown, NJ 07962
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Number of Percentage
Title of Class Beneficial Owner Shares of Class
-------------- ---------------- ------ --------
<S> <C> <C> <C>
Common Dr. Mark S. Gold (2) 5,625 *
2002 San Marco Boulevard
Jacksonville, FL 32207
Common Dennis E. Groat (2) 5,625 *
c/o Groat & Associates
411 Lonestar Lane
Lindale, TX 75771
Common David Popofsky (2) 5,625 *
c/o Popofsky Advertising
60 Madison Avenue
New York, NY 10010
Common Erwin Lehr (2) 2,500 *
156 Clarkin Drive
West Orange, NJ 07052
Common All Executive Officers and Directors
as a group (13 persons) (7) 1,502,187 71.9%
</TABLE>
* Less than 1%
(1) Includes 75,177 shares owned by Beverlee Edell, the wife of E. Joseph
Edell. Mr. Edell disclaims beneficial ownership of the shares owned by his
wife.
(2) Represents shares issuable upon exercise of stock options that are
presently exercisable or exercisable within 60 days of the date of this
report.
(3) Includes 117,981 shares owned by his wife. Mr. Pinkowski disclaims
beneficial ownership of the shares owned by his wife.
(4) Includes 6,250 shares issuable upon exercise of stock options, 22,484
shares owned by Susan H. Hirschfeld, the wife of I. Alan Hirschfeld, 3,900
shares owned by Mr. Hirschfeld's minor children, and 15,000 shares owned
by Two Seas Ventures, a family partnership. Mr. Hirschfeld disclaims
beneficial ownership of the shares owned by his wife and children.
(5) Includes 28,125 shares issuable upon exercise of stock options and 187,500
shares owned by the Edell Family Partnership.
(6) Includes 5,625 shares issuable upon exercise of stock options that are
presently exercisable or exercisable within 60 days of this report.
(7) Includes 87,542 shares issuable upon the exercise of stock options held by
all executive officers and directors that are presently exercisable or
exercisable within 60 days of this report.
34
<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
loan balance at July 31, 1998 was $80,000. This loan was paid in full during the
fiscal year 1999.
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, 1999,
the aggregate net advances to E. Joseph Edell and I. Alan Hirschfeld were
$366,000 and $140,000, respectively. The balance due the Company by E. Joseph
Edell is payable by July 31, 2000 and the balance due the Company by I. Alan
Hirschfeld is payable in three successive annual installments commencing March
1, 2004.
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, 1999, 1998 and 1997 were $63,000, $104,000 and $169,000,
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 former President of the Company's International
Division. The Company's sales to D.N.R. Inc. for the years ended July 31, 1999,
1998 and 1997 were approximately $128,000, $131,000, and $313,000, respectively.
The Company paid approximately $112,000, $42,000 and $0 in 1999, 1998 and
1997, respectively, for legal services provided to the Company by Edell &
Associates. Marc Z. Edell is a principal of Edell & Associates and also a
Director of the Company.
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 $813,000 and $850,000, as
at July 31, 1999 and 1998, respectively. Interest income earned by the Company
on this contract was $74,000, $78,000 and $80,000 for the years ended July 31,
1999, 1998 and 1997, respectively. The Company leases its manufacturing and
administration facility in Portland, Oregon from Agora. Rent expense incurred by
the Company for this property was $170,000, $169,000 and $163,000 for the years
ended July 31, 1999, 1998 and 1997, respectively. The above sales and rentals
were made on terms no less favorable to the Company than could be obtained from
non-related parties.
35
<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
------ -------
3.1 Restated Certificate of Incorporation of IVC Industries,
Inc.
3.2 Amended and Restated By-laws of IVC Industries, Inc. (1)
4.1 Common Stock Specimen
10.1 Amended and Restated Credit Agreement, dated as of July 31,
1999, among IVC Industries, Inc., the Banks party thereto
and The Chase Manhattan Bank (National Association), as
Agent (2)
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 (1)
10.3 Agreement, dated as of June 2, 1998, by and between IVC
Industries, Inc. and The Navesink Group (3)
10.4 Lease Agreement between The Navesink Group and IVC
Industries, Inc. (3)
10.5 Settlement Agreement, dated September 17, 1999 with Hoffman
La-Roche Inc. and Roche Vitamins Inc. (4)
10.6 Employment Agreement with E. Joseph Edell (5)
10.7 Amendment to Employment Agreement with E. Joseph Edell (3)
10.8 Employment Agreement with Jesus Febus
36
<PAGE>
(A) Documents Included as Part of This Report - (Continued)
10.9 Severance Agreement with Arthur S. Edell (3)
10.10 Severance Agreement with I. Alan Hirschfeld
10.11 International Vitamin Corporation 1993 Stock Option Plan (6)
10.12 International Vitamin Corporation 1995 Stock Option Plan (7)
10.13 Non-Employee Directors' Stock Option Plan (8)
11 Earnings Per Share Computation (Page E-1)
27.1 Financial Data Schedule
Foot Notes
- ----------
(1) Incorporated herein by reference from the Form 8-K filed on May 14,
1996, as amended on August 9, 1996.
(2) Incorporated herein by reference from the Form 8-K filed on October
1, 1999.
(3) Incorporated herein by reference from Form 10-K filed by the Company
for the year ended July 31, 1999.
(4) Incorporated herein by reference from the Form 8-K filed on
September 24, 1999.
(5) Incorporated herein by reference from Form 10-QSB filed by the
Company for the quarterly period ended April 30, 1995.
(6) Incorporated herein by reference from the Registration Statement
number 33-73406 filed by the Company on Form SB-2.
(7) Incorporated herein by reference from the Company's Proxy Statement
and Annual Report to Shareholders, dated March 5, 1996.
(8) Incorporated herein by reference from the Company's Proxy Statement
for Annual Meeting of Shareholders, filed on March 26, 1998.
* Confidential Information indicated by X's has been omitted and filed
separately with the Securities and Exchange Commission.
37
<PAGE>
(B) Reports on Form 8-K
A report on Form 8-K was filed on July 14, 1999 with respect to Item 5,
Other Events.
A report on Form 8-K was filed on July 28, 1999 with respect to Item 2,
Acquisition or Disposition of Assets.
38
<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: October 28, 1999 By: /s/ E. Joseph Edell
-------------------------- -------------------------------
E. Joseph Edell
Chairman of the Board
Chief Executive Officer
and President
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ E. Joseph Edell Chairman of the Board of October 28, 1999
- ----------------------------- Directors Chief Executive ----------------
E. Joseph Edell Officer and President
/s/ Domenic N. Golato Vice President, Chief Financial October 28, 1999
- ----------------------------- Officer and Secretary ----------------
Domenic N. Golato
/s/ Andrew M. Pinkowski Director October 28, 1999
- ----------------------------- ----------------
Andrew M. Pinkowski
/s/ Arthur S. Edell Director October 28, 1999
- ----------------------------- ----------------
Arthur S. Edell
/s/ Dennis E. Groat Director October 28, 1999
- ----------------------------- ----------------
Dennis E. Groat
</TABLE>
39
<PAGE>
<TABLE>
<S> <C> <C>
/s/ David Popofsky Director October 28, 1999
- ----------------------------- ----------------
David Popofsky
/s/ Dr. Mark S. Gold Director October 28, 1999
- ----------------------------- ----------------
Dr. Mark S. Gold
/s/ Marc Z. Edell Director October 28, 1999
- ----------------------------- ----------------
Marc Z. Edell
/s/ Erwin Lehr Director October 28, 1999
- ----------------------------- ----------------
Erwin Lehr
</TABLE>
40
<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, 1998 and 1999 and the related consolidated
statements of operations, cash flows and shareholders' equity for each of the
years ended July 31, 1997, 1998 and 1999. 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 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.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of IVC Industries, Inc. and
Subsidiaries at July 31, 1998 and 1999, and the results of their operations and
their cash flows for each of the three years in the period ended July 31, 1999
in conformity with generally accepted accounting principles.
In connection with our audits of the financial statements referred to above, we
audited the financial schedule listed under Item 14. In our opinion, the
financial schedule, when considered in relation to the financial statements
taken as a whole, presents fairly, in all material respects, the information
stated therein.
/s/ AMPER POLITZINER & MATTIA P.A.
October 15, 1999
Edison, New Jersey
F-1
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1998 AND 1999
(Dollars in Thousands, Except as Noted or Per Share Information)
<TABLE>
<CAPTION>
Unaudited
ASSETS Proforma
(see note 16)
1998 1999 1999
-------- -------- --------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,604 $ 287 $ 1,545
Accounts receivable 11,725 7,296 7,296
Inventories 37,389 27,374 27,374
Due from related parties 95 26 26
Deferred taxes 2,238 4,673 4,673
Prepaid expenses 2,006 671 671
Refundable income taxes -- 2,117 2,117
Other current assets 979 483 483
-------- -------- --------
Total Current Assets 56,036 42,927 44,185
Property, Plant and Equipment - Net 20,766 19,839 19,839
Due from related parties 1,876 1,313 1,313
Goodwill - Net 1,773 -- --
Other Assets 803 1,162 1,162
-------- -------- --------
Total Assets $ 81,254 $ 65,241 $ 66,499
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 22,749 $ 2,697 $ 2,697
Current portion of capital lease payable 134 180 180
Current portion of deferred gain on building 97 104 104
Accounts payable 25,504 14,785 9,842
Accrued expenses 3,003 4,896 4,896
Income taxes payable -- -- 3,800
-------- -------- --------
Total Current Liabilities 51,487 22,662 21,519
Long-Term Debt - less current portion 7,271 27,898 21,398
Capital lease obligation 3,317 3,136 3,136
Deferred gain on building sale 1,109 1,005 1,005
Deferred taxes 211 -- --
Other Liabilities 99 -- 2,700
-------- -------- --------
Total Liabilities 63,494 54,701 49,758
-------- -------- --------
Shareholders' Equity:
Preferred stock, no par, 2,000,000 shares authorized -- -- --
Common stock, $.08 par value, 25,000,000 shares
authorized; 2,088,092 and 2,151,469 issued, respectively 172 167 167
Additional paid-in capital 11,673 11,499 11,499
Foreign currency translation adjustment (202) (202) (202)
Retained earnings (Deficit) 6,117 (924) 5,277
-------- -------- --------
Total Shareholders' Equity 17,760 10,540 16,741
-------- -------- --------
Total Liabilities and Shareholders' Equity $ 81,254 $ 65,241 $ 66,499
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1997, 1998 AND 1999
(Dollars in Thousands, Except as Noted or Per Share Information)
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 108,531 $ 119,775 $ 107,339
Cost of sales 80,480 91,256 81,189
----------- ----------- -----------
Gross profit 28,051 28,519 26,150
Selling, general and administrative expenses 23,628 25,035 27,658
Special and unusual charges -- -- 3,360
Loss on sale of retail subsidiary -- -- 2,343
Shutdown of manufacturing facility -- -- 1,291
----------- ----------- -----------
Income (loss) from operations 4,423 3,484 (8,502)
Other expenses, net 1,639 1,572 2,429
----------- ----------- -----------
Income (loss) before income taxes 2,784 1,912 (10,931)
Income tax expense (benefit) 1,438 765 (3,890)
----------- ----------- -----------
Net income (loss) $ 1,346 $ 1,147 $ (7,041)
=========== =========== ===========
Net income (loss) per share - Basic $ .63 $ .54 $ (3.28)
=========== =========== ===========
Net income (loss) per share - Diluted $ .63 $ .53 $ (3.28)
=========== =========== ===========
Weighted average shares - Basic 2,136,394 2,143,191 2,148,143
Weighted average shares - Diluted 2,141,347 2,154,365 2,148,909
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1997, 1998 AND 1999
(Dollars in Thousands, Except as Noted or Per Share Information)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,346 $ 1,147 $ (7,041)
-------- -------- --------
Adjustments to Reconcile Net Income to Net Cash Provided
By (Used In) Operating Activities:
Depreciation 2,105 2,464 2,208
Amortization 21 130 162
Deferred income taxes provision (benefit) (321) 156 (3,216)
Stock distributed to Employee Savings Plan 63 226 --
Stock options issued to non-employee directors 38 55 138
(Gain) loss on sale of assets (138) (683) 2,343
Changes in assets - (increase) decrease:
Accounts receivable 7,940 (3,445) 4,429
Inventories (5,140) (6,204) 8,781
Prepaid expenses and other current assets (506) (664) 895
Other assets (398) 1,196 801
Changes in liabilities - increase (decrease):
Accounts payable and accrued expenses (3,968) 9,847 (9,326)
-------- -------- --------
Total adjustments (304) 3,078 7,215
-------- -------- --------
Net Cash Provided By Operating Activities 1,042 4,225 174
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for notes receivable (568) 56 --
Additions to property, plant and equipment (1,120) (3,715) (1,614)
Proceeds from sale of assets 138 3,874 --
Purchase of retail subsidiary (2,800) (86) --
Retirement of Common Stock -- -- (317)
-------- -------- --------
Net Cash Provided By (Used In) Investment Activities (4,350) 129 (1,931)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt - net (33,936) (6,343) (3,605)
Proceeds from long-term debt 37,074 3,500 4,180
Acquisition of treasury shares (54) -- --
Principle Payments on Capital Lease -- -- (135)
-------- -------- --------
Net Cash Provided By (Used In) Financing Activities 3,084 (2,843) 440
-------- -------- --------
Foreign currency translation adjustment (17) (86) --
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (241) 1,425 (1,317)
CASH AND CASH EQUIVALENTS - BEGINNING 420 179 1,604
-------- -------- --------
CASH AND CASH EQUIVALENTS - ENDING $ 179 $ 1,604 $ 287
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
1997 1998 1999
------ ------ ------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $2,075 $2,210 $2,466
====== ====== ======
Taxes $ 811 $1,436 $ 682
====== ====== ======
Non Cash Financing and Investing Activities
During the year ended July 31, 1998, the Company entered into a capital lease
obligation for building in the amount of $3,451.
During the year ended July 31, 1999, the Company sold a retail subsidiary
(consisting of fixed assets, inventories, goodwill, accounts payable and accrued
expenses) in exchange for a $1,182 note receivable. The Company incurred a net
loss on this sale of $2,343.
See notes to consolidated financial statements.
F-5
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended July 31, 1997, 1998 and 1999
(Dollars in Thousands, Except as Noted or Per Share Information)
<TABLE>
<CAPTION>
Foreign
Common Treasury Additional Retained Currency
Stock Stock Common Treasury Paid-In Earnings ranslation
(Shares) (Shares) Stock Stock Capital (Deficit) Adjustment Total
-------- -------- ----- ----- ------- --------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - July 31, 1996 2,136,869 -- 171 -- 11,345 3,624 (99) 15,041
Purchase of treasury shares -- (4,000) -- (54) -- -- -- (54)
Issuance of shares to employee
benefit plan 4,081 -- -- -- 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 2,140,950 (4,000) 171 (54) 11,446 4,970 (116) 16,417
Issuance of treasury shares to
employee benefit plan -- 4,000 -- 54 -- -- -- 54
Issuance of shares to employee
benefit plan 10,519 -- 1 -- 172 -- -- 173
Issuance of options to non-
employee Directors -- -- -- -- 55 -- -- 55
Net income -- -- -- -- -- 1,147 -- 1,147
Foreign currency translation
adjustment -- -- -- -- -- -- (86) (86)
----------- --------- -------- -------- -------- ----------- -------- -------
Balance - July 31, 1998 2,151,469 -- 172 -- 11,673 6,117 (202) 17,760
Shares retired (63,377) -- (5) -- (312) -- -- (317)
Issuance of options to
Non-employee Directors -- -- -- -- 138 -- -- 138
Net Income (loss) -- -- -- -- -- (7,041) -- (7,041)
Foreign currency translation
adjustment -- -- -- -- -- -- -- --
----------- --------- -------- -------- -------- ----------- -------- -------
Balance - July 31, 1999 $ 2,088,092 $ -- $ 167 $ -- $ 11,499 $ (924) $ (202) $10,540
=========== ========= ======== ======== ======== =========== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 1 - Organization and 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. Its
products are distributed under the Fields of Nature, LiquaFil, Rybutol,
Nature's Wonder, American Vitamin(R), Synergy Plus, Nature's Blend and
Pine Bros. brands, as well as under the private labels of its retail chain
store customers. Total sales consist of domestic of 87%, Canadian of 10%
and other export of 3%.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries, Hall Laboratories Ltd. ("Hall") and
Vitamin Specialties Corp. ("VSC") since the date of acquisition, June 13,
1997, accounted for as a purchase (see "Business Combinations") until date
of disposal (July 13, 1999). All material intercompany transactions and
balances have been eliminated.
Foreign Currency Translation
Assets and liabilities of Hall, 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.
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 $461 and $489 in 1998 and 1999,
respectively, representing deposits held by trustees in connection with
payments for the current portion of and interest on long-term debt.
Deposits in banks may exceed the amount of insurance provided on such
deposits. The Company performs reviews of the credit worthiness of its
depository banks. The Company has not experienced any losses on its
deposits of cash and cash equivalents.
F-7
<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):
Accounts Receivable
Accounts receivable are stated at their net values. Included in net
accounts receivable is an allowance for doubtful accounts. At July 31,
1998 and 1999 the allowance for doubtful accounts was $2,148 and $580,
respectively.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents, accounts receivable, accounts
payable, 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, which is equal to the FIFO (first-in, first-out)
method. The labor and overhead components of inventories are determined on
the FIFO method.
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 was amortized on a
straight-line basis over 10 years in 1999 and 1998 and over 15 years in
prior years. The balance of the goodwill was written off in conjunction
with the sale of the VSC in 1999.
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 - (continued):
Other Assets
Other assets include trademarks, security deposits, a covenant not to
compete and deferred financing costs. 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 in 1998 are the costs associated
with acquiring long-term sales agreements with certain customers, which
are being charged to operations over the terms of the individual
agreements.
Intangible Assets
The Company periodically reviews its intangible assets to access
recoverability and a charge will be recognized in the consolidated
statement of operations if a permanent impairment is determined to have
occurred. Recoverability of intangibles is determined based on discounted
future operating cash flows from the related business unit or activity.
The amount of impairment if any, would be measured based on discounted
future operating cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of the recoverability of intangible
assets will be affected if estimated future operating cash flows are not
achieved. The Company does not believe that any impairment has occurred as
of July 31, 1997, 1998 and 1999.
Revenue Recognition
Revenues are recognized when a product is shipped. Such revenues are
recorded net of estimated sales returns, discounts and allowances.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees
primarily with an exercise price equal to the fair value of the shares on
date of grant. The Company accounts for these stock option grants in
accordance with Accounting Principals Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", and accordingly, generally
recognizes no compensation expense for stock options granted at fair
value. The Company recognizes compensation expense for stock options
granted with an exercise price below the fair value of the shares on the
date of grant.
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):
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.
Net Income Per Share
The Company retroactively adopted SFAS No. 128, "Earnings Per Share",
during the fiscal year ended July 31, 1998. This changed the computation,
presentation and disclosure requirements for earnings per share, and
requires presentation of "basic" and "diluted" earnings per share. The
adoption of this statement did not have a material impact on the Company's
net income per share.
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing income available to common shareholders by the weighted-average
number of common shares outstanding during the period increased to include
the number of additional common shares that would have been outstanding if
the dilutive potential common shares had been issued.
Comprehensive Income
Effective August 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. The objective of the
Statement is to report a measure of all changes in equity of an enterprise
that result from transactions and other economic events of the period
other than transactions with owners ("Comprehensive income").
Comprehensive income is the total of net income and all other non-owner
changes in equity. The adoption of this statement is not material.
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):
Advertising Costs
Advertising and promotional costs are expensed as incurred and are
included in selling, general and administrative expenses. Such expense for
the years ended July 31, 1997, 1998 and 1999 were $5.6, $4.8 and $7.5
million, respectively.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which is required to be
adopted for fiscal quarters of fiscal years beginning after June 15, 2000.
The Company expects to adopt SFAS No. 133 effective August 1, 2000. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company is currently evaluating
the impact that the adoption of this statement will have on its financial
position and results of operations.
Note 2 - Vitamin Specialties Disposition:
On July 13, 1999, the Company completed the sale of its Vitamin
Specialties Corp. ("VSC"), subsidiary. Vitamin Specialties is engaged,
among other things, in the retail sales through 16 health food/vitamin
stores and by mail order of vitamins and nutritional supplements.
The selling price for all of the issued and outstanding shares of VSC in
the aggregate was $1.8 million, which will be paid in monthly installments
equal to 5% of VSC's gross sales until such time as the aggregate payments
total $1.8 million; provided, however, that for each of the first 36
months following the closing, the buyer must pay to the Company the
greater of $10,000 or 5% of VSC's gross sales. The amount in excess of the
monthly minimum will be recognized when received.
In addition the selling price includes inventory at cost, offset by the
amount of accounts payable owed to third parties at the time of closing,
in equal monthly installments. The loss on the sale of VSC was
approximately $2.3 million.
On June 13, 1997, the Company had acquired VSC's operations from
HealthRite, Inc. for $2.8 million. 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 VSC have been included in the
financial statements since the date of acquisition.
F-11
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 3 - Details of Balance Sheet:
Inventories: July 31,
--------
1998 1999
---- ----
Finished goods $15,129 $ 9,427
Bulk and work in process 14,180 9,789
Raw materials and packaging components 8,080 8,158
------- -------
Total inventory $37,389 $27,374
======= =======
The LIFO reserves at July 31, 1998 and 1999, were $0.
Property, Plant and Equipment: July 31,
--------
1998 1999
---- ----
Land $ 1,451 $ 1,451
Buildings and improvements 6,951 7,936
Capital lease building 3,451 3,106
Leasehold improvements 721 743
Machinery and equipment 18,941 19,518
Furniture and fixtures 952 667
Computer Equipment 1,929 2,100
Transportation Equipment 253 253
------- -------
Sub-Total 34,649 35,774
Accumulated depreciation and amortization (13,883) (15,935)
------- -------
Net property, plant and equipment $20,766 $19,839
======= =======
In July 1998, the Company entered into a sales-leaseback transaction at
its 569 Halls Mill Road, Freehold, NJ location. In the transaction, the
Company sold a warehouse/distribution center and undeveloped land, and
subsequently, the Company entered into a ten-year lease agreement for the
warehouse/distribution center (see Note 12), which was recorded as a
capitalized lease. The Company realized a total gain of approximately
$1,900 of which $1,200 was attributed to the warehouse/distribution center
and is deferred and will be recognized ratably over the life of the lease
agreement. The gain of $683 in 1998, attributable to the undeveloped land,
was recognized and is reflected in other expenses, net.
F-12
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Accrued Expenses: July 31,
------
1998 1999
------ ------
Accrued payroll and related $ 725 $ 884
Accrued interest 462 189
Income taxes payable 205 381
Accrued for plant shut down -- 1,291
Accrued brokerage 214 175
Accrued advertising and promotion 207 310
Accrued severance -- 964
Other 1,190 702
------ ------
Accrued Expenses $3,003 $4,896
====== ======
Note 4 - Long-Term Debt:
July 31,
--------
1998 1999
---- ----
Notes payable to bank, under revolving line of credit $18,950 $22,322
Term loan payable to bank, paid March 31, 1999 2,250 --
Bonds payable, New Jersey Economic Development Authority,
interest at the floating tax-free rate (3.10 % at
July 31, 1999), due May 1, 2003 3,560 2,840
Bonds payable, New Jersey Economic Development Authority,
interest at 6.90 %, due June 30, 2007 4,250 3,850
Equipment financing agreement, due August, 2005,
interest at 7.17% - 8.50% 775 1,379
Other 235 204
------- -------
Total 30,020 30,595
Less current portion 22,749 2,697
------- -------
Long-Term Debt - Less current portion $ 7,271 $27,898
======= =======
F-13
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 4 - Long-Term Debt - (Continued):
Notes Payable to Bank
On April 30, 1996, the Company entered into a credit agreement with a
bank, which expired on March 31, 1999 and was extended through September
22, 1999. The Company is allowed to borrow up to $15.0 million under
borrowing Facility A, and $6.5 million under borrowing Facility B, subject
to certain borrowing base limitations, as defined. Borrowings under
Facility A bear interest at either the bank's prime rate plus .50%, or at
money market rates or applicable LIBOR rates plus 2.25% (7.92% at July 31,
1998, 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% (6.13% at July 31, 1998, based
on 120 day LIBOR) at the Company's option. The agreement included 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. The Company was in violation of these covenants and were
amended by the new agreement below.
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 and $5.2 million under a term
loan commitment, subject to borrowing base limitations, as defined.
Borrowings under the revolving credit commitment bear interest at either
the Bank's Alternative Base Rate ("ABR"), (the greatest of the Prime Rate,
the Federal Funds Rate plus 1/2 of 1% and the Base CD Rate plus 1%) plus a
spread ranging from 0%-50%, based upon the Company's consolidated leverage
ratio ("CLR"), (ratio of consolidated funded debt to consolidated EBITDA),
or LIBOR plus a spread ranging from 2.0% - 2.75% based on the Company's
CLR. Borrowings under the term loan commitment bear interest at the Bank's
ABR plus a spread ranging from .25%-.75%, based upon the Company's CLR, or
LIBOR plus a spread ranging form 2.25%-3.0%, based upon 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%-.50%, based upon 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 as of July 31, 1999.
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 6 "Classification of Short Term Obligations Expected to be
Refinanced," the note payable to bank outstanding at July 31, 1999 has
been classified in accordance with the terms of the new credit agreement.
F-14
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Term Loan Payable to Bank
On May 1, 1998, the Company entered into a term loan agreement with a
bank. The interest rate was based upon LIBOR plus .50% or 6.19% on July
31, 1998. The loan was repaid in full, when due on March 31, 1999.
Bonds Payable
The New Jersey Economic Development Authority tax exempt bond issue had an
outstanding balance of $2,840 as of July 31, 1999. Interest on these bonds
is payable based upon the weekly tax-free floating rate. 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
$3,850 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 $425 to $525 during the term of the mortgage with a final payment of
$100 due June 30, 2007. 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.
Equipment Financing Agreements
The equipment financing agreements with two banks provide for up to $3.0
million for acquisitions of computer and manufacturing equipment. These
agreements call for monthly payments of principal and interest over a
seven-year period. At July 31, 1999, the Company had approximately $1.1
million available for future equipment purchases.
F-15
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 4 - Long-Term Debt - (Continued):
Other
On April 9, 1998, the Company established an operating line of credit with
a Canadian bank for its Canadian subsidiary in the amount of CDN $800. The
Company agreed to guarantee payment to the bank, limited to US $500 plus
interest and expenses. Borrowings under the facility bear interest at the
Canadian Prime Rate plus .75% per year (7.0% at July 31, 1999). The debt
is collateralized by the personal property of the Canadian business. The
Canadian company is required to maintain certain financial ratios, and
there is a limitation on capital expenditures. As of July 31, 1998 and
1999, the outstanding balances were $155 and $203, respectively.
The aggregate amount of long-term debt maturing in each of the five years
subsequent to July 31, 1999 and thereafter is as follows:
2000 $ 2,697
2001 2,545
2002 21,723
2003 1,341
2004 670
Thereafter 1,619
-------
Total $30,595
=======
Note 5 - Special and Unusual Charges:
During the fiscal 1999, the management team led by recently recruited
senior management personnel implemented a long term restructuring plan to
rebuild and improve the infrastructure of the Company and refine stability
in the Company's operations. Special and unusual charges of approximately
$3,360 consist of one time charges incurred as a result of the
restructuring including management severance agreements of approximately
$1,188 and the write-off of capitalized promotional costs of approximately
$2,172.
Note 6 - Shutdown of Manufacturing Facility:
Shutdown of manufacturing facility consists of the costs associated with
the closing of the Portland manufacturing facility which approximated
$1,291. These costs were accounted for in accordance with EITF 94-3:
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity", and consist of severance costs, facility
closing costs, lease continuation costs and writedowns of related fixed
assets.
F-16
<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 1998 1999
------- ------- -------
Current tax expense (benefits):
Federal $ 1,273 $ 356 $ (776)
State 359 63 (73)
Foreign 127 191 175
------- ------- -------
1,759 610 (674)
------- ------- -------
Deferred tax expense (benefit):
Federal (287) 3 (2,904)
State (34) 152 (312)
Foreign -- -- --
------- ------- -------
(321) 155 (3,216)
------- ------- -------
Income tax provision (benefit) $ 1,438 $ 765 $(3,890)
======= ======= =======
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:
<TABLE>
<CAPTION>
July 31,
-----------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Provision at statutory rate $ 975 $ 650 $(3,716)
Increases (reductions) in taxes resulting from:
State income taxes 250 42 (320)
Effect of foreign income not subject to federal income tax -- 28 (3)
Nondeductible costs 213 45 123
Increase in valuation allowance -- -- 250
Reversal of prior tax accruals -- -- (224)
------- ------- -------
Income tax provision (benefit) $ 1,438 $ 765 $(3,890)
======= ======= =======
</TABLE>
The Company has a federal net operating loss and capital loss carryforward
of approximately $7,431 and $652, respectively, which expires in fiscal
years ended 2019 and 2004, respectively. The Company has net operating
loss and capital loss carryforward for state tax purposes of approximately
$8,525 and $652, respectively, expiring in fiscal year ended 2006 and
2004, respectively.
F-17
<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 as follows:
July 31,
----------------
1998 1999
---- -----
Current assets and liabilities
Allowance for doubtful accounts $ 535 $ 99
Inventory valuation (IRC 263A) 671 448
Accrued expenses 204 345
Net operating loss carryforward 17 3,086
Inventory valuation allowance 811 945
------- -------
2,238 4,923
Valuation allowance -- (250)
------- -------
Net current deferred tax asset $ 2,238 $ 4,673
======= =======
Non-current assets and liabilities
Deferred gain on sale of land $ 468 $ 417
Installment contract (222) (207)
Property and equipment (538) 124
Other 81 108
Net operating loss carryforward -- 16
Accrued expenses -- 113
------- -------
(211) 571
Valuation allowance -- --
------- -------
Net non-current deferred tax (liability) $ (211) $ 571
======= =======
Included in other assets for 1999 is $571 non-current deferred taxes.
The valuation allowance relates to utilization of net operating loss
carryforwards. The Company believes some uncertainty exists with regard to
the ability to realize these items, and accordingly, has established a
partial valuation allowance.
F-18
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 8 - Other Expenses, Net:
July 31,
--------------------------------
1997 1998 1999
---- ---- ----
Interest expense $ 2,386 $ 2,555 $ 2,682
Rental income (332) (220) --
Interest income (190) (209) (75)
Gain on sale of land -- (683) --
Other (225) 129 (178)
------- ------- -------
Other expenses, net $ 1,639 $ 1,572 $ 2,429
======= ======= =======
Interest expense for the years ended July 31, 1998 and 1999, excludes
capitalized interest of approximately $75 and $37, respectively, relating
to the renovation program at the Freehold facility.
Note 9 - Shareholders' Equity:
On July 8, 1999, the shareholders of the Company approved an eight-for-one
reverse split of the Company's common stock. The effects of the stock
split have been retroactively reflected in the accompanying consolidated
financial statements and in these notes to the consolidated financial
statements.
In April 1998, the shareholders approved the Non-Employee Directors' Stock
Option Plan, pursuant to which 62,500 shares of IVC common stock were
reserved for issuance. The plan provides for grants, as of September 1 of
each year, of options to purchase 1,250 shares of IVC common stock, to
each of IVC's non-employee directors.
In March 1999, the Board of Directors unanimously approved, subject to
shareholder approval, an amendment to the Non-employee Directors' Stock
Option Plan, to provide that as of September 1 of each year commencing
with 1999, each non-employee director be granted an option to purchase
3,125 shares of IVC common stock and the grant to each non-employee
director of an option to purchase 1,875 shares of IVC common stock. The
plan terminates on March 16, 2008.
In July 1995, the Board of Directors adopted the 1995 Stock Option Plan
(the "1995 Option Plan") pursuant to which 125,000 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 1998, the stockholders approved an
increase in the number of shares subject to the plan to 250,000 shares.
F-19
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 9 - Stock Option Plans:
The Company has options outstanding under three plans. Under the "1993
Option Plan", the "1995 Option Plan", and the "Non-Employee Directors'
Stock Option Plan", options may be granted for 62,500, 250,000 and 62,500
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).
A summary of the Company's stock option activity and related information
for the years ended July 31, follows:
<TABLE>
<CAPTION>
Non-Employee
1993 1995 Director Other Option Price
Option Plan Option Plan Plan Options Range
----------- ----------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C>
Outstanding at July 31, 1996 55,500 32,748 -- 12,500 $
Granted -- 15,000 5,000 -- 11.52-15.44
Cancelled (1,625) -- -- -- 12.00-19.04
Exercised -- -- -- --
-------------------------------------------------------------
Outstanding at July 31, 1997 53,875 47,748 5,000 12,500
Granted -- 16,125 6,250 -- 15.76-18.72
Cancelled -- (6,250) -- -- 12.00-36.00
Exercised -- -- -- --
-------------------------------------------------------------
Outstanding at July 31, 1998 53,875 57,623 11,250 12,500
Granted -- 238,250 19,375 -- 3.75-16.00
Cancelled (22,625) (35,665) (2,500) (12,500) 7.52-26.48
Exercised -- -- -- --
-------------------------------------------------------------
Outstanding at July 31, 1999 31,250 260,208 28,125 --
====== ======= ====== ======
Options currently
exercisable 31,250 72,585 16,875 --
====== ======= ====== ======
Options available for grant
at July 31, 1999 31,250 -- 34,375
====== ======= ======
</TABLE>
During the 1999 fiscal year options were granted for 10,208 shares,
subject to shareholder approval of an amendment to the 1995 Stock Option
Plan increasing the number of shares that may be issued pursuant to the
plan.
The weighted average fair value of options granted at fair market value
was $7.28, $8.96 and $3.46 where the exercise price equals stock price
during the fiscal years ended July 31, 1997, 1998 and 1999, respectively,
and $8.40 where the exercise price exceeded the stock price during fiscal
year ended July 31, 1997.
F-20
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 9 - Stock Option Plans - (Continued):
The table below summarizes information relating to options outstanding and
exercisable at July 31, 1999:
<TABLE>
<CAPTION>
Outstanding Options Options Exercisable
----------------------------------------------------------- -----------------------------
Exercise Options Weighted Avg. Remaining Est. Options Weighted Avg.
Price Outstanding Exercise Price Life (Years) Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$ 3.75-5.00 128,875 $ 4.86 7.3 - -
5.01-10.00 92,750 7.18 8.6 35,251 $7.46
10.01-15.00 26,250 12.11 8.3 13,750 12.60
15.01-20.00 36,500 16.24 5.7 36,500 16.24
20.01-26.48 35,209 22.50 2.7 35,209 22.50
</TABLE>
The fair value of options granted in the years ended July 31, 1997, 1998
and 1999 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 1998 1999
------------------- ---- ---- ----
Risk-free interest rate 6.6% 6.3% 6.0%
Expected volatility 54.6% 52.4% 56.3%
Dividend yield 0% 0% 0%
Expected life 5 years 5 years 5 years
F-21
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 9 - 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, $121 and $458 for
the years ended July 31, 1997, 1998 and 1999, respectively. The Company's
pro-forma net income and pro-forma net income per share for the years
ended July 31, 1997, 1998 and 1999 would have been as follows:
<TABLE>
<CAPTION>
Year End July 31,
-----------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net income (loss)
-----------------------------------------------------------------------------
As reported $ 1,346 $ 1,147 $ (7,041)
Pro-forma 1,263 1,026 (7,499)
Net income (loss) per share - Diluted:
-----------------------------------------------------------------------------
As reported $ 0.63 $ 0.53 $ (3.28)
Pro-forma 0.59 0.48 (3.49)
</TABLE>
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 10 - Employee Benefit Plan:
The Company has 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
five hundred dollars per year. For the fiscal years ended July 31, 1997,
1998 and 1999 the Company contributed $117, $173 and $206, respectively,
to the Plan.
F-22
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 11 - Related Party Transactions:
The Company has advanced funds to certain shareholders. Interest charged
is 5% per annum. The amounts due at July 31, 1998 and July 31, 1999
totaled $520 and $507, respectively. These amounts are payable, $366 by
July 2000 and $141 by March 2005. Interest income earned on receivables
from shareholders was approximately $42 and $27 for the years ended July
31, 1998 and 1999, respectively.
Interest on a loan payable to a shareholder aggregated approximately $11,
$7 and $1 for the years ended July 31, 1997, 1998 and 1999, respectively.
The Company had advanced funds to certain employees. Interest charged was
8% per annum. These amounts were paid back during the fiscal year ended
July 31, 1999. The amount due at July 31, 1998 was $531.
The Company sells products to Healthfair Vitamin Centers, Inc., a company
wholly owned by Arthur and Ethel Edell. Sales to this affiliate were $169,
$104 and $63 for the years ended July 31, 1997, 1998 and 1999,
respectively. The amount due from this affiliate was $4 and $3 at July 31,
1998 and 1999, 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 former
President of the Company's International Division. These sales aggregated
$313, $131 and $128 for the years ended July 31, 1997, 1998 and 1999,
respectively. Accounts receivable from these related parties aggregated
$102, $65 and $0 at July 31, 1997, 1998 and 1999, respectively.
During the fiscal years ended July 31, 1997, 1998 and 1999 the Company
paid approximately $0, $42 and $112, respectively, for legal services
provided to the company by Edell & Associates. Marc Z. Edell is a
principal of Edell & Associates and also a Director of the company.
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 $850 and $813
at July 31, 1998 and 1999, 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, $78 and $74 for the years ended July 31, 1997, 1998 and
1999, 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, $169 and $170 for the
years ended July 31, 1997, 1998 and 1999, respectively.
F-23
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 12 - Commitments and Contingencies:
Operating Leases
The Company leases certain production and warehouse facilities and other
equipment under long-term operating leases expiring in fiscal years
through 2004.The leases provide that in addition to rent, the Company pay
taxes, maintenance, insurance and other related expenses. Rent expense
aggregated $760, $1,305 and $1,373 for the years ended July 31, 1997, 1998
and 1999, respectively. Future minimum lease payments due under these
leases at July 31, 1999 are as follows:
Year Ending
July 31,
--------
2000 $ 479
2001 390
2002 112
2003 38
2004 19
--------
Total $ 1,038
========
Capital Leases
In connection with the sale/leaseback transaction in 1998, the Company has
entered into a capital lease for its warehouse and distribution facility,
expiring in July 2008, with aggregate monthly payments of $4,843 as of
July 31, 1999. The following is a schedule by years of future minimum
lease payments under the capital lease, together with the present value of
the net minimum lease payments as of July 31, 1999:
Year Ending
July 31,
--------
2000 $ 455
2001 488
2002 520
2003 520
2004 520
Thereafter 2,340
--------
Total minimum lease payments $ 4,843
Less amount representing interest (1,527)
--------
Present value of net minimum lease payments 3,316
Less current maturities (180)
--------
Long-term maturities $ 3,136
========
F-24
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 12 - Commitments and Contingencies - (Continued):
Employment Agreements
The Company has entered into an employment agreement with Mr. E. Joseph
Edell the Company's Chairman and Chief Executive Officer. The employment
agreement provides for salaries aggregating $344 and $172 in fiscal 2000
and 2001, respectively.
The agreement with Mr. Edell is for one year and is automatically extended
for successive one-year periods unless the Company or Mr. Edell gives
three months' notice that the term of employment shall not be further
extended. In the event notice is given in accordance with the terms of the
agreement, Mr. Edell is entitled to receive a severance payment equal to
his annual salary.
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 $7.0 million
related to the New Jersey Economic Development Authority borrowings.
Note 13 - Major Customers:
The Company sells its products to a geographically diverse base of
customers, primarily national and regional drug stores, mass merchandiser
and supermarket chains. One customer accounted for 36% of net sales for
the fiscal year ended July 31, 1998. The same customer accounted for 48%
of net sales in the fiscal year ended July 31, 1999.
F-25
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 14 - 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, 1998
Net sales $ 27,709 $ 29,253 $ 34,980 $ 27,833 $119,775
Gross profit 6,801 8,038 8,423 5,257 28,519
Income from operations 1,022 1,401 1,648 (587) 3,484
Net income (loss) 332 536 702 (423) 1,147
Net income (loss) per share - Basic 0.16 0.24 0.32 (0.18) 0.54
Net income (loss) per share - Diluted 0.16 0.24 0.32 (0.19) 0.53
July 31, 1999
Net sales $ 29,239 $ 30,661 $ 25,558 $ 21,881 $107,339
Gross profit 7,006 8,492 7,014 3,638 26,150
Income (loss) from operations 914 1,547 1,283 (12,246) (8,502)
Net income (loss) 179 569 459 (8,248) (7,041)
Net income (loss) per share - Basic 0.08 0.24 0.24 (3.84) (3.28)
Net income (loss) per share - Diluted 0.08 0.24 0.24 (3.84) (3.28)
</TABLE>
The fourth quarter 1998 gross profit was detrimentally impacted by excess
manufacturing labor caused by the unexpected volume decrease in the fourth
quarter, as compared to the third quarter. At the balance sheet date, the
Company took a physical count of all inventories and adjusted to these
counts and valuations.
The fourth quarter 1999 was detrimentally impacted by charges associated
with the Company's strategic restructuring plan implementation.
F-26
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 15 - Year 2000 ("Y2K") Uncertainty:
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.
Note 16 - Subsequent Event:
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. The proforma effect on the Company shareholder's equity net of
applicable income taxes is approximately $6,200.
The proforma balance sheet at July 31, 1999 reflects the transaction noted
above.
F-27
<PAGE>
SCHEDULE II
IVC INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JULY 31, 1998 AND 1999
(Dollars in Thousands, Except as Noted or Per Share Information)
<TABLE>
<CAPTION>
For the Year Balance at Added Charged to Charged
Ended Beginning During Cost and to Other Balance at
July 31, Description of Year the Year Expenses Accounts Deductions End of Year
-------- ----------- ------- -------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulated amortization of
goodwill:
1998 $ -- 130 36 -- -- $ 94
======= ===== ===== ======= ====== ========
1999 $ 94 -- 162 -- 256 $ --
======= ===== ===== ======= ====== ========
Allowance for doubtful accounts:
1998 $ 1,871 277 -- -- -- $ 2,148
======= ===== ===== ======= ====== ========
1999 $ 2,148 -- 597 -- 2,165 $ 580
======= ===== ===== ======= ====== ========
Inventory reserve:
1998 $ 1,976 488 -- -- -- $ 2,464
======= ===== ===== ======= ====== ========
1999 $ 2,464 3,525 3,450 -- -- $ 2,539
======= ===== ===== ======= ====== ========
Valuation allowance related to
deferred taxes:
1999 $ -- 250 -- -- -- $ 250
======= ===== ===== ======= ====== ========
</TABLE>
S-1
RESTATED CERTIFICATE OF INCORPORATION
OF
IVC INDUSTRIES, INC.
The Certificate of Incorporation of IVC Industries, Inc. (the
"Corporation") as heretofore amended reads in full as follows:
FIRST. The name of the Corporation is IVC Industries, Inc.
SECOND. The address of the Corporation's registered office in the State of
Delaware is 32 Loockerman Square, Suite L-100, in the City of Dover, County of
Kent. The name of its registered agent in such address is The Prentice-Hall
Corporation System.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law.
FOURTH. The Corporation shall have authority to issue 25,000,000 shares of
Common Stock of the par value of $0.08 per share and 2,000,000 shares of
Preferred Stock of the par value of $0.01 per share.
FIFTH. In furtherance and not in limitation of the powers conferred by the
laws of the State of Delaware, the following provisions are inserted in this
Restated Certificate of Incorporation for the regulation and conduct of the
business and affairs of the Corporation:
1. The election of directors of the Corporation need not be by
written ballot unless the By-Laws so require.
2. The business and affairs of the Corporation shall be managed by,
or under the direction of, a Board of Directors consisting of not less than
seven nor more than fifteen persons. The exact number of directors within the
minimum and maximum limitations specified herein shall be fixed from time to
time by resolution of a majority of the whole Board.
3. The directors of the Corporation, by the affirmative vote of a
majority of the whole Board, at any regular or special meeting, shall have the
power to adopt, amend or repeal By-Laws of the Corporation, provided, however,
that such power of the Board shall not
<PAGE>
divest the stockholders of the Corporation of their power to adopt, amend or
repeal By-Laws of the Corporation.
4. In addition to the powers and authorities conferred upon the
Board of Directors of the Corporation by this Restated Certificate of
Incorporation, the Board of Directors of the Corporation may exercise all such
powers and take all such actions as may be exercised or taken by the
Corporation, subject, however, to the provisions of the laws of the State of
Delaware, this Restated Certificate of Incorporation and the By-Laws of the
Corporation.
5. Any vote or votes authorizing liquidation of the Corporation or
proceedings for its dissolution may provide, subject to the rights of creditors
and preferred stockholders, if any, for the distribution pro rata among the
stockholders of the Corporation of the assets of the Corporation, wholly or in
part, in cash or in kind, whether such assets be in cash or other property, and
any such vote or votes may authorize the Board of Directors of the Corporation
to determine the valuation of the different assets of the Corporation for the
purpose of such liquidation and may divide or authorize the Board of Directors
to divide such assets or any part thereof among the stockholders of the
Corporation, in such manner that every stockholder will receive a proportionate
amount in value (determined as aforesaid) of cash and/or property of the
Corporation upon such agreement, vote of stockholders or disinterested directors
or otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of such a person.
SIXTH. The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation law of the State of Delaware, as the same may be
amended and supplemented, indemnify any and all persons whom its shall have
power to indemnify under said section from and against any and all of the
expenses, liabilities or other matters referred to in or covered by said section
and the indemnification provided for herein shall not be deemed exclusive of any
other rights to which those indemnified may be entitled under any By-Law,
agreement, vote of stockholders or disinterested Directors of otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
SEVENTH. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation, or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of Section 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
to be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholder of this Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
this Corporation as consequence of such compromise and arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be
-2-
<PAGE>
binding on all creditors or class of creditors, and/or of the stockholders or
class of stockholders of this Corporation, as the case may be, and also on this
Corporation.
EIGHTH. If any Article of this Certificate of Incorporation or any portion
thereof is found to be void or unenforceable by a court of competent
jurisdiction, the remaining Articles or portions of said Article, as the case
may be, shall nevertheless remain in full force and effect as though the
unenforceable part had been severed and deleted.
-3-
NUMBER IVC INDUSTRIES, INC. SHARES
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
IVU
COMMON STOCK
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS IS TO CERTIFY that CUSIP 45070M 30 9
is the owner of
full-paid and non-assessable shares of Common Stock of
the par value of Eight Cents ($.08) each of
IVC INDUSTRIES, INC.
============================= =============================
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed.
This Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated
/s/ Domenic Golato /s/ Joseph Edell
SECRETARY CHAIRMAN AND CHIEF EXECUTIVE OFFICER
[Corporate Seal]
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, NY)
TRANSFER AGENT
AND REGISTRAR
AUTHORIZED SIGNATURE
<PAGE>
The Corporation will furnish without charge to any shareholder who so
requests a full statement of, and the authority of the Board of Directors to
fix, the designation, relative rights, preferences and limitations of the shares
of each class of stock, or series thereof, authorized to be issued.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right
of survivorship and not as
tenants in common Act
UNIF GIFT MIN ACT -- Custodian
------------------ ------------
(Cust) (Minor)
under Uniform Gifts to Minors
Act
------------------
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, __________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
---------------------------
---------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- -----------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- -----------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
---------------------------
--------------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
- ----------------------------------------
THE SIGNATURE(S) MUST BE GURANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS),
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATION AND CREDIT UNIIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GURANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
SEVERANCE, CONSULTING AND NON-COMPETITION AGREEMENT
AGREEMENT, dated as of March 1, 1999, between I. ALAN HIRSCHFELD
("Hirschfeld") and IVC INDUSTRIES, INC. ("IVC").
WHEREAS:
(1) Hirschfeld is employed by IVC pursuant to the terms of an Employment
Agreement (the "Employment Agreement"), dated as of April 28, 1995 and amended
as of February 1, 1998, between Hirschfeld and International Vitamin Corporation
(a predecessor corporation of IVC);
(2) Hirschfeld wishes to resign his employment with IVC and all its
subsidiaries, and IVC is willing to accept such resignation, all on the terms
set forth herein.
NOW, THEREFORE, it is hereby agreed as follows:
1. Hirschfeld hereby resigns his employment with IVC and all its
subsidiaries, effective as of March 1, 1999 (the "Effective Date"). Hirschfeld
hereby further resigns, effective as of the Effective Date, all officerships,
directorships and committee memberships with IVC and all of its subsidiaries.
Hirschfeld agrees that, subsequent to the date this Agreement is executed and
delivered, he shall not represent or hold himself out as an officer, director,
employee or member of any committee of IVC or any of its subsidiaries. In
consideration of
<PAGE>
such resignations, IVC shall pay to Hirschfeld on a weekly basis for a period of
one year commencing on the second anniversary of the Effective Date the amount
of $90,000.
2. IVC hereby retains Hirschfeld as a consultant to IVC for a period (the
"Consulting Period") of three years commencing on the Effective Date. Hirschfeld
accepts such retention and agrees to consult in connection with the operation of
IVC's business in person and/or by telephone, facsimile or e-mail, from his home
or place of business or at the Company's principal offices with IVC's chief
executive, or at the chief executive's direction, with IVC's chief operating
and/or chief financial officer, for no more than ten hours in any month during
the Consulting Period, which services may be rendered from such locations and at
such times as Hirschfeld shall reasonably determine. IVC agrees that Hirschfeld
may assign his obligations to serve as a consultant under this Agreement to a
corporation wholly-owned by Hirschfeld or a member of his immediate family. In
consideration of such services, IVC shall pay to Hirschfeld on a weekly basis a
consulting fee (the "Consulting Payment") at the rate of: (i) $96,000 per annum
for the first and second year of the Consulting Period and (ii) $9,000 for the
third year of the Consulting Period. In the event of the death of Hirschfeld
during the Consulting Period, IVC shall pay to Hirschfeld's executor,
administrator or other legal representative any Consulting Payments owed to
Hirschfeld at the time of his death and the Consulting Payments shall continue
to be made to Hirschfeld's executor, administrator or other legal representative
during the remainder of the Consulting Period. IVC shall not be responsible for
the withholding and payment of Federal, state and local taxes associated with
the Consulting Payments, including but not limited to, income taxes, FICA or
FUTA, as those terms are defined in the Internal Revenue Code of 1986, as
amended.
2
<PAGE>
3. IVC agrees that the options granted to Hirschfeld under the 1995 Stock
Option Plan to purchase 50,000 shares of IVC's common stock shall remain
exercisable during the Consulting Period, provided that, in the event of the
death of Hirschfeld during the Consulting Period, Hirschfeld's executor,
administrator or other legal representative shall be entitled to exercise such
options for a period of 90 days following his death, at which time such options
shall expire.
4. Hirschfeld hereby elects to waive his rights under COBRA continuation
medical coverage. IVC agrees to obtain and pay for a private insurance plan (the
"Private Plan") providing substantially the same benefits as presently provided
under IVC's Group Medical Insurance Plan (the "IVC Plan"). During the Consulting
Period, IVC shall reimburse Hirschfeld, on a semi-annual basis commencing six
months form the Effective Date and upon appropriate documentation, up to a
maximum of $6,000 per year for amounts (each, a "Make Whole Amount") paid by
Hirschfeld under the Private Plan that he would not have otherwise paid under
the then current IVC Plan. Following the termination of the Consulting Period,
Hirschfeld shall be solely responsible for any payments due under the Private
Plan. If during the Consulting Period, Hirschfeld independently obtains a
private insurance plan, IVC agrees to pay Hirschfeld on a monthly basis for the
remainder of the Consulting Period an amount equal to the monthly premium IVC
would have otherwise paid under the Private Plan, but IVC shall no longer be
obligated to pay any Make Whole Amount.
5. During the Consulting Period, IVC shall pay to Hirschfeld or his
designee an allowance of $700 per month for expenses associated with his use of
a car. Hirschfeld shall be responsible for paying all such expenses, including,
without limitation, finance charges, lease
3
<PAGE>
payments, insurance payments and repair expenses, but shall have no obligation
to account to IVC for such expenses.
6. Hirschfeld hereby acknowledges that as of January 31, 1999, Hirschfeld
owes to IVC the principal amount, together with accrued unpaid interest as of
January 31, 1999, of $136,912.28 (the "Unpaid Balance"). Beginning February 1,
1999, the Unpaid Balance shall accrue interest at the rate of 5.0% per annum,
compounded monthly. Hirschfeld and IVC agree that the Unpaid Balance, together
with all accrued interest thereon, shall be payable in three successive annual
installments commencing on the fourth anniversary of the Effective Date.
7. Hirschfeld hereby acknowledges that during his employment he has or may
have acquired proprietary, private and/or otherwise confidential information of
or concerning IVC or any of its subsidiaries or any persons or entities with
which IVC or any of its subsidiaries transacts or transacted business,
including, without limitation, any non-public financial information concerning,
or any information relating to, any aspect of the operation of the business of
IVC or any of its subsidiaries ("Confidential Information"). Hirschfeld hereby
represents and agrees that (a) he has returned to IVC or destroyed, and has not
retained any copies of, all documents, records or materials of any kind, whether
written or electronically created or stored, which contain, relate to or refer
to any Confidential Information ("Confidential Materials"), (b) he will not
disclose any Confidential Information or Confidential Materials to any person or
entity outside the scope of his employment without the express authorization of
the Chief Executive Officer of IVC, and (c) in consideration of IVC's entering
into this Agreement, he shall not disclose any Confidential Information or
Confidential Materials in any manner whatsoever, except as shall be required by
law or as directed by IVC or its chief executive.
4
<PAGE>
8. Hirschfeld hereby agrees that for the period from August 1, 1999 to the
expiration of the Consulting Period (the "Non-Compete Period"), he shall not,
directly or indirectly, engage or participate anywhere in the United States or
North America as an owner, partner, shareholder, member, employee, director,
consultant or otherwise in any business engaged in the manufacturing, packaging
and sale and distribution of store brand (private label) vitamins and
nutritional supplements, unless such store brand (private label) business
constitutes less than 50% of the revenue of such business. In the event of any
breach of this paragraph 8, the time period of the breached covenant shall be
extended for the period of such breach. Hirschfeld recognizes that the
territorial, time and scope limitations set forth in this paragraph 8 are
reasonable and are required for the protection of IVC, and in the event that any
such territorial, time or scope limitation is deemed to be unreasonable by a
court of competent jurisdiction, Hirschfeld and IVC agree to the reduction of
any of said territorial, time or scope limitations to such an area, period or
scope as said court shall deem reasonable under the circumstances. In
consideration of the foregoing covenant not to compete, IVC shall pay to
Hirschfeld on a weekly basis commencing on the Effective Date (i) $75,000 per
annum for the first and second year of the Consulting Period and (ii) $9,000 per
annum for the third year of the Consulting Period. Payments made by IVC to
Hirschfeld prior to beginning of the Non-Compete Period shall be deemed
prepayments of such covenant not to compete.
9. As a material inducement to IVC to enter into this Agreement, and in
consideration of IVC's obligations under this Agreement and for other good and
valuable consideration, the receipt of which is hereby acknowledged by
Hirschfeld, Hirschfeld hereby irrevocably, unconditionally and generally
releases IVC and all its subsidiaries and each of IVC's and its subsidiaries'
officers, directors, and employees, and the heirs, executors, administrators,
receivers, successors and assigns of all of the foregoing (collectively,
"Releasee"), from, and
5
<PAGE>
hereby waives and/or settles any and all, actions, causes of action, suits,
debts, sums of money, agreements, promises, damages, or any liability, claims or
demands, known or unknown and of any nature whatsoever (collectively, "Claims")
which Hirschfeld ever had, now has or hereafter can, shall or may have, for,
upon, or by reason of any matter, cause or thing whatsoever from the beginning
of the world to the date of this release, arising directly or indirectly
pursuant to or out of his employment with IVC, the performance of services for
IVC or any Releasee or the termination of such employment or services and,
specifically, without limitation, any rights and/or Claims (a) arising under or
pursuant to any contract, express or implied, written or oral, including,
without limitation, the Employment Agreement, (b) for wrongful dismissal or
termination of employment, (c) arising under any federal, state, local or other
statutes, orders, laws, ordinances, regulations or the like that relate to the
employment relationship and/or specifically that prohibit discrimination based
upon age, race, religion, sex, national origin, disability, sexual orientation
or any other unlawful bases, including, without limitation, the Age
Discrimination in Employment Act of 1967, as amended, the Equal Pay Act, the
Civil Rights Act of 1991, as amended, the Civil Rights Acts of 1866 and 1871, as
amended, the Americans with Disabilities Act of 1990, as amended, and any
applicable rules and regulations promulgated pursuant to or concerning any of
the foregoing statutes, (d) for tort, tortious or harassing conduct, infliction
of mental or emotional distress, interference with contract, fraud, libel or
slander, and (e) for damages, including, without limitation, punitive or
compensatory damages or for attorneys' fees, expenses, costs, wages, injunctive
or equitable relief. This section shall not apply to any claim which Hirschfeld
may have for a breach of this Agreement.
10. Each Releasee hereby irrevocably, unconditionally and generally
releases Hirschfeld and his heirs, executors, administrators and assigns from,
and hereby waives and or
6
<PAGE>
settles any and all Claims which any Releasee ever had, now has or hereafter
can, shall or may have, for, upon, or by reason of any matter, cause or thing
whatsoever from the beginning of the world to the date of this release, arising
directly or indirectly pursuant to or out of Hirschfeld's employment with IVC,
his performance of services for IVC or any of its subsidiaries or the
termination of such employment or services and, specifically, without
limitation, any rights and/or Claims (a) arising under or pursuant to any
contract, express or implied, written or oral, including, without limitation,
the Employment Agreement, (b) for tort, interference with contract, fraud, libel
or slander, and (c) for damages, including, without limitation, punitive or
compensatory damages or for attorneys' fees, expenses, costs, injunctive or
equitable relief. This section shall not apply to any claim which IVC may have
for a breach of this Agreement or IVC's rights under paragraph 6 above.
11. Hirschfeld represents and warrants that he has not filed, commenced or
participated in any way in any complaints, claims, actions or proceedings of any
kind against any Releasee with any federal, state or local court or any
administrative, regulatory or arbitration agency or body, and he agrees not to
file, assert or commence any complaint, claim, action or proceeding of any kind
against any Releasee with any federal, state or local court or any
administrative, regulatory or arbitration agency or body with respect to any
matter from the beginning of the world to the date hereof. This section shall
not apply to any claim which Hirschfeld may have for breach of this Agreement.
12. Each Releasee represents and warrants that it has not filed, commenced
or participated in any way in any complaints, claims, actions or proceedings of
any kind against Hirschfeld with any federal, state or local court or any
administrative, regulatory or arbitration agency or body, and each Releasee
agrees not to file, assert or commence any complaint, claim, action or
proceeding of any kind against Hirschfeld with any federal, state or local court
or any administrative, regulatory or arbitration
7
<PAGE>
agency or body with respect to any matter from the beginning of the world to the
date hereof. This section shall not apply to any claim which IVC may have for a
breach of this Agreement or IVC's rights under paragraph 6 above.
13. Hirschfeld hereby waives any right to, and agrees not to, seek
reinstatement of employment with IVC or any Releasee.
14. Hirschfeld acknowledges and agrees that any monetary or other benefits
which are, were or may have been claimed to be due to Hirschfeld and which he
may have earned or accrued, or to which he may have been entitled, have been
paid or such payments have been released, waived or settled by Hirschfeld
pursuant to this Agreement. This section shall not apply to any claim which
Hirschfeld may have for any bonus payments owed to Hirschfeld as of the date of
this Agreement or any payments under this Agreement.
15. IVC and each Releasee acknowledge and agree that any monetary or other
benefits which are, were or may have been claimed to be due to IVC or any
Releasee and which IVC or any Releasee may have earned or accrued, or to which
he may have been entitled, have been paid or such payments have been released,
waived or settled by Hirschfeld or any Releasee pursuant to this Agreement. This
section shall not apply to any claim which IVC may have for a breach of this
Agreement or IVC's rights under paragraph 6 above.
16. (a) By executing this Agreement, Hirschfeld acknowledges that (i) he
has been advised by IVC to consult with an attorney before executing this
Agreement and has
8
<PAGE>
consulted and been represented by Alan Davis, Esq., of the firm of Greenbaum,
Rowe, Smith, Ravin, Davis & Himmel LLP, in connection herewith, (ii) he has been
provided with at least a 21 day period to review and consider whether to sign
this Agreement and that by executing and delivering this Agreement to IVC, he is
waiving any remaining portion of such 21 day period, and (iii) he has been
advised that he has seven days following execution by both parties to this
Agreement to revoke this Agreement (the "Revocation Period").
(b) This Agreement will not be effective or enforceable until the
Revocation Period has expired, and the Consulting Payment will not be payable
nor will the deferment of the loan referred to in paragraph 6 of this Agreement
be effective until after the expiration of the Revocation Period. Such
revocation shall only be effective if an originally executed written notice
thereof is delivered to IVC on or before 5:00 p.m. on the seventh day after
execution of this Agreement. If so revoked, this Agreement shall be deemed to be
void ab initio and of no further force and effect.
17. Hirschfeld agrees that, unless otherwise required by law, neither he,
nor anyone acting on his behalf, shall hereafter (i) make any derogatory,
disparaging or critical statement about IVC or any of its subsidiaries or the
business of IVC or any of its subsidiaries or any of IVC's and its subsidiaries'
current officers, directors or employees or any persons who were officers,
directors or employees of IVC or any of its subsidiaries or (ii) communicate,
directly or indirectly, with the press or other media concerning the past or
present employees or business of IVC or any of its subsidiaries.
18. Each Releasee agrees that neither it, nor anyone acting on each
Releasee's behalf, shall hereafter (i) make any derogatory, disparaging or
critical statement about Hirschfeld, his
9
<PAGE>
reputation, business expertise and job performance or (ii) communicate, directly
or indirectly, with the press or other media concerning Hirschfeld in any
manner.
19. IVC and Hirschfeld agree that, unless otherwise required by law, the
form and substance of the press release appended hereto as Exhibit A shall be
the only announcement made to the press or other media concerning the
resignation of Hirschfeld.
20. If not revoked in accordance with paragraph 16 (b), the covenants,
representations and acknowledgments contained herein shall survive the execution
and delivery of this Agreement.
21. This Agreement (a) constitutes the sole and complete understanding and
agreement between the parties hereto with respect to the matters set forth
herein and there are no other agreements or understandings, whether written or
oral and whether made contemporaneously or otherwise, that are binding upon the
parties hereto, (b) fully supersedes the Employment Agreement, (c) may not be
amended unless in a writing signed by the parties hereto, (d) shall be subject
to, governed by and construed and enforced in accordance with the internal laws
of the State of New Jersey and (e) shall inure to the benefit of and be binding
upon the heirs, devisees, legatees, executors, administrators, successors,
assigns, officers, directors, and affiliates of each of the parties hereto.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Severance,
Consulting and Non-Competition Agreement on the date set forth opposite their
respective signatures.
Dated: March 29, 1999 /s/ I. Alan Hirschfeld
----------------------------------------
I. ALAN HIRSCHFELD
Dated: March 29, 1999 IVC INDUSTRIES, INC.
By:/s/ Domenic Golato
-------------------------------------
Name: Domenic Golato
Title: Secretary and Chief Financial
Officer
11
<PAGE>
EXHIBIT A
IVC INDUSTRIES, INC.
Appoints Domenic N. Golato, Chief Financial Officer
Freehold, NJ, March xx, 1999- IVC Industries, Inc. (NASDAQ: IVCO) announced
today the appointment of Domenic N. Golato (xx) as Chief Financial Officer.
Mr. Golato had served as Vice President Finance and Controller since he
joined the Company in 1998. He succeeds Alan Hirschfeld who resigned his
position as Executive Vice President, Chief Financial Officer and his seat on
the Board of Directors. Mr. Hirschfeld will continue to serve as a consultant to
IVC.
Prior to joining IVC, Mr. Golato was Vice President and Chief Financial
Officer of RF Power Products, Inc. Previously, he held financial management
positions with Silo, Inc., Radnor Financial Corporation and MG Industries, Inc.
He began his career with Coopers & Lybrand, Philadelphia. Mr. Golato holds a
B.S. degree in accounting and a masters in taxation from Villanova University.
In announcing the appointment, E. Joseph Edell, Chairman and Chief
Executive Officer, said, "Since joining IVC, Dom Golato has been instrumental in
helping the Company initiate its restructuring program. He is an important
member of our new management team and we are pleased to appoint him to this very
strategic position. His financial and management background will add
significantly to our strategic goals."
IVC Industries, Inc. is engaged in the manufacturing, packaging and
worldwide sales and distribution of vitamins, nutritional supplements and
over-the-counter (non-prescription) pharmaceutical products through drug stores,
supermarkets and mass merchandising chains, as well as health food stores,
independent drug stores and the company-owned retail stores and mail order
operation. Its products are distributed under the "Fields of Nature,"
"LiquaFil," "Pine Bros.," "Rybutol," "Nature's Wonder," "Synergy Plus" and
"Vitamin Specialties" brands, as well as under the private brands (store brands)
of its retail chain store customers.
EMPLOYMENT AGREEMENT
This employment agreement (Agreement) is entered into as of this 30th day of
November, 1998 by and between IVC Industries, Inc. with the address of 500 Halls
Mill Road, Freehold, NJ 07728 ("IVC" or the "Company") and Jesus Febus with a
home address of 313 Stevens Avenue, Jersey City, NJ 07305.
Whereas, IVC desires to employ the services of Mr. Febus utilizing his knowledge
and expertise as a full-time employee without the distraction of employment
related uncertainties and considers such employment in the best interests of the
Company and its shareholders, and Mr. Febus desires to be employed full-time by
the Company; and
Whereas, IVC and Mr. Febus desire to enter into an Agreement reflecting the
terms under which Mr. Febus will be employed by the Company for a two (2) year
period.
Now, therefore, in consideration of the premises and mutual covenants set forth
herein, the parties hereto agree as follows:
1. Term. This Agreement will remain in effect for a period of two
(2) years and will be renewed automatically for succeeding
periods of two (2) years unless sooner terminated as provided in
sections 6 and 7 below.
2. Nature of Employment. Mr. Febus shall be employed as Vice
President, Information Technology of IVC with full power and
authority as determined by the Board of Directors of IVC (the
"Board"). Mr. Febus agrees to diligently and faithfully perform
such duties and serve in the above capacity or such capacities
as the Board of Directors of the Company shall determine from
time to time. The duties to be performed by Mr. Febus are to be
in line with the customary duties for this position in the
Information Technologies Industry.
Mr. Febus' duties include but are not limited to the following:
a. Report to the Chief Executive Officer of the Company.
b. Manage the Information Technology function corporate-wide.
c. Provide support to the company strategic direction.
d. Manage the budget allocated to the Information Technology
function.
3. Compensation for Services. As consideration to Mr. Febus for
services rendered under this Agreement, IVC shall compensate Mr.
Febus as follows:
(a) Base salary. Mr. Febus shall receive a minimum base salary of
$125,000 per year, to be reviewed annually by the Chief
Executive Officer.
(b) Incentive Compensation. Incentive compensation may be awarded as
determined by the Board of Directors, based on the executive's
performance.
<PAGE>
(c) Benefits. Mr. Febus shall be entitled to all other benefits
normally accorded to full time employees of IVC and to members
of the IVC Board of Directors, including medical insurance and
life insurance for Mr. Febus' family, holidays, etc. as
consistent with other key senior management personnel or as may
be decided by the Company if said items are discretionary with
the Company.
(d) Mr. Febus shall be entitled to a minimum of 50,000 incentive
stock options at a price of $0.875 per share. Mr. Febus will
receive 25,000 incentive stock options on November 30, 1998. Mr.
Febus will receive the remaining incentive stock options on
November 30, 1999.
(e) Mr. Febus will be entitled to three (3) weeks of vacation per
year.
(f) Mr. Febus shall be entitled to all health and sick leave as is
accorded to other key senior management personnel.
4. Responsibilities of Executive. The responsibilities of Mr. Febus
under this Agreement are as follows:
(a) Mr. Febus agrees to serve IVC for the term of employment
specified in Section 1 above. Mr. Febus agrees to (i) devote his
full business time to the business and affairs of IVC, and (ii)
use his best efforts to promote the interests of IVC, and (iii)
perform faithfully and efficiently the responsibilities assigned
to him and listed in Section 2 above.
(b) During the term of this Agreement, Mr. Febus shall not perform
services for any person or entity that competes directly or
indirectly with the Company. Mr. Febus agrees to disclose in
writing to the Board any non-Company activities for which Mr.
Febus receives compensation for services rendered. If the Board
deems such activities to be excessive and to conflict with Mr.
Febus' full time commitment, then the Company shall notify Mr.
Febus in writing to limit those activities to periods in which
no time conflict occurs.
(c) Mr. Febus agrees to abide by general Company policies as the
same are duly adopted by the Board from time to time, so long as
such policies do not conflict with the terms and conditions of
this Agreement.
5. Confidentiality and Non-Disclosure Agreement. Mr. Febus hereby
agrees that he will not at any time, without the express written
consent of the Company: (i) disclose, directly or indirectly,
any Confidential Information (as defined below) to anyone
outside the employ of the Company, or (ii) use, directly or
indirectly, any confidential information for the benefit of
anyone other than the Company.
Confidential Information as used herein means all information of
a business or technical nature disclosed to, learned or
developed by Mr. Febus in the course of his employment by the
Company, which information relates to the business of the
Company or the business of any customer of the Company, or the
business of any other person, firm, corporation, or other entity
which consults with the Company in connection with the business
which is generally not known in the vitamin or soft gelatin
industry. Confidential Information shall include, but is not
-2-
<PAGE>
limited to, information and knowledge pertaining to soft gelatin
capsule formulation or manufacture, vitamin formulation,
manufacturing processes, procedures, packaging, developments,
improvements, methods or operation, sales and profit figures,
customer and client lists, credit and other financial
information about the Company or their customers, and
relationships between the Company and its customers, clients and
others who have business dealings with the Company.
6. Terminations by the Company. The Board of Directors may
terminate the employment of Mr. Febus at any time with or
without cause, and in such event the following shall apply.
"Cause" for termination shall be defined as gross neglect by the
Executive of his duties hereunder, willful failure by the
Executive of a felony committed during the term of this
Agreement, or of any lesser crime or offense involving the
property of the Company or any of its subsidiaries or
affiliates, gross malfeasance by the Executive in connection
with the performance of his duties hereunder, willful engagement
in conduct by the Executive to perform his duties and
responsibilities which he has reason to know is materially
injurious to the Company.
(a) In the event of termination for cause, as defined above, by IVC,
all salary and other benefits paid or provided to the Executive
hereunder shall cease as of the date of the termination, and the
Company shall have no further obligations to the Executive. Upon
a finding by the Board of Directors that the Executive has
willfully failed or refused to observe or perform his duties or
grossly neglected his duties as specifically set forth in
Section 4 hereof. IVC may terminate this Agreement for cause
provided that the Board of Directors has first notified the
Executive at least thirty (30) days after each such occasion to
remedy such breach of duty.
(b) In the event of termination by IVC without cause, except as
provided in Section 6(c) hereof, the Company agrees to provide
the Executive with the following:
(i) Mr. Febus shall receive an amount equal to twelve (12)
months base salary plus the value of the other employment
benefits accrued at the time of termination that Mr. Febus
would have received under this Agreement but for such
termination. Such amount shall be payable to Mr. Febus in
bimonthly installments over a period of twelve (12) months
following termination.
(ii) The definition of termination without case shall
include, but not be limited to, any termination relating to
a continuous disability or incapacity of Mr. Febus which
prevents him from performing his duties for a period of not
less than three (3) months as determined by any independent
licensed medical doctor. The definition of termination
without cause shall also include the non-renewal of this
agreement by the Company.
(c) IVC shall be entitled to terminate this Agreement upon a finding
of the Board that Mr. Febus has willfully failed to observe or
perform his obligations or duties as specifically set forth in
Section 4 hereof, provided that the Board has first notified Mr.
Febus on two separate occasions of such failure and has given
Mr. Febus at least thirty (30) days after each
-3-
<PAGE>
such occasion to remedy such willful breach of duty. In the
event of a termination under this Section 6(c), IVC shall
provide Mr. Febus with an amount equal to six (6) months base
salary. Such amounts shall be payable to Mr. Febus in bimonthly
installments over a period of six (6) months following
termination.
7. Resignation by Executive. Mr. Febus may terminate this Agreement
and his employment with IVC at any time with our without cause.
In the event of termination by Mr. Febus with cause, he shall
receive an amount equal to twelve (12) months base salary plus
the value of the other employment benefits accrued at the time
of termination that Mr. Febus would have received under this
Agreement but for such termination. Such amount shall be payable
to Mr. Febus in bimonthly installments over a period of twelve
(12) months following termination. For purposes of this Section
7, the Executive termination "for cause" shall be defined as
termination for IVC's willful or permanent breach of its
obligations under this Agreement.
8. Governing Law. The Agreement shall be governed by and construed
in accordance with the laws of the State of New Jersey. In the
event of any dispute under this Agreement, it shall be resolved
through binding arbitration in accordance with the rules of the
American Arbitration Association.
9. Validity. The invalidity or unenforceability of any provision or
any provisions of this Agreement shall not effect the validity
or enforceability of any other provision of the Agreement, which
shall remain in full force and effect.
10. Entire Agreement. This Agreement constitutes the entire
understanding between the parties with respect to the subject
matter hereof, superseding all negotiations, prior discussions
and preliminary agreements. This Agreement may not be amended
except in writing executed by the parties hereto. 11. Effect on
Successors in Interest. This Agreement shall inure to the
benefit of and be binding upon heirs, administrators, executors,
successors and assigns of each of the parties hereto.
11. Effect on Successors in Interest. This Agreement shall inure to
the benefit of and be binding upon heirs, administrators,
executors, successors and assigns of each of the parties hereto.
12. Notices. Any notice required or permitted hereunder shall be
given in writing and shall be deemed effectively given upon
personal delivery, including by facsimile, or by recognized
courier (such as Federal Express), or three (3) business days
after deposit in the United States mail, by registered or
certified mail, addressed to a party at its address shown below
or at such other address or facsimile number as such party may
designate in writing to the other party pursuant to this
section.
13. Assignment. IVC must assign this agreement and delegate all its
rights, duties and obligations hereunder, whether in whole or in
part to any parent, affiliate, successor, or subsidiary
organization or company of IVC or corporation with which IVC may
merge or consolidate or which acquires by purchase or otherwise
all or substantially all of IVC assets, subject to the
provisions of Section 6(d), but such assignment shall not
release IVC from its obligations under this Agreement. The
Executive shall have no right to assign this Agreement.
-4-
<PAGE>
14. Severability. If any court of competent jurisdiction should find
any provision of this Agreement invalid or unenforceable, for
any reason, the remaining portion or portions hereof shall
nevertheless be valid, enforceable and carried into effect,
unless to do so would clearly violate the present legal and
valid intention of the parties hereto.
In witness whereof, the Company has caused this Agreement to be signed by a duly
authorized officer, and Mr. Febus has signed this Agreement.
The Company:
IVC Industries, Inc.
500 Halls Mill Road
Freehold, NJ 07728
By: /s/ E. Joseph Edell
-------------------------
E. Joseph Edell
Chief Executive Officer
Executive:
/s/ Jesus Febus
-------------------------
Jesus Febus
-5-
AMENDMENT TO EMPLOYMENT AGREEMENT
This amendment to the current employment agreement is entered into as of this
26th day of July 1999 by and between IVC Industries, Inc. and Jesus Febus.
In consideration of the premises and mutual covenants defined in the EMPLOYMENT
AGREEMENT, and in compliance with section 3.(a) "Annual review of the Executive
salary by the Chief Executive Officer", and in lieu of the employment
anniversary of the Executive the 2nd day of June, the parties hereto agree to
the following update:
1. Mr. Febus will serve IVC Industries, Inc. as Chief Information Officer
and Sr. Vice President of Information Technology.
2. Revised base salary. The revised base salary will reflect an eighteen
percent increase from the current base salary, effective on the
employment anniversary. This is less than the twenty-five percent
increase necessary to match the median low of the salary scale for the
northeast region.
3. Benefits. As a company executive, Mr. Febus shall be entitled to a car
allowance equal to the average call allowance granted to other key
senior management personnel.
In witness whereof, the Company has caused this Agreement to be signed by a duly
authorized officer, and Mr. Febus has signed this Agreement.
The Company:
IVC Industries, Inc.
500 Halls Mill Road
Freehold, NJ 07728
By: /s/ E. Joseph Edell
-------------------------
E. Joseph Edell
Chief Executive Officer
Executive:
/s/ Jesus Febus
-------------------------
Jesus Febus
IVC INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF NET INCOME (LOSS) PER SHARE
FOR THE YEARS ENDED JULY 31, 1997, 1998 AND 1999
(Dollars in Thousands, Except as Noted or Per Share Information)
<TABLE>
<CAPTION>
Years Ended
July 31,
---------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ 1,346 $ 1,147 $ (7,041)
Less - preferred stock dividends -- -- --
----------- ----------- -----------
Net income (loss) for basic income per common share $ 1,346 1,147 $ (7,041)
=========== =========== ===========
Weighted average number of common shares
outstanding during the year - Basic 2,136,394 2,143,191 2,148,143
Add - common equivalent shares
(determined using the "treasury stock" method)
representing shares issuable upon exercise of
employee stock options and incentive
performance shares 4,953 11,174 766
----------- ----------- -----------
Weighted average number of common shares - Diluted 2,141,347 2,154,365 2,148,909
=========== =========== ===========
Income (loss) per common share - Diluted $ 0.63 $ 0.53 $ (3.28)
=========== =========== ===========
</TABLE>
E-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from 10K 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-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 287
<SECURITIES> 0
<RECEIVABLES> 7,296
<ALLOWANCES> 0
<INVENTORY> 27,374
<CURRENT-ASSETS> 42,927
<PP&E> 19,839
<DEPRECIATION> 0
<TOTAL-ASSETS> 65,241
<CURRENT-LIABILITIES> 22,662
<BONDS> 27,898
0
0
<COMMON> 167
<OTHER-SE> 10,373
<TOTAL-LIABILITY-AND-EQUITY> 65,241
<SALES> 107,339
<TOTAL-REVENUES> 0
<CGS> 81,189
<TOTAL-COSTS> 27,658
<OTHER-EXPENSES> 6,994
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,607
<INCOME-PRETAX> (10,931)
<INCOME-TAX> (3,890)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,041)
<EPS-BASIC> (3.28)
<EPS-DILUTED> (3.28)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> MAY-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 287
<SECURITIES> 0
<RECEIVABLES> 7,296
<ALLOWANCES> 0
<INVENTORY> 27,374
<CURRENT-ASSETS> 42,927
<PP&E> 19,839
<DEPRECIATION> 0
<TOTAL-ASSETS> 65,241
<CURRENT-LIABILITIES> 22,662
<BONDS> 27,898
0
0
<COMMON> 167
<OTHER-SE> 10,373
<TOTAL-LIABILITY-AND-EQUITY> 65,241
<SALES> 21,881
<TOTAL-REVENUES> 0
<CGS> 18,243
<TOTAL-COSTS> 8,890
<OTHER-EXPENSES> 6,994
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 610
<INCOME-PRETAX> (12,826)
<INCOME-TAX> (4,578)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,248)
<EPS-BASIC> (3.83)
<EPS-DILUTED> (3.83)
</TABLE>
