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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended April 30, 1999
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 13(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the period from _______________ to _______________
Commission file number 0-23624
IVC INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-1567481
(State of incorporation) (I.R.S. Employer Identification No.)
500 HALLS MILL ROAD, FREEHOLD, N. J. 07728
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (732) 308-3000
NOT APPLICABLE
--------------
(former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No |_|
Registrant had 17,211,540 shares of common stock outstanding as of June 1, 1999
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<PAGE>
IVC INDUSTRIES, INC.
Table of Contents
Part I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets as at
April 30, 1999 and July 31, 1998................................... 3
Consolidated Statements of Income
For The Three and Nine Months Ended April 30, 1999 and 1998......... 4
Consolidated Statements of Cash Flows
For the Nine Months Ended April 30, 1999 and 1998................... 5
Notes to Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 12
Part II. OTHER INFORMATION, REPORTS ON FORM 8-K AND EXHIBITS............. 13
Signature Page........................................................... 15
<PAGE>
Item 1. Financial Statements.
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Information)
April 30, July 31,
ASSETS 1999 1998
------ ---- ----
Current Assets: (unaudited)
Cash and cash equivalents $ 813 $ 1,604
Accounts receivable 13,410 11,725
Inventories 26,245 37,389
Due from related parties 26 95
Deferred taxes 2,238 2,238
Prepaid expenses 1,173 2,006
Other current assets 374 979
-------- --------
Total Current Assets 44,279 56,036
Property, Plant and Equipment - Net 19,878 20,766
Due from related parties 1,876 1,876
Goodwill - Net 1,640 1,773
Other Assets 1,779 803
-------- --------
Total assets $ 69,452 $ 81,254
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 22,469 $ 22,749
Current portion of capital lease payable 168 134
Current portion of deferred gain on building 102 97
Accounts payable 12,682 25,504
Accrued expenses 3,161 3,003
-------- --------
Total Current Liabilities 38,582 51,487
Long-term debt -- Less current portion 7,408 7,271
Capital lease obligation 3,183 3,317
Deferred gain on building sale 1,031 1,109
Other liablities 211 211
Total liabilities -- 99
-------- --------
Total Liabilities 50,415 63,494
-------- --------
Shareholders' Equity:
Preferred stock, no par value,
2,000,000 shares authorized -- --
Common stock, $.01 par value, 25,000,000
shares authorized; 17,211,540 shares issued 172 172
Additional paid-in capital 11,718 11,673
Foreign currency translation adjustment (177) (202)
Retain earnings 7,324 6,117
-------- --------
Total Shareholders' Equity 19,037 17,760
======== ========
Total Liabilities and Shareholders' Equity $ 69,452 $ 81,254
======== ========
3
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Information)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 25,558 $ 34,980 $ 85,459 $ 91,942
Cost of sales 18,544 26,557 62,946 68,680
----------- ----------- ----------- -----------
Gross profit 7,014 8,423 22,513 23,262
Selling, general and
administrative expenses 5,731 6,775 18,731 19,191
----------- ----------- ----------- -----------
Income from operations 1,283 1,648 3,782 4,071
Other expenses - net 638 553 1,887 1,713
----------- ----------- ----------- -----------
Income before income taxes 645 1,095 1,895 2,358
Income tax provision 186 393 688 787
----------- ----------- ----------- -----------
Net income $ 459 $ 702 $ 1,207 $ 1,571
=========== =========== =========== ===========
Basic earnings per share $ 0.03 $ 0.04 $ 0.07 $ 0.09
=========== =========== =========== ===========
Diluted earnings per share $ 0.03 $ 0.04 $ 0.07 $ 0.09
=========== =========== =========== ===========
Weighted average shares
outstanding:
Basic 17,211,540 17,127,392 17,211,540 17,125,751
=========== =========== =========== ===========
Diluted 17,219,304 17,242,093 17,214,463 17,199,493
=========== =========== =========== ===========
</TABLE>
4
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(unaudited)
Nine Months Ended
April 30,
---------
CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998
-------- --------
Net income $ 1,207 $ 1,571
-------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,235 1,719
Stock distributed to employee savings plan -- 54
Stock issued to non-employee directors 45 --
Changes in assets - (increase) decrease:
Accounts receivable (1,685) (4,808)
Inventories 11,144 1,210
Prepaid expenses and other current assets 1,507 (687)
Other assets (976) 1,129
Changes in liabilities - increase (decrease):
Accounts payable and accrued expenses (12,664) 4,594
Other (172) --
-------- --------
Total adjustments (566) 3,211
-------- --------
Net Cash Provided By Operating Activities 641 4,782
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1,214) (1,831)
-------- --------
Net Cash Used In Investment Activities (1,214) (1,831)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds/(payments) of short-term debt (280) 205
Proceeds/(payments) of long-term debt 137 (2,454)
Principal payments of capital lease obligations (100) --
-------- --------
Net Cash (Used In) Financing Activities (243) (2,249)
-------- --------
Foreign currency translation adjustment 25 (42)
-------- --------
NET INCREASE (DECREASE) IN CASH (791) 660
CASH AND CASH EQUIVALENTS - BEGINNING 1,604 179
-------- --------
CASH AND CASH EQUIVALENTS - ENDING $ 813 $ 839
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 1,781 $ 1,108
======== ========
Taxes $ 940 $ 258
======== ========
5
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Basis of Presentation and Other Matters:
The accompanying unaudited consolidated financial statements, which are
for interim periods, do not include all disclosures provided in the annual
consolidated financial statements. These unaudited consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the footnotes thereto contained in the IVC Industries, Inc. (the
"Company") Annual Report on Form 10-K for the year ended July 31, 1998, as filed
with the Securities and Exchange Commission.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (which are of a normal recurring
nature) necessary for a fair presentation of the financial statements. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
Certain amounts have been reclassified to conform with the current period
presentation.
Note 2 - Inventories:
Inventories consist of the following:
April 30, July 31,
1999 1998
---- ----
(dollars in thousands)
Finished Goods $10,863 $15,129
Bulk and Work in Process 8,349 14,180
Raw Materials and Packaging Components 7,033 8,080
------- -------
Total Inventory $26,245 $37,389
======= =======
6
<PAGE>
Note 3 - Earnings Per Share (EPS):
Basic EPS is calculated based on income available to common shareholders
and the weighted average number of shares outstanding during the reported
period. Diluted EPS includes additional dilution from potential common stock
issuable pursuant to the exercise of stock options outstanding. Prior year
amounts have been restated to conform with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share".
Note 4 - Comprehensive Income:
As of August 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for the reporting and
displaying of comprehensive income. The following table presents the Company's
comprehensive income for the three and nine month periods ended April 30, 1999
and 1998.
Three Months Ended Nine Months Ended
April 30, April 30, April 30, April 30,
1999 1998 1999 1998
--------- ---------- --------- --------
(dollars in thousands) (dollars in thousands)
Net income $ 459 $ 702 $ 1,207 $ 1,571
Other comprehensive income (loss),
net of tax:
Foreign exchange translation
adjustments 23 7 25 (42)
------- ------- ------- -------
Comprehensive income $ 482 $ 709 $ 1,232 $ 1,529
======= ======= ======= =======
Note 5 - Noncash Financing Activities:
During the quarter ended October 31, 1998, a capital lease obligation of
$891,000 was incurred when the Company entered into a lease for new equipment.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Three Months Ended April 30, 1999 Compared to the Three Months Ended April 30,
1998
Results of Operations. For the quarter ended April 30, 1999, net income
was $459,000 equivalent to basic earnings per share of $.03 as compared to
$702,000 or $.04 per share, in the same quarter last year. Diluted earnings per
share were also $.03 as compared to $.04 last year.
Net Sales. Net sales for the quarter were $25.6 million, representing a
decrease of $9.4 million or 27% versus the same period of 1998. This decrease
was primarily attributable to lower sales levels to outside customers recorded
by Intergel, the Company's soft gelatin encapsulation division, and decreased
private brand sales levels at the Company's west coast operations. Sales for the
quarter at Intergel were lower than the comparable period of the prior year
which included one-time shipments of $3.3 million. These shipments were made at
a minimal gross profit margin.
Costs and Expenses. Cost of sales for the three months ended April 30,
1999 was $18.5 million, a decrease of $8.0 million or 30% from the $26.6 million
for the three months ended April 30, 1998. Cost of sales decreased 3.3% as a
percentage of sales as compared to the prior year's period. The decrease was
primarily due to favorable manufacturing costs at the Company's manufacturing
facilities, as the Company began to realize the benefits of the reduced
workforce at the Freehold and soft gelatin encapsulation facilities. Favorable
product mix towards herbal nutritional products which entail higher margins also
contributed to the favorable margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended April 30, 1999 were $5.7
million, a decrease of $1.0 million or 15% as compared to the prior year's
quarter. As a percentage of sales, these expenses increased by 3% as compared
with the prior year. The decrease is primarily attributable to: (i) lower
promotion costs, reflecting accrual reversals to appropriate levels, (ii) lower
advertising and sample costs, and (iii) lower office supplies, postage and
professional fees. These were partially offset by increased administrative costs
including consulting costs and a severance accrual related to executive
organization changes.
Other Expenses, Net. Other expenses, net, for the three months ended April
30, 1999 were $638,000. This principally represents net interest expense of
$744,000 which was offset by the amortization of deferred gain on sale of
building of $18,000 and other miscellaneous income. Other expenses, net, for the
three months ended April 30, 1998 were $553,000. This included net interest
expense of $608,000, which was offset by other miscellaneous income.
8
<PAGE>
Income Taxes. Income taxes generally reflect the effect of statutory
federal and state income tax rates and certain non-deductible expenses. An
adjustment was made this quarter to properly reflect accrued income taxes.
Nine Months Ended April 30, 1999 Compared to the Nine Months Ended April 30,
1998
Results of Operations. For the nine months ended April 30, 1999, net
income was $1.2 million, equivalent to basic earnings per share of $.07, as
compared to $1.6 million or $.09 per share, in the same period last year.
Diluted earnings per share were also $.07 as compared to $.09 last year.
Net Sales. Net sales for the nine months were $85.4 million, representing
a decrease of $6.5 million or 7% versus the same period of 1998. This decrease
was primarily attributable to lower sales levels to outside customers recorded
by Intergel as the prior year included one-time shipments of $5.2 million. These
shipments were made at a minimal gross profit margin. In addition, sales of
Fields of Nature branded products were slightly lower. These were offset by
increased sales of private brand products.
Costs and Expenses. Cost of sales for the nine months ended April 30, 1999
was $62.9 million, a decrease of $5.7 million or 8.3% from the $68.7 million for
the nine months ended April 30, 1998. Cost of sales decreased 1.0% as a
percentage of sales as compared to the prior year's period. This reduction was
primarily due to the savings resulting from the reduced workforce at the
Freehold and Intergel facilities and favorable efficiencies at the company's
West coast operations. These were offset by an unfavorable sales mix towards
private brands which entail lower margins and the charge for anticipated
expenses for the shutdown of the Portland manufacturing facility.
The Company began a major effort to reduce overall expenses. In October,
the manufacturing workforce in Freehold and at the soft gel encapsulation
facility was reduced significantly and operations realigned to meet projected
sales levels.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended April 30, 1999 were $18.7
million, a decrease of $.5 million or 2% as compared to the same period during
the prior year. As a percentage of sales however, these were 1.0% higher than
the prior year. The decrease is primarily attributable to: (i) lower promotion
costs, and, (ii) lower cost of utilities and supplies. These were partially
offset by increased reserves for doubtful accounts and the severance accrual
related to executive organization changes.
Other Expenses, Net. Other expenses, net, for the nine months ended April
30, 1999 were $1.9 million. This principally represents net interest expense of
$2.0 million, which was offset by the deferred gain on sale of building of
$73,000 and other miscellaneous income. Other expenses, net, for the nine months
ended April 30, 1998 were $1.7 million. This included net interest expense of
$1.8 million, offset by other net miscellaneous income.
9
<PAGE>
Income Taxes. Income taxes generally reflect the effect of statutory
federal and state income tax rates and certain non-deductible expenses. An
adjustment was made this quarter to properly reflect accrued income taxes.
Liquidity and Capital Resources
In August 1998, the Company entered into an equipment lease agreement in
the amount of $2 million to finance the purchase of manufacturing equipment to
upgrade its operation capabilities. To date, the Company utilized $891,000 under
this agreement. The lease is for a seven-year term at an interest rate of 7.2%,
with interest and principal paid monthly. The equipment purchased with the
proceeds of the lease financing secures the lease.
Operating activities provided $.6 million in cash for the nine-month
period ended April 30, 1999, versus $4.8 million provided for the comparable
period in 1998. $3.4 million was generated from net income plus non-cash
depreciation and amortization. In addition, cash was generated by decreases in
inventory of $11.1 million and prepaid expenses of $1.5 million and were
utilized by a decrease in accounts payable and accrued expenses of $12.7 million
and, increases in accounts receivable of $1.6 million and other assets of $1.0
million.
The Company presently has a revolving line of credit with its bank in the
amount of $21.5 million and a $.5 million facility with its Canadian bank. The
agreements with its U.S. bank will expire on June 30, 1999. The Company is
currently in discussions with its bank to further extend the agreements. The
notes are collateralized by substantially all of the Company's assets. In
addition, the Company has lease financing agreements with two banks in the
amount of $3 million for the acquisition of computer and manufacturing
equipment. At April 30, 1999, approximately $1.3 million was available for
additions.
The agreement with the bank requires the Company to maintain certain
financial ratios and minimum working capital. At April 30, 1999, the Company was
in violation of certain of these covenants, which have been waived by the bank.
The entire balance due to the bank is classified as a current liability.
The Company believes that its existing cash balance, internally generated
funds from operations and available financing will provide the liquidity
required to satisfy the Company's working capital needs and anticipated capital
expenditures for the next fiscal year.
Year 2000
In the past year, IVC Industries, Inc invested in a complete replacement
of its internal management information systems. The Company replaced its
information
10
<PAGE>
technologies infrastructure with new enterprise servers, personal computers,
local area networks and wide area networks.
The Company's Year 2000 (Y2K) compliant systems have been utilized in half
of its facilities since the beginning of January 1998, and an additional
facility has been integrated during the first calendar quarter of 1999. The
Company's goal is to have fully compliant systems enterprise-wide by the end of
the current fiscal year, July 31, 1999.
As part of its Year 2000-Compliance Program, the Company has contacted its
vendors for assurance that they will be Y2K compliant.
The total costs of the Company's Y2K-related program are estimated to be
approximately $300,000.
The company's contingency plans are expected to be defined by the end of
the third calendar quarter of 1999.
Satisfactorily addressing the Year 2000 issue is dependent upon 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
vendor or supplier fail to achieve Year 2000 compliance, the Company's business
and results of operations could be adversely affected.
Forward Looking Statements
This report, including Management's Discussion and Analysis, contains
certain "forward-looking statements", within the meaning of Section 27A of the
Securities Act of 1933, which represent the Company's expectations or beliefs,
including, but not limited to, statements concerning industry performance, the
Company's operations, performance, financial condition, growth and acquisition
strategies, margins and growth in sales of the Company's products. For this
purpose, any statements contained in this Report that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the generality of the foregoing, words such as "may", "will", "expect",
"believe", "anticipate", "intend", "could", "estimate" or "continue" or the
negative or other variations thereof or comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, certain of which are beyond the Company's
control, and actual results may differ materially depending on a variety of
important factors, including beneficial or adverse trends in the domestic market
for vitamins and nutritional supplements, the gain or loss of significant
customers for the Company's products, the competitive environment in the vitamin
and nutritional supplement industry, and the enactment or promulgation of new
government legislation or regulation, as well as other risks and uncertainties
that may be detailed from time to time in the Company's reports filed with the
Securities and Exchange Commission.
11
<PAGE>
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company has no market risk sensitive instruments that subject the Company to
material market risk exposures.
12
<PAGE>
Part II. Other Information
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits:
(II) Computation of earnings per share
(b) Reports on Form 8-K:
None
13
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT II
COMPUTATION OF EARNINGS PER SHARE
(Dollars in Thousands, Except Per Share Information)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic:
Net income $ 459 $ 702 $ 1,207 $ 1,571
Weighted average shares
outstanding 17,211,540 17,127,392 17,211,540 17,125,751
=========== =========== =========== ===========
Basic earnings per share $ 0.03 $ 0.04 $ 0.07 $ 0.09
=========== =========== =========== ===========
Diluted:
Net Income $ 459 $ 702 $ 1,207 $ 1,571
Weighted average shares
outstanding 17,211,540 17,127,392 17,211,540 17,125,751
Incremental shares under
Stock Option Plan 7,764 114,701 2,923 73,742
----------- ----------- ----------- -----------
Adjusted weighted average
shares outstanding 17,219,304 17,242,093 17,214,463 17,199,493
=========== =========== =========== ===========
Diluted earnings per share $ 0.03 $ 0.04 $ 0.07 $ 0.09
=========== =========== =========== ===========
</TABLE>
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: June 8, 1999 By: /s/ E. Joseph Edell
-----------------------------------
Chairman and
Chief Executive Officer
Dated: June 8, 1999 By: /s/ Domenic N. Golato
-----------------------------------
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from 10Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 813
<SECURITIES> 0
<RECEIVABLES> 13,410
<ALLOWANCES> 0
<INVENTORY> 26,245
<CURRENT-ASSETS> 44,279
<PP&E> 19,878
<DEPRECIATION> 0
<TOTAL-ASSETS> 69,452
<CURRENT-LIABILITIES> 38,582
<BONDS> 0
0
0
<COMMON> 172
<OTHER-SE> 18,865
<TOTAL-LIABILITY-AND-EQUITY> 69,452
<SALES> 25,558
<TOTAL-REVENUES> 0
<CGS> 18,544
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,731
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 744
<INCOME-PRETAX> 645
<INCOME-TAX> 186
<INCOME-CONTINUING> 459
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 459
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from 10Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> APR-30-1999
<CASH> 813
<SECURITIES> 0
<RECEIVABLES> 13,410
<ALLOWANCES> 0
<INVENTORY> 26,245
<CURRENT-ASSETS> 44,279
<PP&E> 19,878
<DEPRECIATION> 0
<TOTAL-ASSETS> 69,452
<CURRENT-LIABILITIES> 38,582
<BONDS> 0
0
0
<COMMON> 172
<OTHER-SE> 18,865
<TOTAL-LIABILITY-AND-EQUITY> 69,452
<SALES> 85,459
<TOTAL-REVENUES> 0
<CGS> 62,946
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 18,731
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,034
<INCOME-PRETAX> 1,895
<INCOME-TAX> 688
<INCOME-CONTINUING> 1,207
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,207
<EPS-BASIC> .07
<EPS-DILUTED> .07
</TABLE>
